EX-99.1 3 doc3.txt EXHIBIT 99.1 ITEM 5. MARKET FOR REGISTRANT'S COMMON SHARES OF BENEFICIAL INTEREST AND RELATED SHAREHOLDER MATTERS WRI's common shares are listed and traded on the New York Stock Exchange under the symbol "WRI". The number of holders of record of our common shares as of February 20, 2004 was 3,387. The closing high and low sale prices per common share, as reported on the New York Stock Exchange, and dividends per share paid for the fiscal quarters indicated were as follows:
HIGH LOW DIVIDENDS ------ ------- --------- 2003: Fourth . . . . $ 30.58 $ 28.39 $ 0.39 Third. . . . . 30.70 27.97 0.39 Second . . . . 28.28 26.33 0.39 First. . . . . 26.93 23.80 0.39 2002: Fourth . . . . $ 25.50 $ 22.97 $ 0.37 Third. . . . . 25.76 20.57 0.37 Second . . . . 24.60 22.37 0.37 First. . . . . 22.95 21.42 0.37
1 ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected consolidated financial data with respect to WRI, which has been updated to reflect the application of SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," for the disposition of two retail shopping centers in June 2004 and the three-for-two share split declared in March 2004. These reclassifications have no effect on the reported net income available to common shareholders in any prior period. The following information should be read in conjunction with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," the Consolidated Financial Statements and accompanying Notes in "Item 8. Financial Statements and Supplementary Data" and the financial schedules included elsewhere in this Form 10-K.
(Amounts in thousands, except per share amounts) Year Ended December 31, 2003 2002 2001 2000 1999 ------------ ------------ ------------ ------------ ------------ Revenues (primarily real estate rentals) . $ 416,041 $ 359,975 $ 303,801 $ 239,945 $ 216,064 ------------ ------------ ------------ ------------ ------------ Expenses: Depreciation and amortization. . . . . . 93,382 77,113 65,630 52,047 46,674 Interest . . . . . . . . . . . . . . . . 88,871 65,863 54,473 43,190 32,982 Other. . . . . . . . . . . . . . . . . . 128,296 109,566 93,502 73,970 66,995 ------------ ------------ ------------ ------------ ------------ Total. . . . . . . . . . . . . . . . 310,549 252,542 213,605 169,207 146,651 ------------ ------------ ------------ ------------ ------------ Income from operations . . . . . . . . . . 105,492 107,433 90,196 70,738 69,413 Equity in earnings of joint ventures . . . 4,743 4,043 5,547 4,143 3,654 Income allocated to minority interests . . (2,723) (3,553) (475) (630) (789) Gain on sale of properties . . . . . . . . 714 188 8,339 382 20,594 Discontinued operations (1). . . . . . . . 8,054 23,756 4,935 4,368 3,258 ------------ ------------ ------------ ------------ ------------ Net income . . . . . . . . . . . . . . . . $ 116,280 $ 131,867 $ 108,542 $ 79,001 $ 96,130 ============ ============ ============ ============ ============ Net income available to common shareholders . . . . . . . . . . . . . . $ 97,880 $ 112,111 $ 88,839 $ 58,961 $ 76,537 ============ ============ ============ ============ ============ Cash flows from operations . . . . . . . . $ 163,545 $ 168,488 $ 146,659 $ 119,043 $ 113,351 ============ ============ ============ ============ ============ Per share data - basic: (2) Income before discontinued operations. $ 1.14 $ 1.13 $ 1.16 $ .91 $ 1.22 Net income . . . . . . . . . . . . . . $ 1.24 $ 1.44 $ 1.23 $ .98 $ 1.27 Weighted average number of shares. . . 78,800 77,866 72,155 60,245 60,051 Per share data - diluted: (2) Income before discontinued operations. $ 1.14 $ 1.13 $ 1.16 $ .91 $ 1.22 Net income . . . . . . . . . . . . . . $ 1.24 $ 1.43 $ 1.23 $ .98 $ 1.27 Weighted average number of shares. . . 81,574 80,041 72,553 60,595 60,503 Cash dividends per common share (2). . . . $ 1.56 $ 1.48 $ 1.41 $ 1.33 $ 1.26 Property (at cost) . . . . . . . . . . . . $ 3,200,091 $ 2,695,286 $ 2,352,393 $ 1,728,414 $ 1,486,224 Total assets . . . . . . . . . . . . . . . $ 2,923,794 $ 2,423,889 $ 2,095,747 $ 1,498,477 $ 1,312,746 Debt . . . . . . . . . . . . . . . . . . . $ 1,810,706 $ 1,330,369 $ 1,070,835 $ 792,353 $ 592,978 Other data: Funds from operations: (3) Net income available to common shareholders . . . . . . . . . . . $ 97,880 $ 112,111 $ 88,839 $ 58,961 $ 76,537 Depreciation and amortization. . . . 88,853 76,855 67,803 55,344 49,256 Gain on sale of properties . . . . . (7,273) (18,614) (9,795) (382) (20,596) ------------ ------------ ------------ ------------ ------------ Total. . . . . . . . . . $ 179,460 $ 170,352 $ 146,847 $ 113,923 $ 105,197 ============ ============ ============ ============ ============ (1) SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" requires the operating results and gain (loss) on the sale of operating properties to be reported as discontinued operations. (2) All per share and weighted average share information has been restated to reflect the three-for-two share split in March 2004. 2 (3) The National Association of Real Estate Investment Trusts defines funds from operations as net income (loss) computed in accordance with generally accepted accounting principles, excluding gains or losses from sales of property, plus real estate related depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. In addition, NAREIT recommends that extraordinary items not be considered in arriving at FFO. We calculate FFO in a manner consistent with the NAREIT definition. We believe FFO is an appropriate supplemental measure of operating performance because it helps investors compare the operating performance of our company relative to other REITs. There can be no assurance that FFO presented by WRI is comparable to similarly titled measures of other REITs. FFO should not be considered as an alternative to net income or other measurements under GAAP as an indicator of our operating performance or to cash flows from operating, investing or financing activities as a measure of liquidity. FFO does not reflect working capital changes, cash expenditures for capital improvements or principal payments on indebtedness.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the consolidated financial statements and notes thereto and the comparative summary of selected financial data appearing elsewhere in this report. Historical results and trends which might appear should not be taken as indicative of future operations. The results of operations and financial condition of the company, as reflected in the accompanying statements and related footnotes, are subject to management's evaluation and interpretation of business conditions, retailer performance, changing capital market conditions and other factors which could affect the ongoing viability of the company's tenants. EXECUTIVE OVERVIEW WRI focuses on increasing Funds from Operations and dividend payments to the company's common shareholders through hands-on leasing and management of the existing portfolio of properties and through disciplined growth from selective acquisitions and new developments. The company is also committed to maintaining a conservative balance sheet, a well-staggered debt maturity schedule and strong credit agency ratings. At December 31, 2003, WRI owned or operated under long-term leases, either directly or through its interest in joint ventures or partnerships, a total of 327 developed income-producing properties located in 19 states that span the southern half of the United States from coast to coast. Included in the portfolio are 266 shopping centers and 61 industrial properties. WRI has approximately 6,600 leases and 4,800 different tenants. Leases for our properties range from less than a year for smaller spaces to over 25 years for larger tenants. Leases generally include minimum lease payments (which often increase over the lease term), reimbursements of property operating expenses, including ad valorem taxes, and additional rent payments based on a percentage of the tenants' sales. The majority of our anchor tenants are supermarkets, value-oriented apparel/discount stores and other retailers or service providers who generally sell basic necessity-type goods and services. The stability of our anchor tenants, combined with convenient locations, attractive and well-maintained properties, high quality retailers and a strong tenant mix, should ensure the long-term success of our merchants and the viability of our portfolio. In assessing the performance of the company's properties, management carefully tracks the occupancy of the company's portfolio. Occupancy for the total portfolio was 93.3% as of year-end 2003 compared to 91.7% as of year-end 2002. Another important indicator of performance is the spread in rental rates on a same-space basis as we complete new leases and renew existing leases. In 2003, WRI completed 1,215 new leases or renewals for the year totaling 6.7 million square feet, increasing rental rates an average of 9.2% on a same-space basis. Net of capital costs, the average increase in rental rates was 5.1%. With respect to external growth through acquisitions and new developments, management closely monitors movements in returns in relation to its blended weighted average cost of capital, the amount of product in its acquisition and new development pipelines and the geographic areas in which opportunities are present. The company purchased 16 shopping centers and five industrial properties during 2003, comprising 4.5 million square feet, and representing a total investment of $413.8 million. These purchases included six properties in Florida, four each in Georgia and Texas, two in California, one each in Colorado, Illinois and North Carolina, and two in the state of Utah. Utah represents the 19th state in which WRI operates, and was a logical expansion given WRI's geographic footprint in the southern part of the United States from coast to coast. 3 With respect to new development, WRI completed 12 projects during 2003 totaling 1.1 million square feet, representing an investment of $151.1 million. As with acquisitions, management closely monitors returns on new opportunities as well as performance against underwritten returns on projects under development. Projects completed in 2003 are 97.5% leased. WRI also has 13 shopping centers in various stages of development in Arizona, Colorado, Louisiana, Nevada, Texas and Utah, and the company anticipates that the majority of them will come on-line during 2004. Continuing its strategy of selling assets that no longer meet its ownership criteria, the company disposed of eight properties during the year. These property sales represented a total of 404,000 square feet and provided proceeds of $17.9 million, generating a gain of $6.5 million, which includes $.5 million from an unconsolidated joint venture. Management is also committed to maintaining a strong, conservative capital structure, which provides constant access to a variety of capital sources. The strength of WRI's balance sheet is evidenced by unsecured debt ratings of "A" by Standard and Poor's and "A3" by Moody's rating services, the highest combined ratings of any public REIT. The company carefully balances obtaining low cost financing with minimizing exposure to interest rate movements, matching long-term liabilities with the long-term assets acquired or developed and maintaining adequate debt to market capitalization, fixed charge coverage and other ratios as necessary to retain our current credit ratings. In executing this strategy, the company redeemed its Series A and B Cumulative Redeemable Preferred Shares during the year through issuance of $75 million of depositary shares, each representing one-thirtieth of a 6.75% Series D Cumulative Redeemable Preferred Share, and 3.3 million common shares of beneficial interest, respectively. The company also issued $211 million of unsecured fixed-rate medium term notes during the year with a weighted average rate of 5.2% and a weighted average term of 10.7 years. With respect to future trends, management expects continued improvement in the performance of the existing portfolio through increased occupancy and rental rate increases as the economy trends upward. With respect to external growth, we have already closed seven acquisitions totaling $231.9 million in 2004 and have nearly $140 million of properties in the pipeline. Each of these potential acquisitions is still subject to a stringent due diligence process and, therefore, there is no assurance that any or all will be purchased. Management anticipates an increase in interest rates over the course of 2004. In managing this risk and maintaining adequate capacity to fund external growth, the company has issued $150 million of ten-year unsecured fixed-rate medium term notes with a weighted average interest rate, net of the effect of related swaps, of 5.1% thus far in 2004. SUMMARY OF CRITICAL ACCOUNTING POLICIES Our discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and contingencies as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We evaluate our assumptions and estimates on an on-going basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. Valuation of Receivables An allowance for the uncollectible portion of accrued rents and accounts receivable is determined based upon an analysis of balances outstanding, historical bad debt levels, tenant credit worthiness and current economic trends. Balances outstanding include base rents, tenant reimbursements and receivables attributable to the straight-lining of rental commitments. Additionally, estimates of the expected recovery of pre-petition and post-petition claims with respect to tenants in bankruptcy is considered in assessing the collectibility of the related receivables. 4 Property Real estate assets are stated at cost less accumulated depreciation, which, in the opinion of management, is not in excess of the individual property's estimated undiscounted future cash flows, including estimated proceeds from disposition. Depreciation is computed using the straight-line method, generally over estimated useful lives of 18-50 years for buildings and 10-20 years for parking lot surfacing and equipment. Major replacements where the betterment extends the useful life of the asset are capitalized and the replaced asset and corresponding accumulated depreciation are removed from the accounts. All other maintenance and repair items are charged to expense as incurred. Upon acquisitions of real estate, the company assesses the fair value of acquired assets (including land, buildings on an "as if vacant" basis, acquired out-of-market and in-place leases, and tenant relationships) and acquired liabilities, and allocates the purchase price based on these assessments. The company assesses fair value based on estimated cash flow projections that utilize appropriate discount and capitalization rates and available market information. Estimates of future cash flows are based on a number of factors including the historical operating results, known trends, and specific market/economic conditions that may affect the property. Property also includes costs incurred in the development of new operating properties. These costs include preacquisition costs directly identifiable with the specific project, development and construction costs, interest and real estate taxes. Indirect development costs, including salaries and benefits, travel and other related costs that are clearly attributable to the development of the property, are also capitalized. The capitalization of such costs ceases at the earlier of one year from the completion of major construction or when the property, or any completed portion, becomes available for occupancy. WRI's properties are reviewed for impairment if events or changes in circumstances indicate that the carrying amount of the property may not be recoverable. In such an event, a comparison is made of the current and projected operating cash flows of each such property into the foreseeable future on an undiscounted basis to the carrying amount of such property. Such carrying amount would be adjusted, if necessary, to estimated fair value to reflect an impairment in the value of the asset. RESULTS OF OPERATIONS COMPARISON OF THE YEAR ENDED DECEMBER 31, 2003 TO THE YEAR ENDED DECEMBER 31, 2002 Revenues Total revenues increased by $56.0 million or 15.6% in 2003 ($416.0 million in 2003 versus $360.0 million in 2002). This increase resulted primarily from the increase in rental revenues of $53.6 million and other income of $2.0 million. Property acquisitions and new development activity contributed $45.7 million of the rental income increase with the remainder of $7.9 million due to the activity at our existing properties, as described below. Occupancy (leased space) of the total portfolio increased as compared to the prior year as follows:
