ITEM 1.
BUSINESS
The Company
We are a real estate investment trust, or REIT, that principally owns, manages, acquires and develops neighborhood and community shopping centers. We were organized as a Maryland corporation in 1992, completed our initial public offering in May 1998, and have elected to be taxed as a REIT since 1995.
As of December 31, 2008, our property portfolio comprises 160 properties, including 146 shopping centers consisting of approximately 16.0 million square feet of gross leasable area (“GLA”), four development/redevelopment properties, six non-retail properties and four parcels of land. As of December 31, 2008, our core portfolio was 92.1% leased and included national, regional and local tenants.
In addition, we currently own a 10% interest in GRI-EQY I, LLC (“GRI Venture”), which owns ten neighborhood shopping centers totaling approximately 1.4 million square feet of GLA as of December 31, 2008. The GRI Venture’s properties were 97.3% leased at December 31, 2008. Additionally, we own a 20% interest in G&I VI Investment South Florida Portfolio, LLC (“DRA Venture”) which owns one office building and two neighborhood shopping centers totaling approximately 503,000 square feet of GLA as of December 31, 2008. The DRA Venture’s properties were 67.6% leased at December 31, 2008.
In this annual report, unless stated otherwise or unless the context requires otherwise, references to “we,” “us” or “our” mean Equity One, Inc. and our consolidated subsidiaries.
Strategy and Philosophy
Our principal business objective is to maximize long-term stockholder value by generating sustainable cash flow growth and increasing the long-term value of our real estate assets. Our strategies for reaching this objective include:
·
Operating Strategy: Maximizing the internal growth of revenue from our shopping centers by leasing and re-leasing those properties to a diverse group of creditworthy tenants at higher rental rates and redeveloping those properties to make them more attractive to tenants or to permit additional or better uses;
·
Investment Strategy: Using capital wisely to renovate or redevelop our properties and to acquire and develop additional shopping centers where expected returns meet or exceed our standards as well as by investing in strategic partnerships that minimize risk; and
·
Capital Strategy: Financing our capital requirements with internally generated funds, borrowings under our existing credit facilities, proceeds from selling properties that do not meet our investment criteria and access to institutional capital and debt and equity capital markets.
Operating Strategy. Our core operating strategy is to maximize rents and maintain high occupancy levels by attracting and retaining a strong and diverse base of tenants. Many of our properties are located in some of the most densely populated areas of the country, including the metropolitan areas around Miami, Ft. Lauderdale, West Palm Beach, Tampa, Jacksonville and Orlando, Florida, Atlanta, Georgia, and Boston, Massachusetts. Strong trade-area demographics help our tenants generate high sales, which has enabled us to maintain high occupancy rates and increase rental rates.
In order to effectively achieve our operating strategy, we seek to:
·
actively manage and maintain the high standards and physical appearance of our assets while maintaining competitive tenant occupancy costs;
·
maintain a diverse tenant base in order to limit exposure to any one tenant’s financial condition;
·
develop strong, mutually beneficial relationships with creditworthy tenants, particularly our anchor tenants, by consistently meeting or exceeding their expectations;
·
increase rental rates upon the renewal of expiring leases or as we lease space to new tenants while minimizing vacancy and down-time; and
·
evaluate renovation or redevelopment opportunities that will make our properties more attractive for leasing or re-leasing to tenants, take advantage of under-utilized land or existing square footage, or re-configure properties for better uses.
- 1 -
Investment Strategy. Our investment strategy is to deploy capital in projects that are expected to generate returns that exceed our cost of capital. Our investments primarily fall into one of the following categories:
·
re-developing, renovating, expanding, reconfiguring and/or re-tenanting our existing properties;
·
selectively acquiring shopping centers that will benefit from our active management and leasing strategies;
·
selectively developing new shopping centers to meet the needs of expanding retailers; and
·
investing in strategic partnerships in real estate related ventures where we act as a manager and utilize our expertise.
In the past, we have also made investments in the securities of other companies, whose assets or markets are consistent with our investment strategy. These investment decisions are made in the same manner as other investments by us and are subject to the gross income and asset tests necessary to maintain our REIT qualification.
In evaluating potential redevelopment, acquisition and development opportunities, we also consider such factors as:
·
the expected returns in relation to our cost of capital, as well as the anticipated risks we will face in achieving the expected returns;
·
the current and projected cash flow of the property and the potential to increase that cash flow;
·
the tenant mix at the property, tenant sales performance and the creditworthiness of those tenants;
·
economic, demographic, regulatory and zoning conditions in the property’s local and regional market;
·
competitive conditions in the vicinity of the property, including competition for tenants and the potential that others may create competing properties through redevelopment, new construction or renovation;
·
the level and success of our existing investments in the relevant market;
·
the current market value of the land, buildings and other improvements and the potential for increasing those market values;
·
the physical configuration of the property, its visibility, ease of entry and exit, and availability of parking; and
·
the physical condition of the land, buildings and other improvements, including the structural and environmental conditions.
Capital Strategy. We intend to grow and expand our business by using cash flows from operations, by borrowing under our existing credit facilities, reinvesting proceeds from selling properties that do not meet our investment criteria or, if appropriate market conditions exist, by accessing capital from institutional partners or the capital markets to issue equity, debt or a combination thereof. Our capital strategy is to maintain a strong balance sheet and sufficient flexibility to fund our operating and investment activities in a cost-efficient way. Our strategy includes:
·
maintaining a prudent level of overall leverage and an appropriate pool of unencumbered properties that is sufficient to support our unsecured borrowings;
·
managing our exposure to variable-rate debt;
·
taking advantage of market opportunities to refinance existing debt and manage our debt maturity schedule; and
·
using joint venture arrangements to access less expensive capital, mitigate capital risk, or to capitalize on the expertise of local real estate partners.
While we generally hold our properties for investment and for the production of rental income, we also recycle our capital. Over time, when our assets no longer meet our investment criteria, asset type or geographic focus, we may sell or otherwise dispose of those assets. By identifying these opportunities, we are able to recycle our capital and reinvest the proceeds in more attractive properties or markets.
Change in Policies
Our board of directors establishes the policies that govern our operating, investment and capital strategies, including, among others, the development and acquisition of shopping centers, tenant and market focus, debt and equity financing policies, and quarterly distributions to our stockholders. The board may amend these policies at any time, without a vote of our stockholders.
- 2 -
REIT Status
We elected to be taxed as a real estate investment trust for federal income tax purposes beginning with our taxable year ended December 31, 1995. As a REIT, we are generally not subject to federal income tax on REIT taxable income that we distribute to our stockholders. Under the Internal Revenue Code of 1986, as amended, which we refer to as the Code, REITs are subject to numerous organizational and operational requirements, including the requirement to distribute at least 90% of REIT taxable income (excluding net capital gains) each year. We will be subject to federal income tax on our taxable income (including any applicable alternative minimum tax) at regular corporate rates if we fail to qualify as a REIT for tax purposes in any taxable year, or to the extent we distribute less than 100% of REIT taxable income. We will also not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year during which qualification is lost. Even if we qualify as a REIT for federal income tax purposes, we may be subject to certain state and local income and franchise taxes and to federal income and excise taxes on our undistributed REIT taxable income.
We have elected to treat certain of our subsidiaries as taxable REIT subsidiaries, each of which we refer to as a TRS. In general, a TRS may engage in any real estate business and certain non-real estate businesses, subject to certain limitations under the Code. A TRS is subject to federal and state income taxes. The sales of certain land parcels, our investment in DIM Vastgoed N.V. and certain other real estate and other activities are being conducted through our TRS entities. Our current TRS activities are limited and they have not incurred any significant income taxes to date.
Governmental Regulations Affecting Our Properties
We and our properties are subject to a variety of federal, state and local environmental, health, safety and similar laws, including:
·
the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, which we refer to as CERCLA;
·
the Resource Conservation & Recovery Act;
·
the Federal Clean Water Act;
·
the Federal Clean Air Act;
·
the Toxic Substances Control Act;
·
the Occupational Safety & Health Act; and
·
the Americans with Disabilities Act of 1990 (“ADA”).
Environmental Regulations. The application of these laws to a specific property that we own depends on a variety of property-specific circumstances, including the current and former uses of the property, the building materials used at the property and the physical layout of the property. Under certain environmental laws, principally CERCLA, we, as the owner or operator of properties currently or previously owned, may be required to investigate and clean up certain hazardous or toxic substances, asbestos-containing materials, or petroleum product releases at the property. We may also be held liable to a federal, state or local governmental entity or third parties for property damage, injuries resulting from the contamination and for investigation and clean up costs incurred in connection with the contamination, whether or not we knew of, or were responsible for, the contamination. Such costs or liabilities could exceed the value of the affected real estate. The presence of contamination or the failure to remediate contamination may adversely affect our ability to sell or lease real estate or to borrow using the real estate as collateral. We have several properties that will require or are currently undergoing varying levels of environmental remediation as a result of contamination from on-site uses by current or former owners or tenants, such as gas stations or dry cleaners.
Americans with Disabilities Act. Our properties are subject to the ADA. Under this act, all places of public accommodation are required to comply with federal requirements related to access and use by disabled persons. The act has separate compliance requirements for “public accommodations” and “commercial facilities” that generally require that buildings and services, including restaurants and retail stores, be made accessible and available to people with disabilities. The Act’s requirements could require removal of access barriers and could result in the imposition of injunctive relief, monetary penalties or, in some cases, an award of damages.
- 3 -
Although we believe that we are in substantial compliance with existing regulations, including environmental and ADA regulations, we cannot predict the impact of new or changed laws or regulations on properties we currently own or may acquire in the future. Other than as part of our development or redevelopment projects, we have no current plans for substantial capital expenditures with respect to compliance with environmental, health, safety and similar laws, and we carry environmental insurance which covers a number of environmental risks for most of our properties.
Competition
There are numerous commercial developers, real estate companies, REITs and other owners of real estate in the areas in which our properties are located that compete with us with respect to the leasing of our properties and in seeking land for development or properties for acquisition. Some of these competitors have substantially greater resources than we have, although we do not believe that any single competitor or group of competitors in any of the primary markets where our properties are located are dominant in that market. This level of competition may reduce the number of properties available for development or acquisition, increase the cost of development or acquisition or interfere with our ability to attract and retain tenants.
All of our existing properties are located in developed areas that include other shopping centers and other retail properties. The number of retail properties in a particular area could materially adversely affect our ability to lease vacant space and maintain the rents charged at our existing properties. We believe that the principal competitive factors in attracting tenants in our market areas are location, price, anchor tenants and maintenance of properties. Our retail tenants also face competition from other retailers, outlet stores and discount shopping clubs. This competition could contribute to lease defaults and insolvency of our tenants.
Employees
Our headquarters are located at 1600 N.E. Miami Gardens Drive, North Miami Beach, Florida 33179. At December 31, 2008, we had 159 full-time employees and we believe that our relationships with our employees are good.
Available Information
The internet address of our website is www.equityone.net. In the Investors section of our website you can obtain, free of charge, a copy of our annual report on Form 10-K, our quarterly reports on Form 10-Q, our Supplemental Information Packages, our current reports on Form 8-K, and any amendments to those or other reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after we electronically file or furnish such reports or amendments with the SEC. Also available in the corporate governance section of our website, free of charge, are copies of our Corporate Governance Guidelines, Code of Conduct and Ethics and the charters for our audit committee, compensation committee and nominating and corporate governance committee. We intend to provide any amendments or waivers to our Code of Conduct and Ethics that apply to any of our executive officers or our senior financial officers on our website within four business days following the date of the amendment or waiver. The reference to our website address does not constitute incorporation by reference of the information contained on our website and should not be considered a part of this report.
You may also obtain printed copies of any of the foregoing materials from us, free of charge, by contacting our Investor Relations Department at:
Equity One, Inc.
N.E. Miami Gardens Drive
North Miami Beach, Florida 33179
Attn: Investor Relations Department
(305) 947-1664
You may also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549, or you may obtain information by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet address at http://www.sec.gov that contains reports, proxy statements and information statements, and other information which you may obtain free of charge.
- 4 -
ITEM 1A.
ITEM 1A.
RISK FACTORS
This annual report on Form 10-K and the information incorporated by reference herein contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts are forward-looking statements and can be identified by the use of forward-looking terminology such as “may,” “will,” “might,” “would,” “expect,” “anticipate,” “estimate,” “would,” “could,” “should,” “believe,” “intend,” “project,” “forecast,” “target,” “plan,” or “continue” or the negative of these words or other variations or comparable terminology. Forward-looking statements are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those projected. Some specific risk factors that could impair forward looking statements are set forth below.
These risks factors are not exhaustive. Other sections of this report may include additional factors that could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for us to predict all risk factors, nor can we assess the impact of all risk factors on our business or the extent to which any factor, or combination of factors, may affect our business. Investors should also refer to our quarterly reports on Form 10-Q and current reports on Form 8-K for future periods for updates to these risk factors.
Credit market constraints may affect our ability to refinance maturing debt at a reasonable cost.
As a result of losses incurred by lenders over the last year, the cost of credit has risen throughout the U.S. economy. Institutions that historically financed investment in commercial real estate directly (through bonds, mortgage loans, or bank financing) or indirectly (through purchases of securitized loans) have curtailed the capital they provide REITs and other real estate investors. For example, the issuance of commercial mortgage-backed securities, or CMBS, virtually ceased in 2008. In addition, since May 2008, no REIT has been successful in issuing new unsecured corporate bonds. Credit spreads on secondary trading in previously issued bonds widened out during the year to the highest levels we have observed. Toward the end of 2008, banks withdrew their willingness to extend credit for real estate companies. To the extent bank credit is being extended, loan tenors are shorter, credit spreads are wider, and covenants are more restrictive than in the past. Although traditional mortgage lenders such as life insurance companies remain active in making loans, the loan-to-value ratios they underwrite are more conservative and their loan pricing is higher than in recent years.
How long the credit markets will remain constrained is unclear. As of December 31, 2008, we had approximately $268.6 million of bonds and mortgage debt scheduled to mature in the next two years. If credit constraints persist, we may experience difficulty refinancing these upcoming loan maturities at a reasonable cost or with desired financing alternatives. For example, it may be hard to raise new unsecured financing in the form of additional bank debt or corporate bonds. If we draw under our existing unsecured revolving line of credit to repay maturing debt, our ability to use the line for other uses such as investments will be reduced. If we increase our reliance on mortgage debt, the credit rating agencies that rate our unsecured corporate debt may reduce our investment-grade credit ratings. Alternately, we may need to repay maturing debt with proceeds from the issuance of equity or the sale of assets.
In order to repay $176.1 million of bonds that mature on April 15, 2009, we accumulated as of December 31, 2008 a diversified portfolio of $128.4 million of short-term corporate bonds that mature over the next year. Subsequent to year end, we were repaid $47.8 million, leaving $80.6 million of such investments outstanding. Any drop in the marketability of the remaining bonds we own or any defaults by the issuers may have adverse effects on our liquidity.
The current recession may make it difficult to lease vacant space or space to be vacated in the future.
Our goal is to improve the performance of our properties by re-leasing vacated space. However, in 2008, rapid decreases in consumer confidence and consumer spending led to a deterioration in the businesses of many of our retail tenants and made it difficult to maintain our overall occupancy. While most of our centers are anchored by supermarkets, drug stores or other necessity-oriented retailers, which are less susceptible to economic cycles, other tenants in our centers are impacted by these consumer trends adversely affecting our occupancy and bad debt experience. Our ability to continue to lease or re-lease vacant space in our properties will be affected by these and other factors, including our properties’ locations, current market conditions and covenants found in certain leases restricting the use of other space at our properties. If the economic conditions persist or worsen in 2009, our properties and results of operations could continue to be adversely affected with lower occupancy and higher bad debt expense as tenants fail to pay rent, close their stores or file bankruptcy. Moreover, because many retailers have slowed their growth plans as a result of the prevailing economic climate, demand for retail space has declined, generally reducing the market rental rates for our properties when renewing leases or leasing or re-leasing vacant space.
- 5 -
If we are able to re-lease vacated space, there is no assurance that rental rates will be equal to or in excess of current rental rates. In addition, we may incur substantial costs in obtaining new tenants, including brokerage commission fees paid by us in connection with new leases or lease renewals, and the cost of making leasehold improvements.
We are dependent upon certain key tenants, and decisions made by these tenants or adverse developments in the business of these tenants could have a negative impact on our financial condition.
We own shopping centers which are supported by “anchor” tenants which, due to size, reputation or other factors, are particularly responsible for drawing other tenants and shoppers to our centers. For instance, Publix Super Markets is our largest tenant and accounted for approximately 2.3 million square feet, or approximately 14.4% of our gross leasable area, at December 31, 2008, and approximately $18.1 million, or 10.5%, of our annual minimum rent in 2008.
Given the difficult retail environment predicted for 2009, some of our anchor or other tenants may experience a downturn in their businesses that may weaken their financial condition. As a result, tenants may delay lease commencement, fail to make rental payments when due or declare bankruptcy. In 2008, several of our national tenants filed for bankruptcy protection. We are subject to the risk that these tenants may be unable to make their lease payments or may decline to extend a lease upon its expiration or may reject the lease in bankruptcy. Any tenant bankruptcies, leasing delays or failures to make rental payments when due could result in the termination of the tenant’s lease and material losses to our business and harm to our operating results.
In addition, an anchor tenant may decide that a particular store is unprofitable and close its operations in our center, and, while the tenant may continue to make rental payments, such a failure to occupy its premises could have an adverse effect on the property. A lease termination by an anchor tenant or a failure by that anchor tenant to occupy the premises could result in lease terminations or reductions in rent by other tenants in the same shopping center if their leases have “co-tenancy” clauses which permit cancellation or rent reduction if an anchor tenant’s lease is terminated or the anchor “goes dark.” Vacated anchor tenant space also tends to adversely affect the entire shopping center because of the loss of the departed anchor tenant’s power to draw customers to the center. We cannot provide any assurance that we would be able to quickly re-lease vacant space on favorable terms, if at all. Any of these developments could adversely affect our financial condition or results of operations.
We have substantial debt obligations which may reduce our operating performance and put us at a competitive disadvantage.
As of December 31, 2008, we had debt and other liabilities outstanding in the aggregate amount of approximately $1.1 billion. Many of our loans require scheduled principal amortization. In addition, our organizational documents do not limit the level or amount of debt that we may incur, nor do we have a policy limiting our debt to any particular level. The amount of our debt outstanding from time to time could have important consequences to our stockholders. For example, it could:
·
require us to dedicate a substantial portion of our cash flow from operations to payments on our debt, thereby reducing funds available for operations, property acquisitions, redevelopments and other appropriate business opportunities that may arise in the future;
·
limit our ability to make distributions on our outstanding shares of our common stock, including the payment of dividends required to maintain our status as a REIT;
·
make it difficult to satisfy our debt service requirements;
·
limit our flexibility in planning for, or reacting to, changes in our business and the factors that affect the profitability of our business, which may place us at a disadvantage compared to competitors with less debt or debt with less restrictive terms;
·
limit our ability to obtain any additional debt or equity financing we may need in the future for working capital, debt refinancing, capital expenditures, acquisitions, redevelopment or other general corporate purposes or to obtain such financing on favorable terms; and
·
require us to dedicate increased amounts of our cash flow from operations to payments on our variable rate, unhedged debt if interest rates rise.
If our internally generated cash is inadequate to repay our indebtedness upon maturity, then we will be required to repay debt through refinancing or equity offerings. If we are unable to refinance our indebtedness on acceptable terms, or at all, we might be forced to dispose of one or more of our properties, potentially upon disadvantageous terms, which might result in losses and might adversely affect our cash available for distribution. If prevailing interest rates or other factors at the time of refinancing result in higher interest rates on refinancing, our interest expense would increase without a corresponding increase in our rental rates, which would adversely affect our results of operations. Further, if one of our properties is mortgaged to secure payment of indebtedness and we are unable to meet mortgage payments, or if we are in default under the related mortgage or deed of trust, such property could be transferred to the mortgagee, or the mortgagee could foreclose upon the property, appoint a receiver and receive an assignment of rents and leases or pursue other remedies, all with a consequent loss of income and asset value. Foreclosure could also create taxable income without accompanying cash proceeds, thereby hindering our ability to meet the REIT distribution requirements under the Code.
- 6 -
Our financial covenants may restrict our operating or acquisition activities, which may harm our financial condition and operating results.
Our unsecured revolving credit facility, our outstanding senior unsecured notes and much of our existing mortgage indebtedness contain customary covenants and conditions, including, among others, compliance with various financial ratios and restrictions upon the incurrence of additional indebtedness and liens on our properties. Furthermore, the terms of some of this indebtedness will restrict our ability to consummate transactions that result in a change of control or to otherwise issue equity or debt securities. The existing mortgages also contain customary negative covenants such as those that limit our ability, without the prior consent of the lender, to further mortgage the applicable property or to discontinue insurance coverage. If we were to breach covenants in these debt agreements, the lender could declare a default and require us to repay the debt immediately. If we fail to make such repayment in a timely manner, the lender may be entitled to take possession of any property securing the loan.
Increases in interest rates cause our borrowing costs to rise and generally adversely affect the market price of our securities.
Of our approximately $1.1 billion of debt outstanding as of December 31, 2008, approximately $136.4 million bears interest at variable interest rates, including $100.0 million of fixed rate borrowings that we have converted to floating rate borrowings through the use of hedging agreements. We also may borrow additional funds at variable interest rates in the future. Increases in interest rates would increase our interest expense on our variable rate debt and reduce our future earnings and cash flows, which could adversely affect our ability to service our debt and meet our other obligations and also could reduce the amount we are able to distribute to our stockholders. Although we may in the future enter into hedging arrangements or other transactions as to a portion of our variable rate debt to limit our exposure to rising interest rates, the amounts we are required to pay under the variable rate debt to which the hedging or similar arrangements relate may increase in the event of non-performance by the counterparties to any of our hedging arrangements.
In addition, the market price of our common stock is affected by the annual distribution rate on the shares of our common stock. Increasing market interest rates may lead prospective purchasers of our common stock and other securities to seek alternative investments that offer a higher annual yield which would likely adversely affect the market price of our common stock and other securities. Finally, increases in interest rates may have the effect of depressing the market value of retail properties such as ours, including the value of those properties securing our indebtedness.
Geographic concentration of our properties makes our business vulnerable to economic downturns in certain regions or to other events, like hurricanes, that disproportionately affect those areas.
Approximately 56.5% of our retail property gross leasable area is located in Florida. As a result, economic, real estate and other, general conditions in Florida will significantly affect our revenues and the value of our properties. Business layoffs or downsizing, industry slowdowns, declines in real estate values, reduced migration to Florida, changing demographics, increases in insurance costs and real estate taxes and other factors may adversely affect the economic climate in Florida. Any resulting oversupply or reduced demand for retail properties in Florida would adversely affect our operating performance and limit our ability to make distributions to stockholders.
In addition, a significant portion of our retail property gross leasable area is located in coastal areas that are susceptible to the harmful effects of tropical storms, hurricanes and other similar natural disasters. As of December 31, 2008, over 60.9% of the total insured value of our portfolio is located in the State of Florida. In 2005, our properties experienced damage from a total of seven named hurricanes or tropical storms with not all of the storm damages fully insured. While some of these uninsured expenses are recoverable from our tenants, not all of the leases have provisions permitting reimbursement, and, therefore, we must pay the remaining amounts. Moreover, with the increased hurricane activity, the cost of property insurance has risen dramatically. While much of the cost of this insurance is passed on to our tenants as reimbursable property costs, some tenants, particularly national tenants, do not pay a pro rata share of these costs under their leases. Hurricanes and similar storms also disrupt our business and the business of our tenants, which could affect the ability of some tenants to pay rent and may affect the willingness of residents to remain in or move to the affected area. Therefore, as a result of the geographic concentration of our properties, we face demonstrable risks, including higher costs, such as uninsured property losses and higher insurance premiums, and disruptions to our business and the businesses of our tenants.
