S-11/A 1 l92086cs-11a.txt DEVELOPERS DIVERSIFIED REALTY CORPORATION S-11/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 22, 2002 REGISTRATION NO. 333-76278 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- AMENDMENT NO. 2 TO FORM S-11 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------------- DEVELOPERS DIVERSIFIED REALTY CORPORATION (Exact Name of Registrant as Specified in Its Governing Instruments) --------------------- 3300 ENTERPRISE PARKWAY BEACHWOOD, OHIO 44122 (216) 755-5500 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) --------------------- SCOTT A. WOLSTEIN, CHIEF EXECUTIVE OFFICER DEVELOPERS DIVERSIFIED REALTY CORPORATION 3300 ENTERPRISE PARKWAY BEACHWOOD, OHIO 44122 (216) 755-5500 (Name, Address, Including Zip Code and Telephone Number, Including Area Code, of Agent for Service) --------------------- COPIES TO: ALBERT T. ADAMS, ESQ. BAKER & HOSTETLER LLP 3200 NATIONAL CITY CENTER 1900 EAST NINTH STREET CLEVELAND, OHIO 44114 (216) 621-0200 --------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. --------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- PROSPECTUS 2,800,000 COMMON SHARES DEVELOPERS DIVERSIFIED REALTY CORPORATION Developers Diversified Realty Corporation, an Ohio corporation, is a self-administered and self-managed real estate investment trust in the business of acquiring, developing, redeveloping, owning, leasing and managing shopping centers and business centers. All of the common shares, without par value, offered and sold hereby are being offered and sold by DDR pursuant to a Purchase and Sale Agreement among Burnham Pacific Properties, Inc. ("BP"), Burnham Pacific Operating Partnership, L.P., BPP/Van Ness, L.P. and DDR. Under the terms of the purchase agreement, DDR will acquire one real property asset and all of BP's direct and indirect partnership and membership interests in another real property asset in exchange for $65.4 million, consisting of at least $15.1 million in cash and, at DDR's option, some or all of the common shares offered hereby or additional cash. BP and the other BP entities have agreed not to resell any such common shares. However, the BP Entities may distribute such common shares to BP's shareholders pursuant to BP's plan of complete liquidation. If we issue the shares offered hereby, we expect the BP Entities to make that distribution shortly after the date of this prospectus. In the event of any such distribution, BP will be a statutory underwriter under applicable United States securities laws with respect to the DDR common shares so distributed. See "Plan of Distribution" on page 9 for additional information relevant to BP's plan of complete liquidation and its intention to distribute DDR common shares. Our common shares are listed on the New York Stock Exchange under the symbol "DDR." The last reported sale price of our common shares on the New York Stock Exchange on February 20, 2002 was $19.89 per share. We impose certain restrictions on the ownership of our common shares so that we can maintain our qualification as a real estate investment trust. In general, our articles of incorporation prohibit the ownership of more than 5% of our outstanding common shares. SEE "RISK FACTORS" BEGINNING ON PAGE 1 FOR RISKS RELEVANT TO AN INVESTMENT IN THE COMMON SHARES. DDR's executive offices are located at 3300 Enterprise Parkway, Beachwood, Ohio 44122, telephone number (216) 755-5500. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED WHETHER THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this prospectus is February 25, 2002. RISK FACTORS THE ECONOMIC PERFORMANCE AND VALUE OF OUR CENTERS DEPEND ON MANY FACTORS The economic performance and value of our real estate holdings can be affected by many factors, including the following: - changes in national, regional and local economic climates; - local conditions, such as an oversupply of space or a reduction in demand for real estate in the area; - the attractiveness of our properties to tenants; - competition from other available space; and - increases in operating costs. OUR REAL ESTATE DEVELOPMENT ACTIVITIES MAY NOT BE PROFITABLE We intend to continue to actively pursue shopping center development projects, including the expansion of existing centers. Our current projects generally require the expenditure of capital and various forms of government and other approvals. We cannot be sure that we will always receive government and other approvals. Consequently, we cannot be sure that any projects will be completed or that they will be profitable. WE DEPEND ON RENTAL INCOME FROM REAL PROPERTY Substantially all of our income is derived from rental income from real property. As a result, our income and funds for distribution would be negatively affected if a significant number of our tenants were unable to meet their obligations to us or if we were unable to lease a significant amount of space in our properties on economically favorable lease terms. We cannot be sure that any tenant whose lease expires will renew that lease or that we will be able to re-lease space on economically advantageous terms. OUR REAL ESTATE INVESTMENTS CONTAIN ENVIRONMENTAL RISKS Under various federal, state and local laws, ordinances and regulations, we may be considered an owner or operator of real property or we may have arranged for the disposal or treatment of hazardous or toxic substances. As a result, we could become liable for the costs of removal or remediation of certain hazardous substances released on or in our property. We could also be liable for other costs that relate to hazardous or toxic substances (including governmental fines and injuries to persons and property). We could incur liability whether or not we knew of, or were responsible for, the presence of the hazardous or toxic substances. WE RELY ON MAJOR TENANTS As of September 30, 2001, the annualized base rental revenues from Wal-Mart represented 5.1% of our and our proportionate share of our joint ventures' aggregate annualized shopping center base rental revenues. We could be adversely affected in the event of the bankruptcy or insolvency of Wal-Mart or a significant downturn in the business of Wal-Mart. In addition, we could be adversely affected if Wal-Mart does not renew its leases as they expire. We could also be adversely affected in the event of a downturn in the business of other major tenants. However, as of September 30, 2001, we received no more than 3.0% of our and our proportionate share of our joint ventures' shopping center base rental revenues from any other single tenant. WE COULD BE ADVERSELY AFFECTED BY KMART'S BANKRUPTCY In January 2002, Kmart, our second largest retailer, representing approximately 2.8% of the Company proportionate share of shopping center base rental revenue as of September 30, 2001, filed for protection from its creditors under Chapter 11 of the bankruptcy code. We and our joint venture partners have 26 leases 1 involving Kmart aggregating 2,256,960 square feet. These leases represent approximately 5.7% of owned gross leasable area. As a result of the Kmart bankruptcy, our income and funds available for distribution could be negatively affected. In addition, we cannot be sure that any properties subject to the Kmart leases, which may be terminated in the bankruptcy, will be re-leased or re-leased on economically advantageous terms. PROPERTY OWNERSHIP THROUGH PARTNERSHIPS AND JOINT VENTURES COULD LIMIT OUR CONTROL OF THOSE INVESTMENTS Partnership or joint venture investments may involve risks not otherwise present for investments made solely by us, including the possibility that our partner or co-venturer might become bankrupt, that our partner or co-venturer might at any time have different interests or goals than we do, and that our partner or co-venturer may take action contrary to our instructions, requests, policies or objectives, including our policy with respect to maintaining our qualification as a REIT. Other risks of joint venture investments include impasse on decisions, such as a sale, because neither our partner or co-venturer nor we would have full control over the partnership or joint venture. There is no limitation under our organizational documents as to the amount of funds that we may invest in partnerships or joint ventures. As of September 30, 2001, we had approximately $276.0 million of investments in and advances to partnerships and joint ventures. OUR ACQUISITION, DEVELOPMENT AND CONSTRUCTION ACTIVITIES COULD RESULT IN LOSSES We intend to acquire existing retail properties to the extent that suitable acquisitions can be made on advantageous terms. Acquisitions of commercial properties entail risks, such as the risks that we may not be in a position or have the opportunity in the future to make suitable property acquisitions on advantageous terms and that our investments will fail to perform as expected. Many of the properties that we acquire require significant additional investment and upgrades and are subject to the risk that estimates of the cost of improvements to bring such properties up to standards established for the intended market position may prove inaccurate. We also intend to continue the selective development and construction of retail properties in accordance with our development and underwriting policies as opportunities arise. Our development and construction activities include the risks that: - We may abandon development opportunities after expending resources to determine feasibility; - Construction costs of a project may exceed our original estimates; - Occupancy rates and rents at a newly completed property may not be sufficient to make the property profitable; - Financing may not be available to us on favorable terms for development of a property; and - We may not complete construction and lease-up on schedule, resulting in increased debt service expense and construction costs. Our development activities are also subject to risks relating to the inability to obtain, or delays in obtaining, all necessary zoning, land-use, building, occupancy and other required governmental permits and authorizations. If any of the above events occur, the ability to pay distributions to our shareholders and service our indebtedness could be adversely affected. In addition, new development activities, regardless of whether or not they are ultimately successful, typically require a substantial portion of management's time and attention. OUR ARTICLES OF INCORPORATION CONTAIN LIMITATIONS ON ACQUISITIONS AND CHANGES IN CONTROL Our articles of incorporation prohibit any person, except for certain existing shareholders at the time of our initial public offering, from owning more than 5% of our outstanding common shares. That restriction is likely to discourage third parties from acquiring control of us without consent of our Board of Directors even if a change in control is in the best interests of our shareholders. 2 THERE IS NO LIMITATION IN OUR ORGANIZATIONAL DOCUMENTS ON INCURRENCE OF DEBT We intend to continue to maintain a conservative debt capitalization with a ratio of debt to total market capitalization (the sum of the aggregate market value of our common shares, the liquidation preference on any preferred shares outstanding, and our total indebtedness) of less than 50%. However, our organizational documents do not contain any limitation on the amount or percentage of indebtedness we may incur. Despite this lack of limitation, the indentures that govern our outstanding indebtedness do contain limits on our ability to incur indebtedness. OUR FAILURE TO QUALIFY AS A REIT WOULD HAVE SERIOUS ADVERSE CONSEQUENCES TO OUR SHAREHOLDERS We intend to operate so as to qualify as a REIT under the Internal Revenue Code of 1986, as amended (the "Code"). We believe that we have been organized and have operated in a manner which would allow us to qualify as a REIT under the Code beginning with our taxable year ended December 31, 1993. However, it is possible that we have been organized or have operated in a manner which would not allow us to qualify as a REIT, or that our future operations could cause us to fail to qualify. We must satisfy numerous requirements (some on an annual and quarterly basis) established under highly technical and complex Code provisions to qualify as a REIT. There are limited judicial and administrative interpretations of these tax provisions. Our status as a REIT also involves the determination of various factual matters and circumstances not entirely within our control. For example, in order to qualify as a REIT, at least 95% of our gross income in any year must be derived from qualifying sources, and we must pay dividends to shareholders aggregating annually at least 90% of our REIT taxable income (determined without regard to the dividends paid deduction and by excluding capital gains). Legislation, new regulations, administrative interpretations or court decisions could significantly change the tax laws with respect to qualification as a REIT or the federal income tax consequences of such qualification. However, we are not aware of any pending tax legislation that would adversely affect our ability to operate as a REIT. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates. Unless we are entitled to relief under certain statutory provisions, we would be disqualified from treatment as a REIT for the four taxable years following the year during which we lost qualification. If we lose our REIT status, our net earnings available for investment or distribution to shareholders would be significantly reduced for each of the years involved. In addition, we would no longer be required to make distributions to our shareholders. See "Federal Income Tax Considerations -- Failure to Qualify." WE COULD BE ADVERSELY AFFECTED BY REQUIRED PAYMENTS OF DEBT OR OF RELATED INTEREST We are generally subject to the risks associated with debt financing. These risks include: - The risk that our cash flow will not satisfy required payments of principal and interest; - The risk that we cannot refinance existing indebtedness on our properties as necessary or that the terms of the refinancing will be less favorable to us than the terms of existing debt; and - The risk that necessary capital expenditures for purposes such as reletting space cannot be financed on favorable terms. If a property is mortgaged to secure payment of indebtedness and we cannot pay the mortgage payments, we may have to surrender the property to the lender with a consequent loss of any prospective income and equity value from such property. OUR ABILITY TO INCREASE OUR DEBT COULD ADVERSELY AFFECT OUR CASH FLOW Generally, our organizational documents do not limit the level or amount of debt that we may incur. At December 31, 2001, we had outstanding debt of approximately $1.3 billion. If we were to become more highly leveraged, our cash needs to fund debt service would increase accordingly. Such an increase could adversely 3 affect our financial condition and results of operations. In addition, increased leverage could increase the risk of default on our debt obligations, which could reduce our cash available for distribution and our asset values. OUR FINANCIAL CONDITION COULD BE ADVERSELY AFFECTED BY FINANCIAL COVENANTS Our credit facilities and the indentures under which our senior and subordinated unsecured indebtedness is, or may be, issued contain certain financial and operating covenants, including, among other things, debt service coverage and fixed charges coverage ratios, as well as limitations on our ability to incur secured and unsecured indebtedness, sell all or substantially all of our assets and engage in mergers and consolidations and certain acquisitions. Although we intend to operate in compliance with these covenants, if we were to violate those covenants we may be subject to higher finance costs and fees. Foreclosure on mortgaged properties or an inability to refinance existing indebtedness would likely have a negative impact on our financial condition and results of operations. OUR ABILITY TO CONTINUE TO OBTAIN PERMANENT FINANCING CANNOT BE ASSURED In the past, we have financed certain acquisitions and certain development activities in part with proceeds from our credit facilities. This financing has been, and may continue to be, replaced by permanent financing. However, we may not be able to obtain permanent financing for future acquisitions or development activities on acceptable terms. If market interest rates were to increase at a time when amounts were outstanding under our credit facilities or if other variable rate debt was outstanding, our debt interest costs would increase, causing potentially adverse effects on our financial condition and results of operations. OUR RESULTS OF OPERATIONS MAY BE AFFECTED BY A JUDGMENT ENTERED AGAINST US In September 2001, the U.S. District Court entered a judgment in the amount of $5.0 million in compensatory damages, plus attorney fees, against us and three other defendants, in respect of a verdict reached in a civil trial regarding a claim filed by a movie theater relating to a property owned by us. The court also awarded to the plaintiff $1.0 million in punitive damages against us and $3.0 million in punitive damages against the three other defendants. The claim alleged breach of contract and fraud during the lease negotiation process that took place prior to and after our acquisition of the property. For further discussion of this litigation, see Note 12 to the Company's Condensed Consolidated Financial Statements for the period ended September 30, 2001 on pages F-55 and 56. The verdict is subject to various post-trial motions and appeal. Ulmer & Berne LLP, our outside legal counsel in this matter, has advised us that it is probable that the verdict will ultimately be reversed, in whole or in substantial part. Accordingly, no provision has been recorded in our financial statements. Although there can be no assurance as to the ultimate outcome, management does not believe that an adverse final determination, if any, will be material in relation to our cash flows, liquidity or financial condition. However, amounts awarded, if any, to the plaintiff upon final resolution of this matter, could adversely affect our results of operations in the period in which they are recorded. Further, a determination has not been made as to the proportionate distribution of the contingent loss associated with the compensatory damages, if any, between the defendants. 