SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual report pursuant to the Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 2002
Or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _________ to __________
Commission file number: 1-07533
FEDERAL REALTY INVESTMENT TRUST
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(Exact Name of Registrant as Specified in its Declaration of Trust)
Maryland 52-0782497
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(State of Organization) (IRS Employer Identification No.)
1626 East Jefferson Street,
Rockville, Maryland 20852
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(Address of Principal Executive Offices) (Zip Code)
(301) 998-8100
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(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name Of Each Exchange On Which Registered
- ------------------------------------------------------ --------------------------------------------------
Common Shares of Beneficial Interest, $.01 par value
per share, with associated Common Share Purchase Rights New York Stock Exchange
7.95% Series A Cumulative Redeemable Preferred Shares
of Beneficial Interest, par value $.01 per share,
(Liquidation Preference $25.00 per share) New York Stock Exchange
8.5% Series B Cumulative Redeemable Preferred Shares
of Beneficial Interest, par value $.01 per share,
(Liquidation Preference $25.00 per share) New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). [X] Yes [ ] No
The aggregate market value of the Registrant's common shares held by
non-affiliates of the Registrant, based upon the closing sales price of the
Registrant's common shares on June 30, 2002 was $1.197 billion.
The number of Registrant's common shares outstanding on March 20, 2003 was
45,115,950.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement to be filed with the Securities and
Exchange Commission for its 2003 annual meeting of shareholders to be held in
May 2003 are incorporated by reference into Part III hereof.
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FEDERAL REALTY INVESTMENT TRUST
ANNUAL REPORT ON FORM 10-K
FISCAL YEAR ENDED DECEMBER 31, 2002
TABLE OF CONTENTS
PART I
Item 1. Business.................................................................................. 4
Item 2. Properties................................................................................ 9
Item 3. Legal Proceedings......................................................................... 19
Item 4. Submission of Matters to a Vote of Shareholders........................................... 19
PART II
Item 5. Market for Our Common Equity and Related Shareholder Matters.............................. 19
Item 6. Selected Financial Information............................................................ 21
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..... 23
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................................ 51
Item 8. Financial Statements and Supplementary Data............................................... 52
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure...... F35
PART III
Item 10. Trustees and Executive Officers........................................................... F37
Item 11. Executive Compensation.................................................................... F37
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Shareholder Matters ...................................................................... F37
Item 13. Certain Relationships and Related Transactions............................................ F38
Item 14. Controls and Procedures................................................................... F38
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......................... F38
SIGNATURES F43
CERTIFICATIONS F47
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PART I
ITEM 1. BUSINESS
References to "we," "us," "our" or the "Trust" refer to Federal Realty
Investment Trust and our business and operations conducted through our directly
or indirectly owned subsidiaries.
GENERAL
We are an equity real estate investment trust specializing in the
ownership, management, development and redevelopment of high quality retail and
mixed-use properties. As of December 31, 2002, we owned or had an interest in 58
community and neighborhood shopping centers comprising over 12 million square
feet, primarily located in densely populated and affluent communities throughout
the Northeast and Mid-Atlantic United States. In addition, we owned 55 urban and
retail mixed-use properties comprising over 2 million square feet and one
apartment complex, all located in strategic metropolitan markets across the
United States. Our properties, excluding Santana Row, see "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Santana Row", were 95.5% leased at December 31, 2002 and December 31, 2001.
Including Santana Row, we were 94.7% leased at December 31, 2002. We have paid
quarterly dividends to our shareholders continuously since our founding in 1962,
and have increased our dividend rate for 35 consecutive years.
We operate our business on an asset management model, where small focused
teams are responsible for a portfolio of assets. We have divided our portfolio
of properties into three operating regions: the Northeast, Mid-Atlantic and
West. Each region is operated under the direction of an asset manager, with
dedicated leasing, property management and financial staff and operates largely
autonomously with respect to day to day operating decisions.
Our principal executive offices are located at 1626 East Jefferson Street,
Rockville, Maryland 20852 and our telephone number is (301) 998-8100. Our Web
site address is www.federalrealty.com. The information contained in our Web site
is not a part of this report.
BUSINESS OBJECTIVES AND STRATEGIES
Our primary business objective is to own, manage, redevelop and acquire a
portfolio of commercial retail properties, with the dominant property type being
grocery anchored community and neighborhood shopping centers, that will:
. provide increasing cash flow for quarterly distributions to
shareholders;
. protect investor capital;
. provide potential for capital appreciation; and
. generate high internal growth as compared to our retail REIT peers.
Our traditional focus has been on grocery anchored community and
neighborhood shopping centers. Late in 1994, recognizing a trend of consumer
shopping preferences and retailer expansion to main streets, we expanded our
investment strategy to include "street retail" and "mixed-use" properties. The
mixed-use properties are typically centered around a retail component but may
also include office, residential and hotel components, in established main
street shopping areas. In addition, from 1997 through 2001 we undertook the
ground-up development of mixed-use projects in urban areas that center around
the retail component. On
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February 28, 2002, our Board of Trustees approved the adoption of a business
plan which returned our primary focus to our traditional business of owning,
managing, redeveloping and acquiring community and neighborhood shopping centers
anchored by grocery stores, drug stores or high volume, value oriented retailers
that provide consumer necessities. We will complete our mixed-use projects in
San Jose, California and Bethesda, Maryland, but will not pursue any further
new, large-scale ground-up development projects. The Pentagon Row mixed-use
development project, located in Arlington, Virginia, was completed during 2002.
OPERATING STRATEGIES
Our core operating strategy is to aggressively manage our properties to
maintain high occupancy rates and a strong diverse base of tenants. Our
properties are generally located in some of the most densely populated and
affluent areas of the country. These strong demographics help our tenants
generate sales which enables us to maintain higher occupancy rates, high rental
rates, and consistent rental rate growth, all of which lead to increased value
of our portfolio. Our operating strategies also include:
. maintaining a diversified tenant base, thereby limiting exposure to
any one tenant's financial difficulties;
. monitoring the credit mix of our tenant base to achieve a balance of
strong national and regional credit tenants with more local specialty
tenants;
. minimizing overhead and operating costs;
. monitoring the physical appearance of our properties and the
construction quality, condition and design of the buildings and other
improvements located on our properties to maximize their effectiveness
in their individual markets;
. developing local and regional market expertise in order to capitalize
on market and retailing trends;
. leveraging the contacts and experience of our management team to build
and maintain long-term relationships with tenants and financing
sources;
. increasing rental rates through the renewal or releasing of expiring
leases at higher rental rates and limiting vacancy; and
. providing exceptional customer service.
INVESTING STRATEGIES
Our investment strategy calls for deploying capital at risk-adjusted rates
of return that exceed our weighted average cost of capital in projects that have
potential for going-forward net income growth equal to, or in excess of, that or
our core portfolio of properties. Our investments primarily fall into one of
following three categories:
. renovate, expand, reconfigure and/or retenant our existing properties
to take advantage of under utilized land and increase our internal
growth rate;
. re-lease anchor tenant spaces with tenants capable or producing higher
sales, and therefore, paying higher rents than the prior tenant. In
certain cases, this may take the form of expanding an existing tenant
that is performing well but is occupying an outdated store format; and
. acquire community and neighborhood shopping centers, located in
densely populated or growing affluent areas where barriers to entry or
further development are high, with possibilities for enhancing their
operating performance through renovation, expansion, reconfiguration
and/or retenanting.
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INVESTMENT CRITERIA
When we evaluate potential redevelopments, retenanting, expansion and
acquisition opportunities, we consider such factors as:
. the expected returns in relation to our cost of capital as well as the
anticipated risk we will face in achieving the expected returns;
. the tenant mix at the property, tenant sales performance and the
creditworthiness of those tenants;
. the geographic area in which the property is located, including the
population density and household incomes, as well as the density and
income trends in that geographic area;
. the current market value of the land, buildings and other improvements
and the potential for increasing those market values;
. the physical condition of the land, buildings and other improvements,
including the structural and environmental condition;
. competitive conditions in the vicinity of the property, including
competition for tenants and the ability to create competing properties
through new construction or through renovation; and
. access to and visibility of the property and potential for new,
widened or realigned roadways on the properties trade area, which may
effect access and commuting and shopping patterns.
FINANCING STRATEGIES
Our financing strategies are designed to maintain a strong balance sheet
while maintaining sufficient flexibility to fund our operating and investing
activities in the most cost efficient way possible. Our financing strategies
include:
. taking advantage of market opportunities to refinance existing debt,
reduce interest costs and manage our debt maturity schedule;
. actively managing our exposure to variable-rate debt;
. maintaining a prudent level of overall leverage and an adequate pool
of unencumbered properties;
. utilizing the most advantageous source of capital available to us to
finance redevelopment and acquisition opportunities, which may
include:
. the sale of equity or debt securities through public offerings or
private placements,
. the incurrence of indebtedness through secured or unsecured
borrowings,
. the issuance of operating units in one of our "downREIT
partnerships," which generally receive the same distributions as
our common shares and may be convertible into our common shares,
in exchange for a tax deferred contribution of property, or
. the use of joint venture arrangements; and
. selling properties that have limited growth potential or are not a
strategic fit within our overall portfolio and redeploying the
proceeds to redevelop, retenant and/or expand our existing properties,
acquire new properties or reduce debt.
EMPLOYEES
At December 31, 2002, we had 270 full-time employees. None of the employees
is represented by a collective bargaining unit. We believe that the relationship
with our employees is good.
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TAX STATUS
We elected under Section 856(c) of the Internal Revenue Code of 1986, as
amended, which we refer to as the Code, to be taxed as a REIT under the Code
beginning with our taxable year ended December 31, 1962. As a REIT we are
generally not subject to federal income tax on REIT taxable income that we
distribute to our shareholders. Under the Code, REITs are subject to numerous
organizational and operational requirements, including the requirement to
distribute at least 90% of REIT taxable income each year. We will be subject to
federal income tax on our REIT taxable income (including any applicable
alternative minimum tax) at regular corporate rates if we fail to qualify as a
REIT for tax purposes in any taxable year. We will also not be permitted to
qualify for treatment as a REIT for federal income tax purposes for four years
following the year during which qualification is lost. Even if we qualify as a
REIT for federal income tax purposes, we may be subject to certain state and
local income and franchise taxes and to federal income and excise taxes on our
undistributed REIT taxable income. In addition, certain of our subsidiaries are
subject to federal, state and local income taxes.
GOVERNMENTAL REGULATIONS AFFECTING OUR PROPERTIES
We and our properties are subject to a variety of federal, state and local
environmental, health, safety and similar laws, including:
. the Comprehensive Environmental Response, Compensation, and Liability
Act of 1980, as amended, which we refer to as CERCLA;
. the Resource Conservation & Recovery Act;
. the Federal Clean Water Act;
. the Federal Clean Air Act;
. the Toxic Substances Control Act;
. the Occupational Safety & Health Act; and
. the Americans with Disabilities Act.
The application of these laws to a specific property that we own will be
dependent on a variety of property-specific circumstances, including the former
uses of the property, the building materials used at each property and the
physical layout of each property. Under certain environmental laws, principally
CERCLA, a current or previous owner or operator of real estate may be required
to investigate and clean up certain hazardous or toxic substances,
asbestos-containing materials, or petroleum product releases at the property.
They may also be held liable to a governmental entity or third parties for
property damage and for investigation and clean up costs such parties incur in
connection with the contamination, whether or not the owner or operator knew of,
or was responsible for, the contamination. In addition, some environmental laws
create a lien on the contaminated site in favor of the government for damages
and costs it incurs in connection with the contamination. The owner or operator
of a site also may be liable under common law to third parties for damages and
injuries resulting from environmental contamination emanating from the site.
Such costs or liabilities could exceed the value of the affected real estate.
The presence of contamination or the failure to remediate contamination may
adversely affect the owner's ability to sell or lease real estate or to borrow
using the real estate as collateral.
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Our compliance with existing environmental, health, safety and similar laws
has not had a material adverse effect on our financial condition and results of
operations, and management does not believe it will have such an impact in the
future. In addition, we have not incurred, and do not expect to incur any
material costs or liabilities due to environmental contamination at properties
we currently own or have owned in the past. However, we cannot predict the
impact of new or changed laws or regulations on our current properties or on
properties that we may acquire in the future. We have no current plans for
substantial capital expenditures with respect to compliance with environmental,
health, safety and similar laws.
COMPETITION
Numerous commercial developers and real estate companies compete with us in
seeking tenants for properties and properties for acquisition. Some of these
competitors may posses greater capital resources than we do, however, no single
competitor or group of competitors in any of our chosen markets is believed to
be dominant in that market. This competition may:
. reduce properties available for acquisition or development;
. increase the cost of properties available for acquisition or
development;
. reduce rents payable to us;
. interfere with our ability to attract and retain tenants;
. lead to increased vacancy rates at our properties; and
. adversely affect our ability to minimize expenses of operation.
Retailers at our properties also face increasing competition from outlet
stores, discount shopping clubs, and other forms of marketing of goods, such as
direct mail, internet marketing and telemarketing. This competition could
contribute to lease defaults and insolvency of tenants.
DEVELOPMENTS SINCE SEPTEMBER 30, 2002
On November 19, 2002, we completed the sale of $150 million of senior notes
in an underwritten public offering. Net proceeds, after deducting the discounts
and commissions to the underwriters and other expenses of the offering, totaled
approximately $148.7 million. We used the net proceeds, together with $20
million in available insurance proceeds relating to the Santana Row fire, and
approximately $7.1 million in borrowings under our revolving credit facility, to
pay in full and retire the Santana Row construction loan.
On December 20, 2002, we announced the resignation of Steven J. Guttman as
Trustee, chief executive officer and chairman of the Board of Trustees effective
January 1, 2003. Donald C. Wood, our then president and chief operating officer,
was named chief executive officer and a member of the Board of Trustees. Mark
Ordan, a member of the Board of Trustees since 1996, was named non-executive
chairman of the board.
On January 9, 2003, we announced the opening of a new 62,000 square foot
Giant Food and Pharmacy, representing Phase V of Bethesda Row. Total development
costs for Phase V of Bethesda Row were $3.6 million.
On January 15, 2003, we announced that three of our five Kmart locations
were on the list of 326 stores that Kmart intends to close. The three properties
are located in Queens, New York,
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Flourtown, Pennsylvania and Leesburg, Virginia. As of December 31, 2002, the
three properties represented approximately 0.7% of our annualized base rent and
2.1% of our total square footage. Based upon the demographics at these centers
and the rent being paid by Kmart we believe that these spaces can be re-leased
on favorable terms.
On February 7, 2003, we announced plans for Phase II of Santana Row, which
includes 84,000 square feet of retail space on two pad sites and 275 additional
parking spaces. Within Phase II, 95% of the retail space has been pre-leased to
Best Buy and The Container Store. Total development costs are expected to be
approximately $27 million.
On February 11, 2003 the $24.4 million Woodmont East construction loan and
the $17.0 million Friendship Center mortgage were paid off through borrowings
under our revolving credit facility.
CODE OF ETHICS
On February 12, 2003, our Board of Trustees adopted a Code of Ethics that
applies to our Chief Executive Officer, Chief Financial Officer, controller and
certain other officers performing similar functions. Our Board also adopted on
February 12, 2003 a Code of Business Conduct applicable to all employees. Copies
of both the Code of Ethics and the Code of Business Conduct are available in the
Investor Information section of our website at www.federalrealty.com. Amendments
to the Code of Ethics or Code of Business Conduct or waivers that apply to our
executive officers or our senior financial officers will be disclosed in that
section of our website as well.
ITEM 2. PROPERTIES
GENERAL
As of December 31, 2002, we owned or had an interest in 58 community and
neighborhood shopping centers comprising over 12 million square feet, primarily
located in densely populated and affluent communities throughout the Northeast
and Mid-Atlantic United States. In addition, we owned 55 urban and retail
mixed-use properties comprising over 2 million square feet and one apartment
complex, all located in strategic metropolitan markets across the United States.
No single property accounted for over 10% of our 2002 total revenue. We believe
that our properties are covered by adequate commercial general, fire, flood and
extended loss insurance provided by reputable companies, with commercially
reasonable exclusions, deductibles and limits.
We operate our business on an asset management model, where small focused
teams are responsible for a portfolio of assets. We have divided our portfolio
of properties into three operating regions: the Northeast, Mid-Atlantic and
West. Each region is operated under the direction of an asset manager, with
dedicated leasing, property management and financial staff and operates largely
autonomously with respect to day to day operating decisions.
TENANT DIVERSIFICATION
As of December 31, 2002, we had approximately 2,100 tenants, ranging from
sole proprietors to major national retailers. No one tenant or affiliated group
of tenants accounted for more than 2.5% of our annualized base rent as of
December 31, 2002. As a result of our tenant diversification, we believe our
exposure to recent bankruptcy filings in the retail sector has not
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been significant. Our largest tenant to declare bankruptcy, Kmart Corporation,
accounted for less than 1% of our 2002 total revenue and 3.3% of our leasable
square footage.
On January 15, 2003, we announced that three of our five Kmart locations
were on the list of 326 stores that Kmart intends to close. The three properties
are located in Queens, New York, Flourtown, Pennsylvania and Leesburg, Virginia.
As of December 31, 2002, the three properties represented approximately 0.7% or
our annualized base rent and 2.1% of our total square footage. Based on the
demographics at these centers and the rent being paid by Kmart we believe that
these spaces can be re-leased on favorable terms.
GEOGRAPHIC DIVERSIFICATION
Our 114 properties are located in 14 states and the District of Columbia.
The following table shows, by region and state within the region, the number of
properties, the gross leasable area (in square feet) and the percentage of total
portfolio gross leasable area in each state as of December 31, 2002.
NUMBER OF PERCENTAGE OF
REGION AND STATE PROPERTIES GROSS LEASABLE AREA GROSS LEASABLE AREA
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NORTHEAST
Connecticut ..................... 11 478,000 3.1%
Illinois ........................ 6 776,000 5.1%
Massachusetts ................... 4 581,000 3.8%
Michigan ........................ 1 218,000 1.4%
New Jersey ...................... 9 2,134,000 14.0%
New York ........................ 7 996,000 6.5%
Pennsylvania .................... 10 2,258,000 14.8%
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Subtotal ...................... 48 7,441,000 48.7%
MID-ATLANTIC
District of Columbia ............ 2 169,000 1.1%
Florida ......................... 2 28,000 .2%
Maryland ........................ 13 3,084,000 20.2%
North Carolina .................. 1 159,000 1.1%
Virginia ........................ 14 2,826,000 18.5%
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Subtotal ...................... 32 6,266,000 41.1%
WEST
Arizona ......................... 2 40,000 .3%
California ...................... 23 1,445,000 9.5%
Texas ........................... 9 53,000 .4%
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Subtotal ...................... 34 1,538,000 10.2%
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Total 114 15,245,000 100.0%
==================== ==================== ====================
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LEASES, LEASE TERMS AND LEASE EXPIRATIONS
Our leases are classified as operating leases and typically are structured
to include the monthly payment in advance of minimum rents with periodic
increases, percentage rents based on our tenants' gross sales volumes and
reimbursement of a majority of on-site operating expenses and real estate taxes.
These features in our leases reduce our exposure to higher costs caused by
inflation and allow us to participate in improved tenant sales.
Leases on apartments are generally for a period of one year or less. Retail
property leases generally range from 3 to 10 years; however certain leases with
anchor tenants may be longer. Many of the leases contain provisions allowing the
tenant the option of extending the term of the lease at expiration at rates
which often include fixed rent increases, consumer price index adjustments or
other market rate adjustments from the prior base rent. Our properties,
including our recently opened Santana Row development, were 94.7% leased at
December 31, 2002.
The following table sets forth the schedule of lease expirations for our
leases in place as of December 31, 2002 for each of the 10 years beginning with
2003, assuming that none of the tenants exercises or has exercised renewal
options.
LEASED PERCENTAGE OF LEASED ANNUALIZED BASE PERCENTAGE OF ANNUALIZED
YEAR OF LEASE SQUARE FOOTAGE SQUARE FOOTAGE RENT REPRESENTED BY BASE RENT REPRESENTED BY
EXPIRATION EXPIRING EXPIRING EXPIRING LEASES EXPIRING LEASES
2003 906,000 6% $ 14,871,000 5%
2004 1,726,000 12% 24,237,000 9%
2005 1,405,000 10% 26,664,000 10%
2006 1,315,000 9% 26,241,000 9%
2007 1,674,000 12% 31,720,000 11%
2008 1,400,000 10% 22,898,000 8%
2009 924,000 6% 19,048,000 7%
2010 531,000 4% 10,591,000 4%
2011 798,000 5% 21,459,000 8%
2012 839,000 6% 21,146,000 8%
Thereafter 2,924,000 20% 60,050,000 21%
-------------------- -------------------- -------------------- -----------------------
Total 14,442,000 100% $ 278,925,000 100%
==================== ==================== ==================== =======================
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Item 2. Property Information
Retail Properties
The following table sets forth information concerning each retail and
mixed-use property in which we own an equity interest or have a leasehold
interest as of December 31, 2002. Except as otherwise noted, retail properties
are 100% owned in fee by us.
Year Year Square Feet (2) Number of
NORTHEAST REGION Completed Acquired /Apartment Units Tenants
- ------------------------------ -------------------- -------------------- -------------------- ---------------
Shopping Centers
Allwood 1958 1988 52,000 7
Clifton, NJ 07013 (4)
Andorra 1953 1988 259,000 39
Philadelphia,PA 19128(5)
Bala Cynwyd 1955 1993 281,000 23
Bala Cynwyd, PA 19004
Blue Star 1959 1988 407,000 35
Watchung, NJ 07060 (4)
Brick Plaza 1958 1989 409,000 37
Brick Township, NJ 08723
Bristol 1959 1995 296,000 23
Bristol, CT 06010
Brunswick 1957 1988 318,000 23
North Brunswick, NJ 08902 (4)
Clifton 1959 1988 80,000 13
Clifton, NJ 07013 (4)
Crossroads 1959 1993 173,000 24
Highland Park, IL 60035
Dedham 1959 1993 248,000 37
Dedham, MA 02026
Ellisburg Circle 1959 1992 259,000 31
Cherry Hill, NJ 08034
Feasterville 1958 1980 116,000 10
Feasterville, PA 19047
Overall Principal
NORTHEAST REGION Acres (3) Occupancy (1) Tenants
- ---------------------------- ------------- -------------- ------------------
Shopping Centers
Allwood 5 100% Stop & Shop
Clifton, NJ 07013 (4) Mandee's
Andorra 23 95% Acme Markets
Philadelphia,PA 19128(5) Andorra Theater
Kohl's
Bala Cynwyd 22 100% Acme Markets
Bala Cynwyd, PA Lord & Taylor
Blue Star 55 96% Kohl's
Watchung, NJ 07060 (4) Michael's
Shop Rite
Toys R Us
Brick Plaza 42 100% A&P Supermarket
Brick Township, NJ Barnes & Noble
Loews Theatres
Sports Authority
Bristol 22 92% Super Stop & Shop
Bristol, CT 06010 TJ Maxx
Brunswick 22 69% A&P Supermarket
North Brunswick, NJ 08902 (4) Just Living Rooms
Clifton 8 93% Acme Markets
Clifton, NJ 07013 (4) Drug Fair
Dollar Express
Crossroads 15 100% Comp USA
Highland Park, IL Golfsmith
Guitar Center
Dedham 18 99% Pier One Imports
Dedham, MA 02026
Ellisburg Circle 27 99% Genuardi's
Cherry Hill, NJ Bed, Bath & Beyond
Feasterville 12 96% Genuardi's
Office Max
12
Year Year Square Feet (2) Number of
Completed Acquired / Apartment Units Tenants
-------------------- -------------------- -------------------- ---------------
Finley Square 1974 1995 313,000 16
Downers Grove, IL 60515
Flourtown 1957 1980 191,000 21
Flourtown, PA 19031
Fresh Meadows 1949 1997 408,000 75
Queens, NY 11365
Garden Market 1958 1994 142,000 19
Western Springs, IL 60558
Gratiot Plaza 1964 1973 218,000 10
Roseville, MI 48066
Greenlawn Plaza 1975 2000 92,000 15
Greenlawn, NY 11740
Hamilton 1961 1988 190,000 14
Hamilton, NJ 08690 (4)
Hauppauge 1963 1998 131,000 20
Hauppauge, NY 11788
Huntington 1962 1988 279,000 14
Huntington, NY 11746 (4)
Lancaster 1958 1980 107,000 16
Lancaster, PA 17601(4)
Langhorne Square 1966 1985 216,000 28
Levittown, PA 19056
Lawrence Park 1972 1980 326,000 40
Broomall, PA 19008
Overall Principal
Acres (3) Occupancy (1) Tenants
------------- -------------- ---------------------
Finley Square 21 91% Bed, Bath & Beyond
Downers Grove, IL 60515 Sports Authority
Flourtown 15 100% Genuardi's
Flourtown, PA 19031
Fresh Meadows 25 94% Cineplex Odeon
Queens, NY 11365 Value City
K Mart
Garden Market 12 94% Dominick's
Western Springs, IL 60558 Walgreens
Gratiot Plaza 20 100% Bed, Bath and Beyond
Roseville, MI 48066 Best Buy
Farmer Jack's
Greenlawn Plaza 13 95% Waldbaum's
Greenlawn, NY 11740
Hamilton 18 100% Shop Rite
Hamilton, NJ 08690 (4) Steven's Furniture
A.C. Moore
Hauppauge 15 100% Shop Rite
Hauppauge, NY 11788
Huntington 21 100% Barnes & Noble
Huntington, NY 11746 (4) Bed, Bath and Beyond
Buy Buy Baby
Toys R Us
Lancaster 11 95% A.C. Moore
Lancaster, PA 17601 (4) Giant Food
Langhorne Square 21 93% Drug Emporium
Levittown, PA 19056 Marshalls
Redner's Market
Lawrence Park 28 99% Acme Markets
Broomall, PA 19008 TJ Maxx
Today's Man
13
Year Year Square Feet (2) Number of
Completed Acquired / Apartment Units Tenants
-------------------- -------------------- -------------------- ---------------
Northeast 1959 1983 292,000 35
Philadelphia, PA 19114
North Lake Commons 1989 1994 129,000 19
Lake Zurich, IL 60047
Queen Anne Plaza 1967 1994 149,000 11
Norwell, MA 02061
Rutgers 1973 1988 217,000 18
Franklin, N.J. 08873 (4)
Saugus Plaza 1976 1996 171,000 7
Saugus, MA 01906
Troy 1966 1980 202,000 21
Parsippany-Troy, NJ 07054
Willow Grove 1953 1984 215,000 25
Willow Grove, PA 19090
Wynnewood 1948 1996 255,000 28
Wynnewood, PA 19096
--------------------
Total Northeast Shopping Centers 7,141,000
--------------------
Main Street Retail Properties
Ten buildings in CT 1900 - 1991 1994 -1996 182,000 71
Two buildings in IL 1920 - 1927 1995 19,000 3
One building in MA 1930 1995 13,000 8
Three buildings in NY 1937 - 1987 1997 86,000 10
--------------------
Total Northeast Main Street Retail
Properties 300,000
--------------------
Total Northeast Region 7,441,000
--------------------
Overall Principal
Acres (3) Occupancy (1) Tenants
------------- -------------- -----------------------
Northeast 19 95% Burlington Coat Factory
Philadelphia, PA 19114 Marshalls
Tower Records
North Lake Commons 14 88% Dominick's
Lake Zurich, IL 60047
Queen Anne Plaza 18 100% TJ Maxx
Norwell, MA 02061 Victory Markets
Rutgers 27 89% Edwards Super Food
Franklin, N.J. 08873 (4) K Mart
Saugus Plaza 19 100% K Mart
Saugus, MA 01906 Super Stop & Shop
Troy 19 100% Comp USA
Parsippany-Troy, NJ 07054 Pathmark
Toys R Us
A. C. Moore
Willow Grove 14 100% Barnes and Noble
Willow Grove, PA 19090 Marshalls
Toys R Us
Wynnewood 16 99% Bed, Bath and Beyond
Wynnewood, PA 19096 Borders Books
Genuardi's
Old Navy
--------------
Total Northeast Shopping Centers 96%
--------------
Main Street Retail Properties 96%
Ten buildings in CT - 85% Sak Fifth Avenue
Two buildings in IL - 100% Foodstuffs
The Gap
One building in MA - 100% AT&T Wireless
Three buildings in NY - 100% Midway Theatre
Duane Reade
The Gap
--------------
Total Northeast Main
Street Retail Properties 91%
--------------
Total Northeast Region 96%
--------------
14
Year Year Square Feet (2) Number of
Completed Acquired / Apartment Units Tenants
-------------------- -------------------- -------------------- ---------------
MID ATLANTIC REGION
Shopping Centers
Barracks Road 1958 1985 484,000 85
Charlottesville, VA 22905
Congressional Plaza 1965 1965 339,000 46
Rockville, MD 20852 (6)
Courthouse Center 1970 1997 38,000 12
Rockville, MD 20852 (7)
Eastgate 1963 1986 159,000 31
Chapel Hill, NC 27514
Falls Plaza 1962 1967 73,000 9
Falls Church, VA 22046
Falls Plaza - East 1960 1972 71,000 18
Falls Church, VA 22046
Federal Plaza 1970 1989 247,000 39
Rockville, MD 20852
Gaithersburg Square 1966 1993 219,000 36
Gaithersburg, MD 20878
Governor Plaza 1963 1985 252,000 24
Glen Burnie, MD 21961 (5)
Idylwood Plaza 1991 1994 73,000 17
Falls Church, VA 22030
Laurel Centre 1956 1986 384,000 54
Laurel, MD 20707
Leesburg Plaza 1967 1998 247,000 27
Leesburg, VA 20176 (7)
Overall Principal
Acres (3) Occupancy (1) Tenants
------------- -------------- -----------------------
MID ATLANTIC REGION
Shopping Centers
Barracks Road 39 100% Bed, Bath & Beyond
Charlottesville, VA 22905 Harris Teeter
Kroger
Barnes & Noble
Old Navy
Congressional Plaza 22 95% Buy Buy Baby
Rockville, MD 20852 (6) Fresh Fields
Tower Records
Container Store
Courthouse Center 2 94% Rockville Interiors
Rockville, MD 20852 (7)
Eastgate 17 99% Southern Season
Chapel Hill, NC 27514
Falls Plaza 6 98% Giant Food
Falls Church, VA 22046
Falls Plaza - East 5 100% CVS Pharmacy
Falls Church, VA 22046 Staples
Federal Plaza 18 98% Comp USA
Rockville, MD 20852 Ross Dress For Less
TJ Maxx
Gaithersburg Square 17 98% Bed, Bath & Beyond
Gaithersburg, MD 20878 Borders Books and Music
Ross Dress For Less
Governor Plaza 26 100% Office Depot
Glen Burnie, MD 21961 (5) Syms
Comp USA
Bally's Total Fitness
Idylwood Plaza 6 100% Fresh Fields
Falls Church, VA 22030
Laurel Centre 26 97% Giant Food
Laurel, MD 20707 Marshalls
Toys R Us
Leesburg Plaza 24 100% Giant Food
Leesburg, VA 20176 (7) K Mart
Peebles
15
Year Year Square Feet (2) Number of
Completed Acquired / Apartment Units Tenants
-------------------- -------------------- -------------------- ---------------
Loehmann's Plaza 1971 1983 242,000 54
Fairfax, VA 22042 (7)
Magruder's Center 1955 1997 109,000 23
Rockville, MD 20852 (7)
Mid-Pike Plaza 1963 1982 306,000 23
Rockville, MD 20852 (4)
Old Keene Mill 1968 1976 92,000 21
Springfield, VA 22152
Pan Am 1979 1993 218,000 33
Fairfax, VA 22031
Perring Plaza 1963 1985 412,000 15
Baltimore, MD 21134 (5)
Pike 7 Plaza 1968 1997 164,000 26
Vienna, VA 22180 (7)
Rollingwood Apartments 1960 1971 282 units 282
Silver Spring, MD 20910
9 three story buildings
Quince Orchard 1975 1993 237,000 29
Gaithersburg, MD 20877 (8)
Tower Shopping Center 1960 1998 109,000 29
Springfield, VA 22150
Tysons Station 1954 1978 50,000 16
Falls Church, VA 22043
Wildwood 1958 1969 84,000 33
Bethesda, MD 20814
The Shops at Willow Lawn 1957 1983 503,000 80
Richmond, VA 23230
---------------
Total Mid Atlantic Shopping Centers 5,112,000
---------------
Overall Principal
Acres (3) Occupancy (1) Tenants
------------- -------------- -----------------------
Loehmann's Plaza 18 99% Linens N Things
Fairfax, VA 22042 (7) Bally's Total Fitness
Loehmann's Dress Shop
Magruder's Center 5 100% Magruder's
Rockville, MD 20852 (7) Tuesday Morning
Mid-Pike Plaza 20 99% Bally Total Fitness
Rockville, MD 20852 (4) Linens N Things
Toys R Us
A. C. Moore
Old Keene Mill 11 100% Fresh Fields
Springfield, VA 22152
Pan Am 25 99% Michael's
Fairfax, VA 22031 Micro Center
Safeway
Perring Plaza 27 88% Burlington Coat Factory
Baltimore, MD 21134 (5) Home Depot
Metro Foods
Pike 7 Plaza 13 100% Staples
Vienna, VA 22180 (7) TJ Maxx
Tower Records
Rollingwood Apartments 14 99%
Silver Spring, MD 20910
9 three story buildings
Quince Orchard 16 97% Circuit City
Gaithersburg, MD 20877 (8) Magruders
Staples
Tower Shopping Center 12 88% Virginia Fine Wine
Springfield, VA 22150 Talbot's Outlet
Tysons Station 4 100% Trader Joe's
Falls Church, VA 22043
Wildwood 13 100% CVS Pharmacy
Bethesda, MD 20814 Sutton Place Gourmet
The Shops at Willow Lawn 37 87% Dillards
Richmond, VA 23230 Hannaford Brothers
Kronger
Old Navy
--------------
Total Mid Atlantic Shopping Centers 96%
--------------
16
Year Year Square Feet (2) Number of
Completed Acquired / Apartment Units Tenants
-------------------- -------------------- -------------------- ---------------
Main Street Retail Properties
Bethesda Row 1945-1991, 1993-1998 457,000 80
Bethesda, MD 20814 (9) 2001
Friendship Center 1998 2001 119,000 5
Washington, D.C 20015
Pentagon Row 2001-2002 1999 296,000 45
Arlington, VA 22202 (8)
Sam's Park & Shop 1930 1995 50,000 13
Washington, DC 20008
Shirlington 1940 1995 204,000 46
Arlington, VA 22206
Two buildings in FL 1920 1996 28,000 9
--------------------
Total Mid Atlantic Main
Street Retail Properties 1,154,000
--------------------
Development
Land in Bethesda, MD 20814 1997 - 2000
Total Mid Atlantic Region 6,266,000
--------------------
WEST REGION
Shopping Centers
Escondido Promenade 1987 1996 222,000 51
Escondido, CA 92029 (10)
King's Court 1960 1998 79,000 18
Los Gatos, CA 95032 (7) (8)
--------------------
Total West Shopping Centers 301,000
--------------------
Main Street Retail Properties
Old Town Center 1962 1997 97,000 22
Los Gatos, CA 95030
150 Post Street 1965 1997 103,000 16
San Francisco, CA 94108
Nine buildings in Santa Monica, CA (11) 1888 - 1995 1996 - 2000 209,000 23
Overall Principal
Acres (3) Occupancy (1) Tenants
------------- -------------- -----------------------
Main Street Retail Properties
Bethesda Row 8 99% Barnes and Noble
Bethesda, MD 20814 (9) Giant Food
Landmark Theater
Friendship Center 1 100% Maggiano's
Washington, D.C 20015 Borders Books
Pentagon Row 18 98% Harris Teeter
Arlington, VA 22202 (8) Bed, Bath & Beyond
Cost Plus World Market
Bally's Total Fitness
Designer Shoe Warehouse
Sam's Park & Shop 1 100% Petco
Washington, DC 20008
Shirlington 16 95% Carlyle Grand Cafe
Arlington, VA 22206 Cineplex Odeon
Two buildings in FL - 90% Express
--------------
Total Mid Atlantic
Main Street
Retail Properties 98%
--------------
Development
Land in Bethesda, MD 20814 1
Total Mid Atlantic
Region 97%
--------------
WEST REGION
Shopping Centers
Escondido Promenade 18 96% Toys R Us
Escondido,CA 92029 (10) TJ Maxx
Cost Plus
King's Court 8 98% Lunardi's Supermarket
Los Gatos,CA 95032 (7)(8) Longs Drug
--------------
Total West Shopping
Centers 97%
--------------
Main Street Retail Properties
Old Town Center 4 94% Borders Books and Music
Los Gatos, CA 95030 Gap Kids
Banana Republic
150 Post Street - 75% Brooks Brothers
San Francisco, CA 94108 Williams - Sonoma
Nine buildings in Santa Monica,
CA (11) - 97% Abercrombie & Fitch
J.Crew
Old Navy
Banana Republic
17
Year Year Square Feet (2) Number of
Completed Acquired /Apartment Units Tenants
-------------------- -------------------- -------------------- ---------------
Two buildings in Hollywood, CA (12) 1921 - 1991 1999 148,000 11
Four buildings in San Diego, CA (13) 1888 - 1995 1996 - 1997 51,000 22
Three buildings in CA (14) 1922 1996 - 1998 92,000 25
Two buildings in AZ (15) 1996 - 1998 1998 40,000 10
Development
Santana Row - Retail Portion (16) 2002 1997 444,000 51
Santana Row - Residential portion 255 units 90
San Jose, CA 95128
Nine buildings in San Antonio, TX (17) 1890 - 1935 1998 - 1999 53,000 9
--------------------
Total West Main Street Retail
Properties 1,237,000
--------------------
Total West Region 1,538,000
--------------------
Total All Regions 15,245,000
====================
Overall Principal
Acres (3) Occupancy (1) Tenants
-------------- ---------------- ------------------------------
Two buildings in Hollywood, CA (12) - 78% General Cinema
Hollywood Entertainment Museum
Four buildings in San Diego, CA (13) - 97% Urban Outfitters
Three buildings in CA (14) - 98% Pottery Barn
Banana Republic
Two buildings in AZ (15) - 100% Gordon Biersch Brewing Co.
