Item 1.
Business.
General
Ramco-Gershenson Properties Trust is a Maryland real estate investment trust organized pursuant to Articles of Amendment and Restatement of Declaration of Trust dated October 2, 1997.
The term “we, our or us” refers to Ramco-Gershenson Properties Trust and/or its predecessors. Our principal office is located at 27600 Northwestern Highway, Suite 200, Southfield, Michigan 48034.
RPS Realty Trust, a Massachusetts business trust, was formed on June 21, 1988 to be a diversified growth oriented real estate investment trust (“REIT”). From 1988 until April 30, 1996, RPS Realty Trust was primarily engaged in the business of owning and managing a participating mortgage loan portfolio, and, through its wholly-owned subsidiaries, owning and operating eight real estate properties.
In May 1996, our predecessor, RPS Realty Trust, acquired the Ramco-Gershenson interests through a reverse merger, including substantially all the shopping centers and retail properties as well as the management company and business operations of Ramco-Gershenson, Inc. and certain of its affiliates. The resulting trust changed its name to Ramco-Gershenson Properties Trust and relocated its corporate office to Southfield, Michigan, where Ramco-Gershenson, Inc.’s officers assumed management responsibility. The trust also changed its operations from a mortgage REIT to an equity REIT and contributed eight mortgage loans and two real estate properties to Atlantic Realty Trust, an independent, newly formed liquidating real estate investment trust.
In 1997, with approval from our shareholders, we changed our state of organization from Massachusetts to Maryland by terminating the Massachusetts trust and merging into a newly formed Maryland real estate investment trust.
We conduct substantially all of our business, and hold substantially all of our interests in our properties, through our operating partnership, Ramco-Gershenson Properties, L.P., either directly or indirectly through partnerships or limited liability companies which hold fee title to the properties. We have the exclusive power to manage and conduct the business of our operating partnership. As of December 31, 2003, our company owned approximately 85.2% of the interests in our operating partnership.
Operations of the Company. We are engaged in the business of owning, developing, acquiring, managing and leasing community shopping centers in the midwestern, southeastern and mid-Atlantic regions of the United States. As of December 31, 2003, we had a portfolio of 64 shopping centers, with more than 13,200,000 square feet of gross leasable area (“GLA”), located in 12 states.
According to the Urban Land Institute, shopping centers are typically organized in five categories: convenience, neighborhood, community, regional and super regional centers. The shopping centers are distinguished by various characteristics, including center size, the number and type of anchor tenants and the types of products sold.
Convenience centers include at least three tenants with a gross leaseable area of up to 30,000 square feet and are generally anchored by a tenant that provides personal/convenience service such as a mini market.
Neighborhood centers provide for the sale of personal services and goods for the day-to-day living of the immediate neighborhood. Average gross leaseable area of a neighborhood center is approximately 60,000 square feet. These centers may include a grocery store.
Community centers provide, in addition to convenience goods and personal services offered by neighborhood centers, a wider range of soft and hard line goods. Average gross leaseable area of a community center ranges between 100,000 and 500,000 square feet. The center may include a grocery store, discount department store, super drug store, and several specialty stores. In some cases a community center may be classified as a power center. A power center may have over 1,000,000 square feet of gross leaseable area and include several category specific off price anchors of 20,000 or more square feet. These anchors typically emphasize hard
goods such as consumer electronics, sporting goods, office supplies, home furnishings and home improvement goods. It is our experience that the demand for the types of goods and services offered at community centers is not generally affected by economic downturns.
Regional centers, also known as regional malls, are built around two or more full line department stores of generally not less than 50,000 square feet. Their typical size ranges from 250,000 to about 900,000 square feet. Regional malls provide services typical of a business district but are not as extensive as those provided by a super regional mall.
Super regional centers, also known as super regional malls are built around three or more full line department stores of generally not less than 75,000 square feet. Their typical size ranges from 500,000 square feet to more than 1,500,000 square feet. These centers offer an extensive variety of general merchandise, apparel, furniture and home furnishings.
Properties
As of December 31, 2003, we owned and operated a portfolio of 64 shopping centers totaling approximately 13.3 million square feet of gross leaseable area located in 12 states. Our properties consist of 63 community shopping centers, ten of which are power centers and two of which are single tenant facilities. We also own one enclosed regional mall.
We are predominantly a community shopping center company with a focus on acquiring, developing and managing centers primarily anchored by grocery stores and nationally recognized discount department stores. It is our belief that centers with a grocery and/or discount component attract consumers seeking value-priced products. Since these products are required to satisfy everyday needs, customers usually visit the centers on a weekly basis. Our shopping centers are focused in metropolitan trade areas in the midwestern and the southeastern regions of the United States. We also own and operate three centers in the mid-Atlantic region of the United States. Our anchor tenants include Wal-Mart, Target, Kmart, Kohl’s, Home Depot and Lowe’s Home Improvement. Approximately 54% of our community shopping centers have grocery anchors, including Publix, A&P, Kroger, Super Value, Shop Rite, Kash ’n Karry, Winn Dixie, Giant Eagle and Meijer.
Our shopping centers are primarily located in major metropolitan areas in the midwestern and southeastern regions of the United States. By focusing our energies on these markets, we have developed a thorough understanding of the unique characteristics of these trade areas. In both of these regions we have concentrated a number of centers in reasonable proximity to each other in order to achieve market penetration as well as efficiencies in management, oversight and purchasing.
Our business objective and operating strategy is to increase funds from operations and cash available for distribution per share through internal and external growth. We expect to achieve internal growth and to enhance the value of our properties by increasing their rental income over time through (i) contractual rent increases, (ii) the leasing and re-leasing of available space at higher rental levels, and (iii) the selective renovation of the properties. We intend to achieve external growth through the selective development of new shopping center properties, the acquisition of shopping center properties directly or through one or more joint venture entities, and the expansion and redevelopment of existing properties. From time to time we have sold mature properties, which have less potential for growth, and the redeployment of the proceeds of those sales to fund acquisition, development and redevelopment activities, to repay variable rate debt and to repurchase outstanding shares. Since January 1, 2002 we have sold two shopping centers and six parcels of land for an aggregate amount of $24,595,000.
As part of our ongoing business strategy, we continue to expand and redevelop existing properties in our shopping center portfolio, depending on tenant demands and market conditions. We plan to take advantage of attractive purchase opportunities by acquiring additional shopping center properties in underserved, attractive and/or expanding markets. We also seek to acquire strategically located, quality shopping centers that (i) have leases at rental rates below market rates, (ii) have potential for rental and/or occupancy increases or (iii) offer cash flow growth or capital appreciation potential where we have financial strength, or expansion or redevelopment capabilities which can enhance value, and provide anticipated total returns that will increase
our cash available for distribution per share. During 2003, we acquired six properties at an aggregate cost of $106,750,000. We believe we have an aggressive approach to repositioning, renovating and expanding our shopping centers. Our management team assesses our centers annually to identify redevelopment opportunities and proactively engage in value-enhancing activities. These efforts have resulted in the improvement of property values and increased operating income. They also keep our centers attractive, well tenanted and properly maintained. In addition, we will continue our strategy to sell non-core assets when properties are not viable redevelopment candidates.
Employment
As of December 31, 2003, we employed 87 corporate employees, including six executives and three executive support personnel, 20 employees in asset management, 12 employees in development and construction, three employees in acquisitions, 19 employees in financial and treasury services, 14 employees in lease administration, six employees in human resources and office services and four employees in information services. In addition, at December 31, 2003, we employed 44 on-site shopping center maintenance personnel. We believe that our relations with our employees are good. None of our employees are unionized.
Equity Transactions
In June 2003, we issued 2.2 million common shares of beneficial interest in a public offering, resulting in approximately $50.6 million of net proceeds. In addition, in October 2003, we issued 2.3 million common shares of beneficial interest in a public offering, resulting in approximately $56.7 million of net proceeds.
Developments and Redevelopment
In 2003, we completed a number of redevelopment projects including Phase I of the repositioning of the Tel-Twelve shopping center in Southfield, Michigan for a total cost of approximately $19.8 million. The redevelopment included the addition of a 144,000 square foot Lowes Home Improvement, which opened in February 2003. Phase II of the redevelopment is currently underway for an estimated net cost of approximately $5.4 million and includes the addition of a 195,000 square foot Meijer discount/grocery superstore, which will replace the closed 128,000 square foot Kmart. Also included in the final phase of the repositioning is Pier 1 Imports, which opened in December 2003 and Michael’s Crafts, which is scheduled to open in the second quarter of 2004.
We are currently redeveloping The Shoppes of Lakeland for an estimated net cost of approximately $9.1 million. A portion of the site was sold to Target, which will anchor the 300,000 square foot redevelopment. In addition to Target, the redevelopment includes an Ashley Furniture store, which is presently under construction.
In June 2003, we commenced the development of a Home Depot anchored shopping center in Grand Haven, Michigan for an estimated net cost of approximately $4.9 million. In addition to the Home Depot, which is anchor owned, the center will contain 50,000 square feet of retail space including two outlots. Home Depot is expected to open in the first quarter of 2004.
Competition
We face competition from similar retail centers within the trade centers in which our centers operate to renew leases or re-let spaces as leases expire. Some of these competing properties may be newer, better located, better capitalized or better tenanted than our properties. In addition, any new competitive properties that are developed within the trade areas in which we operate may result in increased competition for customer traffic and creditworthy tenants. We may not be able to renew leases or obtain new tenants to whom space may be re-let as leases expire, and the terms of renewals or new leases (including the cost of required renovations or concessions to tenants) may be less favorable to us than current lease terms. Increased competition for tenants may require us to make capital improvements to properties which we would not have otherwise planned to make. In addition, we face competition from alternate forms of retailing, including home shopping networks, mail order catalogues and on-line based shopping services, which may limit the number of
retail tenants that desire to seek space in shopping center properties generally. If we are unable to re-let substantial amounts of vacant space promptly, if the rental rates upon a renewal or new lease are significantly lower than expected, or if reserves for costs of re-letting prove inadequate, then our earnings and cash flow could decrease.
Tax Matters
We first elected to qualify as a REIT for our tax year ended December 31, 1988. Our policy has been and is to operate in such a manner as to qualify as a REIT for federal income tax purposes. If we so qualify, then we will generally not be subject to corporate income tax on amounts we pay as distributions to our shareholders. For any tax year in which we do not meet the requirements qualifying as a REIT, we will be taxed as a corporation.
The requirements for qualification as a REIT are contained in sections 856 through 860 of the Internal Revenue Code and applicable provisions of the Treasury Regulations. Among other requirements, at the end of each fiscal quarter, at least 75% of the value of our total assets must consist of real estate assets (including interests in mortgages on real property and interests in other REITs) as well as cash, cash items and government securities. There are also limitations on the amount of certain types of securities we can hold. Additionally, at least 75% of our gross income for the tax year must be derived from certain sources, which include “rents from real property,” and interest on loans secured by mortgages on real property. An additional 20% of our gross income must be derived from these same sources or from dividends and interest from any source gains from the sale or other disposition of stock or securities or any combination of the foregoing. We are also generally required to distribute annually at least 90% of our “REIT taxable income” (as defined in the Internal Revenue Code) to our shareholders.
We have been the subject of an Internal Revenue Service (“IRS”) examination of our taxable years ended December 31, 1991 through 1995 (the “IRS Audit”). On October 29, 2001, the IRS issued an examination report in connection with the IRS Audit wherein they proposed, among other things, to disqualify us as a REIT for the taxable year ended December 31, 1994 (the “IRS Report”). During the third quarter of 1994, we held more than 25% of the value of our total assets in short-term Treasury Bill reverse repurchase agreements, which could be viewed as non-qualifying assets for purposes of determining whether we qualify to be taxed as a REIT. We filed a formal protest with respect to the IRS Report on November 29, 2001, and subsequently participated in numerous meetings with the IRS appellate conferee. On December 4, 2003, we reached an agreement with the IRS with respect to the IRS Audit (the “Closing Agreement”).
Pursuant to the terms of the Closing Agreement (i) our “REIT taxable income” was adjusted for each of the taxable years ended December 31, 1991, 1992, and 1993; (ii) our election to be taxed as a REIT was terminated for the taxable year ended December 31, 1994; (iii) we were not permitted to reelect REIT status for the taxable year ended December 31, 1995; (iv) we were permitted to reelect REIT status for taxable years beginning on or after January 1, 1996; (v) our timely filing of IRS Form 1120-REIT for the taxable year ended December 31, 1996 was treated, for all purposes of the Internal Revenue Code (the “Code”), as an election to be taxed as a REIT; (vi) the provisions of the Closing Agreement were expressly contingent upon our payment of “deficiency dividends” (that is, our declaration and payment of a distribution that is permitted to relate back to the year for which the IRS determines a deficiency in order to satisfy the requirement for REIT qualification that we distribute a certain minimum amount of our “REIT taxable income” for such year) in amounts not less than $1,387,000 and $809,000 for our 1992 and 1993 taxable years respectively; (vii) we consented to the assessment and collection, by the IRS, of approximately $5,180,000 in tax and interest; and (viii) we agreed that no penalties or other “additions to tax” would be asserted with respect to any adjustments to taxable income required pursuant to the Closing Agreement.
As a consequence of losing our REIT status for the taxable year ended December 31, 1994, and reelecting REIT status for the taxable year which began January 1, 1996, we became subject to certain Treasury Regulations applicable to corporations qualifying as a REIT after being subject to tax under subchapter C of the Internal Revenue Code. Under these Treasury Regulations, a corporation which owns an asset on the day before, as well as the day of, the corporation’s qualification as a REIT recognizes gain
(subject to tax at the highest corporate income tax rate) as of the day before such qualification in an amount equal to the excess of (1) the fair market value of such assets on such date over (2) the corporation’s adjusted basis in such assets on such date. In lieu of this treatment, the corporation may elect, in respect of any asset it held on the day before, as well as on the first day, it qualified as a REIT, to recognize, on any taxable disposition of such asset during the ten-year period beginning on such date, gain which, to the extent of the excess of (1) the fair market value of the asset as of the beginning of such ten-year period over (2) the corporation’s adjusted basis in such asset as of the beginning of such ten-year period, is subject to tax at the highest corporate income tax rate.