4 FORWARD-LOOKING INFORMATION This prospectus includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include, without limitation, statements related to acquisitions and other business development activities, future capital expenditures, financing sources and availability and the effects of environmental and other regulations. Although we believe that the expectations reflected in those forward-looking statements are based upon reasonable assumptions, we can give no assurance that our expectations will be achieved. For this purpose, any statements contained herein that are not statements of historical fact should be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks," "estimates," and similar expressions are intended to identify forward-looking statements. Actual results could differ materially from forward-looking statements since they involve known and unknown risks, uncertainties and other factors which are, in some cases, beyond our control and could materially affect our actual results, performance or achievements. Factors that could cause actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements include, but are not limited to, the following: - We are subject to general risks affecting the real estate industry, including the need to enter into new leases or renew leases on favorable terms to generate rental revenues; - We are subject to competition for tenants from other owners of retail properties and our tenants are subject to competition from other retailers and methods of distribution. We are dependent upon the successful operations and financial condition of our tenants, particularly certain of our major tenants, and could be adversely affected by the bankruptcy or other financial difficulty of those tenants; - We may fail to identify, acquire, construct or develop additional properties that produce a desired yield on invested capital, or may fail to effectively integrate acquisitions of properties or portfolios of properties; - Debt and equity financing necessary for us to continue to grow and operate our business may not be available or may not be available on favorable terms; - We are subject to complex regulations related to our status as a real estate investment trust ("REIT") and would be adversely affected if we failed to qualify as a REIT; - We must make distributions to shareholders to continue to qualify as a REIT, and if we borrow funds to make distributions then those borrowings may not be available on favorable terms; - We could be adversely affected by changes in the local markets where our properties are located, as well as by adverse changes in national economic and market conditions; - We are subject to potential environmental liabilities; - We could be adversely affected by changes in government regulations, including changes in environmental, zoning, tax and other regulations; - Changes in interest rates could adversely affect the market price for our common shares, as well as our performance and cash flow; - We may fail to anticipate the effects on our properties of changes in consumer buying practices, including sales over the Internet, and the resulting retailing practices and space needs of our tenants; - E-commerce may affect the sales volume of our tenants, which may reduce the amount of percentage rental income; and - The other factors set forth under the heading "Risk Factors." 5 THE COMPANY We are a self-administered and self-managed REIT in the business of acquiring, developing, redeveloping, owning, leasing and managing shopping centers and business centers. We were incorporated in Ohio in November 1992 by the principals of the entities comprising the Developers Diversified Group or "DDG." We believe that our portfolio of shopping center properties is one of the largest (measured by amount of total gross leasable area, referred to as "GLA") currently held by any publicly traded REIT. At September 30, 2001, we owned or had an interest in and managed a portfolio of: - 194 shopping centers (the "Properties"), encompassing approximately 52.5 million square feet of GLA, of which we own 39.3 million square feet; and - 70 parcels of undeveloped land for future development, which are typically located adjacent to shopping centers we own. At September 30, 2001, we also managed 44 retail properties owned by third parties containing an aggregate of approximately 5.5 million square feet of GLA. Additionally, we owned 38 business centers containing approximately 4.6 million square feet of GLA. Our shopping center properties are located in 39 states, principally in the East and Midwest, with significant concentrations in California, Florida, Michigan, Minnesota, Missouri, North Carolina, Ohio, South Carolina and Utah. STRATEGY AND PHILOSOPHY Our investment objective is to increase cash flow and the value of our portfolio of properties and to seek continued growth through the selective acquisition, development, redevelopment, renovation and expansion of income-producing real estate properties, primarily shopping centers. In addition, we may also pursue the disposition of certain real estate assets and utilize the proceeds to repay debt, repurchase our common shares, reinvest in other real estate assets and developments and for other corporate purposes. In pursuing our investment objective, we will continue to seek to acquire and develop high quality, well-located shopping centers with attractive initial yields and strong prospects for future cash flow growth and capital appreciation where our financial strength and management and leasing capabilities can enhance value. We believe that opportunities to acquire existing shopping centers have been and will continue to be available to buyers with access to capital markets and institutional investors, such as us. Our real estate strategy and philosophy is to grow our business through a combination of leasing, expansion, acquisition and development. We seek to: - increase cash flows and property values through strategic leasing, re-tenanting, renovation and expansion of our portfolio; - continue to selectively acquire well-located, quality shopping centers (individually or in portfolio transactions) which have leases at rental rates below market rates or other cash flow growth or capital appreciation potential where our financial strength, relationships with retailers and management capabilities can enhance value; - increase cash flows and property values by continuing to take advantage of attractive financing and refinancing opportunities; - increase per share cash flows through the strategic disposition of certain real estate assets and utilizing the proceeds to repay debt, repurchase our common shares, invest in other real estate assets and developments and for other corporate purposes; - selectively develop our undeveloped parcels or new sites in areas with attractive demographics; - hold properties for long-term investment and place a strong emphasis on regular maintenance, periodic renovation and capital improvements; and - continue to manage and develop the properties of others to generate fee income, subject to restrictions imposed by federal income tax laws, and create opportunities for acquisitions. 6 As part of our ongoing business, we engage in discussions with public and private real estate entities regarding possible portfolio or asset acquisitions or business combinations. Our strategy, philosophy, investment and financing policies, and our policies with respect to certain other activities, including our growth, debt capitalization, distributions, status as a REIT and operating policies, are determined by the Board of Directors. Although it has no present intention to do so, the Board of Directors may amend or revise these policies from time to time without a vote of our shareholders. On February 22, 2002, we released our fourth quarter earnings results. Net income for the three month period ended December 31, 2001 was $20.2 million, or $0.24 per share (diluted), compared to fourth quarter 2000 net income of $23.1 million, or $0.30 per share (diluted). Net income for the year ended December 31, 2001 was $92.4 million, or $1.17 per share (diluted), compared to net income of $100.8 million, or $1.31 per share (diluted) for the prior year. RECENT FINANCINGS In December 2001 we sold 3.2 million registered common shares in an underwritten offering. We applied the net cash proceeds of approximately $57.9 million from this offering to reduce the outstanding balance on our primary unsecured line of credit. In January 2001, we entered into a $100 million, two year swap agreement, converting a portion of the variable rate debt under our Unsecured Credit Facility to a fixed rate of approximately 6.3%. In April 2001, we entered into a 10 year, $156 million, financing agreement secured by five properties with a fixed coupon interest rate of approximately 6.9%. Proceeds were effectively used to repay amounts outstanding on our revolving credit facilities and to repay an $8.1 million mortgage scheduled to mature in July 2001. In February 2002 we completed the following transactions associated with our "Community Centers" joint ventures, under which we own a 20% ownership interest and DRA Advisors, Inc. owns an 80% interest: - We purchased DRA's 80% interest in an Independence, Missouri shopping center from the joint venture for approximately $33.4 million. The acquisition was financed with a six-month bridge loan of $27.5 million at LIBOR plus 1.45% and cash from the refinancing and sale of the other joint venture assets. At the joint venture level, the sale of the Independence, Missouri asset generated a gain of approximately $4.9 million. - The joint venture sold its Durham, North Carolina shopping center to Kimco Income REIT for $50.1 million. The sale of the Durham, North Carolina asset generated a gain on sale of approximately $10.6 million. - Seven of the remaining eight properties held under the DDR/DRA joint ventures which are located in Fairfax, Virginia; Denver, Colorado; Atlanta, Georgia, Marietta, Georgia; Schaumburg, Illinois; San Diego, California; and Framingham, Massachusetts; were refinanced under two mortgages totaling $339.5 million, with a weighted average interest rate of 5.57%. Approximately $119 million of the debt has a fixed interest rate of 6.0%. Approximately $220.5 million of the debt has a current weighted average floating interest rate of 5.34%, of which $175 million is subject to a two-year interest rate cap with a maximum weighted average rate of 6.93%. It is anticipated that a mortgage in excess of $22 million will be obtained for the Naples, Florida property within the next thirty days. STRATEGIC TRANSACTIONS In May 2001 we completed our previously announced merger with American Industrial Properties REIT ("AIP"). The merger provided us with complete ownership of AIP's portfolio of properties. This portfolio is comprised of 31 industrial properties, six office properties, two retail properties and 23.7 acres of undeveloped land. We intend to implement an orderly strategic disposition of the industrial and office assets. ECONOMIC CONDITIONS Historically, real estate has been subject to a wide range of cyclical economic conditions which affect various real estate sectors and geographic regions with differing intensities and at different times. In 2001, many regions of the United States experienced varying degrees of economic recession. A continuation of the 7 economic recession, or further adverse changes in general or local economic conditions, could result in the inability of some of our existing tenants to meet their lease obligations and could otherwise adversely affect our ability to attract or retain tenants. The shopping centers are typically anchored by discount department stores (Wal-Mart, Kmart or Target), off-price department stores (Kohl's, TJ Maxx/Marshalls), home improvement stores (Home Depot, Lowes) and supermarkets which generally offer day-to-day necessities rather than high- priced luxury items. Since these merchants typically perform better in an economic recession than those who market high priced luxury items, the percentage rents received by us have remained relatively stable. In addition, we seek to reduce our operating and leasing risks through ownership of a portfolio of properties with a diverse geographic and tenant base. As indicated above, many regions experienced various degrees of economic recession and the tragic events of September 11, 2001, may have accelerated certain recessionary trends, such as the cost of obtaining sufficient property and liability insurance coverage and short term interest rates. However, we believe that these tragic events should not have a material effect on our portfolio due to the quality of the real estate and the strength of the tenant mix. During 2001, several value-oriented retailers consistently posted positive same store sales results. This reflected consumers' pronounced shift toward discount and value-oriented retailers rather than traditional department stores and enclosed mall specialty retailers, which continued to display weakening sales trends. According to Merrill Lynch (Retail Real Estate Same Store Monitor, January 20, 2002) community center retailers posted same store sales increases of 5.4% to 7.0% during the December 2001 holiday shopping season. In contrast enclosed mall anchors displayed same store sales decreases of 2.4% and enclosed mall specialty retailers' same store sales fell 5.1%. We expect that value-oriented community shopping center tenants will open slightly more stores in 2002 than they did in 2001. The retail shopping center sector has been impacted by the competitive nature of the retail business and the competition for market share. The stronger retailers have out-positioned some of the weaker retailers. This positioning is taking market share away from weaker retailers and is forcing some weaker retailers to declare bankruptcy. Overall, the industry trends for our portfolio and business are strong and the portfolio continues to be stable. We have experienced a temporary decrease in occupancy rates due to bankruptcies (for example, HomePlace), but leasing activity continues to be strong. We believe that we will benefit from a growing shift to stronger retailers in the retail environment. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and Notes thereto included in this prospectus for further information on certain of the recent developments described above. COMPETITION As one of the nation's largest owners and developers of shopping centers, we have established close relationships with a large number of major national and regional retailers. Management is associated with and actively participates in many shopping center and REIT industry organizations. Notwithstanding these relationships, there are numerous developers and real estate companies that compete with us in seeking properties for acquisition and tenants who will lease space in these properties. EMPLOYEES As of December 31, 2001, we employed approximately 308 full-time individuals, including executive, administrative and field personnel. We consider our relations with our personnel to be good. QUALIFICATION AS A REAL ESTATE INVESTMENT TRUST We presently meet the qualification requirements of a REIT under Sections 856-860 of the Code. As a result, we generally will not be subject to federal income tax to the extent we meet certain requirements of the Code. 8 USE OF PROCEEDS The shares offered hereby, if issued, will constitute a portion of the purchase price under the Purchase and Sale Agreement among us and BP, Burnham Pacific Operating Partnership, L.P. and BPP/Van Ness, L.P. (collectively, the "BP Entities") dated December 17, 2001 (the "BP Purchase Agreement"). Pursuant to the BP Purchase Agreement, upon closing of the transactions contemplated thereby we will acquire from the BP Entities for consideration consisting of at least $15.1 million in cash and, at our option, some or all of the common shares offered hereby or additional cash, two real property assets (or ownership interests therein). The total purchase price for the assets, subject to customary adjustments, is $65.4 million. One property is located in downtown San Francisco, California, which is an eight-story building with over 123,000 square feet of leasable space and has been designated as a National Historic Landmark. The second property is located in a suburb of San Francisco, California. It contains over 245,000 square feet of leaseable space. PLAN OF DISTRIBUTION As described above under the caption "Use of Proceeds," if we elect to use our common shares as consideration, the common shares offered hereby will be acquired by the BP Entities upon the closing of the purchase transaction under the BP Purchase Agreement. Other than the $15.1 we must pay in cash there is no limitation in the BP Purchase Agreement on the amount of consideration that we may elect to pay with our common shares. We will make that decision prior to the closing of the purchase transaction contemplated by the BP Purchase Agreement. After we decide the amount of consideration we will pay with our common shares, if any, the number of common shares to be issued to the BP entities will be calculated by dividing the common share consideration amount by the average closing price of our common shares on the New York Stock Exchange for the 10 trading day period ending two days prior to the closing. BP, a real estate operating company that has acquired, rehabilitated, developed and managed retail properties nationwide, is also a reporting company whose securities are registered with the Securities and Exchange Commission under Section 12 of the Securities Exchange Act of 1934, as amended, and are traded on the New York Stock Exchange under the symbol "BPP." On August 15, 2000, BP announced that its Board of Directors intended to adopt a plan of liquidation and intended to retain a third party to oversee and manage the liquidation process. On August 31, 2000, the BP Board of Directors, and on December 15, 2000 the BP shareholders, adopted the Plan of Liquidation. See "Services as Liquidation Agent" on p. 90. The BP Plan of Liquidation contemplates the orderly sale of all of BP's assets for cash or such other form of consideration as may be conveniently distributed to BP's stockholders and the payment of (or provision for) BP's liabilities and expenses, as well as the establishment of reserves to fund BP's contingent liabilities. The Plan of Liquidation gives BP's Board of Directors the power to sell any and all of the assets of BP without further approval by the stockholders and provides that the final liquidating distribution to stockholders shall be made no later than December 15, 2002. The BP Purchase Agreement was entered into pursuant to and in accordance with the Plan of Liquidation. BP's Plan of Liquidation is attached as Appendix A to BP's Schedule 14A (proxy statement) filed with the Securities and Exchange Commission on November 29, 2000. You can obtain this document at www.sec.gov. BP and the other BP Entities have agreed not to resell any of the DDR common shares received by them pursuant to the BP Purchase Agreement. However, the BP Entities may distribute such common shares to BP's shareholders pursuant to BP's Plan of Liquidation. Based on our conversations with BP, we expect the BP Entities to distribute such common shares to BP's shareholders promptly after the closing of the BP Purchase Agreement. In the event of any such distribution, BP will be a statutory underwriter under applicable United States securities laws with respect to the DDR common shares so distributed. BP has not entered into any underwriting agreement with DDR, and will not receive any commissions or other compensation in connection with such distribution. We have agreed to indemnify the BP Entities against liabilities under the Securities Act of 1933, as amended. Any DDR common shares held by distributees of DDR common shares who are not DDR affiliates will be freely tradable. 9 SELECTED FINANCIAL INFORMATION The financial data included in the following table has been derived from the financial statements for the last five years and the nine month periods ended September 30, 2001 and 2000. COMPARATIVE SUMMARY OF SELECTED FINANCIAL DATA (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED SEPTEMBER 30, FOR THE YEARS ENDED DECEMBER 31, ----------------------- -------------------------------------------------------------- 2001 2000 2000 1999 1998 1997 1996 ---------- ---------- ---------- ---------- ---------- ---------- ---------- OPERATING DATA: Revenues (primary real estate rentals)........................... $236,699 $213,061 $285,793 $263,933 $228,168 $169,223 $130,905 -------- -------- -------- -------- -------- -------- -------- Expenses: Rental operation................... 69,256 60,231 80,872 69,670 59,498 47,200 35,123 Impairment charge.................. 2,895 -- Depreciation & amortization........ 45,259 40,625 54,201 50,083 42,957 32,227 24,899 Interest........................... 61,867 56,582 77,030 68,023 57,196 35,558 29,888 -------- -------- -------- -------- -------- -------- -------- 179,277 157,438 212,103 187,776 159,651 114,985 89,910 -------- -------- -------- -------- -------- -------- -------- Income before equity in net income from joint ventures, minority equity investment, minority equity interests, gain (loss) on disposition of real estate and investments and extraordinary items.............................. 57,422 55,623 73,690 76,157 68,517 54,238 40,995 Equity in net income of joint ventures........................... 13,431 12,402 17,072 18,993 12,461 10,807 8,547 Equity in net income from minority equity investment.................. 1,550 5,136 6,224 5,720 890 -- -- Minority interests................... (15,988) (14,425) (19,593) (11,809) (3,312) (1,049) -- Gain (loss) on disposition of real estate and investments............. 15,761 18,979 23,440 (1,664) 248 3,526 -- -------- -------- -------- -------- -------- -------- -------- Income before extraordinary item..... 72,176 77,715 100,833 87,397 78,804 67,522 49,542 Extraordinary item(1)................ -- -- -- -- (882) -- -- -------- -------- -------- -------- -------- -------- -------- Net income........................... $ 72,176 $ 77,715 $100,833 $ 87,397 $ 77,922 $ 67,522 $ 49,542 ======== ======== ======== ======== ======== ======== ======== Net income applicable to common shareholders....................... $ 51,729 $ 57,268 $ 73,571 $ 60,135 $ 57,969 $ 53,322 $ 35,342 ======== ======== ======== ======== ======== ======== ======== Earnings per share data -- Basic: Income before extraordinary item(2).......................... $ 0.94 $ 1.02 $ 1.31 $ 0.99 $ 1.03 $ 1.03 $ 0.84 Net income......................... $ 0.94 $ 1.02 $ 1.31 $ 0.99 $ 1.02 $ 1.03 $ 0.84 Weighted average number of common shares........................... 54,960 56,347 55,959 60,985 56,949 51,760 42,294 Earnings per share data -- Diluted: Income before extraordinary item(2).......................... $ 0.93 $ 1.01 $ 1.31 $ 0.95 $ 1.00 $ 1.03 $ 0.84 Net income......................... $ 0.93 $ 1.01 $ 1.31 $ 0.95 $ 0.98 $ 1.03 $ 0.84 Weighted average number of common shares........................... 55,527 56,582 56,176 63,468 58,509 52,124 42,372 Annualized cash dividend............. $ 1.11 $ 1.08 $ 1.44 $ 1.40 $ 1.31 $ 1.26 $ 1.20
AT SEPTEMBER 30, AT DECEMBER 31, ----------------------- -------------------------------------------------------------- 2001 2000 2000 1999 1998 1997 1996 ---------- ---------- ---------- ---------- ---------- ---------- ---------- BALANCE SHEET DATA: Real estate (at cost)................ $2,480,594 $2,130,539 $2,161,810 $2,068,274 $1,896,763 $1,325,742 $ 991,647 Real estate, net of accumulated depreciation....................... 2,144,450 1,843,989 1,864,563 1,818,362 1,693,666 1,154,005 849,608 Advances to and investments in joint ventures........................... 275,973 289,482 260,927 299,176 266,257 136,267 106,796 Total assets......................... 2,508,588 2,337,953 2,332,021 2,320,860 2,126,524 1,391,918 975,126 Total debt........................... 1,386,137 1,226,491 1,227,575 1,152,051 1,000,481 668,521 478,432 Shareholders' equity................. 771,482 787,341 783,750 852,345 902,785 669,050 469,336
10
NINE MONTHS ENDED SEPTEMBER 30, FOR THE YEARS ENDED DECEMBER 31, ----------------------- -------------------------------------------------------------- 2001 2000 2000 1999 1998 1997 1996 ---------- ---------- ---------- ---------- ---------- ---------- ---------- OTHER DATA: Cash flow provided from (used in): Operating activities............... $ 135,918 $ 114,249 $ 146,272 $ 152,930 $ 140,078 $ 94,393 $ 75,820 Investing activities............... (45,610) (27,963) (20,579) (209,708) (538,289) (416,220) (199,670) Financing activities............... (82,227) (89,744) (127,442) 60,510 400,453 321,832 123,851 Funds from operations(3): Net income applicable to common shareholders..................... $ 51,729 $ 57,268 $ 73,571 $ 60,135 $ 57,969 $ 53,322 $ 35,342 Depreciation and amortization of real estate investments.......... 44,340 39,692 52,975 49,137 42,408 31,869 24,669 Equity in net income from joint ventures......................... (13,431) (12,402) (17,072) (18,993) (12,461) (10,807) (8,547) Joint ventures' funds from operations....................... 23,964 22,200 30,512 32,316 20,779 16,077 13,172 Equity in net income from minority equity investment................ (1,550) (5,136) (6,224) (5,720) (890) -- -- Minority equity investment funds from operations.................. 6,448 11,020 14,856 12,965 1,493 -- -- Minority interests (OP Units)...... 1,147 3,756 4,125 6,541 3,069 10 -- (Gain) loss on disposition of real estate and investments........... (15,761) (18,979) (23,440) 1,664 (248) (3,526) -- Extraordinary item(1).............. -- -- -- -- 882 -- -- Impairment charge.................. 2,895 -- --------- --------- --------- --------- --------- -------- -------- $ 99,781 $ 97,419 $ 129,303 $ 138,045 $ 113,001 $ 86,945 $ 64,636 ========= ========= ========= ========= ========= ======== ======== Weighted average number of common shares outstanding (Diluted)(2)..................... 56,601 60,058 59,037 62,309 62,501 55,502 45,952
--------------- (1) In 1998 the extraordinary charge relates primarily to the write-off of deferred financing costs. (2) Effective August 3, 1998, the Company executed a two-for-one stock split for shareholders of record on July 27, 1998. Earnings per share data is reflected for all years utilizing SFAS 128. (3) Industry analysts generally consider funds from operations ("FFO") to be an appropriate measure of the performance of an equity REIT. FFO does not represent cash generated from operating activities in accordance with generally accepted accounting principles and is not necessarily indicative of cash available to fund cash needs and should not be considered as an alternative to net income as an indicator of the Company's operating performance or as an alternative to cash flow as a measure of liquidity. FFO is defined generally as net income applicable to common shareholders excluding gains (losses) on sales of real estate and investments, certain impairment charges, extraordinary items, adjusting for certain noncash items, principally real property depreciation, equity income (loss) from its joint ventures and minority equity investments and adding the Company's proportionate share of FFO of its unconsolidated joint ventures and minority equity investments, determined on a consistent basis. FFO for the nine month period ended September 30, 2001 includes an add back of approximately $3.2 million relating to the Company's proportionate share of loss on sale, including certain transaction related costs and severance charges which were incurred by AIP as a result of the Lend Lease sale and consummation of the merger with DDR. Other real estate companies may calculate FFO in a different manner. 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS COMPARISON OF 2000 TO 1999 RESULTS OF OPERATIONS REVENUES FROM OPERATIONS Total revenues increased $21.9 million, or 8.3%, to $285.8 million for the year ended December 31, 2000, as compared to $263.9 million in 1999. Base and percentage rents for 2000 increased $12.4 million, or 6.4%, to $206.2 million as compared to $193.8 million in 1999. Approximately $3.3 million of the increase in base and percentage rental income was the result of new leasing, re-tenanting and expansion of the "Core Portfolio Properties" (for purposes of comparison, for any particular calendar year, "Core Portfolio Properties" refers to shopping center properties owned as of January 1 of the prior calendar year), an increase of 1.8% over 1999 revenues from Core Portfolio Properties. Without the impact of bankruptcies, primarily associated with Home Quarters, Service Merchandise, Factory Card Outlet and Just For Feet, actual base and percentage revenues would have increased approximately $5.2 million, or 3.1%, as compared to the same period in 1999. The shopping center acquired by the Company in 2000 contributed $1.7 million of additional base and percentage revenue and the nine shopping centers developed by the Company contributed $8.9 million. These increases were offset by a $1.5 million decrease due to the sale of five properties in 1999 and 2000. At December 31, 2000, the aggregate occupancy of the Company's wholly-owned shopping centers was 95.2% as compared to 94.1% at December 31, 1999. The average annualized base rent per leased square foot was $8.17 as compared to $7.89 at December 31, 1999. During 2000, same store sales, for those tenants required to report sales (approximately 13.7 million square feet), increased 1.6% to $233 per square foot. At December 31, 2000, the aggregate occupancy of the Company's joint venture shopping centers was 96.7% as compared to 96.1% at December 31, 1999. The average annualized base rent per leased square foot was $12.35 as compared to $12.62 at December 31, 1999. During 2000, same store sales, for those tenants required to report such information (approximately 5.9 square feet), increased 4.8% to $244 per square foot. Recoveries from tenants for the year ended December 31, 2000, increased $6.7 million, to $54.5 million as compared to $47.8 million in 1999. This increase was directly related to the increase in operating and maintenance expenses and real estate taxes primarily associated with the 2000 and 1999 shopping center acquisitions and developments. Recoveries were approximately 90.2% of operating and maintenance expenses and real estate taxes in 2000 as compared to 92.1% in 1999. The slight decrease is primarily attributed to a lower average occupancy rate in 2000 compared to 1999 and increases in operating expenses and real estate taxes at certain shopping centers. Ancillary and other property related income for the year ended December 31, 2000, increased $0.2 million to $1.9 million as compared to $1.7 million in 1999. This increase was primarily due to the Company pursuing additional ancillary income opportunities. It is anticipated that growth in ancillary revenues will continue in 2001 as additional opportunities are pursued. Management fee income for the year ended December 31, 2000, increased $1.9 million, to $7.0 million as compared to $5.1 million in 1999. This increase was primarily associated with the formation of new joint ventures in 1999 and 2000 for which the Company became the property manager. In addition, in the fourth quarter of 2000, the Company assumed property management responsibilities for all the real estate assets of BP. Development fee income for the year ended December 31, 2000, decreased $1.4 million, to $2.6 million as compared to $4.0 million in 1999. This decrease was due to a decrease in the development activities performed directly for third parties. Interest income for the year ended December 31, 2000, decreased $1.9 million, to $4.3 million as compared to $6.4 million in 1999. This decrease was primarily associated with the repayment of loans and advances made to certain joint ventures in 1999 and 2000. 