UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
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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 years ended
December 31, 2007
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission File
No. 001-32365
FELDMAN MALL PROPERTIES,
INC.
(Exact name of registrant as
specified in its charter)
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Maryland
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13-4284187
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(State or other jurisdiction
incorporation or organization)
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(I.R.S. Employer of
Identification No.)
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1010 Northern Boulevard, Suite 314, Great Neck, NY
11021
(Address of principal executive
offices zip code)
(516) 684-1239
Registrants telephone number, including area code
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, $.01 par value
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act:
None
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
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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 restraint
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
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Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation SK is not contained
herein, and will not be contained, to the best of the
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. Yes
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No
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Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2
of the
Exchange Act. (Check one):
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Large
accelerated
filer
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Accelerated
filer
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Non-accelerated
filer
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Smaller
reporting
company
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(Do not check if a smaller reporting company)
Indicated by check mark whether the registrant is a shell
company (as defined in
Rule 12b-2
of the Exchange
Act). Yes
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No
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As of April 4, 2008 there were 13,018,811 shares of
the Registrants common stock outstanding. The aggregate
market value of voting and non-voting common equity held by
non-affiliates of the Registrant (12,545,926 shares) as of
that date was $34,375,837. The aggregate market value was
calculated by using the closing price of the common stock as of
that date on the New York Stock Exchange.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the registrants proxy statement for the 2008
annual stockholders meeting to be held on May 28,
2008 and to be filed within 120 days after the close of the
registrants fiscal year are incorporated by reference into
Part III of this Annual Report on
Form 10-K.
FELDMAN
MALL PROPERTIES, INC.
FORM 10-K
TABLE OF CONTENTS
2
STATEMENTS
REGARDING FORWARD-LOOKING INFORMATION
When used within this Annual Report on
Form 10-K,
the words believes, anticipates,
projects, should, estimates,
expects, and similar expressions are intended to
identify forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as
amended (the Securities Act), and Section 21E
of the Securities Exchange Act of 1934, as amended (the
Exchange Act). Such forward-looking statements
involve known and unknown risks, uncertainties, and other
factors, which may cause the actual results, performance or
achievements of our company to be materially different from
those expressed or implied in the forward-looking statements.
Such factors include, but are not limited to, the following
changes in general economic conditions and in the markets in
which our company operates:
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our business strategy, including our renovation and
repositioning plans;
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our ability to obtain financing and capital for our business;
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our understanding of our competition;
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market trends;
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projected capital expenditures;
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construction costs;
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demand for shop space or retail goods;
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changes in general economic conditions and the markets in which
we operate;
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availability and creditworthiness of current and prospective
tenants; and
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lease rates and terms.
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The forward-looking statements are based on our beliefs,
assumptions and expectations of our future performance, taking
into account all information currently available to us. These
beliefs, assumptions and expectations are subject to risks and
uncertainties and can change as a result of many possible events
or factors, not all of which are known to us. If a change
occurs, our business, financial condition, liquidity and results
of operations may vary materially from those expressed in our
forward-looking statements. You should carefully consider these
risks before you make an investment decision with respect to our
common stock.
We do not intend and disclaim any duty or obligation to update
or revise any forward-looking statements set forth in this
Annual Report on
Form 10-K
to reflect new information, future events or otherwise.
3
PART I
General
Feldman Mall Properties, Inc. is a real estate investment trust,
or REIT, formed in July 2004 to continue the business of Feldman
Equities of Arizona to acquire, renovate and reposition retail
shopping malls. We completed our initial public offering on
December 15, 2004, or the Offering Date.
Our investment strategy is to opportunistically acquire
underperforming malls and transform them into physically
attractive and profitable Class A or near Class A
malls through comprehensive renovation and repositioning efforts
aimed at increasing shopper traffic and tenant sales. Through
these renovation and repositioning efforts, we expect to raise
occupancy levels, rental income and property cash flow. We
currently qualify as a REIT for federal income tax purposes.
On December 31, 2007, our portfolio consisted of
(i) four wholly owned malls, identified as the Stratford
Square Mall located in Bloomingdale, Illinois, the Tallahassee
Mall located in Tallahassee, Florida, the Northgate Mall located
in the northern suburbs of Cincinnati, Ohio and the Golden
Triangle Mall, located in the northern suburbs of Dallas, Texas,
totaling 4.1 million square feet, (ii) a 25% interest
in each of two joint ventures that own the Harrisburg Mall,
located in Harrisburg, Pennsylvania (totaling 0.9 million
square feet) and the Colonie Center Mall, located in Albany, New
York (totaling 1.2 million square feet), and (iii) a
30.8% interest in the Foothills Mall located in Tucson, Arizona
(totaling 0.7 million square feet).
Unless the context otherwise requires or indicates,
we, our company, our and
us refer to Feldman Mall Properties, Inc., a
Maryland corporation, together with our consolidated
subsidiaries, including Feldman Equities Operating Partnership,
LP, a Delaware limited partnership, which we refer to in this
Annual Report on
Form 10-K
as our operating partnership, and Feldman Equities
of Arizona, LLC, an Arizona limited liability company, together
with its subsidiaries and affiliates, which we refer to
collectively herein as Feldman Equities of Arizona,
the predecessor or our predecessor. We
conduct substantially all of our business through our operating
partnership in which we hold approximately a 90% ownership
interest as of December 31, 2007. We control all major
decisions regarding the activities and management of our
operating partnership. Our operating partnership enables us to
complete tax deferred acquisitions of additional malls using its
units of limited partnership interests, or OP units, as an
alternative acquisition currency.
Corporate
Structure
IPO
and Formation Transactions
On the Offering Date, we sold 10,666,667 shares of our
common stock and contributed the net proceeds to our operating
partnership. Subsequently, on January 15, 2005, we sold an
additional 1,600,000 shares of our common stock upon the
underwriters full exercise of their over-allotment option.
Prior to the completion of our initial public offering, we
conducted our business through (i) our predecessor, which
owned a 25% capital interest in the joint venture that owns the
Harrisburg Mall and a 67% capital interest in the joint venture
that owned the Foothills Mall and (ii) two corporations
that owned interests in these joint ventures. Through the
formation transactions outlined below, we acquired 100% of the
economic and legal interests in the Foothills Mall. We refer to
the ownership interest in the contributed entities collectively
as the ownership interests and we refer to the holders of these
ownership interests who are members of our senior management
team and their respective affiliates as the contributors.
At or prior to the closing of our initial public offering, we
engaged in various transactions, which include the following:
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Pursuant to separate contribution, merger and related
agreements, the contributors contributed their direct and
indirect ownership interests in the contributed entities to us
in exchange for an aggregate of 123,228 shares of our
common stock and 1,593,464 OP units. In addition, unaffiliated
third party investors exchanged their ownership interests in two
of our joint ventures for $5.0 million in cash.
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The contribution, merger and related agreements provide that
Larry Feldman, our Chairman, Jim Bourg, our former Chief
Operating Officer, and Scott Jensen, our Senior Vice President
of Leasing, retain all right, title and interest held by the
contributed entities to amounts held in certain cash impound
accounts established pursuant to the prior $54.8 million
mortgage loan that was due in 2008 that was secured by the
Foothills Mall. As of the offering date of our initial public
offering, or IPO, the balance in these accounts totaled
$7.6 million. As of December 31, 2005, these impound
accounts had been released to us by the lender of Foothills Mall
and distributed to Messrs. Feldman, Bourg and Jensen.
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The contribution, merger and related agreements further provide
that Feldman Partners, LLC (an entity controlled by Larry
Feldman and owned by him and his family), Jim Bourg and Scott
Jensen will receive additional OP units relating to the
performance of the joint venture that owns the Harrisburg Mall.
The aggregate value of the additional OP units that may be
issued with respect to the Harrisburg Mall is equal to 50% of
the amount, if any, that the internal rate of return achieved by
us from the joint venture exceeds 15% on our investment on or
prior to December 31, 2009. The fair value of the right to
receive these additional OP Units was approximately
$5.0 million as of the Offering Date.
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We became subject to approximately $74.2 million of
consolidated mortgage and other indebtedness consisting of
(i) a $54.8 million mortgage loan secured by the
Foothills Mall, (ii) a $5.5 million mezzanine loan
relating to the Foothills Mall, (iii) a $5.9 million
intercompany loan owed to Feldman Partners, LLC that was used to
invest in the Harrisburg Mall and the Foothills Mall and to pay
our predecessors overhead expenses,
(iv) $4.0 million outstanding under a line of credit
owed by our predecessor which was incurred to return funds
advanced by the contributors in connection with the purchase and
renovation of the Harrisburg Mall and the Foothills Mall, and
(v) a $4.0 million distribution owed by our
predecessor to Messrs. Larry Feldman, James Bourg and Scott
Jensen. In addition, the joint venture that owns the Harrisburg
Mall remained subject to a construction loan of which the joint
venture had borrowed approximately $44.3 million as of the
Offering Date.
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We applied approximately $17.5 million of the net proceeds
from our initial public offering to repay certain of our
predecessors outstanding indebtedness, including
(i) the $5.5 million mezzanine loan relating to the
Foothills Mall, (ii) $4.0 million of the
$5.9 million intercompany loan owed to Feldman Partners,
LLC ($1.9 million of this loan was converted into equity
securities), (iii) a $4.0 million distribution owed by
our predecessor to Messrs. Larry Feldman, James Bourg and
Scott Jensen, and (iv) the $4.0 million outstanding
under our predecessors line of credit.
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In connection with the formation transactions, we entered into
agreements with Messrs. Feldman, Bourg and Jensen that
indemnify them with respect to certain tax liabilities intended
to be deferred in the formation transactions, if those
liabilities are triggered either as a result of a taxable
disposition of a property (Harrisburg Mall or Foothills Mall) by
our company, or if we fail to offer the opportunity for the
contributors to guarantee or otherwise bear the risk of loss,
with respect to certain amounts of our companys debt for
tax purposes (the contributor-guaranteed debt). With
respect to tax liabilities arising out of property sales, the
indemnity will cover 100% of any such liability (approximately
$5.2 million as of December 31, 2007) until
December 31, 2009 and will be reduced by 20% of the
aggregate liability on each of the five following year-ends
thereafter.
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Our
Industry
Our property redevelopment activities are focused on
underperforming regional and super-regional malls. The following
tables describe these property types and contain certain
comparable information relating to other retail properties:
Types of
Retail Properties
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Square Feet
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Type of Center
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Concept/Market
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(Including Anchors)
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Anchor Type
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Neighborhood Center
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Convenience
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30,000 - 150,000
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One or more supermarkets
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Community Center
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General merchandise, convenience
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100,000 - 350,000
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Two or more discount department stores, supermarkets, drug
stores, home improvement or large specialty/discount apparel
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Regional Malls*
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General merchandise, fashion (typically enclosed and referred
to as malls)
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400,000 - 800,000
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Two or more full-line department stores, jr. department
stores, mass merchant, discount department stores or fashion
apparel
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Super-Regional Malls*
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Similar to regional mall but has more variety and assortment
(typically enclosed and referred to as malls)
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800,000+
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Three or more full-line department stores, jr. department
stores, mass merchant or fashion apparel
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Fashion/Specialty Center
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Higher-end, fashion-oriented
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80,000 - 250,000
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Fashion
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Lifestyle Center
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Upscale specialty stores; dining and entertainment in outdoor
setting
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150,000 -500,000
(can be smaller or larger)
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Not usually anchored but may include large-format book store,
multiplex cinema, small department stores and other big boxes
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Power Center
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Category-dominant anchors, few small tenants
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250,000 - 600,000
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Three or more category killer, home improvement, discount
department stores, warehouse club or off-price stores
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Theme/Festival Center
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Leisure, tourist-oriented, retail and service
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80,000 - 250,000
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Restaurants, entertainment
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Outlet Center
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Manufacturers outlet stores
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50,000 - 400,000
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Manufacturers outlet stores
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Target properties
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Source: International Council of Shopping Centers
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Malls
Regional malls generally contain in excess of
400,000 square feet of enclosed and climate controlled
space and offer a variety of fashion merchandise, hard goods,
services, restaurants, entertainment and convenient parking.
Regional malls are typically anchored by two or more department
stores or large big box retail stores, which are called anchor
tenants. These anchor tenants act as the main draw to a typical
mall and are normally located within the mall at the ends of the
common corridors. Super-regional malls have the same
characteristics as regional malls but are generally larger than
800,000 square feet and have three or more anchor tenants.
We refer to regional and super-regional malls as malls.
Malls typically contain numerous diversified smaller retail
stores, which we refer to as shops or shop tenants. Shop tenants
are mostly national or regional retailers, typically located
along common corridors, which connect to the anchor tenants.
Shop tenants typically account for a substantial majority of the
revenues of a mall.
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Malls have different strategies with regard to price,
merchandise offered and tenant mix, and are generally tailored
to meet the needs of their trade areas. Malls draw from their
trade areas by providing an array of shops, restaurants and
entertainment facilities and often serve as the town center and
a preferred gathering place for community, charity, and
promotional events. In many communities, the mall is an
important engine of economic activity, providing a range of
employment opportunities to local residents and sales and
property tax revenues to local governments.
Investment
Classes
According to the International Council of Shopping Centers, the
United States has approximately 1,100 malls. We generally
classify malls into one of the following three rating categories
based upon the average annual sales per square foot of shop
tenants:
Classes
of Malls
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Shop Tenant
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Class
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Sales per Square Foot
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Class A
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Above $350
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Class B
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$250 - $350
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Class C
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Below $250
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Mall
Renovation Opportunities
We believe that more than half of the approximately 1,100 malls
in the United States fall into the Class B and Class C
categories. We believe a significant number of these malls are
potential candidates for renovation and repositioning. The best
candidates are those that are situated in good locations within
favorable retail markets but are underperforming due to
mismanagement, changing retail trends, weak or closed anchor
tenants, poor shop tenant mixes, non-optimal layouts or outdated
designs and appearances.
The implementation of a successful renovation and repositioning
effort, which targets the causes of a propertys
underperformance, normally requires the investment of a
substantial amount of efficiently priced capital to fund the
demolition, reconstruction, tenant improvements and other costs
associated with the project. The ability to implement these
projects is therefore heavily dependent on capital availability
for real estate companies in general and for development
projects in particular.
The recovery in U.S. credit markets anticipated to commence
in the early part of 2008 has yet not materialized. As a result,
capital to fund renovation projects is harder to find and
financing terms are far less attractive compared to prior
periods. In addition, declining home prices in many regions has
also impacted consumer spending, which in turn has caused a slow
start to the 2008 retailing season. Some retailers have reduced
their growth plans for 2008 and 2009 while others have announced
store closures or delays in new store openings. See
Managements Discussion and Analysis of Financial
Condition and Results of Operation Trends Which
May Influence Our Business and Results of Operations. As a
result, for the balance of 2008, we do not anticipate market
conditions will be favorable for acquiring new properties or
commencing major redevelopment efforts.
Our
Business Strategy
Our primary business objectives are to increase the occupancy,
tenant sales, rental income, and cash flow from each of our
properties. Our business strategies, which are aimed at
achieving these objectives, include the following elements:
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Pursue Joint Ventures.
We intend to renovate
and reposition some of our properties in joint ventures with
institutional investors. Through these joint ventures, we will
seek to enhance our returns by supplementing the cash flow we
receive from our properties with additional management, leasing,
development and incentive fees from the joint ventures. In
addition, we will periodically sell partial equity interests in
our more stabilized assets through joint venture partnerships
with institutional investors.
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Implement Renovation and Repositioning
Strategies.
Subject to future access to capital,
we intend to continue our ongoing comprehensive renovation and
repositioning strategies aimed at improving the physical
appearance, visibility and design of our malls in order to
increase shopper traffic and tenant sales.
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Maximize Occupancy.
We will seek to remedy
weak occupancy levels at our properties under redevelopment by
adding or replacing anchor tenants with powerful consumer draws
as well as attractive and diverse national and specialty shop
tenants. We expect to achieve preferable tenant mixes by moving
tenants into tenant neighborhoods. Tenant
neighborhoods are clusters of tenants located within a
concentrated area of a mall that sell to specific consumer
segments, such as teenagers. A major component of our tenant
leasing program will include implementing targeted tenant
marketing campaigns at the local and national levels.
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Drive Revenues Through Leasing.
We will seek
to increase rental income from existing space by maintaining
high levels of occupancy, increasing rental rates as current
leases with below market rents expire, negotiating new leases to
reflect increases in rental rates and maximizing percentage
rents. We will also seek to replace underperforming shop tenants
with stronger tenants whose sales will enhance overall mall
traffic and tenant sales. Following the completion of the
renovation and repositioning of our malls, we expect our
tenants sales per square foot to increase. We expect that
such increases in sales per square foot will enable our tenants
to pay higher rents. We also believe that higher tenant sales
per square foot will generate increased leasing demand from
higher quality shop tenants. As a result, we believe that our
malls will tend to have a greater potential for increases in
rent upon lease renewal in comparison to more stable properties
owned by other mall REITs.
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Manage Property Intensively.
The core of our
management strategy is to increase shopper traffic through our
malls, which improves tenant sales volume and, ultimately,
rental rates. In certain cases, we may evaluate the replacement
of heating, ventilation and air conditioning systems in order to
reduce the cost of energy.
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Our
Financing Strategies
While our charter does not limit the amount of debt we can
incur, our business plan is to maintain a flexible financing
position by maintaining a prudent level of leverage consistent
with our business strategy. We will consider a number of factors
in evaluating our actual level of indebtedness, both fixed and
variable rate, in making financial decisions. We intend to
finance our renovation and repositioning projects with the most
advantageous source of capital available to us at the time,
including traditional floating rate construction financing. We
expect that once we have completed our renovation and
repositioning of a specific mall asset we will replace
short-term financing with medium to long-term fixed rate
financing. We may also finance our activities through any
combination of sales of preferred shares or debt securities,
additional secured or unsecured borrowings and our line of
credit.
In addition, we may also finance our renovation and
repositioning projects through joint ventures with institutional
investors. Through these joint ventures, we will seek to enhance
our returns by supplementing the cash flow we receive from our
properties with additional management, leasing, development and
incentive fees from the joint ventures. As discussed above, the
current conditions of the U.S. credit markets have negatively
impacted our ability to access capital and thus making debt
financing in particular less available and more expensive than
in prior years. See Managements Discussion and
Analysis of Financial Condition and Results of
Operations Trends Which May Influence Our Business
and Results of Operations.
Competition
We may compete with other owners and operators of malls in all
of our markets. We believe that the primary competition for
potential tenants at any of our malls comes from other malls or
lifestyle shopping centers within a three to
15-mile
radius of that mall.
Excluding our company, there are other publicly traded mall
REITs and several large private mall companies, any of which
under certain circumstances could compete against us for anchor
tenants or shop tenants. However, in some cases we may compete
with other REITs for shop tenants or anchor tenants to occupy
space.
8
Employees
Currently, all of our employees are employed by Feldman Equities
Management, LLC, a wholly owned subsidiary, as well as Feldman
Equities Management, Inc., our wholly owned taxable REIT
subsidiary, both of which perform various property management,
maintenance, acquisition, renovation and management functions.
As of December 31, 2007, we had 167 employees. None of
our employees are represented by a union. We consider our
relations with our employees to be good.
Segment
Information
Our Company is a REIT engaged in owning, managing, leasing,
renovating and repositioning Class B regional malls and has
one reportable segment, retail mall real estate.
Available
Information
Our corporate headquarters is located at 1010 Northern
Boulevard, Suite 314, Great Neck, New York 11021. We file
our annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and all amendments to those reports with the Securities and
Exchange Commission (the SEC). You may obtain copies
of these documents by visiting the SECs Public Reference
Room at 100 F Street, NE, Washington, D.C. 20549,
by calling the SEC at
1-800-SEC-0330
or by accessing the SECs Web site at www.sec.gov. Our
website is www.feldmanmall.com. Our reports on
Forms 10-K,
10-Q,
and
8-K
and all
amendments to those reports are posted on our website as soon as
reasonably practicable after the reports and amendments are
electronically filed with or furnished to the SEC. We also make
available on our website our audit committee charter,
compensation committee charter, corporate governance and
nominating committee charter, code of business conduct and
ethics and corporate governance principles. The contents of our
website are not incorporated by reference.
Recent
Developments
Convertible
Preferred Equity Financing
Effective April 10, 2007, we entered into an agreement to
issue, at a price of $25 per share, up to $50 million 6.85%
Series A Cumulative Convertible Preferred Stock, or the
Series A Preferred Stock, to Inland American Real Estate
Trust, Inc., or Inland American, a public non-listed REIT
sponsored by an affiliate of the Inland Real Estate Group of
Companies. As of December 31, 2007, all
2,000,000 shares of the Series A Preferred Stock have
been issued and sold to Inland American for an aggregate
purchase price of $50 million. The net proceeds from the
offering are being applied to fund the redevelopment of our
malls, and for general corporate purposes.
Under the terms of this transaction, and in accordance with New
York Stock Exchange rules, we were required to obtain
shareholder approval to permit conversion of the Series A
Preferred Stock into shares of our common stock. At our annual
meeting held on December 28, 2007, our shareholders voted
to approve the convertibility of the Series A Preferred
Stock to common stock. As of June 30, 2009, each share of
Series A Preferred Stock will be convertible, in whole or
in part, at the option of the holder thereof, into shares of our
common stock, at a conversion ratio of 1.77305 common shares for
each share of Series A Preferred Stock. This conversion
ratio is based upon a common share price of $14.10 per share.
Under the terms of the Articles Supplementary relating to
the Series A Preferred Stock, at all times during which the
Series A Preferred Stock is outstanding, the holders of the
Series A Preferred Stock have the right to elect one person
to serve as a director of our company. In addition, in the event
that beginning on March 31, 2008 (upon public release of
the unaudited interim financial statements for such date) and
each March 31 thereafter, if our fixed charge coverage ratio
measured on a trailing 12 month basis shall be less than
1.20 to 1.00 or our capitalization ratio shall be less than 0.75
to 1.00, the holders of the Series A Preferred Stock shall
have the right to elect one additional member to our board of
directors. We do not expect to meet the fixed charge coverage
ratio of 1.20 to 1.00 as of March 31, 2008.
9
$25
Million Credit Facility
On April 16, 2007, we announced that we had entered into a
debt financing facility, or the Note, providing for up to
$25 million of borrowings from Kimco Capital Corp., or
Kimco. Loan draws under the Note are optional and will bear
interest at the rate of 7% per annum, payable monthly. Any
outstanding principal amount will be due and payable on
April 10, 2008, provided that the maturity of the Note may
be extended to April 10, 2009 if we deliver to Kimco, on or
before March 17, 2008, a notice of extension and further
provided that we comply with certain financial covenants. We may
prepay the outstanding principal amount under the Note in whole
or in part at any time. In addition to the interest on the Note,
Kimco will be paid a variable fee equal to (i) $500,000,
multiplied by (ii) (a) the volume weighted average price of
our common stock as of a
five-day
period chosen by Kimco, minus (b) $13.00 per common share.
If Kimco does not select a date for determination of the fee
prior to termination of the Note, we will instead pay to Kimco
$250,000 in additional interest. We have not exercised our
option to extend the Note and the Note is no longer available to
us.
Secured
Line of Credit
On April 5, 2006, in connection with the acquisition of the
Golden Triangle Mall, we entered into a $24.6 million
secured line of credit, or the Line, which bears interest at
140 basis points over LIBOR. The Line was fully drawn on
the date we acquired the Golden Triangle Mall. The Line contains
certain financial covenants requiring us to, among other
requirements, maintain certain financial coverage ratios.
On April 20, 2007, we increased the Line from
$24.6 million to $30.0 million. The maturity date of
the Line is April 2009. The Line is secured by the Golden
Triangle Mall and the $5.4 million increase to the Line is
recourse to us. As of December 31, 2007, the debt coverage
ratio was above 1.4. As of December 31, 2007, we were not
in compliance with a quarterly debt coverage constant of 10.5%.
We are currently negotiating a waiver of this covenant, however,
if we are unable to obtain a waiver, we would be required to
reduce the current outstanding balance by $1.0 million.
Colonie
Center Financing
On February 13, 2007, one of our joint ventures closed on
our previously announced first mortgage loan financing secured
by the Colonie Center Mall. On February 27, 2007, we
increased the first mortgage loan financing by $6.5 million
to $116.3 million. Proceeds from the increased loan were
used to repay certain preferred equity loans made by our Company
to the joint venture.
Stratford
Square Financing
On May 8, 2007, we closed on a $104.5 million first
mortgage refinancing of the Stratford Square Mall. The first
mortgage has an initial term of 36 months and bears
interest at 115 basis points over LIBOR. The loan has two
one-year extension options. On the closing date,
$78.2 million of the loan proceeds were used to retire the
Stratford Square Malls two outstanding first mortgages.
The balance of the proceeds was placed into escrow and will be
released to fund the completion of the redevelopment project.
In July 2007, we acquired the building occupied by JCPenney and
related acreage at the Northgate Mall for a price of
$2.0 million.
Common
Dividends
Our board of directors declared a quarterly dividend of $0.2275
per common share for the quarter ending March 31, 2007. The
dividend was paid on May 25, 2007 to shareholders of record
at the close of business on May 18, 2007.
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On October 26, 2007, we announced the suspension of our
common stock dividend and we do not expect to declare any
additional common stock dividends in the foreseeable future
except as may be required to maintain our REIT status.
Preferred
Dividends
Our board of directors has declared quarterly dividends of
$0.4281 per preferred share for the quarters ended
September 30, 2007 and December 31, 2007.
Stock
Repurchase
On November 12, 2007, we announced that our board of
directors authorized the repurchase of up to
3,000,000 shares of our issued and outstanding common
stock, par value $0.01 per share. The shares are expected to be
acquired from time to time at prevailing prices through
open-market transactions or through negotiated block purchases,
which will be subject to restrictions related to volume, price,
timing, market conditions and applicable Securities and Exchange
Commission rules.
The repurchase program does not require us to repurchase any
specific number of shares and may be modified, suspended or
terminated by our board of directors at any time without prior
notice. At this time, based on the current market conditions, we
do not plan on using our current liquidity to repurchase any
shares.
Executive
Management Restructuring
Effective April 17, 2007, we entered into an agreement with
Lloyd Miller, executive vice president of leasing since November
2005, pursuant to which he agreed to resign. We made a severance
payment to Mr. Miller in the amount of $147,000 and also
repurchased 15,500 of Mr. Millers shares of our
common stock at a price of $12.50 per share. Subsequent to the
execution of this agreement, Mr. Miller notified us that he
had exercised his right to rescind the agreement. He also
threatened to make a claim against us alleging breach of his
employment contract with us. On October 31, 2007, we
entered into an agreement with Mr. Miller whereby we paid
him $325,000 in cash in addition to his severance and the
repurchase of his shares and he waived his rights to any future
claims against us.
On October 26, 2007, we announced the following management
restructuring:
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Larry Feldman, our chairman, entered into a letter agreement
with us pursuant to which he agreed to step down as our chief
executive officer. He remains chairman of the board and is
employed by us to focus on leasing, anchor tenant retention and
replacement, redevelopment and construction, and strategic
direction and planning. Under the terms of this letter
agreement, Mr. Feldman has agreed to forego any severance
payments arising out of his change of status, unless his
employment with us is terminated (without cause) on or prior to
May 31, 2008.
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Tom Wirth has been named President and remains chief financial
officer. Mr. Wirth assumed management responsibilities for
our company with a focus on public company obligations,
including timely financial reporting.
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To provide support to, and more direct oversight of management,
the independent board members have formed an executive
committee. The executive committee will remain in place until
such time as we have retained additional executive talent, or
the committee deems its assistance is no longer required.
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On December 21, 2007, we announced that we are
concentrating on expense reduction both at the property and
corporate levels and that we initiated programs, including
outsourcing, to achieve certain cost reductions. In this regard,
we have determined to close our Phoenix office, except for a
minimal leasing staff. In addition, James Bourg, our former
executive vice president and chief operating office and a
director, resigned from our company. Mr. Bourg left in the
first quarter of 2008 and the closure of the Phoenix office is
expected to take place during the second quarter of 2008. In
connection with Mr. Bourgs departure, we incurred a
severance charge of approximately $1.3 million that was
accrued in the fourth quarter of 2007. In connection with the
closing of our Phoenix Office, we expect to incur additional
restructuring charges during the first half of 2008.
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Outsourcing
of Accounting and Management Functions
As part of our efforts aimed at expense reduction, on
April 1, 2008, we entered into an agreement with Brandywine
Financial Services Corporation, a Pennsylvania corporation
(Brandywine), and a member of The Brandywine
Companies, for which Bruce E. Moore, one of our directors, is
the chairman and chief executive officer. The Brandywine
Companies are privately held, with offices in Chadds Ford,
Pennsylvania, Clearwater, Florida and Orlando, Florida. Since
its origins in the early 1970s, Brandywine has developed
expertise in all aspects of ownership and management of
commercial and residential real estate. Historically,
Mr. Moore managed, and Brandywine performed similar
services for, a New York Stock Exchange traded company. In
addition, in connection with a joint venture with another New
York Stock Exchange retail REIT, Brandywine provides property
management and accounting services.
Pursuant to this agreement, effective as of April 1, 2008,
Brandywine agreed to provide us various accounting and
management services relating to certain of our properties (the
Projects), such as supervision of our operations,
maintenance and development of certain of our properties, lease
administration, bookkeeping, accounting, our compliance with
FASB 141 and FASB 13, as amended, financial statement
preparation, coordination of our compliance with Sarbanes-Oxley
Act of 2002, as amended, and our financial statement audits
(collectively, the Project Services). In addition,
Brandywine agreed to provide us certain corporate accounting and
administrative services, including, among other things,
information technology user support, financial statement
preparation and audits, reports to joint venture partners,
periodic reports to lenders, payroll preparation and filing
coordination, human resources management, cash management,
general ledger accounting, accounts payable, accounts
receivable, cost allocation, inter-company billing and funding
and FASB 109 compliance (collectively, the Corporate
Services). As compensation to Brandywine for the Project
Services (with certain exceptions) and the Corporate Services,
we agreed to pay Brandywine a fee equal to (a) with respect
to the Project Services, 1.50% of our gross revenue generated by
the Projects, payable monthly, plus (b) with respect to the
Corporate Services, $60,000 per month, plus (c) travel and
other out-of-pocket expenses incurred by Brandywine in
connection with such services. This agreement has an initial
term through June 30, 2009 and can be renewed on a
year-to-year basis but is subject to termination by the parties
at any time starting June 30, 2008 upon no less than
90 days prior to written notice. As a result of this
transaction, Bruce E. Moore will no longer be deemed independent
from our management, as such term is defined by the rules of the
New York Stock Exchange and the Securities and Exchange
Commission.
Appointment
of Two New Board Members
In connection with the Series A Preferred Stock transaction
with Inland American, Mr. Thomas H. McAuley is expected to
join our board of directors. Mr. McAuley, age 61, has
been a Director of Inland Real Estate Corp. since 2004.
Mr. McAuley is also currently the president of Inland
Capital Markets Group, Inc., which is an advisor on real estate
investments, including public REITs, to various entities within
The Inland Real Estate Group of Companies, Inc.
In addition, we do not expect to comply with the financial
covenant set forth under the terms of the Series A
Preferred Stock as of March 31, 2008 and therefore, we
expect that the holders of the Series A Preferred will have
the right to appoint an additional member to our board of
directors. As a result, Inland American has notified us that it
intends to elect one additional member to our board of
directors. Therefore, we have been in discussions with Inland
American relating to this development and have agreed with
Inland American to appoint Mr. Thomas McGuinness to our
board of directors. Mr. McGuinness, age 51, is the
president and chief executive officer of Inland American Retail
Management LLC.
Consideration
of Strategic Alternatives
On June 5, 2007, we announced that we retained Friedman,
Billings, Ramsey & Co., Inc. to assist us in exploring
strategic alternatives in order to enhance shareholder value.
These strategic alternatives included an assessment of a variety
of potential capital raising and disposition transactions. These
efforts, which required a substantial amount of management time
and attention during the latter part of 2007, did not lead to
the completion of any significant transaction. We believe the
deterioration of U.S. credit markets, which coincided with
our exploration of strategic alternatives, played a role in this
outcome. In addition, the hoped-for recovery in these
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markets has not yet materialized and it remains a highly
challenging environment in which to execute any of the
transactions of the type that we were exploring during 2007.
Nevertheless, our board of directors remains committed to
exploring options to enhance the value of the investments held
by our stockholders. While we focus on enhancing operating
efficiencies, improving the performance of our properties, and
lowering our general and administrative costs, we will also be
diligently pursuing a range of capital raising options, which
include new borrowings, joint venture arrangements and selected
property dispositions. In addition, we will also consider larger
portfolio assets sales and transactions involving the sale or
merger of our company in its entirety. However, given the
current credit environment, there can be no assurances that any
such transactions will be completed.
Risks
Related to Our Properties and Operations
Our
investments in underperforming or distressed malls could be
subject to higher than anticipated costs and unexpected
redevelopment delays, which would adversely affect our
investment returns, harm our operating results and reduce funds
available for distributions to our stockholders.
A key component of our growth strategy is pursuing renovation
and repositioning opportunities in underperforming or distressed
malls. These renovation and repositioning projects may
(i) be abandoned after funds have been expended,
(ii) not be completed on schedule or within budgeted
amounts, or (iii) encounter delays or refusals in obtaining
all necessary zoning, land use, building, occupancy and other
required governmental permits and authorizations. Any of the
foregoing circumstances could result in our failing to realize
any return on our investment or a lower return than expected.
Such an outcome could reduce our revenue, harm our operating
results and reduce funds available for distributions to our
stockholders.
The
assumptions we make in evaluating a renovation or repositioning
opportunity may not prove to be correct and, as a result, our
investment returns may be adversely impacted.
In deciding whether to renovate and reposition a particular
property, we make certain assumptions regarding the expected
future performance of that property and the projected costs and
expenses to be incurred. We may underestimate the costs or time
necessary to bring the property up to the standards established
for its intended market position or may be unable to increase
occupancy at a newly acquired property as quickly as expected or
at all. Any substantial unanticipated delays or expenses could
adversely affect the investment returns from these projects and
harm our operating results, liquidity and financial performance.
Our
properties are limited to seven geographic areas leaving us
exposed to economic downturns in those areas.
Our properties are located in areas of or surrounding
Harrisburg, Pennsylvania; Tucson, Arizona; Bloomingdale,
Illinois; Albany, New York; Tallahassee, Florida; Cincinnati,
Ohio; and Dallas, Texas. We are particularly exposed to
downturns in these local economies or other changes in local
real estate market conditions. As a result of economic changes
in these markets, our business, financial condition, operating
results, cash flow, the trading price of our common stock, our
ability to satisfy our debt service obligations and our ability
to pay distributions could be materially adversely affected.
We
have a limited operating history and might not be able to
operate our business or implement our strategies
successfully.
We were organized in July 2004 and have only a limited operating
history as a publicly traded mall REIT dedicated to the
acquisition, renovation and repositioning of retail shopping
malls. Our lack of a long operating history provides a limited
basis to evaluate the likelihood that we will be able to
successfully implement our mall renovation and repositioning
strategies. We cannot assure you that our past experience will
be sufficient to successfully operate our company as a publicly
traded mall REIT.
13
Managements
Internal Control Assessment
As of December 31, 2007, we determined that our controls
over financial reporting contained material weaknesses. We
continue to lack the necessary personnel with adequate technical
accounting expertise to ensure the financial statements were
prepared accurately and on a timely basis. As a result, we were
unable to adequately complete our necessary procedures, such as
proper review and approval of supporting documents and journal
entries, to prepare our financial statements on a timely basis
in accordance with regulatory guidelines. In addition, due to
lack of the necessary personnel, we lack adequate segregation of
duties related to the review, approval and recording of
financial transactions. Due to these material weaknesses, there
is a reasonable possibility that a material misstatement in our
financial statements would not be prevented or detected on a
timely basis.
Any
tenant bankruptcies or leasing delays we encounter, particularly
with respect to our anchor tenants, could adversely affect our
operating results and financial condition.
We receive a substantial portion of annualized base rent from
long-term leases, which we define as having an initial term of
more than five years. At any time, any of our tenants may
experience a downturn in their business that may weaken their
financial condition. As a result, our tenants may delay lease
commencement, fail to make rental payments when due or declare
bankruptcy. Any leasing delays, tenant failure to make rental
payments when due or tenant bankruptcies could result in the
termination of the tenants lease and, particularly in the
case of a key anchor tenant, material losses to us and harm to
our results of operations. Some of our tenants may occupy stores
at multiple locations in our portfolio, and the impact of a
bankruptcy of those tenants may be more significant to us than
to other mall operators. If tenants are unable to comply with
the terms of our leases, we may modify lease terms in ways that
are unfavorable to us. In addition, under many of our leases,
our tenants may be required to pay rent based on a percentage of
their sales or other operating results. Accordingly, declines in
these tenants operating performance would reduce the
income produced by our properties.
Any bankruptcy filings by or relating to one of our tenants or a
lease guarantor would bar all efforts by us to collect
pre-bankruptcy debts from that tenant, the lease guarantor or
their property, unless we receive an order permitting us to do
so from the bankruptcy court. A tenant or lease guarantor
bankruptcy could also delay our efforts to collect past due
balances under the relevant leases, and could ultimately
preclude full collection of these sums. If a tenant affirms the
lease while in bankruptcy, all pre-bankruptcy balances due under
the lease must be paid to us in full. However, if a tenant
rejects the lease while in bankruptcy, we would have only a
general unsecured claim for prepetition damages. Any unsecured
claim we hold may be paid only to the extent that funds are
available and only in the same percentage as is paid to all
other holders of unsecured claims. It is possible that we may
recover substantially less than the full value of any unsecured
claims we hold, which may harm our financial condition.
Certain
provisions of our leases with some of our tenants may harm our
operating performance.
We have entered into leases with some of our tenants that allow
the tenant to terminate its lease, or to pay reduced rent, if
certain tenants fail to open or subsequently cease operating, if
certain percentages of the shop space in the applicable mall are
not leased, if we violate exclusives
and/or
restrictions imposed under the leases on the types and sizes of
certain tenants or uses or if the tenant fails to achieve
certain minimum sales levels. If any of these events occur, we
may be unable to re-lease the vacated space which would reduce
our rental revenue.
In addition, in many cases, our tenant leases contain provisions
giving the tenant the exclusive right to sell particular types
of merchandise or provide specific types of services within the
particular mall, or limit the ability of other tenants within
that mall to sell that merchandise or provide those services.
When re-leasing space after a vacancy by one of these other
tenants, these provisions may limit the number and types of
prospective tenants for the vacant space. The failure to
re-lease on satisfactory terms could harm our operating results.
Joint
venture investments could be subject to additional risks as a
result of our lack of sole
decision-making
authority.
We hold various capital interests in the Harrisburg Mall,
Foothills Mall and Colonie Center Mall through joint ventures.
We may selectively enter into additional joint ventures as part
of our strategy. In the event that we enter into a joint
venture, we would not be in a position to exercise sole
decision-making authority regarding the property,
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partnership, joint venture or other entity. Although major
decisions affecting our current joint ventures are shared
equally by us and our joint venture partners, some of the
decision-making authority in other joint ventures may be vested
exclusively with our joint venture partners or be subject to a
majority vote of the joint venture partners. In addition,
investments in partnerships, joint ventures or other entities
may, under certain circumstances, involve risks not present were
a third party not involved, including the possibility that
partners or co-venturers might become bankrupt or fail to fund
their share of required capital contributions. Partners or
co-venturers may have economic or other business interests or
goals which are inconsistent with our business interests or
goals, and may be in a position to take actions contrary to our
policies or objectives or which may have an adverse tax impact
on us. Such investments may also have the potential risk of
impasses on decisions, such as a sale, because neither we nor
the partner or
co-venturer
would have full control over the partnership or joint venture.
Disputes between us and partners or
co-venturers
may result in litigation or arbitration that would increase our
expenses and prevent our officers
and/or
directors from focusing their time and efforts on our business.
Consequently, actions by or disputes with partners or
co-venturers
might result in subjecting properties owned by the partnership
or joint venture to additional risk. In addition, we may in
certain circumstances be liable for the actions of our third
party partners or co-venturers.
Adverse
economic or other conditions in the markets in which we do
business could negatively affect our occupancy levels and rental
rates and therefore our operating results.
Our operating results are dependent upon our ability to maximize
occupancy levels and rental rates in our properties. Adverse
economic or other conditions in the markets in which we operate
may lower our occupancy levels and limit our ability to increase
rents or require us to offer rental discounts. If our properties
fail to generate sufficient revenues to meet our cash
requirements, including operating and other expenses, debt
service and capital expenditures, our net income, funds from
operations, cash flow, financial condition and ability to make
distributions to stockholders could be adversely affected. The
following factors, among others, may adversely affect the
operating performance of our properties:
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the national economic climate and the local or regional economic
climate in the markets in which we operate, which may be
adversely impacted by, among other factors, industry slowdowns,
relocation of businesses and changing demographics;
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periods of economic slowdown or recession, rising interest rates
or the public perception that any of these events may occur,
which could result in a general decline in rent under our leases
or an increase in tenant defaults;
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local or regional real estate market conditions such as the
oversupply of shop space in a particular area;
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negative perceptions by retailers or shoppers of the safety,
convenience and attractiveness of our properties and the areas
in which they are located;
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increases in operating costs, including the need for capital
improvements, insurance premiums, real estate taxes and
utilities;
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changes in supply of or demand for similar or competing
properties in an area;
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the impact of environmental protection laws;
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earthquakes and other natural disasters, terrorist acts, civil
disturbances or acts of war which may result in uninsured or
underinsured losses; and
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changes in tax, real estate and zoning laws.
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Competition
may impede our ability to renew leases or re-let space as leases
expire and require us to undertake unbudgeted capital
improvements, which could harm our operating
results.
We face competition from the following retail centers that are
near our malls with respect to the renewal of leases and
re-letting of space as leases expire. For example:
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The Harrisburg Mall faces competition from two regional malls, a
lifestyle center and four power centers located within
10 miles of the property.
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The Foothills Mall faces competition from three regional malls
and seven power centers within 12 miles of this property.
We expect the construction of new retail properties to increase
modestly in proportion to demand so that vacancy levels remain
low.
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The Colonie Center Mall faces competition from three regional
malls described below that comprise approximately
3.2 million square feet of shop space. Four power centers
that comprise approximately 2.2 million square feet are
located within five miles of the property.
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The Stratford Square Mall faces competition from two
super-regional shopping centers situated within Stratford Square
Malls trade region. In addition, there are two smaller
malls that compete to a lesser degree with Stratford.
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The Tallahassee Mall faces competition from Governors
Square Mall, which is a super-regional mall located
approximately five miles southeast of the Tallahassee Mall.
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The Northgate Mall faces competition from three super-regional
malls that comprise approximately 4.8 million square feet
of shop space. Additional retail competition totals an
additional 2.7 million square feet, including one power
center.
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The Golden Triangle Mall faces competition from two
super-regional malls within 18 miles and two smaller malls
that compete to a lesser degree with Golden Triangle. In
addition, a new mixed-use development with a life style center
is scheduled to possibly open in 2010 and a new super-regional
mall, scheduled to open in 2007, will be primary competitors. In
addition, there may be additional development in the immediate
vicinity of the mall.
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Any additional competitive properties that are developed close
to our existing properties also may impact our ability to lease
space to creditworthy tenants. Increased competition for tenants
may require us to make capital improvements to properties that
we would not have otherwise planned to make. Any unbudgeted
capital improvements may negatively impact our financial
position. Also, to the extent we are unable to renew leases or
re-let space as leases expire, we could experience decreased
cash flow from tenants and a reduction in the income produced by
our properties. Excessive vacancies (and related reduced shopper
traffic) at one of our properties may hurt sales of other
tenants at that property and may discourage them from renewing
leases.
Our
leases do not allow us to pass on all real estate related costs
to our tenants and, if such costs increase, they could reduce
our cash flow and funds available for
distributions.
Our properties and any properties we acquire in the future are
and will be subject to operating risks common to real estate in
general, any or all of which may negatively affect us. If any
property is not fully occupied or if rents are being paid in an
amount that is insufficient to cover operating expenses, we
could be required to expend funds for that propertys
operating expenses, including real estate and other taxes,
utility costs, operating expenses, insurance costs, repair and
maintenance costs and administrative expenses. To the extent we
lease properties on a basis not requiring tenants to pay all or
some of the expenses associated with the property, or if tenants
fail to pay required expenses, we could be required to pay those
costs, which could reduce our results of operations and cash
flow.
We may
seek to acquire, renovate and reposition a property in a new,
less familiar geographic area, and such an expansion may not
prove successful or achieve expected performance even if
successfully completed.
We may in the future renovate and reposition malls in geographic
regions where we do not currently have a presence and where we
do not possess the same level of familiarity with redevelopment
as we do in other geographic areas. Our ability to redevelop
such properties successfully or at all or to achieve expected
performance depends, in part, on our familiarity with local
demographic trends and potential competition from new
development. There can be no assurance that we will make any
investments in any other properties that meet our investment
criteria.
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We may
not be successful in identifying and consummating suitable
acquisitions that meet our investment criteria, which may impede
our long-term growth and negatively affect our long-term results
of operations.
Our ability to expand through acquisitions requires us to
identify suitable acquisition candidates or investment
opportunities that meet our investment criteria and are
compatible with our growth strategy. We analyze potential
acquisitions on a
property-by-property
and
market-by-market
basis. We may not be successful in identifying suitable
acquisition candidates or investment opportunities or in
consummating acquisitions or investments on satisfactory terms.
Failures in identifying or consummating acquisitions could
reduce the number of acquisitions we complete and slow our
growth, which could adversely affect our results of operations.
Our ability to acquire properties on favorable terms may be
adversely affected by the following significant risks:
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competition from local investors and other real estate investors
with significant capital, including other publicly traded REITs
and institutional investment funds, that may significantly
increase the purchase price of the property, which could reduce
our profitability;
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unsatisfactory completion of due diligence investigations and
other customary closing conditions;
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failure to finance an acquisition on favorable terms or at
all; or
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acquisitions of properties subject to liabilities and without
any recourse, or with only limited recourse, with respect to
unknown liabilities such as liabilities for
clean-up
of
undisclosed environmental contamination, claims by persons
dealing with the former owners of the properties and claims for
indemnification by general partners, directors, officers and
others indemnified by the former owners of the properties.
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We may
not be successful in integrating and operating acquired
properties which could adversely affect our results of
operations.
We may make future acquisitions of underperforming or distressed
malls. We will be required to integrate them into our existing
portfolio. The acquired properties may turn out to be less
compatible with our growth strategy than originally anticipated,
may require expenditures of excessive time and cash to make
necessary improvements or renovations and may cause disruptions
in our operations and divert managements attention away
from our other operations, which could impair our results of
operations as a whole.
Uninsured
losses or losses in excess of our insurance coverage could
result in a loss of our investment, anticipated profits and cash
flow from a property.
