EXHIBIT 99.1
REAL ESTATE INVESTMENT RISK
Statements in this document filed with the SEC include forward
looking statements under the federal securities laws. Statements that are not
historical in nature, including the words "anticipate," "estimate," "should,"
"expect," "believe," "intend," and similar expressions, are intended to identify
forward-looking statements. While these statements reflect our good faith belief
based on current expectations, estimates and projections about (among other
things) the industry and the markets in which we operate, they are not
guarantees of future performance, involve known and unknown risks and
uncertainties that could cause actual results to differ materially from those in
the forward looking statements, and should not be relied upon as predictions of
future events. In making these cautionary statements, we are not committed to
addressing or updating each factor in future filings of communications regarding
our business or results, or addressing how any of these factors may have caused
results to differ from discussions or information contained in previous filings
or communications. The following is a discussion of factors that could impact
future results:
Industry Risks
Real property investments are subject to changes in general economic
conditions.
Real property investments are subject to varying types and degrees of
risk that may hinder or otherwise affect our ability to generate revenues. These
risks could reduce the amount of cash available for distributions to
shareholders.
Any of the following factors could affect the value of our real estate
and our ability to generate revenues:
o changes in the general economic climate;
o local conditions (such as an oversupply of space or a
reduction in demand for real estate in an area);
o competition from other shopping centers, properties,
developers or real estate owners;
o variable operating costs;
o government regulations;
o changes in interest rates;
o the availability of financing; and
o potential liability due to changes in environmental and other
laws.
Real estate investments are relatively illiquid.
Real estate investments are relatively illiquid and, therefore, our
ability to react promptly in response to changes in economic or other conditions
will be limited. In addition, the Internal Revenue Code limits our ability to
sell property held for less than four years.
We may not be able to re-lease properties upon the expiration of
existing leases.
Upon the expiration of leases, tenants may not renew leases and we
may not be able to re-lease properties or the terms of the renewal or re-lease,
including the costs of required renovations or concessions to tenants may be
less favorable than current lease terms. Our operating cash flow would decrease
if we were unable to properly re-lease all or a substantial portion of this
space, if the rental rates upon the re-lease were significantly lower than
expected, or if reserves for costs of the re-leasing prove inadequate.
If tenants are unable to meet their obligations to us our cash flow
would be adversely affected.
If a significant number of tenants are unable to meet their
obligations to us, the cash receipts and cash available for distribution will
decrease. A tenant may experience a downturn in its business which may weaken
its financial condition and result in a reduction or failure to make rental
payments when due. If a lessee or sublessee defaults in its obligations to us,
we may be delayed in enforcing our rights as lessor or sublessor. In addition,
we may incur substantial costs and experience significant delays associated with
protecting our investment, including costs incurred in renovating and re-leasing
the property.
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At any time, one or more of our tenants may seek the protection of the
bankruptcy laws, which could result in the rejection and termination of their
lease. We are subject to risks that:
o any present tenant that has filed for bankruptcy protection
will not continue making payments under its lease;
o any tenant may file for bankruptcy protection in the future;
or
o any tenants that file for bankruptcy protection may not
continue to make rental payments in a timely manner.
Losses from earthquakes and other natural disasters are uninsurable or
insurable only at costs that are not economically justifiable.
We carry comprehensive liability, fire, flood, extended coverage and
rental loss insurance with policy specifications and insured limits that are
customary for similar properties. Losses from catastrophic events and natural
disasters like wars or earthquakes, however, are uninsurable or insurable only
at costs that are not economically justifiable. If an uninsured loss occurs, we
may lose both our invested capital and anticipated profits from the property.
Nevertheless, we would still be obligated to repay any recourse mortgage
indebtedness on the property.
We are subject to risks associated with debt financing and existing
debt maturities.
We are subject to a variety of risks associated with debt financing.
Examples of these risks include the following:
o our cash from operating activities may be insufficient to meet
required payments;
o we may be unable to pay or refinance indebtedness on our
properties;
o if interest rates or other factors result in higher interest
rates on refinancing, these factors will diminish our returns
on development and redevelopment activities, reduce cash from
operating activities, and hamper our ability to make
distributions to shareholders;
o if we are unable to secure refinancing of indebtedness on
acceptable terms, we may be forced to dispose of properties
upon disadvantageous terms, which may cause losses and affect
our funds from operations; and
o if properties are mortgaged to secure payment of indebtedness
and we are unable to meet payments, the mortgagee may
foreclose upon the properties, resulting in a loss of income
and a valuable asset to us.
Because many of our competitors have greater capital resources, we may
be at a disadvantage with regard to exploiting land development,
property acquisition and tenant opportunities.
Based on total assets and annual revenues, we are smaller than many of
the numerous commercial developers, real estate companies and other owners of
real estate that compete with us in seeking land for development, properties for
acquisition and tenants for properties. We are even smaller than many of our
competitors that operate in the region in which our properties are located. Many
of these competitors may have greater capital and resources than us, and this
fact could impair our ability to acquire properties in the future.
