-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MsD85J+g2urqQwBj0BjdS/Hq0u1RifWcN85zxxZR1vYXRiH2roLe3L/TvpfYZVPF fVkKkI4mR1wQFYyOlAfMoQ== 0000912057-02-030114.txt : 20020806 0000912057-02-030114.hdr.sgml : 20020806 20020806163843 ACCESSION NUMBER: 0000912057-02-030114 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020806 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HERITAGE PROPERTY INVESTMENT TRUST INC CENTRAL INDEX KEY: 0001158265 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 043474810 STATE OF INCORPORATION: MD FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-31297 FILM NUMBER: 02720840 BUSINESS ADDRESS: STREET 1: 535 BOYLSTON STREET CITY: BOSTON STATE: MA ZIP: 02116 BUSINESS PHONE: 6172472200 MAIL ADDRESS: STREET 1: 535 BOYLSTON STREET CITY: BOSTON STATE: MA ZIP: 02116 10-Q 1 a2086055z10-q.txt FORM 10-Q HERITAGE PROPERTY INVESTMENT TRUST, INC. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________ COMMISSION FILE NUMBER: 001-31297 HERITAGE PROPERTY INVESTMENT TRUST, INC. (Exact name of registrant as specified in its charter) MARYLAND 04-3474810 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 535 BOYLSTON STREET, BOSTON, MA 02116 (Address of principal executive offices) (Zip Code) (617) 247-2200 (Registrant's telephone number, including area code) NONE (Former name, former address and former fiscal year, if changed since last report) 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 X No . As of August 6, 2002, there were 41,504,208 shares of the Company's $0.001 par value common stock outstanding. HERITAGE PROPERTY INVESTMENT TRUST, INC. INDEX TO FORM 10-Q PART I........................................................................................................2 ITEM 1. FINANCIAL STATEMENTS................................................................................2 CONSOLIDATED BALANCE SHEETS............................................................................2 CONSOLIDATED STATEMENTS OF INCOME......................................................................3 CONSOLIDATED STATEMENTS OF CASH FLOWS..................................................................4 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY..............................................5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.............................................................6 1. MANAGEMENT STATEMENT AND GENERAL...............................................................6 2. INITIAL PUBLIC OFFERING........................................................................6 3. INCOME TAXES...................................................................................6 4. EARNINGS PER SHARE.............................................................................7 5. REAL ESTATE INVESTMENTS........................................................................7 6. INVESTMENTS IN JOINT VENTURES..................................................................8 7. DEBT...........................................................................................8 8. RELATED PARTY TRANSACTIONS.....................................................................9 9. DERIVATIVES AND HEDGING INSTRUMENTS...........................................................10 10. SEGMENT REPORTING..........................................................................10 11. NEW ACCOUNTING PRONOUNCEMENTS..............................................................13 12. STOCK-BASED COMPENSATION...................................................................13 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..........15 ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....................................30 PART II -- OTHER INFORMATION................................................................................31 ITEM 1. LEGAL PROCEEDINGS..................................................................................31 ITEM 2. CHANGES IN SECURITIES..............................................................................31 ITEM 3. DEFAULTS UPON SENIOR SECURITIES....................................................................32 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................................32 ITEM 5. OTHER INFORMATION..................................................................................33 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...................................................................33 SIGNATURES...................................................................................................34
1 HERITAGE PROPERTY INVESTMENT TRUST, INC. PART I ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS JUNE 30, 2002 AND DECEMBER 31, 2001 (IN THOUSANDS OF DOLLARS)
JUNE 30, DECEMBER 31, 2002 2001 ---- ---- (unaudited) Assets Real estate investments, net.................................................... $1,966,923 1,845,168 Cash and cash equivalents....................................................... 3,888 6,146 Accounts receivable, net of allowance for doubtful accounts of $7,328 in 2002 and $7,473 in 2001.......................................... 22,510 23,639 Prepaids and other assets....................................................... 11,075 13,628 Deferred financing and leasing costs............................................ 15,050 18,684 ---------- --------- Total assets............................................................ $2,019,446 1,907,265 ========== ========= Liabilities, Redeemable Equity and Shareholders' Equity Liabilities: Mortgage loans payable....................................................... $540,423 492,289 Unsecured notes payable...................................................... 201,490 201,490 Line of credit facility...................................................... 210,000 343,000 Subordinated debt............................................................ -- 100,000 Accrued expenses and other liabilities....................................... 64,875 69,931 Accrued distributions........................................................ 18,553 12,041 ---------- --------- Total liabilities....................................................... 1,035,341 1,218,751 ---------- --------- Series B Preferred Units........................................................ 50,000 50,000 Series C Preferred Units........................................................ 25,000 25,000 Exchangeable limited partnership units.......................................... 8,268 527 --------- Other minority interest......................................................... 2,425 2,425 ---------- --------- Total minority interests................................................ 85,693 77,952 ---------- --------- Redeemable equity: Series A 8.5% Cumulative Convertible Participating Preferred Stock, $.001 par value, 3,743,315 shares issued and outstanding at December 31, 2001; and common stock, $.001 par value, 1,256,685 shares issued and outstanding at December 31, 2001.......................................................... -- 123,094 ---------- --------- Shareholders' equity: Series A 8.5% Cumulative Convertible Participating Preferred Stock, $.001 par value; 0 and 25,000,000 shares authorized at June 30, 2002 and December 31, 2001, respectively; 0 and 16,598,452 shares issued and outstanding at June 30, 2002 and December 31, 2001........................................ -- 16 Common stock, $.001 par value; 200,000,000 and 70,000,000 shares authorized at June 30, 2002 and December 31, 2001, respectively; 41,349,208 and 5,561,635 shares issued and outstanding at June 30, 2002 and December 31, 2001, respectively............................................ 41 6 Additional paid-in capital................................................... 1,002,341 551,623 Cumulative distributions in excess of net income............................. (103,970) (55,435) Accumulated other comprehensive loss......................................... -- (8,742) ---------- --------- Total shareholders' equity.............................................. 898,412 487,468 ---------- --------- Total liabilities, redeemable equity and shareholders' equity........... $2,019,446 1,907,265 ========== =========
See accompanying notes to consolidated financial statements. 2 HERITAGE PROPERTY INVESTMENT TRUST, INC. CONSOLIDATED STATEMENTS OF INCOME THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001 (UNAUDITED AND IN THOUSANDS OF DOLLARS, EXCEPT PER-SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------- -------- 2002 2001 2002 2001 ---- ---- ---- ---- Income: Rentals and recoveries.............................. $69,301 63,602 135,768 128,857 Interest and other.................................. 25 66 40 193 --------- --------- --------- --------- Total income................................... 69,326 63,668 135,808 129,050 --------- --------- --------- --------- Expenses: Property operating expenses......................... 9,537 8,232 19,469 18,740 Real estate taxes................................... 9,871 9,796 19,395 18,841 Depreciation and amortization....................... 17,138 15,473 34,518 30,810 Interest............................................ 17,633 21,878 38,754 43,954 Interest-related party.............................. -- 763 -- 2,027 General and administrative.......................... 10,404 2,917 13,650 6,081 --------- --------- --------- --------- Total expenses................................. 64,583 59,059 125,786 120,453 --------- --------- --------- --------- Income before net gains (losses)............... 4,743 4,609 10,022 8,597 Net gains on sales of real estate investments.......... -- 4 1,374 2,343 Net derivative (losses) gains.......................... (7,616) (81) (7,766) 431 --------- --------- --------- --------- (Loss) income before allocation to minority interests................................... (2,873) 4,532 3,630 11,371 Income allocated to Series B & C Preferred Units....... (1,664) (1,664) (3,328) (3,328) --------- --------- --------- --------- (Loss) income before discontinued operations and extraordinary item...................... (4,537) 2,868 302 8,043 Income from discontinued operations 79 63 142 122 --------- --------- --------- --------- (Loss) income before extraordinary item........ (4,458) 2,931 444 8,165 Extraordinary loss on prepayment of debt......... (6,749) -- (6,749) -- --------- --------- --------- --------- Net (loss) income.............................. (11,207) 2,931 (6,305) 8,165 Preferred stock distributions.......................... (3,452) (10,925) (14,302) (21,733) Accretion of redeemable equity......................... (79) (249) (328) (498) --------- --------- --------- --------- Net loss attributable to common shareholders... $(14,738) (8,243) (20,935) (14,066) ========= ========= ========= ========= Basic and diluted per-share data: Loss before discontinued operations and extraordinary item............................... $(0.26) (1.21) (0.76) (2.08) Income from discontinued operations................. -- -- 0.01 0.02 Extraordinary loss on prepayment of debt............ (0.22) -- (0.36) -- --------- --------- --------- --------- Loss attributable to common shareholders............ $(0.48) (1.21) (1.11) (2.06) ========= ========= ========= ========= Weighted average common shares outstanding.......... 30,710,540 6,827,616 18,843,926 6,827,616 ========== ========= ========= =========
See accompanying notes to consolidated financial statements. 3 HERITAGE PROPERTY INVESTMENT TRUST, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 2002 AND 2001 (UNAUDITED AND IN THOUSANDS OF DOLLARS)
SIX MONTHS ENDED JUNE 30, -------- 2002 2001 ---- ---- Cash flows from operating activities: Net (loss) income...................................................... $(6,305) 8,165 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization..................................... 34,518 30,810 Amortization of deferred debt financing costs..................... 1,968 2,256 Stock-based compensation.......................................... 5,156 734 Net gains on sales of real estate investments and equipment....... (1,374) (2,343) Net derivative losses (gains)..................................... 7,766 (431) Income allocated to Series B & C Preferred Units.................. 3,328 3,328 Extraordinary loss on prepayment of debt.......................... 6,749 -- Changes in operating assets and liabilities, net of effect of Bradley acquisition.................................. 4,383 (7,953) -------- -------- Net cash provided by operating activities................... 56,189 34,567 -------- -------- Cash flows from investing activities: Net cash used for acquisition of Bradley............................... (117) (400) Acquisitions and additions to real estate investments.................. (87,694) (11,390) Net proceeds from sales of real estate investments..................... 4,209 9,594 Expenditures for capitalized leasing commissions....................... (1,893) (1,826) Expenditures for furniture, fixtures and equipment..................... (200) (366) -------- -------- Net cash used by investing activities....................... (85,695) (4,388) -------- -------- Cash flows from financing activities: Proceeds from mortgage loans payable................................... -- 7,000 Repayments of mortgage loans payable................................... (14,865) (5,528) Repayments of unsecured notes payable.................................. -- (475) Proceeds from draws under line of credit facility...................... 289,000 30,000 Repayments of draws under line of credit facility...................... (33,000) (32,000) Payoff of prior line of credit facility................................ (389,000) -- Interest rate collar termination payment............................... (6,788) -- Proceeds from subordinated debt........................................ -- 50,000 Repayment of subordinated debt ........................................ (100,000) -- Repayment of subordinated debt to related party........................ -- (50,000) Distributions paid to minority interests............................... (3,338) (3,336) Preferred stock distributions paid..................................... (21,657) (21,547) Common stock distributions paid........................................ (14,153) (1,235) Expenditures for deferred debt financing costs......................... (3,925) (1,829) Proceeds from issuance of common stock................................. 352,014 -- Expenditures for equity issuance costs................................. (27,040) -- -------- -------- Net cash provided (used) by financing activities............ 27,248 (28,950) -------- -------- Net (decrease) increase in cash and cash equivalents...................... (2,258) 1,229 Cash and cash equivalents: Beginning of period.................................................... 6,146 4,086 -------- -------- End of period.......................................................... $3,888 5,315 ======== ========
See accompanying notes to consolidated financial statements. 4 HERITAGE PROPERTY INVESTMENT TRUST, INC. CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY SIX MONTHS ENDED JUNE 30, 2002 (UNAUDITED AND IN THOUSANDS OF DOLLARS, EXCEPT PER-SHARE DATA)
SERIES A CUMULATIVE CUMULATIVE CONVERTIBLE DISTRIBUTIONS ACCUMULATED PARTICIPATING ADDITIONAL IN EXCESS OTHER PREFERRED COMMON PAID-IN OF NET COMPREHENSIVE STOCK STOCK CAPITAL INCOME LOSS TOTAL ------------- ------ ----------- ------------- ------------- ----- Balance at December 31, 2001 $16 6 551,623 (55,435) (8,742) 487,468 Net loss -- -- -- (6,305) -- (6,305) Other comprehensive income: Unrealized derivative gains: Effective portion of interest rate collar for the period from January 1, 2002 through April 29, 2002 -- -- -- -- 1,177 1,177 Reclassification adjustment to earnings for realized loss on termination of interest rate collar -- -- -- -- 7,565 7,565 ------------- ------ ---------- ------------- ------------- --------- Total other comprehensive income -- -- -- -- 8,742 8,742 ------------- ------ ---------- ------------- ------------- --------- Comprehensive income 2,437 ------------- ------ ---------- ------------- ------------- --------- Issuance of common stock -- 14 352,000 -- -- 352,014 Equity issuance costs -- -- (29,527) -- -- (29,527) Conversion of preferred stock to common stock (16) 16 -- -- -- -- Accretion of redeemable equity -- -- (328) -- -- (328) Conversion of redeemable equity to common stock -- 5 123,417 -- -- 123,422 Preferred stock distributions ($0.70 per share) -- -- -- (14,302) -- (14,302) Common stock distributions ($0.84 per share) -- -- -- (27,928) -- (27,928) Stock-based compensation -- -- 5,156 -- -- 5,156 ------------- ------ ---------- ------------- ------------ --------- Balance at June 30, 2002 $-- 41 1,002,341 (103,970) -- 898,412 ============= ====== ========== ============= ============ =========