We maintain comprehensive liability, fire, flood, earthquake,
wind (as deemed necessary or as required by our lenders),
extended coverage and rental loss insurance with respect to our
properties with policy specifications, limits and deductibles
customarily carried for similar properties. Certain types of
losses, however, may be either uninsurable or not economically
insurable, such as losses due to riots, acts of war or
terrorism. Should an uninsured loss occur, we could lose our
investment in, as well as anticipated profits and cash flow
from, a property. In addition, even if any such loss is insured,
we may be required to pay a significant deductible on any claim
for recovery of such a loss prior to our insurer being obligated
to reimburse us for the loss, or the amount of the loss may
exceed our coverage for the loss.
Increases
in taxes and regulatory compliance costs may reduce our
revenue.
Increases in income, service or other taxes generally are not
passed through to tenants under leases and may reduce our net
income, cash flow, financial condition and ability to pay or
refinance our debt obligations and ability to make distributions
to stockholders. Similarly, changes in laws increasing the
potential liability for environmental conditions existing on
properties or increasing the restrictions on discharges or other
conditions may result in significant unanticipated expenditures,
which could similarly adversely affect our business and results
of operations.
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Risks
Related to the Real Estate Industry
Recent
disruptions in the financial markets could have adverse effects
on us.
The U.S. credit markets have recently experienced
significant dislocations and liquidity disruptions. Continued
uncertainty in the credit markets have materially impacted
liquidity in the debt markets, making financing terms for
borrowers less attractive, and in certain cases have resulted in
the unavailability of certain types of debt financing. In
addition, these factors may make it more difficult for us to
sell properties or may adversely affect the price we receive for
properties that we do sell, as prospective buyers may experience
increased costs of debt financing or difficulties in obtaining
debt financing. These disruptions in the financial markets also
may have other unknown adverse effects on us or the economy
generally. Based on these conditions, we may have more
difficulty in replacing our maturing debt, including the debt of
our joint ventures.
Any
negative perceptions of the mall industry generally by the
investing public may result in a decline in our stock
price.
We own and operate indoor malls and may continue to focus on
acquiring, renovating and repositioning indoor malls in the
future. Consequently, we are subject to risks inherent in
investments in a single industry. To the extent that the
investing public has a negative perception of indoor mall
properties, the value of our common stock may be negatively
impacted, which would result in our common stock trading at a
discount below the inherent value of our assets as a whole.
Illiquidity
of real estate investments could significantly impede our
ability to respond to adverse changes in the performance of our
properties.
Because real estate investments are relatively illiquid, our
ability to promptly sell one or more properties in our portfolio
in response to changing economic, financial and investment
conditions is limited. Decreases in market rents, negative tax,
real estate and zoning law changes and changes in environmental
protection laws may also increase our costs, lower the value of
our investments and decrease our income, which would adversely
affect our business, financial condition and operating results.
We cannot predict whether we will be able to sell any property
for the price or on the terms set by us, or whether any price or
other terms offered by a prospective purchaser would be
acceptable to us. We also cannot predict the length of time
needed to find a willing purchaser and to close the sale of a
property.
We may be required to expend funds to correct defects or to make
improvements before a property can be sold. There is no
assurance that we will have funds available to correct those
defects or to make those improvements. In acquiring a property,
we may agree to transfer restrictions that materially restrict
us from selling that property for a period of time or impose
other restrictions, such as a limitation on the amount of debt
that can be placed or repaid on that property. These lockout
provisions may restrict our ability to sell a property even if
we deem it necessary or appropriate.
We
could incur significant costs related to environmental
matters.
Under various U.S. federal, state and local laws,
ordinances and regulations, owners and operators of real estate
may be liable for the costs of removal or remediation of certain
hazardous substances or other regulated materials on or in such
property. These laws often impose strict liability without
regard to whether the owner or operator knew of, or was
responsible for, the presence of such hazardous substances or
materials. The presence of such hazardous substances or
materials, or the failure to properly remediate such substances,
may adversely affect the owners or operators ability
to lease, sell or rent such property or to borrow using such
property as collateral. Persons who arrange for the disposal or
treatment of hazardous substances or other regulated materials
may be liable for the costs of removal or remediation of such
substances at a disposal or treatment facility, whether or not
such facility is owned or operated by such person. Certain
environmental laws impose liability for release of
asbestos-containing materials into the air, and third parties
may seek recovery from owners or operators of real properties
for personal injury associated with asbestos-containing
materials.
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Certain environmental laws also impose liability, without regard
to knowledge or fault, for removal or remediation of hazardous
substances or other regulated materials upon owners and
operators of a contaminated property even after they no longer
own or operate the property. Moreover, the past or present owner
or operator from which a release emanates could be liable for
any personal injuries or property damages that may result from
such releases, as well as any damages to natural resources that
may arise from such releases. The cost of investigation,
remediation or removal of these substances may be substantial.
Certain environmental laws impose compliance obligations on
owners and operators of real property with respect to the
management of hazardous materials and other regulated
substances. For example, environmental laws govern the
management of asbestos-containing materials and lead-based
paint. Failure to comply with these laws can result in penalties
or other sanctions.
Phase I Environmental Reports were completed more than two years
ago in connection with our predecessors investments in the
Harrisburg Mall and the Foothills Mall. Phase I Environmental
Reports were completed for Stratford Square Mall, Colonie
Center, Northgate Mall (including the JCPenney building acquired
in July 2007), Tallahassee Mall and Golden Triangle Mall. The
Phase I Environmental Report for each of the properties did not
reveal any existing material environmental conditions. In
connection with our acquisition of the JCPenney building at
Northgate Mall, we incurred approximately $1.4 million of
asbestos abatement in connection with the subsequent demolition
of this building.
Existing environmental reports with respect to any of our
properties may not reveal (i) all environmental
liabilities, (ii) that any prior owner or operator of our
properties did not create any material environmental condition
not known to us, or (iii) that a material environmental
condition does not otherwise exist as to any one or more of our
properties. There also exists the risk that material
environmental conditions, liabilities or compliance concerns may
have arisen after the review was completed or may arise in the
future. Finally, future laws, ordinances or regulations and
future interpretations of existing laws, ordinances or
regulations may impose additional material environmental
liability.
Costs
associated with complying with the Americans with Disabilities
Act of 1990 may result in unanticipated
expenses.
Under the Americans with Disabilities Act of 1990, or ADA, all
places of public accommodation are required to meet certain
federal requirements related to access and use by disabled
persons. These requirements became effective in 1992. A number
of additional U.S. federal, state and local laws may also
require modifications to our properties, or restrict certain
further renovations of the properties, with respect to access
thereto by disabled persons. Non-compliance with the ADA could
result in the imposition of fines or an award of damages to
private litigants and also could result in an order to correct
any non-complying feature, which could result in substantial
capital expenditures. We have not conducted an audit or
investigation of all of our properties to determine our
compliance and we cannot predict the ultimate cost of compliance
with the ADA or other legislation. If one or more of our
properties is not in compliance with the ADA or other
legislation, then we would be required to incur additional costs
to bring the facility into compliance. If we incur substantial
costs to comply with the ADA or other legislation, our financial
condition, our results of operations, our cash flow, the per
share trading price of our common stock and our ability to
satisfy our debt service obligations and to make distributions
to our stockholders could be adversely affected.
Risks
Related to Our Organization and Structure
Our
management team received material benefits upon completion of
our IPO, including a 9.8% equity stake in our Company which
could allow them to exercise significant influence over matters
submitted to our stockholders.
Our management team received material benefits upon completion
of our IPO, and holds an equity stake of 9.8% in our Company on
a fully diluted basis as of December 31, 2007.
Managements equity stake includes 389,382 shares of
common stock and 966,454 OP units being held by Larry Feldman,
our Chairman, and his affiliates, 9,615 shares of common
stock and 233,504 OP units being held by Jim Bourg, our former
Executive Vice President and Chief Operating Officer,
9,615 shares of common stock and 233,504 OP units being
held by Scott Jensen, our Senior Vice President of
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Leasing, and 9,615 shares of common stock and
76,923 shares of restricted stock (or other equity-based
compensation of equivalent value) issued under the 2004 equity
incentive plan held by Thomas Wirth, our President and Chief
Financial Officer. Consequently, those stockholders,
individually or to the extent their interests are aligned,
collectively, may be able to influence the outcome of matters
submitted for stockholder consideration, including the election
of our board of directors, the approval of significant corporate
transactions, including business combinations, consolidations
and mergers, and the determination of our
day-to-day
corporate and management policies. Therefore, those stockholders
have substantial influence over us and could exercise their
influence in a manner that is not in the best interests of our
other stockholders.
Conflicts
of interest could arise as a result of our relationship with our
operating partnership and the resolution of such conflicts may
not be in our favor.
Conflicts of interest could arise in the future as a result of
the relationships between us and our affiliates, on the one
hand, and our operating partnership or any holder of OP units,
on the other hand. For example, in connection with a proposed
sale or refinancing of a property that has been contributed by a
holder of OP units, that holder may have different and more
adverse tax consequences with respect to that sale as compared
to our stockholders. Our directors and officers have duties to
our company and our stockholders under applicable Maryland law
in connection with their management of our company. At the same
time, we, through our wholly owned business trust subsidiary, as
a general partner, have fiduciary duties to our operating
partnership and to its limited partners under Delaware laws. To
the extent that conflicts exist between the interests of our
company and our stockholders, on the one hand, and our operating
partnership and holders of OP units, on the other hand, the
duties of our directors and officers to our company and to our
stockholders may conflict with our duties as general partner to
our operating partnership and its partners. The partnership
agreement of our operating partnership does not require us to
resolve such conflicts in favor of either our stockholders or
the limited partners in our operating partnership.
Unless otherwise provided for in the relevant partnership
agreement, Delaware law generally requires a general partner of
a Delaware limited partnership to adhere to fiduciary duty
standards under which it owes its limited partners the highest
duties of good faith, fairness and loyalty and which generally
prohibit such general partner from taking any action or engaging
in any transaction as to which it has a conflict of interest.
Potential conflicts of interest exist between our directors and
executive officers and our Company as described below.
We entered into tax protection agreements with the contributors
which may limit our ability to sell certain of our properties
(the Foothills and Harrisburg malls).
Larry Feldman, our Chairman, Jim Bourg, our former Executive
Vice President and Chief Operating Officer and Scott Jensen, our
Senior Vice President of Leasing, have direct or indirect
ownership interests in certain entities contributed to our
operating partnership in the formation transactions.
Accordingly, to the extent these individuals are parties to any
of our contribution agreements, we may pursue less vigorous
enforcement of the terms of these agreements.
Additionally, the partnership agreement of our operating
partnership expressly limits our liability by providing that
neither we, our direct wholly owned business trust subsidiary,
as the general partner of the operating partnership, nor any of
our or their trustees, directors or officers, will be liable or
accountable in damages to our operating partnership, the limited
partners or assignees for errors in judgment, mistakes of fact
or law or for any act or omission if we, or such trustee,
director or officer, acted in good faith. In addition, our
operating partnership is required to indemnify us, our
affiliates and each of our respective trustees, officers,
directors, employees and agents to the fullest extent permitted
by applicable law against any and all losses, claims, damages,
liabilities (whether joint or several), expenses (including,
without limitation, attorneys fees and other legal fees
and expenses), judgments, fines, settlements and other amounts
arising from any and all claims, demands, actions, suits or
proceedings, whether civil, criminal, administrative or
investigative, that relate to the operations of the operating
partnership, provided that our operating partnership will not
indemnify a person for (1) willful misconduct or a knowing
violation of the law, (2) any transaction for which such
person received an improper personal benefit in violation or
breach of any provision of the partnership agreement or
(3) in the case of a criminal proceeding, the person had
reasonable cause to believe the act or omission was unlawful.
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The provisions of Delaware law that allow the common law
fiduciary duties of a general partner to be modified by a
partnership agreement have not been resolved in a court of law,
and we have not obtained an opinion of counsel covering the
provisions set forth in the partnership agreement that purport
to waive or restrict our fiduciary duties that would be in
effect under common law were it not for the partnership
agreement.
Conflicts
of interest between management and our stockholders may arise
that could impact potential dispositions.
Members of our senior management team may suffer adverse tax
consequences upon the sale or refinancing of our properties.
Therefore, certain members of our senior management team may
have different objectives than our stockholders regarding the
pricing, timing and other material terms of any sale or
refinancing of our properties.
Our
managements right to receive OP units upon the achievement
of certain performance thresholds relating to the Harrisburg
Mall may cause them to devote a disproportionate amount of time
to such performance thresholds, which could cause our overall
operating performance to suffer.
Feldman Partners, LLC (an entity controlled by Larry Feldman and
owned by him and his family), Jim Bourg, our former Executive
Vice President and Chief Operating Officer, and Scott Jensen,
our Senior Vice President of Leasing, acquired the right to
receive additional OP units for ownership interests contributed
by them as part of the formation transactions in connection with
the initial public offering, only upon the achievement of the
internal rate of return relating to the Harrisburg Mall. The
aggregate value of the additional OP units that may be issued
with respect to the Harrisburg Mall is equal to 50% of the
amount, if any, that the internal rate of return achieved by us
from the joint venture exceeds 15% on or prior to
December 31, 2009.
As a result, Larry Feldman and Scott Jensen may have an
incentive to devote a disproportionately large amount of their
time and a disproportionate amount of our resources to achieving
these performance thresholds in comparison with our other
objectives, which could harm our operating results.
We may
pursue less vigorous enforcement of terms of contribution,
merger and other related agreements because of conflicts of
interest with certain of our officers.
Larry Feldman and Scott Jensen, who serve as directors
and/or
officers have direct or indirect ownership interests in certain
entities that were contributed to our operating partnership in
the formation transactions related to the initial public
offering. We are entitled to indemnification and damages in the
event of breaches of representations or warranties made by the
contributors. We may choose not to enforce, or to enforce less
vigorously, our rights under these contribution, merger and
related agreements because of our desire to maintain our ongoing
relationships with the individuals party to these agreements.
Our
organizational documents, including the stock ownership limit
imposed by our charter, may inhibit market activity in our stock
and could delay, defer or prevent a change in control
transaction.
Our charter authorizes our directors to take such actions as are
necessary and desirable to preserve our qualification as a REIT
and, subject to certain exceptions, limits any person to actual
or constructive ownership of no more than 9.0% (by value or by
number of shares, whichever is more restrictive) of our
outstanding common stock or 9.0% (by value or by number of
shares, whichever is more restrictive) of our outstanding
capital stock. Our board of directors, in its sole discretion,
may exempt a proposed transferee from the ownership limit.
However, our board of directors may not grant an exemption from
the ownership limit to any proposed transferee whose ownership,
direct or indirect, in excess of 9.0% (by value or by number of
shares, whichever is more restrictive) of our outstanding common
stock or 9.0% (by value or by number of shares, whichever is
more restrictive) of our outstanding capital stock could
jeopardize our status as a REIT. These restrictions on ownership
will not apply if our board of directors determines that it is
no longer in our best interests to attempt to qualify, or to
continue to qualify, as a REIT. The ownership limit may delay,
defer or prevent a change in control or other transaction that
might involve a premium price for our common stock or otherwise
be in the best interests of our stockholders.
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Certain
provisions of Maryland law could inhibit changes in
control.
Certain provisions of the Maryland General Corporation Law, or
MGCL, may have the effect of inhibiting a third party from
making a proposal to acquire us or of impeding a change in
control under circumstances that otherwise could provide the
holders of shares of our common stock with the opportunity to
realize a premium over the then prevailing market price of such
shares. We are subject to the business combination
provisions of the MGCL that, subject to limitations, prohibit
certain business combinations between us and an interested
stockholder (defined generally as any person who
beneficially owns 10% or more of the voting power of our shares
or an affiliate or associate of ours who, at any time within the
two-year period prior to the date in question, was the
beneficial owner of 10% or more of our then outstanding voting
shares, or an affiliate thereof) for five years after the most
recent date on which the stockholder becomes an interested
stockholder, and thereafter imposes special appraisal rights and
special stockholder voting requirements on these combinations.
However, we have, by resolution, exempted business combinations
(1) between us and Larry Feldman, his affiliates and
associates and people acting in concert with any of the
foregoing and (2) between us and any person who has not
otherwise become an interested stockholder, provided that such
business combination is first approved by our board of directors
(including a majority of our directors who are not affiliates or
associates of such person), from the provisions of the Maryland
Business Combination Act. Consequently, the five-year
prohibition and the supermajority vote requirements will not
apply to business combinations between us and any person
described above. We have determined to opt out of the so-called
control share provisions of the MGCL that provide
that control shares of a Maryland corporation
(defined as shares which, when aggregated with other shares
controlled by the stockholder, entitle the stockholder to
exercise one of three increasing ranges of voting power in
electing directors) acquired in a control share
acquisition (defined as the direct or indirect acquisition
of ownership or control of control shares) have no
voting rights except to the extent approved by our stockholders
by the affirmative vote of at least two-thirds of all the votes
entitled to be cast on the matter, excluding all interested
shares. We may in the future elect to become subject to the
control share provisions of the MGCL. The unsolicited
takeover provisions of the MGCL permit our board of
directors, without stockholder approval and regardless of what
is currently provided in our charter or bylaws, to implement
takeover defenses, some of which (for example, a classified
board) we do not yet have. These provisions may have the effect
of inhibiting a third party from making an acquisition proposal
for us or of delaying, deferring or preventing a change in
control of our company under the circumstances that otherwise
could provide the holders of our common stock with the
opportunity to realize a premium over the then current market
price.
Our
board of directors has the power to issue additional shares of
our stock in a manner that may not be in your best
interests.
Our charter authorizes our board of directors to issue
additional authorized but unissued shares of common stock or
preferred stock and to increase the aggregate number of
authorized shares or the number of shares of any class or series
without stockholder approval. In addition, our board of
directors may classify or reclassify any unissued shares of
common stock or preferred stock and set the preferences, rights
and other terms of the classified or reclassified shares. Our
board of directors could issue additional shares of our common
stock or establish a series of preferred stock that could have
the effect of delaying, deferring or preventing a change in
control or other transaction that might involve a premium price
for our common stock or otherwise be in the best interests of
our stockholders. As of December 31, 2007, we have
186,844,938 authorized but unissued shares of common stock,
13,018,831 shares of common stock issued and outstanding,
50,000,000 authorized shares of preferred stock and
2,000,000 shares of preferred stock issued and outstanding.
Our
rights and the rights of our stockholders to take action against
our directors and officers are limited.
Maryland law provides that a director or officer has no
liability in that capacity if he or she performs his or her
duties in good faith, in a manner he or she reasonably believes
to be in our best interests and with the care that an ordinarily
prudent person in a like position would use under similar
circumstances. In addition, our charter eliminates our
directors and officers liability to us and our
stockholders for money damages except for liability resulting
from actual receipt of an improper benefit in money, property or
services or active and deliberate dishonesty established by a
final judgment and which is material to the cause of action. Our
bylaws require us to
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indemnify our directors and officers for liability resulting
from actions taken by them in those capacities to the maximum
extent permitted by Maryland law. As a result, we and our
stockholders may have more limited rights against our directors
and officers than might otherwise exist under common law. In
addition, we may be obligated to fund the defense costs incurred
by our directors and officers.
Our
business could be harmed if key personnel with long standing
business relationships in the real estate business terminate
their employment with us.
Our success depends, to a significant extent, on the continued
services of our senior management team. Although we will have
employment agreements with some members of our senior management
team, there is no guarantee that any of them will remain
employed by us. We do not maintain key-person life insurance on
any of our officers. The loss of services of one or more members
of our senior management team could harm our business and our
prospects.
Risks
Related to Our Organization and Operation as a REIT
To
maintain our REIT status, we may be forced to borrow funds on a
short-term basis during unfavorable market
conditions.
To qualify as a REIT, we generally must distribute to our
stockholders at least 90% of our net taxable income each year,
excluding net capital gains, and we will be subject to regular
corporate income taxes to the extent that we distribute less
than 100% of our net taxable income each year. In addition, we
will be subject to a 4% non-deductible excise tax under certain
circumstances if we fail to make sufficient and timely
distributions of our taxable income. In order to maintain our
REIT status and avoid the payment of income and excise taxes, we
may need to borrow funds on a short-term basis to meet the REIT
distribution requirements even if the then-prevailing market
conditions are not favorable for these borrowings. These
short-term borrowing needs could result from a difference in
timing between the actual receipt of cash and inclusion of
income for U.S. federal income tax purposes, or the effect
of non-deductible capital expenditures, the creation of reserves
or required debt or amortization payments.
Distributions
payable by REITs do not qualify for the reduced tax rates under
recently enacted tax legislation.
The maximum tax rate for dividends payable by domestic
corporations to individual U.S. stockholders (as such term
is defined under U.S. Federal Income Tax
Considerations below) has been reduced to 15% (through
2008). Distributions payable by REITs, however, are generally
not eligible for the reduced rates (though distributions paid by
a taxable REIT subsidiary or other corporation are generally
eligible for the reduced rates). Consequently, the more
favorable rates applicable to regular corporate dividends could
cause stockholders who are individuals to perceive investments
in REITs to be relatively less attractive than investments in
the stocks of non-REIT corporations that pay dividends, which
could adversely affect the value of the stock of REITs,
including our common stock.
In addition, the relative attractiveness of real estate in
general may be adversely affected by the newly favorable tax
treatment given to corporate dividends, which could negatively
affect the value of our properties.
Possible
legislative or other actions affecting REITs could reduce our
total return to our stockholders or cause us to terminate our
REIT status.
The rules dealing with U.S. federal income taxation are
constantly under review by persons involved in the legislative
process and by the IRS and the U.S. Treasury Department.
Changes to tax laws (which may have retroactive application)
could adversely affect our stockholders. It cannot be predicted
whether, when, in what forms, or with what effective dates, the
tax laws applicable to us or our stockholders will be changed.
The power of our board of directors to revoke our REIT status
without stockholder approval may cause adverse consequences to
our stockholders. Our charter provides that our board of
directors may revoke or otherwise terminate our REIT election,
without the approval of our stockholders, if it determines that
it is no longer in our best interests to continue to qualify as
a REIT. If we cease to be a REIT, we would become subject to
U.S. federal income
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tax on our taxable income and would no longer be required to
distribute most of our taxable income to our stockholders, which
may have adverse consequences on our total return to our
stockholders.
If we
fail to qualify as a REIT, our distributions will not be
deductible by us and we will be subject to corporate level tax
on our taxable income. This would reduce the cash available to
make distributions to our stockholders and may have significant
adverse consequences on the value of our stock.
We operate in a manner that will allow us to elect to qualify as
a REIT for U.S. federal income tax purposes under the
Internal Revenue Code. If we fail to qualify as a REIT or lose
our status as a REIT at any time, we will face serious tax
consequences that would substantially reduce the funds available
for distribution to shareholders for each of the years involved
because:
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we would not be allowed a deduction for distributions to
stockholders in computing our taxable income and would be
subject to U.S. federal income tax at regular corporate
rates;
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we also could be subject to the U.S. federal alternative
minimum tax and possibly increased state and local
taxes; and
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unless we are entitled to relief under applicable statutory
provisions, we could not elect to be taxed as a REIT for the
four taxable years following a year during which we were
disqualified.
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In addition, if we fail to qualify as a REIT, we will not be
required to make distributions to stockholders, and all
distributions to stockholders will be subject to tax as regular
corporate dividends to the extent of our current and accumulated
earnings and profits. This means that our stockholders who are
taxed as individuals would be taxed on our distributions at
capital gains rates, and our corporate stockholders generally
would be entitled to deductions with respect to such
distributions, subject, in each case, to applicable limitations
under the Internal Revenue Code. As a result of all these
factors, our failure to qualify as a REIT also could impair our
ability to expand our business and raise capital, and would
adversely affect the value of our common stock.
Qualification as a REIT involves the application of highly
technical and complex Internal Revenue Code provisions for which
there are only limited judicial and administrative
interpretations. The complexity of these provisions and of the
applicable Treasury regulations that have been promulgated under
the Internal Revenue Code is greater in the case of a REIT that,
like us, holds its assets through a partnership. The
determination of various factual matters and circumstances not
entirely within our control may affect our ability to qualify as
a REIT. In order to qualify as a REIT, we must satisfy a number
of requirements, including requirements regarding the
composition of our assets and sources of our gross income. Also,
we must make distributions to stockholders aggregating annually
at least 90% of our net taxable income, excluding capital gains.
In addition, legislation, new regulations, administrative
interpretations or court decisions may adversely affect our
investors, our ability to qualify as a REIT for
U.S. federal income tax purposes, or the desirability of an
investment in a REIT relative to other investments.
We
will pay some taxes which will reduce the amount of funds
available to make distributions to our
stockholders.
Even though we qualify as a REIT for U.S. federal income
tax purposes, we will be required to pay some U.S. federal,
state and local taxes on our income and property. We elected
that Feldman Equities Management, Inc. and certain corporations
that held small interests in the Foothills Mall, be treated as a
taxable REIT subsidiary of our company for
U.S. federal income tax purposes. A taxable REIT subsidiary
is a fully taxable corporation and may be limited in its ability
to deduct interest payments made to us. In addition, we will be
subject to a 100% penalty tax on certain amounts if the economic
arrangements among our tenants, our taxable REIT subsidiaries
and us are not comparable to similar arrangements among
unrelated parties or if we receive payments for inventory or
property held for sale to tenants in the ordinary course of
business. To the extent that we or our taxable REIT subsidiaries
(or additional taxable REIT subsidiaries we may form in the
future) are required to pay U.S. federal, state or local
taxes, we will have less cash available for distribution to
stockholders.
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Risks
Related to Our Debt Financings
The
current dislocations in the real estate sector and the current
weakness in the broader financial market, could affect our
ability to obtain debt financing on favorable terms (or at all)
and have other adverse effects on us.
The continuing dislocations in the real estate sector and the
current weakness in the broader financial market have caused the
spreads on prospective debt financings to widen considerably.
These circumstances have materially impacted liquidity in the
debt markets, making financing terms for borrowers less
attractive, and in certain cases have resulted in the
unavailability of certain types of debt financing. Continued
uncertainty in the credit markets may adversely impact our
ability to access additional debt financing or to refinance
existing debt maturities on favorable terms (or at all), which
may negatively affect our ability to fund current and future
development projects. A prolonged downturn in the credit markets
may cause us to seek alternative sources of potentially less
attractive financing, and may require us to adjust our business
plan accordingly. In addition, these factors may make it more
difficult for us to sell properties or may adversely affect the
price we receive for properties that we do sell, as prospective
buyers may experience increased costs of debt financing or
difficulties in obtaining debt financing. These disruptions in
the real estate and financial markets may have other adverse
effects on us or the economy generally and, more specifically,
on the retail sector.
Required
payments of principal and interest on borrowings may leave us
with insufficient cash to operate our properties or to pay the
distributions currently contemplated or necessary to maintain
our qualification as a REIT and may expose us to the risk of
default under our debt obligations.
As of December 31, 2007, we had approximately
$273.0 million of outstanding indebtedness in our
consolidated subsidiaries, $243.6 million (or 89%) of which
is secured by our properties. This indebtedness does not include
our proportionate share of indebtedness incurred by any of our
unconsolidated joint ventures. We may borrow new funds to
renovate our current properties.
Limitations on our level of debt and the limitations imposed on
us by our debt agreements could have significant adverse
consequences, including the following:
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our cash flow may be insufficient to meet our required principal
and interest payments;
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we may be unable to borrow additional funds as needed or on
favorable terms, including to make distributions required to
maintain our REIT status;
|
|
|
|
we may be unable to refinance our indebtedness at maturity or
the refinancing terms may be less favorable than the terms of
our original indebtedness;
|
|
|
|
an increase in interest rates could materially increase our
interest expense;
|
|
|
|
we may be forced to dispose of one or more of our properties,
possibly on disadvantageous terms;
|
|
|
|
our debt level could place us at a competitive disadvantage
compared to our competitors with less debt;
|
|
|
|
we may experience increased vulnerability to economic and
industry downturns, reducing our ability to respond to changing
business and economic conditions;
|
|
|
|
we may default on our obligations and the lenders or mortgagees
may foreclose on our properties that secure their loans and
receive an assignment of rents and leases;
|
|
|
|
we may violate restrictive covenants in our loan documents,
which would entitle the lenders to accelerate our debt
obligations; and
|
|
|
|
Our current debt violations could require us to have an adverse
change in our loan terms
|
Our
organizational documents contain no limitations on the amount of
indebtedness we may incur, and our cash flow and ability to make
distributions could be adversely affected if we become highly
leveraged.
Our organizational documents contain no limitations on the
amount of indebtedness that we or our operating partnership may
incur. As of December 31, 2007, we had approximately
$273.0 million of outstanding
25
indebtedness. We could alter the balance between our total
outstanding indebtedness and the value of our portfolio at any
time. If we become more highly leveraged, then the resulting
increase in debt service could adversely affect our ability to
make payments on our outstanding indebtedness and to pay our
anticipated distributions
and/or
the
distributions required to maintain our REIT status, and could
harm our financial condition.
Increases
in interest rates may increase our interest expense and reduce
our cash flow and impair our ability to service our indebtedness
and make distributions to our stockholders.
We had approximately $273.0 million of outstanding
indebtedness as of December 31, 2007, of which
$151.0 million bears interest at fixed rates ranging from
6.60% to 8.70% and $122,0 million bears interest on a
floating rate basis at LIBOR plus 1.15% to 1.40%. Upon the
maturity of our debt, there is a market rate risk as to the
prevailing rates at the time of refinancing. Changes in market
rates on our fixed-rate debt affects the fair market value of
our debt but it has no impact on interest expense incurred or
cash flow. A 100 basis point increase or decrease in
interest rates on our floating/fixed rate debt would increase or
decrease our annual interest expense by approximately
$2.7 million, as the case may be.
In addition to the fixed rate debt outlined above, we have
entered into cash flow hedges that will effectively fix the rate
for $75.0 million of LIBOR-based floating rate debt at 5.0%
per annum through January 2008 and at 4.91% per annum for the
period January 2008 to January 2011.
Our
cash flow is not assured. If our cash flow is reduced, we may
not be able to make distributions to our
stockholders.
We intend to distribute to our stockholders all or substantially
all of our REIT taxable income each year in order to comply with
the distribution requirements of the federal tax laws and to
avoid federal income tax and the nondeductible excise tax. We
have not established a minimum distribution payment level. Our
ability to make distributions may be adversely affected by the
risks described in this
Form 10-K.
All distributions will be made at the discretion of our board of
directors and will depend on our earnings, our financial
condition, maintenance of our REIT status and other factors that
our board of directors may deem relevant from time to time. We
cannot assure you that we will be able to make distributions in
the future. Our ability to make distributions is based on many
factors, including efficient management of our properties.
The Harrisburg Mall joint ventures construction loan with
Commerce Bank provides that loan advances are reduced by the
amount of the joint ventures net cash flow after operating
expenses and debt service. The construction loan with Commerce
Bank was due to mature in March 2008. We have extended this loan
through April 14, 2008 and plan to further extend the loan
through December 31, 2009 at a borrowing rate of
200 basis points over LIBOR. However, there can be no
assurance that we will be able to extend the loan for this
period or at this rate.
We also cannot assure you that the level of our distributions
will continue or increase over time or the receipt of rental
revenue in connection with future acquisitions of properties
will increase our cash available for distribution to
stockholders. In the event of defaults or lease terminations by
our tenants, rental payments could decrease or cease, which
would result in a reduction in cash available for distribution
to our stockholders. If our cash available for distributions
generated by our assets is less than our expected dividend
distributions, or if such cash available for distribution
decreases in future periods from expected levels, our ability to
make the expected distributions would be adversely affected. We
may be required either to fund future distributions from
borrowings under our line of credit or to reduce such
distributions. If we need to borrow funds on a regular basis to
meet our distribution requirements or if we reduce the amount of
our distribution or fail to make expected distributions, our
stock price may decline.
|
|
ITEM 1B.
|
UNRESOLVED
STAFF COMMENTS
|
As of December 31, 2007, we did not have any unresolved
comments with the staff of the SEC.
26
As of December 31, 2007, we had wholly owned interests in
four malls encompassing approximately 2.5 million rentable
square feet. Our portfolio also included ownership interests in
three unconsolidated joint ventures encompassing approximately
2.1 million rentable square feet. The tables below set
forth information with respect to these properties (square feet
and annualized base rent in thousands).
Wholly
Owned Properties
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shop
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shop
|
|
|
Shop
|
|
|
|
|
|
Tenant
|
|
|
|
|
|
Property & Year
|
|
Total
|
|
|
Rentable
|
|
|
|
|
|
Tenant
|
|
|
Tenants
|
|
|
Annualized
|
|
|
Base Rent
|
|
|
|
|
|
Built/ Most Recent
|
|
Square
|
|
|
Square
|
|
|
Percentage
|
|
|
Square
|
|
|
Percentage
|
|
|
Base
|
|
|
per Leased
|
|
|
Owned
|
|
Non-Owned
|
Renovation
|
|
Feet
|
|
|
Feet
|
|
|
Leased
|
|
|
Feet
|
|
|
Leased
|
|
|
Rent
|
|
|
Sq. Ft.
|
|
|
Anchors
|
|
Anchors
|
|
Stratford Square Mall 1966/2007
|
|
|
1,300
|
|
|
|
629
|
|
|
|
95.7
|
%
|
|
|
384
|
|
|
|
67.8
|
%
|
|
$
|
6,540
|
|
|
$
|
25.38
|
|
|
JCPenney
|
|
Marshall Fields;
Sears; Kohls;
Carson Pirie Scott;
Burlington Coat
Factory
|
Tallahassee Mall 1971/1993
|
|
|
966
|
|
|
|
966
|
|
|
|
92.9
|
|
|
|
204
|
|
|
|
76.8
|
|
|
|
7,170
|
|
|
|
24.27
|
|
|
Dillards(1); Belks;
Burlington Coat
Factory; AMC
Theaters
|
|
|
Northgate Mall 1972/1993
|
|
|
947
|
|
|
|
577
|
|
|
|
95.1
|
|
|
|
315
|
|
|
|
68.4
|
|
|
|
7,215
|
|
|
|
25.07
|
|
|
Macys;
JCPenney(2)
|
|
Dillards; Sears
|
Golden Triangle Mall 1969/2004
|
|
|
765
|
|
|
|
288
|
|
|
|
98.8
|
|
|
|
171
|
|
|
|
68.1
|
|
|
|
2,996
|
|
|
|
20.97
|
|
|
|
|
Sears; JCPenney;
Dillards; Macys;
DSW
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total/Weighted Average
|
|
|
3,978
|
|
|
|
2,460
|
|
|
|
94.8
|
%
|
|
|
1,074
|
|
|
|
69.7
|
%
|
|
$
|
23,921
|
|
|
$
|
24.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1)
|
|
In connection with their lease expiration, Dillards
vacated their space at the Tallahassee Mall on January 31,
2008.
|
|
2)
|
|
During July 2007, we purchased the JCPenney anchor store at the
Northgate Mall. JCPenney vacated the anchor store and we are
presently redeveloping the site.
|
Joint
Venture Properties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shop
|
|
|
|
|
|
|
|
|
|
|
|
|
Shop
|
|
Shop
|
|
|
|
Tenant
|
|
|
|
|
Property (Ownership
|
|
Total
|
|
Rentable
|
|
|
|
Tenant
|
|
Tenants
|
|
Annualized
|
|
Base Rent
|
|
|
|
|
Interest) & Year Built/Most
|
|
Square
|
|
Square
|
|
Percentage
|
|
Square
|
|
Percentage
|
|
Base
|
|
per Leased
|
|
Owned
|
|
Non-Owned
|
Recent Renovation
|
|
Feet
|
|
Feet
|
|
Leased
|
|
Feet
|
|
Leased
|
|
Rent
|
|
Sq. Ft.
|
|
Anchors
|
|
Anchors
|
|
Foothills Mall (31)% 1983/2004
|
|
|
711
|
|
|
|
502
|
|
|
|
99.7
|
%
|
|
|
230
|
|
|
|
90.1
|
%
|
|
$
|
7,827
|
|
|
$
|
20.32
|
|
|
Barnes & Noble;
Linens N Things;
AMC Cineplex;
Ross Dress for Less;
Saks Off 5th Ave;
Nike
|
|
Wal-Mart(3)
|
Colonie Center Mall (25)% 1969/2007
|
|
|
1,200
|
|
|
|
668
|
|
|
|
91.6
|
|
|
|
336
|
|
|
|
76.7
|
|
|
|
7,187
|
|
|
|
26.35
|
|
|
Boscovs;
Christmas Tree Shops
|
|
Macys;
Sears
|
Harrisburg Mall (25)% 1969/2004
|
|
|
922
|
|
|
|
922
|
|
|
|
86.4
|
|
|
|
270
|
|
|
|
60.0
|
|
|
|
6,014
|
|
|
|
25.62
|
|
|
Bass Pro Shops;
Boscovs;
Macys
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total/Weighted Average
|
|
|
2,833
|
|
|
|
2,092
|
|
|
|
91.2
|
%
|
|
|
836
|
|
|
|
75.0
|
%
|
|
$
|
21,028
|
|
|
$
|
23.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3)
|
|
Wal-Mart is a shadow anchor that is located on a
separate land parcel adjacent to the Foothills Mall.
|
27
In the table above:
|
|
|
|
|
Total Square Feet includes Rentable Square Feet and the square
feet occupied by nonowned anchor tenants.
|
|
|
|
Rentable Square Feet includes all owned square feet, including
owned-anchor square feet.
|
|
|
|
Shop Tenant Square Feet consists of all Rentable Square Feet,
less (a) anchor and junior anchor square feet, (b) all
out parcel square feet, and (c) non-retail square feet.
|
|
|
|
Percentage Leased is calculated based on leases executed as of
December 31, 2007 and includes owned anchor tenant space.
|
|
|
|
Shop Tenants Percentage Leased is calculated based on leases
executed as of December 31, 2007 by shop tenants and
non-anchor tenants. These figures exclude leases to tenants
under temporary leases, which are leases for an initial term of
less than one year.
|
|
|
|
Annualized Base Rent is calculated based on monthly base rent
derived from 100% of our existing lease agreements executed as
of December 31, 2007 and annualized for a
12-month
period, except as set forth below. The Annualized Base Rent
figures appearing in the table above are based on net rent,
which means that the rent shown above does not include certain
additional charges that are passed on to the tenants, including
common area maintenance charges and real estate taxes.
Annualized Base Rent does not include (a) any additional
revenues from temporary or
month-to-month
tenants or tenants paying rent based on a percentage of the
tenants sales,
(b) lease-up
of vacant space, (c) rental increases occurring after
December 31, 2007 or (d) pass-through of operating
expenses to tenants.
|
|
|
|
Shop Tenant Base Rent Per Leased Square Foot is calculated based
on monthly base rent derived from shop tenant leases executed
and in occupancy as of December 31, 2007 and annualized for
a
12-month
period, with the product divided by the rentable square feet
leased to shop tenants as of such date.
|
|
|
|
Non-owned Anchor Tenants are anchor tenants of the mall, but we
do not own their improvements or their underlying land and
therefore we will not collect rent from these retailers. We
refer to these retailers as non-owned anchor tenants. We believe
non-owned anchor tenants are important to a property because the
attractiveness of the anchor retailers at the property (whether
or not we collect rent from them) may significantly affect the
leasing of owned space and shop tenant sales at the property.
Wal-Mart is a non-owned anchor tenant of the Foothills Mall and
occupies and owns a super center consisting of approximately
210,000 square feet, which shares a common parking lot and
entrance road with the Foothills Mall.
|
28
Tenant
Diversification
We have approximately 500 leases, many of which are with
nationally recognized retailers. The following table sets forth
information regarding the 10 largest tenants in our portfolio
(including wholly-owned and joint venture properties) based on
annualized base rent as of December 31, 2007.
Top 10
Tenants by Annualized Base Rent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
% of
|
|
|
|
|
|
Feldman
|
|
|
|
|
|
|
|
Principal
|
|
|
|
|
|
|
Rentable
|
|
|
|
|
|
Total
|
|
|
|
|
|
Share of
|
|
|
|
|
|
Mall
|
|
Nature of
|
|
Lease
|
|
Rentable
|
|
|
Square
|
|
|
Annualized
|
|
|
Annualized
|
|
|
Base Rent
|
|
|
Annualized
|
|
|
|
Tenant
|
|
Location
|
|
Business
|
|
Expiration
|
|
Sq. Feet
|
|
|
Feet(1)
|
|
|
Base Rent
|
|
|
Base Rent
|
|
|
per Sq. Ft.
|
|
|
Base Rent
|
|
|
1
|
|
Loews Cineplex and AMC Theaters
|
|
Foothills, Tallahassee
|
|
Multi Screen
|
|
2016 - 2017
|
|
|
146,500
|
|
|
|
3.2
|
%
|
|
$
|
2,231,771
|
|
|
|
5.0
|
%
|
|
$
|
15.23
|
|
|
$
|
1,405,816
|
|
2
|
|
Macys
|
|
Harrisburg, Northgate
|
|
Department Store
|
|
2014 - 2024
|
|
|
367,280
|
|
|
|
8.1
|
%
|
|
|
1,950,000
|
|
|
|
4.3
|
%
|
|
|
5.31
|
|
|
|
1,800,000
|
|
3
|
|
The Limited
|
|
Colonie, Foothills, Golden Triangle, Harrisburg, Northgate,
Stratford, Tallahassee
|
|
Department Store
|
|
2008 - 2017
|
|
|
83,401
|
|
|
|
1.8
|
%
|
|
|
1,716,410
|
|
|
|
3.8
|
%
|
|
|
41.74
|
|
|
|
1,368,473
|
|
4
|
|
Century Theaters, Inc.
|
|
Stratford
|
|
Multi Screen Movie Theater
|
|
2022
|
|
|
50,141
|
|
|
|
1.1
|
%
|
|
|
1,203,384
|
|
|
|
2.7
|
%
|
|
|
24.00
|
|
|
|
1,203,384
|
|
5
|
|
Boscovs
|
|
Colonie Harrisburg
|
|
Discount Department Store
|
|
2018 -2023
|
|
|
413,244
|
|
|
|
9.1
|
%
|
|
|
1,105,000
|
|
|
|
2.5
|
%
|
|
|
2.67
|
|
|
|
276,250
|
|
6
|
|
Barnes & Noble
|
|
Colonie, Foothills, GTM, Northgate, Tallahassee
|
|
Book Store
|
|
2012-2018
|
|
|
89,909
|
|
|
|
2.0
|
%
|
|
|
1,040,414
|
|
|
|
2.3
|
%
|
|
|
11.58
|
|
|
|
799,644
|
|
7
|
|
Christmas Tree Shops (a division of Bed Bath & Beyond
|
|
Colonie
|
|
Discount Department Store
|
|
2018
|
|
|
57,207
|
|
|
|
1.3
|
%
|
|
|
943,025
|
|
|
|
2.1
|
%
|
|
|
16.48
|
|
|
|
235,756
|
|
8
|
|
Footlocker
|
|
Colonie, Harrisburg, Northgate, Tallahassee
|
|
Shoe Store
|
|
2008-2018
|
|
|
37,329
|
|
|
|
0.8
|
%
|
|
|
870,958
|
|
|
|
1.9
|
%
|
|
|
23.33
|
|
|
|
537,060
|
|
9
|
|
Bass Pro Shops
|
|
Harrisburg
|
|
Sportsmans Superstore
|
|
2019
|
|
|
219,269
|
|
|
|
4.8
|
%
|
|
|
843,832
|
|
|
|
1.9
|
%
|
|
|
3.85
|
|
|
|
210,958
|
|
10
|
|
Linens N Things
|
|
Foothills
|
|
Discount Store
|
|
2013
|
|
|
41,480
|
|
|
|
0.9
|
%
|
|
|
414,800
|
|
|
|
0.9
|
%
|
|
|
10.00
|
|
|
|
127,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total/Weighted Average
|
|
|
|
|
|
|
|
|
1,505,657
|
|
|
|
33.1
|
%
|
|
$
|
12,319,594
|
|
|
|
27.4
|
%
|
|
$
|
8.18
|
|
|
$
|
7,965,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The percentage of Total Rentable Square Feet excludes non-owned
anchor tenants.
|
29
Lease
Expiration
The following table sets forth information regarding lease
expirations at our properties, including joint venture
properties, based on executed and occupied leases as of
December 31, 2007.
Lease
Expiration Table Total Portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Expiring
|
|
|
% of Total Sq.
|
|
|
|
|
|
|
|
|
Expiring
|
|
|
|
Expiring
|
|
|
Rentable
|
|
|
Ft.
|
|
|
Expiring Base
|
|
|
% of Total Base
|
|
|
Base Rent
|
|
Lease Expiration Year
|
|
Leases
|
|
|
Area(1)
|
|
|
Expiring
|
|
|
Rent(2)
|
|
|
Rent
|
|
|
per Sq. Ft.
|
|
|
2008
|
|
|
78
|
|
|
|
342,539
|
|
|
|
9.85
|
|
|
|
4,018,933
|
|
|
|
8.9
|
|
|
$
|
11.73
|
(3)
|
2009
|
|
|
65
|
|
|
|
180,437
|
|
|
|
5.19
|
|
|
|
3,632,305
|
|
|
|
8.1
|
|
|
|
20.13
|
|
2010
|
|
|
70
|
|
|
|
182,839
|
|
|
|
5.26
|
|
|
|
4,288,409
|
|
|
|
9.5
|
|
|
|
23.45
|
|
2011
|
|
|
65
|
|
|
|
261,647
|
|
|
|
7.52
|
|
|
|
5,206,018
|
|
|
|
11.6
|
|
|
|
19.90
|
|
2012
|
|
|
49
|
|
|
|
309,351
|
|
|
|
8.89
|
|
|
|
3,984,367
|
|
|
|
8.9
|
|
|
|
12.88
|
|
2013
|
|
|
37
|
|
|
|
331,602
|
|
|
|
9.53
|
|
|
|
4,141,129
|
|
|
|
9.2
|
|
|
|
12.49
|
|
2014
|
|
|
34
|
|
|
|
305,197
|
|
|
|
8.77
|
|
|
|
4,405,513
|
|
|
|
9.8
|
|
|
|
14.43
|
|
2015
|
|
|
21
|
|
|
|
83,551
|
|
|
|
2.40
|
|
|
|
1,678,042
|
|
|
|
3.7
|
|
|
|
20.08
|
|
2016
|
|
|
19
|
|
|
|
137,810
|
|
|
|
3.96
|
|
|
|
2,932,591
|
|
|
|
6.5
|
|
|
|
21.28
|
|
2017 and thereafter
|
|
|
53
|
|
|
|
1,344,218
|
|
|
|
38.64
|
|
|
|
10,662,042
|
|
|
|
23.7
|
|
|
|
7.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total/Weighted Average
|
|
|
491
|
|
|
|
3,479,191
|
|
|
|
100.0
|
%
|
|
$
|
44,949,349
|
|
|
|
100.0
|
%
|
|
$
|
12.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Expiring rentable area excludes 168,479 square feet on
tenants paying percentage rent as of December 31, 2007.
|
|
(2)
|
|
Annualized base rent as of December 31, 2007 (leases
executed as of that date). Excludes revenues from leases to
tenants under temporary leases or tenants paying rents on a
percent-of-sales basis.
|
|
(3)
|
|
2008 expirations include Dillards at Tallahassee Mall,
totaling 203,660 square feet at $1.38 per square foot of
base rent.
|
Wholly
Owned Properties
Stratford
Square Mall
Overview
On December 30, 2004, we acquired Stratford Square Mall for
a base purchase price of $93.1 million. We are investing an
additional $46.8 million in the renovation and
repositioning plan for Stratford Square Mall, of which
$37.8 million was incurred through December 31, 2007,
for an estimated total project cost of approximately
$139.9 million.
