NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
1. Interim Financial
Statements
The
condensed consolidated financial statements included in this report are
unaudited; however, amounts presented in the condensed consolidated balance
sheet as of December 31, 2006 are derived from our audited financial statements
at that date. In our opinion, all adjustments necessary for a fair
presentation of such financial statements have been included. Such
adjustments consisted of normal recurring items. Interim results are
not necessarily indicative of results for a full year.
The
condensed consolidated financial statements and notes are presented as permitted
by Form 10-Q and certain information included in our annual financial statements
and notes has been condensed or omitted. These condensed consolidated
financial statements should be read in conjunction with our Annual Report on
Form 10-K for the year ended December 31, 2006.
Business
Weingarten
Realty Investors is a real estate investment trust (“REIT”) organized under the
Texas Real Estate Investment Trust Act. We, and our predecessor
entity, began the ownership and development of shopping centers and other
commercial real estate in 1948. Our primary business is leasing space
to tenants in the shopping and industrial centers we own or lease. We
also manage centers for joint ventures in which we are partners or for other
outside owners for which we charge fees.
We
operate a portfolio of properties which includes neighborhood and community
shopping centers and industrial properties of approximately 70 million square
feet. We have a diversified tenant base with our largest tenant
comprising only 3% of total rental revenues during 2007.
We
currently operate and intend to operate in the future as a REIT.
Basis
of Presentation
Our
condensed consolidated financial statements include the accounts of our
subsidiaries and certain partially owned real estate joint ventures or
partnerships which meet the guidelines for consolidation. All
significant intercompany balances and transactions have been
eliminated.
Our
financial statements are prepared in accordance with accounting principles
generally accepted in the United States. Such statements require
management to make estimates and assumptions that affect the reported amounts
on
our condensed consolidated financial statements.
Restricted
Deposits and Mortgage Escrows
Restricted
deposits and mortgage escrows consist of escrow deposits held by lenders
primarily for property taxes, insurance and replacement reserves and restricted
cash that is held in a qualified escrow account for the purposes of completing
like-kind exchange transactions. At September 30, 2007 and December
31, 2006, we had $8.3 million and $79.4 million held for like-kind exchange
transactions, respectively, and $20.7 million and $15.1 million held in escrow
related to our mortgages, respectively.
Per
Share Data
Net
income per common share - basic is computed using net income available to common
shareholders and the weighted average shares outstanding. Net income
per common share - diluted includes the effect of potentially dilutive
securities for the periods indicated as follows (in thousands):
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income available to common shareholders – basic
|
|
$
|
38,281
|
|
|
$
|
103,223
|
|
|
$
|
154,940
|
|
|
$
|
243,048
|
|
Income
attributable to operating partnership units
|
|
|
|
|
|
|
1,355
|
|
|
|
3,311
|
|
|
|
4,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income available to common shareholders – diluted
|
|
$
|
38,281
|
|
|
$
|
104,578
|
|
|
$
|
158,251
|
|
|
$
|
247,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding – basic
|
|
|
85,470
|
|
|
|
86,567
|
|
|
|
85,914
|
|
|
|
88,476
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share
options and awards
|
|
|
994
|
|
|
|
905
|
|
|
|
1,193
|
|
|
|
902
|
|
Operating
partnership units
|
|
|
|
|
|
|
3,138
|
|
|
|
2,303
|
|
|
|
3,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding – diluted
|
|
|
86,464
|
|
|
|
90,610
|
|
|
|
89,410
|
|
|
|
92,528
|
|
Options
to purchase 526,419 and 300 common shares for the three months ended September
30, 2007 and 2006, respectively, were not included in the calculation of net
income per common share – diluted as the exercise prices were greater than the
average market price for the period. Options to purchase 525,119 and
1,700 common shares for the nine months ended September 30, 2007 and 2006,
respectively, were not included in the calculation of net income per common
share - diluted as the exercise prices were greater than the average market
price for the period. Operating partnership units totaling 2.2
million for the three months ended September 30, 2007 were not included in
the
calculation of net income per common share – diluted as these units had an
anti-dilutive effect for the period.
Cash
Flow Information
All
highly liquid investments with original maturities of three months or less
are
considered cash equivalents. We issued common shares of beneficial
interest valued at $12.9 million and $3.9 million during the first nine months
of September 30, 2007 and 2006, respectively, in exchange for interests in
limited partnerships, which had been formed to acquire
properties. Cash payments for interest on debt, net of amounts
capitalized, of $138.0 million and $125.3 million were made during the first
nine months of 2007 and 2006, respectively. A cash payment of $.05
million and $.6 million for federal income taxes was made during the first
nine
months of 2007 and 2006, respectively. In association with property
acquisitions and investments in unconsolidated real estate joint ventures and
partnerships, items assumed were as follows (in thousands):
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Debt
|
|
$
|
63,957
|
|
|
$
|
76,199
|
|
Obligations
Under Capital Leases
|
|
|
12,888
|
|
|
|
|
|
Minority
Interest
|
|
|
27,932
|
|
|
|
15,816
|
|
Net
Assets and Liabilities
|
|
|
13,175
|
|
|
|
22,474
|
|
Net
assets and liabilities were reduced by $59.8 million during the first nine
months of 2007 from the reorganization of three joint ventures, two of which
were previously consolidated, to tenancy-in-common arrangements where we have
a
50% interest. This reduction was offset by the assumption of debt
totaling $33.2 million. We also accrued $11.3 million and $5.5
million during the first nine months of 2007 and 2006, respectively, associated
with the construction of property. In conjunction with the
disposition of properties completed during the first nine months of 2007, we
defeased two mortgage loans totaling $21.2 million and transferred marketable
securities totaling $21.5 million in connection with the legal defeasance of
these two loans. In conjunction with the disposition of properties
and the sale of an 80% interest in five industrial properties during the first
nine months of 2006, we received notes receivable totaling $2.6 million and
retained a 20% unconsolidated investment of $24.8 million.
Reclassifications
The
reclassification of prior years’ operating results for certain properties to
discontinued operations was made to conform to the current year
presentation. We also reclassified the net balance of our
below-market assumed mortgages from Other Liabilities to Debt. For
additional information see Note 8, “Discontinued Operations” and Note 13,
“Identified Intangible Assets and Liabilities,” respectively.
Note
2. Newly Adopted
Accounting Pronouncements
In
June
2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for
Uncertainty in Income Taxes-an interpretation of FASB Statement No.
109.” FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in the financial statements. The interpretation prescribes
a recognition threshold and measurement attribute for the financial statement
recognition of a tax position taken, or expected to be taken, in a tax
return. A tax position may only be recognized in the financial
statements if it is more likely than not that the tax position will be sustained
upon examination. There are also several disclosure
requirements. We adopted FIN 48 as of January 1, 2007, and its
adoption did not have a material effect on our condensed consolidated financial
statements.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements.” This Statement defines fair value and establishes a
framework for measuring fair value in generally accepted accounting
principles. The key changes to current practice are (1) the
definition of fair value, which focuses on an exit price rather than an entry
price; (2) the methods used to measure fair value, such as emphasis that fair
value is a market-based measurement, not an entity-specific measurement, as
well
as the inclusion of an adjustment for risk, restrictions and credit standing
and
(3) the expanded disclosures about fair value measurements. This
Statement does not require any new fair value measurements.
This
Statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. We are required to adopt SFAS No. 157 in the first quarter of
2008, and we are currently evaluating the impact that this Statement will have
on our condensed consolidated financial statements.
In
September 2006, the FASB issued FASB Statement No. 158, “Employers’ Accounting
for Defined Benefit Pension and Other Postretirement Plans – An Amendment of
FASB Statements No. 87, 88, 106, and 132R.” This new standard
requires an employer to: (a) recognize in its statement of financial position
an
asset for a plan’s over-funded status or a liability for a plan’s under-funded
status; (b) measure a plan’s assets and its obligations that determine its
funded status as of the end of the employer’s fiscal year (with limited
exceptions); and (c) recognize changes in the funded status of a defined benefit
postretirement plan in the year in which the changes occur. These
changes will be reported in comprehensive income of a business
entity. The requirement to recognize the funded status of a benefit
plan and the disclosure requirements were effective for us as of December 31,
2006, and as a result we recognized an additional liability of
$803,000. The requirement to measure plan assets and benefit
obligations as of the date of the employer’s fiscal year-end statement of
financial position (the “Measurement Provision”) is effective for fiscal years
ending after December 15, 2008. We have assessed the potential impact
of the Measurement Provision of SFAS No. 158 and concluded that its adoption
will not have a material effect on our condensed consolidated financial
statements.
In
February 2007, the FASB issued Statement No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities.” SFAS No. 159 expands
opportunities to use fair value measurement in financial reporting and permits
entities to choose to measure many financial instruments and certain other
items
at fair value. This Statement is effective for fiscal years beginning
after November 15, 2007. We have not decided if we will choose to
measure any eligible financial assets and liabilities at fair value under the
provisions of SFAS No. 159.
On
August
31, 2007, the FASB authorized a proposed FASB Staff Position (the “proposed
FSP”) that, if issued, would affect the accounting for our convertible and
exchangeable senior debentures. If issued in the form expected, the
proposed FSP would require that the initial debt proceeds from the sale of
our
convertible and exchangeable senior debentures be allocated between a liability
component and an equity component. The resulting debt discount would
be amortized using the effective interest method over the period the debt is
expected to be outstanding as additional interest expense. The
proposed FSP is expected to be effective for fiscal years beginning after
December 15, 2007 and requires retroactive application. Upon the
adoption of the proposed FSP on January 1, 2008, we have estimated the
unamortized debt discount (as of September 30, 2007) to be approximately $35.2
million to be included as a reduction of Debt and approximately $46.3 million
as
Accumulated Additional Paid-In Capital on our condensed consolidated balance
sheet. We have estimated incremental Interest Expense to be
approximately $7.7 million for the first nine months of 2007 and $3.4 million
for the year ended December 31, 2006.
Note
3. Derivatives and
Hedging
We
occasionally hedge the future cash flows of our debt transactions, as well
as
changes in the fair value of our debt instruments, principally through interest
rate swaps with major financial institutions. At September 30, 2007,
we had four interest rate swap contracts designated as fair value hedges with
an
aggregate notional amount of $65.0 million that convert fixed interest payments
at rates ranging from 4.2% to 6.8% to variable interest payments. We
have determined that they are highly effective in limiting our risk of changes
in the fair value of fixed-rate notes attributable to changes in variable
interest rates. Also, at September 30, 2007, we had two
forward-starting interest rate swap contracts with an aggregate notional amount
of $118.6 million, which lock the swap rate at 5.2% until January
2008. The purpose of these forward-starting swaps, which are
designated as cash flow hedges, is to mitigate the risk of future fluctuations
in interest rates on forecasted issuances of long-term debt. We have
determined that they are highly effective in offsetting future variable interest
cash flows on anticipated long-term debt issuances.
In
July
2007 a $10 million swap matured in conjunction with the maturity of the
associated medium term note. This contract was designated as a fair
value hedge.
Changes
in the fair value of fair value hedges, as well as changes in the fair value
of
the hedged item, are recorded in earnings each reporting period. For
the quarter and nine months ended September 30, 2007 and 2006, these
changes in fair value offset with minimal impact to earnings. The
derivative instruments at September 30, 2007 and December 31, 2006 were reported
at their fair values in Other Assets, net of accrued interest, of $.02 million
and $.1 million, respectively, and as Other Liabilities, net of accrued
interest, of $2.3 million and $3.2 million, respectively.
As
of
September 30, 2007 and December 31, 2006, the balance in Accumulated Other
Comprehensive Loss relating to derivatives was $6.7 million and $7.6 million,
respectively. Amounts amortized to interest expense were $.2 million
and $.1 million during the third quarter of 2007 and 2006, respectively, and
$.6
million and $.3 million during the first nine months of 2007 and 2006,
respectively. Within the next 12 months, we expect to amortize to
interest expense approximately $.9 million of the balance in Accumulated Other
Comprehensive Loss.
The
interest rate swaps increased interest expense and decreased net income by
$.2
million and $.5 million for the three and nine months ended September 30, 2007,
respectively, and increased the average interest rate of our debt by 0.02%
for
both periods. For the three and nine months ended September 30, 2006,
the interest rate swaps increased interest expense and decreased net income
by
$.2 million and $.3 million, respectively, and increased the average interest
rate of our debt by 0.02% for both periods. We could be exposed to
credit losses in the event of nonperformance by the counter-party; however,
management believes the likelihood of such nonperformance is
remote.
Note
4.