Development
Santana Row - Retail Portion (16) 42 73% Crate & Barrel
Borders Books
Santana Row - Residential portion 45%
San Jose, CA 95128
Nine buildings in San Antonio, TX (17) - 37% The Palm
----------------
Total West Main Street Retail
Properties 81%
----------------
Total West Region 84%
----------------
Total All Regions 95%
================
(1) Overall occupancy is expressed as a percentage of rentable square feet and
includes square feet covered by leases for stores not yet opened. Regional
and Total Occupancy reflects retail occupancy only.
(2) Represents the physical square feet of the property, which may exceed the
rentable square feet used to express occupancy.
(3) Acreage on each individual main street retail building is not significant.
(4) We have a leasehold interest in this property.
(5) We own 99.99% general and limited partnership interests in these
properties.
(6) We own a 55.7% general partnership interest in this center.
(7) We own this property in a "downreit" partnership.
(8) All or a portion of this property is subject to a ground lease.
(9) This property contains twelve buildings; seven are subject to a leasehold
interest, one is subject to a ground lease and four are owned 100% by us.
(10) We own the controlling interest in this center.
(11) We own 100% of seven buildings and a 90% general partnership interest in
two buildings.
(12) We own a 90% general partnership interest in these buildings.
(13) We own 100% of three buildings and a 90% general partnership interest in
one building.
(14) We own 100% of one building and a 90% general partnership interest in two
buildings.
(15) We own 100% of one building and an 85% partnership interest in the second
building.
(16) Square footage and number of tenants apply only to Phase I retail. No
future retail phases are included.
(17) We are redeveloping these properties, many of which are currently vacant.
18
ITEM 3. LEGAL PROCEEDINGS
Neither we nor any of our properties are currently subject to any material
legal proceeding nor, to our knowledge, is any material litigation currently
threatened against us or any of our properties. Under our leases, tenants are
typically obligated to indemnify us from and against all liabilities, costs and
expenses imposed upon or asserted against us (1) as owner of the properties due
to certain matters relating to the operation of the properties by the tenant,
and (2) where appropriate, due to certain matters relating to the ownership of
the properties prior to their acquisition by us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
No matters were submitted to a vote of our shareholders during the fourth
quarter of the fiscal year ended December 31, 2002.
PART II
ITEM 5. MARKET FOR OUR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Our common shares trade on the New York Stock Exchange under the symbol
"FRT." Listed below are the high and low closing prices of our common shares as
reported on the New York Stock Exchange and the dividends declared for each of
the periods indicated.
PRICE PER SHARE DIVIDENDS DECLARED PER SHARE
------------------- -------------------------------
HIGH LOW
------ --------
2002
Fourth quarter $ 28.75 $ 24.55 $ 0.485
Third quarter 27.85 23.70 .485
Second quarter 28.50 25.56 .48
First quarter 26.34 22.93 .48
2001
Fourth quarter $ 23.67 $ 21.04 $ 0.48
Third quarter 23.71 20.32 .48
Second quarter 21.56 18.98 .47
First quarter 20.20 19.06 .47
On March 20, 2003, we estimate that there were 35,787 holders of record of
our common shares.
Our ongoing operations generally will not be subject to federal income
taxes as long as we maintain our REIT status and distribute to shareholders at
least 100% of our taxable income. Under the Code, REITs are subject to numerous
organizational and operational requirements, including the requirement to
distribute at least 90% of REIT taxable income. State income taxes are not
material.
- 19 -
Future distributions will be at the discretion of our Board of Trustees and
will depend on our actual net income available for common shareholders,
financial condition, capital requirements, the annual distribution requirements
under the REIT provisions of the Code and such other factors as the Board of
Trustees deems relevant. We have paid quarterly dividends to our shareholders
continuously since our founding in 1962 and have increased our annual dividend
rate for 35 consecutive years.
Our total annual dividends paid per share for 2002 and 2001 were $1.925 per
share and $1.89 per share, respectively. The annual dividend amounts are
different from total distributions calculated for tax purposes. Distributions to
the extent of our current and accumulated earnings and profits for federal
income tax purposes generally will be taxable to a shareholder as ordinary
dividend income. Distributions in excess of current and accumulated earnings and
profits will be treated as a nontaxable reduction of the shareholder's basis in
such shareholder's shares, to the extent thereof, and thereafter as taxable
capital gain. Distributions that are treated as a reduction of the shareholder's
basis in its shares will have the effect of deferring taxation until the sale of
the shareholder's shares. No assurances can be given regarding what portion, if
any, of distributions in 2003 or subsequent years will constitute a return of
capital for federal income tax purposes. During a year in which a REIT earns a
net long-term capital gain, the REIT can elect under Code Sec. 857(b)(3) to
designate a portion of dividends paid to shareholders as capital gain dividends.
If this election is made, then the capital gain dividends are taxable to the
shareholder as long-term capital gains. During 2002, a portion of the
distributions was designated as a capital gain dividend.
Following is the income tax status of distributions paid during the years
ended December 31, 2002 and 2001 to common shareholders:
2002 2001
---------- ----------
Ordinary dividend income $ 1.555 $ 1.890
Capital gain .370 -
Return of capital - -
---------- ----------
$ 1.925 $ 1.890
========== ==========
Distributions on our 7.95% Series A Cumulative Redeemable Preferred Shares
and our 8.5% Series B Cumulative Redeemable Preferred Shares are payable at the
rate of $1.9875 and $2.125 per share per annum, prior to distributions on our
common shares. We do not believe that the preferential rights available to the
holders of our preferred shares or the financial covenants contained in our debt
agreements will have an adverse impact on our ability to pay dividends in the
normal course to our common shareholders or to distribute amounts necessary to
maintain our qualification as a REIT.
- 20 -
ITEM 6. SELECTED FINANCIAL INFORMATION
The following table includes certain financial information on a
consolidated historical basis. You should read this section in conjunction with
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations" and "Item 8. Financial Statements and Supplementary Data." Our
selected operating, other and balance sheet data for the years ended 1998
through 2001 have been reclassified to conform to the presentation in 2002 as
they relate to income from operations of discontinued assets and the
presentation of tax loans receivable issued in connection with employee stock
plans as contra-equity.
(In Thousands, Except Per Share Data and Ratios) FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------
OPERATING DATA:
Rental income ......................................... $ 298,085 $ 274,567 $ 255,634 $ 241,356 $ 218,062
Property operating income ............................. 214,057 204,047 192,347 182,493 162,372
Income before gain (loss) on sale of real estate ...... 45,833 59,571 56,842 55,493 44,960
Gain (loss) on sale of real estate .................... 9,454 9,185 3,681 (7,050) -
Net income ............................................ 55,287 68,756 60,523 48,443 44,960
Net income available for common shareholders .......... 35,862 59,722 52,573 40,493 37,010
Net cash provided by operating activities (1) ......... 119,069 109,448 107,056 102,183 90,427
Net cash (used in) investing activities (1) ........... (175,744) (232,138) (121,741) (99,313) (187,646)
Net cash provided by (used in) financing
activities (1) ....................................... 62,235 128,896 14,304 (8,362) 97,406
Dividends declared on common shares ................... 82,273 75,863 72,512 71,630 69,512
Weighted average number of common shares outstanding
Basic: .............................................. 41,624 39,164 38,796 39,574 39,174
Diluted: ............................................ 42,882 40,266 39,910 40,638 40,080
Earnings per share
Basic: .............................................. .86(6) 1.52 1.36 1.02 .94
Diluted: ............................................ .85(6) 1.52 1.35 1.02 .94
Dividends declared per common share ................... 1.93 1.90 1.84 1.78 1.74
OTHER DATA:
Funds from operations (2)(3) .......................... 90,503 110,432 102,173 96,795 86,536
Ratio of earnings to fixed charges (4) ................ 1.3x(7) 1.5x 1.5x 1.7x 1.7x
Ratio of earnings to combined fixed charges and
preferred share dividends (4) ........................ 1.0x(7) 1.3x 1.4x 1.5x 1.5x
Ratio of EBITDA to combined fixed charges and
preferred share dividends (4)(5) ..................... 1.6x(7) 1.9x 2.0x 2.1x 2.1x
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------
BALANCE SHEET DATA:
Real estate at cost.................................... $ 2,306,826 $ 2,104,304 $ 1,854,913 $ 1,721,459 $ 1,642,136
Total assets .......................................... 1,999,378 1,834,881 1,618,885 1,532,764 1,483,170
Mortgage, construction loans and capital lease
obligations .......................................... 393,212 450,336 340,152 172,573 173,480
Notes payable ......................................... 198,311 174,843 209,005 162,768 263,159
Senior notes .......................................... 535,000 410,000 410,000 510,000 335,000
Convertible subordinated debentures ................... 75,000 75,289 75,289 75,289 75,289
Redeemable preferred shares ........................... 235,000 235,000 100,000 100,000 100,000
Shareholders' equity .................................. 644,287 589,291 465,460 500,543 528,800
Number of common shares outstanding ................... 43,535 40,071 39,469 40,201 40,080
1) Determined in accordance with Financial Accounting Standards Board,
which we refer to as FASB, Statement No. 95, Statement of Cash Flows.
2) We have historically reported our funds from operations ("FFO") in
addition to our net income and net cash provided by operating
activities. FFO is a supplemental non-GAAP financial measure of real
estate companies' operating performance. The National Association of
Real Estate Investment Trusts ("NAREIT") defines FFO as follows:
income available for common shareholders before
- 21 -
depreciation and amortization of real estate assets and before
extraordinary items less gains on sale of real estate. NAREIT
developed FFO as a relative measure of performance and liquidity of an
equity REIT in order to recognize that the value of income-producing
real estate historically has not depreciated on the basis determined
under GAAP. However, FFO does not represent cash flows from operating
activities in accordance with GAAP (which, unlike FFO, generally
reflects all cash effects of transactions and other events in the
determination of net income); should not be considered an alternative
to net income as an indication of our performance; and is not
necessarily indicative of cash flow as a measure of liquidity or
ability to pay dividends. We consider FFO a meaningful, additional
measure of operating performance because it primarily excludes the
assumption that the value of the real estate assets diminishes
predictably over time, and because industry analysts have accepted it
as a performance measure. Comparison of our presentation of FFO to
similarly titled measures for other REITs may not necessarily be
meaningful due to possible differences in the application of the
NAREIT definition used by such REITs. For a reconciliation of net
income available for common shareholders to FFO, please see "Item 7.
Management's Discussion and Analysis of Results of Financial Condition
and Results of Operations- Funds From Operations."
3) Includes a $8.5 million restructuring charge incurred in the first
quarter of 2002 and a $13.8 million restructuring charge incurred in
the fourth quarter of 2002. Excluding these charges, Funds from
Operations would have been $112.8 million.
4) Earnings consist of income before gain (loss) on sale of real estate
and fixed charges. Fixed charges consist of interest on borrowed funds
(including capitalized interest), amortization of debt discount and
expense and the portion of rent expense representing an interest
factor. Preferred share dividends consist of dividends paid on our
outstanding Series A preferred shares and Series B preferred shares.
5) EBITDA is a non-GAAP measure that means net income or loss plus
interest expense, income taxes, depreciation and amortization;
adjusted for gain or loss on sale of assets, impairment provisions,
provision for loss on equity securities and other nonrecurring
expenses. EBITDA is presented because it provides useful information
regarding our ability to service debt, EBITDA should not be considered
an alternative measure of operating results or cash flow from
operations as determined in accordance with GAAP. EBITDA as presented
may not be comparable to other similarly titled measures used by other
REITs.
6) Includes an $8.5 million restructuring charge incurred in the first
quarter of 2002 and a $13.8 million restructuring charge incurred in
the fourth quarter of 2002. Excluding these charges, Earnings per
Share - Basic would have been $1.40 and Earnings per Share - Diluted
would have been $1.37.
7) Excluding the restructuring charges the ratio of earnings to fixed
charges would have been 1.5x, the ratio of earnings to combined fixed
charges and preferred share dividends would have been 1.2x, and the
ratio of EBITDA to combined fixed charges and preferred share
dividends would have been 1.8x.
The reconciliation of EBITDA, adjusted for discontinued operations, to
net income for the period presented is as follows:
(In thousands) 2002 2001 2000 1999 1998
---------- --------- --------- --------- ---------
Net income................................... $ 55,287 $ 68,756 $ 60,523 $ 48,443 $ 44,960
Depreciation and amortization................ 64,529 59,914 53,259 50,011 46,047
Interest..................................... 65,058 69,313 66,418 61,492 55,125
(Gain) loss on sale of real estate .......... (9,454) (9,185) (3,681) 7,050 --
---------- --------- --------- --------- ---------
EBITDA....................................... $ 175,420 $ 188,798 $ 176,519 $ 166,996 $ 146,132
========== ========= ========= ========= =========
- 22 -
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto appearing in Item 8 of this
report. Historical results set forth in Selected Financial Information, the
Financial Statements and Supplemental Data included in Item 6 and Item 8 and
this section should not be taken as indicative of our future operations.
This Annual Report on Form 10-K contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, Section 21E of the
Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act
of 1995. Also, documents that we "incorporate by reference" into this Annual
Report on Form 10-K, including documents that we subsequently file with the
Securities and Exchange Commission, which we refer to as the SEC, will contain
forward-looking statements. When we refer to forward-looking statements or
information, sometimes we use words such as "may," "will," "could," "should,"
"plans," "intends," "expects," "believes," "estimates," "anticipates" and
"continues." In particular, the risk factors included or incorporated by
reference in this Annual Report on Form 10-K describe forward-looking
information. The risk factors describe risks that may affect these statements
but are not all-inclusive, particularly with respect to possible future events.
Many things can happen that can cause actual results to be different from those
we describe. These factors include, but are not limited to:
. risks that our tenants will not pay rent;
. risks of financing, such as our ability to consummate additional
financings or obtain replacement financing on terms which are
acceptable to us, our ability to comply with our existing financial
covenants and the possibility of increases in interest rates that
would result in increased interest expense;
. risks normally associated with the real estate industry, including
risks that we may be unable to renew leases or relet space at
favorable rents as leases expire, that new acquisitions and our
development, construction and renovation projects, including our
Santana Row project, may fail to perform as expected, that competition
for acquisitions could result in increased prices, environmental
risks, and, because real estate is illiquid, that we may not be able
to sell properties when appropriate;
. risks that our growth will be limited if we cannot obtain additional
capital; and
. risks related to our status as a real estate investment trust,
commonly referred to as a REIT, for federal income tax purposes, such
as our obligation to comply with complex tax regulations relating to
our status as a REIT, the effect of future changes in REIT
requirements as a result of new legislation and the adverse
consequences if we fail to qualify as a REIT.
Given these uncertainties, readers are cautioned not to place undue
reliance on these forward-looking statements or those incorporated into this
Annual Report on Form 10-K. We also make no promise to update any of the
forward-looking statements. You should carefully review the risks and the risk
factors incorporated herein by reference from our Form 8-K filed on March 25,
2003, as well as the other information in this Annual Report on Form 10-K or
referred to in this Annual Report on Form 10-K, before making any investment in
us.
OVERVIEW
We are an equity real estate investment trust specializing in the
ownership, management, development and redevelopment of high quality retail and
mixed-use properties. As of December 31, 2002, we owned or had an interest in 58
community and neighborhood shopping
- 23 -
centers comprising over 12 million square feet, primarily located in densely
populated and affluent communities throughout the Northeast and Mid-Atlantic
United States. In addition, we owned 55 urban and retail mixed-use properties
comprising over 2 million square feet and one apartment complex, all located in
strategic metropolitan markets across the United States. Our properties,
excluding Santana Row were 95.5% leased at December 31, 2002 and December 31,
2001. Including Santana Row our occupancy was 94.7% at December 31, 2002.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America, which we refer to
as GAAP, requires management to make estimates and assumptions that in certain
circumstances affect the reported amounts of assets and liabilities, disclosure
of contingent assets and liabilities, and revenues and expenses. These estimates
are prepared using management's best judgment, after considering past and
current events and economic conditions. In addition, information relied upon by
management in preparing such estimates includes internally generated financial
and operating information, external market information when available, and when
necessary, information obtained from consultations with third party experts.
Actual results could differ from these estimates. The most significant
accounting policies which involve the use of estimates and assumptions as to
future uncertainties and, therefore, may result in actual amounts that differ
from estimates, are as follows.
Revenue Recognition and Accounts Receivable
Leases with tenants are classified as operating leases. Base rents are
recognized on a straight-line basis over the terms of the related leases, net of
valuation adjustments, based on management's assessment of credit, collection
and other business risk. We make estimates of the collectibility of our accounts
receivable related to base rents, including straight line rentals, expense
reimbursements and other revenue or income. In some cases the ultimate
collectibility of these claims extends beyond one year. These estimates have a
direct impact on our net income. We believe that our revenue recognition
policies comply with both generally accepted accounting principles and the
Securities and Exchange Commissions Staff Accounting Bulletin No. 101, Revenue
Recognition.
Real Estate
Land, buildings and real estate under development are recorded at cost.
Depreciation is computed using the straight-line method with useful lives
ranging from three to 50 years on buildings and improvements. Maintenance and
repair costs are charged to operations as incurred. Tenant work and other major
improvements, which improve or extend the life of the asset, are capitalized and
depreciated over the life of the lease or the estimated useful life of the
improvements, whichever is shorter. Certain external and internal costs directly
related to the development, redevelopment and leasing of real estate, including
applicable salaries and the related direct costs, are capitalized. The
capitalized costs associated with developments, redevelopments and leasing are
depreciated or amortized over the life of the improvement and lease,
respectively. Unamortized leasing costs are charged to operations if the
applicable tenant vacates before the expiration of its lease. Undepreciated
tenant work is charged to operations if the applicable tenant vacates and the
tenant work is replaced.
When applicable as lessee, we classify our leases of land and building as
operating or capital leases in accordance with the provisions of Statement of
Financial Accounting Standard (SFAS) No. 13, "Accounting for Leases." We are
required to use judgment and make estimates
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in determining the lease term, the estimated economic life of the property and
the interest rate to be used in applying the provisions of SFAS No. 13. These
estimates determine whether or not the lease meets the qualification of a
capital lease and is recorded as an asset.
We are required to make subjective assessments as to the useful lives of
our real estate for purposes of determining the amount of depreciation to
reflect on an annual basis. These assessments have a direct impact on net
income. Should we lengthen the expected useful life of an asset, it would be
depreciated over a greater number of years, resulting in less annual
depreciation expense and higher annual net income. Likewise, we must make
subjective assumptions as to which costs should be capitalized. These
assumptions also have a direct impact on net income.
Interest costs on developments and major redevelopments are capitalized as
part of developments and redevelopments not yet placed in service.
Capitalization of interest commences when development activities and
expenditures begin and end upon completion, which is when the asset is ready for
its intended use. Generally, rental property is considered substantially
complete and ready for its intended use upon completion of tenant improvements,
but no later than one year from completion of major construction activity. We
make judgments as to the time period over which to capitalize such costs and
these assumptions have a direct impact on net income because capitalized costs
are not subtracted in calculating net income. If the time period is extended,
more interest is capitalized, thereby increasing net income.
Long-Lived Assets
Through December 31, 2001, we evaluated the carrying value of our
long-lived assets in accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." In
cases where particular assets are being held for sale, impairment is based on
whether the fair value (estimated sales price less costs of disposal) of each
individual property to be sold is less than the net book value. Otherwise,
impairment is based on whether it is probable that undiscounted future cash
flows from each property will be less than its net book value. If a property is
impaired, its basis is adjusted to its estimated fair market value.
In August 2001 the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets" (effective for us on January 1, 2002). SFAS
No. 144 requires that one accounting model be used for long-lived assets to be
disposed of by sale, whether previously held and used or newly-acquired, and
broadens the presentation of discontinued operations to include components of an
entity comprising operations and cash flows that can be distinguished,
operationally and for financial reporting purposes from the rest of the entity.
We are required to make estimates of undiscounted cash flows in determining
whether there is an impairment. Actual results could be significantly different
from the estimates. These estimates have a direct impact on net income, because
recording an impairment charge results in a negative adjustment to net income.
Contingencies
We are sometimes involved in lawsuits and environmental matters arising in
the ordinary course of business. Management makes assumptions and estimates
concerning the amount and
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likelihood of loss relating to these matters. These estimates and assumptions
have a direct impact on net income.
OUTLOOK
Growth in net income and FFO during 2003 will depend primarily on growth in
the core portfolio. Growth of net income from the core portfolio depends, in
part, on the general economy, the financial health of our tenants and on our
ability, directly or indirectly, to control expenses, some of which are beyond
our complete control, such as snow removal, insurance and real estate tax
assessments. The current weakening of the retail and overall economic
environment could adversely impact us by increasing vacancies and decreasing
rents. In past weak retail and real estate environments, however, we have been
able to replace weak and bankrupt tenants with stronger tenants. Management
believes that due to the quality of our properties there will continue to be
demand for our space. Our properties, excluding Santana Row were 95.5% leased at
December 31, 2002 and December 31, 2001. Including Santana Row our occupancy was
94.7% at December 31, 2002.
Growth in the core portfolio, however, will be offset by expenses at
Santana Row. Operating and marketing expenses, as well as additional
depreciation and interest expense as the project is phased into operations will
have a dilutive effect on 2003 earnings. As a result of the August 2002 fire at
Santana Row, as more fully described in this section at "Santana Row", the
projected opening of certain retail spaces have been delayed and approximately
50% of the total residential units for the project scheduled to be phased into
service throughout 2003 were destroyed. These delayed openings, while lowering
the income we will receive, will not substantially reduce the costs associated
with maintaining and operating the infrastructure of the project.
Growth in net income is also dependent on the amount of our leverage and
interest rates. Our leverage has increased as we financed our development
projects. In addition, to the extent variable-rate debt is unhedged, we will
continue to have exposure to changes in market interest rates although we have
reduced this exposure as of December 31, 2002 as compared to December 31, 2001.
If interest rates increase, net income and FFO, as well as the ultimate cost of
our development and redevelopment projects, will be negatively impacted.
2002 PROPERTY ACQUISITIONS AND DISPOSITIONS
Acquisitions
We did not acquire any properties in 2002.
Dispositions
On April 11, 2002, we sold the street retail property located at 252
Greenwich Avenue in Greenwich, Connecticut for $16.5 million, resulting in a
gain of $7.0 million.
On April 30, 2002, we sold three street retail properties, two in Westport,
Connecticut and one in Westfield, New Jersey, for $19.2 million, resulting in a
gain of $6.9 million.
On June 6, 2002, we sold the Uptown Shopping Center located in Portland,
Oregon for $20.8 million, resulting in a gain of $4.5 million.
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The proceeds from the sales of the four street retail properties and the
Uptown Shopping Center were used to pay down our syndicated credit facility
except $16.0 million which was used to pay down the Santana Row construction
loan. As of December 31, 2002 all of the proceeds previously held by the
qualified intermediary have been released to us.