Stratford Square Mall is a 1.3 million square-foot,
super-regional mall located in Bloomingdale, Illinois. Located
in DuPage County, a northwestern suburb of Chicago, the mall has
five non-owned anchor tenants: Kohls, Sears, Carson Pirie
Scott (a unit of the Saks Department Store Group), Marshall
Fields and Burlington Coat Factory. We have entered into an
operating agreement with these five anchor tenants to share
certain operating expenses based on allocated amounts per square
foot. The agreements will terminate in March 2031. We acquired
the sixth anchor location in 2006 which is leased to JCPenney.
The malls anchor tenants are complemented by nationally
recognized retailers such as Forever 21, Abercrombie &
Fitch, Pacific Sun, American Eagle, Claires,
Bath & Body Works, The Childrens Place, The Gap,
f.y.e., Limited Too and Victorias Secret. The shops are
comprised of approximately 450,000 square feet and are
accessed on two levels, with a central food court.
30
Renovation
and Repositioning Plan
Our opportunity, with respect to Stratford Square, is to take
advantage of the malls six anchor tenants to leverage the
draw from such anchor tenants into higher shop sales. In
addition, with approximately 123,000 square feet of shop
space available, there is an opportunity to enhance the net
operating income from this property through an ongoing leasing
program. The following is an outline of our strategic plan to
accomplish this goal:
|
|
|
|
|
New Movie Theatre Tenant.
In July 2007, we
opened a state-of-the-art, multi-screen cineplex, with Cinemark
Theaters. Similar to our Foothills Mall property, the objective
is to support the shop tenants with a movie theatre that is
entered only through the interior of the mall. Over time, the
plan contemplates that the theater will draw restaurant tenants
to the mall. Pursuant to dispute provisions in our lease with
Cinemark, we have entered into an arbitration proceeding related
to cost responsibility pursuant to the completion of theater
totaling approximately $1.0 million. In addition, we have
taken action to collect delinquent rent in the amount of
approximately $800,000. Pursuant to that action, Cinemark has
commenced rent payments.
|
|
|
|
Redirecting Anchor Tenant Traffic.
We are near
completion of the renovations of the interior common areas and
the mall entrances. The objective with respect to this
renovation is to create a unique series of indoor mall features
that will complement the malls attractive architecture.
|
|
|
|
Signage.
We will improve the visibility of the
mall by adding significantly upgraded signage, including a
series of new pylon signs (subject to municipal approvals) that
will be visible from nearby local roads.
|
|
|
|
Restaurants.
We will focus a significant
portion of our continuing leasing efforts towards tenants that
are entertainment and tourist destinations, such as upscale and
trendy restaurants and arcades.
|
We expect these renovation and repositioning efforts will help
draw more shoppers into the mall, which we expect will increase
the average sales per square foot of existing tenants and to
encourage new tenants to lease space at the mall.
Financing
On May 8, 2007, we closed on a $104.5 million first
mortgage refinancing of the Stratford Square Mall. The first
mortgage has an initial term of 36 months and bears
interest at 115 basis points over LIBOR. The loan has two
one-year extension options. On the closing date,
$78.2 million of the loan proceeds were used to retire the
Stratford Square Malls two outstanding first mortgages.
The balance of the proceeds was placed into escrow, pending
completion of the redevelopment project. As of December 31,
2007, approximately $12.9 million remains available to be
released from the escrow. We believe that the balance of the
funds held in the escrow account will be sufficient to complete
the redevelopment of this project.
Location
and Demographics
Stratford Square is located in Bloomingdale, Illinois, a suburb
of Chicago. The following are the key demographic and other
information that we expect will benefit Stratford Square:
|
|
|
|
|
Population.
The suburban Chicago population
within a
15-mile
radius of Stratford Square is approximately 2.0 million
people according to Claritas.
|
|
|
|
Population Growth.
The population within a
15-mile
radius of Stratford Square is estimated to have grown by
approximately 2.2% from 2000 to 2007 and is projected to grow by
an additional 1.1% from 2007 to 2012 according to Claritas.
|
|
|
|
Household Income.
For the year ended
December 31, 2007, the average household income within a
15-mile
radius of the Stratford Square Mall was estimated to be $89,422
according to Claritas.
|
|
|
|
Local Market Characteristics.
Bloomingdale is
located within 25 miles of the Chicago loop area. The
Chicago area thrives on its strong, diverse, and growing
economy. The Chicago area also enjoys one of the finest
transportation systems of any urban area, a highly skilled labor
pool, and an appreciation of and devotion to cultural and
recreational activities that attract corporations and tourists
from around the world.
|
31
Competition
The primary competitors of Stratford Square include two
super-regional shopping centers situated within Stratford Square
Malls trade region. In addition, there are two smaller
malls that compete to a lesser degree with the subject property.
A summary of Stratford Squares competitors are as follows:
|
|
|
|
|
Woodfield Mall.
The 2.3 million
square-foot Woodfield Shopping Center is anchored by Nordstrom,
Marshall Fields, Lord & Taylor, Sears and
JCPenney and is located approximately eight miles from Stratford
Square.
|
|
|
|
Oakbrook Center.
The 2.0 million
square-foot Oakbrook Center is an outdoor mall anchored by
Nordstrom, Marshall Fields, Neiman-Marcus,
Bloomingdales, Lord & Taylor and Sears and is
located about 11 miles from Stratford Square.
|
|
|
|
Charlestown Mall.
The recently upgraded
832,000 square-foot Charlestown Mall is anchored by
Carsons, Von Maur, Sears and Kohls and is located
eight miles from Stratford Square.
|
|
|
|
Yorktown Shopping Center.
The 1.6 million
square-foot Yorktown Shopping Center is anchored by
Carsons, Von Maur, JCPenney and Target and is located
about 10 miles from Stratford Square.
|
Average
Occupancy Rate and Base Rent Stratford
Square(1)
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average Annual
|
|
Fiscal Year
|
|
Occupancy Rate(2)(3)
|
|
|
Rent per Sq. Ft.(3)
|
|
|
2007
|
|
|
68
|
%
|
|
$
|
24.42
|
|
2006
|
|
|
62
|
%
|
|
$
|
26.73
|
|
2005
|
|
|
62
|
%
|
|
$
|
27.74
|
|
2004
|
|
|
69
|
%
|
|
$
|
23.96
|
|
2003
|
|
|
75
|
%
|
|
$
|
23.71
|
|
|
|
|
(1)
|
|
The information in this chart prior to our acquisition in
December 2004 was supplied by or derived from information
provided by the seller of the property.
|
|
(2)
|
|
Excludes temporary leases, which are leases for a term of less
than one year.
|
|
(3)
|
|
Calculated based on rentable shop tenant space.
|
Tallahassee
Mall
Overview
In June 2005, we acquired the Tallahassee Mall for a purchase
price of $61.5 million. The purchase price consisted of the
assumption of the existing mortgage loan of approximately
$45.8 million plus cash in the amount of approximately
$16.2 million. The property is subject to a long-term
ground lease that expires in the year 2063 (assuming the
exercise of an extension option).
In December 2005, we issued 369,375 shares of our common
stock to an affiliate of Kimco Realty Corporation in connection
with acquiring a long-term lease located at the Tallahassee Mall.
Tallahassee Mall is a 966,000 square-foot, super-regional
mall serving Tallahassee, Florida and its surrounding areas. The
Tallahassee Mall is anchored by four major tenants: AMC
Theaters, Burlington Coat Factory and Belks. In addition,
the mall has Old Navy, Sports Authority, Goodys Family
Clothing, Ross Dress for Less, Shoe Carnival and
Barnes & Noble and junior anchor tenants. The
malls anchor tenants are complemented by numerous
nationally recognized retailers such as Victorias Secret
and Express. The 85 shops comprise approximately
204,000 square feet and are accessed on one level, with a
central food court, restaurants and cafés. One of our
anchors, Dillards, did not renew its lease at the mall and
vacated its space on January 31, 2008. We have not yet
found a tenant to occupy this vacant space. As a result of this
vacancy, certain tenant leases allow for them to pay lower
rental income.
32
The city of Tallahassee is the state capital of Florida and is
located in northwestern Florida, 20 miles north of the Gulf
of Mexico and only 13 miles south of Georgia. The mall
itself is located minutes from the center of the capital
district, Interstate 10 and three college campuses with a
combined population of 65,000 students: Florida State
University, Florida Agriculture and Mechanical University and
Tallahassee Community College. The population within a
10-mile
radius has experienced a 7.7% increase from 2000 to 2006 and
employment has consistently increased each year for all industry
sectors.
Financing
The property is currently encumbered by a $45.9 million
first mortgage. The mortgage bears interest at 8.6% and with an
anticipated repayment date in July 2009. If we do not repay the
loan by July 2009, the interest rate on this loan will be reset
to the greater of (i) 8.6% plus 5% or (ii) the then
current treasury rate plus 5% through the final maturity date in
July 2029.
Renovation
and Repositioning Plan
Our goal, with respect to the Tallahassee Mall, is to take
advantage of the markets unusually strong population
growth and solid in-place tenant base. In addition, with
approximately 35,000 square feet of vacant space available,
there is an opportunity to create value for our stockholders
through an ongoing leasing program. Our plan contemplates a
renovation and repositioning plan for the Tallahassee Mall. The
following is a preliminary outline of our strategic plan to
accomplish this goal:
|
|
|
|
|
New Junior Anchor Tenants.
We are currently
targeting a number of potential anchor
and/or
junior anchor tenants to replace the recently vacated
Dillards building.
|
|
|
|
Appearance.
We intend to improve the
appearance of the mall by undertaking major renovations of the
interior common areas and the mall entrances.
|
The commencement of this redevelopment effort will, however,
depend on our securing additional financing proceeds to
re-tenant the vacant anchor space and complete the project. We
do not anticipate securing additional financing proceeds and
commencing our redevelopment plans until 2009.
Location
and Demographics
The following are key demographic and other information that we
expect will benefit the Tallahassee Mall:
|
|
|
|
|
Population.
The Tallahassee metropolitan
statistical area population within a
15-mile
radius of the Tallahassee Mall is approximately 277,005
according to Claritas. This figure excludes a large and growing
college population of 65,000 students.
|
|
|
|
Population Growth.
The population within a
15-mile
radius of the Tallahassee Mall is estimated to have grown by
approximately 10% from 2000 to 2007 and is projected to grow by
9.8% from 2007 to 2012 according to Claritas.
|
|
|
|
Household Income.
For the year ended
December 31, 2007, the average household income within a
15-mile
radius of the Colonie Center was estimated to be $60,141
according to Claritas.
|
|
|
|
Local Market Characteristics.
With stable
growth and expansion in the area, the Tallahassee unemployment
rates have remained relatively low at 5.6% in 2006. The
unemployment rates stability is largely due to the state
government work force as well as to high quality educational
institutions and a stable community. This student population and
stable government workforce provides a steady pool of consumers
for area retailers.
|
Competition
The primary competitor of the Tallahassee Mall is:
|
|
|
|
|
Governors Square Mall.
The
Governors Square Mall is located in Tallahassee,
approximately five miles from the Tallahassee Mall.
Governors Square is on the Apalachee Parkway and is
accessible from Highway
|
33
|
|
|
|
|
10 and Route 261. The anchor tenants include Macys,
JCPenney, and Sears. Governors Square is a two-story
super-regional mall totaling 1 million square feet. The
malls occupancy is competitive, with a traditional middle
market merchandising mix.
|
Average
Occupancy Rate and Base Rent Tallahassee
Mall(1)
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average Annual
|
|
Fiscal Year
|
|
Occupancy Rate(2)(3)
|
|
|
Rent per Sq. Ft.(3)
|
|
|
2007
|
|
|
75
|
%
|
|
$
|
23.41
|
|
2006
|
|
|
79
|
%
|
|
$
|
23.03
|
|
2005
|
|
|
80
|
%
|
|
$
|
20.24
|
|
2004
|
|
|
72
|
%
|
|
$
|
16.53
|
|
2003
|
|
|
73
|
%
|
|
$
|
20.36
|
|
|
|
|
(1)
|
|
The information in this chart prior to our acquisition in June
2005 was supplied by or derived from information provided by the
seller of the property.
|
|
(2)
|
|
Excludes temporary leases, which are leases for a term of less
than one year.
|
|
(3)
|
|
Calculated based on rentable shop tenant space.
|
Northgate
Mall
Overview
In July 2005, we acquired the Northgate Mall
(Northgate) for a purchase price of
$110.0 million. The purchase price consisted of the
assumption of the existing mortgage loan of $79.6 million
and $30.4 million of cash. We also plan to invest an
additional $18.4 million in the renovation and
repositioning plan for Northgate, of which $13.2 million
was incurred through December 31, 2007, for an estimated
total project cost of $128.4 million.
Northgate is an enclosed single-level, three-anchor,
super-regional mall with a total gross leasable area
(GLA) of approximately 1.1 million square feet
of which 577,000 square feet are owned by one of our wholly
owned subsidiaries (including approximately 84,000 square
feet of free-standing retail space). We own the Macys
anchor store. Northgate is anchored by Dillards,
Macys and Sears and has a mix of national in-line tenants,
including American Eagle, Aeropostale, The Childrens
Place, Finish Line, The Disney Store, Express, Victorias
Secret and Zales. Northgate also has outparcels that are
occupied by Borders Books, TGI Fridays and Burger King.
Northgate opened in 1972 and was expanded in 1993 as part of a
$50 million expansion/renovation.
In July 2007, we acquired the building occupied by JCPenney and
related acreage for a purchase price of $2.0 million.
JCPenney has vacated and we have demolished the building. On
October 9, 2007, we entered into a lease with a prospective
tenant to develop a stadium-seating movie theater on this
parcel. However, we have been unable to finalize a construction
plan and budget with this tenant for this project. On
March 31, 2008, we sent a termination notice to this tenant
and are currently evaluating our options for this space.
Financing
The property is currently secured by a first mortgage with a
balance at December 31, 2007 of $77.1 million. The
first mortgage bears interest at 6.6% and has an anticipated
repayment date in September 2012. We may refinance the mortgage
on or before 2012. We also may elect to defease the debt prior
to the final maturity date in 2032.
Renovation
and Repositioning Plan
Our long-term goal, with respect to the Northgate Mall, is to
build on the malls anchor tenant mix to enhance increase
shop tenant sales. In addition, with approximately
35,000 square feet of vacant shop space available, there
34
is an opportunity to create value for our stockholders through
an ongoing leasing program. The following is a preliminary
outline of our strategic plan to accomplish this goal:
|
|
|
|
|
New Upscale Junior Anchor Tenants.
Discussions
have begun with junior anchor tenants, whose use and shopper
appeal is ideally suited to the repositioning plan.
|
|
|
|
Appearance.
A new lifestyle streetscape
area is being planned for the malls exterior facing
Colerain Avenue. Additional retailers will be added along this
streetscape with a multi-million dollar upgrade to the
malls main entrance, streetscape sidewalks, lighting and
facades. This will enhance the overall appearance and will help
attract marquee tenants which will have the ability to have
frontage along Colerain Avenue. We also intend to improve the
appearance of the mall by undertaking major renovations of the
interior common areas and the mall entrances.
|
|
|
|
Signage.
We will improve the visibility of the
mall by adding significantly upgraded signage.
|
We expect these renovation and repositioning efforts will impact
the financial performance of the Northgate Mall. We expect our
revenues to grow as more shoppers spend more time in the mall,
which we expect will increase shop tenant sales per square foot.
The overall objective will be to convert this mall from a
Class B mall to a Class A or near Class A mall.
We are currently seeking financing to commence our redevelopment
project, however we do not anticipate securing the financing and
commencing the redevelopment during 2008.
Location
and Demographics
Northgate is located in the northwest Cincinnati suburbs and
benefits from the residential and business development occurring
in its trade area. Northgate is located on Colerain Avenue, less
than one mile south of I-275, the primary highway serving the
metropolitan Cincinnati area. Colerain Township is a densely
populated suburb of the Cincinnati city limits which is
10 miles to the south.
The following are key demographic and other information that we
expect will benefit the Northgate Mall:
|
|
|
|
|
Population.
Cincinnati is the second largest
metropolitan area in Ohio spanning 13 counties in Ohio, Kentucky
and Indiana, with a total population of over 2 million.
|
|
|
|
Population Growth.
The population within a
15-mile
radius of Northgate Mall is estimated to have decreased by
approximately 3.1% from 2000 to 2007 and is projected to
decrease by an additional 2.4% from 2007 to 2012 according to
Claritas
|
|
|
|
Household Income.
For the year ended
December 31, 2007, the average household income within a
15-mile
radius of Northgate was estimated to be $66,442 according to
Claritas.
|
|
|
|
Local Market Characteristics.
In 2006, the
civilian labor force within a
15-mile
radius of Northgate was approximately 572,000 and the average
unemployment rate was only 3.1%.
|
Competition
The primary competitors of the Northgate Mall include three
super-regional malls described below that comprise approximately
3.9 million square feet of shop space. Additional retail
competition totals an additional 2.4 million square feet,
including one power center. Competitors of Northgate include:
|
|
|
|
|
Tri-County Mall.
The 1.3 million
square-foot, two-level regional mall is located approximately
nine miles to the east along I-275. Tri-Countys primary
trade area is the area immediately north and east along I-275.
The mall is anchored by Macys, Dillards and Sears
and includes traditional mall tenants that focus on the
mid-price point.
|
|
|
|
Cincinnati Mills.
The two-level,
1.5 million square-foot big box, entertainment and
lifestyle center opened in August 2004. The property is located
approximately six miles east of Northgate Mall, in Fairfield,
and has Bass Pro Shops, Babys R Us, Biggs,
Kohls, Saks Off
5
th
,
Showcase Cinemas (10-screen theater) and Media Play. The in-line
tenancy is primarily comprised of outlet discount tenants and a
few national tenants.
|
35
|
|
|
|
|
Kenwood Towne Center.
Located 13 miles
southeast of the Northgate Mall, Kenwood Towne Center anchors
the I-71 corridor retail market with in-line tenant sales in
excess of $500 per square foot. The 1.1 million square-foot
super-regional mall serves the affluent northeast communities.
The mall is anchored by Dillards, Macys, Parisian
and Loews Theatres and includes numerous upscale retailers such
as Coach, Abercrombie & Fitch, Banana Republic,
Pottery Barn, Williams-Sonoma, Bebe, Chicos and
Talbots. Kenwood Towne Center recently completed a
100,000 square-foot addition and interior renovation and
added Cheesecake Factory and Maggianos to the exterior of
the mall.
|
|
|
|
Colerain Avenue Retail.
Along Colerain Avenue,
there are approximately 2.0 million square feet of
additional retail shops including free-standing stores and
community and power centers. In addition to the centers listed
below, Colerain Avenue has free-standing Target, Kmart,
Lowes Homestore, Home Depot, Staples and Kroger stores.
|
|
|
|
Colerain Towne Center.
A
370,000 square-foot power center anchored by Wal-Mart,
Dicks, Office Max, Petsmart and TJ Maxx is located along
Colerain Avenue directly north of I-275.
|
|
|
|
Stone Creek Town Center.
A 470,000 square
foot Lifestyle Center is located less than one mile north of
Northgate Mall on Colerain Avenue located at the intersection of
Colerain and I-275. The Center opened in August 2007 and is
anchored by JC Penney, Meijer, Bed Bath and Beyond, and Old
Navy. It will have five restaurant pads. Best Buy will join the
center by Fall 2008.
|
Average
Occupancy Rate and Base Rent Northgate
Mall(1)
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average Annual
|
|
Fiscal Year
|
|
Occupancy Rate(2)(3)
|
|
|
Rent per Sq. Ft.(3)
|
|
|
2007
|
|
|
70
|
%
|
|
$
|
24.32
|
|
2006
|
|
|
72
|
%
|
|
$
|
24.03
|
|
2005
|
|
|
78
|
%
|
|
$
|
22.45
|
|
2004
|
|
|
72
|
%
|
|
$
|
16.53
|
|
2003
|
|
|
73
|
%
|
|
$
|
20.36
|
|
|
|
|
(1)
|
|
The information in this chart prior to our acquisition in July
2005 was supplied by or derived from information provided by the
seller of the property.
|
|
(2)
|
|
Excludes temporary leases, which are leases for a term of less
than one year.
|
|
(3)
|
|
Calculated based on rentable shop tenant space.
|
Golden
Triangle Mall
Overview
On April 5, 2006, we acquired the Golden Triangle Mall
(Golden Triangle) for a base purchase price of
$40.2 million. The purchase price was subsequently
increased by $2.1 million, in accordance with the purchase
agreement, as the seller was able to complete the opening of a
Hollister store (unit of Abercrombie and Fitch) in January 2007.
We plan to fund an additional investment in the renovation and
repositioning plan for Golden Triangle Mall.
Golden Triangle is a 765,000 square-foot, super-regional
mall located in Denton, Texas. Located in Denton County, a
northern suburb of Dallas. The mall has four non-owned anchor
tenants Macys, Dillards, JC Penney and
Sears and three junior anchors, which are DSW, Ross
and Barnes & Noble. The malls anchor and junior
anchor tenants are complemented by nationally recognized
retailers such as Victorias Secret, American Eagle
Outfitters, Hollister, Pacific Coast Sun Wear and
Bath & Body Works. The shops are comprised of
approximately 252,000 square feet and are accessed on one
level.
As previously reported, two anchor tenants at the Golden
Triangle Mall, Dillards and JCPenney, have signed letters
of intent to relocate to a new competitive life style center
known as Rayzor Ranch, which may be located
36
approximately five miles north of the property. If Rayzor Ranch
is built, we believe the anchors may move in 2010. We are
assessing our options with regard to this property in light of
these developments.
Renovation
and Repositioning Plan
Our opportunity, with respect to Golden Triangle, is to take
advantage of the trade areas unusually strong growth in
order to attract new anchors and key shop tenants. Ultimately,
the plan is to increase occupancy and drive up shop sales. In
addition, with approximately 151,000 square feet of shop
space available, there is an opportunity to create value for our
stockholders through an ongoing leasing program. The following
is a preliminary outline of our strategic plan to accomplish
this goal.
We expect that our renovation and repositioning efforts will
impact the financial performance of Golden Triangle by drawing
the anchor tenant shoppers into the main mall and attracting
more shoppers. By combining an entertainment theme including
numerous restaurants and the existing Barnes & Noble,
we expect our shop tenant revenues to grow as more shoppers
spend more time in the main mall, which we expect will increase
shop tenant sales per square foot. The overall objective will be
to convert this mall from a Class B mall to a Class A
or near Class A mall.
Financing
On April 5, 2006, in connection with the acquisition of the
Golden Triangle Mall, we entered into a $24.6 million
secured line of credit (the line). On April 20,
2007, we increased the line from $24.6 million, to
$30.0 million. The maturity date of the line is April 2009
and up to $5.5 million of the line is recourse to us. The
line contains customary covenants that require us to, among
other things, maintain certain financial coverage ratios. As of
December 31, 2007, we were not in compliance with a
quarterly debt coverage constant of 10.50%. We are currently
negotiating a waiver of this covenant; however, if we are unable
to obtain a waiver, we would be required to reduce the current
outstanding balance by $1.0 million.
Loan draws and repayments are at our option. Interest is payable
monthly at a rate equal to LIBOR plus a margin ranging from
1.40% to 2.00% or, at our option, the prime rate plus a margin
ranging from zero to 0.25%. The applicable margins depend on our
debt coverage ratio as specified in the loan agreement.
Commitment fees are paid monthly at the rate of 0.125% to 0.25%
of the average unused borrowing capacity.
In October 2006, we entered into a modification agreement that
provides for the issuance of letters of credit in the aggregate
amount of up to $13.0 million for a fee of 0.5% of the face
amount. As of December 31, 2007, letters of credit
outstanding under this agreement amounted to $10.25 million
and are renewable through the maturity date of the line.
The outstanding balance on the line as of December 31, 2007
was $17.5 million with interest rates on the tranches
ranging from 6.59% to 7.25%.
Location
and Demographics
Golden Triangle is located in Denton, Texas, which is in the
Dallas/Ft. Worth metropolitan area. The following are the
key demographic and other information that we expect will
benefit Golden Triangle:
|
|
|
|
|
Population.
The suburban Dallas population
within a
15-mile
radius of Golden Triangle is approximately 446,370 people
according to Claritas.
|
|
|
|
Population Growth.
The population within a
15-mile
radius of Golden Triangle is estimated to have grown by
approximately 38.3% from 2000 to 2007 and is projected to grow
by an additional 19.3% from 2007 to 2012 according to Claritas.
|
|
|
|
Household Income.
For the year ended
December 31, 2007, the average household income within a
15-mile
radius of Golden Triangle was estimated to be $84,831 according
to Claritas.
|
37
|
|
|
|
|
Local Market Characteristics.
Dallas
represents the tenth largest metropolitan area in the nation and
the third largest in the south behind Houston and Atlanta. The
combined Dallas/Fort Worth area, or Metroplex,
encompasses a population of more than 5.7 million people.
Migration in the Metroplex continues to spread increasingly
northward, resulting in tremendous population gains in the
county and city of Denton.
|
Dallas is a major site for high-income employment sectors such
as professional and business services, financial services and
high-technology industries. Together these high wage-earning
industries are expected to continue to drive the areas
economic growth over the next five years. Dallas benefits from a
labor force that is skilled, educated and dependable and from a
relatively affordable housing market.
Competition
The Golden Triangle Mall has several competitors, which include
the following:
|
|
|
|
|
Vista Ridge Mall
is located 14 miles southeast of
Golden Triangle in Lewisville and consists of 1.1 million
square feet of total gross leasable area and is home to 168
stores. Categorized as a super-regional mall, Vista Ridge Mall
is larger in size than Golden Triangle, but shares a similar
in-line tenant mix and has four anchor tenants in common with
Golden Triangle Dillards, Foleys,
JCPenney and Sears. Built in 1989 and remodeled in 1991, Vista
Ridge Mall represents primary competition to Golden Triangle due
to its in-line tenant mix and anchor stores.
|
|
|
|
Stonebriar Centre
is located approximately 18 miles
southeast of the Golden Triangle in the City of Frisco. The
two-story super-regional mall opened in 2000. Stonebriar Centre
is more than double the size of Golden Triangle, consisting of
1.6 million square feet of total GLA and more than
525,000 square feet of in-line GLA. Stonebriar Centre
includes 163 traditional and upscale in-line tenants such as
Chicos, Coach, J. Crew, Pottery Barn and Williams-Sonoma.
Stonebriar Centre is anchored by Foleys, JCPenney,
Macys, Neiman Marcus and Sears and includes an AMC
Theatre. Due to the malls shared anchors and relative
location, Stonebriar Centre represents primary competition for
the Golden Triangle; Stonebriar Centres distance and more
upscale tenancy make the mall comparatively less competitive
with Golden Triangle.
|
|
|
|
Denton Crossing
is a 488,000 square-foot power
center located one mile northeast of Golden Triangle off of Loop
288. Opened in 2004, Denton Crossing includes such national
big-box tenants as Bed, Bath & Beyond, Best Buy,
Kroger Supermarket, Michaels, Pier 1 Imports, T.J. Maxx
and Walgreens. Because of Denton Crossings big-box tenant
mix, the power center does not represent primary competition to
Golden Triangle. Denton Crossings close proximity to
Golden Triangle bodes well for both retail centers, which
together create a synergy of retail offerings along the Loop 288
corridor.
|
|
|
|
The Shops at Circle T Ranch
is scheduled for completion
in 2008 and will be located 14 miles southwest of Golden
Triangle in the City of Westlake. This super-regional mall will
include 1.3 million square feet of total GLA and while
in-line tenants have yet to be determined, the mall is set to be
anchored by Dillards, Foleys and AMC Theatres. Upon
completion, The Shops at Circle T Ranch will serve as primary
competition to Golden Triangle due to shared anchor tenants and
relative proximity to Golden Triangle.
|
|
|
|
Grapevine Mills
is located 20 miles south of Golden
Triangle and just two miles from the Dallas/Forth Worth
International Airport and serves as a major retail and
entertainment destination for residents and tourists visiting
the Dallas metro area. Grapevine Mills includes a unique tenant
mix of specialty stores (Virgin Megastore), outlets (Neiman
Marcus, Saks), manufacturer stores, (Burlington Coat Factory),
entertainment (ESPN X Games Skate Park) and themed restaurants
(Rainforest Café). Opened in 1997, Grapevine Mills serves
as secondary competition to Golden Triangle due to its unique
tenant mix and geographical distance from Golden Triangle.
|
|
|
|
Rayzor Ranch
is a 400 acre mixed-use development
that will include a proposed lifestyle center that may total
1.2 million square feet. The proposed lifestyle center may
contain fashion-oriented tenants and a movie theater. In
addition to the lifestyle center, Rayzor Ranch may also include
office and residential development. Rayzor Ranch will be located
less than five miles from Golden Triangle and has not yet begun
construction and the scheduled opening date is uncertain.
|
38
Average
Occupancy Rate and Base Rent Golden
Triangle(1)
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average Annual
|
|
Fiscal Year
|
|
Occupancy Rate(2)(3)
|
|
|
Rent per Sq. Ft.(3)
|
|
|
2007
|
|
|
69
|
%
|
|
$
|
19.44
|
|
2006
|
|
|
66
|
%
|
|
$
|
20.35
|
|
2005
|
|
|
62
|
%
|
|
$
|
27.74
|
|
2004
|
|
|
69
|
%
|
|
$
|
23.96
|
|
2003
|
|
|
75
|
%
|
|
$
|
23.71
|
|
|
|
|
(1)
|
|
The information in this chart prior to our acquisition in April
2006 was supplied by or derived from information provided by the
seller of the property.
|
|
(2)
|
|
Excludes temporary leases, which are leases for a term of less
than one year.
|
|
(3)
|
|
Calculated based on rentable shop tenant space.
|
Joint
Venture Properties
Foothills
Mall
Overview
The Foothills Mall is located in the suburbs of Tucson, Arizona
and is a single level, enclosed regional mall containing
approximately 711,000 square feet originally built in 1983.
In addition, Wal-Mart occupies and owns a
210,000 square-foot super center that shares a common
parking lot and road entrance with the Foothills Mall. The
Foothills Mall is anchored by a series of big box
anchor tenants, including Barnes & Noble, Linens
N Things, a Loews/AMC Cineplex 15-screen stadium theatre,
Ross Dress For Less, Old Navy, Saks Off 5th and a large
Nike Factory Outlet store. In addition, we have entered into a
15,000 square-foot lease with Sega World Sports Bar and
Grill, which is expected to take occupancy in the second quarter
of 2008. The Foothills Malls specialty stores include
Bath & Body Works, Claires, Haggar, Levis,
PacSun, Quiksilver, Samsonite and Sunglass Hut. In addition, the
Foothills Mall includes numerous restaurants such as
Applebees, Gavi Italian Restaurant, Keatons Restaurant,
Melting Pot, Outback Steakhouse and Thunder Canyon Brewery.
On June 26, 2006, we contributed the Foothills Mall to a
joint venture with a subsidiary of Kimco at an agreed value of
$104 million, plus certain closing costs (the
Foothills JV). We accounted for the transaction as a
partial sale of real estate, which resulted in us recognizing a
gain of $29.4 million. Pursuant to the terms of the
contribution agreement, we received approximately
$38.9 million in net proceeds from the transaction.
Simultaneous with the formation of the joint venture, Kimco
contributed cash in the amount of $14.8 million to the
Foothills JV. Kimco will receive a preferred return of 8.0% on
its capital from the Foothills Malls cash flow. Kimco may
be required to make additional capital contributions to the
Foothills JV for additional tenant improvements and leasing
commissions, as defined in the limited liability company
agreement, which in the aggregate shall not exceed
$2 million. Upon the first to occur of a sale of the
property or June 2010, Kimco will make an additional capital
contribution to the Foothills JV in an amount equal to the
unfunded portion (if any), which will be distributed to us. Upon
a sale or refinancing of the Foothills Mall, Kimco is also
entitled to receive a priority return of its capital together
with any unpaid accrued preferred return. After certain
adjustments, we are next entitled to receive an 8% preferred
return on and a return of capital. Thereafter, all surplus
proceeds will be split 20% to Kimco and 80% to us. Additionally,
we agreed to serve as the managing member of the Foothills JV
and will retain primary management, leasing and construction
oversight, for which we will receive customary fees. We have
determined that the Foothills JV is not a variable interest
entity and account for our investment in the joint venture under
the equity method. The Foothills JV agreement includes
buy-sell provisions commencing in June 2008 for us
and after May 2010 allowing either Foothills JV partner to
acquire the interests of the other. Either partner to the
Foothills JV may initiate a buy-sell proceeding,
which may enable it to acquire the interests of the other
partner. However, the partner receiving an offer to be bought
out will have the right to buy out such offering partner at the
same price offered. The Foothills JV agreement does not limit
our ability to enter into real estate ventures or
co-investments
with other third parties.
39
In connection with the formation transactions, we entered into
agreements with Messrs. Feldman, Bourg and Jensen that
indemnify them with respect to certain tax liabilities intended
to be deferred in the formation transactions, if those
liabilities are triggered either as a result of a taxable
disposition of a property (Harrisburg Mall or Foothills Mall) by
our company, or if we fail to offer the opportunity for the
contributors to guarantee or otherwise bear the risk of loss,
with respect to certain amounts of our debt for tax purposes
(the contributor-guaranteed debt). With respect to
tax liabilities arising out of property sales, the indemnity
will cover 100% of any such liability (approximately
$5.2 million at December 31, 2007) until
December 31, 2009 and will be reduced by 20% of the
aggregate liability on each of the five following year-ends
thereafter.
Renovation
and Repositioning
We have substantially completed the renovation and repositioning
project for the Foothills Mall.
Financing
On the closing date, the Foothills JV extinguished the existing
first mortgage loan totaling $54.75 million and refinanced
the property with an $81.0 million non-recourse first
mortgage loan. The $81.0 million first mortgage loan
matures in July 2016 and bears interest at 6.08%. The loan may
not be prepaid until the earlier of three years from the first
interest payment or two years from date of loan syndication and
has no principal payments for the first five years and then loan
principal amortizes on a
30-year
basis thereafter.
Location
and Demographics
The Foothills Mall is located in the greater Tucson, Arizona
market and is near a busy thoroughfare which makes it accessible
to significant local and tourist traffic. The following are key
demographic and other information that we expect will benefit
the Foothills Mall:
|
|
|
|
|
Population.
Tucson is Arizonas second
largest city with a metropolitan statistical area population of
843,746, according to the US Census Bureau Census 2000.
|
|
|
|
Population Growth.
Tucson is estimated to be
one of the fastest-growing cities in the United States. The
population within a
15-mile
radius of the Foothills Mall is estimated to have grown by 10.6%
from 2000 to 2007 and is projected to grow by 8.5% from 2007 to
2011, according to Claritas.
|
|
|
|
Household Income.
For the year ended
December 31, 2007, the average household income within a
15-mile
radius of the Foothills Mall was estimated to be $58,222,
according to Claritas.
|
|
|
|
Local Market Characteristics.
The mall is
located in a market that continues to experience positive growth
trends.
|
Competition
The primary competitors of the Foothills Mall include three
regional malls described below that jointly comprise
approximately 3.5 million square feet of shop space. Seven
power centers that comprise approximately 2.5 million
square feet are located within ten miles of the property.
Tucsons expanding economy, tourism and strong population
growth have created a strong retail market, including the
regional mall sector. Accordingly, there is a strong demand for
retail property in the Tucson area as evidenced by a 90%
occupancy level for shop space. We expect the construction of
new retail properties to increase modestly and in proportion to
demand so that vacancy levels remain low. We believe the
Foothills Mall is the only value and entertainment oriented mall
in its trade area. Competitors of the Foothills Mall include:
|
|
|
|
|
El Con Mall.
The El Con Mall is a
1.2 million square-foot mall and is located approximately
12 miles southeast of the Foothills Mall. The mall was
originally built in 1962 and partially renovated in 1996. It has
a 20-screen Century Theatre and a Home Depot and is seeking to
add an additional discount retailer. Existing anchor tenants
include JCPenney and Macys.
|
|
|
|
Park Place Mall.
The Park Place Mall is a
single level enclosed mall, which contains approximately
1.0 million square feet and is located 12 miles from
the Foothills Mall. It is approximately 97% occupied and
|
40
|
|
|
|
|
is anchored by Dillards, Macys and Sears. Other
tenants in the mall include Borders Books, Century Theatre and
Old Navy. This mall recently completed a renovation process,
which included the addition of street retailers, a
food court, mall shops, restaurants, theatres and a new
Dillards.
|
|
|
|
|
|
Tucson Mall.
The Tucson Mall is a
1.3 million square-foot mall that has been considered the
dominant mall in Tucson for nearly 20 years. The property
is located approximately five miles southeast of the Foothills
Mall. This mall was constructed in 1982 and renovated in 1991.
Dillards, JCPenney, Macys, Mervyns and Sears are the
anchor tenants.
|
|
|
|
La Encantada.
La Encantada is a
258,000 square-foot mall located approximately
13 miles from Foothills. The mall opened in November 2003.
It is an open air lifestyle center featuring upscale shops. Its
anchor tenants are AJs Fine Foods, Crate &
Barrel and Pottery Barn.
|
Average
Occupancy Rate and Base Rent Foothills
Mall(1)
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average Annual
|
|
Fiscal Year
|
|
Occupancy Rate(2)(3)
|
|
|
Rent per Sq. Ft.(3)
|
|
|
2007
|
|
|
88
|
%
|
|
$
|
19.25
|
|
2006
|
|
|
95
|
%
|
|
$
|
20.31
|
|
2005
|
|
|
96
|
%
|
|
$
|
20.07
|
|
2004
|
|
|
81
|
%
|
|
$
|
16.47
|
|
2003
|
|
|
82
|
%
|
|
$
|
16.89
|
|
|
|
|
(1)
|
|
The information in this chart for the periods prior to our
predecessors acquisition of the Foothills Mall in April
2002 was supplied by or derived from information provided by the
previous owner of the property.
|
|
(2)
|
|
Excludes temporary leases, which are leases for a term of less
than one year.
|
|
(3)
|
|
Calculated based on rentable shop tenant space.
|
Colonie
Center
Overview
In February 2005, we acquired the Colonie Center Mall for a base
purchase price of $82.2 million. We paid additional
consideration of $2.4 million in connection with the
execution of certain pending leases that increased the purchase
price to $84.6 million. We have nearly completed a
$110 million renovation and repositioning plan for Colonie
Center, of which we incurred $92.8 million through
December 31, 2007, for an estimated total project cost of
$192 million.
Colonie Center is a 1.2 million square-foot, super-regional
mall serving Albany, New York and its surrounding areas. Colonie
Center is anchored by four major department stores: Macys,
Sears, Boscovs and Christmas Tree Shops (a wholly owned
subsidiary of Bed Bath & Beyond). The malls
anchor tenants are complemented by numerous nationally
recognized retailers such as Abercrombie & Fitch,
American Eagle, Bath & Body Works, The Childrens
Place, Steve & Barrys The Gap, Limited Too and
Victorias Secret. The 110 shops are comprised of
approximately 381,000 square feet and are accessed on two
levels, with a central food court, restaurants and cafés.
Joint
Venture with Heitman
On September 29, 2006, we completed a joint venture with a
subsidiary of Heitman LLC (Heitman) in connection
with the Colonie Center Mall whereby we entered into a
contribution agreement (the Contribution Agreement)
with a subsidiary of Heitman. Under the terms of the
Contribution Agreement, we contributed the mall to FMP Colonie
LLC, a new Delaware limited liability company. Heitmans
contribution to the venture was approximately $47 million
in order to purchase approximately 75% of the equity in Colonie
Center. Our contribution to the venture was valued at
approximately $15 million, representing approximately 25%
of the equity in Colonie Center. In addition, we have made
preferred capital contributions of approximately
$10.3 million as of December 31, 2007 and subsequently
have made additional contributions totaling $6.8 million
that were used
41
primarily to fund construction costs. We have also agreed to a
cost guarantee related to certain hard redevelopment
costs of the propertys redevelopment project totaling
$56.0 million. To the extent these costs exceed
$56.0 million, our preferred equity contributions will be
recharacterized as subordinated capital contributions. We
estimate that this project will experience approximately
$15 million of hard cost overruns. We have secured the
balance of these cost overruns with a $10.25 million letter
of credit drawn from our line of credit which is secured by our
ownership of the Golden Triangle Mall. These subordinated equity
contributions may not be distributed to us until Heitman
receives a 15% return on and return of its invested equity
capital.
The LLC Agreement between us and Heitman allows a buy-sell
process to be initiated by us at any time on or after
January 30, 2010 or by Heitman, at any time on or after
November 1, 2010. There are additional provisions regarding
disputes, defaults and change in management that allow Heitman
to initiate a buy-sell process. The member initiating the
buy-sell must specify a total purchase price for the property
and the amount of the purchase price that would be distributed
to each of the two members, with the allocation of the total
purchase price being subject to arbitration if the parties
disagree. The member receiving the buy-sell notice must elect
within 60 days to either allow the initiating member to
purchase the recipients interest in the Colonie JV for the
price stated in the notice or to purchase the initiating
members interest in the joint venture.
Financing
In June 2005, we completed a $50.8 million first mortgage
bridge financing collateralized by the Colonie Center Mall.
Subsequently, in September 2006, we refinanced the bridge loan
with a new construction loan that currently has a maximum
borrowing capacity of approximately $116.3 million and
matures in October 2008. A portion of this loan, in the amount
of $50.8 million, has a fixed interest rate of 6.84%. The
rate on the balance of this loan is floating at 180 basis
points over LIBOR. The loan may be extended beyond October 2008,
subject to satisfaction of certain financial covenants and other
customary requirements for up to two additional years. The loan
requires that we maintain a minimum debt service coverage ratio
during the initial term of the loan and, if we fail to meet the
required ratio, cash flow to us is restricted. As of
December 31, 2007, we did not meet the debt service
coverage ratio and certain cash flow is currently unavailable,
however if and when we satisfy the ratio, the cash flow will be
released to us. Based upon the malls current performance,
we do not believe these financial covenants will be satisfied
and therefore we will not satisfy the conditions to extend the
loan. We will attempt to negotiate a modification or waiver of
the covenants and loan extension with the current lender prior
to the maturity date. We continue to manage the property and
receive customary management, construction and leasing fees in
accordance with our joint venture agreement with Heitman.
Renovation
and Repositioning Plan
We are putting the finishing touches on the new movie theater
for Colonie Center and upon completion of this part of the
project our redevelopment project for this mall will be
substantially complete. The following is an outline of our
strategic plan for this mall:
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Redirecting Anchor Tenant Traffic.
We improved
the appearance and ambiance of the mall by undertaking major
renovations of the interior common areas and the mall entrances.
We added a unique series of indoor mall features, including a
series of high-end Adirondack themed living rooms complete with
a stone clad fire place area, fountain area, comfortable leather
sofa seating, television viewing areas with modern full size
flat screen televisions and a large scale, high-end
childrens play area. In addition, indoor and outdoor
restaurant seating are opening throughout the mall.
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Appearance.
We have improved the appearance of
the mall by completing major renovations of the interior common
areas and the mall entrances
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Theater.
We expect to open a 13-screen
stadium-seating movie theater in May 2008.
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We expect these renovation and repositioning efforts will
ultimately impact the financial performance of Colonie Center by
drawing more affluent shoppers to the mall. We expect our
revenues to grow as more shoppers spend more time in the main
mall, which we expect will increase shop tenant sales per square
foot.
42
Location
and Demographics
Colonie Center is located in the greater Albany, New York area
adjacent to major thoroughfares including Interstate 87. The
following are key demographic and other information that we
expect will benefit Colonie Center:
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|
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Population.
The Albany metropolitan
statistical area population within a
20-mile
radius of Colonie Center is approximately 875,000 according to
the US Census Bureau 2000.
|
|
|
|
Population Growth.
The population within a
15-mile
radius of Colonie Center is estimated to have grown by
approximately 2.5% from 2000 to 2007 and is projected to grow by
1.3% from 2007 to 2012 according to Claritas.
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|
|
|
Household Income.
For the year ended
December 31, 2007, the average household income within a
15-mile
radius of the Colonie Center was estimated to be $66,050
according to Claritas.
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|
|
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Local Market Characteristics.
The Albany
region is home to a growing state government workforce, which
tends to insulate the region from major economic downturns. In
the next decade, the number of government employees is expected
to increase, due to fiscal stimulus packages, which will have a
positive impact on the Albany area. In addition, the region is
home to 21 colleges with over 65,000 students. This student
population and stable government workforce provides a steady
pool of consumers for area retailers.
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Competition
The primary competitors of Colonie Center include three regional
malls described below that comprise approximately
3.2 million square feet of shop space. Four power centers
that comprise approximately 2.2 million square feet are
located within five miles of the property. With four established
anchor tenants, two unique junior anchor tenants and a
well-balanced mix of shop tenants, Colonie Center is one of the
dominant, super-regional malls in its trade area. Competitors of
Colonie Center include:
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Crossgates Mall.
The Crossgates Mall, located
three miles south on Interstate 87, is Colonie Centers
closest and strongest competitor. The property was originally
built in 1984 and underwent a renovation in 1994. It is the
largest mall in the Albany region with over 1.6 million
square feet and is anchored by Cohoes, Filenes, H&M,
JCPenney, Lord & Taylor and Macys. Other tenants
in the mall include Best Buy, DSW Shoe Warehouse, a 30-screen
Hoyts Cinemas, The Gap, Hollister, Pottery Barn and
Williams-Sonoma. This mall has a large food court and much of
its tenant mix is targeted toward teenagers.
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Latham Circle Mall.
The Latham Circle Mall is
located four miles northeast of Colonie Center. The property was
built in 1957 and renovated in 1994 and contains
677,000 square feet. It is anchored by Burlington Coat
Factory, JCPenney, Kleins and includes other major
retailers such as Baby Depot and Malt River Brewing Company.
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Clifton Park Center.
Clifton Park Center is an
875,000 square-foot regional mall located 15 miles
northwest of Colonie Center. The property was constructed in
1976 and was renovated in 2001. It is anchored by Boscovs,
JCPenney and Mega Marshalls and includes a food court, day
spa and a six-screen Hoyts Cinemas.
|
Average
Occupancy Rate and Base Rent Colonie
Center(1)
|
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|
|
|
|
|
|
|
|
|
Average
|
|
|
Average Annual
|
|
Fiscal Year
|
|
Occupancy Rate(2)(3)
|
|
|
Rent per Sq. Ft.(3)
|
|
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2007
|
|
|
73
|
%
|
|
$
|
26.77
|
|
2006
|
|
|
75
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%
|
|
$
|
25.48
|
|
2005
|
|
|
73
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%
|
|
$
|
21.00
|
|
2004
|
|
|
72
|
%
|
|
$
|
16.53
|
|
2003
|
|
|
73
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%
|
|
$
|
20.36
|
|
43
|
|
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(1)
|
|
The information in this chart prior to our acquisition in
February 2005 was supplied by or derived from information
provided by the seller of the property.
