CEDAR REALTY TRUST, INC. - Quarter Report: 2009 March (Form 10-Q)
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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, 2009
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 | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) | |
| 44 South Bayles Avenue, Port Washington, New York | 11050-3765 | |
| (Address of principal executive offices) | (Zip Code) | |
(516) 767-6492
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such
files). o 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. (Check one):
| 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 issuer’s classes of common stock, as of
the latest practicable date: At April 30, 2009, there were 45,062,472 shares of Common Stock,
$0.06 par value, outstanding.
CEDAR SHOPPING CENTERS, INC.
INDEX
| 3 | ||||||||
Part I. Financial Information |
||||||||
Item 1. Financial Statements |
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| 4 | ||||||||
| 5 | ||||||||
| 6 | ||||||||
| 7 | ||||||||
| 8-26 | ||||||||
| 27-37 | ||||||||
| 37 | ||||||||
| 38 | ||||||||
| 40 | ||||||||
| 40 | ||||||||
| EX-31 | ||||||||
| EX-32 | ||||||||
Table of Contents
Forward-Looking Statements
Certain statements contained in this Form 10-Q constitute forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange
Act of 1934. Such forward-looking statements include, without limitation, statements containing the
words “anticipates”, “believes”, “expects”, “intends”, “future”, and words of similar import which
express the Company’s beliefs, expectations or intentions regarding future performance or future
events or trends. While forward-looking statements reflect good faith beliefs, expectations or
intentions, they are not guarantees of future performance and involve known and unknown risks,
uncertainties and other factors, which may cause actual results, performance or achievements to
differ materially from anticipated future results, performance or achievements expressed or implied
by such forward-looking statements as a result of factors outside of the Company’s control. Certain
factors that might cause such differences include, but are not limited to, the following: real
estate investment considerations, such as the effect of economic and other conditions in general
and in the Company’s market areas in particular; the financial viability of the Company’s tenants;
the continuing availability of acquisition, 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 and potential purchasers of the Company’s properties if offered for sale; changes
in interest rates; the fact that returns from acquisition, development and redevelopment 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 relating thereto, and market factors involved in the pricing of material and labor; the
need to renew leases or re-let space upon the expiration or termination of current leases; and the
financial flexibility to repay or refinance debt obligations when due and to fund tenant
improvements and capital expenditures.
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CEDAR
SHOPPING CENTERS, INC.
Consolidated Balance Sheets
| March 31, | December 31, | |||||||
| 2009 | 2008 | |||||||
| (unaudited) | ||||||||
Assets |
||||||||
Real estate: |
||||||||
Land |
$ | 394,209,000 | $ | 379,780,000 | ||||
Buildings and improvements |
1,480,256,000 | 1,402,198,000 | ||||||
| 1,874,465,000 | 1,781,978,000 | |||||||
Less accumulated depreciation |
(158,418,000 | ) | (146,997,000 | ) | ||||
Real estate, net |
1,716,047,000 | 1,634,981,000 | ||||||
Land held for sale |
2,266,000 | 2,266,000 | ||||||
Investment in unconsolidated joint venture |
5,385,000 | 4,976,000 | ||||||
Cash and cash equivalents |
14,327,000 | 8,231,000 | ||||||
Restricted cash |
13,877,000 | 14,004,000 | ||||||
Rents and other receivables, net |
8,125,000 | 5,818,000 | ||||||
Straight-line rents receivable |
14,962,000 | 14,322,000 | ||||||
Other assets |
9,851,000 | 9,403,000 | ||||||
Deferred charges, net |
32,977,000 | 33,127,000 | ||||||
Total assets |
$ | 1,817,817,000 | $ | 1,727,128,000 | ||||
Liabilities and shareholders’ equity |
||||||||
Mortgage loans payable |
$ | 758,379,000 | $ | 708,983,000 | ||||
Secured revolving credit facilities |
336,925,000 | 304,490,000 | ||||||
Accounts payable and accrued expenses |
43,699,000 | 46,548,000 | ||||||
Unamortized intangible lease liabilities |
61,233,000 | 61,384,000 | ||||||
Total liabilities |
1,200,236,000 | 1,121,405,000 | ||||||
Limited partners’ interest in Operating Partnership |
14,279,000 | 14,271,000 | ||||||
Commitments and contingencies |
||||||||
Equity: |
||||||||
Cedar Shopping Centers, Inc. 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
45,062,000 and 44,468,000 shares, respectively, issued and
outstanding) |
2,704,000 | 2,668,000 | ||||||
Treasury stock (989,000 and 713,000 shares, respectively, at cost) |
(9,864,000 | ) | (9,175,000 | ) | ||||
Additional paid-in capital |
577,203,000 | 576,083,000 | ||||||
Cumulative distributions in excess of net income |
(128,090,000 | ) | (127,043,000 | ) | ||||
Accumulated other comprehensive loss |
(6,354,000 | ) | (7,256,000 | ) | ||||
Total Cedar Shopping Centers, Inc. shareholders’ equity |
524,349,000 | 524,027,000 | ||||||
Noncontrolling interests: |
||||||||
Minority interests in consolidated joint ventures |
69,672,000 | 58,150,000 | ||||||
Limited partners’ interest in Operating Partnership |
9,281,000 | 9,275,000 | ||||||
Total noncontrolling interests |
78,953,000 | 67,425,000 | ||||||
Total equity |
603,302,000 | 591,452,000 | ||||||
Total liabilities and equity |
$ | 1,817,817,000 | $ | 1,727,128,000 | ||||
See accompanying notes to consolidated financial statements.
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CEDAR
SHOPPING CENTERS, INC.
Consolidated Statements of Income
(unaudited)
| Three months ended March 31, | ||||||||
| 2009 | 2008 | |||||||
Revenues: |
||||||||
Rents |
$ | 36,070,000 | $ | 34,380,000 | ||||
Expense recoveries |
10,563,000 | 9,048,000 | ||||||
Other |
262,000 | 207,000 | ||||||
Total revenues |
46,895,000 | 43,635,000 | ||||||
Expenses: |
||||||||
Operating, maintenance and management |
9,301,000 | 8,210,000 | ||||||
Real estate and other property-related taxes |
5,371,000 | 4,701,000 | ||||||
General and administrative |
2,964,000 | 2,191,000 | ||||||
Depreciation and amortization |
12,400,000 | 11,529,000 | ||||||
Total expenses |
30,036,000 | 26,631,000 | ||||||
Operating income |
16,859,000 | 17,004,000 | ||||||
Non-operating income and expense: |
||||||||
Interest expense, including amortization of
deferred financing costs |
(11,592,000 | ) | (11,384,000 | ) | ||||
Interest income |
14,000 | 158,000 | ||||||
Equity in income of unconsolidated joint venture |
259,000 | 150,000 | ||||||
Gain on sale of land parcel |
239,000 | — | ||||||
Total non-operating income and expense |
(11,080,000 | ) | (11,076,000 | ) | ||||
Net income |
5,779,000 | 5,928,000 | ||||||
Less, net loss (income) attributable to noncontrolling interests: |
||||||||
Minority interests in consolidated joint ventures |
354,000 | (706,000 | ) | |||||
Limited partners’ interest in Operating Partnership |
(180,000 | ) | (143,000 | ) | ||||
Total net loss (income) attributable to noncontrolling interests |
174,000 | (849,000 | ) | |||||
Net income attributable to Cedar Shopping Centers, Inc. |
5,953,000 | 5,079,000 | ||||||
Preferred distribution requirements |
(1,954,000 | ) | (1,967,000 | ) | ||||
Net income attributable to common shareholders |
$ | 3,999,000 | $ | 3,112,000 | ||||
Per common share (basic and diluted) attributable to common
shareholders |
$ | 0.09 | $ | 0.07 | ||||
Dividends to common shareholders |
$ | 5,046,000 | $ | 10,004,000 | ||||
Per common share |
$ | 0.1125 | $ | 0.2250 | ||||
Weighted average number of common shares outstanding |
44,880,000 | 44,458,000 | ||||||
See accompanying notes to consolidated financial statements.
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CEDAR SHOPPING CENTERS, INC.
Consolidated Statement of Equity
Three months ended March 31, 2009
(unaudited)
| Cedar Shopping Centers, Inc. Shareholders | Noncontrolling Interests | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Limited | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred stock | Common stock | Cumulative | Accumulated | Minority | partners’ | |||||||||||||||||||||||||||||||||||||||||||||||
| $25.00 | Treasury | Additional | distributions | other | interests in | interest in | ||||||||||||||||||||||||||||||||||||||||||||||
| Total | Liquidation | $0.06 | stock, | paid-in | in excess of | comprehensive | consolidated | Operating | ||||||||||||||||||||||||||||||||||||||||||||
| equity | Shares | value | Shares | Par value | at cost | capital | net income | (loss) income | Total | Total | joint ventures | Partnership | ||||||||||||||||||||||||||||||||||||||||
Balance, December 31, 2008 |
$ | 591,452,000 | 3,550,000 | $ | 88,750,000 | 44,468,000 | $ | 2,668,000 | $ | (9,175,000 | ) | $ | 576,083,000 | $ | (127,043,000 | ) | $ | (7,256,000 | ) | $ | 524,027,000 | $ | 67,425,000 | $ | 58,150,000 | $ | 9,275,000 | |||||||||||||||||||||||||
Net income |
5,670,000 | 5,953,000 | 5,953,000 | (283,000 | ) | (354,000 | ) | 71,000 | ||||||||||||||||||||||||||||||||||||||||||||
Unrealized gain on change in fair value of cash flow hedges |
918,000 | 902,000 | 902,000 | 16,000 | 16,000 | |||||||||||||||||||||||||||||||||||||||||||||||
Total other comprehensive income |
6,588,000 | 6,855,000 | (267,000 | ) | (354,000 | ) | 87,000 | |||||||||||||||||||||||||||||||||||||||||||||
Deferred compensation activity, net |
487,000 | 594,000 | 36,000 | (689,000 | ) | 1,140,000 | 487,000 | |||||||||||||||||||||||||||||||||||||||||||||
Preferred distribution requirements |
(1,954,000 | ) | (1,954,000 | ) | (1,954,000 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Distributions to common shareholders/noncontrolling
interests |
(5,135,000 | ) | (5,046,000 | ) | (5,046,000 | ) | (89,000 | ) | (89,000 | ) | ||||||||||||||||||||||||||||||||||||||||||
Reallocation adjustment of limited partners’ interest |
(12,000 | ) | (20,000 | ) | (20,000 | ) | 8,000 | 8,000 | ||||||||||||||||||||||||||||||||||||||||||||
Contributions, net, from minority interest partners |
11,876,000 | 11,876,000 | 11,876,000 | |||||||||||||||||||||||||||||||||||||||||||||||||
Balance, March 31, 2009 |
$ | 603,302,000 | 3,550,000 | $ | 88,750,000 | 45,062,000 | $ | 2,704,000 | $ | (9,864,000 | ) | $ | 577,203,000 | $ | (128,090,000 | ) | $ | (6,354,000 | ) | $ | 524,349,000 | $ | 78,953,000 | $ | 69,672,000 | $ | 9,281,000 | |||||||||||||||||||||||||
See accompanying notes to consolidated financial statements.