An exception to the Treasury Regulations described in the preceding paragraph applies to any re-election as a REIT by a corporation that, (1) immediately prior to qualifying as a REIT, was taxed as a subchapter C corporation for a period not exceeding two taxable years, and (2) immediately prior to being subject to tax as a subchapter C corporation, was taxed as a REIT for a period of at least one taxable year. Because we meet the requirements for this exception to apply, the rules in the Treasury Regulations do not apply to us.
In addition, because we lost our REIT status for the taxable year ended December 31, 1994, and reelected REIT status for the taxable year which began January 1, 1996, we were required to have distributed to our shareholders by the close of the taxable year which began January 1, 1996, any earnings and profits we accumulated as a subchapter C corporation for the taxable years ended December 31, 1994 and 1995. Because we did not accumulate (but rather distributed) any profits we earned during the taxable years ended December 31, 1994 and 1995, we did not have any accumulated earnings and profits that we were required to distribute by the close of the taxable year which began January 1, 1996.
In connection with the incorporation and distribution of all of the shares of Atlantic Realty Trust (“Atlantic”) in May 1996, we entered into a tax agreement with Atlantic under which Atlantic assumed all of our tax liability arising out of the IRS’ then ongoing examination (which included, but is not otherwise limited to, the IRS Audit), excluding any tax liability relating to any actions or events occurring, or any tax return position taken after May 10, 1996, but including liabilities for additions to tax, interest, penalties and costs relating to covered taxes (the “Tax Agreement”). In addition, the Tax Agreement provides that, to the extent any tax which Atlantic is obligated to pay under the Tax Agreement can be avoided through the declaration of a “deficiency dividend”, we will make, and Atlantic will reimburse us for the amount of, such deficiency dividend.
On December 15, 2003, our Board of Trustees declared a cash dividend in the amount of $2,200,000, payable on January 20, 2004, to common shareholders of record on December 31, 2003. Immediately following the payment of such dividend, we timely filed IRS Form 976, Claim for Deficiency Dividends Deductions by a Real Estate Investment Trust, claiming deductions in the amount of $1,387,000 and $809,000 for our 1992 and 1993 taxable years respectively. Our payment of the deficiency dividend was both consistent with the terms of the Closing Agreement and necessary to retain our status as a REIT for each of the taxable years ended December 31, 1992 and 1993. On January 21, 2004, pursuant to the Tax Agreement, Atlantic reimbursed us $2,200,000 in recognition of our payment of the deficiency dividend. Pursuant to the Closing Agreement, the IRS issued its assessment of $5,180,000 in tax and interest.
In the notes to the consolidated financial statements of Atlantic’s most recent quarterly report on Form 10-Q filed with the Securities and Exchange Commission for its calendar quarter ended September 30, 2003, Atlantic has disclosed its liability under the Tax Agreement for the tax deficiencies, and deficiency dividend (and interest on the tax deficiencies and deficiency dividend) reflected in the Closing Agreement. As discussed above, on January 21, 2004, Atlantic reimbursed us $2,200,000 in recognition of our payment of the deficiency dividend. We expect to be reimbursed by Atlantic for the tax assessment and related interest pursuant to the Tax Agreement, but there can be no assurance that we will receive payment from Atlantic. We believe, but can provide no assurance, that Atlantic currently has sufficient assets to reimburse us for our payment of $5,180,000 in tax deficiencies and interest. According to the quarterly report on Form 10-Q filed by Atlantic for its calendar quarter ended September 30, 2003, Atlantic had net assets of approximately $64.3 million (as determined pursuant to the liquidation basis of accounting).
The IRS is currently conducting an examination of us for the taxable years ended December 31, 1996 and 1997, and of one of our subsidiary partnerships for the taxable years ended December 31, 1997, 1998, and 1999 (the “IRS Examination”). As of even date herewith, the IRS has not issued a report nor proposed any adjustments in connection with the IRS Examination. Certain tax deficiencies (and any related interest and penalties) which may be assessed against us in connection with the IRS Examination may constitute covered taxes under the Tax Agreement. Atlantic may not have sufficient assets to reimburse us for all amounts we must pay to the IRS with respect to such covered taxes, and we would be required to pay the difference out of our own funds. The IRS may also assess taxes that Atlantic is not required to pay. Accordingly, the ultimate resolution of any tax liabilities arising pursuant to the IRS Examination may have a material adverse effect on our financial position, results of operations and cash flows.
Environmental Matters
Under various Federal, state and local laws, ordinances and regulations relating to the protection of the environment (“Environmental Laws”), a current or previous owner or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances disposed, stored, released, generated, manufactured or discharged from, on, at, onto, under or in such property. Environmental Laws often impose such liability without regard to whether the owner or operator knew of, or was responsible for, the presence or release of such hazardous or toxic substance. The presence of such substances, or the failure to properly remediate such substances when present, released or discharged, may adversely affect the owner’s ability to sell or rent such property or to borrow using such property as collateral. The cost of any required remediation and the liability of the owner or operator therefore as to any property is generally not limited under such Environmental Laws and could exceed the value of the property and/or the aggregate assets of the owner or operator. Persons who arrange for the disposal or treatment of hazardous or toxic substances may also be liable for the cost of removal or remediation of such substances at a disposal or treatment facility, whether or not such facility is owned or operated by such persons. In addition to any action required by Federal, state or local authorities, the presence or release of hazardous or toxic substances on or from any property could result in private plaintiffs bringing claims for personal injury or other causes of action.
In connection with ownership (direct or indirect), operation, management and development of real properties, we may be potentially liable for remediation, releases or injury. In addition, Environmental Laws impose on owners or operators the requirement of on-going compliance with rules and regulations regarding business-related activities that may affect the environment. Such activities include, for example, the ownership or use of transformers or underground tanks, the treatment or discharge of waste waters or other materials, the removal or abatement of asbestos-containing materials (“ACMs”) or lead-containing paint during renovations or otherwise, or notification to various parties concerning the potential presence of regulated matters, including ACMs. Failure to comply with such requirements could result in difficulty in the lease or sale of any affected property and/or the imposition of monetary penalties, fines or other sanctions in addition to the costs required to attain compliance. Several of our properties have or may contain ACMs or underground storage tanks (“USTs”); however, we are not aware of any potential environmental liability which could reasonably be expected to have a material impact on our financial position or results of operations. No assurance can be given that future laws, ordinances or regulations will not impose any material environmental requirement or liability, or that a material adverse environmental condition does not otherwise exist.
Item 2.
Item 2.
Properties
Our properties are located in twelve states primarily throughout the midwestern, southeastern and mid-Atlantic regions of the United States as follows:
The above table includes four properties owned by joint ventures in which we have an equity investment.
Our properties, by type of center, consist of the following:
(1)
“Annualized Base Rental Revenue” is equal to December 2003 base rental revenues multiplied by 12.
Additional information regarding the Properties is included in the Property Schedule on the following pages.
PROPERTY SUMMARY
AS OF 12/31/03
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(1)
Anchor-owned store
(2)
50% general partner interest
(3)
Represents year constructed/acquired/year of latest renovation or expansion by either the Company or the former Ramco Group, as applicable.
(4)
Wal-Mart currently is not occupying its leased premises in this shopping center but remains obligated to pay under the terms of the respective lease agreement. The space leased by Wal-Mart has been subleased to third parties
(5)
Tenant closed - lease obligated
(6)
Owned by others
(7)
40% joint venture interest
(8)
The tenant has vacated the space but is still obligated to pay rent. The space is currently subleased to a third party.
(9)
We define anchor tenants as single tenants which lease 19,000 square feet or more at a property.
(10)
Anchor owned expansion
(11)
Lease terminated effective 12/31/03. As of 1/1/04 the subtenants will become direct tenants of Landlord.
(12)
Lease terminated effective 12/31/03.
Tenant Information
The following table sets forth, as of December 31, 2003, information regarding space leased to tenants which in each case, individually account for 2% or more of total annualized base rental revenue from our properties.
Included in the thirteen Wal-Mart locations listed in the above table are six locations (representing approximately 489,000 square feet of GLA) which are leased to, but not currently occupied by Wal-Mart, although Wal-Mart remains obligated under the respective lease agreements. The leases for these six Wal-Mart properties expire between 2006 and 2009. Wal-Mart has entered into various subleases with respect to certain of such locations, and sub-tenants currently occupy approximately 154,000 of the 489,000 square feet of GLA.
The following table sets forth the total GLA leased to anchors, retail tenants, and available space, in the aggregate, of our properties as of December 31, 2003:
The following table sets forth as of December 31, 2003, the total GLA leased to national, regional and local tenants, in the aggregate, of our properties.
The following table sets forth lease expirations for the next five years at our properties assuming that no renewal options are exercised.
(1)
“Annualized Base Rental Revenue” is equal to December 2003 base rental revenue multiplied by 12.
Item 3.
Item 3. Legal Proceedings
There are no material pending legal proceedings, other than ordinary routine litigation incidental to our business, against or involving us or our properties.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of 2003, no matters were submitted for a vote of our shareholders.
PART II
Item 5.
Item 5.
Market for Registrant’s Common Equity and Related Stockholder Matters
Market Information - Our Common Shares are currently listed and traded on the New York Stock Exchange (“NYSE”) under the symbol “RPT”. On March 11, 2004, the last reported sales price of the Shares on the NYSE was $27.20.
The following table shows high and low closing prices per share for each quarter in 2003 and 2002.
Holders - The number of holders of record of the Common Shares was 2,852 as of March 11, 2004.
Dividends - Under the Code, a REIT must meet certain requirements, including a requirement that it distribute annually to its shareholders at least 90% of its taxable income. Dividend distributions per common share for the years ended December 31, 2003 and 2002, are summarized as follows.
We declared the following cash distributions per share to common shareholders for the years ended December 31, 2003 and 2002:
The December 31, 2003 record date dividend includes a deficiency dividend of $0.13 per common share. A dispute with the Internal Revenue Service with respect to its examination of our taxable years ended December 31, 1991 through 1995 has been resolved and that, in connection with such resolution, a cash deficiency dividend of $2,200,000 was declared.
Distributions paid by us are at the discretion of the Board of Trustees and depend on a number of factors, including our cash flow, financial condition and capital requirements, the annual distribution requirements necessary to maintain our status as a REIT under the Code, and such other factors as the Board of Trustees deems relevant.
We have a Dividend Reinvestment Plan (the “DRP Plan”) which allows our shareholders to acquire additional Common Shares by automatically reinvesting cash dividends. Shares are acquired pursuant to the DRP Plan at a price equal to the prevailing market price of such Shares, without payment of any brokerage
commission or service charge. Shareholders who do not participate in the DRP Plan continue to receive cash distributions, as declared.
Item 6.
Item 6.
Selected Financial Data (In thousands, except per share data and number of properties)
The following table sets forth selected consolidated financial data for the Company and should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this report.
(1)
In accordance with Statement of Financial Accounting Standards No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”, which we adopted on January 1, 2002, shopping centers that were sold subsequent to December 31, 2001 have been classified as discontinued operations for all periods presented. Shopping centers that were sold prior to January 1, 2002 are included in gain on sales of real estate.
(2)
In 2000, we changed our method of accounting for percentage rental revenue in accordance with SEC Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements.”
(3)
We consider funds from operations, also known as “FFO,” an appropriate supplemental measure of the financial performance of an equity REIT. Under the National Association of Real Estate Investment Trusts (“NAREIT”) definition, FFO represents income before minority interest, excluding extraordinary items, as defined under accounting principles generally accepted in the United States of America (“GAAP”), gains on sales of depreciable property, plus real estate related depreciation and amortization (excluding amortization of financing costs), and after adjustments for unconsolidated partnerships and joint ventures. FFO should not be considered an alternative to GAAP net income as an indication of our performance. We consider FFO to be a useful measure for reviewing our comparative operating and financial performance between periods or to compare our performance to different REITs. However, our computation of FFO may differ from the methodology for calculating FFO utilized by other real estate companies, and therefore, may not be comparable to these other real estate companies. A reconciliation of FFO to net income is included under the heading, “Funds From Operations” in Item 7.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with the consolidated financial statements, the notes thereto, and the comparative summary of selected financial data appearing elsewhere in this report.
This Form 10-K contains forward-looking statements with respect to the operation of certain of our properties. We believe the expectations reflected in the forward-looking statements made in this document are based on reasonable assumptions. Certain factors could occur that might cause actual results to vary. These include: our success or failure in implementing our business strategy; economic conditions generally and in the commercial real estate and finance markets specifically; our cost of capital, which depends in part on our asset quality, our relationships with lenders and other capital providers; our business prospects and outlook and general market conditions; and changes in governmental regulations, tax rates and similar matters; and other factors discussed elsewhere in this Form 10-K report filed with the Securities and Exchange Commission. The forward-looking statements are identified by terminology such as “may,” “will,” “should,” “believe,” “expect,” “estimate,” “anticipate,” “continue,” “predict” or similar terms. Although we believe that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from those projected in the forward-looking statements.
Overview
We are a fully integrated, self-administered, publicly-traded real estate investment trust which owns, develops, acquires, manages and leases community shopping centers, single tenant retail properties and one
regional mall, in the midwestern, southeastern and mid-Atlantic regions of the United States. At December 31, 2003, our portfolio consist of 64 shopping centers, of which ten are power centers and three are single tenant properties, as well as one enclosed regional mall, totaling approximately 13.6 million square feet of gross leasable area.
Our corporate strategy is to maximize total return for our shareholders by improving operating income and enhancing asset value. We pursue our goal through:
•
A proactive approach to redeveloping, renovating and expanding our shopping centers.
•
The acquisition of community shopping centers, with a focus on grocery and nationally-recognized discount department store anchor tenants.
•
The development of new shopping centers in metropolitan markets where we believe demand for a center exists.
•
A proactive approach to leasing vacant spaces and entering into new leases for occupied spaces where leases are about to expire.
We have followed a disciplined approach to managing our operations by focusing primarily on enhancing the value of our existing portfolio through strategic sales and successful leasing efforts and by improving our capital structure through the refinancing of a portion of our variable rate debt with long-term fixed rate debt and two stock offerings. We continue to selectively pursue new acquisitions and development opportunities. The highlights of our 2003 activity reflect this strategy:
•
We acquired six properties at an aggregate cost of $106.8 million.