See accompanying notes to consolidated financial statements. 5 HERITAGE PROPERTY INVESTMENT TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. MANAGEMENT STATEMENT AND GENERAL The consolidated financial statements of Heritage Property Investment Trust, Inc. (Heritage or the Company) contained in this report were prepared from the books and records of the Company without audit and in the opinion of management include all adjustments (consisting of only normal recurring accruals) necessary to present a fair statement of results for the interim periods presented. However, amounts presented in the consolidated balance sheet as of December 31, 2001 are derived from the audited financial statements of the Company at that date. Interim results are not necessarily indicative of results for a full year. Certain reclassifications of 2001 amounts have been made to conform to the 2002 presentation. Readers of this quarterly report should refer to the audited consolidated financial statements of the Company for the year ended December 31, 2001, which are included in the registration statement on Form S-11, dated April 23, 2002, filed with the Securities and Exchange Commission under the Securities Act of 1933 (File No. 333-69118) for the Company's initial public offering of its common stock (the Registration Statement). The consolidated financial statements of the Company include the accounts and operations of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. 2. INITIAL PUBLIC OFFERING On April 23, 2002, the Securities and Exchange Commission simultaneously declared effective the Company's registration statement on Form S-11 filed under the Securities Act of 1933 and its registration statement on Form 8-A, filed under the Securities Exchange Act of 1934, for an initial public offering (IPO) of its common stock. On April 29, 2002, the Company completed its IPO and sold 14,000,000 shares of its common stock in the IPO at a price of $25.00 per share. The net proceeds from the IPO, after deducting the underwriters' discount and offering expenses, were $320.6 million and were used by the Company to repay $213.8 million of the outstanding indebtedness under its prior line of credit facility, to repay in full the $100.0 million of subordinated debt then outstanding, and to pay the $6.8 million fee associated with terminating the collar previously in place with respect to the $150.0 million term loan under the prior line of credit facility. In connection with the IPO, all 20,341,767 shares of Series A Cumulative Convertible Preferred Stock and redeemable equity outstanding converted automatically into shares of the Company's common stock on a one for one basis. On May 21, 2002, the Underwriters of the IPO exercised their option, granted under the terms of an Underwriting Agreement with the Company, to purchase an additional 80,556 shares of common stock solely to cover overallotments. On May 24, 2002, upon the closing of the sale of the over-allotment shares, the Company received additional net proceeds of $1.9 million from the Underwriters. These additional net proceeds were used to repay outstanding indebtedness of the Company. 3. INCOME TAXES The Company has elected to be taxed as a real estate investment trust (REIT) under the Internal Revenue Code and believes it is operating so as to qualify as a REIT. In order to qualify as a REIT for income tax purposes, the Company must, among other things, distribute to shareholders at least 90% of its taxable income. It is the Company's policy to distribute 100% of its taxable income to shareholders; accordingly, no provision has been made for federal income taxes. 6 HERITAGE PROPERTY INVESTMENT TRUST, INC. 4. EARNINGS PER SHARE In accordance with SFAS No. 128, EARNINGS PER SHARE, basic earnings per common share is computed by dividing net income attributable to common shareholders (defined as net income less paid and accrued preferred stock distributions and accretion of redeemable equity) by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock and then shared in the earnings of the Company. At June 30, 2002, outstanding options and warrants to purchase 2,050,352 shares of common stock at $25.00 per share and the assumed conversion of exchangeable units of limited partnership interest into shares of common stock were not included in the computation of diluted loss per common share because the impact on basic loss per common share was anti-dilutive. For the three and six months ended June 30, 2001, preferred stock distributions, and the effect of the assumed conversion of convertible preferred stock and exchangeable units of limited partnership interest outstanding into shares of common stock were not included in the computation of diluted loss per common share because the impact on basic loss per common share was anti-dilutive. At June 30, 2001, outstanding options and warrants to purchase 1,293,200 shares of common stock at $25.00 per share were outstanding but were not included in the computation of diluted loss per common share because their exercise price was not below the estimated fair value of the common shares and would therefore not dilute basic loss per common share. 5. REAL ESTATE INVESTMENTS (a) SUMMARY A summary of real estate investments follows (in thousands of dollars):
JUNE 30, 2002 DECEMBER 31, 2001 Land.......................................... $313,958 290,758 Land improvements............................. 161,372 149,072 Buildings and improvements.................... 1,586,308 1,474,058 Tenant improvements........................... 29,171 24,420 Improvements in process....................... 11,897 10,660 ------- ------ 2,102,706 1,948,968 Accumulated depreciation and amortization..... (135,783) (103,800) ---------- --------- Net carrying value......................... $1,966,923 1,845,168 =========== =========
(b) 2ND QUARTER ACQUISITION ACTIVITY On May 7, 2002, the Company acquired 144,000 square feet of gross leasable area at Montgomery Towne Center, a 267,000 square foot grocer-anchored shopping center located in Alabama. On May 31, 2002, the Company completed the acquisition of an additional 32,000 square feet at Montgomery Towne Center. The combined purchase prices for these transactions was $18.7 million and was funded with a combination of the Company's assumption of an $7.9 million mortgage loan payable and borrowings under the Company's new line of credit facility. On May 17, 2002, the Company acquired four shopping centers (the "Pioneer Properties"), located in Michigan, Massachusetts, New Hampshire and New York, with an aggregate of 1,114,000 square feet of company-owned gross leasable area. The purchase price for this transaction was approximately $78.1 million and was funded with a combination of the issuance of units of limited 7 HERITAGE PROPERTY INVESTMENT TRUST, INC. partnership interest in the Bradley Operating Limited Partnership, a subsidiary of the Company, in the amount of $7.9 million, the Company's assumption of $55.1 million of mortgage loans payable, and borrowings under the Company's new line of credit facility. On May 21, 2002, the Company acquired Marketplace at Independence, a grocer-anchored shopping center located in Missouri, with an aggregate of 242,000 square feet of total and company-owned gross leaseable area. The purchase price for this transaction was $20.1 million and was funded with borrowings under the Company's new line of credit facility. (c) REAL ESTATE INVESTMENTS HELD FOR SALE As of June 30, 2002, 11 single-tenant properties were classified as real estate investments held for sale. Such properties had an aggregate net book value of $1.7 million at June 30, 2002. See Note 11 for further discussion of real estate held for sale. 6. INVESTMENTS IN JOINT VENTURES At June 30, 2002, the Company had an ownership interest in a joint venture which owned a grocer-anchored shopping center located in Tennessee. The Company has a 60% interest in the joint venture consisting of a general partnership interest and consolidates this joint venture for financial reporting purposes. In addition, in November 1999, the Company and its largest stockholder, NETT, entered into a joint venture for the acquisition and development of a 365,000 square foot commercial office tower in Boston, Massachusetts. The Company has a 6% interest in the joint venture and accounts for its interest using the cost method. The Company was issued this interest as part of a management arrangement the Company entered into with the joint venture partners. Under this arrangement, through a subsidiary of the Company, the Company is providing management services to the joint venture, for which the Company is entitled to receive 6% of all cash and capital transaction proceeds received by the joint venture. The Company has no ongoing capital contribution requirements with respect to the development of the office tower, which is expected to be completed in October 2002. 7. DEBT (a) NEW LINE OF CREDIT On April 29, 2002, the Company entered into a $350 million unsecured line of credit with a group of lenders and Fleet National Bank, as agent. This new line of credit replaced the Company's prior $425 million senior unsecured credit facility, which was repaid primarily with proceeds of the IPO. Heritage Property Investment Limited Partnership and Bradley Operating Limited Partnership (Bradley OP), subsidiaries of Heritage, are the borrowers under this new line of credit, and Heritage and substantially all of Heritage's other subsidiaries have guaranteed this new line of credit. This new line of credit is being used principally to fund growth opportunities and for working capital purposes. At June 30, 2002, $210 million was outstanding under the new line of credit. This new line of credit bears interest at a floating rate based on a spread over LIBOR ranging from 80 basis points to 135 basis points, depending upon the Company's debt rating, and requires monthly payments of interest. The variable rate in effect at June 30, 2002, including the lender's margin of 135 basis points, was 3.29%. In addition, this new line of credit has a facility fee based on the amount committed ranging from 15 basis points to 25 basis points, depending upon the Company's debt rating, and requires quarterly payments. 8 HERITAGE PROPERTY INVESTMENT TRUST, INC. This new line of credit requires the Company to maintain certain financial ratios and restricts the incurrence of certain indebtedness and the making of certain investments. This new line of credit also, except under some circumstances, including as necessary to maintain the Company's status as a REIT, limits the Company's ability to make distributions in excess of 90% of annual funds from operations. Upon entering into this new line of credit and repayment of the prior senior unsecured credit facility, the Company wrote off unamortized deferred financing costs and recognized an extraordinary loss of $4.2 million on this transaction. Also, as described in note 9, the Company terminated its interest rate collar. (b) SUBORDINATED DEBT The Company used $100.0 million of the net proceeds from the IPO to repay in full the $100.0 million of subordinated debt outstanding that was scheduled to mature on March 18, 2004. In connection with the full repayment, the Company wrote off unamortized deferred financing costs and recognized an extraordinary loss of $2.5 million. (c) MORTGAGE LOANS PAYABLE In April 2002, the Company signed a commitment to refinance its $7.7 million mortgage loan payable secured by Southport Center, which loan matured in April 2002. The refinancing of the mortgage loan payable closed on July 1, 2002. The new mortgage loan is in the amount of $10.0 million, bears interest at a rate of 6.94%, and matures on July 1, 2007. The new mortgage loan will require interest only payments for the first two years. In April 2002, the Company repaid in full its approximately $4.8 million mortgage loan payable secured by Fox River Plaza with borrowings under the Company's line of credit facility. In addition, in May 2002, the Company repaid in full its approximately $6.4 million mortgage loan payable secured by Edgewood Shopping Center with borrowings under the Company's new line of credit facility. 8. RELATED PARTY TRANSACTIONS (a) TRANSACTIONS WITH PRUDENTIAL INSURANCE COMPANY OF AMERICA (PRUDENTIAL - AN 11.9% SHAREHOLDER AT JUNE 30, 2002) Preferred and common distributions paid to Prudential for the six months ended June 30, 2002 and 2001 were $6.6 million and $4.2 million, respectively. At June 30, 2002 and December 31, 2001, distributions payable to Prudential were $2.4 million and $2.2 million, respectively. Prudential received advisory and other fees totaling $3.4 million in connection with the IPO. This fee was incurred in the three months ended June 30, 2002. On April 30, 2001, in conjunction with the modification of its now repaid $100.0 million subordinated debt, the Company used the proceeds of a $50.0 million loan from a lender to repay the $50.0 million of subordinated debt held by Prudential. Interest expense paid to Prudential for this issue for the six months ended June 30, 2001 was $2.0 million. A portion of redeemable equity, representing costs associated with prior equity transactions with Prudential, is reclassified as a charge to earnings for each quarter over the redemption period. As a result of the IPO, all redeemable equity outstanding converted automatically into shares of the Company's common stock on a one for one basis. This charge, which is recorded as accretion of redeemable equity in the accompanying consolidated statements of income, amounted to $0.3 million and $0.5 million for the six months ended June 30, 2002 and 2001, respectively. 9 HERITAGE PROPERTY INVESTMENT TRUST, INC. (b) TRANSACTIONS WITH NEW ENGLAND TEAMSTERS AND TRUCKING INDUSTRY PENSION FUND (NETT - AN 43.4% SHAREHOLDER AT JUNE 30, 2002) Preferred and common distributions paid to NETT for the six months ended June 30, 2002 and 2001 were approximately $28.9 million and $18.5 million, respectively. At June 30, 2002 and December 31, 2001, distributions payable to NETT were approximately $9.3 million and $9.8 million, respectively. In connection with the formation of Heritage in July 1999, environmental studies were not completed for all of the contributed properties. NETT has agreed to indemnify the Company for environmental costs up to $50.0 million. The environmental costs include completing environmental studies and any required remediation. 9. DERIVATIVES AND HEDGING INSTRUMENTS The Company is exposed to the effect of changes in interest rates. The Company has limited this risk by following established risk management policies and procedures including the use of derivatives. From time to time, the Company uses interest rate caps, floors, swaps and locks to limit its exposure to changes in interest rates on its floating rate debt and to hedge interest rates in anticipation of issuing unsecured debt at a time when management believes interest rates are favorable, or at least at a time when management believes it advisable given the anticipated consequences of not hedging an interest rate while the Company is exposed to increases in interest rates. The Company requires that hedging derivative instruments are effective in reducing the interest rate risk exposure that they are designed to hedge. Instruments that meet the hedging criteria are formally designated as hedges at the inception of the derivative contract. The Company does not use derivatives for trading or speculative purposes and only enters into contracts with major financial institutions based on their credit rating and other factors. To determine the fair values of its derivative instruments, the Company uses methods and assumptions based on market conditions and risks existing at each balance sheet date. Such methods incorporate standard market conventions and techniques such as discounted cash flow analysis and option pricing models to determine fair value. All methods of estimating fair value result in general approximation of value, and such value may or may not actually be realized. On April 29, 2002, the Company entered into a $350.0 million unsecured line of credit with a group of lenders and Fleet National Bank, as agent. This new line of credit replaced the Company's prior $425.0 million senior unsecured credit facility. Upon entering into this new line of credit, the Company paid $6.8 million to terminate the interest rate collar that was then in place with respect to the $150.0 million term loan under the prior senior unsecured credit facility. As a result of this termination, the Company reclassified $7.6 million of accumulated other comprehensive loss, a component of shareholders' equity, to earnings during the three months ended June 30, 2002. 10. SEGMENT REPORTING The Company, which has internal property management, leasing, and redevelopment capabilities, owns and seeks to acquire primarily grocer-anchored neighborhood and community shopping centers in the Eastern and Midwestern United States. Such shopping centers are typically anchored by grocers complemented with stores providing a wide range of other goods and services to shoppers. Since substantially all of the Company's shopping centers exhibit similar economic characteristics, cater to the day-to-day living needs of their respective surrounding communities, and offer similar degrees of risk and opportunities for growth, the shopping centers have been aggregated and reported as one operating segment. The Company also owns office buildings and single-tenant properties. Because these properties require a different operating strategy 10 HERITAGE PROPERTY INVESTMENT TRUST, INC. and management expertise than all other properties in the portfolio, they are considered separate reportable segments. The Company assesses and measures operating results on an individual property basis within each segment, based on net operating income, and then converts such amounts in the aggregate to a performance measure referred to as Funds From Operations (FFO). FFO, computed in accordance with the October 1999 "White Paper" on FFO published by the National Association of Real Estate Investment Trusts (NAREIT) and as followed by the Company, represents income before allocation to minority interests (computed in accordance with GAAP), excluding gains or losses from debt restructuring and sales of property, plus depreciation and amortization of real estate-related assets, and, as applicable, after preferred stock distributions and adjustments for unconsolidated partnerships and joint ventures. FFO does not represent cash generated from operating activities in accordance with GAAP and should not be considered an alternative to cash flow as a measure of liquidity. Since the NAREIT White Paper only provides guidelines for computing FFO, the computation of FFO may vary from one REIT to another. FFO is not necessarily indicative of cash available to fund cash needs. The accounting policies of the segments are the same as those followed by the Company as a whole and are described in the Company's audited consolidated financial statements for the year ended December 31, 2001 included in the Registration Statement. The revenue and net operating income for the three months and six months ended June 30, 2002 and 2001 and assets as of June 30, 2002 and December 31, 2001 for each of the reportable segments are summarized in the following tables. Non-segment assets necessary to reconcile to total assets include cash and cash equivalents, deferred financing and leasing costs and other assets. 