Item 6. SELECTED FINANCIAL DATA

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Item 6. SELECTED FINANCIAL DATA

The following table includes certain financial information on a consolidated historical basis. You should read this section in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8. Financial Statements and Supplementary Data.” Our selected operating data, other data and balance sheet data for the years ended 2003 through 2006 has been reclassified to conform to the presentation for the year ended 2007.


	For the Year Ended December 31,
	2007			2006			2005			2004			2003
	(In thousands, except per share data and ratios)
Operating Data:
Rental income	$	468,498		$	414,979		$	375,927		$	351,101		$	318,549
Property operating income(1)	$	338,269		$	301,574		$	272,304		$	245,253		$	219,675
Income from continuing operations	$	96,380		$	90,552		$	83,247		$	63,755		$	67,716
Gain on sale of real estate	$	94,768		$	23,956		$	30,748		$	14,052		$	20,053
Net income	$	195,537		$	118,712		$	114,612		$	84,156		$	94,497
Net income available for common shareholders	$	195,095		$	103,514		$	103,137		$	72,681		$	75,990
Net cash provided by operating activities(2)	$	214,209		$	186,654		$	174,941		$	174,148		$	136,393
Net cash used in investing activities(2)	$	(151,439	)	$	(317,429	)	$	(152,730	)	$	(157,611	)	$	(98,166	)
Net cash (used in) provided by financing activities(2)	$	(23,574	)	$	133,631		$	(44,047	)	$	(21,030	)	$	(26,382	)
Dividends declared on common shares	$	135,102		$	133,066		$	124,928		$	101,969		$	93,889
Weighted average number of common shares outstanding:
Basic		56,108			53,469			52,533			51,008			47,379
Diluted		56,543			53,962			53,050			51,547			48,619
Earnings per common share, basic:
Continuing operations	$	1.71		$	1.41		$	1.36		$	1.02		$	1.04
Discontinued operations		1.77			0.39			0.60			0.40			0.56
Gain on sale of real estate		—			0.14			—			—			—

Total	$	3.48		$	1.94		$	1.96		$	1.42		$	1.60

Earnings per common share, diluted:
Continuing operations	$	1.70		$	1.40		$	1.35		$	1.01		$	1.04
Discontinued operations		1.75			0.38			0.59			0.40			0.55
Gain on sale of real estate		—			0.14			—			—			—

Total	$	3.45		$	1.92		$	1.94		$	1.41		$	1.59

Dividends declared per common share(3)	$	2.37		$	2.46		$	2.37		$	1.99		$	1.95

Other Data:
Funds from operations available to common shareholders(4)(5)	$	206,762		$	177,113		$	163,544		$	148,671		$	131,257
EBITDA(6)	$	417,560		$	316,783		$	292,465		$	258,143		$	243,956
Adjusted EBITDA(6)	$	322,792		$	292,827		$	261,717		$	244,091		$	223,903
Ratio of EBITDA to combined fixed charges and preferred share dividends(6)(7)		3.3x			2.6x			2.7x			2.5x			2.2x
Ratio of Adjusted EBITDA to combined fixed charges and preferred share dividends(6)(7)		2.5x			2.4x			2.4x			2.4x			2.1x


	As of December 31,
	2007		2006		2005		2004		2003
	(In thousands, except per share data)
Balance Sheet Data:
Real estate at cost	$	3,452,847	$	3,204,258	$	2,829,321	$	2,666,276	$	2,470,149
Total assets	$	2,989,297	$	2,688,606	$	2,350,852	$	2,266,896	$	2,141,185
Mortgage, construction loans and capital lease obligations	$	450,084	$	460,398	$	419,713	$	410,885	$	414,357
Notes payable	$	210,820	$	109,024	$	316,755	$	325,051	$	361,323
Senior notes and debentures	$	977,556	$	1,127,508	$	653,675	$	568,121	$	532,750
Preferred stock	$	9,997	$	—	$	135,000	$	135,000	$	135,000
Shareholders’ equity	$	1,114,632	$	784,078	$	774,847	$	790,534	$	691,374
Number of common shares outstanding		58,646		55,321		52,891		52,137		49,201

(1)	Property operating income consists of rental income, other property income and mortgage interest income, less rental expenses and real estate taxes. This measure is used internally to evaluate the performance of our regional operations, and we consider it to be a significant measure.

(2)	Determined in accordance with Financial Accounting Standards Board (“FASB”) Statement No. 95, Statement of Cash Flows.

(3)	The 2006 and 2005 dividends declared per common share each include a special dividend of $0.20 resulting from the sales of condominiums at Santana Row.

(4)

Funds from Operations (“FFO”) is a supplemental non-GAAP financial measure of real estate companies’ operating performances. The National Association of Real Estate Investment Trusts (“NAREIT”) defines FFO as follows: net income, computed in accordance with the U.S. GAAP, plus depreciation and amortization of real estate assets and excluding extraordinary items and gains on the sale of real estate. We compute FFO in accordance with the NAREIT definition, and we have historically reported our FFO available for common shareholders in addition to our net income.

We consider FFO available for common shareholders a meaningful, additional measure of operating performance primarily because it excludes the assumption that the value of the real estate assets diminishes predictably over time, as implied by the historical cost convention of GAAP and the recording of depreciation. We use FFO primarily as one of several means of assessing our operating performance in comparison with other REITs. Comparison of our presentation of FFO to similarly titled measures for other REITs may not necessarily be meaningful due to possible differences in the application of the NAREIT definition used by such REITs. Additional information regarding our calculation of FFO is contained in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

The reconciliation of net income to funds from operations available for common shareholders is as follows:


	2007			2006			2005			2004			2003
	(In thousands)
Net income	$	195,537		$	118,712		$	114,612		$	84,156		$	94,497
Gain on sale of real estate		(94,768	)		(23,956	)		(30,748	)		(14,052	)		(20,053	)
Depreciation and amortization of real estate assets		95,565			88,649			82,752			81,649			68,202
Amortization of initial direct costs of leases		8,473			7,390			6,972			7,151			5,801
Depreciation of joint venture real estate assets		1,241			768			630			187			—

Funds from operations		206,048			191,563			174,218			159,091			148,447
Dividends on preferred stock		(442	)		(10,423	)		(11,475	)		(11,475	)		(15,084	)
Income attributable to operating partnership units		1,156			748			801			1,055			1,317
Preferred stock redemption costs		—			(4,775	)		—			—			(3,423	)

Funds from operations available for common shareholders	$	206,762		$	177,113		$	163,544		$	148,671		$	131,257

(5)	Includes $3.1 million and $8.0 million of insurance recoveries in 2004 and 2003, respectively, attributable to rental income lost at Santana Row as a result of the August 2002 fire. Insurance recoveries received in 2005 were insignificant.

(6)

The SEC has stated that EBITDA is a non-GAAP measure as calculated in the table below. Adjusted EBITDA is a non-GAAP measure that means net income or loss plus net interest expense, income taxes, depreciation and amortization, gain or loss on sale of real estate and impairments of real estate if any. Adjusted EBITDA is presented because we believe that it provides useful information to investors regarding our ability to service debt and because it approximates a key covenant in material notes. Adjusted EBITDA should not be considered an alternative measure of operating results or cash flow from operations as determined in accordance with GAAP. Adjusted EBITDA as presented may not be comparable to other similarly titled measures used by other REITs.

The reconciliation of Adjusted EBITDA to net income for the periods presented is as follows:


	2007			2006			2005			2004			2003
	(In thousands)
Net income	$	195,537		$	118,712		$	114,612		$	84,156		$	94,497
Depreciation and amortization		105,966			97,879			91,503			90,438			75,503
Interest expense		117,394			102,808			88,566			85,058			75,232
Other interest income		(1,337	)		(2,616	)		(2,216	)		(1,509	)		(1,276	)

EBITDA		417,560			316,783			292,465			258,143			243,956
Gain on sale of real estate		(94,768	)		(23,956	)		(30,748	)		(14,052	)		(20,053	)

Adjusted EBITDA	$	322,792		$	292,827		$	261,717		$	244,091		$	223,903

(7)

Fixed charges consist of interest on borrowed funds (including capitalized interest), amortization of debt discount and expense and the portion of rent expense representing an interest factor. Preferred share dividends consist of dividends paid on preferred shares and preferred stock redemption costs. Our Series A preferred shares were redeemed in full in June 2003 and our Series B preferred shares were redeemed in full in November 2006.

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 and notes thereto appearing in “Item 8. Financial Statements and Supplementary Data” of this report.

Overview

We are an equity real estate investment trust specializing in the ownership, management, development and redevelopment of high quality retail and mixed-use properties. As of December 31, 2007, we owned or had a majority interest in community and neighborhood shopping centers and mixed-use properties which are operated as 82 predominantly retail real estate projects comprising approximately 18.2 million square feet. These properties are located primarily in densely populated and affluent communities in strategic metropolitan markets in the Mid-Atlantic and Northeast regions of the United States, as well as in California. In total, these 82 real estate projects were 96.7% leased at December 31, 2007. A joint venture in which we own a 30% interest owned seven retail real estate projects totaling approximately 1.0 million square feet as of December 31, 2007. In total, the joint venture properties in which we own an interest were 98.3% leased at December 31, 2007. We have paid quarterly dividends to our shareholders continuously since our founding in 1962 and have increased our dividends per common share for 40 consecutive years.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, which we refer to as GAAP, requires management to make estimates and assumptions that in certain circumstances affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and revenues and expenses. These estimates are prepared using management’s best judgment, after considering past and current events and economic conditions. In addition, information relied upon by management in preparing such estimates includes internally generated financial and operating information, external market information, when available, and when necessary, information obtained from consultations with third party experts. Actual results could differ from these estimates. A discussion of possible risks which may affect these estimates is included in “Item 1A. Risk Factors” of this report. Management considers an accounting estimate to be critical if changes in the estimate or accrual results could have a material impact on our consolidated results of operations or financial condition.

