e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|
|
|
þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2008
OR
|
|
|
o |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
COMMISSION FILE NUMBER: 001-31817
CEDAR SHOPPING CENTERS, INC.
(Exact name of registrant as specified in its charter)
|
|
|
Maryland
|
|
42-1241468 |
|
|
|
(State or other jurisdiction of
incorporation or organization)
|
|
(I.R.S. Employer
Identification No.) |
|
|
|
44 South Bayles Avenue, Port Washington, New York
|
|
11050-3765 |
|
|
|
(Address of principal executive offices)
|
|
(Zip Code) |
(516) 767-6492
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
|
|
|
|
|
|
|
Large accelerated filer o
|
|
Accelerated filer þ
|
|
Non-accelerated filer o
|
|
Smaller reporting company o |
|
|
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date: At April 30, 2008, there were 44,460,886 shares of Common Stock, $0.06
par value, outstanding.
CEDAR SHOPPING CENTERS, INC.
INDEX
|
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
Part I. Financial Information |
|
|
|
|
|
|
|
|
|
Item 1. Financial Statements |
|
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
|
|
7 |
|
|
|
|
|
|
|
|
|
8-25 |
|
|
|
|
|
|
|
|
|
26-35 |
|
|
|
|
|
|
|
|
|
35 |
|
|
|
|
|
|
|
|
|
36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37 |
|
|
|
|
|
|
|
|
|
38 |
|
2
Forward-Looking Statements
Certain statements contained in this Form 10-Q constitute forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Such forward-looking statements include, without limitation, statements containing the
words anticipates, believes, expects, intends, future, and words of similar import which
express the Companys beliefs, expectations or intentions regarding future performance or future
events or trends. While forward-looking statements reflect good faith beliefs, expectations or
intentions, they are not guarantees of future performance and involve known and unknown risks,
uncertainties and other factors, which may cause actual results, performance or achievements to
differ materially from anticipated future results, performance or achievements expressed or implied
by such forward-looking statements as a result of factors outside of the Companys control. Certain
factors that might cause such differences include, but are not limited to, the following: real
estate investment considerations, such as the effect of economic and other conditions in general
and in the Companys market areas in particular; the financial viability of the Companys tenants;
the continuing availability of suitable acquisitions, and development and redevelopment
opportunities, on favorable terms; the availability of equity and debt capital (including the
availability of construction financing) in the public and private markets; the availability of
suitable joint venture partners; changes in interest rates; the fact that returns from development,
redevelopment and acquisition activities may not be at expected levels or at expected times; risks
inherent in ongoing development and redevelopment projects including, but not limited to, cost
overruns resulting from weather delays, changes in the nature and scope of development and
redevelopment efforts, changes in governmental regulations related thereto, and market factors
involved in the pricing of material and labor; the need to renew leases or re-let space upon the
expiration of current leases; and the financial flexibility to repay or refinance debt obligations
when due.
3
CEDAR SHOPPING CENTERS, INC.
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(unaudited) |
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
Real estate: |
|
|
|
|
|
|
|
|
Land |
|
$ |
346,852,000 |
|
|
$ |
313,156,000 |
|
Buildings and improvements |
|
|
1,286,335,000 |
|
|
|
1,272,405,000 |
|
|
|
|
|
|
|
|
|
|
|
1,633,187,000 |
|
|
|
1,585,561,000 |
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation |
|
|
(113,763,000 |
) |
|
|
(103,135,000 |
) |
|
|
|
|
|
|
|
Real estate, net |
|
|
1,519,424,000 |
|
|
|
1,482,426,000 |
|
|
Property and related assets held for sale, net of
accumulated depreciation |
|
|
12,170,000 |
|
|
|
12,135,000 |
|
Investment in unconsolidated joint venture |
|
|
3,775,000 |
|
|
|
3,757,000 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
14,434,000 |
|
|
|
20,307,000 |
|
Restricted cash |
|
|
19,172,000 |
|
|
|
17,839,000 |
|
Rents and other receivables, net |
|
|
9,148,000 |
|
|
|
7,640,000 |
|
Straight-line rents receivable |
|
|
11,941,000 |
|
|
|
11,242,000 |
|
Other assets |
|
|
10,402,000 |
|
|
|
9,778,000 |
|
Deferred charges, net |
|
|
28,952,000 |
|
|
|
29,860,000 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,629,418,000 |
|
|
$ |
1,594,984,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders equity |
|
|
|
|
|
|
|
|
Mortgage loans payable |
|
$ |
676,951,000 |
|
|
$ |
661,074,000 |
|
Secured revolving credit facility |
|
|
226,740,000 |
|
|
|
190,440,000 |
|
Accounts payable and accrued expenses |
|
|
23,253,000 |
|
|
|
26,068,000 |
|
Unamortized intangible lease liabilities |
|
|
67,800,000 |
|
|
|
71,157,000 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
994,744,000 |
|
|
|
948,739,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority interests in consolidated joint ventures |
|
|
57,669,000 |
|
|
|
62,402,000 |
|
Limited partners interest in Operating Partnership |
|
|
25,388,000 |
|
|
|
25,689,000 |
|
|
|
|
|
|
|
|
|
|
Shareholders equity: |
|
|
|
|
|
|
|
|
Preferred stock ($.01 par value, $25.00 per share
liquidation value, 12,500,000 shares authorized, 3,550,000
shares issued and outstanding) |
|
|
88,750,000 |
|
|
|
88,750,000 |
|
Common stock ($.06 par value, 150,000,000 shares authorized
44,461,000 and 44,238,000 shares, respectively, issued and
outstanding) |
|
|
2,668,000 |
|
|
|
2,654,000 |
|
Treasury stock (701,000 and 616,000 shares, respectively, at cost) |
|
|
(9,031,000 |
) |
|
|
(8,192,000 |
) |
Additional paid-in capital |
|
|
573,765,000 |
|
|
|
572,392,000 |
|
Cumulative distributions in excess of net income |
|
|
(104,406,000 |
) |
|
|
(97,514,000 |
) |
Accumulated other comprehensive (loss) income |
|
|
(129,000 |
) |
|
|
64,000 |
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
551,617,000 |
|
|
|
558,154,000 |
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
1,629,418,000 |
|
|
$ |
1,594,984,000 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
4
CEDAR SHOPPING CENTERS, INC.
Consolidated Statements of Income
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
2008 |
|
2007 |
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
Rents |
|
$ |
34,071,000 |
|
|
$ |
28,274,000 |
|
Expense recoveries |
|
|
8,918,000 |
|
|
|
7,192,000 |
|
Other |
|
|
207,000 |
|
|
|
352,000 |
|
|
|
|
Total revenues |
|
|
43,196,000 |
|
|
|
35,818,000 |
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
Operating, maintenance and management |
|
|
8,138,000 |
|
|
|
6,999,000 |
|
Real estate and other property-related taxes |
|
|
4,627,000 |
|
|
|
3,507,000 |
|
General and administrative |
|
|
2,191,000 |
|
|
|
1,998,000 |
|
Depreciation and amortization |
|
|
11,529,000 |
|
|
|
9,810,000 |
|
|
|
|
Total expenses |
|
|
26,485,000 |
|
|
|
22,314,000 |
|
|
|
|
Operating income |
|
|
16,711,000 |
|
|
|
13,504,000 |
|
Non-operating income and expense: |
|
|
|
|
|
|
|
|
Interest expense, including amortization of
deferred financing costs |
|
|
(11,384,000 |
) |
|
|
(7,920,000 |
) |
Interest income |
|
|
158,000 |
|
|
|
275,000 |
|
Equity in income of unconsolidated joint venture |
|
|
150,000 |
|
|
|
156,000 |
|
|
|
|
Total non-operating income and expense |
|
|
(11,076,000 |
) |
|
|
(7,489,000 |
) |
|
|
|
Income before minority and limited partners interests
and discontinued operations |
|
|
5,635,000 |
|
|
|
6,015,000 |
|
Minority interests in consolidated joint ventures |
|
|
(706,000 |
) |
|
|
(395,000 |
) |
Limited partners interest in Operating Partnership |
|
|
(130,000 |
) |
|
|
(156,000 |
) |
|
|
|
Income from continuing operations |
|
|
4,799,000 |
|
|
|
5,464,000 |
|
Discontinued operations, net of limited partners interest |
|
|
280,000 |
|
|
|
145,000 |
|
|
|
|
Net income |
|
|
5,079,000 |
|
|
|
5,609,000 |
|
Preferred distribution requirements |
|
|
(1,967,000 |
) |
|
|
(1,954,000 |
) |
|
|
|
Net income applicable to common shareholders |
|
$ |
3,112,000 |
|
|
$ |
3,655,000 |
|
|
|
|
Per common share (basic): |
|
|
|
|
|
|
|
|
Income from continuing operations, net of preferred
distribution requirements |
|
$ |
0.06 |
|
|
$ |
0.08 |
|
Discontinued operations, net of limited partners interest |
|
|
0.01 |
|
|
|
|
|
|
|
|
Net income applicable to common shareholders |
|
$ |
0.07 |
|
|
$ |
0.08 |
|
|
|
|
Per common share (diluted): |
|
|
|
|
|
|
|
|
Income from continuing operations, net of preferred
distribution requirements |
|
$ |
0.06 |
|
|
$ |
0.08 |
|
Discontinued operations, net of limited partners interest |
|
|
0.01 |
|
|
|
|
|
|
|
|
Net income applicable to common shareholders |
|
$ |
0.07 |
|
|
$ |
0.08 |
|
|
|
|
Dividends to common shareholders |
|
$ |
10,004,000 |
|
|
$ |
9,929,000 |
|
|
|
|
Per common share |
|
$ |
0.225 |
|
|
$ |
0.225 |
|
|
|
|
Weighted average number of common shares outstanding: |
|
|
|
|
|
|
|
|
Basic |
|
|
44,458,000 |
|
|
|
44,112,000 |
|
|
|
|
Diluted |
|
|
44,459,000 |
|
|
|
44,119,000 |
|
|
|
|
See accompanying notes to consolidated financial statements.
5
CEDAR SHOPPING CENTERS, INC.
