e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| |
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| þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
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FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2008 |
OR
| |
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| o |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
COMMISSION FILE NUMBER: 001-31817
CEDAR SHOPPING CENTERS, INC.
(Exact name of registrant as specified in its charter)
| |
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| Maryland
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42-1241468 |
| |
(State or other jurisdiction of
incorporation or organization)
|
|
(I.R.S. Employer
Identification No.) |
| |
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|
| 44 South Bayles Avenue, Port Washington, New York 11050-3765 |
| |
| (Address of principal executive offices) (Zip Code) |
(516) 767-6492
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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| Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of
the latest practicable date: At July 31, 2008, there were 44,487,817 shares of Common Stock, $0.06
par value, outstanding.
CEDAR SHOPPING CENTERS, INC.
INDEX
2
Forward-Looking Statements
Certain statements contained in this Form 10-Q constitute forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Such forward-looking statements include, without limitation, statements containing the
words “anticipates”, “believes”, “expects”, “intends”, “future”, and words of similar import which
express the Company’s beliefs, expectations or intentions regarding future performance or future
events or trends. While forward-looking statements reflect good faith beliefs, expectations or
intentions, they are not guarantees of future performance and involve known and unknown risks,
uncertainties and other factors, which may cause actual results, performance or achievements to
differ materially from anticipated future results, performance or achievements expressed or implied
by such forward-looking statements as a result of factors outside of the Company’s control. Certain
factors that might cause such differences include, but are not limited to, the following: real
estate investment considerations, such as the effect of economic and other conditions in general
and in the Company’s market areas in particular; the financial viability of the Company’s tenants;
the continuing availability of suitable acquisitions, and development and redevelopment
opportunities, on favorable terms; the availability of equity and debt capital (including the
availability of construction financing) in the public and private markets; the availability of
suitable joint venture partners; changes in interest rates; the fact that returns from development,
redevelopment and acquisition activities may not be at expected levels or at expected times; risks
inherent in ongoing development and redevelopment projects including, but not limited to, cost
overruns resulting from weather delays, changes in the nature and scope of development and
redevelopment efforts, changes in governmental regulations related thereto, and market factors
involved in the pricing of material and labor; the need to renew leases or re-let space upon the
expiration of current leases; and the financial flexibility to repay or refinance debt obligations
when due.
3
CEDAR SHOPPING CENTERS, INC.
Consolidated Balance Sheets
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June 30, |
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December 31, |
|
| |
|
2008 |
|
|
2007 |
|
| |
|
(unaudited) |
|
|
|
|
|
Assets |
|
|
|
|
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|
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|
Real estate: |
|
|
|
|
|
|
|
|
Land |
|
$ |
369,813,000 |
|
|
$ |
315,599,000 |
|
Buildings and improvements |
|
|
1,320,355,000 |
|
|
|
1,282,180,000 |
|
|
|
|
|
|
|
|
|
|
|
1,690,168,000 |
|
|
|
1,597,779,000 |
|
Less accumulated depreciation |
|
|
(125,023,000 |
) |
|
|
(103,621,000 |
) |
|
|
|
|
|
|
|
Real estate, net |
|
|
1,565,145,000 |
|
|
|
1,494,158,000 |
|
|
|
|
|
|
|
|
|
|
Investment in unconsolidated joint venture |
|
|
4,791,000 |
|
|
|
3,757,000 |
|
|
|
|
|
|
|
|
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Cash and cash equivalents |
|
|
7,203,000 |
|
|
|
20,307,000 |
|
Restricted cash |
|
|
19,508,000 |
|
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|
17,839,000 |
|
Rents and other receivables, net |
|
|
6,920,000 |
|
|
|
7,640,000 |
|
Straight-line rents receivable |
|
|
12,927,000 |
|
|
|
11,446,000 |
|
Other assets |
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|
6,472,000 |
|
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|
9,778,000 |
|
Deferred charges, net |
|
|
31,653,000 |
|
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|
30,059,000 |
|
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|
|
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Total assets |
|
$ |
1,654,619,000 |
|
|
$ |
1,594,984,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Liabilities and shareholders’ equity |
|
|
|
|
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|
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Mortgage loans payable |
|
$ |
680,258,000 |
|
|
$ |
661,074,000 |
|
Secured revolving credit facility |
|
|
254,390,000 |
|
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|
190,440,000 |
|
Accounts payable and accrued expenses |
|
|
23,412,000 |
|
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|
26,068,000 |
|
Unamortized intangible lease liabilities |
|
|
68,722,000 |
|
|
|
71,157,000 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
1,026,782,000 |
|
|
|
948,739,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interests in consolidated joint ventures |
|
|
58,688,000 |
|
|
|
62,402,000 |
|
Limited partners’ interest in Operating Partnership |
|
|
24,414,000 |
|
|
|
25,689,000 |
|
|
|
|
|
|
|
|
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|
Shareholders’ equity: |
|
|
|
|
|
|
|
|
Preferred stock ($.01 par value, $25.00 per share
liquidation value, 12,500,000 shares authorized, 3,550,000
shares issued and outstanding) |
|
|
88,750,000 |
|
|
|
88,750,000 |
|
Common stock ($.06 par value, 150,000,000 shares authorized
44,488,000 and 44,238,000 shares, respectively, issued and
outstanding) |
|
|
2,669,000 |
|
|
|
2,654,000 |
|
Treasury stock (719,000 and 616,000 shares, respectively, at cost) |
|
|
(9,240,000 |
) |
|
|
(8,192,000 |
) |
Additional paid-in capital |
|
|
575,136,000 |
|
|
|
572,392,000 |
|
Cumulative distributions in excess of net income |
|
|
(113,185,000 |
) |
|
|
(97,514,000 |
) |
Accumulated other comprehensive income |
|
|
605,000 |
|
|
|
64,000 |
|
|
|
|
|
|
|
|
Total shareholders’ equity |
|
|
544,735,000 |
|
|
|
558,154,000 |
|
|
|
|
|
|
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Total liabilities and shareholders’ equity |
|
$ |
1,654,619,000 |
|
|
$ |
1,594,984,000 |
|
|
|
|
|
|
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|
See accompanying notes to consolidated financial statements.
4
CEDAR SHOPPING CENTERS, INC.
Consolidated Statements of Income
(unaudited)
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Three months ended June 30, |
|
Six months ended June 30, |
| |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
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|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rents |
|
$ |
34,652,000 |
|
|
$ |
30,015,000 |
|
|
$ |
69,032,000 |
|
|
$ |
58,579,000 |
|
Expense recoveries |
|
|
8,088,000 |
|
|
|
6,834,000 |
|
|
|
17,136,000 |
|
|
|
14,109,000 |
|
Other |
|
|
175,000 |
|
|
|
101,000 |
|
|
|
382,000 |
|
|
|
453,000 |
|
| |
|
|
|
|
Total revenues |
|
|
42,915,000 |
|
|
|
36,950,000 |
|
|
|
86,550,000 |
|
|
|
73,141,000 |
|
| |
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating, maintenance and management |
|
|
7,114,000 |
|
|
|
5,690,000 |
|
|
|
15,324,000 |
|
|
|
12,767,000 |
|
Real estate and other property-related taxes |
|
|
4,758,000 |
|
|
|
3,623,000 |
|
|
|
9,459,000 |
|
|
|
7,200,000 |
|
General and administrative |
|
|
2,323,000 |
|
|
|
3,220,000 |
|
|
|
4,514,000 |
|
|
|
5,218,000 |
|
Depreciation and amortization |
|
|
14,007,000 |
|
|
|
9,898,000 |
|
|
|
25,536,000 |
|
|
|
19,781,000 |
|
| |
|
|
|
|
Total expenses |
|
|
28,202,000 |
|
|
|
22,431,000 |
|
|
|
54,833,000 |
|
|
|
44,966,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
14,713,000 |
|
|
|
14,519,000 |
|
|
|
31,717,000 |
|
|
|
28,175,000 |
|
Non-operating income and expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, including amortization of
deferred financing costs |
|
|
(11,279,000 |
) |
|
|
(9,562,000 |
) |
|
|
(22,663,000 |
) |
|
|
(17,482,000 |
) |
Interest income |
|
|
77,000 |
|
|
|
223,000 |
|
|
|
235,000 |
|
|
|
498,000 |
|
Equity in income of unconsolidated joint venture |
|
|
222,000 |
|
|
|
157,000 |
|
|
|
372,000 |
|
|
|
313,000 |
|
| |
|
|
|
|
Total non-operating income and expense |
|
|
(10,980,000 |
) |
|
|
(9,182,000 |
) |
|
|
(22,056,000 |
) |
|
|
(16,671,000 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority and limited partners’ interests |
|
|
3,733,000 |
|
|
|
5,337,000 |
|
|
|
9,661,000 |
|
|
|
11,504,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interests in consolidated joint ventures |
|
|
(482,000 |
) |
|
|
(300,000 |
) |
|
|
(1,188,000 |
) |
|
|
(695,000 |
) |
Limited partners’ interest in Operating Partnership |
|
|
(56,000 |
) |
|
|
(132,000 |
) |
|
|
(199,000 |
) |
|
|
(295,000 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
3,195,000 |
|
|
|
4,905,000 |
|
|
|
8,274,000 |
|
|
|
10,514,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred distribution requirements |
|
|
(1,971,000 |
) |
|
|
(1,984,000 |
) |
|
|
(3,938,000 |
) |
|
|
(3,938,000 |
) |
| |
|
|
|
|
Net income applicable to common shareholders |
|
$ |
1,224,000 |
|
|
$ |
2,921,000 |
|
|
$ |
4,336,000 |
|
|
$ |
6,576,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
Per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.03 |
|
|
$ |
0.07 |
|
|
$ |
0.10 |
|
|
$ |
0.15 |
|
| |
|
|
|
|
Diluted |
|
$ |
0.03 |
|
|
$ |
0.07 |
|
|
$ |
0.10 |
|
|
$ |
0.15 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends to common shareholders |
|
$ |
10,003,000 |
|
|
$ |
9,942,000 |
|
|
$ |
20,007,000 |
|
|
$ |
19,871,000 |
|
| |
|
|
|
|
Per common share |
|
$ |
0.225 |
|
|
$ |
0.225 |
|
|
$ |
0.450 |
|
|
$ |
0.450 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Weighted average number of common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
44,464,000 |
|
|
|
44,194,000 |
|
|
|
44,461,000 |
|
|
|
44,153,000 |
|
| |
|
|
|
|
Diluted |
|
|
44,466,000 |
|
|
|
44,198,000 |
|
|
|
44,462,000 |
|
|
|
44,158,000 |
|
| |
|
|
|
|
See accompanying notes to consolidated financial statements.
5
CEDAR SHOPPING CENTERS, INC.
Consolidated Statement of Shareholders’ Equity
Six months ended June 30, 2008
(unaudited)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Preferred stock |
|
|
Common stock |
|
|
|
|
|
|
|
|
|
|
Cumulative |
|
|
Accumulated |
|
|
|
|
| |
|
|
|
|
|
$25.00 |
|
|
|
|
|
|
|
|
|
|
Treasury |
|
|
Additional |
|
|
distributions |
|
|
other |
|
|
Total |
|
| |
|
|
|
|
|
Liquidation |
|
|
|
|
|
|
$0.06 |
|
|
stock, |
|
|
paid-in |
|
|
in excess of |
|
|
comprehensive |
|
|
shareholders’ |
|
| |
|
Shares |
|
|
value |
|
|
Shares |
|
|
Par value |
|
|
at cost |
|
|
capital |
|
|
net income |
|
|
income |
|
|
equity |
|
| |
|
|
Balance, December 31, 2007 |
|
|
3,550,000 |
|
|
$ |
88,750,000 |
|
|
|
44,238,000 |
|
|
$ |
2,654,000 |
|
|
$ |
(8,192,000 |
) |
|
$ |
572,392,000 |
|
|
$ |
(97,514,000 |
) |
|
$ |
64,000 |
|
|
$ |
558,154,000 |
|
| |
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,274,000 |
|
|
|
|
|
|
|
8,274,000 |
|
Unrealized gain on change in fair value of cash flow hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
541,000 |
|
|
|
541,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,815,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation activity, net |
|
|
|
|
|
|
|
|
|
|
246,000 |
|
|
|
14,000 |
|
|
|
(1,048,000 |
) |
|
|
2,273,000 |
|
|
|
|
|
|
|
|
|
|
|
1,239,000 |
|
Conversion of OP Units into common stock |
|
|
|
|
|
|
|
|
|
|
4,000 |
|
|
|
1,000 |
|
|
|
|
|
|
|
40,000 |
|
|
|
|
|
|
|
|
|
|
|
41,000 |
|
Preferred distribution requirements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,938,000 |
) |
|
|
|
|
|
|
(3,938,000 |
) |
Dividends to common shareholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,007,000 |
) |
|
|
|
|
|
|
(20,007,000 |
) |
Reallocation adjustment of limited partners’ interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
431,000 |
|
|
|
|
|
|
|
|
|
|
|
431,000 |
|
| |
Balance, June 30, 2008 |
|
|
3,550,000 |
|
|
$ |
88,750,000 |
|
|
|
44,488,000 |
|
|
$ |
2,669,000 |
|
|
$ |
(9,240,000 |
) |
|
$ |
575,136,000 |
|
|
$ |
(113,185,000 |
) |
|
$ |
605,000 |
|
|
$ |
544,735,000 |
|
| |
See accompanying notes to consolidated financial statements.
