UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of report (Date of earliest event reported) November 10, 2004
Equity One, Inc.
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(Exact Name of Registrant as Specified in Its Charter)
Maryland
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(State or Other Jurisdiction of Incorporation)
001-13499 52-1794271
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(Commission File Number) (IRS Employer Identification No.
1696 NE Miami Gardens Drive
North Miami Beach, Florida 33179
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(Address of Principal Executive Offices) (Zip Code)
(305) 947-1664
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(Registrant's Telephone Number, Including Area Code)
N/A
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(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions:
[ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange
Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange
Act (17 CFR 240.13e-4(c))
EQUITY ONE, INC.
FORM 8-K
Index
Page
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Section 8. Other Events.................................................. 1
Selected Consolidated Financial Data...................................... 1
Item 7. Management Discussion and Analysis of Financial Condition and
Results of Operations............................................ 5
Liquidity and Capital Resources...................................... 14
Mortgage Indebtedness................................................ 17
Inflation and Recession Consideration................................ 24
Quantitative and Qualitative Disclosures About Market Risk........... 24
Index To Financial Statements
Report of Independent Registered Public Accounting Firm.............. F-1
Consolidated Balance Sheets.......................................... F-2
Consolidated Statements of Operations ............................... F-3 - F-4
Consolidated Statements of Comprehensive Income ..................... F-5
Consolidated Statements of Stockholders' Equity ..................... F-6
Consolidated Statements of Cash Flows ............................... F-7 - F-8
Notes to Consolidated Financial Statements........................... F-9
Signature
Section 9 - Financial Statements and Exhibits
23.1 Consent of Independent Registered Public Accounting Firm
SECTION 8. OTHER EVENTS
Item 8.01 Other Events
Equity One, Inc. (the "Company") is revising its financial statements,
Management's Discussion and Analysis, and Selected Financial Data which appeared
in its Annual Report on Form 10-K for the year ended December 31, 2003. The
revisions relate to Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144").
The Company disposed of income producing properties through September 30, 2004
or had properties categorized as held for sale as of September 30, 2004. The
operating results of those properties have been reclassified as discontinued
operations on the Consolidated Statements of Operations for all periods
presented. SFAS 144 requires that financial statements be revised to give
retroactive effect to discontinued operations if the financial statements are
included or incorporated by reference in subsequent filings made with the SEC.
There is no effect on net income or funds from operations for all periods
presented related to the reclassifications made for the discontinued items.
The current Report on Form 8-K updates Items 6, 7 and 8 of the Company's
2003 Form 10-K to reflect properties disposed of or held for sale through
September 30, 2004. All other items in the 2003 Form 10-K remain current and no
revisions to other information provided in such Form 10-K has been made other
than to reflect changes related to discontinued operations.
Disposed of:
Square Gross
Property City State Date Sold Feet/Acres Sales Price
----------------------------- ---------------- ----- ------------------- ---------- ------------
Southwest Walgreens Phoenix AZ February 23, 2004 93,402 $ 6,650
Watson Central Warner Robbins GA June 29, 2004 227,747 6,000
Plaza Del Rey Miami FL July 13, 2004 50,146 9,000
Forrest Gallery Tullahoma TN July 19, 2004 214,450 10,500
Epsilon (Clematis) West Palm Beach FL July 30, 2004 18,707 2,650
Millervillage Baton Rouge LA September 2, 2004 94,559 2,700
Plymouth Park (4 properties) Irving TX September 24, 2004 728,566 24,000
--------
$ 61,500
========
Held for Sale:
As of September 30, 2004, four properties with a carrying cost of $12,232
and a joint venture interest with a carrying cost of $2,575 were held for sale,
of which three of the properties were sold in October 2004 for total
consideration of $17,250.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated operating data and balance sheet data set forth
below have been derived from our consolidated financial statements, including
the consolidated financial statements for the years ended December 31, 2003,
2002 and 2001 contained elsewhere herein. The consolidated financial statements
as of and for the years ended December 31, 2003, 2002 and 2001 have been audited
by Deloitte & Touche LLP, an independent registered public accounting firm. The
data set forth below should be read in conjunction with the consolidated
financial statements and related notes, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this Form 8-K.
1
Year Ended December 31,
------------------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
(in thousands other than per share, percentage and ratio data)
Statement of Operations Data: (1)(2)
Total rental income ................. $ 181,633 $ 93,569 $ 74,455 $ 44,701 $ 23,817
--------- --------- --------- --------- ---------
Property operating expenses ......... 52,042 28,849 23,267 12,676 5,722
Rental property depreciation and .... 1 2 5
amortization ...................... 26,621 12,562 10,355 5,814 3,122
Litigation settlement ............... -- 2,067 -- -- --
General and administrative expenses . 11,046 6,648 3,553 2,559 1,622
--------- --------- --------- --------- ---------
Total operating expenses ............ 89,709 50,126 37,175 21,049 10,466
Other income and expenses ........... 1,263 4,235 702 793 4,418
Interest expense .................... (36,814) (20,889) (20,417) (12,215) (5,086)
Amortization of deferred financing
fees .............................. (992) (759) (1,080) (242) --
--------- --------- --------- --------- ---------
Income before discontinued .......... $ 55,381 $ 26,030 $ 16,485 $ 11,988 $ 12,683
operations and minority interest
========= ========= ========= ========= =========
Net income .......................... $ 63,647 $ 39,934 $ 18,721 $ 12,555 $ 13,589
========= ========= ========= ========= =========
Basic earnings per share:
Income before discontinued
operations ...................... $ 0.91 $ 0.79 $ 0.70 $ 0.80 $ 1.17
========= ========= ========= ========= =========
Net income ........................ $ 1.06 $ 1.22 $ 0.83 $ 0.88 $ 1.26
========= ========= ========= ========= =========
Diluted earnings per share:
Income before discontinued
operations ...................... $ 0.90 $ 0.78 $ 0.70 $ 0.79 $ 1.17
========= ========= ========= ========= =========
Net income ........................ $ 1.05 $ 1.20 $ 0.83 $ 0.87 $ 1.26
========= ========= ========= ========= =========
(continued)
2
Year Ended December 31,
--------------------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ---------- --------- ---------- ----------
(in thousands other than per share, percentage and ratio data)
Balance Sheet Data: (2)
Total rental properties, net
of accumulated depreciation .. $1,617,299 $ 678,431 $ 627,687 $ 483,699 $ 204,919
Total assets ................... 1,677,386 730,069 668,536 542,817 212,497
Mortgage notes payable ........... 459,103 332,143 345,047 280,396 97,752
Total liabilities ................ 834,162 375,969 386,400 317,392 121,068
Minority interest ................ 12,672 3,869 3,869 37,762 989
Shareholders' equity ............. 830,552 350,231 278,267 187,663 90,440
Other Data: (2)
Funds from operations(3) ........ $ 89,870 $ 45,487 $ 29,848 $ 19,266 $ 13,354
Cash flows from:
Operating activities .......... 78,262 45,613 28,214 20,293 20,169
Investing activities .......... (326,160) (51,439) (42,435) (11,679) (62,239)
Financing activities .......... 245,920 7,864 12,780 (6,694) 40,903
GLA (square feet) at end of
period ........................ 19,883 8,530 8,637 3,169 2,836
Occupancy at end of period ..... 90% 89% 86% 95% 95%
Dividends per share ............ $ 1.10 $ 1.08 $ 1.06 $ 1.10 $ 1.02
(continued)
<FN>
- --------------------------
(1) Restated to reflect the reporting of discontinued operations.
(2) Prior year data has been reclassified to conform to the current period's
presentation.
(3) We believe Funds From Operations ("FFO") (combined with the primary GAAP
presentations) is a useful supplemental measure of our operating
performance that is a recognized metric used extensively by the real estate
industry and in particular, REITs. The National Association of Real Estate
Investment Trusts ("NAREIT") stated in its April 2002 White Paper on Funds
from Operations, "Historical cost accounting for real estate assets
implicitly assumes that the value of real estate assets diminish
predictably over time. Since real estate values instead have historically
risen or fallen with market conditions, many industry investors have
considered presentations of operating results for real estate companies
that use historical cost accounting to be insufficient by themselves." FFO,
as defined by NAREIT, is "net income (computed in accordance with GAAP),
excluding gains (or losses) from sales of property, plus depreciation and
amortization, and after adjustments for unconsolidated partnerships and
joint ventures". It states further that "adjustments for unconsolidated
partnerships and joint ventures will be calculated to reflect funds from
operations on the same basis." We believe that financial analysts,
investors and stockholders are better served by the supplemental
presentation of comparable period operating results generated from our FFO
measure. Our method of calculating FFO may be different from methods used
by other REITs and, accordingly, may not be comparable to such other REITs.
FFO is presented to assist investors in analyzing our operating
performance. FFO (i) does not represent cash flow from operations as
defined by GAAP, (ii) is not indicative of cash available to fund all cash
flow needs, including the ability to make distributions, (iii) is not an
alternative to cash flow as a measure of liquidity, and (iv) should not be
considered as an alternative to net income (which is determined in
accordance with GAAP) for purposes of evaluating our operating performance.
We believe net income is the most directly comparable GAAP measure to FFO.
</FN>
3
The following table illustrates the calculation of funds from operations
for the five years ended December 31, 2003:
Year Ended December 31,
--------------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
Net income ........................... $ 63,647 $ 39,934 $ 18,721 $ 12,555 $ 13,589
Adjustments:
Rental property depreciation and
amortization, including discontinued
operations ............................ 28,007 13,810 11,665 6,534 3,483
(Gain) loss on disposal of income
producing properties .................. (3,083) (9,264) 609 63 (3,814)
Minority interest, excluding CEFUS ...... 803 101 99 -- 96
Other Items:
Interest on convertible partnership units 43 259 259 20 --
Deferred income tax (benefit) expense ... -- -- (374) 1,071 --
Minority interest in CEFUS share of FFO
adjustments ........................... -- -- (1,369) (1,010) --
Pro-rata share of real estate
depreciation from joint ventures ...... 453 647 238 33 --
-------- -------- -------- -------- --------
Funds from operations ..................... $ 89,870 $ 45,487 $ 29,848 $ 19,266 $ 13,354
======== ======== ======== ======== ========
The following table reflects the reconciliation of FFO per diluted
share to earnings per diluted share, the most directly comparable GAAP measure,
for the periods presented:
Year Ended December 31,
--------------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
Earnings per diluted share*............... $ 1.05 $ 1.20 $ 0.83 $ 0.87 $ 1.26
Adjustments:
Rental property depreciation and
amortization, including discontinued
operations............................. 0.45 0.41 0.52 0.45 0.32
(Gain) loss on disposal of income
producing properties.................. (0.05) (0.27) 0.03 0.01 (0.35)
Minority interest........................ 0.01 - - - 0.01
Other items:
Deferred income tax (benefits) expense... - - (0.02) 0.07 -
Minority interest in CEFUS share of
FFO adjustments....................... - - (0.06) (0.07) -
Pro-rata share of real estate
depreciation from joint ventures...... - 0.02 0.01 - -
-------- -------- -------- -------- --------
Funds from operations per diluted share... $ 1.46 $ 1.36 $ 1.31 $ 1.33 $ 1.24
======== ======== ======== ======== ========
* Earnings per diluted share reflect the add-back of interest on convertible
partnership units and the minority interest(s) in earnings of consolidated
subsidiaries which are convertible to shares of our common stock.
4
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management discussion and analysis of financial condition and results of
operations reflect the impact of the reclassification of discontinued operations
of depreciable rental property disposed of during the nine months ended
September 30, 2004 of designated or held for sale as of September 30, 2004.
Overview
The following should be read in conjunction with our consolidated financial
statements, including the notes thereto, which are included elsewhere in this
annual report.
We operate as a real estate investment trust, or REIT, that principally
acquires, renovates, develops and manages community and neighborhood shopping
centers located predominately in high growth markets in the southern United
States. Our shopping centers are primarily anchored by supermarkets or other
necessity-oriented retailers such as drug stores or discount retail stores. As
of December 31, 2003, our portfolio consisted of 185 properties, comprising 123
supermarket-anchored shopping centers, 11 drug store-anchored shopping centers,
44 other retail-anchored shopping centers, one self-storage facility, one
industrial and five retail developments, as well as non-controlling interests in
two unconsolidated joint ventures that own and operate commercial properties.
We believe we distinguish ourselves by owning and operating shopping
centers anchored by supermarkets or necessity-oriented retailers in high density
areas that are experiencing high population growth. Our goal is to own and
operate properties containing dominant supermarket operators and a diverse
tenant mix. We believe that these characteristics combine to reduce the
vulnerability of our properties to economic downturns, enhance consumer traffic
through our properties and generate more stable cash flows over time. We derive
substantially all of our revenue from tenants under existing leases at our
properties.
Our business is generally dependent on the performance of the economy in
the areas in which we own properties. Changes in the economic environment tend
to have a direct effect on our tenants' businesses and, therefore, their ability
to continue to pay us rent. In 2003, the overall U.S. economy began to
demonstrate sustained economic growth. This growth, as well as the prevailing
low interest rate environment, contributed to the growth in our cash flows and
allowed us to increase the occupancy rates at our centers for the year. We have
followed a disciplined approach and taken advantage of the improving economic
environment in our markets. First, we continue to concentrate on shopping
centers in the southern region of the United States by acquiring new centers in
high growth, high density areas, developing and redeveloping centers in these
areas and selling properties that no longer meet our investment criteria.
Second, we also have repaid certain high interest rate mortgage debt and
obtained a variable rate unsecured revolving credit facility on what we consider
to be favorable financial and legal terms. Third, we were able to access the
capital markets for additional equity financing.
The highlights of our 2003 activity reflect this strategy.
o We completed a statutory merger with IRT Property Company acquiring 93
properties comprising approximately 10 million square feet of gross
leasable area located in ten states in the southern region of the
United States. We now have shopping centers in twelve states primarily
in Florida, Texas, Georgia, North Carolina, South Carolina and
Louisiana.
o We acquired an additional 10 supermarket anchored centers, an
outparcel and land held for future development for approximately
$211.0 million.
5
o We sold 6 properties, a property held by a joint venture and a joint
venture interest for gross proceeds of $33.3 million.
o We completed the development of a supermarket anchored shopping center
containing 91,000 square feet of gross leasable area and have over 25
development and redevelopments underway.
o We completed two public equity offerings of our common stock, raising
proceeds of $99.9 million and issuing 6.0 million shares of our common
stock.
o We entered into a $340 million unsecured revolving credit facility and
prepaid $54.8 million of fixed and variable rate debt. Our fixed rate
mortgage debt outstanding of $459.1 million is at a weighted average
interest rate of 7.45%, our $150.0 million fixed rate senior unsecured
notes are at a weighted average interest rate of 7.55% and our
variable rate revolving credit facility has an interest rate currently
at 2.06% including the effect of interest swaps.
o We increased the base rental rate by 3.1% on 284 lease renewals
aggregating 674,889 square feet to $12.30 per square foot. We executed
367 new leases totaling 1,144,882 square feet at an average rate of
$10.89 per square foot and we increased our occupancy rate to 91.6% in
the portfolio.
However, our long-term operating cash flow is dependent on the continued
occupancy of our properties, the rents that we are able to charge to our tenants
and the ability of these tenants to make their rental payments. Therefore, the
main long-term threat to our business is our dependence on the viability of our
anchor and other tenants. General economic downturns and competition from
national and regional supercenters, such as Wal-Mart or other discount
retailers, may have an increasing adverse impact on the business of our tenants
by taking customers or reducing operating margins. For instance, Winn-Dixie
Stores Inc., which has supermarkets in 17 of our centers, has recently announced
deteriorating operating results and has had the rating on its senior notes
downgraded. However, we believe that these risks are mitigated by concentrating
on high-density, urban areas, leasing to the dominant supermarket operators in
the markets in which we own properties and maintaining a diverse tenant mix. We
are not currently aware of any pending tenant bankruptcies that are likely to
materially affect our rental revenues.
We are optimistic that we are well positioned to take advantage of the
sustained growth of the economy and continuing low interest rate environment
while our largely fixed rate indebtedness protects us from increases in interest
rates in the near term.
Short-Term Liquidity Needs
As of December 31, 2003, we had $966,000 in cash and $150.6 million
available to be drawn under our revolving credit facilities. Our cash flow
generated by operations was $78.3 million for the year ended December 31, 2003.
Our short-term liquidity requirements consist primarily of funds necessary
to pay for operating and other expenses directly associated with our portfolio
of properties, general and administrative expenses (including payroll and
related costs), interest expense and scheduled principal payments on our
outstanding debt, capital expenditures incurred to facilitate the leasing of
space (e.g., tenant improvements and leasing commissions), development and
redevelopment activities, quarterly dividends paid to our common shareholders
and distributions made to holders of operating partnership units.
Historically, we have satisfied these requirements principally through cash
generated from operations. We believe that cash generated from operations and
borrowings under our unsecured revolving credit facilities will be sufficient to
meet our short-term liquidity requirements; however, there are certain factors
that may have a material adverse effect on our cash flow.
6
Our current development plans include over 25 development and redevelopment
projects, the aggregate cost of which (including costs incurred in prior years
on these projects) is expected to be approximately $107.2 million of which $32.5
million remains unfunded based on our current plans. We intend to fund these
costs from our unsecured revolving credit facilities.
We may incur significant expenditures in connection with the re-leasing of
our retail space, principally in the form of tenant improvements and leasing
commissions. The amounts of these expenditures can vary significantly, depending
on negotiations with tenants and the willingness of tenants to pay higher base
rents over the life of the leases. We also incur expenditures for certain
recurring capital expenses. We expect to pay for re-leasing and recurring
capital expenditures out of cash from operations.
As a REIT, we are required to distribute at least 90% of our taxable income
to our stockholders on an annual basis. Therefore, as a general matter, it is
unlikely that we will be able to retain any substantial cash balances that could
be used to meet our liquidity needs. Instead, these needs must be met with cash
generated from current operations and external sources of capital.
During 2003, we paid dividends on our common stock in an amount equal to
$1.10 per share. The maintenance of these dividends is subject to various
factors, including the discretion of our Board of Directors, our ability to pay
dividends under Maryland law, the availability of cash to make the necessary
dividend payments and the effect of REIT distribution requirements. We also make
regular distributions on units in partnerships that we control.
Long-Term Liquidity Needs
Our long-term liquidity requirements consist primarily of funds necessary
to pay for the principal amount of our long-term debt as it matures, significant
non-recurring capital expenditures that need to be made periodically at our
properties, development and redevelopment projects that we undertake at our
properties and the costs associated with acquisitions of properties or other
companies. Historically, we have satisfied these requirements principally
through what we believe to be the most advantageous source of capital available
at the time, which has included the incurrence of new debt through borrowings
under credit facilities and the issuance of debt securities, sales of common
stock, capital raised through the disposition of assets, repayment by third
parties of notes receivable and joint venture capital transactions. We believe
that these sources of capital will continue to be available in the future to
fund our long-term capital needs; however, there are certain factors that may
have a material adverse effect on our ability to access these capital sources.
Our ability to incur additional debt is dependent upon a number of factors,
including our degree of leverage, the value of our unencumbered assets, our
credit rating and borrowing restrictions imposed by existing lenders. Currently,
we have investment grade credit ratings for our unsecured senior debt from two
major rating agencies - Standard & Poor's and Moody's Investors Service. A
downgrade in outlook or rating by a rating agency can occur at any time if the
agency perceives an adverse change in our financial condition, results of
operations or ability to service debt. If such a downgrade occurs, it would
increase the interest rate currently payable under our existing credit
facilities, it likely would increase the costs associated with obtaining future
financing, and it potentially could adversely affect our ability to obtain
future financing. The indentures under which our publicly traded debt securities
are issued also contain certain restrictions on our ability to incur debt and
other financial covenants.