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(2)
|
|
Excludes temporary leases, which are leases for a term of less
than one year.
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(3)
|
|
Calculated based on rentable shop tenant space.
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Harrisburg
Mall
Overview
The Harrisburg Mall is located in Swatara Township, three miles
from downtown Harrisburg, Pennsylvania. The property was
originally built in 1969 and is a two-story, enclosed, regional
mall containing 922,000 square feet. It is the largest mall
in the Harrisburg market and has approximately 83 shop spaces.
It is anchored by three large anchor tenants: Bass Pro Shops,
Boscovs and Macys. The Harrisburg Malls
specialty shop tenants include Disney Store, Foot Locker, The
Limited and Victorias Secret. In addition, the Harrisburg
Mall has a food court that includes such national tenants as
Arbys, Cosimos Pizza and McDonalds.
Renovation
and Repositioning
The Phase II renovation of this property is targeted for
completion in the fourth quarter of 2008. The plan includes the
addition of upscale restaurants on the exterior of the mall in
order to create a streetscape look and feel for the property, as
well as the construction of a new movie theater (which has been
completed) and up to two large big-box junior anchor
tenants. We estimate the costs of these renovations will total
$36.8 million, of which we incurred $24.4 million
through December 31, 2007. The total renovation and
repositioning plan for this mall, which is designed to convert
the mall from a Class C mall to a Class A mall,
includes the following:
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Anchors and Key Renewals.
Our predecessor
signed two new long-term leases and renewed a third lease with
proven high traffic anchor tenants. Bass Pro Shops occupies a
200,000 square-foot super store consisting of fishing,
hunting and boating products. Our predecessor also signed a
long-term lease with Boscovs, a regional discount
department store chain with approximately 40 stores. In
addition, the May Company, which merged with Federated
Department Stores, renewed its long-term lease through the year
2024. All three anchor tenants have agreed to operate their
stores continuously for an extended period.
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Entertainment.
We have focused a significant
portion of our leasing efforts towards leasing to tenants that
are entertainment and tourist destinations, such as Bass Pro
Shops and a movie theater. The Bass Pro Shops store opened on
November 18, 2004 and is our most important anchor tenant
in the Harrisburg Mall, serving both as a retailer and as an
entertainment destination. At approximately 200,000 square
feet, the Bass Pro Shops Harrisburg store is the second largest
Bass Pro Shops store in the nation and features a 60,000-gallon
aquarium, rock climbing walls, a live trout stream, waterfalls
and an indoor archery range. During 2006, a lease was signed
with the Great Escape movie theater chain for a 14-screen state
of the art stadium seated movie theater. Construction of the
theater is complete and the theater opened for business in the
fourth quarter of 2007.
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Accessibility.
We improved the malls
access by arranging for the Pennsylvania Department of
Transportation to provide a direct exit ramp to the property
from Interstate 83.
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Appearance.
We are improving the appearance of
the mall by undertaking major renovations of the interior of the
two new anchor stores, the interior and exterior of the mall and
mall entrances.
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Signage.
We have improved visibility of the
mall by adding significantly upgraded signage, including a
150-foot pylon sign which is visible from Interstate 83 and
nearby local roads. In addition, we have installed a digital
color video screen at the entrance to the mall. The digital
color video screen is programmable from a computer inside our
mall management office and will be available to notify the
public about special events and other mall promotions. Working
in collaboration with local officials, our predecessor succeeded
in adding Bass Pro Drive to the name of a nearby
local street, which will allow us to identify the retailer on
multiple sign locations along Interstate 83.
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44
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|
|
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Lighting and Security.
We have improved
lighting and security by installing brighter energy-efficient
lighting and increasing security in parking lots with regular
patrols.
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|
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Heating, Ventilation and Air Conditioning.
We
are reducing operating expenses by replacing the main air
conditioning central plant with new modern energy efficient
units that we estimate will result in a significant reduction in
the cost of energy.
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As a result of our renovation and repositioning efforts at the
Harrisburg Mall, leased square footage will have grown from
850,000 to 995,000 as of December 31, 2007, after giving
effect to executed anchor leases as of such date. Given the
attractiveness of the new anchor tenants at the Harrisburg Mall
and the next phase of renovation projected to be completed in
2008, additional revenue growth from the property is expected as
occupancy levels and rental rates rise above current levels.
One of our tenants at this property, Panera Bread, which has
executed a new lease to cover approximately 4,200 square
feet of newly developed restaurant space, has notified us that
it is considering sub-letting this space to another retailer.
Under its lease, Panera Bread has the right to sublet this
space, subject to our reasonable approval. The subletting of
this space could delay the opening of the restaurant that will
ultimately occupy this space. Under the lease with
Barnes & Noble at this property, a delay in the
opening of a suitable restaurant in the Panera Bread location
could result in Barnes & Noble exercising its right
under its lease to convert its fixed rate rent into a percentage
rent formula and ultimately could give this tenant the right to
terminate its lease at this property. We are in the process of
assessing our options with regard to this space in the event
that Panera Bread moves forward with its sub-let plan.
Joint
Venture and Financing
In September 2003, our predecessor acquired an ownership
interest in the Harrisburg Mall through Feldman Lubert Adler
Harrisburg LP, a joint venture with affiliates of the Lubert
Adler Funds based in Philadelphia. The joint venture paid
$17.5 million, or approximately $20.00 per square foot, for
the property, which was financed through both equity capital and
a loan. Our joint venture partner provided approximately
$10.8 million, or 75%, of the equity capital and our
predecessor provided approximately $3.6 million, or 25%, of
the equity capital. The remaining $3.1 million of the
purchase price was financed through a construction loan with
Commerce Bank.
As of December 31, 2007, the joint venture had spent
approximately $62.1 million (net of government grant
funding) on the renovation and repositioning of this property
and we estimate that the total additional investment required to
renovate and reposition the property is approximately
$12.4 million. The joint venture intends to fund the
additional $12.4 million investment from additional partner
contributions and cash flow from operations.
The construction loan with Commerce Bank contained an initial
maximum funding commitment of $46.9 million. During July
2005, the loan was amended and the commitment increased to
$50 million with no principal payments due until the
maturity date in March 2008. The interest rate is LIBOR plus
1.625% per annum. During July 2005, the borrowings were
increased to $49.8 million and a distribution of
$6.5 million was made to the partners on a pro rata basis
of which we received $1.625 million. We extended the loan
through April 14, 2008 at a borrowing rate of
200 basis points over LIBOR. We plan to extend the loan
through December 31, 2009 at the same borrowing rate.
However, there can be no assurances that we will be able to
extend the loan for this period or at this rate.
This loan presently has a limited recourse of $5.0 million,
of which affiliates of the Lubert Adler Funds are liable for
$3.2 million, or 63% and we are liable for
$1.8 million, or 37%. In addition, pursuant to the terms of
this loan, at any time the joint venture is entitled to receive
a loan advance, the lender shall reduce the amount of such
advance by the amount of the joint ventures net cash flow
after operating expenses and debt service.
Under the terms of the limited partnership agreement of Feldman
Lubert Adler Harrisburg LP, the general partner (one of our
wholly owned subsidiaries) manages the day-to-day operations of
the property. The general partner and limited partners share
equally in decision-making authority over major decisions
affecting the property, including property sales and financings,
leasing and budget approval and amendments.
We and our joint venture partner each have the right to receive
on a pro rata basis the operating cash flow of the property
equal to 12%, computed on an annual compounded basis, on
invested capital. Once operating cash
45
flow exceeds 12%, we will be entitled to receive an additional
20% of the excess cash flow. Upon a sale of the property and
after both partners receive a return of their capital
contributions to the joint venture (an aggregate of
approximately $27.4 million as of December 31,
2007) plus a 12% cumulative, compounded return thereon, we
will have the right to receive an additional 20% of the
available cash, if any, plus our 25% share of the remaining 80%
interest. In addition, in the event that a sale of the property
produces an overall return in excess of 20% to our joint venture
partner, we will be entitled to a 30% share of such excess, if
any, plus our 25% share of the remaining 70% interest. To the
extent that the partners are required to make additional capital
contributions to the joint venture, the amount of the 12%
preferred return, which operating cash flow must exceed in order
for the partners to receive the additional 20% of excess cash
flow, will increase.
Under the terms of the joint venture, we are generally
responsible for funding 25% of the capital contributions
required for the venture. As of December 31, 2007, we had
funded $10.6 million and our joint venture partner
$16.8 million of the capital contributions made to the
joint venture. As of December 31, 2007, we estimate that
completion of the redevelopment project for this property will
require total additional capital contributions of approximately
$12.4 million. We are currently attempting to resolve a
dispute with our joint venture partner relating to the scope of
the redevelopment plan for this project. Our joint venture
partner has notified us that it believes that certain aspects of
the last phase of the development plan were not approved in
accordance with the joint venture agreement and as a result has
claimed that we are responsible for 100% of the funding required
for this part of the project. We are continuing to negotiate
with our joint venture partner relating to this dispute and are
seeking to develop a mutually acceptable solution for this
issue. Through December 31, 2007, we have funded
$4.0 million above our 25% capital contribution requirement
for these redevelopment projects.
The contribution, merger and related agreements further provide
that Feldman Partners, LLC (an entity controlled by Larry
Feldman and owned by him and his family), Jim Bourg and Scott
Jensen will receive additional OP units relating to the
performance of the joint venture that owns the Harrisburg Mall.
The aggregate value of the additional OP units that may be
issued with respect to the Harrisburg Mall is equal to 50% of
the amount, if any, that the internal rate of return achieved by
us from the joint venture exceeds 15% on our investment on or
prior to December 31, 2009. The estimated fair value of
these additional OP units was zero at December 31, 2007.
The fees we are entitled to earn as manager of the Harrisburg
Mall include a management fee of 3.5% of annual gross revenues
paid monthly, a construction management fee of 3% of the amount
of capital improvements and customary leasing fees for a mall
leasing agent.
The joint venture agreement includes a buy-sell
provision allowing either joint venture partner to acquire the
interests of the other beginning on September 30, 2005.
Either partner to the joint venture may initiate a
buy-sell proceeding, which may enable it to acquire
the interests of the other partner. However, the partner
receiving an offer to be bought out will have the right to buy
out such offering partner at the same price offered.
Location
and demographics
The property is located east of the Harrisburg capital region in
Pennsylvania adjacent to major thoroughfares, including
Interstate 83. The following are key demographic and other
information that we expect will benefit the Harrisburg Mall:
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Population.
The Harrisburg metropolitan
statistical area population was 629,401 according to the US
Census Bureau Census 2000.
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|
|
|
Population Growth.
The population within a
15-mile
radius of the Harrisburg Mall is estimated to have grown by
approximately 4.5% from 2000 to 2007 and is projected to grow by
2.7% from 2007 to 2012, according to Claritas.
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|
|
|
Household Income.
For the year ended
December 31, 2007, the average household income within a
15-mile
radius of the Harrisburg Mall was estimated to be $68,310
according to Claritas.
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|
|
|
Local Market Characteristics.
The Harrisburg
regions economy is dominated by State and Federal
Government, which tends to insulate the region from major
economic downturns in the national economy.
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46
|
|
|
|
|
The Harrisburg Mall is located within a 10 minute drive from the
city of Hershey and Hershey Park, which is a national tourist
destination.
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Competition
The primary competitors of the Harrisburg Mall include two
regional malls that jointly comprise approximately
1.4 million square feet of shop space. Four power centers
that comprise approximately 1.7 million square feet are
located within seven miles of the property. In addition we
expect to compete with a new lifestyle center within four miles
of the property. We believe there are no major regional mall
projects under construction or planned for the near future. No
competitor has a unique anchor tenant similar to Bass Pro Shops.
The significant competitors within a
10-mile
radius include:
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Colonial Park Mall.
The Colonial Park Mall
opened in 1960 and is located approximately five miles north of
the Harrisburg Mall. It contains approximately
745,000 square feet of leasable area, 95 shops and is
anchored by Bon Ton, Sears and Boscovs. This center was
renovated and expanded with a food court and some specialty
shops during 1990.
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|
Capital City Mall.
The Capital City Mall is
located 10 miles to the west of the Harrisburg Mall. It
contains approximately 722,000 square feet of leasable area
and 94 shops. This center opened in 1974 and is anchored by
Hechts, JCPenney and Sears. The center was first renovated
in 1986 and a second renovation was completed in 1998, which
included new flooring, plantings, seating, skylights and a food
court area.
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|
The Shoppes at Susquehanna.
The Shoppes at
Susquehanna is a 108,000 square-foot, open-air lifestyle
center that opened in October 2004. It is approximately four
miles from the Harrisburg Mall and is approximately 63% leased
to such tenants as Ann Taylor Loft, Childrens Place,
Coldwater Creek, J. Jill, Jos. A Banks and Williams-Sonoma. This
center has dining establishments including Damons and
Macaroni Grill.
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Camp Hill Shopping Center.
The Camp Hill
Shopping Center is a 535,743 square foot center, located
just ten miles west of Harrisburg, with easy access to major
highways. The process of de-malling included: a
25,000 square foot Barnes and Noble (the only one of its
kind in the area), a 5,000 square foot Panera Bread (in the
front parking lot), Staples, Hallmark, Holiday Hair and Giant
Foods Superstore (a new prototype). Boscovs is its one
major retail anchor.
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The High Pointe Commons.
Less than
3 miles from the Harrisburg Mall, the High Pointe Commons
is a joint venture managed by High Real Estate Group and
CBL & Associates Properties, Inc. Anchored by a
100,000 square foot JCPenney and a 125,000 square foot
Target, the Center features two stand-alone sit-down
restaurants, Chilis and Friendlys. Other tenants
include: Sallys Beauty Supply, Payless Shoe Source, Lane
Bryant, Serta Mattress, Verizon Wireless, Hollywood Tans, Famous
Footwear, Subway, Lee Nails, Hair Cuttery, Jackson Hewitt,
Moes Southwestern Grill, Lasik Plus, GameStop, Five Guys
Famous Burgers and Fries. This center has a prime location,
located right off of I-283.
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Average
Occupancy Rate and Base Rent Harrisburg
Mall(1)
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average Annual
|
|
Fiscal Year
|
|
Occupancy Rate(2)(3)
|
|
|
Rent per Sq. Ft.(3)
|
|
|
2007
|
|
|
57
|
%
|
|
$
|
22.97
|
|
2006
|
|
|
63
|
%
|
|
$
|
22.88
|
|
2005
|
|
|
65
|
%
|
|
$
|
18.36
|
|
2004
|
|
|
65
|
%
|
|
$
|
17.70
|
|
2003
|
|
|
70
|
%
|
|
$
|
15.40
|
|
|
|
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(1)
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|
The information in this chart for the periods prior to our
predecessors investment in the Harrisburg Mall in
September 2003 was supplied by or derived from information
provided by the previous owner of the property.
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|
(2)
|
|
Excludes temporary leases, which are leases for a term of less
than one year.
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47
|
|
|
(3)
|
|
Calculated based on rentable shop tenant space.
|
Regulation
Generally, the ownership and operation of real properties are
subject to various laws, ordinances and regulations, including
regulations relating to lien sale rights and procedures. Changes
in any of these laws or regulations, such as the Comprehensive
Environmental Response and Compensation Liability Act,
increasing the potential liability for environmental conditions
or circumstances existing or created by tenants or others on
properties or laws affecting development, construction,
operation, upkeep, safety and taxation requirements may result
in significant unanticipated expenditures, loss of regional mall
sites or other impairments to operations, which would adversely
affect our cash flows from operating activities.
Under the Americans with Disabilities Act of 1990 (the
ADA), all places of public accommodation are
required to meet certain federal requirements related to access
and use by disabled persons. These requirements became effective
in 1992. A number of additional U.S. federal, state and
local laws also exist that may require modifications to the
properties, or restrict certain further renovations thereof,
with respect to access thereto by disabled persons.
Noncompliance with the ADA could result in the imposition of
fines or an award of damages to private litigants and could also
result in an order to correct any non-complying feature and in
substantial capital expenditures. To the extent our properties
are not in compliance, we are likely to incur additional costs
to comply with the ADA.
Insurance activities are subject to state insurance laws and
regulations as determined by the particular insurance
commissioner for each state in accordance with the
McCarran-Ferguson Act, as well as subject to the
Gramm-Leach-Bliley Act and the privacy regulations promulgated
by the Federal Trade Commission pursuant thereto.
Property management activities are often subject to state real
estate brokerage laws and regulations as determined by the
particular real estate commission for each state.
Changes in any of the laws governing our conduct could have an
adverse impact on our ability to conduct our business or could
materially affect our financial position, operating income,
expense or cash flow.
Environmental
Matters
Pursuant to U.S. federal, state and local environmental
laws and regulations, a current or previous owner or operator of
real property may be required to investigate, remove
and/or
remediate a release of hazardous substances or other regulated
materials at or emanating from such property. Further, under
certain circumstances, such owners or operators of real property
may be held liable for property damage, personal injury
and/or
natural resource damage resulting from or arising in connection
with such releases. Certain of these laws have been interpreted
to impose joint and several liability unless the harm is
divisible and there is a reasonable basis for allocation of
responsibility. The failure to properly remediate the property
may also adversely affect the owners ability to lease,
sell or rent the property or to borrow using the property as
collateral.
In connection with the ownership, operation and management of
our current or past properties and any properties that we may
acquire
and/or
manage in the future, we could be legally responsible for
environmental liabilities or costs relating to a release of
hazardous substances or other regulated materials at or
emanating from such property. In order to assess the potential
for such liability, we conduct an environmental assessment of
each property prior to acquisition and manage our properties in
accordance with environmental laws while we own or operate them.
We and our predecessor engaged qualified, reputable and
adequately insured environmental consulting firms to perform
environmental site assessments of all of our properties and we
are not aware of any environmental issues that are expected to
materially impact the operations of any property.
Insurance
We believe that our properties are covered by adequate fire,
flood, earthquake, wind (as deemed necessary or as required by
our lenders) and property insurance as well as commercial
liability insurance provided by reputable companies and with
commercially reasonable deductibles and limits. Furthermore, we
believe our businesses and
48
business assets are likewise adequately insured against casualty
loss and third-party liabilities. Changes in the insurance
market since September 11, 2001 have caused increases in
insurance costs and deductibles and have led to more active
management of our insurance component.
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|
ITEM 3.
|
LEGAL
PROCEEDINGS
|
As of December 31, 2007, we were not involved in any
material litigation nor, to managements knowledge, is any
material litigation threatened against us or our portfolio other
than routine litigation arising in the ordinary course of
business or litigation that is adequately covered by insurance.
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|
ITEM 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
We held our annual meeting of stockholders on December 28,
2007 at which the following matters were voted upon:
1. To elect four directors of our company to serve until
the 2008 annual meeting of stockholders and until their
successors are duly elected and qualified.
2. To ratify the selection of KPMG LLP as our independent
registered public accounting firm for the fiscal year ending
December 31, 2007.
3. To approve the convertibility feature of the
Series A Preferred Stock into our common stock, in
accordance with the terms of the Series A Preferred Stock.
4. To consider a stockholder proposal if it is properly
presented to the meeting.
The results of the meeting were as follows:
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|
|
|
|
|
|
|
|
Proposal 1:
|
|
For
|
|
|
Abstain
|
|
|
Lawrence Feldman
|
|
|
9,675,744
|
|
|
|
1,259,270
|
|
Lawrence Kaplan
|
|
|
8,979,407
|
|
|
|
1,955,607
|
|
Paul McDowell
|
|
|
8,983,180
|
|
|
|
1,941,834
|
|
Bruce Moore
|
|
|
8,993,007
|
|
|
|
1,942,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proposal 2:
|
|
For
|
|
|
Against
|
|
|
Abstain
|
|
|
KPMG LLP
|
|
|
10,779,744
|
|
|
|
20,869
|
|
|
|
134,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proposal 3
|
|
For
|
|
|
Against
|
|
|
Abstain
|
|
|
Approval of the Series A Preferred Stock
|
|
|
6,954,975
|
|
|
|
262,933
|
|
|
|
3,717,107(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proposal 4
|
|
For
|
|
|
Against
|
|
|
Abstain
|
|
|
No vote was taken as a stockholder proposal was not properly
presented during the annual meeting
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
(1)
|
|
Includes 3,708,862 broker non-votes.
|
49
PART II
|
|
ITEM 5.
|
MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Our common stock began trading on the New York Stock Exchange
(NYSE) on December 16, 2004 under the symbol
FMP. On April 4, 2008, the reported closing
sale price per share of common stock on the NYSE was $2.74 and
there were approximately 44 holders of record of our common
stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
Quarter Ended
|
|
High
|
|
|
Low
|
|
|
Dividends
|
|
|
High
|
|
|
Low
|
|
|
Dividends
|
|
|
March 31
|
|
$
|
12.94
|
|
|
$
|
11.55
|
|
|
$
|
0.2275
|
|
|
$
|
12.85
|
|
|
$
|
11.03
|
|
|
$
|
0.2275
|
|
June 30
|
|
|
13.00
|
|
|
|
10.82
|
|
|
|
|
|
|
|
12.49
|
|
|
|
10.30
|
|
|
|
0.2275
|
|
September 30
|
|
|
11.63
|
|
|
|
7.55
|
|
|
|
|
|
|
|
11.40
|
|
|
|
10.24
|
|
|
|
0.2275
|
|
December 31
|
|
|
7.95
|
|
|
|
2.42
|
|
|
|
|
|
|
|
12.60
|
|
|
|
10.10
|
|
|
|
0.2275
|
|
Generally, if dividends are declared in a quarter, those
dividends will be paid during the subsequent quarter.
On December 31, 2007, there were 1,414,618 operating
partnership units of limited partnership interest of our
operating partnership outstanding. These units receive
distributions per unit in the same manner as dividends per share
were distributed to common stockholders.
On May 14, 2007, we declared a dividend of $0.2275 per
common share for the period January 1, 2007 to
March 31, 2007 to shareholders of record on May 18,
2007. This dividend was paid on May 25, 2007.
On October 26, 2007, we announced the suspension of our
common stock dividend and we do not expect to declare any
additional common stock dividends in the foreseeable future
except as may be required to maintain REIT status.
The following table summarizes information, as of
December 31, 2007, relating to our equity compensation
plans pursuant to which shares of our common stock or other
equity securities may be granted from time to time.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
|
|
|
|
|
|
Remaining Available for
|
|
|
|
|
|
|
|
|
|
Future Issuance Under
|
|
|
|
Number of Securities to
|
|
|
Weighted Average
|
|
|
Equity Compensation
|
|
|
|
be Issued Upon Exercise
|
|
|
Exercise Price of
|
|
|
Plans (Excluding
|
|
|
|
of Outstanding Options,
|
|
|
Outstanding Options,
|
|
|
Securities Reflected in
|
|
Plan Category
|
|
Warrants and Rights(a)
|
|
|
Warrants and Rights
|
|
|
Column(a))
|
|
|
Equity compensation plans approved by security holders(1)
|
|
|
N/A
|
(1)
|
|
|
N/A
|
|
|
|
203,160
|
|
Equity compensation plans not approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
N/A
|
(1)
|
|
|
N/A
|
|
|
|
203,160
|
|
|
|
|
(1)
|
|
Includes information related to our 2004 Equity Incentive Plan
and 2004 Incentive Bonus Plan. As of December 31, 2007, we
have issued 266,061 shares of restricted common stock, net
of forfeitures.
|
Recent
Sale of Unregistered Securities
Our contribution, merger and related agreements provide that
Feldman Partners, LLC (an entity controlled by Larry Feldman and
owned by him and his family), Jim Bourg and Scott Jensen will
receive additional OP units that may be issued with respect to
the Harrisburg Mall equal to 50% of the amount, if any, that the
internal rate of return achieved by us from the joint venture
exceeds 15% on or prior to December 31, 2009. The issuance
of such shares of common stock and OP units was effected in
reliance upon an exemption from registration provided by
Section 4(2) under the Securities Act.
We issued 5,000 shares of our common stock in 2007 for
deferred stock-based compensation, none of which were issued in
connection with employment contracts and we issued
3,000 shares of our common stock to our
50
directors. The issuance of these shares of our common stock was
affected in reliance upon an exemption from registration
provided by Section 4(2) under the Securities Act.
On April 10, 2007, we entered into a purchase agreement
with Inland American to sell to Inland American, in one or more
private placements, up to 2,000,000 shares of the
Series A Preferred Stock. Inland American subsequently
purchased 600,000 shares of the Series A Preferred
Stock for an aggregate purchase price of $15 million.
On October 22, 2007, Inland American purchased from us
800,000 additional shares of the Series A Preferred Stock
for an aggregate purchase price of $20 million. In
addition, on December 17, 2007, Inland American purchased
from us 600,000 shares of Series A Preferred Stock for
an aggregate purchase price of $15 million. The sales to
Inland American were made in reliance upon the exemption from
securities registration afforded by Section 4(2) of the
Securities Act of 1933, as amended, as transactions not
involving any public offering. No commissions or fees were paid
in connection with these sales.
See note 2 to the Consolidated Financial Statements in
Item 8 for a description of our deferred compensation plan
and other compensation arrangements.
51
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA
|
The following table shows selected consolidated financial data
for our company and historical financial data for our
predecessor for the periods indicated. You should read the
following selected historical financial data together with
Managements Discussion and Analysis of Financial
Condition and Results of Operations and historical
consolidated financial statements and related notes thereto. The
following selected consolidated historical financial data have
been derived from financial statements audited by KPMG LLP, an
independent registered public accounting firm. Consolidated
balance sheets as of December 31, 2007 and 2006 and the
related consolidated statements of operations for the years
ended December 31, 2007 and 2006 and cash flows for each of
the years in the three-year period ended December 31, 2007
and the related notes thereto appear in Item 8.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company
|
|
|
Our Predecessor
|
|
|
|
Year Ended December 31,
|
|
|
December 16, to
|
|
|
January 1 to
|
|
|
Year Ended
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
December 31, 2004
|
|
|
December 15, 2004
|
|
|
December 31, 2003
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
|
|
$
|
31,815
|
|
|
$
|
41,014
|
|
|
$
|
35,729
|
|
|
$
|
327
|
|
|
$
|
6,340
|
|
|
$
|
6,720
|
|
Tenant reimbursements
|
|
|
13,741
|
|
|
|
19,867
|
|
|
|
17,634
|
|
|
|
193
|
|
|
|
4,124
|
|
|
|
4,446
|
|
Management, leasing and development services
|
|
|
3,734
|
|
|
|
1,310
|
|
|
|
470
|
|
|
|
58
|
|
|
|
917
|
|
|
|
461
|
|
Interest and other income
|
|
|
6,048
|
|
|
|
3,024
|
|
|
|
1,362
|
|
|
|
52
|
|
|
|
250
|
|
|
|
67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
55,338
|
|
|
|
65,305
|
|
|
|
55,195
|
|
|
|
630
|
|
|
|
11,631
|
|
|
|
11,694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental property operating and maintenance
|
|
|
19,261
|
|
|
|
21,014
|
|
|
|
18,383
|
|
|
|
329
|
|
|
|
3,886
|
|
|
|
4,193
|
|
Real estate taxes
|
|
|
5,918
|
|
|
|
7,645
|
|
|
|
6,520
|
|
|
|
45
|
|
|
|
1,218
|
|
|
|
1,225
|
|
Interest (including the amortization of deferred financing costs)
|
|
|
14,762
|
|
|
|
16,435
|
|
|
|
11,909
|
|
|
|
443
|
|
|
|
4,007
|
|
|
|
4,904
|
|
Loss from early extinguishment of debt
|
|
|
379
|
|
|
|
357
|
|
|
|
|
|
|
|
300
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
14,498
|
|
|
|
17,394
|
|
|
|
13,383
|
|
|
|
211
|
|
|
|
1,462
|
|
|
|
1,442
|
|
General and administrative
|
|
|
16,518
|
|
|
|
8,657
|
|
|
|
7,511
|
|
|
|
747
|
|
|
|
3,498
|
|
|
|
833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
71,336
|
|
|
|
71,502
|
|
|
|
57,706
|
|
|
|
2,075
|
|
|
|
14,071
|
|
|
|
12,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(15,998
|
)
|
|
|
(6,197
|
)
|
|
|
(2,511
|
)
|
|
|
(1,445
|
)
|
|
|
(2,440
|
)
|
|
|
(903
|
)
|
Equity in (losses) earnings of unconsolidated real estate
partnerships
|
|
|
(1,900
|
)
|
|
|
(550
|
)
|
|
|
(454
|
)
|
|
|
12
|
|
|
|
425
|
|
|
|
197
|
|
Gain on partial sale of real estate
|
|
|
|
|
|
|
29,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before minority interest
|
|
|
(17,898
|
)
|
|
|
22,650
|
|
|
|
(2,965
|
)
|
|
|
(1,433
|
)
|
|
|
(2,015
|
)
|
|
|
(706
|
)
|
Minority interest
|
|
|
1,651
|
|
|
|
(2,469
|
)
|
|
|
332
|
|
|
|
184
|
|
|
|
(233
|
)
|
|
|
(30
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(16,247
|
)
|
|
$
|
20,181
|
|
|
$
|
(2,633
|
)
|
|
$
|
(1,249
|
)
|
|
$
|
(2,248
|
)
|
|
$
|
(736
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share
|
|
$
|
(1.33
|
)
|
|
$
|
1.58
|
|
|
$
|
(0.21
|
)
|
|
$
|
(0.12
|
)
|
|
|
N/A
|
|
|
|
N/A
|
|
Diluted (loss) earnings per share
|
|
|
(1.33
|
)
|
|
|
1.54
|
|
|
|
(0.21
|
)
|
|
|
(0.12
|
)
|
|
|
N/A
|
|
|
|
N/A
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
12,863
|
|
|
|
12,808
|
|
|
|
12,363
|
|
|
|
10,790
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Diluted
|
|
|
12,863
|
|
|
|
14,666
|
|
|
|
12,363
|
|
|
|
10,790
|
|
|
|
N/A
|
|
|
|
N/A
|
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company
|
|
|
Our Predecessor
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Balance Sheet Data (at end of period)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in real estate, net
|
|
$
|
342,897
|
|
|
$
|
318,440
|
|
|
$
|
396,108
|
|
|
$
|
143,653
|
|
|
$
|
50,473
|
|
Total assets
|
|
|
469,194
|
|
|
|
413,851
|
|
|
|
475,485
|
|
|
|
188,783
|
|
|
|
70,776
|
|
Mortgages and other loans payable
|
|
|
279,758
|
|
|
|
240,831
|
|
|
|
318,489
|
|
|
|
54,750
|
|
|
|
61,278
|
|
Total liabilities
|
|
|
320,638
|
|
|
|
288,657
|
|
|
|
358,407
|
|
|
|
80,290
|
|
|
|
69,923
|
|
Minority interest
|
|
|
9,677
|
|
|
|
11,649
|
|
|
|
12,117
|
|
|
|
13,962
|
|
|
|
762
|
|
Stockholders equity
|
|
|
138,879
|
|
|
|
113,545
|
|
|
|
104,961
|
|
|
|
94,531
|
|
|
|
91
|
|
Total liabilities and stockholders equity
|
|
|
469,194
|
|
|
|
413,851
|
|
|
|
475,485
|
|
|
|
188,783
|
|
|
|
70,776
|
|
Other Data (for the year ended)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
(6,393
|
)
|
|
|
381
|
|
|
|
11,605
|
|
|
|
945
|
|
|
|
758
|
|
Investing activities
|
|
|
(48,237
|
)
|
|
|
(14,372
|
)
|
|
|
(139,401
|
)
|
|
|
(102,530
|
)
|
|
|
(6,644
|
)
|
Financing activities
|
|
|
70,570
|
|
|
|
12,696
|
|
|
|
126,520
|
|
|
|
113,215
|
|
|
|
9,517
|
|
53
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Overview
We are a REIT formed in July 2004 to continue the business of
our predecessor, Feldman Equities of Arizona, LLC, and its
subsidiaries and affiliates, to renovate and reposition retail
shopping malls. Our investment strategy is to opportunistically
redevelop underperforming or distressed malls and transform them
into physically attractive and profitable Class A or near
Class A malls through comprehensive renovation and
repositioning efforts aimed at increasing shopper traffic and
tenant sales. Through these renovation and repositioning
efforts, we expect to raise occupancy levels, rental income and
property cash flow.
We derive revenues primarily from rent and reimbursement
payments received by our operating partnership from tenants
under existing leases at each of our properties. Our operating
results, therefore, depend materially on the ability of our
tenants to make required payments and overall real estate market
conditions.
On December 16, 2004, we completed our formation
transactions, sold 10,666,667 shares of our common stock in
our IPO and contributed the net proceeds from this offering to
our operating partnership. Subsequently, on January 15,
2005, we sold an additional 1,600,000 shares of our common
stock to underwriters upon their full exercise of their
over-allotment option. Prior to the completion of our IPO and
formation transactions, our business was conducted by our
predecessor.
Material
Transactions Impacting Our Financial Condition and Results of
Operations
A discussion of the results of operations of our Company,
comparing the year ended December 31, 2007 to the year
ended December 31, 2006 and comparing the year ended
December 31, 2006 to the year ended December 31, 2005,
is set forth below. Over this three-year period, we have
initiated a number of separate mall acquisitions, financings,
joint ventures and re-development activities, which are
summarized below. As a consequence of such transactions, period
over period comparisons of our results of operations may not be
indicative of operating results covering any future periods.
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On February 1, 2005, we acquired Colonie Center Mall
located in Albany, New York for an initial purchase price of
$82.2 million. We funded the purchase price of this
acquisition using the net proceeds from a property-level
financing of the Stratford Square Mall. We paid additional
consideration of $2.4 million in connection with the
execution of certain leases. As of December 31, 2007, shop
occupancy at the Colonie Center Mall, excluding temporary
tenants, was 77.0%.
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On June 28, 2005, we acquired the Tallahassee Mall, a
966,000 square-foot mall located in Tallahassee, the state
capital of Florida. The purchase price of $61.5 million
included the assumption of an existing $45.8 million
mortgage loan plus cash in the amount of approximately
$16.2 million. The mortgage loan we assumed bears interest
at a fixed rate of 8.60% and has a July 2009 anticipated
repayment date. The property is subject to a long-term ground
lease that expires in 2063 (assuming the exercise of all
extension options). The ground lease does not contain a purchase
option. As of December 31, 2007, shop occupancy, excluding
temporary and anchor tenants, was 76.8%.
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On July 12, 2005, we acquired Northgate Mall, a
1.1 million square-foot mall located in the northwest
suburbs of Cincinnati, Ohio. The purchase price of
$110.0 million included the assumption of an existing
$79.6 million mortgage loan in the plus cash in the amount
of approximately $30.4 million. The mortgage loan we
assumed bears interest at a fixed rate of 6.60% and has an
anticipated prepayment date in November 2012. As of
December 31, 2007, shop occupancy, excluding temporary and
anchor tenants, was 68.4%.
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During July 2005, the construction loan held by the Harrisburg
Mall joint venture which contained an initial maximum funding
commitment of $46.9 million, was increased to
$50 million with no principal payments due until the
maturity date in March 2008. The interest rate is under this
loan is LIBOR plus 162.5 basis points. During July 2005,
the borrowings were increased to $49.8 million and a
distribution of $6.5 million was made to the partners on a
pro rata basis of which we received $1.625 million. We plan
to extend the loan through December 31, 2009 at a borrowing
rate of 200 basis points over LIBOR.
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During March 2006, we completed the issuance and sale in a
private placement of $29.4 million in aggregate principal
amount of junior subordinated debt obligations (the
Notes). The Notes require quarterly interest
payments calculated at a fixed interest rate equal to 8.70% per
annum through April 2011 and subsequently at a variable interest
rate equal to LIBOR plus 345 basis points. The Notes mature
in April 2036 and may be redeemed, in whole or in part, at par,
at our option, beginning after April 2011.
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On April 5, 2006, we acquired the Golden Triangle Mall in
the Dallas suburb of Denton, Texas, for approximately
$42.3 million (including $2.1 million of additional
consideration accrued in accordance with an earn-out provision
in the purchase agreement). Including non-owned anchors, the
Golden Triangle Mall is a 765,000 square-foot regional
mall. As of December 31, 2007, excluding temporary tenants,
the malls occupancy was 68.1%.
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On April 5, 2006, in connection with the acquisition of the
Golden Triangle Mall, we entered into a $24.6 million
secured line of credit which bears interest at 140 basis
points over LIBOR and matures in April 2008. The secured line of
credit was fully drawn on the date we acquired the Golden
Triangle Mall. In October 2006, we entered into a modification
agreement that provides for the issuance of letters of credit in
the aggregate amount of up to $13.0 million for a fee of
0.5% of the face amount. As of December 31, 2007, letters
of credit outstanding under this agreement amounted to
$10.25 million. The secured line of credit contains
customary covenants that require us, among other things, to
maintain certain financial coverage ratios. As of
December 31, 2007, we were in compliance with the covenant
requirements. The outstanding balance on the line as of
December 31, 2007 was $17.5 million with interest
rates on the tranches ranging from 6.59% to 7.25%.
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On April 7, 2006, we acquired the building occupied by
JCPenney and related acreage at Stratford Square Mall for a
price of $6.7 million. The purchase price included
assumption of a loan secured by the property that had a
principal balance of approximately $3.5 million. The loan
bore interest at a 5.15% fixed rate and was repaid in May 2007.
In connection with the acquisition, we renewed and extended the
lease with JCPenney.
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On June 29, 2006, we contributed the Foothills Mall to a
joint venture and retained a 30.8% interest. In connection with
this transaction, the joint venture refinanced the existing
$54.8 million first mortgage with an $81.0 million
first mortgage. As a result of these transactions, we received a
distribution of approximately $38.9 million and recognized
a $29.4 million gain on the partial sale of the property as
reported in our 2006 consolidated statement of operations. A
portion of the proceeds from the transaction was used to repay
$24.6 million outstanding on our secured line of credit and
$5.0 million outstanding under our credit facility with
Kimco.
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On September 29, 2006, we contributed the Colonie Center
Mall to a joint venture and retained a 25% interest. In
connection with this transaction, the joint venture refinanced
the property with a first mortgage and construction facility
with a maximum capacity commitment of $109.8 million. As a
result of these transactions, we received a distribution of
approximately $41.2 million and recorded a
$3.5 million deferred gain. A portion of the proceeds from
the transaction were used to repay $4.0 million outstanding
on our secured line of credit on October 2, 2006.
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Effective April 10, 2007, we entered into an agreement to
issue up to $50 million of Series A Preferred Stock to
Inland American. We issued $15 million of the Series A
Preferred Stock on April 30, 2007, an additional
$20.0 million on October 22, 2007, and the balance on
December 17, 2007. We used the proceeds from this financing
to fund redevelopment costs and to repay borrowings under our
secured line of credit.
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On April 16, 2007, we arranged for up to $25 million
in debt financing (the Note) from Kimco. In addition
to the interest on the Note, Kimco will be paid a variable fee
equal to (i) $500,000, multiplied by (ii) (a) the
volume weighted average price of our common stock as of a
five-day
period chosen by Kimco, minus (b) $13.00 per common share.
If Kimco does not select a date for determination of the fee
prior to termination of the Note, we will instead pay to Kimco
$250,000 in additional interest. We will not being drawing any
funds under this financing.
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On May 8, 2007, we closed on a $104.5 million first
mortgage loan secured by Stratford Square Mall. On the closing
date, $75.0 million of the proceeds were used to retire
Stratfords outstanding $75.0 million first mortgage.
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Trends
that May Impact Future Operating Results
In addition, several trends affecting the U.S. economy in
general and the retail sector in particular are expected to
impact our business and our results of operations in future
periods, including the following:
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The recovery in U.S. credit markets anticipated in the
early part of 2008 has not materialized, and the broader
U.S. economy is beginning to feel the adverse impact of
this lingering problem. In particular, we believe that these
conditions have resulted in the following:
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Many commercial real estate lenders have substantially tightened
underwriting standards or have withdrawn from the lending
marketplace. These circumstances have materially impacted
liquidity in the debt markets, making financing terms for owners
of retail properties less attractive, and in certain cases have
resulted in the unavailability of certain types of debt
financing. As a result, until conditions change, we expect debt
financing and refinancing will be more difficult to obtain and
our borrowing costs on new and refinanced debt will be more
expensive compared to prior periods.
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At the same time, constraints on capital is expected to reduce
new development competition in certain of our marketplaces,
which may delay the opening of some competitive projects near
our existing properties.
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Tighter lending standards and higher borrower costs have exerted
downward pressure on the value and liquidity of real estate
assets which will impact the values we could obtain for our
properties in the case of their sale. These factors may make it
more difficult for us to sell properties or may adversely affect
the price we receive for properties that we do sell, as
prospective buyers may experience increased costs of debt
financing or difficulties in obtaining debt financing.
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These events in the credit markets have also had an adverse
effect on other financial markets in the U.S., which may make it
more difficult or costly for us to raise capital through the
issuance of common stock, preferred stock or other equity
securities.
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Declining home prices in many regions has also impacted consumer
spending, which in turn has caused a slow start to the 2008
retailing season. Some retailers have reduced their growth plans
for 2009 while others have announced store closures or delays in
new store openings. These factors are expected to impact the
pace of our leasing activity for the balance of 2008.
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The increase in many global commodity prices purchased in
U.S. dollars has led to higher than anticipated
construction costs in our redevelopment projects.
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During the redevelopment and repositioning period, our
properties tend to experience decreases in occupancy and net
operating income. We have, for example, completed or are near
completion of the development projects for Colonie Center and
Harrisburg Mall. We experienced declines in occupancy and net
income during 2007 as compared to 2006 at these properties. We
expect these lower occupancy and operating income trends will
improve as lease up of these properties progresses. However, the
pace of our lease up activities could be impacted by broader
economic factors.
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For the balance of 2008 we expect to focus our efforts on
improving the operating performance of our properties and
selectively accessing additional capital, including borrowings
or joint venture arrangements, to be used for our in place
development efforts. Our ability to acquire new properties or to
commence major redevelopment efforts on our other existing
properties will require that we first see improving economic
conditions and can access required financing.
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Critical
Accounting Policies
A summary of the accounting policies that management believes
are critical to the preparation of the consolidated financial
statements, included elsewhere in this Annual Report on
Form 10-K,
are set forth below.
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Certain of the accounting policies used in the preparation of
these consolidated financial statements are particularly
important for an understanding of our financial position and
results of operations. These policies require the application of
judgment and assumptions by management and, as a result, are
subject to a degree of uncertainty. Actual results could differ
from these estimates.
Revenue
Recognition
Base rental revenues from rental retail properties are
recognized on a straight-line basis over the noncancelable terms
of the related leases. Deferred rent represents the aggregate
excess of rental revenue recognized on a straight-line basis
over cash received under applicable lease provisions.
Percentage rent, or rental revenue that is based
upon a percentage of the sales recorded by tenants, is
recognized in the period such sales are earned by the respective
tenants.
Reimbursements from tenants related to real estate taxes,
insurance and other shopping center operating expenses are
recognized as revenue, based on a predetermined formula, in the
period the applicable costs are incurred. Lease termination
fees, net of deferred rent and related intangibles, which are
included in interest and other income in the accompanying
consolidated statements of operations, are recognized when the
related leases are cancelled, the tenant surrenders the space
and we have no continuing obligation to provide services to such
former tenants.
Additional revenue is derived from providing management services
to third parties, including property management, brokerage,
leasing and development. Management fees generally are a
percentage of managed property cash receipts. Leasing and
brokerage fees are earned and recognized in installments as
follows: one-third upon lease execution, one-third upon delivery
of the premises and one-third upon the commencement of rent.
Development fees are earned and recognized over the time period
of the development activity.
We must also make estimates related to the collectibility of our
accounts receivable related to minimum rent, deferred rent,
tenant reimbursements, lease termination fees, management and
development fees and other income. We analyze accounts
receivable and historical bad debts, tenant concentrations,
tenant credit worthiness and current economic trends when
evaluating the adequacy of the allowance for doubtful accounts
receivable. These estimates have a direct impact on net income,
because a higher bad debt allowance would result in lower net
income.
Principles
of Consolidation and Equity Method of Accounting
We evaluate our investments in partially owned entities in
accordance with FASB Interpretation No. 46 (revised
December 2003),
Consolidation of Variable Interest
Entities
, or FIN 46R. If the investment is a
variable interest entity, or a VIE, and
we are the primary beneficiary, as defined in
FIN 46R, we account for such investment as if it were a
consolidated subsidiary. We have determined that Feldman Lubert
Adler Harrisburg L.P., FMP Kimco Foothills LLC and FMP191
Colonie Center LLC are not VIEs.
We evaluate the consolidation of entities in which we are a
general partner in accordance with EITF Issue
04-05,
which
provides guidance in determining whether a general partner
should consolidate a limited partnership or a limited liability
company with characteristics of a partnership.
EITF 04-05 states
that the general partner in a limited partnership is presumed to
control that limited partnership. The presumption may be
overcome if the limited partners have either (1) the
substantive ability to dissolve the limited partnership or
otherwise remove the general partner without cause or
(2) substantive participating rights, which provide the
limited partners with the ability to effectively participate in
significant decisions that would be expected to be made in the
ordinary course of the limited partnerships business and
thereby preclude the general partner from exercising unilateral
control over the partnership. Based on these criteria, we do not
consolidate our investments in the Harrisburg, Foothills and
Colonie joint ventures. We account for our investment in these
joint ventures under the equity method of accounting. These
investments were recorded initially at cost and thereafter the
carrying amount is increased by our share of comprehensive
income and any additional capital contributions and decreased by
our share of comprehensive loss and capital distributions.
The equity in net income or loss and other comprehensive income
or loss from real estate joint ventures recognized by us and the
carrying value of our investments in real estate joint ventures
are generally based on our
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share of cash that would be distributed to us under the
hypothetical liquidation of the joint venture, at the then book
value, pursuant to the provisions of the respective
operating/partnership agreements. In the case of FMP Kimco
Foothills Member LLC, the joint venture that owns the Foothills
Mall (the Foothills JV), we have suspended the
recognition of our share of losses because we have a negative
carrying value in our investment in this joint venture. In
accordance with AICPA Statement of Position
No. 78-9
Accounting for Investments in Real Estate Ventures
(SOP 78-9)
as amended by
EITF 04-05
,
if and when the Foothills JV reports net income, we will
resume applying the equity method of accounting after our share
of that net income equals the share of net losses not recognized
during the period that the equity method was suspended.
For a joint venture investment that is not a VIE or in which we
are not the general partner, we follow the accounting set forth
in
SOP 78-9.
In accordance with this pronouncement, investments in joint
ventures are accounted for under the equity method when our
ownership interest is less than 50% and we do not exercise
direct or indirect control.