11 HERITAGE PROPERTY INVESTMENT TRUST, INC. The computation of FFO for the Company and a reconciliation to net income attributable to common shareholders are as follows (in thousands of dollars):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, 2002 2001 2002 2001 ------------------------------------------------------- Total property income: Shopping centers............................................... $69,125 63,274 134,558 122,513 Office buildings............................................... 176 328 1,210 6,271 Single-tenant properties....................................... 79 63 142 195 --------- ------- -------- -------- $69,380 63,665 135,910 128,979 ========= ======= ======== ======== Total property net operating income: Shopping centers............................................... $49,794 45,393 96,253 87,584 Office buildings............................................... 99 181 651 3,636 Single-tenant properties....................................... 79 63 142 178 --------- ------- -------- -------- Net Operating Income.............................................. 49,972 45,637 97,046 91,398 --------- ------- -------- -------- Non-property (income) expenses: Interest and other income...................................... (25) (66) (40) (193) Net derivative losses (gains).................................. 7,616 81 7,766 (431) Interest expense............................................... 17,633 21,878 38,754 43,954 Interest expense-related party................................. -- 763 -- 2,027 General and administrative..................................... 10,404 2,917 13,650 6,081 Amortization of non-real estate related costs.................. 119 73 229 130 Income allocated to minority interests......................... 1,664 1,664 3,328 3,328 Preferred stock distributions.................................. 3,452 10,925 14,302 21,733 Accretion of redeemable equity................................. 79 249 328 498 --------- ------- -------- -------- 40,942 38,484 78,317 77,127 --------- ------- -------- -------- Funds from Operations............................................. $9,030 7,153 18,729 14,271 ========= ======= ======== ======== Reconciliation to net loss attributable to common shareholders: Funds from operations.......................................... $9,030 7,153 18,729 14,271 Depreciation of real estate assets and amortization of tenant improvements...................................... (16,665) (15,152) (33,458) (30,266) Amortization of deferred leasing commissions................... (354) (248) (831) (414) Net gains on sales of real estate investments and equipment............................................... -- 4 1,374 2,343 Extraordinary loss on prepayment of debt....................... (6,749) -- (6,749) -- --------- ------- -------- -------- Net loss attributable to common shareholders...................... $ (14,738) (8,243) (20,935) 14,066 ========= ======= ======== ========
As of -------------------------------------------- June 30, 2002 December 31, 2001 -------------------------------------------- Total Assets: Shopping centers........................... $1,952,750 1,828,135 Office buildings........................... 52,488 56,003 Single-tenant properties................... 1,658 1,678 Non-segment assets......................... 12,550 21,449 ---------- --------- $2,019,446 1,907,265 ========== =========
12 HERITAGE PROPERTY INVESTMENT TRUST, INC. 11. NEW ACCOUNTING PRONOUNCEMENTS SFAS NO. 145 In April 2002, the Financial Accounting Standards Board issued SFAS No. 145, RESCISSION OF FASB STATEMENTS NO. 4, 44 AND 64, AMENDMENT OF FASB STATEMENT NO. 13, AND TECHNICAL CORRECTIONS. SFAS No. 145 eliminates the requirement that all gains and losses from the extinguishment of debt be aggregated and, if material, classified as an extraordinary item. However, a company could continue to classify transactions as extraordinary items if they meet the criteria described in paragraph 20 of APB No. 30, REPORTING THE RESULTS OF OPERATIONS - REPORTING THE EFFECTS OF DISPOSAL OF A SEGMENT OF A BUSINESS, AND EXTRAORDINARY, UNUSUAL AND INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS. Paragraph 20 of APB 30 requires that the event or transaction be both unusual in nature and infrequent in occurrence. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002. However, any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods presented that does not meet the criteria of APB 30 shall be reclassified. The Company has elected to adopt SFAS No. 145 for its fiscal year beginning January 1, 2003, and therefore has classified its losses associated with its prepayment of its prior senior unsecured credit facility and subordinated debt during the three months ended June 30, 2002 as an extraordinary item. SFAS NO. 144 In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS, which supersedes both SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, and the accounting and reporting provisions of APB Opinion No. 30, REPORTING THE RESULTS OF OPERATIONS--REPORTING THE EFFECTS OF DISPOSAL OF A SEGMENT OF BUSINESS, AND EXTRAORDINARY, UNUSUAL, AND INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS, for the disposal of a segment of a business (as previously defined in that Opinion). SFAS No. 144 retains the fundamental provisions in SFAS No. 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale, while also resolving implementation issues associated with SFAS No. 121. In addition, SFAS No. 144 retains the basic provisions of Opinion 30 for presenting discontinued operations in the income statement but broadens that presentation to include a component of an entity (rather than a segment of a business). The Company adopted SFAS No. 144 on January 1, 2002. The Company had one property disposition during the six months ended June 30, 2002 that was classified as held for sale as of December 31, 2001. As the property was classified as held for sale as of December 31, 2001, it was exempt from the provisions of SFAS No. 144. In addition, the Company has classified 11 single-tenant properties as real estate held for sale as June 30, 2002. Accordingly, the operating results of the real estate held for sale have been reclassified and reported as discontinued operations for the three and six months ended June 30, 2002 and 2001. 12. STOCK-BASED COMPENSATION In January 2002, options to purchase 614,352 shares of common stock were granted to certain employees relating to 2001 performance. The options have an exercise price of $25.00 per share, which was equal to the fair value per share of the Company's common stock at the grant date. The options have a contractual life of 10 years and, at the date of grant, were to vest ratably over three years. In addition, in April 2002, options to purchase 430,000 shares of common stock were granted to members of senior management in connection with the Company's initial public offering. These options have an exercise price of $25.00 per share, which was equal to the fair value per share of the Company's common stock at the grant date. The options have a contractual life of 10 years and vest ratably over five years. 13 HERITAGE PROPERTY INVESTMENT TRUST, INC. In January 2002, the Company issued 108,565 shares of restricted stock with no performance-based conditions and no exercise price to certain employees relating to 2001 performance. At the date of issuance, these shares were subject to transfer restrictions and risk of forfeiture. Upon completion of the Company's initial public offering, the vesting of all stock options previously granted to employees (other than the 430,000 options granted in April 2002) accelerated and all contractual restrictions on transfer and forfeiture provisions that existed on restricted shares previously granted to members of our senior management and other key employees terminated. As a result, the Company incurred compensation expense, including with respect to the reimbursement of a portion of the taxes paid by two employees, of $6.8 million on the restricted shares in the second quarter of 2002, which is comprised of $4.3 million of stock compensation expense and $2.5 million for the reimbursement of a portion of such taxes. In July 2002, following completion of the IPO, the Board of Directors approved the issuance over five years of an aggregate of 775,000 shares of restricted stock with no exercise price to members of senior management of the Company. The first installment of 155,000 shares was issued in July 2002. These shares are subject to risk of forfeiture and transfer restrictions, which terminate on March 1, 2003, subject to the continued employment of such individuals with the Company. The remaining installments of this special share grant will be issued to these individuals ratably over a four-year period beginning in 2003, subject to the satisfaction of certain performance milestones and other conditions during the four-year period. Upon issuance, the remaining installments will also be subject to risk of forfeiture and transfer restrictions, which will terminate upon the first anniversary of the date of each installment, subject to the continued employment of such individuals with the Company. The Company will recognize compensation expense over the service and vesting periods. With respect to the quarter ended June 30, 2002, the Company has also accrued $0.5 million of compensation expense, including for the reimbursement of a portion of the taxes to be paid by one employee, related to restricted stock anticipated to be issued by the Company in 2003 for 2002 performance. This accrual is an estimate of the compensation expense that will be required to be recognized in the event that this restricted stock is actually issued. For all periods after the IPO, the Company will recognize compensation expense with respect to performance-based stock grants ratably over the performance and vesting periods. The Company has not restated any prior period amounts because it does not believe that such restatement would be material to the financial condition or results of operations of the Company. 14 HERITAGE PROPERTY INVESTMENT TRUST, INC. ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY LANGUAGE Some of the statements contained in MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF Operations constitute forward-looking statements. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. The forward-looking statements reflect our current views about future events and are subject to risks, uncertainties, assumptions and changes in circumstances that may cause our actual results to differ significantly from those expressed in any forward-looking statement. You should not rely on forward-looking statements since they involve known and unknown risks, uncertainties and other factors which are, in some cases, beyond the Company's control and which could materially affect actual results. The factors that could cause actual results to differ materially from current expectations include financial performance and operations of our shopping centers, including of our tenants, real estate conditions, future bankruptcies of our tenants, execution of shopping center redevelopment programs, our ability to finance our operations, successful completion of renovations, completion of pending acquisitions, the availability of additional acquisitions, changes in economic, business, competitive market and regulatory conditions, acts of terrorism or war and other risks detailed from time to time in filings with the Securities and Exchange Commission, including those risks and uncertainties discussed in the Company's Final Prospectus, dated April 23, 2002, in the section entitled "Risk Factors." The forward-looking statements contained herein represent the Company's judgment as of the date of this report, and the Company cautions readers not to place undue reliance on such statements. OVERVIEW We are a fully integrated, self-administered and self-managed REIT that acquires, owns, manages, leases and redevelops primarily grocer-anchored neighborhood and community shopping centers in the Eastern and Midwestern United States. As of June 30, 2002, we had a portfolio of 149 shopping centers totaling approximately 29.6 million square feet of total gross leaseable, of which 25.4 million square feet is company-owned gross leasable area, located in 26 states. Our shopping center portfolio was approximately 93% leased as of June 30, 2002. We also own four office buildings and 11 single-tenant properties. We currently intend to dispose of one of our remaining four office buildings and substantially all of our single-tenant properties in the foreseeable future. As our net operating income from these properties constituted only approximately 1% of our total net operating income for the six months ended June 30, 2002, we do not expect the sale of these properties to have a significant or adverse impact on our future operations or cash flows. As of June 30, 2002, we had approximately $952 million of indebtedness. This indebtedness will require balloon payments starting in November 2002. We anticipate that we will not have sufficient funds on hand to repay these balloon amounts at maturity. Therefore, we expect to refinance our debt either through unsecured private or public debt offerings, additional debt financings secured by individual properties or groups of properties or by additional equity offerings. We may also finance those payments through borrowings under our new line of credit facility. We derive substantially all of our revenues from rentals and recoveries received from tenants under existing leases on each of our properties. Our operating results therefore depend materially on the ability of our tenants to make required rental payments. We believe that the nature of the properties that we primarily own and invest in - grocer-anchored neighborhood and community shopping centers - provides a more stable revenue flow in uncertain economic times, as they are more resistant to economic down cycles. This is because consumers still need to purchase food and other goods found at grocers, even in difficult economic times. 15 HERITAGE PROPERTY INVESTMENT TRUST, INC. During 2001, 15 of our tenants filed for bankruptcy protection. These tenants contributed approximately 2.7% of our annualized base rent for all leases in which tenants were in occupancy at December 31, 2001. In addition, during 2002, three of our tenants have filed for bankruptcy protection, the largest of which is Kmart Corporation. Kmart Corporation contributed approximately 1.5% of our annualized base rent for all leases in which tenants were in occupancy at June 30, 2002. As a general matter, the Company believes that these bankruptcy filings and the current economic downturn have not had a material impact on our operating results. However, continuation of the current downturn or a recession could materially negatively impact our operating results in 2002. In the future, we intend to focus on increasing our internal growth, and we expect to continue to pursue targeted acquisitions of primarily grocer-anchored neighborhood and community shopping centers in attractive markets with strong economic and demographic characteristics. We currently expect to incur additional debt in connection with any future acquisitions of real estate. INITIAL PUBLIC OFFERING AND RELATED TRANSACTIONS On April 23, 2002, the Securities and Exchange Commission simultaneously declared effective our registration statement on Form S-11 filed under the Securities Act of 1933 and our registration statement on Form 8-A, filed under the Securities Exchange Act of 1934 for an initial public offering (IPO) of our common stock, and on April 29, 2002, we completed our IPO. We sold 14,000,000 shares of our common stock in the IPO at a price of $25.00 per share. The net proceeds from our IPO, after deducting the underwriters' discount and offering expenses, were approximately $321 million. The net proceeds from our IPO were used for the following: o To repay approximately $214 million of the outstanding indebtedness under our prior senior unsecured credit facility; o To fully repay the $100 million of subordinated debt outstanding; o To pay the approximately $7 million fee associated with terminating the hedge then in place with respect to the $150 million term loan under prior existing senior unsecured credit facility. In connection with our IPO, all 20,341,767 shares of Series A Cumulative Convertible Preferred Stock and redeemable equity outstanding converted automatically into shares of the Company's common stock on a one for one basis. On May 21, 2002, the Underwriters of the IPO exercised their option, granted under the terms of an Underwriting Agreement with the Company, to purchase an additional 80,556 shares of common stock from the Company solely to cover overallotments. On May 24, 2002, upon the closing of the sale of the over-allotment shares, the Company received additional net proceeds of approximately $1.9 million from the Underwriters. These additional net proceeds were used to repay outstanding indebtedness of the Company. Upon completion of the IPO, the vesting of all stock options previously granted to our employees (other than 430,000 stock options granted in April 2002 in connection with the IPO) accelerated and all contractual restrictions on transfer and forfeiture provisions that existed on restricted shares previously granted to members of our senior management and other key employees terminated. As a result, we incurred compensation expense, including with respect to the reimbursement of a portion of the taxes paid by two individuals, of $6.8 million on the restricted shares in the second quarter of 2002, which is comprised of $4.3 million of stock compensation expense and $2.5 million for the reimbursement of a portion of such taxes payable. 