Our insurance coverage on our properties may be inadequate therefore increasing the risks to our business.
We currently carry comprehensive insurance on all of our properties, including insurance for liability, fire, flood, rental loss and acts of terrorism. We also currently carry environmental insurance on most of our properties. All of these policies contain coverage limitations. We believe these coverages are of the types and amounts customarily obtained for or by an owner of similar types of real property assets located in the areas where our properties are located. We intend to obtain similar insurance coverage on subsequently acquired properties.
- 7 -
The availability of insurance coverage may decrease and the prices for insurance may increase as a consequence of significant losses incurred by the insurance industry. For instance, given the issues facing financial firms in general, including insurance companies, and following the hurricane and other property loss activity in recent years, property insurance costs across our portfolio have increased. In the event of future industry losses, we may be unable to renew or duplicate our current insurance coverage in adequate amounts or at reasonable prices. In addition, insurance companies may no longer offer coverage against certain types of losses, such as losses from named wind storms or due to terrorist acts and toxic mold, or, if offered, the expense of obtaining these types of insurance may not be justified. We, therefore, may cease to have insurance coverage against certain types of losses and/or there may be decreases in the limits of insurance available.
If an uninsured loss or a loss in excess of our insured limits occurs, we could lose all or a portion of the capital we have invested in a property, as well as the anticipated future revenue from the property, but still remain obligated for any mortgage debt or other financial obligations related to the property. We cannot guarantee that material losses in excess of insurance proceeds will not occur in the future. If any of our properties were to experience a catastrophic loss, it could disrupt our operations, delay revenue and result in large expenses to repair or rebuild the property. Also, due to inflation, changes in codes and ordinances, environmental considerations and other factors, it may not be feasible to use insurance proceeds to replace a building after it has been damaged or destroyed or the proceeds could be insufficient. Events such as these could adversely affect our results of operations and our ability to meet our obligations, including distributions to our stockholders.
We may be unable to sell properties when appropriate because real estate investments are illiquid.
Real estate investments generally cannot be sold quickly. Also, there are limitations under federal income tax laws applicable to real estate and to REITs in particular that may limit our ability to sell our assets. We may not be able to alter our portfolio promptly in response to changes in economic or other conditions. Our inability to respond quickly to changes in the performance of our investments could adversely affect our ability to meet our obligations and make distributions to our stockholders.
The federal income tax provisions applicable to REITs provide that any gain realized by a REIT on the sale of property held as inventory or other property held primarily for sale to customers in the ordinary course of business is treated as income from a “prohibited transaction” that is subject to a 100% penalty tax. Under current law, unless a sale of real property qualifies for a safe harbor, the question of whether the sale of a property constitutes the sale of property held primarily for sale to customers is generally a question of the facts and circumstances regarding a particular transaction. We intend to hold our properties for investment with a view to long-term appreciation, to engage in the business of acquiring and owning properties and to make occasional sales as are consistent with our investment objectives. We do not intend to engage in prohibited transactions. We cannot assure you, however, that we will only make sales that satisfy the requirements of the safe harbors or that the IRS will not successfully assert that one or more of our sales are prohibited transactions.
Our development and redevelopment activities are inherently risky and may not yield anticipated returns, which would harm our operating results and reduce funds available for distributions to stockholders.
An important component of our growth strategy is the redevelopment of properties within our portfolio and the development of new shopping centers. At December 31, 2008, we had invested an aggregate of approximately $55.0 million in these development or redevelopment projects at various stages of completion and anticipate that these projects will require an additional $11.7 million to complete, based on our current plans and estimates. These developments and redevelopments may not be as successful as currently expected. Expansion, renovation and development projects entail the following considerable risks:
·
significant time lag between commencement and completion subjects us to greater risks due to fluctuation in the general economy;
·
failure or inability to obtain construction or permanent financing on favorable terms;
·
expenditure of money and time on projects that may never be completed;
·
inability to achieve projected rental rates or anticipated pace of lease-up;
·
higher-than-estimated construction costs, including labor and material costs; and
·
possible delay in completion of the project because of a number of factors, including weather, labor disruptions, construction delays or delays in receipt of zoning or other regulatory approvals, or man-made or natural disasters (such as fires, hurricanes, earthquakes or floods).
- 8 -
While our policies with respect to expansion, renovation and development activities are intended to limit some of the risks otherwise associated with such activities, such as initiating construction only after securing commitments from anchor tenants, we will nevertheless be subject to risks that the construction costs of a property, due to factors such as cost overruns, design changes and timing delays arising from a lack of availability of materials and labor, weather conditions and other factors outside of our control, as well as financing costs, may exceed original estimates, possibly making the associated investment unprofitable. Significant changes in economic condition could adversely affect prospective tenants and our ability to lease newly developed and redeveloped properties. Any substantial unanticipated delays or expenses could adversely affect the investment returns from these redevelopment projects and harm our operating results.
Future acquisitions may not yield the returns expected, may result in disruptions to our business, may strain management resources and may result in stockholder dilution.
Our investing strategy and our market selection process may not ultimately be successful and may not provide positive returns on our investment. The acquisition of properties or portfolios of properties entails risks that include the following, any of which could adversely affect our results of operations and our ability to meet our obligations:
·
we may not be able to identify suitable properties to acquire or may be unable to complete the acquisition of the properties we identify;
·
we may not be able to integrate any acquisitions into our existing operations successfully;
·
properties we acquire may fail to achieve within the time frames we project the occupancy or rental rates we project at the time we make the decision to acquire, which may result in the properties’ failure to achieve the returns we projected;
·
our pre-acquisition evaluation of the physical condition of each new investment may not detect certain defects or identify necessary repairs, which could significantly increase our total acquisition costs; and
·
our investigation of a property or building prior to our acquisition, and any representations we may receive from the seller of such building or property, may fail to reveal various liabilities, which could reduce the cash flow from the property or increase our acquisition cost.
If we acquire a business, we will be required to integrate the operations, personnel and accounting and information systems of the acquired business and train, retain and motivate any key personnel from the acquired business. In addition, acquisitions of or investments in companies may cause disruptions in our operations and divert management’s attention away from day-to-day operations, which could impair our relationships with our current tenants and employees. The issuance of equity or debt securities in connection with any acquisition or investment could be substantially dilutive to our stockholders.
Our ability to grow will be limited if we cannot obtain additional capital.
Our growth strategy is focused on the redevelopment of properties we already own and the acquisition and development of additional properties. We believe that it will be difficult to fund our expected growth with cash from operating activities because, in addition to other requirements, we are required to distribute to our stockholders at least 90% of our REIT taxable income (excluding net capital gains) each year to continue to qualify as a REIT for federal income tax purposes. As a result, we must rely primarily upon the availability of debt or equity capital, which may or may not be available on favorable terms or at all. The debt could include mortgage loans from third parties or the sale of debt securities. Equity capital could include shares of our common stock or preferred stock. We cannot guarantee that additional financing, refinancing or other capital will be available in the amounts we desire or on favorable terms. Our access to debt or equity capital depends on a number of factors, including the general availability of credit in the capital markets, the market’s perception of our growth potential, our ability to pay dividends, our financial condition, our credit rating and our current and potential future earnings. Depending on the outcome of these factors, we could experience delay or difficulty in implementing our growth strategy on satisfactory terms, or we may be unable to implement this strategy at all.
Competition for the acquisition of assets and the leasing of properties may impede our ability to make, or may increase the cost of, these acquisitions and may impair our future income.
Numerous commercial developers and real estate companies compete with us in seeking tenants for our existing properties and properties for acquisition. This competition may:
·
reduce properties available for acquisition;
·
increase the cost of properties available for acquisition;
·
reduce the rate of return on these properties;
- 9 -
·
reduce rents payable to us;
·
interfere with our ability to attract and retain tenants;
·
lead to increased vacancy rates at our properties; and
·
adversely affect our ability to minimize expenses of operation.
In addition, tenants and potential acquisition targets may find competitors to be more attractive because they may have greater resources, broader geographic diversity, may be willing to pay more or offer greater lease incentives or may have a more compatible operating philosophy. In particular, larger REITs may enjoy significant competitive advantages that result from, among other things, a lower cost of capital and enhanced operating efficiencies. These competitive factors may adversely affect our profitability, and our stockholders may experience a lower return on their investment.
We may be subjected to liability for environmental contamination which might have a material adverse impact on our financial condition and results of operations.
As an owner and operator of real estate and real estate-related facilities, we may be liable for the costs of removal or remediation of hazardous or toxic substances present at, on, under, in or released from our properties, as well as for governmental fines and damages for injuries to persons and property. We may be liable without regard to whether we knew of, or were responsible for, the environmental contamination and with respect to properties we have acquired, whether the contamination occurred before or after the acquisition. We have several properties in our portfolio that will require or are currently undergoing varying levels of environmental remediation. The presence of contamination or the failure to properly remediate contamination at any of our properties may adversely affect our ability to sell or lease those properties or to borrow funds by using those properties as collateral. The costs or liabilities could exceed the value of the affected real estate. Although we have environmental insurance policies covering most of our properties, there is no assurance that these policies will cover any or all of the potential losses or damages from environmental contamination; therefore, any liability, fine or damage could directly impact our financial results.
We may experience adverse consequences in the event we fail to qualify as a REIT.
Although we believe that we are organized and have operated so as to qualify as a REIT under the Internal Revenue Code since our REIT election in 1995, no assurance can be given that we have qualified or will remain so qualified. In addition, no assurance can be given that new legislation, regulations, administrative interpretations or court decisions will not significantly change the tax laws with respect to qualification as a REIT or the federal income tax consequences of such qualification.
Qualification as a REIT involves the application of highly technical and complex provisions of the Internal Revenue Code for which not infrequently there are only limited judicial and administrative interpretations. These provisions include requirements concerning, among other things, the ownership of our outstanding common stock, the nature of our assets, the nature and sources of our income, and the amount of our distributions to our stockholders. The determination of various factual matters and circumstances not entirely within our control may affect our ability to qualify as a REIT. For example, in order to qualify as a REIT, at least 95% of our gross income in any year must be derived from qualifying sources. Satisfying this requirement could be difficult, for example, if defaults by tenants were to reduce the amount of income from qualifying rents. In addition, we must make distributions to stockholders aggregating annually at least 90% of our REIT taxable income, excluding net capital gains. Under new procedures adopted in 2008 and 2009, REITs are permitted to pay the distributions required to qualify as a REIT under the Code in their own stock, rather than cash, subject to certain limitations. To the extent we satisfy the 90% distribution requirement, but distribute less than 100% of our taxable income, we will be subject to federal corporate income tax on our undistributed income. In addition, we will incur a 4% nondeductible excise tax on the amount, if any, by which our distributions (or deemed distributions) in any year are less than the sum of 85% of our ordinary income for that year, 95% of our capital gain net earnings for that year and 100% of our undistributed taxable income from prior years. We intend to make distributions to our stockholders to comply with the distribution provisions of the Internal Revenue Code. Although we anticipate that our cash flows from operating activities will be sufficient to enable us to pay our operating expenses and meet distribution requirements, no assurance can be given in this regard. We may be required to borrow money or sell assets to distribute enough of our taxable income to satisfy the distribution requirement and to avoid corporate income tax.
If we fail to qualify as a REIT:
·
we would not be allowed a deduction for distributions to stockholders in computing taxable income, and therefore our taxable income or alternative minimum taxable income so computed would be fully subject to the regular federal income tax or the federal alternative minimum tax;
·
unless we are entitled to relief under specific statutory provisions, we could not elect to be taxed as a REIT again for the four taxable years following the year during which we were disqualified;
- 10 -
·
we could be required to pay significant income taxes, which would substantially reduce the funds available for investment or for distribution to our stockholders for each year in which we failed or were not permitted to qualify; and
·
the tax laws would no longer require us to pay any distributions to our stockholders.
We are subject to other tax liabilities.
Even if we qualify as a REIT, we are subject to some federal, state and local taxes on our income and property that could reduce operating cash flow. For example, we will pay tax on certain types of income that are not distributed, and will be subject to a 100% excise tax on transactions with a TRS that are not conducted on an arms-length basis. In addition, our TRSs are subject to foreign, federal, state and local taxes.
Our Chairman of the Board and his affiliates are beneficial owners of approximately 57.1% of our common stock and exercise significant control over our company and may delay, defer or prevent us from taking actions that would be beneficial to our other stockholders.
Chaim Katzman, the chairman of our board of directors and our largest stockholder, and his affiliates beneficially own approximately 57.1% of the outstanding shares of our common stock and, as a result of a stockholders’ agreement with other of our stockholders, have voting power over almost 63.8% of our outstanding shares with respect to the election of directors. Accordingly, Mr. Katzman is able to exercise significant control over the outcome of substantially all matters required to be submitted to our stockholders for approval, including decisions relating to the election of our board of directors and the determination of our day-to-day corporate and management policies. In addition, Mr. Katzman is able to exercise significant control over the outcome of any proposed merger or consolidation of our company which, under our charter, requires the affirmative vote of the holders of a majority of the outstanding shares of our common stock. Mr. Katzman’s ownership interest in our company may discourage third parties from seeking to acquire control of our company which may adversely affect the market price of our common stock.
Several of our controlling stockholders have pledged their shares of our stock as collateral under bank loans, foreclosure and disposition of which could have a negative impact on our stock price.
Several of our affiliated stockholders that beneficially own a significant interest in our company, including Gazit-Globe, Ltd. and related entities, have pledged a substantial portion of our stock that they own to secure loans made to them by commercial banks.
If a stockholder defaults on any of its obligations under these pledge agreements or the related loan documents, these banks may have the right to sell the pledged shares in one or more public or private sales that could cause our stock price to decline. Many of the occurrences that could result in a foreclosure of the pledged shares are out of our control and are unrelated to our operations. Some of the occurrences that may constitute such an event of default include:
·
the stockholder’s failure to make a payment of principal or interest when due;
·
a reduction in the dividend we pay on our common stock;
·
the occurrence of another default that would entitle any of the stockholder’s other creditors to accelerate payment of any debts and obligations owed to them by the stockholder;
·
if the bank, in its absolute discretion, deems that a change has occurred in the condition of the stockholder to which the bank has not given its prior written consent; and
·
if, in the opinion of the bank, the value of the pledged shares shall be reduced or is likely to be reduced (for example, the price of our common stock declines).
In addition, because so many shares are pledged to secure loans, the occurrence of an event of default could result in a sale of pledged shares that would trigger a change of control of our company, even when such a change may not be in the best interests of our stockholders or may violate covenants of certain loan agreements.
To maintain our status as a REIT, we limit the amount of shares any one stockholder can own.
The Internal Revenue Code imposes certain limitations on the ownership of the stock of a REIT. For example, not more than 50% in value of our outstanding shares of capital stock may be owned, actually or constructively, by five or fewer individuals (as defined in the Code). To protect our REIT status, our charter prohibits any one stockholder from owning (actually or constructively) more than 9.9% in value of the outstanding shares of common stock or of any class or series of outstanding preferred stock. The constructive ownership rules are complex. Shares of our capital stock owned, actually or constructively, by a group of related individuals and/or entities may be treated as constructively owned by one of those individuals or entities. As a result, the acquisition of less than 9.9% in value of the outstanding common stock and/or a class or series of preferred stock (or the acquisition of an interest in an entity that owns common stock or preferred stock) by an individual or entity could cause that individual or entity (or another) to own constructively more than 9.9% in value of the outstanding stock. If that happened, either the transfer or ownership would be void or the shares would be transferred to a charitable trust and then sold to someone who can own those shares without violating the 9.9% ownership limit. Our board of directors may waive these restrictions on a case-by-case basis, and it has in the past done so, including for the affiliates of Chaim Katzman, our chairman of the board. The 9.9% ownership restrictions may delay, defer or prevent a transaction or a change of control that might involve a premium price for our common stock or otherwise be in the stockholders’ best interest.
- 11 -
We cannot assure you we will continue to pay dividends at historical rates.
Our ability to continue to pay dividends on our common stock at historical rates or to increase our common stock dividend rate will depend on a number of factors, including, among others, the following:
·
our financial condition and results of future operations;
·
the performance of lease terms by tenants;
·
the terms of our loan covenants; and
·
our ability to acquire, finance, develop or redevelop and lease additional properties at attractive rates.
If we do not maintain or increase the dividend rate on our common stock, there could be an adverse effect on the market price of our common stock and debt securities. Conversely, the payment of dividends on our common stock may be subject to payment in full of the interest on debt we may owe.
Under newly adopted procedures of the Internal Revenue Service, REITs are permitted to pay the distributions required to qualify as a REIT under the Code in common stock for two years ended December 31, 2009 . If we were to pay all or a portion of our dividends in stock, there could be an adverse effect on the market price of our common stock.
Our organizational documents contain provisions which may discourage the takeover of our company, may make removal of our management more difficult and may depress our stock price.
Our organizational documents contain provisions that may have an anti-takeover effect and inhibit a change in our management. As a result, these provisions could prevent our stockholders from receiving a premium for their shares of common stock above the prevailing market prices. These provisions include:
·
the REIT ownership limit described above;
·
the ability to issue preferred stock with the powers, preferences or rights determined by our board of directors;
·
special meetings of our stockholders may be called only by the chairman of the board, the chief executive officer, the president or by the board of directors;
·
advance notice requirements for stockholder proposals;
·
the absence of cumulative voting rights; and
·
provisions relating to the removal of incumbent directors.
Finally, Maryland law also contains several statutes that restrict mergers and other business combinations with an interested stockholder or that may otherwise have the effect of preventing or delaying a change of control.
Changes in taxation of corporate dividends may adversely affect the value of our common stock.
The maximum marginal rate of tax payable by a domestic non-corporate taxpayer on a dividend received from a regular “C” corporation in a taxable year beginning before January 1, 2011 is 15%, as opposed to the marginal tax rates up to 35% that apply to ordinary income. The reduced tax rate, however, does not apply to dividends paid to domestic non-corporate taxpayers by a REIT, except for certain limited amounts. Although the distributed earnings of a REIT are generally subject to less total federal income tax than are the distributed earnings of a non-REIT “C” corporation which are distributed to stockholders net of corporate-level income tax, domestic non-corporate investors could view the stock of regular “C” corporations as more attractive relative to the stock of a REIT because the dividends from regular “C” corporations are taxed at a lower stated tax rate while distributions from REITs (other than distributions designated as capital gain dividends or returns of capital or the limited amounts of dividends that qualify for the 15% rate) are generally taxed at the same rate as the individual’s other ordinary income. That result could continue to be the case if legislation were to extend the 15% tax rate to taxable years starting after December 31, 2010. No legislation, however, is currently pending in Congress to extend the 15% tax rate on dividends.
- 12 -
Foreign stockholders may be subject to U.S. federal income tax on gain recognized on a disposition of our common stock if we do not qualify as a “domestically controlled” REIT.
A foreign person disposing of a U.S. real property interest, including shares of a U.S. corporation whose assets consist principally of U.S. real property interests, is generally subject to U.S. federal income tax on any gain recognized on the disposition. This tax does not apply, however, to the disposition of stock in a REIT if the REIT is “domestically controlled.” A REIT is domestically controlled if at all times during a specified testing period less than 50% in value of its stock was held directly or indirectly by non-U.S. persons. We cannot assure our stockholders that we will qualify as a domestically controlled REIT. If we were to fail to so qualify, gain recognized by a foreign stockholder on a disposition of our common stock would be subject to U.S. federal income tax unless our common stock was traded on an established securities market and the foreign stockholder did not at any time during a specified testing period directly or indirectly own more than 5% of our outstanding common stock.
ITEM 1B.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
- 13 -
ITEM 2.
ITEM 2.
PROPERTIES
Our portfolio consists primarily of grocery-anchored shopping centers and, at December 31, 2008, contained an aggregate of approximately 16.4 million square feet of gross leasable area, or GLA. Other than our leasehold interests in McAlpin Square shopping center located in Savannah, Georgia, Plaza Acadienne shopping center located in Eunice, Louisiana, and El Novillo shopping center located in Miami, Florida, all of our properties are owned in fee simple. In addition, some of our properties are subject to mortgages as described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Mortgage Indebtedness.”
The following table provides a brief description of our properties as of December 31, 2008:
- 14 -
- 15 -
- 16 -
- 17 -
- 18 -
Most of our leases provide for the monthly payment in advance of fixed minimum rentals, the tenants’ pro rata share of ad valorem taxes, insurance (including fire and extended coverage, rent insurance and liability insurance) and common area maintenance for the property. They may also provide for the payment of additional rentals based on a percentage of the tenants’ sales. Utilities are generally paid directly by tenants except where common metering exists with respect to a property. In this case, we make the payments for the utilities and are reimbursed by the tenants on a monthly basis. Generally, our leases prohibit the tenant from assigning or subletting its space. They also require the tenant to use its space for the purpose designated in its lease agreement and to operate its business on a continuous basis. Some of the lease agreements with major or national or regional tenants contain modifications of these basic provisions in view of the financial condition, stability or desirability of those tenants. Where a tenant is granted the right to assign its space, the lease agreement generally provides that the original lessee will remain liable for the payment of the lease obligations under that lease agreement.
- 19 -
Major Tenants
The following table sets forth as of December 31, 2008 the gross leasable area, or GLA, of our existing properties leased to tenants in our core shopping center portfolio:
(1) We define anchor tenants as tenants occupying a space consisting of 10,000 square feet or more of GLA.
The following table sets forth as of December 31, 2008 the annual minimum rent at expiration attributable to tenants in our core shopping center portfolio:
The following table sets forth as of December 31, 2008 information regarding leases with the ten largest tenants in our core shopping center portfolio:
- 20 -
Lease Expirations
The following tables sets forth as of December 31, 2008 the anticipated expirations of tenant leases in our core shopping center portfolio for each year from 2009 through 2017 and thereafter:
- 21 -
We may incur substantial expenditures in connection with the re-leasing of our retail space, principally in the form of landlord work, tenant improvements and leasing commissions. The amounts of these expenditures can vary significantly, depending on negotiations with tenants and the willingness of tenants to pay higher base rents over the terms of the leases. We also incur expenditures for certain recurring or periodic capital expenses required to keep our properties competitive.
Insurance
Our tenants are generally responsible under their leases for providing adequate insurance on the spaces they lease. We believe that our properties are covered by adequate liability, property, flood and environmental, and where necessary, hurricane and windstorm insurance coverage all provided by reputable companies. However, most of our insurance policies contain deductible or self-retention provisions requiring us to share some of any resulting losses. In addition, most all of our policies contain limits beyond which we have no coverage.
ITEM 3.
ITEM 3.
LEGAL PROCEEDINGS
Neither we nor our properties are subject to any litigation which we believe will have a material adverse affect on our business, financial condition, results of operations or cash flows. Furthermore, to the best of our knowledge, there is no litigation threatened against us or any of our properties, other than routine litigation and administrative proceedings arising in the ordinary course of business, which collectively are not expected to have a material adverse effect on our business, financial condition, results of operations or cash flows.
ITEM 4.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted for stockholder vote during the fourth quarter of 2008.
- 22 -
PART II
ITEM 5.
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information and Dividends
Our common stock began trading on the New York Stock Exchange, or NYSE, on May 18, 1998, under the symbol “EQY.” On February 16, 2009, we had 1,526 stockholders of record representing 13,757 beneficial owners. The following table sets forth for the periods indicated the high and low sale prices as reported by the NYSE and the distributions declared by us:
Dividends paid during 2008 and 2007 totaled $89.6 million and $88.6 million, respectively. Future declarations of dividends will be made at the discretion of our board of directors and will depend upon our earnings, financial condition and such other factors as our board of directors deems relevant. In order to qualify for the beneficial tax treatment accorded to real estate investment trusts under the Internal Revenue Code of 1986, or the Code, we are currently required to make distributions to holders of our shares in an amount equal to at least 90% of our “real estate investment trust taxable income,” as defined in Section 857 of the Code.