12 Other income for the year ended December 31, 2000, increased $4.2 million, to $9.2 million as compared to $5.0 million in 1999. This generally reflects an increase in lease termination and bankruptcy settlement revenues aggregating approximately $5.5 million offset by a decrease of approximately $0.7 million relating to commissions and financing fees earned in 1999 from the Company's joint ventures and a charge of $0.6 million relating to the write-off of abandoned development projects in 2000. EXPENSES FROM OPERATIONS Rental operating and maintenance expenses for the year ended December 31, 2000, increased $2.4 million, or 9.6%, to $27.0 million as compared to $24.6 million in 1999. An increase of $1.3 million was attributable to the 10 shopping centers acquired and developed in 2000 and 1999 and $1.2 million is primarily attributable to an increase in various maintenance items in the Core Portfolio Properties. These increases were offset by a decrease of approximately $0.1 million due to the sale of five properties in 1999 and 2000. Real estate taxes increased $6.2 million, or 22.6%, to $33.4 million for the year ended December 31, 2000, as compared to $27.2 million in 1999. This increase was primarily attributable to the growth related to the 10 shopping centers acquired and developed in 2000 and 1999 which contributed $1.5 million of the increase and an additional $4.9 million is primarily associated with recently developed and acquired properties included in the Core Portfolio Properties which were not fully assessed in 1999. These increases were offset by a decrease of approximately $0.2 million due to the sale of five properties in 1999 and 2000. General and administrative expenses increased $2.6 million, or 15.0%, to $20.4 million for the year ended December 31, 2000, as compared to $17.8 million in 1999. Total general and administrative expenses were approximately 4.3% and 4.1% of total revenues, including revenues of joint ventures, for the years ended December 31, 2000 and 1999, respectively (3.9% in 1999 after excluding a $0.8 million severance charge). The increase in general and administrative expenses is attributable to the growth of the Company primarily related to shopping center acquisitions, expansions and developments (including those owned through joint ventures), the addition of several new key executives, employee benefits and the opening of a west coast office in conjunction with the Company's increased ownership of assets on the west coast and property management responsibilities retained for BP in the fourth quarter of 2000. Interest expense, net of amounts capitalized, increased $9.0 million, or 13.2%, to $77.0 million for the year ended December 31, 2000, as compared to $68.0 million in 1999. The overall increase in interest expense was primarily related to the acquisition and development of 10 shopping centers during 2000 and 1999 and an increase in interest rates. The weighted average debt outstanding and related weighted average interest rate during 2000 was $1.2 billion and 7.7%, respectively, as compared to $1.1 billion and 7.2%, respectively, during 1999. Interest capitalized, in connection with development and expansion projects, was $18.2 million for the year ended December 31, 2000, as compared to $13.5 million in 1999. Depreciation increased $4.1 million, or 8.2%, to $54.2 million for the year ended December 31, 2000, as compared to $50.1 million in 1999. The increase was primarily attributable to the 10 shopping centers acquired and developed in 2000 and 1999 which contributed $2.5 million of the increase, an additional $1.6 million increase related to the expansions and improvements associated with the Core Portfolio Properties and approximately $0.3 million related to increased depreciation expense for personal property primarily associated with the relocation of the Company's headquarters. These increases are offset by a decrease of approximately $0.3 million, relating to the sale of five shopping center properties in 1999 and 2000. OTHER Equity in net income of joint ventures decreased $1.9 million, or 10.1%, to $17.1 million in 2000 as compared to $19.0 million in 1999. A decrease of $5.2 million related to the Company's sale of 60% of its half interest in the Community Centers Joint Venture. In addition, during the fourth quarter of 2000, an equity affiliate of the Company recognized a gain, net of tax, of approximately $1.7 million relating to the sale of five former Best Products locations. This gain was offset by a $1.8 million impairment write-off, net of tax, of an investment in a technology company. These reductions were offset by an increase of $2.0 million which is 13 primarily attributable to the joint ventures formed in 2000 and 1999 and an additional increase of $1.3 million related to various other joint ventures formed prior to 1999. Equity in net income of minority equity investment increased $0.5 million, to $6.2 million for the year ended December 31, 2000, as compared to $5.7 million for the same period in 1999. This increase relates to the Company's equity investment in AIP (NYSE: IND). This increase is primarily attributable to an increase in operating income from the office and industrial properties owned by AIP. This increase was impacted by certain basis differentials which resulted in adjustments to depreciation and amortization and, more significantly, to adjustments to gain (loss) on sale of assets. The basis differentials relate to certain adjustments that were made to the Company's accounts to reflect the fair market value of the assets at the date of the Company's initial investment in AIP. In addition, the $6.2 million net income from minority equity investment recorded in 2000 includes a $4.9 million impairment loss on the pending sale of 31 properties to an institutional investor partially offset by a $3.6 million gain from the sale of an office building in the fourth quarter of 2000. Accordingly, the Company's equity in net income for AIP is adjusted, as discussed above, to reflect these basis differences. As of December 31, 2000, the Company owned approximately 9.7 million shares of AIP which approximates 46.0% of AIP's total outstanding common shares. The expense relating to minority interests increased $7.8 million, to $19.6 million, or 65.9%, for the year ended December 31, 2000, as compared to $11.8 million in 1999. This expense represents the income allocation associated with the priority distributions relating to minority equity interests. An increase of $10.1 million relates to the Company's operating partnerships' issuance of preferred operating partnership minority units ("Preferred Units") in September 1999 and May 2000. These Preferred Units may be exchanged, under certain circumstances, into preferred shares of the Company. In addition, a $0.1 million increase related to minority interests in shopping centers. This increase was offset by a $2.4 million decrease due to the Company's purchase of 3.6 million common operating partnership units ("OP Units") in July 2000, representing a minority partner's ownership interest in 11 operating properties. Gain on disposition of real estate and investments aggregated $23.4 million for the year ended December 31, 2000. In 2000, the Company sold several properties including shopping centers located in Stone Mountain, Georgia; Florence, Kentucky; a portion of a shopping center in Las Vegas, Nevada; and Wal-Mart stores in Camden, South Carolina; and New Bern and Washington, North Carolina; and its 50% joint venture interest in a recently developed shopping center in Fenton, Missouri. The aggregate net gain from the aforementioned transactions was $6.8 million. In addition, the Company sold 60% of its half interest in a joint venture which owns 10 operating shopping centers for approximately $163 million, including the assumption of approximately $97 million of debt, and recognized a gain of approximately $16.1 million. In connection with the formation of a joint venture in February 2000, the Company sold one property, received cash and a 50% partnership interest and recognized a gain of approximately $0.5 million. Net proceeds received in conjunction with the above sales aggregated $133.0 million. The Company utilized approximately $62.9 million of net sales proceeds to repurchase 4.7 million of the Company's common shares in open market transactions at an average price of $13.26 per share from March through June 2000. The loss on disposition of real estate and investments, aggregating $1.7 million for the year ended December 31, 1999, primarily relates to the sale of a shopping center and residual land in Pensacola, Florida, to a major retailer which resulted in a $2.2 million loss. In connection with this disposition, the Company developed a 17,000 square foot shopping center adjacent to the site sold. In addition, the Company sold four properties at an aggregate gain of approximately $0.5 million which partially offsets the previously described loss. Net proceeds received in conjunction with the above sales aggregated $13.9 million. NET INCOME Net income increased $13.4 million to $100.8 million for the year ended December 31, 2000, as compared to $87.4 million in 1999. The increase in net income was primarily attributable to increases in gain on sale of real estate and investments of $25.1 million, increases in net operating revenues (total revenues less operating and maintenance expenses, real estate taxes, and general and administrative expense) aggregating $10.6 million, resulting from new leasing, re-tenanting and expansion of Core Portfolio Properties and the 10 14 shopping centers acquired and developed in 2000 and 1999 and an increase in minority equity investment of $0.5 million. These increases were offset by a decrease of $1.9 million related to equity in net income from joint ventures and increases in interest expense, depreciation and amortization, and minority interest expense of $9.0 million, $4.1 million and $7.8 million, respectively. COMPARISON OF 1999 TO 1998 RESULTS OF OPERATIONS REVENUES FROM OPERATIONS Total revenues increased $35.8 million, or 15.7%, to $263.9 million for the year ended December 31, 1999, as compared to $228.1 million in 1998. Base and percentage rents for 1999 increased $22.9 million, or 13.4%, to $193.8 million as compared to $170.9 million in 1998. Approximately $6.6 million of the increase in base and percentage rental income was the result of new leasing, re-tenanting and expansion of the Core Portfolio Properties, an increase of 5.8% over 1998 revenues from Core Portfolio Properties. The 38 shopping centers acquired by the Company in 1999 and 1998 contributed $28.1 million of additional revenue and the nine shopping centers developed by the Company contributed $4.6 million. These increases were offset by a decrease of $16.4 million relating to the transfer of five business centers to AIP in August 1998 and the transfer of six properties to a joint venture in September 1998. At December 31, 1999, the aggregate occupancy of the Company's wholly-owned shopping centers was 94.1% as compared to 96.0% at December 31, 1998. The average annualized base rent per leased square foot was $7.89 as compared to $7.62 at December 31, 1998. During 1999, same store sales, for those tenants required to report sales (approximately 13.8 million square feet), increased 2.9% to $236 per square foot. At December 31, 1999, the aggregate occupancy of the Company's joint venture shopping centers was 96.1% as compared to 98.4% at December 31, 1998. The average annualized base rent per leased square foot was $12.62 as compared to $12.56 at December 31, 1998. During 1999, same store sales, for those tenants required to report such information (approximately 5.0 square feet), increased 5.0% to $234 per square foot. Recoveries from tenants for the year ended December 31, 1999, increased $4.7 million, to $47.8 million as compared to $43.1 million in 1998. This increase was directly related to the increase in operating and maintenance expenses and real estate taxes primarily associated with the 1999 and 1998 shopping center acquisitions and developments. Recoveries were approximately 92.1% of operating and maintenance expenses and real estate taxes in 1999 as compared to 92.5% in 1998. Ancillary and other property related income for the year ended December 31, 1999, increased $0.4 million, to $1.7 million as compared to $1.3 million in 1998 primarily associated with the growth in shopping center acquisitions and developments. Management fee income for the year ended December 31, 1999, increased $1.4 million, to $5.1 million as compared to $3.7 million in 1998. This increase was primarily associated with 12 additional joint ventures formed in 1998 and 1999 for which the Company was engaged as the property manager. Development fee income for the year ended December 31, 1999, increased $2.3 million, to $4.0 million as compared to $1.7 million in 1998 primarily relating to an increase in development activities performed directly for third parties in 1999. Interest income for the year ended December 31, 1999, increased $1.3 million, to $6.4 million as compared to $5.1 million in 1998. This increase was primarily associated with advances made to certain joint ventures formed in 1998 and 1999. Other income for the year ended December 31, 1999, increased $2.5 million, to $5.0 million as compared to $2.5 million in 1998, primarily related to increases in lease termination fees of approximately $1.8 million and increases in other income of approximately $0.7 million, comprised of commissions, financing fees earned from the Company's joint ventures and other miscellaneous revenue items. 15 EXPENSES FROM OPERATIONS Rental operating and maintenance expenses for the year ended December 31, 1999, increased $4.6 million, or 22.8%, to $24.6 million as compared to $20.0 million in 1998. An increase of $3.0 million was attributable to the 47 shopping centers acquired and developed in 1999 and 1998 and $3.1 million related to the Core Portfolio Properties generally associated with increased snow removal costs and other maintenance related costs. These increases were offset by a decrease of $1.5 million relating to the transfer of five business center properties to AIP in August 1998 and the transfer of six shopping center properties into a joint venture in September 1998. Real estate taxes increased $0.7 million, or 2.8%, to $27.2 million for the year ended December 31, 1999, as compared to $26.5 million in 1998. This increase was primarily attributable to the growth related to the 47 shopping centers acquired and developed in 1999 and 1998 which contributed $4.1 million of the increase and an additional $0.4 million of the increase related primarily to expansions associated with the Core Portfolio Properties. These increases were offset by a decrease of $3.8 million relating to the transfer of five business center properties to AIP in August 1998 and the transfer of six shopping center properties into a joint venture in September 1998. General and administrative expenses increased $4.9 million, or 37.6%, to $17.8 million for the year ended December 31, 1999, as compared to $12.9 million in 1998. Total general and administrative expenses were approximately 4.1% (3.9% after excluding a $0.8 million severance charge, described below) and 3.8% of total revenues, including revenues of joint ventures, for the years ended December 31, 1999 and 1998, respectively. The increase in general and administrative expenses is attributable to the growth of the Company primarily related to shopping center acquisitions, expansions and developments (including those owned through joint ventures), relocation of the Company's headquarters to a new office, additional consulting costs, professional services, the addition of several new key executives and a severance charge. The increase was offset by adjustments to certain variable rate executive incentive compensation accruals of approximately $1.3 million. Interest expense, net of amounts capitalized, increased $10.8 million, or 18.9%, to $68.0 million for the year ended December 31, 1999, as compared to $57.2 million in 1998. The overall increase in interest expense was primarily related to the acquisition and development of shopping centers during 1999 and 1998. The weighted average debt outstanding and related weighted average interest rate during 1999 was $1.1 billion and 7.2%, respectively, as compared to $911.7 million and 7.4%, respectively, during 1998. Interest capitalized, in connection with development and expansion projects, was $13.5 million for the year ended December 31, 1999, as compared to $9.9 million in 1998. Depreciation and amortization expense increased $7.1 million, or 16.6%, to $50.1 million for the year ended December 31, 1999, as compared to $43.0 million in 1998. The increase was primarily attributable to the growth related to the 47 shopping centers acquired and developed in 1999 and 1998 which contributed $8.3 million of the increase, an additional $2.4 million increase related to the expansions and improvements associated with the Core Portfolio Properties and approximately $0.4 million related to increased depreciation expense related to personal property primarily associated with the relocation of the Company's headquarters. These increases were offset by a decrease of $4.0 million relating to the transfer of five business center properties to AIP in August 1998 and the transfer of six shopping center properties into a joint venture in September 1998. OTHER Equity in net income of joint ventures increased $6.5 million, or 52.4%, to $19.0 million in 1999 as compared to $12.5 million in 1998. An increase of $5.5 million is primarily attributable to the joint ventures formed and/or acquired during 1998 and 1999 and the remaining $1.0 million increase is primarily due to the Community Centers Joint Venture and Liberty Fair Joint Venture of $0.9 million and $0.1 million, respectively. The increase in income of $5.5 million is comprised of $2.9 million relating to the formation of a joint venture in September 1998 with DRA Advisors whereby the Company contributed six wholly owned 16 shopping centers, $1.1 million from DD Development Company and $1.0 million through the formation of the Sansone management and development companies. The Company's joint ventures in Merriam and Leawood, Kansas, each contributed $0.4 million of additional income. These increases are offset by a $0.3 million decrease due to the impact of other joint ventures formed in 1998 to develop shopping center properties which were in the lease-up phase in 1999. Equity in net income of minority equity investment increased $4.8 million, to $5.7 million for the year ended December 31, 1999, as compared to $0.9 million for the same period in 1998. This increase relates to the Company's equity investment in AIP which began in August 1998. Initially, the Company owned approximately 