Consolidated Statement of Shareholders Equity
Three months ended March 31, 2008
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock |
|
|
Common stock |
|
|
|
|
|
|
|
|
|
|
Cumulative |
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
$25.00 |
|
|
|
|
|
|
|
|
|
|
Treasury |
|
|
Additional |
|
|
distributions |
|
|
other |
|
|
Total |
|
|
|
|
|
|
|
Liquidation |
|
|
|
|
|
|
$0.06 |
|
|
stock, |
|
|
paid-in |
|
|
in excess of |
|
|
comprehensive |
|
|
shareholders |
|
|
|
Shares |
|
|
value |
|
|
Shares |
|
|
Par value |
|
|
at cost |
|
|
capital |
|
|
net income |
|
|
(loss) income |
|
|
equity |
|
|
|
|
Balance, December 31, 2007 |
|
|
3,550,000 |
|
|
$ |
88,750,000 |
|
|
|
44,238,000 |
|
|
$ |
2,654,000 |
|
|
$ |
(8,192,000 |
) |
|
$ |
572,392,000 |
|
|
$ |
(97,514,000 |
) |
|
$ |
64,000 |
|
|
$ |
558,154,000 |
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,079,000 |
|
|
|
|
|
|
|
5,079,000 |
|
Unrealized (loss) on change in fair value of cash
flow hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(193,000 |
) |
|
|
(193,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,886,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation activity, net |
|
|
|
|
|
|
|
|
|
|
219,000 |
|
|
|
13,000 |
|
|
|
(839,000 |
) |
|
|
1,396,000 |
|
|
|
|
|
|
|
|
|
|
|
570,000 |
|
Conversion of OP Units into common stock |
|
|
|
|
|
|
|
|
|
|
4,000 |
|
|
|
1,000 |
|
|
|
|
|
|
|
40,000 |
|
|
|
|
|
|
|
|
|
|
|
41,000 |
|
Preferred distribution requirements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,967,000 |
) |
|
|
|
|
|
|
(1,967,000 |
) |
Dividends to common shareholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,004,000 |
) |
|
|
|
|
|
|
(10,004,000 |
) |
Reallocation adjustment of limited partners interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(63,000 |
) |
|
|
|
|
|
|
|
|
|
|
(63,000 |
) |
|
|
|
|
Balance, March 31, 2008 |
|
|
3,550,000 |
|
|
$ |
88,750,000 |
|
|
|
44,461,000 |
|
|
$ |
2,668,000 |
|
|
$ |
(9,031,000 |
) |
|
$ |
573,765,000 |
|
|
$ |
(104,406,000 |
) |
|
$ |
(129,000 |
) |
|
$ |
551,617,000 |
|
|
|
|
See accompanying notes to consolidated financial statements.
6
CEDAR SHOPPING CENTERS, INC.
Consolidated Statements of Cash Flows
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2008 |
|
|
2007 |
|
Cash flow from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
5,079,000 |
|
|
$ |
5,609,000 |
|
Adjustments to reconcile net income to net cash provided by operating
activities: |
|
|
|
|
|
|
|
|
Non-cash provisions: |
|
|
|
|
|
|
|
|
Earnings in excess of distributions of consolidated joint venture
minority interests |
|
|
467,000 |
|
|
|
129,000 |
|
Equity in income of unconsolidated joint venture |
|
|
(150,000 |
) |
|
|
(156,000 |
) |
Distributions from unconsolidated joint venture |
|
|
132,000 |
|
|
|
132,000 |
|
Limited partners interest in Operating Partnership |
|
|
143,000 |
|
|
|
163,000 |
|
Straight-line rents receivable |
|
|
(711,000 |
) |
|
|
(967,000 |
) |
Depreciation and amortization |
|
|
11,529,000 |
|
|
|
9,883,000 |
|
Amortization of intangible lease liabilities |
|
|
(3,400,000 |
) |
|
|
(2,589,000 |
) |
Amortization relating to stock-based compensation |
|
|
734,000 |
|
|
|
440,000 |
|
Amortization of deferred financing costs |
|
|
403,000 |
|
|
|
352,000 |
|
Increases/decreases in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Cash at consolidated joint ventures |
|
|
(148,000 |
) |
|
|
25,000 |
|
Rents and other receivables, net |
|
|
(1,509,000 |
) |
|
|
(1,522,000 |
) |
Other |
|
|
(272,000 |
) |
|
|
(709,000 |
) |
Accounts payable and accrued expenses |
|
|
(86,000 |
) |
|
|
(3,908,000 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
12,211,000 |
|
|
|
6,882,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow from investing activities: |
|
|
|
|
|
|
|
|
Expenditures for real estate and improvements |
|
|
(29,956,000 |
) |
|
|
(23,719,000 |
) |
Purchase of consolidated joint venture minority interests |
|
|
(17,454,000 |
) |
|
|
|
|
Investment in unconsolidated joint venture |
|
|
|
|
|
|
(8,000 |
) |
Construction escrows and other |
|
|
(1,062,000 |
) |
|
|
63,000 |
|
|
|
|
|
|
|
|
Net cash (used in) investing activities |
|
|
(48,472,000 |
) |
|
|
(23,664,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow from financing activities: |
|
|
|
|
|
|
|
|
Net advances from line of credit |
|
|
36,300,000 |
|
|
|
24,100,000 |
|
Proceeds from sales of common stock |
|
|
|
|
|
|
4,132,000 |
|
Proceeds from mortgage financings |
|
|
27,500,000 |
|
|
|
|
|
Mortgage repayments |
|
|
(25,147,000 |
) |
|
|
(2,022,000 |
) |
Contribution from minority interest partner, net |
|
|
3,993,000 |
|
|
|
|
|
Distributions in excess of earnings from consolidated joint venture
minority interests |
|
|
(27,000 |
) |
|
|
|
|
Distributions to limited partners |
|
|
(457,000 |
) |
|
|
(443,000 |
) |
Preferred distribution requirements |
|
|
(1,970,000 |
) |
|
|
(1,969,000 |
) |
Distributions to common shareholders |
|
|
(10,004,000 |
) |
|
|
(9,929,000 |
) |
Refund (payments) of deferred financing costs, net |
|
|
200,000 |
|
|
|
(198,000 |
) |
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
30,388,000 |
|
|
|
13,671,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(5,873,000 |
) |
|
|
(3,111,000 |
) |
Cash and cash equivalents at beginning of period |
|
|
20,307,000 |
|
|
|
17,885,000 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
14,434,000 |
|
|
$ |
14,774,000 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
7
Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
March 31, 2008
(unaudited)
Note 1. Organization and Basis of Preparation
Cedar Shopping Centers, Inc. (the Company) was organized in 1984 and elected to be taxed as
a real estate investment trust (REIT) in 1986. The Company focuses primarily on the ownership,
operation, development and redevelopment of supermarket-anchored shopping centers in nine
mid-Atlantic and New England states. At March 31, 2008, the Company owned 119 properties,
aggregating approximately 12.0 million square feet of gross leasable area (GLA).
Cedar Shopping Centers Partnership, L.P. (the Operating Partnership) is the entity through
which the Company conducts substantially all of its business and owns (either directly or through
subsidiaries) substantially all of its assets. At March 31, 2008 and December 31, 2007,
respectively, the Company owned a 95.6% economic interest in, and is the sole general partner of,
the Operating Partnership. The limited partners interest in the Operating Partnership (4.4% at
March 31, 2008 and December 31, 2007, respectively) is represented by Operating Partnership Units
(OP Units), and is adjusted at the end of each reporting period to an amount equal to the limited
partners ownership percentage of the Operating Partnerships net equity. The approximately
2,030,000 OP Units outstanding at March 31, 2008 are economically equivalent to the Companys
common stock and are convertible into the Companys common stock at the option of the respective
holders on a one-to-one basis.
The consolidated financial statements include the accounts and operations of the Company, the
Operating Partnership, its subsidiaries, and certain joint venture partnerships in which it
participates. On January 3, 2008, the Company entered into a joint venture agreement, retaining a
75% general partnership interest, for the redevelopment of its shopping center in Bloomsburg,
Pennsylvania, including adjacent land parcels. On March 18, 2008, the Company acquired the
remaining interests (three at 70% and one at 75%) in four properties previously owned in joint
venture.
With respect to its ten consolidated operating joint ventures, the Company has general
partnership interests of 20% (nine properties) and 75% (one property), and (i) as such entities are
not variable-interest entities pursuant to the Financial Accounting Standards Board (FASB)
Interpretation No. 46R, Consolidation of Variable Interest Entities (FIN 46R), and (ii) as the
Company is the sole general partner and exercises substantial operating control over these entities
pursuant to Emerging Issues Task Force (EITF) 04-05, Determining Whether a General Partner, or
General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited
Partners Have Certain Rights, the Company has determined that such partnerships should be
consolidated for financial statement purposes. EITF 04-05 provides a framework for determining
whether a general partner controls, and should consolidate, a limited partnership or similar entity
in which it owns a minority interest.
8
Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
March 31, 2008
(unaudited)
The Companys 60%-owned joint venture for a development project in Pottsgrove, Pennsylvania,
is consolidated as it is deemed to be a variable interest entity and the Company is the primary
income or loss beneficiary. The Company has a 49% interest (increased to 76.3% effective April 1,
2008) in an unconsolidated joint venture which owns a single-tenant office property, and which the
Company has determined is not a variable-interest entity pursuant to FIN 46R. Although the Company
exercises influence over this joint venture, it does not have operating control; accordingly, it
accounts for its investment in this joint venture under the equity method.
The accompanying interim unaudited financial statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission (SEC). Certain information and
footnote disclosures normally included in financial statements prepared in accordance with
accounting principles generally accepted in the United States (GAAP) may have been condensed or
omitted pursuant to such rules and regulations. The unaudited financial statements as of March 31,
2008 and for the three months ended March 31, 2008 and 2007 include, in the opinion of management,
all adjustments, consisting of normal recurring adjustments necessary to present fairly the
financial information set forth therein. The 2007 financial statements have been revised, where
necessary, to conform to the 2008 presentation, relating principally to the discontinued operation
and the consolidated statement of cash flows. The results of operations for the three months ended
March 31, 2008 are not necessarily indicative of the results that may be expected for the year
ending December 31, 2008. The financial statements should be read in conjunction with the Companys
audited financial statements and the notes thereto included in the Companys Form 10-K for the year
ended December 31, 2007.
As used herein, the Company refers to Cedar Shopping Centers, Inc. and its subsidiaries on a
consolidated basis, including the Operating Partnership or, where the context so requires, Cedar
Shopping Centers, Inc. only.
Note 2. Summary of Significant Accounting Policies
The accompanying financial statements are prepared on the accrual basis in accordance with
GAAP, which requires management to make estimates and assumptions that affect the disclosure of
contingent assets and liabilities, the reported amounts of assets and liabilities at the date of
the financial statements, and the reported amounts of revenue and expenses during the periods
covered by the financial statements. Actual results could differ from these estimates.
Real Estate Investments and Discontinued Operations
Real estate investments are carried at cost less accumulated depreciation. The provision for
depreciation is calculated using the straight-line method based upon the estimated useful lives
9
Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
March 31, 2008
(unaudited)
of the respective assets. Expenditures for maintenance, repairs, and betterments that do not
materially prolong the normal useful life of an asset are charged to operations as incurred.