7
The following table sets forth certain information regarding future
contractual obligations, excluding interest payments, as of December 31, 2003
(in thousands):
Payments due by period
Less than More than
Contractual Obligation Total 1 year 1-3 years 3-5 years 5 years
----------- ----------- ------------ ----------- ----------
Mortgage notes payable:
Scheduled amortization........ $ 116,468 $ 9,432 $ 19,762 $ 20,263 $ 67,011
Balloon payments.............. 342,635 2,727 54,851 42,968 242,089
----------- ----------- ------------ ----------- ----------
Total mortgage obligations... 459,103 12,159 74,613 63,231 309,100
Unsecured revolving credit
facilities.................... 162,000 - 162,000 - -
Unsecured senior notes.......... 150,000 - 50,000 75,000 25,000
Capital leases.................. - - - - -
Operating leases................ 346 277 57 12 -
Development and redevelopment... 32,487 25,274 7,213 - -
----------- ----------- ------------ ----------- ----------
Total contractual obligations... $ 803,936 $ 37,710 $ 293,883 $ 138,243 $ 334,100
=========== =========== ============ =========== ==========
Off Balance Sheet Arrangements
We have an off balance sheet joint venture and other unconsolidated
arrangements with varying structures. As of December 31, 2003, our off balance
sheet arrangements were as follows:
o Letters of credit totaling $1.4 million have been provided as security
for certain performance requirements.
o Our unconsolidated joint venture, PG Partners, has aggregate
outstanding indebtedness of approximately $12.9 million, bearing fixed
rate interest at 8.5% and maturing April 2010. Principal and interest
payments of $102,000 are due monthly which are paid out of operating
cash flow from the property. Our investment in this joint venture is
$2.9 million.
o We have committed to fund $32.5 million, based on current plans and
estimates, in order to complete pending development and redevelopment
projects. These obligations, comprised principally of construction
contracts, are generally due as the work is performed and are expected
to be financed by our available credit facilities.
Critical Accounting Policies and Estimates
Management's Discussion and Analysis of Financial Condition and Results of
Operations provides additional information related to our consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these
consolidated financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. On an ongoing basis, management evaluates and if necessary,
adjusts its estimates and judgments, including those related to real estate and
development assets, revenue recognition in conjunction with providing
development, leasing and management services and equity in earnings of
unconsolidated joint ventures. Management believes that the following critical
accounting policies affect its more significant judgments and estimates used in
the preparation of our consolidated financial statements.
8
Real Estate Properties and Development Assets. We capitalize acquisition
and construction costs, property taxes, interest and other miscellaneous costs
that are directly identifiable with a project, from pre-acquisition until the
time that construction is complete and the development is ready for its intended
use, in accordance with Statement of Financial Accounting Standards ("SFAS") No.
67 and SFAS No. 34. We allocate the capitalized project costs to the various
components of the project based on the components' relative fair values. Our
cost allocation method requires the use of management estimates regarding the
fair market value of each project component. Management bases its estimates on
current market appraisals, comparable sales, existing sale and purchase
contracts, replacement cost, historical experience, and various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the fair market
values of real estate assets. Actual results may differ from these estimates and
anticipated returns on a project, as well as the gain or loss on disposition of
the individual project components, could vary significantly from estimated
amounts.
Management reviews long-lived assets used in operations for impairment when
there is an event or change in circumstances that indicates that the carrying
amount of the asset may not be recoverable and the future undiscounted cash
flows expected to be generated by the asset are less than its carrying amount.
If such asset is considered to be impaired, we record impairment losses and
reduce the carrying amount of the impaired asset to an amount that reflects the
fair value of the asset at the time impairment is evident. Our impairment review
process relies on management's judgment regarding the indicators of impairment,
the remaining life of the asset used to generate the asset's undiscounted cash
flows, and the fair value of the asset at a particular point in time. Management
uses historical experience, current market appraisals and various other
assumptions to form the basis for making judgments about the impairment of real
estate assets. Under different assumptions or conditions, the asset impairment
analysis may yield a different outcome, which would alter the ultimate return on
our assets, as well as the gain or loss on the eventual disposition of the
asset.
Business Combinations. We allocate the purchase price of acquired companies
and properties to the tangible and intangible assets acquired and liabilities
assumed, based on their estimated fair values. Fair value is defined as the
amount at which that asset could be bought or sold in a current transaction
between willing parties (other than in a forced or liquidation sale). In order
to allocate the purchase price of acquired companies and properties to the
tangible and intangible assets acquired, we identify and estimate the fair value
of the land, buildings, and improvements, review the leases to determine the
existence of, and estimate the fair value of, any contractual or other legal
rights and investigation of the existence of, and estimate the fair value of,
any other identifiable intangible assets. Such valuations require management to
make significant estimates and assumptions, especially with respect to
intangible assets.
The cost approach is used as the primary method to estimate the fair value
of buildings, improvements and other assets. The market value approach is used
as the primary method to estimate the fair value of land. The determination of
the fair value of contractual intangibles is based on the costs to originate a
lease including commissions and legal costs to the extent that such costs are
not already incurred with a new lease that has been negotiated in connection
with the purchase of a property. In-place lease values are based on our
evaluation of the specific characteristics of each lease and our overall
relationship with each tenant. Among the factors considered in the allocation of
these values include the nature of the existing relationship with the tenant,
the tenant's credit quality, the expectation of lease renewals, the estimated
carrying costs of the property during a hypothetical expected lease-up period,
current market conditions and costs to execute similar leases. Estimated
carrying costs include real estate taxes, insurance, other property operating
costs and estimates of lost rentals at market rates during the hypothetical
expected lease-up periods, under specific market conditions. Above-market,
below-market and in-place lease values are determined based on the present value
(using discount rate reflecting the risks associated with the leases acquired)
of the difference between (i) the contractual amounts to be paid pursuant to the
leases negotiated and in-place at the time of acquisition and (ii) management's
estimate of fair market lease rates for the property or equivalent
9
property, measured over a period equal to the remaining non-cancelable term of
the lease. The value of contractual intangibles is amortized over the remaining
term of each lease.
Critical estimates in valuing certain of the intangible assets and our
assumptions on what marketplace participants would use in making estimates of
fair value, include but are not limited to: future expected cash flows,
estimated carrying costs, estimated origination costs, lease up periods, and the
tenant risk attributes, as well as assumptions about the period of time the
acquired lease will continue to be used in the our portfolio; and discount rates
used in these calculations. Management's estimates of fair value are based upon
assumptions believed to be reasonable, but which are inherently uncertain and
unpredictable. Assumptions may not always reflect unanticipated events and
changes in circumstances that may occur. In making such estimates, management
uses a number of sources, including appraisals that may be obtained in
connection with the acquisition or financing of the respective property or other
market data. Management also considers information obtained in its
pre-acquisition due diligence and marketing and leasing activities in estimating
the fair value of tangible and intangible assets acquired.
Goodwill. Effective January 1, 2002, we adopted Statement of Financial
Accounting Standards No. 142 (SFAS No. 142), Goodwill and Other Intangible
Assets. Under Statement 142, we are required to perform annual impairment tests
of its goodwill and intangible assets and more frequently in certain
circumstances. Management has elected to test for goodwill impairment in
November of each year. The goodwill impairment test is a two-step process, which
requires management to make judgments in determining what assumptions to use in
the calculation. The first step of the process consists of estimating the fair
value of each reporting unit and comparing those estimated fair values with the
carrying values, which include the allocated goodwill. If the estimated fair
value is less than the carrying value, a second step is performed to compute the
amount of the impairment by determining an "implied fair value" of goodwill. The
determination of a reporting unit's "implied fair value" of goodwill requires us
to allocate the estimated fair value of the reporting unit to the assets and
liabilities of the reporting unit. Any unallocated fair value represents the
"implied fair value" of goodwill, which is compared to its corresponding
carrying value.
The key assumptions we made to determine the fair value of our reporting
units (each property is considered a reporting unit under SFAS No. 142) included
(a) net operating income; (b) cash flows; and (c) estimated the fair value,
which was based on our experience in evaluating acquisitions and market
conditions. A variance in the net operating income or discount rate could have
had a significant impact on the amount of the goodwill impairment charge
recorded.
Management cannot predict the occurrence of certain future events that
might adversely effect the reported value of goodwill that totaled $14.0 million
at December 31, 2003. Such events include, but are not limited to, strategic
decisions made in response to economic and competitive conditions, the impact of
the economic environment on our tenants, or a material negative change in its
relationships with significant tenants.
Revenue Recognition. As lessor, we retain substantially all the risks and
benefits of property ownership and account for our leases as operating leases.
Rental income is recognized over the lease term on a straight-line basis as it
becomes receivable according to the provisions of the lease. Revenue from
percentage rent is recognized when tenants' reported sales have reached certain
levels specified in the respective leases. Recoveries from tenants for real
estate taxes and other operating expenses are recognized as revenue in the
period when the applicable costs are incurred.
We maintain an allowance for doubtful accounts for estimated losses
resulting from the inability of tenants to make required rent payments. The
computation of this allowance is based on the tenants' payment history and
current credit quality. If our estimate of collectibility differs from the cash
received the timing and amount of our reported revenue could be impacted.
10
Investments in Unconsolidated Joint Ventures. We do not consider ourselves
to be in control of joint ventures when major business decisions require the
approval of at least one other managing equity owner. Accordingly, we account
for the two joint ventures in which we do not retain unilateral control under
the equity method.
We calculate the equity in income or loss earned from our unconsolidated
joint ventures based on each equity owners' economic ownership, which is
estimated based on anticipated stabilized cash flows as they would be allocated
to each equity owner based on how cash flow is distributed. Generally, under the
terms of the respective joint venture agreements, net ordinary cash flow is
distributed to each equity owner in accordance with such owner's equity
ownership percentages.
Accounting for Stock Options. We apply the intrinsic value method as
prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations in measuring stock-based
compensation, including options. Accordingly, no compensation expense has been
recognized for options granted under our compensation plan as no grants were
made at less than market value. In accordance with SFAS No. 123, Accounting for
Stock-Based Compensation, compensation expense would be recognized based upon
the fair value of the award at the grant date.
Results of Operations
On February 12, 2003, we completed our acquisition of IRT Property Company,
or IRT, by statutory merger. As a result of the merger, we acquired 93
properties encompassing approximately 10 million square feet of gross leasable
area and including 64 supermarket anchored shopping centers, four drug store
anchored shopping center, 22 other retail-anchored shopping centers, an
industrial property and two development projects. In connection with the merger,
we paid aggregate cash consideration of approximately $189.4 million, issued
approximately 17.5 million shares of our common stock and assumed approximately
$341.9 million of mortgages, unsecured indebtedness and other liabilities,
including $150 million of IRT's senior unsecured indebtedness. The acquisition
of IRT was accounted for using the purchase method of accounting and the results
of IRT are included in our consolidated financial statements since February 12,
2003.
During 2003, we sold 7 properties (including a property held by an
unconsolidated joint venture) and a joint venture interest that no longer met
our investment criteria. We also acquired ten retail properties, one out parcel
and a property held for future development.
In September 2001, we acquired Centrefund Realty (U.S.) Corporation, or
CEFUS, and United Investors Realty Trust, or UIRT. As a result of these
acquisitions, we acquired 50 shopping centers and other retail properties which
contained an aggregate of approximately 5.2 million square feet of gross
leasable area. The acquisition of CEFUS has been accounted for on a push-down
basis and partially in a manner similar to a pooling of interests. Our results
for the period between August 18, 2000, the day our affiliate, Gazit-Group
(1988) Ltd., acquired its beneficial interest in First Capital Realty Inc., and
September 19, 2001 have been restated to consolidate our operations with those
of CEFUS subject to a 31.93% minority interest in CEFUS. Our results from
September 20, 2001, the day we acquired CEFUS, eliminate this minority interest.
The acquisition of UIRT was accounted for using the purchase method of
accounting and the results of UIRT are included in our consolidated financial
statements since September 21, 2001.
We derive substantially all of our revenues from rents received from
tenants under existing leases on each of our properties. These revenues include
fixed base rents, recoveries of expenses that we have incurred and which we pass
through to the individual tenants and percentage rents that are based on
specified percentages of tenants' revenues, in each case as provided in the
particular leases.
Our primary cash expenses consist of our property operating expenses, which
include real estate taxes, repairs and maintenance, management expenses,
insurance, utilities and other expenses, general and
11
administrative expenses, which include payroll, office expenses, professional
fees and other administrative expenses, and interest expense, primarily on
mortgage unsecured senior debt and revolving credit facilities indebtedness. In
addition, we incur substantial non-cash charges for depreciation and
amortization on our properties. We also capitalize certain expenses, such as
taxes and interest, incurred in respect of property under development or
redevelopment until the property is ready for its intended use.
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002.
Total rental income increased by $88.0 million, or 94.0%, to $181.6 million
in 2003 from $93.6 million in 2002. The following factors accounted for this
difference:
o The acquisition of IRT increased rental income by approximately $78.3
million;
o Properties acquired during 2003 increased rental income by
approximately $6.9 million;
o The full year 2003 benefited from properties acquired during 2002
which increased rental income by approximately $3.9 million;
o Same property rental income increased by $2.1 million in 2002 due to
higher tenant expense and rental income;
o These increases were offset by a $70,000 decrease in rental income
from under development and redevelopment properties.
Property operating expenses increased by $23.2 million, or 80.6%, to $52.0
million for 2003 from $28.8 million in 2002. The following factors accounted for
this difference:
o The acquisition of IRT increased operating expenses by approximately
$20.3 million;
o Properties acquired during 2003 increased operating expenses by
approximately $1.9 million;
o Properties acquired during 2002 increased the full year operating
expenses by $901,000; and
o Same property operating expenses increased by $978,000 as a result of
property maintenance expenses.
Rental property depreciation and amortization increased by $14.0 million,
or 111.1%, to $26.6 million for 2003 from $12.6 million in 2002. The following
factors accounted for this difference:
o The acquisition of IRT increased depreciation and amortization by
approximately $10.8 million;
o Properties acquired during 2003 increased depreciation and
amortization by $1.2 million;
o Properties acquired during 2002 increased the full year depreciation
expense by $539,000; and
o Completed development and redevelopment activities increased
depreciation and amortization by $1.7 million.
Interest expense increased by $15.9 million, or 76.1%, to $36.8 million for
2003 from $20.9 million in 2002. This difference was primarily due to:
o An increase in interest expense of $15.0 million as a result of the
assumption of mortgage loans and senior unsecured debt in the
acquisition of IRT;
12
o Interest incurred on the debt related to the acquisition of properties
during 2003 of $822,000, offset by a $1.3 million decrease in same
property interest expense, related to the repayment of certain
existing mortgage notes;
o An increase in revolving credit facility interest of $1.9 million
primarily related to the acquisition of IRT, the 2003 acquisition of
properties and repayment of various mortgage loans;
o An increase of $7.2 million related to interest on the unsecured
senior notes; and
o A decrease in interest expense attributable to capitalized interest of
$3.8 million related to development and redevelopment activities.
General and administrative expenses increased by $4.4 million, or 66.7%, to
$11.0 million for 2003 from $6.6 million in 2002. Compensation and employer
related expenses increased by $3.1 million and other general office expenses
increased by $1.4 million. These expense increases were primarily due to the
increase in staffing resulting from the IRT acquisition.
Investment income decreased by $543,000 due to the principal repayments
received on notes receivable and repayments by stockholders of loans related to
previous stock purchases.
During 2003, we settled certain mortgage notes at a discount and recognized
a loss on the extinguishment of debt of approximately $623,000.
We sold seven properties (including a property held by a joint venture), a
joint venture interest and have two properties that are held for sale at
December 31, 2003. For the nine months ended September 30, 2004 we have sold
eight properties and have four properties and one joint venture interest held
for sale. The operating results of these properties of $6.0 million are being
reflected as income from rental properties sold or held for sale.
The sales of the properties and joint venture interest produced a gain of
$3.1 million for 2003. The 2002 discontinued operations reflect a
reclassification of operations for properties sold during 2002 and 2003. We
recognized a gain of $9.3 million in 2002 related to a gain on the disposal of
properties sold during 2002.
Minority interest increased by $702,000 related to the interests that were
part of the acquisition of IRT.
As a result of the foregoing, net income increased by $23.7 million, or
59.4%, to $63.6 million for 2003 from $39.9 million in 2002.
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001.
Total rental income increased by $18.9 million, or 25.4%, to $93.6 million
in 2002 from $74.5 million in 2001. The following factors accounted for this
difference:
o The acquisition of UIRT increased rental income by approximately $16.2
million; and
o Properties acquired during 2002 increased rental income by
approximately $4.2 million.
Property operating expenses increased by $5.6 million, or 24.1%, to $28.8
million for 2002 from $23.3 million in 2001. The following factors accounted for
this difference:
o The acquisition of UIRT increased operating expenses by approximately
$3.1 million;
13
o Properties acquired during 2002 increased operating expenses by
approximately $1.3 million; and
o Property management expenses increased by $1.6 million as a result of
managing a larger portfolio of properties, of which $833,000 was due
to an increase in salaries and benefits.
Rental property depreciation and amortization increased by $2.2 million, or
21.2%, to $12.6 million for 2002 from $10.4 million in 2001. The following
factors accounted for this difference:
o The acquisition of UIRT increased depreciation and amortization by
approximately $1.4 million; and
o Properties acquired during 2002 increased depreciation and
amortization by approximately $796,000.
Interest expense increased by $472,000, or 2.3%, to $20.9 million for 2002
from $20.4 million in 2001. This difference was primarily due to:
o An increase in interest expense of $3.5 million as a result of the
assumption of mortgage loans in the acquisition of UIRT;
o Interest incurred on the debt related to the acquisition of properties
during 2002 of $1.2 million;
o An increase in revolving credit facility interest of $503,000
primarily related to higher average balances; and
o These increases in interest expense were partially offset by the
repayment of nine loans which reduced interest by $1.9 million and an
increase in capitalized interest related to development activity
decreasing interest expense by $273,000.
General and administrative expenses increased by $3.1 million, or 87.1%, to
$6.6 million for 2002 from $3.6 million in 2001. Compensation and employer
related expenses increased by $1.8 million and other general office expenses
increased by $1.3 million, of which $332,000 was related to professional fees,
$695,000 was related to the write-off of previously capitalized pre-acquisition
due diligence costs for projects that did not materialize, and $223,000 was
related to an increase in public relations costs. These expense increases were
due to the increase in staffing resulting from the CEFUS and UIRT acquisitions.
During 2002, we settled a mortgage note at a discount and recognized a gain
on the extinguishment of debt of $1.5 million.
Minority interest decreased by $1.6 million due to the elimination of the
minority interests in the acquisition of CEFUS in 2001.
As a result of the foregoing, net income increased by $21.2 million, or
113.4%, to $39.9 million for 2002 from $18.7 million in 2001.
Liquidity and Capital Resources
We anticipate that cash flows from operating activities will continue to
provide adequate capital for dividend payments in accordance with the IRS' REIT
requirements and our operating needs. Depending on capital market conditions, we
anticipate using cash on hand, borrowings under our existing unsecured revolving
credit facilities, issuance of unsecured public debt and equity as well as other
similar financing, to provide the necessary capital to achieve growth.
14
CASH FLOWS
Our net cash provided by operations was $78.3 million for the year ended
December 31, 2003 This amount included net income of $63.6 million and
adjustments for non-cash and gain on sale items of $25.0 million, offset by an
increase in operating assets over operating liabilities of $10.3 million. Our
2003 operating cash number compares to net cash provided by operations of $45.6
million for the year ended December 31, 2002. This amount included net income of
$39.9 million, adjustments for non-cash items which increased cash flow of $4.9
million, and an increase in operating liabilities over operating assets of
$764,000.