16% of the outstanding shares of AIP and as of December 31, 1999, the Company owned approximately 9.7 million shares of AIP which approximated 46% of AIP's outstanding common shares. The expense relating to minority interests increased $8.5 million, to $11.8 million, or 256.4%, for the year ended December 31, 1999, as compared to $3.3 million in 1998. This expense represents the income allocation associated with the priority distributions relating to minority equity interests. An increase of $5.0 million relates to the Company's operating partnerships' issuance of Preferred Units in September 1999 and December 1998. These Preferred Units may be exchanged, under certain circumstances, into preferred shares of the Company. An increase of $3.6 million relates to the Company's issuance of OP Units as partial consideration for shopping centers acquired in 1998 and 1999. This increase related to the Company's purchase of 22 shopping centers in 1998 and 1999 and as consideration, the related issuance of OP Units which are exchangeable, in certain circumstances and at the option of the Company, into 4.7 million common shares of the Company or for cash. These increases were offset by a $0.1 million net decrease related to minority interests in shopping centers. The loss on disposition of real estate and investments, aggregating $1.7 million for the year ended December 31, 1999, primarily relates to the sale of a shopping center and residual land in Pensacola, Florida, to a major retailer which resulted in a $2.2 million loss. In connection with this disposition, the Company developed a 17,000 square foot shopping center adjacent to the site sold. In addition, the Company sold four properties at an aggregate gain of approximately $0.5 million which partially offsets the previously described loss. Net proceeds received in conjunction with the above sales aggregated $13.9 million. The extraordinary item, which aggregated $0.9 million for the year ended December 31, 1998, relates to the write-off of unamortized deferred finance costs associated with the amended and restated $375 million revolving credit facility. NET INCOME Net income increased $9.5 million to $87.4 million for the year ended December 31, 1999, as compared to $77.9 million in 1998. The increase in net income was primarily attributable to increased net operating revenues (total revenues less operating and maintenance expenses, real estate taxes, and general and administrative expense) aggregating $25.6 million, resulting from new leasing, re-tenanting and expansion of Core Portfolio Properties and the 47 shopping centers acquired and developed in 1999 and 1998. An additional increase of $11.3 million related to equity in net income from joint ventures and minority equity investment and an increase of $0.9 million related to the 1998 extraordinary item. These increases were offset by increases in interest expense, depreciation and amortization, minority interest expense and loss on disposition of real estate and investments of $10.8 million, $7.1 million, $8.5 million and $1.9 million, respectively. FUNDS FROM OPERATIONS Management believes that Funds From Operations ("FFO") provides an additional indicator of the financial performance of a REIT. FFO is defined generally as net income applicable to common shareholders excluding gains (or losses) from sales of real estate and securities and extraordinary items, adjusted for certain non-cash items, principally real property depreciation, equity income from its joint ventures and equity income from its minority equity investment and adding the Company's proportionate share of FFO from its unconsolidated joint ventures and minority equity investment, determined on a consistent basis. Other real estate companies may calculate FFO in a different manner. 17 In 2000, FFO was $129.3 million as compared to $138.0 million in 1999 and $113.0 million in 1998. The decrease in total FFO in 2000 is principally attributable to the sale of real estate assets and a joint venture interest in February, 2000, aggregating approximately $250 million and the issuance of Preferred Units in September 1999 and May 2000. Proceeds were used to repay indebtedness and repurchase common shares of the Company. Also contributing to the decrease were higher interest rates and tenant bankruptcies. The net decrease is offset by increases in revenues from Core Portfolio Properties, acquisitions and developments. The Company's calculation of FFO is as follows (in thousands):
YEAR ENDED DECEMBER 31, ------------------------------ 2000 1999 1998 -------- -------- -------- Net income applicable to common shareholders(1)...... $ 73,571 $ 60,135 $ 57,969 Depreciation and amortization of real estate investments........................................ 52,974 49,137 42,408 Equity in net income of joint ventures............... (17,072) (18,993) (12,461) Equity in net income of minority equity investment... (6,224) (5,720) (890) Joint ventures' FFO(2)............................... 30,512 32,316 20,779 Minority equity investment FFO....................... 14,856 12,965 1,493 Minority interest (OP Units)......................... 4,126 6,541 3,069 (Gain) loss on disposition of real estate and investments........................................ (23,440) 1,664 (248) Extraordinary items.................................. -- -- 882 -------- -------- -------- $129,303 $138,045 $113,001 ======== ======== ========
--------------- (1) Includes straight-line rental revenues, which approximated $4.6 million, $4.1 million and $3.3 million in 2000, 1999 and 1998, respectively, primarily relating to acquisitions and new developments. (2) Joint ventures' FFO is summarized as follows (in thousands):
YEAR ENDED DECEMBER 31, --------------------------- 2000 1999 1998 ------- ------- ------- Net income(a)................................... $41,545 $38,045 $25,070 Depreciation and amortization of real estate investments................................... 27,270 22,948 16,009 Loss (gain) on disposition of real estate and other investments(b).......................... 86 (344) (314) ------- ------- ------- $68,901 $60,649 $40,765 ------- ------- ------- DDRC ownership interests........................ $30,512 $32,316 $20,779 ======= ======= =======
--------------- (a) Includes straight-line rental revenue of approximately $4.6 million, $4.2 million and $3.1 million in 2000, 1999 and 1998, respectively. The Company's proportionate share of straight-line rental revenues was $1.9 million, $2.1 million and $1.5 million in 2000, 1999 and 1998, respectively. (b) During the fourth quarter of 2000, an equity affiliate of the Company recognized a gain, net of tax, of approximately $1.7 million relating to the sale of five former Best Products locations. This gain was offset by a $1.8 million write-off, net of tax, of an investment in a technology company. 18 LIQUIDITY AND CAPITAL RESOURCES The Company's cash flow activities are summarized as follow:
YEAR ENDED DECEMBER 31, --------------------------------- 2000 1999 1998 --------- --------- --------- Cash flow from operating activities............... $ 146,272 $ 152,930 $ 140,078 Cash flow from investing activities............... (20,579) (209,708) (538,289) Cash flow from financing activities............... (127,442) 60,510 400,453
The Company anticipates that cash flow from operating activities will continue to provide adequate capital for all interest and principal payments on outstanding indebtedness, recurring tenant improvements, as well as dividend payments in accordance with REIT requirements and that cash on hand, borrowings under its existing revolving credit facilities, as well as other debt and equity alternatives, including the issuance of OP Units and joint venture capital, will provide the necessary capital to achieve continued growth. The decrease in cash flow from operating activities in 2000 as compared to 1999 is primarily due to the sale of real estate assets, as discussed above, a reduction in other liabilities and repurchase of common shares in 1999 and 2000. The Company satisfied its REIT requirement of distributing at least 95% of ordinary taxable income with declared common and preferred share dividends of $107.4 million in 2000 as compared to $112.5 million and $95.1 million in 1999 and 1998, respectively. Accordingly, federal income taxes were not incurred at the corporate level. The Company's common share dividend payout ratio for the year approximated 65.2% of its 2000 FFO as compared to 66.5% and 69.6% in 1999 and 1998, respectively. In December, 1999, the REIT Modernization Act ("RMA") was passed by the federal government. The RMA, which becomes effective in 2001, allows REITs to own a taxable REIT subsidiary ("TRS") which can provide certain services to a REIT's tenants without disqualifying the rents that a REIT receives from those tenants and also permits the REIT to increase fee related revenues. In addition, the RMA lowers the distribution requirements for a REIT from 95% to 90% of its ordinary taxable income. The Company intends to elect TRS status during the first quarter of 2001 for its existing taxable preferred equity investments. The Company's Board of Directors approved an increase in the 2001 quarterly dividend per common share to $0.37 from $0.36 in February 2001. It is anticipated that the new dividend level will continue to result in a conservative payout ratio. A low payout ratio enables the Company to retain more capital which will be utilized towards attractive investment opportunities in the development, acquisition and expansion of portfolio properties. 19 ACQUISITIONS, DEVELOPMENTS AND EXPANSIONS During the three-year period ended December 31, 2000, the Company and its joint ventures expended $1.8 billion, net, to acquire, develop, expand, improve and re-tenant its properties as follows (in millions):
2000 1999 1998 ------- ------- -------- COMPANY: Acquisitions............................................ $ 81.1(1) $ 78.3(4) $ 688.4 Completed expansions.................................... 13.6 43.3 11.2 Developments and construction in progress............... 81.2 75.6 121.0 Tenant improvements and building renovations............ 6.3 6.6 4.4 Furniture and fixtures and equipment.................... 0.4 5.3 2.3 ------- ------- -------- 182.6 209.1 827.3 Less real estate sales and property contributed to joint ventures............................................. (89.1) (37.6) (328.8) ------- ------- -------- Company total........................................ 93.5 171.5 498.5 ------- ------- -------- JOINT VENTURES: Acquisitions/Contributions.............................. 91.2(2) 96.5(5) 489.3(6) Completed expansions.................................... 6.2 3.3 -- Developments and construction in progress............... 114.7 169.0 86.7 Tenant improvements and building renovations............ 1.9 1.5 1.8 Minority equity investment in AIP....................... (2.2) 42.2 95.1 ------- ------- -------- 211.8 312.5 672.9 Less real estate sales............................... (115.9)(1) (26.5)(4) (33.8) ------- ------- -------- Joint ventures total................................. 95.9 286.0 639.1 ------- ------- -------- 189.4 457.5 1,137.6 ------- ------- -------- Less proportionate joint venture share owned by others............................................. (101.7) (107.9) (265.5) ------- ------- -------- Total DDR net additions.............................. $ 87.7(3) $ 349.6 $ 872.1 ======= ======= ========
--------------- (1) Includes transfers to the Company in the aggregate amount of $58.5 million relating to the Nassau Pavilion development project, two former DDR OliverMcMillan projects and Phase II of the Salisbury, MD development project. All of which were previously held through joint venture interests. (2) Includes transfers from the Company to joint ventures in the aggregate amount of $42.5 million relating to the development project in San Antonio, Texas, a transfer of the Phoenix, Arizona, property, the outparcel land at Round Rock, Texas, and construction costs for a former DDR OliverMcMillan project. (3) Does not include the Company's sale of 60% of its half interest in the Community Center Joint Venture for approximately $163 million, as this transaction did not affect the change in assets at the joint venture level. (4) Includes a transfer of the Everett, Maryland, development project to the Company and Salem, New Hampshire, to DD Development Company. (5) Includes a transfer of $20.4 million from the Company relating to the development project in Coon Rapids, Minnesota and the transfer of the 13 remaining Best Products sites from the Retail Value Fund, which had an aggregate cost basis of $43.9 million at December 31, 1999. (6) Includes transfers/investments aggregating approximately $323.1 million from the Company and the acquisition of joint venture interests aggregating $166.2 million. 20 2000 ACTIVITY EXPANSIONS In 2000, the Company and its joint ventures completed 10 expansion projects at an aggregate cost of $13.6 million and $6.2 million, for wholly owned projects and joint venture projects, respectively. These expansion projects included: - A 91,000 square foot expansion/redevelopment, which includes Office Depot, Carolina Pottery, T.J. Maxx and additional retail at Wando Crossings in Mt. Pleasant, South Carolina; - A 30,000 square foot Bed Bath & Beyond redevelopment at the Stow Community Shopping Center in Stow, Ohio; - A 30,000 square foot redevelopment for Ross Stores at the Family Center at Fort Union in Midvale, Utah; - A 64,000 square foot retail expansion, which included Belk's, Hibbits and additional retail at the Springdale Plaza in Camden, South Carolina; - A 25,000 square foot Old Navy expansion at the Spring Creek Centre in Fayetteville, Arkansas; - A 60,000 square foot redevelopment for Bassett Direct Furniture and Room Stores at the Ahwatukee Foothills Towne Center in Phoenix, Arizona; and - A 51,000 square foot expansion for Dick's Clothing and Sporting Goods and Hallmark at the Merriam Towne Center in Merriam, Kansas; ACQUISITIONS In April, 2000, the Company purchased a 199,000 square foot shopping center in Brentwood, Tennessee, for approximately $22.6 million. In September, 2000, the Company announced it intended to acquire 15 west coast retail properties for approximately $355 million from BP through a joint venture with Prudential Real Estate Investors ("PREI") and Coventry Real Estate Partners ("Coventry") in which the Company would own a 20% interest. Since this original announcement, four of the 15 properties were eliminated from the portfolio. Accordingly, the Company, through an equity affiliate and PREI, will acquire 11 properties at an aggregate cost of approximately $266 million. Two of the properties were acquired in December 2000 in which the Company's 20% ownership interest aggregated $9.7 million. Four of the properties were acquired through February 21, 2001, in which the Company's 20% interest aggregated $11.2 million. The remaining five properties are expected to close in the first half of 2001. DDR will earn fees for managing and leasing the properties, all of which are located in western states. The Company and Coventry were also selected by BP to serve as its liquidation agent pursuant to BP's plan of liquidation. The liquidation portfolio includes 47 properties aggregating 5.8 million square feet. DDR is providing property management services for this portfolio and is receiving property management, leasing and development fees for its services at market rates. Coventry, which is 79% owned by the Company, is providing asset management services for this portfolio and is receiving asset management fees at market rates. The appointment of Coventry and the Company was effective on December 15, 2000, following approval from BP's shareholders. DEVELOPMENT (CONSOLIDATED) During 2000, the Company completed construction at the following two shopping centers: - Phase II of a 186,000 square foot shopping center in Oviedo, Florida, which included the following tenants: Linens 'n Things, T.J. Maxx, PetsMart and miscellaneous retail shops. Phase I, which is anchored by OfficeMax, Michael's, Ross Dress for Less and Shoe Carnival, was completed in 1999. 