The most significant accounting policies, which involve the use of estimates and assumptions as to future uncertainties and, therefore, may result in actual amounts that differ from estimates, are as follows:

Revenue Recognition and Accounts Receivable

Leases with tenants are classified as operating leases. Substantially all such leases contain fixed escalations which occur at specified times during the term of the lease. Base rents are recognized on a straight-line basis from when the tenant controls the space through the term of the related lease, net of valuation adjustments, based on management’s assessment of credit, collection and other business risk. We make estimates of the collectibility of our accounts receivable related to base rents, straight-line rents, expense reimbursements and other revenue or income taking into account our expertise in the retail sector, tenant credit information both internally and externally available, payment history, industry trends, tenant credit-worthiness and the length of remaining lease terms over which certain of these amounts will be collected. In some cases, primarily relating to straight-line rents, the collection of these amounts extends beyond one year. Our experience relative to unbilled straight-line rents is that a certain portion of the amounts otherwise recognizable as revenue is never billed to or collected from tenants due to early lease terminations, lease modifications, bankruptcies and other factors. Accordingly, the extended collection period for straight-line rents along with our evaluation of tenant credit risk may result in the nonrecognition of a portion of straight-line rental income until the collection of such income is reasonably assured. If our evaluation of tenant credit risk changes indicating more straight-line revenue is reasonably collectible than previously estimated and realized, the additional straight-line rental income is recognized as revenue. If our evaluation of tenant credit risk changes indicating a portion of realized straight-line rental income is no longer collectible, a reserve and bad debt expense is recorded. At December 31, 2007 and 2006, accounts receivable include approximately $32.0 million and $24.8 million, respectively, related to straight-line rents. These estimates have a direct impact on our net income.

Historically, we have recognized bad debt expense between 0.4% and 1.4% of rental income and it was 0.4% in 2007. An increase in our bad debt expense would decrease our net income. For example, if we had experienced an increase in bad debt of 0.5% of rental income in 2007, our net income would have been reduced by approximately $2.3 million.

Real Estate

The nature of our business as an owner, redeveloper and operator of retail shopping centers and mixed-use properties means that we invest significant amounts of capital. Depreciation and maintenance costs relating to our properties constitute substantial costs for us as well as the industry as a whole. We capitalize real estate investments and depreciate them in accordance with GAAP and consistent with industry standards based on our best estimates of the assets’ physical and economic useful lives. The cost of our real estate investments, less

salvage value, if any, is charged to depreciation expense over the estimated life of the asset using straight-line rates for financial statement purposes. We periodically review the estimated lives of our assets and implement changes, as necessary, to these estimates and, therefore, to our depreciation rates. These reviews take into account the historical retirement and replacement of our assets, the repairs required to maintain the condition of our assets, the cost of redevelopments that may extend the useful lives of our assets and general economic and real estate factors. A newly developed neighborhood shopping center building would typically have an economic useful life of 50 to 60 years, but since many of our assets are not newly developed buildings, estimating the useful lives of assets that are long-lived as well as their salvage value requires significant management judgment. Certain events could occur that would materially affect our estimates and assumptions related to depreciation. Unforeseen competition or changes in customer shopping habits could substantially alter our assumptions regarding our ability to realize the expected return on investment in the property and therefore reduce the economic life of the asset and affect the amount of depreciation expense to be charged against both the current and future revenues. These assessments have a direct impact on our net income. The longer the economic useful life, the lower the depreciation charged to that asset in a fiscal period will be, which in turn will increase our net income. Similarly, having a shorter economic useful life would increase the depreciation for a fiscal period and decrease our net income.

Land, buildings and real estate under development are recorded at cost. We compute depreciation using the straight-line method with useful lives ranging generally from 35 years to a maximum of 50 years on buildings and improvements. Maintenance and repair costs are charged to operations as incurred. Tenant work and other major improvements, which improve or extend the life of the asset, are capitalized and depreciated over the life of the lease or the estimated useful life of the improvements, whichever is shorter. Minor improvements, furniture and equipment are capitalized and depreciated over useful lives ranging from three to 15 years. Certain external and internal costs directly related to the development, redevelopment and leasing of real estate, including applicable salaries and the related direct costs, are capitalized. The capitalized costs associated with developments and redevelopments are depreciated over the life of the improvement. Capitalized costs associated with leases are depreciated or amortized over the base term of the lease. Unamortized leasing costs are charged to operating expense if the applicable tenant vacates before the expiration of its lease. Undepreciated tenant work is charged to operations if the applicable tenant vacates and the tenant work is replaced.

When applicable, as lessee, we classify our leases of land and building as operating or capital leases in accordance with the provisions of Statement of Financial Accounting Standard (SFAS) No. 13, “Accounting for Leases.” We are required to use judgment and make estimates in determining the lease term, the estimated economic life of the property and the interest rate to be used in applying the provisions of SFAS No. 13. These estimates determine whether or not the lease meets the qualification of a capital lease and is recorded as an asset.

Interest costs on developments and major redevelopments are capitalized as part of developments and redevelopments not yet placed in service. Capitalization of interest commences when development activities and expenditures begin and end upon completion, which is when the asset is ready for its intended use. Generally, rental property is considered substantially complete and ready for its intended use upon completion of tenant improvements, but no later than one year from completion of major construction activity. We make judgments as to the time period over which to capitalize such costs and these assumptions have a direct impact on net income because capitalized costs are not subtracted in calculating net income. If the time period for capitalizing interest is extended, more interest is capitalized, thereby decreasing interest expense and increasing net income during that period.

Real Estate Acquisitions

Upon acquisition of operating real estate properties, we estimate the fair value of acquired tangible assets (consisting of land, building and improvements), identified intangible assets and liabilities (consisting of above-market and below-market leases, in-place leases and tenant relationships), and assumed debt in accordance with SFAS No. 141, Business Combinations. Based on these estimates, we allocate the purchase price to the

applicable assets and liabilities. We utilize methods similar to those used by independent appraisers in estimating the fair value of acquired assets and liabilities. We evaluate the useful life of each amortizable intangible asset each reporting period and account for any changes in such estimated useful life over the revised remaining useful life.

Long-Lived Assets

There are estimates and assumptions made by management in preparing the consolidated financial statements for which the actual results will be determined over long periods of time. This includes the recoverability of long-lived assets, including our properties that have been acquired or developed. Management must evaluate properties for possible impairment of value and, for those properties where impairment may be indicated, make estimates of future cash flows including revenues, operating expenses, required maintenance and development expenditures, market conditions, demand for space by tenants and rental rates over very long periods. Because our properties typically have a very long life, the assumptions used to estimate the future recoverability of book value requires significant management judgment.

SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” requires that one accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly-acquired, and broadens the presentation of discontinued operations to include components of an entity comprising operations and cash flows that can be distinguished operationally and for financial reporting purposes from the rest of the entity. As a result, the sale of a property, or the classification of a property as held for sale, requires us to report the results of operations of that property as “discontinued operations.”

We are required to make estimates of undiscounted cash flows in determining whether there is an impairment of an asset. Actual results could be significantly different from the estimates. These estimates have a direct impact on net income, because recording an impairment charge results in a negative adjustment to net income.

Contingencies

We are sometimes involved in lawsuits, warranty claims, and environmental matters arising in the ordinary course of business. Management makes assumptions and estimates concerning the likelihood and amount of any potential loss relating to these matters.

Any difference between our estimate of a potential loss and the actual outcome would result in an increase or decrease to net income. In addition, we reserve for estimated losses, if any, associated with warranties given to a buyer at the time an asset is sold or other potential liabilities relating to that sale, taking any insurance policies into account. These warranties may extend up to ten years and the calculation of potential liability requires significant judgment. Any changes to our estimated warranty losses would result in an increase or decrease in net income.

Self-Insurance

We are self-insured for general liability costs up to predetermined retained amounts per claim, and we believe that we maintain adequate accruals to cover our retained liability. We currently do not maintain third party stop-loss insurance policies to cover liability costs in excess of predetermined retained amounts. Our accrual for self-insurance liability is determined by management and is based on claims filed and an estimate of claims incurred but not yet reported. Management considers a number of factors, including third-party actuary valuations and future increases in costs of claims, when making these determinations. If our liability costs differ from these accruals, it will increase or decrease our net income.

New Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 applies to accounting pronouncements that require or permit fair value measurements, except for share-based payments under SFAS No. 123(R). We are required to adopt the recognition and disclosure provisions of SFAS No. 157 for financial assets and financial liabilities and for nonfinancial assets and nonfinancial liabilities that are re-measured at least annually effective January 1, 2008; we are required to adopt the provisions of SFAS No. 157 for all other nonfinancial assets and nonfinancial liabilities effective January 1, 2009. We do not believe the adoption of SFAS No. 157 will have a material impact on our financial position, results of operations or cash flows.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115” (“SFAS No. 159”). This standard permits entities to choose to measure many financial instruments and certain other items at fair value and is effective for the first fiscal year beginning after November 15, 2007. We do not intend to make this fair value election and, therefore, we do not expect SFAS No. 159 to have an impact on our financial position, results of operations, or cash flows.

