UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K/A
(Amendment No. 2)
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006
OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
Commission file number 1-11690
DEVELOPERS DIVERSIFIED REALTY CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
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Ohio
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34-1723097
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(State or Other Jurisdiction
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(I.R.S. Employer Identification No.)
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of Incorporation or Organization)
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3300 Enterprise Parkway, Beachwood, Ohio 44122
(Address of Principal Executive Offices Zip Code)
(216) 755-5500
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Name of Each Exchange on
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Title of Each Class
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Which Registered
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Common Shares, Without Par Value.
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New York Stock Exchange
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Depositary Shares Representing Class F Cumulative Redeemable Preferred Shares
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New York Stock Exchange
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Depositary Shares Representing Class G Cumulative Redeemable Preferred Shares
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New York Stock Exchange
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Depositary Shares Representing Class H Cumulative Redeemable Preferred Shares
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New York Stock Exchange
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Depositary Shares Representing Class I Cumulative Redeemable Preferred Shares
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes
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No
o
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. Yes
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No
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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
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No
o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
þ
Accelerated filer
o
Non-accelerated filer
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes
o
No
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The aggregate market value of the voting stock held by non-affiliates of the registrant at
June 30, 2006 was $5.5 billion.
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrants classes of common stock
as of the latest practicable date.
109,452,823 common shares outstanding as of February 5, 2007
DOCUMENTS INCORPORATED BY REFERENCE
None.
EXPLANATORY NOTE
This Form 10-K/A (Amendment No. 2) (this Amendment) amends the Annual Report on Form 10-K of Developers
Diversified Realty Corporation (the Company) for the year ended December 31, 2006, which was
filed on February 21, 2007 and was amended on March 6, 2007 to incorporate by reference into Part
III portions of the Companys definitive proxy statement for its 2007 Annual Shareholders Meeting
(the Form 10-K as previously amended, the Original Report).
The Company is amending the Original Report to include as Exhibit 99.2 the financial statements
of DDR Macquarie Fund LLC for its fiscal years ended June 30, 2006 and 2005 and the period November
21, 2003 (date of inception) to June 30, 2004. The Company is also including additional footnote
disclosure in the Companys consolidated financial statements related to DDR MDT PS LLC, in addition to the existing footnote disclosure which presents combined financial information about
the Companys joint ventures. The Company has determined that these additional financial
statements and disclosures are appropriate based on the application of Rules 3.09 and 4.08(g) of
Regulation S-X. These additional financial statements and disclosures do not have any affect on
the Companys previously reported consolidated results of operations, financial condition or cash
flows.
This Amendment also includes a signature page, the certifications required by Rule 13a-14(a)
of the Securities Exchange Act of 1934 which have been reexecuted and refiled, the Exhibit Index
which has been amended and restated in its entirety to reflect the inclusion of the certifications,
the financial statements of DDR Macquarie LLC and the consents of PricewaterhouseCoopers LLP to the
inclusion of the financial statements in subsequent filings under the Securities Act of 1933.
Item 9A (Controls and Procedures) is included in this Amendment, but it has not been modified or updated from the Original Report.
All other items of the Original Report remain unchanged, and no attempt has been made to
update matters in the Original Report, except to the extent expressly provided above. Refer to the
Companys quarterly reports on Form 10-Q for periods subsequent to December 31, 2006.
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Item 9A.
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CONTROLS
AND PROCEDURES
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Disclosure
Controls and Procedures
Based on their evaluation as required by Securities Exchange Act
Rules 13a-15(b)
and 15d-15(b), the Companys Chief Executive Officer
(CEO) and Chief Financial Officer (CFO)
have concluded that the Companys disclosure controls and
procedures (as defined in Securities Exchange Act
Rules 13a-15(e)
and 15d-15(e)) are effective as of December 31, 2006, to
ensure that information required to be disclosed by the Company
in reports that it files or submits under the Securities
Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange
Commission rules and forms and were effective as of
December 31, 2006, to ensure that information required to
be disclosed by the Company issuer in the reports that it files
or submits under the Securities Exchange Act is accumulated and
communicated to the Companys management, including its CEO
and CFO, or persons performing similar functions, as appropriate
to allow timely decisions regarding required disclosure.
Managements
Report on Internal Control Over Financial Reporting
The Companys management is responsible for establishing
and maintaining adequate internal control over financial
reporting as defined in Exchange Act
Rule 13a-15(f).
Management assessed the effectiveness of its internal control
over financial reporting based on the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control Integrated Framework.
Based on those criteria, management concluded that the
Companys internal control over financial reporting was
effective as of December 31, 2006.
Managements assessment of the effectiveness of the
Companys internal control over financial reporting as of
December 31, 2006, has been audited by
PricewaterhouseCoopers, LLP, an independent registered public
accounting firm, as stated in their report, which is included in
Part IV; Item 15 of this Annual Report on
Form 10-K.
Changes
in Internal Control Over Financial Reporting
During the three-month period ended December 31, 2006,
there were no changes in the Companys internal control
over financial reporting that materially affected or are
reasonably likely to materially affect the Companys
internal control over financial reporting.
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Item 15.
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EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
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a.) 1.
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Financial Statements
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The following documents are filed as a part of this report:
Report of Independent Registered Public Accounting Firm.
Consolidated Balance Sheets as of December 31, 2006 and
2005.
Consolidated Statements of Operations for the three years ended
December 31, 2006.
Consolidated Statements of Shareholders Equity for the
three years ended December 31, 2006.
Consolidated Statements of Cash Flows for the three years ended
December 31, 2006.
Notes to the Consolidated Financial Statements.
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2.
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Financial Statement Schedules
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The following financial statement schedules were filed as part of the Annual Report on
Form 10-K
filed with the SEC on February 21, 2007 and should be read in conjunction with the Consolidated
Financial Statements of the registrant:
Schedule
II Valuation and Qualifying Accounts and
Reserves for the three years ended December 31, 2006.
60
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III Real Estate and Accumulated Depreciation at
December 31, 2006.
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Schedules not listed above have been omitted because they are
not applicable or because the information required to be set
forth therein is included in the Consolidated Financial
Statements or notes thereto.
b.) Exhibits The following
exhibits are filed as part of, or incorporated by reference
into, this report:
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Exhibit No.
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Under Reg.
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Form 10-K
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Filed Herewith or
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S-K
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Exhibit
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Incorporated Herein by
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Item 601
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No.
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Description
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Reference
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2
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2
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.1
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Agreement and Plan of Merger dated
as of October 20, 2006 by and among the Company, Inland
Retail Real Estate Trust, Inc., and DDR IRR Acquisition LLC
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Current Report on
Form 8-K
(Filed October 23, 2006)
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2
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2
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.2
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Purchase and Sale Agreement
between
MPR Del Norte LP, S.E.,
MPR Vega Baja LP, S.E.,
MPR Fajarado LP, S.E.,
MPR Del Oeste LP, S.E. and
MPR Guyama LP, S.E. and the Company
dated November 2, 2004
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Current Report on
Form 8-K
(Filed with the SEC on November 5, 2004)
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2
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2
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.3
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Purchase and Sale Agreement
between
CRV Rio Hondo LP, LLLP,
CRV Del Atlantico LP, LLLP,
CRV Rexville LP, LLLP,
CRV Senorial LP, LLLP and
CRV Hamilton Land Acquisition LP, LLLP
and the Company dated November 2, 2004
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Current Report on
Form 8-K
(Filed with the SEC on November 5, 2004)
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2
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2
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.4
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Purchase and Sale Agreement
between
CPR Del Sol LP, S.E.,
CPR Escorial LP, S.E.,
CPR Cayey LP, S.E.,
CPR Palma Real LP, S.E.,
CPR Isabela LP, S.E. and
CPR San Germain LP, S.E. and
the Company dated November 2, 2004
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Current Report on
Form 8-K
(Filed with the SEC on November 5, 2004)
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3
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3
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.1
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Amended and Restated Articles of
Incorporation of the Company, as amended
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Form S-3
Registration
No. 333-108361
(Filed with the SEC on August 29, 2003)
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3
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3
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.2
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Second Amendment to the Amended
and Restated Articles of Incorporation of the Company
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Form S-3
Registration
No. 333-108361
(Filed with the SEC on August 29, 2003)
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3
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3
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.3
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Third Amendment to the Amended and
Restated Articles of Incorporation of the Company
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Form S-3
Registration
No. 333-108361
(Filed with the SEC on August 29, 2003)
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3
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3
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.4
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Fourth Amendment to the Amended
and Restated Articles of Incorporation of the Company
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Form S-3
Registration
No. 333-108361
(Filed with the SEC on August 29, 2003)
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3
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3
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.5
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Fifth Amendment to the Amended and
Restated Articles of Incorporation of the Company
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Form S-3
Registration
No. 333-108361
(Filed with the SEC on August 29, 2003)
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3
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3
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.6
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Sixth Amendment to the Amended and
Restated Articles of Incorporation of the Company
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Form S-4
Registration
No. 333-117034
(Filed with the SEC on June 30, 2004)
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61
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Exhibit No.
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Under Reg.
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Form 10-K
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Filed Herewith or
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S-K
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Exhibit
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Incorporated Herein by
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Item 601
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No.
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Description
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Reference
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3
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3
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.7
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Seventh Amendment to the Amended
and Restated Articles of Incorporation of the Company
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Form S-4
Registration
No. 333-117034
(Filed with the SEC on June 30, 2004)
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3
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3
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.8
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Code of Regulations of the Company
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Form S-3
Registration
No. 333-108361
(Filed with the SEC on August 29, 2003)
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4
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4
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.1
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Specimen Certificate for Common
Shares
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Form S-3
Registration
No. 33-78778
(Filed with the SEC on May 10, 1994)
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4
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4
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.2
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Specimen Certificate for 8.60%
Class F Cumulative Redeemable Preferred Shares
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Form 8-A
Registration Statement (Filed with the SEC on March 21,
2002)
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4
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4
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.3
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Specimen Certificate for
Depositary Shares Relating to 8.60% Class F Cumulative
Redeemable Preferred Shares
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Annual Report on
Form 10-K
(Filed with the SEC on March 15, 2004)
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4
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4
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.4
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Specimen Certificate for 8.0%
Class G Cumulative Redeemable Preferred Shares
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Form 8-A
Registration Statement (Filed with the SEC on March 25,
2003)
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4
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4
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.5
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Specimen Certificate for
Depositary Shares Relating to 8.0% Class G Cumulative
Redeemable Preferred Shares
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Form 8-A
Registration Statement (Filed with the SEC on March 25,
2003)
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4
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4
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.6
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Specimen Certificate for
7
3
/
8
%
Class H Cumulative Redeemable Preferred Shares
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Form 8-A
Registration Statement (Filed with the SEC on July 17, 2003)
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4
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4
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.7
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Specimen Certificate for
Depositary Shares Relating to
7
3
/
8
%
Class H Cumulative Redeemable Preferred Shares
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Form 8-A
Registration Statement (Filed with the SEC on July 17, 2003)
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4
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4
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.8
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Specimen Certificate for 7.50%
Class I Cumulative Redeemable Preferred Shares
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Form 8-A
Registration Statement (Filed with the SEC on May 4, 2004)
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4
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4
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.9
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Specimen Certificate for
Depositary Shares Relating to 7.50% Class I Cumulative
Redeemable Preferred Shares
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Form 8-A
Registration Statement (Filed with the SEC on May 4, 2004)
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4
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4
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.10
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Indenture dated as of May 1,
1994 by and between the Company and Chemical Bank, as Trustee
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Form S-3
Registration
No. 333-108361
(Filed with the SEC on August 29, 2003)
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4
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4
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.11
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Indenture dated as of May 1,
1994 by and between the Company and National City Bank, as
Trustee (the NCB Indenture)
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Form S-3
Registration
No. 333-108361
(Filed with the SEC on August 29, 2003)
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4
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4
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.12
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First Supplement to NCB Indenture
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Form S-3
Registration
No. 333-108361
(Filed with the SEC on August 29, 2003)
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4
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4
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.13
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Second Supplement to NCB Indenture
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Form S-3
Registration
No. 333-108361
(Filed with the SEC on August 29, 2003)
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4
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4
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.14
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Third Supplement to NCB Indenture
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Form S-4
Registration
No. 333-117034
(Filed with the SEC on June 30, 2004)
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62
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Exhibit No.
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Under Reg.
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Form 10-K
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Filed Herewith or
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S-K
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Exhibit
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Incorporated Herein by
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Item 601
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No.
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Description
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Reference
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4
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4
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.15
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Fourth Supplement to NCB Indenture
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Form S-4
Registration
No. 333-117034
(Filed with the SEC on June 30, 2004)
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4
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4
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.16
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Fifth Supplement to NCB Indenture
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Annual Report on Form 10-K (Filed with the SEC on February
21, 2007)
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4
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4
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.17
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Sixth Supplement to NCB Indenture
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Annual Report on Form 10-K (Filed with the SEC on February
21, 2007)
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4
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4
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.18
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Seventh Supplement to NCB Indenture
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Current Report on
Form 8-K
(Filed with the SEC on September 1, 2006)
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4
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4
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.19
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Form of Fixed Rate Senior
Medium-Term Note
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Annual Report on
Form 10-K
(Filed with the SEC on March 30, 2000; File No. 001-11690)
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4
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4
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.20
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Form of Floating Rate Senior
Medium- Term Note
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Annual Report on
Form 10-K
(Filed with the SEC on March 30, 2000; File No. 001-11690)
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4
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4
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.21
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Form of Fixed Rate Subordinated
Medium-Term Note
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Annual Report on
Form 10-K
(Filed with the SEC on March 30, 2000; File No. 001-11690)
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4
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4
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.22
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Form of Floating Rate Subordinated
Medium-Term Note
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Annual Report on
Form 10-K
(Filed with the SEC on March 30, 2000; File No. 001-11690)
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4
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4
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.23
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Form of 3.875% Note due 2009
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Current Report on
Form 8-K
(Filed with the SEC on January 22, 2004)
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4
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4
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.24
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Form of 5.25% Note due 2011
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Form S-4
Registration
No. 333-117034
(Filed with the SEC on June 30, 2004)
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4
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4
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.25
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Form of 3.50% Convertible
Senior Note due 2011
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Current Report on
Form 8-K
(Filed with the SEC on September 1, 2006)
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4
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4
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.26
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Seventh Amended and Restated
Credit Agreement dated as of June 29, 2006 among the
Company and JPMorgan Securities, Inc. and Banc of America
Securities LLC, and other lenders named therein
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Current Report on
Form 8-K
(Filed with the SEC on July 6, 2006)
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4
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4
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.27
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Credit Agreement dated as of
March 13, 2003 among the Company and Banc of America
Securities, LLC and Wells Fargo Bank, National Association and
other lenders named therein
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Quarterly Report on
Form 10-Q
(Filed with the SEC on June 24, 2003)
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4
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4
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.28
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Term Loan Credit Agreement
dated as of May 20, 2004 among the Company and Banc One
Capital Markets, Inc. and Wachovia Capital Markets, LLC and
other lenders named therein
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Current Report on
Form 8-K
(Filed with the SEC on June 24, 2004)
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4
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4
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.29
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Waiver and First Amendment to Term
Loan Credit Agreement dated as of March 10, 2006 between
the Company and JPMorgan Chase Bank, N.A.
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Quarterly Report on
Form 10-Q
(Filed with the SEC on May 10, 2006)
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4
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4
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.30
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First Amended and Restated Secured
Term Loan Agreement dated as of June 29, 2006 among the
Company and Keybanc Capital Markets and Banc of America
Securities, LLC and other lenders named therein
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Current Report on
Form 8-K
(Filed with the SEC on July 6, 2006)
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63
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Exhibit No.
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Under Reg.
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Form 10-K
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Filed Herewith or
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S-K
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Exhibit
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Incorporated Herein by
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Item 601
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No.
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Description
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Reference
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4
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4
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.31
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Form of Indemnification Agreement
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Annual Report on
Form 10-K
(Filed with the SEC on March 15, 2004)
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4
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4
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.32
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Shareholder Rights Agreement dated
as of May 26, 1999 between the Company and National City
Bank
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Quarterly Report on
Form 10-Q
(Filed with the SEC on August 16, 1999; File No. 001-11690)
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4
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4
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.33
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Registration Rights Agreement
dated as of August 28, 2006 among the Company and the
Initial Purchasers named therein.
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Current Report on
Form 8-K
(Filed with the SEC on September 1, 2006)
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4
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4
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.34
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Fourth Amended and Restated Operating Agreement
of DDR Down REIT LLC dated as of February 26, 2007
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Annual Report on
Form 10-K/A
(Filed with the SEC on March 6, 2007)
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10
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10
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.1
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Registration Rights Agreement
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Form S-11
Registration
No. 33-54930
(Filed with the SEC on November 23, 1992)
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10
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10
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.2
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Stock Option Plan*
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Form S-8
Registration No.
33-74562
(Filed with the SEC on January 28, 1994)
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10
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10
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.3
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Amended and Restated
Directors Deferred Compensation Plan*
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Annual Report on
Form 10-K
(filed with the SEC on April 2, 2001)
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10
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10
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.4
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Elective Deferred Compensation
Plan*
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Annual Report on
Form 10-K
(Filed with the SEC on March 15, 2004)
|
|
10
|
|
|
|
10
|
.5
|
|
Developers Diversified Realty
Corporation Equity Deferred Compensation Plan*
|
|
Form S-3
Registration No.
333-108361
(Filed with the SEC on August 29, 2003)
|
|
10
|
|
|
|
10
|
.6
|
|
Developers Diversified Realty
Corporation Equity-Based Award Plan*
|
|
Annual Report on
Form 10-K
(Filed with the SEC on March 15, 2004)
|
|
10
|
|
|
|
10
|
.7
|
|
Amended and Restated 1998
Developers Diversified Realty Corporation Equity- Based Award
Plan*
|
|
Form S-8
Registration
No. 333-76537
(Filed with the SEC on April 19, 1999)
|
|
10
|
|
|
|
10
|
.8
|
|
2002 Developers Diversified Realty
Corporation Equity-Based Award Plan*
|
|
Quarterly Report on
Form 10-Q
(Filed with the SEC on August 14, 2002)
|
|
10
|
|
|
|
10
|
.9
|
|
2004 Developers Diversified Realty
Corporation Equity-Based Award Plan*
|
|
Form S-8
Registration
No. 333-117069
(Filed with the SEC on July 1, 2004)
|
|
10
|
|
|
|
10
|
.10
|
|
Form of Restricted Share Agreement
under the 1996/1998/2002/2004 Developers Diversified Realty
Corporation Equity-Based Award Plan*
|
|
Annual Report on
Form 10-K
(Filed with the SEC on March 16, 2005)
|
|
10
|
|
|
|
10
|
.11
|
|
Form of Restricted Share Agreement
for Executive Officers under the 2004 Developers Diversified
Realty Corporation Equity-Based Award Plan*
|
|
Quarterly Report on
Form 10-Q
(Filed with the SEC on November 9, 2006)
|
|
10
|
|
|
|
10
|
.12
|
|
Form of Incentive Stock Option
Grant Agreement for Executive Officers under the 2004 Developers
Diversified Realty Corporation Equity-Based Award Plan*
|
|
Quarterly Report on
Form 10-Q
(Filed with the SEC on November 9, 2006)
|
|
10
|
|
|
|
10
|
.13
|
|
Form of Incentive Stock Option
Grant Agreement for Executive Officers (with accelerated vesting
upon retirement) under the 2004 Developers Diversified Realty
Corporation Equity-Based Award Plan*
|
|
Quarterly Report on
Form 10-Q
(Filed with the SEC on November 9, 2006)
|
64
|
|
|
|
|
|
|
|
|
|
|
Exhibit No.
|
|
|
|
|
|
|
|
Under Reg.
|
|
|
Form 10-K
|
|
|
|
Filed Herewith or
|
S-K
|
|
|
Exhibit
|
|
|
|
Incorporated Herein by
|
Item 601
|
|
|
No.
|
|
Description
|
|
Reference
|
|
|
10
|
|
|
|
10
|
.14
|
|
Form of Non-Qualified Stock Option
Grant Agreement for Executive Officers under the 2004 Developers
Diversified Realty Corporation Equity-Based Award Plan*
|
|
Quarterly Report on
Form 10-Q
(Filed with the SEC on November 9, 2006)
|
|
10
|
|
|
|
10
|
.15
|
|
Form of Non-Qualified Stock Option
Grant Agreement for Executive Officers (with accelerated vesting
upon retirement) under the 2004 Developers Diversified Realty
Corporation Equity-Based Award Plan*
|
|
Quarterly Report on
Form 10-Q
(Filed with the SEC on November 9, 2006)
|
|
10
|
|
|
|
10
|
.16
|
|
Form of Directors Restricted
Shares Agreement, dated January 1, 2000*
|
|
Form S-11
Registration
No. 333-76278
(Filed with SEC on January 4, 2002; see Exhibit 10(ff)
therein)
|
|
10
|
|
|
|
10
|
.17
|
|
Performance Units Agreement, dated
as of March 1, 2000, between the Company and Scott A.
Wolstein*
|
|
Annual Report on
Form 10-K
(Filed with the SEC on March 8, 2002)
|
|
10
|
|
|
|
10
|
.18
|
|
Performance Units Agreement, dated
as of January 2, 2002, between the Company and Scott A.
Wolstein*
|
|
Annual Report on
Form 10-K
(Filed with the SEC on March 8, 2002)
|
|
10
|
|
|
|
10
|
.19
|
|
Performance Units Agreement, dated
as of January 2, 2002, between the Company and David M.
Jacobstein*
|
|
Quarterly Report on
Form 10-Q
(Filed with the SEC on May 15, 2002)
|
|
10
|
|
|
|
10
|
.20
|
|
Performance Units Agreement, dated
as of January 2, 2002, between the Company and Daniel B.
Hurwitz*
|
|
Quarterly Report on
Form 10-Q
(Filed with the SEC on May 15, 2002)
|
|
10
|
|
|
|
10
|
.21
|
|
Incentive Compensation Agreement,
effective as of February 11, 1998, between the Company and
Scott A. Wolstein*
|
|
Quarterly Report on
Form 10-Q
(Filed with the SEC on May 15, 2002)
|
|
10
|
|
|
|
10
|
.22
|
|
Amended and Restated Employment
Agreement dated as of November 6, 2006 between the Company
and Joan U. Allgood*
|
|
Quarterly Report on
Form 10-Q
(Filed with the SEC on November 9, 2006)
|
|
10
|
|
|
|
10
|
.23
|
|
Amended and Restated Employment
Agreement, dated as of November 6, 2006, between the
Company and Timothy J. Bruce*
|
|
Quarterly Report on
Form 10-Q
(Filed with the SEC on November 9, 2006)
|
|
10
|
|
|
|
10
|
.24
|
|
Employment Agreement dated as of
May 25, 1999 between the Company and Daniel B. Hurwitz*
|
|
Quarterly Report on
Form 10-Q
(Filed with the SEC on August 16, 1999; File No. 001-11690)
|
|
10
|
|
|
|
10
|
.25
|
|
Employment Agreement dated as of
April 21, 1999 between the Company and David M. Jacobstein*
|
|
Quarterly Report on
Form 10-Q
(Filed with the SEC on August 16, 1999; File No. 001-11690)
|
|
10
|
|
|
|
10
|
.26
|
|
Amended and Restated Employment
Agreement dated as of November 6, 2006 between the Company
and William H. Schafer*
|
|
Quarterly Report on
Form 10-Q
(Filed with the SEC on November 9, 2006)
|
|
10
|
|
|
|
10
|
.27
|
|
Employment Agreement dated as of
December 6, 2001, between the Company and Scott A. Wolstein*
|
|
Annual Report on
Form 10-K
(Filed with the SEC on March 8, 2002)
|
65
|
|
|
|
|
|
|
|
|
|
|
Exhibit No.
|
|
|
|
|
|
|
|
Under Reg.
|
|
|
Form 10-K
|
|
|
|
Filed Herewith or
|
S-K
|
|
|
Exhibit
|
|
|
|
Incorporated Herein by
|
Item 601
|
|
|
No.
|
|
Description
|
|
Reference
|
|
|
10
|
|
|
|
10
|
.28
|
|
Amended and Restated Employment
Agreement dated as of November 6, 2006 between the Company
and Richard E. Brown*
|
|
Quarterly Report on
Form 10-Q
(Filed with the SEC on November 9, 2006)
|
|
10
|
|
|
|
10
|
.29
|
|
Employment Agreement dated as of
November 6, 2006 between the Company and Robin R.
Walker-Gibbons*
|
|
Quarterly Report on
Form 10-Q
(Filed with the SEC on November 9, 2006)
|
|
10
|
|
|
|
10
|
.30
|
|
Amended and Restated Change of
Control Agreement dated as of November 6, 2006 between the
Company and Joan U. Allgood*
|
|
Quarterly Report on
Form 10-Q
(Filed with the SEC on November 9, 2006)
|
|
10
|
|
|
|
10
|
.31
|
|
Amended and Restated Change of
Control Agreement dated as of November 6, 2006 between the
Company and Richard E. Brown*
|
|
Quarterly Report on
Form 10-Q
(Filed with the SEC on November 9, 2006)
|
|
10
|
|
|
|
10
|
.32
|
|
Amended and Restated Change of
Control Agreement dated as of November 6, 2006 between the
Company and William H. Schafer*
|
|
Quarterly Report on
Form 10-Q
(Filed with the SEC on November 9, 2006)
|
|
10
|
|
|
|
10
|
.33
|
|
Form of Change of Control
Agreement dated as of March 24, 1999 between the Company
and each of Scott A. Wolstein*
|
|
Quarterly Report on
Form 10-Q
(Filed with the SEC on May 17, 1999; File No. 001-11690)
|
|
10
|
|
|
|
10
|
.34
|
|
Amended and Restated Change of
Control Agreement, dated as of November 6, 2006, between
the Company and Timothy J. Bruce*
|
|
Quarterly Report on
Form 10-Q
(Filed with the SEC on November 9, 2006)
|
|
10
|
|
|
|
10
|
.35
|
|
Change of Control Agreement dated
as of May 25, 1999 between the Company and Daniel B.