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CEDAR SHOPPING CENTERS, INC.
Consolidated Statements of Cash Flows
(unaudited)
| Three months ended March 31, | ||||||||
| 2009 | 2008 | |||||||
Cash flow from operating activities: |
||||||||
Net income |
$ | 5,779,000 | $ | 5,928,000 | ||||
Adjustments to reconcile net income to net cash provided by operating
activities: |
||||||||
Non-cash provisions: |
||||||||
Equity in income of unconsolidated joint venture |
(259,000 | ) | (150,000 | ) | ||||
Distributions from unconsolidated joint venture |
200,000 | 132,000 | ||||||
Straight-line rents receivable |
(640,000 | ) | (711,000 | ) | ||||
Depreciation and amortization |
12,400,000 | 11,529,000 | ||||||
Amortization of intangible lease liabilities |
(3,416,000 | ) | (3,400,000 | ) | ||||
Amortization/market price adjustments relating to stock-based compensation |
(936,000 | ) | 734,000 | |||||
Amortization of deferred financing costs |
637,000 | 403,000 | ||||||
Increases/decreases in operating assets and liabilities: |
||||||||
Rents and other receivables, net |
(2,307,000 | ) | (1,509,000 | ) | ||||
Other |
(942,000 | ) | (272,000 | ) | ||||
Accounts payable and accrued expenses |
(1,446,000 | ) | (86,000 | ) | ||||
Net cash provided by operating activities |
9,070,000 | 12,598,000 | ||||||
Cash flow from investing activities: |
||||||||
Expenditures for real estate and improvements |
(35,656,000 | ) | (29,956,000 | ) | ||||
Purchase of consolidated joint venture minority interests |
— | (17,454,000 | ) | |||||
Investment in unconsolidated joint venture |
(350,000 | ) | — | |||||
Construction escrows and other |
(397,000 | ) | (1,062,000 | ) | ||||
Net cash (used in) investing activities |
(36,403,000 | ) | (48,472,000 | ) | ||||
Cash flow from financing activities: |
||||||||
Net advances from revolving lines of credit |
32,435,000 | 36,300,000 | ||||||
Proceeds from mortgage financings |
8,000,000 | 27,500,000 | ||||||
Mortgage repayments |
(11,520,000 | ) | (25,147,000 | ) | ||||
Payments/refund of deferred financing costs |
(101,000 | ) | 200,000 | |||||
Noncontrolling interests: |
||||||||
Contributions from consolidated joint venture minority interests, net |
11,857,000 | 3,993,000 | ||||||
Distributions to consolidated joint venture minority interests |
— | (266,000 | ) | |||||
Distributions to limited partners |
(227,000 | ) | (457,000 | ) | ||||
Preferred stock distributions |
(1,969,000 | ) | (1,970,000 | ) | ||||
Distributions to common shareholders |
(5,046,000 | ) | (10,004,000 | ) | ||||
Net cash provided by financing activities |
33,429,000 | 30,149,000 | ||||||
Net increase (decrease) in cash and cash equivalents |
6,096,000 | (5,725,000 | ) | |||||
Cash and cash equivalents at beginning of period |
8,231,000 | 23,289,000 | ||||||
Cash and cash equivalents at end of period |
$ | 14,327,000 | $ | 17,564,000 | ||||
See accompanying notes to consolidated financial statements.
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Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
March 31, 2009
(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 mid-Atlantic
and Northeast coastal states. At March 31, 2009, the Company owned 123 operating properties,
aggregating approximately 12.7 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, 2009 and December 31, 2008,
respectively, the Company owned a 95.7% economic interest in, and was the sole general partner of,
the Operating Partnership. The limited partners’ interest in the Operating Partnership (4.3% at
March 31, 2009 and December 31, 2008, respectively) is represented by Operating Partnership Units
(“OP Units”), and the carrying amount of such interest is adjusted at the end of each reporting
period to an amount equal to the limited partners’ ownership percentage of the Operating
Partnership’s net equity. The approximately 2,017,000 OP Units outstanding at March 31, 2009 are
economically equivalent to the Company’s common stock and are convertible into the Company’s common
stock at the option of the respective holders on a one-to-one basis.
The consolidated financial statements include the accounts and operations of the Company, the
Operating Partnership, its subsidiaries, and certain joint venture partnerships in which it
participates. On January 30, 2009 and February 10, 2009, respectively, the Company entered into two
joint ventures (with the same minority interest partner), in which it has 40% general partnership
interests, for acquisitions on those dates of shopping centers in New London, Connecticut and
California, Maryland. In addition, the Company recorded a 50% minority interest in a completed
single-tenant development project which had commenced operations during the fourth quarter of 2008.
With respect to its 13 consolidated operating joint ventures, the Company has general
partnership interests of 20% in nine properties, 40% in two properties, 50% in one property and 75%
in one property. As (i) such entities are not variable-interest entities pursuant to the Financial
Accounting Standards Board (“FASB”) Interpretation No. 46R, “Consolidation of Variable Interest
Entities” (“FIN 46R”), and (ii) the Company is the sole general partner and exercises substantial
operating control over these entities pursuant to Emerging Issues Task Force (“EITF”) 04-05,
“Determining Whether a General Partner, or General Partners as a Group, Controls a Limited
Partnership or Similar Entity When the Limited Partners Have Certain
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Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
March 31, 2009
(unaudited)
Notes to Consolidated Financial Statements
March 31, 2009
(unaudited)
Rights”, the Company has determined that such entities should be consolidated for financial
statement purposes. EITF 04-05 provides a framework for determining whether a general partner
controls, and should consolidate, a limited partnership or similar entity in which it owns a
minority interest.
The Company’s three 60%-owned joint ventures for development projects in Limerick, Pottsgrove
and Stroudsburg, Pennsylvania, are consolidated as they are deemed to be variable interest entities
(“VIEs”) pursuant to FIN 46R and the Company is the primary income or loss beneficiary in each
case. At March 31, 2009, these VIEs owned real estate with a carrying value of $90.0 million and
had mortgage loans payable of $38.5 million.
The Company has deposits on land to be purchased for development of $1.8 million at March 31,
2009 which are VIEs. The Company has not consolidated these VIEs as it is not the primary income or
loss beneficiary in each case.
The Company has a 76.3% interest in an unconsolidated joint venture which owns a single-tenant
office property in Philadelphia, Pennsylvania. Although the Company exercises influence over this
joint venture, it does not have operating control. The Company has determined that this joint
venture is not a VIE pursuant to FIN 46R and, accordingly, the Company accounts for its investment
in this joint venture under the equity method.
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 consolidated financial statements have been prepared in accordance with the
instructions to Form 10-Q and include all of the information and disclosures required by accounting
principles generally accepted in the United States (“GAAP”) for interim reporting. Accordingly,
they do not include all of the disclosures required by GAAP for complete financial statements. In
the opinion of management, all adjustments necessary for fair presentation (including normal
recurring accruals) have been included. The consolidated financial statements in this Form 10-Q
should be read in conjunction with the audited consolidated financial statements and related notes
contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008. The
consolidated financial statements reflect certain reclassifications of prior period amounts to
conform to the 2009, principally the retrospective adoption of Statement of Financial Accounting
Standard (“SFAS”) No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an
amendment to ARB 51” and the application of EITF D-98, “Classification and Measurement of
Redeemable Securities”. The reclassifications had no impact on previously-reported net income
available to common stockholders or earnings per share.
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Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
March 31, 2009
(unaudited)
Notes to Consolidated Financial Statements
March 31, 2009
(unaudited)
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 of
the respective assets. Expenditures for betterments that substantially extend the useful lives of
the assets are capitalized. Expenditures for maintenance, repairs, and betterments that do not
materially prolong the normal useful life of an asset are charged to operations as incurred.
Upon the sale or other disposition of assets, the cost and related accumulated depreciation
and amortization are removed from the accounts and the resulting gain or loss, if any, is reflected
as discontinued operations. In addition, prior periods’ financial statements would be reclassified
to eliminate the operations of sold properties. Real estate investments include costs of
development and redevelopment activities, and construction in progress. Capitalized costs,
including interest and other carrying costs during the construction and/or renovation periods, are
included in the cost of the related asset and charged to operations through depreciation over the
asset’s estimated useful life. Interest and financing costs capitalized amounted to $1,399,000 and
$1,178,000 for the three months ended March 31, 2009 and 2008, respectively.
The Company’s capitalization policy on its development and redevelopment properties is guided
by SFAS No. 34, “Capitalization of Interest Cost” and SFAS No. 67, “Accounting for Costs and
Initial Rental Operations of Real Estate Projects”. A variety of costs are incurred in the
acquisition, development and leasing of a property, such as pre-construction costs essential to the
development of the property, development costs, construction costs, interest costs, real estate
taxes, salaries and related costs, and other costs incurred during the period of development. After
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 to be substantially
completed and held available for occupancy upon the completion of tenant improvements, but not
later than one year from cessation of major construction activity.
SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, requires that
management review each real estate investment for impairment whenever events or circumstances
indicate that the carrying value of a real estate investment may not be recoverable. The review of
recoverability is based on an estimate of the future cash flows that are expected to result from
the real estate investment’s use and eventual disposition. These cash flows consider factors such
as expected future operating income, trends and prospects, as well as the effects of leasing
demand, competition and other factors. If an impairment event exists due to the projected inability
to recover the carrying value of a real estate investment, an impairment loss is recorded to the
extent that the carrying value exceeds estimated fair value. No impairment provisions were recorded
by the Company during the three months ended March 31, 2009 and 2008, respectively.
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Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
March 31, 2009
(unaudited)
Notes to Consolidated Financial Statements
March 31, 2009
(unaudited)
Real estate investments held for sale are carried at the lower of their respective carrying amounts
or estimated fair values, less costs to sell. Depreciation and amortization are suspended during
the periods held for sale.
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. FIN 47 requires that the Company record a liability for a conditional asset
retirement obligation if the fair value of the obligation can be reasonably estimated.
