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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
Certain statements in this section or elsewhere in this report may be deemed “forward-looking statements”. See “Item 1A. Risk Factors” in this report for important information regarding these forward-looking statements and certain risk and uncertainties that may affect us. 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 (“REIT”) specializing in the ownership, management, and redevelopment of high quality retail and mixed-use properties located primarily in densely populated and affluent communities in strategically selected metropolitan markets in the Northeast and Mid-Atlantic regions of the United States, as well as in California. As of December 31, 2011, we owned or had a majority interest in community and neighborhood shopping centers and mixed-use properties which are operated as 87 predominantly retail real estate projects comprising approximately 19.3 million square feet. In total, the real estate projects were 93.4% leased and 92.4% occupied at December 31, 2011. 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, 2011. In total, the joint venture properties in which we own a 30% interest were 90.9% leased and occupied at December 31, 2011. We have paid quarterly dividends to our shareholders continuously since our founding in 1962 and have increased our dividends per common share for 44 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 2 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 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, 2011 and 2010, our allowance for doubtful accounts was $17.6 million and $18.7 million, respectively. Historically, we have recognized bad debt expense between 0.4% and 1.3% of rental income and it was 0.5% in 2011 reflecting positive 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 $5.4 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, 2011 and 2010, accounts receivable include approximately $50.5 million and $45.6 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 may take into account such factors as the
historical retirement and replacement of our assets, expected redevelopments, the repairs required to maintain the condition of our assets, and general economic and real estate factors. 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 expense will be for that asset in a fiscal period, 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.
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.
Certain external and internal costs directly related to the development, redevelopment and leasing of real estate, including pre-construction costs, real estate taxes, insurance, construction costs and salaries and related costs of personnel directly involved, are capitalized. We capitalized external and internal costs related to both development and redevelopment activities of $96 million and $4 million, respectively, for 2011 and $54 million and $3 million, respectively, for 2010. We capitalized external and internal costs related to other property improvements of $46 million and $1 million, respectively, for 2011 and $39 million and $1 million, respectively, for 2010. We capitalized external and internal costs related to leasing activities of $8 million and $5 million, respectively, for 2011 and $7 million and $4 million, respectively, for 2010. The amount of capitalized internal costs for salaries and related benefits for development and redevelopment activities, other property improvements, and leasing activities were $4 million, $1 million, and $5 million, respectively, for 2011 and $3 million, $1 million, and $4 million, respectively, for 2010.
Additionally, 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 assets and liabilities acquired including land, building, improvements, leasing costs, intangibles such as in-place leases, assumed debt, and current assets and liabilities, if any. 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. We consider qualitative and quantitative factors in evaluating the likelihood of a tenant exercising a below market renewal option and include such renewal options in the calculation of in-place lease value when we consider these to be bargain renewal options. 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. Since most of our investments in real estate are wholly-owned or controlled assets which are held for use, a property with impairment indicators is first tested for impairment by comparing the undiscounted cash flows, including residual value, to the current net book value of the property. If the undiscounted cash flows are less than the net book value, the property is written down to expected fair value.
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.
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 projected to be 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.
Recently Issued Accounting Pronouncements
In May 2011, the FASB issued Accounting Standards Update (“ASU”) 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” The pronouncement was issued to provide a uniform framework for fair value measurements and related disclosures between U.S. GAAP and International Financial Reporting Standards (“IFRS”). ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements particularly for level 3 fair value measurements. This pronouncement is effective for us in the first quarter of 2012 and is not expected to have a significant impact to our consolidated financial statements.
In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income.” ASU 2011-05 eliminates the option to present components of other comprehensive income as part of the statement of shareholders’ equity and requires the presentation of components of net income and components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In December 2011, the FASB deferred the requirement to present reclassification adjustments for each component of accumulated
other comprehensive income in both net income and other comprehensive income on the face of the financial statements. These pronouncements are effective for us in the first quarter of 2012 and will not have a significant impact to our consolidated financial statements.
2011 Significant Property Acquisitions and Disposition
On January 19, 2011, we acquired the fee interest in Tower Shops located in Davie, Florida for a net purchase price of $66.1 million which included the assumption of a mortgage loan with a face amount of $41.0 million and a fair value of approximately $42.9 million. The property contains approximately 368,000 square feet of gross leasable area on 67 acres and is shadow-anchored by Home Depot and Costco. Approximately $1.2 million and $4.4 million of net assets acquired were allocated to other assets for “above market leases” and other liabilities for “below market leases”, respectively. We incurred a total of $0.4 million of acquisition costs of which $0.2 million were incurred in 2011 and are included in “general and administrative expenses” for the year ended December 31, 2011.
On July 12, 2011, we sold Feasterville Shopping Center located in Feasterville, Pennsylvania for a sales price of $20.0 million resulting in a gain of $14.8 million. The operations of this property are included in “discontinued operations” in the consolidated statements of operations for all periods presented and included in “assets held for sale/disposal” in our consolidated balance sheet as of December 31, 2010. The sale was completed as a Section 1031 tax deferred exchange transaction with the acquisition of Tower Shops.
On October 31, 2011, our Newbury Street Partnership sold its three buildings for $44.0 million. As part of the sale, we received $34.6 million of the net proceeds which included the repayment of our $11.8 million loans. Due to our earnings being recorded one quarter in arrears, we will recognize the gain on sale of $11.8 million in the first quarter 2012. See Note 5 to the consolidated financial statements for further discussion of our Newbury Street Partnership.
On December 27, 2011, we acquired an 89.9% controlling interest in Montrose Crossing, a 357,000 square foot shopping center located in Rockville, Maryland. The purchase price was $141.5 million and our 89.9% ownership interest was $127.2 million which was funded with cash and our pro-rata share of $80.0 million of new mortgage debt. We are the managing member of the entity, control all significant operating decisions, and receive approximately 89.9% of the cash flow of the entity. Therefore, we have consolidated the property and its operations effective on the acquisition date. The purchase price has been preliminarily allocated to real estate assets, debt, and noncontrolling interests. The final purchase price allocation to all acquired assets, liabilities, and noncontrolling interests will be finalized after our valuation studies are complete. We incurred approximately $2.4 million of acquisition costs which are included in “general and administrative expenses” in 2011.
On December 30, 2011, we acquired a 48.2% controlling interest in Plaza El Segundo, a 381,000 square foot shopping center located in El Segundo, California. The purchase price was $192.7 million and our 48.2% ownership interest was funded with $8.5 million of cash and the assumption of our pro-rata share of the existing $175.0 million mortgage debt. We are the managing member of the entity, control all significant operating decisions, and receive the majority of the cash flow of the entity. Therefore, we have consolidated the property and its operations effective on the acquisition date. The purchase price has been preliminarily allocated to real estate assets, debt, and noncontrolling interests. The final purchase price allocation to all acquired assets, liabilities, and noncontrolling interests will be finalized after our valuation studies are complete. We incurred approximately $1.0 million of acquisition costs which are included in “general and administrative expenses” in 2011.