DECEMBER 31, ----------------- 2003 2002 ------ ------ Shopping Centers. . . . . . . . . . 93.5% 92.5% Industrial. . . . . . . . . . . . . 92.4% 88.7% Total . . . . . . . . . . . . . . . 93.3% 91.7%
In 2003, we completed 1,215 renewals and new leases comprising 6.7 million square feet at an average rental rate increase of 9.2%. Net of the amortized portion of capital costs for tenant improvements, the increase averaged 5.1%. Other income increased by $2.0 million or 39.2% in 2003 ($7.1 million in 2003 versus $5.1 million in 2002). This increase is due primarily to an increase in lease cancellation payments from various tenants. 5 Expenses Total expenses increased by $58.0 million or 23.0% in 2003 ($310.5 million in 2003 versus $252.5 million in 2002). The increases in 2003 for depreciation and amortization expense ($16.3 million), operating expenses ($9.8 million) and ad valorem taxes ($3.5 million) are primarily a result of the properties acquired and developed during the year. Overall, direct operating costs and expenses (operating and ad valorem tax expense) of operating our properties as a percentage of rental revenues declined from 28% in 2002 to 27% in 2003. Interest expense as reported represents the gross interest expense on our indebtedness plus interest expense on our preferred shares classified as liabilities less interest that is capitalized for properties under development and over-market interest payments on mortgages assumed through acquisitions. Interest expense as reported in 2003 increased by $23.0 million due to the combination of increased gross interest expense, increased interest expense from preferred shares, decreased interest capitalization and increased over-market interest. Gross interest expense increased by $17.3 million in 2003 due to an increase in the average debt outstanding from $1.2 billion in 2002 to $1.5 billion in 2003. This was offset by a decrease in the weighted-average interest rate between the two periods from 6.3% in 2002 to 6.2% in 2003. Interest on preferred shares increased by $3.4 million and represents the dividends paid or accrued as of December 31, 2003 on WRI's Series B and Series C Cumulative Redeemable Preferred Shares that are classified as liabilities in 2003 versus equity in 2002, as a result of the adoption of SFAS No. 150. Interest capitalized in 2003 decreased by $3.3 million versus 2002 due to completion of new development projects in 2003. Interest from our over-market mortgages increased from zero in 2002 to $1.0 million in 2003. General and administrative expenses increased by $2.7 million or 24.3% in 2003 ($13.8 million in 2003 versus $11.1 million in 2002). This increase results primarily from normal compensation increases as well as increases in staffing necessitated by the growth in the portfolio. General and administrative expense as a percentage of rental revenues was 3% in 2003 and 2002, respectively. Loss on early redemption of preferred shares of $2.7 million represents the unamortized original issuance costs related to the Series B Cumulative Redeemable Preferred Shares redeemed in December 2003. Other Equity in earnings of joint ventures increased by $.7 million or 17.5% in 2003 ($4.7 million in 2003 versus $4.0 million in 2002). This increase is due primarily to the gain on the sale of a shopping center in Lake Charles, Louisiana in a 50%-owned unconsolidated joint venture. Income allocated to minority interests decreased by $.8 million or 22.9% in 2003 ($2.7 million in 2003 versus $3.5 million in 2002). This decrease resulted primarily from a $1.1 million gain on the sale of a shopping center in a consolidated partnership in 2002 that did not recur in 2003. Offsetting this decrease is higher minority interest expense from the acquisition of an industrial park in Atlanta in March 2003 and seven shopping centers in Raleigh in April 2002, both of which utilized a DownREIT structure. These limited partnerships are included in our consolidated financial statements because we exercise financial and operating control. WRI began reporting discontinued operations effective January 2002 based on the guidelines established in SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which broadened the definition of discontinued operations to include components of an entity whose operations and cash flows are clearly distinguishable from the rest of the entity for operational and financial reporting purposes. Income from discontinued operations decreased $15.7 million in 2003 ($8.1 million in 2003 versus $23.8 million in 2002). Included in this caption for 2003 are the operating results and gain from the disposition of seven properties in 2003 totaling 371,000 square feet of gross leasable area plus the operating results of two properties sold in the second quarter of 2004. Included in the 2002 amounts are the operating results and gain from the disposition of seven properties in 2002 totaling 681,000 square feet of gross leasable area plus the operating results of the seven properties sold in 2003 and the two properties sold in the second quarter of 2004. 6 RESULTS OF OPERATIONS COMPARISON OF THE YEAR ENDED DECEMBER 31, 2002 TO THE YEAR ENDED DECEMBER 31, 2001 Revenues Total revenues increased by $56.2 million or 18.5% in 2002 ($360.0 million in 2002 versus $303.8 million in 2001). This increase resulted primarily from the increase in rental revenues of $55.2 million in 2002. Property acquisitions and new development contributed $53.3 million of this increase. Bad debt expense contributed $.9 million as it declined from $2.7 million in 2001 to $1.8 million in 2002 due to the recovery of previously reserved receivables. The remaining portion of the rental revenue increase is due to activity at our existing properties, as described below, offset by the effect of property dispositions in 2001. Occupancy (leased space) of the total portfolio decreased as compared to the prior year as follows:
DECEMBER 31, ----------------- 2002 2001 ------ ------ Shopping Centers. . . . . . . . . . 92.5% 92.8% Industrial. . . . . . . . . . . . . 88.7% 90.1% Total . . . . . . . . . . . . . . . 91.7% 92.2%
In 2002, we completed 1,301 renewals and new leases comprising 5.1 million square feet at an average rental rate increase of 8.2%. Net of the amortized portion of capital costs for tenant improvements, the increase averaged 5.6%. Expenses Total expenses increased by $38.9 million or 18.2% in 2002 ($252.5 million in 2002 versus $213.6 million in 2001). The increases in 2002 for depreciation and amortization expense ($11.5 million), operating expenses ($8.3 million) and ad valorem taxes ($6.2 million) are primarily a result of the properties acquired and developed during the year. Overall, direct operating costs and expenses (operating and ad valorem tax expense) of operating our properties as a percentage of rental revenues were 28% in 2002 and 2001, respectively. Interest expense as reported represents the gross interest expense on our indebtedness less interest that is capitalized for properties under development. Gross interest expense increased by $11.3 million in 2002 due to an increase in the average debt outstanding from $927.6 million in 2001 to $1.2 billion in 2002. This was offset by a decrease in the weighted-average interest rate between the two periods from 6.9% in 2001 to 6.3% in 2002. Interest expense as reported increased $11.4 million in 2002 due primarily to the increase in gross interest expense. General and administrative expenses increased by $1.6 million or 16.7% in 2002 ($11.1 million in 2002 versus $9.6 million in 2001), which is primarily due to normal compensation increases as well as increases in staffing necessitated by the growth in the portfolio. General and administrative expense as a percentage of rental revenues was 3% in 2002 and 2001, respectively. Other Equity in earnings of joint ventures decreased by $1.5 million or 27.3% in 2002 ($4.0 million in 2002 versus $5.5 million in 2001). This decrease results primarily from the gain on the sale of two mini-storage warehouses in 50%-owned unconsolidated joint ventures in August 2001. Income allocated to minority interests increased by $3.1 million in 2002 ($3.6 million in 2002 versus $.5 million in 2001). This increase is due primarily to the acquisition of seven supermarket-anchored shopping centers in the Raleigh-Durham market in April 2002 utilizing a DownREIT structure. These limited partnerships are included in our consolidated financial statements because we exercise financial and operating control. Also, $1.1 million of this increase results from a gain from the sale of a shopping center in a consolidated partnership that is reported as discontinued operations in the Statements of Consolidated Income and Comprehensive Income. 7 Income from discontinued operations increased $18.9 million in 2002 ($23.8 million in 2002 versus $4.9 million in 2001). Included in this caption for 2002 are the operating results and gain from the disposition of seven properties in 2002 totaling 681,000 square feet of gross leasable area plus the operating results of seven properties disposed in 2003 and two properties sold in the second quarter of 2004. Included in the 2001 amounts are the operating results of two properties sold in the second quarter of 2004 and seven properties sold both in 2003 and 2002. The gain on sale of $8.3 million in continuing operations in 2001 was due primarily to the sale of nine properties. Prior to the application of SFAS No. 144, WRI reported its property dispositions in this caption. FUNDS FROM OPERATIONS The National Association of Real Estate Investment Trusts defines funds from operations as net income (loss) computed in accordance with generally accepted accounting principles, excluding gains or losses from sales of property, plus real estate related depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. In addition, NAREIT recommends that extraordinary items not be considered in arriving at FFO. We calculate FFO in a manner consistent with the NAREIT definition. We believe FFO is an appropriate supplemental measure of operating performance because it helps investors compare the operating performance of our company relative to other REITs. There can be no assurance that FFO presented by WRI is comparable to similarly titled measures of other REITs. FFO should not be considered as an alternative to net income or other measurements under GAAP as an indicator of our operating performance or to cash flows from operating, investing or financing activities as a measure of liquidity. FFO does not reflect working capital changes, cash expenditures for capital improvements or principal payments on indebtedness. Funds from operations is calculated as follows (in thousands):
YEAR ENDED DECEMBER 31, ---------------------------------- 2003 2002 2001 ---------- ---------- ---------- Net income available to common shareholders . . . . . . . . . . . . . . . $ 97,880 $ 112,111 $ 88,839 Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . 86,913 74,870 65,940 Depreciation and amortization of unconsolidated joint ventures. . . . . . 1,940 1,985 1,863 Gain on sale of properties. . . . . . . . . . . . . . . . . . . . . . . . (6,765) (18,614) (8,368) Gain on sale of properties of unconsolidated joint ventures . . . . . . . (508) (1,427) ---------- ---------- ---------- Funds from operations . . . . . . . . . . . . . . . . . . . 179,460 170,352 146,847 Funds from operations attributable to operating partnership units . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,554 3,644 180 ---------- ---------- ---------- Funds from operations assuming conversion of OP units . . . $ 184,014 $ 173,996 $ 147,027 ========== ========== ========== Weighted average shares outstanding - basic . . . . . . . . . . . . . . . 78,800 77,866 72,155 Effect of dilutive securities: Share options and awards. . . . . . . . . . . . . . . . . . . . . . 690 492 282 Operating partnership units . . . . . . . . . . . . . . . . . . . . 2,084 1,683 116 ---------- ---------- ---------- Weighted average shares outstanding - diluted . . . . . . . . . . . . . . 81,574 80,041 72,553 ========== ========== ==========
8 EFFECTS OF INFLATION The rate of inflation was relatively unchanged in 2003. WRI has structured its leases, however, in such a way as to remain largely unaffected should significant inflation occur. Most of the leases contain percentage rent provisions whereby WRI receives increased rentals based on the tenants' gross sales. Many leases provide for increasing minimum rentals during the terms of the leases through escalation provisions. In addition, many of WRI's leases are for terms of less than ten years, which allows WRI to adjust rental rates to changing market conditions when the leases expire. Most of WRI's leases also require the tenants to pay their proportionate share of operating expenses and ad valorem taxes. As a result of these lease provisions, increases due to inflation, as well as ad valorem tax rate increases, generally do not have a significant adverse effect upon WRI's operating results. CAPITAL RESOURCES AND LIQUIDITY WRI anticipates that cash flows from operating activities will continue to provide adequate capital for all dividend payments in accordance with REIT requirements. Cash on hand, internally-generated cash flow, borrowings under our existing credit facilities, issuance of secured and unsecured debt, as well as other debt and equity alternatives, should provide the necessary capital to maintain and operate our properties, refinance debt maturities and achieve planned growth, which are WRI's primary liquidity needs. Investing Activities - Acquisitions During 2003, WRI invested $404.6 million in the acquisition of operating properties of which $307.8 million was invested in shopping centers and $96.8 million was invested in industrial properties. Additionally, we acquired a retail property through an investment of $9.2 million in a 40%-owned unconsolidated joint venture. We acquired 16 shopping centers adding 2.6 million square feet and five industrial properties adding 1.9 million square feet to our portfolio. Non-recourse secured debt totaling $180.2 million, of which $25.2 million is held by joint ventures or partnerships in which we participate, was assumed in conjunction with these purchases. Additionally, operating partnership units valued at $6.8 million were issued in conjunction with the purchase of three properties that used the DownREIT structure. The cash requirements for all acquisitions in 2003 were initially financed under WRI's revolving credit facilities, funded with excess cash flow from our existing portfolio of properties or with proceeds from property dispositions. Investing Activities - New Development and Capital Expenditures With respect to new development, WRI completed 12 projects during 2003 totaling 1.1 million square feet, representing an investment of $151.1 million. As of December 31, 2003, WRI has 13 retail developments underway in which we invested $41.3 million during 2003 and expect to invest $22.7 million in 2004. Upon completion, these projects will represent a total investment of approximately $129.0 million and will add 944,000 square feet to the portfolio. These projects will come on-line during 2004. All new development in 2003 was initially financed under WRI's revolving credit facilities, funded with excess cash flow from our existing portfolio of properties or with proceeds from property dispositions. Capital expenditures for additions to the existing portfolio, acquisitions, and new development totaled $507.7 million in 2003 and $351.2 million in 2002. WRI's share of capital expenditures for unconsolidated joint ventures or partnerships, including the purchase and development of properties by newly-formed joint ventures or partnerships was $20.9 million in 2003 and $1.8 million in 2002. Financing Activities - Debt Total debt outstanding increased to $1.8 billion at December 31, 2003 from $1.3 billion at December 31, 2002, due primarily to funding of acquisitions and new development. Total debt at December 31, 2003 includes $1.5 billion on which interest rates are fixed, including the net effect of our $112.5 million of interest rate swaps, and $351.9 million which bears interest at variable rates. Additionally, debt totaling $593.7 million is secured by operating