•
We completed a number of redevelopments projects, including Phase I of the repositioning of the Tel-Twelve shopping center in Southfield, Michigan for a total cost of approximately $19.8 million. Phase II of the redevelopment is currently underway for an estimated net cost of approximately 5.4 million.
•
The strength of our portfolio supplemented with acquisitions brought on line since January 1, 2002 allowed us to increase our total revenue by 19.4% in 2003.
•
During 2003, we opened 77 new non-anchor stores, at an average base rent of $13.75 per square foot, which represents a 9.1% increase above our portfolio average. We also renewed 98 non-anchor leases at an average base rent of $11.14, achieving an increase of 5.75% over prior rental rates. In addition, we signed 10 new anchor leases during 2003. Our occupancy for the portfolio was 89.7% as of December 31, 2003.
•
We repaid two floating rate mortgages totaling $27.8 million and replaced them with fixed rate mortgages amounting to $37.1 million with interest rates of 5.45% and 5.51%. In addition, we refinanced a shopping center that was previously included as part of our borrowings under our secured credit facility. This new mortgage in the amount of $11.0 million has a 4.76% fixed rate interest rate.
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In June 2003, we issued 2,150,000 common shares of beneficial interest in a public offering. The net proceeds of approximately $50.6 million were used to pay down amounts outstanding under our two credit facilities and partially finance two acquisitions. In October 2003, we had a second public offering. We issued 2,300,000 common shares of beneficial interest with a total net proceeds of $56.6 million that were used to pay down outstanding balances under our secured and unsecured credit facilities and invest in short-term investments
Critical Accounting Policies
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 at the date of the financial statements. It is our opinion that we fully disclose our significant accounting policies in the Notes to our consolidated financial statements. Consistent with our
disclosure policies we include the following discussion related to what we believe to be our most critical accounting policies that require our most difficult, subjective or complex judgment:
Reserve for Bad Debts - We provide for bad debt expense based upon the reserve method of accounting. We continuously monitor the collectibility of our accounts receivable (billed, unbilled and straight-line) from specific tenants, analyze historical bad debts, customer credit worthiness, current economic trends and changes in tenant payment terms when evaluating the adequacy of the allowance for bad debts. When tenants are in bankruptcy, we make estimates of the expected recovery of pre-petition and post-petition claims. The ultimate resolution of these claims can exceed one year. Management believes the allowance is adequate to absorb currently estimated bad debts. However, if we experience bad debts in excess of the reserves we have established, our operating income would be reduced.
Real Estate - We record real estate assets at cost, net of accumulated depreciation. Direct costs incurred for the acquisition, development and construction of properties are capitalized. For redevelopment of an existing operating property, the undepreciated net book value plus the direct costs for the construction (including demolition costs) incurred in connection with the redevelopment are capitalized to the extent such costs do not exceed the estimated fair value when complete. To the extent such costs exceed the estimated fair value of such property, the excess would be charged to expense.
Other Assets - Other assets consist primarily of prepaid expenses, proposed development and acquisition costs, and financing and leasing costs which are amortized using the straight-line method over the terms of the respective agreements. Should a tenant terminate its lease, the unamortized portion of the leasing costs is charged to expense. Unamortized financing costs are expensed when the related agreements are terminated before their scheduled maturity dates. Proposed development and acquisition costs are deferred and transferred to construction in progress when development commences or written-off to expense if development is not considered probable.
Purchase Accounting for Acquisitions of Real Estate and Other Assets - Amounts allocated to land and buildings are based on cost segregation studies performed by management’s analysis of comparable properties in the existing portfolio.
The estimated fair value of above-market and below-market in-place leases for acquired properties are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease.
The aggregate fair value of other intangible assets (consisting of in place, at market leases) is estimated based on the difference between (i) the property valued with existing in-place leases adjusted to market rental rates and (ii) the property valued as if vacant. We utilize independent appraisals or management’s estimates to determine the respective property values. Management’s estimates of property values are made using internally developed methods. Factors considered by management in their analysis include an estimate of costs to execute similar leases.
The fair value of above-market in-place leases and the fair value of other intangible assets acquired are recorded as identified intangible assets, included in other assets, and are amortized as reductions of rental revenue over the initial term of the respective leases. The fair value of below-market in-place leases are recorded as deferred credits and are amortized as additions to rental income over the initial terms of the respective leases. Should a tenant terminate its lease, the unamortized portion of the in-place lease value would be written-off.
Accounting for the Impairment or Disposal of Long-Lived Assets - Statement of Financial Accounting Standard No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”) requires an impairment loss to be recognized if the carrying amount of a long-lived asset is not recoverable and exceeds its fair value. This statement requires the use of one of two present value techniques to measure the fair value of an asset. Using our best estimates based on reasonable and supportable assumptions and projections, we review for impairment long-lived assets whenever events or changes in circumstances indicate
that the carrying amount of these assets might not be recoverable. In addition, this statement requires us to account for the sale of shopping centers in discontinued operations and not as part of our ongoing operations.
We evaluate the recoverability of our investment in real estate whenever events or changes in circumstances indicate that the carrying amount of an asset may be impaired. Our assessment of recoverability of our real estate assets includes, but is not limited to, recent operating results, expected net operating cash flow and our plans for future operations.
We are required to make subjective assessments as to whether there are impairments in value of other assets. These assessments have a direct impact on our consolidated financial statements if events or changes in circumstances indicate that the carrying amounts of these assets might not be recoverable.
For the years ended, December 31, 2003, 2002 and 2001, none of our assets were considered impaired.
Revenue Recognition - Shopping center space is generally leased to retail tenants under leases which are accounted for as operating leases. We recognize minimum rents on the straight-line method over the terms of the leases, as required under Statement of Financial Accounting Standards No. 13. Certain of the leases also provide for additional revenue based on contingent percentage income which is recorded on an accrual basis once the specified target that triggers this type of income is achieved. The leases also typically provide for tenant recoveries of common area maintenance, real estate taxes and other operating expenses. Revenues from fees and management income are recognized in the period in which the services occur. Lease termination fees are recognized when a lease termination agreement is executed by the parties.
Straight-line rental income was greater than the current amount required to be paid by our tenants by $2.0 million, $2.8 million and $2.1 million for the years ended December 31, 2003, 2002 and 2001, respectively. Accounts receivable include unbilled straight-line rent receivables of $11.9 million at December 31, 2003 and $12.8 million at December 31, 2002.
Off Balance Sheet Arrangements - We have five off balance sheet investments in which we own 50.0% or less of the total ownership interests. With the exception of PLC Novi West Development, LLC, we provide leasing, development and property management services to the joint ventures. These investments are accounted for under the equity method. In our judgment, we do not have the level of control of these joint ventures to include the entities as consolidated subsidiaries.
Results of Operations
Comparison of the Year Ended December 31, 2003 to the Year Ended December 31, 2002
Revenues
Total revenues increased 19.4% or $17.6 million to $108.4 million for the year ended December 31, 2003 as compared to $90.8 million for the year ended December 31, 2002. Of the $17.6 million increase, $12.8 million was the result of increased minimum rents and $4.3 million was the result of increased recoveries from tenants.
For purposes of comparison between the years ended December 31, 2003 and 2002, “same center” refers to the shopping center properties owned as of January 1, 2002 and December 31, 2003. We made three shopping center acquisitions and we acquired our joint venture partners’ interests in four shopping centers during 2002. We made six acquisitions during the year ended December 31, 2003. These 13 properties are included as “Acquisitions” in the following discussion.
Minimum rents increased 21.1%, or $12.8 million for the year ended December 31, 2003. The increase is primarily related to acquisitions, as shown in the table below.
The increase in same center minimum rents is principally attributable to new tenant lease up throughout our same center portfolio in 2003.
Recoveries from tenants increased 17.0%, or $4.3 million for the year ended December 31, 2003. The decrease in recoveries from tenants at same centers is primarily the result of our redevelopment projects and the negative impact of reduced occupancy rates in 2003. The overall recovery ratio was 93.1% for the year ended December 31, 2003, compared to 96.1% for the year ended December 31, 2002. The decline in this ratio is a result of decreased occupancy during the redevelopment of seven shopping centers. The following two tables include recovery revenues and related expenses that comprise the recovery ratio.
The net increase in recoveries from tenants is comprised of the following:
Recoverable operating expenses, including real estate taxes, is a component of our recovery ratio. These expenses increased 20.8%, or $5.4 million for the year ended December 31, 2003.
For the year ended December 31, 2003, percentage rents increased $125,000 to $1.2 million, as compared to $1.1 million for the twelve months ended December 31, 2002. The increase is the result of tenant changes associated with redevelopment projects.
Fees and management income decreased $72,000, or 4.7%, to $1.4 million in 2003 from $1.5 million for 2002. The decrease was primarily the result of lower development and acquisition fees in 2003 when compared to 2002.
Expenses
Total expenses increased 20.2%, or $16.3 million, for the year ended December 31, 2003, as compared to 2002. Real estate taxes and recoverable operating expenses increased $5.5 million, depreciation and amortization increased $5.3 million and general and administrative expenses decreased $318,000. The increase in real estate taxes and recoverable operating expenses is primarily attributable to acquisitions made during the two years ended December 31, 2003.
Other operating expenses increased $2.9 million from $1.4 million in 2002 to $4.3 million in 2003 and is principally related to the increase of 2.8 million in bad debt expense. The increase in bad debt expense relates to a lease assignment made by Kmart Corporation at our Tel-Twelve shopping center that was accounted for as a lease termination. As a result, the straight-line receivable of approximately $3.0 million was written-off.
Depreciation and amortization expense increased $5.3 million, or 30.1%, to $22.9 million as compared to $17.6 million in 2002. Depreciation expense related to acquisitions made in 2002 and 2003 contributed $2.7 million of the increase. Depreciation expense related to same centers contributed $2.6 million of the increase, and such increase primarily related to redevelopment projects completed during 2002 and 2003.
General and administrative expenses were $8.5 million for the year ended December 31, 2003, as compared to $8.8 million for the same period in 2002. As a result of utilizing various tax credits, the Michigan Single Business Tax expense decreased $1.7 million in 2003 when compared to 2002. The decrease was off-set by an increase in other general and administrative expenses. Due to the Company’s growth, primarily related to shopping center acquisitions, expansions and developments during the past two years, salaries, bonuses and fringe benefits increased $1.5 million. During 2003, professional and consulting fees increased $77,000.
Interest expense increased 11.4%, or $3.0 million, for the year ended December 31, 2003. The summary below identifies the increase by its various components (dollars in thousands).
Income from discontinued operations for the year ended December 31, 2003 consists of operating income for Ferndale Plaza shopping center, which was sold in December 2003. For the year ended December 31, 2002, income from discontinued operations included operating income of Ferndale Plaza for 12 months and three months of operating income related to Hickory Corners, which was sold in April 2002. The sale of Ferndale Plaza resulted in a gain on sale of property of $897, net of minority interest. Hickory Corners resulted in a gain on sale of property of approximately $2.2 million, net of minority interest.
Comparison of the Year Ended December 31, 2002 to the Year Ended December 31, 2001
Revenues
Total revenues increased 1.9% or $1.7 million to $90.8 million for the year ended December 31, 2002 as compared to $89.1 million for the year ended December 31, 2001. Of the $1.7 million increase, $1.1 million was the result of increased minimum rents.
For purposes of comparison between the years ended December 31, 2002 and 2001, “same center” refers to the shopping center properties owned as of January 1, 2001 and December 31, 2002. We made three acquisitions during the year ended December 31, 2002, and we acquired the joint venture partners’ interests in four shopping centers, previously reported on the equity method. These seven properties are included in “Acquisitions” in the following discussion. Dispositions include the sale of White Lake MarketPlace and Athens Town Center that occurred in 2001. The results of operations for these two properties have been included as dispositions in the following tables.
Minimum rents increased 1.9%, or $1.1 million for the year ended December 31, 2002. The increase is primarily related to acquisitions, as shown in the table below.
The decrease in same center minimum rents is principally attributable to the redevelopment during 2002 of our Tel-Twelve shopping center from an enclosed regional mall to an open-air center and the redevelopment of the Shoppes of Lakeland. In addition, our occupancy rate for our centers decreased to 90.5% at December 31, 2002 from 95.5% at December 31, 2001. The decrease in the occupancy rate is attributable to the increase in the number of retail companies filing for bankruptcy protection during 2001 and 2002. As a result of these bankruptcies, some national retail tenants closed stores at several of our locations.
Recoveries from tenants increased 9.6%, or $2.2 million for the year ended December 31, 2002. The increase in recoveries from tenants at same centers is primarily the result of general increases in real estate tax recoveries during 2002. The overall recovery ratio was 96.1% for the year ended December 31, 2002, compared to 95.3% for the year ended December 31, 2001.
The following two tables include recovery revenue and related expenses that comprise the recovery ratio.
The net increase in recoveries from tenants is comprised of the following:
Recoverable operating expenses, including real estate taxes increased 8.7%, or $2.1 million for the year ended December 31, 2002.
For the year ended December 31, 2002, percentage rents decreased $390,000 to $1.1 million, as compared to $1.4 million for the twelve months ended December 31, 2001. The decrease is the result of tenant changes associated with redevelopment projects and our efforts to convert percentage rent to higher minimum rent when renewing leases. Fees and management income decreased $958,000 or 38.6% to $1.5 million in 2002 from $2.5 million for 2001. The decrease was primarily the result of lower development and acquisition fees in 2002 when compared to 2001.
Expenses
Total expenses for the year ended December 31, 2002 increased 4.5%, or $3.5 million to $80.5 million, compared to $77.0 million for the year ended December 31, 2001. The increase was due to a $814,000 increase in depreciation and amortization expense, a $2.1 million increase in Real estate taxes and recoverable operating expenses, and a $496,000 increase in general and administrative expenses
Depreciation and amortization expense increased 4.9%, or $814,000 to $17.6 million in 2002. The increase is primarily due to acquisitions made during 2002.