Factors we consider in determining whether or not we exercise
control include rights of partners in significant business
decisions, including dispositions and acquisitions of assets,
financing, operating and capital budgets, board and management
representation and authority and other contractual rights of our
partners. To the extent that we are deemed to control these
entities, these entities are consolidated.
On a periodic basis, we assess whether there are any indicators
that the value of an investment in unconsolidated joint ventures
may be impaired. An investments value is impaired if
managements estimate of the fair value of the investment
is less than the carrying value of the investment. To the extent
impairment has occurred, the loss shall be measured as the
excess of the carrying amount of the investment over the
estimated fair value of the investment.
Investments
in Real Estate and Real Estate Entities
Real estate is stated at historical cost, less accumulated
depreciation. Improvements and replacements are capitalized when
they extend the useful life or improve the efficiency of the
asset. Repairs and maintenance are charged to expense as
incurred.
The building and improvements thereon are depreciated on the
straight-line basis over an estimated useful life ranging from 3
to 39 years. Tenant improvements are depreciated on the
straight-line basis over the shorter of the lease term or their
estimated useful life. Equipment is being depreciated on a
straight-line basis over estimated useful lives of three to
seven years.
It is our policy to capitalize interest, insurance and real
estate taxes related to properties under redevelopment and to
depreciate these costs over the life of the related assets.
Predevelopment costs, which generally include legal and
professional fees and other third-party costs related directly
to the acquisition of a property, are capitalized as part of the
property being developed. In the event a development is no
longer deemed to be probable, the costs previously capitalized
are written off as a component of operating expenses.
In accordance with SFAS No. 144,
Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of
, investment properties are reviewed for
impairment on a
property-by-property
basis whenever events or changes in circumstances indicate that
the carrying value of investment properties may not be
recoverable. Impairment losses for investment properties are
recorded when the undiscounted cash flows estimated to be
generated by the investment properties during the expected hold
period are less than the carrying amounts of those assets.
Impairment losses are measured as the difference between the
carrying value and the fair value of the asset. We are required
to assess whether there are impairments in the values of our
investments in real estate, including indirect investments in
real estate through entities which we do not control and are
accounted for using the equity method of accounting.
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Gains
on Disposition of Real Estate
Gains on the disposition of real estate assets are recorded when
the recognition criteria have been met, generally at the time
title is transferred and we no longer have substantial
continuing involvement with the real estate asset sold. Gains on
the disposition of real estate assets are deferred if we
continue to have substantial continuing involvement with the
real estate asset sold.
When we contribute a property to a joint venture in which we
have retained an ownership interest, we do not recognize a
portion of the proceeds in the computation of the gain resulting
from the contribution. The amount of gain not recognized is
based on our continuing ownership interest in the contributed
property that arises due to the ownership interest in the joint
venture acquiring the property.
Purchase
Price Allocation
We allocate the purchase price of properties to tangible and
identified intangible assets acquired based on their fair values
in accordance with the provisions of SFAS No. 141,
Business Combinations
. In making estimates of fair values
for the purpose of allocating purchase price, management
utilized a number of sources. We also consider information about
each property obtained as a result of our pre-acquisition due
diligence, marketing and leasing activities in estimating the
fair value of tangible and intangible assets acquired.
We allocate a portion of the purchase price to tangible assets
including the fair value of the building on an as-if-vacant
basis and to land determined either by real estate tax
assessments, third-party appraisals or other relevant data.
Since June 2005, we determine the as-if-vacant value by using a
replacement cost method. Under this method we obtain valuations
from a qualified third party utilizing relevant third-party
property condition and Phase I environmental reports. We believe
the replacement cost method closely approximates our previous
methodology and is a better determination of the as-if vacant
fair value.
A portion of the purchase price is allocated to above-market and
below-market lease values for acquired properties based on the
present value (using an interest rate which reflects the risks
associated with the leases acquired) of the difference between
(i) the contractual amounts to be paid pursuant to the
in-place leases and (ii) managements estimate of fair
market lease rates for the corresponding in-place leases,
measured over a period equal to the remaining noncancelable term
of the lease. The capitalized above-market and below-market
lease values are amortized as a reduction of or an addition to
rental income over the remaining noncancelable terms of the
respective leases. Should a tenant terminate its lease, the
unamortized portion of the lease intangibles would be charged or
credited to income.
A portion of the purchase price is also allocated to the value
of leases acquired and management utilizes independent sources
or managements determination of the relative fair values
of the respective in-place lease values. Our estimates of value
are made using methods similar to those used by independent
appraisers. Factors considered by management in performing these
analyses include an estimate of carrying costs during the
expected
lease-up
periods, considering current market conditions and costs to
execute similar leases. In estimating carrying costs, management
includes real estate taxes, insurance and other operating
expenses and estimates of lost rental revenue during the
expected
lease-up
periods based on current market demand. We also estimate costs
to execute similar leases including leasing commissions, legal
expenses and other related costs.
Depreciation
The U.S. federal tax basis for the Foothills and Harrisburg
malls, used to determine depreciation for U.S. federal
income tax purposes, is the carryover basis for such malls. The
tax basis for all other properties is our acquisition cost. For
U.S. federal income tax purposes, depreciation with respect
to the real property components of our malls (other than land)
generally will be computed using the straight-line method over a
useful life of 39 years.
Derivative
Instruments
In the normal course of business, we use derivative instruments
to manage, or hedge, interest rate risk. We require that
derivative instruments are effective in reducing the interest
rate risk exposure that they are designated to
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hedge. This effectiveness is essential for qualifying for hedge
accounting. Some derivative instruments are associated with
forecasted cash flows. In those cases, hedge effectiveness
criteria also require that it be probable that the underlying
forecasted cash flows will occur. Instruments that meet these
hedging criteria are formally designated as hedges at the
inception of the derivative contract.
To determine the fair values of derivative instruments, we may
use a variety of methods and assumptions that are based on
market conditions and risks existing at each balance sheet date.
For the majority of financial instruments including most
derivatives, long-term investments and long-term debt, standard
market conventions and techniques such as discounted cash flow
analysis, are used to determine fair value. All methods of
assessing fair value result in a general approximation of value
and such value may never actually be realized.
In the normal course of business, we are exposed to the effect
of interest rate changes and limit these risks by following risk
management policies and procedures including the use of
derivatives. To address exposure to interest rates, derivatives
are used primarily to fix the rate on debt based on
floating-rate indices and manage the cost of borrowing
obligations.
Derivatives that are reported at fair value and presented on the
balance sheet could be characterized as either cash flow hedges
or fair value hedges. Cash flow hedges address the risk
associated with future cash flows of debt transactions. All
hedges held by us are deemed to be fully effective in meeting
the hedging objectives established by our corporate policy
governing interest rate risk management and as such no net gains
or losses are reported in earnings. The changes in fair value of
hedge instruments are reflected in accumulated other
comprehensive income. For derivative instruments not designated
as hedging instruments, the gain or loss, resulting from the
change in the estimated fair value of the derivative
instruments, is recognized in current earnings during the period
of change. Changes in the fair value of our derivative
instruments may increase or decrease our reported net income and
stockholders equity prospectively, depending on future
levels of LIBOR interest rates and other variables, but will
have no effect on cash flows.
Results
of Operations
Comparison
of the Year Ended December 31, 2007 to the Year Ended
December 31, 2006
Revenue
Rental revenues decreased approximately $9.3 million, or
22.6%, to $31.8 million for the year ended
December 31, 2007 compared to $41.1 million for the
year ended December 31, 2006. The decrease resulted from
$10.4 million due to the partial sales of Colonie and
Foothills, offset in part by an increase in revenue of
$1.0 million from Golden Triangle, which we acquired on
April 5, 2006. The decrease is primarily due to certain
expiring tenants with reimbursement provisions renewing their
leases that exclude such reimbursement provisions. We believe
this trend may continue in 2008 until our redevelopment
activities are complete.
Dillards, one of our anchor tenants at Tallahassee,
vacated its leased space (totaling approximately
204,000 square feet) on January 1, 2008. Previously,
Dillard paid annual rent totaling approximately $311,000.
Currently, we are in discussion with one or more replacement
anchors to replace Dillards. In addition, certain tenants
at Tallahassee have provisions in their leases that could result
in rental revenue reductions if Dillards is not replaced
within certain time periods.
Revenues from tenant reimbursements decreased approximately
$6.1 million, or 30.8%, to $13.7 million for the year
ended December 31, 2007 compared to $19.8 million for
the year ended December 31, 2006. The decrease was
primarily due to the partial sales of Colonie and Foothills,
which combined accounted for $5.8 million of prior year
revenues, offset in part by a $200,000 increase in revenue from
Golden Triangle and an aggregate decrease at our other malls.
Revenues from management, leasing and development services
increased approximately $2.4 million to $3.7 million
for the year ended December 31, 2007 compared to
$1.3 million for the year ended December 31, 2006. The
increase is primarily due to the fees charged to the Foothills
and Colonie joint ventures and increased development fees
related to the Harrisburg joint venture.
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Interest and other income increased $3.0 million to
$6.0 million for the year ended December 31, 2007
compared to $3.0 million for the year ended
December 31, 2006. The increase was primarily due to a
$3.9 million reduction in 2007 in the estimated fair value
of our obligation to the OP unitholders related to the
Harrisburg partnership compared to a $1.4 million reduction
in this same liability in the 2006 period. The reduction in 2007
was due primarily to lower estimated construction loan proceeds
and projected delays in the sale of the property. In addition,
we recorded an increase in income representing a return on
preferred capital contributions to the Colonie joint venture
($694,000) and an increase in lease termination fees ($177,000),
offset by a decrease due to the contribution of Colonie and
Foothills to joint ventures ($349,000) and a $126,000 decrease
in interest income.
Expenses
Rental property operating and maintenance expenses decreased
approximately $1.7 million or 8.3%, to $19.3 million
for the year ended December 31, 2007 compared to
$21.0 million for the year ended December 31, 2006.
The decrease is due primarily to the partial sales of Colonie
and Foothills, which combined accounted for $5.5 million of
the expense for the prior year period, offset in part by a
$912,000 increase in expense at Golden Triangle. Expenses of our
other malls that increased over the prior year period include
bad debt expense ($1.1 million), utilities ($274,000) and
various other rental property operating and maintenance expenses
($1.8 million).
Real estate taxes decreased approximately $1.7 million, or
22.6%, to $5.9 million for the year ended December 31,
2007 compared to $7.6 million for the year ended
December 31, 2006. The decrease in real estate taxes was
primarily due to $2.1 million recorded by Colonie and
Foothills in 2006. The decrease was partially offset by
increases in taxes at the other malls.
Interest expense decreased approximately $1.7 million, or
10.2%, to $14.7 million for the year ended
December 31, 2007 compared to $16.4 million for the
year ended December 31, 2006. The decrease was due
primarily to the partial sales of Colonie and Foothills, which
combined accounted for $3.5 million of mortgage interest
expense in the prior year period, and a $431,000 increase in
capitalized interest. These decreases were offset in part by an
increase in interest on the Notes ($838,000), an increase in
interest on the Stratford mortgage ($1.2 million) and an
increase in interest on the secured line of credit ($315,000).
Interest expense will increase in future periods due to
increases in borrowings and a decrease in interest capitalized.
We recorded a loss on the early extinguishment of debt in the
2007 period in the amount of $379,000 in connection with the
refinancing of the Stratford first mortgage. The loss represents
prepayment penalties and the write-off of deferred financing
costs related to the existing mortgage that was repaid. In the
2006 period, we recorded a $357,000 loss on early extinguishment
of debt in connection with the contribution of Foothills to the
joint venture and related payoff of that mortgage.
Depreciation and amortization expense decreased
$2.9 million, or 16.6%, to $14.5 million for the year
ended December 31, 2007 compared to $17.4 million for
the year ended December 31, 2006. The decrease is primarily
due to a $3.5 million decrease related to the partial sales
of Colonie and Foothills and $1.1 million from lower
in-place lease amortization throughout the portfolio as some
acquired leases expired. The decrease was partially offset by an
increase in amortization of deferred leasing costs of $195,000
and an increase in depreciation expense of $1.0 million,
including $279,000 relating to Golden Triangle and an increase
in tenant and building improvements.
General and administrative expense increased approximately
$7.9 million, or 90.8% to $16.5 million for the year
ended December 31, 2007 compared to $8.7 million for
the year ended December 31, 2006. The increase was
primarily due to (i) construction management, consulting,
Sarbanes-Oxley Act related and other professional fees
($3.5 million), (ii) a severance charge of
approximately relating to Jim Bourgs resignation
($1.3 million) and severance payouts to the Phoenix office
staff ($290,000), (iii) fees related to our analysis and
pursuit of strategic alternatives ($850,000),
(iv) personnel costs due to increased use of temporary
personnel and growth in staff in connection to our increased
redevelopment and joint venture activity ($700,000),
(v) severance and related costs in connection with the
resignation of Lloyd Miller ($680,000), and (vi) an
increase in construction management, consulting, costs
associated with special construction audits and lease audits
($600,000). In connection with closing of our Phoenix office, we
expect to incur additional restructuring charges during the
first half of 2008.
61
Other
Gain on the partial sale of a property totaled
$29.4 million for the year ended December 31, 2006.
This gain resulted from the contribution of the Foothills Mall
into a joint venture on June 29, 2006. We currently have a
30.8% interest in the joint venture that owns the mall, however,
since the inception of the joint venture, we have suspended the
recognition of our share of losses because we have a negative
carrying value in our investment in this joint venture. If and
when the Foothills JV reports net income, we will resume
applying the equity method of accounting after our share of that
net income equals the share of net losses not recognized during
the period that the equity method was suspended.
Equity in losses of unconsolidated real estate partnerships
represents our share of the equity in the losses of the joint
venture owning the Harrisburg Mall for the years ended 2006 and
2007 and the Colonie Center Mall for the three month period
ended December 31, 2006 and the year ended 2007. The equity
in loss of unconsolidated real estate partnerships totaled
$1.9 million for the year ended December 31, 2007
compared to $550,000 for the year ended December 31, 2006.
The equity in the loss at the Harrisburg Mall increased from
$503,000 in 2006 to $653,000 in 2007 due primarily to lower
revenue and lower occupancy. The equity in loss from the Colonie
Center Mall increased from $47,000 for the period
October 1, 2006 (inception) to December 31, 2006 to
$1.2 million for the year ended December 31, 2007
primarily due to (i) increased interest expense in
connection with increased borrowings, (ii) higher
annualized operating costs primarily due to seasonality and
(iii) increased depreciation expense.
Minority interest for the years ended December 31, 2007 and
2006 represents the unit holders interest in our operating
partnership, which represents 9.8% and 9.7%, respectively, of
our income or loss.
Comparison
of the Year Ended December 31, 2006 to the Year Ended
December 31, 2005
Revenue
Rental revenues increased approximately $5.4 million, or
15.0%, to $41.1 million for the year ended
December 31, 2006 compared to $35.7 million for the
year ended December 31, 2005. The increase was primarily
due to a $12.0 million increase from the Acquisition
Properties. The increase was partially offset by a
$5.9 million decrease in revenues related to the Foothills
and Colonie Center Malls, which were not included in our
consolidated operating results for the entire 2006 fiscal year,
as indicated above and $797,000 lower rental revenue at the
Stratford Square Mall due to reduced occupancy and lower rental
rates upon renewal.
Revenues from tenant reimbursements increased approximately
$2.2 million, or 12.7%, to $19.9 million for the year
ended December 31, 2006 compared to $17.6 million for
the year ended December 31, 2005. The increase was
primarily due to a $5.6 million increase from the
Acquisition Properties. The increase was partially offset by a
$3.3 million decrease in revenues related to the Foothills
and Colonie Center Malls.
Revenues from management, leasing and development services
increased approximately $840,000 to $1.3 million for the
year ended December 31, 2006 compared to $470,000 for the
year ended December 31, 2005. The increase is due to the
$714,000 of fees charged to the Foothills and Colonie Center
Malls and increased fees related to the Harrisburg Mall.
Interest and other income increased $1.7 million to
$3.0 million for the year ended December 31, 2006
compared to $1.4 million for the year ended
December 31, 2005. The increase is due to a
$1.4 million decrease in the fair value of our liability to
the previous owners of the Harrisburg Mall. The reduction in the
liability in 2006 was caused by our reduction of the anticipated
return we will receive on the project. The decrease in our
anticipated return is due to an increase in the anticipated
redevelopment costs and delays in the timing of certain
redevelopment plans. The remaining increase in interest and
other income is due primarily to a $133,000 increase in lease
termination charges and a $168,000 increase in interest income.
Expenses
Rental property operating and maintenance expenses increased
approximately $2.6 million, or 14.3%, to $21.0 million
for the year ended December 31, 2006 compared to
$18.4 million for the year ended December 31,
62
2005. The increase was due to a $6.5 million increase from
the Acquisition Properties. The increase was partially offset by
a $3.6 million decrease in expenses related to the
Foothills and Colonie Center Malls.
Real estate taxes increased approximately $1.1 million, or
17.3%, to $7.6 million for the year ended December 31,
2006 compared to $6.5 million for the year ended
December 31, 2005. The increase was primarily due to a
$2.1 million increase from the Acquisition Properties. The
increase was partially offset by $1.1 million from the
Foothills and Colonie Center Malls not included in our
consolidated results for the entire 2006 fiscal year.
Interest expense increased approximately $4.5 million, or
38.0%, to $16.4 million for the year ended
December 31, 2006 compared to $11.9 million for the
year ended December 31, 2005. The increase was primarily
due to (i) $3.4 million of interest associated with
the Acquisition Properties, (ii) $2.3 million due to
the issuance of the Notes and (iii) $538,000 for the
secured line of credit. The increase was partially offset by a
$980,000 decrease related to the Foothills and Colonie Center
Malls.
Depreciation and amortization expense increased
$4.0 million, or 30.0%, to $17.4 million for the year
ended December 31, 2006 compared to $13.4 million for
the year ended December 31, 2005. The increase is primarily
due to a $5.4 million increase in depreciation from the
Acquisition Properties. The increase was partially offset by a
$1.4 million decrease related to the Foothills and Colonie
Center Malls.
General and administrative expenses increased approximately
$1.2 million, or 15.3%, to $8.7 million for the year
ended December 31, 2006 compared to $7.5 million for
the year ended December 31, 2005. The increase was
primarily due to (i) increases in personnel costs due to
increased staff in connection with our redevelopment and joint
venture activity, (ii) additional costs associated with
being a publicly-traded REIT and (iii) office relocation
and expansion in Arizona.
Other
Gain on the partial sale of a property totaled
$29.4 million for the year ended December 31, 2006.
This gain resulted from the contribution of the Foothills Mall
into a joint venture on June 29, 2006. We currently have a
30.8% interest in the joint venture.
Equity in losses of unconsolidated real estate partnerships
represents our share of the equity in the losses of the joint
venture owning the Harrisburg Mall for 2005 and 2006 and the
Colonie Center Mall for 2006. The equity in loss of
unconsolidated real estate partnerships totaled $550,000 for the
year ended December 31, 2007 compared to $454,000 for the
year ended December 31, 2005. The loss at the Harrisburg
Mall increased from $454,000 in 2005 to $503,000 in 2006 due
primarily to higher depreciation expense, which was offset in
part by income from the proceeds of government grants. The
equity in loss from the Colonie Center Mall totaled $47,000 for
the year ended December 31, 2006. We did not recognize our
share of our losses from the Foothills JV because we have a
negative carrying value in our investment in this joint venture.
See Critical Accounting Policies
Principles
of Consolidation and Equity Method of Accounting.
The $357,000 early extinguishment of debt for the year ended
December 31, 2006 was incurred in connection with the
recapitalization of the Foothills Mall on June 29, 2006 and
represents fees and the write-off of deferred financing charges.
Minority interest for the years ended December 31, 2006 and
2005 represents the unit holders interest in our operating
partnership, which represents 9.7% and 11.3%, respectively, of
our income or loss.
Cash
Flows
Comparison
of the year ended December 31, 2007 to the year ended
December 31, 2006
Cash and cash equivalents were $28.0 million and
$13.0 million at December 31, 2007 and 2006, respectively.
Net cash used in operating activities was $6.4 million for
the year ended December 31, 2007 as compared to net cash
provided by operating activities of $381,000 in 2006. The
decrease in cash flow from operations is primarily due to an
increase in general and administrative costs totaling
$7.9 million and a decrease in cash operating income
totaling $9.0 million from the contribution of the
Foothills Mall and Colonie Center Mall to unconsolidated joint
63
ventures. These decreases in operating cash flow were partially
offset by, net of a $2.4 million increase in fee income
from management, leasing and development services;
$6.0 million due to an increase in net operating assets and
liabilities during the year primarily due to increased
receivables (primarily rent) and the timing of payment of
accounts payable and other liabilities; and a $2.4 million
decrease in cash paid for interest expense.
Net cash used in investing activities was $49.2 million for
the year ended December 31, 2007 as compared to
$14.4 million for 2006. The increase in cash used in
investing activities was primarily the result of net cash
received in 2006 totaling $80.3 million in connection with
the partial sales of the Foothills and Colonie Center Malls and
a $1.1 million decrease in our investments in joint
ventures. The 2007 decrease was partially offset by
(i) $43.2 million for the 2006 acquisition of the
Golden Triangle Mall and Stratford Square Mall anchor,
(ii) a $2.0 million increase in capital expenditures,
(iii) an acquisition of OP units totaling $1.6 million
in 2006 and (iv) the purchase of $880,000 of our trust
preferred securities in 2006.
Net cash provided by financing activities totaled
$70.6 million for year ended December 31, 2007 as
compared to $12.7 million for 2006. The increase was due to
(i) $49.7 million in net proceeds from the sales of
the Series A Preferred Stock, (ii) $6.3 million
decrease in distributions and dividends paid as we suspended our
dividend during 2007, (iii) $17.5 million proceeds
from our secured line of credit and (iv) $16.6 million
of net proceeds from the refinancing of the Stratford Square
mortgage. During 2006, we received cash of $29.4 million
from the sale of junior subordinated notes.
Comparison
of the year ended December 31, 2006 to the year ended
December 31, 2005
Cash and cash equivalents were $13.0 million and
$14.3 million at December 31, 2006 and 2005,
respectively.
Net cash provided by operating activities was $381,000 for the
year ended December 31, 2006 as compared to net cash
provided by operating activities of $11.6 million in 2005.
The decrease in cash flow is primarily due to (i) a
$7.5 million increase in cash paid for interest expense,
(ii) an increase in general and administrative costs
totaling $1.2 million, (iii) decreased cash operating
income from the Stratford Square Mall totaling approximately
$911,000, and (iv) decreased operating income totaling
$4.6 million from the contribution of the Foothills Mall
and Colonie Center Mall to unconsolidated joint ventures. These
decreases in operating cash flow were partially offset by higher
cash operating income totaling $9.3 million from the
Acquisition Properties and a $840,000 increase in fee income
from management, leasing and development services. The remaining
increase is due to increases in operating assets during the year
and fluctuations in the timing of payment of accounts payable
and other liabilities.
Net cash used in investing activities was $14.4 million for
the year ended December 31, 2006 as compared to
$139.4 million for 2005. The decrease in cash used in
investing activities was primarily the result of net cash
received in 2006 totaling $80.3 million in connection with
the partial sales of the Foothills and Colonie Center Malls. The
2006 decrease was partially offset by
(i) $43.2 million for the acquisition of the Golden
Triangle Mall and Stratford Square Mall anchor, (ii) a
$28.4 million increase in capital expenditures primarily
due to redevelopment work at the Colonie Center and Stratford
Square Malls and (iii) investments in joint ventures
totaling $13.9 million in 2006. The cash used in investing
activities in 2005 included $133.0 million for the
acquisitions of the Colonie Center, Tallahassee and Northgate
Malls.
Net cash provided by financing activities totaled
$12.7 million for year ended December 31, 2006 as
compared to $126.5 million for 2005. In 2006, we received
cash of $29.4 million from the sale of junior subordinated
notes and used cash to pay dividends and distributions
($13.4 million), mortgage payments (net, $1.8 million)
and financing charges ($1.6 million). In 2005, we received
cash proceeds of (i) $125.8 million from our mortgages
on Stratford Square and Colonie Center Malls,
(ii) $17.0 million from the issuance of
1.6 million shares of common stock, net of offering costs
and (iii) $3.6 million from the release of cash in
escrow. These cash inflows were offset in part by dividend and
distribution payments ($10.2 million), payments to
affiliates ($7.9 million) and other payments
($1.8 million).
64
Liquidity
and Capital Resources
As of December 31, 2007, we had approximately
$28.0 million in cash and cash equivalents on hand. At
December 31, 2007, our total consolidated indebtedness
outstanding was approximately $273.0 million, or 58.1% of
our total assets.
Our business strategy is to maintain a flexible financing
position by employing a prudent level of leverage consistent
with the level of debt typical in the mall industry.
In light of current market conditions and to enhance the
redevelopment of our malls, our board of directors has suspended
the payment of our common stock dividend and does not expect to
declare any additional common stock dividends in the foreseeable
future, except as may be required to maintain our REIT status.
Short-Term
Liquidity Requirements
Our principal short-term liquidity needs include general and
administrative expenses, property operating expenses, capital
expenditures and preferred dividends. Our properties require
periodic investments for tenant-related capital expenditures,
tenant improvements and leasing commissions. As of
December 31, 2007, we have commitments to make tenant
improvements and other recurring capital expenditures at our
portfolio in the amount of approximately $3.0 million to be
incurred during 2008.
We expect that our operating cash flow will be negative for the
first three quarters of 2008 but with anticipated lease up
activity at our properties will turn positive in the fourth
quarter of 2008. We nevertheless believe that our current cash
on hand, restricted cash and cash available under existing
financings will be adequate to fund our short-term liquidity
needs for the balance of 2008.
In addition to such periodic recurring capital expenditures,
tenant improvements and leasing commissions, we are also
obligated to make expenditures for completion of redevelopment
and renovation of our properties. As of December 31, 2007,
in connection with leases signed in 2007 and anticipated leases
to be signed during 2008, our commitments for redevelopment and
renovation costs are $9.1 million for the year ending
December 31, 2008. In addition we expect to incur
additional redevelopment and renovation costs (primarily at
Northgate Mall and Stratford Square Mall) of an estimated
$12.2 million in 2008 and $2.2 million in 2009. In
addition, capital requirements at Harrisburg Mall, Colonie
Center and Foothills Mall, are described below:
Harrisburg Mall.
As of December 31, 2007,
the joint venture owning the Harrisburg Mall has commitments for
tenant improvements and other capital expenditures in the amount
of $273,000 to be incurred in 2008. The joint venture intends to
fund these commitments from operating cash flow, cash on hand
and state and local government grants. The joint venture has
begun the last phase of the renovation of the Harrisburg Mall
that will have an anticipated cost of approximately
$36.8 million. The joint venture incurred
$24.4 million through December 31, 2007 and
anticipates expending an additional $12.4 million during
2008 and 2009. We anticipate funding the renovation with cash on
hand, operating cash flows and equity contributions from the
partners. Under the joint venture agreement for the Harrisburg
Mall, we are responsible for 25% of any necessary equity
contributions. However, as noted under
Properties Harrisburg Mall Joint
Venture and Financing, we are currently attempting to
resolve a dispute with our joint venture partner for this mall
relating to the scope of the redevelopment plan for this
project. Our joint venture partner has notified us that it
believes that certain aspects of the last phase of the
development plan were not approved in accordance with the joint
venture agreement and as a result has claimed that we are
responsible for 100% of the funding required for this part of
the project. We are continuing to negotiate with our joint
venture partner relating to this dispute and are seeking to
develop a mutually acceptable solution for this issue. Through
December 31, 2007, we have funded $4.0 million above
our 25% capital contribution requirement for these redevelopment
projects. The propertys first mortgage loan matured in
March 2008. See Mortgage Loans Harrisburg
Mall Joint Venture.
Colonie Center.
As of December 31, 2007,
the joint venture owning the Colonie Center Mall has commitments
for tenant improvements, renovation costs and other capital
expenditures in the amount of $10.5 million in which will
be spent in 2008. The joint venture intends to fund these
commitments from additional borrowing on an existing
construction loan commitment, and cash on hand. If additional
equity contributions are required, we are responsible for 25% of
any necessary requirements. In addition, we are required to
fund 100% of any renovation hard cost
65
overruns, as defined by the joint venture contribution
agreement. Subsequent to the closing of the joint venture, we
contributed additional equity totaling $16.7 million, most
of which was used to fund such cost overruns, and have also
issued a $10.25 million letter of credit against our
unsecured line of credit that will remain outstanding until the
project is complete. We do not expect additional significant
equity contributions will be required in the short or long term.
We have agreed to guarantee that certain property redevelopment
project costs will not exceed $56 million. To the extent
these costs exceed $56 million, our preferred equity
contributions, and any funds drawn from our letter of credit,
will be reclassified as subordinated capital contributions.
These subordinated equity contributions may not be distributed
to us until our joint venture partner receives a 15% return on
and a return of its invested equity capital. The propertys
first mortgage loan matures October 2008, see
Mortgage Loans Colonie Center Mall Joint
Venture.
Foothills Mall.
As of December 31, 2007,
the joint venture owning the Foothills Mall has commitments for
tenant improvements, renovation costs and other capital
expenditures in the amount of $3.0 million in which will be
incurred in 2008. The joint venture intends to fund these
commitments from operating cash flow and cash on hand. If
additional equity contributions are required, we are responsible
for 25% of any necessary requirements. In addition, we may be
required to fund cost overruns of approximately $505,000 related
to the construction of a 15,550 square-foot junior anchor
tenant.
As we assess our financing options for the balance of 2008, we
anticipate that debt financing and refinancings will be more
difficult to obtain and our borrowing costs on new and
refinanced debt will be more expensive compared to prior
periods. In addition, we anticipate that joint venture capital
will also be more expensive and more difficult to obtain
compared to prior periods.
As a result, for the balance of 2008 we expect to focus our
efforts on improving the operating performance of our properties
and selectively accessing additional capital, including through
borrowings or joint venture arrangement, to be used for our in
place development efforts. Our ability to acquire new properties
or to commence major redevelopment efforts on our other existing
properties will require that we first see improving economic
conditions and can access required financing.
Long-Term
Liquidity Requirements
Our long-term liquidity requirements consist primarily of funds
necessary for the renovation and repositioning of our
properties, nonrecurring capital expenditures and payment of
indebtedness at maturity. We do not expect to meet our long-term
liquidity requirements from operating cash flow but instead
expect to meet these needs through our recent 2007 financing
activity noted above, secured line of credit, net cash from
operations, existing cash, selective property dispositions,
additional long-term borrowings, the issuance of additional
equity or debt securities and additional property-level joint
ventures.
In the future, we may seek to increase the amount of our
mortgages, negotiate credit facilities or issue corporate debt
instruments. Any debt incurred or issued by us may be secured or
unsecured, long-term or short-term, fixed or variable interest
rate and may be subject to such other terms as we deem prudent.
While our charter does not limit the amount of debt we can
incur, we intend to preserve a flexible financing position by
maintaining a prudent level of leverage. We will consider a
number of factors in evaluating our actual level of
indebtedness, both fixed and variable rate and in making
financial decisions. We intend to finance our renovation and
repositioning projects with the most advantageous source of
capital available to us at the time of the transaction,
including traditional floating rate construction financing. We
expect that once we have completed our renovation and
repositioning of a specific mall asset we will replace
construction financing with medium to long-term fixed rate
financing. In addition, we may also finance our activities
through any combination of sales of common or preferred shares
or debt securities
and/or
additional secured or unsecured borrowings.
In addition, we may also finance our renovation and
repositioning projects through joint ventures. Through these
joint ventures, we will seek to enhance our returns by
supplementing the cash flow we receive from our properties with
additional management, leasing, development and incentive fees
from the joint ventures.
Stock
Repurchase
On November 12, 2007, we announced that our board of
directors authorized the repurchase of up to
3,000,000 shares of our issued and outstanding common
stock, par value $0.01 per share. The shares are expected to
66
be acquired from time to time at prevailing prices through
open-market transactions or through negotiated block purchases,
which will be subject to restrictions related to volume, price,
timing, market conditions and applicable Securities and Exchange
Commission rules.
The repurchase program does not require us to repurchase any
specific number of shares and may be modified, suspended or
terminated by our board of directors at any time without prior
notice. At this time, and based on the current market
conditions, our continued focus is on maintaining liquidity and
we do not plan on using our current liquidity to repurchase
shares.
As of December 31, 2007, there have been no share
repurchases made under this program.
Contractual
Obligations
The following table summarizes our contractual payment
obligations due to third parties as of December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our Share of
|
|
|
|
|
|
Our Share of
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
Capital Expenditure
|
|
|
|
|
|
Long-Term
|
|
|
Operating
|
|
|
|
|
|
|
Capital
|
|
|
Commitments in
|
|
|
Consolidated
|
|
|
Debt in
|
|
|
and
|
|
|
|
|
|
|
Expenditure
|
|
|
Unconsolidated
|
|
|
Long-Term
|
|
|
Unconsolidated
|
|
|
Ground
|
|
|
|
|
Year
|
|
Commitments
|
|
|
Joint Ventures
|
|
|
Debt(1)
|
|
|
Joint Ventures(1)
|
|
|
Leases
|
|
|
Total
|
|
|
2008
|
|
$
|
12,300
|
|
|
$
|
8,049
|
|
|
$
|
18,459
|
|
|
$
|
41,103
|
|
|
$
|
602
|
|
|
$
|
80,513
|
|
2009
|
|
|
|
|
|
|
154
|
|
|
|
61,734
|
|
|
|
1,517
|
|
|
|
532
|
|
|
|
63,937
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
115,005
|
|
|
|
1,517
|
|
|
|
450
|
|
|
|
116,972
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
8,763
|
|
|
|
1,640
|
|
|
|
351
|
|
|
|
10,754
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
8,240
|
|
|
|
1,826
|
|
|
|
265
|
|
|
|
10,331
|
|
2013 and thereafter
|
|
|
|
|
|
|
|
|
|
|
159,505
|
|
|
|
31,341
|
|
|
|
23,310
|
|
|
|
214,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
12,300
|
|
|
$
|
8,203
|
|
|
$
|
371,706
|
|
|
$
|
78,944
|
|
|
$
|
25,510
|
|
|
$
|
496,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Amounts include interest payments based on contractual terms and
current interest rates for variable rate debt.
|
Mortgage
Loans
Northgate
Mall
On July 12, 2005, we assumed a $79.6 million first
mortgage in connection with the acquisition of the Northgate
Mall. The stated interest on the mortgage is 6.60%. We
determined this rate to be above-market and, in applying
purchase accounting, determined the fair market value interest
rate to be 5.37%. The above premium was initially
$8.2 million and is being amortized over the remaining term
of the acquired loan using the effective interest method. We may
refinance the loan prior to the repayment date of September 2012.
Tallahassee
Mall
On June 28, 2005, we assumed a $45.8 million first
mortgage in connection with the acquisition of the Tallahassee
Mall. The stated interest rate on the mortgage is 8.60%. We
determined this rate to be above-market and, in applying
purchase accounting, determined the fair market value interest
rate to be 5.16%. The above-market premium was initially
$6.5 million and is being amortized over the remaining term
of the acquired loan using the effective interest method.
$104.5
Million Stratford Square Refinancing
On May 8, 2007, we closed on a $104.5 million first
mortgage loan secured by the Stratford Square Mall. The loan has
an initial term of 36 months and bears interest at a
floating rate of 115 basis points over LIBOR. The loan has
two one-year extension options. On the closing date,
$75.0 million of the loan proceeds were used to retire
Stratford Squares outstanding $75.0 million first
mortgage. The balance of the proceeds was placed into escrow and
is being released to us to fund the completion of the
malls redevelopment project, of which $12.9 million
is remaining in escrow at December 31, 2007.
67
Also, see
Long-Term Liquidity Requirements
Mortgage Loans for additional discussions
on potential early refinancing activity.
$30
Million Secured Line of Credit
On April 5, 2006, in connection with the acquisition of the
Golden Triangle Mall, we entered into a $24.6 million
secured line of credit. On April 20, 2007, we increased the
line from $24.6 million to $30 million. The maturity
date of the line is April 2009 and up to $5.4 million of
the line is recourse to us. In addition, the line requires that
the property maintain a quarterly debt coverage constant of at
least 10.50%.
Loan draws and repayments are at our option. Interest is payable
monthly at a rate equal to LIBOR plus a margin ranging from
1.40% to 2.00% or, at our option, the prime rate plus a margin
ranging from zero to 0.25%. The applicable margins depend on our
debt coverage ratio as specified in the loan agreement.
Commitment fees are paid monthly at the rate of 0.125% to 0.25%
of the average unused borrowing capacity.
In October 2006, we entered into a modification agreement that
provides for the issuance of letters of credit in the aggregate
amount of up to $13.0 million for a fee of 0.5% of the face
amount. As of December 31, 2007, letters of credit
outstanding under this agreement amounted to $10.25 million.
The line contains customary covenants that require us to, among
other things, maintain certain financial coverage ratios. As of
December 31, 2007, we were in compliance with the covenant
requirements, except the quarterly debt coverage constant
covenant. We are currently negotiating a waiver of this
covenant; however, if we are unable to obtain a waiver, we would
be required to reduce the current outstanding balance on the
line by approximately $1.0 million. The outstanding balance
on the line at December 31, 2007 was $17.5 million
with interest rates on the tranches ranging from 6.59% to 7.25%.
As of and for the year ended December 31, 2007,
$2.25 million was unused on the secured line of credit.
Colonie
Center Mall Joint Venture
In connection with the recapitalization of the Colonie Center
Mall, the joint venture refinanced the property with a new
construction facility (the Loan) with a maximum
capacity of $109.8 million and repaid the existing
$50.8 million mortgage loan on the property. On
February 13, 2007, the joint venture borrowed
$50.1 million under the Loan and on February 27, 2007,
the Loan was increased by $6.5 million to
$116.3 million. The Loan bears interest at 180 basis
points over LIBOR and matures in October 2008. The Loan may be
extended beyond 2008, subject to certain customary requirements
for up to two additional years. In connection with the Loan, the
joint venture entered into a two-year interest rate protection
agreement fixing the initial $50.8 million of the Loan at
an all-in interest rate of 6.84%. The Loan is an interest-only
loan. The Loan requires that we maintain a minimum debt service
coverage ratio during the initial term of the Loan and, if we
fail to meet the required ratio, cash flow to us is restricted.
As of December 31, 2007, we did not meet the debt service
coverage ratio and certain cash flow is currently unavailable,
however if and when we satisfy the ratio, the cash flow will be
released to us. Based upon the malls current performance,
we do not believe these financial covenants will be satisfied
and therefore we will not satisfy the conditions to extend the
loan. We will attempt to negotiate a modification or waiver of
the covenants and loan extension with the current lender prior
to the maturity date. We continue to manage the property and
receive customary management, construction and leasing fees in
accordance with our joint venture agreement with Heitman.
We have agreed to guarantee that certain property redevelopment
project costs will not exceed $56 million. If required, we
will fund these additional costs as subordinated capital
contributions. We estimate that this project will experience
approximately $15 million of hard cost overruns. We have
secured the balance of these cost overruns with a
$10.25 million letter of credit drawn from our line of
credit which is secured by our ownership of the Golden Triangle
Mall. These subordinated equity contributions may not be
distributed to us until Heitman receives a 15% return on and
return of its invested equity capital.
Foothills
Mall Joint Venture
In June 2006, we completed a contribution agreement with a
subsidiary in connection with the Foothills Mall, located in
Tucson Arizona. In connection with the contribution agreement we
retained a 30.8% interest in the
68
Foothills Mall. In connection with the contribution agreement
closing, we refinanced the Foothills Mall with an
$81.0 million non-recourse first mortgage. The first
mortgage matures in July 2016 and bears interest at 6.08%. The
loan may not be prepaid until the earlier of three years from
the first interest payment or two years from the date of loan
syndication and has no principal payments for the first five
years and the loan principal amortizes on a
30-year
basis thereafter. We intend to refinance the loan on the
maturity date.
Harrisburg
Mall Joint Venture
The Harrisburg Mall was purchased with the proceeds of a
mortgage loan and cash contributions from our predecessor and
its joint venture partner. At December 31, 2007, the loan
on this property had a balance of $49.8 million and is due
in April 2008. The effective rates on the loan at
December 31, 2007 and 2006 were 6.28% and 6.975%,
respectively. We are in negotiations to extend the current loan
through December 31, 2009.
Under certain circumstances our operating partnership may extend
the maturity of the loan for three, one-year periods. We may
prepay the loan at any time, without incurring any prepayment
penalty. The loan presently has a limited recourse of
$5.0 million of which our joint venture partner is liable
for $3.1 million, or 63% and we are liable for
$1.9 million, or 37%.
The balance outstanding under the loan was $49.8 million,
as of December 31, 2007.
Capital
Expenditures
We are required to maintain each retail property in good repair
and condition and in conformity with applicable laws and
regulations and in accordance with the tenants standards
and the agreed upon requirements in our lease agreements. The
cost of all such routine maintenance, repairs and alterations
may be paid out of a capital expenditures reserve, which will be
funded by cash flow. Routine repairs and maintenance will be
administered by our subsidiary management company.
Off-Balance
Sheet Arrangements
Loan
Guarantees
See our loan guarantees described on the Harrisburg Mall loan
above.
Forward
Swap Contracts
In connection with the Stratford Square Mall mortgage financing,
during January 2005, we entered into a $75.0 million swap
commencing February 2005 with a final maturity date in January
2008. The effect of the swap is to fix the all-in interest rate
of the Stratford Square mortgage loan at 5.0% per annum. During
December 2005, we entered into a $75.0 million swap which
commences February 2008 and has a final maturity date in January
2011. The effect of the swap is to fix the all-in interest rate
of our forecasted cash flow on LIBOR-based loans at 4.91% per
annum. In connection with the refinancing of the Stratford
mortgage in May 2007, we entered into an additional
$29.5 million swap that matures in May 2010. The effect of
this swap is to fix the all-in interest rate of
$29.5 million of the mortgage at 6.65% per annum.
Tax
Indemnifications
In connection with the formation transactions, we entered into
agreements with Messrs. Feldman, Bourg and Jensen that
indemnify them with respect to certain tax liabilities intended
to be deferred in the formation transactions, if those
liabilities are triggered either as a result of a taxable
disposition of a property (Harrisburg Mall or Foothills Mall) by
our Company, or if we fail to offer the opportunity for the
contributors to guarantee or otherwise bear the risk of loss,
with respect to certain amounts of our Companys debt for
tax purposes (the contributor-guaranteed debt). With
respect to tax liabilities arising out of property sales, the
indemnity will cover 100% of any such liability (approximately
$5.2 million at December 31, 2007) until
December 31, 2009 and will be reduced by 20% of the
aggregate liability on each of the five following year-ends
thereafter.
69
We have also agreed to maintain approximately $10.0 million
of indebtedness and to offer the contributors the option to
guarantee $10.0 million of our operating partnerships
indebtedness, in order to enable them to continue to defer
certain tax liabilities. The obligation to maintain such
indebtedness extends to 2013, but will be extended by an
additional five years for any contributor that holds (together
with his affiliates) at that time at least 25% of the initial
ownership interest in the operating partnership issued to them
in the formation transactions.
Funds
From Operations
The revised White Paper on Funds From Operations, or FFO, issued
by NAREIT in 2002 defines FFO as net income (loss) (computed in
accordance with GAAP), excluding gains or losses from the sale
of property, plus real estate related depreciation and
amortization and after adjustments for unconsolidated
partnerships and joint ventures. We believe that FFO is helpful
to investors as a measure of the performance of an equity REIT
because, along with cash flow from operating activities,
financing activities and investing activities, it provides
investors with an indication of our ability to incur and service
debt, to make capital expenditures and to fund other cash needs.
We compute FFO in accordance with the current standards
established by NAREIT, which may not be comparable to FFO
reported by other REITs that interpret the current NAREIT
definition differently than us. FFO does not represent cash
generated from operating activities in accordance with GAAP and
should not be considered as an alternative to net income
(determined in accordance with GAAP), as an indication of our
financial performance or to cash flow from operating activities
(determined in accordance with GAAP) as a measure of our
liquidity, nor is it indicative of funds available to fund our
cash needs, including our ability to make cash distributions.
Funds From Operations for the periods are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Net (loss) income
|
|
$
|
(16,247
|
)
|
|
$
|
20,181
|
|
|
$
|
(2,633
|
)
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization (excluding depreciation of
non-real estate furniture and fixtures)
|
|
|
13,994
|
|
|
|
17,114
|
|
|
|
13,136
|
|
FFO contribution from unconsolidated joint ventures
|
|
|
2,663
|
|
|
|
1,377
|
|
|
|
729
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends
|
|
|
(903
|
)
|
|
|
|
|
|
|
|
|
Minority interest
|
|
|
(1,651
|
)
|
|
|
2,469
|
|
|
|
(332
|
)
|
Gain on partial sale of property
|
|
|
|
|
|
|
(29,397
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds From Operations available to common stockholders and OP
Unit holders
|
|
$
|
(2,144
|
)
|
|
$
|
11,744
|
|
|
$
|
10,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Our future income, cash flows and fair values relevant to
financial instruments depend upon interest rates. Market risk
refers to the risk of loss from adverse changes in market prices
and interest rates.
Market
Risk Related to Fixed Rate Debt
We had approximately $273.0 million of outstanding
indebtedness as of December 31, 2007, including the Notes
described below, of which $151.0 million bears interest at
fixed rates ranging from 6.60% to 8.70% and $122.0 million
which bears interest on a floating rate basis of LIBOR plus a
margin. Upon the maturity of our debt, there is a market rate
risk as to the prevailing rates at the time of refinancing.
Changes in market rates on our fixed-rate debt affects the fair
market value of our debt but it has no impact on interest
expense incurred or cash flow. A 100 basis point increase
or decrease in interest rates on our floating/fixed rate debt
would increase or decrease our annual interest expense by
approximately $2.7 million, as the case may be.
We currently have two $75 million swap contracts that run
consecutively through January 2011 and a $29.5 million swap
contract that matures in May 2010. A 100 basis point
increase in interest rates would increase
70
the fair value of these swaps by approximately $2.7 million
and a 100 basis point decrease in interest rates would
decrease the fair value of these swap contracts by approximately
$2.8 million.
We currently have $29.4 million in aggregate principal
amount of fixed/floating rate junior subordinated debt
obligation (the Notes). The Notes require quarterly
interest payments calculated at a fixed interest rate equal to
8.70% per annum through April 2011 and subsequently at a
variable interest rate equal to LIBOR plus 3.45% per annum.
The notes mature in April 2036 and may be redeemed, in whole or
in part, at par, at our option, beginning after April 2011.