Environmental studies conducted at the time of acquisition with respect to all of the Company’s
properties did not reveal any material environmental liabilities, and the Company is unaware of any
subsequent environmental matters that would have created a material liability. The Company believes
that its properties are currently in material compliance with applicable environmental, as well as
non-environmental, statutory and regulatory requirements. There were no conditional asset
retirement obligation liabilities recorded by the Company during the three months ended March 31,
2009 and 2008, respectively.
Intangible Lease Asset/Liability
SFAS No. 141, “Business Combinations”, and SFAS No. 142, “Goodwill and Other Intangibles”,
require that management allocate the fair value of real estate acquired to land, buildings and
improvements. In addition, the fair value of in-place leases is allocated to intangible lease
assets and liabilities.
The fair value of the tangible assets of an acquired property is determined by valuing the
property as if it were vacant, which value is then allocated to land, buildings and improvements
based on management’s determination of the relative fair values of these assets. In valuing an
acquired property’s intangibles, factors considered by management include an estimate of carrying
costs during the expected lease-up periods, such as real estate taxes, insurance, other operating
expenses, and estimates of lost rental revenue during the expected lease-up periods based on its
evaluation of current market demand. Management also estimates costs to execute similar leases,
including leasing commissions, tenant improvements, legal and other related costs.
The value of in-place leases is measured by the excess of (i) the purchase price paid for a
property after adjusting existing in-place leases to market rental rates, over (ii) the estimated
fair value of the property as if vacant. Above-market and below-market in-place lease values are
recorded based on the present value (using a discount rate which reflects the risks associated with
the leases acquired) of the difference between the contractual amounts to be received
and management’s estimate of market lease rates, measured over the non-cancelable terms of the
respective leases. The value of other intangibles is amortized to expense, and the above-market
11
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Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
March 31, 2009
(unaudited)
Notes to Consolidated Financial Statements
March 31, 2009
(unaudited)
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 the Company’s 2009 acquisitions, the fair values of in-place leases and other
intangibles have been allocated to the intangible asset and liability accounts. Such allocations
are preliminary and are based on information and estimates available as of the respective dates of
acquisition. As final information becomes available and is refined, appropriate adjustments are
made to the purchase price allocations, which are finalized within twelve months of the respective
dates of acquisition. Unamortized intangible lease liabilities relate primarily to below-market
leases, and amounted to $61,233,000 and $61,384,000 at March 31, 2009 and December 31, 2008,
respectively.
As a result of recording the intangible lease assets and liabilities, (i) revenues were
increased by $3,416,000 and $3,400,000 for the three months ended March 31, 2009 and 2008,
respectively, relating to the amortization of intangible lease liabilities, and (ii) depreciation
and amortization expense was increased correspondingly by $4,873,000 and $4,348,000 for the
respective three-month periods.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash in banks and short-term investments with original
maturities of less than ninety days, and include cash at consolidated joint ventures of $4,105,000
and $1,897,000 at March 31, 2009 and December 31, 2008, respectively.
Restricted Cash
The terms of several of the Company’s mortgage loans payable require the Company to deposit
certain replacement and other reserves with its lenders. Such “restricted cash” is generally
available only for property-level requirements for which the reserve was established, is not
available to fund other property-level or Company-level obligations, and amounted to $13,877,000
and $14,004,000 at March 31, 2009 and December 31, 2008, respectively.
Rents and Other Receivables
Management has determined that all of the Company’s leases with its various tenants are
operating leases. Rental income with scheduled rent increases is recognized using the straight-line
method over the respective terms of the leases. The aggregate excess of rental revenue recognized
on a straight-line basis over base rents under applicable lease provisions is included
in straight-line rents receivable on the consolidated balance sheet. Leases also generally
contain
12
Table of Contents
Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
March 31, 2009
(unaudited)
Notes to Consolidated Financial Statements
March 31, 2009
(unaudited)
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, as additional rent, a percentage of their sales in excess of a specified amount.
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, percentage rent, expense reimbursements and other revenues. When
management analyzes accounts receivable and evaluates the adequacy of the allowance for doubtful
accounts, it considers such things as historical bad debts, tenant creditworthiness, current
economic trends, and changes in tenants’ payment patterns. The allowance for doubtful accounts was
$3,515,000 and $2,966,000 at March 31, 2009 and December 31, 2008, respectively. The provision for
doubtful accounts (included in operating, maintenance and management expenses) was $582,000 and
$139,000 for the three months ended March 31, 2009 and 2008, respectively.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk
consist primarily of cash and cash equivalents in excess of insured amounts and tenant receivables.
The Company places its cash and cash equivalents with high quality financial institutions.
Management performs ongoing credit evaluations of its tenants and requires certain tenants to
provide security deposits. Although these security deposits are insufficient to meet the terminal
value of a tenant’s lease obligations, they are a measure of good faith and a source to partially
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, 2009 and December 31, 2008 are comprised of the following:
| Mar 31, | Dec 31, | |||||||
| 2009 | 2008 | |||||||
Prepaid expenses |
$ | 4,607,000 | $ | 4,643,000 | ||||
Deposits |
1,856,000 | 2,795,000 | ||||||
Other |
3,388,000 | 1,965,000 | ||||||
| $ | 9,851,000 | $ | 9,403,000 | |||||
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Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
March 31, 2009
(unaudited)
Notes to Consolidated Financial Statements
March 31, 2009
(unaudited)
Deferred Charges, Net
Deferred charges at March 31, 2009 and December 31, 2008 are net of accumulated amortization
and are comprised of the following:
| Mar 31, | Dec 31, | |||||||
| 2009 | 2008 | |||||||
Lease origination costs (i) |
$ | 20,076,000 | $ | 19,464,000 | ||||
Financing costs (ii) |
10,629,000 | 11,168,000 | ||||||
Other |
2,272,000 | 2,495,000 | ||||||
| $ | 32,977,000 | $ | 33,127,000 | |||||
| (i) | Lease origination costs include the amortized balance of intangible lease assets
resulting from purchase accounting allocations of $13,440,000 and $13,091,000, respectively. |
|
| (ii) | Financing costs are incurred in connection with the Company’s credit facilities and other long-term debt. |
Deferred charges are amortized over the terms of the related agreements. Amortization expense
related to deferred charges (including amortization of deferred financing costs included in
non-operating income and expense) amounted to $1,616,000 and $1,304,000 for the three months ended
March 31, 2009 and 2008, respectively.
Income Taxes
The Company has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as
amended. 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.
Management believes that it has the ability to take the appropriate actions so that the suspension
of the Company’s common stock/OP Unit dividends will not affect the Company’s REIT status for 2009.
Derivative Financial Instruments
The Company occasionally utilizes derivative financial instruments, principally interest rate
swaps, to manage its exposure to fluctuations in interest rates. The Company has established
policies and procedures for risk assessment, and the approval, reporting and monitoring of
derivative financial instrument activities. The Company has not entered into, and does not plan to
enter into, derivative financial instruments for trading or speculative purposes. Additionally, the
Company has a policy of entering into derivative contracts only with major financial institutions.
As of March 31, 2009, the Company believes it has no significant risk associated with
non-performance of the financial institutions which are the counterparties to its derivative
contracts. Additionally, based on the rates in effect as of March 31, 2009, if a counterparty were
to default,
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Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
March 31, 2009
(unaudited)
Notes to Consolidated Financial Statements
March 31, 2009
(unaudited)
the Company would receive a net interest benefit. At March 31, 2009, the Company had $41.5
million of mortgage loans payable subject to interest rate swaps which converted LIBOR-based
variable rates to fixed annual rates ranging from 5.2% to 6.8% per annum. At that date, the Company
had accrued liabilities (included in accounts payable and accrued expenses on the consolidated
balance sheet) for (i) $4.0 million relating to the fair value of interest rate swaps applicable to
existing mortgage loans payable of $41.5 million, and (ii) $5.6 million relating to an interest
rate swap applicable to anticipated permanent financing of $28.0 million for its development joint
venture project in Stroudsburg, Pennsylvania, bearing an effective date of June 1, 2010,
termination date of June 1, 2020, and a fixed rate of 5.56%. Charges and/or credits relating to the
changes in fair values of such interest rate swaps are made to accumulated other comprehensive
(loss) income, noncontrolling interests (minority interests in consolidated joint ventures and
limited partners’ interest), or operations (included in interest expense), as appropriate. Total
other comprehensive income was $6,588,000 and $4,886,000 for the three months ended March 31, 2009
and 2008, respectively. The total amount charged (credited) to operations was $(24,000) and $0 for
the three months ended March 31, 2009 and 2008, respectively. Currently, all of the Company’s
derivative instruments are designated as effective hedging instruments.
The following is a summary of the derivative financial instruments held by the Company at
March 31, 2009 and December 31, 2008:
| Notional values | Balance | Fair value | ||||||||||||||||||||||||||||||
| Designation/ | Mar 31, | Dec 31, | Expiration | sheet | Mar 31, | Dec 31, | ||||||||||||||||||||||||||
| Cash flow | Derivative | Count | 2009 | 2008 | dates | location | 2009 | 2008 | ||||||||||||||||||||||||
Qualifying |
Interest rate swaps | 9 | $ | 69,910,000 | $ | 61,796,000 | 2010 - 2020 | Accounts payable and accrued expenses | $ | 9,623,000 | $ | 10,590,000 | ||||||||||||||||||||
These interest rate swaps are used to hedge the variable cash flows associated with existing
variable-rate debt, and amounts reported in accumulated other comprehensive loss related to
derivatives will be reclassified to interest expense as interest payments are made on the Company’s
variable-rate debt.
The following presents the effect of the Company’s derivative financial
instruments on the consolidated statements of income and the consolidated statement of equity for
the three months ended March 31, 2009 and 2008:
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Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
March 31, 2009
(unaudited)
Notes to Consolidated Financial Statements
March 31, 2009
(unaudited)
| Amount of gain (loss) | Amount of gain (loss) | |||||||||||||||
| recognized in other | recognized in | |||||||||||||||
| comprehensive loss | interest expense | |||||||||||||||
| (effective portion) | (ineffective portion) | |||||||||||||||
| Three months ended Mar 31, | Three months ended Mar 31, | |||||||||||||||
| Derivative | 2009 | 2008 | 2009 | 2008 | ||||||||||||
Interest rate swaps |
$ | 918,000 | $ | (193,000 | ) | $ | 24,000 | $ | — | |||||||
Earnings Per Share
In accordance with SFAS No. 128, “Earnings Per Share”, basic earnings per share (“EPS”) is
computed by dividing net income attributable to the Company’s common shareholders by the weighted
average number of common shares outstanding for the period (including restricted shares and shares
held by Rabbi Trusts). Fully-diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted into shares of
common stock; such additional dilutive shares were insignificant for the three months ended March
31, 2009 and 2008, respectively.