6
CEDAR SHOPPING CENTERS, INC.
Consolidated Statements of Cash Flows
(unaudited)
| |
|
|
|
|
|
|
|
|
| |
|
Six months ended June 30, |
|
| |
|
2008 |
|
|
2007 |
|
Cash flow from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
8,274,000 |
|
|
$ |
10,514,000 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Non-cash provisions: |
|
|
|
|
|
|
|
|
Earnings in excess of distributions of consolidated joint venture
minority interests |
|
|
949,000 |
|
|
|
163,000 |
|
Equity in income of unconsolidated joint venture |
|
|
(372,000 |
) |
|
|
(313,000 |
) |
Distributions from unconsolidated joint venture |
|
|
434,000 |
|
|
|
265,000 |
|
Limited partners’ interest in Operating Partnership |
|
|
199,000 |
|
|
|
295,000 |
|
Straight-line rents receivable |
|
|
(1,481,000 |
) |
|
|
(1,806,000 |
) |
Depreciation and amortization |
|
|
25,536,000 |
|
|
|
19,781,000 |
|
Amortization of intangible lease liabilities |
|
|
(6,904,000 |
) |
|
|
(5,098,000 |
) |
Amortization relating to stock-based compensation |
|
|
1,341,000 |
|
|
|
1,154,000 |
|
Amortization of deferred financing costs |
|
|
799,000 |
|
|
|
729,000 |
|
Increases/decreases in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Cash at consolidated joint ventures |
|
|
(266,000 |
) |
|
|
87,000 |
|
Rents and other receivables, net |
|
|
720,000 |
|
|
|
(453,000 |
) |
Other |
|
|
267,000 |
|
|
|
(23,000 |
) |
Accounts payable and accrued expenses |
|
|
(1,142,000 |
) |
|
|
(395,000 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
28,354,000 |
|
|
|
24,900,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow from investing activities: |
|
|
|
|
|
|
|
|
Expenditures for real estate and improvements |
|
|
(50,439,000 |
) |
|
|
(92,646,000 |
) |
Purchase of consolidated joint venture minority interests |
|
|
(17,454,000 |
) |
|
|
— |
|
Investment in unconsolidated joint venture |
|
|
(1,094,000 |
) |
|
|
(8,000 |
) |
Construction escrows and other |
|
|
(1,299,000 |
) |
|
|
(474,000 |
) |
|
|
|
|
|
|
|
Net cash (used in) investing activities |
|
|
(70,286,000 |
) |
|
|
(93,128,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow from financing activities: |
|
|
|
|
|
|
|
|
Net advances from line of credit |
|
|
63,950,000 |
|
|
|
70,520,000 |
|
Proceeds from sales of common stock |
|
|
— |
|
|
|
3,910,000 |
|
Redemption of Operating Partnership Units |
|
|
(122,000 |
) |
|
|
— |
|
Proceeds from mortgage financings |
|
|
27,562,000 |
|
|
|
23,000,000 |
|
Mortgage repayments |
|
|
(40,058,000 |
) |
|
|
(4,125,000 |
) |
Contribution from minority interest partners, net |
|
|
4,269,000 |
|
|
|
1,048,000 |
|
Distributions in excess of earnings from consolidated joint venture
minority interests |
|
|
(27,000 |
) |
|
|
— |
|
Distributions to limited partners |
|
|
(913,000 |
) |
|
|
(890,000 |
) |
Preferred distribution requirements |
|
|
(3,938,000 |
) |
|
|
(3,938,000 |
) |
Distributions to common shareholders |
|
|
(20,007,000 |
) |
|
|
(19,871,000 |
) |
Payments of deferred financing costs, net |
|
|
(1,888,000 |
) |
|
|
(1,053,000 |
) |
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
28,828,000 |
|
|
|
68,601,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents |
|
|
(13,104,000 |
) |
|
|
373,000 |
|
Cash and cash equivalents at beginning of period |
|
|
20,307,000 |
|
|
|
17,885,000 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
7,203,000 |
|
|
$ |
18,258,000 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
7
Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
June 30, 2008
(unaudited)
Note 1. Organization and Basis of Preparation
Cedar Shopping Centers, Inc. (the “Company”) was organized in 1984 and elected to be taxed as
a real estate investment trust (“REIT”) in 1986. The Company focuses primarily on the ownership,
operation, development and redevelopment of supermarket-anchored shopping centers in nine
mid-Atlantic and New England states. At June 30, 2008, the Company owned 119 properties,
aggregating approximately 12.0 million square feet of gross leasable area (“GLA”).
Cedar Shopping Centers Partnership, L.P. (the “Operating Partnership”) is the entity through
which the Company conducts substantially all of its business and owns (either directly or through
subsidiaries) substantially all of its assets. At June 30, 2008 and December 31, 2007,
respectively, the Company owned 95.7% and 95.6% economic interests in, and is the sole general
partner of, the Operating Partnership. The limited partners’ interest in the Operating Partnership
(4.3% and 4.4% at June 30, 2008 and December 31, 2007, respectively) is represented by Operating
Partnership Units (“OP Units”), and the carrying amount of such interest is adjusted at the end of
each reporting period to an amount equal to the limited partners’ ownership percentage of the
Operating Partnership’s net equity. The approximately 2,020,000 OP Units outstanding at June 30,
2008 are economically equivalent to the Company’s common stock and are convertible into the
Company’s common stock at the option of the respective holders on a one-to-one basis.
The consolidated financial statements include the accounts and operations of the Company, the
Operating Partnership, its subsidiaries, and certain joint venture partnerships in which it
participates. On January 3, 2008, the Company entered into a joint venture, in which it has a 75%
general partnership interest, for the redevelopment of its shopping center and adjacent land
parcels in Bloomsburg, Pennsylvania. On March 18, 2008, the Company acquired the remaining
interests (three at 70% and one at 75%) in four properties previously owned in joint venture. On
April 23, 2008, the Company entered into a joint venture, in which it has a 60% limited partnership
interest, for the development of a shopping center in Hamilton Township (Stroudsburg),
Pennsylvania.
With respect to its ten consolidated operating joint ventures, the Company has general
partnership interests of 20% in nine properties and 75% in one property. As (i) such entities are
not variable-interest entities pursuant to the Financial Accounting Standards Board (“FASB”)
Interpretation No. 46R, “Consolidation of Variable Interest Entities” (“FIN 46R”), and as (ii) the
Company is the sole general partner and exercises substantial operating control over these entities
pursuant to Emerging Issues Task Force (“EITF”) 04-05, “Determining Whether a General Partner, or
General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited
Partners Have Certain Rights”, the Company has determined that such entities should be consolidated
for financial statement purposes. EITF 04-05 provides a framework for determining whether a general
partner controls, and should consolidate, a limited partnership or similar entity in which it owns
a minority interest.
8
Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
June 30, 2008
(unaudited)
The Company’s two 60%-owned joint ventures for development projects in Pottsgrove and
Stroudsburg, Pennsylvania, are consolidated as they are deemed to be variable interest entities and
the Company is the primary income or loss beneficiary in each case. The Company has a 76.3%
interest in an unconsolidated joint venture which owns a single-tenant office property. Although
the Company exercises influence over this joint venture, it does not have operating control; in
addition, the Company has determined that this joint venture is not a variable-interest entity
pursuant to FIN 46R. Accordingly, the Company accounts for its investment in this joint venture
under the equity method.
The accompanying interim unaudited financial statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and
footnote disclosures normally included in financial statements prepared in accordance with
accounting principles generally accepted in the United States (“GAAP”) may have been condensed or
omitted pursuant to such rules and regulations. The unaudited financial statements as of June 30,
2008 and for the three and six months ended June 30, 2008 and 2007 include, in the opinion of
management, all adjustments, consisting of normal recurring adjustments necessary to present fairly
the financial information set forth therein. The 2007 financial statements have been revised where
necessary (principally relating to discontinued operations) to conform to the 2008 presentation.
The results of operations for the three and six months ended June 30, 2008 are not necessarily
indicative of the results that may be expected for the year ending December 31, 2008. The financial
statements should be read in conjunction with the Company’s audited financial statements and the
notes thereto included in the Company’s Form 10-K for the year ended December 31, 2007.
As used herein, the “Company” refers to Cedar Shopping Centers, Inc. and its subsidiaries on a
consolidated basis, including the Operating Partnership or, where the context so requires, Cedar
Shopping Centers, Inc. only.
Note 2. Summary of Significant Accounting Policies
The accompanying financial statements are prepared on the accrual basis in accordance with
GAAP, which requires management to make estimates and assumptions that affect the disclosure of
contingent assets and liabilities, the reported amounts of assets and liabilities at the date of
the financial statements, and the reported amounts of revenue and expenses during the periods
covered by the financial statements. Actual results could differ from these estimates.
Real Estate Investments and Discontinued Operations
Real estate investments are carried at cost less accumulated depreciation. The provision for
depreciation is calculated using the straight-line method based upon the estimated useful lives
9
Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
June 30, 2008
(unaudited)
of the respective assets. Expenditures for maintenance, repairs, and betterments that do not
materially prolong the normal useful life of an asset are charged to operations as incurred.
Upon the sale or other disposition of assets, the cost and related accumulated depreciation
and amortization are removed from the accounts and the resulting gain or loss, if any, is reflected
as discontinued operations. In addition, prior periods’ financial statements would be reclassified
to eliminate the operations of sold properties. Real estate investments include costs of
development and redevelopment activities, and construction in progress. Capitalized costs,
including interest and other carrying costs during the construction and/or renovation periods, are
included in the cost of the related asset and charged to operations through depreciation over the
asset’s estimated useful life. Interest and financing costs capitalized amounted to $1,417,000 and
$985,000 for the three months ended June 30, 2008 and 2007, respectively, and $2,595,000 and
$1,865,000 for the six months ended June 30, 2008 and 2007, respectively.
The Company’s capitalization policy on its development and redevelopment properties is guided
by Statement of Financial Accounting Standards (“SFAS”) No. 34, “Capitalization of Interest Cost”
and SFAS No. 67, “Accounting for Costs and Initial Rental Operations of Real Estate Projects”. A
variety of costs are incurred in the acquisition, development and leasing of a property, such as
pre-construction costs essential to the development of the property, development costs,
construction costs, interest costs, real estate taxes, salaries and related costs, and other costs
incurred during the period of development. After determination is made to capitalize a cost, it is
allocated to the specific component of a project that is benefited. The Company ceases
capitalization on the portions substantially completed and occupied, or held available for
occupancy, and capitalizes only those costs associated with the portions under construction. The
Company considers a construction project as substantially completed and held available for
occupancy upon the completion of tenant improvements, but not later than one year from cessation of
major construction activity.
SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, requires that
management review each real estate investment for impairment whenever events or circumstances
indicate that the carrying value of a real estate investment may not be recoverable. The review of
recoverability is based on an estimate of the future cash flows that are expected to result from
the real estate investment’s use and eventual disposition. These cash flows consider factors such
as expected future operating income, trends and prospects, as well as the effects of leasing
demand, competition and other factors. If an impairment event exists due to the projected inability
to recover the carrying value of a real estate investment, an impairment loss is recorded to the
extent that the carrying value exceeds estimated fair value. No impairment provisions were recorded
by the Company during the three and six months ended June 30, 2008 and 2007, respectively. Real
estate investments held for sale are carried at the lower of their respective carrying amounts or
estimated fair values, less costs to sell. Depreciation and amortization are suspended during the
periods held for sale.
10
Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
June 30, 2008
(unaudited)
In May 2007, the Company decided to dispose of Stadium Plaza, located in East Lansing,
Michigan. The property, with 78,000 sq. ft. of GLA, was being marketed and, in accordance with SFAS
No. 144, the carrying value of the property’s assets (principally the net book value of the real
estate) was classified as “held for sale” on the Company’s consolidated balance sheets. In
addition, the property’s results of operations were classified as “discontinued operations” for all
periods presented in the consolidated statements of income. In May 2008, the Company reconsidered
its decision to sell the property and, as a result, the property has been reclassified as “held and
used”. The reclassified amounts have been adjusted for depreciation and amortization expense
(approximately $360,000) that would have been recognized had the property been continuously
classified as “held and used”.
FIN 47, “Accounting for Conditional Asset Retirement Obligations”, provides clarification of
the term “conditional asset retirement obligation” as used in SFAS No. 143, “Asset Retirement
Obligations”, to be a legal obligation to perform an asset retirement activity in which the timing
and/or method of settlement are conditional on a future event that may or may not be within the
control of the Company. The Interpretation requires that the Company record a liability for a
conditional asset retirement obligation if the fair value of the obligation can be reasonably
estimated. Environmental studies conducted at the time of acquisition with respect to all of the
Company’s properties did not reveal any material environmental liabilities, and the Company is
unaware of any subsequent environmental matters that would have created a material liability. The
Company believes that its properties are currently in material compliance with applicable
environmental, as well as non-environmental, statutory and regulatory requirements. There were no
conditional asset retirement obligation liabilities recorded by the Company during the three and
six months ended June 30, 2008 and 2007, respectively.
Intangible Lease Asset/Liability
SFAS No. 141, “Business Combinations”, and SFAS No. 142, “Goodwill and Other Intangibles”,
require that management allocate the fair value of real estate acquired to land, buildings and
improvements. In addition, the fair value of in-place leases is allocated to intangible lease
assets and liabilities.
The fair value of the tangible assets of an acquired property is determined by valuing the
property as if it were vacant, which value is then allocated to land, buildings and improvements
based on management’s determination of the relative fair values of these assets. In valuing an
acquired property’s intangibles, factors considered by management include an estimate of carrying
costs during the expected lease-up periods, such as real estate taxes, insurance, other operating
expenses, and estimates of lost rental revenue during the expected lease-up periods based on its
evaluation of current market demand. Management also estimates costs to execute similar leases,
including leasing commissions, tenant improvements, legal and other related costs.
11
Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
June 30, 2008
(unaudited)
The value of in-place leases is measured by the excess of (i) the purchase price paid for a
property after adjusting existing in-place leases to market rental rates, over (ii) the estimated
fair value of the property as if vacant. Above-market and below-market in-place lease values are
recorded based on the present value (using a discount rate which reflects the risks associated with
the leases acquired) of the difference between the contractual amounts to be received
and management’s estimate of market lease rates, measured over the non-cancelable terms of the
respective leases. The value of other intangibles is amortized to expense, and the above-market and
below-market lease values are amortized to rental income, over the remaining non-cancelable terms
of the respective leases. If a lease were to be terminated prior to its stated expiration, all
unamortized amounts relating to that lease would be recognized in operations at that time.
With respect to all of the Company’s 2008 acquisitions, including the acquisition of the
remaining interests in four properties previously owned in joint venture and consolidated for
financial reporting purposes, the fair value of in-place leases and other intangibles has been
allocated, on a preliminary basis, to the intangible asset and liability accounts. Unamortized
intangible lease liabilities relate primarily to below-market leases, and amounted to $68,722,000
and $71,157,000 at June 30, 2008 and December 31, 2007, respectively.
As a result of recording the intangible lease assets and liabilities, (i) revenues were
increased by $3,504,000 and $2,509,000 for the three months ended June 30, 2008 and 2007,
respectively, relating to the amortization of intangible lease liabilities, and (ii) depreciation
and amortization expense was increased correspondingly by $4,781,000 and $3,473,000 for the
respective three-month periods. For the six months ended June 30, 2008 and 2007, (1) revenues were
increased by $6,904,000 and $5,098,000, respectively, relating to the amortization of intangible
lease liabilities, and (2) depreciation and amortization expense was increased correspondingly by
$9,129,000 and $6,769,000 for the respective six-month periods.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash in banks and short-term investments with original
maturities of less than ninety days.
Restricted Cash
The terms of several of the Company’s mortgage loans payable require the Company to deposit
certain replacement and other reserves with its lenders. Such “restricted cash” is generally
available only for property-level requirements for which the reserve was established, is not
available to fund other property-level or Company-level obligations, and amounted to $16,260,000
and $14,857,000 at June 30, 2008 and December 31, 2007, respectively. In addition, joint venture
partnership agreements require, among other things, that the Company maintain
12
Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
June 30, 2008
(unaudited)
separate cash accounts for the operation of the joint ventures, and that distributions to the
partners be strictly controlled. Cash at consolidated joint ventures amounted to $3,248,000 and
$2,982,000 at June 30, 2008 and December 31, 2007, respectively.
Rents and Other Receivables
Management has determined that all of the Company’s leases with its various tenants are
operating leases. Rental income with scheduled rent increases is recognized using the straight-line
method over the respective terms of the leases. The aggregate excess of rental revenue recognized
on a straight-line basis over base rents under applicable lease provisions is included in
straight-line rents receivable on the consolidated balance sheet. Leases also generally contain
provisions under which the tenants reimburse the Company for a portion of property operating
expenses and real estate taxes incurred; such income is recognized in the periods earned. In
addition, certain operating leases contain contingent rent provisions under which tenants are
required to pay a percentage of their sales in excess of a specified amount as additional rent. The
Company defers recognition of contingent rental income until those specified sales targets are met.
The Company must make estimates as to the collectibility of its accounts receivable related to
base rent, straight-line rent, expense reimbursements and other revenues. Management analyzes
accounts receivable and the allowance for bad debts by considering historical bad debts, tenant
creditworthiness, current economic trends, and changes in tenants’ payment patterns when evaluating
the adequacy of the allowance for doubtful accounts receivable. The allowance for doubtful accounts
was $2,073,000 and $1,372,000 at June 30, 2008 and December 31, 2007, respectively.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk
consist primarily of cash and cash equivalents in excess of insured amounts and tenant receivables.
The Company places its cash and cash equivalents with high quality financial institutions.
Management performs ongoing credit evaluations of its tenants and requires certain tenants to
provide security deposits. Although these security deposits are insufficient to meet the terminal
value of a tenant’s lease obligations, they are a measure of good faith and a partial source to
offset the economic costs associated with lost rents and other charges, and the costs associated
with releasing the space.
Other Assets
Other assets at June 30, 2008 and December 31, 2007 are comprised of the following:
13
Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
June 30, 2008
(unaudited)
| |
|
|
|
|
|
|
|
|
| |
|
Jun 30, |
|
Dec 31, |
| |
|
2008 |
|
2007 |
| |
|
|
Prepaid expenses |
|
$ |
3,148,000 |
|
|
$ |
4,493,000 |
|
Deposits |
|
|
2,735,000 |
|
|
|
4,594,000 |
|
Other |
|
|
589,000 |
|
|
|
691,000 |
|
| |
|
|
|
|
$ |
6,472,000 |
|
|
$ |
9,778,000 |
|
| |
|
|
Deferred Charges, Net
Deferred charges at June 30, 2008 and December 31, 2007 are net of accumulated amortization
and are comprised of the following:
| |
|
|
|
|
|
|
|
|
| |
|
Jun 30, |
|
Dec 31, |
| |
|
2008 |
|
2007 |
| |
|
|
Lease origination costs (i) |
|
$ |
20,094,000 |
|
|
$ |
19,218,000 |
|
Financing costs (ii) |
|
|
8,982,000 |
|
|
|
7,941,000 |
|
Other |
|
|
2,577,000 |
|
|
|
2,900,000 |
|
| |
|
|
|
|
$ |
31,653,000 |
|
|
$ |
30,059,000 |
|
| |
|
|
|
|
|
| (i) |
|
Deferred lease origination costs include intangible lease assets resulting from
purchase accounting allocations of $14,163,000 and $14,116,000, respectively. |
| |
| (ii) |
|
Deferred financing costs are incurred in connection with the Company’s secured
revolving credit facilities and other long-term debt. |
Such costs are amortized over the terms of the related agreements. Amortization expense
related to deferred charges (including amortization of deferred financing costs included in
non-operating income and expense) amounted to $1,477,000 and $1,117,000 for the three months ended
June 30, 2008 and 2007, respectively, and $2,781,000 and $2,329,000 for the six months ended June
30, 2008 and 2007, respectively.
Income Taxes
The Company has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as
amended (the “Code”). A REIT will generally not be subject to federal income taxation on that
portion of its income that qualifies as REIT taxable income, to the extent that it distributes at
least 90% of such REIT taxable income to its shareholders and complies with certain other
requirements.
Derivative Financial Instruments
The Company occasionally utilizes derivative financial instruments, principally interest
14
Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
June 30, 2008
(unaudited)
rate swaps, to manage its exposure to fluctuations in interest rates. The Company has established
policies and procedures for risk assessment, and the approval, reporting and monitoring of
derivative financial instrument activities. The Company has not entered into, and does not plan to
enter into, derivative financial instruments for trading or speculative purposes. Additionally, the
Company has a policy of entering into derivative contracts only with major financial institutions.
At June 30, 2008, the Company had $18,919,000 of mortgage loans payable subject to interest rate
swaps which converted LIBOR-based variable rates to fixed annual rates ranging from 5.4% to 7.1%
per annum. At that date, the Company had accrued liabilities (included in accounts payable and
accrued expenses on the consolidated balance sheet) for (i) $681,000 relating to the fair value of
the interest rate swaps applicable to the existing mortgage loans payable of $18.9 million, and
(ii) $1,024,000 relating to an interest rate swap applicable to anticipated permanent financing of
$28.0 million for its development joint venture project in Stroudsburg, Pennsylvania. Charges
and/or credits relating to the changes in fair values of such interest rate swaps are made to
accumulated other comprehensive (loss) income, minority interests in consolidated joint ventures,
or limited partners’ interest, as appropriate. Total other comprehensive income was $3,929,000 and
$4,927,000 for the three months ended June 30, 2008 and 2007, respectively, and $8,815,000 and
$10,522,000 for the six months ended June 30, 2008 and 2007, respectively.
Earnings Per Share
In accordance with SFAS No. 128, “Earnings Per Share”, basic earnings per share (“EPS”) is
computed by dividing net income available to common shareholders by the weighted average number of
common shares outstanding for the period (including shares held by Rabbi Trusts). Fully-diluted EPS
reflects the potential dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into shares of common stock; such additional dilutive shares
amounted to 2,000 and 4,000 for the three months ended June 30, 2008 and 2007, respectively, and
1,000 and 5,000 for the six months ended June 30, 2008 and 2007, respectively.
Stock-Based Compensation
SFAS No. 123R, “Share-Based Payments” establishes financial accounting and reporting standards
for stock-based employee compensation plans, including all arrangements by which employees receive
shares of stock or other equity instruments of the employer, or the employer incurs liabilities to
employees in amounts based on the price of the employer’s stock. The statement also defines a fair
value-based method of accounting for an employee stock option or similar equity instrument.