16 HERITAGE PROPERTY INVESTMENT TRUST, INC. CRITICAL ACCOUNTING POLICIES In response to recent guidance of the Securities and Exchange Commission, we have identified the following critical accounting policies that affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us 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. Our estimates are based on information that is currently available to us and on various other assumptions that we believe are reasonable under the circumstances. On an ongoing basis, we evaluate our estimates based upon historical experience and various other factors and circumstances. We believe that our estimates are reasonable for our current circumstances; however, actual results could vary from those estimates and those estimates could be different under different assumptions or conditions. We believe that the estimates and judgments that are most important to the portrayal of our financial condition and results of operations, in that they require our most subjective judgments, form the basis for the accounting policies deemed to be most critical. These critical accounting policies include those related to revenue recognition and the allowance for doubtful accounts receivable, real estate investments and asset impairment, and derivatives used to hedge interest-rate risks. We state these accounting policies in the notes to our consolidated financial statements and at relevant sections in this discussion and analysis. Our estimates are based on information that is currently available to us and on various other assumptions that we believe are reasonable under the circumstances. REVENUE RECOGNITION Rental income with scheduled rent increases is recognized using the straight-line method over the term of the leases. Deferred rent receivable represents the aggregate excess of rental revenue recognized on a straight-line basis over cash received under applicable lease provisions, which we generally recognize over the remaining term unless the tenant files for bankruptcy or provides other indications that it will not fulfill the remainder of the lease term. In these cases, we write off the remaining deferred balance upon such bankruptcy filing or other event. Leases for both retail and office space generally contain provisions under which the tenants reimburse us for a portion of property operating expenses and real estate taxes incurred by us. In addition, certain of our operating leases for retail space contain contingent rent provisions under which tenants are required to pay a percentage of their sales in excess of a specified amount as additional rent. We defer recognition of contingent rental income until those specified targets are met. We must make estimates of the uncollectibility of our accounts receivable related to minimum rent, deferred rent, expense reimbursements and other revenue or income, and we record this provision ( or recovery) as a reduction of (or addition to) rental income. We specifically analyze accounts receivable and historical bad debts, tenant concentrations, tenant credit worthiness, current economic trends and changes in our tenant payment terms when evaluating the adequacy of the allowance for doubtful accounts receivable. These estimates have a direct impact on our net income, because a higher bad debt allowance would result in lower net income. The Securities and Exchange Commission's Staff Accounting Bulletin (SAB) No. 101, REVENUE RECOGNITION, provides guidance on the application of generally accepted accounting principles to selected revenue recognition issues. We believe that our revenue recognition policy is appropriate and in accordance with generally accepted accounting principles and SAB No. 101. 17 HERITAGE PROPERTY INVESTMENT TRUST, INC. REAL ESTATE INVESTMENTS Contributed real estate investments at our formation in July 1999 were recorded at the carry-over basis of our predecessor, which was fair market value of the assets in conformity with GAAP applicable to pension funds. Subsequent acquisitions of real estate investments, including those acquired in connection with our acquisition of Bradley Real Estate, Inc. in September 2000 and other acquisitions since our formation, are recorded at cost. Expenditures that substantially extend the useful life of a real estate investment are capitalized. Expenditures for maintenance, repairs and betterments that do not materially extend the useful life of a real estate investment are charged to operations as incurred. The provision for depreciation and amortization has been calculated using the straight-line method over the following estimated useful lives: Land improvements 15 years Buildings and improvements 20-39 years Tenant improvements Term of related lease We are required to make subjective assessments as to the useful lives of our properties for purposes of determining the amount of depreciation to reflect on an annual basis with respect to our properties. These assessments have a direct impact on our net income because if we were to shorten the expected useful life of our properties or improvements, we would depreciate them over fewer years, resulting in more depreciation expense and lower net income on an annual basis during these periods. We apply Statement of Financial Accounting Standards (SFAS) No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS, to recognize and measure impairment of long-lived assets. We 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 undiscounted cash flows, excluding interest charges, 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 impairment exists due to the 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 market value. Real estate investments held for sale are carried at the lower of carrying amount or fair value, less estimated costs to sell. Depreciation and amortization are suspended during the period held for sale, and operating results for all periods presented are presented as discontinued operations. We are required to make subjective assessments as to whether there are impairments in the value of our real estate properties. These assessments have a direct impact on our net income, because taking an impairment loss results in an immediate negative adjustment to net income. HEDGING ACTIVITIES From time to time, we use certain derivative financial instruments to limit our exposure to changes in interest rates. We were not a party to any hedging agreements with respect to our floating rate debt as of June 30, 2002. We have in the past used derivative financial instruments to manage, or hedge, interest rate risks related to our borrowings, from lines of credit to medium- and long-term financings. We require that hedging derivative instruments are effective in reducing the interest rate risk exposure that they are designed to hedge. We do not use derivatives for trading or speculative purposes and only enter into contracts with major financial institutions based on their credit rating and other factors. 18 HERITAGE PROPERTY INVESTMENT TRUST, INC. If interest rate assumptions and other factors used to estimate a derivatives fair value or methodologies used to determine hedge effectiveness were different, amounts reported in earnings and other comprehensive income and losses expected to be reclassified into earnings in the future could be affected. Furthermore, future changes in market interest rates and other relevant factors could increase the fair value of a liability for a derivative, increase future interest expense, and result in lower net income. RESULTS OF OPERATIONS The discussion of our results of operations set forth below focuses on our neighborhood and community shopping centers and does not separately address our results attributable to our office buildings and single-tenant properties. For the six months ended June 30, 2002, our shopping centers represented approximately 99% of our total revenue and net operating income. In addition, during the first quarter of 2002, we sold one of our office buildings and we intend to dispose of one of our remaining four office buildings and substantially all of our single-tenant properties in the foreseeable future. As a result, we expect that revenues and net operating income from these properties will continue to decline in comparison to revenue and net operating income from our shopping center properties, and therefore we believe that a separate presentation of those items is not meaningful. COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2002 TO THE THREE MONTHS ENDED JUNE 30, 2001 Rental and recovery income increased approximately $5.7 million, or 9.0%, to approximately $69.3 million for the three months ended June 30, 2002, as compared with approximately $63.6 million for the three months ended June 30, 2001. Rental income increased approximately $3.3 million, or 6.6%, to approximately $53.6 million for the three months ended June 30, 2002, as compared with approximately $50.3 million for the three months ended June 30, 2001. This increase resulted from the combined effect of: o seven property acquisitions in 2002, three property acquisitions in 2001, one property disposition in 2002 and five property dispositions in 2001, providing an additional $3.0 million of rental income for the three months ended June 30, 2002. o an additional $0.3 million of rental income from same store properties, representing a 0.6% increase for the three months ended June 30, 2002. The average base rental rate on leases signed during the six months ended June 30, 2002, which measures the first twelve months of base rent payable under new and renewed leases signed during a period divided by the total square footage represented by those leases, was $10.78, as compared to $10.72 for the year ended December 31, 2001. Recoveries from tenants of property operating expenses and real estate taxes, increased approximately $2.4 million, or 18.1%, to approximately $15.7 million for the three months ended June 30, 2002, as compared with approximately $13.3 million for the three months ended June 30, 2001. Recoveries from tenants of property operating expenses and real estate taxes were 80% and 73% for the three months ended June 30, 2002 and 2001, respectively. The increase in recoveries from tenants resulted from the net effect of: o seven property acquisitions in 2002, three property acquisitions in 2001, one property disposition in 2002 and five property dispositions in 2001, providing an additional $0.8 million of recoveries from tenants for the three months ended June 30, 2002. o an additional $1.6 million of recoveries from tenants from same store properties, representing a 12.4% increase for the three months ended June 30, 2002. The increase at same store properties is primarily attributable to an increase in operating expenses for the 19 HERITAGE PROPERTY INVESTMENT TRUST, INC. three months ended June 30, 2002, and leasing activity for the six months ended June 30, 2002. Operating expenses, which are comprised of property operating expenses and real estate taxes, increased approximately $1.4 million, or 7.7%, to approximately $19.4 million for the three months ended June 30, 2002, as compared with approximately $18.0 million for the three months ended June 30, 2001. The increase in operating expenses resulted from the net effect of: o seven property acquisitions in 2002, three property acquisitions in 2001, one property disposition in 2002 and five property dispositions in 2001, providing an additional $.5 million of operating expenses for the three months ended June 30, 2002. o an additional $.9 million of operating expenses from same store properties, representing a 5.2% increase for the three months ended June 30, 2002. The increase at same store properties primarily resulted from an increase in parking lot related work during the three months ended June 30, 2002. Net operating margin percentage, defined as rental and recovery income less property operating expenses, divided by rental and recovery income, was approximately 72% for each of the three months ended June 30, 2002 and 2001. Depreciation and amortization expense increased approximately $1.6 million, or 10.8%, to approximately $17.1 million for the three months ended June 30, 2002, as compared with approximately $15.5 million for the three months ended June 30, 2001. This increase resulted primarily from the net effect of seven property acquisitions in 2002, three property acquisitions in 2001, one property disposition in 2002, five property dispositions in 2001, capital and tenant improvements made during 2001 and the six months ended June 30, 2002 and a writeoff of approximately $.2 million of tenant improvements during the three months ended June 30, 2002 related to vacated tenants. Interest expense, which is comprised of interest expense and interest expense-related party, decreased approximately $5.0 million, or 22.1%, to approximately $17.6 million for the three months ended June 30, 2002, as compared with approximately $22.6 million for the three months ended June 30, 2001. This decrease resulted primarily from the net effect of: o the repayment of approximately $213.8 million of the outstanding indebtedness under our prior line of credit facility; o the full repayment of the $100 million of subordinated debt previously outstanding; o a reduction in the LIBOR component of our borrowing cost under our floating rate debt; o the termination of the interest rate collar associated with the $150 term loan under our prior senior unsecured credit facility; and o additional indebtedness incurred primarily to finance acquired properties. General and administrative expenses increased approximately $7.5 million, or 256.7%, to approximately $10.4 million for the three months ended June 30, 2002, as compared with approximately $2.9 million for the three months ended June 30, 2001. This increase was primarily attributable to the effect of accelerated stock compensation expense in connection with the IPO. Upon completion of the IPO, all contractual restrictions on transfer and forfeiture provisions that existed on restricted shares previously granted to members of our senior management and other key employees terminated. As a result, compensation expense, including with respect to the reimbursement of a portion of the taxes paid by two of these individuals, of $6.8 million on the 20 HERITAGE PROPERTY INVESTMENT TRUST, INC. restricted shares was incurred during the three months ended June 30, 2002, which is comprised of $4.3 million of stock compensation expense and $2.5 million for the reimbursement of a portion of the taxes to be paid by certain senior officers. In addition, included in general and administrative expenses was a $0.5 million accrual for compensation expense, including the reimbursement of a portion of the taxes to be paid by one employee, related to restricted stock anticipated to be issued by the Company in 2003 for 2002 performance. This accrual is an estimate of the compensation expense that will be required to be recognized in the event that this restricted stock is actually issued. For all periods after the IPO, the Company will recognize compensation expense with respect to performance-based stock grants ratably over the performance and vesting periods. The Company has not restated any prior period amounts because it does not believe that such restatement would be material to the financial condition or results of operations of the Company. Net derivative loss for the three months ended June 30, 2002 was approximately $7.6 million. This loss was attributable to the termination of an interest rate collar. On April 29, 2002, the Company entered into a $350 million unsecured line of credit with a group of lenders and Fleet National Bank, as agent. Upon entering into this new line of credit, the Company paid approximately $6.8 million to terminate the interest rate collar that was in place with respect to the $150 million term loan under the prior senior unsecured credit facility. As a result of this termination, the Company reclassified approximately $7.6 million of accumulated other comprehensive loss, a component of shareholders' equity, to earnings during the three months ended June 30, 2002. Operating income from discontinued operations represents income associated with the 11 single-tenant properties, which are classified as real estate held for sale as of June 30, 2002. Extraordinary loss on the prepayment of debt for the three months ended June 30, 2002 was approximately $6.7 million. Upon entering into this new line of credit, the Company wrote off unamortized deferred financing costs with respect to the prior $425 million senior unsecured credit facility. This write-off amounted to approximately $4.2 million during the three months ended June 30, 2002. In addition, the Company used $100,000,000 of the net proceeds from the IPO to repay in full the $100,000,000 of subordinated debt previously outstanding that was scheduled to mature on March 18, 2004. In connection with the full repayment, the Company wrote off unamortized deferred financing costs with respect to the subordinated debt. This write-off amounted to approximately $2.5 million during the three months ended June 30, 2002. COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2002 TO THE SIX MONTHS ENDED JUNE 30, 2001 Rental and recovery income increased approximately $6.9 million, or 5.4%, to approximately $135.8 million for the six months ended June, 2002, as compared with approximately $128.9 million for the six months ended June 30, 2001. Rental income increased approximately $3.8 million, or 3.8%, to approximately $105.3 million for the six months ended June 30, 2002, as compared with approximately $101.5 million for the six months ended June 30, 2001. This increase resulted from the combined effect of: o seven property acquisitions in 2002, three property acquisitions in 2001, one property disposition in 2002 and five property dispositions in 2001, providing an additional $3.5 million of rental income for the six months ended June 30, 2002. o an additional $0.3 million of rental income from same store properties, representing a .4% increase for the six months ended June 30, 2002. The average base rental rate on leases signed during the six months ended June 30, 2002, which measures the first twelve months of base rent payable under new and renewed leases signed during a period divided by the total square footage represented by those leases, was $10.78, as compared to $10.72 for the year ended December 31, 2001. 