Stock-Based Compensation
SFAS No. 123R, “Share-Based Payments” establishes financial accounting and reporting standards
for stock-based employee compensation plans, including all arrangements by which employees receive
shares of stock or other equity instruments of the employer, or the employer incurs liabilities to
employees in amounts based on the price of the employer’s stock. The statement also defines a fair
value-based method of accounting for an employee stock option or similar equity instrument.
The Company’s 2004 Stock Incentive Plan (the “Incentive Plan”) provides for the granting of
incentive stock options, stock appreciation rights, restricted shares, performance units and
performance shares. The maximum number of shares of the Company’s common stock that may be issued
pursuant to the Incentive Plan is 2,750,000, and the maximum number of shares that may be granted
to a participant in any calendar year may not exceed 250,000. Substantially all grants issued
pursuant to the Incentive Plan are “restricted stock grants” which specify vesting (i) upon the
third anniversary of the date of grant for time-based grants, or (ii) upon the completion of a
designated period of performance for performance-based grants. Time-based grants are valued
according to the market price for the Company’s common stock at the date of grant. For
performance-based grants, the Company generally engages an independent appraisal company to
determine the value of the shares at the date of grant, taking into account the underlying
contingency risks associated with the performance criteria.
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Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
March 31, 2009
(unaudited)
Notes to Consolidated Financial Statements
March 31, 2009
(unaudited)
In February 2007, the Company issued 37,000 shares of common stock as performance-based
grants, which will vest if the total annual return on an investment in the Company’s common stock
over the three-year period ending December 31, 2009 is equal to, or greater than, an average of 8%
per year. The independent appraisal determined the value of the performance-based shares to be
$10.09 per share, compared to a market price at the date of grant of $16.45 per share. In January
2008 and June 2008, the Company issued 53,000 shares and 7,000 shares of common stock,
respectively, as performance-based grants, which will vest if the total annual return on an
investment in the Company’s common stock over the three-year period ending December 31, 2010 is
equal to, or greater than, an average of 8% per year. The independent appraisal determined the
value of the January 2008 performance-based shares to be $6.05 per share, compared to a market
price at the date of grant of $10.07 per share; similar methodology determined the value of the
June 2008 performance-based shares to be $10.31 per share, compared to a market price at the date
of grant of $12.13 per share. In January 2009, the Company issued 218,000 shares of common stock as
performance-based grants, which will vest if the total annual return on an investment in the
Company’s common stock over the three-year period ending December 31, 2011 is equal to, or greater
than, a blended measure of (i) an average of 6% return per year on the Company’s common stock with
(ii) the median return per year of the Company’s peer group. The independent appraisal determined
the value of the performance-based shares to be $5.96 per share, compared to a market price at the
date of grant of $7.02 per share.
Additional restricted shares issued during the three months ended March 31, 2009 and 2008 were
time-based grants, and amounted to 376,000 shares and 166,000 shares, respectively. The value of
all grants is being amortized on a straight-line basis over the respective vesting periods
adjusted, as applicable, for fluctuations in the market value of the Company’s common stock, in
accordance with the provisions of EITF No. 97-14, “Accounting for Deferred Compensation
Arrangements Where Amounts Earned Are Held in a Rabbi Trust and Invested”. Those grants of
restricted shares that are transferred to Rabbi Trusts are classified as treasury stock in the
Company’s consolidated balance sheet, and are accounted for pursuant to EITF No. 97-14. The
following table sets forth certain stock-based compensation information for the three months ended
March 31, 2009 and 2008, respectively:
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Table of Contents
Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
March 31, 2009
(unaudited)
Notes to Consolidated Financial Statements
March 31, 2009
(unaudited)
| Three months ended Mar 31, | ||||||||
| 2009 | 2008 | |||||||
Restricted share grants |
594,000 | 219,000 | ||||||
Average per-share grant price |
$ | 4.91 | $ | 9.11 | ||||
Recorded as deferred compensation, net |
$ | 2,917,000 | $ | 2,001,000 | ||||
Charged to operations: |
||||||||
Amortization relating to stock-based compensation |
$ | 699,000 | $ | 588,000 | ||||
Adjustments to reflect changes in market price of
Company’s common stock |
(1,635,000 | ) | 146,000 | |||||
Total charged to operations |
$ | (936,000 | ) | $ | 734,000 | |||
Non-vested shares: |
||||||||
Non-vested, beginning of period |
508,000 | 380,000 | ||||||
Grants |
594,000 | 219,000 | ||||||
Vested during period |
— | — | ||||||
Forfeitures |
— | — | ||||||
Non-vested, end of period |
1,102,000 | 599,000 | ||||||
Average value of non-vested shares (based on
grant price) |
$ | 8.30 | $ | 12.58 | ||||
Value of shares vested during the
period (based on grant price) |
$ | — | $ | — | ||||
At March 31, 2009, 1,530,000 shares remained available for grants pursuant to the Incentive
Plan, and $4,992,000 remained as deferred compensation, to be amortized over various periods ending
in January 2012.
During 2001, pursuant to the 1998 Stock Option Plan (the “Option Plan”), the Company granted
to directors options to purchase an aggregate of approximately 13,000 shares of common stock at
$10.50 per share, the market value of the Company’s common stock on the date of the grant. The
options are fully exercisable and expire in 2011. In connection with the adoption of the Incentive
Plan, the Company agreed that it would not grant any more options under the Option Plan.
In connection with an acquisition of a shopping center in 2002, the Operating Partnership
issued warrants to purchase approximately 83,000 OP Units to a then minority interest partner in
the property. Such warrants have an exercise price of $13.50 per unit, subject to certain
anti-dilution adjustments, are fully vested, and expire in 2012.
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Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
March 31, 2009
(unaudited)
Notes to Consolidated Financial Statements
March 31, 2009
(unaudited)
Supplemental consolidated statement of cash flows information
| Three months ended Mar 31, | ||||||||
| 2009 | 2008 | |||||||
Supplemental disclosure of cash activities: |
||||||||
Interest paid |
$ | 12,059,000 | $ | 12,278,000 | ||||
Supplemental disclosure of non-cash activities: |
||||||||
Additions to deferred compensation plans |
2,917,000 | 2,001,000 | ||||||
Issuance of non-interest-bearing purchase money mortgage (a) |
— | (13,851,000 | ) | |||||
Assumption of mortgage loans payable |
(54,565,000 | ) | — | |||||
Conversion of OP Units into common stock |
— | 41,000 | ||||||
Purchase accounting allocations: |
||||||||
Intangible lease assets |
7,174,000 | 1,832,000 | ||||||
Intangible lease liabilities |
(3,265,000 | ) | (43,000 | ) | ||||
Net valuation (increase) in assumed mortgage loan
payable (b) |
(1,649,000 | ) | — | |||||
Other non-cash investing and financing activities: |
||||||||
Accrued interest rate swap liabilities |
967,000 | (358,000 | ) | |||||
Accrued real estate improvement costs |
(629,000 | ) | (3,052,000 | ) | ||||
Accrued construction escrows |
1,028,000 | 16,000 | ||||||
Accrued financing costs and other |
(22,000 | ) | (48,000 | ) | ||||
Capitalization of deferred financing costs |
264,000 | 111,000 | ||||||
| (a) | A $14,575,000 non-interest-bearing mortgage was issued in connection with a purchase of land,
and was valued at a net amount of $13,851,000. This reflected a valuation decrease of $724,000 to a
market rate of 9.25% per annum |
|
| (b) | The net valuation (increase) in an assumed mortgage loan payable resulted from adjusting the contract rate of interest (4.9% per annum) to a market rate of interest (6.1% per annum). |
Fair Value Measurements
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”, which defines fair
value, establishes a framework for measuring fair value in accordance with GAAP, and expands
disclosures about fair value measurements. SFAS 157 was effective for financial assets and
liabilities on January 1, 2008. In February 2008, the FASB issued FASB Staff Position (“FSP”) No.
157-2, “Effective Date of FASB Statement No. 157”, which delayed the effective date of SFAS No. 157
for all nonfinancial assets and liabilities, except those that are recognized or disclosed at fair
value in the financial statements on a recurring basis, at least annually. FSP 157-2 partially
defers the effective date of SFAS No. 157 to fiscal years beginning after November 15, 2008. The
adoption of FSP 157-2 did not have a material effect on the consolidated financial statements.
These standards did not materially affect how the Company determines fair value, but resulted in
certain additional disclosures. SFAS 157 establishes a fair
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Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
March 31, 2009
(unaudited)
Notes to Consolidated Financial Statements
March 31, 2009
(unaudited)
value hierarchy that prioritizes observable and unobservable inputs used to measure fair value
into three levels:
| • | Level 1 — Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. | ||
| • | Level 2 — Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. | ||
| • | Level 3 — Inputs to the valuation methodology are unobservable and significant to the fair value measurement. |
The fair value hierarchy gives the highest priority to Level 1 inputs and the lowest priority
to Level 3 inputs. In determining fair value, the Company utilizes valuation techniques that
maximize the use of observable inputs and minimize the use of unobservable inputs to the extent
possible as well as consider counterparty credit risk in the assessment of fair value. Financial
assets and liabilities measured at fair value in the consolidated financial statements consist of
interest rate swaps. The fair values of interest rate swaps are determined using widely accepted
valuation techniques including discounted cash flow analysis on the expected cash flows of each
derivative. The analysis reflects the contractual terms of the swaps, including the period to
maturity, and uses observable market-based inputs, including interest rate curves (“significant
other observable inputs”). The fair value calculation also includes an amount for risk of
non-performance using “significant unobservable inputs” such as estimates of current credit spreads
to evaluate the likelihood of default. The Company has concluded, as of March 31, 2009, that the
fair value associated with the “significant unobservable inputs” relating to the Company’s risk of
non-performance was insignificant to the overall fair value of the interest rate swap agreements
and, as a result, has determined that the relevant inputs for purposes of calculating the fair
value of the interest rate swap agreements, in their entirety, were based upon “significant other
observable inputs” pursuant to SFAS 157. These methods of assessing fair value result in a general
approximation of value, and such value may never be realized.
The carrying amounts of cash and cash equivalents, restricted cash, rents and other
receivables, other assets, accounts payable and accrued expenses approximate fair value. The
valuation of the liability for the Company’s interest rate swaps ($9,623,000 at March 31, 2009),
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.
