SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

	(Mark One)
ý	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 2004
OR
o	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 incorporation or organization)	(I.R.S. Employer Identification No.)
131 Dartmouth 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 ý  No o.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.  Yes ý No o.

As of November 1, 2004, there were 46,866,798 shares of the Company’s $0.001 par value common stock outstanding.

HERITAGE PROPERTY INVESTMENT TRUST, INC.

INDEX TO FORM 10-Q

ITEM 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

ITEM 3: Quantitative and Qualitative Disclosures About Market Risk

ITEM 4: Controls and Procedures

PART II — OTHER INFORMATION

ITEM 1. Legal Proceedings

ITEM 2. Changes in Securities

ITEM 3. Defaults upon Senior Securities

ITEM 4. Submission of Matters to a Vote of Security Holders

ITEM 5. Other Information

ITEM 6. Exhibits and Reports on Form 8-K

SIGNATURES

CERTIFICATIONS

1

HERITAGE PROPERTY INVESTMENT TRUST, INC.

PART I

ITEM 1.  Financial Statements

Consolidated Balance SheetsSeptember 30, 2004 and December 31, 2003
(Unaudited and in thousands of dollars)

	September 30, 2004			December 31, 2003
Assets
Real estate investments, net	$	2,174,704		$	2,157,232
Real estate investment held for sale	6,983			—
Cash and cash equivalents	5,853			5,464
Accounts receivable, net of allowance for doubtful accounts of $9,543 in 2004 and $8,770 in 2003	37,571			25,514
Prepaids and other assets	29,556			13,608
Investment in joint venture	3,335			—
Deferred financing and leasing costs	38,843			25,757
Total assets	$	2,296,845		$	2,227,575
Liabilities and Shareholders’ Equity
Liabilities:
Mortgage loans payable	$	625,936		$	632,965
Unsecured notes payable	399,854			201,490
Line of credit facility	213,000			243,000
Accrued expenses and other liabilities	94,481			82,115
Accrued distributions	24,738			24,438
Total liabilities	1,358,009			1,184,008
Series B Preferred Units	—			50,000
Series C Preferred Units	—			25,000
Exchangeable limited partnership units	7,157			7,670
Other minority interest	2,425			2,425
Total minority interests	9,582			85,095
Shareholders’ equity:
Common stock, $.001 par value; 200,000,000 shares authorized; 46,781,048 and 46,208,574 shares issued and outstanding at September 30, 2004 and December 31, 2003, respectively	47			46
Additional paid-in capital	1,149,740			1,136,516
Cumulative distributions in excess of net income	(216,153		)	(176,267		)
Other comprehensive loss	(272		)	—
Unearned compensation	(4,108		)	(1,823		)
Total shareholders’ equity	929,254			958,472
Total liabilities and shareholders’ equity	$	2,296,845		$	2,227,575

See accompanying notes to condensed consolidated financial statements.

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HERITAGE PROPERTY INVESTMENT TRUST, INC.

Consolidated Statements of OperationsNine Months ended September 30, 2004 and 2003
(Unaudited and in thousands, except per-share data)

	Nine Months Ended September 30,
	2004			2003
Revenue:
Rentals and recoveries	$	242,301		$	220,193
Interest and other	565			456
Total revenue	242,866			220,649
Expenses:
Property operating expenses	33,883			31,919
Real estate taxes	37,033			32,219
Depreciation and amortization	65,665			57,582
Interest	57,155			51,345
General and administrative	16,991			16,153
Total expenses	210,727			189,218
Income before gain on sales of real estate investment and marketable securities	32,139			31,431
Gain of sale of marketable securities	529			—
Gain on sale of real estate investment	25			—
Income before allocation to minority interests	32,693			31,431
Income allocated to exchangeable limited partnership units	(191		)	(170		)
Income allocated to Series B & C Preferred Units	(2,176		)	(4,992		)
Income before discontinued operations	30,326			26,269
Discontinued operations:
Income from discontinued operations	422			1,605
Gains on sales of discontinued operations	2,988			2,683
Income from discontinued operations	3,410			4,288
Net income attributable to common shareholders	$	33,736		$	30,557
Basic per-share data:
Income before discontinued operations	$	0.65		$	0.63
Income from discontinued operations	0.07			0.10
Income attributable to common shareholders	$	0.72		$	0.73
Weighted average common shares outstanding	46,617			41,730
Diluted per-share data:
Income before discontinued operations	$	0.65		$	0.63
Income from discontinued operations	0.07			0.10
Income attributable to common shareholders	$	0.72		$	0.73
Weighted average common and common equivalent shares outstanding	47,230			42,195

See accompanying notes to condensed consolidated financial statements.

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HERITAGE PROPERTY INVESTMENT TRUST, INC.

Consolidated Statements of Operations

Three Months ended September 30, 2004 and 2003
(Unaudited and in thousands, except per-share data)

	Three Months Ended September 30,
	2004			2003
Revenue:
Rentals and recoveries	$	82,267		$	73,786
Interest and other	294			31
Total revenue	82,561			73,817
Expenses:
Property operating expenses	10,811			10,552
Real estate taxes	12,690			11,592
Depreciation and amortization	22,459			19,485
Interest	20,125			17,303
General and administrative	6,044			4,840
Total expenses	72,129			63,772
Income before gain on sales of real estate investment and marketable securities	10,432			10,045
Gain of sale of marketable securities	529			—
Gain on sale of real estate investment	25			—
Income before allocation to minority interest	10,986			10,045
Income allocated to exchangeable limited partnership units	(48		)	(82		)
Income allocated to Series B & C Preferred Units	(413		)	(1,664		)
Income before discontinued operations	10,525			8,299
Discontinued operations:
Operating income from discontinued operations	118			483
Gains on sales of discontinued operations	—			1,874
Income from discontinued operations	118			2,357
Net income attributable to common shareholders	$	10,643		$	10,656
Basic per-share data:
Income before discontinued operations	$	0.23		$	0.20
Income from discontinued operations	—			0.05
Income attributable to common shareholders	$	0.23		$	0.25
Weighted average common shares outstanding	46,747			41,812
Diluted per-share data:
Income before discontinued operations	$	0.23		$	0.20
Income from discontinued operations	—			0.05
Income attributable to common shareholders	$	0.23		$	0.25
Weighted average common and common equivalent shares outstanding	47,345			42,198

See accompanying notes to condensed consolidated financial statements.

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HERITAGE PROPERTY INVESTMENT TRUST, INC.

Consolidated Statements of Comprehensive IncomeThree and Nine Months ended September 30, 2004 and 2003
(Unaudited and in thousands)

	Nine Months Ended September 30,					Three Months Ended September 30,
	2004			2003		2004			2003
Net income attributable to common shareholders	$	33,736		$	30,557	$	10,643		$	10,656
Other comprehensive income (loss):
Realized gain from settlement of cash flow hedges	1,185			—		—			—
Unrealized loss on cash flow hedges	(1,398		)	—		(1,398		)	—
Unrealized holding gains on marketable securities	529			—		65			—
Reclassification adjustment for realized gain from sale of marketable securities	(529		)	—		(529		)	—
Reclassification adjustment for accretion of realized gain of cash flow hedges	(59		)	—		(29		)	—
Total other comprehensive loss	(272		)	—		(1,891		)	—
Comprehensive income	$	33,464		$	30,557	$	8,752		$	10,656

See accompanying notes to condensed consolidated financial statements.

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HERITAGE PROPERTY INVESTMENT TRUST, INC.

Consolidated Statements of Cash Flows

Nine months ended September 30, 2004 and 2003

(unaudited and in thousands of dollars)

	Nine months ended September 30,
	2004			2003
Cash flows from operating activities:
Net income	$	33,736		$	30,557
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	65,819			57,772
Amortization of deferred debt financing costs	1,510			1,385
Amortization of debt premiums and discount	(1,167		)	(542		)
Amortization of effective portion of interest rate swap	(60		)	—
Compensation expense associated with stock plans, including acceleration of unvested stock options	4,546			4,834
Net gains on sales of real estate investments	(3,013		)	(2,683		)
Gain on sale of marketable securities	(529		)	—
Income allocated to exchangeable limited partnership units	191			170
Income allocated to Series B & C Preferred Units	2,176			4,992
Changes in operating assets and liabilities	(21,471		)	(3,713		)
Net cash provided by operating activities	81,738			92,772
Cash flows from investing activities:
Acquisitions of and additions to real estate investments	(85,063		)	(37,588		)
Expenditures for investment in joint venture	(3,321		)	—
Investment in mortgage loan receivable	(9,188		)	—
Net proceeds from sales of real estate investments	14,410			15,528
Proceeds from sale of marketable securities	1,101			—
Expenditures for capitalized leasing commissions	(3,657		)	(3,604		)
Expenditures for furniture, fixtures and equipment	(1,748		)	(317		)
Net cash used for investing activities	(87,466		)	(25,981		)
Cash flows from financing activities:
Proceeds from the issuance of common stock	6,116			5,841
Repurchase of common stock	(34		)	—
Repayments of mortgage loans payable	(16,183		)	(13,762		)
Proceeds from line of credit facility	280,000			66,000
Repayments of line of credit facility	(310,000		)	(34,000		)
Proceeds from interest swap termination	1,185			—
Proceeds from issuance of unsecured bonds	198,278			—
Distributions paid to exchangeable limited partnership unit holders	(533		)	(536		)
Distributions paid to Series B & C Preferred Unit holders	(2,176		)	(4,992		)
Redemption of Series B and C Preferred Units	(75,000		)	—
Common stock distributions paid	(73,324		)	(65,666		)
Expenditures for deferred debt financing costs	(2,011		)	—
Expenditures for equity issuance costs	(201		)	—
Net cash provided by (used for) financing activities	6,117			(47,115		)
Net increase in cash and cash equivalents	389			19,676
Cash and cash equivalents:
Beginning of period	5,464			1,467
End of period	$	5,853		$	21,143

See accompanying notes to condensed consolidated financial statements.

6

HERITAGE PROPERTY INVESTMENT TRUST, INC.

Notes to Condensed Consolidated Financial Statements

1.Organization

Basis of Presentation

The condensed 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 in accordance with the rules and regulations of the Securities and Exchange Commission, 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 condensed consolidated balance sheet as of December 31, 2003 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 2003 amounts have been made to conform to the 2004 presentation.  The results of operations for properties disposed of during the three-and nine-month periods ended September 30, 2004 have been reclassified as discontinued operations for the prior comparable periods.

The condensed 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. These financial statements should be read in conjunction with the Company’s financial statements and notes thereto contained in the Company’s annual report on Form 10-K for its fiscal year ended December 31, 2003.

2.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.

3.Marketable Securities

The Company received shares of a publicly traded company during the nine-month period ended September 30, 2004 in settlement of the rejection of certain leases in connection with bankruptcy proceedings of the publicly traded company.  The Company accounts for investments in securities of publicly traded companies in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 115, Accounting for Certain Investments in Debt and Equity Investments, and has classified the securities as available-for-sale.  All shares received were sold during the three-month period ended September 30, 2004 for $1.1 million, resulting in a realized gain of $0.5 million.  The unrealized holding gain of $0.5 million included in other comprehensive income as of June 30, 2004 has been reclassified to realized gain during the three and nine month periods ended September 30, 2004.

4.Stock-Based Compensation

At September 30, 2004, the Company had one stock-based employee compensation plan (the “Plan”).  The Company accounts for this Plan under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations.  No stock-based employee compensation cost related to stock option grants is reflected in the Company’s

7

reported results, as all options granted under the Plan have an exercise price equal to the market value of the underlying common stock and the number of shares were fixed on the date of grant.  The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, (“SFAS No. 123”) to stock-based employee compensation (in thousands, except per-share data):

	Nine months ended September 30,
	2004		2003
Net income, as reported	$	33,736	$	30,557
Deduct:
Total additional stock-based employee compensation expense determined under fair value based method for all awards	572		507
Pro forma net income attributable to common shareholders	$	33,164	$	30,050
Earnings per share:
Basic – as reported	$	0.72	$	0.73
Basic – pro forma	$	0.71	$	0.72
Diluted – as reported	$	0.72	$	0.73
Diluted – pro-forma	$	0.71	$	0.72

	Three months ended September 30,
	2004		2003
Net income, as reported	$	10,643	$	10,656
Deduct:
Total additional stock-based employee compensation expense determined under fair value based method for all awards	122		132
Pro forma net income attributable to common shareholders	$	10,521	$	10,524
Earnings per share:
Basic – as reported	$	0.23	$	0.25
Basic – pro forma	$	0.23	$	0.25
Diluted – as reported	$	0.23	$	0.25
Diluted – pro-forma	$	0.22	$	0.25

Restricted Shares

In July 2002, the Board of Directors approved the issuance over five years of an aggregate of up to 775,000 shares of restricted stock with no exercise price to members of senior management of the Company. The Company issued the first installment of 155,000 shares in July 2002 based on a fair market value per share of $23.65 on the grant date. These shares were subject to risk of forfeiture and transfer restrictions, which terminated on March 1, 2003, based on the continued employment of these individuals with the Company through that date. During the nine-month period ended September 30, 2003, the Company recognized $1.0 million of compensation expense related to these shares.