Our net cash used in investing activities was $326.2 million for the year
ended December 31, 2003. This amount included the acquisition of one parcel of
land held for future development, an outparcel, and ten shopping centers for
$156.9 million, construction, development and other capital improvements of
$28.8 million and the acquisition of IRT for $187.6 million, net of cash
received, and leasing costs of $4.5 million. These amounts were offset by the
proceeds from the sale of seven properties (including a property held by a joint
venture) and a joint venture interests of $31.7 million, utilization of
available funds escrowed in connection with the deferred taxable gains from the
sale of properties of $12.9 million, proceeds from repayment of notes receivable
of $5.1 million and proceeds from other sources of $1.9 million. Our cash used
for investment in 2003 compares to net cash used in investing activities of
$51.4 million for the year ended December 31, 2002. This amount included the
acquisition of two drugstores, five shopping centers and three parcels of land
for $63.7 million; the construction, development and other capital improvements
of $15.8 million, an increase in escrowed funds for sale of properties to
utilize tax deferred exchanges for $4.2 million, and leasing costs of $1.6
million. These amounts were offset by proceeds from the sale of one parcel of
land and eight properties of $27.2 million, proceeds from payments of notes
receivable of $5.1 million and proceeds from other sources of $1.6 million.
Our net cash provided by financing activities was $245.9 million for the
year ended December 31, 2003. This amount included net borrowings on the
revolving credit facilities of $139.0 million, less the pay down of $8.0 million
on the credit facility assumed in the IRT merger, net proceeds from the
issuances of common stock of $247.5 million, and proceeds from repayment of
notes receivable of $3.5 million. These amounts were offset by the repayment of
ten mortgage notes in the aggregate amount of $55.4 million and monthly
principal payments on mortgage notes of $8.2 million, cash dividends paid to
common stockholders of $70.7 million, and other miscellaneous uses of $1.8
million. Our cash used by financing in 2003 compares to net cash used in
financing activities of $7.9 million for the year ended December 31, 2002. This
amount includes net proceeds from issuance of common stock of $66.5 million, and
new mortgage note borrowings of $25.9 million, offset by the repayment of ten
mortgage notes for $37.7 million and monthly principal payments on mortgage
notes of $5.5 million, net repayments on the revolving credit facility of $4.4
million, cash dividends paid to common stockholders of $35.8 million, and other
miscellaneous uses of $1.1 million.
DEBT
On February 7, 2003, we entered into a $340 million unsecured revolving
credit facility with a syndicate of banks for which Wells Fargo Bank, National
Association is the sole lead arranger and administrative agent. This facility
bears interest at our option at (i) LIBOR plus 0.65% to 1.35%, depending on the
credit ratings of our senior unsecured long term notes or (ii) at the greater of
(x) Wells Fargo's prime rate and (y) the Federal Funds Rate plus 0.5%. The
facility also includes a competitive bid option which allows us to conduct
auctions among the participating banks for borrowings in an amount not to exceed
$150.0 million, a $25.0 million swing line facility for short term borrowings, a
$20.0 million letter of credit commitment and may, at our request, be increased
up to a total commitment of $400.0 million. The facility expires February 12,
2006 with a one year extension option. In addition, the facility contains
customary covenants, including financial covenants regarding debt levels, total
liabilities, interest coverage, EBITDA levels, unencumbered properties,
permitted investments and others. The facility also prohibits stockholder
15
distributions in excess of 95% of funds from operations calculated at the end of
each fiscal quarter for the four fiscal quarters then ending. Notwithstanding
this limitation, we can make stockholder distributions to avoid income taxes on
asset sales. If a default under the facility exists, our ability to pay
dividends would be limited to the amount necessary to maintain our status as a
REIT unless the default is a payment default or bankruptcy event in which case
we would be prohibited from paying any dividends. The facility is guaranteed by
most of our wholly-owned subsidiaries. As of December 31, 2003, we had $162
million outstanding on this credit facility. The weighted average interest rate,
including the interest rate swaps as of December 31, 2003 was 2.06%.
As of December 31, 2003, we had a $5.0 million unsecured credit facility
with City National Bank of Florida, of which no funds had been drawn. This
facility provides security of $1.4 million in outstanding letters of credit.
Our revolving credit facility balances as of December 31, 2003 and December
31, 2002 consisted of the following:
December 31, December 31,
2003 2002
-------------- ---------------
(in thousands)
Revolving Credit Facilities
Wells Fargo (unsecured).......................... $ 162,000 $ -
Wells Fargo (secured) (retired).................. - 23,000
City National Bank (unsecured)................... - -
-------------- ---------------
Total revolving credit facilities............. $ 162,000 $ 23,000
============== ===============
As of December 31, 2003, the gross availability under the various credit
facilities was approximately $345 million, resulting in additional borrowing
capacity of $145.6 million, net of letters of credit.
Our mortgage and unsecured senior notes payable balances as of December 31,
2003 and 2002 consisted of the following:
December 31, December 31,
2003 2002
-------------- --------------
(in thousands)
Mortgage and Unsecured Senior Notes Payable
Fixed rate mortgage loans....................... $ 459,103 $ 307,508
Unsecured senior notes payable.................. 150,000 -
Variable rate mortgage loans (retired).......... - 24,635
Unamortized premium on notes payable............ 24,218 -
------------- --------------
Total mortgage and unsecured senior notes
payable.................................. $ 633,321 $ 332,143
============= ==============
As a result of our merger with IRT, we assumed IRT's obligations relating
to $150.0 million principal amount of senior notes, bearing interest at fixed
annual interest rates ranging from 7.25% to 7.84% and maturing between 2006 and
2012. The interest rate of one series of these senior notes is subject to a 50
basis point increase if we do not maintain an investment grade debt rating.
These notes have also been guaranteed by most of our wholly-owned subsidiaries.
Each of the existing mortgage loans is secured by a mortgage on one or more
of certain of our properties. Certain of the mortgage loans involving an
aggregate principal balance of approximately $182.0 million contain prohibitions
on transfers of ownership which may have been violated by our previous
16
issuances of common stock or in connection with past acquisitions and may be
violated by transactions involving our capital stock in the future. If a
violation were established, it could serve as a basis for a lender to accelerate
amounts due under the affected mortgage. To date, no lender has notified us that
it intends to accelerate its mortgage. Based on discussions with various
lenders, current credit market conditions and other factors, we believe that the
mortgages will not be accelerated. Accordingly, we believe that the violations
of these prohibitions will not have a material adverse impact on our results of
operations or financial condition.
As of December 31, 2003, our total debt of $771.1 million, divided by our
gross real estate assets of $1.6 billion equals 48.2%.
Our debt level could subject us to various risks, including the risk that
our cash flow will be insufficient to meet required payments of principal and
interest, and the risk that the resulting reduced financial flexibility could
inhibit our ability to develop or improve our rental properties, withstand
downturns in our rental income or take advantage of business opportunities. In
addition, because we currently anticipate that only a small portion of the
principal of our indebtedness will be repaid prior to maturity, it is expected
that it will be necessary to refinance the majority of our debt. Accordingly,
there is a risk that such indebtedness will not be able to be refinanced or that
the terms of any refinancing will not be as favorable as the terms of our
current indebtedness.
Mortgage Indebtedness
The following table sets forth certain information regarding our mortgage
indebtedness related to our properties as of December 31, 2003:
Balance at
December 31, Balance Due
Property 2003 Interest Rate(1) Maturity Date at Maturity
- ---------------------------------- -------------- ---------------- ------------- -------------
Fixed Rate Mortgage Debt
Middle Beach $ 2,808 7.375% 08/15/04 $ 2,727
Lantana Village 3,669 6.950% 02/15/05 3,498
Woodruff 3,096 7.580% 05/10/05 2,913
Elmwood Oaks 7,500 8.375% 06/01/05 7,500
Benchmark Crossing 3,313 9.250% 08/01/05 3,170
Sterling Plaza 3,982 8.750% 09/01/05 3,794
Townsend Square 4,848 8.500% 10/01/05 4,703
Green Oaks 3,022 8.375% 11/01/05 2,861
Melbourne Plaza 1,747 8.375% 11/01/05 1,654
Walden Woods 2,387 7.875% 08/01/06 2,071
Big Curve 5,437 9.190% 10/01/06 5,059
Highland Square 4,047 8.870% 12/01/06 3,743
Park Northern 2,284 8.370% 12/01/06 1,963
Crossroads Square 12,510 8.440% 12/01/06 11,922
Rosemeade 3,179 8.295% 12/01/07 2,864
Colony Plaza 3,015 7.540% 01/01/08 2,834
Parkwood (2) 6,196 7.280% 01/01/08 5,805
Richmond (2) 3,192 7.280% 01/01/08 2,990
Commonwealth 2,754 7.000% 02/15/08 2,217
Mariners Crossing 3,380 7.080% 03/01/08 3,154
17
Balance at
December 31, Balance Due
Property 2003 Interest Rate(1) Maturity Date at Maturity
- ---------------------------------- -------------- ---------------- ------------- -------------
Fixed Rate Mortgage Debt
Pine Island/Ridge Plaza $ 24,938 6.910% 07/01/08 $ 23,104
Forestwood 7,286 5.070% 01/01/09 6,406
Shoppes of North Port 4,108 6.650% 02/08/09 3,526
Prosperity Centre 6,390 7.875% 03/01/09 4,137
North Village Center 1,463 8.130% 03/15/09 -
Shoppes of Ibis 5,865 6.730% 09/01/09 4,680
Tamarac Town Square 6,206 9.190% 10/01/09 5,583
Park Promenade 6,302 8.100% 02/01/10 5,833
Skipper Palms 3,556 8.625% 03/01/10 3,318
Jonathan's Landing 2,901 8.050% 05/01/10 2,639
Bluff's Square 10,086 8.740% 06/01/10 9,401
Kirkman Shoppes 9,524 8.740% 06/01/10 8,878
Ross Plaza 6,642 8.740% 06/01/10 6,192
Boynton Plaza 7,494 8.030% 07/01/10 6,902
Pointe Royale 4,533 7.950% 07/15/10 2,502
Plymouth Park East 1 (3) 150 8.250% 08/01/10 113
Plymouth Park East 2 (3) 451 8.250% 08/01/10 340
Plymouth Park North (3) 8,043 8.250% 08/01/10 6,076
Plymouth Park South (3) 601 8.250% 08/01/10 455
Plymouth Park Story North (3) 370 8.250% 08/01/10 280
Plymouth Park West (3) 2,404 8.250% 08/01/10 1,816
Shops at Skylake 14,628 7.650% 08/01/10 11,644
Parkwest Crossing 4,728 8.100% 09/01/10 4,352
Spalding Village 10,537 8.190% 09/01/10 7,932
Minyards 2,511 8.320% 11/01/10 2,175
Charlotte Square 3,614 9.190% 02/01/11 2,992
Forest Village 4,488 7.270% 04/01/11 4,044
Boca Village 8,298 7.200% 05/01/11 7,466
MacLand Pointe 5,859 7.250% 05/01/11 5,267
Pine Ridge Square 7,354 7.020% 05/01/11 6,579
Sawgrass Promenade 8,298 7.200% 05/01/11 7,466
Presidential Markets 27,420 7.650% 06/01/11 24,863
Lake Mary 24,529 7.250% 11/01/11 21,973
Lake St. Charles 3,873 7.130% 11/01/11 3,461
Belfair Towne Village 11,379 7.320% 12/01/11 9,322
Marco Town Center 8,731 6.700% 01/01/12 7,150
Riverside Square 7,694 9.190% 03/01/12 6,458
Cashmere 5,245 5.880% 11/01/12 4,084
Eastwood 6,250 5.880% 11/01/12 4,866
Meadows 6,568 5.870% 11/01/12 5,113
Lutz Lake 7,500 6.280% 12/01/12 7,012
Summerlin Square 3,898 6.750% 02/01/14 -
18
Balance at
December 31, Balance Due
Property 2003 Interest Rate(1) Maturity Date at Maturity
- ---------------------------------- -------------- ---------------- ------------- -------------
Fixed Rate Mortgage Debt
Bird Ludlum $ 10,296 7.680% 02/15/15 $ -
Treasure Coast 4,804 8.000% 04/01/15 -
Shoppes of Silverlakes 2,781 7.750% 07/01/15 30
Grassland Crossing 5,985 7.870% 12/01/16 2,601
Mableton Crossing 4,157 6.850% 08/15/18 1,869
BridgeMill 9,555 7.940% 05/05/21 3,761
Chastain Square 3,918 6.500% 02/28/24 57
Daniel Village 4,282 6.500% 02/28/24 62
Douglas Commons 5,102 6.500% 02/28/24 74
Fairview Oaks 4,829 6.500% 02/28/24 71
Madison Centre 3,918 6.500% 02/28/24 58
Paulding Commons 6,651 6.500% 02/28/24 97
Siegen Village 4,328 6.500% 02/28/24 63
Wesley Chapel Crossing 3,416 6.500% 02/28/24 50
-------------- -------------
Total Fixed Rate Mortgage Debt
(76 loans)................................. 459,103 7.45% 6.48 years $ 342,635
-------------- =============== =================== =============
(wtd.-avg.rate) (wtd.-avg. maturity)
Fixed Rate Unsecured Senior Notes
Payable....................................
7.77% senior notes 50,000 7.77% April 2006 $ 50,000
7.25% senior notes 75,000 7.25% August 2007 75,000
7.84% senior notes 25,000 7.84% January 2012 25,000
-------------- --------------- -------------
Total Fixed Rate Unsecured Senior Notes
Payable ................................. 150,000 7.55% 3.96 years $ 150,000
-------------- =============== =================== =============
(wtd.-avg.rate) (wtd.-avg. maturity)
Unsecured Variable Rate Revolving Credit
Facilities.................................
Wells Fargo(4) 162,000 2.06% February 2006 $ 162,000
City National Bank - LIBOR + 2.25% August 2004 =============
--------------
Total Unsecured Variable Rate Revolving
Credit Facilities........................ 162,000
--------------
Total Debt................................. $ 771,103
==============
<FN>
- -----------------------
(1) The rate in effect on December 31, 2003.
(2) The mortgage balances for Parkwood and Richwood represent the future
minimum lease payments (net of imputed interest) attributable to lease
payments on these two properties, both of which are owned pursuant to
capital lease obligations.
(3) All of the Plymouth loans are with Sun Life of Canada. In the case of
Plymouth Park North and East, the collateral has been split into two parts;
hence the two individual loans.
(4) The indicated rate includes the effect of interest rate swaps, if any.
</FN>
19
Our mortgage and outstanding revolving credit facilities indebtedness
outstanding at December 31, 2003 will require approximate balloon and scheduled
principal payments as follows:
Secured Debt Unsecured Debt
---------------------------- ------------------------------
Year Due Revolving
Schedule Balloon Credit Senior
Amortization Payments Facilities Notes Total
- ------------ ------------- ------------ -------------- ------------ ----------
2004 $ 9,432 $ 2,727 $ - $ - $ 12,159
2005 9,777 30,093 - - 39,870
2006 9,985 24,758 162,000 50,000 246,743
2007 10,097 2,864 - 75,000 87,961
2008 10,166 40,104 - - 50,270
2009 9,550 24,332 - - 33,882
2010 8,452 80,848 - - 89,300
2011 6,592 93,433 - - 100,025
2012 5,290 34,683 - 25,000 64,973
Thereafter 37,127 8,793 - - 45,920
- ------------ ------------- ------------ -------------- ------------ ----------
Total $ 116,468 $ 342,635 $ 162,000 $ 150,000 $ 771,103
============= ============ ============== ============ ==========
The following table sets forth certain information regarding indebtedness
related to our joint venture properties as of December 31, 2003:
Joint Venture Debt Balance
Balance at Due at
December 31, 2003 Interest Rate Maturity Date Maturity
------------------- ------------- ---------------- -----------
Joint Venture Debt
City Centre $12,878 8.54% April 2010 $ 11,989
We may not have sufficient funds on hand to repay these balloon amounts at
maturity. Therefore, we expect to refinance this indebtedness either through
additional mortgage financing secured by individual properties or groups of
properties, by unsecured private or public debt offerings or by additional
equity offerings. Our results of operations could be affected if the cost of new
debt is greater or lesser than existing debt. If new financing is not available,
we could be required to sell assets and our business would be adversely
affected.
DEVELOPMENT ACTIVITY
As of December 31, 2003, we have over 25 development and redevelopment
projects underway or in the planning stage totaling approximately $74.7 million
of asset value and requiring approximately $32.5 million to complete based on
current plans and estimates. These include:
o The reconfiguration of a portion of Oakbrook Square in Palm Beach
Gardens, Florida to accommodate a new Homegoods store, a new
out-parcel and a recently opened Stein Mart store;
o The complete redevelopment of Crossroads Square (formerly known as
University Mall) in Pembroke Pines, Florida, incorporating a new
Lowe's home improvement store, a new Eckerd drug store and the
refurbishing of the remainder of the center;
o The construction of a new 46,000 square foot L.A. Fitness Sports Club
as part of an up to 120,000 square foot addition to our Shops at
Skylake in North Miami Beach, Florida;
20
o The development of a new 25,000 square foot CVS drug store-anchored
center across the street from our recently completed Plaza Alegre
shopping center development in Miami, Florida;
o The redevelopment of Salerno Village in Stuart, Florida to accommodate
a new and expanded Winn Dixie supermarket;
o The development of two supermarket-anchored shopping centers, one in
Homestead, Florida and the other in McDonough, Georgia, both on
parcels we currently own and control;
o The reconfiguration of the former Gerland space at Copperfield in
Houston, Texas into multi-tenant space;
o The reconfiguration of a portion of Ambassador Row Courtyards in
Lafayette, Louisiana; and
o The redevelopment of a portion of Gulf Gate Plaza in Naples, Florida.
All of these developments and redevelopments are scheduled for completion
between early 2004 and the end of 2005.
EQUITY
On January 23, 2002, we filed a universal shelf registration statement with
the Securities and Exchange Commission, which will permit us, from time to time,
to offer and sell various types of securities, including common stock, preferred
stock, debt securities, depositary shares and warrants, up to a value of $250
million.
On February 12, 2003, we completed a private placement of 6.911 million
shares of our common stock. Three affiliated investors, AH Investments US LP,
Silver Maple (2001), Inc. and M.G.N. (USA) Inc. purchased 1.6 million, 1.0
million, and 4.3 million shares of common stock, respectively, at $13.50 per
share. The net proceeds of $93 million in cash were used to fund a portion of
the cost of the acquisition of IRT. The foregoing issuances were made pursuant
to an exemption under Section 4(2) of the Securities Act of 1933, as amended.
In May 2003, we completed the sale of 3.0 million shares of common stock at
a price of $16.22 per share in an underwritten public offering. The net proceeds
of $48.7 million from the offering were used for general corporate purposes,
including the repayment of debt, ongoing development activities and the
acquisition of additional shopping centers.
In July 2003, we filed a second universal shelf registration statement with
the Securities and Exchange Commission, which will permit us, from time to time,
to offer and sell various types of securities, including common stock, preferred
stock, debt securities, depositary shares and warrants, up to a value of $600
million. The registration statement provides us additional flexibility in
accessing capital markets to fund future growth and for general corporate
purposes. In conjunction with the $155 million balance from our prior universal
shelf registration, and after taking into account our public offering in
September 2003 of $52 million, we now have approximately $703.0 million of
availability under our existing shelf registration statements.