Debt
Our
debt
consists of the following (in thousands):
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Debt
payable to 2030 at 4.5% to 8.8%
|
|
$
|
2,873,685
|
|
|
$
|
2,890,545
|
|
Unsecured
notes payable under revolving credit agreements
|
|
|
135,000
|
|
|
|
18,000
|
|
Obligations
under capital leases
|
|
|
42,613
|
|
|
|
29,725
|
|
Industrial
revenue bonds payable to 2015 at 3.9% to 5.8%
|
|
|
4,247
|
|
|
|
4,422
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,055,545
|
|
|
$
|
2,942,692
|
|
The
grouping of total debt between fixed and variable-rate, as well as between
secured and unsecured, is summarized below (in thousands):
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
As
to interest rate (including the effects of interest rate
swaps):
|
|
|
|
|
|
|
Fixed-rate
debt
|
|
$
|
2,838,414
|
|
|
$
|
2,827,293
|
|
Variable-rate
debt
|
|
|
217,131
|
|
|
|
115,399
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,055,545
|
|
|
$
|
2,942,692
|
|
|
|
|
|
|
|
|
|
|
As
to collateralization:
|
|
|
|
|
|
|
|
|
Unsecured
debt
|
|
$
|
1,992,739
|
|
|
$
|
1,910,216
|
|
Secured
debt
|
|
|
1,062,806
|
|
|
|
1,032,476
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,055,545
|
|
|
$
|
2,942,692
|
|
We
have a
$400 million unsecured revolving credit facility held by a syndicate of banks
that expires in February 2010 and provides a one-year extension option available
at our request. Borrowing rates under this facility float at a margin
over LIBOR, plus a facility fee. The borrowing margin and facility
fee, which are currently 37.5 and 12.5 basis points, respectively, are priced
off a grid that is tied to our senior unsecured credit ratings. This
facility retains a competitive bid feature that allows us to request bids for
amounts up to $200 million from each of the syndicate banks, allowing us an
opportunity to obtain pricing below what we would pay using the pricing
grid.
At
September 30, 2007 and December 31, 2006, the balance outstanding under the
$400 million revolving credit facility was $135 million at a variable interest
rate of 5.44% and $18 million at a variable interest rate of 5.75%,
respectively. We also have an agreement for an unsecured and
uncommitted overnight facility totaling $30 million as of September 30, 2007
and
$20 million at December 31, 2006 with a bank that we use for cash management
purposes, of which no amounts were outstanding at each respective
date. Letters of credit totaling $9.2 million and $10.1 million were
outstanding under the $400 million revolving credit facility at September 30,
2007 and December 31, 2006, respectively. The available balance under our
revolving credit agreement was $255.8 million and $371.9 million at September
30, 2007 and December 31, 2006, respectively. During the first nine
months of 2007, the maximum balance and weighted average balance outstanding
under both facilities combined were $312.4 million and $74.9 million,
respectively, at a weighted average interest rate of 6.4%. During
2006, the maximum balance and weighted average balance outstanding under both
facilities combined were $368.2 million and $179.1 million, respectively, at
a
weighted average interest rate of 5.5%.
In
conjunction with acquisitions completed during the first nine months of 2007,
we
assumed $64.0 million of nonrecourse debt secured by the related properties
and
a capital lease obligation totaling $12.9 million. As of December 31,
2006, the balance of secured debt that was assumed in conjunction with 2006
acquisitions was $140.7 million.
In
conjunction with the disposition of properties completed during the first nine
months of 2007, we incurred a net loss of $.4 million on the early
extinguishment of two loans totaling $21.2 million. These defeasance
costs were recognized as Interest Expense and have been reclassified and
reported as discontinued operations in the Condensed Consolidated Statements
of
Income and Comprehensive Income in accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets."
Scheduled
principal payments on our debt (excluding $135.0 million due under our revolving
credit agreements, $31.5 million of capital leases, $2.1 million fair value
of
interest rate swaps and $35.9 million of out-of-market mortgages) are due during
the following years (in thousands):
2007
|
|
$
|
26,853
|
|
2008
|
|
|
252,682
|
|
2009
|
|
|
113,642
|
|
2010
|
|
|
119,330
|
|
2011
|
|
|
890,475
|
|
2012
|
|
|
333,285
|
|
2013
|
|
|
283,581
|
|
2014
|
|
|
338,553
|
|
2015
|
|
|
205,531
|
|
Thereafter
|
|
|
291,283
|
|
Our
various debt agreements contain restrictive covenants, including minimum
interest and fixed charge coverage ratios, minimum unencumbered interest
coverage ratios and minimum net worth requirements and maximum total debt
levels. Management believes that we are in compliance with all
restrictive covenants.
In
December 2006, we issued $75 million of 10-year unsecured fixed rate medium
term
notes at 6.1% including the effect of an interest rate swap that had hedged
the
transaction. Proceeds from this issuance were used to repay balances
under our revolving credit facilities, to cash settle a forward hedge and for
general business purposes.
In
July
2006, we priced an offering of $575 million of 3.95% convertible senior
unsecured notes due 2026, which closed on August 2, 2006. Interest is
payable semi-annually in arrears on February 1 and August 1 of each year,
beginning February 1, 2007. The net proceeds of $395.9 million from
the sale of the debentures, after repurchasing 4.3 million of our common shares
of beneficial interest, were used for general business purposes and to reduce
amounts outstanding under our revolving credit facility. The
debentures are convertible under certain circumstances for our common shares
of
beneficial interest at an initial conversion rate of 20.3770 common shares
per
$1,000 of principal amount of debentures (an initial conversion price of
$49.075). In addition, the conversion rate may be adjusted if certain
change in control transactions or other specified events occur on or prior
to
August 4, 2011. Upon the conversion of debentures, we will deliver
cash for the principal return, as defined, and cash or common shares, at our
option, for the excess of the conversion value, as defined, over the principal
return. The debentures are redeemable for cash at our option
beginning in 2011 for the principal amount plus accrued and unpaid
interest. Holders of the debentures have the right to require us to
repurchase their debentures for cash equal to the principal of the debentures
plus accrued and unpaid interest in 2011, 2016 and 2021 and in the event of
a
change in control.
In
connection with the issuance of these debentures, we filed a shelf registration
statement related to the resale of the debentures and the common shares issuable
upon the conversion of the debentures. This registration statement
has been declared effective by the SEC.
Note
5. Preferred
Shares
On
January 30, 2007, we issued $200 million of depositary shares. Each
depositary share represents one-hundredth of a Series F Cumulative Redeemable
Preferred Share. The depositary shares are redeemable, in whole or in
part, on or after January 30, 2012 at our option, at a redemption price of
$25
per depositary share, plus any accrued and unpaid dividends
thereon. The depositary shares are not convertible or exchangeable
for any of our other property or securities. The Series F Preferred
Shares pay a 6.5% annual dividend and have a liquidation value of $2,500 per
share. Net proceeds of $194.4 million were used to repay amounts
outstanding under our credit facilities and for general business
purposes.
On
September 25, 2007, we issued $200 million of depositary shares in a private
placement, and the net proceeds of $193.7 million were used to repay amounts
outstanding under our credit facilities. Each depositary share
represents one-hundredth of a Series G Cumulative Redeemable Preferred
Share. The depositary shares are redeemable, in whole or in part on
or after September 25, 2007 at our option, at a redemption price of $25
multiplied by a graded rate per depositary share based on the date of redemption
plus any accrued and unpaid dividends thereon. The depositary shares
are not convertible or exchangeable for any of our other property or
securities. The Series G Preferred Shares pay a variable-rate
quarterly dividend through September 2008 and then a variable-rate monthly
dividend and have a liquidation preference of $2,500 per share. The
variable-rate dividend is calculated on the period’s three-month LIBOR rate plus
a percentage determined by the number of days outstanding. Further,
the rate may vary if any of our outstanding preferred shares are
downgraded. The variable-rate dividend is not to exceed
20%.
Note
6. Common
Shares
In
July
2007, our board of trust managers authorized a common share repurchase
program as part of our ongoing investment strategy. Under the terms
of the program, we may purchase up to a maximum value of $300 million of our
common shares of beneficial interest during the next two years. Share
repurchases may be made in the open market or in privately negotiated
transactions at the discretion of management and as market conditions
warrant. We anticipate funding the repurchase of shares primarily
through the proceeds received from our property disposition program, as well
as
from general corporate funds.
As
of
September 30, 2007, we have repurchased 1.4 million common shares of beneficial
interest at an average share price of $37.75.
In
July
2006, our board of trust managers authorized the repurchase of our common shares
of beneficial interest to a total of $207 million, and we used $167.6 million
of
the net proceeds from the $575 million debt offering to purchase 4.3 million
common shares of beneficial interest at $39.26 per share. For additional
information see Note 4, “Debt.”
Note
7.
Property
Our
property consisted of the following (in thousands):
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
956,388
|
|
|
$
|
847,295
|
|
Land
held for development
|
|
|
19,163
|
|
|
|
21,405
|
|
Land
under development
|
|
|
260,992
|
|
|
|
146,990
|
|
Buildings
and improvements
|
|
|
3,475,344
|
|
|
|
3,339,074
|
|
Construction
in-progress
|
|
|
140,796
|
|
|
|
91,124
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,852,683
|
|
|
$
|
4,445,888
|
|
The
following carrying charges were capitalized (in thousands):
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
6,665
|
|
|
$
|
2,119
|
|
|
$
|
19,156
|
|
|
$
|
4,274
|
|
Ad
valorem taxes
|
|
|
638
|
|
|
|
465
|
|
|
|
1,578
|
|
|
|
511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,303
|
|
|
$
|
2,584
|
|
|
$
|
20,734
|
|
|
$
|
4,785
|
|
Acquisitions
of properties are accounted for utilizing the purchase method and, accordingly,
the results of operations are included in our results of operations from the
respective dates of acquisition. We have used estimates of future
cash flows and other valuation techniques to allocate the purchase price of
acquired property among land, buildings on an "as if vacant" basis and other
identifiable intangibles.
During
the first nine months of 2007, we completed the acquisition of 13 shopping
centers, one office building and five industrial properties that are located
in
Arizona, Florida, Georgia, Illinois, Oregon, Texas and Virginia.
We
commenced 11 new development projects located in Arizona, Florida, Georgia,
North Carolina and Texas during the first nine months of 2007. Of
these, five represent interests in consolidated joint ventures in which we
have
an ownership interest ranging from 50% to 55%.
Note
8. Discontinued
Operations
During
the first nine months of 2007, we sold 11 shopping centers and one industrial
center, six of which were located in Texas, two each in Colorado and Illinois,
and one each in Georgia and Louisiana. Also, we classified three
shopping centers, totaling $6.0 million, as held for sale as of September 30,
2007. In 2006, we sold 19 shopping centers and four industrial
properties, 10 of which were located in Texas, three in Kansas, two each in
Arkansas, Oklahoma and Tennessee, and one each in Arizona, Missouri, New Mexico
and Colorado. The operating results of these properties have been
reclassified and reported as discontinued operations in the Condensed
Consolidated Statements of Income and Comprehensive Income in accordance with
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
as well as any gains on the respective disposition for all periods
presented. Revenues recorded in Operating Income from Discontinued
Operations related to our dispositions totaled $1.2 million and $8.1 million
for
the quarter ended September 30, 2007 and 2006, respectively, and $8.8 million
and $32.6 million for the nine months ended September 30, 2007 and 2006,
respectively. Included in the Condensed Consolidated Balance Sheet at
December 31, 2006 were $152.6 million of Property and $19.5 million of
Accumulated Depreciation related to properties sold during the first nine months
of 2007.
During
the first nine months of 2007, we incurred a net loss of $.4 million on the
defeasance of two loans totaling $21.2 million that were required to be settled
upon their disposition. These defeasance costs were recognized as
Interest Expense and have been reclassified and reported as discontinued
operations.
The
discontinued operations reported in 2006 had no debt that was required to be
repaid upon their disposition.
We
elected not to allocate other consolidated interest to discontinued operations
because the interest savings to be realized from the proceeds of the sale of
these operations was not material.
Note
9. Related
Parties
We
have
ownership interests in a number of real estate joint ventures and
partnerships. Notes receivable from these entities bear interest
ranging from 5.5% to 10% at September 30, 2007 and 6.0% to 10% at December
31,
2006. These notes are due at various dates through 2028 and are
generally secured by real estate assets. Interest income recognized
on these notes was $.8 million and $.2 million for the three months ended
September 30, 2007 and 2006, respectively, and $1.6 million and $1.0 million
for
the nine months ended September 30, 2007 and 2006.
Included
in Other Assets are notes receivable from individual partners of certain real
estate joint ventures and partnerships that totaled $23.7 million at September
30, 2007 and $1.9 million at December 31, 2006. These notes bear
interest ranging from 5% to 7.3% at September 30, 2007 and 7.8% at December
31,
2006.