On March 3, 2003, the Company issued the second installment of 155,000 shares based on a value of $24.36 per share. These shares were subject to risk of forfeiture and transfer restrictions, which terminated on March 3, 2004, based on the continued employment of these individuals with the Company through that date. During the nine-month periods ended September 30, 2004 and 2003, the Company recognized $0.5 million and $2.4 million (including $0.3 million of acceleration amortization related to a separation agreement entered into during the quarter ended June 30, 2003 with one of the participants), respectively of compensation expense related to these shares.

On March 1, 2004, the Company issued the third installment of 135,000 shares (reduced from 155,000 to reflect the termination of employment of one of the participants) based on a value of $29.70 per share. These shares are subject to risk of forfeiture and transfer restrictions, which terminate on March 1, 2005, subject to the continued employment of these individuals with the Company through that date.  During the nine-month period ended September 30, 2004, the Company recognized $2.4 million of compensation expense related to these shares.  The unamortized compensation expense of $1.7 million is included as unearned compensation on the accompanying September 30, 2004 balance sheet and will be amortized ratably through February 2005.

In March 2003, the Company issued 119,500 shares of restricted stock related to 2002 performance and based on a fair value on the date of issuance of $24.36 per share.  The Company recognizes compensation expense with respect to performance-based stock grants ratably over the one-year performance period and three-year vesting period.  During the nine-month periods ended September 30, 2004 and 2003, including the reimbursement of the taxes to be paid by one employee related to the shares, the Company recognized $0.6 million and $1.0 million (including $0.3 million of acceleration amortization related to a separation agreement entered into during the quarter ended June 30, 2003 with one of the recipients of shares), respectively of compensation expense related to these shares.  The unamortized compensation expense of $0.7 million is included as unearned compensation on the accompanying September 30, 2004 balance sheet and will be amortized ratably through December 2005.

In March 2004, the Company issued 108,000 shares of restricted stock related to 2003 performance and based on a fair value on the date of issuance of $28.47 per share.  During the nine-month periods ended September 30, 2004 and 2003, including the reimbursement of the taxes to be paid by one employee related to the shares, the Company recognized $0.8 million and $0.9 million, respectively of compensation expense related to these shares.  The unamortized compensation expense of $1.7 million is included as unearned compensation on the accompanying September 30, 2004 balance sheet and will be amortized ratably through December 2006.

During the nine-month period ended September 30, 2004, including the reimbursement of the taxes to be paid by one employee related to the shares, the Company also recorded $0.7 million of compensation expense related to 110,000 shares of restricted stock anticipated to be issued by the Company in 2005 for 2004 performance.  This accrual is an estimate of the compensation expense that will be required to be recognized in the event that these shares are actually issued.  The Company will recognize compensation expense with respect to these restricted shares ratably over the one-year performance and three-year vesting periods.

5.Earnings Per Share

Earnings per common share (“EPS”) has been computed pursuant to SFAS No. 128, Earnings per Share (“SFAS No. 128”).  The following table provides a reconciliation of both net income and the number of common shares used in the computation of basic EPS, which utilizes the weighted average number of common shares outstanding without regard to the dilutive potential common shares, and diluted EPS, which includes all shares, as applicable (in thousands, except per-share data):

8

	Nine months ended September 30, 2004
	Income (Numerator)		Shares (Denominator)	Per Share Amount
Basic Earnings Per Share:
Net income attributable to common shareholders	$	33,736	46,617	$	0.72
Effect of dilutive securities:
Stock options and anticipated stock compensation	—		274	—
Operating partnership units	191		339	0.56
Diluted earnings per share:
Net income attributable to common shareholders	$	33,927	47,230	$	0.72

	Nine months ended September 30, 2003
	Income (Numerator)		Shares (Denominator)	Per Share Amount
Basic Earnings Per Share:
Net income attributable to common shareholders	$	30,557	41,730	$	0.73
Effect of dilutive securities:
Stock options and anticipated stock compensation	—		125	—
Operating partnership units	170		340	0.50
Diluted earnings per share:
Net income attributable to common shareholders	$	30,727	42,195	$	0.73

	Three months ended September 30, 2004
	Income (Numerator)		Shares (Denominator)	Per Share Amount
Basic Earnings Per Share:
Net income attributable to common shareholders	$	10,643	46,747	$	0.23
Effect of dilutive securities:
Stock options and anticipated stock compensation	—		262	—
Operating partnership units	48		336	0.14
Diluted earnings per share:
Net income attributable to common shareholders	$	10,691	47,345	$	0.23

	Three months ended September 30, 2003
	Income (Numerator)		Shares (Denominator)	Per Share Amount
Basic Earnings Per Share:
Net income attributable to common shareholders	$	10,656	41,812	$	0.25
Effect of dilutive securities:
Stock options and anticipated stock compensation	—		386	—
Diluted earnings per share:
Net income attributable to common shareholders	$	10,656	42,198	$	0.25

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In March 2004, the Company issued 68,166 shares of common stock in full settlement of 375,000 warrants held by the Prudential Insurance Company of America (“Prudential”) in accordance with the cashless exercise provisions of its warrant agreement.  The Company had issued these warrants in 1999 and 2000 in connection with advisory services provided by Prudential to the Company.  The Company did not incur any expense under SFAS No.123 as a result of the exercise of these warrants.

6.Supplemental Cash Flow Information

During the nine-month periods ended September 30, 2004 and 2003, interest paid was $51.9 million and $50.7 million, respectively.

During the nine-month periods ended September 30, 2004 and 2003, the Company assumed $10.4 million and $39.2 million, respectively of existing debt in connection with the acquisition of properties.

During the nine-month period ended September 30, 2004, 7,814 exchangeable limited partnership units in a subsidiary of the Company were exchanged for 7,814 shares of common stock pursuant to the limited partnership agreement of that subsidiary.

Included in accrued expenses and other liabilities at September 30, 2004 and December 31, 2003 are accrued expenditures for real estate investments of $6.7 million and $5.7 million, respectively.

7.Real Estate Investments

A summary of real estate investments follows (in thousands of dollars):

	September 30, 2004			December 31, 2003
Land	$	353,010		$	345,618
Land improvements	192,124			187,799
Buildings and improvements	1,850,880			1,808,759
Tenant improvements	59,038			46,972
Improvements in process	18,452			10,825
	2,473,504			2,399,973
Accumulated depreciation and amortization	(298,800		)	(242,741		)
Net carrying value	$	2,174,704		$	2,157,232

Acquisitions

In July 2004, the Company acquired 433,000 square feet of a 505,000 square foot grocer-anchored community shopping center located in Harrisburg, Pennsylvania known as Colonial Commons.  The Company also acquired leasehold interests in an additional approximately 53,000 square feet.  The acquisition price for Colonial Commons was $63.1 million and was funded through borrowings under the Company’s line of credit.

In April 2004, the Company acquired a 118,000 square foot grocer-anchored community shopping center located in Mundelein, Illinois (a northern Chicago suburb) known as Long Meadow Commons.  The acquisition price for Long Meadow Commons was $18.5 million and was funded through the assumption of $10.4 million of debt and borrowings under the Company’s line of credit.

In January 2003, the Company acquired 181,000 square feet of a 442,000 square foot community shopping center located in Christiansburg, VA known as Spradlin Farm.  The acquisition price for Spradlin Farm was $23.7 million and was funded with the assumption of $18.5 million of debt and borrowings under the Company’s line of credit.

In April 2003, the Company acquired a 131,000 square foot grocer-anchored community shopping center located in Carmel, Indiana known as Meridian Village Plaza.  The acquisition price for Meridian Village Plaza was $13.6 million and was funded with the assumption of $6.0 million of debt and borrowings under the Company’s line of credit.

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In June 2003, the Company acquired 214,000 of a 222,000 square foot grocer-anchored community shopping center located near St. Louis, Missouri known as Clocktower Place.  The acquisition price for Clocktower Place was $24.2 million and was funded with the assumption of $14.7 million of debt and borrowings under the Company’s line of credit.

Dispositions

In April 2004, the Company completed the disposition of the Fortune office building located in Hartsdale, New York, for $7.7 million, resulting in a net gain of $3.0 million.  The results of operations of the Fortune office building have been reclassified as discontinued operations for the three and nine-month periods ended September 30, 2004 and 2003.

In September 2003, the Company completed the disposition of River Ridge Marketplace, a 214,000 square foot community shopping center located in Asheville, North Carolina.  The sale price was $13.2 million resulting in a gain of $1.8 million.  The proceeds from the sale were used to partially pay down the Company’s line of credit.  The results of operations of the property have been reclassified as discontinued operations for the three and nine-month periods ended September 30, 2003.

During the first quarter of 2003, the Company completed the disposition of its ten remaining single-tenant properties classified as held for sale at December 31, 2002.  The Company received proceeds of $2.4 million, resulting in a net gain on sale of $0.8 million.  The results of operations for these properties are classified as discontinued operations for the three and nine-month periods ended September 30, 2003.

Real estate assets held for sale

In June 2004, the Company entered into a purchase and sale agreement for the sale of Camelot Shopping Center, a 151,000 square foot shopping center located in Louisville, Kentucky for a purchase price of $7.4 million.  The sale was completed on October 1, 2004 and resulted in a gain of $0.4 million.  The Camelot Shopping Center has been classified as held for sale on the accompanying consolidated balance sheet as of September 30, 2004. The results of operations, consisting of $0.3 million and $0.2 million for nine-month periods ended September 30, 2004 and 2003, respectively, and $0.1 million for each of the three-month periods ended September 30, 2004 and 2003, have been classified as discontinued operations in the accompanying statement of operations.

8.Investment in Joint Venture

In May 2004, the Company acquired a 50% interest in a joint venture for the development and construction of a 302,000 square foot shopping center, of which the joint venture will own 210,000 square feet, to be located in a suburb of Grand Rapids, Michigan.  The Company made an initial equity investment of $3.3 million, which is being accounted for under the equity method of accounting and provided a short-term bridge loan of approximately $9.2 million, which had an original maturity date of August 20, 2004 and was subsequently extended for 90 days. The operations of the joint venture, consisting of incidental activity related to operating restaurants located on out parcels, are being reported on a 90-day lag basis.  Accordingly, the operations for the period from May 17, 2004 (acquisition date) through June 30, 2004 are included in the accompanying consolidated statement of operations and are classified as Interest and Other.  The bridge loan receivable is classified as other assets in the accompanying consolidated balance sheet and the interest earned on the loan, to the extent attributable to the outside interest in the joint venture, is recorded as Interest and Other.

9.Debt

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.  The Company’s two operating partnerships are the borrowers under this line of credit, and the Company and certain of the Company’s other subsidiaries have guaranteed this line of credit.  This line of credit is being used principally to fund growth opportunities and for working capital purposes.  At September 30, 2004 and December 31, 2003, $213.0 million and $243.0 million was outstanding under this line of credit, respectively.

This line of credit bears interest at either the lender’s base rate or 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 September 30, 2004 and December 31, 2003, including the lender’s margin of 105 basis points and borrowings outstanding at the base rate, was 2.76% and 2.78%, respectively.  In addition, this line of credit has a facility fee based on the amount committed ranging from 15 to 25 basis points, depending upon the Company’s debt rating, and requires quarterly payments.

This line of credit requires the Company to maintain specific financial ratios and restricts the incurrence of indebtedness and the making of investments.  This 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, as defined.  The Company is in compliance with all applicable covenants as of September 30, 2004.

Heritage Notes

On April 1, 2004, the Company completed the issuance and sale of $200 million principal amount of unsecured 5.125% notes due April 15, 2014.  These notes were issued pursuant to the terms of an indenture the Company entered into with LaSalle National Bank, as trustee.  The notes are shown net of an original issue discount of $1.7 million that is being accreted on a basis that approximates the effective interest method over the term of the notes.  The notes may be redeemed at any time at the option of the Company, in whole or in part, at a redemption price equal to the sum of (1) the principal amount of the notes being redeemed plus accrued interest on the notes to the redemption date and (2) a make-whole amount, if any, with respect to the notes that is designed to provide yield maintenance protection to the holders of these notes.