In September 2003, we completed the sale of 3.0 million shares of common
stock at a price of $17.05 per share in an underwritten public offering. The net
proceeds of $51.2 million from the offering were used for general corporate
purposes, including the repayment of debt and ongoing development activities.
For the year ended December 31, 2003 we issued 895,312 shares of our common
stock pursuant to the exercise of stock options at prices ranging from $8.69 to
$14.87 per share. We also issued 2.8 million shares of common stock at prices
ranging from $12.76 to $17.11 per share pursuant to our Dividend
21
Reinvestment and Stock Purchase Plan. As of December 31, 2003, we have 2.1
million shares remaining for sale under our Dividend Reinvestment and Stock
Purchase Plan.
FUTURE CAPITAL REQUIREMENTS
We believe, based on currently proposed plans and assumptions relating to
our operations, that our existing financial arrangements, together with cash
generated from our operations, will be sufficient to satisfy our cash
requirements for a period of at least twelve months. In the event that our plans
change, our assumptions change or prove to be inaccurate or cash flows from
operations or amounts available under existing financing arrangements prove to
be insufficient to fund our expansion and development efforts or to the extent
we discover suitable acquisition targets the purchase price of which exceeds our
existing liquidity, we would be required to seek additional sources of
financing. There can be no assurance that any additional financing will be
available on acceptable terms or at all, and any future equity financing could
be dilutive to existing stockholders. If adequate funds are not available, our
business operations could be materially adversely affected.
DISTRIBUTIONS
We believe that we currently qualify, and intend to continue to qualify in
the future, as a REIT under the Internal Revenue Code. As a REIT, we are allowed
to reduce taxable income by all or a portion of our distributions to
stockholders. As distributions have exceeded taxable income, no provision for
federal income taxes has been made. While we intend to continue to pay dividends
to our stockholders, we also will reserve such amounts of cash flow as we
consider necessary for the proper maintenance and improvement of our real estate
and other corporate purposes, while still maintaining our qualification as a
REIT. Our cash distributions for the year ended December 31, 2003 were $70.7
million.
New Accounting Standards
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections
which rescinds FASB Statement No. 4, Reporting Gains and Losses from
Extinguishment of Debt, and an amendment of that Statement, FASB Statement No.
64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. It also
rescinds FASB Statement No. 44, Accounting for Intangible Assets or Motor
Carriers, and amends FASB Statement No. 13, Accounting for Leases. Finally SFAS
No. 145 amends other existing authoritative pronouncements to make various
technical corrections, clarify meanings, or describe their applicability under
changed conditions. The provisions related to the rescission of FASB Statement
No. 4 and its amendment Statement No. 64 are effective for fiscal years
beginning after May 15, 2002. We adopted SFAS No. 145 as of July 2002 and have
reflected gains (losses) from extinguishment of debt as part of ordinary income.
In November 2002, FASB issued FASB Interpretation No. 45 ("FIN 45"),
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantee's of Indebtedness of Other's (an interpretation of FASB
Statements No. 5, 57 and 107 and rescission of FASB Interpretation No. 34). FIN
45 clarifies the requirements of FASB Statement No. 5, Accounting for
Contingencies. It requires that upon issuance of a guarantee, the guarantor must
recognize a liability for the fair value of the obligation it assumes under that
guarantee regardless of whether or not the guarantor receives separate
identifiable consideration (i.e., a premium). We adopted the disclosure
requirements in 2002 and the initial recognition and measurement provisions in
2003. The adoption of FIN 45 did not have a material impact on the Company's
financial statements.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure. This Statement provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation and amends the disclosure
requirement of SFAS No. 123, Accounting for Stock-Based Compensation, to require
prominent
22
disclosure in both annual and interim financial statements about the effect of
the method used on reported results. SFAS No. 148 is effective for financial
statements issued for fiscal years ending after December 15, 2002 and, as it
relates to Opinion No. 28, Interim Financial Reporting, the interim periods
beginning after December 15, 2002, although earlier application is encouraged.
We apply the intrinsic value method as prescribed by Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations in measuring stock-based compensation. We have adopted the
disclosure requirements of SFAS No. 148 in our financial statements as of
December 31, 2002.
In January 2003, FASB issued FASB Interpretation No. 46, Consolidation of
Variable Interest Entities ("FIN 46"), an interpretation of ABR 51. FIN 46
provides guidance on identifying entities for which control is achieved through
means other than through voting rights, variable interest entities ("VIE"), and
how to determine when and which business enterprises should consolidate the VIE.
In addition, FIN 46 requires both the primary beneficiary and all other
enterprises with a significant variable interest in a VIE to make additional
disclosures. The transitional disclosure requirements will take effect almost
immediately and are required for all financial statements issued after January
31, 2003. The consolidated provisions of FIN 46 are effective immediately for
variable interests in VIEs created after January 31, 2003. For variable
interests in VIEs created before February 1, 2003, the provisions of FIN 46 are
effective for the first interim or annual period ending after December 15, 2003.
We have evaluated the effect of FIN 46 and have determined where we are primary
beneficiary and have consolidated those VIE's. Where we have determined that we
are not the primary beneficiary of the VIE, we report the VIE under the equity
method. The adoption of FIN 46 did not require a change in the accounting
treatment of any VIE's. We have not become a party to any VIE's during 2003.
In April 2003, FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, which clarifies the accounting
and reporting for derivative instruments, including derivative instruments that
are embedded in contracts. This statement is effective for contracts entered
into or modified after June 30, 2003. We have adopted this pronouncement
beginning July 1, 2003. The adoption of SFAS No. 149 did not have a material
impact on our financial condition or results of operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This statement
establishes standards for the classification and measurement of financial
instruments that possess characteristics similar to both liability and equity
instruments. SFAS No. 150 also addresses the classification of certain financial
instruments that include an obligation to issue equity shares. On October 29,
2003, the FASB voted to defer, for an indefinite period, the application of the
guidance in FASB Statement No. 150, Accounting for Certain Financial Instruments
with Characteristics of Both Liabilities and Equity. The FASB also decided to
defer the application of the aspect of certain provisions of statement 150 until
it could consider some of the resulting implementation issues. We have adopted
certain provisions of SFAS No. 150 which did not have a material impact on our
financial position or results of operations. We are still evaluating the
potential impact of the provisions of SFAS 150 that have been deferred to future
periods.
In December 2003, the FASB issued Statement No. 132 (SFAS No. 132) (revised
2003), Employers' Disclosures about Pensions and Other Postretirement Benefits.
This Statement revises employers' disclosures about pension plans and other
postretirement benefit plans. It does not change the measurement or recognition
provisions of FASB Statements No. 87, Employers' Accounting for Pensions, No.88,
Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits, and No. 106, Employers' Accounting
for Postretirement Benefits Other Than Pensions. This Statement retains the
disclosure requirements contained in SFAS No. 132, Employers' Disclosures about
Pensions and Other Postretirement Benefits, which it replaces. It requires
additional disclosures about the assets, obligations, cash flows, and net
periodic benefit cost of defined benefit pension plans and other postretirement
benefit plans. The adoption of SFAS No. 132 (revised) did not have a material
impact on our financial statements.
23
Environmental Matters
We are subject to numerous environmental laws and regulations. The
operation of dry cleaning facilities at our shopping centers is the principal
environmental concern. We require that the tenants who operate these facilities
do so in material compliance with current laws and regulations and we have
established procedures to monitor their operations. Additionally, we use all
legal means to cause tenants to remove dry cleaning plants from our shopping
centers. Where available, we have applied and been accepted into state sponsored
environmental programs. We have also placed environmental insurance on specific
properties with known contamination in order to mitigate our environmental risk.
We believe that the ultimate disposition of currently known environmental
matters will not have a material effect on our financial position, liquidity or
operations.
Inflation and Recession Considerations
Most of our leases contain provisions designed to partially mitigate the
adverse impact of inflation. Most of our leases require the tenant to pay its
share of operating expenses, including common area maintenance, real estate
taxes and insurance, thereby reducing our exposure to increases in costs and
operating expenses resulting from inflation. A small portion of our leases also
include clauses enabling us to receive percentage rents based on a tenant's
gross sales above predetermined levels, which sales generally increase as prices
rise, or escalation clauses which are typically related to increases in the
Consumer Price Index or similar inflation indices.
Our financial results are affected by general economic conditions in the
markets in which our properties are located. An economic recession, or other
adverse changes in general or local economic conditions, could result in the
inability of some of our existing tenants to meet their lease obligations and
could otherwise adversely affect our ability to attract or retain tenants.
Supermarkets, drugstores and other anchor tenants that offer day-to-day
necessities rather than luxury items anchor our existing properties. These types
of tenants, in our experience, generally maintain more consistent sales
performance during periods of adverse economic conditions.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary market risk to which we have exposure is interest rate risk.
Changes in interest rates can affect our net income and cash flows. As changes
in market conditions occur, interest rates can either increase or decrease and
interest expense on the variable component of our debt will move in the same
direction. With respect to our mortgage and senior unsecured notes payable,
changes in interest rates generally do not affect our interest expense, as these
notes payable at fixed-rates for extended terms with a weighted average life of
6.5 years and 4.0 years, respectively. Because we intend to hold our existing
fixed rate notes are payable either to maturity or until the sale of the
associated property, there is believed to be no interest rate market risk on our
operations or our working capital position. Our primary risk is from increases
in long-term interest rates that may occur over a period of several years, as
this may decrease the overall value of our real estate.
We estimate the fair market value of our long term, fixed rate mortgage
loans using discounted cash flow analysis based on current borrowing rates for
similar types of debt. At December 31, 2003, the fair value of the fixed rate
mortgage loans was estimated to be $505.1 million compared to the carrying value
amount of $459.1 million, excluding the unamortized premium on notes payable. If
the weighted average interest rate on our fixed rate debt were 100 basis points
lower or higher than the current weighted average rate of 7.45%, the fair market
value would be $483.0 million and $438.4 million, respectively.
We estimate the fair market value of our senior unsecured fixed rate debt
using discounted cash flow analysis based on current borrowing rates for similar
types of debt. At December 31, 2003, the fair value of
24
our senior unsecured fixed rate debt was estimated to be $165.7 million compared
to the carrying value amount of $150.0 million, excluding unamortized premium on
notes payable. If the weighted average interest rate on our fixed rate debt were
100 basis points lower or higher than the current weighted average rate of
7.55%, the fair market value would be $155.0 million and $145.0 million,
respectively.
At December 31, 2003, our variable rate debt balance consisted of $162.0
million of revolving credit facilities, of which $70.0 million has been hedged
under interest rate swaps pursuant to which we pay fixed interest rates, and
$92.0 million remains subject to changes in interest rates. If the weighted
average interest rate on the unhedged portion of our variable rate debt were 100
basis points higher or lower, annual interest expense would increase or decrease
by approximately $920,000. At December 31, 2003, the fair value of the $70
million of variable rate debt where interest costs have been fixed under
interest rate hedges was estimated to be $70.1 million.
Financial Instruments - Derivatives and Hedging
In the normal course of business, we are exposed to the effect of interest
rate changes that could affect our results of operations or cash flows. We limit
these risks by following established risk management policies and procedures,
including the use of a variety of derivative financial instruments to manage or
hedge interest rate risk. We do not enter into derivative instruments for
speculative purposes. We require that the hedging derivative instruments be
effective in reducing interest rate risk exposure. This effectiveness is
essential to qualify for hedge accounting. Changes in the hedging instrument's
fair value related to the effective portion of the risk being hedged are
included in accumulated other comprehensive income or loss. In those cases,
hedge effectiveness criteria also require that it be probable that the
underlying transaction occurs.
Hedges that meet these hedging criteria are formally designated as cash
flow hedges at the inception of the derivative contract. When the terms of an
underlying transaction are modified, or when the underlying hedged item ceases
to exist, the change in the fair value of the derivative instrument is marked to
market with the change included in net income in each period until the
derivative instrument matures. Additionally, any derivative instrument used for
risk management that becomes ineffective is marked to market.
We do not anticipate non-performance by any of our counterparties. Net
interest differentials to be paid or received under a swap contract and/or
collar agreement are included in interest expense as incurred or earned.
Interest rate hedges that are designated as cash flow hedges hedge the
future cash outflows on debt. Interest rate swaps that convert variable payments
to fixed payments, interest rate caps, floors, collars and forwards are cash
flow hedges. The unrealized gains or losses in the fair value of these hedges
are reported on the balance sheet and included in accounts payable and accrued
expenses with a corresponding adjustment to either accumulated other
comprehensive income or loss, or are recognized in earnings depending on the
hedging relationship. If the hedging transaction is a cash flow hedge, then the
offsetting gains or losses are reported in accumulated other comprehensive
income or loss. Over time, the unrealized gains or losses held in accumulated
other comprehensive income or loss will be recognized in earnings consistent
with when the hedged items are recognized in earnings.
In conjunction with our policy to reduce interest rate risk, we have
entered into interest rate swaps to hedge a portion of the variability of
monthly cash outflows attributable to changes in LIBOR. Under the swaps, we
receive LIBOR based payments and pay a fixed rate. A summary of the terms of the
derivative instruments, as of December 31, 2003, and a reconciliation of the
fair value and adjustments to accumulated other comprehensive loss (in
thousands) are as follows:
25
Hedge type.................................................. Cash Flow
Description................................................. Swap
Range of notional amounts................................... $10,000 - $50,000
Total................................................... $70,000
Range of interest rates..................................... 1.38% - 2.3975%
Range of maturity dates..................................... 2/12/04 - 2/12/06
Total accumulated other comprehensive loss at December -
31, 2002.................................................
Change in fair value for the year ended
December 31, 2003........................................ $ (122)
------------------
Total accumulated other comprehensive loss at December
31, 2003................................................. $ (122)
==================
The estimated fair value of our financial instruments has been determined
by us, using available market information and appropriate valuation
methodologies. However, considerable judgment is necessarily required in
interpreting market data to develop the estimates of fair value. Accordingly,
the estimates presented herein are not necessarily indicative of the amounts
that we could realize in a current market exchange. The use of different market
assumptions or estimation methodologies may have a material effect on the
estimated fair value amounts.
For purposes of the Securities and Exchange Commission's market risk disclosure
requirements, we have estimated the fair value of our financial instruments at
December 31, 2003. The fair value estimates presented herein are based on
pertinent information available to management as of December 31, 2003. Although
management is not aware of any factors that would significantly affect the
estimated fair value amounts as of December 31, 2003, future estimates of fair
value and the amounts which may be paid or realized in the future may differ
significantly from amounts presented. Our revolving credit facilities are
sensitive to changes in interest rates.
26
EQUITY ONE, INC. AND SUBSIDIARIES
---------------------------------
TABLE OF CONTENTS
-----------------
Page
----
Report of Independent Registered Public Accounting Firm...................................................... F-1
Consolidated Balance Sheets as of December 31, 2003 and 2002.................................................. F-2
Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and 2001.................... F-3 - F-4
Consolidated Statements of Comprehensive Income for the years ended December 31, 2003, 2002 and 2001......... F-5
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2003, 2002 and 2001......... F-6
Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001................... F-7 - F-8
Notes to the Consolidated Financial Statements................................................................ F-9 - F-33
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
of Equity One, Inc.:
We have audited the accompanying consolidated balance sheets of Equity One, Inc.
and subsidiaries (the "Company") as of December 31, 2003 and 2002, and the
related consolidated statements of operations, comprehensive income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2003. 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 audits.
We conducted our audits in accordance with standards of the Public Accounting
Oversight Board (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, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 2003
and 2002 and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2003 in conformity with accounting
principles generally accepted in the United States of America.
Deloitte & Touche LLP
Certified Public Accountants
Miami, Florida
March 10, 2004, except for the effects of discontinued operations described in
Note 16, as to which the date is November 5, 2004.
F-1
EQUITY ONE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
(In thousands, except per share amounts)
2003 2002
------------ -----------
ASSETS
PROPERTIES:
Income producing ........................................................... $ 1,594,579 $ 682,941
Less: accumulated depreciation ............................................. (66,406) (40,433)
----------- -----------
1,528,173 642,508
Construction in progress and land held for development ..................... 74,686 35,923
Property held for sale ..................................................... 14,440 --
----------- -----------
Properties, net ......................................................... 1,617,299 678,431
CASH AND CASH EQUIVALENTS ..................................................... 966 2,944
CASH HELD IN ESCROW ........................................................... -- 5,933
ACCOUNTS AND OTHER RECEIVABLES, NET .......................................... 13,492 7,053
INVESTMENTS IN AND ADVANCES TO JOINT VENTURES ................................. 2,861 10,021
GOODWILL ...................................................................... 14,014 2,276
OTHER ASSETS .................................................................. 28,754 23,411
----------- -----------
TOTAL ......................................................................... $ 1,677,386 $ 730,069
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
NOTES PAYABLE
Mortgage notes payable ..................................................... $ 459,103 $ 332,143
Unsecured revolving credit facilities ...................................... 162,000 -
Secured revolving credit facilities ........................................ - 23,000
Unsecured senior notes payable ............................................. 150,000 -
----------- -----------
771,103 355,143
Unamortized premium on notes payable ....................................... 24,218 -
----------- -----------
Total notes payable ..................................................... 795,321 355,143
OTHER LIABILITIES
Accounts payable and accrued expenses ...................................... 25,211 14,760
Tenant security deposits ................................................... 7,706 4,342
Other liabilities .......................................................... 5,924 1,724
----------- -----------
Total liabilities ....................................................... 834,162 375,969
----------- -----------
MINORITY INTEREST ............................................................. 12,672 3,869
----------- -----------
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value - 10,000 shares authorized but unissued ... - -
Common stock, $0.01 par value - 100,000 shares authorized, 69,353 and 34,540
shares issued and outstanding for 2003 and 2002, respectively ........... 694 345
Additional paid-in capital ................................................. 843,678 355,450
Retained earnings .......................................................... - 5,969
Accumulated other comprehensive loss ....................................... (122) (46)
Unamortized restricted stock compensation .................................. (10,091) (4,375)
Notes receivable from issuance of common stock ............................. (3,607) (7,112)
----------- -----------
Total stockholders' equity .............................................. 830,552 350,231
----------- -----------
TOTAL ......................................................................... $ 1,677,386 $ 730,069
=========== ===========
See accompanying notes to the consolidated financial statements.