properties while the remaining $1.2 billion is unsecured. In November 2003, WRI closed on an Amended and Restated Credit Agreement for a $400 million unsecured revolving credit facility with a syndicate of banks. The facility bears an interest rate of LIBOR plus 50 basis points. Additionally, the facility includes a competitive bid option that allows WRI to hold auctions at lower pricing for short-term funds for up to $200 million and an accordion feature, which can increase the facility amount up to $600 million at our 9 option. WRI used $195.0 million under this facility to retire in full its outstanding obligations under a $350 million unsecured revolving credit facility and a $50 million unsecured term loan, both of which matured in November 2003. As of December 31, 2003, WRI is in full compliance with the Amended and Restated Credit Agreement currently in place. WRI also has an unsecured and uncommitted overnight credit facility totaling $20 million to be used for cash management purposes. During the year ended December 31, 2003, WRI issued a total of $211 million of unsecured fixed-rate medium term notes with a weighted average interest rate of 5.2% and a weighted average term of 10.7 years. Subsequent to year-end, WRI issued a total of $150 million of ten-year unsecured fixed-rate medium term notes with a weighted average rate of 5.1%, including the effect of related swap transactions discussed below. Proceeds received from both the 2003 and 2004 medium term note issuances were used to pay down amounts outstanding under our revolving credit facilities. In addition, a $25 million floating-rate medium term note matured in July 2003, and a $15 million fixed-rate medium term note matured in December 2003. WRI hedges the future cash flows of its debt transactions, as well as changes in the fair value of its debt instruments, principally through interest rate swaps with major financial institutions. As of December 31, 2003, we have two interest rate swap contracts, which fix interest rates at 7.7% on an aggregate notional amount of $20 million and expire in June 2004. We have determined that these swap contracts are highly effective in offsetting future variable interest cash flows of the revolving credit debt and, accordingly, they have been designated as cash flow hedges with a fair value, net of accrued interest, of $.6 million at December 31, 2003 and are included in Other Liabilities. Also, we have ten interest rate swap contracts with an aggregate notional amount of $92.5 million at December 31, 2003 that convert fixed interest payments at rates ranging from 6.4% to 7.4% to variable interest payments. These contracts have been designated as fair value hedges. We have determined that they are highly effective in limiting our risk of changes in the fair value of the fixed-rate notes attributable to changes in variable interest rates. The fair value of these ten interest rate swaps, net of accrued interest, at December 31, 2003 was $5.1 million and is included in Other Assets. In December 2003, we entered into two forward-starting interest rate swaps with an aggregate notional amount of $97.0 million in anticipation of the issuance of fixed-rate medium term notes subsequent to year-end. These contracts were designated as a cash flow hedge of forecasted interest payments for $100 million of unsecured notes with a coupon of 4.9% that were sold in February 2004. Concurrent with the sale of the 4.9% notes, we settled our $97.0 million forward-starting interest rate swap contracts, resulting in a loss of $.9 million recorded in accumulated other comprehensive income. This $.9 million loss is being amortized to earnings over the life of the 4.9% notes. In January 2004, we entered into four additional forward-starting interest rate swaps with an aggregate notional amount of $194.0 million in anticipation of the issuance of fixed-rate medium term notes before April 2004. Medium term notes totaling $50 million were issued in January 2004, at which time one of the four forward-starting interest rate swaps with a notional amount of $48.5 million was settled at a loss of $.7 million. In conjunction with acquisitions completed during 2003, we assumed $155.0 million of non-recourse debt secured by the related properties. The weighted average interest rate on this debt is 7.1%, and the weighted average remaining life is 6.6 years. Additionally, we assumed non-recourse debt secured by three properties that are held by joint ventures or partnerships in which we participate. Our share of this debt totaled $25.2 million with a weighted average interest rate of 7.6% and a weighted average remaining life of 7.5 years. In December 2003, $88.0 million of 7.125% Series B Cumulative Redeemable Preferred Shares were redeemed from the proceeds of the common share offerings in the fourth quarter of 2003. Financing Activities - Equity Common and preferred dividends increased to $139.3 million in 2003, compared to $135.2 million in 2002 and $123.0 million in 2001. WRI satisfied its REIT requirement of distributing at least 90% of ordinary taxable income for each of the three years ending December 31, 2003. Our dividend payout ratio on common equity for 2003, 2002 and 2001 approximated 68.8%, 67.7% and 70.4%, respectively, based on funds from operations for the applicable year. In April 2003, the SEC declared effective WRI's $1 billion shelf registration statement, of which $555.9 million was available as of March 2, 2004. WRI will continue to closely monitor both the debt and equity markets and carefully consider its available financing alternatives, including both public and private placements. 10 With respect to its preferred shares, WRI has engaged in the following transactions: In April 2003, the company issued $75 million of depositary shares. Each depositary share represents one-thirtieth of a 6.75% Series D Cumulative Redeemable Preferred Share at a redemption price of $25 per depositary share, plus any accrued and unpaid dividends thereon. The depositary shares are not convertible or exchangeable for any other property or securities of WRI and are classified as equity at December 31, 2003. The 7.44% Series A Cumulative Redeemable Preferred Shares were redeemed in May 2003 with proceeds from the April 2003 issuance of $75 million of depositary shares. The original issuance costs of $2.5 million for the Series A shares were reported as a deduction in arriving at Net Income Available to Common Shareholders. The 7.125% Series B Cumulative Redeemable Preferred Shares were redeemed in December 2003 with proceeds from common share offerings in the fourth quarter of 2003. Due to the adoption of SFAS No. 150 in the third quarter of 2003, these shares were reclassified from equity to liabilities. The unamortized original issuance costs of $2.7 million for these shares were reported as a loss in arriving at Operating Income. The 7.0% Series C Cumulative Redeemable Preferred Shares remain outstanding as of December 31, 2003, have a liquidation value of $50 per share, and, due to the adoption of SFAS No. 150 in the third quarter of 2003, were reclassified from equity to liabilities. In October 2003, we issued 1.8 million common shares of beneficial interest. Net proceeds to WRI totaled $50.9 million based on a price of $30.33 per share. In November 2003, we issued an additional 1.5 million common shares of beneficial interest. Net proceeds to WRI totaled $44.5 million based on a price of $30.47 per share. The proceeds from the above offerings were used primarily to redeem our Series B preferred shares. In March 2004, we issued an additional 3.6 million common shares of beneficial interest. Net proceeds to WRI totaled $118.0 million based on a price of $33.64 per share. The proceeds from this offering will be used primarily to redeem our Series C preferred shares on April 1, 2004. CONTRACTUAL OBLIGATIONS The following table summarizes the company's principal contractual obligations as of December 31, 2003 (in thousands):
2004 2005 2006 2007 2008 Thereafter Total ---------- --------- ---------- --------- ---------- ----------- ------------ Unsecured Debt: (1) Medium Term Notes. . . . . . . . $ 50,000 $ 52,500 $ 37,000 $ 79,000 $ 36,000 $ 500,500 $ 755,000 7% 2011 Bonds. . . . . . . . . . 200,000 200,000 Revolving Credit Facilities. . . 18,050 241,000 259,050 Secured Debt . . . . . . . . . . . . . 53,412 21,824 21,063 19,378 163,682 314,349 593,708 Ground Lease Payments. . . . . . . . . 1,468 1,310 1,075 904 874 22,986 28,617 Construction Contracts on Development Projects . . . . . . . . 22,651 22,651 ---------- --------- ---------- --------- ---------- ----------- ------------ Total Contractual Obligations. . . . . $ 145,581 $ 75,634 $ 300,138 $ 99,282 $ 200,556 $ 1,037,835 $ 1,859,026 ========== ========= ========== ========= ========== ============ ============ --------------------------- (1) Total unsecured debt obligations as shown above are $2.9 million less than total unsecured debt as reported due to amortization of the discount on medium term notes and the fair value of interest rate swaps.
As of year-end 2003 and 2002, WRI did not have any off-balance sheet arrangements. 11 NEW ACCOUNTING PRONOUNCEMENTS On January 1, 2002, WRI adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 broadened the definition of discontinued operations to include components of an entity whose operations and cash flows are clearly distinguishable from the rest of the entity for operational and financial reporting purposes. Included in Income from Discontinued Operations for 2003 are the operating results and gain from the disposition of seven properties in 2003 totaling 371,000 square feet of gross leasable area plus the operating results of two properties sold in the second quarter of 2004. Included in the 2002 amounts are the operating results and gain from the disposition of seven properties in 2002 totaling 681,000 square feet of gross leasable area plus the operating results of the seven properties sold in 2003 and the two properties sold in the second quarter of 2004. In November 2002, FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others". FIN 45 establishes new disclosure and liability-recognition requirements for direct and indirect debt guarantees with specified characteristics. The initial measurement and recognition requirements of FIN 45 are effective prospectively for guarantees issued or modified after December 31, 2002. The adoption of FIN 45 did not have a material impact on WRI's financial position, results of operations or cash flows. In December 2002, FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123", which was effective for fiscal years beginning after December 15, 2002. This statement provides alternative methods of transition for an entity that voluntarily changes to the fair value-based method of accounting for stock-based employee compensation. It also amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. We adopted this statement effective January 1, 2003 using the prospective method, which requires us to recognize stock-based employee compensation as an expense when new share options are awarded, and determined that the adoption of SFAS No. 148 did not have a material impact on our results of operations or cash flows. In January 2003, FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities". FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. FIN 46, as amended, requires disclosures about variable interest entities that a company is not required to consolidate, but in which it has a significant variable interest (other than a majority voting interest). WRI has assessed its joint ventures and believes that the adoption of FIN 46 will not have a material impact on our financial position, results of operations or cash flows. In May 2003, FASB issued SFAS No. 150 "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity", which was effective for the first interim period beginning after June 15, 2003. SFAS No. 150 requires that certain financial instruments that incorporate an obligation by the issuer to transfer assets or issue equity be reported as liabilities. Financial instruments that fall within the scope of SFAS No. 150 include equity shares and non-controlling interests in subsidiaries that are mandatorily redeemable. WRI's Series B and Series C Cumulative Redeemable Preferred Shares fall within the scope of SFAS No. 150, since they are mandatorily redeemable and redemption is through transfer of cash or a variable number of WRI common shares. Accordingly, we reclassified the redemption value, net of unamortized issuance costs of $6.3 million, from equity to liabilities identified as "Preferred Shares Subject to Mandatory Redemption" as of September 30, 2003. FORWARD-LOOKING STATEMENTS This Annual Report includes certain forward-looking statements reflecting WRI's expectations in the near term that involve a number of risks and uncertainties; however, many factors may materially affect the actual results, including demand for our properties, changes in rental and occupancy rates, changes in property operating costs, interest rate fluctuations, and changes in local and general economic conditions. Accordingly, there is no assurance that WRI's expectations will be realized. 12 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Trust Managers and Shareholders of Weingarten Realty Investors: We have audited the accompanying consolidated balance sheets of Weingarten Realty Investors and subsidiaries (the "Company") as of December 31, 2003 and 2002, and the related statements of consolidated income and comprehensive income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2003. Our audits also included the financial statement schedules listed in the Index at Item 15. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Weingarten Realty Investors and subsidiaries at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. As discussed in Note 2 to the consolidated financial statements, in 2002 the Company changed its method of accounting for the impairment and disposal of long-lived assets to conform to Statement of Financial Accounting Standards No. 144. DELOITTE & TOUCHE LLP Houston, Texas March 9, 2004, except for Notes 1, 2, 7, 8, 9, 16, 18, 19, 20, and financial statement schedule III, as to which the date is September 8, 2004 13
STATEMENTS OF CONSOLIDATED INCOME AND COMPREHENSIVE INCOME (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Year Ended December 31, ---------------------------------- 2003 2002 2001 ---------- ---------- ---------- Revenues: Rentals . . . . . . . . . . . . . . . . . . . . . . . . . $ 407,387 $ 353,783 $ 298,580 Interest income . . . . . . . . . . . . . . . . . . . . . 1,587 1,054 1,167 Other . . . . . . . . . . . . . . . . . . . . . . . . . . 7,067 5,138 4,054 ---------- ---------- ---------- Total . . . . . . . . . . . . . . . . . . . 416,041 359,975 303,801 ---------- ---------- ---------- Expenses: Depreciation and amortization . . . . . . . . . . . . . . 93,382 77,113 65,630 Interest. . . . . . . . . . . . . . . . . . . . . . . . . 88,871 65,863 54,473 Operating . . . . . . . . . . . . . . . . . . . . . . . . 64,608 54,816 46,487 Ad valorem taxes. . . . . . . . . . . . . . . . . . . . . 47,129 43,602 37,445 General and administrative. . . . . . . . . . . . . . . . 13,820 11,148 9,570 Loss on early redemption of preferred shares. . . . . . . 2,739 ---------- ---------- ---------- Total . . . . . . . . . . . . . . . . . . . 310,549 252,542 213,605 ---------- ---------- ---------- Operating Income . . . . . . . . . . . . . . . . . . . . . . . 105,492 107,433 90,196 Equity in Earnings of Joint Ventures. . . . . . . . . . . 4,743 4,043 5,547 Income Allocated to Minority Interests. . . . . . . . . . (2,723) (3,553) (475) Gain on Sale of Properties. . . . . . . . . . . . . . . . 714 188 8,339 ---------- ---------- ---------- Income Before Discontinued Operations. . . . . . . . . . . . . 108,226 108,111 103,607 ---------- ---------- ---------- Operating Income from Discontinued Operations . . . . . . 2,015 4,284 4,935 Gain on Sale of Properties. . . . . . . . . . . . . . . . 6,039 19,472 ---------- ---------- ---------- Income from Discontinued Operations . . . . 8,054 23,756 4,935 ---------- ---------- ---------- Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . 116,280 131,867 108,542 ---------- ---------- ---------- Preferred Share Dividends . . . . . . . . . . . . . . . . (15,912) (19,756) (19,703) Redemption Costs of Series A Preferred Shares . . . . . . (2,488) ---------- ---------- ---------- Net Income Available to Common Shareholders. . . . . . . . . . $ 97,880 $ 112,111 $ 88,839 ========== ========== ========== Net Income Per Common Share - Basic: Income Before Discontinued Operations . . . . . . . . . . $ 1.14 $ 1.13 $ 1.16 Discontinued Operations . . . . . . . . . . . . . . . . . .10 .31 .07 ---------- ---------- ---------- Net Income. . . . . . . . . . . . . . . . . . . . . . . . $ 1.24 $ 1.44 $ 1.23 ========== ========== ========== Net Income Per Common Share - Diluted: Income Before Discontinued Operations . . . . . . . . . . $ 1.14 $ 1.13 $ 1.16 Discontinued Operations . . . . . . . . . . . . . . . . . .10 .30 .07 ---------- ---------- ---------- Net Income. . . . . . . . . . . . . . . . . . . . . . . . $ 1.24 $ 1.43 $ 1.23 ========== ========== ========== Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 116,280 $ 131,867 $ 108,542 ---------- ---------- ---------- Other Comprehensive Income (Loss): Cumulative effect of change in accounting principle (SFAS No. 133) on other comprehensive loss. . . . . . . (1,877) Unrealized derivative gain (loss) on interest rate swaps. 1,451 2,065 (2,579) Unrealized derivative gain (loss) on forward-starting interest rate swaps . . . . . . . . . . . . . . . . . . (159) (159) 1,520 Minimum pension liability adjustment. . . . . . . . . . . 959 (1,572) ---------- ---------- ---------- Other Comprehensive Income (Loss). . . . . . . . . . . . . . . 2,251 334 (2,936) ---------- ---------- ---------- Comprehensive Income . . . . . . . . . . . . . . . . . . . . . $ 118,531 $ 132,201 $ 105,606 ========== ========== ==========