Recently-Issued Accounting Pronouncements
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-
20
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Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
March 31, 2009
(unaudited)
Notes to Consolidated Financial Statements
March 31, 2009
(unaudited)
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) became effective for fiscal years
beginning after December 15, 2008 and early adoption was not permitted. The principal impact of the
adoption of SFAS No. 141(R) on the Company’s financial statements is that the Company has expensed
most transaction costs relating to its acquisition activities ($259,000 for the three months ended
March 31, 2009, net of non controlling interests’ share).
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 certain limited partners’ interest, in the case of
the Company), subject to the provisions of EITF D-98, “Classification and Measurement of Redeemable
Securities”, is an ownership interest in a consolidated entity which should be reported as equity
in the parent company’s consolidated financial statements. SFAS 160 requires a reconciliation of
the beginning and ending balances of equity attributable to noncontrolling interests and
disclosure, on the face of the consolidated income statement, of those amounts of consolidated net
income attributable to the noncontrolling interests, eliminating the past practice of reporting
these amounts as an adjustment in arriving at consolidated net income. SFAS 160 requires a parent
company to recognize a gain or loss in net income when a subsidiary is deconsolidated and requires
the parent company to attribute to noncontrolling interests their share of losses, if appropriate,
even if such attribution results in a deficit balance applicable to the noncontrolling interests
within the parent company’s equity accounts. SFAS 160 became 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 was not permitted. The Company has
reclassified, for all periods presented, the balances related to minority interests in consolidated
joint ventures and limited partners’ interest in the Operating Partnership into the consolidated
equity accounts, as appropriate (certain non-controlling interests of the Company will continue to
be classified in the mezzanine section of the balance sheet as these redeemable OP Units (“Mezz OP
Units”) do not meet the requirements for equity classification under EITF D-98). The Company will
adjust the carrying value of the Mezz OP Units each period to equal the greater of its historical
carrying value or its redemption value as prescribed by EITF D-98. As of March 31, 2009, there were
no adjustments recorded to the carrying amounts of the Mezz OP Units.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and
Hedging Activities — an amendment of FASB Statement No. 133”. SFAS 161 is intended to improve
financial standards for derivative instruments and hedging activities by requiring enhanced
disclosures to enable investors to better understand their effects on an entity’s financial
position, financial performance, and cash flows. Among other requirements, entities are required to
provide enhanced disclosures about (1) how and why an entity uses derivative instruments, (2) how
derivative instruments and related hedged items are accounted
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Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
March 31, 2009
(unaudited)
Notes to Consolidated Financial Statements
March 31, 2009
(unaudited)
for under SFAS 133 and its related interpretations, and (3) how derivative instruments and
related hedged items affect an entity’s financial position, financial performance and cash flows.
SFAS 161 became effective for the Company on January 1, 2009 and, other than the enhanced
disclosure requirements, did not have a material effect on the Company’s consolidated financial
statements.
In June 2008, the FASB issued FSP No. EITF 03-6-1, “Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities”, which states that unvested
share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents
(whether paid or unpaid) are participating securities and shall be included in the computation of
earnings per share. FSP EITF 03-6-1 became effective on January 1, 2009; its adoption had no impact
on the Company as unvested restricted stock awards are included in the computations of both basic
and diluted earnings per share.
In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair
Value of Financial Instruments”, which expands the fair value disclosure requirements of SFAS 107,
“Disclosures about Fair Value of Financial Instruments”, to include interim periods, and amends APB
Opinion No. 28, “Interim Financial Reporting”, to require these disclosures in summarized financial
information in interim reporting periods. The FSP is effective for interim periods ending after
June 15, 2009, with early adoption permitted under certain circumstances. The adoption of the FSP
is not expected to have a material effect on the Company’s financial statements.
Note 3. Real Estate
The following are the significant real estate transactions that occurred during the three
months ended March 31, 2009:
Joint Venture Activities
On January 30, 2009, a newly-formed 40% Company-owned joint venture acquired the New London
Mall in New London, Connecticut, an approximate 259,000 sq. ft. supermarket-anchored shopping
center, for a purchase price of approximately $40.7 million. The purchase price included the
assumption of an existing $27.4 million first mortgage bearing interest at 4.9% per annum and
maturing in 2015. The total joint venture partnership contribution was approximately $14.0 million,
of which the Company’s 40% share ($5.6 million) was funded from its secured revolving stabilized
property credit facility. The Company is the sole managing partner of the venture and receives
certain acquisition, property management, construction management and leasing fees. In addition,
the Company will be entitled to a “promote” fee structure, pursuant to which its profits
participation would be increased to 44% if the venture reaches certain income targets. The
Company’s joint venture partners are affiliates of Prime Commercial Properties PLC (“PCP”), a
London-based real estate/development company.
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Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
March 31, 2009
(unaudited)
Notes to Consolidated Financial Statements
March 31, 2009
(unaudited)
On February 10, 2009, a second newly-formed (also with affiliates of PCP) 40% Company-owned
joint venture acquired San Souci Plaza in California, Maryland, an approximate 264,000 sq. ft.
supermarket-anchored shopping center, for a purchase price of approximately $31.8 million. The
purchase price included the assumption of an existing $27.2 million first mortgage bearing interest
at 6.2% per annum and maturing in 2016. The total joint venture partnership contribution was
approximately $5.8 million, of which the Company’s 40% share ($2.3 million) was funded from its
secured revolving stabilized property credit facility. The Company is the sole managing partner of
the venture and receives certain acquisition, property management, construction management and
leasing fees. In addition, the Company will be entitled to a “promote” fee structure, pursuant to
which its profits participation would be increased to 44% if the venture reaches certain income
targets.
With respect to the Company’s 20% joint-venture interest in nine properties, in partnership
with affiliates of Homburg Invest Inc., the terms of the partnership agreements provide for
buy/sell agreements of equity interests which can be exercised by either party after June 30, 2009.
The buy/sell agreements allow for either partner to provide notice that it intends to purchase the
non-initiating partner’s interest at a specific price. The non-initiating party may either accept
that offer or instead may reject that offer and become the purchaser at the initially offered
price.
Real Estate Pledged
At March 31, 2009 and December 31, 2008, respectively, a substantial portion of the Company’s
real estate was pledged as collateral for mortgage loans payable and the revolving credit
facilities.
Pro Forma Financial Information (unaudited)
During the period January 1, 2008 through March 31, 2009, the Company acquired six shopping
and convenience centers aggregating approximately 790,000 sq. ft. of GLA, purchased the joint
venture minority interests in four properties, and purchased approximately 182 acres of land for
expansion and/or future development, for a total cost of approximately $189.0 million. The
following table summarizes, on an unaudited pro forma basis, the combined results of operations of
the Company for the three months ended March 31, 2009 and 2008, respectively, as if all of these
property acquisitions were completed as of January 1, 2008. 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, 2008, nor does it purport to predict the results of
operations for future periods.
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Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
March 31, 2009
(unaudited)
Notes to Consolidated Financial Statements
March 31, 2009
(unaudited)
| Three months ended Mar 31, | ||||||||
| 2009 | 2008 | |||||||
Revenues |
$ | 47,662,000 | $ | 46,609,000 | ||||
Net income attributable to common shareholders |
$ | 4,004,000 | $ | 3,129,000 | ||||
Per common share (basic and diluted) |
$ | 0.09 | $ | 0.07 | ||||
Weighted average number of common shares outstanding |
44,880,000 | 44,458,000 | ||||||
Note 4. Mortgage Loans Payable and Secured Revolving Credit Facilities
Secured debt is comprised of the following at March 31, 2009 and December 31, 2008:
| At March 31, 2009 | At December 31, 2008 | |||||||||||||||||||||||||
| Interest rates | Interest rates | |||||||||||||||||||||||||
| Balance | Weighted | Balance | Weighted | |||||||||||||||||||||||
| Description | outstanding | average | Range | outstanding | average | Range | ||||||||||||||||||||
Fixed-rate mortgages |
$ | 700,198,000 | 5.8 | % | 4.8% - 8.5 | % | $ | 655,681,000 | 5.8 | % | 4.8% - 8.5 | % | ||||||||||||||
Variable-rate mortgages |
58,181,000 | 3.9 | % | 2.5% - 5.9 | % | 53,302,000 | 4.4 | % | 2.5% - 5.9 | % | ||||||||||||||||
Total property-specific mortgages |
758,379,000 | 5.6 | % | 708,983,000 | 5.7 | % | ||||||||||||||||||||
Stabilized property credit facility |
276,035,000 | 1.8 | % | 250,190,000 | 2.7 | % | ||||||||||||||||||||
Development property credit
facility |
60,890,000 | 2.8 | % | 54,300,000 | 3.4 | % | ||||||||||||||||||||
| $ | 1,095,304,000 | 4.5 | % | $ | 1,013,473,000 | 4.8 | % | |||||||||||||||||||
Mortgage loans payable
During the three months ended March 31, 2009, the Company assumed $52.9 million of fixed-rate
mortgage loans payable in connection with acquisitions, bearing interest at rates of 6.1% and 6.2%
per annum, with an average of 6.2% per annum. These principal amounts and rates of interest
represent the fair values at the respective dates of acquisition. The stated contract amounts were
$54.6 million at the respective dates of acquisition, bearing interest at rates of 4.9% and 6.2%
per annum, with an average of 5.5% per annum.
In addition, the Company has a $77.7 million construction facility with Manufacturers and
Traders Trust Company (as agent) and several other banks, pursuant to which the Company has
guaranteed and pledged its joint venture development project in Pottsgrove, Pennsylvania as
collateral for borrowings to be made thereunder. This facility will expire in September 2011,
subject to a one-year extension option. Borrowings outstanding under the facility aggregated $37.2
million at March 31, 2009, and such borrowings bore interest at a rate of 2.8% per annum.
Borrowings under the facility bear interest at the Company’s option at either LIBOR plus a
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Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
March 31, 2009
(unaudited)
Notes to Consolidated Financial Statements
March 31, 2009
(unaudited)
spread
of 225 bps, or the agent bank’s prime rate. As of March 31, 2009, the Company was in
compliance with the financial covenants and financial statement ratios required by the terms
of the construction facility.
Secured Revolving Stabilized Property Credit Facility
The Company has a $300 million secured revolving stabilized property 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 on January 30, 2010. Borrowings outstanding under the facility
aggregated $276.0 million at March 31, 2009, and such borrowings bore interest at an average rate
of 1.8% per annum. Borrowings under the facility bear interest at the Company’s option at either
LIBOR or the agent bank’s prime rate, plus a bps spread depending upon the Company’s leverage
ratio, as defined, measured quarterly. The LIBOR spread ranges from 110 to 145 bps (the spread as
of March 31, 2009 was 125 bps, which will remain in effect through June 30, 2009). The prime rate
spread ranges from 0 to 50 bps (the spread as of March 31, 2009 was 0 bps, which will remain in
effect through June 30, 2009). The facility also requires an unused portion fee of 15 bps.