F-2
EQUITY ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(In thousands, except per share amounts)
2003 2002 2001
--------- --------- ---------
RENTAL INCOME:
Minimum rents ................................................. $ 138,418 $ 68,705 $ 55,594
Expense recoveries ............................................ 40,112 21,548 16,979
Termination fees .............................................. 1,363 1,911 995
Percentage rent payments ...................................... 1,740 1,405 887
--------- --------- ---------
Total rental income ......................................... 181,633 93,569 74,455
--------- --------- ---------
COSTS AND EXPENSES:
Property operating expenses .................................... 52,042 28,849 23,267
Rental property depreciation and amortization .................. 26,621 12,562 10,355
Litigation settlement .......................................... - 2,067 -
General and administrative expenses ............................ 11,046 6,648 3,553
--------- --------- ---------
Total costs and expenses ................................... 89,709 50,126 37,175
--------- --------- ---------
INCOME BEFORE OTHER INCOME AND EXPENSES, INCOME TAXES, DISCONTINUED
OPERATIONS AND MINORITY INTEREST ............................... 91,924 43,443 37,280
OTHER INCOME AND EXPENSES
Investment income ................................................. 1,089 1,632 1,930
Other income ...................................................... 687 1,083 927
Interest expense .................................................. (36,814) (20,889) (20,417)
Amortization of deferred financing fees ........................... (992) (759) (1,080)
Equity in income of joint ventures ................................ - - -
Loss on disposal of income producing properties ................... - - (609)
Gain (loss) on extinguishment of debt ............................. (513) 1,520 (1,546)
--------- --------- ---------
INCOME BEFORE INCOME TAXES, DISCONTINUED OPERATIONS, AND MINORITY
INTEREST ....................................................... 55,381 26,030 16,485
--------- --------- ---------
INCOME TAX BENEFIT (EXPENSE)
Current ........................................................ - - 593
Deferred ....................................................... - - 374
--------- --------- ---------
Total income tax benefit (expense) ........................... - - 967
--------- --------- ---------
DISCONTINUED OPERATIONS:
Income from rental properties sold or held for sale ............ 5,986 4,741 2,995
Gain on disposal of income producing properties ................ 3,083 9,264 -
--------- --------- ---------
Total income from discontinued operations .................... 9,069 14,005 2,995
--------- --------- ---------
INCOME BEFORE MINORITY INTEREST ................................... 64,450 40,035 20,447
MINORITY INTEREST ................................................. (803) (101) (1,726)
--------- --------- ---------
NET INCOME ........................................................ $ 63,647 $ 39,934 $ 18,721
========= ========= =========
(continued)
F-3
EQUITY ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(In thousands, except per share amounts)
2003 2002 2001
-------- -------- --------
EARNINGS PER SHARE:
BASIC EARNINGS PER SHARE
Income from continuing operations ... $ 0.91 $ 0.79 $ 0.70
Income from discontinued operations 0.15 0.43 0.13
-------- -------- --------
Total basic earnings per share .... $ 1.06 $ 1.22 $ 0.83
======== ======== ========
NUMBER OF SHARES USED IN COMPUTING
BASIC EARNINGS PER SHARE ............ 59,998 32,662 22,414
======== ======== ========
DILUTED EARNINGS PER SHARE
Income from continuing operations.... $ 0.90 $ 0.78 $ 0.70
Income from discontinued operations 0.15 0.42 0.13
-------- -------- --------
Total diluted earnings per share... $ 1.05 $ 1.20 $ 0.83
======== ======== ========
NUMBER OF SHARES USED IN COMPUTING
DILUTED EARNINGS PER SHARE .......... 61,665 33,443 23,037
========== ======== ========
(Concluded)
See accompanying notes to the consolidated financial statements.
F-4
EQUITY ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(In thousands, except per share amounts)
2003 2002 2001
----------- ----------- -----------
NET INCOME............................................................... $ 63,647 $ 39,934 $ 18,721
OTHER COMPREHENSIVE (LOSS) INCOME:
Net unrealized holding gain (loss) on securities available for sale... 46 (12) 310
Reclassified adjustment for gains included in net income.............. - - (33)
Change in fair value of cash flow hedges.............................. (122) - -
----------- ----------- -----------
COMPREHENSIVE INCOME..................................................... $ 63,571 $ 39,922 $ 18,998
=========== =========== ===========
See accompanying notes to the consolidated financial statements.
F-5
EQUITY ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(In thousands, except per share amounts)
Notes
Accumulate Receivable
Addit- Equity Other Unamortize from the Total
ional Related to Compre-hen Restricted Issuance Stock-
Common Paid-In Step Retained (Loss)/ Stock Compen- of Common holders'
Stock Capital Acquisition Earnings Income sation Stock Equity
---------- ---------- ----------- ---------- ---------- ---------- ---------- ---------
BALANCE,
JANUARY 1, 2001......... $ 128 $ 105,368 $ 82,123 $ 1,709 $ (311) $ (809) $ (545) $ 187,663
Issuance of common
stock:
CEFUS transaction.... 105 120,540 (82,123) - - - - 38,522
UIRT transaction..... 29 31,450 - - - - - 31,479
Alony Hetz........... 20 21,187 - - - - - 21,207
Other issuances...... 6 6,550 - - - (1,027) (5,033) 496
Stock issuance cost - (1,476) - - - - - (1,476)
Net income............. - - - 18,721 - - - 18,721
Dividends paid......... - - - (18,622) - - - (18,622)
Net unrealized holding
gain on securities
available for sale... - - - - 277 - - 277
---------- ---------- ---------- ---------- ---------- ---------- ---------- --------
BALANCE,
DECEMBER 31, 2001....... 288 283,619 - 1,808 (34) (1,836) (5,578) 278,267
Issuance of common
stock.................. 57 73,359 - - - (2,539) (1,534) 69,343
Stock issuance cost.... - (1,528) - - - - - (1,528)
Net income............. - - - 39,934 - - - 39,934
Dividends paid......... - - - (35,773) - - - (35,773)
Net unrealized holding
loss on securities
available for sale... - - - - (12) - - (12)
---------- ---------- ---------- ---------- ---------- ---------- ---------- --------
BALANCE,
DECEMBER 31, 2002....... 345 355,450 - 5,969 (46) (4,375) (7,112) 350,231
Issuance of common
stock:
IRT transaction...... 175 231,562 - - - - 231,737
Other issuances...... 174 259,445 - (5,716) 3,505 257,408
Stock issuance cost - (1,718) - - - - (1,718)
Net income............ - - 63,647 - - 63,647
Dividends paid........ - (1,061) (69,616) - - (70,677)
Change in fair value
of cash flow hedges.. - - - (122) (122)
Net unrealized
holding gain on
securities available
for sale ............ - - - - 46 - - 46
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------
BALANCE,
DECEMBER 31, 2003.... $ 694 $ 843,678 $ - $ - $ (122) $ (10,091) $ (3,607) $ 830,552
========== ========== ========== ========== ========== ========== ========== =========
See accompanying notes to the consolidated financial statements.
F-6
EQUITY ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(In thousands, except per share amounts)
2003 2002 2001
-------------- ------------- ------------
OPERATING ACTIVITIES:
Net income............................................................ $ 63,647 $ 39,934 $ 18,721
Adjustments to reconcile net income to net cash provided by
operating activities:..............................................
Straight line rent adjustment.................................... (1,974) (636) (129)
Provision for losses on accounts receivable...................... 582 524 322
Amortization of premium on notes payable......................... (3,584) - -
Amortization of deferred financing fees.......................... 1,111 884 1,114
Rental property depreciation and amortization.................... 26,621 12,562 10,906
Depreciation and amortization included in discontinued operations 1,386 1,248 759
Amortization of restricted stock................................. 2,833 1,579 973
(Gain) loss on disposal of real estate........................... (3,083) (9,264) 609
Gain on securities available for sale............................ (9) (14) -
Loss (gain) on debt extinguishment............................... 623 (1,520) 1,546
Equity in income of joint ventures............................... (500) (549) (494)
Minority interest in earnings of consolidated subsidiary......... 803 101 1,726
Deferred income tax benefit...................................... - - (374)
Changes in assets and liabilities:
Accounts and other receivables.................................. (5,080) (3,152) 840
Other assets.................................................... (2,969) 173 146
Accounts payable and accrued expenses........................... (5,378) 2,548 (8,362)
Tenants' security deposits...................................... 1,038 252 206
Other liabilities............................................... 2,195 943 (295)
-------------- ------------- -------------
Net cash provided by operating activities............................. 78,262 45,613 28,214
-------------- ------------- -------------
INVESTING ACTIVITIES:
Additions to and purchase of rental property....................... (185,693) (79,457) (37,409)
Proceeds from disposal of rental property.......................... 25,013 27,195 22,276
Decrease (increase) in cash held in escrow......................... 12,897 (4,218) (402)
Proceeds from sales of joint venture interest...................... 6,714 - 6,630
Distributions received from joint ventures......................... 940 871 287
Increase in deferred leasing expenses.............................. (4,455) (1,660) (378)
Proceeds from repayments of notes receivable....................... 5,074 5,068 2,643
Proceeds from sale of securities................................... 976 762 -
Due to (from) affiliates........................................... - - 212
Cash used in the purchase of IRT................................... (189,382) - -
Cash used in the purchase of UIRT.................................. - - (36,294)
Cash acquired in acquisitions...................................... 1,756 - -
-------------- ------------- -------------
Net cash used in investing activities................................. (326,160) (51,439) (42,435)
-------------- ------------- -------------
FINANCING ACTIVITIES:
Repayments of mortgage notes payable............................... (63,586) (43,156) (66,210)
Borrowings under mortgage notes payable............................ - 25,850 64,884
Decrease in restricted cash........................................ - - 4,273
Net borrowings (repayments) under revolving credit facilities...... 131,000 (4,409) 9,210
Increase in deferred financing expenses............................ (888) (1,058) (540)
Proceeds from stock subscription and issuance of common stock...... 249,205 67,982 21,366
Stock issuance costs............................................... (1,718) (1,471) (1,476)
Repayment of notes receivable from issuance of common stock........ 3,505 - -
Cash dividends paid to stockholders................................ (70,677) (35,773) (18,622)
Distributions to minority interest................................. (921) (101) (105)
-------------- ------------- -------------
Net cash provided by financing activities............................. 245,920 7,864 12,780
-------------- ------------- -------------
(continued)
F-7
EQUITY ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(In thousands, except per share amounts)
2003 2002 2001
-------------- ------------- -------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS.................. $ (1,978) $ 2,038 $ (1,441)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR.......................... 2,944 906 2,347
-------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF YEAR................................ $ 966 $ 2,944 $ 906
============== ============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest, net of amount capitalized................... $ 35,264 $ 22,772 $ 20,457
============== ============= =============
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Change in unrealized holding gain (loss) on securities available for
sale............................................................... $ 46 $ (12) $ 277
============== ============= =============
Change in fair value of cash flow hedges.............................. $ 122
==============
Conversion of partnership operating units............................. $ 2,880
============== ============= =============
Issuance of restricted stock.......................................... $ 7,534 $ 3,900 $ 1,525
============== ============= =============
Common stock issued for notes receivable.............................. $ 1,534 $ 5,033
============= =============
Note receivable from sale of property................................. $ 3,900
=============
The Company acquired all of the outstanding common stock of IRT for
$763,047, including transaction costs:
Fair value of assets acquired, including goodwill.................. $ 763,047
Assumption of liabilities, unsecured senior notes and mortgage
notes payable.................................................... (319,598)
Fair value adjustment of unsecured senior notes and mortgage notes
payable.......................................................... (22,330)
Common stock issued................................................ (231,737)
--------------
Cash paid for IRT acquisition, including transaction costs......... $ 189,382
==============
The Company acquired and assumed the mortgage on the acquisition of a
rental property:
Fair value of rental property...................................... $ 101,692 $ 9,300
Assumption of mortgage notes payable............................... (54,369) (6,097)
Fair value adjustment of mortgage notes payable.................... (6,029) -
-------------- -------------
Cash paid for rental property...................................... $ 41,294 $ 3,203
============== =============
Sale of joint venture interest in settlement of notes receivable...... $ 1,438
=============
Issuance of CEFUS common stock in settlement of $ 3,345
affiliated debt.....................................................
=============
Purchase of minority interest in CEFUS................................ $ 40,893
=============
The Company acquired all the outstanding capital stock of UIRT for
$67,773, including transaction costs:
Fair value of assets acquired...................................... $ 147,640
Liabilities assumed................................................ (79,867)
Common stock issued................................................ (31,479)
-------------
Cash paid for acquisition, including transaction costs............. $ 36,294
=============
See accompanying notes to the consolidated financial statements. (Concluded)
F-8
EQUITY ONE, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001
(In thousands, except per share amounts)
1. Organization and Basis of Presentation
--------------------------------------
Organization
Equity One, Inc. operates as a self-managed real estate investment trust
("REIT") that principally acquires, renovates, develops and manages community
and neighborhood shopping centers located predominately in high growth markets
in the southern United States. These shopping centers are primarily anchored by
supermarkets or other necessity-oriented retailers such as drugstores or
discount retail stores.
Basis of Presentation
The consolidated financial statements include the accounts of Equity One,
Inc. and its wholly-owned subsidiaries and those partnerships where the Company
has financial and operating control. Equity One, Inc. and subsidiaries are
hereinafter referred to as "the consolidated companies "or "the Company." The
Company has a 50% investment in two joint ventures of which the Company is not
the primary beneficiary and, accordingly, uses the equity method of accounting
for these joint ventures.
All significant intercompany transactions and balances have been eliminated
in consolidation.
Portfolio
As of December 31, 2003, the Company owned a total of 185 properties,
encompassing 123 supermarket-anchored shopping centers, 11 drug store-anchored
shopping centers, 44 other retail-anchored shopping centers, one self-storage
facility, one industrial property and five retail developments, as well as
non-controlling interests in two unconsolidated joint ventures which own and
operate commercial real estate properties.
IRT Merger
On February 12, 2003, the Company completed a statutory merger with IRT
Property Company ("IRT"). The Company entered into the merger to acquire 93
properties comprising an aggregate of approximately 10,041,000 square feet of
gross leasable area and create one of the largest shopping center REITs
primarily focusing on the southeastern United States. The merger provided the
Company with a unique business opportunity to increase its portfolio of
properties and enhance its core portfolio by broadening its concentration in
existing markets and expanding into new markets. This provided the Company with
a more stable earnings stream as a majority of the properties are in high-growth
areas of the southeastern United States. The Company's Board believes that the
increase in the size of the Company's portfolio strengthens its position as a
leading shopping center REIT and provides synergies because of the Company's
experience, geographic locations, greater market capitalization, opportunity for
further growth and liquidity. These factors contributed to a purchase price that
resulted in $11,738 of goodwill. The acquisition of IRT was accounted for using
the purchase method and the results of IRT are included in the Company's
financial statements since the date of its acquisition. The aggregate purchase
price for the acquisition was $763,047 (including transaction costs and assumed
debt), consisting of the payment of $189,382 in cash, the issuance of 17,490
shares of the Company's common stock valued at $231,737 and the assumption of
$341,928 of outstanding debt, premium on notes payable, and other liabilities.
The value of the Company's common stock was determined based on the average
market price
F-9
over the 3-day period before and after the terms of the acquisition were agreed
to and announced. There were no contingent payments, options, or commitments
specified in the agreement.
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of the acquisition.
As of
February 12, 2003
------------------
Properties ............................................. $ 738,209
Cash and cash equivalents............................... 1,756
Cash held in escrow .................................... 6,964
Accounts receivable .................................... 3,401
Goodwill ............................................... 11,738
Other assets .......................................... 979
------------------
Total assets acquired .............................. 763,047
------------------
Mortgage notes payable ................................. 135,352
Premium on mortgage notes .............................. 7,223
Unsecured senior notes payable ......................... 150,000
Premium on unsecured senior notes payable.............. 15,107
Other liabilities....................................... 34,246
------------------
Total liabilities assumed .......................... 341,928
------------------
Net assets acquired ................................ $ 421,119
==================
The Company has determined that the amounts assigned to other intangible
assets acquired are not significant in relation to the total cost of the
acquisition.
The following unaudited supplemental pro forma information is presented to
reflect the effects of the IRT acquisition and related transactions, and the
impact on the Company's results, as if the transactions had occurred on January
1, 2002. The pro forma information includes the acquisition of IRT, the issuance
of common stock related to the IRT transaction, the private placement of common
stock and the borrowing under the revolving credit facility. The pro forma
financial information is presented for informational purposes only and may not
be indicative of what the actual results of operations would have been had the
acquisition occurred as indicated, nor does it purport to represent the results
of the operations for future periods:
F-10
2003 2002
----------- ------------
Pro forma rental income..................... $ 200,461 $ 189,442
=========== ============
Pro forma income before discontinued
operations................................ $ 60,113 $ 54,656
=========== ============
Pro forma net income........................ $ 60,007 $ 73,305
=========== ============
Pro forma earnings per share:
Basic earnings per share:
Income before discontinued operations... $ 0.96 $ 0.96
Income from discontinued operations..... 0.09 0.33
----------- ------------
Total basic earnings per share........ $ 1.05 $ 1.29
=========== ============
Diluted earnings per share:
Income before discontinued operations... $ 0.94 $ 0.95
Income from discontinued operations..... 0.09 0.32
----------- ------------
Total diluted earnings per share...... $ 1.03 $ 1.27
=========== ============
Other Mergers
On September 20, 2001, the Company completed the acquisition of Centrefund
Realty (U.S.) Corporation ("CEFUS") from First Capital Realty Inc. ("FCR"),
formerly known as Centrefund Realty Corporation, for approximately $281,000
(including assumed debt). As provided for in the stock exchange agreement, the
Company issued 10,500 shares of its common stock to subsidiaries of FCR and
assumed approximately $149,021 of CEFUS's outstanding debt. The acquisition of
CEFUS was partially accounted for on a "push-down" basis and partially in a
manner similar to a pooling of interests, due to the acquisition by Gazit Globe
(1982) Ltd., the Company's majority shareholder, of a 68.07% controlling
interest in FCR on August 18, 2000.
To reflect the events of August 18, 2000, the Company recorded equity
related to step acquisition in the consolidated financial statements equivalent
to 68.07% of the value of the consideration paid to subsidiaries of FCR (the
"Equity Related to Step Acquisition"). In addition, the Company recorded a
minority interest equivalent to 31.93% of the value of the net assets acquired
on August 18, 2000 (the "31.93% Minority Interest"), which was eliminated on
September 20, 2001 when the acquisition of CEFUS was completed.
The results for the year ended December 31, 2001 were adjusted to
incorporate the results of CEFUS for the period January 1, 2001 to September 19,
2001. Through September 19, 2001, CEFUS operated under the control of FCR as a
subchapter C-corporation under the Internal Revenue Code (the "Code") and
recorded current and deferred income taxes in connection with its operations.
Effective September 20, 2001, the Company no longer recorded any provision for
income taxes consistent with the acquisition of 100% of CEFUS, and the Company's
intent to operate CEFUS as a qualified REIT subsidiary. In addition, with the
September 20, 2001 acquisition of 100% of CEFUS, the Company has eliminated the
Equity Related to Step Acquisition, the 31.93% Minority Interest and the
deferred income tax assets, and has recorded in their place the issuance of
10,500 shares of the Company's common stock.
On September 21, 2001, the Company completed the acquisition of United
Investors Realty Trust ("UIRT"), a Texas-based REIT, for $147,640 (including
assumed debt). As a result of the transaction with UIRT, the Company issued
2,896 shares of its common stock, paid $36,294 in cash consideration to former
UIRT shareholders and for transaction costs, and assumed approximately $79,867
of UIRT's outstanding debt. The acquisition of UIRT was accounted for using the
purchase method and the results of UIRT are included in the Company's
consolidated financial statements from the date of acquisition.
F-11
2. Summary of Significant Accounting Policies
------------------------------------------
Properties
Income producing property is stated at cost and includes all costs related
to acquisition, development and construction, including tenant improvements,
interest incurred during development, costs of predevelopment and certain direct
and indirect costs of development. Costs incurred during the predevelopment
stage are capitalized once management has identified a site, determined that the
project is feasible and it is probable that the Company is able to proceed with
the project. Expenditures for ordinary maintenance and repairs are expensed to
operations as they are incurred. Significant renovations and improvements, which
improve or extend the useful life of assets, are capitalized.
The Company is actively pursuing acquisition opportunities and will not be
successful in all cases; costs incurred related to these acquisition
opportunities are expensed when it is probable that the Company will not be
successful in the acquisition.
Depreciation expense is computed using the straight-line method over the
estimated useful lives of the assets, as follows:
Land improvements 40 years
Buildings 30-40 years
Building improvements 5-40 years
Tenant improvements Over the term of the related lease
Equipment 5-7 years
Business Combinations
The Company allocates the purchase price of acquired companies and
properties to the tangible and intangible assets acquired, and liabilities
assumed, based on their estimated fair values. Fair value is defined as the
amount at which that asset could be bought or sold in a current transaction
between willing parties (other than in a forced or liquidation sale). In order
to allocate the purchase price of acquired companies and properties to the
tangible and intangible assets acquired, the Company identifies and estimates
the fair value of the land, buildings, and improvements, review the leases to
determine the existence of, and estimates fair value of, any contractual or
other legal rights and investigates the existence of, and estimates fair value
of, any other identifiable intangible assets. Such valuations require management
to make significant estimates and assumptions, especially with respect to
intangible assets.