On June 18, 2002, a partnership, in which one of our subsidiaries is the
general partner, sold the street retail property located at 6410 Hollywood
Boulevard in Hollywood, California for $2.3 million, resulting in a gain of
$700,000.
On June 20, 2002, the proceeds of $6 million previously held by a qualified
intermediary from the 2001 sale of the street retail property located at 101
East Oak Street in Chicago, Illinois were released to us.
2002 FINANCING DEVELOPMENTS
On February 1, 2002, we received the minority partner's interest in Santana
Row in exchange for a $2.6 million investment in a partnership. We made a $5.9
million loan to the partnership on January 12, 2001, that is due February 28,
2003. The loan was not repaid on the due date. We are currently exploring all
available options we may have as a result of the borrowers failure to pay at
maturity.
On June 12, 2002 we issued 2.2 million common shares at $25.98 per share
netting $56.6 million, after all expenses of the offering.
On November 19, 2002, we completed the sale of $150 million of senior notes
in an underwritten public offering under our shelf registration statement
declared effective by the SEC on September 30, 1998. Net proceeds, after
deducting the discounts and commissions to the underwriters and other expenses
of this offering, totaled approximately $148.7 million. We used the net
proceeds, together with $20 million in available insurance proceeds relating to
the Santana Row fire, and approximately $7.1 million in borrowings under our
credit facility, to pay in full and retire the Santana Row construction loan,
including all interest owed on the loan.
SANTANA ROW
In 2002, our single largest capital need was the development of Santana
Row, a multi-phase mixed-use project being built on 42 acres in San Jose,
California in the heart of Silicon Valley. The project will consist of
residential, retail and hotel components, creating a community with the feel of
an urban district.
Phase I of the project includes Santana Row, the "1,500 foot long main
street" and eight buildings which will contain approximately 444,000 square feet
of retail space, 255 residential units, a 213 room hotel and the supporting
infrastructure. The first building, containing 40,000 square feet and occupied
by Crate & Barrel, opened on June 27, 2002. Six buildings comprising
approximately 317,000 square feet of retail space opened on November 7, 2002.
Tenants in the final 87,000 square foot building in Phase I are expected to
begin opening in early 2003. As of February 4, 2003, approximately 320,000
square feet, or 73%, of the Phase I retail space is leased, of which
approximately 200,000 square feet, or 46%, of the Phase I retail space is open.
On August 19, 2002 a fire broke out at Building Seven in the Santana Row
project. Building Seven contained approximately 87,000 square feet of retail
space, approximately 1,000 parking spaces and 246 residential units. All but
eleven of the residential units in the building, which were originally scheduled
to open in early 2003, were destroyed. The retail units and parking structure
sustained water and smoke damage but were not structurally impaired. The opening
of these retail units, originally scheduled for September 2002, will be delayed
until early 2003. The damage related to the fire was limited almost entirely to
this single building. We believe that our insurance coverage will substantially
cover our losses from the fire. We estimate the insurance claim to be in the
range of $70 million to $90 million which includes
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costs to clean-up, repair and rebuild as well as soft (non-construction) costs
and lost rents. The cause of the fire is unknown but will not affect our
insurance claim. On October 22, 2002, a $20 million insurance reimbursement was
advanced by the insurance carrier bringing the total amount received to date to
$21 million. This advance, along with the proceeds from the November 19, 2002
note offering and borrowings under our credit facility, were used to pay in full
and retire the Santana Row construction loan. Because our final insurance claim
has not yet been submitted, insurance proceeds expected to be received over and
above those received to date have not been recorded in our December 31, 2002
financial statements.
We estimate the total cost of Phase I to be approximately $445 million, net
of anticipated insurance proceeds. Insurance proceeds could exceed our $70 to
$90 million estimate due to increased fire related costs. Insurance proceeds
increased by such costs would therefore not reduce our anticipated Phase I
investment below $445 million. As of December 31, 2002, before applying the $21
million of insurance proceeds received to date, we have incurred costs of $434
million including the purchase of all of the project's, land, the construction
of Phase I, costs associated with the Building Seven fire and related cleanup
and costs related to future phases of the project. We estimate that we will
spend approximately $38 million, before insurance reimbursements, in 2003
relating to the completion of Phase I of the project.
We are evaluating our Building Seven residential options and alternatives
taking into account costs incurred to date, costs to rebuild and market
conditions and believe that we will be able to rebuild a residential component
for Building Seven on economically favorable terms as part of a future phase of
the project.
The success of Santana Row will depend on many factors which cannot be
assured and are not entirely within our control. These factors include among
others, the demand for retail and residential space, the cost of operations,
including utilities and insurance, the availability and cost of capital and the
general economy, particularly in the Silicon Valley.
On February 7, 2003, we announced plans for Phase II of Santana Row, which
includes 84,000 square feet of retail space on two pad sites and 275 additional
parking spaces. 95% of the Phase II retail space has been pre-leased to Best Buy
and The Container Store. Total development costs are expected to be
approximately $27 million.
We have not determined the scope of future phases of Santana Row and will
not do so until the success of Phase I, Phase II and future demand for rental
space is determined. However, as Phases I and II utilize only part of the retail
and residential entitlements of the property, and as Phase I includes the costs
of land and infrastructure for future phases, we expect to identify and execute
relatively small, additional phases on economically favorable terms.
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NEW BUSINESS PLAN, RESTRUCTURING CHARGES AND CEO TRANSITION
On February 28, 2002, we adopted a new business plan which returned our
primary focus to our traditional business of acquiring and redeveloping
community and neighborhood shopping centers that are anchored by supermarkets,
drug stores, or high volume, value oriented retailers that provide consumer
necessities. We will complete Bethesda Row and Santana Row (Pentagon Row was
completed in 2002) but do not plan to develop any new large-scale, mixed-use,
ground-up development projects. Rather, we will seek to acquire income producing
centers around our existing markets and will identify and execute redevelopment
opportunities in our existing portfolio. Concurrent with the adoption of the
business plan, we adopted a management succession plan and restructured our
management team.
In connection with this change in our business plan, we recorded a charge
of $18.2 million. This charge included a reserve for a restructuring charge of
$8.5 million made up of $6.9 million of severance and other compensation costs
for several of our senior officers related to the management restructuring, as
well as the write-off of $1.6 million of development costs. All charges against
the reserve, totaling $8.5 million, were expended during 2002. An additional
component of the restructuring charge is an impairment loss of $9.7 million
representing the estimated loss on the abandonment of development projects held
for sale, primarily the Tanasbourne development project located in Portland,
Oregon, thereby adjusting the value of these assets to their estimated fair
value. We are marketing these properties for sale. The carrying value of these
properties as of December 31, 2002, classified on our consolidated balance sheet
as real estate under development, is $8.5 million.
On December 20, 2002, we announced the resignation of Steven J. Guttman as
Trustee, Chief Executive Officer and Chairman of the Board of Trustees effective
January 1, 2003. Donald C. Wood, our then President and Chief Operating Officer,
was named Chief Executive Officer and a member of the Board of Trustees. Mark
Ordan, a member of the Board of Trustees since 1996, was named non-executive
chairman of the board. As a result of this transition, we recorded a charge of
$13.8 million in the fourth quarter of 2002 for payments and benefits to Mr.
Guttman pursuant to his contractual arrangements with us and for other
transition related costs. Of this amount, $7.9 had not been paid as of December
31, 2002, the majority of which was paid in the first quarter of 2003.
RESULTS OF OPERATIONS
Comparison of 2002 to 2001
Throughout this section, we have provided certain information on a "same
center" basis. Information provided on a same center basis is provided only for
those properties owned and operated in the periods being compared and includes
properties which were redeveloped or expanded during the periods being compared.
Properties purchased or sold and properties under development during the periods
being compared are excluded.
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REVENUE
Total revenues increased $23.7 million, or 8.0%, to $318.8 million for the
year ended December 31, 2002, as compared to $295.1 million for the year ended
December 31, 2001. The primary components of the increase in total revenues are
discussed below.
Rental Income. Rental income consists of minimum rent, percentage rent and
cost recoveries for common area maintenance and real estate taxes. The increase
in rental income of $23.5 million, or 8.6%, for the year ended December 31,
2002, as compared to the year ended December 31, 2001, is attributable to:
. an increase of $8.1 million in rental income attributable to the
properties acquired subsequent to January 1, 2001 and properties under
development in 2001 and 2002 which phased into service during 2001 and
2002, specifically Santana Row and Pentagon Row. These increases were
offset by properties sold in 2001; and
. an increase of $15.4 million, or 5.7%, on a same center basis due
primarily to the increased rental rates at redeveloped and retenanted
centers, as well as increased rental rates associated with lease
rollovers and higher cost recoveries as a result of increased rental
expenses and real estate tax expenses.
Same center basis for the year ended December 31, 2002 excludes the six
properties sold in 2002, the Williamsburg Shopping Center in Williamsburg,
Virginia, 101 E. Oak Street in Chicago, Illinois and 70/10 Austin Street in
Forest Hills, New York which were sold in 2001, Friendship Center in Washington,
D.C. which was purchased on September 21, 2001, the office building located at
580 Market Street in San Francisco, California which was exchanged for the
minority partner's interest in Santana Row and properties under development in
2001 and 2002, including Pentagon Row in Arlington, Virginia and Santana Row in
San Jose, California. Same center rental income, excluding the contribution from
property redevelopments and expansions, for the year ended December 31, 2002
increased 5.1% from 2001, reflecting increases due to retenanting, lease
rollovers and cost recoveries.
Interest and Other Income. Interest and other income includes interest
earned on mortgage notes receivable, overnight cash investments, including
tax-deferred exchange escrow deposits, as well as a provision for estimated
losses related to various unconsolidated restaurant joint ventures at Santana
Row. The decrease in interest and other income of $1.4 million, or 21.8% for
the year ended December 31, 2002, as compared to the year ended December 31,
2001, is attributable to a write down associated with the estimated impairment
of $1.3 million which represents our best estimate of the diminution of value
based upon the current economic climate surrounding these joint ventures.
Other Property Income. Other property income includes items, which although
recurring, tend to fluctuate more than rental income from period to period, such
as utility reimbursements, telephone income, merchant association dues, late
fees, lease termination fees and temporary tenant income. The increase in other
property income of $1.6 million, or 11.8%, for the year ended December 31, 2002,
as compared to the year ended December 31, 2001, is attributable to:
. a one-time $800,000 perpetual easement payment from a residential
developer that has commenced development on an adjacent site at the
Pentagon Row project;
. increases of $1.3 million in parking income, utility reimbursements
and lease termination fees at Pentagon Row, which began phasing into
service in the second quarter of 2001, Santana Row, which
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began phasing into service in the fourth quarter of 2002 and
Friendship Center which was purchased in the third quarter
of 2001; partially offset by
. lower lease termination fees and parking income from properties owned
and operated in both periods.
On a same center basis, other property income decreased $500,000 in 2002 as
compared to 2001, as explained above.
EXPENSES
Total expenses increased $36.3 million to $270.1 million for the year ended
December 31, 2002, as compared to $233.8 million for the year ended December 31,
2001. The primary components of the increase in total expenses are discussed
below.
Rental Expense. The increase in rental expense of $10.9 million, or 17.3%,
for the year ended December 31, 2002, as compared to the year ended December 31,
2001, is attributable to:
. an increase of $9.1 million in non-capitalized operating, leasing and
marketing costs associated with our development projects, primarily
operating, pre-opening and marketing expenses at our Santana Row
project, as well as increased costs reflecting a full year of
operating activity at the Pentagon Row project; and
. an increase of $1.8 million, or 3.1%, on a same center basis due
primarily to increased maintenance, insurance and utility costs,
offset by lower bad debt and property management costs.
Rental expense as a percentage of rental income and other property income,
which we refer to as property income, increased slightly from 21.7% in 2001 to
23.5% in 2002 due primarily to increased marketing and pre-opening expenses at
Santana Row. Same center rental expense, excluding the effect of property
redevelopments and expansions, as a percentage of property income decreased
slightly from 20.0% in 2001 to 19.6% in 2002 and overall for the year ended
December 31, 2002 increased 2.2% from 2001.
Real Estate Taxes. The increase in real estate taxes of $2.8 million, or
10.0%, for the year ended December 31, 2002, as compared to the year ended
December 31, 2001, is attributable to increased taxes on new development
projects, recently redeveloped properties and overall increases in tax
assessments. On a same center basis, real estate taxes increased 7.0% due
primarily to increased taxes on recently redeveloped properties and overall
increases in tax assessments at various projects, principally Woodmont East,
Fresh Meadows, Garden Market and Mid-Pike. Same center real estate taxes,
excluding the effect of property redevelopments and expansions, for the year
ended December 31, 2002 increased 6.1% from 2001.
Property Operating Income. As a result of the changes and variances
explained above, operating property income, total income less rental expenses
and real estate taxes, increased $10.1 million, or 4.9%, to $214.1 million for
the year ended December 31, 2002 as compared to $204.0 million for the year
ended December 31, 2001.
Interest Expense. In 2002, we incurred interest expense of $88.6 million,
of which $23.5 million was capitalized yielding interest expense of $65.1
million, as compared to interest of $87.1 million in 2001, of which $17.8
million was capitalized yielding interest expense of $69.3 million. The decrease
in interest expense of $4.2 million, or 6.1%, for the year ended December 31,
2002, as compared to the year ended December 31, 2001, is attributable to:
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. a decrease in the weighted-average interest rate on our debt from 7.6%
in 2001 to 7.4% in 2002, primarily as a result of decrease in interest
rates on our variable rate debt; and
. increased capitalized interest at the Santana Row project which was
under construction for the majority of 2002 and began to be phased
into service beginning with the first tenant opening in June 2002.
Administrative Expense. The decrease in administrative expense of $500,000,
or 3.4%, for the year ended December 31, 2002, as compared to the year ended
December 31, 2001, is mostly attributable to lower payroll costs in 2002 as a
result of our corporate restructuring. As a result, administrative expenses as a
percentage of revenue decreased from 4.8% in the year ended December 31, 2001 to
4.3% in the year ended December 31, 2002.
Restructuring Charge. On February 28, 2002, we adopted a new business plan
which returned our primary focus to our traditional business of acquiring and
redeveloping community and neighborhood shopping centers that are anchored by
supermarkets, drug stores, or high volume, value oriented retailers that provide
consumer necessities. Concurrently with the adoption of the business plan, we
adopted a management succession plan and restructured our management team. In
connection with this change in business plan, we recorded a charge of $18.2
million. This charge included a reserve for a restructuring charge of $8.5
million made up of $6.9 million of severance and other compensation costs for
several of our senior officers related to the management restructuring, as well
as the write-off of $1.6 million of our development costs. All charges against
the reserve, totaling $8.5 million, were expended during 2002. Please see "New
Business Plan, Restructuring Charges and CEO Transition" for additional
information.
In addition, in the fourth quarter of 2002 we recorded a charge of $13.8
million as a result of the accelerated executive transition whereby Donald C.
Wood, the Trust's President and Chief Operating Officer, replaced Steven Guttman
as Chief Executive Officer of the Trust. The fourth quarter charge, which
includes an accrual of $7.9 million at December 31, 2002 for payments and
benefits due to Mr. Guttman pursuant to his contractual arrangements with us and
for other transition related costs. No cash payments were made against this
charge in 2002 and we expect to expend the majority of the accrual in 2003.
Depreciation and Amortization Expense. The increase in depreciation and
amortization expense of $5.1 million, or 8.6%, for the year ended December 31,
2002, as compared to the year ended December 31, 2001 reflects the impact of
recent new developments, tenant improvements and property redevelopments which
were placed into service throughout 2001 and 2002.
OTHER
Investors' Share of Operations. Investors' share of operations represents
the minority partner's interest in the income of certain properties. The
decrease in investors' share of operations of $1.1 million, or 20.5%, for the
year ended December 31, 2002, as compared to the year ended December 31, 2001,
is attributable to our 2001 purchase of the minority interest in nine street
retail buildings in southern California and three street retail buildings in
Forest Hills, New York and the operating unit holders share of the decrease in
operating income in 2002.
Gain on Sale of Real Estate Net of Loss on Abandoned Developments Held for
Sale. The approximately $300,000 increase in gain on sale of real estate, net of
loss on abandoned developments held for sale for the year ended December 31,
2002, as compared to the year ended December 31, 2001, is attributable to:
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. an increase in net gains recognized in 2002 from the sale of six
properties for a combined gain of $19.1 million in the second quarter
of 2002, as compared to the sale of one shopping center in the second
quarter of 2001 for a gain of $7.9 million, the sale of one street
retail property in the fourth quarter of 2001 for a gain of $1.8
million and the exchange of a 90% interest in a street retail building
for a 10% interest in three street retail buildings with a minority
partner which resulted in an accounting loss of $500,000 in the fourth
quarter of 2001; primarily offset by
. the impairment loss of $9.7 million on the abandonment of developments
held for sale as described under "New Business Plan, Restructuring
Charges and CEO Transition."
Income from Operations of Discontinued Assets. Beginning in 2002, SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets," requires
that gains and losses from dispositions of properties and all operating earnings
from these properties be reported as income from operations of discontinued
assets. This also requires that all past earnings applicable to a property
disposed of subsequent to January 1, 2002 be reported as income from operations
of discontinued assets. As a result, previously reported income will be updated
each time a property is sold. This requirement is for presentation only and has
no impact on net income. As described above, in 2002, we sold six properties for
a combined gain of $19.1 million. The earnings generated from these properties
have been reported as income from operations of discontinued assets in
accordance with SFAS No. 144. Income from operations of discontinued assets for
the years ended December 31, 2002 and 2001 was $1.3 million and $3.5 million,
respectively with the decrease being primarily due to the fact that these
properties were owned for less than a full year in 2002.
Comparison of 2001 to 2000
REVENUE
Total revenues increased $20.9 million, or 7.6%, to $295.1 million for the
year ended December 31, 2001, as compared to $274.2 million for the year ended
December 31, 2000. The primary components of the increase in total revenues are
discussed below.
Rental Income. The increase in rental income of $18.9 million, or 7.4%, for
the year ended December 31, 2001, as compared to the year ended December 31,
2000, is attributable to:
. an increase of $2.9 million in rental income attributable to the
properties acquired subsequent to January 1, 2000 and properties under
development in 2000 and 2001 which began phasing into service during
2001, specifically Pentagon Row and Woodmont East. These increases
were offset by properties sold in 2001 and 2000; and
. an increase of $16.0 million, or 6.4%, on a same center basis due
primarily to the increased rental rates at redeveloped and retenanted
centers, as well as increased rental rates associated with lease
rollovers and higher cost recoveries.
Same center basis for the year ended December 31, 2001 excludes the six
properties sold in 2002 because they have been reclassified to Income from
Operations of Discontinued Assets on the Consolidated Statements of Operations,
the Williamsburg Shopping Center in Williamsburg, Virginia and Peninsula
Shopping Center in Palos Verdes, California which were sold on April 27, 2001
and June 30, 2000, respectively, as well as, properties acquired and properties
under development in 2000 and 2001, including Friendship Center in Washington,
D.C., Woodmont East in Bethesda, Maryland, Pentagon Row in Arlington, Virginia,
214 Wilshire Boulevard in Santa Monica, California and Town & Country Shopping
Center in San Jose, California, which was demolished to make way for the Santana
Row development.
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Interest and Other Income. The decrease in interest and other income of
$900,000, or 12.5%, for the year ended December 31, 2001, as compared to the
year ended December 31, 2000, is attributable to a decrease in interest earned
on mortgage notes receivable which reflects the $11.8 million decrease in
mortgage notes receivable from December 31, 2000 to December 31, 2001.
Other Property Income. The increase in other property income of $2.9
million, or 26.6%, for the year ended December 31, 2001, as compared to the year
ended December 31, 2000, is attributable to:
. an approximate $1.2 million increase in lease termination fees; and
. increased parking income and utility reimbursements.
On a same center basis, other property income during the year ended
December 31, 2001 increased 18.7% from the year ended December 31, 2000.
EXPENSES
Total expenses increased $19.7 million, or 9.2%, to $233.8 million for the
year ended December 31, 2001, as compared to $214.1 million for the year ended
December 31, 2000. The primary components of the decrease in total expenses are
discussed below.
Rental Expense. The increase in rental expense of $7.1 million, or 12.7%,
for the year ended December 31, 2001, as compared to the year ended December 31,
2000, is attributable to:
. an increase of $5.7 million in operating, leasing and marketing costs
associated with our development projects, primarily leasing and
marketing expenses at our Santana Row project, as well as increased
costs reflecting the increased operating activity at the Pentagon Row
and Woodmont East projects; and
. an increase of $2.3 million, or 4.3%, on a same center basis due
primarily to general cost increases along with increased property
management costs in 2001; partially offset by
. a decrease of $900,000 in operating costs related to properties
acquired and sold during the two periods.
Rental expense as a percentage of rental income and other property income,
which we refer to as property income, increased slightly from 20.9% in 2000 to
21.7% in 2001 due primarily to the increased leasing and marketing expenses at
Santana Row.
Real Estate Taxes. The increase in real estate taxes of $2.1 million, or
8.2%, for the year ended December 31, 2001, as compared to the year ended
December 31, 2000, is attributable primarily to increased tax assessments on
recently redeveloped properties partially offset by taxes on properties sold in
2001 and 2000. On a same center basis, real estate taxes increased 9.4%,
reflecting the increases on redeveloped properties.
Property Operating Income. As a result of the changes and variances
explained above, property operating income, total income less rental expenses
and real estate taxes, increased $11.7 million, or 6.1%, to $204.0 million for
the year ended December 31, 2001 as compared to $192.3 million for the year
ended December 31, 2000.
- 34 -
Interest Expense. In 2001, we incurred interest expense of $87.1 million,
of which $17.8 million was capitalized, as compared to 2000's $79.7 million, of
which $13.3 million was capitalized. The increase in interest expense of $2.9
million, or 4.4%, for the year ended December 31, 2001, as compared to the year
ended December 31, 2000, is attributable to:
. increased mortgage interest, primarily due to the $152 million of
mortgages placed on five properties in the fourth quarter of 2000;
partially offset by
. a decrease in the weighted-average interest rate on our debt from 7.9%
in 2000 to 7.6% in 2001, primarily as a result of the decrease in
interest rates on our variable rate debt; and
. increased capitalized interest at the Santana Row project which was
under construction during 2001.
Administrative Expense. The increase in administrative expense of $1.0
million, or 7.2%, for the year ended December 31, 2001, as compared to the year
ended December 31, 2000, is attributable to increased personnel costs, legal and
accounting fees. However, administrative expenses as a percentage of revenue
decreased slightly in 2001 to 4.8% from 4.9% in 2000.
Depreciation and Amortization Expense. The increase in depreciation and
amortization expense of $6.6 million, or 12.6%, for the year ended December 31,
2001, as compared to the year ended December 31, 2000, reflects the impact of
recent new development, tenant improvements and property redevelopments which
were placed in service during the year, specifically the Pentagon Row and
Woodmont East developments.
OTHER
Investors' Share of Operations. The decrease in investors' share of
operations of $1.3 million, or 21.0%, for the year ended December 31, 2001, as
compared to the year ended December 31, 2000, is attributable to our buy-out of
the minority partners' in nine street retail buildings in southern California,
thereby increasing our ownership in these buildings to 100%.
Gain on Sale of Real Estate Net of Loss on Abandoned Developments Held for
Sale. The increase in gain on sale of real estate, net of loss on abandoned
developments held for sale, of $5.5 million for the year ended December 31,
2001, as compared to the year ended December 31, 2000, is attributable to an
increase in net gains recognized in 2001 from:
. the sale of one shopping center in the second quarter of 2001 for a
gain of $7.9 million; and
. the sale of one street retail property in the fourth quarter of 2001
for a gain of $1.8 million; partially offset by
. the exchange of our 90% interest in a street retail building to the
minority partner in exchange for the minority partner's 10% interest
in three other street retail buildings in the fourth quarter of 2001
resulting in a loss of approximately $500,000; as compared to
. the sale of one shopping center in the second quarter of 2000 for a
gain of $3.7 million
Income from Operations of Discontinued Assets. Beginning in 2002, SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets," requires
that gains and losses from dispositions of properties and all operating earnings
from these properties be reported as income from operations of discontinued
assets. This also requires that all past earnings applicable to a property
disposed of subsequent to January 1, 2002 be reported as income from operations
of discontinued assets. As a result, previously reported income will be updated
each time a property is sold. This requirement is for presentation only and has
no impact on net income. As described above, in 2002, we sold six properties
for a
- 35 -
combined gain of $19.1 million. The earnings generated from these properties
have been reported as income from operations of discontinued assets in
accordance with SFAS No. 144. Income from operations of discontinued assets for
the years ended December 31, 2001 and 2000 was $3.5 million and $3.3 million,
respectively.
SEGMENT RESULTS
We operate our business on an asset management model, where small focused
teams are responsible for a portfolio of assets. We have divided our portfolio
of properties into three operating regions: the Northeast, Mid-Atlantic and
West. Each region is operated under the direction of an asset manager, with
dedicated leasing, property management and financial staff and operates largely
autonomously with respect to day to day operating decisions. Incentive
compensation, throughout the regional teams, is tied to the net operating income
of the respective portfolios.
Historical operating results for the three regions are as follows (in
thousands):
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
2002 2001 2000
---------- ---------- ----------
Rental Income
Northeast ............................. $ 123,093 $ 117,353 $ 110,256
Mid-Atlantic .......................... 139,596 124,765 114,371
West .................................. 35,396 32,449 31,007
---------- ---------- ----------
Total ............................ $ 298,085 $ 274,567 $ 255,634
========== ========== ==========
Property Operating Income (1)
Northeast ............................. $ 92,399 $ 87,831 $ 81,633
Mid-Atlantic .......................... 103,429 92,086 84,346
West .................................. 18,269 21,982 24,212
---------- ---------- ----------
Total ............................ $ 214,097 $ 201,899 $ 190,191
========== ========== ==========
(1) Property operating income consists of rental income, other property income
and interest income on mortgage notes receivable, less rental expense and
real estate taxes.
NORTHEAST
As of December 31, 2002, 48 of our properties were located in the Northeast
region. The Northeast region extends from suburban Philadelphia north through
New York and its suburbs into New England and west to Illinois and Michigan.
Rental Income. The increase in rental income of $5.7 million, or 4.9%, for
the year ended December 31, 2002 as compared to the year ended December 31,
2001, is attributable to:
. an increase of $6.8 million, or 5.9%, on a same center basis due
primarily to the increased rental rates at redeveloped, expanded and
retenanted centers, such as Bala Cynwyd, Brunswick, Dedham, Fresh
Meadows, Rutgers and Wynnewood, as well as increased rental rates
associated with lease rollovers; partially offset by
. a decrease of $1.1 million due to the disposition of 101 E. Oak Street
and 70/10 Austin Street in 2001.
- 36 -
Same center basis for the year ended December 31, 2002 excludes 101 E. Oak
Street and 70/10 Austin Street which were sold in 2001. Same center rental
income, excluding the contribution from property redevelopments and expansions,
for the year ended December 31, 2002 increased 5.7% from 2001.
When comparing 2001 with 2000, rental income, on an overall and same center
basis, increased $7.1 million, or 6.4%, primarily due to increases at recently
redeveloped and retenanted shopping center and street retail properties such as
Greenlawn, Blue Star, Brunswick, Ellisburg, Fresh Meadows and Austin Street.
Property Operating Income. Property operating income consists of rental
income, other property income and interest income on mortgage notes receivable,
less rental expense and real estate taxes. The increase in property operating
income of $4.6 million, or 5.2%, for the year ended December 31, 2002 as
compared to the year ended December 31, 2001, is attributable to:
. an increase of $5.7 million in rental revenue as described above;
offset by
. a decrease of $600,000 in interest income on mortgage notes receivable
as a result of a payoff of a $10 million mortgage note in July 2002;
and
. an increase of $500,000 in real estate taxes primarily as a result of
increased taxes on recently redeveloped and retenanted properties.
Same center property operating income in the year ended December 31, 2002
increased 7.2% from 2001. Same center property operating income, excluding the
contribution from property redevelopments and expansions, for the year ended
December 31, 2002 increased 7.1% from 2001.
Property operating income increased $6.2 million, or 7.6%, for the year
ended December 31, 2001 as compared to December 31, 2000. This increase is
attributable to:
. an increase of $7.1 million in rental revenue as described above;
. an increase in other property income of $1.4 million due primarily to
increased lease termination fees of $1.0 million; partially offset by
. an increase of $1.5 million in real estate taxes primarily as a result
of increased taxes on redeveloped and retenanted properties;
. an increase in rental expenses of $300,000; and
. decreased interest income on mortgage notes receivable of $500,000 as
a result of mortgage notes of approximately $10 million being paid off
in late 2000 and early 2001.
MID-ATLANTIC
As of December 31, 2002, 32 of our properties, including Pentagon Row, were
located in the Mid-Atlantic region. The Mid-Atlantic region extends from
Baltimore south to metropolitan Washington, D.C. and further south through
Virginia and North Carolina into Florida.
Rental Income. The increase in rental income of $14.8 million, or 11.9%,
for the year ended December 31, 2002 as compared to the year ended December 31,
2001, is attributable to:
. an increase of $9.4 million from Friendship Center which was purchased
in 2001 and from Pentagon Row which was phased into service throughout
2001 and 2002;
- 37 -
. a net increase of $6.1 million, or 5.0%, on a same center basis due
primarily to the increased rental rates attributable to retenanting at
several shopping centers and street retail properties, as well as the
increased rental income from the Trust's Woodmont East project in
Bethesda, Maryland which was open and occupied for a full year in
2002. These increases were partially offset by higher vacancy levels
at three of the region's shopping centers; offset by
. a decrease of $700,000 from the Williamsburg Shopping Center which was
sold in 2001.
Same center basis for the year ended December 31, 2002 excludes
Williamsburg Shopping Center which was sold in 2001, Friendship Center which was
purchased in 2001 and Pentagon Row which was being phased into service
throughout 2001 and 2002. There were no significant contributions from
redevelopments or expansions in this region during 2001 and 2002.
When comparing 2001 with 2000, rental income increased $10.4 million, or
9.1%, reflecting the contribution from the recently completed Woodmont East
project, the rental income generated from the first three buildings at the
Pentagon Row project, as well as Friendship Center which was acquired on
September 21, 2001. On a same center basis, which excludes Woodmont East,
Pentagon Row, Friendship Center and Williamsburg shopping center which was sold
on April 27, 2001, rental income increased $4.8 million, or 4.3%, due to
successful retenanting at several of the regions properties.
