<Page>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 23, 2002.
REGISTRATION NO. 333-69118
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
PRE-EFFECTIVE AMENDMENT NO. 4 TO
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
HERITAGE PROPERTY INVESTMENT TRUST, INC.
(Exact Name of Registrant as Specified in its Governing Instruments)
<Table>
MARYLAND 04-3474810
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
</Table>
535 BOYLSTON STREET
BOSTON, MA 02116
(617) 247-2200
(Address, Including Zip Code, and Telephone Number, including
Area Code, of Registrant's Principal Executive Offices)
THOMAS C. PRENDERGAST
PRESIDENT AND CHIEF EXECUTIVE OFFICER
HERITAGE PROPERTY INVESTMENT TRUST, INC.
535 BOYLSTON STREET
BOSTON, MA 02116
Telephone: (617) 247-2200
Telecopy: (617) 267-4557
(Name, Address, Including Zip Code, and Telephone
Number, Including Area Code, of Agent for Service)
------------------------------
WITH COPIES TO:
<Table>
VICTOR J. PACI, ESQ. J. WARREN GORRELL, JR., ESQ.
STEPHEN H. FABERMAN, ESQ. DAVID W. BONSER, ESQ.
BINGHAM DANA LLP HOGAN & HARTSON L.L.P.
150 Federal Street 555 Thirteenth Street, N.W.
Boston, MA 02110 Washington, D.C. 20004-1109
Telephone: (617) 951-8000 Telephone: (202) 637-5600
Telecopy: (617) 951-8736 Telecopy: (202) 637-5910
</Table>
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
------------------------------
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<Table>
<Caption>
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
Common Stock, $0.001 par value per share.................... $473,800,000 $43,590(2)
</Table>
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(o) under the Securities Act of 1933, as amended.
(2) Pursuant to the fee schedule in effect at the time of the initial filing,
$105,000 was previously paid.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<Page>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell securities, and is not soliciting an offer to buy these securities in
any state where the offer or sale is not permitted.
<Page>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED APRIL 23, 2002
PROSPECTUS
16,000,000 SHARES
HERITAGE PROPERTY INVESTMENT TRUST, INC.
COMMON STOCK
-------------
This is Heritage Property Investment Trust, Inc.'s initial public offering.
We are selling 12,000,000 shares of common stock and Net Realty Holding Trust,
our largest stockholder, is selling 4,000,000 shares of common stock in this
offering.
We expect the public offering price to be between $24.25 and $25.75 per
share. Currently, no public market exists for our common stock. After pricing of
this offering, we expect that the shares of common stock sold in this offering
will trade on the New York Stock Exchange under the symbol "HTG."
INVESTING IN OUR COMMON STOCK INVOLVES RISKS THAT ARE DESCRIBED IN THE "RISK
FACTORS" SECTION BEGINNING ON PAGE 9 OF THIS PROSPECTUS. SOME RISKS INCLUDE:
- Adverse market conditions and competition may impede our ability to renew
leases or re-let space as leases expire and require us to undertake
unbudgeted capital improvements, which could harm our business and
operating results;
- After this offering and the proposed property acquisitions described in
this prospectus, we expect to have approximately $984.6 million of debt, a
portion of which will be variable rate debt, which may impede our
operating performance and put us at a competitive disadvantage;
- We could become too highly leveraged because our organizational documents
will contain no limitation on the amount of debt we may incur;
- We may not be successful in identifying suitable acquisitions that meet
our criteria, which may impede our growth;
- Our ability to pay our estimated initial annual distribution, which
represents approximately 98% of our estimated cash available for
distribution for the twelve months ending December 31, 2002, or 104% if we
do not realize the interest savings we have anticipated, could be
adversely affected if we fail to achieve our expected operating results
and we may have to borrow funds to pay this distribution; and
- After this offering, our largest stockholder will own approximately 46% of
our common stock, will exercise significant control of our company and may
delay, defer or prevent us from taking actions that would be beneficial to
our other stockholders.
-------------------
<Table>
<Caption>
PER SHARE TOTAL
--------- -----
Public offering price....................................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to Heritage...................... $ $
Proceeds, before expenses, to Net Realty Holding Trust...... $ $
</Table>
The underwriters also may purchase up to an additional aggregate 2,400,000
shares from us, Net Realty Holding Trust and The Prudential Insurance Company of
America, our second largest stockholder and an affiliate of one of the
underwriters, at the public offering price, less the underwriting discount,
within 30 days from the date of this prospectus to cover overallotments.
Prudential will receive advisory and other fees totaling approximately
$3.375 million in connection with this offering based upon an assumed initial
public offering price of $25.00 per share.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The shares of common stock will be ready for delivery on or about
, 2002.
-------------------
MERRILL LYNCH & CO.
GOLDMAN, SACHS & CO.
MORGAN STANLEY
UBS WARBURG
LEGG MASON WOOD WALKER INCORPORATED
WACHOVIA SECURITIES
-------------------
The date of this prospectus is , 2002.
<Page>
[PICTURES OF DIFFERENT SHOPPING CENTERS WITHIN THE HERITAGE PORTFOLIO]
<Page>
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
--------
Special Note Regarding Forward-Looking Statements........... iv
Prospectus Summary.......................................... 1
Risk Factors................................................ 9
Risks Related to Our Properties and Our Business.......... 9
ADVERSE MARKET CONDITIONS AND COMPETITION MAY IMPEDE OUR
ABILITY TO RENEW LEASES OR RE-LET SPACE AS LEASES EXPIRE
AND REQUIRE US TO UNDERTAKE UNBUDGETED CAPITAL
IMPROVEMENTS, WHICH COULD HARM OUR BUSINESS AND
OPERATING RESULTS....................................... 9
AFTER THIS OFFERING AND THE PROPOSED PROPERTY
ACQUISITIONS DESCRIBED IN THIS PROSPECTUS, WE EXPECT TO
HAVE APPROXIMATELY $984.6 MILLION OF DEBT, A PORTION OF
WHICH WILL BE VARIABLE RATE DEBT, WHICH MAY IMPEDE OUR
OPERATING PERFORMANCE AND PUT US AT A COMPETITIVE
DISADVANTAGE............................................ 9
IF WE HAVE TO BORROW FUNDS UNDER THE NEW LINE OF CREDIT
THAT WE INTEND TO ENTER INTO IN CONNECTION WITH THIS
OFFERING IN ORDER TO MAKE BALLOON PAYMENTS REQUIRED
UNDER OUR MORTGAGE INDEBTEDNESS, THE AMOUNT THAT WE WILL
HAVE AVAILABLE TO BORROW UNDER THIS NEW LINE OF CREDIT
FOR ACQUISITIONS AND OTHER OPPORTUNITIES WILL BE
REDUCED, WHICH COULD SLOW OUR GROWTH.................... 10
OUR FINANCIAL COVENANTS MAY RESTRICT OUR OPERATING OR
ACQUISITION ACTIVITIES, WHICH MAY HARM OUR FINANCIAL
CONDITION AND OPERATING RESULTS......................... 10
WE ANTICIPATE THAT OUR WORKING CAPITAL RESERVES WILL NOT
BE ADEQUATE TO COVER ALL OF OUR CASH NEEDS AND WE WILL
HAVE TO OBTAIN FINANCING FROM OTHER SOURCES............. 11
WE MAY NOT BE SUCCESSFUL IN IDENTIFYING SUITABLE
ACQUISITIONS THAT MEET OUR CRITERIA, WHICH MAY IMPEDE
OUR GROWTH.............................................. 11
WE FACE INCREASING COMPETITION FOR THE ACQUISITION OF
REAL ESTATE PROPERTIES AND OTHER ASSETS, WHICH MAY
IMPEDE OUR ABILITY TO MAKE FUTURE ACQUISITIONS OR MAY
INCREASE THE COST OF THESE ACQUISITIONS................. 11
FUTURE ACQUISITIONS OF REAL PROPERTIES, OTHER ASSETS OR
OTHER COMPANIES MAY NOT YIELD THE RETURNS WE EXPECT, MAY
RESULT IN DISRUPTIONS TO OUR BUSINESS, MAY STRAIN
MANAGEMENT RESOURCES AND MAY RESULT IN STOCKHOLDER
DILUTION................................................ 12
OUR INVESTMENTS IN REDEVELOPMENT PROJECTS MAY NOT YIELD
ANTICIPATED RETURNS, WHICH WOULD HARM OUR OPERATING
RESULTS AND REDUCE THE AMOUNT OF FUNDS AVAILABLE FOR
DISTRIBUTIONS........................................... 12
ANY INVESTMENTS IN UNIMPROVED REAL PROPERTY MAY TAKE
SIGNIFICANTLY LONGER TO YIELD INCOME PRODUCING RETURNS,
IF AT ALL, AND MAY RESULT IN ADDITIONAL COSTS TO US TO
COMPLY WITH RE-ZONING RESTRICTIONS OR ENVIRONMENTAL
REGULATIONS............................................. 12
RISING OPERATING EXPENSES COULD REDUCE OUR CASH FLOW AND
FUNDS AVAILABLE FOR FUTURE DISTRIBUTIONS................ 12
ANY TENANT BANKRUPTCIES OR LEASING DELAYS WE ENCOUNTER,
PARTICULARLY WITH RESPECT TO OUR ANCHOR TENANTS, COULD
SERIOUSLY HARM OUR OPERATING RESULTS AND FINANCIAL
CONDITION............................................... 13
WE MAY BE UNABLE TO COLLECT BALANCES DUE FROM ANY
TENANTS IN BANKRUPTCY, WHICH WOULD HARM OUR OPERATING
RESULTS................................................. 14
WE MAY BE RESTRICTED FROM RE-LEASING SPACE BASED ON
EXISTING EXCLUSIVITY LEASE PROVISIONS WITH SOME OF OUR
TENANTS................................................. 14
Risks Related to Our Organization and Structure........... 14
AFTER THIS OFFERING, OUR LARGEST STOCKHOLDER WILL OWN
APPROXIMATELY 46% OF OUR COMMON STOCK, WILL EXERCISE
SIGNIFICANT CONTROL OF OUR COMPANY AND MAY DELAY, DEFER
OR PREVENT US FROM TAKING ACTIONS THAT WOULD BE
BENEFICIAL TO OUR OTHER STOCKHOLDERS.................... 14
OUR STOCKHOLDERS AGREEMENT WILL ALLOW OUR LARGEST
STOCKHOLDER TO PURCHASE SHARES OF OUR COMMON STOCK TO
MAINTAIN ITS OWNERSHIP PERCENTAGE IN US SHOULD WE
PROPOSE TO ISSUE ADDITIONAL SHARES TO THIRD PARTIES IN
THE FUTURE, WHICH MAY HAVE THE EFFECT OF DISCOURAGING
THIRD PARTIES FROM INVESTING IN US...................... 14
</Table>
i
<Page>
<Table>
<Caption>
PAGE
--------
OUR ORGANIZATIONAL DOCUMENTS CONTAIN PROVISIONS WHICH
MAY DISCOURAGE A TAKEOVER OF US AND DEPRESS OUR STOCK
PRICE................................................... 15
OUR BUSINESS WOULD BE HARMED IF KEY PERSONNEL WITH
LONGSTANDING BUSINESS RELATIONSHIPS WITH OUR TENANTS
TERMINATE THEIR EMPLOYMENT WITH US...................... 16
OUR RIGHTS AND THE RIGHTS OF OUR STOCKHOLDERS TO TAKE
ACTION AGAINST OUR DIRECTORS AND OFFICERS ARE
LIMITED................................................. 16
YOU HAVE LIMITED CONTROL AS A STOCKHOLDER REGARDING ANY
CHANGES WE MAKE TO OUR POLICIES......................... 16
OUR ABILITY TO PAY OUR ESTIMATED INITIAL ANNUAL
DISTRIBUTION, WHICH REPRESENTS APPROXIMATELY 98% OF OUR
ESTIMATED CASH AVAILABLE FOR DISTRIBUTION FOR THE TWELVE
MONTHS ENDING DECEMBER 31, 2002, OR 104% IF WE DO NOT
REALIZE THE INTEREST SAVINGS WE HAVE ANTICIPATED, COULD
BE ADVERSELY AFFECTED IF WE FAIL TO ACHIEVE OUR EXPECTED
OPERATING RESULTS AND WE MAY HAVE TO BORROW FUNDS TO PAY
THIS DISTRIBUTION....................................... 17
WE COULD BECOME TOO HIGHLY LEVERAGED BECAUSE OUR
ORGANIZATIONAL DOCUMENTS WILL CONTAIN NO LIMITATION ON
THE AMOUNT OF DEBT WE MAY INCUR......................... 17
Risks Related to the Real Estate Industry................. 17
MORTGAGE DEBT OBLIGATIONS EXPOSE US TO INCREASED RISK OF
LOSS OF PROPERTY, WHICH COULD HARM OUR FINANCIAL
CONDITION............................................... 17
ILLIQUIDITY OF REAL ESTATE INVESTMENTS COULD
SIGNIFICANTLY IMPEDE OUR ABILITY TO RESPOND TO ADVERSE
CHANGES IN THE PERFORMANCE OF OUR PROPERTIES AND HARM
OUR FINANCIAL CONDITION................................. 18
ANY NEGATIVE PERCEPTIONS OF THE RETAIL SECTOR GENERALLY
MAY RESULT IN A DECLINE IN OUR STOCK PRICE.............. 18
IF WE SUFFER LOSSES THAT ARE NOT COVERED BY INSURANCE OR
THAT ARE IN EXCESS OF OUR INSURANCE COVERAGE LIMITS, WE
COULD LOSE INVESTED CAPITAL AND ANTICIPATED PROFITS..... 18
THE COSTS OF COMPLIANCE WITH ENVIRONMENTAL LAWS,
INCLUDING LIABILITY FOR CONTAMINATION AT OUR PROPERTIES
RESULTING FROM GASOLINE OR DRY-CLEANING POLLUTANTS, MAY
HARM OUR OPERATING RESULTS.............................. 18
COSTS ASSOCIATED WITH COMPLYING WITH THE AMERICANS WITH
DISABILITIES ACT MAY ADVERSELY AFFECT OUR FINANCIAL
CONDITION AND OPERATING RESULTS......................... 19
Risks Related to this Offering............................ 20
OF OUR TOTAL OUTSTANDING SHARES AFTER THIS OFFERING,
APPROXIMATELY 23.3 MILLION SHARES WILL BE RESTRICTED
FROM IMMEDIATE RESALE BUT MAY BE SOLD INTO THE MARKET IN
THE NEAR FUTURE. THIS COULD CAUSE THE MARKET PRICE OF
OUR COMMON STOCK TO DROP SIGNIFICANTLY, EVEN IF OUR
BUSINESS IS DOING WELL.................................. 20
YOU SHOULD NOT RELY ON THE UNDERWRITERS' LOCK-UP
AGREEMENTS TO LIMIT THE NUMBER OF SHARES SOLD INTO THE
MARKET BY OUR AFFILIATES................................ 20
THERE IS NO PRIOR PUBLIC MARKET FOR OUR COMMON STOCK AND
OUR STOCK PRICE COULD BE VOLATILE AND COULD DECLINE
SUBSTANTIALLY FOLLOWING THIS OFFERING................... 20
IF YOU PURCHASE SHARES OF OUR COMMON STOCK IN THIS
OFFERING, YOU WILL EXPERIENCE IMMEDIATE DILUTION........ 21
Tax and Employee Benefit Plan Risks....................... 21
YOUR INVESTMENT HAS VARIOUS FEDERAL INCOME TAX RISKS.... 21
IF WE FAIL TO REMAIN QUALIFIED AS A REIT, OUR
DISTRIBUTIONS WILL NOT BE DEDUCTIBLE BY US, AND OUR
INCOME WILL BE SUBJECT TO TAXATION, REDUCING OUR
EARNINGS AVAILABLE FOR DISTRIBUTION..................... 21
EVEN REITS ARE SUBJECT TO FEDERAL AND STATE INCOME
TAXES................................................... 21
WE ARE SUBJECT TO BUSINESS CONSTRAINTS RELATED TO OUR
STATUS AS A PENSION-HELD REIT........................... 22
AN INVESTMENT IN OUR COMMON STOCK MAY NOT BE SUITABLE
FOR EVERY EMPLOYEE BENEFIT PLAN......................... 22
Dilution.................................................... 23
Selling Stockholders........................................ 25
Use of Proceeds............................................. 26
Distribution Policy......................................... 27
Capitalization.............................................. 32
Unaudited Pro Forma Income Statement Data................... 33
</Table>
ii
<Page>
<Table>
<Caption>
PAGE
--------
Selected Historical Consolidated Financial and Operating
Data...................................................... 36
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 39
Business and Properties..................................... 56
Overview.................................................. 56
Industry Background....................................... 57
Our Competitive Strengths................................. 58
Business and Growth Strategies............................ 58
Financing Strategy........................................ 59
Properties................................................ 60
Top 10 Tenants by Annualized Base Rent.................... 78
Historical Leasing Activity--Total Portfolio.............. 79
Maintenance Capital Expenditures.......................... 79
Lease Expiration Summary.................................. 80
Acquisition and Market Selection Process.................. 80
In-House Leasing and Property Management Program.......... 81
Competition............................................... 81
Offices................................................... 81
Legal Proceedings......................................... 81
Indebtedness Outstanding After This Offering.............. 82
Employees................................................. 86
Management.................................................. 87
Directors and Executive Officers.......................... 87
Director Nominees......................................... 89
Additional Disclosures Regarding NETT..................... 90
Committees of the Board of Directors...................... 90
Management Committee...................................... 91
Compensation of Directors................................. 91
Executive Compensation.................................... 92
Supplemental Executive Retirement Plan.................... 93
Stock Option Grants....................................... 95
Option Exercises and Holdings............................. 95
Special Stock Option Grants and Accelerated Options....... 96
Acceleration of Restricted Stock Grants................... 96
Special Stock Grants...................................... 97
Employment Agreements..................................... 97
Change in Control/Severance Agreements.................... 98
Compensation Committee Interlocks and Insider
Participation........................................... 99
Equity Incentive Plan..................................... 99
Indemnification........................................... 101
Certain Relationships and Related Transactions.............. 102
Transactions with Net Realty Holding Trust and
Affiliates.............................................. 102
Transactions with Prudential and Affiliates............... 103
Stockholders Agreement with Net Realty Holding Trust and
Prudential.............................................. 105
Other Transactions........................................ 106
Investment Policies and Policies with Respect to Certain
Activities................................................ 107
Principal and Selling Stockholders.......................... 111
Description of Capital Stock................................ 113
Structure and Description of Operating Partnerships......... 122
Shares Eligible for Future Sale............................. 131
</Table>
iii
<Page>
<Table>
<Caption>
PAGE
--------
Material United States Federal Income Tax Considerations.... 133
General................................................... 133
Taxation of the Company................................... 134
Taxation of Taxable U.S. Stockholders..................... 141
Taxation of Tax-Exempt U.S. Stockholders.................. 143
Taxation of Non-U.S. Stockholders......................... 146
Other Tax Considerations.................................. 147
ERISA Considerations........................................ 148
Underwriting................................................ 150
Experts..................................................... 155
Legal Matters............................................... 155
Where You Can Find More Information......................... 155
Index to Financial Statements............................... F-1
</Table>
------------------------
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where that offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate only as of the date on
the front cover of this prospectus. Our business, financial condition, results
of operations and prospects may have changed since that date.
------------------------
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements contained in "Prospectus Summary," "Risk Factors,"
"Distribution Policy," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business and Properties," "Investment
Policies and Policies With Respect to Certain Activities" and elsewhere in this
prospectus constitute forward-looking statements. Forward-looking statements
relate to expectations, beliefs, projections, future plans and strategies,
anticipated events or trends and similar expressions concerning matters that are
not historical facts. In some cases, you can identify forward-looking statements
by terms such as "may," "will," "should," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential" or the negative of these terms
or other comparable terminology.
The forward-looking statements contained in this prospectus reflect our
current views about future events and are subject to risks, uncertainties,
assumptions and changes in circumstances that may cause our actual results to
differ significantly from those expressed in any forward-looking statement. The
factors that could cause actual results to differ materially from expected
results include changes in economic, business, competitive market and regulatory
conditions. For more information regarding risks that may cause our actual
results to differ materially from any forward-looking statements, see "Risk
Factors" beginning on page 9. We do not intend and disclaim any duty or
obligation to update or revise any industry information or forward-looking
statements set forth in this prospectus to reflect new information, future
events or otherwise.
iv
<Page>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS. THIS SUMMARY IS NOT COMPLETE AND DOES NOT CONTAIN ALL OF THE
INFORMATION THAT YOU SHOULD CONSIDER BEFORE INVESTING IN OUR COMMON STOCK. YOU
SHOULD READ THE ENTIRE PROSPECTUS, INCLUDING "RISK FACTORS" AND OUR HISTORICAL
AND PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES APPEARING
ELSEWHERE IN THIS PROSPECTUS, BEFORE DECIDING TO INVEST IN OUR COMMON STOCK.
UNLESS OTHERWISE INDICATED, THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS'
OVERALLOTMENT OPTION IS NOT EXERCISED.
HERITAGE PROPERTY INVESTMENT TRUST, INC.
OVERVIEW
We are a fully integrated, self-administered and self-managed real estate
investment trust, or REIT, which acquires, owns, manages, leases and redevelops
primarily grocer-anchored neighborhood and community shopping centers in the
Eastern and Midwestern United States. After this offering, based on publicly
available information, we will be the sixth largest publicly-traded shopping
center REIT in the country, ranked according to gross leasable area. As of
December 31, 2001, we had a portfolio of 142 shopping centers totaling
approximately 23.2 million square feet of gross leasable area, located in
26 states. Our shopping center portfolio was approximately 93% leased as of
December 31, 2001. We also own five office buildings and 11 single-tenant
properties. We currently intend to dispose of several of our office buildings
and substantially all of our single-tenant properties in the foreseeable future.
We are a Maryland corporation that commenced operations in July 1999 as the
successor to a company formed in 1970 to manage the real estate investments of
the New England Teamsters & Trucking Industry Pension Fund, or NETT. At our
formation, NETT contributed its portfolio of 60 real estate properties to our
company as a newly formed REIT, and The Prudential Insurance Company of America
also made an equity investment in our company.
On September 18, 2000, we acquired Bradley Real Estate, Inc., a
publicly-traded REIT headquartered in Illinois, for aggregate consideration of
approximately $1.2 billion. The Bradley portfolio consisted of 97 shopping
centers with a total of approximately 15.3 million square feet of gross leasable
area located in 15 states, primarily in the Midwest. The Bradley acquisition
provided our company with a unique opportunity to acquire an attractively
priced, large portfolio of properties in a contiguous geographic market,
consistent with our business strategy and investment criteria. We have
substantially integrated the Bradley operations, and we intend to continue to
enhance the operating performance of the Bradley portfolio in the future. Since
July 1999, we have also acquired nine additional shopping center properties, an
out-parcel of an owned shopping center, and a parcel of land for development of
a shopping center, for an aggregate purchase price of approximately
$202 million.
In March 2002, we entered into a letter of intent with a third party to
acquire four shopping centers, located in Michigan, Massachusetts, New Hampshire
and New York, with an aggregate of approximately 1,220,000 square feet of gross
leaseable area. The purchase price for this transaction will be approximately
$77.8 million, including our transaction expenses. We expect to complete this
acquisition in the second quarter of 2002.
OUR COMPETITIVE STRENGTHS
We believe that we distinguish ourselves from other owners and operators of
community and neighborhood shopping centers in a number of ways, including by
our:
- GROCER-ANCHORED NEIGHBORHOOD AND COMMUNITY SHOPPING CENTER FOCUS. As of
December 31, 2001, approximately 80% of our centers were grocer-anchored.
Our grocer-anchored centers accounted for approximately 75% of our total
net operating income for the year ended
1
<Page>
December 31, 2001. In our experience, grocers generate continuous consumer
traffic which enhances the quality and appeal of our centers.
- MULTI-ANCHORED FOCUS. Our neighborhood and community shopping centers have
an average of 2.6 anchor tenants. We consider an anchor tenant to be a
tenant that occupies at least 15,000 square feet at one of our centers. In
our experience, multiple anchors provide greater consumer flow and improve
the economic stability of our shopping centers.
- DIVERSE TENANT BASE. No single tenant currently represents more than 5.6%
of our annualized base rental revenue. As of December 31, 2001, the
average lease term for our neighborhood and community shopping centers was
6.9 years, with no more than 13% of our total base rent expiring in any
single year through 2010. We believe that this diversity of tenants and
lease expirations will enable us to generate stable cash flows over time.
- GEOGRAPHIC DIVERSIFICATION. Our properties are located in 26 states
primarily in the Eastern and Midwestern United States. As of December 31,
2001, the six largest concentrations of properties in our total portfolio
were located in Illinois, North Carolina, Minnesota, Indiana, Wisconsin
and New York, representing approximately 14%, 12%, 11%, 10%, 6% and 5%,
respectively, of our total gross leasable area.
- ATTRACTIVE LOCATIONS WITH STRONG MARKET DEMOGRAPHICS. The average
population and annual household income within a three-mile area of our
properties is approximately 65,000 people and $64,000, respectively, based
upon 2000 updates of 1990 census data provided by CACI Marketing Systems.
- SEASONED MANAGEMENT TEAM. Our senior management team is comprised of
executives with an average of approximately 20 years experience in the
acquisition, management, leasing, redevelopment and construction of real
estate or retail properties.
OUR BUSINESS AND GROWTH STRATEGY
Our objective has been and will continue to be to generate stable and
increasing cash flow and asset value by acquiring and managing a portfolio of
real estate properties located in attractive markets with strong economic and
demographic characteristics. Our business strategy consists of the following
elements:
- Building and leveraging our long-term tenant relationships as we grow and
expand our business;
- Maximizing cash flow from our properties by continuing to enhance the
operating performance of each property;
- Targeting redevelopment and expansion projects that we believe will
generate substantial returns;
- Increasing the number of anchor tenants to enhance the consumer traffic of
our neighborhood and community shopping centers; and
- Pursuing opportunities to acquire primarily grocer-anchored neighborhood
and community shopping centers.
2
<Page>
RISK FACTORS
You should carefully consider the matters discussed in the section "Risk
Factors" beginning on page 9 prior to deciding whether to invest in our common
stock. Some of these risks include:
- Adverse market conditions and competition may impede our ability to renew
leases or re-let space as leases expire and require us to undertake
unbudgeted capital improvements, which could harm our business and
operating results;
- After this offering and the proposed property acquisitions described in
this prospectus, we expect to have approximately $984.6 million of debt, a
portion of which will be variable rate debt, which may impede our
operating performance and put us at a competitive disadvantage;
- We could become too highly leveraged because our organizational documents
will contain no limitation on the amount of debt we may incur;
- Any tenant bankruptcies or leasing delays we encounter, particularly with
respect to our anchor tenants, could seriously harm our operating results
and financial condition;
- We may not be successful in identifying suitable acquisitions that meet
our criteria, which may impede our growth;
- Future acquisitions of real properties, other assets or other companies
that we may make may not yield the returns we expect, may result in
disruptions to our business, may strain management resources or may result
in stockholder dilution;
- After this offering, our largest stockholder will own approximately 46% of
our common stock, will exercise significant control of our company and may
delay, defer or prevent us from taking actions that would be beneficial to
our other stockholders;
- Of our total outstanding shares after this offering, approximately
23.3 million shares will be restricted from immediate resale but may be
sold into the market in the near future. This could cause the market price
of our common stock to drop significantly, even if our business is doing
well;
- Our charter documents contain several anti-takeover provisions and a
requirement that, with some exceptions, no person may actually or
constructively own more than 9.8% of our capital stock, which may
discourage third parties from conducting a tender offer or seeking other
change of control transactions that could involve a premium price for our
shares or otherwise benefit our stockholders;
- Our ability to pay our estimated initial annual distribution, which
represents approximately 98% of our estimated cash available for
distribution for the twelve months ending December 31, 2002, or 104% if we
do not realize the interest savings we have anticipated, could be
adversely affected if we fail to achieve our expected operating results
and we may have to borrow funds to pay this distribution; and
- If we fail to remain qualified as a REIT, our distributions will not be
deductible by us, and our income will be subject to taxation, reducing our
earnings available for distribution.
RESTRICTIONS ON OWNERSHIP OF OUR CAPITAL STOCK
Due to limitations on the concentration of ownership of REIT stock imposed
by the Internal Revenue Code, and to address other concerns relating to
concentration of capital stock ownership, our charter documents generally
prohibit any stockholder from actually or constructively owning more than 9.8%
of the outstanding shares of our capital stock.
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Our board of directors may, in its sole discretion, waive the ownership
limit with respect to a particular stockholder if our board is presented with
evidence satisfactory to it that the ownership will not then or in the future
jeopardize our status as a REIT. After this offering, each of Net Realty Holding
Trust and The Prudential Insurance Company of America will continue to own more
than 9.8% of the outstanding shares of our common stock. Our board of directors
has granted waivers to each of Net Realty Holding Trust and Prudential.
OUR TAX STATUS
We elected to be taxed as a REIT under Sections 856 through 860 of the
Internal Revenue Code, commencing with our initial taxable year ended
December 31, 1999. We believe that we are organized in conformity with the
requirements for qualification as a REIT under the Internal Revenue Code, and
that our manner of operation enables our company to meet the requirements for
taxation as a REIT for federal income tax purposes. To maintain REIT status, we
must meet a number of organizational and operational requirements, including a
requirement that we currently distribute at least 90% of our REIT taxable income
to our stockholders. As a REIT, we generally will not be subject to federal
income tax on REIT taxable income we distribute currently to our stockholders.
If we fail to qualify as a REIT in any taxable year, we will be subject to
federal income tax at regular corporate rates. Even if we qualify for taxation
as a REIT, we may be subject to some federal, state and local taxes on our
income and property.
DISTRIBUTION POLICY
We intend to pay regular quarterly distributions to holders of our common
stock. The initial distribution, covering a partial quarter commencing on the
closing of this offering and ending on June 30, 2002, is expected to be
approximately $ per share. This initial partial distribution is based on a
full quarterly distribution of $.525 per share and represents an annualized
distribution of $2.10 per share. This initial expected annual distribution
represents an initial annual distribution rate of 8.40%, based upon the assumed
initial public offering price of $25.00 per share of our common stock. We
estimate that this initial distribution will represent approximately 98% of our
estimated cash available for distribution for the twelve months ending December
31, 2002. We established this distribution rate based upon an estimate of our
cash available for distribution after this offering. See "Distribution Policy"
beginning on page 26 for information as to how we derived this estimate. We
cannot assure you that our estimated distribution will be made or sustained. In
addition, we are not estimating the amount of any distribution we might make for
any period after the twelve months ending December 31, 2002. Our actual results
of operations will be affected by a number of factors, including the revenue we
receive from our properties, our operating expenses, interest expense, the
ability of our tenants, including, in particular, our tenants in bankruptcy, to
meet their obligations and unanticipated expenditures.
NEW LINE OF CREDIT
We have obtained a commitment to establish a three-year, $300 million
unsecured line of credit with Fleet National Bank, as agent. Fleet has agreed to
use its "best efforts" to syndicate this line of credit up to $350 million. We
expect to enter into this new line of credit on or shortly after completion of
this offering, and this new line of credit will replace our existing senior
unsecured credit facility. Our two operating partnerships will be borrowers
under this new line of credit, and we and substantially all of our other
subsidiaries will guarantee this new line of credit. We intend to use this new
line of credit principally to fund growth opportunities and for working capital
purposes. We may also use this new line of credit to fund balloon payments under
our existing mortgage indebtedness.
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OUR CORPORATE STRUCTURE
We conduct our business primarily through two operating partnerships,
Heritage Property Investment Limited Partnership, or the Heritage OP, and
Bradley Operating Limited Partnership, or the Bradley OP. From the date of our
formation until we acquired Bradley, we conducted substantially all of our
business through the Heritage OP. We are the sole general partner and hold all
of the partnership interests in the Heritage OP. In connection with the Bradley
acquisition, Heritage-Austen Acquisition, Inc., one of our wholly-owned
subsidiaries, became the sole general partner of the Bradley OP. We own, either
directly or indirectly through Heritage-Austen Acquisition, Inc., approximately
99% of the voting interests in the Bradley OP. In addition to common units of
limited partnership interests in the Bradley OP, all but approximately 1% of
which we own, there are two classes of preferred units of limited partnership
interest in the Bradley OP, all of which are owned by outside investors.
After this offering, we intend to conduct substantially all of our business
and hold substantially all of our interests in our properties through either the
Heritage OP or the Bradley OP, either directly or indirectly through
partnerships or limited liability companies holding title to our properties. In
the future, we may seek to merge our two operating partnerships into one
operating partnership. As the sole general partner, directly or indirectly, of
each of our operating partnerships, we have the exclusive power to manage and
conduct the business of these partnerships, subject to customary exceptions
described in their respective partnership agreements.
The diagram below sets forth our corporate structure immediately following
this offering but does not give effect to the proposed property acquisitions
described in this prospectus.
[CHART DEPICTING CORPORATE STRUCTURE]
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THE OFFERING
<Table>
<Caption>
Common stock offered:
By Heritage................................ 12,000,000 shares
By Net Realty Holding Trust................ 4,000,000 shares
Shares of common stock outstanding after the
offering................................... 39,268,652 shares
Shares of common stock and common units
outstanding after the offering............. 39,294,851 shares and units
Use of proceeds.............................. We estimate that our net proceeds from this offering will be
approximately $274.5 million based on an assumed initial public
offering price of $25.00 per share. We intend to use these net
proceeds to repay existing indebtedness.
Risk Factors................................. See "Risk Factors" beginning on page 9 and other information included
in this prospectus for a discussion of factors you should carefully
consider before deciding to invest in shares of our common stock.
New York Stock Exchange symbol............... HTG
</Table>
The number of shares of common stock to be outstanding after this offering
is based on the total number of shares of common stock outstanding as of
December 31, 2001, as adjusted to give effect to:
- the issuance of 108,565 restricted shares of preferred and common stock to
members of our senior management and other key employees in January 2002
relating to 2001 performance;
- the conversion, upon consummation of this offering, of all shares of our
Series A Cumulative Convertible Preferred Stock outstanding immediately
prior to this offering into 20,341,767 shares of common stock; and
- the issuance of 12,000,000 shares of common stock in this offering.
The number of shares of common stock to be outstanding after this offering
excludes 3,600,000 shares reserved for issuance under our equity incentive plan,
of which options to purchase 1,001,500 shares at an average option price of
$25.00 were outstanding as of December 31, 2001. The number of shares of common
stock to be outstanding after this offering also excludes 375,000 shares
reserved for issuance under warrants outstanding as of December 31, 2001. If the
overallotment option is exercised in full, we will issue and sell an additional
800,000 shares.
The number of common units to be outstanding after this offering is based on
the total number of common units of limited partnership interests of the Bradley
OP outstanding as of December 31, 2001 and held by third parties. These common
units are convertible into cash or shares of common stock on a one-for-one
basis. The number of common units to be outstanding after this offering excludes
up to approximately 323,000 units which may be issued by the Bradley OP in
connection with one of the proposed property acquisitions described elsewhere in
this prospectus.
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<Table>
<Caption>
</Table>
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL AND OPERATING DATA
You should read the following summary historical and pro forma consolidated
financial and operating data together with "Unaudited Pro Forma Income Statement
Data," "Selected Historical Consolidated Financial and Operating Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and related notes included
elsewhere in this prospectus.
The following summary financial and operating data includes pro forma
financial information to reflect adjustments relating to property acquisitions
and sales and the completion of this offering. The unaudited pro forma income
statement data is presented as if the property acquisitions and sales and this
offering had occurred on January 1, 2001. The unaudited pro forma balance sheet
data as of December 31, 2001 is presented as if the property acquisitions and
sales and this offering had occurred on December 31, 2001.
The unaudited pro forma financial data presented below does not purport to
represent what our financial position or results of operations would actually
have been if this offering and the application of the net proceeds from this
offering had in fact occurred on the earlier dates discussed above.
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<Table>
<Caption>
PRO FORMA HISTORICAL
------------ ------------------------------------
YEAR ENDED YEAR ENDED JULY 9, 1999
DECEMBER 31, DECEMBER 31, TO DEC. 31,
------------ --------------------- ------------
2001 2001 2000(1) 1999
------------ --------- --------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Income:
Rental and recoveries..................................... $ 273,024 255,534 139,149 38,550
Interest and other........................................ 336 298 2,117 485
----------- --------- --------- ---------
Total income............................................ 273,360 255,832 141,266 39,035
----------- --------- --------- ---------
Expenses:
Operating................................................. 77,719 75,052 38,514 10,992
General and administrative................................ 13,140 12,640 8,274 2,699
Depreciation and amortization............................. 68,569 64,051 34,808 9,788
Interest.................................................. 78,767 90,342 35,517 2,032
----------- --------- --------- ---------
Total expenses.............................................. 238,195 242,085 117,113 25,511
----------- --------- --------- ---------
Income before net gains..................................... 35,165 13,747 24,153 13,524
Net gains on sales of real estate investments and
equipment............................................... -- 4,159 1,890 --
Net derivative gains...................................... 986 986 -- --
----------- --------- --------- ---------
Income before allocations to minority interests............. 36,151 18,892 26,043 13,524
Income allocated to minority interests.................... (6,975) (6,656) (1,941) --
----------- --------- --------- ---------
Net income.................................................. 29,176 12,236 24,102 13,524
Preferred stock distributions............................. -- (43,345) (38,410) (17,487)
Accretion of redeemable equity............................ -- (995) (329) (25)
----------- --------- --------- ---------
Net income (loss) attributable to common shareholders....... $ 29,176 (32,104) (14,637) (3,988)
=========== ========= ========= =========
Per Share Data:
Basic income (loss) attributable to common shareholders... $ 0.74 (4.71) (2.40) (0.69)
=========== ========= ========= =========
Diluted income (loss) attributable to common
shareholders............................................ $ 0.74 (4.71) (2.40) (0.69)
=========== ========= ========= =========
Weighted average common shares outstanding................ 39,268,652 6,818,320 6,088,480 5,780,749
=========== ========= ========= =========
BALANCE SHEET DATA:
(AT END OF PERIOD)
Real estate investments, before accumulated depreciation.... $ 2,076,406 1,948,968 1,899,025 690,454
Total assets................................................ 2,035,614 1,906,964 1,905,662 719,431
Total liabilities........................................... 1,066,010 1,218,450 1,173,790 148,394
Minority interests.......................................... 86,037 77,952 77,981 --
Redeemable equity........................................... -- 123,094 122,099 24,806
Shareholders' equity........................................ 883,567 487,468 531,792 546,231
OTHER DATA:
# of Shopping Centers (at end of period).................... 148 142 140 42
Gross Leasable Area of Shopping Centers (sq. ft. at end of
period in thousands)(2)................................... 24,920 23,154 22,902 7,503
% Leased (at end of period)................................. 93% 93% 94% 92%
Total portfolio net operating income........................ $ 195,305 180,482 100,635 27,558
Funds from Operations(3).................................... 97,417 27,460 18,067 5,666
Cash flow from operating activities......................... 78,697 64,796 31,887
Cash flow from investing activities......................... (39,216) (745,119) (97,880)
Cash flow from financing activities (37,421) 656,614 93,788
</Table>
- ----------------------------------
(1) Includes approximately 3.5 months of operations of the properties acquired
from Bradley on September 18, 2000.
(2) Represents the total gross leasable area of all Company-owned and operated
shopping center square footage.
(3) We calculate Funds from Operations in accordance with the best practices
described in the April 2001 National Policy Bulletin of the National
Association of Real Estate Investment Trusts, referred to as NAREIT, and
NAREIT's 1995 White Paper on Funds from Operations, as supplemented in
November 1999. The White Paper defines Funds From Operations as net income
(loss) (computed in accordance with GAAP), excluding gains (or losses) from
debt restructuring and sales of property, plus real estate related
depreciation and amortization and after adjustments for unconsolidated
partnerships and joint ventures. Funds from Operations should not be
considered as an alternative to net income (determined in accordance with
GAAP) as an indicator of our financial performance or to cash flow from
operating activities (determined in accordance with GAAP) as a measure of
our liquidity, nor is it indicative of funds available to fund our cash
needs, including our ability to make distributions. We believe that Funds
from Operations is helpful to investors as a measure of our performance as
an equity REIT because, along with cash flows from operating activities,
financing activities and investing activities, it provides investors with an
understanding of our ability to incur and service debt and make capital
expenditures. Our computation of Funds from Operations may, however, differ
from the methodology for calculating funds from Operations utilized by other
equity REITs and, therefore, may not be comparable to such other REITs.
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RISK FACTORS
AN INVESTMENT IN OUR COMMON STOCK INVOLVES SIGNIFICANT RISKS. YOU SHOULD
CONSIDER THE FOLLOWING RISKS IN ADDITION TO OTHER INFORMATION SET FORTH
ELSEWHERE IN THIS PROSPECTUS BEFORE MAKING YOUR INVESTMENT DECISION.
RISKS RELATED TO OUR PROPERTIES AND OUR BUSINESS
ADVERSE MARKET CONDITIONS AND COMPETITION MAY IMPEDE OUR ABILITY TO RENEW LEASES
OR RE-LET SPACE AS LEASES EXPIRE AND REQUIRE US TO UNDERTAKE UNBUDGETED CAPITAL
IMPROVEMENTS, WHICH COULD HARM OUR BUSINESS AND OPERATING RESULTS.
The economic performance and value of our real estate assets is subject to
all of the risks associated with owning and operating real estate, including
risks related to adverse changes in national, regional and local economic and
market conditions. Our properties currently are located in 26 states in the East
and the Midwest. The economic condition of each of our markets may be dependent
on one or more industries. An economic downturn in one of these industry sectors
may result in an increase in tenant bankruptcies, which may harm our performance
in the affected market. Economic and market conditions also may impact the
ability of our tenants to make lease payments. If our properties do not generate
sufficient income to meet our operating expenses, including future debt service,
our income and results of operations would be significantly harmed.
Also, we face competition from similar retail centers within the
neighborhood trade areas of each of our centers to renew leases or re-let space
as leases expire. In addition, any new competitive properties that are developed
within the neighborhood trade areas of our existing properties may result in
increased competition for customer traffic and creditworthy tenants. Increased
competition for tenants may require us to make capital improvements to
properties which we would not have otherwise planned to make. Any unbudgeted
capital improvements we undertake may divert away cash that would otherwise be
available for distributions to stockholders. Ultimately, to the extent we are
unable to renew leases or re-let space as leases expire, it would result in
decreased cash flow from tenants and harm our operating results.
AFTER THIS OFFERING AND THE PROPOSED PROPERTY ACQUISITIONS DESCRIBED IN THIS
PROSPECTUS, WE EXPECT TO HAVE APPROXIMATELY $984.6 MILLION OF DEBT, A PORTION OF
WHICH WILL BE VARIABLE RATE DEBT, WHICH MAY IMPEDE OUR OPERATING PERFORMANCE AND
PUT US AT A COMPETITIVE DISADVANTAGE.
Required repayments of debt and related interest can adversely affect our
operating performance. After this offering and the proposed property
acquisitions described in this prospectus, we expect to have approximately
$984.6 million of outstanding indebtedness. Approximately $241.2 million of this
debt will bear interest at a variable rate, and, upon completion of this
offering and our proposed property acquisitions described in this prospectus, we
expect to have the ability to borrow approximately $183.8 million of additional
variable rate debt under our existing senior unsecured credit facility.
Increases in interest rates on our existing indebtedness would increase our
interest expense, which could harm our cash flow and our ability to pay
distributions. For example, if market rates of interest on our variable rate
debt outstanding as of December 31, 2001 increase by approximately 10%, or
approximately 58 basis points, the increase in interest expense on our existing
variable rate debt would decrease future earnings and cash flows by
approximately $2.6 million annually.
Since we anticipate that our internally generated cash will be adequate to
repay only a portion of our indebtedness prior to maturity, we expect that we
will be required to repay debt through refinancings and/or equity offerings. In
particular, we have outstanding indebtedness that will require balloon payments
of approximately $6.4 million starting in June 2002. It is likely that we will
not have sufficient funds on hand to repay these balloon amounts at maturity and
that we will have to borrow additional funds to make these payments. The amount
of our existing indebtedness may adversely affect
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our ability to repay debt through refinancings. If we are unable to refinance
our indebtedness on acceptable terms, or at all, we might be forced to dispose
of one or more of our properties on disadvantageous terms, which might result in
losses to us and which might adversely affect cash available for distributions.
If prevailing interest rates or other factors at the time of refinancing result
in higher interest rates on refinancing, our interest expense would increase,
which would adversely affect our operating results.
We also intend to incur additional debt in connection with future
acquisitions of real estate. We may, in some instances, borrow under our
existing senior unsecured credit facility or borrow new funds to acquire
properties. In addition, we may incur or increase our mortgage debt by obtaining
loans secured by a portfolio of some or all of the real estate properties we
acquire. We may also borrow funds if necessary to satisfy the requirement that
we distribute to stockholders as distributions at least 90% of our annual REIT
taxable income, or otherwise as is necessary or advisable to ensure that we
maintain our qualification as a REIT for federal income tax purposes.
Our substantial debt may harm our business and operating results, including:
- requiring our company to use a substantial portion of our funds from
operations to pay interest, which reduces the amount available for
distributions;
- placing us at a competitive disadvantage compared to our competitors that
have less debt;
- making our company more vulnerable to economic and industry downturns and
reducing our flexibility in responding to changing business and economic
conditions; and
- limiting our ability to borrow more money for operations, capital or to
finance acquisitions in the future.
IF WE HAVE TO BORROW FUNDS UNDER THE NEW LINE OF CREDIT THAT WE INTEND TO ENTER
INTO IN CONNECTION WITH THIS OFFERING IN ORDER TO MAKE BALLOON PAYMENTS REQUIRED
UNDER OUR MORTGAGE INDEBTEDNESS, THE AMOUNT THAT WE WILL HAVE AVAILABLE TO
BORROW UNDER THIS NEW LINE OF CREDIT FOR ACQUISITIONS AND OTHER OPPORTUNITIES
WILL BE REDUCED, WHICH COULD SLOW OUR GROWTH.
We have obtained a commitment to establish a three-year, $300 million
unsecured line of credit with Fleet National Bank, as agent. Fleet has agreed to
use its best efforts to syndicate this line of credit up to $350 million. We
expect to enter into this new line of credit on or shortly after completion of
this offering. Assuming that we enter into this new line of credit, after this
offering, we will have $58.8 million, or $108.8 million, if Fleet syndicates
this line of credit up to $350 million, available for borrowings under this new
line of credit. However, we have outstanding mortgage indebtedness that will
require balloon payments upon maturity of $25.7 million during the twelve months
ending December 31, 2002, including a balloon payment of $6.4 million in
June 2002. Although we generally intend to refinance our mortgage indebtedness
upon maturity, we may be required to borrow funds under this new line of credit
to make these balloon payments. If we do, this will reduce the amount available
to us under this line of credit to borrow for other purposes, such as for
acquisitions and other opportunities, which could slow our growth.
OUR FINANCIAL COVENANTS MAY RESTRICT OUR OPERATING OR ACQUISITION ACTIVITIES,
WHICH MAY HARM OUR FINANCIAL CONDITION AND OPERATING RESULTS.
The mortgages on our properties contain customary negative covenants such as
those that limit our ability, without the prior consent of the lender, to
further mortgage the applicable property or to discontinue insurance coverage.
In addition, our outstanding unsecured debt contains customary restrictions,
requirements and other limitations on our ability to incur indebtedness,
including total debt to assets ratios, secured debt to total asset ratios, debt
service coverage ratios and minimum ratios of unencumbered assets to unsecured
debt, which we must maintain. Our ability to borrow under our
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senior unsecured credit facility is subject to compliance with these financial
and other covenants. We rely on borrowings under our senior unsecured credit
facility to finance acquisitions and redevelopment activities and for working
capital, and if we are unable to borrow under our senior unsecured credit
facility or to refinance existing indebtedness our financial condition and
results of operations would likely be adversely impacted. The indenture under
which the Bradley OP previously issued unsecured public debt also contains
limitations on the Bradley OP's ability to incur future secured and unsecured
debt. If we need to pledge properties owned by the Bradley OP in order to borrow
additional funds, these covenants could reduce our flexibility in conducting our
operations by limiting our ability to borrow and may create a risk of default on
our debt if we cannot continue to satisfy these covenants. If we breach
covenants in our debt agreements, the lender can declare a default and require
us to repay the debt immediately and, if the debt is secured, can immediately
take possession of the property securing the loan.
WE ANTICIPATE THAT OUR WORKING CAPITAL RESERVES WILL NOT BE ADEQUATE TO COVER
ALL OF OUR CASH NEEDS AND WE WILL HAVE TO OBTAIN FINANCING FROM OTHER SOURCES.
We anticipate that our working capital reserves will not be adequate to
cover all of our cash needs. In order to cover those needs, we may have to
obtain financing from either affiliated or unaffiliated sources. We cannot
assure you that sufficient financing will be available or, if available, will be
available on economically feasible terms or on terms acceptable to us.
Additional borrowings for working capital purposes will increase our interest
expense, and therefore may harm our financial condition and results of
operations.
WE MAY NOT BE SUCCESSFUL IN IDENTIFYING SUITABLE ACQUISITIONS THAT MEET OUR
CRITERIA, WHICH MAY IMPEDE OUR GROWTH.
Integral to our business strategy is our ability to expand through
acquisitions, which requires us to identify suitable acquisition candidates or
investment opportunities that meet our criteria and are compatible with our
growth strategy. As we describe in the section "Business and Properties--
Acquisition and Market Selection Process" beginning on page 79, we analyze
potential acquisitions on a property-by-property and market-by-market basis. We
may not be successful in identifying suitable real estate properties or other
assets that meet our acquisition criteria or consummating acquisitions or
investments on satisfactory terms. Failures in identifying or consummating
acquisitions could reduce the number of acquisitions we complete and slow our
growth, which could in turn harm our stock price.
WE FACE INCREASING COMPETITION FOR THE ACQUISITION OF REAL ESTATE PROPERTIES AND
OTHER ASSETS, WHICH MAY IMPEDE OUR ABILITY TO MAKE FUTURE ACQUISITIONS OR MAY
INCREASE THE COST OF THESE ACQUISITIONS.
We compete with many other entities engaged in real estate investment
activities for acquisitions of retail shopping centers, including institutional
pension funds, other REITs and other owner-operators of shopping centers. These
competitors may drive up the price we must pay for real estate properties, other
assets or other companies we seek to acquire or may succeed in acquiring those
companies or assets themselves. In addition, our potential acquisition targets
may find our competitors to be more attractive suitors because they may have
greater resources, may be willing to pay more, or may have a more compatible
operating philosophy. In particular, larger REITs may enjoy significant
competitive advantages that result from, among other things, a lower cost of
capital and enhanced operating efficiencies. In addition, the number of entities
and the amount of funds competing for suitable investment properties may
increase. This will result in increased demand for these assets and therefore
increased prices paid for them. If we pay higher prices for properties, our
profitability will be reduced, and you may experience a lower return on your
investment.
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FUTURE ACQUISITIONS OF REAL PROPERTIES, OTHER ASSETS OR OTHER COMPANIES MAY NOT
YIELD THE RETURNS WE EXPECT, MAY RESULT IN DISRUPTIONS TO OUR BUSINESS, MAY
STRAIN MANAGEMENT RESOURCES AND MAY RESULT IN STOCKHOLDER DILUTION.
We expect to make future acquisitions or investments in real properties,
other assets or other companies. Although we generally have described our
acquisition and market selection process in the "Business and
Properties--Acquisition and Market Selection Process" section beginning on
page 79, you ultimately may not like the location, lease terms or other relevant
economic and financial data of any real properties, other assets or other
companies we may acquire in the future. If we acquire any businesses, we will be
required to assimilate the operations and personnel of the acquired business and
train, retain and motivate any key personnel from the acquired business. In
addition, acquisitions may cause disruptions in our operations and divert
management's attention away from day-to-day operations, which could impair our
relationships with our current tenants and employees. The issuance of equity
securities for any acquisitions could be substantially dilutive to our
shareholders. In addition, our profitability may suffer because of
acquisition-related costs or amortization costs for acquired goodwill and other
intangible assets.
OUR INVESTMENTS IN REDEVELOPMENT PROJECTS MAY NOT YIELD ANTICIPATED RETURNS,
WHICH WOULD HARM OUR OPERATING RESULTS AND REDUCE THE AMOUNT OF FUNDS AVAILABLE
FOR DISTRIBUTIONS.
A key component of our growth strategy is exploring redevelopment
opportunities at existing properties within our portfolio. To the extent that we
engage in these redevelopment activities, they will be subject to the risks
normally associated with these projects, including, among others, cost overruns
and timing delays due to lack of availability of materials and labor, weather
conditions and other factors outside of our control. Any substantial
unanticipated delays or expenses could adversely affect the investment returns
from these redevelopment projects and harm our operating results.
ANY INVESTMENTS IN UNIMPROVED REAL PROPERTY MAY TAKE SIGNIFICANTLY LONGER TO
YIELD INCOME PRODUCING RETURNS, IF AT ALL, AND MAY RESULT IN ADDITIONAL COSTS TO
US TO COMPLY WITH RE-ZONING RESTRICTIONS OR ENVIRONMENTAL REGULATIONS.
We have in the past, and may in the future, invest in unimproved real
property. Unimproved properties generally take longer to yield income-producing
returns based on the typical time required for development. Any development of
unimproved property may also expose us to the risks and uncertainties associated
with re-zoning the land for a higher use or development and environmental
concerns of governmental entities and/or community groups. Any unsuccessful
investments or delays in realizing an income producing return or increased costs
to develop unimproved real estate would harm our financial condition and
operating results.
RISING OPERATING EXPENSES COULD REDUCE OUR CASH FLOW AND FUNDS AVAILABLE FOR
FUTURE DISTRIBUTIONS.
Our properties and any properties we buy in the future are and will be
subject to operating risks common to real estate in general, any or all of which
may negatively affect us. If any property is not fully occupied or if rents are
being paid in an amount that is insufficient to cover operating expenses, then
we could be required to expend funds for that property's operating expenses. The
properties will be subject to increases in real estate and other tax rates,
utility costs, operating expenses, insurance costs, repairs and maintenance and
administrative expenses.
While some of our properties are leased on a triple-net-lease basis or
require that tenants pay a portion of the expenses, renewals of leases or future
leases may not be negotiated on that basis, in which event we will have to pay
those costs. If we are unable to lease properties on a triple-net-lease basis or
on a basis requiring the tenants to pay all or some of the expenses, or if
tenants fail to pay
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required tax, utility and other impositions, we could be required to pay those
costs which could adversely affect our operating results.
ANY TENANT BANKRUPTCIES OR LEASING DELAYS WE ENCOUNTER, PARTICULARLY WITH
RESPECT TO OUR ANCHOR TENANTS, COULD SERIOUSLY HARM OUR OPERATING RESULTS AND
FINANCIAL CONDITION.
At any time, our tenants may experience a downturn in their business that
may weaken their financial condition. As a result, our tenants may delay lease
commencement, fail to make rental payments when due, or declare bankruptcy. We
are subject to the risk that these tenants may be unable to make their lease
payments or may decline to extend a lease upon its expiration. Any tenant
bankruptcies, leasing delays, or failure to make rental payments when due could
result in the termination of the tenant's lease and material losses to our
company and harm our operating results.
During 2001, 15 of our anchor tenants and other side shop tenants filed for
bankruptcy protection. Some of these tenants, the largest of which is Ames
Department Stores, Inc., occupy stores at multiple locations in our portfolio.
These tenants contributed approximately 2.7% of annualized base rent for all
leases in which tenants were in occupancy at December 31, 2001. We calculate
annualized base rent by dividing total base rent to be received during the
entire term of each lease by the terms in months for those leases, and
multiplying the result by 12.
On January 22, 2002, Kmart Corporation filed for bankruptcy protection. We
currently lease space to Kmart at seven of our shopping centers. These
locations, all of which were physically occupied at December 31, 2001,
represented approximately 1.6% of our total annualized base rent for all leases
in which tenants were in occupancy at December 31, 2001. In addition, Kmart owns
store locations at three of our shopping centers and subleases space from third
party tenants of ours at two of our other locations.
On March 8, 2002, Kmart announced that it intends to close 284 store
locations as part of its bankruptcy reorganization. None of the twelve store
locations described in the preceding paragraph were included on the list of
announced store closings. However, we have agreed with Kmart to a rent reduction
at one of our shopping centers of approximately $290,000 on an annualized basis.
Although Kmart has announced its current intended store closings, we are not
able to predict the impact on our business of Kmart's bankruptcy filing at this
time. For instance, Kmart could decide to close additional stores, including our
locations, terminate a substantial number of leases with us, or request
additional rent reductions or deferrals. Any of these actions could adversely
affect our rental revenues, and the impact may be material. In addition, Kmart's
termination of leases or closure of stores could result in lease terminations or
reductions in rent by other tenants in the same shopping centers, the impact of
which could be material to us.
If any of our anchor tenants becomes insolvent, suffers a downturn in
business, or decides not to renew its lease or vacates a property and prevents
us from re-leasing that property by continuing to pay base rent for the balance
of the term, it may seriously harm our business. In addition to the loss of
rental payments from the anchor tenant, a lease termination by an anchor tenant
or a failure by that anchor tenant to occupy the premises could result in lease
terminations or reductions in rent by other tenants in the same shopping center
whose leases permit cancellation or rent reduction if an anchor tenant's lease
is terminated. In that event, we may be unable to re-lease the vacated space.
Similarly, the leases of some anchor tenants may permit the anchor tenant to
transfer its lease to another retailer. The transfer to a new anchor tenant
could cause customer traffic in the retail center to decrease which would reduce
the income generated by that retail center. A transfer of a lease to a new
anchor tenant could also allow other tenants to make reduced rental payments or
to terminate their leases at the retail center.
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WE MAY BE UNABLE TO COLLECT BALANCES DUE FROM ANY TENANTS IN BANKRUPTCY, WHICH
WOULD HARM OUR OPERATING RESULTS.
As described above, 15 of our anchor tenants and other side shop tenants
filed for bankruptcy protection during 2001. In addition, Kmart filed for
bankruptcy protection in January 2002. Any bankruptcy filings by or relating to
one of our tenants or a lease guarantor would bar all efforts by us to collect
pre-bankruptcy debts from that tenant, the lease guarantor or their property,
unless we receive an order permitting us to do so from the bankruptcy court. A
tenant or lease guarantor bankruptcy could delay our efforts to collect past due
balances under the relevant leases, and could ultimately preclude full
collection of these sums. If a lease is assumed by the tenant in bankruptcy, all
pre-bankruptcy balances due under the lease must be paid to us in full. However,
if a lease is rejected by a tenant in bankruptcy, we would have only a general
unsecured claim for damages. Any unsecured claim we hold may be paid only to the
extent that funds are available and only in the same percentage as is paid to
all other holders of unsecured claims. It is possible that we may recover
substantially less than the full value of any unsecured claims we hold, which
may harm our financial condition.
WE MAY BE RESTRICTED FROM RE-LEASING SPACE BASED ON EXISTING EXCLUSIVITY LEASE
PROVISIONS WITH SOME OF OUR TENANTS.
In many cases, our tenant leases contain provisions giving the tenant the
exclusive right to sell particular types of merchandise or provide specific
types of services within the particular retail center, or limit the ability of
other tenants within that center to sell that merchandise or provide those
services. When re-leasing space after a vacancy by one of these other tenants,
these provisions may limit the number and types of prospective tenants for the
vacant space. The failure to re-lease or to re-lease on satisfactory terms could
harm our operating results.
RISKS RELATED TO OUR ORGANIZATION AND STRUCTURE
AFTER THIS OFFERING, OUR LARGEST STOCKHOLDER WILL OWN APPROXIMATELY 46% OF OUR
COMMON STOCK, WILL EXERCISE SIGNIFICANT CONTROL OF OUR COMPANY AND MAY DELAY,
DEFER OR PREVENT US FROM TAKING ACTIONS THAT WOULD BE BENEFICIAL TO OUR OTHER
STOCKHOLDERS.
After this offering, our largest stockholder, Net Realty Holding Trust, will
own approximately 46% of the outstanding shares of our common stock and will
have the right to nominate four of our eleven directors. Accordingly, Net Realty
Holding Trust will be able to exercise significant control over the outcome of
substantially all matters required to be submitted to our stockholders for
approval, including decisions relating to the election of our board of
directors, and the determination of our day-to-day corporate and management
policies. In addition, Net Realty Holding Trust will be able to exercise
significant control over the outcome of any proposed merger or consolidation of
our company under Maryland law. Net Realty Holding Trust's ownership interest in
our company may discourage third parties from seeking to acquire control of our
company which may adversely affect the market price of our common stock.
OUR STOCKHOLDERS AGREEMENT WILL ALLOW OUR LARGEST STOCKHOLDER TO PURCHASE SHARES
OF OUR COMMON STOCK TO MAINTAIN ITS OWNERSHIP PERCENTAGE IN US SHOULD WE PROPOSE
TO ISSUE ADDITIONAL SHARES TO THIRD PARTIES IN THE FUTURE, WHICH MAY HAVE THE
EFFECT OF DISCOURAGING THIRD PARTIES FROM INVESTING IN US.
Upon the closing of this offering, our stockholders agreement with Net
Realty Holding Trust and The Prudential Insurance Company of America will
provide that, subject to some exceptions, Net Realty Holding Trust may elect to
purchase from us shares of our common stock to maintain its ownership percentage
in us should we propose to issue additional shares to third parties in the
future. This agreement may have the effect of discouraging third parties from
investing in our common stock
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in the future, which may impede our ability to raise additional capital
necessary to fund our business and operations.
OUR ORGANIZATIONAL DOCUMENTS CONTAIN PROVISIONS WHICH MAY DISCOURAGE A TAKEOVER
OF US AND DEPRESS OUR STOCK PRICE.
Upon completion of this offering, our organizational documents will contain
provisions which may have an anti-takeover effect and inhibit a change in our
management. These provisions include:
(1) THERE ARE OWNERSHIP LIMITS AND RESTRICTIONS ON TRANSFERABILITY IN OUR
ARTICLES OF AMENDMENT AND RESTATEMENT. In order for us to qualify as a
REIT, no more than 50% of the value of outstanding shares of our capital
stock may be owned, actually or constructively, by five or fewer
individuals at any time during the last half of each taxable year. To
make sure that we will not fail to qualify as a REIT under this test,
subject to some exceptions, our articles prohibit any stockholder from
owning actually or constructively more than 9.8% of the value or number
of outstanding shares of our capital stock. Our board of directors may
exempt a person from the 9.8% ownership limit if the board determines, in
its sole discretion, that exceeding the 9.8% ownership limit as to any
proposed transferee would not jeopardize our qualification as a REIT.
This restriction may:
- discourage a tender offer or other transactions or a change in
management or control that might involve a premium price for our shares
or otherwise be in the best interests of our stockholders; or
- compel a stockholder who had acquired more than 9.8% of our stock to
dispose of the additional shares and, as a result, to forfeit the
benefits of owning the additional shares.
(2) OUR ARTICLES PERMIT OUR BOARD OF DIRECTORS TO ISSUE PREFERRED STOCK WITH
TERMS THAT MAY DISCOURAGE A THIRD PARTY FROM ACQUIRING US. Upon
completion of this offering, our articles will permit our board of
directors to issue up to 50,000,000 shares of preferred stock, having
those preferences, conversion or other rights, voting powers,
restrictions, limitations as to distributions, qualifications, or terms
or conditions of redemption as determined by our board. Thus, our board
could authorize the issuance of preferred stock with terms and conditions
which could have the effect of discouraging a takeover or other
transaction in which holders of some or a majority of our shares might
receive a premium for their shares over the then-prevailing market price
of our shares.
(3) OUR ARTICLES AND BYLAWS CONTAIN OTHER POSSIBLE ANTI-TAKEOVER PROVISIONS.
Upon completion of this offering, our articles and bylaws will contain
other provisions which may have the effect of delaying, deferring or
preventing a change in control of our company or the removal of existing
management and, as a result, could prevent our stockholders from being
paid a premium for their shares of common stock over the then-prevailing
market prices. These provisions include staggered terms for our
directors, advance notice requirements for stockholder proposals and the
absence of cumulative voting rights.
(4) MARYLAND LAW MAY DISCOURAGE A THIRD PARTY FROM ACQUIRING US. Maryland
law restricts mergers and other business combinations between our company
and an interested stockholder. An "interested stockholder" is defined as
any person who is the beneficial owner of 10% or more of the voting power
of our common stock and also includes any of our affiliates or associates
that, at any time within the two-year period prior to the date of a
proposed merger or other business combination, was the beneficial owner
of 10% or more of our voting power. A person is not an interested
stockholder if, prior to the most recent time at which the person would
otherwise have become an interested stockholder, our board approved the
transaction which otherwise would have resulted in the person becoming an
interested stockholder. For a
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period of five years after the most recent acquisition of stock by an
interested stockholder, we may not engage in any merger or other business
combination with that interested stockholder or any affiliate of that
interested stockholder. After the five-year period, any merger or other
business combination must be approved by our board and by at least 80% of
all the votes entitled to be cast by holders of outstanding shares of our
voting stock and two-thirds of all the votes entitled to be cast by
holders of outstanding shares of our voting stock other than the
interested stockholder or any affiliate or associate of the interested
stockholder unless, among other things, the stockholders (other than the
interested stockholder) receive a minimum price for their common stock
and the consideration received by those stockholders is in cash or in the
same form as previously paid by the interested stockholder for its common
stock. These provisions of the business combination statute do not apply
to business combinations that are approved or exempted by our board prior
to the time that the interested stockholder becomes an interested
stockholder. However, the business combination statute could have the
effect of discouraging offers from third parties to acquire us and
increasing the difficulty of successfully completing this type of offer.
See "Description of Capital Stock--Certain Provisions of Maryland Law and
of our Articles and Bylaws--Business Combinations" on page 119.
OUR BUSINESS WOULD BE HARMED IF KEY PERSONNEL WITH LONGSTANDING BUSINESS
RELATIONSHIPS WITH OUR TENANTS TERMINATE THEIR EMPLOYMENT WITH US.
Our future success depends, to a significant extent, upon the continued
services of Thomas C. Prendergast, our President and Chief Executive Officer,
and of our corporate management team. In particular, the extent and nature of
relationships that Mr. Prendergast has developed with existing and prospective
tenants and institutional and other owners and operators of retail shopping
centers is critically important to the success of our business. Although we have
an employment agreement with Mr. Prendergast, there is no guarantee that
Mr. Prendergast will remain employed with our company, and we generally do not
have employment agreements with other members of our corporate and regional
management teams that impose a specific term of employment. We do not maintain
key person life insurance on any of our officers. The loss of services of one or
more members of our corporate or regional management teams, particularly
Mr. Prendergast, would harm our business and our prospects.
OUR RIGHTS AND THE RIGHTS OF OUR STOCKHOLDERS TO TAKE ACTION AGAINST OUR
DIRECTORS AND OFFICERS ARE LIMITED.
Maryland law provides that a director or officer has no liability in that
capacity if he or she performs his or her duties in good faith, in a manner he
or she reasonably believes to be in our best interests and with the care that an
ordinarily prudent person in a like position would use under similar
circumstances. Our articles, in the case of our directors and officers, require
us to indemnify our directors and officers for actions taken by them in those
capacities to the extent permitted by Maryland law. As a result, we and our
stockholders may have more limited rights against our directors and officers
than might otherwise exist under common law. In addition, we may be obligated to
fund the defense costs incurred by our directors and officers. See
"Management--Indemnification" on page 100.
YOU HAVE LIMITED CONTROL AS A STOCKHOLDER REGARDING ANY CHANGES WE MAKE TO OUR
POLICIES.
Our board of directors determines our major policies, including our
investment objectives, financing, growth and distributions. Our board may amend
or revise these and other policies without a vote of our stockholders. This
means that our stockholders will have limited control over changes in our
policies.
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OUR ABILITY TO PAY OUR ESTIMATED INITIAL ANNUAL DISTRIBUTION, WHICH REPRESENTS
APPROXIMATELY 98% OF OUR ESTIMATED CASH AVAILABLE FOR DISTRIBUTION FOR THE
TWELVE MONTHS ENDING DECEMBER 31, 2002, OR 104% IF WE DO NOT REALIZE THE
INTEREST SAVINGS WE HAVE ANTICIPATED, COULD BE ADVERSELY AFFECTED IF WE FAIL TO
ACHIEVE OUR EXPECTED OPERATING RESULTS AND WE MAY HAVE TO BORROW FUNDS TO PAY
THIS DISTRIBUTION.
We expect to pay an initial annual dividend of $2.10 per share, which
represents approximately 98% of our estimated cash available for distribution.
This distribution amount has been established on the assumption that we will
generate sufficient cash to make this distribution out of cash flow from our
operations. If we fail to achieve our expected operating results, we may not
generate enough cash flow to meet our distribution requirements. In that event,
we either would need to borrow funds under our senior unsecured credit facility
to make up the shortfall, or reduce the amount of the distribution. If we need
to borrow funds on a regular basis to meet our distribution requirements or if
we reduce the amount of the distribution, it is likely that our stock price
would be adversely affected.
In addition, for purposes of estimating our initial annual distribution, we
have assumed that the amount of variable interest that we will be required to
pay under our senior unsecured credit facility will remain at 3.6% (the variable
rate of interest in effect at March 21, 2002) for the remainder of 2002. If the
variable interest rate is higher than 3.6% for the remainder of 2002, this will
result in a reduction in the amount of interest savings we have estimated for
2002. See "Distribution Policy" beginning on page 27 for a description of our
estimate of our interest savings for 2002. If we do not realize any interest
savings in 2002 compared to 2001 under our senior unsecured credit facility
except in connection with the termination of the interest rate collar under our
senior unsecured credit facility, this will reduce our cash available for
distribution and our estimated initial annual distribution of $2.10 per share
would represent approximately 104% of our estimated cash available for
distribution. In that event, we would not have sufficient cash available for
this distribution and we would be required to borrow funds under our senior
unsecured credit facility to make this distribution or to reduce the amount of
the distribution.
WE COULD BECOME TOO HIGHLY LEVERAGED BECAUSE OUR ORGANIZATIONAL DOCUMENTS WILL
CONTAIN NO LIMITATION ON THE AMOUNT OF DEBT WE MAY INCUR.
Upon completion of this offering, our organizational documents will not
limit the amount of indebtedness that we or our two operating partnerships may
incur. Although we intend to maintain a balance between our total outstanding
indebtedness and the value of our portfolio, we could alter this balance at any
time. If we become highly leveraged, then the resulting increase in debt service
could adversely affect our ability to make payments on our outstanding
indebtedness and harm our financial condition.
RISKS RELATED TO THE REAL ESTATE INDUSTRY
MORTGAGE DEBT OBLIGATIONS EXPOSE US TO INCREASED RISK OF LOSS OF PROPERTY, WHICH
COULD HARM OUR FINANCIAL CONDITION.
Incurring mortgage debt increases our risk of loss because defaults on
indebtedness secured by properties may result in foreclosure actions initiated
by lenders and ultimately our loss of the property securing any loans for which
we are in default. We have entered into mortgage loans which are secured by
multiple properties and contain cross collateralization and cross default
provisions. Specifically, we have three individual loans which are secured by
29, eight and two of our properties. Cross default provisions under each of
these loans would allow a lender to foreclose on multiple properties in the
event that we default under the loan. For tax purposes, a foreclosure of any of
our properties would be treated as a sale of the property for a purchase price
equal to the outstanding balance of the debt secured by the mortgage. If the
outstanding balance of the debt secured by the mortgage exceeds our
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tax basis in the property, we would recognize taxable income on foreclosure, but
would not receive any cash proceeds.
ILLIQUIDITY OF REAL ESTATE INVESTMENTS COULD SIGNIFICANTLY IMPEDE OUR ABILITY TO
RESPOND TO ADVERSE CHANGES IN THE PERFORMANCE OF OUR PROPERTIES AND HARM OUR
FINANCIAL CONDITION.
Because real estate investments are relatively illiquid, our ability to
promptly sell one or more properties in our portfolio in response to changing
economic, financial and investment conditions is limited. The real estate market
is affected by many factors, such as general economic conditions, availability
of financing, interest rates and other factors, including supply and demand,
that are beyond our control. We cannot predict whether we will be able to sell
any property for the price or on the terms set by us, or whether any price or
other terms offered by a prospective purchaser would be acceptable to us. We
also cannot predict the length of time needed to find a willing purchaser and to
close the sale of a property.
We may be required to expend funds to correct defects or to make
improvements before a property can be sold. We cannot assure you that we will
have funds available to correct those defects or to make those improvements. In
acquiring a property, we may agree to lock-out provisions that materially
restrict us from selling that property for a period of time or impose other
restrictions, such as a limitation on the amount of debt that can be placed or
repaid on that property. These lock-out provisions would restrict our ability to
sell a property. These factors and any others that would impede our ability to
respond to adverse changes in the performance of our properties could
significantly harm our financial condition and operating results.
ANY NEGATIVE PERCEPTIONS OF THE RETAIL SECTOR GENERALLY MAY RESULT IN A DECLINE
IN OUR STOCK PRICE.
We predominantly own and operate retail shopping centers catering to retail
tenants and expect to continue to focus on acquiring retail shopping centers in
the future. To the extent that the investing public has a negative perception of
the retail sector, the value of our common stock may be negatively impacted,
which would result in our common stock trading at a discount below the inherent
value of our assets as a whole.
IF WE SUFFER LOSSES THAT ARE NOT COVERED BY INSURANCE OR THAT ARE IN EXCESS OF
OUR INSURANCE COVERAGE LIMITS, WE COULD LOSE INVESTED CAPITAL AND ANTICIPATED
PROFITS.
Catastrophic losses, such as losses due to wars, earthquakes, floods,
hurricanes, pollution or environmental matters, generally are either uninsurable
or not economically insurable, or may be subject to insurance coverage
limitations, such as large deductibles or co-payments. If one of these events
occurred to, or caused the destruction of, one or more of our properties, we
could lose both our invested capital and anticipated profits from that property.
THE COSTS OF COMPLIANCE WITH ENVIRONMENTAL LAWS, INCLUDING LIABILITY FOR
CONTAMINATION AT OUR PROPERTIES RESULTING FROM GASOLINE OR DRY-CLEANING
POLLUTANTS, MAY HARM OUR OPERATING RESULTS.
Under various federal, state and local laws, ordinances and regulations, an
owner or operator of real estate may be liable for the costs of removal or
remediation of hazardous or toxic substances present at, on, under, in, or
released from its property. We currently have approximately 20 properties in our
portfolio that are undergoing or have been identified as requiring some form of
remediation to clean up contamination. In some cases, contamination has migrated
into the groundwater beneath our properties from adjacent properties, such as
service stations. In other cases, contamination has resulted from on-site uses
by current or former owners or tenants, such as gas stations or dry cleaners,
which have released pollutants such as gasoline or dry-cleaning solvents into
soil and/or groundwater. Based on our experience with properties in our
portfolio, we believe the cost of remediation for
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contamination resulting from dry-cleaning pollutants will range from
approximately $15,000 to $225,000 per property and the cost of remediation for
contamination from gasoline pollutants will range from approximately $15,000 to
$100,000 per property.
Of the approximately 20 properties in our portfolio that currently are
undergoing or have been identified as requiring remediation, 12 properties were
contributed by NETT at our formation and are the subject of an indemnity
arrangement under which NETT has agreed to indemnify us against environmental
liabilities. However, this indemnity is limited to $50 million in the aggregate
for all of the properties covered by that indemnity arrangement. For the
remaining eight properties, we anticipate incurring costs over the next two to
five years associated with the required remediation and currently expect that
those costs will not exceed approximately $700,000 in the aggregate. Any failure
to properly remediate the contamination at our properties may result in
liability to federal, state or local governments for damages to natural
resources or liability to third parties for property damage or personal injury
and may adversely affect our ability to operate, lease or sell that property.
In addition to the costs of remediation described above, we may incur
additional costs to comply with federal, state and local laws, ordinances and
regulations relating to environmental protection and human health and safety
generally. These laws, ordinances and regulations generally govern wastewater
discharges, air emissions, the operation and removal of underground and
above-ground storage tanks, the use, storage, treatment, transportation and
disposal of solid and hazardous materials, the management of asbestos and the
remediation of contamination. Some of these laws, ordinances and regulations may
impose joint and several liability on current or former tenants, owners or
operators for the costs of investigation or remediation of contaminated
properties, regardless of fault or the legality of the actions that caused the
contamination. Some of these laws and regulations require compliance with new or
more stringent standards as of future dates. Compliance with new or more
stringent laws or regulations, stricter interpretation of existing laws or the
future discovery of environmental contamination may require material
expenditures on our part. We cannot assure you that future laws, ordinances or
regulations will not impose any material environmental liability, or that the
current environmental condition of our properties will not be affected by the
operations of our tenants, by the existing condition of the land, by operations
in the vicinity of the properties, such as the presence of underground storage
tanks, or by the activities of unrelated third parties. These laws typically
allow liens to be placed on the affected property. In addition, there are
various local, state and federal fire, health, life-safety and similar
regulations which may be applicable to our operations, and which may subject us
to liability in the form of fines or damages for noncompliance.
COSTS ASSOCIATED WITH COMPLYING WITH THE AMERICANS WITH DISABILITIES ACT MAY
ADVERSELY AFFECT OUR FINANCIAL CONDITION AND OPERATING RESULTS.
Our properties are subject to the Americans with Disabilities Act of 1990.
Under the Disabilities Act, all places of public accommodation are required to
comply with federal requirements related to access and use by disabled persons.
The Disabilities Act has separate compliance requirements for "public
accommodations" and "commercial facilities" that generally require that
buildings and services, including restaurants and retail stores, be made
accessible and available to people with disabilities. The Disabilities Act's
requirements could require removal of access barriers and could result in the
imposition of injunctive relief, monetary penalties or, in some cases, an award
of damages.
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RISKS RELATED TO THIS OFFERING
OF OUR TOTAL OUTSTANDING SHARES AFTER THIS OFFERING, APPROXIMATELY 23.3 MILLION
SHARES WILL BE RESTRICTED FROM IMMEDIATE RESALE BUT MAY BE SOLD INTO THE MARKET
IN THE NEAR FUTURE. THIS COULD CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO
DROP SIGNIFICANTLY, EVEN IF OUR BUSINESS IS DOING WELL.
After this offering, we will have approximately 39.3 million shares of
common stock outstanding. Of these shares, the shares we and Net Realty Holding
Trust are selling in this offering will be freely tradable except for any shares
purchased by our "affiliates" as that term is used in Rule 144 of the Securities
Act. Affiliates may only sell their shares pursuant to the requirements of
Rule 144 or in a registered public offering. Unless sold earlier pursuant to a
registered public offering, the remaining approximately 23.3 million shares will
become available for resale in the public market at various times in the future,
as discussed in "Shares Eligible for Future Sale" beginning on page 130.
As restrictions on resale end, the market price of our common stock could
drop significantly if the holders of these shares sell them or are perceived by
the market as intending to sell them. In addition, the sale of these shares
could impair our ability to raise capital through the sale of additional stock.
Holders of 23 million shares of common stock, which will represent
approximately 59% of our outstanding shares after completion of this offering,
and holders of 375,000 warrants to acquire our common stock have the right to
require us to register their common stock with the Securities and Exchange
Commission. In addition, after this offering, we intend to register all common
stock that we may issue under our equity incentive plan and once we register
these shares, they can be freely sold in the public market after issuance. If
any or all of these holders cause a large number of securities to be sold in the
public market, the sales could reduce the trading price of our common stock and
could impede our ability to raise future capital.
YOU SHOULD NOT RELY ON THE UNDERWRITERS' LOCK-UP AGREEMENTS TO LIMIT THE NUMBER
OF SHARES SOLD INTO THE MARKET BY OUR AFFILIATES.
The holders of approximately 59% of the shares of our common stock to be
outstanding after this offering have agreed with our underwriters to be bound by
180-day lock-up agreements that prohibit these holders from selling or
transferring their stock except in specified limited circumstances. The lock-up
agreements signed by our stockholders are only contractual agreements, and
Merrill Lynch, on behalf of the underwriters, can waive the restrictions of the
lock-up agreements at an earlier time without prior notice or announcement and
allow stockholders to sell their shares. If the restrictions of the lock-up
agreement are waived, approximately 23.3 million shares will be available for
sale into the market, subject only to applicable securities rules and
regulations, which would likely reduce the market price for our common stock.
THERE IS NO PRIOR PUBLIC MARKET FOR OUR COMMON STOCK AND OUR STOCK PRICE COULD
BE VOLATILE AND COULD DECLINE SUBSTANTIALLY FOLLOWING THIS OFFERING.
Prior to this offering, there has not been any public market for our common
stock, and an active trading market for our common stock may never develop or be
sustained. The stock markets, including the New York Stock Exchange, on which
our common stock has been approved for listing, subject to official notice of
issuance, have experienced significant price and volume fluctuations. Further,
the market price of our common stock could decline and you may not be able to
resell your shares at or above the initial public offering price. Even if an
active trading market develops, the market price of our common stock may be
highly volatile and could be subject to wide fluctuations after this offering.
Some of the factors that could negatively affect our share price or result in
fluctuations in the price of our stock include:
- actual or anticipated variations in our quarterly operating results;
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- changes in our funds from operations or earnings estimates or publication
of research reports about us or the real estate industry;
- increases in market interest rates may lead purchasers of our shares to
demand a higher yield;
- changes in market valuations of similar companies;
- adverse market reaction to any increased indebtedness we incur in the
future;
- additions or departures of key personnel;
- actions by institutional stockholders;
- speculation in the press or investment community; and
- general market, economic and political conditions.
IF YOU PURCHASE SHARES OF COMMON STOCK IN THIS OFFERING, YOU WILL EXPERIENCE
IMMEDIATE DILUTION.
We expect the initial public offering price of our common stock to be higher
than the book value per share of our outstanding common stock. Accordingly, if
you purchase shares of common stock in this offering, you will experience
immediate dilution of approximately $2.50 in the book value per share of common
stock. This means that investors who purchase shares will pay a price per share
that exceeds the book value of our assets after subtracting our liabilities.
Moreover, to the extent that outstanding options or warrants to purchase our
common stock are exercised, or options reserved for issuance are issued and
exercised, each person purchasing common stock in this offering will experience
further dilution.
TAX AND EMPLOYEE BENEFIT PLAN RISKS
YOUR INVESTMENT HAS VARIOUS FEDERAL INCOME TAX RISKS.
Although the provisions of the Internal Revenue Code relevant to your
investment are generally described in "Material United States Federal Income Tax
Considerations" beginning on page 132, we strongly urge you to consult your own
tax advisor concerning the effects of federal, state and local income tax law on
an investment in our common stock and on your individual tax situation.
IF WE FAIL TO REMAIN QUALIFIED AS A REIT, OUR DISTRIBUTIONS WILL NOT BE
DEDUCTIBLE BY US, AND OUR INCOME WILL BE SUBJECT TO TAXATION, REDUCING OUR
EARNINGS AVAILABLE FOR DISTRIBUTION.
We intend to remain qualified as a REIT under the Internal Revenue Code,
which will afford us significant tax advantages. The requirements for this
qualification, however, are complex. If we fail to meet these requirements, our
distributions will not be deductible to us and we will have to pay a corporate
level tax on our income. This would substantially reduce our cash available to
pay distributions and your yield on your investment in our stock. In addition,
such a tax liability might cause us to borrow funds, liquidate some of our
investments or take other steps which could negatively affect our operating
results. Moreover, if our REIT status is terminated because of our failure to
meet a technical REIT requirement or if we voluntarily revoke our election, we
would generally be disqualified from electing treatment as a REIT for the four
taxable years following the year in which REIT status is lost.
EVEN REITS ARE SUBJECT TO FEDERAL AND STATE INCOME TAXES.
Even if we qualify and maintain our status as a REIT, we may become subject
to federal income taxes and related state taxes. For example, if we have net
income from a "prohibited transaction," that income will be subject to a 100%
tax. A "prohibited transaction" is, in general, the sale or other
21
<Page>
disposition of inventory or property, other than foreclosure property, held
primarily for sale to customers in the ordinary course of business. We may not
be able to make sufficient distributions to avoid excise taxes applicable to
REITs. We may also decide to retain income we earn from the sale or other
disposition of our property and pay income tax directly on that income. In that
event, our stockholders would be treated as if they earned that income and paid
the tax on it directly. However, stockholders that are tax-exempt, such as
charities or qualified pension plans, would have no benefit from their deemed
payment of that tax liability.