Note
10. Investment in Real Estate
Joint Ventures and Partnerships
We
own
interests in real estate joint ventures or limited partnerships and have
tenancy-in-common interests in which we exercise significant influence, but
do
not have financial and operating control. We account for these
investments using the equity method, and our interests range from 10% to
75%. Combined condensed unaudited financial information of these
ventures (at 100%) is summarized as follows (in thousands):
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
Combined
Condensed Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
|
|
$
|
1,650,600
|
|
|
$
|
1,123,600
|
|
Accumulated
depreciation
|
|
|
(70,692
|
)
|
|
|
(41,305
|
)
|
Property,
net
|
|
|
1,579,908
|
|
|
|
1,082,295
|
|
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
198,488
|
|
|
|
118,642
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,778,396
|
|
|
$
|
1,200,937
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
$
|
430,513
|
|
|
$
|
328,508
|
|
Amounts
payable to Weingarten Realty Investors
|
|
|
65,119
|
|
|
|
22,657
|
|
Other
liabilities
|
|
|
121,219
|
|
|
|
39,154
|
|
Accumulated
equity
|
|
|
1,161,545
|
|
|
|
810,618
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,778,396
|
|
|
$
|
1,200,937
|
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Combined
Condensed Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
39,561
|
|
|
$
|
15,721
|
|
|
$
|
106,047
|
|
|
$
|
41,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
9,760
|
|
|
|
3,556
|
|
|
|
25,296
|
|
|
|
9,527
|
|
Interest
|
|
|
7,014
|
|
|
|
4,617
|
|
|
|
17,500
|
|
|
|
12,076
|
|
Operating
|
|
|
5,786
|
|
|
|
1,900
|
|
|
|
15,574
|
|
|
|
5,193
|
|
Ad
valorem taxes
|
|
|
3,955
|
|
|
|
1,840
|
|
|
|
12,288
|
|
|
|
4,426
|
|
General
and administrative
|
|
|
276
|
|
|
|
156
|
|
|
|
621
|
|
|
|
415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
26,791
|
|
|
|
12,069
|
|
|
|
71,279
|
|
|
|
31,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
on land and merchant development sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
555
|
|
Gain
(loss) on sale of properties
|
|
|
(5
|
)
|
|
|
1
|
|
|
|
(5
|
)
|
|
|
5,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
12,765
|
|
|
$
|
3,653
|
|
|
$
|
34,763
|
|
|
$
|
16,147
|
|
Our
investment in real estate joint ventures and partnerships, as reported on our
Condensed Consolidated Balance Sheets, differs from our proportionate share
of
the joint ventures' and partnerships’ underlying net assets due to basis
differentials, which arose upon the transfer of assets to the joint
ventures. The basis differentials, which totaled $16.9 million and
$20.1 million at September 30, 2007 and December 31, 2006, respectively, are
generally amortized over the useful lives of the related assets.
Fees
earned by us for the management of these joint ventures and partnerships totaled
$1.4 million and $.3 million for the quarters ended September 30, 2007 and
2006,
respectively, and $3.5 million and $1.0 million for the nine months ended
September 30, 2007 and 2006, respectively.
During
the first nine months of 2007, a 25%-owned unconsolidated joint venture acquired
two shopping centers. Cole Park Plaza is located in Chapel
Hill, North Carolina, and Sunrise West is located in Sunrise,
Florida. A 50%-owned unconsolidated joint venture was formed for the
purpose of developing a retail shopping center. A 20%-owned
unconsolidated joint venture acquired seven industrial properties, one each
in
Ashland and Chester, Virginia, two in Colonial Heights, Virginia and three
in
Richmond, Virginia. We invested in a 20% owned unconsolidated joint
venture, which acquired three retail power centers: Pineapple Commons
located in Stuart, Florida; Mansell Crossing located in Alpharetta, Georgia;
and
Preston Shepard Place located in Plano, Texas. We acquired a 10%
interest in a retail shopping center located in San Jose, California through
a
tenancy-in-common arrangement.
In
March
2007, three joint ventures, two of which were previously consolidated, were
reorganized and our 50% interest in each of these properties is now held in
a
tenancy-in-common arrangement.
During
the first nine months of 2006, we invested in a 25%-owned unconsolidated joint
venture, which acquired five shopping centers: Fresh Market Shoppes is located
in Hilton Head, South Carolina; Shoppes at Paradise Isle is located in Destin,
Florida; Indian Harbor Place is located in Melbourne, Florida, and both Quesada
Commons and Shoppes of Port Charlotte are located in Port Charlotte,
Florida. Two 50%-owned joint ventures commenced development of a
retail center each located in Mission, Texas and Apple Valley,
California. Also, two shopping centers, one each in Crosby and
Dickinson, Texas, were sold. Our share of the sales proceeds totaled
$8.1 million and generated a gain of $4.1 million. Associated with
our land and merchant development activities, a parcel of land in Houston,
Texas
was sold in a 75%-owned joint venture, of which our share of the gain totaled
$.4 million.
During
the third quarter of 2006, we formed a strategic joint venture with PNC Realty
Investors (“PNC”) to acquire and operate industrial properties within target
markets across the United States. PNC served as investment advisor to
the AFL-CIO Building Investment Trust (“BIT”). The joint venture is
80% owned by BIT and 20% by us. The partners plan to invest $500
million in total capital over the next two years including leverage targeted
at
approximately 50% of total capital. As part of this transaction, we
provided the initial “seeding” for the joint venture, contributing 16 buildings
at five properties with a total value of $123 million and aggregating more
than
two million square feet. The sale of an 80% interest in these
properties resulted in a gain to us of $26.9 million, and due to our continuing
involvement with these properties, the operating results have not been
reclassified and reported in discontinued operations. The properties
are located in the San Diego, Memphis and Atlanta markets.
Note
11. Income Tax
Considerations
We
qualify as a REIT under the provisions of the Internal Revenue Code, and
therefore, no tax is imposed on us for our taxable income distributed to
shareholders. In our taxable REIT subsidiaries, we recorded a federal
income tax provision of $.3 million and $1.2 million during the third quarter
of
2007 and 2006, respectively, and $.5 million and $1.3 million for the first
nine
months of 2007 and 2006, respectively. Our deferred tax assets at
September 30, 2007 and December 31, 2006 were $1.0 million and $.3 million,
respectively, with the deferred tax liabilities totaling $1.5 million and $1.6
million, respectively. In addition, a current tax obligation of $.6
million has been recorded at September 30, 2007, which was reduced by payments
made in 2006 and 2007 totaling $.7 million.
We
have
reviewed our tax positions under FIN 48, which clarifies the accounting for
uncertainty in income taxes recognized in the financial
statements. The interpretation prescribes a recognition threshold and
measurement attribute for the financial statement recognition of a tax position
taken, or expected to be taken, in a tax return. A tax position may
only be recognized in the financial statements if it is more likely than not
that the tax position will be sustained upon examination. We believe
it is more likely than not that our tax positions will be sustained in any
tax
examinations.
In
May
2006, the state of Texas enacted a margin tax, replacing the taxable capital
components of the current franchise tax with a new “taxable margin”
component. Most REITs are subject to the margin tax, whereas they
were previously exempt from the franchise tax. The tax became
effective for us beginning in calendar year 2007. Since the tax base
on the margin tax is derived from an income-based measure for accounting
purposes, we believe the margin tax is an income tax. We also record
deferred taxes for the temporary tax differences that have resulted from those
activities as required under SFAS No. 109, “Accounting for Income
Taxes.”
During
the first nine months of 2007 and 2006, we recorded a provision for the Texas
margin tax of $1.5 million and $.1 million, respectively, and $.6 million and
$.02 million during the quarter ended September 30, 2007 and 2006,
respectively. The deferred tax assets associated with the Texas
margin tax were $.1
million as of September 30, 2007 and
December 31, 2006, respectively, with the deferred tax liabilities totaling
$.1
million in both periods. In addition, a current tax obligation of
$1.5 million has been recorded at September 30, 2007.
Note
12. Commitments and
Contingencies
We
participate in six ventures, structured as DownREIT partnerships that have
properties in Arkansas, California, Georgia, North Carolina, Texas and
Utah. As a general partner, we have operating and financial control
over these ventures and consolidate their operations in our condensed
consolidated financial statements. These ventures allow the outside
limited partners to put their interest to the partnership for our common shares
of beneficial interest or an equivalent amount in cash. We may
acquire any limited partnership interests that are put to the partnership,
and
we have the option to redeem the interest in cash or a fixed number of our
common shares, at our discretion. We also participate in two ventures
that have properties in Florida and Texas that allow its outside partners to
put
an operating partnership unit to us for our common shares of beneficial interest
or an equivalent amount of cash. We have the option to redeem these units
in cash or a fixed number of our common shares, at our
discretion. During the first nine months of 2007 and 2006, we issued
common shares of beneficial interest valued at $12.9 million and $3.9 million,
respectively, in exchange for certain of these limited partnership interests
or
operating partnership units.
We
expect
to invest approximately $38.6 million in 2007, $148.0 million in 2008, $133.3
million in 2009, $91.2 million in 2010, $21.4 million in 2011 and the remaining
balance of $1.4 million in 2012 to complete construction of 37 properties under
various stages of development. We also expect to invest $22.7 million
to acquire projects in the fourth quarter of 2007.
We
are
subject to numerous federal, state and local environmental laws, ordinances
and
regulations in the areas where we own or operate properties. We are
not aware of any material contamination, which may have been caused by us or
any
of our tenants that would have a material effect on our condensed consolidated
financial statements.
As
part
of our risk management activities, we have applied and been accepted into state
sponsored environmental programs which will limit our expenses if contaminants
need to be remediated. We also have an environmental insurance policy
that covers us against third party liabilities and remediation
costs.
While
we
believe that we do not have any material exposure to environmental remediation
costs, we cannot give absolute assurance that changes in the law or new
discoveries of contamination will not result in increased liabilities to
us.
Related
to our investment in a redevelopment project in Sheridan, Colorado that is
held
in an unconsolidated real estate joint venture, we, our joint venture partner
and the joint venture have each provided a guarantee for the payment of any
annual sinking fund requirement shortfalls on bonds issued in connection with
the project. The Sheridan Redevelopment Agency issued $97 million of
series A bonds used for an urban renewal project. The bonds are to be
repaid with incremental sales and property taxes and a public improvement fee
(“PIF”) to be assessed on future retail sales. The incremental taxes
and PIF are to remain intact until the bond liability has been paid in full,
including any amounts we may have to provide. We have evaluated and
determined that the fair value of the guarantee is nominal.
We
are
involved in various matters of litigation arising in the normal course of
business. While we are unable to predict with certainty the amounts
involved, our management and counsel are of the opinion that, when such
litigation is resolved, our resulting liability, if any, will not have a
material effect on our condensed consolidated financial statements.
Note
13. Identified Intangible Assets
and Liabilities
Identified
intangible assets and liabilities associated with our property acquisitions
are
as follows (in thousands):
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Identified
Intangible Assets:
|
|
|
|
|
|
|
Above-Market
Leases (included in Other Assets)
|
|
$
|
18,544
|
|
|
$
|
14,686
|
|
Above-Market
Leases – Accumulated Amortization
|
|
|
(6,749
|
)
|
|
|
(5,277
|
)
|
Above-Market
Assumed Mortgages (included in Other Assets)
|
|
|
2,072
|
|
|
|
1,653
|
|
Above-Market
Assumed Mortgages – Accumulated Amortization
|
|
|
(176
|
)
|
|
|
|
|
Valuation
of In Place Leases (included in Unamortized Debt and Lease
Cost)
|
|
|
59,589
|
|
|
|
52,878
|
|
Valuation
of In Place Leases – Accumulated Amortization
|
|
|
(20,632
|
)
|
|
|
(16,297
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
52,648
|
|
|
$
|
47,643
|
|
|
|
|
|
|
|
|
|
|
Identified
Intangible Liabilities:
|
|
|
|
|
|
|
|
|
Below-Market
Leases (included in Other Liabilities)
|
|
$
|
38,497
|
|
|
$
|
24,602
|
|
Below-Market
Leases – Accumulated Amortization
|
|
|
(10,425
|
)
|
|
|
(6,569
|
)
|
Below-Market
Assumed Mortgages (included in Debt)
|
|
|
58,963
|
|
|
|
59,863
|
|
Below-Market
Assumed Mortgages – Accumulated Amortization
|
|
|
(23,040
|
)
|
|
|
(18,123
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
63,995
|
|
|
$
|
59,773
|
|
These
identified intangible assets and liabilities are amortized over the terms of
the
acquired leases or the remaining lives of the assumed mortgages.