In addition, the notes have been guaranteed by the Company’s two operating partnerships.  The indenture contains various covenants, including covenants which restrict the amount of indebtedness that may be incurred by the Company and its subsidiaries.  The Company is in compliance with all applicable covenants as of September 30, 2004.

Bradley Notes

Prior to the Company’s acquisition of Bradley Real Estate, Inc. (“Bradley”), Bradley Operating Limited Partnership (“Bradley OP”) completed the sale of three series of senior, unsecured debt securities. These debt securities were issued pursuant to the terms of an indenture and three supplemental indentures entered into by Bradley OP with LaSalle National Bank, as trustee, beginning in 1997. The indenture and three supplemental indentures contain various covenants, including covenants which restrict the amount of indebtedness that may be incurred by Bradley OP and those of our subsidiaries which are owned directly or indirectly by Bradley OP. Bradley OP is in compliance with all applicable covenants as of September 30, 2004.

10.Related Party Transactions

Common distributions paid to The New England Teamsters and Trucking Pension Fund (“NETT”), the Company’s largest shareholder, for the nine months ended September 30, 2004 and 2003 were $30.8 million and $28.4 million, respectively.  At September 30, 2004 and December 31, 2003, distributions payable to NETT were $10.3 million.

In November 1999, the Company entered into a joint venture with NETT for the acquisition and development of a 365,000 square foot commercial office building at 131 Dartmouth Street, Boston, Massachusetts.  This joint venture is owned 94% by NETT and 6% by the Company.  The Company was issued this interest as part of a management arrangement with the joint venture pursuant to which the Company manages the building.  The Company has no ongoing capital contribution requirements with respect to this office building, which was completed in 2003.  The Company accounts for its interest in this joint venture using the cost method and has not expended any amounts on the office building through September 30, 2004.

In February 2004, the Company entered into an eleven-year lease with this joint venture for the lease of approximately 31,000 square feet of space and moved its corporate headquarters to this space during the first quarter of 2004.  Under the terms of this lease, which were negotiated on an arms-length basis, we begin paying rent to the joint venture in February 2005.

In connection with the formation of the Company, environmental studies were not completed for all of the contributed properties.  NETT has agreed to indemnify the Company for environmental costs up to $50 million.  The environmental costs include completing environmental studies and any required remediation.  Since its formation in July 1999, the Company has been reimbursed by NETT for approximately $2.1 million of environmental costs pursuant to this indemnity.

11

11.Minority Interest

On September 7, 2004, the Company redeemed all 1,000,000 outstanding 8.875% Series C Cumulative Redeemable Perpetual Preferred Units of Bradley OP, at a redemption price of $25.00 per unit, plus approximately $0.413 of accrued and unpaid distributions.  There were no unamortized issuance costs associated with the Series C Preferred Units, therefore, the Company did not incur a charge in connection with this redemption.

On February 23, 2004, the Company redeemed all 2,000,000 outstanding 8.875% Series B Cumulative Redeemable Perpetual Preferred Units of Bradley OP, at a redemption price of $25.00 per unit, plus approximately $0.3266 of accrued and unpaid distributions.  There were no unamortized issuance costs associated with the Series B Preferred Units, therefore, the Company did not incur a charge in connection with this redemption.

12.Derivatives and Hedging Instruments

Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133), as amended and interpreted, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities.  As required by SFAS 133, the Company records all derivatives on the balance sheet at fair value.  The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and the resulting designation. Derivatives used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges.

Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. The Company’s objective in using derivatives is to add stability to interest expense and to manage its exposure to interest rate movements or other identified risks.  To accomplish this objective, the Company primarily uses interest rate swaps as part of its cash flow hedging strategy.  Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts in exchange for fixed-rate payments over the life of the agreements without exchange of the underlying principal amount.  To date, such derivatives were used to hedge the variable cash flows associated with floating rate debt and forecasted interest payments on forecasted issuances of debt.

For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income and subsequently reclassified to earnings when the hedged transactions affect earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings.  As of September 30, 2004, no derivatives were designated as fair value hedges or hedges of net investments in foreign operations. Additionally, the Company does not use derivatives for trading or speculative purposes and currently does not have any derivatives that are not designated as hedges.

During the three and nine month periods ended September 30, 2004, the Company entered into forward-starting interest rate swaps to mitigate the risk of changes in forecasted interest payments on forecasted issuances of long-term debt. During the third quarter, the Company used such derivatives to hedge variability in future cash flows related to $146.6 million of forecasted debt issuances.  The fair value of such derivatives was ($1.4 million) at September 30, 2004.  The Company issued the forecasted debt on October 15, 2004 and terminated the related forward starting interest rate swaps at their then current fair value of ($1.7 million).  This amount will continue to be deferred in other comprehensive loss and will be reclassified as an increase of interest expense as the forecasted interest payments affect earnings.

During the first quarter, the Company used forward-starting interest rate swaps to hedge the variability in future cash flows related to $192.4 million of forecasted debt issuances.  The Company issued the forecasted debt on April 1, 2004 and terminated the related forward starting interest rate swaps at their then current fair value of $1.2 million.  This amount has been deferred in other comprehensive loss and will be reclassified as a reduction of interest expense as the forecasted interest payments affects earnings.

For the three-month period ended September 30, 2004, the change in net unrealized losses for derivatives designated as cash flow hedges was $1.4 million and is separately disclosed in the statement of comprehensive income.  This change is comprised of decreases in the fair value of cash flow hedges of $1.4 million and reclassification adjustments of $.03 million.

For the nine-month period ended September 30, 2004, the change in net unrealized losses for derivatives designated as cash flow hedges was $0.3 million and is separately disclosed in the statement of changes in shareholders’ equity and other comprehensive loss.  This change is comprised of a realized gain of $1.2 million in the fair value of the swaps entered into in March 2004 offset by a $1.4 million unrealized loss in the fair value of the swaps entered into in August 2004 and reclassification adjustments of $0.1 million.

No hedge ineffectiveness on cash flow hedges was recognized during 2004.  Amounts reported in other comprehensive loss

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related to these swaps will be reclassified to interest expense as scheduled interest payments are made on the Company’s notes issued in the Company’s debt offerings. As previously discussed, the Company terminated forward starting swaps hedging $146.6 million of debt issuances on October 15, 2004 at a fair value of ($1.7 million).  Including the impact of the terminated forward starting swaps, the Company estimated that $0.2 million would be reclassified from other comprehensive loss as an increase of interest expense during the next 12 months.

13.Segment Reporting

The Company predominantly operates in one industry segment – real estate ownership and management of retail properties. As of September 30, 2004, the Company owned 164 community and neighborhood shopping centers.  Management reviews operating and financial data for each property separately and independently from all other properties when making resource allocation decisions and measuring performance.  The Company defines operating segments as individual properties with no segment representing more than 10% or more of rental revenue.

14.Guarantor of Notes Payable

On April 1, 2004, the Company issued $200,000,000 aggregate principal amount of its 5.125% Notes due 2014 (the “Prior Notes”) to certain initial purchasers, who then sold those notes to qualified institutional buyers in reliance on Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”). The Prior Notes were guaranteed (the “Prior Guarantees”) by the Company’s two operating partnerships, Heritage Property Investment Limited Partnership and Bradley Operating Limited Partnership (the “Guarantors”). Each of the Prior Guarantees was full and unconditional and joint and several.

Because they were sold pursuant to exemptions from registration under the Securities Act, the Prior Notes and Prior Guarantees were subject to transfer restrictions. In connection with the issuance of the Prior Notes and Prior Guarantees, the Company and the Guarantors entered into a registration rights agreement with the initial purchasers in which the Company and the Guarantors agreed to register with the Securities and Exchange Commission (“SEC”) under the Securities Act new notes (“Registered Notes”) and new guarantees (“Registered Guarantees”) to be exchanged for the Existing Notes and Existing Guarantees. Each of the Registered Guarantees is full and unconditional and joint and several.

The Company and the Guarantors filed a Registration Statement on Form S-4 with the SEC for the purpose of registering the Registered Notes and Registered Guarantees under the Securities Act. Following the effectiveness of this Registration Statement, the Registered Notes and Registered Guarantees were exchanged for the Prior Notes and Prior Guarantees.  Rule 3-10(a) of Regulation S-X requires the Company to file separate financial statements for guarantors of registered securities. In lieu of providing such separate financial statements with respect to wholly owned guarantors, Rule 3-10(f) of Regulation S-X requires the Company to include a footnote with respect to its guarantor and non-guarantor subsidiaries in its financial statements.

As a result of the foregoing, this footnote is being provided pursuant to Rule 3-10(f) of Regulation S-X in lieu of providing separate annual financial statements with respect to Heritage Property Investment Limited Partnership, a wholly owned Guarantor. Financial statements with respect to Bradley Operating Limited Partnership, a non-wholly owned Guarantor, will be separately filed with the SEC.

The following represents summarized condensed consolidating financial information as of September 30, 2004 and December 31, 2003 with respect to the financial position of the Company and for the three and nine-month periods ended September 30, 2004 and 2003 with respect to the results of operations and cash flows of the Company and its subsidiaries. The Parent Company column presents the financial information of the Company, the primary obligor of the Registered Notes, under the equity method of accounting. The Guarantors’ columns are segregated between Bradley Operating Limited Partnership, which is 99% owned by the Company, and Heritage Property Investment Limited Partnership, a wholly-owned subsidiary of the Company. The Non-Guarantor Subsidiaries column presents the financial information of all non-guarantor subsidiaries, which consists primarily of subsidiaries of the Guarantors.

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Condensed Consolidating Balance Sheets

			Guarantors
September 30, 2004 (In thousands)	Parent Company		Bradley Operating LP		Heritage Property Investment LP		Non- Guarantor Subsidiaries		Eliminations			Consolidated
Assets
Real estate investments, net	$	—	$	1,015,337	$	290,374	$	868,993	$	—		$	2,174,704
Other assets	229,345		100,478		10,067		60,446		(278,195		)	122,141
Investment in guarantor & non-guarantor subsidiaries	924,929		158,366		326,832		—		(1,410,127		)	—
Total assets	$	1,154,274	$	1,274,181	$	627,273	$	929,439	$	(1,688,322	)	$	2,296,845
Liabilities & Shareholders’ Equity/Partners’ Capital
Liabilities:
Indebtedness	198,364		656,680		217,876		416,811		(250,941		)	1,238,790
Other Liabilities	27,372		59,750		34,274		25,005		(27,182		)	119,219
Total liabilities	225,736		716,430		252,150		441,816		(278,123		)	1,358,009
Minority Interests	—		9,698		—		2,425		(2,541		)	9,582
Shareholders’ equity / partners’ capital	928,538		548,053		375,123		485,198		(1,407,658		)	929,254
Total liabilities and partners’ capital	$	1,154,274	$	1,274,181	$	627,273	$	929,439	$	(1,688,322	)	$	2,296,845

			Guarantors
December 31, 2003	Parent Company		Bradley Operating LP		Heritage Property Investment LP		Non-Guarantor Subsidiaries		Eliminations			Consolidated
	(In thousands)
Assets
Real estate investments, net	$	—	$	1,026,975	$	299,794	$	830,463	$	—		$	2,157,232
Other assets	24,259		22,483		8,269		39,591		(24,259		)	70,343
Investment in subsidiaries	958,472		150,421		267,683		—		(1,376,576		)	—
Total assets	$	982,731	$	1,199,879	$	575,746	$	870,054	$	(1,400,835	)	$	2,227,575
Liabilities and Shareholders’ Equity/Partners’ Capital
Liabilities:
Indebtedness	—		480,842		170,075		426,538		—			1,077,455
Other liabilities	24,259		51,698		31,868		22,987		(24,259		)	106,553
Total liabilities	24,259		532,540		201,943		449,525		(24,259		)	1,184,008
Minority interests/redeemable equity	—		84,681		—		2,425		(2,011		)	85,095
Shareholders’ equity/partners’ capital	958,472		582,658		373,803		418,104		(1,374,565		)	958,472
Total liabilities and shareholders’ equity/partners’ capital	$	982,731	$	1,199,879	$	575,746	$	870,054	$	(1,400,835	)	$	2,227,575