Upon the sale or other disposition of assets, the cost and related accumulated depreciation
and amortization would be removed from the accounts and the resulting gain or loss, if any, would
be reflected as discontinued operations. In addition, prior periods financial statements would be
reclassified to eliminate the operations of sold properties. Real estate investments include costs
of development and redevelopment activities, and construction in progress. Capitalized costs,
including interest and other carrying costs during the construction and/or renovation periods, are
included in the cost of the related asset and charged to operations through depreciation over the
assets estimated useful life. Interest and financing costs capitalized amounted to $1,178,000 and
$880,000 for the three months ended March 31, 2008 and 2007, respectively.
The Companys capitalization policy on its development and redevelopment properties is guided
by Statement of Financial Accounting Standards (SFAS) No. 34, Capitalization of Interest Cost
and SFAS No. 67, Accounting for Costs and Initial Rental Operations of Real Estate Projects. A
variety of costs are incurred in the acquisition, development and leasing of a property, such as
pre-construction costs essential to the development of the property, development costs,
construction costs, interest costs, real estate taxes, salaries and related costs, and other costs
incurred during the period of development. After determination is made to capitalize a cost, it is
allocated to the specific component of a project that is benefited. The Company ceases
capitalization on the portions substantially completed and occupied, or held available for
occupancy, and capitalizes only those costs associated with the portions under construction. The
Company considers a construction project as substantially completed and held available for
occupancy upon the completion of tenant improvements, but not later than one year from cessation of
major construction activity.
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, requires that
management review each real estate investment for impairment whenever events or circumstances
indicate that the carrying value of a real estate investment may not be recoverable. The review of
recoverability is based on an estimate of the future cash flows that are expected to result from
the real estate investments use and eventual disposition. These cash flows consider factors such
as expected future operating income, trends and prospects, as well as the effects of leasing
demand, competition and other factors. If an impairment event exists due to the projected inability
to recover the carrying value of a real estate investment, an impairment loss is recorded to the
extent that the carrying value exceeds estimated fair value. No impairment provisions were recorded
by the Company during the three months ended March 31, 2008 and 2007, respectively. A real estate
investment held for sale is carried at the lower of its carrying amount or estimated fair value,
less cost to sell. Depreciation and amortization are suspended during the period held for sale.
10
Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
March 31, 2008
(unaudited)
In 2007, the Company decided to dispose of Stadium Plaza, located in East Lansing, Michigan.
The property, with 78,000 sq. ft. of GLA, is being marketed, and, in accordance with SFAS No. 144,
the carrying value of the propertys assets (principally the net book value of the real estate) has
been classified as held for sale on the Companys consolidated balance sheets at March 31, 2008
and December 31, 2007 (there were no related held for sale liabilities associated with the
property). In addition, the propertys results of operations have been classified as discontinued
operations for all periods presented in the consolidated statements of income. No impairment
provisions were required during the three months ended March 31, 2008 and 2007, respectively. The
following is a summary of the components of income from discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
2008 |
|
2007 |
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
Rents |
|
$ |
309,000 |
|
|
$ |
290,000 |
|
Expense recoveries |
|
|
130,000 |
|
|
|
83,000 |
|
|
|
|
Total revenues |
|
|
439,000 |
|
|
|
373,000 |
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
Operating, maintenance and management |
|
|
72,000 |
|
|
|
78,000 |
|
Real estate and other property-related taxes |
|
|
74,000 |
|
|
|
70,000 |
|
Depreciation and amortization |
|
|
|
|
|
|
73,000 |
|
|
|
|
|
|
|
146,000 |
|
|
|
221,000 |
|
|
|
|
Operating income |
|
|
293,000 |
|
|
|
152,000 |
|
Limited partners interest |
|
|
(13,000 |
) |
|
|
(7,000 |
) |
|
|
|
Income from discontinued operations |
|
$ |
280,000 |
|
|
$ |
145,000 |
|
|
|
|
FIN 47, Accounting for Conditional Asset Retirement Obligations, provides clarification of
the term conditional asset retirement obligation as used in SFAS No. 143, Asset Retirement
Obligations, to be a legal obligation to perform an asset retirement activity in which the timing
and/or method of settlement are conditional on a future event that may or may not be within the
control of the Company. The Interpretation requires that the Company record a liability for a
conditional asset retirement obligation if the fair value of the obligation can be reasonably
estimated. Environmental studies conducted at the time of acquisition with respect to all of the
Companys properties did not reveal any material environmental liabilities, and the Company is
unaware of any subsequent environmental matters that would have created a material liability. The
Company believes that its properties are currently in material compliance with applicable
environmental, as well as non-environmental, statutory and regulatory requirements. There were no
conditional asset retirement obligation liabilities recorded by the Company during the three months
ended March 31, 2008 and 2007, respectively.
11
Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
March 31, 2008
(unaudited)
Intangible Lease Asset/Liability
SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangibles,
require that management allocate the fair value of real estate acquired to land, buildings and
improvements. In addition, the fair value of in-place leases is allocated to intangible lease
assets and liabilities.
The fair value of the tangible assets of an acquired property is determined by valuing the
property as if it were vacant, which value is then allocated to land, buildings and improvements
based on managements determination of the relative fair values of these assets. In valuing an
acquired propertys intangibles, factors considered by management include an estimate of carrying
costs during the expected lease-up periods, such as real estate taxes, insurance, other operating
expenses, and estimates of lost rental revenue during the expected lease-up periods based on its
evaluation of current market demand. Management also estimates costs to execute similar leases,
including leasing commissions, tenant improvements, legal and other related costs.
The value of in-place leases is measured by the excess of (i) the purchase price paid for a
property after adjusting existing in-place leases to market rental rates, over (ii) the estimated
fair value of the property as if vacant. Above-market and below-market in-place lease values are
recorded based on the present value (using a discount rate which reflects the risks associated with
the leases acquired) of the difference between the contractual amounts to be received
and managements estimate of market lease rates, measured over the non-cancelable terms of the
respective leases. The value of other intangibles is amortized to expense, and the above-market and
below-market lease values are amortized to rental income, over the remaining non-cancelable terms
of the respective leases. If a lease were to be terminated prior to its stated expiration, all
unamortized amounts relating to that lease would be recognized in operations at that time.
With respect to substantially all of the Companys acquisitions through March 31, 2008,
including the acquisition of the remaining interests in four properties previously owned in joint
venture and consolidated for financial reporting purposes, the fair value of in-place leases and
other intangibles has been allocated, on a preliminary basis where applicable for recent
acquisitions, to the intangible asset and liability accounts. Unamortized intangible lease
liabilities relate primarily to below-market leases, and amounted to $67,800,000 and $71,157,000 at
March 31, 2008 and December 31, 2007, respectively.
As a result of recording the intangible lease assets and liabilities, (i) revenues were
increased by $3,400,000 and $2,589,000 for the three months ended March 31, 2008 and 2007,
respectively, relating to the amortization of intangible lease liabilities, and (ii) depreciation
and amortization expense was increased correspondingly by $4,348,000 and $3,296,000 for the
respective three-month periods.
12
Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
March 31, 2008
(unaudited)
Cash and Cash Equivalents
Cash and cash equivalents consist of cash in banks and short-term investments with original
maturities of less than ninety days.
Restricted Cash
The terms of several of the Companys mortgage loans payable require the Company to deposit
certain replacement and other reserves with its lenders. Such restricted cash is generally
available only for property-level requirements for which the reserve was established, is not
available to fund other property-level or Company-level obligations, and amounted to $16,042,000
and $14,857,000 at March 31 2008 and December 31, 2007, respectively. In addition, joint venture
partnership agreements require, among other things, that the Company maintain separate cash
accounts for the operation of the joint ventures, and that distributions to the general and
minority interest partners be strictly controlled. Cash at consolidated joint ventures amounted to
$3,130,000 and $2,982,000 at March 31, 2008 and December 31, 2007, respectively.
Rents and Other Receivables
Management has determined that all of the Companys leases with its various tenants are
operating leases. Rental income with scheduled rent increases is recognized using the straight-line
method over the respective terms of the leases. The aggregate excess of rental revenue recognized
on a straight-line basis over base rents under applicable lease provisions is included in
straight-line rents receivable on the consolidated balance sheet. Leases also generally contain
provisions under which the tenants reimburse the Company for a portion of property operating
expenses and real estate taxes incurred; such income is recognized in the periods earned. In
addition, certain operating leases contain contingent rent provisions under which tenants are
required to pay a percentage of their sales in excess of a specified amount as additional rent. The
Company defers recognition of contingent rental income until those specified sales targets are met.
The Company must make estimates as to the collectibility of its accounts receivable related to
base rent, straight-line rent, expense reimbursements and other revenues. Management analyzes
accounts receivable and the allowance for bad debts by considering historical bad debts, tenant
creditworthiness, current economic trends, and changes in tenants payment patterns when evaluating
the adequacy of the allowance for doubtful accounts receivable. The allowance for doubtful accounts
was $1,492,000 and $1,372,000 at March 31, 2008 and December 31, 2007, respectively.
13
Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
March 31, 2008
(unaudited)
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk
consist primarily of cash and cash equivalents in excess of insured amounts and tenant receivables.
The Company places its cash equivalents with high quality financial institutions. Management
performs ongoing credit evaluations of its tenants and requires certain tenants to provide security
deposits. Although these security deposits are insufficient to meet the terminal value of a
tenants lease obligations, they are a measure of good faith and a source of funds to offset the
economic costs associated with lost rents and other charges, and the costs associated with
releasing the space.
Other Assets
Other assets at March 31, 2008 and December 31, 2007 are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
Mar 31, |
|
Dec 31, |
|
|
2008 |
|
2007 |
|
|
|
Deposits |
|
$ |
5,374,000 |
|
|
$ |
4,594,000 |
|
Prepaid expenses |
|
|
4,501,000 |
|
|
|
4,493,000 |
|
Other |
|
|
527,000 |
|
|
|
691,000 |
|
|
|
|
|
|
$ |
10,402,000 |
|
|
$ |
9,778,000 |
|
|
|
|
Deferred Charges, Net
Deferred charges at March 31, 2008 and December 31, 2007 are net of accumulated amortization
and are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
Mar 31, |
|
Dec 31, |
|
|
2008 |
|
2007 |
|
|
|
Lease origination costs (i) |
|
$ |
19,082,000 |
|
|
$ |
19,218,000 |
|
Financing costs (ii) |
|
|
7,290,000 |
|
|
|
7,941,000 |
|
Other |
|
|
2,580,000 |
|
|
|
2,701,000 |
|
|
|
|
|
|
$ |
28,952,000 |
|
|
$ |
29,860,000 |
|
|
|
|
|
|
|
(i) |
|
Deferred lease origination costs include intangible lease assets resulting from
purchase accounting allocations of $13,611,000 and $13,954,000, respectively. |
|
(ii) |
|
Deferred financing costs are incurred in connection with the Companys secured
revolving credit facility and other long-term debt. |
Such costs are amortized over the terms of the related agreements. Amortization expense
related to deferred charges (including amortization of deferred financing costs included in
non-
14
Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
March 31, 2008
(unaudited)
operating income and expense) amounted to $1,304,000 and $1,212,000 for the three months ended
March 31, 2008 and 2007, respectively.