The
net
amortization of above-market and below-market leases increased rental revenues
by $.9 million and $.5 million for the quarters ended September 30, 2007 and
2006, respectively, and by $2.3 million and $.8 million for the nine months
ended September 30, 2007 and 2006, respectively. The estimated net
amortization of these intangible assets and liabilities for each of the next
five years is as follows (in thousands):
2008
|
|
$
|
3,322
|
|
2009
|
|
|
2,713
|
|
2010
|
|
|
1,899
|
|
2011
|
|
|
1,328
|
|
2012
|
|
|
1,061
|
|
The
amortization of the in place lease intangible recorded in depreciation and
amortization, was $2.1 million and $1.9 million for the quarters ended September
30, 2007 and 2006, respectively, and $6.2 million and $5.4 million for the
nine
months ended September 30, 2007 and 2006, respectively. The estimated
amortization of this intangible asset for each of the next five years is as
follows (in thousands):
2008
|
|
$
|
7,123
|
|
2009
|
|
|
6,191
|
|
2010
|
|
|
5,170
|
|
2011
|
|
|
3,990
|
|
2012
|
|
|
3,197
|
|
The
amortization of above-market and below-market assumed mortgages decreased
interest expense $1.6 million and $1.9 million for the quarters ended September
30, 2007 and 2006, respectively, and by $5.1 million and $5.5 million for the
nine months ended September 30, 2007 and 2006, respectively. The
estimated amortization of these intangible assets and liabilities for each
of
the next five years is as follows (in thousands):
2008
|
|
$
|
5,858
|
|
2009
|
|
|
4,518
|
|
2010
|
|
|
3,866
|
|
2011
|
|
|
2,569
|
|
2012
|
|
|
1,397
|
|
Note
14. Share Options and
Awards
On
January 1, 2006, we adopted SFAS No. 123(R), “Share-Based Payment,” which
established accounting standards for all transactions in which an entity
exchanges its equity instruments for goods and services. This
accounting standard focuses primarily on equity transactions with
employees. We began recording compensation expense on any unvested
awards granted during the remaining vesting periods.
In
1988,
we adopted a Share Option Plan that provided for the issuance of options and
share awards up to a maximum of 1.6 million common shares. This plan
expired in December 1997, and no awards remain outstanding at September 30,
2007.
In
1992,
we adopted the Employee Share Option Plan that grants 100 share options to
every
employee, excluding officers, upon completion of each five-year interval of
service. This plan expires in 2012 and provides options for a maximum
of 225,000 common shares, of which .2 million is available for future grant
of
options or awards at September 30, 2007. Options granted under this
plan are exercisable immediately.
In
1993,
we adopted the Incentive Share Option Plan that provided for the issuance of
up
to 3.9 million common shares, either in the form of restricted shares or share
options. This plan expired in 2002, but some awards made pursuant to
it remain outstanding as of September 30, 2007. The share options
granted to non-officers vest over a three-year period beginning after the grant
date, and for officers vest over a seven-year period beginning two years after
the grant date. Restricted shares under this plan have multiple
vesting periods. Prior to 2000, restricted shares generally vested
over a 10 year period. Effective in 2000, the vesting period became
five years. In addition, the vesting period for these restricted
shares can be accelerated based on appreciation in the market share
price. All restricted shares related to this plan vested prior to
2005.
In
2001,
we adopted the Long-term Incentive Plan for the issuance of options and share
awards. In 2006, the maximum number of common shares issuable under
this plan was increased to 4.8 million common shares of beneficial interest,
of
which 2.6 million is available for the future grant of options or awards at
September 30, 2007. This plan expires in 2011. The share
options granted to non-officers vest over a three-year period beginning after
the grant date, and share options and restricted shares for officers vest over
a
five-year period after the grant date. Restricted shares granted to
trust managers and options or awards granted to retirement eligible employees
are expensed immediately.
The
grant
price for the Employee Share Option Plan is equal to the closing price of our
common shares on the date of grant. The grant price of the Long-term
Incentive Plan is calculated as an average of the high and low of the quoted
fair value of our common shares on the date of grant. In both plans,
these options expire upon termination of employment or 10 years from the date
of
grant. In the Long-term Incentive Plan, restricted shares for
officers and trust managers are granted at no exercise price. Our
policy is to recognize compensation expense for equity awards ratably over
the
vesting period, except for retirement eligible amounts. For the three
months ended September 30, 2007 and 2006, compensation expense, net of
forfeitures, associated with share options and restricted shares totaled $1.3
million and $1.0 million, of which $.3 million and $.2 million was capitalized,
respectively. For the nine months ended September 30, 2007 and 2006,
compensation expense, net of forfeitures, associated with share options and
restricted shares totaled $3.9 million and $3.1 million, of which $1.0 million
and $.8 million was capitalized, respectively.
The
fair
value of share options and restricted shares is estimated on the date of grant
using the Black-Scholes option pricing method based on the expected weighted
average assumptions in the following table. The dividend yield is an
average of the historical yields at each record date over the estimated expected
life. We estimate volatility using our historical volatility data for
a period of 10 years, and the expected life is based on historical data from
an
option valuation model of employee exercises and terminations. The
risk-free rate is based on the U.S. Treasury yield curve in effect at the time
of grant. The fair value and weighted average assumptions are as
follows:
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Fair
value per share
|
|
$
|
4.96
|
|
|
$
|
3.22
|
|
Dividend
yield
|
|
|
5.7
|
%
|
|
|
6.3
|
%
|
Expected
volatility
|
|
|
18.2
|
%
|
|
|
16.9
|
%
|
Expected
life (in years)
|
|
|
5.9
|
|
|
|
6.7
|
|
Risk-free
interest rate
|
|
|
4.4
|
%
|
|
|
4.4
|
%
|
Following
is a summary of the option activity for the nine months ended September 30,
2007:
|
|
|
|
|
Weighted
|
|
|
|
Shares
|
|
|
Average
|
|
|
|
Under
|
|
|
Exercise
|
|
|
|
Option
|
|
|
Price
|
|
|
|
|
|
|
|
|
Outstanding,
January 1, 2007
|
|
|
3,147,153
|
|
|
$
|
31.99
|
|
Granted
|
|
|
4,621
|
|
|
|
48.25
|
|
Forfeited
or expired
|
|
|
(54,779
|
)
|
|
|
35.99
|
|
Exercised
|
|
|
(183,321
|
)
|
|
|
24.05
|
|
Outstanding,
September 30, 2007
|
|
|
2,913,674
|
|
|
$
|
32.44
|
|
The
total
intrinsic value of options exercised during the three months ended September
30,
2007 and 2006 was $.3 million and $1.9 million, respectively. For the
nine months ended September 30, 2007 and 2006, the total intrinsic value of
options exercised was $4.2 million and $8.9 million, respectively. As
of September 30, 2007 and December 31, 2006, there was approximately $3.7
million and $4.9 million, respectively, of total unrecognized compensation
cost
related to unvested share options, which is expected to be amortized over a
weighted average of 2.3 years and 3.0 years, respectively.
The
following table summarizes information about share options outstanding and
exercisable at September 30, 2007:
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Average
|
|
Weighted
|
|
|
Aggregate
|
|
|
|
|
|
Weighted
|
|
Average
|
|
Aggregate
|
|
|
|
|
|
|
Remaining
|
|
Average
|
|
|
Intrinsic
|
|
|
|
|
|
Average
|
|
Remaining
|
|
Intrinsic
|
|
Range
of
|
|
|
|
|
Contractual
|
|
Exercise
|
|
|
Value
|
|
|
|
|
|
Exercise
|
|
Contractual
|
|
Value
|
|
Exercise
Prices
|
|
|
Number
|
|
Life
|
|
Price
|
|
|
(000’s)
|
|
|
Number
|
|
|
Price
|
|
Life
|
|
(000’s)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17.89
- $26.83
|
|
|
|
1,124,327
|
|
4.21
years
|
|
$
|
21.89
|
|
|
|
|
|
|
|
734,750
|
|
|
$
|
21.34
|
|
4.01
years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
26.84
- $40.26
|
|
|
|
1,266,527
|
|
7.24
years
|
|
$
|
35.59
|
|
|
|
|
|
|
|
560,136
|
|
|
$
|
34.32
|
|
6.86
years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
40.27
- $49.62
|
|
|
|
522,820
|
|
9.17
years
|
|
$
|
47.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
2,913,674
|
|
6.42
years
|
|
$
|
32.44
|
|
|
$
|
26,281
|
|
|
|
1,294,886
|
|
|
$
|
26.95
|
|
5.24
years
|
|
$
|
18,786
|
|
A
summary
of the status of unvested restricted shares for the nine months ended September
30, 2007 is as follows:
|
|
Unvested
|
|
|
Weighted
|
|
|
|
Restricted
|
|
|
Average
Grant
|
|
|
|
Shares
|
|
|
Date
Fair Value
|
|
|
|
|
|
|
|
|
Outstanding,
January 1, 2007
|
|
|
172,255
|
|
|
$
|
40.80
|
|
Granted
|
|
|
10,412
|
|
|
|
48.43
|
|
Vested
|
|
|
(9,920
|
)
|
|
|
48.37
|
|
Forfeited
|
|
|
(7,041
|
)
|
|
|
42.38
|
|
Outstanding,
September 30, 2007
|
|
|
165,706
|
|
|
$
|
40.75
|
|
As
of
September 30, 2007 and December 31, 2006, there was approximately $4.8 million
and $6.1 million, respectively, of total unrecognized compensation cost related
to unvested restricted shares, which is expected to be amortized over a weighted
average of 2.92 years and 3.66 years, respectively.
Note
15. Employee Benefit
Plans
We
sponsor a noncontributory qualified retirement plan and a separate and
independent nonqualified supplemental retirement plan for our
officers. The components of net periodic benefit costs for both plans
are as follows (in thousands):
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
1,004
|
|
|
$
|
772
|
|
|
$
|
2,844
|
|
|
$
|
2,316
|
|
Interest
cost
|
|
|
666
|
|
|
|
565
|
|
|
|
1,860
|
|
|
|
1,695
|
|
Expected
return on plan assets
|
|
|
(403
|
)
|
|
|
(346
|
)
|
|
|
(1,097
|
)
|
|
|
(1,038
|
)
|
Prior
service cost
|
|
|
(32
|
)
|
|
|
(32
|
)
|
|
|
(86
|
)
|
|
|
(96
|
)
|
Recognized
loss
|
|
|
73
|
|
|
|
102
|
|
|
|
195
|
|
|
|
306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,308
|
|
|
$
|
1,061
|
|
|
$
|
3,716
|
|
|
$
|
3,183
|
|
During
the first nine months ended September 30, 2007 and 2006, we contributed $2.0
million and $1.5 million, respectively, to the qualified retirement plan and
$2.8 million and $2.0, respectively, to the supplemental retirement
plan. We do not expect to make any additional contributions to either
plan in 2007.
We
have a
Savings and Investment Plan pursuant to which eligible employees may elect
to
contribute from 1% of their salaries to the maximum amount established annually
by the Internal Revenue Service. We match employee contributions at
the rate of $.50 per $1.00 for the first 6% of the employee's
salary. The employees vest in the employer contributions ratably over
a six-year period. Compensation expense related to the plan was $.2
million for both the three months ended September 30, 2007 and 2006 and $.7
million and $.5 million for nine months ended September 30, 2007 and 2006,
respectively.
We
have
an Employee Share Purchase Plan under which .6 million of our common shares
have
been authorized. These shares, as well as common shares purchased by
us on the open market, are made available for sale to employees at a discount
of
15%. Purchases are limited to 10% of an employee’s regular
salary. Shares purchased by the employee under the plan are
restricted from being sold for two years from the date of purchase or until
termination of employment. During the first nine months of 2007 and
2006, a total of 20,042 and 16,769 common shares of beneficial interest were
purchased for the employees at an average per share price of $37.00 and $33.83,
respectively.
We
also
have a deferred compensation plan for eligible employees allowing them to defer
portions of their current cash salary or share-based
compensation. Deferred amounts are deposited in a grantor trust,
which are included in Other Assets, and are reported as compensation expense
in
the year service is rendered. Cash deferrals are invested based on
the employee’s investment selections from a mix of assets based on a “Broad
Market Diversification” model. Deferred share-based compensation
cannot be diversified, and distributions from this plan are made in the same
form as the original deferral.
Note
16. Segment
Information
The
operating segments presented are the segments for which separate financial
information is available, and for which operating performance is evaluated
regularly by senior management in deciding how to allocate resources and in
assessing performance. We evaluate the performance of the operating
segments based on net operating income that is defined as total revenues less
operating expenses and ad valorem taxes. Management does not consider
the effect of gains or losses from the sale of property in evaluating ongoing
operating performance.