On December 30, 2011, we acquired an 8.1 acre land parcel adjacent to Plaza El Segundo for a purchase price of $15.9 million. We intend to use the land parcel for future development.
2011 Significant Debt, Equity and Other Transactions
In connection with the acquisition of Tower Shops on January 19, 2011, we assumed a mortgage loan with a face amount of $41.0 million and a fair value of approximately $42.9 million. The mortgage loan bore interest at 6.52%, had a scheduled maturity on July 1, 2015 and was contractually pre-payable after June 2011 with a 3% prepayment premium. On March 24, 2011, the lender unexpectedly allowed us to repay the $41.0 million mortgage loan prior to the permitted prepayment date including the 3% prepayment premium of $1.2 million. The $0.3 million of income from early extinguishment of debt in the year ended December 31, 2011, relates to the early payoff of this loan and includes the write-off of the unamortized debt premium of $1.7 million net of the 3% prepayment premium and unamortized debt fees.
On February 15, 2011, we repaid our $75.0 million 4.50% senior notes on the maturity date.
On February 24, 2011, we entered into an at the market (“ATM”) equity program in which we may from time to time offer and sell common shares having an aggregate offering price of up to $300.0 million. We intend to use the net proceeds to fund potential acquisition opportunities, fund our development and redevelopment pipeline, repay amounts outstanding under our
revolving credit facility and/or for general corporate purposes. For the three months ended December 31, 2011, no shares were issued under the ATM equity program. For the year ended December 31, 2011, we issued 1,662,038 common shares at a weighted average price per share of $85.26 for net cash proceeds of $139.3 million and paid $2.1 million in commissions related to the sales of these common shares.
In March 2011, we paid the final judgment of $16.2 million related to a previously disclosed lawsuit regarding a parcel of land located adjacent to Santana Row. The final judgment was previously accrued and is included in “accounts payable and accrued expenses” in our consolidated balance sheet at December 31, 2010.
On April 29, 2011, we repaid the $31.7 million mortgage loan on Federal Plaza which had an original maturity date of June 1, 2011.
On June 1, 2011, we repaid the $5.6 million mortgage loan on Tysons Station which had an original maturity date of September 1, 2011.
On July 7, 2011, we replaced our existing $300.0 million revolving credit facility with a new $400.0 million unsecured revolving credit facility. This new revolving credit facility matures on July 6, 2015, subject to a one-year extension at our option, and bears interest at LIBOR plus 115 basis points. The spread over LIBOR is subject to adjustment based on our credit rating.
On November 22, 2011, we entered into a $275.0 million unsecured term loan which bears interest at LIBOR plus 145 basis points. The spread over LIBOR is subject to adjustment based on our credit rating. The loan matures on November 21, 2018 and is prepayable without penalty after three years. We entered into two interest rate swap agreements to fix the variable rate portion of our $275.0 million term loan at 1.72% from December 1, 2011 through November 1, 2018. The swap agreements effectively fixed the rate on the term loan at 3.17%. Both swaps were designated and qualified as cash flow hedges and are recorded at fair value.
In connection with the acquisition of Montrose Crossing on December 27, 2011, our joint venture that owns the property entered into an $80.0 million mortgage loan that bears interest at 4.20% and matures on January 10, 2022. As Montrose Crossing is a consolidated property, 100% of the mortgage loan is included in our consolidated balance sheet.
In connection with the acquisition of Plaza El Segundo on December 30, 2011, we assumed our pro-rata share of an existing mortgage loan with a face amount of $175.0 million and a fair value of approximately $185.6 million. As Plaza El Segundo is a consolidated property, 100% of the mortgage loan is included in our consolidated balance sheet. The mortgage loan requires monthly interest only payments through maturity, bears interest at a weighted average rate of 6.33% and matures on August 5, 2017.
Mortgage Loan Receivable Refinancing
Prior to June 30, 2011, we were the lender on a first and second mortgage loan on a shopping center and an adjacent commercial building in Norwalk, Connecticut. Our carrying amount of the loans was approximately $18.3 million. The loans were in default and foreclosure proceedings had been filed, however, we were in negotiations with the borrower to refinance the loans. On June 30, 2011, we refinanced the existing loans with a first mortgage loan which had an initial principal balance of $11.9 million, bears interest at 6.0%, and matures on June 30, 2014, subject to a one year extension option. The loan is secured by the shopping center in Norwalk, Connecticut. As part of the refinancing, we received approximately $8.7 million in cash.
Because the loans were in default, we had certain rights under the first mortgage loan agreement that gave us the ability to direct the activities that most significantly impacted the shopping center. Although we did not exercise those rights, the existence of those rights in the loan agreement resulted in the entity being a variable interest entity ("VIE"). Additionally, given our investment in both the first and second mortgage on the property, the overall decline in fair market value since the loans were initiated, and the default status of the loans, we also had the obligation to absorb losses or rights to receive benefits that could potentially be significant to the VIE. Consequently, we were the primary beneficiary of this VIE and consolidated the shopping center and adjacent building from March 30, 2010 to June 29, 2011. Our investment in the property is included in “assets held for sale/disposal” in the consolidated balance sheet at December 31, 2010 and the operations of the entity are included in “discontinued operations” for all periods presented.
In conjunction with the refinancing of the loans, we re-evaluated our status as the primary beneficiary of the VIE. Because the loan is not in default, we no longer have those certain rights that give us the ability to control the activities that most significantly impact the shopping center. Our current involvement in the property is solely as the lender on the mortgage loan with protective rights as the lender. Therefore, we are no longer the primary beneficiary and deconsolidated the entity as of
June 30, 2011. The mortgage loan receivable was recorded at its estimated fair value of $11.9 million and we recognized a $2.0 million gain on deconsolidation as part of the refinancing which is included in “discontinued operations - gain on deconsolidation of VIE” for 2011. As of December 31, 2011, the loan was performing and the carrying amount of the mortgage loan was $11.7 million which is included in “mortgage notes receivable” on the balance sheet. This amount also reflects our maximum exposure to loss related to this investment.
The change in design of the entity including the refinancing of the loan was a VIE reconsideration event. Given that the loan is no longer in default, we, as lender, do not have the power to direct the activities that most significantly impact the entity, and the additional equity investment at risk provided by the entity’s equity holders, the entity is no longer a VIE.
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 development and 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. In 2012, we expect to have redevelopment projects stabilizing with projected costs of approximately $57 million.