Performance Graph
The following graph compares the cumulative total return of our common stock with the Russell 2000 Index, the NAREIT All Equity Index and SNL Shopping Center REITs, an index of approximately 20 publicly-traded REITS that primarily own and operate shopping centers, each as provided by SNL Securities L.C., from December 31, 2003 until December 31, 2008. The SNL Shopping Center REIT index is compiled by SNL Securities L.C. and includes our common stock and securities of many of our competitors. The graph assumes that $100 was invested on December 31, 2003 in our common stock, the Russell 2000 Index, the NAREIT All Equity REIT Index and SNL Shopping Center REITs, and that all dividends were reinvested. The lines represent semi-annual index levels derived from compounded daily returns. The indices are re-weighted daily, using the market capitalization on the previous tracking day. If the semi-annual interval is not a trading day, the preceding trading day is used.
The performance graph shall not be deemed incorporated by reference by any general statement incorporating by reference this annual report into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934 except to the extent we specifically incorporate this information by reference, and shall not otherwise be deemed filed under such acts.
- 23 -
Issuer Purchases Of Equity Securities
No equity securities were purchased by us during 2008.
Equity Compensation Plan Information
Information regarding equity compensation plans is presented in Item 12 of this annual report and incorporated herein by reference.
- 24 -
ITEM 6.
ITEM 6.
SELECTED FINANCIAL DATA
The following table includes selected consolidated financial data set forth as of and for each of the five years in the period ended December 31, 2008. The balance sheet data at December 31, 2008 and 2007, and the statement of operations data for the years ended December 31, 2008, 2007 and 2006, have been derived from the Consolidated Financial Statements included in this Form 10-K. This selected financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our Consolidated Financial Statements and the related notes included in Items 7 and 8, respectively, of this Form 10-K.
(1)
Reclassified to reflect the reporting of discontinued operations.
(2)
Amounts have been reclassified to conform to the 2008 presentation.
(3)
We believe Funds from Operations (“FFO”) (when combined with the primary GAAP presentations) is a useful supplemental measure of our operating performance that is a recognized metric used extensively by the real estate industry and, in particular, REITs. The National Association of Real Estate Investment Trusts (“NAREIT”) stated in its April 2002 White Paper on Funds from Operations, “Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminish predictably over time. Since real estate values instead have historically risen or fallen with market conditions, many industry investors have considered presentations of operating results for real estate companies that use historical cost accounting to be insufficient by themselves.”
- 25 -
FFO, as defined by NAREIT, is “net income (computed in accordance with GAAP), excluding gains (or losses) from sales of depreciable real property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures”. It states further that “adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect funds from operations on the same basis.” We believe that financial analysts, investors and stockholders are better served by the clearer presentation of comparable period operating results generated from our FFO measure. Our method of calculating FFO may be different from methods used by other REITs and, accordingly, may not be comparable to such other REITs.
FFO is presented to assist investors in analyzing our operating performance. FFO (i) does not represent cash flow from operations as defined by GAAP, (ii) is not indicative of cash available to fund all cash flow needs, including the ability to make distributions, (iii) is not an alternative to cash flow as a measure of liquidity, and (iv) should not be considered as an alternative to net income (which is determined in accordance with GAAP) for purposes of evaluating our operating performance.
The following table illustrates the calculation of FFO for each of the five years in the period ended December 31, 2008:
The following table reflects the reconciliation of FFO per diluted share to earnings per diluted share, the most directly comparable GAAP measure, for the periods presented:
*
Earnings per diluted share reflect the add-back of interest on convertible partnership units and the minority interests in earnings of consolidated subsidiaries which are convertible to shares of our common stock.
- 26 -
ITEM 7.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following should be read in conjunction with our consolidated financial statements, including the notes thereto, appearing in “Item 8. Financial Statements and Supplementary Data” of this annual report.
Overview
We are a real estate investment trust, or REIT, that principally owns, manages, acquires and develops neighborhood and community shopping centers. We were organized as a Maryland corporation in 1992, completed our initial public offering in May 1998, and have elected to be taxed as a REIT since 1995. Our primary objective is to maximize stockholder value by generating sustainable cash flow growth and increasing the value of our real estate assets. To achieve our objective, we lease and manage our shopping centers primarily with experienced, in-house personnel. We acquire neighborhood or community shopping centers that either have leading anchor tenants or contain a mix of tenants which reflect the shopping needs of the communities they serve. We also develop and redevelop shopping centers on a tenant-driven basis, leveraging either existing tenant relationships or geographic and demographic knowledge while seeking to minimize risks associated with land development.
As of December 31, 2008, our property portfolio comprises 160 properties, including 146 shopping centers consisting of approximately 16.0 million square feet of gross leasable area (“GLA”), four development/redevelopment properties, six non-retail properties and four parcels of land. As of December 31, 2008, our core portfolio was 92.1% leased and included national, regional and local tenants. We currently own a 10% interest in GRI-EQY I, LLC, a joint venture which owns ten neighborhood shopping centers totaling approximately 1.4 million square feet of GLA as of December 31, 2008. In total, the GRI joint venture’s properties were 97.3% leased at December 31, 2008. Additionally, we own a 20% interest in G&I VI Investment South Florida Portfolio, LLC, a joint venture which owns one office building and two neighborhood shopping centers totaling approximately 503,000 square feet of GLA as of December 31, 2008. In total, this venture’s properties were 67.6% leased at December 31, 2008.
During 2008, our business felt the effects of the softening economic environment and extended turmoil in the U.S credit markets. Buyers and sellers of real estate assets have faced a constrained financial market that has made completing transactions more difficult. A consumer-led economic slowdown has had a meaningful impact on most retailers, causing some companies, both national and local, to cease operations or declare bankruptcy. While the economic conditions have had an effect in most of our markets, certain markets, such as South Florida, have experienced a disproportionate economic slowdown due to housing price declines and other regional factors. Due to these difficult conditions, our development program has slowed and is focusing on higher return projects with the least amount of capital requirements. Management responded to the prevailing market conditions and lower levels of development and acquisition activity by reducing our workforce by 10% during the three months ended December 31, 2008.
These macro-trends have made it more difficult for us to achieve our objectives of growing our business through internal rent increases, re-cycling capital from lower-tier assets into higher quality properties, and growing our asset management business. As an example, lower occupancy resulting from tenants ceasing operations has had an impact on our rental revenue and expense recoveries, thereby negatively affecting our year over year operating results.
Operating Strategies. We derive substantially all of our revenue from tenants under existing leases at our properties. Due to the difficult leasing environment in 2008, our operating strategy centered on maximizing occupancy while continuing to increase rents. In 2008, this strategy resulted in:
·
an increase in the average rental rate of 8.9% to $17.28 per square foot on 349 lease renewals aggregating approximately 757,522 square feet;
·
additional new leases totaling 496,552 square feet at an average rental rate of $17.27 per square foot on same site basis; and
·
a decrease in economic occupancy for our core shopping center portfolio of 1.10% as compared to 2007.
In the long-term, our operating revenues are dependent on the continued occupancy of our properties, the rents that we are able to charge to our tenants and the ability of these tenants to make their rental payments. The main long-term threat to our business is our dependence on the viability of our anchor and other tenants. We believe, however, that our general operating risks are mitigated by concentrating on high-density neighborhoods in major metropolitan areas, leasing to strong tenants in the markets in which we own properties and maintaining a diverse tenant mix.
- 27 -
Investment Strategies. Our investment strategy is to deploy capital in projects that generate attractive, risk-adjusted returns and, at the same time, to sell assets that no longer meet our investment criteria. In 2008, this strategy resulted in:
·
the sale of nine community shopping center properties and one out parcel to the GRI joint venture for an aggregate gross sales price of $201.2 million which generated an aggregate gain of approximately $21.6 million;
·
the sale of one community shopping center located in Carrollton, Texas for a consideration of $2.8 million resulting in a loss of $557,000;
·
the purchase of short-term debt securities for an aggregate purchase price of approximately $132.7 million;
·
the completion of one redevelopment project for approximately $4.2 million located in North Carolina; and
·
the investment in two new joint ventures, including GRI, owning commercial and retail properties totaling $14.2 million.
Capital Strategy. Our business during 2008 was financed using our revolving lines of credit, proceeds from the sale of properties to joint ventures and third parties, the issuance of equity and new mortgages. Specifically, in 2008, our capital strategy resulted in:
·
the acquisition of approximately $88.0 million principal amount of our senior notes, at a discount, resulting in a net gain on early extinguishment of debt of approximately $6.4 million;
·
the issuance of $54.7 million in equity;
·
the prepayment of $36.9 million of certain mortgage notes;
·
the completion of a $65.0 million loan transaction secured by a mortgage on one of our larger properties; and
·
the amendment and restatement of our credit agreement with a syndicate of banks to provide for a $227.0 million unsecured revolving credit facility, maturing October 2011, that replaced a facility that would have expired in January 2009.
At December 31, 2008, the outstanding balances on our lines of credit aggregated $35.5 million, with $193.7 million of availability under those facilities subject to covenants that may restrict our use of additional borrowings. Although we have enjoyed a low interest rate environment and open access to capital markets in recent years, a tightening of the credit markets has had an adverse effect on the availability of capital and the cost of our borrowings. At this time, it is very difficult to project the extent to which credit will be available at a reasonable cost for our business.
2009 Outlook. We expect the current recession to continue to affect our business in 2009. Decreases in retail sales are straining many of our tenants, particularly those tenants that sell goods or provide services that tend to be more discretionary than necessity-oriented in nature. As a result, some tenants may no longer be able to afford their current rent or may not be able to continue in business at all. We anticipate addressing these challenges by undertaking intensive leasing efforts, negotiating reductions in certain recoverable expenses from our vendors, and making case-by-case assessments regarding the financial and operating strength of our tenants. We believe that the fact that 72.6% of our centers are grocery-anchored serves as a competitive advantage because supermarket sales have not been as affected as the sales of many other classes of retailers, and our supermarkets continue to draw traffic to these centers.
We also expect current credit market constraints to limit our debt financing options compared to the options available to us in recent years. While availability under our existing unsecured revolving line of credit provides sufficient capital to address our near-term debt maturities, our ability to raise new capital at an attractive cost through the issuance of debt and equity securities, the placement of mortgage financings, or the sale of assets will determine our capacity to invest in a manner that provides growing returns for our shareholders.
As a result of credit constraints and less retailer demand for new stores, our acquisition and development activities have slowed. In the fourth quarter of 2008, we implemented a reduction in workforce to streamline our organization given the current economic environment. In addition, certain of our executives voluntarily agreed to reduce their base compensation in 2009. Our focus remains on reducing overhead costs throughout our organization, although contractual agreements that are in force in many instances limit our ability to do so.
We expect to continue to market non-core properties for sale in 2009. We also expect to market certain properties where we would like to retain a continuing interest to potential institutional joint venture partners. However, the volume of commercial real estate transactions has slowed over the last year, and it may be difficult to sell properties at prices that we deem appropriate.
- 28 -
Following the end of the year, we entered into a Stock Exchange Agreement pursuant to which we acquired approximately 1.2 million ordinary shares of DIM Vastgoed N.V., or DIM. Under this agreement, we issued 866,373 shares of our common stock as payment for these initial shares and obtained voting rights with respect to an additional 766,573 ordinary shares of DIM, which we have agreed to buy, subject to the satisfaction of certain conditions, on or before January 1, 2011 for additional shares of our stock or cash. As a result of the initial exchange and the voting rights agreement, we have voting control over approximately 74.6% of DIM’s outstanding ordinary shares, including the approximately 4.0 million DIM shares we owned prior to year-end and excluding treasury shares. Given our increased stake in DIM, we are working with its existing management to reduce costs, improve operations and address certain financing and other needs. Based on our current assumption that we will demonstrate control over DIM as of the first quarter of 2009, we anticipate consolidating the financial results and balance sheet of DIM into our financial statements at such time.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, which we refer to as GAAP, requires management to make estimates and assumptions that in certain circumstances affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and revenues and expenses. These estimates are prepared using our best judgment, after considering past and current events and economic conditions. In addition, certain information relied upon by us in preparing such estimates includes internally generated financial and operating information, external market information, when available, and when necessary, information obtained from consultations with third party experts. Actual results could differ from these estimates. A discussion of possible risks which may affect these estimates is included in “Item 1A. Risk Factors” of this annual report. We consider an accounting estimate to be critical if changes in the estimate or accrual results could have a material impact on our consolidated results of operations or financial condition.
The most significant accounting policies, which involve the use of estimates and assumptions as to future uncertainties and, therefore, may result in actual amounts that differ from estimates, are as follows:
Revenue Recognition and Accounts Receivable. Leases with tenants are classified as operating leases. Generally, our leases contain fixed escalations which occur at specified times during the term of the lease. Base rents are recognized on a straight-line basis from when the tenant controls the space through the term of the related lease, net of valuation adjustments, based on our assessment of credit, collection and other business risk. We make estimates of the collectability of our accounts receivable using the specific identification method related to base rents, straight-line rents, expense reimbursements and other revenue or income taking into account our experience in the retail sector, available internal and external tenant credit information, payment history, industry trends, tenant credit-worthiness and remaining lease terms. In some cases, primarily relating to straight-line rents, the collection of these amounts extends beyond one year. The extended collection period for straight-line rents along with our evaluation of tenant credit risk may result in the non-recognition of a portion of straight-line rental income until the collection of such income is reasonably assured. These estimates have a direct impact on our earnings.
Recognition of Gains from the Sales of Real Estate. We account for profit recognition on sales of real estate in accordance with SFAS Statement No. 66, Accounting for Sales of Real Estate. Profits from sales of real estate will not be recognized under the full accrual method by us unless (i) a sale has been consummated; (ii) the buyer’s initial and continuing investment is adequate to demonstrate a commitment to pay for the property; (iii) we have transferred to the buyer the usual risks and rewards of ownership; and (iv) we do not have significant continuing involvement with the property. Recognition of gains from sales to co-investment partnerships is recorded on only that portion of the sales not attributable to our ownership interest.
Real Estate Acquisitions. Upon acquisition of operating real estate properties, we estimate the fair value of acquired tangible assets (consisting of land, building and improvements), identified intangible assets and liabilities (consisting of above- and below-market leases, in-place leases and lease origination costs), and assumed debt in accordance with SFAS No. 141, Business Combinations. Based on these estimates, we allocate the purchase price to the applicable assets and liabilities based on their estimated fair value. We evaluate the useful life of each amortizable intangible asset in each reporting period and account for any changes in such estimated useful life over the revised remaining useful life. In 2009, the accounting guidance for real estate acquisitions will change pursuant to SFAS No.141(R) Business combinations. Refer to Accounting Pronouncements for further details.
Real Estate Properties and Development Assets. The nature of our business as an owner, developer and operator of retail shopping centers means that we invest significant amounts of capital into our properties. Depreciation and maintenance costs relating to our properties constitute substantial costs for us as well as the industry as a whole. We capitalize real estate investments and depreciate them based on estimates of the assets’ physical and economic useful lives. The cost of our real estate investments is charged to depreciation expense over the estimated life of the asset using straight-line rates for financial statement purposes. We periodically review the estimated lives of our assets and implement changes, as necessary, to these estimates and, therefore, to our depreciation rates.
- 29 -
Properties and real estate under development are recorded at cost. We compute depreciation using the straight-line method over the estimated useful lives of up to 40 years for buildings and improvements, the minimum lease term or economic useful life for tenant improvements, and five to seven years for furniture and equipment. Expenditures for ordinary maintenance and repairs are expensed to operations as they are incurred. Significant renovations and improvements, which improve or extend the useful life of assets, are capitalized. The useful lives of amortizable intangible assets are evaluated each reporting period with any changes in estimated useful lives being accounted for over the revised remaining useful life.
Properties also include construction in progress and land held for development. These properties are carried at cost and no depreciation is recorded. Properties undergoing significant renovations and improvements are considered under development. All direct and indirect costs related to development activities are capitalized into properties in construction in progress and land held for development on our consolidated balance sheets. Costs incurred include predevelopment expenditures directly related to a specific project including development and construction costs, interest, insurance and real estate tax expense. Indirect development costs include employee salaries and benefits, travel and other related costs that are directly associated with the development of the property. The capitalization of such expenses ceases when the property is ready for its intended use, but no later than one year from substantial completion of major construction activity. If we determine that a project is no longer probable all predevelopment project costs are immediately expensed. Similar costs related to properties not under development are expensed as incurred.
Our method of calculating capitalized interest is based upon applying our weighted average borrowing rate to that portion of actual costs incurred. We cease interest cost capitalization when the property is held available for occupancy upon substantial completion of tenant improvements, but no later than one year from the completion of major construction.
Long Lived Assets. When assets are identified as held for sale, we estimate the sales prices, net of selling costs, of such assets. Assets that will be sold together in a single transaction are aggregated in determining if the net sales proceeds of the group are expected to be less than the net book value of the assets. If, in our opinion, the net sales prices of the assets which have been identified for sale are expected to be less than the net book value of the assets, an impairment charge is recorded. An impairment charge may also be recorded for any asset if it is probable, in our estimation, that aggregate future cash flows (undiscounted and without interest charges) to be generated by the property are less than the carrying value of the property.
Our properties are reviewed for impairment if events or changes in circumstances indicate that the carrying amount of the property may not be recoverable. If there is an event or change in circumstance indicating the potential for impairment in the value of a property, we evaluate our ability to recover our net investment in the long-lived assets by comparing the carrying value (net book value) of such asset to the estimated future undiscounted cash flows over their expected useful life. The impairment assessment has a direct impact on our net income because recording an impairment charge results in an immediate charge to expense.
Investments in Unconsolidated Joint Ventures. We strategically invest in unconsolidated entities that own, manage, acquire, develop and redevelop operating properties. Our partners generally are financial or other strategic partners. Most of the unconsolidated entities through which we acquire and develop land are accounted for by the equity method of accounting because we are not the primary beneficiary, as defined under FIN 46R, and we have a significant, but less than controlling, interest in the entities. We record our investments in and advances to these entities in our consolidated balance sheets as “Investment and advances in real estate joint ventures” and our pro-rata share of the entities’ earnings or losses are included in our consolidated statements of operations as “Equity in income in unconsolidated joint ventures,” as described in Note 11 of the notes to our consolidated financial statements.
Management uses its judgment when determining if we are the primary beneficiary of, or have a controlling interest in, an unconsolidated entity. Factors considered in determining whether we have significant influence or we have control include risk and reward sharing, experience and financial condition of the other partners, voting rights, involvement in day-to-day capital and operating decisions and continuing involvement.
We evaluate our investments in unconsolidated entities for impairment during each reporting period in accordance with APB 18. A series of operating losses of an investee or other factors may indicate that a decrease in the value of our investment in the unconsolidated entity has occurred which is other-than-temporary. The amount of impairment recognized is the excess of the investment’s carrying amount over its estimated fair value.
Additionally, we consider various qualitative factors to determine if a decrease in the value of our investment is other-than-temporary. These factors include age of the venture, intent and ability for us to retain our investment in the entity, financial condition and long-term prospects of the entity and relationships with our partners and banks. If we believe that the decline in the fair value of the investment is temporary, then no impairment charge is recorded.
- 30 -
Securities. We have investments that consist primarily of equity securities. These equity investments are classified as available-for-sale and recorded at fair value based on current market prices. Changes in the fair value of these equity investments are included in accumulated other comprehensive income (loss) unless a decrease in fair value is deemed to be other than temporary. Refer to Note 8 of the consolidated financial statements for additional disclosure on impairments of securities held by the company.
Goodwill. Goodwill has been recorded to reflect the excess of cost over the fair value of net assets acquired in various business acquisitions. We are required to perform annual, or more frequently in certain circumstances, impairment tests of our goodwill. We have elected to test for goodwill impairment in November of each year. The goodwill impairment test is a two-step process that requires us to make decisions in determining appropriate assumptions to use in the calculation. The first step consists of estimating the fair value of each reporting unit and comparing those estimated fair values with the carrying values, which include the allocated goodwill. If the estimated fair value is less than the carrying value, a second step is performed to compute the amount of the impairment by determining an “implied fair value” of goodwill. The determination of each reporting unit’s (each property is considered a reporting unit) implied fair value of goodwill requires us to allocate the estimated fair value of the reporting unit to its assets and liabilities. Any unallocated fair value represents the implied fair value of goodwill which is compared to its corresponding carrying amount. For the year ended December 31, 2008, $531,700 of goodwill impairment was incurred.
We cannot predict the occurrence of certain future events that might adversely affect the reported value of goodwill that totaled approximately $11.8 million at December 31, 2008. Such events include, but are not limited to, strategic decisions made in response to economic and competitive conditions, the impact of the economic environment on our tenant base, or a materially negative change in our relationships with significant tenants.
Share Based Compensation and Incentive Awards. We recognize all share-based awards to employees, including grants of stock options, in our financial statements based on fair values. Because there is no observable market for our options, management must make critical estimates in determining the fair value at the grant date. Variations in the assumptions will have a direct impact on our net income. Critical estimates in valuing the fair value at the grant date and the assumptions that marketplace participants would use in making estimates of fair value include: expected volatility, expected dividend yield, risk-free interest rate, involuntary conversion due to change in control and expected exercise history of similar grants.
In addition, we have employment agreements for three of our executive officers under which the employees have the right to an additional cash bonus at the end of the initial term of those agreements, or earlier as provided in the agreements, based on the performance of our stock versus a group of our peers. In assessing the annual compensation costs related to these future payments, we are required to make critical assumptions and estimates in determining the future payment.
Our estimates of the compensation costs under SFAS No. 123(R), Share-Based Payment and these agreements are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. Assumptions may not always reflect unanticipated events and changes in circumstances may occur.
Income tax. Although we may qualify for REIT status for federal income tax purposes, we may be subject to state income or franchise taxes in certain states in which some of our properties are located. In addition, taxable income from non-REIT activities managed through our taxable REIT subsidiaries (each a “TRS”) are subject to federal, state and local income taxes. TRS income taxes are accounted for under the asset and liability method as required by SFAS No. 109, Accounting for Income Taxes. Under the asset and liability method, deferred income taxes are recognized for the temporary differences between the financial reporting basis and the tax basis of the TRS assets and liabilities and for operating loss and tax credit carry-forwards. The TRS estimates its income taxes in each of the jurisdictions in which they operate. This process involves estimating our tax exposure together with assessing temporary differences resulting from differing treatment of items, such as depreciation, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. The recording of a net deferred tax asset assumes the realization of such asset in the future. Otherwise a valuation allowance must be recorded to reduce this asset to its net realizable value. We consider future pretax income and ongoing prudent and feasible tax planning strategies in assessing the need for such a valuation allowance. In the event that we determine that we may not be able to realize all or part of the net deferred tax asset in the future, a valuation allowance for the deferred tax asset is charged against income in the period such determination is made. For the year ended December 31, 2008, we recorded a valuation allowance of $1.2 million.
- 31 -
Discontinued Operations. The application of current accounting principles that govern the classification of any of our properties as held-for-sale on the balance sheet, or the presentation of results of operations and gains on the sale of these properties as discontinued, requires management to make certain significant judgments. In evaluating whether a property meets the criteria set forth by SFAS No. 144, Accounting for the Impairment and Disposal of Long-Lived Assets (“SFAS 144”), we make a determination as to the point in time that it is probable that a sale will be consummated. Given the nature of all real estate sales contracts, it is not unusual for such contracts to allow potential buyers a period of time to evaluate the property prior to formal acceptance of the contract. In addition, certain other matters critical to the final sale, such as financing arrangements often remain pending even upon contract acceptance. As a result, properties under contract may not close within the expected time period, or may not close at all. Due to these uncertainties, it is not likely that we can meet the criteria of SFAS 144 prior to the sale formally closing. Therefore, any properties categorized as held-for-sale represent only those properties that management has determined are probable to close within the requirements set forth in SFAS 144. Prior to sale, we evaluate the extent of involvement with, and the significance to us of cash flows from a property subsequent to its sale, in order to determine if the results of operations and gain on sale should be reflected as discontinued. Consistent with SFAS 144, any property sold in which we have significant continuing involvement or cash flows (most often sales to co-investment partnerships) is not considered to be discontinued. In addition, any property which we sell to an unrelated third party, but in which we retain a property or asset management function, is not considered discontinued. Therefore, based on our evaluation of SFAS 144, only properties sold, or to be sold, to unrelated third parties where we will have no significant continuing involvement or significant cash flows are classified as discontinued.