The
shopping center segment is engaged in the acquisition, development and
management of real estate, primarily anchored neighborhood and community
shopping centers located in Arizona, Arkansas, California, Colorado, Florida,
Illinois, Georgia, Kansas, Kentucky, Louisiana, Maine, Missouri, Nevada, New
Mexico, North Carolina, Oklahoma, Oregon, South Carolina, Tennessee, Texas,
Utah
and Washington. The customer base includes supermarkets, discount
retailers, drugstores and other retailers who generally sell basic
necessity-type commodities. The industrial segment is engaged in the
acquisition, development and management of bulk warehouses and office/service
centers. Its properties are located in California, Florida, Georgia,
Tennessee, Texas and Virginia, and the customer base is
diverse. Included in "Other" are corporate-related items,
insignificant operations and costs that are not allocated to the reportable
segments.
Information
concerning our reportable segments is as follows (in thousands):
|
|
Shopping
|
|
|
|
|
|
|
|
|
|
|
|
|
Center
|
|
|
Industrial
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
139,200
|
|
|
$
|
14,177
|
|
|
$
|
3,233
|
|
|
$
|
156,610
|
|
Net
Operating Income
|
|
|
97,099
|
|
|
|
9,616
|
|
|
|
1,576
|
|
|
|
108,291
|
|
Equity
in Earnings of Real Estate Joint Ventures and Partnerships,
net
|
|
|
4,572
|
|
|
|
262
|
|
|
|
59
|
|
|
|
4,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
124,599
|
|
|
$
|
14,167
|
|
|
$
|
277
|
|
|
$
|
139,043
|
|
Net
Operating Income (Loss)
|
|
|
88,753
|
|
|
|
9,337
|
|
|
|
(904
|
)
|
|
|
97,186
|
|
Equity
in Earnings of Real Estate Joint Ventures and Partnerships,
net
|
|
|
2,069
|
|
|
|
39
|
|
|
|
145
|
|
|
|
2,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
398,694
|
|
|
$
|
40,071
|
|
|
$
|
7,354
|
|
|
$
|
446,119
|
|
Net
Operating Income
|
|
|
285,591
|
|
|
|
27,551
|
|
|
|
3,248
|
|
|
|
316,390
|
|
Equity
in Earnings of Real Estate Joint Ventures and Partnerships,
net
|
|
|
11,294
|
|
|
|
1,055
|
|
|
|
164
|
|
|
|
12,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
355,491
|
|
|
$
|
42,287
|
|
|
$
|
1,218
|
|
|
$
|
398,996
|
|
Net
Operating Income (Loss)
|
|
|
258,966
|
|
|
|
29,413
|
|
|
|
(338
|
)
|
|
|
288,041
|
|
Equity
in Earnings of Real Estate Joint Ventures and Partnerships,
net
|
|
|
10,502
|
|
|
|
84
|
|
|
|
280
|
|
|
|
10,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
in Real Estate Joint Ventures and Partnerships
|
|
$
|
257,728
|
|
|
$
|
35,374
|
|
|
$
|
4,295
|
|
|
$
|
297,397
|
|
Total
Assets
|
|
|
3,829,842
|
|
|
|
354,390
|
|
|
|
700,190
|
|
|
|
4,884,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
in Real Estate Joint Ventures and Partnerships
|
|
$
|
174,587
|
|
|
$
|
25,156
|
|
|
$
|
4,096
|
|
|
$
|
203,839
|
|
Total
Assets
|
|
|
3,517,733
|
|
|
|
324,343
|
|
|
|
533,464
|
|
|
|
4,375,540
|
|
Net
operating income reconciles to Income from Continuing Operations as shown on
the
Condensed Consolidated Statements of Income and Comprehensive Income as follows
(in thousands):
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Segment Net Operating Income
|
|
$
|
108,291
|
|
|
$
|
97,186
|
|
|
$
|
316,390
|
|
|
$
|
288,041
|
|
Depreciation
and Amortization
|
|
|
(33,882
|
)
|
|
|
(30,886
|
)
|
|
|
(98,042
|
)
|
|
|
(89,834
|
)
|
General
and Administrative
|
|
|
(6,537
|
)
|
|
|
(5,497
|
)
|
|
|
(19,650
|
)
|
|
|
(16,500
|
)
|
Interest
Expense
|
|
|
(38,536
|
)
|
|
|
(37,384
|
)
|
|
|
(110,384
|
)
|
|
|
(105,920
|
)
|
Interest
and Other Income
|
|
|
2,082
|
|
|
|
2,787
|
|
|
|
6,838
|
|
|
|
4,818
|
|
Equity
in Earnings of Real Estate Joint Ventures and Partnerships,
net
|
|
|
4,893
|
|
|
|
2,253
|
|
|
|
12,513
|
|
|
|
10,866
|
|
Income
Allocated to Minority Interests
|
|
|
(3,003
|
)
|
|
|
(1,676
|
)
|
|
|
(7,678
|
)
|
|
|
(4,977
|
)
|
Gain
on Land and Merchant Development Sales
|
|
|
4,199
|
|
|
|
4,504
|
|
|
|
8,150
|
|
|
|
6,180
|
|
Gain
on Sale of Properties
|
|
|
986
|
|
|
|
26,871
|
|
|
|
3,010
|
|
|
|
26,974
|
|
Provision
for Income Taxes
|
|
|
(930
|
)
|
|
|
(1,253
|
)
|
|
|
(1,933
|
)
|
|
|
(1,401
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from Continuing Operations
|
|
$
|
37,563
|
|
|
$
|
56,905
|
|
|
$
|
109,214
|
|
|
$
|
118,247
|
|
Note
17. Subsequent
Events
Subsequent
to September 30, 2007, we acquired Westlake Industrial Centre, a 154,000 square
foot industrial building, and South Park Industrial Centre, a 235,000 square
foot industrial center, both of which are located in Atlanta,
Georgia.
In
November 2007, we acquired a 10% interest in Paradise Key Shopping
Center through a tenancy-in-common arrangement. This 272,000 square
foot grocery anchored shopping center is located in Destin,
Florida.
Also,
we
sold two properties located in Louisiana and Texas that were classified as
property held for sale at September 30, 2007.
During
September 2007, we issued a consent solicitation which sought the consent from
the holders of our outstanding senior unsecured notes (collectively the
“Securities”) to modify certain financial covenants and related defined terms
applicable to the Securities. This consent solicitation expired on
October 26, 2007 without modification to our financial covenants.
In
November 2007, we increased our revolving credit facility from $400 million
to
$575 million and amended certain covenants of this facility.
ITEM
2. Management's
Discussion and Analysis of Financial Condition and Results of
Operations
Forward-Looking
Statements
This
quarterly report on Form 10-Q, together with other statements and information
publicly disseminated by us, contains certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. We
intend such forward-looking statements to be covered by the safe harbor
provisions for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995 and include this statement for purposes of
complying with these safe harbor provisions. Forward-looking
statements, which are based on certain assumptions and describe our future
plans, strategies and expectations, are generally identifiable by use of the
words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” or
similar expressions. You should not rely on forward-looking
statements since they involve known and unknown risks, uncertainties and other
factors, which are, in some cases, beyond our control and which could materially
affect actual results, performances or achievements. Factors which
may cause actual results to differ materially from current expectations include,
but are not limited to, (i) general economic and local real estate conditions,
(ii) the inability of major tenants to continue paying their rent obligations
due to bankruptcy, insolvency or general downturn in their business, (iii)
financing risks, such as the inability to obtain equity, debt, or other sources
of financing on favorable terms, (iv) changes in governmental laws and
regulations, (v) the level and volatility of interest rates, (vi) the
availability of suitable acquisition opportunities, (vii) changes in expected
development activity, (viii) increases in operating costs, (ix) tax matters,
including failure to qualify as a real estate investment trust, could have
adverse consequences and (x) investments through real estate joint ventures
and
partnerships involve risks not present in investments in which we are the sole
investor. Accordingly, there is no assurance that our expectations
will be realized.
The
following discussion should be read in conjunction with the condensed
consolidated financial statements and notes thereto and the comparative summary
of selected financial data appearing elsewhere in this
report. Historical results and trends which might appear should not
be taken as indicative of future operations. Our results of
operations and financial condition, as reflected in the accompanying financial
statements and related footnotes, are subject to management's evaluation and
interpretation of business conditions, retailer performance, changing capital
market conditions and other factors which could affect the ongoing viability
of
our tenants.
Executive
Overview
Weingarten
Realty Investors is a real estate investment trust (“REIT”) organized under the
Texas Real Estate Investment Trust Act. We, and our predecessor
entity, began the ownership and development of shopping centers and other
commercial real estate in 1948. Our primary business is leasing space
to tenants in the shopping and industrial centers we own or lease. We
also manage centers for joint ventures in which we are partners or for other
outside owners for which we charge fees.
We
operate a portfolio of rental properties which includes neighborhood and
community shopping centers and industrial properties. We have a
diversified tenant base with our largest tenant comprising only 3% of total
rental revenues during 2007.
We
focus
on increasing funds from operations and growing dividend payments to our common
shareholders. We do this through hands-on leasing, management and
selected redevelopment of the existing portfolio of properties, through
disciplined growth from selective acquisitions and new developments, and through
the disposition of assets that no longer meet our ownership
criteria. We do this while remaining committed to maintaining a
conservative balance sheet, a well-staggered debt maturity schedule and strong
credit agency ratings.
We
continue to maintain a strong, conservative capital structure, which provides
ready access to a variety of attractive capital sources. We carefully
balance obtaining low cost financing with minimizing exposure to interest rate
movements and matching long-term liabilities with the long-term assets acquired
or developed.
At
September 30, 2007, we owned or operated under long-term leases, either directly
or through our interest in real estate joint ventures or partnerships, a total
of 383 developed income-producing properties and 37 properties under various
stages of construction and development. The total number of centers
includes 342 neighborhood and community shopping centers located in 22 states
spanning the country from coast to coast. We also owned 75 industrial
projects located in California, Florida, Georgia, Tennessee, Texas and
Virginia and three other operating properties located in Arizona and
Texas.
We
also
owned interests in 15 parcels of unimproved land held for future development
that totaled approximately 5.5 million square feet.
We
had
approximately 7,600 leases with 5,600 different tenants at September 30,
2007.
Leases
for our properties range from less than a year for smaller spaces to over 25
years for larger tenants. Rental revenues generally include minimum
lease payments, which often increase over the lease term, reimbursements of
property operating expenses, including ad valorem taxes, and additional rent
payments based on a percentage of the tenants' sales. The majority of
our anchor tenants are supermarkets, value-oriented apparel/discount stores
and
other retailers or service providers who generally sell basic necessity-type
goods and services. We believe stability of our anchor tenants,
combined with convenient locations, attractive and well-maintained properties,
high quality retailers and a strong tenant mix, should ensure the long-term
success of our merchants and the viability of our portfolio.
In
assessing the performance of our properties, management carefully tracks the
occupancy of the portfolio. Occupancy for the total portfolio was
95.1% at September 30, 2007 compared to 94.0% at September 30,
2006. Same store property NOI was up a strong 3.1% for the first nine
months of September 30, 2007. As we continue the strategic shift of
our portfolio to properties with barriers to entry, we are confident that we
will continue to produce strong same store NOI growth going
forward. Another important indicator of performance is the spread in
rental rates on a same-space basis as we complete new leases and renew existing
leases. We completed 948 new leases or renewals during the first nine
months of 2007 totaling 5.3 million square feet, increasing rental rates an
average of 10.1% on a cash basis and 13.4% on a GAAP basis.
In
the
first quarter of 2006, we articulated a new long-term growth strategy with
a
planned three-year implementation. The key elements of this strategy
are as follows:
·
|
A
much greater focus on new development, including merchant development,
with $300 million in annual new development completions beginning
in
2009.
|
·
|
Increased
use of joint ventures for acquisitions including the recapitalization
(or
partial sale) of existing assets, which provide the opportunity to
further
increase returns on investment through the generation of fee income
from
leasing and management services we will provide to the
venture.
|
·
|
Further
recycling capital through the active disposition of non-core properties
and reinvesting the proceeds into properties with barriers to entry
within
high growth metropolitan markets. This, combined with our
continuous focus on our assets, produces a higher quality portfolio
with
higher occupancy rates and much stronger internal revenue
growth.
|
During
2006 and continuing into 2007, we made excellent progress in the execution
of
this long-term growth strategy as described in the following sections on new
development, acquisitions and joint ventures and dispositions.
New
Development
At
September 30, 2007, we had 37 properties in various stages of development,
which includes our merchant development program and is up from 21 properties
under development a year ago. We have invested $386 million to-date on
these projects and, at completion we estimate our total investment to be $820
million. These properties are slated to open over the next three to four
years with a projected return on investment of approximately 9% when
completed.