Property Operating Income. The increase in property operating income of
$11.3 million, or 12.3%, for the year ended December 31, 2002 as compared to the
year ended December 31, 2001, is attributable to:
. an increase of $14.8 million in rental revenue as described above; and
. an increase of $1.8 million in other income primarily from Pentagon
Row and Friendship Center, as both of these properties were owned and
operated for a full year in 2002; partially offset by
. an increase of $3.5 million in rental expense, primarily due to the
Pentagon Row and Friendship Center properties as well as increased
insurance costs; and
. an increase of $1.8 million in real estate taxes, of which
approximately $800,000 was attributable to Pentagon Row and Friendship
Center with the remaining increase primarily as a result of increased
taxes on recently redeveloped properties and overall increases in tax
assessments.
Same center property operating income in the year ended December 31, 2002
increased 4.8% from 2001.
Property operating income increased $7.7 million, or 9.2%, for the year
ended December 31, 2001 when compared to the year ended December 31, 2000. This
increase is attributable to:
. an increase of $10.4 million in rental revenue as described above;
. an increase in other property income of $1.8 million due primarily to
increased lease termination fees and other miscellaneous income;
partially offset by
. an increase of $3.7 million in rental expenses primarily at Pentagon
Row and Woodmont East; and
. an increase in real estate taxes of $800,000, approximately $400,000
of which was related to Pentagon Row, Woodmont East and Friendship
Center with the remainder attributable to increases in tax
assessments throughout the portfolio.
- 38 -
WEST
As of December 31, 2002, 34 of our properties, including Santana Row, were
located in the West region. The West region extends from Texas to the West
Coast.
Rental. The increase in rental income of $2.9 million, or 9.1%, for the
year ended December 31, 2002 as compared to the year ended December 31, 2001, is
attributable to:
. an increase of $2.5 million, or 7.9%, on a same center basis due
primarily to the increased rental rates at redeveloped and retenanted
properties in the Los Angeles area, San Francisco and Los Gatos,
California, as well as the increased rental income associated with
lease rollovers;
. an increase of approximately $800,000 of rental income generated at
Santana Row; offset by
. a decrease of approximately $400,000 due to the exchange of 580 Market
Street in 2002.
Same center basis for the year ended December 31, 2002 excludes 580 Market
Street which was exchanged for the minority partner's interest in Santana Row
and Santana Row, which was under development in 2001 and 2002. Same center
rental income, excluding the contribution from property redevelopments and
expansions, for the year ended December 31, 2002 increased 5.1% from 2001.
When comparing 2001 with 2000, rental income increased $1.4 million, or
4.7%, reflecting the recently redeveloped and retenanted properties in Los
Angeles and San Francisco, California, offset by the impact of the sale of
Peninsula Shopping Center on June 30, 2000. On a same center basis, which
excludes properties acquired and sold in 2001 and 2000 and Santana Row, which is
under development, rental income increased $4.1 million, or 15.4%, due to the
successful redevelopment and retenanting mentioned above.
Property Operating Income. The decrease in property operating income of
$3.7 million, or 16.9%, for the year ended December 31, 2002 as compared to the
year ended December 31, 2001, is attributable to:
. an increase of $7.4 million in rental expense primarily as a result of
leasing, marketing and other start-up costs associated with our
Santana Row project;
. an increase of $500,000 in real estate taxes primarily as a result of
increased taxes on recently redeveloped properties and real estate tax
expense on Santana Row reflecting the period the project was operating
in 2002; and
. a decrease of $100,000 in other property income primarily as a result
of lower parking income which offset the increase associated with
Santana Row; partially offset by
. an increase of $2.9 million in rental income as described above; and
. an increase of $1.4 million in interest income on mortgage notes
receivable primarily as a result of additional loans funded during
2002 and higher participating interest on loans outstanding.
Same center property operating income in the year ended December 31, 2002
increased 5.4% from 2001. Same center property operating income, excluding the
contribution from property redevelopments and expansions, for the year ended
December 31, 2002 increased 4.0% from 2001.
Property operating income decreased $2.2 million, or 9.2%, for the year
ended December 31, 2001 when compared to the year ended December 31, 2000. This
decrease is attributable to:
- 39 -
. an increase of $3.1 million in rental expenses, consisting primarily
of the marketing and leasing costs associated with the Santana Row
development;
. a decrease in interest and other income of $400,000 reflecting the
payoff of a note in 2001 and higher participation interest in 2000;
. a decrease in other property income of $300,000 due primarily to the
reduction in earnings when the old Town & Country Shopping Center was
demolished to make way for the new Santana Row project; offset by
. an increase of $1.4 million in rental income as described above; and
. a net decrease in real estate taxes of $200,000 attributable to the
June 30, 2000 sale of Peninsula Shopping Center, which offsets
increased assessments on redeveloped properties and overall increases
in tax assessments.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $23.1 million and $17.5 million at December
31, 2002 and December 31, 2001, respectively. This $5.6 million increase is
attributable to $119.1 million and $62.2 million provided by operating and
financing activities, respectively, partially offset by $175.7 million used in
investing activities.
(in thousands) FOR THE YEAR ENDED
DECEMBER 31, 2002
------------------
Cash Provided by Operating Activities ....................... $ 119,069
Cash Provided by Financing Activities ....................... 62,235
Cash Used in Investing Activities ........................... (175,744)
-------------
Increase in Cash and Cash Equivalents ....................... 5,560
Cash and Cash Equivalents, Beginning of Period .............. 17,563
-------------
Cash and Cash Equivalents, End of Period .................... $ 23,123
=============
Operating Activities
The cash provided by operating activities for the year ended December 31,
2002 of $119.1 million is attributable to:
. $99.5 million from property operations; and
. $19.6 million from the non-cash portion of our restructuring expense.
Financing Activities
The cash provided by financing activities for the year ended December 31,
2002 of $62.2 million is attributable to:
. $148.7 million of proceeds, net of costs, from the November 2002 note
issuance;
. $130.6 million of proceeds under the Santana Row and Woodmont East
construction loans;
. $56.6 million of proceeds, net of costs, received from the issuance of
2,200,000 common shares in an underwritten public offering in June
2002;
. $27.0 million of net proceeds under our credit facility; and
. $20.1 million of net proceeds received from the issuance of common
shares under our dividend reinvestment plan and exercise of common
stock options.
The cash provided by financing activities was partially offset by:
. $191.3 million payoff and retirement of the Santana Row construction
loan;
- 40 -
. $96.5 million of distributions to shareholders;
. the repayment and retirement of our 8% Senior Notes of $25 million;
. the repayment and retirement of a $3.4 million note;
. the repayment of $289,000 of our 5.25% Convertible Subordinated
Debentures;
. $900,000 of principal payments on mortgages, capital leases and notes
payable; and
. a $3.4 million decrease in minority interest.
Investing Activities
The cash used in investing activities for the year ended December 31, 2002
of $175.7 million is attributable to:
. $200.3 million for the development of Santana Row and Pentagon Row;
and
. $43.6 million of capital expenditures relating to improvements to
common areas, tenant work and various redevelopments including the
Congressional Apartments in Rockville, Maryland, the redevelopment
of retail buildings in San Antonio, Texas and the completion of
tenant work at our Woodmont East development in Bethesda, Maryland.
The cash used in investing activities was partially offset by:
. $62.5 million of net proceeds from the disposition of the six
properties sold in the second quarter of 2002 and the 1 street retail
property sold in the fourth quarter of 2001; and
. the repayment, net of additional loans to existing borrowers, of
mortgage notes receivable of $5.7 million.
- 41 -
Debt Financing Arrangements
As of December 31, 2002, we had total debt outstanding of $1.1 billion. Of
this debt, approximately $289 million (consisting of $238 million of fixed rate
and $51 million of variable rate debt) was secured by approximately 12 of our
properties.
The following is a summary of our total debt outstanding as of December 31,
2002 and 2001 (dollars in thousands):
ORIGINAL PRINCIPAL PRINCIPAL
DEBT ISSUED BALANCE AS OF BALANCE AS OF INTEREST RATE
DESCRIPTION OF DEBT OR DECEMBER 31, DECEMBER 31, AS OF DECEMBER
AVAILABLE 2002 2001 31, 2002 MATURITY DATE
----------- ------------- ------------- -------------- ------------------
MORTGAGE AND CONSTRUCTION LOANS
Secured Fixed Rate
Leesburg Plaza (1).................. $ 9,900 $ 9,900 $ 9,900 6.510% October 1, 2008
164 E. Houston Street (2)........... 345 268 304 7.500% October 6, 2008
Federal Plaza (3)................... 36,500 35,936 36,304 6.750% June 1, 2011
Tysons Station (4).................. 7,000 6,864 6,967 7.400% September 1, 2011
Barracks Road (5)................... 44,300 44,300 44,300 7.950% November 1, 2015
Hauppauge (6)....................... 16,700 16,700 16,700 7.950% November 1, 2015
Lawrence Park (7)................... 31,400 31,400 31,400 7.950% November 1, 2015
Wildwood (8)........................ 27,600 27,600 27,600 7.950% November 1, 2015
Wynnewood (9)....................... 32,000 32,000 32,000 7.950% November 1, 2015
Brick Plaza (10).................... 33,000 33,000 33,000 7.415% November 1, 2015
Secured Variable Rate
Woodmont East Construction (11)..... 24,500 24,449 23,164 Libor + 1.20% August 29, 2003
Friendship Center (11).............. 17,000 17,000 17,000 Libor + 1.35% September 22, 2003
Santana Row Construction (12)....... 295,000 - 62,004 Libor + 2.125% April 16, 2004
Unsecured Variable Rate
Escondido (Municipal Bonds) (13).... 9,400 9,400 9,400 3.140% November 1, 2015
------------- -------------
Total Mortgage and Construction
Loans $ 288,817 $ 350,043
------------- -------------
NOTES PAYABLE
Unsecured Fixed Rate
Term note with banks (14)........... $ 125,000 $ 125,000 $ 125,000 6.22% December 19,2003
Perring Plaza Renovation (15)....... 3,087 2,266 2,389 10.00% January 31, 2013
Other............................... 295 45 54 Various Various
Unsecured Variable Rate
Land purchase note (16)............. 3,400 - 3,400 Libor + 1.25% June 30, 2002
Revolving credit facilities (17).... 300,000 71,000 44,000 Libor + .80% December 19, 2003
------------- -------------
Total Notes Payable $ 198,311 $ 174,843
------------- -------------
SENIOR NOTES AND DEBENTURES
Unsecured Fixed Rate
8.00% Notes (18).................... $ 25,000 - $ 25,000 8.000% April 21,2002
5.25% Convertible Subordinated
Debentures (19).................... 289 - 289 5.250% April 30, 2002
5.25% Convertible Subordinated
Debentures (20).................... 75,000 $ 75,000 75,000 5.250% October 28, 2003
6.74% Medium Term Notes (21) (22)... 39,500 39,500 39,500 6.370% March 10, 2004
6.625% Notes (21)................... 40,000 40,000 40,000 6.625% December 1, 2005
6.99% Medium Term Notes (21) (23)... 40,500 40,500 40,500 6.894% March 10, 2006
6.125% Notes (21) (24).............. 150,000 150,000 - 6.325% November 15, 2007
8.75% Notes (21).................... 175,000 175,000 175,000 8.750% December 1, 2009
7.48% Debentures (21)(25)........... 50,000 50,000 50,000 7.480% August 15, 2026
6.82% Medium Term Notes (21)(26).... 40,000 40,000 40,000 6.820% August 1, 2027
------------- -------------
Total Senior Notes and Debentures $ 610,000 $ 485,289
------------- -------------
Total Debt Outstanding $ 1 ,097,128 $ 1,010,175
============= =============
(1) The loan requires monthly payments of principal and interest with a final
balloon payment at maturity of approximately $9.5 million.
(2) The loan requires monthly payments of principal and interest.
- 42 -
(3) The loan requires monthly payments of principal and interest with a final
balloon payment at maturity of approximately $31.7 million.
(4) The loan requires monthly payments of principal and interest with a final
balloon payment at maturity of approximately $5.6 million.
(5) The loan requires monthly payments of principal and interest with a final
balloon payment at maturity of approximately $35.0 million.
(6) The loan requires monthly payments of principal and interest with a final
balloon payment at maturity of approximately $13.2 million.
(7) The loan requires monthly payments of principal and interest with a final
balloon payment at maturity of approximately $24.8 million.
(8) The loan requires monthly payments of principal and interest with a final
balloon payment at maturity of approximately $21.8 million.
(9) The loan requires monthly payments of principal and interest with a final
balloon payment at maturity of approximately $25.3 million.
(10) The loan requires monthly payments of principal and interest with a final
balloon payment at maturity of approximately $25.7 million.
(11) The loans require monthly interest only payments through maturity. The
loans were paid off on February 11, 2003 through borrowings under the
revolving credit facility.
(12) The loan was repaid on November 19, 2002.
(13) The loan requires monthly interest only payments through maturity. This
loan bears interest at a variable rate determined weekly to be the interest
rate which would enable the bonds to be remarketed at 100% of their
principal amount. The weighted average interest rate for the year ended
December 31, 2002 was 3.14%. The property is not encumbered by a lien.
(14) The loan requires monthly interest only payments through maturity. This
loan bears interest at LIBOR plus 95 basis points. We purchased interest
rate swaps or hedges on this note, thereby locking in the LIBOR rate at
5.27%. As a result, the interest rate on this loan is currently fixed at
6.22%.
(15) The loan requires monthly payments of principal and interest.
(16) The loan was repaid on June 18, 2002.
(17) Amounts borrowed under the facility bear interest at LIBOR plus 80 basis
points. The maximum amount drawn under the facility during 2002 was $100
million. The weighted average interest rate on borrowings under the
facility for the year ended December 31, 2002 was 2.59%.
(18) The notes were paid off on April 22, 2002.
- 43 -
(19) The debentures were paid off on April 29, 2002.
(20) The debentures require semi-annual interest payments with principal due at
maturity. The debentures are convertible into our common shares at $36 per
share. The debentures are redeemable by us, in whole, at any time, at 100%
of the principal amount plus accrued interest.
(21) The notes require semi-annual payments of interest only during their terms.
(22) We purchased interest rate swaps at issuance, thereby reducing the
effective interest rate from 6.74% to 6.37%.
(23) We purchased interest rate swaps at issuance, thereby reducing the
effective interest rate from 6.99% to 6.894%.
(24) The Trust purchased an interest rate lock to hedge the planned note
offering. A hedge loss of $1.5 million associated with this hedge is being
amortized into the November 2002 note offering thereby increasing the
effective interest rate on these notes to 6.325%.
(25) Beginning on August 15, 2008, the debentures are redeemable by the holders
thereof at the original purchase price.
(26) Beginning on August 1, 2007, the notes are redeemable by the holders
thereof at the original purchase price.
Our credit facility and other debt agreements include financial covenants
that may limit our operating activities in the future. These covenants require
us to:
. limit the amount of debt as a percentage of gross asset value to less
than .6 to 1 (we maintained a ratio of .41 to 1 as of December 31,
2002);
. limit the amount of secured debt as a percentage of gross asset value
to less than .35 to 1 (we maintained a ratio of .13 to 1 as of
December 31, 2002);
. limit the amount of debt so that our interest coverage will exceed
1.75 to 1 on a rolling four quarter basis (we maintained a ratio of
2.45 to 1 as of December 31, 2002);
. limit the amount of secured debt so that unencumbered asset value to
unsecured debt will equal or exceed 1.67 to 1 (we maintained a ratio
of 1.81 to 1 as of December 31, 2002); and
. limit the total cost of development projects under construction to 30%
or less of gross asset value (the budgeted total cost of our projects
under construction represented 15.4% of gross asset value as of
December 31, 2002).
We are also obligated to comply with other covenants, including, among
others, provisions:
. relating to the maintenance of property securing a mortgage;
. restricting our ability to pledge assets or create liens;
. restricting our ability to incur additional debt;
. restricting our ability to amend or modify existing leases;
. restricting our ability to enter into transactions with affiliates;
and
. restricting our ability to consolidate, merge or sell all or
substantially all of our assets.
- 44 -
As of December 31, 2002, we were in compliance with all of the listed
financial covenants. If we were to breach any of our debt covenants, including
the listed covenants, and did not cure the breach within any applicable cure
period, our lenders could require us to repay the debt immediately, and, if the
debt is secured, could immediately begin proceedings to take possession of the
property securing the loan. Many of our debt arrangements, including our public
notes and our credit facility are cross-defaulted which means that the lenders
under those debt arrangements can put us in default and require immediate
repayment of their debt if we breach and fail to cure a covenant under certain
of our other debt obligations. As a result, any default under our debt covenants
could have an adverse effect on our financial condition, our results of
operations, our ability to meet our obligations and the market value of our
shares.
Below are the aggregate principal payments required as of December 31, 2002
under our debt financing arrangements by year. Scheduled principal installments
and amounts due at maturity are included.
(in thousands) SECURED UNSECURED TOTAL
2003 $ 42,149 $ 271,137 $ 313,286
2004 2,659 39,652 42,311
2005 2,896 40,168 43,064
2006 3,227 40,685 43,912
2007 3,482 150,204 153,686
2008 and thereafter 234,404 266,465 500,869
---------- ---------- ----------
$ 288,817 $ 808,311 $1,097,128
========== ========== ==========
Our organizational documents do not limit the level or amount of debt that
we may incur. Also see "Liquidity Requirements" in this section regarding
management's plans with respect to debt maturing in 2003.
Interest Rate Hedging
We enter into derivative contracts, which qualify as cash flow hedges under
SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities", in
order to manage interest rate risk. Derivatives are not purchased for
speculation.
During 2001, to hedge our exposure to interest rates on our $125 million
term loan, we entered into interest rate swaps, which fixed the LIBOR interest
rate on the term loan at 5.27%. The current interest rate on the term loan is
LIBOR plus 95 basis points, thus fixing the interest rate at 6.22% on notional
amounts totaling $125 million. We are exposed to credit loss in the event of
non-performance by the counterparties to the interest rate protection agreement
should interest rates exceed the cap. However, management does not anticipate
non-performance by the counterparties. The counterparties have long-term debt
ratings of A- or above by Standard and Poor's Ratings Service ("S&P") and Aa2 or
above by Moody's Investors Service ("Moody's"). Although our cap is not exchange
traded, there are a number of financial institutions which enter into these
types of transactions as part of their day-to-day activities. The interest rate
swaps mature concurrently with the $125 million term loan on December 19, 2003.
The swaps were documented as cash flow hedges and designated as effective at
inception of the swap contract. Consequently, the unrealized gain or loss upon
measuring the swaps at their fair value is recorded as a component of other
comprehensive income within shareholders' equity and either a derivative
instrument asset or liability is recorded on the balance sheet. At December 31,
2002, a
- 45 -
cumulative unrealized loss of $4.6 million, representing the difference between
the current market value and the 6.22% fixed interest rate on the swap, was
recorded in other comprehensive income with a corresponding derivative liability
on the balance sheet. Interest expense of approximately $4.6 million will be
reclassified from other comprehensive income into current earnings during 2003
to bring the effective interest rate up to 6.22%.
In anticipation of a $150 million Senior Unsecured Note offering, on August
1, 2002, we entered into a treasury rate lock that fixed the benchmark five year
treasury rate at 3.472% through August 19, 2002. The rate lock was documented as
a cash flow hedge of a forecasted transaction and designated as effective at the
inception of the contract. On August 16, 2002, we priced the Senior Unsecured
Notes with a scheduled closing date of August 21, 2002 and closed out the
associated rate lock. Five year treasury rates declined between the pricing
period and the settlement of the hedge purchase; therefore, to settle the rate
lock, we paid $1.5 million. As a result of the August 19, 2002 fire at Santana
Row, we elected not to proceed with the note offering at that time. However, we
consummated a $150 Senior Unsecured Note offering on November 15, 2002, and
thus, the hedge loss will be amortized into interest expense over the life of
these Notes.
Liquidity Requirements
As of December 31, 2002, we had unfunded contractual payment obligations of
approximately $403 million due within the next twelve months. The table below
specifies our total contractual payment obligations as of December 31, 2002.
(in thousands)
CONTRACTUAL OBLIGATIONS(1)(2)(3)(4) TOTAL COST LESS THAN 1 YEAR 1 - 3 YEARS 4 - 5 YEARS AFTER 5 YEARS
- ----------------------- --------------- ----------------- --------------- --------------- -----------------
Notes and loans payable ........ $ 1,097,128 $ 313,286 $ 85,375 $ 197,598 $ 500,869
Capital lease obligations,
principal only ................ 104,395 254 591 722 102,828
Operating leases ............... 265,944 3,910 7,849 7,999 246,186
Development and
redevelopment obligations...... 78,403 78,403 - - -
Joint venture obligations....... 2,991 2,991 - - -
Contractual operating
obligations ................... 5,104 4,381 723 - -
--------------- ----------------- --------------- --------------- -----------------
Total contractual cash
obligations ................... $ 1,553,965 $ 403,225 $ 94,538 $ 206,319 $ 849,883
=============== ================= =============== =============== =================
(1) Under the terms of the Congressional Plaza partnership agreement, from and
after January 1, 1986 Rockville Plaza Company ("RPC"), an unaffiliated
third party, has the right to require us and the two other minority
partners to purchase from half to all of RPC's 37.5% interest in
Congressional Plaza at the interest's then-current fair market value. Based
on management's current estimate of fair market value, our estimated
liability upon exercise of the put option is approximately $27.5 million.
Since the timing of this transaction is unknown, the put option is excluded
from our capital requirements.
- 46 -
In conjunction with a redevelopment currently taking place at the property,
we have agreed to acquire an additional 7.5% interest in Congressional
Plaza from RPC, thereby lowering their ownership percentage to 30%, in
exchange for funding approximately $7 million of RPC's share of the
redevelopment cost. The funding will take place through the first quarter
of 2003 and the transaction will be completed in 2003. After the completion
of this transaction, our estimated liability upon the exercise of the put
option will be approximately $22 million.
(2) Under the terms of four partnerships which own street retail properties in
southern California with a cost of approximately $61 million, if certain
leasing and revenue levels are obtained for the properties owned by the
partnerships, the other partners may require us to purchase their
partnership interests at a formula price based upon net operating income.
The purchase price may be paid in cash or, for two of the partnerships, a
limited number of our common shares at the election of the other partners.
Because we may elect to issue common shares in settlement of part of our
obligations, we have excluded these amounts from our capital requirements.
In certain of these partnerships, if the other partners do not redeem their
interest, we may choose to purchase the limited partnership interests upon
the same terms.
(3) Under the terms of various other partnerships which own shopping center
properties with a cost of approximately $71 million, the partners may
exchange their 796,773 operating units for cash or the same number of our
common shares, at our option. Because we may elect to issue common shares
in settlement of our obligation we have excluded these amounts from our
capital requirements. During the second quarter of 2002 we issued 100,000
of our common shares valued at $2.8 million in exchange for 100,000
operating units and cash of $205,000 in exchange for an additional 7,816
operating units. On February 14, 2003 we paid $333,000 to redeem an
additional 12,000 operating units.
(4) Street Retail San Antonio LP, a wholly-owned subsidiary of the Trust,
entered into a Development Agreement (the "Agreement") on March 13, 2000
with the City of San Antonio, Texas (the "City") related to the
redevelopment of land and buildings that we own along Houston Street in the
City. Houston Street and the surrounding area have been designated by the
City as a Reinvestment Zone (the "Zone"). The City has agreed to facilitate
redevelopment of the Zone by undertaking and financing certain public
improvements based on our agreement to redevelop our properties in the
Zone. Under the terms of the Agreement, the City issued debt to fund
specific public improvements within the Zone. The initial and primary
source of funding to the City for repayment of the debt and debt service is
the incremental tax revenue that accretes to the City as the taxable value
of the redeveloped properties within the Zone increase. We are required to
issue an annual letter of credit, commencing on October 1, 2002 through
September 30, 2014, that covers our designated portion of the debt service
should the incremental tax revenue generated not cover the debt service. We
posted a letter of credit with the City on September 25, 2002 for $795,000.
Our obligation under this agreement cannot be determined at this time
because it is dependent on the annual assessed value of the properties in
the Zone and the related tax revenue generated. We were not required to
provide any funding in 2002 or for the semi-annual payment due March 15,
2003. Based on the current assessed value of the properties in the Zone, we
expect to provide some funding under the Agreement prior to its expiration
on September 30, 2014, but anticipate that our obligation will not exceed
$600,000 in any year and will be between $2 million
- 47 -
and $3 million in total. If the Zone creates sufficient tax increment
funding to repay the City's debt prior to the expiration of the Agreement,
we will be eligible to receive reimbursement of amounts paid for debt
service shortfalls together with interest thereon.
As of December 31, 2002, our current contractual payment obligations due
within one year total approximately $403 million. Included in this amount is
$196 million that represents our revolving credit facility and term loan which
mature on December 19, 2003, which we plan to renew.
In addition to our contractual obligations we have other short-term
liquidity requirements consisting primarily of normal recurring operating
expenses, regular debt service requirements (including debt service relating to
additional and replacement debt), recurring corporate expenditures,
non-recurring corporate expenditures (such as tenant improvements and
redevelopments) and dividends to common and preferred shareholders. Overall
capital requirements in 2003 will depend upon acquisition opportunities, the
level of improvements and redevelopments on existing properties and the timing
and cost of future phases of Santana Row. We expect to fund the remaining
capital requirements of $207 million, as well as our development and
redevelopment costs, acquisitions and normal recurring operating costs through a
combination of cash provided by operating activities, borrowings under our
credit facility and other funding sources which may consist of additional debt,
both secured and unsecured, additional equity, joint venture relationships and
property dispositions.
We expect to fund our long-term capital requirements, which consist
primarily of maturities under our long-term debt, development and redevelopment
costs and potential acquisition opportunities through a combination of funding
sources which we believe will be available to us including debt, both secured
and unsecured, additional equity, joint venture relationships and property
dispositions.
The following factors could affect our ability to meet our liquidity
requirements:
. we may be unable to obtain debt or equity financing on favorable
terms, or at all, as a result of our financial condition or market
conditions at the time we seek additional financing;
. restrictions on our debt instruments or outstanding equity may
prohibit us from incurring debt or issuing equity at all, or on terms
available under then-prevailing market conditions; and
. we may be unable to service additional or replacement debt due to
increases in interest rates or a decline in our operating performance.
Dividend Reinvestment and Share Purchase Plan
We have implemented a Dividend Reinvestment and Share Purchase Plan, which
was subsequently amended in March 2002 (the "DRIP"). Under the DRIP, current
shareholders are permitted to elect to reinvest all, a portion or none of their
cash dividends to purchase common shares. The DRIP also allows both new
investors and existing shareholders to make optional cash payments to purchase
common shares.
The DRIP permits current shareholders and new investors to invest a minimum
of $25 up to a maximum of $10,000 in common shares per month. Shares purchased
under the DRIP through reinvestment of dividends and optional cash payments are
purchased at market price.
- 48 -
Common shares may be purchased directly from the Company or in open market
purchases, as we determine from time to time, to fulfill the requirements for
the DRIP. We issued 134,247 and 159,234 common shares under the DRIP and
received approximately $3.5 million and $3.3 million in proceeds for the years
ended December 31, 2002 and 2001, respectively.
Stock Purchase Plan
In 1991, the Board of Trustees of the Company approved a Stock Purchase
Plan (the "ESPP") under Section 423 of the Code. The ESPP is regarded as a
noncompensatory plan under APB No. 25, because it meets the qualifications under
IRC 423. Under the terms of the ESPP, eligible employees may purchase common
shares of the Company at a price that is equal to 90% of the lower of the common
shares' fair market value at the beginning or the end of a quarterly period. The
fair market value of a common share is equal to the last sale price of the
common shares on the New York Stock Exchange. Eligible employees may purchase
the common shares through payroll deductions of up to 10% of eligible
compensation. The ESPP is not subject to the provisions of ERISA. The ESPP
terminated on January 31, 2001.
Under the terms of the ESPP, eligible employees had purchased 446,000
common shares at $15.125 per share with the assistance of loans of $6.7 million
from us. Originally, ESPP called for one sixteenth of the loan to be forgiven
each year for eight years, as long as the participant was still employed by us.
The loans for all participants, but two, were modified in 1994 to extend the
term an additional four years and to tie forgiveness in 1995 and thereafter to
certain criteria related to our performance. One sixteenth of the loan has been
forgiven during each year of the plan. At December 31, 2002, we had outstanding
purchase loans to participants of approximately $830,000. The purchase loans
bear interest at 9.39%. The shares purchased under the plan may not be sold,
pledged or assigned until both the purchase and tax loans associated with the
plan are satisfied and the term has expired, without the consent of the
Compensation Committee of the Board of Trustees. On January 24, 2003, a $750,000
loan was repaid.
REIT Qualification
We intend to maintain our qualification as a REIT under Section 856(c) of
the Code. As a REIT, we generally will not be subject to corporate federal
income taxes as long as we satisfy certain technical requirements of the Code,
including the requirement to distribute 90% of our REIT taxable income to our
shareholders.
FUNDS FROM OPERATIONS
We have historically reported our FFO in addition to our net income and net
cash provided by operating activities. FFO is a supplemental non-GAAP financial
measure of real estate companies' operating performance. NAREIT defines FFO as
follows: income available for common shareholders before depreciation and
amortization of real estate assets and before extraordinary items less gains on
sale of real estate. NAREIT developed FFO as a relative measure of performance
and liquidity of an equity REIT in order to recognize that the value of
income-producing real estate historically has not depreciated on the basis
determined under GAAP. However, FFO:
- 49 -
. does not represent cash flows from operating activities in accordance
with GAAP (which, unlike FFO, generally reflects all cash effects of
transactions and other events in the determination of net income);
. should not be considered an alternative to net income as an indication
of our performance; and
. is not necessarily indicative of cash flow as a measure of liquidity
or ability to pay dividends.
We consider FFO a meaningful, additional measure of operating performance
because it primarily excludes the assumption that the value of the real estate
assets diminishes predictably over time, and because industry analysts have
accepted it as a performance measure. Comparison of our presentation of FFO to
similarly titled measures for other REITs may not necessarily be meaningful due
to possible differences in the application of the NAREIT definition used by such
REITs.
An increase or decrease in FFO does not necessarily result in an increase
or decrease in aggregate distributions because our Board of Trustees is not
required to increase distributions on a quarterly basis unless necessary for us
to maintain REIT status. However, we must distribute 90% of our REIT taxable
income (as defined in the Code). Therefore, a significant increase in FFO will
generally require an increase in distributions to shareholders although not
necessarily on a proportionate basis.