14

Condensed Statements of Operations

				Guarantors
Three months ended September 30, 2004 (In thousands)	Parent Company			Bradley Operating LP			Heritage Property Investment LP			Non- Guarantor Subsidiaries		Eliminations			Consolidated
Revenue:
Rentals and recoveries	$	—		$	38,131		$	11,528		$	32,608	$	—		$	82,267
Interest and other	2,619			194			90			10		(2,619		)	294
Total revenue	2,619			38,325			11,618			32,618		(2,619		)	82,561
Expenses:
Operating expenses	—			11,728			2,817			8,956		—			23,501
Depreciation and amortization	—			10,268			3,086			9,105		—			22,459
Interest	2,688			8,882			3,382			7,792		(2,619		)	20,125
Interest-related party
General and administrative	—			3,381			1,733			930		—			6,044
Total expenses	2,688			34,259			11,018			26,783		(2,619		)	72,129
Income (loss) before net gains	(69		)	4,066			600			5,835		—			10,432
Gain on sale of marketable securities	—			—			245			284		—			529
Gain on sale of real estate investment	—			25			—			—		—			25
Income before allocation to minority interests	(69		)	4,091			845			6,119		—			10,986
Income allocated to exchangeable partnership units	(48		)	—			—			—		—			(48		)
Income allocated to Series B & C preferred units				(413		)	—			—		—			(413		)
Subsidiary earnings	13,301			2,605			3,514			—		(19,420		)	—
Income before discontinued operations	13,184			6,283			4,359			6,119		(19,420		)	10,525
Discontinued operations:
Operating income from discontinued operations	—			131			(13		)	—		—			118
Income from discontinued operations	—			131			(13		)	—		—			118
Net income	$	13,184		$	6,414		$	4,346		$	6,119	$	(19,420	)	$	10,643

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				Guarantors
Three months ended September 30, 2003 (In thousands)	Parent Company			Bradley Operating LP			Heritage Property Investment LP		Non- Guarantor Subsidiaries		Eliminations			Consolidated
Revenue:
Rentals and recoveries	$	—		$	38,129		$	10,985	$	24,890	$	(218	)	$	73,786
Interest and other	—			7			13		11		—			31
Total revenue	—			38,136			10,998		24,901		(218		)	73,817
Expenses:
Operating expenses	—			12,803			2,780		6,561		—			22,144
Depreciation and amortization	—			9,816			3,129		6,540		—			19,485
Interest	—			6,413			3,448		7,442		—			17,303
General and administrative	218			2,754			1,314		772		(218		)	4,840
Total expenses	218			31,786			10,671		21,315		(218		)	63,772
Income (loss) before allocation to minority interests	(218		)	6,350			327		3,586		—			10,045
Income allocated to exchangeable partnership units	(82		)	—			—		—		—			(82		)
Income allocated to Series B & C preferred units	—			(1,664		)	—		—		—			(1,664		)
Subsidiary earnings	13,022			2,375			1,211		—		(16,608		)	—
Income before discontinued operations	12,722			7,061			1,538		3,586		(16,608		)	8,299
Discontinued operations:
Operating income from discontinued operations	—			72			411		—		—			483
Gain on sale of discontinued operations	—						1,874		—		—			1,874
Income from discontinued operations	—			72			2,285		—		—			2,357
Net income	$	12,722		$	7,133		$	3,823	$	3,586	$	(16,608	)	$	10,656

16

				Guarantors
Nine months ended September 30, 2004 (In thousands)	Parent Company			Bradley Operating LP			Heritage Property Investment LP		Non- Guarantor Subsidiaries		Eliminations			Consolidated
Revenue:
Rentals and recoveries	$	—		$	113,898		$	33,911	$	94,592	$	(100	)	$	242,301
Interest and other	5,210			203			338		24		(5,210		)	565
Total revenue	5,210			114,101			34,249		94,616		(5,310		)	242,866
Expenses:
Operating expenses	—			36,867			7,853		26,196		—			70,916
Depreciation and amortization	—			30,582			9,521		25,562		—			65,665
Interest	5,347			23,353			10,178		23,487		(5,210		)	57,155
General and administrative	100			9,935			4,396		2,660		(100		)	16,991
Total expenses	5,447			100,737			31,948		77,905		(5,310		)	210,727
Income (loss) before net gains	(237		)	13,364			2,301		16,711		—			32,139
Gain on sale of marketable securities	—			—			245		284		—			529
Gain on sale of real estate investment	—			25			—		—		—			25
Income before allocation to minority interests	(237		)	13,389			2,546		16,995		—			32,693
Income allocated to exchangeable partnership units	(191		)	—			—		—		—			(191		)
Income allocated to Series B & C preferred units	—			(2,176		)	—		—		—			(2,176		)
Subsidiary earnings	38,458			7,646			9,349		—		(55,453		)	—
Income before discontinued operations	38,030			18,859			11,895		16,995		(55,453		)	30,326
Discontinued operations:
Operating income from discontinued operations	—			294			128		—		—			422
Gain on sale of discontinued operations	—			—			2,988		—		—			2,988
Income from discontinued operations	—			294			3,116		—		—			3,410
Net income	$	38,030		$	19,153		$	15,011	$	16,995	$	(55,453	)	$	33,736

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				Guarantors
Nine months ended September 30, 2003 (In thousands)	Parent Company			Bradley Operating LP			Heritage Property Investment LP		Non- Guarantor Subsidiaries		Eliminations			Consolidated
Revenue:
Rentals and recoveries	$	—		$	113,711		$	32,622	$	74,509	$	(649	)	$	220,193
Interest and other	—			23			168		265		—			456
Total revenue	—			113,734			32,790		74,774		(649		)	220,649
Expenses:
Operating expenses	—			36,232			7,835		20,071		—			64,138
Depreciation and amortization	—			29,054			9,210		19,318		—			57,582
Interest	—			19,335			10,322		21,688		—			51,345
General and administrative	649			9,220			4,378		2,555		(649		)	16,153
Total expenses	649			93,841			31,745		63,632		(649		)	189,218
Income before allocation to minority interests	(649		)	19,893			1,045		11,142		—			31,431
Income allocated to exchangeable partnership units	(170		)	—			—		—		—			(170		)
Income allocated to Series B & C preferred units	—			(4,992		)	—		—		—			(4,992		)
Subsidiary earnings	34,799			7,425			3,717		—		(45,941		)	—
Income before discontinued operations	33,980			22,326			4,762		11,142		(45,941		)	26,269
Discontinued operations:
Operating income from discontinued operations	—			208			1,397		—		—			1,605
Gain on sale of discontinued operations	—			—			2,683		—		—			2,683
Income from discontinued operations	—			208			4,080		—		—			4,288
Net income	$	33,980		$	22,534		$	8,842	$	11,142	$	(45,941	)	$	30,557

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Condensed Statements of Cash Flows

				Guarantors
Nine months ended September 30, 2004 (In thousands)	Parent Company			Bradley Operating LP			Heritage Property Investment LP			Non- Guarantor Subsidiaries			Eliminations			Consolidated
Cash flows from operating activities	$	69,991		$	42,279		$	20,562		$	55,599		$	(106,693	)	$	81,738
Cash flows from investing activities	—			(26,063		)	1,856			(63,259		)	—			(87,466		)
Cash flows from financing activities	(69,991		)	(16,003		)	(23,433		)	8,851			106,693			6,117
Change in cash and cash equivalents	—			213			(1,015		)	1,191			—			389
Beginning of period	—			1,292			1,139			3,033			—			5,464
End of period	$	—		$	1,505		$	124		$	4,224		$	—		$	5,853

				Guarantors
Nine months ended September 30, 2003 (In thousands)	Parent Company			Bradley Operating LP			Heritage Property Investment LP			Non- Guarantor Subsidiaries			Eliminations			Consolidated
Cash flows from operating activities	$	59,825		$	56,961		$	19,384		$	52,728		$	(96,126	)	$	92,772
Cash flows from investing activities	—			(12,222		)	5,394			(19,153		)	—			(25,981		)
Cash flows from financing activities	(59,825		)	(34,562		)	(15,769		)	(33,085		)	96,126			(47,115		)
Change in cash and cash equivalents	—			10,177			9,009			490			—			19,676
Beginning of period	—			341			(700		)	1,826			—			1,467
End of period	$	—		$	10,518		$	8,309		$	2,316		$	—		$	21,143

15.Subsequent Event

Issuance of New Debt Securities

On October 15, 2004, the Company completed the issuance and sale of $150 million principal amount of 4.50% notes due 2009.  These notes were issued pursuant to the terms of an indenture the Company entered into with LaSalle National Bank, as trustee.  These notes may be redeemed at any time at our option, in whole or in part, at a redemption price equal to the sum of (1) the principal amount of the notes being redeemed plus accrued interest on the notes to the redemption date and (2) a make-whole amount, if any, with respect to the notes that is designed to provide yield maintenance protection to the holders of these notes.  In addition, these notes have been guaranteed by the Company’s two operating partnerships.  The indenture contains various covenants, including covenants that restrict the amount of indebtedness that may be incurred by the Company and its subsidiaries.

In August 2004, in anticipation of completing an unsecured debt financing, the Company entered into forward starting interest rate swaps with a total notional amount of $146.6 million.  The purpose of these forward swaps was to mitigate the risk of changes in interest rates prior to the pricing of our debt offering.  These forward swaps terminated upon pricing of the debt offering and the Company made a payment to the counterparties of $1.7 million in connection with the termination of these swaps.

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ITEM 2:Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the historical consolidated financial statements and related notes thereto. Some of the statements contained in this discussion 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 the Company’s current views about future events and are subject to risks, uncertainties, assumptions and changes in circumstances that may cause the Company’s 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 that 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 the Company’s shopping centers, including the Company’s tenants, real estate conditions, current and future bankruptcies of the Company’s tenants, execution of shopping center redevelopment programs, the Company’s ability to finance the Company’s operations, successful completion of renovations, completion of pending acquisitions, the availability of additional acquisitions, execution of joint venture opportunities, 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.  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 real estate investment trust, or “REIT.”  We are one of the nation’s largest owners of neighborhood and community shopping centers.  As of September 30, 2004, we had a shopping center portfolio consisting of 164 shopping centers, located in 29 states and totaling approximately 33.2 million square feet of GLA, of which approximately 27.9 million square feet was Company-owned GLA. Our shopping center portfolio was approximately 92.1% leased as of September 30, 2004.

Our operating strategy is to own and manage a quality portfolio of community and neighborhood shopping centers that will provide stable cash flow and investment returns.  Our focus is to own grocer-anchored centers with a diverse and multi-anchored tenant base in attractive geographic locations with strong demographics.  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 primarily on the ability of our tenants to make required rental payments.

Generally, we do not expect that our net operating income will deviate significantly in the short-term.  This is because our leases with our tenants provide us a stable cash flow over the long-term.  In addition, other than in circumstances such as higher than anticipated snow removal costs, utility expenses or real estate taxes, our operating expenses generally remain predictable.

However, as an owner of community and neighborhood shopping centers, our performance is linked to economic conditions in the retail industry in those markets in which our centers are located.  The retail sector continues to change dramatically as a result of continued industry consolidation due to the continuing strength of Wal-Mart and large retail bankruptcies resulting in an excess amount of available retail space and greater competition.  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 stability is due to the fact that consumers still need to purchase food and other goods found at grocers, even in difficult economic times.

In the face of these challenging market conditions, we follow a dual growth strategy.  First, we continue to focus on increasing our internal growth by leveraging our existing tenant relationships to improve the performance of our existing shopping center portfolio.  We believe that there are meaningful opportunities to increase our cash flow from our existing properties because of their desirable locations.  For instance, during 2002, 2003, and the first quarter of 2004, we were adversely affected by large retail bankruptcies that created vacant space within our portfolio and by the increasingly competitive leasing environment resulting from the economic downturn during the early part of this decade.  However, as a result of our efforts to re-let space, including space recovered from bankrupt tenants, as well as the improvement in the overall performance of our portfolio and improving economic conditions within our markets, we experienced an increase of approximately 1.6% in our same property net operating income during the first nine months of 2004 (after deducting lease termination activity).  We anticipate our same property operating performance during the remainder of 2004 and into 2005 will be consistent with our performance during the first nine months of 2004.

During the first nine months of 2004, in order to re-let vacant space within our portfolio, we incurred higher non-recurring capital expenditures than in prior periods as we re-positioned several of our centers for future growth.  In addition, we anticipate incurring additional non-recurring capital expenditures during the remainder of 2004 and into 2005 as we seek further

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opportunities to reposition vacant space.

Secondly, we focus on achieving external growth by the expansion of our portfolio and we will continue to pursue targeted acquisitions of primarily grocer-anchored neighborhood and community shopping centers in attractive markets with strong economic and demographic characteristics.  We will pursue acquisitions in our existing markets as well as in new markets where a portfolio of properties might be available to enable us to establish a platform for further growth.  In recent years, the market for acquisitions has been particularly competitive with a greater number of potential buyers pursuing fewer properties.  The low interest rate environment and reduced costs of funds have further served to dramatically increase prices paid for shopping center properties.  As a result, during 2004, our effort to expand our portfolio through acquisition has been adversely affected.  We expect that as long as the interest rate environment continues to be favorable to buyers, this competitive acquisition environment will continue.