General and administrative expenses were $8.8 million and represented 9.7% of total revenue for the year ended December 31, 2002, as compared to $8.3 million and 9.3% of total revenue for the same period in 2001. The increase is attributable to $1.2 million expense related to Michigan Single Business Tax for the years ended December 31, 2001, 2000 and 1999. In 1995, the State of Michigan changed the method of computing the capital acquisition deduction for multi-state taxpayers. The change in the law has been vigorously challenged in the courts by a number of taxpayers. In January 2003, we were informed that the Michigan Supreme Court elected not to review the appellate courts decision that overturned a favorable lower court ruling in favor of a taxpayer. Since we previously paid the additional tax for the above-mentioned years and filed a protective claim requesting a refund, we recorded a receivable from the State of Michigan. As a result of the Michigan Supreme Court’s decision not to hear the case, we reversed the receivable and recognized an expense in 2002.
Interest expense increased 0.4%, or $97,000 for the year ended December 31, 2002. The summary below identifies the increase by its various components (dollars in thousands).
Income from discontinued operations, which consists of operating income for the Hickory Corners and Ferndale Plaza shopping centers, decreased $491,000 or 54.7% when compared to the year ended December 31, 2001. Hickory Corners was sold on April 10, 2002, and therefore, only three months of operating income was included in 2002, compared to twelve months of operating income included in the year ended December 31, 2001. The sale of Hickory Corners resulted in a gain on sale of property of approximately $2.2 million, net of minority interest.
During the year ended December 31, 2001, we completed $29.0 million in asset sales and recognized net gains of $5.6 million. The sales of properties included White Lake MarketPlace and Athens Town Center, as well as the sales of four parcels of land. For sales entered into prior to January 1, 2002, the sales of properties are not accounted for as discontinued operations and are included in gain on sales of real estate.
Financing Activities
The acquisitions, developments and redevelopments, including expansion and renovation programs, that we made during 2003 generally were financed though cash provided from operating activities, revolving credit facilities, refinancing mortgages, a construction loan, assumption of four mortgages as a result of acquisitions and two equity offerings. Total debt outstanding was approximately $454.4 million as compared to $423.2 million at December 31, 2003 and 2002, respectively. In 2003, the increase in our debt was due primarily to the funding of acquisitions, development and expansion activity.
In June 2003, we issued 2,150,000 common shares of beneficial interest in a public offering. The net proceeds of approximately $50.6 million were used to pay down amounts outstanding under our two credit facilities and partially finance two acquisitions.
In October 2003, we issued 2,300,000 common shares of beneficial interest in a public offering. Total net proceeds of $56.6 million were used to pay down outstanding balances under our secured and unsecured credit facilities and invest in short-term investments.
In connection with the acquisitions of four properties in 2003, we assumed fixed rate mortgages amounting to $43.8 million with interest rates ranging from 6.67% to 8.18%. During 2003, we repaid two floating rate mortgages totaling $27.8 million and increased fixed rate mortgages by $37.1 million with interest rates of 5.45% and 5.51%. In addition, we refinanced a shopping center that was previously included as part of our borrowings under our secured credit facility. This new mortgage in the amount of $11.0 million has a 4.76% fixed rate interest rate. In 2003, we repaid a $6.8 million fixed rate mortgage with an interest rate of 7.58%.
During the year we refinanced three existing mortgages, increasing our outstanding indebtedness by approximately $12.8 million. In 2003, we also increased borrowings under a construction loan by $1.5 million.
Liquidity and Capital Resources
Our capital structure at December 31, 2003, includes property-specific mortgages, our unsecured revolving credit facility, our secured revolving credit facility, our Series B Preferred Shares, our Common Shares and a minority interest in the Operating Partnership.
The principal uses of our liquidity and capital resources are for operations, acquisitions, developments, redevelopments, including expansion and renovation programs and debt repayment, as well as dividend payments in accordance with REIT requirements. We anticipate that cash on hand, borrowings under our existing credit facilities, as well as other debt and additional equity offerings, will provide the necessary capital to achieve continued growth.
The following is a summary of our cash flow activities (dollars in thousands):
To maintain our qualification as a REIT under the Code, we are required to distribute to our shareholders at least 90% of our “Real Estate Investment Trust Taxable Income” as defined in the Code. We satisfied the REIT requirement with distributed common and preferred share dividends of $24.9 million in 2003, $18.2 million in 2002 and $15.3 million in 2001.
At December 31, 2003, our market capitalization amounted to $1,041.1 million. Market capitalization consisted of $454.4 million of debt, $28.5 million of Series B Preferred Shares, and $558.2 million of market equity of Common Shares and Operating Partnership Units. Our debt to total market capitalization was 43.7% at December 31, 2003, as compared to 56.5% at December 31, 2002. Our outstanding debt at December 31, 2003, had a weighted average interest rate of 6.6%, and consisted of $415.8 million of fixed rate debt and $38.6 million of variable rate debt.
Our $125.0 million secured revolving credit facility bears interest between 150 and 200 basis points over LIBOR depending on certain of our leverage ratios. Using 175 basis points over LIBOR at December 31, 2003, the effective interest resulted in an effective interest rate was 5.0%, including interest rate swap agreements. At our option, through June 2004, we can increase the available amount of borrowings from $125.0 million to $150.0 million, upon payment of a fee to the lenders and provided that we are not then in
default. A portion of the proceeds from our two equity offerings in 2003 were used to pay down the outstanding balance under our secured revolving credit facility.
Our unsecured revolving credit facility bears interest between 325 and 375 basis points over LIBOR depending on certain debt ratios. We amended this facility in December 2002, increasing our ability to borrow up to $40.0 million. The credit facility is due December 2005. At our option through June 2004, we can increase the available amount of borrowings by $10.0 million to $50.0 million, upon payment of a fee to the lenders and provided that we are not then in default.
Outstanding letters of credit issued under the secured revolving credit facility total approximately $2.0 million. At December 31, 2003, we also had other letters of credit outstanding of approximating $1.2 million related to redevelopment and leasing activity. At December 31, 2003, we had no outstanding borrowings under any of our letters of credit.
As of December 31, 2003, we were in compliance with all loan covenants and we expect to continue to be in compliance with all loan covenants. If we were to violate these covenants, we may be subject to higher finance costs and fees. Foreclosure on mortgaged properties or an inability to refinance existing indebtedness would likely have a negative impact on our financial condition and results of operations.
Under terms of various debt agreements, we are required to maintain interest rate swap agreements to reduce the impact of changes in interest rate on our floating rate debt. We have interest rate swap agreements with an aggregate notional amount of $100.0 million at December 31, 2003. Based on rates in effect at December 31, 2003, the agreements provide for fixed rates ranging from 4.4% to 7.4% (at LIBOR plus 175 basis points) and expire at various dates through December 2005. We are exposed to credit loss in the event of non-performance by the counter party to the interest rate swap agreements; however we do not anticipate non-performance by the counter party.
After taking into account the impact of converting our variable rate debt into fixed rate debt by use of the interest rate swap agreements, at December 31, 2003, our variable rate debt accounted for approximately $38.6 million of outstanding debt with a weighted average interest rate of 3.3%. Variable rate debt accounted for approximately 8.5% of our total debt and 3.7% of our total market capitalization.
The properties in which Ramco-Gershenson Properties, L.P. (the “Operating Partnership”), owns an interest but do not have financial or operating control of, are accounted for using the equity method of accounting, are subject to non-recourse mortgage indebtedness. At December 31, 2003, our unconsolidated joint venture entities had $99.7 million of debt outstanding with a weighted average interest rate of 6.1%, of which $21.3 million was our proportionate share.
The mortgage loans (other than our secured revolving credit facility) encumbering our properties, including properties held by our unconsolidated joint ventures, are generally non-recourse, subject to certain exceptions for which we would be liable for any resulting losses incurred by the lender. These exceptions vary from loan to loan but generally include fraud or a material misrepresentation, misstatement or omission by the borrower, intentional or grossly negligent conduct by the borrower that harms the property or results in a loss to the lender, filing of bankruptcy petition by the borrower, either directly or indirectly, and certain environmental liabilities. In addition, upon the occurrence of certain of such events, such as fraud or filing of a bankruptcy petition by the borrower, we would be liable for the entire outstanding balance of the loan, all interest accrued thereon and certain other costs, penalties and expenses.
Contractual Obligations
The following are our contractual cash obligations as of December 31, 2003 (dollars in thousands):
Mortgages and notes payable
See analysis of debt included in the Financing Activities section above.
Employment Contracts
We have employment contracts with various officers. See our definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the year covered by this Annual Report for a discussion of these agreements.
Operating Lease
We lease office space for our corporate headquarters under an operating lease that expires on June 30, 2004. We are currently negotiating a long-term operating lease for our corporate office needs. We expect that the rent under the new lease agreement will increase our annual rent expense by approximately $364,000.
Construction Costs
In connection with the development and expansion of various shopping centers as of December 31, 2003, we have entered into agreements for construction costs of approximately $3.3 million.
Capitalization
Our capital structure at December 31, 2003, includes property-specific mortgages, our unsecured revolving credit facility, our secured revolving credit facility, our Series B Preferred Shares, our Common Shares and the minority interest in the Operating Partnership. At December 31, 2003, the minority interest in the Operating Partnership represented a 14.9% ownership in the Operating Partnership which, may under certain conditions, be exchanged for an aggregate of 2,930,000 Common Shares.
As of December 31, 2003, the units in the Operating Partnership Units (“OP Units”) were exchangeable for Common Shares of the Company on a one-for-one basis. We, as sole general partner of the Operating Partnership, have the option, but not the obligation, to settle exchanged OP Units in cash based on the current trading price of our Common Shares. Assuming the exchange of all limited partnership interests in the Operating Partnership, there would have been 19,723,853 of our common shares outstanding at December 31, 2003, with a market value of approximately $558.2 million (based on the closing price of $28.30 per share on December 31, 2003).
As part of our business plan to improve our capital structure and reduce debt, we will continue to pursue the strategy of selling fully-valued properties and to dispose of shopping centers that no longer meet the criteria established for our portfolio. Our ability to obtain acceptable selling prices and satisfactory terms will impact the timing of future sales. Net proceeds from the sale of properties are expected to reduce outstanding debt.
We anticipate that the combination of the availability under the Secured Revolving Credit Facility, the Unsecured Revolving Credit Facility, possible equity offerings, the sale of existing properties, and potential new debt will satisfy our expected working capital requirements through at least the next 12 months. We anticipate adequate liquidity for the foreseeable future to fund future developments, expansions, repositionings, and to continue currently planned capital programs, and to make distributions to our shareholders in accordance with the Code’s requirements applicable to REITs. Although we believe that the combination of factors discussed above will provide sufficient liquidity, no such assurance can be given.
Economic Conditions
The retail industry has experienced some financial difficulties during the past few years and certain local, regional and national retailers have filed for protection under bankruptcy laws. If this trend should continue, and includes tenants in our portfolio, our future earnings performance could be negatively impacted.
Sensitivity Analysis
We are exposed to interest rate risk on our variable rate debt obligations. We are not subject to any foreign currency exchange rate risk or commodity price risk, or other material market rate or price risks. Based on our debt and interest rates and the interest rate swap agreements in effect at December 31, 2003, a 100 basis point increase or decrease in interest rates would result in a decrease or increase of our annual earnings and cash flows by approximately $286,000.
Under terms of various debt agreements, we are required to maintain interest rate swap agreements to reduce the impact of changes in interest rate on our floating rate debt. We have seven interest rate swap agreements with an aggregate notional amount of $100.0 million at December 31, 2003. Based on rates in effect at December 31, 2003, the agreements provide for fixed rates ranging from 4.4% to 7.4% (at LIBOR plus 175 basis points) and expire at various dates through December 2005. We are exposed to credit loss in the event of non-performance by the counter party to the interest rate swap agreements; however we do not anticipate non-performance by the counter party.
Risks Related to Our Business
Adverse market conditions and tenant bankruptcies could adversely affect our revenues.
The economic performance and value of our real estate assets are subject to all the risks associated with owning and operating real estate, including risks related to adverse changes in national, regional and local economic and market conditions. Our current properties are located in 12 states in the midwestern, southeastern and mid-Atlantic regions of the United States. The economic condition of each of our markets may be dependent on one or more industries. An economic downturn in one of these industries may result in a business downturn for our tenants, and as a result, these tenants may fail to make rental payments, decline to extend leases upon expiration, delay lease commencements or declare bankruptcy.
Any tenant bankruptcies, leasing delays, or failure to make rental payments when due could result in the termination of the tenant’s lease, causing material losses to us and adversely impacting our operating results. If our properties do not generate sufficient income to meet our operating expenses, including future debt service, our income and results of operations would be adversely affected. Kmart Corporation filed for Chapter 11 bankruptcy protection during January 2002. In June 2003, Kmart Corporation assigned its lease at our Tel-Twelve shopping center to Meijer, Inc., a discount department and grocery store retailer. The assignment of this lease was accounted for as a lease termination and we wrote off the straight-line rent receivable of approximately $3.0 million, with a corresponding charge to other operating expenses.
Any bankruptcy filings by or relating to one of our tenants or a lease guarantor would bar all efforts by us to collect pre-bankruptcy debts from that tenant, the lease guarantor or their property, unless we receive an order permitting us to do so from the bankruptcy court. A tenant or lease guarantor bankruptcy could delay our efforts to collect past due balances under the relevant leases and could ultimately preclude full collection of these sums. If a lease is assumed by the tenant in bankruptcy, all pre-bankruptcy balances due under the
lease must be paid to us in full. However, if a lease is rejected by a tenant in bankruptcy, we would have only a general unsecured claim for damages. Any unsecured claim we hold may be paid only to the extent that funds are available and only in the same percentage as is paid to all other holders of unsecured claims. It is possible that we may recover substantially less than the full value of any unsecured claims we hold, if at all, which may adversely affect our operating results and financial condition.
If any of our anchor tenants becomes insolvent, suffers a downturn in business, or decides not to renew its lease or vacates a property and prevents us from re-letting that property by continuing to pay rent for the balance of the term, it may adversely impact our business. In addition, a lease termination by an anchor tenant or a failure of an anchor tenant to occupy the premises could result in lease terminations or reductions in rent by some of our non-anchor tenants in the same shopping center pursuant to the terms of their leases. In that event, we may be unable to re-let the vacated space.