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. We adopted the requirements of SFAS 157 as of January 1, 2008 without a material impact on our consolidated financial statements, as more fully disclosed in Note 9 thereto, Fair Value Measurements. In February 2008, the FASB issued FASB Staff Position Paper (“FSP”) FAS 157-2, Effective Date of FASB Statement No. 157 (“FSP 157-2”), which delays the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed in the financial statements on a nonrecurring basis to fiscal years beginning after November 15, 2008. In October 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for that Asset is Not Active (“FSP 157-3”). FSP 157-3 clarifies the application of SFAS 157 in a market that is not active. We have not applied the provisions of SFAS 157 to our nonfinancial assets and nonfinancial liabilities in accordance with FSP 157-2 and FSP 157-3.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”), which allows entities to voluntarily choose, at specified election dates, to measure many financial assets and financial liabilities at fair value. The election is made on an instrument-by-instrument basis and is irrevocable. Subsequent to the adoption of SFAS 159, changes in fair value for the particular instruments must be reported in earnings. Upon initial adoption, SFAS 159 provided entities with a one-time chance to elect the fair value option for existing eligible items. The effect of the first measurement to fair value should be reported as a cumulative-effect adjustment to the opening balance of retained earnings in the year the statement is adopted. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We did not elect the fair value option for financial assets or liabilities existing on the January 1, 2008 adoption date. We will consider the applicability of the fair value option for assets acquired or liabilities incurred in future transactions.
In December 2007, the FASB issued SFAS No. 141 (R), Business Combinations (“SFAS 141(R)”). In summary, SFAS 141(R) requires the acquirer of a business to measure at fair value the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, with limited exceptions. In addition, this standard requires acquisition costs to be expensed as incurred. The standard is effective for fiscal years beginning after December 15, 2008 and is to be applied prospectively, with no earlier adoption permitted. The adoption of this standard may have an impact on the accounting for certain costs related to our future acquisitions. As noted in footnote 20 Subsequent Events to our consolidated financial statements, we increased our ownership to greater than 50% in DIM subsequent to December 31, 2008. As a result of our increased influence over DIM, we currently anticipate consolidating the results of DIM with ours beginning with the first quarter of 2009. Finally, we are still evaluating the accounting treatment of this increased investment both relating to its prior treatment under the cost method and the allocation of the purchase price. Given recent accounting guidance, our acquisition may be treated as a multistep acquisition and, therefore, have an effect on earnings in the three months ending March 31, 2009.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements (“SFAS 160”), which requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and non-controlling interest. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008. The adoption of this standard is not expected to have a material effect on our consolidated results of operations, yet will require additional disclosures relating to our joint venture at Sunlake and down-REIT at Walden Woods Village and will effect our disclosure for the three months ending March 31, 2009.
- 32 -
In March 2008, the FASB issued SFAS No. 161, Disclosures About Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133, (“SFAS 161”). SFAS 161 expands the disclosure requirements in SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, regarding an entity’s derivative instruments and hedging activities. SFAS 161 is effective for fiscal years beginning after December 1, 2008. We are evaluating the impact that adoption of SFAS 161 will have on our consolidated financial statements.
In April 2008, the FASB issued FSP SFAS No. 142-3, Determination of the Useful Life of Intangible Assets (“FSP SFAS 142-3”). FSP SFAS 142-3 amends paragraph 11(d) of FASB SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”), which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142. FSP SFAS 142-3 is intended to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under FSP SFAS 142-3. FSP SFAS 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and must be applied prospectively to intangible assets acquired after the effective date. We are evaluating the impact that adoption of FSP SFAS 142-3 will have on our consolidated financial statements.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (“SFAS 162”). SFAS 162 is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements for nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States of America. SFAS 162 will be effective 60 days following the U.S. Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Fairly Presented in Conformity with Generally Accepted Accounting Principles. We do not expect the adoption of SFAS 162 to result in a change in current practice, and as such, will have no impact on our consolidated financial statements.
In June 2008, the FASB issued FASB Staff Position Emerging Issues Task Force 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSP-EITF 03-6-1”). Under FSP-EITF 03-6-1, unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. FSP-EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years and requires retrospective application. We are currently evaluating the impact of adopting FSP-EITF 03-6-1 on our earnings per share.
In December 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8, Disclosure by Public Entities (Enterprises) About Transfers of Financial Assets and Interests in Variable Interest Entities. The purpose of the FSP is to promptly improve disclosures by public companies until the pending amendments to FASB SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities (“SFAS 140”), and FIN 46R are finalized and approved by the FASB. The FSP amends SFAS 140 to require public companies to provide additional disclosures about a transferor’s continuing involvement with transferred financial assets. It also amends FIN 46R by requiring public companies to provide additional disclosures regarding their involvement with variable interest entities. This FSP is effective for fiscal years beginning after December 1, 2008. The FSP will not have a material effect on our consolidated financial statements.
- 33 -
Results of Operations
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
We derive substantially all of our revenues from rents received from tenants under existing leases on each of our properties. These revenues include fixed base rents, recoveries of expenses that we have incurred and that we pass through to the individual tenants and percentage rents that are based on specified percentages of tenants’ revenues, in each case as provided in the particular leases.
Our primary cash expenses consist of our property operating expenses, which include real estate taxes, repairs and maintenance, management expenses, insurance, utilities and other expenses; general and administrative expenses, which include payroll, office expenses, professional fees and other administrative expenses; and interest expense, primarily on mortgage debt, unsecured senior debt and revolving credit facilities. In addition, we incur substantial non-cash charges for depreciation and amortization on our properties and impairment charges. We also capitalize certain expenses, such as taxes and interest related to properties under development or redevelopment until the property is ready for its intended use.
Our consolidated results of operations often are not comparable from period to period due to the impact of property acquisitions, dispositions, developments and redevelopments. The results of operations of any acquired property are included in our financial statements as of the date of its acquisition. A large portion of the change in our statement of operations line items is related to these changes in our property portfolio. In addition, non-cash impairment charges may also affect comparability.
The following summarizes certain line items from our audited consolidated statements of operations which we think are important in understanding our operations and/or those items which have significantly changed in 2008 compared to 2007:
Total revenue decreased by $7.1 million, or 2.9%, to $239.0 million in 2008. The decrease is primarily attributable to the following:
·
a decrease of approximately $10.8 million attributable to the sale of nine income producing properties to the GRI Venture, revenue from which was included fully in 2007 results and partially included in 2008 results through the date of sale;
·
a decrease of approximately $300,000 in non-retail property income;
·
an increase of approximately $1.5 million related to properties acquired in 2007;
- 34 -
·
an increase of approximately $1.3 million related to a settlement fee received in connection with a previous tenant’s bankruptcy;
·
an increase of approximately $800,000 related to the completion of various development/redevelopment projects, partly offset by a decrease of $300,000 for development/redevelopment projects currently under construction; and
·
an increase of approximately $600,000 associated with management, leasing and asset management services provided to our joint ventures.
Property operating expenses increased by $1.6 million, or 2.6%, to $64.4 million in 2008. The increase primarily consists of the following:
·
an increase of approximately $4.1 million in property operating costs partly due to higher common area maintenance expense, bad debt expense, general repairs and maintenance costs associated with vacant rental units, and higher real estate tax expense, partially offset by lower insurance expense;
·
an increase of approximately $300,000 related to properties acquired in 2007;
·
an increase of $200,000 related to the completion of various development/redevelopment properties; and
·
a decrease of approximately $2.9 million associated with the sale of nine income producing properties to the GRI Venture.
Rental property depreciation and amortization decreased by $500,000, or 1.0%, to $45.5 million for 2008 from $46.0 million in 2007. The decrease in 2008 was primarily related to the following activity:
·
a decrease of approximately $2.1 million related to the sale of nine income producing properties to the GRI venture;
·
a decrease of approximately $100,000 in non-retail properties;
·
an increase of approximately $1.3 million related to amortization of tenant improvements and leasing commissions;
·
an increase of approximately $300,000 related to properties acquired in 2007; and
·
the completion of various development/redevelopment projects increased depreciation and amortization by $200,000.
General and administrative expenses increased by $3.8 million, or 13.3%, to $32.0 million for 2008 from $28.2 million in 2007. The increase is mainly attributable to:
·
an increase of $1.8 million related to employee training, professional conferences and information technology expenses;
·
an increase of approximately $900,000 in compensation and employment-related expenses related to new executives and employees partly offset by lower severance-related expense paid to former employees;
·
an increase of approximately $700,000 related to acquisition costs associated with additional shares of DIM;
·
an increase of approximately $500,000 related to satellite offices expense;
·
an increase of $300,000 for personal property tax expense; and
·
a decrease of approximately $400,000 of pre-development costs related to non-viable projects.
Investment income increased by $3.0 million, or 41.1%, compared to 2007. The increase relates primarily to interest income associated with our short-term bond investments.
- 35 -
Equity in income in unconsolidated joint ventures was $108,000 for 2008 based on our pro rata share of our joint ventures operating gains/losses.
Other income increased by $650,000 in 2008 compared to 2007. The increase primarily relates to the receipt of income of approximately $600,000 following the execution of an easement agreement in settlement of a condemnation proceeding at one of our properties and the receipt of a $200,000 earnest money deposit following the termination of a land sale contract offset by $100,000 of lower related-party revenue.
Interest expense decreased by $5.7 million, or 8.5%, to $60.8 million in 2008 as compared to $66.5 million for 2007. The decrease is primarily attributable to the following:
·
a decrease of approximately $2.1 million attributable to reduced usage of our lines of credit;
·
a decrease of approximately $1.2 million in interest expense related to a reduction in mortgage indebtedness resulting from the sale of properties to the GRI joint venture;
·
a decrease of $2.1 million related to the payoff of certain mortgages and principal amortization offset by an increase of approximately $900,000 in mortgage interest related to additional mortgage indebtedness;
·
an increase of approximately $1.9 million of interest incurred related to higher average unsecured senior notes outstanding in 2008, offset by a decrease of $1.7 million related to our interest rate swap contract associated with our senior notes and a decrease of approximately $1.6 million related to the write off of interest rate contracts due to the early extinguishment of our debt; and
·
an increase of $200,000 of interest expense related to lower capitalized interest for development/redevelopment projects.
Gain on sale of real estate was approximately $21.5 million in 2008 as compared to $2.0 million in 2007. The gain was primarily attributable to the sale of nine properties to the GRI joint venture, which is not included in discontinued operations due to the continuing involvement we have with that venture.
During 2008, we repurchased and canceled approximately $88.0 million principal amount of our senior unsecured notes and recognized a net gain on early extinguishment of debt of approximately $6.4 million, coupled with $200,000 gain from early extinguishment of mortgages, totaling $6.5 million net gain for 2008. There were no comparable gains in continuing operations in the same 2007 period.
Impairment loss for 2008 was $37.5 million as compared to $430,000 for 2007. The increase is primarily attributable to the following:
·
approximately $32.8 million of impairment loss related to our DIM investment;
·
approximately $3.7 million of impairment loss associated with two redevelopment projects that were terminated;
·
approximately $531,700 of impairment loss related to goodwill associated with several of our income producing properties; and
·
approximately $380,000 of impairment loss related to our preferred stock investment in another REIT.
For further information regarding our impairment loss, see Note 7, Securities, and Note 8, Impairment Loss, to our consolidated financial statements.
In the twelve months ended December 31, 2008, our discontinued operations resulted in a net loss of $425,000 compared to a net gain of $19.3 million in 2007. In 2008, we sold one income producing property for a loss of $557,000 partly offset by $132,000 generated in net operating income related to discontinued operations. During 2007, we had a net gain of $19.3 million in net operating income related to discontinued operations.
- 36 -
Our provision for income taxes is $1.0 million for 2008, compared to a benefit of $0.3 million in 2007. This change was primarily attributable to our recording of a $1.2 million valuation allowance associated with a deferred tax asset of one of our TRSs, which we determined was not realizable.
As a result of the foregoing, net income decreased by $34.4 million, or 49.5%, to $35.0 million for 2008 from $69.4 million in 2007.
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
The following summarizes items from our audited consolidated statements of operations that we think are important in understanding our operations and/or those items which significantly changed in 2007 as compared to 2006:
Total revenue increased by $21.2 million, or 9.4%, to $246.1 million in 2007 from $224.9 million in 2006. The increase was mostly composed of the following:
·
an increase of $19.9 million associated with properties acquired in 2007 and 2006;
·
an increase of approximately $2.2 million related to the completion of various development/redevelopment projects, partly offset by a decrease of $900,000 for development/redevelopment projects under construction;
·
an increase of $1.6 million in same-property revenue due to higher rental rates, tenant expense recovery income and percentage rent income;
·
a decrease of approximately $1.0 million associated with property management, leasing and accounting services revenue for a portfolio of Texas properties, which services were terminated in the second quarter of 2007; and
·
a decrease of approximately $600,000 in non-retail property income.
Property operating expenses increased by $3.4 million, or 5.7%, to $62.8 million for 2007 from $59.4 million in 2006. The increase in 2007 is largely a result of the following activity:
·
an increase of approximately $5.5 million related to properties acquired in 2007 and 2006;
·
an increase of approximately $700,000 related to the completion of various development/redevelopment projects, partly offset by a decrease of $300,000 for development/redevelopment projects under construction;
- 37 -
·
a decrease of approximately $1.8 million in property operating costs partly due to lower common area maintenance expense, property management/maintenance salary, lease termination expense, hurricane expense and real estate tax expense partially offset by higher insurance and bad debt provision expense;
·
a decrease of approximately $700,000 in office-related expense primarily related to closing the operation of various property management satellite offices; and
·
a decrease of $300,000 in general operating expenses for our non-retail properties.
Rental property depreciation and amortization increased by $5.8 million, or 14.4%, to $46.0 million for 2007 from $40.2 million in 2006. The increase is primarily attributable to the following:
·
an increase of $4.9 million related to properties acquired during 2007 and 2006;
·
the completion of various development/redevelopment projects increased depreciation and amortization by $600,000, partially offset by a decrease of approximately $300,000 of depreciation expense related to projects in various stages of construction; and
·
same-property depreciation and amortization expense increased by $600,000 related to increased leasing and tenant improvement activity.
General and administrative expenses decreased by $3.7 million, or 11.6%, to $28.2 million for 2007 from $31.9 million in 2006. The decrease resulted primarily from:
·
$1.5 million decrease in compensation and employment-related expenses paid in 2006 related to executive management changes partly offset by higher severance-related expense paid to former employees in 2007 as well as higher payroll and payroll-related expenses;
·
$1.0 million decrease attributable to lower pre-acquisition costs;
·
a decrease of approximately $700,000 related to lower travel and entertainment expense;
·
a decrease of approximately $400,000 related to lower income taxes;
·
a decrease of approximately $400,000 in fees reflecting fewer directors and fewer meetings; and
·
an increase of approximately $300,000 of professional fees mainly related to higher audit fees.
Investment income decreased by $158,000 in 2007, mostly due to a $1.6 million decrease in interest income related to lower cash balances, partially offset by an increase of $1.4 million of dividend income primarily related to our ownership of 3.8 million ordinary shares of DIM Vastgoed N.V.
Equity in income in unconsolidated joint ventures was $1.9 million for 2006. The income primarily was related to the sale of a land parcel held in a joint venture in which we had a 50% interest.
Interest expense increased by $12.8 million, or 23.8%, to $66.5 million for 2007 from $53.7 million in 2006. The increase is mainly attributable to the following:
·
an increase of approximately $8.2 million related to higher total unsecured senior debt outstanding, partially offset by a $400,000 decrease in interest expense associated with our interest rate swap;
·
an increase of approximately $2.6 million of interest expense related to lower capitalized interest for development/redevelopment projects;
·
an increase of approximately $1.6 million related to the decrease in the amortization of the fair value debt premium related to two unsecured senior notes that were paid off in April and August 2006;
·
an increase of $1.7 million in mortgage interest which is primarily related to properties acquired in 2007 and 2006 partly offset by repayment of certain mortgages; and
·
a decrease of approximately $900,000 related to lower interest expense associated with our unsecured line of credit facility.
- 38 -
Gain on sale of real estate in 2007 includes the sale of six land parcels for proceeds of nearly $5.5 million, generating $2.0 million in net realized gains, compared to gains in the same period of 2006 of approximately $2.5 million for 2006,
In 2007, our discontinued operations resulted in a net gain of $19.3 million compared to a net gain of $126.5 million for 2006. In 2007, we sold 14 income producing properties that produced a net gain of $19.4 million partly offset by $82,000 operating income loss related to discontinued operations. The $7.0 million of operations of income-producing property sold for 2006 reflects a reclassification of operations of properties sold or held for sale. The income from discontinued operations of $126.5 million in 2006 is primarily related to the sale of our Texas properties.
As a result of the foregoing, net income decreased by $107.6 million, or 60.8%, to $69.4 million for 2007 from $177.0 million in 2006.
Liquidity and Capital Resources
Due to the nature of our business, we typically generate significant amounts of cash from operations; however, the cash generated from operations is primarily paid to our stockholders in the form of dividends. Our status as a REIT requires that we distribute 90% of our REIT taxable income (including net capital gain) each year, as defined in the Code. Our short-term liquidity requirements consist primarily of normal recurring operating expenses, regular debt service requirements (including debt service relating to additional or replacement debt, as well as scheduled debt maturities), recurring company expenditures, such as general and administrative expenses, non-recurring company expenditures, such as tenant improvements and redevelopments, and dividends to common stockholders. Historically, we have satisfied these requirements principally through cash generated from operations and our credit facilities.
Our long-term capital requirements consist primarily of maturities under our long-term debt, development and redevelopment costs and the costs related to growing our business, including acquisitions. Historically, we have funded these requirements through a combination of sources which were available to us, including additional and replacement secured and unsecured borrowings, proceeds from the issuance of additional debt or equity securities, capital from institutional partners that desire to form joint venture relationships with us and proceeds from property dispositions. During 2008, however, as a result of deteriorating conditions in the credit and capital markets, many of these sources of capital became increasingly more expensive or more difficult to obtain or may be temporarily unavailable.
In response to the changing economic conditions that occurred during the second half of 2008, we have undertaken a number of initiatives to improve our liquidity position and address our capital needs. The following is a summary of those initiatives:
·
Equity Offering. On September 29, 2008, we completed a public offering and concurrent private placement of equity securities. The offerings resulted in net cash proceeds of approximately $54.7 million to us.
·
New Mortgage Loan. On September 25, 2008, we completed a $65.0 million loan transaction secured by a mortgage on our Sheridan Plaza shopping center located in Hollywood, Florida. The loan matures on October 10, 2018 and principal and interest are payable in arrears based on a 30 year amortization and a 6.25% annual interest rate.
·
Senior Note Repurchases. During 2008, we purchased $88.0 million of our unsecured senior notes with varying maturities, including $23.8 million of notes maturing in 2009, and generated a gain on the early extinguishment of debt of $6.4 million for 2008.
·
GRI Joint Venture. During 2008, we contributed nine operating properties to a joint venture with Global Retail Investors LLC in which we have a 10% interest. The sale of these properties generated a gain on sale of $21.6 million and cash proceeds of approximately $142.5 million.
·
Credit Lines. On October 17, 2008, we amended and restated our credit agreement with a syndicate of banks to provide for a $227.0 million unsecured revolving credit facility that replaced a facility that would have expired in January 2009. The new facility includes a competitive bid option which allows us to conduct auctions among the participating banks for borrowings at any one time outstanding up to 50% of the then commitments, a $35.0 million swing line facility for short term borrowings and a $20.0 million letter of credit commitment. Subject to the terms and conditions in the amended credit agreement, the total commitments under the facility may be increased up to a total of $400.0 million. The facility expires on October 17, 2011, with a one year extension option.
- 39 -
We believe that we have access to capital resources necessary to operate, expand and develop our business. As a result, we intend to operate with, and maintain, a conservative capital structure that will allow us to maintain strong debt service coverage and fixed-charge coverage ratios.
While we believe that cash generated from operations, borrowings under our unsecured revolving credit facilities and our access to other, longer term capital sources will be sufficient to meet our short-term and long-term liquidity requirements, there are risks inherent in our business, including those risks described in Item 1A - “Risk Factors,” that may have a material adverse effect on our cash flow, and, therefore, on our ability to meet these requirements.
As of December 31, 2008, we had approximately $128.5 million of short-term corporate debt securities that we expect to use for the repayment of certain near-term debt, including $176.2 million of senior notes due in April 2009. In addition, we had $5.4 million of cash and cash equivalents available as of December 31, 2008. We have two revolving credit facilities with aggregate potential borrowing limits up to $242.0 million, which we can utilize initially to finance the acquisition of properties and meet other short-term working capital requirements. As of December 31, 2008, we had $193.7 million available to be drawn under those credit facilities. Subsequent to year-end, we repaid $35.5 million of outstanding balances under our lines of credit with proceeds from repayment receipts and sales of certain short-term corporate debt securities.
Summary of Cash Flows. The following summary discussion of our cash flows is based on the consolidated statements of cash flows and is not meant to be an all-inclusive discussion of the changes in our cash flows for the periods presented below.
Net cash from operating activities consists primarily of net operating income from our rental properties (rental and other revenue less property operating expenses), plus fee income and investment income, less general and administrative expenses and interest expense. In addition, net cash from operating activities includes changes in working capital. In 2008, our net cash from operating activities was $86.6 million, compared to $107.0 million in 2007. The decrease of $20.4 million is primarily due to an increase in working capital of $9.5 million in 2008, when we reduced payables and accrued expenses by $7.1 million, compared to a decrease in working capital of $5.6 million in 2007, when we received repayment of a note receivable in the amount of $4.7 million. The decrease also resulted from lower net operating income and higher general administrative expenses, partly offset by higher investment income and lower interest expense.
Net cash from investing activities consists primarily of property acquisitions or dispositions, costs incurred in developments, investments in or distributions from joint ventures, investments in securities, and cash held in escrow. In 2008, our net cash provided by investing activities was $51.3 million. In 2007, our net cash used in investing activities was $104.6 million. The difference of $155.9 million is primarily due to our property dispositions exceeding our acquisitions in 2008, whereas in 2007, our acquisitions exceeded our dispositions. In 2008, we invested $134.7 million of our disposition proceeds and cash released from escrow in short-term debt securities to prepare for the repayment of our $176.2 million in bonds that mature in April 2009.
Net cash from financing activities consists primarily of proceeds from financing and the issuance of common stock, less repayment of debt and dividends paid to stockholders. In 2008, our net cash used in financing activities was $133.9 million, compared to $1.1 million in 2007. The difference of $132.8 million primarily reflects a net reduction in debt of $96.3 million in 2008, compared to a net increase in debt of $87.1 million in 2007. In 2008, we funded a portion of our debt reduction with proceeds from the issuance of common stock of $57.1 million.
- 40 -
Contractual Commitments. The following tables set forth certain information regarding future contractual obligations, excluding interest, as of December 31, 2008:
(1)
$100 million of the outstanding balance has been swapped to a floating interest rate based on the six-month LIBOR in arrears, plus 0.4375%. The contractual obligations for the unsecured senior notes do not reflect this interest rate swap.