We may also be subject to state and local taxes on our income or property,
either directly or at the level of our operating partnerships or at the level of
the other companies through which we indirectly own our assets. We cannot assure
you that we will be able to continue to satisfy the REIT requirements, or that
it will be in our best interests to continue to do so.
In view of the complexity of the tax aspects of the offering, particularly
in light of the fact that some of the tax aspects of this offering will not be
the same for all investors, prospective investors are strongly advised to
consult their own tax advisors with specific reference to their own tax
situation prior to an investment in shares of our common stock.
WE ARE SUBJECT TO BUSINESS CONSTRAINTS RELATED TO OUR STATUS AS A PENSION-HELD
REIT.
We expect to be classified as a "pension-held REIT" following the completion
of this offering. See "Material United States Federal Income Tax
Considerations--Taxation of Tax-Exempt U.S. Stockholders" beginning on
page 142. As a result, some "qualified trusts" such as Net Realty Holding Trust
may be required to treat a portion of the distributions that we pay as
"unrelated business taxable income" unless we comply with certain rules, which
are summarized elsewhere in this prospectus. See "Material United States Federal
Income Tax Considerations--Taxation of Tax-Exempt U.S. Stockholders" beginning
on page 142. Following the completion of this offering, we intend to comply with
those rules so that we do not generate "unrelated business taxable income" for
our "qualified trust" shareholders, including Net Realty Holding Trust. Our
compliance with those rules may affect the manner in which we are able to
conduct our business and may cause us to refrain from taking actions or from
consummating transactions on terms that would be advantageous to us and to our
other shareholders.
AN INVESTMENT IN OUR COMMON STOCK MAY NOT BE SUITABLE FOR EVERY EMPLOYEE BENEFIT
PLAN.
When considering an investment in our common stock, an individual with
investment discretion over assets of any pension plan, profit-sharing plan,
retirement plan, IRA or other employee benefit plan covered by ERISA should
consider whether the investment satisfies the requirements of Section 404 of
ERISA or other applicable laws. In particular, attention should be paid to the
diversification requirements of Section 404(a)(3) of ERISA in light of all the
facts and circumstances, including the portion of the plan's portfolio of which
the investment will be a part. All plan investors should also consider whether
the investment is prudent and meets plan liquidity requirements as there may be
only a limited market in which to sell or otherwise dispose of our common stock,
and whether the investment is permissible under the plan's governing instrument.
We have not, and will not, evaluate whether an investment in our common stock is
suitable for any particular plan. See "ERISA Considerations" beginning on
page 147.
22
<Page>
DILUTION
NET TANGIBLE BOOK VALUE
As of December 31, 2001, we had a net tangible book value of approximately
$610.6 million, or approximately $22.48 per share. Net tangible book value per
share represents the amount of our total tangible assets less our total
liabilities and total minority interests, divided by the number of shares of our
common stock and Series A Cumulative Convertible Preferred Stock outstanding.
DILUTION AFTER THIS OFFERING
Dilution in net tangible book value per share represents the difference
between the amount per share paid by purchasers of common stock in this offering
and the net tangible book value per share of common stock immediately after this
offering. Assuming--
(a) the sale of the shares of common stock offered by this prospectus, at an
assumed initial public offering price of $25.00 per share, and our
receipt of approximately $274.5 million in net proceeds from this
offering, after deducting the underwriting discount and estimated
offering expenses,
(b) the issuance of 108,565 restricted shares of preferred and common stock
to members of our senior management and other key employees in
January 2002 relating to 2001 performance, and
(c) the automatic conversion of all of the shares of our Series A Cumulative
Convertible Preferred Stock into shares of common stock,
our pro forma net tangible book value as of December 31, 2001 would have been
approximately $883.6 million, or $22.50 per share of our common stock. This
amount represents an immediate increase in net tangible book value of $.02 per
share to existing stockholders prior to this offering and an immediate dilution
in pro forma net tangible book value of $2.50 per share of common stock to new
investors. The following table illustrates this dilution.
<Table>
Assumed initial public offering price....................... $25.00
------
Net tangible book value per share as of December 31,
2001.................................................... $22.48
Increase in net tangible book value per share to existing
stockholders attributable to new investors.............. .02
------
Pro forma net tangible book value per share after this
offering.................................................. 22.50
------
Dilution per share to new investors......................... $ 2.50
======
</Table>
23
<Page>
DIFFERENCES BETWEEN NEW AND EXISTING STOCKHOLDERS IN NUMBER OF SHARES AND AMOUNT
PAID
The table below summarizes, as of December 31, 2001 on the pro forma basis
discussed above, the differences between the number of shares of common stock
purchased from us, the total consideration paid and the average price per share
paid by existing stockholders and by the new investors purchasing shares in this
offering. We used an assumed initial public offering price of $25.00 per share,
and we have not deducted estimated underwriting discounts and commissions and
estimated offering expenses in our calculations.
<Table>
<Caption>
SHARES PURCHASED
ASSUMING NO EXERCISE OF
UNDERWRITERS' OVER-
ALLOTMENT OPTION TOTAL CONSIDERATION AVERAGE
------------------------ ------------------------- PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
----------- ---------- ------------ ---------- ---------
Existing stockholders................. 27,268,652 69.4% $681,716,300 69.4% $25.00
New investors......................... 12,000,000 30.6% 300,000,000 30.6% 25.00
---------- ----- ------------ -----
Total............................... 39,268,652 100.0% $981,716,300 100.0%
========== ===== ============ =====
</Table>
This table excludes options to purchase 1,001,500 shares of common stock and
warrants to purchase 375,000 shares of common stock outstanding as of
December 31, 2001. All of these options and warrants are exercisable at
$25.00 per share and will remain outstanding upon the completion of this
offering. To the extent that these outstanding options and warrants are
exercised in the future, there will be further dilution to new investors.
24
<Page>
SELLING STOCKHOLDERS
As part of this offering, our largest stockholder, Net Realty Holding Trust,
is offering for sale 4,000,000 shares of common stock, or approximately 18% of
the total number of shares of our common stock held by Net Realty Holding Trust.
Net Realty Holding Trust is the real estate company subsidiary of NETT from
which we originally acquired 60 of our properties in connection with our
formation. As of December 31, 2001, Net Realty Holding Trust owned 5,529,412
shares of our common stock and 16,470,588 shares of our Series A Cumulative
Convertible Preferred Stock, representing approximately 81% of the total
outstanding shares of each class. Following this offering, Net Realty Holding
Trust will own 18,000,000 shares of our common stock, or approximately 46% of
the total outstanding shares of our common stock. If the underwriters'
overallotment option is exercised in full, Net Realty Holding Trust will sell an
additional 600,000 shares of common stock in this offering, reducing its
ownership of our common stock to 17,400,000 shares, or approximately 43% of the
total outstanding shares of our common stock.
In addition, if the underwriters' overallotment option is exercised in full,
The Prudential Insurance Company of America, our second largest stockholder and
a wholly-owned, indirect subsidiary of Prudential Financial, Inc. and an
affiliate of one of the underwriters, will sell 1,000,000 shares of common stock
in this offering. This will reduce its ownership of our common stock to
4,000,000 shares, or approximately 10% of the total outstanding shares of our
common stock.
As described elsewhere in this prospectus, Net Realty Holding Trust and its
parent, NETT, and Prudential and its affiliates, are parties to several
transactions with us. Among other arrangements, upon completion of this
offering, we, Net Realty Holding Trust and Prudential will enter into a written
agreement which provides, among other things, that upon completion of this
offering, Net Realty Holding Trust will have the right to designate four of the
eleven members of our board. See "Certain Relationships and Related
Transactions" beginning on page 101 for a discussion of our arrangements with
Net Realty Holding Trust, Prudential and their affiliates.
25
<Page>
USE OF PROCEEDS
The net cash proceeds to us from this offering, after payment of all
expenses of this offering, are expected to be approximately $274.5 million based
on an assumed initial public offering price of $25.00 per share. The principal
purposes of this offering are to reduce our indebtedness, to increase our
financial flexibility, to facilitate our future access to public equity markets
and to provide increased visibility, credibility and name recognition for us in
a marketplace where many of our competitors are publicly held companies.
We expect that approximately $100 million of these net proceeds will be
applied to the full repayment of the outstanding principal and interest on the
subordinated loan we entered into with Fleet National Bank in September 2000.
This subordinated loan bears interest at a variable rate, which was 7.06% at
December 31, 2001. This loan matures on March 18, 2004.
In addition, approximately $174.5 million of the net proceeds of this
offering will be used by our operating partnerships to repay a portion of the
outstanding indebtedness under a senior unsecured credit facility with Fleet and
other financial institutions. This $425 million senior unsecured credit facility
bears interest at a variable rate, which was 5.43% as of December 31, 2001,
including the impact of the 6% floor under the interest rate collar agreement
for the $150 million term loan. This senior unsecured credit facility matures on
September 18, 2003. See "Business and Properties--Indebtedness Outstanding After
This Offering" beginning on page 81 for a more detailed description of this
senior unsecured credit facility.
If the underwriters' overallotment option to purchase 2,400,000 shares is
exercised in full, we will sell an additional 800,000 shares in this offering
and will receive additional net proceeds of approximately $18.8 million, based
on an assumed initial public offering price of $25.00 per share. To the extent
that the underwriters' overallotment option is exercised in part, the number of
shares we will sell will be reduced pro rata. We will use these additional
proceeds to repay additional indebtedness outstanding under our senior unsecured
credit facility.
26
<Page>
DISTRIBUTION POLICY
INITIAL DISTRIBUTION
After this offering, we intend to make regular quarterly distributions to
holders of our common stock. The initial distribution, covering a partial
quarter commencing on the closing of this offering and ending on June 30, 2002,
is expected to be approximately $ per share. This initial partial distribution
is based on a full quarterly distribution of $.525 per share and represents an
annualized distribution of $2.10 per share. This initial expected annual
distribution represents an initial annual distribution rate of 8.4%, based upon
an assumed initial public offering price of $25.00 per share of our common
stock. You should read the following discussion and the information set forth in
the table and footnotes below together with "Unaudited Pro Forma Income
Statement Data", "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources" and the financial
statements and related notes beginning on page F-1 of this prospectus.
Our intended initial distribution has been established based on our estimate
of the cash flow that will be available to us for distributions for the year
ending December 31, 2002. This estimate is based on pro forma cash flows
provided by our operations for the year ended December 31, 2001, as adjusted for
those adjustments described in the table and footnotes below. In estimating our
cash available for distribution for the twelve months ending December 31, 2002,
we have made certain assumptions as reflected in the table below, including that
there will be no new leases or net increases in renewals or terminations of
existing leases in our portfolio after March 21, 2002, that the variable
interest rate under our senior unsecured credit facility will remain at 3.6%
(the variable rate of interest in effect at March 21, 2002) during the twelve
months ending December 31, 2002 and that we will be able to refinance balloon
payments required during the twelve months ending December 31, 2002 under our
mortgage debt. We have also made assumptions with respect to the amount of our
non-revenue enhancing capital expenditures for the twelve months ending December
31, 2002 and the amount of tenant improvements and leasing commissions for
leases scheduled to expire during the twelve months ending December 31, 2002.
Our estimate of our cash flow does not include the effect of any changes in
our working capital resulting from changes in our current assets and current
liabilities. Our estimate also does not reflect the amount of cash estimated to
be used for investing activities for acquisition and other activities, other
than a reserve for capital expenditures, tenant improvements for renewing space
and working capital, and for financing activities, other than scheduled mortgage
loan principal payments on existing mortgage indebtedness. These and the other
adjustments described in the table below constitute all significant sources and
uses of cash flows from operating, investing and financing activities known to
us as of the date of the information provided in the table below, based on our
knowledge of related events and transactions as of that date. We anticipate
that, except as reflected in the table and notes below, investing and financing
activities will not have a material effect on our estimated cash available for
distribution for the twelve months ending December 31, 2002, although we cannot
assure you that this will in fact be the case. Our estimated pro forma cash
flows from operating activities determined in accordance with generally accepted
accounting principles is substantially equivalent to estimated pro forma Funds
from Operations, as adjusted for the items set forth in the table below. We are
estimating our cash available for distribution solely for the purpose of setting
our initial distribution. We do not intend this estimate to be a projection or
forecast of our actual results of operations or our liquidity. In addition, the
methodology upon which we made the adjustments described below is not
necessarily intended to be a basis for determining future distributions.
We believe that our estimate of cash available for distributions constitutes
a reasonable basis for setting our initial distribution. Any future
distributions we make will be at the discretion of our board of directors. We
cannot assure you that our estimated distribution will be made or sustained. Our
actual results of operations may differ materially from our current
expectations. Our actual results of operations will be affected by a number of
factors, including the revenue we receive from our properties, our operating
expenses, interest expense, the ability of our tenants, including, in
particular, our tenants in bankruptcy, to meet their obligations and
unanticipated expenditures. For more
27
<Page>
information regarding risk factors that could materially adversely affect our
actual results of operations, please see "Risk Factors" beginning on page 9. In
addition, variations in the net proceeds from this offering as a result of a
change in the initial public offering price or the exercise of the underwriters'
overallotment option may affect our cash available for distributions, and
available reserves, which may affect our ability to make the contemplated
distribution.
The following table describes the calculation of our pro forma Funds from
Operations for the year ended December 31, 2001 and the adjustments to pro forma
Funds from Operations for the year ended December 31, 2001 used in estimating
initial cash available for distribution for the year ending December 31, 2002.
<Table>
<Caption>
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
-----------------------
PRO FORMA INCOME BEFORE ALLOCATION TO MINORITY INTERESTS FOR THE YEAR ENDED
DECEMBER 31, 2001...................................................................
</Table>
<Table>
<Caption>
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
-----------------------
$ 36,151
Less: Income allocated to minority interests......................
</Table>
<Table>
<Caption>
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
-----------------------
(6,975)
Add: Real estate depreciation and amortization...................
</Table>
<Table>
<Caption>
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
-----------------------
68,569
Less: FF&E depreciation...........................................
</Table>
<Table>
<Caption>
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
-----------------------
(328)
--------
PRO FORMA FUNDS FROM OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2001(1).............
</Table>
<Table>
<Caption>
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
-----------------------
97,417
Add: Income allocated to Bradley OP common unitholders (2).......
</Table>
<Table>
<Caption>
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
-----------------------
319
Add: Amortization of deferred debt financing costs, net (2)......
</Table>
<Table>
<Caption>
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
-----------------------
3,673
Add: Amortization of stock based compensation (2)................
</Table>
<Table>
<Caption>
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
-----------------------
1,463
Less: Net derivative gains (2)....................................
</Table>
<Table>
<Caption>
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
-----------------------
(986)
Less: Straight line rents (3).....................................
</Table>
<Table>
<Caption>
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
-----------------------
(3,776)
PRO FORMA CASH FLOWS FROM OPERATING ACTIVITIES FOR THE YEAR ENDED DECEMBER 31,
2001................................................................................
</Table>
<Table>
<Caption>
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
-----------------------
98,110
Add: New leases and net increases in renewals (4)................
</Table>
<Table>
<Caption>
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
-----------------------
10,174
Less: Provision for lease expirations, assuming no renewals (5)...
</Table>
<Table>
<Caption>
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
-----------------------
(6,042)
Add: Net reduction in interest expense (6).......................
</Table>
<Table>
<Caption>
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
-----------------------
7,717
--------
ESTIMATED PRO FORMA CASH FLOWS FROM OPERATING ACTIVITIES FOR THE YEAR ENDING
DECEMBER 31, 2002...................................................................
</Table>
<Table>
<Caption>
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
-----------------------
109,959
Estimated cash flows used in investing activities:
Less: Non-revenue enhancing capital expenditures (7)..............................
</Table>
<Table>
<Caption>
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
-----------------------
(7,753)
Less: Tenant improvements and leasing commissions (8).............................
</Table>
<Table>
<Caption>
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
-----------------------
(9,434)
--------
Estimated cash flows used in investing activities...................................
</Table>
<Table>
<Caption>
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
-----------------------
(17,187)
--------
Estimated cash flows used in financing activities:
Less: Scheduled mortgage loan principal payments (9)..............................
</Table>
<Table>
<Caption>
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
-----------------------
(8,250)
--------
ESTIMATED CASH AVAILABLE FOR DISTRIBUTION FOR THE YEAR ENDING DECEMBER 31, 2002
</Table>
<Table>
<Caption>
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
-----------------------
$ 84,522
========
The Company's share of Estimated Cash Available for Distribution (10)............. $83,788
Minority Interest's share of Estimated Cash Available for Distribution............ $ 734
Total estimated initial annual distribution (11)..................................
</Table>
<Table>
<Caption>
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
-----------------------
$ 83,198
========
Estimated annual distribution per share...........................................
</Table>
<Table>
<Caption>
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
-----------------------
$ 2.10
========
Payout Ratio (12).................................................................
</Table>
<Table>
<Caption>
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
-----------------------
98%
========
</Table>
- ------------------------
(1) We calculate Funds from Operations in accordance with the best practices
described in the April 2001 National Policy Bulletin of the National
Association of Real Estate Investment Trusts, referred to as NAREIT, and
NAREIT's 1995 White Paper on Funds from Operations, as supplemented in
November 1999. The White Paper defines Funds From Operations as net income
(loss) (computed in accordance with GAAP), excluding gains (or losses) from
debt restructuring and sales of property, plus real estate related
depreciation and amortization and after adjustments for unconsolidated
partnerships and joint ventures. Funds from Operations should not be
considered as an alternative to net income (determined in accordance with
GAAP) as an indicator of our financial performance or to cash flow from
operating activities (determined in accordance
28
<Page>
with GAAP) as a measure of our liquidity, nor is it indicative of funds
available to fund our cash needs, including our ability to make
distributions. We believe that Funds from Operations is helpful to investors
as a measure of our performance as an equity REIT because, along with cash
flows from operating activities, financing activities and investing
activities, it provides investors with an understanding of our ability to
incur and service debt and make capital expenditures. Our computation of
Funds from Operations may, however, differ from the methodology for
calculating funds from Operations utilized by other equity REITs and,
therefore, may not be comparable to such other REITs.
(2) Represents non-cash item for the year ended December 31, 2001.
(3) Represents the effect of adjusting straight-line rental revenue included in
pro forma net income on the accrual basis under generally accepted
accounting principles to amounts currently being paid or due from tenants.
(4) Represents contractual rental income from new leases and net increases in
contractual rental income from renewals that were not in effect for the
entire year ended December 31, 2001 and new leases and net increases in
contractual rental income from renewals that went into effect between
January 1, 2002 and March 21, 2002.
(5) Represents contractual rental income under leases expiring after January 1,
2001 unless a renewal lease has been entered into by March 21, 2002.
(6) Represents an estimated reduction in interest expense for the year ending
December 31, 2002 from the unwinding of the interest rate collar on the
$150 million term loan portion of our senior unsecured credit facility (as
outstanding on December 31, 2001) and a reduction in interest rates,
calculated as follows (dollars in thousands):
<Table>
Pro forma balance of our senior unsecured credit facility at
December 31, 2001......................................... $241,164
Weighted average interest rate under our senior unsecured
credit facility during 2001, including the effect of the
collar.................................................... 6.80%
LIBOR rate plus the applicable lender's margin under our
senior unsecured credit facility at March 21, 2002
(assuming rate was in effect for entire year)............. 3.60%
====
Net reduction in interest rate for 2002..................... 3.20%
========
Net reduction in interest expense........................... $ 7,717
</Table>
If the interest rate on our senior unsecured credit facility changed by
1/8%, the corresponding effect on interest expense savings would be
approximately $303. This would result in a corresponding change to our
estimated payout ratio of approximately 0.4%.
Assuming there were no interest rate savings other than as a result of
terminating the collar, the net reduction in interest expense would have
been $2,973, which represents the amount we paid under the collar for the
year ended December 31, 2001. This would decrease estimated cash available
for distribution for the year ending December 31, 2002 to $79,778, resulting
in an increase in our payout ratio to 104%, and is calculated as follows
(dollars in thousands):
<Table>
Estimated cash available for distribution for the year
ending December 31, 2002.................................. $84,522
Net reduction in interest expense from unwinding of the
interest rate collar on the $150 million term loan portion
of our senior unsecured credit facility and reduction in
interest rates............................................ (7,717)
Subtotal................................................ $76,805
=======
Net reduction in interest expense from terminating the
collar.................................................... 2,973
------- -------
Estimated cash available for distribution for the year
ending December 31, 2002.................................. $79,778
=======
Total estimated initial annual distribution................. $83,198
=======
Payout Ratio................................................ 104%
=======
</Table>
29
<Page>
Under this scenario, if the interest rate on our senior unsecured credit
facility changed by 1/8%, the corresponding effect on interest expense
savings would be approximately $188. This would result in a corresponding
change to our estimated payout ratio of approximately 0.2%.
(7) Represents an assumed capital expenditure per square foot for the pro forma
year ending December 31, 2002 of $0.33 multiplied by the total company owned
GLA at December 31, 2001 of 23.5 million square feet. Our historical average
annual capital expenditure per square foot for the three years ended
December 31, 2001 was $0.27.
(8) Represents assumed recurring tenant improvements and leasing commissions
projected for the year ending December 31, 2002 based on the weighted
average expenditures for tenant improvements and leasing commissions for
renewed and retenanted space at properties incurred during the years ended
December 31, 2001, 2000, 1999 and 1998 multiplied by the space for which
leases are scheduled to expire during the year ending December 31, 2002. The
weighted average annual per square foot cost of tenant improvements and
leasing commissions expenditures is presented below:
<Table>
<Caption>
WEIGHTED
2001 2000 1999 1998 AVERAGE
-------- -------- -------- -------- ----------
Recurring tenant improvements and lease
commissions per square foot................ $7.35 $7.93 $5.04 $3.04 $ 6.28
Square feet scheduled to expire during year
ending December 31, 2002................... 1,502,224
Total estimated annual recurring capitalized
tenant improvements and leasing
commissions................................ $9,433,967
</Table>
(9) Represents scheduled payments of mortgage loan principal due during the year
ending December 31, 2002, excluding balloon payments of approximately
$25.7 million required under our mortgage debt. We currently expect to
refinance our mortgage debt requiring balloon payments during 2002 through
additional debt financings secured by individual properties or groups of
properties, unsecured private or public debt offerings or additional equity
offerings. We may also refinance these balloon payments through borrowings
under our senior unsecured credit facility.
(10) Our share of estimated cash available for distribution and estimated
initial annual cash distributions to our stockholders is based on our
approximately 99% aggregate ownership interest in the Bradley OP as of
December 31, 2001, as adjusted to reflect the issuance of limited
partnership units in connection with one of the property acquisitions
described in our pro forma financial statements.
(11) Based on a total of 39,268,652 shares of common stock expected to be
outstanding after this offering (consisting of 27,268,652 shares of common
stock outstanding as of the date of this prospectus, plus, 12,000,000 shares
of common stock being issued by us in this offering), plus 349,586 common
units of limited partnership interests in the Bradley OP.
(12) Calculated as estimated initial annual distribution to stockholders divided
by our share of estimated cash available for distribution for the year
ending December 31, 2002. The payout ratio based on estimated adjusted pro
forma cash flows from operating activities for the year ending December 31,
2002 is 76%.
We anticipate that, at least initially, our distributions will exceed our
current and accumulated earnings and profits as determined for U.S. federal
income tax purposes due to non-cash expenses, primarily depreciation and
amortization charges that we expect to incur. Therefore, a portion of these
distributions may represent a return of capital for federal income tax purposes.
We anticipate that approximately 31% (or $0.68 per share) of the distributions
we anticipate that we will pay during the year ending December 31, 2002 will
represent a return of capital for federal income tax purposes. Distributions in
excess of our current and accumulated earnings and profits and not treated by us
as a dividend will not be taxable to a taxable U.S. stockholder under current
federal income tax law to the extent those distributions do not exceed the
stockholder's adjusted tax basis in his or her common stock, but rather will
reduce the adjusted basis of the common stock. Therefore, the gain or loss
recognized on the sale of that common stock or upon our liquidation will be
increased or decreased accordingly. To the extent those distributions exceed a
taxable U.S. stockholder's adjusted tax basis in
30
<Page>
his or her common stock, they generally will be treated as a capital gain
realized from the taxable disposition of those shares. The percentage of our
stockholder distributions that exceeds our current and accumulated earnings and
profits may vary substantially from year to year. For a more complete discussion
of the tax treatment of distributions to holders of our common stock, see
"Material United States Federal Income Tax Considerations--Taxation of Taxable
U.S. Stockholders," "--Taxation of Tax-Exempt U.S. Stockholders," and
"--Taxation of Non-U.S. Stockholders" beginning on page 140.
Federal income tax law requires that a REIT distribute annually at least 90%
of its REIT taxable income. For more information, please see "Material United
States Federal Income Tax Considerations--Taxation of the Company--Annual
Distribution Requirements" beginning on page 138. We anticipate that our
estimated cash available for distribution will exceed the annual distribution
requirements applicable to REITs. However, under some circumstances, we may be
required to pay distributions in excess of cash available for distributions in
order to meet these distribution requirements and we may need to borrow funds to
make some distributions.
HISTORICAL DISTRIBUTIONS
Prior to this offering and since our formation in July 1999, we paid regular
quarterly distributions to holders of our Series A Cumulative Convertible
Preferred Stock, which will convert into common stock upon completion of this
offering. For the abbreviated portion of the third quarter of 1999 after our
formation and for the fourth quarter of 1999, we paid aggregate cash
distributions to the holders of our Series A Cumulative Convertible Preferred
Stock of approximately $8.34 million, or $.53 per share.
In 2000, we made aggregate cash distributions to holders of our Series A
Cumulative Convertible Preferred Stock of approximately $36.8 million, or
approximately $.53 per share per quarter. Beginning in 2000, in addition to
distributions made to holders of our Series A Cumulative Convertible Preferred
Stock, we also made distributions to our common stockholders. In 2000, we made
aggregate cash distributions of $1.11 million, or approximately $.16 per share,
to holders of our common stock. The holders of our Series A Cumulative
Convertible Preferred Stock also participated in the common stock distributions
as if their shares had converted to shares of our common stock on a one-for-one
basis.
In 2001, we made aggregate cash distributions to holders of our Series A
Cumulative Convertible Preferred Stock of approximately $43.3 million, or
approximately $.53 per share per quarter, and aggregate cash distributions to
holders of our common stock of approximately $3.7 million, or approximately $.18
per share per quarter. The holders of our Series A Cumulative Convertible
Preferred Stock also participated in the common stock distributions as if their
shares had converted to shares of our common stock on a one-for-one basis.
Prior to this offering, our board has declared, and we will make, a special
cash distribution to holders of our Series A Cumulative Convertible Preferred
Stock and common stock as of March 11, 2002 of $12.9 million, or $.47 per share.
This distribution will be funded from borrowings under our senior unsecured
credit facility.
31
<Page>
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 2001,
on an actual and as adjusted basis to reflect completed and probable property
acquisitions and completed sales, this offering and the use of the net proceeds
from this offering as described in "Use of Proceeds" on page 25.
<Table>
<Caption>
AS
ACTUAL ADJUSTED(1)
----------- -----------
(DOLLARS IN THOUSANDS)
Debt:
Mortgage loans payable.................................... $ 492,289 $ 541,994
Unsecured notes payable................................... 201,490 201,490
Line of credit facility................................... 343,000 241,164
Subordinated debt......................................... 100,000 --
----------- ----------
Total debt.......................................... 1,136,779 984,648
----------- ----------
Minority Interests:
Series B Preferred Units.................................. 50,000 50,000
Series C Preferred Units.................................. 25,000 25,000
Other minority interests.................................. 2,952 11,037
----------- ----------
Total minority interests............................ 77,952 86,037
----------- ----------
Redeemable Equity:
Series A 8.5% Cumulative Convertible Participating
Preferred Stock, $0.01 par value, and Common Stock,
$.001 par value, no shares issued and outstanding, as
adjusted................................................ 123,094 --
Shareholders' Equity:
Series A 8.5% Cumulative Convertible Participating
Preferred Stock, $.001 par value; 25,000,000 shares
authorized; no shares issued and outstanding, as
adjusted................................................ 16 --
Common stock, $.001 par value, 70,000,000 shares
authorized; 39,268,652 shares issued and outstanding, as
adjusted................................................ 6 39
Additional paid-in capital................................ 551,623 947,705
Cumulative distributions in excess of net income.......... (55,435) (55,435)
Accumulated other comprehensive loss...................... (8,742) (8,742)
----------- ----------
Total redeemable and shareholders' equity........... 610,562 883,567
----------- ----------
Total capitalization................................ $ 1,825,293 $1,954,252
=========== ==========
</Table>
- ------------------------
(1) Adjusted to give effect to (a) the issuance of 108,565 restricted shares of
our common stock to members of our senior management and other key employees
in January 2002 relating to 2001 performance, (b) the automatic conversion
of the shares of our Series A Cumulative Convertible Preferred Stock into
20,341,767 shares of common stock, (c) the sale of 12,000,000 shares of
common stock by us at an assumed initial public offering price of $25.00 per
share and the application of the net proceeds from this offering, and (d)
the completion of those acquisitions and sales of properties described in
the pro forma financial information contained in this prospectus.
32
<Page>
UNAUDITED PRO FORMA INCOME STATEMENT DATA
The unaudited pro forma income statement data presented below gives effect
to property acquisitions and sales and the completion of this offering. The
unaudited pro forma income statement data for the year ended December 31, 2001
presented below gives effect to property acquisitions and sales during the year
ended December 31, 2001 and completed and probable acquisitions and a completed
sale after December 31, 2001, to reflect our operations on a pre-offering pro
forma basis as if these events had occurred on January 1, 2001. These
pre-offering amounts are then adjusted for the effects of this offering as if it
had occurred on January 1, 2001.
The unaudited pro forma financial information and related notes presented
below do not purport to represent what our financial position or results of
operations would actually have been if those property acquisitions and sales and
this offering and the application of the net proceeds from this offering had in
fact occurred on the earlier dates discussed above.
The unaudited pro forma income statement data should be read in conjunction
with our consolidated financial statements and related notes included elsewhere
in this prospectus. The unaudited pro forma condensed consolidated statement of
income for the year ended December 31, 2001 does not purport to represent what
our results of operations would have been had the indicated transactions been
completed on January 1, 2001, or to project our results of operations for any
future period.
33
<Page>
<Table>
<Caption>
PRE-OFFERING
PRO FORMA ADJUSTMENTS PRO FORMA 2001
----------------------- PRE-OFFERING EFFECTS POST-OFFERING
PROPERTY PROPERTY PRO FORMA OF THE PRO FORMA
HISTORICAL ACQUISITIONS SALES AMOUNTS OFFERING AMOUNTS
---------- ------------ -------- ------------ ----------- -------------
(A) (B) (C) (D) (E) (F)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Income:
Rentals and recoveries................. $ 255,534 20,469 (2,979) 273,024 -- 273,024
Interest and other..................... 298 38 -- 336 -- 336
---------- ------ ------ ---------- ------- -----------
Total income....................... 255,832 20,507 (2,979) 273,360 -- 273,360
---------- ------ ------ ---------- ------- -----------
Expenses:
Property operating expenses............ 37,182 2,080 (833) 38,429 -- 38,429
Real estate taxes...................... 37,870 2,170 (750) 39,290 -- 39,290
Depreciation and amortization.......... 64,051 4,927 (409) 68,569 -- 68,569
Interest............................... 88,315 11,608 (1,081) 98,842 (20,075) 78,767
Interest--related party................ 2,027 -- -- 2,027 (2,027) --
General and administrative............. 12,640 -- -- 12,640 500 13,140
---------- ------ ------ ---------- ------- -----------
Total expenses..................... 242,085 20,785 (3,073) 259,797 (21,602) 238,195
---------- ------ ------ ---------- ------- -----------
Income before net gains............ 13,747 (278) 94 13,563 21,602 35,165
Net gains on sales of real estate
investments and equipment.............. 4,159 -- (4,159) -- -- --
Net derivative gains..................... 986 -- -- 986 -- 986
---------- ------ ------ ---------- ------- -----------
Income (loss) before allocation to
minority interests..................... 18,892 (278) (4,065) 14,549 21,602 36,151
Income allocated to minority interests... (6,656) (319) -- (6,975) -- (6,975)
---------- ------ ------ ---------- ------- -----------
Net income (loss).................. 12,236 (597) (4,065) 7,574 21,602 29,176
Preferred stock distributions............ (43,345) -- -- (43,345) 43,345 --
Accretion of redeemable equity........... (995) -- -- (995) 995 --
---------- ------ ------ ---------- ------- -----------
Net (loss) income attributable to
common shareholders.............. $ (32,104) (597) (4,065) (36,766) 65,942 29,176
========== ====== ====== ========== ======= ===========
Per-share data:
Basic (loss) earnings attributable to
common shareholders.................. $ (4.71) $ (5.39) $ 0.74
========== ========== ===========
Diluted (loss) earnings attributable to
common shareholders.................. $ (4.71) $ (5.39) $ 0.74
========== ========== ===========
Weighted average common shares
outstanding.......................... 6,818,320 6,818,320 39,268,652
========== ========== ===========
</Table>
- ------------------------------
(A) This column reflects our historical income statement data for the year
ended December 31, 2001, as contained in our historical consolidated
financial statements and related notes thereto included elsewhere in this
prospectus.
(B) This column reflects pro forma revenues and expenses attributable to the
completed acquisitions of Division Place and Franklin Square, which we
purchased in fiscal 2001, and Cross Keys Commons, which we acquired in the
first quarter of 2002. This column also reflects pro forma revenues and
expenses attributable to two probable acquisitions. These consist of four
shopping centers we expect to acquire in the second quarter of 2002, which
we refer to as the Pioneer properties; and portions of a shopping center at
Montgomery Towne Center, which we expect to acquire from two separate
sellers in the second quarter of 2002. Interest expense of approximately
$11.6 million includes pro forma interest of approximately $5.9 million
during the year attributable to draws under our senior unsecured credit
facility to fund these probable acquisitions and pro forma interest of
approximately $5.7 million on the mortgage loans assumed. The chart below
summarizes the assumed rate terms of the debt issued or assumed in
connection with these acquisitions:
<Table>
<Caption>
WEIGHTED AVERAGE TYPE OF
TYPE OF DEBT INTEREST RATE RATE
- ------------ ---------------- --------
Mortgage loans payable...................................... 8.14% Fixed
Senior unsecured credit facility, including effect of
related interest rate collar.............................. 6.80% Variable
</Table>
If interest rates on the variable rate debt issued or assumed in connection
with the above acquisitions changed by 1/8%, the corresponding effect on
net income would be approximately $119,000.
This column also reflects, as income allocated to minority interests,
distributions of $319,000 attributable to limited partnership units issued
in connection with the acquisition of the Pioneer Properties. The terms of
the limited partnership units provide distributions to the holder that are
equal to the distributions paid on each share of our common stock. Each
34
<Page>
unit is redeemable beginning one year after this offering (subject to
certain limitations) by the holder for the cash equivalent at the time of
redemption of one share of our common stock or, at our option, for one
share of our common stock.
(C) This column reflects the removal of historical revenues, expenses and gains
on five properties sold during the year ended December 31, 2001, as well as
the removal of historical revenues and expenses of Flower Hill, an office
building we sold in March 2002. Aggregate sales proceeds for these
properties of approximately $27.5 million are applied as repayments under
our senior unsecured credit facility (variable rate of 6.80%) at
January 1, 2001, resulting in a reduction of approximately $1.1 million
from historical interest expense.
If interest rates on all debt repaid in connection with the property sales
changed by 1/8%, the corresponding effect on net income would be
approximately $34,000.
(D) This column reflects our pro forma condensed consolidated income data for
the year ended December 31, 2001 as adjusted for the property acquisitions
and sales but before giving effect to this offering.
(E) This column reflects the application of approximately $274.5 million of the
net offering proceeds from this offering to repay approximately
$174.5 million of the balance outstanding under our senior unsecured credit
facility and approximately $100.0 million of subordinated debt outstanding
at January 1, 2001. The debt repayments result in pro forma savings of
approximately $20.1 million and $2.0 million from the historical interest
expense and related party interest expense, respectively, for the year
ended December 31, 2001. The approximately $20.1 million of actual interest
expense incurred in 2001 includes approximately $11.9 million of interest
expense on our senior unsecured credit facility, as well as approximately
$7.1 million of interest expense and amortization of deferred financing
costs of approximately $1.1 million on the subordinated debt. The chart
below summarizes the rate terms of the debt repaid with offering proceeds:
<Table>
<Caption>
WEIGHTED AVERAGE TYPE OF
TYPE OF DEBT INTEREST RATE RATE
- ------------ ---------------- --------
Senior unsecured credit facility, including effect of
related interest rate collar.............................. 6.80% Variable
Subordinated debt........................................... 9.13% Variable
</Table>
If interest rates on all debt repaid with offering proceeds changed by
1/8%, the corresponding effect on net income would be approximately
$347,000.
The pro forma increase in general and administrative expenses consists of
approximately $500,000 of recurring expenses necessary to operate as a
public company, including filing fees, printing costs, additional board and
legal expenses, and some other administrative costs.
Upon completion of the offering, all shares of our Series A Cumulative
Convertible Preferred Stock will be automatically converted on a one-to-one
basis into shares of our common stock, resulting in the elimination of
preferred stock distributions of approximately $43.3 million for the year
ended December 31, 2001. In addition, historical accretion of redeemable
equity of $995,000 is eliminated on a pro forma basis upon conversion of
redeemable equity at the offering date.
(F) This column reflects our pro forma income statement data for the year ended
December 31, 2001 after giving effect to the probable property acquisitions
and sales and the offering.
For purposes of calculating post-offering pro forma basic earnings per
share, weighted average common shares outstanding includes the following:
<Table>
Actual weighted average common shares outstanding........... 6,818,320
Conversion as of January 1, 2001 of preferred shares
outstanding on December 31, 2001.......................... 20,341,767
Shares issued in the primary offering....................... 12,000,000
Restricted shares granted in 2002 with accelerated vesting
immediately prior to the offering......................... 108,565
----------
Total post-offering pro forma shares outstanding........ 39,268,652
==========
</Table>
For purposes of calculating post-offering pro forma diluted earnings per
share, weighted average common shares outstanding includes the following:
<Table>
Total post-offering pro forma shares outstanding............ 39,268,652
Exchangeable limited partnership units in Bradley Operating
Limited Partnership....................................... 349,586
----------
Total................................................... 39,618,238
==========
</Table>
35
<Page>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA
You should read the following selected historical consolidated financial and
operating data together with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Unaudited Pro Forma Income Statement
Data" and our consolidated financial statements, the financial statements of
NETT's real estate company, our predecessor, and the financial statements of
Bradley and related notes included elsewhere in this prospectus. Our historical
financial information has been presented on an accrual basis in accordance with
generally accepted accounting principles, GAAP, applicable to real estate
investment trusts for all periods presented since our commencement of operations
on July 9, 1999. Prior to our formation, our business was operated by NETT's
real estate company. Accordingly, the historical financial information presented
for all periods prior to our formation was prepared by NETT on a fair value
basis in accordance with GAAP applicable to pension funds such as NETT.
The major differences between the two types of GAAP are:
- pension funds report the periodic changes in the estimated fair value of
the real estate investments as unrealized gain (loss) in fair value of
assets;
- pension funds do not report periodic depreciation expense on the real
estate investments; and
- pension funds report rental revenues as payments are due, whereas REITs
report rental income on a straight-line basis over the term of the lease
if the lease contains deferred payment terms.
36
<Page>
<Table>
<Caption>
HERITAGE
--------------------------------------------
YEAR ENDED JULY 9, 1999
DECEMBER 31, TO DEC. 31,
------------------------- -------------
2001 2000(1) 1999
---------- --------- -------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Income:
Rentals and recoveries.................................... $ 255,534 139,149 38,550
Interest and other........................................ 298 2,117 485
---------- --------- ---------
Total income............................................ 255,832 141,266 39,035
---------- --------- ---------
Expenses:
Operating................................................. 75,052 38,514 10,992
General and administrative................................ 12,640 8,274 2,699
Depreciation and amortization............................. 64,051 34,808 9,788
Interest.................................................. 90,342 35,517 2,032
---------- --------- ---------
Total expenses.............................................. 242,085 117,113 25,511
---------- --------- ---------
Income before net gains..................................... 13,747 24,153 13,524
Net gains on sales of real estate investments and
equipment............................................... 4,159 1,890 --
Net derivative gains...................................... 986 -- --
---------- --------- ---------
Income before allocations to minority interests............. 18,892 26,043 13,524
Income allocated to minority interests.................... (6,656) (1,941) --
---------- --------- ---------
Net income.................................................. 12,236 24,102 13,524
Preferred stock distributions............................. (43,345) (38,410) (17,487)
Accretion of redeemable equity............................ (995) (329) (25)
---------- --------- ---------
Net loss attributable to common shareholders................ $ (32,104) (14,637) (3,988)
========== ========= =========
Per Share Data:
Basic loss attributable to common shareholders............ $ (4.71) $ (2.40) $ (0.69)
========== ========= =========
Diluted loss attributable to common shareholders.......... $ (4.71) $ (2.40) $ (0.69)
========== ========= =========
Weighted average common shares outstanding.................. 6,818,320 6,088,480 5,780,749
========== ========= =========
BALANCE SHEET DATA:
(AT END OF PERIOD)
Real estate investments, before accumulated depreciation.... $1,948,968 1,899,025 690,454
Total assets................................................ 1,906,964 1,905,662 719,431
Total liabilities........................................... 1,218,450 1,173,790 148,394
Minority interests.......................................... 77,952 77,981 --
Redeemable equity........................................... 123,094 122,099 24,806
Shareholders' equity........................................ 487,468 531,792 546,231
OTHER DATA:
# of Shopping Centers (at end of period).................... 142 140 42
Gross Leasable Area of Shopping Centers
(sq. ft. at end of period, in thousands)(2)............... 23,154 22,902 7,503
% Leased (at end of period)................................. 93% 94% 92%
Total portfolio net operating income........................ $ 180,482 100,635 27,558
Funds from Operations(3).................................... 27,460 18,067 5,666
Cash flow from operating activities......................... 64,796 31,887
Cash flow from investing activities......................... (745,119) (97,880)
Cash flow from financing activities......................... 656,614 93,788
</Table>
- ------------------------------
(1) Includes approximately 3.5 months of operations of the properties acquired
from Bradley on September 18, 2000.
(2) Represents the total gross leasable area of all Company-owned and operated
shopping center square footage.
(3) We calculate Funds from Operations in accordance with the best practices
described in the April 2001 National Policy Bulletin of the National
Association of Real Estate Investment Trusts, referred to as NAREIT, and
NAREIT's 1995 White Paper on Funds from Operations, as supplemented in
November 1999. The White Paper defines Funds From Operations as net income
(loss) (computed in accordance with GAAP), excluding gains (or losses) from
debt restructuring and sales of property, plus real estate related
depreciation and amortization and after adjustments for unconsolidated
partnerships and joint ventures. Funds from Operations should not be
considered as an alternative to net income (determined in accordance with
GAAP) as an indicator of our financial performance or to cash flow from
operating activities (determined in accordance with GAAP) as a measure of
our liquidity, nor is it indicative of funds available to fund our cash
needs, including our ability to make distributions. We believe that Funds
from Operations is helpful to investors as a measure of our performance as
an equity REIT because, along with cash flows from operating activities,
financing activities and investing activities, it provides investors with an
understanding of our ability to incur and service debt and make capital
expenditures. Our computation of Funds from Operations may, however, differ
from the methodology for calculating funds from Operations utilized by other
equity REITs and, therefore, may not be comparable to such other REITs.
37
<Page>
<Table>
<Caption>
HERITAGE PREDECESSOR (1)
-----------------------------------
OCT. 1, 1998 YEAR ENDED
TO JULY 8, SEPT. 30,
------------- -------------------
1999 1998 1997
------------- -------- --------
(DOLLARS IN THOUSANDS)
INCOME STATEMENT DATA:
Income:
Rentals and recoveries.................................... $ 55,941 67,074 63,929
Interest and other........................................ 393 628 884
--------- -------- --------
Total income............................................ 56,334 67,702 64,813
--------- -------- --------
Expenses:
Operating................................................. 17,247 23,117 22,324
General and administrative................................ 3,757 3,060 2,571
Interest.................................................. 2,155 1,292 --
--------- -------- --------
Total expenses.............................................. 23,159 27,469 24,895
--------- -------- --------
Net additions from operations............................... 33,175 40,233 39,918
Unrealized gain (loss) in fair value of assets............ 35,170 11,511 (5,810)
Net gains (losses) on sales of real estate investments and
equipment............................................... (8,807) 3,239 14,367
--------- -------- --------
Net additions after gains (losses)........................ 59,538 54,983 48,475
Distributions to NETT....................................... (25,858) (20,771) (59,646)
--------- -------- --------
Net increase (decrease) in net assets....................... $ 33,680 34,212 (11,171)
========= ======== ========
BALANCE SHEET DATA:
(AT END OF PERIOD)
Real estate investments, before accumulated depreciation.... $ 578,200 544,937 477,010
Total assets................................................ 585,592 557,514 489,010
Total liabilities........................................... 35,592 41,194 6,902
OTHER DATA:
# of Shopping Centers (at end of period).................... 41 40 37
Gross Leasable Area of Shopping Centers (sq. ft. at end of
period, in thousands)..................................... 7,155 6,700 6,072
% Leased (at end of period)................................. 92% 92% 91%
Total portfolio net operating income........................ $ 38,694 43,957 41,605
</Table>
- ------------------------------
(1) Certain information contained in the Heritage table is not included in the
Heritage Predecessor table because this information is not comparable to
Predecessor's operations or accounting requirements. This information
includes, for example, depreciation and amortization expense, net income,
earnings per share and various cash flow disclosures. Additionally,
Predecessor reports unrealized gain/loss in fair value of assets that
Heritage does not report.
38
<Page>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION IN CONJUNCTION WITH "SELECTED
HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA," "UNAUDITED PRO FORMA
INCOME STATEMENT DATA," AND OUR CONSOLIDATED FINANCIAL STATEMENTS, THE FINANCIAL
STATEMENTS OF NETT'S REAL ESTATE COMPANY, OUR PREDECESSOR, AND OF BRADLEY, AND
RELATED NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
We are a fully integrated, self-administered and self-managed REIT which
acquires, owns, manages, leases and redevelops primarily grocer-anchored
neighborhood and community shopping centers in the Eastern and Midwestern United
States. After this offering, based on publicly available information, we will be
the sixth largest publicly-traded shopping center REIT in the country, ranked
according to gross leasable area. As of December 31, 2001, we had a portfolio of
142 shopping centers totaling approximately 23.2 million square feet of gross
leasable area, located in 26 states. Our shopping center portfolio was
approximately 93% leased as of December 31, 2001. We also own five office
buildings and 11 single-tenant properties. We currently intend to dispose of
several of our office buildings and substantially all of our single-tenant
properties in the foreseeable future. As our net operating income from these
properties constituted only approximately 4% of our total net operating income
during 2001, we do not expect the sale of these properties to have a significant
or adverse impact on our future operations or cash flows.
We commenced operations in July 1999 as the successor to a company formed in
1970 to manage NETT's real estate investments. Prior to our formation, the
assets and liabilities of our business were owned by NETT. NETT contributed
$550 million of real estate investments and related assets net of liabilities to
us on July 9, 1999. At our formation, The Prudential Insurance Company of
America also invested $25 million of equity in us. In September 2000, we
completed our largest acquisition to date, acquiring Bradley for approximately
$1.2 billion. Since our formation in July 1999, we have acquired nine additional
shopping center properties, an out-parcel of an owned shopping center and a
parcel of land for development for a total of approximately $202 million. For
more information regarding these acquisitions, see page 39 of this prospectus.
In connection with the Bradley acquisition, we significantly increased our
leverage. As of December 31, 2001, we had total indebtedness of approximately
$1.1 billion. After this offering, we expect to have approximately $985 million
of indebtedness. This indebtedness will require balloon payments starting in
June 2002. We anticipate that we will not have sufficient funds on hand to repay
these balloon amounts at maturity. Therefore, we expect to refinance our debt
either through unsecured private or public debt offerings, additional debt
financings secured by individual properties or groups of properties or by
additional equity offerings.
We derive substantially all of our revenues from rents received from tenants
under existing leases on each of our properties. Our operating results therefore
depend materially on the ability of our tenants to make required rental
payments. We believe that the nature of the properties which we primarily own
and invest in - grocer-anchored neighborhood and community shopping centers -
provides a more stable revenue flow in uncertain economic times, as they are
more resistant to economic down cycles. This is because consumers still need to
purchase food and other goods found at grocers, even in difficult economic
times.
During 2001, 15 of our anchor tenants and other side shop tenants filed for
bankruptcy protection. These tenants contributed approximately 2.7% of our
annualized base rent for all leases in which tenants were in occupancy at
December 31, 2001. Continuation of the current downturn or a recession could
materially negatively impact our operating results in 2002.
39
<Page>
In the future, we intend to focus on increasing our internal growth, and we
expect to continue to pursue targeted acquisitions of primarily grocer-anchored
neighborhood and community shopping centers in attractive markets with strong
economic and demographic characteristics. We currently expect to incur
additional debt in connection with any future acquisitions of real estate.
Following this offering, we intend to pay regular quarterly distributions to
the holders of our common stock in amounts that meet or exceed the requirements
to maintain our REIT status. We currently anticipate that our estimated cash
available for distributions will exceed the annual distribution requirements
applicable to REITs. However, under some circumstances, we may be required to
pay distributions in excess of cash available for those distributions in order
to meet these distribution requirements, and we may need to borrow funds to pay
distributions in the future.
As described in "Management--Special Stock Option Grants and Accelerated
Options," and "--Acceleration of Restricted Stock Grants" on page 95 of this
prospectus, upon completion of this offering, the vesting of all stock options
previously granted to members of our senior management and other key employees
will accelerate and all contractual restrictions on transfer and forfeiture
provisions which currently exist on restricted shares previously granted to
members of our senior management and other key employees will terminate. As a
result, we will incur compensation expense, including with respect to the
reimbursement of a portion of the taxes paid by two of these individuals, of
approximately $6.8 million if this offering is completed in the second quarter
of 2002.
We anticipate that, after this offering, the current members of our board of
directors will recommend to the board and our compensation committee, as
comprised after this offering, that special stock grants be made to members of
our senior management and other key employees, which may compensate these
individuals for past performance and/or provide incentives to these individuals
through ownership of our stock. If made, we believe that these special stock
grants would be issued in an aggregate amount not to exceed 2% of the number of
outstanding shares of our common stock after this offering, or approximately
800,000 shares. We also believe that these shares will be issued and/or will
vest over a period of time of not less than five years. However, as of the date
of this prospectus, the identity of those members of our senior management and
other key employees who might receive these special stock grants, the aggregate
amount of these grants, the amount of any grants to be made to any particular
individual, the period of time over which these grants would be made and/or vest
and the other terms of these grants have not yet been determined. As a result,
the dollar amount that we may recognize as stock compensation expense in
connection with these grants and the period of recognition of this stock
compensation expense cannot be determined as of the date of this prospectus.
However, if the issuance of these shares occurs in one grant, with the shares
vesting immediately, we will incur compensation expense of approximately
$20.0 million, assuming a stock price on the date of grant of $25.00 per share,
the assumed initial public offering price. If these shares are issued in one
grant or over a period of time not to exceed five years and vest over a five
year period, we will incur compensation expense of approximately $4.0 million in
each of the five years of the period, assuming a stock price on the date of
grant of $25.00 per share, the assumed initial public offering price.
ACQUISITIONS AND SALES
On September 18, 2000, we acquired Bradley for an aggregate purchase price
of approximately $1.2 billion, including transaction expenses. We paid
approximately $592 million in cash to the common and preferred stockholders of
Bradley and to the holders of common units of limited partnership interest in
the Bradley OP in exchange for their interests. In addition, we assumed
approximately $292 million of Bradley debt, including approximately
$202 million of outstanding public debt and approximately $90 million of
mortgage loans. We also assumed approximately $76 million of preferred units of
limited partnership interest in the Bradley OP. As part of the acquisition, we
also repaid approximately $179 million of Bradley debt, including approximately
$73 million of outstanding public debt. In connection with the acquisition, we
incurred approximately $51 million of transaction and
40
<Page>
financing costs. To finance the acquisition, we and our subsidiaries borrowed an
aggregate of $627 million. For more information regarding indebtedness we
incurred in connection with this acquisition, see "Business and
Properties--Indebtedness Outstanding After this Offering" beginning on page 81.
In addition, in connection with the acquisition, Prudential invested an
additional $100 million in us, the proceeds of which we used to finance a
portion of the Bradley acquisition. See "Certain Relationships and Related
Transactions--Transactions with Prudential and Affiliates" beginning on
page 102. In connection with the integration of Bradley, we reduced our combined
employee headcount, principally through the elimination of duplicate executive
level and finance department positions and by outsourcing maintenance functions
which had previously been performed internally. We have substantially integrated
the Bradley operations and we intend to continue to enhance the operating
performance of the Bradley portfolio.
Since our formation, we have acquired nine additional shopping centers as
described in the chart below:
<Table>
<Caption>
PROPERTY NAME/LOCATION DATE OF ACQUISITION ACQUISITION COST
- ---------------------- ------------------- ----------------
(IN MILLIONS)
Innes Street Marketplace .................................
North Carolina July 1999 $ 29.0
Wendover Place ...........................................
North Carolina December 1999 84.0(1)
University Commons Greenville ............................
North Carolina December 1999 (1)
New Center Market ........................................
North Carolina December 1999 (1)
River Ridge Marketplace ..................................
North Carolina November 2000 12.2
Village Plaza ............................................
Kansas January 2001 2.2
Division Place ...........................................
Minnesota July 2001 11.3
Franklin Square Shopping Center ..........................
North Carolina October 2001 26.5
Cross Keys Commons .......................................
New Jersey March 2002 34.0
------
$199.2
======
</Table>
- ------------------------
(1) Wendover Place, University Commons Greenville and New Center Market were
purchased in a single transaction for an aggregate purchase price of
approximately $84.0 million.
In addition to those property acquisitions described above, in May 2001, we
purchased an out-parcel at an owned shopping center for approximately
$1.0 million and in July 2001, we purchased a parcel of land in Mishawaka,
Indiana, for development of a shopping center for approximately $1.3 million.
Since we commenced operations in July 1999, we have sold one shopping center
that we acquired from Bradley, four single-tenant properties, which were located
in Indiana, Michigan, Pennsylvania and New York, and three office buildings
located in New York. In June 2001, we sold one of the Bradley properties located
in Nebraska for approximately $4.8 million. The aggregate sales price of the
single-tenant properties was approximately $9.1 million. The aggregate sales
price of the three office buildings was approximately $18.6 million. We sold the
one Bradley property because it was an underperforming asset and a non
grocer-anchored shopping center which we viewed as not consistent with our
overall
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strategy. In addition, the sales of the single-tenant properties and the office
buildings were part of our overall strategy to focus primarily on
grocer-anchored neighborhood and community shopping centers.
CRITICAL ACCOUNTING POLICIES
In response to the Securities and Exchange Commission's Release Numbers
33-8040, CAUTIONARY ADVICE REGARDING DISCLOSURE ABOUT CRITICAL ACCOUNTING
POLICIES, and 33-8056, COMMISSION STATEMENT ABOUT MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, we have identified
the following critical accounting policies that affect our more significant
judgments and estimates used in the preparation of our consolidated financial
statements. The preparation of our consolidated financial statements in
conformity with accounting principles generally accepted in the United States of
America requires us to make estimates and judgments that affect the reported
amounts of assets and liabilities, revenues and expenses, and related
disclosures of contingent assets and liabilities.
On an ongoing basis, we evaluate our estimates, including those related to
revenue recognition and the allowance for doubtful accounts receivable, real
estate investments and asset impairment, and derivatives used to hedge
interest-rate risks. We state these accounting policies in the notes to our
consolidated financial statements and at relevant sections in this discussion
and analysis. Our estimates are based on information that is currently available
to us and on various other assumptions that we believe are reasonable under the
circumstances. Actual results could vary from those estimates and those
estimates could be different under different assumptions or conditions.
REVENUE RECOGNITION
Rental income with scheduled rent increases is recognized using the
straight-line method over the term of the leases. Deferred rent receivable
represents the aggregate excess of rental revenue recognized on a straight-line
basis over cash received under applicable lease provisions. Leases for both
retail and office space generally contain provisions under which the tenants
reimburse us for a portion of property operating expenses and real estate taxes
incurred by us. In addition, certain of our operating leases for retail space
contain contingent rent provisions under which tenants are required to pay a
percentage of their sales in excess of a specified amount as additional rent. We
defer recognition of contingent rental income until those specified targets are
met.
We must make estimates of the uncollectibility of our accounts receivable
related to minimum rent, deferred rent, expense reimbursements and other revenue
or income. We specifically analyze accounts receivable and historical bad debts,
tenant concentrations, tenant credit worthiness, current economic trends and
changes in our tenant payment terms when evaluating the adequacy of the
allowance for doubtful accounts receivable. These estimates have a direct impact
on our net income, because a higher bad debt allowance would result in lower net
income.
The Securities and Exchange Commission's Staff Accounting Bulletin (SAB)
No. 101, REVENUE RECOGNITION, provides guidance on the application of generally
accepted accounting principles to selected revenue recognition issues. We
believe that our revenue recognition policy is appropriate and in accordance
with generally accepted accounting principles and SAB No. 101.
REAL ESTATE INVESTMENTS
Contributed real estate investments at our formation in July 1999 were
recorded at the carry-over basis of our predecessor, which was fair market value
of the assets in conformity with GAAP applicable to pension funds. Subsequent
acquisitions of real estate investments, including those acquired in connection
with our acquisition of Bradley in September 2000 and other acquisitions since
our formation, are recorded at cost. Expenditures that substantially extend the
useful life of a real estate
42
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investment are capitalized. Expenditures for maintenance, repairs and
betterments that do not materially extend the useful life of a real estate
investment are charged to operations as incurred.
The provision for depreciation and amortization has been calculated using
the straight-line method over the following estimated useful lives:
<Table>
Land improvements 15 years
Buildings and improvements 20-39 years
Tenant improvements Term of related lease
</Table>
We are required to make subjective assessments as to the useful lives of our
properties for purposes of determining the amount of depreciation to reflect on
an annual basis with respect to our properties. These assessments have a direct
impact on our net income because if we were to shorten the expected useful life
of our properties or improvements, we would depreciate them over fewer years,
resulting in more depreciation expense and lower net income on an annual basis
during these periods.
We apply Statement of Financial Accounting Standards (SFAS) No. 121,
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF, to recognize and measure impairment of long-lived assets. We
review each real estate investment for impairment whenever events or
circumstances indicate that the carrying value of a real estate investment may
not be recoverable. The review of recoverability is based on an estimate of the
future undiscounted cash flows, excluding interest charges, expected to result
from the real estate investment's use and eventual disposition. These cash flows
consider factors such as expected future operating income, trends and prospects,
as well as the effects of leasing demand, competition and other factors. If
impairment exists due to the inability to recover the carrying value of a real
estate investment, an impairment loss is recorded to the extent that the
carrying value exceeds estimated fair market value.
Real estate investments held for sale are carried at the lower of carrying
amount or fair value, less costs to sell. Depreciation and amortization are
suspended during the period held for sale.
We are required to make subjective assessments as to whether there are
impairments in the value of our real estate properties. These assessments have a
direct impact on our net income, because taking an impairment loss results in an
immediate negative adjustment to net income.
HEDGING ACTIVITIES
From time to time, we use some derivative financial instruments to limit our
exposure to changes in interest rates. Our only outstanding derivative
instrument as of December 31, 2001 was an interest rate floor and cap agreement
(collar) that we entered into as a condition to entering into our senior
unsecured credit facility. If interest rate assumptions and other factors used
to estimate the collar's fair value or methodologies used to determine hedge
effectiveness were different, amounts reported in earnings and other
comprehensive income and losses expected to be reclassified into earnings in the
future could be affected. Furthermore, future changes in market interest rates
and other relevant factors could increase the fair value of our liability for
the collar, increase future interest expense, and result in lower net income.
RESULTS OF OPERATIONS
We believe that, for the reasons set forth below, our historical results of
operations prior to the year ended December 31, 2000 and the results of
operations of NETT's real estate company, our predecessor, cannot be compared in
a meaningful way. Prior to our formation in July 1999, our business operated as
part of NETT's real estate company's portfolio of real estate investments. The
results of operations attributable to our operations for the year ended
September 30, 1998 and for the period from October 1, 1998 to July 8, 1999
represent the financial statements of NETT as our
43
<Page>
predecessor. The results of operations for these periods are presented in
accordance with generally accepted accounting principles applicable to pension
plans. Our historical results of operations for the period from the commencement
of our operations, July 9, 1999, through December 31, 1999 and for the years
ended December 31, 2000 and 2001, are presented on an accrual basis of
accounting in accordance with GAAP applicable to REITs.
The major differences between the two types of GAAP are:
- pension funds report the periodic changes in the estimated fair value of
the real estate investments as unrealized gain (loss) in fair value of
assets;
- pension funds do not report periodic depreciation expense on the real
estate investments; and
- pension funds report rental revenues as payments are due, while REITs
report rental income on a straight-line basis over the term of the lease
if the lease contains deferred payment terms.
We recorded the $550 million of real estate investments and related assets
net of liabilities contributed by NETT at our formation at the carry-over basis
of NETT, which was fair value. Subsequent acquisitions of real estate
investments are recorded at our cost. Depreciation and amortization is
calculated and recorded using the straight-line method over the applicable
estimated useful lives. Rental income with scheduled rent increases is recorded
on the straight-line basis over the terms of the leases.
In light of the substantial differences in the accounting treatment as
described above and because the periods presented prior to the year ended
December 31, 2000 for our and NETT's results of operations are not of even
duration, the discussion of those periods below is presented in a non-
comparative format that focuses on the significant events that affected our and
NETT's financial performance in each period.
We have provided below a comparison between our actual results for the years
ended December 31, 2001 and 2000. The material differences in our results of
operations for these periods primarily result from the impact of the Bradley
acquisition, which we completed in September 2000.
The discussion of our results of operations set forth below focuses on our
neighborhood and community shopping centers and does not separately address our
results attributable to our office buildings and single-tenant properties. For
2001, our shopping center revenue represented approximately 95% of our total
revenue and approximately 96% of our net operating income. In addition, during
the fourth quarter of 2001, we sold one of our office buildings and we intend to
continue to dispose of several of our office buildings and substantially all of
our single-tenant properties. As a result, we expect that revenues and net
operating income from these properties will continue to decline in comparison to
revenue and net operating income from our shopping center properties, and
therefore we believe that a separate presentation of those items is not
meaningful.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
Rental and recovery income increased $116.4 million, or 84%, to
$255.5 million for the year ended December 31, 2001, as compared with
$139.1 million for the year ended December 31, 2000. Rental income increased
$87.4 million, or 78%, to $199.7 million for the year ended December 31, 2001,
as compared with $112.3 million for the year ended December 31, 2000. This
increase resulted from the combined effect of:
(1) our acquisition of Bradley in September 2000, providing an additional
$83.7 million of rental income for the year ended December 31, 2001;
(2) our acquisition of River Ridge Marketplace, Village Plaza, Division
Place and Franklin Square Shopping Center in November 2000, January 2001,
July 2001 and October 2001, respectively,
44
<Page>
providing an additional $2.9 million of rental income for the year ended
December 31, 2001; and
(3) an additional $.8 million of rental income from new leasing,
re-tenanting and rental increases at properties that we have owned since
January 1, 2000, or same store properties, for the year ended
December 31, 2001, representing an increase of .9% from December 31,
2000.
The average base rental rate on leases signed during 2001, which measures
the first 12 months of base rent payable under new and renewed leases signed
during a period divided by the total square footage represented by those leases,
was $10.72, as compared to $13.34 for 2000.
Recoveries from tenants increased $29.0 million, or 108%, to $55.8 million
for the year ended December 31, 2001, as compared with $26.8 million for the
year ended December 31, 2000. Recoveries from tenants were 74% and 70% of
property operating expenses and real estate taxes for the years ended
December 31, 2001 and 2000, respectively. This increase resulted from the
combined effect of:
(1) our acquisition of Bradley in September 2000, providing an additional
$26.8 million of recoveries for the year ended December 31, 2001;
(2) our acquisition of River Ridge Marketplace, Village Plaza, Division
Place and Franklin Square Shopping Center, providing an additional
$.9 million of recoveries from tenants for the year ended December 31,
2001; and
(3) an additional $1.3 million of recoveries from same store properties for
the year ended December 31, 2001, representing an increase of 4.9% from
the year ended December 31, 2000.
Interest and other income decreased $1.8 million, or 86%, to $.3 million,
for the year ended December 31, 2001, as compared with $2.1 million for the year
ended December 31, 2000. This decrease resulted primarily from a decrease in the
average monthly cash balances maintained during the year ended December 31, 2001
due to the use of cash in connection with our acquisition of Bradley in
September 2000.
Operating expenses, which are comprised of property operating expenses and
real estate taxes, increased $36.6 million, or 95%, to $75.1 million for the
year ended December 31, 2001, as compared with $38.5 million for the year ended
December 31, 2000. This increase resulted from the combined effect of:
(1) our acquisition of Bradley, providing an additional $35.1 million of
operating expenses for the year ended December 31, 2001;
(2) our acquisition of River Ridge Marketplace, Village Plaza, Division
Place and Franklin Square Shopping Center, providing an additional
$1.1 million of operating expenses for the year ended December 31, 2001;
and
(3) an additional $.4 million of operating expenses from same store
properties for the year ended December 31, 2001, representing an increase
of 1.0% from the year ended December 31, 2000. This increase was
primarily attributable to snow removal and related costs associated with
the severe 2001 winter we experienced throughout a substantial part of
our portfolio.
Net operating margin percentage, defined as rental and recovery income less
property operating expenses, divided by rental and recovery income, was
approximately 71% for the year ended December 31, 2001, as compared to 72% for
the year ended December 31, 2000. The decrease in the net operating margin
percentage resulted primarily from a 1% decrease in occupancy from December 31,
2000 to December 31, 2001 across the portfolio.
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<Page>
General and administrative expenses increased $4.3 million, or 52%, to
$12.6 million for the year ended December 31, 2001, as compared with
$8.3 million for the year ended December 31, 2000. This increase resulted from a
one-time compensation cost associated with the Bradley acquisition and the
increase in the overall size of our real estate portfolio, mainly attributable
to the Bradley acquisition. In addition, our employee headcount increased as a
result of the Bradley acquisition, which also contributed to our increased
general and administrative expenses.
Depreciation and amortization expense increased $29.3 million, or 84%, to
$64.1 million for the year ended December 31, 2001, as compared with
$34.8 million for the year ended December 31, 2000. This increase resulted from
the combined effect of:
(1) our acquisition of Bradley, providing an additional $26.9 million of
depreciation and amortization expense for the year ended December 31,
2001;
(2) our acquisition of River Ridge Marketplace, Village Plaza, Division
Place and Franklin Square Shopping Center, providing an additional
$.7 million of depreciation and amortization expense for the year ended
December 31, 2001; and
(3) an additional $1.7 million of depreciation and amortization expense from
same store properties for the year ended December 31, 2001, representing
an increase of 5.8% from the year ended December 31, 2000. This increase
was primarily attributable to capital and tenant improvements made during
2001.
Interest expense increased $54.8 million, or 154%, to $90.3 million for the
year ended December 31, 2001, as compared with $35.5 million for the year ended
December 31, 2000. This increase resulted primarily from the additional debt we
incurred and assumed in connection with the Bradley acquisition and the
acquisitions of River Ridge Marketplace, Village Plaza, Division Place and
Franklin Square Shopping Center.
During the year ended December 31, 2001, we sold two single-tenant
properties, one shopping center and two office buildings, resulting in a net
gain on sale of real estate investments of $4.2 million. During the year ended
December 31, 2000, we sold two single-tenant properties resulting in a net gain
on sale of real estate investments of $1.9 million.
PERIOD FROM JULY 9, 1999 THROUGH DECEMBER 31, 1999
Rental and recovery income for the period from July 9, 1999 through
December 31, 1999 was $38.6 million. Rental income for the period from July 9,
1999 through December 31, 1999 was $31.7 million. The percentage of our gross
leasable area actually leased remained constant and was 92% at December 31,
1999. The average base rental rate on leases signed during 1999 was $13.55.
Recoveries from tenants were $6.9 million for the period from July 9, 1999
through December 31, 1999. Recoveries from tenants were 69% of property
operating expenses and property taxes for the period from July 9, 1999 through
December 31, 1999.
Net operating margin percentage was approximately 72% for this period.
There were no significant events or items that materially impacted interest
or other income, operating expenses, general and administrative expense,
depreciation and amortization and interest expense for the period from July 9,
1999 through December 31, 1999.
PERIOD FROM OCTOBER 1, 1998 TO JULY 8, 1999
Rental and recovery income for the period from October 1, 1998 to July 8,
1999 was $55.9 million. Rental income for the period from October 1, 1998 to
July 8, 1999 was $45.0 million. The percentage of our gross leasable area
actually leased during the period from October 1, 1998 to July 8, 1999
46
<Page>
remained constant and was 92% at July 8, 1999. The average base rental rate on
leases signed during 1999 was $13.55.
Recoveries from tenants were $10.9 million for the period from October 1,
1998 through July 8, 1999. Recoveries from tenants were 70% of property
operating expenses and property taxes for the period from October 1, 1998
through July 8, 1999.
Net operating margin percentage was approximately 69% for this period.
There were no significant events or items that materially impacted interest
or other income, operating expenses, general and administrative expense,
depreciation and amortization and interest expense for the period from
October 1, 1998 to July 8, 1999.
In October 1998, NETT's real estate company sold two shopping centers
resulting in a net loss on sale of approximately $8.8 million.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2001, we had approximately $6.1 million in available cash
and cash equivalents. As a REIT, we are required to distribute at least 90% of
our taxable income to our stockholders on an annual basis. Therefore, as a
general matter, it is unlikely that we will have any substantial cash balances
that could be used to meet our liquidity needs. Instead, these needs must be met
from cash generated from operations and external sources of capital.
We believe that this offering will improve our financial position through
changes to our capital structure, principally through the reduction in our
overall debt and our debt-to-equity ratio. Upon completion of this offering, we
will repay approximately $274.5 million of indebtedness, which will reduce our
outstanding debt to approximately $984.6 million, after taking into account debt
we expect to incur or assume in connection with the proposed property
acquisitions described in this prospectus. This will result in a significant
reduction in annual interest expense as a percentage of total revenue. On a pro
forma basis, our indebtedness outstanding immediately after this offering and
the proposed property acquisitions described in this prospectus will have a
weighted average interest rate of 7.20% with an average maturity of 5.8 years.
As a result, cash from operations required to fund debt service requirements
will increase significantly. Our pro forma market capitalization, based on the
assumed initial public offering price of $25.00 per share will be approximately
$2.05 billion and our pro forma debt outstanding at the completion of this
offering and the proposed property acquisitions described in this prospectus,
will be approximately $984.6 million, resulting in the pro forma debt to total
market capitalization ratio of approximately 48%.
SHORT-TERM LIQUIDITY REQUIREMENTS
Our short-term liquidity requirements consist primarily of funds necessary
to pay for operating expenses and other expenditures directly associated with
our properties, including:
- recurring maintenance capital expenditures necessary to properly maintain
our properties;
- interest expense and scheduled principal payments on outstanding
indebtedness;
- capital expenditures incurred to facilitate the leasing of space at our
properties, including tenant improvements and leasing commissions; and
- future distributions paid to our stockholders.
Historically, we have satisfied our short-term liquidity requirements through
our existing working capital and cash provided by our operations. We believe
that our existing working capital and cash provided by operations will continue
to be sufficient to meet our short-term liquidity requirements.
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<Page>
There are a number of factors that could adversely affect our cash flow. An
economic downturn in one or more of our markets may impede the ability of our
tenants to make lease payments and may impact our ability to renew leases or
re-let space as leases expire. In addition, an economic downturn or recession
could also lead to an increase in tenant bankruptcies, increases in our overall
vacancy rates or declines in rents we can charge to re-lease properties upon
expiration of current leases. In all of these cases, our cash flow would be
adversely affected.
During 2001, 15 of our anchor tenants and other side shop tenants filed for
bankruptcy protection. Some of these tenants, the largest of which is Ames
Department Stores, Inc., occupy stores at multiple locations in our portfolio.
These tenants contributed approximately 2.7% of our annualized base rent for all
leases in which tenants were in occupancy at December 31, 2001.
On January 22, 2002, Kmart Corporation filed for bankruptcy protection. We
currently lease space to Kmart at seven of our shopping centers. These
locations, all of which were physically occupied at December 31, 2001,
represented approximately 1.6% of our total annualized base rent for all leases
in which tenants were in occupancy at December 31, 2001. In addition, Kmart owns
store locations at three of our shopping centers and subleases space from third
party tenants at two of our other locations. On March 8, 2002, Kmart announced
that it intends to close 284 store locations as part of its bankruptcy
reorganization. None of the twelve store locations described above were included
in the list of announced store closings. However, we have agreed with Kmart to a
rent reduction at one of our shopping centers of approximately $290,000 on an
annualized basis.
Although Kmart has announced its current intended store closings, we are not
able to fully predict the impact on our business of Kmart's bankruptcy filing at
this time. For instance, Kmart could decide to close additional stores,
including our locations, terminate a substantial number of leases with us, or
request additional rent reductions or deferrals. Any of these actions could
adversely affect our rental revenues, and the impact may be material. In
addition, Kmart's termination of leases or closure of stores could result in
lease terminations or reductions in rent by other tenants in the same shopping
centers which could materially harm our business.
Any future bankruptcies of tenants in our portfolio, particularly major or
anchor tenants, may negatively impact our operating results.
We incur maintenance capital expenditures at our properties, which include
such expenses as parking lot improvements, roof repairs and replacements and
other non-revenue enhancing capital expenditures. Maintenance capital
expenditures were approximately $5.5 million for the year ended December 31,
2001. We expect total maintenance capital expenditures to be approximately
$7.8 million, or $.33 per square foot, in 2002. We also expect to incur revenue
enhancing capital expenditures such as tenant improvements and leasing
commissions in connection with the leasing or re-leasing of retail space. We
believe that our existing working capital and cash provided by operations will
be sufficient to fund our maintenance capital expenditures for the next twelve
months.
We believe that we qualify and we intend to continue to qualify as a REIT
under the Internal Revenue Code. As a REIT, we are allowed to reduce taxable
income by all or a portion of our distributions paid to shareholders. We believe
that our existing working capital and cash provided by operations will be
sufficient to allow us to pay distributions necessary to enable us to continue
to qualify as a REIT.
LONG-TERM LIQUIDITY REQUIREMENTS
Our long-term liquidity requirements consist primarily of funds necessary to
pay for scheduled debt maturities, renovations, expansions and other
non-recurring capital expenditures that need to be made periodically to our
properties, and the costs associated with acquisitions of properties that we
pursue. Historically, we have satisfied our long-term liquidity requirements
through various sources of capital,
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<Page>
including our existing working capital, cash provided by operations, long-term
property mortgage indebtedness, our senior unsecured credit facility and through
the issuance of additional equity securities. We believe that these sources of
capital will continue to be available to us in the future to fund our long-term
liquidity requirements. However, there are certain factors that may have a
material adverse effect on our access to these capital sources.
Our ability to incur additional debt is dependent upon a number of factors,
including our degree of leverage, the value of our unencumbered assets, our
credit rating and borrowing restrictions imposed by existing lenders. Currently,
we have a credit rating from two major rating agencies - Standard & Poor's,
which has given us a rating of BB-, and Moody's Investor Service, which has
given us a rating of Ba2. A downgrade in outlook or rating by a rating agency
can occur at any time if the agency perceives an adverse change in our financial
condition, results of operations or ability to service our debt. If our credit
rating is upgraded, it would decrease the interest rate currently payable by us
under our existing senior unsecured credit facility, which would likely decrease
the costs associated with obtaining future financing.
Based on our internal evaluation of our properties, the estimated value of
our properties exceeds the outstanding amount of mortgage debt encumbering those
properties as of December 31, 2001. Therefore, at this time, we believe that
additional funds could be obtained, either in the form of mortgage debt or
additional unsecured borrowings. In addition, we believe that we could obtain
additional financing without violating the financial covenants contained in our
unsecured public notes.
Our ability to raise funds through the issuance of equity securities is
dependent upon, among other things, general market conditions for REITs and
market perceptions about us. We will continue to analyze which source of capital
is most advantageous to us at any particular point in time, but the equity
markets may not be consistently available on terms that are attractive or at
all.
COMMITMENTS
We currently do not have any capital lease obligations or operating lease
commitments. The following table summarizes our repayment obligations under our
indebtedness outstanding as of December 31, 2001.
<Table>
<Caption>
YEAR ENDING DECEMBER 31, AMOUNT
- ------------------------ --------------
(IN THOUSANDS)
2002........................................................ $ 32,467
2003........................................................ 352,887
2004........................................................ 222,920
2005........................................................ 40,601
2006........................................................ 14,855
Thereafter.................................................. 473,049
----------
Total due................................................. $1,136,779
==========
</Table>
The indebtedness described in the table above will require balloon payments
starting in June 2002 in an amount equal to approximately $6.4 million. It is
likely that we will not have sufficient funds on hand to repay these balloon
amounts at maturity. We currently expect to refinance this debt through
unsecured private or public debt offerings, additional debt financings secured
by individual properties or groups of properties or additional equity offerings.
We may also refinance balloon payments through borrowings under our senior
unsecured credit facility.
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<Page>
EXISTING CREDIT FACILITY
We currently have a $425 million senior unsecured credit facility,
consisting of a $275 million revolving credit facility, with a $35 million
letter of credit sub-limit, and a $150 million term loan with Fleet National
Bank and other financial institutions. The senior unsecured credit facility
bears interest at a variable rate based on a spread to LIBOR which rate, as of
December 31, 2001, was 165 basis points and matures on September 18, 2003. The
$150 million term loan is hedged throughout the term with an interest rate floor
and cap agreement that limits the LIBOR range from 6.0% to 8.5%. The average
interest rate at December 31, 2001 on our senior unsecured credit facility was
5.43%, including the impact of the floor on the $150 million term loan. The
availability of funds under this facility is subject to, among other things, our
compliance with specified debt service coverage ratios, limitations on total
indebtedness, restrictions on the payment of distributions beyond those required
for us to maintain our status as a REIT, limitations on investments and other
customary financial and other covenants.
As of December 31, 2001, we were in compliance with all of the financial
covenants under our senior unsecured credit facility. However, if our properties
do not perform as expected, or if unexpected events occur that require us to
borrow additional funds, compliance with these covenants may become difficult
and may restrict our ability to pursue some business initiatives. In addition,
these financial covenants may restrict our ability to pursue particular
acquisition transactions, including for example, acquiring a portfolio of
properties that is highly leveraged. These constraints on acquisitions could
significantly impede our growth.
Our senior unsecured credit facility requires us to provide collateral to
secure the repayment of this facility if we have not repaid in full our
$100 million subordinated loan from Fleet National Bank with the proceeds of an
equity financing by June 18, 2002. If this provision of our senior unsecured
credit facility is triggered, we will be required to provide to Fleet collateral
having an aggregate value of up to approximately $774 million. As described in
"Use of Proceeds" on page 25, we intend to use $100 million of the net proceeds
of this offering to repay in full our subordinated loan.
NEW LINE OF CREDIT
We have obtained a commitment to establish a three-year, $300 million
unsecured line of credit with Fleet National Bank, as agent. Fleet has agreed to
use its "best efforts" to syndicate this line of credit up to $350 million. We
expect to enter into this new line of credit on or shortly after completion of
this offering. Each of the Heritage OP and the Bradley OP will be borrowers
under the new line of credit and we, and substantially all of our other
subsidiaries, will guarantee this new line of credit.
Our ability to borrow under this new line of credit will be subject to our
ongoing compliance with a number of financial and other covenants, which are
described in "Business and Properties--Indebtedness Outstanding After This
Offering" beginning on page 81. This new line of credit will, except under some
circumstances, limit our ability to make distributions in excess of 90% of our
annual funds from operations. In addition, this new line of credit will bear
interest at a floating rate based on a spread over LIBOR ranging from 80 basis
points to 135 basis points, depending upon our debt rating, and will require
monthly payments of interest. In addition, this new line of credit will have a
facility fee based on the amount committed ranging from 15 to 25 basis points,
depending upon our debt rating, and will require quarterly payments. We will pay
an upfront fee of approximately $3 million in connection with entering into this
new line of credit.
If we enter into this new line of credit, we will terminate the hedge
currently in place with respect to the $150 million term loan under our existing
senior unsecured credit facility. As a result if we had terminated this hedge as
of December 31, 2001, we would have reclassified approximately $8.7 million of
accumulated other comprehensive loss, a component of shareholders' equity, to
earnings. This would have resulted in a reduction of approximately $8.7 million
in our earnings for the year ended December 31, 2001.
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Our ability to enter into this new line of credit is subject to completion
of this offering, final approval and satisfactory completion by the lender of
its due diligence and preparation and execution of an acceptable credit
agreement. We cannot assure you that we will enter into this new line of credit
or that Fleet will be successful in syndicating this line of credit up to
$350 million. If we do not enter into this new line of credit, we anticipate
that our existing senior unsecured credit facility will remain in place.
FUNDS FROM OPERATIONS
The White Paper on Funds from Operations approved by NAREIT in March 1995
defines Funds from Operations as net income (loss) computed in accordance with
GAAP, excluding gains (or losses) from debt restructuring and sales of
properties, plus real estate related depreciation and amortization and after
adjustments for unconsolidated partnerships and joint ventures. In November
1999, NAREIT issued a National Policy Bulletin effective January 1, 2000
clarifying the definition of Funds from Operations to include all operating
results, both recurring and non-recurring, except those defined as extraordinary
under GAAP.
We believe that Funds from Operations is helpful as a measure of the
performance of a REIT because, along with cash flow from operating activities,
financing activities and investing activities, it provides an indication of our
ability to incur and service debt, to make capital expenditures and to fund
other cash needs. We compute Funds from Operations in accordance with standards
established by NAREIT, which may not be comparable to Funds from Operations
reported by other REITs that do not define the term in accordance with the
current NAREIT definition or that interpret the current NAREIT definition
differently than we do. Funds from Operations does not represent cash generated
from operating activities in accordance with GAAP, nor does it represent cash
available to pay distributions and should not be considered as an alternative to
net income, financial performance or to cash flow from operating activities,
determined in accordance with GAAP, as a measure of our liquidity, nor is it
indicative of funds available to fund our cash needs, including our ability to
pay cash distributions.
The following table reflects the calculation of Funds from Operations:
<Table>
<Caption>
PRO FORMA HISTORICAL
------------- -------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
------------- -------------------
2001 2001 2000
------------- -------- --------
(DOLLARS IN THOUSANDS)
Net income.................................................. $29,176 12,236 24,102
Add (deduct):
Depreciation and amortization (real-estate related)....... 68,241 63,723 34,594
Net gains on sales of real estate investments and
equipment............................................... -- (4,159) (1,890)
Preferred stock distributions............................. -- (43,345) (38,410)
Accretion of redeemable equity............................ -- (995) (329)
------- ------- -------
Funds from Operations....................................... $97,417 27,460 18,067
======= ======= =======
</Table>
See "Unaudited Pro Forma Income Statement Data" beginning on page 32 for
more information on our pro forma net income.
RELATED PARTY TRANSACTIONS
We have in the past engaged in and currently engage in a number of
transactions with related parties. The following is a summary of ongoing
transactions with related parties that may impact our
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future operating results. Please see "Certain Relationships and Related
Transactions" beginning on page 101 for a more complete discussion of these and
other transactions with related parties.
THE TJX COMPANIES
In July 1999, Bernard Cammarata became a member of our board of directors.
Mr. Cammarata is Chairman of the Board of TJX Companies, Inc., our largest
tenant, and was President and Chief Executive Officer of TJX until June 1999. We
received annualized base rent from the TJX Companies of approximately
$11.0 million in 2001, which represented approximately 5.6% of our total
annualized base rent for all leases in which tenants were in occupancy at
December 31, 2001. TJX pays us rent in accordance with written leases with
respect to several of our properties.