The reconciliation of net income available for common shareholders to
funds from operations for the years ended December 31, 2002 and 2001 is as
follows:
(in thousands)
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
2002 2001
--------------- ---------------
Net income available for common shareholders - basic ................................ $ 35,862 $ 59,722
(Gain) on sale of real estate net of loss on abandoned developments held for
sale ............................................................................... (9,454) (9,185)
Depreciation and amortization of real estate assets ................................. 58,605 54,350
Amortization of initial direct costs of leases ...................................... 4,750 4,161
Income attributable to operating partnership units .................................. 740 1,384
--------------- ---------------
Funds from operations for common shareholders ....................................... $ 90,503 $ 110,432
=============== ===============
Weighted average number of common shares used to compute basic FFO per share ........ 41,624 39,164
=============== ===============
Weighted average number of common shares used to compute diluted FFO per share ...... 42,882 40,266
=============== ===============
- 50 -
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our use of financial instruments, such as debt instruments, subject us to
market risk which may affect our future earnings and cash flows as well as the
fair value of our assets. Market risk generally refers to the risk of loss from
changes in interest rates and market prices. We manage our market risk by
attempting to match anticipated inflow of cash from our operating, investing and
financing activities with anticipated outflow of cash to fund debt payments,
dividends to common and preferred shareholders, investments, capital
expenditures and other cash requirements. We also enter into derivative
financial instruments such as interest rate swaps to mitigate our interest rate
risk on a related financial instrument or to effectively lock the interest rate
on a portion of our variable rate debt.
The following discussion of market risk is based solely on hypothetical
changes in interest rates related to our variable rate debt. This discussion
does not purport to take into account all of the factors that may affect the
financial instruments discussed in this section.
INTEREST RATE RISK
Our interest rate risk is most sensitive to fluctuations in interest rates
on our variable rate debt. At December 31, 2002, we had $121.8 million of
variable rate debt. Based upon this balance of variable operating debt, if
interest rates increased 1%, our earnings and cash flows would decrease by
approximately $1.2 million. If interest rates decreased 1%, our earnings and
cash flows would increase by approximately $1.2 million. We believe that the
change in the fair value of our financial instruments resulting from a
foreseeable fluctuation in interest rates would be immaterial to our total
assets and total liabilities.
INTEREST RATE HEDGING
We use derivative financial instruments to convert a portion of our
variable rate debt to fixed rate debt and to manage our fixed to variable rate
debt ratio. A description of these derivative financial instruments is contained
in "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources - Interest Rate
Hedging." and is incorporated by reference into this Item 7A.
- 51 -
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
NOTICE REGARDING ARTHUR ANDERSEN LLP
Section 11(a) of the Securities Act of 1933, as amended, provides that if
any part of a registration statement at the time it becomes effective contains
an untrue statement of a material fact or an omission to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading, any person acquiring a security pursuant to the registration
statement (unless it is proved that at the time of the acquisition the person
knew of the untruth or omission) may sue, among others, every accountant who has
consented to be named as having prepared or certified any part of the
registration statement or as having prepared or certified any report or
valuation which is used in connection with the registration statement with
respect to the statement in the registration statement, report or valuation
which purports to have been prepared or certified by the accountant.
Prior to the date of the filing of this Form 10-K, the Arthur Andersen LLP
partners who reviewed our audited financial statements contained herein resigned
from Arthur Andersen LLP and Arthur Andersen LLP was convicted for obstruction
of justice and elected to cease practicing before the SEC in August 2002. As a
result, after reasonable efforts, we have been unable to obtain Arthur Andersen
LLP's written consent to the incorporation by reference into our previously
filed Registration Statements File No. 333-100819, 333-84210, 333-97945,
333-63619, File No. 33-63687, File No. 33-63955, File No. 33-15264 and File No.
33-55111 and in their related prospectuses (the "Prior Registration Statements")
of its audit report with respect to our financial statements for the fiscal
years ended December 31, 2001 and 2000.
Under these circumstances, Rule 437a under the Securities Act permits us to
file this Form 10-K without a written consent from Arthur Andersen LLP.
Accordingly, Arthur Andersen LLP will not be liable to persons acquiring our
securities registered pursuant to the Prior Registration Statements under
Section 11(a) of the Securities Act because it has not consented to being named
as an expert in the Prior Registration Statements.
- 52 -
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE NO.
---------------
Report of Independent Public Accountants - Grant Thornton LLP........................ F1
Report of Independent Public Accountants - Arthur Andersen LLP....................... F2
Consolidated Balance Sheets.......................................................... F3
Consolidated Statements of Operations................................................ F4
Consolidated Statements of Common Shareholders' Equity............................... F5
Consolidated Statements of Cash Flows................................................ F6
Notes to Consolidated Financial Statements........................................... F7 - F30
Financial Statement Schedules........................................................
Schedule III - Summary of Real Estate and Accumulated Depreciation................... F31 - F34
Schedule IV - Mortgage Loans on Real Estate.......................................... F35 - F36
- 53 -
REPORT OF INDEPENDENT CERTIFIED ACCOUNTANTS
Trustees and Shareholders of Federal Realty Investment Trust:
We have audited the accompanying consolidated balance sheet of
Federal Realty Investment Trust (a Maryland real estate investment trust) and
subsidiaries as of December 31, 2002 and the related consolidated statements of
operations, common shareholders' equity and cash flows for the year then ended.
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. The consolidated financial statements of Federal Realty Investment
Trust and subsidiaries as of December 31, 2001 and for the two years then ended
were audited by other auditors who have ceased operations. Those auditors
expressed an unqualified opinion on those financial statements in their report
dated February 12, 2002.
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 misstatements. 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 2002 consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Federal Realty Investment Trust and subsidiaries as of December 31,
2002 and the consolidated results of its operations and its consolidated cash
flows for the year then ended in conformity with accounting principles generally
accepted in the United States of America.
We have also audited Schedules III and IV for the year ended December
31, 2002. In our opinion, these schedules present fairly, when considered in
relation to the basic financial statements taken as a whole, in all material
respects, the information therein.
As discussed above, the consolidated financial statements of Federal
Realty Investment Trust and subsidiaries as of December 31, 2001 and for the two
years then ended were audited by other auditors, who have ceased operations. As
described in Note 1, these financial statements have been restated. We audited
the adjustments described in Note 1 that were applied to restate the 2000 and
2001 financial statements. In our opinion, such adjustments are appropriate and
have been properly applied. However, we were not engaged to audit, review or
apply any procedures to the 2000 and 2001 financial statements of the Company
other than with respect to such adjustments and, accordingly, we do not express
an opinion or any other form of assurance on the 2000 and 2001 financial
statements taken as a whole.
/s/ GRANT THORNTON LLP
Washington, D.C.
February 6, 2003
- F1 -
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Trustees and Shareholders of Federal Realty Investment Trust:
We have audited the accompanying consolidated balance sheets of
Federal Realty Investment Trust (a Maryland real estate investment trust) and
subsidiaries as of December 31, 2001 and 2000 and the related consolidated
statements of operations, common shareholders' equity and cash flows for each
of the years in the three year period ended December 31, 2001. These financial
statements are the responsibility of the Trust's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit 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 Federal Realty Investment Trust and subsidiaries as of
December 31, 2001 and 2000 and the results of their operations and their cash
flows for each of the years in the three year period ended December 31, 2001 in
conformity with accounting principles generally accepted in the United States.
Our audit was made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The financial statement
schedules included on pages F-29 through F-34 of the Form 10-K are presented for
purposes of complying with the Securities and Exchange Commission's rules and
are not a required part of the basic consolidated financial statements. These
schedules have been subjected to the auditing procedures applied in our audit of
the basic consolidated financial statements and, in our opinion, are fairly
stated in all material respects in relation to the basic consolidated financial
statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Vienna, Virginia
February 12, 2002
Note: As permitted by Rule 2-02(e) of Regulation S-X promulgated under the
Securities Act, this is a copy of the audit report previously issued by Arthur
Andersen LLP in connection with the filing of our Form 10-K for the fiscal year
ended December 31, 2001. After reasonable efforts, we have been unable to have
Arthur Andersen LLP reissue this audit report in connection with the filing of
this Form 10-K. See "Item 8. Financial Statements and Supplemental Data - Notice
Regarding Arthur Andersen LLP" for a further discussion. The consolidated
balance sheet as of December 31, 2000, and the related consolidated statements
of operations, changes in shareholders' equity and other comprehensive income,
and cash flows for the fiscal years ended December 31, 1999 referred to in this
report have not been included in the accompanying financial statements or
schedule. In addition, Arthur Andersen's audit report relates to the financial
statements of the trust for 2000 and 2001 before restatement adjustments to
reflect discontinued operations. The restatement adjustments for these years
have been audited by Grant Thornton LLP.
- F2 -
Federal Realty Investment Trust
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2002 2001
(in thousands, except share data)
ASSETS
Real estate, at cost
Operating $ 1,864,244 $ 1,741,385
Development 442,582 321,986
Discontinued operations - 40,933
-------------- --------------
2,306,826 2,104,304
Less accumulated depreciation and amortization (450,697) (395,767)
-------------- --------------
1,856,129 1,708,537
Other Assets
Cash 23,123 17,563
Mortgage notes receivable 35,577 35,607
Accounts and notes receivable 18,722 15,483
Prepaid expenses and other assets, principally
property taxes and lease commissions 57,257 44,733
Tax deferred exchange escrows - 6,006
Debt issue costs, net of accumulated amortization
of $6,344 and $4,840, respectively 8,570 6,952
-------------- --------------
$ 1,999,378 $ 1,834,881
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Obligations under capital leases $ 104,395 $ 100,293
Mortgages and construction loans payable 288,817 350,043
Notes payable 198,311 174,843
Accounts payable and accrued expenses 79,517 64,014
Dividends payable 24,356 21,664
Security deposits 6,685 6,026
Prepaid rents 13,644 10,400
Senior notes and debentures 535,000 410,000
5 1/4% Convertible subordinated debentures 75,000 75,289
Investors' interest in consolidated assets 29,366 33,018
Commitments and contingencies
Shareholders' equity
Preferred stock, authorized 15,000,000 shares, $.01 par
7.95% Series A Cumulative Redeemable Preferred Shares, (stated at
liquidation preference $25 per share), 4,000,000 shares issued in 1997 100,000 100,000
8.5% Series B Cumulative Redeemable Preferred Shares, (stated at
liquidation preference $25 per share), 5,400,000 shares issued in 2001 135,000 135,000
Common shares of beneficial interest, $.01 par, 100,000,000 shares
authorized, 44,996,382 and 41,524,165 issued, respectively 450 417
Additional paid in capital 818,290 730,835
Accumulated dividends in excess of Trust net income (368,839) (322,428)
-------------- --------------
684,901 643,824
Less:1,461,147 and 1,452,926 common shares in treasury - at cost, respectively (28,193) (27,990)
Deferred compensation on restricted shares (2,657) (15,005)
Notes receivable from employee stock plans (5,151) (7,245)
Accumulated other comprehensive income (loss) (4,613) (4,293)
-------------- --------------
644,287 589,291
-------------- --------------
$ 1,999,378 $ 1,834,881
============== ==============
The accompanying notes are an integral part of these consolidated statements.
F3
Federal Realty Investment Trust
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
2002 2001 2000
---------- ----------- ----------
(In thousands, except per share data)
Revenue
Rental income $ 298,085 $ 274,567 $ 255,634
Interest and other income 5,156 6,590 7,532
Other property income 15,593 13,953 11,023
---------- ----------- ----------
318,834 295,110 274,189
Expenses
Rental 73,591 62,715 55,631
Real estate taxes 31,186 28,348 26,211
---------- ----------- ----------
Total property operating expenses 104,777 91,063 81,842
---------- ----------- ----------
Property operating income 214,057 204,047 192,347
Interest 65,054 69,313 66,418
Administrative 13,790 14,281 13,318
Restructuring expenses 22,269 - -
Depreciation and amortization 64,251 59,171 52,559
---------- ----------- ----------
Total other expenses 165,364 142,765 132,295
---------- ----------- ----------
Income before investors' share
of operations and discontinued operations 48,693 61,282 60,052
Investors' share of operations (4,112) (5,170) (6,544)
---------- ----------- ----------
Income before gain on sale of real estate net of loss on abandoned
developments held for sale and discontinued operations 44,581 56,112 53,508
Income from discontinued operations 1,252 3,459 3,334
---------- ----------- ----------
Income before gain on sale of real estate net of
loss on abandoned developments held for sale 45,833 59,571 56,842
Gain on sale of real estate net of loss on abandoned developments held for sale 9,454 9,185 3,681
---------- ----------- ----------
Net income 55,287 68,756 60,523
Dividends on preferred stock (19,425) (9,034) (7,950)
---------- ----------- ----------
Net income available for common shareholders $ 35,862 $ 59,722 $ 52,573
========== =========== ==========
Earnings per common share, basic
Income before gain on sale of real estate net of loss on abandoned
developments held for sale and discontinued operations $ 0.60 $ 1.20 $ 1.17
Discontinued operations 0.03 0.09 0.09
Gain on sale of real estate net of loss on abandoned developments held for sale 0.23 0.23 0.10
---------- ----------- ----------
$ 0.86 $ 1.52 $ 1.36
========== =========== ==========
Weighted average number of common shares, basic 41,624 39,164 38,796
========== =========== ==========
Earnings per common share, diluted
Income before gain on sale of real estate net of loss on abandoned
developments held for sale and discontinued operations $ 0.60 $ 1.20 $ 1.18
Discontinued operations 0.03 0.09 0.08
Gain on sale of real estate net of loss on abandoned developments held for sale 0.22 0.23 0.09
---------- ----------- ----------
$ 0.85 $ 1.52 $ 1.35
========== =========== ==========
Weighted average number of common shares, diluted 42,882 40,266 39,910
========== =========== ==========
The accompanying notes are an integral part of these consolidated statements.
F4
Federal Realty Investment Trust
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
Year ended December 31,
2002 2001
--------------------------------------------------------------------------
Additional
(In thousands, except share data) Shares Amount Paid-in Capital Shares Amount
Common Shares of Beneficial Interest
Balance, beginning of year 41,524,165 $ 417 $ 730,835 40,910,972 $ 410
Exercise of stock options 951,971 9 20,857 22,066 -
Shares issued to purchase partnership
interest 2,907 - 77 335,236 3
Shares issued under dividend
reinvestment plan 134,247 1 3,488 159,234 2
Performance and Restricted Shares
granted, net of Restricted Shares
retired 98,092 - 2,468 96,657 2
Net proceeds from sale of shares 2,185,000 22 56,631 - -
Shares issued to purchase operating
partnership units 100,000 1 2,769 - -
Cost of 8.5% Series B Cumulative
Preferred Shares - -
Accelerated vesting of options and
restricted shares - - 1,165 - -
----------- ---------- --------------- -------------- ------------
Balance, end of year 44,996,382 $ 450 $ 818,290 41,524,165 $ 417
=========== ========== =============== ============== ============
Accumulated Dividends in Excess of Trust
Net Income
Balance, beginning of year $ (322,428) $ (306,287)
Net income 55,287 68,756
Dividends declared to common shareholders (82,273) (75,863)
Dividends declared to preferred
shareholders (19,425) (9,034)
---------- ------------
Balance, end of year $ (368,839) $ (322,428)
========== ============
Common Shares of Beneficial Interest in
Treasury
Balance, beginning of year (1,452,926) $ (27,990) (1,441,594) $ (27,753)
Performance and Restricted Shares
forfeited (8,221) (203) (11,322) (237)
Purchase of treasury shares - - - -
----------- ---------- -------------- ------------
Balance, end of year (1,461,147) $ (28,193) (1,452,916) $ (27,990)
=========== ========== ============== ============
Deferred Compensation on Restricted Shares
Balance, beginning of year (666,656) $ (15,005) (735,875) $ (17,254)
Performance and Restricted Shares issued,
net of forfeitures (73,821) (1,763) (61,369) (830)
Vesting of Performance and
Restricted Shares 586,484 14,111 130,588 3,079
----------- ---------- -------------- ------------
Balance, end of year (153,993) $ (2,657) (666,656) $ (15,005)
=========== ========== ============== ============
Subscriptions receivable from employee
stock plans
Balance, beginning of year (218,555) $ (7,245) (242,638) $ (6,734)
Subscription and tax loans issued (93,469) (2,986) (3,333) (973)
Subscription and tax loans paid or
forgiven 127,961 5,080 27,416 462
----------- ---------- -------------- ------------
Balance, end of year (184,063) $ (5,151) (218,555) $ (7,245)
=========== ========== ============== ============
Accumulated other comprehensive income
(loss)
Balance, beginning of year $ (4,293) -
Change due to recognizing gain (loss) on
securities (44) $ 49
Change in valuation on interest rate swap (276) (4,342)
---------- ------------
Balance, end of year $ (4,613) $ (4,293)
========== ============
Comprehensive income
Net income $ 55,287 $ 68,756
Change due to recognizing gain (loss) on
securities (44) 49
Change in valuation on interest rate swap (276) (4,342)
---------- ------------
Total comprehensive income $ 54,967 $ 64,463
========== ============
Year ended December 31,
2001 2000
---------------------------------------------------------------
Additional Additional
(In thousands, except share data) Paid-in Capital Shares Amount Paid-in Capital
Common Shares of Beneficial Interest
Balance, beginning of year $ 723,078 40,418,766 $ 404 $ 713,354
Exercise of stock options 459 67,684 1 1,398
Shares issued to purchase partnership
interest 6,919 - - -
Shares issued under dividend
reinvestment plan 3,277 153,713 2 3,136
Performance and Restricted Shares
granted, net of Restricted Shares retired 1,877 270,809 3 5,190
Net proceeds from sale of shares - - - -
Shares issued to purchase operating
partnership units - - - -
Cost of 8.5% Series B Cumulative
Preferred Shares (4,775) - - -
Accelerated vesting of options and
restricted shares - - - -
--------------- ------------ ----------- ----------------
Balance, end of year $ 730,835 40,910,972 $ 410 $ 723,078
=============== ============ =========== ================
Accumulated Dividends in Excess of Trust
Net Income
Balance, beginning of year $ (286,348)
Net income 60,523
Dividends declared to common shareholders (72,512)
Dividends declared to preferred
shareholders (7,950)
-----------
Balance, end of year $ (306,287)
===========
Common Shares of Beneficial Interest in
Treasury
Balance, beginning of year (217,644) $ (4,334)
Performance and Restricted Shares
forfeited (38,550) (787)
Purchase of treasury shares (1,185,400) (22,632)
------------ -----------
Balance, end of year (1,441,594) $ (27,753)
============ ===========
Deferred Compensation on Restricted Shares
Balance, beginning of year (599,427) $ (15,219)
Performance and Restricted Shares issued,
net of forfeitures (218,771) (4,151)
Vesting of Performance and
Restricted Shares 82,323 2,116
------------ -----------
Balance, end of year (735,875) $ (17,254)
============ ===========
Subscriptions receivable from employee
stock plans
Balance, beginning of year (317,606) $ (7,314)
Subscription and tax loans issued (5,500) (1,025)
Subscription and tax loans paid or
forgiven 80,468 1,605
------------ -----------
Balance, end of year (242,638) $ (6,734)
============ ===========
Accumulated other comprehensive income
(loss)
Balance, beginning of year -
Change due to recognizing gain (loss) on
securities -
Change in valuation on interest rate swap -
-----------
Balance, end of year $ 0
===========
Comprehensive income
Net income -
Change due to recognizing gain (loss) on
securities -
Change in valuation on interest rate swap -
-----------
Total comprehensive income $ 0
===========
The accompanying notes are an integral part of these consolidated statements.
F5
Federal Realty Investment Trust
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
2002 2001 2000
---------------- --------------- ----------------
(In thousands)
OPERATING ACTIVITIES
Net income $ 55,287 $ 68,756 $ 60,523
Items not requiring cash outlays
Depreciation and amortization, including discontinued operations 64,529 59,914 53,259
Gain on sale of real estate (19,101) (9,185) (3,681)
Loss on abandoned developments held for sale 9,647 - -
Non-cash portion of restructuring expense 19,586 - -
Other, net 4,792 1,041 1,634
Changes in assets and liabilities
(Increase) decrease in accounts receivable (3,239) (4,641) 1,233
Increase in prepaid expenses and other
assets before depreciation and amortization (19,762) (18,305) (6,834)
Increase in operating accounts payable,
security deposits and prepaid rent 2,996 4,132 3,342
Increase (decrease) in accrued expenses 4,334 7,736 (2,420)
---------------- --------------- ----------------
Net cash provided by operating activities 119,069 109,448 107,056
INVESTING ACTIVITIES
Acquisition of real estate - (61,415) (23,554)
Capital expenditures - development (200,357) (158,048) (81,023)
Capital expenditures - other (43,579) (41,013) (64,815)
Proceeds from sale of real estate 62,544 25,063 47,157
Repayment of mortgage notes receivable, net 5,648 3,275 494
---------------- --------------- ----------------
Net cash used in investing activities (175,744) (232,138) (121,741)
FINANCING ACTIVITIES
Borrowing (repayment) of short-term debt, net 27,000 (34,000) 47,400
(Repayment) proceeds from mortgage and construction
financing, net of costs (60,718) 145,427 166,383
Note issuance (repayment), net of costs 148,746 - (100,000)
Issuance of Series B Preferred shares, net of costs - 130,225 -
Issuance of common shares, net of subscriptions receivable 76,701 398 2,518
Common shares repurchased - - (22,632)
Payments on mortgages, capital leases and notes payable (29,627) (31,550) (2,169)
Dividends paid (96,461) (80,593) (77,499)
(Decrease) increase in minority interest, net (3,406) (1,011) 303
---------------- --------------- ----------------
Net cash provided by financing activities 62,235 128,896 14,304
---------------- --------------- ----------------
Increase (decrease) in cash 5,560 6,206 (381)
Cash at beginning of year 17,563 11,357 11,738
---------------- --------------- ----------------
Cash at end of year $ 23,123 $ 17,563 $ 11,357
================ =============== ================
The accompanying notes are an integral part of these consolidated statements.
F6
Federal Realty Investment Trust
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Federal Realty Investment Trust (the "Trust") is a full-service equity
real estate investment trust specializing in the ownership, management,
development and redevelopment of high quality community and neighborhood
shopping centers and main street mixed-use properties located in densely
developed urban and suburban areas in strategic metropolitan markets across the
United States.
We operate in a manner intended to enable us to qualify as a real
estate investment trust for federal income tax purposes. A trust which
distributes at least 90% of its real estate investment trust taxable income to
its shareholders each year and which meets certain other conditions will not be
taxed on that portion of its taxable income which is distributed to its
shareholders. Therefore, Federal income taxes have been and are generally
expected to be immaterial. We are obligated for state taxes, generally
consisting of franchise or gross receipts taxes in certain states. Such state
taxes have not been material.
Our consolidated financial statements include the accounts of the
Trust, its wholly owned corporate subsidiaries, several corporations where we
have a majority ownership, and numerous partnerships, all of which we control.
The equity interests of other investors are reflected as investors' interest in
consolidated assets. All significant intercompany transactions and balances are
eliminated in consolidation. We account for our interest in joint ventures which
we do not control or manage using the equity method of accounting.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America, which we refer to
as GAAP, requires management to make estimates and assumptions that in certain
circumstances affect the reported amounts of assets and liabilities, disclosure
of contingent assets and liabilities, and revenues and expenses. These estimates
are prepared using management's best judgment, after considering past and
current events and economic conditions. Actual results could differ from these
estimates.
Revenue Recognition and Accounts Receivable. Leases with tenants are classified
- --------------------------------------------
as operating leases. Minimum rents are recognized on a straight-line basis over
the terms of the related leases net of valuation adjustments based on
management's assessment of credit, collection and other business risk.
Percentage rents, which represent additional rents based on gross tenant sales,
are recognized at the end of the lease year or other period in which tenant
sales' thresholds have been reached and the percentage rents are due. Real
estate tax and other cost reimbursements are recognized on an accrual basis over
the periods in which the expenditures occurred. We make estimates of the
collectibility of our accounts receivable related to base rents, including
straight line rentals, expense reimbursements and other revenue or income. In
some cases the ultimate collectibility of these claims extends beyond one year.
Real Estate. Land, buildings and real estate under development are recorded at
- ------------
cost. Depreciation is computed using the straight-line method. Estimated useful
lives range from three to 50 years on apartment buildings and improvements, and
from three to 50 years on retail properties and improvements. Maintenance and
repair costs are charged to operations as incurred. Tenant work and other major
improvements are capitalized and depreciated over the life of the lease or their
estimated useful life, respectively. In accordance with Statement of Financial
Accounting Standard ("SFAS") No. 66, "Accounting for Sales of Real Estate",
sales are recognized at closing only when sufficient down payments have been
obtained, possession and other attributes of ownership have been transferred to
the buyer and we have no significant continuing involvement. The gain or loss
resulting from the sale of properties is included in net income at the time of
sale. Upon termination of a lease, undepreciated tenant improvement costs
- F7 -
are charged to operations if the assets are replaced and the asset and the
corresponding accumulated depreciation are retired.
We evaluate the carrying value of our long-lived assets in accordance
with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of". In cases where particular assets are being
held for sale, impairment is based on whether the fair value (estimated sales
price less costs of disposal) of each individual property to be sold is less
than the net book value. Otherwise, impairment is based on whether it is
probable that undiscounted future cash flows from each property will be less
than its net book value. If a property is impaired, its basis is adjusted to its
estimated fair market value.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (effective for us on January 1,
2002). SFAS No. 144 requires that one accounting model be used for long-lived
assets to be disposed of by sale, whether previously held and used or
newly-acquired, and broadens the presentation of discontinued operations to
include components of an entity comprising operations and cash flows that can be
distinguished, operationally and for financial reporting purposes from the rest
of the entity.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which addresses accounting and
processing for costs associated with exit or disposal activities. SFAS No. 146
requires the recognition of a liability for a cost associated with an exit or
disposal activity when the liability is incurred verses the date the Company
commits to an exit plan. In addition, SFAS No. 146 states that the liability
should be initially measured at fair value. The requirements of SFAS No. 146 are
effective for exit or disposal activities that are initiated after December 31,
2002. This pronouncement is not expected to have a material impact on our
financial position or results of operations.
When applicable as lessee, we classify our leases of land and
buildings as operating or capital leases in accordance with the provisions of
SFAS No. 13, "Accounting for Leases".
Certain external and internal costs directly related to the
development, redevelopment and leasing of real estate including applicable
salaries and their related direct costs are capitalized. The capitalized costs
associated with developments, redevelopments and leasing are depreciated or
amortized over the life of the improvement or lease, whichever is shorter.
Unamortized leasing costs are charged to operations if the applicable tenant
vacates before the expiration of their lease.
Interest costs on developments and major redevelopments are
capitalized as part of the development and redevelopment until it is placed in
service. Capitalization of interest commences when development activities and
expenditures begin and end upon completion, i.e. when the asset is ready for its
intended use. Generally rental property is considered substantially complete and
ready for its intended use upon completion of tenant improvements, but no later
than one year from the completion of major construction activity.
Debt Issue Costs. Costs related to the issuance of debt instruments are
capitalized and are amortized as interest expense over the life of the related
issue using the effective interest method. Upon conversion or in the event of
redemption, applicable unamortized costs are charged to shareholders' equity or
to operations, respectively.
- F8 -
Cash and Cash Equivalents. We define cash as cash on hand, demand deposits with
financial institutions and short term liquid investments with an initial
maturity under three months. Cash balances in individual banks may exceed
insurable amounts from time to time.
Risk Management. We enter into derivative contracts, which qualify as cash flow
hedges under SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities", in order to manage interest rate risk. Derivatives are not
purchased for speculation. During 2001, to hedge our exposure to interest rates
on our $125 million term loan, we entered into interest rate swaps, which fixed
the LIBOR interest rate on the term loan at 5.27%. The current interest rate on
the term loan is LIBOR plus 95 basis points, thus fixing the interest rate at
6.22% on notional amounts totaling $125 million. We are exposed to credit loss
in the event of non-performance by the counterparties to the interest rate
protection agreement should interest rates exceed the cap. However, management
does not anticipate non-performance by the counterparties. The counterparties
have long-term debt ratings of A- or above by Standard & Poor's Ratings Service
("S&P") and Aa2 or above by Moody's Investor Service ("Moody's"). Although our
cap is not exchange-traded, there are a number of financial institutions which
enter into these types of transactions as part of their day-to-day activities.
The interest rate swaps mature concurrently with the $125 million term loan on
December 19, 2003. The swaps were documented as cash flow hedges and designated
as effective at inception of the swap contract. Consequently, the unrealized
gain or loss upon measuring the swaps at their fair market value is recorded as
a component of other comprehensive income within shareholders' equity and either
a derivative instrument asset or liability is recorded on the balance sheet. At
December 31, 2002, a cumulative unrealized loss of $4.6 million, representing
the difference between the current market value and the 6.22% fixed interest
rate on the swap, was recorded in other comprehensive income with a
corresponding derivative liability on the balance sheet. Interest expense of
approximately $4.6 million will be reclassified from other comprehensive income
into current earnings during 2003 to bring the effective interest rate up to
6.22%. There were no open derivative contracts at December 31, 1999.
In anticipation of a $150 million Senior Unsecured Note offering, on
August 1, 2002, we entered into a treasury rate lock that fixed the benchmark
five year treasury rate at 3.472% through August 19, 2002. The rate lock was
documented as a cash flow hedge of a forecasted transaction and designated as
effective at the inception of the contract. On August 16, 2002, we priced the
Senior Unsecured Notes with a scheduled closing date of August 21, 2002 and
closed out the associated rate lock. Five year treasury rates declined between
the pricing period and the settlement of the hedge purchase; therefore, to
settle the rate lock, we paid $1.5 million. As a result of the August 19, 2002
fire at Santana Row, we elected not to proceed with the note offering at that
time. However, we consummated a $150 Senior Unsecured Note offering on November
15, 2002, and thus, the hedge loss will be amortized into interest expense over
the life of the Notes.
Acquisition, Development and Construction Loan Arrangements. We have made
certain mortgage loans that, because of their nature, qualify as loan
receivables. At the time the loans were made we did not intend for the
arrangement to be anything other than a financing and did not contemplate a real
estate investment. Using guidance set forth in the Third Notice to
- F9 -
Practitioners issued by the AICPA in February 1986 entitled "ADC Arrangements"
("the Third Notice"), we evaluate each investment to determine whether the loan
arrangement qualifies under the Third Notice as a loan, joint venture or real
estate investment and the appropriate accounting thereon; such determination
affects our balance sheet classification of these investments and the
recognition of interest income derived therefrom. Generally, we receive
additional interest on these loans, however we never receive in excess of 50% of
the residual profit in the project (as defined in the Third Notice) and because
the borrower has either a substantial investment in the project or has
guaranteed all or a portion of our loan (or a combination thereof) the loans
qualify for loan accounting. The amounts under ADC arrangements at December 31,
2002 and 2001 were $35.6 million and interest income recognized thereon was $4.3
million and $3.9 million, respectively.