The cost approach is used as the primary method to estimate the fair value
of the buildings, improvements and other assets. The cost approach is based upon
the current costs to develop the particular asset in that geographic location,
less an allowance for physical and functional depreciation. The market value
approach is used as the primary method to estimate the fair value of the land.
The determination of the fair value of contractual intangibles is based on the
costs to originate a lease including commissions and legal costs to the extent
that such costs are not already incurred with a new lease that has been
negotiated in connection with the purchase of a property. In-place lease values
are based on management's evaluation of the specific characteristics of each
lease and the Company's overall relationship with each tenant. Among the factors
considered in the allocation of these values include the nature of the existing
relationship with the tenant, the tenant's credit quality, the expectation of
lease renewals, the estimated carrying costs of the property during a
hypothetical expected lease-up period, current market conditions and costs to
execute similar leases. Estimated carrying costs include real estate taxes,
insurance, other property operating costs and estimates of lost rentals at
market rates during the hypothetical expected lease-up periods, under specific
market conditions. Above-market, below-market and in-place lease values are
determined based on the present value (using a discount rate reflecting the
risks associated with the leases acquired) of the difference between (i) the
contractual amounts to be paid pursuant to the leases negotiated and in-place at
the time of acquisition and (ii) management's estimate of
F-12
fair market lease rates for the property or equivalent property, measured over a
period equal to the remaining non-cancelable term of the lease. The value of
contractual intangibles is amortized over the remaining term of each lease.
Other than discussed above, the Company has determined that its real estate
properties do not have any other significant identifiable intangible assets.
Critical estimates in valuing certain of the intangible assets and the
assumptions of what marketplace participants would use in making estimates of
fair value include, but are not limited to: future expected cash flows,
estimated carrying costs, estimated origination costs, lease up periods, and the
tenant risk attributes, as well as assumptions about the period of time the
acquired lease will continue to be used in the Company's portfolio, and discount
rates used in these calculations. Management's estimates of fair value are based
upon assumptions believed to be reasonable, but which are inherently uncertain
and unpredictable. Assumptions may not always reflect unanticipated events and
changes in circumstances may occur. In making such estimates, management uses a
number of sources, including appraisals that may be obtained in connection with
the acquisition or financing of the respective property or other market data.
Management also considers information obtained in its pre-acquisition due
diligence and marketing and leasing activities in estimating the fair value of
tangible and intangible assets acquired.
Construction in progress and land held for development
Land held for development is stated at cost. Costs incurred during the
predevelopment stage are capitalized once management has identified a site,
determined that the project is feasible and it is probable that the Company is
able to proceed with the project. Properties undergoing significant renovations
and improvements are considered under development. The Company estimates the
cost of a property undergoing renovations as a basis for determining eligible
costs. Interest, real estate taxes and other costs directly related to the
properties and projects under development are capitalized until the property is
ready for its intended use. Similar costs related to properties not under
development are expensed as incurred. In addition, the Company writes off costs
related to predevelopment projects when it determines that it will no longer
pursue the project.
Total interest expense capitalized to construction in progress and land
held for development was $3,822, $2,375 and $2,102 for the years ended December
31, 2003, 2002 and 2001, respectively.
Long-lived assets
Long-lived assets, such as property, land held for development, and certain
identifiable intangibles, are reviewed for impairment whenever events or changes
in circumstances indicate that it is probable that the sum of expected
undiscounted cash flows of the related operations are less than historical net
cost basis. These factors, along with plans with respect to the operations, are
considered in assessing the recoverability of long-lived assets. If the Company
determines that the carrying amount is impaired, the long-lived assets are
written down to their fair value with a corresponding charge to earnings. During
the periods presented, no such impairment was incurred.
Cash and cash equivalents
The Company considers highly liquid investments with an initial maturity of
three months or less to be cash equivalents.
Cash held in escrow
Escrowed cash consists of cash being held in anticipation of the execution
of tax-free exchanges under Section 1031 of the Internal Revenue Code.
Accounts Receivable
Accounts receivable include amounts billed to tenants and accrued expense
recoveries due from tenants. Management evaluates the collectibility of these
receivables and adjusts the allowance for
F-13
doubtful accounts to reflect amounts estimated to be uncollectible. The
allowance for doubtful accounts was $1,201 and $619 at December 31, 2003 and
2002, respectively.
Deferred expenses
Deferred expenses consist of loan origination fees and leasing costs. Loan
and other fees directly related to rental property financing with third parties
are amortized over the term of the loan which approximates the effective
interest method. Direct salaries, third party fees and other costs incurred by
the Company to originate a lease are capitalized and are being amortized using
the straight-line method over the term of the related leases.
Goodwill
Goodwill has been recorded to reflect the excess of cost over the fair
value of net assets acquired in various acquisitions. The Company adopted
Statement of Financial Accounting Standard ("SFAS") No. 142 on January 1, 2002
and no longer amortizes goodwill.
The Company is required to perform annual impairment tests of its goodwill
and intangible assets, or more frequently in certain circumstances. The Company
has elected to test for goodwill impairment in November of each year. The
goodwill impairment test is a two-step process, which requires management to
make judgments in determining what assumptions to use in the calculation. The
first step of the process consists of estimating the fair value of each
reporting unit and comparing those estimated fair values with the carrying
values, which includes the allocated goodwill. If the estimated fair value is
less than the carrying value, a second step is performed to compute the amount
of the impairment by determining an "implied fair value" of goodwill. The
determination of a reporting unit's "implied fair value" of goodwill requires
the Company to allocate the estimated fair value of the reporting unit to the
assets and liabilities of the reporting unit. Any unallocated fair value
represents the "implied fair value" of goodwill, which is compared to its
corresponding carrying value.
The key assumptions management employs to determine the fair value of the
Company's reporting units (each property is considered a reporting unit)
included (a) net operating income; (b) cash flows; and (c) an estimation of the
fair value of each reporting unit, which was based on the Company's experience
in evaluating acquisitions and market conditions. A variance in the net
operating income or discount rate could have a significant impact on the amount
of any goodwill impairment charge recorded.
Management cannot predict the occurrence of certain future events that
might adversely affect the reported value of goodwill that totaled $14,014
million at December 31, 2003. Such events include, but are not limited to,
strategic decisions made in response to economic and competitive conditions, the
impact of the economic environment on the Company's tenant base, or a material
negative change in its relationships with significant tenants.
Deposits
Deposits are composed of funds held by various institutions for future
payments of property taxes, insurance and improvements, utility and other
service deposits.
Minority interest
On January 1, 1999, Equity One (Walden Woods) Inc., a wholly-owned
subsidiary, entered into a limited partnership as a general partner. An income
producing shopping center ("Walden Woods Village") was contributed by its owners
(the "Minority Partners"), and the Company contributed 93.656 shares of common
stock (the "Walden Woods Shares") to the limited partnership at an agreed-upon
price of $10.30 per share. Based on this per share price and the net value of
property contributed by the Minority Partners, each of the partners received
93.656 limited partnership units. The Company has entered into a Redemption
Agreement with the Minority Partners whereby the Minority Partners can request
that the Company purchase either their limited partnership units or any shares
of common stock which they received in exchange for their partnership units at a
price of $10.30 per unit or per share no
F-14
earlier than two years nor later than fifteen years after the exchange date of
January 1, 1999. As a result of the Redemption Agreement, the Company has
consolidated the accounts of the partnership with the Company's financial data.
In addition, under the terms of the limited partnership agreement, the Minority
Partners do not have an interest in the Walden Woods Shares except to the extent
of dividends. Accordingly, a preference in earnings has been allocated to the
Minority Partners to the extent of the dividends declared. The Walden Woods
Shares are not considered outstanding in the consolidated financial statements
and are excluded from the share count in the calculation of primary earnings per
share.
On December 5, 2000, a wholly owned subsidiary of the Company, Equity One
(North Port) Inc., entered into a limited partnership (the "Shoppes of North
Port, Ltd.") as a general partner. An income producing shopping center was
contributed by its owners (the "North Port Minority Partners") and the Company
contributed an income producing property to a limited liability company wholly
owned by the Shoppes of North Port, Ltd. Both the North Port Minority Partners
and the general partner were issued 261.850 operating partnership units ("OPUs")
based on the net value of the properties contributed. The North Port Minority
Partners had the right to redeem their OPUs for the Company's common stock on a
one-for-one basis or for cash at an agreed upon price of $11.00 per share no
earlier than December 10, 2001, nor later than three and one half years
thereafter. The North Port Minority Partners received a preferred quarterly
distribution equal to a 9% annual return on their initial capital contribution
through December 31, 2002. On January 1, 2003, the preferred distribution was
reduced to a 3% annual return on their initial capital contribution. This amount
is reflected as interest expense in the consolidated financial statements.
During July 2003, North Port Minority Partners redeemed their OPUs in exchange
for 261.850 shares of the Company's common stock.
The Company is the general partner of IRT Partners L.P. ("LP") and
maintains an indirect partnership interest through its wholly-owned subsidiary,
IRT Management Company. LP was formed in order to enhance the acquisition
opportunities of the Company through a downREIT structure. This structure offers
potential sellers of properties the ability to make a tax-deferred sale of their
real estate properties in exchange for limited partnership units ("OP Units") of
LP. As of December 31, 2003, there were 734.266 OP Units outstanding held by
partners not affiliated with the Company. LP is obligated to redeem each OP Unit
held by a person other than the Company, at the request of the holder, for cash
equal to the fair market value of a share of the Company's common stock at the
time of such redemption, provided that the Company may elect to acquire any such
OP Unit presented for redemption for one share of common stock. Such limited
partnership interest of 5.59% of LP are held by persons unaffiliated with the
Company and are reflected as a minority interest in the consolidated
subsidiaries in the accompanying consolidated balance sheets.
The Company also records a minority interest for the limited partners'
share of equity in two separate general partnerships which it controls and is
the primary beneficiary. The two partnerships in which the Company has a
partnership interest are Venice Plaza (75% interest) and North Village Center
(49% interest). The minority interest has been presented in the accompanying
consolidated balance sheet.
Notes receivable from issuance of common stock
As a result of certain provisions of the Sarbanes-Oxley Act of 2002, the
Company is generally prohibited from making loans to directors and executive
officers. Prior to the adoption of the Sarbanes-Oxley Act of 2002, the Company
had loaned $7,112 to various executives in connection with their exercise of
options to purchase shares of the Company's common stock of which $3,505 has
been repaid during 2003. The notes bear interest at a rate of 5%. Interest only
is payable quarterly and the principal is due between 2006 and 2009. In
accordance with the provisions of the Sarbanes-Oxley Act of 2002, there have
been no material modifications to any of the terms of the loans granted to our
executives.
F-15
Revenue Recognition
Rental income comprises minimum rents, expense reimbursements, termination
fees and percentage rent payments. Minimum rents are recognized over the lease
term on a straight-line basis as it becomes receivable according to the
provisions of the lease. Expense reimbursements are recognized in the period
that the applicable costs are incurred. The Company accounts for these leases as
operating leases as the Company has retained substantially all risks and
benefits of property ownership. Percentage rent is recognized when the tenant's
reported sales have reached certain levels specified in the respective lease.
The Company maintains an allowance for doubtful accounts for estimated
losses resulting from the inability of tenants to make required rent payments.
The computation of this allowance is based on the tenants' payment history and
current credit quality.
Earnings Per Share
Basic earnings per share ("EPS") is computed by dividing net income by the
weighted average number of shares of the Company's common stock outstanding
during the period. Diluted EPS reflects the potential dilution that could occur
from shares issuable under stock-based compensation plans, which would include
the exercise of stock options, and the conversion of the minority interests in
the Operating Partnerships.
Management fees
Management fees consist of fees earned in connection with certain
third-party leasing activities and other third-party management activities.
Management fees are recognized when earned.
Income taxes
The Company elected to be taxed as a real estate investment trust (REIT)
under the Internal Revenue Code, commencing with its taxable year ended December
31, 1995. To qualify as a REIT, the Company must meet a number of organizational
and operational requirements, including a requirement that it currently
distribute at least 90% of its REIT taxable income to its stockholders. Also, at
least 90% of the Company's gross income in any year must be derived from
qualifying sources. The difference between net income available to common
shareholders for financial reporting purposes and taxable income before dividend
deductions relates primarily to temporary differences, principally real estate
depreciation and amortization. It is management's current intention to adhere to
these requirements and maintain the Company's REIT status. As a REIT, the
Company generally will not be subject to corporate level federal income tax on
taxable income it distributes currently to its stockholders. If the Company
fails to qualify as a REIT in any taxable year, it will be subject to federal
income taxes at regular corporate rates (including any applicable alternative
minimum tax) and may not be able to qualify as a REIT for four subsequent
taxable years. Even if the Company qualifies for taxation as a REIT, the Company
may be subject to certain state and local taxes on its income and property, and
to federal income and excise taxes on its undistributed taxable income. In
addition, taxable income of the Company's consolidated subchapter C-Corporation
("C-Corporation") taxable REIT subsidiary ("TRS"), is subject to federal and
state income taxes.
CEFUS, was taxed as a C-Corporation and accordingly recorded current and
deferred income taxes through September 19, 2001. Deferred income taxes reflect
the net tax effects of temporary differences between the carrying amounts of the
assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes. These taxes are reflected in the accompanying consolidated
financial statements as current and deferred components of the income tax
benefit/expense. In addition, certain corporate tax attributes carried over to
the Company as a result of this transaction (for example, net operating losses,
alternative minimum tax credit carry-forwards, etc.). Net operating losses
available
F-16
to the Company are estimated to be approximately $11,973, but their utilization
is limited subject to the provisions of the Code Sections 381 and 382.
As a result of the acquisition of CEFUS, Code Section 1374 imposes a tax on
the net built-in gain of C-Corporation (i.e. CEFUS) assets that become assets of
a REIT (i.e. the Company) in a carryover-basis transaction. The estimated net
built-in gain at the date of acquisition is approximately $38,390. In lieu of
the tax imposed on the transferor C-Corporation (i.e. CEFUS), the Company is
subject to a Ten-Year Rule, which defers and eliminates recognition of the
built-in gain tax liability if the assets subject to the tax are not disposed of
within ten years from the date of the acquisition. In addition to the Ten-Year
Rule, the Company has the ability to utilize like-kind exchanges, carry-over
C-Corporation tax attributes, and other tax planning strategies to mitigate the
potential recognition of built-in gain tax.
Segment information
The Company's properties are community and neighborhood shopping centers
located predominately in high growth markets in the southern United States. Each
of the Company's centers are separate operating segments which have been
aggregated and reported as one reportable segment because they have
characteristics so similar that they are expected to have essentially the same
future prospects. The economic characteristics include similar returns,
occupancy and tenants and each is located near a metropolitan area with similar
economic demographics and site characteristics.
Use of estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
New accounting pronouncements
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections
which rescinds FASB Statement No. 4, Reporting Gains and Losses from
Extinguishment of Debt, and an amendment of that Statement, FASB Statement No.
64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. It also
rescinds FASB Statement No. 44, Accounting for Intangible Assets or Motor
Carriers, and amends FASB Statement No. 13, Accounting for Leases. Finally SFAS
No. 145 amends other existing authoritative pronouncements to make various
technical corrections, clarify meanings, or describe their applicability under
changed conditions. The provisions related to the rescission of FASB Statement
No. 4 and its amendment Statement No. 64 are effective for fiscal years
beginning after May 15, 2002. The Company adopted SFAS No. 145 as of July 2002
and has reflected gains (losses) from extinguishment of debt as part of ordinary
income.
In November 2002, FASB issued FASB Interpretation No. 45 ("FIN 45"),
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantee's of Indebtedness of Other's (an interpretation of FASB
Statements No. 5, 57 and 107 and rescission of FASB Interpretation No. 34). FIN
45 clarifies the requirements of FASB Statement No. 5, Accounting for
Contingencies. It requires that upon issuance of a guarantee, the guarantor must
recognize a liability for the fair value of the obligation it assumes under that
guarantee regardless of whether or not the guarantor receives separate
identifiable consideration (i.e., a premium). We adopted the disclosure
requirements in 2002 and the initial recognition and measurement provisions in
2003. The adoption of FIN 45 did not have a material impact on the Company's
financial statements.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure. This Statement provides alternative
methods of transition for a voluntary
F-17
change to the fair value based method of accounting for stock-based employee
compensation and amends the disclosure requirement of SFAS No. 123, Accounting
for Stock-Based Compensation, to require prominent disclosure in both annual and
interim financial statements about the effect of the method used on reported
results. SFAS No. 148 is effective for financial statements issued for fiscal
years ending after December 15, 2002 and, as it relates to Opinion No. 28,
Interim Financial Reporting, the interim periods beginning after December 15,
2002, although earlier application is encouraged. The Company applies the
intrinsic value method as prescribed by Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees, and related interpretations in
measuring stock-based compensation. Accordingly, no compensation expense has
been recognized for options granted under the Company's compensation plan as no
grants were made at less than market value. The Company has adopted the
disclosure requirements of SFAS No. 148 in its financial statements as of
December 31, 2002.
Had compensation expense been determined based upon the fair value at the
grant date for awards under the Plan consistent with SFAS No. 123, Accounting
for Stock-Based Compensation, the Company's net income and earnings per share on
a pro forma basis would have been:
Years Ended December 31,
---------------------------------------
2003 2002 2001
---------- ---------- -----------
Net Income As reported $ 63,647 $ 39,934 $ 18,721
Stock based employee
compensation expense
included in reported net
income........................ - - -
Total stock based employee
compensation expense
determined under fair value
based method for all awards... 896 743 238
---------- ---------- ----------
Pro forma........................ $ 62,751 $ 39,191 $ 18,483
========== ========== ==========
Basic earnings per share As reported...................... $ 1.06 $ 1.22 $ 0.83
========== ========== ==========
Pro forma........................ $ 1.05 $ 1.20 $ 0.82
========== ========== ==========
Diluted earnings per share As reported...................... $ 1.05 $ 1.20 $ 0.83
========== ========== ==========
Pro forma........................ $ 1.03 $ 1.18 $ 0.82
========== ========== ==========
The fair value of each option grant was estimated on the grant date using
the Black-Scholes option-pricing model with the following assumptions for the
years ended December 31, 2003, 2002 and 2001:
2003 2002 2001
-------------- ---------- ------------
Dividend Yield.................. 6.5% - 7.0% 7.9% 7.5%
Risk-free interest rate......... 1.2% - 4.27% 4.3% 4.3% - 5.1%
Expected option life (years).... 1-10 10 7
Expected volatility............. 16.5% - 25% 24% 25%
In January 2003, FASB issued FASB Interpretation No. 46, Consolidation of
Variable Interest Entities ("FIN 46"), an interpretation of ARB 51. FIN 46
provides guidance on identifying entities for which control is achieved through
means other than through voting rights, variable interest entities ("VIE"), and
how to determine when and which business enterprises should consolidate the VIE.
In addition, FIN 46 requires both the primary beneficiary and all other
enterprises with a significant variable interest in a VIE to make additional
disclosures. The consolidation provisions of FIN 46 are effective immediately
for variable interests in VIEs created after January 31, 2003. For variable
interests in VIEs
F-18
created before February 1, 2003, the provisions of FIN 46 are effective for the
first interim or annual period ending after December 15, 2003. The Company has
evaluated the effect of FIN 46 and has determined where it is the primary
beneficiary and has consolidated those VIE's. Where the Company has determined
it is not the primary beneficiary of the VIE, it reports the VIE under the
equity method. The adoption of FIN 46 did not require a change in the accounting
treatment of any VIE's. The Company has not become a party to any VIE's during
2003.