21 HERITAGE PROPERTY INVESTMENT TRUST, INC. Recoveries from tenants of property operating expenses and real estate taxes increased approximately $3.1 million, or 11.0%, to approximately $30.5 million for the six months ended June 30, 2002, as compared with approximately $27.4 million for the six months ended June 30, 2001. Recoveries from tenants of property operating expenses and real estate taxes were 78% and 73% for the six months ended June 30, 2002 and 2001, respectively. The increase in the recovery rate for the six months ended June 30, 2002 as compared to the six months ended June 30, 2001 was primarily the result of recovery income from bankrupt tenants, primarily Kmart Corporation, being recorded during the three months ended June 30, 2002, as these amounts are now recognizable under the Company's revenue recognition policy. This increase resulted from the net effect of: o seven property acquisitions in 2002, three property acquisitions in 2001, one property disposition in 2002 and five property dispositions in 2001, providing an additional $.9 million of recoveries from tenants for the six months ended June 30, 2002. o an additional $2.2 million of recoveries from tenants from same store properties, representing a 7.7% increase for the six months ended June 30, 2002. The increase at same store properties is primarily attributable to an increase in operating expenses for the six months ended June 30, 2002, and leasing activity for the six months ended June 30, 2002. Operating expenses, which are comprised of property operating expenses and real estate taxes, increased approximately $1.3 million, or 3.4%, to approximately $38.9 million for the six months ended June 30, 2002, as compared with approximately $37.6 million for the six months ended June 30, 2001. The increase in operating expenses resulted from the net effect of: o seven property acquisitions in 2002, three property acquisitions in 2001, one property disposition in 2002 and five property dispositions in 2001, providing an additional $.5 million of operating expenses for the six months ended June 30, 2002. o an additional $.8 million of operating expenses from same store properties, representing a 2.3% increase for the six months ended June 30, 2002. The increase at same store properties primarily resulted from an increase in parking lot related work during the six months ended June 30, 2002. Net operating margin percentage, defined as rental and recovery income less property operating expenses, divided by rental and recovery income, was approximately 71% for each of the six months ended June 30, 2002 and 2001. Depreciation and amortization expense increased approximately $3.7 million, or 12.0%, to approximately $34.5 million for the six months ended June 30, 2002, as compared with approximately $30.8 million for the six months ended June 30, 2001. This increase resulted primarily from the net effect of seven property acquisition in 2002, three property acquisitions in 2001, one property disposition in 2002, five property dispositions in 2001, capital and tenant improvements made during 2001 and the six months ended June 30, 2002 and a writeoff of approximately $1.2 million of tenant improvements during the six months ended June 30, 2002 related to vacated tenants. Interest expense, which is comprised of interest expense and interest expense-related party, decreased approximately $7.2 million, or 15.7%, to approximately $38.8 million for the six months ended June 30, 2002, as compared with approximately $46.0 million for the six months ended June 30, 2001. This decrease resulted primarily from the net effect of: o the repayment of approximately $213.8 million of the outstanding indebtedness under our prior line of credit facility; o the full repayment of the $100 million of subordinated debt previously outstanding; 22 HERITAGE PROPERTY INVESTMENT TRUST, INC. o a reduction in the LIBOR component of our borrowing cost under our floating rate debt; o the termination of the interest rate collar associated with the $150 term loan under our prior senior unsecured credit facility; and o additional indebtedness incurred primarily to finance acquired properties. General and administrative expenses increased approximately $7.6 million, or 124.5%, to approximately $13.7 million for the six months ended June 30, 2002, as compared with approximately $6.1 million for the six months ended June 30, 2001. This increase was primarily attributable to the effect of accelerated stock compensation expense in connection with the IPO. Upon completion of the IPO, all contractual restrictions on transfer and forfeiture provisions that existed on restricted shares previously granted to members of our senior management and other key employees terminated. As a result, compensation expense, including with respect to the reimbursement of a portion of the taxes paid by two of these individuals, of $6.8 million on the restricted shares was incurred during the three months ended June 30, 2002, which is comprised of $4.3 million of stock compensation expense and $2.5 million for the reimbursement of a portion of the taxes to be paid by certain senior officers. In addition, included in general and administrative expenses was a $0.5 million accrual for compensation expense, including the reimbursement of a portion of the taxes to be paid by one employee, related to restricted stock anticipated to be issued by the Company in 2003 for 2002 performance. This accrual is an estimate of the compensation expense that will be required to be recognized in the event that this restricted stock is actually issued. For all periods after the IPO, the Company will recognize compensation expense with respect to performance-based stock grants ratably over the performance and vesting periods. The Company has not restated any prior period amounts because it does not believe that such restatement would be material to the financial condition or results of operations of the Company. During the six months ended June 30, 2002, we sold one office building, resulting in a net gain on sale of real estate investments of approximately $1.4 million. During the six months ended June 30, 2001, we sold two single-tenant properties resulting in a net gain on sale of real estate investments of $2.3 million. Net derivative loss for the six months ended June 30, 2002 was approximately $7.6 million as compared to a net derivate gain of approximately $.4 million for the six months ended June 30, 2001 . This loss was attributable to the termination of an interest rate collar. On April 29, 2002, the Company entered into a $350 million unsecured line of credit with a group of lenders and Fleet National Bank, as agent. Upon entering into this new line of credit, the Company paid approximately $6.8 million to terminate the interest rate collar that was then in place with respect to the $150 million term loan under the prior senior unsecured credit facility. As a result of this termination, the Company reclassified approximately $7.6 million of accumulated other comprehensive loss, a component of shareholders' equity, to earnings during the six months ended June 30, 2002. Operating income from discontinued operations represents income associated with the 11 single-tenant properties, which are classified as real estate held for sale as of June 30, 2002. Extraordinary loss on the prepayment of debt for the six months ended June 30, 2002 was approximately $6.7 million. Upon entering into this new line of credit, the Company wrote off unamortized deferred financing costs with respect to the prior $425 million senior unsecured credit facility. This write-off amounted to approximately $4.2 million during the six months ended June 30, 2002. In addition, the Company used $100.0 million of the net proceeds from the IPO to repay in full the $100,000,000 of subordinated debt previously outstanding that was scheduled to mature on March 18, 2004. In connection with the full repayment, the Company wrote off unamortized deferred financing costs with respect to the subordinated debt. This write-off amounted to approximately $2.5 million during the six months ended June 30, 2002. 23 HERITAGE PROPERTY INVESTMENT TRUST, INC. LIQUIDITY AND CAPITAL RESOURCES As of June 30, 2002, we had approximately $3.9 million in available cash and cash equivalents. As a REIT, we are required to distribute at least 90% of our taxable income to our stockholders on an annual basis. Therefore, as a general matter, it is unlikely that we will have any substantial cash balances that could be used to meet our liquidity needs. Instead, these needs must be met from cash generated from operations and external sources of capital. SHORT-TERM LIQUIDITY REQUIREMENTS Our short-term liquidity requirements consist primarily of funds necessary to pay for operating expenses and other expenditures directly associated with our properties, including: o recurring maintenance capital expenditures necessary to properly maintain our properties; o interest expense and scheduled principal payments on outstanding indebtedness; o capital expenditures incurred to facilitate the leasing of space at our properties, including tenant improvements and leasing commissions; and o future distributions to be paid to our stockholders. Historically, we have satisfied our short-term liquidity requirements through our existing working capital and cash provided by our operations. We believe that our existing working capital and cash provided by operations will continue to be sufficient to meet our short-term liquidity requirements. Cash flows provided by operations increased to approximately $56.2 million for the six months ended June 30, 2002, as compared to $34.6 million for the six months ended June 30, 2001. The increase in cash flows from operations is attributable to the combined effect of a $7.2 million decrease in interest expense for the six months ended June 30, 2002 and a decrease in accounts receivable and prepaids and other assets. There are a number of factors that could adversely affect our cash flow. An economic downturn in one or more of our markets may impede the ability of our tenants to make lease payments and may impact our ability to renew leases or re-let space as leases expire. In addition, an economic downturn or recession could also lead to an increase in tenant bankruptcies, increases in our overall vacancy rates or declines in rents we can charge to re-lease properties upon expiration of current leases. In all of these cases, our cash flow would be adversely affected. During 2001, 15 of our tenants filed for bankruptcy protection. These tenants contributed approximately 2.7% of our annualized base rent for all leases in which tenants were in occupancy at December 31, 2001. In addition, during 2002, threeof our tenants have filed for bankruptcy protection, the largest of which was Kmart Corporation. Kmart Corporation contributed approximately 1.5% of our annualized base rent for all leases in which tenants were in occupancy at June 30, 2002. As a general matter, the Company believes that these bankruptcies and the current economic downturn has not had a material impact on our operating results. However, continuation of the current downturn or a recession could materially negatively impact our operating results in 2002. We currently lease space to Kmart at seven of our shopping centers. These locations were all physically occupied at June 30, 2002. In addition, Kmart owns store locations at three of our shopping centers and subleases space from third party tenants at two of our other locations. On March 8, 2002, Kmart announced that it intends to close 284 store locations as part of its bankruptcy reorganization. None of the twelve store locations described above were included in the list of announced store closings. However, we have agreed with Kmart to a rent reduction at one of our shopping centers of approximately $290,000 on an annualized basis. 24 HERITAGE PROPERTY INVESTMENT TRUST, INC. Although Kmart has announced its current intended store closings, we are not able to fully predict the impact on our business of Kmart's bankruptcy filing at this time. For instance, Kmart could decide to close additional stores, including our locations, terminate a substantial number of leases with us, or request additional rent reductions or deferrals. Any of these actions could adversely affect our rental revenues, and the impact may be material. In addition, Kmart's termination of leases or closure of stores could result in lease terminations or reductions in rent by other tenants in the same shopping centers which could materially harm our business. Any future bankruptcies of tenants in our portfolio, particularly major or anchor tenants, may negatively impact our operating results. We incur maintenance capital expenditures at our properties, which include such expenses as parking lot improvements, roof repairs and replacements and other non-revenue enhancing capital expenditures. Maintenance capital expenditures were approximately $1.3 million for the six months ended June 30, 2002. We expect total maintenance capital expenditures to be approximately $7.4 million, or approximately $.32 per square foot, in 2002. We also expect to incur revenue enhancing capital expenditures such as tenant improvements and leasing commissions in connection with the leasing or re-leasing of retail space. We believe that our existing working capital and cash provided by operations will be sufficient to fund our maintenance capital expenditures for the next twelve months. We believe that we qualify and we intend to continue to qualify as a REIT under the Internal Revenue Code. As a REIT, we are allowed to reduce taxable income by all or a portion of our distributions paid to shareholders. We believe that our existing working capital and cash provided by operations will be sufficient to allow us to pay distributions necessary to enable us to continue to qualify as a REIT. LONG-TERM LIQUIDITY REQUIREMENTS Our long-term liquidity requirements consist primarily of funds necessary to pay for scheduled debt maturities, renovations, expansions and other non-recurring capital expenditures that need to be made periodically to our properties, and the costs associated with acquisitions of properties that we pursue. Historically, we have satisfied our long-term liquidity requirements through various sources of capital, including our existing working capital, cash provided by operations, long-term property mortgage indebtedness, lines of credit and through the issuance of additional equity securities. We believe that these sources of capital will generally continue to be available to us in the future to fund our long-term liquidity requirements. However, certain factors may have a material adverse effect on our access to these capital sources. Our ability to incur additional debt is dependent upon a number of factors, including our degree of leverage, the value of our unencumbered assets, our credit rating and borrowing restrictions imposed by existing lenders. Currently, we have a credit rating from two major rating agencies - Standard & Poor's, which on August 1, 2002 raised our rating to BBB-, and Moody's Investor Service, which has given us a rating of Ba2. On May 17, 2002, Moody's announced that it had placed the rating of Bradley Operating Limited Partnership under review for a possible upgrade. A downgrade in outlook or rating by a rating agency can occur at any time if the agency perceives an adverse change in our financial condition, results of operations or ability to service our debt. If our credit rating is upgraded, it would decrease the spread over LIBOR currently payable by us under our new line of credit. Based on our internal evaluation of our properties, the estimated value of our properties exceeds the outstanding amount of mortgage debt encumbering those properties as of June 30, 2002. Therefore, at this time, we believe that additional funds could be obtained, either in the form of mortgage debt or additional unsecured borrowings. In addition, we believe that we could obtain additional 25 HERITAGE PROPERTY INVESTMENT TRUST, INC. financing without violating the financial covenants contained in our new line of credit or unsecured public notes. Our ability to raise funds through the issuance of equity securities is dependent upon, among other things, general market conditions for REITs and market perceptions about us. We will continue to analyze which source of capital is most advantageous to us at any particular point in time, but the equity markets may not be consistently available on terms that are attractive or at all. COMMITMENTS We currently do not have any capital lease obligations or operating lease commitments. The following table summarizes our repayment obligations under our indebtedness outstanding as of June 30, 2002.