Similarly, the leases of some anchor tenants may permit them to transfer their leases to other retailers. The transfer to a new anchor tenant could cause customer traffic in the retail center to decrease, which would reduce the income generated by that retail center. In addition, a transfer of a lease to a new anchor tenant could also give other tenants the right to make reduced rental payments or to terminate their leases with us.
Concentration of our credit risk could reduce our operating results.
Several of our tenants represent a significant portion of our leasing revenues. As of December 31, 2003, we received 6.7% of our annualized rent from Wal-Mart Stores, Inc. Seven other tenants each represented at least 2.0% of our total annualized base rent. The concentration in our leasing revenue from a small number of tenants creates the risk that, should these tenants experience financial difficulties, our operating results could be adversely affected.
We are involved in various tax disputes with the Internal Revenue Service and may not be able to resolve these disputes on satisfactory terms.
The IRS is currently conducting an examination (“IRS Examination”) of us for the taxable years ended December 31, 1996 and 1997, and of one of our subsidiary partnerships for the taxable years ended December 31, 1997, 1998, and 1999. As of December 31, 2003, the IRS has not issued a report nor proposed any adjustments in connection with the IRS Examination. Certain tax deficiencies (and any related interest and penalties) which may be assessed against us in connection with the IRS Examination may constitute covered taxes under an agreement we entered into with Atlantic Realty Trust (“Atlantic”). Atlantic may not have sufficient assets to reimburse us for all amounts we must pay to the IRS with respect to such covered taxes, and we would be required to pay the difference out of our own funds. The IRS may also assess taxes that Atlantic is not required to pay. Accordingly, the ultimate resolution of any controversy over tax liabilities arising pursuant to the IRS Examination may have a material adverse effect on our financial position, results of operations and cash flows, including if we are required to distribute deficiency dividends to our shareholders and/or pay additional taxes, interest and penalties to the IRS in amounts that Atlantic cannot, is not required to, or otherwise does not pay.
Our failure to qualify as a REIT would result in higher taxes and reduced cash available for our shareholders.
We believe that we currently operate in a manner so as to qualify as a REIT for federal income tax purposes. If, however, we were to fail to qualify as a REIT in any taxable year, we would be subject to federal income tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates, and distributions to shareholders would not be deductible by us in computing our taxable income. Any such corporate tax liability could be substantial and would reduce the amount of cash available for distribution to our shareholders, which in turn could have an adverse impact on the value of, and trading prices for, our shares. Unless entitled to relief under certain Internal Revenue Code provisions, we also would be disqualified from taxation as a REIT for the four taxable years following the year during which we ceased to qualify as a REIT.
Our inability to successfully identify or complete suitable acquisitions and new developments would adversely affect our results of operations
Integral to our business strategy is our ability to continue to acquire and develop properties. We also may not be successful in identifying suitable real estate properties that meet our acquisition criteria and are compatible with our growth strategy or in consummating acquisitions or investments on satisfactory terms. We may not be successful in identifying suitable areas for new development, negotiating for the acquisition of the land, obtaining required permits and authorizations, completing developments in accordance with our budgets and on a timely basis or leasing any newly-developed space. If we fail to identify or complete suitable acquisitions or developments within our budget, our financial condition and results of operations could be adversely affected and our growth could slow, which in turn could adversely impact our share price.
Our redevelopment projects may not yield anticipated returns, which would adversely affect our operating results.
A key component of our business strategy is exploring redevelopment opportunities at existing properties within our portfolio and in connection with property acquisitions. To the extent that we engage in these redevelopment activities, they will be subject to the risks normally associated with these projects, including, among others, cost overruns and timing delays as a result of the lack of availability of materials and labor, weather conditions and other factors outside of our control. Any substantial unanticipated delays or expenses could adversely affect the investment returns from these redevelopment projects and adversely impact our operating results.
Funds From Operations
We consider funds from operations, also known as “FFO,” an appropriate supplemental measure of the financial performance of an equity REIT. Under the National Association of Real Estate Investment Trusts (“NAREIT”) definition, FFO represents income before minority interest, excluding extraordinary items, as defined under accounting principles generally accepted in the United States of America (“GAAP”), gains on sales of depreciable property, plus real estate related depreciation and amortization (excluding amortization of financing costs), and after adjustments for unconsolidated partnerships and joint ventures. FFO should not be considered an alternative to GAAP net income as an indication of our performance. We consider FFO to be a useful measure for reviewing our comparative operating and financial performance between periods or to compare our performance to different REITs. However, our computation of FFO may differ from the methodology for calculating FFO utilized by other real estate companies, and therefore, may not be comparable to these other real estate companies.
The following table illustrates the calculations of FFO (in thousands):
(1)
Excludes gain on sale of undepreciated land of $1,853 in 2003, $0 in 2002 and $343 in 2001.
(2)
Series B preferred shares are not convertible into common shares. Therefore they are excluded from the calculation.
(3)
Basic weighted average shares outstanding represents the weighted average total shares outstanding, which includes common shares and assumes the redemption of all Operating Partnership Units for common shares. Diluted weighted average shares outstanding represents the basic weight average common shares outstanding plus the conversion of Series A Convertible Preferred Shares to common shares and the dilutive impact of in-the-money stock options.
Capital Expenditures
During 2003, we spent approximately $6.3 million on revenue-generating capital expenditures including tenant allowances, leasing commissions paid to third-party brokers, legal costs relative to lease documents, and capitalized leasing and construction costs. These types of costs generate a return through rents from tenants over the terms of their leases. Revenue-enhancing capital expenditures, including expansions, renovations and repositionings were approximately $18.5 million. Revenue neutral capital expenditures, such as roof and parking lot repairs, which are anticipated to be recovered from tenants, amounted to approximately $1.4 million.
For the year ending December 31, 2004, we anticipate spending approximately $34.0 million for revenue-generating, revenue-enhancing and revenue neutral capital expenditures.
Inflation
Substantially all of our long-term leases contain provisions designed to mitigate the adverse impact of inflation. Such provisions include clauses enabling us to receive percentage rent based on tenants’ gross sales, which usually increase as prices rise, and/or, in certain cases, escalation clauses, which generally increase rental rates during the term of the leases. A substantial number of our leases require the tenants to pay their maintenance, real estate taxes, maintenance and utilities, thereby reducing our exposure to increases in costs and operating expenses resulting from inflation.
Recent Accounting Pronouncements
Extinguishment of Debt and Other Technical Corrections - On January 1, 2003, we adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 145 “Rescission of FASB Statement No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections” which eliminates the requirement to report gains and losses from extinguishment of debt as extraordinary unless they meet the criteria of APB Opinion 30. This Statement also amends other existing pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. This Statement had no impact on our consolidated financial statements.
Accounting for Exit and Disposal Activities - On January 1, 2003, we adopted the provisions of SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”) which improves financial accounting and reporting for costs associated with exit or disposal activities. SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. SFAS 146 also establishes that fair value is the objective for initial measurement of the liability. This Statement had no impact on our consolidated financial statements.
Guarantor’s Accounting and Disclosure Requirements - In November 2002, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” (“FIN 45”). This interpretation expands the disclosure to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued and is for guarantees issued or modified after December 31, 2002. The provisions of FIN 45 had no impact on our consolidated financial statements.
Consolidation of Variable Interest Entities - In January 2003, the FASB issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities.” The objective of this Interpretation is to provide guidance on how to identify a variable interest entity (“VIE”) and determine when the assets, liabilities, non-controlling interests, and results of operations of a VIE need to be included in a company’s consolidated financial statements. A company that holds variable interests in an entity will need to consolidate the entity if the company’s interest in the VIE is such that the company will absorb a majority of the VIE’s expected losses and/or receive a majority of the entity’s expected residual returns, if they occur. FIN 46 also requires additional disclosure by primary beneficiaries and other significant variable interest holders.
In December 2003, the FASB issued FIN 46-Revised (“FIN 46-R”) which clarified and replaced FIN 46. FIN 46-R again deferred the adoption of its provisions until periods ending after March 15, 2004, however, application is required for periods ended after December 15, 2003 for public entities that have interests in special-purpose entities, as defined. We believe that our consolidated financial statements will not be impacted by the adoption of this statement.
Amendment of SFAS No. 133 - Effect July 1, 2003 we adopted SFAS No. 149 “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (“SFAS No. 149”). This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. The adoption of this Statement had no impact on our consolidated financial statements.
Financial Instruments with Characteristics of Liabilities and Equity - In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This statement establishes how an issuer classifies and measures certain financial instruments that have characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within the scope as a liability because that financial instrument embodies an obligation of the issuer. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and shall be effective at the beginning of the first interim period after September 15, 2003. During November 2003, the FASB deferred the effective date of paragraphs 9 and 10 of SFAS No. 150 as they apply to mandatorily redeemable noncontrolling interests in order to address and seek clarification of a number of interpretation and implementation issues. The Company has determined that none of our consolidated joint ventures, including the Operating Partnership, qualify as mandatorily redeemable noncontrolling interests. As provided in our Operating Partnership agreement, upon the termination of this partnership, the minority interest holders’ units will be exchanged for common shares of beneficial interest of Ramco-Gershenson Properties Trust at a ratio of one-to-one. The adoption of this Statement on had no impact on our consolidated financial statements.
Item 7A.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.
The information required by this Item is included in this report at Item 7 under the captions “Liquidity and Capital Resources” and “Sensitivity Analysis.”
Item 8.
Item 8.
Financial Statements and Supplementary Data.
The information required by Item 8 is included in the consolidated financial statements on pages through of this Form 10-K.
Item 9.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not applicable.
Item 9A.
Item 9A.
Controls and Procedures
Our principal executive officer and principal financial officer have evaluated our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e)) under the Securities Exchange Act of 1934, as amended (the “Act”) as of the end of the period covered by this report and have determined that such disclosure controls and procedures are effectively designed to ensure that required information disclosed by us in reports that we file or submit under the Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
PART III
Item 10.
Item 10.
Directors and Executive Officers of the Registrant
Item 11.
Item 11.
Executive Compensation
Item 12.
Item 12.
Security Ownership of Certain Beneficial Owners and Management
Item 13.
Item 13.
Certain Relationships and Related Transactions
Item 14.
Item 14.
Principal Accountant Fees and Services
Information required by Part III (Items 10, 11, 12, 13 and 14) of this Form 10-K is incorporated by reference from the company’s definitive Proxy Statement for its 2004 Annual Meeting of Common Shareholders. The annual meeting will be held June 10, 2004. The Proxy Statement will be filed with the Securities and Exchange Commission, pursuant to Regulation 14A, not later than 120 days after the end of our fiscal year covered by this report on Form 10-K, all of which information is hereby incorporated by reference in, and made part of, this Form 10-K.
PART IV
Item 15.
Item 15.
Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(1) Consolidated financial statements. See “Item 8 - Financial Statements and Supplementary Data.”
(2) Financial statement schedule. See “Item 8 - Financial Statements and Supplementary Data.”
(3) Exhibits
*
Filed herewith
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.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of registrant and in the capacities and on the dates indicated.
INDEPENDENT AUDITORS’ REPORT
To the Board of Trustees of
Ramco-Gershenson Properties Trust:
We have audited the accompanying balance sheets of Ramco-Gershenson Properties Trust and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of income and comprehensive income, shareholders’ equity and of cash flows for each of the three years in the period ended December 31, 2003. Our audits also included the financial statement schedule listed in the Index at Item 15. These consolidated financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Ramco-Gershenson Properties Trust and subsidiaries as of December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, in 2002 the Company changed its method of accounting for the impairment and disposal of long-lived assets to conform to Statement of Financial Accounting Standards No. 144. Also, as discussed in Note 10 to the consolidated financial statements, in 2001 the Company changed its method of accounting for derivative instruments and hedging activities to conform to Statement of Financial Accounting Standards No. 133, as amended and interpreted.
Detroit, Michigan
March 5, 2004
RAMCO-GERSHENSON PROPERTIES TRUST
CONSOLIDATED BALANCE SHEETS
See notes to consolidated financial statements.
RAMCO-GERSHENSON PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
See notes to consolidated financial statements.
RAMCO-GERSHENSON PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
See notes to consolidated financial statements.
RAMCO-GERSHENSON PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
See notes to consolidated financial statements.
RAMCO-GERSHENSON PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2003, 2002 and
(Dollars in thousands)
1.
Organization and Summary of Significant Accounting Policies
We are engaged in the business of owning, developing, acquiring, managing and leasing community shopping centers, regional malls and single tenant retail properties. At December 31, 2003, we had a portfolio of 64 shopping centers, with more than 13,300,000 square feet of gross leasable area, located in the midwestern, southeastern and mid-Atlantic regions of the United States. Our centers are usually anchored by discount department stores or supermarkets and the tenant base consists primarily of national and regional retail chains and local retailers. Our credit risk, therefore, is concentrated in the retail industry.
The economic performance and value of our real estate assets are subject to all the risks associated with owning and operating real estate, including risks related to adverse changes in national, regional and local economic and market conditions. The economic condition of each of our markets may be dependent on one or more industries. An economic downturn in one of these industries may result in a business downturn for our tenants, and as a result, these tenants may fail to make rental payments, decline to extend leases upon expiration, delay lease commencements or declare bankruptcy.
Principles of Consolidation - The consolidated financial statements include the accounts of the Company and our majority owned subsidiary, the Operating Partnership, Ramco-Gershenson Properties, L.P. (85.2% owned by us at December 31, 2003 and 80.7% at December 31, 2002), and all wholly owned subsidiaries, including bankruptcy remote single purpose entities. Investments in real estate joint ventures for which we have the ability to exercise significant influence over, but we do not have financial or operating control, are accounted for using the equity method of accounting. Accordingly, our share of the earnings of these joint ventures is included in consolidated net income. All significant intercompany accounts and transactions have been eliminated in consolidation.
Through the Operating Partnership we own 100% of the non-voting and voting common stock of Ramco-Gershenson, Inc. (“Ramco”), and therefore it is included in the consolidated financial statements. Ramco has elected to be a taxable real estate investment trust subsidiary for federal income tax purposes. Ramco provides property management services to us and other entities. See Note 17 for management fees earned from related parties.
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.