21 - Phase II of a 268,000 square foot shopping center in Toledo, Ohio, which included the following tenants: Old Navy, Shoe Carnival, The Avenue and miscellaneous retail shops. Phase I, which is anchored by Kohl's, Gander Mountain, Bed Bath & Beyond and Babies R Us, was completed in 1999. The other consolidated development projects are as follows: - A 412,000 square foot shopping center in Meridian, Idaho (a suburb of Boise), which was substantially completed in 2000 and is anchored by a Wal-Mart Supercenter (not owned by the Company), Shopko (which opened during the fourth quarter of 1999), and the following tenants which opened in 2000: Shepler's, Bed Bath & Beyond, Office Depot, Old Navy, and Sportman's Warehouse. Ross Dress for Less and additional retail tenants will open in 2001; - A 622,000 square foot shopping center in Everett, Massachusetts, which is scheduled for completion in 2001 and will be anchored by Target and Home Depot (not owned by the Company), Bed Bath & Beyond, OfficeMax, Old Navy, and PetsMart; - A 162,000 square foot shopping center in Kildeer, Illinois, which is located adjacent to the Company's joint venture shopping center located in Deer Park, Illinois. The Kildeer project is scheduled for completion in 2001 and will include the following tenants: Bed Bath & Beyond, Circuit City, Cost Plus World Market, Old Navy and miscellaneous shops; - A 480,000 square foot shopping center in Princeton, New Jersey, adjacent to the Company's existing center, which is scheduled for completion in 2001 and includes the following tenants: Kohl's, Wegman's, Michael's, Target (not owned by the Company), Dick's Clothing and Sporting Goods and 55,000 square feet of additional retail space. This project was previously reflected as a joint venture property through December 31, 1999; - The Company intends to break ground during 2001 on a shopping center development located in Riverdale, Utah; - The Company has funded approximately $148.1 million of construction costs associated with the above development projects as of December 31, 2000. The net projected remaining funding associated with the above projects is $21.5 million. DEVELOPMENT (JOINT VENTURES) The Company has joint venture development agreements for nine additional shopping center projects with leading regional developers. These nine projects have an aggregate projected cost of approximately $329 million. All of these projects have commenced development and are currently scheduled for completion through 2002. The Company currently holds an interest in six of these projects through the Retail Value Fund. These projects are located in Long Beach, California; Plainville, Connecticut; Deer Park, Illinois; Hagerstown, Maryland; Round Rock, Texas and San Antonio, Texas. The remaining three projects are located in Salisbury, Maryland (Phase III); Coon Rapids, Minnesota; and St. Louis, Missouri. Construction has been substantially completed and the centers are open for business at the Plainville, Connecticut; Deer Park, Illinois; Hagerstown, Maryland; Salisbury, Maryland, and Round Rock, Texas, properties. As of December 31, 2000, $271.2 million of construction costs were funded relating to the above projects. The remaining net project costs are projected to be $57.8 million. It is anticipated that the Company's share of these remaining net costs will result in the Company being reimbursed approximately $20.1 million, net, relating to construction financing proceeds, joint venture partner contributions and sale of parcels to tenants. In addition, the Company is in the process of entering into a joint venture relating to a 280,000 square foot lifestyle center in Littleton, Colorado. This project is scheduled for completion in the Spring of 2002. The Company intends to break ground during 2001 on a shopping center development located in Long Beach, California the interest of which is anticipated to be transferred into a new joint venture with an institutional investor. The Company's additional net equity funding requirements associated with these two projects are 22 expected to be nominal as the remaining net costs are expected to be funded through joint venture equity contributions and construction loans. DISPOSITIONS During 2000, the Company sold real estate assets or joint venture interests therein with an aggregate value of approximately $250 million. In December 2000, the Company sold to Wal-Mart its occupied space in the New Bern and Washington, North Carolina, shopping centers for an aggregate sales price of approximately $20.7 million. In addition, the Company sold its 50% interest in a joint venture property located in Fenton, Missouri, for approximately $14.3 million. An equity affiliate of the Company, DD Development Company, sold 5 of the remaining 12 sites formerly occupied by Best Products for approximately $25.1 million. In the third quarter of 2000, the Company sold a 15,000 square foot shopping center in Florence, Kentucky, for a purchase price of approximately $1.7 million and 12,500 square feet of a 62,000 square foot shopping center located in Las Vegas, Nevada, for approximately $2.3 million. In addition, the Company sold to Wal-Mart its occupied space in the Company's Camden, South Carolina, shopping center for a purchase price of approximately $11.6 million. In February 2000, the Company entered into an agreement to sell 60% of its half interest in the Community Centers Joint Venture to DRA Advisors, Inc. at a price of approximately $163 million comprised of cash of approximately $66 million and debt assumed of $97 million. In conjunction with this transaction, the Company recognized a gain of approximately $16.1 million. Subsequent to this transaction, the Company's ownership in the joint venture is effectively 20% with funds advised by DRA Advisors, Inc. owning 80%. The Company continues to be responsible for the day-to-day management of the shopping centers and receives fees for such services. In February 2000, the Company formed a joint venture with DRA Advisors, Inc. whereby the Company contributed a wholly owned property in Phoenix, Arizona, valued at approximately $26.7 million and related mortgage debt of $18.0 million and, in exchange, received a 50% equity ownership interest in the joint venture and cash proceeds of approximately $4.3 million. In conjunction with this transaction, the Company recognized a gain of approximately $0.5 million. The Company continues to manage and operate the center and receives fees for such services. In February 2000, the Company sold a shopping center in Stone Mountain, Georgia, a suburb of Atlanta, for approximately $1.8 million. Proceeds from the above sales in 2000 were used to repay amounts outstanding on the Company's revolving credit facility, repurchase 4.7 million common shares in open market transactions and to fund the Company's investment relating to the BP acquisition. STRATEGIC TRANSACTIONS The Company completed its previously announced merger with AIP following AIP shareholders' approval of the plan of merger on May 14, 2001. AIP's shareholders also approved the sale of 31 industrial assets to an affiliate of Lend Lease Real Estate Investments, Inc. ("Lend Lease") for $292.2 million, which closed on May 14, 2001, immediately prior to the merger. Under the merger agreement, all common shareholders' interests, other than DDR, were effectively redeemed and each shareholder received a final cash payment equal to $12.89 per share which was funded from proceeds received from the asset sale to Lend Lease. In addition, in January 2001, all AIP shareholders, including DDR, received a special dividend of $1.27 per share associated with the sale of the Manhattan Towers office building in November 2000 for $55.3 million. The merger of a subsidiary of DDR (DDR Transitory Sub, Inc.) into AIP provides DDR with complete ownership of AIP's 39 remaining properties after the sale to Lend Lease. This portfolio is comprised of 31 industrial properties, six office properties, two retail properties and 23.7 acres of undeveloped land. DDR 23 intends to implement an orderly strategic disposition of the industrial and office assets. From the date of the merger, the AIP assets, liabilities and operating results are consolidated in the Company's financial statements. Prior to the merger and since 1999 the Company owned a 46% common stock interest which was accounted for under the equity method of accounting. The Company's effective purchase of the remaining interest in AIP through the redemption of all other shareholders, as previously described, was accounted for as a step acquisition. In December 2000, an equity affiliate of the Company terminated its entity level investment with DDR OliverMcMillan. In settlement of advances to DDR OliverMcMillan, the Company, through its equity affiliate, received two operating properties, one of which is located in Reno, Nevada, and the other located in Oceanside, California; a development project in Long Beach, California; residual land located in San Diego, California; and notes receivable, secured by real estate transferred to OliverMcMillan. The aggregate value associated with these assets was approximately $37 million. The Oceanside, California, and Reno, Nevada, property and certain notes receivable aggregating $18 million were transferred/assigned from the equity affiliate to the Company in 2000. 1999 ACTIVITY In July 1999, the Company acquired Deer Valley Towne Center, a 198,000 square foot shopping center in Phoenix, Arizona, for an aggregate purchase price of $25.8 million. The Company transferred this property in February 2000 to a 50% owned joint venture with DRA Advisors. In November 1999, the Company acquired, through a 50% owned joint venture, the fourth phase of a shopping center in Phoenix, Arizona, which aggregates 125,000 square feet. The total purchase price for the fourth phase of this center aggregated approximately $15.6 million. In April 1999, the Company acquired a 50% interest in a 206,000 square foot shopping center in St. Louis, Missouri. The joint venture's aggregate purchase price was $16.6 million and included the assumption of debt aggregating $13.0 million. In 1999, the Company acquired 3.8 million additional common shares of AIP for approximately $57.3 million. At December 31, 1999, the Company's ownership in AIP approximated 46% of the total outstanding shares of AIP. In June 1999, DD Development Company, a Company in which DDR has an equity ownership interest, acquired PREI's limited partnership interest in a joint venture, Hendon/DDR/BP, LLC, which owned 15 sites formerly occupied by Best Products at a cost of approximately $29.7 million. As a result, the Company's aggregate investment in the joint venture increased to approximately $36 million. In addition, in June 1999, Hendon/DDR/BP, LLC, entered into a $25 million mortgage, with a financial institution secured by the leased sites. The net financing proceeds were used to repay advances made by the Company to the joint venture. During 1999, the Company, on a wholly owned basis and through certain joint ventures, completed 14 expansion projects at an aggregate cost of $46.6 million. During 1999, the Company completed construction of a 185,000 square foot shopping center in Solon, Ohio; a 200,000 square foot Phase II of its shopping center in Erie, Pennsylvania; Phase I of the 282,000 square foot shopping center in Toledo, Ohio; Phase I of the 185,000 square foot shopping center in Oviedo, Florida; and a 170,000 square foot Phase II development in Macedonia, Ohio. During 1999, the Company through certain joint ventures completed construction of a 170,278 square foot shopping center in Salem, New Hampshire; Phase I of a 310,475 square foot shopping center in Salisbury, Maryland, which was acquired by the Company in 1999, and Phase I of a 569,340 square foot shopping center in Plainville, Connecticut. 1998 ACTIVITY During 1998, the Company and its joint ventures completed the acquisition of, or investment in, 41 shopping centers aggregating 7.4 million square feet of Company owned gross leasable area (GLA) for an aggregate investment of approximately $854.6 million. In December 1998, the Company acquired a 50% ownership interest in a 400,000 square foot shopping center in Leawood, Kansas. The Company's investment 24 aggregated approximately $18 million and was comprised of an equity investment of approximately $12.3 million and a note receivable due from the joint venture partner of $5.7 million. In September 1998, the Company entered into a 50/50 joint venture with DRA Advisors. In conjunction with this joint venture, the Company contributed properties valued at approximately $238 million to the joint venture and DRA contributed cash of approximately $42 million. In addition, the joint venture entered into a $156 million, seven-year mortgage with a coupon interest rate of 6.64%. Net proceeds aggregating approximately $192 million were distributed to the Company and used to repay borrowings on the Company's revolving credit facilities. The Company continues to manage the shopping centers and receive market fees for these services. In 1998, the Company, in a joint release with AIP, announced the execution of a definitive agreement providing for the strategic investment in AIP by the Company. In July 1998, the Company, in exchange for five industrial properties owned by the Company with a net book value of $7.4 million and valued at approximately $19.5 million, acquired approximately 1.3 million additional newly issued AIP shares of beneficial interest. As of December 31, 1998, the Company had purchased 5.9 million of common shares for approximately $91.3 million. Combined, the Company's acquired shares represented 34.5% of AIP's total outstanding shares as of December 31, 1998. During 1998, the Company completed seven expansion projects at an aggregate cost of $11.2 million. During 1998, the Company substantially completed the construction of a 445,000 square foot shopping center in Merriam, Kansas, which was being developed through a joint venture with DRA Advisors, Inc., formed in October 1996, 50% of which is owned by the Company. In 1998, an equity affiliate of the Company entered into joint venture development agreements for six additional projects with various developers throughout the country. In May 1998, the Company formed DDROM, with OliverMcMillan, LLC, based in San Diego, California, to develop, acquire, operate and manage urban entertainment and retail projects throughout the United States. DDROM's initial investments were comprised of six urban entertainment and retail projects located in Southern California and Reno, Nevada. The Company terminated its entity level investment with DDR OliverMcMillan in December 2000. FINANCING ACTIVITIES The acquisitions, developments, expansions and share repurchases of the Company were generally financed through cash provided from operating activities, revolving credit facilities, mortgages assumed, construction loans, unsecured public debt, common and preferred equity offerings, joint venture capital, Preferred Units, OP Units and asset sales. Total debt outstanding at December 31, 2000, was $1.2 billion as compared to $1.2 billion and $1.1 billion at December 31, 1999, and 1998, respectively. In 2000, the Company's debt remained relatively constant with the funding of acquisition, development and expansion activity offset largely by asset sales. In December 2000, the Company amended its $25 million credit facility with National City Bank. The current stated rate on this facility is LIBOR plus 1.10% with a maturity of November 2002. In December 2000, the Company refinanced its newly developed Toledo, Ohio, property for $23.0 million. The mortgage bears interest at LIBOR plus 1.20% and has a maturity date of December, 2002. In addition, the Company obtained a $35.5 million construction loan on its project in Everett, Massachusetts, bearing interest at LIBOR plus 1.85% of which $17.1 million has been drawn at December 31, 2000. Also, the Company transferred its 50% ownership interest in a development property located in San Antonio, Texas, to the Retail Value Fund and received proceeds of approximately $18.5 in conjunction with this transaction. In October 2000, the Company entered into two two-year interest rate swap agreements aggregating $100 million, effectively converting a portion of the variable rate debt on the Company's unsecured line-of-credit facility to a fixed rate of approximately 7.6%. In July 2000, the Company acquired the minority ownership interest associated with the 11 Hermes Properties acquired in July 1998 at an aggregate cost of approximately $81.9 million. As a result, 3,630,668 OP Units and all contingently issuable OP Units were purchased and all restrictions and obligations associated with the 11 operating properties were settled. 25 In June 2000 the Company amended its primary unsecured credit facility with a syndicate of financial institutions for which Bank One, NA serves as agent. The amended facility increased the borrowing availability to $550 million from $375 million and extended the term for an additional two years to May 31, 2003. The current stated interest rate on the facility is at LIBOR plus 1.10%. The Company also can competitively bid up to 50% of the facility amount. In May 2000, the Company entered into a $100 million bridge loan agreement with interest at LIBOR plus 1.10% agreement with Bank of America. The proceeds from this facility were used to repay the $100 million, 7 5/8% unsecured senior notes which matured on May 15, 2000. The bridge loan matured in November 2000 and was repaid with proceeds from the Company's expanded unsecured credit facility and asset sales. In May 2000, the Company's operating partnership issued $105 million, 9.0% perpetual preferred "down-REIT" operating partnership units to an institutional investor and received net proceeds of approximately $102.4 million. The Preferred Units may be exchanged, under certain circumstances, for Class J, 9.0% cumulative redeemable perpetual preferred shares. In 1999 and 2000, the Company's Board of Directors authorized the officers of the Company to implement and continue a common share repurchase program in response to what the Company believed was a distinct undervaluation of the Company's common shares in the public market. Under the terms authorized by the Company's Board, as amended in November 1999 and 2000, the Company may purchase in the open market, subject to certain requirements, common shares of the Company, up to a maximum value of $200 million. The Company may utilize proceeds from the sale of assets to purchase these shares. It is not the Company's intention to increase the leverage on its balance sheet to implement this stock repurchase program. In accordance with the stock repurchase plan approved by the Company's Board of Directors, from February 29, 2000, through December 31, 2000, the Company purchased, in open market transactions, 4,741,700 of its common shares, at prices ranging from $11.61 to $14.88, for an aggregate purchase price of approximately $62.9 million. Since the fourth quarter of 1999, the Company has acquired 6,602,000 shares at an aggregate cost of $88.7 million. From the fourth quarter of 1999 through December 31, 2000, total common shares and OP Units repurchased/converted aggregated 10.3 million shares and units of which 8.4 million were repurchased/converted in 2000. A summary of the aggregate gross proceeds raised through the issuance of common shares, preferred shares, warrants, senior unsecured notes, construction loans, Preferred Units and OP Units (units are issued by the Company's partnerships) issued as consideration for the purchase of real estate assets aggregating $822.1 million during the three-year period ended December 31, is as follows (in millions):