The following table sets forth certain information regarding future interest obligations on outstanding debt as of December 31, 2008:
(2)
$100 million of the outstanding principal balance has been swapped to a floating interest rate based on the six-month LIBOR in arrears, plus 0.4375%. The interest obligations for the unsecured senior notes presented above assume that the rate that was in effect at December 31, 2008 remains the same for this interest rate swap.
(3)
Interest on the unsecured revolving credit facility is variable; these amounts assume that the weighted average interest rate remains the same as the rate at December 31, 2008.
- 41 -
Indebtedness. The following table sets forth certain information regarding our indebtedness as of December 31, 2008:
- 42 -
(1)
The rate in effect on December 31, 2008.
The weighted average interest rate of the mortgage notes payable at December 31, 2008 and 2007 was 7.22% and 7.42%, respectively, excluding the effects of the premium adjustment.
Each of the existing mortgage loans is secured by a mortgage on one or more of our properties. Certain of the mortgage loans involving an aggregate principal balance of approximately $63.9 million contain prohibitions on transfers of ownership which may have been violated by our previous issuances of common stock or in connection with past acquisitions and may be violated by transactions involving our capital stock in the future. If a violation were established, it could serve as a basis for a lender to accelerate amounts due under the affected mortgage. To date, no lender has notified us that it intends to accelerate its mortgage. In the event that the mortgage holders declare defaults under the mortgage documents, we will, if required, prepay the remaining mortgage from existing resources, refinancing of such mortgages, borrowings under our other lines of credit or other sources of financing. Based on discussions with various lenders, current credit market conditions and other factors, we believe that the mortgages will not be accelerated. Accordingly, we believe that the violations of these prohibitions will not have a material adverse impact on our results of operations or financial condition.
- 43 -
Our outstanding unsecured senior notes at December 31, 2008 consist of the following:
(1)
The rate in effect on December 31, 2008.
(2)
$100.0 million of the outstanding balance has been swapped to a floating interest rate based on the six-month LIBOR in arrears, plus 0.4375%. The indicated rate and weighted average rate for the unsecured senior notes do not reflect this interest rate swap.
The weighted average interest rate of the unsecured senior notes at December 31, 2008 and December 31, 2007 was 5.66% and 5.67%, respectively, excluding the effects of the interest rate swap and net premium adjustment. In April 2007, we completed a private placement of $150.0 million senior unsecured notes that mature on September 15, 2017. Interest is due semi-annually on March 15 and September 15 of each year, with the first payment paid on September 15, 2007. The notes were issued at a discount of $151,500 that is being amortized as interest expense over the life of the notes. On December 5, 2007, we completed an exchange offer of registered notes for the private placement notes.
The indentures under which our unsecured senior notes were issued have several covenants which limit our ability to incur debt, require us to maintain an unencumbered assets ratio above a specified level and limit our ability to consolidate, sell, lease, or convey substantially all of our assets to, or merge with, any other entity. These notes have also been guaranteed by most of our subsidiaries.
On March 24, 2004, concurrently with the issuance of the $200.0 million 3.875% senior unsecured notes, we entered into a $100.0 million notional principal variable rate interest swap with an estimated fair value of $949,000 as of December 31, 2008. This swap converted fixed rate debt to variable rate based on the six-month LIBOR in arrears plus 0.4375%, and matures April 15, 2009.
The following table provides a summary of our unsecured revolving lines of credit balances at December 31, 2008:
(1) The rate in effect on December 31, 2008, which is the weighted average interest rate on the outstanding Wells Fargo balance.
- 44 -
On October 17, 2008, we amended and restated our credit agreements with a syndicate of banks to provide for a $227.0 million unsecured revolving credit facility that replaced our existing facility that would have expired in January 2009. The amended facility bears interest at our option at (i) applicable LIBOR plus 1.00% to 1.70%, depending on the credit ratings of our senior unsecured notes, or (ii) daily LIBOR plus 3.00%. The amended facility also includes a competitive bid option which allows us to conduct auctions among the participating banks for borrowings at any one time outstanding up to 50% of the lender commitments, a $35.0 million swing line facility for short term borrowings and a $20.0 million letter of credit commitment. Subject to the terms and conditions in the amended credit agreement the total commitments under the facility may be increased up to a total of $400.0 million. The amended facility expires on October 17, 2011, with a one year extension option. In addition, the amended facility contains customary covenants, including financial covenants regarding debt levels, total liabilities, interest coverage, fixed charge coverage ratios, unencumbered properties, permitted investments and others. If a default under the facility exists, our ability to pay dividends is limited to the amount necessary to maintain our status as a REIT unless the default is a payment default or bankruptcy event in which case we are prohibited from paying any dividends.
We also have a $15.0 million unsecured credit facility with City National Bank of Florida, on which there was no outstanding balance as of December 31, 2008 and December 31, 2007. This facility also provides collateral for $527,000 in outstanding letters of credit. In addition, we also have a $55,000 outstanding secured letter of credit with Bank of America.
As of December 31, 2008, the aggregate availability under the both credit facilities was approximately $193.7 million, net of outstanding balances and letters of credit and subject to covenants provided therein.
We may not have sufficient funds on hand to repay balloon amounts on our indebtedness at maturity. Therefore, we plan to refinance such indebtedness either through additional mortgage financings secured by individual properties or groups of properties, by unsecured private or public debt offerings or by additional equity offerings, if available, or through the availability of our credit lines. Our results of operations could be affected if the cost of new debt is greater or lesser than the cost of the maturing debt. If new financing is not available, we could be required to sell assets and our business could be adversely affected. Refer to our risk factors with the caption “ Credit markets may affect our ability to refinance maturing debt at a reasonable cost” for additional risks related to liquidity.
Equity. For the year ended December 31, 2008, we issued 711,250 shares of our common stock pursuant to the exercise of stock options at prices ranging from $16.61 to $24.45 per share. No shares were purchased from the Dividend Reinvestment and Stock Purchase Plan which was suspended in March 2006, with approximately 5.4 million shares still available for sale.
On September 24, 2008, we entered into an underwriting agreement with several underwriters with respect to the issue and sale of 2,200,000 shares of our common stock in an underwritten public offering. The shares were offered to the public at $21.47 per share. The issuance of the shares was registered under the Securities Act of 1933 pursuant to our shelf registration statement.
Contemporaneous with the execution of the underwriting agreement, we entered into a common stock purchase agreement with an affiliate of our largest stockholder, Gazit-Globe, Ltd., which may be deemed to be controlled by Chaim Katzman, the chairman of our board of directors. Under the purchase agreement, Gazit’s affiliate agreed to purchase 440,000 shares of our common stock at the public offering price in a private placement. In connection with the purchase agreement, we also executed a registration rights agreement granting the investor customary demand and “piggy-back” registration rights.
Future Capital Requirements. We believe, based on currently proposed plans and assumptions relating to our operations, that our existing financial arrangements, together with cash generated from our operations, will be sufficient to satisfy our cash requirements for a period of at least twelve months. In the event that our plans change, our assumptions change or prove to be inaccurate or cash flows from operations or amounts available under existing financing arrangements prove to be insufficient to fund our expansion and development efforts or to the extent we discover suitable acquisition targets the purchase price of which exceeds our existing liquidity, we would be required to seek additional sources of financing. There can be no assurance that any additional financing will be available on acceptable terms or at all, and any future equity financing could be dilutive to existing stockholders. If adequate funds are not available, our business operations could be materially adversely affected.
Distributions. We believe that we currently qualify, and intend to continue to qualify in the future, as a REIT under the Internal Revenue Code. As a REIT, we are allowed to reduce taxable income by all or a portion of our distributions to stockholders. As distributions have exceeded taxable income, no provision for federal income taxes has been made. While we intend to continue to pay dividends to our stockholders, we also will reserve such amounts of cash flow as we consider necessary for the proper maintenance and improvement of our real estate and other corporate purposes while still maintaining our qualification as a REIT. Our cash distributions for the year ended December 31, 2008 were $89.6 million.
- 45 -
Off-Balance-Sheet Arrangements
From time to time, we may have off-balance-sheet joint ventures and other unconsolidated arrangements with varying structures. As of December 31, 2008 we had two unconsolidated joint ventures.
On February 22, 2008, we formed a joint venture with Global Retail Investors, LLC., an entity formed by an affiliate of First Washington Realty, Inc. and the State of California Public Employees’ Retirement System. We have a 10% ownership interest in this joint venture. On April 1, 2008, the joint venture agreement was amended and restated in connection with the our sale of seven income producing properties and one outparcel to the joint venture. The aggregate gross sales price of the seven assets was $176.8 million and the assets were sold in two tranches during the quarter ended June 30, 2008. The properties had a net book value of $152.6 million and we recognized a total gain on sale of approximately $18.5 million, which is net of approximately $2.4 million of costs incurred in connection with the defeasance of existing mortgage debt paid for by the purchaser. At the closings, $9.3 million of the sale proceeds were contributed by us to the joint venture as our investment in the joint venture. On November 13, 2008, we sold an additional two properties to the joint venture which had a net book value of $21.9 million, and we recognized a total gain on sale of approximately $3.2 million. At the closings, $1.2 million of the sale proceeds were contributed by us to the joint venture as our investment in the joint venture.
On April 29, 2008, we entered into a joint venture with an affiliate of DRA Advisors, LLC, or DRA, to invest in value-added acquisition opportunities. The joint venture is 80% owned by the affiliate of DRA and 20% owned by us. During 2008, the DRA joint venture completed the acquisition of a portfolio of three properties comprising one office building and two neighborhood shopping centers totaling approximately 503,000 square feet of GLA. As part of this acquisition, we contributed $3.2 million to the venture. Our capital contribution represents our pro-rata portion of the net purchase price, after the assumption by the DRA joint venture of existing mortgage indebtedness. We have agreed to manage all three of the properties and will act as leasing agent for the two retail properties acquired by the joint venture.
In addition, following the end of the year, we entered into a Stock Exchange Agreement pursuant to which we acquired approximately 1.2 million ordinary shares of DIM Vastgoed N.V., or DIM. Under this agreement, we issued 866,373 shares of our common stock as payment for these initial shares and obtained voting rights with respect to an additional 766,573 ordinary shares of DIM, which we have agreed to buy, subject to the satisfaction of certain conditions, on or before January 1, 2011 for additional shares of our stock or cash. As a result of the initial exchange and the voting rights agreement, we have voting control over approximately 74.6% of DIM’s outstanding ordinary shares, including the approximately 4.0 million DIM shares we owned prior to year-end and excluding treasury shares. Based on our current assumption that we will demostrate control over DIM as of the first quarter of 2009, we anticipate consolidating the financial results and balance sheet of DIM into our financial statements at such time.
We consolidate entities in which we own less than a 100% equity interest if we have a controlling interest or are the primary beneficiary in a variable-interest entity, as defined in Financial Interpretation No. 46, Consolidation of Variable Interest Entities.
Letters of Credit: As of December 31, 2008, we have pledged letters of credit for $12.9 million as additional security for certain property matters. Substantially all of our letters of credit are issued under our revolving credit facilities.
Construction Commitments: As of December 31, 2008, we have entered into construction commitments and have outstanding obligations to fund $2.2 million, based on current plans and estimates, in order to complete current development and redevelopment projects. These obligations, comprising principally construction contracts, are generally due as the work is performed and are expected to be financed by funds available under our credit facilities.
Operating Lease Obligations: Certain of our properties are subject to ground leases, which are accounted for as operating leases and have annual obligations of approximately $40,000. Additionally, we have operating lease agreements for office space for which we have an annual obligation of approximately $425,000.
Non-Recourse Debt Guarantees: Under the terms of certain non-recourse mortgage loans, we could, under specific circumstances, be responsible for portions of the mortgage indebtedness in connection with certain customary non-recourse carve-out provisions, such as environmental conditions, misuse of funds, and material misrepresentations. In management’s judgment, it would be unlikely for us to incur any material liability under these guarantees that will have a material adverse effect on our financial condition, results of operations, or cash flow.
- 46 -
Environmental Matters
We are subject to numerous environmental laws and regulations. The operation of dry cleaning facilities or gas stations at our shopping centers is the principal environmental concern. We require that the tenants who operate these facilities do so in material compliance with current laws and regulations and we have established procedures to monitor their operations. Where available, we have applied and been accepted into state sponsored environmental programs. Several properties in our portfolio will require or are currently undergoing varying levels of environmental remediation. We have environmental insurance policies covering most of our properties.
We believe that the ultimate disposition of currently known environmental matters will not have a material effect on our financial position, liquidity or operations.
Inflation and Recession Considerations
Most of our leases contain provisions designed to partially mitigate any adverse impact of inflation. Most of our leases require the tenant to pay its share of operating expenses, including common area maintenance, real estate taxes and insurance, thereby reducing our exposure to increases in costs and operating expenses resulting from inflation. A small number of our leases also include clauses enabling us to receive percentage rents based on a tenant’s gross sales above predetermined levels, which sales generally increase as prices rise, or escalation clauses which are typically related to increases in the Consumer Price Index or similar inflation indices.
Our financial results are affected by general economic conditions in the markets in which our properties are located. An economic recession, or other adverse changes in general or local economic conditions, could result in the inability of some of our existing tenants to meet their lease obligations and could otherwise adversely affect our ability to attract or retain tenants.
- 47 -
ITEM 7A.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Interest Rate Risk. The primary market risk to which we have exposure is interest rate risk. Changes in interest rates can affect our net income and cash flows. As changes in market conditions occur and interest rates increase or decrease, interest expense on the variable component of our debt will move in the same direction. We intend to utilize variable rate indebtedness available under our unsecured revolving credit facilities in order to initially fund future acquisitions, development costs and other operating needs. With respect to our fixed rate mortgage notes and senior unsecured notes, changes in interest rates generally do not affect our interest expense as these notes are at fixed rates for extended terms. Because we have the intent to hold our existing fixed-rate debt either to maturity or until the sale of the associated property, these fixed-rate notes pose an interest rate risk to our results of operations and our working capital position only upon the refinancing of that indebtedness. Our possible risk is from increases in long-term interest rates that may occur as this may increase our cost of refinancing maturing fixed-rate debt. In addition, we may incur prepayment penalties or defeasance costs when prepaying or defeasing fixed-rate debt.
As of December 31, 2008, we had approximately $135.5 million of outstanding floating rate debt (excluding our interest rate swap), including $100.0 million of fixed rate borrowings that we have converted to floating rate borrowings through the use of hedging agreements. We do not believe that the interest rate risk represented by our floating rate debt is material as of December 31, 2008, in relation to our $1.1 billion of outstanding debt, $2.0 billion of total assets and $2.4 billion total market capitalization as of that date.
If interest rates on our variable rate debt increase by 1%, the increase in annual interest expense on our variable rate debt would decrease future earnings and cash flows by approximately $1.4 million. If interest rates on our variable rate debt decrease by 1%, the decrease in interest expense on our variable rate debt would increase future earnings and cash flows by approximately $1.4 million. This assumes that the amount outstanding under our variable rate debt remains at approximately $135.5 million (including the $100.0 million of fixed rate debt converted to floating rate debt through the use of hedging agreements), the balance as of December 31, 2008.
The fair value of our fixed-rate debt is $781.4 million, which includes the mortgage notes and fixed-rate portion of the senior unsecured notes payable (excluding the unamortized premium and the $100.0 million of fixed-rate debt converted to floating-rate debt through maturity). If interest rates increase by 1%, the fair value of our total fixed-rate debt would decrease by approximately $32.8 million. Conversely, if interest rates decrease by 1%, the fair value of our total outstanding debt would increase by approximately $35.0 million. This assumes that our total outstanding fixed-rate debt remains at $781.4 million, the balance as of December 31, 2008.
Hedging. To manage, or hedge, our exposure to interest rate risk, we follow established risk management policies and procedures, including the use of a variety of derivative financial instruments. We do not enter into derivative instruments for speculative purposes. We require that the hedges or derivative financial instruments be effective in managing the interest rate risk exposure that they are designated to hedge. This effectiveness is essential to qualify for hedge accounting. Hedges that meet these hedging criteria are formally designated as such at the inception of the contract. When the terms of an underlying transaction are modified, or when the underlying hedged item ceases to exist, resulting in some ineffectiveness, the change in the fair value of the derivative instrument will be included in earnings. Additionally, any derivative instrument used for risk management that becomes ineffective is marked-to-market each period and would be charged to operations.
We are exposed to credit risk in the event of non-performance by the counter-parties to the hedge agreements. We believe that we mitigate our credit risk by entering into these agreements with major financial institutions. Net interest differentials to be paid or received under a swap contract and/or collar agreement are included in interest expense as incurred or earned.
During 2004, concurrent with the issuance of $200.0 million unsecured senior notes, we entered into a $100.0 million notional principal variable rate interest swap with an estimated fair value of $949,000 as of December 31, 2008. This swap converted fixed rate debt to variable rate based on the six-month LIBOR in arrears plus 0.4375%, and matures April 15, 2009.
The estimated fair value of our derivative financial instruments has been determined using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that we could realize in a current market exchange. The use of different market assumptions or estimation methodologies may have a material effect on the estimated fair value.
- 48 -
Other Market Risks
As of December 31, 2008, we had no material exposure to any other market risks (including foreign currency exchange risk, commodity price risk or equity price risk).
In making this determination and for purposes of the Securities and Exchange Commission's market risk disclosure requirements, we have estimated the fair value of our financial instruments at December 31, 2008 based on pertinent information available to management as of that date. Although management is not aware of any factors that would significantly affect the estimated fair value amounts as of December 31, 2008, future estimates of fair value and the amounts which may be paid or realized in the future may differ significantly from amounts presented.
ITEM 8.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by Regulation S-X are included in this Form 10-K commencing on page.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including the principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of December 31, 2008, the end of the period covered by this report. Based on this evaluation, our principal executive officer and principal financial officer concluded as of December 31, 2008 that our disclosure controls and procedures were effective at the reasonable assurance level such that the information relating to us and our consolidated subsidiaries, required to be disclosed in our Securities and Exchange Commission (“SEC”) reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Management Report on Internal Control over Financial Reporting
The report of our management regarding internal control over financial reporting is set forth on page of this Annual Report on Form 10-K under the caption “Management Report on Internal Control over Financial Reporting” and incorporated herein by reference.
Attestation Report of Independent Registered Public Accounting Firm
The report of our independent registered public accounting firm regarding our internal control over financial reporting is set forth in page of this Annual Report on Form 10-K under the caption “Report of Independent Registered Public Accounting Firm” and incorporated herein by reference.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended December 31, 2008, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B.
OTHER INFORMATION
None.
- 49 -
PART III
ITEM 10.
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference from our definitive proxy statement to be filed within 120 days after the end of our fiscal year covered by this Form 10-K.
ITEM 11.
ITEM 11.
EXECUTIVE COMPENSATION
Incorporated by reference from our definitive proxy statement to be filed within 120 days after the end of our fiscal year covered by this Form 10-K.
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Equity Compensation Plan Information
The following table sets forth information regarding securities authorized for issuance under equity compensation plans as of December 31, 2008
The other information required by this item is incorporated by reference from our definitive proxy statement to be filed within 120 days after the end of our fiscal year covered by this Form 10-K.
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from our definitive proxy statement to be filed within 120 days after the end our fiscal year covered by this Form 10-K.
ITEM 14.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
Incorporated by reference from our definitive proxy statement to be filed within 120 days after the end our fiscal year covered by this Form 10-K.
- 50 -
PART IV
ITEM 15.
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
The following consolidated financial information is included as a separate section of this Form 10-K:
(b)
Exhibits: The following exhibits are filed as part of, or incorporated by reference into, this annual report.
- 51 -
- 52 -
*Identifies employee agreements, management contracts, compensatory plans or other arrangements.
(1)
Previously filed as an exhibit to our Quarterly Report on Form 10-Q for the period ended June 30, 2002, and incorporated by reference herein.
(2)
Previously filed as an exhibit to our Annual Report on Form 10-K for the period ended December 31, 2003, and incorporated by reference herein.
(3)
Previously filed by IRT Property Company as an exhibit to IRT’s Annual Report on Form 10-K for the period ending December 31, 1995, and incorporated by reference herein.
(4)
Intentionally Omitted.
(5)
Intentionally Omitted.
(6)
Previously filed by IRT Property Company as an exhibit to IRT’s Current Report on Form 8-K filed on September 15, 1998, and incorporated by reference herein.
(7)
Previously filed by IRT Property Company as an exhibit to IRT’s Current Report on Form 8-K filed on November 12, 1999, and incorporated by reference herein.
(8)
Previously filed as an exhibit to our Current Report on Form 8-K filed on February 20, 2003, and incorporated by reference herein.
(9)
Previously filed as an exhibit to our Quarterly Report on Form 10-Q for the period ended March 31, 2004, and incorporated by reference herein.
(10)
Previously filed as an exhibit to our Quarterly Report on Form 10-Q for the period ended June 30, 2005, and incorporated by reference herein.
(11)
Previously filed as an exhibit to our Current Report on Form 8-K filed on March 31, 2004, and incorporated by reference herein.
(12)
Previously filed as an exhibit to our Current Report on Form 8-K filed on September 20, 2005, and incorporated by reference herein.
(13)
Previously filed as an exhibit to our Annual Report on Form 10-K on March 3, 2006, and incorporated by reference herein.
- 53 -
(14)
Previously filed as an exhibit to our Current Report on Form 8-K on March 13, 2006, and incorporated by reference herein.
(15)
Previously filed as an exhibit to our Current Report on Form 8-K filed on August 22, 2006, and incorporated by reference herein.
(16)
Previously filed as an exhibit to our Annual Report on Form 10-K on March 16, 2005, and incorporated by reference herein.
(17)
Previously filed with our definitive Proxy Statement for the Annual Meeting of Stockholders held on June 30, 1999, and incorporated herein by reference.
(18)
Previously filed with our definitive Proxy Statement for the Annual Meeting of Stockholders held on May 21, 2004, and incorporated herein by reference.
(19)
Previously filed with our Current Report on Form 8-K filed on February 18, 2005, and incorporated by reference herein.
(20)
Previously filed by IRT Property Company as an exhibit to IRT’s Current Report on Form 8-K filed on March 22, 1989, and incorporated herein by reference.
(21)
Previously filed by IRT Property Company with IRT’s definitive Proxy Statement for the Annual Meeting of Stockholders held on May 22, 1998, and incorporated herein by reference.
(22)
Previously filed with our Registration Statement on Form S-11, as amended (Registration No. 333-3397), and incorporated herein by reference.
(23)
Previously filed as Appendix A to our definitive Proxy Statement for the Special Meeting of Stockholders held on September 6, 2001 and incorporated herein by reference.
(24)
Previously filed with our Annual Report Form 10-K/A filed on March 18, 2002, and incorporated herein by reference.
(25)
Previously filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q for the period ended September 30, 2002, and incorporated by reference herein.
(26)
Previously filed as an exhibit to our Quarterly Report on Form 10-Q on November 9, 2006, and incorporated by reference herein.
(27)
Previously filed as an exhibit to our Current Report on Form 8-K filed on April 20, 2007, and incorporated by reference herein.
(28)
Previously filed as Exhibit 2.1 to our Current Report on Form 8-K filed on October 30, 2002, and incorporated by reference herein.
(29)
Previously filed as an exhibit to our Current Report on Form 8-K filed on October 23, 2008, and incorporated by reference herein.
(30)
Previously filed as an exhibit to our Current Report on Form 8-K filed on March 16, 2004, and incorporated by reference herein.
(31)
Previously filed as an exhibit to our Current Report on Form 8-K filed on July 7, 2005, and incorporated by reference herein.
(32)
Previously filed as Annex A to our definitive Proxy Statement for the Annual Meeting of Stockholders held on June 4, 2007 and incorporated herein by reference
(33)
Previously filed as an exhibit to our Current Report on Form 8-K filed on March 18, 2008, and incorporated by reference herein.