The Company’s 2004 Stock Incentive Plan (the “Incentive Plan”) provides for the granting of
incentive stock options, stock appreciation rights, restricted shares, performance units and
performance shares. As amended and approved by shareholders in June 2008, the maximum
15
Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
June 30, 2008
(unaudited)
number of shares of the Company’s common stock that may be issued pursuant to the Incentive Plan is 2,750,000, and the maximum number
of shares that may be granted to a participant in
any calendar year may not exceed 250,000. Substantially all grants issued pursuant to the Incentive
Plan are “restricted stock grants” which specify vesting (i) upon the third anniversary of the date
of grant for time-based grants, or (ii) upon the completion of a designated period of performance
for performance-based grants. Time—based grants are valued according to the market price for the
Company’s common stock at the date of grant. For performance-based grants, the Company generally
engages an independent appraisal company to determine the value of the shares at the date of grant,
taking into account the underlying contingency risks associated with the performance criteria. In
February 2007, the Company issued 37,000 shares of common stock as performance-based grants, which
will vest if the total annual return on an investment in the Company’s common stock over the
three-year period ending December 31, 2009 is equal to, or greater than, an average of 8% per year.
The independent appraisal determined the value of the performance-based shares to be $10.09 per
share, compared to a market price at the date of grant of $16.45 per share. In January 2008 and
June 2008, the Company issued 52,000 shares and 7,000 shares of common stock, respectively, as
performance-based grants, which will vest if the total annual return on an investment in the
Company’s common stock over the three-year period ending December 31, 2010 is equal to, or greater
than, an average of 8% per year. The independent appraisal determined the value of the January 2008
performance-based shares to be $6.05 per share, compared to a market price at the date of grant of
$10.07 per share; similar methodology determined the value of the June 2008 performance-based
shares to be $10.31 per share, compared to a market price at the date of grant of $12.13 per share.
The additional restricted shares issued during the three and six months ended June 30, 2008 and
2007, respectively, were time-based grants. The value of such grants is being amortized on a
straight-line basis over the respective vesting periods, as adjusted for fluctuations in the market
value of the Company’s common stock, in accordance with the provisions of EITF No. 97-14,
“Accounting for Deferred Compensation Arrangements Where Amounts Earned Are Held in a Rabbi Trust
and Invested”. Those grants of restricted shares that are transferred to Rabbi Trusts are
classified as treasury stock in the Company’s consolidated balance sheet, and are accounted for
pursuant to EITF No. 97-14. The following table sets forth certain stock-based compensation
information for the three and six months ended June 30, 2008 and 2007, respectively:
16
Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
June 30, 2008
(unaudited)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended Jun 30, |
|
Six months ended Jun 30, |
| |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
| |
|
|
|
|
Restricted share grants |
|
|
27,000 |
|
|
|
39,000 |
|
|
|
246,000 |
|
|
|
179,000 |
|
Average per-share grant price |
|
$ |
11.65 |
|
|
$ |
14.35 |
|
|
$ |
9.39 |
|
|
$ |
14.52 |
|
Recorded as deferred compensation, net |
|
$ |
313,000 |
|
|
$ |
562,000 |
|
|
$ |
2,314,000 |
|
|
$ |
2,606,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charged to operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization relating to stock-based
compensation |
|
$ |
668,000 |
|
|
$ |
918,000 |
|
|
$ |
1,256,000 |
|
|
$ |
1,319,000 |
|
Adjustments to reflect changes in market
price of Company’s common stock |
|
|
(61,000 |
) |
|
|
(204,000 |
) |
|
|
85,000 |
|
|
|
(165,000 |
) |
| |
|
|
|
|
Total charged to operations |
|
$ |
607,000 |
|
|
$ |
714,000 |
|
|
$ |
1,341,000 |
|
|
$ |
1,154,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested, beginning of period |
|
|
599,000 |
|
|
|
343,000 |
|
|
|
380,000 |
|
|
|
203,000 |
|
Grants |
|
|
27,000 |
|
|
|
39,000 |
|
|
|
246,000 |
|
|
|
179,000 |
|
Vested during period |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Forfeitures |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
Non-vested, end of period |
|
|
626,000 |
|
|
|
382,000 |
|
|
|
626,000 |
|
|
|
382,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value of shares vested during the
period (based on grant price) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
| |
|
|
|
|
At June 30, 2008, 2,102,000 shares remained available for grants pursuant to the Incentive
Plan, and $3,915,000 remained as deferred compensation, to be amortized over various periods ending
in June 2011.
During 2001, pursuant to the 1998 Stock Option Plan (the “Option Plan”), the Company granted
to directors options to purchase an aggregate of approximately 13,000 shares of common stock at
$10.50 per share, the market value of the Company’s common stock on the date of the grant. The
options are fully exercisable and expire in 2011. In connection with the adoption of the Incentive
Plan, the Company agreed that it would not grant any more options under the Option Plan.
In connection with an acquisition of a shopping center in 2002, the Operating Partnership
issued warrants to purchase approximately 83,000 OP Units to a then minority interest partner in
the property. Such warrants have an exercise price of $13.50 per unit, subject to certain
anti-dilution adjustments, are fully vested, and expire in 2012.
17
Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
June 30, 2008
(unaudited)
Supplemental consolidated statement of cash flows information
| |
|
|
|
|
|
|
|
|
| |
|
Six months ended Jun 30, |
| |
|
2008 |
|
2007 |
| |
|
|
Supplemental disclosure of cash activities: |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
24,299,000 |
|
|
$ |
18,358,000 |
|
| |
Supplemental disclosure of non-cash activities: |
|
|
|
|
|
|
|
|
Additions to deferred compensation plans |
|
|
2,314,000 |
|
|
|
2,606,000 |
|
Issuance of non-interest bearing purchase money
mortgage (a) |
|
|
(14,575,000 |
) |
|
|
— |
|
Assumption of mortgage loans payable |
|
|
(18,156,000 |
) |
|
|
(42,812,000 |
) |
Assumption of interest rate swap liability |
|
|
(2,288,000 |
) |
|
|
— |
|
Issuance of OP Units |
|
|
— |
|
|
|
(18,000 |
) |
Conversion of OP Units into common stock |
|
|
41,000 |
|
|
|
45,000 |
|
Purchase accounting allocations: |
|
|
|
|
|
|
|
|
Intangible lease assets |
|
|
7,593,000 |
|
|
|
15,951,000 |
|
Intangible lease liabilities |
|
|
(4,469,000 |
) |
|
|
(7,727,000 |
) |
Net valuation decreases (increases) in non-interest
bearing purchase money mortgage and assumed
mortgage loans payable (a) |
|
|
1,051,000 |
|
|
|
(472,000 |
) |
Other non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
Accrued real estate improvement costs |
|
|
(3,031,000 |
) |
|
|
690,000 |
|
Accrued construction escrows |
|
|
(46,000 |
) |
|
|
— |
|
Accrued financing costs and other |
|
|
(46,000 |
) |
|
|
— |
|
Accrued stock issuance expenses |
|
|
— |
|
|
|
(222,000 |
) |
Capitalization of deferred financing costs |
|
|
219,000 |
|
|
|
— |
|
|
|
|
| (a) |
|
The valuation decrease in the purchase money mortgage obligation results from adjusting the
contract rate (non-interest bearing) to a market rate of 9.25% per annum. |
Recently-Issued Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”, which provides
guidance for using fair value to measure financial assets and liabilities, and clarifies the
principle that fair value should be based on the assumptions that market participants would use
when pricing assets or liabilities. The statement establishes a fair value hierarchy, giving the
highest priority to quoted prices in active markets and the lowest priority to unobservable data,
and applies whenever other standards require assets or liabilities to be measured at fair value. In
February 2008, the FASB issued FASB Staff Position No. FAS 157-2, “Effective Date of FASB Statement
No. 157”, which deferred the effective date of SFAS 157 for all nonrecurring fair value
measurements of non-financial assets and non-financial liabilities until fiscal years beginning
after November 15, 2008. The provisions of SFAS 157 applicable to recurring fair
18
Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
June 30, 2008
(unaudited)
value measurements
of financial assets and liabilities became effective January 1, 2008. The Company’s financial
assets and liabilities, other than fixed-rate mortgage loans payable, are
generally short-term in nature, or bear interest at variable current market rates, and consist
of cash and cash equivalents, restricted cash, rents and other receivables, other assets, and
accounts payable and accrued expenses. The carrying amounts of these assets and liabilities, a net
of approximately $18.4 million at June 30, 2008, are not measured at fair value on a recurring
basis but are considered to be recorded at amounts that approximate fair value due to their
short-term nature. The valuation of the liability for the Company’s interest rate swaps ($1,705,000
at June 30, 2008), was determined to be a Level 2 within the valuation hierarchy established by
SFAS 157, and was based on independent values provided by financial institutions. Accordingly, the
adoption of SFAS No. 157, as it relates to fair value measurements of financial assets and
liabilities, has not had a material effect on the Company’s consolidated financial statements.
However, the Company has not completed its evaluation of the impact of SFAS No. 157 as it relates
to fair value measurements of non-financial assets and non-financial liabilities, and the effect
that such pronouncement will have on its financial statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets
and Financial Liabilities”, which provides companies with an option to report selected financial
assets and liabilities at fair value. SFAS No. 159, which became effective for fiscal years
beginning after November 15, 2007, also establishes presentation and disclosure requirements
designed to facilitate comparisons between companies that choose different measurement attributes
for similar types of assets and liabilities. The statement does not eliminate the disclosure
requirements of other accounting standards, including requirements for disclosures about fair value
measurements in SFAS No. 107, “Disclosures about Fair Value of Financial Instruments”, and SFAS No.
157. As prescribed by SFAS No. 159, the Company chose not to elect the fair value option.
In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations — a replacement of
FASB Statement No. 141”, which applies to all transactions or events in which an entity obtains
control of one or more businesses. SFAS 141(R) (i) establishes the acquisition-date fair value as
the measurement objective for all assets acquired and liabilities assumed, (ii) requires expensing
of most transaction costs, and (iii) requires the acquiror to disclose to investors and other users
all of the information needed to evaluate and understand the nature and financial effect of the
business combination. SFAS 141(R) is effective for fiscal years beginning after December 15, 2008
and early adoption is not permitted. The Company has not completed its evaluation of the impact of
SFAS No. 141R and the effect that such pronouncement will have on its financial statements.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated
Financial Statements — an amendment of ARB No. 51”. SFAS 160 clarifies that a noncontrolling
interest in a subsidiary (minority interests or limited partners’ interest, in the case of the
Company) is an ownership interest in a consolidated entity which should be reported as
19
Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
June 30, 2008
(unaudited)
equity in the parent company’s consolidated financial statements. SFAS 160 requires a reconciliation of the
beginning and ending balances of equity attributable to noncontrolling interests and disclosure, on
the face of the consolidated income statement, of those amounts of
consolidated net income attributable to the noncontrolling interests, eliminating the past
practice of reporting these amounts as an adjustment in arriving at consolidated net income. SFAS
160 requires a parent company to recognize a gain or loss in net income when a subsidiary is
deconsolidated and requires the parent company to attribute to noncontrolling interests their share
of losses even if such attribution results in a deficit balance applicable to the noncontrolling
interests within the parent company’s equity accounts. SFAS 160 is effective for fiscal years
beginning after December 15, 2008, requires retroactive application of the presentation and
disclosure requirements for all periods presented, and early adoption is not permitted. The Company
has not yet quantified the effect that the adoption of SFAS 160 will have on its consolidated
financial statements.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and
Hedging Activities, an amendment to FASB Statement No. 133”, which provides for enhanced
disclosures of an entity’s objectives and strategies for using derivatives, and where those
derivatives and related hedging items are reported in the entity’s financial statements. SFAS 161
is effective for fiscal years beginning after November 15, 2008, with early adoption permitted.
Although the Company has not completed its evaluation of the impact of SFAS No. 161, it believes
that it already applies the principal provisions of the pronouncement.
Note 3. Real Estate
The following are the more significant real estate transactions that occurred during the six
months ended June 30, 2008:
On January 4, 2008, the Company purchased a 15.9 acre parcel of land in South Londonderry
Township, Pennsylvania, for the development of an approximate 85,000 sq. ft. supermarket-anchored
shopping center. The purchase price was approximately $3.3 million, including closing costs, and
was funded from the Company’s secured revolving credit facility.