Revenue Recognition - Shopping center space is generally leased to retail tenants under leases which are accounted for as operating leases. We recognize minimum rents on the straight-line method over the terms of the leases, as required under Statement of Financial Accounting Standards (“SFAS”) No. 13. Certain of the leases also provide for additional revenue based on contingent percentage income and is recorded on an accrual basis once the specified target that triggers this type of income is achieved. The leases also typically provide for tenant recoveries of common area maintenance, real estate taxes and other operating expenses. These recoveries are recognized as revenue in the period the applicable costs are incurred. Revenues from fees and management income are recognized in the period in which the services occur. Lease termination fees are recognized when a lease termination agreement is executed by the parties.
Straight line rental income was greater than the current amount required to be paid by our tenants by $1,988, $2,848 and $2,135 for the years ended December 31, 2003, 2002 and 2001, respectively.
RAMCO-GERSHENSON PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Revenues from our largest tenant, Wal-Mart, amounted to 6.7%, 7.5% and 8.7% of our annualized base rent for the years ended December 31, 2003, 2002 and 2001, respectively.
Cash and Cash Equivalents - We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Income Tax Status - We conduct our operations with the intent of meeting the requirements applicable to a real estate investment trust (“REIT”) under Sections 856 through 860 of the Internal Revenue Code of 1986 as amended, also known as the Code. In order to maintain qualification as a real estate investment trust, the REIT is also required to distribute annually at least 90% of its REIT Taxable Income (as defined in the Internal Revenue Code) to its shareholders. As a real estate investment trust, the REIT will generally not be liable for federal corporate income taxes. Thus, no provision for federal income taxes has been included in the accompanying financial statements.
Real Estate - We record real estate assets at cost, net of accumulated depreciation. Direct costs incurred for the acquisition, development and construction of properties are capitalized. For redevelopment of an existing operating property, the undepreciated net book value plus the direct costs for the construction (including demolition costs) incurred in connection with the redevelopment are capitalized to the extent such costs do not exceed the estimated fair value when complete. To the extent such costs exceed the estimated fair value of such property, the excess would be charged to expense.
Depreciation is computed using the straight-line method and estimated useful lives for buildings and improvements of 40 years and equipment and fixtures of 5 to 10 years. Expenditures for improvements and construction allowances paid to tenants are capitalized and amortized over the remaining life of the initial terms of each lease. Expenditures for normal, recurring, or periodic maintenance and planned major maintenance activities are charged to expense when incurred. Renovations which improve or extend the life of the asset are capitalized.
Other Assets - Other assets consist primarily of prepaid expenses, proposed development and acquisition costs, and financing and leasing costs which are amortized using the straight-line method over the terms of the respective agreements. Should a tenant terminate its lease, the unamortized portion of the leasing costs is charged to expense. Unamortized financing costs are expensed when the related agreements are terminated before their scheduled maturity dates. Proposed development and acquisition costs are deferred and transferred to construction in progress when development commences or written-off if development is not considered probable.
Purchase Accounting for Acquisitions of Real Estate and Other Assets - Amounts allocated to land and buildings are based on cost segregation studies performed by management’s analysis of comparable properties in the existing portfolio.
The estimated fair value of above-market and below-market in-place leases for acquired properties are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease.
The aggregate fair value of other intangible assets (consisting of in place, at market leases) is estimated based on the difference between (i) the property valued with existing in-place leases adjusted to market rental rates and (ii) the property valued as if vacant. We utilize independent appraisals or management’s estimates to determine the respective property values. Management’s estimates of property values are made using internally developed methods. Factors considered by management in their analysis include an estimate of costs to execute similar leases.
RAMCO-GERSHENSON PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The fair value of above-market in-place leases and the fair value of other intangible assets acquired are recorded as identified intangible assets, included in other assets, and are amortized as reductions of rental revenue over the initial term of the respective leases. The fair value of below-market in-place leases are recorded as deferred credits and are amortized as additions to rental income over the initial terms of the respective leases. Should a tenant terminate its lease, the unamortized portion of the in-place lease value would be written-off.
Accounting for the Impairment or Disposal of Long-Lived Assets - SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”) requires an impairment loss to be recognized if the carrying amount of a long-lived asset is not recoverable and exceeds its fair value. This statement requires the use of one of two present value techniques to measure the fair value of an asset. Using our best estimates based on reasonable and supportable assumptions and projections, we review our long-lived assets, including those held by unconsolidated entities, for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets might not be recoverable. In addition, this statement requires us to account for the operations and gain on sale of shopping centers sold in 2002 and later years, as discontinued operations and not as part of our ongoing operations.
We evaluate the recoverability of our investment in real estate whenever events or changes in circumstances indicate that the carrying amount of an asset may be impaired. Our assessment of recoverability of our real estate assets includes, but is not limited to, recent operating results, expected net operating cash flow and our plans for future operations.
We are required to make subjective assessments as to whether there are impairments in value of other assets. These assessments have a direct impact on our consolidated financial statements if events or changes in circumstances indicate that the carrying amounts of these assets might not be recoverable.
For the years ended December 31, 2003, 2002 and 2001, none of our assets were considered impaired.
Derivative Financial Instruments - Effective January 1, 2001, we adopted Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”). This statement, as amended, requires us to measure all derivatives at fair value on the Consolidated Balance Sheet as an asset or liability, depending on our rights and obligations under each derivative contract. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are deferred and recorded as a component of other comprehensive income (“OCI”) until the hedged transactions occur and are recognized in earnings. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and the ineffective portion of a hedged derivative are recognized in earnings in the current period.
In managing interest rate exposure on certain floating rate debt, we at times enter into interest rate protection agreements. We do not utilize these arrangements for trading or speculative purposes. The differential between fixed and variable rates to be paid or received is accrued monthly, and recognized currently in the Consolidated Statement of Income. We are exposed to credit loss in the event of non-performance by the counter party to the interest rate swap agreements, however, we do not anticipate non-performance by the counter party.
Stock-Based Compensation - We have two stock-based compensation plans, which are described more fully in Note 14. We account for these plans under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under the plans had an exercise price equal to the market value of the underlying common shares on the date of grant. The following table illustrates the effect on net income and earnings per share as if we had applied the fair value recognition
RAMCO-GERSHENSON PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
provisions of FASB Statement No. 123, “Accounting for Stock-Based Compensation”, to stock-based employee compensation.
Reclassification - Certain reclassifications have been made to the 2002 and 2001 financial statements to conform to the 2003 presentation.
2.
Recent Accounting Pronouncements
Extinguishment of Debt and Other Technical Corrections - On January 1, 2003, we adopted the provisions of SFAS No. 145 “Rescission of FASB Statement No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections” which eliminates the requirement to report gains and losses from extinguishment of debt as extraordinary unless they meet the criteria of APB Opinion 30. This Statement also amends other existing pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The adoption of this Statement had no impact on our consolidated financial statements.
Accounting for Exit and Disposal Activities - On January 1, 2003, we adopted the provisions of SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”), which improves financial accounting and reporting for costs associated with exit or disposal activities. SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. SFAS 146 also establishes that fair value is the objective for initial measurement of the liability. The adoption of this Statement had no impact on our consolidated financial statements.
Guarantor’s Accounting and Disclosure Requirements - On January 1, 2003, we adopted the provisions of FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” (“FIN 45”). This interpretation expands the disclosure to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued and is for guarantees issued or modified after December 31, 2002. The provisions of FIN 45 had no impact on our consolidated financial statements.
RAMCO-GERSHENSON PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Consolidation of Variable Interest Entities - In January 2003, the FASB issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities.” The objective of this Interpretation is to provide guidance on how to identify a variable interest entity (“VIE”) and determine when the assets, liabilities, non-controlling interests, and results of operations of a VIE need to be included in a company’s consolidated financial statements. A company that holds variable interests in an entity will need to consolidate the entity if the company’s interest in the VIE is such that the company will absorb a majority of the VIE’s expected losses and/or receive a majority of the entity’s expected residual returns, if they occur. FIN 46 also requires additional disclosure by primary beneficiaries and other significant variable interest holders.
In December 2003, the FASB issued FIN 46-Revised (“FIN 46-R”) which clarified and replaced FIN 46. FIN 46-R again deferred the adoption of its provisions until periods ending after March 15, 2004, however, application is required for periods ended after December 15, 2003 for public entities that have interests in special-purpose entities, as defined. We believe that our consolidated financial statements will not be impacted by the adoption of this statement.
Amendment of SFAS No. 133 - Effect July 1, 2003 we adopted SFAS No. 149 “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”. This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. The adoption of this Statement had no impact on our consolidated financial statements.
Financial Instruments with Characteristics of Liabilities and Equity - In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This statement establishes how an issuer classifies and measures certain financial instruments that have characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within the scope as a liability because that financial instrument embodies an obligation of the issuer. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and shall be effective at the beginning of the first interim period after September 15, 2003. During November 2003, the FASB deferred the effective date of paragraphs 9 and 10 of SFAS No. 150 as they apply to mandatorily redeemable noncontrolling interests in order to address and seek clarification of a number of interpretation and implementation issues. The Company has determined that none of our consolidated joint ventures, including the Operating Partnership, qualify as mandatorily redeemable noncontrolling interests. As provided in our Operating Partnership agreement, upon the termination of this partnership, the minority interest holders’ units will be exchanged for common shares of beneficial interest of Ramco-Gershenson Properties Trust at a ratio of one-to-one. The adoption of this Statement on had no impact on our consolidated financial statements.
3.
Accounts Receivable - Net
Accounts receivable at December 31, 2003 includes $5,180 due from Atlantic Realty Trust (“Atlantic”) for tax deficiencies and interest related to the Internal Revenue Service (“IRS”) examination of our taxable years ended December 31, 1991 through 1995. Under terms of the Tax Agreement, Atlantic assumed all of our liability for tax and interest arising out of the IRS examination. See Note 18.
Accounts receivable includes $11,857 and $12,791 of unbilled straight-line rent receivables at December 31, 2003 and December 31, 2002, respectively. Straight-line rent receivable at December 31, 2002 includes approximately $3,289 due from Kmart Corporation. In June 2003, Kmart Corporation assigned its lease at our Tel-Twelve shopping center to Meijer, Inc. The assignment of this lease was accounted for as a lease termination and we wrote off the straight line rent receivable of $2,982, with a corresponding charge to other operating expenses.
We provide for bad debt expense based upon the reserve method of accounting. We continuously monitor the collectibility of our accounts receivable (billed, unbilled and straight-line) from specific tenants, analyze
RAMCO-GERSHENSON PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
historical bad debts, customer credit worthiness, current economic trends and changes in tenant payment terms when evaluating the adequacy of the allowance for bad debts. When tenants are in bankruptcy, we make estimates of the expected recovery of pre-petition and post-petition claims. The ultimate resolution of these claims can exceed one year. Accounts receivable in the accompanying balance sheet is shown net of an allowance for doubtful accounts of $873 and $1,573 as of December 31, 2003 and 2002, respectively.
Bad debt expense, which is a component of other operating expenses, amounted to $3,031 (including the $2,982 write-off discussed above), $211 and $735 for the years ended December 31, 2003, 2002 and 2001, respectively.
4.
Investment in Real Estate
Investment in real estate at December 31, consists of the following:
5.
Property Acquisitions and Dispositions
We acquired six properties during 2003 at an aggregate cost of $106,750 and we acquired three properties during 2002 at an aggregate cost of $45,500. These acquisitions have been accounted for using the purchase method of accounting and the results of their operations have been included in the consolidated financial statements since the date of acquisition. The purchase prices were allocated to the assets acquired and liabilities assumed based upon their estimated fair market value, and no goodwill was recorded. The preliminary purchase price allocation is subject to adjustment until finalized, which is expected within one year from the date of acquisition.
In December 2003, we sold Ferndale Plaza for cash of $3,268, resulting in a gain on sale of approximately $897, net of minority interest. Ferndale Plaza’s results of operations and the gain on sale have been included in income from discontinued operations in the Consolidated of Statements of Income for the three years ended December 31, 2003. In addition, during 2003, we sold six parcels of land and recognized an aggregate gain of $263.
In April 2002, we sold Hickory Corners for cash of $10,272, resulting in a gain on sale of approximately $2,164, net of minority interest. Hickory Corners’ results of operations and the gain on sale have been included
RAMCO-GERSHENSON PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
in income from discontinued operations in the Consolidated Statements of Income for the years ended December 31, 2002 and 2001.
In January 2001, we sold White Lake MarketPlace for cash of $20,200, resulting in a gain on sale of approximately $5,300. See Note 17. In addition, we sold our Athens Town Center property and four parcels of land and recognized an additional aggregate gain of $250.
6.
Acquisition of Joint Venture Properties
In May 2002, we acquired an additional 75% ownership interest in RPT/ INVEST, LLC, which owns two community centers: Chester Springs and Rivertowne Square. As a result of this purchase, we became the 100% owner of the two centers. The transaction resulted in a net payment to our joint venture partner of approximately $8,714 in cash and we assumed $22,000 of debt.
During November 2002, we acquired an additional 90% ownership interest in Rossford Development LLC, which owns Crossroads Centre located in Rossford, Ohio. As a result of this purchase, we became the 100% owner of this center. The purchase price amounted to $1,373 and we assumed debt of $20,246.
In December 2002, we acquired an additional 75% ownership interest in RPT/ INVEST II, LLC, which owns East Town Plaza shopping center located in Madison, Wisconsin. We paid our joint venture partner approximately $3,992 in cash and assumed $12,000 of debt. This additional investment resulted in us becoming the 100% owner of the center.
Prior to acquiring the 100% interest in the above mentioned shopping centers, we accounted for the shopping centers using the equity method of accounting. Accordingly, our share of the earnings of these joint ventures prior to acquiring the remaining ownership interest is included in earnings from unconsolidated entities in the consolidated statements of income.
The acquisitions of the additional interests in these above-mentioned shopping centers were accounted for using the purchase method of accounting and the results of operations have been included in the consolidated financial statements since the date of acquisitions. The excess of the fair value over the net book basis of the interest in these four shopping centers have been allocated to land, buildings and, as applicable, identifiable intangibles, and no goodwill was recorded.
7.
Investments in Unconsolidated Entities
We currently have investments in the following unconsolidated entities:
In September 2001, we invested $756 for a 40% interest in a joint venture, Ramco/ West Acres LLC. Simultaneously, the joint venture acquired West Acres Commons shopping center located in Flint Township, Michigan for a purchase price of approximately $11,000 and assumed a mortgage note of $9,407.