Hurwitz*
|
|
Quarterly Report on
Form 10-Q
(Filed with the SEC on August 16, 1999; File No. 001-11690)
|
|
10
|
|
|
|
10
|
.36
|
|
Change of Control Agreement dated
as of May 17, 1999 between the Company and David M.
Jacobstein*
|
|
Quarterly Report on
Form 10-Q
(Filed with the SEC on August 16, 1999; File No. 001-11690)
|
|
10
|
|
|
|
10
|
.37
|
|
Amended and Restated Change of
Control Agreement dated as of November 6, 2006 between the
Company and Robin R. Walker-Gibbons*
|
|
Quarterly Report on
Form 10-Q
(Filed with the SEC on November 9, 2006)
|
|
10
|
|
|
|
10
|
.38
|
|
Outperformance Long-Term Incentive
Plan Agreement dated as of August 18, 2006 between the
Company and Scott A. Wolstein*
|
|
Quarterly Report on
Form 10-Q
(Filed with the SEC on November 9, 2006)
|
|
10
|
|
|
|
10
|
.39
|
|
Outperformance Long-Term Incentive
Plan Agreement dated as of August 18, 2006 between the
Company and Daniel B. Hurwitz*
|
|
Quarterly Report on
Form 10-Q
(Filed with the SEC on November 9, 2006)
|
|
10
|
|
|
|
10
|
.40
|
|
Outperformance Long-Term Incentive
Plan Agreement dated as of February 23, 2006 between the
Company and Joan U. Allgood*
|
|
Quarterly Report on
Form 10-Q
(Filed with the SEC on November 9, 2006)
|
|
10
|
|
|
|
10
|
.41
|
|
Outperformance Long-Term Incentive
Plan Agreement dated as of February 23, 2006 between the
Company and Richard E. Brown*
|
|
Quarterly Report on
Form 10-Q
(Filed with the SEC on November 9, 2006)
|
66
|
|
|
|
|
|
|
|
|
|
|
Exhibit No.
|
|
|
|
|
|
|
|
Under Reg.
|
|
|
Form 10-K
|
|
|
|
Filed Herewith or
|
S-K
|
|
|
Exhibit
|
|
|
|
Incorporated Herein by
|
Item 601
|
|
|
No.
|
|
Description
|
|
Reference
|
|
|
10
|
|
|
|
10
|
.42
|
|
Outperformance Long-Term Incentive
Plan Agreement dated as of February 23, 2006 between the
Company and Timothy J. Bruce*
|
|
Quarterly Report on
Form 10-Q
(Filed with the SEC on November 9, 2006)
|
|
10
|
|
|
|
10
|
.43
|
|
Outperformance Long-Term Incentive
Plan Agreement dated as of February 23, 2006 between the
Company and William H. Schafer*
|
|
Quarterly Report on
Form 10-Q
(Filed with the SEC on November 9, 2006)
|
|
10
|
|
|
|
10
|
.44
|
|
Outperformance Long-Term Incentive
Plan Agreement dated as of February 23, 2006 between the
Company and Robin R. Walker-Gibbons*
|
|
Quarterly Report on
Form 10-Q
(Filed with the SEC on November 9, 2006)
|
|
10
|
|
|
|
10
|
.45
|
|
Form of Medium-Term
Note Distribution Agreement
|
|
Annual Report on
Form 10-K
(Filed with the SEC on March 30, 2000; File No. 001-11690)
|
|
10
|
|
|
|
10
|
.46
|
|
Program Agreement for Retail Value
Investment Program, dated as of February 11, 1998, among
Retail Value Management, Ltd., the Company and The Prudential
Insurance Company of America
|
|
Annual Report on
Form 10-K
(Filed with the SEC on March 15, 2004)
|
|
10
|
|
|
|
10
|
.47
|
|
Confirmation of Forward Sale
Transaction dated as of December 4, 2006 between the
Company and Deutsche Bank AG London
|
|
Current Report on
Form 8-K
(Filed with the SEC on December 7, 2006)
|
|
10
|
|
|
|
10
|
.48
|
|
Confirmation of Forward Sale
Transaction dated as of December 4, 2006 between the
Company and Merrill Lynch International
|
|
Current Report on
Form 8-K
(Filed with the SEC on December 7, 2006)
|
|
10
|
|
|
|
10
|
.49
|
|
Confirmation of Forward Sale
Transaction dated as of December 4, 2006 between the
Company and JPMorgan Chase Bank, National Association
|
|
Current Report on
Form 8-K
(Filed with the SEC on December 7, 2006)
|
|
14
|
|
|
|
14
|
.1
|
|
Developers Diversified Realty
Corporation Code of Ethics for Senior Financial Officers
|
|
Annual Report on
Form 10-K
(Filed with the SEC on March 15, 2004)
|
|
21
|
|
|
|
21
|
.1
|
|
List of Subsidiaries
|
|
Annual Report on Form 10-K (Filed with the SEC on February 21, 2007)
|
|
23
|
|
|
|
23
|
.1
|
|
Consent of PricewaterhouseCoopers
LLP
|
|
Filed herewith
|
|
23
|
|
|
|
23
|
.2
|
|
Consent of PricewaterhouseCoopers
LLP
|
|
Filed herewith
|
|
31
|
|
|
|
31
|
.1
|
|
Certification of principal
executive officer pursuant to
Rule 13a-14(a)
of the Securities Exchange Act of 1934
|
|
Filed herewith
|
|
31
|
|
|
|
31
|
.2
|
|
Certification of principal
financial officer pursuant to
Rule 13a-14(a)
of the Securities Exchange Act of 1934
|
|
Filed herewith
|
|
32
|
|
|
|
32
|
.1
|
|
Certification of chief executive
officer pursuant to
Rule 13a-14(b)
of the Securities Exchange Act of 1934 and 18 U.S.C.
Section 1350
|
|
Filed herewith
|
67
|
|
|
|
|
|
|
|
|
|
|
Exhibit No.
|
|
|
|
|
|
|
|
Under Reg.
|
|
|
Form 10-K
|
|
|
|
Filed Herewith or
|
S-K
|
|
|
Exhibit
|
|
|
|
Incorporated Herein by
|
Item 601
|
|
|
No.
|
|
Description
|
|
Reference
|
|
|
32
|
|
|
|
32
|
.2
|
|
Certification of chief financial
officer pursuant to
Rule 13a-14(b)
of the Securities Exchange Act of 1934 and 18 U.S.C.
Section 1350
|
|
Filed herewith
|
|
99
|
|
|
|
99
|
.1
|
|
Voting Agreement, dated
October 4, 2002, between the Company and certain
stockholders named therein
|
|
Current Report on
Form 8-K
(Filed with the SEC on October 9, 2002)
|
|
99
|
|
|
|
99
|
.2
|
|
Consolidated Financial Statements
of DDR Macquarie Fund LLC
|
|
Filed herewith
|
|
|
|
*
|
|
Management contracts and
compensatory plans or arrangements required to be filed as an
exhibit pursuant to Item 15(b) of
Form 10-K.
|
68
DEVELOPERS
DIVERSIFIED REALTY CORPORATION
INDEX TO
FINANCIAL STATEMENTS
Financial statements of the Companys unconsolidated joint
venture companies, except for DDR Macquarie Fund LLC, have been
omitted because they do not meet the significant subsidiary
definition of S-X 210.1-02(w).
F-1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Developers Diversified Realty Corporation:
We have completed integrated audits of Developers Diversified
Realty Corporations consolidated financial statements and
of its internal control over financial reporting as of
December 31, 2006, in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Our
opinions, based on our audits, are presented below.
Consolidated
financial statements and financial statement schedules
In our opinion, the consolidated financial statements listed in
the index appearing under Item 15(a)(1) present fairly, in
all material respects, the financial position of Developers
Diversified Realty Corporation and its subsidiaries (the
Company) at December 31, 2006 and 2005, and the
results of their operations and their cash flows for each of the
three years in the period ended December 31, 2006 in
conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the
financial statement schedules listed in the index appearing
under Item 15(a)(2) present fairly, in all material
respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
These financial statements and financial statement schedules are
the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements and financial statement schedules based on our
audits. We conducted our audits of these statements in
accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit of financial statements includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
As discussed in Notes 1 and 2 to the consolidated financial
statements, the Company, on April 1, 2004, adopted
FIN 46R, Consolidation of Variable Interest
Entities an interpretation of ARB 51, as
interpreted.
Internal
control over financial reporting
Also, in our opinion, managements assessment, included
Managements Report on Internal Control over
Financial Reporting appearing under Item 9A, that the
Company maintained effective internal control over financial
reporting as of December 31, 2006, based on criteria
established in
Internal Control Integrated
Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), is
fairly stated, in all material respects, based on those
criteria. Furthermore, in our opinion, the Company maintained,
in all material respects, effective internal control over
financial reporting as of December 31, 2006, based on
criteria established in
Internal Control
Integrated Framework
issued by the COSO. The Companys
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our
responsibility is to express opinions on managements
assessment and on the effectiveness of the Companys
internal control over financial reporting based on our audit. We
conducted our audit of internal control over financial reporting
in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over
financial reporting was maintained in all material respects. An
audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial
reporting, evaluating managements assessment, testing and
evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we consider
necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinions.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail,
F-2
accurately and fairly reflect the transactions and dispositions
of the assets of the company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance
with authorizations of management and directors of the company;
and (iii) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or
disposition of the companys assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
/s/ PRICEWATERHOUSECOOPERS LLP
Cleveland, Ohio
February 21, 2007
F-3
CONSOLIDATED
BALANCE SHEETS
(In thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
1,768,702
|
|
|
$
|
1,721,321
|
|
Buildings
|
|
|
5,023,665
|
|
|
|
4,806,373
|
|
Fixtures and tenant improvements
|
|
|
196,275
|
|
|
|
152,958
|
|
Construction in progress and land under development
|
|
|
453,493
|
|
|
|
348,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,442,135
|
|
|
|
7,029,337
|
|
Less: Accumulated depreciation
|
|
|
(861,266
|
)
|
|
|
(692,823
|
)
|
|
|
|
|
|
|
|
|
|
Real estate, net
|
|
|
6,580,869
|
|
|
|
6,336,514
|
|
Cash and cash equivalents
|
|
|
28,378
|
|
|
|
30,655
|
|
Accounts receivable, net
|
|
|
152,161
|
|
|
|
112,464
|
|
Notes receivable
|
|
|
18,161
|
|
|
|
24,996
|
|
Investments in and advances to joint ventures
|
|
|
291,685
|
|
|
|
275,136
|
|
Deferred charges, net
|
|
|
23,708
|
|
|
|
21,157
|
|
Other assets
|
|
|
79,467
|
|
|
|
62,055
|
|
Real estate held for sale
|
|
|
5,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,179,753
|
|
|
$
|
6,862,977
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity
|
|
|
|
|
|
|
|
|
Unsecured indebtedness:
|
|
|
|
|
|
|
|
|
Senior notes
|
|
$
|
2,218,020
|
|
|
$
|
1,966,268
|
|
Term debt
|
|
|
|
|
|
|
200,000
|
|
Revolving credit facility
|
|
|
297,500
|
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,515,520
|
|
|
|
2,316,268
|
|
Secured indebtedness:
|
|
|
|
|
|
|
|
|
Term debt
|
|
|
400,000
|
|
|
|
220,000
|
|
Mortgage and other secured indebtedness
|
|
|
1,333,292
|
|
|
|
1,354,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,733,292
|
|
|
|
1,574,733
|
|
|
|
|
|
|
|
|
|
|
Total indebtedness
|
|
|
4,248,812
|
|
|
|
3,891,001
|
|
Accounts payable and accrued expenses
|
|
|
134,781
|
|
|
|
111,186
|
|
Dividends payable
|
|
|
71,269
|
|
|
|
65,799
|
|
Other liabilities
|
|
|
106,775
|
|
|
|
93,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,561,637
|
|
|
|
4,161,247
|
|
|
|
|
|
|
|
|
|
|
Minority equity interests
|
|
|
104,596
|
|
|
|
99,181
|
|
Operating partnership minority interests
|
|
|
17,337
|
|
|
|
32,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,683,570
|
|
|
|
4,292,696
|
|
Commitments and contingencies (Note 12)
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
Preferred shares (Note 13)
|
|
|
705,000
|
|
|
|
705,000
|
|
Common shares, without par value, $.10 stated value;
200,000,000 shares authorized; 109,739,262 and
108,947,748 shares issued at December 31, 2006 and
2005, respectively
|
|
|
10,974
|
|
|
|
10,895
|
|
Paid-in-capital
|
|
|
1,959,629
|
|
|
|
1,945,245
|
|
Accumulated distributions in excess of net income
|
|
|
(159,615
|
)
|
|
|
(99,756
|
)
|
Deferred obligation
|
|
|
12,386
|
|
|
|
11,616
|
|
Accumulated other comprehensive income
|
|
|
7,829
|
|
|
|
10,425
|
|
Less: Unearned compensation-restricted stock
|
|
|
|
|
|
|
(13,144
|
)
|
Common shares in treasury at
cost: 752,975 shares at December 31, 2006
|
|
|
(40,020
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,496,183
|
|
|
|
2,570,281
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,179,753
|
|
|
$
|
6,862,977
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Revenues from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum rents
|
|
$
|
563,611
|
|
|
$
|
506,221
|
|
|
$
|
402,016
|
|
Percentage and overage rents
|
|
|
11,294
|
|
|
|
9,965
|
|
|
|
7,193
|
|
Recoveries from tenants
|
|
|
177,665
|
|
|
|
156,793
|
|
|
|
115,854
|
|
Ancillary and other property income
|
|
|
21,048
|
|
|
|
14,425
|
|
|
|
7,275
|
|
Management, development and other fee income
|
|
|
30,294
|
|
|
|
22,859
|
|
|
|
16,937
|
|
Other
|
|
|
14,186
|
|
|
|
9,300
|
|
|
|
13,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
818,098
|
|
|
|
719,563
|
|
|
|
562,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental operation expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and maintenance
|
|
|
113,468
|
|
|
|
97,599
|
|
|
|
63,929
|
|
Real estate taxes
|
|
|
95,620
|
|
|
|
84,756
|
|
|
|
72,850
|
|
General and administrative
|
|
|
60,679
|
|
|
|
54,048
|
|
|
|
47,126
|
|
Depreciation and amortization
|
|
|
192,219
|
|
|
|
163,341
|
|
|
|
122,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
461,986
|
|
|
|
399,744
|
|
|
|
306,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
356,112
|
|
|
|
319,819
|
|
|
|
255,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
9,113
|
|
|
|
10,078
|
|
|
|
4,233
|
|
Interest expense
|
|
|
(221,525
|
)
|
|
|
(181,040
|
)
|
|
|
(123,527
|
)
|
Other expense, net
|
|
|
(446
|
)
|
|
|
(2,532
|
)
|
|
|
(1,779
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(212,858
|
)
|
|
|
(173,494
|
)
|
|
|
(121,073
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before equity in net income of joint ventures, minority
interests, tax benefit (expense) of taxable REIT subsidiaries
and franchise taxes, discontinued operations, gain on
disposition of real estate and cumulative effect of adoption of
a new accounting standard
|
|
|
143,254
|
|
|
|
146,325
|
|
|
|
134,595
|
|
Equity in net income of joint ventures
|
|
|
30,337
|
|
|
|
34,873
|
|
|
|
40,895
|
|
Income before minority interests, tax benefit (expense) of
taxable REIT subsidiaries and franchise taxes, discontinued
operations, gain on disposition of real estate and cumulative
effect of adoption of a new accounting standard
|
|
|
173,591
|
|
|
|
181,198
|
|
|
|
175,490
|
|
Minority interests:
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority equity interests
|
|
|
(6,337
|
)
|
|
|
(4,965
|
)
|
|
|
(2,457
|
)
|
Operating partnership minority interests
|
|
|
(2,116
|
)
|
|
|
(2,916
|
)
|
|
|
(2,607
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,453
|
)
|
|
|
(7,881
|
)
|
|
|
(5,064
|
)
|
Tax benefit (expense) of taxable REIT subsidiaries and franchise
taxes
|
|
|
2,481
|
|
|
|
(342
|
)
|
|
|
(1,469
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
167,619
|
|
|
|
172,975
|
|
|
|
168,957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
|
2,571
|
|
|
|
4,861
|
|
|
|
10,603
|
|
Gain on disposition of real estate, net of tax
|
|
|
11,051
|
|
|
|
16,667
|
|
|
|
8,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,622
|
|
|
|
21,528
|
|
|
|
19,164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before gain on disposition of real estate and cumulative
effect of adoption of a new accounting standard
|
|
|
181,241
|
|
|
|
194,503
|
|
|
|
188,121
|
|
Gain on disposition of real estate
|
|
|
72,023
|
|
|
|
88,140
|
|
|
|
84,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of adoption of a new accounting
standard
|
|
|
253,264
|
|
|
|
282,643
|
|
|
|
272,763
|
|
Cumulative effect of adoption of a new accounting standard
|
|
|
|
|
|
|
|
|
|
|
(3,001
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
253,264
|
|
|
$
|
282,643
|
|
|
$
|
269,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred dividends
|
|
|
55,169
|
|
|
|
55,169
|
|
|
|
50,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common shareholders
|
|
$
|
198,095
|
|
|
$
|
227,474
|
|
|
$
|
219,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
1.69
|
|
|
$
|
1.90
|
|
|
$
|
2.10
|
|
Income from discontinued operations
|
|
|
0.13
|
|
|
|
0.20
|
|
|
|
0.20
|
|
Cumulative effect of adoption of a new accounting standard
|
|
|
|
|
|
|
|
|
|
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common shareholders
|
|
$
|
1.82
|
|
|
$
|
2.10
|
|
|
$
|
2.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
1.69
|
|
|
$
|
1.88
|
|
|
$
|
2.08
|
|
Income from discontinued operations
|
|
|
0.12
|
|
|
|
0.20
|
|
|
|
0.19
|
|
Cumulative effect of adoption of a new accounting standard
|
|
|
|
|
|
|
|
|
|
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common shareholders
|
|
$
|
1.81
|
|
|
$
|
2.08
|
|
|
$
|
2.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS EQUITY
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Accumulated
|
|
|
Unearned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions in
|
|
|
|
|
|
Other
|
|
|
Compensation -
|
|
|
Treasury
|
|
|
|
|
|
|
Preferred
|
|
|
Common
|
|
|
Paid in
|
|
|
Excess of
|
|
|
Deferred
|
|
|
Comprehensive
|
|
|
Restricted
|
|
|
Stock at
|
|
|
|
|
|
|
Shares
|
|
|
Shares
|
|
|
Capital
|
|
|
Net Income
|
|
|
Obligation
|
|
|
Income/(Loss)
|
|
|
Stock
|
|
|
Cost
|
|
|
Total
|
|
|
Balance, December 31, 2003
|
|
$
|
535,000
|
|
|
$
|
9,379
|
|
|
$
|
1,301,232
|
|
|
$
|
(116,737
|
)
|
|
$
|
8,336
|
|
|
$
|
(541
|
)
|
|
$
|
(3,892
|
)
|
|
$
|
(118,707
|
)
|
|
$
|
1,614,070
|
|
Issuance of 457,378 common shares for cash related to exercise
of stock options and dividend reinvestment plan
|
|
|
|
|
|
|
(27
|
)
|
|
|
(1,390
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,323
|
|
|
|
4,906
|
|
Issuance of 105,974 common shares related to restricted stock
plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,956
|
)
|
|
|
1,861
|
|
|
|
(1,095
|
)
|
Vesting of restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,929
|
|
|
|
|
|
|
|
1,433
|
|
|
|
|
|
|
|
3,362
|
|
Issuance of 20,450,000 common shares for cash
underwritten offerings
|
|
|
|
|
|
|
1,500
|
|
|
|
637,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
97,587
|
|
|
|
736,749
|
|
Redemption of 284,304 operating partnership units in exchange
for common shares
|
|
|
|
|
|
|
|
|
|
|
1,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,084
|
|
|
|
6,800
|
|
Issuance of Class I preferred shares for cash
underwritten offerings
|
|
|
170,000
|
|
|
|
|
|
|
|
(5,787
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
164,213
|
|
Dividends declared common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(194,078
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(194,078
|
)
|
Dividends declared preferred shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(51,237
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(51,237
|
)
|
Comprehensive income (Note 15):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
269,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
269,762
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of interest rate contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
867
|
|
|
|
|
|
|
|
|
|
|
|
867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
269,762
|
|
|
|
|
|
|
|
867
|
|
|
|
|
|
|
|
|
|
|
|
270,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
|
705,000
|
|
|
|
10,852
|
|
|
|
1,933,433
|
|
|
|
(92,290
|
)
|
|
|
10,265
|
|
|
|
326
|
|
|
|
(5,415
|
)
|
|
|
(7,852
|
)
|
|
|
2,554,319
|
|
Issuance of 425,985 common shares for cash related to exercise
of stock options, dividend reinvestment plan and performance
unit plan
|
|
|
|
|
|
|
43
|
|
|
|
10,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,740
|
)
|
|
|
6,206
|
|
|
|
10,366
|
|
Issuance of 88,360 common shares related to restricted stock plan
|
|
|
|
|
|
|
|
|
|
|
2,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,905
|
)
|
|
|
1,646
|
|
|
|
1,047
|
|
Vesting of restricted stock
|
|
|
|
|
|
|
|
|
|
|
(1,351
|
)
|
|
|
|
|
|
|
1,351
|
|
|
|
|
|
|
|
1,916
|
|
|
|
|
|
|
|
1,916
|
|
Dividends declared common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(234,940
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(234,940
|
)
|
Dividends declared preferred shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(55,169
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(55,169
|
)
|
Comprehensive income (Note 15):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
282,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
282,643
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of interest rate contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,619
|
|
|
|
|
|
|
|
|
|
|
|
10,619
|
|
Amortization of interest rate contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(520
|
)
|
|
|
|
|
|
|
|
|
|
|
(520
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
282,643
|
|
|
|
|
|
|
|
10,099
|
|
|
|
|
|
|
|
|
|
|
|
292,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
|
705,000
|
|
|
|
10,895
|
|
|
|
1,945,245
|
|
|
|
(99,756
|
)
|
|
|
11,616
|
|
|
|
10,425
|
|
|
|
(13,144
|
)
|
|
|
|
|
|
|
2,570,281
|
|
Issuance of 726,574 common shares for cash related to exercise
of stock options, dividend reinvestment plan and director
compensation
|
|
|
|
|
|
|
28
|
|
|
|
(1,819
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,028
|
|
|
|
8,237
|
|
Redemption of operating partnership units in exchange for common
shares
|
|
|
|
|
|
|
45
|
|
|
|
22,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,416
|
|
Repurchase of 909,000 common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(48,313
|
)
|
|
|
(48,313
|
)
|
Issuance of 64,940 common shares related to restricted stock plan
|
|
|
|
|
|
|
6
|
|
|
|
653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(150
|
)
|
|
|
509
|
|
Vesting of restricted stock
|
|
|
|
|
|
|
|
|
|
|
1,628
|
|
|
|
|
|
|
|
770
|
|
|
|
|
|
|
|
|
|
|
|
(1,585
|
)
|
|
|
813
|
|
Purchased option arrangement on common shares
|
|
|
|
|
|
|
|
|
|
|
(10,337
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,337
|
)
|
Adoption of SFAS 123(R)
|
|
|
|
|
|
|
|
|
|
|
(1,558
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,144
|
|
|
|
|
|
|
|
11,586
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
3,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,446
|
|
Dividends declared common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(257,954
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(257,954
|
)
|
Dividends declared preferred shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(55,169
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(55,169
|
)
|
Comprehensive income (Note 15):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
253,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
253,264
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of interest rate contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,729
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,729
|
)
|
Amortization of interest rate contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,454
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,454
|
)
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,587
|
|
|
|
|
|
|
|
|
|
|
|
1,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
253,264
|
|
|
|
|
|
|
|
(2,596
|
)
|
|
|
|
|
|
|
|
|
|
|
250,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
$
|
705,000
|
|
|
$
|
10,974
|
|
|
$
|
1,959,629
|
|
|
$
|
(159,615
|
)
|
|
$
|
12,386
|
|
|
$
|
7,829
|
|
|
$
|
|
|
|
$
|
(40,020
|
)
|
|
$
|
2,496,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Cash flow from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
253,264
|
|
|
$
|
282,643
|
|
|
$
|
269,762
|
|
Adjustments to reconcile net income to net cash flow provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
193,527
|
|
|
|
170,701
|
|
|
|
132,647
|
|
Stock-based compensation
|
|
|
3,446
|
|
|
|
|
|
|
|
|
|
Amortization of deferred finance costs and settled interest rate
protection agreements
|
|
|
7,756
|
|
|
|
7,433
|
|
|
|
7,300
|
|
Net cash received from interest rate hedging contracts
|
|
|
|
|
|
|
10,645
|
|
|
|
|
|
Ineffective portion of derivative financing investments
|
|
|
1,157
|
|
|
|
|
|
|
|
|
|
Equity in net income of joint ventures
|
|
|
(30,337
|
)
|
|
|
(34,873
|
)
|
|
|
(40,895
|
)
|
Cash distributions from joint ventures
|
|
|
23,304
|
|
|
|
39,477
|
|
|
|
38,724
|
|
Operating partnership minority interest expense
|
|
|
2,116
|
|
|
|
2,916
|
|
|
|
2,607
|
|
Gain on disposition of real estate and impairment charge, net
|
|
|
(83,074
|
)
|
|
|
(104,165
|
)
|
|
|
(92,616
|
)
|
Cumulative effect of adoption of a new accounting standard
|
|
|
|
|
|
|
|
|
|
|
3,001
|
|
Net change in accounts receivable
|
|
|
(38,013
|
)
|
|
|
(32,207
|
)
|
|
|
(6,611
|
)
|
Net change in accounts payable and accrued expenses
|
|
|
9,875
|
|
|
|
11,146
|
|
|
|
(15,048
|
)
|
Net change in other operating assets and liabilities
|
|
|
(2,329
|
)
|
|
|
1,707
|
|
|
|
(6,645
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
87,428
|
|
|
|
72,780
|
|
|
|
22,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flow provided by operating activities
|
|
|
340,692
|
|
|
|
355,423
|
|
|
|
292,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate developed or acquired, net of liabilities assumed
|
|
|
(454,357
|
)
|
|
|
(863,795
|
)
|
|
|
(1,907,683
|
)
|
Decrease in restricted cash
|
|
|
|
|
|
|
|
|
|
|
99,340
|
|
Equity contributions to joint ventures
|
|
|
(206,645
|
)
|
|
|
(28,244
|
)
|
|
|
(11,433
|
)
|
Repayment (advances) to joint ventures, net
|
|
|
622
|
|
|
|
(83,476
|
)
|
|
|
(7,355
|
)
|
Repayment (issuance) of notes receivable, net
|
|
|
6,834
|
|
|
|
(7,172
|
)
|
|
|
2,228
|
|
Proceeds resulting from contribution of properties to joint
ventures and repayments of advances from affiliates
|
|
|
298,059
|
|
|
|
344,292
|
|
|
|
635,445
|
|
Return of investments in joint ventures
|
|
|
50,862
|
|
|
|
87,349
|
|
|
|
39,342
|
|
Proceeds from disposition of real estate
|
|
|
101,578
|
|
|
|
211,603
|
|
|
|
15,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flow used for investing activities
|
|
|
(203,047
|
)
|
|
|
(339,443
|
)
|
|
|
(1,134,601
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from (repayment of) revolving credit facilities, net
|
|
|
147,500
|
|
|
|
90,000
|
|
|
|
(126,500
|
)
|
Proceeds from borrowings from term debt, net
|
|
|
(20,000
|
)
|
|
|
70,000
|
|
|
|
50,000
|
|
Proceeds from mortgage and other secured debt
|
|
|
11,093
|
|
|
|
158,218
|
|
|
|
105,394
|
|
Principal payments on rental property debt
|
|
|
(153,732
|
)
|
|
|
(809,396
|
)
|
|
|
(203,255
|
)
|
Repayment of senior notes
|
|
|
|
|
|
|
(1,000
|
)
|
|
|
(140,000
|
)
|
Proceeds from issuance of convertible senior notes, net of
underwriting commissions and offering expenses of $5,550 in 2006
|
|
|
244,450
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of medium term notes, net of underwriting
commissions and $1,390 and $421 of offering expenses paid in
2005 and 2004, respectively
|
|
|
|
|
|
|
741,139
|
|
|
|
520,003
|
|
Payment of deferred financing costs (bank borrowings)
|
|
|
(4,047
|
)
|
|
|
(6,994
|
)
|
|
|
(4,120
|
)
|
Payment of underwriting commissions for forward equity contract
|
|
|
(4,000
|
)
|
|
|
|
|
|
|
|
|
Purchased option arrangement on common shares
|
|
|
(10,337
|
)
|
|
|
|
|
|
|
|
|
Purchase of operating partnership minority interests
|
|
|
(2,097
|
)
|
|
|
|
|
|
|
|
|
Proceeds from the issuance of common shares, net of underwriting
commissions and $609 of offering expenses paid in 2004
|
|
|
|
|
|
|
|
|
|
|
736,749
|
|
Proceeds from the issuance of preferred shares, net of
underwriting commissions and $432 of offering expenses paid in
2004
|
|
|
|
|
|
|
|
|
|
|
164,213
|
|
Proceeds from the issuance of common shares in conjunction with
exercise of stock options, 401(k) plan and dividend reinvestment
plan
|
|
|
9,560
|
|
|
|
12,139
|
|
|
|
7,170
|
|
Distributions to operating partnership minority interests
|
|
|
(2,347
|
)
|
|
|
(2,902
|
)
|
|
|
(2,354
|
)
|
Repurchase of common shares
|
|
|
(48,313
|
)
|
|
|
|
|
|
|
|
|
Dividends paid
|
|
|
(307,652
|
)
|
|
|
(286,400
|
)
|
|
|
(226,747
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used for) provided by financing activities
|
|
|
(139,922
|
)
|
|
|
(35,196
|
)
|
|
|
880,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
|
(2,277
|
)
|
|
|
(19,216
|
)
|
|
|
38,178
|
|
Cash and cash equivalents, beginning of year
|
|
|
30,655
|
|
|
|
49,871
|
|
|
|
11,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
28,378
|
|
|
$
|
30,655
|
|
|
$
|
49,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
1. Summary
of Significant Accounting Policies
Nature of
Business
Developers Diversified Realty Corporation and its subsidiaries
(the Company or DDR) are primarily
engaged in the business of acquiring, expanding, owning,
developing, managing and operating shopping centers and enclosed
malls. The Companys shopping centers are typically
anchored by two or more national tenant anchors (Wal-Mart and
Target), home improvement stores (Home Depot, Lowes Home
Improvement) and two or more junior tenants (Bed
Bath & Beyond, Kohls, Circuit City, T.J. Maxx or
PETsMART). At December 31, 2006, the Company owned or had
interests in 467 shopping centers in 44 states plus Puerto Rico
and Brazil and seven business centers in five states. The
Company has an interest in 206 of these shopping centers through
equity method investments. The tenant base primarily includes
national and regional retail chains and local retailers.