In
addition to these projects, we have significantly increased our development
pipeline with 18 development sites under contract, which will represent a
projected investment of approximately $370 million. In addition to
the 18 development sites under contract, we have another 24 development sites
under preliminary pursuit.
Merchant
development is a new program in which we develop a project with the objective
of
selling all or part of it, instead of retaining it in our portfolio on a
long-term basis. Also, disposition of land parcels and vacant
structures are included in this program. We generated gains of
approximately $8.2 million from this program during the first nine months of
2007. We expect to generate these gains in the fourth quarter of 2007
and throughout future years. We currently have 25 properties
identified as merchant development properties. We have invested $260
million to date in this program and expect to invest a total of approximately
$626 million.
Acquisitions
and Joint Ventures
During
the first nine months of 2007, we have acquired 19 shopping centers, 12
industrial properties and one other operating property for a purchase price
of
approximately $504 million. Included in that total were six retail
properties and seven industrial properties purchased as part of unconsolidated
joint ventures we have with AEW Capital Management, PNC Realty Investors on
behalf of its institutional client, AFL-CIO Building Investment Trust (“BIT”)
and a private investor. It is possible that, consistent with our
strategy, some of the other acquired properties will also be contributed to
future joint ventures.
Acquisitions
are critical to our growth and a key component of our strategy. However,
intense competition for good quality assets has driven asset prices up and
returns down. Partnering with institutional investors through joint
ventures enables us to acquire high quality assets in our target markets while
also meeting our financial return objectives. We benefit from access to
lower-cost capital, as well as leveraging our expertise to provide fee-based
services such as the acquisition, leasing and management of properties, to
the
joint ventures.
Joint
venture fee income for the first nine months of 2007 was approximately $5.7
million or an increase of $4.6 million over the same period in
2006. This is a direct result of our strategy initiative to develop
new joint venture relationships. We expect continued strong growth in
joint venture income during the year.
Dispositions
During
the first nine months of 2007, we sold 11 shopping centers, one industrial
distribution center and an industrial building for $210 million. We
expect to continue to dispose of non-core properties during the year as
opportunities present themselves. Dispositions are part of an ongoing
portfolio management process where we prune our portfolio of properties that
do
not meet our geographic or growth targets and provide capital to recycle into
properties that have barrier-to-entry locations within high growth metropolitan
markets. Over time we expect this to produce a portfolio with higher
occupancy rates and much stronger internal revenue growth.
Summary
of Critical Accounting Policies
Our
discussion and analysis of financial condition and results of operations is
based on our condensed consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities and contingencies as of the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. We evaluate our assumptions and estimates on an
ongoing basis. We base our estimates on historical experience and on
various other assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent
from
other sources. Actual results may differ from these estimates under
different assumptions or conditions.
A
summary
of our critical accounting policies is included in our Annual Report on Form
10-K for the year ended December 31, 2006 in Management’s Discussion and
Analysis of Financial Condition. There have been no significant
changes to our critical accounting policies during 2007.
Results
of Operations
Comparison
of the Three Months Ended September 30, 2007 to the Three Months Ended September
30, 2006
Revenues
Total
revenues were $156.6 million in the third quarter of 2007 versus $139.0 million
in the third quarter 2006, an increase of $17.6 million or
12.7%. This increase resulted from an increase in rental revenues of
$14.3 million and other income of $3.3 million.
Property
acquisitions and new development activity contributed $16.0 million of the
rental income increase with $.6 million resulting from 329 renewals and new
leases, comprising 1.9 million square feet at an average rental rate increase
of
9.2%. Offsetting these rental income increases was a decrease of $2.3
million, which resulted from the sale of an 80% interest in five industrial
centers in the third quarter of 2006.
Occupancy
(leased space) of the portfolio as compared to the prior year was as
follows:
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Shopping
Centers
|
|
|
95.2
|
%
|
|
|
95.0
|
%
|
Industrial
|
|
|
94.5
|
%
|
|
|
90.4
|
%
|
Total
|
|
|
95.1
|
%
|
|
|
94.0
|
%
|
Other
income increased by $3.3 million from the third quarter of 2006. This
increase resulted primarily from the increase in joint venture fee income of
$2.4 million and lease cancellation revenue of $.6 million.
Expenses
Total
expenses for the third quarter 2007 were $88.7 million versus $78.2 million
in
the third quarter of 2006, an increase of $10.5 million or 13.4%.
The
increases in 2007 for depreciation and amortization expense ($3.0 million),
operating expenses ($5.2 million), ad valorem taxes ($1.3 million) and general
and administrative expenses ($1.0 million) were primarily a result of the
properties acquired and developed during the year and increases in headcount
associated with planned growth of the portfolio. Overall, direct
operating costs and expenses (operating and ad valorem taxes) of operating
our
properties as a percentage of rental revenues were 31.8% and 30.4% in 2007
and
2006, respectively.
Interest
Expense
Interest
expense totaled $38.5 million for the third quarter 2007, up $1.2 million or
3.1% from the third quarter 2006. The components of interest expense
were as follows (in thousands):
|
|
Three
Months Ended
|
|
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Gross
interest expense
|
|
$
|
46,769
|
|
|
$
|
41,433
|
|
Out-of-market
mortgage adjustment of acquired mortgages
|
|
|
(1,568
|
)
|
|
|
(1,930
|
)
|
Capitalized
interest
|
|
|
(6,665
|
)
|
|
|
(2,119
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
38,536
|
|
|
$
|
37,384
|
|
Gross
interest expense totaled $46.8 million in the third quarter of 2007, up $5.3
million or 12.9% from the third quarter 2006. The increase in gross
interest expense was due to an increase in the average debt outstanding from
$2.3 billion in 2006 to $3.1 billion in 2007 at a weighted average interest
rate
of 5.8% for third quarter of 2007 and 6.2% for the third quarter of
2006. Capitalized interest increased $4.5 million due to an increase
in new development activity.
Equity
in Earnings of Real Estate Joint Ventures and Partnerships,
net
Our
equity in earnings of real estate joint ventures and partnerships was $4.9
million in the third quarter of 2007 versus $2.3 million in the third quarter
of
2006, an increase of $2.6 million or 113.0%. This increase was
attributable to our incremental income from our investments in newly formed
joint ventures for the acquisition and development of retail and industrial
properties.
Income
Allocated to Minority Interests
Income
allocated to minority interests was $3.0 million in the third quarter of 2007
versus $1.7 million in the third quarter of 2006, an increase of $1.3 million
or
76.5%. This increase resulted primarily from the gain on sale of a
shopping center in Texas that was held in a 50% consolidated joint
venture. This joint venture was included in our consolidated
financial statements because we exercise financial and operating
control.
Gain
on Sale of Properties
Gain
on
sale of properties was $1.0 million in the third quarter of 2007 versus $26.9
million in the third quarter of 2006, a decrease of $25.9 million or
96.3%. A gain of $26.9 million was realized in the third quarter of
2006 from the sale of an 80% interest in five industrial properties in the
San
Diego, Memphis and Atlanta markets in which we have a continuing 20% operating
interest
.
Income
from Discontinued Operations
Income
from discontinued operations was $6.7 million in the third quarter of 2007
versus $48.8 million in the third quarter of 2006, a decrease of $42.1 million
or 86.3%. This decrease was due primarily to the gain on sale of
three shopping centers and one industrial property in 2007 as compared to the
gain on sale for five retail properties and one industrial property during
the
same period of 2006. Also, the decrease in operating income from
discontinued operations results primarily from the disposition of 19 retail
and
four industrial properties during the fiscal year of 2006.
Results
of Operations
Comparison
of the Nine Months Ended September 30, 2007 to the Nine Months Ended September
30, 2006
Revenues
Total
revenues were $446.1 million in the first nine months of 2007 versus $399.0
million in the first nine months of 2006, an increase of $47.1 million or
11.8%. This increase resulted from an increase in rental revenues of
$42.1 million and other income of $5.0 million.
Property
acquisitions and new development activity contributed $44.2 million of the
rental income increase with $5.4 million resulting from 948 renewals and new
leases, comprising 5.3 million square feet at an average rental rate increase
of
10.1%. Offsetting these rental income increases was a decrease of
$7.5 million, which resulted from the sale of an 80% interest in five industrial
centers in the third quarter of 2006.
Occupancy
(leased space) of the portfolio as compared to the prior year was as
follows:
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Shopping
Centers
|
|
|
95.2
|
%
|
|
|
95.0
|
%
|
Industrial
|
|
|
94.5
|
%
|
|
|
90.4
|
%
|
Total
|
|
|
95.1
|
%
|
|
|
94.0
|
%
|
Other
income increased by $5.0 million from the first nine months of
2006. This increase resulted primarily from the increase in joint
venture fee income $4.6 million.
Expenses
Total
expenses for the first nine months of 2007 were $247.4 million versus $217.3
million in the first nine months of 2006, an increase of $30.1 million or
13.9%.
The
increases in 2007 for depreciation and amortization expense ($8.2 million),
operating expenses ($14.9 million), ad valorem taxes ($3.9 million) and general
and administrative expenses ($3.1 million) were primarily a result of the
properties acquired and developed during the year, an increase in insurance
expenses as a result of the hurricanes experienced in 2005 and increases
associated with planned growth of the portfolio. Overall, direct
operating costs and expenses (operating and ad valorem taxes) of operating
our
properties as a percentage of rental revenues were 29.8% in 2007 and 28.1%
in
2006, respectively.
Interest
Expense
Interest
expense totaled $110.4 million for the first nine months of 2007, up $4.5
million or 4.2% from the first nine months of 2006. The components of
interest expense were as follows (in thousands):
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Gross
interest expense
|
|
$
|
134,742
|
|
|
$
|
115,871
|
|
Out-of-market
mortgage adjustment of acquired mortgages
|
|
|
(5,202
|
)
|
|
|
(5,677
|
)
|
Capitalized
interest
|
|
|
(19,156
|
)
|
|
|
(4,274
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
110,384
|
|
|
$
|
105,920
|
|
Gross
interest expense totaled $134.7 million in the first nine months of 2007, up
$18.9 million or 16.3% from the first nine months of 2006. The
increase in gross interest expense was due to an increase in the average debt
outstanding from $2.4 billion in 2006 to $3.0 billion in 2007 at a weighted
average interest rate of 5.8% for the nine months ended September 30, 2007
and
6.2% for the nine months ended September 30, 2006. Capitalized
interest increased $14.9 million due to an increase in new development activity,
and the out-of-market mortgage adjustment decreased by $.5 million.
Interest
and Other Income
Interest
and other income was $6.8 million in the first nine months of 2007 versus $4.8
million in the first nine months of 2006, an increase of $2.0 million or
41.7%. This increase resulted primarily from income earned from
construction loans associated with our new development activities and other
receivables, excess proceeds from the Series F Preferred Share offering and
assets held in a grantor trust related to our deferred compensation
plan.
Equity
in Earnings of Real Estate Joint Ventures and Partnerships,
net
Our
equity in earnings of real estate joint ventures and partnerships was $12.5
million in the first nine months of 2007 versus $10.9 million in the first
nine
months of 2006, an increase of $1.6 million or 14.7%. This increase
was attributable to our incremental income from our investments in newly formed
joint ventures for the acquisition and development of retail and industrial
properties.
Income
Allocated to Minority Interests
Income
allocated to minority interests were $7.7 million in the first nine months
of
2007 versus $5.0 million in the first nine months of 2006, an increase of $2.7
million or 54.0%. This increase resulted primarily from the gain on
sale of three shopping centers that were each held in a 50% consolidated joint
venture. These joint ventures are included in our consolidated
financial statements because we exercise financial and operating
control.
Gain
on Sale of Properties
Gain
on
sale of properties was $3.0 million in the first nine months of 2007 versus
$27.0 million in the first nine months of 2006, a decrease of $24.0 million
or
88.9%. A gain of $26.9 million was realized in the third quarter of
2006 from the sale of an 80% interest in five industrial properties in the
San
Diego, Memphis and Atlanta markets in which we have a continuing 20% operating
interest
.
Gain
on Land and Merchant Development Sales
Gain
on
land and merchant development sales of $8.2 million for the first nine months
of
2007 resulted from sale of six parcels of land in Texas, one Arizona shopping
center and two vacant industrial buildings in San Diego,
California. The activity during the first nine months of 2006 of $6.2
million represents the gain from the sale of an unimproved land tract in
Phoenix, Arizona and the Timber Springs shopping center in Orlando,
Florida.
Income
from Discontinued Operations
Income
from discontinued operations was $62.2 million in the first nine months of
2007
versus $132.4 million in the first nine months of 2006, a decrease of $70.2
million or 53.0%. This decrease was due primarily to the gain on sale
of 11 shopping centers and one industrial property in 2007 as compared to the
gain on sale for 14 retail properties and three industrial properties during
the
same period of 2006. Also, the decrease in operating income from
discontinued operations results primarily from the disposition of 19 retail
and
four industrial properties during the fiscal year of 2006.