As a means of increasing our access to potential acquisitions and alternative sources of capital to fund future acquisitions, we are pursuing joint venture arrangements with third party developers and institutional investors.  We completed our first joint venture arrangement with a third party developer during the second quarter of 2004.  However, with respect to joint venture arrangements with third party developers, in most cases, we do not anticipate that it will recognize the full economic benefit of such arrangements for 2-3 years.

In the near future, to take advantage of favorable market conditions, we intend to dispose of properties that are not a strategic fit within our overall portfolio.  The disposition of shopping center properties may lead to short-term decreases in net operating income.  However, we intend to offset any such decreases by re-investing the proceeds of such sales to grow our existing portfolio, whether through acquisition or joint venture.  We may also use these sale proceeds to reduce our outstanding indebtedness, improving the quality of our balance sheet.

During 2004, as reflected below, our general and administrative expenses have been higher than anticipated as a result of various business initiatives aimed at future growth, the increased costs associated with being a public company and unanticipated severance costs.  In particular, the costs associated with the Company’s review of its internal controls to ensure compliance with Section 404 of the Sarbanes-Oxley Act have been significantly higher than expected.  We expect these increased non-severance general and administrative costs to continue during the balance of 2004.

We currently expect to incur additional debt in connection with future acquisitions of real estate.  As of September 30, 2004, we had $1.2 billion of indebtedness, of which, approximately $612.9 million was unsecured indebtedness.  Although we expect to assume additional secured debt in connection with the acquisition of real estate, in the future, we intend to finance our operations and growth primarily through borrowings under our line of credit facility, unsecured private or public debt offerings or by additional equity offerings. We may also pursue joint venture arrangements aimed at providing alternative sources of capital.

Critical Accounting Policies

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 GAAP requires us to make judgments and estimates that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities.

On an ongoing basis, we evaluate our estimates, including 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 and credit 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. Actual results could differ from those estimates and those estimates could be different under varying assumptions or conditions.

Revenue Recognition

Rental income with scheduled rent increases is recognized using the straight-line method over the term of the leases. The aggregate excess of rental revenue recognized on a straight-line basis over cash received under applicable lease provisions is included in accounts receivable. 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 the Company is certain those specified targets are met.

We must make estimates of the uncollectibility of our accounts receivable related to minimum rent, deferred rent, expense

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reimbursements and other revenue or 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 revenue and income, because a higher bad debt allowance would result in lower net revenue and income.

Real Estate Investments

At our formation in July 1999, contributed real estate investments 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	Shorter of useful life or 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. No such impairment losses have been recognized to date.

Real estate investments held for sale are carried at the lower of carrying amount or fair value, less cost to sell. In addition, the operations of the real estate investments are reflected as discontinued operations on a restated basis.  Depreciation and amortization are suspended during the period held for sale.

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 recording an impairment loss results in an immediate negative adjustment to net income.

We apply Statement of Financial Accounting Standards No. 141, Business Combinations, to property acquisitions. Accordingly, the fair value of the real estate acquired is allocated to the acquired tangible assets, identified intangible assets and liabilities.  Identified intangibles consist of the value of above-market and below-market leases, other value of in-place leases and value of tenant relationships, if any, and are based in each case on their fair values.

The fair value of the tangible assets of an acquired property is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated based on management’s determination of the relative fair values of these assets. Management determines the as-if-vacant fair value of a property using methods similar to those used by independent appraisers. Factors considered by management in performing these analyses include an estimate of carrying costs during the expected lease-up periods considering current market conditions and costs to execute similar leases. In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses and estimates of lost rental revenue during the expected lease-up periods based on current market demand. Management also estimates costs to execute similar leases including leasing commissions, legal and other related costs.

In allocating the fair value of the identified intangible assets and liabilities of an acquired property, above-market and below-market in-place lease values are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to

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the remaining non-cancelable term of the lease. The capitalized above-market lease values are amortized as a reduction of rental income over the remaining non-cancelable terms of the respective leases. The capitalized below-market lease values are amortized as an increase to rental income over the initial term and any fixed rate renewal periods in the respective leases.

The aggregate value of other acquired intangible assets, consisting of in-place leases and tenant relationships, is measured by the excess of (i) the purchase price paid for a property after adjusting existing in-place leases to market rental rates over (ii) the estimated fair value of the property as if vacant, determined as set forth above. This aggregate value is allocated between in-place lease values and tenant relationships, if any, based on management’s evaluation of the specific characteristics of each tenant’s lease.  To date, no value attributable to tenant relationships has been identified. Should future acquisitions of properties result in allocating material amounts to the value of tenant relationships, an amount would be separately allocated and amortized over the estimated life of the relationship. The value of in-place leases exclusive of the value of above-market and below-market in-place leases is amortized to expense over the average remaining non-cancelable periods of the respective leases. If leases were to be terminated or otherwise modified prior to their stated expiration, all, or a portion of, unamortized amounts relating to the leases would be written off.

Investment in Joint Venture

Except for ownership interests in a variable interest entity, we account for our investments in joint ventures under the equity method of accounting as we exercise significant influence, but do not control these entities.  These investments are recorded initially at cost, as Investments in Joint Ventures, and subsequently adjusted for equity in earnings and cash contributions and distributions.  Under the equity method of accounting, our net equity is reflected on the consolidated balance sheets, and our share of net income or loss, if material, from the joint ventures is included on the consolidated statements of operations.  The joint venture agreements may designate different percentage allocations among investors for profits and losses, however, our recognition of joint venture income or loss generally follows the joint venture’s distribution priorities, which may change upon the achievement of certain investment return thresholds.

Hedging Activities

From time to time, we use derivative financial instruments to limit our exposure to changes in interest rates. The Company’s objective in using derivatives is to add stability to interest expense and to manage its exposure to interest rate movements or other identified risks. To accomplish this objective, the Company primarily uses interest rate swaps as part of its cash flow hedging strategy. Interest rate swaps designated as cash flow hedges typically involve the receipt of variable-rate amounts in exchange for fixed-rate payments over the life of the agreements without exchange of the underlying principal amount.  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 contracts with major financial institutions based on their credit rating and other factors.

For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (outside of earnings) and subsequently reclassified to earnings when the hedged transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings.

On March 8, 2004, we entered into forward-starting swaps for a notional amount of $192.4 million as a means to mitigate the risk of changes in forecasted interest payments on an anticipated issuance of long-term debt. The swaps were designated as cash flow hedges as we hedged its exposure to the variability in future cash flows for the anticipated transactions (i.e. future interest payments).

Upon pricing of our unsecured debt offering, on March 29, 2004, those derivatives were terminated. The cash received from the counterparties of $1.2 million for these swaps (designated as cash flow hedges) is included as other comprehensive loss in the accompanying consolidated balance sheet. No hedge ineffectiveness was recognized on these swaps. Amounts reported in other comprehensive loss related to these swaps will be reclassified to interest expense as scheduled interest payments are made on the our notes issued in the Company’s debt offering. For the 12-month period from October 1, 2004 to September 30, 2005, we estimate that $0.1 million will be reclassified ratably into earnings as a reduction of interest expense from these swaps.

On August 24, 2004, we entered into forward-starting swaps for a notional amount of $146.6 million as a means to mitigate the risk of changes in forecasted interest payments on an anticipated issuance of long-term debt. The swaps were designated as cash flow hedges as we hedged its exposure to the variability in future cash flows for the anticipated transactions (i.e. future interest payments).

As of September 30, 2004, the fair value of such derivatives was ($1.4 million) and is included as other comprehensive loss in the accompanying consolidated balance sheet.   Upon pricing of our second unsecured debt offering, on October 15, 2004,

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those derivatives were terminated. The cash paid to the counterparties of $1.7 million for these swaps (designated as cash flow hedges) will be reclassified ratably into earnings as an increase to interest expense as scheduled interest payments are made on the our notes issued in the Company’s second debt offering.  For the 12-month period from October 1, 2004 to September 30, 2005, we estimate that $0.2 million will be reclassified ratably into earnings as an increase to interest expense from these swaps.

Results of Operations

The following discussion is based on our consolidated financial statements for the three and nine-month periods ended September 30, 2004 and 2003.

The comparison of operating results for the three and nine-month periods ended September 30, 2004 and 2003 show changes in revenue and expenses resulting from net operating income for properties that we owned for each period compared (we refer to this comparison as our “Same Property Portfolio” for the applicable period) and the changes for income before net gains attributable to our Total Portfolio. Unless otherwise indicated, increases in revenue and expenses attributable to the Total Portfolio are due to the acquisition of properties during the periods being compared. In addition, amounts classified as discontinued operations in the accompanying consolidated financial statements related to properties that have been sold prior to September 30, 2004 are excluded from the Same Property Portfolio and Total Portfolio information.  Amounts classified as discontinued operations in the accompanying consolidated financial statements related to the classification of a property as held for sale are included in the Same Property Portfolio and are excluded from the Total Portfolio information.

Comparison of the nine-month period ended September 30, 2004 to the nine-month period ended September 30, 2003.

The table below shows selected operating information for our Total Portfolio and the 153 properties acquired prior to January 1, 2003 that remained in the Total Portfolio through September 30, 2004, which constitute the Same Property Portfolio for the nine-month periods ended September 30, 2004 and 2003 (in thousands):

	Same Property Portfolio									Total Portfolio
	2004		2003		Increase/ (Decrease)			% Change		2004		2003		Increase/ (Decrease)			% Change
Revenue:
Rentals	$	163,362	$	161,095	$	2,267		1.4	%	$	182,584	$	166,400	$	16,184		9.7	%
Percentage rent	3,217		3,400		(183		)	(5.4	)%	3,391		3,496		(105		)	(3.0	)%
Recoveries	49,150		47,887		1,263			2.6	%	55,232		49,036		6,196			12.6	%
Other property	1,065		1,258		(193		)	(15.3	)%	1,094		1,261		(167		)	(13.2	)%
Total revenue	216,794		213,640		3,154			1.5	%	242,301		220,193		22,108			10.0	%
Expenses:
Property operating expenses	30,251		31,330		(1,079		)	(3.4	)%	33,883		31,919		1,964			6.2	%
Real estate taxes	32,576		31,322		1,254			4.0	%	37,033		32,219		4,814			14.9	%
Net operating income	$	153,967	$	150,988	$	2,979		2.0	%	171,385		156,055		15,330			9.8	%
Add:
Interest and other income										565		456		109			23.9	%
Gain on sale of marketable securities										529		—		529			100.0	%
Gain on sale of real estate investment										25		—		25			100.0	%
Deduct:
Depreciation and amortization										65,665		57,582		8,083			14.0	%
Interest										57,155		51,345		5,810			11.3	%
General and administrative										16,991		16,153		838			5.2	%
Income before allocation to minority interests										$	32,693	$	31,431	$	1,262		4.0	%

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The increase in rental revenue, including termination fees, for our Same Property Portfolio is primarily the result of a decrease in the provision for allowance for doubtful accounts of $1.2 million, an increase in minimum rent of $1.0 million and an increase in lease termination fees of $0.1 million.  A lower provision was required for the nine-month period ended September 30, 2004 as compared with the nine-month period ended September 30, 2003 as a result of a decrease in large tenant bankruptcies and recoveries of amounts previously written off.  Minimum rent increased as a result of new leases and renewals of existing tenants at higher rental rates. Our occupancy on a same property basis remained flat at 91.9% as of September 30, 2004 and 2003.

Percentage rent revenue decreased for our Same Property Portfolio primarily due to lower sales volume for leases with significant percentage rent provisions and the uncertainty of realization that certain tenant sales thresholds have been met.

Recoveries revenue increased for our Same Property Portfolio primarily due to an overall increase in real estate tax recovery income of $1.9 million offset by a decrease in property operating expense recovery income of $1.0 million.  Real estate recovery income increased primarily as a result of an increase in real estate tax expense as well as an increase in the real estate tax expense recovery rates due to true-ups related to the annual reconciliation process.  Property operating expense recovery income decreased primarily as a result of a decrease in property operating expenses and lower recovery rates.  The lower recovery rates were due to lower occupancies and lower anchor tenant recoveries.