AMOUNT YEAR ENDING DECEMBER 31, (IN THOUSANDS) 2002 Remainder............................ $18,866 2003...................................... 12,001 2004...................................... 125,206 2005...................................... 253,080 2006...................................... 17,540 Thereafter................................ 525,220 -------- Total due.............................. $951,913 ========
The indebtedness described in the table above will require balloon payments, including approximately $3.2 million due in November 2002. It is likely that we will not have sufficient funds on hand to repay additional balloon amounts at maturity. We currently expect to refinance this debt through unsecured private or public debt offerings, additional debt financings secured by individual properties or groups of properties or additional equity offerings. We may also refinance balloon payments through borrowings under our new line of credit. NEW LINE OF CREDIT On April 29, 2002, the Company entered into a $350 million unsecured line of credit with a group of lenders and Fleet National Bank, as agent. This new line of credit replaced the Company's prior senior unsecured credit facility, which was repaid primarily with proceeds of the IPO. Heritage Property Investment Limited Partnership and Bradley Operating Limited Partnership are borrowers under the new line of credit and we, and substantially all of our other subsidiaries, have guaranteed this new line of credit. This new line of credit is being used principally to fund growth opportunities and for working capital purposes. At June 30, 2002, $210 million was outstanding under the new line of credit. Our ability to borrow under this new line of credit is subject to our ongoing compliance with a number of financial and other covenants. This new line of credit, except under some circumstances, limits our ability to make distributions in excess of 90% of our annual funds from operations. In addition, this new line of credit bears interest at a floating rate based on a spread over LIBOR ranging from 80 basis points to 135 basis points, depending upon our debt rating, and requires monthly payments of interest. The variable rate in effect at June 30, 2002, including the lender's margin of 135 basis points, was 3.29%. In addition, this new line of credit has a facility fee based on the amount committed ranging from 15 to 25 basis points, depending upon our debt rating, and requires quarterly payments. 26 HERITAGE PROPERTY INVESTMENT TRUST, INC. Upon entering into this new line of credit, we paid $6.8 million to terminate the collar which was then in place with respect to the $150 million term loan under our prior senior unsecured credit facility. As a result of the termination of the collar, we reclassified $7.6 million of accumulated other comprehensive loss, a component of shareholders' equity, to earnings in the second quarter ended June 30, 2002. In addition, upon entering into this new line of credit, the Company wrote off unamortized deferred financing costs with respect to the existing $425 million senior unsecured credit facility. This write-off amounted to approximately $4.2 million during the six months ended June 30, 2002. FUNDS FROM OPERATIONS The White Paper on Funds from Operations approved by NAREIT in March 1995 defines Funds from Operations as net income (loss) computed in accordance with generally accepted accounting principles, excluding gains (or losses) from debt restructuring and sales of properties, plus real estate related depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures. In November 1999, NAREIT issued a National Policy Bulletin effective January 1, 2000 clarifying the definition of Funds from Operations to include all operating results, both recurring and non-recurring, except those defined as extraordinary under GAAP. We believe that Funds from Operations is helpful as a measure of the performance of a REIT because, along with cash flow from operating activities, financing activities and investing activities, it provides an indication of our ability to incur and service debt, to make capital expenditures and to fund other cash needs. We compute Funds from Operations in accordance with standards established by NAREIT, which may not be comparable to Funds from Operations reported by other REITs that do not define the term in accordance with the current NAREIT definition or that interpret the current NAREIT definition differently than we do. Funds from Operations does not represent cash generated from operating activities in accordance with GAAP, nor does it represent cash available to pay distributions and should not be considered as an alternative to net income, financial performance or to cash flow from operating activities, determined in accordance with GAAP, as a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to pay cash distributions. The following table reflects the calculation of Funds from Operations:
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED JUNE 30, JUNE 30, 2002 2001 2002 2001 ------------------------------------------------------ (in thousands) Net (loss) income.......................... $(11,207) 2,931 (6,305) 8,165 Add (deduct): Depreciation and amortization (real-estate related)................ 17,019 15,400 34,289 30,680 Net gains on sales of real estate investments and equipment.......... -- (4) (1,374) (2,343) Extraordinary loss on debt prepayment......................... 6,749 -- 6,749 -- Preferred stock distributions...... (3,452) (10,925) (14,302) (21,733) Accretion of redeemable equity..... (79) (249) (328) (498) -------- -------- -------- -------- Funds from Operations........... $ 9,030 7,153 18,729 14,271 ======== ======== ======== ========
27 HERITAGE PROPERTY INVESTMENT TRUST, INC. RELATED PARTY TRANSACTIONS We have in the past engaged in and currently engage in a number of transactions with related parties. The following is a summary of ongoing transactions with related parties that may impact our future operating results. THE TJX COMPANIES In July 1999, Bernard Cammarata became a member of our board of directors. Mr. Cammarata is Chairman of the Board of TJX Companies, Inc., our largest tenant, and was President and Chief Executive Officer of TJX until June 1999. Annualized base rent from the TJX Companies represents approximately 5.2% of our total annualized base rent for all leases in which tenants were in occupancy at June 30, 2002. TJX pays us rent in accordance with written leases with respect to several of our properties. ADVISORY FEE The Prudential Insurance Company of America, our second largest stockholder, received advisory and other fees totaling approximately $3.4 million in connection with our IPO. This fee was incurred in the three months ended June 30, 2002. 131 DARTMOUTH STREET JOINT VENTURE In November 1999, we entered into a joint venture for the acquisition and development of a 365,000 square foot commercial office tower at 131 Dartmouth Street, Boston, Massachusetts. In addition to an unaffiliated third party, NETT, our largest stockholder, is also participating in this project. Specifically, NETT, Heritage and DFS Dartmouth, LLC have formed an entity to own this project. This entity is owned 74% by NETT, 20% by DFS Dartmouth, LLC and 6% by us. We were issued this interest as part of a management arrangement we entered into with the new entity. Under this arrangement, through our subsidiary, we are providing management services to this project, for which we are entitled to receive 6% of all cash and capital transaction proceeds received by the project. We have no ongoing capital contribution requirements with respect to this project, which we expect will be completed in October 2002. We account for our interest in this joint venture using the cost method and we have not expensed any amounts through June 30, 2002. BOSTON OFFICE LEASE One of the properties contributed to us by Net Realty Holding Trust was our headquarters building at 535 Boylston Street, Boston, Massachusetts. In 1974, NETT and Net Realty Holding Trust entered into a lease providing for the lease of 14,400 square feet of space in this office building to NETT for its Boston offices. The current term of this lease expires on March 31, 2005 and, under this lease, NETT pays us $648,000 per year in rent. CONTINGENCIES LEGAL AND OTHER CLAIMS We are subject to legal and other claims incurred in the normal course of business. Based on our review and consultation with counsel of those matters known to exist, we do not believe that the ultimate outcome of these claims would materially affect our financial position or results of operations. 28 HERITAGE PROPERTY INVESTMENT TRUST, INC. NON-RECOURSE LOAN GUARANTEES In connection with the Bradley acquisition, we entered into a special securitized facility with Prudential Mortgage Capital Corporation pursuant to which $244 million of collateralized mortgage-backed securities were issued by a trust created by PMCC. The trust consists of a single mortgage loan due from a subsidiary we created, Heritage SPE LLC, to which we contributed 29 of our properties. This loan is secured by all 29 properties we contributed to the borrower. In connection with the securitized financing with PMCC, we entered into several indemnification and guaranty agreements with PMCC under the terms of which we agreed to indemnify PMCC for various bad acts of Heritage SPE LLC and with respect to specified environmental liabilities with respect to the properties contributed by us to Heritage SPE LLC. We also have agreed to indemnify other mortgage lenders for bad acts and environmental liabilities in connection with other mortgage loans that we have obtained. INFLATION Inflation has had a minimal impact on the operating performance of our properties. However, many of our leases contain provisions designed to mitigate the adverse impact of inflation. These provisions include clauses enabling us to receive payment of additional rent calculated as a percentage of tenants' gross sales above pre-determined thresholds, which generally increase as prices rise, and/or escalation clauses, which generally increase rental rates during the terms of the leases. These escalation clauses often are at fixed rent increases or indexed escalations (based on the consumer price index or other measures). Many of our leases are also for terms of less than ten years, which permits us to seek to increase rents to market rates upon renewal. In addition, most of our leases require the tenant to pay an allocable share of operating expenses, including common area maintenance costs, real estate taxes and insurance. This reduces our exposure to increases in costs and operating expenses resulting from inflation. NEW ACCOUNTING STANDARDS AND ACCOUNTING CHANGES SFAS NO. 145 In April 2002, the Financial Accounting Standards Board issued SFAS No. 145, RESCISSION OF FASB STATEMENTS NO. 4, 44 AND 64, AMENDMENT OF FASB STATEMENT NO. 13, AND TECHNICAL CORRECTIONS. SFAS No. 145 eliminates the requirement that all gains and losses from the extinguishment of debt be aggregated and, if material, classified as an extraordinary item. However, a company could continue to classify transactions as extraordinary items if they meet the criteria described in paragraph 20 of APB No. 30, REPORTING THE RESULTS OF OPERATIONS - REPORTING THE EFFECTS OF DISPOSAL OF A SEGMENT OF A BUSINESS, AND EXTRAORDINARY, UNUSUAL AND INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS. Paragraph 20 of APB 30 requires that the event or transaction be both unusual in nature and infrequent in occurrence. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002. However, any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods presented that does not meet the criteria of APB 30 shall be reclassified. The Company has elected to adopt SFAS No. 145 for its fiscal year beginning January 1, 2003, and therefore has classified its losses associated with its prepayment of its prior senior unsecured credit facility and subordinated debt during the three months ended June 30, 2002 as an extraordinary item. 29 HERITAGE PROPERTY INVESTMENT TRUST, INC. SFAS NO. 144 In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS, which supersedes both SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, and the accounting and reporting provisions of APB Opinion No. 30, REPORTING THE RESULTS OF OPERATIONS--REPORTING THE EFFECTS OF DISPOSAL OF A SEGMENT OF BUSINESS, AND EXTRAORDINARY, UNUSUAL, AND INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS, for the disposal of a segment of a business (as previously defined in that Opinion). SFAS No. 144 retains the fundamental provisions in SFAS No. 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale, while also resolving significant implementation issues associated with SFAS No. 121. In addition, SFAS No. 144 retains the basic provisions of Opinion 30 for presenting discontinued operations in the income statement but broadens that presentation to include a component of an entity (rather than a segment of a business). The Company adopted SFAS No. 144 on January 1, 2002. The Company had one property disposition during the six months ended June 30, 2002, which was classified as held for sale as of December 31, 2001. As the property was classified as held for sale as of December 31, 2001, it was exempt from the provisions of SFAS No. 144. In addition, the Company has classified 11 single-tenant properties as real estate held for sale as June 30, 2002. Accordingly, the operating results of the real estate held for sale has been reclassified and reported as discontinued operations for the three and six months ended June 30, 2002 and 2001. ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the exposure to loss resulting from adverse changes in market prices, interest rates, foreign currency exchange rates, commodity prices and equity prices. The primary market risk to which we are exposed is interest rate risk, which is sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors that are beyond our control. Our future income, cash flows and fair values relevant to financial instruments are dependent upon prevalent market interest rates. As of June 30, 2002, our total outstanding debt was approximately $952 million, of which approximately $210 million, or 22%, was variable rate debt under our line of credit facility. We were not a party to any hedging agreements with respect to our floating rate debt as of June 30, 2002. We have in the past used derivative financial instruments to manage, or hedge, interest rate risks related to our borrowings, from lines of credit to medium- and long-term financings. We require that hedging derivative instruments are effective in reducing the interest rate risk exposure that they are designed to hedge. We do not use derivatives for trading or speculative purposes and only enter into contracts with major financial institutions based on their credit rating and other factors. We do not believe that the interest rate risk represented by our floating rate debt is material as of June 30, 2002 in relation to total assets and our total market capitalization. The majority of our outstanding debt as of June 30, 2002 has a fixed interest rate, which minimizes the risk of fluctuating interest rates. We do not believe that our weighted average interest rate of 7.76% on our fixed rate debt is materially different from current fair market interest rates for debt instruments with similar risks and maturities. 