Additionally, we continue to invest in the development at Assembly Row which is a long-term development project we expect to be involved in over the coming years. The carrying value of the development portion of this project at December 31, 2011 is approximately $148 million. The project currently has zoning entitlements to build 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 transfers of entitlements or co-developing with other companies. In December 2011, we entered into agreements with AvalonBay Communities ("AvalonBay") for a portion of the first phase of residential and retail development at Assembly Row which will include 575 residential units (by AvalonBay) and approximately 323,000 square feet of retail space. The Massachusetts Bay Transit Authority (MBTA) will also construct the new orange line T-Stop at the property. We expect construction on Phase 1 to commence in early 2012 with stabilization in 2015. We will also continue our infrastructure work during 2012. We invested $36 million in Assembly Row in 2011 and expect to invest between $20 million and $40 million in 2012, net of expected public funding.
During 2011, we continued our predevelopment work related to the long-term redevelopment of Mid-Pike Plaza in Rockville, Maryland, which will become Pike & Rose, a long-term, multi-phased, mixed-use project. The property currently has zoning entitlements to build 1.7 million square feet of commercial-use buildings and 1.7 million square feet for residential use. Phase I of Pike & Rose involves demolition of roughly 25% of the existing GLA at Mid-Pike Plaza and construction of 493 residential units, 151,000 square feet of retail space and 79,000 square of office space. We expect construction of Phase I to commence in 2012 with stabilization in 2015/2016. We invested $7 million in Pike & Rose in 2011 and expect to invest between $15 million to $35 million in 2012.
We continue to review acquisition opportunities in our primary markets that complement our portfolio and provide long-term growth 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 new or assumed 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. This will have a long-term impact over the contractual term of the lease agreement, which on average is between five and ten years. 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 re-lease vacant spaces. We seek to maintain a mix of strong
national, regional, and local retailers. At December 31, 2011, no single tenant accounted for more than 2.5% of annualized base rent.
The current economic environment has impacted the success of certain of our tenants’ retail operations and therefore the amount of rent and expense reimbursements we receive from certain of our tenants. While we believe the locations of our centers and diverse tenant base mitigates the negative impact of the economic environment, 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. We expect our occupancy rate will remain relatively flat in the short term. Since the latter part of 2010, we have seen signs of improvement for some of our tenants as well as increased interest from prospective tenants for our retail spaces; however, there can be no assurance that these positive signs will continue. We continue to monitor our tenants’ operating performances as well as trends in the retail industry to evaluate any future impact.
At December 31, 2011, the leasable square feet in our properties was 92.4% occupied and 93.4% 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.
Same-Center
Throughout this section, we have provided certain information on a “same-center” basis. Information provided on a same-center basis includes the results of properties that we owned and operated for the entirety of both periods being compared except for properties for which significant redevelopment or expansion occurred during either of the periods being compared and properties classified as discontinued operations.
YEAR ENDED DECEMBER 31, 2011 COMPARED TO YEAR ENDED DECEMBER 31, 2010
| Change | ||||||||||||||
| 2011 | 2010 | Dollars | % | |||||||||||
| (Dollar amounts in thousands) | ||||||||||||||
| Rental income | $ | 538,701 | $ | 522,651 | $ | 16,050 | 3.1 | % | ||||||
| Other property income | 9,260 | 14,545 | (5,285 | ) | (36.3 | )% | ||||||||
| Mortgage interest income | 5,098 | 4,601 | 497 | 10.8 | % | |||||||||
| Total property revenue | 553,059 | 541,797 | 11,262 | 2.1 | % | |||||||||
| Rental expenses | 109,549 | 110,519 | (970 | ) | (0.9 | )% | ||||||||
| Real estate taxes | 60,620 | 58,663 | 1,957 | 3.3 | % | |||||||||
| Total property expenses | 170,169 | 169,182 | 987 | 0.6 | % | |||||||||
| Property operating income | 382,890 | 372,615 | 10,275 | 2.8 | % | |||||||||
| Other interest income | 218 | 256 | (38 | ) | (14.8 | )% | ||||||||
| Income from real estate partnerships | 1,808 | 1,060 | 748 | 70.6 | % | |||||||||
| Interest expense | (98,465 | ) | (101,882 | ) | 3,417 | (3.4 | )% | |||||||
| Early extinguishment of debt | 296 | (2,801 | ) | 3,097 | (110.6 | )% | ||||||||
| General and administrative expense | (28,985 | ) | (24,189 | ) | (4,796 | ) | 19.8 | % | ||||||
| Litigation provision | — | (330 | ) | 330 | (100.0 | )% | ||||||||
| Depreciation and amortization | (126,208 | ) | (118,878 | ) | (7,330 | ) | 6.2 | % | ||||||
| Total other, net | (251,336 | ) | (246,764 | ) | (4,572 | ) | 1.9 | % | ||||||
| Income from continuing operations | 131,554 | 125,851 | 5,703 | 4.5 | % | |||||||||
| Discontinued operations - income | 957 | 976 | (19 | ) | (1.9 | )% | ||||||||
| Discontinued operations - gain on deconsolidation of VIE | 2,026 | — | 2,026 | 100.0 | % | |||||||||
| Discontinued operations - gain on sale of real estate | 15,075 | 1,000 | 14,075 | 1,407.5 | % | |||||||||
| Gain on sale of real estate | — | 410 | (410 | ) | (100.0 | )% | ||||||||
| Net income | 149,612 | 128,237 | 21,375 | 16.7 | % | |||||||||
| Net income attributable to noncontrolling interests | (5,695 | ) | (5,447 | ) | (248 | ) | 4.6 | % | ||||||
| Net income attributable to the Trust | $ | 143,917 | $ | 122,790 | $ | 21,127 | 17.2 | % |
Property Revenues
Total property revenue increased $11.3 million, or 2.1%, to $553.1 million in 2011 compared to $541.8 million in 2010. The percentage occupied at our shopping centers decreased to 92.4% at December 31, 2011 compared to 93.2% at December 31, 2010. Changes in the components of property revenue are discussed below.
Rental Income
Rental income consists primarily of minimum rent, cost reimbursements from tenants and percentage rent. Rental income increased $16.1 million, or 3.1%, to $538.7 million in 2011 compared to $522.7 million in 2010 due primarily to the following:
| • | an increase of $7.8 million attributable to properties acquired in 2010 and 2011, |
| • | an increase of $5.5 million at redevelopment properties due primarily to increased occupancy at certain properties and higher rental rates on new and renewal leases, and |
| • | an increase of $2.8 million at same-center properties due primarily to higher rental rates on new and renewal leases and an increase in percentage rent partially offset by lower recovery income as a result of lower recoverable expenses (primarily snow removal costs). |
Other Property Income
Other property income decreased $5.3 million, or 36.3%, to $9.3 million in 2011 compared to $14.5 million in 2010. 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. This decrease is primarily due to a decrease in lease termination fees at redevelopment and same-center properties.
Property Expenses
Total property expenses increased $1.0 million, or 0.6%, to $170.2 million in 2011 compared to $169.2 million in 2010. Changes in the components of property expenses are discussed below.