Consequently, the Companys credit risk is concentrated in
the retail industry.
Consolidated revenues derived from the Companys largest
tenant, Wal-Mart, aggregated 4.7%, 5.1% and 4.0% of total
revenues for the years ended December 31, 2006, 2005 and
2004, respectively. The total percentage of Company-owned gross
leasable area (GLA unaudited) attributed to Wal-Mart
was 8.7% at December 31, 2006. The Companys ten
largest tenants comprised 17.7%, 20.0% and 19.4% of total
revenues for the years ended December 31, 2006, 2005 and
2004, respectively, including revenues reported within
discontinued operations. Management believes the Companys
portfolio is diversified in terms of the location of its
shopping centers and its tenant profile. Adverse changes in
general or local economic conditions could result in the
inability of some existing tenants to meet their lease
obligations and could otherwise adversely affect the
Companys ability to attract or retain tenants. During the
three-year period ended December 31, 2006, 2005 and 2004,
certain national and regional retailers experienced financial
difficulties, and several filed for protection under bankruptcy
laws. The Company does not believe that these bankruptcies will
have a material impact on the Companys financial position,
results of operations or cash flows.
Principles
of Consolidation
The Company consolidates certain entities if it is deemed to be
the primary beneficiary in a variable interest entity
(VIE), as defined in FIN No. 46(R),
Consolidation of Variable Interest Entities
(FIN 46). For those entities that are not VIEs,
the Company also consolidates entities in which it has financial
and operating control. All significant inter-company balances
and transactions have been eliminated in consolidation.
Investments in real estate joint ventures and companies in which
the Company has the ability to exercise significant influence,
but does not have financial or operating control, are accounted
for using the equity method of accounting. Accordingly, the
Companys share of the earnings (or loss) of these joint
ventures and companies is included in consolidated net income.
In 2005, the Company formed a joint venture (the Mervyns
Joint Venture) with an Australia-based Listed Property
Trust, MDT, that acquired the underlying real estate of 36
operating Mervyns stores. The Company holds a 50% economic
interest in the Mervyns Joint Venture, which is considered a
VIE, and the Company was determined to be the primary
beneficiary. The Company earns property management, acquisition
and financing fees from this VIE, which are eliminated in
consolidation. The VIE has total real estate assets and total
non-recourse mortgage debt of approximately $405.8 million
and $258.5 million, respectively, at December 31,
2006, and is consolidated in the results of the Company.
In 2003, the Company formed a joint venture (the MDT Joint
Venture) with Macquarie Bank Limited, that focuses on
acquiring community center properties in the United States. The
Company maintains an interest in the MDT Joint Venture, a VIE in
which the Company has an approximate 12% economic interest. The
Company was not determined to be the primary beneficiary. The
Company earns asset management and performance fees from a joint
venture that serves as the manager of the MDT Joint Venture
(MDT Manager). The Company has a 50% ownership and
serves as the managing member, accounted for under the equity
method of accounting. The MDT Joint Venture has total real
estate assets and total non-recourse mortgage debt of
approximately $1.7 billion and $1.1 billion and
$1.7 billion and $1.0 billion, respectively, at
December 31, 2006 and 2005, respectively. The
Companys maximum exposure to loss associated with this
joint venture is primarily limited to the Companys
aggregate capital investment, which was approximately
$63.6 million at December 31, 2006. The financial
F-8
statements of the MDT Joint Venture are included as part of the
combined joint ventures financial statements in Note 2.
Statement
of Cash Flows and Supplemental Disclosure of Non-Cash Investing
and Financing Information
Non-cash investing and financing activities are summarized as
follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Contribution of net assets to joint ventures
|
|
$
|
2.9
|
|
|
$
|
13.6
|
|
|
$
|
70.7
|
|
Consolidation of the net assets (excluding mortgages as
disclosed below) of joint ventures
|
|
|
368.9
|
|
|
|
|
|
|
|
10.2
|
|
Mortgages assumed, shopping center acquisitions and
consolidation of joint ventures
|
|
|
132.9
|
|
|
|
661.5
|
|
|
|
458.7
|
|
Liabilities assumed with the acquisition of shopping centers
|
|
|
|
|
|
|
|
|
|
|
46.9
|
|
Consolidation of net assets from adoption of EITF 04-05
|
|
|
43.0
|
|
|
|
|
|
|
|
|
|
Mortgages assumed, adoption of EITF 04-05
|
|
|
17.1
|
|
|
|
|
|
|
|
|
|
Dividends declared, not paid
|
|
|
71.3
|
|
|
|
65.8
|
|
|
|
62.1
|
|
Fair value of interest rate swaps
|
|
|
1.1
|
|
|
|
0.3
|
|
|
|
2.6
|
|
Deferred payment of swaption
|
|
|
2.8
|
|
|
|
|
|
|
|
|
|
Share issuance for operating partnership unit redemption
|
|
|
14.9
|
|
|
|
|
|
|
|
6.8
|
|
The transactions above did not provide or use cash in the years
presented and, accordingly, are not reflected in the
consolidated statements of cash flows.
Real
Estate
Real estate assets held for investment are stated at cost less
accumulated depreciation, which, in the opinion of management,
is not in excess of the individual propertys estimated
undiscounted future cash flows, including estimated proceeds
from disposition.
Depreciation and amortization are provided on a straight-line
basis over the estimated useful lives of the assets as follows:
|
|
|
Buildings
|
|
Useful lives, ranging from 30 to 40 years
|
Furniture/fixtures and tenant improvements
|
|
Useful lives, which approximate lease terms, where applicable
|
Expenditures for maintenance and repairs are charged to
operations as incurred. Significant renovations that improve or
extend the life of the assets are capitalized. Included in land
at December 31, 2006, was undeveloped real estate,
generally outlots or expansion pads adjacent to shopping centers
owned by the Company (excluding shopping centers owned through
joint ventures) and excess land of approximately 1,000 acres.
Construction in progress includes shopping center developments
and significant expansions and redevelopments. The Company
capitalizes interest on funds used for the construction,
expansion or redevelopment of shopping centers, including funds
invested in or advanced to joint ventures with qualifying
development activities. Capitalization of interest ceases when
construction activities are substantially completed and the
property is available for occupancy by tenants. In addition, the
Company capitalized certain direct and incremental internal
construction and software development and implementation costs
of $10.0 million, $6.2 million and $5.7 million
in 2006, 2005 and 2004, respectively.
Purchase
Price Accounting
Upon acquisition of properties, the Company estimates the fair
value of acquired tangible assets, consisting of land, building
and improvements, and, if determined to be material, identifies
intangible assets generally consisting
F-9
of the fair value of (i) above- and below-market leases,
(ii) in-place leases and (iii) tenant relationships.
The Company allocates the purchase price to assets acquired and
liabilities assumed based on their relative fair values at the
date of acquisition pursuant to the provisions of Statement of
Financial Accounting Standards (SFAS) No. 141,
Business Combinations. In estimating the fair value
of the tangible and intangible assets acquired, the Company
considers information obtained about each property as a result
of its due diligence, marketing and leasing activities, and
utilizes various valuation methods, such as estimated cash flow
projections using appropriate discount and capitalization rates,
estimates of replacement costs net of depreciation, and
available market information. Depending upon the size of the
acquisition, the Company may engage an outside appraiser to
perform a valuation of the tangible and intangible assets
acquired. The fair value of the tangible assets of an acquired
property considers the value of the property as if it were
vacant.
Above- and below-market lease values for acquired properties are
recorded based on the present value (using a discount rate that
reflects the risks associated with the leases acquired) of the
difference between (i) the contractual amounts to be paid
pursuant to each in-place lease and (ii) managements
estimate of fair market lease rates for each corresponding
in-place lease, measured over a period equal to the remaining
term of the lease for above-market leases and the initial term
plus the term of any below-market fixed-rate renewal options for
below-market leases. The capitalized above-market lease values
are amortized as a reduction of base rental revenue over the
remaining term of the respective leases, and the capitalized
below-market lease values are amortized as an increase to base
rental revenue over the remaining initial terms plus the terms
of any below-market fixed-rate renewal options of the respective
leases. At December 31, 2006 and 2005, the below-market
leases aggregated $22.9 million and $11.5 million,
respectively. At December 31, 2006 and 2005, the
above-market leases aggregated $2.3 million and
$1.4 million, respectively.
The total amount allocated to in-place lease values and tenant
relationship values is based upon managements evaluation
of the specific characteristics of the acquired lease portfolio
and the Companys overall relationship with anchor tenants.
Factors considered in the allocation of these values include the
nature of the existing relationship with the tenant, the
expectation of lease renewals, the estimated carrying costs of
the property during a hypothetical, expected
lease-up
period, current market conditions and costs to execute similar
leases. Estimated carrying costs include real estate taxes,
insurance, other property operating costs and estimates of lost
rentals at market rates during the hypothetical, expected
lease-up
periods, based upon managements assessment of specific
market conditions.
The value of in-place leases including origination costs is
amortized to expense over the estimated weighted average
remaining initial term of the acquired lease portfolio. The
value of tenant relationship intangibles is amortized to expense
over the estimated initial and renewal terms of the lease
portfolio; however, no amortization period for intangible assets
will exceed the remaining depreciable life of the building.
Intangible assets associated with property acquisitions are
included in other assets and other liabilities, with respect to
the below-market leases, in the Companys consolidated
balance sheets.
Impairment
of Long-Lived Assets
The Company follows the provisions of SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets (SFAS 144). If an asset is held
for sale, it is stated at the lower of its carrying value or
fair value, less cost to sell. The determination of undiscounted
cash flows requires significant estimates made by management and
considers the expected course of action at the balance sheet
date. Subsequent changes in estimated undiscounted cash flows
arising from changes in anticipated actions could affect the
determination of whether an impairment exists.
The Company reviews its long-lived assets used in operations for
impairment when there is an event or change in circumstances
that indicates an impairment in value. An asset is considered
impaired when the undiscounted future cash flows are not
sufficient to recover the assets carrying value. If such
impairment is present, an impairment loss is recognized based on
the excess of the carrying amount of the asset over its fair
value. The Company records impairment losses and reduces the
carrying amounts of assets held for sale when the carrying
amounts exceed the estimated selling proceeds, less the costs to
sell.
F-10
Deferred
Charges
Costs incurred in obtaining indebtedness are included in
deferred charges in the accompanying consolidated balance sheets
and are amortized on a straight-line basis over the terms of the
related debt agreements, which approximates the effective
interest method. Such amortization is reflected as interest
expense in the consolidated statements of operations.
Revenue
Recognition
Minimum rents from tenants are recognized using the
straight-line method over the lease term of the respective
leases. Percentage and overage rents are recognized after a
tenants reported sales have exceeded the applicable sales
breakpoint set forth in the applicable lease. Revenues
associated with tenant reimbursements are recognized in the
period that the expenses are incurred based upon the tenant
lease provision. Management fees are recorded in the period
earned based on a percentage of collected rent at the properties
under management. Ancillary and other property-related income,
which includes the leasing of vacant space to temporary tenants,
is recognized in the period earned. Lease termination fees are
included in other income and recognized upon the effective
termination of a tenants lease when the Company has no
further obligations with the lease. Fee income derived from the
Companys joint venture investments is recognized to the
extent attributable to the unaffiliated ownership interest.
Accounts
Receivable
The Company makes estimates of the uncollectability of its
accounts receivable related to base rents, expense
reimbursements and other revenues. The Company analyzes accounts
receivable and historical bad debt levels, customer credit
worthiness and current economic trends when evaluating the
adequacy of the allowance for doubtful accounts. In addition,
tenants in bankruptcy are analyzed and estimates are made in
connection with the expected recovery of pre-petition and
post-petition claims. The Companys reported net income is
directly affected by managements estimate of the
collectability of accounts receivable.
Accounts receivable, other than straight-line rents receivable,
are expected to be collected within one year and are net of
estimated unrecoverable amounts of approximately
$14.5 million and $19.0 million at December 31,
2006 and 2005, respectively. At December 31, 2006 and 2005,
straight-line rents receivable, net of a provision for
uncollectable amounts of $3.5 million and
$2.4 million, aggregated $54.7 million and
$38.5 million, respectively.
Disposition
of Real Estate and Real Estate Investments
Disposition of real estate relates to the sale of outlots and
land adjacent to existing shopping centers, shopping center
properties and real estate investments. Gains from dispositions
are recognized using the full accrual or partial sale methods,
as applicable, in accordance with the provisions of
SFAS No. 66, Accounting for Real Estate
Sales, (SFAS 66) provided that various
criteria relating to the terms of sale and any subsequent
involvement by the Company with the properties sold are met.
SFAS 144 retains the basic provisions for presenting
discontinued operations in the income statement but broadens the
scope to include a component of an entity rather than a segment
of a business. Pursuant to the definition of a component of an
entity in SFAS 144, assuming no significant continuing
involvement, the sale of a retail or industrial operating
property is considered discontinued operations. In addition,
properties classified as held for sale are also considered a
discontinued operation. Accordingly, the results of operations
of properties disposed of, or classified as held for sale, for
which the Company has no significant continuing involvement, are
reflected as discontinued operations. Interest expense, which is
specifically identifiable to the property, is used in the
computation of interest expense attributable to discontinued
operations. Consolidated interest at the corporate level is
allocated to discontinued operations pursuant to the methods
prescribed under Emerging Issues Task Force (EITF)
87-24,
Allocation of Interest to Discontinued Operations,
based on the proportion of net assets disposed.
Real
Estate Held for Sale
The Company generally considers assets to be held for sale when
the transaction has been approved by the appropriate level of
management and there are no known significant contingencies
relating to the sale such that the
F-11
property sale within one year is considered probable. The
Company evaluates the held for sale classification of its owned
real estate each quarter. Assets that are classified as held for
sale are recorded at the lower of their carrying amount or fair
value less cost to sell. The results of operations of these
shopping centers are reflected as discontinued operations in all
periods presented.
On occasion, the Company will receive unsolicited offers from
third parties to buy individual shopping centers. The Company
will generally classify the properties as held for sale when a
sales contract is executed with no contingencies and the
prospective buyer has significant funds at risk to ensure
performance.
General
and Administrative Expenses
General and administrative expenses include certain internal
leasing and legal salaries and related expenses directly
associated with the re-leasing of existing space, which are
charged to operations as incurred.
Stock
Option and Other Equity-Based Plans
Prior to January 1, 2006, the Company followed Accounting
Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees.
Accordingly, the Company did not recognize compensation cost for
stock options when the option exercise price equaled or exceeded
the market value on the date of the grant. Prior to
January 1, 2006, no stock-based employee compensation cost
for stock options was reflected in net income, as all options
granted under those plans had an exercise price equal to or in
excess of the market value of the underlying common stock on the
date of grant. The Company recorded compensation expense related
to its restricted stock plan and its performance unit awards.
In December 2004, the Financial Accounting Standards Board
(FASB) issued SFAS No. 123(R),
Share-Based Payment (SFAS 123(R)).
SFAS 123(R) is an amendment of SFAS 123 and requires
that the compensation cost relating to share-based payment
transactions be recognized in the financial statements based
upon the grant date fair value. The grant date fair value of the
portion of the restricted stock and performance unit awards
issued prior to the adoption of SFAS 123(R) that is
ultimately expected to vest is recognized as expense on a
straight-line attribution basis over the requisite service
periods in the Companys consolidated financial statements.
SFAS 123(R) requires forfeitures to be estimated at the
time of grant in order to estimate the amount of share-based
awards that will ultimately vest. The forfeiture rate is based
on historical rates.
The Company adopted SFAS 123(R) as required on
January 1, 2006, using the modified prospective method. The
Companys consolidated financial statements as of and for
the year ended December 31, 2006, reflect the impact of
SFAS 123(R). In accordance with the modified prospective
method, the Companys consolidated financial statements for
prior periods have not been restated to reflect the impact of
SFAS 123(R). Share-based compensation expense recognized in
the Companys consolidated financial statements for the
year ended December 31, 2006, includes
(i) compensation expense for share-based payment awards
granted prior to, but not yet vested, as of December 31,
2005, based on the grant-date fair value and
(ii) compensation expense for the share-based payment
awards granted subsequent to December 31, 2005, based on
the grant date fair value estimated in accordance with the
provisions of SFAS 123(R).
The adoption of this standard changed the balance sheet and
resulted in decreasing other liabilities and increasing
shareholders equity by $11.6 million. In addition,
unearned compensation restricted stock (included in
shareholders equity) of $13.1 million was eliminated
and reclassed to paid in capital. These balance sheet changes
relate to deferred compensation under the performance unit plans
and unvested restricted stock awards. Under SFAS 123(R),
deferred compensation is no longer recorded at the time unvested
shares are issued. Share-based compensation expense is
recognized over the requisite service period with an offsetting
credit to equity.
F-12
The compensation cost recognized under SFAS 123(R) was
$8.3 million for the year ended December 31, 2006.
There were no significant capitalized stock-based compensation
costs at December 31, 2006. The following table illustrates
the effect on net income and earnings per share if the Company
had applied the fair value recognition provisions of
SFAS 148, Accounting for Stock-Based
Compensation Transition and Disclosure an amendment
of SFAS No. 123, for the years ended
December 31, 2005 and 2004 (in thousands, except per share
amounts):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Net income, as reported
|
|
$
|
282,643
|
|
|
$
|
269,762
|
|
Add: Stock-based employee compensation included in reported net
income
|
|
|
5,652
|
|
|
|
6,308
|
|
Deduct: Total stock-based employee compensation expense
determined under fair value-based method for all awards
|
|
|
(5,319
|
)
|
|
|
(5,062
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
282,976
|
|
|
$
|
271,008
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
Basic as reported
|
|
$
|
2.10
|
|
|
$
|
2.27
|
|
|
|
|
|
|
|
|
|
|
Basic pro forma
|
|
$
|
2.10
|
|
|
$
|
2.28
|
|
|
|
|
|
|
|
|
|
|
Diluted as reported
|
|
$
|
2.08
|
|
|
$
|
2.24
|
|
|
|
|
|
|
|
|
|
|
Diluted pro forma
|
|
$
|
2.09
|
|
|
$
|
2.25
|
|
|
|
|
|
|
|
|
|
|
See Note 18, Benefit Plans, for additional
information.
Interest
and Real Estate Taxes
Interest and real estate taxes incurred during the development
and significant expansion of real estate assets are capitalized
and depreciated over the estimated useful life of the building.
Interest paid during the years ended December 31, 2006,
2005 and 2004, aggregated $239.3 million,
$190.0 million and $133.8 million, respectively, of
which $20.0 million, $12.7 million and
$9.9 million, respectively, was capitalized.
Goodwill
SFAS 142, Goodwill and Other Intangible Assets,
requires that intangible assets not subject to amortization and
goodwill be tested for impairment annually, or more frequently
if events or changes in circumstances indicate that the carrying
value may not be recoverable. Amortization of goodwill,
including such assets associated with joint ventures acquired in
past business combinations, ceased upon adoption of
SFAS 142. Goodwill is included in the balance sheet caption
Investments in and Advances to Joint Ventures in the amount of
$5.4 million as of December 31, 2006 and 2005. The
Company evaluated the goodwill related to its joint venture
investments for impairment and determined that it was not
impaired as of December 31, 2006 and 2005.
Intangible
Assets
In addition to the intangibles discussed above in purchase price
accounting, the Company has finite-lived intangible assets,
comprised of management contracts associated with the
Companys acquisition of a joint venture, stated at cost
less amortization calculated on a straight-line basis over
15 years. Intangible assets, net, are included in the
balance sheet caption Investments in and Advances to Joint
Ventures in the amount of $4.3 million and
$4.4 million as of December 31, 2006 and 2005,
respectively. The
15-year
life
approximates the expected turnover rate of the original
management contracts acquired. The estimated amortization
expense associated with this intangible asset for each of the
five succeeding fiscal years is approximately $0.3 million
per year.
F-13
Investments
in and Advances to Joint Ventures
To the extent that the Company contributes assets to a joint
venture, the Companys investment in the joint venture is
recorded at the Companys cost basis in the assets that
were contributed to the joint venture. To the extent that the
Companys cost basis is different from the basis reflected
at the joint venture level, the basis difference is amortized
over the life of the related assets and included in the
Companys share of equity in net income of the joint
venture. In accordance with the provisions of
SFAS No. 66 and Statement of Position
78-9,
Accounting for Investments in Real Estate Ventures,
paragraph 30, the Company recognizes gains on the
contribution of real estate to joint ventures, relating solely
to the outside partners interest, to the extent the
economic substance of the transaction is a sale. The Company
continually evaluates its investments in and advances to joint
ventures for other than temporary declines in market value. The
Company records impairment charges based on these evaluations.
The Company has determined that these investments are not
impaired as of December 31, 2006.
