Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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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, 2008, we owned or had a majority interest in community and neighborhood shopping centers and mixed-use properties which are operated as 84 predominantly retail real estate projects comprising approximately 18.1 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, the real estate projects were 95.0% leased and 94.3% occupied at December 31, 2008. 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, 2008. In total, the joint venture properties in which we own an interest were 97.4% leased and occupied at December 31, 2008. We have paid quarterly dividends to our shareholders continuously since our founding in 1962 and have increased our dividends per common share for 41 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 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

Our 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. Percentage rents, which represent additional rents based upon the level of sales achieved by certain tenants, are recognized at the end of the lease year or earlier if we have determined the required sales level is achieved and the percentage rents are collectible. Real estate tax and other cost reimbursements are recognized on an accrual basis over the periods in which the related expenditures are incurred. For a tenant to terminate its lease agreement prior to the end of the agreed term, we may require that they pay a fee to cancel the lease agreement. Lease termination fees for which the tenant has relinquished control of the space are generally recognized on the termination date. When a lease is terminated early but the tenant continues to control the space under a modified lease agreement, the lease termination fee is generally recognized evenly over the remaining term of the modified lease agreement.

We make estimates of the collectibility of our accounts receivable related to minimum rents, straight-line rents, expense reimbursements and other revenue or income. 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, 2008 and 2007, accounts receivable include approximately $37.2 million and $32.0 million, respectively, related to straight-line rents. These estimates have a direct impact on our net income.

At December 31, 2008 and 2007, our allowance for doubtful accounts was $11.8 million and $7.0 million, respectively. Historically, we have recognized bad debt expense between 0.4% and 1.4% of rental income and it was 1.2% in 2008. 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 2008, our net income would have been reduced by approximately $2.5 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 major 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 3 to 20 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 or has no future value.

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. The value allocated to in-place leases is amortized over the related lease term and reflected as rental income in the statement of operations. If a tenant vacates its space prior to contractual termination of its lease, the unamortized balance of any in-place lease value is written off to rental income.

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. 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.

SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” requires 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, typically requires us to reclassify the revenues and expenses associated with the property from continuing operations to “discontinued operations” for all periods presented.

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 actuarial analysis 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 Financial Accounting Standards Board (“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 adopted 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; the adoption did not have a material impact on our financial position, results of operations or cash flows. In accordance with the FASB Staff Position (“FSP”) SFAS No. 157-2, “Effective Date of FASB Statement No. 157”, we are required to adopt the provisions of SFAS No. 157 for all other nonfinancial assets and nonfinancial liabilities effective January 1, 2009 and do not expect the adoption to 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 did not make this fair value election when we adopted SFAS No. 159 effective January 1, 2008, and, therefore, it did not 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)”). SFAS No. 141 (R) broadens and clarifies the definition of a business which will result in significantly more of our acquisitions being treated as business combinations rather than asset acquisitions. FAS 141 (R) is effective for business combinations for which the acquisition date is on or after January 1, 2009. Early adoption is not permitted and therefore, this will only impact prospective acquisitions with no change to the accounting for acquisitions completed prior to or on December 31, 2008. The new standard requires us to expense as incurred all acquisition related transaction costs which could include broker fees, transfer taxes, legal, accounting, valuation, and other professional and consulting fees; for acquisitions prior to January 1, 2009, these costs were capitalized as part of the acquisition cost. The impact to our financial statements will vary significantly depending on the number of acquisitions, size of the acquisitions, and location of the acquisitions. Based on acquisitions in the last three years, transaction costs for single asset acquisitions typically ranged from $0.1 million to $1.0 million with significantly higher transaction costs for an acquisition of a larger portfolio. The new standard includes several other changes to the accounting for business combinations including requiring contingent consideration to be measured at fair value at acquisition and subsequently remeasured through the income statement if accounted for as a liability as the fair value changes, any adjustments during the purchase price allocation period to be “pushed back” to the acquisition date with prior periods being adjusted for any changes, and the business combination to be accounted for on the acquisition date or the date control is obtained. During 2008, we expensed all acquisition related costs for acquisitions which did not close prior to December 31, 2008.

On December 4, 2007, the FASB issued Statement No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB 51” (“SFAS No. 160”). The new standard significantly changes the accounting and reporting of minority interests in the consolidated financial statements. The new standard requires a non-controlling interest, which is currently referred to as a minority interest, to be recognized as a component of equity rather than included in the mezzanine section of the balance sheet where it is currently presented. The terminology “minority interest” is changed to “noncontrolling interest”. The “minority interest” caption on the statement of operations will be reflected as “net income attributable to the noncontrolling interests” and shown after consolidated net income and will be an adjustment to reconcile to net income. This is a presentation only change for minority interest on both the balance sheet and statement of operations and will have no impact to net income, total liabilities and equity, and earnings per share. The statement also requires the recognition of 100% of the fair values of assets acquired and liabilities assumed in acquisitions of less than 100% controlling interest with subsequent acquisitions of the non-controlling interest recorded as equity transactions. SFAS No. 160 is effective January 1, 2009 and is to be applied prospectively except for the presentation changes to the balance sheet and income

statement which will be applied retrospectively in the 2009 financial statements. Effective January 1, 2009, we will reclassify $32.4 million from the mezzanine section of the balance sheet to shareholders’ equity. The additional impact on the financial statements will vary depending on the level of transactions with entities involving non-controlling interests.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (“SFAS No. 161”). SFAS No. 161 requires enhanced disclosures about an entity’s derivative instruments and hedging activities and is effective for fiscal years beginning after November 15, 2008. We do not expect the adoption of SFAS No. 161 to have a material impact on our consolidated financial statements.