In April 2003, FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, which clarifies the accounting
and reporting for derivative instruments, including derivative instruments that
are embedded in contracts. This statement is effective for contracts entered
into or modified after June 30, 2003. The Company adopted this pronouncement
beginning July 1, 2003. The adoption of SFAS No. 149 did not have a material
impact on the Company's financial condition or results of operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This statement
establishes standards for the classification and measurement of financial
instruments that possess characteristics similar to both liability and equity
instruments. SFAS No. 150 also addresses the classification of certain financial
instruments that include an obligation to issue equity shares. On October 29,
2003, the FASB voted to defer, for an indefinite period, the application of the
guidance in SFAS No. 150. The FASB decided to defer the application of certain
aspects of Statement 150 until it could consider some of the resulting
implementation issues. The Company has adopted certain provisions of SFAS No.
150 which did not have a material impact on the Company's financial condition or
results of operations. The Company is still evaluating the potential effect of
the provisions of SFAS No. 150 that have been deferred to future periods.
In December 2003, the FASB issued Statement No. 132 (revised 2003),
Employers' Disclosures about Pensions and Other Postretirement Benefits. This
Statement revises employers' disclosures about pension plans and other
postretirement benefit plans. It does not change the measurement or recognition
provisions of FASB Statements No. 87, Employers' Accounting for Pensions, No.
88, Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits, and No. 106, Employers' Accounting
for Postretirement Benefits Other Than Pensions. This Statement retains the
disclosure requirements contained in FASB Statement No. 132, Employers'
Disclosures about Pensions and Other Postretirement Benefits, which it replaces.
It requires additional disclosures about the assets, obligations, cash flows,
and net periodic benefit cost of defined benefit pension plans and other
postretirement benefit plans. The adoption of SFAS No. 132 (revised) did not
have a material impact on the Company's financial statements.
Fair value of financial instruments
The estimated fair values of financial instruments have been determined by
the Company using available market information and appropriate valuation
methods. Considerable judgment is required in interpreting market data to
develop the estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts that the Company could realize in
a current market exchange. The use of different market assumptions and/or
estimation methods may have a material effect on the estimated fair value
amounts. The Company has used the following market assumptions and/or estimation
methods:
Cash and Cash Equivalents and Accounts and Other Receivables. The carrying
amounts reported in the balance sheets for these financial instruments
approximate fair value because of their short maturities.
Notes Receivable. The fair value is estimated by using the current interest
rates at which similar loans would be made. The carrying amounts reported in the
balance sheets approximate fair value.
F-19
Mortgage Notes Payable. The fair value estimated at December 31, 2003 and
2002 was $505,148 and $373,166, respectively, calculated based on the net
present value of payments over the term of the loans using estimated market
rates for similar mortgage loans and remaining terms.
Unsecured Revolving Credit Facilities. The fair value is estimated by using
the current rates at which similar loans would be made and remaining terms. The
carrying amounts reported in the balance sheets approximate fair value.
Unsecured Senior Notes Payable. The fair value estimated at December 31,
2003 was $165,700, calculated based on the net present value of payments over
the term of the loan using estimated market rate for similar notes and remaining
terms.
Reclassifications
Certain prior year amounts have been reclassified to conform with the
current year financial presentation.
3. Properties
----------
Composition in the consolidated balance sheets: December 31,
---------------------------
2003 2002
------------ ------------
Land and land improvements.................................. $ 654,654 $ 178,066
Building and building improvements.......................... 924,097 495,301
Tenant improvements......................................... 15,828 9,574
------------ ------------
Total income producing property............................. 1,594,579 682,941
Less: accumulated depreciation................................... (66,406) (40,433)
------------ ------------
Total rental property....................................... 1,528,173 642,508
Construction in progress and land held for development........... 74,686 35,923
Property held for sale........................................... 14,440 -
------------ ------------
Properties, net............................................... $1,617,299 $ 678,431
============ ============
Acquisitions
The following table reflects properties acquired (excluding the properties
acquired in the IRT merger - see Note 1) since January 1, 2003:
Date SquareFeet/ Purchase
Property Location Purchased Acres Price
------------------------ ---------------------- ------------ ------------- ----------
Westridge Henry County, GA February 13.5 acres $ 1,688
HEB - Spring Shadow Houston, TX April 62,661 3,500
Sheridan Plaza Hollywood, FL July 451,294 75,325
Butler Creek Acworth, GA July 95,597 12,100
Bandera Outparcel San Antonio, TX July 6,000 533
Presidential Snellville, GA August 374,112 47,238
Hunters Creek Orlando, FL September 68,032 7,446
Bridgemill Canton, GA November 78,654 14,070
Hamilton Ridge Buford, GA December 89,496 13,650
Belfair Towne Village Bluffton, SC December 125,389 19,861
Publix at Middle Beach Panama City Beach, FL December 69,277 7,637
Publix at Woodruff Greenville, SC December 68,055 7,985
----------
$ 211,033
==========
F-20
No equity interests were issued or issuable in connection with the above
purchases and no contingent payments, options or commitments are specific in the
agreements. No goodwill was recorded in conjunction with the above acquisitions.
The Company has determined that the amounts assigned to intangible assets
acquired are not significant in relation to the total cost of the acquisition.
4. Accounts and Other Receivables
------------------------------
Composition in the consolidated balance sheets: December 31,
----------------------------
2003 2002
------------ -----------
Tenants............................................ $13,921 $ 6,568
Other.............................................. 772 1,104
Allowance for doubtful accounts.................... (1,201) (619)
------------ -----------
Total accounts and other receivables............ $ 13,492 $ 7,053
============ ===========
5. Investments in Joint Ventures
-----------------------------
A summary of the Company's investments in joint ventures at December 31,
2003 and 2002 is as follows (all investments in unconsolidated entities are
accounted for under the equity method):
December 31, December 31,
Entity Location Ownership 2003 2002
- ------------------------- ----------------------- --------- ------------ ------------
PG Partners Palm Beach Gardens, FL 50.0% $ 2,633 $ 2,823
Parcel F, LLC Palm Beach Gardens, FL 50.0% 228 228
Oaksquare JV* Gainesville, FL - - 1,243
CDG (Park Place) LLC** Plano, TX - - 5,727
------------ ------------
Investments in joint ventures $ 2,861 $ 10,021
============ ============
* The Company sold its interest in this joint venture during 2003.
** The property held by this joint venture was sold during 2003.
A summary of the unaudited balance sheets for the joint ventures being
reported on the equity method of accounting is as follows:
As of As of
December 31, December 31,
Condensed Balance Sheet 2003 2002
--------------------------------------- ----------- -----------
Assets:
Rental properties, net............. $ 16,688 $ 47,309
Cash and cash equivalents.......... - 690
Other assets....................... 457 1,170
----------- -----------
Total assets....................... $ 17,145 $ 49,169
----------- -----------
Liabilities and Ventures' Equity:
Mortgage notes..................... $ 12,878 $ 44,625
Other liabilities.................. 90 651
Ventures' equity................... 4,177 3,893
----------- -----------
Total ............................. $ 17,145 $ 49,169
=========== ===========
The Company's investments in joint ventures, as reported on its
consolidated balance sheets, differ from its proportionate share of the joint
ventures' underlying net assets due to basis differentials. This basis
differential of approximately $1,000 and $5,000 as of December 31, 2003 and
2002, respectively, is being depreciated over the useful lives of the related
assets.
F-21
A summary of the unaudited statements of operations for the joint ventures
being reported on the equity method of accounting is as follows:
Year Ended December 31,
--------------------------------------------
Condensed Statements of Operations 2003 2002 2001
--------------------------------------------------- ------------ ------------ ------------
Revenues:
Rental revenues................................ $ 5,313 $ 7,176 $ 6,376
Other revenues................................. 8 12 125
------------ ------------ ------------
Total revenues............................... 5,321 7,188 6,501
------------ ------------ ------------
Expenses:
Operating expenses............................. 1,228 1,742 1,399
Interest expense............................... 2,058 2,932 3,285
Depreciation................................... 905 1,291 579
Other expense.................................. 130 125 250
------------ ------------ ------------
Total expense................................ 4,321 6,090 5,513
------------ ------------ ------------
Net income......................................... $ 1,000 $ 1,098 $ 988
============ ============ ============
The Company's equity in income (loss) of joint
ventures reported in............................ $ 500 $ 549 $ 494
============ ============ ============
Continuing operations........................ $ - $ - $ -
============ ============ ============
Discontinued operations...................... $ 500 $ 549 $ 494
============ ============ ============
Significant accounting policies used by the unconsolidated joint ventures
are similar to those used by the Company.
6. Other Assets
------------s
Composition in the consolidated balance sheets:
December 31,
-----------------------------
2003 2002
------------- -----------
Notes Receivable, bearing interest at 8.0% through 10.0% per annum,
maturing from February 2004 through November 2010..................... $ 3,050 $ 5,827
Deposits and escrow impounds............................................ 10,885 6,916
Deferred expenses....................................................... 8,681 5,263
Furniture and equipment, net............................................ 2,974 1,138
Prepaid and other assets................................................ 3,164 4,267
------------- -----------
Total other assets................................................. $ 28,754 $ 23,411
============= ===========
7. Notes Payable
-------------
Composition in the consolidated balance sheets: December 31,
-----------------------------
2003 2002
------------ --------------
Fixed rate mortgage loans
Various mortgage notes payable secured by rental properties, bearing
interest at 5.07% to 9.25% per annum, maturing from February 2005
through November 2024................................................... $ 459,103 $ 307,508
Variable rate mortgage loans
Mortgage notes payable secured by rental properties. This mortgage was
retired during 2003..................................................... - 24,635
------------ --------------
Total mortgage notes payable............................................... 459,103 332,143
------------ --------------
F-22
Composition in the consolidated balance sheets: December 31,
-----------------------------
2003 2002
------------ --------------
Revolving credit facilities
Unsecured line of credit of $340,000, with a bank group, bearing interest
at LIBOR plus 0.65% to 1.35%, maturing February 2006.................... 162,000 -
Unsecured line of credit of $5,000, with a bank, bearing interest at LIBOR
plus 2.25%, maturing August 2004........................................ - -
Line of credit of $41,300 with a bank. During 2003, the Company entered
into a new revolving credit facility and retired this facility.......... - 23,000
------------ --------------
Total revolving credit facilities.......................................... 162,000 23,000
------------ --------------
Fixed Rate Unsecured Senior Notes Payable
Senior notes of $25,000, bearing interest of 7.84%, maturing January 2012. 25,000 -
Senior notes of $50,000, bearing interest of 7.77%, maturing April 2006... 50,000 -
Senior notes of $75,000, bearing interest of 7.25%, maturing August 2007.. 75,000 -
------------ --------------
Total fixed rate unsecured senior notes payable............................ 150,000 -
------------ --------------
Unamortized premium on notes payable
Unamortized premium on mortgage notes payable............................. 11,779 -
Unamortized premium on unsecured senior notes payable...................... 12,439 -
------------ --------------
Total unamortized premium on notes payable................................. 24,218 -
------------ --------------
Total notes payable........................................................ $ 795,321 $ 355,143
============ ==============
Each of the existing mortgage loans is secured by a mortgage on one or more
of the Company's properties. Certain of the mortgage loans involving an
aggregate principal balance of approximately $182,000 contain prohibitions on
transfers of ownership which may have been violated by the Company's previous
issuances of common stock or in connection with past acquisitions and may be
violated by transactions involving the Company's capital stock in the future. If
a violation were established, it could serve as a basis for a lender to
accelerate amounts due under the affected mortgage. To date, no lender has
notified the Company that it intends to accelerate its mortgage. Based on
discussions with various lenders, current credit market conditions and other
factors, the Company believes that the mortgages will not be accelerated.
Accordingly, the Company believes that the violations of these prohibitions will
not have a material adverse impact on the Company's results of operations or
financial condition.
On February 7, 2003, the Company entered into a $340,000 unsecured
revolving credit facility with a syndicate of banks for which Wells Fargo Bank,
National Association is the administrative agent. This facility bears interest
at the Company's option at (i) LIBOR plus 0.65% to 1.35%, depending on the
credit ratings of the Company's senior unsecured long term notes or (ii) at the
greater of (x) Wells Fargo's prime rate and (y) the Federal Funds Rate plus
0.5%. Based on the Company's current rating the LIBOR spread is 1.0%. The
facility also includes a competitive bid option which allows the Company to
conduct auctions among the participating banks for borrowings in an amount not
to exceed $150,000, a $25,000 swing line facility for short term borrowings, a
$20,000 letter of credit commitment and may, at the request of the Company, be
increased up to a total commitment of $400,000. The facility expires February
12, 2006 and the Company has a one year extension option. In addition, the
facility contains customary covenants, including financial covenants regarding
debt levels, total liabilities, interest coverage, EBITDA levels, unencumbered
properties, permitted investments and others. The facility also prohibits
stockholder distributions in excess of 95% of funds from operations calculated
at the end of each fiscal quarter for the four fiscal quarters then ending.
Notwithstanding this limitation, the Company can
F-23
make stockholder distributions to avoid income taxes on asset sales. If a
default under the facility exists, the Company's ability to pay dividends would
be limited to the amount necessary to maintain the Company's status as a REIT
unless the default is a payment default or bankruptcy event in which case the
Company would be prohibited from paying any dividends. The facility is
guaranteed by most of the Company's wholly-owned subsidiaries. As of December
31, 2003, the Company had $162,000 outstanding on this credit facility. The
weighted average interest rate of as of December 31, 2003 was 2.06%, including
the effect of interest rate hedges.
As a result of the Company's merger with IRT, the Company assumed IRT's
obligations relating to $150,000 principal amount of unsecured senior notes,
bearing interest at fixed interest rates ranging from 7.25% to 7.84% and
maturing between 2006 and 2012. The interest rate of one series of these senior
notes is subject to a 50 basis point increase if the Company does not maintain
an investment grade debt rating. These notes have also been guaranteed by most
of the Company's wholly-owned subsidiaries and LP.
Principal maturities (including scheduled amortization payments) of the
notes payable as of December 31, 2003 are as follows:
Year Ending December 31, Amount
---------------------------------- -----------
2004............................ $ 12,159
2005............................ 39,870
2006............................ 246,743
2007............................ 87,961
2008............................ 50,270
Thereafter...................... 334,100
-----------
Total........................... $ 771,103
===========
Interest costs incurred were $41,305, $25,004 and $24,345 in the years
ended December 31, 2003, 2002 and 2001, respectively, of which $3,822, $2,375
and $2,102 were capitalized in the years ended December 31, 2003, 2002 and 2001,
respectively.
8. Financial Instruments - Derivatives and Hedging
-----------------------------------------------
In the normal course of business, the Company is exposed to the effect of
interest rate changes that could affect its results of operations or cash flows.
The Company limits these risks by following established risk management policies
and procedures, including the use of a variety of derivative financial
instruments to manage or hedge interest rate risk. The Company does not enter
into derivative instruments for speculative purposes. The Company requires that
the hedging derivative instruments be effective in reducing interest rate risk
exposure. This effectiveness is essential to qualify for hedge accounting.
Changes in each hedging instrument's fair value related to the effective portion
of the risk being hedged are included in accumulated other comprehensive income
or loss. In those cases, hedge effectiveness criteria also require that it be
probable that the underlying transaction occurs.
Hedges that meet these hedging criteria are formally designated as cash
flow hedges at the inception of the derivative contract. When the terms of an
underlying transaction are modified, or when the underlying hedged item ceases
to exist, the change in the fair value of the derivative instrument is marked to
market with the change included in net income in each period until the
derivative instrument matures. Additionally, any derivative instrument used for
risk management that becomes ineffective is marked to market.
F-24
The Company does not anticipate non-performance by any of its
counterparties. Net interest differentials to be paid or received under a swap
contract and/or collar agreement are included in interest expense as incurred or
earned.
Interest rate hedges that are designated as cash flow hedges hedge the
future cash outflows on debt. Interest rate swaps that convert variable payments
to fixed payments, interest rate caps, floors, collars and forwards are cash
flow hedges. The unrealized gains or losses in the fair value of these hedges
are reported on the balance sheet and are included in accounts payable and
accrued expenses with a corresponding adjustment to either accumulated other
comprehensive income or loss, or in earnings depending on the hedging
relationship. If the hedging transaction is a cash flow hedge, then the
offsetting gains or losses are reported in accumulated other comprehensive
income or loss. Over time, the unrealized gains or losses held in accumulated
other comprehensive income or loss will be recognized in earnings consistent
with when the hedged items are recognized in earnings.
In conjunction with the Company's policy to reduce interest rate risk, it
has entered into interest rate swaps to hedge the variability of monthly cash
outflows attributable to changes in LIBOR. Under the swaps, the Company receives
LIBOR based payments and pays a fixed rate. A summary of the terms of the
derivative instruments, as of December 31, 2003, and a reconciliation of the
fair value and adjustments to accumulated other comprehensive loss (in
thousands) is as follows:
Hedge type......................................................... Cash Flow
Description........................................................ Swap
Range of notional amounts.......................................... $10,000 - $50,000
Total.......................................................... $70,000
%
Range of interest rates............................................ 1.38% - 2.3975
6
Range of maturity dates............................................ 2/12/04 - 2/12/0
Total accumulated other comprehensive loss at December 31, 2002.... -
Change in fair value for the year ended December 31, 2003.......... $ (122)
================
Total accumulated other comprehensive loss at December 31, 2003.... $ (122)
================
The estimated fair value of the Company's financial instruments has been
determined using available market information and appropriate valuation
methodologies. However, considerable judgment is necessarily required in
interpreting market data to develop the estimates of fair value. Accordingly,
the estimates presented herein are not necessarily indicative of the amounts
that the Company could realize in a current market exchange. The use of
different market assumptions or estimation methodologies may have a material
effect on the estimated fair value amounts.
9. Consolidating Financial Information
-----------------------------------
As of December 31, 2003, most of the Company's subsidiaries, including IRT
Partners L.P., have guaranteed the Company's indebtedness under the unsecured
senior debt. The guarantees are joint and several and full and unconditional.