In November 2001, we invested $1,713 for a 40% interest in a joint venture, Ramco/ Shenandoah LLC. The remaining 60% of Ramco/ Shenandoah LLC is owned by various partnerships and trusts for the benefit of family members of one of our trustees, who also serves as a trustee for several of these trusts. The
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joint venture acquired Shenandoah Square shopping center located in Davie, Florida for a purchase price of approximately $16,300.
During the year ended December 31, 2001, under terms of the joint venture agreements, we earned acquisition fees of $165 from Ramco/ West Acres LLC and $163 from Ramco/ Shenandoah LLC. We did not receive acquisition fees in 2003 and 222 from any of our joint venture partners. Under terms of the joint venture agreements, we are responsible for the leasing and management of the projects, for which we receive management fees and leasing fees. Each joint venture agreement includes a buy-sell provision whereby each partner has the right to purchase or sell the properties during specific time periods.
The Fountain Walk shopping center is currently under development by PLC Novi West Development, LLC (“PLC Novi”). As with any development stage shopping center, certain risks exist. PLC Novi may not be able to complete the development within budget and on a timely basis and it may not be successful identifying tenants to lease space. If PLC Novi fails to complete the development and/or to lease space at an acceptable occupancy level, our investment of approximately $5,000 could be adversely affected.
Our unconsolidated entities had the following debt outstanding at December 31, 2003:
Combined condensed financial information of our unconsolidated entities is summarized as follows:
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The joint ventures in which we own 40% or more interests had net income of $920 for the year ended December 31, 2003 and contributed $422 to earnings from unconsolidated entities. The 10% owned joint venture incurred a loss of $1,700 for the year, reducing earnings from unconsolidated entities by $170 to $252.
8.
Other Assets
Other assets at December 31 are as follows:
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9.
Mortgages and Notes Payable
Mortgages and notes payable at December 31 consist of the following:
The mortgage notes and construction loans are secured by mortgages on properties that have an approximate net book value of $560,662 as of December 31, 2003. The Secured Revolving Credit Facility is secured by mortgages on various properties that have an approximate net book value of $125,484 as of December 31, 2003.
Borrowings under the $125,000 Secured Revolving Credit Facility bear interest between 150 and 200 basis points over LIBOR depending on certain of our leverage ratios. Using 175 basis points over LIBOR at December 31, 2003, the effective interest rate was 5.0%, including interest rate swap agreements. At our option, through June 2004, we can increase the available amount of borrowings from $125,000 to $150,000. A portion of the proceeds from our two equity offerings in 2003 were used to pay down the outstanding balance.
Borrowings under the Unsecured Revolving Credit Facility bear interest between 325 and 375 basis points over LIBOR depending on certain debt ratios. At our option through June 2004, we can increase the available amount of borrowings by $10,000 to $50,000.
In connection with the acquisitions of four properties in 2003, we assumed fixed rate mortgages amounting to $43,747, with interest rates ranging from 6.67% to 8.18%. During 2003, we repaid two floating rate mortgages totaling $27,794 and increased fixed rate mortgages by $37,100 with interest rates of 5.45% and
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5.51%. In addition, we refinanced a shopping center that was previously included as part of our borrowings under the Secured Credit Facility. This new mortgage in the amount of $11,000 has a 4.76% fixed rate interest rate. In 2003, we repaid a $6,753 fixed rate mortgage with an interest rate of 7.58%.
We have the intent and ability to replace the construction loan due March 2004 with a fixed rate mortgage. We currently have a $28,000 commitment with a fixed interest rate of 5.38%. Under terms of the commitment, we have to complete the transaction by April 2004.
At December 31, 2003, outstanding letters of credit issued under the Secured Revolving Credit Facility, not reflected in the accompanying consolidated balance sheet, total approximately $1,976. At December 31, 2003, we also had other letters of credit outstanding of approximately $1,247. At December 31, 2003, we had no outstanding borrowings under any of our letters of credit.
The Secured Revolving Credit Facility and the Unsecured Revolving Credit Facility contain financial covenants relating to loan to asset value, minimum operating coverage ratios, and a minimum equity value. As of December 31, 2003, we were in compliance with the covenant terms.
The mortgage loans (other than our Secured Revolving Credit Facility) encumbering our properties, including properties held by our unconsolidated joint ventures, are generally non-recourse, subject to certain exceptions for which we would be liable for any resulting losses incurred by the lender. These exceptions vary from loan to loan but generally include fraud or a material misrepresentation, misstatement or omission by the borrower, intentional or grossly negligent conduct by the borrower that harms the property or results in a loss to the lender, filing of a bankruptcy petition by the borrower, either directly or indirectly, and certain environmental liabilities. In addition, upon the occurrence of certain of such events, such as fraud or filing of a bankruptcy petition by the borrower, we would be liable for the entire outstanding balance of the loan, all interest accrued thereon and certain other costs, penalties and expenses.
The following table presents scheduled principal payments on mortgages and notes payable as of December 31, 2003:
10.
Derivative Financial Instruments
On the date we enter into an interest rate swap, we designate the derivative as a hedge against the variability of cash flows that are to be paid in connection with a recognized liability. Subsequent changes in the fair value of a derivative designated as a cash flow hedge that is determined to be highly effective is recorded in Other Comprehensive Income (“OCI”) until earnings are affected by the variability of cash flows of the hedged transaction. The differential between fixed and variable rates to be paid or received is accrued, as interest rates change, and recognized currently in the Consolidated Statement of Income. We are exposed to credit loss in the event of non-performance by the counter party to the interest rate swap agreements, however, we do not anticipate non-performance by the counter party.
Under the terms of the Secured Revolving Credit Facility, we are required to maintain interest rate swap agreements in the amount of $75,000 to reduce the impact of changes in interest rates on our variable rate
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debt. During 2002, we acquired an additional 90% interest in Rossford Development LLC (“Rossford”). This acquisition was accounted for using the purchase method of accounting. At the time of the acquisition, Rossford had an interest rate swap agreement outstanding with a notional value of $10,000 and an interest rate of 5.5%.
The following table summarizes the notional values and fair values of our derivative financial instruments as of December 31, 2003 (dollars in thousands):
The adoption of SFAS 133 resulted in a transition adjustment loss charged to OCI of $348 as of January 1, 2001. The change in fair market value of the interest rate swap agreements decreased the charge to accumulated OCI by $1,832 and $249 for the years ended December 31, 2003 and 2002, respectively. The change in fair value of the interest rate swap agreements increased the charge to accumulated OCI by $2,831 for the year ended December 31, 2001. The interest rate swap related to Rossford has not been designated as a hedge, and therefore, the change in fair value associated with this swap agreement is recorded in the statement of operations as a component of interest expense and amounted to approximately $394 in 2003 and $0 in 2002.
11.
Leases
Approximate future minimum revenues from rentals under noncancelable operating leases in effect at December 31, 2003, assuming no new or renegotiated leases nor option extensions on lease agreements, are as follows:
We lease office space under an operating lease that expires on June 30, 2004. Rent expense under this lease amounted to $363 in 2003, 2002 and 2001. We are currently negotiating a long-term operating lease for our corporate office needs.
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12.
Earnings per Share
The following table sets forth the computation of basic and diluted earnings per share (“EPS”) (in thousands, except per share data):
Conversion of the Series A Preferred Shares totaling 2,000,000 in 2001 would have been antidilutive and, therefore, were not considered in the computation of diluted earnings per share. Series A Preferred Shares were redeemed during 2002 and therefore, the shares are not considered in the December 31, 2002 calculation. Operating Partnership Units would not be dilutive in any period, as income is allocated to each Operating Partnership Unit in the same amount as a common share.
13.
Shareholders’ Equity
On June 10, 2003, we issued 2,150,000 common shares of beneficial interest in a public offering. We received total net proceeds of $50,646, based on a net offering price of $23.65 per share. The net proceeds from the offering were used to pay down amounts outstanding under our two credit facilities and partially finance two acquisitions.
On October 20, 2003, we issued 2,300,000 common shares of beneficial interest in a public offering. Total net proceeds amounted to $56,559, based on a net offering price of $24.70 per share. The net proceeds were used to pay down outstanding balances under our secured and unsecured credit facilities and invest in short-term investments.
On April 29, 2002, we issued 4.2 million common shares of beneficial interest in a public offering. On May 29, 2002, we issued an additional 630,000 common shares upon the exercise by the underwriters of their over-allotment option. We received total net proceeds of $77,698, based on an offering price of $17.50 per share. A portion of the net proceeds from the offering were used to redeem 1.2 million of our Series A Preferred Shares. The redemption of Series A Preferred Shares resulted in a gain of $2,425. The remaining 200,000 shares of our Series A Preferred Shares automatically converted into 286,537 common shares.
On November 5, 2002, we completed a $25,000 public offering of 1.0 million shares of 9.5% Series B cumulative Preferred Shares of beneficial interest. The aggregate net proceeds of this offering were $23,804. Dividends on the Series B Preferred Shares are payable quarterly in arrears. We may, but we are not required to, redeem the Series B Preferred Shares any time after November 5, 2007, at a redemption price of $25.00 per share, plus accrued and unpaid dividends. A portion of the net proceeds from this offering were
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used to purchase the equity interest of our joint venture partners in East Town Plaza and from Rossford Development LLC and purchase the fee interest in the property adjacent to our Naples, Florida shopping center.
The Series B Preferred Shares rank senior to the common shares with respect to dividends and the distribution of assets in the event of our liquidation, dissolution or winding up. The Series B Preferred Shares are not convertible into or exchangeable for any of our other securities or property.
Holders of Series B Preferred Shares generally have no voting rights. However, if we do not pay dividends on the Series B Preferred Shares for six or more quarterly periods (whether or not consecutive), the holders of the Series B Preferred Shares will be entitled to vote at the next annual meeting of shareholders for the election of two additional trustees to serve on the board of trustees until we pay all dividends which we owe on Series B Preferred Shares.
We have a dividend reinvestment plan that allows for participating shareholders to have their dividend distributions automatically invested in additional shares of beneficial interest in us based on the average price of the shares acquired for the distribution.
14.
Benefit Plans
Incentive Plan and Stock Option Plans
2003 Long-Term Incentive Plan - In June 2003, our shareholders approved the 2003 Long-Term Incentive Plan (the “Plan”) to allow for the grant to employees the following: incentive or non-qualified stock options to purchase common shares of the Company, stock appreciation rights, restricted shares, awards of performance shares and performance units issuable in the future upon satisfaction of certain conditions and rights, as well as other stock-based awards as determined by the Compensation Committee of the Board of Trustees. The effective date of the Plan was March 5, 2003. Under terms of the Plan, awards may be granted with respect to an aggregate of not more than 700,000 shares, provided that no more than 300,000 shares may be issued in the form of incentive stock options. Options may be granted at per share prices not less than fair market value at the date of grant, and in the case of incentive options, must be exercisable within ten years thereof. Options granted under the Plan generally become exercisable one year after the date of grant as to one-third of the optioned shares, with the remaining options being exercisable over the following two-year period.
Ramco-Gershenson 2003 Non-Employee Trustee Stock Option Plan - During 2003, we adopted the 2003 Non-Employee Trustee Stock Option Plan (the “Trustees’ Plan”) which permits us to grant non-qualified options to purchase up to 100,000 common shares of beneficial interest in the Company at the fair market value at the date of grant. Each Non-Employee Trustee will be granted an option to purchase 2,000 shares annually on our annual meeting date, beginning with the first annual meeting after March 5, 2003. Stock options granted to participants vest and become exercisable in installments on each of the first two anniversaries of the date of grant and expire ten years after the date of grant.
1996 Share Option Plan - Effective March 5, 2003, this plan was terminated, except with respect to awards outstanding. This plan allowed for the grant of stock options to executive officers and employees of the Company. Shares subject to outstanding awards under the 1996 Share Option Plan are not available for re-grant if the awards are forfeited or cancelled.
1997 Non-Employee Trustee Stock Option Plan - This plan was terminated on March 5, 2003, except with respect to awards outstanding. Shares subject to outstanding awards under the 1997 Non-Employee Trustee Stock Option Plan are not available for re-grant if the awards are forfeited or cancelled.
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The following table reflects the stock option activity at December 31:
During 2003, we granted 12,000 shares under the 2003 Non-Employee Trustee Stock Option Plan.
The following table summarizes the characteristics of the options outstanding and exercisable at December 31, 2003:
401(k) Plan
We sponsor a 401(k) defined contribution plan covering substantially all officers and employees of the Company which allows participants to defer up to a maximum of 17.5% of their compensation. We contribute up to a maximum of 50% of the employee’s contribution, up to a maximum of 5%, of an employee’s annual compensation. During 2003, 2002 and 2001, our matching cash contributions were $176, $163 and $154, respectively.
15.
Financial Instruments
The carrying values of cash and cash equivalents, receivables and accounts payable are reasonable estimates of their fair values because of the short maturity of these financial instruments. As of December 31, 2003 and 2002 the carrying amounts of our borrowings under variable rate debt approximated fair value. Interest rate swaps are recorded at their fair value.
We estimated the fair value of fixed rate mortgages using a discounted cash flow analysis, based on our incremental borrowing rates for similar types of borrowing arrangements with the same remaining maturity. At December 31, 2003, the fair value of our fixed rate debt amounted to $361,262 compared to the carrying amount of $330,776.
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Considerable judgment is required to develop estimated fair values of financial instruments. The fair value of our fixed rate debt is greater than the carrying amount, settlement at the reported fair value may not be possible or may not be a prudent management decision. The estimates presented herein are not necessarily indicative of the amounts we could realize on disposition of the financial instruments.
16.
Quarterly Financial Data (Unaudited)
The following table sets forth the quarterly results of operations for the years ended December 31, 2003 and 2002 (in thousands, except per share amounts):
During the second quarter of 2003, Kmart Corporation assigned its lease at our Tel-Twelve shopping center to Meijer, Inc. The assignment of this lease was accounted for as a lease termination and we wrote off the straight-line rent receivable of approximately $3,000, with a corresponding charge to other operating expenses.
During the second quarter of 2002, we redeemed 1.2 million of our Series A preferred shares for approximately $26,571, resulting in a gain of $2,425.