See Notes to Consolidated Financial Statements. 14
CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) December 31, -------------------------- 2003 2002 ------------ ------------ ASSETS Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,200,091 $ 2,695,286 Accumulated Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . (527,375) (460,832) ------------ ------------ Property - net . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,672,716 2,234,454 Investment in Real Estate Joint Ventures . . . . . . . . . . . . . . . . . 32,742 28,738 ------------ ------------ Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,705,458 2,263,192 ------------ ------------ Notes Receivable from Real Estate Joint Ventures and Partnerships. . . . . 36,825 14,747 Unamortized Debt and Lease Costs . . . . . . . . . . . . . . . . . . . . . 70,895 48,377 Accrued Rent and Accounts Receivable (net of allowance for doubtful accounts of $4,066 in 2003 and $4,302 in 2002) . . . . . . . . . . . . . 43,368 38,156 Cash and Cash Equivalents. . . . . . . . . . . . . . . . . . . . . . . . . 20,255 27,420 Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,993 31,997 ------------ ------------ Total . . . . . . . . . . . . . . . . . . . . . $ 2,923,794 $ 2,423,889 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,810,706 $ 1,330,369 Preferred Shares Subject to Mandatory Redemption, net. . . . . . . . . . . 109,364 Accounts Payable and Accrued Expenses. . . . . . . . . . . . . . . . . . . 79,686 81,488 Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,671 23,636 ------------ ------------ Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,052,427 1,435,493 ------------ ------------ Minority Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,804 54,983 ------------ ------------ Commitments and Contingencies Shareholders' Equity: Preferred Shares of Beneficial Interest - par value, $.03 per share; shares authorized: 10,000 7.44% Series A cumulative redeemable preferred shares of beneficial interest; 3,000 shares issued and outstanding at December 31, 2002 . . . . . . . . . . . . . . . . . . . . . . 90 7.125% Series B cumulative redeemable preferred shares of beneficial interest; 3,600 shares issued and 3,518 shares outstanding at December 31, 2002 . . . . . . . . . . . . . . . . 106 7.0% Series C cumulative redeemable preferred shares of beneficial interest; 2,300 shares issued and 2,253 shares outstanding at December 31, 2002 . . . . . . . . . . . . . . . . 67 6.75% Series D cumulative redeemable preferred shares of beneficial interest; 100 shares issued and outstanding at December 31, 2003; liquidation preference $75,000 . . . . . . 90 Common Shares of Beneficial Interest - par value, $.03 per share; shares authorized: 150,000; shares issued and outstanding: 81,889 in 2003 and 78,113 in 2002. . . . . . . . . . . . . . . . . . 2,488 2,415 Capital Surplus. . . . . . . . . . . . . . . . . . . . . . . . . . . . 993,570 1,082,046 Accumulated Dividends in Excess of Net Income. . . . . . . . . . . . . (174,234) (148,709) Accumulated Other Comprehensive Loss . . . . . . . . . . . . . . . . . (351) (2,602) ------------ ------------ Shareholders' Equity . . . . . . . . . . . . . . . . . . . . . . 821,563 933,413 ------------ ------------ Total . . . . . . . . . . . . . . . . . . . . . $ 2,923,794 $ 2,423,889 ============ ============
See Notes to Consolidated Financial Statements. 15
STATEMENTS OF CONSOLIDATED CASH FLOWS (AMOUNTS IN THOUSANDS) Year Ended December 31, ----------------------------------------- 2003 2002 2001 ----------- ----------- ----------- Cash Flows from Operating Activities: Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 116,280 $ 131,867 $ 108,542 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization . . . . . . . . . . . . . 94,455 79,344 68,316 Loss on early redemption of preferred shares. . . . . . 2,739 Equity in earnings of joint ventures. . . . . . . . . . (4,743) (4,043) (5,547) Income allocated to minority interests. . . . . . . . . 2,723 3,553 475 Gain on sale of properties. . . . . . . . . . . . . . . (6,753) (19,660) (8,339) Changes in accrued rent and accounts receivable . . . . (5,596) (9,016) (12,680) Changes in other assets . . . . . . . . . . . . . . . . (31,579) (16,947) (22,869) Changes in accounts payable and accrued expenses. . . . (3,491) 2,940 17,307 Other, net. . . . . . . . . . . . . . . . . . . . . . . (490) 450 1,454 ----------- ----------- ----------- Net cash provided by operating activities . . . 163,545 168,488 146,659 ----------- ----------- ----------- Cash Flows from Investing Activities: Investment in properties. . . . . . . . . . . . . . . . . . (339,287) (214,128) (471,174) Notes receivable: Advances. . . . . . . . . . . . . . . . . . . . . . . . (22,577) (9,663) (2,895) Collections . . . . . . . . . . . . . . . . . . . . . . 509 2,285 7,943 Proceeds from sale of properties. . . . . . . . . . . . . . 21,713 45,763 23,146 Real estate joint ventures and partnerships: Investments . . . . . . . . . . . . . . . . . . . . . . (3,888) (5,355) (1,011) Distributions . . . . . . . . . . . . . . . . . . . . . 5,064 5,229 4,774 ----------- ----------- ----------- Net cash used in investing activities . . . . . (338,466) (175,869) (439,217) ----------- ----------- ----------- Cash Flows from Financing Activities: Proceeds from issuance of: Debt. . . . . . . . . . . . . . . . . . . . . . . . . . 467,625 275,997 442,650 Common shares of beneficial interest. . . . . . . . . . 100,250 13,850 307,722 Preferred shares of beneficial interest . . . . . . . . 72,758 Redemption of preferred shares. . . . . . . . . . . . . . . (162,995) Principal payments of debt. . . . . . . . . . . . . . . . . (170,408) (132,189) (329,824) Common and preferred dividends paid . . . . . . . . . . . . (139,317) (135,160) (123,015) Other, net. . . . . . . . . . . . . . . . . . . . . . . . . (157) (131) 138 ----------- ----------- ----------- Net cash provided by financing activities . . . 167,756 22,367 297,671 ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents. . . . . . (7,165) 14,986 5,113 Cash and cash equivalents at January 1. . . . . . . . . . . . . 27,420 12,434 7,321 ----------- ----------- ----------- Cash and cash equivalents at December 31. . . . . . . . . . . . $ 20,255 $ 27,420 $ 12,434 =========== =========== ===========
See Notes to Consolidated Financial Statements. 16
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY (AMOUNTS IN THOUSANDS) Year Ended December 31, 2003, 2002 and 2001 Preferred Common Accumulated Accumulated Shares of Shares of Dividends in Other Beneficial Beneficial Capital Excess of Comprehensive Interest Interest Surplus Net Income Loss ----------- ------------ ------------ ----------- ------------- Balance, January 1, 2001. . . . . . . . . . . . . . . $ 265 $ 2,182 $ 758,363 $ (130,943) Net income. . . . . . . . . . . . . . . . . . . . . 108,542 Issuance of common shares . . . . . . . . . . . . . 216 301,824 Shares issued under benefit plans . . . . . . . . . 4 6,571 Dividends declared - common shares. . . . . . . . . (103,312) Dividends declared - preferred shares . . . . . . . (19,703) Redemption of Series B preferred shares . . . . . . (1) 1 Redemption of Series C preferred shares . . . . . . (1) 1 (1) Other comprehensive loss. . . . . . . . . . . . . . $ (2,936) ----------- ------------ ------------ ----------- ------------- Balance, December 31, 2001. . . . . . . . . . . . . . 263 2,404 1,066,757 (145,416) (2,936) Net income. . . . . . . . . . . . . . . . . . . . . 131,867 Issuance of common shares . . . . . . . . . . . . . 6 9,482 Shares issued under benefit plans . . . . . . . . . 5 5,807 Dividends declared - common shares. . . . . . . . . (115,404) Dividends declared - preferred shares . . . . . . . (19,756) Other comprehensive income. . . . . . . . . . . . . 334 ----------- ------------ ------------ ----------- ------------- Balance, December 31, 2002. . . . . . . . . . . . . . 263 2,415 1,082,046 (148,709) (2,602) Net income. . . . . . . . . . . . . . . . . . . . . 116,280 Issuance of common shares . . . . . . . . . . . . . 65 95,201 Shares issued under benefit plans . . . . . . . . . 5 4,708 Shares issued in exchange for interests in limited partnerships . . . . . . . . . . . . . 3 5,410 Dividends declared - common shares. . . . . . . . . (123,405) Dividends declared - preferred shares . . . . . . . (15,912) Redemption of Series A preferred shares . . . . . . (90) (72,422) (2,488) Issuance of Series D preferred shares . . . . . . . 90 72,668 Effect of adoption of SFAS No. 150. . . . . . . . . (173) (194,041) Other comprehensive income. . . . . . . . . . . . . 2,251 ----------- ------------ ------------ ------------- ------------- Balance, December 31, 2003. . . . . . . . . . . . . . $ 90 $ 2,488 $ 993,570 $ (174,234) $ (351) =========== ============ ============ =========== =============
See Notes to Consolidated Financial Statements. 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business Weingarten Realty Investors, a Texas real estate investment trust, is engaged in the management, acquisition and development of real estate, primarily anchored neighborhood and community shopping centers and, to a lesser extent, industrial properties. Over 45% of the building square footage of WRI's portfolio is in Texas, with the remainder located primarily in the southern half of the United States. WRI's major tenants include supermarkets, discount retailers, drugstores and other merchants who generally sell basic, necessity-type goods and services. WRI currently operates, and intends to operate in the future, as a real estate investment trust. Basis of Presentation The consolidated financial statements include the accounts of WRI and its subsidiaries, as well as 100% of the accounts of joint ventures and partnerships over which WRI exercises financial and operating control and the related amounts of minority interests. All significant intercompany balances and transactions have been eliminated. Investments in joint ventures and partnerships where WRI has the ability to exercise significant influence, but does not exercise financial and operating control, are accounted for using the equity method. Revenue Recognition Rental revenue is generally recognized on a straight-line basis over the life of the lease. Revenue from tenant reimbursements of taxes, maintenance expenses and insurance is recognized in the period the related expense is recorded. Revenue based on a percentage of tenants' sales is recognized only after the tenant exceeds their sales breakpoint. Accrued Rent and Accounts Receivable An allowance for the uncollectible portion of accrued rents and accounts receivable is determined based upon an analysis of balances outstanding, historical bad debt levels, customer credit worthiness and current economic trends. Balances outstanding include base rents, tenant reimbursements and receivables attributable to the straight-lining of rental commitments. Additionally, estimates of the expected recovery of pre-petition and post-petition claims with respect to tenants in bankruptcy is considered in assessing the collectibility of the related receivables. Property Real estate assets are stated at cost less accumulated depreciation, which, in the opinion of management, is not in excess of the individual property's estimated undiscounted future cash flows, including estimated proceeds from disposition. Depreciation is computed using the straight-line method, generally over estimated useful lives of 18-50 years for buildings and 10-20 years for parking lot surfacing and equipment. Major replacements where the betterment extends the useful life of the asset are capitalized and the replaced asset and corresponding accumulated depreciation are removed from the accounts. All other maintenance and repair items are charged to expense as incurred. Acquisitions of properties are accounted for utilizing the purchase method (as set forth in SFAS No. 141 and SFAS No. 142) and, accordingly, the results of operations are included in the company's results of operations from the respective dates of acquisition. The company has used estimates of future cash flows and other valuation techniques to allocate the purchase price of acquired property among land, buildings on an "as if vacant" basis, and other identifiable intangibles. Other identifiable intangibles include the effect of out-of-market leases, the value of having leases in place, out-of-market assumed mortgages and tenant relationships. Property also includes costs incurred in the development of new operating properties. These costs include preacquisition costs directly identifiable with the specific project, development and construction costs, interest and real estate taxes. Indirect development costs, including salaries and benefits, travel and other related costs that are clearly attributable to the development of the property, are also capitalized. The capitalization of such costs ceases at the earlier of one year from the completion of major construction or when the property, or any completed portion, becomes available for occupancy. 18 WRI's properties are reviewed for impairment if events or changes in circumstances indicate that the carrying amount of the property may not be recoverable. In such an event, a comparison is made of the current and projected operating cash flows of each such property into the foreseeable future on an undiscounted basis to the carrying amount of such property. Such carrying amount would be adjusted, if necessary, to estimated fair value to reflect an impairment in the value of the asset. Interest Capitalization Interest is capitalized on land under development and buildings under construction based on rates applicable to borrowings outstanding during the period and the weighted average balance of qualified assets under construction during the period. Deferred Charges Debt and lease costs are amortized primarily on a straight-line basis, which approximates the effective interest method, over the terms of the debt and over the lives of leases, respectively. Lease costs represent the initial direct costs incurred in origination, negotiation and processing of a lease agreement. Such costs include outside broker commissions and other independent third party costs as well as salaries and benefits, travel and other related internal costs incurred in completing the leases. Costs related to supervision, administration, unsuccessful origination efforts and other activities not directly related to completed lease agreements are charged to expense as incurred. Stock-Based Compensation As a result of adopting SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123", beginning January 1, 2003, WRI recognized stock-based employee compensation as new shares were awarded. With respect to share options awarded prior to January 1, 2003, WRI accounted for stock-based employee compensation using the intrinsic value method set forth in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations. In accordance with APB Opinion No. 25, no stock-based employee compensation had been recognized in WRI's financial statements prior to January 1, 2003. The following table illustrates the effect on net income available to common shareholders and net income per common share if the fair value-based method had been applied to all outstanding and unvested awards in each period (in thousands, except per share amounts):