30 HERITAGE PROPERTY INVESTMENT TRUST, INC. PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On October 31, 2001, a complaint was filed against the Company in the Superior Court of Suffolk County of the Commonwealth of Massachusetts by Weston Associates and its president, Paul Donahue, alleging that the Company owes Mr. Donahue and his firm a fee in connection with services he claims he performed on the Company's behalf in connection with the acquisition of Bradley. Through his personal relationships with the parties involved, Mr. Donahue introduced the Company to Bradley and its senior management team. Mr. Donahue alleges, however, that he played an instrumental role in the negotiation and completion of the acquisition of Bradley beyond merely introducing the parties. For these alleged efforts, Mr. Donahue demands that he receive a fee equal to 2% of the aggregate consideration the Company paid to acquire Bradley, or a fee of approximately $24 million. In addition, Mr. Donahue also seeks treble damages based on alleged unfair or deceptive business practices under Massachusetts law. On December 30, 2001, the Company filed a motion to dismiss all of Mr. Donahue's claims. Mr. Donahue filed an opposition to our motion and on March 22, 2002, a hearing was held by the court. The court has not yet rendered a decision with respect to our motion to dismiss. It is not possible at this time to predict the outcome of this litigation and the Company intends to vigorously defend against these claims. Except as set forth above, the Company is not involved in any material litigation nor, to its knowledge, is any material litigation threatened against the Company, other than routine litigation arising in the ordinary course of business, which is expected to be covered by insurance. In the opinion of management, after consultation with counsel, this litigation is not expected to have a material adverse effect on the Company's business, financial condition or results of operations. ITEM 2. CHANGES IN SECURITIES On April 23, 2002, the Securities and Exchange Commission simultaneously declared effective the Company's registration statement on Form S-11 (Registration No. 333-69118) filed under the Securities Act of 1933, and its registration statement on Form 8-A, filed under the Securities Exchange Act of 1934, for an initial public offering (IPO) of its common stock. On April 24, 2002, the Company also filed a registration statement on Form S-11 (Registration No. 333-86836), pursuant to Rule 462(b) promulgated by the Securities and Exchange Commission. The registration statements provided for the registration of an aggregate of 20,700,000 shares of the Company's common stock, of which, 15,500,000 shares were registered on behalf of the Company, 4,000,000 shares were registered on behalf of NETT, the Company's largest stockholder, and 1,200,000 shares were registered on behalf of The Prudential Insurance Company of America, our second largest stockholder. On April 29, 2002, the Company completed its IPO, of which, Merrill Lynch & Co. acted as managing underwriter, and sold 14,000,000 shares of common stock and NETT sold 4,000,000 shares of its common stock in the IPO at a price of $25.00 per share. The net proceeds from the IPO were approximately $321 million, after deducting the underwriters' discounts and commissions of approximately $22 million and offering expenses payable by us of approximately $7.1 million. In connection with the IPO, the Company paid an affiliate of The Prudential Insurance Company of America an advisory fee of $3.375 million. All of the proceeds of the IPO were used to repay then outstanding indebtedness of the Company. The Company used approximately $100 million of these net proceeds to fully repay all of the outstanding principal and interest on the subordinated loan the Company entered into with Fleet 31 HERITAGE PROPERTY INVESTMENT TRUST, INC. National Bank in September 2000 and approximately $214 million of the net proceeds of this offering was used to repay a portion of the outstanding indebtedness under the Company's senior unsecured credit facility with Fleet and other financial institutions. In addition, the Company used approximately $7 million to pay the fee associated with terminating the hedge then in place with respect to the $150 million term loan under the prior existing senior unsecured credit facility. On May 21, 2002, the Underwriters of the IPO notified the Company of their exercise of their option, granted under the terms of an Underwriting Agreement with the Company, to purchase 145,000 additional shares of common stock, including 80,556 shares from the Company and 64,444 shares from The Prudential Insurance Company of America, solely to cover overallotments, and on May 24, 2002, upon the closing of the sale of the over-allotment shares, the Company received additional net proceeds of approximately $1.9 million from the Underwriters after deducting the underwriters' discounts and commissions of $.1 million. These net proceeds were used to repay outstanding indebtedness. In connection with our IPO, all 20,341,767 shares of Series A Cumulative Convertible Preferred Stock and redeemable equity outstanding converted automatically into shares of the Company's common stock on a one for one basis. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At a special meeting of the Company's stockholders held on April 4, 2002 in lieu of the Company's 2002 Annual Meeting, the Company's stockholders approved the following three proposals: (i) To elect eleven persons to the Board of Directors of the Company for staggered terms to be effective upon completion of the IPO as follows-- Class 1 (To Serve Until 2003) Paul V. Walsh William M. Vaughn Robert J. Watson Kenneth K. Quigley, Jr. Class 2 (To Serve Until 2004) David W. Laughton Joseph L. Barry Kevin C. Phelan Richard C. Garrison Class 3 (To Serve Until 2005) Thomas C. Prendergast Bernard Cammarata Robert Falzon (ii) To adopt Articles of Amendment and Restatement (Third) of the Company, providing for the amendment and restatement of the Company's current charter, and (iii) To ratify the amendment and restatement of the Heritage Property Investment Trust, Inc. 2000 Equity Incentive Plan to, among other things, increase the number of shares authorized for issuance under the Plan. 32 HERITAGE PROPERTY INVESTMENT TRUST, INC. Each of these proposals was adopted by a vote of 20,272,852 shares of Series A Cumulative Convertible Preferred Stock, or approximately 99% of the total outstanding shares, in favor, with no shares voting against or abstaining, and 6,802,197 shares of common stock, or approximately 99% of the total outstanding shares, in favor, with no shares voting against or abstaining. ITEM 5. OTHER INFORMATION Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 99.1 Amendment, dated as of July 24, 2002, to Employment Agreement, by and between the Company and Thomas C. Prendergast 99.2 Certification of Chief Executive Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.3 Certification of Chief Financial Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K On June 5, 2002, the Company filed a Current Report on Form 8-K with respect to its financial results for the quarter ended March 31, 2002. 33 HERITAGE PROPERTY INVESTMENT TRUST, INC. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused the report to be signed on its behalf by the undersigned, thereunto duly authorized. HERITAGE PROPERTY INVESTMENT TRUST, INC. Dated: August 6, 2002 /s/ THOMAS C. PRENDERGAST ----------------------------------- Thomas C. Prendergast Chairman, President and Chief Executive Officer /s/ DAVID G. GAW ---------------------------------- David G. Gaw Senior Vice President, Chief Financial Officer and Treasurer 34 EX-99.1 3 a2086055zex-99_1.txt EXHIBIT 99-1 Exhibit 99.1 THIRD AMENDMENT OF THE EMPLOYMENT AGREEMENT BETWEEN THOMAS C. PRENDERGAST AND HERITAGE PROPERTY INVESTMENT TRUST, INC. This agreement (the "Agreement"), dated this 24th day of July, 2002, is by and between Heritage Property Investment Trust, Inc., a corporation organized under the laws of the State of Maryland and having its principal place of business at 535 Boylston Street, Boston, Massachusetts 02116 (the "Company"), and Thomas C. Prendergast, an individual currently residing at 62 Jack Pine Drive, Sudbury, Massachusetts 01776 (the "Executive"): WITNESSETH THAT: WHEREAS, the Executive and the Company have heretofore entered into an employment agreement, dated as of July 9, 1999 (the "Employment Agreement"); WHEREAS, the Employment Agreement may be amended by a written instrument signed by the Executive and a duly authorized representative of the Board of Directors of the Company; WHEREAS, the Company and the Executive have previously amended the Employment Agreement by their written agreements dated April 3, 2000 and February 1, 2001; WHEREAS, the Company and the Executive desire and intend to further amend the Employment Agreement as provided herein, to reflect and document certain additional agreements of the parties relating to the compensation of the Executive and other terms of his employment which are based on the decisions of the Company's Board of Directors upon the recommendation of the Compensation Committee of the Board and the advice of the Company's consultants, FPL Associates Consulting, following the initial public offering of the Company's Common Stock; WHEREAS, the parties agree that such initial public offering constitutes a "Public Market Event" as defined in Section 7(b) of the Employment Agreement; NOW, THEREFORE, the Company and the Executive hereby agree that the Employment Agreement shall be and is hereby amended to include new provisions or modify provisions thereof as follows. The provisions of this instrument shall supersede and take precedence over any provision of the Employment Agreement, as heretofore amended, which is in conflict therewith. 1. Section 3 of the Employment Agreement is amended to delete the second sentence thereof and to substitute therefor the following sentence: "Commencing June 14, 2002, the Executive's base salary shall be Five Hundred Eighty-Five Thousand Dollars ($585,000) per year." 2. Section 4(c) of the Employment Agreement is amended to insert at the end thereof the following paragraph: Notwithstanding the foregoing provisions of this Section 4(c), from and after April 29, 2002, the date of completion of the initial public offering of the Company's Common Stock (the "IPO Date"), every grant or award of stock options, restricted stock, annual stock options and performance shares or any other grant or award under this Agreement which is denominated in shares of stock of the Company shall consist solely of Common Stock, unless the Company and the Executive shall agree with respect to any specific grant or award, and the Company shall specify in writing at the time of any such grant or award, that the grant or award is for Preferred Stock or Common Stock or some combination thereof. Furthermore, every grant or award of stock options, restricted stock, annual stock options and annual performance shares or any other grant or award hereunder prior to the IPO Date which was denominated in whole or in part in shares of Preferred Stock shall be changed and converted to all Common Stock effective as of the IPO Date; the parties agree that all ancillary agreements and documents heretofore delivered with respect to the grant or award of such options or shares shall be amended or superseded by documentation to reflect the change or conversion thereof to all Common Stock. 3. Section 4 of the Employment Agreement is amended, effective as of the date set forth above, to insert after subsection (d) the following new subsection (e): (e) AWARDS OF STOCK OPTIONS AND RESTRICTED STOCK AFTER IPO. The Executive shall be awarded options and restricted stock on the terms and conditions set forth in Appendix E to this Agreement. 4. Section 5(a) of the Employment Agreement is amended to delete the second sentence thereof and to substitute therefor the following sentence: "Effective for the fiscal years of the Company ending on and after December 31, 2002, the threshold bonus award shall not be less than 40% of Base Salary, the target bonus amount shall be 100% of Base Salary, and the maximum bonus amount shall be 160% of Base Salary." 5. Section 5(d) of the Employment Agreement is amended to delete the paragraph containing the schedules of Company performance component objectives and to substitute therefor the following paragraph and schedules: The Executive and the Company agree that, effective for the fiscal year of the Company ending December 31, 2002, the overall Company performance component of each year's incentive award opportunities shall be based on the combination of 75% FFO Per Share Growth and 25% Same Store NOI Growth as follows: FFO Per Share Growth Over Prior Year: Threshold: 2.0% Target: 4.0% High: 6.0% 2 Same Store NOI Growth Over Prior Year: Threshold: 0.50% Target: 0.75% High: 1.00% 6. Section 9(c) of the Employment Agreement is amended to include at the end thereof the following sentence: "Furthermore, upon the expiration of this Agreement at the end of a Public Market Event Extended Term, all of the Executive's annual stock options awarded under Section 5(b) hereof and his annual performance shares awarded under Section 5(c) hereof shall immediately vest." 7. Appendix B of the Employment Agreement is amended to include at the end of the first paragraph thereof the following sentence: "Notwithstanding the foregoing, effective as of the IPO Date (April 29, 2002), the options for all 400,000 of such shares became vested and exercisable by the Executive." 8. The Employment Agreement is amended to include Appendix E in the form attached hereto. 9. Except as hereinabove specifically amended, all provisions of the Employment Agreement, as heretofore amended, shall continue in full force and effect. IN WITNESS WHEREOF, and intending to be legally bound hereby, the parties hereto have caused this Agreement to be duly executed under seal as of the date first above written. HERITAGE PROPERTY INVESTMENT THOMAS C. PRENDERGAST TRUST, INC. By:/S/BERNARD CAMMARATA /S/THOMAS C. PRENDERGAST --------------------------------- ----------------------------------- Bernard Cammarata Chairman, Compensation Committee 3 APPENDIX E As bonus compensation intended in part to reward the Executive for his past services to the Company and in part to provide incentives for his further performance after the initial public offering of the Company's Common Stock on April 29, 2002 (the "IPO Date"), the Company shall award to the Executive non-qualified options to purchase 250,000 shares of the Company's Common Stock and an aggregate of 600,000 shares of restricted stock subject to the terms set forth in this Appendix E. 1. STOCK OPTION AWARD. Effective as of April 29, 2002, the Company hereby grants to the Executive a non-qualified option to purchase 250,000 shares of the Company's Common Stock at an option price of $25.00 per share (the "IPO Options"). Subject to customary provisions regarding the effect of termination of employment (provided that such IPO Options shall remain exercisable by the Executive until the end of any applicable Severance Period as defined herein and otherwise until at least 90 days following any termination of employment by the Executive not resulting in any such Severance Period), such IPO Options shall have a term of 10 years from the IPO Date and shall become vested and exercisable by the Executive as follows: Subject to the Executive's remaining an employee of the Company until the applicable date, options for 50,000 of such shares shall become vested and exercisable on each of the first, second, third, fourth and fifth anniversaries of the IPO Date. Notwithstanding the foregoing, if there is a Change of Control, or if the employment of the Executive should terminate by reason of (A) Disability, (B) termination by the Company for any reason other than Cause, or (C) by the Executive for Good Reason, then all IPO Options granted pursuant to this Appendix E shall immediately become vested and exercisable. 