Rental Expenses
Rental expenses decreased $1.0 million, or 0.9%, to $109.5 million in 2011 compared to $110.5 million in 2010. This decrease is primarily due to the following:
| • | a decrease of $3.5 million in bad debt expense at same-center properties, |
| • | a decrease of $1.4 million in repairs and maintenance at same-center properties primarily due to lower snow removal costs, and |
| • | a decrease of $0.8 million in ground rent due to the fourth quarter 2010 purchases of the fee interest in the land under Pentagon Row and a portion of Bethesda Row, |
partially offset by
| • | an increase of $2.1 million in marketing expense primarily due to our Assembly Row project and certain same-center properties, |
| • | an increase of $1.5 million related to properties acquired in 2010 and 2011, and |
| • | an increase of $1.1 million in other operating costs. |
As a result of the changes in rental income, other property income and rental expenses as discussed above, rental expenses as a percentage of rental income plus other property income decreased to 20.0% in 2011 from 20.6% in 2010.
Real Estate Taxes
Real estate tax expense increased $2.0 million, or 3.3% to $60.6 million in 2011 compared to $58.7 million in 2010 due primarily to properties acquired in 2010 and 2011 and higher assessments at redevelopment properties.
Property Operating Income
Property operating income increased $10.3 million, or 2.8%, to $382.9 million in 2011 compared to $372.6 million in 2010. This increase is primarily due to growth in earnings at same-center properties, properties acquired in 2010 and 2011 and redevelopment properties.
Other
Income from Real Estate Partnerships
Income from real estate partnerships increased $0.7 million, or 70.6%, to $1.8 million in 2011 compared to $1.1 million in 2010. The increase is primarily due to $0.4 million of formation and acquisition related expenses from our Newbury Street Partnership in 2010.
Interest Expense
Interest expense decreased $3.4 million, or 3.4%, to $98.5 million in 2011 compared to $101.9 million in 2010. This decrease is due primarily to the following:
| • | a decrease of $5.7 million due to a lower overall weighted average borrowing rate, and |
| • | an increase of $1.8 million in capitalized interest, |
partially offset by
| • | an increase of $4.1 million due to higher borrowings. |
Gross interest costs were $106.6 million and $108.2 million in 2011 and 2010, respectively. Capitalized interest was $8.1 million and $6.3 million in 2011 and 2010, respectively.
Early Extinguishment of Debt
The $0.3 million of income from early extinguishment of debt in 2011 is due to the write-off of unamortized debt premium net of a 3.0% prepayment premium and unamortized debt fees related to the payoff of our mortgage loan on Tower Shops prior to its contractual prepayment date. The $2.8 million early extinguishment of debt expense in 2010 is due to the write-off of unamortized debt fees related to the $250.0 million payoff of the term loan prior to its maturity date.
General and Administrative Expense
General and administrative expense increased $4.8 million, or 19.8%, to $29.0 million in 2011 from $24.2 million in 2010. This increase is due primarily to $3.4 million of transaction costs related to our December 2011 acquisitions of Montrose Crossing and Plaza El Segundo and higher personnel related costs.
Depreciation and Amortization
Depreciation and amortization expense increased $7.3 million, or 6.2%, to $126.2 million in 2011 from $118.9 million in 2010. This increase is due primarily to 2010 and 2011 acquisitions, accelerated depreciation due to the change in use of certain redevelopment buildings and capital improvements at same-center properties.
Discontinued Operations— Income
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 operating income of $1.0 million for both 2011 and 2010 primarily represents the operating income for the period during which we owned properties sold/disposed of in 2011 and 2010.
Discontinued Operations— Gain on Deconsolidation of VIE
The $2.0 million gain on deconsolidation of VIE in 2011, is the result of the refinancing of a mortgage note receivable on a shopping center in Norwalk, Connecticut, resulting in us no longer being the primary beneficiary of the VIE. See Note 4 to the consolidated financial statements for further discussion of this transaction.
Discontinued Operations—Gain on Sale of Real Estate
The $15.1 million gain on sale of real estate from discontinued operations for 2011 is primarily due to the sale of Feasterville Shopping Center on July 12, 2011. The $1.0 million gain on sale of real estate from discontinued operations for 2010 relates to the final settlement reached with the contractors responsible for performing defective work in previous years related to the work done in connection with the sale of certain condominium units at Santana Row.
Gain on Sale of Real Estate
The $0.4 million gain on sale of real estate in 2010 is due to condemnation proceeds, net of costs, at one of our Northern Virginia properties in order to expand a local road.
YEAR ENDED DECEMBER 31, 2010 COMPARED TO YEAR ENDED DECEMBER 31, 2009
| Change | ||||||||||||||
| 2010 | 2009 | Dollars | % | |||||||||||
| (Dollar amounts in thousands) | ||||||||||||||
| Rental income | $ | 522,651 | $ | 510,777 | $ | 11,874 | 2.3 | % | ||||||
| Other property income | 14,545 | 12,849 | 1,696 | 13.2 | % | |||||||||
| Mortgage interest income | 4,601 | 4,943 | (342 | ) | (6.9 | )% | ||||||||
| Total property revenue | 541,797 | 528,569 | 13,228 | 2.5 | % | |||||||||
| Rental expenses | 110,519 | 108,344 | 2,175 | 2.0 | % | |||||||||
| Real estate taxes | 58,663 | 57,866 | 797 | 1.4 | % | |||||||||
| Total property expenses | 169,182 | 166,210 | 2,972 | 1.8 | % | |||||||||
| Property operating income | 372,615 | 362,359 | 10,256 | 2.8 | % | |||||||||
| Other interest income | 256 | 1,894 | (1,638 | ) | (86.5 | )% | ||||||||
| Income from real estate partnerships | 1,060 | 1,322 | (262 | ) | (19.8 | )% | ||||||||
| Interest expense | (101,882 | ) | (108,781 | ) | 6,899 | (6.3 | )% | |||||||
| Early extinguishment of debt | (2,801 | ) | (2,639 | ) | (162 | ) | 6.1 | % | ||||||
| General and administrative expense | (24,189 | ) | (22,032 | ) | (2,157 | ) | 9.8 | % | ||||||
| Litigation provision | (330 | ) | (16,355 | ) | 16,025 | (98.0 | )% | |||||||
| Depreciation and amortization | (118,878 | ) | (114,443 | ) | (4,435 | ) | 3.9 | % | ||||||
| Total other, net | (246,764 | ) | (261,034 | ) | 14,270 | (5.5 | )% | |||||||
| Income from continuing operations | 125,851 | 101,325 | 24,526 | 24.2 | % | |||||||||
| Discontinued operations - income | 976 | 1,249 | (273 | ) | (21.9 | )% | ||||||||
| Discontinued operations - gain on sale of real estate | 1,000 | 1,298 | (298 | ) | (23.0 | )% | ||||||||
| Gain on sale of real estate | 410 | — | 410 | 100.0 | % | |||||||||
| Net income | 128,237 | 103,872 | 24,365 | 23.5 | % | |||||||||
| Net income attributable to noncontrolling interests | (5,447 | ) | (5,568 | ) | 121 | (2.2 | )% | |||||||
| Net income attributable to the Trust | $ | 122,790 | $ | 98,304 | $ | 24,486 | 24.9 | % |
Property Revenues
Total property revenue increased $13.2 million, or 2.5%, to $541.8 million in 2010 compared to $528.6 million in 2009. The percentage occupied at our shopping centers remained unchanged at 93.2% at December 31, 2010 and 2009. Changes in the components of property revenue are discussed below.