Effects
of Inflation
We
have
structured our leases in such a way as to remain largely unaffected should
significant inflation occur. Most of the leases contain percentage
rent provisions whereby we receive increased rentals based on the tenants'
gross
sales. Many leases provide for increasing minimum rentals during the
terms of the leases through escalation provisions. In addition, many
of our leases are for terms of less than 10 years, which allow us to adjust
rental rates to changing market conditions when the leases
expire. Most of our leases also require the tenants to pay their
proportionate share of operating expenses and ad valorem taxes. As a
result of these lease provisions, increases due to inflation, as well as ad
valorem tax rate increases, generally do not have a significant adverse effect
upon our operating results as they are absorbed by our tenants.
Capital
Resources and Liquidity
Our
primary liquidity needs are payment of our common and preferred dividends,
maintaining and operating our existing properties, payment of our debt service
costs and funding planned growth. We anticipate that cash flows from
operating activities will continue to provide adequate capital for all common
and preferred dividend payments and debt service costs, as well as the capital
necessary to maintain and operate our existing properties. We do not
anticipate that the current turmoil in the capital markets will have an affect
on our ability to obtain capital or to execute our business
strategy.
Primary
sources of capital for funding our acquisitions and new development programs
are
our revolving credit facilities, cash generated from sales of properties that
no
longer meet our investment criteria, cash flow generated by our operating
properties and proceeds from capital issuances as needed. Amounts
outstanding under the revolving credit agreement are retired as needed with
proceeds from the issuance of long-term debt, common and preferred equity,
cash
generated from dispositions of properties and cash flow generated by our
operating properties. As of September 30, 2007, the balance
outstanding under our $400 million revolving credit facility was $135.0 million,
and no amounts were outstanding under our $30 million credit facility,
which we use for cash management purposes.
Our
capital structure also includes non-recourse secured debt that we assume in
conjunction with our acquisitions program. We also have non-recourse
debt secured by acquired or developed properties held in several of our real
estate joint ventures and partnerships. We hedge the future cash
flows of certain debt transactions, as well as changes in the fair value of
our
debt instruments, principally through interest rate swaps with major financial
institutions. We generally have the right to sell or otherwise
dispose of our assets except in certain cases where we are required to obtain
a
third party consent, such as assets held in entities in which we have less
than
100% ownership.
Investing
Activities:
Acquisitions
Retail
Properties
.
A
portfolio of six retail properties was purchased in January and March 2007,
including five properties in Tucson, Arizona and one in Scottsdale, Arizona.
The centers are leased to a diverse mix of strong national retailers
including Wal-Mart, Safeway, Walgreens, Kohl’s, Home Depot, PetSmart and
Circuit City. This acquisition added 780,000 square feet to our
portfolio and represented a total investment of $165 million, including $22
million that is contingent upon the subsequent development of space by the
property seller. This contingency agreement expires in
2010.
Cherokee Plaza,
acquired in January 2007, is a 99,000 square foot grocery anchored
neighborhood center located in the prestigious Buckhead area in Atlanta,
Georgia. The 100% occupied property is anchored by a 57,000 square
foot Kroger.
Sunrise West Shopping
Center, acquired in January 2007, is a 76,000 square foot grocery-anchored
neighborhood center located in Sunrise (Miami), Florida. This 98% occupied
property is anchored by a 44,000 square foot
Publix. Cole Park Plaza, acquired in February 2007, is an
82,000 square foot retail development located in Chapel Hill (Durham), North
Carolina next to our existing Chatham Crossing shopping center. Both of
these properties were acquired through an existing unconsolidated joint venture
with AEW Capital Management.
Oak Grove Market Center,
acquired in June 2007, is a 97,000 square foot grocery anchored shopping center
located in Portland, Oregon. The 100% occupied center is anchored by
a 53,000 square foot Safeway.
In
July
2007, we acquired a portfolio of five retail power centers, adding 1.4 million
square feet to our portfolio under management. Three of the retail
power centers in Florida, Georgia and Texas were acquired through a new retail
joint venture with PNC Realty Investors on behalf of its institutional client,
the BIT. We own 20% of this joint venture with the BIT owning
80%. The remaining two centers, one in Atlanta, Georgia and the other
in Chicago, Illinois, were acquired by us.
Countryside
Centre, a 243,000 square foot community center located in the St.
Petersburg/Clearwater Area of Florida, was also acquired in July
2007. This center is anchored by Albertson’s, TJ Maxx, Home Goods and
Shoe Carnival.
Stella Link Shopping
Center is a 29,000 square foot shopping center located in Houston, Texas, which
was acquired in August 2007. The center is anchored by Sellers
Brothers and Burke’s Outlet.
The
Shoppes at South Semoran is a 102,000 square foot shopping center located in
suburban Orlando, Florida, which was acquired in September 2007. This
100% occupied center is anchored by a 57,000 square foot Winn
Dixie.
In
September 2007, we acquired a 10% interest in Tully Corners Shopping
Center through a tenancy-in-common arrangement. This 116,000 square
foot grocery anchored shopping center located in San Jose, California is 97%
leased and is anchored by Food Maxx, Petco and Party City.
Subsequent
to September 30, 2007, we acquired a 10% interest in
Paradise Key Shopping Center through a tenancy-in-common
arrangement. This 272,000 square foot grocery anchored shopping
center is located in Destin, Florida.
Industrial
Properties.
Lakeland Business Park,
acquired in January 2007, is a 100% leased 168,000 square foot industrial
business center located in Lakeland (Tampa), Florida.
In
April
and May 2007, we acquired a portfolio of 10 high quality industrial buildings
located in Richmond, Virginia for a purchase price of $136 million, including
$6
million that is contingent upon the lease up of vacant space by the property
seller. This contingency agreement expires in 2009. Eight
of the buildings were acquired through an existing 20%-owned unconsolidated
joint venture with PNC Realty Investors on behalf of its institutional client
the BIT. The remaining two buildings were acquired directly by
us. This portfolio added 2.5 million square feet under
management.
Town
& Country Commerce Center, acquired in June 2007, is a 206,000
square foot industrial distribution center located in Houston,
Texas. The property is 100% leased to Arizona Tile and
Seitel Solution Tech Center.
Riverview Distribution Center,
acquired in August 2007, is a 265,000 square foot industrial center located
in
Atlanta, Georgia. It is anchored by 109,000 square foot CHEP
USA.
Subsequent
to September 30, 2007, we acquired Westlake Industrial Centre, a 154,000 square
foot industrial building, and South Park Industrial Centre, a 235,000 square
foot industrial center, both of which are located in Atlanta,
Georgia.
The
cash
requirements for these acquisitions were initially financed under our revolving
credit facilities, using available cash generated from dispositions of
properties or using cash flow generated by our operating
properties.
Dispositions
Retail
Properties.
During
the first nine months of 2007, we sold 11 shopping centers totaling 1.3 million
square feet of building area, of which two each are located in Colorado and
Illinois, five in Texas and one each in Louisiana and Georgia. Sales
proceeds from these dispositions totaled $199.2 million and generated gains
of
$56.9 million. Three of these shopping centers were each held in a
50% consolidated joint venture. These joint ventures are included in
our consolidated financial statements because we exercise financial and
operating control.
Subsequent
to September 30, 2007, we sold two properties located in Louisiana and Texas
that were classified as property held for sale at September 30,
2007.
Industrial
Properties.
During
the first nine months of 2007, we sold an industrial distribution center
totaling 152,000 square feet and an industrial building totaling 90,000 square
foot. Both of these properties are located in Texas. Sales
proceeds from these dispositions totaled $10.7 million and generated gains
of
$3.7 million.
Merchant
Development Properties.
During
the first nine months of 2007, we sold two vacant industrial buildings in San
Diego, California; six parcels of land in Texas; and one shopping center in
Phoenix, Arizona, which generated gains of $8.2 million from sale proceeds
totaling $53.0 million.
New
Development and Capital Expenditures
At
September 30, 2007, we had 37 projects under construction or in preconstruction
stages with a total square footage of approximately 10.0
million. These properties are slated to be completed over the next
three to four years.
Our
new
development projects are financed initially under our revolving credit
facilities, using available cash generated from dispositions of properties
or
using cash flow generated by our operating properties.
Capital
expenditures for additions to the existing portfolio, acquisitions, new
development and our share of investments in unconsolidated joint ventures
totaled $863.2 million and $698.2 million for the first nine months of
2007 and 2006, respectively.
Financing
Activities:
Debt
Total
debt outstanding increased to $3.1 billion at September 30, 2007 from $2.9
billion at December 31, 2006. Total debt at September 30, 2007
included $2.8 billion of which interest rates are fixed and $217.1 million,
including the effect of $65 million of interest rate swaps, that bears
interest at variable rates. Additionally, debt totaling $1.1 billion
was secured by operating properties while the remaining $2.0 billion was
unsecured.
We
have a
$400 million unsecured revolving credit facility held by a syndicate of banks
that expires in February 2010 and provides a one-year extension option available
at our request. Borrowing rates under this facility float at a margin
over LIBOR, plus a facility fee. The borrowing margin and facility
fee, which are currently 37.5 and 12.5 basis points, respectively, are priced
off a grid that is tied to our senior unsecured credit rating. This
facility includes a competitive bid feature where we are allowed to request
bids
for borrowings up to $200 million from the syndicate
banks. Additionally, the facility contains an accordion feature,
which allows us to increase the facility amount up to $600
million. As of October 31, 2007, there was $115.0 million
outstanding under this facility. We also maintain a $30 million unsecured
and uncommitted overnight facility that is used for cash management purposes,
and as of October 31, 2007, $13.3 million was outstanding under this
facility. The available balance under our revolving credit agreement
was $262.5 million at October 31, 2007, which is reduced by amounts outstanding
for letters of credit and our overnight facility. We are in full
compliance with the covenants of our unsecured revolving credit
facilities.
In
November 2007, we increased our revolving credit facility from $400 million
to
$575 million and amended certain covenants of this facility.
In
August
2006, we issued $575 million of 3.95% convertible senior unsecured notes due
2026. The net proceeds from the sale of the debentures, after
repurchasing 4.3 million of our common shares of beneficial interest, were
used
for general business purposes and to reduce amounts outstanding under our
revolving credit facility. The debentures are convertible under
certain circumstances for our common shares of beneficial interest at an initial
conversion rate of 20.3770 common shares per $1,000 of principal amount of
debentures (an initial conversion price of $49.075). Upon the
conversion of debentures, we will deliver cash for the principal return, as
defined, and cash or common shares, at our option, for the excess of the
conversion value, as defined, over the principal return. The
debentures are redeemable for cash at our option beginning in 2011 for the
principal amount plus accrued and unpaid interest. Holders of the
debentures have the right to require us to repurchase their debentures for
cash
equal to the principal of the debentures plus accrued and unpaid interest in
2011, 2016 and 2021 and in the event of a change in control.
During
September 2007, we issued a consent solicitation which sought the consent from
the holders of our outstanding senior unsecured notes (collectively the
“Securities”) to modify certain financial covenants and related defined terms
applicable to the Securities. This consent solicitation expired on
October 26, 2007 without modification to our financial covenants.
In
December 2006, we issued $75 million of 10-year unsecured fixed rate medium
term
notes at 6.1% including the effect of an interest rate swap that had hedged
the
transaction. Proceeds from this issuance were used to repay balances
under our revolving credit facilities, to cash settle a forward hedge and for
general business purposes. In May 2006, we entered into a
forward-starting interest rate swap with a notional amount of $74.0
million. In December 2006, we terminated this interest rate swap in
conjunction with the issuance of the $75.0 million of medium term
notes. The termination fee of $4.1 million is being amortized over
the life of the medium term note.
At
September 30, 2007, we had four interest rate swap contracts designated as
fair
value hedges with an aggregate notional amount of $65.0 million that convert
fixed rate interest payments at rates ranging from 4.2% to 6.8% to variable
interest payments. Also, at September 30, 2007, we had two
forward-starting interest rate swap contracts with an aggregate notional amount
of $118.6 million. These contracts have been designated as cash flow
hedges and mitigate the risk of increasing interest rates on forecasted
long-term debt issuances over a maximum period of two years. We could be
exposed to credit losses in the event of nonperformance by the
counter-party; however, management believes the likelihood of such
nonperformance is remote.
In
July
2007 a $10 million swap matured in conjunction with the maturity of the
associated medium term note. This contract was designated as a fair
value hedge.
In
conjunction with acquisitions completed during the first nine months of 2007,
we
assumed $64.0 million of non-recourse debt secured by the related properties
and
a capital lease obligation of $12.9 million. During the first nine
months of 2006, we assumed $76.2 million of non-recourse debt secured by the
related properties.