On December 4, 2007, the FASB issued Statement No. 141 (R), Business Combinations (“SFAS No. 141 (R)”) and Statement No. 160 “Accounting and Reporting of Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51” (“SFAS No. 160”). The new standards significantly change the accounting and reporting of business combination transactions and minority interests in the consolidated financial statements; these changes include expensing all acquisition related transaction costs, recognizing contingent consideration arrangements at their acquisition date fair values with subsequent changes generally reflected in earnings, recognizing 100% of the fair values of assets acquired and liabilities assumed in acquisitions of less than 100% controlling interest and recognizing a non-controlling interest as equity in the consolidated financial statements. We are required to adopt SFAS No. 141 (R) for business combination transactions for which the acquisition date is on or after January 1, 2009 and SFAS No. 160 on January 1, 2009. We are currently evaluating the impact SFAS No. 141 (R) and SFAS No. 160 will have on our financial position, results of operations, and cash flows.

Property Acquisitions and Dispositions

A summary of our significant acquisitions in 2007 and 2006 is as follows:


Date	Property	City, State	Gross Leasable Area	Purchase Price (1)
			(In square feet)	(In millions)
Year ended December 31, 2007
February 28	Crow Canyon Crest	San Ramon, CA	17,000	$	10.9	(1)
March 8	The White Marsh Portfolio: (2)	White Marsh, MD			189.4	(3)
	THE AVENUE at White Marsh		296,000
	The Shoppes at Nottingham Square		186,000
	White Marsh Plaza		79,000
	White Marsh Other		53,000
May 30	Shoppers’ World	Charlottesville, VA	169,000		27.2	(4)
October 26	Mid-Pike Plaza	Rockville, MD	—		45.2	(5)
October 26	Huntington Shopping Center	Huntington, NY	—		37.7	(5)

		Total	800,000	$	310.4


Year ended December 31, 2006
January 20	4900 Hampden Lane	Bethesda, MD	35,000	$	12.0
January 27	7770 Richmond Hwy	Alexandria, VA	60,000		9.9
June 29	Town Center of New Britain	New Britain, PA	126,000		12.8
August 24	Key Road Plaza	Keene, NH	76,000		14.5
August 24	Riverside Plaza	Keene, NH	218,000		24.0
August 24	Bath Shopping Center	Bath, ME	101,000		22.8
August 24	Linden Square	Wellesley, MA	261,000		99.6
August 24	North Dartmouth	North Dartmouth, MA	183,000		27.5
August 25	Chelsea Commons	Chelsea, MA	180,000		20.1
Various after September 13	Rockville Town Square	Rockville, MD	152,000		5.9	(6)
October 16	Melville Mall	Huntington, NY	248,000		60.0	(7)

		Total	1,640,000	$	309.1

(1)	Approximately $0.4 million and $1.8 million of the net assets acquired were allocated to other assets for “above market leases” and liabilities for “below market leases,” respectively.

(2)

The White Marsh Portfolio was purchased using $11.5 million of cash plus a combination of common stock and convertible preferred stock, downREIT operating partnership units, and the assumption of mortgage loans through a merger with Nottingham Properties, Inc. The acquisition also included ground leases covering 50,000 square feet of office space and a hotel which are not included in gross leasable area.

(3)	Approximately $3.6 million and $9.3 million of the net assets acquired were allocated to other assets for “above market leases” and liabilities for “below market leases,” respectively.

(4)	Approximately $0.8 million and $2.1 million of the net assets acquired were allocated to other assets for “above market leases” and liabilities for “below market leases,” respectively.

(5)

On October 26, 2007, we completed an exchange transaction whereby we sold our leasehold interests in six New Jersey properties and acquired the fee interests in Mid-Pike Plaza and Huntington Shopping Center. Prior to the transaction, we held leasehold interests in all eight properties. The transaction was completed as a 1031 tax-deferred exchange and involved a cash payment of $17.2 million. All eight properties were previously encumbered by capital lease obligations which were extinguished as part of the transaction.

(6)	We acquired an additional 30,000 square feet of gross leasable area in 2007.

(7)	The Trust controls and consolidates Melville Mall at its approximate fair value of $60.0 million. We gained control of Melville Mall through a 20-year master lease and $34.1 million secondary financing to the owner. The master lease includes a purchase option in 2021 for $5.0 million plus the assumption of the owner’s first mortgage that has a balance of $25.1 million at December 31, 2007.

Generally, our acquisitions are initially financed by available cash and borrowings under our revolving credit facility which may be repaid later with funds raised through the issuance of new equity or new long-term debt. On occasion we also finance our acquisitions through the issuance of common stock, preferred stock, or downREIT units as well as through the assumption of mortgages.

On November 16, 2007, we purchased the 10% minority interest in three properties located at our Fifth Avenue, Hermosa Avenue and Third Street Promenade projects for $5.7 million. We now own 100% of these properties.

The Linden Square acquisition is currently undergoing redevelopment. After the initial phases of the redevelopment are completed the project will include approximately 222,000 square feet of retail, 17,000 square feet of office, seven affordable residential units, and a car dealership. The initial phases of redevelopment are expected to be complete in 2008.

The following table provides a summary of acquisitions made by our unconsolidated real estate partnership in 2007 and 2006:


Date	Property	City, State	Gross Leasable Area	Purchase Price
			(In square feet)	(In millions)
Year ended December 31, 2007
February 15	Free State Shopping Center	Bowie, MD	278,000	$	64.1
February 20	Lake Barcroft Shopping Center(1)	Falls Church, VA	9,000		6.0

		Total	287,000	$	70.1


Year ended December 31, 2006
June 5	Greenlawn Plaza(2)	Huntington, NY	102,000	$	20.4
June 8	Barcroft Plaza	Falls Church, VA	90,000		25.1

		Total	192,000	$	45.5

(1)	The property acquired is adjacent to and operated as part of Barcroft Plaza which is also owned by the Partnership.

(2)	This property was acquired from the Trust.

A summary of our significant dispositions in 2007 and 2006 is as follows:


Sale Date	Property	Location	Year Acquired or Built	Gross Leasable Area	Sales Price		Gain
				(In square feet)	(In millions)
Year ended December 31, 2007
April 5	Bath Shopping Center	Bath, ME	2006	101,000	$	21.8	$	0.6	(1)
June 20	Key Road Plaza	Keene, NH	2006	76,000		15.3		0.4	(2)
June 20	Riverside Plaza	Keene, NH	2006	218,000		25.9		0.5	(3)
October 11	Forest Hills Shopping Center	Forest Hills, NY	1997	39,500		33.2		19.1	(4)
October 26	New Jersey Leasehold Interests:					65.7		79.6	(5)
	Allwood Shopping Center	Clifton, NJ	1988	50,000
	Blue Star Shopping Center	Watchung, NJ	1988	410,000
	Brunswick Shopping Center	North Brunswick, NJ	1988	303,000
	Clifton Shopping Center	Clifton, NJ	1988	80,000
	Hamilton Shopping Center	Hamilton, NJ	1988	190,000
	Rutgers Shopping Center	Franklin, NJ	1988	267,000

		Total		1,734,500	$	161.9	$	100.2


Year ended December 31, 2006
January - August	Santana Row Condominiums (89 units) (6)	San Jose, CA	2002	N/A	$	64.1	$	16.5	(7)
June 5	Greenlawn Plaza	Huntington, NY	2000	102,000		20.4		7.4	(8)

		Total		102,000	$	84.5	$	23.9

(1)	Gain of $0.6 million is net of $0.3 million in taxes.

(2)	Gain of $0.4 million is net of $0.1 million in taxes.

(3)	Gain of $0.5 million is net of $0.1 million in taxes.

(4)	We sold two of three retail buildings located in Forest Hills, NY.

(5)

On October 26, 2007, we completed an exchange transaction whereby we sold our leasehold interests in six New Jersey properties and acquired the fee interests in Mid-Pike Plaza and Huntington Shopping Center. The transaction was completed as a 1031 tax-deferred exchange and involved a cash payment of $17.2 million. All eight properties were previously encumbered by capital lease obligations which were extinguished as part of the transaction.

(6)	As of August 25, 2006, we had sold all of the 219 condominium units we planned to sell at Santana Row.

(7)	Gain of $16.5 million is net of $2.4 million in taxes.

(8)	This property was contributed to our real estate partnership in which we own a 30% interest. Accordingly, we recognized a partial gain of $7.4 million on this sale related to the 70% equity interest contributed.

The proceeds from our dispositions were used to pay down our revolving credit facility and for general corporate purposes.

Warranty reserves for condominium units sold at Santana Row were established to cover potential costs for materials, labor and other items associated with warranty-type claims that may arise within the ten-year statutorily mandated latent construction defect warranty period. Our warranty and latent construction defect reserves are calculated based upon historical industry experience and current known factors. Variables used in the calculation of the warranty reserves, as well as the adequacy of the reserves based on the number of condominium units still under warranty, are reviewed on a periodic basis.

During the third and fourth quarters of 2007, we became aware of certain facts and circumstances that caused us to reassess our initial reserve for damages related to defective work done by third party contractors while upgrades were made to the units being prepared for sale. Based on current estimates, we believe the range of possible incremental cost is between $5.1 million and $9.3 million, net of taxes of $1.9 million and $2.6 million, respectively, before insurance recoveries. The full extent of damages and required repairs on any particular unit cannot be determined until we have evaluated whether there was defective work in the unit and determined the extent of damages (if any) caused by the defective work. We are still in the process of evaluating units for potential damage arising from the defective work and, to date, have completed the repairs caused by the defective work in only a limited number of units. The extent of the damages encountered in those units, and the resulting costs to repair, varied considerably. Accordingly, our current estimates are based on limited and varying actual costs. We are continuing our evaluation of this matter, and in 2007, we increased our reserves by $5.1 million, net of taxes of $1.9 million, to the low end of our estimated range of potential obligation related to these particular damages. This range excludes any amounts we may recover from insurance or the contractors responsible for the defective work. In the event that our evaluation allows us to develop a better estimate of these damages, we will adjust our estimate accordingly. This increase reduces our gain on sale of condominium units that were sold during 2005 and 2006. The increase in the reserve is included in “Discontinued operations—gain on sale of real estate”. The reserve is included in accounts payable and accrued expenses. Although we consider the reserve to be adequate, there can be no assurance that the reserve will prove to be adequate over time to cover losses due to the difference between the assumptions used to estimate the reserve and actual losses.

2007 Significant Debt, Equity and Other Transactions

On March 8, 2007, as part of the consideration to acquire the White Marsh portfolio, we issued (i) 884,066 common shares at $88.18 per share, par value $0.01 per share, (ii) 399,896 shares of 5.417% Series 1 Cumulative Convertible Preferred Shares (“Series 1 Preferred Shares”) at the liquidation preference of $25 per share, par value $0.01 per share, and (iii) 185,504 downREIT operating partnership units at $88.18 per share. The Series 1 Preferred Shares accrue dividends at a rate of 5.417% per year and are convertible at any time by the holders to our common shares at a conversion rate of $104.69 per share. The Series 1 Preferred Shares are also convertible under certain circumstances at our election. The holders of the Series 1 Preferred Shares have no voting rights.

In connection with the acquisition of the White Marsh portfolio and Shoppers’ World, we assumed five mortgage notes as follows:


Property	Fair Value (1)		Maturity Date	Stated Annual Interest Rate
	(In millions)
THE AVENUE at White Marsh	$	61.9	January 1, 2015	5.46	%
White Marsh Plaza	$	6.4	April 1, 2013	5.96	%
White Marsh Plaza	$	4.5	April 1, 2013	6.18	%
White Marsh Other	$	1.2	December 31, 2008	6.06	%
Shoppers’ World	$	6.0	January 31, 2021	5.91	%

(1)	The aggregate face amount of the mortgage notes is $79.7 million. However, in accordance with GAAP, these mortgage notes were recorded at their fair value of $80.0 million.

On April 10, 2007, our unconsolidated real estate partnership entered into a mortgage note for approximately $4.2 million. The mortgage note is secured by the Lake Barcroft property which was acquired in February 2007 and by Barcroft Plaza. The Lake Barcroft property is adjacent to and operated as part of Barcroft Plaza. The note matures on July 1, 2016, bears interest at 5.71% per annum and requires monthly payments of interest only.

On October 26, 2007, we acquired the fee interest in Mid-Pike Plaza and Huntington Shopping Center and sold our leasehold interest in six properties, Allwood, Blue Star, Brunswick, Clifton, Hamilton and Rutgers Shopping Centers. Prior to the transaction, we had capital lease obligations totaling $76.4 million on all eight properties. The capital lease obligations were extinguished as part of the transactions.

On November 9, 2007, we entered into a $200 million unsecured term loan bearing interest at LIBOR plus 57.5 basis points. The loan matures on November 6, 2008, subject to a one-year extension at our option and is prepayable without penalty. The spread over LIBOR is subject to adjustment based on our credit rating.

On November 15, 2007, we repaid our 6.125% senior notes with a principal amount of $150.0 million. These notes were repaid with funds borrowed on our $200 million unsecured term loan.

On December 27, 2007, we issued 2.0 million common shares at $81.21 per share, for cash proceeds of approximately $162.4 million before other expenses of the offering. The proceeds were used on an interim basis to repay our revolving credit facility.

Effective December 31, 2007, Larry Finger, our former Chief Financial Officer, was no longer employed by the Trust. Under his existing severance agreement, his departure was treated as a termination without cause. As a result, we recognized approximately $0.6 million related to the accelerated vesting of unvested shares and options and $0.4 million related to a cash payment to Mr. Finger. These amounts are included in general and administrative expenses in the consolidated statement of income.

Outlook

General

We anticipate our 2008 income from continuing operations to grow in comparison to our 2007 income from continuing operations. We expect this income growth primarily to be generated by a combination of the following:

	•		increased earnings in our same-center portfolio and from properties under redevelopment; and

	•		increased earnings as we expand our portfolio through property acquisitions.

On October 31, 2007, we announced a regular quarterly cash dividend of $0.61 per share on our common shares, resulting in an indicated annual rate of $2.44 per share. The regular common dividend was payable on January 15, 2008, to common shareholders of record as of January 2, 2008.

We continue to see a positive impact on our income as a result of the redevelopment of our shopping centers and higher rental rates on existing spaces as leases on these spaces expire. For example, leases signed in 2005, 2006 and 2007 on spaces for which there was a previous tenant have on average been renewed at double digit cash base rent increases. On spaces where the tenant leases are expiring over the next few years, our analysis of current market rents as compared to rents on the existing leases leads us to expect that the base rents on new leases will have double-digit weighted average increases over the cash basis base rents currently in place. We anticipate investments in redevelopment projects of approximately $104 million and $55 million to stabilize in 2008 and 2009, respectively. As redevelopment properties are completed, spaces that were out of service begin generating revenue; in addition, spaces that were not out of service and that have expiring leases may generate higher revenue because we generally receive higher rent on new leases.

At December 31, 2007 the leasable square feet in our shopping centers was 95.4% occupied and 96.7% leased. The leased rate is higher than the occupied rate due to leased spaces that are being redeveloped or improved, or that are awaiting permits and therefore, are not yet ready to be occupied. Our occupancy and leased rates are subject to variability over time due to factors including acquisitions, the timing of the start and stabilization of our redevelopment projects, lease expirations and tenant bankruptcies.

Acquisitions

We anticipate further growth in earnings from the acquisition of neighborhood and community shopping centers in our primary markets in the East and West regions, as well as a reduction in earnings from selective dispositions. We continue to evaluate potential acquisitions in additional markets.

Any growth in earnings from acquisitions is contingent, however, on our ability to find properties that meet our qualitative standards at prices that meet our financial hurdles. Changes in interest rates also may affect our success in achieving growth through acquisitions by affecting both the price that must be paid to acquire a property, as well as our ability to economically finance the property acquisitions.

Results of Operations

YEAR ENDED DECEMBER 31, 2007 COMPARED TO YEAR ENDED DECEMBER 31, 2006


							Change
	2007			2006			Dollars			%
	(Dollar amounts in thousands)
Rental income	$	468,498		$	414,979		$	53,519		12.9	%
Other property income		12,834			7,461			5,373		72.0	%
Mortgage interest income		4,560			5,095			(535	)	-10.5	%

Total property revenues		485,892			427,535			58,357		13.6	%

Rental expenses		100,389			84,763			15,626		18.4	%
Real estate taxes		47,234			41,198			6,036		14.7	%

Total property expenses		147,623			125,961			21,662		17.2	%

Property operating income		338,269			301,574			36,695		12.2	%
Other interest income		921			2,042			(1,121	)	-54.9	%
Income from real estate partnership		1,395			656			739		112.7	%
Interest expense		(111,365	)		(95,234	)		(16,131	)	16.9	%
General and administrative expense		(25,575	)		(21,340	)		(4,235	)	19.8	%
Depreciation and amortization		(101,675	)		(92,793	)		(8,882	)	9.6	%

Total other, net		(236,299	)		(206,669	)		(29,630	)	14.3	%

Income from continuing operations before minority interests		101,970			94,905			7,065		7.4	%
Minority interests		(5,590	)		(4,353	)		(1,237	)	28.4	%
Discontinued operations—income		4,389			4,204			185		4.4	%
Discontinued operations—gain on sale of real estate		94,768			16,515			78,253		473.8	%
Gain on sale of real estate		—			7,441			(7,441	)	-100.0	%

Net income	$	195,537		$	118,712		$	76,825		64.7	%

Same-center

Throughout this section, we have provided certain information on a “same-center” basis. Information provided on a same-center basis includes the results of properties that we owned and operated for the entirety of both

periods being compared except for properties for which significant development, redevelopment or expansion occurred during either of the periods being compared and properties classified as discontinued operations.

Property Revenues

Total property revenue increased $58.4 million, or 13.6%, to $485.9 million in 2007 compared to $427.5 million in 2006. The percentage leased at our shopping centers increased to 96.7% at December 31, 2007 compared to 96.5% at December 31, 2006. Changes in the components of property revenue are discussed below.

Rental Income

Rental income consists primarily of minimum rent, cost recoveries from tenants and percentage rent. Rental income increased $53.5 million, or 12.9%, to $468.5 million in 2007 compared to $415.0 million in 2006, due primarily to the following:

	•		an increase of $32.0 million attributable to properties acquired in 2007 and 2006 and the completion of the power-center at Assembly Square Mall,

	•		an increase of $11.6 million at same-center properties due to increased rental rates on new leases and increased cost recoveries,

	•		an increase of $8.9 million at redevelopment properties due to increased occupancy, increased rental rates on new leases and increased cost recoveries,

	•		an increase of $2.2 million at Santana Row residential due primarily to leasing of residential units,

partially offset by

	•		a decrease of $0.8 million related to the sale of Greenlawn Plaza to our unconsolidated real estate partnership in June 2006.

Other Property Income

Other property income increased $5.4 million, or 72.0%, to $12.8 million in 2007 compared to $7.5 million in 2006. Included in other property income are items which, although recurring, tend to fluctuate more than rental income from period to period, such as lease termination fees. In 2007, the increase is primarily due to an increase in lease and other termination fees at our same-center properties, an increase in marketing income, and an increase in management fee income.

Property Expenses

Total property expenses increased $21.7 million, or 17.2%, to $147.6 million in 2007 compared to $126.0 million in 2006. Changes in the components of property expenses are discussed below.

Rental Expenses

Rental expenses increased $15.6 million, or 18.4%, to $100.4 million in 2007 compared to $84.8 million in 2006. This increase is due primarily to the following:

	•		an increase of $5.7 million attributable to properties acquired in 2007 and 2006 and the completion of the power-center at Assembly Square Mall,

	•		an increase of $4.6 million in repairs and maintenance at same-center and redevelopment properties due primarily to higher snow removal and maintenance costs,

	•		an increase of $1.3 million in bad debt expense at same-center and redevelopment properties due to amounts recovered in 2006 of receivables previously deemed uncollectible,

	•		an increase of $1.1 million in utilities at same-center and redevelopment properties,

	•		an increase of $0.9 million in legal fees related to the litigation at a shopping center in New Jersey and at Santana Row,

	•		an increase of $0.8 million in insurance at same-center and redevelopment projects, and

	•		an increase of $0.7 million attributable to Santana Row residential.

As a result of the changes in rental income, rental expenses and other property income described above, rental expenses as a percentage of rental income plus other property income increased to 20.9% in 2007 from 20.1% in 2006.

Real Estate Taxes

Real estate tax expense increased $6.0 million, or 14.7%, to $47.2 million in 2007 compared to $41.2 million in 2006. This increase is due primarily to increased taxes of $3.8 million related to properties acquired in 2007 and 2006 and Assembly Square Mall and $2.4 million related to higher assessments at our same-center, redevelopment and Santana Row residential properties.

Property Operating Income

Property operating income increased $36.7 million, or 12.2%, to $338.3 million in 2007 compared to $301.6 million in 2006. This increase is due primarily to the following:

	•		earnings attributable to properties acquired in 2007 and 2006 and the completion of the power-center at Assembly Square Mall,

	•		growth in same-center earnings,

	•		growth in earnings at redevelopment properties, and

	•		growth in earnings at Santana Row residential.

Other

Interest Expense

Interest expense increased $16.1 million, or 16.9%, to $111.4 million in 2007 compared to $95.2 million in 2006. This increase is primarily due to the following:

	•		an increase of $23.4 million due to higher borrowings to finance our acquisitions,

partially offset by

	•		an increase of $3.8 million in capitalized interest,

	•		a decrease of $1.8 million due to a lower overall weighted average borrowing rate, and

	•		a decrease of $1.4 million due to the termination of the Mid-Pike and Huntington capital leases on October 26, 2007, as part of the acquisition of the fee interests in these properties.

Gross interest costs were $119.2 million and $99.3 million in 2007 and 2006, respectively. Capitalized interest amounted to $7.9 million and $4.1 million in 2007 and 2006, respectively. Capitalized interest increased due primarily to redevelopment at Linden Square, which was acquired in 2006, and redevelopment at Arlington East (Bethesda Row).

General and Administrative Expense

General and administrative expense increased $4.2 million, or 19.8%, to $25.6 million in 2007 compared to $21.3 million in 2006. This is primarily due to an increase in personnel, primarily in our asset management department, and increased share-based and other compensation expense. Approximately $1.0 million of the increase is due to additional stock and other compensation expense related to the departure of Larry Finger, our Chief Financial Officer, effective December 31, 2007.

Depreciation and Amortization

Depreciation and amortization expense increased $8.9 million, or 9.6%, to $101.7 million in 2007 from $92.8 million in 2006. This increase is due primarily to acquisitions and capital improvements at same-center and redevelopment properties.

Minority Interests

Income to minority partners increased $1.2 million, or 28.4%, to $5.6 million in 2007 from $4.4 million in 2006. This increase is due primarily to an increase in earnings at properties held in non-wholly owned partnerships and an increase in operating partnership units issued to acquire the White Marsh portfolio in March 2007.

Discontinued Operations—Income

Income from discontinued operations represents the income of properties that have been disposed, or will be disposed, which is required to be reported separately from results of ongoing operations. The reported income of $4.4 million and $4.2 million in 2007 and 2006, respectively, represent the income for the period during which we owned properties sold, or deemed held for sale, in 2007 and 2006.

Discontinued Operations—Gain on Sale of Real Estate

The gain on sale of real estate from discontinued operations of $94.8 million for the year ended December 31, 2007 is due to a $100.2 million gain primarily related to the sales of Bath Shopping Center, Key Road Plaza, Riverside Plaza, two properties in Forest Hills, and Allwood, Blue Star, Brunswick, Clifton, Hamilton and Rutgers Shopping Centers, partially offset by a $5.1 million increase in the reserve, net of taxes, for the reassessment of damages in 2007 of defective work completed when making upgrades to certain condominiums sold in 2006 and 2005 at Santana Row. The gain on sale of real estate from discontinued operations of $16.5 million for the year ended December 31, 2006, was due to the sale of condominiums at Santana Row.

Gain on Sale of Real Estate

The gain on sale of real estate includes properties in which we maintained continuing involvement through our unconsolidated real estate partnership. No properties in which we maintained continuing involvement were sold in 2007. One property, Greenlawn Plaza, was sold in 2006 to our unconsolidated real estate partnership, which resulted in a $7.4 million gain.

YEAR ENDED DECEMBER 31, 2006 COMPARED TO YEAR ENDED DECEMBER 31, 2005


							Change
	2006			2005			Dollars			%
	(Dollar amounts in thousands)
Rental income	$	414,979		$	375,927		$	39,052		10.4	%
Other property income		7,461			9,511			(2,050	)	-21.6	%
Mortgage interest income		5,095			5,370			(275	)	-5.1	%

Total property revenues		427,535			390,808			36,727		9.4	%

Rental expenses		84,763			82,055			2,708		3.3	%
Real estate taxes		41,198			36,449			4,749		13.0	%

Total property expenses		125,961			118,504			7,457		6.3	%

Property operating income		301,574			272,304			29,270		10.7	%
Other interest income		2,042			1,731			311		18.0	%
Income from real estate partnership		656			493			163		33.1	%
Interest expense		(95,234	)		(81,617	)		(13,617	)	16.7	%
General and administrative expense		(21,340	)		(19,909	)		(1,431	)	7.2	%
Depreciation and amortization		(92,793	)		(84,521	)		(8,272	)	9.8	%

Total other, net		(206,669	)		(183,823	)		(22,846	)	12.4	%

Income from continuing operations before minority interests		94,905			88,481			6,424		7.3	%
Minority interests		(4,353	)		(5,234	)		881		-16.8	%
Discontinued operations—income		4,204			617			3,587		581.4	%
Discontinued operations—gain on sale of real estate		16,515			30,748			(14,233	)	-46.3	%
Gain on sale of real estate		7,441			—			7,441		100.0	%

Net income	$	118,712		$	114,612		$	4,100		3.6	%

Property Revenues

Total property revenues increased $36.7 million, or 9.4%, to $427.5 million in 2006 compared to $390.8 million in 2005. The percentage leased at our commercial properties increased to 96.5% at December 31, 2006 compared to 96.3% at December 31, 2005 due primarily to new leases signed at existing properties. Changes in the components of property revenue are discussed below.

Rental income

Rental income consists primarily of minimum rent, cost recoveries from tenants, and percentage rent. Rental income increased $39.1 million, or 10.4%, to $415.0 million in 2006 compared to $375.9 million in 2005. This increase is due primarily to the following:

	•		an increase of $17.8 million attributable to the properties acquired in 2006 and 2005,

	•		an increase of $10.1 million at same-center properties due primarily to increased rental rates on new leases and increased occupancy,

	•		an increase of $6.6 million at redevelopment properties due primarily to increased occupancy and increased rental rates on new leases, and

	•		an increase of $6.5 million at Santana Row due primarily to leasing newly constructed residential units, increased rental rates on new retail leases, and increased occupancy,

partially offset by

	•		a decrease of $1.0 million related to the sale of Greenlawn Plaza to our unconsolidated real estate partnership in June 2006.

Other Property Income

Other property income decreased $2.1 million, or 21.6%, to $7.5 million in 2006 compared to $9.5 million in 2005. Included in other property income are items which, although recurring, tend to fluctuate more than rental income from period to period, such as lease termination fees and temporary tenant income. In 2006, the decrease is primarily due to a decrease in lease termination fees.

Property Expenses

Total property operating expenses increased $7.5 million, or 6.3%, to $126.0 million in 2006 compared to $118.5 million in 2005. Changes in the components of property expenses are discussed below.

Rental Expenses

Rental expenses increased $2.7 million, or 3.3%, to $84.8 million in 2006 compared to $82.1 million in 2005. This increase is primarily due to the following:

	•		an increase of $2.9 million in expenses attributable to properties acquired in 2006 and 2005,

	•		an increase of $2.5 million at Santana Row due primarily to higher repair and maintenance expenses and common area costs associated with newly constructed residential units placed into service, and

	•		an increase of $0.9 million in utility costs at same-center and redevelopment properties,

partially offset by

	•		a decrease of $1.2 million in bad debt expense due to recoveries in 2006 of receivables previously deemed uncollectible, and

	•		a decrease of $1.0 million in repairs and maintenance expense at same-center and redevelopment properties due primarily to a decrease in snow removal costs.

As a result of these changes in rental expenses, rental income and other property income, rental expense as a percentage of rental income plus other property income decreased to 20.1% in 2006 from 21.3% in 2005.

Real Estate Taxes

Real estate tax expense increased $4.7 million, or 13.0%, to $41.2 million in 2006 compared to $36.4 million in 2005. The increase is due to the following:

	•		an increase of $2.3 million attributable to properties acquired in 2006 and 2005,

	•		an increase of $2.1 million at Santana Row due primarily to higher assessments and a change in estimated real estate taxes recorded in June 2005. This change in estimate resulted from our receipt of the final real estate tax assessments, which decreased our real estate taxes for retail real estate and increased our real estate taxes for residential units at Santana Row by $1.1 million in 2005. The related residential units impacted by this change in estimate were sold as condominiums and, therefore, the increase in residential real estate taxes is included in discontinued operations as discussed below, and

	•		an increase of $0.4 million due to higher assessments at same-center properties.

Property Operating Income

Property operating income increased $29.3 million, or 10.7%, to $301.6 million in 2006 compared to $272.3 million in 2005. This increase is due primarily to the following:

	•		earnings attributable to properties acquired in 2006 and 2005,

	•		growth in same-center earnings, and

	•		growth in earnings at redevelopment properties and Santana Row.

Other

Interest Expense

Interest expense increased $13.6 million, or 16.7%, to $95.2 million in 2006 compared to $81.6 million in 2005. This increase is due primarily to the following:

	•		an increase of $8.0 million due to higher borrowings to finance our acquisitions,

	•		an increase of $3.6 million due to higher interest rates on certain borrowings,

	•		an increase of $1.6 million due to a decrease in capitalized interest.

Gross interest costs were $99.3 million and $87.3 million in 2006 and 2005, respectively. Capitalized interest amounted to $4.1 million and $5.7 million in 2006 and 2005, respectively. Capitalized interest decreased due primarily to the placement into service of newly constructed residential rental units at Santana Row and retail development at Assembly Square, partially offset by capitalized interest related to construction at Linden Square, which was acquired in 2006.

General and Administrative Expense

General and administrative expenses increased by $1.4 million, or 7.2%, to $21.3 million in 2006 compared to $19.9 million in 2005. This is primarily due to an increase in compensation (including increased grant expense under SFAS No. 123(R)), partially offset by an increase in compensation capitalized as a result of increased redevelopment activities.

Depreciation and Amortization

Depreciation and amortization expense increased $8.3 million, or 9.8%, to $92.8 million in 2006 compared to $84.5 million in 2005. This increase is due primarily to depreciation on acquired properties, improvements at same-center properties, the placement into service of the newly constructed residential rental units at Santana Row, and retail development at Assembly Square.

Minority Interests

Income to minority partners decreased $0.9 million, or 16.8%, to $4.4 million in 2006 from $5.2 million in 2005. This decrease is due primarily to a decrease in earnings at a property under redevelopment which is held in a non-wholly owned partnership, and a decrease in operating units held by partners in certain of our “downREIT” partnerships.

Discontinued Operations—Income

Income from discontinued operations represents the income of properties that have been disposed or will be disposed, which is required to be reported separately from results of ongoing operations. The reported income of $4.2 million and $0.6 million for the years ended December 31, 2006 and 2005, respectively, represents the income for the period during which we owned properties sold or to be sold between 2005 and 2007.

Discontinued Operations—Gain on Sale of Real Estate

The gain on sale of real estate from discontinued operations of $16.5 million for 2006 is due to the sale of condominiums at Santana Row. The gain on sale of real estate from discontinued operations of $30.7 million for 2005 was due to the sales of properties in Tempe, Arizona and Winter Park, Florida, Shaw’s Plaza in Carver, Massachusetts and condominiums at Santana Row in San Jose, California.

Gain on Sale of Real Estate

The gain on sale of real estate includes properties in which we maintained continuing involvement through our unconsolidated real estate partnership. One property, Greenlawn Plaza, was sold in 2006 to our unconsolidated real estate partnership, which resulted in a $7.4 million gain. No properties in which we maintained continuing involvement were sold in 2005.

Segment Results

We operate our business on an asset management model, where asset management teams are responsible for a portfolio of assets. We manage our portfolio as two operating regions: East and West. Property management teams consist of asset managers, leasing agents, development staff and financial personnel, each of whom has responsibility for a distinct portfolio.

The following selected key segment data is presented for 2007, 2006 and 2005. The results of properties classified as discontinued operations have been excluded from rental income, total revenue, and property operating income from the following table.


	2007			2006			2005
	(Dollars and square feet in thousands)
East
Rental income	$	363,698		$	318,176		$	292,688
Total revenue	$	375,857		$	325,928		$	299,658
Property operating income(1)	$	267,704		$	236,968		$	214,352
Property operating income as a percent of total revenue		71.2	%		72.7	%		71.5	%
Gross leasable square feet		15,568			16,195			14,941
West
Rental income	$	104,800		$	96,803		$	83,239
Total revenue	$	110,035		$	101,607		$	91,150
Property operating income(1)	$	70,565		$	64,606		$	57,952
Property operating income as a percent of total revenue		64.1	%		63.6	%		63.6	%
Gross leasable square feet		2,627			2,605			2,610

(1)	Property operating income consists of rental income, other property income and mortgage interest income, less rental expenses and real estate taxes. This measure is used internally to evaluate the performance of our regional operations, and we consider it to be a significant measure.

East

Rental income for the East region increased $45.5 million, or 14.3%, to $363.7 million in 2007 compared to $318.2 million in 2006 due primarily to the following:

	•		an increase of $31.3 million attributable to properties acquired in 2007 and 2006 and the completion of the power-center at Assembly Square Mall,

	•		an increase of $9.0 million at same-center properties due to increased rental rates on new leases and increased cost recoveries, and

	•		an increase of $6.4 million at redevelopment properties,

partially offset by

	•		a decrease of $0.8 million related to the sale of Greenlawn Plaza to our unconsolidated real estate partnership in June 2006.

Property operating income for the East region increased $30.7 million in 2007 due primarily to the increase in rental income discussed above and an increase of $2.8 million in lease and other termination fees. These increases in income were partially offset by a $13.7 million increase in rental expense due to the acquisition of properties, increased snow removal costs, repairs and maintenance costs, insurance costs, and additional legal costs and a $5.5 million increase in real estate taxes due primarily to the acquisition of properties and higher assessments on our same-center and redevelopment properties. As a result of these changes, the ratio of property operating income to total revenue for the East region decreased to 71.2% in 2007 from 72.7% in 2006.

Rental income for the East region increased $25.5 million, or 8.7%, to $318.2 million in 2006 compared to $292.7 million in 2005 due primarily to the following:

	•		an increase of $12.4 million attributable to properties acquired in 2006 and 2005,

	•		an increase of $9.4 million at same-center properties due to increased rental rates on new leases and increased cost recoveries, and

	•		an increase of $6.6 million at redevelopment properties,

partially offset by

	•		a decrease of $1.0 million related to the sale of Greenlawn Plaza to our unconsolidated real estate partnership in June 2006.

Property operating income for the East region increased $22.6 million in 2006 due primarily to the increase in rental income discussed above. These increases in income were partially offset by a $1.2 million increase in rental expense primarily due to the acquisition of properties offset by lower snow removal costs, and a $2.5 million increase in real estate taxes due primarily to the acquisition of properties and increased assessments at same-center properties. As a result of these changes, the ratio of property operating income to total revenue for the East region increased to 72.7% in 2006 from 71.5% in 2005.

West

Rental income for the West region increased $8.0 million, or 8.3%, to $104.8 million in 2007 from $96.8 million in 2006 due primarily to the following:

	•		an increase of $4.0 million at Santana Row due to leasing residential units throughout 2006, increased retail occupancy and increased rental rates on new retail leases, and

	•		an increase of $2.5 million at a redevelopment project.

Property operating income for the West region increased $6.0 million in 2007 due primarily to the increase in rental income discussed above, partially offset by a $2.5 million increase in rental expense and real estate taxes primarily at Santana Row and a $0.4 million decrease in mortgage interest income due to an amendment of our $17.7 million mortgage note receivable secured by the hotel at our Santana Row project in San Jose, California, which was executed on August 14, 2006 and decreased the interest rate from 14% per annum to 9% per annum. As a result of these changes, the ratio of property operating income to total revenue for the West region increased to 64.1% in 2007 from 63.6% in 2006.

Rental income for the West region increased $13.6 million, or 16.3%, to $96.8 million in 2006 from $83.2 million in 2005 due primarily to the following:

	•		an increase of $6.5 million at Santana Row due to leasing residential units throughout 2006 and increased retail occupancy, and

	•		an increase of $5.4 million attributable to the acquisition of Crow Canyon Commons in 2005.

Property operating income for the West region increased $6.7 million in 2006 due primarily to the increase in rental income discussed above, partially offset by a $3.8 million increase in rental expense and real estate taxes primarily at Santana Row and a $2.5 million decrease in other property income primarily due to a decrease in lease termination fees. The ratio of property operating income to total revenue for the West region stayed constant at 63.6% in 2006 and 2005.

Liquidity and Capital Resources

Due to the nature of our business and strategy, we generally generate significant amounts of cash from operations. The cash generated from operations is primarily paid to our shareholders in the form of dividends. As a REIT, we must generally make annual distributions to shareholders of at least 90% of our REIT taxable income.

Our short-term liquidity requirements consist primarily of obligations under our capital and operating leases, normal recurring operating expenses, regular debt service requirements (including debt service relating to additional or replacement debt, as well as scheduled debt maturities), recurring expenditures, non-recurring expenditures (such as tenant improvements and redevelopments) and dividends to common and preferred shareholders. Overall capital requirements in 2008 will depend upon acquisition opportunities, the level of improvements and redevelopments on existing properties and the timing and cost of development of future phases of existing properties.

Our long-term capital requirements consist primarily of maturities under our long-term debt agreements, development and redevelopment costs and potential acquisitions. We expect to fund these through a combination of sources which we believe will be available to us, including additional and replacement unsecured and secured borrowings, issuance of additional equity, joint venture relationships relating to existing properties or new acquisitions, and property dispositions.

The cash needed to execute our strategy and invest in new properties, as well as to pay our debt at maturity, must come from one or more of the following sources:

	•		cash provided by operations that is not distributed to shareholders,

	•		proceeds from the issuance of new debt or equity securities, or

	•		proceeds from property dispositions.

It is management’s intention that we continually have access to the capital resources necessary to expand and develop our business. As a result, we intend to operate with and maintain a conservative capital structure that will allow us to maintain strong debt service coverage and fixed-charge coverage ratios as part of our commitment to investment-grade debt ratings. We may, from time to time, seek to obtain funds by the following means:

	•		additional equity offerings,

	•		unsecured debt financing and/or secured mortgage financings, and

	•		other debt and equity alternatives, including formation of joint ventures, in a manner consistent with our intention to operate with a conservative debt structure.

The following factors could affect our ability to meet our liquidity requirements:

	•		we may be unable to obtain debt or equity financing on favorable terms, or at all, as a result of our financial condition or market conditions at the time we seek additional financing;

	•		restrictions in our debt instruments or preferred stock equity may prohibit us from incurring debt or issuing equity at all, or on acceptable terms under then-prevailing market conditions; and

	•		we may be unable to service additional or replacement debt due to increases in interest rates or a decline in our operating performance.

We seek to maintain a staggered schedule of debt maturities such that a disproportionate amount of debt maturities does not occur in any one year. Consistent therewith, we have less than $220 million of debt maturities occurring through December 31, 2008, $200 million of which can be extended for one-year at our option. Despite the current turmoil in the credit markets, we believe that we will be able to refinance these maturities.

Cash and cash equivalents were $50.7 million and $11.5 million at December 31, 2007 and 2006, respectively. Cash and cash equivalents are not a good indicator of our liquidity. We have a $300.0 million unsecured revolving credit facility that matures July 27, 2010, subject to a one-year extension at our option. No amounts were outstanding on the revolving credit facility at December 31, 2007. We intend to utilize our revolving credit facility to finance the initial acquisition of properties and meet other short-term working capital requirements.

Summary of Cash Flows for 2007 and 2006


	Year Ended December 31,
	2007			2006
	(In thousands)
Cash provided by operating activities	$	214,209		$	186,654
Cash used in investing activities		(151,439	)		(317,429	)
Cash (used in) provided by financing activities		(23,574	)		133,631

Increase in cash and cash equivalents		39,196			2,856
Cash and cash equivalents, beginning of year		11,495			8,639

Cash and cash equivalents, end of year	$	50,691		$	11,495

Net cash provided by operating activities increased by $27.6 million to $214.2 million during the year ended December 31, 2007 from $186.7 million during the year ended December 31, 2006. The increase was primarily attributable to:

	•		$10.0 million higher net income before gain on sale of real estate, depreciation and amortization, minority interest and other non-cash items, and

	•		$17.6 million increase in cash provided for working capital due primarily to lower prepaid expenses and other assets and higher prepaid rent balances.

Net cash used in investing activities decreased approximately $166.0 million to $151.4 million during the year ended December 31, 2007 from $317.4 million during the year ended December 31, 2006. The decrease was due primarily to:

	•		$197.5 million decrease in acquisitions of real estate,

partially offset by

	•		$17.7 million increase in capital expenditures due primarily to an increase in development and redevelopment activities, and

	•		$15.5 million increase in capital contributions to our unconsolidated real estate partnership to fund acquisitions.

Net cash used in financing activities increased approximately $157.2 million to $23.6 million used during the year ended December 31, 2007 from $133.6 million provided during the year ended December 31, 2006. The increase was due primarily to:

	•		$509.9 million in net proceeds from the issuance of senior notes in 2006 and no issuances of senior notes in 2007,

	•		$139.2 million increase in net repayments on our revolving credit facility,

	•		$109.5 million increase in repayment of senior notes, and

	•		$2.2 million increase in distributions to minority interests,

partially offset by

	•		$397.9 million decrease in repayment of mortgages, capital leases and notes payable,

	•		$135.0 million redemption of Series B preferred shares in 2006,

	•		$49.5 million increase in net proceeds from the issuance of notes payable,

	•		$12.7 million increase in net proceeds from the issuance of common shares, and

	•		$8.4 million decrease in dividends paid to shareholders due primarily to $10.6 million of special common dividends paid in 2006 and a $13.0 million decrease in preferred share dividends paid offset by an increase in the common dividend rate in 2007.

Off-Balance Sheet Arrangements

Other than the restaurants and joint venture funding commitments described in the next paragraph and items disclosed in the Contractual Commitments Table below, we have no off-balance sheet arrangements as of December 31, 2007 that are reasonably likely to have a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

We are joint venture partners in eight restaurants at Santana Row. Our investment balance in the restaurant joint ventures was approximately $7.9 million and $8.6 million at December 31, 2007 and 2006, respectively. Our equity in earnings from the restaurant joint ventures was $2.2 million, $1.5 million and $1.3 million in 2007, 2006 and 2005, respectively.

We have a joint venture arrangement with affiliates of Clarion Lion Properties Fund (“Clarion”), a discretionary fund created and advised by ING Clarion Partners. We own 30% of the equity in the partnership, and Clarion owns 70%. We are the manager of the Partnership and its properties, earning fees for acquisitions, management, leasing, and financing. We also have the opportunity to receive performance-based earnings through our Partnership interest. We account for our interest in the partnership using the equity method. In total, at December 31, 2007, the Partnership had $81.5 million of mortgage notes outstanding.

Contractual Commitments

The following table provides a summary of our fixed, noncancelable obligations as of December 31, 2007:


	Commitments Due by Period
	Total		Less Than 1 Year		1-3 Years		3-5 Years		After 5 Years
	(In thousands)
Current and long-term debt	$	1,560,423	$	217,084	$	194,101	$	302,745	$	846,493
Capital lease obligations		268,524		6,939		13,810		13,819		233,956
Operating leases		289,541		4,796		9,509		9,521		265,715
Real estate commitments		145,438		11,320		44,023		—		90,095
Development and redevelopment obligations		55,057		54,481		472		104		—
Contractual operating obligations		14,472		7,427		6,663		382		—

Total contractual cash obligations	$	2,333,455	$	302,047	$	268,578	$	326,571	$	1,436,259

In addition to the amounts set forth in the table above, the following potential commitments exist:

(a) Under the terms of the Congressional Plaza partnership agreement, from and after January 1, 1986, an unaffiliated third party has the right to require us and the two other minority partners to purchase between

one-half to all of its 29.47% interest in Congressional Plaza at the interest’s then-current fair market value. Based on management’s current estimate of fair market value as of December 31, 2007, our estimated maximum liability upon exercise of the put option would range from approximately $46 million to $51 million.

(b) Under the terms of one other partnership which owns a project in southern California, if certain leasing and revenue levels are obtained for the property owned by the partnership, the other partner may require us to purchase their partnership interest at a formula price based upon property operating income. The purchase price for the partnership will be paid using our common shares or, subject to certain conditions, cash. If the other partner does not redeem their interest, we may choose to purchase the limited partnership interest upon the same terms.

(c) Street Retail San Antonio LP, a wholly owned subsidiary of the Trust, entered into a Development Agreement (the “Agreement”) in 2000 with the City of San Antonio, Texas (the “City”) related to the redevelopment of land and buildings that we own along Houston Street. Under the Agreement, we are required to issue an annual letter of credit, commencing on October 1, 2002 and ending on September 30, 2014, that covers our designated portion of the debt service should the incremental tax revenue generated in the Zone not cover the debt service. We posted a letter of credit with the City on September 25, 2002 for $0.8 million, and the letter of credit remains outstanding. As of December 31, 2007, we have funded approximately $1.3 million related to this obligation. In anticipation of further shortfalls of incremental tax revenues to the City, we have accrued approximately $0.3 million as of December 31, 2007 to cover additional payments we may be obligated to make as part of the project costs.

(d) Under the terms of various other partnership agreements for entities, the partners have the right to exchange their operating units for cash or the same number of our common shares, at our option. As of December 31, 2007, a total of 380,938 operating units are outstanding.

(e) In addition to our contractual obligations, we have other short-term liquidity requirements consisting primarily of normal recurring operating expenses, regular debt service requirements (including debt service relating to additional and replacement debt), recurring corporate expenditures including compensation agreements, non-recurring corporate expenditures (such as tenant improvements and redevelopments) and dividends to common and preferred shareholders. Overall capital requirements will depend upon acquisition opportunities, the level of improvements and redevelopments on existing properties and the timing and cost of future phases of existing properties, including Santana Row and Assembly Square.

(f) At December 31, 2007, we had letters of credit outstanding of approximately $10.6 million. The majority of these letters of credit are collateral for existing indebtedness and other obligations of the Trust.

Debt Financing Arrangements

The following is a summary of our total debt outstanding as of December 31, 2007:


Description of Debt	Original Debt Issued		Principal Balance as of December 31, 2007			Stated Interest Rate as of December 31, 2007		Maturity Date
	(Dollars in thousands)
Mortgage loans(1)
Secured fixed rate
Leesburg Plaza	$	9,900	$	9,631		6.510	%	October 1, 2008
164 E. Houston Street		345		46		7.500	%	October 6, 2008
White Marsh Other		Acquired		1,149		6.060	%	December 31, 2008
Mercer Mall		Acquired		4,441		8.375	%	April 1, 2009
Federal Plaza		36,500		33,675		6.750	%	June 1, 2011
Tysons Station		7,000		6,217		7.400	%	September 1, 2011
White Marsh Plaza(2)		Acquired		10,350		6.040	%	April 1, 2013
Crow Canyon		Acquired		21,588		5.400	%	August 11, 2013
Melville Mall(3)		Acquired		25,095		5.250	%	September 1, 2014
THE AVENUE at White Marsh		Acquired		61,035		5.460	%	January 1, 2015
Barracks Road		44,300		41,988		7.950	%	November 1, 2015
Hauppauge		16,700		15,828		7.950	%	November 1, 2015
Lawrence Park		31,400		29,761		7.950	%	November 1, 2015
Wildwood		27,600		26,159		7.950	%	November 1, 2015
Wynnewood		32,000		30,330		7.950	%	November 1, 2015
Brick Plaza		33,000		31,128		7.415	%	November 1, 2015
Shoppers’ World		Acquired		5,980		5.910	%	January 31, 2021
Mount Vernon(4)		13,250		11,962		5.660	%	April 15, 2028
Chelsea		Acquired		8,240		5.360	%	January 15, 2031

Subtotal				374,603
Net unamortized discount				(628	)

Total mortgage loans				373,975

Notes payable
Unsecured fixed rate
Perring Plaza renovation		3,087		1,420		10.000	%	January 31, 2013
Unsecured variable rate
Term note(5)		200,000		200,000		LIBOR + 0.575	%	November 6, 2008
Revolving credit facility (6)		300,000		—		LIBOR + 0.425	%	July 27, 2010
Escondido (Municipal bonds)(7)		9,400		9,400		3.474	%	October 1, 2016

Total notes payable				210,820

Senior notes and debentures
Unsecured fixed rate
8.75% notes		175,000		175,000		8.750	%	December 1, 2009
4.50% notes		75,000		75,000		4.500	%	February 15, 2011
6.00% notes		175,000		175,000		6.000	%	July 15, 2012
5.40% notes		135,000		135,000		5.400	%	December 1, 2013
5.65% notes		125,000		125,000		5.650	%	June 1, 2016
6.20% notes		200,000		200,000		6.200	%	January 15, 2017
7.48% debentures(8)		50,000		50,000		7.480	%	August 15, 2026
6.82% medium term notes		40,000		40,000		6.820	%	August 1, 2027

Subtotal				975,000
Net unamortized premium				2,556

Total senior notes and debentures				977,556

Capital lease obligations
Various				76,109		Various		Various through 2106

Total debt and capital lease obligations			$	1,638,460

(1)	Mortgage loans do not include our 30% share ($24.5 million) of the $81.5 million debt of the partnership with Clarion Lion Properties Fund.

(2)	The stated interest rate represents the weighted average interest rate for two mortgage loans secured by this property. The loan balance represents an interest-only note of $4.35 million at a stated rate of 6.18% and the remaining balance at a stated rate of 5.96%.

(3)	The Trust acquired control of Melville Mall through a 20-year master lease and secondary financing. Because the Trust controls this property and retains substantially all of the economic benefit and risk associated with it, this property is consolidated and the mortgage loan is reflected on the balance sheet, though it is not a legal obligation of the Trust.

(4)	The interest rate is fixed at 5.66% for the first ten years and then will be reset to a market rate in 2013. The lender has the option to call the loan on April 15, 2013 or any time thereafter.

(5)	The term note offers a one-year extension option. The weighted average effective interest rate, before amortization of debt fees, was 5.27% for the period from November 9, 2007 through December 31, 2007.

(6)	The revolving credit facility offers a one-year extension option. The maximum amount drawn under the facility during 2007 was $244.0 million. The weighted average effective interest rate on borrowings under our revolving credit facility, before amortization of debt fees, was 5.63% for the year ended December 31, 2007.

(7)	The bonds require monthly interest only payments through maturity. The bonds bear interest at a variable rate determined weekly, which would enable the bonds to be remarketed at 100% of their principal amount. The property is not encumbered by a lien.

(8)	Beginning on August 15, 2008, the debentures are redeemable by the holders thereof at the original purchase price of $1,000 per debenture.

Our credit facility and other debt agreements include financial and other covenants that may limit our operating activities in the future. As of December 31, 2007, we were in compliance with all of the financial and other covenants. If we were to breach any of our debt covenants and did not cure the breach within any applicable cure period, our lenders could require us to repay the debt immediately and, if the debt is secured, could immediately begin proceedings to take possession of the property securing the loan. Many of our debt arrangements, including our public notes and our credit facility, are cross-defaulted, which means that the lenders under those debt arrangements can put us in default and require immediate repayment of their debt if we breach and fail to cure a covenant under certain of our other debt obligations. As a result, any default under our debt covenants could have an adverse effect on our financial condition, our results of operations, our ability to meet our obligations and the market value of our shares.

Below are the aggregate principal payments required as of December 31, 2007 under our debt financing arrangements by year. Scheduled principal installments and amounts due at maturity are included.


	Secured		Capital Leases		Unsecured			Total
	(In thousands)
2008	$	16,858	$	1,076	$	200,226	(1)	$	218,160
2009		11,232		1,216		175,250			187,698
2010		7,344		1,305		275	(2)		8,924
2011		44,645		1,399		75,304			121,348
2012		7,460		1,500		175,336			184,296
Thereafter(3)		287,064		69,613		559,429			916,106

	$	374,603	$	76,109	$	1,185,820		$	1,636,532	(4)

Our organizational documents do not limit the level or amount of debt that we may incur.

(1)	Includes $200 million outstanding on our term note which is subject to a one-year extension at our option.

(2)	Our $300 million four-year revolving credit facility is subject to a one-year extension at our option. As of December 31, 2007, there is $0 drawn under this credit facility.

(3)	Includes the Mount Vernon projected mortgage loan balance of $10.0 million as of April 15, 2013 that may be required to be paid on or after April 15, 2013. Amount also includes $50 million of unsecured debt that may be called by the holders beginning August 15, 2008.

(4)	Total debt maturities differs from the total reported on the consolidated balance sheet due to unamortized discounts and premiums as of December 31, 2007.

Interest Rate Hedging

As of December 31, 2007, we have no outstanding hedging instruments. We may enter into interest rate swaps and treasury rate locks that qualify as cash flow hedges under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” We generally enter into interest rate swaps to manage our exposure to variable interest rate risk and treasury locks to manage the risk of interest rates rising prior to the issuance of debt. We do not purchase derivatives for speculation. Our cash flow hedges are recorded at fair value. The effective portion of changes in fair value of our cash flow hedges is recorded in other comprehensive income and reclassified to earnings when the hedged item affects earnings. The ineffective portion of changes in fair value of our cash flow hedges is recognized in earnings in the period affected. We assess effectiveness of our cash flow hedges both at inception and on an ongoing basis. Hedge ineffectiveness did not have a significant impact on earnings in 2007, 2006 and 2005, and we do not anticipate it will have a significant effect in the future.

In August 2002, in anticipation of a $150 million senior unsecured note offering, we entered into a treasury lock that fixed the five year treasury rate at 3.472% through August 19, 2002. On August 16, 2002, we priced the senior unsecured notes with a scheduled closing date of August 21, 2002 and closed on the associated rate lock. Five-year treasury rates declined between the pricing period and the settlement of the rate lock and therefore, we paid $1.5 million to settle the rate lock. As a result of the August 19, 2002 fire at Santana Row, we did not proceed with the note offering at that time. However, we consummated a $150 million, 6.125% Senior Unsecured Note offering on November 2002, and thus, the hedge loss was amortized into interest expense over the life of these notes which matured on November 15, 2007.

REIT Qualification

We intend to maintain our qualification as a REIT under Section 856(c) of the Code. As a REIT, we generally will not be subject to corporate federal income taxes on income we distribute to generally our shareholders as long as we satisfy certain technical requirements of the Code, including the requirement to distribute at least 90% of our REIT taxable income to our shareholders.

Funds From Operations

Funds from operations (“FFO”) is a supplemental non-GAAP financial measure of real estate companies’ operating performance. The National Association of Real Estate Investment Trusts (“NAREIT”) defines FFO as follows: net income, computed in accordance with the U.S. GAAP, plus depreciation and amortization of real estate assets and excluding extraordinary items and gains on the sale of real estate. We compute FFO in accordance with the NAREIT definition, and we have historically reported our FFO available for common shareholders in addition to our net income and net cash provided by operating activities. It should be noted that FFO:

	•		does not represent cash flows from operating activities in accordance with GAAP (which, unlike FFO, generally reflects all cash effects of transactions and other events in the determination of net income);

	•		should not be considered an alternative to net income as an indication of our performance; and

	•		is not necessarily indicative of cash flow as a measure of liquidity or ability to fund cash needs, including the payment of dividends.

An increase or decrease in FFO available for common shareholders does not necessarily result in an increase or decrease in aggregate distributions because our Board of Trustees is not required to increase distributions on a quarterly basis unless necessary for us to maintain REIT status. However, we must generally distribute 90% of our REIT taxable income to remain qualified as a REIT. Therefore, a significant increase in FFO will generally require an increase in distributions to shareholders although not necessarily on a proportionate basis.

The reconciliation of net income to funds from operations available for common shareholders is as follows:


	For the Year Ended December 31,
	2007			2006			2005
	(In thousands, except per share data)
Net income	$	195,537		$	118,712		$	114,612
Gain on sale of real estate		(94,768	)		(23,956	)		(30,748	)
Depreciation and amortization of real estate assets		95,565			88,649			82,752
Amortization of initial direct costs of leases		8,473			7,390			6,972
Depreciation of joint venture real estate assets		1,241			768			630

Funds from operations		206,048			191,563			174,218
Dividends on preferred stock		(442	)		(10,423	)		(11,475	)
Income attributable to operating partnership units		1,156			748			801
Preferred stock redemption costs		—			(4,775	)		—

Funds from operations available for common shareholders	$	206,762		$	177,113		$	163,544

Weighted average number of common shares, diluted		56,999			54,351			53,469
Funds from operations available for common shareholders, per diluted share	$	3.63		$	3.26		$	3.06

Previous: Item 5. MARKET FOR OUR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES · Next: Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Item 6. SELECTED FINANCIAL DATA

Item 6. SELECTED FINANCIAL DATA

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