Foreign
Currency Translation
The financial statements of Sonae Sierra Brazil, an equity
method investment, are translated into U.S. dollars using
the exchange rate at each balance sheet date for assets and
liabilities and a weighted average exchange rate for each period
for revenues, expenses, gains and losses, with the
Companys proportionate share of the resulting translation
adjustments recorded as Accumulated Other Comprehensive Income
(Loss). Foreign currency gains or losses from changes in
exchange rates are not material to the consolidated operating
results.
Cash and
Cash Equivalents
The Company considers all highly liquid investments with an
original maturity of three months or less to be cash
equivalents. The Company maintains cash deposits with a major
financial institution, which from time to time may exceed
federally insured limits. The Company periodically assesses the
financial condition of the institution and believes that the
risk of loss is minimal. Cash flows associated with items
intended as hedges of identifiable transactions or events are
classified in the same category as the cash flows from the items
being hedged.
Income
Taxes
The Company has made an election to qualify, and believes it is
operating so as to qualify, as a REIT for federal income tax
purposes. Accordingly, the Company generally will not be subject
to federal income tax, provided that distributions to its
stockholders equal at least the amount of its REIT taxable
income as defined under Section 856 through 860 of the Code.
In connection with the REIT Modernization Act, which became
effective January 1, 2001, the Company is now permitted to
participate in certain activities which it was previously
precluded from in order to maintain its qualification as a REIT,
so long as these activities are conducted in entities which
elect to be treated as taxable subsidiaries under the Code. As
such, the Company is subject to federal and state income taxes
on the income from these activities.
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for
the estimated future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases
and operating loss and tax credit carry-forwards. Deferred tax
assets and liabilities are measured using enacted tax rates in
effect for the year in which those temporary differences are
expected to be recovered or settled.
Treasury
Stock
The Companys share repurchases are reflected as treasury
stock utilizing the cost method of accounting and are presented
as a reduction to consolidated shareholders equity.
Use of
Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amount
of assets and liabilities, the
F-14
disclosure of contingent assets and liabilities and the reported
amounts of revenues and expenses during the year. Actual results
could differ from those estimates.
New
Accounting Standards
Investors
Accounting for an Investment in a Limited Partnership When the
Investor is the Sole General Partner and the Limited Partners
Have Certain Rights EITF 04-05
In June 2005, the FASB ratified the consensus reached by the
EITF regarding EITF 04-05, Investors Accounting for
an Investment in a Limited Partnership When the Investor is the
Sole General Partner and the Limited Partners Have Certain
Rights. The conclusion provides a framework for addressing
the question of when a sole general partner, as defined in EITF
04-05, should consolidate a limited partnership. The EITF has
concluded that the general partner of a limited partnership
should consolidate a limited partnership unless the limited
partners have the substantive right to remove the general
partner, liquidate the limited partnership or substantive
participating rights (veto rights decisions made in the ordinary
course of business). This EITF is effective for all new limited
partnerships formed and, for existing limited partnerships for
which the partnership agreements are modified after June 29,
2005 and, as of January 1, 2006, for existing limited
partnership agreements. As a result of the adoption of this
EITF, the Company consolidated one limited partnership with
total assets and liabilities of $24.4 million and $17.7 million,
respectively, which were consolidated into the Companys
financial statements at January 1, 2006.
Accounting
Changes and Error Corrections
SFAS 154
In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections
(SFAS 154), which replaces APB Opinion
No. 20, Accounting Changes, and
SFAS No. 3, Reporting Accounting Changes in
Interim Financial Statements An Amendment of APB
Opinion No. 28. SFAS 154 provides guidance on
the accounting for and reporting of accounting changes and error
corrections. It establishes retrospective application, on the
latest practicable date, as the required method for reporting a
change in accounting principle and the reporting of a correction
of an error. SFAS 154 was effective for the Company in the
first quarter of 2006. The adoption of this standard did not
have a material impact on the Companys financial position,
results of operations or cash flows.
Accounting
for Uncertainty in Income Taxes
FIN 48
In July 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes An
Interpretation of SFAS No. 109
(FIN 48). FIN 48 prescribes a
comprehensive model for how a company should recognize, measure,
present and disclose in its financial statements uncertain tax
positions that a company has taken or expects to take on a tax
return (including a decision whether to file or not to file a
return in a particular jurisdiction). Under FIN 48, the
financial statements will reflect expected future tax
consequences of such positions presuming the taxing
authorities full knowledge of the position and all
relevant facts, but without considering time values. FIN 48
also revises disclosure requirements and introduces a
prescriptive, annual, tabular roll-forward of the unrecognized
tax benefits. FIN 48 is effective for fiscal years
beginning after December 15, 2006 (i.e., fiscal year ending
December 31, 2007 for the Company). The Company is
currently evaluating the impact that FIN 48 will have on
its financial statements.
Considering
the Effects of Prior Year Misstatements When Quantifying
Misstatements in Current Year Financial Statements
SAB 108
In September 2006, the SEC staff issued Staff Accounting
Bulletin No. 108, Considering the Effects of
Prior Year Misstatements When Quantifying Misstatements in
Current Year Financial Statements, to address the observed
diversity in quantification practices with respect to annual
financial statements. This bulletin was adopted by the Company
in the fourth quarter of 2006. This bulletin did not have a
material impact on the Companys results of operations,
cash flows or financial position.
F-15
Fair
Value Measurements SFAS 157
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements. This Statement defines fair
value and establishes a framework for measuring fair value in
generally accepted accounting principles. The key changes to
current practice are (1) the definition of fair value,
which focuses on an exit price rather than an entry price;
(2) the methods used to measure fair value, such as
emphasis that fair value is a market-based measurement, not an
entity-specific measurement, as well as the inclusion of an
adjustment for risk, restrictions and credit standing and
(3) the expanded disclosures about fair value measurements.
This Statement does not require any new fair value measurements.
This Statement is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. The Company is required to
adopt SFAS 157 in the first quarter of 2008. The Company is
currently evaluating the impact that this Statement will have on
its financial statements.
F-16
2. Investments
in and Advances to Joint Ventures
The Companys substantial unconsolidated joint ventures at
December 31, 2006, are as follows:
|
|
|
|
|
|
|
|
|
Effective
|
|
|
|
|
Ownership
|
|
|
Unconsolidated Real Estate Ventures
|
|
Percentage (1)
|
|
Assets Owned
|
|
Sun Center Limited
|
|
|
79.45
|
%
|
|
A shopping center in Columbus, Ohio
|
Continental Sawmill LLC
|
|
|
63.4
|
|
|
Land
|
DDR Aspen Grove Office Parcel LLC
|
|
|
50.0
|
|
|
Land
|
DDRA Community Centers Five, LP
|
|
|
50.0
|
|
|
Six shopping centers in several states
|
DOTRS LLC
|
|
|
50.0
|
|
|
A shopping center in Macedonia, Ohio
|
Jefferson County Plaza LLC
|
|
|
50.0
|
|
|
A shopping center in St. Louis (Arnold), Missouri
|
Lennox Town Center Limited
|
|
|
50.0
|
|
|
A shopping center in Columbus, Ohio
|
Sansone Group/DDRC LLC
|
|
|
50.0
|
|
|
A management and development company
|
Sonae Sierra Brazil BV Sarl
|
|
|
47.0
|
|
|
Nine shopping centers and a management company in Sao Paulo,
Brazil
|
Retail Value Investment Program IIIB LP
|
|
|
25.5
|
|
|
A shopping center in Deer Park, Illinois
|
Retail Value Investment Program VI LP
|
|
|
25.5
|
|
|
A shopping center in Overland Park, Kansas
|
Retail Value Investment Program VIII LP
|
|
|
25.5
|
|
|
A shopping center in Austin, Texas
|
Retail Value Investment Program VII LLC
|
|
|
20.75
|
|
|
Two shopping centers in California
|
Coventry II DDR Buena Park LLC
|
|
|
20.0
|
|
|
A shopping center in Buena Park, California
|
Coventry II DDR Fairplain LLC
|
|
|
20.0
|
|
|
A shopping center in Benton Harbor, Michigan
|
Coventry II DDR Merriam Village LLC
|
|
|
20.0
|
|
|
A shopping center under development in Merriam, Kansas
|
Coventry II DDR Phoenix Spectrum LLC
|
|
|
20.0
|
|
|
A shopping center in Phoenix, Arizona
|
Coventry II DDR Totem Lakes LLC
|
|
|
20.0
|
|
|
A shopping center in Kirkland, Washington
|
Coventry II DDR Ward Parkway LLC
|
|
|
20.0
|
|
|
A shopping center in Kansas City, Missouri
|
DDR Markaz LLC
|
|
|
20.0
|
|
|
Seven shopping centers in several states
|
DDR Markaz II LLC
|
|
|
20.0
|
|
|
13 neighborhood grocery-anchored retail properties in several
states
|
Service Holdings LLC
|
|
|
20.0
|
|
|
50 retail sites in several states
|
Coventry II DDR Tri-County LLC
|
|
|
18.0
|
|
|
A shopping center in Cincinnati, Ohio
|
DDR Macquarie LLC
|
|
|
14.5
|
|
|
48 shopping centers in several states
|
Coventry II DDR Bloomfield LLC
|
|
|
10.0
|
|
|
A shopping center under development in Bloomfield Hills, Michigan
|
Coventry II DDR Marley Creek Square LLC
|
|
|
10.0
|
|
|
A shopping center in Orland Park, Illinois
|
Coventry II DDR Montgomery Farm LLC
|
|
|
10.0
|
|
|
A shopping center under development in Allen, Texas
|
Coventry II DDR Westover LLC
|
|
|
10.0
|
|
|
A shopping center under development in San Antonio (Westover),
Texas
|
DPG Realty Holdings LLC
|
|
|
10.0
|
|
|
12 neighborhood grocery-anchored retail properties in several
states
|
DDR MDT PS LLC
|
|
|
0.00
|
(2)
|
|
Seven shopping centers in several states
|
|
|
|
(1)
|
|
Ownership may be held through
different investment structures. Percentage ownerships are
subject to change as certain investments contain promoted
structures.
|
|
(2)
|
|
See MDT Preferred Joint Venture
discussed below.
|
F-17
Combined condensed unconsolidated financial information of the
Companys unconsolidated joint venture investments is
summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Combined balance sheets
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
902,486
|
|
|
$
|
894,477
|
|
Buildings
|
|
|
2,703,711
|
|
|
|
2,480,025
|
|
Fixtures and tenant improvements
|
|
|
57,989
|
|
|
|
58,060
|
|
Construction in progress
|
|
|
157,750
|
|
|
|
37,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,821,936
|
|
|
|
3,470,112
|
|
Less: Accumulated depreciation
|
|
|
(245,674
|
)
|
|
|
(195,708
|
)
|
|
|
|
|
|
|
|
|
|
Real estate, net
|
|
|
3,576,262
|
|
|
|
3,274,404
|
|
Receivables, net
|
|
|
70,903
|
|
|
|
76,744
|
|
Leasehold interests
|
|
|
15,195
|
|
|
|
23,297
|
|
Other assets
|
|
|
129,914
|
|
|
|
109,490
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,792,274
|
|
|
$
|
3,483,935
|
|
|
|
|
|
|
|
|
|
|
Mortgage debt
|
|
$
|
2,409,080
|
|
|
$
|
2,173,401
|
|
Amounts payable to DDR
|
|
|
4,930
|
|
|
|
108,020
|
|
Other liabilities
|
|
|
92,904
|
|
|
|
78,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,506,914
|
|
|
|
2,359,827
|
|
Accumulated equity
|
|
|
1,285,360
|
|
|
|
1,124,108
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,792,274
|
|
|
$
|
3,483,935
|
|
|
|
|
|
|
|
|
|
|
Companys share of accumulated equity(1)
|
|
$
|
252,937
|
|
|
$
|
178,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Combined statements of operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from operations
|
|
$
|
423,051
|
|
|
$
|
417,434
|
|
|
$
|
313,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental operation expenses
|
|
|
143,573
|
|
|
|
147,983
|
|
|
|
106,526
|
|
Depreciation and amortization expense
|
|
|
79,713
|
|
|
|
82,753
|
|
|
|
62,089
|
|
Interest expense
|
|
|
125,995
|
|
|
|
113,466
|
|
|
|
73,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
349,281
|
|
|
|
344,202
|
|
|
|
242,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before gain on disposition of real estate and
discontinued operations
|
|
|
73,770
|
|
|
|
73,232
|
|
|
|
71,374
|
|
Tax expense
|
|
|
(1,176
|
)
|
|
|
|
|
|
|
|
|
Gain on disposition of real estate
|
|
|
398
|
|
|
|
858
|
|
|
|
4,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
72,992
|
|
|
|
74,090
|
|
|
|
76,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net of tax
|
|
|
139
|
|
|
|
(486
|
)
|
|
|
3,006
|
|
Gain on disposition of real estate, net of tax
|
|
|
20,343
|
|
|
|
48,982
|
|
|
|
39,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,482
|
|
|
|
48,496
|
|
|
|
42,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
93,436
|
|
|
$
|
122,586
|
|
|
$
|
118,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Companys share of net income (2)
|
|
$
|
28,530
|
|
|
$
|
36,828
|
|
|
$
|
42,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-18
Investments in and advances to joint ventures include the
following items, which represent the difference between the
Companys investment and its proportionate share of all of
the joint ventures underlying net assets (in millions):
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31.
|
|
|
|
2006
|
|
|
2005
|
|
|
Companys proportionate share of accumulated equity
|
|
$
|
252.9
|
|
|
$
|
178.9
|
|
Basis differentials (2)
|
|
|
92.3
|
|
|
|
46.3
|
|
Deferred development fees, net of portion relating to the
Companys interest
|
|
|
(3.0
|
)
|
|
|
(3.0
|
)
|
Basis differential upon transfer of assets (2)
|
|
|
(74.3
|
)
|
|
|
(74.9
|
)
|
Notes receivable from investments
|
|
|
18.8
|
|
|
|
19.8
|
|
Amounts payable to DDR (3)
|
|
|
5.0
|
|
|
|
108.0
|
|
|
|
|
|
|
|
|
|
|
Investments in and advances to joint ventures (1)
|
|
$
|
291.7
|
|
|
$
|
275.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The difference between the
Companys share of accumulated equity and the investments
in and advances to joint ventures recorded on the Companys
consolidated balance sheets primarily results from the basis
differentials, as described below, deferred development fees,
net of the portion relating to the Companys interest,
notes and amounts receivable from the joint ventures
investments.
|
|
(2)
|
|
Basis differentials occur primarily
when the Company has purchased interests in existing joint
ventures at fair market values, which differ from their
proportionate share of the historical net assets of the joint
ventures. In addition, certain acquisition, transaction and
other costs, including capitalized interest, may not be
reflected in the net assets at the joint venture level. Basis
differentials upon transfer of assets are primarily associated
with assets previously owned by the Company that have been
transferred into a joint venture at fair value. This amount
represents the aggregate difference between the Companys
historical cost basis and the basis reflected at the joint
venture level. Certain basis differentials indicated above are
amortized over the life of the related assets. Differences in
income also occur when the Company acquires assets from joint
ventures. The difference between the Companys share of net
income, as reported above, and the amounts included in the
consolidated statements of operations is attributable to the
amortization of such basis differentials, deferred gains and
differences in gain (loss) on sale of certain assets due to the
basis differentials. The Companys share of joint venture
net income has been increased by $1.6 million and reduced
by $2.1 million and $1.3 million for the years ended
December 31, 2006, 2005 and 2004, respectively, to reflect
additional basis depreciation and basis differences in assets
sold.
|
|
(3)
|
|
In 2005, the Company advanced
$101.4 million to the KLA/SM LLC joint venture. This
advance was repaid when the Company acquired its partners
interests in the joint venture and subsequently sold these
assets to the Service Holdings LLC joint venture, and the
Company did not advance funds to this partnership to fund the
acquisition.
|
The Company has made advances to several partnerships in the
form of notes receivable and fixed-rate loans that accrue
interest at rates ranging from 6.3% to 12%. Maturity dates range
from payment on demand to June 2020. Included in the
Companys accounts receivable is approximately
$1.1 million and $1.2 million at December 31,
2006 and 2005, respectively, due from affiliates related to
construction receivables.
Service fees earned by the Company through management, leasing,
development and financing activities performed related to all of
the Companys joint ventures are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Management and other fees
|
|
$
|
23.7
|
|
|
$
|
16.7
|
|
|
$
|
11.4
|
|
Acquisition, financing and guarantee fees
|
|
|
0.5
|
|
|
|
2.4
|
|
|
|
3.0
|
|
Development fees and leasing commissions
|
|
|
6.1
|
|
|
|
5.6
|
|
|
|
3.8
|
|
Interest income
|
|
|
5.4
|
|
|
|
6.8
|
|
|
|
1.9
|
|
Disposition fees
|
|
|
|
|
|
|
0.2
|
|
|
|
0.2
|
|
The Companys joint venture agreements generally include
provisions whereby each partner has the right to trigger a
purchase or sale of its interest in the joint venture
(Reciprocal Purchase Rights), to initiate a purchase or
F-19
sale of the properties (Property Purchase Rights) after a
certain number of years, or if either party is in default of the
joint venture agreements. Under these provisions, the Company is
not obligated to purchase the interest of its outside joint
venture partners.
Joint
Venture Interests
Macquarie
DDR Trust
The Company owns an interest in Macquarie DDR Trust, an
Australia-based Listed Property Trust (MDT), with
Macquarie Bank Limited (ASX: MBL), an international investment
bank, advisor and manager of specialized real estate funds in
Australia (MDT Joint Venture). MDT focuses on
acquiring ownership interests in institutional-quality community
center properties in the United States.
At December 31, 2006, MDT, which listed on the Australian
Stock Exchange in November 2003, owns an approximate 83%
interest in the portfolio of assets. The Company retained an
effective 14.5% ownership interest in the assets, with MBL
primarily owning the remaining 2.5%. The Company has been
engaged to provide
day-to-day
operations of the properties and will receive fees at prevailing
rates for property management, leasing, construction management,
acquisitions, due diligence, dispositions (including outparcel
sales) and financing. Through their joint venture, the Company
and MBL receives base asset management fees and incentive fees
based on the performance of MDT. The Company recorded fees
aggregating $0.4 million, $2.4 million and
$3.0 million in 2006, 2005 and 2004, respectively, in
connection with the acquisition, structuring, formation and
operation of the MDT Joint Venture.
In 2006, the Company sold four additional expansion areas in
Birmingham, Alabama; McDonough, Georgia; Coon Rapids, Minnesota
and Monaca, Pennsylvania to the MDT Joint Venture for
approximately $24.7 million. These expansion areas are
adjacent to shopping centers currently owned by the MDT Joint
Venture. The Company recognized an aggregate merchant build gain
of $9.2 million, and deferred gains of approximately
$1.6 million relating to the Companys effective 14.5%
ownership interest in the venture.
Sonae
Sierra Brazil BV Sarl
In October 2006, the Company acquired a 50% joint venture
interest in Sonae Sierra Brazil, a fully integrated retail real
estate company based in Sao Paulo, Brazil, for approximately
$147.5 million. Sonae Sierra Brazil is a subsidiary of
Sonae Sierra, an international owner, developer and manager of
shopping centers based in Portugal. Sonae Sierra Brazil is the
managing partner of a partnership that owns direct and indirect
interests in nine retail assets aggregating 3.5 million
square feet and a property management company in Sao Paulo,
Brazil that oversees the leasing and management operations of
the portfolio. Sonae Sierra Brazil owns approximately 93% of the
joint venture and Enplanta Engenharia, a third party, owns
approximately 7%.
Coventry
II
In 2003, the Company and Coventry Real Estate Advisors
(CREA) announced the formation of Coventry Real
Estate Fund II (the Fund). The Fund was formed
with several institutional investors and CREA as the investment
manager. Neither the Company nor any of its officers owns a
common equity interest in this Fund or has any incentive
compensation tied to this Fund. The Fund and the Company have
agreed to jointly acquire value-added retail properties in the
United States. The Funds strategy is to invest in a
variety of retail properties that present opportunities for
value creation, such as retenanting, market repositioning,
redevelopment or expansion.
The Company co-invested 20% in each joint venture and is
responsible for
day-to-day
management of the properties. Pursuant to the terms of the joint
venture, the Company will earn fees for property management,
leasing
F-20
and construction management. The Company also will earn a
promoted interest, along with CREA, above a 10% preferred return
after return of capital, to fund investors. The retail
properties at December 31, 2006, are as follows:
|
|
|
|
|
|
|
|
|
DDR
|
|
|
|
|
|
Effective
|
|
|
Owned
|
|
|
Ownership
|
|
|
Square Feet
|
Location
|
|
Interest(1)
|
|
|
(Thousands)
|
|
Phoenix, Arizona
|
|
|
20
|
%
|
|
391
|
Buena Park, California
|
|
|
20
|
%
|
|
724
|
Orland Park, Illinois
|
|
|
10
|
%
|
|
58
|
Merriam, Kansas
|
|
|
20
|
%
|
|
Under Development
|
Benton Harbor, Michigan
|
|
|
20
|
%
|
|
223
|
Bloomfield Hills, Michigan
|
|
|
10
|
%
|
|
Under Development
|
Kansas City, Missouri
|
|
|
20
|
%
|
|
358
|
Cincinnati, Ohio
|
|
|
18
|
%
|
|
668
|
Allen, Texas
|
|
|
10
|
%
|
|
Under Development
|
San Antonio (Westover), Texas
|
|
|
10
|
%
|
|
188
|
Kirkland, Washington
|
|
|
20
|
%
|
|
228
|
50 retail sites in several states formerly occupied by Service
Merchandise
|
|
|
20
|
%
|
|
2,691
|
|
|
(1)
|
The Fund invested in certain assets with development partners,
as such, the Companys effective interest may be less than
20%.
|
Retail
Value Fund
In February 1998, the Company and an equity affiliate of the
Company entered into an agreement with Prudential Real Estate
Investors (PREI) and formed the Retail Value Fund
(the PREI Fund). The PREI Funds ownership
interests in each of the projects, unless discussed otherwise,
are generally structured with the Company owning (directly or
through its interest in the management service company) a 24.75%
limited partnership interest, PREI owning a 74.25% limited
partnership interest and Coventry Real Estate Partners
(Coventry), which was 75% owned by a consolidated
entity of the Company, owning (directly or through its interest
in the management service company) (Note 22) a 1%
general partnership interest. The PREI Fund invests in retail
properties within the United States that are in need of
substantial re-tenanting and market repositioning and may also
make equity and debt investments in companies owning or managing
retail properties as well as in third party development projects
that provide significant growth opportunities. The retail
property investments may include enclosed malls, neighborhood
and community centers or other potential retail commercial
development and redevelopment opportunities.
The PREI Fund owned the following shopping center investments at
December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
DDR
|
|
|
|
|
|
|
Effective
|
|
|
Company-Owned
|
|
|
|
Ownership
|
|
|
Square Feet
|
|
Location
|
|
Interest
|
|
|
(Thousands)
|
|
|
Deer Park, Illinois
|
|
|
25.5
|
%
|
|
|
287
|
|
Kansas City, Kansas
|
|
|
25.5
|
%
|
|
|
61
|
|
Austin, Texas
|
|
|
25.5
|
%
|
|
|
283
|
|
In 2006, four shopping centers in Kansas City, Kansas, and
Kansas City, Missouri, aggregating 0.4 million square feet,
were sold for approximately $20.0 million. The joint
venture recognized a loss of approximately $1.8 million, of
which the Companys proportionate share was approximately
$0.5 million.
In addition, in 2000 the PREI Fund entered into an agreement to
acquire ten properties located in western states from Burnham
Pacific Properties, Inc. (Burnham), with PREI owning
a 79% interest, the Company owning a 20% interest and Coventry
owning a 1% interest. The Company earns fees for managing and
leasing the properties. At
F-21
December 31, 2006, the joint venture owned two of these
properties. The properties sold in 2006, 2005 and 2004 are
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joint
|
|
|
Companys
|
|
|
|
Number of
|
|
Sale
|
|
|
Venture
|
|
|
Proportionate
|
|
|
|
Properties
|
|
Price
|
|
|
Gain
|
|
|
Share of Gain
|
|
Year
|
|
Sold
|
|
(Millions)
|
|
|
(Millions)
|
|
|
(Millions)
|
|
|
2006
|
|
One
|
|
$
|
8.1
|
|
|
$
|
3.7
|
|
|
$
|
1.2
|
|
2005
|
|
Three (1)
|
|
|
73.3
|
|
|
|
21.1
|
|
|
|
6.7
|
|
2004
|
|
One (1)
|
|
|
84.2
|
|
|
|
18.6
|
|
|
|
6.0
|
|
|
|
|
(1)
|
|
One of the properties was sold over
a two-year period. A majority of the shopping center was sold in
2004 and the outparcels were sold in 2005.
|
As discussed above, Coventry generally owns a 1% interest in
each of the PREI Funds investments. Coventry is entitled
to receive an annual asset management fee equal to 0.5% of total
assets for the Kansas City properties and the property in Deer
Park, Illinois. Except for the PREI Funds investment
associated with properties acquired from Burnham, Coventry is
entitled to one-third of all profits (as defined), after the
limited partners have received a 10% preferred return and
previously advanced capital. The remaining two-thirds of the
profits (as defined) in excess of the 10% preferred return are
split proportionately among the limited partners.
With regard to the PREI Funds investment associated with
the acquisition of shopping centers from Burnham, Coventry has a
1% general partnership interest. Coventry also receives annual
asset management fees equal to 0.8% of total revenue collected
from these assets, plus a minimum of 25% of all amounts in
excess of an 11% annual preferred return to the limited
partners, that could increase to 35% if returns to the limited
partners exceed 20%.
Management
Service Companies
The Company owns a 50% equity ownership interest in a management
and development company in St. Louis, Missouri.
KLA/SM
Joint Venture
The Company entered into a joint venture in 2002 with
Lubert-Adler Real Estate Funds and Klaff Realty, L.P.