The secured revolving stabilized property credit facility has been used to fund acquisitions,
certain 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. Based on
covenant measurements and collateral in place as of March 31, 2009, the Company was permitted to
draw up to approximately $277.1 million, of which approximately $1.1 million remained available as
of that date. The Company is in the process of pledging additional collateral under this facility
which will increase the availability thereunder by approximately $20.2 million. As of March 31,
2009, the Company was in compliance with the financial covenants and financial statement ratios
required by the terms of the stabilized property credit facility.
Secured Revolving Development Property Credit Facility
The Company has a $150 million secured revolving development property credit facility with
KeyBank, National Association (as agent) and several other banks, pursuant to which the Company has
pledged certain of its development projects and redevelopment properties as collateral for
borrowings thereunder. The facility, as amended, is expandable to $250 million, subject to certain
conditions, including acceptable collateral, and will expire in June 2011, subject to a one-year
extension option. Borrowings under the facility bear interest at the Company’s option at either
LIBOR or the agent bank’s prime rate, plus a spread of 225 bps or 75
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Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
March 31, 2009
(unaudited)
Notes to Consolidated Financial Statements
March 31, 2009
(unaudited)
bps, respectively. Advances
under the facility are calculated at the least 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. This facility has been
and is expected to be further used to fund in part the Company’s and certain joint ventures’
development activities in 2009 and subsequent years. In order to draw funds under this construction
facility, the Company must meet certain pre-leasing and other
conditions. Borrowings outstanding under the facility aggregated $60.9 million at March 31,
2009, and such borrowings bore interest at a rate of 2.8% per annum. Based on covenant measurements
and collateral in place as of March 31, 2009, the Company was permitted to draw an additional $69.6
million, which will become available as approved project costs are incurred. As of March 31, 2009,
the Company was in compliance with the financial covenants and financial statement ratios required
by the terms of the secured revolving development property credit facility.
Note 5. Subsequent Events
On April 23, 2009, the Company sold its 6,000 sq. ft. McDonalds/Waffle House property, located
in Medina, Ohio, for a sales price of $1.3 million; the Company realized a net gain on the
transaction of approximately $250,000. This property met the “held for sale” criteria subsequent to
March 31, 2009, and the Company will report the carrying amounts and results of operations for this
property as “held for sale” and “discontinued operations” for all periods presented, effective with
the quarterly period ending June 30, 2009.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the Company’s consolidated
financial statements and related notes thereto included elsewhere in this report.
Executive Summary
The Company is a fully-integrated real estate investment trust which focuses primarily on
ownership, operation, development and redevelopment of supermarket-anchored shopping centers
predominantly in coastal mid-Atlantic and New England states. At March 31, 2009, the Company had a
portfolio of 123 operating properties totaling approximately 12.7 million square feet of gross
leasable area (“GLA”), including 110 wholly-owned properties comprising approximately 11.0 million
square feet and 13 properties owned in joint venture comprising approximately 1.7 million square
feet. The entire 123 property portfolio was approximately 92% leased at March 31, 2009; the 115
property “stabilized” portfolio (including properties wholly-owned and in joint venture) was
approximately 95% leased at that date. The Company also owned 398 acres of land parcels, a
significant portion of which is under development. In addition, the Company has a 76.3% interest 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, 2009, the Company owned 95.7%
of the Operating Partnership and is its sole general partner. OP Units are economically equivalent
to the Company’s common stock and are convertible into the Company’s common stock at the option of
the holders on a one-to-one basis.
The Company derives substantially all of its revenues from rents and operating expense
reimbursements received pursuant to long-term leases. The Company’s operating results therefore
depend on the ability of its tenants to make the payments required by the terms of their leases.
The Company focuses its investment activities on supermarket-anchored community shopping centers
and drug store-anchored convenience centers. The Company believes that, because of the need of
consumers to purchase food and other staple goods and services generally available at such centers,
its type of “necessities"-based properties should provide relatively stable revenue flows even
during difficult economic times. In April 2009, the Company’s Board of Directors determined to
suspend payment of dividends for the balance of 2009 (the quarterly dividend paid in February had
already been reduced by one-half). The savings over the remainder of 2009 will be approximately
$31.8 million. This decision was in response to the current state of the economy, the difficult
retail environment and the constrained capital markets.
The Company has historically sought opportunities to acquire properties suited for development
and/or redevelopment, and, to a lesser extent than in the recent past, stabilized properties, where
it can utilize its experience in shopping center construction, renovation, expansion, re-leasing
and re-merchandising to achieve long-term cash flow growth and favorable
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investment returns. The
Company expects to substantially reduce these activities in the
foreseeable future in view of current economic conditions.
Summary of Critical Accounting Policies
The preparation of the consolidated financial statements in conformity with GAAP requires the
Company to make estimates and judgments that affect the reported amounts of assets and liabilities,
revenues and expenses, and related disclosures of contingent assets and liabilities. On an ongoing
basis, management evaluates its estimates, including those related to revenue recognition and the
allowance for doubtful accounts receivable, real estate investments and purchase accounting
allocations related thereto, asset impairment, and derivatives used to hedge interest-rate risks.
Management’s estimates are based both on information that is currently available and on various
other assumptions management believes to be reasonable under the circumstances. Actual results
could differ from those estimates and those estimates could be different under varying assumptions
or conditions.
The Company has identified the following critical accounting policies, the application of
which requires significant judgments and estimates:
Revenue Recognition
Rental income with scheduled rent increases is recognized using the straight-line method over
the respective terms of the leases. The aggregate excess of rental revenue recognized on a
straight-line basis over base rents under applicable lease provisions is included in straight-line
rents receivable on the consolidated balance sheet. Leases also generally contain provisions under
which the tenants reimburse the Company for a portion of property operating expenses and real
estate taxes incurred; such income is recognized in the periods earned. In addition, certain
operating leases contain contingent rent provisions under which tenants are required to pay, as
additional rent, a percentage of their sales in excess of a specified amount. 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. When management analyzes
accounts receivable and evaluates the adequacy of the allowance for doubtful accounts, it considers
such things as historical bad debts, tenant creditworthiness, current economic trends, and changes
in tenants’ payment patterns. These estimates have a direct impact on net income, because a higher
bad debt allowance would result in lower net income, whereas a lower bad debt allowance would
result in higher net income.
Real Estate Investments
Real estate investments are carried at cost less accumulated depreciation. The provision for
depreciation is calculated using the straight-line method based on estimated useful lives.
Expenditures for maintenance, repairs and betterments that do not materially prolong the normal
useful life of an asset are charged to operations as incurred. Expenditures for betterments that
substantially extend the useful lives of real estate assets are capitalized. Real estate
investments
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include costs of development and redevelopment activities, and construction in
progress. Capitalized costs, including interest and other carrying costs during the construction
and/or
renovation periods, are included in the cost of the related asset and charged to operations through
depreciation over the asset’s estimated useful life. The Company is required to make subjective
estimates as to the useful lives of its real estate assets for purposes of determining the amount
of depreciation to reflect on an annual basis. These assessments have a direct impact on net
income. A shorter estimate of the useful life of an asset would have the effect of increasing
depreciation expense and lowering net income, whereas a longer estimate of the useful life of an
asset would have the effect of reducing depreciation expense and increasing net income.
The Company’s capitalization policy on its development and redevelopment properties is guided
by SFAS No. 34, “Capitalization of Interest Cost” and SFAS No. 67, “Accounting for Costs and
Initial Rental Operations of Real Estate Projects”. A variety of costs are incurred in the
acquisition, development and leasing of a property, such as pre-construction costs essential to the
development of the property, development costs, construction costs, interest costs, real estate
taxes, salaries and related costs, and other costs incurred during the period of development. After
a determination is made to capitalize a cost, it is allocated to the specific component of a
project that is benefited. The Company ceases capitalization on the portions substantially
completed and occupied, or held available for occupancy, and capitalizes only those costs
associated with the portions under construction. The Company considers a construction project as
substantially completed and held available for occupancy upon the completion of tenant
improvements, but not later than one year from cessation of major construction activity.
Determination of when a development project is substantially complete and capitalization must cease
involves a degree of judgment. The effect of a longer capitalization period would be to increase
capitalized costs and would result in higher net income, whereas the effect of a shorter
capitalization period would be to reduce capitalized costs and would result in lower net income.
The Company applies SFAS No. 141, “Business Combinations”, and SFAS No. 142, “Goodwill and
Other Intangibles”, in valuing real estate acquisitions. In connection therewith, the fair value of
real estate acquired is allocated to land, buildings and improvements. In addition, the fair value
of in-place leases is allocated to intangible lease assets and liabilities. The fair value of the
tangible assets of an acquired property is determined by valuing the property as if it were vacant,
which value is then allocated to land, buildings and improvements based on management’s
determination of the relative fair values of such assets. In valuing an acquired property’s
intangibles, factors considered by management include an estimate of carrying costs during the
expected lease-up periods, such as real estate taxes, insurance, other operating expenses, and
estimates of lost rental revenue during the expected lease-up periods based on its evaluation of
current market demand. Management also estimates costs to execute similar leases, including leasing
commissions, tenant improvements, legal and other related costs. The principal impact on the
Company’s financial statements of the adoption of SFAS No. 141R, “Business Combinations — a
replacement of FASB Statement No. 141”, which became effective January 1, 2009, is that the Company
has expensed most transaction costs relating to its acquisition activities.
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
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value of the property as if vacant. Above-market and below-market in-place lease values are
recorded based on the present value (using a discount rate which reflects the risks associated with
the leases acquired) of the difference between the contractual amounts to be received
and management’s estimate of market lease rates, measured over the non-cancelable terms of the
respective leases. The value of other intangibles is amortized to expense, and the above-market and
below-market lease values are amortized to rental income, over the remaining non-cancelable terms
of the respective leases. If a lease were to be terminated prior to its stated expiration, all
unamortized amounts relating to that lease would be recognized in operations at that time.
Management is required to make subjective assessments in connection with its valuation of real
estate acquisitions. These assessments have a direct impact on net income, because (i) above-market
and below-market lease intangibles are amortized to rental income, and (ii) the value of other
intangibles is amortized to expense. Accordingly, higher allocations to below-market lease
liability and other intangibles would result in higher rental income and amortization expense,
whereas lower allocations to below-market lease liability and other intangibles would result in
lower rental income and amortization expense.