Comprehensive Income. Our interest rate swaps were documented as cash flow
hedges and designated as effective at inception of the swap contract, therefore,
the unrealized gain or loss upon measuring the swaps at their fair market value
is recorded as a component of other comprehensive income within shareholders'
equity. In accordance with SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities", investments purchased in connection with our
nonqualified deferred compensation plan are classified as available for sale
securities and reported at fair value. Unrealized gains or losses on these
investments purchased to match our obligation to the participants is also
recorded as a component of other comprehensive income. At December 31, 2002
these investments consisted of mutual funds and are stated at market value.
Earnings Per Share. We calculate basic and diluted earnings per share in
accordance with SFAS No. 128, "Earnings Per Share". Basic EPS excludes dilution
and is computed by dividing net income available for common shareholders by the
weighted 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 shares were exercised or converted into common shares
and then shared in the our earnings.
The following table sets forth the reconciliation between basic and
diluted EPS (in thousands, except per share data):
2002 2001 2000
-------- -------- --------
Numerator
Net income available for common shareholders - basic.................. $ 35,862 $ 59,722 $ 52,573
Income attributable to operating partnership units.................... 740 1,384 1,311
-------- -------- --------
Net income available for common shareholders - diluted................ $ 36,602 $ 61,106 $ 53,884
======== ======== ========
Denominator
Denominator for basic EPS- weighted average shares.................... 41,624 39,164 38,796
Effect of dilutive securities, stock options and awards............... 417 197 155
Operating partnership units........................................... 841 905 959
-------- -------- --------
Weighted average shares - diluted..................................... 42,882 40,266 39,910
======== ======== ========
Earnings per common share - basic..................................... $ .86 $ 1.52 $ 1.36
======== ======== ========
Earnings per common share - diluted $ .85 $ 1.52 $ 1.35
======== ======== ========
- F10 -
Stock-Based Compensation. In December 2002 the FASB issued SFAS No. 148,
"Accounting for Stock Based Compensation-Transition and Disclosure" an amendment
of FASB Statement No. 123, "Accounting for Stock-Based Compensation". SFAS No.
148 amends the disclosure provisions to require prominent disclosure about the
effects on reported net income of an entity's accounting policy decisions with
respect to stock-based compensation. Stock options are accounted for using the
intrinsic method in accordance with APB No. 25, "Accounting for Stock Issued to
Employees, as interpreted, whereby if options are priced at fair market value or
above at the date of grant, no compensation expense is recognized. The pro forma
information is as follows (in thousands except for earnings per share):
2002 2001 2000
-------- -------- --------
Net income as reported $ 55,287 $ 68,756 $ 60,523
Stock-based employee compensation cost included in net income as reported - - -
Stock-based employee compensation cost under the fair value method of
SFAS No. 123 $ 432 $ 680 $ 1,078
Pro forma net income $ 54,855 $ 68,076 $ 59,445
Earnings per common share, basic $ 0.86 $ 1.52 $ 1.36
Earnings per common share, diluted $ 0.85 $ 1.52 $ 1.35
Pro forma earnings per share, basic $ 0.85 $ 1.51 $ 1.33
Pro forma earnings per share, diluted $ 0.84 $ 1.50 $ 1.32
Reclassifications. Certain components of rental income, other property income,
rental expense, real estate tax expense and depreciation and amortization on the
December 31, 2001 and 2000 Consolidated Statements of Operations have been
reclassified to Income from operations of discontinued assets to assure
comparability of all periods presented. In addition, certain balance sheet
accounts have been reclassified to assure comparability of all periods
presented.
Guarantor's Accounting. In November 2002, the FASB issued FASB Interpretation
No. 45 ("FIN 45"), Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Guarantees of Indebtedness of Others. FIN 45 addresses the
disclosure requirements of a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued.
FIN 45 also requires a guarantor to recognize, at the inception of a guarantee,
a liability for the fair value of the obligation undertaken in issuing the
guarantee. The disclosure requirements of FIN 45 are effective for the Company
effective December 31, 2002. The liability recognition requirements will be
applicable prospectively to all guarantees issued or modified after December 31,
2002. This pronouncement is not expected to have a material impact on our
financial position or results of operations.
Variable Interest Entities. On January 31, 2003, the FASB issued FASB
Interpretation No. 46, Consolidation of Variable Interest Entities ("FIN 46").
FIN 46 clarifies existing accounting for whether interest entities should be
consolidated in financial statements based upon the investees ability to finance
its activities without additional financial support and whether investors
possess characteristics of a controlling financial interest. FIN 46 applies to
years or interim periods
- F11 -
beginning after June 15, 2003 with certain disclosure provisions required for
financial statements issued after January 31, 2003. We are currently evaluating
the applicability of FIN 46 to our investments in certain restaurant joint
ventures established in 2001 and 2002 at Santana Row and have complied with the
disclosure provisions of FIN 46 in these financial statements.
Investment in Restaurant Ventures at Santana Row. In lieu of tenant allowances,
we have a member interest in six restaurant joint ventures which we account for
using the equity method of accounting based on current authoritative generally
accepted accounting principles. Our member interests currently range from 20% to
88% and in each venture an unrelated third party member controls and manages the
day-to-day operations of each restaurant. We are currently evaluating the
applicability of the recently issued FIN 46 on our accounting for these
ventures. It is possible that some of these ventures in which we are members may
require consolidation in our financial statements, beginning in the third
quarter of fiscal 2003. All of the joint venture agreements in which we
currently have an interest greater than 50% provide for a reduction in our
membership interest upon the distribution, by the joint venture, of our initial
capital contributions. These distributions are based on the cash flow of each
venture.
As of December 31, 2002, we have invested approximately $5.0 million
in these ventures, principally to fund buildout costs of each restaurant. Of
this amount, $3.7 million has been capitalized as an investment in these
ventures and $1.3 million was expensed in 2002 to reflect our estimate of the
permanent impairment of our investment in two of these ventures due principally
to declining economic conditions. We are currently committed to invest a total
of $8.0 million in these ventures and as such, our maximum exposure to further
losses as a result of involvement in these ventures is $6.7 million at December
31, 2002.
Because the restaurants have either opened in late 2002 or have not
yet opened, operating activity of these ventures and our share of profits and
losses earned or incurred through December 31, 2002 is not material.
NOTE 2: REAL ESTATE AND ENCUMBRANCES
A summary of our properties at December 31, 2002 and 2001 is as
follows (in thousands):
Accumulated
depreciation and
Cost amortization Encumbrances
----------- ---------------- ------------
2002
- ----
Retail properties........................................... $ 2,123,890 $ 378,148 $ 288,817
Retail properties under capital leases...................... 176,253 66,538 104,395
Apartments.................................................. 6,683 6,011 -
----------- ---------------- ------------
$ 2,306,826 $ 450,697 $ 393,212
=========== ================ ============
2001
- ----
Retail properties........................................... $ 1,928,554 $ 329,911 $ 350,043
Retail properties under capital leases...................... 169,072 59,967 100,293
Apartments.................................................. 6,678 5,889 -
----------- ---------------- ------------
$ 2,104,304 $ 395,767 $ 450,336
=========== ================ ============
- F12 -
During 2002 we expended cash of $243.9 million to improve, redevelop
and develop our existing real estate. No properties were acquired during 2002.
Of the $243.9 million spent in 2002 on our existing real estate portfolio,
approximately $200.3 million was invested in our Santana Row, located in San
Jose, California, and Pentagon Row, located in Arlington, Virginia, development
projects. The remaining $43.6 million of capital expenditures relates to
improvements to common areas, tenant work and various redevelopments, including
the Congressional Apartments in Rockville, Maryland, the redevelopment of retail
buildings in San Antonio, Texas and the completion of tenant work at the
Woodmont East development in Bethesda, Maryland.
On April 11, 2002, we sold the street retail property located at 252
Greenwich Avenue in Greenwich, Connecticut for $16.5 million, resulting in a
gain of $7.0 million.
On April 30, 2002, we sold three street retail properties, two in
Westport, Connecticut and one in Westfield, New Jersey, for $19.2 million,
resulting in a gain of $6.9 million.
On June 6, 2002, we sold the Uptown Shopping Center located in
Portland, Oregon for $20.8 million, resulting in a gain of $4.5 million.
The proceeds from the sales of the four street retail properties and
the Uptown Shopping Center were used to pay down our syndicated credit facility
except $16.0 million which was used to pay down the Santana Row construction
loan. As of December 31, 2002 all of the proceeds previously held by the
qualified intermediary have been released to us.
On June 18, 2002, a partnership, in which one of our subsidiaries is
the general partner, sold the street retail property located at 6410 Hollywood
Boulevard in Hollywood, California for $2.3 million, resulting in a gain of
$700,000.
On June 20, 2002, the proceeds of $6 million previously held by a
qualified intermediary from the 2001 sale of the street retail property located
at 101 East Oak Street in Chicago, Illinois were released to us.
These property sales constitute discontinued operations and as such,
the accompanying financial statements have been restated to reclassify the
operations of these properties as discontinued operations. A summary of the
financial information for the discontinued operations is as follows:
2002 2001 2000
------- ------- -------
Revenue $ 2,134 $ 5,392 $ 5,092
Income from operations of discontinued operations 1,252 3,459 3,334
On February 1, 2002, we received the minority partner's interest in
Santana Row in exchange for a $2.6 million investment in a partnership. We made
a $5.9 million loan to the partnership on January 12, 2001, that is due February
28, 2003. The loan was not repaid on the due date. We are currently exploring
all available options we may have as a result of the borrowers failure to pay at
maturity.
Our 113 retail properties at December 31, 2002 are located in 14
states and the District of Columbia. There are approximately 2,100 tenants
providing a wide range of retail products and
- F13 -
services. These tenants range from sole proprietorships to national retailers;
no one tenant or corporate group of tenants accounts for more than 2.5% of
revenue.
Mortgage notes receivable of $35.6 million are due over various terms
from February 2003 to May 2021 and have an average weighted interest rate of
10.2%. Under the terms of certain of these mortgages, we will receive additional
interest based upon the gross income of the secured properties and, upon sale of
the properties, we will share in the appreciation of the properties.
Mortgages and construction loans payable and capital lease obligations
are due in installments over various terms extending to 2016 and 2060,
respectively, with interest rates ranging from 3.14% to 11.25%. Certain of the
capital lease obligations require additional interest payments based upon
property performance.
On April 17, 2001 we closed on a $295 million construction loan for
Santana Row in San Jose, California. The loan, which initially bore interest at
LIBOR plus 212.5 basis points, was scheduled to mature on April 16, 2004 with
two one-year extension options, subject to obtaining certain operating targets.
The construction loan required fees and had various covenants including the
maintenance of a minimum shareholders' equity and a maximum ratio of debt to
gross asset value. The initial funding of the construction loan took place on
August 23, 2001 when the equity and pre-leasing requirements were met. On
November 19, 2002 we used the proceeds from our $150 million public note
offering, as well as $20 million of available insurance proceeds relating to the
Santana Row fire and approximately $7.1 million in borrowings under our credit
facility, to pay in full and retire the Santana Row construction loan.
At December 31, 2002 there was $24.4 million borrowed under the
construction loan for our Woodmont East development in Bethesda, Maryland. The
loan had a floating interest rate of LIBOR plus 120 basis points. On February
11, 2003 the $24.4 million Woodmont East construction loan and the $17.0 million
Friendship Center mortgage were paid off through borrowings under our revolving
credit facility.
Scheduled principal payments on mortgage and construction loan
indebtedness as of December 31, 2002 are as follows (in thousands):
Year ending December 31,
2003..................................................... $ 42,149
2004..................................................... 2,659
2005..................................................... 2,896
2006..................................................... 3,227
2007..................................................... 3,481
Thereafter............................................... 234,405
----------
$ 288,817
==========
- F14 -
Future minimum lease payments and their present value for property
under capital leases as of December 31, 2002, are as follows (in thousands):
Year ending December 31,
2003..................................................... $ 9,345
2004..................................................... 9,301
2005..................................................... 9,252
2006..................................................... 9,199
2007..................................................... 9,159
Thereafter............................................... 398,402
----------
444,658
Less amount representing interest........................ (340,263)
----------
Present value............................................ $ 104,395
==========
Leasing Arrangements
Our leases with retail property and apartment tenants are classified
as operating leases. Leases on apartments are generally for a period of one year
of less. Retail property leases generally range from three to 10 years (certain
leases with anchor tenants may be longer), and usually provide for contingent
rentals based on sales and sharing of certain operating costs.
The components of rental income are as follows (in thousands):
Year ended December 31,
2002 2001 2000
--------- --------- ---------
Retail and mixed-use properties
Minimum rents............................ $ 236,451 $ 219,071 $ 204,346
Cost reimbursements...................... 52,669 46,619 42,292
Percentage rent.......................... 5,637 5,892 6,206
Apartments - rents......................... 3,328 2,985 2,790
--------- --------- ---------
$ 298,085 $ 274,567 $ 255,634
========= ========= =========
The components of rental expense are as follows (in thousands):
Year ended December 31,
2002 2001 2000
--------- --------- ---------
Repairs and maintenance.................... $ 18,804 $ 17,177 $ 16,404
Management fees and costs.................. 12,342 11,764 9,684
Utilities.................................. 9,011 8,061 8,018
Payroll - properties....................... 5,947 4,558 4,364
Ground rent................................ 4,801 3,698 3,190
Insurance.................................. 4,226 3,104 2,853
Other operating............................ 18,460 14,353 11,118
--------- --------- ---------
$ 73,591 $ 62,715 $ 55,631
========= ========= =========
- F15 -
Minimum future retail property rentals on noncancelable operating
leases, before any reserve for uncollectible amounts, on operating properties as
of December 31, 2002 are as follows (in thousands):
Year ending December 31,
2003..................................................... $ 246,447
2004..................................................... 231,629
2005..................................................... 210,896
2006..................................................... 187,169
2007..................................................... 160,751
Thereafter............................................... 928,069
-----------
$ 1,964,961
===========
NOTE 3. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of estimated fair value was determined by us,
using available market information and appropriate valuation methods.
Considerable judgment is necessary to develop estimates of fair value. The
estimates presented herein are not necessarily indicative of the amounts that
could be realized upon disposition of the financial instruments.
We estimate the fair value of our financial instruments using the
following methods and assumptions: (1) quoted market prices, when available, are
used to estimate the fair value of investments in marketable debt and equity
securities; (2) quoted market prices are used to estimate the fair value of our
marketable convertible subordinated debentures; (3) discounted cash flow
analyses are used to estimate the fair value of mortgage notes receivable and
payable, using our estimate of current interest rates for similar notes, in 2002
the carrying amount on the balance sheet was used to approximate fair value for
mortgage notes receivable since these notes are for specific deals, some contain
participation provisions based on the property performance and also are
convertible into ownership of the properties; (4) carrying amounts on the
balance sheet approximate fair value for cash, accounts payable, accrued
expenses and short term borrowings. Notes receivable from officers are excluded
from fair value estimation since they have been issued in connection with
employee stock ownership programs.
December 31, 2002 December 31, 2001
Carrying Fair Carrying Fair
(in thousands) Value Value Value Value
--------- -------- -------- --------
Cash & equivalents....................... $ 23,123 $ 23,123 $ 17,563 $ 17,563
Investments.............................. 5,929 5,929 2,739 2,739
Mortgage notes
receivable.............................. 35,577 35,577 35,607 36,427
Mortgages and construction loans and
notes payable........................... 487,128 543,535 524,886 559,179
Convertible debentures................... 75,000 75,103 75,289 70,696
Senior notes............................. 535,000 581,293 410,000 425,970
- F16 -
NOTE 4. NOTES PAYABLE
Our notes payable consist of the following (in thousands):
2002 2001
---------- ---------
Revolving credit facilities $ 71,000 $ 44,000
Term note with banks 125,000 125,000
Other 2,311 5,843
---------- ---------
$ 198,311 $ 174,843
========== =========
In December 1997, we obtained a five year syndicated revolving credit
facility for $300 million due December 2002. The syndicated facility requires
fees and has various covenants including the maintenance of a minimum
shareholders' equity and a maximum ratio of debt to net worth. In June 2000, we
modified certain covenants and extended the maturity date to December 19, 2003.
The current borrowing rate on the syndicated credit facility is LIBOR plus 80
basis points.
In December 1998, we obtained a four year loan of $125 million from
five institutional lenders. The loan was originally due December 2002 and was
extended to December 19, 2003 along with the syndicated credit facility. The
loan requires the payment of certain fees and has the same covenants as the
syndicated credit facility. The current borrowing rate on the term loan is LIBOR
plus 95 basis points.
The maximum amount drawn under these facilities during 2002, 2001 and
2000 was $225.0 million, $308.5 million and $343.1 million, respectively. In
2002, 2001 and 2000 the weighted average interest rate on borrowings was 5.0%,
5.6% and 7.2%, respectively, and the average amount outstanding was $189.1
million, $269.7 million and $283.2 million, respectively.
A $3.4 million note issued in connection with the land held for future
development in Hillsboro, Oregon was repaid on June 18, 2002.
NOTE 5. 5 1/4% CONVERTIBLE SUBORDINATED DEBENTURES
In October 1993, we issued $75.0 million of 5 1/4% convertible
subordinated debentures, realizing cash proceeds of approximately $73.0 million.
The debentures were not registered under the Securities Act of 1933 and were not
publicly distributed within the United States. The debentures, which mature on
October 28, 2003, are convertible into shares of beneficial interest at $36 per
share. The debentures are redeemable by us, in whole, at any time after October
28, 1998 at 100% of the principal amount plus accrued interest.
At December 2001, we had outstanding $289,000 of 5 1/4% convertible
subordinated debentures which were paid off on April 29, 2002. The debentures
which were convertible into shares of beneficial interest at $30.625 were not
registered under the Securities Act of 1933 and were not publicly distributed
within the United States.
- F17 -
There are no significant financial covenants on these debentures. We
are in compliance with the terms and covenants of these borrowings. No principal
is due on these notes prior to maturity.
NOTE 6. SENIOR NOTES AND DEBENTURES
Unsecured senior notes and debentures at December 31, 2002 and 2001
consist of the following (in thousands):
2002 2001
--------- ----------
8% Notes due April 21, 2002 $ -- $ 25,000
6.74% Medium-Term Notes due March 10, 2004 39,500 39,500
6.625% Notes due December 1, 2005 40,000 40,000
6.99% Medium-Term Notes due March 10, 2006 40,500 40,500
6.82% Medium-Term Notes due August 1, 2027,
redeemable at par by holder August 1, 2007 40,000 40,000
6.125% Notes due November 15, 2007 150,000 --
7.48% Debentures due August 15, 2026,
redeemable at par by holder August 15, 2008 50,000 50,000
8.75% Notes due December 1, 2009 175,000 175,000
--------- ----------
$ 535,000 $ 410,000
========= ==========
On April 22, 2002 our $25 million 8.0% Notes matured and were paid
with borrowings from our syndicated credit facilities.
On November 19, 2002, we completed the sale of $150 million of senior
notes in an underwritten public offering under its shelf registration statement
declared effective by the SEC on September 30, 1998. Net proceeds, after
deducting the discounts and commissions to the underwriters and other expenses
of this offering, totaled approximately $148.7 million. The net proceeds,
together with $20 million in available insurance proceeds relating to the
Santana Row fire, and approximately $7.1 million in borrowings under our credit
facility, to pay in full and retire the Santana Row construction loan, including
all interest owed on the loan.
The loan agreements contain various covenants, including limitations
on the amount of debt and minimum debt service coverage ratios. We are in
compliance with all covenants. No principal is due on these notes prior to
maturity.
In October 2002, we filed a $500 million shelf registration statement,
declared effective on November 6, 2002, with the Securities and Exchange
Commission which allows the issuance of debt securities, preferred shares and
common shares. As of December 31, 2002, the entire $500 million is available
under the shelf registration.
NOTE 7. DIVIDENDS
On October 29, 2002 the Trustees declared a quarterly cash dividend of
$.485 per common share, payable January 15, 2003 to common shareholders of
record January 2, 2003. The total dividend declared per common share for 2002
was $1.93.
Also on October 29, 2002 and December 12, 2002 the Trustees declared a
quarterly cash dividend of $.49688 per share on its Series A Cumulative
Redeemable Preferred Shares, payable
- F18 -
on January 31, 2003 to shareholders of record on January 15, 2003 and a
quarterly cash dividend of $.532 per share on its Series B Cumulative Redeemable
Preferred Shares, payable on January 31, 2003 to shareholders of record on
January 15, 2003, respectively.
For the year ended December 31, 2002 $.37 of dividends paid per common
share and per Series B preferred share represent a capital gain. $.38 of
dividends paid per Series A preferred share represents a capital gain. There
were no capital gains in 2001.
NOTE 8. COMMITMENTS AND CONTINGENCIES
Pentagon Row is a mixed-use project with the retail component
developed by the Trust and the residential component developed by an unrelated
developer. In October 2000 the general contractor on the project was replaced
because of schedule delays and other events that caused both the residential
developer and us to conclude that the original contractor was either unable or
unwilling to comply with its contractual obligations. We both filed suit against
the original contractor to recover damages that were being incurred as a result
of defaults under the contract. The original contractor filed a counterclaim
against both of us. On May 9, 2002 the residential developer and ourselves
entered into a settlement agreement with the original contractor in which a full
settlement, totaling $5 million payable to us and the residential developer, was
reached for all claims and counterclaims between the parties involved. On June
7, 2002 the original contractor paid into an escrow account the agreed upon
settlement amount. This settlement was distributed, $3 million to us, which
offset our cost of the development, and $2 million to the residential developer,
in July 2002.
In addition, we are involved in various other lawsuits and
environmental matters arising in the normal course of business. Management
believes that such matters will not have a material effect on our financial
condition or results of operations.
As detailed at Note 1, "Summary of Significant Accounting Policies -
Investment in Restaurant Joint Ventures at Santana Row," we are currently
committed to invest approximately $8.0 million in these joint ventures. As of
December 31, 2002 we have invested approximately $5.0 million. We anticipate
investing the remaining commitment of $3.0 million in the first six months of
2003.
Under the terms of the Congressional Plaza partnership agreement, from
and after January 1, 1986 Rockville Plaza Company ("RPC"), an unaffiliated third
party, has the right to require us and the two other minority partners to
purchase from half to all of RPC's 37.5% interest in Congressional Plaza at the
interest's then-current fair market value. Based on management's current
estimate of fair market value, our estimated liability upon exercise of the put
option is approximately $27.5 million. In conjunction with a redevelopment
currently taking place at the property, we have agreed to acquire an additional
7.5% interest in Congressional Plaza from RPC, thereby lowering their ownership
percentage to 30%, in exchange for funding approximately $7 million of RPC's
share of the redevelopment cost. The funding will take place through the first
quarter of 2003 and the transaction will be completed in 2003. After the
completion of this transaction, our estimated liability upon the exercise of the
put option will be approximately $22 million.
Under the terms of various other partnerships which own shopping
center properties with a cost of approximately $71 million, the partners may
exchange their 796,773 operating units for cash or the same number of our common
shares, at our option. During the second quarter of 2002
- F19 -
we issued 100,000 of our common shares valued at $2.8 million in exchange for
100,000 operating units and cash of $205,000 in exchange for an additional 7,816
operating units. On February 14, 2003 we paid $333,000 to redeem an additional
12,000 operating units.
Under the terms of four other partnerships which own street retail
properties in southern California with a cost of approximately $61 million, if
certain leasing and revenue levels are obtained for the properties owned by the
partnerships, the other partners may require us to purchase their partnership
interests at a formula price based upon net operating income. The purchase price
may be paid in cash or for two of the partnerships, a limited number of our
common shares at the election of the other partners. In certain of the
partnerships, if the other partners do not redeem their interest, we may choose
to purchase the limited partnership interests upon the same terms.
Street Retail San Antonio LP, a wholly-owned subsidiary of the Trust,
entered into a Development Agreement (the "Agreement") on March 13, 2000 with
the City of San Antonio, Texas (the "City") related to the redevelopment of land
and buildings that we own along Houston Street in the City. Houston Street and
the surrounding area have been designated by the City as a Reinvestment Zone
(the "Zone"). The City has agreed to facilitate redevelopment of the Zone by
undertaking and financing certain public improvements based on our agreement to
redevelop our properties in the Zone. Under the terms of the Agreement, the City
issued debt to fund specific public improvements within the Zone. The initial
and primary source of funding to the City for repayment of the debt and debt
service is the incremental tax revenue that accretes to the City as the taxable
value of the redeveloped properties within the Zone increase. We are required to
issue an annual letter of credit, commencing on October 1, 2002 through
September 30, 2014, that covers our designated portion of the debt service
should the incremental tax revenue generated not cover the debt service. We
posted a letter of credit with the City on September 25, 2002 for $795,000. Our
obligation under this agreement cannot be determined at this time because it is
dependent on the annual assessed value of the properties in the Zone and the
related tax revenue generated. We were not required to provide any funding in
2002 or for the semi-annual payment due March 15, 2003. Based on the current
assessed value of the properties in the Zone, we expect to provide some funding
under the Agreement prior to its expiration on September 30, 2014, but
anticipate that our obligation will not exceed $600,000 in any year and will be
between $2 million and $3 million in total. If the Zone creates sufficient tax
increment funding to repay the City's debt prior to the expiration of the
Agreement, we will be eligible to receive reimbursement of amounts paid for debt
service shortfalls together with interest thereon.
As of December 31, 2002 in connection with renovation and development
projects, the Trust has contractual obligations of approximately $78 million,
including approximately $71 million for Santana Row Phase I and Phase II.
- F20 -
We are obligated under ground lease agreements on several shopping
centers requiring minimum annual payments as follows (in thousands):
2003.................................................... 3,910
2004.................................................... 3,920
2005.................................................... 3,929
2006.................................................... 3,976
2007.................................................... 4,023
Thereafter.............................................. 246,186
----------
$ 265,944
==========
NOTE 9. SHAREHOLDERS' EQUITY
In May 1999, we reorganized as a Maryland real estate investment trust
by amending and restating our declaration of trust and bylaws. The Amended
Declaration of Trust changed the number of authorized shares of common and
preferred shares from unlimited to 100,000,000 and 15,000,000, respectively. In
addition, all common shares of beneficial interest, no par value, which were
issued and outstanding were changed to common shares of beneficial interest,
$0.01 par value per share and all Series A Cumulative Redeemable Preferred
Shares of beneficial interest, no par value, which were issued and outstanding
were changed to Series A Cumulative Redeemable Preferred Shares of beneficial
interest, $0.01 par value per share.
On October 6, 1997 we issued four million 7.95% Series A Cumulative
Redeemable Preferred Shares at $25 per share in a public offering, realizing
cash proceeds of approximately $96.6 million after costs of $3.4 million. The
Series A Preferred Shares were not redeemable prior to October 6, 2002. On or
after that date, the Preferred Shares may be redeemed, in whole or in part, at
our option, at a redemption price of $25 per share plus all accrued and unpaid
dividends. Dividends on the Preferred Shares are payable quarterly in arrears on
the last day of January, April, July and October.
On November 19, 2001 we issued 5.4 million 8.5% Series B Cumulative
Redeemable Preferred Shares at $25 per share in a public offering, realizing
cash proceeds of approximately $130.2 million after costs of $4.8 million. The
Series B Preferred Shares are not redeemable prior to November 27, 2006. On or
after that date, the Preferred Shares may be redeemed, in whole or in part, at
our option, at a redemption price of $25 per share plus all accrued and unpaid
dividends. Dividends on the Preferred Shares are payable quarterly in arrears on
the last day of January, April, July and October.
On June 12, 2002 we issued 2.2 million common shares at $25.98 per
share netting $56.6 million, after all expenses of the offering.
We have a Dividend Reinvestment Plan, whereby shareholders may use
their dividends and make optional cash payments to purchase shares. In 2002,
2001 and 2000, 134,247 shares, 159,234 shares and 153,713 shares, respectively,
were issued under the Plan.
In December 1999, the Trustees authorized a share repurchase program
for calendar year 2000 of up to an aggregate of 4 million of our common shares.
During 2000, a total of 1,325,900
- F21 -
shares were repurchased, at a cost of $25.2 million. We did not repurchase
shares in 2002 or 2001.
In 2002, 2001 and 2000, 98,092 common shares, 96,657 common shares and
270,809 common shares, respectively, were awarded to our former Chief Executive
Officer and other key employees under various incentive compensation programs
designed to directly link a significant portion of their current and long term
compensation to the prosperity of the Trust and its shareholders. The shares
vest over terms from 3 to 8 years. Vesting of common shares awarded to the
former Chief Executive Officer was accelerated pursuant to his contractual
arrangement.
In January 1994 under the terms of the 1993 Long Term Incentive Plan,
Ronald Kaplan, an ex-officer of the Trust purchased 40,000 common shares at $25
per share with the assistance of a $1.0 million loan from us. The loan, which
had a term of 12 years and a current balance of $375,000, bore interest at
6.24%. Forgiveness of up to 75% of the loan was subject to our future
performance. One eighth of the loan was forgiven on January 31, 1995 and an
additional one sixteenth has been forgiven each January 31 since then as we met
certain performance criteria. The loan was paid in full on October 18, 2002.
On January 26, 1998, we granted 75,000 Performance Shares to an
employee for which vesting was tied to leasing performance as it relates to
Santana Row and other projects. Performance was to be measured at three separate
dates extending into 2003. By December 31, 2002, the first two performance
measures had been met. In connection with the restructuring (See Note 13), the
2003 performance measure was accelerated and granted as of December 31, 2002. We
applied variable accounting to these awards by valuing the shares at each date
the performance measures were either met or accelerated and recorded a charge of
$712,000 as part of the restructuring charge.
In 1991, the Board of Trustees of the Company approved a Stock
Purchase Plan (the "ESPP") under Section 423 of the Code. The ESPP is regarded
as a noncompensatory plan under APB No. 25, because it meets the qualifications
under IRC 423. Under the terms of the ESPP, eligible employees may purchase
common shares of the Company at a price that is equal to 90% of the lower of the
common shares' fair market value at the beginning or the end of a quarterly
period. The fair market value of a common share is equal to the last sale price
of the common shares on the New York Stock Exchange. Eligible employees may
purchase the common shares through payroll deductions of up to 10% of eligible
compensation. The ESPP is not subject to the provisions of ERISA. The ESPP
terminated on January 31, 2001.
Under the terms of the ESPP, eligible employees have purchased 446,000
common shares at $15.125 per share with the assistance of loans of $6.7 million
from us. Originally, ESPP called for one sixteenth of the loan to be forgiven
each year for eight years, as long as the participant was still employed by us.