F-25
Guarantors
--------------------------
Condensed Balance Sheet Equity Combined IRT Non Eliminating Consolidated
One, Inc. Subsidiaries Partners, LP Guarantors Entries Equity One
----------- ----------- ----------- ----------- ----------- -----------
As of December 31, 2003
ASSETS
Properties, net.................... $ 526,136 $ 561,455 $ 187,132 $ 342,576 $ - $ 1,617,299
Investment in affiliates........... 435,752 - - - (435,752) -
Other assets........................ 22,865 21,926 2,940 12,356 - 60,087
----------- ---------- ---------- ---------- ----------- -----------
Total ............................ $984,753 $ 583,381 $ 190,072 $ 354,932 $ (435,752) $ 1,677,386
=========== ========== ========== ========== =========== ===========
LIABILITIES
Mortgage notes payable.............. $ 74,726 $ 171,230 $ 34,400 $ 178,747 $ - $ 459,103
Unsecured revolving credit
facilities.......................... 162,000 - - - - 162,000
Unsecured senior notes, net........ 150,000 - - - - 150,000
Unamortized premium on notes payable. 13,505 5,950 4,661 102 - 24,218
Other liabilities.................. 13,000 15,522 1,780 8,539 - 38,841
----------- ---------- ---------- ---------- ----------- -----------
Total liabilities................ 413,231 192,702 40,841 187,388 - 834,162
MINORITY INTEREST.................... - - - - 12,672 12,672
STOCKHOLDERS' EQUITY
Total stockholders' equity......... 571,522 390,679 149,231 167,544 (448,424) 830,552
----------- ---------- ---------- ---------- ----------- -----------
Total.............................. $ 984,753 $ 583,381 $ 190,072 $ 354,932 $ (435,752) $ 1,677,386
=========== ========== ========== ========== =========== ===========
F-26
Guarantors
----------------------------
Condensed Statement of Operations Equity Combined IRT Non Consolidated
One, Inc. Subsidiaries Partners, LP Guarantors Equity One
------------ ------------ ------------ ------------ ------------
For the Year Ended
December 31, 2003
RENTAL REVENUE:
Minimum rents............................. $ 43,291 $ 46,833 $ 15,455 $ 32,839 $ 138,418
Expense recoveries........................ 10,197 14,124 4,647 11,144 40,112
Termination fees.......................... 188 400 27 748 1,363
Percentage rent payments.................. 537 380 295 528 1,740
------------ ------------ ------------ ----------- ------------
Total rental revenue.................... 54,213 61,737 20,424 45,259 181,633
------------ ------------ ------------ ----------- ------------
COSTS AND EXPENSES:
Property operating expenses............... 14,263 17,136 6,295 14,348 52,042
Rental property depreciation and
amortization.............................. 7,812 9,995 2,672 6,142 26,621
General and administrative expenses....... 11,191 (161) 16 - 11,046
------------ ------------ ------------ ----------- ------------
Total costs and expenses................ 33,266 26,970 8,983 20,490 89,709
------------ ------------ ------------ ----------- ------------
INCOME BEFORE OTHER INCOME AND EXPENSES,
DISCONTINUED OPERATIONS AND MINORITY
INTEREST.................................. 20,947 34,767 11,441 24,769 91,924
OTHER INCOME AND EXPENSES:
Interest expense.......................... (12,093) (8,448) (2,161) (14,112) (36,814)
Amortization of deferred financing fees... (602) (197) (1) (192) (992)
Investment income......................... 416 577 72 24 1,089
Other income (expense).................... 36 625 - 26 687
Loss on extinguishment of debt............ - (513) - - (513)
------------ ------------ ------------ ----------- ------------
INCOME BEFORE DISCONTINUED OPERATIONS AND
MINORITY INTEREST......................... 8,704 26,811 9,351 10,515 55,381
------------ ------------ ------------ ----------- ------------
DISCONTINUED OPERATIONS
Income from operations of sold properties. 2,321 2,015 839 811 5,986
Gain on disposal of income producing
properties.............................. - 2,613 - 470 3,083
------------ ------------ ------------ ----------- ------------
Total income from discontinued
operations.............................. 2,321 4,628 839 1,281 9,069
------------ ------------ ------------ ----------- ------------
INCOME BEFORE MINORITY INTEREST.............. 11,025 31,439 10,190 11,796 64,450
MINORITY INTEREST............................ - (103) (570) (130) (803)
------------ ------------ ------------ ----------- ------------
NET INCOME................................... $ 11,025 $ 31,336 $ 9,620 $ 11,666 $ 63,647
============ ============ ============ =========== ============
F-27
10. Debt Extinguishment
-------------------
During 2003, the Company prepaid four mortgages and incurred a loss of $623
on the early extinguishment of debt. During 2002, the Company settled an
outstanding mortgage note payable at less than face value and recognized a gain
of $1,520 on an early extinguishment of debt. During 2001, the Company prepaid a
mortgage and incurred a loss of $1,546 on an early extinguishment of debt. The
Company has adopted SFAS No. 145, Rescission of FASB Statements No. 4, 44 and
64, Amendment of FASB Statement No. 13, and Technical Corrections, and is
reporting gains and losses on extinguishment of debt as part of ordinary income
as they no longer meet the criteria for extraordinary gain (loss) accounting
treatment.
11. Dispositions
------------
The Company has adopted SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, effective January 1, 2002, and has included the
operations of properties sold and held for sale, as well as the gain on sale of
sold properties identified for sale on or after January 1, 2002, as discontinued
operations for all periods presented.
The following table reflects properties being reported in discontinued
operations for the years ended December 31, 2003 and 2002:
Square Feet/ Gross Sales Gain On
Property Location Date Sold Acres Price Sale
- --------------------------- ------------------- ---------- ------------ ----------- ---------
2003 Dispositions
- ---------------------------
Eckerd..................... Leesburg, FL March 12,739 $ 4,050 $ 326
Eckerd..................... Melbourne, FL March 10,908 2,715 177
Pompano.................... Pompano Beach, FL April 80,697 3,400 470
Huntcrest outparcels....... Huntcrest, GA May 2.94 acres 1,686 -*
Oak Square Joint Venture... Gainesville, FL June n/a 2,230 901
CDG (Park Place) LLC JV.... Plano, TX September n/a 4,434 1,209
Heritage Walk.............. Milledgeville, GA November 159,991 10,000 -*
Stadium Plaza.............. Phenix City, AL December 70,475 4,800 -*
---------- ---------
Total ............................................................. $ 33,315 $3,083
========== =========
*Properties acquired as part of the IRT Property Company merger.
As of December 31, 2003, two retail properties and two outparcels of land
were classified as property held for sale. These properties have an aggregate
gross leasable area of 307,852 square feet and an aggregate net book value of
$14,440.
Square Feet/ Gross Sales Gain On
Property Location Date Sold Acres Price Sale
- ---------------------------- ---------------- ------- ---------- ----------- -----------
2002 Dispositions
- ----------------------------
Equity One Office........... Miami Beach, FL February 28,780 $ 6,050 $ 4,396
Olive land.................. Miami, FL February 6.79 acres 1,900 694
Benbrook................... Fort Worth, TX February 247,422 2,590 1,032
Montclair apartments....... Miami Beach, FL September 9,375 2,450 981
Shoppes of Westburry....... Miami, FL July 33,706 5,220 167
Forest Edge................ Orlando, FL July 68,631 3,475 561
Northwest Crossing.......... Dallas, TX September 33,366 2,350 363
McMinn Plaza............... Athens, TN November 107,200 6,200 951
Woodforest.................. Houston, TX December 12,741 1,850 119
----------- -----------
Total.................................................................... $ 32,085 $9,264
=========== ===========
F-28
12. Stockholders' Equity and Earnings Per Share
-------------------------------------------
The following table reflects the change in number of shares of common stock
outstanding for the year ended December 31, 2003: Common Options
Stock Exercised Total
---------- ----------- -----------
Board of Directors............................. 24* 16 40
Officers....................................... 386* 491 877
Employees...................................... 32* 388 420
Exercise of OP units........................... 262 - 262
IRT acquisition................................ 17,490 - 17,490
Private placement.............................. 6,911 - 6,911
Security offerings............................. 6,000 - 6,000
Dividend Reinvestment and Stock Purchase
Plan.......................................... 2,813 - 2,813
---------- ----------- -----------
Total................................... 33,918 895 34,813
========== =========== ===========
* Reflects shares of "restricted stock" which are subject to forfeiture and
vest over a period of two to five years.
The following table reports dividends paid for the twelve months ended
December 31, 2003 and 2002:
2003 2002
- ---------------------------------------------- -------------------------------------------
Date Per Share Amount Date Per Share Amount
- ------------------ ----------- ---------- ------------------ ---------- ---------
March 31......... $ 0.27 $ 16,130 March 28.......... $ 0.27 $ 8,015
June 30.......... $ 0.27 17,084 June 28........... $ 0.27 9,124
September 30..... $ 0.28 18,159 September 30...... $ 0.27 9,298
December 31...... $ 0.28 19,304 December 31....... $ 0.27 9,336
--------- --------
Total.......................... $ 70,677 Total.......................... $ 35,773
========= ========
The following is a reconciliation of the amounts of net income and shares
of common stock used in calculating basic and diluted per-share income ("EPS")
for the years ended December 31, 2003, 2002 and 2001:
For the Year Ended December 31, 2003
------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
-------------- --------------- -------------
Net Income.................................... $ 63,647
==============
Basic EPS
Income attributable to common stockholders.... $ 63,647 59,998 $1.06
-------------- --------------- =============
Effect of Dilutive Securities
Walden Woods Village, Ltd..................... 103 94
Unvested restricted stock..................... - 612
Convertible partnership units................. 700 648
Stock options................................. - 313
-------------- ---------------
803 1,667
-------------- ---------------
Diluted EPS
Income attributable to common stockholders
assuming conversions....................... $ 64,450 61,665 $1.05
============== =============== =============
F-29
Options to purchase 350 shares of common stock at $16.22 per share were
outstanding at December 31, 2003 but were not included in the computation of
diluted EPS because the option price was greater than the average market price
of common shares.
For the Year Ended December 31, 2002
--------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------------- --------------- ----------------
Net Income $ 39,934
=================
Basic EPS
Income attributable to common stockholders..... $ 39,934 32,662 $1.22
----------------- --------------- ================
Effect of Dilutive Securities
Walden Woods Village, Ltd...................... 101 94
Unvested restricted stock...................... - 298
Convertible partnership units.................. 259 262
Stock options.................................. - 127
----------------- ---------------
360 781
----------------- ---------------
Diluted EPS
Income attributable to common stockholders
assuming conversions........................... $ 40,294 33,443 $1.20
================= =============== ================
All options outstanding at December 31, 2002 were included in the
computation of diluted EPS.
For the Year Ended December 31, 2001
--------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------------- --------------- ----------------
Net Income $ 18,721
=================
Basic EPS
Income attributable to common stockholders..... $ 18,721 22,414 $ 0.83
----------------- --------------- ----------------
Effect of Dilutive Securities
Walden Woods Village, Ltd...................... 99 94
Unvested restricted stock...................... - 192
Convertible partnership units.................. 259 262
Stock options.................................. - 75
----------------- ---------------
358 623
----------------- ---------------
Diluted EPS
Income attributable to common stockholders
assuming conversions...................... $ 19,079 23,037 $ 0.83
================= =============== ================
Options to purchase 30 shares of common stock at $12.38 per share were
outstanding at December 31, 2001 but were not included in the computation of
diluted EPS because the option price was greater than the average market price
of common shares.
For the year ended December 31, 2001, basic and diluted earnings per share
have been adjusted so that the weighted average number of shares used in those
calculations include the effect of the assumed issuance on August 18, 2000 of
68.07% of the 10,500 shares which were issued in connection with the CEFUS
acquisition on September 20, 2001. This adjustment is in accordance with the
CEFUS Accounting Treatment described in Note 1.
F-30
13. Benefit Plans
-------------
Stock-Based Compensation
On October 23, 1996, the Company adopted the Equity One, Inc. 1995 Stock
Option Plan (the "Plan"), which was amended December 10, 1998. The purpose of
the Plan is to further the growth of the Company by offering incentives to
directors, officers and other key employees of the Company, and to increase the
interest of these employees in the Company through additional ownership of its
common stock. The effective date of the Plan was January 1, 1996. The maximum
number of shares of common stock as to which options may be granted under this
Plan is 1,000 shares, which is reduced each year by the required or
discretionary grant of options. The term of each option is determined by the
Compensation Committee of the Company (the "Committee"), but in no event can be
longer than ten years from the date of the grant. The vesting of the options is
determined by the Committee, in its sole and absolute discretion, at the date of
grant of the option.
On June 23, 2000, the Company, with shareholder approval, adopted the
Equity One 2000 Executive Incentive Compensation Plan (the "2000 Plan"). The
terms of the 2000 Plan provide for grants of stock options, stock appreciation
rights ("SARs"), restricted stock, deferred stock, other stock-related awards
and performance or annual incentive awards that may be settled in cash, stock or
other property. The persons eligible to receive an award under the 2000 Plan are
the officers, directors, employees and independent contractors of the Company
and its subsidiaries.
During the term of the 2000 Plan, as amended by the shareholders on May 24,
2002, the total number of shares of Common Stock that may be issuable under the
2000 Plan is 2,500 shares, plus (i) the number of shares with respect to which
options previously granted under the 1995 Stock Option Plan terminate without
being exercised, and (ii) the number of shares that are surrendered in payment
of the exercise price for any awards or any tax withholding requirements.
The following is a summary of the Company's stock option activity for the
years ended December 31, 2003, 2002 and 2001:
2003 2002 2001
------------------------ --------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Stock Exercise Stock Exercise Stock Exercise
Options Price Options Price Options Price
----------- --------- ----------- ----------- ----------- -----------
Outstanding at the 960 $ 11.78 625 $ 10.12 953 $ 10.08
beginning of year
Granted............. 860 14.44 509 13.25 175 10.00
IRT options*........ 827 11.17 - - - -
Forfeited........... (51) - - - - -
Exercised........... (895) 10.96 (174) 10.15 (503) 10.00
----------- --------- ---------- ----------- ----------- -----------
Outstanding at the
end of year....... 1,701 $13.22 960 $11.78 625 $10.12
=========== ========= ========== =========== =========== ===========
Exercisable,
end of year....... 708 $12.09 541 $11.78 325 $10.23
=========== ========= ========== =========== =========== ===========
Weighted average
fair value of
options granted
during the year... $1.24 $1.69 $2.39
========= =========== ==========
*Converted to the Company's options upon merger with IRT.
F-31
The following table summarizes information about outstanding stock options
as of December 31, 2003:
Options Outstanding Options Exercisable
---------------------------------------------------------------- ---------------------
Weighted Average
Remaining
Number Contractual Life
Exercise Price Outstanding (in years) Number Exercisable
----------------- ----------------- ---------------------- ---------------------
$ 9.00 - 9.99 14 7.0 14
$10.00 - 10.99 302 5.8 215
$11.00 - 11.99 45 6.7 45
$12.00 - 12.99 33 3.5 33
$13.00 - 13.99 947 8.8 401
$14.00 - 14.99 10 9.5 -
$16.22 350 9.0 -
----------------- ---------------------
1,701 708
================= =====================
Restricted Stock Grants
The Company grants restricted stock to its officers, directors, and other
employees. Vesting periods for the restricted stock are determined by the
Company's Compensation Committee. As of December 31, 2003, the Company had 649
shares of non-vested restricted stock grants outstanding. The vesting of the 649
shares is as follows:
Number of
Year Ending December 31, Shares
---------------------------------------- --------------
2004.................................. 233
2005.................................. 193
2006.................................. 24
2007.................................. 199
--------------
Total 649
==============
401(k) Plan
The Company has a 401(k) defined contribution plan (the "401(k) Plan")
covering substantially all of the officers and employees of the Company which
permits participants to defer up to a maximum of $12,000 of their compensation.
The Company matches 75% of the employees' contribution up to a maximum of 4.5%
of an employees' annual compensation. Employees' contributions vest immediately
and the Company's matching contributions vest over three years. The Company's
contributions to the 401(k) Plan for the year ended December 31, 2003, 2002 and
2001 (inception) were $177, $67 and $49, respectively. The 401(k) Plan invests
the Company's matching contributions by purchasing publicly traded shares of the
Company's common stock.
F-32
14. Future Minimum Rental Income, Commitments and Contingent Liabilities
--------------------------------------------------------------------
Future minimum rental income under noncancelable operating leases
approximates the following as of December 31, 2003:
Year Ending December 31, Amount
-------------------------------------- -------------
2004.................................. $149,960
2005.................................. 127,486
2006.................................. 106,482
2007.................................. 86,113
2008.................................. 68,212
Thereafter............................ 344,426
-------------
Total............................. $882,679
=============
As of December 31, 2003 and 2002, the Company has pledged letters of credit
for $1,433 and $1,128, respectively, as additional security for financing.
The Company is subject to litigation in the normal course of business, none
of which as of December 31, 2003 in the opinion of management will have a
material adverse effect on the financial condition, results of operations, or
cash flows of the Company.
15. Related Party Transactions
--------------------------
As of December 31, 2003 and 2002, the Company had outstanding loans to
various executives in connection with their exercises of options to purchase
shares of the Company's common stock. The notes bear interest at 5%. Interest is
payable quarterly and the entire principal is due between 2006 and 2007.
Investment income earned on the loans was $255 and $337 for the years ended
December 31, 2003 and 2002, respectively.
16. Subsequent Dispositions
-----------------------
The results of operations of depreciable rental properties disposed of
through September 30, 2004 or classified as held for sale as of September 30,
2004, for which the Company has no significant continuing involvement, are
reflected as discontinued operations in the accompanying consolidated financial
statements.
During the nine months ended September 30, 2004, the Company sold the
following income producing properties:
Square Gross Sales
perty City State Date Sold Feet/Acres Price
--------------------- ---------------- ----- -------------------- ------------ -----------
Southwest Walgreens Phoenix AZ February 23, 2004 93,402 $ 6,650
Watson Central Warner Robbins GA June 29, 2004 227,747 6,000
Plaza Del Rey Miami FL July 13, 2004 50,146 9,000
Forrest Gallery Tullahoma TN July 19, 2004 214,450 10,500
Epsilon (Clematis) West Palm Beach FL July 30, 2004 18,707 2,650
Millervillage Baton Rouge LA September 2, 2004 94,559 2,700
Plymouth Park Irving TX September 24, 2004 728,566 24,000
-----------
$61,500
===========
F-33
Held for Sale:
As of September 30, 2004, four properties and a joint venture interest were
held for sale, of which three of the properties were sold in October 2004 for
total consideration of $17,250.
17. Quarterly Financial Data (unaudited)
-----------------------------------
First Second Third Fourth
Quarter(1) Quarter(1) Quarter(1) Quarter(1) Total(2)
---------- ---------- ----------- ---------- ---------
2003:
Total revenues............................. $ 35,518 $ 46,089 $ 48,067 $ 51,959 $181,633
Income before discontinued operations.... $ 10,793 $ 13,563 $ 14,800 $ 16,225 $ 55,381
Net income............................... $ 12,344 $ 16,352 $ 17,249 $ 17,702 $ 63,647
Basic per share data
Income before discontinued operations.... $ 0.18 $ 0.22 $ 0.24 $ 0.27 $ 0.91
Net Income............................. $ 0.22 $ 0.27 $ 0.28 $ 0.29 $ 1.06
Diluted per share data
Income before discontinued operations.... $ 0.19 $ 0.21 $ 0.24 $ 0.26 $ 0.90
Net income.............................. $ 0.22 $ 0.26 $ 0.28 $ 0.29 $ 1.05
2002:
Total revenues............................. $ 22,874 $ 21,920 $ 23,486 $ 25,289 $ 93,569
Income before discontinued operations.... $ 5,601 $ 6,207 $ 8,941 $ 5,281 $ 26,030
Net income............................... $ 13,267 $ 8,438 $ 10,926 $ 7,303 $ 39,934
Basic per share data
Income before discontinued operations.... $ 0.16 $ 0.19 $ 0.28 $ 0.16 $ 0.79
Net income.............................. $ 0.41 $ 0.26 $ 0.33 $ 0.22 $ 1.22
Diluted per share data
Income before discontinued operations.... $ 0.15 $ 0.20 $ 0.27 $ 0.16 $ 0.78
Net income.............................. $ 0.40 $ 0.26 $ 0.32 $ 0.22 $ 1.20
<FN>
- ------------------
(1) Restated to reflect the reporting of discontinued operations.
(2) The sum of quarterly earnings per share amounts may differ from annual
earnings per share.
</FN>
* * * * *
F-34
ITEM 7. EXHIBITS
23.1 Consent of Independent Registered Public Accounting Firm
F-35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: November 10, 2004 EQUITY ONE, INC.
/ s / HOWARD M. SIPZNER
--------------------------------
Howard M. Sipzner
Executive Vice President and Chief Financial
Officer
(Principal Accounting and Financial Officer)
INDEX TO EXHIBITS
-----------------
EXHIBIT DESCRIPTION
23.1 Consent of Independent Registered Public Accounting Firm