We may become liable for the costs of removal or remediation of
certain environmentally hazardous or toxic substances under federal,
state or local laws.
Under various federal, state and local laws, ordinances and
regulations, we may become liable for the cost of removal or remediation of
certain hazardous or toxic substances on or in our real property. Liability may
be imposed regardless of whether we or the tenant knew of, or was responsible
for, the presence of such hazardous or toxic substances. The costs of any
required remediation or removal of environmentally hazardous substances may be
substantial, and our liability as to any property is generally not limited under
those laws, ordinances and regulations. The liability could exceed the value of
our property and/or aggregate assets. The presence of, or the failure to
properly remediate substances when released may adversely affect our ability to
sell the affected real estate or to borrow using the real estate as collateral.
At the time of this filing, we had not been notified by any governmental
authority of any non-compliance, liability or other claim in connection with any
of our properties, and we are not aware of any other environmental condition
with respect to any of the our portfolio properties that we believe would have a
material adverse effect on our business, assets or results of operations.
However, we cannot assure that there are no potential environmental liabilities,
that no environmental liabilities may develop, that no prior owner created any
material environmental condition not known to us, or that future uses or
conditions, including, without limitation, changes in applicable environmental
laws and regulations, will not result in liability.
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We may incur significant costs complying with the Americans with
Disabilities Act.
We must comply with Title III of the Americans with Disabilities Act.
To comply with the ADA's requirements, we may be required to remove structural,
architectural or communication barriers to handicapped access and utilization in
certain public areas of our properties. Noncompliance could result in injunctive
relief, imposition of fines or an award of damages to private litigants. If we
are required to make changes to bring any of the properties into compliance with
the ADA, expenses associated with these changes could adversely affect our
ability to make expected distributions to shareholders. We believe that our
competitors face similar costs to comply with the requirements of the ADA.
The ownership limitations on REITs create an anti-takeover effect.
To maintain our qualification as a REIT not more than 50% in value
of our outstanding common shares may be owned, actually or constructively, by
five or fewer individuals. In addition, the Internal Revenue Code imposes
certain other limitations on the ownership of the shares of a REIT. For the
purpose of preserving our tax status as a REIT, our charter prohibits actual or
constructive ownership of more than 9.9% of the outstanding shares, either in
the aggregate or of any class, by any person, unless waived by the board of
trustees. In addition, the beneficial ownership limitations restrict the
ownership, under applicable attribution rules of the Internal Revenue Code, of
more than 9.9% of the outstanding shares, either in the aggregate or of any
class. The rules addressing constructive ownership are complex and may cause
shares owned, actually or constructively, by a group of related individuals
and/or entities to be deemed to be constructively owned by one individual or
entity. As a result, the acquisition of less than 9.9% of the outstanding
shares, either in the aggregate or of any class, by an individual or entity
could cause that individual or entity (or another individual or entity) to
constructively own more than 9.9% of the outstanding shares. This situation
would subject such shares to the beneficial ownership limitations. Actual or
constructive ownership of shares in excess of such limits would either cause the
violative transfer or ownership to be void or cause such shares to be converted
to Excess Shares.
The ownership restrictions have the effect of deterring
non-negotiated acquisitions of us, and proxy fights for us by third parties.
Limiting the ownership of our shares may discourage a change of control and may
also:
o deter tender offers for the common shares, which offers may be
attractive to the shareholders,
o limit the opportunity for shareholders to receive a premium
for the common shares that might otherwise exist if an
investor attempted to assemble a block of shares in excess of
the 9.9% beneficial ownership limitation, or
o limit the opportunity for shareholders to effect a change in
our control.
We may not qualify as a REIT in the future causing us to be taxed at
regular corporate rates and reducing the amount of cash for
distribution.
We believe that we have operated in a manner that permits us to
qualify as a REIT under the Internal Revenue Code for each taxable year since
our formation as a REIT in 1993. Qualification as a REIT, however, involves the
application of highly technical and complex Internal Revenue Code provisions for
which there are only limited judicial or administrative interpretations. In
addition, REIT qualification involves the determination of various factual
matters and circumstances not entirely within our control. For example, in order
to qualify as a REIT, at least 95% of our gross income in any year must be
derived from qualifying sources, and we must distribute annually to shareholders
95% of our REIT taxable income, excluding net capital gains. Therefore, although
we believes that we are organized and operating in a manner that permits us to
remain qualified as a REIT, we cannot guarantee that we will be able to continue
to operate in such a manner. In addition, if we are ever audited by the IRS with
respect to any past year, the IRS may challenge our qualification as a REIT for
that year.
Similarly, new legislation, regulations, administrative
interpretations or court decisions may change the tax laws with respect to
qualification as a REIT or the federal income tax consequences of that
qualification. We are not aware, however, of any currently pending tax
legislation that would adversely affect our ability to continue to operate as a
REIT.