ADVISORY FEE
The Prudential Insurance Company of America, our second largest stockholder,
will receive advisory and other fees totaling approximately $3.375 million in
connection with this offering, based upon an assumed initial public offering
price of $25.00 per share. We expect to incur this fee in the second quarter of
2002.
131 DARTMOUTH STREET JOINT VENTURE
In November 1999, we entered into a joint venture for the acquisition and
development of a 365,000 square foot commercial office tower at 131 Dartmouth
Street, Boston, Massachusetts. In addition to an unaffiliated third party, NETT
is also participating in this project. Specifically, NETT, Heritage and
DFS Dartmouth, LLC have formed an entity to own this project. This entity is
owned 74% by NETT, 20% by DFS Dartmouth, LLC and 6% by us. We were issued this
interest as part of a management arrangement we entered into with the new
entity. Under this arrangement, through our subsidiary, we are providing
management services to this project, for which we are entitled to receive 6% of
all cash and capital transaction proceeds received by the project. We have no
ongoing capital contribution requirements with respect to this project, which we
expect will be completed in June 2003. We account for our interest in this joint
venture using the cost method and we have not expensed any amounts through
December 31, 2001.
BOSTON OFFICE LEASE
One of the properties contributed to us by Net Realty Holding Trust was our
headquarters building at 535 Boylston Street, Boston, Massachusetts. In 1974,
NETT and Net Realty Holding Trust entered into a lease providing for the lease
of 14,400 square feet of space in this office building to NETT for its Boston
offices. This area was assigned by Net Realty Holding Trust to us as part of our
formation. The current term of this lease expires on March 31, 2005 and under
this lease, NETT pays us $648,000 per year in rent.
CONTINGENCIES
LEGAL AND OTHER CLAIMS
We are subject to legal and other claims incurred in the normal course of
business. Based on our review and consultation with counsel of those matters
known to exist, we do not believe that the ultimate outcome of these claims
would materially affect our financial position or results of operations.
NON-RECOURSE LOAN GUARANTEES
In connection with the Bradley acquisition, we entered into a special
securitized facility with Prudential Mortgage Capital Corporation pursuant to
which $244 million of collateralized mortgage-
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backed securities were issued by a trust created by PMCC. The trust consists of
a single mortgage loan due from a subsidiary we created, Heritage SPE LLC, to
which we contributed 29 of our properties. This loan is secured by all
29 properties we contributed to the borrower.
In connection with the securitized financing with PMCC, we entered into
several indemnification and guaranty agreements with PMCC under the terms of
which we agreed to indemnify PMCC for various bad acts of Heritage SPE LLC and
with respect to specified environmental liabilities with respect to the
properties contributed by us to Heritage SPE LLC.
We also have agreed to indemnify other mortgage lenders for bad acts and
environmental liabilities in connection with other mortgage loans that we have
obtained.
INFLATION
Inflation has had a minimal impact on the operating performance of our
properties. However, many of our leases contain provisions designed to mitigate
the adverse impact of inflation. These provisions include clauses enabling us to
receive payment of additional rent calculated as a percentage of tenants' gross
sales above pre-determined thresholds, which generally increase as prices rise,
and/or escalation clauses, which generally increase rental rates during the
terms of the leases. These escalation clauses often are at fixed rent increases
or indexed escalations (based on the consumer price index or other measures).
Many of our leases are also for terms of less than ten years, which permits us
to seek to increase rents to market rates upon renewal. In addition, most of our
leases require the tenant to pay an allocable share of operating expenses,
including common area maintenance costs, real estate taxes and insurance. This
reduces our exposure to increases in costs and operating expenses resulting from
inflation.
NEW ACCOUNTING STANDARDS AND ACCOUNTING CHANGES
SFAS NO. 133, AS AMENDED BY SFAS NO. 138
On January 1, 2001, we adopted SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, as amended by SFAS No. 138, ACCOUNTING FOR
CERTAIN DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES. SFAS No. 133, as
amended, establishes accounting and reporting standards for derivative
instruments. Specifically, SFAS No. 133 requires an entity to recognize all
derivatives as either assets or liabilities in the balance sheet and to measure
those instruments at fair value. Fair value adjustments affect either other
comprehensive income (a component of shareholders' equity) or net income,
depending on whether the derivative instrument qualifies as a hedge for
accounting purposes and, if so, the nature of the hedging activity.
We use derivative financial instruments to manage, or hedge, interest rate
risks related to our borrowings, from lines of credit. We require that hedging
derivative instruments be effective in reducing the interest rate risk exposure
that they are designed to hedge. Instruments that meet the hedging criteria are
formally designated as hedges at the inception of the derivative contract. We do
not use derivatives for trading or speculative purposes and only enter into
contracts with major financial institutions based on their credit rating and
other factors. To determine the fair values of our derivative instruments, we
use methods and assumptions based on market conditions and risks existing at
each balance sheet date. Such methods incorporate standard market conventions
and techniques such as discounted cash flow analysis and option pricing models
to determine fair value. All methods of estimating fair value result in general
approximation of value, and such value may or may not actually be realized.
Our only derivative is an interest rate "collar" entered into pursuant to
and as a condition of our senior unsecured credit facility. This collar limits
the variable interest rate range on the entire $150,000,000 term loan under the
facility to a floor of 6% and a cap of 8.5% through September 18,
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2003, the date of maturity of the facility. The derivative is classified as a
cash flow hedge. For purposes of determining hedge effectiveness, we exclude the
time value element of the collar. As of January 1, 2001, the adoption of
SFAS No. 133 resulted in the recognition of a loss of $2,477,000, which is
reported as a cumulative transition adjustment to accumulated other
comprehensive loss (a component of changes in shareholders' equity).
SFAS NO. 144
In August 2001, the Financial Accounting Standards Board issued SFAS
No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS, which
supersedes both SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, and the accounting and reporting
provisions of APB Opinion No. 30, REPORTING THE RESULTS OF OPERATIONS--REPORTING
THE EFFECTS OF DISPOSAL OF A SEGMENT OF BUSINESS, AND EXTRAORDINARY, UNUSUAL,
AND INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS, for the disposal of a
segment of a business (as previously defined in that Opinion). SFAS No. 144
retains the fundamental provisions in SFAS No. 121 for recognizing and measuring
impairment losses on long-lived assets held for use and long-lived assets to be
disposed of by sale, while also resolving significant implementation issues
associated with SFAS No. 121. In addition, SFAS No. 144 retains the basic
provisions of Opinion 30 for presenting discontinued operations in the income
statement but broadens that presentation to include a component of an entity
(rather than a segment of a business).
We are required to adopt SFAS No. 144 no later than the year beginning after
December 15, 2001, and we plan to adopt its provisions for the quarter ending
March 31, 2002. We do not expect the adoption of SFAS No. 144 for long-lived
assets held for use to have a material impact on our financial statements
because the impairment assessment under SFAS No. 144 is largely unchanged from
SFAS No. 121. The remaining provisions of SFAS No. 144 will be applied
prospectively by us to newly initiated sale or disposal activities from the date
of adoption.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our future income, cash flows and fair values relevant to financial
instruments are dependent upon prevalent market interest rates. Market risk
refers to the risk of loss from adverse changes in market prices and interest
rates. The majority of our outstanding debt has a fixed interest rate, which
minimizes the risk of fluctuating interest rates. We also use some derivative
financial instruments to manage, or hedge, interest rate risks related to our
borrowings, from lines of credit to medium- and long-term financings. We require
that hedging derivative instruments are effective in reducing the interest rate
risk exposure that they are designed to hedge. We do not use derivatives for
trading or speculative purposes and only enter into contracts with major
financial institutions based on their credit rating and other factors.
As of December 31, 2001, our total outstanding debt was approximately
$1.1 billion, of which approximately $443 million, or 40%, was variable rate
debt. With respect to our variable rate debt outstanding as of December 31,
2001, we have entered into one interest rate "collar" agreement to reduce our
exposure to market interest rate changes under our senior unsecured credit
facility. This collar agreement limits the variable interest rate range on the
entire amount of our $150 million term loan under our senior unsecured credit
facility with a minimum rate payable, or floor, of 6% and a maximum rate
payable, or cap, of 8.5% through September 18, 2003, the date of maturity of
this senior unsecured credit facility. If market rates of interest on our
variable rate debt increase by 10%, or approximately 58 basis points, the
increase in interest expense on the variable rate debt would decrease future
earnings and cash flows by approximately $2.6 million annually. If market rates
of interest increase by 10%, the fair value of our total outstanding debt would
decrease by approximately $24 million. If market rates of interest on the
variable rate debt decrease by 10%, or approximately 58 basis points, the
decrease in interest expense on the variable rate debt would increase future
earnings
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and cash flows by approximately $2.6 million annually. If market rates of
interest decrease by 10%, the fair value of our total outstanding debt would
increase by approximately $25 million.
As of December 31, 2000, our total outstanding debt was approximately
$1.1 billion, of which approximately $423 million, or 38% was variable rate
debt. If market rates of interest on the variable rate debt increase by 10%, or
approximately 90 basis points, the increase in interest expense on the variable
rate debt would decrease future earnings and cash flows by approximately
$3.8 million annually. If market rates of interest increased by 10%, the fair
value of our total outstanding debt would decrease by approximately
$23 million. If market rates of interest on the variable rate debt decrease by
10%, or approximately 90 basis points, the decrease in interest expense on the
variable rate debt would increase future earnings and cash flows by
approximately $3.8 million annually. If market rates of interest decrease by
10%, the fair value of our total outstanding debt would increase by
approximately $21 million.
Interest risk amounts were determined by considering the impact of
hypothetical interest rates on our financial instruments. These analyses do not
consider the effect of the reduced level of overall economic activity that could
exist in that environment. Further, in the event of a change of that magnitude,
we may take actions to further mitigate our exposure to the change. However, due
to the uncertainty of the specific actions that would be taken and their
possible effects, these analyses assume no changes in our financial structure.
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BUSINESS AND PROPERTIES
OVERVIEW
We are a fully integrated, self-administered and self-managed REIT that
acquires, owns, manages, leases and redevelops primarily grocer-anchored
neighborhood and community shopping centers in the Eastern and Midwestern United
States. After this offering, based on publicly available information, we will be
the sixth largest publicly-traded shopping center REIT in the country, ranked
according to gross leasable area. As of December 31, 2001, we had a portfolio of
142 shopping centers totaling approximately 23.2 million square feet of gross
leasable area located in 26 states. Our shopping center portfolio was
approximately 93% leased as of December 31, 2001. We also own five office
buildings and 11 single-tenant properties. We currently intend to dispose of
several of our office buildings and substantially all of our single-tenant
properties in the foreseeable future.
We are a Maryland corporation that commenced operations in July 1999 as the
successor to a company formed in 1970 to manage the real estate investments of
NETT. In 1970, NETT began to invest in real estate, primarily focusing on
strip-center retail neighborhood and community shopping centers. NETT's real
estate company first opened an office in Great Neck, New York, followed by the
opening of two additional offices in Boston, Massachusetts and Lighthouse Point,
Florida. From 1970 to the late 1980's, NETT's real estate investments were
located primarily in New England, New York and Florida. In the early 1990's,
NETT expanded its investments by acquiring real estate in other parts of the
Eastern United States, including North Carolina.
In July 1999, recognizing that its real estate portfolio had reached its
target allocation size, NETT made a strategic decision to contribute its
portfolio of 60 properties into a newly formed REIT, Heritage Property
Investment Trust, Inc. At our formation, The Prudential Insurance Company of
America also made an equity investment in us. Prudential's investment
diversified our sources of capital and facilitated our growth strategy.
Several members of our management team have been involved with us and our
predecessor, NETT, since the 1970's, including Thomas C. Prendergast, our
President and Chief Executive Officer. Mr. Prendergast joined NETT's real estate
company in 1974 as a leasing agent. In 1978, he was promoted to Vice President
and Director of Leasing, overseeing leasing in all markets. In 1980,
Mr. Prendergast was promoted to President and Chief Executive Officer, a
position he held for 19 years, prior to becoming our President and Chief
Executive Officer upon our formation in July 1999. Our management team has a
strong history of producing excellent results. During NETT's fiscal years from
1992 to 1998, management generated average annual income returns of 10.7% and
average annual unrealized increases in property market values of 1.9%, for a
total average annual return of 12.6%. Over the same time period, according to
the National Council of Real Estate Investment Fiduciaries, or NCREIF, community
shopping center properties in the United States which report data to NCREIF
generated total annual returns of 8.6% and average annual unrealized decreases
in property market values of 3.0%, for a total average annual return of 5.6%.
On September 18, 2000, we acquired Bradley for aggregate consideration of
approximately $1.2 billion, including transaction expenses. The Bradley
portfolio consisted of 97 shopping centers with a total of approximately
15.3 million square feet of gross leasable area located in 15 states, primarily
in the Midwest. The Bradley acquisition provided us with a unique opportunity to
acquire an attractively priced, large portfolio of properties in a contiguous
geographic market, consistent with our business strategy and investment
criteria.
Our integration efforts for Bradley included the centralization of
management functions, cost reductions and the elimination of long term
development projects. As part of the integration, we reduced our combined
employee headcount, principally through the elimination of duplicate executive
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level and finance department positions and by outsourcing maintenance functions
previously performed internally within Bradley.
We have substantially integrated the Bradley operations, and we intend to
continue to enhance the operating performance of the Bradley portfolio in the
future. During 2001, we have entered into agreements to place additional anchor
tenants at four former Bradley properties and believe that the opportunity
exists to place additional anchors at other former Bradley properties. During
2001, we executed leases for add-on space of approximately 80,000 square feet at
former Bradley properties. Since our formation in July 1999, we acquired nine
additional shopping center properties, an outparcel of an owned shopping center,
and a parcel of land for development of a shopping center, for an aggregate
purchase price of approximately $202 million.
INDUSTRY BACKGROUND
International Council of Shopping Centers, or ICSC, in an industry report
dated April 2001, estimates that retail shopping center sales in the United
States were approximately $1.14 trillion in 2000 and have grown at an average
annual rate of 5% since 1990. At the end of 2000, there were 45,025 shopping
centers containing 5.57 billion square feet of gross leasable area in the United
States according to ICSC's April 2001 report. ICSC also estimates that adult
visitors to shopping centers in the United States averaged 197 million per month
in 2000, an increase of over 3% above the average monthly traffic for 1999.
Meanwhile, the supply of new shopping centers in the United States has been
stable, with the number of new shopping centers increasing by no more than 2.2%
per year since 1993, according to the ICSC.
Shopping centers typically are organized in one of four formats:
neighborhood shopping centers; community centers; regional malls; and super
regional malls. These centers are distinguished by various characteristics,
which include shopping center size, the number and type of anchor tenants, types
of products sold, distance and travel time, and customer base.
Neighborhood shopping centers generally provide consumers with convenience
goods such as food and drugs and services such as dry cleaning and laundry for
the daily living needs of residents in the immediate neighborhood. These centers
are typically anchored by a supermarket. In addition to the convenience goods
provided by a neighborhood center, a community shopping center typically
contains multiple anchors and may provide facilities for the sale of apparel,
accessories, home fashion, hardware or appliances.
In our experience, grocer-anchored neighborhood and community shopping
centers are generally more resistant to economic down cycles. The ICSC, in its
April 2001 report, estimates that grocery stores accounted for almost 50% of
non-automotive retail sales in 2000. In addition, from 1973 to 2000, average
weekly sales per supermarket increased at a compound annual growth rate of
approximately 8.7%, according to the Food Marketing Institute.
Typically, our neighborhood and community shopping centers are anchored by
supermarkets. According to Progressive Grocer, sales for supermarkets accounted
for $384.8 billion, or approximately 78%, of total grocery store revenues in
2000, up 5% from 1999. Progressive Grocer also estimates that there were a total
of 127,980 grocery stores operating in the United States in 2000, of which
31,830, or approximately 25%, were supermarkets. Progressive Grocer defines
supermarkets as grocers with greater than $2 million in sales.
Our experience indicates that the key factors that drive the success of
neighborhood and community shopping centers include strong market demographics,
a diverse tenant mix with multiple anchors, including grocers, the proper
positioning of the center to its customer base, and a strong relationship
between the owner of the shopping center and the anchor tenants.
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OUR COMPETITIVE STRENGTHS
We believe that we distinguish ourselves from other owners and operators of
community and neighborhood shopping centers in a number of ways, including by
our:
- GROCER-ANCHORED NEIGHBORHOOD AND COMMUNITY SHOPPING CENTER FOCUS. As of
December 31, 2001, approximately 80% of our centers were grocer-anchored.
Our grocer-anchored centers accounted for approximately 75% of our total
net operating income for the year ended December 31, 2001. More resistant
to economic downturns by the nature of their business, grocers, in our
experience, generate continuous consumer traffic to our centers. This
traffic enhances the quality and appeal of our centers and benefits our
other tenants.
- MULTI-ANCHORED FOCUS. Our neighborhood and community shopping centers have
an average of 2.6 anchor tenants. We consider an anchor tenant to be a
tenant that occupies at least 15,000 square feet at one of our centers. In
our experience, multiple anchors attract greater consumer flow through the
entire shopping center and add to the economic stability of our shopping
centers as a whole.
- DIVERSE TENANT BASE. No single tenant currently represents more than 5.6%
of our annualized base rental revenue. As of December 31, 2001, we had
approximately 2,800 separate leases with various tenants, including
national and regional supermarket chains, drug stores, discount retail
stores, other nationally or regionally known stores and a great variety of
other regional and local retailers. As of December 31, 2001, the average
lease term for our neighborhood and community shopping centers was 6.9
years, with no more than 13% of our total base rent expiring in any single
year through 2010. We believe that this diversity of tenants and lease
expirations will enable us to generate more stable cash flows over time.
- GEOGRAPHIC DIVERSIFICATION. Our properties are located in 26 states
primarily in the Eastern and Midwestern United States. As of December 31,
2001, the six largest concentrations of properties in our total portfolio
are located in Illinois, North Carolina, Minnesota, Indiana, Wisconsin and
New York, representing 14%, 12%, 11%, 10%, 6% and 5%, respectively, of our
total gross leasable area. We believe that geographic diversity helps
mitigate the risks associated with localized economic downturns.
- ATTRACTIVE LOCATIONS WITH STRONG MARKET DEMOGRAPHICS. The average
population and the average annual household income within a three-mile
area of our properties is approximately 65,000 and $64,000, respectively,
based upon 2000 updates of 1990 census data provided by CACI Marketing
Systems. We believe these strong market demographics provide our
properties with consistent supply of shoppers who exhibit strong demand
for goods and services.
- SEASONED MANAGEMENT TEAM. Our senior management team is comprised of
executives with an average of approximately 20 years experience in the
acquisition, management, leasing, redevelopment and construction of real
estate or retail properties. In particular, we believe the in-depth market
knowledge and long-term tenant relationships developed by our senior
management provide us with a key competitive advantage.
BUSINESS AND GROWTH STRATEGIES
Our business strategy has been and will continue to be to generate stable
and increasing cash flow and asset value by acquiring and managing a portfolio
of real estate properties located in attractive markets with strong economic and
demographic characteristics. Our business strategy consists of the following
elements:
- BUILDING AND LEVERAGING OUR LONG-TERM TENANT RELATIONSHIPS. Our top
priority in managing our business is establishing and developing strong,
lasting relationships with our tenants. We believe
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that we have been successful in consistently meeting or exceeding the
expectations and demands of our tenants. Over the years, this strategy has
allowed us to forge mutually beneficial business relationships, enabling
our tenants, through our broad geographic focus and contacts, to enter new
markets and leverage opportunities to increase their presence in and
across markets. We intend to continue to leverage our existing tenant
relationships as we grow and expand our business.
- MAXIMIZING CASH FLOW FROM OUR PROPERTIES BY CONTINUING TO ENHANCE THE
OPERATING PERFORMANCE OF EACH PROPERTY. We manage our properties through a
centralized property management and leasing program, which enables us to
achieve operating, marketing and leasing efficiencies. We aggressively
lease currently available space and space that becomes available in the
future, both to existing and new tenants. During 2000 and 2001, we signed
new leases and renewals of leases on approximately 2.9 million square feet
of space at an average base rental rate increase of approximately 14% over
the expired rates. In 2002, we anticipate that the leases on 1.5 million
square feet of space will expire, representing 6.9% of our portfolio.
- TARGETING REDEVELOPMENT AND EXPANSION PROJECTS THAT WE BELIEVE WILL
GENERATE SUBSTANTIAL RETURNS. We seek to leverage our operating and
redevelopment capabilities to capitalize on prospects within our existing
portfolio. In particular, we are currently exploring opportunities to
expand or redevelop properties we acquired from Bradley, to expand our
existing centers, to reposition our tenant mix and, where appropriate, to
lease parcels on our properties with minimal incremental cost.
- INCREASING THE NUMBER OF ANCHOR TENANTS TO ENHANCE THE CONSUMER TRAFFIC AT
OUR NEIGHBORHOOD AND COMMUNITY SHOPPING CENTERS. We believe that securing
multiple anchors to a property enhances the attractiveness of the center,
by increasing consumer traffic, and therefore enhances the performance of
our non-anchor tenants within the remaining available space of a center.
Recently, we entered into four agreements to place additional anchor
tenants at properties that we acquired from Bradley. We believe that there
are additional opportunities to increase the number of anchor tenants at
other existing properties in our portfolio.
- PURSUING OPPORTUNITIES TO ACQUIRE PRIMARILY GROCER-ANCHORED NEIGHBORHOOD
AND COMMUNITY SHOPPING CENTERS. We utilize our knowledge of key markets to
pursue opportunistic acquisitions of grocer-anchored shopping centers with
a multi-anchored focus. As described in "--Acquisition and Market
Selection Process" beginning on page 79 of this prospectus, our
acquisition activities are focused primarily in the 26 states in which we
currently operate in the Eastern and Midwestern United States. We seek
properties at attractive investment yields with potential growth in cash
flow that can benefit from our hands-on management, that may require
repositioning or redevelopment, and are consistent in terms of quality,
demographics and location with our existing portfolio. Our senior
management team has developed long-standing relationships with
institutional and other owners and operators of shopping center properties
which have enhanced our ability to identify and capitalize on acquisition
opportunities.
FINANCING STRATEGY
Our financing strategy is to maintain a strong and flexible financial
position by maintaining a prudent level of leverage and managing our variable
interest rate exposure. We intend to finance future growth with the most
advantageous source of capital available to us at the time of an acquisition.
These sources may include selling common stock, preferred stock or debt
securities through public offerings or private placements, incurring additional
indebtedness through secured or unsecured borrowings and issuing units of
limited partnership interests of one of our operating partnerships in exchange
for contributed property. With respect to financing alternatives, we intend to
focus primarily on financing growth through the incurrence of unsecured debt
rather than on secured debt on individual or a portfolio of properties.
59
<Page>
PROPERTIES
SHOPPING CENTERS
As of December 31, 2001, we owned and operated 142 neighborhood and
community shopping centers totaling approximately 23.2 million square feet of
gross leasable area located in 26 states. We believe that our shopping center
properties are adequately covered by insurance.
In July 2001, we acquired an approximately 32 acre parcel of land in
Mishawaka, Indiana for approximately $1.3 million, which we funded with
borrowings under our senior unsecured credit facility. We sold approximately 12
acres of this parcel to Target Corporation, which has agreed to construct an
approximately 175,000 square foot Super Target store. We retained the remaining
approximately 20 acres of this parcel, on which we intend to construct
approximately 145,000 square feet of junior anchor and side shop space and
approximately 20,000 square feet of out-parcel space. Construction of this
property, including the Super Target store, has begun and the Super Target store
currently is scheduled to be completed in the second quarter of 2002. We intend
to dispose of this project. However, if we complete construction of this
project, we currently expect our costs with respect to this project to be
approximately $12.5 million.
In February 2002, we entered into a purchase and sale agreement with a third
party to acquire 146,000 square feet of gross leasable area at Montgomery Towne
Center, a 251,000 square foot shopping center located in Alabama. In March 2002,
we entered into a letter of intent with a different third party to acquire an
additional approximately 32,000 square feet of gross leasable area at Montgomery
Towne Center. We expect to complete these acquisitions in the second quarter of
2002. The aggregate purchase price for these transactions is approximately
$18.6 million, including our assumption of approximately $7.9 million of debt,
with the remaining $10.7 million being paid in cash from borrowings under our
senior unsecured credit facility.
In March 2002, we acquired Cross Keys Commons, a grocer-anchored shopping
center located in New Jersey, with an aggregate of approximately 371,000 square
feet of gross leaseable area. The purchase price for this transaction was
$34,000,000 and was funded with borrowings under our senior unsecured credit
facility.
In March 2002, we entered into a letter of intent with a third party to
acquire four shopping centers, located in Michigan, Massachusetts, New Hampshire
and New York, with an aggregate of approximately 1,220,000 square feet of gross
leasable area. We expect to complete this acquisition in the second quarter of
2002. The purchase price for this transaction, including transaction expenses,
will be approximately $77.83 million, including our assumption of approximately
$41.76 million of debt, with the remaining approximately $36.07 million being
paid with a combination of approximately $27.98 million in cash from borrowings
under our senior unsecured credit facility, and the issuance of approximately
$8.09 million of units of limited partnership interest in the Bradley OP. This
acquisition will be subject to, among other things, execution of definitive
documentation and the satisfactory completion of our due diligence investigation
of the properties.
OTHER PROPERTIES
We also own five office buildings, three in New York and two in Boston,
totaling approximately 311,000 square feet and 11 single-tenant properties,
totaling approximately 28,000 square feet. We currently intend to dispose of
substantially all of our single-tenant properties, which had an aggregate net
carrying value of approximately $1.7 million at December 31, 2001, in the
foreseeable future. We also intend to dispose of one of our New York buildings,
Fortune, which had an aggregate net carrying value of approximately
$4.3 million at December 31, 2001. We intend to retain ownership of the
remaining office building which houses our New York office and our two Boston
buildings which contain our headquarters. We believe that our office buildings
and single-tenant properties are adequately covered by insurance.
In March 2002, we completed the sale of Flower Hill, an office building
located in New York. The net cash proceeds of this sale were approximately
$4.2 million.
60
<Page>
The tables set forth below contain various information regarding our
portfolio of properties as of December 31, 2001:
GEOGRAPHIC DIVERSIFICATION--TOTAL PORTFOLIO
<Table>
<Caption>
%
NUMBER OF TOTAL ANNUALIZED ANNUALIZED
STATE PROPERTIES OWNED GLA(1) % TOTAL BASE RENT(2) BASE RENT
- ----- ---------- ------------ -------- ------------ ----------
EAST
North Carolina...................... 11 2,809,804 11.96% $ 26,100,706 13.16%
New York............................ 16 1,184,733 5.04% 16,391,457 8.26%
Florida............................. 16 1,058,666 4.51% 7,579,757 3.82%
Tennessee........................... 3 877,010 3.73% 5,873,580 2.96%
Massachusetts....................... 5 650,442 2.77% 11,882,161 5.99%
New Hampshire....................... 3 555,470 2.36% 4,335,413 2.19%
Pennsylvania........................ 2 427,156 1.82% 1,920,809 0.97%
Vermont............................. 1 221,314 0.94% 1,873,014 0.94%
Maine............................... 1 204,006 0.87% 1,403,976 0.71%
Alabama............................. 1 178,511 0.76% 1,723,308 0.87%
New Jersey.......................... 1 159,454 0.68% 2,281,742 1.15%
Georgia............................. 1 141,072 0.60% 636,418 0.32%
Connecticut......................... 1 125,730 0.54% 1,221,515 0.62%
---- ----------- ------- ------------ -------
SUBTOTAL.............................. 62 8,593,368 36.58% $ 83,223,856 41.95%
MIDWEST
Illinois............................ 17 3,244,992 13.81% $ 28,301,762 14.27%
Minnesota........................... 17 2,590,261 11.03% 23,882,145 12.04%
Indiana............................. 11 2,286,544 9.73% 15,189,407 7.66%
Wisconsin........................... 11 1,300,424 5.54% 9,378,964 4.73%
Missouri............................ 7 1,146,845 4.88% 7,997,265 4.03%
Kansas.............................. 6 932,186 3.97% 5,314,809 2.68%
Iowa................................ 7 726,552 3.09% 4,311,488 2.17%
Ohio................................ 3 669,562 2.85% 4,896,598 2.47%
Kentucky............................ 5 640,202 2.73% 4,739,198 2.39%
Nebraska............................ 7 596,670 2.54% 4,876,781 2.46%
Michigan............................ 3 533,010 2.27% 4,499,126 2.27%
South Dakota........................ 1 196,766 0.84% 1,420,745 0.72%
New Mexico.......................... 1 35,800 0.15% 363,732 0.18%
---- ----------- ------- ------------ -------
SUBTOTAL.............................. 96 14,899,814 63.42% $115,172,020 58.05%
---- ----------- ------- ------------ -------
TOTAL................................. 158 23,493,182 100.00% $198,395,876 100.00%
</Table>
- --------------------------
(1) Represents (a) gross leasable area with respect to our shopping centers and
(b) rentable square feet with respect to our office buildings and
single-tenant properties.
(2) We calculate Annualized Base Rent for all leases in place in which tenants
are in occupancy at December 31, 2001 as follows: total base rent to be
received during the entire term of each lease, divided by the terms in
months for those leases, multiplied by 12. For any leases relating to
properties we acquired from NETT's real estate company upon our formation or
relating to properties acquired from Bradley, we calculate total base rent
to be received beginning from the date we acquired the property.
61
<Page>
INDIVIDUAL PROPERTY DATA
<Table>
<Caption>
YEAR % LEASED COMPANY
PROPERTY NAME BUILT/ AS OF OWNED TOTAL ANCHOR
AND LOCATION RENOVATED(1) 12/31/01 GLA(2) GLA(3) SF(4) ANCHORS(5)
- ------------- ------------ --------- --------- --------- ---------- ------------------------------
SHOPPING CENTERS:
Riverchase Village Shopping
Center
Hoover, AL 1994 93% 178,511 187,711 128,225 Bruno's Supermarket
Service Merchandise
Barnes & Noble
Torrington Plaza
Torrington, CT 1963/1994 93% 125,730 125,730 42,037 TJ Maxx
Staples
Barton Commons
Rockledge, FL 1989 82% 215,049 218,049 138,518 Kmart
Bealls Dept. Store
Bealls Outlet
Naples Shopping Center
Naples, FL 1962/1997 100% 195,471 198,971 162,486 Publix Supermarket
Marshalls
Linens N Things
Office Depot
Books A Million
Park Shore Shopping Center
Naples, FL 1973/1993 99% 231,830 240,330 188,180 Fresh Market Supermarket
Kmart
Rhodes Furniture
Homegoods
Sound Advice
Shoppers Haven Shopping Center
Pompano Beach, FL 1959/1998 59% 205,049 205,049 68,404 Winn Dixie Supermarket
Walgreens
Venetian Isle Shopping
Center(8)
Lighthouse Point, FL 1959/1992 90% 183,467 186,967 111,831 Publix Supermarket
TJ Maxx
Linens N Things
PetsMart
Shenandoah Plaza
Newnan, GA 1987 96% 141,072 141,072 113,922 Ingles Market
Wal-Mart
<Caption>
PROPERTY NAME ANNUALIZED ANNUALIZED BASE
AND LOCATION BASE RENT(6) RENT/SQ. FT.(7)
- ------------- ------------ ---------------
SHOPPING CENTERS:
Riverchase Village Shopping
Center
Hoover, AL $ 1,723,308 $ 9.65
Torrington Plaza
Torrington, CT $ 1,221,515 $ 9.72
Barton Commons
Rockledge, FL $ 971,720 $ 4.52
Naples Shopping Center
Naples, FL $ 1,819,066 $ 9.31
Park Shore Shopping Center
Naples, FL $ 1,704,490 $ 7.35
Shoppers Haven Shopping Center
Pompano Beach, FL $ 1,355,761 $ 6.61
Venetian Isle Shopping
Center(8)
Lighthouse Point, FL $ 1,479,211 $ 8.06
Shenandoah Plaza
Newnan, GA $ 636,418 $ 4.51
</Table>
62
<Page>
INDIVIDUAL PROPERTY DATA
<Table>
<Caption>
YEAR % LEASED COMPANY
PROPERTY NAME BUILT/ AS OF OWNED TOTAL ANCHOR
AND LOCATION RENOVATED(1) 12/31/01 GLA(2) GLA(3) SF(4) ANCHORS(5)
- ------------- ------------ --------- --------- --------- ---------- ------------------------------
SHOPPING CENTERS (CONTINUED):
Bartonville Square
Bartonville, IL 1972 98% 55,348 60,846 41,824 Kroger Supermarket
Butterfield Square
Libertyville, IL 1997 97% 106,824 121,427 51,677 Sunset Foods
The Commons of Chicago Ridge
Chicago Ridge, IL 1992/1999 92% 324,080 324,080 233,405 Home Depot
Office Depot
Marshalls
Pep Boys
Old Navy
Michaels
The Commons of Crystal Lake
Crystal Lake, IL 1995/1998 98% 273,060 365,335 210,569 Jewel Foods/Osco Drugs
Marshalls
Toys R Us
Hobby Lobby (Non-Owned)
Crossroads Centre
Fairview Heights, IL 1975/1988 96% 242,320 247,820 129,468 Malan Realty Investors, Inc.
TJ Maxx
Fairhills Shopping Center
Springfield, IL 1971/1989 75% 107,614 107,614 49,330 Jewel Foods/Osco Drugs
Heritage Square
Naperville, IL 1992 100% 210,237 210,237 164,054 Circuit City
Carson Funiture Gallery
DSW Warehouse
Rhodes Furniture
High Point Centre
Lombard, IL 1988 98% 240,032 240,032 141,068 Cub Foods
Office Depot
Babies R Us
Big Lots
Parkway Pointe
Springfield, IL 1996 100% 38,587 221,887 179,300 Wal-Mart (Non-Owned)
Target (Non-Owned)
Party Tree (Non-Owned)
<Caption>
PROPERTY NAME ANNUALIZED ANNUALIZED BASE
AND LOCATION BASE RENT(6) RENT/SQ. FT.(7)
- ------------- ------------ ---------------
SHOPPING CENTERS (CONTINUED):
Bartonville Square
Bartonville, IL $ 280,261 $ 5.06
Butterfield Square
Libertyville, IL $ 1,283,040 $12.01
The Commons of Chicago Ridge
Chicago Ridge, IL $ 3,657,979 $11.29
The Commons of Crystal Lake
Crystal Lake, IL $ 3,056,295 $11.19
Crossroads Centre
Fairview Heights, IL $ 1,556,959 $ 6.43
Fairhills Shopping Center
Springfield, IL $ 495,973 $ 4.61
Heritage Square
Naperville, IL $ 2,462,457 $11.71
High Point Centre
Lombard, IL $ 2,221,687 $ 9.26
Parkway Pointe
Springfield, IL $ 488,822 $12.67
</Table>
63
<Page>
INDIVIDUAL PROPERTY DATA
<Table>
<Caption>
YEAR % LEASED COMPANY
PROPERTY NAME BUILT/ AS OF OWNED TOTAL ANCHOR
AND LOCATION RENOVATED(1) 12/31/01 GLA(2) GLA(3) SF(4) ANCHORS(5)
- ------------- ------------ --------- --------- --------- ---------- ------------------------------
SHOPPING CENTERS (CONTINUED):
Rivercrest
Crestwood, IL 1992/1999 100% 484,680 849,835 711,859 Dominick's Supermarket
Best Buy
PetsMart
TJ Maxx
Kimco Realty Corp.
Sears
OfficeMax
Hollywood Park
Target (Non-Owned)
Kohl's (Non-Owned)
Menards (Non-Owned)
Sony Theaters (Non-Owned)
Rollins Crossing
Round Lake Beach, IL 1995/1998 99% 150,576 344,696 283,704 Sears Paint & Hardware
Super Kmart (Non-Owned)
Regal Cinema
Sangamon Center North
Springfield, IL 1970/1996 97% 139,757 144,757 79,257 Schnuck's Supermarket
U.S. Post Office
Sheridan Village
Peoria, IL 1954/1995 91% 303,896 303,896 177,409 Bergner's Dept Store
Cohen's Furniture Co.
Sterling Bazaar
Peoria, IL 1992 84% 82,837 82,837 52,337 Kroger Supermarket
Twin Oaks Centre
Silvis, IL 1991 88% 94,741 94,741 59,682 Hy-Vee Supermarket
Wardcliffe Shopping Center
Peoria, IL 1976/1977 100% 67,531 67,531 48,341 CVS
Big Lots
Westview Center
Hanover Park, IL 1992 74% 322,872 413,672 184,265 Cub Foods
Marshalls
Value City Dept. Store (Non-
Owned)
County Line Mall
Indianapolis, IN 1976/1991 99% 260,785 263,585 183,866 Kroger Supermarket
OfficeMax
Target
<Caption>
PROPERTY NAME ANNUALIZED ANNUALIZED BASE
AND LOCATION BASE RENT(6) RENT/SQ. FT.(7)
- ------------- ------------ ---------------
SHOPPING CENTERS (CONTINUED):
Rivercrest
Crestwood, IL $ 4,204,292 $ 8.67
Rollins Crossing
Round Lake Beach, IL $ 1,043,090 $ 6.93
Sangamon Center North
Springfield, IL $ 1,088,236 $ 7.79
Sheridan Village
Peoria, IL $ 2,322,261 $ 7.64
Sterling Bazaar
Peoria, IL $ 688,574 $ 8.31
Twin Oaks Centre
Silvis, IL $ 588,211 $ 6.21
Wardcliffe Shopping Center
Peoria, IL $ 366,027 $ 5.42
Westview Center
Hanover Park, IL $ 2,497,598 $ 7.74
County Line Mall
Indianapolis, IN $ 1,854,013 $ 7.11
</Table>
64
<Page>
INDIVIDUAL PROPERTY DATA
<Table>
<Caption>
YEAR % LEASED COMPANY
PROPERTY NAME BUILT/ AS OF OWNED TOTAL ANCHOR
AND LOCATION RENOVATED(1) 12/31/01 GLA(2) GLA(3) SF(4) ANCHORS(5)
- ------------- ------------ --------- --------- --------- ---------- ------------------------------
SHOPPING CENTERS (CONTINUED):
Double Tree Plaza
Winfield, IN 1996 93% 100,104 112,104 45,000 Amelia's Supermarket
Germantown Shopping Center
Jasper, IN 1985 89% 230,600 238,000 155,405 Beuhlers Supermarket
Quality Farm & Fleet
Elder Beerman Dept Store
Peebles Dept Store
King's Plaza
Richmond, IN 1965 87% 102,788 102,788 60,200 Cub Foods
Lincoln Plaza
New Haven, IN 1968 94% 95,664 95,664 39,104 Kroger Supermarket
Martin's Bittersweet Plaza
Mishawaka, IN 1992 97% 78,245 81,255 61,079 Martin's Supermarket
Osco Drug
Rivergate Shopping Center
Shelbyville, IN 1982 94% 133,086 137,286 108,086 Super Foods
Wal-Mart
Sagamore Park Centre
West Lafayette, IN 1982 85% 102,439 102,439 41,154 Payless Supermarket
Speedway SuperCenter
Indianapolis, IN 1960/1998 88% 552,097 558,097 237,399 AJ Wright
Kroger Supermarket
Kohl's
Sears
Factory Card Outlet
Old Navy
The Village
Gary, IN 1950 95% 294,212 294,212 153,025 Ames Department Stores, Inc.
US Factory Outlet
AJ Wright
Ind. Dept of Employment
Washington Lawndale Commons
Evansville, IN 1957/1993 97% 336,524 336,524 214,199 Target Stores
Stein Mart
Dunham's Sporting Goods
Homelife Furniture (Sears)
Jo-Ann Fabrics
Books A Million
<Caption>
PROPERTY NAME ANNUALIZED ANNUALIZED BASE
AND LOCATION BASE RENT(6) RENT/SQ. FT.(7)
- ------------- ------------ ---------------
SHOPPING CENTERS (CONTINUED):
Double Tree Plaza
Winfield, IN $ 671,149 $ 6.70
Germantown Shopping Center
Jasper, IN $ 1,141,468 $ 4.95
King's Plaza
Richmond, IN $ 421,143 $ 4.10
Lincoln Plaza
New Haven, IN $ 671,349 $ 7.02
Martin's Bittersweet Plaza
Mishawaka, IN $ 528,832 $ 6.76
Rivergate Shopping Center
Shelbyville, IN $ 499,024 $ 3.75
Sagamore Park Centre
West Lafayette, IN $ 863,440 $ 8.43
Speedway SuperCenter
Indianapolis, IN $ 4,226,124 $ 7.65
The Village
Gary, IN $ 2,401,242 $ 8.16
Washington Lawndale Commons
Evansville, IN $ 1,911,623 $ 5.68
</Table>
65
<Page>
INDIVIDUAL PROPERTY DATA
<Table>
<Caption>
YEAR % LEASED COMPANY
PROPERTY NAME BUILT/ AS OF OWNED TOTAL ANCHOR
AND LOCATION RENOVATED(1) 12/31/01 GLA(2) GLA(3) SF(4) ANCHORS(5)
- ------------- ------------ --------- --------- --------- ---------- ------------------------------
SHOPPING CENTERS (CONTINUED):
Burlington Plaza West
Burlington, IA 1989 97% 88,118 88,118 52,468 Festival Foods
Davenport Retail Center
Davenport, IA 1996 100% 62,588 229,588 214,433 Staples
PetsMart
Super Target (Non-Owned)
Kimberly West
Davenport, IA 1987/1997 93% 113,713 113,713 76,896 Hy-Vee Supermarket
Parkwood Plaza
Urbandale, IA 1992 93% 126,369 126,369 63,108 Albertson's Supermarket
Southgate Shopping Center
Des Moines, IA 1972/1996 100% 155,399 155,399 124,065 Hy-Vee Supermarket
Walgreens
Big Lots
Spring Village
Davenport, IA 1980/1991 81% 90,263 92,763 45,763 Eagle Foods
Warren Plaza
Dubuque, IA 1980/1993 96% 90,102 187,135 148,525 Hy-Vee Supermarket
Target (Non-Owned)
Mid State Plaza
Salina, KS 1971 89% 286,601 293,101 180,288 Food 4 Less
Sutherlands Lumber
Hobby Lobby
Carroll's Books
Santa Fe Square
Olathe, KS 1987 95% 133,698 133,698 55,820 Hy-Vee Supermarket
Shawnee Parkway Plaza
Shawnee, KS 1979/1995 82% 92,213 92,213 59,128 Price Chopper Supermarket
Village Plaza
Manhattan, KS 1975 100% 55,698 55,698 24,510 Falley's Food 4 Less
Westchester Square
Lenexa, KS 1968/1998 85% 164,944 168,644 63,000 Hy-Vee Supermarket
West Loop Shopping Center
Manhattan, KS 1986/1998 87% 199,032 199,032 78,558 Dillons Supermarket
Waters True Value
<Caption>
PROPERTY NAME ANNUALIZED ANNUALIZED BASE
AND LOCATION BASE RENT(6) RENT/SQ. FT.(7)
- ------------- ------------ ---------------
SHOPPING CENTERS (CONTINUED):
Burlington Plaza West
Burlington, IA $ 599,344 $ 6.80
Davenport Retail Center
Davenport, IA $ 668,827 $10.69
Kimberly West
Davenport, IA $ 641,412 $ 5.64
Parkwood Plaza
Urbandale, IA $ 866,966 $ 6.86
Southgate Shopping Center
Des Moines, IA $ 536,791 $ 3.45
Spring Village
Davenport, IA $ 330,361 $ 3.66
Warren Plaza
Dubuque, IA $ 667,787 $ 7.41
Mid State Plaza
Salina, KS $ 846,764 $ 2.95
Santa Fe Square
Olathe, KS $ 1,071,282 $ 8.01
Shawnee Parkway Plaza
Shawnee, KS $ 586,337 $ 6.36
Village Plaza
Manhattan, KS $ 294,719 $ 5.29
Westchester Square
Lenexa, KS $ 1,301,606 $ 7.89
West Loop Shopping Center
Manhattan, KS $ 1,214,101 $ 6.10
</Table>
66
<Page>
INDIVIDUAL PROPERTY DATA
<Table>
<Caption>
YEAR % LEASED COMPANY
PROPERTY NAME BUILT/ AS OF OWNED TOTAL ANCHOR
AND LOCATION RENOVATED(1) 12/31/01 GLA(2) GLA(3) SF(4) ANCHORS(5)
- ------------- ------------ --------- --------- --------- ---------- ------------------------------
SHOPPING CENTERS (CONTINUED):
Camelot Shopping Center
Louisville, KY 1969/1997 83% 150,391 150,391 61,500 Winn Dixie Supermarket
Gatti's Pizza
Dixie Plaza
Louisville, KY 1987 100% 47,954 82,737 59,383 Winn Dixie Supermarket
Frank's Nursery (Non-Owned)
Midtown Mall
Ashland, KY 1970/1994 86% 153,566 153,566 96,171 Kroger Supermarket
Odd Lots/Big Lots
Gatti's Pizza
Plainview Village Center
Louisville, KY 1977 88% 151,461 182,261 30,975 Kroger Supermarket
Stony Brook
Louisville, KY 1988 96% 136,830 228,030 159,625 Kroger Supermarket
H.H. Gregg (Non-Owned)
Pine Tree Shopping Center
Portland, ME 1958/1973 100% 204,006 254,378 200,178 Shaw's Supermarket (Non-Owned)
Ames Department Stores, Inc.
Mardens
Jo-Ann Fabrics
AJ Wright
Lynn Market Place
Lynn, MA 1966/1993 100% 78,092 78,092 52,620 Star Market
Watertower Plaza
Leominster, MA 1988/1998 88% 285,821 296,321 194,078 Shaw's Supermarket
TJ Maxx
OfficeMax
Barnes & Noble
Linens 'N Things
Petco
Michael's
Westgate Plaza
Westfield, MA 1969/1996 97% 103,903 103,903 77,768 Stop & Shop
TJ Maxx
Cherry Hill Marketplace
Westland, MI 1992/1999 82% 122,132 122,132 53,739 Farmer Jacks
<Caption>
PROPERTY NAME ANNUALIZED ANNUALIZED BASE
AND LOCATION BASE RENT(6) RENT/SQ. FT.(7)
- ------------- ------------ ---------------
SHOPPING CENTERS (CONTINUED):
Camelot Shopping Center
Louisville, KY $ 774,242 $ 5.15
Dixie Plaza
Louisville, KY $ 380,214 $ 7.93
Midtown Mall
Ashland, KY $ 835,333 $ 5.44
Plainview Village Center
Louisville, KY $ 1,291,161 $ 8.52
Stony Brook
Louisville, KY $ 1,458,248 $10.66
Pine Tree Shopping Center
Portland, ME $ 1,403,976 $ 6.88
Lynn Market Place
Lynn, MA $ 599,354 $ 7.67
Watertower Plaza
Leominster, MA $ 3,576,007 $12.51
Westgate Plaza
Westfield, MA $ 969,568 $ 9.33
Cherry Hill Marketplace
Westland, MI $ 1,220,686 $ 9.99
</Table>
67
<Page>
INDIVIDUAL PROPERTY DATA
<Table>
<Caption>
YEAR % LEASED COMPANY
PROPERTY NAME BUILT/ AS OF OWNED TOTAL ANCHOR
AND LOCATION RENOVATED(1) 12/31/01 GLA(2) GLA(3) SF(4) ANCHORS(5)
- ------------------------------ ------------ --------- --------- --------- ---------- ------------------------------
SHOPPING CENTERS (CONTINUED):
The Courtyard
Burton, MI 1989 100% 125,965 268,520 219,421 V.G. Food Center
OfficeMax
Dunhams Sporting Goods
Home Depot (Non-Owned)
Redford Plaza
Redford, MI 1956/1987 96% 284,913 284,913 194,014 Kroger Supermarket
Burlington Coat Factory
Bally Total Fitness
AJ Wright
Aco Hardware
The Resource Network
Austin Town Center
Austin, MN 1999 98% 111,110 201,110 170,789 Rainbow Foods
Staples
Target (Non-Owned)
Brookdale Square
Brooklyn Center, MN 1971/1994 76% 185,883 185,883 114,320 Circuit City
Office Depot
Brookdale Theater
Pep Boys
Burning Tree Plaza
Duluth, MN 1987/1998 99% 173,929 173,929 117,716 Best Buy
TJ Maxx
Hancocks Fabrics
Dunham's Sporting Goods
Central Valu Center
Columbia Heights, MN 1961/1984 100% 123,350 123,350 90,946 Rainbow Foods
Slumberland Clearance
Division Place
St. Cloud, MN 1991 100% 129,354 133,354 24,016 TJ Maxx
Elk Park Center
Elk River, MN 1995/1999 97% 184,890 282,533 172,656 Cub Foods
Target (Non-Owned)
OfficeMax
<Caption>
PROPERTY NAME ANNUALIZED ANNUALIZED BASE
AND LOCATION BASE RENT(6) RENT/SQ. FT.(7)
- ------------------------------ ------------ ---------------
SHOPPING CENTERS (CONTINUED):
The Courtyard
Burton, MI $ 992,032 $ 7.88
Redford Plaza
Redford, MI $ 2,286,408 $ 8.02
Austin Town Center
Austin, MN $ 944,625 $ 8.50
Brookdale Square
Brooklyn Center, MN $ 945,003 $ 5.08
Burning Tree Plaza
Duluth, MN $ 1,578,516 $ 9.08
Central Valu Center
Columbia Heights, MN $ 938,928 $ 7.61
Division Place
St. Cloud, MN $ 1,452,858 $11.23
Elk Park Center
Elk River, MN $ 1,934,145 $10.46
</Table>
68
<Page>
INDIVIDUAL PROPERTY DATA
<Table>
<Caption>
YEAR % LEASED COMPANY
PROPERTY NAME BUILT/ AS OF OWNED TOTAL ANCHOR
AND LOCATION RENOVATED(1) 12/31/01 GLA(2) GLA(3) SF(4) ANCHORS(5)
- ------------- ------------ --------- --------- --------- ---------- ------------------------------
SHOPPING CENTERS (CONTINUED):
Har Mar Mall
Roseville, MN 1992/1995 97% 429,791 429,791 246,814 Cub Foods
Barnes & Noble
Marshalls
TJ Maxx
General Cinema
Michaels
Mars Music
Hub West(9)
Richfield Hub
Richfield, MN 1952/1992 98% 214,855 217,655 129,400 Rainbow Foods
Bally Total Fitness
Marshalls
Michaels
Marketplace at 42
Savage, MN 1999 100% 120,377 135,877 56,371 Rainbow Foods
Roseville Center
Roseville, MN 1950/2000 96% 76,723 141,723 65,000 Rainbow Foods (Non-Owned)
Southport Centre
Apple Valley, MN 1992 96% 124,848 427,944 347,614 Best Buy
Frank's Nursery
Super Target (Non-Owned)
OfficeMax (Non-Owned)
Cub Foods (Non-Owned)
Sun Ray Shopping Center
St. Paul, MN 1958/1992 96% 256,725 256,725 133,090 JC Penney
TJ Maxx
Bally Total Fitness
Michael's
Petters Warehouse Direct
Ten Acres Center
West St. Paul, MN 1972/1986 100% 162,364 162,364 133,894 Cub Foods
Burlington Coat Factory
Terrace Mall
Robbinsdale, MN 1979/1993 90% 135,031 250,031 97,430 Rainbow Foods
North Memorial Medical
Westwind Plaza
Minnetonka, MN 1985 90% 87,936 87,936 20,245 Northern Hydraulics
<Caption>
PROPERTY NAME ANNUALIZED ANNUALIZED BASE
AND LOCATION BASE RENT(6) RENT/SQ. FT.(7)
- ------------- ------------ ---------------
SHOPPING CENTERS (CONTINUED):
Har Mar Mall
Roseville, MN $ 4,006,340 $ 9.32
Hub West(9)
Richfield Hub
Richfield, MN $ 2,349,361 $10.93
Marketplace at 42
Savage, MN $ 1,421,725 $11.81
Roseville Center
Roseville, MN $ 819,513 $10.68
Southport Centre
Apple Valley, MN $ 1,722,917 $13.80
Sun Ray Shopping Center
St. Paul, MN $ 2,100,802 $ 8.18
Ten Acres Center
West St. Paul, MN $ 1,093,355 $ 6.73
Terrace Mall
Robbinsdale, MN $ 991,220 $ 7.34
Westwind Plaza
Minnetonka, MN $ 964,703 $10.97
</Table>
69
<Page>
INDIVIDUAL PROPERTY DATA
<Table>
<Caption>
YEAR % LEASED COMPANY
PROPERTY NAME BUILT/ AS OF OWNED TOTAL ANCHOR
AND LOCATION RENOVATED(1) 12/31/01 GLA(2) GLA(3) SF(4) ANCHORS(5)
- ------------- ------------ --------- --------- --------- ---------- ------------------------------
SHOPPING CENTERS (CONTINUED):
White Bear Hills
White Bear Lake, MN 1990/1996 99% 73,095 73,095 45,679 Festival Foods
Ellisville Square
Ellisville, MO 1990 98% 146,052 146,052 107,772 Kmart
Lukas Liquors
Grandview Plaza
Florissant, MO 1961/1991 57% 294,586 294,586 114,192 Schnuck's Supermarket
OfficeMax
Walgreens
Hub Shopping Center
Independence, MO 1972/1995 97% 161,472 161,472 103,322 Price Chopper Supermarket
Liberty Corners
Liberty, MO 1987/1996 100% 121,432 203,432 126,000 Price Chopper Supermarket
Sutherlands (Non-Owned)
Maplewood Square
Maplewood, MO 1998 100% 71,590 71,590 57,575 Shop n' Save Supermarket
Prospect Plaza
Gladstone, MO 1979/1999 100% 189,996 189,996 136,566 Hen House Grocery
Hobby Lobby
Westlake Ace Hardware
Watts Mill Plaza
Kansas City, MO 1973/1997 100% 161,717 169,717 91,989 Price Chopper Supermarket
Westlake Hardware
Bishop Heights
Lincoln, NE 1971/1997 100% 26,042 120,102 106,992 Russ's IGA Supermarket
Shopko (Non-Owned)
Cornhusker Plaza
South Sioux City, NE 1988 100% 63,016 141,996 100,656 Hy-Vee Supermarket
Wal-Mart (Non-Owned)
Eastville Plaza
Fremont, NE 1986 100% 68,546 133,436 99,046 Hy-Vee Supermarket
Menard's (Non-Owned)
Edgewood Shopping Center
Lincoln, NE 1980/1994 95% 172,429 391,479 295,020 SuperSaver Supermarket
Osco Drug
Target (Non-Owned)
Kmart (Non-Owned)
<Caption>
PROPERTY NAME ANNUALIZED ANNUALIZED BASE
AND LOCATION BASE RENT(6) RENT/SQ. FT.(7)
- ------------- ------------ ---------------
SHOPPING CENTERS (CONTINUED):
White Bear Hills
White Bear Lake, MN $ 618,134 $ 8.46
Ellisville Square
Ellisville, MO $ 1,357,422 $ 9.29
Grandview Plaza
Florissant, MO $ 1,366,966 $ 4.64
Hub Shopping Center
Independence, MO $ 828,477 $ 5.13
Liberty Corners
Liberty, MO $ 946,894 $ 7.80
Maplewood Square
Maplewood, MO $ 529,396 $ 7.39
Prospect Plaza
Gladstone, MO $ 1,535,956 $ 8.08
Watts Mill Plaza
Kansas City, MO $ 1,432,154 $ 8.86
Bishop Heights
Lincoln, NE $ 175,345 $ 6.73
Cornhusker Plaza
South Sioux City, NE $ 493,065 $ 7.82
Eastville Plaza
Fremont, NE $ 551,100 $ 8.04
Edgewood Shopping Center
Lincoln, NE $ 1,433,271 $ 8.31
</Table>
70
<Page>
INDIVIDUAL PROPERTY DATA
<Table>
<Caption>
YEAR % LEASED COMPANY
PROPERTY NAME BUILT/ AS OF OWNED TOTAL ANCHOR
AND LOCATION RENOVATED(1) 12/31/01 GLA(2) GLA(3) SF(4) ANCHORS(5)
- ------------- ------------ --------- --------- --------- ---------- ------------------------------
SHOPPING CENTERS (CONTINUED):
The Meadows
Lincoln, NE 1998 98% 67,840 70,840 50,000 Russ's IGA Supermarket
Miracle Hills Park
Omaha, NE 1988 85% 69,488 135,488 66,000 Cub Foods (Non-Owned)
Stockyards Plaza
Omaha, NE 1988 95% 129,309 148,509 85,649 Hy-Vee Supermarket
Movies 8
Bedford Mall
Bedford, NH 1963/1999 86% 232,251 264,375 188,607 Marshalls
Bob's Stores
Staples
Linens N Things
MVP Sports (Non-Owned)
Hoyts Cinemas
Capitol Shopping Center
Concord, NH 1961/1999 95% 178,631 182,891 129,551 Demoulas Market Basket
Ames Department Stores, Inc.
Marshalls
Tri City Plaza
Somersworth, NH 1968/1992 100% 144,588 144,948 84,920 Demoulas Market Basket
TJ Maxx
Morris Hills Shopping Center
Parsippany, NJ 1957/1994 100% 159,454 160,954 109,161 Mega Marshalls
Clearview Cinema
Michaels
St. Francis Plaza
Santa Fe, NM 1992/1993 100% 35,800 35,800 20,850 Wild Oats Market
College Plaza
Selden, NY 1975/1994 96% 175,086 175,086 128,812 Bob's Stores
Marshalls
Eckerd Drugs
Staples
Dalewood I Shopping Center
Hartsdale, NY 1966/1995 100% 58,969 58,969 36,989 Pathmark
Dalewood II Shopping Center
Hartsdale, NY 1970/1995 100% 81,326 81,326 59,326 Turco's Supermarket
Bed, Bath & Beyond
<Caption>
PROPERTY NAME ANNUALIZED ANNUALIZED BASE
AND LOCATION BASE RENT(6) RENT/SQ. FT.(7)
- ------------- ------------ ---------------
SHOPPING CENTERS (CONTINUED):
The Meadows
Lincoln, NE $ 513,170 $ 7.56
Miracle Hills Park
Omaha, NE $ 751,418 $10.81
Stockyards Plaza
Omaha, NE $ 959,412 $ 7.42
Bedford Mall
Bedford, NH $ 2,432,450 $10.47
Capitol Shopping Center
Concord, NH $ 1,018,394 $ 5.70
Tri City Plaza
Somersworth, NH $ 884,569 $ 6.12
Morris Hills Shopping Center
Parsippany, NJ $ 2,281,742 $14.31
St. Francis Plaza
Santa Fe, NM $ 363,732 $10.16
College Plaza
Selden, NY $ 1,384,689 $ 7.91
Dalewood I Shopping Center
Hartsdale, NY $ 899,811 $15.26
Dalewood II Shopping Center
Hartsdale, NY $ 1,826,393 $22.46
</Table>
71
<Page>
INDIVIDUAL PROPERTY DATA
<Table>
<Caption>
YEAR % LEASED COMPANY
PROPERTY NAME BUILT/ AS OF OWNED TOTAL ANCHOR
AND LOCATION RENOVATED(1) 12/31/01 GLA(2) GLA(3) SF(4) ANCHORS(5)
- ------------- ------------ --------- --------- --------- ---------- ------------------------------
SHOPPING CENTERS (CONTINUED):
Dalewood III Shopping Center
Hartsdale, NY 1972/1995 96% 48,390 48,390 28,361 TJ Maxx
Falcaro's Plaza
Lawrence, NY 1968/1993 100% 61,295 63,295 26,130 OfficeMax
Kings Park Shopping Center
Kings Park, NY 1963/1985 100% 71,940 71,940 47,208 Dan's Supreme Supermarket
TJ Maxx
Nesconset Shopping Center
Port Jefferson Station, NY 1961/1999 97% 123,034 125,034 33,460 Office Depot
Parkway Plaza
Carle Place, NY 1973/1992 95% 89,704 89,704 31,600 TJ Maxx
Roanoke Plaza
Riverhead, NY 1972/1994 100% 87,161 89,661 43,590 TJ Maxx
Produce Warehouse
Rockville Centre Shopping
Center
Rockville Centre, NY 1975 100% 44,131 44,131 27,781 HomeGoods
Suffolk Plaza
East Setauket, NY 1967/1998 98% 84,480 89,680 56,759 Waldbaum's Supermarket
Three Village Plaza
East Setauket, NY 1964/1991 100% 77,458 77,458 40,455 Swezey and Newins
Turnpike Plaza
Huntington Station, NY 1971/1994 100% 52,950 52,950 30,700 Waldbaum's Supermarket
The Commons at Chancellor Park
Charlotte, NC 1994 98% 236,230 351,460 312,497 Home Depot (Non-Owned)
Kmart
Circuit City
Marshalls
Summit Fitness
Crown Point Shopping Center
Charlotte, NC 1990 100% 147,200 147,200 135,200 Lowe's of Crown Point
Babies R US
<Caption>
PROPERTY NAME ANNUALIZED ANNUALIZED BASE
AND LOCATION BASE RENT(6) RENT/SQ. FT.(7)
- ------------- ------------ ---------------
SHOPPING CENTERS (CONTINUED):
Dalewood III Shopping Center
Hartsdale, NY $ 1,037,331 $21.44
Falcaro's Plaza
Lawrence, NY $ 933,499 $15.23
Kings Park Shopping Center
Kings Park, NY $ 966,013 $13.43
Nesconset Shopping Center
Port Jefferson Station, NY $ 1,534,902 $12.48
Parkway Plaza
Carle Place, NY $ 1,598,301 $17.82
Roanoke Plaza
Riverhead, NY $ 957,190 $10.98
Rockville Centre Shopping
Center
Rockville Centre, NY $ 577,407 $13.08
Suffolk Plaza
East Setauket, NY $ 668,955 $ 7.92
Three Village Plaza
East Setauket, NY $ 906,211 $11.70
Turnpike Plaza
Huntington Station, NY $ 522,523 $ 9.87
The Commons at Chancellor Park
Charlotte, NC $ 2,332,259 $ 9.87
Crown Point Shopping Center
Charlotte, NC $ 1,014,775 $ 6.89
</Table>
72
<Page>
INDIVIDUAL PROPERTY DATA
<Table>
<Caption>
YEAR % LEASED COMPANY
PROPERTY NAME BUILT/ AS OF OWNED TOTAL ANCHOR
AND LOCATION RENOVATED(1) 12/31/01 GLA(2) GLA(3) SF(4) ANCHORS(5)
- ------------- ------------ --------- --------- --------- ---------- -------------------------------
SHOPPING CENTERS (CONTINUED):
Franklin Square Shopping Center
Gastonia, NC 1990 98% 307,948 491,838 364,558 Super Wal-Mart (Non-Owned)
Best Buy
Ross Dress for Less
Bed, Bath & Beyond
Dollar Tree
Pep Boys
OfficeMax
Michaels
Innes Street Market
Salisbury, NC 1998 99% 349,262 349,262 296,740 Food Lion Supermarket
Lowe's Home Centers
Tinseltown Cinema
Marshalls
Staples
Circuit City
Old Navy
McMullen Creek Shopping
Center(10)
Charlotte, NC 1988 91% 283,824 293,424 98,222 Winn Dixie Supermarket
Burlington Coat Factory
New Centre Market
Wilmington, NC 1998 98% 139,941 266,241 202,040 Target (Non-Owned)
Marshalls
PetsMart
OfficeMax
River Ridge Marketplace
Asheville, NC 1984/1996 90% 204,344 214,444 104,541 Food Lion Supermarket
Hamricks
Reading China
Tarrymore Square
Raleigh, NC 1989 98% 260,405 260,405 135,447 Marshalls
Phar-Mor
Dick's Sporting Goods
University Commons
Wilmington, NC 1989 96% 231,943 231,943 139,282 Lowes Foods
TJ Maxx
Phar-Mor
AC Moore
University Commons Greenville
Greenville, NC 1996 100% 232,821 338,021 270,249 Kroger Supermarket
TJ Maxx
Circuit City
Barnes & Noble
Target (Non-Owned)
Linens N Things
<Caption>
ANNUALIZED
PROPERTY NAME ANNUALIZED BASE
AND LOCATION BASE RENT(6) RENT/SQ. FT.(7)
- ------------- ------------ ---------------
SHOPPING CENTERS (CONTINUED):
Franklin Square Shopping Center
Gastonia, NC $ 2,899,884 $ 9.42
Innes Street Market
Salisbury, NC $ 3,252,560 $ 9.31
McMullen Creek Shopping
Center(10)
Charlotte, NC $ 2,812,978 $ 9.91
New Centre Market
Wilmington, NC $ 1,620,748 $11.58
River Ridge Marketplace
Asheville, NC $ 1,389,181 $ 6.80
Tarrymore Square
Raleigh, NC $ 2,418,041 $ 9.29
University Commons
Wilmington, NC $ 2,034,959 $ 8.77
University Commons Greenville
Greenville, NC $ 2,645,453 $11.36
</Table>
73
<Page>
INDIVIDUAL PROPERTY DATA
<Table>
<Caption>
YEAR % LEASED COMPANY
PROPERTY NAME BUILT/ AS OF OWNED TOTAL ANCHOR
AND LOCATION RENOVATED(1) 12/31/01 GLA(2) GLA(3) SF(4) ANCHORS(5)
- ------------- ------------ --------- --------- --------- ---------- ------------------------------
SHOPPING CENTERS (CONTINUED):
Wendover Place
Greensboro, NC 1997 87% 415,886 548,786 408,454 Kroger Supermarket
Kohl's
Dick's Sporting Goods
Babies R Us
PetsMart
Old Navy
Target (Non-Owned)
30th Street Plaza
Canton, OH 1951/1999 96% 157,085 157,085 111,251 Giant Eagle Supermarket
Marc's Pharmacy
Clock Tower Plaza
Lima, OH 1989 96% 237,975 237,975 172,300 Ray's Supermarket
Wal-Mart
Salem Consumer Square
Trotwood, OH 1988 94% 274,502 274,502 131,650 Cub Foods
Office Depot
Michigan Sporting Goods
AJ Wright
Boyertown Plaza
Boyertown, PA 1961 84% 83,229 87,629 50,229 Ames Department Stores, Inc.
Lehigh Shopping Center
Bethlehem, PA 1955/1999 89% 343,927 347,927 241,887 Supervalu Supermarket
Ames Department Stores, Inc.
Mega Marshalls
Staples
Franks Nursery
Baken Park
Rapid City, SD 1962/1997 96% 196,766 196,766 95,039 Nash Finch Supermarket
Ben Franklin
Boyd's Drug
Oakwood Commons(11)
Hermitage, TN 1989/1997 96% 282,537 295,071 192,279 Albertson's Supermarket
Kmart
Peebles Dept. Store
Watson Glen Shopping Center
Franklin, TN 1989 97% 261,988 264,360 206,427 Bi-Lo Foods
Kmart
Goody's Family Clothing
World Gym
<Caption>
PROPERTY NAME ANNUALIZED ANNUALIZED BASE
AND LOCATION BASE RENT(6) RENT/SQ. FT.(7)
- ------------- ------------ ---------------
SHOPPING CENTERS (CONTINUED):
Wendover Place
Greensboro, NC $ 3,679,868 $ 8.85
30th Street Plaza
Canton, OH $ 1,428,683 $ 9.09
Clock Tower Plaza
Lima, OH $ 1,343,873 $ 5.65
Salem Consumer Square
Trotwood, OH $ 2,124,042 $ 7.74
Boyertown Plaza
Boyertown, PA $ 383,269 $ 4.60
Lehigh Shopping Center
Bethlehem, PA $ 1,537,540 $ 4.47
Baken Park
Rapid City, SD $ 1,420,745 $ 7.22
Oakwood Commons(11)
Hermitage, TN $ 2,039,907 $ 7.22
Watson Glen Shopping Center
Franklin, TN $ 1,591,447 $ 6.07
</Table>
74
<Page>
INDIVIDUAL PROPERTY DATA
<Table>
<Caption>
YEAR % LEASED COMPANY
PROPERTY NAME BUILT/ AS OF OWNED TOTAL ANCHOR
AND LOCATION RENOVATED(1) 12/31/01 GLA(2) GLA(3) SF(4) ANCHORS(5)
- ------------- ------------ --------- ---------- ---------- ---------- -----------------------------
SHOPPING CENTERS (CONTINUED):
Williamson Square(12)
Franklin, TN 1988/1993 80% 332,485 342,735 143,700 Kroger Supermarket
Hobby Lobby
USA Baby
Rutland Plaza
Rutland, VT 1966/1996 100% 221,314 224,314 182,264 Price Chopper Supermarket
Wal-Mart
TJ Maxx
Plaza Movie Plex
Fairacres Shopping Center
Oshkosh, WI 1992 100% 79,736 82,486 58,678 Pick 'N Save Supermarket
Fitchburg Ridge
Madison, WI 1980 57% 49,846 61,096 N/A N/A
Fox River Plaza
Burlington, WI 1987 100% 169,883 172,383 137,113 Pick 'N Save Supermarket
Kmart
Garden Plaza
Franklin, WI 1990 96% 80,099 80,099 49,564 Pick 'N Save Supermarket
Madison Plaza
Madison, WI 1988/1994 79% 127,559 127,559 68,309 SuperSaver Foods
Mequon Pavilions
Mequon, WI 1967/1991 91% 211,027 211,027 65,597 Jewel Foods/Osco Drugs
Funiture Clearance
Moorland Square
New Berlin, WI 1990 100% 98,288 199,010 149,674 Pick 'N Save Supermarket
Kmart (Non-Owned)
Oak Creek Centre
Oak Creek, WI 1988 100% 91,510 99,510 50,000 Sentry Supersaver
Park Plaza
Manitowoc, WI 1959/1993 92% 113,923 113,923 74,063 Sentry Foods
Big Lots
<Caption>
PROPERTY NAME ANNUALIZED ANNUALIZED BASE
AND LOCATION BASE RENT(6) RENT/SQ. FT.(7)
- ------------- ------------ ---------------
SHOPPING CENTERS (CONTINUED):
Williamson Square(12)
Franklin, TN $ 2,242,226 $ 6.74
Rutland Plaza
Rutland, VT $ 1,873,014 $ 8.46
Fairacres Shopping Center
Oshkosh, WI $ 678,113 $ 8.50
Fitchburg Ridge
Madison, WI $ 174,245 $ 3.50
Fox River Plaza
Burlington, WI $ 808,268 $ 4.76
Garden Plaza
Franklin, WI $ 518,568 $ 6.47
Madison Plaza
Madison, WI $ 803,704 $ 6.30
Mequon Pavilions
Mequon, WI $ 2,425,683 $11.49
Moorland Square
New Berlin, WI $ 815,947 $ 8.30
Oak Creek Centre
Oak Creek, WI $ 676,474 $ 7.39
Park Plaza
Manitowoc, WI $ 612,622 $ 5.38
</Table>
75
<Page>
INDIVIDUAL PROPERTY DATA
<Table>
<Caption>
YEAR % LEASED COMPANY
PROPERTY NAME BUILT/ AS OF OWNED TOTAL ANCHOR
AND LOCATION RENOVATED(1) 12/31/01 GLA(2) GLA(3) SF(4) ANCHORS(5)
- ------------- ------------ --------- ---------- ---------- ---------- -----------------------------
SHOPPING CENTERS (CONTINUED):
Spring Mall
Greenfield, WI 1967/1994 84% 193,481 193,481 140,701 Pick 'N Save Supermarket
TJ Maxx
Walgreens
Taylor Heights
Sheboygan, WI 1989 100% 85,072 233,862 158,630 Piggly Wiggly Foods
Wal-Mart (Non-Owned)
---------- ---------- ----------
TOTAL SHOPPING CENTERS 93% 23,153,947 27,182,202 17,213,307
---------- ---------- ----------
SINGLE TENANT PROPERTIES:
General Host (7 properties)
Florida Various 100% 14,000 14,000
Sambo's Restaurants
(3 properties)
Florida Various 100% 12,000 12,000
Subway (1 property)
Florida 1975 100% 1,800 1,800
---------- ----------
TOTAL SINGLE TENANT PROPERTIES 100% 27,800 27,800
---------- ----------
<Caption>
PROPERTY NAME ANNUALIZED ANNUALIZED BASE
AND LOCATION BASE RENT(6) RENT/SQ. FT.(7)
- ------------- ------------ ---------------
SHOPPING CENTERS (CONTINUED):
Spring Mall
Greenfield, WI $ 977,186 $ 5.05
Taylor Heights
Sheboygan, WI $ 888,154 $10.44
------------ ------
TOTAL SHOPPING CENTERS $188,830,903 $ 8.16
------------ ------
SINGLE TENANT PROPERTIES:
General Host (7 properties)
Florida $ 88,874 $ 6.35
Sambo's Restaurants
(3 properties)
Florida $ 147,435 $12.29
Subway (1 property)
Florida $ 13,200 $ 7.33
------------ ------
TOTAL SINGLE TENANT PROPERTIE $ 249,509 $ 8.98
------------ ------
</Table>
76
<Page>
INDIVIDUAL PROPERTY DATA
<Table>
<Caption>
COMPANY
OWNED NET TOTAL
YEAR % LEASED RENTABLE NET RENTABLE
PROPERTY NAME BUILT/ AS OF SQUARE SQUARE
AND LOCATION RENOVATED(1) 12/31/01 FEET FEET MAJOR TENANT(5)
- ------------- ------------ -------- ---------- ------------ -------------------------------------
OFFICE BUILDINGS:
William J. McCarthy Building
Boston, MA 1963/1995 94% 93,335 93,335 NETT
Heritage
545 Boylston Street
Boston, MA 1972/1996 99% 89,291 89,291 N/A
Executive Office Building
Great Neck, NY 1970 95% 40,230 40,230 Lipner Gordon & Co.
Norca
Sol G Atlas Realty
Heritage
Flower Hill Office Building
Roslyn, NY 1988 95% 29,876 29,876 N/A
Fortune Office Building
Hartsdale, NY 1969 87% 58,703 58,703 N/A
---------- ----------
TOTAL OFFICE BUILDINGS 94% 311,435 311,435
---------- ----------
TOTAL PORTFOLIO 93% 23,493,182 27,521,437
========== ==========
<Caption>
PROPERTY NAME ANNUALIZED ANNUALIZED BASE
AND LOCATION BASE RENT(6) RENT/SQ. FT.(7)
- ------------- ------------ ---------------
OFFICE BUILDINGS:
William J. McCarthy Building
Boston, MA $ 3,490,807 $37.40
545 Boylston Street
Boston, MA $ 3,246,425 $36.36
Executive Office Building
Great Neck, NY $ 957,362 $23.80
Flower Hill Office Building
Roslyn, NY $ 658,694 $22.05
Fortune Office Building
Hartsdale, NY $ 962,176 $16.39
------------ ------
TOTAL OFFICE BUILDINGS $ 9,315,464 $29.91
------------ ------
TOTAL PORTFOLIO $198,395,876 $ 8.44
============ ======
</Table>
- ------------------------------
(1) Represents the year the property originally opened for business and, if
applicable, the year in which a substantial renovation was completed. These
dates do not include years in which tenant improvements were made to the
properties.
(2) Represents gross leasable area owned by us and excludes 4,028,255 square
feet of non-owned gross leasable area.
(3) Some of our shopping centers contain space not owned by us. In addition to
Company-Owned GLA, Total GLA includes approximately 4.0 million square feet
of this non-owned gross leasable area, which generally is owned directly by
the anchor occupying this space.
(4) Represents square feet of gross leasable area at a property that an anchor
tenant either leases or owns.
(5) We define anchor tenants as single tenants which lease 15,000 square feet or
more at a property. We define major tenants at our office buildings as
tenants which lease at least 10% or more of the rentable square footage at a
property.
(6) We calculate Annualized Base Rent for all leases in place in which tenants
are in occupancy at December 31, 2001 as follows: total base rent to be
received during the entire term of each lease, divided by the terms in
months for such leases, multiplied by 12. For any leases relating to
properties we acquired from NETT's real estate company upon our formation or
relating to properties acquired from Bradley, we calculate total base rent
to be received beginning from the date we acquired the property.
(7) Represents Annualized Base Rent divided by Company Owned GLA at
December 31, 2001.
(8) Property contains 11,697 square feet of office space.
(9) Property is comprised of two shopping centers.
(10) Property contains 32,406 square feet of office space.
(11) We hold a leasehold interest in this property pursuant to a ground lease
that expires in 2088.
(12) Williamson Square is owned in a joint venture of which we own 60%.
77
<Page>
TOP 10 TENANTS BY ANNUALIZED BASE RENT
<Table>
<Caption>
TENANT % OF TOTAL
GLA AS A ANNUALIZED BASE ANNUALIZED
TENANT # OF STORES TOTAL GLA % OF TOTAL RENT(1) BASE RENT(2) TYPE OF BUSINESS
- ------ ------------ --------- ----------- --------------- ------------ -------------------
TJX Companies (3)...... 41 1,231,763 5.2% $11,046,067 5.6% Off price/Apparel/
Home Fashions
Kroger (4)............. 14 687,113 2.9% 4,966,901 2.5% Grocer
Fleming Companies (5).. 13 692,996 2.9% 4,955,198 2.5% Grocer
Supervalu (6).......... 9 587,021 2.5% 4,109,813 2.1% Grocer
Kmart.................. 7 641,130 2.7% 3,182,957 1.6% Discount
Hy-Vee................. 9 513,999 2.2% 2,585,546 1.3% Grocer
Charming Shoppes,
Inc.(7).............. 32 271,654 1.2% 2,324,200 1.2% Discount/Apparel
Walgreen's............. 18 240,591 1.0% 2,278,395 1.1% Drug Store
Price Chopper.......... 5 343,397 1.5% 2,113,569 1.1% Grocer
OfficeMax.............. 9 212,770 0.9% 1,881,982 0.9% Office Products
</Table>
- --------------------------
(1) We calculate annualized base rent for all leases in place in which tenants
are in occupancy at December 31, 2001 as follows: total base rent to be
received during the entire term of each lease, divided by the terms in
months for such leases, multiplied by 12. For any leases relating to
properties we acquired from NETT's real estate company upon our formation or
relating to properties acquired from Bradley, we calculate total base rent
to be received beginning from the date we acquired the property.
(2) Represents total Tenant Annualized Base Rent divided by Total Annualized
Base Rent of $198,395,876.
(3) TJX Companies include: Marshalls, TJ Maxx, A.J. Wright and Homegoods.
(4) The Kroger Co. includes: Kroger, Pay Less Supermarket and Dillons.
(5) Fleming Companies Inc. include: Rainbow Foods, Sentry Foods, Super Saver
Supermarket, Russ's IGA Supermarket and Festival Foods.
(6) Supervalu Inc. includes: Cub Foods, Shop n' Save, Supervalu and Rays
Supermarket.
(7) Charming Shoppes, Inc. includes: Fashion Bug, Fashion Bug Plus, Added
Dimensions, Catherines and Lane Bryant.
78
<Page>
HISTORICAL LEASING ACTIVITY--TOTAL PORTFOLIO
The following table reflects leasing activity in our portfolio beginning
with the year ended December 31, 1999. This information reflects leasing
activity with respect to the properties we acquired from Bradley from
September 18, 2000, the date we completed the Bradley acquisition. All periods
presented below include information with respect to those properties contributed
by NETT. As used in the table below, the term "Expiring Base Rent" represents
the last 12 months of rent payable immediately prior to the expiration of the
lease. The term "New Base Rent" represents the base rent payable for the first
12 months of the lease. Expiring Base Rents and New Base Rents do not include
straight line rent adjustments, tenant improvements or leasing commissions.
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
--------------------------------
2001 2000 1999
---------- -------- --------
NEW LEASES
Number of New Leases Signed................................. 231 127 76
GLA Leased (sq. ft. at end of period)....................... 849,453 484,814 482,215
New Base Rent/sq. ft........................................ $ 10.44 $ 12.16 $ 12.22
Expiring Base Rent/sq. ft................................... $ 9.04 $ 10.39 $ 9.50
Percentage Growth in Base Rent.............................. 15.5% 17.0% 28.7%
RENEWALS
Number of New Leases Signed................................. 337 150 118
GLA Leased (sq. ft. at end of period)....................... 1,144,299 439,509 365,786
New Base Rent/sq. ft........................................ $ 10.92 $ 14.63 $ 15.29
Expiring Base Rent/sq. ft................................... $ 9.89 $ 12.92 $ 14.20
Percentage Growth in Base Rent.............................. 10.41% 13.3% 7.7%
TOTAL NEW LEASES AND RENEWALS
Number of New Leases Signed................................. 568 277 194
GLA Leased (sq. ft. at end of period)....................... 1,993,752 924,323 848,001
New Base Rent/sq. ft........................................ $ 10.72 $ 13.34 $ 13.55
Expiring Base Rent/sq. ft................................... $ 9.53 $ 11.59 $ 11.53
Percentage Growth in Base Rent.............................. 12.5% 15.0% 17.5%
</Table>
MAINTENANCE CAPITAL EXPENDITURES
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
--------------------------------------
2001 2000 1999
----------- ----------- ----------
Maintenance capital expenditures....................... $ 5,466,000 $ 4,089,000 $2,229,000
Average number of square feet(1)....................... 23,308,000 13,303,000 7,639,000
Capital expenditures per square foot................... $ .23 $ .31 $ .29
</Table>
- ------------------------
(1) Represents the average aggregate amount of square feet owned by us during
the year.
We currently expect that maintenance capital expenditures will be
approximately $7.8 million, or $.33 per square foot, for the year ending
December 31, 2002.
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LEASE EXPIRATION SUMMARY
<Table>
<Caption>
EXPIRING
EXPIRING % OF TOTAL BASE
NUMBER OF SQUARE SQ. FT. EXPIRING % OF TOTAL RENT/
LEASE EXPIRATION YEAR EXPIRING LEASES FEET EXPIRING BASE RENT(1) BASE RENT SQ. FT.(2)
- --------------------- --------------- ---------- ---------- ------------ ---------- -----------
2002........................ 467 1,502,224 6.9% $ 14,315,369 7.0% $ 9.53
2003........................ 518 2,174,363 10.0% 22,928,577 11.3% 10.54
2004........................ 490 2,676,915 12.3% 25,474,784 12.5% 9.52
2005........................ 383 2,083,070 9.6% 22,439,370 11.0% 10.77
2006........................ 314 2,240,991 10.3% 20,595,691 10.1% 9.19
2007........................ 151 1,516,763 7.0% 13,260,368 6.5% 8.74
2008........................ 84 1,158,022 5.3% 10,375,748 5.2% 8.96
2009........................ 83 1,272,409 5.8% 12,440,195 6.2% 9.78
2010........................ 81 1,065,253 4.9% 10,600,487 5.3% 9.95
2011 and Thereafter......... 238 6,068,500 27.9% 50,646,750 24.9% 8.35
----- ---------- ----- ------------ ----- ------
TOTALS.................. 2,809 21,758,510 100.0% $203,077,339 100.0% $ 9.33
===== ========== ===== ============ ===== ======
</Table>
- --------------------------
(1) Represents the last 12 months of rent payable immediately prior to the
expiration of the lease.
(2) Represents Expiring Base Rent divided by Expiring Square Feet.
ACQUISITION AND MARKET SELECTION PROCESS
We seek to acquire primarily grocer-anchored neighborhood and community
shopping centers in neighborhood trade areas with attractive demographics. When
specific markets are selected, we seek a convenient and easily accessible
location with abundant parking facilities, preferably occupying the dominant
corner, close to residential communities, with excellent visibility for our
tenants and easy access for neighborhood shoppers. In particular, we emphasize
the following factors:
- - GEOGRAPHIC FOCUS: Our acquisition activities are focused primarily in the 26
states in which we currently operate in the Eastern and Midwestern United
States. In general, our strategy is to target geographic areas proximate to
our existing neighborhood and community shopping centers which allows us to
maximize our current resources and manage expenses. We seek to establish a
firm market presence by owning multiple properties in an area. We also
consider opportunities to expand into other geographic markets where the
opportunity presented is a sizable portfolio that would allow us to reach an
economy of scale. We will continue to evaluate all potential acquisitions on a
property-by-property and market-by-market basis.
We evaluate each market based on different criteria, including:
- stable or growing population base;
- positive job growth;
- diverse economy; and
- other competitive factors.
- - PROPERTY FOCUS: We target grocer-anchored, open-air neighborhood and community
shopping centers containing approximately 100,000 to 500,000 square feet of
gross leasable area. In particular, we focus on those shopping centers
anchored by market-leading grocers or those smaller operators who have
dominant positions in their trade areas. In addition, we focus on the presence
of other additional anchor(s) for these centers, including off-price
retailers, office superstores, and fabric and clothing retailers, all of whom
we believe to be generally beneficial to the value of the center.