Income Taxes
The Company has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as
amended (the Code). A REIT will generally not be subject to federal income taxation on that
portion of its income that qualifies as REIT taxable income, to the extent that it distributes at
least 90% of such REIT taxable income to its shareholders and complies with certain other
requirements.
Derivative Financial Instruments
The Company occasionally utilizes derivative financial instruments, principally interest rate
swaps and interest rate caps, to manage its exposure to fluctuations in interest rates. The Company
has established policies and procedures for risk assessment, and the approval, reporting and
monitoring of derivative financial instrument activities. The Company has not entered into, and
does not plan to enter into, derivative financial instruments for trading or speculative purposes.
Additionally, the Company has a policy of entering into derivative contracts only with major
financial institutions. At March 31, 2008, the Company had $14,680,000 of mortgage loans payable
subject to interest rate swaps which converted LIBOR-based variable rates to fixed annual rates
ranging from 5.4% to 6.8% per annum. At that date, the Company had accrued a liability for $454,000
relating to the fair value of the interest rate swaps (included in accounts payable and accrued
expenses on the consolidated balance sheet) with the charge made to accumulated other comprehensive
(loss) income, minority interests in consolidated joint ventures, or limited partners interest, as
appropriate. Total other comprehensive income was $4,886,000 and $5,595,000 for the three months
ended March 31, 2008 and 2007, respectively.
Earnings Per Share
In accordance with SFAS No. 128, Earnings Per Share, basic earnings per share (EPS) is
computed by dividing net income available to common shareholders by the weighted average number of
common shares outstanding for the period (including shares held by the Rabbi Trusts). Fully-diluted
EPS reflects the potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into shares of common stock; such additional dilutive
shares amounted to 1,000 and 7,000 for the three months ended March 31, 2008 and 2007,
respectively.
Stock-Based Compensation
SFAS No. 123R, Share-Based Payments establishes financial accounting and reporting
15
Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
March 31, 2008
(unaudited)
standards
for stock-based employee compensation plans, including all arrangements by which employees receive
shares of stock or other equity instruments of the employer, or the employer
incurs liabilities to employees in amounts based on the price of the employers stock. The
statement also defines a fair value-based method of accounting for an employee stock option or
similar equity instrument.
The Companys 2004 Stock Incentive Plan (the Incentive Plan) provides for the granting of
incentive stock options, stock appreciation rights, restricted shares, performance units and
performance shares. The maximum number of shares of the Companys common stock that may be issued
pursuant to the Incentive Plan is 850,000, and the maximum number of shares that may be subject to
grants to any single participant is 250,000. Substantially all grants issued pursuant to the
Incentive Plan are restricted stock grants which specify vesting (i) upon the third anniversary
of the date of grant for time-based grants, or (ii) upon the completion of a designated period of
performance for performance-based grants. Timebased grants are valued according to the market
price for the Companys common stock at the date of grant. For performance-based grants, the
Company engages an independent appraisal company to determine the value of the shares at the date
of grant, taking into account the underlying contingency risks associated with the performance
criteria. In February 2007, the Company issued 37,000 shares of common stock as performance-based
grants, which will vest if the total annual return on an investment in the Companys common stock
over the three-year period ending December 31, 2009 is equal to, or greater than, an average of 8%
per year. The independent appraisal determined the value of the performance-based shares to be
$10.09 per share, compared to a market price at the date of grant of $16.45 per share. In January
2008, the Company issued 52,000 shares of common stock as performance-based grants, which will vest
if the total annual return on an investment in the Companys common stock over the three-year
period ending December 31, 2010 is equal to, or greater than, an average of 8% per year. The
independent appraisal determined the value of the performance-based shares to be $6.05 per share,
compared to a market price at the date of grant of $10.07 per share. The additional restricted
shares issued during the three months ended March 31, 2008 and 2007, respectively, were time-based
grants. The value of such grants is being amortized on a straight-line basis over the respective
vesting periods, as adjusted for fluctuations in the market value of the Companys common stock, in
accordance with the provisions of EITF No. 97-14, Accounting for Deferred Compensation
Arrangements Where Amounts Earned Are Held in a Rabbi Trust and Invested. Those grants of
restricted shares that are transferred to Rabbi Trusts are classified as treasury stock in the
Companys consolidated balance sheet, and are accounted for pursuant to EITF No. 97-14. The
following table sets forth certain stock-based compensation information for the three months ended
March 31, 2008 and 2007, respectively:
16
Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
March 31, 2008
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three months ended Mar 31, |
|
|
2008 |
|
2007 |
|
|
|
Restricted share grants |
|
|
219,000 |
|
|
|
140,000 |
|
Average per-share grant price |
|
$ |
9.11 |
|
|
$ |
14.56 |
|
Recorded as deferred compensation, net |
|
$ |
2,001,000 |
|
|
$ |
2,044,000 |
|
Total charged to operations (including adjustments to
reflect changes in the market price of the Companys
common stock: $146,000 and $39,000,
respectively) |
|
$ |
734,000 |
|
|
$ |
440,000 |
|
|
|
|
|
|
|
|
|
|
Non-vested shares: |
|
|
|
|
|
|
|
|
Non-vested, beginning of period |
|
|
380,000 |
|
|
|
203,000 |
|
Grants |
|
|
219,000 |
|
|
|
140,000 |
|
Vested during period |
|
|
|
|
|
|
|
|
Forfeitures |
|
|
|
|
|
|
|
|
|
|
|
Non-vested, end of period |
|
|
599,000 |
|
|
|
343,000 |
|
|
|
|
|
Value of shares vested during the
period (based on grant price) |
|
$ |
|
|
|
$ |
|
|
|
|
|
At March 31, 2008, 229,000 shares remained available for grants pursuant to the Incentive
Plan, and $4,191,000 remained as deferred compensation, to be amortized over various periods ending
in January 2011.
During 2001, pursuant to the 1998 Stock Option Plan (the Option Plan), the Company granted
to directors options to purchase an aggregate of approximately 13,000 shares of common stock at
$10.50 per share, the market value of the Companys common stock on the date of the grant. The
options are fully exercisable and expire in 2011. In connection with the adoption of the Incentive
Plan, the Company agreed that it would not grant any more options under the Option Plan.
In connection with an acquisition of a shopping center in 2002, the Operating Partnership
issued warrants to purchase approximately 83,000 OP Units to a then minority interest partner in
the property. Such warrants have an exercise price of $13.50 per unit, subject to certain
anti-dilution adjustments, are fully vested, and expire in 2012.
17
Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
March 31, 2008
(unaudited)
Supplemental consolidated statement of cash flows information
|
|
|
|
|
|
|
|
|
|
|
Three months ended Mar 31, |
|
|
2008 |
|
2007 |
|
|
|
Supplemental disclosure of cash activities: |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
12,278,000 |
|
|
$ |
8,579,000 |
|
|
Supplemental disclosure of non-cash activities: |
|
|
|
|
|
|
|
|
Additions to deferred compensation plans |
|
|
2,001,000 |
|
|
|
2,044,000 |
|
Issuance of non-interest bearing purchase money
mortgage (a) |
|
|
(14,575,000 |
) |
|
|
|
|
Issuance of OP Units |
|
|
|
|
|
|
(18,000 |
) |
Conversion of OP Units into common stock |
|
|
41,000 |
|
|
|
|
|
Purchase accounting allocations: |
|
|
|
|
|
|
|
|
Intangible lease assets |
|
|
1,832,000 |
|
|
|
5,518,000 |
|
Intangible lease liabilities |
|
|
(43,000 |
) |
|
|
(5,936,000 |
) |
Net valuation decrease in non-interest bearing
purchase money mortgage (a) |
|
|
1,051,000 |
|
|
|
|
|
Other non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
Accrued real estate improvement costs |
|
|
(3,052,000 |
) |
|
|
3,223,000 |
|
Accrued construction escrows and other |
|
|
16,000 |
|
|
|
|
|
Capitalization of deferred financing costs |
|
|
111,000 |
|
|
|
|
|
|
|
|
(a) |
|
The valuation decrease in the purchase money mortgage obligation results from adjusting the
contract rate (non-interest bearing) to a market rate of 9.25% per annum. |
In connection with preparation of the Companys June 30, 2007 consolidated financial
statements, the Company determined that cash flows from changes in accounts payable and accrued
expenses relating to real estate expenditures and construction escrows should have been included in
investing, rather than operating, cash flow activities. Accordingly, the consolidated statement of
cash flows for the three months ended March 31, 2007 has been revised: cash flows provided by
operating activities was changed from $10,105,000 to $6,882,000, and cash flows used in investing
activities was changed from ($26,887,000) to ($23,664,000).
Recently-Issued Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which provides
guidance for using fair value to measure assets and liabilities, and clarifies the principle that
fair value should be based on the assumptions that market participants would use when pricing
assets or liabilities. The statement establishes a fair value hierarchy, giving the highest
priority to quoted prices in active markets and the lowest priority to unobservable data, and
applies whenever other standards require assets or liabilities to be measured at fair value. In
February 2008, the FASB issued FASB Staff Position No. FAS 157-2, Effective Date of FASB
18
Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
March 31, 2008
(unaudited)
Statement
No. 157, which deferred the effective date of SFAS 157 for all nonrecurring fair
value measurements of non-financial assets and non-financial liabilities until fiscal years
beginning after November 15, 2008. The provisions of SFAS 157 applicable to recurring fair value
measurements of financial assets and liabilities became effective January 1, 2008. The Companys
financial assets and liabilities, other than fixed-rate mortgage loans payable, are generally
short-term in nature, or bear interest at variable current market rates, and consist of cash and
cash equivalents, cash at consolidated joint ventures and restricted cash, rents and other
receivables, other assets, and accounts payable and accrued expenses. The carrying amounts of these
assets and liabilities, a net of approximately $30.4 million at March 31, 2008, are not measured at
fair value on a recurring basis but are considered to be recorded at amounts that approximate fair
value due to their short-term nature. The valuation of the liability for the Companys interest
rate swaps ($454,000 at March 31, 2008), was determined to be a Level 2 within the valuation
hierarchy established by SFAS 157, and was based on independent values provided by financial
institutions. Accordingly, the adoption of SFAS No. 157, as it relates to fair value measurements
of financial assets and liabilities, has not had a material effect on the Companys consolidated
financial statements. However, the Company has not completed its evaluation of the impact of SFAS
No. 157 as it relates to fair value measurements of non-financial assets and non-financial
liabilities, and the effect that such pronouncement will have on its financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities, which provides companies with an option to report selected financial
assets and liabilities at fair value. SFAS No. 159 also establishes presentation and disclosure
requirements designed to facilitate comparisons between companies that choose different measurement
attributes for similar types of assets and liabilities. The statement does not eliminate the
disclosure requirements of other accounting standards, including requirements for disclosures about
fair value measurements in SFAS No. 107, Disclosures about Fair Value of Financial Instruments,
and SFAS No. 157. The adoption of SFAS No. 159, which became effective for fiscal years beginning
after November 15, 2007, has not had a material effect on the Companys consolidated financial
statements.