If we fail to qualify as a REIT, we will be subject to federal
income tax on taxable income at regular corporate rates. Increased tax liability
in a given year could significantly reduce, or possibly eliminate, the amount of
cash we have available for investment or distribution to shareholders for that
year. In addition, we will also be disqualified from treatment as a REIT for the
next four taxable years, unless we are entitled to relief under other statutory
provisions.
If we do not qualify as a REIT, we will no longer be required to
make annual distributions to shareholders. To the extent that we made
distributions to shareholders in anticipation of our qualifying as a REIT, we
might be required to borrow funds or to liquidate some of our investments to pay
the applicable tax. Our failure to qualify as a REIT would also constitute a
default under certain of our debt obligations and would significantly reduce the
market value of our shares.
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Company Risks
Our performance depends on the economic conditions of the Middle
Atlantic Area where most of our properties are located.
Our performance depends on the economic conditions in markets in which
our properties are concentrated. Since our properties are located in the Middle
Atlantic area, our results could be adversely affected if conditions, such as an
oversupply of space or a reduction in demand for real estate, in the Middle
Atlantic area become more competitive than other geographic areas. The existence
of these conditions could have a greater adverse impact on us than on a real
estate company with properties in a number of different geographic areas.
Our organizational documents do not place limits on the incurrence of
debt.
Our documents do not limit the amount of indebtedness that we may
incur. Although our board of trustees attempts to maintain a balance between
total outstanding indebtedness and the value of our portfolio (for example, a
ratio of secured debt and preferred stock to real estate value of 50% or less),
it could alter this balance at any time. If we become more highly leveraged,
then the resulting increase in debt service could diminish our ability to make
expected distributions to shareholders and make payments on outstanding
indebtedness. If we default on our obligations under any outstanding
indebtedness, we could lose our interest in any properties that secure that
indebtedness.
Many real property leases contain covenants that restrict the use of
space at a property and may prevent us from re-leasing the property.
Many leases with existing tenants have covenants that restrict the
use of other space at a property. For example, many
shopping center leases have covenants that provide for an appropriate tenant mix
or balance of the shopping center. Leases with covenants that provide for an
appropriate tenant mix would require a high end luxury store to be replaced with
a high end luxury store rather than a discount clothes store (for example,
Macy's must be replaced with a store such as a Saks Fifth Avenue or Nordstrom's
rather than a K-Mart or another discount store).
We may need to borrow money to qualify as a REIT.
Our ability to make distributions to shareholders could be
diminished by increased debt service obligations if we need to borrow money in
order to maintain our REIT qualification. For example, differences in timing
between when we receive income and when we have to pay expenses could require us
to borrow money to meet the requirement that we distribute to shareholders at
least 95% of our net taxable income excluding net capital gain each year. The
incurrence of large expenses also could require us to borrow money to meet this
requirement. We might need to borrow money for these purposes even if we believe
that market conditions are not favorable for such borrowings. In other words, we
may have to borrow money on unfavorable terms.
We cannot avoid risks inherent in development and acquisition
activities.
Developing or expanding existing properties in our real estate
portfolio is an integral part of our strategy for maintaining and enhancing the
value of our portfolio. We may also choose to acquire additional properties in
the future. While our policies with respect to developing and expanding
properties are intended to limit some of the risks otherwise associated with
property acquisition such as not starting construction on a project prior to
obtaining a commitment from an anchor tenant, we nevertheless will incur risks,
including risks related to delays in construction and lease-up, costs of
materials, financing availability, volatility in interest rates and labor
availability.
In addition, once a property is acquired, the renovation and
improvement costs we incur in bringing an acquired property up to market
standards may exceed our estimates, and the property may fail to perform as
expected.
Maryland law may prevent or discourage a change in control.
The Maryland General Corporation Law establishes special restrictions
against "business combinations" between a Maryland corporation and "interested
shareholders" or their affiliates unless an exemption is applicable. The
business combination statute could have the effect of discouraging offers to
acquire us and of increasing the difficulty of consummating any offers to
acquire us, even if our acquisition would be in our shareholders' best
interests.
Maryland law also provides that "control shares" of a Maryland
corporation acquired in a "control share acquisition" have no voting rights
except to the extent approved by a vote of two-thirds of the votes entitled to
be cast on the matter, excluding shares of beneficial interest owned by the
acquiror, by officers or by trustees who are employees of the corporation. The
control share statute could have the effect of discouraging offers to acquire us
and of increasing the difficulty of consummating any control share acquisitions,
even if our acquisition would be in our shareholders' best interests.
Increased market interest rates could reduce share prices.
The annual dividend rate on shares as a percentage of its market price
may influence the trading price of stock. Also, an increase in market interest
rates may lead purchasers to demand a higher annual dividend rate, which could
lower the market price of the shares. A decrease in the market price of the
shares could reduce our ability to raise additional equity in the public
markets.
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