(34)
Previously filed as an exhibit to our Quarterly Report on Form 10-Q filed on May 5, 2008, and incorporated by reference herein.
(35)
Previously filed as an exhibit to our Current Report on Form 8-K filed on September 29, 2008, and incorporated by reference herein.
(36)
Previously filed as an exhibit to our Current Report on Form 8-K filed on February 6, 2009, and incorporated by reference herein.
- 54 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: February 28,
EQUITY ONE, INC.
By:/s/ Jeffrey S. Olson
Jeffrey S. Olson
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities, and on the dates indicated.
SIGNATURE
TITLE
DATE
/s/ Jeffrey S. Olson
Chief Executive Officer and Director
February 28, 2009
Jeffrey S. Olson
(Principal Executive Officer)
/s/ Gregory R. Andrews
Executive Vice President and
February 28, 2009
Gregory R. Andrews
Chief Financial Officer
(Principal Accounting and
Financial Officer)
/s/ Chaim Katzman
Chairman of the Board
February 28, 2009
Chaim Katzman
/s/ Noam Ben-Ozer
Director
February 28, 2009
Noam Ben-Ozer
Director
February 28, 2009
James S. Cassel
/s/ Cynthia Cohen
Director
February 28, 2009
Cynthia Cohen
/s/ Neil Flanzraich
Director
February 28, 2009
Neil Flanzraich
/s/ Nathan Hetz
Director
February 28, 2009
Nathan Hetz
/s/ Peter Linneman
Director
February 28, 2009
Peter Linneman
/s/ Dori J. Segal
Director
February 28, 2009
Dori J. Segal
- 55 -
EQUITY ONE, INC. AND SUBSIDIARIES
Management Report on Internal Control over Financial Reporting
The management of Equity One, Inc. and subsidiaries (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting, defined in Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934, as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting, which requires the use of certain estimates and judgments, and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
·
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
·
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
·
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Reasonable assurance is based on the premise that the cost of internal controls should not exceed the benefits derived. Reasonable assurance includes the understanding that there is a remote likelihood that material misstatements will not be prevented or detected in a timely manner. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2008. In making this assessment, the Company’s management used the criteria set forth by the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has concluded that, as of December 31, 2008, the Company’s internal control over financial reporting is effective.
Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s independent registered public accounting firm has issued a report on the Company’s internal control over financial reporting. This report appears on the following page of this Form 10-K.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Equity One, Inc.
We have audited Equity One, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Equity One, Inc. and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Equity One, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Equity One, Inc. and subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of operations, comprehensive income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2008 of Equity One, Inc. and subsidiaries and our report dated February 27, 2009 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Certified Public Accountants
February 27, 2009
Miami, Florida
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Equity One, Inc.
We have audited the accompanying consolidated balance sheets of Equity One, Inc. and subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of operations, comprehensive income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2008. Our audits also included the financial statement schedules listed in the Index at Item 15(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Equity One, Inc. and subsidiaries at December 31, 2008 and 2007, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, the Company adopted SFAS No. 123(R), “Share-Based Payment,” applying the modified prospective method at the beginning of fiscal year 2006.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Equity One, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 27, 2009 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Certified Public Accountants
February 27, 2009
Miami, Florida
EQUITY ONE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2008 and 2007
(In thousands)
See accompanying notes to consolidated financial statements.
EQUITY ONE, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended December 31, 2008, 2007 and 2006
(In thousands, except per share amounts)
See accompanying notes to consolidated financial statements.
EQUITY ONE, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Years ended December 31, 2008, 2007 and 2006
(In thousands)
See accompanying notes to consolidated financial statements.
EQUITY ONE, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
For the years ended December 31, 2008, 2007 and 2006
(In thousands)
See accompanying notes to consolidated financial statements.
EQUITY ONE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended December 31, 2008, 2007 and 2006
(In thousands)
EQUITY ONE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2008, 2007 and 2006
(In thousands)
(Concluded)
See accompanying notes to the consolidated financial statements.
EQUITY ONE, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
1.
Organization and Basis of Presentation
Organization
Equity One, Inc. operates as a self-managed real estate investment trust (“REIT”) that principally acquires, renovates, develops and manages neighborhood and community shopping centers anchored by leading supermarkets, drug stores or discount retail store chains. As of December 31, 2008, our property portfolio comprises 160 properties, including 146 shopping centers consisting of approximately 16.0 million square feet of gross leasable area (“GLA”), four development/redevelopment properties, six non-retail properties and four parcels of land. As of December 31, 2008, our core portfolio was 92.1% leased and included national, regional and local tenants.
We currently own a 10% interest in GRI-EQY I, LLC (“GRI Venture”), which owns ten neighborhood shopping centers totaling approximately 1.4 million square feet of GLA as of December 31, 2008. The GRI Venture’s properties were 97.3% leased at December 31, 2008. Additionally, we own a 20% interest in G&I VI Investment South Florida Portfolio, LLC (“DRA Venture”) which owns one office building and two neighborhood shopping centers totaling approximately 503,000 square feet of GLA as of December 31, 2008. The DRA Venture’s properties were 67.6% leased at December 31, 2008.
Basis of Presentation
The consolidated financial statements include the accounts of Equity One, Inc. and its wholly-owned subsidiaries and those partnerships where it has financial and operating control. Equity One, Inc. and its subsidiaries are hereinafter referred to as the “consolidated companies”, the “Company”, “we”, “our”, “us” or similar terms. All significant intercompany transactions and balances have been eliminated in consolidation. Certain prior-period data have been reclassified to conform to the current period presentation.
2.
Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Properties
Income-producing properties are stated at cost, less accumulated depreciation and amortization. Costs include those related to acquisition, development and construction, including tenant improvements, interest incurred during development, costs of predevelopment and certain direct and indirect costs of development. Costs related to unsuccessful acquisition opportunities are expensed when it is probable that we will not be successful in the acquisition.
Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the assets, as follows:
Buildings
30-40 years
Buildings and Land Improvements
5-40 years
Tenant improvements
Lesser of minimum lease term or economic useful life
Furniture and Equipment
5-7 years
Expenditures for ordinary maintenance and repairs are expensed to operations as they are incurred. Significant renovations and improvements that improve or extend the useful lives of assets are capitalized. The useful lives of amortizable intangible assets are evaluated each reporting period with any changes in estimated useful lives being accounted for over the revised remaining useful life.
Cash and Cash Equivalents
We consider liquid investments with a purchase date life to maturity of three months or less to be cash equivalents.
Cash Held in Escrow
Cash held in escrow represents the cash proceeds of property sales that were held by qualified intermediaries in anticipation of the acquisition of replacement properties in tax-free exchanges under Section 1031 of the Internal Revenue Code.
Accounts Receivable
Accounts receivable includes amounts billed to tenants and accrued expense recoveries due from tenants. We make estimates of the un-collectability of our accounts receivable related to base rents, straight-line rent balances, expense reimbursements and other revenues. We analyze accounts receivable and historical bad debt levels, customer credit worthiness and current economic trends when evaluating the adequacy of the allowance for doubtful accounts using the specific identification method. In addition, tenants in bankruptcy are analyzed and estimates are made in connection with the expected recovery of pre-petition and post-petition claims. Our reported net income is directly affected by management’s estimate of the collectability of accounts receivable.
The allowance for doubtful accounts was approximately $3.1 million and $2.2 million at December 31, 2008 and December 31, 2007, respectively.
Long-lived Assets
We evaluate the carrying value of long-lived assets, including definite-lived intangible assets, when events or changes in circumstances indicate that the carrying value may not be recoverable. Such events and circumstances include, but are not limited to, significant decreases in the market value of the asset, adverse changes in the extent or manner in which the asset is being used, significant changes in business conditions, or cash flows associated with the use of the assets. The carrying value of a long-lived asset is considered impaired when the total projected undiscounted cash flows from such asset is separately identifiable and is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. For long-lived assets to be held and used, fair value of fixed (tangible) assets and definite-lived intangible assets is determined primarily using either the projected cash flows discounted at a rate commensurate with the risk involved or an appraisal. For long-lived assets to be disposed of by sale or other than by sale, fair value is determined in a similar manner, except that fair values are reduced for disposal costs. At December 31, 2008, we reviewed the operating properties and construction in progress for impairment on a property-by-property and project-by-project basis in accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS 144”), as we determined the current economic conditions to be a general indicator of impairment.
Each property was assessed individually and as a result, the assumptions used to derive future cash flows varied by property or project. These key assumptions are dependent on property-specific conditions and are inherently uncertain. The factors that may influence the assumptions include:
·
historical project performance, including current occupancy, projected capitalization rates and net operating income;
·
competitors’ presence and their actions;
·
properly specific attributes such as location desirability, anchor tenants and demographics;
·
current local market economic and demographic conditions; and
·
future expected capital expenditures and the timing before net operating income is stabilized.
After considering these factors, we project future cash flows for each property based on management’s intention for the respective properties (hold period) and, if appropriate, an assumed sale at the final year of the hold period using a projected capitalization rate. If the resulting carrying amount of the project exceeds the estimated undiscounted cash flows (including the projected sale using a capitalization rate) from the property, an impairment charge would be recognized to reduce the carrying value of the project to its fair value. Fair value would be determined by applying a risk adjusted discount rate to the future estimated cash flows for each project.
Properties Held for Sale
Under SFAS 144, the definition of a component of an entity, assuming no significant continuing involvement, requires that income producing properties that are sold or classified as held for sale be accounted for as discontinued operations. Accordingly, the results of operations of income producing properties disposed of or classified as held for sale for which we have no significant continuing involvement are reflected as discontinued operations. Given the nature of real estate sales contracts, it is customary for such contracts to allow potential buyers a period of time to evaluate the property prior to becoming committed to its acquisition. In addition, certain conditions to the closing of a sale, such as financing contingencies, often remain following the completion of the buyer’s due diligence review. As a result, properties under contract may not close within the expected time period, or may not close at all. However, notwithstanding these conditions, if we determine that the property meets the criteria of SFAS 144 and is likely to close within the time requirements, we typically classify a property as “discontinued operations” following completion of the buyer’s due diligence review. Otherwise, if we are unable to make such a determination, we do not classify a property as “discontinued operations” until all buyer contingencies are removed or it is sold.
Construction in Progress and Land Held for Development
Properties also include construction in progress and land held for development. These properties are carried at cost and no depreciation is recorded. Properties undergoing significant renovations and improvements are considered under development. All direct and indirect costs related to development activities are capitalized into construction in progress and land held for development on our consolidated balance sheets. Costs incurred include predevelopment expenditures directly related to a specific project including development and construction costs, interest, insurance and real estate tax expense. Indirect development costs include employee salaries and benefits, travel and other related costs that are directly associated with the development of the property. The capitalization of such expenses ceases when the property is ready for its intended use and has reached stabilization but no later than one-year from substantial completion of construction activity. If we determine that a project is no longer viable, all predevelopment project costs are immediately expensed. Similar costs related to properties not under development are expensed as incurred.
Our method of calculating capitalized interest is based upon applying our weighted average borrowing rate to the actual costs incurred. Total interest capitalized to construction in progress and land held for development was $2.9 million, $3.2 million, and $5.8 million for the years ended December 31, 2008, 2007 and 2006, respectively.
Investments In Unconsolidated Joint Ventures
We analyze our joint ventures under Financial Accounting Standards Board (“FASB”) Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities ("FIN 46R"), an interpretation of Accounting Research Bulletin No. 51 (“ARB No. 51”), as well as Emerging Issues Task Force No. 04-5, Determining Whether a General Partner, or General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights ("EITF 04-5") and the American Institute of Certified Public Accountants (AICPA) Statement of Position 78-9, Accounting for Investments in Real Estate Ventures ("SOP 78-9") in order to determine whether the entity should be consolidated. If it is determined that these investments do not require consolidation because the entities are not variable interest entities (“VIEs”) in accordance with FIN 46R, we are not considered the primary beneficiary of the entities determined to be VIEs, we do not have voting control, and/or the limited partners (or non-managing members) have substantive participatory rights, then the selection of the accounting method used to account for our investments in unconsolidated joint ventures is generally determined by our voting interests and the degree of influence we have over the entity.
We use the equity method of accounting for investments in unconsolidated joint ventures when we own more than 20% but less than 50% of the voting interests and have significant influence but do not have a controlling financial interest, or if we own less than 20% of the voting interests but have determined that we have significant influence. Under the equity method, our proportionate share of earnings or losses earned by the joint venture is recognized in equity in income (loss) of unconsolidated joint ventures in the accompanying consolidated statements of operations.
Securities
Our investments in securities are classified as available-for-sale and recorded at fair value based on current market prices. Changes in the fair value of the securities investments are included in accumulated other comprehensive income, except other-than-temporary decreases in fair value, which are recognized immediately as a change to earnings. We evaluate our investments in available-for-sale securities, such as our investment in DIM and our other debt and equity securities, for other-than-temporary declines each reporting period in accordance with Financial Accounting Standard 115, Accounting for Certain Investments in Debt and Equity Securities (“FAS 115”), FASB Staff Position 115-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (“FSP 115-1”), and Securities and Exchange Commission Staff Accounting Bulletin 103, Update of Codification of Staff Accounting Bulletins, (“SAB 103”). We performed this impairment review with respect to our investments for the year ended December 31, 2008, and recorded impairment during that period in the aggregate amount of $33.2 million. We considered the following quantitative and qualitative factors to determine if an impairment adjustment was needed:
·
our intent and ability to hold the securities for a period of time sufficient to allow for any anticipated recovery in fair value;
·
the financial and operational condition of the company underlying the security;
·
market and economic conditions that might affect the investments’ prospects;
·
the extent to which fair value is below our cost basis and the period of time over which the decline has existed; and
·
various other factors that could be indicators of the recoverability of the investment.
For expanded detail on the qualitative factors considered in the 2008 impairment review, refer to Note 8, Impairment Loss.
Goodwill
Goodwill reflects the excess of cost over the fair value of net assets acquired in various business acquisitions. We adopted SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”), on January 1, 2002.
We are required to perform annual, or more frequently in certain circumstances, impairment tests of our goodwill. We have elected to test for goodwill impairment in November of each year. The goodwill impairment test is a two-step process that requires us to make decisions in determining appropriate assumptions to use in the calculation. The first step consists of estimating the fair value of each reporting unit and comparing those estimated fair values with the carrying values, which include the allocated goodwill. If the estimated fair value is less than the carrying value, a second step is performed to compute the amount of the impairment by determining an “implied fair value” of goodwill. The determination of each reporting unit’s (each property is considered a reporting unit) implied fair value of goodwill requires us to allocate the estimated fair value of the reporting unit to its assets and liabilities. Any unallocated fair value represents the implied fair value of goodwill which is compared to its corresponding carrying amount. For the year ended December 31, 2008, we recorded $531,700 of goodwill impairment.
We cannot predict the occurrence of certain future events that might adversely affect the reported value of goodwill, which totaled approximately $11.8 million at December 31, 2008. Such events include, but are not limited to, strategic decisions made in response to economic and competitive conditions, the impact of the economic environment on our tenants, or a materially negative change in our relationships with significant tenants.
Goodwill was included in the determination of the gain on disposal of real estate due to the disposition of certain properties. For the years ended December 31, 2008, 2007 and 2006, $112,000, $595,000 and $604,000, respectively, was included in the gains on sale for these periods.
For expanded detail on the qualitative factors considered in the 2008 impairment review, refer to Note 8, Impairment Loss.
Deferred Costs and Intangibles
Deferred costs, intangible assets included in other assets, and intangible liabilities included in other liabilities consist of loan origination fees, leasing costs and the value of intangible assets when a property was acquired. Loan and other fees directly related to rental property financing with third parties are amortized over the term of the loan using the effective interest method. Direct salaries, third-party fees and other costs incurred by us to originate a lease are capitalized and are being amortized against the respective leases using the straight-line method over the term of the related leases. Intangible assets consist of in-place lease values, tenant origination costs and above-market rents that were recorded in connection with the acquisition of the properties. Intangible liabilities consist of below-market rents that are also recorded in connection with the acquisition of properties. Both intangible assets and liabilities are amortized accreted using the straight-line method over the term of the related leases. When a lease is terminated early, any remaining unamortized balances under lease intangible assets or liabilities are expensed.
Deposits
Deposits included in other assets comprise funds held by various institutions for future payments of property taxes, insurance and improvements, utility and other service deposits.
Minority Interest
On January 1, 1999, Equity One (Walden Woods) Inc., a wholly-owned subsidiary of ours, entered into a limited partnership as a general partner. An income-producing shopping center (“Walden Woods Village”) was contributed by its owners (the “Minority Partners”), and we contributed 93,656 shares of our common stock (the “Walden Woods Shares”) to the limited partnership at an agreed-upon price of $10.30 per share. Based on this per share price and the net value of property contributed by the Minority Partners, the limited partners received 93,656 partnership units. We have entered into a Redemption Agreement with the Minority Partners whereby the Minority Partners can request that we purchase either their limited partnership units or any shares of common stock that they may receive in exchange for their partnership units at a price of $10.30 per unit or per share at any time before January 1, 2014. Because of the Redemption Agreement, we consolidate the accounts of the partnership with our financial data. We have also entered into a Conversion Agreement with the Minority Partners under which, following notice, the Minority Partners can convert their partnership units into Walden Woods Shares. In addition, under the terms of the limited partnership agreement, the Minority Partners do not have an interest in the Walden Woods Shares except to the extent of dividends. Accordingly, a preference in earnings has been allocated to the Minority Partners to the extent of the dividends declared. The Walden Woods Shares are not considered outstanding in our consolidated financial statements and are excluded from the share count in the calculation of primary earnings per share.
We have controlling interests in two joint ventures that, together, own our Sunlake development project. We have funded all of the acquisition costs, are required to fund any necessary development and operating costs, receive an 8% preferred return on our advances and are entitled to 60% of the profits thereafter. The minority partners are not required to make contributions and, to date, have not contributed any capital. One joint venture has commenced construction of its retail project and the other joint venture is evaluating the future development of the remaining land parcels. No minority interest has been recorded as the venture has incurred operating losses after taking into account our preferred return.
Use of Derivative Financial Instruments
We account for derivative and hedging activities in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended and interpreted. These accounting standards require us to measure derivatives, including certain derivatives embedded in other contracts, at fair value and to recognize them in our consolidated balance sheets as assets or liabilities, depending on our rights or obligations under the applicable derivative contract. For derivatives designated as fair value hedges, the changes in the fair value of both the derivative instrument and the hedged item are recorded in earnings. For derivatives designated as cash flow hedges, the effective portions of changes in fair value of the derivative are reported in other comprehensive income and are subsequently reclassified into earnings when the hedged item affects earnings. Changes in fair value of derivative instruments not designated as hedging instruments, and ineffective portions of hedges, are recognized in earnings in the current period.
We do not enter into derivative instruments for speculative purposes. We require that the hedges or derivative financial instruments be effective in managing the interest rate risk exposure that they are designated to hedge. This effectiveness is essential to qualify for hedge accounting. Hedges that meet these hedging criteria are formally designated as such at the inception of the contract. When the terms of an underlying transaction are modified, or when the underlying hedged item ceases to exist, resulting in some ineffectiveness, the change in the fair value of the derivative instrument will be included in earnings. Additionally, any derivative instrument used for risk management that becomes ineffective is marked-to-market each period. We believe that our credit risk has been mitigated by entering into these agreements with major financial institutions. Net interest differentials to be paid or received under a swap contract and/or collar agreement are included in interest expense as incurred or earned.
The estimated fair value of our derivative financial instruments has been determined using available market information and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that we could realize in a current market exchange. The use of different market assumptions or estimation methodologies may have a material effect on the estimated fair value.
In 2006, we entered into an aggregate notional amount of $85.0 million of treasury locks. The treasury locks were executed to hedge the benchmark interest rate associated with forecasted interest payments relating to an anticipated issuance of fixed-rate borrowings. The treasury locks were terminated in connection with the issuance of $150.0 million of unsecured senior notes in April 2007. The realized loss on these hedging relationships has been deferred in other comprehensive income and is being amortized against earnings over the term of the debt as an adjustment to interest expense.
On March 24, 2004, concurrently with the issuance of $200.0 million 3.875% senior unsecured notes, we entered into a $100.0 million notional principal variable interest rate swap with an estimated fair value of $949,000 as of December 31, 2008. This swap converts fixed rate debt to variable rate based on the six-month LIBOR in arrears plus 0.4375%, and matures April 15, 2009.
Business Combinations
When we purchase real estate properties, we allocate the initial purchase price of assets acquired (net tangible and identifiable intangible assets) and liabilities assumed based on their relative fair values at the date of acquisition pursuant to the provisions of SFAS No. 141, Business Combinations (“SFAS 141”). Our initial fair value purchase price allocations may be refined as final information regarding the fair value of the assets acquired and liabilities assumed becomes available, and would be limited to one year from the acquisition date. We allocate the purchase price of the acquired property to land, building, improvements and intangible assets. The aggregate value of other acquired intangible assets, consisting of in-place leases, is measured by the excess of (i) the purchase price paid for a property after adjusting existing in-place leases to market rental rates over (ii) the estimated fair value of the property as-if-vacant, determined as set forth above. The value of in-place leases exclusive of the value of above-market and below-market in-place leases is amortized to expense over the remaining non-cancelable periods of the respective leases. If a lease were to be terminated prior to its stated expiration, all unamortized amounts relating to that lease would be written off. There are three categories of intangible assets to be considered: (1) in-place leases; (2) above and below-market value of in-place leases; and (3) customer relationships.
The value of in-place leases is estimated based on the fair value of at-market in-place leases considering the cost of acquiring similar leases, the foregone rents associated with the lease-up period and carrying costs associated with the lease-up period. Intangible assets associated with at-market, in-place leases are amortized as additional lease expense over the remaining contractual lease term.
Above-market and below-market in-place lease values for acquired properties are computed based on the present value of the difference between the contractual amounts to be paid pursuant to the leases negotiated and in-place at the time of acquisition and our estimate of fair market lease rates for the property or comparable property, measured over a period equal to the remaining contractual lease period. The value of above-market lease assets is amortized as a reduction of rental income over the remaining terms of the respective leases. The value of below-market lease liabilities is amortized as an increase to rental income over the remaining terms of the respective leases.
We evaluate business combinations to determine the value, if any, of customer relationships separate from customer contracts (leases). Other than as discussed above, we have determined that our real estate properties do not have any other significant identifiable intangibles.
The results of operations of acquired properties are included in our financial statements as of the dates they are acquired. The intangible assets and liabilites associated with property acquisitions are included in other assets and other liabilities in our consolidated balance sheets. In the event that a tenant terminates its lease, all unamortized costs are written-off as a charge to depreciation expense.
Revenue Recognition
Rental income includes minimum rents, expense reimbursements, termination fees and percentage rental payments. Minimum rents are recognized on an accrual basis over the terms of the related leases on a straight-line basis. As part of the leasing process, we may provide the lessee with an allowance for the construction of leasehold improvements. Leasehold improvements are capitalized and recorded as tenant improvements and depreciated over the shorter of the useful life of the improvements or the lease term. If the allowance represents a payment for a purpose other than funding leasehold improvements, or in the event we are not considered the owner of the improvements, the allowance is considered a lease incentive and is recognized over the lease term as a reduction to rental revenue. Factors considered during this evaluation include, among others, the type of improvements made, who holds legal title to the improvements, and other controlling rights provided by the lease agreement. Lease revenue recognition commences when the lessee is given possession of the leased space and there are no contingencies offsetting the lessee’s obligation to pay rent.
Many of the lease agreements contain provisions that require the payment of additional rents based on the respective tenant’s sales volume (contingent or percentage rent) and substantially all contain provisions that require reimbursement of the tenant’s share of real estate taxes, insurance and common area maintenance costs, or CAM. Revenue based on percentage of a tenant’s sales is recognized only after the tenant exceeds its sales breakpoint. Revenue from tenant reimbursements of taxes, CAM and insurance is recognized in the period that the applicable costs are incurred in accordance with the lease agreements.