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations a replacement of
FASB Statement No. 141, which applies to all transactions or events in which an entity obtains
control of one or more businesses. SFAS 141(R) (i) establishes the acquisition-date fair value as
the measurement objective for all assets acquired and liabilities assumed, (ii) requires expensing
of most transaction costs, and (iii) requires the acquiror to disclose to investors and other users
all of the information needed to evaluate and understand the nature and financial effect of the
business combination. SFAS 141(R) is effective for fiscal years beginning after December 15, 2008
and early adoption is not permitted. The effect of adopting SFAS 141(R) on the Companys
consolidated financial statements will be the expensing of most acquisition transaction costs.
19
Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
March 31, 2008
(unaudited)
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements an amendment of ARB No. 51. SFAS 160 clarifies that a noncontrolling
interest in a subsidiary (minority interests or limited partners interest, in the case of the
Company) is an ownership interest in a consolidated entity which should be reported as equity in
the parent companys consolidated financial statements. SFAS 160 requires a reconciliation of the
beginning and ending balances of equity attributable to noncontrolling interests and disclosure, on
the face of the consolidated income statement, of those amounts of consolidated net income
attributable to the noncontrolling interests, eliminating the past practice of reporting these
amounts as an adjustment in arriving at consolidated net income. SFAS 160 requires a parent company
to recognize a gain or loss in net income when a subsidiary is deconsolidated and requires the
parent company to attribute to noncontrolling interests their share of losses even if such
attribution results in a deficit balance applicable to the noncontrolling interests within the
parent companys equity accounts. SFAS 160 is effective for fiscal years beginning after
December 15, 2008, requires retroactive application of the presentation and disclosure requirements
for all periods presented, and early adoption is not permitted. The Company has not yet determined
the effect that SFAS 160 will have on its consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities, an amendment to FASB Statement No. 133, which provides for enhanced
disclosures of an entitys objectives and strategies for using derivatives, and where those
derivatives and related hedging items are reported in the entitys financial statements. SFAS 161
is effective for fiscal years beginning after November 15, 2008, with early adoption permitted. The
Company believes that it already applies the principal provisions of SFAS 161 applicable to its
hedging activities, which has not had a material effect on its consolidated financial statements.
Note 3. Common Stock Issuance
In January 2007, underwriters of the Companys December 2006 public offering exercised their
over allotment option to the extent of 275,000 shares, and the Company realized net proceeds of
$4.1 million.
Note 4. Real Estate
On January 4, 2008, the Company purchased a 15.9 acre parcel of land in South Londonderry
Township, Pennsylvania, for the development of an approximate 85,000 sq. ft. supermarket-anchored
shopping center. The purchase price was approximately $3.3 million, including closing costs, and
was funded from the Companys secured revolving credit facility.
On February 15, 2008, the Company acquired Mason Discount Drug Mart Plaza in Mason, Ohio, an
approximate 53,000 sq. ft. convenience center, for a purchase price of
20
Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
March 31, 2008
(unaudited)
approximately $6.5 million, including closing costs. The acquisition cost was funded from the
Companys secured revolving credit facility.
Joint Venture Activities
On January 3, 2008, the Company entered into a joint venture agreement for the redevelopment
of its 351,000 sq. ft. shopping center in Bloomsburg, Pennsylvania, including adjacent land parcels
comprising an additional 48 acres. The required equity contribution from the Companys joint
venture partner was $4.0 million for a 25% interest in the property. The Company used the funds to
reduce the outstanding balance on its secured revolving credit facility. The joint venture
transaction does not qualify as a sale for financial reporting purposes; accordingly, the Company
continues to consolidate the property.
On February 20, 2008, the Company and Homburg Invest Inc. (Homburg Invest) entered into an
agreement in principle to form a group of joint ventures into which the Company would contribute 32
of its convenience centers (mostly drug store-anchored and including all 27 of the Companys Ohio
properties). Richard Homburg, a director of the Company, is Chairman and CEO of Homburg Invest,
with which the Company concluded a previous joint venture arrangement in December 2007. The
aggregate valuation for the properties is approximately $128.9 million. The Company will hold 20%
interests (in 15 properties) and 51% interests (in 17 properties), and be the sole managing members
of the joint ventures. Homburg Invest will acquire the remaining respective 80% and 49% interests.
In connection with the transaction, the Company anticipates receiving approximately $49 million,
exclusive of closing costs and adjustments, which will be used to reduce the outstanding balance on
its secured revolving credit facility. The Company will be entitled to a promote structure,
applicable separately to each property, which, if certain targets are met, will permit the Company
to receive either 33-1/3% or 59% of the returns in excess of a leveraged 10.5% threshold.
Additionally, the Company will receive fees for ongoing property management, leasing, construction
management, acquisitions, dispositions, financings and refinancings. The joint venture transactions
require final approval by the Companys Board of Directors. In that connection, the independent
members of the Board have commissioned appraisals in support of the aggregate transfer value. The
transactions contemplated by this joint venture, which are expected to close during the third
quarter of 2008, will not qualify as a sale for financial reporting purposes, and, accordingly, the
Company will continue to consolidate the properties.
On March 7, 2008, a Company development joint venture acquired approximately 108 acres of land
in Pottsgrove, Pennsylvania, for a shopping center development project. The $28.5 million purchase
price, including closing costs, was funded by the issuance of a non-interest-bearing purchase money
mortgage of $14.6 million, payable in January 2009. The balance of the purchase price was funded by
the Companys capital contribution to the joint venture which, in turn, was funded from its secured
revolving credit facility.
21
Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
March 31, 2008
(unaudited)
On March 18, 2008, the Company acquired the remaining interests in Fairview Plaza, Halifax
Plaza and Newport Plaza (70% in each) and Loyal Plaza (75%), previously owned in joint venture and
consolidated for financial reporting purposes, for a purchase price of approximately $17.5 million,
which was funded from its secured revolving credit facility. The total outstanding mortgage loans
payable on the properties were approximately $27.3 million at the time. The excess of the purchase
price and closing costs over the carrying value of the minority interest partners accounts
(approximately $8.4 million) was allocated to the Companys real estate asset accounts.
Pro Forma Financial Information (unaudited)
During the period January 1, 2007 through March 31, 2008, the Company acquired 21 shopping and
convenience centers aggregating approximately 2.0 million sq. ft. of GLA, purchased the joint
venture minority interests in four properties, and purchased approximately 142 acres of land for
expansion and/or future development, for a total cost of approximately $353.9 million. The
following table summarizes, on an unaudited pro forma basis before purchase accounting allocations,
the combined results of operations of the Company for the three months ended March 31, 2008 and
2007, respectively, as if all of these property acquisitions were completed as of January 1, 2007.
This unaudited pro forma information does not purport to represent what the actual results of
operations of the Company would have been had all the above occurred as of January 1, 2007, nor
does it purport to predict the results of operations for future periods.
|
|
|
|
|
|
|
|
|
|
|
Three months ended Mar 31, |
|
|
2008 |
|
2007 |
|
|
|
Revenues |
|
$ |
43,292,000 |
|
|
$ |
42,517,000 |
|
Net income applicable to common shareholders |
|
$ |
3,200,000 |
|
|
$ |
3,231,000 |
|
Per common share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.07 |
|
|
$ |
0.07 |
|
Diluted |
|
$ |
0.07 |
|
|
$ |
0.07 |
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding: |
|
|
|
|
|
|
|
|
Basic |
|
|
44,458,000 |
|
|
|
44,112,000 |
|
Diluted |
|
|
44,459,000 |
|
|
|
44,119,000 |
|
Real Estate Pledged
At March 31, 2008 and December 31, 2007, respectively, a substantial number of the Companys
real estate properties were pledged as collateral for either property-specific mortgage loans
payable or for the secured revolving credit facility.
22
Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
March 31, 2008
(unaudited)
Note 5. Mortgage Loans Payable and Secured Revolving Credit Facility; Construction Facility
Secured Debt
Secured debt consisted of the following at March 31, 2008 and December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mar 31, 2008 |
|
Dec 31, 2007 |
|
|
|
|
|
|
Interest rates |
|
|
|
|
|
Interest rates |
|
|
Balance |
|
Weighted |
|
|
|
|
|
Balance |
|
Weighted |
|
|
Description |
|
outstanding |
|
average |
|
Range |
|
outstanding |
|
average |
|
Range |
|
|
|
|
|
|
|
Fixed-rate mortgages |
|
$ |
676,951,000 |
|
|
|
5.8 |
% |
|
|
4.8%-9.3 |
% |
|
$ |
656,320,000 |
|
|
|
5.7 |
% |
|
|
4.8%-7.6 |
% |
Variable-rate mortgage |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,754,000 |
|
|
|
7.7 |
% |
|
|
7.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
676,951,000 |
|
|
|
5.8 |
% |
|
|
|
|
|
|
661,074,000 |
|
|
|
5.7 |
% |
|
|
|
|
Secured revolving credit facility |
|
|
226,740,000 |
|
|
|
4.0 |
% |
|
|
|
|
|
|
190,440,000 |
|
|
|
6.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
903,691,000 |
|
|
|
5.3 |
% |
|
|
|
|
|
$ |
851,514,000 |
|
|
|
5.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured Revolving Credit Facility
The Company has a $300 million secured revolving credit facility with Bank of America, N.A.
(as agent) and several other banks, pursuant to which the Company has pledged certain of its
shopping center properties as collateral for borrowings thereunder. The facility, as amended, is
expandable to $400 million, subject to certain conditions, including acceptable collateral, and
will expire in January 2009, subject to a one-year extension option. Borrowings outstanding under
the facility aggregated $226.7 million at March 31, 2008, and such borrowings bore interest at an
average rate of 4.0% per annum. Borrowings under the facility bear interest at a rate of LIBOR plus
a basis points (bps) spread ranging from 110 to 145 bps depending upon the Companys leverage
ratio, as defined (the spread as of March 31, 2008 was 110 bps). The facility also requires an
unused portion fee of 15 bps. Based on covenant measurements and collateral in place as of March
31, 2008, the Company was permitted to draw up to approximately $293.2 million, of which
approximately $66.5 million remained available as of March 31, 2008.
The credit facility is used to fund acquisitions, development and redevelopment activities,
capital expenditures, mortgage repayments, dividend distributions, working capital and other
general corporate purposes. The facility is subject to customary financial covenants, including
limits on leverage and distributions (limited to 95% of funds from operations, as defined), and
other financial statement ratios. The Company plans to add additional properties, when available,
to the collateral pool with the intent of making the full facility available.