Property operating expenses decreased primarily as a result of a $0.5 million lease buy-out expense recorded in the prior year, a $0.3 million decrease in snow removal expense, a $0.3 million decrease in insurance expense, and a $0.2 million decrease in cleaning expense.  These decreases were partially offset by a $0.2 million increase in utility expense and a $0.1 million increase in maintenance and supervision.

Real estate tax expense increased primarily as a result of increased valuations assessed for certain properties primarily located in the Mid-West.

The increase in interest and other income in the Total Portfolio is primarily due to an increase in third party management, interest income on a bridge loan provided to our joint venture, and other joint venture income.

The gain on sale of marketable securities of $0.5 million relates to the sale of shares of Kmart stock received during the nine-month period ended September 30, 2004.  The Company classified these shares as available for sale securities and recorded the appreciation in value of these shares from the date received through the date of sale as other comprehensive income.  Upon the sale of these securities for $1.1 million, the unrealized holding gain of $0.5 million was reclassified to realized gain during the three and nine month periods ended September 30, 2004.

Interest expense increased primarily as a result of an increase in indebtedness resulting from property acquisitions in 2003 and the nine-month period ended September 30, 2004 and the issuance of fixed rate unsecured indebtedness to replace variable rate indebtedness.

Our general and administrative expenses, consisting primarily of salaries, bonuses, employee benefits, insurance and other corporate-level expenses increased $0.8 million in the nine-month period ended September 30, 2004 as compared with the nine-month period ended September 30, 2003.  This increase resulted from higher salary and bonus expense due to a larger workforce, including the retention of two additional senior officers responsible for joint venture initiatives and as corporate counsel.  In addition, office expenses increased due to the Company’s relocation of its corporate office in February 2004.  The Company also incurred higher expenses as a result of the more stringent regulatory environment impacting public companies. In particular, costs associated with the Company's review of its internal controls to ensure compliance with Section 404 of the Sarbanes-Oxley Act have been significantly higher than expected.  These increased costs were partially offset by $1.3 million less severance costs for the nine-month period ended September 30, 2004 as compared with the nine-month period ended September 30, 2003, during which a former senior officer departed in 2003.

Comparison of the three-month period ended September 30, 2004 to the three-month period ended September 30, 2003.

The table below shows selected operating information for our Total Portfolio and the 154 properties acquired prior to July 1, 2003 that remained in the Total Portfolio through September 30, 2004, which constitute the Same Property Portfolio for the three-month periods ended September 30, 2004 and 2003 (in thousands):

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	Same Property Portfolio									Total Portfolio
	2004		2003		Increase/ (Decrease)			% Change		2004		2003		Increase/ (Decrease)			% Change
Revenue:
Rentals	$	56,106	$	55,218	$	888		1.6	%	$	62,216	$	56,156	$	6,060		10.8	%
Percentage rent	696		615		81			13.2	%	762		602		160			26.6	%
Recoveries	17,040		16,589		451			2.7	%	18,954		16,559		2,395			14.5	%
Other property	323		469		(146		)	(31.1	)%	335		469		(134		)	(28.6	)%
Total revenue	74,165		72,891		1,274			1.7	%	82,267		73,786		8,481			11.5	%
Expenses:
Property operating expenses	9,585		10,466		(881		)	(8.4	)%	10,811		10,552		259			2.5	%
Real estate taxes	11,046		11,344		(298		)	(2.6	)%	12,690		11,592		1,098			9.5	%
Net operating income	$	53,534	$	51,081	$	2,453		4.8	%	58,766		51,642		7,124			13.8	%
Add:
Interest and other income										294		31		263			848.4	%
Gain on sale of marketable securities										529		—		529			100.0	%
Gain on sale of real estate investment										25		—		25			100.0	%
Deduct:
Depreciation and amortization										22,459		19,485		2,974			15.3	%
Interest										20,125		17,303		2,822			16.3	%
General and administrative										6,044		4,840		1,204			24.9	%
Income before allocation to minority interests										$	10,986	$	10,045	$	941		9.4	%

The increase in rental revenue, including termination fees, for our Same Property Portfolio is primarily the result of an increase in minimum rent of $0.4 million and a decrease in the provision for allowance for doubtful accounts of $0.3 million.  Minimum rent increased as a result of new leases and renewals of existing tenants at higher rental rates offset by a decrease in lease termination fees of $0.2 million.  A lower provision was required for the three-month period ended September 30, 2004 as compared with the three-month period ended September 30, 2003 as a result of a decrease in anchor and other tenant bankruptcies and recoveries of amounts previously written off.  Our occupancy on a same property basis remained flat at 91.9% as of September 30, 2004 and 2003.

Percentage rent revenue increased for our Same Property Portfolio primarily due to the timing of the certainty of realization that certain tenant sales thresholds have been met offset by lower sales volume.

Recoveries revenue increased for our Same Property Portfolio primarily due to an increase in property operating expense recovery income of $0.2 million and an increase in real estate tax recovery income of $0.3 million.  Property operating expense and real estate tax recovery income increased primarily as a result of an increase in recovery rates due to true-ups related to the annual reconciliation process offset by a decrease in overall property operating and real estate tax expenses.

Property operating expenses decreased primarily as a result of a $0.5 million lease buy-out expense recorded in the prior year and a $0.1 million decrease in insurance expense, offset by a $0.1 million increase in utility expense.

Real estate tax expense decreased primarily as a result of a significant upward adjustment for a two-year period assessed in 2003 for one property, offset by increased valuations assessed for certain properties primarily located in the Mid-West.

The increase in interest and other income in the Total Portfolio is primarily due to an increase in third party management, interest income on a bridge loan provided to our joint venture, and other

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joint venture income.

The gain on sale of marketable securities of $0.5 million relates to the sale of shares of Kmart stock received during the nine-month period ended September 30, 2004.  The Company classified these shares as available for sale securities and recorded the appreciation in value of these shares from the date received through the date of sale as other comprehensive income.  Upon the sale of these securities for $1.1 million, the unrealized holding gain of $0.5 was reclassified to realized gain during the three and nine month periods ended September 30, 2004.

Interest expense increased primarily as a result of an increase in indebtedness resulting from property acquisitions in 2003 and 2004 and the issuance of fixed rate unsecured indebtedness to replace variable rate indebtedness.

Our general and administrative expenses, consisting primarily of salaries, bonuses, employee benefits, insurance and other corporate-level expenses increased $1.2 million in the three-month period ended September 30, 2004 as compared with the three-month period ended September 30, 2003.  This increase resulted from higher salary and bonus expense due to a larger workforce, including the retention of two additional senior officers responsible for joint venture initiatives and as corporate counsel.  In addition, office expenses increased due to the Company’s relocation of its corporate office in February 2004. The Company also incurred higher expenses as a result of the more stringent regulatory environment impacting public companies. In particular, costs associated with the Company's review of its internal controls to ensure compliance with Section 404 of the Sarbanes-Oxley Act have been significantly higher than expected.

Liquidity and Capital Resources

Short-Term Liquidity Requirements

At September 30, 2004, we had $5.9 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.

At September 30, 2004, we had $1.2 billion of indebtedness. This indebtedness had a weighted average interest rate of 6.26% with an average maturity of 4.8 years.  As of September 30, 2004, our market capitalization was $2.6 billion, resulting in a debt-to-total market capitalization ratio of approximately 47.4%.

Our short-term liquidity requirements consist primarily of funds necessary to pay for operating expenses and other expenditures directly associated with our properties, including:

•Recurring maintenance capital expenditures necessary to properly maintain our properties;

•Interest expense and scheduled principal payments on outstanding indebtedness;

•Capital expenditures incurred to facilitate the leasing of space at our properties, including tenant improvements and leasing commissions; and

•Future distributions paid to our stockholders.

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 $5.6 million, or $0.20 per square foot, for the nine months ended September 30, 2004.  We expect total maintenance capital expenditures to be approximately $2.3 million, or $0.08 per square foot, for the remainder of 2004.  We also expect to incur revenue enhancing capital expenditures such as tenant improvements and leasing commissions in connection with the leasing and re-leasing of retail space.  During the first nine months of 2004, in order to re-let vacant space within our portfolio, we incurred higher non-recurring capital expenditures than in prior periods as we re-positioned several of our centers for future growth.  In addition, we anticipate incurring additional non-recurring capital expenditures during the remainder of 2004 and into 2005 as we seek further opportunities to reposition vacant space.

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.

However, under some circumstances, we may be required to pay distributions in excess of cash available for those distributions in order to meet these distribution requirements, and we may need to borrow funds to pay distributions in the future.

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Historically, we have satisfied our short-term liquidity requirements through our existing working capital and cash provided by our operations as well as with borrowings under the Company’s line of credit facility. As of September 30, 2004 we had an outstanding balance on our line of credit facility of $213 million.  However, after quarter end, we used all of the net proceeds of our recent $150 million unsecured debt offering to reduce the outstanding balance under our line of credit facility.  We believe that our existing working capital and cash provided by operations should be sufficient to meet our short-term liquidity requirements.  Cash flows provided by operating activities decreased to $81.7 million for the nine months ended September 30, 2004 from $92.8 million for the nine months ended September 30, 2003. The decrease in cash flows from operations is primarily attributable to the combined effect of an increase in accounts receivable and other assets offset by an increase in accounts payable.

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-lease 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 and operating results would be adversely affected.

As of September 30, 2004, the Company had 6 tenants operating under bankruptcy protection. The leases directly impacted by these bankruptcy filings totaled approximately 0.4% of our annualized base rent for all leases in which tenants were in occupancy at September 30, 2004.

On April 1, 2003, Fleming Companies (“Fleming”) filed for bankruptcy protection. As part of this bankruptcy, Fleming’s motion to reject leases at three of our 13 Fleming store locations was allowed by the Bankruptcy Court on that date. The three rejected leases aggregated approximately 178,000 square feet and represented approximately 0.6% of total annualized base rent for all leases in which tenants were in occupancy on March 31, 2003.

In June 2003, leases at four of our store locations aggregating 234,000 square feet were assumed by Fleming and assigned to Roundy’s, Inc., as part of Roundy’s acquisition of Rainbow Foods.  In December 2003, a fifth lease was assumed by Knowlan’s Food.  A motion filed with the Bankruptcy Court to permit three leases to be assumed by Fleming and assigned to a third party independent grocer was allowed in September 2004.  The two remaining leases, aggregating 95,000 square feet were rejected on March 25, 2004.  We are actively pursuing permanent tenants to lease the five locations that have been rejected.

Long-Term Liquidity Requirements

Our long-term liquidity requirements consist primarily of funds necessary to pay for scheduled debt maturities, renovations, redevelopment, expansions and other non-recurring capital expenditures that are required periodically to our properties, and the costs associated with acquisitions of properties and third party developer joint venture opportunities 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, our credit facility, bridge financing, through the issuance of additional debt and equity securities and through long-term property mortgage indebtedness.  We believe that these sources of capital will continue to be available to us in the future to fund our long-term liquidity requirements. We may also enter into joint ventures with institutional investors as an alternative source of capital.  Although we expect to assume additional secured debt in connection with the acquisition of real estate, in the future we intend to satisfy our long-term liquidity requirements primarily through the other sources outlined above.

However, there are certain factors that 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 three major rating agencies—Standard & Poor’s, which has given us a rating of BBB-, Moody’s Investor Service, which has given us a rating of Baa3, and Fitch Ratings, which has given us a rating of BBB-, all three have stated the outlook as stable.  A downgrade in outlook or rating by a rating agency can occur at any time if the agency perceives adverse change in our financial condition, results of operations or ability to service our debt.