The loans for all participants, but two, were modified in 1994 to extend the
term an additional four years and to tie forgiveness in 1995 and thereafter to
certain criteria related to our performance. One sixteenth of the loan has been
forgiven during each year of the plan. At December 31, 2002, we had outstanding
purchase loans to participants of approximately $830,000. The purchase loans
bear interest at 9.39%. The shares purchased under the plan may not be sold,
pledged or assigned until both the purchase and tax loans associated with the
plan are satisfied and the term has expired, without the consent of the
Compensation Committee of the Board of Trustees. On January 24, 2003 a $750,000
note was repaid.
Tax loans with a balance of $1.8 million in 2002, $3.1 million in 2001
and $2.2 million in 2000 have been made in connection with restricted share
grants to certain of our officers and in connection with the Share Purchase
Plans. The loans, which bear interest ranging from 6.36% to 9.39%, are due over
periods ranging from 8 to 13 years from the date of the loan. On January 24,
2003 a $908,000 tax loan was repaid.
- F22 -
On April 13, 1999, the Shareholder Rights Plan adopted in 1989
expired. On March 11, 1999 we entered into an Amended and Restated Rights
Agreement with American Stock Transfer and Trust Company, pursuant to which (i)
the expiration date of our shareholder rights plan was extended for an
additional ten years to April 24, 2009, (ii) the beneficial ownership percentage
at which a person becomes an "Acquiring Person" under the plan was reduced from
20% to 15%, and (iii) certain other amendments were made.
NOTE 10. STOCK OPTION PLAN
The 1993 Long Term Incentive Plan ("Plan") has been amended to
authorize the grant of options and other stock based awards for up to 5.5
million shares. Options granted under the Plan have ten year terms and vest in
one to five years. Under the Plan, on each annual meeting date during the term
of the Plan, each nonemployee Trustee will be awarded 2,500 options.
In May 2001 our shareholders' approved the 2001 Long Term Incentive
Plan ("2001 Plan") which authorized an additional 1,750,000 shares for future
option and other stock based awards.
The option price to acquire shares under the 2001 Plan and previous
plans is required to be at least the fair market value at the date of grant. As
a result of the exercise of options, we had outstanding from our officers and
employees notes for $2.5 million, $2.5 million and $2.6 million at December 31,
2002, 2001 and 2000, respectively. Notes issued after 2001 bear interest at
LIBOR plus 200 basis points with the rate adjusted annually. Notes issued prior
to 2002 under the 1993 Plan bear interest at the lesser of (i) our borrowing
rate on the date of exercise or (ii) the dividend rate on the date of exercise
divided by the purchase price of such shares. The notes issued under the
previous plans bear interest at the lesser of (i) our borrowing rate or (ii) the
current indicated annual dividend rate on the shares acquired pursuant to the
option, divided by the purchase price of such shares. The notes are
collateralized by the shares and are with recourse and have five-year terms.
SFAS No. 123, "Accounting for Stock-Based Compensation" requires pro
forma information regarding net income and earnings per share as if we accounted
for our stock options under the fair value method of that Statement. The fair
value for options issued in 2002, 2001 and 2000 has been estimated as $536,000,
$350,000 and $549,000, respectively, as of the date of grant, using a Black
Scholes model with the following weighted-average assumptions for 2002, 2001 and
2000, respectively: risk-free interest rates of 4.5%, 4.9% and 5.2%; volatility
factors of the expected market price of our shares of 16%, 20% and 14%; and a
weighted average expected life of the option of 6.9 years, 6.9 years and 5.7
years. Our assumed weighted average dividend yield used to estimate the fair
value of the options issued was 7.70% in 2002.
Because option valuation models require the input of highly subjective
assumptions, such as the expected stock price volatility, and because changes in
these subjective input assumptions can materially affect the fair value
estimate, the existing model may not necessarily provide a reliable single
measure of the fair value of its stock options.
- F23 -
For purposes of pro forma disclosures, the estimated fair value of the
options are amortized to expense over the options' vesting period. The pro forma
information is as follows (in thousands, except for earnings per share):
Year ended December 31,
2002 2001 2000
-------- -------- --------
Pro forma net income $ 54,855 $ 68,076 $ 59,445
Pro forma earnings per share, basic $ .85 $ 1.51 $ 1.33
Pro forma earnings per share, diluted $ .84 $ 1.50 $ 1.32
A summary of our stock option activity for the years ended December
31, is as follows:
Shares Under Weighted Average
Option Exercise Price
------------ ----------------
January 1, 2000 3,895,514 $ 24.31
Options granted 737,500 19.75
Options exercised (67,684) 20.50
Options forfeited (847,049) 24.27
------------
December 31, 2000 3,718,281 23.46
Options granted 417,500 19.80
Options exercised (27,566) 20.81
Options forfeited (351,834) 22.88
------------
December 31, 2001 3,756,381 23.12
Options granted 435,500 25.26
Options exercised (951,971) 21.92
Options forfeited (19,168) 23.95
------------
December 31, 2002 3,220,742 23.76
============
At December 31, 2002 and 2001, options for 2.5 million and 2.7 million
shares, respectively, were exercisable. The average remaining contractual life
of options outstanding at December 31, 2002 and 2001 was 5.4 years and 5.8
years, respectively. The weighted average grant date fair value per option for
options granted in 2002 and 2001 was $1.23 and $1.04, respectively. The exercise
price of options outstanding at December 31, 2002 ranged from $18.00 per share
to $27.75 per share.
NOTE 11. SAVINGS AND RETIREMENT PLANS
We have a savings and retirement plan in accordance with the
provisions of Section 401(k) of the Internal Revenue Code. Employees'
contributions range, at the discretion of each employee, from 1% to 20% of
compensation up to a maximum of $11,000. Under the plan, we contribute out of
our current net income, 50% of each employee's first 5% of contributions. In
addition, we may make discretionary contributions within the limits of
deductibility set forth by the Code. Our employees are immediately eligible to
become plan participants. Employees are not eligible to receive matching
contributions until their first anniversary of employment. Our
- F24 -
expense for the years ended December 31, 2002, 2001 and 2000 was $271,000,
$243,000 and $216,000, respectively.
A nonqualified deferred compensation plan for our officers and
directors was established in 1994. The plan allows the participants to defer
future income until the earlier of age 65 or termination of employment. As of
December 31, 2002, we are liable to participants for approximately $2.2 million
under this plan. Although this is an unfunded plan, we have purchased certain
investments with which to match this obligation.
NOTE 12. INTEREST EXPENSE
We incurred interest totaling $88.6 million, $87.1 million and $79.7
million in 2002, 2001 and 2000, respectively, of which $23.5 million, $17.8
million, and $13.3 million respectively, was capitalized. Interest paid was
$86.2 million in 2002, $84.1 million in 2001 and $83.1 million in 2000.
NOTE 13. CHANGE IN BUSINESS PLAN
On February 28, 2002, we adopted a new business plan which returned
our primary focus to our traditional business of acquiring and redeveloping
community and neighborhood shopping centers that are anchored by supermarkets,
drug stores, or high volume, value oriented retailers that provide consumer
necessities. We will complete Bethesda Row and Santana Row (Pentagon Row was
completed in 2002) but do not plan to develop any new large-scale, mixed-use,
ground-up development projects. Rather, we will seek to acquire income producing
centers around our existing markets and will identify and execute redevelopment
opportunities in our existing portfolio. Concurrent with the adoption of the
business plan, we adopted a management succession plan and restructured our
management team.
In connection with this change in our business plan, we recorded a
charge of $18.2 million. This charge included a reserve for a restructuring
charge of $8.5 million made up of $6.9 million of severance and other
compensation costs for several of our senior officers related to the management
restructuring, as well as the write-off of $1.6 million of our development
costs. All charges against the reserve, totaling $8.5 million, were expended
during 2002. An additional component of the restructuring charge is an
impairment loss of $9.7 million representing the estimated loss on the
abandonment of development projects held for sale, primarily the Tanasbourne
development project located in Portland, Oregon, thereby adjusting the value of
these assets to their estimated fair value. We are marketing these properties,
components of our Western region, for sale. The carrying value of these
properties as of December 31, 2002, classified on our consolidated balance sheet
as real estate under development, is $8.5 million.
On December 20, 2002, we announced the resignation of Steven J.
Guttman as Trustee, Chief Executive Officer and Chairman of the Board of
Trustees effective January 1, 2003. Donald C. Wood, our then President and Chief
Operating Officer, was named Chief Executive Officer and a member of the Board
of Trustees. Mark Ordan, a member of the Board of Trustees since 1996, was named
non-executive chairman of the board. As a result of this transition, we recorded
a charge of $13.8 million in the fourth quarter of 2002 for payments and
benefits to Mr. Guttman pursuant to his contractual arrangements with the Trust
and for other transition related costs. Of
- F25 -
this amount, $7.9 million had not been paid as of December 31, 2002, the
majority of which was paid in the first quarter of 2003.
NOTE 14. SUBSEQUENT EVENTS
On February 11, 2003 the $24.4 million Woodmont East construction loan
and the $17.0 million Friendship Center mortgage were paid off through
borrowings under our revolving credit facility.
Pursuant to the 2001 Incentive Bonus Plan, vice presidents and certain
key employees receive part of their 2002 bonus in Federal Realty shares which
vest over three years. Consequently, on February 12, 2003, 16,496 shares were
awarded under this plan.
Also in February 2003, 265,000 options and 113,500 performance shares
were granted to certain officers and key employees.
NOTE 15. RELATED PARTY TRANSACTIONS
Our former Chairman and CEO, Steven J. Guttman, has an ownership
interest in three retailers, comprising approximately 3,500 square feet, at
Santana Row. The leases were negotiated at what management believes to be arms
length at market terms.
In addition, Nate Fishsin one of our officers, whose last day of
employment with the Trust will be March 31, 2003, has an ownership interest in a
retailer occupying approximately 2,600 square feet at Santana Row. This lease
was also negotiated at what management believes to be arms length at market
terms.
- F26 -
NOTE 16. SEGMENT INFORMATION
We operate our portfolio of assets in three geographic operating
regions: Northeast, Mid-Atlantic and West.
A summary of our operations by geographic region is presented below
(in thousands):
2002 Northeast Mid Atlantic West Other Consolidated
- ---- ------------- ------------- ------------- ------------- -------------
Rental income $ 123,093 $ 139,596 $ 35,396 $ 298,085
Other income 5,604 7,509 2,480 15,593
Interest income - mortgage notes 3,294 1,902 5,196
Rental expense (23,447) (31,897) (18,247) (73,591)
Real estate tax (16,145) (11,779) (3,262) (31,186)
------------- ------------- ------------- -------------
Property operating income 92,399 103,429 18,269 214,097
Interest and other income (expense) $ (40) (40)
Interest expense (65,054) (65,054)
Administrative expense (13,790) (13,790)
Restructuring expense (22,269) (22,269)
Depreciation and amortization (27,784) (27,073) (8,583) (811) (64,251)
------------- ------------- ------------- ------------- -------------
Income before investors' share of
operations and discontinued operations $ 64,615 $ 76,356 $ 9,686 $ (101,964) $ 48,693
============= ============= ============= ============= =============
Capital expenditures $ 10,539 $ 34,265 $ 220,539 $ 265,343
============= ============= ============= =============
Real estate assets $ 747,778 $ 827,090 $ 731,958 $ 2,306,826
============= ============= ============= =============
2001 Northeast Mid Atlantic West Other Consolidated
- ---- ------------- ------------- ------------- ------------- -------------
Rental income $ 117,353 $ 124,765 $ 32,449 $ 274,567
Other income 5,657 5,715 2,581 13,953
Interest income - mortgage notes 3,908 - 534 4,442
Rental expense (23,442) (28,443) (10,830) (62,715)
Real estate tax (15,645) (9,951) (2,752) (28,348)
------------- ------------- ------------- -------------
Property operating income 87,831 92,086 21,982 201,899
Interest and other income (expense) $ 2,148 2,148
Interest expense (69,313) (69,313)
Administrative expense (14,281) (14,281)
Depreciation and amortization (27,118) (23,921) (7,098) (1,034) (59,171)
------------- ------------- ------------- ------------- -------------
Income before investors' share of
operations and discontinued operations $ 60,713 $ 68,165 $ 14,884 $ (82,480) $ 61,282
============= ============= ============= ============= =============
Capital expenditures $ 15,386 $ 87,706 $ 169,278 $ 272,370
============= ============= ============= =============
Real estate assets $ 760,849 $ 793,566 $ 549,889 $ 2,104,304
============= ============= ============= =============
2000 Northeast Mid Atlantic West Other Consolidated
- ---- ------------- ------------- ------------- ------------- -------------
Rental income $ 110,256 $ 114,371 $ 31,007 $ 255,634
Other income 4,206 3,900 2,917 11,023
Interest income - mortgage notes 4,433 - 943 5,376
Rental expense (23,131) (24,766) (7,734) (55,631)
Real estate tax (14,131) (9,159) (2,921) (26,211)
------------- ------------- ------------- -------------
Property operating income 81,633 84,346 24,212 190,191
Interest and other income (expense) $ 2,156 2,156
Interest expense (66,418) (66,418)
Administrative expense (13,318) (13,318)
Depreciation and amortization (24,715) (21,915) (4,996) (933) (52,559)
------------- ------------- ------------- ------------- -------------
Income before investors' share of
operations and discontinued operations $ 56,918 $ 62,431 $ 19,216 $ (78,513) $ 60,052
============= ============= ============= ============= =============
Capital expenditures $ 38,696 $ 60,783 $ 83,205 $ 182,684
============= ============= ============= =============
Real estate assets $ 754,048 $ 720,208 $ 380,657 $ 1,854,913
============= ============= ============= =============
There are no transactions between geographic areas.
- F27 -
NOTE 17. QUARTERLY DATA (UNAUDITED)
The following summary represents the results of operations for each
quarter in 2002 and 2001 (in thousands, except per share data):
First Second Third Fourth
Quarter Quarter Quarter Quarter (5)
-------- ---------- ---------- -----------
2002
- ----
Revenue (1) $ 75,236 $ 75,828 $ 78,333 $ 89,437
Net income (loss) available for common shares (6,187)(2) 30,479(3) 13,648 (2,078)(4)
Earnings (loss) per common share - basic (6) (.15) .75 .32 (.05)
Earnings (loss) per common share - diluted (.15) .74 .31 (.05)
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- ---------- ---------- -----------
2001
- ----
Revenue (1) $ 70,399 $ 72,093 $ 74,149 $ 78,469
Net income available for common shares 12,245 20,180(7) 13,194 14,103(8)
Earnings per common share - basic .32 .51 .34 .35
Earnings per common share - diluted (9) .32 .51 .33 .35
(1) As required by SFAS No. 144, revenue in the first quarter of 2002 and
for all of 2001 has been reduced to reflect the discontinued assets
sold in the second quarter of 2002. Total revenue from these
discontinued assets, by quarter, is summarized as follows (in
thousands):
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- ---------- ---------- -----------
2002 Revenue from discontinued assets $ 1,415 $ 688 $ 6 $ 25
2001 Revenue from discontinued assets 1,304 1,305 1,375 1,408
(2) Net income includes an $8.5 million restructuring charge ($.21 per
share expense - basic and diluted) and a $9.6 million loss on
abandoned developments held for sale ($.24 loss per share - basic and
diluted).
(3) Net income includes a $19.1 million gain on sale of real estate ($.47
gain per share - basic and $.46 gain per share - diluted).
(4) Net income includes a $13.8 million restructuring charge ($.32 per
share expense - basic and $.31 per share expense - diluted).
(5) In the fourth quarter of 2002 we recorded adjustments to increase
revenue accruals for estimated tenant expense reimbursements by $3.3
million and decrease certain expense accruals by $1.0 million. These
adjustments were offset by a revision to the cumulative amount of
interest capitalized on development projects in the amount of $4.2
million. The net effect of such adjustments did not have a material
effect on net income or net income per share for the year ended
December 31, 2002.
(6) The sum of the quarterly earnings per common share - basic, $.87
differs from the annual earnings per common share - basic, $.86, due
to rounding.
(7) Net income includes a $7.9 million gain on sale of real estate ($.20
gain per share - basic and diluted).
(8) Net income includes a net $1.3 million gain on sale of real estate
($.03 gain per share - basic and $.02 gain per share - diluted).
(9) The sum of the quarterly earnings per common share - diluted, $1.51
differs from the annual earnings per common share - diluted, $1.52,
due to rounding.
- F28 -
FEDERAL REALTY INVESTMENT TRUST
SCHEDULE III
SUMMARY OF REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2002
COLUMN A COLUMN B COLUMN C COLUMN D
- ------------------------------------- ----------------- --------- ----------------- -----------------
Initial cost to company
Cost Capitalized
Building and Subsequent to
Descriptions Encumbrance Land Improvements Acquisition
- ------------------------------------- ----------------- --------- ----------------- -----------------
ALLWOOD (New Jersey) $ 3,513,000 $ $ 3,920,000 $ 345,000
ANDORRA (Pennsylvania) 2,432,000 12,346,000 4,308,000
ARIZONA BUILDINGS (2) 1,334,000 9,104,000 598,000
BALA CYNWYD (Pennsylvania) 3,565,000 14,466,000 5,865,000
BARRACKS ROAD (Virginia) 44,300,000 4,363,000 16,459,000 18,686,000
BETHESDA ROW (Maryland) 37,025,000 9,114,000 20,821,000 48,377,000
BLUESTAR (New Jersey) 26,812,000 29,922,000 8,949,000
BRICK PLAZA (New Jersey) 33,000,000 24,715,000 29,020,000
BRISTOL (Connecticut) 3,856,000 15,959,000 1,978,000
BRUNSWICK (New Jersey) 11,162,000 12,456,000 8,616,000
CALIFORNIA RETAIL BUILDINGS
SANTA MONICA (9) 22,645,000 12,709,000 35,924,000
SAN DIEGO (4) 3,844,000 1,352,000 6,894,000
150 POST STREET (San Francisco) 11,685,000 9,181,000 7,061,000
OTHER (5) 19,496,000 25,752,000 (289,000)
CLIFTON (New Jersey) 3,267,000 3,646,000 1,290,000
CONGRESSIONAL PLAZA (Maryland) 2,793,000 7,424,000 50,012,000
CONNECTICUT RETAIL BUILDINGS (10) 25,061,000 27,739,000 (17,279,000)
COURTHOUSE CENTER (Maryland) 1,750,000 1,869,000 573,000
CROSSROADS (Illinois) 4,635,000 11,611,000 5,457,000
DEDHAM PLAZA (Massachusetts) 12,369,000 12,918,000 3,997,000
EASTGATE (North Carolina) 1,608,000 5,775,000 7,261,000
ELLISBURG CIRCLE (New Jersey) 4,028,000 11,309,000 10,664,000
ESCONDIDO PROMENADE (California) 9,400,000 11,505,000 12,147,000 972,000
FALLS PLAZA (Virginia) 1,260,000 735,000 6,150,000
FALLS PLAZA - East (Virginia) 538,000 535,000 2,278,000
FEASTERVILLE (Pennsylvania) 1,431,000 1,600,000 8,539,000
FEDERAL PLAZA (Maryland) 35,936,000 10,216,000 17,895,000 33,657,000
FINLEY SQUARE (Illinois) 9,252,000 9,544,000 7,313,000
FLORIDA RETAIL BUILDINGS (2) 5,206,000 1,631,000 38,000
FLOURTOWN (Pennsylvania) 1,345,000 3,943,000 3,410,000
FRESH MEADOWS (New York) 24,625,000 25,255,000 14,501,000
FRIENDSHIP CTR (District of Columbia) 17,000,000 12,696,000 20,803,000 (47,000)
GAITHERSBURG SQUARE (Maryland) 7,701,000 5,271,000 10,606,000
GARDEN MARKET (Illinois) 2,677,000 4,829,000 3,107,000
GOVERNOR PLAZA (Maryland) 2,068,000 4,905,000 10,930,000
GRATIOT PLAZA (Michigan) 525,000 1,601,000 14,520,000
GREENLAWN (New York) 2,294,000 3,864,000 4,426,000
HAMILTON (New Jersey) 4,843,000 5,405,000 2,257,000
HAUPPAUGE (New York) 16,700,000 8,791,000 15,262,000 2,129,000
HUNTINGTON (New York) 14,344,000 16,008,000 6,513,000
IDYLWOOD PLAZA (Virginia) 4,308,000 10,026,000 475,000
ILLINOIS RETAIL BUILDINGS (2) 1,291,000 2,325,000 661,000
KINGS COURT (California) 10,714,000 207,000
LANCASTER (Pennsylvania) 4,907,000 2,103,000 7,659,000
LANGHORNE SQUARE (Pennsylvania) 720,000 2,974,000 13,848,000
LAUREL (Maryland) 7,458,000 22,525,000 15,497,000
LAWRENCE PARK (Pennsylvania) 31,400,000 5,723,000 7,160,000 10,719,000
LEESBURG PLAZA (Virginia) 9,900,000 8,184,000 10,722,000 1,437,000
LOEHMANN'S PLAZA (Virginia) 1,237,000 15,096,000 8,799,000
COLUMN A COLUMN E COLUMN F
- ------------------------------------- ---------------- ----------------- ----------------- -----------------
Gross amount at which carried at close of period
Accumulated
Building and Depreciation and
Descriptions Land Improvements Total Amortization
- ------------------------------------- ---------------- ----------------- ----------------- -----------------
ALLWOOD (New Jersey) $ $ 4,265,000 $ 4,265,000 $ 1,793,000
ANDORRA (Pennsylvania) 2,432,000 16,654,000 19,086,000 7,752,000
ARIZONA BUILDINGS (2) 1,334,000 9,702,000 11,036,000 1,268,000
BALA CYNWYD (Pennsylvania) 3,565,000 20,331,000 23,896,000 5,893,000
BARRACKS ROAD (Virginia) 4,363,000 35,145,000 39,508,000 19,705,000
BETHESDA ROW (Maryland) 9,127,000 69,185,000 78,312,000 11,479,000
BLUESTAR (New Jersey) 38,871,000 38,871,000 14,772,000
BRICK PLAZA (New Jersey) 3,788,000 49,947,000 53,735,000 18,689,000
BRISTOL (Connecticut) 3,856,000 17,937,000 21,793,000 4,097,000
BRUNSWICK (New Jersey) 21,072,000 21,072,000 7,020,000
CALIFORNIA RETAIL BUILDINGS
SANTA MONICA (9) 22,645,000 48,633,000 71,278,000 6,219,000
SAN DIEGO (4) 3,844,000 8,246,000 12,090,000 808,000
150 POST STREET (San Francisco) 11,685,000 16,242,000 27,927,000 2,410,000
OTHER (5) 19,496,000 25,463,000 44,959,000 2,659,000
CLIFTON (New Jersey) 4,936,000 4,936,000 2,002,000
CONGRESSIONAL PLAZA (Maryland) 2,793,000 57,436,000 60,229,000 18,051,000
CONNECTICUT RETAIL BUILDINGS (10) 25,061,000 10,460,000 35,521,000 4,408,000
COURTHOUSE CENTER (Maryland) 1,750,000 2,442,000 4,192,000 310,000
CROSSROADS (Illinois) 4,635,000 17,068,000 21,703,000 5,308,000
DEDHAM PLAZA (Massachusetts) 12,369,000 16,915,000 29,284,000 4,595,000
EASTGATE (North Carolina) 1,608,000 13,036,000 14,644,000 6,175,000
ELLISBURG CIRCLE (New Jersey) 4,028,000 21,973,000 26,001,000 9,791,000
ESCONDIDO PROMENADE (California) 11,505,000 13,119,000 24,624,000 2,339,000
FALLS PLAZA (Virginia) 1,260,000 6,885,000 8,145,000 2,396,000
FALLS PLAZA - East (Virginia) 559,000 2,792,000 3,351,000 2,644,000
FEASTERVILLE (Pennsylvania) 1,431,000 10,139,000 11,570,000 5,022,000
FEDERAL PLAZA (Maryland) 10,216,000 51,552,000 61,768,000 18,151,000
FINLEY SQUARE (Illinois) 9,252,000 16,857,000 26,109,000 5,011,000
FLORIDA RETAIL BUILDINGS (2) 5,206,000 1,669,000 6,875,000 322,000
FLOURTOWN (Pennsylvania) 1,345,000 7,353,000 8,698,000 3,685,000
FRESH MEADOWS (New York) 24,625,000 39,756,000 64,381,000 6,167,000
FRIENDSHIP CTR (District of Columbia) 12,696,000 20,756,000 33,452,000 792,000
GAITHERSBURG SQUARE (Maryland) 6,012,000 17,566,000 23,578,000 6,521,000
GARDEN MARKET (Illinois) 2,677,000 7,936,000 10,613,000 1,883,000
GOVERNOR PLAZA (Maryland) 2,068,000 15,835,000 17,903,000 9,353,000
GRATIOT PLAZA (Michigan) 525,000 16,121,000 16,646,000 4,918,000
GREENLAWN (New York) 2,294,000 8,290,000 10,584,000 823,000
HAMILTON (New Jersey) 7,662,000 7,662,000 3,846,000
HAUPPAUGE (New York) 8,791,000 17,391,000 26,182,000 2,188,000
HUNTINGTON (New York) 22,521,000 22,521,000 10,051,000
IDYLWOOD PLAZA (Virginia) 4,308,000 10,501,000 14,809,000 2,745,000
ILLINOIS RETAIL BUILDINGS (2) 1,291,000 2,986,000 4,277,000 734,000
KINGS COURT (California) 10,921,000 10,921,000 1,851,000
LANCASTER (Pennsylvania) 9,762,000 9,762,000 4,150,000
LANGHORNE SQUARE (Pennsylvania) 720,000 16,822,000 17,542,000 6,370,000
LAUREL (Maryland) 7,458,000 38,022,000 45,480,000 18,761,000
LAWRENCE PARK (Pennsylvania) 5,734,000 17,868,000 23,602,000 14,593,000
LEESBURG PLAZA (Virginia) 8,184,000 12,159,000 20,343,000 1,594,000
LOEHMANN'S PLAZA (Virginia) 1,248,000 23,884,000 25,132,000 3,023,000
COLUMN A COLUMN G COLUMN H COLUMN I
- ------------------------------------- ------------ ----------- ---------------------
Life on which
Date depreciation in latest
of Date income statements
Descriptions Construction Acquired is computed
- ------------------------------------- ------------ ----------- ---------------------
ALLWOOD (New Jersey) 1958 12/12/88 35 years
ANDORRA (Pennsylvania) 1953 01/12/88 35 years
ARIZONA BUILDINGS (2) 1995-1998 05/07/98 35 years
BALA CYNWYD (Pennsylvania) 1955 09/22/93 35 years
BARRACKS ROAD (Virginia) 1958 12/31/85 35 years
BETHESDA ROW (Maryland) 1945-2000 12/31/93 35 - 50 years
BLUESTAR (New Jersey) 1959 12/12/88 35 years
BRICK PLAZA (New Jersey) 1958 12/28/89 35 years
BRISTOL (Connecticut) 1959 9/22/95 35 years
BRUNSWICK (New Jersey) 1957 12/12/88 35 years
CALIFORNIA RETAIL BUILDINGS
SANTA MONICA (9) 1888-2000 1996-2000 35 years
SAN DIEGO (4) 1888-1995 1996-1997 35 years
150 POST STREET (San Francisco) 1908 10/23/97 35 years
OTHER (5) var 1996-1999 35 years
CLIFTON (New Jersey) 1959 12/12/88 35 years
CONGRESSIONAL PLAZA (Maryland) 1965 04/01/65 35 years
CONNECTICUT RETAIL BUILDINGS (10) 1900-1991 1994-1996 35 years
COURTHOUSE CENTER (Maryland) 1975 12/17/97 35 years
CROSSROADS (Illinois) 1959 07/19/93 35 years
DEDHAM PLAZA (Massachusetts) 1959 12/31/93 35 years
EASTGATE (North Carolina) 1963 12/18/86 35 years
ELLISBURG CIRCLE (New Jersey) 1959 10/16/92 35 years
ESCONDIDO PROMENADE (California) 1987 12/31/96 35 years
FALLS PLAZA (Virginia) 1962 09/30/67 22 3/4 years
FALLS PLAZA - East (Virginia) 1960 10/05/72 25 years
FEASTERVILLE (Pennsylvania) 1958 07/23/80 20 years
FEDERAL PLAZA (Maryland) 1970 06/29/89 35 years
FINLEY SQUARE (Illinois) 1974 04/27/95 35 years
FLORIDA RETAIL BUILDINGS (2) 1920 02/28/96 35 years
FLOURTOWN (Pennsylvania) 1957 04/25/80 35 years
FRESH MEADOWS (New York) 1946-1949 12/05/97 35 years
FRIENDSHIP CTR (District of Columbia) 1998 09/21/01 35 years
GAITHERSBURG SQUARE (Maryland) 1966 04/22/93 35 years
GARDEN MARKET (Illinois) 1958 07/28/94 35 years
GOVERNOR PLAZA (Maryland) 1963 10/01/85 35 years
GRATIOT PLAZA (Michigan) 1964 03/29/73 25 3/4 years
GREENLAWN (New York) 1975 01/05/00 35 years
HAMILTON (New Jersey) 1961 12/12/88 35 years
HAUPPAUGE (New York) 1963 08/06/98 35 years
HUNTINGTON (New York) 1962 12/12/88 35 years
IDYLWOOD PLAZA (Virginia) 1991 04/15/94 35 years
ILLINOIS RETAIL BUILDINGS (2) 1900-1927 1995-1997 35 years
KINGS COURT (California) 1960 08/24/98 26 years
LANCASTER (Pennsylvania) 1958 04/24/80 22 years
LANGHORNE SQUARE (Pennsylvania) 1966 01/31/85 35 years
LAUREL (Maryland) 1956 08/15/86 35 years
LAWRENCE PARK (Pennsylvania) 1972 07/23/80 22 years
LEESBURG PLAZA (Virginia) 1967 09/15/98 35 years
LOEHMANN'S PLAZA (Virginia) 1971 07/21/83 35 years
F29
COLUMN A COLUMN B COLUMN C COLUMN D
- ---------------------------------------- ----------------- ----------------- ----------------- -----------------
Initial cost to company
Cost Capitalized
Building and Subsequent to
Descriptions Encumbrance Land Improvements Acquisition
- ---------------------------------------- ----------------- ----------------- ----------------- -----------------
MAGRUDERS (Maryland) 4,554,000 4,859,000 975,000
MASSACHUSETTS RETAIL BLDG (1) 1,873,000 1,884,000 265,000
MID PIKE PLAZA (Maryland) 10,041,000 10,335,000 6,648,000
NEW YORK RETAIL BUILDINGS (3) 5,891,000 6,051,000 12,023,000
NORTHEAST (Pennsylvania) 1,152,000 10,596,000 9,696,000
NORTH LAKE COMMONS (Illinois) 2,782,000 8,604,000 1,568,000
OLD KEENE MILL (Virginia) 638,000 998,000 3,408,000
OLD TOWN CENTER (California) 3,420,000 2,765,000 26,315,000
PAN AM SHOPPING CENTER (Virginia) 8,694,000 12,929,000 3,174,000
PENTAGON ROW (Virginia) 2,955,000 82,610,000
PERRING PLAZA (Maryland) 2,800,000 6,461,000 14,714,000
PIKE 7 (Virginia) 9,709,000 22,799,000 862,000
QUEEN ANNE PLAZA (Massachusetts) 3,319,000 8,457,000 2,866,000
QUINCE ORCHARD PLAZA (Maryland) 3,197,000 7,949,000 7,814,000
ROLLINGWOOD APTS. (Maryland) 552,000 2,246,000 3,885,000
RUTGERS (New Jersey) 12,930,000 14,429,000 1,486,000
SAM'S PARK & SHOP (District of Columbia) 4,840,000 6,319,000 577,000
SAUGUS (Massachusetts) 4,383,000 8,291,000 395,000