Market
Risk Related to Other Obligations
At December 31, 2007 we had an obligation to make payments
to certain owners of the predecessor in connection with the
formation transactions. As part of the formation transactions,
Messrs. Feldman, Bourg and Jensen have the right to receive
additional OP units for ownership interests contributed as part
of the formation transactions upon our achieving a 15% internal
rate of return from the Harrisburg joint venture on or prior to
December 31, 2009. The right to receive such additional OP
units is a financial instrument that we recorded as an
obligation of the offering that is adjusted to fair value each
reporting period until the thresholds have been achieved and the
OP units have been issued. The more significant assumptions used
in determining the fair value of the obligation are
(i) refinancing the property with a $65.0 million
loan, as compared to $80 million at December 31, 2006,
(ii) probability weighted sale of the property in 2008, as
compared to a probability weighted sale in 2009 at
December 31, 2006, and (iii) sales proceeds totaling
approximately $118.2 million, which is based upon an
estimated multiple of 15 times future net operating income
(6.75% cap rate). Based on the expected operating performance of
the Harrisburg Mall, and the significant valuation assumptions
noted above, the fair value is estimated to be zero at
December 31, 2007.
A 25 basis point decrease in this multiple would not change
our valuation.
Inflation
Most of our leases contain provisions designed to mitigate the
adverse impact of inflation by requiring the tenant to pay its
share of operating expenses, including common area maintenance,
real estate taxes and insurance. The leases also include clauses
enabling us to receive percentage rents based on gross sales of
tenants, which generally increase as prices rise. This reduces
our exposure to increases in costs and operating expenses
resulting from inflation.
71
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTAL DATA
|
FELDMAN
MALL PROPERTIES, INC.
INDEX TO
FINANCIAL STATEMENTS
Feldman
Mall Properties, Inc. and Subsidiaries
72
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Feldman Mall Properties, Inc.:
We have audited the accompanying consolidated balance sheets of
Feldman Mall Properties, Inc. and subsidiaries (the
Company) as of December 31, 2007 and 2006, and
the related consolidated statements of operations,
stockholders equity and comprehensive income (loss) and
cash flows for each of the years in the three-year period ended
December 31, 2007. These consolidated financial statements
are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits 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 includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Feldman Mall Properties, Inc. and subsidiaries as of
December 31, 2007 and 2006, and the results of their
operations and cash flows for each of the years in the
three-year period ended December 31, 2007 in conformity
with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of Feldman Mall Properties, Inc. and
subsidiaries internal control over financial reporting as
of December 31, 2007, based on criteria established in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO), and our report dated April 2008
expressed an adverse opinion on the effective operation of
internal control over financial reporting.
/s/ KPMG LLP
New York, New York
April 11, 2008
73
FELDMAN
MALL PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
ASSETS:
|
Investments in real estate, net
|
|
$
|
342,897
|
|
|
$
|
318,440
|
|
Investments in unconsolidated real estate partnerships
|
|
|
43,683
|
|
|
|
32,833
|
|
Cash and cash equivalents
|
|
|
27,976
|
|
|
|
13,036
|
|
Restricted cash
|
|
|
20,395
|
|
|
|
8,159
|
|
Rents, deferred rents and other receivables, net
|
|
|
5,545
|
|
|
|
5,718
|
|
Acquired below-market ground lease, net
|
|
|
7,538
|
|
|
|
7,674
|
|
Acquired lease rights, net
|
|
|
7,281
|
|
|
|
9,262
|
|
Acquired in-place lease values, net
|
|
|
6,437
|
|
|
|
10,049
|
|
Deferred charges, net
|
|
|
3,394
|
|
|
|
3,284
|
|
Other assets, net
|
|
|
4,048
|
|
|
|
5,396
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
469,194
|
|
|
$
|
413,851
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY:
|
Liabilities
|
|
|
|
|
|
|
|
|
Mortgage loans payable
|
|
$
|
232,878
|
|
|
$
|
211,451
|
|
Junior subordinated debt obligations
|
|
|
29,380
|
|
|
|
29,380
|
|
Secured line of credit
|
|
|
17,500
|
|
|
|
|
|
Due to affiliates
|
|
|
|
|
|
|
3,891
|
|
Accounts payable, accrued expenses and other liabilities
|
|
|
27,211
|
|
|
|
25,832
|
|
Dividends and distributions payable
|
|
|
568
|
|
|
|
3,315
|
|
Acquired lease obligations, net
|
|
|
5,136
|
|
|
|
6,823
|
|
Deferred gain on partial sale of real estate
|
|
|
3,515
|
|
|
|
3,515
|
|
Negative carrying value of investment in unconsolidated
partnership
|
|
|
4,450
|
|
|
|
4,450
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
320,638
|
|
|
|
288,657
|
|
Minority interest
|
|
|
9,677
|
|
|
|
11,649
|
|
Commitments and contingencies (note 14)
|
|
|
|
|
|
|
|
|
Stockholders Equity
|
|
|
|
|
|
|
|
|
Series A 6.85% Cumulative Convertible Preferred Stock;
50,000,000 shares authorized; 2,000,000 shares issued
and outstanding at December 31, 2007; $25.00 liquidation
preference
|
|
|
49,580
|
|
|
|
|
|
Common stock, $0.01 par value, 200,000,000 shares
authorized 13,018,831 and 13,155,062 issued and outstanding at
December 31, 2007 and 2006, respectively
|
|
|
130
|
|
|
|
132
|
|
Additional paid-in capital
|
|
|
120,542
|
|
|
|
120,163
|
|
Distributions in excess of earnings
|
|
|
(27,712
|
)
|
|
|
(7,637
|
)
|
Accumulated other comprehensive (loss) income
|
|
|
(3,661
|
)
|
|
|
887
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
138,879
|
|
|
|
113,545
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity
|
|
$
|
469,194
|
|
|
$
|
413,851
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
74
FELDMAN
MALL PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental
|
|
$
|
31,815
|
|
|
$
|
41,104
|
|
|
$
|
35,729
|
|
Tenant reimbursements
|
|
|
13,741
|
|
|
|
19,867
|
|
|
|
17,634
|
|
Management, leasing and development services
|
|
|
3,734
|
|
|
|
1,310
|
|
|
|
470
|
|
Interest and other income
|
|
|
6,048
|
|
|
|
3,024
|
|
|
|
1,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
55,338
|
|
|
|
65,305
|
|
|
|
55,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental property operating and maintenance
|
|
|
19,261
|
|
|
|
21,014
|
|
|
|
18,383
|
|
Real estate taxes
|
|
|
5,918
|
|
|
|
7,645
|
|
|
|
6,520
|
|
Interest (including amortization of deferred financing costs)
|
|
|
14,762
|
|
|
|
16,435
|
|
|
|
11,909
|
|
Loss on early extinguishment of debt
|
|
|
379
|
|
|
|
357
|
|
|
|
|
|
Depreciation and amortization
|
|
|
14,498
|
|
|
|
17,394
|
|
|
|
13,383
|
|
General and administrative
|
|
|
16,518
|
|
|
|
8,657
|
|
|
|
7,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
71,336
|
|
|
|
71,502
|
|
|
|
57,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(15,998
|
)
|
|
|
(6,197
|
)
|
|
|
(2,511
|
)
|
Equity in losses of unconsolidated real estate partnerships
|
|
|
(1,900
|
)
|
|
|
(550
|
)
|
|
|
(454
|
)
|
Gain on partial sale of real estate
|
|
|
|
|
|
|
29,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before minority interest
|
|
|
(17,898
|
)
|
|
|
22,650
|
|
|
|
(2,965
|
)
|
Minority interest
|
|
|
1,651
|
|
|
|
(2,469
|
)
|
|
|
332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(16,247
|
)
|
|
$
|
20,181
|
|
|
$
|
(2,633
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share
|
|
$
|
(1.33
|
)
|
|
$
|
1.58
|
|
|
$
|
(0.21
|
)
|
Diluted (loss) earnings per share
|
|
$
|
(1.33
|
)
|
|
$
|
1.54
|
|
|
$
|
(0.21
|
)
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
12,863
|
|
|
|
12,808
|
|
|
|
12,363
|
|
Diluted
|
|
|
12,863
|
|
|
|
14,666
|
|
|
|
12,363
|
|
See accompanying notes to consolidated financial statements.
75
FELDMAN
MALL PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND
COMPREHENSIVE INCOME (LOSS)
(Amounts in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Number of
|
|
|
Series A
|
|
|
|
|
|
Additional
|
|
|
Distributions
|
|
|
Other
|
|
|
|
|
|
Comprehensive
|
|
|
|
Preferred
|
|
|
Common
|
|
|
Preferred
|
|
|
Common
|
|
|
Paid-In
|
|
|
in Excess
|
|
|
Comprehensive
|
|
|
|
|
|
Income
|
|
|
|
Shares
|
|
|
Shares
|
|
|
Stock
|
|
|
Stock
|
|
|
Capital
|
|
|
of Earnings
|
|
|
Income (Loss)
|
|
|
Total
|
|
|
(Loss)
|
|
|
Balance at December 31, 2004
|
|
|
|
|
|
|
10,789,895
|
|
|
|
|
|
|
$
|
108
|
|
|
$
|
95,672
|
|
|
$
|
(1,249
|
)
|
|
|
|
|
|
$
|
94,531
|
|
|
|
|
|
Proceeds from offering of common stock
|
|
|
|
|
|
|
1,600,000
|
|
|
|
|
|
|
|
16
|
|
|
|
20,784
|
|
|
|
|
|
|
|
|
|
|
|
20,800
|
|
|
|
|
|
Common stock issued to independent directors
|
|
|
|
|
|
|
6,000
|
|
|
|
|
|
|
|
|
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
77
|
|
|
|
|
|
Costs associated with offering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,543
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,543
|
)
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,633
|
)
|
|
|
|
|
|
|
(2,633
|
)
|
|
$
|
(2,633
|
)
|
Unrealized gain on derivative instruments, net of $58 recorded
in interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,099
|
|
|
|
1,099
|
|
|
|
1,099
|
|
Deferred compensation plan and stock awards
|
|
|
|
|
|
|
285,100
|
|
|
|
|
|
|
|
3
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unregistered common stock issuance
|
|
|
|
|
|
|
369,375
|
|
|
|
|
|
|
|
4
|
|
|
|
4,207
|
|
|
|
|
|
|
|
|
|
|
|
4,211
|
|
|
|
|
|
Share-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
449
|
|
|
|
|
|
|
|
|
|
|
|
449
|
|
|
|
|
|
Dividends(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,030
|
)
|
|
|
|
|
|
|
(12,030
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
|
|
|
|
13,050,370
|
|
|
|
|
|
|
|
131
|
|
|
|
119,643
|
|
|
|
(15,912
|
)
|
|
|
1,099
|
|
|
|
104,961
|
|
|
$
|
(1,534
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,181
|
|
|
|
|
|
|
|
20,181
|
|
|
|
20,181
|
|
Common stock issued to outside directors
|
|
|
|
|
|
|
3,000
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
|
|
|
|
Repurchase of OP Units in excess of book value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(216
|
)
|
|
|
|
|
|
|
|
|
|
|
(216
|
)
|
|
|
|
|
Unrealized loss on derivative instruments, net of $11 recorded
in interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(212
|
)
|
|
|
(212
|
)
|
|
|
(212
|
)
|
Deferred compensation plan and stock awards
|
|
|
|
|
|
|
101,692
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
Share-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
701
|
|
|
|
|
|
|
|
|
|
|
|
701
|
|
|
|
|
|
Dividends on forfeited nonvested stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
|
|
|
|
|
|
|
|
32
|
|
|
|
|
|
Dividends(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,938
|
)
|
|
|
|
|
|
|
(11,938
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
|
|
|
|
13,155,062
|
|
|
|
|
|
|
|
132
|
|
|
|
120,163
|
|
|
|
(7,637
|
)
|
|
|
887
|
|
|
|
113,545
|
|
|
$
|
19,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,247
|
)
|
|
|
|
|
|
|
(16,247
|
)
|
|
|
(16,247
|
)
|
Proceeds from offering of preferred shares issued
|
|
|
2,000,000
|
|
|
|
|
|
|
$
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
Costs associated with offering
|
|
|
|
|
|
|
|
|
|
|
(420
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(420
|
)
|
|
|
|
|
Unrealized loss on derivative instruments, net of $83 recorded
in interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,548
|
)
|
|
|
(4,548
|
)
|
|
|
(4,548
|
)
|
Deferred compensation plan and stock awards
|
|
|
|
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited stock awards
|
|
|
|
|
|
|
(125,731
|
)
|
|
|
|
|
|
|
(2
|
)
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of shares from employee
|
|
|
|
|
|
|
(15,500
|
)
|
|
|
|
|
|
|
|
|
|
|
(194
|
)
|
|
|
|
|
|
|
|
|
|
|
(194
|
)
|
|
|
|
|
Share-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
571
|
|
|
|
|
|
|
|
|
|
|
|
571
|
|
|
|
|
|
Dividends on forfeited nonvested stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
160
|
|
|
|
|
|
|
|
160
|
|
|
|
|
|
Dividends(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,988
|
)
|
|
|
|
|
|
|
(3,988
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
2,000,000
|
|
|
|
13,018,831
|
|
|
$
|
49,580
|
|
|
$
|
130
|
|
|
$
|
120,542
|
|
|
$
|
(27,712
|
)
|
|
$
|
(3,661
|
)
|
|
$
|
138,879
|
|
|
$
|
(20,795
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Represents $0.9496 per common share of which $0.4241 per common
share represented a return of capital for federal income tax
purposes.
|
|
(2)
|
|
Represents $0.9100 per common share, all of which represented a
return of capital for federal income tax purposes.
|
|
(3)
|
|
Represents $0.4550 per common share, all of which represented a
return of capital for federal income tax purposes.
|
See accompanying notes to consolidated financial statements.
76
FELDMAN
MALL PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Cash Flows From Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(16,247
|
)
|
|
$
|
20,181
|
|
|
$
|
(2,633
|
)
|
Adjustments to reconcile net (loss) income to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on partial sale of real estate
|
|
|
|
|
|
|
(29,397
|
)
|
|
|
|
|
Loss on early extinguishment of debt
|
|
|
379
|
|
|
|
357
|
|
|
|
|
|
Depreciation and amortization
|
|
|
14,498
|
|
|
|
17,394
|
|
|
|
13,383
|
|
Amortization of deferred financing costs
|
|
|
1,113
|
|
|
|
858
|
|
|
|
628
|
|
Provision for doubtful accounts receivable
|
|
|
2,016
|
|
|
|
843
|
|
|
|
584
|
|
Amortization of ground rent
|
|
|
352
|
|
|
|
358
|
|
|
|
68
|
|
Noncash stock compensation
|
|
|
571
|
|
|
|
701
|
|
|
|
526
|
|
Minority interest
|
|
|
(1,651
|
)
|
|
|
2,469
|
|
|
|
(332
|
)
|
Interest expense (accretion) amortization, net
|
|
|
(3,192
|
)
|
|
|
(3,243
|
)
|
|
|
(1,377
|
)
|
Equity in losses (earnings) of unconsolidated real estate
partnerships
|
|
|
1,900
|
|
|
|
550
|
|
|
|
454
|
|
Deferred tax expense (benefit)
|
|
|
109
|
|
|
|
(190
|
)
|
|
|
|
|
Other noncash expense (income)
|
|
|
(3,579
|
)
|
|
|
(1,375
|
)
|
|
|
|
|
Net change in revenue related to acquired lease
rights/obligations
|
|
|
294
|
|
|
|
(240
|
)
|
|
|
(734
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Rents, deferred rents and other receivables
|
|
|
(1,843
|
)
|
|
|
(2,883
|
)
|
|
|
(4,508
|
)
|
Restricted cash related to operating activities
|
|
|
173
|
|
|
|
(335
|
)
|
|
|
(1,607
|
)
|
Other deferred charges
|
|
|
(599
|
)
|
|
|
(1,394
|
)
|
|
|
(3,416
|
)
|
Other assets, net
|
|
|
(186
|
)
|
|
|
(3,130
|
)
|
|
|
371
|
|
Accounts payable, accrued expenses and other liabilities
|
|
|
(501
|
)
|
|
|
(1,143
|
)
|
|
|
10,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
(6,393
|
)
|
|
|
381
|
|
|
|
11,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from partial sales of real estate, net
|
|
|
|
|
|
|
80,319
|
|
|
|
|
|
Distribution from (investment in) unconsolidated real estate
partnerships
|
|
|
(12,750
|
)
|
|
|
(13,894
|
)
|
|
|
1,625
|
|
Expenditures for real estate improvements
|
|
|
(36,994
|
)
|
|
|
(34,934
|
)
|
|
|
(6,584
|
)
|
Real estate acquisitions, net of assumed liabilities
|
|
|
|
|
|
|
(43,235
|
)
|
|
|
(132,971
|
)
|
Acquisition of minority interest
|
|
|
|
|
|
|
(1,570
|
)
|
|
|
|
|
Other
|
|
|
|
|
|
|
(880
|
)
|
|
|
|
|
Change in restricted cash relating to investing activities
|
|
|
507
|
|
|
|
(178
|
)
|
|
|
(1,471
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(49,237
|
)
|
|
|
(14,372
|
)
|
|
|
(139,401
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from junior subordinated debt obligations
|
|
|
|
|
|
|
29,380
|
|
|
|
|
|
Proceeds from lines of credit
|
|
|
17,500
|
|
|
|
28,600
|
|
|
|
|
|
Repayment of lines of credit
|
|
|
|
|
|
|
(28,600
|
)
|
|
|
|
|
Proceeds from equity offering (net of underwriters fees)
|
|
|
|
|
|
|
|
|
|
|
20,800
|
|
Payment of offering costs
|
|
|
|
|
|
|
|
|
|
|
(3,754
|
)
|
Proceeds from mortgages
|
|
|
104,500
|
|
|
|
10,000
|
|
|
|
125,766
|
|
Repayment of mortgages
|
|
|
(79,846
|
)
|
|
|
(11,781
|
)
|
|
|
(624
|
)
|
Increase in due to affiliates
|
|
|
|
|
|
|
|
|
|
|
102
|
|
Payments to affiliates
|
|
|
|
|
|
|
|
|
|
|
(7,996
|
)
|
Change in restricted cash relating to financing activities
|
|
|
(12,917
|
)
|
|
|
31
|
|
|
|
3,626
|
|
Payment of deferred financing costs
|
|
|
(1,162
|
)
|
|
|
(1,571
|
)
|
|
|
(1,129
|
)
|
Common stock repurchased from former employee
|
|
|
(194
|
)
|
|
|
|
|
|
|
|
|
Proceeds from sale of 6.85% Series A cumulative convertible
preferred stock, net of issue cost
|
|
|
49,745
|
|
|
|
|
|
|
|
|
|
Unrealized loss on derivative
|
|
|
|
|
|
|
|
|
|
|
(59
|
)
|
Distributions and dividends
|
|
|
(7,056
|
)
|
|
|
(13,363
|
)
|
|
|
(10,212
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
70,570
|
|
|
|
12,696
|
|
|
|
126,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
14,940
|
|
|
|
(1,295
|
)
|
|
|
(1,276
|
)
|
Cash and cash equivalents, beginning of year
|
|
|
13,036
|
|
|
|
14,331
|
|
|
|
15,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
27,976
|
|
|
$
|
13,036
|
|
|
$
|
14,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77
FELDMAN
MALL PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for interest, net of amounts
capitalized
|
|
$
|
17,320
|
|
|
$
|
19,755
|
|
|
$
|
12,253
|
|
Supplemental disclosures of noncash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued renovation costs
|
|
$
|
4,158
|
|
|
$
|
7,576
|
|
|
$
|
|
|
Accrued additional purchase consideration
|
|
|
|
|
|
|
2,051
|
|
|
|
|
|
Record minority interest for limited partnership units in the
operating partnership by reclassifying from additional paid in
capital
|
|
|
|
|
|
|
216
|
|
|
|
|
|
Assets acquired in connection with real estate acquisition
|
|
|
|
|
|
|
19
|
|
|
|
4,338
|
|
Liabilities assumed in connection with real estate acquisition
|
|
|
|
|
|
|
3,699
|
|
|
|
128,976
|
|
Unrealized (loss) gain on derivative instruments
|
|
|
(4,548
|
)
|
|
|
(212
|
)
|
|
|
1,157
|
|
Dividends and distributions payable
|
|
|
568
|
|
|
|
3,315
|
|
|
|
3,331
|
|
Accrued preferred stock issuance cost
|
|
|
165
|
|
|
|
|
|
|
|
|
|
Issuance of common stock relating to lease buyout
|
|
|
|
|
|
|
|
|
|
|
4,211
|
|
Contribution of property to joint ventures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in real estate, net
|
|
$
|
|
|
|
$
|
134,240
|
|
|
$
|
|
|
Other assets
|
|
|
|
|
|
|
13,722
|
|
|
|
|
|
Mortgage loans
|
|
|
|
|
|
|
(105,516
|
)
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
(4,370
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets
|
|
$
|
|
|
|
$
|
38,076
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
78
FELDMAN
MALL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007
(Dollar Amounts in Thousands, Except Share and Per Share
Data)
|
|
1.
|
Organization
and Description of Business
|
Feldman Equities of Arizona, LLC (our predecessor)
was organized under the laws of the State of Arizona and
commenced operations on April 1, 2002. Feldman Mall
Properties, Inc. (FMP, the Company,
we, our, or us) its
affiliates and subsidiaries are principally engaged in the
acquisition and management of retail malls. Tenants include
national and regional retail chains as well as local retailers.
We are a real estate investment trust, or REIT, incorporated in
Maryland on July 14, 2004. We closed our initial offering
of common stock on December 16, 2004 (our
offering). Our wholly owned subsidiaries, Feldman
Holdings Business Trust I and Feldman Holdings Business
Trust II, are the sole general partner and a limited
partner, respectively, in and collectively own 90.2% of, Feldman
Equities Operating Partnership, LP (the operating
partnership). We have, through such subsidiaries, control
over major decisions of the operating partnership, including
decisions related to sale or refinancing of the properties. FMP,
the operating partnership and Feldman Equities Management, Inc.
(the service company) were formed to continue to
operate and expand the business of the predecessor. We
consolidate the assets and liabilities of the operating
partnership. Until the completion of the offering, FMP, the
operating partnership and the service company had no operations.
In a series of transactions culminating with the closing of our
offering, we, our operating partnership and the service company,
together with the partners and members of the affiliated
partnerships and limited liability companies affiliated with the
predecessor and other parties that hold direct or indirect
ownership interests in the properties (collectively, the
participants), engaged in certain formation
transactions (the formation transactions). The
formation transactions were designed to (i) continue the
operations of our predecessor, (ii) enable us to raise the
necessary capital to acquire interests in certain of the
properties, repay mortgage debt relating thereto and pay other
indebtedness, (iii) fund costs, capital expenditures and
working capital, (iv) provide a vehicle for future
acquisitions, (v) enable us to qualify as a REIT and
(vi) preserve tax advantages for certain participants.
Pursuant to contribution agreements among the owners of the
predecessor and the operating partnership, which were executed
on August 13, 2004, our operating partnership received a
contribution of interests in the predecessor, which included the
property management, leasing and real estate development
operations in exchange for limited partnership interests in our
operating partnership.
As part of our formation transactions, the owners of our
predecessor contributed their ownership interests in our
predecessor to the operating partnership. Pursuant to
contribution agreements among the owners of the predecessor and
our operating partnership, our operating partnership received a
contribution of 100% of the interests in our predecessor in
exchange for units of limited partnership interests in our
operating partnership (units). The exchange of
contributed interests was accounted for as a reorganization of
entities under common control; accordingly the contributed
assets and assumed liabilities were recorded at our
predecessors historical cost basis. As of
December 31, 2007, these contributors owned 9.8% of our
operating partnership as limited partners.
As of December 31, 2007, we owned four real estate
properties and had minority interests in partnerships owning the
Harrisburg Mall in Harrisburg, Pennsylvania, the Foothills Mall
in Tucson, Arizona and the Colonie Center Mall in Albany, New
York.
We expect that our operating cash flow will be negative for the
first three quarters of 2008 but with anticipated lease up
activity at our properties will turn positive in the fourth
quarter of 2008. We nevertheless believe that our current cash
on hand, restricted cash and cash available under existing
financings will be adequate to fund our short-term liquidity
needs for the balance of 2008.
As we assess our financing options for the balance of 2008, we
anticipate that debt financing and refinancings will be more
difficult to obtain and our borrowing costs on new and
refinanced debt will be more expensive
79
FELDMAN
MALL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
DECEMBER 31, 2007
(Dollar Amounts in Thousands, Except Share and Per Share
Data)
compared to prior periods. In addition, we anticipate that joint
venture capital will also be more expensive and more difficult
to obtain compared to prior periods.
As a result, for the balance of 2008 we expect to focus our
efforts on improving the operating performance of our properties
and selectively accessing additional capital, including through
borrowings or joint venture arrangement, to be used for our in
place development efforts. Our ability to acquire new properties
or to commence major redevelopment efforts on our other existing
properties will require that we first see improving economic
conditions can access required financing.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Basis
of Accounting
The accompanying consolidated financial statements have been
prepared on the accrual method of accounting in accordance with
U.S. generally accepted accounting principles.
Principles
of Consolidation and Equity Method of Accounting
The accompanying consolidated financial statements of our
Company include the accounts of our wholly owned subsidiaries
and all entities in which we have a controlling interest. All
intercompany balances and transactions have been eliminated in
consolidation.
We evaluate our investments in partially owned entities in
accordance with the Financial Accounting Standards Board
(FASB) Interpretation No. 46 (revised December
2003),
Consolidation of Variable Interest Entities
, or
FIN 46R. If the partially owned entity is a variable
interest entity, or a VIE, and we are the
primary beneficiary as defined in FIN 46R, we
account for such investments as a consolidated subsidiary. We
have determined that Feldman Lubert Adler Harrisburg, L.P., FMP
Kimco Foothills Member LLC and FMP191 Colonie Center LLC are not
VIEs.
We evaluate the consolidation of entities in which we are a
general partner in accordance with EITF Issue
04-05,
which
provides guidance in determining whether a general partner
should consolidate a limited partnership or a limited liability
company with characteristics of a partnership.
EITF 04-05 states
that the general partner in a limited partnership is presumed to
control that limited partnership. The presumption may be
overcome if the limited partners have either (1) the
substantive ability to dissolve the limited partnership or
otherwise remove the general partner without cause or
(2) substantive participating rights, which provide the
limited partners with the ability to effectively participate in
significant decisions that would be expected to be made in the
ordinary course of the limited partnerships business and
thereby preclude the general partner from exercising unilateral
control over the partnership. Based on this criterion, we do not
consolidate our investments in Feldman Lubert Adler Harrisburg,
L.P., FMP Kimco Foothills Member LLC and FMP191 Colonie Center
LLC. We account for these investments under the equity method of
accounting. These investments are recorded initially at cost and
thereafter the carrying amount is increased by our share of
comprehensive income and any additional capital contributions
and decreased by our share of comprehensive loss and any capital
distributions.
The equity in net income or loss and other comprehensive income
or loss from real estate joint ventures recognized by us and the
carrying value of our investments in real estate joint ventures
are generally based on our share of cash that would be
distributed to us under the hypothetical liquidation of the
joint venture, at the then book value, pursuant to the
provisions of the respective operating/partnership agreements.
In the case of FMP Kimco Foothills Member LLC, the joint venture
that owns the Foothills Mall (the Foothills JV), we
have suspended the recognition of our share of losses because we
have a negative carrying value in our investment in this joint
venture. In accordance with AICPA Statement of Position
No. 78-9,
Accounting for Investments in Real Estate Ventures
(SOP 78-9)
as amended by
EITF 04-05,
if and when the Foothills JV reports net income, we will resume
applying
80
FELDMAN
MALL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
DECEMBER 31, 2007
(Dollar Amounts in Thousands, Except Share and Per Share
Data)
the equity method of accounting after our share of that net
income equals the share of net losses not recognized during the
period that the equity method was suspended.
For a joint venture investment that is not a VIE or in which we
are not the general partner, we consider the accounting set
forth in
SOP 78-9.
In accordance with this pronouncement, investments in joint
ventures are accounted for under the equity method when the
ownership interest is less than 50% and we do not exercise
direct or indirect control.
Factors we consider in determining whether or not we exercise
control include rights of partners in significant business
decisions, including dispositions and acquisitions of assets,
financing and operating and capital budgets, board and
management representation and authority and other contractual
rights of our partners. To the extent that we are deemed to
control these entities, these entities are consolidated.
On a periodic basis, we assess whether there are any indicators
that the value of our investments in unconsolidated joint
ventures may be impaired. An investments value is impaired
only if our estimate of the fair value of the investment is less
than the carrying value of the investment. To the extent
impairment has occurred, the loss shall be measured as the
excess of the carrying amount of our investment over the
estimated fair value of our investment. We have not recognized
any impairment of our investments.
Gains
on Disposition of Real Estate
Gains on the disposition of real estate assets are recorded when
the recognition criteria have been met, generally at the time
title is transferred and we no longer have substantial
continuing involvement with the real estate asset sold. Gains on
the disposition of real estate assets are deferred if we
continue to have substantial continuing involvement with the
real estate asset sold.
When we contribute a property to a joint venture in which we
have retained an ownership interest, we do not recognize a
portion of the proceeds in the computation of the gain resulting
from the contribution. The amount of gain not recognized is
based on our continuing ownership interest in the contributed
property that arises due to our ownership interest in the joint
venture acquiring the property.
Managements
Estimates
The preparation of the consolidated financial statements in
conformity with U.S. generally accepted accounting
principles requires management to make estimates and
assumptions. Our estimates and assumptions affect the reported
amounts of certain assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
consolidated financial statements. They also affect reported
amounts of revenue and expenses during the reporting period.
Actual results could differ from these amounts.
We have identified certain significant judgments and estimates
used in the preparation of the consolidated financial
statements, including those related to revenue recognition, the
allowance for doubtful accounts receivable, investments in real
estate and asset impairment, and fair value measurements. The
estimates are based on information that is currently available
to us and on various other assumptions that we believe are
reasonable under the circumstances.
We make estimates related to the collectibility of accounts
receivable related to minimum rent, deferred rent, expense
reimbursements, lease termination fees and other income. We
specifically analyze accounts receivable and historical bad
debts, tenant concentrations, tenant creditworthiness and
current economic trends when evaluating the adequacy of the
allowance for doubtful accounts receivable. These estimates have
a direct impact on net income (loss) because a higher bad debt
allowance would result in lower net income.
81
FELDMAN
MALL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
DECEMBER 31, 2007
(Dollar Amounts in Thousands, Except Share and Per Share
Data)
We are required to make subjective assessments as to the useful
lives of the properties for purposes of determining the amount
of depreciation to record on an annual basis with respect to
investments in real estate. These assessments have a direct
impact on net income (loss) because if we were to shorten the
expected useful lives of its investments in real estate, we
would depreciate such investments over fewer years, resulting in
more depreciation expense and lower net income on an annual
basis.
We are required to make subjective assessments as to whether
there are impairments in the values of our investments in real
estate, including real estate held by any unconsolidated real
estate entities accounted for using the equity method. These
assessments have a direct impact on our net income (loss)
because recording an impairment loss results in an immediate
negative adjustment to income.
We are required to make subjective assessments as to the fair
value of assets and liabilities in connection with purchase
accounting related to real estate acquired. These assessments
have a direct impact on our net income (loss) subsequent to the
acquisitions as a result of depreciation and amortization being
recorded on these assets and liabilities over the expected lives
of the related assets and liabilities.
Cash
and Cash Equivalents
For purposes of the consolidated statements of cash flows, we
consider short-term investments with maturities of 90 days
or less when purchased to be cash equivalents.
Restricted
Cash
Restricted cash includes escrowed funds and other restricted
deposits in conjunction with our loan agreements and cash
restricted for property level marketing funds.
Revenue
Recognition and Tenant Receivables
Base rental revenue from rental retail property is recognized on
a straight-line basis over the noncancelable terms, including
bargain renewal options, if any, of the related leases, which
are all accounted for as operating leases. As of
December 31, 2007 and 2006, approximately $1,465 and $891,
respectively, has been recognized as straight-line rents
receivable (representing the current net cumulative rents
recognized prior to the date when billed and collectible as
provided by the terms of the lease). These amounts are included
in deferred rents receivable in the accompanying consolidated
financial statements. Percentage rent, or rental
revenue that is based upon a percentage of the sales recorded by
our tenants, is recognized in the period such sales are earned
by the respective tenants. Contingent rents for the years ended
December 31, 2007, 2006 and 2005 were $2,272, $2,975 and
$1,952.
As part of the leasing process, we may provide the lessee with
an allowance for the construction of leasehold improvements.
Leasehold improvements are capitalized as part of the building
and recorded as tenant improvements and depreciated over the
shorter of the useful life of the improvements or the lease
term. If the allowance represents a payment for a purpose other
than funding leasehold improvements, or in the event we are not
considered the owner of the improvements, the allowance is
considered to be a lease incentive and is recognized over the
lease term as a reduction of rental revenue. Factors considered
during this evaluation include, among others, who holds legal
title to the improvements and other controlling rights provided
by the lease agreement (e.g. unilateral control of the tenant
space during the build-out process). Determination of the
appropriate accounting for a tenant allowance is made on a
case-by-case
basis, considering the facts and circumstances of the individual
tenant lease. Lease revenue recognition commences when the
lessee is given possession of the leased space upon completion
of tenant improvements when we are the owner of the leasehold
improvements; however, when the leasehold improvements are owned
by the tenant, the lease inception date is when the tenant
obtains possession of the leased space for purposes of
constructing its leasehold improvements.
82
FELDMAN
MALL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
DECEMBER 31, 2007
(Dollar Amounts in Thousands, Except Share and Per Share
Data)
Reimbursements from tenants related to real estate taxes,
insurance and other shopping center operating expenses are
recognized as revenue, based on a predetermined formula, in the
period the applicable costs are incurred. Lease termination
fees, net of deferred rent and related intangibles, which are
included in interest and other income in the accompanying
consolidated statements of operations, are recognized when the
related leases are cancelled, the tenant surrenders the space
and we have no continuing obligation to provide services to such
former tenants. We recorded $534, $390 and $257 of lease
termination fees during the years ended December 31, 2007,
2006 and 2005.
Our other sources of revenue come from providing management
services to joint ventures, including property management,
brokerage, leasing and development. Management fees generally
are a percentage of cash receipts from managed properties and
are recorded when earned as services are provided. Leasing and
brokerage fees are earned and recognized in installments as
follows: one-third upon lease execution, one-third upon delivery
of the premises and one-third upon the commencement of rent.
Development fees are earned and recognized over the time period
of the development activity. We defer recognition of our fees to
the extent of our ownership interest on the joint ventures.
These activities are referred to as management, leasing
and development services in the consolidated statements of
operations.
We provide an allowance for doubtful accounts receivable against
the portion of tenant receivables that is estimated to be
uncollectible. Management reviews its allowance for doubtful
accounts receivable monthly. Past due balances over 90 days
and over a specified amount are reviewed individually for
collectibility. Account balances are charged off against the
allowance after all means of collection have been exhausted and
the potential for recovery is considered remote. Tenant
receivables in the accompanying consolidated balance sheets are
shown net of an allowance for doubtful accounts of $2,905 and
$1,088 at December 31, 2007 and 2006, respectively.
Activity in the allowance for doubtful accounts follows:
|
|
|
|
|
Balance at December 31, 2004
|
|
$
|
414
|
|
Provision
|
|
|
584
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
998
|
|
Provision
|
|
|
843
|
|
Write-offs
|
|
|
(188
|
)
|
Recoveries
|
|
|
187
|
|
Contributions of properties to joint ventures
|
|
|
(752
|
)
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
1,088
|
|
Provision
|
|
|
2,016
|
|
Write-offs
|
|
|
(340
|
)
|
Recoveries
|
|
|
141
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
2,905
|
|
|
|
|
|
|
Deferred
Charges
Deferred leasing commissions and other direct costs associated
with the acquisition of tenants are capitalized and amortized on
a straight-line basis over the terms of the related leases. Loan
costs are capitalized and amortized to interest expense over the
terms of the related loans using a method that approximates the
effective-interest method. Certain of our employees provide
leasing services to the properties. Its our policy to
capitalize employee compensation directly allocable to these
leasing services. A portion of their compensation, approximating
$472, $929 and $471 for the years ended December 31, 2007,
2006, 2005, respectively, was capitalized and is being
83
FELDMAN
MALL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
DECEMBER 31, 2007
(Dollar Amounts in Thousands, Except Share and Per Share
Data)
amortized over the corresponding lease terms. The related
amortization expense for the years ended December 31, 2007,
2006 and 2005 was $223, $69 and $14, respectively.
Our early extinguishments of debt (described in
note 6) resulted from fees and write-offs of
unamortized deferred financing costs totaling $379 for the year
ended December 31, 2007 and $357 for the year ended
December 31, 2006.
Issuance
Costs
Costs that represent expenditures related to the issuance of
preferred or common stock, including underwriting commissions
and public offering costs, were charged to equity upon
completion of the issuance and are recorded as a reduction to
preferred stock and additional paid-in capital, respectively.
Investments
in Real Estate and Depreciation
Investments in real estate are stated at historical cost, less
accumulated depreciation. The building and improvements thereon
are depreciated on the straight-line basis over their estimated
useful lives ranging from three to thirty-nine years. Tenant
improvements are depreciated on the straight-line basis over the
shorter of the lease term or their estimated useful life.
Equipment is being depreciated on a straight-line basis over the
estimated useful lives of three to seven years.
For redevelopment of existing operating properties, the net
carrying value of the existing property under redevelopment plus
the cost for the construction and improvements incurred in
connection with the redevelopment are capitalized to the extent
the capitalized costs do not exceed the estimated fair value of
the redeveloped property when complete. Real estate taxes and
insurance costs incurred during construction periods are
capitalized and amortized on the same basis as the related
assets. Interest costs are capitalized during periods of active
construction for qualified expenditures based upon interest
rates in place during the construction period until construction
is substantially complete. Capitalized interest costs are
amortized over lives consistent with constructed assets. We
capitalized the following costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Interest
|
|
$
|
754
|
|
|
$
|
727
|
|
|
$
|
34
|
|
Real estate taxes
|
|
|
167
|
|
|
|
445
|
|
|
|
37
|
|
Insurance
|
|
|
15
|
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
936
|
|
|
$
|
1,218
|
|
|
$
|
71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certain of our employees provide construction services to the
properties. Its our policy to capitalize employee
compensation directly allocable to these construction services.
A portion of their compensation, approximately $106, $378 and
$56 for the years ended December 31, 2007, 2006 and 2005,
respectively, has been capitalized to these construction
projects and will be amortized over the estimated useful lives
of these redevelopment projects.
Predevelopment costs, which generally include legal and
professional fees and other third-party costs related directly
to the redevelopment of a property, are capitalized as part of
the property being developed. In the event a development is no
longer deemed to be probable, the costs previously capitalized
are written off as a component of operating expenses.
Improvements and replacements are capitalized when they extend
the useful life or improve the efficiency of the asset. Repairs
and maintenance are charged to expense as incurred.
Accumulated depreciation was $24,868 and $14,964 at
December 31, 2007 and 2006, respectively.
84
FELDMAN
MALL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
DECEMBER 31, 2007
(Dollar Amounts in Thousands, Except Share and Per Share
Data)
Due to
Affiliates
At December 31, 2007, we had an obligation to make payments
to certain owners of the predecessor in connection with the
formation transactions. As part of the formation transactions,
Messrs. Feldman, Bourg and Jensen have the right to receive
additional OP units for ownership interests contributed as part
of the formation transactions upon our achieving a 15% internal
rate of return from the Harrisburg joint venture on or prior to
December 31, 2009. The right to receive such additional OP
units is a financial instrument that we recorded as an
obligation of the offering that is adjusted to fair value each
reporting period until the thresholds have been achieved and the
OP units have been issued. The more significant assumptions used
in determining the fair value of the obligation are
(i) refinancing the property mortgage,
(ii) probability weighted sale of the property and
(iii) sales proceeds, which are based upon an estimated
multiple of future net operating income.
Conditional
Asset Retirement Obligations
We own certain properties that contain environmental conditions
that could require us to perform future remediation. Although we
may have a legal obligation to remediate environmental
conditions contained in any of our investment properties, either
in the course of future remodeling, demolition or tenant
construction, or as a transferred liability to a buyer, we do
not believe that the current estimation of that liability and
the related asset and cumulative
catch-up
of
any accretion or depreciation, is material to our consolidated
financial statements. There is currently no obligation to
perform any amount of such work that is material to the
consolidated financial statements in conjunction with any
current renovation or construction project. Accordingly, these
amounts are not material to our consolidated financial
statements.
Impairment
of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards
(SFAS) No. 144,
Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of
, investment properties are reviewed for
impairment on a
property-by-property
basis or whenever events or changes in circumstances indicate
that the carrying value of investment properties may not be
recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount to the future
net cash flows, undiscounted and without interest, expected to
be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the
fair value of the assets. We believe no impairment in the net
carrying values of the investments in real estate and investment
in unconsolidated real estate partnerships has occurred as of
December 31, 2007.
Restructuring
costs
In accordance with SFAS No. 146,
Accounting for
Costs Associated with Exit of Disposal Activities
, costs
associated with restructuring costs are amortized ratably over
the future service periods. These costs would include employee
severance payments and accelerated vesting of restricted stock
awards. Costs associated with contract terminations, are
recognized once notification of contract termination has been
delivered, or negotiated, with the counterparty. In November
2007, we announced that we would close our Phoenix office by
March 31, 2008. In connection with the closing of our
Phoenix office, we accrued approximately $335 for severance and
acceleration of restricted stock awards. We expect to incur a
similar charge during the first quarter of 2008. As of
December 31, 2007, we have not negotiated, or terminated,
any of our office leases.
Derivative
Instruments
In the normal course of business, we use derivative instruments
to manage, or hedge, interest rate risk. We require that hedging
derivative instruments are effective in reducing the interest
rate risk exposure that they are
85
FELDMAN
MALL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
DECEMBER 31, 2007
(Dollar Amounts in Thousands, Except Share and Per Share
Data)
designated to hedge. This effectiveness is essential for
qualifying for hedge accounting. Some derivative instruments are
associated with forecasted cash flows. In those cases, hedge
effectiveness criteria also require that it be probable that the
underlying forecasted cash flows will occur. Instruments that
meet these hedging criteria are formally designated as hedges at
the inception of the derivative contract.
To determine the fair values of derivative instruments, we may
use a variety of methods and assumptions that are based on
market conditions and risks existing at each balance sheet date.
For the majority of financial instruments including most
derivatives, long-term investments and long-term debt, standard
market conventions and techniques such as discounted cash flow
analysis, are used to determine fair value. All methods of
assessing fair value result in a general approximation of value
and such value may never actually be realized.
In the normal course of business, we are exposed to the effect
of interest rate changes and limit these risks by following risk
management policies and procedures including the use of
derivatives. To address exposure to interest rates, derivatives
are used primarily to fix the rate on debt based on
floating-rate indices and manage the cost of borrowing
obligations.
Derivatives that are reported at fair value and presented on the
balance sheet could be characterized as either cash flow hedges
or fair value hedges. Cash flow hedges address the risk
associated with future cash flows of debt transactions. All
hedges held by us are deemed to be fully effective in meeting
the hedging objectives established by our corporate policy
governing interest rate risk management and as such no net gains
or losses are reported in earnings. The changes in fair value of
hedge instruments are reflected in accumulated other
comprehensive income. For derivative instruments not designated
as hedging instruments, the gain or loss, resulting from the
change in the estimated fair value of the derivative
instruments, is recognized in current earnings during the period
of change. Changes in the fair value of our derivative
instruments may increase or decrease our reported net income and
stockholders equity prospectively, depending on future
levels of LIBOR interest rates and other variables, but will
have no effect on cash flows.
Purchase
Accounting for Acquisition of Interests in Real Estate
Entities
We allocate the purchase price of properties to tangible and
identified intangible assets acquired based on their fair value
in accordance with the provisions of SFAS No. 141,
Business Combinations
. The fair value of the tangible
assets of an acquired property (which includes land, building
and tenant improvements) is determined by valuing the property
as if it were vacant and the as-if-vacant value is
then allocated to land, building and related improvements based
on managements determination of the relative fair values
of these assets. We have determined the as-if-vacant fair value
of a property using methods similar to those used by independent
appraisers. Factors we considered in performing these analyses
include an estimate of carrying costs during the expected
lease-up
periods considering current market conditions and costs to
execute similar leases. In estimating carrying costs, management
includes real estate taxes, insurance and other operating
expenses and estimates of lost rental revenue during the
expected
lease-up
periods based on current market demand. We also estimate costs
to execute similar leases including leasing commissions, legal
and other related costs. Since June 2005, we determine the
as-if-vacant value by using a replacement cost method, adjusted
by both physical condition and possible obsolescence of the
property acquired. Under this method, we obtain valuations from
a qualified third party utilizing relevant third-party property
condition and Phase I environmental reports. We believe the
replacement cost method closely approximates our previous
methodology and is a better determination of the as-if-vacant
fair value.
In allocating the fair value of the identified intangible assets
and liabilities of an acquired property, above-market and
below-market lease values are recorded based on the present
value (using an interest rate which reflects the risks
associated with the leases acquired) of the difference between
(i) the contractual amounts to be paid pursuant to the
in-place leases and (ii) managements estimate of fair
market lease rates for the corresponding
in-place
leases, measured over a period equal to the remaining
noncancelable term of the lease. The capitalized
86
FELDMAN
MALL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
DECEMBER 31, 2007
(Dollar Amounts in Thousands, Except Share and Per Share
Data)
above-market lease values (presented as acquired lease rights in
the accompanying consolidated balance sheets) are amortized as a
reduction of rental income over the remaining noncancelable
terms of the respective leases. The capitalized below-market
lease values (presented as acquired lease obligations in the
accompanying consolidated balance sheets) are amortized as an
increase to rental income over the initial term and any fixed
rate/bargain renewal periods in the respective leases.
The aggregate value of other acquired intangible assets,
consisting of in-place leases and tenant relationships, is
measured by the excess of (i) the purchase price paid for a
property after adjusting existing in-place leases to market
rental rates over (ii) the estimated fair value of the
property as-if-vacant, which is determined as set forth above.
This aggregate value is allocated between in-place lease values
and tenant relationships based on managements evaluation
of the specific characteristics of each tenants lease;
however, the value of tenant relationships has not been
separated from in-place lease value for the additional interests
in real estate entities acquired by us because such value and
its consequence to amortization expense is immaterial for these
particular acquisitions. Should future acquisitions of
properties result in allocating material amounts to the value of
tenant relationships, an amount would be separately allocated
and amortized over the estimated life of the relationship. The
value of in-place leases, exclusive of the value of above-market
and below-market in-place leases, is amortized to expense over
the remaining noncancelable terms of the respective leases. If a
lease were to be terminated prior to its stated expiration, all
unamortized amounts relating to that lease would be written off.
Other acquired intangible assets and liabilities include
above-market fixed rate mortgage debt and a below-market ground
lease. Above-market debt is measured by adjusting the existing
fixed rate mortgage to market fixed rate debt and amortizing the
acquired liability over the weighted-average term of the
acquired mortgage using the interest method. The liability is
being amortized as a reduction to our interest expense. The
below-market ground lease asset is being amortized over the
estimated length of the ground lease as an increase to ground
rent expense.