23
Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
March 31, 2008
(unaudited)
Secured Revolving Construction Credit Facility
In February 2008, the Company obtained a commitment in principle for a $150 million master
secured revolving construction facility with a major commercial bank as lead agent, pursuant to
which the Company will pledge certain of its development projects and redevelopment properties as
collateral for borrowings thereunder. The facility will expire three years after the effective
date, subject to a one-year extension option. Borrowings under the facility will bear interest at
LIBOR plus a spread of 225 bps. Advances under the facility will be calculated at the lesser of 70%
of aggregate project costs, 70% of as stabilized appraised values, or costs incurred in excess of
a 30% equity requirement on the part of the Company. The facility also requires an unused portion
fee of 15 bps. The syndication process applicable to the facility has been substantially completed,
subject to normal documentation and lender due diligence with respect to the collateral properties,
all expected to be completed during the second quarter of 2008. The Company expects to use this
facility to fund in part its development activities in 2008 and subsequent years. There can be no
assurance, however, that the Company will either complete the master secured revolving construction
facility, or that it will complete the facility on the terms described.
Note 6. Subsequent Events
On April 10, 2008, the Company acquired Stop & Shop Plaza in Bridgeport, Connecticut, an
approximately 55,000 sq. ft. single-store property, for a purchase price of approximately $10.9
million, including closing costs, financed by (1) the assumption of an existing $7.0 million
first-mortgage bearing interest at 6.17% per annum and maturing in 2017, and (2) approximately $3.9
million from the Companys secured revolving credit facility.
On April 18, 2008, the Company entered into a long-term ground lease (minimum fixed term of 25
years plus renewal options) for a 1.4 acre parcel of land in Naugatuck, Connecticut, for the
development of an approximate 13,000 sq. ft. CVS store. Total estimated project costs will be
approximately $3.0 million, and the ground rent will be $200,000 per year during the initial term.
On April 22, 2008, the Companys Board of Directors approved amendments to the Incentive Plan,
subject to shareholder approval, whereby (a) the total number of shares authorized under the
Incentive Plan would be increased by 1,900,000 shares (the total number of authorized shares will
now be 2,750,000), and (b) the maximum number of shares that may be granted to a single participant
in any calendar year may not exceed 250,000 shares, which replaced the provision limiting the
maximum number of shares that could be granted to a participant during the lifetime of the
Incentive Plan.
On April 22, 2008, the Companys Board of Directors declared a dividend of $0.225 per share
with respect to its common stock as well as an equal distribution per unit on its outstanding
24
Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
March 31, 2008
(unaudited)
OP
Units. At the same time, the Board declared a dividend of $0.554688 per share with respect
to the Companys 8-7/8% Series A Cumulative Redeemable Preferred Stock. The distributions are
payable on May 20, 2008 to shareholders of record on May 9, 2008.
Effective April 23, 2008 the Company entered into a joint venture for the construction and
development of an estimated 137,000 sq. ft shopping center in Hamilton Township (Stroudsburg),
Pennsylvania. Total project costs, including purchase of land parcels, are estimated at $37
million. The Company is committed to paying a development fee of $500,000 and providing up to $9.5
million of equity capital for a 60% interest in the joint venture, with a preferred rate of return
of 9.25% per annum on such amounts. The required equity contribution from the Companys joint
venture partner was $400,000. The Companys initial $5.6 million contribution to the joint venture
was funded from its secured revolving credit facility. The venture previously acquired the land
parcels at a cost of approximately $14.9 million, subject to existing mortgage indebtedness of
approximately $11.2 million; approximately $23.2 million remains available under an existing first
mortgage construction/development loan with Wachovia Bank, N.A in the initial amount of $27.7
million. As contemplated, the joint venture transaction will be deemed to be a variable interest
entity with the Company as the primary income or loss beneficiary; accordingly, the Company will
consolidate the property.
25
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the Companys consolidated
financial statements and related notes thereto included elsewhere in this report.
Executive Summary
The Company is a fully-integrated real estate investment trust which focuses primarily on
ownership, operation, development and redevelopment of supermarket-anchored shopping centers in
nine mid-Atlantic and New England states. At March 31, 2008, the Company had a portfolio of 119
operating properties totaling approximately 12.0 million square feet of gross leasable area
(GLA), including 109 wholly-owned properties comprising approximately 10.8 million square feet
and ten properties owned in joint venture comprising approximately 1.2 million square feet. At
March 31, 2008, the portfolio of wholly-owned properties was comprised of (i) 99 stabilized
properties (those properties at least 80% leased and not designated as development/redevelopment
properties at March 31, 2008), with an aggregate of 9.6 million square feet of GLA, which were
approximately 96% leased, (ii) five development/redevelopment properties with an aggregate of
859,000 square feet of GLA, which were approximately 66% leased, (iii) four non-stabilized
properties with an aggregate of 296,000 square feet of GLA, which are presently being re-tenanted
and which were approximately 74% leased, and (iv) one property held for sale with an aggregate of
78,000 square feet of GLA, which was 100% leased. Of the ten properties owned in joint venture,
nine were stabilized properties with an aggregate of 833,000 square feet of GLA and were
approximately 96% leased, and one was a redevelopment property with an aggregate of 349,000 square
feet of GLA, which was 68% leased. The entire 119 property portfolio was approximately 92% leased
at March 31, 2008; the 108 property stabilized portfolio (including wholly-owned and in joint
venture) was approximately 96% leased at that date. The Company also owns approximately 338 acres
of land parcels a significant portion of which are under development. In addition, the Company has
a 49% interest (increased to 76.3% effective April 1, 2008) in an unconsolidated joint venture
which owns a single-tenant office property in Philadelphia, Pennsylvania.
The Company, organized as a Maryland corporation, has established an umbrella partnership
structure through the contribution of substantially all of its assets to the Operating Partnership,
organized as a limited partnership under the laws of Delaware. The Company conducts substantially
all of its business through the Operating Partnership. At March 31, 2008, the Company owned 95.6%
of the Operating Partnership and is its sole general partner. OP Units are economically equivalent
to the Companys common stock and are convertible into the Companys common stock at the option of
the holders on a one-to-one basis.
The Company derives substantially all of its revenues from rents and operating expense
reimbursements received pursuant to long-term leases. The Companys operating results therefore
depend on the ability of its tenants to make the payments required by the terms of their leases.
The Company focuses its investment activities on supermarket-anchored community shopping centers
and drug store-anchored convenience centers. The Company believes that, because of the need of
consumers to purchase food and other staple goods and services generally
26
available at such centers, its type of necessities-based properties should provide
relatively stable revenue flows even during difficult economic times.
The Company continues to seek opportunities to acquire properties suited for development
and/or redevelopment, as well as stabilized properties, where it can utilize its experience in
shopping center construction, renovation, expansion, re-leasing and re-merchandising to achieve
long-term cash flow growth and favorable investment returns. The Company would also consider
investment opportunities in regions beyond its present markets in the event such opportunities were
consistent with its focus, could be effectively controlled and managed, have the potential for
favorable investment returns, and would contribute to increased shareholder value.
Summary of Critical Accounting Policies
The preparation of the consolidated financial statements in conformity with GAAP requires the
Company to make estimates and judgments that affect the reported amounts of assets and liabilities,
revenues and expenses, and related disclosures of contingent assets and liabilities. On an ongoing
basis, management evaluates its estimates, including those related to revenue recognition and the
allowance for doubtful accounts receivable, real estate investments and purchase accounting
allocations related thereto, asset impairment, and derivatives used to hedge interest-rate risks.
Managements estimates are based both on information that is currently available and on various
other assumptions management believes to be reasonable under the circumstances. Actual results
could differ from those estimates and those estimates could be different under varying assumptions
or conditions.
The Company has identified the following critical accounting policies, the application of
which requires significant judgments and estimates:
Revenue Recognition
Rental income with scheduled rent increases is recognized using the straight-line method over
the respective terms of the leases. The aggregate excess of rental revenue recognized on a
straight-line basis over base rents under applicable lease provisions is included in straight-line
rents receivable on the consolidated balance sheet. Leases also generally contain provisions under
which the tenants reimburse the Company for a portion of property operating expenses and real
estate taxes incurred; such income is recognized in the periods earned. In addition, certain
operating leases contain contingent rent provisions under which tenants are required to pay a
percentage of their sales in excess of a specified amount as additional rent. The Company defers
recognition of contingent rental income until those specified targets are met.
The Company must make estimates as to the collectibility of its accounts receivable related to
base rent, straight-line rent, expense reimbursements and other revenues. Management analyzes
accounts receivable by considering tenant creditworthiness, current economic conditions, and
changes in tenants payment patterns when evaluating the adequacy of the allowance for doubtful
accounts receivable. These estimates have a direct impact on net income, because a higher bad debt
allowance would result in lower net income, whereas a lower bad debt
allowance would result in higher net income.
27
Real Estate Investments
Real estate investments are carried at cost less accumulated depreciation. The provision for
depreciation is calculated using the straight-line method based on estimated useful lives.
Expenditures for maintenance, repairs and betterments that do not materially prolong the normal
useful life of an asset are charged to operations as incurred. Expenditures for betterments that
substantially extend the useful lives of real estate assets are capitalized. Real estate
investments include costs of development and redevelopment activities, and construction in
progress. Capitalized costs, including interest and other carrying costs during the construction
and/or renovation periods, are included in the cost of the related asset and charged to operations
through depreciation over the assets estimated useful life. The Company is required to make
subjective estimates as to the useful lives of its real estate assets for purposes of determining
the amount of depreciation to reflect on an annual basis. These assessments have a direct impact on
net income. A shorter estimate of the useful life of an asset would have the effect of increasing
depreciation expense and lowering net income, whereas a longer estimate of the useful life of an
asset would have the effect of reducing depreciation expense and increasing net income.
The Companys capitalization policy on its development and redevelopment properties is guided
by SFAS No. 34, Capitalization of Interest Cost and SFAS No. 67, Accounting for Costs and
Initial Rental Operations of Real Estate Projects. A variety of costs are incurred in the
acquisition, development and leasing of a property, such as pre-construction costs essential to the
development of the property, development costs, construction costs, interest costs, real estate
taxes, salaries and related costs, and other costs incurred during the period of development. After
a determination is made to capitalize a cost, it is allocated to the specific component of a
project that is benefited. The Company ceases capitalization on the portions substantially
completed and occupied, or held available for occupancy, and capitalizes only those costs
associated with the portions under construction. The Company considers a construction project as
substantially completed and held available for occupancy upon the completion of tenant
improvements, but not later than one year from cessation of major construction activity.
Determination of when a development project is substantially complete and capitalization must cease
involves a degree of judgment. The effect of a longer capitalization period would be to increase
capitalized costs and would result in higher net income, whereas the effect of a shorter
capitalization period would be to reduce capitalized costs and would result in lower net income.