Year Ended December 31, -------------------------------- 2003 2002 2001 --------- ---------- --------- Net income available to common shareholders. . . . . . . $ 97,880 $ 112,111 $ 88,839 Stock-based employee compensation included in net income available to common shareholders. . . . . . 7 Stock-based employee compensation determined under the fair value-based method for all awards . . . (410) (344) (531) --------- ---------- --------- Pro forma net income available to common shareholders. . . . . . . . . . . . . . . . . . $ 97,477 $ 111,767 $ 88,308 ========= ========== ========= Net income per common share: Basic - as reported. . . . . . . . . . . . . . . . $ 1.24 $ 1.44 $ 1.23 ========= ========== ========= Basic - pro forma. . . . . . . . . . . . . . . . . $ 1.24 $ 1.44 $ 1.22 ========= ========== ========= Net income per common share: Diluted - as reported. . . . . . . . . . . . . . . $ 1.24 $ 1.43 $ 1.23 ========= ========== ========= Diluted - pro forma. . . . . . . . . . . . . . . . $ 1.23 $ 1.43 $ 1.22 ========= ========== =========
19 The weighted average fair value per share of options granted during 2003, 2002 and 2001 was $1.64, $1.75 and $1.62, respectively. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing method with the following weighted-average assumptions in 2003, 2002 and 2001, respectively: dividend yield of 6.6%, 6.0% and 6.6%; expected volatility of 15.1%, 16.5% and 15.3%; expected lives of 6.8, 7.4 and 7.4 and risk-free interest rates of 3.7%, 3.6% and 5.1%. Use of Estimates The preparation of financial statements requires management to make use of estimates and assumptions that affect amounts reported in the financial statements as well as certain disclosures. Actual results could differ from those estimates. Per Share Data Net income per common share - basic is computed using net income available to common shareholders and the weighted average shares outstanding that have been adjusted for the three-for-two share split described in Note 7. Net income per common share - diluted includes the effect of potentially dilutive securities for the periods indicated, as follows (in thousands):
YEAR ENDED DECEMBER 31, ----------------------------------- 2003 2002 2001 ---------- ---------- --------- Numerator: Net income available to common shareholders - basic. . . . . . . . . $ 97,880 $ 112,111 $ 88,839 Income attributable to operating partnership units . . . . . . . . . 3,040 2,388 83 ---------- ---------- --------- Net income available to common shareholders - diluted. . . . . . . . $ 100,920 $ 114,499 $ 88,922 ========== ========== ========= Denominator: Weighted average shares outstanding - basic. . . . . . . . . . . . . 78,800 77,866 72,155 Effect of dilutive securities: Share options and awards. . . . . . . . . . . . . . . . . . . . 690 492 282 Operating partnership units . . . . . . . . . . . . . . . . . . 2,084 1,683 116 ---------- ---------- --------- Weighted average shares outstanding - diluted. . . . . . . . . . . . 81,574 80,041 72,553 ========== ========== =========
Options to purchase, in millions: .5, .6 and .6 common shares of beneficial interest in 2003, 2002 and 2001, respectively, were not included in the calculation of net income per common share - diluted as the exercise prices were greater than the average market price for the year. Statements of Cash Flows - Additional Data WRI considers all highly liquid investments with original maturities of three months or less as cash equivalents. WRI issued .2 million common shares of beneficial interest in 2003 valued at $5.4 million in exchange for interests in limited partnerships which had been formed to acquire operating properties. We assumed debt totaling $180.2 million, $105.1 million and $165.0 million in connection with purchases of property during 2003, 2002 and 2001, respectively. Reclassifications Certain reclassifications of prior years' amounts have been made to conform with the current year presentation. NOTE 2. NEWLY ADOPTED ACCOUNTING PRONOUNCEMENTS On January 1, 2002, WRI adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 broadened the definition of discontinued operations to include components of an entity whose operations and cash flows are clearly distinguishable from the rest of the entity for operational and financial reporting purposes. Included in Income from Discontinued Operations for 2003 are the operating results and gain from the disposition of seven properties in 2003 totaling 371,000 square feet of gross 20 leasable area plus the operating results of two properties sold in the second quarter of 2004. Included in the 2002 amounts are the operating results and gain from the disposition of seven properties in 2002 totaling 681,000 square feet of gross leasable area plus the operating results of the seven properties sold in 2003 and the two properties sold in the second quarter of 2004. In November 2002, FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others". FIN 45 establishes new disclosure and liability-recognition requirements for direct and indirect debt guarantees with specified characteristics. The initial measurement and recognition requirements of FIN 45 are effective prospectively for guarantees issued or modified after December 31, 2002. The adoption of FIN 45 did not have a material impact on WRI's financial position, results of operations or cash flows. In December 2002, FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123", which was effective for fiscal years beginning after December 15, 2002. This statement provides alternative methods of transition for an entity that voluntarily changes to the fair value-based method of accounting for stock-based employee compensation. It also amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. We adopted this statement effective January 1, 2003 using the prospective method, which requires us to recognize stock-based employee compensation as an expense when new share options are awarded, and determined that the adoption of SFAS No. 148 did not have a material impact on our results of operations or cash flows. In January 2003, FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities". FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. FIN 46, as amended, requires disclosures about variable interest entities that a company is not required to consolidate, but in which it has a significant variable interest (other than a majority voting interest). WRI has assessed its joint ventures and believes that the adoption of FIN 46 will not have a material impact on our financial position, results of operations or cash flows. In May 2003, FASB issued SFAS No. 150 "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity", which was effective for the first interim period beginning after June 15, 2003. SFAS No. 150 requires that certain financial instruments that incorporate an obligation by the issuer to transfer assets or issue equity be reported as liabilities. Financial instruments that fall within the scope of SFAS No. 150 include equity shares and non-controlling interests in subsidiaries that are mandatorily redeemable. WRI's Series B and Series C Cumulative Redeemable Preferred Shares fall within the scope of SFAS No. 150, since they are mandatorily redeemable and redemption is through transfer of cash or a variable number of WRI common shares. Accordingly, we reclassified the redemption value, net of unamortized issuance costs of $6.3 million, from equity to liabilities identified as "Preferred Shares Subject to Mandatory Redemption" as of September 30, 2003. NOTE 3. DERIVATIVES AND HEDGING On January 1, 2001, WRI adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended. SFAS No. 133, as amended, requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and to measure those instruments at fair value. Additionally, the fair value adjustments will affect either shareholders' equity or net income depending on whether the derivative instrument qualifies as a hedge for accounting purposes and, if so, the nature of the hedging activity. WRI hedges the future cash flows of its debt transactions, as well as changes in the fair value of its debt instruments, principally through interest rate swaps with major financial institutions. As of December 31, 2003, we have two interest rate swap contracts, which fix interest rates at 7.7% on an aggregate notional amount of $20 million and expire in June 2004. We have determined that these swap contracts are highly effective in offsetting future variable interest cash flows of the revolving credit debt and, accordingly, they have been designated as cash flow hedges with a fair value, net of accrued interest, of $ .6 million at December 31, 2003 and are included in Other Liabilities. Also, we have ten interest rate swap contracts with an aggregate notional amount of $92.5 million at December 31, 2003 that convert fixed interest payments at rates ranging from 6.4% to 7.4% to variable interest payments. These contracts have 21 been designated as fair value hedges. We have determined that they are highly effective in limiting our risk of changes in the fair value of fixed-rate notes attributable to changes in variable interest rates. The fair value of these ten interest rate swaps, net of accrued interest, at December 31, 2003 was $5.1 million and is included in Other Assets. In December 2003, we entered into two forward-starting interest rate swaps with an aggregate notional amount of $97.0 million in anticipation of the issuance of fixed-rate medium term notes subsequent to year-end. These contracts were designated as a cash flow hedge of forecasted interest payments for $100 million of unsecured notes with a coupon of 4.9% that were sold in February 2004. Concurrent with the sale of the 4.9% notes, we settled our $97.0 million forward-starting interest rate swap contracts, resulting in a loss of $.9 million recorded in accumulated other comprehensive income. This $.9 million loss is being amortized to earnings over the life of the 4.9% notes. In January 2004, we entered into four additional forward-starting interest rate swaps with an aggregate notional amount of $194.0 million in anticipation of the issuance of fixed-rate medium term notes before April 2004. Medium term notes totaling $50 million were issued in January 2004, at which time one of the four forward-starting interest rate swaps with a notional amount of $48.5 million was settled at a loss of $.7 million. On December 31, 2003 and 2002, the derivative instruments designated as cash flow hedges were reported at their fair values as Other Liabilities, net of accrued interest, of $0.9 million and $2.4 million, respectively. The derivative instruments designated as fair value hedges on December 31, 2003 and 2002 were reported at their fair values as Other Assets, net of accrued interest, of $5.1 million and $7.7 million, respectively. Within the next twelve months, the Company expects to reclassify to earnings as interest expense approximately $0.6 million of the current balance held in accumulated other comprehensive loss. As of December 31, 2003 and 2002, the balance in accumulated other comprehensive income (loss) relating to the derivatives was $.3 million and ($1.0) million, respectively. With respect to fair value hedges, both changes in fair market value of the derivative hedging instrument and changes in the fair value of the hedged item will be recorded in earnings each reporting period. These amounts should completely offset with no impact to earnings, except for the portion of the hedge that proves to be ineffective, if any. The interest rate swaps decreased interest expense and increased net income by $2.3 million in 2003. In 2002 and 2001, the interest rate swaps increased interest expense and decreased net income by $.8 million and $.5 million, respectively. The interest rate swaps decreased the average rate for our debt by .2% for 2003. In 2002 and 2001, the interest rate swaps increased the average rate by .1% for both years. WRI could be exposed to credit losses in the event of non-performance by the counter-party; however, management believes the likelihood of such non-performance is remote. NOTE 4. DEBT WRI's debt consists of the following (in thousands):
DECEMBER 31, --------------------------- 2003 2002 ------------ ------------ Fixed-rate debt payable to 2030 at 4.5% to 8.9%. . . . . . . $ 1,510,294 $ 1,097,185 Variable-rate unsecured notes payable. . . . . . . . . . . . 75,000 Unsecured notes payable under revolving credit agreements. . 259,050 119,000 Obligations under capital leases . . . . . . . . . . . . . . 33,458 33,462 Industrial revenue bonds payable to 2015 at 1.3% to 3.0% . . 7,904 5,722 ------------ ------------ Total. . . . . . . . . . . . . . . . . . . . . . $ 1,810,706 $ 1,330,369 ============ ============
22 The grouping of WRI's total debt between fixed and variable-rate as well as between secured and unsecured is summarized below (in thousands):
DECEMBER 31, --------------------------- 2003 2002 ------------ ------------ As to interest rate (including the effects of interest rate swaps): Fixed-rate debt. . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,458,792 $ 1,055,688 Variable-rate debt . . . . . . . . . . . . . . . . . . . . . . . . 351,914 274,681 ------------ ------------ Total. . . . . . . . . . . . . . . . . . . . . . . . . $ 1,810,706 $ 1,330,369 ============ ============ As to collateralization: Unsecured debt . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,216,998 $ 958,719 Secured debt . . . . . . . . . . . . . . . . . . . . . . . . . . . 593,708 371,650 ------------ ------------ Total. . . . . . . . . . . . . . . . . . . . . . . . . $1,810,706 $ 1,330,369 ============ ============
In November 2003, WRI entered into an Amended and Restated Credit Agreement creating a $400 million unsecured revolving credit facility. The agreement expires in November 2006, but we can request a one-year extension of the agreement, solely at our option. We also have an agreement for an unsecured and uncommitted overnight credit facility totaling $20 million with a bank to be used for cash management purposes. WRI had letters of credit totaling $14.9 million outstanding under the $400 million revolving credit facility at December 31, 2003. The revolving credit agreements are subject to normal banking terms and conditions and do not adversely restrict our operations or liquidity. At December 31, 2003, the variable interest rate for notes payable under the $400 million revolving credit agreement was 1.7%. During 2003, the maximum balance and weighted average balance outstanding under both the $400 million and the $20 million revolving credit facilities were $275.2 million and $110.6 million, respectively, at a weighted average interest rate of 2.2%. WRI made cash payments for interest on debt, net of amounts capitalized, of $84.5 million in 2003, $63.1 million in 2002 and $42.9 million in 2001. During the year ended December 31, 2003, WRI issued a total of $211 million of unsecured fixed-rate medium term notes with a weighted average rate of 5.2% and a weighted average term of 10.7 years. Subsequent to year-end, WRI issued a total of $150 million of ten-year unsecured fixed-rate medium term notes with a weighted average rate, net of the effect of related swaps, of 5.1%. Proceeds received from both 2003 and 2004 medium term note issuances were used to pay down amounts outstanding under our revolving credit facilities. In addition, a $25 million floating-rate medium term note matured in July 2003, and a $15 million fixed-rate medium term note matured in December 2003. In conjunction with property acquisitions completed during 2003, we assumed $155.0 million of non-recourse debt secured by the related properties. The weighted average interest rate on this debt is 7.1% and the weighted average remaining life is 6.6 years. Additionally, we assumed non-recourse debt secured by three properties that are held by joint ventures or partnerships in which we participate. Our share of this debt totaled $25.2 million with a weighted average interest rate of 7.6% and a weighted average remaining life of 7.5 years. This non-recourse assumed debt falls within the scope of SFAS No. 141 and 142 since the contractual interest rate was higher than current market rates. The over-market mortgage adjustment on all debt assumed in 2003 was $24.4 million and is reported in Other Liabilities. Various leases and properties, and current and future rentals from those leases and properties, collateralize certain debt. At December 31, 2003 and 2002, the carrying value of such property aggregated $933.5 million and $688.5 million, respectively. 23 Scheduled principal payments on our debt (excluding $259 million due under our revolving credit agreements, $21.0 million of capital leases and $5.1 million market value of rate swaps) are due during the following years (in thousands):