Based on our internal valuation of our properties, the estimated value of our properties exceeds the outstanding amount of mortgage debt encumbering those properties as of September 30, 2004. Therefore, at this time, we believe that additional funds could be obtained, either in the form of additional unsecured borrowings or mortgage debt.  In addition, we believe that we could obtain additional financing without violating the financial covenants contained in our 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

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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

The following table summarizes our repayment obligations under our indebtedness outstanding as of September 30, 2004 (in thousands):

	2004 (1)		2005	2006	2007	2008	Thereafter	Total (2) (3)
Mortgage loans:
The Commons of Chancellor Park	$	12,075	—	—	—	—	—	$	12,075
Franklin Square	113		13,583	—	—	—	—	13,696
Williamson Square	83		10,833	—	—	—	—	10,916
Riverchase Village Shopping Center	80		9,764	—	—	—	—	9,844
Meridian Village Plaza	70		292	4,841	—	—	—	5,203
Spring Mall	29		120	8,021	—	—	—	8,170
Southport Centre	38		160	171	9,593	—	—	9,962
Longmeadow Commons	75		317	344	8,717	—	—	9,453
Innes Street Market	83		352	380	12,098	—	—	12,913
Southgate Shopping Center	26		110	119	2,166	—	—	2,421
Salem Consumer Square	104		453	501	555	8,806	—	10,419
St. Francis Plaza	45		191	207	225	243	—	911
Buckingham Place	15		63	69	74	79	5,054	5,354
County Line Plaza	49		205	222	240	256	16,002	16,974
Trinity Commons	41		171	185	200	214	13,776	14,587
8 shopping centers, cross collateralized	406		1,705	1,843	1,993	2,154	72,132	80,233
Montgomery Commons	17		79	86	94	100	7,437	7,813
Warminster Towne Center	58		260	283	307	329	18,657	19,894
Clocktower Place	29		121	132	144	154	12,009	12,589
545 Boylston St. and William J. McCarthy Bldg.	155		655	711	772	838	31,808	34,939
29 shopping centers, cross collateralized	611		2,520	2,728	2,955	3,147	224,115	236,076
Spradlin Farm	46		189	203	219	232	16,440	17,329
Berkshire Crossing	129		532	552	573	593	12,279	14,658
Grand Traverse Crossing	86		366	394	424	457	11,643	13,370
Salmon Run Plaza	76		319	349	381	417	3,192	4,734
Elk Park Center	71		297	321	346	374	6,906	8,315
Grand Traverse Crossing - Wal-Mart	40		165	179	193	208	4,415	5,200
Montgomery Towne Center	90		382	393	307	335	5,626	7,133
Bedford Grove - Wal-Mart	36		152	164	178	191	3,382	4,103
Berkshire Crossing - Home Depot/ Wal-Mart	57		239	258	278	300	5,542	6,674
Total mortgage loans	$	14,833	44,595	23,656	43,032	19,427	470,415	$	615,958
Unsecured notes	100,000			1,490		100,000	200,000	401,490
Line of credit facility			213,000					213,000
Total indebtedness	$	114,833	257,595	25,146	43,032	119,427	670,415	$	1,230,448

(1)Represents the period from October 1, 2004 through December 31, 2004.

(2)The aggregate repayment amount for mortgage loans of $615,958 does not reflect the unamortized mortgage loan premiums of $9,978 related to the assumption of eleven mortgage loans with above-market contractual interest rates.

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(3)The aggregate repayment amount for unsecured loans of $401,490 does not reflect the unamortized original issue discount of $1,636 related to the April 2004 bond issuance.

The mortgage indebtedness described in the table above will require balloon payments, including approximately $12.0 million commencing in November 2004. In addition, $100.0 million of unsecured notes will mature in November 2004.  It is likely that we will not have sufficient funds on hand to repay these amounts at maturity. We generally refinance maturity payments through borrowings under our unsecured credit facility. We refinance borrowings under our unsecured credit facilty through unsecured private or public debt offerings, additional debt financings secured by individual properties or groups of properties, or additional equity offerings.

As of September 30, 2004, in addition to the repayment obligations under the indebtedness described above, we have future contractual payment obligations relating to construction contracts, ground leases, and leases for the rental of office space as follows (in thousands):

	2004 (1)		2005	2006	2007	2008	Thereafter	Total
Construction contracts and tenant improvement obligations	$	23,895	3,689	—	—	—	—	$	27,584
Ground leases and subleases	332		1,355	1,355	1,381	1,447	55,166	61,036
Office leases	20		1,060	1,116	1,067	1,067	7,247	11,577
Total	$	24,247	6,104	2,471	2,448	2,514	62,413	$	100,197

(1) Represents the period from October 1, 2004 through December 31, 2004

The repayment obligations reflected in the above table do not reflect the interest payments on debt and cash obligations pursuant to the supplemental executive retirement plan.

In addition to the contractual payment obligations included above, we have various existing utility and service contracts with vendors related to our property management.  We enter into these contracts in the ordinary course of business, which vary based on usage and may extend beyond one year.  These contracts are generally for one year or less and include terms that provide for termination with insignificant or no cancellation penalties.

During the second quarter of 2004, the Company entered into a joint venture agreement with a third party for the development and construction of a shopping center.  Under the joint venture agreement, at any time subsequent to the second anniversary of the completion of the shopping center, which is estimated to occur in the fall of 2005, the Company may be required to purchase the third party’s joint venture interest.  The purchase price for this interest would be at the estimated fair market value.  This contingent obligation is not reflected in the table above.

In addition, pursuant to the joint venture agreement, Bradley OP has guaranteed the payment obligations of the joint venture with respect to tenant improvements being constructed by a tenant pursuant to a written lease with the joint venture.  The maximum obligation of Bradley OP under this guaranty is approximately $2.2 million.

Line of Credit

On April 29, 2002, we entered into a three-year $350 million unsecured line of credit with a group of lenders and Fleet National Bank, as agent.  Our two operating partnerships are the borrowers under the line of credit and we, and certain of our other subsidiaries, have guaranteed this line of credit.  This line of credit is being used principally to fund growth opportunities and for working capital purposes. At September 30, 2004, $213 million was outstanding under the line of credit.  We used all of the net proceeds of our recent $150 million unsecured debt offering to reduce the outstanding balance under our line of credit.

Our ability to borrow under this line of credit is subject to our ongoing compliance with a number of financial and other covenants.  This 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 line of credit bears interest at either the lender’s base rate or a floating rate based on a spread over LIBOR ranging from 80 basis points to 135 basis points, depending upon our debt rating.  In addition, this 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.  The variable rate in effect at September 30, 2004, including the lender’s margin of 105 basis points and borrowings outstanding at the base rate was 2.76%.

As of September 30, 2004, we were in compliance with all of the financial covenants under this line of credit.  However, if our properties do not perform as expected, or if unexpected events occur that require us to borrow additional funds, compliance with these covenants may become difficult and may restrict our ability to pursue some business initiatives.  In addition, these financial covenants may restrict our ability to pursue particular acquisition transactions, including for

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example, acquiring a portfolio of properties that is highly leveraged.  These constraints on acquisitions could significantly impede our growth.

Debt Offerings

Heritage Notes

As of the date of this report, the Company has outstanding two series of unsecured notes.  These notes were issued pursuant to the terms of two separate but substantially identical indentures the Company entered into with LaSalle National Bank, as trustee.  These indentures contain various covenants, including covenants that restrict the amount of indebtedness that may be incurred by us and our subsidiaries.  Specifically, for as long as the debt securities issued under these indentures are outstanding:

•The Company is not permitted to incur additional indebtedness if the aggregate principal amount of all indebtedness of the Company and its subsidiaries would be greater than 60% of the total assets, as defined, of the Company and its subsidiaries.

•The Company is not permitted to incur any indebtedness if the ratio of the Company’s consolidated income available for debt service to the annual debt service charge for the four consecutive fiscal quarters most recently ended prior to the date the additional indebtedness is to be incurred would be less than 1.5:1 on a pro forma basis.

•The Company is not permitted to incur additional indebtedness if, after giving effect to any additional indebtedness, the total secured indebtedness of the Company and its subsidiaries is greater than 40% of the total assets, as defined, of the Company and its subsidiaries.

•The Company and its subsidiaries may not at any time own total unencumbered assets equal to less than 150% of the aggregate outstanding principal amount of unsecured indebtedness of the Company and its subsidiaries.

These debt securities have been guaranteed by our two operating partnerships, Heritage Property Investment Limited Partnership (“Heritage OP”) and Bradley Operating Limited Partnership (“Bradley OP”).

Notes due 2009.On October 15, 2004, the Company completed the issuance and sale of $150 million principal amount of 4.50% notes due 2009, or the 2009 Notes.  The 2009 Notes bear interest at a rate of 4.50% and mature on October 15, 2009.  The 2009 Notes may be redeemed at any time at our option, in whole or in part, at a redemption price equal to the sum of (1) the principal amount of the notes being redeemed plus accrued interest on the notes to the redemption date and (2) a make-whole amount, if any, with respect to the notes that is designed to provide yield maintenance protection to the holders of these notes.

In August 2004, in anticipation of completing an unsecured debt financing, we entered into forward starting interest rate swaps with a total notional amount of $146,600,000.  The purpose of these forward swaps was to mitigate the risk of changes in interest rates prior to the pricing of our debt offering.  These forward swaps terminated upon pricing of the debt offering and we made a payment from the counterparties of $1.7 million in connection with the termination of these swaps.

Notes due 2014.On April 1, 2004, the Company completed the issuance and sale of $200 million principal amount of 5.125% notes due 2014, or the 2014 Notes.  The 2014 Notes bear interest at a rate of 5.125% and mature on April 15, 2004.  The 2014 Notes may be redeemed at any time at our option, in whole or in part, at a redemption price equal to the sum of (1) the principal amount of the notes being redeemed plus accrued interest on the notes to the redemption date and (2) a make-whole amount, if any, with respect to the notes that is designed to provide yield maintenance protection to the holders of these notes.

In March 2004, in anticipation of completing an unsecured debt financing, we entered into forward starting interest rate swaps with a total notional amount of $192,450,000. The purpose of these forward swaps was to mitigate the risk of changes in interest rates prior to the pricing of our debt offering. These forward swaps terminated upon pricing of the debt offering and we received a payment from the counterparties of $1.185 million in connection with the termination of these swaps.

The Company was in compliance with all applicable covenants as of September 30, 2004.

Bradley Notes

Prior to our acquisition of Bradley Real Estate, Inc. (“Bradley”), Bradley OP completed the sale of three series of senior, unsecured debt securities. These debt securities were issued pursuant to the terms of an indenture and three supplemental indentures entered into by Bradley OP with LaSalle National Bank, as trustee, beginning in 1997. The indenture and three

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supplemental indentures contain various covenants, including covenants which restrict the amount of indebtedness that may be incurred by Bradley OP and those of our subsidiaries which are owned directly or indirectly by Bradley OP. Specifically, for as long as these debt securities are outstanding:

•Bradley OP is not permitted to incur additional indebtedness if the aggregate principal amount of all indebtedness of Bradley OP and its subsidiaries would be greater than 60% of the total assets, as defined, of Bradley OP and its subsidiaries.

•Bradley OP is not permitted to incur any indebtedness if the ratio of Bradley OP’s consolidated income available for debt service to the annual debt service charge for the four consecutive fiscal quarters most recently ended prior to the date the additional indebtedness is to be incurred would be less than 1.5:1 on a pro forma basis.

•Bradley OP is not permitted to incur additional indebtedness if, after giving effect to any additional indebtedness, the total secured indebtedness of Bradley OP and its subsidiaries is greater than 40% of the total assets, as defined, of Bradley OP and its subsidiaries.

•Bradley OP and its subsidiaries may not at any time own total unencumbered assets equal to less than 150% of the aggregate outstanding principal amount of unsecured indebtedness of Bradley OP and its subsidiaries.

For purposes of these covenants, any indebtedness incurred by Heritage, Heritage OP or any of the Company’s subsidiaries that are owned directly or indirectly by Heritage OP is not included as indebtedness of Bradley OP.

Notes due 2004.  In November 1997, Bradley OP completed the offering of $100 million aggregate principal amount of its 7% Notes due 2004, or the 2004 Notes. The 2004 Notes bear interest at 7% per year and mature on November 15, 2004. Heritage intends to cause Bradley OP to repay those notes upon maturity through additional borrowings under the line of credit facility. The 2004 Notes may be redeemed at any time at the option of Bradley OP, in whole or in part, at a redemption price equal to the sum of (1) the principal amount of the 2004 Notes being redeemed plus accrued interest on the 2004 Notes to the redemption date and (2) a make-whole amount, if any, with respect to the 2004 Notes that is designed to provide yield maintenance protection to the holders of these notes.

Notes due 2006.  In March 2000, Bradley OP completed the offering of $75 million aggregate principal amount of its 8.875% Notes due 2006, or the 2006 Notes. The 2006 Notes bear interest at 8.875% per year and mature on March 15, 2006. The 2006 Notes may be redeemed at any time at the option of Bradley OP, in whole or in part, at a redemption price equal to the sum of (1) the principal amount of the 2006 Notes being redeemed plus accrued interest on the 2006 Notes to the redemption date and (2) a make-whole amount, if any, with respect to the 2006 Notes that is designed to provide yield maintenance protection to the holders of these notes. In connection with the Bradley acquisition, we repurchased approximately $73.5 million of the 2006 Notes at a purchase price equal to the principal and accrued interest on the 2006 Notes as of the date of purchase, so that approximately $1.5 million of the 2006 Notes were outstanding as of June 30, 2004.