During the fourth quarter of 2002, general and administrative expenses increased. The increase is attributable to a $1.2 million expense related to Michigan Single Business Tax for the taxable years ended December 31, 2001, 2000 and 1999. In 1995, the State of Michigan changed the method of computing the capital acquisition deduction for multi-state taxpayers. The change in the law has been vigorously challenged in the courts by a number of taxpayers. In January 2003, we were informed that the Michigan Supreme Court elected not to review the appellate courts’ decision that overturned a favorable lower court ruling in favor of a taxpayer. Since we had previously paid the additional tax for the above-mentioned taxable years and filed a protective claim requesting a refund, we recorded a receivable from the State of Michigan. As a result of the Michigan Supreme Court’s decision not to hear the case, we reversed the receivable and recognized an expense.
Earnings per share, as reported in the above table, are based on weighted average common share outstanding during the quarter and, therefore, may not agree with the earnings per share calculated for the years ended December 31, 2003 and 2002.
17.
Transactions With Related Parties
During 2003, Kmart Corporation agree to convey to us a certain parcel of land in connection with a settlement of certain disputes with us. We entered into an agreement with Ramco Clinton Development Company (“Partnership”) that caused Kmart to convey the parcel directly to the Partnership, in exchange of
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a cash payment to us in the amount of $175 from the Partnership. Various executive officers/ trustees of the Company are partners in that partnership. This transaction with the Partnership was entered into upon the unanimous approval of the independent members of our Board of Trustees.
In January 2001, we sold White Lake MarketPlace to Pontiac Mall Limited Partnership for cash of $20,200, resulting in a gain on sale of approximately $5,300. Various executive officers/ trustees of the Company are partners in that partnership. The property was offered for sale, utilizing the services of a national real estate brokerage firm, and we accepted the highest offer from an unrelated party. Subsequently the buyer cancelled the agreement. Pontiac Mall Limited Partnership presented a comparable offer, which resulted in more favorable economic benefits to us. The sale of the property to Pontiac Mall Limited Partnership was entered into upon the unanimous approval of the independent members of our Board of Trustees.
Under terms of an agreement with Pontiac Mall Limited Partnership, we continue to manage the property and receive management fees. We received $69 in 2003, $76 in 2002 and $70 in 2001 for management fees from the partnership.
In November 2001, we invested $1,713 for a 40% interest in a joint venture, Ramco/ Shenandoah LLC. The remaining 60% of Ramco/ Shenandoah LLC is owned by various partnerships and trusts for the benefit of family members of one of our trustees, who also serve as a trustee for several of these trusts. The joint venture acquired Shenandoah Square shopping center located in Davie, Florida for a purchase price of approximately $16,300.
We have management agreements with various partnerships and perform certain administrative functions on behalf of entities owned in part by certain trustees and/or officers of the Company. The following revenue was earned during the three years ended December 31, 2003 from these related parties:
We had receivables from related entities in the amount of $64 at December 31, 2003 and $78 at December 31, 2002.
18.
Commitments and Contingencies
Internal Revenue Service Examination - We have been the subject of an Internal Revenue Service (“IRS”) examination of our taxable years ended December 31, 1991 through 1995 (the “IRS Audit”). On October 29, 2001, the IRS issued an examination report in connection with the IRS Audit wherein they proposed, among other things, to disqualify us as a REIT for the taxable year ended December 31, 1994 (the “IRS Report”). During the third quarter of 1994, we held more than 25% of the value of our total assets in short-term Treasury Bill reverse repurchase agreements, which could be viewed as non-qualifying assets for purposes of determining whether we qualify to be taxed as a REIT. We filed a formal protest with respect to the IRS Report on November 29, 2001, and subsequently participated in numerous meetings with the IRS appellate conferee. On December 4, 2003, we reached an agreement with the IRS with respect to the IRS Audit (the “Closing Agreement”).
Pursuant to the terms of the Closing Agreement (i) our “REIT taxable income” was adjusted for each of the taxable years ended December 31, 1991, 1992, and 1993; (ii) our election to be taxed as a REIT was
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terminated for the taxable year ended December 31, 1994; (iii) we were not permitted to reelect REIT status for the taxable year ended December 31, 1995; (iv) we were permitted to reelect REIT status for taxable years beginning on or after January 1, 1996; (v) our timely filing of IRS Form 1120-REIT for the taxable year ended December 31, 1996 was treated, for all purposes of the Internal Revenue Code (the “Code”), as an election to be taxed as a REIT; (vi) the provisions of the Closing Agreement were expressly contingent upon our payment of “deficiency dividends” (that is, our declaration and payment of a distribution that is permitted to relate back to the year for which the IRS determines a deficiency in order to satisfy the requirement for REIT qualification that we distribute a certain minimum amount of our “REIT taxable income” for such year) in amounts not less than $1,387 and $809 for our 1992 and 1993 taxable years respectively; (vii) we consented to the assessment and collection, by the IRS, of approximately $5,180 in tax and interest; and (viii) we agreed that no penalties or other “additions to tax” would be asserted with respect to any adjustments to taxable income required pursuant to the Closing Agreement.
As a consequence of losing our REIT status for the taxable year ended December 31, 1994, and reelecting REIT status for the taxable year which began January 1, 1996, we became subject to certain Treasury Regulations applicable to corporations qualifying as a REIT after being subject to tax under subchapter C of the Internal Revenue Code. Under these Treasury Regulations, a corporation which owns an asset on the day before, as well as the day of, the corporation’s qualification as a REIT recognizes gain (subject to tax at the highest corporate income tax rate) as of the day before such qualification in an amount equal to the excess of (1) the fair market value of such assets on such date over (2) the corporation’s adjusted basis in such assets on such date. In lieu of this treatment, the corporation may elect, in respect of any asset it held on the day before, as well as on the first day, it qualified as a REIT, to recognize, on any taxable disposition of such asset during the ten-year period beginning on such date, gain which, to the extent of the excess of (1) the fair market value of the asset as of the beginning of such ten-year period over (2) the corporation’s adjusted basis in such asset as of the beginning of such ten-year period, is subject to tax at the highest corporate income tax rate.
An exception to the Treasury Regulations described in the preceding paragraph applies to any re-election as a REIT by a corporation that, (1) immediately prior to qualifying as a REIT, was taxed as a subchapter C corporation for a period not exceeding two taxable years, and (2) immediately prior to being subject to tax as a subchapter C corporation, was taxed as a REIT for a period of at least one taxable year. Because we meet the requirements for this exception to apply, the rules in the Treasury Regulations do not apply to us.
In addition, because we lost our REIT status for the taxable year ended December 31, 1994, and reelected REIT status for the taxable year which began January 1, 1996, we were required to have distributed to our shareholders by the close of the taxable year which began January 1, 1996, any earnings and profits we accumulated as a subchapter C corporation for the taxable years ended December 31, 1994 and 1995. Because we did not accumulate (but rather distributed) any profits we earned during the taxable years ended December 31, 1994 and 1995, we did not have any accumulated earnings and profits that we were required to distribute by the close of the taxable year which began January 1, 1996.
In connection with the incorporation and distribution of all of the shares of Atlantic Realty Trust (“Atlantic”) in May 1996, we entered into a tax agreement with Atlantic under which Atlantic assumed all of our tax liability arising out of the IRS’ then ongoing examination (which included, but is not otherwise limited to, the IRS Audit), excluding any tax liability relating to any actions or events occurring, or any tax return position taken after May 10, 1996, but including liabilities for additions to tax, interest, penalties and costs relating to covered taxes (the “Tax Agreement”). In addition, the Tax Agreement provides that, to the extent any tax which Atlantic is obligated to pay under the Tax Agreement can be avoided through the declaration of a “deficiency dividend”, we will make, and Atlantic will reimburse us for the amount of such deficiency dividend.
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On December 15, 2003, our Board of Trustees declared a cash dividend in the amount of $2,200, payable on January 20, 2004, to common shareholders of record on December 31, 2003. Immediately following the payment of such dividend, we timely filed IRS Form 976, Claim for Deficiency Dividends Deductions by a Real Estate Investment Trust, claiming deductions in the amount of $1,387 and $809 for our 1992 and 1993 taxable years respectively. Our payment of the deficiency dividend was both consistent with the terms of the Closing Agreement and necessary to retain our status as a REIT for each of the taxable years ended December 31, 1992 and 1993. On January 21, 2004, pursuant to the Tax Agreement, Atlantic reimbursed us $2,200 in recognition of our payment of the deficiency dividend.
In the notes to the consolidated financial statements of Atlantic’s most recent quarterly report on Form 10-Q filed with the Securities and Exchange Commission for its calendar quarter ended September 30, 2003, Atlantic has disclosed its liability under the Tax Agreement for the tax deficiencies and deficiency dividend (and interest on the tax deficiencies and deficiency dividend) reflected in the Closing Agreement. As discussed above, on January 21, 2004, Atlantic reimbursed us $2,200 in recognition of our payment of the deficiency dividend. We expect to be reimbursed by Atlantic for the tax assessment and related interest pursuant to the Tax Agreement, but there can be no assurance that we will receive payment for Atlantic. We believe, but can provide no assurance, that Atlantic currently has sufficient assets to reimburse us for our payment of $5,180 in tax deficiencies and interest. According to the quarterly report on Form 10-Q filed by Atlantic for its calendar quarter ended September 30, 2003, Atlantic had net assets of approximately $64.3 million (as determined pursuant to the liquidation basis of accounting).
The IRS is currently conducting an examination of us for the taxable years ended December 31, 1996 and 1997, and of one of our subsidiary partnerships for the taxable years ended December 31, 1997, 1998, and 1999 (the “IRS Examination”). As of even date herewith, the IRS has not issued a report nor proposed any adjustments in connection with the IRS Examination. Certain tax deficiencies (and any related interest and penalties) which may be assessed against us in connection with the IRS Examination may constitute covered taxes under the Tax Agreement. Atlantic may not have sufficient assets to reimburse us for all amounts we must pay to the IRS with respect to such covered taxes, and we would be required to pay the difference out of our own funds. The IRS may also assess taxes that Atlantic is not required to pay. Accordingly, the ultimate resolution of any tax liabilities arising pursuant to the IRS Examination may have a material adverse effect on our financial position, results of operations and cash flows.
Construction Costs - In connection with the development and expansion of various shopping centers as of December 31, 2003, we have entered into agreements for construction costs of approximately $3,325.
Litigation - We are currently involved in certain litigation arising in the ordinary course of business. We believe that this litigation will not have a material adverse effect on our consolidated financial statements.
Environmental Matters - Under various Federal, state and local laws, ordinances and regulations relating to the protection of the environment (“Environmental Laws”), a current or previous owner or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances disposed, stored, released, generated, manufactured or discharged from, on, at, onto, under or in such property. Environmental Laws often impose such liability without regard to whether the owner or operator knew of, or was responsible for, the presence or release of such hazardous or toxic substance. The presence of such substances, or the failure to properly remediate such substances when present, released or discharged, may adversely affect the owner’s ability to sell or rent such property or to borrow using such property as collateral. The cost of any required remediation and the liability of the owner or operator therefore as to any property is generally not limited under such Environmental Laws and could exceed the value of the property and/or the aggregate assets of the owner or operator. Persons who arrange for the disposal or treatment of hazardous or toxic substances may also be liable for the cost of removal or remediation of such substances at a disposal or treatment facility, whether or not such facility is owned or operated by such persons. In addition to any action required by Federal, state or local authorities, the presence or release of
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hazardous or toxic substances on or from any property could result in private plaintiffs bringing claims for personal injury or other causes of action.
In connection with ownership (direct or indirect), operation, management and development of real properties, we may be potentially liable for remediation, releases or injury. In addition, Environmental Laws impose on owners or operators the requirement of on-going compliance with rules and regulations regarding business-related activities that may affect the environment. Such activities include, for example, the ownership or use of transformers or underground tanks, the treatment or discharge of waste waters or other materials, the removal or abatement of asbestos-containing materials (“ACMs”) or lead-containing paint during renovations or otherwise, or notification to various parties concerning the potential presence of regulated matters, including ACMs. Failure to comply with such requirements could result in difficulty in the lease or sale of any affected property and/or the imposition of monetary penalties, fines or other sanctions in addition to the costs required to attain compliance. Several of our properties have or may contain ACMs or underground storage tanks (“USTs”); however, we are not aware of any potential environmental liability which could reasonably be expected to have a material impact on our financial position or results of operations. No assurance can be given that future laws, ordinances or regulations will not impose any material environmental requirement or liability, or that a material adverse environmental condition does not otherwise exist.
19.
Pro Forma Financial Information (Unaudited)
The following unaudited supplemental pro forma information is presented as if the property acquisitions made during 2003 and 2002 had occurred on January 1, 2001 (see Notes 5 and 6). In management’s opinion, all adjustments necessary to reflect the property acquisitions have been made. The pro forma financial information is presented for informational purposes only and may not necessarily indicative of what the actual results of operations would have been had the acquisitions occurred as indicated nor does it purport to represent the results of operations for future periods.
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20.
Subsequent Events
On January 15, 2004, we purchased Merchants’ Square shopping center located in Carmel, Indiana. The cost of this property was approximately $37,200 and we assumed fixed rate debt in the amount of $23,122 with an interest rate of 7.1%. The purchase price will be allocated to the assets acquired and liabilities assumed based on their fair market values.
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21. Real Estate Assets
Net Investment in Real Estate Assets at December 31, 2003
[Additional columns below]
[Continued from above table, first column(s) repeated]
[Additional columns below]
[Continued from above table, first column(s) repeated]
RAMCO-GERSHENSON PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
[Additional columns below]
[Continued from above table, first column(s) repeated]
[Additional columns below]
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(a)
If prior to May 1996, constructed by a predecessor of the Company.
(b)
The aggregate cost of land and buildings and improvements for federal income tax purposes is approximately $754 million.
(c)
Depreciation for all properties is computed over the useful life which is generally forty years.
(d)
The property is pledged as collateral on the secured line of credit.
(e)
The property is pledged as collateral on secured mortgages.
(f)
Refer to Footnote 1 for a summary of the Company’s capitalization policies.
RAMCO-GERSHENSON PROPERTIES TRUST
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 2003, 2002 and 2001