2000 1999 1998 ------ ----- ------ EQUITY: Common shares............................................. $ -- $ -- $ 80.9 Operating partnership units............................... -- 2.7 91.4 Class C preferred shares.................................. -- -- 100.0 Class D preferred shares.................................. -- -- 54.0 Preferred partnership units and warrant................... 105.0 75.0 35.0 ------ ----- ------ Total Equity.............................................. 105.0 77.7 361.3 DEBT: Senior fixed rate notes................................... -- -- 200.0 Secured loans............................................. 40.1 8.3 29.7 ------ ----- ------ Total..................................................... $145.1 $86.0 $591.0 ====== ===== ======
During the year ended December 31, 2000, the Company also assumed mortgage debt in conjunction with certain property acquisitions aggregating $47.9 million. 26 CAPITALIZATION At December 31, 2000, the Company's capitalization consisted of $1.2 billion of debt (excluding the Company's proportionate share of joint venture mortgage debt aggregating $322.8 million as compared to $466.6 million in 1999), $518.8 million of preferred stock and Preferred Units and $744.6 million of market equity (market equity is defined as common shares outstanding and OP Units outstanding multiplied by the closing price of the common shares on the New York Stock Exchange at December 31, 2000 of $13.3125) resulting in a debt to total market capitalization ratio of .49 to 1.0 as compared to the ratios of .48 to 1.0 and .40 to 1.0 at December 31, 1999 and 1998, respectively. At December 31, 2000, the Company's total debt consisted of $759.6 million of fixed rate debt, including $100 million of variable rate debt which has been effectively swapped to a fixed rate of approximately 7.6%, and $468.0 million of variable rate debt. In addition, in January, 2001, the Company entered into an additional $100 million interest rate swap which effectively converted $100 million of variable rate debt to a fixed rate of approximately 6.3%. It is management's intention that the Company have access to the capital resources necessary to expand and develop its business. Accordingly, the Company may seek to obtain funds through additional equity offerings or debt financings in a manner consistent with its intention to operate with a conservative debt capitalization policy and maintain its investment grade ratings with Moody's Investor Services and Standard and Poor's. As of December 31, 2000, the Company had a shelf registration statement with the Securities and Exchange Commission under which $750 million of debt securities, preferred shares or common shares may be issued. In addition, as of December 31, 2000, the Company had $134.5 million available under its $575 million of revolving credit facilities. As of December 31, 2000, the Company also had 112 operating properties with $213.1 million, or 70.4%, of the total revenue of the Company for the year ended December 31, 2000 which were unencumbered, thereby providing a potential collateral base for future borrowings. ECONOMIC CONDITIONS Historically, real estate has been subject to a wide range of cyclical economic conditions which affect various real estate markets and geographic regions with differing intensities and at different times. Adverse changes in general or local economic conditions could result in the inability of some existing tenants of the Company to meet their lease obligations and could otherwise adversely affect the Company's ability to attract or retain tenants. The Company's shopping centers are typically anchored by one or more discount department stores (Wal-Mart, Kmart, Target), off price department stores (Kohl's, T.J. Maxx/Marshalls), home improvement stores (Home Depot, Lowes) and supermarkets which generally offer day-to-day necessities, rather than high-priced luxury items. Since these merchants typically perform better in an economic recession than those who market high priced luxury items, the percentage rents received by the Company have remained relatively stable. In addition, the Company seeks to reduce its operating and leasing risks through ownership of a portfolio of properties with a diverse geographic and tenant base. During 2000 and 1999, certain national and regional retailers have experienced financial difficulties and several have filed for protection under bankruptcy laws. Although the Company has a number of tenants filing for protection under bankruptcy laws, the Company has not incurred any significant financial losses through February 21, 2001 with regard to the Company's portfolio of tenants. THE REMAINDER OF THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION RELATES TO THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2001. RESULTS OF OPERATIONS REVENUES FROM OPERATIONS Total revenues increased $10.9 million, or 15.1%, to $83.0 million for the three-month period ended September 30, 2001 from $72.1 million for the same period in 2000. Total revenues increased $23.6 million, or 11.1% to $236.7 million for the nine-month period ended September 30, 2001 from $213.1 million for the same period in 2000. Base rental revenues for the three-month period ended September 30, 2001 increased $8.6 million, or 16.8%, to $59.5 million as compared to $50.9 million for the same period in 2000. Base rental 27 revenues increased $16.4 million, or 10.9%, to $167.0 million for the nine-month period ended September 30, 2001 from $150.6 million for the same period in 2000. Aggregate base rental revenues relating to new leasing, re-tenanting and expansion of the Core Portfolio Properties (shopping center properties owned as of January 1, 2000) increased approximately $1.2 million, or 0.8%, for the nine-month period ended September 30, 2001 as compared to the same period in 2000. Had HomePlace not rejected their eight leases during the period, increases in Core Portfolio Properties base rents would have increased $1.6 million (or 1.1%). The shopping center acquired by the Company in 2000 contributed $0.8 million of additional base rental revenue, the eight newly developed shopping centers contributed $5.6 million and the merger of AIP contributed $13.3 million. These increases were offset by a $4.5 million decrease from the sale/transfer of seven properties and three Wal-Mart stores in 2000 and 2001. At September 30, 2001, the aggregate occupancy of the Company's wholly-owned shopping centers was 93.8% as compared to 95.8% at September 30, 2000. The average annualized base rent per leased square foot was $8.30 as compared to $8.08 at September 30, 2000. During 2001, same store sales, for those tenants required to report sales (approximately 11.3 million square feet), increased 1.1% to $250 per square foot. At September 30, 2001, the aggregate occupancy of the Company's joint venture shopping centers was 93.4% as compared to 95.3% at September 31, 2000. The average annualized base rent per leased square foot was $12.53 as compared to $11.87 at September 30, 2000. Same store sales, for those tenants required to report such information (approximately 4.4 square feet), increased 4.0% to $251 per square foot for the twelve-month period ended September 30, 2001. The temporary decrease in occupancy is primarily attributed to the rejection of eight HomePlace leases during the beginning of the third quarter. Recoveries from tenants for the three-month period ended September 30, 2001 increased $2.0 million, or 15.6%, to $15.0 million as compared to $13.0 million for the same period in 2000. Recoveries from tenants for the nine-month period ended September 30, 2001 increased $3.8 million, or 9.4%, to $44.2 million as compared to $40.4 million in 2000. This increase was primarily related to the Company's merger with AIP which contributed $2.5 million and the increase in operating and maintenance expenses and real estate taxes associated with the 2000 and 2001 shopping center acquisitions and developments. Recoveries were approximately 85.9% and 89.0% of operating expenses and real estate taxes for the nine-month periods ended September 30, 2001 and 2000, respectively. The decrease in the recovery percentage rate is primarily associated with the consolidation of the industrial and office properties from AIP, which historically have a lower recovery percentage and an increase in nonrecoverable operating expenses as discussed below under the caption "Expenses from Operations." Ancillary and other property related income for the three-month period ended September 30, 2001 increased $0.2 million, or 45.3%, to $0.7 million as compared to $0.5 million for the same period in 2000. Ancillary and other property related income for the nine-month period ended September 30, 2001 increased $0.6 million, or 45.4%, to $1.8 million as compared to $1.2 million in 2000. This increase was primarily due to the Company pursuing additional ancillary income opportunities. It is anticipated that growth in ancillary revenues will continue in 2001 as additional opportunities are pursued. Management fee income for the three-month period ended September 30, 2001 increased $1.0 million, or 59.5%, to $2.8 million as compared to $1.8 million for the same period in 2000. Management fee income for the nine-month period ended September 30, 2001 increased $4.0 million, or 83.0%, to $8.8 million as compared to $4.8 million in 2000. This increase was primarily associated with the Company assuming property management responsibilities for all of the real estate assets of BP in the fourth quarter of 2000. In addition, the Company formed certain joint ventures in 1999 and 2000, which are now operational. Accordingly, the Company is performing property management services and is receiving fees at market rates for these services. Development fee income for the three-month period ended September 30, 2001 increased $0.6 million, to $0.7 million as compared to $0.1 million for the same period in 2000. Development fee income for the nine-month period ended September 30, 2001 increased $0.5 million, or 35.9%, to $1.7 million as compared to $1.2 million in 2000. This increase is attributable to the substantial completion of certain joint venture development projects in 2000. The Company is currently involved with joint venture development projects in 28 Long Beach, California; Coon Rapids, Minnesota and Littleton, Colorado. The Company will continue to pursue additional development joint ventures as opportunities present themselves. Interest income for the three-month period ended September 30, 2001 increased $0.5 million or 61.1%, to $1.2 million as compared to $0.7 million for the same period in 2000. Interest income for the nine-month period ended September 30, 2001, increased $2.2 million, or 83.7%, to $4.7 million as compared to $2.5 million in 2000. This increase was primarily associated with advances to joint ventures and an increase in notes receivable in 2001. Other income for the three-month period ended September 30, 2001 decreased $1.9 million, or 44.5%; to $2.5 million as compared to $4.4 million for the same period in 2000. Other income for the nine-month period ended September 30, 2001 decreased $2.6 million, or 29.2%, to $6.2 million as compared to $8.8 million in 2000. This decrease is due to a decrease in lease termination revenues aggregating approximately $2.8 million for the comparative nine-month periods. EXPENSES FROM OPERATIONS Rental operating and maintenance expenses for the three-month period ended September 30, 2001 increased $1.0 million, or 14.3%, to $8.2 million as compared to $7.2 million for the same period in 2000. Rental operating and maintenance expenses increased $4.8 million, or 23.7%, to $25.2 million for the nine month period ended September 30, 2001 from $20.4 million for the same period in 2000. An increase of $1.0 million is attributable to the nine shopping centers acquired and developed in 2001 and 2000, $2.6 million attributable to the merger of the AIP properties and $1.7 million is primarily attributable to nonrecoverable operating expenses including an increase in the Company's provisions for bad debt expense of approximately $0.8 million and various maintenance items in the Core Portfolio Properties. These increases were offset by a decrease of $0.5 million relating to the sale/transfer of seven properties and three Wal-Mart stores in 2000 and 2001. Real estate taxes for the three-month period ended September 30, 2001 increased $1.4 million, or 16.9%, to $9.4 million as compared to $8.0 million for the same period in 2000. Real estate taxes increased $1.3 million, or 5.1%, to $26.3 million for the nine-month period ended September 30, 2001 from $25.0 million for the same period in 2000. Increases of $0.9 million related to the nine shopping centers acquired and developed in 2001 and 2000 and $1.7 million related to the merger of the AIP properties. These increases were offset by a decrease of $0.4 million relating to the sale/transfer of seven properties and three Wal-Mart stores in 2000 and 2001 and the remaining $0.9 million decrease is primarily associated with the Core Portfolio Properties. General and administrative expenses increased $1.2 million, or 24.3%, to $5.9 million for the three-month period ended September 30, 2001 as compared to $4.7 million in 2000. General and administrative expenses increased $2.9 million, or 19.6%, to $17.8 million for the nine-month period ended September 30, 2001 from $14.9 million for the same period in 2000. Total general and administrative expenses were approximately 4.3% of total revenues, including total revenues of joint ventures, for the nine-month periods ended September 30, 2001 and 2000. The increase in general and administrative expenses is primarily attributable to the growth of the Company generally related to recent acquisitions, expansions and developments, the merger of AIP and the opening of a west coast office in conjunction with the Company's increased ownership of assets on the west coast and property management services provided to BP beginning in the fourth quarter of 2000. The Company continues to expense all internal leasing salaries, legal salaries and related expenses associated with the leasing and re-leasing of existing space. Interest expense increased $1.1 million, or 5.4%, to $20.9 million for the three-month period ended September 30, 2001, as compared to $19.8 million for the same period in 2000. Interest expense increased $5.3 million, or 9.3%, to $61.9 million for the nine-month period ended September 30, 2001 from $56.6 million for the same period in 2000. The overall increase in interest expense for the nine-month period ended September 30, 2001, as compared to the same period in 2000 is primarily related to the higher debt balances 29 resulting from the merger of AIP in May 2001 and the acquisition and development of shopping centers during 2001 and 2000. The weighted average debt outstanding during the nine-month period ended September 30, 2001 and related weighted average interest rate was $1.3 billion and 7.0%, respectively, compared to $1.2 billion and 7.7%, respectively, for the same period in 2000. Interest costs capitalized, in conjunction with development, expansion projects and development joint venture interests, were $3.6 million and $10.5 million for the three and nine month periods ended September 30, 2001, as compared to $5.2 million and $13.6 million for the same periods in 2000. The impairment charge aggregated $2.9 million for the three and nine month periods ended September 30, 2001. During the second quarter of 2001, one of the Company's retail tenants announced it was liquidating its inventory and closing its remaining stores. In assessing recoverability of its recorded assets associated with this tenant, the Company had initially estimated, based upon its prior experience with similar liquidations, that proceeds relating to the Company's claims in liquidation would be sufficient to recover the aggregate recorded assets for this tenant. However, in the third quarter, the tenant completed its sale of inventory and auction