In June 2008, the FASB issued FSP EITF No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF No. 03-6-1”). Under the FSP, unvested share-based payment awards that contain non-forfeitable rights to receive dividends (whether paid or unpaid) are participating securities, and should be included in computation of EPS pursuant to the two-class method. As part of our stock based compensation program, we issue restricted shares which vest over a three to six year period; these shares have non-forfeitable rights to dividends immediately after issuance. We currently exclude the unvested shares from the basic EPS calculation and include them using the treasury stock method in diluted earnings per share. We expect the adoption of FSP EITF No. 03-6-1 to result in a minimal decrease to our basic and diluted earnings per share calculations for all periods presented. The FSP is effective for fiscal years beginning after December 15, 2008 and will require retrospective application to all prior period EPS data presented in the financial statements; early adoption is not permitted.

In November 2008, the EITF issued Issue 08-6, “Equity Method Investment Accounting Considerations” (“EITF 08-6”), which clarified the accounting for certain transactions and impairment considerations involving equity method investments. EITF 08-6 clarified that equity method investments should initially be measured at cost, the issuance of shares by the investee would result in a gain or loss on issuance of shares reflected in the income statement of the equity investor, and that a loss in value of an equity investment which is other than a temporary decline should be recognized in accordance with APB 18, “The Equity Method of Accounting for Investments in Common Stock”. The consensus is effective on a prospective basis beginning on January 1, 2009; we do not expect EITF 08-6 to have a material impact on our financial position, results of operations, or cash flows.

Property Acquisitions and Dispositions

A summary of our significant acquisitions in 2008 and 2007 is as follows:


Date	Property	City, State	Gross Leasable Area	Purchase Price
			(In square feet)	(In millions)
Year ended December 31, 2008
May 30	Del Mar Village	Boca Raton, FL	154,000	$	41.7	(1)
July 11	7015 & 7045 Beracasa Way	Boca Raton, FL	24,000		6.7	(2)
July 16	Chelsea Commons Phase II	Chelsea, MA	26,000		8.0	(3)
September 4	Courtyard Shops	Wellington, FL	127,000		37.9	(4)
September 25 and 30	Bethesda Row	Bethesda, MD	N/A		38.8	(5)

		Total	331,000	$	133.1


Year ended December 31, 2007
February 28	Crow Canyon Crest	San Ramon, CA	17,000	$	10.9
March 8	The White Marsh Portfolio:(6)	White Marsh, MD			189.4
	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
October 26	Mid-Pike Plaza	Rockville, MD	—		45.2	(7)
October 26	Huntington Shopping Center	Huntington, NY	—		37.7	(7)

		Total	800,000	$	310.4

(1)	Approximately $1.7 million and $7.4 million of the net assets acquired were allocated to other assets for “above market leases” and liabilities for “below market leases,” respectively.

(2)	Approximately $0.2 million of the net assets acquired were allocated to other assets for “above market leases”. The two buildings acquired are adjacent to our Del Mar Village shopping center.

(3)	Approximately $0.2 million and $0.3 million of the net assets acquired were allocated to other assets for “above market leases” and liabilities for “below market leases,” respectively. This property includes four pad sites that are adjacent to our Chelsea Commons property.

(4)	Approximately $0.6 million and $1.0 million of the net assets acquired were allocated to other assets for “above market leases” and liabilities for “below market leases,” respectively.

(5)

On September 25 and 30, 2008, we completed exchange transactions whereby we sold our fee interest in four land parcels that were subject to long-term ground leases with tenants and acquired the fee interest in two land parcels under our Bethesda Row property. Prior to the transactions, the land parcels at Bethesda Row were encumbered by capital lease obligations which were extinguished as part of the transactions. The transactions were completed as 1031 tax deferred exchange transactions and involved net cash paid to us of $23.2 million.

(6)

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.

(7)

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.

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.

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.

A summary of our significant dispositions in 2008 and 2007 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, 2008
September 25 and 30	Four Land Parcels:(1)					$	38.8	$	0.9
	The Shoppes at Nottingham Square	White Marsh, MD	2007	134,000
	White Marsh Other	White Marsh, MD	2007	N/A	(2)
	White Marsh Other	White Marsh, MD	2007	3,000
	North Dartmouth	North Dartmouth, MA	2006	135,000
December 29	Greenwich Avenue	Greenwich, CT	1995	7,000			7.2		5.2	(3)

		Total		279,000		$	46.0	$	6.1


Year ended December 31, 2007
April 5	Bath Shopping Center	Bath, ME	2006	101,000		$	21.8	$	0.6	(4)
June 20	Key Road Plaza	Keene, NH	2006	76,000			15.3		0.4	(5)
June 20	Riverside Plaza	Keene, NH	2006	218,000			25.9		0.5	(6)
October 11	Forest Hills	Forest Hills, NY	1997	39,500			33.2		19.1	(7)
October 26	New Jersey Leasehold Interests:						65.7		79.6	(8)
	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

(1)

On September 25 and 30, 2008, we completed exchange transactions whereby we sold our fee interest in four land parcels that were subject to long-term ground leases with tenants and acquired the fee interest in two land parcels under our Bethesda Row property. Three of the land parcels we sold were in White Marsh, MD, and one parcel was in North Dartmouth, MA. The transactions were completed as 1031 tax deferred exchange transactions and involved net cash paid to us of $23.2 million.

(2)	This land parcel was subject to a ground lease covering 50,000 square feet of office space not included in our gross leasable area.

(3)	We sold one of two retail buildings located in Greenwich, CT.

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

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

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

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

(8)

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.