On February 15, 2008, the Company acquired Mason Discount Drug Mart Plaza in Mason, Ohio, an
approximate 53,000 sq. ft. convenience center, for a purchase price of approximately $6.5 million,
including closing costs. The acquisition cost was funded from the Company’s secured revolving
credit facility.
On April 10, 2008, the Company acquired Stop & Shop Plaza in Bridgeport, Connecticut, an
approximately 55,000 sq. ft. single-store property, for a purchase price of approximately $10.9
million, including closing costs, financed by (1) the assumption of an existing $7.0 million
first-mortgage bearing interest at 6.17% per annum and maturing in 2017, and (2) approximately $3.9
million from the Company’s secured revolving credit facility.
20
Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
June 30, 2008
(unaudited)
On April 18, 2008, the Company entered into a long-term ground lease (minimum fixed term of 25
years plus renewal options) for a 1.4 acre parcel of land in Naugatuck, Connecticut, for the
development of an approximate 13,000 sq. ft. CVS store. Total estimated project costs
will be approximately $3.0 million, and the ground rent will be $200,000 per year during the
initial term.
In April 2008, Value City, the only tenant at the Value City Shopping center, vacated its
premises at the end of the lease term. In keeping with the Company’s redevelopment plans for the
property, the vacant building was subsequently razed and the Company took a one-time depreciation
charge of $1.9 million. The property has been reclassified as “land under/held for development”,
and is no longer included as one of the Company’s operating properties.
Joint Venture Activities
On January 3, 2008, the Company entered into a joint venture agreement for the redevelopment
of its 351,000 sq. ft. shopping center in Bloomsburg, Pennsylvania, including adjacent land parcels
comprising an additional 48 acres. The required equity contribution from the Company’s joint
venture partner was $4.0 million for a 25% interest in the property. The Company used the funds to
reduce the outstanding balance on its secured revolving credit facility. The joint venture
transaction does not qualify as a sale for financial reporting purposes; accordingly, the Company
continues to consolidate the property.
On February 20, 2008, the Company and Homburg Invest Inc. (“Homburg Invest”) entered into an
agreement in principle to form a group of joint ventures into which the Company would contribute 32
of its convenience centers (mostly drug store-anchored and including all 27 of the Company’s Ohio
properties). Richard Homburg, a director of the Company, is Chairman and CEO of Homburg Invest. The
aggregate valuation for the properties is approximately $128.9 million. The Company will hold 20%
interests (in 15 properties) and 51% interests (in 17 properties), and be the sole managing members
of the joint ventures. Homburg Invest will acquire the remaining respective 80% and 49% interests.
In connection with the transaction, the Company anticipates receiving approximately $49 million
(exclusive of closing costs and adjustments), which will be used to reduce the outstanding balance
on its secured revolving credit facility. The Company will be entitled to a “promote” structure,
applicable separately to each property, which, if certain targets are met, will permit the Company
to receive either 33-1/3% or 59% of the returns in excess of a leveraged 10.5% threshold.
Additionally, the Company will receive fees for ongoing property management, leasing, construction
management, acquisitions, dispositions, financings and refinancings. The joint venture transactions
require final approval by the Company’s Board of Directors. In that connection, the independent
members of the Board commissioned appraisals which support the aggregate transfer value. The
transactions contemplated by this joint venture, which are expected to close in the fourth quarter
of 2008, will not qualify as a sale for financial reporting purposes, and, accordingly, the
21
Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
June 30, 2008
(unaudited)
Company will continue to consolidate the properties. The Company concluded a previous joint venture
arrangement with Homburg Invest in December 2007.
On March 7, 2008, a 60%-owned development joint venture of the Company acquired approximately
108 acres of land in Pottsgrove, Pennsylvania, for a shopping center development
project. The $28.5 million purchase price, including closing costs, was funded by the issuance
of a non-interest-bearing purchase money mortgage of $14.6 million, payable in January 2009. The
balance of the purchase price was funded by the Company’s capital contribution to the joint venture
which, in turn, was funded from its secured revolving credit facility. The costs of development and
construction of this project are expected to be funded in part by separate construction financing.
On March 18, 2008, the Company acquired the remaining interests in Fairview Plaza, Halifax
Plaza and Newport Plaza (70% in each) and Loyal Plaza (75%), previously owned in joint venture and
consolidated for financial reporting purposes, for a purchase price of approximately $17.5 million,
which was funded from its secured revolving credit facility. The total outstanding mortgage loans
payable on the properties were approximately $27.3 million at the time. The excess of the purchase
price and closing costs over the carrying value of the minority interest partner’s accounts
(approximately $8.4 million) was allocated to the Company’s real estate asset accounts.
On April 23, 2008 the Company entered into a joint venture for the construction and
development of an estimated 137,000 sq. ft shopping center in Hamilton Township (Stroudsburg),
Pennsylvania. Total project costs, including purchase of land parcels, are estimated at $37
million. The Company is committed to paying a development fee of $500,000 and providing up to $9.5
million of equity capital for a 60% interest in the joint venture, with a preferred rate of return
of 9.25% per annum on such amounts. The required equity contribution from the Company’s joint
venture partner was $400,000. The Company’s initial $5.6 million contribution to the joint venture
was funded from its secured revolving credit facility. The venture previously acquired the land
parcels at a cost of approximately $15.4 million, incurring mortgage indebtedness of approximately
$10.8 million (including purchase money mortgages payable to the seller of $3.9 million);
approximately $19.0 million remains available under an existing first mortgage
construction/development loan in the initial amount of $27.8 million. In addition, the venture has
entered into an interest rate swap agreement with respect to its existing construction/development
loan facility, as well as a future swap agreement applicable to anticipated permanent financing of
$28.0 million. The joint venture is deemed to be a variable interest entity with the Company as the
primary income or loss beneficiary; accordingly, the Company has consolidated the property. The
minority interest partners in the Pottsgrove and Stroudsburg joint ventures are principally the
same individuals.
22
Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
June 30, 2008
(unaudited)
Pro Forma Financial Information (unaudited)
During the period January 1, 2007 through June 30, 2008, the Company acquired 22 shopping and
convenience centers aggregating approximately 2.1 million sq. ft. of GLA, purchased the joint
venture minority interests in four properties, and purchased approximately 174 acres of land for
expansion and/or future development, for a total cost of approximately $381.6 million. The
following table summarizes, on an unaudited pro forma basis before purchase accounting allocations,
the combined results of operations of the Company for the three and six months ended June 30, 2008
and 2007, respectively, as if all of these property acquisitions were completed as of January 1,
2007. This unaudited pro forma information does not purport to represent what the actual results of
operations of the Company would have been had all the above occurred as of January 1, 2007, nor
does it purport to predict the results of operations for future periods.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended Jun 30, |
|
Six months ended Jun 30, |
| |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
| |
|
|
|
|
Revenues |
|
$ |
42,923,000 |
|
|
$ |
41,939,000 |
|
|
$ |
86,877,000 |
|
|
$ |
85,052,000 |
|
Net income applicable to common shareholders |
|
$ |
1,208,000 |
|
|
$ |
2,412,000 |
|
|
$ |
4,333,000 |
|
|
$ |
5,267,000 |
|
Per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.03 |
|
|
$ |
0.05 |
|
|
$ |
0.10 |
|
|
$ |
0.12 |
|
Diluted |
|
$ |
0.03 |
|
|
$ |
0.05 |
|
|
$ |
0.10 |
|
|
$ |
0.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
44,464,000 |
|
|
|
44,194,000 |
|
|
|
44,461,000 |
|
|
|
44,153,000 |
|
Diluted |
|
|
44,466,000 |
|
|
|
44,198,000 |
|
|
|
44,462,000 |
|
|
|
44,158,000 |
|
Real Estate Pledged
At June 30, 2008 and December 31, 2007, respectively, a substantial number of the Company’s
real estate properties were pledged as collateral for either property-specific mortgage loans
payable or for the secured revolving credit facility.
Note 4. Mortgage Loans Payable and Secured Revolving Credit Facility; Construction Facility
Secured Debt
Secured debt consisted of the following at June 30, 2008 and December 31, 2007:
23
Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
June 30, 2008
(unaudited)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Jun 30, 2008 |
|
Dec 31, 2007 |
| |
|
|
|
|
|
|
Interest rates |
|
|
|
|
|
|
Interest rates |
| |
|
Balance |
|
|
Weighted |
|
|
|
|
|
Balance |
|
|
Weighted |
|
|
| Description |
|
outstanding |
|
|
average |
|
Range |
|
outstanding |
|
|
average |
|
Range |
| |
|
|
|
|
|
|
|
|
Fixed-rate mortgages |
|
$ |
677,281,000 |
|
|
|
|
5.8 |
% |
|
|
4.8%-9.3 |
% |
|
$ |
656,320,000 |
|
|
|
|
5.7 |
% |
|
|
4.8%-7.6 |
% |
Variable-rate mortgages |
|
|
2,977,000 |
|
|
|
|
4.4 |
% |
|
|
4.4% |
|
|
4,754,000 |
|
|
|
|
7.7 |
% |
|
|
7.7% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
680,258,000 |
|
|
|
|
5.8 |
% |
|
|
|
|
|
|
661,074,000 |
|
|
|
|
5.7 |
% |
|
|
|
|
Secured revolving credit facility |
|
|
254,390,000 |
|
|
|
|
3.6 |
% |
|
|
|
|
|
|
190,440,000 |
|
|
|
|
6.2 |
% |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
934,648,000 |
|
|
|
|
5.2 |
% |
|
|
|
|
|
$ |
851,514,000 |
|
|
|
|
5.8 |
% |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured Revolving Credit Facility
The Company has a $300 million secured revolving credit facility with Bank of America, N.A.
(as agent) and several other banks, pursuant to which the Company has pledged certain of its
shopping center properties as collateral for borrowings thereunder. The facility, as amended, is
expandable to $400 million, subject to certain conditions, including acceptable collateral, and
will expire in January 2009, subject to a one-year extension option. Borrowings outstanding under
the facility aggregated $254.4 million at June 30, 2008, and such borrowings bore interest at an
average rate of 3.6% per annum. Borrowings under the facility bear interest at a rate of LIBOR plus
a basis points (“bps”) spread ranging from 110 to 145 bps depending upon the Company’s leverage
ratio, as defined (the spread as of June 30, 2008 was 110 bps). The facility also requires an
unused portion fee of 15 bps. Based on covenant measurements and collateral in place as of June 30,
2008, the Company was permitted to draw up to approximately $299.3 million, of which approximately
$44.9 million remained available as of June 30, 2008.
The credit facility is used to fund acquisitions, development and redevelopment activities,
capital expenditures, mortgage repayments, dividend distributions, working capital and other
general corporate purposes. The facility is subject to customary financial covenants, including
limits on leverage and distributions (limited to 95% of funds from operations, as defined), and
other financial statement ratios.
Secured Revolving Construction Credit Facility
In June 2008, the Company closed on a $150 million master secured revolving construction
facility with KeyBank, National Association as lead agent, pursuant to which the Company will
pledge certain of its development projects and redevelopment properties as collateral for
borrowings thereunder. The facility will expire in June 2011, subject to a one-year extension
option. Borrowings under the facility will bear interest at LIBOR plus a spread of 225 bps.
Advances under the facility will be calculated at the lesser of 70% of aggregate project costs, 70%
of “as stabilized” appraised values, or costs incurred in excess of a 30% equity requirement on the
part of the Company. The facility also requires an unused portion fee of 15 bps. The Company plans
to use this facility to fund in part its development activities in 2008 and
24
Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
June 30, 2008
(unaudited)
subsequent years. In
order to draw funds under this construction facility, the Company must meet certain pre-leasing and
other conditions.
Note 5. Subsequent Events
On July 17, 2008, the Company completed the refinancing of a mortgage loan payable on one of
its shopping center properties in Philadelphia, Pennsylvania. The original loan was repaid on April
10, 2008 in the amount of $10.5 million. The new loan, a $15.0 million five-year variable-rate
first mortgage, bears interest at 200 basis points over 30-day LIBOR. On the same date, the Company
entered into an interest rate swap agreement fixing the rate at 6.45%. The Company used the net
proceeds from the two loan transactions to reduce the outstanding balance on its secured revolving
credit facility.