2. RESTRICTED STOCK AWARDS. The Company has reserved for possible future issuance 600,000 shares for awards of restricted stock to the Executive subject to the following terms and conditions: (a) DEFINITIONS. For purposes of this Appendix E the following terms shall have the meanings indicated below: The "ADJUSTED DIVIDEND PERCENTAGE" for any year is the Concurrent Year Dividend Percentage for such year increased by the amount of any Extra Dividend Percentage that the Executive elects to carry back or carry forward to such year. The "ANNUAL PERFORMANCE MEASURES" shall be the following objective measures of the Executive's performance in the 12-month period ending on each of March 1, 2003, 2004, 2005 and 2006: (a) Transactional goals - explored at least $100 million of acquisition or disposition opportunities per year; (b) diverse tenant base - maintained portfolio with a diverse tenant base with a minimum of either 1,000 tenant leases or properties collectively totaling not less than 10 million square feet of leased space, unless a sale or other disposition of Company assets makes the achievement of such an objective impracticable; (c) tenant relationships - maintained and supported activities whose primary purpose is to develop relationships with national accounts; (d) community development - supported activities that promote the Company's relationship with local communities and/or charities; (e) organizational development - developed and reviewed a succession plan with the Compensation Committee on an annual basis. Such objective Annual Performance Measures may be modified or revised from time to time by mutual agreement of the Executive and the Compensation Committee. "AWARDED SHARES" is defined in Subsection (d) below. The "CONCURRENT FISCAL YEAR" is the last fiscal year of the Company ending prior to each of March 1, 2003, 2004, 2005, 2006, and 2007. "CONCURRENT YEAR DIVIDEND PERCENTAGE" with respect to a Concurrent Fiscal Year is the per share amount of dividends declared and paid to shareholders of the Company with respect to such Concurrent Fiscal Year divided by the Standard Dividend in effect for such year expressed as a percentage. An "EXTRA DIVIDEND PERCENTAGE" is the amount (expressed as a percentage) by which the dividends declared and paid to shareholders of the Company with respect to a Concurrent Fiscal Year exceeds the Standard Dividend in effect for such year. (For example, if the Standard Dividend for the fiscal year 2004 is $2.10 and the Company pays dividends of $2.20 per share, the Extra Dividend Percentage for the fiscal year 2004 is 4.76% (i.e., ($2.20 / $2.10) - 100% = 4.76%).) If an Extra Dividend Percentage arises in any fiscal year, then as of any subsequent March 1 (but not after March 1, 2007), assuming that the other conditions to an issuance of shares are met, the Executive may elect that any portion or all of the Extra Dividend Percentage shall be carried back, without duplication, to a prior fiscal year or years or carried forward, without duplication, to a subsequent fiscal year or years (provided that the sum of all such carrybacks and carryforwards shall not exceed the amount of the Extra Dividend Percentage). The amount of Extra Dividend Percentage carried to any prior or subsequent fiscal year shall be added to that year's Concurrent Year Dividend Percentage to establish the Adjusted Dividend Percentage for such prior or subsequent fiscal year; provided, however, that in no event shall the Adjusted Dividend Percentage for any such prior or subsequent year exceed 100%. The "STANDARD DIVIDEND" shall be total dividends of $2.10 per share of Common Stock declared and paid to shareholders of the Company with respect to the Company's fiscal year; provided that the amount of the Standard Dividend will be proportionately adjusted from time to time for any increase or decrease after July 1, 2002 in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock or any other increase or decrease in the number of issued shares of Common Stock effected without the receipt of consideration by the Company, and the amount of the Standard Dividend shall also be adjusted, by mutual agreement of the Executive and Compensation Committee, as appropriate to reflect any changes in the issued Common Stock resulting from any mergers, consolidations, acquisitions, dispositions, reorganizations, recapitalizations or other similar transactions. (b) INITIAL AWARD. The Company hereby awards and issues 120,000 shares of restricted stock to the Executive. 2 (c) ANNUAL AWARDS. (1) BASED ON CONCURRENT YEAR DIVIDEND PERCENTAGE. The Company shall award and issue to the Executive 120,000 restricted shares on each of March 1, 2003, 2004, 2005 and 2006, provided that, as of each such date, the following conditions are satisfied: (i) the Executive shall have remained continuously as an employee of the Company through such date; AND (ii) the Executive shall have satisfied the Annual Performance Measures during the 12-month period ending on such date as determined by the Compensation Committee of the Board; AND (iii) the Concurrent Year Dividend Percentage is at least 100%. If the Concurrent Year Dividend Percentage is less than 100% but greater than 75%, a portion of the 120,000 shares for the year shall nevertheless be awarded; in that case, the percentage of such 120,000 shares to be awarded shall be the same as the Concurrent Year Dividend Percentage. (For example, if the Company actually pays dividends equal to 91% of the Standard Dividend for the fiscal year ending December 31, 2003, then 91% of 120,000 shares would be awarded to the Executive on March 1, 2004 under this Subsection (c)(1).) If the Concurrent Year Dividend Percentage for any year is greater than 100%, the Executive shall be entitled to cause the Concurrent Year Dividend Percentage for any prior or subsequent fiscal year in which the Concurrent Year Dividend Percentage is less than 100% to be increased (but not in excess of 100%), in which case, the Concurrent Year Dividend Percentage for each prior or subsequent year shall be the "Adjusted Dividend Percentage" for such prior or subsequent year. Subsections (c)(2) and (c)(3) below shall govern the extent to which additional shares may be awarded as the result of the immediately preceding sentence. (2) BASED ON ADJUSTED DIVIDEND PERCENTAGE - CARRYFORWARD. If less than 100% of the 120,000 shares are awarded on any March 1 under Subsection (c)(1) above because the Concurrent Year Dividend Percentage for that year was less than 100%, some or all of the 120,000 shares not awarded shall nevertheless be awarded on such March 1 if the following conditions are satisfied as of such March 1: (i) the Executive shall have remained continuously as an employee of the Company through such date; AND (ii) the Executive shall have satisfied the Annual Performance Measures during the 12-month period ending on such date as determined by the Compensation Committee of the Board; AND (iii) the Adjusted Dividend Percentage exceeds 75%; AND (iv) the Adjusted Dividend Percentage exceeds the Concurrent Year Dividend Percentage. If those conditions are satisfied, the percentage of such 120,000 shares to be awarded under this Subsection (c)(2) shall be the same as the Adjusted Dividend Percentage (reduced by the percentage of shares, if any, awarded pursuant to Subsection (c)(1) above). (For example, if the Concurrent Year Dividend Percentage for the fiscal year ending December 31, 2004 is 79% and the Adjusted Dividend Percentage for such year is 85% (because the Executive elected to carry forward some or all of an Extra Dividend Percentage that arose in the 2003 fiscal year because the Company paid dividends to its shareholders in excess of the Standard Dividend for the 2003 fiscal year), then of the 120,000 shares available for award on March 1, 2005, 79% of such shares would be awarded pursuant to Subsection (c)(1) above and an additional 6% of such shares would be awarded pursuant to this Subsection (c)(2).) (3) BASED ON ADJUSTED DIVIDEND PERCENTAGE - CARRYBACK. If less than 120,000 shares were awarded under Subsection (c)(1) and (c)(2) above as of any of March 1, 2003, 2004, 2005, or 2006 because the applicable Concurrent Year Dividend Percentage for that year was less than 100% and any Adjusted Dividend Percentage applied to that year was less than 100% 3 (the "Unawarded Shares"), such Unawarded Shares for any such year shall nevertheless be awarded on any subsequent March 1 (but not after March 1, 2007), if and to the extent that the following conditions are satisfied as of the subsequent March 1: (i) the Executive shall have remained continuously as an employee of the Company through such March 1; AND (ii) the Executive shall have satisfied the Annual Performance Measures during the 12-month period ending on such March 1 as determined by the Compensation Committee of the Board; AND (iii) the Adjusted Dividend Percentage exceeds 75%; AND (iv) the Adjusted Dividend Percentage exceeds the prior Concurrent Year Dividend Percentage and any prior Adjusted Dividend Percentage applied under Subsection (c)(1) or (c)(2) or this Subsection (c)(3) with respect to the Unawarded Shares. If these conditions are satisfied, then any or all of the Unawarded Shares (but not more than 100% of such shares) shall be awarded as of the current March 1, but no such shares shall be awarded under this Subsection (c)(3) after March 1, 2007. (For example, if none of the 120,000 shares were awarded on March 1, 2003 (the "2003 Shares") because the Concurrent Year Dividend Percentage was only 72%, but after the fiscal year ending December 31, 2004, the Adjusted Dividend Percentage for 2003 has become 80% (because the Executive elected to carry back some or all of an Extra Dividend Percentage arising in the 2004 fiscal year because the Company paid dividends to its shareholders in excess of the Standard Dividend for the 2004 fiscal year), then 80% of the 120,000 2003 Shares would be awarded on March 1, 2005 under this Subsection (c)(3), and such Awarded Shares would be restricted until March 1, 2006 as provided in Subsection (d); if after the 2005 fiscal year the Adjusted Dividend Percentage for 2003 has become 95% (because the Executive elected to carry back some or all of an Extra Dividend Percentage arising in the 2005 fiscal year because the Company paid dividends to its shareholders in excess of the Standard Dividend for the 2005 fiscal year), an additional 15% of the 120,000 2003 Shares would be awarded on March 1, 2006 under this Subsection (c)(3), and such additional Awarded Shares would be restricted until March 1, 2007 as provided in Subsection (d).) (d) VESTING. Such shares as have been awarded to the Executive pursuant to Subsection (b) or (c) above ("Awarded Shares") shall be restricted shares in that the Executive shall not be permitted to transfer such Awarded Shares and such Awarded Shares shall be forfeited to the Company if the vesting conditions specified in this Subsection (d) are not satisfied with respect to such shares. However, dividends shall be paid, and the Executive shall be entitled to exercise all voting rights, with respect to all Awarded Shares whether such shares are vested or unvested. The transfer restrictions and forfeiture provisions shall lapse with respect to the Awarded Shares as follows: (1) As to the 120,000 shares awarded pursuant to Subsection (b) above, the transfer restrictions and forfeiture provisions shall lapse on March 1, 2003, IF the Executive shall have remained continuously as an employee of the Company until March 1, 2003. (2) As to each award of shares on March 1, 2003, 2004, 2005 and 2006 pursuant to Subsection (c)(1), (c)(2) or (c)(3) above, the transfer restrictions and forfeiture provisions shall lapse on the first anniversary of the date of the award (for example, the restrictions will lapse on March 1, 2005 with respect to all shares awarded on March 1, 2004), IF the Executive shall have remained continuously as an employee of the Company until such first anniversary. 4 (3) As to any award of shares on March 1, 2007 pursuant to Subsection (c)(3) above, the transfer restrictions and forfeiture provisions shall lapse on March 1, 2007, IF the Executive shall have remained continuously as an employee of the Company until March 1, 2007. (4) Notwithstanding the foregoing provisions of this Subsection (d), if there is a Change of Control, or if the employment of the Executive should terminate by reason of (A) Disability, (B) termination by the Company for any reason other than Cause, or (C) by the Executive for Good Reason, then the transfer restrictions and forfeiture provisions shall immediately lapse as to all of the Awarded Shares. (5) The Awarded Shares as to which the transfer restrictions and forfeiture provisions have lapsed shall be registered under the Securities Act of 1933, shall be fully paid and nonassessable shares, and shall be fully vested in the Executive and not subject to any transfer restrictions or forfeiture provisions. (e) CHANGE OF CONTROL. Notwithstanding the foregoing provisions of this Section 2, if there is a Change of Control, or if the employment of the Executive should terminate by reason of (A) Disability, (B) termination by the Company for any reason other than Cause, or (C) by the Executive for Good Reason, then the Company shall thereupon immediately award and issue to the Executive a number of shares equal to the difference between 600,000 and the number of shares previously awarded pursuant to this Section 2, and all such shares shall be registered under the Securities Act of 1933, shall be fully paid and nonassessable shares, and shall be fully vested in the Executive and not subject to any transfer restrictions or forfeiture provisions. (f) TAX MATTERS. Notwithstanding Appendix B to the contrary, the parties hereto agree that the Executive shall not be entitled to receive, and the Company shall not be required to pay, any Tax Offset Payments with respect to the issuance or exercise of the IPO Options or the restricted shares issued pursuant to (b) and (c) above. The parties also understand that the lapse of the transfer restrictions and forfeiture provisions with respect to shares awarded pursuant to this Section 2 shall result in the inclusion of the value of such shares at that time in the gross income of the Executive for federal and state income tax purposes. The parties expect that an amount equal to the value of the shares when they become vested will be subject to withholding of applicable federal and state income taxes and Social Security payroll and withholding taxes. The parties agree that such withholding taxes shall be provided for, at the election of the Executive at the time any shares become vested, by withholding from the shares becoming vested a number of shares having a value equal to the aggregate withholding tax liability. 3. AWARDS PURSUANT TO PLAN AND AGREEMENTS. The awards of stock options and restricted shares under this Appendix E shall be made by the Company to the Executive pursuant to the Company's Amended and Restated 2000 Stock Option Plan and pursuant to written stock option and restricted stock agreements, each such agreement containing customary terms and conditions, provided that the terms of such agreements shall not contain any terms or limitations with respect to these awards to the Executive that are inconsistent with the foregoing provisions of this Appendix E. 5 EX-99.2 4 a2086055zex-99_2.txt EXHIBIT 99-2 Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of Heritage Property Investment Trust, Inc. (the "Company") for the period ending June 30, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Thomas C. Prendergast, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and the results of operations of the Company. Heritage Property Investment Trust, Inc. By: /S/ THOMAS C. PRENDERGAST ------------------------------------- Thomas C. Prendergast President and Chief Executive Officer EX-99.3 5 a2086055zex-99_3.txt EXHIBIT 99-3 Exhibit 99.3 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of Heritage Property Investment Trust, Inc. (the "Company") for the period ending June 30, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, David G. Gaw, Senior Vice President, Chief Financial Officer and Treasurer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and the results of operations of the Company. Heritage Property Investment Trust, Inc. By: /S/ DAVID G. GAW -------------------------------------- David G. Gaw Senior Vice President, Chief Financial Officer and Treasurer -----END PRIVACY-ENHANCED MESSAGE-----