(Note 17), that was awarded asset designation rights for
all of the retail real estate interests of the bankrupt estate
of Service Merchandise Corporation for approximately
$242 million. The Company had an approximate 25% interest
in the joint venture (KLA/SM). In addition, the
Company earned fees for the management, leasing, development and
disposition of the real estate portfolio. The designation rights
enabled the joint venture to determine the ultimate disposition
of the real estate interests held by the bankrupt estate.
In August 2006, the Company purchased its then partners
approximately 75% interest in the remaining 52 assets formerly
occupied by Service Merchandise owned by the KLA/SM Joint
Venture at a gross purchase price of approximately
$138 million relating to the partners approximate 75%
ownership interest, based on a total valuation of approximately
$185 million for all remaining assets, including
outstanding indebtedness.
In September 2006, the Company sold 51 of these assets to the
Service Holdings LLC at a gross purchase price of approximately
$185 million and assumed debt of approximately
$29 million. The Company has a 20% interest in the newly
formed joint venture. The Company recorded a gain of
approximately $6.1 million.
F-22
The Service Merchandise site dispositions by the KLA/SM Joint
Venture are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joint
|
|
|
Companys
|
|
|
|
Number of
|
|
Sales
|
|
|
Venture
|
|
|
Proportionate
|
|
|
|
Properties
|
|
Price
|
|
|
Gain
|
|
|
Share of Gain
|
|
Year
|
|
Sold
|
|
(Millions)
|
|
|
(Millions)
|
|
|
(Millions)
|
|
|
2006
|
|
One
|
|
$
|
3.2
|
|
|
$
|
0.2
|
(1)
|
|
$
|
|
(1)
|
2005
|
|
Eight
|
|
|
19.4
|
|
|
|
7.6
|
|
|
|
1.9
|
|
2004
|
|
Ten
|
|
|
20.7
|
|
|
|
2.0
|
|
|
|
0.5
|
|
|
|
|
(1)
|
|
Less than $0.1 million.
|
The Company also earned disposition, development, management,
leasing fees and interest income aggregating $5.7 million,
$6.4 million and $2.6 million in 2006, 2005 and 2004,
respectively, relating to this investment.
Adoption
of FIN 46 (Note 1) and EITF
04-05
In 2006, as a result of the adoption of EITF
04-5,
the
Company consolidated one limited partnership with total assets
and liabilities of $24.4 million and $17.7 million,
respectively, which were consolidated into the Companys
financial statements.
In 2004, the Company recorded a charge of $3.0 million as a
cumulative effect of adoption of a new accounting standard
attributable to the consolidation of a 50% owned shopping center
in Martinsville, Virginia. This amount represents the minority
partners share of cumulative losses in excess of its cost
basis in the partnership.
Acquisitions
of Joint Venture Interests by the Company
The Company purchased its joint venture partners interest
in the following shopping centers in 2006, 2005 and 2004:
|
|
|
|
|
A 20% interest in a shopping center in Columbus, Ohio, purchased
in 2005;
|
|
|
|
A 20% interest in a shopping center development in Apex, North
Carolina, purchased in 2006;
|
|
|
|
A 50% interest in a shopping center in Phoenix, Arizona,
purchased in 2006;
|
|
|
|
A 50% interest in a shopping center in Littleton, Colorado,
purchased in 2004;
|
|
|
|
A 50% interest in a shopping center in Salisbury, Maryland,
purchased in 2006 and
|
|
|
|
A 75% interest in a shopping center in Pasadena, California,
purchased in 2006.
|
The MDT Joint Venture acquired the interest in one shopping
center owned through other joint venture interests in 2004.
Discontinued
Operations
Included in discontinued operations in the combined statements
of operations for the joint ventures are the following
properties sold subsequent to December 31, 2003:
|
|
|
|
|
A 10% interest in a shopping center in Kildeer, Illinois, sold
in 2006;
|
|
|
|
A 20.75% interest in five properties held in the PREI Fund
originally acquired from Burnham. The shopping center in
Everett, Washington, was sold in 2006. The shopping centers in
City of Industry, California; Richmond, California and San
Ysidro, California, were sold in 2005. The shopping center
Mission Viejo, California, was sold in 2004;
|
|
|
|
A 24.75% interest in a property held in the PREI Fund in Long
Beach, California, sold in 2005;
|
|
|
|
A 24.75% interest in four properties held in the PREI Fund in
Kansas City, Kansas and Kansas City, Missouri, sold in 2006;
|
F-23
|
|
|
|
|
An approximate 25% interest in one, eight and ten Service
Merchandise sites sold in 2006, 2005 and 2004, respectively;
|
|
|
|
A 20% interest in a Service Merchandise site sold in 2006;
|
|
|
|
A 35% interest in a shopping center in San Antonio, Texas, sold
in 2004 and
|
|
|
|
A 50% interest in a property held in Community Centers Five in
Fort Worth, Texas, sold in 2006.
|
During the second quarter of 2006, the Company sold six
properties, aggregating 0.8 million owned square feet, to a
newly formed joint venture with MDT (MDT Preferred Joint
Venture or DDR MDT PS LLC), for approximately
$122.7 million and recognized gains of approximately
$38.9 million.
Under the terms of the new MDT Preferred Joint Venture, MDT
receives a 9% preferred return on its preferred equity
investment of approximately $12.2 million and then receives
a 10% return on its common equity investment of approximately
$20.8 million before the Company receives a 10% return on
an agreed upon common equity investment of $3.5 million
that has not been recognized in the consolidated balance sheet
due to the terms of its subordination. The Company is then
entitled to a 20% promoted interest in any cash flow achieved
above a 10% leveraged internal rate of return on all common
equity. The Company recognizes its proportionate share of equity
in earnings of the MDT Preferred Joint Venture at an amount
equal to increases in its common equity investment, based upon
an assumed liquidation, including consideration of cash
received, of the joint venture at its depreciated book value as
of the end of each reporting period. The Company has not
recorded any equity in earnings from the MDT Preferred Joint
Venture as of December 31, 2006.
The Company has been engaged to perform all
day-to-day
operations of the properties and earns and/or may be entitled to
receive ongoing fees for property management, leasing and
construction management, in addition to a promoted interest,
along with other periodic fees such as financing fees.
F-24
At December 31, 2006, the Companys investment in DDR
MDT PS LLC was considered a significant subsidiary pursuant to
the applicable
Regulation S-X
rules. During the year
ended December 31, 2006, the Company recognized a gain, net
of tax, of approximately $38.9 million relating to the
contribution of the assets to the joint venture. Condensed
financial information of DDR MDT PS LLC is as follows (in
thousands):
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
Balance sheet
|
|
|
|
|
Land
|
|
$
|
31,430
|
|
Buildings
|
|
|
85,152
|
|
Fixtures and tenant improvements
|
|
|
1,177
|
|
Construction in progress
|
|
|
12
|
|
|
|
|
|
|
|
|
|
117,771
|
|
Less: Accumulated depreciation
|
|
|
(1,338
|
)
|
|
|
|
|
|
Real estate, net
|
|
|
116,433
|
|
Receivables, net
|
|
|
4,121
|
|
Other assets
|
|
|
3,070
|
|
|
|
|
|
|
|
|
$
|
123,624
|
|
|
|
|
|
|
Mortgage debt
|
|
$
|
86,000
|
|
Amounts payable to DDR
|
|
|
30
|
|
Other liabilities
|
|
|
1,744
|
|
|
|
|
|
|
|
|
|
87,774
|
|
Accumulated equity
|
|
|
35,850
|
|
|
|
|
|
|
|
|
$
|
123,624
|
|
|
|
|
|
|
Companys share of accumulated equity
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31, 2006
|
|
|
Statements of operations
|
|
|
|
|
Revenues from operations
|
|
$
|
6,255
|
|
|
|
|
|
|
Rental operation expenses
|
|
|
2,481
|
|
Depreciation and amortization expense
|
|
|
1,556
|
|
Interest expense
|
|
|
3,030
|
|
|
|
|
|
|
|
|
|
7,067
|
|
|
|
|
|
|
Net loss
|
|
$
|
(812
|
)
|
|
|
|
|
|
Companys share of equity in net loss of joint ventures
|
|
$
|
|
|
|
|
|
|
|
4. Acquisitions
and Pro Forma Financial Information
Acquisitions
In 2005, the Mervyns Joint Venture acquired the underlying real
estate of 36 operating Mervyns stores for approximately
$396.2 million. The assets were acquired from several
funds, one of which was managed by Lubert-Adler Real Estate
Funds (Note 16). The Mervyns Joint Venture, owned
approximately 50% by the Company and 50% by MDT, obtained
approximately $258.5 million of debt, of which
$212.6 million is a five-year secured non-recourse
financing at a fixed rate of approximately 5.2%, and
$45.9 million is at LIBOR plus 72 basis points for two
F-25
years. In 2006, the Mervyns Joint Venture purchased one
additional site for approximately $11.0 million and the
Company purchased one additional site for approximately
$12.4 million. The Company is responsible for the
day-to-day
management of the assets and receives fees in accordance with
the same fee schedule as the MDT Joint Venture for property
management services.
During 2005, the Company received approximately
$2.5 million of acquisition and financing fees in
connection with the acquisition of the Mervyns assets. Pursuant
to FIN 46(R), the Company is required to consolidate the
Mervyns Joint Venture and, therefore, the $2.5 million of
fees has been eliminated in consolidation and has been reflected
as an adjustment in basis and is not reflected in net income.
In 2005, the Company completed the acquisition of 15 retail real
estate assets located in Puerto Rico from Caribbean Property
Group, LLC and related entities (CPG) for
approximately $1.2 billion (CPG Properties).
The financing for the transaction was provided by the assumption
of approximately $660 million of existing debt and line of
credit borrowings on the Companys senior unsecured credit
facility and the application of a $30 million deposit
funded in 2004. Included in the assets acquired are the land,
building and tenant improvements associated with the underlying
real estate. The other assets allocation of $12.6 million
relates primarily to in-place leases, leasing commissions,
tenant relationships and tenant improvements of the properties
(Note 7). There was a separate allocation in the purchase
price of $8.1 million for above-market leases and
$1.4 million for below-market leases. The Company entered
into this transaction to obtain a shopping center portfolio in
Puerto Rico, a market where the Company previously did not have
any assets.
In 2004, the Company entered into an agreement to purchase
interests in 110 retail real estate assets, with approximately
18.8 million square feet of GLA, from Benderson Development
Company and related entities (Benderson). The
purchase price of the assets, including associated expenses, was
approximately $2.3 billion, less assumed debt and the value
of a 2% equity interest in certain assets valued at
approximately $16.2 million at December 31, 2005, that
Benderson converted its interest into the Companys common
shares in 2006 (Note 13). Benderson transferred a 100%
ownership in certain assets or entities owning certain assets.
The remaining assets were held by a joint venture in which the
Company held a 98.0% interest and Benderson held a 2.0%
interest. Bendersons minority interest was classified as
operating partnership minority interests on the Companys
consolidated balance sheet at December 31, 2005.
The Company completed the purchase of 107 properties from
Benderson, including 14 purchased directly by the MDT Joint
Venture (Note 2) and 52 held by a consolidated joint
venture with Benderson at various dates commencing May 14,
2004, through December 21, 2004. The remaining three
properties were not acquired.
The Company funded the transaction through a combination of new
debt financing of approximately $450 million, net proceeds
of approximately $164.2 million from the issuance of
6.8 million cumulative preferred shares, net proceeds of
approximately $491 million from the issuance of
15.0 million common shares, asset transfers to the MDT
Joint Venture that generated net proceeds of approximately
$194.3 million (Note 2), line of credit borrowings and
assumed debt. With respect to the assumed debt, the fair value
was approximately $400 million, which included an
adjustment of approximately $30 million to increase its
stated principal balance, based on rates for debt with similar
terms and remaining maturities as of May 2004. Included in the
assets acquired were the land, building and tenant improvements
associated with the underlying real estate. The other assets
allocation of $30.9 million relates primarily to in-place
leases, leasing commissions, tenant relationships and tenant
improvements of the properties (Note 7). There was a
separate allocation in the purchase price of $4.7 million
for certain below-market leases. The Company entered into this
transaction to acquire the largest privately owned retail
shopping center portfolio in markets where the Company
previously did not have a strong presence.
Pro Forma
Financial Information
The following unaudited supplemental pro forma operating data is
presented for the year ended December 31, 2005, as if the
acquisition of the CPG Properties were completed on
January 1, 2005. The following unaudited supplemental pro
forma operating data is presented for the year ended
December 31, 2004, as if the acquisition of the CPG
Properties, the common share offering completed in December 2004
and the acquisition of the properties from Benderson and related
financing activity, including the sale of eight wholly-owned
assets to the MDT Joint Venture, were completed on
January 1, 2004.
F-26
These acquisitions were accounted for using the purchase method
of accounting. The revenues and expenses related to assets and
interests acquired are included in the Companys historical
results of operations from the date of purchase.
The pro forma financial information is presented for
informational purposes only and may not be indicative of what
actual results of operations would have been had the
acquisitions occurred as indicated, nor does it purport to
represent the results of the operations for future periods (in
thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31,
|
|
|
|
(Unaudited)
|
|
|
|
2005
|
|
|
2004
|
|
|
Pro forma revenues
|
|
$
|
727,508
|
|
|
$
|
739,458
|
|
|
|
|
|
|
|
|
|
|
Pro forma income from continuing operations
|
|
$
|
174,526
|
|
|
$
|
211,230
|
|
|
|
|
|
|
|
|
|
|
Pro forma income from discontinued operations
|
|
$
|
21,528
|
|
|
$
|
15,918
|
|
|
|
|
|
|
|
|
|
|
Pro forma income before cumulative effect of adoption of a new
accounting standard
|
|
$
|
284,194
|
|
|
$
|
311,790
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income applicable to common shareholders
|
|
$
|
229,025
|
|
|
$
|
253,620
|
|
|
|
|
|
|
|
|
|
|
Per share data:
|
|
|
|
|
|
|
|
|
Basic earnings per share data:
|
|
|
|
|
|
|
|
|
Income from continuing operations applicable to common
shareholders
|
|
$
|
1.92
|
|
|
$
|
2.24
|
|
Income from discontinued operations
|
|
|
0.20
|
|
|
|
0.15
|
|
Cumulative effect of adoption of a new accounting standard
|
|
|
|
|
|
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
Net income applicable to common shareholders
|
|
$
|
2.12
|
|
|
$
|
2.36
|
|
|
|
|
|
|
|
|
|
|
Diluted earning per share data:
|
|
|
|
|
|
|
|
|
Income from continuing operations applicable to common
shareholders
|
|
$
|
1.90
|
|
|
$
|
2.22
|
|
Income from discontinued operations
|
|
|
0.20
|
|
|
|
0.15
|
|
Cumulative effect of adoption of a new accounting standard
|
|
|
|
|
|
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
Net income applicable to common shareholders
|
|
$
|
2.10
|
|
|
$
|
2.34
|
|
|
|
|
|
|
|
|
|
|
The supplemental pro forma financial information does not
present the acquisitions described below or the disposition of
real estate assets.
During the year ended December 31, 2006, the Company
acquired its partners interests, at an initial aggregate
investment of approximately $94.1 million, net of mortgages
assumed, in the following joint venture properties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-
|
|
|
|
|
|
|
Owned
|
|
|
|
Interest
|
|
|
Square Feet
|
|
|
|
Acquired
|
|
|
(Thousands)_
|
|
|
Phoenix, Arizona
|
|
|
50%
|
|
|
|
197
|
|
Pasadena, California
|
|
|
75%
|
|
|
|
557
|
|
Salisbury, Maryland
|
|
|
50%
|
|
|
|
126
|
|
Apex, North Carolina
|
|
|
80%/20%
|
|
|
|
324
|
|
San Antonio, Texas
|
|
|
50%
|
|
|
|
Under Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,204
|
|
|
|
|
|
|
|
|
|
|
Additionally, the Company acquired one Mervyns site for
approximately $12.4 million (Note 17).
During the year ended December 31, 2005, the Company
acquired its partners 20% interest in one joint venture.
This property aggregates approximately 0.4 million square
feet of Company-owned GLA at an initial
F-27
aggregate investment of approximately $3.2 million.
Additionally, the Company acquired one Mervyns site for
approximately $14.4 million (Note 17).
During the year ended December 31, 2004, the Company
acquired a 20% interest in two shopping centers and an effective
10% interest in a shopping center and its partners 50%
interest in a joint venture. These four properties aggregate
approximately 2.4 million square feet of Company-owned GLA
at an initial aggregate investment of approximately
$180 million.
5. Notes Receivable
The Company owns notes receivables aggregating
$18.2 million and $25.0 million, including accrued
interest, at December 31, 2006 and 2005, respectively,
which are classified as held to maturity. The notes are secured
by certain rights in future development projects and partnership
interests. The notes bear interest ranging from 6.9% to 12.0%
with maturity dates ranging from payment on demand through July
2026.
Included in notes receivable are $16.5 million and
$23.2 million of tax incremental financing bonds or notes
(TIF Bonds), plus accrued interest at
December 31, 2006 and 2005, respectively, from the Town of
Plainville, Connecticut (the Plainville Bonds), the
City of Merriam, Kansas (the Merriam Bonds), and the
City of St. Louis, Missouri (the Southtown Notes).
The Plainville Bonds, with a principal balance of
$7.1 million and $7.2 million at December 31,
2006 and 2005, respectively, mature in April 2021 and bear
interest at 7.125%. The Merriam Bonds, with a principal balance
of $7.1 million and $8.0 million at December 31,
2006 and 2005, respectively, mature in February 2016 and bear
interest at 6.9%. The Southtown Notes, with a principal balance
of $2.3 million and $8.0 million at December 31,
2006 and 2005, respectively, mature in July 2026 and bear
interest ranging from 7.13% to 8.50%. Interest and principal are
payable solely from the incremental real estate taxes, if any,
generated by the respective shopping center and development
project pursuant to the terms of the financing agreement.
6. Deferred
Charges
Deferred charges consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Deferred financing costs
|
|
$
|
39,748
|
|
|
$
|
31,681
|
|
Less: Accumulated amortization
|
|
|
(16,040
|
)
|
|
|
(10,524
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
23,708
|
|
|
$
|
21,157
|
|
|
|
|
|
|
|
|
|
|
The Company incurred deferred financing costs aggregating
$9.6 million and $13.1 million in 2006 and 2005,
respectively. Deferred financing costs paid in 2006 primarily
relate to the modification of the Companys unsecured
credit agreements and expansion of term loans
(Note 8) and issuance of convertible notes
(Note 9). Deferred financing costs paid in 2005 primarily
relate to the modification of the Companys unsecured
revolving credit agreements and term loan (Note 8),
issuance of medium term notes (Note 9) and mortgages
payable (Note 10) obtained in connection with the
Mervyns Joint Venture. Amortization of deferred charges was
$7.1 million, $6.1 million and $5.6 million for
the years ended December 2006, 2005 and 2004, respectively.
F-28
7. Other
Assets
Other assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
In-place leases (including lease origination costs and fair
market value of leases), net
|
|
$
|
1,485
|
|
|
$
|
2,568
|
|
Tenant relations, net
|
|
|
12,969
|
|
|
|
14,538
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
14,454
|
|
|
|
17,106
|
|
Other assets:
|
|
|
|
|
|
|
|
|
Fair value hedge
|
|
|
|
|
|
|
292
|
|
Prepaids, deposits and other assets
|
|
|
65,013
|
|
|
|
44,657
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
$
|
79,467
|
|
|
$
|
62,055
|
|
|
|
|
|
|
|
|
|
|
The amortization period of the in-place leases and tenant
relations is approximately two to 31 years and ten years,
respectively. The Company recorded amortization expense of
approximately $5.5 million, $6.1 million and
$4.0 million for the years ended December 31, 2006,
2005 and 2004, respectively. The estimated amortization expense
associated with the Companys intangible assets is
$3.0 million, $2.9 million, $2.9 million,
$2.9 million and $2.0 million for the years ending
December 31, 2007, 2008, 2009, 2010 and 2011, respectively.
Other assets consist primarily of deposits, land options and
other prepaid expenses.
8. Revolving
Credit Facilities and Term Loans
The Company maintains its primary unsecured revolving credit
facility with a syndicate of financial institutions, for which
JP Morgan serves as the administrative agent (the
Unsecured Credit Facility). The Unsecured Credit
Facility was amended in June 2006. As a result of the amendment,
the borrowing capacity on the Unsecured Credit Facility
increased from $1.0 billion to $1.2 billion, provided
for an accordion feature of a future expansion to
$1.4 billion, extended the maturity date to June 2010, with
a one-year extension option, and amended the pricing. The
Unsecured Credit Facility includes a competitive bid option on
periodic interest rates for up to 50% of the facility. The
Companys borrowings under the Unsecured Credit Facility
bear interest at variable rates at the Companys election,
based on the prime rate as defined in the facility or LIBOR,
plus a specified spread (0.60% at December 31, 2006). The
specified spread over LIBOR varies depending on the
Companys long-term senior unsecured debt rating from
Standard and Poors and Moodys Investors Service. The
Company is required to comply with certain covenants relating to
total outstanding indebtedness, secured indebtedness,
maintenance of unencumbered real estate assets and fixed charge
coverage. The Unsecured Credit Facility is used to finance the
acquisition, development and expansion of shopping center
properties, to provide working capital and for general corporate
purposes. At December 31, 2006 and 2005, total borrowings
under the Unsecured Credit Facility aggregated
$297.5 million and $150.0 million, respectively, with
a weighted average interest rate of 5.6% and 4.6%, respectively.
The Company also maintains a $60 million unsecured
revolving credit facility with National City Bank (together with
the $1.2 billion Unsecured Credit Facility, the
Revolving Credit Facilities). This facility was also
amended in June 2006 to extend the maturity date to June 2010
and to reflect terms consistent with those contained in the
Unsecured Credit Facility. Borrowings under the facility bear
interest at variable rates based on the prime rate as defined in
the facility or LIBOR plus a specified spread (0.60% at
December 31, 2006). The specified spread over LIBOR is
dependent on the Companys long-term senior unsecured debt
rating from Standard and Poors and Moodys Investors
Service. The Company is required to comply with certain
covenants relating to total outstanding indebtedness, secured
indebtedness, maintenance of unencumbered real estate assets and
fixed charge coverage. At December 31, 2006 and 2005, there
were no borrowings outstanding.
F-29
The Company also maintains term loan facilities (collectively
the Term Loans) with various lenders. These loans
are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings
|
|
|
Weighted
|
|
|
|
Spread
|
|
|
|
|
|
Outstanding
|
|
|
Average
|
|
|
|
Over
|
|
|
|
|
|
(Millions)
|
|
|
Interest Rate
|
|
|
|
LIBOR
|
|
|
Maturity
|
|
|
December 31
|
|
|
December 31
|
|
Financial Institution
|
|
12/31/06
|
|
|
Date
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Key Bank Capital Markets and Banc of America Securities
LLC (1)
|
|
|
0.85
|
%
|
|
|
June 2008
|
|
|
$
|
400.0
|
|
|
$
|
220.0
|
|
|
|
5.9
|
%
|
|
|
5.1
|
%
|
JP Morgan and several other lenders (2)
|
|
|
0.75
|
%
|
|
|
May 2007
|
|
|
|
|
|
|
$
|
200.0
|
|
|
|
|
|
|
|
5.1
|
%
|
|
|
|
(1)
|
|
Facility allows for two one-year
extension options. In 2006, the facility was amended to add an
accordion feature to increase the loan, at the Companys
option, up to $500 million and covenant modifications. The
Term Loan is secured by the equity in certain assets that are
already encumbered by first mortgages. The weighted average
interest rate at December 31, 2006 reflects the effect of
$400 million of interest rate swaps (Note 11).
|
|
(2)
|
|
This facility was repaid in 2006.
|
For each of the Term Loans, the spread is dependent on the
Companys corporate credit ratings from
Standard & Poors and Moodys Investors
Service. The Term Loans are subject to the same covenants
associated with the Unsecured Credit Facility.
Total fees paid by the Company on its Revolving Credit
Facilities and Term Loans in 2006, 2005 and 2004 aggregated
approximately $1.7 million, $2.0 million and
$1.7 million, respectively. At December 31, 2006 and
2005, the Company was in compliance with all of the financial
and other covenant requirements.
9. Fixed-Rate
Notes
The Company had outstanding unsecured notes of approximately
$2.2 billion and $2.0 billion at December 31,
2006 and 2005, respectively. Several of the notes were issued at
a discount aggregating $3.9 million and $6.0 million
at December 31, 2006 and 2005, respectively. The effective
interest rates of the unsecured notes range from 3.9% to 8.4%
per annum.
In August 2006, the Company issued $250 million of Senior
Convertible Notes due 2011 (the Senior Convertible
Notes). The Senior Convertible Notes have an initial
conversion price of $65.11 per share into the Companys
common shares or cash, at the option of the Company. In
connection with the issuance of these notes, the Company entered
into a registration rights agreement for the common shares that
may be issuable upon conversion of the Senior Convertible Notes.
Concurrent with the issuance of the Senior Convertible Notes,
the Company purchased an option on its common stock in a private
transaction, effectively increasing the conversion price of the
notes to $74.41 per common share. This option allows the Company
to receive shares of the Companys common stock (up to a
maximum of approximately 480,000 shares) from
counterparties equal to the amounts of common stock and/or cash
related to the excess conversion value that the Company would
pay to the holders of the Senior Convertible Notes upon
conversion. The option will terminate upon the earlier of the
maturity dates of the related Senior Convertible Notes or the
first day all of the related Senior Convertible Notes are no
longer outstanding due to conversion or otherwise. The option,
which cost $10.3 million, was recorded as a reduction of
shareholders equity.