The Company applies SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and
Other Intangibles, in valuing real estate acquisitions. In connection therewith, the fair value of
real estate acquired is allocated to land, buildings and improvements. In addition, the fair value
of in-place leases is allocated to intangible lease assets and liabilities. The fair value of the
tangible assets of an acquired property is determined by valuing the property as if it were vacant,
which value is then allocated to land, buildings and improvements based on managements
determination of the relative fair values of such assets. In valuing an acquired propertys
intangibles, factors considered by management include an estimate of carrying costs during the
expected lease-up periods, such as real estate taxes, insurance, other operating expenses, and
estimates of lost rental revenue during the expected lease-up periods based on its
28
evaluation of current market demand. Management also estimates costs to execute similar
leases, including leasing commissions, tenant improvements, legal and other related costs.
The value of in-place leases is measured by the excess of (i) the purchase price paid for a
property after adjusting existing in-place leases to market rental rates, over (ii) the estimated
fair value of the property as if vacant. Above-market and below-market in-place lease values are
recorded based on the present value (using a discount rate which reflects the risks associated with
the leases acquired) of the difference between the contractual amounts to be received
and managements estimate of market lease rates, measured over the non-cancelable terms of the
respective leases. The value of other intangibles is amortized to expense, and the above-market and
below-market lease values are amortized to rental income, over the remaining non-cancelable terms
of the respective leases. If a lease were to be terminated prior to its stated expiration, all
unamortized amounts relating to that lease would be recognized in operations at that time.
Management is required to make subjective assessments in connection with its valuation of real
estate acquisitions. These assessments have a direct impact on net income, because (i) above-market
and below-market lease intangibles are amortized to rental income, and (ii) the value of other
intangibles is amortized to expense. Accordingly, higher allocations to below-market lease
liability and other intangibles would result in higher rental income and amortization expense,
whereas lower allocations to below-market lease liability and other intangibles would result in
lower rental income and amortization expense.
The Company applies SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, to recognize and measure impairment of long-lived assets. Management reviews each real
estate investment for impairment whenever events or circumstances indicate that the carrying value
of a real estate investment may not be recoverable. The review of recoverability is based on an
estimate of the future cash flows that are expected to result from the real estate investments use
and eventual disposition. These estimates of cash flows consider factors such as expected future
operating income, trends and prospects, as well as the effects of leasing demand, competition and
other factors. If an impairment event exists due to the projected inability to recover the carrying
value of a real estate investment, an impairment loss is recorded to the extent that the carrying
value exceeds estimated fair value. A real estate investment held for sale is carried at the lower
of its carrying amount or estimated fair value, less the cost of a potential sale. Depreciation and
amortization are suspended during the period the property is held for sale. Management is required
to make subjective assessments as to whether there are impairments in the value of its real estate
properties. These assessments have a direct impact on net income, because an impairment loss is
recognized in the period that the assessment is made.
Stock-Based Compensation
SFAS No. 123R, Share-Based Payments, establishes financial accounting and reporting
standards for stock-based employee compensation plans, including all arrangements by which
employees receive shares of stock or other equity instruments of the employer, or the employer
incurs liabilities to employees in amounts based on the price of the employers stock. The
statement also defines a fair value-based method of accounting for an employee stock option or
similar equity instrument.
29
The Companys 2004 Stock Incentive Plan (the Incentive Plan) provides for the granting of
incentive stock options, stock appreciation rights, restricted shares, performance units and
performance shares. The maximum number of shares of the Companys common stock that may be issued
pursuant to the Incentive Plan is 850,000, and the maximum number of shares that may be subject to
grants to any single participant is 250,000. Substantially all grants issued pursuant to the
Incentive Plan are restricted stock grants which specify vesting (i) upon the third anniversary
of the date of grant for time-based grants, or (ii) upon the completion of a designated period of
performance for performance-based grants. Timebased grants are valued according to the market
price for the Companys common stock at the date of grant. For performance-based grants, the
Company engages an independent appraisal company to determine the value of the shares at the date
of grant, taking into account the underlying contingency risks associated with the performance
criteria. These value estimates have a direct impact on net income, because higher valuations would
result in lower net income, whereas lower valuations would result in higher net income. The value
of such grants is being amortized on a straight-line basis over the respective vesting periods, as
adjusted for fluctuations in the market value of the Companys common stock, in accordance with the
provisions of EITF No. 97-14, Accounting for Deferred Compensation Arrangements Where Amounts
Earned Are Held in a Rabbi Trust and Invested.
Results of Operations
Differences in results of operations between 2008 and 2007, respectively, were primarily the
result of the Companys property acquisition program and continuing development/redevelopment
activities. During the period January 1, 2007 through March 31, 2008, the Company acquired 21
shopping and convenience centers aggregating approximately 2.0 million sq. ft. of GLA, purchased
the joint venture minority interests in four properties, and purchased approximately 142 acres of
land for expansion and/or future development, for a total cost of approximately $353.9 million. In
addition, the Company placed into service one ground-up development having an aggregate cost of
approximately $3.6 million. Income from continuing operations before minority and limited partners
interests and preferred distribution requirements was $5.6 million during the three months ended
March 31, 2008 as compared with $6.0 million during the three months ended March 31, 2007.
30
Comparison of the quarter ended March 31, 2008 to the quarter ended March 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Properties |
|
|
Three months ended Mar 31, |
|
|
|
|
|
Percentage |
|
|
|
|
|
held in |
|
|
2008 |
|
2007 |
|
Increase |
|
change |
|
Acquisitions |
|
both periods |
|
|
|
Total revenues |
|
$ |
43,196,000 |
|
|
$ |
35,818,000 |
|
|
$ |
7,378,000 |
|
|
|
21 |
% |
|
$ |
8,029,000 |
|
|
$ |
(651,000 |
) |
Property operating expenses |
|
|
12,765,000 |
|
|
|
10,506,000 |
|
|
|
2,259,000 |
|
|
|
22 |
% |
|
|
2,211,000 |
|
|
|
48,000 |
|
Depreciation and amortization |
|
|
11,529,000 |
|
|
|
9,810,000 |
|
|
|
1,719,000 |
|
|
|
18 |
% |
|
|
2,117,000 |
|
|
|
(398,000 |
) |
General and administrative |
|
|
2,191,000 |
|
|
|
1,998,000 |
|
|
|
193,000 |
|
|
|
10 |
% |
|
|
n/a |
|
|
|
n/a |
|
Non-operating income and
expense, net (i) |
|
|
11,076,000 |
|
|
|
7,489,000 |
|
|
|
3,587,000 |
|
|
|
48 |
% |
|
|
n/a |
|
|
|
n/a |
|
|
|
|
(i) |
|
Non-operating income and expense consists principally of interest expense (including
amortization of deferred financing costs), and equity in income of an unconsolidated joint venture. |
Properties held in both periods. The Company held 96 properties throughout the three months
ended March 31, 2008 and 2007. The comparative differences in the operating results for those
properties are as follows:
|
|
|
|
|
Explanation |
|
Increase
(decrease) |
|
Total revenues: |
|
|
|
|
Base rents Increase due primarily to new leases and
lease renewals at higher rates, net of approximately
$100,000 related to a lease terminated in the quarter
ended December 31, 2007. |
|
$ |
281,000 |
|
|
|
|
|
|
Percentage rents Decrease due to more timely receipt
of tenant sales documentation for the December 2007
quarter as compared to the December 2006 quarter,
resulting in more percentage rent recognition in the
first quarter of 2007. |
|
|
(164,000 |
) |
|
|
|
|
|
Straight-line
rents Decrease due primarily to higher straight-line rents during initial
periods for two large tenancies during the quarter
ended March 31, 2007. The quarter ended March 31,
2007 also included recognition of $175,000 as a result
of the resolution of an issue applicable to one
tenant. |
|
|
(476,000 |
) |
|
|
|
|
|
Amortization of intangible lease liabilities
Decrease due to the higher level of lease terminations
by tenants in the quarter ended March 31, 2007 that
accelerated the amortization of intangible lease
liabilities applicable to those tenants. |
|
|
(325,000 |
) |
|
|
|
|
|
Expense recoveries Increase due to higher level of
operating expenses and real estate taxes subject to
recovery from tenants. |
|
|
176,000 |
|
|
|
|
|
|
Other Decrease due to higher level of lease
terminations by tenants in the quarter ended March 31,
2007 |
|
|
(143,000 |
) |
|
|
|
|
|
|
$ |
(651,000 |
) |
|
|
|
|
31
|
|
|
|
|
Explanation |
|
Increase
(decrease) |
|
Property operating expenses Increase due to
increased real estate taxes as a result of higher
assessments and higher other operating expenses
subject to recovery from tenants, partially offset by
a lower provision for doubtful accounts of $271,000 (a
non-recoverable expense). |
|
$ |
48,000 |
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization Decrease due to the
higher level of lease terminations by tenants in the
quarter ended March 31, 2007 that accelerated
depreciation and amortization of tenant improvements
and deferred lease origination fees applicable to
those tenants. |
|
$ |
(398,000 |
) |
|
|
|
|
General and administrative expenses Increase primarily the result of increased
compensation costs and the Companys continued growth.
Non-operating income and expense, net Increase primarily the result of increased interest
costs from borrowings related to property acquisitions and development/redevelopment activities.
Liquidity and Capital Resources
The Company funds operating expenses and other short-term liquidity requirements, including
debt service, tenant improvements, leasing commissions, and preferred and common dividend
distributions, primarily from operating cash flows; the Company has also used its secured revolving
credit facility for these purposes. The Company expects to fund long-term liquidity requirements
for property acquisitions, development and/or redevelopment costs, capital improvements, and
maturing debt initially with the secured revolving credit facility and construction financing, and
ultimately through a combination of issuing and/or assuming additional mortgage debt, the sale of
equity securities, the issuance of additional OP Units, and the sale of properties or interests
therein (including joint venture arrangements).
The Company has a $300 million secured revolving credit facility with Bank of America, N.A.
(as agent) and several other banks, pursuant to which the Company has pledged certain of its
shopping center properties as collateral for borrowings thereunder; the facility, as amended, is
expandable to $400 million, subject to certain conditions, including acceptable collateral, and
will expire in January 2009, subject to a one-year extension option. As of March 31, 2008, based on
covenant measurements and collateral in place, the Company was permitted to draw up to
approximately $293.2 million, of which approximately $66.5 million remained available as of that
date. The credit facility is used to fund acquisitions, development and redevelopment activities,
capital expenditures, mortgage repayments, dividend distributions, working capital and other
general corporate purposes. The facility is subject to customary financial covenants, including
limits on leverage and distributions (limited to 95% of funds from operations, as defined), and
other financial statement ratios.
At March 31, 2008, the Companys financial liquidity was provided principally by (i) $14.4
million in cash and cash equivalents, and (ii) $66.5 million available under the secured revolving
credit facility. In addition, the Company anticipates the availability of additional
32
construction
financing (including the commitment in principle for a $150 million master secured revolving
construction facility), and net proceeds from the contribution of properties to joint ventures. The
Company also anticipates excess funds from the refinancing of existing debt as it becomes due.