Rental Income
Rental income consists primarily of minimum rent, cost reimbursements from tenants and percentage rent. Rental income increased $11.9 million, or 2.3%, to $522.7 million in 2010 compared to $510.8 million in 2009 due primarily to the following:
| • | an increase of $8.5 million at same-center properties due primarily to higher rental rates on new and renewal leases, increased cost reimbursements, and increased temporary tenant income, |
| • | an increase of $2.6 million at redevelopment properties due primarily to increased occupancy and rental rates on new leases and higher cost reimbursements, and |
| • | an increase of $0.8 million attributable to a property acquired in 2010. |
Other Property Income
Other property income increased $1.7 million, or 13.2%, to $14.5 million in 2010 compared to $12.8 million in 2009. 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. This increase is primarily due to an increase in lease termination fees.
Property Expenses
Total property expenses increased $3.0 million, or 1.8%, to $169.2 million in 2010 compared to $166.2 million in 2009. Changes in the components of property expenses are discussed below.
Rental Expenses
Rental expenses increased $2.2 million, or 2.0%, to $110.5 million in 2010 compared to $108.3 million in 2009. This increase is primarily due to the following:
| • | an increase of $1.7 million in repairs and maintenance due primarily to snow removal costs, |
| • | an increase of $1.0 million in other operating costs at same-center properties primarily due to higher demolition costs, and |
| • | an increase of $0.6 million in utility costs, |
partially offset by
| • | a decrease of $1.4 million in ground rent due to the 2010 purchase of the fee interest in the land under Pentagon Row resulting from the settlement of certain litigation. |
As a result of the changes in rental income, other property income and rental expenses as discussed above, rental expenses as a percentage of rental income plus other property income decreased to 20.6% in 2010 from 20.7% in 2009.
Real Estate Taxes
Real estate tax expense increased $0.8 million, or 1.4% to $58.7 million in 2010 compared to $57.9 million in 2009 due primarily to annual increases in tax assessments partially offset by lower assessments and refunds of taxes at certain properties due primarily to successful tax appeals.
Property Operating Income
Property operating income increased $10.3 million, or 2.8%, to $372.6 million in 2010 compared to $362.4 million in 2009. This increase is primarily due to growth in earnings at same-center and redevelopment properties.
Other
Other Interest Income
Other interest income decreased $1.6 million, or 86.5%, to $0.3 million in 2010 compared to $1.9 million in 2009. This decrease is due primarily to decreased short-term investing. During 2009, we invested the funds from our 2009 debt and equity transactions on a short-term basis in money market and other highly liquid investments.
Income from Real Estate Partnerships
Income from real estate partnerships decreased $0.3 million, or 19.8%, to $1.1 million in 2010 compared to $1.3 million in 2009. The decrease is primarily due to $0.4 million of formation and acquisition related expenses from our Newbury Street Partnership in 2010.
Interest Expense
Interest expense decreased $6.9 million, or 6.3%, to $101.9 million in 2010 compared to $108.8 million in 2009. This decrease is due primarily to the following:
| • | a decrease of $8.2 million due to lower borrowings, and |
| • | an increase of $0.7 million in capitalized interest, |
partially offset by
| • | an increase of $2.1 million due to a higher overall weighted average borrowing rate. |
Gross interest costs were $108.2 million and $114.3 million in 2010 and 2009, respectively. Capitalized interest was $6.3 million and $5.5 million in 2010 and 2009, respectively.
Early Extinguishment of Debt
The $2.8 million early extinguishment of debt expense in 2010 is due to the write-off of unamortized debt fees related to the
$250.0 million payoff of the term loan prior to its maturity date. The $2.6 million early extinguishment of debt for 2009 consists of $1.7 million due to the write-off of unamortized debt fees related to the $122.0 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 increased $2.2 million, or 9.8%, to $24.2 million in 2010 from $22.0 million in 2009. The increase is primarily due to higher personnel related costs, higher acquisition costs as a result of expensing all transaction costs, and higher legal fees, as a result of the litigation regarding certain rights to acquire the land under Pentagon Row further discussed in Note 3 to the consolidated financial statements in this Form 10-K.
Litigation Provision
The $0.3 million litigation provision in 2010 is due to certain costs related to the litigation and appeal process over a parcel of land located adjacent to Santana Row partially offset by the adjustment of the litigation provision to $16.2 million based on the rejection of both parties appeals in February 2011. The $16.4 million litigation provision in 2009 relates to increasing the accrual as well as costs related to the litigation and appeal process for such litigation matter. See Note 9 to the consolidated financial statements in this Form 10-K for further discussion on the litigation.
Depreciation and Amortization
Depreciation and amortization expense increased $4.4 million, or 3.9%, to $118.9 million in 2010 from $114.4 million in 2009. This increase is due primarily to capital improvements at same-center and redevelopment properties and accelerated depreciation related to the change in use of certain redevelopment buildings.
Discontinued Operations— Income
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 decrease relates to a $0.4 million expense in 2010 to write down one of the properties to be sold in 2011 to fair value less cost to sell.
Discontinued Operations—Gain on Sale of Real Estate
The $1.0 million gain on sale of real estate from discontinued operations in 2010 relates to the final settlement reached with the contractors responsible for performing defective work in previous years related to the work done in connection with the sale of certain condominium units at Santana Row. 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 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.
Gain on Sale of Real Estate
The $0.4 million gain on sale of real estate in 2010 is due to condemnation proceeds, net of costs, at one of our Northern Virginia properties in order to expand a local road.
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 normal recurring operating expenses, obligations under our capital and operating leases, 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.
On February 24, 2011, we entered into an ATM equity program in which we may from time to time offer and sell common shares having an aggregate offering price of up to $300.0 million. Through December 31, 2011, we have issued 1,662,038 common shares for net cash proceeds of $139.3 million under the program.
On November 22, 2011, we entered into a $275.0 million unsecured term loan that matures on November 21, 2018 and we have an option to increase the term loan through an accordion feature to $350.0 million. In addition, we entered into two interest rate swap agreements which effectively fixed the interest rate on the loan at 3.17% through November 1, 2018.