We recognize gains or losses on sales of real estate in accordance with SFAS No. 66 Accounting for Sales of Real Estate (“SFAS 66”). Profits are not recognized until (a) a sale has been consummated; (b) the buyer’s initial and continuing investments are adequate to demonstrate a commitment to pay for the property; (c) our receivable, if any, is not subject to future subordination; and (d) we have transferred to the buyer the usual risks and rewards of ownership, and we do not have a substantial continuing involvement with the property. The sales of income producing properties where we do not have a continuing involvement are presented in the discontinued operations section of our consolidated statements of operations.
We are engaged by two joint ventures to provide asset management, property management, leasing and investing services for such venture’s respective assets. We receive fees for our services, including a property management fee calculated as a percentage of gross revenues received, and recognize these fees as the services are rendered.
Earnings Per Share
Earnings per share is accounted for in accordance with SFAS No. 128, Earnings per Share, which requires a dual presentation of basic and diluted earnings per share on the face of the consolidated statement of operations. Basic earnings per share is computed by dividing net income attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. We calculate the dilutive effect of share-based payment compensation arrangements using the treasury stock method. This method assumes that the proceeds we receive from the exercise of stock options and non-vested stock are used to repurchase common shares in the market. The adoption of SFAS No. 123(R), Share-Based Payment (“SFAS 123(R)”), requires that we include, as assumed proceeds, the amount of compensation cost attributed to future services and not yet recognized, and the amount of tax benefits (both deferred and current), if any, that would be credited to additional paid-in capital assuming exercise of the options and vesting of the restricted shares.
Income Taxes
We elect to be taxed as a REIT and believe that we qualify as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”). To maintain REIT status for federal income tax purposes, we are required to distribute at least 90% of our REIT taxable income to our stockholders as well as comply with certain other requirements as defined by the Code. Accordingly, we are not subject to federal corporate income tax to the extent that we distribute 100% of our REIT taxable income each year.
Although we may qualify for REIT status for federal income tax purposes, we may be subject to state income or franchise taxes in certain states in which some of our properties are located. In addition, taxable income from non-REIT activities managed through our taxable REIT subsidiaries (“TRS”) are subject to federal, state and local income taxes.
TRS income taxes are accounted for under the asset and liability method as required by SFAS No. 109, Accounting for Income Taxes. Under the asset and liability method, deferred income taxes are recognized for the temporary differences between the financial reporting basis and the tax basis of the TRS assets and liabilities and for operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. We provide a valuation allowance for deferred tax assets that we do not anticipate will be realized. Prior to 2008, our TRSs did not have significant tax provisions or net deferred income tax items.
In June 2006, the FASB issued SFAS Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”). FIN 48 requires that all tax positions subject to SFAS No. 109, Accounting for Income Taxes, be analyzed using a two-step approach. The first step requires an entity to determine if a tax position would more likely than not be sustained upon examination. In the second step, the tax benefit is measured as the largest amount of benefit, determined on a cumulative probability basis that is more likely than not to be realized upon ultimate settlement. FIN 48 was effective for fiscal years beginning after December 15, 2006, with any adjustment in a company’s tax provision being accounted for as a cumulative effect of accounting change in beginning equity. The adoption of the standard did not have a material impact on our consolidated financial statements.
Share-Based Payment
Cumulative Effect of Change in Accounting Principle
Prior to January 1, 2006, we accounted for share-based payments under the recognition and measurement provisions of Accounting Principle Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”) , and related interpretations, as permitted by SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”). Under APB No. 25, no stock-based compensation costs were recognized in the statement of operations as our options granted had an exercise price equal to the market value of our common shares on the date of grant. Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS 123(R), using the modified-prospective-transition method. Under this transition method, compensation costs recognized beginning January 1, 2006 include: (a) compensation costs for all share-based payments granted prior to, but not vested as of, January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, and (b) compensation costs for all share-based payments granted subsequent to January 1, 2006 based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R). We use the Black-Scholes-Merton valuation model to value stock options.
On January 1, 2006, we recorded the cumulative effect of adopting SFAS 123(R). This cumulative effect resulted in decreasing accrued liabilities by $4.5 million and increasing shareholder equity by $4.5 million. These balance sheet changes related to deferred compensation on unvested shares. There was no effect on the consolidated statement of operations or cash flows. Under SFAS 123(R), deferred compensation is no longer recorded at the time unvested shares are issued. Share-based compensation is now recorded over the requisite service period with an offsetting credit to equity (generally additional paid-in capital).
Share-Based Payment Subsequent to the Adoption of SFAS 123(R)
Share-based compensation expense charged against earnings for the years ended December 31, 2008, 2007 and 2006 is summarized as follows:
Segment Reporting
We invest in retail shopping centers through direct ownership or through joint ventures. It is our intent that all retail shopping centers will be owned or developed for investment purposes; however, we may decide to sell all or a portion of a development upon completion. Our revenue and net income are generated from the operation of our investment portfolio. We also earn fees from third parties for services provided to manage and lease retail shopping centers owned through joint ventures.
Our portfolio is primarily located throughout the southeastern United States; however, we do not distinguish or group our operations on a geographical basis for purposes of allocating resources or measuring performance. We review operating and financial data for each property on an individual basis; therefore, each of our individual properties is a separate operating segment. No individual property constitutes more than 4% of our combined revenue, net income or assets, and thus the individual properties have been aggregated into one reportable segment based upon their similarities with regard to both the nature and economics of the centers, tenants and operational processes, as well as long-term average financial performance. In addition, none of the shopping centers are located outside the United States.
Concentration of Credit Risk
A concentration of credit risk arises in our business when a national or regionally based tenant occupies a substantial amount of space in multiple properties owned by us. In that event, if the tenant suffers a significant downturn in its business, it may become unable to make its contractual rent payments to us, exposing us to potential losses in rental revenue, expense recoveries, and percentage rent. Further, the impact may be magnified if the tenant is renting space in multiple locations. Generally, we do not obtain security from our nationally-based or regionally-based tenants in support of their lease obligations to us. We regularly monitor our tenant base to assess potential concentrations of credit risk. As of December 31, 2008, Publix Super Markets accounted for over 10%, or approximately $18.1 million, of our aggregated annualized minimum rent. No other tenant accounted for over 5% of our annualized minimum rent.
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. We adopted the requirements of SFAS 157 as of January 1, 2008 without a material impact on our consolidated financial statements, as more fully disclosed in Note 9 thereto, Fair Value Measurements. In February 2008, the FASB issued FASB Staff Position Paper (“FSP”) FAS 157-2, Effective Date of FASB Statement No. 157 (“FSP 157-2”), which delays the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed in the financial statements on a nonrecurring basis to fiscal years beginning after November 15, 2008. In October 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for that Asset is Not Active (“FSP 157-3”). FSP 157-3 clarifies the application of SFAS 157 in a market that is not active. We have not applied the provisions of SFAS 157 to our nonfinancial assets and nonfinancial liabilities in accordance with FSP 157-2 and FSP 157-3.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”), which allows entities to voluntarily choose, at specified election dates, to measure many financial assets and financial liabilities at fair value. The election is made on an instrument-by-instrument basis and is irrevocable. Subsequent to the adoption of SFAS 159, changes in fair value for the particular instruments must be reported in earnings. Upon initial adoption, SFAS 159 provided entities with a one-time election of the fair value option for existing eligible items. The effect of the first measurement to fair value should be reported as a cumulative-effect adjustment to the opening balance of retained earnings in the year the statement is adopted. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We did not elect the fair value option for financial assets or liabilities existing on the January 1, 2008 adoption date. We will consider the applicability of the fair value option for assets acquired or liabilities incurred in future transactions.
In December 2007, the FASB issued SFAS No. 141 (R), Business Combinations (“SFAS 141(R)”). SFAS 141(R) of a business to measure at fair value the assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date, with limited exceptions. In addition, this standard requires acquisition costs to be expensed as incurred and changes the accounting related to acquisitions and business combinations to more of a fair value based approach. The standard is effective for fiscal years beginning after December 15, 2008 and is to be applied prospectively, with no earlier adoption permitted. The adoption of this standard may have an impact on the accounting for certain costs related to our future acquisitions. Pursuant to the SFAS No. 141 (R), in the fourth quarter of 2008 a charge in the amount of $500,000 was recognized in general administrative expense associated with previously capitalized acquisition costs that are no longer capitalizable under SFAS 141(R). As noted in footnote 20 Subsequent Events, we increased our ownership to greater than 50% in DIM subsequent to December 31, 2008. In addition, as a result of our increased influence over DIM, we currently anticipate consolidating the results of DIM with ours beginning with the first quarter of 2009. Finally, we are still evaluating the accounting treatment of this increased investment both relating to its prior treatment under the cost method and the allocation of the purchase price. Given recent accounting guidance, our acquisition may be treated as a multistep acquisition and, therefore, have an effect on earnings in the three months ending March 31, 2009.
In December 2007, the FASB issued SFAS 160, Noncontrolling Interests in Consolidated Financial Statements (“SFAS 160), which requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and non-controlling interest. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008. The adoption of this standard is not expected to have a material effect on our consolidated results of operations, yet will require additional disclosures relating to our joint venture at Sunlake and our down-REIT at Walden Woods Village and will effect our disclosure for the three months ending March 31, 2009.
In March 2008, the FASB issued SFAS No. 161, Disclosures About Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133, (“SFAS 161”). SFAS 161 expands the disclosure requirements in SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, regarding an entity’s derivative instruments and hedging activities. SFAS 161 is effective for fiscal years beginning after December 1, 2008. We are currently evaluating the impact that adoption of SFAS 161 will have on our consolidated financial statements.
In April 2008, the FASB issued FSP SFAS No. 142-3, Determination of the Useful Life of Intangible Assets (“FSP SFAS 142-3”). FSP SFAS 142-3 amends paragraph 11(d) of FASB SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”), which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142. FSP SFAS 142-3 is intended to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under FSP SFAS 142-3. FSP SFAS 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and must be applied prospectively to intangible assets acquired after the effective date. We are currently evaluating the impact that adoption of FSP SFAS 142-3 will have on our consolidated financial statements.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (“SFAS 162”). SFAS 162 is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements for nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States of America. SFAS 162 will be effective 60 days following the U.S. Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Fairly Presented in Conformity with Generally Accepted Accounting Principles. We are currently evaluating the impact that the adoption of SFAS 162 will have on our consolidated financial statements.
In June 2008, the FASB issued FASB Staff Position Emerging Issues Task Force 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSP-EITF 03-6-1”). Under FSP-EITF 03-6-1, unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. FSP-EITF 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years and requires retrospective application. We are currently evaluating the impact of adopting FSP-EITF 03-6-1 on our earnings per share.
In December 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8, Disclosure by Public Entities (Enterprises) About Transfers of Financial Assets and Interests in Variable Interest Entities. The purpose of the FSP is to promptly improve disclosures by public companies until the pending amendments to FASB SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities (“SFAS 140”), and FIN 46R are finalized and approved by the FASB. The FSP amends SFAS 140 to require public companies to provide additional disclosures about a transferor’s continuing involvement with transferred financial assets. It also amends FIN 46R by requiring public companies to provide additional disclosures regarding their involvement with variable interest entities. This FSP is effective for fiscal years beginning after December 1, 2008. We do not expect the FSP will have a material effect on our consolidated financial statements.
Fair value of financial instruments
The estimated fair values of financial instruments have been determined by us using available market information and appropriate valuation methods. Considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that we could realize in a current market exchange. The use of different market assumptions and/or estimation methods may have a material effect on the estimated fair value amounts. We have used the following market assumptions and/or estimation methods:
Cash and Cash Equivalents and Accounts and Other Receivables. The carrying amounts reported in the balance sheets for these financial instruments approximate fair value because of their short maturities.
Notes Receivable. The fair value is estimated by using the current interest rates at which similar loans would be made. The carrying amounts reported in the balance sheets approximate fair value.
Available for Sale Securities. The fair value estimated at December 31, 2008 and 2007 was $160.6 million and $72.3 million, respectively, based on the closing market prices of the securities. The unrealized holding loss was $21.3 million at December 31, 2008, and $7.9 million at December 31, 2007.
Mortgage Notes Payable. The fair value estimated at December 31, 2008 and 2007 was $383.5 million and $426.4 million, respectively, calculated based on the net present value of payments over the term of the loans using estimated market rates for similar mortgage loans and remaining terms.
Unsecured Revolving Credit Facilities. The fair value estimated at December 31, 2008 was $31.4 million, calculated by using the current rates at which similar loans would be made and remaining terms. The carrying amounts reported in the balance sheets approximate fair value.
Unsecured Senior Notes Payable. The fair value estimated at December 31, 2008 and 2007 was $498.0 million and $704.7 million, calculated based on the net present value of payments over the terms of the notes using estimated market rates for similar notes and remaining terms.
3.
Properties
The following table is a summary of the composition of properties in the consolidated balance sheets:
4.
Accounts and Other Receivables
The following table is a summary of the composition of accounts and other receivables in the consolidated balance sheets:
5.
Other Assets
The following is a summary of the composition of other assets in the consolidated balance sheets:
The following is a summary of the composition of our intangible assets and accumulated amortization as of December 31, 2008 and 2007:
The amortization for the next five years for the recorded intangible assets is approximately $2.7 million, $2.0 million, $1.6 million, $1.3 million and $1.0 million, respectively. At December 31, 2008 and 2007, the gross carrying amount of our intangible liabilities is $25.8 million and $30.7 million, respectively, and the accumulated amortization was $11.9 million and $9.5 million, respectively. Our intangible liabilities are solely composed of below-market rent adjustments. The amortization for the next five years for the recorded intangible liabilities is approximately $3.7 million, $2.7 million, $1.8 million, $1.4 million and $1.2 million, respectively.
6.
Borrowings
The following table is a summary of our mortgage notes payable balances for the years ended December 31, 2008 and December 31, 2007:
The weighted average interest rate of the mortgage notes payable at December 31, 2008 and December 31, 2007 was 7.22% and 7.42%, respectively, excluding the effects of the net premium adjustment.
Each of the existing mortgage loans is secured by a mortgage on one or more of our properties. Certain of the mortgage loans involving an aggregate principal balance of approximately $63.9 million contain prohibitions on transfers of ownership which may have been violated by our previous issuances of common stock or in connection with past acquisitions and may be violated by transactions involving our capital stock in the future. If a violation were established, it could serve as a basis for a lender to accelerate amounts due under the affected mortgage. To date, no lender has notified us that it intends to accelerate its mortgage. In the event that the mortgage holders declare defaults under the mortgage documents we will, if required, repay the remaining mortgage from existing resources, refinancing of such mortgages, borrowings under its revolving lines of credit or other sources of financing. Based on discussions with various lenders, current credit market conditions and other factors, we believe that the mortgages will not be accelerated. Accordingly, we believe that the violations of these prohibitions will not have a material adverse impact on our results of operations or financial condition.
On September 25, 2008, we obtained a $65.0 million loan secured by a mortgage on our Sheridan Plaza shopping center located in Hollywood, Florida. The loan matures on October 10, 2018, and principal and interest are payable in arrears monthly based on a 30-year amortization and a 6.25% annual interest rate.
During the year ended December 31, 2008, we prepaid, without penalty, $36.9 million in mortgage loans.
Our outstanding unsecured senior notes at December 31, 2008 and December 31, 2007 consist of the following:
Our unamortized/unaccreted premium / (discount) on our mortgage notes payable and notes payable at December 31, 2008 and December 31, 2007 consists of the following:
The weighted average interest rate of the unsecured senior notes at December 31, 2008 and 2007 was 5.66% and 5.67%, respectively, excluding the effects of the interest rate swap and net premium adjustment.
During the year ended December 31, 2008, we purchased $88.0 million of our outstanding unsecured senior notes, with varying maturities, which generated a gain on the early extinguishment of debt of $6.4 million for the year ended December 31, 2008.
The indentures under which our unsecured senior notes were issued have several covenants which limit our ability to incur debt, require us to maintain an unencumbered assets ratio above a specified level and limit our ability to consolidate, sell, lease, or convey substantially all of our assets to, or merge with, any other entity. These notes have been guaranteed by most of our subsidiaries.
On March 24, 2004, we swapped $100.0 million notional principal of the $200.0 million, 3.875% senior notes to a floating interest rate based on the six-month LIBOR in arrears plus 0.4375%. The swap matures April 15, 2009, concurrently with the maturity of the 3.875% senior notes.
The following table provides a summary of our unsecured revolving lines of credit balances at December 31, 2008 and December 31, 2007:
On October 17, 2008, we amended and restated our credit agreements with a syndicate of banks to provide for a $227.0 million unsecured revolving credit facility that replaced our existing facility that would have expired in January 2009. The amended facility bears interest at our option at (i) applicable LIBOR plus 1.00% to 1.70%, depending on the credit ratings of our senior unsecured notes, or (ii) daily LIBOR plus 3.0%. The amended facility also includes a competitive bid option which allows us to conduct auctions among the participating banks for borrowings at any one time outstanding up to 50% of the lender commitments, a $35.0 million swing line facility for short term borrowings and a $20.0 million letter of credit commitment. Subject to the terms and conditions in the amended credit agreement the total commitments under the facility may be increased up to a total of $400.0 million. The amended facility expires on October 17, 2011, with a one year extension option. In addition, the amended facility contains customary covenants, including financial covenants regarding debt levels, total liabilities, interest coverage, fixed charge coverage ratios, unencumbered properties, and permitted investments. If a default under the facility were to arise, our ability to pay dividends is limited to the amount necessary to maintain our status as a REIT unless the default is a payment default or bankruptcy event in which case we are prohibited from paying any dividends.
The interest rate in effect at December 31, 2008 and December 31, 2007, was 2.14% and 5.00%, respectively. The facility also provides for the issuance of letters of credit, of which there were $12.3 million issued at December 31, 2008.
We also have a $15.0 million unsecured credit facility with City National Bank of Florida, on which there was no outstanding balance as of December 31, 2008 and December 31, 2007. This facility also provides for the issuance of $527,000 in outstanding letters of credit. In addition, we also have a $55,000 outstanding secured letter of credit with Bank of America.
As of December 31, 2008, the availability under the various credit facilities was approximately $193.7 million net of outstanding balances and letters of credit and subject to the covenants in the loan agreements.
Principal maturities (including scheduled amortization payments) of the notes payable as of December 31, 2008 are as follows:
Interest costs incurred, excluding amortization of discount/premium, were $65.7 million, $72.4 million and $64.8 million in the years ended December 31, 2008, 2007, 2006, respectively, of which $2.9 million, $3.2 million and $5.8 million were capitalized, respectively.
7.
Securities
Our investments in securities are classified as available-for-sale and recorded at fair value based on current market prices, and consist of debt and equity securities.
As of December 31, 2008, our equity securities consisted primarily of approximately 4.0 million ordinary shares of DIM Vastgoed N.V., or DIM, representing 48.0% of the total outstanding ordinary shares of DIM. DIM is a public company organized under the laws of the Netherlands, the shares of which are listed on NYSE Euronext Amsterdam stock exchange and which operates as a closed-end investment company owning and operating a portfolio of 21 shopping center properties aggregating approximately 2.6 million square feet in the southeastern United States. In addition, we own approximately $475,000 of preferred stock of another REIT.
During the year ended December 31, 2008, we purchased various short term debt securities with an aggregate principal balance of $132.7 million, at a net discount of approximately $557,000. As of December 31, 2008, our total investment in these debt securities, which have various maturities through January 2010 and are classified as available-for-sale, was $128.4 million. Interest earned on these securities was $3.1 million during the year ended December 31, 2008. There were no comparable investments for the years ended December 31, 2007 and 2006.
Other-than-temporary changes in the fair value of the equity and debt investments are included on our consolidated balance sheets in accumulated other comprehensive income (loss). If a decline in fair value is other-than-temporary, then an impairment is recognized in earnings. For the year ended December 31, 2008, we recorded a $33.2 million impairment loss in our consolidated statement of operations with respect to our investment in DIM’s ordinary shares and our preferred stock holdings. Refer to note 8 for additional explanation on the impairment loss recorded.
The following table reflects the fair value of our investments, together with the realized losses and unrealized losses that are not deemed other-than-temporarily:
8.
Impairment Loss
Goodwill
The provisions of SFAS No. 142 Goodwill and Other Intangible Assets require that goodwill and indefinite-lived intangible assets be tested at least annually for impairment and require reporting units to be identified for the purpose of assessing potential future impairments of goodwill. The carrying value of goodwill and indefinite-lived intangibles is considered impaired when their fair value, as established by appraisal or based on discounted future cash flows of certain related properties, is less than their carrying value. During the fourth quarter of 2008, we performed our annual review of goodwill for impairment. We projected future cash flows for all properties with goodwill using a ten year hold period and assumed sale at year ten using a projected capitalization rate. Fair value was then determined by applying a risk-adjusted discount rate, which varied by property, to the future estimated cash flows for each property. If the carrying amount of the project exceeded the estimated fair value (including the projected sale using a capitalization rate) from the property, an impairment charge was recognized to reduce the carrying value of the project to fair value. Seven properties were determined to have goodwill impairments; accordingly $531,700 was recorded in impairment loss. There were no comparable goodwill impairment losses incurred in prior periods.
Construction in progress
As indicated in Note 2, at December 31, 2008, we reviewed the construction projects in place on a project-by-project basis in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS 144”). We measured the recoverability of assets by comparing the carrying amount of an asset to its estimated future undiscounted cash flows. For the purpose of this analysis, we used current development plans and management’s intention with regard to future development assumptions, including estimated cash flows required to complete construction, estimated timing to reach stabilized net operating income, hold period for the asset subsequent to reaching stabilized net operating income before sale, and the projected sale price using an assumed capitalization rate. At the end of 2008, we elected not to pursue two redevelopment projects. For the year ended December 31, 2008, we impaired $3.8 million related to these two projects. There were no comparable charges in the years ended December 31, 2007 and 2006.
Other-Than-Temporary Impairment of Securities
As of December 31, 2008, we indirectly owned approximately 4.0 million ordinary shares of DIM Vastgoed N.V., or DIM, representing 48.0% of the total outstanding ordinary shares of DIM. As of December 31, 2008, this investment in DIM is accounted for as an available-for-sale security because of our inability to exert significant influence over DIM’s operating or financial policies and, based on DIM’s organizational and capital structure, we were unable to participate in the affairs of DIM’s supervisory board. As an available-for-sale security, the investment is and has been recorded on our balance sheets at its fair value based on the market price of the ordinary shares. Temporary declines in the fair value of those shares have been included in accumulated other comprehensive loss. Declines that are deemed other-than-temporary are recognized as an impairment loss in our statement of operations.
We evaluate our investments in available-for-sale securities, such as our investment in DIM, for other than temporary declines each reporting period in accordance with FAS 115, FSP 115-1 and SAB 103. We performed this impairment review with respect to our DIM investment for the year ended December 31, 2008, and we considered the following quantitative and qualitative factors to determine if an impairment adjustment was needed:
·
our intent and ability to hold the securities for a period of time sufficient to allow for any anticipated recovery in fair value;
·
our assessment of the net asset value of the properties held by DIM based upon our expertise in the shopping center real estate business;
·
the assessment by DIM’s management of its net asset value, or NAV, based upon its use of fair value accounting;
·
the financial and operational condition of DIM’s properties;
·
market and economic conditions that might affect DIM’s prospects;
·
the extent to which fair value of DIM is below our cost basis and the period of time over which the decline has existed;
·
the relevance of the market price given the thin trading in DIM shares and the concentration of share ownership between ourselves and one other institutional investor; and
·
the share-price premium that might be warranted given our ownership of a large block of the outstanding common stock.