Purchase accounting was applied to the assets and liabilities
related to the real estate properties we acquired after our
offering. The fair value of the real estate acquired was
allocated to the acquired tangible assets, consisting of land,
building and improvements and identified intangible assets and
liabilities, consisting of above-market and below-market leases,
in-place leases and tenant relationships, if any, based in each
case on their fair values.
Accumulated amortization for acquired lease rights was $4,462
and $3,486 at December 31, 2007 and 2006, respectively.
Accumulated amortization for in-place lease values was $5,657
and $5,474 at December 31, 2007 and 2006, respectively.
Accumulated amortization of acquired lease obligations was
$3,230 and $3,464 at December 31, 2007 and 2006,
respectively.
The following are the amounts assigned to each major asset and
liability caption at the acquisition date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Golden
|
|
|
|
Northgate(1)
|
|
|
Tallahassee(2)
|
|
|
Colonie(B)
|
|
|
Stratford(3)
|
|
|
Triangle(4)
|
|
|
Land
|
|
$
|
11,120
|
|
|
$
|
|
(A)
|
|
$
|
9,045
|
|
|
$
|
11,528
|
|
|
$
|
9,198
|
|
Building and improvements
|
|
|
98,223
|
|
|
|
64,775
|
|
|
|
71,507
|
|
|
|
74,547
|
|
|
|
30,473
|
|
Below-market ground lease
|
|
|
|
|
|
|
7,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired lease rights
|
|
|
7,839
|
|
|
|
1,215
|
|
|
|
3,687
|
|
|
|
3,380
|
|
|
|
992
|
|
In-place lease values
|
|
|
2,701
|
|
|
|
4,358
|
|
|
|
2,845
|
|
|
|
7,262
|
|
|
|
791
|
|
Acquired lease obligations
|
|
|
(1,306
|
)
|
|
|
(10,109
|
)
|
|
|
(3,439
|
)
|
|
|
(3,352
|
)
|
|
|
(1,254
|
)
|
Assumed above-market mortgages
|
|
|
(8,243
|
)
|
|
|
(6,533
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
110,334
|
|
|
$
|
61,585
|
|
|
$
|
83,645
|
|
|
$
|
93,365
|
|
|
$
|
40,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87
FELDMAN
MALL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
DECEMBER 31, 2007
(Dollar Amounts in Thousands, Except Share and Per Share
Data)
|
|
|
(A)
|
|
The Tallahassee Mall is subject to an operating
ground lease.
|
|
(B)
|
|
Acquired February 2005; the property was
subsequently contributed to a joint venture in September 2006.
|
|
(1)
|
|
The Northgate Mall acquired lease rights, lease obligations and
in-place lease values are being amortized over the remaining
lease terms and the remaining weighted average amortization
expense periods as of December 31, 2007 are 3.4 years,
1.8 years and 3.6 years, respectively.
|
|
(2)
|
|
The Tallahassee Mall acquired lease rights, lease obligations
and in-place lease values are being amortized over the remaining
lease terms and the remaining weighted average amortization
expense periods as of December 31, 2007 are 2.6 years,
5.4 years and 2.7 years, respectively.
|
|
(3)
|
|
The Stratford Square Mall acquired lease rights, lease
obligations and in-place lease values are being amortized over
the remaining lease terms and the remaining weighted average
amortization expense periods as of December 31, 2007 are
3.3 years, 3.6 years and 3.0 years, respectively.
|
|
(4)
|
|
The Golden Triangle Mall acquired lease rights, lease
obligations and in-place lease values are being amortized over
the remaining lease terms and the remaining weighted average
amortization expense periods as of December 31, 2007 are
3.0 years, 3.7 years and 4.8 years, respectively.
In 2007, we paid $1,000 of additional consideration in
accordance with an earn-out provision in the purchase agreement.
|
Income
Taxes
We have elected to be treated and believe that we have operated
in a manner that has enabled us to qualify as a Real Estate
Investment Trust, or REIT under Sections 856 through 860 of
the Internal Revenue Code of 1986, (the Code) as
amended. As a REIT, we generally are not required to pay federal
corporate income taxes on our taxable income to the extent it is
currently distributed to our stockholders. However,
qualification and taxation as a REIT depends upon our ability to
meet the various qualification tests imposed under the Code,
including tests related to annual operating results, asset
composition, distribution levels and diversity of stock
ownership. Accordingly, no assurance can be given that we will
be organized or be able to operate in a manner so as to qualify
or remain qualified as a REIT. If we fail to qualify as a REIT
in any taxable year, we will be subject to federal income tax
(including any applicable alternative minimum tax) on our
taxable income at regular corporate tax rates.
We have elected that our management company subsidiary and
certain corporations that held small interests in the Foothills
Mall be treated as a taxable REIT subsidiary or TRS.
In general, a TRS may perform noncustomary services for tenants,
hold assets that we cannot hold directly and generally may
engage in any real estate or non-real estate related business
(except for the operation or management of health care
facilities or lodging facilities or the provision to any person,
under a franchise, license or otherwise, of rights to any brand
name under which any lodging facility or health care facility is
operated). Our TRS are subject to corporate federal and
state income taxes based on their taxable income. These rates
are generally those rates which are charged for regular
corporate entities. Income taxes are recorded using the asset
and liability method. 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. 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. A valuation allowance is
recorded against the combined federal and state net deferred
taxes reducing the deferred tax asset to a net amount. As of
December 31, 2007, we had unused net operating losses of
approximately $200 which, based on our historical ($287 for the
year ended December 31, 2007) and projected TRS income from
our third-party service contracts, we expect to fully utilize in
fiscal 2008. Based upon current tax rates, our unused net
operating losses have generated a deferred tax asset of
approximately $81 and $190, at December 31, 2007 and 2006,
respectively, which is classified in other assets. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment
date.
88
FELDMAN
MALL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
DECEMBER 31, 2007
(Dollar Amounts in Thousands, Except Share and Per Share
Data)
The net income tax (expense) benefit related to our TRS is
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Income tax (expense) benefit:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current state
|
|
$
|
(25
|
)
|
|
$
|
(25
|
)
|
|
$
|
|
|
Deferred federal
|
|
|
(98
|
)
|
|
|
170
|
|
|
|
|
|
Deferred state
|
|
|
(11
|
)
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (expense) benefit, net
|
|
$
|
(134
|
)
|
|
$
|
165
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The net income tax (expense) benefit is included in general and
administrative expenses in our consolidated statements of
operations.
As a REIT, we are permitted to deduct dividends paid to our
stockholders, eliminating the federal taxation of income
represented by such dividends. REITs are subject to a number of
organizational and operational requirements. If we fail to
qualify as a REIT in any taxable year, we will be subject to
federal and state income tax (including any applicable
alternative minimum tax) on our taxable income at regular
corporate tax rates.
In July 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109
(FIN 48). FIN 48 clarifies the accounting
and reporting for uncertainties in income tax law. This
Interpretation prescribes a comprehensive model for the
financial statement recognition, measurement, presentation and
disclosure of uncertain tax positions taken or expected to be
taken in income tax returns. Under FIN 48, tax positions
shall initially be recognized in the financial statements when
it is more likely than not the position will be sustained upon
examination by the tax authorities. Such tax positions shall
initially and subsequently be measured as the largest amount of
tax benefit that is greater than 50% likely of being realized
upon ultimate settlement with the tax authority assuming full
knowledge of the position and relevant facts. Our tax returns
for fiscal years 2004, 2005, 2006 and 2007 remain subject to
examination by the relevant tax jurisdictions. We adopted this
interpretation effective January 1, 2007 and the adoption
of FIN 48 did not have any effect on our consolidated
financial statements.
Earnings
(Loss) Per Share
We present both basic and diluted earnings (loss) per share, or
EPS. Basic EPS excludes potentially dilutive securities and is
computed by dividing net income (loss) available to common
stockholders by the weighted average number of common shares
outstanding during the period. Diluted EPS reflects the
potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into
common stock, where
89
FELDMAN
MALL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
DECEMBER 31, 2007
(Dollar Amounts in Thousands, Except Share and Per Share
Data)
such exercise or conversion would result in a lower EPS or
greater loss per share amount. The following is the computation
of our basic and diluted shares for the following periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Net (loss) income
|
|
$
|
(16,247
|
)
|
|
$
|
20,181
|
|
|
$
|
(2,633
|
)
|
Less preferred stock dividends, net of minority interest ($98)
|
|
|
(903
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to common
stockholders basic
|
|
|
(17,150
|
)
|
|
|
20,181
|
|
|
|
(2,633
|
)
|
Add back minority interest
|
|
|
|
|
|
|
2,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to common
stockholders diluted
|
|
$
|
(17,150
|
)
|
|
$
|
22,650
|
|
|
$
|
(2,633
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares
|
|
|
12,863,036
|
|
|
|
12,808,061
|
|
|
|
12,363,488
|
|
Plus: weighted average unvested restricted shares
|
|
|
|
|
|
|
293,416
|
|
|
|
|
|
Plus: weighted average OP units
|
|
|
|
|
|
|
1,564,555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average common shares
|
|
|
12,863,036
|
|
|
|
14,666,032
|
|
|
|
12,363,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share
|
|
$
|
(1.33
|
)
|
|
$
|
1.58
|
|
|
$
|
(0.21
|
)
|
Diluted (loss) earnings per share
|
|
|
(1.33
|
)
|
|
|
1.54
|
|
|
|
(0.21
|
)
|
Our computation of net loss per share excludes unvested
restricted stock issued to certain employees totaling 158,743 in
2007 and 285,100 in 2005 and OP units in the amount of 1,414,618
in 2007 and 1,593,464 in 2005 because these securities are
antidilutive.
Segment
Information
Our Company is a REIT engaged in owning, managing, leasing and
repositioning Class B regional malls and has one reportable
segment, which is retail mall real estate.
Recent
Accounting Pronouncements
In September 2006, the FASB issued Statement No. 157,
Fair Value Measurements
, or SFAS No. 157.
SFAS No. 157 provides guidance for using fair value to
measure assets and liabilities. This statement clarifies the
principle that fair value should be based on the assumptions
that market participants would use when pricing the asset or
liability. SFAS No. 157 establishes a fair value
hierarchy, giving the highest priority to quoted prices in
active markets and the lowest priority to unobservable data.
SFAS No. 157 applies whenever other standards require
assets or liabilities to be measured at fair value. This
statement is effective in fiscal years beginning after
November 15, 2007. We believe that the adoption of this
standard on January 1, 2008 will not have a material effect
on our consolidated financial statements.
In September 2006, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 108, or SAB 108.
SAB 108 provides guidance on the consideration of the
effects of prior period misstatements in quantifying current
year misstatements for the purpose of a materiality assessment.
SAB 108 provides for the quantification of the impact of
correcting all misstatements, including both the carryover and
reversing effects of prior year misstatements, on the current
year financial statements. If a misstatement is material to the
current year financial statements, the prior year financial
statements should also be corrected, even though such revision
was, and continues to be, immaterial to the prior year financial
statements. Correcting prior year financial statements for
90
FELDMAN
MALL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
DECEMBER 31, 2007
(Dollar Amounts in Thousands, Except Share and Per Share
Data)
immaterial errors would not require previously filed reports to
be amended. Such correction should be made in the current period
filings. The adoption of this standard had no effect on our
consolidated financial statements.
In February 2007, the FASB Issued Statement No. 159,
The
Fair Value Option for Financial Assets and Financial
Liabilities
. This Statement permits entities to choose to
measure many financial instruments and certain other items at
fair value that are not currently required to be measured at
fair value. The Statement also establishes presentation and
disclosure requirements designed to facilitate comparisons
between entities that choose different measurement attributes
for similar types of assets and liabilities. Statement
No. 159 is effective for financial statements issued for
fiscal years beginning after November 15, 2007. We have
adopted this standard effective January 1, 2008 and have
elected not to measure any of our current eligible financial
assets or liabilities at fair value upon adoption. However, we
do reserve the right to elect to measure future eligible
financial assets or liabilities at fair value.
In November 2007, the FASB ratified the consensus in EITF Issue
07-06,
Sales of Real Estate with Buy-Sell Clauses which
addresses whether a buy-sell clause in a sale of a partial
interest in real estate would preclude partial sale and profit
recognition under SFAS 66. The new consensus holds that a
buy-sell clause does not by itself constitute a form of
continuing involvement that would preclude partial sale
recognition Such clauses should be evaluated with the
agreements other explicit and implicit terms to determine
whether the seller has an obligation to repurchase the property,
the terms of the transaction allow the buyer to compel the
seller to repurchase the property, or the seller can compel the
buyer to sell its interest in the property back to the seller.
EITF 07-06
is effective for fiscal years beginning after December 15,
2007 and applies to new assessments made under SFAS 66
after the effective date.
Share-Based
Deferred Compensation
We have a deferred compensation plan under which we are
authorized to issue up to 469,221 shares of common stock to
employees. As of December 31, 2007, we had granted
266,061 shares of common stock, net of forfeitures, which
vest annually over periods ranging from two to five years.
Stock awards entitle the holder to shares of common stock as the
award vests. We measure the fair value of share awards based
upon the closing market price of the Companys common stock
on the date of grant. Stock awards that vest in accordance with
service conditions are amortized over their applicable vesting
period using the straight-line method.
The following describes the shares of unvested common stock for
the years ended December 31, 2007, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Unvested Shares
|
|
|
Weighted Average Share Price
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Beginning balance
|
|
|
326,074
|
|
|
|
285,100
|
|
|
|
|
|
|
$
|
11.28
|
|
|
$
|
11.23
|
|
|
$
|
|
|
Shares granted
|
|
|
5,000
|
|
|
|
135,530
|
|
|
|
300,716
|
|
|
|
11.31
|
|
|
|
11.47
|
|
|
|
11.30
|
|
Shares vested
|
|
|
(46,599
|
)
|
|
|
(60,718
|
)
|
|
|
|
|
|
|
12.17
|
|
|
|
11.31
|
|
|
|
|
|
Shares forfeited
|
|
|
(125,731
|
)
|
|
|
(33,838
|
)
|
|
|
(15,616
|
)
|
|
|
10.15
|
|
|
|
11.73
|
|
|
|
12.37
|
|
Shares repurchased
|
|
|
(15,500
|
)
|
|
|
|
|
|
|
|
|
|
|
12.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
|
143,244
|
|
|
|
326,074
|
|
|
|
285,100
|
|
|
|
11.91
|
|
|
|
11.28
|
|
|
|
11.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense included in net (loss) income
for the years ended December 31, 2007, 2006 and 2005 was
$505, $484 and $449, respectively. Gross share-based
compensation was $571, $701 and $449 for the years ended
December 31, 2007, 2006 and 2005 respectively. Its
our policy to capitalize employee compensation, including
share-based compensation, allocated to construction and leasing
services, of which $172, $217 and zero were capitalized for the
years ended December 31, 2007, 2006 and 2005, respectively.
91
FELDMAN
MALL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
DECEMBER 31, 2007
(Dollar Amounts in Thousands, Except Share and Per Share
Data)
As of December 31, 2007, there was $1,481 of total
unrecognized compensation costs related to nonvested restricted
stock awards granted under the plan, which are expected to be
recognized over a weighted-average period of 1.3 years. The
total grant date fair value of shares that vested during 2007
was $567.
|
|
3.
|
Intangible
Assets and Liabilities
|
At December 31, 2007 and 2006, intangible assets and
liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired
|
|
|
Acquired
|
|
|
|
Acquired
|
|
|
In-Place
|
|
|
Lease
|
|
|
|
Lease Rights
|
|
|
Lease Values
|
|
|
Obligations
|
|
|
Balance at December 31, 2005
|
|
$
|
17,453
|
|
|
$
|
23,742
|
|
|
$
|
(15,600
|
)
|
Acquisition of Golden Triangle Mall(1)
|
|
|
992
|
|
|
|
2,841
|
|
|
|
(1,254
|
)
|
Contribution of Foothills Mall to unconsolidated joint venture
|
|
|
(1,332
|
)
|
|
|
(4,558
|
)
|
|
|
1,971
|
|
Contribution of Colonie Center Mall to unconsolidated joint
venture
|
|
|
(3,739
|
)
|
|
|
(5,350
|
)
|
|
|
3,613
|
|
Purchase and other adjustments
|
|
|
55
|
|
|
|
327
|
|
|
|
(174
|
)
|
Lease expirations and terminations
|
|
|
(681
|
)
|
|
|
(1,479
|
)
|
|
|
1,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
12,748
|
|
|
|
15,523
|
|
|
|
(10,287
|
)
|
Purchase and other adjustments(1)
|
|
|
|
|
|
|
(999
|
)
|
|
|
1
|
|
Lease expirations and terminations
|
|
|
(1,005
|
)
|
|
|
(2,430
|
)
|
|
|
1,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
11,743
|
|
|
$
|
12,094
|
|
|
$
|
(8,366
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Includes $1,000, net, of additional consideration paid in
accordance with an earn-out provision in the purchase agreement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired
|
|
|
Acquired
|
|
|
|
Acquired
|
|
|
In-Place
|
|
|
Lease
|
|
|
|
Lease Rights
|
|
|
Lease Values
|
|
|
Obligations
|
|
|
Accumulated amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
$
|
(3,248
|
)
|
|
$
|
(4,644
|
)
|
|
$
|
3,988
|
|
Contribution of Foothills Mall to joint venture
|
|
|
801
|
|
|
|
1,352
|
|
|
|
(903
|
)
|
Contribution of Colonie Center Mall to joint venture
|
|
|
1,209
|
|
|
|
874
|
|
|
|
(1,574
|
)
|
Lease expirations and terminations
|
|
|
681
|
|
|
|
1,479
|
|
|
|
(1,157
|
)
|
Other adjustments
|
|
|
18
|
|
|
|
|
|
|
|
(77
|
)
|
Amortization during the year
|
|
|
(2,947
|
)
|
|
|
(4,535
|
)
|
|
|
3,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
(3,486
|
)
|
|
|
(5,474
|
)
|
|
|
3,464
|
|
Lease expirations and terminations
|
|
|
1,005
|
|
|
|
2,430
|
|
|
|
(1,920
|
)
|
Amortization during the year
|
|
|
(1,981
|
)
|
|
|
(2,613
|
)
|
|
|
1,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
(4,462
|
)
|
|
$
|
(5,657
|
)
|
|
$
|
3,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense of in-place lease value is expected to be
$1,731, $1,327, $1,112, $721 and $570 over each of the next five
years through December 31, 2012.
92
FELDMAN
MALL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
DECEMBER 31, 2007
(Dollar Amounts in Thousands, Except Share and Per Share
Data)
The following is information related to our investments in real
estate as of December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Golden
|
|
|
Northgate
|
|
|
Tallahassee
|
|
|
Stratford
|
|
|
|
Triangle
|
|
|
Mall
|
|
|
Mall
|
|
|
Square
|
|
|
Initial cost of the acquired or purchased property:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
9,198
|
|
|
$
|
11,120
|
|
|
|
|
(A)
|
|
$
|
11,528
|
|
Buildings and improvements
|
|
|
30,473
|
|
|
|
98,223
|
|
|
$
|
64,775
|
|
|
|
74,547
|
|
Cost capitalized subsequent to acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Building improvements
|
|
|
968
|
|
|
|
10,133
|
|
|
|
5,317
|
|
|
|
45,267
|
|
Land and building purchased
|
|
|
|
|
|
|
3,453
|
|
|
|
|
|
|
|
2,763
|
|
Total costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
|
9,198
|
|
|
|
14,573
|
|
|
|
|
|
|
|
14,291
|
|
Buildings and improvements
|
|
|
31,441
|
|
|
|
108,356
|
|
|
|
70,092
|
|
|
|
119,814
|
|
Accumulated depreciation
|
|
|
(2,415
|
)
|
|
|
(8,049
|
)
|
|
|
(6,652
|
)
|
|
|
(7,752
|
)
|
Date of acquisition
|
|
|
4/5/2006
|
|
|
|
7/12/2005
|
|
|
|
6/28/2005
|
|
|
|
12/30/2004
|
|
Federal tax cost basis at December 31, 2007 (unaudited)
|
|
$
|
40,612
|
|
|
$
|
126,879
|
|
|
$
|
72,928
|
|
|
$
|
139,853
|
|
|
|
|
(A)
|
|
The Tallahassee Mall is subject to an operating
ground lease.
|
At December 31, 2007 and 2006, investments in real estate
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Buildings and improvements
|
|
$
|
267,333
|
|
|
$
|
259,095
|
|
Tenant improvements
|
|
|
55,934
|
|
|
|
19,015
|
|
Construction in progress
|
|
|
6,436
|
|
|
|
20,685
|
|
Land
|
|
|
38,062
|
|
|
|
34,609
|
|
|
|
|
|
|
|
|
|
|
Total investments in real estate
|
|
|
367,765
|
|
|
|
333,404
|
|
Accumulated depreciation
|
|
|
(24,868
|
)
|
|
|
(14,964
|
)
|
|
|
|
|
|
|
|
|
|
Investments in real estate, net
|
|
$
|
342,897
|
|
|
$
|
318,440
|
|
|
|
|
|
|
|
|
|
|
The following tables reconcile the historical cost of our
investments in real estate and accumulated depreciation for the
years ended December 31, 2007, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of the year
|
|
$
|
333,404
|
|
|
$
|
408,529
|
|
|
$
|
147,275
|
|
Acquisition of mall properties
|
|
|
|
|
|
|
39,671
|
|
|
|
254,670
|
|
Additions during the year
|
|
|
34,361
|
|
|
|
48,898
|
|
|
|
6,584
|
|
Contribution of mall properties to unconsolidated joint ventures
|
|
|
|
|
|
|
(163,694
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
367,765
|
|
|
$
|
333,404
|
|
|
$
|
408,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93
FELDMAN
MALL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
DECEMBER 31, 2007
(Dollar Amounts in Thousands, Except Share and Per Share
Data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Accumulated depreciation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of the year
|
|
$
|
14,964
|
|
|
$
|
12,421
|
|
|
$
|
3,622
|
|
Contribution of mall properties to unconsolidated joint ventures
|
|
|
|
|
|
|
(9,936
|
)
|
|
|
|
|
Depreciation during the year
|
|
|
9,904
|
|
|
|
12,479
|
|
|
|
8,799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
24,868
|
|
|
$
|
14,964
|
|
|
$
|
12,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2007 and 2006, deferred charges consisted
of the following:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Deferred financing costs
|
|
$
|
3,479
|
|
|
$
|
3,230
|
|
Deferred leasing costs
|
|
|
1,793
|
|
|
|
1,293
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
5,272
|
|
|
|
4,523
|
|
Less accumulated amortization
|
|
|
(1,878
|
)
|
|
|
(1,239
|
)
|
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
3,394
|
|
|
$
|
3,284
|
|
|
|
|
|
|
|
|
|
|
|
|
6.
|
Mortgage
Loans Payable
|
At December 31, 2007 and 2006, mortgage loans payable
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Mortgage loan payable interest only at
115 basis points over LIBOR (6.18% at December 31,
2007) payable monthly, due May 2010, secured by Stratford
Square Mall property
|
|
$
|
104,500
|
|
|
$
|
|
|
Mortgage loan payable interest only at
125 basis points over LIBOR (6.625% at December 31,
2006) payable monthly, due January 2008, secured by
Stratford Square Mall property
|
|
|
|
|
|
|
75,000
|
|
Mortgage loan payable interest at 8.60% payable
monthly, due July 11, 2029, anticipated repayment on
July 11, 2009, secured by the Tallahassee Mall property
|
|
|
44,540
|
|
|
|
45,100
|
|
Mortgage loan payable interest at 6.60% payable
monthly, due October 11, 2032 anticipated prepayment date
of November 11, 2012, secured by the Northgate Mall property
|
|
|
77,117
|
|
|
|
78,201
|
|
Mortgage loan payable interest at 5.15% payable
monthly, due November 1, 2013, secured by the JCPenney
Parcel at the Stratford Square Mall
|
|
|
|
|
|
|
3,202
|
|
|
|
|
|
|
|
|
|
|
Total mortgages outstanding
|
|
|
226,157
|
|
|
|
201,503
|
|
Assumed above-market mortgage premiums, net
|
|
|
6,721
|
|
|
|
9,948
|
|
|
|
|
|
|
|
|
|
|
Total mortgage loans payable
|
|
$
|
232,878
|
|
|
$
|
211,451
|
|
|
|
|
|
|
|
|
|
|
On April 5, 2006, we assumed a $3,455 promissory note in
connection with the acquisition of the JCPenney Parcel. The
stated interest on the note was 5.15%. We determined this rate
to be above-market and, in applying purchase accounting,
determined the fair market value interest rate to be 4.87%. The
above-market premium of $47
94
FELDMAN
MALL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
DECEMBER 31, 2007
(Dollar Amounts in Thousands, Except Share and Per Share
Data)
was being amortized over the remaining term of the acquired loan
using the effective interest method. The amortization of the
above-market premium totaled $3 and $8 for the years ended
December 31, 2007 and 2006, respectively. This loan was
fully repaid in May 2007 in connection with the refinancing of
the Stratford Square Mall mortgage as described below.
On July 12, 2005, we assumed a $79,605 first mortgage in
connection with the acquisition of the Northgate Mall. The
stated interest on the mortgage is 6.60% with an anticipated
prepayment date of 2012 and a final maturity date of 2032. We
determined this rate to be above market and, in applying
purchase accounting, determined the fair market value interest
rate to be 5.37%. The above-market premium was initially $8,243
and is being amortized over the remaining term of the acquired
loan using the effective interest method. The amortization of
the above-market premium totaled $1,394, $1,414 and $714 for the
years ended December 31, 2007, 2006 and 2005, respectively.
On June 28, 2005, we assumed a $45,848 first mortgage in
connection with the acquisition of the Tallahassee Mall. The
stated interest rate on the mortgage is 8.60%. We determined
this rate to be above-market and, in applying purchase
accounting, determined the fair market value interest rate to be
5.16%. The above-market premium was initially $6,533 and is
being amortized over the remaining term of the acquired loan
using the effective interest method. The amortization of the
above-market premium totaled $1,795, $1,820 and $919 for the
years ended December 31, 2007, 2006 and 2005, respectively.
In January 2005, we completed a $75,000, three-year first
mortgage financing collateralized by the Stratford Square Mall.
On May 8, 2007, we closed on a $104,500 first mortgage loan
secured by the Stratford Square Mall. The loan has an initial
term of 36 months and bears interest at a floating rate of
115 basis points over the London Interbank Offered Rate
(LIBOR). The loan has two one-year extension
options. On the closing date, $75,000 of the loan proceeds was
used to retire Stratford Squares outstanding $75,000 first
mortgage and $3,040 was used to repay the JCPenney parcel note.
The balance of the proceeds was placed into escrow and will be
released to us to fund the completion of the malls
redevelopment project. As of December 31, 2007, the balance
of funds in escrow was $12,917. In connection with this
transaction, we recorded a $379 loss on early extinguishment of
debt, which represents prepayment penalties and the write-off of
deferred financing costs related to the existing mortgage that
was repaid.
In connection with the Stratford Square Mall mortgage financing,
during January 2005, we entered into a $75,000 interest rate
swap commencing February 2005 with a final maturity date in
January 2008. The effect of the swap is to fix the all-in
interest rate of the Stratford Square mortgage loan at 5.0% per
annum. In connection with the refinancing of the Stratford
Square Mall mortgage in May 2007, we entered into an additional
$29,500 swap that matures in May 2010. The effect of this swap
is to fix the all-in interest rate on $29,500 of the mortgage at
6.65% per annum.
During December 2005, we entered into a $75,000 swap which
commences February 2008 and has a final maturity date in January
2011. The effect of the swap is to fix the all-in interest rate
of our forecasted cash flows on LIBOR-based loans at 4.91% per
annum.
95
FELDMAN
MALL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
DECEMBER 31, 2007
(Dollar Amounts in Thousands, Except Share and Per Share
Data)
Aggregate principal payments of the Companys mortgage
loans as of December 31, 2007 are as follows:
|
|
|
|
|
2008
|
|
$
|
1,744
|
|
2009
|
|
|
45,179
|
|
2010
|
|
|
105,824
|
|
2011
|
|
|
1,415
|
|
2012
|
|
|
1,364
|
|
2013 and thereafter
|
|
|
70,631
|
|
|
|
|
|
|
Total principal payments
|
|
|
226,157
|
|
Assumed above-market mortgage premiums, net
|
|
|
6,721
|
|
|
|
|
|
|
Total
|
|
$
|
232,878
|
|
|
|
|
|
|
Certain of our mortgage loans payable contain various financial
covenants requiring us to maintain certain financial debt
coverage ratios, among other requirements. As of and for the
year ended December 31, 2007, we were in compliance with
these financial covenants.
|
|
7.
|
Junior
Subordinated Debt Obligations
|
During March 2006, we completed the issuance and sale in a
private placement of $28,500 in aggregate principal amount of
preferred securities issued by our wholly owned subsidiary,
Feldman Mall Properties Statutory Trust I (the
Trust). The Trust simultaneously issued 880 of its
common securities to the operating partnership for a purchase
price of $880, which constitutes all of the issued and
outstanding common securities of the Trust. The Trust used the
proceeds from the sale of the trust preferred securities
together with the proceeds from the sale of the common
securities to purchase $29,380 in aggregate principal amount of
unsecured fixed/floating rate junior subordinated notes due
April 2036, issued by us. The junior subordinated notes, the
common and the trust preferred securities have substantially
identical terms, requiring quarterly interest payments
calculated at a fixed interest rate equal to 8.70% per annum
through April 2011 and subsequently (after April 2011) at a
variable interest rate equal to LIBOR plus 3.45% per annum. The
notes mature April 2036 and may be redeemed, in whole or in
part, at par, at our option, beginning after April 2011. The
preferred securities do not have a stated maturity date;
however, the preferred and common securities are subject to
mandatory redemption upon the redemption or maturity of the
notes. The trust agreement contains a financial covenant
requiring us to maintain a minimum net worth. As of
December 31, 2007, we were in compliance with this covenant.
The principal amount of the junior subordinated notes of $29,380
is reported as an obligation on our consolidated balance sheet
at December 31, 2007. However, because we are not deemed to
be the primary beneficiary of the Trust under FIN 46R, we
account for our investment under the equity method of accounting
and record our investment in the Trusts common shares of
$880 as part of other assets on our consolidated balance sheet.
We have entered into a parent guarantee agreement for the
purpose of guaranteeing the payment, after the expiration of any
grace or cure period, of any amounts required to be paid. Our
obligations under the parent guarantee agreement constitute
unsecured obligations and rank subordinate and junior to all of
our senior debt. The parent guarantee agreement will terminate
upon the full payment of the redemption price for the trust
preferred securities or full payment of the junior subordinated
notes upon liquidation of the trust.
96
FELDMAN
MALL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
DECEMBER 31, 2007
(Dollar Amounts in Thousands, Except Share and Per Share
Data)
$30,000
Secured Line of Credit
On April 5, 2006, in connection with the acquisition of the
Golden Triangle Mall, we entered into a $24,600 secured line of
credit (the line). On April 20, 2007, we
increased the line from $24,600 to $30,000. The maturity date of
the line is April 2009 and up to $5,400 of the line is recourse
to us. The line contains customary covenants that require us to,
among other things, maintain certain financial coverage ratios.
The line needs to maintain a quarterly debt coverage constant of
10.50% and we were not in compliance with this covenant as of
December 31, 2007. We are currently negotiating a waiver of
this covenant, however, if we are unable to obtain a waiver, we
would be required to reduce the current outstanding balance by
approximately $1,000.
Loan draws and repayments are at our option. Interest is payable
monthly at a rate equal to LIBOR plus a margin ranging from
1.40% to 2.00% or, at our option, the prime rate plus a margin
ranging from zero to 0.25%. The applicable margins depend on our
debt coverage ratio as specified in the loan agreement.
Commitment fees are paid monthly at the rate of 0.125% to 0.25%
of the average unused borrowing capacity.
In October 2006, we entered into a modification agreement that
provides for the issuance of letters of credit in the aggregate
amount of up to $13,000 for a fee of 0.5% of the face amount. As
of December 31, 2007, letters of credit outstanding under
this agreement amounted to $10,250, which were used to secure
our current cost guarantee on the Colonie Center Mall, and are
renewable through the maturity date of the line.
The outstanding balance on the line at December 31, 2007
was $17,500 with interest rates on the tranches ranging from
6.59% to 7.25%. As of December 31, 2007, $2,250 was unused
on the secured line of credit.
$25,000
Credit Facility
On April 16, 2007, we announced the execution of an
unsecured promissory note (the Note) providing for
loans aggregating up to $25,000 from Kimco Realty Corp.
(Kimco). As of December 31, 2007, there were no
outstanding borrowings under the Note and the Note is no longer
available to us.
Loans drawn under the Note are optional and will bear interest
at the rate of 7.0% per annum, payable monthly. Any outstanding
principal amount will be due and payable on April 10, 2008,
provided that the maturity of the Note may be extended to
April 10, 2009 if we deliver to Kimco, on or before
March 17, 2008, a notice of extension and further provided
that we comply with certain performance criteria. We did not
extend the maturity date of the Note. In addition to the
interest on the Note, Kimco will be paid a variable fee equal to
(i) $500, multiplied by (ii) (a) the volume weighted
average price of our common stock as of a
five-day
period chosen by Kimco, minus (b) $13.00 per common share.
If Kimco does not select a date for determination of the fee
prior to termination of the Note, we will instead pay to Kimco
$250 in additional interest. We are accounting for the variable
fee as an embedded derivative and, accordingly, have recorded
the fair value of this instrument as a deferred loan fee and as
a derivative liability in the amount of $312 at inception in
April 2007. Changes in the fair value of the derivative
liability are recorded in operating income in each reporting
period. As of December 31, 2007, we estimated the fair
value of the derivative liability to be $248 and recognized the
$64 change in fair value in interest and other income.
|
|
9.
|
Related
Party Transactions
|
We provide certain property management, leasing and development
services to our unconsolidated real estate partnerships for an
annual management fee, ranging from 2% to 3.5% of gross receipts
and construction management fees of 3% to 5% on the amount of
capital improvements, as defined by their agreements. In
97
FELDMAN
MALL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
DECEMBER 31, 2007
(Dollar Amounts in Thousands, Except Share and Per Share
Data)
addition, we earn customary brokerage commission fees as a
percentage of contractual rents on new leases and lease
renewals. Total fees earned from such partnerships aggregated
$3,734, $1,310 and $440 for the years ended December 31,
2007, 2006 and 2005, respectively. These fees are recorded in
management, leasing and development services on the accompanying
consolidated statements of operations.
Effective November 3, 2006, Mr. Erhart, our former
General Counsel, left the Company. In connection with
Mr. Erharts separation, we bought back his units,
totaling approximately 179,000 units, at a price of $9.75
per share or $1,744. As of December 31, 2006, we had paid
90% of this amount, or $1,570, to Mr. Erhart in cash, which
we recorded as a reduction in our minority interest liability.
Under the terms of Mr. Erharts separation agreement,
the remaining 10%, or $175, was paid in April 2007. The excess
of the amount paid over the book value of his minority interest
has been charged to our additional paid-in capital in 2006.
We entered into a consulting contract with Ed Feldman, the
father of our Chairman, Larry Feldman, to provide professional
acquisition services. The agreement pays Mr. Feldman $3 per
month commencing July 1, 2005. For the years ended
December 31, 2007, 2006 and 2005, Mr. Feldman received
$33, $33 and $18, respectively. There were $3 and zero due at
December 31, 2007 and 2006, respectively.
On December 21, 2007, we announced that, in conjunction
with our continuing efforts to restructure, the Phoenix office
will be closed except for a minimal leasing staff. In addition,
James Bourg, our former executive vice president and chief
operating officer and director resigned from our company.
Mr. Bourg left in the first quarter of 2008. In connection
with Mr. Bourgs departure, we incurred a severance
charge of approximately $1,300 that was accrued in the fourth
quarter of 2007. As of December 31, 2007, we owed
Mr. Bourg approximately $670 which we paid in March 2008.
|
|
10.
|
Rentals
Under Operating Leases
|
We receive rental income from the leasing of retail shopping
center space under operating leases. We recognize income from
tenant operating leases on a straight-line basis over the
respective lease terms and, accordingly, rental income in a
given period will vary from actual contractual rental amounts
due. Our rental revenue will also be reduced by amortization of
capitalized above-market lease values and increased by the
amortization of below-market lease values. Amounts included in
lease income on the straight-line basis for the years ended
December 31, 2007, 2006 and 2005 were $601, $794, and $734,
respectively.
The minimum future base rentals under noncancelable operating
leases as of December 31, 2007 are as follows:
|
|
|
|
|
Year ending December 31,
|
|
|
|
|
2008
|
|
$
|
24,284
|
|
2009
|
|
|
21,769
|
|
2010
|
|
|
19,639
|
|
2011
|
|
|
16,179
|
|
2012
|
|
|
14,467
|
|
2013 and thereafter
|
|
|
48,645
|
|
|
|
|
|
|
Total future minimum base rentals
|
|
$
|
144,983
|
|
|
|
|
|
|
Minimum future rentals do not include amounts which are payable
by certain tenants based upon certain reimbursable shopping
center operating expenses. For the years ended December 31,
2007, 2006 and 2005, no tenant exceeded 10% of rental revenue.
98
FELDMAN
MALL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
DECEMBER 31, 2007
(Dollar Amounts in Thousands, Except Share and Per Share
Data)
At December 31, 2007 and 2006, amounts due to affiliates
primarily reflect obligations to make payments to certain owners
of the predecessor in connection with the formation
transactions. As part of the formation transactions, the owners
of the predecessor are entitled to the following:
Messrs. Feldman, Bourg and Jensen had the right to the
receipt of funds totaling $7,594 at December 16, 2004 from
certain restricted cash accounts held by the lender of the
Foothills Mall, once these accounts were released to the
Company. The owners were paid $3,700 of the restricted cash
accounts prior to December 31, 2004, and the remaining
balance, plus accrued interest, totaling $3,976 during 2005.
Messrs. Feldman, Bourg and Jensen have the right to receive
additional OP Units for ownership interests contributed as
part of the formation transactions upon our achieving a 15%
internal rate of return from the Harrisburg joint venture on or
prior to December 31, 2009. The right to receive such
additional OP Units is a financial instrument that we
recorded as an obligation of the offering that is adjusted to
fair value each reporting period until the thresholds have been
achieved and the OP Units have been issued. Based on the
expected operating performance of the Harrisburg Mall, the fair
value is estimated to be zero and $3,891 at December 31,
2007 and 2006, respectively, and is included in due to
affiliates. The reduction in the fair value estimate for the
years ended December 31, 2007 and 2006 were $3,907 and
$1,412, respectively, and have been reflected in interest and
other income in the accompanying consolidated financial
statements. The decrease in our anticipated return is due to
delays in the timing of certain redevelopment plans, higher than
previously expected construction costs and a reduction in the
projected future net operating income of the property, which is
due to delays in leasing activity. The fair value of this
obligation is estimated by management on a quarterly basis.
Our authorized capital stock consists of
250,000,000 shares, $.01 par value, consisting of up
to 200,000,000 shares of common stock, $.01 par value
per share and up to 50,000,000 shares of preferred stock,
$.01 par value per share. As of December 31, 2007 and
December 31, 2006, 13,018,831 and 13,155,062 shares of
common stock were issued and outstanding, respectively. We
issued fully vested shares of our common stock to our outside
directors in the aggregate amount of zero in 2007, 3,000 in 2006
and 6,000 in 2005.
In January 2005, we sold 1,600,000 shares of our common
stock at a gross price of $13.00 per share. The net proceeds
from this offering were approximately $19,300.
In December 2005, we issued 369,375 shares of our common
stock in connection with acquiring a long-term lease located at
the Tallahassee Mall.
Effective April 10, 2007, we entered into an agreement to
issue, at a price of $25 per share, up to $50,000 of convertible
preferred stock through the private placement of
2,000,000 shares of 6.85% Series A Cumulative
Convertible Preferred Stock (the Series A Preferred
Stock) to Inland American Real Estate Trust, Inc., a
public non-listed REIT sponsored by an affiliate of the Inland
Real Estate Group of Companies (Inland American). As
of December 31, 2007, we had issued all
2,000,000 shares for an aggregate purchase price of $50,000.
The net proceeds are being applied to fund redevelopment costs,
to repay borrowings under our line of credit and for general
corporate purposes. Concurrently, our operating partnership
issued to us 2,000,000 of its 6.85% Preferred Units.
Under the terms of this transaction, and in accordance with New
York Stock Exchange rules, we obtained shareholder approval to
permit conversion of the preferred shares into common stock.
Inland American Real Estate Trust has the option after
June 30, 2009 to convert some or all of its outstanding
preferred shares. Each preferred
99
FELDMAN
MALL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
DECEMBER 31, 2007
(Dollar Amounts in Thousands, Except Share and Per Share
Data)
share was issued at a price of $25.00 per share and is
convertible, in whole or in part, at a conversion ratio of
1.77305 common shares to preferred shares. This conversion ratio
is based upon a common share price of $14.10 per share.
Under the terms of the Articles Supplementary relating to
the Series A Preferred Stock, at all times during which the
Series A Preferred Stock is outstanding, the holders of the
Series A Preferred Stock have the right to elect one person
to serve as a director of our company. In addition, in the event
that beginning on March 31, 2008 (upon public release of
the unaudited interim financial statements for such date) and
each March 31 thereafter, if our fixed charge coverage ratio
measured on a trailing 12 month basis shall be less than
1.20 to 1.00 or our capitalization ratio shall be less than 0.75
to 1.00, the holders of the Series A Preferred Stock shall
have the right to elect one additional member to our board of
directors. We do not expect to meet the fixed charge coverage
ratio of 1.20 to 1.00 as of March 31, 2008.
Stock
Repurchase
On November 12, 2007, we announced that our board of
directors authorized the repurchase of up to
3,000,000 shares of our issued and outstanding common
stock, par value $0.01 per share. The shares are expected to be
acquired from time to time at prevailing prices through
open-market transactions or through negotiated block purchases,
which will be subject to restrictions related to volume, price,
timing, market conditions and applicable Securities and Exchange
Commission rules.
The repurchase program does not require us to repurchase any
specific number of shares and may be modified, suspended or
terminated by our board of directors at any time without prior
notice. At this time, based on the current market conditions, we
do not plan on using our current liquidity to repurchase shares.
As of December 31, 2007, there have been no share
repurchases made under this program.
As of December 31, 2007 and 2006, minority interest relates
to the interests in our operating partnership that are not owned
by us, which were approximately 9.8% and 9.7%, respectively. In
conjunction with our formation, certain persons and entities
contributing ownership interests in our predecessor to the
operating partnership received units. Limited partners who
acquired units in our formation transactions have the right,
commencing on or after December 16, 2005, to require our
operating partnership to redeem part or all of their units for
cash or, at our option, an equivalent number of shares of our
common stock at the time of the redemption. Alternatively, we
may elect to acquire those units in exchange for shares of our
common stock on a
one-for-one
basis subject to adjustment in the event of stock splits, stock
dividends, and issuance of stock rights, specified extraordinary
distributions or similar events. If we elect to exchange OP
units for shares of common stock, we will initially issue such
shares in a transaction that is not required to be registered
under the Securities Act of 1933. As a consequence, such shares
will be subject to resale restrictions required under such Act.
Under the registration rights agreement to which the holders of
OP units are parties, we are obligated, during the period of
time that we are eligible to use Form S-3 registration
statements, to register the resale of any shares of common stock
that may be issued to such holders upon the exchange of their OP
units.
|
|
14.
|
Commitment
and Contingencies
|
In the normal course of business, we may become involved in
legal actions relating to the ownership and operations of our
properties and the properties we manage for third parties. In
managements opinion, the resolutions of these legal
actions are not expected to have a material adverse effect on
our consolidated financial position or results of operations.
100
FELDMAN
MALL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
DECEMBER 31, 2007
(Dollar Amounts in Thousands, Except Share and Per Share
Data)
All of our malls that have nonowned parcels sharing common areas
are subject to reciprocal easement agreements that address use
and maintenance of common areas and often address other issues,
including use restrictions and operating covenants. These
agreements are recorded against the properties and are long-term
in nature.
Adjacent to the Stratford Square Mall are five third-party owned
anchor tenant spaces. We have entered into operating agreements
with these six anchor tenants to share certain operating
expenses based on allocated amounts per square foot. The
agreements terminate in March 2031.
As of December 31, 2007, we have commitments to make tenant
improvements and other capital expenditures in the amount of
approximately $3,000. In addition, in connection with leases
that have been signed through December 31, 2007 included in
the redevelopment expansion plans of the malls and current
redevelopment activity, we are committed to spend approximately
$9,100 for 2008.
In connection with the formation transactions, we entered into
agreements with Messrs. Feldman, Bourg and Jensen that
indemnify them with respect to certain tax liabilities intended
to be deferred in the formation transactions, if those
liabilities are triggered either as a result of a taxable
disposition of a property by us, or if we fail to offer the
opportunity for the contributors to guarantee or otherwise bear
the risk of loss, with respect to certain amounts of our debt
for tax purposes (the contributor-guaranteed debt).
With respect to tax liabilities arising out of property sales,
the indemnity will cover 100% of any such liability
(approximately $5.2 million at December 31,
2007) until December 31, 2009 and will be reduced by
20% of the aggregate liability on each of the five following
year ends thereafter.
We also have agreed to maintain approximately $10,000 of
indebtedness and to offer the contributors the option to
guarantee $10,000 of the operating partnerships
indebtedness, in order to enable them to continue to defer
certain tax liabilities. The obligation to maintain such
indebtedness extends to 2013, but will be extended by an
additional five years for any contributor that holds (together
with his affiliates) at that time at least 25% of the initial
ownership interest in the operating partnership issued to them
in the formation transactions. As of December 31, 2007,
Feldman Partners, LLC, an affiliate of Larry Feldman, guarantees
$8,000 of the loan secured by the Stratford Square Mall.
We have operating lease obligations for office space and
equipment related to our corporate offices and property
locations. The future minimum lease payments under these
noncancelable leases as of December 31, 2007 are as follows:
|
|
|
|
|
Year ending December 31,
|
|
|
|
|
2008
|
|
$
|
373
|
|
2009
|
|
|
296
|
|
2010
|
|
|
206
|
|
2011
|
|
|
99
|
|
2012
|
|
|
5
|
|
2013 and thereafter
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
979
|
|
|
|
|
|
|
101
FELDMAN
MALL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
DECEMBER 31, 2007
(Dollar Amounts in Thousands, Except Share and Per Share
Data)
We have a ground lease obligation at the Tallahassee Mall
expiring in February 2063, which includes renewal option
periods, and the minimum commitment under this lease as of
December 31, 2007 was as follows:
|
|
|
|
|
Year ending December 31,
|
|
|
|
|
2008
|
|
$
|
228
|
|
2009
|
|
|
236
|
|
2010
|
|
|
244
|
|
2011
|
|
|
252
|
|
2012
|
|
|
260
|
|
2013 and thereafter
|
|
|
23,311
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
24,531
|
|
|
|
|
|
|
Total rent expense, including amortization of the below-market
ground lease asset, was $1,073, $989, and $470 in 2007, 2006 and
2005, respectively.