Cash and cash equivalents increased $52.0 million to $67.8 million at December 31, 2011; however, cash and cash equivalents are not the only indicator of our liquidity. We also have a $400.0 million unsecured revolving credit facility which matures on July 6, 2015 and had no outstanding balance at December 31, 2011. In addition, we have an option to increase the credit facility through an accordion feature to $800.0 million.
For 2011, the maximum amount of borrowings outstanding under our revolving credit facility was $265.0 million, the weighted average amount of borrowings outstanding was $163.5 million and the weighted average interest rate, before amortization of debt fees, was 1.0%. Also, as of December 31, 2011, we had the capacity to issue up to $158.3 million in common shares under our ATM equity program. We have approximately $192 million of debt maturing in 2012, of which $175.0 million relates to our 6.00% senior notes that matures in July 2012. We currently believe that cash flows from operations, cash on hand, our ATM equity program and our revolving credit facility will be sufficient to finance our operations and fund our capital expenditures.
Our overall capital requirements during 2012 will depend upon acquisition opportunities, the level of improvements and redevelopments on existing properties and the timing and cost of development of Assembly Row, Pike & Rose and future phases of Santana Row. While the amount of future expenditures will depend on numerous factors, we expect to incur higher amounts in 2012 compared to those incurred in 2011 related to capital investments for development, redevelopment and existing properties as we progress with our active development pipeline. These amounts will be funded on a short-term basis with cash flow from operations, cash on hand, our revolving credit facility and/or shares issued under our ATM equity program, and on a long-term basis, with long-term debt or equity. If necessary, we may access the debt or equity capital markets to finance significant acquisitions. Given our past ability to access the capital markets, we expect debt or equity to be available to us. 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 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. |
Summary of Cash Flows
| Year Ended December 31, | |||||||
| 2011 | 2010 | ||||||
| (In thousands) | |||||||
| Cash provided by operating activities | $ | 244,711 | $ | 256,735 | |||
| Cash used in investing activities | (196,369 | ) | (187,088 | ) | |||
| Cash provided by (used in) financing activities | 3,667 | (189,239 | ) | ||||
| Increase (decrease) in cash and cash equivalents | 52,009 | (119,592 | ) | ||||
| Cash and cash equivalents, beginning of year | 15,797 | 135,389 | |||||
| Cash and cash equivalents, end of year | $ | 67,806 | $ | 15,797 |
Net cash provided by operating activities decreased $12.0 million to $244.7 million during 2011 from $256.7 million during 2010. The decrease was primarily attributable to the $16.2 million payment of the final judgment related to a previously disclosed lawsuit offset by higher net income before certain non-cash items.
Net cash used in investing activities increased $9.3 million to $196.4 million during 2011 from $187.1 million during 2010.
The increase was primarily attributable to:
| • | $53.4 million increase in capital investments, and |
| • | $46.4 million increase in acquisitions of real estate primarily due to the December 2011 Montrose Crossing acquisition, |
partially offset by
| • | $34.6 million cash received from our Newbury Street Partnership due to the sale of its properties in October 2011, |
| • | $23.7 million in proceeds from sales of real estate primarily from the sale of Feasterville Shopping Center in July 2011, |
| • | $10.5 million acquisition of a first mortgage loan in March 2010, |
| • | $10.0 million decrease in contributions to the Newbury Street Partnership due to the $16.7 million initial investment in 2010, and |
| • | $8.7 million payment received in June 2011 related to the refinancing of a mortgage loan receivable. |
Net cash provided by financing activities increased $192.9 million to $3.7 million during 2011 from $189.2 million used in 2010. The increase was primarily attributable to:
| • | $272.2 million in net proceeds from the term loan in November 2011, |
| • | $170.4 million decrease in repayment of mortgages, capital leases and notes payable due substantially to the $250.0 million payoff of our term loan in 2010 offset by the payoff of two mortgages totaling $37.4 million in 2011, and |
| • | $150.3 million increase in net proceeds from the issuance of common shares due primarily to the sale of 1.7 million shares under our ATM equity program entered into in February 2011, |
partially offset by
| • | $157.7 million increase in net repayments on our revolving credit facility, net of financing costs, |
| • | $148.5 million in net proceeds from the issuance of 5.90% senior notes in March 2010, |
| • | $75.0 million repayment of 4.50% senior notes in February 2011, and |
| • | $10.0 million in public funding received for the development at Assembly Row in April 2010. |
Contractual Commitments
The following table provides a summary of our fixed, noncancelable obligations as of December 31, 2011:
| 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) | $ | 2,589,948 | $ | 319,427 | $ | 758,614 | $ | 403,245 | $ | 1,108,662 | |||||||||
| Fixed rate debt - unconsolidated real estate partnership (principal and interest)(2) | 21,058 | 1,056 | 8,714 | 11,288 | — | ||||||||||||||
| Capital lease obligations (principal and interest) | 175,141 | 5,784 | 11,575 | 11,575 | 146,207 | ||||||||||||||
| Variable rate debt (principal only)(3) | 9,400 | — | — | 9,400 | — | ||||||||||||||
| Operating leases | 59,747 | 1,612 | 3,229 | 3,063 | 51,843 | ||||||||||||||
| Real estate commitments(4) | 67,500 | — | — | — | 67,500 | ||||||||||||||
| Development, redevelopment, and capital improvement obligations | 44,535 | 38,962 | 5,573 | — | — | ||||||||||||||
| Contractual operating obligations | 14,695 | 9,557 | 4,975 | 163 | — | ||||||||||||||
| Total contractual obligations | $ | 2,982,024 | $ | 376,398 | $ | 792,680 | $ | 438,734 | $ | 1,374,212 |
| (1) | Fixed rate debt includes our $275.0 million term loan as the rate is effectively fixed by two interest rate swap agreements. |
| (2) | Amounts reflect our share of principal and interest payments on our unconsolidated joint venture's fixed rate debt. |
| (3) | Variable rate debt includes a $9.4 million bond that had an interest rate of 0.14% at December 31, 2011 and our revolving credit facility, which currently has no outstanding balance and bears interest at LIBOR plus 1.15%. |
| (4) | A master lease on Melville Mall includes a fixed price put option requiring us to purchase the property for $5.0 million plus the assumption of the owners’ mortgage debt. The current mortgage loan matures on September 1, 2014, is expected to be refinanced at maturity, and has an outstanding contractual balance of $22.3 million at December 31, 2011. The real estate commitments currently include the fixed $5.0 million and all payments related to the current mortgage loan are included in fixed rate debt. |
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 other minority partner to purchase its 29.47% interest in Congressional Plaza at the interest’s then-current fair market value. If the other minority partner defaults in their obligation, we must purchase the full interest. Based on management’s current estimate of fair market value as of December 31, 2011, our estimated liability upon exercise of the put option would range from approximately $54 million to $64 million.