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In addition to those anchors, we also seek properties with a diverse tenant
mix that includes service retailers, such as banks, florists, video stores,
restaurants, apparel and specialty shops. The dominant characteristic we seek
is the ability of the center to generate a steady, repetitive flow of traffic
by providing staple goods to the community and offering a high level of
convenience with ease of access and abundant parking.
IN-HOUSE LEASING AND PROPERTY MANAGEMENT PROGRAM
We believe that effective leasing is the key to successful asset management.
We maintain close relationships with our tenants, properties and markets by
maintaining 13 regional offices in addition to our corporate headquarters in
Boston. Each of these offices is staffed with leasing representatives. Our
primary goal is for each leasing representative to become an expert in his or
her marketplace by becoming familiar with current tenants as well as potential
local, regional and national tenants who would complement our current tenant
mix. The renewal and replacement of tenants is critical to our leasing and
management performance.
Our full time property managers are located throughout our regional offices
which make them easily accessible to our properties. This enables our managers
to remain in frequent contact with our tenants to ensure the proper maintenance
of our properties. We periodically renovate and improve our properties to
respond to market conditions to continually attract and retain our tenants.
Our leasing and property management functions are supervised and
administered by our executive officers at our Boston headquarters. Corporate
management, leasing and maintenance personnel regularly visit all of our
properties to support our regional personnel and to ensure implementation of our
policies and directives.
COMPETITION
We believe that competition for the acquisition and operation of retail
shopping centers is highly fragmented. We face competition from institutional
pension funds, other REITs and owner-operators engaged in the acquisition,
ownership and leasing of shopping centers as well as from numerous local,
regional and national real estate developers and owners in each of our markets.
We encounter competition for acquisitions of existing income-producing
properties. We also face competition in leasing available space at our
properties to prospective tenants. The actual competition for tenants varies
depending upon the characteristics of each local market in which we own and
manage property. We believe that the principal competitive factors in attracting
tenants in our market areas are location, price, the presence of anchor tenants
and maintenance of properties.
OFFICES
We own our headquarters building located at 535 Boylston Street, in the Back
Bay of Boston, Massachusetts. In addition, we also manage our properties through
13 regional offices, strategically located throughout our portfolio states. We
own all of our regional offices, some of which are located in our shopping
center properties. We believe that our current facilities are adequate for our
present and future operations.
LEGAL PROCEEDINGS
On October 31, 2001, a complaint was filed against us in the Superior Court
of Suffolk County of the Commonwealth of Massachusetts by Weston Associates and
its president, Paul Donahue, alleging that we owe Mr. Donahue and his firm a fee
in connection with services he claims he performed on our behalf in connection
with our acquisition of Bradley. Through his personal relationships with the
parties involved, Mr. Donahue introduced us to Bradley and its senior management
team.
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Mr. Donahue alleges, however, that he played an instrumental role in the
negotiation and completion of our acquisition of Bradley beyond merely
introducing the parties. For these alleged efforts, Mr. Donahue demands that he
receive a fee equal to 2% of the aggregate consideration we paid to acquire
Bradley, or a fee of approximately $24 million. In addition, Mr. Donahue also
seeks treble damages based on alleged unfair or deceptive business practices
under Massachusetts law.
On December 30, 2001, we filed a motion to dismiss all of Mr. Donahue's
claims. Mr. Donahue filed an opposition to our motion and on March 22, 2002, a
hearing was held by the court. The court has not yet rendered a decision with
respect to our motion to dismiss. It is not possible at this time to predict the
outcome of this litigation and we intend to vigorously defend against these
claims.
Except as set forth above, we are not involved in any material litigation
nor, to our knowledge, is any material litigation threatened against us, other
than routine litigation arising in the ordinary course of business, which is
expected to be covered by insurance. In the opinion of our management, after
consultation with counsel, this litigation is not expected to have a material
adverse effect on our business, financial condition or results of operations.
INDEBTEDNESS OUTSTANDING AFTER THIS OFFERING
The following table sets forth information with respect to our total
indebtedness that we expect will be outstanding after this offering and the
proposed property acquisitions described in this prospectus.
<Table>
<Caption>
AVERAGE AVERAGE
AMOUNT RATE MATURITY
------------ -------- --------------
Mortgage Debt......................... $541,994,000 8.02% January 2010
Unsecured Notes....................... 201,490,000 7.11% June 2006
Senior Unsecured Credit Facility...... 241,164,000 5.43% September 2003
------------ ---- --------------
TOTAL / WEIGHTED AVERAGE.............. $984,648,000 7.20% October 2007
</Table>
EXISTING SENIOR UNSECURED CREDIT FACILITY
In connection with the Bradley acquisition, the Heritage OP and the Bradley
OP jointly entered into a $425 million senior unsecured credit facility,
consisting of a $275 million revolving credit facility, with a $35 million
letter of credit sub-limit, and a $150 million term loan with Fleet National
Bank and other financial institutions. We and substantially all of our
subsidiaries have guaranteed this senior unsecured credit facility. We entered
into this facility to finance the Bradley acquisition as well as to finance
future acquisition and development activities and for general corporate
purposes. Borrowings under this facility bear interest at a variable rate based
on LIBOR, which rate was 5.43% at December 31, 2001, including the impact of the
6% floor under the interest rate collar agreement for the $150 million term
loan. As described elsewhere in this prospectus, the interest rate on the
$150 million term loan is hedged throughout the term of this facility with an
interest rate floor and cap agreement. As of December 31, 2001, we had borrowed
$343 million under this facility, consisting of the $150 million term loan and
$193 million of draws under the revolving line of credit. This facility matures
in September 2003. As described elsewhere in this prospectus, we intend to use
approximately $174.5 million of the net proceeds of this offering to repay a
portion of the outstanding balance of this facility. As a result, after this
offering and the proposed property acquisitions described in this prospectus, we
expect to have a balance of approximately $241.2 million outstanding under this
facility.
The availability of funds under this facility is subject, among other
things, to our compliance with specified debt service coverage ratios,
limitations on total indebtedness, restrictions on distributions beyond those
required for us to maintain our status as a REIT, limitations on investments and
other customary financial and other covenants.
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As described below, we are in the process of obtaining a commitment to
establish a three-year, $300 million unsecured line of credit with Fleet
National Bank. This new line of credit will replace our existing senior
unsecured credit facility. If we do not enter into this new line of credit, our
existing senior unsecured credit facility will remain in place.
NEW LINE OF CREDIT
We have obtained a commitment to establish a three-year, $300 million
unsecured line of credit with Fleet National Bank, as agent. Fleet has agreed to
use its "best efforts" to syndicate this line of credit up to $350 million. We
expect to enter into this new line of credit on or after completion of this
offering. Each of the Heritage OP and the Bradley OP will be borrowers under
this new line of credit, and we and substantially all of our other subsidiaries
will guarantee this new line of credit. We intend to use this new line of credit
principally to fund growth opportunities and for working capital purposes.
Our ability to borrow under this new line of credit will be subject to our
ongoing compliance with a number of financial and other covenants. This new line
of credit will require, among other things, that--
- we not permit our unencumbered property value to be less than 175% of our
total outstanding unsecured debt, including guarantees and contingent
obligations;
- our unencumbered properties must generate sufficient net operating income
to maintain a fixed charge ratio of at least 1.75 to 1 (based on a 25-year
amortization with an assumed interest rate equal to the highest of the
average actual interest rate on our total unsecured indebtedness, the rate
on 10-year U.S. Treasury plus 2%, and 8.25%);
- we maintain a total indebtedness to total asset value ratio of not more
than 55%; and
- our ratio of earnings before interest, taxes, depreciation and
amortization, as adjusted for a $0.20 per square foot annual reserve for
replacements, capital expenditures and leasing costs, to fixed charges be
at least 1.75 to 1.
This new line of credit will also contain other customary covenants and
performance requirements. This new line of credit will, except under some
circumstances, including as necessary to maintain our status as a REIT, limit
our ability to make distributions in excess of 90% of our annual funds from
operations.
This new line of credit will bear interest at a floating rate based on a
spread over LIBOR ranging from 80 basis points to 135 basis points, including a
facility fee, depending upon our debt rating, and will require monthly payments
of interest. LIBOR loans may be for periods of 30, 60 or 90 days. In addition,
this new line of credit will have a facility fee based on the amount committed
ranging from 15 to 25 basis points, depending upon our debt rating, and will
require quarterly payments. We will pay an upfront fee of $3 million in
connection with entering into this line of credit.
Our ability to enter into this new line of credit is subject to completion
of an initial public offering of 16 million shares of common stock, with
proceeds of at least $388 million, final approval and satisfactory completion by
the lender of its due diligence and preparation and execution of an acceptable
credit agreement. We cannot assure you that we will enter into this new line of
credit or that Fleet will be successful in syndicating this line of credit up to
$350 million. If we do not enter into this new line of credit, our existing
senior unsecured credit facility will remain in place.
BRADLEY OP NOTES
Prior to our acquisition of Bradley, the Bradley OP completed the sale of
three series of underwritten public debt securities, the proceeds of which were
used to pay indebtedness of Bradley and for other corporate purposes. These debt
securities were issued pursuant to the terms of an
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indenture and three supplemental indentures entered into by the Bradley OP with
LaSalle National Bank, as trustee, beginning in 1997. The indenture and three
supplemental indentures contain various covenants, including covenants which
restrict the amount of indebtedness that may be incurred by the Bradley OP and
those of our subsidiaries which are owned directly or indirectly by the Bradley
OP. Specifically, for as long as these debt securities are outstanding:
- The Bradley OP is not permitted to incur additional indebtedness if the
aggregate principal amount of all indebtedness of the Bradley OP and its
subsidiaries would be greater than 60% of the total assets of the Bradley
OP and its subsidiaries.
- The Bradley OP is not permitted to incur any indebtedness if the ratio of
the Bradley OP's consolidated income available for debt service to the
annual debt service charge for the four consecutive fiscal quarters most
recently ended prior to the date the additional indebtedness is to be
incurred would be less than 1.5:1 on a pro forma basis.
- The Bradley OP is not permitted to incur additional indebtedness if, after
giving effect to any additional indebtedness, the total secured
indebtedness of the Bradley OP and its subsidiaries is greater than 40% of
the total assets of the Bradley OP and its subsidiaries.
- The Bradley OP and its subsidiaries may not at any time own total
unencumbered assets equal to less than 150% of the aggregate outstanding
principal amount of unsecured indebtedness of the Bradley OP and its
subsidiaries.
For purposes of these covenants, any indebtedness incurred by us, the
Heritage OP or any of our subsidiaries which are owned directly or indirectly by
the Heritage OP is not included as indebtedness of the Bradley OP.
NOTES DUE 2004. In November 1997, the Bradley OP completed the offering of
$100 million aggregate principal amount of its 7% Notes due 2004, or the 2004
Notes. The 2004 Notes bear interest at 7% per annum and mature on November 15,
2004. The 2004 Notes may be redeemed at any time at the option of the Bradley
OP, in whole or in part, at a redemption price equal to the sum of (1) the
principal amount of the 2004 Notes being redeemed plus accrued interest on the
2004 Notes to the redemption date and (2) a make-whole amount, if any, with
respect to the 2004 Notes that is designed to provide yield maintenance
protection to the holders of these notes.
NOTES DUE 2006. In March 2000, the Bradley OP completed the offering of
$75 million aggregate principal amount of its 8.875% Notes due 2006, or the 2006
Notes. The 2006 Notes bear interest at 8.875% per annum and mature on March 15,
2006. The 2006 Notes may be redeemed at any time at the option of the Bradley
OP, in whole or in part, at a redemption price equal to the sum of (1) the
principal amount of the 2006 Notes being redeemed plus accrued interest on the
2006 Notes to the redemption date and (2) a make-whole amount, if any, with
respect to the 2006 Notes that is designed to provide yield maintenance
protection to the holders of these notes. In connection with the Bradley
acquisition, we repurchased approximately $73.5 million of the 2006 Notes at a
purchase price equal to the principal and accrued interest on the 2006 Notes as
of the date of purchase, so that approximately $1.5 million of the 2006 Notes
were outstanding as of December 31, 2001.
NOTES DUE 2008. In January 1998, the Bradley OP completed the offering of
$100 million aggregate principal amount of its 7.2% Notes due 2008, or the 2008
Notes. The 2008 Notes bear interest at 7.2% per annum and mature on January 15,
2008. The 2008 Notes may be redeemed at any time at the option of the Bradley
OP, in whole or in part, at a redemption price equal to the sum of (1) the
principal amount of the 2008 Notes being redeemed plus accrued interest on the
2008 Notes to the redemption date and (2) a make-whole amount, if any, with
respect to the 2008 Notes that is designed to provide yield maintenance
protection to the holders of these notes.
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HERITAGE SPE LLC FACILITY
In connection with the Bradley acquisition, we also entered into a special
securitized facility with Prudential Mortgage Capital Company LLC, or PMCC,
pursuant to which $244 million of collateralized mortgage-backed securities were
issued by a trust created by PMCC. The trust consists of a single mortgage loan
due from a subsidiary we created, Heritage SPE LLC, to which we contributed 29
of our properties. This loan is secured by all 29 properties we contributed to
the borrower. Heritage SPE LLC is a special purpose entity formed exclusively
for the purpose of entering into this financing transaction and its activities
are generally limited to owning the properties which secure this facility. The
proceeds of this facility were used to finance, in part, the Bradley
acquisition. We have issued a guarantee related to certain environmental and
other acts. Borrowings under this facility, which matures in September 2010,
bear interest at 7.88% per annum. PMCC subsequently sold this facility, although
it continues to service this facility.
VALIC LOAN
Also in connection with the Bradley acquisition, the Heritage OP entered
into a $37 million term loan with The Variable Annuity Life Insurance Company,
or VALIC, the proceeds of which were used to finance the Bradley acquisition.
The VALIC loan is secured by two of our properties, including our Boston
headquarters. We have issued a guarantee to VALIC related to various
environmental and other acts. Borrowings under this loan bear interest at 8.26%
per annum. The VALIC loan matures in September 2010.
METLIFE LOAN
In December 1999, through the Heritage OP and a subsidiary limited
partnership, we entered into a $79 million financing consisting of four loans
from Metropolitan Life Insurance Company, or MetLife. In April 2001, we borrowed
an additional $7 million from MetLife under one of these loans. The original
purpose of these loans was to finance the purchase of three additional
properties located in North Carolina. The MetLife loans are secured by eight of
our properties, including the three acquired properties. We have issued a
payment guarantee to MetLife. These loans bear interest at a weighted average
rate of 7.82% per annum and mature in December 2009.
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MORTGAGE INDEBTEDNESS
As of December 31, 2001, we had the following outstanding mortgage
indebtedness:
<Table>
<Caption>
BALANCE DUE
PRINCIPAL BALANCE AT INTEREST
PROPERTY SECURING LOAN AS OF 12/31/01 MATURITY DATE(1) MATURITY(2) RATE
- ---------------------- ----------------- ---------------- ------------ --------
Southport Centre.............................. $ 7,843,000 April 2002(3) $ 7,827,000 9.20%
Fox River Plaza............................... 4,836,000 April 2002(4) 4,825,000 7.76%
Edgewood Shopping Center...................... 6,384,000 June 2002(5) 6,357,000 9.08%
Moorland Square............................... 3,239,000 November 2002 3,160,000 8.99%
Kimberly West................................. 3,625,000 January 2003(5) 3,517,000 7.88%
Martin's Bittersweet Plaza.................... 3,142,000 June 2003 2,917,000 8.88%
Miracle Hills Park............................ 3,744,000 August 2004(6) 3,552,000 8.28%
The Commons of Chancellor Park................ 13,086,000 November 2004 12,041,000 8.48%
Franklin Square............................... 14,783,000 June 2005(7) 13,389,000 9.00%
Williamson Square............................. 11,765,000 August 2005(8) 10,651,000 8.00%
Riverchase Village Shopping Center............ 10,627,000 September 2005 9,545,000 7.62%
Spring Mall................................... 8,441,000 October 2006 7,935,000 9.39%
Innes Street Market........................... 13,738,000 October 2007 11,829,000 7.63%
Salem Consumer Square......................... 11,449,000 September 2008 8,386,000 10.13%
Southgate Shopping Center..................... 2,674,000 October 2008 2,080,000 8.38%
St. Francis Plaza............................. 1,354,000 December 2008(9) 21,000 8.13%
Wendover Place, University
Commons--Greenville, New Centre Market,
Naples, Capitol, Tri-City Plaza, Roanoke
Plaza and Turnpike Plaza.................... 84,213,000 December 2009 70,202,000 7.83%
29 properties, cross collateralized........... 241,881,000 October 2010 217,883,000 7.88%
545 Boylston Street and William J. McCarthy
Building.................................... 36,454,000 October 2010 30,162,000 8.26%
Elk Park Center............................... 9,011,000 August 2016(10) 2,981,000 7.64%
------------ -----
TOTAL/WEIGHTED AVERAGE........................ $492,289,000 8.07%
============ =====
</Table>
- ------------------------
(1) Except as otherwise noted, all of the mortgages can be prepaid at any time,
in whole or in part, subject to prepayment penalties typically calculated on
a yield maintenance basis.
(2) Assumes no prepayment of principal is made prior to the maturity date other
than scheduled amortization.
(3) In April 2002, we refinanced this mortgage upon maturity.
(4) In April 2002, we repaid this mortgage upon maturity from borrowings under
our existing senior unsecured credit facility.
(5) This mortgage may be prepaid with the payment of a 1% premium.
(6) This mortgage may be prepaid with the payment of a 3% premium.
(7) This mortgage may be prepaid with the payment of the greater of a 1% premium
or a prepayment penalty calculated on a yield maintenance basis.
(8) This mortgage may be prepaid with the payment of a 4% premium until August
2002, at which time and for each year thereafter, the premium decreases by
1%.
(9) This mortgage may not be prepaid until 2003, at which time this mortgage may
be prepaid, subject to a prepayment penalty calculated on a yield
maintenance basis.
(10) This mortgage may be prepaid with the payment of an 8% premium until July
2006, at which time the premium decreases to 5%. For each year thereafter
the premium decreases by 1% until July 2015, after which there is no
prepayment penalty.
EMPLOYEES
At December 31, 2001, we had 114 total employees. Our employees include
20 leasing professionals, 48 property managers, eight legal personnel, and 38
corporate management personnel. We believe that our relations with our employees
are good. None of our employees are unionized.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Upon completion of this offering, our board of directors will consist of
eleven directors, including the director nominees named below, each of whom has
been nominated for election and consented to serve. Pursuant to our charter
documents, the board of directors will be divided into three classes of
directors, each chosen for three-year terms. There will be no cumulative voting
in the election of directors. Consequently, at each annual meeting of our
stockholders, the successors of the class of directors whose terms expire at
that meeting will be elected by a plurality of the votes cast at that meeting.
The following table sets forth information concerning the individuals who
will be our directors and executive officers upon the consummation of the
offering:
<Table>
<Caption>
NAME AGE POSITION
- ---- ----------- --------
Thomas C. Prendergast..................... 52 President, Chief Executive Officer and Chairman of
the Board of Directors (Class of 2005)
Gary Widett, Esq.......................... 52 Senior Vice President and Chief Operating Officer
David G. Gaw.............................. 50 Senior Vice President, Chief Financial Officer and
Treasurer
Robert Prendergast........................ 42 Vice President of Property Management and
Construction
Barry Rodenstein.......................... 41 Vice President of Leasing
Patrick O'Sullivan........................ 34 Vice President of Finance and Assistant Treasurer
Louis C. Zicht, Esq....................... 52 Vice President and General Counsel
MaryKate Herron........................... 43 Vice President of Lease Management
William M. Vaughn, III.................... 61 Director (Class of 2003)
Paul V. Walsh............................. 64 Director (Class of 2003)
Joseph L. Barry, Jr....................... 68 Director (Class of 2004)
David W. Laughton......................... 53 Director (Class of 2004)
Bernard Cammarata......................... 62 Director (Class of 2005)
Robert M. Falzon.......................... 42 Director (Class of 2005)
Robert J. Watson.......................... 51 Director Nominee (Class of 2003)
Kenneth K. Quigley, Jr.................... 44 Director Nominee (Class of 2003)
Kevin C. Phelan........................... 57 Director Nominee (Class of 2004)
Richard C. Garrison....................... 53 Director Nominee (Class of 2004)
</Table>
The following is a biographical summary of the experience of our executive
officers, directors and director nominees:
THOMAS C. PRENDERGAST has served as our President and Chief Executive
Officer since our formation in July 1999. Prior to that time, from 1980 until
July 1999, Mr. Prendergast was President and Chief Executive Officer of the real
estate company formed by NETT in 1970. Mr. Prendergast joined NETT's real estate
company in 1974 as a leasing agent and became Vice President and Director of
Leasing in 1978. Mr. Prendergast holds a bachelor's degree from St. Anselm's
College. Mr. Prendergast is the brother of Robert Prendergast, our Vice
President of Property Management and Construction.
GARY WIDETT, ESQ. joined us as Senior Vice President and Chief Operating
Officer in July 1999. From 1978 until July 1999, Mr. Widett was in private
practice as an attorney in Natick, Massachusetts. He has over 25 years
experience in real estate development, acquisitions and management. While
practicing law, he concentrated on zoning, permitting, tax abatement, leasing,
commercial lending and other real estate related areas. Mr. Widett holds a
bachelor's degree in Business Administration from Boston University and a law
degree from Suffolk University. Mr. Widett is licensed to practice law in
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the Commonwealth of Massachusetts, before the U.S. District Court for the
District of Massachusetts, and before the United States Supreme Court.
DAVID G. GAW became our Senior Vice President, Chief Financial Officer and
Treasurer in April 2001. Mr. Gaw was previously Senior Vice President and Chief
Financial Officer of Boston Properties, Inc., a publicly-traded office REIT.
While at Boston Properties, Mr. Gaw oversaw the accounting, control and
financial management department. He joined Boston Properties in 1982 and was
responsible for its financial operations until October 2000, including
administering Boston Properties' financing and banking relationships. Mr. Gaw
received a bachelor of science and a masters in business administration from
Suffolk University.
ROBERT PRENDERGAST joined us as Vice President of Property Management and
Construction in October 1999. Previously, he was an Asset Manager for Urban
Retail Properties/Overseas Management, Inc., a publicly-traded retail REIT in
Chicago, from 1990 until July 1999. Mr. Prendergast has over 18 years experience
in the management and construction of retail properties. Mr. Prendergast, who is
the brother of Thomas Prendergast, our President and Chief Executive Officer,
holds a bachelor's of science degree from Seton Hall University and is a
Certified Property Manager from the Institute of Real Estate Management.
BARRY RODENSTEIN became our Vice President of Leasing in July 2001. Prior to
that time, Mr. Rodenstein was with Trammell Crow Company, a nationwide real
estate company, with whom he was employed from 1988 until 2001. While at
Trammell Crow Company, he was responsible for overseeing its New England Retail
Services Division. His responsibilities included project leasing, tenant
representation, property management, land acquisitions, urban/specialty retail,
investment sales, development and construction. Mr. Rodenstein is a graduate of
Brandeis University with a bachelor of arts in economics and has a graduate
degree from Northwestern University's Kellogg School of Management where he
completed his masters in management in finance and marketing. Mr. Rodenstein is
also a licensed real estate broker in Massachusetts, Rhode Island, New Hampshire
and Connecticut.
PATRICK O'SULLIVAN has been our Vice President of Finance & Accounting since
our formation in July 1999. Prior to that time, he was Director of Finance at
NETT's real estate company, which he joined in 1998. Previously, from 1990 to
1998, he was at KPMG Peat Marwick LLP (n/k/a KPMG LLP), where he was a senior
manager from 1996 to 1998. He has over 13 years of experience working with real
estate owners and operators including REITs. Mr. O'Sullivan received a
bachelor's degree from Boston College and is a Certified Public Accountant.
LOUIS C. ZICHT, ESQ., has served as our Vice President and General Counsel
since our formation in July 1999. Prior to that time, he was General Counsel of
NETT's real estate company, which he joined in 1974, and in 1980, he also
assumed the title of Vice President. He has over 27 years of experience
overseeing all legal aspects of our (and our predecessor's) acquisitions,
dispositions, litigation and all major lease transactions. Mr. Zicht received a
bachelor's degree from Clark University and his law degree from Boston College.
MARYKATE HERRON became our Vice President of Lease Management in September
2000. Prior to joining us, Ms. Herron was with WellsPark Group/New England
Development as Vice President of Tenant Relations, where she was involved in
property revenue enhancement, tenant workouts, collections and retail sales
reporting for 37 regional malls. Prior to her role in tenant relations, she was
Vice President of Lease Administration and was responsible for coordinating all
income budgeting, streamlining procedures, improving recoveries and cash flow,
and establishing portfolio benchmarks. Ms. Herron was with New England
Development for 15 years. Ms. Herron has her masters in business administration
from Northeastern University.
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WILLIAM M. VAUGHN III has been a member of our board since our formation in
July 1999. Mr. Vaughn is Executive Vice President, Human Resources of The
Stop & Shop Supermarket Company, with whom he has been employed since 1975, a
grocery chain headquartered in Massachusetts with 320 stores throughout
Connecticut, Massachusetts, Rhode Island, New York and New Jersey. Mr. Vaughn is
a co-trustee of NETT.
PAUL V. WALSH was elected to our board in March 2002. Mr. Walsh has been
President of the Teamsters Local Union 379, of Boston, Massachusetts for more
than five years. Mr. Walsh is a co-trustee of NETT.
JOSEPH L. BARRY, JR. has been a member of our board since our formation in
July 1999. Mr. Barry has served as President of Hallmark Mechanical Corp., a
machinery service company, since 1990, and as President of Hallamore Corp., a
transportation and rigging company, since 1956. Since 1975, Mr. Barry has served
as Chairman of Northeast Concrete Products. Mr. Barry has served as co-chairman
of NETT, the parent company of our largest stockholder, since 1978. Mr. Barry is
also a director of Bottomline Technologies, Inc., a publicly-traded software
company.
DAVID W. LAUGHTON has been a member of our board since our formation in
July 1999. Mr. Laughton has been Secretary-Treasurer/Principal Officer of the
Teamsters Local 633, of Manchester, New Hampshire for more than five years.
Mr. Laughton serves as co-chairman of NETT.
BERNARD CAMMARATA has been a member of our board since July 1999.
Mr. Cammarata is Chairman of the Board of TJX Companies, Inc., a leading
publicly-traded off-price retailer of apparel and home fashions, a position he
has held since June 1999. Mr. Cammarata founded TJX Maxx in 1976 and served as
its President until 1986. From 1986 to June 1999, Mr. Cammarata was President
and Chief Executive Officer of TJX.
ROBERT M. FALZON has been a member of our board since September 2000.
Mr. Falzon is Managing Director of Prudential Real Estate Investors, an
affiliate of The Prudential Insurance Company of America, one of our principal
stockholders, and head of Prudential's Merchant Banking Group in Parsippany, New
Jersey. Before joining Prudential Real Estate Investors in June 1998,
Mr. Falzon was a Managing Director in the Real Estate Investment Banking Group
at Prudential Securities Incorporated in New York. Mr. Falzon, who joined
Prudential Securities Incorporated in 1992, has managed numerous public and
private equity offerings, and has worked extensively in mergers and acquisitions
of real estate companies, REITs and property portfolios across a broad range of
property types.
DIRECTOR NOMINEES
ROBERT J. WATSON is one of our Director Nominees. Mr. Watson is Chairman,
Chief Executive Officer and principal stockholder of LPM Holding Company, a food
service conglomerate that services principally the Eastern United States.
Mr. Watson has been with LPM Holding Company and its predecessor entity, The
Tobin Corporation, since 1988.
KENNETH K. QUIGLEY, JR. is one of our Director Nominees. Since
February 1996, Mr. Quigley has been President of Curry College, a private
independent college offering undergraduate and graduate degrees located in
Milton, Massachusetts. Prior to that time, Mr. Quigley served on the faculty of
Curry College. Mr. Quigley has also previously taught undergraduate and graduate
management courses at Suffolk University and Bentley College.
KEVIN C. PHELAN is one of our Director Nominees. Mr. Phelan is Executive
Vice President and Director of Meredith & Grew, Incorporated, a full-service
real estate company headquartered in Boston, Massachusetts, which provides real
estate advisory services, counseling and valuation services, brokerage services,
finance and capital markets and property and asset management services.
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Mr. Phelan has been employed with Meredith & Grew since 1978, when he joined the
firm to start its finance and capital markets group.
RICHARD C. GARRISON is one of our Director Nominees. Mr. Garrison is
President of Bink Inc., a management consulting firm located in Boston,
Massachusetts which he founded in 2001. Prior to that time, Mr. Garrison was
Chairman of Holland Mark Edmund Ingalls, a marketing, advertising and public
relations firm, which was the product of the merger of two firms in 1999, one of
which, Ingalls, Quinn & Johnson, Mr. Garrison was Chairman and Chief Executive
Officer from 1981-1999.
ADDITIONAL DISCLOSURES REGARDING NETT
As described above, four of our directors are also members of the Board of
Trustees of New England Teamsters and Trucking Industry Pension Fund, or NETT.
As described elsewhere in this prospectus, through its real estate subsidiary,
NETT previously managed the portfolio of properties which was contributed to us
upon our formation in July 1999. NETT is a Taft-Hartley Pension Fund managed by
a board of eight trustees, half of whom are members of the International
Brotherhood of Teamsters, or the Teamsters, and the other half of whom are
executives from industries that employ Teamsters in their businesses. Together,
the Board of Trustees manages NETT's assets.
In January 2002, the U.S. Department of Justice brought criminal proceedings
against George Cashman, President of the local Massachusetts branch of the
Teamsters, and several other individuals alleging that Mr. Cashman and these
other individuals caused health benefits to be provided by the Teamsters to
several individuals who were not members of the Teamsters. Mr. Cashman, who is a
member of the Board of Trustees of NETT, was a member of our board of directors
from our formation in July 1999 until he resigned from our board in
February 2002.
In 1996, our predecessor company, NET Properties Management, Inc., entered
into a five year monitoring agreement with the U.S. Department of Labor relating
to the sale of property by NET Properties Management in 1985 to a joint venture
consisting of related entities. Under the monitoring agreement, which was
executed by the Trustees of NETT, as well as by three senior executives of NET
Properties Management (Thomas Prendergast, our President and Chief Executive
Officer, Louis Zicht, our general counsel, and one other individual who is not
employed by us), NETT's outside auditor, KPMG LLP, submitted to the Department
of Labor an annual report regarding regulatory compliance activities of NET
Properties Management. This monitoring agreement also included a monetary
settlement, without any admission of liability or wrongdoing. This monitoring
agreement has expired.
COMMITTEES OF THE BOARD OF DIRECTORS
AUDIT COMMITTEE
Our board has established an audit committee, which makes recommendations
regarding the engagement of independent public accountants, reviews with the
independent public accountants the scope and results of the audit engagement,
approves professional services provided by the independent public accountants,
reviews the independence of the independent public accountants, considers the
range of audit and non-audit fees and reviews the adequacy of our internal
accounting controls. Upon completion of this offering, the members of our audit
committee will be Messrs. Watson, who will serve as chairman, Barry, Falzon,
Quigley and Vaughn. We believe that each member of the audit committee is
"independent" as that term is defined in the rules of the SEC and the applicable
listing standards of the NYSE.
COMPENSATION COMMITTEE
Our board has also established a compensation committee to establish
compensation levels for our executive officers, to administer our equity
incentive plan and to implement our incentive programs.
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Upon completion of this offering, the members of our compensation committee will
be Messrs. Cammarata, who will serve as chairman, Laughton, Quigley and Watson.
Each of Messrs. Laughton, Quigley and Watson is a non-employee director.
NOMINATING COMMITTEE
Our board has also established a nominating committee, which is responsible
for making recommendations to our board concerning nominees to serve as members
of our board. Upon completion of this offering, the members of our nominating
committee will be Messrs. Garrison, who will serve as chairman, Cammarata,
Falzon, Prendergast, Vaughn and Walsh.
MANAGEMENT COMMITTEE
ACQUISITIONS COMMITTEE
Our board has also established an acquisitions committee, consisting of
three of our executive officers, Messrs. Thomas Prendergast, Widett and Gaw, who
are authorized to approve purchase, sale, mortgage and other actions,
individually and collectively up to $35 million, by us with respect to real
estate without the approval of our full board. This committee allows our senior
management to effectively manage our core business, the acquisition and
development of real estate, without the necessity of seeking board approval for
those matters which we regard as ordinary course transactions. This committee is
advised by our outside counsel, currently Bingham Dana LLP.
COMPENSATION OF DIRECTORS
Those of our directors who are also our employees or who are members of the
Board of Trustees of NETT are not entitled to compensation for their service as
directors. Our other directors receive an annual retainer of $25,000, as well as
$1,000 for each board meeting attended in person, $750 for each telephonic board
meeting attended and $1,000 for each board committee meeting attended. In
addition, these directors receive, upon initial election to our board, an option
to purchase 5,000 shares of our common stock, and annually each year after their
initial election, receive an option to purchase 5,000 shares of our common
stock.
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EXECUTIVE COMPENSATION
The following table sets forth the compensation paid or accrued in 2001, to
our Chief Executive Officer and our four other most highly compensated executive
officers.
SUMMARY COMPENSATION TABLE
<Table>
<Caption>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------------------- ---------------------------------
SECURITIES
OTHER ANNUAL UNDERLYING RESTRICTED STOCK ALL OTHER
YEAR SALARY ($) BONUS ($) COMPENSATION($)(1) OPTIONS (#)(2) AWARDS (#)(3) COMPENSATION($)
---- ---------- --------- ------------------ -------------- ---------------- ---------------
Thomas C. 2001 $500,000 $500,000 $1,000,800 140,000 60,000 $718,793(4)
Prendergast .......
President and Chief
Executive Officer
Gary Widett ......... 2001 300,000 240,000 59,376 80,000 18,000 147,033(5)
Senior Vice
President and Chief
Operating Officer
David G. Gaw (6) .... 2001 250,000 200,000 -- 60,000 14,000 3,500(7)
Senior Vice
President and Chief
Financial Officer
Robert Prendergast . 2001 200,000 120,000 -- 30,000 4,000 12,679(8)
Vice President of
Property Management
and Construction
Barry Rodenstein (9) 2001 200,000 80,000 -- 20,000 3,000 2,200(10)
Vice President of
Leasing
</Table>
- --------------------------
(1) Represents amounts reimbursed by us with respect to the payment of taxes on
behalf of these individuals in connection with the issuance of shares of
common stock to these individuals in 2001 and with respect to insurance
premiums paid on their behalf during 2001.
(2) Represents options which were granted in January 2002, but which relate to
2001 compensation.
(3) Represents shares of restricted common and preferred stock issued in
January 2002, but which relate to 2001 compensation. As of the date of this
prospectus, each of the executive officers named in the summary compensation
table held the following aggregate number of shares of restricted common and
preferred stock--
<Table>
<Caption>
TOTAL NUMBER OF
NAME RESTRICTED SHARES HELD
---- ----------------------
Thomas C. Prendergast....................................... 121,599
Gary Widett................................................. 31,653
David G. Gaw................................................ 14,000
Robert Prendergast.......................................... 7,320
Barry Rodenstein............................................ 3,000
</Table>
These shares are forfeitable to us upon termination of employment and are
subject to restrictions on transfer. Upon grant, the recipient has full
voting and dividend rights with respect to all shares granted. The
contractual restrictions on transfer and forfeiture provisions lapse ratably
over periods ranging from three to five years. As described in
"--Acceleration of Restricted Stock Grants" on page 95, the restrictions
with respect to the restricted shares described above that have not already
lapsed will lapse upon consummation of the offering.
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<Page>
(4) Includes (a) $28,175 in insurance premiums paid by us for a life insurance
policy in favor of Mr. Prendergast, (b) $6,800 in contributions made to our
401(k) Plan on Mr. Prendergast's behalf, (c) $6,155 in auto expenses paid on
Mr. Prendergast's behalf, (d) $10,000 in financial planning and other
service fees paid on Mr. Prendergast's behalf and (e) $667,663 accrued by us
under the supplemental executive retirement plan, or SERP, we established
for Mr. Prendergast's benefit.
(5) Includes (a) $11,826 in insurance premiums paid by us for a life insurance
policy in favor of Mr. Widett, (b) $6,800 in contributions made to our
401(k) Plan on Mr. Widett's behalf, (c) $4,012 in auto expenses paid on
Mr. Widett's behalf, and (d) $124,395 accrued by us under the SERP we
established for Mr. Widett's benefit.
(6) Mr. Gaw became our Senior Vice President, Chief Financial Officer and
Treasurer in April 2001.
(7) Represents $3,500 in auto expenses paid on Mr. Gaw's behalf.
(8) Represents (a) $5,879 in auto expenses paid on Mr. Prendergast's behalf and
(b) $6,800 in contributions made to our 401(k) Plan on Mr. Prendergast's
behalf.
(9) Mr. Rodenstein became our Vice President of Leasing in July 2001.
(10) Represents auto expenses paid on Mr. Rodenstein's behalf.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
Effective January 2000, we adopted a non-qualified supplemental executive
retirement plan, or SERP. Messrs. Thomas Prendergast and Widett are eligible to
participate in the SERP as part of their total compensation package. Benefits
payable under the SERP are based upon a percentage of each participant's average
annual compensation, including base salary and bonus for the three calendar
years of the last ten years of his employment with us and our predecessor,
NETT's real estate company, which produce the highest average amount (or the
annualized average of that compensation for the participant's actual period of
employment, if less than three calendar years). Participants may begin to
receive payments under the SERP following their 65th birthday. Benefits under
the SERP will terminate upon the participant's death. At the election of the
participant, made not later than 30 days after termination of employment,
payment of the SERP benefit which has vested with respect to that participant
will commence at any time selected by the participant after he has terminated
employment with us. If the election to receive that SERP benefit is made prior
to the participant's 65th birthday, the SERP payment will be actuarially
reduced.
Under Mr. Prendergast's employment agreement, the SERP benefit to which he
is entitled will be equal to 50% of his highest three-year average annual
compensation of the last ten years, subject to reduction under certain
circumstances. Benefits earned under the SERP vested 50% upon adoption of the
SERP and Mr. Prendergast becomes additionally vested at 6.25% per year as of the
end of each calendar year commencing December 31, 1999 that he continues to be
our employee. Mr. Prendergast will become 100% vested in his SERP upon the
effective date of a change of control.
Under the SERP, the benefit to which Mr. Widett is entitled will be equal to
40% of his highest three-year average annual compensation, subject to reduction
under certain circumstances. Benefits earned under the SERP vest ratably over
ten years beginning in July 1999.
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<Page>
The following table shows estimated annual retirement benefits payable to
Mr. Thomas Prendergast in the SERP on a straight life annuity basis upon
retirement in specified years of continuous service and remuneration classes.
<Table>
<Caption>
SERVICE
AVERAGE (IN YEARS)
ANNUAL --------------------------------------------
COMPENSATION 3 5 10 OR MORE
- --------------------- -------- -------- ----------
$ 500,000 $ 67,322 $117,322 $ 242,322
750,000 104,822 179,822 367,322
1,000,000 142,322 242,322 492,322
1,250,000 179,822 304,822 617,322
1,500,000 217,322 367,322 742,322
1,750,000 254,822 429,822 867,322
2,000,000 292,322 492,322 992,322
2,250,000 329,822 554,822 1,117,322
2,500,000 367,322 617,322 1,242,322
</Table>
Amounts are payable for life with a guaranteed period of ten years commencing at
age the later of retirement or age 60.
The following table shows estimated annual retirement benefits payable to
Mr. Widett in the SERP on a straight life annuity basis upon retirement in
specified years of continuous service and remuneration classes.
<Table>
<Caption>
SERVICE
AVERAGE (IN YEARS)
ANNUAL --------------------------------------------
COMPENSATION 3 5 10 OR MORE
- --------------------- -------- -------- ----------
$ 250,000 $ 20,778 $ 40,778 $ 90,778
500,000 50,778 90,778 190,778
750,000 80,778 140,778 290,778
1,000,000 110,778 190,778 390,778
1,250,000 140,778 240,778 490,778
1,500,000 170,778 290,778 590,778
1,750,000 200,778 340,778 690,778
2,000,000 230,778 390,778 790,778
2,250,000 260,778 440,778 890,778
2,500,000 290,778 490,778 990,778
</Table>
Amounts payable for life with a guaranteed period of ten years commencing at age
the later of retirement or age 65.
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<Page>
STOCK OPTION GRANTS
The following table contains information concerning options granted under
our equity incentive plan for 2001 performance to each of the executive officers
named in the summary compensation table.
OPTION GRANTS
<Table>
<Caption>
INDIVIDUAL GRANTS
---------------------------------------------- POTENTIAL REALIZABLE VALUE AT
NUMBER OF ASSUMED ANNUAL RATES OF
SECURITIES PERCENT OF TOTAL STOCK PRICE APPRECIATION FOR
UNDERLYING OPTIONS GRANTED EXERCISE OPTION TERM(3)
OPTIONS TO EMPLOYEES IN PRICE PER -----------------------------
NAME GRANTED 2001(1) SHARE(2) EXPIRATION DATE 5% 10%
- ---- ---------- ---------------- --------- --------------- ------------- -------------
Thomas C.
Prendergast......... 140,000 22.8% $25.00 2011 $2,201,131 $5,578,099
Gary Widett........... 80,000 13.0% 25.00 2011 1,257,789 3,187,485
David G. Gaw.......... 60,000 9.8% 25.00 2011 943,342 2,390,614
Robert Prendergast.... 30,000 4.9% 25.00 2011 471,671 1,195,307
Barry Rodenstein...... 20,000 3.3% 25.00 2011 314,447 796,871
</Table>
- --------------------------
(1) Based on a total of 614,352 options to purchase shares of common stock
granted for 2001 performance.
(2) The options were granted at an exercise price equal to the estimated fair
market value of our common stock at the time of grant as determined in good
faith by our board of directors.
(3) The potential realizable value is calculated based on the term of the option
at its time of grant, which is ten years. It is calculated assuming that the
fair market value of our common stock on the date of the grant was equal to
the option exercise price, that the value of the option appreciates at the
indicated annual rate compounded annually for the entire term of the option
and that the option is exercised and the shares of common stock sold on the
last day of its term for the appreciated stock price.
OPTION EXERCISES AND HOLDINGS
The following table contains information concerning option holdings with
respect to each of the executive officers named in the summary compensation
table. None of these officers exercised any options during 2001.
<Table>
<Caption>
OPTION VALUES
------------------------------------------------------------------
VALUE OF UNEXERCISED
NUMBER OF SHARES UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS(1)
--------------------------------- ---------------------------
NAME EXERCISABLE(2) UNEXERCISABLE(2) EXERCISABLE UNEXERCISABLE
- ---- -------------- ---------------- ----------- -------------
Thomas C. Prendergast..................... 33,333 606,667 $ -- $ --
Gary Widett............................... 63,000 157,000 -- --
David G. Gaw.............................. -- 90,000 -- --
Robert Prendergast........................ 16,267 52,733 -- --
Barry Rodenstein.......................... -- 40,000 -- --
</Table>
- --------------------------
(1) Value is determined by subtracting the exercise price from $25.00, the
assumed initial public offering price, multiplied by the number of shares
underlying the options.
(2) As described in "--Special Stock Option Grants and Accelerated Options"
below, all of the options set forth in this table will vest upon completion
of this offering.
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<Page>
SPECIAL STOCK OPTION GRANTS AND ACCELERATED OPTIONS
Immediately prior to the completion of this offering, we will issue special
grants of options to purchase shares of our common stock to the executive
officers named in the summary compensation table. These stock options will vest
ratably over a five year period and the exercise price of these options will be
equal to the initial public offering price. These options are referred to as
"Special Option Grants" in the table set forth below.
Our compensation committee has determined that the vesting of all options
previously granted to our officers will accelerate upon the completion of this
offering. The exercise price of these options is $25.00 per share. These options
are referred to as "Accelerated Options" in the table set forth below.
<Table>
<Caption>
SPECIAL
OPTION ACCELERATED
NAME GRANTS OPTIONS
- ---- ------ -------
Thomas C. Prendergast................................... 250,000 606,667
Gary Widett............................................. 50,000 157,000
David G. Gaw............................................ 50,000 90,000
Robert Prendergast...................................... 25,000 52,733
Barry Rodenstein........................................ 10,000 40,000
</Table>
We will reimburse Mr. Thomas Prendergast with respect to the payment of
taxes by him in connection with the acceleration of the vesting of these
options. We do not anticipate issuing any restricted or unrestricted shares of
common stock or options to purchase shares of common stock to our senior
management in respect of 2002 performance until 2003.
ACCELERATION OF RESTRICTED STOCK GRANTS
Our compensation committee has determined to remove upon completion of this
offering all contractual restrictions on transfer and forfeiture provisions
which currently exist on restricted shares previously granted to our senior
management.
Set forth in the table below is information regarding the shares to be
accelerated immediately prior to, or upon completion of, this offering with
respect to the following members of our senior management. We will reimburse
Messrs. Thomas Prendergast and Widett with respect to their payment of taxes in
connection with the acceleration of a portion of these shares.
<Table>
<Caption>
ACCELERATED
RESTRICTED
NAME SHARES
- ---- ------
Thomas C. Prendergast....................................... 121,599
Gary Widett................................................. 31,653
David G. Gaw................................................ 14,000
Robert Prendergast.......................................... 7,320
Barry Rodenstein............................................ 3,000
</Table>
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SPECIAL STOCK GRANTS
In addition, we anticipate that, after this offering, the current members of
our board of directors will recommend to the board and our compensation
committee, as comprised after this offering, that special stock grants be made
to members of our senior management and other employees, which may compensate
these individuals for past performance and/or provide incentives to these
individuals through ownership of our stock. If made, we believe that these
special stock grants would be issued in an aggregate amount not to exceed
approximately 2% of the number of outstanding shares of our common stock after
this offering, or approximately 800,000 shares. We also believe that these
shares will be issued and/or will vest over a period of time of not less than
five years. As of the date of this prospectus, the identity of those members of
our senior management who might receive these special stock grants, the
aggregate amount of these grants, the amount of any grants to be made to any
particular individual, the period of time over which these grants would be made
and/or vest and the other terms of these grants have not yet been determined.
EMPLOYMENT AGREEMENTS
Mr. Thomas C. Prendergast, our President and Chief Executive Officer, has an
employment agreement with us, which provides for a five-year term from the date
of the completion of this offering. Under his employment agreement,
Mr. Prendergast receives an annual base salary of $500,000 and he is eligible
for an incentive bonus based on performance objectives as established by our
compensation committee. The threshold bonus amount may not be less than 25% of
Mr. Prendergast's base salary and the maximum bonus amount payable to
Mr. Prendergast is 100% of his base salary.
Mr. Prendergast received in January 2000 an initial stock option grant of
400,000 shares under his employment agreement. He also received in January 2000
a grant of 75,000 shares of restricted stock under his employment agreement.
Mr. Prendergast is also eligible to receive an annual stock option award of
up to 140,000 options and an annual performance share award of up to 60,000
shares under our equity incentive plan based upon the achievement of management
and performance objectives established by our compensation committee.
Mr. Prendergast also participates in our employee benefit plans on a basis
consistent with other executives of our company. As required by his employment
agreement, we have established a supplemental executive retirement plan, or
SERP, for Mr. Prendergast's benefit. We have also agreed to reimburse
Mr. Prendergast for certain business, legal and tax preparation and financial
planning expenses.
Mr. Prendergast's employment may be terminated by us for "cause" in the
event of:
- the conviction of Mr. Prendergast of a felony,
- the willful breach of duty of loyalty by Mr. Prendergast which is
materially detrimental to us,
- the willful failure of Mr. Prendergast to perform his duties or to follow
the directives of our board, or
- the gross negligence or willful misconduct of Mr. Prendergast in the
performance of his duties.
Mr. Prendergast may terminate his employment for "good reason," which
includes:
- a removal from or failure to re-elect Mr. Prendergast as President, Chief
Executive Officer or a director of our company,
- the assignment to Mr. Prendergast of duties, responsibilities or reporting
requirements inconsistent with his positions as President and Chief
Executive Officer or director,
- a reduction in Mr. Prendergast's base salary,
- our failure to maintain our incentive plans,
- except as required by law, a material diminution in Mr. Prendergast's
fringe benefits,
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<Page>
- the requirement by us that our principal place of business be changed to a
location outside the greater Boston area, or
- any breach by us of his employment agreement.
If Mr. Prendergast's employment is terminated without cause, for good reason
or because of any disability, we must pay Mr. Prendergast his base salary for
the longer of 12 months after the termination or the expiration of the term of
the employment agreement. We must also pay him a portion of his incentive bonus.
In addition, the SERP benefit, any restricted shares, annual performance shares
and stock options granted to Mr. Prendergast under our incentive plan will
immediately vest. Mr. Prendergast will also be allowed to participate in our
benefit plans during his severance period. If Mr. Prendergast's employment is
terminated for cause, without good reason or because of death, Mr. Prendergast
is entitled to his base salary through the date of termination. If
Mr. Prendergast's employment terminates as a result of the completion of the
term, we are required to pay Mr. Prendergast his base salary for 12 months after
the date of termination.
In the event of a change in control of our company during the term of
Mr. Prendergast's employment agreement when the remainder of the term is less
than three years, the term of Mr. Prendergast's employment agreement
automatically extends for an additional three years. In addition, upon a change
of control, the SERP benefit, any restricted shares, annual performance shares
and stock options granted to Mr. Prendergast under our equity incentive plan
will immediately vest. In addition, to the extent that payments or benefits
under Mr. Prendergast's employment agreement or other benefit plan will result
in application of federal excise taxes on "excess parachute payments," we have
agreed to provide a gross up payment to offset the excise tax liability.
Mr. Prendergast's employment agreement prohibits Mr. Prendergast while he is
employed with us and for one year after a termination of employment for cause or
without good reason, from engaging, directly or indirectly, in any business in
competition with us or employing or soliciting the employment of any individual
employed by us at any time while Mr. Prendergast was also employed with us.
Mr. Prendergast also has received tax offset payments from us under his
employment agreement. The purpose of these payments is to reimburse
Mr. Prendergast for the amount of applicable taxes such as federal, state, local
and Medicare taxes he incurs with respect to his exercise of options and the
grant, vesting or payment of any awards covered by his employment agreement.
Mr. Prendergast will receive no tax offset payments from us with respect to any
special grants of options to Mr. Prendergast immediately prior to the completion
of this offering. See "--Special Stock Option Grants and Accelerated Options" on
page 95. In addition, Mr. Prendergast has also agreed to waive his right to
receive any tax offset payments in connection with the future issuance of any
special stock grants described in "--Special Stock Grants" on page 96. However,
Mr. Prendergast will have the right to receive tax offset payments from us with
respect to any other future special stock grants and options after this
offering.
CHANGE IN CONTROL/SEVERANCE AGREEMENTS
In connection with this offering, we will enter into Change in
Control/Severance Agreements with some of our officers, including each of the
persons named in the summary compensation table other than Mr. Prendergast. The
terms of Mr. Prendergast's severance, including in connection with a change in
control, are contained in his employment agreement described above.
These Change in Control/Severance Agreements provide for severance to be
paid to each of these officers in the event that their employment with us is
terminated by us other than for "cause" or by these individuals for "good
reason," including following a change in control. In the event that the
employment of any of these individuals with us is terminated under these
circumstances following a change in control, these individuals are entitled to
receive severance pay equal to two times the sum of their base salary and their
average bonus for each of the three most recently completed fiscal years. In the
event that the employment of any of these individuals with us is terminated
other than in
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connection with a change of control, under these circumstances, these
individuals are entitled to receive severance pay equal to the sum of their base
salary and their average bonus for each of the three most recently completed
fiscal years. In addition, under our equity incentive plan, upon a termination
of employment in these circumstances, following a change in control, any
restricted shares, annual performance shares and stock options granted to these
individuals under our equity incentive plan will immediately vest and all
restrictions on these shares will terminate. Under these agreements, these
individuals are also entitled to receive a payment for benefits forfeited under
our retirement plans as a result of the termination of their employment. These
individuals are also entitled to receive tax offset payments from us to
reimburse these individuals for the amount of excise taxes that may be incurred
by these individuals in connection with the payment of the severance under these
agreements and any other arrangements between these individuals and us. These
agreements also contain confidentiality and noncompete provisions. Each of these
agreements is substantially identical.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our board of directors has established a compensation committee which, prior
to this offering, included Mr. Prendergast, our President and Chief Executive
Officer, Mr. Laughton, co-chairman of NETT, and Mr. Cammarata, Chairman of TJX
Companies, Inc. and the former President and Chief Executive Officer of TJX. For
more information on the relationships between us and each of Mr. Laughton and
Mr. Cammarata, please see "Certain Relationships and Related
Transactions--Transactions with Net Realty Holding Trust and Affiliates"
beginning on page 101 and "Certain Relationships and Related Transactions--Other
Transactions" on page 105. Upon completion of this offering, our compensation
committee will consist of at least three non-employee directors.
EQUITY INCENTIVE PLAN
We have adopted the Heritage Property Investment Trust, Inc. 2000 Equity
Incentive Plan to provide incentives to attract and retain executive officers,
directors, employees and other key personnel. The incentive plan is administered
by our compensation committee. Upon completion of this offering, the maximum
number of shares available for issuance under the incentive plan will be
3,600,000 shares of common stock, or approximately 9.2% of the total outstanding
shares of our common stock after this offering. Under the incentive plan, no
more than 400,000 shares of stock may be covered by options first granted to any
person in any one year, and no more than 1,200,000 shares may be subject at any
time to outstanding grants of restricted stock, performance shares, performance
units or stock grants. The following summary of the incentive plan is qualified
in its entirety by reference to the full text of the incentive plan, a copy of
which has been filed with the SEC as an exhibit to the registration statement of
which this prospectus is a part.
STOCK OPTIONS
The incentive plan permits the granting of (1) options to purchase common
stock intended to qualify as incentive stock options under Section 422 of the
Internal Revenue Code and (2) options that do not so qualify. The option
exercise price of each option is determined by our compensation committee but
may not be less than 100% of the fair market value of our common stock on the
date of grant in the case of incentive stock options.
The term of each option is fixed by our compensation committee and may not
exceed ten years from date of grant in the case of an incentive option. Unless
our compensation committee determines otherwise, if an optionee's employment or
other association with our company is terminated, whether voluntary or
otherwise, any outstanding option of the optionee ceases to be exercisable not
later than 90 days following the date of termination. Upon exercise of options,
the option exercise price must be paid in full either in cash or, if our
compensation committee permits, by delivery of shares of common stock already
owned by the optionee.
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To qualify as incentive options, options must meet additional Federal tax
requirements, including limits on the value of shares subject to incentive
options which first become exercisable in any one calendar year, and a shorter
term and higher minimum exercise price in the case of certain large
stockholders.
RESTRICTED STOCK
Our compensation committee may also award shares of our common stock to
participants, subject to those conditions and restrictions as our compensation
committee may determine. These conditions and restrictions may include the
achievement of certain performance goals and/or continued employment with our
company through a specified restricted period. If the performance goals and
other restrictions are not attained, the participants will forfeit their shares
of restricted stock. The purchase price of shares of restricted stock, if any,
will be determined by our compensation committee.
UNRESTRICTED STOCK
Our compensation committee may also grant shares of our common stock, at no
cost, or for a purchase price determined by our compensation committee, which
are free from any restrictions under the incentive plan. Shares of unrestricted
stock may be issued to participants in recognition of past services or other
valid consideration, and may be issued in lieu of cash compensation to be paid
to those participants.
PERFORMANCE SHARE AWARDS
Our compensation committee may also grant performance share awards of our
common stock to participants entitling the participants to receive shares of our
common stock upon the achievement of individual or company performance goals and
those other conditions as our compensation committee may determine.
TAX ASPECTS UNDER THE INTERNAL REVENUE CODE
The following is a summary of the principal Federal income tax consequences
of awards under the incentive plan. This discussion is based upon the Internal
Revenue Code of 1986, as amended, the Treasury Regulations promulgated under the
Internal Revenue Code, judicial decisions, and administrative rulings of the
Internal Revenue Service now in effect, all of which are subject to change or
different interpretations, possibly with retroactive effect. It does not
describe all Federal tax consequences under the incentive plan, however, nor
does it describe state or local tax consequences.
INCENTIVE OPTIONS. Under the Internal Revenue Code, an employee will not
realize taxable income by reason of the grant or the exercise of an incentive
option. If an employee exercises an incentive option and does not dispose of the
shares until the later of (a) two years from the date the option was granted or
(b) one year from the date the shares were transferred to the employee, the
entire gain, if any, realized upon disposition of those shares will be taxable
to the employee as long-term capital gain, and we will not be entitled to any
deduction. If an employee disposes of the shares within that one-year or
two-year period in a manner so as to violate the holding period requirements,
the employee generally will realize ordinary income in the year of that
disposition, and, provided we comply with applicable reporting requirements, we
will receive a corresponding deduction, in an amount equal to the excess of
(1) the lesser of (x) the amount, if any, realized on the disposition and
(y) the fair market value of the shares on the date the option was exercised
over (2) the option price. Any additional gain realized on the disposition of
the shares acquired upon exercise of the option will be long-term or short-term
capital gain and any loss will be long-term or short-term capital loss depending
upon the holding period for those shares.
The employee will be considered to have disposed of his shares if he sells,
exchanges, makes a gift of or transfers legal title to the shares, except by
pledge or by transfer on death. If the disposition of
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shares is by gift and violates the holding period requirements, the amount of
the employee's ordinary income, and our deduction, is equal to the fair market
value of the shares on the date of exercise, less the option price. If the
disposition is by sale or exchange, the employee's tax basis will equal the
amount paid for the shares plus any ordinary income realized as a result of the
disqualifying distribution.
The exercise of an incentive option may subject the employee to the
alternative minimum tax. Special rules apply if an employee surrenders shares of
our common stock in payment of the exercise price of his incentive option. An
incentive option that is exercised by an employee more than three months after
an employee's employment with us terminates will be treated as a non-qualified
option for Federal income tax purposes. In the case of an employee who is
disabled, the three-month period is extended to one year and in the case of an
employee who dies, the three-month employment rule does not apply.
NONQUALIFIED OPTIONS. There are no Federal income tax consequences to
either the optionee or to us on the grant of a non-qualified option. On the
exercise of a non-qualified option, the optionee has taxable ordinary income
equal to the excess of the fair market value of the common stock received on the
exercise date over the option price of those shares. The optionee's tax basis
for the shares acquired upon exercise of a non-qualified option is increased by
the amount of that taxable income. We will be entitled to a Federal income tax
deduction in an amount equal to that excess provided that we comply with the
applicable reporting requirements. Upon the sale of the shares acquired by
exercise of a non-qualified option, the optionee will realize long-term or
short-term capital gain or loss depending upon his or her holding period for
those shares.
Special rules apply if an optionee surrenders shares of our common stock in
payment of the exercise price of a non-qualified option.
OTHER AWARDS. Grants of restricted stock, stock grants and performance
awards under the incentive plan will generally result in additional compensation
taxable as ordinary income for Federal income tax purposes when granted, unless
the award is subject to a substantial risk of forfeiture (such as an obligation
to perform substantial future services as a condition to retaining awarded
stock). If the award is subject to a substantial risk of forfeiture, the
recipient will be taxed when the award is granted if the recipient elects to
have the substantial risk of forfeiture disregarded for Federal income tax
purposes via a so-called "Section 83(b) election," and otherwise when the risk
of forfeiture lapses. The amount of recipient's taxable income will be the value
of the stock or award at the point at which the recipient is taxable, reduced by
the amount paid for the award, if any. We will be entitled to a Federal income
tax deduction in the same amount generally provided we comply with applicable
reporting requirements.
INDEMNIFICATION
Our articles contain a provision permitted under the Maryland General
Corporation Law eliminating, with limited exceptions, each director's and
officer's personal liability for monetary damages for breach of any duty as a
director or officer. In addition, our charter documents require us to indemnify
our directors and officers from specified liabilities and expenses, as well as
to advance costs, expenses and attorneys' fees, to the fullest extent permitted
under the Maryland General Corporation Law. These rights are contract rights
fully enforceable by each beneficiary of those rights, and are in addition to,
and not exclusive of, any other right to indemnification. Furthermore, our
officers and directors are indemnified against specified liabilities by the
underwriters, and the underwriters are indemnified against certain liabilities
by us, under the purchase agreements relating to this offering. See
"Underwriting" beginning on page 149.
We have entered into an agreement with Prudential Investment Management
Services, LLC, or PIMS, an affiliate of The Prudential Insurance Company of
America, one of our stockholders, under the terms of which we have agreed to
indemnify PIMS in connection with certain advisory services they performed on
our behalf. See "Certain Relationships and Related Transactions--Transactions
with Prudential and Affiliates" beginning on page 102.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH NET REALTY HOLDING TRUST AND AFFILIATES
RELATIONSHIP WITH HERITAGE
As of December 31, 2001, Net Realty Holding Trust, a wholly-owned subsidiary
of NETT, owned approximately 81% of the outstanding shares of each of the
classes of our capital stock. During the relevant periods described below, four
of our seven directors were also members of the Board of Trustees of NETT.
FORMATION TRANSACTIONS
In July 1999, Net Realty Holding Trust, the real estate company of NETT,
contributed approximately $550 million of real estate investments and related
assets, net of liabilities, to our company in connection with our formation. In
exchange for these properties, we issued Net Realty Holding Trust 95.7% of our
capital stock.
Of the properties contributed, three of those properties were acquired by
Net Realty Holding Trust during the two years prior to our formation. These
properties and the purchase prices paid for these properties are set forth
below:
<Table>
<Caption>
DATE PURCHASE
PROPERTY ACQUIRED PRICE
- -------- ---------- -----------
Riverchase.......................................... April 1998 $16,119,000
Commons of Chancellor Park.......................... April 1998 $22,250,000
Crown Point......................................... April 1998 $ 8,500,000
</Table>
As described in the financial statements contained in this prospectus,
because of prior accounting methods, no depreciation expense was recorded by Net
Realty Holding Trust with respect to any of the properties contributed to our
company during the five year period prior to July 1999.
TRANSITIONAL SERVICES AGREEMENT
In connection with our formation transactions, we also entered into a
transitional services agreement with Net Realty Holding Trust, under which we
agreed to provide management and collection services to Net Realty Holding Trust
during a transition period with respect to various pre-closing matters involving
the properties contributed by Net Realty Holding Trust to our company. Under the
terms of this agreement, from July 1999 through September 2000, we were paid an
aggregate total of $339,000 in fees by Net Realty Holding Trust. This agreement
was terminated in September 2000.
BOSTON OFFICE LEASE
One of the properties which was contributed to us by Net Realty Holding
Trust was our headquarters building at 535 Boylston Street, Boston,
Massachusetts. In 1974, NETT and Net Realty Holding Trust entered into a lease
providing for the lease of 14,400 square feet of space in this office building
to NETT for its Boston offices. This lease was assigned by Net Realty Holding
Trust to us as part of our formation. The current term of this lease expires on
March 31, 2005 and under this lease, NETT pays us $648,000 per year in rent.
BRADLEY ACQUISITION/SUBORDINATED LOAN
In order to complete the financing of the Bradley acquisition, in
September 2000, we entered into a $100 million bridge loan with Fleet and NETT.
This loan was subordinated to the senior unsecured credit facility described
elsewhere in this prospectus and was secured by a pledge by us of the stock of
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certain of our subsidiaries. Borrowings under this loan currently bear interest
at a variable rate which, as of December 31, 2001, was 7.06%. This facility
matures on March 18, 2004. In November 2000, NETT sold its portion of this loan
to Prudential and in May 2001, we borrowed $50 million from Fleet and repaid
Prudential's portion of this loan. We intend to repay this subordinated loan
with $100 million of the proceeds of this offering. See "Use of Proceeds" on
page 25.
131 DARTMOUTH STREET JOINT VENTURE
In November 1999, we entered into a joint venture for the acquisition and
development of a 365,000 square foot commercial office tower at 131 Dartmouth
Street, Boston, Massachusetts. In addition to an unaffiliated third party, NETT
is also participating in this project. Specifically, NETT, Heritage and DFS
Dartmouth, LLC have formed an entity to own this project. This entity is owned
74% by NETT, 20% by DFS Dartmouth, LLC and 6% by us. We were issued this
interest as part of a management arrangement we entered into with the new
entity. Under this arrangement, through our subsidiary, we are providing
management services to the project, for which we are entitled to receive 6% of
all cash and capital transaction proceeds received by the project. We have no
ongoing capital contribution requirements with respect to this project, which we
expect will be completed in June 2003.
TRANSACTIONS WITH PRUDENTIAL AND AFFILIATES
RELATIONSHIP WITH HERITAGE
As of December 31, 2001, Prudential owned approximately 18% of the
outstanding shares of each of the classes of our capital stock. For all periods
from and after September 18, 2000, Robert Falzon, Managing Director of an
affiliate of Prudential, was also one of our directors.
INITIAL INVESTMENT
Simultaneously with our formation and NETT's contribution of its properties,
in July 1999, The Prudential Insurance Company of America invested $25 million
and received an aggregate of 1,000,000 shares of our capital stock, representing
an approximate 4% equity interest in our company.
PIMS ADVISORY AGREEMENT
As part of our formation transactions, we entered into an agreement with
Prudential Investment Management Services, LLC, an affiliate of Prudential, or
PIMS, pursuant to which we engaged PIMS to act as our advisor in connection with
various transactions. Specifically, we engaged PIMS to act as our exclusive
agent while we are a private company in the private placement of equity for cash
and to provide other financial advisory services to us in our discretion. Under
this agreement, in connection with our original formation and REIT
qualification, we issued Prudential warrants to acquire 75,000 shares of our
common stock at an exercise price of $25.00 per share. These warrants expire on
July 13, 2003. In addition, we agreed that in connection with any future equity
financings while we remained a private company, we would pay PIMS a fee of 2% of
all cash contributions made by investors plus warrants to acquire shares of our
common stock in an amount equal to 7.5% of the number of shares issued in the
equity financing. We also agreed to pay PIMS a fee for any advisory services
provided by PIMS equal to the fair market value of those services. During the
period from July 9, 1999 to December 31, 1999, we paid PIMS approximately
$100,000 in advisory fees for services provided to us during this period. During
our 2000 fiscal year, we paid Prudential and its affiliates, including PIMS and
PMCC, approximately $12.7 million in advisory and debt and equity financing fees
for services provided in connection with our acquisition of Bradley. These
services and fees are described below. As described below in "--Initial Public
Offering Advisory Fee," this advisory agreement will be amended with respect to
the payment of an advisory fee to PIMS in connection with this offering.
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In connection with the PIMS advisory agreement, we also entered into an
indemnification letter with PIMS pursuant to which we agreed to indemnify and
hold harmless PIMS and its directors, officers and various other persons from
any liabilities incurred by those persons in connection with performing services
on our behalf, other than where the liabilities incurred by PIMS are found by a
judgment of a court to have resulted directly and primarily from PIMS' gross
negligence or willful misconduct.
BRADLEY ACQUISITION/FINANCING COMMITMENT LETTERS
In May 2000, we entered into a merger agreement to acquire Bradley Real
Estate, Inc., a publicly-traded REIT headquartered in Illinois, for an aggregate
purchase price of approximately $1.2 billion. Prudential provided advisory
services to us in connection with the Bradley acquisition, for which we paid
them approximately $3.7 million. As a condition to our entering into the merger
agreement with Bradley, we also obtained a commitment letter from Prudential to
provide up to $100 million in equity financing for the merger and related
transactions and a commitment letter from Prudential Mortgage Capital Company,
LLC, or PMCC, to provide up to $600 million in debt financing for the merger and
related transactions.
BRADLEY ACQUISITION/EQUITY AND DEBT FINANCINGS
Subsequent to the issuance by Prudential of its commitment letters, we
entered into two financing transactions with Prudential and its affiliates, the
proceeds of which were used to finance the Bradley acquisition. In
September 2000, we entered into a securities purchase agreement with Prudential,
under the terms of which Prudential invested an additional $100 million of
equity in our company. As a result of this investment, Prudential received an
aggregate of four million shares of our capital stock, increasing Prudential's
interest in our company to approximately 18%. The terms of Prudential's
investment were substantially identical to the terms of Prudential's original
1999 investment in connection with our formation. In the securities purchase
agreement, we agreed to provisions with respect to representations and
warranties, covenants and indemnification provisions as are customary in equity
transactions. Generally speaking, the indemnification provided in this
securities purchase agreement will expire on the date that is 30 days after
Prudential receives our 2001 audited financial statements and is subject to a
cap of $10 million. As of the date of this prospectus, no claims have been made
by Prudential under this indemnity. As part of this transaction, we amended our
advisory agreement with PIMS, pursuant to which we paid PIMS equity placement
and debt structuring fees of $5.1 million and issued Prudential warrants to
purchase 300,000 shares of our common stock at an exercise price of $25.00 per
share. These warrants expire on September 18, 2004. As part of this transaction,
our stockholders agreement with Net Realty Holding Trust and Prudential was
amended to provide Prudential with a right to designate one director on our
board. See "--Stockholders Agreement with Net Realty Holding Trust and
Prudential" below. In September 2000, Robert Falzon, Managing Director of
Prudential Real Estate Investors, was appointed to our board as Prudential's
designee.
The second financing transaction we entered into with Prudential in
connection with the Bradley acquisition was a special securitized facility with
PMCC pursuant to which $244 million of collateralized mortgage-backed securities
were issued by a trust created by PMCC. The trust consists of a single mortgage
loan due from a subsidiary we created, Heritage SPE LLC, to which we contributed
29 of our properties. This loan is secured by all 29 properties we contributed
to the borrower. Heritage SPE LLC is a special purpose entity formed exclusively
for the purpose of entering into this financing transaction and its activities
are generally limited to owning the properties which secure this facility. The
proceeds of this facility were used to finance the Bradley acquisition. We have
issued a guarantee to PMCC related to certain environmental and other acts.
Borrowings under this facility, which matures in September 2010, bear interest
at 7.88% per annum. PMCC subsequently sold this facility, although it
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continues to service this facility. We paid PMCC $3.9 million in debt financing
fees in connection with this financing.
In connection with the securitized financing with PMCC described above, we
entered into several indemnification and guaranty agreements with PMCC under the
terms of which we agreed to indemnify PMCC for various bad acts of Heritage SPE
LLC and with respect to specified environmental liabilities with respect to the
properties contributed by us to Heritage SPE LLC.
INITIAL PUBLIC OFFERING ADVISORY FEE
In connection with this offering, we are amending our advisory agreement
with PIMS with respect to the payment of an advisory fee to PIMS in connection
with this offering. As amended, this agreement provides for PIMS to receive a
fee equal to approximately $3.375 million based on an assumed initial public
offering price of $25.00 per share. Upon completion of this offering and payment
of this fee, this agreement will terminate.
STOCKHOLDERS AGREEMENT WITH NET REALTY HOLDING TRUST AND PRUDENTIAL
EXISTING STOCKHOLDERS AGREEMENT.
In connection with our original formation, we entered into a stockholders
agreement with Net Realty Holding Trust and Prudential. This agreement was
subsequently amended in September 2000 in connection with Prudential's
additional equity investment in our company. This agreement provides for the
arrangements of the parties with respect to the composition of our board of
directors, which currently consists of seven directors. Specifically, under this
agreement, Net Realty Holding Trust is entitled to designate four of our
directors and Prudential is entitled to designate one director. This agreement
also provides that the two remaining directors are to be outside directors, i.e.
not associated with NETT, one of whom is required to be our chief executive
officer. This agreement also provides for various actions of our board to be
taken only with special consent and restricts various other actions. This
agreement contains transfer restrictions, preemptive rights, rights of first
refusal on transfers and co-sale rights and also provides Net Realty Holding
Trust and Prudential with customary demand and piggyback registration rights.
Finally, Prudential has been given the right to require that we redeem their
shares of our stock under some circumstances. This redemption right will expire
upon completion of this offering.
AMENDED STOCKHOLDERS AGREEMENT
Simultaneously with the completion of this offering, we, Net Realty Holding
Trust and Prudential will enter into an amended stockholders agreement governing
our relationship with Net Realty Holding Trust and Prudential after this
offering. This agreement will eliminate all prior terms of our existing
stockholders agreement and will provide for the following new terms--
ELECTION OF DIRECTORS
- We will agree that as long as Net Realty Holding Trust owns at least
25% of the outstanding shares of our common stock, Net Realty Holding
Trust will have the right to designate for nomination four members of
our board of directors. If Net Realty Holding Trust's ownership
percentage in our common stock is reduced to less than 25% but remains
in excess of 10% of our common stock, two of Net Realty Holding
Trust's designees will be required to resign from our board of
directors. If Net Realty Holding Trust's ownership percentage in our
common stock is reduced to less than 10%, Net Realty Holding Trust
will no longer have the right to designate for nomination any of our
directors.
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- Net Realty Holding Trust will agree that it will not seek any
additional representation on our board of directors. In addition,
except at our request, and subject to its fiduciary duties under
applicable law, Net Realty Holding Trust has agreed that it will not
seek to change the size or composition of our board of directors.
ADDITIONAL EQUITY AND PREEMPTIVE RIGHTS
- Net Realty Holding Trust will agree that it will not, directly or
indirectly, acquire any additional shares of stock if that acquisition
would result in an increase in Net Realty Holding Trust's ownership
percentage of our stock.
- We will grant to Net Realty Holding Trust a preemptive right to
maintain its ownership percentage of our stock by purchasing any
shares of our stock offered to third parties on the same terms and
conditions as are offered to those third parties. This preemptive
right will not apply to some limited issuances, including in
connection with the exercise of stock options and other rights under
our incentive plan, issuances of units of limited partnership
interests by our operating partnerships and issuances of equity in
connection with acquisition or merger transactions. In addition, the
preemptive right will not apply if the exercise of this right would
jeopardize our status as a REIT.
REGISTRATION RIGHTS
- Net Realty Holding Trust and Prudential will have demand and piggyback
registration rights with respect to their shares of our common stock.
These registration rights will be subject to customary cut-back and
lock-out restrictions.
OTHER TRANSACTIONS
TRANSACTIONS WITH MR. CAMMARATA
In July 1999, Bernard Cammarata became a member of our board of directors.
Mr. Cammarata is Chairman of the Board of TJX Companies, Inc., our largest
tenant, and was President and Chief Executive Officer of TJX until June 1999.
TJX has had a long-standing relationship as a significant tenant of ours and our
predecessor company. During 1999, TJX paid us approximately $4.4 million of base
rent, which represented 7% of our total annualized base rent for all leases in
which tenants were in occupancy at December 31, 1999. During 2000, TJX paid us
approximately $8.0 million of base rent, which represented 5% of our total
annualized base rent for all leases in which tenants were in occupancy at
December 31, 2000. TJX paid us approximately $10.5 million of base rent during
2001, which represented 5% of our total annualized base rent for all leases in
which tenants were in occupancy at December 31, 2001. TJX pays us rent in
accordance with written leases with respect to several of our properties.
TRANSACTION WITH MR. TRUEBLOOD
In January 2000, we loaned our former chief financial officer, Richard L.
Trueblood, $100,000 on an unsecured, interest-free basis pursuant to the terms
of a promissory note delivered by Mr. Trueblood. The proceeds of this loan were
used by Mr. Trueblood to finance certain relocation expenses incurred by
Mr. Trueblood in connection with his employment with us. This loan was repaid in
full in March 2001 in connection with the termination of Mr. Trueblood's
employment with us.
We believe that each of these transactions was entered into by us on terms
no less favorable to us than those that could be obtained from unrelated third
parties.
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INVESTMENT POLICIES AND
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of our investment policies and our policies
with respect to other activities, including financing matters and conflicts of
interest. These policies may be amended or revised from time to time at the
discretion of our board of directors without a vote of our stockholders. Any
change to any of these policies would be made by our board, however, only after
a review and analysis of that change, in light of then existing business and
other circumstances, and then only if, in the exercise of their business
judgment, they believe that it is advisable to do so in our and our
stockholders' best interest. We cannot assure you that our investment objectives
will be attained.
INVESTMENTS IN REAL ESTATE OR INTERESTS IN REAL ESTATE
We are a fully integrated, self-administered and self-managed private REIT
that acquires, owns, manages, leases and redevelops grocer-anchored neighborhood
and community shopping centers in the Eastern and the Midwestern United States.
We plan to invest primarily in neighborhood and community shopping centers in
major metropolitan and suburban areas. In evaluating future acquisitions of
neighborhood and community shopping centers, we seek a convenient and easily
accessible location with abundant parking facilities, preferably occupying the
dominant corner, close to residential communities, with excellent visibility for
our tenants and easy access for neighborhood shoppers. We will also consider
future opportunities to acquire other properties on a case-by-case basis. In
evaluating future acquisitions of properties other than neighborhood and
community shopping centers, we seek properties or transactions that have unique
characteristics which present a compelling case for investment. Examples might
include properties having high entry yields, properties that are outside of our
target markets but are being sold as part of a portfolio package, properties
which are debt-free, a transaction in which we might issue units of one of our
operating partnerships or properties which provide substantial growth potential
through redevelopment.
We conduct substantially all of our investment activities through our two
operating partnerships and our other affiliates. Our policy is to acquire assets
primarily for current income generation. In general, our investment objectives
are:
- to increase our value through increases in the cash flows and values of
our properties;
- to achieve long-term capital appreciation, and preserve and protect the
value of our interest in our properties; and
- to provide quarterly cash distributions, a portion of which is expected to
constitute a nontaxable return of capital because it will exceed our
current and accumulated earnings and profits, as well as to provide growth
in distributions over time.
There are no limitations on the amount or percentage of our total assets
that may be invested in any one property. Additionally, no limits have been set
on the concentration of investments in any one location or facility type.
INVESTMENTS IN MORTGAGES
We have not, prior to this offering, engaged in any significant investments
in mortgages nor do we intend to engage in this activity in the future.
INVESTMENTS IN SECURITIES OF OR INTERESTS IN PERSONS PRIMARILY ENGAGED IN REAL
ESTATE ACTIVITIES AND OTHER ISSUERS
Generally speaking, we have not, prior to this offering, engaged in any
significant investment activities in other entities. Since our formation, we
have acquired interests in two joint ventures, neither
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of which is significant. However, subject to the percentage of ownership
limitations and gross income and asset tests necessary for REIT qualification,
we may in the future invest in securities of entities engaged in real estate
activities or securities of other issuers. See "Material United States Federal
Income Tax Considerations" beginning on page 132. We may also invest in the
securities of other issuers in connection with acquisitions of indirect
interests in properties, which normally would include general or limited
partnership interests in special purpose partnerships owning properties. We may
in the future acquire some, all or substantially all of the securities or assets
of other REITs or similar entities where that investment would be consistent
with our investment policies. Subject to the percentage of ownership limitations
and asset test referred to above, there are no limitations on the amount or
percentage of our total assets that may be invested in any one issuer. However,
we do not anticipate investing in other issuers of securities for the purpose of
exercising control or acquiring any investments primarily for sale in the
ordinary course of business or holding any investments with a view to making
short-term profits from their sale. In any event, we do not intend that our
investments in securities will require us to register as an "investment company"
under the Investment Company Act, and we intend to divest securities before any
registration would be required.
We have not in the past acquired, and we do not anticipate that we will in
the future seek to acquire, loans secured by properties and we have not, nor do
we intend to, engage in trading, underwriting, agency distribution or sales of
securities of other issuers.
DISPOSITIONS
Although we generally do not seek to dispose of properties within our
portfolio, we will consider doing so, subject to REIT qualification rules, if
our management determines that a sale of a property would be in our best
interests based on the price being offered for the property, the operating
performance of the property, the tax consequences of the sale and other factors
and circumstances surrounding the proposed sale. In addition, as discussed
elsewhere in this prospectus, we intend to dispose of all of our single-tenant
properties and one of our office buildings in New York.
FINANCING POLICIES
As disclosed elsewhere in this prospectus, we have incurred debt since our
formation in order to fund operations and acquisitions. After this offering and
the proposed property acquisitions described in this prospectus, we expect to
have total indebtedness of $985 million. Our board will consider a number of
factors when evaluating our level of indebtedness and when making decisions
regarding the incurrence of indebtedness, including the purchase price of
properties to be acquired with debt financing, the estimated market value of our
properties upon refinancing and the ability of particular properties, and our
company as a whole, to generate cash flow to cover expected debt service. See
"Risk Factors" beginning on page 9 and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources"
beginning on page 46.
Generally speaking, although we may incur any of the forms of indebtedness
described below, we intend to focus primarily on financing future growth through
the incurrence of unsecured debt rather than secured debt on an individual
property or a portfolio of properties. We may incur debt in the form of purchase
money obligations to the sellers of properties, or in the form of publicly or
privately placed debt instruments, financing from banks, institutional
investors, or other lenders, any of which indebtedness may be unsecured or may
be secured by mortgages or other interests in our properties. This indebtedness
may be recourse, non-recourse or cross-collateralized and, if recourse, that
recourse may include our general assets and, if non-recourse, may be limited to
the particular property to which the indebtedness relates. In addition, we may
invest in properties subject to existing loans secured by mortgages or similar
liens on the properties, or may refinance properties acquired on a leveraged
basis. We may use the proceeds from any borrowings for working capital, to
purchase additional interests in partnerships or joint ventures in which we
participate, to refinance existing indebtedness or to finance
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acquisitions, expansion, redevelopment of existing properties or development of
new properties. We may also incur indebtedness for other purposes when, in the
opinion of our board, it is advisable to do so. In addition, we may need to
borrow to meet the taxable income distribution requirements under the Internal
Revenue Code if we do not have sufficient cash available to meet those
distribution requirements.
LENDING POLICIES
We do not have a policy limiting our ability to make loans to other persons.
We may consider offering purchase money financing in connection with the sale of
properties where the provision of that financing will increase the value to be
received by us for the property sold. We and our operating partnerships may make
loans to joint ventures in which we or they participate or may participate in
the future. We have not engaged in any significant lending activities in the
past nor do we intend to in the future.
EQUITY CAPITAL POLICIES
Our board has the authority, without further stockholder approval, to issue
additional authorized shares of common stock and preferred stock or otherwise
raise capital, including through the issuance of senior securities, in any
manner and on those terms and for that consideration it deems appropriate,
including in exchange for property. Other than Net Realty Holding Trust,
existing stockholders will have no preemptive right to shares of common stock or
other shares of our capital stock issued in any offering, and any offering might
cause a dilution of a stockholder's investment in us. Although we have no
current plans to do so, and we have not done so other than in connection with
the transfer of 60 properties to us by NETT, we may in the future issue common
stock in connection with acquisitions. We also may issue partnership units in
one of our operating partnerships in connection with acquisitions of property.
We may, under certain circumstances, purchase shares of our common stock in
the open market or in private transactions with our stockholders, if those
purchases are approved by our board. Our board has no present intention of
causing us to repurchase any shares, and any action would only be taken in
conformity with applicable federal and state laws and the applicable
requirements for qualifying as a REIT.
CONFLICT OF INTEREST POLICY
We have adopted policies to reduce or eliminate potential conflicts of
interest. In addition, our board is subject to certain provisions of Maryland
law, which are also designed to eliminate or minimize conflicts. However, we
cannot assure you that these policies or provisions of law will be successful in
eliminating the influence of these conflicts.
We have adopted a policy that, without the approval of a majority of the
disinterested directors, we will not:
- acquire from or sell to any of our directors, officers or employees, or
any entity in which any of our directors, officers or employees is
employed or has an interest of more than 5%, any assets or other property;
- make any loan to or borrow from any of our directors, officers or
employees, or any entity in which any of our directors, officers or
employees is employed or has an interest of more than 5%; or
- engage in any other transaction with any of our directors, officers or
employees, or any entity in which any of our directors, officers or
employees is employed or has an interest of more than 5%.
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Under Maryland law, a contract or other transaction between us and any of
our directors and any other entity in which that director is also a director or
has a material financial interest is not void or voidable solely on the grounds
of the common directorship or interest, the fact that the director was present
at the meeting at which the contract or transaction is approved or the fact that
the director's vote was counted in favor of the contract or transaction, if--
- the fact of the common directorship or interest is disclosed to our board
or a committee of our board, and our board or that committee authorizes
the contract or transaction by the affirmative vote of a majority of the
disinterested directors, even if the disinterested directors constitute
less than a quorum;
- the fact of the common directorship or interest is disclosed to our
stockholders entitled to vote, and the contract or transaction is approved
by a majority of the votes cast by the stockholders entitled to vote,
other than votes of shares owned of record or beneficially by the
interested director, corporation, firm or other entity; or
- the contract or transaction is fair and reasonable to us.