SHIRLINGTON (Virginia) 9,761,000 14,808,000 7,546,000
TEXAS RETAIL BUILDINGS (9) 268,000 14,680,000 1,976,000 38,342,000
TOWER (Virginia) 7,170,000 10,518,000 405,000
TROY (New Jersey) 3,126,000 5,193,000 12,127,000
TYSONS STATION (Virginia) 6,864,000 388,000 453,000 2,482,000
WILDWOOD (Maryland) 27,600,000 9,111,000 1,061,000 5,844,000
WILLOW GROVE (Pennsylvania) 1,499,000 6,643,000 17,733,000
WILLOW LAWN (Virginia) 3,192,000 7,723,000 51,406,000
WYNNEWOOD (Pennsylvania) 32,000,000 8,055,000 13,759,000 13,320,000
DEVELOPMENT PROJECTS:
TANASBOURNE (Oregon) 7,502,000 0
SANTANA ROW (California) 41,969,000 1,161,000 390,993,000
----------------- ----------------- ----------------- -----------------
TOTALS $ 393,212,000 $ 429,886,000 $ 728,553,000 $ 1,148,387,000
================= ================= ================= =================
COLUMN A COLUMN E COLUMN F
- ---------------------------------------- ----------------- ----------------- ------------------ -----------------
Gross amount at which carried at close of period
Accumulated
Building and Depreciation and
Descriptions Land Improvements Total Amortization
- ---------------------------------------- ----------------- ----------------- ------------------ -----------------
MAGRUDERS (Maryland) 4,554,000 5,834,000 10,388,000 847,000
MASSACHUSETTS RETAIL BLDG (1) 1,873,000 2,149,000 4,022,000 534,000
MID PIKE PLAZA (Maryland) 16,983,000 16,983,000 9,228,000
NEW YORK RETAIL BUILDINGS (3) 6,140,000 17,825,000 23,965,000 1,910,000
NORTHEAST (Pennsylvania) 1,153,000 20,291,000 21,444,000 10,755,000
NORTH LAKE COMMONS (Illinois) 2,782,000 10,172,000 12,954,000 2,608,000
OLD KEENE MILL (Virginia) 638,000 4,406,000 5,044,000 3,375,000
OLD TOWN CENTER (California) 3,420,000 29,080,000 32,500,000 4,069,000
PAN AM SHOPPING CENTER (Virginia) 8,694,000 16,103,000 24,797,000 5,857,000
PENTAGON ROW (Virginia) 85,565,000 85,565,000 3,468,000
PERRING PLAZA (Maryland) 2,800,000 21,175,000 23,975,000 10,913,000
PIKE 7 (Virginia) 9,709,000 23,661,000 33,370,000 4,216,000
QUEEN ANNE PLAZA (Massachusetts) 3,319,000 11,323,000 14,642,000 3,597,000
QUINCE ORCHARD PLAZA (Maryland) 2,928,000 16,032,000 18,960,000 5,971,000
ROLLINGWOOD APTS. (Maryland) 572,000 6,111,000 6,683,000 6,011,000
RUTGERS (New Jersey) 15,915,000 15,915,000 6,466,000
SAM'S PARK & SHOP (District of Columbia) 4,840,000 6,896,000 11,736,000 1,647,000
SAUGUS (Massachusetts) 4,383,000 8,686,000 13,069,000 1,678,000
SHIRLINGTON (Virginia) 9,816,000 22,299,000 32,115,000 4,188,000
TEXAS RETAIL BUILDINGS (9) 14,680,000 40,318,000 54,998,000 1,089,000
TOWER (Virginia) 7,129,000 10,964,000 18,093,000 1,419,000
TROY (New Jersey) 3,126,000 17,320,000 20,446,000 11,554,000
TYSONS STATION (Virginia) 475,000 2,848,000 3,323,000 2,396,000
WILDWOOD (Maryland) 9,111,000 6,905,000 16,016,000 6,056,000
WILLOW GROVE (Pennsylvania) 1,499,000 24,376,000 25,875,000 12,054,000
WILLOW LAWN (Virginia) 7,790,000 54,531,000 62,321,000 26,718,000
WYNNEWOOD (Pennsylvania) 8,055,000 27,079,000 35,134,000 5,173,000
DEVELOPMENT PROJECTS:
TANASBOURNE (Oregon) 7,502,000 7,502,000
SANTANA ROW (California) 41,969,000 392,154,000 434,123,000 1,763,000
----------------- ----------------- ------------------ -----------------
TOTALS $ 436,741,000 $ 1,870,085,000 $ 2,306,826,000 $ 450,697,000
================= ================= ================== =================
COLUMN A COLUMN G COLUMN H COLUMN I
- ---------------------------------------- ------------- ------------ ----------------------
Life on which
Date depreciation in latest
of Date income statements
Descriptions Construction Acquired is computed
- ---------------------------------------- ------------- ------------ ----------------------
MAGRUDERS (Maryland) 1955 12/17/97 35 years
MASSACHUSETTS RETAIL BLDG (1) 1930 09/07/95 35 years
MID PIKE PLAZA (Maryland) 1963 05/18/82 50 years
NEW YORK RETAIL BUILDINGS (3) 1937 - 1987 12/16/97 35 years
NORTHEAST (Pennsylvania) 1959 08/30/83 35 years
NORTH LAKE COMMONS (Illinois) 1989 04/27/94 35 years
OLD KEENE MILL (Virginia) 1968 06/15/76 33 1/3 years
OLD TOWN CENTER (California) 1997-1998 10/22/97 35 years
PAN AM SHOPPING CENTER (Virginia) 1979 02/05/93 35 years
PENTAGON ROW (Virginia) 1999 - 2002 1998 35 years
PERRING PLAZA (Maryland) 1963 10/01/85 35 years
PIKE 7 (Virginia) 1968 03/31/97 35 years
QUEEN ANNE PLAZA (Massachusetts) 1967 12/23/94 35 years
QUINCE ORCHARD PLAZA (Maryland) 1975 04/22/93 35 years
ROLLINGWOOD APTS. (Maryland) 1960 01/15/71 25 years
RUTGERS (New Jersey) 1973 12/12/88 35 years
SAM'S PARK & SHOP (District of Columbia) 1930 12/01/95 35 years
SAUGUS (Massachusetts) 1976 10/01/96 35 years
SHIRLINGTON (Virginia) 1940 12/21/95 35 years
TEXAS RETAIL BUILDINGS (9) var 1998-1999 35 years
TOWER (Virginia) 1953-1960 08/24/98 35 years
TROY (New Jersey) 1966 07/23/80 22 years
TYSONS STATION (Virginia) 1954 01/17/78 17 years
WILDWOOD (Maryland) 1958 05/05/69 33 1/3 years
WILLOW GROVE (Pennsylvania) 1953 11/20/84 35 years
WILLOW LAWN (Virginia) 1957 12/05/83 35 years
WYNNEWOOD (Pennsylvania) 1948 10/29/96 35 years
DEVELOPMENT PROJECTS:
TANASBOURNE (Oregon) 2000
SANTANA ROW (California) 1999 - 2002 03/05/97 50 years
TOTALS
F30
FEDERAL REALTY INVESTMENT TRUST
SCHEDULE III
SUMMARY OF REAL ESTATE AND ACCUMULATED
DEPRECIATION - CONTINUED
THREE YEARS ENDED DECEMBER 31, 2002
RECONCILIATION OF TOTAL COST
Balance, January 1, 2000 $ 1,721,459,000
Additions during period
Acquisitions 26,794,000
Improvements 156,021,000
Deduction during period - disposition
of property and miscellaneous retirements and impairments (49,361,000)
-----------------------
Balance, December 31, 2000 1,854,913,000
Additions during period
Acquisitions 52,820,000
Improvements 219,549,000
Deduction during period - disposition
of property and miscellaneous retirements (22,978,000)
-----------------------
Balance, December 31, 2001 2,104,304,000
Additions during period
Acquisitions -
Improvements 265,531,000
Deduction during period - disposition
of property and miscellaneous retirements (63,009,000)
-----------------------
Balance, December 31, 2002 $ 2,306,826,000
=======================
(A) For Federal tax purposes, the aggregate cost basis is approximately
$2,090,091,000 as of December 31, 2002.
F31
FEDERAL REALTY INVESTMENT TRUST
SCHEDULE III
SUMMARY OF REAL ESTATE AND ACCUMULATED
DEPRECIATION - CONTINUED
THREE YEARS ENDED DECEMBER 31, 2002
RECONCILIATION OF ACCUMULATED DEPRECIATION AND AMORTIZATION
Balance, January 1, 2000 $ 317,921,000
Additions during period
Depreciation and amortization expense 49,176,000
Deductions during period - disposition of
property and miscellaneous retirements (15,839,000)
-----------------------
Balance, December 31, 2000 351,258,000
Additions during period
Depreciation and amortization expense 55,048,000
Deductions during period - disposition of property,
miscellaneous retirements and acquisition of minority interest (10,539,000)
-----------------------
Balance, December 31, 2001 395,767,000
Additions during period
Depreciation and amortization expense 59,296,000
Deductions during period - disposition of property,
miscellaneous retirements and acquisition of minority interest (4,366,000)
-----------------------
Balance, December 31, 2002 $ 450,697,000
=======================
F32
FEDERAL REALTY INVESTMENT TRUST
SCHEDULE IV
MORTGAGE LOANS ON REAL ESTATE
YEAR ENDED DECEMBER 31, 2002
Column A Column B Column C
- ---------------------------- --------------------------- -------------------
Description of Lien Interest Rate Maturity Date
- ---------------------------- --------------------------- -------------------
Leasehold mortgage 7.88% February 2003
on office building
in San Francisco, CA
Mortgage on Hotel 12% to 15% January 2012
in San Jose, CA
Mortgage on retail Greater of prime plus May 2021
buildings in Philadelphia 2% or 10%
Mortgage on retail 10% plus participation May 2021
buildings in Philadelphia
Column D Column E Column F Column G
- ---------------------------------------- ---------------- --------------- ------------------
Carrying
Periodic Payment Face Amount Amount of
Terms Prior Liens of Mortgages Mortgages (1)
- ---------------------------------------- ---------------- --------------- ------------------
Interest only -- $ 5,618,000 $ 5,618,000 (2)
monthly; ballon payment
due at maturity
(3) -- 7,200,000 7,200,000
Interest only -- 25,000,000 13,509,000 (4)
monthly; balloon payment
due at maturity
Interest only; balloon -- 9,250,000 9,250,000
payment due at maturity
---------------- --------------- ------------------
-- $ 47,068,000 $ 35,577,000
================ =============== ==================
1) For Federal tax purposes, the aggregate tax basis is approximately
$35,577,000 as of December 31, 2002. No payments are delinquent on these
mortgages.
2) The loan was not repaid on the due date. We are currently exploring all
available options we may have as a result of the borrowers failure to pay at
maturity.
3) For the first five years interest is payable from cash flow, if available. If
cash flow is not sufficient to pay interest in full, the unpaid amount will
accrue and bear interest at the same rate as the principal. After year five,
current interest payments are required. After year seven, mortgagee is
required to apply 50% of all available cash flow to repayment of principal.
4) This mortgage is available for up to $25,000,000.
F33
FEDERAL REALTY INVESTMENT TRUST
SCHEDULE IV
MORTGAGE LOANS ON REAL ESTATE - CONTINUED
THREE YEARS ENDED DECEMBER 31, 2001
RECONCILIATION OF CARRYING AMOUNT
Balance, January 1, 2000 $ 53,495,000
Additions during period
Issuance of loan 5,701,000
Deductions during period
Collection of loan (11,836,000)
-----------------------
Balance, December 31, 2000 47,360,000
Additions during period
Issuance of loans 925,000
Deductions during period
Collection and satisfaction of loans (12,678,000)
-----------------------
Balance, December 31, 2001 35,607,000
Additions during period
Issuance of loans 14,362,000
Deductions during period
Collection and satisfaction of loans (14,392,000)
-----------------------
Balance, December 31, 2002 $ 35,577,000
=======================
F34
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Grant Thornton LLP has been selected as our independent public
accountants for the current year and examined our financial statements for the
year ended December 31, 2002. On June 4, 2002, Arthur Andersen LLP was dismissed
and Grant Thornton LLP was engaged as our principal independent public
accountants. The decision to change accountants was approved by the Board of
Trustees upon the recommendation of the Audit Committee. The reports of Arthur
Andersen LLP for the years ended December 31, 2000 and 2001 and the subsequent
interim period through June 4, 2002 did not contain any adverse opinion or
disclaimer of opinion, nor were they qualified as to uncertainty, audit scope or
accounting principles. During our fiscal years ended December 31, 2000 and 2001
and the subsequent interim period through June 4, 2002, there were no
disagreements with Arthur Andersen LLP on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedures,
which disagreements, if not resolved to the satisfaction of Arthur Andersen LLP,
would have caused them to make reference thereto in their reports on the
financial statements for those years.
PART III
Certain information required in Part III is omitted from this Report
but is incorporated herein by reference from our Proxy Statement for the 2003
Annual Meeting of Shareholders (the "Proxy Statement").
ITEM 10. TRUSTEES AND EXECUTIVE OFFICERS
a.) The table identifying our Trustees under the caption "Election of
Trustees" and the section entitled "Executive Officers" of the Proxy Statement
is incorporated herein by reference.
b.) The information required by this item is included in this report
at Item 1 under the caption "Executive Officers of the Registrant". The
information contained in the Proxy Statement under the captions "The Board of
Trustees" and "Executive Officers" is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The sections entitled "Summary Compensation Table" and "Aggregated
Option Exercises in 2002 and December 31, 2002 Option Values" of the Proxy
Statement are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED SHAREHOLDER MATTERS
The sections entitled "Ownership of Shares by Certain Beneficial
Owners," "Ownership of Shares by Trustees and Officers" and "Equity Compensation
Plan Information" of the Proxy Statement are incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section entitled "Certain Relationships and Related Transactions"
of the Proxy Statement is incorporated herein by reference.
ITEM 14. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and that such information is accumulated and communicated
to our management, including our President and Chief Executive Officer and
Senior Vice President and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure based
- F35 -
closely on the definition of "disclosure controls and procedures" in Rule
13a-14(c) promulgated under the Exchange Act. In designing and evaluating the
disclosure controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
Report of Independent Public Accountants - Grant Thornton LLP
Report of Independent Public Accountants - Arthur Andersen LLP
Consolidated Balance Sheets - December 31, 2002 and 2001
Consolidated Statements of Operations - Years Ended December
31, 2002, 2001 and 2000
Consolidated Statements of Common Shareholders' Equity - Years
Ended December 31, 2002, 2001 and 2000
Consolidated Statements of Cash Flows - Years Ended December
31, 2002, 2001 and 2000
Notes to Consolidated Financial Statements (including selected
quarterly data)
(2) Financial Statement Schedules
Schedule III. Schedule of Real Estate and Accumulated
Depreciation
Schedule IV. Mortgage Loans on Real Estate
- F36 -
(3) Exhibits
Exhibit
No. Description
- ------- -----------
3.1 Declaration of Trust of Federal Realty Investment Trust dated May 5,
1999 (previously filed as Exhibit 3.2 to the Trust's Current Report on
Form 8-K filed on May 25, 1999 (File No. 1-07533) and incorporated
herein by reference)
3.2 Amended and Restated Bylaws of Federal Realty Investment Trust dated
February 12, 2003 (filed herewith)
4.1 Specimen Common Share certificate (previously filed as Exhibit 4(i) to
the Trust's Annual Report on Form 10-K for the year ended December 31,
1999 (File No. 1-07533) (the "1999 Form 10-K") and incorporated herein
by reference)
4.2 Specimen 7.95% Series A Cumulative Redeemable Preferred Share
certificate (previously filed as Exhibit 4(ii) to the 1999 Form 10-K
and incorporated herein by reference)
4.3 Articles Supplementary relating to the 8 1/2% Series B Cumulative
Redeemable Preferred Shares (previously filed as Exhibit 4.1 to the
Trust's Registration Statement on Form 8-A filed on November 26, 2001
(File No. 1-07533) (the "2001 Form 8-A") and incorporated by
reference)
4.4 Specimen 8 1/2% Series B Cumulative Redeemable Preferred Share
certificate (previously filed as Exhibit 4.2 to the 2001 Form 8-A and
incorporated herein by reference)
4.5 Amended and Restated Rights Agreement, dated March 11, 1999, between
the Trust and American Stock Transfer & Trust Company (previously
filed as Exhibit 1 to the Trust's Registration Statement on Form 8-A/A
filed on March 11, 1999 (File No. 1-07533) and incorporated herein by
reference)
4.6 5 1/4% Convertible Subordinated Debenture due 2003 (previously
described in Amendment No. 1 to Form S-3 filed on August 4, 1987 (File
No. 33-15264) is incorporated herein by reference)
4.7 Indenture dated December 13, 1993 related to the Trust's 7.48%
Debentures due August 15, 2026; 6 5/8% Notes due 2005; 6.82% Medium
Term Notes due August 1, 2027; 6.74% Medium Term Notes due March 10,
2004; and 6.99% Medium Term Notes due March 10, 2006 (previously filed
as Exhibit 4(a) to the Trust's Registration Statement on Form S-3
(File No. 33-51029), and amended on Form S-3 (File No. 33-63687),
filed on December 13, 1993 is incorporated herein by reference)
4.8 Indenture dated September 1, 1998 related to the Trust's 8.75% Notes
due December 1, 2009 and the Trust's 6 1/8% Notes due November 15,
2007 filed as Exhibit 4(a) to the Trust's Registration Statement on
Form S-3 (File No. 333-63619) filed on September 17, 1998 is
incorporated herein by reference thereto
10.1 * Deferred Compensation Agreement with Steven J. Guttman dated
December 13, 1978 (previously filed as Exhibit 10(iv) to the Trust's
Annual Report on Form 10-K for the year ended December 31, 1980 (File
No. 1-07533) and incorporated herein by reference)
10.2 Amended and Restated 1983 Stock Option Plan and 1985 Non-Qualified
Stock Option Plan of Federal Realty Investment Trust (previously filed
as exhibits to the Trust's Registration Statement in Form S-8 (File
No. 33-55111), filed on August 17, 1994 and incorporated herein by
reference)
10.3 1985 Non-Qualified Stock Option Plan (previously filed as a portion
of Exhibit 10 to the Trust's Annual Report on Form 10-K for the year
ended December 31, 1985 (File No. 1-07533) and incorporated herein by
reference)
10.4 1991 Share Purchase Plan (previously filed as a portion of Exhibit 10
to the Trust's Annual Report on Form 10-K for the year ended December
31, 1990 (File No. 1-07533) and incorporated herein by reference)
10.5 Amendment dated October 1, 1992 to Voting Trust Agreement dated as of
March 3, 1989 by and between I. Wolford Berman and Dennis L. Berman
(previously filed as an exhibit to the Trust's Annual Report on Form
10-K for the year ended December 31, 1992 (File No. 1-07533) and
incorporated herein by reference)
- F37 -
Exhibit
No. Description
- ------- -----------
10.6 Amended and Restated 1993 Long-Term Incentive Plan, as amended on
October 6, 1997 and further amended on May 6, 1998 (previously filed
as a portion of Exhibit 10 to the Trust's Annual Report on Form 10-K
for the year ended December 31, 1998 (File No. 1-07533) and
incorporated herein by reference)
10.7 Fiscal Agency Agreement dated as of October 28, 1993 between the Trust
and Citibank, N.A. (previously filed as an exhibit to the Trust's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1993
(File No. 1-07533) (the "1993 Form 10-Q") and incorporated herein by
reference)
10.8 Form of Severance Agreement between the Trust and Certain of its
Officers dated December 31, 1994 (previously filed as a portion of
Exhibit 10 to the Trust's Annual Report on Form 10-K for the year
ended December 31, 1994 (File No. 1-07533) and incorporated herein by
reference)
10.9 Credit Agreement dated as of December 19, 1997 by and among the Trust,
as Borrower, the financial institutions party thereto and their
assignees, as Lenders, Corestates Bank, N.A., as Syndication Agent,
First Union National Bank, as Administrative Agent and as Arranger,
and Wells Fargo Bank, as Documentation Agent and as Co-Arranger
(previously filed as a portion of Exhibit 10 to the Trust's Annual
Report on Form 10-K for the year ended December 31, 1997 (File No.
1-07533) (the "1997 Form 10-K") and incorporated herein by reference)
10.10 * Performance Share Award Agreement between the Trust and Steven J.
Guttman, as of January 1, 1998 (previously filed as a portion of
Exhibit 10 to the 1997 Form 10-K and incorporated herein by reference)
10.11 * Form of Amended and Restated Restricted Share Award Agreements
between the Trust and Steven J. Guttman for the years 1998 through
2002 (previously filed as a portion of Exhibit 10 to the 1997 Form
10-K and incorporated herein by reference)
10.12 * Amended and Restated Employment Agreement between the Trust and
Steven J. Guttman as of March 6, 1998 (previously filed as a portion
of Exhibit 10 to the 1997 Form 10-K and incorporated herein by
reference)
10.13 * Amended and Restated Executive Agreement between the Trust and
Steven J. Guttman as of March 6, 1998 (previously filed as a portion
of Exhibit 10 to the 1997 Form 10-K and incorporated herein by
reference)
10.14 Term Loan Agreement, dated as of December 22, 1998 by and among the
Trust, as Borrower, the financial institutions party thereto and their
assignees, as Lenders, Commerzbank Aktiengesellschaft, New York Branch
as Syndication Agent, PNC, National Association, as Administrative
Agent and Fleet National Bank, as documentation agent (previously
filed as a portion of Exhibit 10 to the Trust's Annual Report on Form
10-K for the year ended December 31, 1998 (File No. 1-07533) and
incorporated herein by reference)
10.15 * Performance Share Award Agreement dated as of February 9, 2000
between the Trust and Donald C. Wood (previously filed as a portion of
Exhibit 10 to the Trust's Annual Report on Form 10-K for the year
ended December 31, 1999 (File No. 1-07533) (the "1999 Form 10-K") and
incorporated herein by reference)
10.16 * Restricted Share Award Agreement dated as of February 9, 2000
between the Trust and Donald C. Wood (previously filed as a portion of
Exhibit 10 to the 1999 Form 10-K and incorporated herein by reference)
10.17 * Amendment to Performance Share Award Agreement dated as of February
25, 2000 between the Trust and Steven J. Guttman (previously filed as
a portion of Exhibit 10 to the 1999 Form 10-K and incorporated herein
by reference)
10.18 * Severance Agreement between the Trust and Donald C. Wood dated
February 22, 1999 (previously filed as a portion of Exhibit 10 to the
1999 Form 10-K and incorporated herein by reference)
10.19 * Executive Agreement between Federal Realty Investment Trust and
Donald C. Wood dated February 22, 1999 (previously filed as a portion
of Exhibit 10 to the 1999 Form 10-K and incorporated herein by
reference)
10.20 * Amendment to Restricted Share Award Agreement dated December 8, 2000
the Trust and Donald C. Wood (previously filed as a portion of Exhibit
10 to the Trust's Annual Report on Form 10-K for the year ended
December 31, 2000 (File No. 1-07533) (the "2000 Form 10-K") and
incorporated herein by reference)
10.21 * Split Dollar Life Insurance Agreement dated June 7, 1998 between the
Trust and The Guttman Family 1998 Trust (previously filed as a portion
of Exhibit 10 to the 2000 Form 10-K and incorporated herein by
reference)
- F38 -
Exhibit
No. Description
- ------- -----------
10.22 * Split Dollar Life Insurance Agreement dated August 12, 1998 between
the Trust and Donald C. Wood (previously filed as a portion of Exhibit
10 to the 2000 Form 10-K and incorporated herein by reference)
10.23 * Restricted Share Award Agreement dated as of February 15, 2000
between the Trust and Jeffrey S. Berkes (previously filed as a portion
of Exhibit 10 to the Trust's Annual Report on Form 10-K for the year
ended December 31, 2001 (File No. 1-07533) (the "2001 Form 10-K") and
incorporated herein by reference)
10.24 * Severance Agreement between the Trust and Jeffrey S. Berkes dated
March 1, 2000 (previously filed as a portion of Exhibit 10 to the 2001
Form 10-K and incorporated herein by reference)
10.25 * Severance Agreement dated March 1, 2002 between the Trust and Larry
E. Finger (filed herewith)
10.26 * Combined Incentive and Non-Qualified Stock Option Agreement dated
February 28, 2002 between the Trust and Larry E. Finger (filed
herewith)
10.27 * Performance Share Award Agreement between the Trust and Donald C.
Wood dated February 28, 2002 (filed herewith)
10.28 * Performance Share Award Agreement between the Trust and Jeffrey S.
Berkes dated February 28, 2002 (filed herewith)
10.29 * Amendment to Promissory Notes dated May 31, 2002 between Federal
Realty Investment Trust and Steven J. Guttman (filed herewith)
10.30 * Amendment to Stock Option Agreement dated August 15, 2002 between
the Trust and Dawn M. Becker (filed herewith)
10.31 * Amendment to Stock Option Agreement dated August 15, 2002 between
Federal Realty Investment Trust and Jeffrey S. Berkes (filed herewith)
10.32 2001 Long-Term Incentive Plan (previously file as Exhibit 99.1 to the
Trust's S-8 Registration Number 333-60364 filed on May 7, 2001)
23.1 Consent of Grant Thornton LLP (filed herewith)
25.1 Power of Attorney (included on signature page)
99.1 Section 906 Certification for Donald C. Wood
99.2 Section 906 Certification for Larry E. Finger
- F39 -
(b) Reports on Form 8-K
On December 23, 2002, we filed a Form 8-K dated December 20, 2002 in
response to Items 5 and 7, to report and file a press release announcing the
resignation of Steven J. Guttman as Trustee, chief executive officer and
chairman of the Board of Trustees effective January 1, 2003 and the appointment
of Donald Wood, our then president and chief operating officer, as chief
executive officer and a member of the Board of Trustees. In addition, Mark
Ordan, a member of the Board of Trustees since 1996, was named non-executive
chairman of the board.
On November 18, 2002, we filed a Form 8-K dated November 18, 2002 in
response to Item 7, to file certain exhibits to our registration statement on
Form S-3 (File No. 333-63619) in connection with our underwritten public
offering of $150 million of 6 1/8% Notes due 2007.
On November 13, 2002, we filed a Form 8-K dated November 13, 2002 in
response to Item 5, to file a description of the material U.S. federal income
tax consequences relating to our taxation as a REIT and the ownership and
disposition of our common shares.
On October 30, 2002, we filed a Form 8-K dated September 30, 2002 in
response to Item 5, to file supplemental data pertaining to our portfolio of
properties at September 30, 2002.
(c) Exhibits
See Item 15(a)(3) above
* Management contract or compensatory plan to be filed under item 15(c) of Form
10-K.
- F41 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned thereunto duly authorized this 26th day of March,
2003.
Federal Realty Investment Trust
By: /s/ DONALD C. WOOD
-------------------------------
Donald C. Wood
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this Report has been signed below by the following persons in the capacities
indicated. Each person whose signature appears below hereby constitutes and
appoints each of Donald C. Wood and Dawn M. Becker as his or her
attorney-in-fact and agent, with full power of substitution and resubstitution
for him or her in any and all capacities, to sign any or all amendments to this
Report and to file same, with exhibits thereto and other documents in connection
therewith, granting unto such attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
in connection with such matters and hereby ratifying and confirming all that
such attorney-in-fact and agent or his or her substitutes may do or cause to be
done by virtue hereof.
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------------------- --------------
/s/ Donald C. Wood Chief Executive Officer (Principal March 26, 2003
- -------------------- Executive Officer)
Donald C. Wood
/s/ Larry E. Finger Senior Vice President, Chief March 26, 2003
- --------------------- Financial Officer and Treasurer
Larry E. Finger (principal financial and accounting
officer)
/s/ Mark S. Ordan Non-Executive Chairman March 26, 2003
- -------------------
Mark S. Ordan
/s/ Dennis L. Berman Trustee March 26, 2003
- ----------------------
Dennis L. Berman
/s/ Kristin Gamble Trustee March 26, 2003
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Kristin Gamble
/s/ Amy B. Lane Trustee March 26, 2003
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Amy B. Lane
/s/ Walter F. Loeb Trustee March 26, 2003
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Walter F. Loeb
/s/ Joseph S. Vassalluzzo Trustee March 26, 2003
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Joseph S. Vassalluzzo
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CERTIFICATIONS
I, Donald C. Wood, certify that:
1. I have reviewed this annual report on Form 10-K of Federal Realty
Investment Trust;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a.) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b.) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c.) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of trustees (or persons
performing the equivalent functions):
a.) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b.) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that
- F45 -
could significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
DATE: March 26, 2003 /s/ Donald C. Wood
------------------
NAME: Donald C. Wood
TITLE: President and Chief Executive Officer
- F46 -
CERTIFICATIONS
I, Larry E. Finger, certify that:
1. I have reviewed this annual report on Form 10-K of Federal Realty
Investment Trust;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a.) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b.) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c.) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of trustees (or persons
performing the equivalent functions):
a.) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b.) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that
- F47 -
could significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
DATE: March 26, 2003 /s/ Larry E. Finger
-------------------
NAME: Larry E. Finger
TITLE: Senior Vice President - Chief Financial
Officer and Treasurer
- F48 -