(b) Under the terms of a 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 partnership units for cash or the same number of our common shares, at our option. As of December 31, 2011, a total of 360,314 operating partnership units are outstanding.
(d) Effective December 27, 2013, the other member in Montrose Crossing has the right to require us to purchase all of its 10.1% interest in Montrose Crossing at the interest's then-current fair market value. If the other member fails to exercise its put option, we have the right to purchase its interest on or after December 27, 2021 at fair market value.
(e) Effective December 30, 2013, two of the members have the right to require us to purchase their 10.0% and 11.8% ownership interests in Plaza El Segundo at the interests' then-current fair market value. If the members fail to exercise their put options, we have the right to purchase each of their interests on or after December 30, 2026 at fair market value. Also, between January 1, 2017 and February 1, 2017, we have an option to purchase the preferred interest of another member in Plaza El Segundo. The purchase price will be the lesser of fair value or the $4.9 million stated value of the preferred interest plus any accrued and unpaid preferred returns.
(f) At December 31, 2011, we had letters of credit outstanding of approximately $15.9 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 also holds a general partnership interest and has substantive participating rights. 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, 2011, 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 this provision 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. Accounting policies for the Partnership are similar to accounting policies followed by the Trust. At December 31, 2011, our investment in the Partnership was $34.4 million and the Partnership had approximately $57.4 million of mortgages payable outstanding.
In May 2010, we formed Taurus Newbury Street JV II Limited Partnership (“Newbury Street Partnership”), a joint venture with an affiliate of Taurus Investment Holdings, LLC (“Taurus”), to acquire, operate and redevelop properties located primarily in the Back Bay section of Boston, Massachusetts. We held an 85% limited partnership interest in Newbury Street Partnership and Taurus held a 15% limited partnership interest and served as general partner. As general partner, Taurus was responsible for the operation and management of the properties, subject to our approval on major decisions. We evaluated the entity and determined it was not a VIE. Accordingly, given Taurus’ role as general partner, we accounted for our interest in Newbury
Street Partnership using the equity method.
On October 31, 2011, our Newbury Street Partnership sold its entire portfolio of three buildings for $44.0 million. As part of the sale, we received $34.6 million of the net proceeds which included the repayment of our $11.8 million loans. Due to our earnings being recorded one quarter in arrears, we will recognize the gain on sale of $11.8 million in the first quarter 2012.
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, 2011 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, 2011:
| Description of Debt | Original Debt Issued | Principal Balance as of December 31, 2011 | Stated Interest Rate as of December 31, 2011 | Maturity Date | |||||||
| (Dollars in thousands) | |||||||||||
| Mortgages payable (1) | |||||||||||
| Secured fixed rate | |||||||||||
| Courtyard Shops | Acquired | $ | 7,045 | 6.87 | % | July 1, 2012 | |||||
| Bethesda Row | Acquired | 19,993 | 5.37 | % | January 1, 2013 | ||||||
| Bethesda Row | Acquired | 4,016 | 5.05 | % | February 1, 2013 | ||||||
| White Marsh Plaza (2) | Acquired | 9,284 | 6.04 | % | April 1, 2013 | ||||||
| Crow Canyon | Acquired | 19,951 | 5.40 | % | August 11, 2013 | ||||||
| Idylwood Plaza | 16,910 | 16,276 | 7.50 | % | June 5, 2014 | ||||||
| Leesburg Plaza | 29,423 | 28,320 | 7.50 | % | June 5, 2014 | ||||||
| Loehmann’s Plaza | 38,047 | 36,621 | 7.50 | % | June 5, 2014 | ||||||
| Pentagon Row | 54,619 | 52,572 | 7.50 | % | June 5, 2014 | ||||||
| Melville Mall (3) | Acquired | 22,325 | 5.25 | % | September 1, 2014 | ||||||
| THE AVENUE at White Marsh | Acquired | 56,603 | 5.46 | % | January 1, 2015 | ||||||
| Barracks Road | 44,300 | 38,995 | 7.95 | % | November 1, 2015 | ||||||
| Hauppauge | 16,700 | 14,700 | 7.95 | % | November 1, 2015 | ||||||
| Lawrence Park | 31,400 | 27,640 | 7.95 | % | November 1, 2015 | ||||||
| Wildwood | 27,600 | 24,295 | 7.95 | % | November 1, 2015 | ||||||
| Wynnewood | 32,000 | 28,168 | 7.95 | % | November 1, 2015 | ||||||
| Brick Plaza | 33,000 | 28,757 | 7.42 | % | November 1, 2015 | ||||||
| Plaza El Segundo | Acquired | 175,000 | 6.33 | % | August 5, 2017 | ||||||
| Rollingwood Apartments | 24,050 | 23,236 | 5.54 | % | May 1, 2019 | ||||||
| Shoppers’ World | Acquired | 5,444 | 5.91 | % | January 31, 2021 | ||||||
| Montrose Crossing | 80,000 | 80,000 | 4.20 | % | January 10, 2022 | ||||||
| Mount Vernon (4) | 13,250 | 10,554 | 5.66 | % | April 15, 2028 | ||||||
| Chelsea | Acquired | 7,628 | 5.36 | % | January 15, 2031 | ||||||
| Subtotal | 737,423 | ||||||||||
| Net unamortized premium | 10,100 | ||||||||||
| Total mortgages payable | 747,523 | ||||||||||
| Notes payable | |||||||||||
| Unsecured fixed rate | |||||||||||
| Various (5) | 15,308 | 10,759 | 3.27 | % | Various through 2013 | ||||||
| Term loan (6) | 275,000 | 275,000 | LIBOR + 1.45% | November 21, 2018 | |||||||
| Unsecured variable rate | |||||||||||
| Revolving credit facility (7) | 400,000 | — | LIBOR + 1.15% | July 6, 2015 | |||||||
| Escondido (municipal bonds) (8) | 9,400 | 9,400 | 0.14 | % | October 1, 2016 | ||||||
| Total notes payable | 295,159 | ||||||||||
| Senior notes and debentures | |||||||||||
| Unsecured fixed rate | |||||||||||
| 6.00% notes | 175,000 | 175,000 | 6.00 | % | July 15, 2012 | ||||||
| 5.40% notes | 135,000 | 135,000 | 5.40 | % | December 1, 2013 | ||||||
| 5.95% notes | 150,000 | 150,000 | 5.95 | % | August 15, 2014 | ||||||
| 5.65% notes | 125,000 | 125,000 | 5.65 | % | June 1, 2016 | ||||||
| 6.20% notes | 200,000 | 200,000 | 6.20 | % | January 15, 2017 | ||||||
| 5.90% notes | 150,000 | 150,000 | 5.90 | % | April 1, 2020 | ||||||
| 7.48% debentures | 50,000 | 29,200 | 7.48 | % | August 15, 2026 | ||||||
| 6.82% medium term notes | 40,000 | 40,000 | 6.82 | % | August 1, 2027 | ||||||
| Subtotal | 1,004,200 | ||||||||||
| Net unamortized premium | 435 | ||||||||||
| Total senior notes and debentures | 1,004,635 | ||||||||||
| Capital lease obligations | |||||||||||
| Various | 63,093 | Various | Various through 2106 | ||||||||
| Total debt and capital lease obligations | $ | 2,110,410 |