We entered into employment agreements with our executive
officers that expire in 2008. These agreements provide for
salary, bonuses and other benefits including, potentially,
severance benefits upon termination of employment, as well as
for grants of restricted common stock, option awards, cash
bonuses and tax
gross-ups,
among other matters.
In October 2007, Larry Feldman, our chairman, entered into a
letter agreement with us pursuant to which he agreed to step
down as our chief executive officer. He remains chairman of the
board and is employed by us to focus on leasing, anchor tenant
retention and replacement, redevelopment and construction, and
strategic direction and planning. Under the terms of this letter
agreement, Mr. Feldman has agreed to forego any severance
payments arising out of his change of status, unless his
employment with us is terminated (without cause) on or prior to
May 31, 2008.
|
|
15.
|
Investments
in Unconsolidated Partnerships
|
Foothills
Mall
During February 2006, we entered into a contribution agreement
with a subsidiary of Kimco Realty Corp. (Kimco) in
connection with the Foothills Mall, located in the suburbs of
Tucson, Arizona. Under the terms of the contribution agreement,
we contributed the Foothills Mall to a limited liability company
at an agreed value of $104,000, plus certain closing costs (the
Foothills JV). The transaction closed on
June 29, 2006. We accounted for the transaction as a
partial sale of real estate, which resulted in us recognizing a
gain of $29,397. Pursuant to the terms of the contribution
agreement, we received approximately $38,900 in net proceeds
from the transaction. Because we received cash in excess of our
net basis contributed to the Foothills JV, we recorded negative
carrying value of our investment in the amount of $4,450.
On the closing date, the Foothills JV extinguished the existing
first mortgage loan totaling $54,750 and refinanced the property
with an $81,000 non-recourse first mortgage loan. The $81,000
first mortgage loan matures in July 2016 and bears interest at
6.08%. The loan may not be prepaid until the earlier of three
years from the first interest payment or two years from date of
loan syndication and has no principal payments for the first
five years and then loan principal amortizes on a
30-year
basis thereafter. The mortgage loan contains financial covenants
requiring the Foothills JV to maintain certain financial debt
service coverage ratios, among other requirements. The Foothills
JV is in compliance with all such covenants as of and for the
period ended December 31, 2007. Simultaneous with the
refinancing, Kimco contributed cash in the amount of $14,757 to
the Foothills JV. Kimco will receive a preferred return of 8.0%
on its capital from the Foothills Malls cash flow. Kimco
may be required to make
102
FELDMAN
MALL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
DECEMBER 31, 2007
(Dollar Amounts in Thousands, Except Share and Per Share
Data)
additional capital contributions to the Foothills JV for
additional tenant improvements and leasing commissions, as
defined in the limited liability company agreement, which in the
aggregate shall not exceed $2,000. Upon the first to occur of a
sale of the property or June 2010, Kimco will make an additional
capital contribution to the Foothills JV in an amount equal to
the unfunded portion of the $2,000 (if any), which will be
distributed to us. Upon a sale or refinancing of the Foothills
Mall, Kimco is also entitled to receive a priority return of its
capital together with any unpaid accrued preferred return. After
certain adjustments, we are next entitled to receive an 8%
preferred return on and a return of capital. Thereafter, all
surplus proceeds will be split 20% to Kimco and 80% to us.
Additionally, we agreed to serve as the managing member of the
Foothills JV and will retain primary management, leasing and
construction oversight, for which we will receive customary
fees. We have determined the Foothills JV is not a VIE and
account for our investment in the joint venture under the equity
method.
The Foothills JV agreement includes buy-sell
provisions commencing in June 2008 for us and after May 2010
allowing either Foothills JV partner to acquire the interests of
the other. Either partner to the Foothills JV may initiate a
buy-sell proceeding, which may enable it to acquire
the interests of the other partner. However, the partner
receiving an offer to be bought out will have the right to buy
out such offering partner at the same price offered. The
Foothills JV agreement does not limit our ability to enter into
real estate ventures or co-investments with other third parties.
As of December 31, 2007, the Foothills JV has commitments
for tenant improvements, renovation costs and other capital
needs in the amount of approximately $2,500. In addition, the JV
is committed to spend approximately $3,000 in 2008 and intends
to fund them from operating cash flow and equity contributions
to the partnership.
Harrisburg
Mall
We have a 24% limited partnership interest and a 1% general
partnership interest in Feldman Lubert Adler Harrisburg, LP (the
partnership). The partnership purchased a regional
mall in Harrisburg, Pennsylvania on September 29, 2003.
The Harrisburg Mall was purchased with the proceeds of a
mortgage loan and cash contributions from the predecessor and
its joint venture partner. The mortgage loan is a line of credit
with a maximum commitment of $50,000 and no principal payments
until the maturity date, which was extended in 2005 to March
2008. The interest rate is LIBOR plus 1.625% per annum. During
July 2005, the partnership increased the borrowings to $49,750
and distributed $6,500 to the partners on a pro rata basis, of
which we received $1,625. The effective rates on the loan at
December 31, 2007 and 2006 were 6.277% and 6.975%,
respectively.
As of December 31, 2007, the partnership may prepay the
loan at any time, without incurring any prepayment penalty. The
loan presently has a limited recourse of $5,000 of which our
joint venture partner is liable for $3,150 or 63% and we are
liable for $1,850 or 37%. We are currently negotiating an
extension to the loan through December 31, 2009, at a
borrowing rate of 200 basis points over LIBOR. However,
there can be no assurances that we will be able to extend the
loan for this period or at this rate.
The balance outstanding under the loan was $49,750 as of
December 31, 2007 and 2006. We are required to maintain
cash balances with the lender averaging $5,000. If the balances
fall below $5,000 in any one month, the interest rate on the
loan increases to LIBOR plus 1.875%.
The partnership agreement includes a buy-sell
provision allowing either joint venture partner to acquire the
interests of the other. Either partner may initiate a
buy-sell proceeding, which may enable it to acquire
the interests of the other partner. However, the partner
receiving an offer to be bought out will have the right to buy
out such offering partner at the same price offered. The
partnership agreement does not limit our ability to enter into
real estate ventures or co-investments with other third parties.
However, the agreement restricts our ability to enter into
transactions relating to the partnership with our affiliates
without the prior approval of our partner.
103
FELDMAN
MALL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
DECEMBER 31, 2007
(Dollar Amounts in Thousands, Except Share and Per Share
Data)
Under the terms of the joint venture, we are generally
responsible for funding 25% of the capital contributions
required for the venture. As of December 31, 2007, we had
funded $10,600 and our joint venture partner $16,800 of the
capital contributions made to the joint venture. As of
December 31, 2007, we estimate that completion of the
redevelopment project for this property will require total
additional capital contributions of approximately $12,400. We
are currently attempting to resolve a dispute with our joint
venture partner relating to the scope of the redevelopment plan
for this project. Our joint venture partner has notified us that
it believes that certain aspects of the last phase of the
development plan were not approved in accordance with the joint
venture agreement and as a result has claimed that we are
responsible for 100% of the funding required for this part of
the project. We are continuing to negotiate with our joint
venture partner relating to this dispute and are seeking to
develop a mutually acceptable solution for this issue. Through
December 31, 2007, we have funded $4,000 above our 25%
capital contribution requirement for these redevelopment
projects.
The partnership has commitments for tenant improvements and
other capital expenditures in the amount of $273 to be incurred
in 2008 and intends to fund them from operating cash flow. The
partnership has additional renovation cost commitments of
$11,807 in 2008 and $614 thereafter. The partnership will fund
these renovation costs with additional financing activity or
equity contributions.
One of our tenants at this property, Panera Bread, which has
executed a new lease to cover approximately 4,200 square
feet of newly developed restaurant space at the this property,
has notified us that it is considering sub-letting this space to
another retailer. Under its lease, Panera Bread has the right to
sublet this space, subject to our reasonable approval. The
subletting of this space could delay the opening of the
restaurant that will ultimately occupy this space. Under the
lease with Barnes & Noble at this property, a delay in
the opening of a suitable restaurant in the Panera Bread
location could result in Barnes & Noble exercising its
right under its lease to convert its fixed rate rent into a
percentage rent formula and ultimately could give
Barnes & Noble the right to terminate its lease at
this property. We are in the process of assessing our options
with regard to this space in the event that Panera Bread moves
forward with its sub-let plan.
Colonie
Center Mall
On August 9, 2006, we announced that we entered into a
joint venture agreement with a subsidiary of Heitman LLC
(Heitman) in connection with the Colonie Center Mall
located in Albany, New York. On September 29, 2006, we
completed the joint venture with Heitman. Under the terms of the
Contribution Agreement, we contributed the property to FMP
Colonie LLC, a new Delaware limited liability company (the
Colonie JV). Heitmans contribution of $47,000
to the venture represents approximately 75% of the equity in the
Mall. The Companys contribution to the venture was valued
at approximately $15,667, representing approximately 25% of the
equity in the property. In addition, we have made preferred
capital contributions of approximately $10,291 as of
December 31, 2007. We have also agreed to a cost guarantee
related to certain redevelopment costs of the propertys
redevelopment project totaling approximately $56,000. To the
extent these costs exceed $56,000, our preferred equity
contributions will be recharacterized as subordinated capital
contributions. These subordinated equity contributions may not
be distributed to us until Heitman receives a 15% return on and
a return of its invested equity capital. We estimate that this
project will experience approximately $15,000 of hard cost
overruns. We have secured the balances of these cost overruns
with a $10,250 letter of credit from our line of credit.
We accounted for our contribution to the Colonie JV as a partial
sale of the real estate and, due to our continuing involvement
in the property, we deferred the $3,515 gain. This deferred gain
was recorded as a liability in our consolidated balance sheet.
The LLC Agreement between us and Heitman allows a buy-sell
process to be initiated by us at any time on or after
January 30, 2010 or by Heitman, at any time on or after
November 1, 2010. There are additional provisions
104
FELDMAN
MALL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
DECEMBER 31, 2007
(Dollar Amounts in Thousands, Except Share and Per Share
Data)
regarding disputes, defaults and change in management that allow
Heitman to initiate a buy-sell process. The member initiating
the buy-sell must specify a total purchase price for the
property and the amount of the purchase price that would be
distributed to each of the two members, with the allocation of
the total purchase price being subject to arbitration if the
parties disagree. The member receiving the buy-sell notice must
elect within 60 days to either allow the initiating member
to purchase the recipients interest in the Colonie JV for
the price stated in the notice or to purchase the initiating
members interest in the joint venture.
In connection with the recapitalization of the property, the
Colonie JV refinanced the property with a new construction
facility (the Loan) with a maximum loan commitment
of $109,800 and repaid the existing $50,766 mortgage loan on the
property. On February 13, 2007, the Colonie JV borrowed an
additional $50,055 under the Loan and on February 27, 2007,
the Loan was increased by $6,500 to $116,300. The Loan bears
interest at 180 basis points over LIBOR and matures in
October 2008. In connection with the Loan, the Colonie JV
entered into a two-year interest rate protection agreement
fixing the initial $50,766 of the Loan at all-in interest rate
of 6.84%. The Colonie JV has entered into a LIBOR-based interest
rate cap agreement on notional amounts ranging from $21,233 in
October 2006 to $59,054 through October 2008 for anticipated
borrowings related to capital expenditures. The LIBOR caps range
from 5.75% to 6.25%. The Loan is an interest only loan. The Loan
has no lockout period, however, the Loan is subject to
prepayment fees ranging from 1.5% to 1.0% through March 2008.
The Loan contains certain financial covenants requiring the
Colonie JV to maintain certain financial debt service coverage
ratios, among other requirements. The Loan requires that we
maintain a minimum debt service coverage ratio during the
initial term of the Loan and, if we fail to meet the required
ratio, cash flow to us is restricted. As of December 31,
2007, we did not meet the debt service coverage ratio and
certain cash flow is currently unavailable, however if and when
we satisfy the ratio, the cash flow will be released to us. The
loan may be extended beyond October 2008, subject to
satisfaction of certain financial covenants and other customary
requirements for up to two additional years. Based upon the
malls current performance, we do not believe these
financial covenants will be satisfied and therefore we will not
satisfy the conditions to extend the loan. We will attempt to
negotiate a modification or waiver of the covenants and loan
extension with the current lender prior to the maturity date. We
continue to manage the property and receive customary
management, construction and leasing fees in accordance with our
joint venture agreement with Heitman.
The Colonie JV has commitments for tenant improvements,
renovation costs and other capital expenditures in the amount of
approximately $17,372 to be incurred during 2008. The Colonie JV
intends to fund these commitments from loan proceeds, equity
contributions and operating cash flow.
We are the managing member of the Colonie JV and are responsible
for the management, leasing and construction of the property and
charge customary market fees for such services.
Condensed combined balance sheets for our unconsolidated joint
ventures at December 31, 2007 and 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
Investment in real estate, net
|
|
$
|
333,463
|
|
|
$
|
257,041
|
|
Receivables including deferred rents
|
|
|
4,308
|
|
|
|
5,768
|
|
Other assets
|
|
|
31,853
|
|
|
|
31,865
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
369,624
|
|
|
$
|
294,674
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans payable
|
|
$
|
233,225
|
|
|
$
|
181,516
|
|
Other liabilities
|
|
|
52,608
|
|
|
|
34,525
|
|
Owners equity
|
|
|
83,791
|
|
|
|
78,633
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and owners equity
|
|
$
|
369,624
|
|
|
$
|
294,674
|
|
|
|
|
|
|
|
|
|
|
The Companys share of owners equity
|
|
$
|
21,283
|
|
|
$
|
20,159
|
|
105
FELDMAN
MALL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
DECEMBER 31, 2007
(Dollar Amounts in Thousands, Except Share and Per Share
Data)
Condensed combined statements of operations for our
unconsolidated joint ventures are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Revenue
|
|
$
|
37,399
|
|
|
$
|
21,540
|
|
|
$
|
10,544
|
|
Operating and other expenses
|
|
|
(21,170
|
)
|
|
|
(11,454
|
)
|
|
|
(5,127
|
)
|
Interest expense (including the amortization of deferred
financing costs)
|
|
|
(13,302
|
)
|
|
|
(6,965
|
)
|
|
|
(2,724
|
)
|
Depreciation and amortization
|
|
|
(11,984
|
)
|
|
|
(6,467
|
)
|
|
|
(3,216
|
)
|
Other
|
|
|
|
|
|
|
50
|
|
|
|
(1,292
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(9,057
|
)
|
|
$
|
(3,296
|
)
|
|
$
|
(1,815
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys share of net loss
|
|
$
|
(1,900
|
)
|
|
$
|
(550
|
)
|
|
$
|
(454
|
)
|
The difference between our investments in unconsolidated joint
ventures and our share of the owners equity is due
primarily to the suspension of losses recognized related to the
Foothills JV (note 2) and net amounts receivable from
the joint ventures that are included in investments in
unconsolidated real estate partnerships in the consolidated
balance sheets.
|
|
16.
|
Fair
Value of Financial Instruments
|
As of December 31, 2007 and 2006, the fair values of our
mortgage and other loans payable are approximately the carrying
values, as the terms are similar to those currently available to
us for debt with similar risk and the same remaining maturities.
The carrying amounts for cash and cash equivalents, restricted
cash, rents and other receivables and accounts payable and other
liabilities, approximate fair value because of the short-term
nature of these instruments.
|
|
17.
|
Financial
Instruments: Derivatives and Hedging
|
The following summarizes the notional and fair value of our
derivative financial instruments at December 31, 2007. The
notional value is an indication of the extent of our involvement
in this instrument at that time, but does not represent exposure
to credit, interest rate or market risks:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional
|
|
|
Strike
|
|
|
Effective
|
|
|
Expiration
|
|
|
Fair
|
|
|
|
Value
|
|
|
Rate
|
|
|
Date
|
|
|
Date
|
|
|
Value
|
|
|
Interest rate swap
|
|
$
|
75,000
|
|
|
|
3.75
|
%
|
|
|
2/2005
|
|
|
|
1/2008
|
|
|
$
|
21
|
|
Interest rate swap
|
|
|
75,000
|
|
|
|
4.91
|
%
|
|
|
1/2008
|
|
|
|
1/2011
|
|
|
|
(2,521
|
)
|
Interest rate swap
|
|
|
29,500
|
|
|
|
5.50
|
%
|
|
|
6/2007
|
|
|
|
5/2010
|
|
|
|
(1,240
|
)
|
On December 31, 2007, the fair values of the derivative
instruments were recorded in other assets and accounts payable,
accrued expenses and other liabilities. Over time, the
unrealized loss of $3,661 in accumulated other comprehensive
loss will be reclassified into operations as interest expense in
the same periods in which the hedged interest payments affect
earnings. We estimate that approximately $1,148 will be
reclassified between accumulated other comprehensive income and
earnings within the next 12 months.
We hedge our exposure to variability in anticipated future
interest payments on existing variable rate debt.
106
FELDMAN
MALL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
DECEMBER 31, 2007
(Dollar Amounts in Thousands, Except Share and Per Share
Data)
|
|
18.
|
Quarterly
Financial Information (Unaudited)
|
The tables below reflect selected quarterly information for the
years ended December 31, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
Total revenue
|
|
$
|
13,269
|
|
|
$
|
14,873
|
|
|
$
|
12,436
|
|
|
$
|
14,760
|
|
Loss before minority interests
|
|
|
(8,051
|
)
|
|
|
(3,440
|
)
|
|
|
(5,450
|
)
|
|
|
(957
|
)
|
Net loss
|
|
|
(7,319
|
)
|
|
|
(3,129
|
)
|
|
|
(4,935
|
)
|
|
|
(864
|
)
|
Loss per share basic and diluted
|
|
$
|
(.60
|
)
|
|
$
|
(.26
|
)
|
|
$
|
(.40
|
)
|
|
$
|
(.07
|
)
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
12,860,086
|
|
|
|
12,867,834
|
|
|
|
12,861,661
|
|
|
|
12,856,661
|
|
Diluted
|
|
|
12,860,086
|
|
|
|
12,867,834
|
|
|
|
12,861,661
|
|
|
|
12,856,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
|
2006
|
|
|
2006
|
|
|
2006(1)
|
|
|
2006
|
|
|
Total revenue
|
|
$
|
14,749
|
|
|
$
|
15,388
|
|
|
$
|
18,490
|
|
|
$
|
16,678
|
|
(Loss) income before minority interests
|
|
|
(1,137
|
)
|
|
|
(1,982
|
)
|
|
|
27,314
|
|
|
|
(1,545
|
)
|
Net (loss) income
|
|
|
(1,026
|
)
|
|
|
(1,767
|
)
|
|
|
24,352
|
|
|
|
(1,378
|
)
|
Basic (loss) earnings per share
|
|
$
|
(0.08
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
1.90
|
|
|
$
|
(0.11
|
)
|
Diluted (loss) earnings per share
|
|
|
(0.08
|
)
|
|
|
(0.14
|
)
|
|
|
1.86
|
|
|
|
(0.11
|
)
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
12,820,563
|
|
|
|
12,811,237
|
|
|
|
12,801,854
|
|
|
|
12,798,310
|
|
Diluted
|
|
|
12,820,563
|
|
|
|
12,811,237
|
|
|
|
14,692,853
|
|
|
|
12,798,310
|
|
|
|
|
(1)
|
|
Income for the three months ended June 30, 2006 includes a
gain on the partial sale of real estate in the amount of $29,968.
|
On April 1, 2008, we entered into an agreement with
Brandywine Financial Services Corporation, a Pennsylvania
corporation (Brandywine), and a member of the
Brandywine Companies, pursuant to which it agreed to provide us
certain management, corporate accounting and administrative
services for a fee equal to (a) 1.50% of our gross revenue
generated by certain of our properties, payable monthly, plus
(b) $60,000 per month, plus (c) travel and other
out-of-pocket expenses incurred by Brandywine in connection with
such services. This agreement has an initial termination date of
June 30, 2009 and can be renewed on a year-to-year basis
unless otherwise terminated by the parties upon not less than
90 days prior written notice (after June 30, 2008). In
connection with this agreement, Brandywine was paid a set-up fee
of $35 per entity totaling $350.
Bruce Moore, one of our directors, is the chairman and chief
executive officer of Brandywine.
107
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
NONE
|
|
ITEM 9A.
|
CONTROLS
AND PROCEDURES
|
|
|
(1)
|
Evaluation
of Disclosure Controls and Procedures
|
We maintain disclosure controls and procedures that are designed
to ensure that information required to be disclosed in our
Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified in the SECs
rules and forms, and that such information is accumulated and
communicated to our management, including our President and
Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure based closely on the
definition of disclosure controls and procedures in
Rule 13a-15(e).
In designing and evaluating the disclosure controls and
procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired
control objectives, and management necessarily was required to
apply its judgment in evaluating the cost-benefit relationship
of possible controls and procedures.
As of the end of the period covered by this report, we carried
out an evaluation, under the supervision and with the
participation of our management, including our President and
Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures. Based upon
that evaluation, our President and Chief Financial Officer
concluded that our disclosure controls and procedures were not
effective, as a result of the material weaknesses in internal
control over financial reporting as of December 31, 2007,
as described below.
|
|
(2)
|
Managements
Report on Internal Control over Financial Reporting
|
We are responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is
defined in Exchange Act
Rules 13a-15(f)
and
15d-15(f).
Under the supervision and with the participation of our
management, including our President and Chief Financial Officer,
we conducted an evaluation of the effectiveness of our internal
control over financial reporting as of December 31, 2007
based on the framework in
Internal Control-Integrated
Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
A material weakness is a deficiency, or a combination of
deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material
misstatement of the Companys annual or interim financial
statements will not be prevented or detected on a timely basis.
Based on that evaluation, we concluded that, as of
December 31, 2007, we have the following material
weaknesses:
|
|
|
|
|
Adequacy of Accounting Personnel
We lacked
personnel possessing technical accounting expertise adequate to
ensure that our consolidated financial statements were prepared
accurately and on a timely basis. As a result, certain controls
and reconciliations associated with financial statement account
balances were not performed on a timely basis, journal entries
were recorded without adequate support, and review and approval
procedures associated with critical financial reporting process
controls were not documented. This material weakness in internal
control over financial reporting resulted in misstatements that
were corrected prior to the issuance of the 2007 annual and
interim financial statements and there is a reasonable
possibility that a material misstatement in the financial
statements would not be prevented or detected on a timely basis.
|
|
|
|
Segregation of Duties
We did not maintain
adequate segregation of duties related to job responsibilities
for initiating, authorizing, and recording transactions. Due to
this material weakness, there is a reasonable possibility that a
material misstatement in the financial statements would not be
prevented or detected on a timely basis.
|
Management has concluded that, as a result of these material
weaknesses noted above, the Company did not maintain effective
internal control over financial reporting as of
December 31, 2007 based on criteria set forth in the COSO
framework.
Our internal control over financial reporting as of
December 31, 2007 has been audited by KPMG LLP, an
independent registered public accounting firm, as stated in
their report which is included on the following page.
108
(3) Report
of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Feldman Mall Properties, Inc.:
We have audited Feldman Mall Properties, Inc.s (the
Company) internal control over financial reporting as of
December 31, 2007, based on criteria established in
Internal Control Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Feldman Mall Properties, Inc.s
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting,
included in the accompanying Managements Report on
Internal Control over Financial Reporting (Item 9A.(2)).
Our responsibility is to express an opinion on the
Companys internal control over financial reporting based
on our audit.
We conducted our audit 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. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material misstatement exists, and testing and evaluating
the design and operating effectiveness of internal control based
on the assessed risk. Our audit also included performing such
other procedures considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our
opinion.
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 (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) 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 (3) 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.
A material weakness is a deficiency, or a combination of
deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material
misstatement of the companys annual or interim financial
statements will not be prevented or detected on a timely basis.
Material weaknesses related to the Adequacy of Accounting
Personnel and Segregation of Duties have been identified and
included in managements assessment.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Feldman Mall Properties, Inc. and
subsidiaries as of December 31, 2007 and 2006, and the
related consolidated statements of operations,
stockholders equity and comprehensive income (loss) and
cash flows for the years in the three-year period ended
December 31, 2007. These material weaknesses were
considered in determining the nature, timing, and extent of
audit tests applied in our audit of the 2007 consolidated
financial statements, and this report does not affect our report
dated April 11, 2008, which expressed an unqualified
opinion on those consolidated financial statements.
In our opinion, because of the effect of the aforementioned
material weaknesses on the achievement of the objectives of the
control criteria, Feldman Mall Properties, Inc. has not
maintained effective internal control over financial reporting
as of December 31, 2007, based on criteria established in
Internal Control Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
New York, New York
April 11, 2008
109
|
|
(4)
|
Managements
Remedial Actions
|
During the quarter ended December 31, 2007, we began taking
steps to restructure the management and certain operations of
the company in part to strengthen our internal control over
financial reporting. We expanded the responsibilities of our
Chief Financial Officer over the management of the Company, with
a greater focus on public company responsibilities, including
timely financial reporting. As described in Item 1 herein,
during 2008, we entered into an agreement and began the process
of outsourcing a significant portion of our accounting functions
to a firm that has the experience to assist the Company in
preparing its 2008 consolidated financial statements and with
the timely filing of quarterly and annual financial reports.
While the Company is ultimately responsible for the financial
statements and the internal control over financial reporting and
will retain certain corporate accounting responsibilities, we
believe this third-party firm has adequate resources to improve
the operating effectiveness of the financial close process, and
maintain appropriate segregation of duties for all positions and
processes.
Management believes that outsourcing property accounting and
certain corporate accounting functions will allow the Company to
prepare its financial statements on a timely basis in accordance
with our current policies and procedures.
|
|
(5)
|
Changes
in Internal Control over Financial Reporting
|
There were no other changes in our internal control over
financial reporting (as defined in
Rules 13a-13(f)
and
15d-15(f)
of
the Exchange Act) , other than the change in management
responsibilities as discussed above, identified in connection
with the evaluation of our controls performed during the quarter
ended December 31, 2007 that have materially affected, or
are reasonably likely to materially affect, our internal control
over financial reporting.
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
NONE
PART III
|
|
ITEM 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
Information required by Item 10 will be in our Definitive
Proxy Statement for our 2007 annual meeting of stockholders,
which is expected to be filed pursuant to Regulation 14A
under the Securities and Exchange Act of 1934, as amended, prior
to April 30, 2008 (the 2008 Proxy Statement)
and is incorporated herein by reference.
|
|
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
Information required by Item 11 will be set forth in the
2008 Proxy Statement and is incorporated herein by reference.
|
|
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
Information required by Item 12 will be set forth in the
2008 Proxy Statement and is incorporated herein by reference.
|
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
|
Information required by Item 13 will be set forth in the
2008 Proxy Statement and is incorporated herein by reference.
110
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
Information required by Item 14 will be set forth in the
2008 Proxy Statement and is incorporated herein by reference.
PART
IV
|
|
ITEM 15.
|
EXHIBITS AND
FINANCIAL STATEMENTS SCHEDULES
|
(a) Documents filed as part of this report:
(1) and (2) Financial Statements and
Schedules see Index to Financial Statements
included in Item 8.
(3) The following documents are filed or incorporated by
references as exhibits to this report:
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
3
|
.1
|
|
Amended and Restated Articles of Incorporation of Feldman Mall
Properties, Inc, incorporated by reference from the
Companys Registration Statement on
Form S-11
(File
No. 333-118246),
filed on December 15, 2004.
|
|
3
|
.2
|
|
Second Amended and Restated Bylaws of Feldman Mall Properties,
Inc., incorporated by reference from the Companys Current
Report on
Form 8-K
filed on March 17, 2005.
|
|
3
|
.3
|
|
Amended and Restated Agreement of Limited Partnership of Feldman
Equities Operating Partnership, LP, dated as of
December 21, 2004, incorporated by reference from the
Companys Annual Report on
Form 10-K
filed on April 15, 2005.
|
|
3
|
.4
|
|
First Amendment to Amended and Restated Agreement of Limited
Partnership of Feldman Equities Operating Partnership, LP, dated
as of December 21, 2004, incorporated by reference from the
Companys Current Report on
Form 10-K
filed on April 15, 2005.
|
|
3
|
.5
|
|
Declaration of Trust of Feldman Holdings Business Trust I,
dated as of November 18, 2004, incorporated by reference
from the Companys Registration Statement on
Form S-11
(File
No. 333-118246),
filed on December 15, 2004.
|
|
3
|
.6
|
|
Declaration of Trust of Feldman Holdings Business Trust II,
dated as of November 18, 2004, incorporated by reference
from the Companys Registration Statement on
Form S-11
(File
No. 333-118246),
filed on December 15, 2004.
|
|
3
|
.7
|
|
Amended and Restated Operating Agreement of Feldman Equities of
Arizona, LLC, dated as of August 13, 2004, by and between
Feldman Partners, LLC, Feldman Equities Operating Partnership,
LP, Lawrence Feldman, Jeffrey Erhart and Edward Feldman,
incorporated by reference from the Companys Registration
Statement on
Form S-11
(File
No. 333-118246),
filed on December 15, 2004.
|
|
3
|
.8
|
|
Second Amended and Restated Agreement of Limited Agreement of
Limited Partnership of Feldman Equities Operating Partnership,
LP, dated as of August 26, 2005, incorporated by reference
from the Companys Current Report on
Form 8-K
filed on August 30, 2005.
|
|
3
|
.9
|
|
Articles Supplementary designating 6.85% Series A
Cumulative Convertible Preferred Stock, par value $0.01 per
share, liquidation preference $25.00 per share, dated as of
April 10, 2007, incorporated by reference to the Company
Current Report on
Form 8-K,
filed on April 16, 2007.
|
|
10
|
.1
|
|
Registration Rights Agreement, dated as of November 15,
2004, by and among the company and the parties listed on
Schedule I thereto, incorporated by reference from the
Companys Registration Statement on
Form S-11
(File
No. 333-118246),
filed on December 15, 2004.
|
|
10
|
.2
|
|
Employment Agreement, dated as of December 13, 2004, by and
between the Company and Lawrence Feldman, incorporated by
reference from the Companys Annual Report on
Form 10-K
filed on April 15, 2005.
|
|
10
|
.3
|
|
Employment Agreement, dated as of December 13, 2004, by and
between the Company and James Bourg, incorporated by reference
from the Companys Registration Statement on
Form S-11
(File No. 333-118246),
filed on December 15, 2004.
|
111
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.4
|
|
Employment Agreement, dated as of December 13, 2004, by and
between the Company and Scott Jensen, incorporated by reference
from the Companys Registration Statement on
Form S-11
(File No. 333-118246),
filed on December 15, 2004.
|
|
10
|
.5
|
|
Employment Agreement, dated as of November 6, 2004, by and
between the Company and Thomas E. Wirth, incorporated by
reference from the Companys Registration Statement on
Form S-11
(File No. 333-118246),
filed on December 15, 2004.
|
|
10
|
.6
|
|
Subscription Agreement, dated as of August 13, 2004, by and
between Feldman Equities Operating Partnership, LP, Feldman
Equities of Arizona, LLC and the Company, incorporated by
reference from the Companys Registration Statement on
Form S-11
(File
No. 333-118246),
filed on December 15, 2004.
|
|
10
|
.7
|
|
Contribution Agreement, dated as of August 13, 2004, by and
between James Bourg, Feldman Equities Operating Partnership, LP
and Feldman Equities of Arizona, LLC., incorporated by reference
from the Companys Registration Statement on
Form S-11
(File
No. 333-118246),
filed on December 15, 2004.
|
|
10
|
.8
|
|
Irrevocable Contribution Agreement, dated as of August 13,
2004, by and between Lawrence Feldman, Feldman Equities
Operating Partnership, LP, Feldman Holdings Business
Trust I, the Company and Feldman Equities of Arizona, LLC.,
incorporated by reference from the Companys Registration
Statement on
Form S-11
(File
No. 333-118246),
filed on December 15, 2004.
|
|
10
|
.9
|
|
Dubin Ownership Interest Assignment Agreement, dated as of
August 13, 2004, by and between Dennis Dubin, Mildred Dubin
and Feldman Equities of Arizona, LLC, incorporated by reference
from the Companys Registration Statement on
Form S-11
(File
No. 333-118246),
filed on December 15, 2004.
|
|
10
|
.10
|
|
Contribution Agreement, dated as of August 13, 2004, by and
between Scott Jensen, Feldman Equities Operating Partnership, LP
and Feldman Equities of Arizona, LLC, incorporated by reference
from the Companys Registration Statement on
Form S-11
(File
no. 333-118246),
filed on December 15, 2004.
|
|
10
|
.11
|
|
Ash Ownership Interests Assignment Agreement, dated as of
August 13, 2004, by and among Ash Foothills Investors, LLC,
Bruce Ash, Paul Ash and Feldman Equities of Arizona, LLC,
incorporated by reference from the Companys Annual Report
on
Form 10-K
filed on April 15, 2005.
|
|
10
|
.12
|
|
Merger Agreement, dated as of August 13, 2004, by and
between Feldman Equities General Partner Inc., Feldman Equities
General Partner Merger Inc., Feldman Equities Partners, LLC and
the Company, incorporated by reference from the Companys
Registration Statement on
Form S-11
(File No. 333-118246),
filed on December 15, 2004.
|
|
10
|
.13
|
|
FHGP Merger Agreement, dated as of August 13, 2004, by and
between Feldman Harrisburg General Partner Inc., Feldman
Harrisburg General Partner Merger Inc., Feldman Partners, LLC
and the Company, incorporated by reference from the
Companys Registration Statement on
Form S-11
(File No. 333-118246),
filed on December 15, 2004.
|
|
10
|
.14
|
|
Recapitalization Agreement, dated as of August 13, 2004, by
and between James Bourg, Scott Jensen, Feldman Equities
Operating Partnership, LP and Feldman Mall Properties, Inc.,
incorporated by reference from the Companys Registration
Statement on
Form S-11
(File
No. 333-118246),
filed on December 15, 2004.
|
|
10
|
.15
|
|
Indemnification Agreement, dated as of December 21, 2004,
by and between the Company and James Bourg, incorporated by
reference from the Companys Annual Report on
Form 10-K
filed on April 15, 2005.
|
|
10
|
.16
|
|
Indemnification Agreement, dated as of December 21, 2004,
by and between the Company and Lawrence Kaplan, incorporated by
reference from the Companys Annual Report on
Form 10-K
filed on April 15, 2005.
|
|
10
|
.17
|
|
Indemnification Agreement, dated as of December 21, 2004,
by and between the Company and Thomas Wirth, incorporated by
reference from the Companys Annual Report on
Form 10-K
filed on April 15, 2005.
|
|
10
|
.18
|
|
Indemnification Agreement, dated as of December 21, 2004,
by and between the Company and Lawrence Feldman, incorporated by
reference from the Companys Annual Report on
Form 10-K
filed on April 15, 2005.
|
112
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.19
|
|
Indemnification Agreement, dated as of December 21, 2004,
by and between the Company and Scott Jensen, incorporated by
reference from the Companys Annual Report on
Form 10-K
filed on April 15, 2005.
|
|
10
|
.20
|
|
Indemnification Agreement, dated as of December 21, 2004,
by and between the Company and Bruce Moore, incorporated by
reference from the Companys Annual Report on
Form 10-K
filed on April 15, 2005.
|
|
10
|
.21
|
|
Indemnification Agreement, dated as of December 21, 2004,
by and between the Company and Paul McDowell, incorporated by
reference from the Companys Annual Report on
Form 10-K
filed on April 15, 2005.
|
|
10
|
.22
|
|
Feldman Partners, LLC Redemption Agreement, dated as of
August 13, 2004, by and between Feldman Partners, LLC,
Feldman Equities of Arizona, LLC, Feldman Equities Operating
Partnership, LP, Feldman Holdings Business Trust I and the
Company, incorporated by reference from the Companys
Registration Statement on
Form S-11
(File
No. 333-118246),
filed on December 15, 2004.
|
|
10
|
.23
|
|
Purchase and Sale Agreement, dated as of September 29,
2004, by and between BRE/Colonie Center LLC. and Feldman
Equities Operating Partnership, LP., incorporated by reference
from the Companys Registration Statement on
Form S-11
(File
No. 333-118246),
filed on December 15, 2004.
|
|
10
|
.24
|
|
First Amendment to Purchase and Sale Agreement, dated as of
December 13, 2004, by and between BRE/Colonie Center LLC
and Feldman Equities Operating Partnership, LP, incorporated by
reference from the Companys Current Report on
Form 8-K
filed on February 7, 2005.
|
|
10
|
.25
|
|
Second Amendment to Purchase and Sale Agreement, dated as of
January 28, 2005, by and between BRE/Colonie Center LLC,
FMP Colonie Center LLP and Feldman Equities Operating
Partnership, LP, incorporated by reference from the
Companys Current Report on
Form 8-K
filed on February 7, 2005.
|
|
10
|
.26
|
|
Waiver and Contribution Agreement, dated as of November 15,
2004, by and between Feldman Partners, LLC, the Company and
Feldman Equities Operating Partnership, LP, incorporated by
reference from the Companys Registration Statement on
Form S-11
(File
No. 333-118246),
filed on December 15, 2004.
|
|
10
|
.27
|
|
Waiver and Contribution Agreement, dated as of November 15,
2004, by and between Lawrence Feldman, the Company and Feldman
Equities Operating Partnership, LP., incorporated by reference
from the Companys Registration Statement on
Form S-11
(File
No. 333-118246),
filed on December 15, 2004.
|
|
10
|
.28
|
|
Waiver and Contribution Agreement, dated as of November 15,
2004, by and between James Bourg, the Company and Feldman
Equities Operating Partnership, LP., incorporated by reference
from the Companys Registration Statement on
Form S-11
(File
No. 333-118246),
filed on December 15, 2004.
|
|
10
|
.29
|
|
Waiver and Contribution Agreement, dated as of November 15,
2004, by and between Scott Jensen, the Company and Feldman
Equities Operating Partnership, LP., incorporated by reference
from the Companys Registration Statement on
Form S-11
(File
No. 333-118246),
filed on December 15, 2004.
|
|
10
|
.30
|
|
Limited Partnership Agreement of Feldman Lubert Adler Harrisburg
LP, dated as of September 30, 2003, incorporated by
reference from the Companys Registration Statement on
Form S-11
(File No. 333-118246),
filed on December 15, 2004.
|
|
10
|
.31
|
|
First Amendment to Limited Partnership Agreement of Feldman
Lubert Adler Harrisburg LP, dated as October 1, 2003,
incorporated by reference from the Companys Registration
Statement on
Form S-11
(File
No. 333-118246),
filed on December 15, 2004.
|
|
10
|
.32
|
|
Second Amendment to Limited Partnership Agreement of Feldman
Lubert Adler Harrisburg LP, dated as of November 13, 2003,
incorporated by reference from the Companys Registration
Statement on
Form S-11
(File
No. 333-118246),
filed on December 15, 2004.
|
|
10
|
.33
|
|
Agreement Regarding Feldman Lubert Adler Harrisburg LP, dated as
of July 19, 2004, incorporated by reference from the
Companys Registration Statement on
Form S-11
(File
No. 333-118246),
filed on December 15, 2004.
|
|
10
|
.34
|
|
First Amendment to Feldman Partners, LLC
Redemption Agreement, dated as of November 15, 2004,
by and between Feldman Partners, LLC, Feldman Equities of
Arizona, LLC, Feldman Equities Operating Partnership, LP,
Feldman Holdings Business Trust I and the Company,
incorporated by reference from the Companys Registration
Statement on
Form S-11
(File
No. 333-118246),
filed on December 15, 2004.
|
113
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.35
|
|
First Amendment to Recapitalization Agreement, dated as of
November 15, 2004, by and between James Bourg, Scott
Jensen, Feldman Equities Operating Partnership, LP and the
Company, incorporated by reference from the Companys
Registration Statement on
Form S-11
(File
No. 333-118246),
filed on December 15, 2004.
|
|
10
|
.36
|
|
2004 Incentive Bonus Plan, incorporated by reference from the
Companys Registration Statement on
Form S-11
(File
No. 333-118246),
filed on December 15, 2004.
|
|
10
|
.37
|
|
2004 Equity Incentive Plan, incorporated by reference from the
Companys Registration Statement on
Form S-11
(File
No. 333-118246),
filed on December 15, 2004.
|
|
10
|
.38
|
|
Purchase and Sale Agreement, dated as of December 29, 2004,
by and between LaSalle Bank National Association and FMP
Stratford LLC, incorporated by reference from the Companys
Current Report on
Form 8-K
filed on January 5, 2005.
|
|
10
|
.39
|
|
Form of Restricted Stock Agreement, incorporated by reference
from the Companys Annual Report on
Form 10-K
filed on April 15, 2005.
|
|
10
|
.40
|
|
Contract for Sale and Purchase, dated as of April 20, 2005,
by and between Tallahassee Partners, Ltd. And FMP Tallahassee
LLC, incorporated by reference from the Companys Current
Report on
Form 8-K
filed on July 5, 2005.
|
|
10
|
.41
|
|
Amendment to Contract for Sale and Purchase, dated as of
May 3, 2005, by and between Tallahassee Partners, Ltd. And
FMP Tallahassee LLC, incorporated by reference from the
Companys Current Report on
Form 8-K
filed on July 5, 2005.
|
|
10
|
.42
|
|
Second Amendment to Contract for Sale and Purchase, dated as of
June 23, 2005, by and between Tallahassee Partners, Ltd.
And FMP Tallahassee LLC, incorporated by reference from the
Companys Current Report on
Form 8-K
filed on July 5, 2005.
|
|
10
|
.43
|
|
Second Amended and Restated Agreement of Limited Partnership of
Feldman Equities Operating Partnership, LP, dated as of
August 26, 2005, incorporated by reference from the
Companys Current Report on
Form 8-K
filed on August 30, 2005.
|
|
10
|
.44
|
|
Amended and Restated Membership Interest Purchase Agreement,
dated as of May 13, 2005, by and among Hocker Northgate
Holdings I, Inc., Hocker Northgate Group, LLC, FMP
Northgate LLC, and David E. Hocker, incorporated by reference
from the Companys Quarterly Report on
Form 10-Q
filed on August 15, 2005.
|
|
10
|
.45
|
|
First Amendment to Amended and Restated Membership Interest
Purchase Agreement, dated as of June 9, 2005, by and among
Hocker Northgate Holdings I, Inc., Hocker Northgate Group,
LLC, FMP Northgate LLC, and David E. Hocker, incorporated by
reference from the Companys Quarterly Report on
Form 10-Q
filed on August 15, 2005.
|
|
10
|
.46
|
|
Second Amendment to Amended and Restated Membership Interest
Purchase Agreement, dated as of July 1, 2005, by and among
Hocker Northgate Holdings I, Inc., Hocker Northgate Group,
LLC, FMP Northgate LLC, and David E. Hocker, incorporated by
reference from the Companys Quarterly Report on
Form 10-Q
filed on August 15, 2005.
|
|
10
|
.47
|
|
Real Estate Purchase and Sale Agreement, dated as of
April 27, 2005, by and among Northgate Investments, LLC and
FMP Northgate Outparcel LLC, incorporated by reference from the
Companys Quarterly Report on
Form 10-Q
filed on August 15, 2005.
|
|
10
|
.48
|
|
Agreement and Release, dated as of November 3, 2006, by and
between Jeffrey Erhart and the Company, incorporated by
reference from the Companys Current Report on
Form 8-K
filed on November 6, 2006.
|
|
10
|
.49
|
|
Purchase Agreement, dated as of April 10, 2007, by and
between the Company and Inland American Real Estate Trust, Inc.,
incorporated by reference from the Companys Current Repot
on
Form 8-K
filed on April 16, 2007.
|
|
10
|
.50
|
|
Registration Rights Agreement, dated as of April 10, 2007,
by and between the Company and Inland American Real Estate
Trust, Inc., incorporated by reference from the Companys
Current Repot on
Form 8-K
filed on April 16, 2007.
|
|
10
|
.51
|
|
Promissory Note, dated as of April 10, 2007, by and between
Feldman Equities Operating Partnership, LP, as borrower, and
Kimco Capital Corp., as lender, incorporated by reference from
the Companys Current Repot on
Form 8-K
filed on April 16, 2007.
|
114
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.52
|
|
Guaranty of Payment and Performance, dated as of April 10,
2007, by and between the Company, as guarantor, and Kimco
Capital Corp., incorporated by reference from the Companys
Current Repot on
Form 8-K
filed on April 16, 2007.
|
|
10
|
.53
|
|
Letter Agreement, dated as of October 26, 2007, by and
between Larry Feldman and the Company, filed herewith.
|
|
10
|
.54
|
|
Agreement and Release, dated as of December 31, 2007, by
and between James Bourg and the Company, filed herewith.
|
|
10
|
.55
|
|
Agreement, dated as of April 1, 2008, by and among the
Company, Feldman Equities Management, LLC and Brandywine
Financial Services Corporation, filed herewith.
|
|
14
|
|
|
Code of Business Conduct and Ethics, incorporated by reference
from the Companys Annual Report on
Form 10-K
filed on April 15, 2005.
|
|
21
|
.1
|
|
List of Subsidiaries of Feldman Mall Properties, Inc., filed
herewith.
|
|
31
|
|
|
Certification of the President and Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002,
filed herewith.
|
|
32
|
|
|
Certifications of the President and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
filed herewith.
|
115
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, the Registrant has
duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FELDMAN MALL PROPERTIES, INC.
Registrant
Thomas Wirth
President and Chief Financial Officer
Date: April 11, 2008
KNOW ALL MEN BY THESE PRESENTS, that we, the undersigned officer
and directors of Feldman Mall Properties, Inc. hereby severally
constitute Thomas Wirth our true and lawful attorney and with
full power to him to sign for us and in our names in the
capacities indicated below, the Annual Report on
Form 10-K
filed herewith and any and all amendments to said Annual Report
on
Form 10-K,
and generally to do all such things in our names and in our
capacities as officers and directors to enable Feldman Mall
Properties, Inc. to comply with the provisions of the Securities
Exchange Act of 1934, and all requirements of the Securities and
Exchange Commission, hereby ratifying and confirming our
signatures as they may be signed by our said attorney to said
Annual Report on
Form 10-K
and any and all amendments thereto.
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, this report has been signed below by the
following person on behalf of the registrant and in the
capacities and on the dates indicated.
|
|
|
|
|
|
|
Name
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Larry
Feldman
Larry
Feldman
|
|
Chairman
|
|
April 11, 2008
|
|
|
|
|
|
/s/ Thomas
Wirth
Thomas
Wirth
|
|
President and Chief Financial Officer (principal executive,
financial
and accounting officer)
|
|
April 11, 2008
|
|
|
|
|
|
/s/ Bruce
Moore
Bruce
Moore
|
|
Director
|
|
April 11, 2008
|
|
|
|
|
|
/s/ Paul
McDowell
Paul
McDowell
|
|
Director
|
|
April 11, 2008
|
|
|
|
|
|
/s/ Lawrence
Kaplan
Lawrence
Kaplan
|
|
Director
|
|
April 11, 2008
|
116
Grafico Azioni Feldman Mall Properties (NYSE:FMP)
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