In
conjunction with the disposition of properties completed during the first nine
months of 2007, we incurred a net loss of $.4 million on the early
extinguishment of two loans totaling $21.2 million.
Equity
Common
and preferred dividends increased to $144.2 million in the first nine months
of
2007, compared to $88.4 million for the first nine months of
2006. The quarterly dividend rate for our common shares of beneficial
interest increased to $.495 in 2007 compared to $.465 for the same period of
2006. Our dividend payout ratio on common equity for the nine months
of 2007 and 2006 approximated 63.7% and 64.4%, respectively, based on basic
funds from operations for the respective periods.
In
July
2007, our board of trust managers authorized a common share repurchase
program as part of our ongoing investment strategy. Under the terms
of the program, we may purchase up to a maximum value of $300 million of our
common shares of beneficial interest during the next two years. Share
repurchases may be made in the open market or in privately negotiated
transactions at the discretion of management and as market conditions
warrant. We anticipate funding the repurchase of shares primarily
through the proceeds received from our property disposition program, as well
as
from general corporate funds.
As
of
September 30, 2007, we have repurchased 1.4 million common shares of beneficial
interest at an average share price of $37.75.
In
July
2006, our board of trust managers authorized the repurchase of our common shares
of beneficial interest to a total of $207 million, and we used $167.6 million
of
the net proceeds from the $575 million debt offering to purchase 4.3 million
common shares of beneficial interest at $39.26 per share.
On
September 25, 2007, we issued $200 million of depositary shares in a private
placement, and the net proceeds of $193.7 million were used to repay amounts
outstanding under our credit facilities. Each depositary share
represents one-hundredth of a Series G Cumulative Redeemable Preferred
Share. The depositary shares are redeemable, in whole or in part on
or after September 25, 2007 at our option, at a redemption price of $25
multiplied by a graded rate per depositary share based on the date of redemption
plus any accrued and unpaid dividends thereon. The depositary shares
are not convertible or exchangeable for any of our other property or
securities. The Series G Preferred Shares pay a variable-rate
quarterly dividend through September 2008 and then a variable-rate monthly
dividend and have a liquidation preference of $2,500 per share. The
variable-rate dividend is calculated on the period’s three-month LIBOR rate plus
a percentage determined by the number of days outstanding. Further,
the rate may vary if any of our outstanding preferred shares are
downgraded. The variable-rate dividend is not to exceed
20%.
On
January 30, 2007, we issued $200 million of depositary shares. Each
depositary share represents one-hundredth of a 6.5% Series F Cumulative
Redeemable Preferred Share. The depositary shares are redeemable, in
whole or in part, on or after January 30, 2012 at our option, at a redemption
price of $25 per depositary share, plus any accrued and unpaid dividends
thereon. The depositary shares are not convertible or exchangeable
for any of our other property or securities. The Series F Preferred
Shares pay a 6.5% annual dividend and have a liquidation value of $2,500 per
share. Net proceeds of $194.4 million were used to repay amounts
outstanding under our credit facilities and for general business
purposes.
In
September 2004, the SEC declared effective two additional shelf registration
statements totaling $1.55 billion, of which $1.35 billion was available as
of
October 31, 2007. In addition, we have $85.4 million available as of
October 31, 2007 under our $1 billion shelf registration statement, which became
effective in April 2003. We will continue to closely monitor both the
debt and equity markets and carefully consider our available financing
alternatives, including both public and private placements.
Contractual
Obligations
The
following table summarizes our primary contractual obligations as of September
30, 2007 (in thousands):
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
Thereafter
|
|
|
Total
|
|
Mortgages
and Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payable:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured
Debt
|
|
$
|
193,314
|
|
|
$
|
156,400
|
|
|
$
|
123,522
|
|
|
$
|
139,810
|
|
|
$
|
667,021
|
|
|
$
|
1,246,602
|
|
|
$
|
2,526,669
|
|
Secured
Debt
|
|
|
21,798
|
|
|
|
248,947
|
|
|
|
132,189
|
|
|
|
114,412
|
|
|
|
139,618
|
|
|
|
704,415
|
|
|
|
1,361,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ground
Lease Payments
|
|
|
493
|
|
|
|
2,435
|
|
|
|
2,961
|
|
|
|
2,917
|
|
|
|
2,862
|
|
|
|
116,389
|
|
|
|
128,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations
to Acquire
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projects
|
|
|
22,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations
to Develop
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projects
|
|
|
38,629
|
|
|
|
147,996
|
|
|
|
133,304
|
|
|
|
91,164
|
|
|
|
21,396
|
|
|
|
1,391
|
|
|
|
433,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Contractual
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations
|
|
$
|
276,934
|
|
|
$
|
555,778
|
|
|
$
|
391,976
|
|
|
$
|
348,303
|
|
|
$
|
830,897
|
|
|
$
|
2,068,797
|
|
|
$
|
4,472,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
____________________
(1)
Includes
principal and interest with interest on variable-rate debt calculated using
rates at September 30, 2007 excluding the effect of interest rate
swaps.
As
of
September 30, 2007 and December 31, 2006, none of our off-balance sheet
arrangements had a material affect on our liquidity or availability of, or
requirement for, our capital resources.
Related
to our investment in a redevelopment project in Sheridan, Colorado that is
held
in an unconsolidated real estate joint venture, we, our joint venture partner
and the joint venture have each provided a guarantee for the payment of any
annual sinking fund requirement shortfalls on bonds issued in connection with
the project. The Sheridan Redevelopment Agency issued $97 million of
series A bonds used for an urban renewal project. The bonds are to be
repaid with incremental sales and property taxes and a public improvement fee
(“PIF”) to be assessed on future retail sales. The incremental taxes
and PIF are to remain intact until the bond liability has been paid in full,
including any amounts we may have to provide. We have evaluated and
determined that the fair value of the guarantee is nominal.
Funds
from Operations
The
National Association of Real Estate Investment Trusts defines funds from
operations (“FFO”) as net income (loss) available to common shareholders
computed in accordance with generally accepted accounting principles, excluding
gains or losses from sales of real estate assets and extraordinary items, plus
depreciation and amortization of operating properties, including our share
of
unconsolidated real estate joint ventures and partnerships. We
calculate FFO in a manner consistent with the NAREIT definition.
Management
uses FFO as a supplemental measure to conduct and evaluate our business because
there are certain limitations associated with using GAAP net income by itself
as
the primary measure of our operating performance. Historical cost
accounting for real estate assets in accordance with GAAP implicitly assumes
that the value of real estate assets diminishes predictably over
time. Since real estate values instead have historically risen or
fallen with market conditions, management believes that the presentation of
operating results for real estate companies that uses historical cost accounting
is insufficient by itself. There can be no assurance that FFO
presented by us is comparable to similarly titled measures of other
REITs.
FFO
should not be considered as an alternative to net income or other measurements
under GAAP as an indicator of our operating performance or to cash flows from
operating, investing or financing activities as a measure of
liquidity. FFO does not reflect working capital changes, cash
expenditures for capital improvements or principal payments on
indebtedness.
Funds
from operations is calculated as follows (in thousands):
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income available to common shareholders
|
|
$
|
38,281
|
|
|
$
|
103,223
|
|
|
$
|
154,940
|
|
|
$
|
243,048
|
|
Depreciation
and amortization
|
|
|
33,142
|
|
|
|
31,475
|
|
|
|
97,023
|
|
|
|
94,510
|
|
Depreciation
and amortization of unconsolidated real estate
joint ventures and
partnerships
|
|
|
2,846
|
|
|
|
1,204
|
|
|
|
7,439
|
|
|
|
3,328
|
|
Gain
on sale of properties
|
|
|
(5,644
|
)
|
|
|
(72,260
|
)
|
|
|
(58,842
|
)
|
|
|
(145,559
|
)
|
(Gain)
loss on sale of properties of unconsolidated real estate
joint
ventures and partnerships
|
|
|
2
|
|
|
|
|
|
|
|
2
|
|
|
|
(4,054
|
)
|
Funds
from operations
|
|
|
68,627
|
|
|
|
63,642
|
|
|
|
200,562
|
|
|
|
191,273
|
|
Funds
from operations attributable to operating partnership
units
|
|
|
|
|
|
|
1,355
|
|
|
|
3,311
|
|
|
|
4,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds
from operations assuming conversion of OP units
|
|
$
|
68,627
|
|
|
$
|
64,997
|
|
|
$
|
203,873
|
|
|
$
|
195,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - basic
|
|
|
85,470
|
|
|
|
86,567
|
|
|
|
85,914
|
|
|
|
88,476
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share
options and awards
|
|
|
994
|
|
|
|
905
|
|
|
|
1,193
|
|
|
|
902
|
|
Operating
partnership units
|
|
|
|
|
|
|
3,138
|
|
|
|
2,303
|
|
|
|
3,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - diluted
|
|
|
86,464
|
|
|
|
90,610
|
|
|
|
89,410
|
|
|
|
92,528
|
|
Newly
Adopted Accounting Pronouncements
In
June
2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for
Uncertainty in Income Taxes-an interpretation of FASB Statement No.
109.” FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in the financial statements. The interpretation prescribes
a recognition threshold and measurement attribute for the financial statement
recognition of a tax position taken, or expected to be taken, in a tax
return. A tax position may only be recognized in the financial
statements if it is more likely than not that the tax position will be sustained
upon examination. There are also several disclosure
requirements. We adopted FIN 48 as of January 1, 2007, and its
adoption did not have a material effect on our condensed consolidated financial
statements.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements.” This Statement defines fair value and establishes a
framework for measuring fair value in generally accepted accounting
principles. The key changes to current practice are (1) the
definition of fair value, which focuses on an exit price rather than an entry
price; (2) the methods used to measure fair value, such as emphasis that fair
value is a market-based measurement, not an entity-specific measurement, as
well
as the inclusion of an adjustment for risk, restrictions and credit standing
and
(3) the expanded disclosures about fair value measurements. This
Statement does not require any new fair value measurements.
This
Statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. We are required to adopt SFAS No. 157 in the first quarter of
2008, and we are currently evaluating the impact that this Statement will have
on our condensed consolidated financial statements.
In
September 2006, the FASB issued FASB Statement No. 158, “Employers’ Accounting
for Defined Benefit Pension and Other Postretirement Plans – An Amendment of
FASB Statements No. 87, 88, 106, and 132R.” This new standard
requires an employer to: (a) recognize in its statement of financial position
an
asset for a plan’s over-funded status or a liability for a plan’s under-funded
status; (b) measure a plan’s assets and its obligations that determine its
funded status as of the end of the employer’s fiscal year (with limited
exceptions); and (c) recognize changes in the funded status of a defined benefit
postretirement plan in the year in which the changes occur. These
changes will be reported in comprehensive income of a business
entity. The requirement to recognize the funded status of a benefit
plan and the disclosure requirements were effective for us as of December 31,
2006, and as a result we recognized an additional liability of
$803,000. The requirement to measure plan assets and benefit
obligations as of the date of the employer’s fiscal year-end statement of
financial position (the “Measurement Provision”) is effective for fiscal years
ending after December 15, 2008. We have assessed the potential impact
of the Measurement Provision of SFAS No. 158 and concluded that its adoption
will not have a material effect on our condensed consolidated financial
statements.
In
February 2007, the FASB issued Statement No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities.” SFAS No. 159 expands
opportunities to use fair value measurement in financial reporting and permits
entities to choose to measure many financial instruments and certain other
items
at fair value. This Statement is effective for fiscal years beginning
after November 15, 2007. We have not decided if we will choose to
measure any eligible financial assets and liabilities at fair value under the
provisions of SFAS No. 159.
On
August
31, 2007, the FASB authorized a proposed FASB Staff Position (the “proposed
FSP”) that, if issued, would affect the accounting for our convertible and
exchangeable senior debentures. If issued in the form expected, the
proposed FSP would require that the initial debt proceeds from the sale of
our
convertible and exchangeable senior debentures be allocated between a liability
component and an equity component. The resulting debt discount would
be amortized using the effective interest method over the period the debt is
expected to be outstanding as additional interest expense. The
proposed FSP is expected to be effective for fiscal years beginning after
December 15, 2007 and requires retroactive application. Upon the
adoption of the proposed FSP on January 1, 2008, we have estimated the
unamortized debt discount (as of September 30, 2007) to be approximately $35.2
million to be included as a reduction of Debt and approximately $46.3 million
as
Accumulated Additional Paid-In Capital on our condensed consolidated balance
sheet. We have estimated incremental Interest Expense to be
approximately $7.7 million for the first nine months of 2007 and $3.4 million
for the year ended December 31, 2006.