On July 23, 2008, the Company’s Board of Directors declared a dividend of $0.225 per share
with respect to its common stock as well as an equal distribution per unit on its outstanding OP
Units. At the same time, the Board declared a dividend of $0.554688 per share with respect to the
Company’s 8-7/8% Series A Cumulative Redeemable Preferred Stock. The distributions are payable on
August 20, 2008 to shareholders of record on August 8, 2008.
25
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the Company’s consolidated
financial statements and related notes thereto included elsewhere in this report.
Executive Summary
The Company is a fully-integrated real estate investment trust which focuses primarily on
ownership, operation, development and redevelopment of supermarket-anchored shopping centers in
nine mid-Atlantic and New England states. At June 30, 2008, the Company had a portfolio of 119
operating properties totaling approximately 12.0 million square feet of gross leasable area
(“GLA”), including 109 wholly-owned properties comprising approximately 10.8 million square feet
and ten properties owned in joint venture comprising approximately 1.2 million square feet. The
entire 119 property portfolio was approximately 92% leased at June 30, 2008; the 109 property
“stabilized” portfolio (including properties wholly-owned and in joint venture) was approximately
96% leased at that date. The Company also owns approximately 382 acres of land parcels a
significant portion of which are under development. In addition, the Company has a 76.3% interest
(increased from 49.0% effective April 1, 2008) in an unconsolidated joint venture which owns a
single-tenant office property in Philadelphia, Pennsylvania.
The Company had previously decided in May 2007 to dispose of Stadium Plaza, located in East
Lansing, Michigan, and, for all periods presented, that property had been classified as “held for
sale” on the Company’s consolidated balance sheets, and its results of operations had been
classified as “discontinued operations” in the consolidated statements of income. In May 2008, the
Company reconsidered its decision to sell the property and, as a result, the property has been
reclassified as “held and used”. For all periods presented, the property is no longer included in
“properties held for sale” or “discontinued operations”. In April 2008, Value City, the only tenant
at the Value City Shopping Center, located in Wyoming, Michigan, vacated its premises at the end of
the lease term. In keeping with the Company’s redevelopment plans for the property, the vacant
building was subsequently razed and, accordingly, the property has now been reclassified as “land
under/held for development”, and is no longer included as one of the Company’s operating
properties.
The Company, organized as a Maryland corporation, has established an umbrella partnership
structure through the contribution of substantially all of its assets to the Operating Partnership,
organized as a limited partnership under the laws of Delaware. The Company conducts substantially
all of its business through the Operating Partnership. At June 30, 2008, the Company owned 95.7% of
the Operating Partnership and is its sole general partner. OP Units are economically equivalent to
the Company’s common stock and are convertible into the Company’s common stock at the option of the
holders on a one-to-one basis.
The Company derives substantially all of its revenues from rents and operating expense
reimbursements received pursuant to long-term leases. The Company’s operating results therefore
depend on the ability of its tenants to make the payments required by the terms of their
26
leases. The Company focuses its investment activities on supermarket-anchored community
shopping centers and drug store-anchored convenience centers. The Company believes that,
because of the need of consumers to purchase food and other staple goods and services generally
available at such centers, its type of “necessities”-based properties should provide relatively
stable revenue flows even during difficult economic times.
The Company continues to seek opportunities to acquire properties suited for development
and/or redevelopment, and, to a lesser extent than in the recent past, stabilized properties,
where it can utilize its experience in shopping center construction, renovation, expansion,
re-leasing and re-merchandising to achieve long-term cash flow growth and favorable investment
returns. The Company would also consider investment opportunities in regions beyond its present
markets in the event such opportunities were consistent with its focus, could be effectively
controlled and managed, have the potential for favorable investment returns, and would contribute
to increased shareholder value.
Summary of Critical Accounting Policies
The preparation of the consolidated financial statements in conformity with GAAP requires the
Company to make estimates and judgments that affect the reported amounts of assets and liabilities,
revenues and expenses, and related disclosures of contingent assets and liabilities. On an ongoing
basis, management evaluates its estimates, including those related to revenue recognition and the
allowance for doubtful accounts receivable, real estate investments and purchase accounting
allocations related thereto, asset impairment, and derivatives used to hedge interest-rate risks.
Management’s estimates are based both on information that is currently available and on various
other assumptions management believes to be reasonable under the circumstances. Actual results
could differ from those estimates and those estimates could be different under varying assumptions
or conditions.
The Company has identified the following critical accounting policies, the application of
which requires significant judgments and estimates:
Revenue Recognition
Rental income with scheduled rent increases is recognized using the straight-line method over
the respective terms of the leases. The aggregate excess of rental revenue recognized on a
straight-line basis over base rents under applicable lease provisions is included in straight-line
rents receivable on the consolidated balance sheet. Leases also generally contain provisions under
which the tenants reimburse the Company for a portion of property operating expenses and real
estate taxes incurred; such income is recognized in the periods earned. In addition, certain
operating leases contain contingent rent provisions under which tenants are required to pay a
percentage of their sales in excess of a specified amount as additional rent. The Company defers
recognition of contingent rental income until those specified targets are met.
The Company must make estimates as to the collectibility of its accounts receivable related to
base rent, straight-line rent, expense reimbursements and other revenues. Management analyzes
accounts receivable by considering tenant creditworthiness, current economic
27
conditions, and changes in tenants’ payment patterns when evaluating the adequacy of the allowance for doubtful
accounts receivable. These estimates have a direct impact on net income,
because a higher bad debt allowance would result in lower net income, whereas a lower bad debt
allowance would result in higher net income.
Real Estate Investments
Real estate investments are carried at cost less accumulated depreciation. The provision for
depreciation is calculated using the straight-line method based on estimated useful lives.
Expenditures for maintenance, repairs and betterments that do not materially prolong the normal
useful life of an asset are charged to operations as incurred. Expenditures for betterments that
substantially extend the useful lives of real estate assets are capitalized. Real estate
investments include costs of development and redevelopment activities, and construction in
progress. Capitalized costs, including interest and other carrying costs during the construction
and/or renovation periods, are included in the cost of the related asset and charged to operations
through depreciation over the asset’s estimated useful life. The Company is required to make
subjective estimates as to the useful lives of its real estate assets for purposes of determining
the amount of depreciation to reflect on an annual basis. These assessments have a direct impact on
net income. A shorter estimate of the useful life of an asset would have the effect of increasing
depreciation expense and lowering net income, whereas a longer estimate of the useful life of an
asset would have the effect of reducing depreciation expense and increasing net income.
The Company’s capitalization policy on its development and redevelopment properties is guided
by SFAS No. 34, “Capitalization of Interest Cost” and SFAS No. 67, “Accounting for Costs and
Initial Rental Operations of Real Estate Projects”. A variety of costs are incurred in the
acquisition, development and leasing of a property, such as pre-construction costs essential to the
development of the property, development costs, construction costs, interest costs, real estate
taxes, salaries and related costs, and other costs incurred during the period of development. After
a determination is made to capitalize a cost, it is allocated to the specific component of a
project that is benefited. The Company ceases capitalization on the portions substantially
completed and occupied, or held available for occupancy, and capitalizes only those costs
associated with the portions under construction. The Company considers a construction project as
substantially completed and held available for occupancy upon the completion of tenant
improvements, but not later than one year from cessation of major construction activity.
Determination of when a development project is substantially complete and capitalization must cease
involves a degree of judgment. The effect of a longer capitalization period would be to increase
capitalized costs and would result in higher net income, whereas the effect of a shorter
capitalization period would be to reduce capitalized costs and would result in lower net income.
The Company applies SFAS No. 141, “Business Combinations”, and SFAS No. 142, “Goodwill and
Other Intangibles”, in valuing real estate acquisitions. In connection therewith, the fair value of
real estate acquired is allocated to land, buildings and improvements. In addition, the fair value
of in-place leases is allocated to intangible lease assets and liabilities. The fair value of the
tangible assets of an acquired property is determined by valuing the property as if it were vacant,
which value is then allocated to land, buildings and improvements based on management’s
determination of the relative fair values of such assets. In valuing an acquired
28
property’s intangibles, factors considered by management include an estimate of carrying costs during the
expected lease-up periods, such as real estate taxes, insurance, other operating expenses, and
estimates of lost rental revenue during the expected lease-up periods based on its
evaluation of current market demand. Management also estimates costs to execute similar
leases, including leasing commissions, tenant improvements, legal and other related costs.
The value of in-place leases is measured by the excess of (i) the purchase price paid for a
property after adjusting existing in-place leases to market rental rates, over (ii) the estimated
fair value of the property as if vacant. Above-market and below-market in-place lease values are
recorded based on the present value (using a discount rate which reflects the risks associated with
the leases acquired) of the difference between the contractual amounts to be received and
management’s estimate of market lease rates, measured over the non-cancelable terms of the
respective leases. The value of other intangibles is amortized to expense, and the above-market and
below-market lease values are amortized to rental income, over the remaining non-cancelable terms
of the respective leases. If a lease were to be terminated prior to its stated expiration, all
unamortized amounts relating to that lease would be recognized in operations at that time.
Management is required to make subjective assessments in connection with its valuation of real
estate acquisitions. These assessments have a direct impact on net income, because (i) above-market
and below-market lease intangibles are amortized to rental income, and (ii) the value of other
intangibles is amortized to expense. Accordingly, higher allocations to below-market lease
liability and other intangibles would result in higher rental income and amortization expense,
whereas lower allocations to below-market lease liability and other intangibles would result in
lower rental income and amortization expense.
The Company applies SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived
Assets”, to recognize and measure impairment of long-lived assets. Management reviews each real
estate investment for impairment whenever events or circumstances indicate that the carrying value
of a real estate investment may not be recoverable. The review of recoverability is based on an
estimate of the future cash flows that are expected to result from the real estate investment’s use
and eventual disposition. These estimates of cash flows consider factors such as expected future
operating income, trends and prospects, as well as the effects of leasing demand, competition and
other factors. If an impairment event exists due to the projected inability to recover the carrying
value of a real estate investment, an impairment loss is recorded to the extent that the carrying
value exceeds estimated fair value. A real estate investment held for sale is carried at the lower
of its carrying amount or estimated fair value, less the cost of a potential sale. Depreciation and
amortization are suspended during the period the property is held for sale. Management is required
to make subjective assessments as to whether there are impairments in the value of its real estate
properties. These assessments have a direct impact on net income, because an impairment loss is
recognized in the period that the assessment is made.
Stock-Based Compensation
SFAS No. 123R, “Share-Based Payments”, establishes financial accounting and reporting
standards for stock-based employee compensation plans, including all arrangements by which
29
employees receive shares of stock or other equity instruments of the employer, or the employer
incurs liabilities to employees in amounts based on the price of the employer’s stock. The
statement also defines a fair value-based method of accounting for an employee stock option or
similar equity instrument.
The Company’s 2004 Stock Incentive Plan (the “Incentive Plan”) provides for the granting of
incentive stock options, stock appreciation rights, restricted shares, performance units and
performance shares. The maximum number of shares of the Company’s common stock that may be issued
pursuant to the Incentive Plan, as amended, is 2,750,000, and the maximum number of shares that may
be granted to a participant in any calendar year is 250,000. Substantially all grants issued
pursuant to the Incentive Plan are “restricted stock grants” which specify vesting (i) upon the
third anniversary of the date of grant for time-based grants, or (ii) upon the completion of a
designated period of performance for performance-based grants. Time—based grants are valued
according to the market price for the Company’s common stock at the date of grant. For
performance-based grants, the Company engages an independent appraisal company to determine the
value of the shares at the date of grant, taking into account the underlying contingency risks
associated with the performance criteria. These value estimates have a direct impact on net income,
because higher valuations would result in lower net income, whereas lower valuations would result
in higher net income. The value of such grants is being amortized on a straight-line basis over the
respective vesting periods, as adjusted for fluctuations in the market value of the Company’s
common stock, in accordance with the provisions of EITF No. 97-14, “Accounting for Deferred
Compensation Arrangements Where Amounts Earned Are Held in a Rabbi Trust and Invested”.