2004 . . . . . . $ 82,402 2005 . . . . . . 74,324 2006 . . . . . . 58,063 2007 . . . . . . 98,378 2008 . . . . . . 199,682 2009 . . . . . . 94,277 2010 . . . . . . 71,021 2011 . . . . . . 282,778 2012 . . . . . . 144,879 2013 . . . . . . 240,745 Thereafter . . . 181,162
Various debt agreements contain restrictive covenants, the most restrictive of which requires WRI to maintain a pool of qualifying assets, as defined, of not less than 160% of unsecured debt. Other restrictions include minimum interest and fixed charge coverage ratios, minimum unencumbered interest coverage ratios, minimum net worth requirements and both secured and unsecured debt to total asset value measures. Management believes that WRI is in compliance with all restrictive covenants. NOTE 5. PREFERRED SHARES SUBJECT TO MANDATORY REDEMPTION In May 2003, FASB issued SFAS No. 150 "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity", which was effective for the first interim period beginning after June 15, 2003. SFAS No. 150 requires that certain financial instruments that incorporate an obligation by the issuer to transfer assets or issue equity be reported as liabilities. Financial instruments that fall within the scope of SFAS No. 150 include equity shares and non-controlling interests in subsidiaries that are mandatorily redeemable. WRI's Series B and Series C Cumulative Redeemable Preferred Shares fall within the scope of SFAS No. 150, since they are mandatorily redeemable and redemption is through transfer of cash or a variable number of WRI common shares. Accordingly, we reclassified the redemption value of these shares, net of unamortized issuance costs of $6.3 million, from equity to liabilities identified as "Preferred Shares Subject to Mandatory Redemption" as of September 30, 2003. In December 2003, WRI redeemed $88.0 million of 7.125% Series B Cumulative Redeemable Preferred Shares. This early redemption resulted in a loss equal to the unamortized original issuance cost of $2.7 million. Proceeds from the common share offerings in October and November 2003 were used to redeem these shares. Preferred Shares Subject to Mandatory Redemption at December 31, 2003 of $109.4 million represents the redemption value, net of unamortized issuance costs totaling $3.6 million, of the 7.0% Series C Cumulative Redeemable Preferred Shares. These shares, with a liquidation preference of $50 per share and no stated maturity, can be redeemed by the holder only upon their death in either cash or a variable number of common shares at our option. There are limitations on the number of shares per shareholder and in the aggregate that may be redeemed per year. These shares are also redeemable by WRI any time on or after March 15, 2004. On March 2, 2004, WRI called for redemption of all of these shares effective April 1, 2004. NOTE 6. PREFERRED SHARES In February 1998, WRI issued $75 million of 7.44% Series A Cumulative Redeemable Preferred Shares with a liquidation preference of $25 per share, which were called for redemption in April 2003. Upon the redemption of these shares, the related original issuance costs of $2.5 million were reported as a deduction in arriving at Net Income Available to Common Shareholders. The redemption in May 2003 was financed through the issuance of $75 million of depositary shares in April 2003. Each depositary share represents one-thirtieth of a Series D Cumulative Redeemable Preferred Share. The depositary shares are redeemable, in whole or in part, for cash on or after April 30, 2008 at the option of WRI, at a redemption price of $25 per depositary share, plus any accrued and unpaid dividends thereon. The depositary shares are not convertible or exchangeable 24 for any other property or securities of WRI. The Series D preferred shares pay a 6.75% annual dividend and have a liquidation value of $750 per share. NOTE 7. COMMON SHARES In October 2003, we issued 1.8 million common shares of beneficial interest. Net proceeds to WRI totaled $50.9 million based on a price of $30.33 per share. In November 2003, we issued an additional 1.5 million common shares of beneficial interest. Net proceeds to WRI totaled $44.5 million based on a price of $30.47 per share. The proceeds from the above offerings were used primarily to redeem our 7.125% Series B Cumulative Redeemable Preferred Shares. In February 2004, a three-for-two share split, effected in the form of a 50% share dividend, was declared for shareholders of record on March 16, 2004, payable March 30, 2004. In March 2004, we issued an additional 3.6 million common shares of beneficial interest. Net proceeds to WRI totaled $118.0 million based on a price of $33.64 per share. The proceeds from this offering will be used primarily to redeem our 7.0% Series C Cumulative Redeemable Preferred Shares. All references to the number of shares and per share amounts have been restated to reflect the three-for-two share split in March 2004, and an amount equal to the par value of the number of common shares issued has been reclassified to common shares from retained earnings. In February 2002, a three-for-two share split, affected in the form of a 50% share dividend, was declared for shareholders of record on April 1, 2002, payable April 15, 2002. We issued 17.3 million common shares of beneficial interest as a result of the share split. All references to the number of shares and per share amounts have been restated to reflect the share split, and an amount equal to the par value of the number of common shares issued has been reclassified to common shares from retained earnings. Also in February 2002, we completed the sale of .4 million common shares of beneficial interest. Net proceeds to WRI totaled $9.5 million based on a price of $22.43 per share and were used to pay down amounts outstanding under our revolving credit facilities. NOTE 8. PROPERTY WRI's property consists of the following (in thousands):
DECEMBER 31, --------------------------- 2003 2002 ------------ ------------ Land . . . . . . . . . . . . . . . . $ 600,369 $ 497,168 Land held for development. . . . . . 21,112 23,613 Land under development . . . . . . . 22,459 44,847 Buildings and improvements . . . . . 2,467,605 2,051,065 Construction in-progress . . . . . . 69,068 77,006 Property held for sale . . . . . . . 19,478 1,587 ------------ ------------ Total. . . . . . . . . . . $ 3,200,091 $ 2,695,286 ============ ============
The following carrying charges were capitalized (in thousands):
YEAR ENDED DECEMBER 31, -------------------------------- 2003 2002 2001 -------- --------- --------- Interest . . . . . . . . . . . . $ 6,361 $ 9,642 $ 9,698 Ad valorem taxes . . . . . . . . 945 974 383 -------- --------- --------- Total . . . . . . . . $ 7,306 $ 10,616 $ 10,081 ======== ========= =========
25 Acquisitions of properties are accounted for utilizing the purchase method (as set forth in SFAS No. 141 and SFAS No. 142) and, accordingly, the results of operations are included in the company's results of operations from the respective dates of acquisition. The company has used estimates of future cash flows and other valuation techniques to allocate the purchase price of acquired property among land, buildings on an "as if vacant" basis, and other identifiable intangibles. Other identifiable intangibles include the effect of out-of-market leases, the value of having leases in place and out-of-market assumed mortgages. At December 31, 2003, the company included deferred charges of $5.2 million for above-market leases in Other Assets, deferred credits of $4.9 million for below-market leases and $24.4 million for out-of-market assumed mortgages in Other Liabilities and deferred charges of $12.4 million for lease origination costs in Unamortized Debt and Lease Costs. These identifiable debit and credit intangibles are amortized over the terms of the acquired leases or the remaining lives of the mortgages. During 2003, WRI invested $404.6 million in the acquisition of operating properties of which $307.8 million was invested in shopping centers and $96.8 million was invested in industrial properties. Additionally, we acquired a retail property through an investment of $9.2 million in a 40%-owned unconsolidated joint venture. We acquired 16 shopping centers adding 2.6 million square feet and five industrial properties adding 1.9 million square feet to our portfolio. Non-recourse secured debt totaling $180.2 million, of which $25.2 million is held by joint ventures or partnerships in which we participate, was assumed in conjunction with these purchases. Additionally, operating partnership units valued at $6.8 million were issued in conjunction with the purchase of three properties that used the DownREIT structure. The cash requirements for all acquisitions in 2003 were initially financed under WRI's revolving credit facilities, funded with excess cash flow from our existing portfolio of properties or with proceeds from property dispositions. In 2003, WRI acquired land, either directly or through its interests in joint ventures, at four separate locations for the development of three retail shopping centers and one industrial distribution warehouse. During 2003, we invested $64.0 million in new developments. NOTE 9. DISCONTINUED OPERATIONS On January 1, 2002, WRI adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses accounting and reporting for the impairment or disposal of a component of a business. More specifically, this Statement broadens the presentation of discontinued operations to include a component of an entity whose operations and cash flows can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity. In 2003, we sold five retail projects located in San Antonio (1), McKinney (1), Nacogdoches (1) and Houston (2), Texas. Also, a warehouse building in Memphis, Tennessee and a retail building in Houston, Texas were sold. The operating results and the gain on sale of these properties have been reclassified and reported as discontinued operations in the Statements of Consolidated Income and Comprehensive Income. Included in the Consolidated Balance Sheet at December 31, 2002 is $1.6 million reported as property held for sale for the warehouse building and $14.3 million of Property and $4.7 million of Accumulated Depreciation associated with the remaining 2003 property dispositions. In 2002, we sold five retail projects located in Houston (3), Grand Prairie and San Antonio, Texas, one industrial building located in Houston, Texas and the River Pointe Apartments located in Conroe, Texas. Accordingly, the operating results and the gain on sale of the disposed properties have been reclassified and reported as discontinued operations in the Statements of Consolidated Income and Comprehensive Income. Property held for sale as of December 31, 2003 represents two retail shopping centers located in Webster and Kingwood, Texas that were sold in June 2004. The operating results of these shopping centers were reclassified and reported as discontinued operations in the Statements of Consolidated Income and Comprehensive Income, and $19.5 million is reported as property held for sale in the Consolidated Balance Sheet at December 31, 2003. Discontinued operations for properties sold in 2002, 2003 and 2004 had no debt that was required to be repaid upon their disposition. In addition, we elected not to allocate other consolidated interest to discontinued operations since the interest savings to be realized from the proceeds of the sale of these operations was not material. 26 NOTE 10. RELATED PARTY TRANSACTIONS WRI has mortgage bonds and notes receivable from WRI Holdings, Inc. of $2.8 million, net of deferred gain of $3.0 million at both December 31, 2003 and 2002. WRI and WRI Holdings share certain directors and are under common management. Unimproved land collateralizes these receivables. Management believes that the fair market value of the collateral exceeds the carrying value of the bonds and notes. The bonds and notes bear interest at rates of 16% and prime plus 1%, respectively. However, due to WRI Holdings' poor financial condition, WRI has limited the recognition of interest income for financial statement purposes to the amount of cash payments received. WRI did not receive any interest payments in 2003 or 2002, and does not anticipate receiving such payments in the near term. No interest income has been recognized for financial reporting purposes in the last three years. In 2002, undeveloped land from WRI Holdings of 6.9 acres was sold and the net proceeds of $1.4 million were used to pay down amounts outstanding under mortgage bonds and notes payable to WRI. WRI's unrecorded receivable for interest on the mortgage bonds and notes receivable was $30.0 million and $28.1 million at December 31, 2003 and 2002, respectively. Interest income not recognized by WRI for financial reporting purposes aggregated, in millions, $1.9, $1.9 and $2.5 for 2003, 2002 and 2001, respectively. WRI does not anticipate recovery of the unrecorded receivable in the future. WRI owns interests in several joint ventures and partnerships. Notes receivable from these entities bear interest at 3.5% to 10% at December 31, 2003, are due at various dates through 2028 and are generally secured by real estate assets. WRI recognized interest income on these notes as follows, in millions: $.5 in 2003; $.3 in 2002 and $.6 in 2001. NOTE 11. INVESTMENT IN REAL ESTATE JOINT VENTURES WRI owns interests in joint ventures or limited partnerships where we do not exercise financial and operating control. These partnerships are accounted for under the equity method since WRI exercises significant influence. Our interests in these joint ventures and limited partnerships range from 20% to 75% and, with the exception of one partnership which owns seven industrial properties, each venture owns a single real estate asset. Combined condensed financial information of these ventures (at 100%) is summarized as follows (in thousands):
DECEMBER 31, ------------------------ 2003 2002 ---------- ---------- Combined Balance Sheets Property. . . . . . . . . . . . . . . . $ 229,285 $ 177,396 Accumulated depreciation. . . . . . . . (26,845) (23,877) ---------- ---------- Property - net . . . . . . . . . . 202,440 153,519 Other assets. . . . . . . . . . . . . . 15,788 11,898 ---------- ---------- Total . . . . . . . . . . . . $ 218,228 $ 165,417 ========== ========== Debt. . . . . . . . . . . . . . . . . . $ 92,839 $ 71,985 Amounts payable to WRI. . . . . . . . . 38,105 16,334 Other liabilities . . . . . . . . . . . 4,729 4,152 Accumulated equity. . . . . . . . . . . 82,555 72,946 ---------- ---------- Total . . . . . . . . . . . . $ 218,228 $ 165,417 ========== ==========
27
YEAR ENDED DECEMBER 31, --------------------------------- 2003 2002 2001 --------- --------- --------- Combined Statements of Income Revenues. . . . . . . . . . . . . . . . . . $ 24,572 $ 25,094 $ 25,548 --------- --------- --------- Expenses: Interest. . . . . . . . . . . . . . . . . 6,212 6,311 7,082 Depreciation and amortization . . . . . . 4,730 4,902 4,519 Operating . . . . . . . . . . . . . . . . 3,586 3,430 3,578 Ad valorem taxes. . . . . . . . . . . . . 3,238 3,220 3,294 General and administrative. . . . . . . . 81 44 46 --------- --------- --------- Total. . . . . . . . . . . . . . . . . 17,847 17,907 18,519 --------- --------- --------- Gain on sale of properties. . . . . . . . . 1,016 2,854 --------- --------- --------- Net income. . . . . . . . . . . . . . . . . $ 7,741 $ 7,187 $ 9,883 ========= ========= =========