The fixed-rate notes have maturities ranging from March 2007 to
July 2018. Interest coupon rates ranged from approximately 3.5%
to 7.5% (averaging 5.1% and 5.3% at December 31, 2006 and
2005, respectively). Notes issued prior to December 31,
2001, aggregating $212.0 million, may not be redeemed by
the Company prior to maturity and will not be subject to any
sinking fund requirements. Notes issued subsequent to 2001 and
the notes assumed with the JDN merger, aggregating
$1.4 billion at December 31, 2006, may be redeemed
based upon a yield maintenance calculation. The notes issued in
October 2005 (aggregating $348.6 million) are redeemable
prior to maturity at par value plus a make-whole premium. If the
notes issued in October 2005 are redeemed within 90 days of
the maturity date, no make-whole premium will be paid. The
Senior Convertible Notes aggregating $250 million may be
converted prior to maturity into cash equal to the lesser of the
principal amount of the note or the conversion value and, to the
extent the conversion value exceeds the principal amount of the
note, shares of the Companys
F-30
common stock. The fixed-rate senior notes and Senior Convertible
Notes were issued pursuant to an indenture dated May 1,
1994, as amended, which contains certain covenants including
limitation on incurrence of debt, maintenance of unencumbered
real estate assets and debt service coverage. Interest is paid
semi-annually in arrears.
10. Mortgages
Payable and Scheduled Principal Repayments
At December 31, 2006, mortgages payable, collateralized by
investments and real estate with a net book value of
approximately $2.5 billion and related tenant leases, are
generally due in monthly installments of principal and/or
interest and mature at various dates through 2028. Fixed-rate
debt obligations included in mortgages payable at
December 31, 2006 and 2005, aggregated approximately
$1,140.9 million and $1,173.3 million, respectively.
Fixed interest rates ranged from approximately 4.4% to 10.2%
(averaging 6.6% at both December 31, 2006 and 2005).
Variable- rate debt obligations totaled approximately
$192.4 million and $181.4 million at December 31,
2006 and 2005, respectively. Interest rates on the variable-rate
debt averaged 6.2% and 5.3% at December 31, 2006 and 2005,
respectively.
Included in mortgage debt are $14.1 million and
$15.1 million of tax-exempt certificates with a weighted
average fixed interest rate of 7.0% at December 31, 2006
and 2005, respectively. As of December 31, 2006, the
scheduled principal payments of the Revolving Credit Facilities,
Term Loans, fixed-rate senior notes and mortgages payable for
the next five years and thereafter are as follows (in thousands):
|
|
|
|
|
Year
|
|
Amount
|
|
|
2007
|
|
$
|
428,609
|
|
2008
|
|
|
664,517
|
|
2009
|
|
|
391,870
|
|
2010
|
|
|
1,059,147
|
|
2011
|
|
|
704,340
|
|
Thereafter
|
|
|
1,000,329
|
|
|
|
|
|
|
|
|
$
|
4,248,812
|
|
|
|
|
|
|
Included in principal payments are $400 million in the year
2008 and $297.5 million in the year 2010, associated with
the maturing of the Term Loans and the Revolving Credit
Facilities, respectively.
11. Financial
Instruments
The following methods and assumptions were used by the Company
in estimating fair value disclosures of financial instruments:
Cash and
cash equivalents, accounts receivable, accounts payable,
accruals and other liabilities
The carrying amounts reported in the balance sheet for these
financial instruments approximated fair value because of their
short-term maturities. The carrying amount of straight-line
rents receivable does not materially differ from its fair market
value.
Notes
receivable and advances to affiliates
The fair value is estimated by discounting the current rates at
which management believes similar loans would be made. The fair
value of these notes was approximately $29.0 million and
$129.9 million at December 31, 2006 and 2005,
respectively, as compared to the carrying amounts of
$28.4 million and $127.7 million, respectively. The
carrying value of the TIF Bonds (Note 5) approximated
its fair value at December 31, 2006 and 2005. The fair
value of loans to affiliates is not readily determinable and has
been estimated by management based upon its assessment of the
interest rate and credit risk.
F-31
Debt
The carrying amounts of the Companys borrowings under its
Revolving Credit Facilities and Term Loans approximate fair
value because such borrowings are at variable rates and the
spreads are typically adjusted to reflect changes in the
Companys credit rating. The fair value of the fixed-rate
senior notes is based on borrowings with a similar remaining
maturity based on the Companys estimated interest rate
spread over the applicable treasury rate or quoted market price.
Fair value of the mortgages payable is estimated using a
discounted cash flow analysis, based on the Companys
incremental borrowing rates for similar types of borrowing
arrangements with the same remaining maturities.
Considerable judgment is necessary to develop estimated fair
values of financial instruments. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts
the Company could realize on disposition of the financial
instruments.
Financial instruments at December 31, 2006 and 2005, with
carrying values that are different than estimated fair values,
are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
|
Senior notes
|
|
$
|
2,218,020
|
|
|
$
|
2,221,553
|
|
|
$
|
1,966,268
|
|
|
$
|
1,960,210
|
|
Term Loans
|
|
|
400,000
|
|
|
|
400,000
|
|
|
|
420,000
|
|
|
|
420,000
|
|
Mortgages payable
|
|
|
1,333,292
|
|
|
|
1,347,501
|
|
|
|
1,354,733
|
|
|
|
1,387,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,951,312
|
|
|
$
|
3,969,054
|
|
|
$
|
3,741,001
|
|
|
$
|
3,767,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounting
Policy for Derivative and Hedging Activities
All derivatives are recognized on the balance sheet at their
fair value. On the date that the Company enters into a
derivative, it designates the derivative as a hedge against the
variability of cash flows that are to be paid in connection with
a recognized liability or forecasted transaction. Subsequent
changes in the fair value of a derivative designated as a cash
flow hedge that is determined to be highly effective are
recorded in other comprehensive income (loss), until earnings
are affected by the variability of cash flows of the hedged
transaction. Any hedge ineffectiveness is reported in current
earnings.
From time to time, the Company enters into interest rate swaps
to convert certain fixed-rate debt obligations to a floating
rate (a fair value hedge). This is consistent with
the Companys overall interest rate risk management
strategy to maintain an appropriate balance of fixed-rate and
variable-rate borrowings. Changes in the fair value of
derivatives that are highly effective and that are designated
and qualify as a fair value hedge, along with changes in the
fair value of the hedged liability that are attributable to the
hedged risk, are recorded in current-period earnings. If hedge
accounting is discontinued due to the Companys
determination that the relationship no longer qualified as an
effective fair value hedge, the Company will continue to carry
the derivative on the balance sheet at its fair value but cease
to adjust the hedged liability for changes in fair value.
The Company formally documents all relationships between hedging
instruments and hedged items, as well as its risk management
objective and strategy for undertaking various hedge
transactions. The Company formally assesses (both at the
hedges inception and on an ongoing basis) whether the
derivatives that are used in hedging transactions have been
highly effective in offsetting changes in the cash flows of the
hedged items and whether those derivatives may be expected to
remain highly effective in future periods. Should it be
determined that a derivative is not (or has ceased to be) highly
effective as a hedge, the Company will discontinue hedge
accounting on a prospective basis.
Risk
Management
The Company enters into derivative contracts to minimize
significant unplanned fluctuations in earnings that are caused
by interest rate volatility or in the case of a fair value hedge
to minimize the impacts of changes in the fair value of the
debt. The Company does not typically utilize these arrangements
for trading or speculative purposes.
F-32
The principal risk to the Company through its interest rate
hedging strategy is the potential inability of the financial
institutions, from which the interest rate swaps were purchased,
to cover all of their obligations. To mitigate this exposure,
the Company purchases its interest rate swaps from major
financial institutions.
Cash Flow
Hedges
In 2006, the Company entered into five interest rate swaps with
notional amounts aggregating $500 million
($200 million for a three-year term and $300 million
for a four-year term). Interest rate swaps aggregating
$400 million effectively convert Term Loan floating rate
debt into a fixed rate of approximately 5.9%. Interest rate
swaps aggregating $100 million effectively convert
Revolving Credit Facilities floating rate debt into a fixed rate
of approximately 5.25%. As of December 31, 2006, the
aggregate fair value of the Companys interest rate swaps
was a liability of $1.1 million, which is included in other
liabilities in the consolidated balance sheets. For the year
ended December 31, 2006, the amount of hedge
ineffectiveness was not material.
All components of the interest rate swaps were included in the
assessment of hedge effectiveness. The Company expects that
within the next 12 months it will reflect as an increase to
earnings $0.9 million of the amount recorded in accumulated
other comprehensive income. The fair value of the interest rate
swaps is based upon the estimated amounts the Company would
receive or pay to terminate the contracts at the reporting date
and is determined using interest rate market pricing models.
In March 2002, the Company entered into an interest rate swap
agreement, with a notional amount of $60 million for a
five-year term, effectively converting a portion of the
outstanding fixed-rate debt under a fixed-rate senior note to a
variable rate of six-month LIBOR.
Swaptions
In anticipation of the joint venture with TIAA-CREF
(Note 22), an affiliate of the Company purchased two
interest rate swaption agreements during 2006 that economically
limits the benchmark interest rate component of future interest
rates on $500 million of forecasted five-year borrowings at
5.72% and $750 million of forecasted ten-year borrowings at
5.78%. These swaptions were not designated for hedge accounting,
and accordingly, gains or losses are reported in earnings as a
component of interest expense, which approximated
$1.2 million of additional expense for the year ended
December 31, 2006. The fair value was calculated based upon
expected changes in forward interest rates. TIAA-CREF will be
obligated to fund its proportionate share of the cost and be
entitled to the economic benefits, if any, of the swaptions upon
formation of the joint venture.
Joint
Venture Derivative Instruments
At December 31, 2006 and 2005, certain of the
Companys joint ventures had interest rate swaps with
notional amounts aggregating $557 million and
$150 million, respectively, converting LIBOR to a weighted
average fixed rate of approximately 5.28% and 4.36%,
respectively. The aggregate fair value of these instruments at
December 31, 2006 and 2005, was a liability of
$5.0 million and an asset of $1.0 million,
respectively.
12. Commitments
and Contingencies
Leases
The Company is engaged in the operation of shopping centers,
which are either owned or, with respect to certain shopping
centers, operated under long-term ground leases that expire at
various dates through 2070, with renewal options. Space in the
shopping centers is leased to tenants pursuant to agreements
that provide for terms ranging generally from one month to
30 years and, in some cases, for annual rentals subject to
upward adjustments based on operating expense levels, sales
volume, or contractual increases as defined in the lease
agreements.
F-33
The scheduled future minimum revenues from rental properties
under the terms of all non-cancelable tenant leases, assuming no
new or renegotiated leases or option extensions for such
premises for the subsequent five years ending December 31,
are as follows for continuing operations (in thousands):
|
|
|
|
|
2007
|
|
$
|
529,293
|
|
2008
|
|
|
494,445
|
|
2009
|
|
|
450,326
|
|
2010
|
|
|
404,942
|
|
2011
|
|
|
349,553
|
|
Thereafter
|
|
|
1,829,388
|
|
|
|
|
|
|
|
|
$
|
4,057,947
|
|
|
|
|
|
|
Scheduled minimum rental payments under the terms of all capital
and non-cancelable operating leases in which the Company is the
lessee, principally for office space and ground leases, for the
subsequent five years ending December 31, are as follows
for continuing operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
Capital
|
|
|
|
Leases
|
|
|
Leases
|
|
|
2007
|
|
$
|
5,320
|
|
|
$
|
305
|
|
2008
|
|
|
5,232
|
|
|
|
315
|
|
2009
|
|
|
4,970
|
|
|
|
315
|
|
2010
|
|
|
4,882
|
|
|
|
315
|
|
2011
|
|
|
4,879
|
|
|
|
315
|
|
Thereafter
|
|
|
204,465
|
|
|
|
12,283
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
229,748
|
|
|
$
|
13,848
|
|
|
|
|
|
|
|
|
|
|
Commitments
and Guarantees
In conjunction with the development and expansion of various
shopping centers, the Company has entered into agreements with
general contractors for the construction of shopping centers
aggregating approximately $63.7 million as of
December 31, 2006.
At December 31, 2006, the Company had letters of credit
outstanding of approximately $20.6 million. The Company has
not recorded any obligation associated with these letters of
credit. The majority of letters of credit are collateral for
existing indebtedness and other obligations of the Company.
As discussed in Note 2, the Company and certain equity
affiliates entered into several joint ventures with various
third-party developers. In conjunction with certain joint
venture agreements, the Company and/or its equity affiliate has
agreed to fund the required capital associated with approved
development projects, comprised principally of outstanding
construction contracts, aggregating approximately
$6.8 million as of December 31, 2006. The Company
and/or its equity affiliate are entitled to receive a priority
return on these capital advances at rates ranging from 10.0% to
11.0%.
In connection with certain of the Companys joint ventures,
the Company agreed to fund any amounts due the joint
ventures lender if such amounts are not paid by the joint
venture based on the Companys pro rata share of such
amount, aggregating $61.1 million at December 31,
2006. The Company and its joint venture partner provided a
$33.0 million payment and performance guarantee on behalf
of the Mervyns Joint Venture to the joint ventures lender
in certain events such as the bankruptcy of Mervyns. The
Companys maximum obligation is equal to its effective 50%
ownership percentage, or $16.5 million.
In 2003, the Company entered into an agreement with DRA
Advisors, one of its joint venture partners, to pay a
$0.8 million annual consulting fee for ten years for
ongoing services relating to the assessment of financing and
strategic investment alternatives.
F-34
In connection with the transfer of one of the properties to the
MDT Joint Venture, the Company deferred the recognition of
approximately $2.8 million and $2.9 million at
December 31, 2006 and 2005, respectively, of the gain on
sale of real estate related to a shortfall agreement guarantee
maintained by the Company. The MDT Joint Venture is obligated to
fund any shortfall amount caused by the failure of the landlord
or tenant to pay taxes on the shopping center when due and
payable. The Company is obligated to pay any shortfall to the
extent that the shortfall is not caused by the failure of the
landlord or tenant to pay taxes on the shopping center when due
and payable. No shortfall payments have been made on this
property since the completion of construction in 1997.
The Company entered into master lease agreements during 2003
through 2006 with the transfer of properties to certain joint
ventures, which are recorded as a liability and reduction of its
related gain. The Company is responsible for the monthly base
rent, all operating and maintenance expenses and certain tenant
improvements and leasing commissions for units not yet leased at
closing for a three-year period. At December 31, 2006, the
Companys material master lease obligations, included in
accounts payable and other expenses, in the following amounts,
were incurred with the properties transferred to the following
joint ventures (in millions):
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2006
|
|
|
2005
|
|
|
MDT Joint Venture
|
|
$
|
2.1
|
|
|
$
|
4.9
|
|
MDT Preferred Joint Venture
|
|
|
3.3
|
|
|
|
|
|
DDR Markaz II
|
|
|
0.6
|
|
|
|
2.5
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6.0
|
|
|
$
|
7.4
|
|
|
|
|
|
|
|
|
|
|
In connection with the Service Holdings LLC joint venture, the
Company guaranteed the base rental income from one to three
years for various affiliates of the Service Holdings LLC joint
venture in the aggregate amount of $2.8 million. The
Company has not recorded a liability for the guarantee, as the
subtenants of the Service Holdings LLC affiliates are paying
rent as due. The Company has recourse against the other parties
in the partnership in the event of default. No assets of the
Company are currently held as collateral to pay this guarantee.
In the event of any loss or the reduction in the historic tax
credit allocated or to be allocated to a joint venture partner
in connection with a historic commercial parcel acquired in
2002, the Company guaranteed payment in the maximum amount of
$0.7 million to the other joint venture partner. The
Company has a liability recorded as of December 31, 2006,
related to this guarantee. The Company does not have recourse
against any other party in the event of default. No assets of
the Company are currently held as collateral to pay this
guarantee.
Related to one of the Companys developments in Long Beach,
California, the Company guaranteed the payment of any special
taxes levied on the property within the City of Long Beach
Community Facilities District No. 6 and attributable to the
payment of debt service on the bonds for periods prior to the
completion of certain improvements related to this project. In
addition, an affiliate of the Company has agreed to make an
annual payment of approximately $0.6 million to defray a
portion of the operating expenses of a parking garage through
the earlier of October 2032 or until the Citys parking
garage bonds are repaid. There are no assets held as collateral
or liabilities recorded related to these obligations.
Related to the development of a shopping center in San Antonio,
Texas, the Company guaranteed the payment of certain road
improvements expected to be funded by the City of San Antonio,
Texas, of approximately $1.5 million. These road
improvements are expected to be completed in 2007. There are no
assets held as collateral or liabilities recorded related to
this guarantee.
The Company continually monitors obligations and commitments
entered into on its behalf. There have been no other material
items entered into by the Company since December 31, 2003,
through December 31, 2006, other than as described above.
Legal
Matters
The Company and its subsidiaries are subject to various legal
proceedings, which, taken together, are not expected to have a
material adverse effect on the Company. The Company is also
subject to a variety of legal actions for personal injury or
property damage arising in the ordinary course of its business,
most of which are covered by
F-35
insurance. While the resolution of all matters cannot be
predicted with certainty, management believes that the final
outcome of such legal proceedings and claims will not have a
material adverse effect on the Companys liquidity,
financial position or results of operations.
|
|
13.
|
Minority
Equity Interests, Operating Partnership Minority Interests,
Preferred Shares, Common Shares and Common Shares in Treasury
and Deferred Obligations
|
Minority
Equity Interests
Minority equity interests consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2006
|
|
|
2005
|
|
|
Mervyns Joint Venture
|
|
$
|
77.6
|
|
|
$
|
75.1
|
|
Shopping centers and development parcels in Arizona, Missouri,
New York, Texas and Utah
|
|
|
8.2
|
|
|
|
6.8
|
|
Business center in Massachusetts
|
|
|
16.5
|
|
|
|
14.3
|
|
Coventry
|
|
|
2.3
|
|
|
|
3.0
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
104.6
|
|
|
$
|
99.2
|
|
|
|
|
|
|
|
|
|
|
Operating
Partnership Minority Interests
At December 31, 2006 and 2005, the Company had 872,373 and
1,349,822 OP Units outstanding, respectively. These OP Units,
issued to different partnerships, are exchangeable, by the
election of the OP Unit holder, and under certain circumstances
at the option of the Company, into an equivalent number of the
Companys common shares or for the equivalent amount of
cash. Most of these OP Units have registration rights agreements
equivalent to the amount of OP Units held by the holder if the
Company elects to settle in its common shares. The liability for
the OP Units is classified on the Companys balance sheet
as operating partnership minority interests.
The OP Unit holders are entitled to receive distributions, per
OP Unit, generally equal to the per share distributions on the
Companys common shares.
In 2004, the Company issued 0.5 million OP Units in
conjunction with the purchase of assets from Benderson. In
December 2005, Benderson exercised its option to convert its
remaining 0.4 million OP Units (Note 4), effective
February 2006. The Company agreed to issue an equivalent number
of common shares of the Company. In 2004 the Company exchanged
284,304 OP Units for common shares of the Company including
60,260 OP Units issued to Benderson. Also in 2006, the Company
purchased 32,274 OP Units for cash of $2.1 million. These
transactions were treated as a purchase of minority interest.
F-36
Preferred
Shares
The Companys preferred shares outstanding at December 31
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Class F 8.60% cumulative redeemable preferred
shares, without par value, $250 liquidation value;
750,000 shares authorized; 600,000 shares issued and
outstanding at December 31, 2006 and 2005
|
|
$
|
150,000
|
|
|
$
|
150,000
|
|
Class G 8.0% cumulative redeemable preferred
shares, without par value, $250 liquidation value;
750,000 shares authorized; 720,000 shares issued and
outstanding at December 31, 2006 and 2005
|
|
|
180,000
|
|
|
|
180,000
|
|
Class H 7.375% cumulative redeemable preferred
shares, without par value, $500 liquidation value;
410,000 shares authorized; 410,000 shares issued and
outstanding at December 31, 2006 and 2005
|
|
|
205,000
|
|
|
|
205,000
|
|
Class I 7.5% cumulative redeemable preferred
shares, without par value, $500 liquidation value;
360,000 shares authorized; 360,000 shares issued and
outstanding at December 31, 2006 and 2005
|
|
|
170,000
|
|
|
|
170,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
705,000
|
|
|
$
|
705,000
|
|
|
|
|
|
|
|
|
|
|
In May 2004, the Company issued $170.0 million, 7.5%
Preferred I Depositary shares and received net proceeds of
approximately $164.2 million.
The Class F and G depositary shares represent 1/10 of a
share of their respective preferred class of shares and have a
stated value of $250 per share. The Class H and I
depositary shares represent 1/20 of a share of a preferred share
and have a stated value of $500 per share. The Class F,
Class G, Class H and Class I depositary shares
are not redeemable by the Company prior to March 27, 2007,
March 28, 2008, July 28, 2008, and May 7, 2009,
respectively, except in certain circumstances relating to the
preservation of the Companys status as a REIT.
The Companys authorized preferred shares consist of the
following:
|
|
|
|
|
750,000 Class A Cumulative Redeemable Preferred Shares,
without par value
|
|
|
|
750,000 Class B Cumulative Redeemable Preferred Shares,
without par value
|
|
|
|
750,000 Class C Cumulative Redeemable Preferred Shares,
without par value
|
|
|
|
750,000 Class D Cumulative Redeemable Preferred Shares,
without par value
|
|
|
|
750,000 Class E Cumulative Redeemable Preferred Shares,
without par value
|
|
|
|
750,000 Class F Cumulative Redeemable Preferred Shares,
without par value
|
|
|
|
750,000 Class G Cumulative Redeemable Preferred Shares,
without par value
|
|
|
|
750,000 Class H Cumulative Redeemable Preferred Shares,
without par value
|
|
|
|
750,000 Class I Cumulative Redeemable Preferred Shares,
without par value
|
|
|
|
750,000 Class J Cumulative Redeemable Preferred Shares,
without par value
|
|
|
|
750,000 Class K Cumulative Redeemable Preferred Shares,
without par value
|
|
|
|
750,000 Non Cumulative preferred shares, without par value
|
Common
Shares
The Companys common shares have a $0.10 per share stated
value.
In December 2006, the Company entered into forward sale
agreements in anticipation of a merger (Note 22). Pursuant to
the terms of the forward sale agreements, and subject to the
Companys right to elect cash settlement, the Company
agreed to sell, upon physical settlement of such forward sale
agreements, an aggregate of 11,599,134 of its common shares for
approximately $750 million. The forward sale contract
expires September 2007 and will
F-37
be reflected in shareholders equity as the contract does not
include any provision that could require the Company to net cash
settle the contract. The Company will not receive any proceeds
from the sale of its common shares until settlement of the
forward sale agreements, which is expected to occur on or before
September 2007.
Common share issuances over the three-year period ended
December 31, 2006, are as follows (in millions):
|
|
|
|
|
|
|
|
|
Issuance Date
|
|
Shares
|
|
|
Net Proceeds
|
|
|
December 2004
|
|
|
5.45
|
|
|
$
|
248
|
|
May 2004
|
|
|
15.0
|
|
|
$
|
491
|
|
Common
Shares in Treasury and Deferred Obligations
In August 2006, the Companys Board of Directors authorized
the Company to repurchase 909,000 common shares of the
Companys common stock at a cost of $53.15 per share in
connection with the convertible debt financing (Note 8).
In 2006, 2005 and 2004, certain officers and a director of the
Company completed a stock for stock option exercise and received
approximately 0.3 million, 0.1 million and
1.0 million common shares, respectively, in exchange for
0.2 million, 0.1 million and 0.6 million common
shares of the Company. In addition, vesting of restricted stock
grants approximating less than 0.1 million,
0.1 million and 0.1 million shares in 2006, 2005 and
2004, respectively, of common stock of the Company was deferred.
The Company recorded $0.8 million, $1.4 million and
$1.9 million in 2006, 2005 and 2004, respectively, in
shareholders equity as deferred obligations for the vested
restricted stock deferred into the Companys non-qualified
deferred compensation plans.
14. Other
Income
Other income from continuing operations was comprised of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Lease terminations and bankruptcy settlements
|
|
$
|
13,313
|
|
|
$
|
5,912
|
|
|
$
|
9,827
|
|
Acquisitions and financing fees
|
|
|
414
|
|
|
|
2,424
|
|
|
|
2,997
|
|
Other, net
|
|
|
459
|
|
|
|
964
|
|
|
|
257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
$
|
14,186
|
|
|
$
|
9,300
|
|
|
$
|
13,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15. Comprehensive
Income
Comprehensive income is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Net income
|
|
$
|
253,264
|
|
|
$
|
282,643
|
|
|
$
|
269,762
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of interest rate contracts
|
|
|
(2,729
|
)
|
|
|
10,619
|
|
|
|
867
|
|
Amortization of interest rate contracts
|
|
|
(1,454
|
)
|
|
|
(520
|
)
|
|
|
|
|
Foreign currency translation
|
|
|
1,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
(2,596
|
)
|
|
|
10,099
|
|
|
|
867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
250,668
|
|
|
$
|
292,742
|
|
|
$
|
270,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16. Discontinued
Operations and Disposition of Real Estate and Real Estate
Investments
Discontinued
Operations
During the year ended December 31, 2006, the Company sold
six properties and one property was classified as held for sale
at December 31, 2006, which were classified as discontinued
operations for the years ended
F-38
December 31, 2006, 2005 and 2004, aggregating
1.0 million square feet. The Company did not have any
properties considered as held for sale at December 31, 2005
or 2004. Included in discontinued operations for the three years
ending December 31, 2006, are 57 properties aggregating
5.6 million square feet. Of these properties, 30 previously
had been included in the shopping center segment and 27 of these
properties previously had been included in the business center
segment (Note 21). The operations of these properties have
been reflected on a comparative basis as discontinued operations
in the consolidated financial statements for the three years
ended December 31, included herein.