The Company applies SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived
Assets”, to recognize and measure impairment of long-lived assets. Management reviews each real
estate investment for impairment whenever events or circumstances indicate that the carrying value
of a real estate investment may not be recoverable. The review of recoverability is based on an
estimate of the future cash flows that are expected to result from the real estate investment’s use
and eventual disposition. These estimates of cash flows consider factors such as expected future
operating income, trends and prospects, as well as the effects of leasing demand, competition and
other factors. If an impairment event exists due to the projected inability to recover the carrying
value of a real estate investment, an impairment loss is recorded to the extent that the carrying
value exceeds estimated fair value. A real estate investment held for sale is carried at the lower
of its carrying amount or estimated fair value, less the cost of a potential sale. Depreciation and
amortization are suspended during the period the property is held for sale. Management is required
to make subjective assessments as to whether there are impairments in the value of its real estate
properties. These assessments have a direct impact on net income, because an impairment loss is
recognized in the period that the assessment is made.
Stock-Based Compensation
SFAS No. 123R, “Share-Based Payments”, establishes financial accounting and reporting
standards for stock-based employee compensation plans, including all arrangements by which
employees receive shares of stock or other equity instruments of the employer, or the employer
incurs liabilities to employees in amounts based on the price of the employer’s stock. The
statement also defines a fair value-based method of accounting for an employee stock option or
similar equity instrument.
The Company’s 2004 Stock Incentive Plan (the “Incentive Plan”) provides for the granting of
incentive stock options, stock appreciation rights, restricted shares, performance units and
performance shares. The maximum number of shares of the Company’s common stock that
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may be issued
pursuant to the Incentive Plan, as amended, is 2,750,000, and the maximum number of shares that may
be granted to a participant in any calendar year is 250,000. Substantially all grants issued
pursuant to the Incentive Plan are “restricted stock grants” which specify vesting (i) upon the
third anniversary of the date of grant for time-based grants, or (ii)
upon the completion of a designated period of performance for performance-based grants.
Time–based grants are valued according to the market price for the Company’s common stock at the
date of grant. For performance-based grants, the Company engages an independent appraisal company
to determine the value of the shares at the date of grant, taking into account the underlying
contingency risks associated with the performance criteria. These value estimates have a direct
impact on net income, because higher valuations would result in lower net income, whereas lower
valuations would result in higher net income. The value of such grants is being amortized on a
straight-line basis over the respective vesting periods, as adjusted for fluctuations in the market
value of the Company’s common stock, in accordance with the provisions of EITF No. 97-14,
“Accounting for Deferred Compensation Arrangements Where Amounts Earned Are Held in a Rabbi Trust
and Invested”.
Results of Operations
Differences in results of operations between the three months ended March 31, 2009 and 2008,
respectively, were primarily the result of the Company’s property acquisition program and
continuing development/redevelopment activities. During the period January 1, 2008 through March
31, 2009, the Company acquired six shopping and convenience centers aggregating approximately
790,000 sq. ft. of GLA, purchased the joint venture minority interests in four properties, and
acquired approximately 182 acres of land for development, expansion and/or future development, for
a total cost of approximately $189.0 million. In addition, the Company placed into service one
ground-up development having an aggregate cost of approximately $2.7 million. Net income was $5.8
million and $5.9 million, respectively, for the three months ended March 31, 2009 and 2008.
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Comparison of the three months ended March 31, 2009 to the three months ended March 31,
2008
| Properties | ||||||||||||||||||||||||
| Three months ended Mar 31, | Percentage | Acquisitions | held in | |||||||||||||||||||||
| 2009 | 2008 | Increase | change | and other (ii) | both periods | |||||||||||||||||||
Total revenues |
$ | 46,895,000 | $ | 43,635,000 | $ | 3,260,000 | 7 | % | $ | 2,408,000 | $ | 852,000 | ||||||||||||
Property operating expenses |
14,672,000 | 12,911,000 | 1,761,000 | 14 | % | (87,000 | ) | 1,848,000 | ||||||||||||||||
Depreciation and amortization |
12,400,000 | 11,529,000 | 871,000 | 8 | % | 1,148,000 | (277,000 | ) | ||||||||||||||||
General and administrative |
2,964,000 | 2,191,000 | 773,000 | 35 | % | n/a | n/a | |||||||||||||||||
Non-operating income and
expense, net (i) |
11,080,000 | 11,076,000 | 4,000 | 0 | % | n/a | n/a | |||||||||||||||||
| (i) | Non-operating income and expense consists principally of interest expense (including
amortization of deferred financing costs), equity in income of an unconsolidated joint venture, and gain on sale of a land parcel. |
|
| (ii) | Includes principally the results of properties acquired after January 1, 2008. Amounts also include (a) unallocated property and construction management compensation and benefits (including stock-based compensation), and (b) results of a property in Wyoming, Michigan that was demolished in the second quarter of 2008 as part of the redevelopment plans for the property. |
Properties held in both periods. The Company held 117 properties throughout the three months
ended March 31, 2009 and 2008.
Total revenues increased primarily as a result (i) an increase in tenant recoveries
($1,170,000), primarily due to an increase in billable property operating expenses, and (ii) an
increase in base rent, primarily related to step-ups in tenants’ base rent ($72,000). This was
offset in part by (iii) a decrease in straight-line rental income due to the aforementioned base
rent increases and early termination of certain leases ($152,000), (iv) a decrease in amortization
of intangible lease liabilities from expiring leases in the ordinary course ($92,000), and (v) a
decrease in percentage rent due to lower tenant sales ($164,000).
Property operating expenses increased as a result of (i) an increase in real estate and other
property-related taxes resulting from reassessments of properties previously acquired and certain
completed development and redevelopment activities ($423,000), (ii) an increase in the provision
for doubtful accounts primarily due to a higher collection rate in 2008 as compared to 2009
($437,000), (iii) an increase in snow removal costs ($887,000), and (iv) an increase in other
operating expenses ($101,000).
General and administrative expenses increased primarily as a result of (i) the write-off of
transaction costs in accordance with SFAS No. 141(R) and the costs associated with a cancelled
acquisition ($1,527,000), and (ii) higher professional and other expenses ($180,000). This was
offset in part by net amounts charged/credited to general and administrative expenses primarily
relating to mark-to-market gains applicable to stock-based compensation ($934,000).
Non-operating income and expenses, net, increased primarily as a result of (i) increased
interest costs from borrowings related to acquisitions of property and a joint venture partner’s
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interest ($1,081,000), (ii) higher amortization of deferred financing costs related to the
Company’s lines of credit ($395,000), and (iii) lower interest income as a result of lower cash
balances ($144,000). This was offset in part by (iv) decreased interest costs primarily from lower
prevailing interest rates applicable to the Company’s variable rate debt ($1,268,000), (v) an
increase in the equity in income from unconsolidated joint venture ($109,000), and (vi) a gain on
sale of a land parcel ($239,000).
Liquidity and Capital Resources
The Company funds operating expenses and other short-term liquidity requirements, including
debt service, tenant improvements, leasing commissions, collateralization of certain interest rate
swap obligations, preferred and common dividend distributions, and distributions to minority
interest partners, primarily from operating cash flows. The Company has also used its secured
revolving stabilized property 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 its credit facilities 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 expects to fund its short-term liquidity requirements principally from the
following: (i) cash and cash equivalents, (ii) availability under its credit facilities, and (iii)
mortgage financing of development projects after they are completed.
There has been a recent fundamental contraction of the U.S. credit and capital markets,
whereby banks and other credit providers have tightened their lending standards and severely
restricted the availability of credit. Accordingly, for this and other reasons, there can be no
assurance that the Company will have the availability of mortgage financing on completed
development projects, additional construction financing, net proceeds from the contribution of
properties to joint ventures, or proceeds from the refinancing of existing debt.
In April 2009, the Company’s Board of Directors determined to suspend payment of dividends on
the Company’s common stock/OP Units for the balance of 2009 (the quarterly dividend paid in
February had already been reduced by one-half). The savings over the remainder of 2009 will be
approximately $31.8 million. This decision was in response to the current state of the economy, the
difficult retail environment and the constrained capital markets. Management does not expect that
it will be required to make any significant common stock/OP Unit cash distributions in 2010 to
maintain the Company’s REIT status for 2009.
The Company has a $300 million secured revolving stabilized property 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 on January 30, 2010. Borrowings outstanding under the facility
aggregated $276.0 million at March 31, 2009, and such borrowings bore interest at an average rate
of 1.8% per annum. Borrowings under the facility bear interest at the Company’s option at either
LIBOR or the agent bank’s prime rate, plus a basis points (“bps”) spread
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depending upon the
Company’s leverage ratio, as defined, measured quarterly. The LIBOR spread ranges from 110 to 145
bps (the spread as of March 31, 2009 was 125 bps, which will remain in effect through June 30,
2009). The prime rate spread ranges from 0 to 50 bps (the
spread as of March 31, 2009 was 0 bps, which will remain in effect through June 30, 2009). The
facility also requires an unused portion fee of 15 bps. The credit facility has been 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. As of March 31,
2009, based on covenant measurements and collateral in place, the Company was permitted to draw up
to approximately $277.1 million, of which approximately $1.1 million remained available as of that
date. The Company is in the process of pledging additional collateral under this facility which
will increase the availability thereunder by approximately $20.2 million. As of March 31, 2009, the
Company was in compliance with the financial covenants and financial statement ratios required by
the terms of the secured revolving stabilized property credit facility.
With respect to the Company’s $300 million secured revolving stabilized property credit
facility, the Company intends to enter into a similarly structured credit facility by January 30,
2010, the maturity date of the existing facility. In the event the Company is unable to arrange a
new facility or to further extend the existing facility on terms generally acceptable to the
Company and that will provide for sufficient availability and covenant compliance, or if members of
the borrowing syndicate should not continue to participate in the facility at the same or reduced
levels, or if additional commitments cannot be obtained from existing members or potential
additional members of such syndicate, the Company may not be able to arrange alternate financing or
to arrange such financing at borrowing rates and other terms which would be acceptable to the
Company.
The Company has a $150 million secured revolving development property credit facility with
KeyBank, National Association (as agent) and several other banks, pursuant to which the Company has
pledged certain of its development and redevelopment projects as collateral for borrowings to be
made thereunder. This facility is expandable to $250 million, subject to certain conditions,
including acceptable collateral, and will expire in June 2011, subject to a one-year extension
option. Borrowings outstanding under the facility aggregated $60.9 million at March 31, 2009 and
bore interest at a rate of 2.8% per annum. Borrowings under the facility bear interest at the
Company’s option at either LIBOR or the agent bank’s prime rate, plus a spread of 225 bps or 75
bps, respectively. The facility also requires an unused portion fee of 15 bps. As of March 31,
2009, based on covenant measurements and collateral in place, the Company was permitted to draw up
to an additional $69.6 million, which will become available as approved project costs are incurred.