Notes due 2008.  In January 1998, Bradley OP completed the offering of $100 million aggregate principal amount of its 7.2% Notes due 2008, or the 2008 Notes. The 2008 Notes bear interest at 7.2% per year and mature on January 15, 2008. The 2008 Notes may be redeemed at any time at the option of Bradley OP, in whole or in part, at a redemption price equal to the sum of (1) the principal amount of the 2008 Notes being redeemed plus accrued interest on the 2008 Notes to the redemption date and (2) a make-whole amount, if any, with respect to the 2008 Notes that is designed to provide yield maintenance protection to the holders of these notes.

Bradley OP was in compliance with all applicable covenants as of September 30, 2004.

Equity Offerings

In April 2002, we completed our initial public offering and sold 14,080,556 shares of our common stock at a price of $25.00 per share resulting in net proceeds to us of $323 million.  We used the net proceeds of the IPO to repay outstanding indebtedness.  In connection with our IPO, all shares of our Series A Cumulative Convertible Preferred Stock and redeemable equity then outstanding converted automatically into shares of our common stock on a one for one basis.

In December 2003, we completed a secondary public offering of our common stock and sold a total of 3,932,736 shares at a net price of $28.27 per share, resulting in net proceeds to us of $111 million.  Net Realty Holding Trust, our largest stockholder, exercised its contractual preemptive right and purchased 1,563,558, or approximately 40% of the shares we sold in the offering, on the same terms as third parties purchased shares.  We used the net proceeds of this offering to repay outstanding indebtedness.

Funds From Operations

We calculate Funds from Operations in accordance with the best practices described in the April 2001 National Policy

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Bulletin of the National Association of Real Estate Investment Trusts, referred to as NAREIT, and NAREIT’s 1995 White Paper on Funds from Operations, as supplemented in November 1999. The White Paper defines Funds From Operations as net income (loss) (computed in accordance with GAAP), excluding gains (or losses) from extraordinary items and sales of property, plus real estate related depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures. Funds from Operations should not be considered as an alternative to net income (determined in accordance with GAAP) as an indicator of our financial performance or to cash flow from operating activities (determined in accordance with GAAP) as a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to make distributions. We believe that Funds from Operations is helpful to investors as a measure of our performance as an equity REIT because, along with cash flows from operating activities, financing activities and investing activities, it provides investors with an understanding of our ability to incur and service debt and make capital expenditures. Our computation of Funds from Operations may, however, differ from the methodology for calculating funds from Operations utilized by other equity REITs and, therefore, may not be comparable to such other REITs.

The following table reflects the calculation of Funds from Operations (in thousands):

	Nine months ended September 30,
	2004			2003
Net income	$	33,736		$	30,557
Add (deduct):
Depreciation and amortization (real-estate related)	65,188			57,315
Net gains on sales of real estate investments	(3,013		)	(2,683		)
Funds from Operations	$	95,911		$	85,189

	Three months ended September 30,
	2004			2003
Net income	$	10,643		$	10,656
Add (deduct):
Depreciation and amortization (real-estate related)	22,305			19,388
Net gains on sales of real estate investments	(25		)	(1,874		)
Funds from Operations	$	32,923		$	28,170

Related Party Transactions

The TJX Companies

In July 1999, Bernard Cammarata became a member of our board of directors.  Mr. Cammarata is non-executive 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 5.4% of our total annualized base rent for all leases in which tenants were in occupancy at September 30, 2004.  TJX pays us rent in accordance with 50 written leases at our properties.

Ahold USA

In July 1999, William M. Vaughn, III became a member of our board of directors.  Mr. Vaughn is Senior Vice President, Labor Relations of Ahold USA, Inc., the parent company of Giant Foods, Bi-Lo, Bruno’s and Stop & Shop.  Mr. Vaughn is also a member of the Board of Trustees of our largest stockholder, Net Realty Holding Trust.  Annualized base rent from Ahold USA and its subsidiary companies represent approximately 0.9% of our total annualized base rent for all leases in which tenants were in occupancy at September 30, 2004.  Ahold USA and its subsidiary companies pay us rent in accordance with 5 written leases at our properties.

Warrants

In connection with advisory services provided to us by Prudential Insurance Company of America, formerly our second largest stockholder, we previously issued to Prudential warrants to purchase 375,000 shares of our common stock at an exercise price of $25.00 per share.  Effective February 7, 2003, we extended the exercise period of these warrants until April 29, 2007 and incurred a charge of $0.1 million. If not extended, 75,000 of these warrants would have expired on July 9, 2003 and the remaining warrants would have expired on September 18, 2004.

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In March 2004, Prudential exercised all of its warrants in accordance with the cashless exercise provisions of its warrant agreement. We issued Prudential 68,166 shares of common stock in full settlement of the warrants. We did not incur any additional expense as a result of the exercise of the warrants.

131 Dartmouth Street Joint Venture and Lease

In November 1999, we entered into a joint venture with NETT for the acquisition and development of a 365,000 square foot commercial office building at 131 Dartmouth Street, Boston, Massachusetts.  This joint venture is owned 94% by our largest stockholder, NETT, and 6% by us.  We were issued this interest as part of a management arrangement with the joint venture pursuant to which we manage the building.  We have no ongoing capital contribution requirements with respect to this office building, which was completed in 2003.  We account for our interest in this joint venture using the cost method and we have not expended any amounts on the office building through September 30, 2004.

In February 2004, we entered into an eleven-year lease with our joint venture with NETT for the lease of approximately 31,000 square feet of space at 131 Dartmouth Street and we moved our corporate headquarters to this space during the first quarter of 2004. Under the terms of this lease, which were negotiated on an arms-length basis, we begin paying rent to the joint venture in February 2005.

Boston Office Lease

In 1974, NETT and Net Realty Holding Trust entered into an agreement providing for the lease of 14,400 square feet of space in an office building at 535 Boylston Street to NETT for its Boston offices.  Net Realty Holding Trust assigned this lease to us as part of our formation.  The current term of this lease expires on June 30, 2005 and under this lease, NETT pays us $648,000 per year in minimum 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, including those matters described on page 36, we do not believe that the ultimate outcome of these claims would materially affect our financial position or results of operations.

Non-Recourse Loan Guarantees

In connection with the Bradley acquisition, we entered into a special securitied facility with Prudential Mortgage Capital Corporation (“PMCC”) 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 securitied 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.

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ITEM 3:Quantitative and Qualitative Disclosures About Market Risk

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.

The following table presents our contractual fixed rate debt obligations as of September 30, 2004 sorted by maturity date and our contractual variable rate debt obligations sorted by maturity date (in thousands):

	2004 (1)		2005		2006		2007		2008		2009+		Total (2)		Weighted Average Interest Rate
Secured Debt:
Fixed rate	$	14,704	$	44,063	$	23,104	$	42,459	$	18,834	$	458,136	$	601,300	7.99	%
Variable rate	129		532		552		573		593		12,279		14,658		3.65	%
Unsecured Debt:
Fixed rate	100,000		—		1,490		—		100,000		200,000		401,490		5.81	%
Variable rate	—		213,000		—		—		—		—		213,000		2.76	%
Total	$	114,833	$	257,595	$	25,146	43,032		$	119,427	$	670,415	$	1,230,448	6.32	%

(1)Represents the period from October 1, 2004 through December 31, 2004.

(2)The aggregate repayment amount of $1,230,448 does not reflect the unamortized mortgage loan premiums totaling $9,978 related to the assumption of eleven mortgage loans with above-market contractual interest rates and the unamortized original issue discount of $1,636 on the April 2004 bond issuance.

If market rates of interest on our variable rate debt outstanding at September 30, 2004 increase by 10%, or 28 basis points, we would expect the interest expense on our existing variable rate debt would decrease future earnings and cash flows by $0.6 million annually.

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.   On August 24, 2004, we entered into forward-starting swaps for a notional amount of $146.6 million as a means to mitigate the risk of changes in forecasted interest payments on an anticipated issuance of long-term debt. The swaps were designated as cash flow hedges as we hedged its exposure to the variability in future cash flows for the anticipated transactions (i.e. future interest payments).

As of September 30, 2004, the fair value of such derivatives was ($1.4 million) and is included as other comprehensive loss in the accompanying consolidated balance sheet.   Upon pricing of our second unsecured debt offering, on October 12, 2004, those derivatives were terminated. The cash paid to the counterparties of $1.7 million for these swaps (designated as cash flow hedges) will be reclassified ratably into earnings as an increase to interest expense as scheduled interest payments are made on the our notes issued in the Company’s second debt offering.  For the 12-month period from October 1, 2004 to September 30, 2005, we estimate that $0.2 million will be reclassified ratably into earnings as an increase to interest expense from these swaps.

We require that hedging derivative instruments be 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 September 30, 2004 in relation to total assets and our total market capitalization.

ITEM 4:Controls and Procedures

As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of the end of the period covered by this report, the Company’s principal executive officer, principal financial officer, and other members of senior management have evaluated the design and operations of the disclosure controls and procedures of the Company.  Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures effectively ensure that information required to be disclosed in the Company’s filings and submissions with the Securities and Exchange Commission under the Exchange Act, is accumulated and communicated to our management (including the principal executive officer and principal financial officer) and is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission.

In addition, there have not been any changes in the Company’s internal control over financial reporting (as such term is

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defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1.  Legal Proceedings

On October 31, 2001, a complaint was filed against us in the Superior Court of Suffolk County of the Commonwealth of Massachusetts by Weston Associates and its president, Paul Donahue, alleging that we owe Mr. Donahue and his firm a fee in connection with services he claims he performed on our behalf in connection with our acquisition of Bradley.  On September 18, 2000, we acquired Bradley, a publicly traded REIT based in Illinois with nearly 100 shopping center properties located primarily in the Midwest, at an aggregate cost of approximately $1.2 billion.  Through his personal relationships with the parties involved, at our request, Mr. Donahue introduced us to Bradley and its senior management team.  Mr. Donahue alleges, however, that he played an instrumental role in the negotiation and completion of our 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 we 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’s law.

On November 29, 2002, the court granted our motion to dismiss Mr. Donahue’s claims. Mr. Donahue subsequently filed an appeal of the court’s decision and on March 4, 2004, an oral argument was heard with respect to Mr. Donahue’s appeal.  On July 14, 2004, the Massachusetts Appellate Court reversed the lower court’s decision dismissing Mr. Donahue’s claims.  The Appellate Court’s decision reverts the case back to the Superior Court for discovery and additional proceedings.  It is not possible at this time to predict the outcome of this litigation and we intend to vigorously defend against these claims.

Except as set forth above, we are not involved in any material litigation nor, to our knowledge, is any material litigation threatened against us, other than routine litigation arising in the ordinary course of business, which is generally expected to be covered by insurance. In the opinion of our management, based upon currently available information, this litigation is not expected to have a material adverse effect on our business, financial condition or results of operations.

ITEM 2.  Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

Not applicable.

ITEM 3.  Defaults upon Senior Securities

Not applicable.

ITEM 4.  Submission of Matters to a Vote of Security Holders

Not applicable.

ITEM 5.  Other Information

Not applicable.

ITEM 6.  Exhibits and Reports on Form 8-K

(a)Exhibits

31.1Certification of Chief Executive Officer of the Company Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14

31.2Certification of Chief Financial Officer of the Company Pursuant to Securities Exchange Act Rules 13a-14 and
15d-14

32.1Chief Executive Officer’s Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2003.

32.2Chief Financial Officer’s Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2003.

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(b)Reports on Form 8-K

On August 3, 2004, the Company furnished to the Securities and Exchange Commission under Item 12 of Form 8-K a copy of the Company’s Press Release, dated August 3 , 2004, as well as supplemental operating and financial data regarding the Company for the second quarter of 2004.

On September 14, 2004, the Company filed a Current Report on Form 8-K in connection with the election of Ritchie Reardon to the Board of Directors on September 10, 2004.

On September 15, 2004, the Company filed a Current Report on Form 8-K in connection with its revision of its annual financial statements contained in its Annual Report on Form 10-K for the year ended December 31, 2003 to (i) include for the year ended December 31, 2003 the footnote required by Rule 3-10(f) of Regulation S-X as a result of the issuance of registered guaranteed securities by the Company, and (ii) update its annual historical financial statements included in the 10-K for discontinued operations that resulted from the disposition of a real estate asset during the period from January 1, 2004 through June 30, 2004.

On September 15, 2004, the Company filed a Current Report on Form 8-K in connection with its revision of its quarterly financial statements contained in its Quarterly Report on Form 10-Q for the period ended June 30, 2004 to include for the six month period ended June 30, 2004 the footnote required by Rule 3-10(f) of Regulation S-X as a result of the issuance of registered guaranteed securities by the Company.

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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:  November 9, 2004
	/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

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