The balance sheet relating to the assets held for sale and the
operating results relating to assets sold or designated as
assets held for sale after December 31, 2003, are as
follows (in thousands):
|
|
|
|
|
|
|
December 31
|
|
|
|
2006
|
|
|
Land
|
|
$
|
685
|
|
Building
|
|
|
7,679
|
|
Other real estate assets
|
|
|
194
|
|
|
|
|
|
|
|
|
|
8,558
|
|
Less: Accumulated depreciation
|
|
|
(3,326
|
)
|
|
|
|
|
|
|
|
|
5,232
|
|
Other assets
|
|
|
92
|
|
|
|
|
|
|
Total assets held for sale
|
|
$
|
5,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Revenues
|
|
$
|
6,627
|
|
|
$
|
29,008
|
|
|
$
|
42,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
1,406
|
|
|
|
10,926
|
|
|
|
14,967
|
|
Impairment charge
|
|
|
|
|
|
|
642
|
|
|
|
586
|
|
Interest, net
|
|
|
1,342
|
|
|
|
5,152
|
|
|
|
6,917
|
|
Depreciation
|
|
|
1,308
|
|
|
|
7,360
|
|
|
|
9,864
|
|
Minority interests
|
|
|
|
|
|
|
67
|
|
|
|
(47
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,056
|
|
|
|
24,147
|
|
|
|
32,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
|
2,571
|
|
|
|
4,861
|
|
|
|
10,603
|
|
Gain on dispostion of real estate
|
|
|
11,051
|
|
|
|
16,667
|
|
|
|
8,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,622
|
|
|
$
|
21,528
|
|
|
$
|
19,164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company sold properties and recorded gains on disposition as
described below, for the three years ended December 31,
2006 (in millions):
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
of
|
|
|
Gain on
|
|
|
|
Properties
|
|
|
Dispostion of
|
|
|
|
Sold
|
|
|
Real Estate
|
|
|
2006
|
|
|
6
|
|
|
$
|
11.1
|
|
2005
|
|
|
35
|
|
|
|
16.7
|
|
2004
|
|
|
15
|
|
|
|
8.6
|
|
In the second quarter of 2005, the Company recorded an
impairment charge of $0.6 million relating to one remaining
former Best Products site sold in the third quarter of 2005. In
the third quarter of 2004, the Company recorded an impairment
charge of $0.6 million relating to the sale of a business
center in the fourth quarter of 2004.
F-39
These impairment charges were reclassified into discontinued
operations (see table above) due to the sale of the property.
Disposition
of Real Estate and Real Estate Investments
The Company recorded gains on disposition of real estate and
real estate investments for the three years ended
December 31, 2006, as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Transfer of assets to the Service Holdings LLC Joint Venture (1)
|
|
$
|
6.1
|
|
|
$
|
|
|
|
$
|
|
|
Transfer of assets to the DPG Realty Holdings Joint Venture (2)
|
|
|
0.6
|
|
|
|
|
|
|
|
4.2
|
|
Transfer of assets to the Markaz II Joint Venture (3)
|
|
|
|
|
|
|
|
|
|
|
2.5
|
|
Transfer of assets to the MDT Joint Venture (4)
|
|
|
9.2
|
|
|
|
81.2
|
|
|
|
65.4
|
|
Transfer of assets to the MDT Preferred Joint Venture (5)
|
|
|
38.9
|
|
|
|
|
|
|
|
|
|
Land sales (6)
|
|
|
14.8
|
|
|
|
6.0
|
|
|
|
14.3
|
|
Previously deferred gains (7)
|
|
|
1.3
|
|
|
|
0.9
|
|
|
|
0.8
|
|
Gain (loss) on disposition of non-core assets (8)
|
|
|
1.1
|
|
|
|
|
|
|
|
(2.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
72.0
|
|
|
$
|
88.1
|
|
|
$
|
84.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The Company transferred 51 retail
sites previously occupied by Service Merchandise. This
disposition is not classified as discontinued operations because
of the Companys continuing involvement due to its retained
ownership interest and management agreements.
|
|
(2)
|
|
The Company transferred a newly
developed expansion area adjacent to a shopping center owned by
the joint venture in 2006. The Company transferred 12 assets in
2004. These dispositions are not classified as discontinued
operations because of the Companys continuing involvement
due to its retained ownership interest and management agreements.
|
|
(3)
|
|
The Company transferred 13 assets
in 2004. These dispositions are not classified as discontinued
operations because of the Companys continuing involvement
due to its retained ownership interest and management agreements.
|
|
(4)
|
|
The Company transferred newly
developed expansion areas adjacent to four shopping centers
owned by the joint venture in 2006. The Company transferred 12
and 11 assets in 2005 and 2004, respectively. These dispositions
are not classified as discontinued operations because of the
Companys continuing involvement due to its retained
ownership interest and management agreements.
|
|
(5)
|
|
The Company transferred six assets
in 2006. These dispositions are not classified as discontinued
operations because of the Companys continuing involvement
due to its retained ownership interest and management agreements.
|
|
(6)
|
|
These dispositions do not qualify
for discontinued operations presentation.
|
|
(7)
|
|
These were primarily attributable
to the recognition of additional gains from the leasing of units
associated with master lease obligations and other obligations
on disposed assets.
|
|
(8)
|
|
The loss recorded in 2004 may be
recovered through an earnout arrangement with the buyer over the
next several years.
|
17. Transactions
With Related Parties
The Company sold a 4% interest in Coventry to certain Coventry
employees in 2005. At December 31, 2006, the Company owns a
75% interest in Coventry.
As discussed in Note 2, the Company entered into the KLA/SM
joint venture in March 2002 with Lubert-Adler Real Estate Funds,
which is owned in part by a director of the Company. In August
2006, the Company purchased its then partners approximate
75% interest in the remaining 52 assets at a gross purchase
price of approximately $138 million relating to the
partners ownership, based on a total valuation of
approximately $185 million. The Company sold 51 of the
assets to the Service Holding LLC in September 2006.
In 1999, the Company entered into a joint venture owned 75% by
Lubert-Adler Real Estate Funds, which is owned in part by a
director of the Company and 25% by the Company. The asset, a
shopping center in Coon Rapids, Minnesota, was sold to the MDT
Joint Venture in November 2003. The Company had a management
agreement and
F-40
performed certain administrative functions for the joint venture
pursuant to which the Company earned management, leasing,
development fees and interest income of $2.6 million in
2004.
As discussed in Note 4, in 2005, the Company entered into
the Mervyns Joint Venture that acquired the underlying real
estate of 36 operating Mervyns stores for approximately
$396.2 million. In 2006, the Mervyns Joint Venture
purchased one additional site for approximately
$11.0 million and the Company purchased one additional site
for approximately $12.4 million. In 2005, the Company also
purchased an additional site for approximately
$14.4 million. The assets were acquired from several funds,
one of which was managed by Lubert-Adler Real Estate Funds,
which is owned in part by a director of the Company.
The Company utilizes a law firm for one of its development
projects in which the father of one of the Companys
executive officers is a partner. The Company paid less than
$0.1 million to this law firm in 2006 and 2005.
In 1995, the Company entered into a lease for office space owned
by the mother of the Chairman of the Board and CEO
(CEO). General and administrative rental expense
associated with this office space aggregated $0.6 million,
$0.6 million and $0.5 million for the years ended
December 31, 2006, 2005 and 2004, respectively. The Company
periodically utilizes a conference center owned by the trust of
Bert Wolstein, deceased founder of the Company, father of the
CEO, and one of its principal shareholders, for
Company-sponsored events and meetings. The Company paid less
than $0.1 million in 2006 and 2005 for the use of this
facility.
The Company was also a party to a lawsuit that involved various
claims against the Company relating to certain
management-related services provided by the Company. The owner
of the properties had entered into a management agreement with
two entities (Related Entities) controlled by one of
its principal shareholders and a former director of the Company,
to provide management services. The Company agreed to perform
those services on behalf of the Related Entities, and the fees
paid by the owner of the properties were paid to the Company.
One of the services to be provided by the Company was to obtain
and maintain casualty insurance for the owners properties.
A loss was incurred at one of the owners properties and
the insurance company denied coverage. The Company filed a
lawsuit against the insurance company. Separately, the Company
entered into a settlement pursuant to which the Company paid
$750,000 to the owner of the properties in 2004 and agreed to
indemnify the Related Entities for any loss or damage incurred
by either of the Related Entities if it were judicially
determined that the owner of the property is not entitled to
receive insurance proceeds under a policy obtained and
maintained by the Company. The lawsuit against the insurance
company was resolved with the insurance company agreeing to
compensate the claimant for the loss as well as reimburse the
Company for a portion of its attorneys fees.
In connection with the settlement, the CEO entered into a joint
venture with the principal of the owner of the properties, and
the Company entered into a management agreement with the joint
venture effective February 1, 2004. The CEO holds an
ownership interest of approximately 25% in the joint venture.
The Company provides management and administrative services and
receives fees equal to 3% of the gross income of each property
for which services are provided, but not less than $5,000 per
year from each such property, of which an aggregate of
$0.1 million was earned in 2006 and 2005. The management
agreement expires on February 28, 2007, unless terminated
earlier at any time by the joint venture upon 30 days
notice to the Company or by the Company upon 60 days notice
to the joint venture.
Transactions with the Companys equity affiliates are
described in Note 2.
Stock-Based
Compensation
The Companys stock option and equity-based award plans
provide for grants to employees of the Company of incentive and
non-qualified stock options to purchase common shares of the
Company, rights to receive the appreciation in value of common
shares, awards of common shares subject to restrictions on
transfer, awards of common shares issuable in the future upon
satisfaction of certain conditions and rights to purchase common
shares and other awards based on common shares. Under the terms
of the award plans, awards available for grant approximated
2.1 million shares at December 31, 2006. Options may
be granted at per share prices not less than fair market value
at the date of grant, and in the case of incentive options, must
be exercisable within the maximum
F-41
contractual term of 10 years thereof (or, with respect to
incentive options granted to certain shareholders, within five
years thereof). Options granted under the plans generally vest
one year after the date of grant as to one-third of the optioned
shares, with the remaining options vesting over the following
two-year period.
The Company grants options to its directors. Such options are
granted at the fair market value on the date of grant. Options
granted generally become exercisable one year after the date of
grant as to one-third of the options, with the remaining options
being exercisable over the following two-year period.
Effective January 1, 2006, the Company adopted
SFAS 123(R) using the modified prospective method. The
Companys consolidated financial statements as of and for
the year ended December 31, 2006, reflect the impact of
SFAS 123(R). In accordance with the modified prospective
method, the Companys consolidated financial statements for
prior periods have not been restated to reflect the impact of
SFAS 123(R). Prior to the adoption of FAS 123(R), the
Company applied APB 25, Accounting for Stock Issued to
Employees, in accounting for its plans. Accordingly, the
Company did not recognize compensation cost for stock options
when the option exercise price equaled or exceeded the market
value on the date of the grant. See Note 1 for disclosure
of pro forma information regarding net income and earnings per
share for 2005 and 2004. Assuming application of the fair value
method pursuant to SFAS 123, the compensation cost, which
was required to be charged against income for all of the above
mentioned plans, was $5.3 million and $5.1 million for
2005 and 2004, respectively.
The fair values for stock-based awards granted in 2006, 2005 and
2004 were estimated at the date of grant using the Black-Scholes
option pricing model with the following weighted average
assumptions:
|
|
|
|
|
|
|
|
|
For the Year Ended December 31
|
|
|
2006
|
|
2005
|
|
2004
|
|
Weighted average fair value of grants
|
|
$6.50
|
|
$4.52
|
|
$3.40
|
Risk-free interest rate (range)
|
|
4.4% - 5.1%
|
|
3.2% - 4.3%
|
|
2.2% - 3.3%
|
Dividend yield (range)
|
|
4.2% - 5.0%
|
|
4.6% - 5.4%
|
|
4.5% - 5.8%
|
Expected life (range)
|
|
3 - 4 years
|
|
3 - 6 years
|
|
3 - 5 years
|
Expected volatility (range)
|
|
19.8% - 20.3%
|
|
19.8% - 22.9%
|
|
19.9% - 22.7%
|
The risk-free rate was based upon a U.S. Treasury Strip with a
maturity date that approximates the expected term of the award.
The expected life of the award was derived by referring to
actual exercise experience. The expected volatility of the stock
was derived by referring to changes in the Companys
historical stock prices over a time frame similar to the
expected life of the award. The Company has no reason to believe
that future stock volatility is likely to materially differ from
historical volatility.
F-42
The following table reflects the stock option activity described
above (aggregate intrinsic value in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of Options
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Employees
|
|
|
Directors
|
|
|
Price
|
|
|
Term
|
|
|
Value
|
|
|
Balance December 31, 2003
|
|
|
2,785
|
|
|
|
125
|
|
|
$
|
20.48
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
665
|
|
|
|
|
|
|
|
36.40
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1,402
|
)
|
|
|
(37
|
)
|
|
|
20.06
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(72
|
)
|
|
|
|
|
|
|
26.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2004
|
|
|
1,976
|
|
|
|
88
|
|
|
$
|
25.66
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
622
|
|
|
|
|
|
|
|
41.96
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(639
|
)
|
|
|
(26
|
)
|
|
|
20.00
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(56
|
)
|
|
|
|
|
|
|
34.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2005
|
|
|
1,903
|
|
|
|
62
|
|
|
$
|
32.46
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
302
|
|
|
|
|
|
|
|
51.19
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(679
|
)
|
|
|
(20
|
)
|
|
|
29.31
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(41
|
)
|
|
|
|
|
|
|
42.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2006
|
|
|
1,485
|
|
|
|
42
|
|
|
$
|
37.28
|
|
|
|
7.4
|
|
|
$
|
39,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
616
|
|
|
|
42
|
|
|
$
|
28.75
|
|
|
|
6.1
|
|
|
$
|
22,517
|
|
2005
|
|
|
635
|
|
|
|
62
|
|
|
|
25.22
|
|
|
|
6.2
|
|
|
|
15,198
|
|
2004
|
|
|
532
|
|
|
|
84
|
|
|
|
18.63
|
|
|
|
5.7
|
|
|
|
15,865
|
|
The following table summarizes the characteristics of the
options outstanding at December 31, 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
Outstanding
|
|
Average
|
|
Weighted-
|
|
|
|
Weighted-
|
Range of
|
|
as of
|
|
Remaining
|
|
Average
|
|
Exercisable as
|
|
Average
|
Exercise Prices
|
|
12/31/06
|
|
Contractual Life
|
|
Exercise Price
|
|
of 12/31/06
|
|
Exercise Price
|
|
$11.50-$16.00
|
|
|
26,211
|
|
|
|
3.4
|
|
|
$
|
13.18
|
|
|
|
26,211
|
|
|
$
|
13.18
|
|
$16.01-$22.50
|
|
|
130,343
|
|
|
|
3.7
|
|
|
|
20.10
|
|
|
|
130,343
|
|
|
|
20.10
|
|
$22.51-$29.00
|
|
|
196,990
|
|
|
|
6.0
|
|
|
|
23.38
|
|
|
|
196,990
|
|
|
|
23.38
|
|
$29.01-$35.50
|
|
|
37,240
|
|
|
|
6.8
|
|
|
|
29.86
|
|
|
|
35,572
|
|
|
|
29.63
|
|
$35.51-$42.00
|
|
|
789,020
|
|
|
|
7.7
|
|
|
|
39.01
|
|
|
|
261,356
|
|
|
|
38.02
|
|
$42.01-$48.50
|
|
|
60,101
|
|
|
|
8.6
|
|
|
|
45.86
|
|
|
|
7,898
|
|
|
|
46.30
|
|
$48.51-$56.00
|
|
|
287,291
|
|
|
|
9.2
|
|
|
|
51.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,527,196
|
|
|
|
7.4
|
|
|
$
|
37.28
|
|
|
|
658,370
|
|
|
$
|
28.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-43
The following table reflects the activity for unvested stock
option awards for the year ended December 31, 2006 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Options
|
|
|
Fair Value
|
|
|
Unvested at December 31, 2005
|
|
|
1,268
|
|
|
$
|
4.27
|
|
Granted
|
|
|
302
|
|
|
|
6.50
|
|
Vested
|
|
|
(660
|
)
|
|
|
3.74
|
|
Forfeited
|
|
|
(41
|
)
|
|
|
4.64
|
|
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2006
|
|
|
869
|
|
|
$
|
5.42
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006, total unrecognized stock option
compensation cost of share-based compensation arrangements
aggregated $2.6 million. The cost is expected to be
recognized over a weighted-average period of approximately
0.9 years.
Exercises
of Employee Stock Options
The total intrinsic value of options exercised for the year
ended December 31, 2006, was approximately
$17.6 million. The total cash received from employees as a
result of employee stock option exercises for the year ended
December 31, 2006, was approximately $11.2 million.
The Company settles employee stock option exercises primarily
with newly issued common shares and, occasionally, with treasury
shares.
Performance
Units
In 2000, the Board of Directors approved a grant of 30,000
Performance Units to the Companys CEO. Pursuant to the
provisions of the Plan, the 30,000 Performance Units were
converted on December 31, 2004, to 200,000 restricted
common shares based on the annualized total shareholders
return for the five-year period ended December 31, 2004.
These shares will vest over the following five-year period. In
2002, the Board of Directors approved grants aggregating 70,000
Performance Units to the Companys CEO, President and
Senior Executive Vice President. The 70,000 Performance Units
granted to each of the individuals in 2002 converted to common
restricted shares in amounts ranging from 70,000 to 466,666
common shares based on the annualized total shareholders
return, as defined by the Plan, for the five-year period ending
December 31, 2006. These restricted shares will vest over
the following five-year period.
The fair value of each Performance Unit grant was estimated on
the date of grant using a simulation approach model using the
following assumptions:
|
|
|
|
|
Range
|
|
Risk-free interest rate
|
|
4.4%-6.4%
|
Dividend yield
|
|
7.8%-10.9%
|
Expected life
|
|
10 years
|
Expected volatility
|
|
20%-23%
|
The performance units awards granted in 2000, were converted
into restricted stock after the measurement date. The following
table reflects the activity for the unvested awards for the year
ended December 31, 2006 (in thousands):
|
|
|
|
|
|
|
Awards
|
|
|
Unvested at December 31, 2005
|
|
|
170
|
|
Vested
|
|
|
(34
|
)
|
|
|
|
|
|
Unvested at December 31, 2006
|
|
|
136
|
|
|
|
|
|
|
F-44
As of December 31, 2006, total unrecognized compensation
cost of the 2000 and 2002 Performance Units granted, aggregated
$0.2 million and $1.4 million, respectively. The cost
is expected to be recognized over a three- and five-year term,
respectively.
Outperformance
Awards
In December 2005 and August 2006, the Board of Directors
approved a grant of outperformance long-term incentive plan
agreements with certain executive officers. The outperformance
agreements provide for awards of the Companys common
shares, or an equivalent amount in cash, at the Companys
option, to certain officers of the Company if stated performance
metrics are achieved.
With respect to the award plans granted to the Companys
Chief Executive Officer and Senior Executive Vice President (the
Senior Executive Officers), the performance metrics
are as follows: (a) a specified level of growth in the
Companys funds from operations (the FFO
Target), (b) an increase in the market price of the
Companys common shares (the Share Price
Target), (c) an increase in the market price of the
Companys common shares relative to the increase in the
market prices of the relative common stock of companies included
in a specified peer group (the Comparative Share Price
Target,) together with the Share Price Target (the
Share Price Metrics) and (d) non-financial
performance criteria established by the Compensation Committee
of the Board of Directors of the Company (the
Discretionary Metrics) and, together with the FFO
Target and the Share Price Metrics (the Senior Executive
Officer Targets). The beginning of the measurement period
for the Senior Executive Officer Targets is January 1,
2005, because the prior performance award measurement period for
the Chief Executive Officer ended December 31, 2004. The
current measurement period ends the earlier of December 31,
2007, or the date of a change in control.
If the FFO Target is achieved, the Company will issue to the
Senior Executive Officers a number of common shares equal to
(a) the dollar value assigned to the FFO Target set forth
in such officers outperformance agreement, divided by
(b) the greater of (i) the average closing price for
the common shares over the 20 trading days ending on the
applicable valuation date (as defined in the outpeformance
agreements) or (ii) the closing price per common share on
the last trading date before the senior officer valuation date
(as defined in the outperformance agreements), or the equivalent
amount of cash, at the Companys option, as soon as
practicable following the applicable vesting date, March 1,
2008.
If one or both of the Share Price Metrics are achieved, the
Company will issue to the officer a number of shares set forth
in the agreement, depending on whether one or both of the Share
Price Metrics have been achieved, or the equivalent amount of
cash, at the Companys option, as soon as practicable
following the applicable vesting date, March 1, 2008. The
value of the number of common shares or equivalent amount paid
in cash with respect to the Share Price Metrics that may be paid
is capped at the amount specified in each Senior Executive
Officers outperformance agreement.
If in the discretion of the Compensation Committee, the
Discretionary Metrics have been achieved, the Company will issue
to the officer a number of common shares equal to (a) the
dollar value assigned to the Discretionary Metrics set forth in
such Senior Executive Officers outperformance agreement,
(b) divided by the greater of (i) the average closing
price for the common shares over the twenty trading days ending
on the valuation date (as defined in the outperformance
agreements), or (ii) the closing price per common share on
the last trading date before the senior officer valuation date
(as defined in the outperformance agreements), or the equivalent
amount of cash, at the Companys option, as soon as
practicable following the applicable vesting date, March 1,
2008.
With respect to nine additional executive officers (the
Officers), the performance metrics are as follows:
(a) the FFO Target, (b) a total return to the
Companys shareholders target (the TRS Target)
and (c) a total return to the Companys shareholders
target relative to that of the total return to shareholders of
companies included in a specified peer group (the
Comparative TRS Target, together with the TRS
Target, the TRS Metrics and, together with the FFO
Target and the TRS Target, the Officer Targets). The
measurement period for the Officer Targets is January 1,
2005, through the earlier of December 31, 2009, or the date
of a change in control.
F-45
If the FFO Target is achieved, the Company will issue to the
Officer a number of common shares equal to (a) the dollar
value assigned to the FFO Target set forth in such
officers outperformance agreement and (b) divided by
the greater of (i) the average closing price for the common
shares over the twenty trading days ending on the valuation date
(as defined in the outperformance agreements) or (ii) the
closing price per common share on the last trading date before
the officer valuation date (as defined in the outperformance
agreements), or the equivalent amount of cash, at the
Companys option, as soon as practicable following the
applicable vesting date, March 1, 2010.
If one or both of the TRS Metrics are achieved, the Company will
issue to the Officer a number of shares set forth in the
agreement, depending on whether one or both of the TRS Metrics
have been achieved, or the equivalent amount of cash, at the
Companys option, as soon as practicable following the
applicable vesting date. The value of the number of common
shares or equivalent amount paid in cash with respect to the TRS
Metrics that may be paid is capped at an amount specified in
each Officers outperformance agreement, which management
believes does not represent an obligation that is based solely
or predominantly on a fixed monetary amount known at the grant
date.
The fair value of each outperformance unit grant for the share
price metrics was estimated on the date of grant using a Monte
Carlo approach model using the following assumptions:
|
|
|
|
|
Range
|
|
Risk-free interest rate
|
|
4.4%-5.0%
|
Dividend yield
|
|
4.4%-4.5%
|
Expected life
|
|
3-5 years
|
Expected volatility
|
|
19%-21%
|
As of December 31, 2006, there was $1.2 million and
$1.1 million of total unrecognized compensation costs
related to the two market metric components associated with the
Senior Executive Officer and the Officers outperformance plans
granted, respectively, and expected to be recognized over a
3.25-and 1.25-year term, respectively.
Restricted
Stock Awards
In 2004, 2005 and 2006, the Board of Directors approved a grant
of 105,974, 88,360 and 64,940 restricted shares of common stock,
respectively, to several executives and outside directors of the
Company. The restricted stock grants vest in equal annual
amounts over a five-year period for the Companys
executives and over a three-year period for the restricted
grants in 2004 to the outside directors of the Company.
Restricted stock awards have the same cash dividend and voting
rights as other common stock and are considered to be currently
issued and outstanding. These grants have a weighted-average
fair value at the date of grant ranging from $23.00 to $50.81,
which was equal to the market value of the Companys stock
at the date of grant. In 2006 and 2005, grants of 9,497 and
6,912 shares of common stock, respectively, were issued as
compensation to the outside directors. These grants had a
weighted-average fair value at the date of grant ranging from
$45.60 to $61.12, which was equal to the market value of the
Companys stock at the date of grant.
The following table reflects the activity for unvested
restricted stock awards for the year ended December 31,
2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Awards
|
|
|
Fair Value
|
|
|
Unvested at December 31, 2005
|
|
|
191
|
|
|
$
|
33.46
|
|
Granted
|
|
|
65
|
|
|
|
50.81
|
|
Vested
|
|
|
(94
|
)
|
|
|
32.37
|
|
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2006
|
|
|
162
|
|
|
$
|
41.04
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006, total unrecognized compensation of
restricted stock award arrangements granted under the plans
aggregated $6.6 million The cost is expected to be
recognized over a weighted-average period of approximately
1.1 years.
F-46
During 2006, 2005 and 2004, approximately $8.3 million,
$5.7 million and $6.3 million, respectively, was
charged to expense associated with awards under the equity-based
award plans relating to stock grants, restricted stock and
Performance Units.
401(k)
Plan
The Company has a 401(k) defined contribution plan, covering
substantially all of the officers and employees of the Company,
that permits participants to defer up to a maximum of 15% of
their compensation. The Company matched the participants
contribution in an amount equal to 50% of the participants
elective deferral for the plan year up to a maximum of 6% of a
participants base salary plus annual cash bonus, not to
exceed the sum of 3% of the participants base salary plus
annual cash bonus. The Companys plan allows for the
Company to also make additional discretionary contributions. No
discretionary contributions have been made. Employees
contributions are fully vested, and the Companys matching
contributions vest 20% per year. Once an employee has been with
the Company five years, all matching contributions are fully
vested. The Company funds all matching contributions with cash.
The Companys contributions for each of the three years
ended December 31, 2006, 2005 and 2004, were
$0.6 million, $0.6 million and $0.5 million,
respectively. The 401(k) plan is fully funded at
December 31, 2006.