As of March 31, 2009, the Company was in compliance with the financial covenants and financial
statement ratios required by the terms of the secured revolving development property credit
facility, which are similar to those contained in the secured revolving stabilized property credit
facility. The Company plans to add additional properties to the collateral pool of this facility as
their respective stages of development permit, with the intent of making a substantial portion of
the facility available.
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The Company has a $77.7 million construction facility with Manufacturers and Traders Trust
Company (as agent) and several other banks, pursuant to which the Company has pledged its joint
venture development project in Pottsgrove, Pennsylvania as collateral for borrowings to be made
thereunder. This facility will expire in September 2011, subject to a one-year extension
option. Borrowings outstanding under the facility aggregated $37.2 million at March 31, 2009
and bore interest at a rate of 2.8% per annum. Borrowings under the facility bear interest at the
Company’s option at either LIBOR plus a spread of 225 bps, or the agent bank’s prime rate. As of
March 31, 2009, the Company was in compliance with the financial covenants and financial statement
ratios required by the terms of the construction facility.
Mortgage loans payable at March 31, 2009 consisted of fixed-rate notes totaling $700.2
million (with a weighted average interest rate of 5.8%) and variable-rate debt totaling $395.1
million, consisting principally of advances outstanding under the Company’s variable-rate credit
facilities (with a weighted average interest rate of 2.3%). Total mortgage loans payable have an
overall weighted average interest rate of 4.5% and mature at various dates through 2029. The
Company has no debt balloon payment due during the balance of 2009, and has approximately $6.2
million of scheduled debt principal amortization payments during the balance of 2009.
The terms of several of the Company’s mortgage loans payable require the Company to deposit
certain replacement and other reserves with its lenders. Such “restricted cash” is generally
available only for property-level requirements for which the reserve was established, and is not
available to fund other property-level or Company-level obligations.
Net Cash Flows
Operating Activities
Net cash flows provided by operating activities amounted to $9.1 million and $12.6 million for
the three months ended March 31, 2009 and 2008, respectively. Net cash flows for the 2009 period
reflect reductions of $1.5 million for payment of transaction costs (including an amount that would
have been treated as an investing activity prior to the adoption of SFAS 141(R)), and $3.7 million
reflecting the timing of payments of accounts payable and accrued expenses and a largely seasonal
build-up of billed receivables.
Investing Activities
Net cash flows used in investing activities were $36.4 million and $48.5 million for the three
months ended March 31, 2009 and 2008, respectively, and were primarily the result of the Company’s
property acquisition program and continuing development/redevelopment activities. During the three
months ended March 31, 2009, the Company acquired two shopping centers and incurred expenditures
for property improvements, an aggregate of $35.7 million. The Company also made a $350,000
additional investment in its unconsolidated joint venture. During the three months ended March 31,
2008, the Company acquired four shopping and convenience centers, acquired land for development,
expansion and/or future development and incurred expenditures for property improvements, an
aggregate of $30.0 million. The Company also purchased the joint venture minority interests in four
properties for $17.5 million.
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Financing Activities
Net cash flows provided by financing activities were $33.4 million and $30.1 million for the
three months ended March 31, 2009 and 2008, respectively. During the first three months of
2009, the Company received net advance proceeds of $32.4 million from its revolving credit
facilities, $11.8 million in contributions from noncontrolling interests (minority interest
partners), and $8.0 million in proceeds from its property-specific construction facility, offset by
repayment of mortgage obligations of $11.5 million, preferred and common stock dividend
distributions of $7.0 million, distributions to noncontrolling interests (limited partners) of
$0.2 million, and the payment of financing costs of $0.1 million. During the first three months of
2008, the Company received net advance proceeds of $36.3 million from its revolving credit
facility, $27.5 million in proceeds from mortgage financings, a $4.0 million contribution from
noncontrolling interests (a minority interest partner), and a refund of deferred financing costs of
$0.2 million, offset by repayment of mortgage obligations of $25.1 million, preferred and common
stock dividend distributions of $12.0 million, and distributions to noncontrolling interests
(minority and limited partner interests) of $0.8 million.
Funds From Operations
Funds From Operations (“FFO”) is a widely-recognized non-GAAP financial measure for REITs that
the Company believes, when considered with financial statements determined in accordance with GAAP,
is useful to investors in understanding financial performance and providing a relevant basis for
comparison among REITs. In addition, FFO is useful to investors as it captures features particular
to real estate performance by recognizing that real estate generally appreciates over time or
maintains residual value to a much greater extent than do other depreciable assets. Investors
should review FFO, along with GAAP net income, when trying to understand an equity REIT’s operating
performance. The Company presents FFO because the Company considers it an important supplemental
measure of its operating performance and believes that it is frequently used by securities
analysts, investors and other interested parties in the evaluation of REITs. Among other things,
the Company uses FFO or an adjusted FFO-based measure (i) as a criterion to determine
performance-based bonuses for members of senior management, (ii) in performance comparisons with
other shopping center REITs, and (iii) to measure compliance with certain financial covenants under
the terms of the Company’s secured revolving credit facilities.
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
attributable 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 attributable to common shareholders or to cash flow from operating
activities. FFO is not indicative of cash available to fund ongoing cash needs,
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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
Company’s calculations of FFO for the three months ended March 31, 2009 and 2008:
| Three months ended Mar 31, | ||||||||
| 2009 | 2008 | |||||||
Net income attributable to the Company’s common shareholders |
$ | 3,999,000 | $ | 3,112,000 | ||||
Add (deduct): |
||||||||
Real estate depreciation and amortization |
12,391,000 | 11,461,000 | ||||||
Noncontrolling interests: |
||||||||
Limited partners’ interest |
180,000 | 143,000 | ||||||
Minority interests in consolidated joint ventures |
(354,000 | ) | 706,000 | |||||
Minority interests’ share of FFO applicable to
consolidated joint ventures |
(832,000 | ) | (1,781,000 | ) | ||||
Equity in income of unconsolidated joint venture |
(259,000 | ) | (150,000 | ) | ||||
FFO from unconsolidated joint venture |
359,000 | 226,000 | ||||||
Funds From Operations |
$ | 15,484,000 | $ | 13,717,000 | ||||
FFO per common share (assuming conversion of OP Units): |
||||||||
Basic |
$ | 0.33 | $ | 0.30 | ||||
Diluted |
$ | 0.33 | $ | 0.30 | ||||
Weighted average number of common shares: |
||||||||
Shares used in determination of basic earnings per share |
44,880,000 | 44,458,000 | ||||||
Additional shares assuming conversion of OP Units (basic) |
2,017,000 | 2,030,000 | ||||||
Shares used in determination of basic FFO per share |
46,897,000 | 46,488,000 | ||||||
Shares used in determination of diluted earnings per share |
44,880,000 | 44,459,000 | ||||||
Additional shares assuming conversion of OP Units (diluted) |
2,017,000 | 2,030,000 | ||||||
Shares used in determination of diluted FFO per share |
46,897,000 | 46,489,000 | ||||||
Inflation
Low to moderate levels of inflation during the past several years have favorably impacted the
Company’s operations by stabilizing operating expenses. However, the Company’s properties have
tenants whose leases include expense reimbursements and other provisions to minimize the effect of
inflation. At the same time, low inflation has had the indirect effect of reducing the Company’s
ability to increase tenant rents upon the signing of new leases and/or lease renewals.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
One of the principal market risks facing the Company is interest rate risk on its credit
facilities. 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 variable-rate credit
facilities used to maintain liquidity, fund capital expenditures, development/redevelopment
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activities, and acquisitions, (ii) property-specific variable-rate construction financing, and
(iii) other property-specific variable-rate mortgages. The Company’s objectives with respect to
interest rate risk are to limit the impact of interest rate changes on operations and cash
flows, and to lower its overall borrowing costs. To achieve these objectives, the Company may
borrow at fixed rates and may enter into derivative financial instruments, such as interest rate
swaps and caps, 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, 2009, the Company had approximately $41.5 million of mortgage
loans payable subject to interest rate swaps which converted LIBOR-based variable rates to fixed
annual rates ranging from 5.2% to 6.8% per annum. In addition, the Company had an interest rate
swap applicable to anticipated permanent financing of $28.0 million for its development joint
venture project in Stroudsburg, Pennsylvania.
At March 31, 2009, long-term debt consisted of fixed-rate mortgage loans payable and
variable-rate debt (principally the Company’s variable-rate credit facilities). The average
interest rate on the $700.2 million of fixed-rate indebtedness outstanding was 5.8%, with
maturities at various dates through 2029. The average interest rate on the $395.1 million of
variable-rate debt (including $336.9 million in advances under the Company’s revolving credit
facilities) was 2.3%. The secured revolving stabilized property credit facility matures in January
2010 and the secured revolving development property credit facility matures in June 2011, subject
to a one-year extension option.
At March 31, 2009, the Company had accrued liabilities (included in accounts payable and
accrued expenses on the consolidated balance sheet) for (i) $4.0 million relating to the fair value
of interest rate swaps applicable to existing mortgage loans payable of $41.5 million, and (ii)
$5.6 million relating to an interest rate swap applicable to anticipated permanent financing of
$28.0 million for its development joint venture project in Stroudsburg, Pennsylvania, bearing an
effective date of June 1, 2010, termination date of June 1, 2020, and a fixed rate of 5.56%.
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures and internal controls designed to
ensure that information required to be disclosed in its filings under the Securities Exchange Act
of 1934 is reported within the time periods specified in the rules and regulations of the
Securities and Exchange Commission (“SEC”). In this regard, the Company has formed a Disclosure
Committee currently comprised of several of the Company’s executive officers as well as certain
other employees with knowledge of information that may be considered in the SEC reporting process.
The Committee has responsibility for the development and assessment of the financial and
non-financial information to be included in the reports filed with the SEC, and assists the
Company’s Chief Executive Officer and Chief Financial Officer in connection with their
certifications contained in the Company’s SEC filings. The Committee meets regularly and reports to
the Audit Committee on a quarterly or more frequent basis. The Company’s principal executive and
financial officers have evaluated its disclosure controls and procedures as of March 31, 2009, and
have determined that such disclosure controls and procedures are effective.
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During the three months ended March 31, 2009, 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, these internal controls over financial reporting.
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Part II Other Information
Item 6. Exhibits
Exhibit 31
|
Section 302 Certifications | |
Exhibit 32
|
Section 906 Certifications |
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 8, 2009
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