There can be no assurance, however, that the Company will obtain such additional construction
financing, net proceeds from the contribution of properties to joint ventures or excess funds from
the refinancing of existing debt.
Mortgage loans payable at March 31, 2008 consisted of fixed-rate notes totaling $677.0 million
(with a weighted average interest rate of 5.8%) and $226.7 million outstanding under the
variable-rate secured revolving credit facility (with a weighted average interest rate of 4.0%).
Total mortgage loans payable have an overall weighted average interest rate of 5.3% and mature at
various dates through 2021.
The terms of several of the Companys mortgage loans payable require the Company to deposit
certain replacement and other reserves with its lenders. Such restricted cash is generally
available only for property-level requirements for which the reserve was established, and is not
available to fund other property-level or Company-level obligations. In addition, joint venture
partnership agreements require, among other things, that the Company maintain separate cash
accounts for the operation of the joint ventures, and that distributions to the general and
minority interest partners be strictly controlled.
Net Cash Flows
In connection with preparation of the Companys June 30, 2007 consolidated financial
statements, the Company determined that cash flows from changes in accounts payable and accrued
expenses relating to real estate expenditures and construction escrows should have been included in
investing, rather than operating, cash flow activities. Accordingly, the consolidated statement of
cash flows for the three months ended March 31, 2007 has been revised: cash flows provided by
operating activities was changed from $10,105,000 to $6,882,000, and cash flows used in investing
activities was changed from ($26,887,000) to ($23,664,000).
Operating Activities
Net cash flows provided by operating activities amounted to $12.2 million during the three
months ended March 31, 2008, compared to net cash flows provided by operating activities of $6.9
million during the three months ended March 31, 2007. The increase in operating cash flows during
the first three months of 2008, as compared with the first three months of 2007, was primarily the
result of property acquisitions.
Investing Activities
Net cash flows used in investing activities were $48.5 million during the three months ended
March 31, 2008 and $23.7 million during the three months ended March 31, 2007, and
were primarily the result of the Companys property acquisition program and continuing
development/redevelopment activities. During the first three months of 2008, the Company purchased
the remaining minority interests in four properties from its joint venture partner, one
33
convenience
center, and land for future expansion and development. During the first three months of 2007, the
Company acquired two shopping centers.
Financing Activities
Net cash flows provided by financing activities were $30.4 million during the three months
ended March 31, 2008 and $13.7 million during the three months ended March 31, 2007. During the
first three months of 2008, the Company received proceeds of net borrowings of $36.3 million under
the Companys secured revolving credit facility, $27.5 million in proceeds from mortgage
financings, a net $4.0 million contribution from a minority interest partner, and a refund of
deferred financing costs of $0.2 million, offset by preferred and common stock dividend
distributions of $12.0 million, repayment of mortgage obligations of $25.1 million, and
distributions paid with respect to limited partners interests of $0.5 million. During the first
three months of 2007, the Company received net borrowings of $24.1 million under the Companys
secured revolving credit facility and $4.1 million in net proceeds from sales of common stock,
offset by preferred and common stock dividend distributions of $11.9 million, the repayment of
mortgage obligations of $2.0 million, distributions paid to limited partners interests of $0.4
million, and the payment of deferred financing costs of $0.2 million.
Funds From Operations
Funds From Operations (FFO) is a widely-recognized non-GAAP financial measure for REITs that
the Company believes, when considered with financial statements determined in accordance with GAAP,
is useful to investors in understanding financial performance and providing a relevant basis for
comparison among REITs. In addition, FFO is useful to investors as it captures features particular
to real estate performance by recognizing that real estate generally appreciates over time or
maintains residual value to a much greater extent than do other depreciable assets. Investors
should review FFO, along with GAAP net income, when trying to understand an equity REITs operating
performance. The Company presents FFO because the Company considers it an important supplemental
measure of its operating performance and believes that it is frequently used by securities
analysts, investors and other interested parties in the evaluation of REITs. Among other things,
the Company uses FFO or an adjusted FFO-based measure (i) as one of several criteria to determine
performance-based bonuses for members of senior management, (ii) in performance comparisons with
other shopping center REITs, and (iii) to measure compliance with certain financial covenants under
the terms of the Loan Agreement relating to the Companys secured revolving credit facility.
The Company computes FFO in accordance with the White Paper on FFO published by the National
Association of Real Estate Investment Trusts (NAREIT), which defines FFO as net income applicable
to common shareholders (determined in accordance with GAAP), excluding gains or losses from debt
restructurings and sales of properties, plus real estate-related depreciation and amortization, and
after adjustments for partnerships and joint ventures (which are computed to reflect FFO on the
same basis).
FFO does not represent cash generated from operating activities and should not be considered
as an alternative to net income applicable to common shareholders or to cash flow
34
from operating
activities. FFO is not indicative of cash available to fund ongoing cash needs, including the
ability to make cash distributions. Although FFO is a measure used for comparability in assessing
the performance of REITs, as the NAREIT White Paper only provides guidelines for computing FFO, the
computation of FFO may vary from one company to another. The following table sets forth the
Companys calculations of FFO for the three months ended March 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2008 |
|
|
2007 |
|
Net income applicable to common shareholders |
|
$ |
3,112,000 |
|
|
$ |
3,655,000 |
|
Add (deduct): |
|
|
|
|
|
|
|
|
Real estate depreciation and amortization |
|
|
11,461,000 |
|
|
|
9,830,000 |
|
Limited partners interest |
|
|
143,000 |
|
|
|
163,000 |
|
Minority interests in consolidated joint ventures |
|
|
706,000 |
|
|
|
395,000 |
|
Minority interests share of FFO applicable to
consolidated joint ventures |
|
|
(1,781,000 |
) |
|
|
(491,000 |
) |
Equity in income of unconsolidated joint venture |
|
|
(150,000 |
) |
|
|
(156,000 |
) |
FFO from unconsolidated joint venture |
|
|
226,000 |
|
|
|
234,000 |
|
|
|
|
|
|
|
|
Funds From Operations |
|
$ |
13,717,000 |
|
|
$ |
13,630,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFO per common share (assuming conversion of OP Units): |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.30 |
|
|
$ |
0.30 |
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.30 |
|
|
$ |
0.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares: |
|
|
|
|
|
|
|
|
Shares used in determination of basic earnings per share |
|
|
44,458,000 |
|
|
|
44,112,000 |
|
Additional shares assuming conversion of OP Units (basic) |
|
|
2,030,000 |
|
|
|
1,985,000 |
|
|
|
|
|
|
|
|
Shares used in determination of basic FFO per share |
|
|
46,488,000 |
|
|
|
46,097,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in determination of diluted earnings per share |
|
|
44,459,000 |
|
|
|
44,119,000 |
|
Additional shares assuming conversion of OP Units (diltued) |
|
|
2,030,000 |
|
|
|
1,999,000 |
|
|
|
|
|
|
|
|
Shares used in determination of diluted FFO per share |
|
|
46,489,000 |
|
|
|
46,118,000 |
|
|
|
|
|
|
|
|
Inflation
Low to moderate levels of inflation during the past several years have favorably impacted the
Companys operations by stabilizing operating expenses. At the same time, low inflation has had the
indirect effect of reducing the Companys ability to increase tenant rents. However, the Companys
properties have tenants whose leases include expense reimbursements and other provisions to
minimize the effect of inflation.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The primary market risk facing the Company is interest rate risk on its secured revolving
credit facility. The Company may, when advantageous, hedge its interest rate risk using derivative
financial instruments. The Company is not subject to foreign currency risk.
The Company is exposed to interest rate changes primarily through (i) the secured
floating-rate revolving credit facility used to maintain liquidity, fund capital expenditures and
expand its real estate investment portfolio, and (ii) floating-rate construction financing. The
35
Companys objectives with respect to interest rate risk are to limit the impact of interest rate
changes on operations and cash flows, and to lower its overall borrowing costs. To achieve these
objectives, the Company may borrow at fixed rates and may enter into derivative financial
instruments such as interest rate swaps, caps, etc., in order to mitigate its interest rate risk on
a related variable-rate financial instrument. The Company does not enter into derivative or
interest rate transactions for speculative purposes. At March 31, 2008, the Company had
approximately $14.7 million of mortgage loans payable subject to interest rate swaps which
converted LIBOR-based variable rates to fixed annual rates ranging from 5.4% to 6.8% per annum.
At March 31, 2008, long-term debt consisted of fixed-rate mortgage loans payable and the
variable-rate secured revolving credit facility. The average interest rate on the $677.0 million of
fixed rate indebtedness outstanding was 5.8%, with maturities at various dates through 2021. The
average interest rate on the outstanding loans under the Companys $226.7 million secured revolving
credit facility was 4.0%, which matures in January 2009 (subject to a one-year extension option).
Based on the amount of variable-rate debt outstanding at March 31, 2008, if interest rates either
increase or decrease by 1%, the Companys income before minority and limited partners interests
would decrease or increase respectively by approximately $2,267,000 per annum.
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures and internal controls designed to
ensure that information required to be disclosed in its filings under the Securities Exchange Act
of 1934 is reported within the time periods specified in the rules and regulations of the
Securities and Exchange Commission (SEC). In this regard, the Company has formed a Disclosure
Committee currently comprised of several of the Companys executive officers as well as certain
other employees with knowledge of information that may be considered in the SEC reporting process.
The Committee has responsibility for the development and assessment of the financial and
non-financial information to be included in the reports filed with the SEC, and assists the
Companys Chief Executive Officer and Chief Financial Officer in connection with their
certifications contained in the Companys SEC filings. The Committee meets regularly and reports to
the Audit Committee on a quarterly or more frequent basis. The Companys principal executive and
financial officers have evaluated its disclosure controls and procedures as of March 31, 2008, and
have determined that such disclosure controls and procedures are effective.
During the three months ended March 31, 2008, there have been no changes in the internal
controls over financial reporting or in other factors that have materially affected, or are
reasonably likely to materially affect, the internal controls over financial reporting.
36
Part II Other Information
Item 6. Exhibits
Exhibit 31 Section 302 Certifications
Exhibit 32 Section 906 Certifications
37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
|
|
|
|
|
|
|
|
|
CEDAR SHOPPING CENTERS, INC. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ LEO S. ULLMAN
|
|
|
|
By:
|
|
/s/ LAWRENCE E. KREIDER, JR.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leo S. Ullman |
|
|
|
Lawrence E. Kreider, Jr. |
|
|
Chairman of the Board, Chief |
|
|
|
Chief Financial Officer |
|
|
Executive Officer and President |
|
|
|
(Principal financial officer) |
|
|
(Principal executive officer) |
|
|
|
|
|
|
|
|
May 4, 2008
38