Elective
Deferred Compensation Plan
The Company has a non-qualified elective deferred compensation
plan for certain officers that permits participants to defer up
to 100% of their base salaries and annual performance-based cash
bonuses, less applicable taxes and benefits deductions. The
Company matched the participants contribution to any
participant who has contributed the maximum permitted under the
401(k) plan. This matching contribution is equal to the
difference between (a) 3% of the sum of the
participants base salary and annual performance-based
bonus deferred under the 401(k) plan and the deferred
compensation combined and (b) the actual employer matching
contribution under the 401(k) plan. Deferred compensation
related to an employee contribution is charged to expense and is
fully vested. Deferred compensation related to the
Companys matching contribution is charged to expense and
vests 20% per year. Once an employee has been with the Company
five years, all matching contributions are fully vested. The
Companys contribution was $0.1 million annually for
the three years ended December 31, 2006. At
December 31, 2006, 2005 and 2004, deferred compensation
under this plan aggregated approximately $12.3 million,
$9.9 million and $8.7 million, respectively. The plan
is fully funded at December 31, 2006.
Equity
Deferred Compensation Plan
In 2003, the Company established the Developers Diversified
Realty Corporation Equity Deferred Compensation Plan (the
Plan), a non-qualified compensation plan for certain
officers and directors of the Company to defer the receipt of
restricted shares and, for compensation earned prior to
December 31, 2004, the gain otherwise recognizable upon the
exercise of options (see Note 13 regarding the deferral of
stock to this Plan.) At December 31, 2006 and 2005, there
were 0.6 million common shares of the Company in the Plan
in each year, valued at $39.6 million and
$28.6 million, respectively. The Plan is fully funded at
December 31, 2006.
Other
Compensation
During 2006, 2005 and 2004, the Company recorded a
$0.7 million, $1.5 million and $0.8 million
charge, respectively, as additional compensation to the
Companys CEO, relating to an incentive compensation
agreement associated with the Companys investment in the
Retail Value Fund Program. Pursuant to this agreement, the
Companys CEO is entitled to receive up to 25% of the
distributions made by Coventry (Note 2), provided the
Company achieves certain performance thresholds in relation to
funds from operations growth and/or total shareholder return.
|
|
19.
|
Earnings
and Dividends Per Share
|
Earnings Per Share (EPS) have been computed pursuant
to the provisions of SFAS No. 128. The following table
provides a reconciliation of income from continuing operations
and the number of common shares used in the
F-47
computations of basic EPS, which utilizes the
weighted average of common shares outstanding without regard to
dilutive potential common shares, and diluted EPS,
which includes all such shares.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
(In thousands, except per share amounts)
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Income from continuing operations
|
|
$
|
167,619
|
|
|
$
|
172,975
|
|
|
$
|
168,957
|
|
Add: Gain on disposition of real estate and real estate
investments
|
|
|
72,023
|
|
|
|
88,140
|
|
|
|
84,642
|
|
Less: Preferred stock dividends
|
|
|
(55,169
|
)
|
|
|
(55,169
|
)
|
|
|
(50,706
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Income from continuing operations applicable
to common shareholders
|
|
|
184,473
|
|
|
|
205,946
|
|
|
|
202,893
|
|
Add: Operating partnership minority interests
|
|
|
|
|
|
|
|
|
|
|
2,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Income from continuing operations applicable
to common shareholders
|
|
$
|
184,473
|
|
|
$
|
205,946
|
|
|
$
|
205,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Average shares outstanding
|
|
|
109,002
|
|
|
|
108,310
|
|
|
|
96,638
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
546
|
|
|
|
677
|
|
|
|
997
|
|
Operating partnership minority interests
|
|
|
|
|
|
|
|
|
|
|
1,308
|
|
Restricted stock
|
|
|
65
|
|
|
|
155
|
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Average shares outstanding
|
|
|
109,613
|
|
|
|
109,142
|
|
|
|
99,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations applicable to common
shareholders
|
|
$
|
1.69
|
|
|
$
|
1.90
|
|
|
$
|
2.10
|
|
Income from discontinued operations
|
|
|
0.13
|
|
|
|
0.20
|
|
|
|
0.20
|
|
Cumulative effect of adoption of a new accounting standard
|
|
|
|
|
|
|
|
|
|
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common shareholders
|
|
$
|
1.82
|
|
|
$
|
2.10
|
|
|
$
|
2.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations applicable to common
shareholders
|
|
$
|
1.69
|
|
|
$
|
1.88
|
|
|
$
|
2.08
|
|
Income from discontinued operations
|
|
|
0.12
|
|
|
|
0.20
|
|
|
|
0.19
|
|
Cumulative effect of adoption of a new accounting standard
|
|
|
|
|
|
|
|
|
|
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common shareholders
|
|
$
|
1.81
|
|
|
$
|
2.08
|
|
|
$
|
2.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase 1.5 million, 2.0 million and
2.1 million shares of common stock were outstanding at
December 31, 2006, 2005 and 2004, respectively
(Note 18), a portion of which has been reflected above in
diluted per share amounts using the treasury stock method.
Options aggregating 0.1 million were antidilutive at
December 31, 2005, and none of the options outstanding at
2006 or 2004 were antidilutive. Accordingly, the antidilutive
options were excluded from the computations.
Basic average shares outstanding do not include restricted
shares totaling 161,958, 191,406 and 202,198 that were not
vested at December 31, 2006, 2005 and 2004, respectively,
or Performance Units totaling 136,000 and 170,000, that were not
vested at December 31, 2006 and 2005, respectively (there
were none in 2004).
The exchange into common stock of the minority interests,
associated with OP Units, was not included in the computation of
diluted EPS for 2006 or 2005 because the effect of assuming
conversion was antidilutive (Note 13).
F-48
The Senior Convertible Notes issued in August 2006, which are
convertible into common shares of the Company at a price of
$65.11, were not included in the computation of diluted EPS for
2006 as the Companys stock price did not exceed the strike
price of the conversion feature (Note 9). These notes were
not outstanding in 2005 or 2004.
The forward equity contract entered into in December 2006 for
11.6 million common shares of the Company, was not included
in the computation of diluted EPS for 2006 because the effect of
assuming conversion was antidilutive (Note 13). This
contract was not outstanding in 2005 or 2004.
20. Federal
Income Taxes
The Company elected to be treated as a Real Estate Investment
Trust (REIT) under the Internal Revenue Code of
1986, as amended, commencing with its taxable year ended
December 31, 1993. To qualify as a REIT, the Company must
meet a number of organizational and operational requirements,
including a requirement that the Company distribute at least 90%
of its taxable income to its stockholders. It is
managements current intention to adhere to these
requirements and maintain the Companys REIT status. As a
REIT, the Company generally will not be subject to corporate
level federal income tax on taxable income it distributes to its
stockholders. As the Company distributed sufficient taxable
income for the three years ended December 31, 2006, no U.S.
federal income or excise taxes were incurred.
If the Company fails to qualify as a REIT in any taxable year,
it will be subject to federal income taxes at regular corporate
rates (including any alternative minimum tax) and may not be
able to qualify as a REIT for the four subsequent taxable years.
Even if the Company qualifies for taxation as a REIT, the
Company may be subject to certain state and local taxes on its
income and property, and to federal income and excise taxes on
its undistributed taxable income. In addition, the Company has
two taxable REIT subsidiaries that generate taxable income from
non-REIT activities and are subject to federal, state and local
income taxes.
At December 31, 2006, 2005 and 2004, the tax cost basis of
assets was approximately $7.3 billion, $6.9 billion
and $5.6 billion, respectively.
The following represents the combined activity of all of the
Companys taxable REIT subsidiaries (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Book income (loss) before income taxes
|
|
$
|
7,770
|
|
|
$
|
(5,166
|
)
|
|
$
|
(5,952
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of income tax (benefit) expense are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
3,410
|
|
|
$
|
|
|
|
$
|
|
|
State and local
|
|
|
490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(6,428
|
)
|
|
|
(1,875
|
)
|
|
|
366
|
|
State and local
|
|
|
(945
|
)
|
|
|
(276
|
)
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,373
|
)
|
|
|
(2,151
|
)
|
|
|
419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (benefit) expense
|
|
$
|
(3,473
|
)
|
|
$
|
(2,151
|
)
|
|
$
|
419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The 2006 income tax benefit is primarily attributable to the
Companys ability to deduct intercompany interest costs due
to the increased gain on disposition of real estate. The
allowance of intercompany interest expense within the
Companys taxable REIT subsidiaries is subject to certain
intercompany limitations based upon taxable income as required
under Internal Revenue Code Section 163(j).
F-49
The differences between total income tax expense or benefit and
the amount computed by applying the statutory federal income tax
rate to income before taxes were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Statutory rate of 34% applied to pre-tax income (loss)
|
|
$
|
2,642
|
|
|
$
|
(1,757
|
)
|
|
$
|
(2,024
|
)
|
Effect of state and local income taxes, net of federal tax
benefit
|
|
|
388
|
|
|
|
(258
|
)
|
|
|
(298
|
)
|
Valuation allowance (decrease) increase
|
|
|
(13,043
|
)
|
|
|
2,855
|
|
|
|
(1,226
|
)
|
Other
|
|
|
6,540
|
|
|
|
(2,991
|
)
|
|
|
3,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (benefit) expense
|
|
$
|
(3,473
|
)
|
|
$
|
(2,151
|
)
|
|
$
|
419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
(44.70
|
)%
|
|
|
41.64
|
%
|
|
|
(7.04
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets and liabilities of the Companys
taxable REIT subsidiaries were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Deferred tax assets (1)
|
|
$
|
45,100
|
|
|
$
|
53,394
|
|
|
$
|
49,390
|
|
Deferred tax liabilities
|
|
|
(237
|
)
|
|
|
(2,861
|
)
|
|
|
(3,863
|
)
|
Valuation allowance (1)
|
|
|
(36,037
|
)
|
|
|
(49,080
|
)
|
|
|
(46,225
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset (liability)
|
|
$
|
8,826
|
|
|
$
|
1,453
|
|
|
$
|
(698
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The majority of the deferred tax
assets and valuation allowance is attributable to interest
expense, subject to limitations and basis differentials in
assets due to purchase price accounting. Reconciliation of GAAP
net income to taxable income is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
GAAP net income
|
|
$
|
253,263
|
|
|
$
|
282,643
|
|
|
$
|
269,762
|
|
Add: Book depreciation and amortization (1)
|
|
|
93,189
|
|
|
|
64,854
|
|
|
|
38,999
|
|
Less: Tax depreciation and amortization (1)
|
|
|
(80,852
|
)
|
|
|
(52,362
|
)
|
|
|
(31,066
|
)
|
Book/tax differences on gains/losses from capital transactions
|
|
|
12,161
|
|
|
|
(4,382
|
)
|
|
|
(7,006
|
)
|
Joint venture equity in earnings, net (1)
|
|
|
(41,694
|
)
|
|
|
(111,351
|
)
|
|
|
(64,578
|
)
|
Dividends from subsidiary REIT investments
|
|
|
33,446
|
|
|
|
96,868
|
|
|
|
32,997
|
|
Deferred income
|
|
|
(2,136
|
)
|
|
|
1,495
|
|
|
|
(2,085
|
)
|
Compensation expense
|
|
|
(9,215
|
)
|
|
|
(10,589
|
)
|
|
|
2,301
|
|
Legal judgment
|
|
|
|
|
|
|
|
|
|
|
(9,190
|
)
|
Miscellaneous book/tax differences, net
|
|
|
(6,068
|
)
|
|
|
(12,186
|
)
|
|
|
(8,503
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable income before adjustments
|
|
|
252,094
|
|
|
|
254,990
|
|
|
|
221,631
|
|
Less: Capital gains
|
|
|
(69,977
|
)
|
|
|
(84,041
|
)
|
|
|
(73,110
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable income subject to the 90% dividend requirement
|
|
$
|
182,117
|
|
|
$
|
170,949
|
|
|
$
|
148,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Depreciation expense from
majority-owned subsidiaries and affiliates, which are
consolidated for financial reporting purposes, but not for tax
reporting purposes, is included in the reconciliation item
Joint venture equity in earnings, net.
|
F-50
Reconciliation between cash dividends paid and the dividends
paid deduction is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Cash dividends paid
|
|
$
|
306,929
|
|
|
$
|
285,710
|
|
|
$
|
226,537
|
|
Less: Dividends designated to prior year
|
|
|
(6,900
|
)
|
|
|
(14,651
|
)
|
|
|
(19,557
|
)
|
Plus: Dividends designated from the following year
|
|
|
6,900
|
|
|
|
6,900
|
|
|
|
14,651
|
|
Less: Portion designated capital gain distribution
|
|
|
(69,977
|
)
|
|
|
(84,041
|
)
|
|
|
(73,110
|
)
|
Less: Return of capital
|
|
|
(54,835
|
)
|
|
|
(22,969
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid deduction
|
|
$
|
182,117
|
|
|
$
|
170,949
|
|
|
$
|
148,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Characterization of distributions is as follows (per share):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Ordinary income
|
|
$
|
1.31
|
|
|
$
|
1.24
|
|
|
$
|
1.19
|
|
Capital gains
|
|
|
0.37
|
|
|
|
0.44
|
|
|
|
0.51
|
|
Return of capital
|
|
|
0.50
|
|
|
|
0.21
|
|
|
|
|
|
Unrecaptured Section 1250 gain
|
|
|
0.13
|
|
|
|
0.17
|
|
|
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2.31
|
|
|
$
|
2.06
|
|
|
$
|
1.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All or a portion of the fourth quarter dividends for each of the
years ended December 31, 2006, 2005 and 2004, have been
allocated and reported to shareholders in the subsequent year.
Dividends per share reported to shareholders for the years ended
December 31, 2006, 2005 and 2004, are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
Date
|
|
|
Ordinary
|
|
|
Capital Gain
|
|
|
Return of
|
|
|
Total
|
|
Dividends
|
|
Paid
|
|
|
Income
|
|
|
Distributions
|
|
|
Capital
|
|
|
Dividends
|
|
|
4th quarter 2005
|
|
|
01/06/06
|
|
|
$
|
0.30
|
|
|
$
|
0.12
|
|
|
$
|
0.12
|
|
|
$
|
0.54
|
|
1st quarter
|
|
|
04/03/06
|
|
|
|
0.33
|
|
|
|
0.13
|
|
|
|
0.13
|
|
|
|
0.59
|
|
2nd quarter
|
|
|
07/05/06
|
|
|
|
0.34
|
|
|
|
0.12
|
|
|
|
0.13
|
|
|
|
0.59
|
|
3rd quarter
|
|
|
10/02/06
|
|
|
|
0.34
|
|
|
|
0.13
|
|
|
|
0.12
|
|
|
|
0.59
|
|
4th quarter
|
|
|
01/08/07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1.31
|
|
|
$
|
.50
|
|
|
$
|
.50
|
|
|
$
|
2.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
Date
|
|
|
Ordinary
|
|
|
Capital Gain
|
|
|
Return of
|
|
|
Total
|
|
Dividends
|
|
Paid
|
|
|
Income
|
|
|
Distributions
|
|
|
Capital
|
|
|
Dividends
|
|
|
4th quarter 2004
|
|
|
01/06/05
|
|
|
$
|
0.26
|
|
|
$
|
0.13
|
|
|
$
|
0.05
|
|
|
$
|
0.44
|
|
1st quarter
|
|
|
04/04/05
|
|
|
|
0.32
|
|
|
|
0.16
|
|
|
|
0.06
|
|
|
|
0.54
|
|
2nd quarter
|
|
|
07/05/05
|
|
|
|
0.33
|
|
|
|
0.16
|
|
|
|
0.05
|
|
|
|
0.54
|
|
3rd quarter
|
|
|
10/03/05
|
|
|
|
0.33
|
|
|
|
0.16
|
|
|
|
0.05
|
|
|
|
0.54
|
|
4th quarter
|
|
|
01/08/06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1.24
|
|
|
$
|
0.61
|
|
|
$
|
0.21
|
|
|
$
|
2.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
2004
|
|
Date
|
|
|
Ordinary
|
|
|
Capital Gain
|
|
|
Total
|
|
Dividends
|
|
Paid
|
|
|
Income
|
|
|
Distributions
|
|
|
Dividends
|
|
|
4th quarter 2003
|
|
|
01/05/04
|
|
|
$
|
0.18
|
|
|
$
|
0.10
|
|
|
$
|
0.28
|
|
1st quarter
|
|
|
04/05/04
|
|
|
|
0.31
|
|
|
|
0.15
|
|
|
|
0.46
|
|
2nd quarter
|
|
|
07/06/04
|
|
|
|
0.31
|
|
|
|
0.15
|
|
|
|
0.46
|
|
3rd quarter
|
|
|
10/04/04
|
|
|
|
0.34
|
|
|
|
0.17
|
|
|
|
0.51
|
|
4th quarter
|
|
|
01/06/05
|
|
|
|
0.05
|
|
|
|
0.02
|
|
|
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1.19
|
|
|
$
|
0.59
|
|
|
$
|
1.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company had two reportable business segments, shopping
centers and business centers, determined in accordance with
SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information. The Company sold the
majority of its business center assets in 2005. Each shopping
center and business center is considered a separate operating
segment, and both segments utilize the accounting policies
described in Note 1; however, each shopping center on a
stand-alone basis is less than 10% of the revenues, profit or
loss, and assets of the combined reported operating segment and
meets the majority of the aggregation criteria under
SFAS 131.
At December 31, 2006, the shopping center segment consisted
of 467 shopping centers (including 167 owned through
unconsolidated joint ventures and 39 consolidated by the
Company) in 44 states, plus Puerto Rico and Brazil. At
December 31, 2006, the business center segment consists of
seven business centers in five states.
The table below presents information about the Companys
reportable segments for the years ended December 31, 2006,
2005 and 2004 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
Business
|
|
|
Shopping
|
|
|
|
|
|
|
|
|
|
Centers
|
|
|
Centers
|
|
|
Other
|
|
|
Total
|
|
|
Total revenues
|
|
$
|
4,386
|
|
|
$
|
813,712
|
|
|
|
|
|
|
$
|
818,098
|
|
Operating expenses
|
|
|
(1,999
|
)
|
|
|
(207,089
|
)
|
|
|
|
|
|
|
(209,088
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,387
|
|
|
|
606,623
|
|
|
|
|
|
|
|
609,010
|
|
Unallocated expenses (1)
|
|
|
|
|
|
|
|
|
|
$
|
(463,275
|
)
|
|
|
(463,275
|
)
|
Equity in net income of
joint ventures
|
|
|
|
|
|
|
30,337
|
|
|
|
|
|
|
|
30,337
|
|
Minority interests
|
|
|
|
|
|
|
|
|
|
|
(8,453
|
)
|
|
|
(8,453
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
167,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate assets
|
|
$
|
90,772
|
|
|
$
|
7,359,921
|
|
|
|
|
|
|
$
|
7,450,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
Business
|
|
|
Shopping
|
|
|
|
|
|
|
|
|
|
Centers
|
|
|
Centers
|
|
|
Other
|
|
|
Total
|
|
|
Total revenues
|
|
$
|
7,077
|
|
|
$
|
712,486
|
|
|
|
|
|
|
$
|
719,563
|
|
Operating expenses
|
|
|
(1,800
|
)
|
|
|
(180,554
|
)
|
|
|
|
|
|
|
(182,354
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,277
|
|
|
|
531,932
|
|
|
|
|
|
|
|
537,209
|
|
Unallocated expenses (1)
|
|
|
|
|
|
|
|
|
|
$
|
(391,226
|
)
|
|
|
(391,226
|
)
|
Equity in net income of joint ventures
|
|
|
|
|
|
|
34,873
|
|
|
|
|
|
|
|
34,873
|
|
Minority interests
|
|
|
|
|
|
|
|
|
|
|
(7,881
|
)
|
|
|
(7,881
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
172,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate assets
|
|
$
|
86,374
|
|
|
$
|
6,942,963
|
|
|
|
|
|
|
$
|
7,029,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
Business
|
|
|
Shopping
|
|
|
|
|
|
|
|
|
|
Centers
|
|
|
Centers
|
|
|
Other
|
|
|
Total
|
|
|
Total revenues
|
|
$
|
8,674
|
|
|
$
|
553,682
|
|
|
|
|
|
|
$
|
562,356
|
|
Operating expenses
|
|
|
(1,734
|
)
|
|
|
(135,045
|
)
|
|
|
|
|
|
|
(136,779
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,940
|
|
|
|
418,637
|
|
|
|
|
|
|
|
425,577
|
|
Unallocated expenses (1)
|
|
|
|
|
|
|
|
|
|
$
|
(292,451
|
)
|
|
|
(292,451
|
)
|
Equity in net income of
joint ventures
|
|
|
|
|
|
|
40,895
|
|
|
|
|
|
|
|
40,895
|
|
Minority interests
|
|
|
|
|
|
|
|
|
|
|
(5,064
|
)
|
|
|
(5,064
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
168,957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate assets
|
|
$
|
264,615
|
|
|
$
|
5,338,809
|
|
|
|
|
|
|
$
|
5,603,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Unallocated expenses consist of
general and administrative, interest income, interest expense,
tax benefit/expense, other income/expense and depreciation and
amortization as listed in the consolidated statements of
operations.
|
Inland
Retail Real Estate Trust, Inc.
In October 2006, the Company and Inland Retail Real Estate
Trust, Inc. (IRRETI) announced that they entered
into a definitive merger agreement. Under the terms of the
agreement, the Company will acquire all of the outstanding
shares of IRRETI for a total merger consideration of $14.00, of
which $12.50 per share is expected to be funded in cash and
$1.50 per share in the form of DDR common stock is to be based
upon the
ten-day
average closing price of DDRs shares determined two
trading days prior to the IRRETI stockholders meeting to
approve the transaction (plus accrued unpaid dividends),
scheduled for February 22, 2007.
The transaction has a total value of approximately
$6.2 billion. This amount includes approximately
$2.3 billion of existing debt, a significant portion of
which is expected to be extinguished at closing. IRRETIs
real estate portfolio aggregates over 300 community shopping
centers, neighborhood shopping centers and single tenant/net
leased retail properties.
In November 2006, the Company announced the formation of a joint
venture with TIAA-CREF to purchase a portfolio of 66 community
retail centers from the IRRETI portfolio of assets for
approximately $3.0 billion of total asset value. An
affiliate of TIAA-CREF expects to contribute 85% of the equity
in the joint venture, and an affiliate of DDR expects to
contribute 15% of the equity in the joint venture.
It is anticipated that this transaction will be approved by the
IRRETI shareholders and will close at the end of February 2007.
However, there is no assurance that the transaction will close
in February 2007 as expected.
Coventry
Effective January 2007, the Company acquired the remaining 25%
minority interest in Coventry (Note 2) and, as such, the
Company now owns 100% in this entity. The aggregate purchase
price was approximately $12.8 million.
President
and Chief Operating Officer
In February 2007, David M. Jacobstein announced he was stepping
down from the Company effective May 2007. Daniel B. Hurwitz, who
currently serves as Senior Executive Vice President and Chief
Investment Officer will assume the role of President and Chief
Operating Officer effective May 2007. The Company will record a
severance charge of approximately $4.1 million to general
and administrative expense in 2007 in connection with these
agreements.
Forward
Sale Agreements
In February 2007, the Company exercised its option to settle,
pursuant to the terms the forward sale agreements, in its common
shares on February 26, 2007 (Note 13).
F-53
23. Quarterly
Results of Operations (Unaudited)
The following table sets forth the quarterly results of
operations, restated for discontinued operations, for the years
ended December 31, 2006 and 2005 (in thousands, except per
share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Total
|
|
|
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
200,565
|
|
|
$
|
198,342
|
|
|
$
|
204,779
|
|
|
$
|
214,412
|
|
|
$
|
818,098
|
|
Net income
|
|
|
49,727
|
|
|
|
78,736
|
|
|
|
62,812
|
|
|
|
61,989
|
|
|
|
253,264
|
|
Net income applicable to common shareholders
|
|
|
35,935
|
|
|
|
64,943
|
|
|
|
49,020
|
|
|
|
48,197
|
|
|
|
198,095
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share
|
|
$
|
0.33
|
|
|
$
|
0.59
|
|
|
$
|
0.45
|
|
|
$
|
0.44
|
|
|
$
|
1.82
|
|
Weighted average number of shares
|
|
|
108,962
|
|
|
|
109,393
|
|
|
|
109,120
|
|
|
|
108,638
|
|
|
|
109,002
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share
|
|
$
|
0.33
|
|
|
$
|
0.59
|
|
|
$
|
0.45
|
|
|
$
|
0.44
|
|
|
$
|
1.81
|
|
Weighted average number of shares
|
|
|
109,609
|
|
|
|
110,866
|
|
|
|
109,670
|
|
|
|
109,308
|
|
|
|
109,613
|
|
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
170,003
|
|
|
$
|
174,432
|
|
|
$
|
178,638
|
|
|
$
|
196,490
|
|
|
$
|
719,563
|
|
Net income
|
|
|
105,550
|
|
|
|
67,954
|
|
|
|
60,277
|
|
|
|
48,862
|
|
|
|
282,643
|
|
Net income applicable to common shareholders
|
|
|
91,758
|
|
|
|
54,162
|
|
|
|
46,485
|
|
|
|
35,069
|
|
|
|
227,474
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share
|
|
$
|
0.85
|
|
|
$
|
0.50
|
|
|
$
|
0.43
|
|
|
$
|
0.32
|
|
|
$
|
2.10
|
|
Weighted average number of shares
|
|
|
108,005
|
|
|
|
108,276
|
|
|
|
108,431
|
|
|
|
108,523
|
|
|
|
108,310
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share
|
|
$
|
0.84
|
|
|
$
|
0.50
|
|
|
$
|
0.43
|
|
|
$
|
0.32
|
|
|
$
|
2.08
|
|
Weighted average number of shares
|
|
|
110,244
|
|
|
|
109,022
|
|
|
|
109,211
|
|
|
|
109,168
|
|
|
|
109,142
|
|
F-54
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.
|
|
|
|
|
|
Developers Diversified Realty Corporation
(Registrant)
|
|
|
|
|
|
|
|
|
|
Date October 25, 2007
|
/s/ William H. Schafer
|
|
|
William H. Schafer
|
|
|
Executive Vice President and Chief Financial Officer
|
|
|
Developers Realty (NYSE:DDR)
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