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

In 2005 and 2006, 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. In 2006 and 2007, we increased our warranty reserves by $2.5 million and $5.1 million, respectively, net of taxes, related to defective work done by third party contractors while upgrades were made to certain units being prepared for sale. During 2007 and 2008, we evaluated the potentially affected units, and as of December 31, 2008, have completed the inspections and repairs. The extent of the damages encountered in the units and the resulting costs to repair varied considerably amongst the units. As a result, we have adjusted the warranty reserve to reflect the actual costs incurred related to these issues which is approximately $2.4 million, net of $1.5 million of taxes. The change in the reserve of $5.2 million is included in “Discontinued operations—gain on sale of real estate” in 2008. These amounts do not reflect any amounts we may recover in the future from insurance or the contractors responsible for the defective work. Due to the inherent uncertainty related to the recovery from insurance or the contractor, we are unable to estimate an expected recovery; any recovery will be reflected in our financial statements once the amount is determinable, considered probable, and collectible.

Litigation Settlement

During the fourth quarter 2008, we entered into an agreement to settle a litigation matter relating to a shopping center in New Jersey where a former tenant alleged that we and our management agent acted improperly by failing to disclose a condemnation action at the property that was pending when the lease was signed. In June 2008, we entered into an agreement with the management agent that provided a framework for sharing litigation costs and payment of any damages to the plaintiff. The final settlement totaled $2.3 million of which we paid $1.15 million and the third party management agent paid $1.15 million. We are currently in the process of settling the amount of the portion of the plaintiff’s legal fees which we are required to pay; we expect the amount to be approximately $1.0 million of which we will pay 50% and the third party management agent will pay 50%. Our share of the total estimated settlement of $1.6 million is included in “general and administrative expense” in the statement of operations.

2008 Significant Debt and Equity Transactions

On February 21, 2008, we entered into two interest rate swap agreements to fix the variable portion of our $200 million term loan through November 6, 2008. The first swap fixed the variable rate at 2.725% on a notional amount of $100 million and the second swap fixed the variable rate at 2.852% on a notional amount of $100 million for a combined fixed rate of 2.789%. Both swaps were designated and qualified as cash flow hedges and were recorded at fair value until the swaps ended on November 6, 2008.

On July 1, 2008, we repaid the $9.6 million mortgage loan on Leesburg Plaza which had an original maturity date of October 1, 2008. This loan was repaid with funds borrowed on our $300 million revolving credit facility.

On July 15, 2008, we exercised a one-year extension for our $200 million term loan extending the maturity date to November 6, 2009.

On August 15, 2008, one of the holders redeemed $20.8 million of the outstanding $50.0 million balance of our 7.48% debentures. The notice period for additional redemptions has expired. These debentures were repaid with funds borrowed on our $300 million revolving credit facility.

In connection with the acquisition of Courtyard Shops and two land parcels at Bethesda Row, we assumed three mortgage notes as follows:


Property	Fair Value(1)		Maturity Date	Stated Annual Interest Rate
	(In millions)
Courtyard Shops	$	8.1	July 1, 2012	6.87	%
Bethesda Row	$	20.0	January 1, 2013	5.37	%
Bethesda Row	$	4.4	February 1, 2013	5.05	%

(1)	The aggregate face amount of the mortgage notes is $32.2 million. However, in accordance with GAAP, these mortgage notes were recorded at their aggregate fair value of $32.5 million.

On September 25 and 30, 2008, we acquired the fee interest in two land parcels under our Bethesda Row property. Prior to the transactions, we had capital lease obligations totaling $11.5 million on the two land parcels which were extinguished as part of the transactions.

On December 31, 2008, we repaid the $1.1 million mortgage loan on one of our properties in White Marsh, MD, on its maturity date. This loan was repaid with funds borrowed on our $300 million revolving credit facility.

Outlook

We seek growth in earnings, funds from operations, and cash flows primarily through a combination of the following:

	•		growth in our same-center portfolio,

	•		growth in our portfolio from property redevelopments, and

	•		expansion of our portfolio through property acquisitions.

Our same-center growth is primarily driven by increases in rental rates on new leases and lease renewals. The infill nature and strong demographics of our properties provide a strategic advantage allowing us to maintain relatively high occupancy and increase rental rates. We seek to maintain a mix of strong national, regional, and local retailers. At December 31, 2008, no single tenant accounted for more than 2.6% of annualized base rent.

We continue to see a positive impact from redevelopment of our shopping centers. In 2009 and 2010, we have redevelopment projects stabilizing with projected costs of approximately $73 million and $16 million, respectively. As redevelopment properties are completed, spaces that were out of service and newly created spaces 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 improved centers.

We continue to review acquisition opportunities in our primary markets that complement our portfolio and provide long term opportunities. Additionally, in 2008, we acquired two properties in South Florida and continue to evaluate further acquisitions in the South Florida market. Generally, our acquisitions do not initially contribute significantly to earnings growth; however, they provide long term re-leasing growth, redevelopment opportunities, and other strategic opportunities. Any growth from acquisitions is contingent on our ability to find properties that meet our qualitative standards at prices that meet our financial hurdles. Changes in interest rates may affect our success in achieving earnings 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 acquisition.

The current downturn in the economy may impact the success of our tenants’ retail operations and therefore the amount of rent and expense reimbursements we receive from our tenants. We have seen tenants experiencing declining sales, vacating early, or filing for bankruptcy, as well as seeking rent relief from us as landlord. Any reduction in our tenants’ abilities to pay base rent, percentage rent or other charges, will adversely affect our

financial condition and results of operations. Further, our ability to re-lease vacant spaces may be negatively impacted by the current economic environment. While we believe the locations of our centers and diverse tenant base should decrease the negative impact of the economic environment, we are likely to see an increase in vacancy that could have a negative impact to our revenue. We continue to monitor our tenants’ operating performances as well as trends in the retail industry to evaluate the future impact.

We continue to maintain a strong balance sheet and a conservative capital structure. We seek to maintain a schedule of debt maturities such that the amount of debt maturing in any one year is manageable with respect to our overall borrowing capacity.

At December 31, 2008, the leasable square feet in our shopping centers was 94.3% occupied and 95.0% 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.

Results of Operations

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.

YEAR ENDED DECEMBER 31, 2008 COMPARED TO YEAR ENDED DECEMBER 31, 2007


							Change
	2008			2007			Dollars			%
	(Dollar amounts in thousands)
Rental income	$	501,964		$	465,728		$	36,236		7.8	%
Other property income		14,013			12,834			1,179		9.2	%
Mortgage interest income		4,548			4,560			(12	)	-0.3	%

Total property revenues		520,525			483,122			37,403		7.7	%

Rental expenses		109,718			99,363			10,355		10.4	%
Real estate taxes		55,714			46,897			8,817		18.8	%

Total property expenses		165,432			146,260			19,172		13.1	%

Property operating income		355,093			336,862			18,231		5.4	%
Other interest income		916			921			(5	)	-0.5	%
Income from real estate partnership		1,612			1,395			217		15.6	%
Interest expense		(99,163	)		(111,365	)		12,202		-11.0	%
General and administrative expense		(26,732	)		(26,581	)		(151	)	0.6	%
Depreciation and amortization		(111,022	)		(101,633	)		(9,389	)	9.2	%

Total other, net		(234,389	)		(237,263	)		2,874		-1.2	%

Income from continuing operations before minority interests		120,704			99,599			21,105		21.2	%
Minority interests		(5,366	)		(5,590	)		224		-4.0	%
Discontinued operations—income		1,877			6,760			(4,883	)	-72.2	%
Discontinued operations—gain on sale of real estate		12,572			94,768			(82,196	)	-86.7	%

Net income	$	129,787		$	195,537		$	(65,750	)	-33.6	%

Property Revenues

Total property revenue increased $37.4 million, or 7.7%, to $520.5 million in 2008 compared to $483.1 million in 2007. The percentage occupied at our shopping centers decreased to 94.3% at December 31, 2008 compared to 95.4% at December 31, 2007. 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 $36.2 million, or 7.8%, to $502.0 million in 2008 compared to $465.7 million in 2007, due primarily to the following:

	•		an increase of $14.2 million at same-center properties due to increased rental rates on new and renewal leases, increased cost reimbursements and increased percentage rent,

	•		an increase of $12.8 million attributable to properties acquired in 2008 and 2007,

	•		an increase of $11.0 million at redevelopment properties due primarily to increased rental rates on new leases including newly created retail and residential spaces generating revenue and increased cost reimbursements,

partially offset by

	•		a decrease of $1.7 million related to the demolition of an operating property in 2008 for use in future development.

Other Property Income

Other property income increased $1.2 million, or 9.2%, to $14.0 million in 2008 compared to $12.8 million in 2007. 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 2008, the increase is primarily due to an increase in lease termination fees at redevelopment properties partially offset by a decrease in income from our restaurant joint ventures.

Property Expenses

Total property expenses increased $19.2 million, or 13.1%, to $165.4 million in 2008 compared to $146.3 million in 2007. Changes in the components of property expenses are discussed below.

Rental Expenses

Rental expenses increased $10.4 million, or 10.4%, to $109.7 million in 2008 compared to $99.4 million in 2007. This increase is due primarily to the following:

	•		an increase of $3.7 million in bad debt expense at same-center properties,

	•		an increase of $2.9 million attributable to properties acquired in 2008 and 2007

	•		an increase of $2.9 million in repairs and maintenance at same-center and redevelopment properties,

	•		an increase of $1.0 million in utility expense at same-center and redevelopment properties,

	•		an increase of $1.0 million in marketing expense at redevelopment properties primarily due to costs related to Arlington East (Bethesda Row) which opened during 2008,

partially offset by

	•		a decrease of $1.4 million in insurance expense at same-center and redevelopment properties.

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 21.3% in 2008 from 20.8% in 2007.

Real Estate Taxes

Real estate tax expense increased $8.8 million, or 18.8%, to $55.7 million in 2008 compared to $46.9 million in 2007. This increase is due primarily to an increase of $6.7 million related to higher assessments at same-center and redevelopment properties and $2.2 million related to properties acquired in 2008 and 2007.

Property Operating Income

Property operating income increased $18.2 million, or 5.4%, to $355.1 million in 2008 compared to $336.9 million in 2007. As discussed above, this increase is due primarily to the following:

	•		growth in earnings at redevelopment properties,

	•		earnings attributable to properties acquired in 2008 and 2007, and

	•		growth in same-center earnings.

Other

Interest Expense

Interest expense decreased $12.2 million, or 11.0%, to $99.2 million in 2008 compared to $111.4 million in 2007. This decrease is primarily due to the following:

	•		a decrease of $7.4 million due to a lower overall weighted average borrowing rate,

	•		a decrease of $4.7 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,

	•		a decrease of $2.7 million due to lower borrowings,

partially offset by

	•		a decrease of $2.6 million in capitalized interest due primarily to substantial completion of our Arlington East (Bethesda Row) and Linden Square projects.

Gross interest costs were $104.5 million and $119.2 million in 2008 and 2007, respectively. Capitalized interest amounted to $5.3 million and $7.9 million in 2008 and 2007, respectively.

General and Administrative Expense

General and administrative expense increased $0.2 million, or 0.6%, to $26.7 million in 2008 from $26.6 million in 2007. This is due to a $1.6 million litigation settlement in 2008 related to a shopping center in New Jersey partially offset by lower personnel related costs.

Depreciation and Amortization

Depreciation and amortization expense increased $9.4 million, or 9.2%, to $111.0 million in 2008 from $101.6 million in 2007. This increase is due primarily to acquisitions, placing into service newly completed redevelopment projects, and capital improvements at same-center and redevelopment properties.

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 $1.9 million and $6.8 million in 2008 and 2007, respectively, represents the income for the period during which we owned properties sold in 2008 and 2007.

Discontinued Operations—Gain on Sale of Real Estate

The gain on sale of real estate from discontinued operations of $12.6 million for 2008 consists primarily of a $5.2 million gain on the sale of one property in Connecticut, a $5.2 million decrease in the warranty reserve for condominium units sold at Santana Row in 2005 and 2006, $1.1 million in accrued state tax refunds applied for in 2008 related to the initial sales of the condominium units at Santana Row, and a $0.9 million gain on the sale of four land parcels in Maryland and Massachusetts.

The gain on sale of real estate from discontinued operations of $94.8 million for 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 2005 and 2006 at Santana Row.

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


							Change
	2007			2006			Dollars			%
	(Dollar amounts in thousands)
Rental income	$	465,728		$	414,261		$	51,467		12.4	%
Other property income		12,834			7,460			5,374		72.0	%
Mortgage interest income		4,560			5,095			(535	)	-10.5	%

Total property revenues		483,122			426,816			56,306		13.2	%

Rental expenses		99,363			84,164			15,199		18.1	%
Real estate taxes		46,897			41,139			5,758		14.0	%

Total property expenses		146,260			125,303			20,957		16.7	%

Property operating income		336,862			301,513			35,349		11.7	%
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		(26,581	)		(21,921	)		(4,660	)	21.3	%
Depreciation and amortization		(101,633	)		(92,751	)		(8,882	)	9.6	%

Total other, net		(237,263	)		(207,208	)		(30,055	)	14.5	%

Income from continuing operations before minority interests		99,599			94,305			5,294		5.6	%
Minority interests		(5,590	)		(4,353	)		(1,237	)	28.4	%
Discontinued operations—income		6,760			4,804			1,956		40.7	%
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	%

Property Revenues

Total property revenues increased $56.3 million, or 13.2%, to $483.1 million in 2007 compared to $426.8 million in 2006. The percentage occupied at our shopping centers remained unchanged at 95.4% at December 31, 2007 and 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 $51.5 million, or 12.4%, to $465.7 million in 2007 compared to $414.3 million in 2006. This increase is due primarily to the following:

	•		an increase of $30.0 million attributable to the 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 reimbursements,

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

	•		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 operating expenses increased $21.0 million, or 16.7%, to $146.3 million in 2007 compared to $125.3 million in 2006. Changes in the components of property expenses are discussed below.

Rental Expenses

Rental expenses increased $15.2 million, or 18.1%, to $99.4 million in 2007 compared to $84.2 million in 2006. This increase is primarily due to the following:

	•		an increase of $5.7 million in expenses 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 expense 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 primarily 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 $0.8 million in insurance at same-center and redevelopment properties, and

	•		an increase of $0.7 million at Santana Row residential.

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 increased to 20.8% in 2007 from 20.0% in 2006.

Real Estate Taxes

Real estate tax expense increased $5.8 million, or 14.0%, to $46.9 million in 2007 compared to $41.1 million in 2006. This increase is due primarily to increased taxes of $3.5 million related to properties acquired in 2007 and 2006 and Assembly Square Mall and $2.3 million related to higher assessments and at our same-center, redevelopment and Santana Row residential properties.

Property Operating Income

Property operating income increased $35.3 million, or 11.7%, to $336.9 million in 2007 compared to $301.5 million in 2006. As discussed above, this increase is due primarily to the following:

	•		earnings attributable to properties acquired in 2007 and 2006 and the completion of the power-center as 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 due primarily 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 a 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 expenses increased by $4.7 million, or 21.3%, to $26.6 million in 2007 compared to $21.9 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 former Chief Financial Officer, effective December 31, 2007.

Depreciation and Amortization

Depreciation and amortization expense increased $8.9 million, or 9.6%, to $101.6 million in 2007 compared to $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 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 $6.8 million and $4.8 million for 2007 and 2006, respectively, represents the income for the period during which we owned properties sold in 2008, 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 2005 and 2006 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.

Segment Results

The following table provides selected key segment data by geographic region for 2008, 2007 and 2006. While we believe we have only one reportable segment as defined by SFAS No. 131, we have provided additional information by geographic region as presented below. The results of properties classified as discontinued operations have been excluded from rental income, total revenue, and property operating income in the following table.


	2008			2007			2006
	(Dollars and square feet in thousands)
East
Rental income	$	389,569		$	360,928		$	317,458
Total revenue	$	404,440		$	373,087		$	325,209
Property operating income(1)	$	281,479		$	265,291		$	236,326
Property operating income as a percent of total revenue		69.6	%		71.1	%		72.7	%
Gross leasable square feet		15,498			15,568			16,195
West
Rental income	$	112,395		$	104,800		$	96,803
Total revenue	$	116,085		$	110,035		$	101,607
Property operating income(1)	$	73,614		$	71,571		$	65,187
Property operating income as a percent of total revenue		63.4	%		65.0	%		64.2	%
Gross leasable square feet		2,621			2,627			2,605

(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 $28.6 million, or 7.9%, to $389.6 million in 2008 compared to $360.9 million in 2007 due primarily to the following:

	•		an increase of $12.6 million attributable to properties acquired in 2008 and 2007,

	•		an increase of $10.5 million at redevelopment properties due primarily to increased rental rates on new leases including newly created retail and residential spaces generating revenue and increased cost reimbursements,

	•		an increase of $7.2 million at same-center properties due to increased rental rates on new and renewal leases and increased cost reimbursements,

partially offset by

	•		a decrease of $1.7 million related to the demolition of an operating property in 2008 for use in future development.

Property operating income for the East region increased $16.2 million in 2008 due primarily to the increase in rental income discussed above and an increase in lease termination fees. These increases in income were partially offset by an $8.2 million increase in rental expense, and a $6.9 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 69.6% in 2008 from 71.1% in 2007.

Rental income for the East region increased $43.5 million, or 13.7%, to $360.9 million in 2007 compared to $317.5 million in 2006 due primarily to the following:

	•		an increase of $29.3 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 reimbursements,

	•		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 $29.0 million in 2007 due primarily to the increase in rental income discussed above and an increase in lease and other termination fees. These increases in income were partially offset by a $13.7 million increase in rental expense primarily due to the acquisition of properties, increased snow removal costs, repairs and maintenance costs, insurance costs and additional legal costs and a $5.2 million increase in real estate taxes due primarily to the acquisition of properties and higher assessments at 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 71.1% in 2007 from 72.7% in 2006.

The gross leasable area in the East region decreased 0.7 million square feet from 2006 to 2008 due primarily to the sale of six properties in New Jersey in October 2007 and the sale of four land parcels in September 2008, the results of which are included in discontinued operations. The decrease was partially offset by 2007 and 2008 acquisitions.

West

Rental income for the West region increased $7.6 million, or 7.2%, to $112.4 million in 2008 from $104.8 million in 2007 due primarily to the following:

	•		an increase of $6.9 million at same-center properties due primarily to increased residential rental rates at Santana Row, increased rental rates on new and renewal retail leases, and increased percentage rent,

	•		an increase of $0.5 million at redevelopment properties, and

	•		an increase of $0.2 million attributable to a property acquired in 2007.

Property operating income for the West region increased $2.0 million in 2008 due primarily to the increase in rental income discussed above, partially offset by a $2.1 million increase in rental expense and $1.9 million real estate taxes. As a result of these changes, the ratio of property operating income to total revenue for the West region decreased to 63.4% in 2008 from 65.0% in 2007.

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,

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

	•		an increase of $0.8 million at same-center properties, and

	•		an increase of $0.7 million attributable to the acquisition of a property in 2007.

Property operating income for the West region increased $6.4 million in 2007 due primarily to the increase in rental income discussed above, partially offset by a $2.0 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, which was executed on August 14, 2006, and decreased the interest rate from 14% per annum to 9% per annum. The ratio of property operating income to total revenue for the West region increased to 65.0% in 2007 from 64.2% in 2006.

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 common and preferred 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. Our long-term capital requirements consist primarily of maturities under our long-term debt agreements, development and redevelopment costs and potential acquisitions.

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. In the short and long term, we may seek to obtain funds through the issuance of additional equity, unsecured and/or secured debt financings, joint venture relationships relating to existing properties or new acquisitions, and property dispositions that are consistent with this conservative structure.

We have approximately $380 million of debt maturing in 2009, of which $200 million matures in November 2009 and $175 million matures in December 2009. While the maturities do not occur until the end of 2009, we have commenced negotiations under several different alternatives to refinance the debt including a new term loan and encumbering additional properties with mortgage financing. We have identified assets that can provide up to $350 million of secured financing proceeds. The current recession and dislocation in the capital markets, however, has resulted in less favorable interest rates for debt financings. Notwithstanding adverse market conditions, we currently believe that cash flows from operations, secured and unsecured refinancing opportunities, and our revolving credit facility will be sufficient to finance our operations and fund our capital expenditures. Alternatively, if we are unable to access the secured and unsecured debt markets at acceptable terms, we may choose to issue common equity to meet our capital needs or pay a portion of our distributions in shares instead of cash. As we expect to address the fourth quarter 2009 maturities several months in advance, we expect to incur additional interest expense due to higher interest rates on such debt and due to a temporary increase in our debt outstanding until we can use the proceeds to retire maturing debt.

Our overall capital requirements in 2009 will depend not only on refinancing of the debt maturities, but also 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. During 2008, 2007, and 2006, we expended approximately $104.2 million, $111.6 million, and $95.7 million, respectively, for development and redevelopment capital expenditures and approximately $33.8 million, $25.8 million, and $24.0 million, respectively for other capital expenditures. While the amount of future expenditures will depend on numerous factors, we expect to incur similar levels of capital expenditures in 2009 which will be funded on a short-term basis with the revolving credit facility and on a long-term basis, with longer term debt or equity. Although there is no intent at this time, if market conditions continue to deteriorate, we may also delay the timing of certain development and redevelopment projects as well as limit future acquisitions, reduce our operating expenditures, or re-evaluate our dividend policy.

In addition to the adverse conditions in the capital markets which could affect our ability to access those markets, the following factors could affect our ability to meet our liquidity requirements:

	•		restrictions in our debt instruments or preferred stock may limit 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.

Cash and cash equivalents were $15.2 million and $50.7 million at December 31, 2008 and 2007, respectively, however, cash and cash equivalents are not a good indicator of our liquidity. We have a $300 million unsecured revolving credit facility that matures July 27, 2010, subject to a one-year extension at our option, of which $123.5 million was outstanding at December 31, 2008. During 2008, the maximum amount of borrowings outstanding under our revolving credit facility was $159.0 million and the weighted average amount of borrowings outstanding was $61.4 million. We expect to continue to utilize our credit facility to fund short-term operating needs, including funding capital expenditures. To date, lenders have funded all of our draw requests under our credit facility and we expect our lenders will continue to fund those draws.

Summary of Cash Flows for 2008 and 2007


	Year Ended December 31,
	2008			2007
	(In thousands)
Cash provided by operating activities	$	228,285		$	214,209
Cash used in investing activities		(207,567	)		(151,439	)
Cash used in financing activities		(56,186	)		(23,574	)

(Decrease) increase in cash and cash equivalents		(35,468	)		39,196
Cash and cash equivalents, beginning of year		50,691			11,495

Cash and cash equivalents, end of year	$	15,223		$	50,691

Net cash provided by operating activities increased by $14.1 million to $228.3 million during the year ended December 31, 2008 from $214.2 million during the year ended December 31, 2007. The increase was primarily attributable to:

	•		$25.0 million higher net income before gain on sale of real estate, depreciation and amortization, minority interest and other non-cash items,

partially offset by

	•		$10.9 million decrease in cash provided for working capital due primarily to lower accounts payable and accrued expense balances and lower prepaid rent balances.

Net cash used in investing activities increased approximately $56.1 million to $207.6 million during the year ended December 31, 2008 from $151.4 million during the year ended December 31, 2007. The increase was due primarily to:

	•		$39.1 million decrease in proceeds from the sale of real estate,

	•		$30.1 million increase in acquisitions of real estate, and

	•		$5.9 million increase in cash used for net issuance of mortgage and other notes receivables primarily related to the funding of a $5.5 million secured loan in 2008,

partially offset by

	•		$20.4 million decrease in contributions to our unconsolidated real estate partnership due to two acquisitions by the real estate partnership in 2007 and no capital contributions in 2008.

Net cash used in financing activities increased approximately $32.6 million to $56.2 million during the year ended December 31, 2008 from $23.6 million during the year ended December 31, 2007. The increase was due primarily to:

	•		$199.5 million in net proceeds from the issuance of our $200 million term loan in 2007 and no issuances of notes payable in 2008,

	•		$159.3 million decrease in net proceeds from the issuance of common shares,

	•		$15.0 million increase in dividends paid to shareholders due to an increase in the dividend rate and increased number of shares outstanding, and

	•		$10.9 million increase in repayment of mortgages, capital leases and notes payable,

partially offset by

	•		$221.5 million increase in net borrowings on our revolving credit facility, and

	•		$129.2 million decrease in repayment of senior notes primarily due to the repayment of our $150 million 6.125% senior notes in November 2007.

Off-Balance Sheet Arrangements

We have a joint venture arrangement (“the Partnership”) with affiliates of a discretionary fund created and advised by ING Clarion Partners (“Clarion”). We own 30% of the equity in the Partnership, and Clarion owns 70%. As of December 31, 2008, the Partnership owned seven retail real estate projects. 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 and our investment in the Partnership was $29.3 million and $29.6 million at December 31, 2008 and 2007, respectively. In total, at December 31, 2008, the Partnership had $81.4 million of mortgage notes outstanding.

Other than the joint venture described above and items disclosed in the Contractual Commitments Table below, we have no off-balance sheet arrangements as of December 31, 2008 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.

Contractual Commitments

The following table provides a summary of our fixed, noncancelable obligations as of December 31, 2008:


	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	$	1,680,310	$	387,542	$	252,834	$	384,879	$	655,055
Capital lease obligations		182,011		5,590		11,180		11,201		154,040
Operating leases		200,977		3,122		6,298		6,120		185,437
Real estate commitments		96,592		—		7,136		—		89,456
Development and redevelopment obligations		52,541		52,404		85		52		—
Contractual operating obligations		10,350		6,544		3,806		—		—

Total contractual cash obligations	$	2,222,781	$	455,202	$	281,339	$	402,252	$	1,083,988

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, 2008, our estimated maximum liability upon exercise of the put option would range from approximately $42 million to $49 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) 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, 2008, a total of 373,260 operating units are outstanding.

(d) 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.

(e) At December 31, 2008, we had letters of credit outstanding of approximately $10.5 million which 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, 2008:


Description of Debt	Original Debt Issued	Principal Balance as of December 31, 2008			Stated Interest Rate as of December 31, 2008		Maturity Date
	(Dollars in thousands)
Mortgage loans(1)
Secured fixed rate
Mercer Mall(2)	Acquired	$	4,370		8.375	%	April 1, 2009
Federal Plaza	36,500		33,128		6.750	%	June 1, 2011
Tysons Station	7,000		6,070		7.400	%	September 1, 2011
Courtyard Shops	Acquired		7,731		6.870	%		July 1, 2012
Bethesda Row	Acquired		19,996		5.370	%	January 1, 2013
Bethesda Row	Acquired		4,437		5.050	%	February 1, 2013
White Marsh Plaza(3)	Acquired		10,122		6.040	%	April 1, 2013
Crow Canyon	Acquired		21,214		5.400	%	August 11, 2013
Melville Mall(4)	Acquired		24,456		5.250	%	September 1, 2014
THE AVENUE at White Marsh	Acquired		60,016		5.460	%	January 1, 2015
Barracks Road	44,300		41,368		7.950	%	November 1, 2015
Hauppauge	16,700		15,595		7.950	%	November 1, 2015
Lawrence Park	31,400		29,322		7.950	%	November 1, 2015
Wildwood	27,600		25,773		7.950	%	November 1, 2015
Wynnewood	32,000		29,882		7.950	%	November 1, 2015
Brick Plaza	33,000		30,633		7.415	%	November 1, 2015
Shoppers’ World	Acquired		5,865		5.910	%	January 31, 2021
Mount Vernon(5)	13,250		11,640		5.660	%	April 15, 2028
Chelsea	Acquired		8,101		5.360	%	January 15, 2031

Subtotal			389,719
Net unamortized discount			(401	)

Total mortgage loans			389,318

Notes payable
Unsecured fixed rate
Other	2,221		2,296		6.50	%	April 1, 2012
Perring Plaza renovation	3,087		1,195		10.000	%	January 31, 2013
Unsecured variable rate
Term loan(6)	200,000		200,000		LIBOR + 0.575	%	November 6, 2009
Revolving credit facility(7)	300,000		123,500		LIBOR + 0.425	%	July 27, 2010
Escondido (Municipal bonds)(8)	9,400		9,400		1.878	%	October 1, 2016

Total notes payable			336,391

Senior notes and debentures
Unsecured fixed rate
8.75% notes(9)	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(10)	50,000		29,200		7.480	%	August 15, 2026
6.82% medium term notes	40,000		40,000		6.820	%	August 1, 2027

Subtotal			954,200
Net unamortized premium			2,384

Total senior notes and debentures			956,584

Capital lease obligations
Various			63,492		Various		Various through 2106

Total debt and capital lease obligations		$	1,745,785

(1)	Mortgage loans do not include our 30% share ($24.4 million) of the $81.4 million debt of the partnership with a discretionary fund created and advised by ING Clarion Partners.

(2)	On January 5, 2009, we repaid the $4.4 million mortgage with funds borrowed on our $300 million revolving credit facility.

(3)	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 loan of $4.35 million at a stated rate of 6.18% and the remaining balance at a stated rate of 5.96%.

(4)	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.

(5)	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.

(6)

In July 2008, we exercised our option extending the maturity date from November 6, 2008 to November 6, 2009. On February 21, 2008 we entered into two interest rate swap agreements to fix the variable portion of this debt through November 6, 2008. The first swap fixed the variable rate at 2.725% on a notional amount of $100 million and the second swap fixed the variable rate at 2.852% on a notional amount of $100 million for a combined rate of 2.789%. The swap ended on November 6, 2008. The weighted average effective interest rate, before amortization of debt fees, was 3.56% for the year ended December 31, 2008.

(7)	The maximum amount drawn under the credit facility during 2008 was $159.0 million. The weighted average effective interest rate on borrowings under our revolving credit facility, before amortization of debt fees, was 3.0% for the year ended December 31, 2008. This credit facility matures on July 27, 2010, subject to a one-year extension at our option.

(8)	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.

(9)	On January 12, 2009 and February 5, 2009, we purchased and retired $5.0 million and $0.9 million, respectively, of the outstanding $175.0 million balance using funds borrowed on our $300 million revolving credit facility.

(10)	On August 15, 2008, one of the holders redeemed $20.8 million of the outstanding $50.0 million balance. The notice period for additional redemptions has expired.

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, 2008, 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. Our organizational documents do not limit the level or amount of debt that we may incur.

The following is a summary of our debt maturities as of December 31, 2008:


	Secured		Capital Leases		Unsecured			Total
	(In thousands)
2009	$	11,389	$	1,220	$	376,153		$	388,762	(1)
2010		7,714		1,305		124,361	(2)		133,380
2011		45,039		1,399		75,720			122,158
2012		14,662		1,500		175,727			191,889
2013		59,460		1,609		135,030			196,099
Thereafter		251,455		56,459		403,600			711,514

	$	389,719	$	63,492	$	1,290,591		$	1,743,802	(3)

(1)	On January 2, 2009, we repaid the $4.4 million mortgage loan on Mercer Mall. On January 12, 2009 and February 5, 2009, we purchased and retired $5.0 million and $0.9 million, respectively, of the outstanding $175.0 million balance on our 8.75% notes. All repayments were made using funds borrowed on our $300 million revolving credit facility.

(2)	Our $300 million four-year revolving credit facility matures on July 27, 2010, subject to a one-year extension at our option. As of December 31, 2008, there is $123.5 million drawn under this credit facility.

(3)	Total debt maturities differs from the total reported on the consolidated balance sheet due to unamortized discounts and premiums as of December 31, 2008.

Interest Rate Hedging

We use derivative instruments to manage exposure to variable interest rate risk. 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 enter into derivative instruments that qualify as cash flow hedges under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” and do not enter into derivative instruments for speculative purposes. As of December 31, 2008, we had no outstanding hedging instruments.

Our cash flow hedges are recorded at fair value. We assess effectiveness of our cash flow hedges both at inception and on an ongoing basis. The effective portion of changes in fair value of our cash flow hedges is recorded in other comprehensive income, and the ineffective portion of changes in fair value of our cash flow hedges is recognized in earnings in the period affected. Hedge ineffectiveness did not have a significant impact on earnings in 2008, 2007 and 2006, and we do not anticipate it will have a significant effect in the future.

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 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 and losses 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.

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.

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. However, we must generally distribute 90% of our REIT taxable income (including net capital gain) 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,
	2008			2007			2006
	(In thousands, except per share data)
Net income	$	129,787		$	195,537		$	118,712
Gain on sale of real estate		(12,572	)		(94,768	)		(23,956	)
Depreciation and amortization of real estate assets		101,450			95,565			88,649
Amortization of initial direct costs of leases		8,771			8,473			7,390
Depreciation of joint venture real estate assets		1,331			1,241			768

Funds from operations		228,767			206,048			191,563
Dividends on preferred stock		(541	)		(442	)		(10,423	)
Income attributable to operating partnership units		950			1,156			748
Preferred stock redemption costs		—			—			(4,775	)

Funds from operations available for common shareholders	$	229,176		$	206,762		$	177,113

Weighted average number of common shares, diluted		59,292			56,999			54,351
Funds from operations available for common shareholders, per diluted share	$	3.87		$	3.63		$	3.26

Previous: Item 6. SELECTED FINANCIAL DATA · Next: Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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