Results of Operations
Differences in results of operations between 2008 and 2007, respectively, were primarily the
result of the Company’s property acquisition program and continuing development/redevelopment
activities. During the period January 1, 2007 through June 30, 2008, the Company acquired 22
shopping and convenience centers aggregating approximately 2.1 million sq. ft. of GLA, purchased
the joint venture minority interests in four properties, and acquired approximately 174 acres of
land for expansion and/or future development, for a total cost of approximately $381.6 million. In
addition, the Company placed into service one ground-up development having an aggregate cost of
approximately $3.6 million. Income before minority and limited partners’ interests and preferred
distribution requirements was $3.7 million during the three months ended June 30, 2008 as compared
with $5.3 million during the three months ended June 30, 2007. Income before minority and limited
partners’ interests and preferred distribution requirements was $9.7 million during the six months
ended June 30, 2008 as compared with $11.5 million during the six months ended June 30, 2007.
30
Comparison of the quarter ended June 30, 2008 to the quarter ended June 30, 2007
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Properties |
| |
|
Three months ended Jun 30, |
|
Increase/ |
|
Percentage |
|
|
|
|
|
held in |
| |
|
2008 |
|
2007 |
|
(decrease) |
|
change |
|
Acquisitions |
|
both periods |
| |
|
|
Total revenues |
|
$ |
42,915,000 |
|
|
$ |
36,950,000 |
|
|
$ |
5,965,000 |
|
|
|
16 |
% |
|
$ |
6,290,000 |
|
|
$ |
(325,000 |
) |
Property operating expenses |
|
|
11,872,000 |
|
|
|
9,313,000 |
|
|
|
2,559,000 |
|
|
|
27 |
% |
|
|
2,105,000 |
|
|
|
454,000 |
|
Depreciation and amortization |
|
|
14,007,000 |
|
|
|
9,898,000 |
|
|
|
4,109,000 |
|
|
|
42 |
% |
|
|
2,069,000 |
|
|
|
2,040,000 |
|
General and administrative |
|
|
2,323,000 |
|
|
|
3,220,000 |
|
|
|
(897,000 |
) |
|
|
-28 |
% |
|
|
n/a |
|
|
|
n/a |
|
Non-operating income and
expense, net (i) |
|
|
10,980,000 |
|
|
|
9,182,000 |
|
|
|
1,798,000 |
|
|
|
20 |
% |
|
|
n/a |
|
|
|
n/a |
|
|
|
|
| (i) |
|
Non-operating income and expense consists principally of interest expense (including
amortization of deferred financing costs), and equity in income of an unconsolidated joint venture. |
Properties held in both periods. The Company held 99 properties throughout the three months
ended June 30, 2008 and 2007. The comparative differences in the operating results for those
properties are as follows:
Explanation
Total revenues — The decrease reflects principally reductions in revenues in
conjunction with the commencement of re-development activities at certain
properties, the termination of a lease in the fourth quarter of 2007 which the
Company expects to replace on more favorable terms, and reductions in
percentage rent. These reductions were partially offset by scheduled increases
in base rents.
Property operating expenses — Increase due to increased real estate taxes as a
result of higher assessments, higher other operating expenses subject to
recovery from tenants, and a higher provision for doubtful accounts, a
non-recoverable expense, principally relating to one fitness center operator.
Depreciation and amortization — Increase due principally to a one-time
depreciation charge of $1.9 million taken for the demolition of a building on
the Company’s property in Wyoming, Michigan as part of the redevelopment plans
for the property, and the depreciation adjustment relating to the East Lansing,
Michigan property reclassified as “held and used”.
General and administrative expenses — Decrease primarily due to the costs of the retirement
of the former Chief Financial Officer and hiring of his replacement in the second quarter of 2007
($1,535,000), partially offset by higher costs in the three months ended June 30, 2008 for
compensation (including costs related to stock-based compensation), accounting and other
professional expenses, and bank fees related to the Company’s new cash management system (formerly
netted in interest income).
Non-operating income and expense, net — Increase primarily the result of increased interest
costs from borrowings related to property acquisitions and development/redevelopment
activities, partially offset by the lower cost of borrowing under the Company’s secured revolving
credit facility.
31
Comparison of the six months ended June 30, 2008 to the six months ended June 30, 2007
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Properties |
| |
|
Six months ended Jun 30, |
|
Increase/ |
|
Percentage |
|
|
|
|
|
held in |
| |
|
2008 |
|
2007 |
|
decrease) |
|
change |
|
Acquisitions |
|
both periods |
| |
|
|
Total revenues |
|
$ |
86,550,000 |
|
|
$ |
73,141,000 |
|
|
$ |
13,409,000 |
|
|
|
18 |
% |
|
$ |
14,287,000 |
|
|
$ |
(878,000 |
) |
Property operating expenses |
|
|
24,783,000 |
|
|
|
19,967,000 |
|
|
|
4,816,000 |
|
|
|
24 |
% |
|
|
4,314,000 |
|
|
|
502,000 |
|
Depreciation and amortization |
|
|
25,536,000 |
|
|
|
19,781,000 |
|
|
|
5,755,000 |
|
|
|
29 |
% |
|
|
4,215,000 |
|
|
|
1,540,000 |
|
General and administrative |
|
|
4,514,000 |
|
|
|
5,218,000 |
|
|
|
(704,000 |
) |
|
|
-13 |
% |
|
|
n/a |
|
|
|
n/a |
|
Non-operating income and
expense, net (i) |
|
|
22,056,000 |
|
|
|
16,671,000 |
|
|
|
5,385,000 |
|
|
|
32 |
% |
|
|
n/a |
|
|
|
n/a |
|
|
|
|
| (i) |
|
Non-operating income and expense consists principally of interest expense (including
amortization of deferred financing costs), and equity in income of an unconsolidated joint venture. |
Properties held in both periods. The Company held 97 properties throughout the six months
ended June 30, 2008 and 2007. The comparative differences in the operating results for those
properties are as follows:
Explanation
Total revenues — The decrease reflects principally reductions in revenues in
conjunction with the commencement of re-development activities at certain
properties, the termination of a lease in the fourth quarter of 2007 which the
Company expects to replace on more favorable terms, a reduction in percentage
rent, and reductions due to number of non-continuing items in the first quarter
of 2007 that led to higher revenue in that period including, principally, lease
terminations that increased other revenue and amortization of intangible lease
liabilities. These decreases were partially offset by scheduled increases in
base rents.
Property operating expenses — Increase due to increased real estate taxes as a
result of higher assessments and higher other operating expenses subject to
recovery from tenants, partially offset by a lower provision for doubtful
accounts, a non-recoverable expense.
Depreciation and amortization — Increase due principally to a one-time
depreciation charge of $1.9 million taken for the demolition of a building on
the Company’s property in Wyoming, Michigan as part of the redevelopment plans
for the property, and the depreciation adjustment relating to the East Lansing,
Michigan property reclassified as “held and used”, partially offset by a higher
level of lease terminations by tenants in the six months ended June 30, 2007
that accelerated depreciation and amortization of tenant improvements and
deferred lease origination fees applicable to those tenants.
General and administrative expenses — Decrease primarily due to the costs of the retirement
of the former Chief Financial Officer and hiring of his replacement in the second quarter of 2007
($1,535,000), partially offset by higher costs in the six months ended June 30, 2008 for
compensation (including costs related to stock-based compensation), accounting and other
32
professional expenses, and bank fees related to the Company’s new cash management system (formerly
netted in interest income).
Non-operating income and expense, net — Increase primarily the result of increased interest
costs from borrowings related to property acquisitions and development/redevelopment activities,
partially offset by the lower cost of borrowing under the Company’s secured revolving credit
facility.
Liquidity and Capital Resources
The Company funds operating expenses and other short-term liquidity requirements, including
debt service, tenant improvements, leasing commissions, and preferred and common dividend
distributions, primarily from operating cash flows; the Company has also used its secured revolving
credit facility for these purposes. The Company expects to fund long-term liquidity requirements
for property acquisitions, development and/or redevelopment costs, capital improvements, and
maturing debt initially with the secured revolving credit facility and construction financing, and
ultimately through a combination of issuing and/or assuming additional mortgage debt, the sale of
equity securities, the issuance of additional OP Units, and the sale of properties or interests
therein (including joint venture arrangements).
The Company has a $300 million secured revolving credit facility with Bank of America, N.A.
(as agent) and several other banks, pursuant to which the Company has pledged certain of its
shopping center properties as collateral for borrowings thereunder; the facility, as amended, is
expandable to $400 million, subject to certain conditions, including acceptable collateral, and
will expire in January 2009, subject to a one-year extension option. As of June 30, 2008, based on
covenant measurements and collateral in place, the Company was permitted to draw up to
approximately $299.3 million, of which approximately $44.9 million remained available as of that
date. The credit facility is used to fund acquisitions, development and redevelopment activities,
capital expenditures, mortgage repayments, dividend distributions, working capital and other
general corporate purposes. The facility is subject to customary financial covenants, including
limits on leverage and distributions (limited to 95% of funds from operations, as defined), and
other financial statement ratios.
The Company has a $150 million secured revolving credit construction facility with KeyBank,
National Association (as agent) and several other banks, pursuant to which the Company is in the
process of pledging certain of its development and redevelopment projects as collateral for
borrowings to be made thereunder. This facility is expandable to $250 million, subject to certain
conditions, including acceptable collateral, and will expire in June 2011, subject to a one-year
extension option. As of June 30, 2008, there were no borrowings outstanding under this facility,
which is subject to similar financial covenants as contained in the Bank of America, N.A. loan
agreement.
The Company expects to fund its liquidity requirements principally from the following: (i)
cash and cash equivalents, (ii) availability under its secured revolving credit facility, and (iii)
availability under its unsecured line of credit. In addition, the Company anticipates the
availability of additional construction financing, net proceeds from the contribution of properties
33
to joint ventures, and proceeds from the refinancing of maturing debt. Such construction financing
includes the recently-completed $150 million master secured revolving construction facility, a
committed $77.7 million construction facility for its joint venture development project in
Pottsgrove, Pennsylvania, and the $27.8 construction facility for its joint venture development
project in Stroudsburg, Pennsylvania. There can be no assurance, however, that the Company will
have the availability of such additional construction financing, net proceeds from the contribution
of properties to joint ventures, or proceeds from the refinancing of existing debt.
Mortgage loans payable at June 30, 2008 consisted of fixed-rate notes totaling $677.3 million
(with a weighted average interest rate of 5.8%) and variable-rate debt totaling $257.3 million,
principally advances outstanding under the variable-rate secured revolving credit facility (with a
weighted average interest rate of 3.6%). Total mortgage loans payable have an overall weighted
average interest rate of 5.2% and mature at various dates through 2021.
The terms of several of the Company’s mortgage loans payable require the Company to deposit
certain replacement and other reserves with its lenders. Such “restricted cash” is generally
available only for property-level requirements for which the reserve was established, and is not
available to fund other property-level or Company-level obligations. In addition, joint venture
partnership agreements require, among other things, that the Company maintain separate cash
accounts for the operation of the joint ventures, and that distributions to the partners be
strictly controlled.
Net Cash Flows
Operating Activities
Net cash flows provided by operating activities amounted to $28.4 million during the six
months ended June 30, 2008, compared to net cash flows provided by operating activities of $24.9
million during the six months ended June 30, 2007. The increase in operating cash flows during the
first six months of 2008, as compared with the first six months of 2007, was primarily the result
of property acquisitions.
Investing Activities
Net cash flows used in investing activities were $70.3 million during the six months ended
June 30, 2008 and $93.1 million during the six months ended June 30, 2007, and were primarily the
result of the Company’s property acquisition program and continuing development/redevelopment
activities. During the first six months of 2008, the Company purchased the remaining minority
interests in four properties from its joint venture partner, two shopping and convenience centers,
and land for expansion and development. During the first six months of 2007, the Company acquired
eight shopping and convenience centers.