| 1) | Mortgages payable do not include our 30% share ($17.2 million) of the $57.4 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 $4.4 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 the activities that most significantly impact 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 interest rate of 3.27% represents the weighted average interest rate for three unsecured fixed rate notes payable. These notes mature between April 1, 2012 and January 31, 2013. |
| 6) | We entered into two interest rate swap agreements to fix the variable rate portion of our $275.0 million term loan at 1.72% from December 1, 2011 through November 1, 2018. The swap agreements effectively fix the rate on the term loan at 3.17%. |
| 7) | The maximum amount drawn under our revolving credit facility during 2011 was $265.0 million and the weighted average effective interest rate on borrowings under our revolving credit facility, before amortization of debt fees, was 0.96%. |
| 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 Escondido Promenade 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, 2011, 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 an 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, term loan 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 scheduled principal repayments as of December 31, 2011:
| Unsecured | Secured | Capital Lease | Total | |||||||||||||
| (In thousands) | ||||||||||||||||
| 2012 | $ | 185,729 | $ | 18,444 | $ | 1,517 | $ | 205,690 | ||||||||
| 2013 | 135,030 | (1) | 73,521 | 1,624 | 210,175 | |||||||||||
| 2014 | 150,000 | 157,838 | 1,741 | 309,579 | ||||||||||||
| 2015 | — | (2) | 204,936 | 1,867 | 206,803 | |||||||||||
| 2016 | 134,400 | 2,521 | 2,002 | 138,923 | ||||||||||||
| Thereafter | 694,200 | 280,163 | 54,342 | 1,028,705 | ||||||||||||
| $ | 1,299,359 | $ | 737,423 | $ | 63,093 | $ | 2,099,875 | (3) |
| 1) | Includes the repayment of the outstanding mortgage payable balance on Mount Vernon. The lender has the option to call the loan on April 15, 2013 or any time thereafter. |
| 2) | Our $400.0 million revolving credit facility matures on July 6, 2015, subject to a one-year extension at our option. As of December 31, 2011, there was $0 drawn under this credit facility. |
| 3) | The total debt maturities differs from the total reported on the consolidated balance sheet due to the unamortized net premium or discount on certain mortgage loans, senior notes and debentures as of December 31, 2011. |
Interest Rate Hedging
We may 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.
The interest rate swaps associated with our cash flow hedges are recorded at fair value on a recurring basis. 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 the interest rate swaps associated with our cash flow hedges is recorded in other comprehensive income which is included in accumulated other comprehensive loss on our consolidated balance sheet and our consolidated statement of of shareholders' equity. Our cash flow hedges become ineffective if critical terms of the hedging instrument and the debt instrument do not perfectly match such as notional amounts, settlement dates, reset dates, calculation period and LIBOR rate. In addition, we evaluate the default risk of the counterparty by monitoring the credit worthiness of the counterparty which includes reviewing debt ratings and financial performance. However, management does not anticipate non-performance by the counterparty. If a cash flow hedge is deemed ineffective, the ineffective portion of changes in fair value of the interest rate swaps associated with our cash flow hedges is recognized in earnings in the period affected.
In November 2011, we entered into two interest rate swap agreements to fix the variable rate portion of our $275.0 million term loan at 1.72% from December 1, 2011 through November 1, 2018. The swap agreements effectively fixed the rate on the term loan at 3.17%. Both swaps were designated and qualified as cash flow hedges and were recorded at fair value. Hedge ineffectiveness did not impact earnings in 2011, and we do not anticipate it will have a significant effect in the future. We had no derivative instruments outstanding during 2010 and 2009.
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 real estate related depreciation and amortization 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 necessary for us to maintain REIT status. However, we must distribute at least 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.
Included below is a reconciliation of net income to FFO available for common shareholders. As further discussed in Note 9 to the consolidated financial statements, net income for 2010 and 2009 includes certain charges related to the litigation and appeal process over a parcel of land adjacent to Santana Row as well as adjusting the accrual for such litigation matter. Management believes FFO excluding this litigation provision provides a more meaningful evaluation of operations; while litigation is not
unusual, we believe the premise of the underlying litigation matter (see Note 9 for discussion) warrants presentation of FFO excluding the related charges.
The reconciliation of net income to FFO available for common shareholders and to FFO available to common shareholders excluding the litigation provision is as follows:
| Year Ended December 31, | |||||||||||
| 2011 | 2010 | 2009 | |||||||||
| (In thousands) | |||||||||||
| Net income | $ | 149,612 | $ | 128,237 | $ | 103,872 | |||||
| Net income attributable to noncontrolling interests | (5,695 | ) | (5,447 | ) | (5,568 | ) | |||||
| Gain on sale of real estate | (15,075 | ) | (1,410 | ) | (1,298 | ) | |||||
| Gain on deconsolidation of VIE | (2,026 | ) | — | — | |||||||
| Depreciation and amortization of real estate assets | 113,188 | 107,187 | 103,104 | ||||||||
| Amortization of initial direct costs of leases | 10,432 | 9,552 | 9,821 | ||||||||
| Depreciation of joint venture real estate assets | 1,771 | 1,499 | 1,388 | ||||||||
| Funds from operations | 252,207 | 239,618 | 211,319 | ||||||||
| Dividends on preferred shares | (541 | ) | (541 | ) | (541 | ) | |||||
| Income attributable to operating partnership units | 981 | 980 | 974 | ||||||||
| Income attributable to unvested shares | (1,071 | ) | (847 | ) | (687 | ) | |||||
| Funds from operations available for common shareholders | $ | 251,576 | $ | 239,210 | $ | 211,065 | |||||
| Litigation provision, net of allocation to unvested shares | — | 329 | 16,301 | ||||||||
| Funds from operations available for common shareholders excluding litigation provision | 251,576 | 239,539 | 227,366 | ||||||||
| Weighted average number of common shares, diluted (1) | 62,964 | 61,693 | 60,201 | ||||||||
| Funds from operations available for common shareholders, per diluted share | $ | 4.00 | $ | 3.88 | $ | 3.51 | |||||
| Litigation provision per diluted share | — | — | 0.27 | ||||||||
| Funds from operations available for common shareholders excluding litigation provision, per diluted share | $ | 4.00 | $ | 3.88 | $ | 3.78 |
| (1) | 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. |
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