Our investment in real estate joint ventures, as reported on the balance sheets, differs from our proportionate share of the joint ventures' underlying net assets due to basis differentials, which arose upon the transfer of assets from WRI to the joint ventures. This basis differential, which totaled $4.8 million at December 31, 2003 and 2002, respectively, is depreciated over the useful lives of the related assets. Fees earned by WRI for the management of these joint ventures totaled, in millions, $.6 in 2003 and $.5 in both 2002 and 2001. In April 2003, a 38%-owned limited partnership commenced construction on a 116,000 square foot center in Denver, Colorado, which will include a corporate-owned King Sooper Supermarket of 67,000 square feet. In July 2003, a 20%-owned limited partnership commenced construction on a 300,000 square foot state-of-the-art distribution warehouse, which is located in Houston, Texas. In August 2003, a 50%-owned joint venture sold a shopping center in Lake Charles, Louisiana resulting in a gain of $1.0 million. In October 2003, a 40%-owned joint venture acquired an 88,000 square foot shopping center in Highlands Ranch, Colorado. In May 2002, a 50%-owned joint venture commenced construction on a 660,000 square foot center in Las Vegas, Nevada, which will include a corporate-owned Wal-Mart of 224,000 square feet and a corporate-owned Lowe's of 170,000 square feet. In August 2002, a 33%-owned limited partnership commenced construction on a 240,000 square foot center in American Fork, Utah, which will include a corporate-owned Target of 147,000 square feet. Also, in August 2002, WRI acquired a joint venture partner's 50% interest in a shopping center in Lewiston, Maine. NOTE 12. FEDERAL INCOME TAX CONSIDERATIONS Federal income taxes are not provided because WRI qualifies as a REIT under the provisions of the Internal Revenue Code. Shareholders of WRI include their proportionate taxable income in their individual tax returns. As a REIT, we must distribute at least 90% of our ordinary taxable income to our shareholders and meet certain income source and investment restriction requirements. Taxable income differs from net income for financial reporting purposes principally because of differences in the timing of recognition of interest, ad valorem taxes, depreciation, rental revenue and pension expense. As a result of these differences, the tax basis exceeds the book value of our net assets by $6.7 million at December 31, 2003. 28 For federal income tax purposes, the cash dividends distributed to common shareholders are characterized as follows:
2003 2002 2001 ------ ------ ------ Ordinary income . . . . . . . . . . . . . . . . . 91.0% 97.1% 92.2% Return of capital (generally non-taxable) . . . . 8.7 6.2 Capital gain distributions. . . . . . . . . . . . 0.3 2.9 1.6 ------ ------ ------ Total . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% ====== ====== ======
NOTE 13. LEASING OPERATIONS WRI's lease terms range from less than one year for smaller tenant spaces to over twenty-five years for larger tenant spaces. In addition to minimum lease payments, most of the leases provide for contingent rentals (payments for taxes, maintenance and insurance by lessees and an amount based on a percentage of the tenants' sales). Future minimum rental income from non-cancelable tenant leases at December 31, 2003, in millions, is: $341.5 in 2004; $301.7 in 2005; $255.1 in 2006; $207.8 in 2007; $164.6 in 2008 and $660.2 thereafter. The future minimum rental amounts do not include estimates for contingent rentals. Such contingent rentals, in millions, aggregated $82.1 in 2003, $72.5 in 2002 and $64.0 in 2001. NOTE 14. COMMITMENTS AND CONTINGENCIES On certain properties, WRI leases from the landowners and then subleases these properties to other parties. Future minimum rental payments under these operating leases, in millions, are: $1.5 in 2004; $1.3 in 2005; $1.1 in 2006; $.9 in 2007; $.9 in 2008; and $23.0 thereafter. Future minimum rental payments on these leases have not been reduced by future minimum sublease rentals aggregating $19.1 million through 2023 that are due under various non-cancelable subleases. Rental expense (including insignificant amounts for contingent rentals) for operating leases was, in millions: $2.8 in 2003; $2.7 in 2002 and $2.8 in 2001. Sublease rental revenue (excluding amounts for improvements constructed by WRI on the leased land) from these leased properties was as follows, in millions: $3.2 in 2003, $3.0 in 2002 and $3.1 in 2001. Property under capital leases, consisting of four shopping centers, aggregated $29.1 million at December 31, 2003 and 2002, respectively, and is included in buildings and improvements. Amortization of property under capital leases is included in depreciation and amortization expense. Future minimum lease payments under these capital leases total $61.6 million, with annual payments due, in millions, of $1.9 in 2004; $2.0 in each of 2005, 2006 and 2007; $2.1 in 2008 and $51.6 thereafter. The amount of these total payments representing interest is $28.1 million. Accordingly, the present value of the net minimum lease payments is $33.5 million at December 31, 2003. WRI owns interests in six limited partnerships (referred to as DownREITs) that have acquired properties in Utah, Georgia, Arkansas and North Carolina. These limited partnerships allow the outside limited partners to put their interest to the partnership for WRI common shares of beneficial interest or an equivalent amount in cash. WRI may assume the right to acquire any limited partnership interests that are put to the partnership and may, at its option, settle the put in cash or a fixed number of WRI common shares. In 2003, WRI paid $4.2 million and issued .1 million common shares of beneficial interest valued at $5.4 million in exchange for certain of these limited partnership interests. WRI, as general partner, exercises operating and financial control of the partnerships and consolidates their operations in the accompanying consolidated financial statements. WRI expects to invest $22.7 million in 2004 to complete construction of properties currently under development. 29 WRI is involved in various matters of litigation arising in the normal course of business. While WRI is unable to predict with certainty the amounts involved, WRI's management and counsel are of the opinion that, when such litigation is resolved, WRI's resulting liability, if any, will not have a material effect on WRI's consolidated financial statements. NOTE 15. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of WRI's financial instruments was determined using available market information and appropriate valuation methodologies as of December 31, 2003. Unless otherwise described below, all other financial instruments are carried at amounts which approximate their fair values. Based on rates currently available to WRI for debt with similar terms and average maturities, fixed-rate debt with carrying values of $1.5 billion and $1.1 billion have fair values of approximately $1.6 billion and $1.2 billion at December 31, 2003 and 2002, respectively. The fair value of WRI's variable-rate debt approximates its carrying values of $351.9 million and $274.7 million at year-end 2003 and 2002, respectively. NOTE 16. SHARE OPTIONS AND AWARDS WRI had an incentive share option plan, which provided for the issuance of options and share awards up to a maximum of 1.6 million common shares that expired in December 1997. Options granted under this plan generally became exercisable in equal increments over a three-year period. WRI has an additional share option plan, which grants 100 share options to every employee of WRI, excluding officers, upon completion of each five-year interval of service. This plan, which expires in 2012, provides options for a maximum of 225,000 common shares. Options granted under this plan are exercisable immediately. For both of these share option plans, options are granted to employees of WRI at an exercise price equal to the quoted fair market value of the common shares on the date the options are granted and expire upon termination of employment or ten years from the date of grant. WRI has another share option plan, which expired in 2002, that provided for the issuance of up to 3.9 million common shares, either in the form of restricted shares or share options. Prior to 2000, the restricted shares generally vested over a ten-year period, with potential acceleration of vesting due to appreciation in the market value of our common shares. Beginning in 2000, the vesting period is five years. During 2003 and 2002, the vesting of certain restricted share grants was accelerated pursuant to the terms of the award agreements, due to appreciation in the market share price, resulting in additional compensation expense of $.7 million for both 2003 and 2002. The share options granted to non-officers vest over a three-year period beginning one year after the date of grant, and over a seven-year period beginning two years after the date of grant for officers. Share options were granted at the quoted fair market value on the date of grant. Restricted shares are issued at no cost to the employee, and as such we recognized compensation expense relating to restricted shares, excluding the effect of accelerated vesting, as follows, in millions: $.5 in 2003, $.7 in 2002 and $.8 in 2001. In April 2001, WRI adopted the 2001 Long Term Incentive Plan for the issuance of options and share awards up to a maximum of 2.3 million common shares. The plan expires in April 2011. In December 2003, .5 million share options were granted. The share options granted to non-officers vest over a three-year period beginning one year after the date of grant and, for officers over a five-year period one year after the date of grant. 30 Following is a summary of the option activity for the three years ended December 31, 2003:
SHARES WEIGHTED UNDER AVERAGE OPTION EXERCISE PRICE ---------- -------------- Outstanding, January 1, 2001 . . . . . 3,185,531 $ 17.46 Granted. . . . . . . . . . . . . . . 791,190 20.71 Canceled . . . . . . . . . . . . . . (249,525) 16.80 Exercised. . . . . . . . . . . . . . (644,477) 16.34 ---------- Outstanding, December 31, 2001 . . . . 3,082,719 18.58 Granted. . . . . . . . . . . . . . . 592,176 24.39 Canceled . . . . . . . . . . . . . . (49,974) 19.89 Exercised. . . . . . . . . . . . . . (564,683) 16.79 ---------- Outstanding, December 31, 2002 . . . . 3,060,238 19.99 Granted. . . . . . . . . . . . . . . 499,083 30.01 Canceled . . . . . . . . . . . . . . (7,800) 22.28 Exercised. . . . . . . . . . . . . . (458,985) 17.38 ---------- Outstanding, December 31, 2003 . . . . 3,092,536 $ 22.01 ==========
The number of share options exercisable at December 31, 2003, 2002 and 2001 was, in millions: 1.0, 1.2 and 1.6, respectively. Options exercisable at year-end 2003 had a weighted average exercise price of $18.67. The weighted average fair value per share of options granted during 2003, 2002 and 2001 was $1.64, $1.75 and $1.62, respectively. There were 1.9 million common shares available for the future grant of options or awards at December 31, 2003. The following table summarizes information about share options outstanding and exercisable at December 31, 2003:
OUTSTANDING EXERCISABLE ----------------------------------------- ------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE RANGE OF REMAINING EXERCISE EXERCISE EXERCISE PRICES NUMBER CONTRACTUAL LIFE PRICE NUMBER PRICE --------------- --------- ---------------- -------- --------- ---------- $16.44 - $24.58 2,601,817 6.50 years $ 20.49 1,040,907 $ 18.67 $24.58 - $30.09 490,719 10.00 years 30.09 --------- ---------------- --------- --------- ---------- Total. . . . 3,092,536 7.06 years $ 22.01 1,040,907 $ 18.67 ========= ================ ========= ========= ==========
31 NOTE 17. BANKRUPTCY REMOTE PROPERTIES WRI has 41 properties, having a net book value of approximately $711.8 million at December 31, 2003 (collectively the "Bankruptcy Remote Properties", and each a "Bankruptcy Remote Property"), which are wholly owned by various "Bankruptcy Remote Entities". Each Bankruptcy Remote Entity is either a direct or an indirect subsidiary of WRI. The assets of each Bankruptcy Remote Entity, including the respective Bankruptcy Remote Property or Properties owned by each, are owned by that Bankruptcy Remote Entity alone and are not available to satisfy claims that any creditor may have against WRI, its affiliates, or any other person or entity. No Bankruptcy Remote Entity has agreed to pay or make its assets available to pay creditors of WRI, any of its affiliates, or any other person or entity. Neither WRI nor any of its affiliates has agreed to pay or make its assets available to pay creditors of any Bankruptcy Remote Entity (other than any agreement by a Bankruptcy Remote Entity to pay its own creditors). No affiliate of any Bankruptcy Remote Entity has agreed to pay or make its assets available to pay creditors of any Bankruptcy Remote Entity. The accounts of the Bankruptcy Remote Entities are included in WRI's consolidated financial statements because WRI exercises financial and operating control over each of these entities. NOTE 18. EMPLOYEE BENEFIT PLANS WRI has a Savings and Investment Plan pursuant to which eligible employees may elect to contribute from 1% of their salaries to the maximum amount established annually by the Internal Revenue Service. Employee contributions are matched by WRI at the rate of $.50 per $1.00 for the first 6% of the employee's salary. The employees vest in the employer contributions ratably over a six-year period. Compensation expense related to the plan was $.5 million in both 2003 and 2002 and $.4 million in 2001. WRI also has an Employee Share Purchase Plan under which .4 million of WRI common shares have been authorized. These shares, as well as common shares purchased by WRI on the open market, are made available for sale to employees at a discount of 15%. Shares purchased by the employee under the plan are restricted from being sold for two years from the date of purchase or until termination of employment with WRI. A total of 19,220, 23,033 and 23,792 shares were purchased by employees at an average price of $28.90, $20.08 and $17.22 during 2003, 2002 and 2001, respectively. 32 Prior to April 1, 2002, WRI maintained a non-contributory pension plan covering substantially all of its employees. Effective April 1, 2002, WRI converted to a non-contributory cash balance retirement plan under which each participant received an actuarially-determined opening balance. Annual additions to each participant's account include a service credit ranging from 3-5% of compensation, depending on years of service, and an interest credit based on the ten-year US Treasury Bill rate. Vesting generally occurs after five years of service. Certain participants were grandfathered under the prior pension plan. Reconciliation of the benefit obligation, plan assets at fair value, funded status of the plan and net amount recognized are as follows (in thousands):
2003 2002 --------- --------- Benefit obligation at beginning of year. . . . . . . . $ 13,290 $ 12,197 Service cost . . . . . . . . . . . . . . . . . . . . . 509 384 Interest cost. . . . . . . . . . . . . . . . . . . . . 870 807 Amendments . . . . . . . . . . . . . . . . . . . . . . (1,407) Assumption changes . . . . . . . . . . . . . . . . . . 1,607 Actuarial loss . . . . . . . . . . . . . . . . . . . . 704 115 Benefit payments . . . . . . . . . . . . . . . . . . . (433) (413) --------- --------- Benefit obligation at end of year. . . . . . . . . . . $ 14,940 $ 13,290 ========= ========= Fair value of plan assets at beginning of year . . . . $ 9,183 $ 10,826 Actual return on plan assets . . . . . . . . . . . . . 2,089 (1,230) Employer contributions . . . . . . . . . . . . . . . . 550 Benefit payments . . . . . . . . . . . . . . . . . . . (433) (413) --------- --------- Fair value of plan assets at end of year . . . . . . . $ 11,389 $ 9,183 ========= ========= Funded status. . . . . . . . . . . . . . . . . . . . . $ (3,551) $ (4,107) Unrecognized actuarial loss. . . . . . . . . . . . . . 2,680 3,481 Unrecognized prior service cost. . . . . . . . . . . . (1,151) (1,279) --------- --------- Pension liability. . . . . . . . . . . . . . . . . . . $ (2,022) $ (1,905) ========= ========= Amounts recognized in the Consolidated Balance Sheets: Accrued benefit liability. . . . . . . . . . . . . . . $ (2,635) $ (3,477) Accumulated other comprehensive loss . . . . . . . . . 613 1,572 --------- --------- Net amount recognized. . . . . . . . . . . . . . . . . $ (2,022) $ (1,905) ========= =========
33 The components of net periodic benefit cost are as follows (in thousands):