of its real estate. The Company has not yet been informed of the tenant's formal plan of liquidation. However, the Company believes that based on (i) lack of significant proceeds received by the tenant on its auction of real estate and the other assets, and (ii) lack of positive information disseminated from the tenant that would indicate lack of probable recoverability of certain recorded amounts, a provision of $2.9 million would be recorded and reflected as an impairment charge within the statement of operations. Depreciation and amortization expense increased $3.1 million, or 22.5%, to $16.9 million for the three-month period ended September 30, 2001, as compared to $13.8 million for the same period in 2000. Depreciation and amortization expense increased $4.6 million, or 11.4%, to $45.2 million for the nine-month period ended September 30, 2001 from $40.6 million for the same period in 2000. An increase of $1.3 million is related to the nine shopping centers acquired and developed in 2001 and 2000, $1.1 million is related to Core Portfolio Properties and $3.1 million is related to the merger of the AIP properties. These increases were offset by a decrease of $0.9 million relating to the sale/transfer of seven properties and three Wal-Mart stores in 2000 and 2001. Equity in net income of joint ventures increased $0.5 million, or 14.3%, to $4.1 million for the three month period ended September 30, 2001, as compared to $3.6 million for the same period in 2000. Equity in net income of joint ventures increased $1.0 million, or 8.3%, to $13.4 million for the nine month period ended September 30, 2001, from $12.4 million for the same period in 2000. An increase of $1.2 million is primarily related to the joint venture formed in 2000 to acquire 10 shopping center properties from BP. This increase was offset by a decrease of $0.4 million relating to the Company's sale of 60% of its half interest in the Community Centers joint venture in February 2000. The remaining decrease of $0.2 million primarily relates to various joint ventures which included HomePlace as a tenant and accordingly the income of these joint ventures was reduced pending releasing of the vacant space. Equity in net income of minority equity investment was $2.2 million for the three month period ended September 30, 2000. Equity in net income/loss of minority equity investment decreased $3.5 million, to $1.6 million for the nine month period ended September 30, 2001 from $5.1 million for the same period in 2000. The overall decrease for the nine month period is due to the sale of 31 of AIP's assets and the subsequent merger of the remaining assets into DDR. See discussion below under "Strategic Transactions." Minority equity interest expense increased $0.3 million, or 6.9%, to $5.5 million for the three month period ended September 30, 2001, as compared to $5.2 million for the same period in 2000. Minority equity interest expense increased $1.6 million, or 10.8%, to $16.0 million for the nine month period ended September 30, 2001, from $14.4 million for the same period in 2000. An increase of $3.8 million relates to the Company's issuance of preferred operating partnership minority units in May 2000. These units may be exchanged, under certain circumstances, into preferred shares of the Company. In addition, an increase of $0.4 million relates to the minority interest associated with an office property assumed in the merger of AIP. This increase was offset by a $2.6 million decrease due to the Company acquiring the minority partners' ownership interest in 11 properties and consequently retiring approximately 3.6 million operating partnership units in July 2000. 30 Gain on disposition on real estate and real estate investments aggregated $15.8 million for the nine month period ended September 30, 2001, which relates to the sale of four shopping center properties in Ahoskie, North Carolina; Rapid City, South Dakota; Highland Heights, Ohio; and Toledo, Ohio. Gain on disposition of real estate and real estate investments aggregated $19.0 million for the nine month period ended September 30, 2000. The Company sold several properties including shopping centers located in Stone Mountain, Georgia; Florence, Kentucky; a portion of a shopping center in Las Vegas, Nevada; and a Wal-Mart store in Camden, South Carolina. In February 2000, the Company also sold 60% of its half interest in a joint venture which owns 10 operating shopping centers. In connection with the formation of one joint venture, the Company sold one property, received cash and a 50% partnership interest. NET INCOME Net income decreased $0.7 million, or 3.2%, to $20.3 million for the three month period ended September 30, 2001, as compared to net income of $21.0 million for the same period in 2000. Net income decreased $5.5 million, or 7.1%, to $72.2 million for the nine month period ended September 30, 2001, from $77.7 million for the same period in 2000. The decrease in net income of $5.5 million is primarily attributable to the decrease in gain on sale of real estate and real estate investments of $3.2 million relating to the sale/ transfer of seven properties and three Wal-Mart stores in 2000 and 2001 and the related operating results therefrom. In addition, a decrease of $3.5 million in net income from minority equity investment due to the consolidation of the AIP properties and certain transaction related costs and severance costs which were incurred by AIP of approximately $3.2 million. These decreases were offset by an increase in net income from joint ventures of approximately $1.0 million and increases in net operating revenues (total revenues less operating and maintenance, real estate taxes, impairment charge and general and administrative expense) aggregating $11.7 million, resulting from new leasing, retenanting and expansion of Core Portfolio Properties, the nine shopping centers acquired and developed in 2001 and 2000, and the merger of the AIP properties. The net operating revenues were offset by increases in interest, depreciation and minority interest expense of $5.3 million, $4.6 million and $1.6 million, respectively. FUNDS FROM OPERATIONS Management believes that Funds From Operations ("FFO") provides an additional indicator of the financial performance of a Real Estate Investment Trust. FFO is defined generally as net income applicable to common shareholders excluding gains (losses) on sale of property, extraordinary items, adjusted for certain non-cash items, principally real property depreciation and equity income (loss) from its joint ventures and adding the Company's proportionate share of FFO of its unconsolidated joint ventures, determined on a consistent basis. Other real estate companies may calculate FFO in a different manner. For the three month period ended September 30, 2001, FFO increased $3.4 million, to $34.2 million as compared to $30.8 million for the same period in 2000. For the nine month period ended September 30, 2001, FFO increased 31 $2.4 million, to $99.8 million as compared to $97.4 million for the same period in 2000. The Company's calculation of FFO is as follows (in thousands):
THREE MONTH PERIODS NINE MONTH PERIODS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ------------------- ------------------- 2001 2000 2001 2000 -------- -------- -------- -------- Net income applicable to common shareholders(1).............................. $13,537 $14,210 $51,729 $57,268 Depreciation of real estate investments........ 16,531 13,411 44,340 39,692 Equity in net income of joint ventures......... (4,076) (3,568) (13,431) (12,402) Equity in net income of minority equity investment................................... -- (2,227) (1,550) (5,136) Joint ventures' FFO(2)......................... 7,930 6,679 23,964 22,200 Minority equity investment FFO(3).............. -- 3,810 6,448 11,020 Minority interest expense (OP Units)........... 371 386 1,147 3,756 Gain on disposition of real estate and real estate investments........................... (3,015) (1,890) (15,761) (18,979) Impairment charge.............................. 2,895 -- 2,895 -- ------- ------- ------- ------- $34,173 $30,811 $99,781 $97,419 ======= ======= ======= =======
--------------- (1) Includes straight line rental revenues of approximately $1.3 million and $1.4 million for the three month periods ended September 30, 2001 and 2000, and approximately $3.6 million and $3.3 million for the nine month periods ended September 30, 2001 and 2000, respectively. (2) Joint ventures' Funds From Operations are summarized as follows:
THREE MONTH PERIODS NINE MONTH PERIODS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ------------------- ------------------- 2001 2000 2001 2000 -------- -------- -------- -------- Net income(a).......................... $11,487 $ 9,344 $38,297 $30,355 Loss on sale of real estate............ -- -- 97 -- Depreciation of real estate investments.......................... 9,873 6,726 26,620 19,468 ------- ------- ------- ------- $21,360 $16,070 $65,014 $49,823 ------- ------- ------- ------- DDR ownership interest(b).............. $ 7,930 $ 6,679 $23,964 $22,200 ======= ======= ======= ======= ---------------
(a) Revenues for the three month periods ended September 30, 2001 and 2000 included approximately $1.1 million and $1.3 million, respectively, resulting from the recognition of straight line rents of which the Company's proportionate share is $0.4 and $0.5 million, respectively. Revenue for the nine month periods ended September 30, 2001 and 2000, included approximately $3.4 million and $3.3 million, respectively, resulting from the recognition of straight line rents of which the Company's proportionate share is $1.2 million and $1.3 million, respectively. (b) At September 30, 2001, the Company owned joint venture interests relating to 55 operating shopping center properties, including an approximate 25% interest in the Prudential Retail Value Fund, and a 50% joint venture in a real estate management company. At September 30, 2000, the Company owned joint venture interests in 43 operating shopping center properties, including an approximate 25% interest in the Prudential Retail Value Fund, and a 50% joint venture interest in a real estate management company. (3) FFO for the nine month period ended September 30, 2001 includes an add back of approximately $3.2 million relating to the Company's proportionate share of loss on sale, including certain transaction related costs and severance charges which were incurred by AIP as a result of the Lend Lease sale and consummation of the merger with DDR. 32 LIQUIDITY AND CAPITAL RESOURCES The Company's cash flow activities are summarized as follows:
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, ------------------- 2001 2000 -------- -------- Cash flow from operating activities......................... $135,918 $114,249 Cash flow used in investing activities...................... (45,610) (27,963) Cash flow used in financing activities...................... (82,227) (89,744)
The Company anticipates that cash flow from operating activities will continue to provide adequate capital for all principal payments, recurring tenant improvements, and dividend payments in accordance with REIT requirements, and that cash on hand, borrowings available under its existing revolving credit facilities, and other debt and equity alternatives, including the issuance of operating partnership units and joint venture capital, will provide the necessary capital to achieve continued growth. The increase in cash flow from operating activities for the nine month period ended September 30, 2001, compared to September 30, 2000 is primarily due to shopping center acquisitions and developments completed in 2001 and 2000, new leasing, expansion, re-tenanting of the Core Portfolio Properties, and distributions from the Company's minority equity investment, prior to the AIP merger. An increase in the 2001 quarterly dividend per common share to $0.37 from $0.36 was approved in March 2001 by the Company's Board of Directors. The Company's common share dividend payout ratio for the first three quarters of 2001 approximated 62.6% of actual FFO as compared to 65.9% for the same period in 2000. It is anticipated that the current dividend level will result in a conservative payout ratio. A low payout ratio will enable the Company to retain more capital which will be utilized to fund attractive investment opportunities in the development, acquisition and expansion of portfolio properties. During the nine month period ended September 30, 2001, the Company and its joint ventures invested $247.6 million, net, to acquire, develop, expand, improve and re-tenant its properties. The Company's expansion, acquisition and development activity is summarized below: EXPANSIONS For the nine month period ended September 30, 2001, the Company completed the expansion and redevelopment of five shopping centers at an aggregate cost of $13.3 million. The completed expansions/ redevelopments include shopping centers located in Fayetteville, Arkansas; Crystal River, Florida; Highland, Indiana; Wilmington, North Carolina and North Charleston, South Carolina. The Company and its joint ventures are currently expanding/redeveloping two shopping centers located in Schaumburg, Illinois and Lebanon, Ohio at an aggregate projected cost of approximately $1.9 million. The Company and its joint ventures are also scheduled to commence three additional expansion/redevelopment projects in North Little Rock, Arkansas; North Canton, Ohio and Taylorsville, Utah. Only the Ohio project is held through a joint venture. The Company's joint venture partner on the Ohio project is the Ohio State Teachers Retirement Fund. ACQUISITIONS In 2000, the Company announced it intended to acquire several west coast retail properties from BP, through a joint venture with Prudential Real Estate Investors ("PREI") and Coventry. The joint venture was funded as follows: 1% by Coventry, 20% by DDR, and 79% by Prudential. These properties are not part of BP's liquidation portfolio. This agreement with BP was entered into before BP's shareholders approved BP's Plan of Liquidation. As of September 30, 2001, ten properties have been acquired at an aggregate cost of approximately $264 million. The joint venture's equity investment as of September 30, 2001, is approximately $123 million. The Company earns fees for managing and leasing the properties, all of which are located in western states. 33 The Company and Coventry were selected to serve as BP's liquidation agent pursuant to BP's plan of liquidation. The Company is providing property management services for this portfolio and receiving property management, leasing and development fees for its services at market rates. As of September 30, 2001, 24 properties remain under management. DEVELOPMENT (CONSOLIDATED) The consolidated development projects are as follows: - A 577,000 square foot shopping center in Meridian, Idaho (a suburb of Boise). The 412,000 square foot Phase I of this center was substantially completed in 2000 and is anchored by a Wal-Mart Supercenter (not owned by the Company), Shopko, Shepler's, Bed, Bath & Beyond, Office Depot, Old Navy, and Sportman's Warehouse. Ross Dress for Less, additional retail tenants and several restaurants will be opening throughout 2001. Construction of Phase II is scheduled to commence in 2002, with completion scheduled for the first half of 2003. - A 622,000 square foot shopping center in Everett, Massachusetts, which is scheduled for completion in the fourth quarter of 2001. The center is anchored by Target (not owned by the Company), Home Depot, Bed, Bath & Beyond, OfficeMax and PetsMart (all of which were open as of March 31, 2001). In addition, Old Navy opened in the second quarter and Michael's is scheduled to open in the fourth quarter of 2001. - A 157,000 square foot shopping center in Kildeer, Illinois, which is located adjacent to the Company's joint venture shopping center located in Deer Park, Illinois. The Kildeer project is scheduled for grand opening in November 2001 and will include the following tenants: Bed, Bath & Beyond, Circuit City, Cost Plus World Market, Old Navy and miscellaneous shops. - A 460,000 square foot shopping center in Princeton, New Jersey, adjacent to the Company's existing center, which includes the following tenants: Kohl's, Wegman's, Michael's, Target (not owned by the Company) and Dick's. All of these tenants opened during 1999 and 2000. The project also includes 55,000 square feet of additional retail space, which is scheduled for completion in 2001. - The Company intends to break ground during 2002 on two shopping center developments located in Riverdale, Utah, and Long Beach, California. It is anticipated that the Long Beach development (The Pike at Rainbow Harbor, formerly referred to as Queensway Bay) will be transferred into a joint venture with an institutional investor. - The Company intends to commence construction during 2002 on the central quadrant of the Coon Rapids, Minnesota, Riverdale Village Shopping Center. This development will create an additional 294,000 square feet of retail space. DEVELOPMENT (JOINT VENTURE) The Company has joint venture development agreements for eight shopping center projects. In April 2001, the Company entered into its eighth joint venture relating to a 280,000 square foot lifestyle center in Littleton, