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 and redevelopment of high quality retail and mixed-use properties 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. As of December 31, 2009, 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 18.2 million square feet. In total, the real estate projects were 94.5% leased and 93.2% occupied at December 31, 2009. 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, 2009. In total, the joint venture properties in which we own an interest were 85.0% leased and occupied at December 31, 2009. We have paid quarterly dividends to our shareholders continuously since our founding in 1962 and have increased our dividends per common share for 42 consecutive years.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, referred 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.

Our significant accounting policies are more fully described in Note 1 to the Consolidated Financial Statements; however, the most critical 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.

Current accounts receivable from tenants primarily relate to contractual minimum rent and percentage rent as well as real estate tax and other cost reimbursements. Accounts receivable from straight-line rent is typically longer term in nature and relates to the cumulative amount by which straight-line rental income recorded to date exceeds cash rents billed to date under the contractual lease agreement.

We make estimates of the collectability of our current accounts receivable and straight-line rents receivable which requires significant judgment by management. The collectability of receivables is affected by numerous different factors including current economic conditions, bankruptcies, and the ability of the tenant to perform under the terms of their lease agreement. While we make estimates of potentially uncollectible amounts and provide an allowance for them through bad debt expense, actual collectability could differ from those estimates which could affect our net income. With respect to the allowance for current uncollectible tenant receivables, we assess the collectability of outstanding receivables by evaluating such factors as nature and age of the receivable, past history and current financial condition of the specific tenant including our assessment of the tenant’s ability to meet its contractual lease obligations, and the status of any pending disputes or lease negotiations with the tenant. At December 31, 2009 and 2008, our allowance for doubtful accounts was $16.1 million and $11.8 million, respectively. Historically, we have recognized bad debt expense between 0.4% and 1.3% of rental income and it was 1.2% in 2009 reflecting economic changes and their impact to our tenants. A change in the estimate of collectability of a receivable would result in a change to our allowance for doubtful accounts and correspondingly bad debt expense and net income. For example, in the event our estimates were not accurate and we were required to increase our allowance by 1% of rental income, our bad debt expense would have increased and our net income would have decreased by $5.1 million.

Due to the nature of the accounts receivable from straight-line rents, the collection period of these amounts typically extends beyond one year. Our experience relative to unbilled straight-line rents is that a 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, 2009 and 2008, accounts receivable include approximately $41.8 million and $37.2 million, respectively, related to straight-line rents. Correspondingly, these estimates of collectability have a direct impact on our net income.

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 on a straight-line basis in accordance with GAAP and consistent with industry standards based on our best estimates of the assets’ physical and economic useful lives. 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 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 expense if the applicable tenant vacates before the expiration of its lease. Undepreciated tenant work is written-off if the applicable tenant vacates and the tenant work is replaced or has no future value. Additionally, we make estimates as to the probability of certain development and redevelopment projects being completed. If we determine the redevelopment is no longer probable of completion, we immediately expense all capitalized costs which are not recoverable.

When applicable, as lessee, we classify our leases of land and building as operating or capital 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 determining 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. 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 the value of below market lease intangibles includes renewal option periods, we include such renewal periods in the amortization period utilized. 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 and Impairment

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 redeveloped and our investment in certain joint ventures. Management’s evaluation of impairment includes review for possible indicators of impairment as well as, in certain circumstances, undiscounted and discounted cash flow analysis. The calculation of both discounted and undiscounted cash flows requires management to 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 long periods. Because our properties typically have a 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.

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. We accrue a liability for litigation if an unfavorable outcome is probable and the amount of loss can be reasonably estimated. If an unfavorable outcome is probable and a reasonable estimate of the loss is a range, we accrue the best estimate within the range; however, if no amount within the range is a better estimate than any other amount, the minimum within the range is accrued. Any difference between our estimate of a potential loss and the actual outcome would result in an increase or decrease to net income.

As further discussed in Note 8 to the Consolidated Financial Statements, we are party to a litigation matter related to a parcel of land adjacent to our Santana Row property. During 2009, the judge awarded damages to the plaintiff including interest and costs of suit resulting in us increasing our litigation accrual to $16.4 million. We and the plaintiff are both appealing the ruling and expect oral arguments on the appeal to be scheduled for later in 2010. A change in the final ruling in our favor as part of the appeals process could result in a decrease to our litigation liability which would increase net income; however, an adverse change during the appeals process could result in an increase to the litigation accrual which would decrease our 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. If changes in facts and circumstances indicate that warranty reserves are understated, we will accrue additional reserves at such time a liability has been incurred and the costs can be reasonably estimated. Warranty reserves are released once the legal liability period has expired or all related work has been substantially completed. 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

FASB Accounting Standards Codification

In June 2009, the FASB issued new accounting requirements, which make the FASB Accounting Standards Codification (“Codification”) the single source of authoritative literature for U.S. accounting and reporting standards. The Codification is not meant to change existing GAAP but rather provide a single source for all literature. We adopted the standard during the quarter ended September 30, 2009, which required us to change certain disclosures in our financial statements to reflect Codification or “plain English” references rather than references to FASB Statements, Staff Positions or Emerging Issues Task Force Abstracts. The adoption of this requirement impacted certain disclosures in the financial statements but did not have an impact on our consolidated financial position, results of operations, or cash flows.

Recently Adopted Accounting Pronouncements

Effective January 1, 2009, we adopted a new accounting standard that 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. The new requirement is effective for business combinations for which the acquisition date is on or after January 1, 2009, and therefore, 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 all acquisition related transaction costs as incurred 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. While the adoption did not have a material impact on our financial statements for 2009, the impact to our future consolidated financial statements will vary significantly depending on the timing and number of acquisitions or potential acquisitions, size of the acquisitions, and location of the acquisitions. Based on acquisitions in the past several 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.

Effective January 1, 2009, we adopted a new accounting standard that significantly changes the accounting and reporting of minority interests in the consolidated financial statements and requires a noncontrolling interest, which was previously 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 was previously presented. On January 1, 2009, we reclassified $32.4 million from the mezzanine section of the balance sheet to shareholders’ equity. The terminology “minority interest” has been changed to “noncontrolling interest”. The “minority interest” caption on the statement of operations is now reflected as “net income attributable to noncontrolling interests” and shown after consolidated net income. This is a presentation only change for minority interest on both the balance sheet and statement of operations and has no impact to total liabilities and shareholders’ equity, net income available to common shareholders, or earnings per share. The statement also requires the recognition of 100% of the fair value of assets acquired and liabilities assumed in acquisitions of less than 100% controlling interest with subsequent acquisitions of the noncontrolling interest recorded as equity transactions. The new accounting standard was adopted effective January 1, 2009 and has been applied prospectively except for the presentation changes to the balance sheet and statement of operations which have been applied retrospectively in the 2008 and 2007 consolidated financial statements. While there was no additional impact on the consolidated financial statements during 2009, the impact on our future consolidated financial statements will vary depending on the level of transactions with entities involving noncontrolling interests.

Effective January 1, 2009, we adopted a new accounting standard that requires enhanced disclosures about an entity’s derivative instruments and hedging activities. The adoption did not have an impact on our consolidated financial statements as we currently have no derivative instruments outstanding.

Effective January 1, 2009, we adopted a new accounting standard that defines unvested share-based payment awards that contain non-forfeitable rights to receive dividends (whether paid or unpaid) as participating securities that should be included in the computation of EPS pursuant to the two-class method. As part of our stock based compensation program, we issue restricted shares which typically vest over a three to six year period; these shares have non-forfeitable rights to dividends immediately after issuance. Prior to January 1, 2009, we excluded the unvested shares from the basic EPS calculation and included them using the treasury stock method in diluted EPS. Effective January 1, 2009, we adopted the new accounting standard and have calculated EPS for all periods presented under the two-class method. The two-class method is an earnings allocation methodology whereby EPS for each class of common stock and participating securities is calculated according to dividends declared and participation rights in undistributed earnings. The implementation did not result in a significant change to basic or diluted EPS for all periods presented.

Effective January 1, 2009, we adopted a new accounting standard which clarifies the accounting for certain transactions and impairment considerations involving equity method investments. The new accounting standard clarifies 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. The standard was effective on a prospective basis beginning on January 1, 2009, and did not have a material impact on our financial position, results of operations, or cash flows.

During the quarter ended June 30, 2009, we adopted a new accounting standard which requires disclosure regarding the fair value of financial instruments for interim reporting periods. The adoption resulted in additional disclosures in our quarterly financial statements.

During the quarter ended June 30, 2009, we adopted a new accounting standard which establishes general standards of accounting and disclosure of events that occur after the balance sheet date but before the financial statements are issued or available to be issued and requires disclosure of the date through which subsequent events have been evaluated. We have added disclosure in Note 1 under “Principles of Consolidation and Estimates” to the consolidated financial statements in this Form 10-K regarding the date through which we have evaluated subsequent events.

Recently Issued Accounting Pronouncements

In June 2009, the FASB issued a new accounting standard which provides certain changes to the evaluation of a VIE including requiring a qualitative rather than quantitative analysis to determine the primary beneficiary of a VIE, continuous assessments of whether an enterprise is the primary beneficiary of a VIE, and enhanced disclosures about an enterprise’s involvement with a VIE. The standard is effective January 1, 2010, and is applicable to all entities in which an enterprise has a variable interest. We are currently evaluating the impact this standard will have on our consolidated financial statements.

Property Acquisitions and Dispositions

2009 Significant Transactions

On June 26, 2009, one of our tenants acquired from us our fee interest in a land parcel in White Marsh, Maryland, that was subject to a long-term ground lease. The ground lease included an option for the tenant to purchase the fee interest. The sales price was $2.1 million and resulted in a gain of $0.4 million.

On October 16, 2009, we acquired 16.6 acres of riverfront property at Assembly Square in Somerville, Massachusetts, for use in future development, in exchange for the sale of 12.4 acres of adjacent inland land, $3 million in cash, and the assumption of a $5 million liability. The purchase price of the riverfront parcel was determined to be $33.1 million based on current fair value calculations. The sale of the inland land resulted in no gain or loss on sale as the fair value of the consideration exchanged equaled the cost basis of the land sold. The land we acquired is included in “construction–in-progress” in the accompanying consolidated balance sheet as of December 31, 2009 and the historical basis in the land we sold in 2009 is classified as “assets held for sale” in the accompanying consolidated balance sheet as of December 31, 2008.

2008 Significant Transactions

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


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

		Total	331,000	$	133.1

(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. 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.

A summary of our significant dispositions in 2008 is as follows:


Sale Date	Property	Location	Year Acquired or Built	Gross Leasable Area		Sales Price		Gain
				(In square feet)		(In millions)
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

(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.

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 substantially 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 “Gain on sale of real estate from discontinued operations” 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 Provision

In May 2003, a breach of contract action was filed against us alleging that a one page document entitled “Final Proposal” constituted a ground lease of a parcel of property located adjacent to our Santana Row property and gave the plaintiff the option to require that we acquire the property at a price determined in accordance with a formula included in the “Final Proposal.” The “Final Proposal” explicitly stated that it was subject to approval of the terms and conditions of a formal agreement. A trial as to liability only was held in June 2006 and a jury rendered a verdict against us. A trial on the issue of damages was held in April 2008 and the court issued a tentative ruling in April 2009 awarding damages to the plaintiff of approximately $14.4 million plus interest.

Based on this tentative ruling, we estimated interest could range from $2.1 million to $8.4 million. Accordingly, considering all the information available to us on May 6, 2009, when we filed our Form 10-Q for the three months ended March 31, 2009, our best estimate of damages, interest, and other costs was $21.4 million.

Accordingly, we increased our accrual for the matter from $0.8 million at December 31, 2008, to $21.4 million at March 31, 2009. In June 2009, the court issued a final judgment awarding damages of $15.9 million (including

interest) plus costs of suit. In July 2009, we and the plaintiff both filed a notice of appeal. The plaintiff also filed reimbursement motions for $2.1 million of legal fees, expert fees, and court costs of which $1.9 million was subsequently denied. In December 2009, the plaintiff filed an “appellee’s principal and response brief” providing additional information regarding the issues the plaintiff is appealing. The plaintiff’s appeal included only the denial of expert fees which totals approximately $0.4 million. Given the additional information regarding the appeal, we lowered our accrual to $16.4 million, which reflects our best estimate of the litigation liability. The net increase in our accrual of $15.6 million is included in “litigation provision” in our consolidated statement of operations, and the $16.4 million accrual is included in the “accounts payable and accrued expenses” line item in our consolidated balance sheet as of December 31, 2009. During 2009, we incurred additional legal and other costs related to this lawsuit and appeal process which are also included in the “litigation provision” line item in the consolidated statement of operations.

We expect oral arguments on the appeal to be scheduled for later in 2010. All judgments will be stayed until completion of the appeals. Furthermore, we continue to believe that the “Final Proposal” which included express language that it was subject to formal documentation was not a binding contract and that we should have no liability whatsoever, and will vigorously defend our position as part of the appeal process.

2009 Significant Debt and Equity Transactions

On January 5, 2009, we repaid the $4.4 million mortgage loan on a small portion of Mercer Mall which had an original maturity date of April 1, 2009. This loan was repaid with funds borrowed on our $300 million revolving credit facility.

On various dates from January 12, 2009 to April 1, 2009, we purchased and retired $11.1 million of our 8.75% senior notes which had an original maturity date of December 1, 2009. These notes were repaid with funds borrowed on our $300 million revolving credit facility.

On April 14, 2009, we closed on a $24.1 million, ten year loan secured by Rollingwood Apartments in Silver Spring, Maryland. The loan bears interest at 5.54% and matures on May 1, 2019.

On May 4, 2009, we refinanced our then existing $200 million term loan with a new $372 million term loan which bears interest at LIBOR, subject to a 1.50% floor, plus 300 basis points and matures on July 27, 2011. The $200 million term loan and the $135 million outstanding balance on our revolving credit facility were repaid with the proceeds from the new $372 million term loan.

On June 4, 2009, we closed on a $139.0 million, five year loan secured by Idylwood Plaza, Loehmann’s Plaza, Leesburg Plaza and Pentagon Row. The loan bears interest at 7.50% and matures on June 5, 2014.

Also on June 4, 2009, we completed a cash tender offer for our 8.75% senior notes due December 1, 2009.

Approximately $40.3 million of notes were purchased and retired at a 2% premium to par value resulting in a net loss on early extinguishment of approximately $1.0 million including costs of the transaction; this amount is included in “early extinguishment of debt” in the consolidated statement of operations. The notes were repaid with funds from our term loan.

On August 13, 2009, we issued $150.0 million of fixed rate senior notes that mature on August 15, 2014 and bear interest at 5.95%. The net proceeds from this note offering after issuance discounts, underwriting fees and other costs were $147.5 million.

On August 14, 2009, we issued 2.0 million common shares at $57.50 per share, for cash proceeds of approximately $110.0 million net of expenses of the offering.

On October 27, 2009 and December 21, 2009, we repaid $100 million and $22 million, respectively, of our term loan. The term loan has an original maturity date of July 27, 2011, however, the loan agreement includes an

option to prepay the loan, in whole or in part, at any time without premium or penalty. Due to these repayments, approximately $1.7 million of unamortized debt fees were recorded as additional interest expense in 2009 and are included in “early extinguishment of debt” in the consolidated statement of operations. The term loan was partially repaid using available cash from the 2009 debt and equity issuances.

On December 1, 2009, we repaid the remaining $123.6 million of our 8.75% senior notes on its original maturity date using available cash from the 2009 debt financings.

Also, on December 1, 2009, we repaid our 30% share of two mortgage loans of our partnership with a discretionary fund created and advised by ING Clarion Partners. Our share of the repayment was $7.0 million (or $23.4 million in total) on the mortgage loans for two properties.

Outlook

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

	•		growth in our portfolio from property redevelopments,

	•		expansion of our portfolio through property acquisitions, and

	•		growth in our same-center portfolio.

Our properties are located in densely populated or affluent areas with high barriers to entry which allow us to take advantage of redevelopment opportunities that enhance our operating performance through renovation, expansion, reconfiguration, and/or retenanting. We evaluate our properties on an ongoing basis to identify these types of opportunities and believe that the decrease in occupancy we have experienced beginning in 2008 as a result of the economic recession will provide future redevelopment opportunities that may not otherwise have been available. In 2010 and 2011, we expect to have redevelopment projects stabilizing with projected costs of approximately $28 million and $53 million, respectively.

Additionally, in October 2009, we completed a land exchange at Assembly Square whereby we now own 16.6 acres of fully entitled riverfront property for the proposed development of Assembly Square. The development at Assembly Square is a long-term development project which we expect to be involved in over the coming years. The project currently has zoning entitlements to add 2.3 million square feet of commercial-use buildings, 2,100 residential units, and a 200 room hotel. We expect that we will structure any future development in a manner designed to mitigate our risk which may include selling entitlements or co-developing with other real estate companies. Beginning in 2009 and continuing into 2010, we will be completing certain infrastructure work as well as continuing our current predevelopment work. We expect to receive approximately $10 million in public funding related to the infrastructure work we are completing and we expect the state will complete certain additional infrastructure work using government stimulus funds. We expect to incur between $10 million and $30 million related to the development in 2010, net of expected bond proceeds.

We continue to review acquisition opportunities in our primary markets that complement our portfolio and provide long term opportunities. 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. Generally, our acquisitions are initially financed by available cash and/or 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 shares, preferred shares, or downREIT units as well as through the assumption of mortgages.

Our same-center growth is primarily driven by increases in rental rates on new leases and lease renewals and changes in portfolio occupancy. Over the long-term, the infill nature and strong demographics of our properties provide a strategic advantage allowing us to maintain relatively high occupancy and increase rental rates. The current economic environment may, however, impact our ability to increase rental rates in the short-term and may require us to decrease some rental rates in the short-term. This will have a long-term impact over the contractual term of the lease agreement, which on average is between five and ten years. As a result of the current economic environment, occupancy declined 1.1% during 2009. We expect to continue to see small changes in occupancy over the short term and expect increases in occupancy to be a driver of our same-center growth over the long term as we are able to release these vacant spaces. We seek to maintain a mix of strong national, regional, and local retailers. At December 31, 2009, no single tenant accounted for more than 2.6% of annualized base rent.

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 mitigate the negative impact of the economic environment, we may continue to see an increase in vacancy that will have a negative impact on our revenue and bad debt expense. We continue to monitor our tenants’ operating performances as well as trends in the retail industry to evaluate any future impact.

At December 31, 2009, the leasable square feet in our properties was 93.2% occupied and 94.5% 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 redevelopment or expansion occurred during either of the periods being compared and properties classified as discontinued operations.

YEAR ENDED DECEMBER 31, 2009 COMPARED TO YEAR ENDED DECEMBER 31, 2008


										Change
	2009				2008				Dollars				%
	(Dollar amounts in thousands)
Rental income		$	513,220			$	501,627			$	11,593			2.3	%
Other property income			12,856				14,013				(1,157	)		-8.3	%
Mortgage interest income			4,943				4,548				395			8.7	%

Total property revenue			531,019				520,188				10,831			2.1	%

Rental expenses			108,806				109,718				(912	)		-0.8	%
Real estate taxes			58,173				55,481				2,692			4.9	%

Total property expenses			166,979				165,199				1,780			1.1	%

Property operating income			364,040				354,989				9,051			2.5	%
Other interest income			1,894				916				978			106.8	%
Income from real estate partnership			1,322				1,612				(290	)		-18.0	%
Interest expense			(108,781	)			(99,163	)			(9,618	)		9.7	%
Early extinguishment of debt			(2,639	)			—				(2,639	)		100	%
General and administrative expense			(22,032	)			(26,732	)			4,700			-17.6	%
Litigation provision			(16,355	)			—				(16,355	)		100	%
Depreciation and amortization			(115,093	)			(111,022	)			(4,071	)		3.7	%

Total other, net			(261,684	)			(234,389	)			(27,295	)		11.6	%

Income from continuing operations			102,356				120,600				(18,244	)		-15.1	%
Income from discontinued operations			218				1,981				(1,763	)		-89.0	%
Gain on sale of real estate from discontinued operations			1,298				12,572				(11,274	)		-89.7	%

Net income			103,872				135,153				(31,281	)		-23.1	%
Net income attributable to noncontrolling interests			(5,568	)			(5,366	)			(202	)		3.8	%

Net income attributable to the Trust		$	98,304			$	129,787			$	(31,483	)		-24.3	%

Property Revenues

Total property revenue increased $10.8 million, or 2.1%, to $531.0 million in 2009 compared to $520.2 million in 2008. The percentage occupied at our shopping centers decreased to 93.2% at December 31, 2009 compared to 94.3% at December 31, 2008. 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 $11.6 million, or 2.3%, to $513.2 million in 2009 compared to $501.6 million in 2008, due primarily to the following:

	•		an increase of $7.0 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,

	•		an increase of $4.8 million attributable to properties acquired in 2008, and

	•		an increase of $0.8 million at same-center properties due to increased rental rates on new and renewal leases and increased temporary tenant income partially offset by lower occupancy, percentage rent and recoveries,

partially offset by

	•		a decrease of $1.1 million as a result of having demolished an operating property in 2008 for use in future development.

Other Property Income

Other property income decreased $1.2 million, or 8.3%, to $12.9 million in 2009 compared to $14.0 million in 2008. 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 2009, the decrease is primarily due to a decrease in lease termination fees partially offset by an increase in income from our restaurant joint ventures.

Property Expenses

Total property expenses increased $1.8 million, or 1.1%, to $167.0 million in 2009 compared to $165.2 million in 2008. Changes in the components of property expenses are discussed below.

Rental Expenses

Rental expenses decreased $0.9 million, or 0.8%, to $108.8 million in 2009 compared to $109.7 million in 2008. This decrease is due primarily to the following:

	•		a decrease of $1.4 million in ground rent expense at same-center properties due primarily to the acquisition of the fee interest in two land parcels at Bethesda Row in 2008,

	•		a decrease of $1.1 million in marketing expense at same-center and redevelopment properties, primarily due to costs related to Arlington East (Bethesda Row) which opened during 2008,

	•		a decrease of $0.7 million in insurance expense at same-center properties, and

	•		a decrease of $0.3 million in payroll expense at same-center and redevelopment properties,

partially offset by

	•		an increase of $2.0 million in repairs and maintenance at same-center and redevelopment properties primarily due to higher snow removal costs, and

	•		an increase of $0.9 million attributable to properties acquired in 2008,

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 decreased to 20.7% in 2009 from 21.3% in 2008.

Real Estate Taxes

Real estate tax expense increased $2.7 million, or 4.9%, to $58.2 million in 2009 compared to $55.5 million in 2008. This increase is due primarily to an increase of $1.8 million related to higher assessments at redevelopment properties and $0.8 million related to properties acquired in 2008.

Property Operating Income

Property operating income increased $9.1 million, or 2.5%, to $364.0 million in 2009 compared to $355.0 million in 2008. As discussed above, this increase is due primarily to growth in earnings at redevelopment properties, earnings attributable to properties acquired in 2008, partially offset by lower earnings in our same-center portfolio as discussed above.

Other

Other Interest Income

Other interest income increased $1.0 million to $1.9 million in 2009 compared to $0.9 million in 2008. This increase is due primarily to investing the funds from our second quarter and August 2009 debt and equity transactions on a short-term basis in money market and other highly liquid investments while we evaluate the current environment to determine the best use of the proceeds in addition to repaying the 8.75% senior notes that matured in December 2009 and paying down the term loan in October and December 2009.

Interest Expense

Interest expense increased $9.6 million, or 9.7%, to $108.8 million in 2009 compared to $99.2 million in 2008. This increase is primarily due to the following:

	•		an increase of $10.4 million due to higher borrowings,

partially offset by

	•		a decrease of $0.6 million due to a lower overall weighted average borrowing rate, and

	•		an increase of $0.2 million in capitalized interest.

Gross interest costs were $114.3 million and $104.5 million in 2009 and 2008, respectively. Capitalized interest amounted to $5.5 million and $5.3 million in 2009 and 2008, respectively.

Early Extinguishment of Debt

The $2.6 million early extinguishment of debt in 2009 consists of $1.7 million due to the write-off of unamortized debt fees related to the $122 million pay down of the term loan in the fourth quarter 2009 and $1.0 million related to a cash tender offer for $40.3 million of our 8.75% senior notes due December 1, 2009, which were purchased and retired at a 2% premium to par value.

General and Administrative Expense

General and administrative expense decreased $4.7 million, or 17.6%, to $22.0 million in 2009 from $26.7 million in 2008. The decrease is primarily due to a $1.6 million litigation settlement in 2008 related to a shopping center in New Jersey, $1.5 million lower legal fees related to litigation over a parcel of land located adjacent to Santana Row and other legal matters, and overall cost reduction efforts partially offset by expensing previously capitalized predevelopment costs.

Litigation Provision

The $16.4 million litigation provision in 2009 is due to increasing the accrual for litigation regarding a parcel of land located adjacent to Santana Row as well as other costs related to the litigation and appeal process. See Note 8 to the consolidated financial statements in this Form 10-K for further discussion on the litigation.

Depreciation and Amortization

Depreciation and amortization expense increased $4.1 million, or 3.7%, to $115.1 million in 2009 from $111.0 million in 2008. This increase is due primarily to capital improvements at same-center and redevelopment

properties and 2008 acquisitions as well as accelerated depreciation for tenant improvements where the tenant vacated prior to the end of their lease term. This increase is partially offset by accelerated depreciation in 2008 related to the change in use of a redevelopment building which was later demolished.

Income from Discontinued Operations

Income from discontinued operations represents the operating 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 $0.2 million and $2.0 million in 2009 and 2008, respectively, represents the income for the period during which we owned properties sold in 2009 and 2008.

Gain on Sale of Real Estate from Discontinued Operations

The $1.3 million gain on sale of real estate from discontinued operations for 2009 consists primarily of $0.9 million in insurance proceeds received related to repairs we performed on certain condominium units sold at Santana Row as the result of defective work done by third party contractors in prior years and $0.4 million on the sale of our fee interest in a land parcel in White Marsh, Maryland, that was subject to a long-term ground lease.

The $12.6 million gain on sale of real estate from discontinued operations for 2008 is due to 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 of 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.

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


		2008			2007			Change
			Dollars			%
	(Dollar amounts in thousands)
Rental income		$	501,627		$	465,394		$	36,233		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 revenue			520,188			482,788			37,400		7.7	%

Rental expenses			109,718			99,363			10,355		10.4	%
Real estate taxes			55,481			46,783			8,698		18.6	%

Total property expenses			165,199			146,146			19,053		13.0	%

Property operating income			354,989			336,642			18,347		5.5	%
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			120,600			99,379			21,221		21.4	%
Income from discontinued operations			1,981			6,980			(4,999	)	-71.6	%
Gain on sale of real estate from discontinued operations			12,572			94,768			(82,196	)	-86.7	%

Net income			135,153			201,127			(65,974	)	-32.8	%
Net income attributable to noncontrolling interests			(5,366	)		(5,590	)		224		-4.0	%

Net income attributable to the Trust		$	129,787		$	195,537		$	(65,750	)	-33.6	%

Property Revenues

Total property revenue increased $37.4 million, or 7.7%, to $520.2 million in 2008 compared to $482.8 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 $501.6 million in 2008 compared to $465.4 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, and

	•		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 as a result of having demolished 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 $19.1 million, or 13.0%, to $165.2 million in 2008 compared to $146.1 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, and

	•		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.

Real Estate Taxes

Real estate tax expense increased $8.7 million, or 18.6%, to $55.5 million in 2008 compared to $46.8 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 $2.1 million related to properties acquired in 2008 and 2007.

Property Operating Income

Property operating income increased $18.3 million, or 5.5%, to $355.0 million in 2008 compared to $336.6 million in 2007. As discussed above, this increase is due primarily to 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, and

	•		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.

Income from Discontinued Operations

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 $2.0 million and $7.0 million in 2008 and 2007, respectively, represents the income for the period during which we owned properties sold in 2009, 2008 or 2007.

Gain on Sale of Real Estate from Discontinued Operations

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.

Liquidity and Capital Resources

Due to the nature of our business and strategy, we typically 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 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.

During 2009 in an effort to ensure availability and provide additional flexibility with our short-term capital needs, we entered into certain financing arrangements in advance of our 2009 debt maturing. In May and June 2009, we refinanced our then existing $200 million term loan with a $372 million term loan and also entered into two separate mortgage financing agreements collateralized by five of our properties for total funds of $163.1 million. We utilized these funds to repay our $200 million term loan, the $135 million outstanding balance on our revolving credit facility, and approximately $163.9 million of our 8.75% senior notes due December 1, 2009. Additionally, in August 2009, we issued $150.0 million in five-year senior notes which bear interest at 5.95% and 2.0 million common shares for combined net cash proceeds of approximately $257.5 million. As the financings completed in the second quarter 2009 provided adequate capital to fund 2009 debt maturities, the proceeds from the debt and equity offerings in August 2009 are expected to be used to fund potential acquisition opportunities, fund our redevelopment pipeline, reduce amounts outstanding on our term loan and for general corporate purposes. In the fourth quarter of 2009, we used a portion of the proceeds to repay $122 million of our term loan. The remaining funds from both the second quarter 2009 and August 2009 transactions are being invested on a short-term basis in money market and other highly liquid investments while we evaluate the current market environment and the best use for the proceeds.

Due to the refinancing of our maturing debt several months in advance of the maturity as well as additional financings in August 2009, we incurred and will continue 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 were able to use the proceeds to retire maturing debt in December 2009 or are able to invest in other long term projects. We currently believe that cash flows from operations, secured and unsecured debt financings, the August 2009 equity offering, and our revolving credit facility will be sufficient to finance our operations and fund our capital expenditures. At December 31, 2009, we have no scheduled debt maturities until 2011.

Our overall capital requirements in 2010 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. While the amount of future expenditures will depend on numerous factors, we expect to incur similar levels of capital expenditures in 2010 compared to prior periods which will be funded on a short-term basis with cash flow from operations, cash on hand, and/or the revolving credit facility, and on a long-term basis, with long-term debt or equity. Although there is no intent at this time, if market conditions 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 volatile 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 shares 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 $135.4 million at December 31, 2009, which is a $120.2 million increase from the $15.2 million balance at December 31, 2008. The significant increase is due to the cash proceeds from financings and the equity offering discussed above. We also have a $300 million unsecured revolving credit facility that matures July 27, 2011, of which we had no outstanding balance at December 31, 2009. During 2009, the maximum amount of borrowings outstanding under our revolving credit facility was $172.5 million and the weighted average amount of borrowings outstanding was $47.7 million. We expect to continue to utilize cash and our revolving credit facility to fund short-term operating needs, including capital expenditures and acquisitions.

Summary of Cash Flows for 2009 and 2008


		Year Ended December 31,
	2009				2008
	(In thousands)
Cash provided by operating activities		$	256,765			$	228,285
Cash used in investing activities			(127,341	)			(207,567	)
Cash used in financing activities			(9,258	)			(56,186	)

Increase (decrease) in cash and cash equivalents			120,166				(35,468	)
Cash and cash equivalents, beginning of year			15,223				50,691

Cash and cash equivalents, end of year		$	135,389			$	15,223

Net cash provided by operating activities increased $28.5 million to $256.8 million during the year ended December 31, 2009 from $228.3 million during the year ended December 31, 2008. The increase was primarily attributable to a $21.5 million increase in cash provided by operating activities due primarily to higher accounts payable and accrued expenses balances and lower accounts receivable balances as well as $7.0 million higher net income before non-cash expenses which includes gain on sale of real estate, litigation provision, and depreciation and amortization.

Net cash used in investing activities decreased $80.2 million to $127.3 million during the year ended December 31, 2009 from $207.6 million during the year ended December 31, 2008. The decrease was primarily attributable to:

	•		$89.1 million decrease in acquisitions of real estate as only land acquisitions occurred in 2009 compared to multiple operating property acquisitions in 2008,

	•		$35.9 million decrease in capital expenditures, and

	•		$3.8 million decrease in cash used for net issuance of mortgage and other notes receivables due primarily to the funding of a $5.5 million secured loan in 2008,

partially offset by

	•		$42.8 million decrease in proceeds from sale of real estate, and

	•		$7.0 million of contributions in 2009 to our real estate partnership which were used to repay property level debt which came due December 1, 2009.

Net cash used in financing activities decreased $46.9 million to $9.3 million during the year ended December 31, 2009 from $56.2 million during the year ended December 31, 2008. The change was primarily attributable to:

	•		$526.6 million net proceeds from the issuance of mortgages, capital leases and notes payable due substantially to the proceeds from our new $372 million term loan and $163.1 million in new mortgage loans,

	•		$147.5 million issuance of 5.95% senior notes in August 2009, and

	•		$110.0 million issuance of 2.0 million shares in August 2009,

partially offset by

	•		$318.7 million increase in repayment of mortgages and notes payable due substantially to the payoff of our $200 million term loan in May 2009, $122 million of pay-downs on our new term loan in the fourth quarter 2009, and the payoff of a loan secured by a portion of Mercer Mall in January 2009,

	•		$247.0 million increase in net repayments on our revolving credit facility which had a $0 balance at December 31, 2009,

	•		$155.1 million increase in repayment of senior notes, primarily due to the $175.9 million purchase and retirement of our 8.75% senior notes including costs related to the tender offer for the notes in June 2009, and

	•		$9.7 million increase in dividends paid to shareholders due to an increase in the dividend rate and increased number of shares outstanding.

Contractual Commitments

The following table provides a summary of our fixed, noncancelable obligations as of December 31, 2009:


		Commitments Due by Period
	Total			Less Than 1 Year			1-3 Years			3-5 Years			After 5 Years
	(In thousands)
Fixed rate debt (principal and interest)		$	1,984,301		$	102,411		$	487,662		$	691,644		$	702,584
Capital lease obligations (principal and interest)			176,421			5,590			11,189			11,204			148,438
Variable rate debt (principal only)(1)			259,400			—			250,000			—			9,400
Operating leases			197,790			3,125			6,211			6,104			182,350
Real estate commitments			95,987			—			7,204			—			88,783
Development and redevelopment obligations			37,632			35,333			2,244			55			—
Contractual operating obligations			13,664			8,644			4,577			443			—

Total contractual obligations		$	2,765,195		$	155,103		$	769,087		$	709,450		$	1,131,555

(1)	Variable rate debt includes our term loan that bears interest at LIBOR, subject to a 1.50% floor, plus 300 basis points and had a rate of 4.50% at December 31, 2009. Using this rate, the annual interest expense

	would be approximately $11.4 million. In addition, variable rate debt includes a $9.4 million bond that had an interest rate of 0.379% at December 31, 2009 and our revolving credit facility, which currently has no outstanding balance, that bears interest at LIBOR plus 0.425%.

In addition to the amounts set forth in the table above and other liquidity requirements previously discussed, 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, 2009, our estimated liability upon exercise of the put option would range from approximately $38 million to $44 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 10% partnership interest at a formula price based upon property operating income. The purchase price for the partnership interest 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 partnership interest upon the same terms.

(c) Under the terms of various other partnership agreements, 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, 2009, a total of 371,260 operating units are outstanding.

(d) At December 31, 2009, we had letters of credit outstanding of approximately $10.7 million which are collateral for existing indebtedness and other obligations of the Trust.

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%. We hold a general partnership interest, however, Clarion has substantive participating rights and we cannot make significant decisions without Clarion’s approval. Accordingly, we account for our interest in the Partnership using the equity method. As of December 31, 2009, the Partnership owned seven retail real estate properties. 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. The Partnership is subject to a buy-sell provision which is customary in real estate joint venture agreements and the industry. Either partner may initiate these provisions at any time which could result in either the sale of our interest or the use of available cash or borrowings to acquire Clarion’s interest. At December 31, 2009 and 2008, the Partnership had $57.8 million and $81.4 million, respectively, of mortgages payable outstanding and our investment in the Partnership was $35.6 million and $29.3 million, respectively.

Other than the joint venture described above and items disclosed in the Contractual Commitments Table, we have no off-balance sheet arrangements as of December 31, 2009 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.

Debt Financing Arrangements

The following is a summary of our total debt outstanding as of December 31, 2009:


Description of Debt	Original Debt Issued	Principal Balance as of December 31, 2009			Stated Interest Rate as of December 31, 2009		Maturity Date
	(Dollars in thousands)
Mortgages payable(1)
Secured fixed rate
Federal Plaza	36,500	$	32,536		6.750	%	June 1, 2011
Tysons Station	7,000		5,898		7.400	%	September 1, 2011
Courtyard Shops	Acquired		7,518		6.870	%	July 1, 2012
Bethesda Row	Acquired		19,995		5.370	%	January 1, 2013
Bethesda Row	Acquired		4,304		5.050	%	February 1, 2013
White Marsh Plaza(2)	Acquired		9,859		6.040	%	April 1, 2013
Crow Canyon	Acquired		20,816		5.400	%	August 11, 2013
Idylwood Plaza	16,910		16,792		7.500	%	June 5, 2014
Leesburg Plaza	29,423		29,219		7.500	%	June 5, 2014
Loehmann’s Plaza	38,047		37,783		7.500	%	June 5, 2014
Pentagon Row	54,619		54,240		7.500	%	June 5, 2014
Melville Mall(3)	Acquired		23,782		5.250	%	September 1, 2014
THE AVENUE at White Marsh	Acquired		58,939		5.460	%	January 1, 2015
Barracks Road	44,300		40,639		7.950	%	November 1, 2015
Hauppauge	16,700		15,320		7.950	%	November 1, 2015
Lawrence Park	31,400		28,805		7.950	%	November 1, 2015
Wildwood	27,600		25,319		7.950	%	November 1, 2015
Wynnewood	32,000		29,355		7.950	%	November 1, 2015
Brick Plaza	33,000		30,053		7.415	%	November 1, 2015
Rollingwood Apartments	24,050		23,880		5.540	%	May 1, 2019
Shoppers’ World	Acquired		5,733		5.910	%	January 31, 2021
Mount Vernon(4)	13,250		11,298		5.660	%	April 15, 2028
Chelsea	Acquired		7,952		5.360	%	January 15, 2031

Subtotal			540,035
Net unamortized discount			(426	)

Total mortgages payable			539,609

Notes payable
Unsecured fixed rate
Other	2,221		1,400		6.50	%	April 1, 2012
Perring Plaza renovation	3,087		945		10.000	%	January 31, 2013
Unsecured variable rate
Revolving credit facility(5)	300,000		—		LIBOR + 0.425	%	July 27, 2011
Term loan(6)	372,000		250,000		LIBOR + 3.000	%	July 27, 2011
Escondido (Municipal bonds)(7)	9,400		9,400		0.379	%	October 1, 2016

Total notes payable			261,745

Senior notes and debentures
Unsecured fixed rate
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
5.95% notes	150,000		150,000		5.950	%	August 15, 2014
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	50,000		29,200		7.480	%	August 15, 2026
6.82% medium term notes	40,000		40,000		6.820	%	August 1, 2027

Subtotal			929,200
Net unamortized premium			1,019

Total senior notes and debentures			930,219

Capital lease obligations
Various			62,275		Various		2028 through 2106

Total debt and capital lease obligations		$	1,793,848

(1)	Mortgages payable do not include our 30% share ($17.3 million) of the $57.8 million debt of the Partnership with a discretionary fund created and advised by ING Clarion Partners.

(2)	The interest rate of 6.04% 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%.

(3)	We acquired control of Melville Mall through a 20-year master lease and secondary financing. Because we control this property and retain 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 our legal obligation.

(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 maximum amount drawn under our revolving credit facility during 2009 was $172.5 million and the weighted average effective interest rate, before amortization of debt fees, was 1.37%. The revolving credit facility was scheduled to mature on July 27, 2010, subject to a one-year extension at our option. On January 28, 2010, we delivered notice to our lender exercising our option to extend the maturity date one year to July 27, 2011.

(6)	The term loan bears interest at LIBOR, subject to a 1.5% floor, plus 300 basis points. The weighted average effective interest rate, before amortization of debt fees, was 4.62% for the period from the inception of the loan of May 4, 2009 through December 31, 2009.

(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.

Our revolving credit facility, term loan, and other debt agreements include financial and other covenants that may limit our operating activities in the future. As of December 31, 2009, 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 revolving 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 default 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, 2009:


	Unsecured			Secured		Capital Lease		Total
	(In thousands)
2010	$	868		$	9,860	$	1,308	$	12,036
2011		325,720	(1)		47,571		1,399		374,690
2012		175,727			17,380		1,500		194,607
2013		135,030			72,107		1,609		208,746
2014		150,000			156,364		1,725		308,089
Thereafter		403,600			236,753		54,734		695,087

	$	1,190,945		$	540,035	$	62,275	$	1,793,255	(2)

(1)	Our $300 million revolving credit facility matures on July 27, 2011. As of December 31, 2009, there is $0 drawn under this credit facility.

(2)	Total debt maturities differs from the total reported on the consolidated balance sheet due to unamortized discounts and premiums as of December 31, 2009.

Interest Rate Hedging

We had no hedging instruments outstanding during 2009. 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 and do not enter into derivative instruments for speculative purposes.

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 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 unless it is necessary for us to maintain REIT status. However, we must distribute 90% of our 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.

Effective January 1, 2009, we adopted a new accounting standard which requires us to calculate FFO per share for all periods presented using the two-class method. The two-class method is an earnings allocation methodology whereby EPS for each class of common stock and participating securities is calculated according to dividends declared and participation rights in undistributed earnings. The implementation resulted in a decrease from $3.87 to $3.85 in FFO per share for 2008 and a decrease from $3.63 to $3.62 in FFO per share for 2007.

The reconciliation of net income to FFO available for common shareholders is as follows:


	For the Year Ended December 31,
	2009			2008			2007
	(In thousands, except per share data)
Net income	$	103,872		$	135,153		$	201,127
Net income attributable to noncontrolling interests		(5,568	)		(5,366	)		(5,590	)
Gain on sale of real estate		(1,298	)		(12,572	)		(94,768	)
Depreciation and amortization of real estate assets		103,104			101,450			95,565
Amortization of initial direct costs of leases		9,821			8,771			8,473
Depreciation of joint venture real estate assets		1,388			1,331			1,241

Funds from operations		211,319			228,767			206,048
Dividends on preferred shares		(541	)		(541	)		(442	)
Income attributable to operating partnership units		974			950			1,156
Income attributable to unvested shares		(687	)		(779	)		(725	)

Funds from operations available for common shareholders(1)	$	211,065		$	228,397		$	206,037

Weighted average number of common shares, diluted(2)		60,201			59,266			56,929

Funds from operations available for common shareholders, per diluted share	$	3.51		$	3.85		$	3.62

(1)	FFO and FFO per diluted share for 2009, includes a $16.4 million charge for increasing the accrual for litigation regarding a parcel of land located adjacent to Santana Row as well as other costs related to the litigation and appeal process. See Note 8 to the consolidated financial statements in this Form 10-K for further discussion on the litigation.

(2)	The weighted average common shares used to compute FFO per diluted common share includes operating partnership units that were excluded from the computation of diluted EPS. Conversion of these operating partnership units is dilutive in the computation of FFO per diluted common share but is anti-dilutive for the computation of diluted EPS for the periods presented.

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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