2003 2002 2001 ------ ------- --------- Service cost . . . . . . . . . . . . . . . . $ 509 $ 384 $ 556 Interest cost. . . . . . . . . . . . . . . . 870 807 825 Expected return on plan assets . . . . . . . (807) (961) (1,092) Prior service cost . . . . . . . . . . . . . (128) (128) Recognized (gain) loss . . . . . . . . . . . 224 (158) ------ ------ --------- Total . . . . . . . . . . . . . . . . . $ 668 $ 102 $ 131 ====== ======= =========
The assumptions used to develop periodic expense are shown below:
2003 2002 2001 ----- ----- ----- Discount rate for net periodic benefit cost. . . . . . . . . . . 6.50% 7.50% 7.50% Salary scale increases for net periodic benefit cost . . . . . . 4.00% 5.00% 5.00% Long-term rate of return on assets . . . . . . . . . . . . . . . 8.75% 9.00% 9.00%
The selection of the discount rate follows the guidance provided in SFAS No. 87, "Employers' Accounting for Pensions". The selection of the discount rate is made annually after comparison to yields based on high quality fixed-income investments. The salary scale is the composite rate which reflects anticipated inflation, merit increases, and promotions for the group of covered participants. The long-term rate of return is a composite rate for the trust. It is derived as the sum of the percentages invested in each principal asset class included in the portfolio multiplied by their respective expected rates of return. WRI considered the historical returns and the future expectations for returns for each asset class, as well as the target asset allocation of the pension portfolio. This analysis resulted in the selection of 8.75% as the long-term rate of return assumption for 2003. The assumptions used to develop the actuarial present value of the benefit obligations were:
2003 2002 2001 ----- ----- ----- Discount rate. . . . . . . . . . . . . . 6.25% 6.50% 7.50% Salary scale increases . . . . . . . . . 4.00% 4.00% 5.00%
Contributions expected to be paid to the plan during 2004 are approximately $500,000. The measurement dates for the non-contributory pension plan were December 31, 2003 and December 31, 2002. The participant data used in determining the liabilities and costs was collected as of January 1, 2003. 34 The fair value of the major categories of plan assets as provided by the plan trustee is as follows (in thousands):
AS OF DECEMBER 31, 2003 ----------------------- Cash and short-term investments . . . . . . . . $ 357 3% Mutual funds - equity . . . . . . . . . . . . . 8,062 71% Mutual funds - fixed income . . . . . . . . . . 2,970 26% --------- ---- Total. . . . . . . . . . . . . . $ 11,389 100% ========= ====
WRI's investment policy and strategy for plan assets require that plan assets be allocated based on a "Broad Market Diversification" model. For purposes of classifying domestic stock funds, approximately 65% of plan assets will be allocated to large company funds and 20% to mid and small-company funds. Approximately 15% of the overall stock allocation will be in the foreign stock category. The remaining balance of plan assets is in the fixed-income component of the portfolio that is divided between a short-term bond option and at least two intermediate-term bond options. On a semi-annual basis, the plan assets are rebalanced to maintain this asset allocation. Selected investment funds are monitored as reasonably necessary to permit the WRI Investment Committee to evaluate any material changes to the investment fund's performance. WRI also has a non-qualified supplemental retirement plan for officers of WRI, which provides for benefits in excess of the statutory limits of its non-contributory cash balance retirement plan. The obligation is funded in a grantor trust with a mix of assets similar to the non-contributory cash balance retirement plan. We recognized expense of $.6 million in 2003 and $.4 million in both 2002 and 2001. NOTE 19. SEGMENT INFORMATION The operating segments presented are the segments of WRI for which separate financial information is available, and operating performance is evaluated regularly by senior management in deciding how to allocate resources and in assessing performance. WRI evaluates the performance of its operating segments based on net operating income that is defined as total revenues less operating expenses and ad valorem taxes. Management does not consider the effect of gains or losses from the sale of property in evaluating ongoing operating performance. The shopping center segment is engaged in the acquisition, development and management of real estate, primarily anchored neighborhood and community shopping centers located in Texas, California, Louisiana, Arizona, Nevada, Arkansas, New Mexico, Oklahoma, Tennessee, Kansas, Colorado, Missouri, Illinois, Florida, North Carolina, Mississippi, Georgia, Utah and Maine. The customer base includes supermarkets, discount retailers, drugstores and other retailers who generally sell basic necessity-type commodities. The industrial segment is engaged in the acquisition, development and management of bulk warehouses and office/service centers. Its properties are located in Texas, Nevada, Georgia, Florida, California and Tennessee, and the customer base is diverse. Included in "Other" are corporate-related items, insignificant operations and costs that are not allocated to the reportable segments. 35 Information concerning WRI's reportable segments is as follows (in thousands):
SHOPPING CENTER INDUSTRIAL OTHER TOTAL ------------ ---------- ---------- ------------ 2003: Revenues . . . . . . . . . . . . . . . . . . . $ 371,431 $ 42,389 $ 2,221 $ 416,041 Net operating income . . . . . . . . . . . . . 272,538 30,268 1,498 304,304 Equity in earnings of joint ventures . . . . . 4,704 118 (79) 4,743 Investment in real estate joint ventures . . . 32,453 289 32,742 Total assets . . . . . . . . . . . . . . . . . 2,397,273 295,611 230,910 2,923,794 Capital expenditures . . . . . . . . . . . . . 429,666 105,773 1,914 537,353 2002: Revenues . . . . . . . . . . . . . . . . . . . $ 321,847 $ 36,123 $ 2,005 $ 359,975 Net operating income . . . . . . . . . . . . . 235,407 24,653 1,497 261,557 Equity in earnings of joint ventures . . . . . 3,779 314 (50) 4,043 Investment in real estate joint ventures . . . 28,469 269 28,738 Total assets . . . . . . . . . . . . . . . . . 2,075,764 212,189 135,936 2,423,889 Capital expenditures . . . . . . . . . . . . . 374,864 6,395 7,752 389,011 2001: Revenues . . . . . . . . . . . . . . . . . . . $ 269,458 $ 31,576 $ 2,767 $ 303,801 Net operating income . . . . . . . . . . . . . 195,943 22,065 1,861 219,869 Equity in earnings of joint ventures . . . . . 3,696 1,909 (58) 5,547 Investment in real estate joint ventures . . . 25,094 648 25,742 Total assets . . . . . . . . . . . . . . . . . 1,775,131 215,782 104,834 2,095,747 Capital expenditures . . . . . . . . . . . . . 615,144 44,083 3,306 662,533
Net operating income reconciles to income before discontinued operations as shown on the Statements of Consolidated Income and Comprehensive Income as follows (in thousands):
2003 2002 2001 ---------- ---------- ---------- Total segment net operating income. . . . . . . . . . $ 304,304 $ 261,557 $ 219,869 Less: Depreciation and amortization. . . . . . . . . . 93,382 77,113 65,630 Interest . . . . . . . . . . . . . . . . . . . . 88,871 65,863 54,473 General and administrative . . . . . . . . . . . 13,820 11,148 9,570 Loss on early redemption of preferred shares . . 2,739 Income allocated to minority interests . . . . . 2,723 3,553 475 Equity in earnings of joint ventures . . . . . . (4,743) (4,043) (5,547) Gain on sale of properties . . . . . . . . . . . (714) (188) (8,339) --------- --------- ---------- Income before discontinued operations . . . . . . . . $ 108,226 $ 108,111 $ 103,607 ========== ========== ==========
36 NOTE 20. QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly financial data is as follows (in thousands, except per share amounts):
FIRST SECOND THIRD FOURTH --------- ---------- ---------- ---------- 2003: Revenues . . . . . . . . . . . . . . . . . . . $ 96,844 $ 101,994 $ 106,379 $ 110,824 Net income available to common shareholders. . 24,969 21,060 (1) 28,381 (2) 23,470 (1) Net income per common share - basic. . . . . . 0.32 0.27 (1) 0.36 (2) 0.29 (1) Net income per common share - diluted. . . . . 0.32 0.27 (1) 0.36 (2) 0.29 (1) 2002: Revenues . . . . . . . . . . . . . . . . . . . $ 83,096 $ 89,557 $ 92,021 $ 95,301 Net income available to common shareholders. . 24,478 26,395 34,486 (2) 26,752 Net income per common share - basic. . . . . . 0.32 0.34 0.44 (2) 0.34 Net income per common share - diluted. . . . . 0.31 0.34 0.44 (2) 0.34 (1) The change is primarily the result of non-cash charges for the redemption of preferred shares during the quarter. (2) The change is primarily the result of gains on the sale of properties during the quarter.
* * * * 37 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated herein by reference to the "Share Ownership of Certain Beneficial Owners" section of WRI's definitive Proxy Statement for the Annual Meeting of Shareholders to be held April 23, 2004. The following table summarizes the equity compensation plans under which WRI's common shares may be issued as of December 31, 2003:
NUMBER OF SHARES TO WEIGHTED AVERAGE BE ISSUED UPON EXERCISE EXERCISE PRICE OF NUMBER OF SHARES OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, REMAINING AVAILABLE PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS FOR FUTURE ISSUANCE ----------------------------- ----------------------- -------------------- -------------------- Equity compensation plans approved by shareholders. . . . . . . 3,092,536 $ 22.01 1,882,056 Equity compensation plans not approved by shareholders. . . . . . . ----------------------- -------------------- -------------------- Total . . . . . . 3,092,536 $ 22.01 1,882,056 ======================= ==================== ====================
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (1) Financial Statement Schedules: ================================= SCHEDULE PAGE -------- ---- II Valuation and Qualifying Accounts. . . . . . . 39 III Real Estate and Accumulated Depreciation . . . 40 IV Mortgage Loans on Real Estate. . . . . . . . . 42 38 SCHEDULE II
WEINGARTEN REALTY INVESTORS VALUATION AND QUALIFYING ACCOUNTS DECEMBER 31, 2003, 2002 AND 2001 (AMOUNTS IN THOUSANDS) Charged Balance at to costs Charged Balance beginning and to other Deductions at end of Description of period expenses accounts (A) period ----------------- ---------- --------- -------- ---------- --------- 2003: Allowance for Doubtful Accounts. . . . . . . $ 4,302 $ 3,637 $ 3,873 $ 4,066 2002: Allowance for Doubtful Accounts. . . . . . . $ 2,926 $ 3,869 $ 2,493 $ 4,302 2001: Allowance for Doubtful Accounts. . . . . . . $ 1,884 $ 3,764 $ 2,722 $ 2,926
------------------- Note A - Write-offs of accounts receivable previously reserved. 39 SCHEDULE III
WEINGARTEN REALTY INVESTORS REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 2003 (AMOUNTS IN THOUSANDS) Total Cost --------------------------------------- Buildings Projects and Under Total Accumulated Encumbrances Land Improvements Development Cost Depreciation (A) ---------- ------------- ------------ ------------ ------------- ------------ SHOPPING CENTERS: Texas. . . . . . .. . . . . . . . . . $ 187,674 $ 757,237 $ 944,911 $ 296,879 $ 57,981 Other States . . .. . . . . . . . . . 350,500 1,382,737 1,733,237 164,761 455,226 ---------- ------------ ---------- ------------ ---------- ---------- Total Shopping Centers. . . . . . 538,174 2,139,974 2,678,148 461,640 513,207 INDUSTRIAL: Texas. . . . . . .. . . . . . . . . . 32,591 166,957 199,548 44,065 2,555 Other States . . .. . . . . . . . . . 29,070 110,027 139,097 4,132 23,476 ---------- ------------ ---------- ------------ ---------- ---------- Total Industrial. . . . . . . . . 61,661 276,984 338,645 48,197 26,031 OTHER: Texas. . . . . . .. . . . . . . . . . 534 12,545 13,079 7,325 ---------- ------------ ---------- ------------ ---------- ---------- Total Improved Properties . . . . 600,369 2,429,503 3,029,872 517,162 539,238 ---------- ------------ ---------- ------------ ---------- ---------- LAND UNDER DEVELOPMENT OR HELD FOR DEVELOPMENT: Texas. . . . . . .. . . . . . . . . . $ 30,949 30,949 Other States . . .. . . . . . . . . . 12,622 12,622 ---------- ------------ ---------- ------------ ---------- ---------- Total Land Under Development or Held for Development. . . . 43,571 43,571 ---------- ------------ ---------- ------------ ---------- ---------- PROPERTY HELD FOR SALE: Texas. . . . . . .. . . . . . . . . . 3,603 15,809 66 19,478 ---------- ------------ ---------- ------------ ---------- ---------- Total Property Held for Sale. . . 3,603 15,809 66 19,478 ---------- ------------ ---------- ------------ ---------- ---------- LEASED PROPERTY (SHOPPING CENTERS) UNDER CAPITAL LEASE: Texas. . . . . . .. . . . . . . . . . 9,048 9,048 697 Other States . . .. . . . . . . . . . 29,054 29,054 9,516 12,467 ---------- ------------ ---------- ------------ ---------- ---------- Total Leased Property Under Capital Lease. . . . . . 38,102 38,102 10,213 12,467 ---------- ------------ ---------- ------------ ---------- ---------- CONSTRUCTION IN PROGRESS: Texas. . . . . . .. . . . . . . . . . 24,062 24,062 Other States . . .. . . . . . . . . . 45,006 45,006 ---------- ------------ ---------- ------------ ---------- ---------- Total Construction in Progress. .. . . . . . . . . . 69,068 69,068 ---------- ------------ ---------- ------------ ---------- ---------- TOTAL OF ALL PROPERTIES . . . . . $ 603,972 $ 2,483,414 $ 112,705 $ 3,200,091 $ 527,375 $ 551,705 ========== ============ ========== ============ ========== ========== Note A - Encumbrances do not include $21.0 million outstanding under a $30 million 20-year term loan, payable to a group of insurance companies secured by a property collateral pool including all or part of three shopping centers.
40 SCHEDULE III (CONTINUED) The changes in total cost of the properties for the years ended December 31, 2003, 2002 and 2001 were as follows:
2003 2002 2001 ------------ ------------ ------------ Balance at beginning of year. . . . . $ 2,695,286 $ 2,352,393 $ 1,728,414 Additions at cost . . . . . . . . . . 537,353 389,011 662,533 Retirements or sales. . . . . . . . . (32,548) (46,118) (38,554) ------------ ------------ ------------ Balance at end of year. . . . . . . . $ 3,200,091 $ 2,695,286 $ 2,352,393 ============ ============ ============
The changes in accumulated depreciation for the years ended December 31, 2003, 2002 and 2001 were as follows:
2003 2002 2001 ---------- ---------- ---------- Balance at beginning of year. . . . . $ 460,832 $ 402,958 $ 362,267 Additions at cost . . . . . . . . . . 77,067 70,403 58,297 Retirements or sales. . . . . . . . . (10,524) (12,529) (17,606) ---------- ---------- ---------- Balance at end of year. . . . . . . . $ 527,375 $ 460,832 $ 402,958 ========== ========== ==========
41 SCHEDULE IV
WEINGARTEN REALTY INVESTORS MORTGAGE LOANS ON REAL ESTATE DECEMBER 31, 2003 (AMOUNTS IN THOUSANDS) Final Periodic Face Carrying Interest Maturity Payment Amount of Amount of Rate Date Terms Mortgages Mortgages(A) -------- -------- ------------------ --------- ------------ SHOPPING CENTERS: FIRST MORTGAGES: Eastex Venture Beaumont, TX (Note D) . . . . . . . . . . 6.75% 10-31-09 $ 314 Annual P & I $ 2,300 $ 1,574 Main/O.S.T., Ltd. Houston, TX (Note D) . . . . . . . . . . 9.3% 02-01-20 $ 476 Annual P & I 4,800 4,250 ($1,241 balloon) INDUSTRIAL: FIRST MORTGAGES: South Loop Business Park Houston, TX (Note D) . . . . . . . . . . 9.25% 11-01-07 $ 74 Annual P & I 439 236 UNIMPROVED LAND: SECOND MORTGAGE: River Pointe, Conroe, TX (Notes B and D). . . . . . . Prime 12-01-04 Varying 12,000 2,698 +1% ($2,698 balloon) --------- -------- TOTAL MORTGAGE LOANS ON REAL ESTATE (Note D). . . . . . . $ 19,539 $ 8,758 ========= ======== ------------------------------------ Note A - The aggregate cost at December 31, 2003 for federal income tax purposes is $8,758. Note B - Principal payments are due monthly to the extent of cash flow generated by the underlying property. Note C - Changes in mortgage loans for the years ended December 31, 2003, 2002 and 2001 are summarized below. Note D - Represents WRI share of mortgage loans to joint ventures.
2003 2002 2001 -------- --------- --------- Balance, Beginning of Year . . . $ 9,006 $ 10,627 $ 14,327 Additions to Existing Loans. . . 80 173 205 Collections of Principal . . . . (328) (1,794) (3,905) -------- --------- --------- Balance, End of Year . . . . . . $ 8,758 $ 9,006 $ 10,627 ======== ========= =========
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