REPORTING POLICIES
Generally speaking, since our formation, we have made available to our
stockholders certified annual financial statements but not annual reports and
other information, unless requested to do so. We are required, however, to
provide more detailed financial information to the holders of those Bradley debt
securities issued prior to our acquisition of Bradley. After this offering, we
will become subject to the full information reporting requirements of the
Securities Exchange Act of 1934, as amended. Pursuant to these requirements, we
will file periodic reports, proxy statements and other information, including
certified financial statements, with the Securities and Exchange Commission. See
"Where You Can Find More Information" on page 154.
REGULATORY COMPLIANCE
Regulatory compliance matters at our company will be overseen by our
corporate compliance officer, presently our chief financial officer, David Gaw,
who is charged with responsibility for implementation of our corporate
compliance plan. This plan, which is in the process of being adapted to meet our
needs as a public company, is a comprehensive, company-wide program of guidance,
training and monitoring developed by a combined team of our employees, our
outside counsel and our auditors. This plan is designed to meet or exceed
appropriate standards for employee conduct, conflict of interest, corporate
integrity, insider trading and other applicable policies governing business
ethics and regulatory compliance. In his capacity as corporate compliance
officer, Mr. Gaw is supported by our outside counsel, currently Bingham
Dana LLP, and our outside auditors, currently KPMG LLP.
Our corporate compliance officer reports to our audit committee for
compliance issues. Our audit committee will meet at least four times each year.
Our audit committee will monitor and enforce compliance standards company-wide
with the assistance of our chief executive officer, chief financial officer and
compliance officer and will be advised by our outside counsel, currently Bingham
Dana LLP, and our outside auditors, KPMG LLP.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock before and after this offering, with respect to
each person who will be a director after this offering, each executive officer
named in the summary compensation table, each stockholder selling shares in this
offering, and each person known by us to be the beneficial owner of more than 5%
of our outstanding common stock. Except as otherwise set forth below, the
principal address of each of the persons named below is care of Heritage
Property Investment Trust, Inc., 535 Boylston Street, Boston, Massachusetts
02116.
<Table>
<Caption>
NUMBER OF NUMBER OF NUMBER OF PERCENT OF
SHARES PERCENT OF SHARES SHARES ALL
OWNED ALL SHARES BEING OWNED SHARES
PRIOR TO PRIOR TO SOLD IN AFTER AFTER
NAME AND BUSINESS ADDRESS OF BENEFICIAL OWNER OFFERING(1) OFFERING OFFERING OFFERING(1) OFFERING
- --------------------------------------------- ----------- ---------- --------- ----------- ----------
New England Teamsters and Trucking Industry
Pension Fund(2)............................. 22,000,000 80.7% 4,000,000 18,000,000 45.8%
Net Realty Holding Trust(3)................... 22,000,000 80.7 4,000,000 18,000,000 45.8
The Prudential Insurance Company of
America(4).................................. 5,000,000 18.3 -- 5,000,000 12.7
Thomas C. Prendergast(5)...................... 823,898 3.0 -- 823,898 2.1
Gary Widett(6)................................ 258,479 * -- 258,479 *
David Gaw(7).................................. 104,000 * -- 104,000 *
Robert Prendergast(8)......................... 61,713 * -- 61,713 *
Barry Rodenstein(9)........................... 43,000 * -- 43,000 *
Joseph L. Barry............................... -- -- -- -- --
David W. Laughton............................. -- -- -- -- --
Bernard Cammarata(10)......................... 15,773 * -- 15,773 *
William M. Vaughn............................. -- -- -- -- --
Paul V. Walsh................................. -- -- -- -- --
Robert M. Falzon(11).......................... 20 * -- 20 *
Kevin C. Phelan............................... -- -- -- -- --
Richard C. Garrison........................... -- -- -- -- --
Robert J. Watson.............................. -- -- -- -- --
Kenneth K. Quigley, Jr........................ -- -- -- -- --
Directors and Executive Officers as a group
(15 persons)................................ 1,306,883 4.8% -- 1,306,883 3.3%
</Table>
- ------------------------
* Less than 1%
(1) The number of shares of our common stock owned assumes the conversion of
all shares of our Series A Cumulative Convertible Preferred Stock to common
stock. In accordance with Rule 13d-3 under the Securities Exchange Act of
1934, shares are shown as beneficially owned if the person named in the
table has or shares the power to vote or to direct the voting of, or the
power to dispose or to direct the disposition of those shares. Inclusion of
shares in the table does not necessarily mean that the persons named have
any economic interest in shares set opposite their names. In addition,
shares are deemed to be beneficially owned by a person if that person has
the right to acquire shares, for example, upon exercise of an option or
warrant, within 60 days of the date as of which the information is
provided. In computing the percentage ownership of any person, the amount
of shares is deemed to include the amount of shares beneficially owned by
that person, and only by that person, by reason of that acquisition right.
As a result, the percentage of outstanding shares of any person as shown on
the preceding table does not necessarily reflect the person's actual voting
power at any particular date.
(2) The principal address of The New England Teamsters and Trucking Industry
Pension Fund, or NETT, is 535 Boylston Street, Boston, Massachusetts 02116.
NETT is the sole stockholder of Net Realty Holding Trust, our largest
stockholder and as such, may be deemed to be the beneficial owner of all
the shares of common stock owned by Net Realty Holding Trust. If the
underwriters'
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overallotment option is exercised in full, Net Realty Holding Trust will
sell 600,000 additional shares of common stock in this offering.
(3) The principal address of Net Realty Holding Trust is care of The New
England Teamsters and Trucking Industry Pension Fund, 535 Boylston Street,
Boston, Massachusetts 02116. If the underwriters' overallotment option is
exercised in full, Net Realty Holding Trust will sell 600,000 additional
shares of common stock in this offering.
(4) The principal address of Prudential Insurance Company of America is care of
Prudential Real Estate Investors, 8 Campus Drive, Parsippany, New Jersey
07054-4493. 121 current or former employees of Prudential own an aggregate
of 2,420 shares of our common stock. Prudential disclaims beneficial
ownership of all shares of common stock owned by these employees. If the
underwriters' overallotment option is exercised in full, Prudential will
sell 1,000,000 shares of common stock in this offering.
(5) Includes (a) 183,898 shares of common stock previously issued to
Mr. Prendergast under our equity incentive plan, and (b) options to
purchase 640,000 shares of common stock previously granted to
Mr. Prendergast under our equity incentive plan, which options will be
immediately exercisable upon completion of this offering. Mr. Prendergast
is the brother of Robert Prendergast, our Vice President of Property
Management and Construction. Mr. Prendergast disclaims beneficial ownership
of all shares of our common stock owned by Robert Prendergast.
(6) Includes (a) 38,479 shares of common stock previously issued to Mr. Widett
under our equity incentive plan, and (b) options to purchase 220,000 shares
of common stock previously granted to Mr. Widett under our equity incentive
plan, which options will be immediately exercisable upon completion of this
offering.
(7) Includes (a) 14,000 shares of common stock previously issued to Mr. Gaw
under our equity incentive plan, and (b) options to purchase 90,000 shares
of common stock previously granted to Mr. Gaw under our equity incentive
plan, which options will be immediately exercisable upon completion of this
offering.
(8) Includes (a) 8,980 shares of common stock previously issued to
Mr. Prendergast under our equity incentive plan, and (b) options to
purchase 52,733 shares of common stock previously granted to
Mr. Prendergast under our equity incentive plan, which options will be
immediately exercisable upon completion of this offering. Mr. Prendergast
is the brother of Thomas C. Prendergast, our President and Chief Executive
Officer. Mr. Prendergast disclaims beneficial ownership of all shares of
our common stock owned by Thomas C. Prendergast.
(9) Includes (a) 3,000 shares of common stock issued to Mr. Rodenstein under
our equity incentive plan, and (b) options to purchase 40,000 shares of
common stock previously granted to Mr. Rodenstein under our equity
incentive plan, which options will be immediately exercisable upon
completion of this offering.
(10) Represents options to purchase 15,773 shares of common stock previously
issued under our equity incentive plan and which are exercisable within 60
days of the date of this prospectus. Mr. Cammarata's principal address is
care of TJX Companies, Inc., 770 Cochituate Road, Framingham,
Massachusetts 07071.
(11) Mr. Falzon is Managing Director of Prudential Real Estate Investors, an
affiliate of The Prudential Insurance Company of America, and may be
deemed to be the beneficial owner of all of the shares of our common stock
owned by Prudential. Mr. Falzon disclaims beneficial ownership of all of
the shares of our common stock owned by Prudential. In addition, 120
current or former employees of Prudential, other than Mr. Falzon, own an
aggregate of 2,400 shares of common stock. Mr. Falzon disclaims beneficial
ownership of all shares of our common stock owned by these employees.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
We were formed under the laws of the State of Maryland. Rights of our
stockholders are governed by the Maryland General Corporation Law, or MGCL, our
charter, or our articles, and our bylaws. The following summary of the material
provisions of our capital stock does not purport to be complete and is subject
to and qualified in its entirety by reference to our articles and bylaws, copies
of which are filed as exhibits to the registration statement of which this
prospectus is a part.
AUTHORIZED STOCK
Upon completion of this offering, our articles will provide that we may
issue up to 200 million shares of voting common stock, par value $.001 per
share, and 50 million shares of preferred stock, par value $.001 per share. Upon
completion of this offering, and the automatic conversion of all shares of our
Series A Cumulative Convertible Preferred Stock, there will be 39,268,652 shares
of common stock issued and outstanding and no shares of preferred stock issued
and outstanding.
As permitted by the MGCL, upon completion of this offering, our articles
will contain a provision permitting our board, without any action by our
stockholders, to classify any unissued preferred stock into one or more classes
or series of shares of stock by setting or changing the preferences, conversion
or other rights, voting powers, restrictions, limitations as to dividends or
distributions, qualifications or terms or conditions of redemption of that new
class or series of shares of stock. We believe that the power of our board to
issue additional shares of stock will provide us with increased flexibility in
structuring possible future financings and acquisitions and in meeting other
needs which might arise. The additional preferred stock will be available for
issuance without further action by our stockholders, unless action by our
stockholders is required by applicable law or by the rules of the NYSE. Although
our board currently has no intention of doing so, it could authorize us to issue
a class or series that could, depending upon the terms of that class or series,
delay, defer or prevent a transaction or a change in control of us that might
involve a premium price for the shares and might otherwise be in the best
interests of our stockholders.
Under Maryland law, a stockholder is not personally liable for our
obligations solely as a result of his or her status as a stockholder. Upon
completion of this offering, our articles will provide that no stockholder will
be liable for any of our debts or obligations by reason of being a stockholder
nor will any stockholder face any personal liability in tort, contract or
otherwise to any person that relates to our property or affairs by reason of
being a stockholder. Upon completion of this offering, our articles will further
provide that we will have the power to indemnify each present or former
stockholder against any claim or liability to which the stockholder may become
subject by reason of being or having been a stockholder and to reimburse each
stockholder for all reasonable expenses incurred by him or her relating to any
such claim or liability. However, with respect to tort claims, contractual
claims where stockholder liability is not so negated, claims for taxes and some
statutory liability, stockholders may, in some jurisdictions, be personally
liable to the extent that those claims are not satisfied by us. Inasmuch as we
carry public liability insurance which we consider to be adequate, any risk of
personal liability to stockholders is limited to situations in which our assets
plus our insurance coverage would be insufficient to satisfy claims against us
or our stockholders.
COMMON STOCK
All of the shares offered by this prospectus will be duly authorized, fully
paid and nonassessable. Subject to the preferential rights of any other class or
series of shares of stock, holders of shares of common stock will be entitled to
receive dividends if, as and when authorized and declared by our board out of
assets legally available for dividends and to share ratably in our assets
legally available for distribution to the stockholders in the event of our
liquidation, dissolution or winding-up after payment
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of, or adequate provision for, all of our known debts and liabilities and any
rights of holders of senior securities.
Each outstanding share of common stock entitles the holder to one vote on
all matters submitted to a vote of our stockholders, including the election of
directors. There is no cumulative voting in the election of directors, which
means that directors then standing for election will be elected by a plurality
of all votes cast. Holders of shares of common stock have no conversion, sinking
fund, redemption, exchange or appraisal rights, and have no preemptive rights to
subscribe for any of our securities other than as set forth in our amended
stockholders agreement with respect to Net Realty Holding Trust. As of
December 31, 2001, approximately 130 individuals or entities held shares of our
common stock.
PREFERRED STOCK
In addition to the Series A Cumulative Convertible Preferred Stock, all
shares of which will automatically convert to shares of our common stock in
connection with this offering, we currently have two additional authorized
classes of preferred stock, Series B Cumulative Redeemable Perpetual Preferred
Stock, or Series B Preferred Stock, and Series C Cumulative Redeemable Perpetual
Preferred Stock, or Series C Preferred Stock, each of which will remain
authorized for issuance after this offering. There are no shares of Series B or
Series C Preferred Stock currently issued and outstanding. Upon the conversion
of all shares of the Series A Cumulative Convertible Preferred Stock, under our
articles, there will be no shares of Series A Cumulative Convertible Preferred
Stock authorized for issuance, issued or outstanding.
TERMS OF SERIES B PREFERRED STOCK
- SHARES RESERVED FOR ISSUANCE--2,000,000 shares.
- ISSUANCE--Shares of Series B Preferred Stock will only be issuable upon
exchange of Series B Units in the Bradley OP, which, generally
speaking, may not occur prior to February 23, 2009. Shares of Series B
Preferred Stock may be issuable prior to that date if the Bradley OP
fails to make full distributions for six prior quarterly distribution
periods (which may or may not be consecutive) and upon other limited
circumstances described in the Bradley OP partnership agreement. See
"Structure and Description of Operating Partnerships" beginning on
page 121.
- RANK--The Series B Preferred Stock will rank senior as to distributions
and rights upon our liquidation to the common stock and on a parity
with the Series C Preferred Stock.
- DIVIDENDS--Holders of the Series B Preferred Stock will be entitled to
receive, when, as and if declared by our board of directors, cumulative
preferential cash dividends at the rate per annum of 8.875% of the
$25.00 liquidation preference per share.
- LIQUIDATION PREFERENCE--Holders of the Series B Preferred Stock will be
entitled to receive out of our assets legally available for
distribution upon liquidation, subject to the rights of holders of
senior securities and parity holders, if any, a liquidation preference
equal to the sum of $25.00 per share and an amount equal to any
accumulated and unpaid dividends on those shares, whether or not
declared, to the date of payment.
- OPTIONAL REDEMPTION. The Series B Preferred Stock may be redeemed by
us, but not prior to February 23, 2004. On and after that date, subject
to various limitations, we may redeem the Series B Preferred Stock at a
redemption price, payable in cash, equal to $25.00 per share, plus
accumulated and unpaid dividends, whether or not declared, to the
redemption date.
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- VOTING--Holders of Series B Preferred Stock will not have any voting
rights, except in the limited circumstances set forth in the next
sentence. If six quarterly dividends, whether or not consecutive,
payable on shares of Series B Preferred Stock or on any class or series
of "parity" preferred stock, including the Series C Preferred Stock,
are in arrears, the number of directors then constituting our board of
directors will be automatically increased by two, and the holders of
the Series B Preferred Stock, voting together as a single class with
the holders of the Series C Preferred Stock and any other class or
series of "parity" preferred stock, will have the right to elect the
two additional directors.
- APPROVAL RIGHTS--In addition, once shares of Series B Preferred Stock
are issued and remain outstanding, we may not, without the affirmative
vote of the holders of at least two-thirds of the outstanding shares of
Series B Preferred Stock (i) designate or create, or increase the
authorized or issued amount of, any class or series ranking senior to
the Series B Preferred Stock with respect to payment of distributions
or rights upon liquidation, (ii) designate or create, or increase the
authorized or issued amount of, any "parity" preferred stock but only
to the extent that "parity" preferred stock is issued to one of our
affiliates upon terms more favorable to that affiliate than those we
would offer in an arm's length transaction to an unrelated party, or
(iii) either (A) consolidate, merge into or with, or convey, transfer
or lease all or substantially all of our assets, or (B) amend, alter or
repeal the provisions of our articles or bylaws whether by merger,
consolidation or otherwise, in each case that would materially and
adversely affect the powers, special rights, preferences, privileges or
voting power of the Series B Preferred Stock or the holders of that
stock. However, with respect to a merger, consolidation or a sale,
transfer or lease of all or substantially all of our assets, so long as
(a) we are the surviving entity and the Series B Preferred Stock
remains outstanding with the terms of the Series B Preferred Stock
unchanged, or (b) the resulting, surviving or transferee entity is
organized under the laws of any state and substitutes the Series B
Preferred Stock for other preferred stock having substantially the same
terms and same rights as the Series B Preferred Stock, then the
occurrence of one of those events will not be deemed to materially and
adversely affect the rights, privileges or voting powers of the holders
of the Series B Preferred Stock.
- NO CONVERSION RIGHTS--Holders of Series B Preferred Stock will have no
conversion rights.
- NO SINKING FUND--No sinking fund will be established for the retirement
or redemption of Series B Preferred Stock.
- NO PREEMPTIVE RIGHTS--Holders of Heritage Series B Preferred Stock will
have no preemptive rights.
TERMS OF SERIES C PREFERRED STOCK
- SHARES RESERVED FOR ISSUANCE--1,200,000 shares.
- ISSUANCE--Shares of Series C Preferred Stock will only be issuable upon
exchange of the Series C Units of the Bradley OP, which, generally
speaking, may not occur prior to September 7, 2009. Shares of Series C
Preferred Stock may be issuable prior to that date if the Bradley OP
fails to make full distributions for six prior quarterly distribution
periods (which may or may not be consecutive) and upon other limited
circumstances described in the Bradley OP partnership agreement. See
"Structure and Description of Operating Partnerships" on page 121.
- RANK--The Series C Preferred Stock will rank senior as to distributions
and rights upon our liquidation to the common stock and on a parity
with the Series B Preferred Stock.
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- DIVIDENDS--Holders of the Series C Preferred Stock will be entitled to
receive, when, as and if declared by our board of directors, cumulative
preferential cash dividends at the rate per annum of 8.875% of the
$25.00 liquidation preference per share.
- LIQUIDATION PREFERENCE--Holders of the Series C Preferred Stock will be
entitled to receive out of our assets legally available for
distribution upon liquidation, subject to the rights of holders of
senior securities and parity holders, if any, a liquidation preference
equal to the sum of $25.00 per share and an amount equal to any
accumulated and unpaid dividends on those shares, whether or not
declared, to the date of payment.
- OPTIONAL REDEMPTION. The Series C Preferred Stock may be redeemed by
us, but not prior to September 7, 2004. On and after that date, subject
to various limitations, we may redeem the Series C Preferred Stock at a
redemption price, payable in cash, equal to $25.00 per share, plus
accumulated and unpaid dividends, whether or not declared, to the
redemption date.
- VOTING--Holders of Series C Preferred Stock will not have any voting
rights, except in the limited circumstances set forth in the next
sentence. If six quarterly dividends, whether or not consecutive,
payable on shares of Series C Preferred Stock or on any class or series
of "parity" preferred stock, including the Series B Preferred Stock,
are in arrears, the number of directors then constituting our board of
directors will be automatically increased by two, and the holders of
the Series C Preferred Stock, voting together as a single class with
the holders of the Series B Preferred Stock and with any other class or
series of "parity" preferred stock, will have the right to elect the
two additional directors.
- APPROVAL RIGHTS--In addition, once shares of Series C Preferred Stock
are issued, we may not, without the affirmative vote of the holders of
at least two-thirds of the outstanding shares of Series C Preferred
Stock (i) designate or create, or increase the authorized or issued
amount of, any class or series ranking prior to the Series C Preferred
Stock with respect to payment of dividends or rights upon liquidation,
(ii) designate or create, or increase the authorized or issued amount
of, any "parity" preferred stock but only to the extent that "parity"
preferred stock is issued to one of our affiliates upon terms more
favorable to that affiliate than those we would offer in an arm's
length transaction to an unrelated party, or (iii) either
(A) consolidate, merge into or with, or sell, transfer or lease all or
substantially all of our assets, or (B) amend, alter or repeal the
provisions of our articles or bylaws whether by merger, consolidation
or otherwise, in each case that would materially and adversely affect
the powers, special rights, preferences, privileges or voting power of
the Series C Preferred Stock or the holders of that stock. However,
with respect to a merger, consolidation or a sale, transfer or lease of
all or substantially all of our assets, so long as (a) we are the
surviving entity and the Series C Preferred Stock remains outstanding
with the terms of the Series C Preferred Stock unchanged, or (b) the
resulting, surviving or transferee entity is organized under the laws
of any state and substitutes the Series C Preferred Stock for other
preferred stock having substantially the same terms and same rights as
the Series C Preferred Stock, then the occurrence of one of those
events will not be deemed to materially and adversely affect the
rights, privileges or voting powers of the holders of the Series C
Preferred Stock.
- NO CONVERSION RIGHTS--Holders of Series C Preferred Stock will have no
conversion rights.
- NO SINKING FUND--No sinking fund will be established for the retirement
or redemption of Series C Preferred Stock.
- NO PREEMPTIVE RIGHTS--Holders of Series C Preferred Stock will have no
preemptive rights.
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Additional shares of preferred stock may be issued from time to time, in one
or more series, as authorized by our board. Prior to the issuance of shares of
each series, our board is required by the MGCL and our articles to fix for each
series, subject to the provisions of our articles, the terms, preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications and terms or conditions of redemption, as permitted by
Maryland law. Because our board has the power to establish the preferences,
powers and rights of each series of preferred stock, it may afford the holders
of any series of preferred stock preferences, powers and rights, voting or
otherwise, senior to the rights of holders of shares of our common stock. The
issuance of preferred stock could have the effect of delaying or preventing a
change of control of our company that might involve a premium price for holders
of shares or otherwise be in their best interest. Our board has no present plans
to issue any preferred stock, except as may be required with respect to the
Series B and C Preferred Stock upon exchange of limited partnership interests in
the Bradley OP as described in "Structure and Description of Operating
Partnerships" beginning on page 121.
RESTRICTIONS ON OWNERSHIP
For us to remain qualified as a REIT under the Internal Revenue Code, not
more than 50% of the value of the outstanding shares of our capital stock may be
owned, actually or constructively, by five or fewer individuals, as defined in
the Internal Revenue Code, during the last half of a taxable year and our stock
must be beneficially owned by 100 or more persons during at least 335 days of a
taxable year of 12 months, or during a proportionate part of a shorter taxable
year. See "Material United States Federal Income Tax Considerations" beginning
on page 132. To satisfy these ownership requirements and other requirements for
qualification as a REIT, our articles contain provisions restricting the
ownership or acquisition of shares of our capital stock.
The ownership limit provisions provide that no stockholder may own, or be
deemed to own by virtue of the attribution provisions of the Internal Revenue
Code, more than the ownership limit, which is equal to 9.8% of our stock. The
attribution rules are complex and may cause stock owned directly or indirectly
by a group of related individuals and/or entities to be deemed to be owned by
one individual or entity. As a result, the acquisition of less than 9.8% (by
value or number of shares, whichever is more restrictive) of each class of our
outstanding stock, or the acquisition of an interest in an entity which owns our
stock, by an individual or entity could cause that individual or entity to
constructively own in excess of 9.8% of our outstanding stock, and thus subject
that stock to the ownership limit.
Our board may, in its sole discretion, waive the ownership limit with
respect to a particular stockholder if evidence satisfactory to our board is
presented that the ownership will not then or in the future jeopardize our
status as a REIT. As a condition to the waiver, our board may require opinions
of counsel satisfactory to it and/or an undertaking from the applicant with
respect to preserving our REIT status. If, in the opinion of our board, any
proposed transfer of shares of our stock may jeopardize our qualification as a
REIT, our board has the right to refuse to permit the transfer of that stock.
Prior to this offering, our board previously waived the ownership limit with
respect to Prudential and Net Realty Holding Trust. After this offering, Net
Realty Holding Trust and Prudential will each continue to remain a holder of at
least 9.8% of our common stock. Our board may at any time revoke a waiver of
ownership limit, except that we have agreed with Net Realty Holding Trust and
Prudential that we will not revoke waivers our board has previously issued with
respect to their ownership.
A transfer of our common stock or other event that results in a person
owning shares in excess of the ownership limit will result in those shares of
our stock most recently acquired by that person that are in excess of the
ownership limit being converted into "excess shares." These excess shares will
then be automatically transferred to a trust, the beneficiary of which will be a
qualified charitable organization that we select. The intended transferee will
not be entitled to vote these shares and will not receive any dividends declared
on these shares. Within 20 days after the transfer of the shares to the trust,
the trustee of the trust will be required to sell the excess shares to a person
or entity who
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could own the shares without violating the ownership limit. The trustee, upon a
sale of these shares, would then distribute to the intended transferee an amount
equal to the lesser of the price paid by that intended transferee (or, in some
circumstances, the market value of those shares) or the sale proceeds received
by the trust. In addition, assuming that these excess shares had not yet been
sold by the trustee, we would have the right, for a period of 120 days beginning
on the date described below, to purchase all or any portion of the excess shares
from the trust at a price equal to the lesser of the price paid for the stock by
the intended transferee (or, in some circumstances, the market value of those
shares) and the closing market price for the common stock on the date we
exercise our option to purchase the stock. This period commences on the date of
the violative transfer if the intended transferee gives us notice of the
transfer, or the date our board determines that a violative transfer has
occurred if no notice is provided.
The affirmative vote of the holders of at least two-thirds of the shares of
our voting stock is required to alter, amend, adopt any provision inconsistent
with or repeal the ownership limit provision. In addition to preserving our
status as a REIT, the ownership limit may have the effect of precluding an
acquisition of control of the REIT without the approval of our board.
All certificates representing shares of stock will bear a legend referring
to the restrictions described above.
All persons who own at least a specified percentage of our stock must file
an affidavit with us containing information regarding their ownership of stock,
as set forth in the United States Treasury Regulations. Under current Treasury
Regulations, the percentage will be set between 0.5% and 5%, depending on the
number of record holders of stock. In addition, each stockholder will upon
demand be required to disclose to us in writing that information with respect to
the direct, indirect and constructive ownership of shares as our board deems
necessary to comply with the provisions of the Internal Revenue Code applicable
to a REIT or to comply with the requirements of any taxing authority or
governmental agency.
CERTAIN PROVISIONS OF MARYLAND LAW AND OF OUR ARTICLES AND BYLAWS
The following paragraphs summarize certain provisions of Maryland law and of
our articles and bylaws. This summary does not purport to be complete and is
subject to and qualified in its entirety by reference to the MGCL, our articles
and our bylaws. The business combination provisions and the control share
acquisition provisions of the MGCL, and the advance notice provisions of our
bylaws could have the affect of delaying, deferring or preventing a transaction
or a change in control that might involve a premium price for holders of shares
of our common stock or otherwise be in our stockholders' best interest.
TERM
In connection with this offering, we are amending our articles and bylaws.
These amended articles and bylaws will become effective immediately prior to the
closing of this offering. These documents will provide for us to have a
perpetual existence.
AMENDMENT OF ARTICLES AND BYLAWS
Our articles may be amended only by the affirmative vote of a majority of
the directors then in office and thereafter by the affirmative vote of the
holders of two-thirds of all of the votes entitled to be cast on the matter by
stockholders. However, if, within sixty days of the meeting at which a vote will
take place with respect to an amendment to our articles, there is an interested
stockholder (i.e., a stockholder who has acquired 9.8% of our stock, other than
a "look-through entity"), that amendment must be approved in advance by an
affirmative vote of a majority of our "continuing directors" (i.e., those
directors who are not affiliated with the interested stockholder and who were in
office prior to
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the time the stockholder became an interested stockholder). Unless otherwise
required by law, our board may amend our bylaws by the affirmative vote of a
majority of the directors then in office. However, if at the time of the action,
there is an "interested stockholder," the amendment must be approved in advance
by an affirmative vote of a majority of the continuing directors.
MEETINGS OF STOCKHOLDERS
Under our bylaws, annual meetings of stockholders are to be held in May of
each year at a date and time as determined by our board. Special meetings of
stockholders may be called only by a majority of the directors then in office,
by the Chairman or the President and must be called by the Secretary upon the
written request of the holders of a majority of the shares of our common stock
entitled to vote at a meeting. Only matters set forth in the notice of the
meeting may be considered and acted upon at such a meeting. Our bylaws provide
that any action required or permitted to be taken at a meeting of stockholders
may be taken without a meeting by unanimous written consent, if that consent
sets forth that action and is signed by each stockholder entitled to vote on the
matter.
ADVANCE NOTICE PROVISIONS FOR STOCKHOLDER NOMINATIONS AND SHAREHOLDER
PROPOSALS
Our bylaws establish an advance notice procedure for stockholders to make
nominations of candidates for directors or bring other business before an annual
meeting of stockholders. Any stockholder nomination or proposal for action at an
upcoming stockholder meeting must be delivered to our secretary not less than
90 days nor more than 150 days prior to the scheduled meeting of stockholders
and must comply with other procedural requirements described in our bylaws.
The purpose of requiring stockholders to give advance notice of nominations
and other proposals is to afford our board the opportunity to consider the
qualifications of the proposed nominees or the advisability of the other
proposals and, to the extent considered necessary by our board, to inform
stockholders and make recommendations regarding the nominations or other
proposals. The advance notice procedures also permit a more orderly procedure
for conducting our stockholder meetings. Although the bylaws do not give our
board the power to disapprove timely stockholder nominations and proposals, they
may have the effect of precluding a contest for the election of directors or
proposals for other action if the proper procedures are not followed, and of
discouraging or deterring a third party from conducting a solicitation of
proxies to elect its own slate of directors to our board or to approve its own
proposal.
THE BOARD OF DIRECTORS
Upon completion of this offering, our articles will provide that our board
will consist of eleven directors and thereafter the number of directors may be
established by our board. Any vacancy will be filled, including any vacancy
created by an increase in the number of directors, at any regular meeting or at
any special meeting called for the purpose, by a majority of the remaining
directors. However, if there is an interested stockholder, the filling of the
vacancy must also be approved by the affirmative vote of a majority of those
directors who are not affiliated with the interested stockholder and who were in
office prior to the time the stockholder became an interested stockholder.
Pursuant to the terms of our articles and bylaws, the directors are divided into
three classes, with each class serving a three year term. As the term of each
class expires, directors in that class will be elected for a term of three years
and until their successors are duly elected and qualified. The use of a
classified board may render it more difficult to effect a change in our control
or removal of incumbent management. We believe, however, that classification of
the board of directors will help to assure the continuity and stability of our
business strategies and policies.
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BUSINESS COMBINATIONS
As permitted by Maryland law, upon completion of this offering, our articles
will provide that any merger, consolidation or sale of substantially all of our
assets or voluntary dissolution or liquidation must be approved by holders of at
least a majority of the outstanding shares of our common stock. In addition,
under the MGCL, particular business combinations, including a merger,
consolidation, share exchange or, in some circumstances, an asset transfer or
issuance or reclassification of equity securities, between a Maryland
corporation and specified insiders or any stockholder who beneficially owns,
directly or indirectly, 10% or more of our stock, are prohibited for five years.
Thereafter, any business combination must be recommended by our board of
directors and approved by the affirmative vote of at least (a) 80% of the votes
entitled to be cast by holders of our outstanding voting stock, and
(b) two-thirds of the votes entitled to be cast by holders of our outstanding
voting stock, other than shares held by the parties with whom the business
combination is to be effected.
These provisions of the MGCL do not apply, however, to business combinations
that are approved or exempted by our board of directors prior to the time that
the insider or 10% stockholder becomes an insider or 10% stockholder. As
permitted by the MGCL, we have exempted any business combinations involving the
issuance of shares to Net Realty Holding Trust or Prudential. Accordingly, the
five-year prohibition and the super-majority vote requirement will not apply to
any business combinations between Net Realty Holding Trust or Prudential and us.
CONTROL SHARE ACQUISITION
With certain exceptions, the MGCL provides that "Control Shares" of a
Maryland corporation acquired in a control share acquisition have no voting
rights except to the extent approved by a vote of two-thirds of the votes
entitled to be cast on the matter, excluding shares owned by the acquiring
person or by our officers or directors who are our employees, and may be
redeemed by us. "Control Shares" are voting shares which, if aggregated with all
other shares owned or voted by the acquiror, would entitle the acquiror to
exercise voting power in electing directors within one of the following ranges
of voting power: (i) one-tenth or more but less than one-third, (ii) one-third
or more but less than a majority, or (iii) a majority or more of all voting
power. Control shares do not include shares the acquiror is then entitled to
vote as a result of having previously obtained stockholder approval. A control
share acquisition means, subject to certain exceptions, the acquisition by any
person of ownership or voting power of issued and outstanding control shares. A
person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions, including an undertaking to pay expenses,
may compel our board to call a special meeting of stockholders to be held within
50 days of demand to consider the voting rights of the "Control Shares" in
question. If no request for a meeting is made, we may present the question at
any stockholders' meeting.
Our bylaws contain a provision exempting any and all acquisitions of our
capital stock from the control shares provision of Maryland law. Nothing
prevents our board from amending or repealing this provision in the future,
except that we have agreed with Net Realty Holding Trust and Prudential that
they will be exempted from the operation of the control shares provision of the
MGCL in the event that our board amends or repeals this provision in the future.
RECENT MARYLAND LEGISLATION
In 1999, Maryland enacted legislation which allows publicly held Maryland
corporations to elect to be governed by all or any part of Maryland law
provisions relating to extraordinary actions and unsolicited takeovers. The
election to be governed by one or more of these provisions can be made by a
Maryland corporation in its articles or bylaws or by resolution adopted by its
board of directors so long as the corporation has at least three directors who,
at the time of electing to be subject to the provisions, are not:
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- officers or employees of the corporation;
- persons seeking to acquire control of the corporation;
- directors, officers, affiliates or associates of any person seeking to
acquire control; or
- nominated or designated as directors by a person seeking to acquire
control.
Articles supplementary must be filed with the Maryland State Department of
Assessments and Taxation if a Maryland corporation elects to be subject to any
or all of the provisions by board resolution or bylaw amendment. Stockholder
approval is not required for the filing of articles supplementary.
The Maryland legislation provides that a corporation can elect to be subject
to all or any portion of the following provisions, notwithstanding any contrary
provisions contained in that corporation's existing charter documents:
- CLASSIFIED BOARD: The corporation may divide its board into three classes
which, to the extent possible, will have the same number of directors, the
terms of which will, after their initial terms, expire at the third annual
meeting of stockholders after the election of each class;
- TWO-THIRDS STOCKHOLDER VOTE TO REMOVE DIRECTORS ONLY FOR CAUSE: The
stockholders may remove any director only by the affirmative vote of at
least two-thirds of all votes entitled to be cast by the stockholders
generally in the election of directors, but a director on a classified
board may not be removed without cause;
- SIZE OF BOARD FIXED BY VOTE OF BOARD: The number of directors will be
fixed only by resolution of the board;
- BOARD VACANCIES FILLED BY THE BOARD FOR THE REMAINING TERM: Vacancies that
result from an increase in the size of the board, or the death,
resignation, or removal of a director, may be filled only by the
affirmative vote of a majority of the remaining directors even if they do
not constitute a quorum. Directors elected to fill vacancies will hold
office for the remainder of the full term of the class of directors in
which the vacancy occurred, as opposed to until the next annual meeting of
stockholders, and until a successor is elected and qualifies; and
- STOCKHOLDER CALLS OF SPECIAL MEETINGS: Special meetings of stockholders
may be called by the secretary of the corporation only upon the written
request of stockholders entitled to cast at least a majority of all votes
entitled to be cast at the meeting and only in accordance with procedures
set out in the MGCL.
We have not elected to be governed by the specific provisions of the 1999
legislation. However, our articles and/or bylaws, as applicable, already provide
for a classified board, that the number of directors is to be determined by a
resolution of the board, subject to a minimum number, and that our secretary
must call a special meeting of stockholders only upon the written request of the
holders of a majority of our outstanding securities entitled to vote. In
addition, we can elect to be governed by any or all of the provisions of the
Maryland legislation at any time in the future.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock will be LaSalle
National Bank.
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STRUCTURE AND DESCRIPTION OF OPERATING PARTNERSHIPS
We conduct our business primarily through our two operating partnerships,
the Heritage OP and the Bradley OP. From our formation in July 1999 until we
completed the Bradley acquisition, we operated our business through a structure
commonly referred to as an "umbrella partnership" REIT or "UPREIT." This
structure generally consists of a corporate REIT with shares of capital stock
and a limited partnership with both entities coordinating to operate a single
real estate business. The limited partnership typically owns all or
substantially all of the real estate properties and the REIT controls the
partnership's business activities as the sole general partner. In our case, we
are the sole general partner of the Heritage OP and hold directly and indirectly
through one of our subsidiaries, all of the partnership interests in the
Heritage OP. Until September 2000, the Heritage OP owned all of our real estate
properties, either directly or indirectly through other subsidiaries.
As described elsewhere in this prospectus, in September 2000, we acquired
Bradley and one of our subsidiaries became the sole general partner of the
Bradley OP. As is the case with our structure, Bradley was also organized and
operated as an "UPREIT." Bradley, a corporate REIT, was the general partner of,
and owned approximately 83% of the partnership interests in, the Bradley OP. The
Bradley OP owned either directly or indirectly through other subsidiaries,
substantially all of the real estate properties in Bradley's real estate
portfolio. Prior to our acquisition of Bradley, the Bradley OP had issued units
of common and preferred limited partnership interests to unaffiliated third
parties in connection with acquisitions by Bradley of properties and other real
estate companies and other financing transactions.
As a result of ambiguities in the technical tax rules arising from our
status as a pension-held REIT, we have elected not to merge or combine the
Heritage OP and the Bradley OP as a legal matter. See "Material United States
Federal Income Tax Considerations--Taxation of Tax-Exempt U.S. Stockholders"
beginning on page 142. However, we intend to seek a ruling from the Internal
Revenue Service that would, if granted, allow us to merge or otherwise combine
the Heritage OP and the Bradley OP. If we obtain this ruling and any other
consents that may be required, we may merge or otherwise combine our two
operating partnerships into one single operating partnership in the future. We
cannot, however, assure you that the IRS will grant us this ruling.
Although we have integrated the operations of the Bradley OP with our other
operations, essentially, we are operating two distinct umbrella partnerships. We
continue to act as the sole general partner and hold of all of the partnership
interests in the Heritage OP. Through our subsidiary, we are also the sole
general partner of the Bradley OP and manage and conduct the business of the
Bradley OP and its portfolio of real estate properties in accordance with the
Bradley OP limited partnership agreement. After this offering, we will continue
to conduct substantially all of our business and will hold substantially all of
our interests in our properties through either the Heritage OP or the Bradley
OP, either directly or indirectly through partnerships or limited liability
companies holding title to our properties. As the sole general partner (directly
or indirectly) of each of our operating partnerships, we have the exclusive
power to manage and conduct the business of these partnerships, subject to
customary exceptions.
The following summary of the Heritage OP and Bradley OP partnership
agreements describes the material provisions of these partnership agreements.
This summary is qualified in its entirety by reference to the limited
partnership agreements, which are filed as exhibits to the registration
statement of which this prospectus constitutes a part.
HERITAGE OP PARTNERSHIP AGREEMENT
MANAGEMENT
The Heritage OP was organized as a Delaware limited partnership on July 1,
1999. We are the sole general partner of, and currently hold all of the
interests in, the Heritage OP, although we may in
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the future issue interests in the Heritage OP to third parties. One of our
subsidiaries holds limited partnership units in the Heritage OP.
Pursuant to the Heritage OP partnership agreement, we, as the sole general
partner of the Heritage OP, generally have full, exclusive and complete
responsibility and discretion in the management, operation and control of the
Heritage OP, including the ability to cause the Heritage OP to enter into
certain major transactions, including acquisitions, developments and
dispositions of properties and refinancings of existing indebtedness. We may not
be removed as general partner of the Heritage OP, with or without cause. We are
not permitted to invest in any entity which would cause our share of the
Heritage OP's assets or gross income not to satisfy the REIT provisions of the
Internal Revenue Code. In addition, we are not permitted to invest in any entity
that could generate net income derived from a prohibited transaction within the
meaning of Section 857(b)(6)(i) of the Internal Revenue Code. See "Material
United States Federal Income Tax Considerations" beginning on page 132. We have
also agreed to use our best efforts to ensure that the Heritage OP qualifies as
a "real estate holding company" as defined in the Internal Revenue Code. See
"ERISA Considerations" beginning on page 147.
The limited partners of the Heritage OP have agreed that in the event of any
conflict in the fiduciary duties owed by us to our stockholders and by us, as
general partner of the Heritage OP, to those limited partners, we may act in the
best interests of our stockholders without violating our fiduciary duties to
those limited partners or being liable for any resulting breach of our duties to
the limited partners.
ADDITIONAL CAPITAL CONTRIBUTIONS
The Heritage OP partnership agreement provides that we may make additional
capital contributions to the Heritage OP, in exchange for additional partnership
units, additional property or other assets, as we determine in good faith to be
desirable to further the purposes or business of the Heritage OP. If we borrow
funds from a financial institution or other lender and contribute those funds to
the Heritage OP as a capital contribution, the Heritage OP will receive those
funds subject to that indebtedness or will assume our obligations with respect
to that indebtedness. We may raise additional funds pursuant to the issuance of
shares of stock and contribute the net amount of cash so raised as an additional
capital contribution to the Heritage OP. If we contribute additional capital to
the Heritage OP, our partnership units in the Heritage OP will be increased on a
proportionate basis. Conversely, the partnership units of the limited partners
will be decreased on a proportionate basis in the event of additional capital
contributions by us, unless limited partners contribute their pro rata share of
the required funds. Limited partners have no preemptive right to make additional
capital contributions. In addition, we may contribute the stock, assets or other
consideration we receive in connection with any merger, consolidation or other
acquisition to the capital of the Heritage OP in exchange for additional
partnership units in the Heritage OP. Under the Heritage OP partnership
agreement, we are required to contribute the proceeds from an offering of shares
of our stock, if and to the extent that, at the time of the issuance, all
required distributions under the Heritage OP partnership agreement have not been
made.
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TRANSFER OF THE GENERAL PARTNER'S INTEREST
The Heritage OP partnership agreement provides that we may not transfer our
interest as a general partner except--
- in connection with a merger in which we are the entity surviving the
merger;
- in connection with a transfer of any of our partnership units to another
partner; or
- with the consent of the holders of a majority of the partnership units in
the Heritage OP.
RIGHTS OF LIMITED PARTNERS. No limited partner may take part in the
operation, management or control of the business of the Heritage OP by virtue of
being a holder of limited partnership units.
TRANSFER OF LIMITED PARTNERSHIP UNITS
The Heritage OP partnership agreement prohibits the sale, assignment,
transfer, pledge or disposition of all or any portion of the limited partnership
units without our consent, which we may give or withhold in our sole discretion.
However, a limited partner may transfer its units to an affiliate of that
limited partner and may pledge its units to an institutional lender, in each
case, without our consent. In addition, the Heritage OP partnership agreement
contains other restrictions on transfer if, among other things, that transfer
would cause us to fail to comply with the REIT rules under the Internal Revenue
Code, if that transfer would cause us to become a publicly-traded partnership
under the Internal Revenue Code or if that transfer would cause us to become a
"party in interest" or a disqualified person as to any employee benefit plan
under ERISA.
REDEMPTION
Under the Heritage OP partnership agreement, we have granted to each limited
partner (other than our subsidiary) the right to redeem their limited
partnership units. This right may be exercised at the election of that limited
partner by giving us written notice, subject to some limitations, at any time.
The purchase price for the limited partnership units to be redeemed will equal
the fair market value of our common stock. The purchase price for the limited
partnership units may be paid, at our option, in cash, or by the issuance by us
of a number of shares of our common stock equal to the number of limited
partnership units with respect to which the rights are being exercised.
ISSUANCE OF ADDITIONAL LIMITED PARTNERSHIP UNITS
We are allowed under the Heritage OP partnership agreement to issue
additional units in the Heritage OP to new or existing limited partners as we
determine to be in the best commercial interest of the Heritage OP. As of the
date of this offering, we have not caused the Heritage OP to issue any
additional units in the Heritage OP to any other person or entity other than to
us and one of our subsidiaries.
AMENDMENTS
Generally, we, as the general partner of the Heritage OP, may amend the
Heritage OP partnership agreement without the consent of any limited partner.
However, any amendment which alters or changes the distribution or redemption
rights of a limited partner (other than a change to reflect the seniority of any
distribution or liquidation rights of any preferred units issued in accordance
with the Heritage OP partnership agreement) requires the consent of holders of a
majority of the limited partnership units in the Heritage OP.
In addition, we, as the general partner of the Heritage OP, may amend the
Heritage OP partnership agreement without the consent of any limited partner in
the event that--
- we or any of our subsidiaries engages in any merger, consolidation or
other combination with any other person in which our securities are being
issued, acquired, converted or exchanged;
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- we engage in the sale of all or substantially all of our assets; or
- we engage in the reclassification, recapitalization or change in the
outstanding shares of our stock which results in the holders of our stock
receiving cash, securities or any other property
as long as--
- in connection with any of those transactions, the limited partners are
offered the opportunity to receive for each unit held by them an amount of
cash, securities or other property equal to the amount of cash, securities
or other property, if any, paid to a holder of one share of our common
stock in connection with the transaction; or
we are the acquiror in the transaction and the holders of our stock are not
receiving any cash, securities or other property in connection with the
transaction.
OPERATIONS
The Heritage OP partnership agreement requires that the Heritage OP be
operated in a manner that will enable us to satisfy the requirements for being
classified as a REIT for federal income tax purposes.
DISTRIBUTIONS
The Heritage OP partnership agreement provides that the net operating cash
flow of the Heritage OP will be distributed from time to time as determined by
us (but not less frequently than quarterly) pro rata in accordance with the
partners' respective percentage interests.
EXCULPATION AND INDEMNIFICATION OF THE GENERAL PARTNER
The Heritage OP partnership agreement provides that we and our directors,
officers and other persons acting on our behalf will not be liable to the
Heritage OP or to any of its partners for any acts or omissions performed or
omitted to be performed by us or them as long as our conduct was taken in good
faith and in the belief that the conduct was in, or not opposed to, the best
interests of the Heritage OP and as long as we are not guilty of fraud, willful
misconduct or gross negligence. In addition, the Heritage OP will indemnify and
hold us and our directors, officers and any other person acting on our behalf
harmless to the same extent those persons would be indemnified by us pursuant to
our articles. However, no partner of the Heritage OP will have any personal
liability with respect to this indemnification obligation as this
indemnification obligation will be satisfied solely out of the assets of the
Heritage OP.
TAX MATTERS
We are the tax matters partner of the Heritage OP and, as such, we have the
authority to make tax elections under the Internal Revenue Code on behalf of the
Heritage OP. The net income or net loss of the Heritage OP will generally be
allocated to us and the limited partners in accordance with our respective
percentage interests in the Heritage OP, subject to compliance with the
provisions of the Internal Revenue Code.
TERM
The Heritage OP will continue in full force and effect until December 31,
2099 or until sooner dissolved pursuant to the terms of the Heritage OP
partnership agreement.
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BRADLEY OP PARTNERSHIP AGREEMENT
MANAGEMENT
The Bradley OP was organized as a Delaware limited partnership on
September 2, 1993. In connection with our acquisition of Bradley Real
Estate, Inc., the general partner of the Bradley OP, Heritage-Austen
Acquisition, Inc., one of our subsidiaries, became the sole general partner of
the Bradley OP. We own, either directly or indirectly, 98% of the economic
interests in the Bradley OP.
Pursuant to the Bradley OP partnership agreement, Heritage-Austen
Acquisition, Inc., as the sole general partner of the Bradley OP, generally has
full, exclusive and complete responsibility and discretion in the management,
operation and control of the Bradley OP, including the ability to cause the
Bradley OP to enter into certain major transactions, including acquisitions,
developments and dispositions of properties and refinancings of existing
indebtedness. Our subsidiary may not be removed as general partner of the
Bradley OP except with cause.
TRANSFER OF THE GENERAL PARTNER'S INTEREST
The Bradley OP partnership agreement provides that our subsidiary may, in
its sole and absolute discretion, transfer or dispose of its general partnership
units in the Bradley OP.
RIGHTS OF LIMITED PARTNERS
No limited partner may take part in the operation, management or control of
the business of the Bradley OP by virtue of being a holder of a limited
partnership interest.
TRANSFER OF LIMITED PARTNERSHIP UNITS
The Bradley OP partnership agreement prohibits the sale, assignment,
transfer, pledge or disposition of all or any portion of the limited partnership
units without our subsidiary's written consent, which consent may be withheld in
its sole and absolute discretion. However, a limited partner may transfer its
units to a family member for estate planning purposes and may pledge its units
to secure the repayment of a loan as long as the limited partner has first
obtained the written agreement of the pledgee to exercise its redemption rights
under the Bradley OP partnership agreement (discussed below) immediately upon
taking any action with respect to those pledged limited partnership units and
has submitted a copy of that agreement and the pledge to our subsidiary. In
addition, the Bradley OP partnership agreement contains other restrictions on
transfer if, among other things, that transfer would cause us to fail to comply
with the REIT rules under the Internal Revenue Code, if that transfer would
cause us to become a publicly-traded partnership under the Internal Revenue Code
or if that transfer would cause us to become a "party in interest" or a
disqualified person as to any employee benefit plan under ERISA.
REDEMPTION
Under the Bradley OP partnership agreement, each limited partner (other than
the general partner) has the right, subject to some limitations, to require the
Bradley OP to redeem all or a portion of the common limited partnership units
held by that partner for cash, or, at our option, we may elect to purchase the
limited partnership units presented for redemption for an equivalent number of
shares of our common stock. Each limited partnership unit that is purchased by
us for shares of our common stock will upon that purchase be converted to a
general partnership unit.
ISSUANCE OF ADDITIONAL LIMITED PARTNERSHIP UNITS
Our subsidiary is allowed under the Bradley OP partnership agreement to
issue additional units in the Bradley OP to new or existing limited partners as
our subsidiary determines in its discretion as the sole general partner of the
Bradley OP.
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AMENDMENTS
Generally, our subsidiary, as the general partner of the Bradley OP, may
amend the Bradley OP partnership agreement without the consent of any limited
partner. However, any amendment which alters or changes the distribution or
redemption rights of a limited partner (other than a change to reflect the
seniority of any distribution or liquidation rights of any preferred units
issued in accordance with the Bradley OP partnership agreement) requires the
consent of holders of a majority of the limited partnership units in the Bradley
OP.
In addition, our subsidiary, as the general partner of the Bradley OP, may
amend the Bradley OP partnership agreement without the consent of any limited
partner in the event that--
- our subsidiary or any of its subsidiaries engages in any merger,
consolidation or other combination with any other person in which the
securities of our subsidiary are being issued, acquired, converted, or
exchanged;
- our subsidiary engages in the sale of all or substantially all of its
assets; or
- our subsidiary engages in the reclassification, recapitalization or change
in the outstanding shares of its stock which results in the holders of its
stock receiving cash, securities or any other property
as long as--
- in connection with any of those transactions, the limited partners of the
Bradley OP are offered the opportunity to receive for each unit held by
them an amount of cash, securities or other property equal to the product
of a conversion factor described in the Bradley OP partnership agreement
and the amount of cash, securities or other property, if any, paid to a
holder of one share of its common stock in connection with the
transaction; or
- our subsidiary is the acquiror in the transaction and the holders of its
stock are not receiving any cash, securities or other property in
connection with the transaction.
OPERATIONS
The Bradley OP partnership agreement requires that the Bradley OP be
operated in a manner that will enable us to satisfy the requirements for being
classified as a REIT for federal income tax purposes.
DISTRIBUTIONS
The Bradley OP partnership agreement provides that the net operating cash
flow of the Bradley OP will be distributed from time to time as determined by
our subsidiary (but not less frequently than quarterly) pro rata in accordance
with the partners' respective percentage interests and priorities. In the
Bradley OP partnership agreement, for the three year period following our
acquisition of Bradley, which ends September 2003, we are required to pay to the
holders of common limited partnership units (including us) a quarterly
distribution of at least $0.38 per unit, subject to the rights of the holders of
preferred units, as described below. As of December 31, 2001, the holders of
26,199 of these common limited partnership units were entitled to this
distribution. Under the Bradley OP partnership agreement, we are required to
contribute the proceeds from an offering of shares of our common stock, if and
to the extent that, at the time of the issuance, all required distributions
under the Bradley OP partnership agreement have not been made.
EXCULPATION AND INDEMNIFICATION OF THE GENERAL PARTNER
The Bradley OP partnership agreement provides that our subsidiary, as
general partner of the Bradley OP, and its directors, officers, and other
persons acting on its behalf will not be liable to the Bradley OP or to any of
its partners for any acts or omissions performed or omitted to be performed
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by it or them as long as its or their conduct was taken in good faith and in the
belief that the conduct was in, or not opposed to, the best interests of the
Bradley OP and does not constitute actual fraud, gross negligence or
deliberately dishonest conduct. In addition, our subsidiary will not be
responsible for any misconduct or negligence on the part of its agents. Our
subsidiary may consult with legal counsel, accountants, appraisers, management
consultants, investment bankers and other consultants and advisors, and any
action it takes or omits to take in reliance upon the opinion of those persons,
as to matters that it reasonably believes to be within their professional or
expert competence, will be conclusively presumed to have been done or omitted in
good faith and in accordance with that opinion.
In addition, the Bradley OP will indemnify and hold our subsidiary and its
directors, officers and any other person acting on its behalf harmless from any
liabilities incurred by any of them by reason of any performed on the Bradley
OP's behalf except where the action constitutes actual fraud, gross negligence
or deliberately dishonest conduct. However, no partner of the Bradley OP will
have any personal liability with respect to this indemnification obligation as
this indemnification obligation will be satisfied solely out of the assets of
the Bradley OP.
TAX MATTERS
Our subsidiary is the tax matters partner of the Bradley OP and, as such,
has the sole discretion to make tax elections under the Internal Revenue Code on
behalf of the Bradley OP.
TERM
The Bradley OP will continue until December 31, 2050 or until sooner
dissolved pursuant to the terms of the Bradley OP partnership agreement.
PREFERRED UNITS
As permitted under the Bradley OP partnership agreement, prior to our
acquisition of Bradley, the Bradley OP issued three series of preferred units of
limited partnership units in the Bradley OP. As provided in the Bradley OP
partnership agreement, upon our acquisition of Bradley, all of the 8.4%
Series A Convertible Preferred Units were cancelled. The 8.875% Series B
Cumulative Redeemable Perpetual Preferred Units, or the Series B Units, and the
8.875% Series C Cumulative Redeemable Perpetual Preferred Units, or the
Series C Units, are held by investors unaffiliated with us or any of our
affiliates. The rights of the holders of Series B Units and Series C Units are
subject to the terms and conditions of the Bradley OP partnership agreement, as
described above, as well as the additional terms and conditions summarized
below.
TERMS OF SERIES B UNITS
- NUMBER OF UNITS--2,000,000
- RANK--With respect to payment of distributions and amounts upon
liquidation, the Series B Units rank senior to the common limited
partnership units and general partnership units and on a parity with the
Series C Units.
- DISTRIBUTIONS--Holders of the Series B Units are entitled to receive
quarterly distributions at an annual rate of 8.875% per annum on the
$25.00 original capital contribution per unit.
- LIQUIDATION--Upon any voluntary or involuntary liquidation, dissolution or
winding up of the Bradley OP, the Series B Units will be entitled to a
preferential distribution equal to the capital account attributable to
that unit (initially $25.00 per unit), plus an amount equal to all
accumulated, accrued and unpaid distributions.
- REDEMPTION--On and after February 23, 2004, the Bradley OP may redeem the
Series B Units at its option, in whole or in part, at any time for cash at
a redemption price equal to the redeemed holder's capital account
(initially $25.00 per unit), plus an amount equal to all accumulated,
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accrued and unpaid distributions or dividends on the unit to the date of
redemption. In lieu of cash, the Bradley OP may elect to deliver shares of
our 8.875% Series B Cumulative Redeemable Perpetual Preferred Stock, or
Series B Preferred Stock, on a one-for-one basis, plus an amount equal to
all accumulated, accrued and unpaid distributions or dividends on the
units to the date of redemption. For a discussion of the terms of this
class of our stock, see "Description of Capital Stock--Preferred
Stock--Terms of Series B Preferred Stock" beginning on page 113 of this
prospectus. The Series B Units do not include any mandatory redemption or
sinking fund provisions.
- EXCHANGE RIGHTS--Holders of the Series B Units have the right to exchange
their Series B Units for shares of Series B Preferred Stock on a
one-for-one basis. The exchange right is exercisable, in minimum amounts
of 500,000 units, at the option of the holders of the Series B Units
(i) at any time on or after February 23, 2009, (ii) at any time if full
quarterly distributions have not been made for six quarters, whether or
not consecutive, or (iii) upon the occurrence of specified events related
to the federal income tax treatment of the Bradley OP or the Series B
Units for federal income tax purposes.
- CONVERSION RIGHTS--The Series B Units are not convertible into or
exchangeable for any other securities, except for Series B Preferred Stock
as described above.
- VOTING--Except as otherwise required by law, holders of the Series B Units
have only those voting rights set forth in the following sentence. So long
as any Series B Units remain outstanding, the Bradley OP may not, without
the affirmative vote of the holders of at least two-thirds of the
Series B Units outstanding,
(i) authorize or create, or increase the authorized or issued amount of,
any class or series of Bradley OP units ranking senior to the
Series B Units,
(ii) authorize or create, or increase the authorized or issued amount
of, any class or series of Bradley OP units ranking on parity with
the Series B Units for the purposes of issuing those units to our
subsidiary or any of its affiliates, unless those units are issued
under terms no more favorable to our subsidiary than those that
would be offered in an arm's length transaction to an unrelated
party or those units are issued to our subsidiary, in its capacity
as general partner, in connection with the issuance of a
corresponding class or series of preferred stock to parties not
affiliated with us, or
(iii) either (a) consolidate, merge with or into, or transfer all or
substantially all of its assets to another party, or (b) amend,
alter or repeal provisions of the Bradley OP partnership agreement
or the terms of the Series B Units,
in each case in a transaction or manner that would materially and
adversely affect any right, preference, privilege or voting power of the
Series B Units or holders of those units.
TERMS OF SERIES C UNITS
- NUMBER OF UNITS--1,000,000
- RANK--With respect to payment of distributions and amounts upon
liquidation, the Series C Units rank senior to the common limited
partnership units and general partnership units and on a parity with the
Series B Units.
- DISTRIBUTIONS--Holders of the Series C Units are entitled to receive
quarterly distributions at an annual rate of 8.875% per annum on the
$25.00 original capital contribution per unit.
- LIQUIDATION--Upon any voluntary or involuntary liquidation, dissolution or
winding up of the Bradley OP, the Series C Units will be entitled to a
preferential distribution equal to the capital
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account attributable to that unit (initially $25.00 per unit), plus an
amount equal to all accumulated, accrued and unpaid distributions.
- REDEMPTION--On and after September 7, 2004, the Bradley OP may redeem the
Series C Units at its option, in whole or in part, at any time for cash at
a redemption price equal to the redeemed holder's capital account
(initially $25.00 per unit), plus an amount equal to all accumulated,
accrued and unpaid distributions or dividends on the unit to the date of
redemption. In lieu of cash, the Bradley OP may elect to deliver shares of
our 8.875% Series C Cumulative Redeemable Perpetual Preferred Stock, or
Series C Preferred Stock, on a one-for-one basis, plus an amount equal to
all accumulated, accrued and unpaid distributions or dividends on the
units to the date of redemption. For a discussion of the terms of this
class of our stock, see "Description of Capital Stock--Preferred
Stock--Terms of Series C Preferred Stock" beginning on page 114 of this
prospectus. The Series C Units do not include any mandatory redemption or
sinking fund provisions.
- EXCHANGE RIGHTS--Holders of the Series C Units have the right to exchange
their Series C Units for shares of Series C Preferred Stock on a
one-for-one basis. The exchange right is exercisable, in minimum amounts
of 500,000 units, at the option of the holders of the Series C Units
(i) at any time on or after September 7, 2009, (ii) at any time if full
quarterly distributions have not been made for six quarters, whether or
not consecutive, or (iii) upon the occurrence of certain specified events
related to the federal income tax treatment of the Bradley OP or the
Series C Units for federal income tax purposes.
- CONVERSION RIGHTS--The Series C Units are not convertible into or
exchangeable for any other securities, except for Series C Preferred Stock
as described above.
- VOTING--Except as otherwise required by law, holders of the Series C Units
have only those voting rights set forth in the following sentence. So long
as any Series C Units remain outstanding, the Bradley OP may not, without
the affirmative vote of the holders of at least two-thirds of the
Series C Units outstanding,
(i) authorize or create, or increase the authorized or issued amount of,
any class or series of Bradley OP units ranking senior to the
Series C Units,
(ii) authorize or create, or increase the authorized or issued amount
of, any class or series of Bradley OP units ranking on parity with
the Series C Units for the purposes of issuing those units to our
subsidiary or any of its affiliates, unless those units are issued
under terms no more favorable to our subsidiary than those that
would be offered in an arm's length transaction to an unrelated
party or those units are issued to our subsidiary, in its capacity
as general partner, in connection with the issuance of a
corresponding class or series of preferred stock to parties not
affiliated with us, or
(iii) either (a) consolidate, merge with or into, or transfer all or
substantially all of its assets to another party, or (b) amend,
alter or repeal provisions of the Bradley OP partnership agreement
or the terms of the Series C Units,
in each case, in a transaction or manner that would materially and
adversely affect any right, preference, privilege or voting power of the
Series C Units or holders of those units.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have outstanding 39,268,652 shares
of common stock, assuming no exercise of outstanding options to purchase shares
of our common stock under our equity incentive plan.
Of these shares, the 16,000,000 shares sold in the offering will be freely
transferable without restriction or further registration under the Securities
Act, except for any shares held by our "affiliates," as that term is defined by
Rule 144 under the Securities Act. The remaining 23,268,652 shares and any
shares purchased by affiliates in the offering, will be "restricted shares" as
defined in Rule 144.
In addition, Net Realty Holding Trust, Prudential, each of our senior
officers and each of our directors who beneficially own shares of our common
stock as of the date of this prospectus have agreed under written "lock-up"
agreements not to sell any shares of common stock for 180 days after the date of
this prospectus without the prior written consent of Merrill Lynch. See
"Underwriting" beginning on page 149.
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the offering, a person who owns shares that were purchased from us or any
affiliate of ours at least one year previously, including a person who may be
deemed an affiliate, is entitled to sell within any three-month period a number
of shares that does not exceed the greater of:
- 1% of the then outstanding shares of common stock; or
- the average weekly trading volume of the common stock on the NYSE during
the four calendar weeks preceding the date on which notice of the sale is
filed with the SEC.
Sales under Rule 144 are also subject to manner of sale provisions, notice
requirements and the availability of current public information about us.
Any person who is not deemed to have been our affiliate at any time during
the 90 days preceding a sale, and who owns shares within the definition of
"restricted securities" under Rule 144 that were purchased from us or any of our
affiliates at least two years previously, would be entitled to sell those shares
under Rule 144(k) without regard to the volume limitations, manner of sale
provisions, public information requirements or notice requirements.
RULE 701
Rule 701 may be relied upon with respect to the resale of securities
originally purchased from us by our employees, directors or officers prior to
the offering. In addition, the SEC has indicated that Rule 701 will apply to the
typical stock options granted by an issuer before it becomes a public company,
along with the shares acquired upon exercise of those options, including
exercises after the date of this offering. Securities issued in reliance on
Rule 701 are restricted securities and, subject to the "lock-up" agreements
described above, beginning 90 days after the date of this prospectus, may be
sold by:
- persons other than affiliates, in ordinary brokerage transactions and
- by affiliates under Rule 144 without compliance with the one-year holding
requirement.
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SALES OF RESTRICTED SHARES
As a result of Rules 144 and 701, beginning 90 days after the closing of the
offering, we expect that:
- 2,400 shares of common stock will be eligible for resale without
restriction under Rule 144(k);
- upon the expiration of the lock-up agreements 180 days after the offering,
an additional 23,157,687 shares of common stock, including 23,155,197
shares of common stock held by our affiliates, will become eligible for
sale under Rule 144, subject to the volume and other resale restrictions
of that rule; and
- 108,565 shares of common stock will be eligible for sale under Rule 144
subject to the volume and other resale restrictions of that rule,
beginning in January 2003.
We have agreed not to offer, sell or otherwise dispose of any shares of
common stock or any securities convertible into or exercisable or exchangeable
for common stock or any rights to acquire common stock for a period of 180 days
after the date of this prospectus, without the prior written consent of the
representative of the Underwriters, subject to specific limited exceptions. See
"Underwriting" beginning on page 149.
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MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following is a general discussion of material United States federal
income tax considerations relevant to investors in our common stock. This
discussion is based upon the Internal Revenue Code of 1986, as amended, or the
Code, the Treasury Regulations promulgated under the Code, judicial decisions,
and administrative rulings of the Internal Revenue Service, or the IRS, now in
effect, all of which are subject to change or different interpretations,
possibly with retroactive effect. This summary does not purport to be a complete
analysis of all the potential tax considerations relating to our qualification
and taxation as a REIT, or to the acquisition, ownership, and disposition of our
common stock. In particular, this discussion does not address any aspect of
state, local or non-U.S. tax law, or any aspect of United States non-income tax
law.
Except as specifically discussed below with respect to non-U.S. Stockholders
this summary applies only to U.S. Stockholders who hold our common stock as a
"capital asset" (within the meaning of Section 1221 of the Code). For purposes
of this summary, a U.S. Stockholder is:
- a citizen or individual resident (as defined in Section 7701(b) of the
Code) of the United States;
- a corporation (including any entity treated as a corporation for United
States federal income tax purposes) formed under the laws of the United
States or any political subdivision of the United States;
- an estate the income of which is subject to United States federal income
taxation regardless of its source; or
- a trust if a United States court is able to exercise primary supervision
over the administration of that trust and if one or more United States
persons has the authority to control all substantial decisions with
respect to that trust.
Persons other than U.S. Stockholders, referred to below as Non-U.S.
Stockholders, are subject to special United States federal income tax
considerations, some of which are discussed below.
This discussion does not address all aspects of United States federal income
taxation that may be relevant to a particular investor in light of that
investor's individual circumstances. In addition, this discussion does not
address the federal income tax considerations applicable to investors that may
be subject to special tax rules, such as banks, insurance companies, regulated
investment companies, REITs, dealers in securities, traders in securities that
elect to use a mark-to-market method of accounting, persons that have a
functional currency other than the United States dollar, persons holding our
common stock in a tax deferred or tax advantaged account, persons who are
partners, shareholders or beneficiaries of an entity that holds our common
stock, persons who are former United States citizens or long-term residents
subject to taxation as expatriates, persons who acquire our common stock as
compensation for the performance of services, persons that are subject to the
alternative minimum tax, persons holding our common stock as part of a hedging
transaction, a straddle or a conversion transaction, persons having entered into
a "constructive ownership transaction" (as defined in the Code) with respect to
our common stock, persons deemed to sell our common stock under the constructive
sale provisions of the Code, Non-U.S. Stockholders (except to the extent
specifically described below), and tax-exempt organizations (except to the
extent specifically described below).
We have not sought, nor will we seek, any ruling from the IRS (other than
the ruling described under the caption "--Taxation of Tax-Exempt U.S.
Stockholders", below) with respect to the statements made and the conclusions
reached in the following summary. Accordingly, there can be no assurance that
the IRS will not challenge those statements and conclusions or that a court will
not sustain that challenge.
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Prospective investors considering the purchase of our common stock should
consult their tax advisors as to the consequences of the purchase, ownership and
disposition of our common stock, as to the application of the United States
federal income tax laws to their particular situations, and as to any tax
consequences arising under United States non-income tax laws, under the laws of
any state, local, or non-U.S. taxing jurisdiction, and under any applicable tax
treaty.
TAXATION OF THE COMPANY
GENERAL
We have elected to be treated as a REIT under Sections 856 through 860 of
the Code, commencing with our initial taxable year, which ended December 31,
1999. We believe that we have been organized and have operated in a manner so as
to qualify for treatment as a REIT under the Code, and we intend to remain
organized and to continue to operate in such a manner. No assurance, however,
can be given that we have operated, or that we will continue to operate, in a
manner so as to qualify or remain qualified as a REIT. Qualification and
treatment as a REIT depend on our ability to meet, on a continuing basis,
various tests relating to our distribution rates, diversity of stock ownership
and other qualification requirements imposed on REITs, some of which are
summarized below. Given the highly complex nature of the rules governing REITs,
the ongoing importance of factual determinations and the possibility of future
changes in our circumstances, no assurance can be given that we have so
qualified, or that we will so qualify, for any particular year. See "--Failure
to Qualify", below.
So long as we qualify for treatment as a REIT, we generally will not be
subject to federal income tax on our net income that we distribute currently to
our stockholders. This treatment substantially eliminates the "double taxation"
(taxation at both the corporate and stockholder levels) that generally results
from an investment in a corporation by a U.S. Stockholder. If we do not qualify
as a REIT, we would be taxed at federal income tax rates applicable to
corporations on all of our income, whether or not distributed to our
stockholders. Even if we qualify as a REIT, we may be subject to some federal
income or excise taxes:
- we will be taxed at regular corporate rates on any undistributed "real
estate investment trust taxable income," including our undistributed net
capital gains;
- under some circumstances, we may be subject to the "alternative minimum
tax" on our items of tax preference, if any;
- if we have (A) net income from the sale or other disposition of
"foreclosure property" (generally, property that we acquire by reason of a
foreclosure or otherwise after a default on a loan secured by the property
or on a lease of the property) that is held primarily for sale to
customers in the ordinary course of business, or (B) other nonqualifying
net income from foreclosure property, we will be subject to tax at the
highest corporate rate on that income;
- if we have net income from "prohibited transactions" (which are, in
general, some sales or other dispositions of inventory or property, other
than foreclosure property, held primarily for sale to customers in the
ordinary course of business), that income will be subject to a 100% tax;
- if we should fail to satisfy the 75% gross income test or the 95% gross
income test for qualification as a REIT, both of which are discussed
below, and nonetheless maintain our qualification as a REIT because we
meet other requirements, we will be subject to a tax equal to the product
of the greater of (A) the amount by which we fail the 75% gross income
test, or (B) the amount by which 90% of our gross income for the taxable
year (excluding gross income from prohibited transactions) exceeds the
amount of our gross income for the taxable year that is qualifying income
for purposes of applying the 95% gross income test, multiplied by a
fraction intended to reflect our profitability;
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- if we should fail to distribute with respect to each calendar year at
least the sum of (A) 85% of our ordinary income (as defined in Code
section 4981) for that year, (B) 95% of our capital gain net income (as
defined in Code section 4981) for that year, and (C) any undistributed
taxable income from prior years, we would be subject to a 4% excise tax on
the excess of that required distribution over the amounts actually
distributed;
- if we acquire any asset from a C corporation (generally, a corporation
subject to full corporate-level tax) in a transaction in which the basis
of the asset in our hands is determined by reference to the basis of the
asset (or any other property) in the hands of the C corporation and we
subsequently recognize gain on the disposition of that asset during the
10-year period (the "Recognition Period") beginning on the date on which
we acquired the asset, then, unless the transferor makes certain
elections, the lesser of (A) the fair market value of the asset as of the
beginning of the Recognition Period over our basis in the asset as of the
beginning of the Recognition Period (the "Built-In Gain"), or (B) the
amount of gain we would otherwise recognize on the disposition will be
subject to tax at the highest regular corporate rate (the "Built-In Gain
Rule"); and
- we will be subject to a 100% tax equal to the amount, if any, of our
redetermined rents (generally, the amount of "rents from real property" we
receive from our tenants that would be treated under the Code as income of
our taxable REIT subsidiaries to clearly reflect the value of services
they render to those tenants), redetermined deductions (generally, the
amount by which the deductions of our taxable REIT subsidiaries are
reduced under the Code to appropriately reflect the sharing of deductible
expenses among us and our taxable REIT subsidiaries), and excess interest
(generally, the amount of interest deductions claimed by our taxable REIT
subsidiaries in respect of interest payments they make to us to the extent
those interest payments are in excess of a commercially reasonable rate).
GENERAL REQUIREMENTS FOR QUALIFICATION
The Code defines a REIT as a corporation, trust or association that
maintains in effect an election to be treated as a REIT and--
(i) is managed by one or more trustees or directors;
(ii) the beneficial ownership of which is evidenced by transferable shares,
or by transferable certificates of beneficial interest;
(iii) would be taxable as a domestic corporation but for Sections 856 through
859 of the Code;
(iv) is neither a financial institution nor an insurance company subject to
certain provisions of the Code;
(v) has the calendar year as its taxable year;
(vi) the beneficial ownership of which is held by 100 or more persons;
(vii) at all times during the last half of each taxable year not more than
50% (by value) of the outstanding stock of which is owned, directly or
indirectly, by five or fewer individuals (which term includes some
entities, such as qualified pension trusts described in Section 401(a)
of the Code), determined by applying various "look-through" rules (we
refer to this test, discussed in more detail below, as the Five or
Fewer Requirement); and
(viii) that meets various other tests, described below, regarding the nature
of its income and assets and the amounts of its distributions.
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The Code provides that each of the conditions described in (i) through (v), must
be met during the entire taxable year and that the condition described in
(vi) must be met during at least 335 days of a taxable year of 12 months, or
during a proportionate part of a taxable year of less than 12 months. The
conditions described in (vi) and (vii) do not apply during the first taxable
year for which an election is made to be taxed as a REIT (in our case, our
initial taxable year, which ended December 31, 1999). Since we elected to be
treated as a REIT for our initial taxable year, which ended December 31, 1999,
these conditions currently apply to us and will apply to us in the future.
The Five or Fewer Requirement referred to above is modified in the case of
some pension trusts, referred to below as qualified trusts, that own shares of a
REIT and are described in Section 401(a) of the Code and exempt from federal
income taxation under Section 501(a) of the Code. Shares in a REIT held by a
qualified trust are treated as held directly by the qualified trust's
beneficiaries in proportion to their actuarial interests in the qualified trust,
rather than by the qualified trust itself. We would not have been able to
qualify as a REIT without the benefit of this "look-through" rule for qualified
trusts, since NETT (a qualified trust) has owned, through a disregarded nominee
trust called Net Realty Holding Trust, more than 50% (by value) of our stock
since our formation. Although we expect that NETT will own less than 50% of the
value of our stock following the completion of this offering, there can be no
assurance that we would be able to satisfy the Five or Fewer Requirement
following the completion of this offering without the benefit of this
"look-through" rule.
We believe that we have satisfied the general requirements described above
with respect to each taxable year beginning with our initial taxable year ended
December 31, 1999. Moreover, we anticipate issuing sufficient shares of our
common stock in the offering with sufficient diversity of ownership to allow us
to continue to satisfy the condition described in (vii) immediately following
the offering. In addition, our articles include restrictions regarding the
transfer of our common stock that are intended to assist us in continuing to
satisfy the share ownership requirements described in conditions (vi) and
(vii) above. We intend to continue to comply with the requirement that we
ascertain, and maintain records that disclose, the actual ownership of our
shares. Although a failure to ascertain, or to maintain records that disclose,
the actual ownership of our shares would not cause our disqualification as a
REIT, a monetary fine may result.
To qualify as a REIT, we cannot have at the end of any taxable year any
undistributed earnings and profits that are attributable to a non-REIT taxable
year. We have not had a non-REIT taxable year and we have not acquired any
earnings and profits from any other corporation from a non-REIT year.
QUALIFIED REIT SUBSIDIARIES
We currently have eight qualified REIT subsidiaries. A corporation that is a
qualified REIT subsidiary is not treated as a separate corporation for federal
income tax purposes, and all assets, liabilities and items of income, deduction
and credit of a qualified REIT subsidiary are treated as assets, liabilities and
items of the REIT. In applying the REIT qualification requirements, our
qualified REIT subsidiaries will be ignored, and all assets, liabilities and
items of income, deduction and credit of each of our qualified REIT subsidiaries
will be treated as our assets, liabilities and items of income, deduction and
credit. Our qualified REIT subsidiaries will therefore not be subject to federal
corporate income taxation, although they may be subject to state and local
taxation.
TAXABLE REIT SUBSIDIARIES
We may in the future have one or more taxable REIT subsidiaries. A taxable
REIT subsidiary is any corporation in which we directly or indirectly own stock,
provided that we and that corporation make a joint election to treat it as a
taxable REIT subsidiary. In addition, if a taxable REIT subsidiary holds,
directly or indirectly, more than 35% of the securities of any other corporation
(by vote or by value), then that other corporation is also treated as a taxable
REIT subsidiary. A taxable REIT
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subsidiary is subject to federal income tax at regular corporate rates, and may
also be subject to state and local taxation. We may hold more than 10% of the
stock of a taxable REIT subsidiary without jeopardizing our qualification as a
REIT. However, as noted below, the securities of taxable REIT subsidiaries may
not represent more than 20% of the total value of our assets. We currently have
no taxable REIT subsidiaries.
PARTNERSHIPS AND DISREGARDED ENTITIES
We currently hold our properties indirectly through entities (i) that are
organized as limited partnerships or limited liability companies under state law
and are classified as partnerships for federal income tax purposes, each of
which is referred to below as a Partnership Entity, or (ii) that are organized
as limited partnerships or limited liability companies under state law and are
disregarded as entities separate from us for federal income tax purposes, each
of which is referred to below as a Disregarded Entity. All assets, liabilities
and items of income, deduction and credit of a Disregarded Entity are treated as
our assets, liabilities and items of income, deduction and credit in applying
the income and asset tests discussed below and for all other federal income tax
purposes. In the case of a REIT that is a partner in a partnership, the REIT is
deemed to own its proportionate share of the assets of the partnership and is
deemed to receive the income of the partnership attributable to that share. In
addition, the partnership's assets and gross income will retain the same
character in the hands of the REIT. Accordingly, our proportionate shares of the
assets and items of income of a Partnership Entity are treated as our assets and
items of income in applying the income and asset tests discussed below.
INCOME TESTS
In order to qualify as a REIT, we must satisfy two gross income requirements
on an annual basis. First, at least 75% of our gross income (excluding gross
income from "prohibited transactions," described above) for each taxable year
must be derived directly or indirectly from investments relating to real
property or interests in mortgages on real property (including "rents from real
property" (described below), interest on obligations secured by mortgages on
real property, and distributions on, and gain with respect to the disposition
of, shares of other REITs) or from various types of temporary investments.
Second, at least 95% of our gross income (excluding gross income from
"prohibited transactions," described above) for each taxable year must be
derived from the same items which qualify under the 75% gross income test, and
from dividends, interest and gain from the sale or disposition of stock or
securities, or from any combination of these items. We intend that the income
generated by our investments will be of a type which satisfies both the 75% and
the 95% gross income tests. If we were to fail either of these tests in a
taxable year, we will not be disqualified as a REIT if the failure was due to
reasonable cause and not willful neglect and we file additional information with
our tax return for that taxable year. It is not possible, however, to state
whether in all circumstances we would be entitled to the benefit of these relief
provisions. As discussed above, even if these relief provisions were to apply, a
tax would be imposed on certain excess net income.
Rents received by a REIT will qualify as "rents from real property" in
satisfying the gross income tests described above only if several conditions are
met:
- First, the amount of rent generally must not be based in whole or in part
on the income or profits of any person. A REIT's "rents from real
property" may include amounts based on a fixed percentage or percentages
of a tenant's gross receipts or sales.
- Second, rents received from a tenant will not qualify as "rents from real
property" in satisfying the gross income tests if the REIT owns 10% or
more of the tenant, whether directly or after application of various
attribution rules. This rule does not apply to amounts paid to a REIT by
its taxable REIT subsidiary if some conditions are met. While we intend
not to lease property to
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any party if rents from that property would not qualify as "rents from
real property," application of the 10% ownership rule is dependent upon
complex attribution rules that may apply by reason of circumstances beyond
our control. For example, ownership (directly or by attribution) by an
unaffiliated third-party of more than 10% of our common stock and more
than 10% of the stock of one or more of our lessees would result in that
lessee's rents not qualifying as "rents from real property". Although our
articles contain restrictions that are intended to help us maintain our
status as a REIT, there can be no assurance that we will be able to
monitor and enforce those restrictions, nor will our stockholders
necessarily be aware of ownership attributable to them under the Code's
attribution rules.
- Third, if rent attributable to personal property leased in connection with
the lease of real property is greater than 15% of the total rent received
under the lease, then the portion of rent attributable to that personal
property will not qualify as "rents from real property." Subject to
meeting this threshold test, rent attributable to personal property leased
in connection with the lease of real property will be treated as "rents
from real property" for this purpose.
- Finally, charges for services customarily furnished or rendered in
connection with the rental of real property may be treated as "rents from
real property" for this purpose. However, in order for rents received with
respect to a property and these charges to qualify as "rents from real
property," the REIT generally must not operate or manage the property or
furnish or render services to tenants, except through a taxable REIT
subsidiary or through an independent contractor who is adequately
compensated and from whom the REIT derives no income. The requirement that
services be provided through a taxable REIT subsidiary or through an
independent contractor, however, does not apply to services provided by
the REIT that are "usually or customarily rendered" in connection with the
rental of space for occupancy only and are not otherwise considered to be
rendered to the occupant. If the value of the non-customary service income
with respect to a property (valued at no less than 150% of the direct
costs of performing such services) is 1% or less of the total income
derived from the property, then all rental income except the non-customary
service income will qualify as "rents from real property."
We have not charged, and we do not anticipate charging, rent that is based
in whole or in part on the income or profits of any person (except by reason of
being based on a fixed percentage or percentages of gross receipts or sales
consistent with the rules described above). We have not received, and we do not
anticipate receiving, a material amount of rents from any tenants that are
related parties as described above. We have not received, and we do not
anticipate receiving, rent attributable to personal property leased in
connection with real property that will exceed 15% of the total rents received
with respect to that property.
We have provided, and will continue to provide, various services with
respect to our properties, either directly or through one or more of our
qualified REIT subsidiaries, Partnership Entities or Disregarded Entities, none
of which is an "independent contractor" or a taxable REIT subsidiary. However,
based upon our experience in the commercial markets in which our properties are
located, we believe that all of those services will be considered "usually or
customarily rendered" in connection with the rental of space for occupancy so
that the provision of the services will not jeopardize the qualification of rent
from our properties as "rents from real property." If we were at any time to
offer any services that are not considered to be "usual and customary," we
intend to establish a taxable REIT subsidiary or to employ an adequately
compensated independent contractor for that purpose.
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ASSET TESTS
To qualify as a REIT, we must also satisfy three tests relating to the
nature of our assets at the close of each quarter of each taxable year:
- at least 75% of the value of our total assets must be represented by "real
estate assets" as defined in the Code, cash, cash items and government
securities. For these purposes, a REIT's "real estate assets" include
(A) its allocable share of real estate assets held by partnerships in
which it has an interest, (B) shares in other REITs, and (C) stock or debt
instruments purchased with the proceeds of a stock offering or long-term
(I.E., at least five years) debt offering of the REIT and held for not
more than one year following the receipt of those proceeds;
- not more than 20% of the value of our total assets may be represented by
securities of taxable REIT subsidiaries; and
- of the investments that do not qualify for purposes of the first test
described above, the value of any one issuer's securities may not exceed
5% of the value of our total assets, and we may not own more than 10% (by
vote or by value) of any one issuer's outstanding securities. Equity
interests in a Partnership Entity or in a Disregarded Entity, shares of a
qualified REIT subsidiary and shares of a taxable REIT subsidiary held by
a REIT are disregarded for purposes of this test. Instead, as discussed
above, our proportionate share of the assets of each Partnership Entity
and all of the assets of each Disregarded Entity are treated as our assets
in applying these asset tests.
Securities, for the purposes of these asset tests, may include debt we hold.
However, debt we hold in an issuer will not be taken into account for purposes
of the 10% value test if the debt securities are straight debt (as defined in
the Code's REIT provisions) and either (i) the issuer is an individual,
(ii) the only securities of the issuer that we hold are straight debt, or
(iii) if the issuer is a partnership, we hold at least a 20% profits interest in
the partnership.
After initially meeting the asset tests at the close of any quarter, we will
not lose our status as a REIT for failure to satisfy these asset tests at the
end of a later quarter solely by reason of changes in asset values. If a failure
to satisfy these asset tests results from an acquisition of securities or other
property during a quarter, the failure may be cured by a disposition of
sufficient nonqualifying assets within 30 days following the close of that
quarter. We have maintained, and we intend to continue to maintain, adequate
records of the value of our assets to permit compliance with the asset tests and
we plan to take on a timely basis any actions that may be required to cure any
noncompliance. However, there can be no assurance that we will succeed in taking
any such necessary actions.
ANNUAL DISTRIBUTION REQUIREMENTS
In order to qualify as a REIT, we are required to distribute dividends
(other than capital gain dividends) to our stockholders in an amount at least
equal to (i) the sum of (A) 90% of our "real estate investment trust taxable
income" (computed without regard to the dividends paid deduction and by
excluding the amount of the REIT's net capital gain) and (B) 90% of our net
income (after tax), if any, from foreclosure property, minus (ii) various items
of noncash income. In addition, if we dispose of any asset subject to the
Built-In Gain Rule during its Recognition Period (see "--Taxation of the
Company--General," above), we are required to distribute an amount equal to at
least 90% of the Built-In Gain (after payment of a corporate level tax), if any,
recognized on the disposition. These distributions must be paid during the
taxable year to which they relate (or during the following taxable year, if the
distributions are declared before we timely file our tax return for the
preceding year and are paid on or before the first regular dividend payment
after the declaration). In addition, dividends declared in October, November, or
December to shareholders of record on a specified date during those months and
paid during the following January will be treated as having been both paid and
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received on December 31 of the year the dividend is declared. As noted above, if
we do not distribute all of our net capital gain and all of our "real estate
investment trust taxable income", as adjusted, we will be subject to tax on the
undistributed amount at regular corporate tax rates. Furthermore, as noted
above, if we fail to distribute during each calendar year at least the sum of
(i) 85% of our ordinary income (as defined in Code Section 4981) for such year,
(ii) 95% of our capital gain net income (as defined in Code Section 4981) for
such year, and (iii) any undistributed taxable income from prior periods, we
will be subject to a nondeductible 4% excise tax on the excess of that required
distribution over the amounts actually distributed.
We may elect to retain rather than distribute all or a portion of our net
capital gains and pay the tax on the gains. In that case, we may elect to have
our shareholders include their proportionate share of the undistributed net
capital gains in income as long-term capital gains and receive a credit for
their share of the tax paid by us. For purposes of the 4% excise tax described
above, any retained amounts would be treated as having been distributed. See
also "--Taxation of Taxable U.S. Stockholders--General" below.
We have made, and we intend to continue to make, timely distributions
sufficient to satisfy the annual distribution requirements for qualification as
a REIT described above. We expect that our "real estate investment trust taxable
income" will be less than our cash flow due to the allowance of depreciation and
other noncash charges in the computation of our "real estate investment trust
taxable income". In this connection, we expect that as a result of our direct
and indirect control of the Partnership Entities and Disregarded Entities
through which we hold our properties, we will have the power to cause those
entities to make distributions to us. It is possible, however, that, from time
to time, we (and the Partnership Entities and Disregarded Entities through which
we hold our properties) may not have sufficient cash or other liquid assets to
meet these distribution requirements due to, among other reasons, timing
differences between the actual receipt of income and the actual realization of
deductible expenses taken into account in computing our "real estate investment
trust taxable income," or our obligation to repay principal or to pay other
amounts not currently deductible in full on our outstanding indebtedness. In the
event that those circumstances do occur, we may, or we may cause one or more of
our Partnership Entities or Disregarded Entities to, arrange for short-term, or
possibly long-term, borrowings in order to obtain sufficient cash so that we are
able to satisfy these distribution requirements. There can be no assurance that
we will be able to arrange, or to cause one or more of our Partnership Entities
or Disregarded Entities to arrange, for those borrowings.
Under some circumstances, we may be able to rectify a failure to meet the
distribution requirements for a year by paying "deficiency dividends" to
stockholders in a later year that may be included in our deduction for dividends
paid for the earlier year. Thus, we may be able to avoid being taxed on amounts
distributed as deficiency dividends. However, we would be required to pay to the
IRS interest based upon the amount of any deduction taken for deficiency
dividends.
FAILURE TO QUALIFY
If we fail to qualify for taxation as a REIT in any taxable year and
relevant relief provisions do not apply, we will be subject to tax (including
any applicable alternative minimum tax) on our taxable income at regular
corporate rates. Distributions to stockholders in any year in which we fail to
qualify as a REIT will not be deductible by us, nor will we be required to make
them. Under those circumstances, to the extent of current and accumulated
earnings and profits, all distributions to our stockholders will be taxable to
them as ordinary dividend income and, subject to some limitations imposed by the
Code, corporate distributees may be eligible for the "dividends received
deduction." Our failure to qualify as a REIT could substantially reduce the cash
available for distributions to stockholders. Unless entitled to relief under
specific statutory provisions, whose availability would depend on the
circumstances of our disqualification, we also would be disqualified from
electing taxation as a REIT for the four taxable years following the year during
which we became disqualified.
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TAXATION OF TAXABLE U.S. STOCKHOLDERS
GENERAL
As long as we qualify as a REIT, distributions made to our taxable U.S.
Stockholders out of current or accumulated earnings and profits (and not
designated as capital gain dividends), or otherwise treated by us as a dividend,
will constitute dividends taxable as ordinary income. No dividends received
deduction will be allowed with respect to our dividend distributions.
Distributions that we designate as capital gain dividends will be taxed as
long-term gains from the sale or exchange of a capital asset (to the extent they
do not exceed our actual net capital gain for the taxable year) without regard
to the period for which the stockholder has held its stock. In the event we
designate any portion of a dividend as a capital gain dividend, a stockholder's
share of that capital gain dividend will be an amount which bears the same ratio
to the total amount of dividends paid to that stockholder for the taxable year
as the total amount of capital gain dividends bears to the total amount of all
dividends paid on all classes of stock for that taxable year. However, corporate
stockholders may be required to treat up to 20% of some capital gain dividends
as ordinary income. We may elect to retain and pay income tax on any net
long-term capital gain, in which case our U.S. Stockholders would include in
their income as long-term capital gain their proportionate share of that
undistributed net long-term capital gain. A U.S. Stockholder would also receive
a refundable tax credit for its proportionate share of the tax paid by us on any
retained net long-term capital gains and an increase in its basis in our stock
in an amount equal to the difference between the undistributed net long-term
capital gains and the amount of tax paid by us. See "--Capital Gains and
Losses," below. If we should elect to retain any net long-term capital gains in
this fashion, we will notify each U.S. Stockholder of the relevant tax
information within 60 days after the close of the applicable taxable year.
Distributions in excess of our current and accumulated earnings and profits
and not treated by us as a dividend will not be taxable to a stockholder to the
extent that they do not exceed the adjusted basis of that stockholder's stock,
but rather will reduce the adjusted basis of that stock. To the extent that
those distributions exceed the adjusted basis of a stockholder's stock, they
will be treated as a capital gain realized from the taxable disposition of those
shares and will be included in income as short-term or long-term capital gain,
depending on the length of time those shares have been held. In addition, as
previously noted, any dividend declared by us in October, November or December
of any year and payable to a stockholder of record on a specific date in any of
those months will be treated as both paid by us and received by the stockholder
on December 31 of that year, provided that the dividend is actually paid by us
during January of the following calendar year.
U.S. Stockholders may not include any of our net operating losses or capital
losses in their individual income tax returns. Instead, we will carry those
losses forward for potential offset against future income, subject to some
limitations. Our distributions and gain realized by stockholders from the sale
or exchange of shares of our common stock will not be treated as passive
activity income, and, as a result, U.S. Stockholders that are individuals,
estates, trusts, personal service corporations, or closely held C corporations
generally will not be able to apply any "passive losses" against that income and
gain.
U.S. Stockholders other than corporations who borrow funds to finance their
acquisition of our common stock may be limited in the amount of deductions
allowed for the interest paid on the indebtedness so incurred. Interest paid or
accrued on indebtedness incurred or continued to purchase or carry property held
for investment is generally deductible only to the extent of the investor's net
investment income. Our ordinary dividend distributions generally will be treated
as investment income for this purpose. Capital gain dividends and capital gains
realized by a stockholder from the disposition of shares of our common stock
(including distributions treated as such), however, will be treated as
investment income only if the stockholder so elects, in which case the capital
gains will be taxed at ordinary income rates. Distributions treated as a
nontaxable return of the U.S. Stockholder's investment
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in our common stock and that reduce the U.S. Stockholder's basis in our common
stock will not enter into the computation of net investment income. We will
notify stockholders after the close of our taxable year as to the portions of
distributions attributable to that year that constitute ordinary dividend
income, return of capital and capital gain.
CAPITAL GAINS AND LOSSES
In general, a U.S. Stockholder will recognize capital gain or loss on the
taxable sale or exchange of shares of our common stock in an amount equal to the
difference between (i) the amount of cash and the fair market value of any
property received in that sale or exchange, and (ii) the stockholder's adjusted
basis in the shares of our common stock sold or exchanged. That gain or loss
generally will constitute short-term capital gain or loss if the stockholder has
not held those shares for more than one year and long-term capital gain or loss
if the stockholder has held those shares for more than one year. In general,
loss realized upon a sale or exchange of shares of our common stock by a
stockholder who has held the common stock for six months or less (after applying
certain holding period rules) will be treated as a long-term capital loss to the
extent of distributions received from us required to be treated by that
stockholder as long-term capital gain and allocations to the shareholder of our
undistributed long-term capital gains. Any loss realized upon a disposition of
shares may also be disallowed under the rules relating to wash sales.
The maximum marginal ordinary income tax rate applicable to individuals,
estates and trusts is 38.6% for calendar year 2002, this rate is being reduced
to 35% in a series of steps, and the 35% rate will be fully implemented for tax
years beginning after December 31, 2005. The maximum marginal income tax rate
applicable to individuals, estates and trusts will be increased to 39.6% for
taxable years beginning after December 31, 2010. The maximum tax rate on net
capital gains applicable to individuals, trusts and estates from the sale or
exchange of capital assets held for more than one year is 20%, and the maximum
rate is reduced to 18% for assets acquired after December 31, 2000 and held for
more than five years. For individuals, trusts and estates who are subject to a
marginal tax rate of 15%, the rate on net capital gains from the sale or
exchange of capital assets held for more than one year is reduced to 10%, or 8%
for assets held for more than five years. The maximum rate applicable to
individuals, estates and trusts for net capital gains attributable to the sale
of depreciable real property held for more than one year is 25% to the extent of
the deductions for depreciation (other than certain depreciation recapture
taxable as ordinary income) with respect to the property. Accordingly, the tax
rate differential between capital gain and ordinary income for noncorporate
taxpayers may be significant. In addition, the characterization of gross income
as either capital gain or ordinary income may affect the deductibility of
capital losses. Capital losses not offset by capital gains may be deducted
against a noncorporate taxpayer's ordinary income only up to a maximum annual
amount of $3,000. Unused capital losses may be carried forward. All net capital
gain of a corporate taxpayer is subject to tax at regular corporate rates. A
corporate taxpayer can deduct capital losses only to the extent of capital
gains; unused capital losses may be carried back three years and forward five
years.
IRS Notice 97-64 provides temporary guidance with respect to the taxation of
distributions by REITs that are designated as capital gain dividends. According
to Notice 97-64, forthcoming temporary Treasury Regulations will provide that
capital gains allocated to a stockholder by us may be designated as a 20% rate
gain distribution or a 25% rate gain distribution. Unless we specifically
designate otherwise, a distribution designated as a capital gain dividend is
presumed to be a 20% rate gain distribution. If we elect to retain any net
long-term capital gain, as discussed above, the undistributed net long-term
capital gains are considered to be designated as capital gain dividends for
purposes of Notice 97-64. Furthermore, Notice 97-64 provides that our
designations of capital gain dividends will only be effective to the extent that
the distributions with respect to our different classes of stock are composed
proportionately of ordinary dividends and capital gain dividends.
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INFORMATION REPORTING AND BACKUP WITHHOLDING
A U.S. Stockholder may be subject to "backup withholding" with respect to
certain "reportable payments", including dividend payments and, under certain
circumstances, proceeds from the sale or other disposition of our common stock.
The backup withholding rate is being reduced from a current rate of 30% to 28%
in a series of steps. Backup withholding generally will not apply, however, to a
U.S. Stockholder who furnishes a correct taxpayer identification number or who
is otherwise exempt from backup withholding, such as a corporation. Generally, a
U.S. Stockholder will provide this information on Form W-9. In addition, we may
be required to withhold a portion of capital gain distributions made to any U.S.
Stockholders who fail to certify their non-foreign status to us. See "--Taxation
of Non-U.S. Stockholders", below. Any amounts withheld under the foregoing rules
will be creditable against the U.S. Stockholder's federal income tax liability
provided that the proper information is timely furnished to the IRS. We will
report to U.S. Stockholders and to the IRS the amount of any "reportable
payments" we make each calendar year and the amount of tax we withhold, if any,
with respect to such payments.
TAXATION OF TAX-EXEMPT U.S. STOCKHOLDERS
GENERAL
U.S. Stockholders otherwise exempt from United States federal income
taxation are nevertheless taxable on their unrelated business taxable income, or
UBTI to the extent that UBTI from all sources exceeds $1,000 in any taxable
year. Dividends (including REIT distributions treated as dividends) and gains
realized from the sale or disposition of stock (other than stock held as
inventory, stock held primarily for sale to customers in the ordinary course of
business, or stock otherwise used in an unrelated trade or business) are
generally not treated as UBTI. However, dividends and gains that would otherwise
be exempt will, with limited exceptions, be included in UBTI to the extent that
the property generating that income is subject to "acquisition indebtedness"
(I.E., indebtedness that would not have been incurred but for the acquisition or
improvement of the property). Thus, a portion of the dividends received and
gains realized by a tax-exempt investor with respect to our common stock may be
treated as UBTI if the tax-exempt investor incurs indebtedness to purchase or
carry our shares or if the tax-exempt investor holds the shares for sale to
customers or as inventory, or otherwise uses the shares in an unrelated trade or
business. In addition, as discussed below, since we expect to be a "pension-held
REIT" following the completion of the offering, a portion of the dividends
received by a "qualified trust" (as defined above) that holds more than 10% of
the value of our common stock may be treated as UBTI in that qualified trust's
hands.
OUR STATUS AS A "PENSION-HELD REIT"
As described above under "--Taxation of the Company--General Requirements
for Qualification," because of NETT's ownership position, we would not meet the
"Five or Fewer Requirement" for qualification as a REIT without the benefit of a
look-through rule applicable to certain qualified trusts. A REIT will be
considered to be a "pension-held REIT" if (i) it would not qualify as a REIT
without the benefit of this "look-through" rule, and (ii) it is "predominantly
held" by qualified trusts. A REIT is "predominantly held" by qualified trusts if
(i) one qualified trust holds more than 25% of the value of the REIT's stock, or
(ii) one or more qualified trusts, each of whom hold more than 10% of the value
of the REIT's stock, together hold more than 50% of the value of the REIT's
stock. Applying this standard, we are currently a "pension-held REIT" and we
expect to continue to be a "pension-held REIT" following the completion of the
offering.
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Since we expect to be a "pension-held REIT" following the completion of the
offering, any qualified trust that holds more than 10% of the value of our stock
at any time during the taxable year may be required to treat a portion of the
dividends that it receives from us as UBTI. Generally, the amount of UBTI that a
qualified trust shareholder must include in its gross income equals the
aggregate amount of dividends paid or treated as paid to the qualified trust
shareholder by us with respect to our taxable year multiplied by a fraction,
(i) the numerator of which equals the gross income (less direct expenses) that
we realize with respect to our taxable year from unrelated trades or businesses,
computed as though we ourselves were a qualified trust, and (ii) the denominator
of which equals the total amount of gross income (less direct expenses) we
realize with respect to our taxable year.
A qualified trust shareholder is not, however, required to include any UBTI
in respect of dividends paid by us in its gross income unless at least 5% of our
gross income (less direct expenses) for our taxable year constitutes UBTI,
computed as though we ourselves were a qualified trust. We expect that less than
5% of our gross income (less direct expenses) for each taxable year will
constitute UBTI. However, we cannot assure you that this will be the case.
Moreover, in order to avoid realizing UBTI, we must satisfy a number of
complicated requirements, summarized below. We cannot assure you that we will
always be able to satisfy those requirements, and our compliance with those
requirements may constrain the manner in which we are able to conduct our
business. See the succeeding paragraph and "Risk Factors--Tax and Employee
Benefit Plan Risks--We are subject to business constraints related to our status
as a pension-held REIT" on page 21.
CONSTRAINTS RELATED TO OUR STATUS AS A "PENSION-HELD REIT"
Generally, rents from real property and gains from the sale of real property
(other than property held primarily for sale to customers in the ordinary course
of business or as inventory) are excluded from the definition of UBTI. However,
if real property is subject to "acquisition indebtedness" during a taxable year,
all or a portion of the rents from the real property and the gains derived from
the sale of the real property during that taxable year will constitute UBTI.
Indebtedness that we incur to acquire or improve real property will be treated
as acquisition indebtedness for this purpose unless we satisfy the series of
requirements described in the following paragraphs. We have incurred, and we
expect to continue to incur, indebtedness to acquire or improve our properties.
Thus, unless we satisfy these requirements, a portion of our gross income will
constitute UBTI:
- The price that we pay for the acquisition or improvement must be a fixed
amount determined as of the date of the acquisition or improvement. For
example, the price of a building that we acquire in a debt-financed
transaction cannot include an earnout provision based on the amount of
rental income derived from the building during a period following the
acquisition. Price adjustments attributable to customary closing
adjustments (E.G., the proration of property taxes) and price adjustments,
in an amount fixed in the contract, that depend on the resolution of
limited external contingencies (E.G., zoning approvals, title clearances,
or the removal of easements) do not violate this restriction. This
restriction does not apply to a limited category of sales by some
financial institutions.
- The amount of indebtedness that we incur to acquire or improve real
property, or the amount or timing of any payments payable with respect to
that indebtedness, cannot depend, in whole or in part, on the revenue,
income or profits derived from that real property. For example, interest
payments cannot be deferred to match the timing of cash flows received
from a leveraged property, nor may the amount of interest payable on the
indebtedness be contingent on revenue derived from the property. This
restriction does not apply to a limited category of sales by some
financial institutions.
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- Real property that we acquire in a leveraged acquisition cannot at any
time be leased back to the seller or a related party to the seller
(determined under specific rules in the Code). This general restriction
does not apply to leases on commercially reasonable terms of 25% or less
of the leasable floor space of the building or complex of buildings.
- We cannot acquire real property from, or lease the property at any time
to, persons that bear certain relationships to us or to our qualified
trust investors. This restriction does not apply to leases on commercially
reasonable terms of 25% or less of the leasable floor space of the
building or complex of buildings.
- Any financing for the acquisition or improvement of real property from the
seller of the real property, a related party to the seller (determined
under specific rules in the Code), or persons that bear certain
relationships to us or to our qualified trust investors must be on
commercially reasonable terms.
- The tax allocations of any Partnership Entity through which we own
debt-financed real estate generally must have "substantial economic
effect" and generally must comply with the so-called fractions rule set
forth in the Treasury Regulations. In general, the fractions rule provides
that a "qualified organization" (which includes us, for this purpose)
cannot have a percentage share of the Partnership Entity's overall
partnership income for any partnership taxable year that is greater than
that qualified organization's percentage share of overall partnership loss
for the partnership taxable year in which the qualified organization
partner's percentage share of overall partnership loss would be the
smallest. The need to comply with the fractions rule may significantly
constrain our ability to acquire interests in real property through joint
ventures or other partnership arrangements.
We believe that we have complied with the restrictions summarized above.
However, there can be no assurance that we will always be able to comply with
these restrictions. Moreover, compliance with these restrictions may cause us to
take actions that we might not otherwise have taken or to refrain from taking
actions or from consummating transactions on terms that would be advantageous to
us and to our other shareholders but that might cause certain of our tax-exempt
shareholders to realize UBTI. See "Risk Factors--Tax and Employee Benefit Plan
Risks" beginning on page 20. We also believe that the tax allocations of each of
our Partnership Entities comply with the "substantial economic effect" and
"fractions rule" requirements discussed above, except where failure of a
Partnership Entity to do so would cause us to realize only a DE MINIMIS amount
of UBTI. However, there can be no assurance that this is, or that it will
continue to be, the case.
Because of certain ambiguities in the relevant Treasury Regulations, it is
unclear whether certain transactions in which an unrelated third party would
contribute real property to a Partnership Entity (such as the Bradley OP) in
exchange for a partnership interest in that Partnership Entity would cause that
Partnership Entity to fail to comply with the fractions rule in the year of the
transaction and in subsequent years. We have received a ruling from the IRS
indicating that the contribution by an unrelated party of four shopping centers,
or the Pioneer Properties, to the Bradley OP in exchange for cash, limited
partnership interests in the Bradley OP, and the Bradley OP's assumption of
mortgage indebtedness will not cause the Bradley OP to fail to so comply with
the fractions rule. We may request similar rulings in connection with similar
transactions that we may propose in the future. We cannot assure you that we
would obtain any rulings. If we do not receive a favorable ruling, we may choose
not to consummate transactions of this nature even though we believe those
transactions may otherwise be advantageous to us and to our other shareholders,
since doing so may cause certain of our tax-exempt shareholders to realize UBTI
or we may restructure the transactions in a manner that may make consummation
more difficult or unlikely. See "Risk Factors--Tax and Employee Benefit Plan
Risks--We are subject to business constraints related to our status as a
pension-held REIT" on page 21.
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TAXATION OF NON-U.S. STOCKHOLDERS
GENERAL
The rules governing the United States federal income taxation of the
ownership and disposition of our common stock by Non-U.S. Stockholders are
complex and this discussion does not purport to provide more than a summary of
those rules. PROSPECTIVE NON-U.S. STOCKHOLDERS SHOULD CONSULT WITH THEIR OWN TAX
ADVISORS TO DETERMINE THE IMPACT OF UNITED STATES FEDERAL, STATE, AND LOCAL
INCOME TAX LAWS ON AN INVESTMENT IN SHARES OF OUR COMMON STOCK, INCLUDING ANY
REPORTING REQUIREMENTS, AS WELL AS THE TAX TREATMENT OF SUCH AN INVESTMENT UNDER
THE LAWS OF NON-U.S. JURISDICTIONS.
In general, Non-U.S. Stockholders will be subject to regular United States
federal income taxation with respect to their investment in shares of our common
stock in the same manner as a U.S. Stockholder if the investment is "effectively
connected" with the conduct by such Non-U.S. Stockholder of a trade or business
in the United States. A Non-U.S. Stockholder that is a corporation and that
receives income with respect to its investment in shares of our common stock
that is (or is treated as) "effectively connected" with the conduct of a trade
or business in the United States may also be subject to the "branch profits tax"
imposed under the Code, which is payable in addition to the regular federal
corporate income tax. The branch profits tax is imposed at a rate of 30%,
subject to reduction in some cases by applicable income tax treaties. The
following discussion addresses only the federal income taxation of Non-U.S.
Stockholders whose investment in shares of our common stock is not "effectively
connected" with the conduct of a trade or business in the United States.
Prospective investors whose investment in shares of our common stock may be
"effectively connected" with the conduct of a United States trade or business
should consult their own tax advisors as to the tax consequences of that
investment.
Distributions that are not attributable to gain from sales or exchanges of
United States real property interests and that are not designated by us as
capital gains dividends will, to the extent that they are made out of our
current or accumulated earnings and profits or are otherwise treated as
dividends, ordinarily be subject to a withholding tax equal to 30% of the gross
amount of the distribution, unless an applicable tax treaty reduces that tax. A
Non-U.S. Stockholder who wishes to claim the benefit of an applicable treaty
rate will be required to satisfy certain certification and other requirements; a
Non-U.S. Stockholder ordinarily will provide that certification on Form W-8BEN.
Distributions that we make in excess of our current and accumulated earnings and
profits and that are not otherwise treated as dividends will not be taxable to a
Non-U.S. Stockholder to the extent they do not exceed the adjusted basis of the
Non-U.S. Stockholder's shares, but rather will reduce the adjusted basis of the
shares (but not below zero). However, distributions in excess of our current and
accumulated earnings and profits will be subject to withholding at a rate of
10%. To the extent that the distributions exceed the adjusted basis of a
Non-U.S. Stockholder's shares, they will give rise to tax liability if such
Non-U.S. Stockholder would otherwise be subject to tax on any gain from the sale
or disposition of shares, as described below.
A distribution in excess of our current and accumulated earnings and profits
may be subject to withholding at the 30% rate (or at a lower rate prescribed by
an applicable treaty) if at the time of the distribution it cannot be determined
whether the distribution will be in an amount in excess of our current and
accumulated earnings and profits. If it is subsequently determined that the
distribution is, in fact, in excess of our current and accumulated earnings and
profits and the distribution is not otherwise treated as a dividend, the
Non-U.S. Stockholder may seek a refund from the IRS if the amount withheld
exceeded the Non-U.S. Stockholder's federal income tax liability, if any, with
respect to the distribution.
For any year in which we qualify as a REIT, distributions that are
attributable to gain from sales or exchanges of United States real property
interests will be taxed to a Non-U.S. Stockholder as if the gain were
effectively connected with the Non-U.S. Stockholder's conduct of a United States
trade or
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business. Non-U.S. Stockholders would thus be taxed at the normal capital gain
rates applicable to domestic stockholders, without regard as to whether such
distributions are designated by us as capital gain dividends. Also, these
distributions may be subject to a branch profits tax at a rate of up to 30% in
the hands of a corporate Non-U.S. Stockholder. We are required to withhold 35%
of any distribution to a Non-U.S. Stockholder that could be designated by us as
a capital gain dividend. In addition, for purposes of this withholding rule, if
we designate prior distributions as capital gain dividends, then subsequent
distributions, up to the amount of the prior distributions, will be treated as
capital gain dividends. The amount of any tax so withheld is creditable against
the Non-U.S. Stockholder's federal income tax liability.
Gain recognized by a Non-U.S. Stockholder upon a sale of our shares
generally will not be subject to United States federal income taxation so long
as, at all times during a specified testing period, less than 50% of the value
of our stock is held directly or indirectly by Non-U.S. Stockholders. We believe
that we will meet this test following the completion of the offering and,
therefore, that gain from the sale of our common stock by a Non-U.S. Stockholder
will not be subject to taxation under these rules. However, because our common
stock will be publicly traded, no assurance can be given that we will continue
to meet this test. Even if we do meet this test, gain from the sale or exchange
of our shares of stock nonetheless will be subject to a 30% tax if the Non-U.S.
Stockholder is a nonresident alien individual who is present in the United
States for 183 days or more during the taxable year and has a "tax home" in the
United States.
If we do not meet the ownership test described in the preceding paragragh,
whether gain arising from the sale or exchange by a Non-U.S. Stockholder of
shares of our common stock would be subject to federal income taxation will
depend on whether our shares are regularly traded (as defined in applicable
Treasury Regulations) on an established securities market (such as the New York
Stock Exchange, on which our common stock will be listed) and on the size of the
selling Non-U.S. Stockholder's interest in us. If the gain on the sale of our
common stock were to be subject to federal income taxation, the Non-U.S.
Stockholder would be subject to the same treatment as a domestic stockholder
with respect to the gain (subject to the possible application of the branch
profits tax in the case of a corporate Non-U.S. Stockholder), and the purchaser
of the common stock would be required to withhold and remit to the IRS 10% of
the purchase price.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Non-U.S. Stockholders are generally exempt from information reporting and
backup withholding, but may be required to provide a properly completed
Form W-8BEN or otherwise comply with the applicable certification and
identification procedures in order to prove their exemption. Any amount paid as
backup withholding will be creditable against the Non-U.S. Stockholder's federal
income tax liability.
OTHER TAX CONSIDERATIONS
STATE, LOCAL AND NON-U.S. TAXES
We and our stockholders may be subject to taxation in various state, local
or non-U.S. jurisdictions, including those in which we or they transact business
or reside. State, local and non-U.S. taxation may not conform to the federal
income tax consequences discussed above. Consequently, prospective stockholders
should consult with their own tax advisors regarding the effect of state, local
and non-U.S. tax laws on any investment in our common stock.
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ERISA CONSIDERATIONS
The following is a summary of certain considerations associated with an
investment in us by a pension, profit sharing or other employee benefit plan
subject to Title I of ERISA or Section 4975 of the Code. THE FOLLOWING IS MERELY
A SUMMARY, HOWEVER, AND SHOULD NOT BE CONSTRUED AS LEGAL ADVICE OR AS COMPLETE
IN ALL RELEVANT RESPECTS. ALL INVESTORS ARE URGED TO CONSULT THEIR LEGAL
ADVISORS BEFORE INVESTING ASSETS OF AN EMPLOYEE PLAN IN OUR COMPANY AND TO MAKE
THEIR OWN INDEPENDENT DECISIONS.
A fiduciary considering investing assets of an employee plan in us should
consult its legal advisor about ERISA, fiduciary and other legal considerations
before making such an investment. Specifically, before investing in us, any
fiduciary should, after considering the employee plan's particular
circumstances, determine whether the investment is appropriate under the
fiduciary standards of ERISA or other applicable law including standards with
respect to prudence, diversification and delegation of control and the
prohibited transaction provisions of ERISA and the Code. In making those
determinations, you should take into account, among the other factors described
in this prospectus that, as described below, we do not expect that our assets
will constitute the "plan assets" of any investing employee plan, so that
neither we nor any of our principals, agents, employees, or affiliates will be a
fiduciary as to any investing employee plan.
ERISA and the Code do not define "plan assets." However, regulations
promulgated under ERISA by the United States Department of Labor, or the DOL
Plan Asset Regulations, generally provide that when an employee plan acquires an
equity interest in an entity that is neither a "publicly-offered security" nor a
security issued by an investment company registered under the Investment Company
Act of 1940, as amended, the employee plan's assets include both the equity
interest in the entity and an undivided interest in each of the underlying
assets of the entity, unless it is established either that equity participation
in the entity by "benefit plan investors" is not "significant" or that the
entity is an "operating company," in each case as defined in the DOL Plan Asset
Regulations.
Under the DOL Plan Asset Regulations, a security is a "publicly-offered
security" if it is freely transferable, part of a class of securities that is
widely-held, and either (i) part of a class of securities registered under
section 12(b) or 12(g) of the Securities Exchange Act of 1934 or (ii) sold to an
employee plan as part of an offering of securities to the public pursuant to an
effective registration statement under the Securities Act of 1933 and the class
of securities of which that security is a part is registered under the
Securities Exchange Act of 1934 within 120 days (or that later time as may be
allowed by the Securities and Exchange Commission) after the end of the fiscal
year of the issuer during which the offering of those securities to the public
occurred. "Widely-held" for this purpose means the security is of a class owned
by 100 or more investors independent of the issuer and of one another. "Freely
transferable", again for purposes of the DOL Plan Asset Regulations, is a
question to be determined on the basis of all relevant facts and circumstances
but, where the minimum investment is $10,000 or less, is ordinarily not
adversely affected by some enumerated restrictions including restrictions
against any transfer which would result in a termination or reclassification of
the issuer for federal tax purposes.
For purposes of the DOL Plan Asset Regulations, equity participation in an
entity by benefit plan investors is not significant if their aggregate interest
is less than 25% of the value of each class of equity securities in the entity,
disregarding, for purposes of such determination, any interests held by persons,
and their affiliates, who have discretionary authority or control with respect
to the assets of the entity or who provide investment advice for a fee with
respect to such assets. Benefit plan investors, for these purposes, include
employee plans and certain other types of plans, such as governmental plans, not
subject to Title I of ERISA.
The definition of "operating company" in the DOL Plan Asset Regulations
includes, among other things, a "real estate operating company," or a REOC, and
a "venture capital operating company," or a VCOC. In general, an entity may
qualify as a REOC if (i) at least 50% of its assets valued at cost,
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other than short-term investments pending long-term commitment or distribution
to investors are invested in real estate which is managed or developed and with
respect to which the entity has the right to substantially participate directly
in the management or development activities and (ii) such entity in the ordinary
course of its business is engaged directly in real estate management or
development activities. Similarly, in general, an entity may qualify as a VCOC
if (a) at least 50% of its assets valued at cost, other than short-term
investments pending long-term commitment or distribution to investors, are
invested in "operating companies," other than other VCOCs, and with respect to
which the entity has or obtains direct contractual management rights and
(b) such entity in the ordinary course of its business actually exercises such
management rights with respect to one or more of the operating companies in
which it invests.
If our assets were deemed to be "plan assets" of employee plans whose assets
were invested in us, whether as a result of the application of the DOL Plan
Asset Regulations or otherwise, Subtitle A and Parts 1 and 4 of Subtitle B of
Title I of ERISA and Section 4975 of the Tax Code would extend to our
investments. This would result, among other things, in (i) the application of
the prudence and other fiduciary standards of ERISA, which impose liability on
fiduciaries, to investments made by us, which could materially affect our
operations, (ii) potential liability of persons having investment discretion
over the assets of the employee plans investing in us should our investments not
conform to ERISA's prudence and fiduciary standards under Part 4 of Subtitle B
of Title I of ERISA, unless certain conditions are satisfied, and (iii) the
possibility that certain transactions that we might enter into in the ordinary
course of our business and operation might constitute "prohibited transactions"
under ERISA and the Tax Code. A prohibited transaction, in addition to imposing
potential personal liability upon fiduciaries of the employee plans, may also
result in the imposition of an excise tax under the Tax Code upon the "party in
interest", as defined in ERISA, or "disqualified person", as defined in the Tax
Code, with whom the employee plan engaged in the transaction, and correction or
unwinding of the transaction.
Historically, we have not treated the requirements of Subtitle A and Parts 1
and 4 of Subtitle B of Title I of ERISA and Section 4975 of the Code as applying
to our investments. Our stock has not been previously publicly-offered, nor are
we an investment company under the 1940 Act, and benefit plan investors'
holdings in us are significant within the meaning of the DOL Plan Asset
Regulations because of NETT's interest in us. However, we believe that we have
qualified since our formation as an operating company as that term is defined
under the DOL Plan Asset Regulations. Further, subject to the following, we
believe that after this offering, our stock should qualify as a "publicly
offered security" under the DOL Plan Asset Regulations.
While there are restrictions imposed on the transfer of our stock, we
believe they are the type of restrictions on transfer generally permitted under
the DOL Plan Asset Regulations or are not otherwise material and should not
result in the failure of our stock to be "freely transferable" within the
meaning of the DOL Plan Asset Regulations. We also believe that certain
restrictions on transfer that derive from the securities laws and from
contractual arrangements with the underwriters in connection with this offering
should not result in the failure of our stock to be "freely transferable."
Furthermore, we are not aware of any other facts or circumstances limiting the
transferability of our stock that are not included among those enumerated as not
affecting their free transferability under the DOL Plan Asset Regulations, and
we do not expect to impose in the future (or to permit any person to impose on
its behalf) any other limitations or restrictions on transfer that would not be
among the enumerated permissible limitations or restrictions.
Assuming that our stock is "widely held" within the meaning of the DOL Plan
Asset Regulations and that no facts and circumstances other than those referred
to in the preceding paragraph exist that restrict transferability of our stock,
we believe that, under the DOL Plan Asset Regulations, our stock should be
considered "publicly offered securities" after this offering, and, therefore,
that our underlying assets should not be deemed to be plan assets of any benefit
plan investors that choose to invest in us.
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UNDERWRITING
We and Net Realty Holding Trust intend to offer the shares of common stock
being sold in this offering through the underwriters. Merrill Lynch, Pierce,
Fenner & Smith Incorporated, Goldman, Sachs & Co., Morgan Stanley & Co.
Incorporated, UBS Warburg LLC, First Union Securities, Inc. and Legg Mason Wood
Walker, Incorporated are acting as representatives of the underwriters named
below. Subject to the terms and conditions described in a purchase agreement
among us and the underwriters, we and Net Realty Holding Trust have agreed to
sell to the underwriters, and the underwriters severally have agreed to purchase
from us and Net Realty Holding Trust, the number of shares listed opposite their
names below.
<Table>
<Caption>
NUMBER
OF SHARES
UNDERWRITER ---------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated......................................
Goldman, Sachs & Co.........................................
Morgan Stanley & Co. Incorporated...........................
UBS Warburg LLC.............................................
First Union Securities, Inc.................................
Legg Mason Wood Walker, Incorporated........................
-----------
Total.............................................
===========
</Table>
The underwriters have agreed to purchase all of the shares sold under the
purchase agreement if any of these shares are purchased. If any underwriter
defaults, the purchase agreement provides that the purchase commitments of the
nondefaulting underwriters may be increased or the purchase agreement may be
terminated.
We have agreed to indemnify the underwriters against various liabilities,
including liabilities under the Securities Act, or to contribute to payments the
underwriters may be required to make in respect of those liabilities.
The underwriters are offering the shares, subject to prior sale, when, as
and if issued to and accepted by them, subject to approval of legal matters by
their counsel, including the validity of the shares, and other conditions
contained in the purchase agreement, such as the receipt by the underwriters of
officer's certificates and legal opinions. The underwriters reserve the right to
withdraw, cancel or modify offers to the public and to reject orders in whole or
in part.
COMMISSIONS AND DISCOUNTS
The representatives have advised us and Net Realty Holding Trust that the
underwriters initially propose to offer the shares to the public at the initial
public offering price on the cover page of this prospectus and to dealers at
that price less a concession not in excess of $ per share. The underwriters
may allow, and the dealers may reallow, a discount not in excess of $ per
share to other dealers. After this offering, the public offering price,
concession and discount may be changed.
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The following table shows the public offering price, underwriting discount
and proceeds before expenses to us and Net Realty Holding Trust. The information
assumes either no exercise or full exercise by the underwriters of the
overallotment option.
<Table>
<Caption>
PER SHARE WITHOUT OPTION WITH OPTION
--------- -------------- -----------
Public offering price............................. $ $ $
Underwriting discount............................. $ $ $
Proceeds, before expenses, to Heritage............ $ $ $
Proceeds, before expenses, to Net Realty Holding
Trust........................................... $ $ $
</Table>
The expenses of the offering, not including the underwriting discount and
the advisory fee payable to PIMS, as described below, are estimated at
approximately $3.0 million and are payable by us.
PIMS, an affiliate of The Prudential Insurance Company of America, an
affiliate of one of the underwriters will receive advisory and other fees
totaling approximately $3.375 million in connection with this offering, based
upon an assumed initial public offering price of $25.00 per share.
OVERALLOTMENT OPTION
We, Net Realty Holding Trust and Prudential have granted an option to the
underwriters to purchase up to 2,400,000 additional shares at the public
offering price less the underwriting discount. The underwriters may exercise
this option for 30 days from the date of this prospectus solely to cover any
overallotments. If the underwriters exercise this option, each will be
obligated, subject to conditions contained in the purchase agreement, to
purchase a number of additional shares proportionate to that underwriter's
initial amount reflected in the above table.
RESERVED SHARE PROGRAM
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to 1% of the shares of common stock offered by this
prospectus for sale to some of our directors, officers and employees. If these
persons purchase reserved shares, this will reduce the number of shares
available for sale to the general public. Any reserved shares that are not
orally confirmed for purchase within one day of the pricing of this offering
will be offered by the underwriters to the general public on the same terms as
the other shares of our common stock offered by this prospectus.
NO SALES OF SIMILAR SECURITIES
We, Net Realty Holding Trust, Prudential, each of our senior officers and
each of our directors who beneficially own shares of our common stock as of the
date of this prospectus have agreed, with some exceptions, not to sell or
transfer any common stock for 180 days after the date of this prospectus without
first obtaining the written consent of Merrill Lynch, Pierce, Fenner & Smith
Incorporated. Specifically, we and these other individuals have agreed not to
directly or indirectly
- offer, pledge, sell or contract to sell any common stock,
- sell any option or contract to purchase any common stock,
- purchase any option or contract to sell any common stock,
- grant any option, right or warrant for the sale of any common stock,
- lend or otherwise dispose of or transfer any common stock,
- request or demand that we file a registration statement related to the
common stock, or
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- enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of any common stock whether
any such swap or transaction is to be settled by delivery of shares of
other securities, in cash or otherwise.
This lockup provision applies to common stock and to securities convertible
into or exchangeable or exercisable for or repayable with common stock. It also
applies to shares of our common stock owned now or acquired later by the person
executing the agreement or for which the person executing the agreement later
acquires the power of disposition.
NEW YORK STOCK EXCHANGE LISTING
The shares of common stock being offered by this prospectus have been
approved for listing on the New York Stock Exchange, subject to official notice
of issuance, under the symbol "HTG". In order to meet the requirements for
listing on that exchange, the underwriters have undertaken to sell a minimum
number of shares to a minimum number of beneficial owners as required by that
exchange.
Before this offering, there has been no public market for our common stock.
The initial public offering price will be determined through negotiations
between us and the representatives. In addition to prevailing market conditions,
the factors considered in determining the initial public offering price were
- the valuation multiples of publicly traded companies that the
representatives believe to be comparable to us,
- our financial information,
- the history of, and the prospects for, our company and the industry in
which we compete,
- an assessment of our management, its past and present operations, and the
prospects for, and timing of, our future revenues,
- the present state of our development, and
- the above factors in relation to market values and various valuation
measures of other companies engaged in activities similar to ours.
An active trading market for the shares may not develop. It is also possible
that after the offering, the shares of our common stock will not trade in the
public market at or above the initial public offering price.
The underwriters do not expect to sell more than 5% of the shares of our
common stock in the aggregate to accounts over which they exercise discretionary
authority.
NASD REGULATIONS
Prior to this offering, The Prudential Insurance Company of America, an
affiliate of Prudential Securities Incorporated, one of the underwriters,
beneficially owned approximately 18% of the outstanding shares of our common
stock. In addition, PIMS, an affiliate of the Prudential Insurance Company of
America, has received advisory and other fees from us in the past and will
receive advisory and other fees in connection with this offering totaling
approximately $3.375 million based on an assumed initial public offering price
of $25.00 per share. In light of the above relationship and compensation
arrangement, we have elected to conduct this offering in accordance with Conduct
Rule 2720 of the National Association of Securities Dealers, Inc. This rule
requires that the public offering price of an equity security be no higher than
the price recommended by a qualified independent underwriter which has
participated in the preparation of the registration statement and performed its
usual standard of due diligence with respect to that registration statement.
Merrill Lynch, Pierce, Fenner & Smith Incorporated has agreed to act as
qualified independent underwriter for this
152
<Page>
offering. The price of the shares will be no higher than that recommended by
Merrill Lynch, Pierce, Fenner & Smith Incorporated.
PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS
Until the distribution of the shares is completed, SEC rules may limit
underwriters and selling group members from bidding for and purchasing our
common stock. However, the representatives may engage in transactions that
stabilize the price of the common stock, such as bids or purchases to peg, fix
or maintain that price.
If the underwriters create a short position in our common stock in
connection with this offering that is, if they sell more shares than are listed
on the cover of this prospectus, the representatives may reduce that short
position by purchasing shares in the open market. The representatives may also
elect to reduce any short position by exercising all or part of the
overallotment option described above. Purchases of our common stock to stabilize
its price or to reduce a short position may cause the price of our common stock
to be higher than it might be in the absence of those purchases.
The representatives may also impose a penalty bid on underwriters and
selling group members. This means that if the representatives purchases shares
in the open market to reduce the underwriters' short position or to stabilize
the price of those shares, they may reclaim the amount of the selling concession
from the underwriters and selling group members who sold those shares. The
imposition of a penalty bid may also affect the price of the shares in that it
discourages resales of those shares.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of our common stock. In addition, neither
we nor any of the underwriters makes any representation that the representatives
will engage in these transactions or that these transactions, once commenced,
will not be discontinued without notice.
ELECTRONIC PROSPECTUS
Merrill Lynch will be facilitating Internet distribution for this offering
to certain of its Internet subscription customers. Merrill Lynch intends to
allocate a limited number of shares for sale to its online brokerage customers.
An electronic prospectus is available on the Internet Web site maintained by
Merrill Lynch and web sites maintained by some of the other underwriters. Other
than the prospectus in electronic format, the information on the Merrill Lynch
Web site is not part of this prospectus.
OTHER RELATIONSHIPS
Prior to this offering, The Prudential Insurance Company of America, an
affiliate of Prudential Securities Incorporated, one of the underwriters,
beneficially owned approximately 18% of the outstanding shares of our common
stock. Immediately after consummation of this offering, The Prudential Insurance
Company of America will own approximately 12.7% of the outstanding shares of our
common stock. In addition, PIMS, an affiliate of the Prudential Insurance
Company of America, has received advisory and other fees from us in the past and
will receive an advisory fee in connection with this offering of approximately
$3.375 million based on an assumed initial public offering price of $25.00 per
share. In connection with this offering, we will also pay Prudential Mortgage
Capital Company LLC, or PMCC, an affiliate of Prudential, a fee of $20,000 in
connection with obtaining a rating agency letter under our securitized facility
with PMCC, as described in "Business and Properties--Indebtedness Outstanding
After This Offering--Heritage SPE LLC Facility" on page 84.
153
<Page>
Some of the underwriters and their affiliates have engaged in, and may in
the future engage in, investment banking and other commercial dealings in the
ordinary course of business with us. They have received customary fees and
commissions for these transactions.
First Union Securities, Inc. is an indirect, wholly-owned subsidiary of
Wachovia Corporation, which conducts its investment banking, institutional and
capital markets businesses through its various bank, broker-dealer and nonbank
subsidiaries (including First Union Securities, Inc.) under the trade name of
Wachovia Securities. Any reference to Wachovia Securities in this prospectus,
however, does not include Wachovia Securities, Inc., member NASD/SIPC and a
separate broker-dealer subsidiary of Wachovia Corporation and sister affiliate
of First Union Securities, Inc. which may or may not be participating as a
selling dealer in the distribution of the common stock.
154
<Page>
EXPERTS
The financial statements of our predecessor for the period from October 1,
1998 to July 8, 1999; our consolidated financial statements for the period from
July 9, 1999 to December 31, 1999 and as of and for the year ended December 31,
2000; our consolidated financial statements and schedule as of and for the year
ended December 31, 2001; and the financial statements of Bradley Real Estate,
Inc. as of and for the three years ended December 31, 1999 appearing in this
prospectus and registration statement of which it is a part, have been audited
by KPMG LLP, independent auditors, as set forth in their reports thereon
appearing elsewhere in this prospectus and in the registration statement and are
included in reliance upon those reports, given upon the authority of that firm
as experts in accounting and auditing. The audit report covering the
December 31, 2001 consolidated financial statements refers to the adoption of
Statement of Financial Accounting Standards (SFAS) No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, as amended by SFAS No. 138,
ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES.
LEGAL MATTERS
Certain legal matters will be passed upon for us by Bingham Dana LLP,
Boston, Massachusetts and for the underwriters by Hogan & Hartson L.L.P. Victor
J. Paci, who is currently our corporate counsel and secretary, is a partner in
Bingham Dana LLP's corporate department and has practiced for over 20 years in
the areas of general corporate and securities laws.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-11, including exhibits, schedules and amendments filed with
this registration statement, under the Securities Act with respect to the shares
of our common stock to be sold in this offering. This prospectus does not
contain all of the information set forth in the registration statement and
exhibits and schedules to the registration statement. For further information
with respect to our company and the shares of our common stock to be sold in
this offering, reference is made to the registration statement, including the
exhibits and schedules to the registration statement. Statements contained in
this prospectus as to the contents of any contract or other document referred to
in this prospectus are not necessarily complete and, where that contract is an
exhibit to the registration statement, each statement is qualified in all
respects by reference to the exhibit to which the reference relates. Copies of
the registration statement, including the exhibits and schedules to the
registration statement, may be examined without charge at the public reference
room of the Securities and Exchange Commission, 450 Fifth Street, N.W. Room
1024, Washington, DC 20549. Information about the operation of the public
reference room may be obtained by calling the Securities and Exchange Commission
at 1-800-SEC-0300. Copies of all or a portion of the registration statement can
be obtained from the public reference room of the Securities and Exchange
Commission upon payment of prescribed fees. Our Securities and Exchange
Commission filings, including our registration statement, are also available to
you on the Securities and Exchange Commission's Web site www.sec.gov.
AS A RESULT OF THIS OFFERING, WE WILL BECOME SUBJECT TO THE INFORMATION AND
REPORTING REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AND
WILL FILE PERIODIC REPORTS, PROXY STATEMENTS AND WILL MAKE AVAILABLE TO OUR
STOCKHOLDERS QUARTERLY REPORTS FOR THE FIRST THREE QUARTERS OF EACH FISCAL YEAR
CONTAINING UNAUDITED INTERIM FINANCIAL INFORMATION.
155
<Page>
INDEX TO FINANCIAL STATEMENTS
<Table>
<Caption>
PAGE
--------
HERITAGE PROPERTY INVESTMENT TRUST, INC.:
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED INFORMATION:
Pro Forma Condensed Consolidated Balance Sheet as of
December 31, 2001 and related notes..................... F-2
Pro Forma Condensed Consolidated Statement of Income for
the year ended December 31, 2001 and related notes...... F-5
CONSOLIDATED FINANCIAL STATEMENTS:
Independent Auditors' Report.............................. F-9
Consolidated Balance Sheets as of December 31, 2001 and
2000.................................................... F-10
Consolidated Statements of Income for the years ended
December 31, 2001 and 2000 and period from July 9, 1999
(commencement of operations) to December 31, 1999....... F-11
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 2001 and 2000 and
period from July 9, 1999 (commencement of operations) to
December 31, 1999....................................... F-12
Consolidated Statements of Cash Flows for the years ended
December 31, 2001 and 2000 and the period from July 9,
1999 (commencement of operations) to December 31,
1999.................................................... F-13
Notes to Consolidated Financial Statements................ F-14
Financial Statement Schedule:
Schedule III--Real Estate and Accumulated Depreciation as
of and for the year ended December 31, 2001............. F-32
HERITAGE PREDECESSOR:
Independent Auditors' Report.............................. F-43
Statement of Net Assets as of July 8, 1999................ F-44
Statement of Changes in Net Assets for the period from
October 1, 1998 to July 8, 1999......................... F-45
Notes to Financial Statements............................. F-46
BRADLEY REAL ESTATE, INC.:
Independent Auditors' Report.............................. F-49
Consolidated Balance Sheets as of June 30, 2000
(unaudited) and December 31, 1999 and 1998.............. F-50
Consolidated Statements of Income for the six months ended
June 30, 2000 and 1999 (unaudited) and years ended
December 31, 1999, 1998 and 1997........................ F-51
Consolidated Statements of Changes in Share Owners' Equity
for the years ended December 31, 1999, 1998 and 1997.... F-52
Consolidated Statements of Cash Flows for the six months
ended June 30, 2000 and 1999 (unaudited) and years ended
December 31, 1999, 1998 and 1997........................ F-53
Notes to Consolidated Financial Statements................ F-54
</Table>
F-1
<Page>
HERITAGE PROPERTY INVESTMENT TRUST, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2001
(UNAUDITED)
(IN THOUSANDS OF DOLLARS)
<Table>
<Caption>
(A) (B) (C) (D) (E) (F)
PRE-OFFERING PRO
FORMA ADJUSTMENTS
----------------------- PRE-OFFERING PRO FORMA POST-OFFERING
HISTORICAL PROPERTY PROPERTY PRO FORMA EFFECTS OF PRO FORMA
AMOUNTS ACQUISITIONS SALES AMOUNTS THE OFFERING AMOUNTS
---------- ------------ -------- ------------ ------------ -------------
ASSETS
Real estate investments, net........... $1,845,168 130,428 (2,990) 1,972,606 -- 1,972,606
Cash and cash equivalents.............. 6,146 -- 4,209 10,355 -- 10,355
Accounts receivable, net............... 23,639 -- -- 23,639 -- 23,639
Deferred financing costs and other
assets............................... 32,011 -- (17) 31,994 (2,980) 29,014
---------- -------- ------- ---------- --------- ----------
Total assets..................... $1,906,964 130,428 1,202 2,038,594 (2,980) 2,035,614
========== ======== ======= ========== ========= ==========
LIABILITIES, REDEEMABLE EQUITY
AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgage loans payable............... $ 492,289 49,705 -- 541,994 -- 541,994
Unsecured notes payable.............. 201,490 -- -- 201,490 -- 201,490
Line of credit facility.............. 343,000 72,638 -- 415,638 (174,474) 241,164
Subordinated debt.................... 100,000 -- -- 100,000 (100,000) --
Accrued expenses and other
liabilities........................ 69,630 -- (309) 69,321 -- 69,321
Accrued distributions................ 12,041 -- -- 12,041 -- 12,041
---------- -------- ------- ---------- --------- ----------
Total liabilities................ 1,218,450 122,343 (309) 1,340,484 (274,474) 1,066,010
---------- -------- ------- ---------- --------- ----------
Series B Preferred Units............... 50,000 -- -- 50,000 -- 50,000
Series C Preferred Units............... 25,000 -- -- 25,000 -- 25,000
Other minority interests............... 2,952 8,085 -- 11,037 -- 11,037
---------- -------- ------- ---------- --------- ----------
Total minority interests......... 77,952 8,085 -- 86,037 -- 86,037
---------- -------- ------- ---------- --------- ----------
Redeemable equity...................... 123,094 -- -- 123,094 (123,094) --
Shareholders' equity................... 487,468 -- 1,511 488,979 394,588 883,567
---------- -------- ------- ---------- --------- ----------
Total liabilities, redeemable
equity and shareholders'
equity......................... $1,906,964 130,428 1,202 2,038,594 (2,980) 2,035,614
========== ======== ======= ========== ========= ==========
</Table>
See accompanying notes to pro forma condensed consolidated balance sheet.
F-2
<Page>
HERITAGE PROPERTY INVESTMENT TRUST, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2001
(UNAUDITED)
PRESENTATION
The accompanying pro forma condensed consolidated balance sheet as of
December 31, 2001 presents Heritage Property Investment Trust, Inc.'s (the
Company's) historical amounts adjusted for the effects of completed and probable
property acquisitions and completed sales occurring after December 31, 2001 to
reflect the Company on a pre-offering pro forma basis. These pre-offering pro
forma amounts are then adjusted for the effects of the Company's initial public
offering as if the offering had occurred on December 31, 2001.
The pro forma condensed consolidated balance sheet should be read in
conjunction with the Company's consolidated financial statements, including the
notes thereto, included elsewhere in this Prospectus. The pro forma condensed
consolidated balance sheet does not purport to represent the Company's financial
position as of December 31, 2001 had the indicated transactions been completed
on December 31, 2001, or to project the Company's financial position as of any
future date.
NOTES AND MANAGEMENT ASSUMPTIONS
A. This column reflects the condensed consolidated historical balance sheet of
the Company as of December 31, 2001, as contained in the historical
consolidated financial statements and notes thereto included elsewhere in
this Prospectus.
B. This column reflects the effects of the following completed and probable
acquisitions:
1. The completed acquisition of one shopping center, Cross Keys Commons.
The acquisition of Cross Keys Commons closed in March 2002 for a purchase
price of $34,000,000, and was funded with draws under the line of credit.
2. The probable acquisition of four shopping centers in a single
transaction (the Pioneer Properties). The probable acquisition of the
Pioneer Properties is expected to close during the quarter ending
June 30, 2002 for a purchase price of $77,828,000, and will be funded
with the issuance of $8,085,000 of limited partnership units in the
Bradley Operating Limited Partnership (a subsidiary of the Company),
draws of $27,979,000 under the Company's line of credit and the
assumption of mortgage loans payable of $41,764,000.
3. The probable acquisition of portions of one shopping center, Montgomery
Towne Center from two separate sellers. The probable acquisition of
Montgomery Towne Center is expected to close in the quarter ending
June 30, 2002 for a purchase price of $18,600,000, and will be funded
with draws of $10,659,000 under the line of credit and the assumption of
a mortgage loan payable of $7,941,000.
C. This column reflects the removal of the net carrying value of $2,990,000 of
Flower Hill, an office building sold in March 2002, as well as related
operating assets of $17,000 and liabilities of $309,000. The property was
sold in March 2002 for net cash proceeds of $4,209,000.
D. This column reflects the pro forma condensed consolidated balance sheet of
the Company as of December 31, 2001 before the pro forma effects of the
offering.
E. Proceeds from the issuance of 12,000,000 shares of common stock in the
primary offering are assumed to be $300,000,000, based upon an initial
public offering price of $25.00 per share. After
F-3
<Page>
HERITAGE PROPERTY INVESTMENT TRUST, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2001
(UNAUDITED)
offering costs and fees of $25,526,000, net proceeds to the Company are
assumed to be $274,474,000. This column reflects the use of the net proceeds
to repay $174,474,000 of the balance outstanding under the line of credit
and $100,000,000 of subordinated debt outstanding at December 31, 2001. The
column also reflects the write-off of deferred financing costs of $2,980,000
as of December 31, 2001 related to the subordinated debt.
The above transactions result in a net increase to shareholders' equity of
$271,494,000. In addition, upon the completion of the offering, all
redeemable equity of $123,094,000 converts automatically to shareholders'
equity and is reclassified accordingly.
Nonrecurring compensation expense of $7,378,000 is incurred due to the
accelerated vesting of outstanding shares of restricted stock upon the
offering. This transaction will be recognized in the Company's statement of
income during the quarter ending June 30, 2002. Assuming the offering had
occurred on December 31, 2001, this transaction would have no net effect on
shareholders' equity and is therefore not separately presented in this
column.
F. This column reflects the pro forma condensed consolidated balance sheet of
the Company as of December 31, 2001 after the pro forma effects of the
offering.
F-4
<Page>
HERITAGE PROPERTY INVESTMENT TRUST, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 2001
(UNAUDITED)
(IN THOUSANDS OF DOLLARS, EXCEPT PER-SHARE DATA)
<Table>
<Caption>
(A) (B) (C) (D) (E) (F)
PRE-OFFERING
PRO FORMA ADJUSTMENTS PRO FORMA 2001
----------------------- PRE-OFFERING EFFECTS POST-OFFERING
HISTORICAL PROPERTY PROPERTY PRO FORMA OF THE PRO FORMA
AMOUNTS ACQUISITIONS SALES AMOUNTS OFFERING AMOUNTS
---------- ------------ -------- ------------ ---------- -------------
Income:
Rentals and recoveries........... $ 255,534 20,469 (2,979) 273,024 -- 273,024
Interest and other............... 298 38 -- 336 -- 336
---------- ------ ------ ---------- ------- -----------
Total income................. 255,832 20,507 (2,979) 273,360 -- 273,360
---------- ------ ------ ---------- ------- -----------
Expenses:
Property operating expenses...... 37,182 2,080 (833) 38,429 -- 38,429
Real estate taxes................ 37,870 2,170 (750) 39,290 -- 39,290
Depreciation and amortization.... 64,051 4,927 (409) 68,569 -- 68,569
Interest......................... 88,315 11,608 (1,081) 98,842 (20,075) 78,767
Interest--related party.......... 2,027 -- -- 2,027 (2,027) --
General and administrative....... 12,640 -- -- 12,640 500 13,140
---------- ------ ------ ---------- ------- -----------
Total expenses............... 242,085 20,785 (3,073) 259,797 (21,602) 238,195
---------- ------ ------ ---------- ------- -----------
Income before net gains...... 13,747 (278) 94 13,563 21,602 35,165
Net gains on sales of real estate
investments and equipment........ 4,159 -- (4,159) -- -- --
Net derivative gains............... 986 -- -- 986 -- 986
---------- ------ ------ ---------- ------- -----------
Income (loss) before allocation to
minority interests............... 18,892 (278) (4,065) 14,549 21,602 36,151
Income allocated to minority
interests........................ (6,656) (319) -- (6,975) -- (6,975)
---------- ------ ------ ---------- ------- -----------
Net income (loss)............ 12,236 (597) (4,065) 7,574 21,602 29,176
Preferred stock distributions...... (43,345) -- -- (43,345) 43,345 --
Accretion of redeemable equity..... (995) -- -- (995) 995 --
---------- ------ ------ ---------- ------- -----------
Net (loss) income
attributable to common
shareholders............... $ (32,104) (597) (4,065) (36,766) 65,942 29,176
========== ====== ====== ========== ======= ===========
Per-share data:
Basic (loss) earnings
attributable to
common shareholders............ $ (4.71) $ (5.39) $ 0.74
========== ========== ===========
Diluted (loss) earnings
attributable to common
shareholders................... $ (4.71) $ (5.39) $ 0.74
========== ========== ===========
Weighted average common shares
outstanding.................... 6,818,320 6,818,320 39,268,652
========== ========== ===========
</Table>
See accompanying notes to pro forma condensed consolidated statement of income.
F-5
<Page>
HERITAGE PROPERTY INVESTMENT TRUST, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 2001
(UNAUDITED)
PRESENTATION
The accompanying pro forma condensed consolidated statement of income for
the year ended December 31, 2001 presents the Company's historical amounts
adjusted for the effects of property acquisitions and sales during the year
ended December 31, 2001 and the effects of completed and probable acquisitions
and completed sales thereafter, to reflect the Company on a pre-offering pro
forma basis as if these events had occurred on January 1, 2001. These
pre-offering amounts are then adjusted for the effects of the Company's initial
public offering as if the offering had occurred on January 1, 2001.
The pro forma condensed consolidated statement of income should be read in
conjunction with the Company's consolidated financial statements, including the
notes thereto, included elsewhere in this Prospectus. The pro forma condensed
consolidated statement of income for the year ended December 31, 2001 does not
purport to represent results of operations that would actually have occurred had
the indicated transactions been completed on January 1, 2001, or to project the
Company's results of operations for any future period.
NOTES AND MANAGEMENT ASSUMPTIONS
A. This column reflects the historical statement of income of the Company for
the year ended December 31, 2001, as contained in the historical
consolidated financial statements and notes thereto included elsewhere in
this Prospectus.
B. This column reflects pro forma revenues and expenses attributable to the
completed acquisitions of Division Place and Franklin Square in 2001 and
Cross Keys Commons in 2002. This column also reflects pro forma revenues and
expenses attributable to two probable acquisitions. These consist of the
Pioneer Properties, which include four shopping centers expected to be
acquired in the quarter ending June 30, 2002; and portions of a shopping
center at Montgomery Towne Center, which we expect to acquire from two
separate sellers in March 2002. Interest expense of $11,608,000 includes pro
forma interest of $5,949,000 attributable to draws under the line of credit
to fund these probable acquisitions and $5,659,000 of pro forma interest on
the mortgage loans assumed. The chart below summarizes the assumed rate
terms of the debt issued or assumed in connection with these acquisitions:
<Table>
<Caption>
WEIGHTED AVERAGE TYPE OF
TYPE OF DEBT INTEREST RATE RATE
- ------------ ---------------- --------
Mortgage loans payable............................. 8.14% Fixed
Line of credit facility, including effect of
related interest rate collar..................... 6.80% Variable
</Table>
If interest rates on the variable rate debt issued or assumed in connection
with the above acquisitions changed by 1/8%, the corresponding effect on net
income would be approximately $119,000.
This column also reflects, as income allocated to minority interests,
distributions of $319,000 attributable to limited partnership units issued
in connection with the acquisition of the Pioneer Properties. The terms of
the limited partnership units provide distributions to the holder that are
equal to the distributions paid on each share of Heritage common stock. Each
unit is redeemable
F-6
<Page>
HERITAGE PROPERTY INVESTMENT TRUST, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME (CONTINUED)
YEAR ENDED DECEMBER 31, 2001
(UNAUDITED)
beginning one year after this offering (subject to certain limitations) by
the holder for the cash equivalent at the time of redemption of one share of
Heritage common stock or, at Heritage's option, for one share of Heritage
common stock.
C. This column reflects the removal of historical revenues, expenses and gains
on five properties sold during the year ended December 31, 2001, as well as
the removal of historical revenues and expenses of Flower Hill, an office
building sold in March 2002. Aggregate sales proceeds for these properties
of $27,458,000 are applied as repayments under the Company's line of credit
(variable rate of 6.80%) at January 1, 2001, resulting in pro forma savings
of $1,081,000 from the historical interest expense.
If interest rates on all debt repaid in connection with the property sales
changed by 1/8%, the corresponding effect on net income would be
approximately $34,000.
D. This column reflects the pro forma condensed consolidated statement of income
of the Company for the year ended December 31, 2001 before the pro forma
effects of the offering.
E. This column reflects the application of $274,474,000 of the net offering
proceeds from the primary offering to repay $174,474,000 of the balance
outstanding under the line of credit and $100,000,000 of subordinated debt
outstanding at January 1, 2001. The debt repayments result in pro forma
savings of $20,075,000 and $2,027,000 from the historical interest expense
and related party interest expense, respectively, for the year ended
December 31, 2001. The $20,075,000 of actual interest expense incurred in
2001 includes $11,865,000 of interest expense on the line of credit, as well
as $7,099,000 of interest expense and amortization of deferred financing
costs of $1,111,000 on the subordinated debt. The chart below summarizes the
rate terms of the debt repaid with offering proceeds:
<Table>
<Caption>
WEIGHTED AVERAGE TYPE OF
TYPE OF DEBT INTEREST RATE RATE
- ------------ ---------------- --------
Line of credit facility, including effect of
related interest rate collar..................... 6.80% Variable
Subordinated debt.................................. 9.13% Variable
</Table>
If interest rates on all debt repaid with offering proceeds changed by
1/8%, the corresponding effect on net income would be approximately
$347,000.
The pro forma increase in general and administrative expenses consists of
$500,000 of recurring expenses necessary to operate as a public company,
including filing fees, printing costs, additional board and legal expenses,
and certain other administrative costs.
Upon the completion of the offering, all shares of the Company's Series A
8.5% Cumulative Convertible Participating Preferred Stock will be
automatically converted on a one-to-one basis into the Company's common
stock, resulting in the elimination of preferred stock distributions of
$43,345,000 for the year ended December 31, 2001. In addition, historical
accretion of redeemable equity of $995,000 is eliminated on a pro forma
basis upon conversion of redeemable equity at the offering date.
F. This column reflects the pro forma condensed consolidated statement of
income of the Company for the year ended December 31, 2001 after the pro
forma effects of the offering.
F-7
<Page>
HERITAGE PROPERTY INVESTMENT TRUST, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME (CONTINUED)
YEAR ENDED DECEMBER 31, 2001
(UNAUDITED)
For purposes of calculating post-offering pro forma basic earnings per
share, weighted average common shares outstanding includes the following:
<Table>
Actual weighted average common shares outstanding........... 6,818,320
Conversion as of January 1, 2001 of preferred shares
outstanding on December 31, 2001.......................... 20,341,767
Shares issued from the primary offering..................... 12,000,000
Restricted shares granted in 2002 with accelerated vesting
immediately prior to the offering......................... 108,565
----------
Total post-offering pro forma shares outstanding........ 39,268,652
==========
</Table>
For purposes of calculating post-offering pro forma diluted earnings per
share, weighted average common shares outstanding includes the following:
<Table>
Total post-offering pro forma shares outstanding............ 39,268,652
Exchangeable limited partnership units in Bradley Operating
Limited Partnership....................................... 349,586
----------
Total................................................... 39,618,238
==========
</Table>
F-8
<Page>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Heritage Property Investment Trust, Inc.:
We have audited the accompanying consolidated balance sheets of Heritage
Property Investment Trust, Inc. and subsidiaries (the Company) as of
December 31, 2001 and 2000 and the consolidated statements of income, changes in
shareholders' equity and cash flows for the years ended December 31, 2001 and
2000 and the period from July 9, 1999 (commencement of operations) to
December 31, 1999. In connection with our audits of the consolidated financial
statements, we also have audited the financial statement schedule III listed in
the accompanying index to financial statements. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of December 31, 2001 and 2000, and the results of its operations and its cash
flows for the years then ended and the period from July 9, 1999 (commencement of
operations) to December 31, 1999, in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the
related financial statement schedule III, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth herein.
As discussed in Notes 6 and 15 to the consolidated financial statements,
effective January 1, 2001 the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES, as amended by SFAS No. 138, ACCOUNTING FOR CERTAIN DERIVATIVE
INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES.
KPMG LLP
Boston, Massachusetts
January 31, 2002
F-9
<Page>
HERITAGE PROPERTY INVESTMENT TRUST, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
(IN THOUSANDS OF DOLLARS)
<Table>
<Caption>
2001 2000
---------- ----------
ASSETS
Real estate investments, net................................ $1,845,168 1,855,462
Cash and cash equivalents................................... 6,146 4,086
Accounts receivable, net of allowance for doubtful accounts
of
$7,473 in 2001 and $4,890 in 2000......................... 23,639 16,446
Deferred financing costs and other assets................... 32,011 29,668
---------- ----------
Total assets.......................................... $1,906,964 1,905,662
========== ==========
LIABILITIES, REDEEMABLE EQUITY AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgage loans payable.................................... $ 492,289 479,160
Unsecured notes payable................................... 201,490 201,965
Line of credit facility................................... 343,000 323,000
Subordinated debt......................................... 100,000 50,000
Subordinated debt due to related party.................... -- 50,000
Accrued expenses and other liabilities.................... 69,630 58,353
Accrued interest due to related party..................... -- 572
Accrued distributions..................................... 12,041 10,740
---------- ----------
Total liabilities..................................... 1,218,450 1,173,790
---------- ----------
Series B Preferred Units.................................... 50,000 50,000
Series C Preferred Units.................................... 25,000 25,000
Other minority interests.................................... 2,952 2,981
---------- ----------
Total minority interests.............................. 77,952 77,981
---------- ----------
Redeemable equity:
Series A 8.5% Cumulative Convertible Participating
Preferred Stock, $.001 par value, 3,743,315 shares
issued and outstanding at December 31, 2001 and 2000,
respectively; and common stock, $.001 par value,
1,256,685 shares issued and outstanding at December 31,
2001 and 2000, respectively............................. 123,094 122,099
Shareholders' equity:
Series A 8.5% Cumulative Convertible Participating
Preferred Stock, $.001 par value; 25,000,000 shares
authorized; 16,598,452 and 16,528,653 shares issued and
outstanding at December 31, 2001 and 2000,
respectively............................................ 16 16
Common stock, $.001 par value; 70,000,000 shares
authorized; 5,561,635 and 5,548,767 shares issued and
outstanding at December 31, 2001 and 2000,
respectively............................................ 6 6
Additional paid-in capital................................ 551,623 551,154
Cumulative distributions in excess of net income.......... (55,435) (19,384)
Accumulated other comprehensive loss...................... (8,742) --
---------- ----------
Total shareholders' equity............................ 487,468 531,792
---------- ----------
Total liabilities, redeemable equity and shareholders'
equity.............................................. $1,906,964 1,905,662
========== ==========
</Table>
See accompanying notes to consolidated financial statements.
F-10
<Page>
HERITAGE PROPERTY INVESTMENT TRUST, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2001 AND 2000 AND THE PERIOD
FROM JULY 9, 1999 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1999
(IN THOUSANDS OF DOLLARS, EXCEPT PER-SHARE DATA)
<Table>
<Caption>
YEARS ENDED PERIOD FROM
DECEMBER 31, JULY 9, 1999 TO
---------------------- DECEMBER 31,
2001 2000 1999
---------- --------- ---------------
Income:
Rentals and recoveries................................. $ 255,534 139,149 38,550
Interest and other..................................... 298 2,117 485
---------- --------- ---------
Total income....................................... 255,832 141,266 39,035
---------- --------- ---------
Expenses:
Property operating expenses............................ 37,182 20,030 5,756
Real estate taxes...................................... 37,870 18,484 5,236
Depreciation and amortization.......................... 64,051 34,808 9,788
Interest............................................... 88,315 33,990 2,032
Interest-related party................................. 2,027 1,527 --
General and administrative............................. 12,640 8,274 2,699
---------- --------- ---------
Total expenses..................................... 242,085 117,113 25,511
---------- --------- ---------
Income before net gains............................ 13,747 24,153 13,524
Net gains on sales of real estate investments and
equipment.............................................. 4,159 1,890 --
Net derivative gains..................................... 986 -- --
---------- --------- ---------
Income before allocation to minority interests..... 18,892 26,043 13,524
Income allocated to minority interests................... (6,656) (1,941) --
---------- --------- ---------
Net income......................................... 12,236 24,102 13,524
Preferred stock distributions............................ (43,345) (38,410) (17,487)
Accretion of redeemable equity........................... (995) (329) (25)
---------- --------- ---------
Net loss attributable to common shareholders....... $ (32,104) (14,637) (3,988)
========== ========= =========
Per-share data:
Basic loss attributable to common shareholders......... $ (4.71) (2.40) (0.69)
========== ========= =========
Diluted loss attributable to common shareholders....... $ (4.71) (2.40) (0.69)
========== ========= =========
Weighted average common shares outstanding............. 6,818,320 6,088,480 5,780,749
========== ========= =========
</Table>
See accompanying notes to consolidated financial statements.
F-11
<Page>
HERITAGE PROPERTY INVESTMENT TRUST, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2001 AND 2000 AND THE PERIOD FROM JULY 9, 1999
(COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1999
(IN THOUSANDS OF DOLLARS, EXCEPT PER-SHARE DATA)
<Table>
<Caption>
SERIES A
CUMULATIVE CUMULATIVE
CONVERTIBLE DISTRIBUTIONS ACCUMULATED
PARTICIPATING ADDITIONAL IN EXCESS OTHER
PREFERRED COMMON PAID-IN OF NET COMPREHENSIVE
STOCK STOCK CAPITAL INCOME LOSS TOTAL
------------- -------- ---------- ------------- ------------- --------
Balance at July 9, 1999 (commencement of
operations)........................... $-- -- -- -- -- --
Issuance of preferred stock........... 16 -- 411,746 -- -- 411,762
Issuance of common stock.............. -- 6 138,231 -- -- 138,237
Issuance of warrants.................. -- -- 220 -- -- 220
Net income............................ -- -- -- 13,524 -- 13,524
Preferred stock distributions ($1.02
per share).......................... -- -- -- (17,487) -- (17,487)
Accretion of redeemable equity........ -- -- (25) -- -- (25)
----- ----- ------- ------- ------ -------
Balance at December 31, 1999............ 16 6 550,172 (3,963) -- 546,231
Issuance of preferred stock........... -- -- 39 -- -- 39
Issuance of common stock.............. -- -- 18 -- -- 18
Issuance of warrants.................. -- -- 879 -- -- 879
Net income............................ -- -- -- 24,102 -- 24,102
Preferred stock distributions ($2.13
per share).......................... -- -- -- (38,410) -- (38,410)
Common stock distributions ($0.16 per
share).............................. -- -- -- (1,113) -- (1,113)
Accretion of redeemable equity........ -- -- (329) -- -- (329)
Stock-based compensation.............. -- -- 375 -- -- 375
----- ----- ------- ------- ------ -------
Balance at December 31, 2000............ 16 6 551,154 (19,384) -- 531,792
Net income............................ -- -- -- 12,236 -- 12,236
Other comprehensive loss:
Unrealized derivative losses:
Cumulative transition adjustment
of interest rate collar as of
January 1, 2001................. -- -- -- -- (2,477) (2,477)
Effective portion of interest rate
collar for the year ended
December 31, 2001............... -- -- -- -- (6,265) (6,265)
----- ----- ------- ------- ------ -------
Total other comprehensive
loss.......................... -- -- -- -- (8,742) (8,742)
-------
Comprehensive income.......... 3,494
-------
Preferred stock distributions ($2.13
per share).......................... -- -- -- (43,345) -- (43,345)
Common stock distributions ($0.73 per
share).............................. -- -- -- (4,942) -- (4,942)
Accretion of redeemable equity........ -- -- (995) -- -- (995)
Stock-based compensation.............. -- -- 1,464 -- -- 1,464
----- ----- ------- ------- ------ -------
Balance at December 31, 2001............ $16 6 551,623 (55,435) (8,742) 487,468
===== ===== ======= ======= ====== =======
</Table>
See accompanying notes to consolidated financial statements.
F-12
<Page>
HERITAGE PROPERTY INVESTMENT TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001 AND 2000 AND THE PERIOD FROM JULY 9, 1999
(COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1999
(IN THOUSANDS OF DOLLARS)
<Table>
<Caption>
YEARS ENDED PERIOD FROM
DECEMBER 31, JULY 9, 1999 TO
------------------- DECEMBER 31,
2001 2000 1999
-------- -------- ---------------
Cash flows from operating activities:
Net income................................................ $12,236 24,102 13,524
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization......................... 64,051 34,808 9,788
Amortization of deferred debt financing costs......... 4,784 1,541 --
Net gains on sales of real estate investments and
equipment........................................... (4,159) (1,890) --
Net derivative gains.................................. (986) -- --
Income allocated to minority interests................ 6,656 1,941 --
Changes in operating assets and liabilities, net of
effect of Bradley acquisition in 2000............... (3,885) 4,294 8,575
------- -------- -------
Net cash provided by operating activities......... 78,697 64,796 31,887
------- -------- -------
Cash flows from investing activities:
Net cash used for acquisition of Bradley.................. (3,710) (707,969) --
Acquisitions of real estate investments................... (27,370) (19,290) (91,510)
Net proceeds from sales of real estate investments........ 23,250 3,643 --
Expenditures for capital and tenant improvements.......... (27,256) (19,460) (5,828)
Expenditures for capitalized leasing commissions.......... (3,455) (1,823) (479)
Net proceeds from sales of furniture, fixtures and
equipment............................................... 7 98 --
Expenditures for furniture, fixtures and equipment........ (682) (318) (63)
------- -------- -------
Net cash used by investing activities............. (39,216) (745,119) (97,880)
------- -------- -------
Cash flows from financing activities:
Proceeds from mortgage loans payable...................... 7,000 281,900 78,500
Repayments of mortgage loans payable...................... (8,740) (16,482) (342)
Repayments of unsecured notes payable..................... (475) (73,035) --
Proceeds from line of credit facility..................... 71,000 330,000 --
Repayments of line of credit facility..................... (51,000) (7,000) --
Proceeds from subordinated debt........................... 50,000 50,000 --
Proceeds from subordinated debt issued through related
parties................................................. -- 100,000 --
Repayment of subordinated debt to related party........... (50,000) (50,000) --
Distributions paid to minority interests.................. (5,021) (1,961) --
Preferred stock distributions paid........................ (43,282) (36,818) (8,339)
Common stock distributions paid........................... (3,704) (1,113) --
Expenditures for deferred debt financing costs............ (1,943) (16,777) (1,031)
Expenditures for deferred equity financing costs.......... (1,256) -- --
Proceeds from issuance of common stock.................... -- 9 18,717
Proceeds from issuance of preferred stock................. -- 42 6,283
Proceeds from issuance of redeemable equity, net.......... -- 97,849 --
------- -------- -------
Net cash (used) provided by financing
activities...................................... (37,421) 656,614 93,788
------- -------- -------
Net increase (decrease) in cash and cash equivalents........ 2,060 (23,709) 27,795
Cash and cash equivalents:
Beginning of period....................................... 4,086 27,795 --
------- -------- -------
End of period............................................. $ 6,146 4,086 27,795
======= ======== =======
</Table>
See accompanying notes to consolidated financial statements.
F-13
<Page>
HERITAGE PROPERTY INVESTMENT TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001 AND 2000 AND THE PERIOD FROM JULY 9, 1999
(COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1999
(1) ORGANIZATION
(A) BACKGROUND
Heritage Property Investment Trust, Inc. (Heritage or the Company) is a
Maryland Corporation organized as a real estate investment trust (REIT).
Heritage was formed on July 1, 1999 and commenced operations on July 9,
1999 through the contribution of $550,000,000 of real estate investments
and related assets net of liabilities by the New England Teamsters &
Trucking Industry Pension Fund (NETT) and $25,000,000 of cash from the
Prudential Insurance Company of America (Prudential). Heritage qualifies
as a REIT under Sections 856-860 of the Internal Revenue Code of 1986, as
amended (the Code).
Heritage is a fully-integrated, self-administered and self-managed REIT
and is focused on the acquisition, ownership, management, leasing and
redevelopment of primarily grocer-anchored neighborhood and community
shopping centers in the Eastern and Midwestern United States. At
December 31, 2001, the Company owned 142 shopping centers, five office
buildings and 11 single-tenant properties.
Heritage Property Investment Limited Partnership (Heritage OP) and
Bradley Operating Limited Partnership (Bradley OP) are subsidiaries
through which the Company conducts substantially all of its business and
owns (either directly or through subsidiaries) substantially all of its
assets. As of December 31, 2001, the Company owned directly or indirectly
all of the ownership interests in the Heritage OP and over 99% of the
voting interests in the Bradley OP, and is the sole general partner of
Heritage OP and Bradley OP. The structure is commonly referred to as an
umbrella partnership REIT or UPREIT.
(B) MINORITY INTERESTS
The Bradley OP has outstanding 2,000,000 units of 8.875% Series B
Cumulative Redeemable Perpetual Preferred Units and 1,000,000 units of
8.875% Series C Cumulative Redeemable Perpetual Preferred Units
(together, the Series B and C Preferred Units). The Series B and C
Preferred Units were issued during 1999 to investors at a price of $25.00
per unit. The Series B and C Preferred Units are callable by the Bradley
OP after five years from the date of issuance at a redemption price equal
to the redeemed holder's capital account plus an amount equal to all
accumulated, accrued and unpaid distributions or dividends thereon to the
date of redemption. In lieu of cash, the Bradley OP may elect to deliver
shares of 8.875% Series B or C Cumulative Redeemable Perpetual Preferred
Stock, as appropriate, of the Company on a one-for-one basis, plus an
amount equal to all accumulated, accrued and unpaid distributions or
dividends thereon to the date of redemption. Holders of the Series B and
C Preferred Units have the right to exchange their Series B and C
Preferred Units for shares of Series B and C Preferred Shares on a
one-for-one basis after ten years from the original issuance, subject to
certain limitations. Income is allocated to the Series B and C Preferred
Units, which have been reported as minority interests in the accompanying
financial statements, in amounts equal to the distributions or dividends
thereon.
The Company also assumed other minority interests in its acquisition of
Bradley that participate in earnings based on terms specified in their
partnership agreements. These
F-14
<Page>
HERITAGE PROPERTY INVESTMENT TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001 AND 2000 AND THE PERIOD FROM JULY 9, 1999
(COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1999
minority interests amounted to $2,952,000 and $2,981,000 at December 31,
2001 and 2000, respectively.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) BASIS OF PRESENTATION
The consolidated financial statements are prepared on the accrual basis
in accordance with accounting principles generally accepted in the United
States of America (GAAP). Management of the Company has made a number of
estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities at
the dates of the consolidated financial statements and the reporting of
revenue and expenses during the periods presented to prepare these
consolidated financial statements in conformity with GAAP. The Company
bases its estimates on historical experience and other assumptions
believed to be reasonable under the circumstances. Actual results could
differ from those estimates under different assumptions or conditions.
Management considers those estimates and assumptions that are most
important to the portrayal of the Company's financial condition and
results of operations, in that they require management's most subjective
judgments, to form the basis for the accounting policies deemed to be
most critical to the Company. These critical accounting policies include
the useful lives used to calculate depreciation expense on real estate
investments, judgments regarding the recoverability or impairment of each
real estate investment and the ultimate collectibility of accounts
receivable, and assumptions used in accounting for and disclosure of the
Company's interest rate collar.
If the useful lives of real estate investments were different, future
operating results would be affected. Future adverse changes in market
conditions or poor operating results could result in an inability to
recover real estate investment carrying values that may not be reflected
in current carrying values and could require an impairment charge in the
future. Future adverse changes in market conditions could also impact the
Company's tenants and may affect the adequacy of the allowance for
doubtful accounts receivable. If the methodologies and assumptions used
to estimate the fair value of the Company's interest rate collar or to
determine hedge effectiveness were different, amounts reported in
earnings and other comprehensive income and amounts expected to be
recognized in earnings in the future could be affected. Further, future
changes in market interest rates and other relevant factors could
increase the fair value of the liability for the collar and future
interest expense.
The consolidated financial statements of the Company include the accounts
and operations of the Company and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
(B) REAL ESTATE INVESTMENTS
Contributed real estate investments in July 1999 were recorded at the
carry-over basis of the Company's predecessor, which was fair market
value of the assets in conformity with GAAP applicable to pension funds.
Subsequent acquisitions of real estate investments, including those
acquired in the Bradley acquisition in 2000 and other additions, are
recorded at cost. The
F-15
<Page>
HERITAGE PROPERTY INVESTMENT TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001 AND 2000 AND THE PERIOD FROM JULY 9, 1999
(COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1999
provision for depreciation and amortization has been calculated using the
straight-line method over the following estimated useful lives:
<Table>
Land improvements............................ 15 years
Buildings and improvements................... 20 - 39 years
Tenant improvements.......................... Term of related lease
</Table>
Expenditures for maintenance, repairs and betterments that do not
materially extend the useful life of a real estate investment are charged
to operations as incurred and amounted to $5,574,000, $3,579,000 and
$1,006,000 for the years ended December 31, 2001 and 2000 and the period
from July 9, 1999 to December 31, 1999, respectively. Expenditures that
substantially extend the useful life of a real estate investment are
capitalized. Upon sale or other disposition of the real estate
investment, the cost and related accumulated depreciation and
amortization are removed and the resulting gain or loss, if any, is
reflected in net income. Interest on significant construction projects is
capitalized as part of the cost of real estate investments. Interest
capitalized for the years ended December 31, 2001 and 2000 and the period
from July 9, 1999 to December 31, 1999 was approximately $65,000, $24,000
and $50,000, respectively.
The Company applies Statement of Financial Accounting Standards (SFAS)
No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF, to recognize and measure impairment
of long-lived assets. Management reviews each real estate investment for
impairment whenever events or circumstances indicate that the carrying
value of a real estate investment may not be recoverable. The review of
recoverability is based on an estimate of the future undiscounted cash
flows, excluding interest charges, expected to result from the real
estate investment's use and eventual disposition. If impairment exists
due to the inability to recover the carrying value of a real estate
investment, an impairment loss is recorded to the extent that the
carrying value exceeds estimated fair market value.
Real estate investments held for sale are carried at the lower of
carrying amount or fair value, less costs to sell. Depreciation and
amortization are suspended during the period held for sale. There can be
no assurance that properties designated as held for sale will actually be
sold. The net carrying value of properties held for sale at December 31,
2001 and 2000 were $2,990,000 and $1,543,000, respectively.
(C) REVENUE RECOGNITION
Management has determined that all of the Company's leases with its
various tenants are operating leases. Rental income from such leases with
scheduled rent increases is recognized using the straight-line method
over the terms of the leases. Deferred rent receivable represents the
aggregate excess of rental revenue recognized on a straight-line basis
over cash received under applicable lease provisions. Rental revenue over
cash received included in income from rental and recoveries for the years
ended December 31, 2001 and 2000 and the period from July 9, 1999 to
December 31, 1999 amounted to $3,776,000, $2,954,000 and $958,000,
respectively.
Leases for both retail and office space generally contain provisions
under which the tenants reimburse the Company for a portion of property
operating expenses and real estate taxes
F-16
<Page>
HERITAGE PROPERTY INVESTMENT TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001 AND 2000 AND THE PERIOD FROM JULY 9, 1999
(COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1999
incurred by the Company. In addition, certain of the Company's operating
leases for retail space contain contingent rent provisions under which
tenants are required to pay a percentage of their sales in excess of a
specified amount as additional rent. The Company defers recognition of
contingent rental income until such specified targets are met.
Reimbursements for operating expenses and real estate taxes and
contingent rental income during the years ended December 31, 2001 and
2000 and the period from July 9, 1999 to December 31, 1999 were
$60,253,000, $28,996,000 and $7,004,000, respectively. These items are
included in income from rentals and recoveries in the consolidated
statements of income.
(D) DEFERRED FINANCING COSTS AND OTHER ASSETS
Included in deferred financing costs and other assets are costs incurred
in connection with securing financing for or leasing space in the
Company's real estate investments. Such charges are capitalized and
amortized over the terms of the related debt or lease. Unamortized
deferred charges are charged to expense upon prepayment of the financing
or early termination of the related lease.
(E) CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash in banks and short-term
investments with maturities at date of purchase of three months or less.
(F) CREDIT RISK
The Company operates in one industry, which is the acquisition,
ownership, management, leasing and redevelopment of real estate, and no
single tenant accounts for more than 10% of total revenue. Financial
instruments potentially subjecting the Company to concentrations of
credit risk consist principally of (1) temporary cash and equivalent
instruments, which are held at financial institutions of high credit
quality; and (2) tenant receivables, whose credit risk is distributed
among tenants in different industries and across several geographical
areas.
(G) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS,
requires the Company to disclose fair value information about all
financial instruments, whether or not recognized in the balance sheets,
for which it is practicable to estimate fair value. The Company's
financial instruments, other than debt, are generally short-term in
nature and contain minimal credit risk. These instruments consist of cash
and cash equivalents, rents and other receivables, and accounts payable.
The carrying values of these assets and liabilities in the consolidated
balance sheets are assumed to be at fair value.
The Company's mortgage loans and unsecured notes payable are at fixed
rates, and when compared with borrowing rates currently available to the
Company with similar terms and average maturities, approximate fair
value. The Company's line of credit facility and subordinated debt are at
variable rates, resulting in carrying values that approximate fair value.
F-17
<Page>
HERITAGE PROPERTY INVESTMENT TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001 AND 2000 AND THE PERIOD FROM JULY 9, 1999
(COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1999
The fair value of the Company's interest rate collar (as discussed
further in notes 6(f) and 15) was $7,756,000 and $2,477,000 as of
December 31, 2001 and 2000, respectively. This amount represents the
estimated termination cost of the contract to the Company at those dates
and is based on option pricing models that consider conditions and risks
existing at each balance sheet date.
(H) EARNINGS PER SHARE
In accordance with SFAS No. 128, EARNINGS PER SHARE, basic earnings per
common share is computed by dividing net income attributable to common
shareholders (defined as net income less paid and accrued preferred stock
distributions and accretion of redeemable equity) by the weighted average
number of common shares outstanding during the period. Diluted earnings
per share reflects the potential dilution that could occur if securities
or other contracts to issue common stock were exercised or converted into
common stock or resulted in the issuance of common stock and then shared
in the earnings of the Company.
At December 31, 2001, 2000, and 1999, preferred stock distributions of
$43,345,000, $38,410,000, and $17,487,000, respectively, and the effect
of the assumed conversion of convertible preferred stock and exchangeable
minority interests outstanding into shares of common stock were not
included in the computation of diluted loss per common share because the
impact on basic loss per common share was anti-dilutive. At December 31,
2001 and 2000, options and warrants to purchase 1,376,500 and 1,082,000
shares, respectively, of common stock at $25.00 per share were
outstanding but were not included in the computation of diluted loss per
common share because their exercise price was not below the estimated
fair value of the common shares and would therefore not dilute basic loss
per common share.
(3) REAL ESTATE INVESTMENTS
A summary of real estate investments follows as of December 31 (in thousands
of dollars):
<Table>
<Caption>
2001 2000
---------- ---------
Land.................................................. $ 290,758 284,996
Land improvements..................................... 149,072 144,950
Buildings and improvements............................ 1,474,058 1,452,353
Tenant improvements................................... 24,420 14,409
Improvements in process............................... 10,660 2,317
---------- ---------
1,948,968 1,899,025
Accumulated depreciation and amortization............. (103,800) (43,563)
---------- ---------
Net carrying value.................................. $1,845,168 1,855,462
========== =========
</Table>
(4) SUPPLEMENTAL CASH FLOW INFORMATION
During 2001, 2000 and 1999, interest paid was $85,013,000, $27,838,000, and
$1,919,000, respectively, and state income and franchise tax payments were
$730,000, $518,000, and $142,000, respectively.
F-18
<Page>
HERITAGE PROPERTY INVESTMENT TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001 AND 2000 AND THE PERIOD FROM JULY 9, 1999
(COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1999
During 2001, the Company assumed $14,869,000 of existing debt in connection
with the acquisition of a shopping center. Included in accrued expenses and
other liabilities at December 31, 2001 are accrued expenditures for real
estate investments of $2,738,000 and accrued expenses of $788,000 for
deferred equity financing costs.
In 2000, in connection with the acquisition of Bradley, the Company assumed
net operating liabilities of approximately $20,000,000 and $364,000,000 of
outstanding debt. Included in accrued expenses and other liabilities at
December 31, 2000 are accrued expenditures for real estate investments of
$312,000.
In July 1999, NETT contributed approximately $577,888,000 of real estate
investments and $3,758,000 of related assets, and the Company assumed
approximately $31,646,000 of existing debt. Included in accrued expenses and
other liabilities at December 31, 1999 are accrued expenditures related to
real estate investments of $877,000. During 1999, the Company assumed
$14,351,000 of existing debt in connection with the acquisition of a
shopping center.
Only the cash portion of the above transactions is reflected in the
accompanying consolidated statements of cash flows.
(5) OPERATING LEASES
Scheduled minimum future rentals under the Company's noncancelable operating
leases are as follows at December 31, 2001 (in thousands of dollars):
<Table>
<Caption>
YEAR ENDING DECEMBER 31 AMOUNT
- ----------------------- ----------
2002........................................................ $ 191,084
2003........................................................ 174,389
2004........................................................ 151,100
2005........................................................ 128,325
2006........................................................ 108,314
Thereafter.................................................. 560,857
----------
Total minimum future rentals............................ $1,314,069
==========
</Table>
(6) DEBT
(A) MORTGAGE LOANS PAYABLE
Mortgage loans consist of various nonrecourse issues collateralized by 56
real estate investments with an aggregate net carrying value of
$775,868,000 at December 31, 2001. The loans require monthly payments of
principal and interest through 2016 at interest rates ranging from 7.09%
to 10.13% and have a weighted average interest rate of 8.07% at
December 31, 2001. The loans are generally subject to prepayment
penalties.
F-19
<Page>
HERITAGE PROPERTY INVESTMENT TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001 AND 2000 AND THE PERIOD FROM JULY 9, 1999
(COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1999
Mortgage loans payable consisted of the following at December 31 (in
thousands of dollars):
<Table>
<Caption>
INTEREST
PROPERTY RATE MATURITY 2001 2000
- -------- -------- -------------- -------- --------
Eastville Plaza................... 7.09% April 2001 $ -- 2,754
Fox River Plaza................... 7.76% April 2002 4,836 4,957
Southport Center.................. 9.20% April 2002 7,843 7,936
Edgewood Shopping Center.......... 9.08% June 2002 6,384 6,459
Moorland Square................... 8.99% November 2002 3,239 3,319
Kimberly West..................... 7.88% January 2003 3,625 3,734
Martin's Bittersweet Plaza........ 8.88% June 2003 3,142 3,294
Miracle Hills Park................ 8.28% August 2004 3,744 3,810
The Commons of Chancellor Park.... 8.48% November 2004 13,086 13,399
Franklin Square................... 9.00% June 2005 14,783 --
Williamson Square................. 8.00% August 2005 11,765 12,030
Riverchase Village Shopping
Center.......................... 7.62% September 2005 10,627 10,873
Spring Mall....................... 9.39% October 2006 8,441 8,524
Innes Street Market............... 7.63% October 2007 13,738 13,997
Salem Consumer Square............. 10.13% September 2008 11,449 11,743
Southgate Shopping Center......... 8.38% October 2008 2,674 2,753
St. Francis Plaza................. 8.13% December 2008 1,354 1,492
8 shopping centers, cross
collateralized.................. 7.83% December 2009 84,213 78,327
545 Boylston Street and William J.
McCarthy Building............... 8.26% October 2010 36,454 36,925
29 shopping centers, cross
collateralized.................. 7.88% October 2010 241,881 243,603
Elk Park Center................... 7.64% August 2016 9,011 9,231
-------- -------
Total mortgage loans
payable..................... $492,289 479,160
======== =======
</Table>
(B) UNSECURED NOTES PAYABLE
In its acquisition of Bradley in September 2000, Heritage assumed
unsecured notes payable consisting of a $100,000,000, 7% fixed-rate issue
maturing on November 15, 2004; a $100,000,000, 7.2% fixed-rate issue
maturing on January 15, 2008; and $1,965,000 of other debt. The amount of
unsecured notes payable outstanding at December 31, 2001 and 2000 was
$201,490,000 and $201,965,000, respectively.
(C) LINE OF CREDIT FACILITY
In September 2000, Heritage entered into a $425,000,000 senior unsecured
revolving line of credit and term loan (the Line), consisting of a
$275,000,000 revolving line of credit and a $150,000,000 term loan. The
Line bears interest at a variable rate based on LIBOR and matures on
September 18, 2003. An annual fee ranging from .15% to .25% is charged on
unused amounts. The interest rate on all borrowings under the
$150,000,000 term loan is hedged throughout the term of the Line with an
interest rate floor and cap agreement as
F-20
<Page>
HERITAGE PROPERTY INVESTMENT TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001 AND 2000 AND THE PERIOD FROM JULY 9, 1999
(COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1999
discussed in (f) below that limits the variable rate range from 6.00% to
8.50%. The variable rates in effect at December 31, 2001 and 2000,
including the lender's margin, were 5.43% and 8.13%, respectively. The
Line requires Heritage to maintain certain financial ratios and restricts
the incurrence of certain indebtedness and the making of certain
investments. As of December 31, 2001 and 2000, amounts due under the Line
consisted of the $150,000,000 term loan, and $193,000,000 and
$173,000,000, respectively, of draws under the revolving line of credit.
(D) SUBORDINATED DEBT
In September 2000, Heritage entered into a $100,000,000 term credit
agreement (the Subdebt) which is subordinated in right of payment to the
Line. The Subdebt matures on March 18, 2004 and bears interest at a
variable rate based on LIBOR. The variable rate was 7.06% at
December 31, 2001 (including the lender's 5% margin) and 10.63%
(including the lender's 4% margin) at December 31, 2000. The Subdebt
contains covenants that, among other things, require the Company to
maintain certain financial ratios. In addition, the Subdebt contains
provisions that require repayment of the Subdebt upon full repayment of
the Line or upon receipt of aggregate equity proceeds in excess of
$250,000.
On April 30, 2001, the Company modified the interest rate terms under the
Subdebt. This modification resulted in the lender's margin being reduced
from its originally scheduled 6% and 8% increasing-rate levels to 5% for
the remaining term of the Subdebt. The Company determined that this
modification did not result in an early extinguishment of debt. The fees
incurred to modify the terms of the Subdebt were $1,800,000 and will be
amortized over the remaining term of the debt.
In the event that the Subdebt is not paid in full from the proceeds of
new equity issued by the Company on or before June 18, 2002, then the
Lender may collateralize the Line with certain of the Company's
properties. The lender, may however, commence with the process of
collateralizing the Line on or after March 18, 2002.
(E) SCHEDULED PRINCIPAL REPAYMENTS
Scheduled principal repayments on aggregate outstanding debt at
December 31, 2001 are as follows (in thousands of dollars):
<Table>
<Caption>
YEAR ENDING DECEMBER 31 AMOUNT
- ----------------------- ----------
2002........................................................ $ 32,467
2003........................................................ 352,887
2004........................................................ 222,920
2005........................................................ 40,601
2006........................................................ 14,855
Thereafter.................................................. 473,049
----------
Total due............................................... $1,136,779
==========
</Table>
F-21
<Page>
HERITAGE PROPERTY INVESTMENT TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001 AND 2000 AND THE PERIOD FROM JULY 9, 1999
(COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1999
(F) HEDGES OF INTEREST RATE RISKS
From time to time the Company uses interest rate caps, floors, swaps and
locks to limit its exposure to changes in interest rates on its floating
rate debt and to hedge interest rates in anticipation of issuing
unsecured debt at a time when management believes interest rates are
favorable, or at least desirable given the consequences of not hedging an
interest rate while the Company is exposed to increases in interest
rates. The Company does not use derivative financial instruments for
trading or speculative purposes.
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES,
which was amended by SFAS No. 137, DEFERRAL OF THE EFFECTIVE DATE OF SFAS
NO. 133, and SFAS No. 138, ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS
AND CERTAIN HEDGING ACTIVITIES. These statements establish accounting and
reporting standards for derivative and hedging activities and require
that an entity recognize all derivatives as either assets or liabilities
in the balance sheet and measure those instruments at fair value. The
Company adopted these statements on January 1, 2001. The adoption of
these statements on this date resulted in the recognition in the
consolidated balance sheet of the fair value of the liability of
$2,477,000 for the Company's interest rate collar. See note 15 for a
description of the effects of this new accounting principle on the
Company's 2001 consolidated financial statements.
(7) SHAREHOLDERS' EQUITY AND REDEEMABLE EQUITY
On September 7, 2001, the Company filed a registration statement on
Form S-11 with the Securities and Exchange Commission under the Securities
Act of 1933 for an initial public offering of its common stock.
The Series A 8.5% Cumulative Convertible Participating Preferred Stock
(Series A Preferred Stock) automatically converts into common stock on a
one-to-one basis upon a majority vote of the outstanding preferred
shareholders to convert or a qualified public offering by the Company.
On July 9, 1999, Prudential purchased 251,337 shares of the Company's common
stock and 748,663 shares of its Series A Preferred Stock for $25,000,000. On
September 18, 2000, Prudential purchased an additional 1,005,348 shares of
the Company's common stock and 2,994,652 shares of Series A Preferred Stock
for $100,000,000, net of equity issuance fees of $2,161,000.
Prudential may redeem its common and preferred shares if certain events do
not occur, including a qualified public offering. The redemption period
commences in October 2003 and ends on the earlier of 540 days after the
commencement of the redemption period or the occurrence of a qualified
public offering or a merger with a public entity. The redemption price is to
be based upon a valuation of the Company. Because Prudential can require the
Company to redeem these shares, its common and preferred shares have been
separately reported as redeemable equity.
In connection with its purchases of common stock and Series A Preferred
Stock, Prudential received warrants to acquire shares of the Company's
common stock at an exercise price of $25.00 per share, which was assumed to
be equal to the fair value of the stock at the date the warrants were
issued. On July 9, 1999, 75,000 of the warrants were issued with an
expiration date of July 13, 2003, and on September 18, 2000, 300,000
warrants were issued with an expiration date of September 18, 2004. The
warrants had an estimated fair value at issuance of $220,000 and
F-22
<Page>
HERITAGE PROPERTY INVESTMENT TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001 AND 2000 AND THE PERIOD FROM JULY 9, 1999
(COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1999
$879,000, respectively, and such amounts were recorded as additional paid-in
capital. The equity issuance costs incurred and warrants issued in
connection with the Prudential share purchases will be accreted over their
respective lives.
(8) INCOME TAXES
The Company has elected to be taxed as a REIT under the Internal Revenue
Code. In order to qualify as a REIT for income tax purposes, the Company
must, among other things, distribute to shareholders at least 90% of its
taxable income. It is the Company's policy to distribute 100% of its taxable
income to shareholders; accordingly, no provision has been made for federal
income taxes.
The Company paid common distributions of $3,704,000 and $1,113,000 in 2001
and 2000, respectively. The Company paid preferred distributions of
$43,282,000, $36,818,000 and $8,339,000 in 2001, 2000 and 1999,
respectively.
On December 31, 2001, the Board of Directors of the Company declared a
fourth quarter distribution on its Series A Cumulative Convertible
Participating Preferred Stock in the amount of $0.53 per share and a fourth
quarter distribution on its capital stock (in which the holders of Series A
Preferred Stock participate on an as-if-converted basis) of $0.045 per
share, payable on January 15, 2002 to shareholders of record on
December 30, 2001.
(9) RELATED PARTY TRANSACTIONS
(A) TRANSACTIONS WITH PRUDENTIAL
On April 30, 2001, in conjunction with the modification of its
$100,000,000 subordinated debt, the Company used the proceeds of a
$50,000,000 loan from a lender to repay the $50,000,000 of subordinated
debt originated by NETT and held by Prudential at December 31, 2000.
Interest expense paid to Prudential for this issue during the years ended
December 31, 2001 and 2000 was $2,027,000 and $1,527,000, respectively.
Interest payable to Prudential at December 31, 2000 for this issue was
$487,000.
Preferred and common distributions paid to Prudential in 2001, 2000 and
1999 were $8,636,000, $1,931,000 and $350,000, respectively. At
December 31, 2001 and 2000, distributions payable to Prudential were
$2,216,000 and $1,989,000, respectively.
Prudential provided financing services to Heritage in connection with the
Bradley acquisition and received fees totaling $6,915,000. These costs
have been capitalized as deferred financing costs and will be amortized
over the lives of the related debt issues. In addition, Heritage paid
Prudential $2,050,000 of equity issuance costs in connection with
Prudential's $100,000,000 purchase of common and preferred shares in
2000. This amount has been charged against additional paid-in capital.
Prudential also provided advisory services to Heritage in connection with
the Bradley acquisition and received fees totaling $3,743,000, which were
capitalized as an acquisition cost of the Bradley real estate
investments. All of these costs were paid by Heritage in 2000.
In September 2000, Heritage issued $244,000,000 of collateralized
mortgage-backed securities payable to Prudential with a fixed interest
rate of 7.88%, maturing October 1, 2010. This issue
F-23
<Page>
HERITAGE PROPERTY INVESTMENT TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001 AND 2000 AND THE PERIOD FROM JULY 9, 1999
(COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1999
is included in mortgage loans payable at December 31, 2001 and 2000 and
was serviced but no longer held by Prudential on these dates.
During the period July 9, 1999 to December 31, 1999, the Company paid
Prudential an advisory fee of approximately $100,000.
(B) TRANSACTIONS WITH NETT
Preferred and common distributions paid to NETT in 2001, 2000 and 1999
were $38,000,000, $36,000,000 and $7,989,000, respectively. At
December 31, 2001 and 2000, distributions payable to NETT were $9,750,000
and $8,750,000, respectively.
Included in accounts payable, accrued expenses and other liabilities at
December 31, 2001 and 2000 is approximately $1,081,000 and $3,833,000,
respectively, that is due to NETT. These amounts represent standard post
closing adjustments related to the contribution of the real estate
investments and related assets and liabilities to the Company.
The Company signed a transitional servicing agreement whereby the Company
provided management and collection services for the benefit of NETT and
was compensated for such services. This agreement was terminated in
September 2000. The Company earned approximately $244,000 and $95,000,
respectively, in connection with the transitional servicing agreement
during the year ended December 31, 2000 and the period July 9, 1999 to
December 31, 1999.
In connection with the formation of Heritage, environmental studies were
not completed for all of the contributed properties. NETT has agreed to
indemnify the Company for environmental costs up to $50,000,000. The
environmental costs include completing environmental studies and any
required remediation.
The Company and NETT have 6% and 74% interests, respectively, in an
office building development project located in Boston, Massachusetts. The
Company has accounted for its interest using the cost method and has
expended nothing on the project to date.
F-24
<Page>
HERITAGE PROPERTY INVESTMENT TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001 AND 2000 AND PERIOD FROM JULY 9, 1999
(COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1999
(10) SEGMENT REPORTING
The Company, which has internal property management, leasing, and
redevelopment capabilities, owns and seeks to acquire primarily
grocer-anchored neighborhood and community shopping centers in the Eastern
and Midwestern United States. Such shopping centers are typically anchored
by grocers complemented with stores providing a wide range of other goods
and services to shoppers. Since all of the Company's shopping centers
exhibit similar economic characteristics, cater to the day-to-day living
needs of their respective surrounding communities, and offer similar degrees
of risk and opportunities for growth, the shopping centers have been
aggregated and reported as one operating segment. The Company also owns
office buildings and single-tenant properties. Because these properties
require a different operating strategy and management expertise than all
other properties in the portfolio, they are considered separate reportable
segments.
The Company assesses and measures operating results on an individual
property basis within each segment, based on net operating income, and then
converts such amounts in the aggregate to a performance measure referred to
as Funds From Operations (FFO).
FFO, computed in accordance with the October 1999 "White Paper" on FFO
published by the National Association of Real Estate Investment Trusts
(NAREIT) and as followed by the Company, represents income before allocation
to minority interests (computed in accordance with GAAP), excluding gains or
losses from debt restructuring and sales of property, plus depreciation and
amortization of real estate-related assets, and, as applicable, after
preferred stock distributions and adjustments for unconsolidated
partnerships and joint ventures. FFO does not represent cash generated from
operating activities in accordance with GAAP and should not be considered an
alternative to cash flow as a measure of liquidity. Since the NAREIT White
Paper only provides guidelines for computing FFO, the computation of FFO may
vary from one REIT to another. FFO is not necessarily indicative of cash
available to fund cash needs.
The accounting policies of the segments are the same as those described in
note 2. The revenue and net operating income for the years ended
December 31, 2001 and 2000 and the period from July 9, 1999 to December 31,
1999 and assets for each of the reportable segments are summarized in the
following tables. Non-segment assets necessary to reconcile to total assets
include cash and cash equivalents and deferred financing costs and other
assets.
F-25
<Page>
HERITAGE PROPERTY INVESTMENT TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001 AND 2000 AND PERIOD FROM JULY 9, 1999
(COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1999
The computation of FFO for the Company and a reconciliation to net income
attributable to common shareholders are as follows (in thousands of
dollars):
<Table>
<Caption>
PERIOD FROM
YEAR ENDED DECEMBER 31, JULY 9 TO
------------------------ DECEMBER 31,
2001 2000 1999
----------- ---------- ------------
Total property revenue:
Shopping centers.................................... $ 243,540 126,219 32,435
Office buildings.................................... 11,687 12,083 5,615
Single-tenant properties............................ 307 847 500
---------- --------- ------
$ 255,534 139,149 38,550
========== ========= ======
Total property net operating income:
Shopping centers.................................... $ 173,459 92,547 23,678
Office buildings.................................... 6,733 7,334 3,388
Single-tenant properties............................ 290 754 492
---------- --------- ------
NET OPERATING INCOME.................................. 180,482 100,635 27,558
---------- --------- ------
Non-property (income) expenses:
Interest and other income........................... (298) (2,117) (485)
Net derivative gains................................ (986) -- --
Interest expense.................................... 88,315 33,990 2,032
Interest expense -- related party................... 2,027 1,527 --
General and administrative.......................... 12,640 8,274 2,699
Amortization of non-real estate related costs....... 328 214 134
Income allocated to minority interests.............. 6,656 1,941 --
Preferred stock distributions....................... 43,345 38,410 17,487
Accretion of redeemable equity...................... 995 329 25
---------- --------- ------
153,022 82,568 21,892
---------- --------- ------
FUNDS FROM OPERATIONS................................. $ 27,460 18,067 5,666
========== ========= ======
Reconciliation to net loss attributable to common
shareholders:
Funds from operations............................... $ 27,460 18,067 5,666
Depreciation of real estate assets and amortization
of tenant improvements............................ (62,530) (34,114) (9,525)
Amortization of deferred leasing commissions........ (1,193) (480) (129)
Net gains on sales of real estate investments and
equipment......................................... 4,159 1,890 --
---------- --------- ------
Net loss attributable to common shareholders.......... $ (32,104) (14,637) (3,988)
========== ========= ======
</Table>
<Table>
<Caption>
AS OF DECEMBER 31,
----------------------
2001 2000
---------- ---------
TOTAL ASSETS:
Shopping centers...................................... $1,827,834 1,807,264
Office buildings...................................... 56,003 68,211
Single-tenant properties.............................. 1,678 3,101
Non-segment assets.................................... 21,449 27,086
---------- ---------
$1,906,964 1,905,662
========== =========
</Table>
F-26
<Page>
HERITAGE PROPERTY INVESTMENT TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001 AND 2000 AND PERIOD FROM JULY 9, 1999
(COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1999
(11) STOCK-BASED COMPENSATION
(A) OVERVIEW
SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, establishes financial
accounting and reporting standards for stock-based employee compensation
plans, including all arrangements by which employees receive shares of stock
or other equity instruments of the employer or the employer incurs
liabilities to employees in amounts based on the price of the employer's
stock. SFAS No. 123 defines a fair value-based method of accounting for an
employee stock option or similar equity instrument and encourages all
entities to adopt that method of accounting for all of their employee stock
compensation plans. However, it also allows an entity to continue to measure
compensation cost using the intrinsic value-based method of accounting
prescribed by Accounting Principles Opinion No. 25, ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES (Opinion No. 25) and to make pro-forma disclosures of
net income and earnings per share as if the fair value method of accounting
defined in SFAS No. 123 were applied. The Company uses Opinion No. 25 and
related Interpretations to measure compensation costs for its stock-based
plans.
The Company's 2000 Equity Incentive Plan (the Plan) authorizes options and
other stock-based compensation awards to be granted to employees for up to
2,400,000 shares of common and/or preferred stock. A committee of the Board
of Directors administers the Plan and is responsible for selecting persons
eligible for awards and for determining the term and duration of any award.
(B) STOCK OPTIONS
During 2000, options to purchase 708,000 shares of common stock at $25.00
per share were granted under the Plan. The exercise price of each option
equals the estimated per-share fair value of the Company's common stock. Of
the 708,000 options granted, 463,300 vest at a rate of one-third per year on
the anniversary of the grant date. The remaining 244,700 shares vest between
2003 and 2004, or earlier if certain events occur, including an initial
public offering of the Company. All options have a duration of ten years
from the grant date. As of December 31, 2001, 154,433 options had vested and
were exercisable by employees. Such options had remaining contractual lives
of nine years at December 31, 2001.
During 2001, pursuant to the Plan, the Company granted 420,750 stock options
at an exercise price of $25.00 per share. The options vest at a rate of
one-third per year on the anniversary of the grant date. All options have a
duration of 10 years from the grant date. No such options had vested as of
December 31, 2001.
F-27
<Page>
HERITAGE PROPERTY INVESTMENT TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001 AND 2000 AND PERIOD FROM JULY 9, 1999
(COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1999
A summary of option transactions during the periods covered by these
financial statements is as follows:
<Table>
<Caption>
NUMBER OF EXERCISE PRICE
SHARES PER SHARE
--------- --------------
Outstanding at January 1, 2000........................... -- $ --
Granted................................................ 708,000 25.00
Expired................................................ (1,000) 25.00
Exercised.............................................. -- --
--------- ------
Outstanding at December 31, 2000......................... 707,000 25.00
Granted................................................ 420,750 25.00
Expired................................................ (126,250) 25.00
Exercised.............................................. -- --
--------- ------
Outstanding at December 31, 2001......................... 1,001,500 $25.00
========= ======
</Table>
In January 2002, options to purchase 614,352 shares of common stock were
granted to certain employees relating to 2001 performance. The options have
an exercise price of $25.00 per share, which was equal to the fair value per
share of the Company's common stock at the grant date. The options have a
contractual life of 10 years and vest over three years.
The Company has estimated the fair value of options granted using the
minimum value method, which SFAS No. 123 indicates may be used by nonpublic
companies and which excludes the expected volatility of the Company's stock.
The Company applied this method incorporating the following weighted-average
assumptions: dividend yield of 8.25%; risk-free interest rate of 5%;
expected life of 4 years; and no expected volatility. Had compensation cost
for these options been determined in accordance with SFAS No. 123, the
Company's net income and basic and diluted loss per common share would have
been unchanged from reported amounts for the years ended December 31, 2001
and 2000. The effect of applying SFAS No. 123 to disclose compensation cost
may not be representative of the effects of such application in future
years.
During the years ended December 31, 2001 and 2000, the Company granted
shares of restricted stock with no performance-based conditions and no
exercise price to certain employees. Grantees immediately receive
distributions and voting rights on shares granted, and the shares vest over
periods ranging up to five years. Compensation expense is recognized over
the vesting periods. During the years ended December 31, 2001 and 2000,
compensation expense recognized was $1,464,000 and $375,000, respectively,
based on a fair value per share of $25.00 at each of the grant dates.
Following is a table summarizing restricted stock activity during the years
ended December 31:
<Table>
<Caption>
2001 2000
-------- --------
Unvested shares outstanding at beginning of year............ 60,000 --
New shares granted........................................ 84,497 75,000
Shares forfeited.......................................... (1,830) --
Shares vesting............................................ (58,556) (15,000)
------- -------
Unvested shares outstanding at end of year.................. 84,111 60,000
======= =======
</Table>
F-28
<Page>
HERITAGE PROPERTY INVESTMENT TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001 AND 2000 AND PERIOD FROM JULY 9, 1999
(COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1999
In January 2002, the Company granted 108,565 shares of restricted stock with
no performance-based conditions and no exercise price to certain employees
relating to 2001 performance. The shares vest over five years, and
compensation expense will be recognized over the vesting period.
(12) COMMITMENTS AND CONTINGENCIES
(A) RETIREMENT SAVINGS PLAN
Effective in January 2000, the Company began to offer its employees a
retirement savings plan qualified under Section 401(k) of the Internal
Revenue Code. Under the Plan, the Company provides matching
contributions. These matching contributions are currently equal to 100%
of the employee's contribution up to 3% of the employee's compensation,
and 50% of the employee's contribution above 3% and up to 5% of the
employee's compensation. These employer contributions aggregated $183,000
and $122,000 in 2001 and 2000, respectively, and vested immediately.
(B) LEGAL AND OTHER MATTERS
The Company is subject to legal and other claims incurred in the normal
course of business. Based on its review and consultation with counsel of
such matters known to exist, management does not believe that the
ultimate outcome of these claims would materially affect the Company's
financial position or results of operations.
(13) ACQUISITION OF BRADLEY REAL ESTATE, INC.
On September 18, 2000, Heritage acquired Bradley Real Estate, Inc.
(Bradley), a publicly traded REIT based in Illinois with nearly 100 shopping
center properties located primarily in the Midwest, at an aggregate cost of
approximately $1,200,000,000. The Company acquired Bradley through a merger
in which all of the holders of Bradley capital stock received cash in
exchange for their shares. The transaction was accounted for using the
purchase method and, accordingly, the acquisition cost was allocated to the
estimated fair values of the assets received and liabilities assumed.
Results of Bradley's operations from the acquisition date have been included
in the accompanying consolidated financial statements
Summary unaudited pro forma operating data for the Company as if Bradley had
been acquired as of July 9, 1999 is as follows (in thousands of dollars,
except per-share data):
<Table>
<Caption>
YEAR ENDED JULY 9, 1999 TO
DECEMBER 31, 2000 DECEMBER 31, 1999
---------------------- ----------------------
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
---------- --------- ---------- ---------
Income from rentals and recoveries........... $139,149 252,666 38,550 111,628
Net income................................... 24,102 14,459 13,524 12,613
Net loss attributable to common
shareholders............................... (14,637) (29,454) (3,988) (8,438)
Basic and diluted net loss per common
share...................................... (2.40) (4.32) (0.69) (1.34)
</Table>
The unaudited pro forma operating data are presented for comparative
purposes only and are not necessarily indicative of what the actual results
of operations would have been for the year ended
F-29
<Page>
HERITAGE PROPERTY INVESTMENT TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001 AND 2000 AND PERIOD FROM JULY 9, 1999
(COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1999
December 31, 2000 or the period from July 9, 1999 to December 31, 1999, nor
do such data purport to represent results to be achieved in future periods.
(14) SUPPLEMENTARY QUARTERLY DATA (UNAUDITED)
<Table>
<Caption>
QUARTER ENDED
------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE DATA)
2001
Income from rentals and recoveries......... $65,314 63,665 61,358 65,197
Net income................................. 5,234 2,931 1,104 2,967
Net loss attributable to common
shareholders............................. (5,823) (8,243) (9,950) (8,088)
Basic and diluted net loss per common
share.................................... (0.85) (1.21) (1.46) (1.19)
</Table>
<Table>
<Caption>
QUARTER ENDED
------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE DATA)
2000
Income from rentals and recoveries......... $22,918 22,472 29,358 64,401
Net income................................. 7,172 8,506 5,744 2,680
Net loss attributable to common
shareholders............................. (1,990) (657) (3,682) (8,308)
Basic and diluted net loss per common
share*................................... (0.34) (0.11) (0.62) (1.22)
</Table>
- ------------------------------
* Loss per common share is computed independently for each of the quarters
presented, which when added together do not equal loss per common share for
the year.
(15) IMPLEMENTATION OF SFAS NO. 133
On January 1, 2001, the Company adopted SFAS No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, as amended by SFAS No. 138,
ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING
ACTIVITIES. SFAS No. 133, as amended, establishes accounting and reporting
standards for derivative instruments. Specifically, SFAS No. 133 requires an
entity to recognize all derivatives as either assets or liabilities in the
balance sheet and to measure such instruments at fair value. Fair value
adjustments affect either other comprehensive income (a component of
shareholders' equity) or net income, depending on whether the derivative
instrument qualifies as a hedge for accounting purposes and, if so, the
nature of the hedging activity.
The Company uses certain derivative financial instruments to manage, or
hedge, interest rate risks related to its borrowings, from lines of credit
to medium- and long-term financings. The Company requires that hedging
derivative instruments are effective in reducing the interest rate risk
exposure that they are designed to hedge. Instruments that meet the hedging
criteria are formally designated as hedges at the inception of the
derivative contract. The Company does not use derivatives for trading or
speculative purposes and only enters into contracts with major financial
institutions based on their credit rating and other factors. To determine
the fair values of its derivative instruments, the Company uses methods and
assumptions based on market conditions and risks existing at each balance
sheet date. Such methods incorporate standard market conventions and
F-30
<Page>
HERITAGE PROPERTY INVESTMENT TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2001 AND 2000 AND PERIOD FROM JULY 9, 1999
(COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1999
techniques such as discounted cash flow analysis and option pricing models
to determine fair value. All methods of estimating fair value result in
general approximation of value, and such value may or may not actually be
realized.
The Company's only derivative is an interest rate "collar" entered into
pursuant to and as a condition of the Company's line of credit facility.
This collar limits the variable interest rate range on the entire
$150,000,000 term loan under the Line to a floor of 6% and a cap of 8.5%
through September 18, 2003, the date of maturity of the Line. The derivative
is classified as a cash flow hedge and the fair value of the derivative is
included in accrued expenses and other liabilities in the accompanying
consolidated balance sheet as of December 31, 2001. For purposes of
determining hedge effectiveness, the Company excludes the time value element
of the collar. As of January 1, 2001, the adoption of SFAS No. 133 resulted
in the recognition of a loss of $2,477,000, which is reported as a
cumulative transition adjustment to accumulated other comprehensive loss (a
component of changes in shareholders' equity). The net increase in the fair
value of the liability for the collar during the year ended December 31,
2001 was $5,279,000, which resulted from a net gain recognized in income
during the year ended December 31, 2001 of $986,000 (representing the time
value component of the collar excluded from the assessment of hedge
effectiveness) and a net loss of $6,265,000 charged to accumulated other
comprehensive loss. If the collar were to be liquidated through settlement
by the parties, accumulated losses reported in accumulated other
comprehensive loss would be reclassified to earnings. The estimated amount
of existing losses as of December 31, 2001 that are expected to be
reclassified into earnings as interest expense within the next 12 months is
$5,650,000.
(16) IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARD
In August 2001, the Financial Accounting Standards Board issued SFAS
No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS,
which supersedes both SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, and the
accounting and reporting provisions of APB Opinion No. 30, REPORTING THE
RESULTS OF OPERATIONS--REPORTING THE EFFECTS OF DISPOSAL OF A SEGMENT OF
BUSINESS, AND EXTRAORDINARY, UNUSUAL, AND INFREQUENTLY OCCURRING EVENTS AND
TRANSACTIONS, for the disposal of a segment of a business (as previously
defined in that Opinion). SFAS No. 144 retains the fundamental provisions in
SFAS No. 121 for recognizing and measuring impairment losses on long-lived
assets held for use and long-lived assets to be disposed of by sale, while
also resolving significant implementation issues associated with SFAS
No. 121. In addition, SFAS No. 144 retains the basic provisions of Opinion
30 for presenting discontinued operations in the income statement but
broadens that presentation to include a component of an entity (rather than
a segment of a business).
The Company is required to adopt SFAS No. 144 no later than the year
beginning after December 15, 2001, and plans to adopt its provisions for the
quarter ending March 31, 2002. Management does not expect the adoption of
SFAS No. 144 for long-lived assets held for use to have a material impact on
the Company's financial statements because the impairment assessment under
SFAS No. 144 is largely unchanged from SFAS No. 121. The remaining
provisions of SFAS No. 144 will be applied prospectively by the Company to
newly initiated sale or disposal activities from the date of adoption.
F-31
<Page>
SCHEDULE III
HERITAGE PROPERTY INVESTMENT TRUST, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2001
(IN THOUSANDS OF DOLLARS)
The following table sets forth detail with respect to the properties, and
related encumbrances, owned by the Company at December 31, 2001.
<Table>
<Caption>
INITIAL COST TO THE COMPANY
------------------------------------------- CAPITALIZED
LAND AND BUILDINGS AND SUBSEQUENT TO
PROPERTY NAME AND LOCATION ENCUMBRANCES IMPROVEMENTS IMPROVEMENTS ACQUISITION
- -------------------------------- ------------ ------------ ------------- -------------
RETAIL SHOPPING CENTERS
ALABAMA
Riverchase Village Shopping
Center
Hoover, AL.................... $ 10,627 $ 4,094 $ 13,718 $ 422
CONNECTICUT
Torrington Plaza
Torrington, CT................ 241,881(1) 2,548 8,538 228
FLORIDA
Barton Commons
Rockledge, FL................. (1) 1,652 5,546 65
Naples Shopping Center
Naples, FL.................... 84,213(2) 4,783 16,029 189
Park Shore Shopping Center
Naples, FL.................... (1) 3,099 10,391 770
Shoppers Haven Shopping Center
Pompano Beach, FL............. -- 3,286 10,933 995
Venetian Isle Shopping Center
Lighthouse Point, FL.......... (1) 3,605 12,084 147
GEORGIA
Shenandoah Plaza
Newnan, GA.................... -- 1,352 4,530 2
ILLINOIS
Bartonville Square
Bartonville, IL............... -- 572 1,914 199
Butterfield Square
Libertyville, IL.............. -- 3,328 11,139 27
The Commons of Chicago Ridge
Chicago Ridge, IL............. -- 9,254 30,982 1,799
The Commons of Crystal Lake
Crystal Lake, IL.............. -- 7,193 24,079 44
Crossroads Centre
Fairview Heights, IL.......... -- 3,614 12,099 74
Fairhills Shopping Center
Springfield, IL............... -- 1,369 4,583 --
Heritage Square
Naperville, IL................ -- 5,554 18,593 350
High Point Centre
Lombard, IL................... -- 5,621 18,817 35
<Caption>
GROSS AMOUNT CARRIED AT DECEMBER 31, 2001
-------------------------------------------------------- LIVES ON WHICH
LAND AND BUILDINGS AND ACCUMULATED DATE ACQUIRED DEPRECIATION IS
PROPERTY NAME AND LOCATION IMPROVEMENTS IMPROVEMENTS TOTAL DEPRECIATION BY COMPANY COMPUTED
- -------------------------------- ------------ ------------- ---------- ------------ ------------- ---------------
RETAIL SHOPPING CENTERS
ALABAMA
Riverchase Village Shopping
Center
Hoover, AL.................... $ 4,094 $ 14,140 $ 18,234 $ 1,481 1999 5-39
CONNECTICUT
Torrington Plaza
Torrington, CT................ 2,548 8,766 11,314 903 1999 3-39
FLORIDA
Barton Commons
Rockledge, FL................. 1,652 5,611 7,263 573 1999 5-39
Naples Shopping Center
Naples, FL.................... 4,783 16,218 21,001 1,654 1999 5-39
Park Shore Shopping Center
Naples, FL.................... 3,099 11,161 14,260 1,176 1999 5-39
Shoppers Haven Shopping Center
Pompano Beach, FL............. 3,304 11,910 15,214 1,195 1999 5-39
Venetian Isle Shopping Center
Lighthouse Point, FL.......... 3,605 12,231 15,836 1,251 1999 2-39
GEORGIA
Shenandoah Plaza
Newnan, GA.................... 1,352 4,532 5,884 247 2000 10-39
ILLINOIS
Bartonville Square
Bartonville, IL............... 572 2,113 2,685 104 2000 10-39
Butterfield Square
Libertyville, IL.............. 3,328 11,166 14,494 609 2000 10-39
The Commons of Chicago Ridge
Chicago Ridge, IL............. 9,271 32,764 42,035 1,863 2000 5-39
The Commons of Crystal Lake
Crystal Lake, IL.............. 7,193 24,123 31,316 1,320 2000 4-39
Crossroads Centre
Fairview Heights, IL.......... 3,614 12,173 15,787 661 2000 10-39
Fairhills Shopping Center
Springfield, IL............... 1,369 4,583 5,952 250 2000 10-39
Heritage Square
Naperville, IL................ 5,554 18,943 24,497 1,023 2000 10-39
High Point Centre
Lombard, IL................... 5,621 18,852 24,473 1,026 2000 10-39
</Table>
F-32
<Page>
SCHEDULE III
HERITAGE PROPERTY INVESTMENT TRUST, INC. (CONTINUED)
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2001
(IN THOUSANDS OF DOLLARS)
<Table>
<Caption>
INITIAL COST TO THE COMPANY
------------------------------------------- CAPITALIZED
LAND AND BUILDINGS AND SUBSEQUENT TO
PROPERTY NAME AND LOCATION ENCUMBRANCES IMPROVEMENTS IMPROVEMENTS ACQUISITION
- -------------------------------- ------------ ------------ ------------- -------------
Parkway Pointe
Springfield, IL............... -- 1,059 3,546 --
Rivercrest
Crestwood, IL................. -- 10,043 33,620 47
Rollins Crossing
Round Lake Beach, IL.......... -- 3,839 12,852 3
Sangamon Center North
Springfield, IL............... -- 2,450 8,204 114
Sheridan Village
Peoria, IL.................... -- 5,293 17,716 867
Sterling Bazaar
Peoria, IL.................... -- 1,619 5,419 50
Twin Oaks Centre
Silvis, IL.................... -- 1,832 6,131 15
Wardcliffe Shopping Center
Peoria, IL.................... -- 503 1,682 189
Westview Center
Hanover Park, IL.............. -- 6,527 21,852 280
INDIANA
County Line Mall
Indianapolis, IN.............. -- 4,616 15,451 67
Double Tree Plaza
Winfield, IN.................. -- 1,404 4,703 24
Germantown Shopping Center
Jasper, IN.................... -- 1,829 6,124 1,280
King's Plaza
Richmond, IN.................. -- 983 3,290 424
Lincoln Plaza
New Haven, IN................. -- 1,241 4,155 104
Martin's Bittersweet Plaza
Mishawaka, IN................. 3,142 1,110 3,717 --
Rivergate Shopping Center
Shelbyville, IN............... -- 1,299 4,350 205
Sagamore Park Centre
West Lafayette, IN............ -- 1,768 5,919 89
Speedway SuperCenter
Indianapolis, IN.............. -- 11,446 38,322 1,254
The Village
Gary, IN...................... -- 2,649 8,871 2,977
University Crossings
Mishawaka, IN................. -- 3,174 -- --
<Caption>
GROSS AMOUNT CARRIED AT DECEMBER 31, 2001
-------------------------------------------------------- LIVES ON WHICH
LAND AND BUILDINGS AND ACCUMULATED DATE ACQUIRED DEPRECIATION IS
PROPERTY NAME AND LOCATION IMPROVEMENTS IMPROVEMENTS TOTAL DEPRECIATION BY COMPANY COMPUTED
- -------------------------------- ------------ ------------- ---------- ------------ ------------- ---------------
Parkway Pointe
Springfield, IL............... 1,059 3,546 4,605 193 2000 10-39
Rivercrest
Crestwood, IL................. 10,043 33,667 43,710 1,838 2000 10-39
Rollins Crossing
Round Lake Beach, IL.......... 3,839 12,855 16,694 702 2000 4-39
Sangamon Center North
Springfield, IL............... 2,450 8,318 10,768 450 2000 10-39
Sheridan Village
Peoria, IL.................... 5,384 18,492 23,876 969 2000 10-39
Sterling Bazaar
Peoria, IL.................... 1,619 5,469 7,088 296 2000 10-39
Twin Oaks Centre
Silvis, IL.................... 1,842 6,136 7,978 335 2000 10-39
Wardcliffe Shopping Center
Peoria, IL.................... 541 1,833 2,374 102 2000 5-39
Westview Center
Hanover Park, IL.............. 6,699 21,960 28,659 1,200 2000 10-39
INDIANA
County Line Mall
Indianapolis, IN.............. 4,616 15,518 20,134 846 2000 3-39
Double Tree Plaza
Winfield, IN.................. 1,419 4,712 6,131 260 2000 5-39
Germantown Shopping Center
Jasper, IN.................... 1,848 7,385 9,233 419 2000 3-39
King's Plaza
Richmond, IN.................. 1,112 3,585 4,697 208 2000 5-39
Lincoln Plaza
New Haven, IN................. 1,241 4,259 5,500 242 2000 2-39
Martin's Bittersweet Plaza
Mishawaka, IN................. 1,110 3,717 4,827 203 2000 10-39
Rivergate Shopping Center
Shelbyville, IN............... 1,299 4,555 5,854 238 2000 5-39
Sagamore Park Centre
West Lafayette, IN............ 1,768 6,008 7,776 328 2000 4-39
Speedway SuperCenter
Indianapolis, IN.............. 11,446 39,576 51,022 2,103 2000 3-39
The Village
Gary, IN...................... 2,649 11,848 14,497 505 2000 3-39
University Crossings
Mishawaka, IN................. 3,174 -- 3,174 -- 2001
</Table>
F-33
<Page>
SCHEDULE III
HERITAGE PROPERTY INVESTMENT TRUST, INC. (CONTINUED)
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2001
(IN THOUSANDS OF DOLLARS)
<Table>
<Caption>
INITIAL COST TO THE COMPANY
------------------------------------------- CAPITALIZED
LAND AND BUILDINGS AND SUBSEQUENT TO
PROPERTY NAME AND LOCATION ENCUMBRANCES IMPROVEMENTS IMPROVEMENTS ACQUISITION
- -------------------------------- ------------ ------------ ------------- -------------
Washington Lawndale Commons
Evansville, IN................ -- 4,757 15,924 487
IOWA
Burlington Plaza West
Burlington, IA................ -- 1,409 4,719 4
Davenport Retail Center
Davenport, IA................. -- 1,355 4,539 --
Kimberly West
Davenport, IA................. 3,625 1,380 4,623 34
Parkwood Plaza
Urbandale, IA................. -- 1,950 6,527 --
Southgate Shopping Center
Des Moines, IA................ 2,674 994 3,327 64
Spring Village
Davenport, IA................. -- 673 2,255 89
Warren Plaza
Dubuque, IA................... -- 1,439 4,818 --
KANSAS
Mid State Plaza
Salina, KS.................... -- 1,718 5,752 176
Santa Fe Square
Olathe, KS.................... -- 2,465 8,252 209
Shawnee Parkway Plaza
Shawnee, KS................... -- 1,176 3,936 148
Village Plaza
Manhattan, KS................. -- 497 1,664 13
Westchester Square
Lenexa, KS.................... -- 3,128 10,473 284
West Loop Shopping Center
Manhattan, KS................. -- 3,285 10,997 147
KENTUCKY
Camelot Shopping Center
Louisville, KY................ -- 1,659 5,553 35
Dixie Plaza
Louisville, KY................ -- 719 2,406 15
Midtown Mall
Ashland, KY................... -- 1,924 6,444 260
Plainview Village Center
Louisville, KY................ -- 2,701 9,044 339
Stony Brook
Louisville, KY................ -- 3,319 11,110 80
<Caption>
GROSS AMOUNT CARRIED AT DECEMBER 31, 2001
-------------------------------------------------------- LIVES ON WHICH
LAND AND BUILDINGS AND ACCUMULATED DATE ACQUIRED DEPRECIATION IS
PROPERTY NAME AND LOCATION IMPROVEMENTS IMPROVEMENTS TOTAL DEPRECIATION BY COMPANY COMPUTED
- -------------------------------- ------------ ------------- ---------- ------------ ------------- ---------------
Washington Lawndale Commons
Evansville, IN................ 4,831 16,337 21,168 912 2000 4-39
IOWA
Burlington Plaza West
Burlington, IA................ 1,409 4,723 6,132 258 2000 10-39
Davenport Retail Center
Davenport, IA................. 1,355 4,539 5,894 248 2000 10-39
Kimberly West
Davenport, IA................. 1,390 4,647 6,037 255 2000 5-39
Parkwood Plaza
Urbandale, IA................. 1,950 6,527 8,477 356 2000 5-39
Southgate Shopping Center
Des Moines, IA................ 1,054 3,331 4,385 183 2000 10-39
Spring Village
Davenport, IA................. 740 2,277 3,017 127 2000 10-39
Warren Plaza
Dubuque, IA................... 1,439 4,818 6,257 263 2000 10-39
KANSAS
Mid State Plaza
Salina, KS.................... 1,718 5,928 7,646 329 2000 3-39
Santa Fe Square
Olathe, KS.................... 2,587 8,339 10,926 455 2000 10-39
Shawnee Parkway Plaza
Shawnee, KS................... 1,240 4,020 5,260 227 2000 1-39
Village Plaza
Manhattan, KS................. 499 1,675 2,174 68 2001 10-39
Westchester Square
Lenexa, KS.................... 3,191 10,694 13,885 585 2000 5-39
West Loop Shopping Center
Manhattan, KS................. 3,388 11,041 14,429 605 2000 3-39
KENTUCKY
Camelot Shopping Center
Louisville, KY................ 1,659 5,588 7,247 304 2000 10-39
Dixie Plaza
Louisville, KY................ 719 2,421 3,140 132 2000 5-39
Midtown Mall
Ashland, KY................... 1,924 6,704 8,628 371 2000 5-39
Plainview Village Center
Louisville, KY................ 2,701 9,383 12,084 505 2000 3-39
Stony Brook
Louisville, KY................ 3,365 11,144 14,509 615 2000 3-39
</Table>
F-34
<Page>
SCHEDULE III
HERITAGE PROPERTY INVESTMENT TRUST, INC. (CONTINUED)
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2001
(IN THOUSANDS OF DOLLARS)
<Table>
<Caption>
INITIAL COST TO THE COMPANY
------------------------------------------- CAPITALIZED
LAND AND BUILDINGS AND SUBSEQUENT TO
PROPERTY NAME AND LOCATION ENCUMBRANCES IMPROVEMENTS IMPROVEMENTS ACQUISITION
- -------------------------------- ------------ ------------ ------------- -------------
MAINE
Pine Tree Shopping Center
Portland, ME.................. (1) 2,390 8,018 1,539
MASSACHUSETTS
Lynn Market Place
Lynn, MA...................... (1) 1,340 4,490 142
Watertower Plaza
Leominster, MA................ (1) 6,669 22,350 4,214
Westgate Plaza
Westfield, MA................. (1) 2,062 6,911 17
MICHIGAN
Cherry Hill Marketplace
Westland, MI.................. -- 2,639 4,113 6,201
The Courtyard
Burton, MI.................... -- 2,039 6,831 33
Redford Plaza
Redford, MI................... -- 5,520 18,482 224
MINNESOTA
Austin Town Center
Austin, MN.................... -- 2,096 7,015 116
Brookdale Square
Brooklyn Center, MN........... -- 2,191 7,335 85
Burning Tree Plaza
Duluth, MN.................... -- 3,355 11,230 112
Central Valu Center
Columbia Heights, MN.......... -- 2,144 7,176 49
Division Place
St. Cloud, MN................. -- 2,614 8,751 24
Elk Park Center
Elk River, MN................. 9,011 4,440 14,866 281
Har Mar Mall
Roseville, MN................. -- 10,281 34,418 1,506
Hub West / Richfield Hub
Richfield, MN................. -- 3,269 10,948 159
Marketplace at 42
Savage, MN.................... -- 5,070 16,973 95
<Caption>
GROSS AMOUNT CARRIED AT DECEMBER 31, 2001
-------------------------------------------------------- LIVES ON WHICH
LAND AND BUILDINGS AND ACCUMULATED DATE ACQUIRED DEPRECIATION IS
PROPERTY NAME AND LOCATION IMPROVEMENTS IMPROVEMENTS TOTAL DEPRECIATION BY COMPANY COMPUTED
- -------------------------------- ------------ ------------- ---------- ------------ ------------- ---------------
MAINE
Pine Tree Shopping Center
Portland, ME.................. 2,425 9,522 11,947 848 1999 5-39
MASSACHUSETTS
Lynn Market Place
Lynn, MA...................... 1,340 4,632 5,972 459 1999 10-39
Watertower Plaza
Leominster, MA................ 6,672 26,561 33,233 2,712 1999 4-39
Westgate Plaza
Westfield, MA................. 2,079 6,911 8,990 679 1999 10-39
MICHIGAN
Cherry Hill Marketplace
Westland, MI.................. 2,639 10,314 12,953 482 2000 5-39
The Courtyard
Burton, MI.................... 2,039 6,864 8,903 380 2000 5-39
Redford Plaza
Redford, MI................... 5,520 18,706 24,226 1,019 2000 4-39
MINNESOTA
Austin Town Center
Austin, MN.................... 2,096 7,131 9,227 394 2000 3-39
Brookdale Square
Brooklyn Center, MN........... 2,191 7,420 9,611 402 2000 10-39
Burning Tree Plaza
Duluth, MN.................... 3,355 11,342 14,697 621 2000 3-39
Central Valu Center
Columbia Heights, MN.......... 2,144 7,225 9,369 392 2000 3-39
Division Place
St. Cloud, MN................. 2,638 8,751 11,389 149 2001 10-39
Elk Park Center
Elk River, MN................. 4,446 15,141 19,587 836 2000 5-39
Har Mar Mall
Roseville, MN................. 10,299 35,906 46,205 1,926 2000 2-39
Hub West / Richfield Hub
Richfield, MN................. 3,269 11,107 14,376 600 2000 9-39
Marketplace at 42
Savage, MN.................... 5,093 17,045 22,138 939 2000 5-39
</Table>
F-35
<Page>
SCHEDULE III
HERITAGE PROPERTY INVESTMENT TRUST, INC. (CONTINUED)
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2001
(IN THOUSANDS OF DOLLARS)
<Table>
<Caption>
INITIAL COST TO THE COMPANY
------------------------------------------- CAPITALIZED
LAND AND BUILDINGS AND SUBSEQUENT TO
PROPERTY NAME AND LOCATION ENCUMBRANCES IMPROVEMENTS IMPROVEMENTS ACQUISITION
- -------------------------------- ------------ ------------ ------------- -------------
Roseville Center
Roseville, MN................. -- 1,571 5,257 448
Southport Centre
Apple Valley, MN.............. 7,843 3,915 13,106 --
Sun Ray Shopping Center
St. Paul, MN.................. -- 4,669 15,628 515
Ten Acres Center
West St. Paul, MN............. -- 2,368 7,930 366
Terrace Mall
Robbinsdale, MN............... -- 2,030 6,799 54
Westwind Plaza
Minnetonka, MN................ -- 2,511 8,409 354
White Bear Hills
White Bear Lake, MN........... -- 1,412 4,732 2
MISSOURI
Ellisville Square
Ellisville, MO................ -- 2,577 8,627 218
Grandview Plaza
Florissant, MO................ -- 3,555 11,902 58
Hub Shopping Center
Independence, MO.............. -- 1,578 5,281 137
Liberty Corners
Liberty, MO................... -- 1,904 6,375 123
Maplewood Square
Maplewood, MO................. -- 1,080 3,616 68
Prospect Plaza
Gladstone, MO................. -- 3,479 11,647 460
Watts Mill Plaza
Kansas City, MO............... -- 3,180 10,645 161
<Caption>
GROSS AMOUNT CARRIED AT DECEMBER 31, 2001
-------------------------------------------------------- LIVES ON WHICH
LAND AND BUILDINGS AND ACCUMULATED DATE ACQUIRED DEPRECIATION IS
PROPERTY NAME AND LOCATION IMPROVEMENTS IMPROVEMENTS TOTAL DEPRECIATION BY COMPANY COMPUTED
- -------------------------------- ------------ ------------- ---------- ------------ ------------- ---------------
Roseville Center
Roseville, MN................. 1,571 5,705 7,276 288 2000 7-39
Southport Centre
Apple Valley, MN.............. 3,915 13,106 17,021 715 2000 10-39
Sun Ray Shopping Center
St. Paul, MN.................. 4,691 16,121 20,812 858 2000 3-39
Ten Acres Center
West St. Paul, MN............. 2,344 8,320 10,664 450 2000 4-39
Terrace Mall
Robbinsdale, MN............... 2,030 6,853 8,883 379 2000 5-39
Westwind Plaza
Minnetonka, MN................ 2,675 8,599 11,274 476 2000 10-39
White Bear Hills
White Bear Lake, MN........... 1,412 4,734 6,146 258 2000 10-39
MISSOURI
Ellisville Square
Ellisville, MO................ 2,708 8,714 11,422 480 2000 9-39
Grandview Plaza
Florissant, MO................ 3,555 11,960 15,515 649 2000 10-39
Hub Shopping Center
Independence, MO.............. 1,655 5,341 6,996 291 2000 10-39
Liberty Corners
Liberty, MO................... 1,969 6,433 8,402 353 2000 4-39
Maplewood Square
Maplewood, MO................. 1,080 3,684 4,764 204 2000 5-39
Prospect Plaza
Gladstone, MO................. 3,479 12,107 15,586 680 2000 5-39
Watts Mill Plaza
Kansas City, MO............... 3,264 10,722 13,986 585 2000 5-39
</Table>
F-36
<Page>
SCHEDULE III
HERITAGE PROPERTY INVESTMENT TRUST, INC. (CONTINUED)
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2001
(IN THOUSANDS OF DOLLARS)
<Table>
<Caption>
INITIAL COST TO THE COMPANY
------------------------------------------- CAPITALIZED
LAND AND BUILDINGS AND SUBSEQUENT TO
PROPERTY NAME AND LOCATION ENCUMBRANCES IMPROVEMENTS IMPROVEMENTS ACQUISITION
- -------------------------------- ------------ ------------ ------------- -------------
NEBRASKA
Bishop Heights
Lincoln, NE................... -- 318 1,062 9
Cornhusker Plaza
South Sioux City, NE.......... -- 1,122 3,754 --
Eastville Plaza
Fremont, NE................... -- 1,137 3,805 --
Edgewood Shopping Center
Lincoln, NE................... 6,384 2,890 9,674 100
The Meadows
Lincoln, NE................... -- 1,037 3,471 9
Miracle Hills Park
Omaha, NE..................... 3,744 1,739 5,824 68
Stockyards Plaza
Omaha, NE..................... -- 2,122 7,102 --
NEW HAMPSHIRE
Bedford Mall
Bedford, NH................... -- 4,686 15,708 316
Capitol Shopping Center
Concord, NH................... (2) 2,300 7,713 1,278
Tri City Plaza
Somersworth, NH............... (2) 1,875 6,287 209
NEW JERSEY
Morris Hills Shopping Center
Parsippany, NJ................ (1) 4,646 15,565 705
NEW MEXICO
St. Francis Plaza
Santa Fe, NM.................. 1,354 891 2,989 --
<Caption>
GROSS AMOUNT CARRIED AT DECEMBER 31, 2001
-------------------------------------------------------- LIVES ON WHICH
LAND AND BUILDINGS AND ACCUMULATED DATE ACQUIRED DEPRECIATION IS
PROPERTY NAME AND LOCATION IMPROVEMENTS IMPROVEMENTS TOTAL DEPRECIATION BY COMPANY COMPUTED
- -------------------------------- ------------ ------------- ---------- ------------ ------------- ---------------
NEBRASKA
Bishop Heights
Lincoln, NE................... 318 1,071 1,389 58 2000 10-39
Cornhusker Plaza
South Sioux City, NE.......... 1,122 3,754 4,876 205 2000 10-39
Eastville Plaza
Fremont, NE................... 1,137 3,805 4,942 208 2000 10-39
Edgewood Shopping Center
Lincoln, NE................... 2,904 9,760 12,664 536 2000 5-39
The Meadows
Lincoln, NE................... 1,037 3,480 4,517 189 2000 6-39
Miracle Hills Park
Omaha, NE..................... 1,739 5,892 7,631 322 2000 3-39
Stockyards Plaza
Omaha, NE..................... 2,122 7,102 9,224 387 2000 10-39
NEW HAMPSHIRE
Bedford Mall
Bedford, NH................... 4,735 15,975 20,710 1,616 1999 3-39
Capitol Shopping Center
Concord, NH................... 2,300 8,991 11,291 863 1999 10-39
Tri City Plaza
Somersworth, NH............... 2,063 6,308 8,371 689 1999 5-39
NEW JERSEY
Morris Hills Shopping Center
Parsippany, NJ................ 4,646 16,270 20,916 1,726 1999 10-39
NEW MEXICO
St. Francis Plaza
Santa Fe, NM.................. 891 2,989 3,880 163 2000 10-39
</Table>
F-37
<Page>
SCHEDULE III
HERITAGE PROPERTY INVESTMENT TRUST, INC. (CONTINUED)
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2001
(IN THOUSANDS OF DOLLARS)
<Table>
<Caption>
INITIAL COST TO THE COMPANY
------------------------------------------- CAPITALIZED
LAND AND BUILDINGS AND SUBSEQUENT TO
PROPERTY NAME AND LOCATION ENCUMBRANCES IMPROVEMENTS IMPROVEMENTS ACQUISITION
- -------------------------------- ------------ ------------ ------------- -------------
NEW YORK
College Plaza
Selden, NY.................... (1) 3,093 10,367 45
Dalewood I Shopping Center
Hartsdale, NY................. (1) 1,767 5,918 73
Dalewood II Shopping Center
Hartsdale, NY................. (1) 3,780 12,661 7
Dalewood III Shopping Center
Hartsdale, NY................. (1) 2,646 8,861 35
Falcaro's Plaza
Lawrence, NY.................. (1) 1,881 6,301 100
Kings Park Shopping Center
Kings Park, NY................ (1) 1,839 6,160 48
Nesconset Shopping Center
Port Jefferson Station, NY.... (1) 2,622 8,787 908
Parkway Plaza
Carle Place, NY............... (1) 3,786 12,678 115
Roanoke Plaza
Riverhead, NY................. (2) 1,653 5,541 131
Rockville Centre Shopping Center
Rockville Centre, NY.......... (1) 897 3,006 1,251
Suffolk Plaza
East Setauket, NY............. (1) 1,182 4,042 96
Three Village Plaza
East Setauket, NY............. (1) 1,763 5,909 114
Turnpike Plaza
Huntington Station, NY........ (2) 908 3,044 89
<Caption>
GROSS AMOUNT CARRIED AT DECEMBER 31, 2001
-------------------------------------------------------- LIVES ON WHICH
LAND AND BUILDINGS AND ACCUMULATED DATE ACQUIRED DEPRECIATION IS
PROPERTY NAME AND LOCATION IMPROVEMENTS IMPROVEMENTS TOTAL DEPRECIATION BY COMPANY COMPUTED
- -------------------------------- ------------ ------------- ---------- ------------ ------------- ---------------
NEW YORK
College Plaza
Selden, NY.................... 3,093 10,412 13,505 1,062 1999 10-39
Dalewood I Shopping Center
Hartsdale, NY................. 1,767 5,991 7,758 610 1999 10-39
Dalewood II Shopping Center
Hartsdale, NY................. 3,780 12,668 16,448 1,294 1999 10-39
Dalewood III Shopping Center
Hartsdale, NY................. 2,646 8,896 11,542 906 1999 10-39
Falcaro's Plaza
Lawrence, NY.................. 1,881 6,401 8,282 655 1999 10-39
Kings Park Shopping Center
Kings Park, NY................ 1,839 6,208 8,047 636 1999 5-39
Nesconset Shopping Center
Port Jefferson Station, NY.... 2,859 9,458 12,317 1,028 1999 5-39
Parkway Plaza
Carle Place, NY............... 3,786 12,793 16,579 1,262 1999 5-39
Roanoke Plaza
Riverhead, NY................. 1,653 5,672 7,325 598 1999 4-39
Rockville Centre Shopping Center
Rockville Centre, NY.......... 897 4,257 5,154 514 1999 9-39
Suffolk Plaza
East Setauket, NY............. 1,182 4,138 5,320 430 1999 10-39
Three Village Plaza
East Setauket, NY............. 1,763 6,023 7,786 614 1999 10-39
Turnpike Plaza
Huntington Station, NY........ 908 3,133 4,041 316 1999 10-39
</Table>
F-38
<Page>
SCHEDULE III
HERITAGE PROPERTY INVESTMENT TRUST, INC. (CONTINUED)
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2001
(IN THOUSANDS OF DOLLARS)
<Table>
<Caption>
INITIAL COST TO THE COMPANY
------------------------------------------- CAPITALIZED
LAND AND BUILDINGS AND SUBSEQUENT TO
PROPERTY NAME AND LOCATION ENCUMBRANCES IMPROVEMENTS IMPROVEMENTS ACQUISITION
- -------------------------------- ------------ ------------ ------------- -------------
NORTH CAROLINA
The Commons at Chancellor Park
Charlotte, NC................. 13,086 4,922 16,502 --
Crown Point Shopping Center
Charlotte, NC................. (1) 2,096 7,026 66
Franklin Square
Gastonia, NC.................. 14,783 6,084 20,369 --
Innes Street Market
Salisbury, NC................. 13,738 6,158 20,615 4,695
McMullen Creek Shopping Center
Charlotte, NC................. (1) 6,580 22,047 379
New Centre Market
Wilmington, NC................ (2) 3,904 13,070 8
River Ridge Marketplace
Asheville, NC................. -- 2,805 9,388 189
Tarrymore Square
Raleigh, NC................... (1) 4,891 16,392 151
University Commons
Wilmington, NC................ (1) 4,370 14,646 520
University Commons Greenville
Greenville, NC................ (2) 5,976 20,009 --
Wendover Place
Greensboro, NC................ (2) 8,309 27,819 7,123
OHIO
30th Street Plaza
Canton, OH.................... -- 3,071 10,279 13
Clock Tower Plaza
Lima, OH...................... -- 3,409 11,409 125
Salem Consumer Square
Trotwood, OH.................. 11,449 5,964 19,965 15
<Caption>
GROSS AMOUNT CARRIED AT DECEMBER 31, 2001
-------------------------------------------------------- LIVES ON WHICH
LAND AND BUILDINGS AND ACCUMULATED DATE ACQUIRED DEPRECIATION IS
PROPERTY NAME AND LOCATION IMPROVEMENTS IMPROVEMENTS TOTAL DEPRECIATION BY COMPANY COMPUTED
- -------------------------------- ------------ ------------- ---------- ------------ ------------- ---------------
NORTH CAROLINA
The Commons at Chancellor Park
Charlotte, NC................. 4,922 16,502 21,424 1,686 1999 10-39
Crown Point Shopping Center
Charlotte, NC................. 2,162 7,026 9,188 732 1999 20-39
Franklin Square
Gastonia, NC.................. 6,084 20,369 26,453 191 2001 15-39
Innes Street Market
Salisbury, NC................. 6,019 25,449 31,468 2,684 1999 5-39
McMullen Creek Shopping Center
Charlotte, NC................. 6,581 22,425 29,006 2,278 1999 3-39
New Centre Market
Wilmington, NC................ 3,904 13,078 16,982 1,019 1999 15-39
River Ridge Marketplace
Asheville, NC................. 2,805 9,577 12,382 410 2000 15-39
Tarrymore Square
Raleigh, NC................... 4,891 16,543 21,434 1,704 1999 3-39
University Commons
Wilmington, NC................ 4,370 15,166 19,536 1,589 1999 5-39
University Commons Greenville
Greenville, NC................ 5,976 20,009 25,985 1,561 1999 15-39
Wendover Place
Greensboro, NC................ 10,085 33,166 43,251 2,322 1999 15-39
OHIO
30th Street Plaza
Canton, OH.................... 3,071 10,292 13,363 562 2000 10-39
Clock Tower Plaza
Lima, OH...................... 3,484 11,459 14,943 637 2000 4-39
Salem Consumer Square
Trotwood, OH.................. 5,964 19,980 25,944 1,089 2000 10-39
</Table>
F-39
<Page>
SCHEDULE III
HERITAGE PROPERTY INVESTMENT TRUST, INC. (CONTINUED)
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2001
(IN THOUSANDS OF DOLLARS)
<Table>
<Caption>
INITIAL COST TO THE COMPANY
------------------------------------------- CAPITALIZED
LAND AND BUILDINGS AND SUBSEQUENT TO
PROPERTY NAME AND LOCATION ENCUMBRANCES IMPROVEMENTS IMPROVEMENTS ACQUISITION
- -------------------------------- ------------ ------------ ------------- -------------
PENNSYLVANIA
Boyertown Plaza
Boyertown, PA................. (1) 675 2,265 865
Lehigh Shopping Center
Bethlehem, PA................. (1) 4,125 13,831 2,062
SOUTH DAKOTA
Baken Park
Rapid City, SD................ -- 3,119 10,440 576
TENNESSEE
Oakwood Commons
Hermitage, TN................. (1) 3,740 12,542 36
Watson Glen Shopping Center
Franklin, TN.................. (1) 3,381 11,336 27
Williamson Square
Franklin, TN.................. 11,765 4,779 15,994 967
VERMONT
Rutland Plaza
Rutland, VT................... (1) 4,037 13,530 57
WISCONSIN
Fairacres Shopping Center
Oshkosh, WI................... -- 1,563 5,230 7
Fitchburg Ridge
Madison, WI................... -- 481 1,611 21
Fox River Plaza
Burlington, WI................ 4,836 1,654 5,536 150
Garden Plaza
Franklin, WI.................. -- 1,088 3,642 57
Madison Plaza
Madison, WI................... -- 1,817 6,082 8
<Caption>
GROSS AMOUNT CARRIED AT DECEMBER 31, 2001
-------------------------------------------------------- LIVES ON WHICH
LAND AND BUILDINGS AND ACCUMULATED DATE ACQUIRED DEPRECIATION IS
PROPERTY NAME AND LOCATION IMPROVEMENTS IMPROVEMENTS TOTAL DEPRECIATION BY COMPANY COMPUTED
- -------------------------------- ------------ ------------- ---------- ------------ ------------- ---------------
PENNSYLVANIA
Boyertown Plaza
Boyertown, PA................. 675 3,130 3,805 242 1999 5-39
Lehigh Shopping Center
Bethlehem, PA................. 4,125 15,893 20,018 1,777 1999 10-39
SOUTH DAKOTA
Baken Park
Rapid City, SD................ 3,119 11,016 14,135 632 2000 4-39
TENNESSEE
Oakwood Commons
Hermitage, TN................. 3,740 12,578 16,318 1,286 1999 3-39
Watson Glen Shopping Center
Franklin, TN.................. 3,381 11,363 14,744 1,164 1999 3-39
Williamson Square
Franklin, TN.................. 4,779 16,961 21,740 900 2000 3-39
VERMONT
Rutland Plaza
Rutland, VT................... 4,037 13,587 17,624 1,397 1999 5-39
WISCONSIN
Fairacres Shopping Center
Oshkosh, WI................... 1,563 5,237 6,800 286 2000 4-39
Fitchburg Ridge
Madison, WI................... 481 1,632 2,113 89 2000 10-39
Fox River Plaza
Burlington, WI................ 1,654 5,686 7,340 304 2000 7-39
Garden Plaza
Franklin, WI.................. 1,088 3,699 4,787 201 2000 10-39
Madison Plaza
Madison, WI................... 1,817 6,090 7,907 335 2000 3-39
</Table>
F-40
<Page>
SCHEDULE III
HERITAGE PROPERTY INVESTMENT TRUST, INC. (CONTINUED)
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2001
(IN THOUSANDS OF DOLLARS)
<Table>
<Caption>
INITIAL COST TO THE COMPANY
------------------------------------------- CAPITALIZED
LAND AND BUILDINGS AND SUBSEQUENT TO
PROPERTY NAME AND LOCATION ENCUMBRANCES IMPROVEMENTS IMPROVEMENTS ACQUISITION
- -------------------------------- ------------ ------------ ------------- -------------
Mequon Pavilions
Mequon, WI.................... -- 6,296 21,075 215
Moorland Square
New Berlin, WI................ 3,239 1,881 6,299 1
Oak Creek Centre
Oak Creek, WI................. -- 1,357 4,546 44
Park Plaza
Manitowoc, WI................. -- 1,586 5,305 406
Spring Mall
Greenfield, WI................ 8,441 3,136 10,499 2,004
Taylor Heights
Sheboygan, WI................. -- 1,976 6,618 --
OFFICE BUILDINGS
MASSACHUSETTS
William J. McCarthy
Boston, MA.................... 36,454(3) 4,700 18,807 717
545 Boylston Street
Boston, MA.................... (3) 4,300 17,206 1,126
NEW YORK
Executive Office Building
Great Neck, NY................ -- 834 3,338 224
Fortune Office Building
Hartsdale, NY................. -- 856 3,430 262
<Caption>
GROSS AMOUNT CARRIED AT DECEMBER 31, 2001
-------------------------------------------------------- LIVES ON WHICH
LAND AND BUILDINGS AND ACCUMULATED DATE ACQUIRED DEPRECIATION IS
PROPERTY NAME AND LOCATION IMPROVEMENTS IMPROVEMENTS TOTAL DEPRECIATION BY COMPANY COMPUTED
- -------------------------------- ------------ ------------- ---------- ------------ ------------- ---------------
Mequon Pavilions
Mequon, WI.................... 6,354 21,232 27,586 1,164 2000 2-39
Moorland Square
New Berlin, WI................ 1,881 6,300 8,181 344 2000 10-39
Oak Creek Centre
Oak Creek, WI................. 1,357 4,590 5,947 249 2000 5-39
Park Plaza
Manitowoc, WI................. 1,694 5,603 7,297 322 2000 10-39
Spring Mall
Greenfield, WI................ 3,136 12,503 15,639 589 2000 10-39
Taylor Heights
Sheboygan, WI................. 1,976 6,618 8,594 361 2000 10-39
OFFICE BUILDINGS
MASSACHUSETTS
William J. McCarthy
Boston, MA.................... 4,700 19,524 24,224 1,458 1999 4-39
545 Boylston Street
Boston, MA.................... 4,300 18,332 22,632 1,364 1999 3-39
NEW YORK
Executive Office Building
Great Neck, NY................ 834 3,562 4,396 283 1999 3-39
Fortune Office Building
Hartsdale, NY................. 856 3,692 4,548 284 1999 3-39
</Table>
F-41
<Page>
SCHEDULE III
HERITAGE PROPERTY INVESTMENT TRUST, INC. (CONTINUED)
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2001
(IN THOUSANDS OF DOLLARS)
<Table>
<Caption>
INITIAL COST TO THE COMPANY
------------------------------------------- CAPITALIZED
LAND AND BUILDINGS AND SUBSEQUENT TO
PROPERTY NAME AND LOCATION ENCUMBRANCES IMPROVEMENTS IMPROVEMENTS ACQUISITION
- -------------------------------- ------------ ------------ ------------- -------------
SINGLE TENANTS
FLORIDA
General Host (7 properties)..... -- 109 364 --
Sambo's Restaurants (4
properties)................... -- 310 1,036 --
-------- -------- ---------- -------
SUBTOTAL........................ $492,289 $435,023 $1,448,450 $62,302
Real Estate Held For Sale....... -- 609 2,439 145
-------- -------- ---------- -------
GRAND TOTAL..................... $492,289 $435,632 $1,450,889 $62,447
======== ======== ========== =======
<Caption>
GROSS AMOUNT CARRIED AT DECEMBER 31, 2001
-------------------------------------------------------- LIVES ON WHICH
LAND AND BUILDINGS AND ACCUMULATED DATE ACQUIRED DEPRECIATION IS
PROPERTY NAME AND LOCATION IMPROVEMENTS IMPROVEMENTS TOTAL DEPRECIATION BY COMPANY COMPUTED
- -------------------------------- ------------ ------------- ---------- ------------ ------------- ---------------
SINGLE TENANTS
FLORIDA
General Host (7 properties)..... 109 364 473 34 1999 10-39
Sambo's Restaurants (4
properties)................... 310 1,036 1,346 106 1999 10-39
-------- ---------- ---------- --------
SUBTOTAL........................ $439,221 $1,506,554 $1,945,775 $103,597
Real Estate Held For Sale....... 609 2,584 3,193 203
-------- ---------- ---------- --------
GRAND TOTAL..................... $439,830 $1,509,138 $1,948,968 $103,800
======== ========== ========== ========
</Table>
- ------------------------------
(1) Noted properties are cross collateralized securing total mortgage
indebtedness with a balance of $241,881,000 at December 31, 2001.
(2) Noted properties are cross collateralized securing total mortgage
indebtedness with a balance of $84,213,000 at December 31, 2001.
(3) Noted properties are cross collateralized securing total mortgage
indebtedness with a balance of $36,454,000 at December 31, 2001.
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
-----------------------
2001 2000
---------- ----------
COST:
Balance, beginning of year.................................. $1,899,025 690,454
Acquisitions and other additions............................ 77,445 1,210,598
Sales of properties and other deductions.................... (27,502) (2,027)
---------- ----------
Balance, end of year........................................ $1,948,968 1,899,025
========== ==========
ACCUMULATED DEPRECIATION:
Balance, beginning of year.................................. $ 43,563 9,521
Depreciation provided....................................... 62,532 34,095
Sales of properties and other deductions.................... (2,295) (53)
---------- ----------
Balance, end of year........................................ $ 103,800 43,563
========== ==========
</Table>
- ------------------------------
Other schedules are omitted as they are not required, are not applicable, or the
required information is set forth in the consolidated financial statements or
notes thereto.
F-42
<Page>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees
New England Teamsters & Trucking Industry Pension Fund:
We have audited the financial statements of Heritage Predecessor as listed
in the accompanying index. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the net assets of Heritage Predecessor as of July 8,
1999 and the changes in its net assets for the period from October 1, 1998 to
July 8, 1999, in conformity with accounting principles generally accepted in the
United States of America.
KPMG LLP
Boston, Massachusetts
January 4, 2000
F-43
<Page>
HERITAGE PREDECESSOR
STATEMENT OF NET ASSETS
JULY 8, 1999
(IN THOUSANDS OF DOLLARS)
<Table>
<Caption>
ASSETS
Real estate investments, at fair value...................... $578,200
Cash and cash equivalents................................... 4,343
Accounts receivable, less allowance for doubtful accounts of
$3,601.................................................... --
Deferred charges, net, and other assets..................... 3,049
--------
Total assets.......................................... $585,592
========
LIABILITIES
Mortgage loans payable...................................... $ 31,646
Accrued expenses and other liabilities...................... 3,946
--------
Total liabilities..................................... 35,592
--------
Net assets.................................................. 550,000
--------
Total liabilities and net assets...................... $585,592
========
</Table>
See accompanying notes to financial statements.
F-44
<Page>
HERITAGE PREDECESSOR
STATEMENT OF CHANGES IN NET ASSETS
PERIOD FROM OCTOBER 1, 1998 TO JULY 8, 1999
(IN THOUSANDS OF DOLLARS)
<Table>
<Caption>
Operating revenues:
Rentals and recoveries.................................... $ 55,941
Interest and other........................................ 393
--------
Total revenues........................................ 56,334
--------
Expenses:
Property operating expenses............................... 9,317
Real estate taxes......................................... 7,930
Interest.................................................. 2,155
General and administrative................................ 3,757
--------
Total expenses........................................ 23,159
--------
Increase in net assets from operations................ 33,175
--------
Appreciation on real estate investments:
Increase in unrealized gains.............................. 35,170
Net realized (loss) gains on properties sold.............. (8,807)
--------
26,363
--------
Distributions to New England Teamsters & Trucking Industry
Pension Fund.............................................. (25,858)
--------
Increase in net assets...................................... 33,680
Net assets:
Beginning of period....................................... 516,320
--------
End of period............................................. $550,000
========
</Table>
See accompanying notes to financial statements.
F-45
<Page>
HERITAGE PREDECESSOR
NOTES TO FINANCIAL STATEMENTS
JULY 8, 1999
(1) ORGANIZATION
Heritage Predecessor (the "Company") is a real estate investment vehicle of
Net Realty Holding Trust, Inc., a wholly-owned subsidiary of the New England
Teamsters & Trucking Industry Pension Fund ("NETT"), whose fiscal year end
is September 30. The Company is focused primarily on the management and
acquisition of commercial properties.
On July 1, 1999, NETT created Heritage Property Investment Trust, Inc.
("Heritage"), a newly-formed, self-administered real estate investment trust
("REIT") which commenced operations on July 9, 1999. In connection with
Heritage's formation, NETT contributed the net assets of the Company as of
July 8, 1999.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) BASIS OF PRESENTATION
The Company's balances and activities are presented in the accompanying
financial statements in accordance with generally accepted accounting
principles ("GAAP") applicable to pension plans, as used by NETT for the
period from October 1, 1998 to July 8, 1999. These financial statements
do not necessarily reflect the financial position, results of operations
or changes in net assets that would have occurred if the Company were a
stand-alone entity during the period indicated.
In contrast to GAAP applicable to REITs, which measures earnings, the
measurement focus of GAAP for pension plans is on changes in the fair
value of net assets. Accordingly, the accompanying financial statements
report real estate investments at fair value, and no depreciation expense
is recorded. Rental income, which if recorded on a straight-line basis
would otherwise include accrued revenue for leases with deferred payment
terms, is recorded only when lease payments are due.
(B) REAL ESTATE INVESTMENTS
Real estate investments, which consist of various commercial properties,
are stated at fair value. As of July 8, 1999, the fair values of real
estate investments have been estimated on the basis of expected future
rental streams and residual values discounted at interest rates
commensurate with the risks involved as determined through third-party
appraisals. Such methodologies have been applied in the absence of
readily ascertainable market values using comparable sales or similar
measurements. Because of the inherent uncertainties involved in
appraising properties, estimated fair values established may differ
significantly from the values that would have been used had a ready
market for the real estate investments existed, and those differences
could be material.
(C) INCOME RECOGNITION
The Company has determined that all leases related to its investment
properties are properly classified as operating leases. Income from
investments in real estate is recorded as earned and excludes any
accruals for rent related to scheduled rent increases. Expenses are
recorded as incurred.
F-46
<Page>
HERITAGE PREDECESSOR
NOTES TO FINANCIAL STATEMENTS
JULY 8, 1999
(D) INCOME TAXES
As a wholly-owned real estate investment vehicle of NETT, which is a
qualified pension plan under Section 401(a) of the Internal Revenue Code,
the Company's activities are exempt from Federal income tax under
Section 501(a) of the Code.
(E) CASH EQUIVALENTS
Cash equivalents consist of overnight repurchase agreements.
(F) CREDIT RISK
The Company operates in one industry, which is commercial real estate
ownership, management and development, and no single-tenant accounts for
more than 10% of total revenue. Financial instruments potentially
subjecting the Company to concentrations of credit risk consist
principally of temporary cash and equivalent investments, which are held
at financial institutions of high credit quality; and tenant receivables,
whose credit risk is distributed among tenants in different industries
and across several geographic areas.
(G) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues, expenses and
realized and unrealized gains during the reporting period. A significant
estimate particularly susceptible to change relates to the valuation of
real estate investments. Actual results could differ from those
estimates.
(3) REAL ESTATE INVESTMENTS
At July 8, 1999, the Company owned and operated 38 shopping centers, 7
office buildings and 15 single-tenant properties aggregating approximately
6,400,000, 400,000 and 194,000 square feet of gross leasable area,
respectively. The Company's properties are located principally in the New
England, New York/Mid-Atlantic and Southeastern regions of the United
States. The aggregate cost of such real estate investments was approximately
$393,947,000 at July 8, 1999.
Following is a summary of real estate investments at July 8, 1999 (in
thousands of dollars):
<Table>
<Caption>
PROPERTY TYPE
- -------------
Shopping centers.............................. $498,860
Office buildings.............................. 68,920
Single-tenant properties...................... 10,420
--------
Total..................................... $578,200
========
</Table>
(4) MORTGAGE LOANS PAYABLE
Mortgage loans payable are non-recourse and collateralized by various real
estate investments with a fair value of approximately $47,870,000 at
July 8, 1999. The loans require monthly payments of
F-47
<Page>
HERITAGE PREDECESSOR
NOTES TO FINANCIAL STATEMENTS
JULY 8, 1999
principal and interest and mature through 2005 at effective interest rates
ranging from 7.62% to 9.38%. In the event the loans are repaid prior to the
maturity dates, the loans are subject to yield maintenance provisions.
Following is a summary of mortgage loans payable at July 8, 1999 (in
thousands of dollars):
<Table>
<Caption>
EFFECTIVE
PROPERTY INTEREST RATE MATURITY
-------- ------------- --------------
Crown Point Shopping Center........................ 9.38% October 2000 $ 6,655
Commons of Chancellor Park......................... 7.80% August 2005 13,799
Riverchase......................................... 7.62% September 2005 11,192
-------
Total mortgage loans payable....................... $31,646
=======
</Table>
(5) OPERATING LEASES
Leases for both retail and office space generally contain provisions under
which the tenants reimburse the Company for a portion of property operating
expenses and real estate taxes incurred by the Company. Reimbursements for
operating expenses and real estate taxes amounted to approximately
$10,933,000 during the period from October 1, 1998 to July 8, 1999 and is
included as part of rental income on the statement of changes in net assets.
In addition, certain of the Company's operating leases for retail space
contain contingent rent provisions under which tenants are required to pay a
percentage of their sales in excess of a specified amount as additional
rent. Rental income earned under such provisions amounted to approximately
$691,000 during the period from October 1, 1998 to July 8, 1999.
F-48
<Page>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Share Owners
Bradley Real Estate, Inc. and subsidiaries:
We have audited the consolidated financial statements of Bradley Real
Estate, Inc. and subsidiaries as listed in the accompanying index. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Bradley Real
Estate, Inc. and subsidiaries as of December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999, in conformity with generally accepted accounting
principles.
KPMG LLP
Chicago, Illinois
January 21, 2000, except as to Note 15, which
is as of March 10, 2000
F-49
<Page>
BRADLEY REAL ESTATE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS)
<Table>
<Caption>
DECEMBER 31,
JUNE 30, ---------------------
2000 1999 1998
----------- ---------- --------
(UNAUDITED)
ASSETS:
Real estate investments--at cost........................... $1,046,042 $1,014,158 $936,465
Accumulated depreciation and amortization.................. (91,767) (81,302) (59,196)
---------- ---------- --------
Net real estate investments................................ 954,275 932,856 877,269
Real estate investments held for sale...................... -- 29,890 46,492
Other assets:
Cash and cash equivalents................................ -- 4,434 1,262
Rents and other receivables, net of allowance for
doubtful accounts of $4,545 for 1999 and $4,078 for
1998................................................... 14,233 12,273 12,165
Investment in partnership................................ -- -- 13,249
Deferred charges, net and other assets................... 18,063 16,714 16,676
---------- ---------- --------
Total assets............................................... $ 986,571 $ 996,167 $967,113
========== ========== ========
LIABILITIES AND SHARE OWNERS' EQUITY:
Mortgage loans............................................. $ 93,436 $ 100,718 $103,333
Unsecured notes payable.................................... 274,616 199,604 199,542
Line of credit............................................. 86,000 144,500 169,500
Accounts payable, accrued expenses and other liabilities... 32,712 32,787 27,848
---------- ---------- --------
Total liabilities.......................................... 486,764 477,609 500,223
---------- ---------- --------
Exchangeable limited partnership units..................... 18,159 19,306 21,573
Series B preferred units................................... 49,100 49,100 --
Series C preferred units................................... 24,344 24,344 --
---------- ---------- --------
Total minority interest.................................... 91,603 92,750 21,573
---------- ---------- --------
Share Owners' equity:
Shares of preferred stock and paid-in capital, par value
$.01 per share; liquidation preference $25.00 per
share:
Authorized 20,000,000 shares; 3,478,219 and 3,478,493
shares of Series A Convertible Preferred Stock issued
and outstanding at December 31, 1999 and 1998,
respectively......................................... 86,802 86,802 86,809
Shares of common stock and paid-in capital, par value
$.01 per share:
Authorized 80,000,000 shares; issued and outstanding
23,079,357 and 23,958,662 shares at December 31, 1999
and 1998, respectively............................... 317,743 333,907 349,254
Shares of excess stock, par value $.01 per share:
Authorized 50,000,000 shares; 0 shares issued and
outstanding.......................................... -- -- --
Retained earnings...................................... 3,659 5,099 9,254
---------- ---------- --------
Total share owners' equity................................. 408,204 425,808 445,317
---------- ---------- --------
Total liabilities and share owners' equity................. $ 986,571 $ 996,167 $967,113
========== ========== ========
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
F-50
<Page>
BRADLEY REAL ESTATE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS OF DOLLARS, EXCEPT PER-SHARE DATA)
<Table>
<Caption>
SIX MONTHS
ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
------------------- ------------------------------
2000 1999 1999 1998 1997
-------- -------- -------- -------- --------
(UNAUDITED)
REVENUE:
Rental income and recoveries from tenants................... $80,148 $75,582 $151,950 $128,444 $96,115
Other income................................................ 1,542 1,329 2,883 2,593 1,437
------- ------- -------- -------- -------
81,690 76,911 154,833 131,037 97,552
------- ------- -------- -------- -------
EXPENSES:
Operations, maintenance and management...................... 10,834 12,083 22,971 18,915 14,012
Real estate taxes........................................... 11,902 11,671 22,859 21,713 18,398
Mortgage and other interest................................. 16,489 14,869 29,404 27,681 16,562
General and administrative (exclusive of $3,415 in 1997
reported below as non-recurring stock-based
compensation)............................................. 3,696 4,067 8,544 7,183 5,123
Provision for merger-related expenses....................... 1,806 -- -- -- --
Non-recurring stock-based compensation...................... -- -- -- -- 3,415
Depreciation and amortization............................... 13,885 12,941 26,456 22,974 16,606
------- ------- -------- -------- -------
58,612 55,631 110,234 98,466 74,116
------- ------- -------- -------- -------
Income before equity in earnings of partnership, net gain on
sale of properties and extraordinary item................. 23,078 21,280 44,599 32,571 23,436
Equity in earnings of partnership........................... -- 500 500 586 --
Net gain on sale of properties.............................. 205 -- -- 29,680 7,438
------- ------- -------- -------- -------
Income before extraordinary item and allocation to minority
interest.................................................. 23,283 21,780 45,099 62,837 30,874
Income allocated to exchangeable limited partnership
units..................................................... (870) (920) (1,806) (3,317) (1,116)
Income allocated to Series B and C preferred units.......... (3,328) (1,565) (4,487) -- --
------- ------- -------- -------- -------
Income before extraordinary item............................ 19,085 19,295 38,806 59,520 29,758
Extraordinary loss on prepayment of debt, net of minority
interest.................................................. -- -- -- -- (4,631)
------- ------- -------- -------- -------
Net income.................................................. 19,085 19,295 38,806 59,520 25,127
Preferred share distributions............................... (3,652) (3,652) (7,304) (2,922) --
------- ------- -------- -------- -------
Net income attributable to common share owners.............. $15,433 $15,643 $ 31,502 $ 56,598 $25,127
======= ======= ======== ======== =======
Basic earnings per common share:
Income before extraordinary item.......................... $ 0.69 $ 0.65 $ 1.31 $ 2.39 $ 1.36
Extraordinary loss on prepayment of debt, net of minority
interest................................................ -- -- -- -- (0.21)
------- ------- -------- -------- -------
Net income................................................ $ 0.69 $ 0.65 $ 1.31 $ 2.39 $ 1.15
======= ======= ======== ======== =======
Diluted earnings per common share:
Income before extraordinary item.......................... $ 0.69 $ 0.65 $ 1.31 $ 2.37 $ 1.36
Extraordinary loss on prepayment of debt, net of minority
interest................................................ -- -- -- -- (0.21)
------- ------- -------- -------- -------
Net income................................................ $ 0.69 $ 0.65 $ 1.31 $ 2.37 $ 1.15
======= ======= ======== ======== =======
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
F-51
<Page>
BRADLEY REAL ESTATE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHARE OWNERS' EQUITY
(IN THOUSANDS OF DOLLARS, EXCEPT PER-SHARE DATA)
<Table>
<Caption>
RETAINED
EARNINGS
(DISTRIBUTIONS
PREFERRED COMMON IN EXCESS OF
SHARES AND SHARES AND ACCUMULATED
PAID-IN CAPITAL PAID-IN CAPITAL EARNINGS) TOTAL
--------------- --------------- -------------- --------
Balance at December 31, 1996............................. $ -- $299,092 $ (9,367) $289,725
Net income............................................. -- -- 25,127 25,127
Distributions on common stock ($1.34 per share)........ -- -- (29,387) (29,387)
Issuance of common stock, net of offering costs of
$449................................................. -- 24,892 -- 24,892
Dividend reinvestment participation.................... -- 770 -- 770
Exercise of stock options.............................. -- 173 -- 173
Reallocation of minority interest...................... -- 6,093 -- 6,093
Shares issued in exchange for Limited Partnership
units................................................ -- 17 -- 17
Non-recurring stock-based compensation................. -- 2,415 -- 2,415
------- -------- -------- --------
Balance at December 31, 1997............................. -- 333,452 (13,627) 319,825
Net income............................................. -- -- 59,520 59,520
Distributions on common stock ($1.42 per share)........ -- -- (33,717) (33,717)
Distributions on preferred stock ($1.05 per share)..... -- -- (2,922) (2,922)
Issuance of common stock, net of offering costs of
$112................................................. -- 7,489 -- 7,489
Preferred shares issued to acquire Mid-America Realty
Investments, Inc., net............................... 86,839 -- -- 86,839
Conversion of Series A preferred stock to common
stock................................................ (30) 30 -- --
Dividend reinvestment and stock purchase plan
participation, net................................... -- 6,049 -- 6,049
Exercise of stock options.............................. -- 4 -- 4
Reallocation of minority interest...................... -- (390) -- (390)
Shares issued in exchange for Limited Partnership
units................................................ -- 2,620 -- 2,620
------- -------- -------- --------
Balance at December 31, 1998............................. 86,809 349,254 9,254 445,317
Net income............................................. -- -- 38,806 38,806
Distributions on common stock ($1.49 per share)........ -- -- (35,657) (35,657)
Distributions on preferred stock ($2.10 per share)..... -- -- (7,304) (7,304)
Repurchase of common stock............................. -- (16,611) -- (16,611)
Conversion of Series A preferred stock to common
stock................................................ (7) 7 -- --
Dividend reinvestment and stock purchase plan
participation, net................................... -- 1,462 -- 1,462
Exercise of stock options.............................. -- 171 -- 171
Reallocation of minority interest--exchangeable Limited
Partnership units.................................... -- (382) -- (382)
Shares issued in exchange for Limited Partnership
units................................................ -- 6 -- 6
------- -------- -------- --------
Balance at December 31, 1999............................. $86,802 $333,907 $ 5,099 $425,808
======= ======== ======== ========
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
F-52
<Page>
BRADLEY REAL ESTATE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<Table>
<Caption>
SIX MONTHS
ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
--------------------- ---------------------------------
2000 1999 1999 1998 1997
--------- --------- --------- --------- ---------
(UNAUDITED)
Cash flows from operating activities:
Net income................................................ $ 19,085 $ 19,294 $ 38,806 $ 59,520 $ 25,127
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 13,885 12,941 26,456 22,974 16,606
Equity in earnings of partnership....................... -- (500) (500) (586) --
Amortization of debt premiums, net of discounts......... (422) (479) (939) (368) --
Extraordinary loss on prepayment of debt, net of
minority interest..................................... -- -- -- -- 4,631
Non-recurring stock-based compensation.................. -- -- -- -- 3,415
Net gain on sale of properties.......................... (205) -- -- (29,680) (7,438)
Income allocated to minority interest................... 4,198 2,486 6,293 3,317 1,116
Change in operating assets and liabilities, net of the
effect of the Mid-America acquisition in 1998:
(Increase) decrease in rents and other receivables...... (2,069) (1,969) 56 (694) (3,629)
Increase in accounts payable, accrued expenses and other
liabilities........................................... 1,171 (181) 1,472 1,818 3,639
(Increase) decrease in deferred charges................. (2,067) (1,064) (3,716) (1,351) 1,360
--------- --------- --------- --------- ---------
Net cash provided by operating activities............. 33,576 30,528 67,928 54,950 44,827
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Expenditures for real estate acquisitions................. (18,895) (21,636) (44,642) (175,927) (137,945)
Cash used for purchase of Mid-America..................... -- -- -- (28,578) --
Expenditures for developments and redevelopments.......... (10,709) (2,249) (8,762) (423) --
Expenditures for other capital improvements............... (6,601) (4,685) (15,071) (11,551) (9,985)
Net proceeds from sale of properties...................... 30,622 16,899 19,999 83,959 25,281
Cash distributions from partnership....................... -- 3,943 3,968 700 --
--------- --------- --------- --------- ---------
Net cash used in investing activities................. (5,583) (7,728) (44,508) (131,820) (122,649)
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Borrowings from line of credit............................ 67,500 46,900 115,400 246,950 148,600
Payments under line of credit............................. (126,000) (95,500) (140,400) (229,150) (60,400)
Proceeds from issuance of unsecured notes payable......... 74,981 -- -- 99,051 99,780
Expenditures for financing costs.......................... (1,022) (59) (203) (6,500) (3,104)
Repayment of mortgage loans............................... (5,994) -- -- (10,031) (100,000)
Payments associated with prepayment of debt............... -- -- -- -- (4,444)
Principal payments on mortgage loans...................... (835) (823) (1,614) (1,123) (656)
Distributions paid to common share owners................. (16,873) (17,802) (35,657) (33,717) (29,387)
Distributions paid to limited partnership unit holders.... (951) (1,044) (2,035) (1,984) (1,117)
Distributions paid to preferred unit holders.............. (3,328) (1,565) (4,487) -- --
Distributions paid to preferred share owners.............. (3,652) (3,652) (7,304) (3,653) --
Net proceeds from stock offerings......................... -- -- -- 7,489 24,892
Proceeds from exercise of stock options................... 7 123 171 4 173
Net proceeds from dividend reinvestment and stock purchase
plan.................................................... (8) 1,482 1,462 6,049 770
Net proceeds from issuance of Series B and C preferred
units................................................... -- 49,100 73,444 -- --
Repurchase of common stock................................ (16,152) -- (16,611) -- --
Payments to redeem limited partnership units.............. (1,077) (1,114) (2,414) -- --
Cash disbursed but not presented to bank.................. 977 -- -- -- --
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing activities... (32,427) (23,954) (20,248) 73,385 75,107
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents........ (4,434) (1,154) 3,172 (3,485) (2,715)
Cash and cash equivalents:
Beginning of period....................................... 4,434 1,262 1,262 4,747 7,462
--------- --------- --------- --------- ---------
End of period............................................. $ -- $ 108 $ 4,434 $ 1,262 $ 4,747
========= ========= ========= ========= =========
Supplemental cash flow information:
Interest paid, net of amount capitalized.................. $ 14,777 $ 15,499 $ 29,738 $ 23,440 $ 15,623
========= ========= ========= ========= =========
</Table>
The accompanying notes are an integral part of these consolidated financial
statements.
F-53
<Page>
BRADLEY REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 1--ORGANIZATION
Bradley Real Estate, Inc. ("Bradley" or the "Company") is the nation's
oldest real estate investment trust ("REIT"). Organized in 1961, the Company,
which is a fully integrated real estate operating company with property
management, leasing, development and acquisition capabilities, focuses on the
ownership, operation and development of community and neighborhood shopping
centers primarily located in the midwestern United States. As of December 31,
1999, the Company owned 98 shopping centers in 15 states, aggregating
15.5 million square feet of rentable space, substantially all of which are
located in Midwest markets, making the Company one of the leading owners of
community and neighborhood shopping centers in this region. The Company's tenant
mix is dominated by a diverse group of supermarkets, drug stores, and other
consumer necessity or value-oriented retailers.
Bradley Operating Limited Partnership (the "Operating Partnership") is the
entity through which the Company conducts substantially all of its business and
owns (either directly or through subsidiaries) substantially all of its assets.
As of December 31, 1999, Bradley owned an approximate 83% economic interest in,
and is the sole general partner of, the Operating Partnership. This structure is
commonly referred to as an umbrella partnership REIT or "UPREIT." Economic
interests in the Operating Partnership are evidenced by units of partnership
interest ("Units") with the interest of the general partner evidenced by general
partner common and general partner preferred units ("GP Units"). Under the
Partnership Agreement, whenever Bradley issues any shares of common or preferred
stock, it contributes the proceeds to the Operating Partnership, and
concurrently the number of GP Units held by Bradley is increased by the number
of newly issued shares, such that the number of GP Units is at all times equal
to the number of outstanding shares of common or preferred Bradley stock.
The interests of persons who have contributed direct or indirect interests
in certain properties to the Operating Partnership are evidenced by limited
partner units ("LP Units"). Each LP Unit is designed to provide distributions to
the holder that are equal to the distributions paid on each share of Bradley
common stock; and each LP Unit is redeemable (subject to certain limitations) by
the holder for the cash equivalent at the time of redemption of one share of
Bradley common stock or, at Bradley's option, for one share of Bradley common
stock.
The Operating Partnership also has outstanding two million units of 8.875%
Series B Cumulative Redeemable Perpetual Preferred Units and one million units
of 8.875% Series C Cumulative Redeemable Perpetual Preferred Units (together,
the "Series B and C Preferred Units"). The Series B and C Preferred Units were
issued during 1999 to institutional investors at a price of $25.00 per unit. The
units are callable by the Operating Partnership after five years from the date
of issuance at a redemption price equal to the redeemed holder's capital
account, plus an amount equal to all accumulated, accrued and unpaid
distributions or dividends thereon to the date of redemption. In lieu of cash,
the Operating Partnership may elect to deliver shares of 8.875% Series B or C
Cumulative Redeemable Perpetual Preferred Stock, as appropriate, of the Company
on a one-for-one basis, plus an amount equal to all accumulated accrued and
unpaid distributions or dividends thereon to the date of redemption. Holders of
the Series B and C Preferred Units have the right to exchange their Series B and
C Preferred Units for shares of Series B and C Preferred Shares on a one-for-one
basis after ten years from the original issuance, subject to certain
limitations.
F-54
<Page>
BRADLEY REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 1--ORGANIZATION (CONTINUED)
As used herein, the "Company" refers to Bradley Real Estate, Inc. and its
subsidiaries on a consolidated basis, including the Operating Partnership or,
where the context so requires, Bradley Real Estate, Inc. only.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Financial Statements for the six months ended June 30, 2000 and 1999 are
unaudited. In the opinion of management, such financial statements reflect all
adjustments necessary for a fair presentation of the results of the respective
interim periods. The financial statements are prepared on the accrual basis in
accordance with generally accepted accounting principles ("GAAP"). The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities, and the disclosure of contingent assets and liabilities, at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from these
estimates.
The consolidated financial statements of the Company include the accounts
and operations of the Company, the Operating Partnership, Bradley Financing
Partnership (a general partnership of which the Operating Partnership owns 99%
and a wholly-owned corporate subsidiary owns the remaining 1%), and the general
partnership interest in the joint venture that owns Williamson Square Shopping
Center which is held through the Operating Partnership. Due to the Company's
ability as general partner to directly or indirectly control each of these
subsidiaries, each is consolidated for financial reporting purposes.
During 1999 and 1998, the Company's 50% general partner interest in Bradley
Bethal Limited Partnership, a joint venture which owned two neighborhood
shopping centers and one enclosed mall, was accounted for using the equity
method. Under the equity method of accounting, the Company's investment was
reflected on the consolidated balance sheet as an investment in partnership, and
the Company's portion of the net income from such partnership was reflected on
the consolidated statement of income as equity in earnings of partnership.
During the second quarter of 1999, the Company acquired the 50% non-owned
portion of the joint venture for approximately $7,750,000, after the joint
venture sold the enclosed mall to an independent third party for $12,100,000. As
a result, the two neighborhood shopping centers previously owned by the joint
venture are now wholly-owned by the Company and are consolidated for financial
reporting purposes.
The ownership interests in the Operating Partnership evidenced by LP Unit
holders represent a minority interest in the Company. Income is allocated to the
LP Unit holders based on the weighted average number of LP Units outstanding
during the period, amounting to 1,376,883, 1,401,464, and 799,938 during 1999,
1998, and 1997, respectively. As of December 31, 1999 and 1998, there were
1,314,347 and 1,441,678 LP Units outstanding, respectively.
The ownership interests in the Operating Partnership evidenced by the
Series B and C Preferred Units represent an additional minority interest in the
Company. Income is allocated to the Series B and C Preferred Units in an amount
equal to the distributions thereon.
F-55
<Page>
BRADLEY REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Rents and Other Receivables
Management has determined that all of the Company's leases with its various
tenants are operating leases. Revenue for such leases is recognized using the
straight-line method over the term of the leases.
Real Estate Investments
Real estate investments are carried at cost less accumulated depreciation.
The provision for depreciation and amortization has been calculated using the
straight-line method based upon the following estimated useful lives of assets:
<Table>
Buildings................................................... 31.5 - 39 years
Improvements and alterations................................ 1 - 39 years
</Table>
Expenditures for maintenance, repairs, and betterments that do not
materially prolong the normal useful life of an asset are charged to operations
as incurred and amounted to $4,010,000, $3,470,000, and $2,604,000 for 1999,
1998, and 1997, respectively.
Additions and betterments that substantially extend the useful lives of the
properties are capitalized. Upon sale or other disposition of assets, the cost
and related accumulated depreciation and amortization are removed from the
accounts and the resulting gain or loss, if any, is reflected in net income.
Real estate investments include capitalized interest and other costs on
development and redevelopment activities and on significant construction in
progress. Capitalized costs are included in the cost of the related asset and
charged to operations through depreciation over the asset's estimated useful
life. Interest capitalized amounted to $482,000, $32,000, and $30,000, in 1999,
1998, and 1997, respectively.
The Company applies Financial Accounting Standards No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
("Statement No. 121") for the recognition and measurement of impairment of
long-lived assets, certain identifiable intangibles and goodwill related both to
assets to be held and used and assets to be disposed of. Management reviews each
property for impairment whenever events or changes in circumstances indicate
that the carrying value of a property may not be recoverable. The review of
recoverability is based on an estimate of undiscounted future cash flows
expected to result from its use and eventual disposition. If impairment exists
due to the inability to recover the carrying value of a property, an impairment
loss is recorded to the extent that the carrying value of the property exceeds
its estimated fair value.
Real Estate Investments Held for Sale
Real estate investments held for sale are carried at the lower of cost or
fair value less cost to sell. Depreciation and amortization are suspended during
the period held for sale.
Cash Equivalents
Cash and cash equivalents consist of cash in banks and short-term
investments with original maturities of less than ninety days.
F-56
<Page>
BRADLEY REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Deferred Charges
Deferred charges consist of leasing commissions incurred in leasing the
Company's properties. Such charges are amortized using the straight-line method
over the term of the related lease. In addition, deferred charges include costs
incurred in connection with securing long-term debt, including the costs of
entering into interest rate protection agreements. Such costs are amortized over
the term of the related agreement.
Derivative Financial Instruments
The Company may enter into derivative financial instrument transactions in
order to mitigate its interest rate risk on a related financial instrument. The
Company has designated these derivative financial instruments as hedges and
applies deferral accounting, as the instrument to be hedged exposes the Company
to interest rate risk, and the derivative financial instrument reduces that
exposure. Gains and losses related to the derivative financial instrument are
deferred and amortized over the terms of the hedged instrument until the
derivative terminates or is sold. If a derivative terminates or is sold, the
gain or loss is deferred and amortized over the remaining life of the hedged
instrument. Derivatives that do not satisfy the criteria above are carried at
market value, and any changes in market value are recognized in other income.
The Company has only entered into derivative transactions that satisfy the
aforementioned criteria. The fair value of interest rate protection agreements
is estimated using option-pricing models that value the potential for interest
rate protection agreements to become in-the-money through changes in interest
rates during the remaining terms of the agreements. A negative fair value
represents the estimated amount the Company would have to pay to cancel the
contract or transfer it to other parties.
Earnings Per Share
In accordance with Statement of Financial Accounting Standards No. 128,
Earnings Per Share ("Statement No. 128"), basic EPS is computed by dividing
income available to common share owners by the weighted average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then
F-57
<Page>
BRADLEY REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
shared in the earnings of the entity. A reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation is as follows:
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
------------------------------------------------
1999 1998 1997
-------------- -------------- --------------
(IN THOUSANDS OF DOLLARS, EXCEPT PER-SHARE DATA)
NUMERATOR:
Basic
Income before extraordinary item and after preferred
share distributions............................... $ 31,502 $ 56,598 $ 29,758
=========== =========== ===========
Diluted
Income before extraordinary item and after preferred
share distributions............................... $ 31,502 $ 56,598 $ 29,758
Income allocated to exchangeable limited partnership
units............................................. 1,806 3,317 1,116
Convertible preferred share distributions........... -- 2,922 --
----------- ----------- -----------
Adjusted net income................................. $ 33,308 $ 62,837 $ 30,874
=========== =========== ===========
DENOMINATOR:
Basic
Weighted average common shares...................... 24,003,077 23,660,542 21,776,146
=========== =========== ===========
Diluted
Weighted average common shares...................... 24,003,077 23,660,542 21,776,146
Effect of dilutive securities:
Stock options..................................... 29,513 47,452 42,451
Stock-based compensation.......................... -- -- 315
Exchangeable limited partnership units............ 1,376,883 1,401,464 799,938
Convertible preferred stock....................... -- 1,440,286 --
----------- ----------- -----------
Weighted average shares and assumed conversions..... 25,409,473 26,549,744 22,618,850
=========== =========== ===========
Per share income before extraordinary item and after
preferred share distributions:
Basic............................................. $ 1.31 $ 2.39 $ 1.36
=========== =========== ===========
Diluted........................................... $ 1.31 $ 2.37 $ 1.36
=========== =========== ===========
</Table>
For the year ended December 31, 1999, convertible preferred share
distributions of $7,304,000, and the effect on the denominator of the conversion
of the convertible preferred shares outstanding into 3,550,833 shares of common
stock were not included in the computation of diluted EPS because the impact on
basic EPS was anti-dilutive. For the years ended December 31, 1999, 1998, and
1997, options to purchase 641,050, 153,500, and 5,500 shares of common stock,
respectively, at prices ranging from $17.00 to $22.00 were outstanding during
1999, 1998, and 1997, respectively, but were not included in the computation of
diluted EPS because the options' exercise prices were greater than the average
market prices of the common shares, thereby having an anti-dilutive impact on
basic EPS.
F-58
<Page>
BRADLEY REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock Option Plans
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("Statement No. 123") establishes financial accounting
and reporting standards for stock-based employee compensation plans, including
all arrangements by which employees receive shares of stock or other equity
instruments of the employer or the employer incurs liabilities to employees in
amounts based on the price of the employer's stock. Statement No. 123 defines a
fair value based method of accounting for an employee stock option or similar
equity instrument and encourages all entities to adopt that method of accounting
for all of their employee stock compensation plans. However, it also allows an
entity to continue to measure compensation cost using the intrinsic value based
method of accounting prescribed by Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("Opinion No. 25"). The Company has
elected to continue using Opinion No. 25 and make pro forma disclosures of net
income and earnings per share as if the fair value method of accounting defined
in Statement No. 123 had been applied. See Note 9 for the required disclosures.
Reclassifications
Certain reclassifications have been made to the prior year consolidated
balance sheet to conform with the presentation in the current year.
NOTE 3--SUPPLEMENTAL CASH FLOW DISCLOSURE
During 1999, 1998, and 1997, 411, 143, 151, and 1,238 shares of common
stock, respectively, were issued in exchange for an equivalent number of common
LP Units held by the minority interest. During 1999, the acquisition of the
Company's non-owned portion of a joint venture resulted in a non-cash
reclassification of investment in partnership to real estate investments of
$6,556,000 and a non-cash transfer of a $3,100,000 note receivable.
During 1998, shopping center acquisitions included the assumption of
$25,753,000 of non-recourse mortgage indebtedness and the issuance of 62,436 LP
Units valued at $1,300,000.
The merger acquisition of Mid-America Realty Investments, Inc.
("Mid-America") on August 6, 1998 (see Note 12), resulted in the following
non-cash effects on the Company's 1998 consolidated balance sheet (in thousands
of dollars):
<Table>
Assets acquired............................................. $(159,433)
Liabilities assumed......................................... 43,973
Preferred stock and paid-in capital issued, net of costs.... 86,882
---------
Cash used for merger acquisition............................ $ (28,578)
=========
</Table>
F-59
<Page>
BRADLEY REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 4--REAL ESTATE INVESTMENTS
The following is a summary of the Company's real estate held for investment
at December 31 (in thousands of dollars):
<Table>
<Caption>
1999 1998
---------- --------
Land.................................................. $ 213,833 $201,849
Buildings............................................. 694,536 659,286
Improvements and alterations.......................... 92,066 72,957
Development and redevelopment in progress............. 11,674 423
Other construction in progress........................ 2,049 1,950
---------- --------
1,014,158 936,465
Accumulated depreciation and amortization............. (81,302) (59,196)
---------- --------
$ 932,856 $877,269
========== ========
</Table>
During 1999, the Company completed the acquisitions of four shopping centers
for an aggregate purchase price of approximately $36,859,000. Two of these
shopping centers, Cherry Hill Marketplace located in Westland, Michigan, and
30th Street Plaza located in Canton, Ohio, were acquired with the intention of
substantial redevelopment and retenanting. The Company expects to incur an
additional $21 million (unaudited) for the redevelopment of these two shopping
centers, as well as for two other shopping centers in the portfolio under
redevelopment, Prospect Plaza located in Gladstone, Missouri, and Commons of
Chicago Ridge, located in Chicago Ridge, Illinois. All of these redevelopment
projects are expected to be substantially completed during the first half of
2000.
At December 31, 1999, the Company was holding for sale three enclosed malls
with an aggregate book value of $29,890,000, all acquired in connection with the
Mid-America merger acquisition. These dispositions are expected to be completed
during the first quarter of 2000, although there can be no assurance that any
such dispositions will occur. During the second quarter of 1999, the Company
completed the sales of an additional three properties, for an aggregate gross
sales price of $17,325,000. These three properties, all acquired in connection
with the merger acquisition of Mid-America, had been held for sale since the
merger acquisition. Two of these properties, Macon County Plaza and Town West
Shopping Center, are shopping centers located in the Southeast region of the
United States and were not aligned with the Company's strategic market focus.
The third property, Monument Mall, is an enclosed mall and, like the three
properties currently held for sale, was not aligned with the Company's strategic
property focus.
In July 1998, the Company completed the sale of One North State, a 640,000
square-foot mixed-use property located in the "loop" area of downtown Chicago,
Illinois, which did not fit with the Company's strategic property focus, for a
net sales price of approximately $82,100,000. The sale resulted in a gain of
approximately $30,600,000 for financial reporting purposes. The net gain on sale
of properties in 1998 includes an $875,000 provision for loss on sale of Holiday
Plaza, which the Company completed in May 1998. The loss on Holiday Plaza, a
46,000 square-foot property located in Iowa, represents the difference between
the sales price, net of closing costs, and the carrying value of the property.
F-60
<Page>
BRADLEY REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 4--REAL ESTATE INVESTMENTS (CONTINUED)
During 1997, the Company completed the sales of its Meadows Town Mall,
Augusta Plaza, Hood Commons, and 585 Boylston Street properties because such
properties were not aligned with the Company's strategic property and market
focus. The net gains on the sales of Augusta Plaza, Hood Commons, and 585
Boylston Street were $826,000, $3,073,000, and $4,839,000, respectively. The net
gain on sale of properties in 1997 includes a provision for the loss on the sale
of Meadows Town Mall of $1,300,000, which represents the difference between the
sales price, net of closing costs, and the carrying value of the property.
The results of operations included in the accompanying financial statements
for properties classified as held for sale as of December 31, 1999 and 1998, or
that were sold during 1999, 1998 and 1997, were $4,472,000, $7,568,000, and
$8,689,000, respectively.
NOTE 5--MORTGAGE LOANS, UNSECURED NOTES PAYABLE AND LINE OF CREDIT
Mortgage loans outstanding consist of the following (in thousands of
dollars):
<Table>
<Caption>
DECEMBER 31,
EFFECTIVE -------------------
PROPERTY INTEREST RATE MATURITY 1999 1998
- -------- ------------- ----------------- -------- --------
Watts Mill Plaza............................. 7.25% February 2000 $ 6,022 $ 6,262
Eastville Plaza.............................. 7.09% April 2001 2,808 2,858
Rivergate Shopping Center.................... 7.25% January 2002 3,141 3,249
Shenandoah Plaza............................. 7.25% January 2002 4,232 4,383
Fox River Plaza.............................. 7.76% April 2002 5,046 5,128
Southport Centre............................. 7.25% April 2002 8,306 8,442
Edgewood Plaza............................... 7.25% June 2002 6,749 6,852
Moorland Square.............................. 7.348% November 2002 3,534 3,655
Kimberly West................................ 7.25% January 2003 3,911 4,030
Martin's Bittersweet Plaza................... 8.875% June 2003 3,434 3,562
Miracle Hills Park........................... 7.25% August 2004 4,019 4,108
Williamson Square............................ 8.00% August 2005 12,274 12,501
Spring Mall.................................. 7.25% October 2006 9,505 9,707
Southgate Shopping Center.................... 7.25% October 2007 2,989 3,076
Salem Consumer Square........................ 7.50% September 2008 13,695 14,161
St. Francis Plaza............................ 8.125% December 2008 1,619 1,737
Elk Park..................................... 7.64% August 2016 9,434 9,622
-------- --------
$100,718 $103,333
======== ========
</Table>
The net book value of real estate pledged as collateral for loans was
approximately $166,920,000. The mortgage loans collateralized by Rivergate
Shopping Center and Shenandoah Plaza are cross-collateralized.
In November 1997, the Operating Partnership issued $100 million, 7%
seven-year unsecured Notes maturing November 15, 2004, which were rated "BBB-"
by Standard & Poor's Investment Services ("Standard & Poor's") and "Baa3" by
Moody's Investors Service ("Moody's"). The Company used the proceeds to prepay a
$100 million, 7.23% mortgage note that had been issued to a trust qualifying as
a
F-61
<Page>
BRADLEY REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 5--MORTGAGE LOANS, UNSECURED NOTES PAYABLE AND LINE OF CREDIT (CONTINUED)
real estate mortgage investment conduit for federal income tax purposes (the
"REMIC Note"). The REMIC Note was secured by six properties and was originally
scheduled to expire in September 2000. Prepayment of the REMIC Note resulted in
an extraordinary loss on prepayment of debt of $4,054,000 (net of the minority
interest portion), consisting primarily of a prepayment yield maintenance fee.
However, issuance of such unsecured debt extended the Company's weighted average
debt maturity and resulted in a slightly lower effective interest rate on $100
million of debt, while the prepayment of the REMIC Note resulted in the
discharge from the mortgage securing the REMIC Note of properties having an
aggregate gross book value of $181.2 million. The outstanding balance of the
unsecured Notes at December 31, 1999, net of the unamortized discount, was
$99,846,000. The effective interest rate on the unsecured Notes is approximately
7.19%.
In January 1998, the Operating Partnership issued $100 million, 7.2%
ten-year unsecured Notes maturing January 15, 2008. The issue was rated "BBB-"
by Standard & Poor's and "Baa3" by Moody's. Proceeds from the offering were used
to pay amounts outstanding under the bank line of credit. The outstanding
balance of the unsecured Notes at December 31, 1999, net of the unamortized
discount, was $99,758,000. The effective interest rate on the unsecured Notes is
approximately 7.61%.
In May 1998, the Company filed a "shelf" registration under which the
Operating Partnership may issue up to $400 million in unsecured, non-convertible
investment grade debt securities. The "shelf" registration gives the Operating
Partnership the flexibility to issue additional debt securities from time to
time when management determines that market conditions and the opportunity to
utilize the proceeds from the issuance of such securities are favorable.
In December 1997, the Operating Partnership entered into a $200 million
unsecured line of credit facility with a syndicate of banks, lead by First
Chicago NBD and BankBoston. In November 1998, the Operating Partnership amended
the line of credit, increasing the maximum capacity to $250 million. The line of
credit bears interest at a rate equal to the lowest of (i) the lead bank's base
rate, (ii) a spread over LIBOR ranging from 0.70% to 1.25% depending on the
credit rating assigned by national credit rating agencies, or (iii) for amounts
outstanding up to $150 million, a competitive bid rate solicited from the
syndicate of banks. Based on the Operating Partnership's current credit rating
assigned by Standard & Poor's and Moody's, the spread over LIBOR is 1.00%.
Additionally, there is a facility fee currently equal to $375,000 per annum. In
the event the current credit ratings were downgraded below "BBB-" or "Baa3" by
either Standard & Poor's or Moody's, respectively, the facility fee would
increase to $625,000 per annum, and the spread over the base rate would increase
by 0.25% and the spread over LIBOR would increase to 1.25%. During 1999,
Standard & Poor's affirmed the Company's "BBB-" rating and raised its rating
outlook from stable to positive. The line of credit is available for the
acquisition, development, renovation and expansion of new and existing
properties, working capital and general business purposes. The Company incurred
an extraordinary loss on the prepayment of debt of $577,000 (net of the minority
interest portion) in connection with replacing the previous line of credit in
1997.
The line of credit contains certain financial and operational covenants
that, among other provisions, limit the amount of secured and unsecured
indebtedness the Company may have outstanding at any time, and provide for the
maintenance of certain financial tests including minimum net worth and debt
service coverage requirements. The Company was in compliance with such covenants
during 1999 and believes that such covenants will not adversely affect the
Company's
F-62
<Page>
BRADLEY REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 5--MORTGAGE LOANS, UNSECURED NOTES PAYABLE AND LINE OF CREDIT (CONTINUED)
business or the operation of its properties. The line of credit is guaranteed by
the Company and matures in December 2000. Management has commenced negotiations
to extend and modify the terms of the line of credit. While management expects
to be able to extend and modify the line of credit on commercially reasonable
terms, there can be no assurance that the Operating Partnership will be able to
extend and modify the line of credit on commercially reasonable or any other
terms. At December 31, 1999, the weighted average interest rate on the line of
credit was 7.62%.
From time to time the Company uses Treasury Note purchase agreements and
interest rate caps and swaps to limit its exposure to increases in interest
rates on its floating rate debt and to hedge interest rates in anticipation of
issuing unsecured debt at a time when management believes interest rates are
favorable, or at least desirable given the consequences of not hedging an
interest rate while the Company is exposed to increases in interest rates. The
Company does not use derivative financial instruments for trading or speculative
purposes. During 1998, the Company was party to interest rate cap agreements
which entitled the Company to receive on a quarterly basis, the amount, if any,
by which the applicable three-month LIBOR Rate (as defined in the interest rate
protection agreement) for the protected amount exceeded the applicable cap rate
for the protected amount. During 1998, the Company was also party to a swap
agreement whereby the Company received or made quarterly payments based on the
differential between the three-month LIBOR Rate (as defined in the interest rate
protection agreement) for the protected amount and the applicable fixed swap
rate for the protected amount.
The following summarizes the interest rate protection agreements outstanding
during 1998 (in thousands of dollars):
<Table>
<Caption>
EFFECT ON
MAXIMUM TYPE OF INTEREST
NOTIONAL AMOUNT RATE CONTRACT MATURITY EXPENSE
- --------------- -------- -------- -------------- ---------
$ 43,000......................... 6.00% Swap April 14, 1998 $38
40,000......................... 7.50% Cap March 18, 1998 --
17,000........................... 7.50% Cap April 11, 1998 --
---
$100,000......................... $38
===
</Table>
Additionally, in anticipation of issuing unsecured debt in the first quarter
of 1998, during 1997 the Company entered into two Treasury Note purchase
agreements with notional amounts of $37 million each, expiring March 2, 1998.
The contracts were terminated at a cost of $3,798,000 as of January 23, 1998,
the date upon which the Company priced the aforementioned $100 million issuance
of ten-year unsecured Notes. The Company has treated the Treasury Note purchase
agreements as hedges and, accordingly, the loss recognized upon termination of
the Treasury Note purchase agreements was deferred and is amortized over the
term of the underlying debt security as an adjustment to interest expense. The
Company had no interest rate protection agreements outstanding during 1999.
F-63
<Page>
BRADLEY REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 5--MORTGAGE LOANS, UNSECURED NOTES PAYABLE AND LINE OF CREDIT (CONTINUED)
Scheduled principal payments of debt outstanding at December 31, 1999 are as
follows (in thousands of dollars):
<Table>
2000........................................................ $152,211
2001........................................................ 4,630
2002........................................................ 30,690
2003........................................................ 7,879
2004........................................................ 105,015
Thereafter.................................................. 140,783
--------
$441,208
========
</Table>
NOTE 6--RENTALS UNDER OPERATING LEASES
Annual minimum future rentals to be received under non-cancelable operating
leases in effect at December 31, 1999 are as follows (in thousands of dollars):
<Table>
2000........................................................ $109,018
2001........................................................ 99,831
2002........................................................ 88,652
2003........................................................ 77,272
2004........................................................ 65,756
Thereafter.................................................. 345,222
--------
$785,751
========
</Table>
Total minimum future rentals do not include contingent rentals under certain
leases based upon lessees' sales volume. On May 22, 1998, the Emerging Issues
Task Force ("EITF") of the Financial Accounting Standards Board reached a
consensus under Issue No. 98-9, Accounting for Contingent Rent in Interim
Financial Periods, that despite the fact that the achievement of a future
specified sales target of a lessee may be considered as probable and reasonably
estimable at some earlier point in the year, a lessor should defer recognition
of contingent rental income until such specified targets are met. The
pronouncement was effective May 23, 1998, and was reaffirmed by Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements, issued by the
Securities and Exchange Commission in December 1999. Previously, the Company
recognized percentage rental income each period based on reasonable estimates of
tenant sales. Contingent rentals earned amounted to approximately $3,310,000,
$1,897,000, and $1,864,000 in 1999, 1998, and 1997, respectively. Certain leases
also require lessees to pay all or a portion of real estate taxes and operating
costs, amounting to $36,171,000, $31,615,000, and $25,253,000, in 1999, 1998,
and 1997, respectively.
No tenant accounted for as much as 10% of rental income in 1999, 1998, or
1997. No property accounted for as much as 10% of the Company's rental income
during 1999 or 1998. One North State accounted for greater than 10% of the
Company's rental income during 1997.
F-64
<Page>
BRADLEY REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 7--INCOME TAXES
The Company has elected to be taxed as a REIT under the Internal Revenue
Code (the "Code"). Under the Code, a qualifying REIT that distributes at least
95% of its ordinary taxable income to its share owners is entitled to a tax
deduction in the amount of the distribution. In addition, qualifying REITs are
permitted to deduct capital gain distributions in the determination of the tax
on capital gains. The Company paid distributions to common share owners
aggregating $35,657,000, $33,717,000, and $29,387,000 in 1999, 1998, and 1997,
respectively. The Company paid $7,304,000 and $3,653,000 of distributions to
preferred share owners on the Series A Preferred Stock in 1999 and 1998,
respectively. The following table summarizes the tax status of distributions
paid to common and preferred share owners during 1999, 1998, and 1997:
<Table>
<Caption>
1999 1998 1997
-------------------- -------------------- --------
COMMON PREFERRED COMMON PREFERRED COMMON
-------- --------- -------- --------- --------
Ordinary income................................. 91% 93% 81% 81% 57%
Capital gain.................................... 7% 7% 19% 19% 15%
Return of capital............................... 2% -- -- -- 28%
---- ---- ---- ---- ----
Total........................................... 100% 100% 100% 100% 100%
==== ==== ==== ==== ====
</Table>
NOTE 8--SHARE OWNERS' EQUITY
In November 1999, the Board of Directors of the Company authorized the
repurchase of up to two million shares of outstanding common shares from time to
time through periodic open market transactions or through privately negotiated
transactions. The share repurchase program is in effect until December 31, 2000,
or until the authorized limit has been reached. The Company expects to fund the
purchases primarily through asset sales. Through December 31, 1999, the Company
repurchased 980,700 shares at an average price of $16.90 per share for a total
purchase price of $16,611,000, including costs.
During 1998, the Company implemented a new Dividend Reinvestment and Stock
Purchase Plan (the "Plan"), replacing the Company's 1993 Dividend Reinvestment
and Share Purchase Plan, to provide both new and existing owners of the
Company's common stock, Series A Convertible Preferred Stock and other classes
of equity securities outstanding from time to time, as well as existing owners
of LP Units of the Operating Partnership, with an economical and convenient
method of increasing their investment in the Company. Under the Plan,
participants may purchase additional shares of common stock at a discount
(ranging from 0% to 3% as determined by the Company in its sole discretion from
time to time) and without brokerage fees or other transaction costs by, (i)
reinvesting all or a portion of their cash dividends, (ii) purchasing shares of
common stock directly from the Company as frequently as once per month by making
optional cash payments of a minimum of $100 to a maximum of $10,000 per quarter,
or (iii) with prior approval by the Company, purchasing shares of common stock
directly from the Company by making optional cash payments in excess of $10,000.
Under the Plan, the Company may, at its option, purchase shares in the open
market and reissue the shares directly to participants purchasing shares under
the Plan. The determination of whether to issue new shares of common stock or to
purchase shares in the open market and reissue them directly to participants is
made after a review of current market conditions and the Company's current and
projected capital needs. During 1999, 1998, and 1997, the Company issued 90,705,
308,016, and 38,592
F-65
<Page>
BRADLEY REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 8--SHARE OWNERS' EQUITY (CONTINUED)
shares under this and the prior plan, raising $1,462,000, $6,049,000, and
$770,000, respectively, net of the discount offered to participants.
In May 1997, the Company filed a "shelf" registration with the Securities
and Exchange Commission to register $234,460,000 of equity securities that the
Company may issue through underwriters or in privately negotiated transactions
for cash from time to time.
On December 1, 1997, the Company completed an offering of 990,000 shares of
its common stock from the "shelf" registration at a price to the public of
$20.375 per share. Net proceeds from the offering of $19,166,000 were used to
reduce outstanding indebtedness under the line of credit. The shares were sold
under a program entered into with PaineWebber Incorporated ("PaineWebber") on
October 21, 1997, pursuant to which the Company had the right, but not the
obligation, until April 21, 1998, to sell shares of its common stock at the
market price on the day following notification to PaineWebber of its intent to
sell common stock to PaineWebber, acting as underwriter, with an aggregate value
up to $60 million, in amounts ranging from $5 million to $20 million per
transaction. No additional shares were sold under the program, which expired
April 21, 1998. The Company completed an additional offering of 300,000 shares
of its common stock on December 10, 1997 at a price to the public of $20.50 per
share. Net proceeds from the offering of $5,726,000 were used to reduce
outstanding indebtedness under the line of credit. In February 1998, the Company
issued 392,638 shares of common stock from the "shelf" registration at a price
based upon the then market value of $20.375 per share, leaving $201,412,000
available under the "shelf" registration. Net proceeds from the offering of
approximately $7,601,000 were used to reduce outstanding borrowings under the
line of credit.
NOTE 9--STOCK OPTION PLANS AND STOCK-BASED COMPENSATION
The Company's Stock Option and Incentive Plan authorizes options and other
stock-based awards to be granted for up to 2,282,348 shares. During 1999, 1998
and 1997, options for 474,500, 148,000 and 94,500 shares, respectively, were
granted under this Plan. At December 31, 1999 and 1998, options for 802,550 and
372,550 shares, respectively, were outstanding. A committee of the Board of
Directors administers the Plan and is responsible for selecting persons eligible
for awards and for determining the term and duration of any award.
In 1997, the Company's share owners approved a Superior Performance
Incentive Plan, originally intended to provide an award pool to be divided among
senior executives and directors of the Company in an amount based upon the
amount (if any) by which total returns to share owners of the Company exceeded
total returns to stockholders of other REITs included in an industry index, over
a three-year period. Because of administrative complexities that made the
implementation of such Plan impractical, at year-end 1997, after working with an
independent compensation consultant, the Board of Directors terminated the Plan
and substituted a non-recurring award of approximately 115,000 shares of the
Company's common stock to certain senior executives, plus a cash amount to
reimburse the executives for taxes resulting from such award. As a result, a
non-recurring charge of $3,415,000 was included in the Company's 1997 financial
statements.
The Company has estimated the fair value of stock options granted on the
date of grant using the Black-Scholes option-pricing model with the following
weighted average assumptions used for grants in
F-66
<Page>
BRADLEY REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 9--STOCK OPTION PLANS AND STOCK-BASED COMPENSATION (CONTINUED)
1999, 1998, and 1997, respectively: dividend yield of 7.60%, 7.50%, and 7.13%;
expected volatility of 23%, 22%, and 16%; risk-free interest rates of 6.8%,
4.8%, and 5.5%; and expected lives ranging from five to seven years for 1999 and
five years for 1998 and 1997. The Company applies Opinion No. 25 and related
Interpretations in accounting for awards under the Plan. Accordingly, no
compensation cost relating to the Stock Option Plans has been recognized in the
accompanying financial statements as stock options are granted at an exercise
price no less than fair value on the date of grant. Had compensation cost for
the Company's Plan been determined consistent with Statement No. 123, the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below (in thousands of dollars, except per-share data):
<Table>
<Caption>
1999 1998 1997
-------- -------- --------
Net income attributable to common share owners
As Reported............................................... $31,502 $56,598 $25,127
Pro Forma................................................. $31,197 $56,409 $25,069
Net income per common share
As Reported, basic........................................ $ 1.31 $ 2.39 $ 1.15
As Reported, diluted...................................... $ 1.31 $ 2.37 $ 1.15
Pro Forma, basic.......................................... $ 1.30 $ 2.38 $ 1.15
Pro Forma, diluted........................................ $ 1.30 $ 2.36 $ 1.15
</Table>
The effect of applying Statement No. 123 for disclosing compensation costs
under such pronouncement may not be representative of the effects on reported
net income for future years.
A summary of option transactions during the periods covered by these
financial statements is as follows:
<Table>
<Caption>
EXERCISE PRICES
SHARES PER SHARE
-------- ---------------
Outstanding at December 31, 1996................... 180,000 $11.50 - $21.25
Granted.......................................... 94,500 $18.16 - $19.35
Expired.......................................... (12,000) $19.35 - $21.25
Exercised........................................ (10,500) $14.74 - $17.00
-------
Outstanding at December 31, 1997................... 252,000 $11.50 - $21.25
Granted.......................................... 148,000 $21.35
Expired.......................................... (27,250) $14.88 - $19.35
Exercised........................................ (200) $19.35
-------
Outstanding at December 31, 1998................... 372,550 $11.50 - $21.35
Granted.......................................... 474,500 $19.90 - $20.25
Expired.......................................... (34,500) $19.35 - $21.35
Exercised........................................ (10,000) $14.88 - $19.35
-------
Outstanding at December 31, 1999................... 802,550 $11.50 - $21.35
=======
</Table>
One third of 72,000 options granted to employees during 1999 and still
outstanding, and one third of 74,750 options granted to employees during 1998
and still outstanding, vest on each of the first,
F-67
<Page>
BRADLEY REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 9--STOCK OPTION PLANS AND STOCK-BASED COMPENSATION (CONTINUED)
second, and third anniversary of the grant date over a three-year period, and
have a duration of ten years from the grant date, subject to earlier termination
in certain circumstances. One half of 375,000 options granted to employees
during 1999 and still outstanding vest on the third anniversary of the grant
date, with an additional one fourth of such options vesting on each of the
fourth and fifth anniversary of the grant date, and have a duration of ten years
from the date of grant, subject to earlier termination in certain circumstances.
The remaining 280,800 options outstanding at December 31, 1999 are fully vested
and exercisable. The weighted average exercise price per share and the weighted
average contractual life remaining of options outstanding at December 31, 1999
were $19.20 and 8.16 years, respectively. The weighted average fair value of
options granted during 1999, 1998, and 1997 were $2.32, $1.82, and $1.36,
respectively.
NOTE 10--FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments, requires the Company to disclose fair value
information of all financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate fair value. The Company's
financial instruments, other than debt are generally short-term in nature and
contain minimal credit risk. These instruments consist of cash and cash
equivalents, rents and other receivables, and accounts payable. The carrying
amount of these assets and liabilities in the consolidated balance sheets are
assumed to be at fair value.
The Company's mortgage loans are at fixed rates, and when compared with
borrowing rates currently available to the Company with similar terms and
average maturities, approximate fair value. The fair values of the fixed rate
unsecured Notes, calculated based on the Company's estimated interest rate
spread over the applicable treasury rate with a similar remaining maturity, are
at or slightly below their carrying values. The Company's line of credit is at a
variable rate, which results in a carrying value that approximates its fair
value.
NOTE 11--COMMITMENTS AND CONTINGENCIES
RETIREMENT SAVINGS PLAN
The Company provides its employees with a retirement savings plan which is
qualified under Section 401(k) of the Internal Revenue Code. The provisions of
the plan provide for an employer discretionary matching contribution currently
equal to 35% of the employee's contributions up to 5% of the employee's
compensation. The employer matching contribution is determined annually by the
Board of Directors, and amounted to $84,000, $72,000, and $43,000 in 1999, 1998,
and 1997, respectively. Employer contributions and any earnings thereon vest in
increments of 20% per year beginning after one year of service.
LEGAL ACTIONS
The Company is a party to several legal actions which arose in the normal
course of business. Management does not expect there to be adverse consequences
from these actions which would be material to the Company's financial position
or results of operations.
F-68
<Page>
BRADLEY REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 12--MID-AMERICA MERGER AND ISSUANCE OF PREFERRED STOCK
On August 6, 1998, pursuant to an Agreement and Plan of Merger dated May 30,
1998, the Company completed the merger acquisition (the "Merger") of
Mid-America. The Merger and the merger agreement were approved by the
stockholders of Mid-America at its special meeting of stockholders held on
August 5, 1998. Upon completion of the Merger, the Company acquired Mid-
America's 22 retail properties located primarily in the Midwest, and succeeded
to Mid-America's 50% general partner interest in Mid-America Bethal Limited
Partnership (renamed Bradley Bethal Limited Partnership), a joint venture which
owned two neighborhood shopping centers and one enclosed mall.
Pursuant to the terms of the merger agreement each of the approximately
8,286,000 outstanding shares of Mid-America common stock were exchanged for 0.42
shares of a newly created 8.4% Series A Convertible Preferred Stock ("Series A
Preferred Stock"). The Series A Preferred Stock pays an annual dividend equal to
8.4% of the $25.00 liquidation preference and is convertible into shares of
Bradley's common stock at a conversion price of $24.49 per share, subject to
certain adjustments. At any time after five years, the Series A Preferred Stock
is redeemable at Bradley's option for $25.00 per share so long as the Bradley
common stock is trading at or above the conversion price. In connection with the
Merger, Bradley assumed all of Mid-America's outstanding liabilities and paid
certain transaction costs, making the total purchase price approximately $159
million. The Merger was structured as a tax-free transaction and was treated as
a purchase for accounting purposes. Accordingly, the purchase price was
allocated to the assets purchased and the liabilities assumed based upon the
fair value at the date of acquisition. The results of operations of Mid-America
have been included in the Company's consolidated financial statements from
August 6, 1998.
The following table sets forth certain summary unaudited pro forma operating
data for the Company as if the Merger had occurred as of January 1, 1998 and
1997 (in thousands of dollars, except per-share data):
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
1998 1998 1997 1997
---------- --------- ---------- ---------
Total revenue........................................ $131,037 $144,458 $97,552 $120,817
Income before extraordinary items.................... $ 59,520 $ 65,003 $29,758 $ 39,199
Net income attributable to common share owners....... $ 56,598 $ 57,737 $25,127 $ 27,261
Basic net income per common share.................... $ 2.39 $ 2.44 $ 1.15 $ 1.25
Diluted net income per common share.................. $ 2.37 $ 2.39 $ 1.15 $ 1.25
</Table>
The unaudited pro forma operating data is presented for comparative purposes
only and is not necessarily indicative of what the actual results of operations
would have been for the years ended December 31, 1998 and 1997, nor does such
data purport to represent the results to be achieved in future periods.
NOTE 13--SEGMENT REPORTING
The Company, which has internal property management, leasing, and
development capabilities, owns and seeks to acquire open-air community and
neighborhood shopping centers in the Midwest, generally consisting of fourteen
states. Ninety-six of the Company's 98 shopping centers are located in these
states. Such shopping centers are typically anchored by grocery and drug stores
complemented
F-69
<Page>
BRADLEY REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 13--SEGMENT REPORTING (CONTINUED)
with stores providing a wide range of other goods and services to shoppers.
During 1998, the Company also owned a mixed-use office property located in
downtown Chicago, Illinois, which was sold in July 1998 (see Note 4). Because
this property required a different operating strategy and management expertise
than all other properties in the portfolio, it was considered a separate
reportable segment.
The Company assesses and measures operating results on an individual
property basis for each of its 98 shopping centers without differentiation,
based on net operating income, and then converts such amounts in the aggregate
to a performance measure referred to as Funds from Operations ("FFO"). Since all
of the Company's shopping centers exhibit similar economic characteristics,
cater to the day-to-day living needs of their respective surrounding
communities, and offer similar degrees of risk and opportunities for growth, the
shopping centers have been aggregated and reported as one operating segment.
FFO, computed in accordance with the March 1995 "White Paper" on FFO
published by the National Association of Real Estate Investment Trusts
("NAREIT") and as followed by the Company, represents income before allocation
to minority interest (computed in accordance with GAAP), excluding gains or
losses from debt restructuring and sales of property, plus depreciation and
amortization, and after preferred stock distributions and adjustments for
unconsolidated partnerships and joint ventures. Adjustments for unconsolidated
partnerships and joint ventures are computed to reflect FFO on the same basis.
In computing FFO, the Company does not add back to net income the amortization
of costs incurred in connection with the Company's financing activities or
depreciation of non-real estate assets, but does add back to net income
significant non-recurring events that materially distort the comparative
measurement of company performance over time. In November 1999, NAREIT issued a
National Policy Bulletin clarifying that FFO should include both recurring and
non-recurring operating results, except gains and losses from sales of
depreciable operating property and those results defined as "extraordinary
items" under GAAP. This clarification, including restatements of comparative
periods, is effective January 1, 2000. During 1997, in computing FFO the Company
added back to net income $3,415,000 of non-recurring stock-based compensation
which, upon adoption January 1, 2000, will not be added back to net income when
presented under the guidelines of the National Policy Bulletin. FFO does not
represent cash generated from operating activities in accordance with GAAP and
should not be considered an alternative to cash flow as a measure of liquidity.
Since the NAREIT White Paper and National Policy Bulletin only provide
guidelines for computing FFO, the computation of FFO may vary from one REIT to
another. FFO is not necessarily indicative of cash available to fund cash needs.
The accounting policies of the segments are the same as those described in
Note 2. The revenue, net operating income, and assets for each of the reportable
segments are summarized in the following tables as of December 31, 1999 and
1998, and for each of the years in the three-year period then ended. Non-segment
assets to reconcile to total assets include the investment in partnership, cash
and cash equivalents, accounts receivable, and deferred financing and other
costs. The computation of FFO
F-70
<Page>
BRADLEY REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 13--SEGMENT REPORTING (CONTINUED)
for the Company, and a reconciliation to net income attributable to common share
owners, are as follows (in thousands of dollars):
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
TOTAL PROPERTY REVENUE:
Mixed-use office property................................... $ -- $ 8,321 $ 14,469
Shopping center properties.................................. 153,906 122,174 82,347
-------- -------- --------
153,906 130,495 96,816
-------- -------- --------
TOTAL PROPERTY OPERATING EXPENSES:
Mixed-use office property................................... -- 3,117 6,120
Shopping center properties.................................. 45,830 37,511 26,290
-------- -------- --------
45,830 40,628 32,410
-------- -------- --------
Net operating income........................................ 108,076 89,867 64,406
-------- -------- --------
NON-PROPERTY (INCOME) EXPENSES:
Other non-property income................................... (927) (542) (736)
Equity in earnings of partnership, excluding depreciation
and amortization.......................................... (600) (655) --
Mortgage and other interest................................. 29,404 27,681 16,562
General and administrative.................................. 8,544 7,183 5,123
Amortization of deferred finance and non-real estate related
costs..................................................... 1,127 962 747
Preferred share distributions............................... 7,304 2,922 --
Income allocated to Series B and C Preferred Units.......... 4,487 -- --
-------- -------- --------
49,339 37,551 21,696
-------- -------- --------
Funds from Operations....................................... $ 58,737 $ 52,316 $ 42,710
======== ======== ========
RECONCILIATION TO NET INCOME ATTRIBUTABLE TO COMMON SHARE
OWNERS:
Funds from Operations....................................... $ 58,737 $ 52,316 $ 42,710
Depreciation of real estate assets and amortization of
tenant improvements....................................... (22,632) (18,635) (13,407)
Amortization of deferred leasing commissions................ (1,902) (2,184) (1,259)
Other amortization.......................................... (795) (1,193) (1,193)
Depreciation and amortization included in equity in earnings
of partnership............................................ (100) (69) --
Non-recurring stock-based compensation...................... -- -- (3,415)
Income allocated to exchangeable limited partnership
units..................................................... (1,806) (3,317) (1,116)
Net gain on sale of properties.............................. -- 29,680 7,438
-------- -------- --------
Income before extraordinary item and after preferred share
distributions............................................. 31,502 56,598 29,758
Extraordinary loss on prepayment of debt, net of minority
interest.................................................. -- -- (4,631)
-------- -------- --------
Net income attributable to common share owners.............. $ 31,502 $ 56,598 $ 25,127
======== ======== ========
</Table>
F-71
<Page>
BRADLEY REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
NOTE 13--SEGMENT REPORTING (CONTINUED)
<Table>
<Caption>
AS OF DECEMBER 31,
-------------------
1999 1998
-------- --------
(IN THOUSANDS OF
DOLLARS)
TOTAL ASSETS:
Shopping center properties.................................. $988,033 $946,489
Non-segment assets.......................................... 8,134 20,624
-------- --------
$996,167 $967,113
======== ========
</Table>
NOTE 14--SUPPLEMENTARY QUARTERLY DATA (UNAUDITED)
<Table>
<Caption>
1999
--------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
----------- ---------- ---------- ----------
(IN THOUSANDS OF DOLLARS, EXCEPT PER-SHARE DATA)
Rental income.......................................... $38,710 $36,872 $37,833 $38,535
Net income attributable to common share owners......... $ 7,811 $ 7,831 $ 7,465 $ 8,395
Basic net income per common share...................... $ 0.33 $ 0.33 $ 0.31 $ 0.35
Diluted net income per common share.................... $ 0.33 $ 0.33 $ 0.31 $ 0.35
</Table>
<Table>
<Caption>
1998
--------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
----------- ---------- ---------- ----------
(IN THOUSANDS OF DOLLARS, EXCEPT PER-SHARE DATA)
Rental income.......................................... $28,736 $30,601 $33,305 $35,802
Net gain (loss) on sale of properties.................. $ (875) -- $30,555 --
Net income attributable to common share owners......... $ 6,351 $ 6,964 $36,092 $ 7,191
Basic net income per common share...................... $ 0.27 $ 0.29 $ 1.52 $ 0.30
Diluted net income per common share.................... $ 0.27 $ 0.29 $ 1.44 $ 0.30
</Table>
NOTE 15--SUBSEQUENT EVENTS
On January 27, 1999, the Board of Directors declared a regular quarterly
dividend on its common stock of $0.38 per share and a regular quarterly dividend
on its Series A Preferred Stock of $0.525 per share payable March 31, 2000 to
share owners of record on March 10, 2000.
In February 2000, the Company purchased two additional shopping centers
located in Kansas and Missouri, aggregating approximately 360,000 square feet of
leasable area for a total purchase price of approximately $19.1 million. The
shopping centers were acquired with cash provided by the line of credit.
On March 10, 2000, the Operating Partnership issued $75 million of unsecured
Notes due March 15, 2006 at an interest rate of 8.875%. Net proceeds were used
to pay-down the outstanding balance on the line of credit.
F-72
<Page>
[Map of the United States indicating locations by state of each of the
properties in the Heritage portfolio]
<Page>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Until , 2002, 25 days after the date of this prospectus, all
dealers that buy, sell or trade our common stock, whether or not participating
in this offering, may be required to deliver a prospectus. This requirement is
in addition to the dealers' obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
SHARES
HERITAGE PROPERTY INVESTMENT TRUST, INC.
COMMON STOCK
--------------
PROSPECTUS
--------------
MERRILL LYNCH & CO.
GOLDMAN, SACHS & CO.
MORGAN STANLEY
UBS WARBURG
LEGG MASON WOOD WALKER
INCORPORATED
WACHOVIA SECURITIES
, 2002
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<Page>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following are estimates of the expenses to be incurred in connection
with the issuance and distribution of the securities to be registered:
<Table>
SEC registration fee........................................ $ 105,000
NASD filing fee............................................. $ 30,500
NYSE listing fee............................................ $ 176,000
Printing and engraving fees................................. $ 550,000
Legal fees and expenses..................................... $1,000,000
Accounting fees and expenses................................ $ 850,000
Blue Sky fees and expense................................... $ 40,000
Transfer Agent and Registrar fees........................... $ 12,500
Other expenses.............................................. $ 236,000
----------
Total..................................................... $3,000,000
==========
</Table>
ITEM 32. SALES TO SPECIAL PARTIES.
None
ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES.
On July 9, 1999, in connection with the Registrant's formation, Net Realty
Holding Trust, a subsidiary of the New England Teamsters and Trucking Industry
Pension Fund, contributed substantially all of its real estate holdings and
related assets, net of related liabilities, or 60 properties, having an
aggregate net fair value of $550,000,000, to the Registrant. In exchange for
these properties, the Registrant issued Net Realty Holding Trust 5,529,412
shares of the Registrant's Common Stock and 16,470,588 shares of the
Registrant's Series A Cumulative Convertible Preferred Stock.
On July 9, 1999, in connection with the Registrant's formation, the
Registrant entered into a Stock Purchase Agreement with The Prudential Insurance
Company of America, pursuant to which the Registrant issued 251,337 shares of
the Registrant's Common Stock and 748,663 shares of the Registrant's Series A
Cumulative Convertible Preferred Stock to The Prudential Insurance Company of
America for an aggregate consideration of $25,000,000, in cash. In addition, in
connection with an advisory agreement entered into by the Registrant with
Prudential Investment Management Services, LLC, an affiliate of The Prudential
Insurance Company of America, the Registrant issued The Prudential Insurance
Company of America warrants to acquire 75,000 shares of the Registrant's Common
Stock at an exercise price of $25.00 per share.
On January 27, 2000, the Registrant issued an aggregate of 605 shares of the
Registrant's Common Stock and 1,815 shares of the Registrant's Series A
Cumulative Convertible Preferred Stock to 121 individual employees of The
Prudential Insurance Company of America, at no cost to such employees. These
shares of stock were issued in connection with the Registrant's qualification as
a "real estate investment trust" under the Internal Revenue Code of 1986, as
amended.
On September 18, 2000, the Registrant entered into a Stock Purchase
Agreement with The Prudential Insurance Company of America, pursuant to which
the Registrant issued 1,005,348 shares of the Registrant's Common Stock and
2,994,652 shares of the Registrant's Series A Cumulative Convertible Preferred
Stock to The Prudential Insurance Company of America for an aggregate
consideration of $100,000,000, in cash. In addition, in connection with an
advisory agreement entered
II-1
<Page>
into by the Registrant with Prudential Investment Management Services, LLC, an
affiliate of The Prudential Insurance Company of America, the Registrant issued
The Prudential Insurance Company of America warrants to acquire 300,000 shares
of the Registrant's Common Stock at an exercise price of $25.00 per share.
The Registrant has, from time to time, issued an aggregate of 60,257 shares
of the Registrant's Common Stock and 230,445 shares of the Registrant's
Series A Cumulative Convertible Preferred Stock to various employees and
directors under the Registrant's 2000 Equity Incentive Plan. These shares were
issued at no cost to the employee or director.
No underwriters were involved in the foregoing sales of securities. Such
sales were made in reliance upon an exemption from the registration provisions
of the Securities Act set forth in Section 4(2) thereof relative to sales by an
issuer not involving any public offering or the rules and regulations
thereunder, or in the case of certain restricted shares, options to purchase
Common Stock and shares issuable upon the exercise of such options, Rule 701 of
the Act. All of the foregoing securities are deemed restricted securities for
purposes of the Act.
ITEM 34. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our charter contains a provision permitted under Maryland General
Corporation Law eliminating, with limited exceptions, each director's and
officer's personal liability for monetary damages for breach of any duty as a
director or officer. In addition, our charter documents require us to indemnify
our directors and officers from specified liabilities and expenses, as well as
advancement of costs, expenses and attorneys' fees, to the fullest extent
permitted under Maryland General Corporation Law. These rights are contract
rights fully enforceable by each beneficiary of those rights, and are in
addition to, and not exclusive of, any other right to indemnification.
Furthermore, our officers and directors are indemnified against specified
liabilities by the underwriters, and the underwriters are indemnified against
certain liabilities by us, under the purchase agreements relating to this
offering. See "Underwriting."
In addition, our directors and officers are indemnified for specified
liabilities and expenses pursuant to the partnership agreements of Heritage
Property Investment Limited Partnership and Bradley Operating Limited
Partnership, two partnerships in which we serve, directly or indirectly, as sole
general partner.
ITEM 35. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED.
None of the proceeds will be credited to an account other than the
appropriate capital share account.
ITEM 36. FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULE AND EXHIBITS.
(a) Financial Statements: See page F-1 for an index of the financial
statements included in the Registration Statement.
(b) Financial Statement Schedule.
(c) Exhibits.
EXHIBIT INDEX
<Table>
<Caption>
NUMBER DESCRIPTION OF DOCUMENT
------ ------------------------------------------------------------
1.1* Form of Purchase Agreement
3.1* Articles of Amendment and Restatement (Third) of the
Registrant
</Table>
II-2
<Page>
<Table>
3.2* Amended and Restated By-Laws of the Registrant
4.1* Form of Common Stock Certificate of the Registrant
4.2* Indenture, dated as of November 24, 1997, by and between
Bradley Operating Limited Partnership and LaSalle National
Bank relating to the Senior Debt Securities of Bradley
Operating Limited Partnership
4.3* Definitive Supplemental Indenture No. 1, dated as of
November 24, 1997, between Bradley Operating Limited
Partnership and LaSalle National Bank
4.4* Definitive Supplemental Indenture No. 2, dated as of January
28, 1998, between Bradley Operating Limited Partnership and
LaSalle National Bank
4.5* Definitive Supplemental Indenture No. 3, dated as of March
10, 2000, between Bradley Operating Limited Partnership and
LaSalle National Bank
4.6* Warrant Agreement for 75,000 shares of Registrant's common
stock issued to The Prudential Insurance Company of America
4.7* Warrant Agreement for 300,000 shares of Registrant's common
stock issued to The Prudential Insurance Company of America
5.1* Opinion of Ballard Spahr Andrews & Ingersoll, LLP with
respect to the legality of the shares being registered
8.1* Opinion of Bingham Dana LLP with respect to tax matters
10.1* Form of Amended and Restated Limited Partnership Agreement
of Heritage Property Investment Limited Partnership
10.2* Second Amended and Restated Agreement of Limited Partnership
of Bradley Operating Limited Partnership dated as of
September 2, 1997
10.3* Amendment, dated August 6, 1998, to Second Restated
Agreement of Limited Partnership of Bradley Operating
Limited Partnership, designating the 8.4% Series A
Convertible Preferred Units
10.4* Amendment, dated February 23, 1999, to Second Restated
Agreement of Limited Partnership of Bradley Operating
Limited Partnership, designating the 8.875% Series B
Cumulative Redeemable Perpetual Preferred Units
10.5* Amendment, dated as of September 7, 1999, to Second Restated
Agreement of Limited Partnership of Bradley Operating
Limited Partnership, designating the 8.875% Series C
Cumulative Redeemable Perpetual Preferred Units
10.6* Amendment, dated as of September 18, 2000, to Second
Restated Agreement of Limited Partnership of Bradley
Operating Limited Partnership
10.7* Form of Amendment to Second Restated Agreement of Limited
Partnership of Bradley Operating Limited Partnership
10.8+* Amended and Restated 2000 Equity Incentive Plan
10.9+* Form of restricted stock and stock option agreements
10.10+* Supplemental Executive Retirement Plan
10.11* Revolving and Term Credit Agreement, dated as of September
18, 2000, among Heritage Property Investment Limited
Partnership, Bradley Operating Limited Partnership, the
Registrant and the lending institutions named therein, as
amended
10.12* Loan Agreement, dated as of September 18, 2000, between
Heritage SPE LLC and Prudential Mortgage Capital Company,
LLC
10.13* Promissory Note, dated as of December 14, 1999, by and among
Heritage Property Investment Limited Partnership, NH
Heritage Limited Partnership and Metropolitan Life Insurance
Company, as amended
10.14* Promissory Note, dated as of September 13, 2000, by Heritage
Property Investment Limited Partnership in favor of The
Variable Annuity Life Insurance Company
10.15+* Employment Agreement with Thomas C. Prendergast, as amended
by the First Amendment, dated as of April 3, 2000
10.16+* Form of Change in Control/Severance Agreement
</Table>
II-3
<Page>
<Table>
10.17* PIMS Indemnification Letter, dated as of July 9, 1999, by
and between the Registrant and Prudential Investment
Management Services, LLC
10.18* Form of Second Amended and Restated Stockholders Agreement,
by and among the Registrant, Net Realty Holding Trust and
The Prudential Insurance Company of America
10.19* Form of Letter Agreement, by and among Registrant,
Prudential Investment Management Inc., and Prudential
Investment Management Services, LLC
21.1* Schedule of Subsidiaries of the Registrant
23.1 Consent of KPMG LLP
23.2* Consent of Ballard Spahr Andrews & Ingersoll, LLP (included
in Exhibit 5.1)
23.3* Consent of Bingham Dana LLP, counsel to the Registrant
(included in Exhibit 8.1)
24.1* Power of Attorney (included on signature page)
99.1* Consent of Richard C. Garrison, as a director nominee
99.2* Consent of Kevin C. Phelan, as a director nominee
99.3* Consent of Kenneth K. Quigley, Jr., as a director nominee
99.4* Consent of Robert J. Watson, as a director nominee
</Table>
- ------------------------
* previously filed
+ compensatory plan or arrangement
ITEM 37. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
Offers and sales of the interests may continue after the filing of a
post-effective amendment containing information previously disclosed in sticker
supplements to the prospectus, as long as the information disclosed in a current
sticker supplement accompanying the prospectus is as complete as the information
contained in the most recently filed post-effective amendment.
The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act, and will be governed by the final adjudication
of such issue.
II-4
<Page>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-11 and has duly caused this amendment to the
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Boston, Commonwealth of Massachusetts, on this
23rd day of April, 2002.
<Table>
HERITAGE PROPERTY INVESTMENT TRUST, INC.
By: /s/ THOMAS C. PRENDERGAST
-----------------------------------------
Thomas C. Prendergast
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</Table>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ THOMAS C. PRENDERGAST President and Chief Executive
------------------------------------------- Officer, Director (principal April 23, 2002
Thomas C. Prendergast executive officer)
*
------------------------------------------- Director April 23, 2002
Joseph L. Barry
*
------------------------------------------- Director April 23, 2002
David W. Laughton
*
------------------------------------------- Director April 23, 2002
William M. Vaughn, III
*
------------------------------------------- Director April 23, 2002
Bernard Cammarata
*
------------------------------------------- Director April 23, 2002
Robert Falzon
</Table>
II-5
<Page>
<Table>
------------------------------------------- Director April , 2002
Paul V. Walsh
Senior Vice President, Chief
/s/ DAVID G. GAW Financial Officer and
------------------------------------------- Treasurer (principal April 23, 2002
David G. Gaw financial officer)
Vice President of Finance and
/s/ PATRICK O'SULLIVAN Assistant Treasurer
------------------------------------------- (principal accounting April 23, 2002
Patrick O'Sullivan officer)
/s/ THOMAS C. PRENDERGAST
- -------------------------------------------
By: Attorney-in-fact
</Table>
II-6
<Page>
EXHIBIT INDEX
<Table>
<Caption>
NUMBER DESCRIPTION OF DOCUMENT
------ ------------------------------------------------------------
1.1* Form of Purchase Agreement
3.1* Articles of Amendment and Restatement (Third) of the
Registrant
3.2* Amended and Restated By-Laws of the Registrant
4.1* Form of Common Stock Certificate of the Registrant
4.2* Indenture, dated as of November 24, 1997, by and between
Bradley Operating Limited Partnership and LaSalle National
Bank relating to the Senior Debt Securities of Bradley
Operating Limited Partnership
4.3* Definitive Supplemental Indenture No. 1, dated as of
November 24, 1997, between Bradley Operating Limited
Partnership and LaSalle National Bank
4.4* Definitive Supplemental Indenture No. 2, dated as of January
28, 1998, between Bradley Operating Limited Partnership and
LaSalle National Bank
4.5* Definitive Supplemental Indenture No. 3, dated as of March
10, 2000, between Bradley Operating Limited Partnership and
LaSalle National Bank
4.6* Warrant Agreement for 75,000 shares of Registrant's common
stock issued to The Prudential Insurance Company of America
4.7* Warrant Agreement for 300,000 shares of Registrant's common
stock issued to The Prudential Insurance Company of America
5.1* Opinion of Ballard Spahr Andrews & Ingersoll, LLP with
respect to the legality of the shares being registered
8.1* Opinion of Bingham Dana LLP with respect to tax matters
10.1* Form of Amended and Restated Limited Partnership Agreement
of Heritage Property Investment Limited Partnership
10.2* Second Amended and Restated Agreement of Limited Partnership
of Bradley Operating Limited Partnership dated as of
September 2, 1997
10.3* Amendment, dated August 6, 1998, to Second Restated
Agreement of Limited Partnership of Bradley Operating
Limited Partnership, designating the 8.4% Series A
Convertible Preferred Units
10.4* Amendment, dated February 23, 1999, to Second Restated
Agreement of Limited Partnership of Bradley Operating
Limited Partnership, designating the 8.875% Series B
Cumulative Redeemable Perpetual Preferred Units
10.5* Amendment, dated as of September 7, 1999, to Second Restated
Agreement of Limited Partnership of Bradley Operating
Limited Partnership, designating the 8.875% Series C
Cumulative Redeemable Perpetual Preferred Units
10.6* Amendment, dated as of September 18, 2000, to Second
Restated Agreement of Limited Partnership of Bradley
Operating Limited Partnership
10.7* Form of Amendment to Second Restated Agreement of Limited
Partnership of Bradley Operating Limited Partnership
10.8+* Amended and Restated 2000 Equity Incentive Plan
10.9+* Form of restricted stock and stock option agreements
10.10+* Supplemental Executive Retirement Plan
10.11* Revolving and Term Credit Agreement, dated as of September
18, 2000, among Heritage Property Investment Limited
Partnership, Bradley Operating Limited Partnership, the
Registrant and the lending institutions named therein, as
amended
10.12* Loan Agreement, dated as of September 18, 2000, between
Heritage SPE LLC and Prudential Mortgage Capital Company,
LLC
10.13* Promissory Note, dated as of December 14, 1999, by and among
Heritage Property Investment Limited Partnership, NH
Heritage Limited Partnership and Metropolitan Life Insurance
Company, as amended
10.14* Promissory Note, dated as of September 13, 2000, by Heritage
Property Investment Limited Partnership in favor of The
Variable Annuity Life Insurance Company
</Table>
<Page>
<Table>
10.15+* Employment Agreement with Thomas C. Prendergast, as amended
by the First Amendment, dated as of April 3, 2000
10.16+* Form of Change in Control/Severance Agreement
10.17* PIMS Indemnification Letter, dated as of July 9, 1999, by
and between the Registrant and Prudential Investment
Management Services, LLC
10.18* Form of Second Amended and Restated Stockholders Agreement,
by and among the Registrant, Net Realty Holding Trust and
The Prudential Insurance Company of America
10.19* Form of Letter Agreement, by and among Registrant,
Prudential Investment Management Inc., and Prudential
Investment Management Services, LLC
21.1* Schedule of Subsidiaries of the Registrant
23.1 Consent of KPMG LLP
23.2* Consent of Ballard Spahr Andrews & Ingersoll, LLP (included
in Exhibit 5.1)
23.3* Consent of Bingham Dana LLP, counsel to the Registrant
(included in Exhibit 8.1)
24.1* Power of Attorney (included on signature page)
99.1* Consent of Richard C. Garrison, as a director nominee
99.2* Consent of Kevin C. Phelan, as a director nominee
99.3* Consent of Kenneth K. Quigley, Jr., as a director nominee
99.4* Consent of Robert J. Watson, as a director nominee
</Table>
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* previously filed
+ compensatory plan or arrangement