Following our review of these factors in the third quarter of 2008, and given the deteriorating market conditions for real estate equities during that period, we determined that the decline was other than temporary. As a result, we recorded an impairment loss of $32.8 million during the year ended December 31, 2008. This impairment charge represented the difference between our cost basis of $79.4 million and the market value of $46.6 million on September 30, 2008. Subsequent to recording the impairment of DIM on September 30, 2008 and through the year ended December 31, 2008, we purchased an additional 197,000 shares of DIM and recorded any additional changes in value of our holdings of the security in other comprehensive income.
As of December 31, 2008, we reviewed our holding of a preferred stock of a public REIT for other than temporary declines in fair value, taking into consideration the factors listed above. As a result of our analysis, we recorded an impairment loss of $380,000 as of December 31, 2008, representing the difference between our cost basis of $855,000 and the market value of $475,000 on that date.
9.
Consolidating Financial Information
Most of our subsidiaries have guaranteed our indebtedness under the unsecured senior notes and the revolving credit facility. The guarantees are joint and several and full and unconditional.
10.
Property Dispositions
As of December 31, 2008, we had no properties held for sale.
The following table provides a summary of property disposition activity during the year ended December 31, 2008:
Pursuant to SFAS 144, the accompanying statements of operations have been retrospectively adjusted to reflect the classification of discontinued operations. The summary selected operating results for income-producing properties disposed of as of December 31, 2008, 2007 and 2006 with no significant continuing involvement, are as follows:
As a result of our significant continuing involvement following the sale of the properties to the GRI joint venture, the operating results of these properties are included in income from continuing operations for the current reporting periods up to the time of sale.
The results of operations of these properties (in which we maintained continuing involvement) for the periods following the date of sale have not been consolidated, but have been accounted for under the equity method of accounting.
11.
Investments in Unconsolidated Joint Ventures
During the year ended December 31, 2008, we entered into two joint ventures for the purpose of acquiring and managing commercial and retail real estate.
On February 22, 2008, we formed a joint venture with Global Retail Investors, LLC, an entity formed by an affiliate of First Washington Realty, Inc. and the State of California Public Employees’ Retirement System. We have a 10% ownership interest in the GRI joint venture. On April 1, 2008, the joint venture agreement was amended and restated in connection with the sale and contribution of seven income-producing properties and one outparcel to the joint venture. The aggregate gross sales price of the seven assets was $176.8 million and the assets were sold in two tranches during the quarter ended June 30, 2008. The properties had a net book value of $152.6 million, and we recognized a total gain on sale of approximately $18.5 million, which is net of approximately $2.4 million of costs incurred in connection with the defeasance of existing mortgage debt paid for by the purchaser. At the closings, $9.3 million of the sale proceeds were contributed by us as our investment in the joint venture. On November 13, 2008, we sold an additional two properties to the joint venture which had a net book value of $21.9 million. We recognized a total gain on sale of approximately $3.2 million and $1.2 million of the sale proceeds were contributed by us as our investment in the joint venture.
Pursuant to SFAS 66, the sale of the properties to the GRI joint venture qualifies as a partial sale because we retained an equity interest in the buyer, and the gain on sale amounts noted above were calculated based on 90% of the properties being sold. The remaining amount of the gain, which totaled $2.9 million, is deferred until such time as the entity is liquidated or the assets are sold. We have no direct or indirect guarantees of indebtedness related to this transaction as of December 31, 2008, other than customary non-recourse carve-out obligations associated with its mortgage indebtedness.
On April 29, 2008, we entered into a joint venture with an affiliate of DRA Advisors, LLC to invest in value-added acquisition opportunities. The joint venture is 80% owned by the affiliate of DRA and 20% owned by us. During 2008, the venture completed its acquisition of a portfolio of three properties comprised of one office building and two neighborhood shopping centers totaling approximately 503,000 square feet of GLA. We have agreed to manage all three of the properties and will act as leasing agent for the two retail properties acquired by the joint venture. As part of this acquisition, we contributed $3.2 million to the joint venture. Our capital contribution represents our pro-rata portion of the net purchase price, after the assumption by the joint venture of existing mortgage indebtedness.
The following is a summary of our investments in unconsolidated joint ventures (in thousands):
Total equity in earnings from these joint ventures totaled $108,000 for the year ended December 31, 2008, and fees associated with these joint ventures totaled approximately $773,000 for the year ended December 31, 2008. There were no comparable fees or equity in earnings associated with joint ventures in the same 2007 period.
12.
Stockholders’ Equity and Earnings Per Share
Equity
On September 24, 2008, we entered into an underwriting agreement with several underwriters with respect to the issue and sale of 2,200,000 shares of our common stock in an underwritten public offering. The shares were offered to the public at $21.47 per share. The issuance of the shares was registered under the Securities Act of 1933 pursuant to our shelf registration statement.
Contemporaneous with the execution of the underwriting agreement, we entered into a common stock purchase agreement with an affiliate of our largest stockholder, Gazit-Globe, Ltd., which may be deemed to be controlled by Chaim Katzman, the chairman of our board of directors. Under the purchase agreement, Gazit’s affiliate agreed to purchase 440,000 shares of our common stock at the public offering price in a private placement. In connection with the purchase agreement, we also executed a registration rights agreement granting the investor customary demand and “piggy-back” registration rights.
On September 29, 2008, we completed the public offering and concurrent private placement in accordance with the underwriting agreement and purchase agreement. The offerings resulted in net cash proceeds of approximately $54.7 million to the company.
On May 11, 2006, our board of directors authorized a $50.0 million share repurchase plan. On July 24, 2006, the board increased the size of the plan to $100.0 million. The plan, which does not have an explicit expiration date, allows, but does not require, the repurchase of common stock in open market and private transactions. Under the share repurchase plan, we expended approximately $69.1 million for approximately 3.0 million shares during the year ended December 31, 2006. No shares were acquired during the years ended December 31, 2007 or 2008. In furtherance of this authorization, we have in place a plan with a broker for pre-authorized purchases within defined market price limits pursuant to Rule 10b5-1 and other applicable securities regulations. This plan may be terminated at any time in our discretion and we may enter into other such plans.
Dividend Reinvestment Plan
We had a Dividend Reinvestment and Share Purchase Plan whereby stockholders could invest cash distributions and make optional cash purchases of our common stock. Effective March 2006, the plan was suspended, with approximately 5.4 million shares still available for sale under the Plan.
Earnings per Share
The following is a reconciliation of the amounts of net income and shares of common stock used in calculating basic and diluted per-share income (“EPS”) for the years ended December 31, 2008, 2007 and 2006:
Options to purchase 900,403 shares of common stock at prices ranging from $23.03 to $28.05 per share were outstanding at December 31, 2008, but were not included in the computation of diluted EPS because the option price was greater than the average market price of common shares.
Options to purchase 119,660 shares of common stock at prices ranging from $26.41 to $28.05 per share were outstanding at December 31, 2007, but were not included in the computation of diluted EPS because the option price was greater than the average market price of common shares.
Options to purchase 1.8 million shares of common stock at prices ranging from $24.12 to $28.05 per share were outstanding at December 31, 2006, but were not included in the computation of diluted EPS because the option price was greater than the average market price of common shares.
13.
Share-Based Payment and Other Benefit Plans
On June 23, 2000, following shareholder approval, we adopted the Equity One 2000 Executive Incentive Compensation Plan (the “2000 Plan”). The 2000 Plan provides for grants of stock options, stock appreciation rights, restricted stock, and deferred stock, other stock-related awards and performance or annual incentive awards that may be settled in cash, stock or other property. The persons eligible to receive an award under the 2000 Plan are our officers, directors, employees and independent contractors. Following an amendment to the 2000 Plan, approved by our stockholders on June 4, 2007, the total number of shares of common stock that may be issuable under the 2000 Plan is 8.5 million shares, plus (i) the number of shares with respect to which options previously granted under the 2000 Plan terminate without being exercised, and (ii) the number of shares that are surrendered in payment of the exercise price for any awards or any tax withholding requirements. In an amendment to the 2000 Plan approved by our stockholders in July 2004, the compensation committee expanded the list of business criteria that the committee may use in granting performance awards and annual incentive awards under the 2000 Plan intended to qualify for the exclusions from the limitations of Section 162(m) of the Internal Revenue Code and modified the definition of a “change of control” to include, in addition to other instances, following approval by stockholders of any reorganization, merger or consolidation or other transaction or series of transactions if persons who were stockholders immediately prior to such reorganization, merger or consolidation or other transaction do not, immediately thereafter, own more than 50% of the combined voting power of the reorganized, merger or consolidated company’s then outstanding voting securities (previously the threshold was 26%). The 2000 Plan will terminate on the earlier of the day before the tenth anniversary of the stockholders’ approval of the 2000 Plan or the date on which all shares reserved for issuance under the 2000 Plan have been issued.
Options
As of December 31, 2008, we have options outstanding under four share-based payment plans. The 2000 Plan authorized the grant of options, common stock and other share-based awards for up to 8.5 million shares of common stock, of which 3.4 million shares are available for issuance. The IRT Property Company 1998 Long Term Incentive Plan similarly authorized the grant of options, common stock and other share-based awards for up to 1,462,500 shares of common stock, of which no shares are available for issuance. Our 1995 Stock Option Plan authorized the grant of option awards for up to 1.0 million shares of common stock, all of which have been issued. The IRT Property Company 1989 Stock Option Plan authorized the grant of stock options and other share-based awards for up to 956,250 shares of common stock, of which no shares are available for issuance. In addition, in connection with the initial employment of Jeffrey S. Olson, our Chief Executive Officer, we issued Mr. Olson options to purchase 364,660 shares of common stock.
The term of each award is determined by our compensation committee, but in no event can be longer than ten years from the date of the grant. The vesting of the awards is determined by the committee, in its sole and absolute discretion, at the date of grant of the award. Dividends are paid on unvested shares of restricted stock. Certain options and share awards provide for accelerated vesting if there is a change in control, as defined in the 2000 Plan.
The fair value of each option award during 2008 was estimated on the date of grant using the Black-Scholes-Merton option-pricing model. Expected volatilities, dividend yields, employee exercises and employee terminations are primarily based on historical data. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant . We measure compensation costs for restricted stock awards based on the fair value of our common stock at the date of the grant and charges to expense such amounts to earnings ratably over the vesting period. For grants with a graded vesting schedule we have elected to recognize compensation expense on a straight-line basis.
The following table reports stock option activity for the years ended December 31, 2008, 2007 and 2006:
The total cash or other consideration received from options exercised during the years ended December 31, 2008, 2007 and 2006 was $259,900, $3.8 million and $3.0 million, respectively.
At December 31, 2008, the aggregate intrinsic value of options exercisable was less than the exercise price.
The total intrinsic value of options exercised during the years ended December 31, 2008, 2007 and 2006 was $1.4 million, $3.9 million and $3.6 million, respectively.
The fair value of each option grant was estimated on the grant date using the Black-Scholes pricing model for grants issued after January 1, 2008 and for options issued before January 1, 2008 with the following assumptions for the years ended December 31, 2008, 2007 and 2006:
The options were granted with an exercise price equivalent to the current stock price on the grant date or the ten-day average of the stock price prior to the grant date.
Restricted Stock Grants
Our compensation committee grants restricted stock to our officers, directors, and other employees. Vesting periods for the restricted stock are determined by our compensation committee. We measure compensation costs for restricted stock awards based on the fair value of our common stock at the date of the grant and expense such amounts ratably over the vesting period. As of December 31, 2008, we had 385,200 shares of non-vested restricted stock grants outstanding.
The following table provides a summary of unvested restricted stock activity during the year ended December 31, 2008:
As of December 31, 2008, there was $12.1 million of total unrecognized compensation expense related to unvested share-based compensation arrangements (options and unvested restricted shares) granted under our plans. This cost is expected to be recognized over a weighted-average period of 2.09 years. The total vesting-date value of the shares that vested during the year ended December 31, 2008 was $3.4 million.
401(k) Plan
We have a 401(k) defined contribution plan (the “401(k) Plan”) covering substantially all of our officers and employees which permits participants to defer compensation up to the maximum amount permitted by law. We match 100% of each employee’s contribution up to 3.0% of the employee’s annual compensation and, thereafter, match 50% of the next 3.0% of the employee’s annual compensation. Employee’s contributions and our matching contributions vest immediately. Our contributions to the 401(k) Plan for the years ended December 31, 2008, 2007 and 2006 were $263,000, $249,000, and $295,000, respectively. Effective January 1, 2007, the 401(k) Plan discontinued purchasing publicly traded shares of our common stock as matching contributions.
Deferred Compensation Plan
During 2005, we established a non-qualified deferred compensation plan that permits eligible employees to defer a portion of their compensation. The deferred compensation liability (included in accounts payable in the accompanying balance sheet) was $330,000 at December 31, 2008. We established a grantor trust (Rabbi Trust) to provide funding for benefits payable under this plan. The assets held in the trust at December 31, 2008 amounted to $330,000. The Rabbi Trust’s assets consist of short-term cash investments and a managed portfolio of equity securities. These assets are included in other assets in the accompanying balance sheets. In December 2008, the compensation committee of our board of directors amended the plan to provide for mandatory distributions of all assets held under the plan in 2009. All such assets were distributed to participants in the first quarter of 2009 and no assets remain under the plan.
Employee Stock Purchase Plan
Under the 2004 Employee Stock Purchase Plan (the “Purchase Plan”) (implemented in October 2004), our employees, including our directors who are employees, are eligible to participate in quarterly plan offerings in which payroll deductions may be used to purchase shares of our common stock. The purchase price per share is 90% of the average closing price per share of our common stock on the NYSE on the five trading days that immediately precede the date of purchase, provided, however, that in no event shall the exercise price per share of common stock on the exercise date of an offering period be less than the lower 85% of (i) the market price on the first day of the offering period or (ii) the market price on the exercise date.
Long-Term Incentive Compensation Plans
Three of our executive officers are eligible for long-term incentive cash compensation subject to a performance-based schedule at the end of an approximate four-year performance period. In order for participants to receive compensation, our Total Shareholder Return (“TSR”) over the performance period must exceed 6% and achieve a certain spread against the average TSR of a defined peer group.
We determine the fair value of TSR grants annually based upon a Monte Carlo simulation model, and recognize compensation expense accordingly over the vesting period. These liabilities totaled $785,000 at December 31, 2008 as compared to $681,000 at December 31, 2007. The level of cash compensation available depends on the spread between our TSR and the average TSR of the peer group companies.
14.
Income Taxes
We elected to be taxed as a REIT under the Internal Revenue Code (“Code”), commencing with our taxable year ended December 31, 1995. To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we currently distribute at least 90% of our REIT taxable income to our stockholders. Also, at least 95% of our gross income in any year must be derived from qualifying sources. The difference between net income available to common stockholders for financial reporting purposes and taxable income before dividend deductions relates primarily to temporary differences, such as real estate depreciation and amortization, deduction of deferred compensation and deferral of gains on sold properties utilizing like kind exchanges. It is our intention to adhere to these requirements and maintain our REIT status. As a REIT, we generally will not be subject to corporate level federal income tax, provided that distribution to our stockholders equal at least the amount of our REIT taxable income as defined under the Code. We have distributed sufficient taxable income for the years ended December 31, 2008, 2007 and 2006; therefore, no federal income or excise taxes were incurred. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income taxes at regular corporate rates (including any applicable alternative minimum tax) and may not be able to qualify as a REIT for four subsequent taxable years. Even if we qualify for taxation as a REIT, we may be subject to state income or franchise taxes in certain states in which some of our properties are located, and for federal income and excise taxes on our undistributed taxable income. Accordingly, the only provision for federal income taxes in our consolidated financial statements relates to our consolidated taxable REIT subsidiaries (“TRSs”).
Further, we believe that we have appropriate support for the tax positions taken on our tax returns and that our accruals for the tax liabilities are adequate for all years still subject to tax audit after 2004.
The following table reconciles GAAP net income to taxable income for the years ended December 31, 2008, 2007 and 2006 (in thousands):
(1) Includes an impairment loss on available-for-sale securities investments of $32,791 in 2008.
The following summarizes the tax status of dividends paid:
Taxable REIT Subsidiaries ("TRS"):
We are subject to federal, state and local income taxes on the income from our TRS activities, which includes IRT Capital Corporation II ("IRT") and Southeast US Holdings, BV (“Southeast”), our wholly owned subsidiaries.
Our taxable income for book purposes and (provision) benefit for income taxes relating to our TRS and taxable entities which have been consolidated for accounting reporting purposes, for the years ended December 31, 2008, 2007, and 2006, are summarized as follows (in thousands):
The income tax (provision) benefit differs from the amount computed by applying the statutory federal income tax rate to taxable income before income taxes as follows (in thousands):
Our deferred tax assets and liabilities at December 31, 2008 and 2007, were as follows (in thousands):
The net deferred tax liability is included in the caption Other liabilities on the accompanying Consolidated Balance Sheets at December 31, 2008 and 2007. The tax deduction for interest paid by the TRS to the REIT is subject to certain limitations pursuant to Federal tax law. Such interest may only be deducted in any tax year in which the TRSs’ income exceeds certain thresholds. Such disallowed interest may be carried forward and utilized in future years, subject to the same limitation. At December 31, 2008, IRT had approximately $6.1 million of disallowed interest carry forwards, with a tax value of approximately $2.3 million. This carry forward does not expire. In prior years, valuations of the operating assets held by IRT indicated that the ultimate disposition of these assets would generate sufficient taxable income to fully utilize this deduction. However, due to the economic downturn, we have determined that it is more likely than not that IRT will not have sufficient income in the future in order to fully utilize the interest expense that had been disallowed and, accordingly, has recorded a valuation allowance of $1.2 million. Southeast had a net operating loss carry forward of $0.4 million at December 31, 2008 with a tax value of approximately $0.1 million. This carry forward has no expiration period. A valuation allowance has been established for this asset.
15.
Future Minimum Rental Income
Our properties are leased to tenants under operating leases with expiration dates extending to the year 2032. Future minimum rents under non-cancelable operating leases as of December 31, 2008, excluding tenant reimbursements of operating expenses and percentage rent based on tenants’ sales volume are as follows:
16.
Other Income
The following table summarizes other income detail information (in thousands):
Included in other income in the year ended December 31, 2008 is $593,000 associated with an easement granted on one of our properties for the use of a retention pond. In addition, we retained an earnest money deposit of $203,000 related to the termination of a land sale contract. We received $135,000 in reimbursements of costs incurred by us to provide accounting reconciliation services to Gazit Globe, Ltd, one of our principal stockholders.
17.
Commitments and Contingent Liabilities
As of December 31, 2008 and 2007, we had pledged letters of credit totaling $12.9 million and $4.7 million, respectively, as additional security for financial and other obligations.
We have committed to fund approximately $2.2 million, based on current plans and estimates, to complete pending development and redevelopment projects. These obligations, comprising principally construction contracts, are generally due as the work is performed and are expected to be financed by the funds available under our credit facilities.
Certain of our properties are subject to ground leases, which are accounted for as operating leases and have annual obligations of approximately $40,000. Additionally, we have operating lease agreements for office space in which we have an annual obligation of approximately $425,000.
We are subject to litigation in the normal course of business. However, we do not believe that any of the litigation outstanding as of December 31, 2008 will have a material adverse effect on our financial condition results of operations or cash flows.
18.
Fair Value Measurements
In September 2006, the FASB issued SFAS 157. SFAS 157 establishes a framework for measuring fair value, which includes a hierarchy based on the quality of inputs used to measure fair value and provides specific disclosure requirements based on the hierarchy.
Fair Value Hierarchy
SFAS 157 requires the categorization of financial assets and liabilities, based on the inputs to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to the quoted prices in active markets for identical assets and liabilities and lowest priority to unobservable inputs. The various levels of the SFAS 157 fair value hierarchy are described as follows:
·
Level 1 - Financial assets and liabilities whose values are based on unadjusted quoted market prices for identical assets and liabilities in an active market that we have the ability to access.
·
Level 2 - Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable for substantially the full term of the asset or liability.
·
Level 3 - Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement.
SFAS 157 requires the use of observable market data, when available, in making fair value measurements. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.
Recurring Fair Value Measurements
The following table presents our fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of December 31, 2008:
Valuation Methods
Interest rate swap - This financial instrument is valued under an income approach using industry-standard models that consider various assumptions, including time value, volatility factors, current market and contractual prices for the underlying, and counterparty non-performance risk. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace.
Debt securities - These securities are valued using industry-standard models that consider various assumptions, including time to maturity, applicable market volatility factors, and current market and selling prices for the underlying debt instruments which are traded on the open market, even if not highly liquid. Substantially all of these assumptions are observable in the marketplace, or can be derived from observable data.
19.
Environmental Matters
We are subject to numerous environmental laws and regulations. The operation of dry cleaning and gas station facilities at our shopping centers are the principal environmental concerns. We require that the tenants who operate these facilities do so in material compliance with current laws and regulations and we have established procedures to monitor their operations. Where available, we have applied and been accepted into state sponsored environmental programs. Several properties in the portfolio will require or are currently undergoing varying levels of environmental remediation. However, we have environmental insurance policies covering most of our properties. Management believes that the ultimate disposition of currently known environmental matters will not have a material effect on our financial position, liquidity or operations.
20.
Subsequent Events
In January of 2009, we repurchased and cancelled approximately $12.1 million principal amount of our unsecured outstanding senior notes payable for a total consideration of $8.3 million.
In January of 2009, we realized approximately $42.8 million of cash through various investment activities in relation to our investments in debt securities. Of the $42.8 million realized, $30.5 million was the result of a scheduled maturity, $7.6 million was a direct result of the sale of certain securities above par and prior to scheduled maturity, and $4.7 million was the result of a tender offer by the issuer earlier than the scheduled maturity.
On January 11, 2009, we entered into an agreement to acquire approximately 1.2 million ordinary shares of DIM Vastgoed N.V. (“DIM”) from Homburg Invest Inc. (“Homburg”). Under the agreement, we issued on January 14, 2009, 866,373 shares of our common stock in exchange for a total of 1,237,676 DIM shares or share equivalents (or an exchange ratio of 0.7 shares of our common stock per DIM share). In addition, we obtained from Homburg voting rights with respect to another 766,573 DIM shares that Homburg has the right to acquire on January 1, 2011. Subject to certain conditions, the agreement also provides for us to acquire these DIM shares or share equivalents at the same 0.7 exchange ratio (or an aggregate of 536,601 shares of our common stock) from Homburg once Homburg has acquired them. The agreement also provided for customary registration rights with respect to our common stock issued to Homburg. As a result of the initial exchange and the voting rights agreement, we have voting control over approximately 74.6% of DIM’s outstanding ordinary shares, including the approximately 4.0 million DIM shares we owned prior to year-end and excluding treasury shares. Based on our current assumption that we will demonstrate control over DIM as of the first quarter of 2009, we anticipate consolidating the financial results and balance sheet of DIM into our financial statements at such time. Finally, we are still evaluating the accounting treatment of this increased investment both relating to its prior treatment under the cost method and the allocation of the purchase price. Given recent accounting guidance, our acquisition may be treated as a multistep acquisition and, therefore, have an effect on earnings in the three months ending March 31, 2009.
---------
(1)
Reclassified to reflect the reporting of discontinued operations.
(2)
The sum of quarterly earnings per share amounts may differ from annual earnings per share.
21. Quarterly Financial Data (unaudited)
---------
(1)
Reclassified to reflect the reporting of discontinued operations.
(2)
The sum of quarterly earnings per share amounts may differ from annual earnings per share.
SCHEDULE III
Equity One, Inc.
REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION
December 31, 2008
(in thousands)
S-2
S-3
S-4
SCHEDULE III
Equity One, Inc.
REAL ESTATE INVESTMENTS AND ACCUMULATED DEPRECIATION
December 31, 2008
S-5
SCHEDULE IV
Equity One, Inc.
MORTGAGE LOANS ON REAL ESTATE
December 31, 2008
S-6
INDEX TO EXHIBITS
E-1