Financing Activities
Net cash flows provided by financing activities were $28.8 million during the six months ended
June 30, 2008 and $68.6 million during the six months ended June 30, 2007. During
the
34
first six
months of 2008, the Company received proceeds of net borrowings of $63.9 million under the
Company’s secured revolving credit facility, $27.5 million in proceeds from mortgage financings,
and a net $4.3 million of contributions from minority interest partners, offset by repayment of
mortgage obligations of $40.1 million, preferred and common stock dividend distributions of $23.9
million, payments of deferred financing costs of $1.9 million, distributions paid with respect to
limited partners’ interests of $0.9 million, and a redemption of OP Units of $0.1 million. During
the first six months of 2007, the Company received proceeds of net borrowings of $70.5 million
under the Company’s secured revolving credit facility, $23.0 million in net proceeds from mortgage
financings, $3.9 million in net proceeds from sales of common stock, and a $1.0 million
contribution from a minority interest partner, offset by preferred and common stock dividend
distributions of $23.8 million, repayment of mortgage obligations of $4.1 million, payment of
deferred financing costs of $1.0 million, and distributions paid with respect to limited partners’
interests of $0.9 million.
Funds From Operations
Funds From Operations (“FFO”) is a widely-recognized non-GAAP financial measure for REITs that
the Company believes, when considered with financial statements determined in accordance with GAAP,
is useful to investors in understanding financial performance and providing a relevant basis for
comparison among REITs. In addition, FFO is useful to investors as it captures features particular
to real estate performance by recognizing that real estate generally appreciates over time or
maintains residual value to a much greater extent than do other depreciable assets. Investors
should review FFO, along with GAAP net income, when trying to understand an equity REIT’s operating
performance. The Company presents FFO because the Company considers it an important supplemental
measure of its operating performance and believes that it is frequently used by securities
analysts, investors and other interested parties in the evaluation of REITs. Among other things,
the Company uses FFO or an adjusted FFO-based measure (i) as a criterion to determine
performance-based bonuses for members of senior management, (ii) in performance comparisons with
other shopping center REITs, and (iii) to measure compliance with certain financial covenants under
the terms of the Loan Agreement relating to the Company’s secured revolving credit facility.
The Company computes FFO in accordance with the “White Paper” on FFO published by the National
Association of Real Estate Investment Trusts (“NAREIT”), which defines FFO as net income applicable
to common shareholders (determined in accordance with GAAP), excluding gains or losses from debt
restructurings and sales of properties, plus real estate-related depreciation and amortization, and
after adjustments for partnerships and joint ventures (which are computed to reflect FFO on the
same basis).
FFO does not represent cash generated from operating activities and should not be considered
as an alternative to net income applicable to common shareholders or to cash flow from operating
activities. FFO is not indicative of cash available to fund ongoing cash needs, including the
ability to make cash distributions. Although FFO is a measure used for comparability in assessing
the performance of REITs, as the NAREIT White Paper only provides
guidelines for computing FFO, the computation of FFO may vary from one company to another.
35
The
following table sets forth the Company’s calculations of FFO for the three and six months ended
June 30, 2008 and 2007:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended Jun 30, |
|
Six months ended Jun 30, |
| |
|
2008 |
|
2007 |
|
2008 |
|
2007 |
| |
|
|
|
|
Net income applicable to common shareholders |
|
$ |
1,224,000 |
|
|
$ |
2,921,000 |
|
|
$ |
4,336,000 |
|
|
$ |
6,576,000 |
|
Add (deduct): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate depreciation and amortization |
|
|
13,939,000 |
|
|
|
9,837,000 |
|
|
|
25,400,000 |
|
|
|
19,667,000 |
|
Limited partners’ interest |
|
|
56,000 |
|
|
|
132,000 |
|
|
|
199,000 |
|
|
|
295,000 |
|
Minority interests in consolidated joint ventures |
|
|
482,000 |
|
|
|
300,000 |
|
|
|
1,188,000 |
|
|
|
695,000 |
|
Minority interests’ share of FFO applicable to
consolidated joint ventures |
|
|
(1,417,000 |
) |
|
|
(426,000 |
) |
|
|
(3,198,000 |
) |
|
|
(917,000 |
) |
Equity in income of unconsolidated joint venture |
|
|
(222,000 |
) |
|
|
(157,000 |
) |
|
|
(372,000 |
) |
|
|
(313,000 |
) |
FFO from unconsolidated joint venture |
|
|
355,000 |
|
|
|
234,000 |
|
|
|
581,000 |
|
|
|
468,000 |
|
| |
|
|
|
|
Funds From Operations |
|
$ |
14,417,000 |
|
|
$ |
12,841,000 |
|
|
$ |
28,134,000 |
|
|
$ |
26,471,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFO per common share (assuming conversion of OP Units): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.31 |
|
|
$ |
0.28 |
|
|
$ |
0.61 |
|
|
$ |
0.57 |
|
| |
|
|
|
|
Diluted |
|
$ |
0.31 |
|
|
$ |
0.28 |
|
|
$ |
0.61 |
|
|
$ |
0.57 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in determination of basic earnings per share |
|
|
44,464,000 |
|
|
|
44,194,000 |
|
|
|
44,461,000 |
|
|
|
44,153,000 |
|
Additional shares assuming conversion of OP Units (basic) |
|
|
2,029,000 |
|
|
|
1,984,000 |
|
|
|
2,030,000 |
|
|
|
1,985,000 |
|
| |
|
|
|
|
Shares used in determination of basic FFO per share |
|
|
46,493,000 |
|
|
|
46,178,000 |
|
|
|
46,491,000 |
|
|
|
46,138,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in determination of diluted earnings per share |
|
|
44,466,000 |
|
|
|
44,198,000 |
|
|
|
44,462,000 |
|
|
|
44,158,000 |
|
Additional shares assuming conversion of OP Units (diltued) |
|
|
2,029,000 |
|
|
|
1,997,000 |
|
|
|
2,030,000 |
|
|
|
1,998,000 |
|
| |
|
|
|
|
Shares used in determination of diluted FFO per share |
|
|
46,495,000 |
|
|
|
46,195,000 |
|
|
|
46,492,000 |
|
|
|
46,156,000 |
|
| |
|
|
|
|
Inflation
Low to moderate levels of inflation during the past several years have favorably impacted the
Company’s operations by stabilizing operating expenses. However, the Company’s properties have
tenants whose leases include expense reimbursements and other provisions to minimize the effect of
inflation. At the same time, low inflation has had the indirect effect of reducing the Company’s
ability to increase tenant rents upon the signing of new leases and/or lease renewals.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
One of the principal market risks facing the Company is interest rate risk on its secured
revolving credit facility. The Company may, when advantageous, hedge its interest rate risk using
derivative financial instruments. The Company is not subject to foreign currency risk.
The Company is exposed to interest rate changes primarily through (i) the secured
variable-rate revolving credit facility used to maintain liquidity, fund capital expenditures and
expand its real estate investment portfolio, (ii) property-specific variable-rate mortgages,
and (iii) variable-rate construction financing. The Company’s objectives with respect to interest
rate risk are to limit the impact of interest rate changes on operations and cash flows, and to
lower its overall borrowing costs. To achieve these objectives, the Company may borrow at fixed
rates
36
and may enter into derivative financial instruments such as interest rate swaps, caps, etc.,
in order to mitigate its interest rate risk on a related variable-rate financial instrument. The
Company does not enter into derivative or interest rate transactions for speculative purposes. At
June 30, 2008, the Company had approximately $18.9 million of mortgage loans payable subject to
interest rate swaps which converted LIBOR-based variable rates to fixed annual rates ranging from
5.4% to 7.1% per annum. In addition, the Company had an interest rate swap applicable to
anticipated permanent financing of $28.0 million for its development joint venture project in
Stroudsburg, Pennsylvania.
At June 30, 2008, long-term debt consisted of fixed-rate mortgage loans payable and
variable-rate debt (principally the variable-rate secured revolving credit facility). The average
interest rate on the $677.3 million of fixed-rate indebtedness outstanding was 5.8%, with
maturities at various dates through 2021. The average interest rate on the $257.3 million of
variable-rate debt (including $254.4 million in advances under the Company’s secured revolving
credit facility) was 3.6%. The secured revolving credit facility matures in January 2009, subject
to a one-year extension option. Based on the amount of variable-rate debt outstanding at June 30,
2008, if interest rates either increase or decrease by 1%, the Company’s interest expense would
increase or decrease respectively by approximately $2,573,000 per annum.
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures and internal controls designed to
ensure that information required to be disclosed in its filings under the Securities Exchange Act
of 1934 is reported within the time periods specified in the rules and regulations of the
Securities and Exchange Commission (“SEC”). In this regard, the Company has formed a Disclosure
Committee currently comprised of several of the Company’s executive officers as well as certain
other employees with knowledge of information that may be considered in the SEC reporting process.
The Committee has responsibility for the development and assessment of the financial and
non-financial information to be included in the reports filed with the SEC, and assists the
Company’s Chief Executive Officer and Chief Financial Officer in connection with their
certifications contained in the Company’s SEC filings. The Committee meets regularly and reports to
the Audit Committee on a quarterly or more frequent basis. The Company’s principal executive and
financial officers have evaluated its disclosure controls and procedures as of June 30, 2008, and
have determined that such disclosure controls and procedures are effective.
During the three months ended June 30, 2008, there have been no changes in the internal
controls over financial reporting or in other factors that have materially affected, or are
reasonably likely to materially affect, the internal controls over financial reporting.
37
Part II Other Information
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of stockholders on June 17, 2008, at which the following
matters were voted upon:
| |
1. |
|
The election of seven directors. |
| |
| |
2. |
|
The approval of an amendment to the Company’s 2004 Stock Incentive Plan
increasing the authorized shares available thereunder and increasing the number of
shares that may be granted to any one participant. |
| |
| |
3. |
|
The approval of the appointment of Ernst & Young LLP as the Company’s
independent registered public accounting firm for the fiscal year ending December 31,
2008. |
The results of the vote were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Withheld/ |
|
|
|
|
|
Broker |
| |
|
For |
|
Against |
|
Abstain |
|
Non-Votes |
1. Directors: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James J. Burns |
|
|
40,682,727 |
|
|
|
435,488 |
|
|
|
|
|
|
|
|
|
Richard Homburg |
|
|
40,736,476 |
|
|
|
381,739 |
|
|
|
|
|
|
|
|
|
Pamela N. Hootkin |
|
|
40,733,532 |
|
|
|
384,683 |
|
|
|
|
|
|
|
|
|
Paul G. Kirk, Jr. |
|
|
40,384,844 |
|
|
|
733,371 |
|
|
|
|
|
|
|
|
|
Everett B. Miller, III |
|
|
40,683,882 |
|
|
|
434,333 |
|
|
|
|
|
|
|
|
|
Leo S. Ullman |
|
|
40,727,076 |
|
|
|
391,139 |
|
|
|
|
|
|
|
|
|
Roger M. Widmann |
|
|
40,680,827 |
|
|
|
437,388 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2. Amendment to 2004 Incentive
Stock Plan |
|
|
30,888,265 |
|
|
|
3,121,580 |
|
|
|
1,257,645 |
|
|
|
|
|
| |
3. Independent registered
public accounting firm |
|
|
40,963,878 |
|
|
|
157,515 |
|
|
|
23,821 |
|
|
|
|
|
Item 6. Exhibits
|
|
|
| Exhibit 10.1 |
|
Loan Agreement dated as of June 13, 2008, incorporated by
reference to Exhibit 10.1 of Form 8-K filed on June 17, 2008 |
|
|
|
| Exhibit 31 |
|
Section 302 Certifications |
|
|
|
| Exhibit 32 |
|
Section 906 Certifications |
38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
CEDAR SHOPPING CENTERS, INC.
| |
|
|
|
|
By: /s/ LEO S. ULLMAN
|
|
By: /s/ LAWRENCE E. KREIDER, JR.
|
|
|
|
|
|
|
|
Leo S. Ullman
|
|
Lawrence E. Kreider, Jr. |
|
|
Chairman of the Board, Chief
|
|
Chief Financial Officer |
|
|
Executive Officer and President
|
|
(Principal financial officer) |
|
|
(Principal executive officer) |
|
|
|
|
|
|
|
|
|
August 4, 2008 |
|
|
|
|
39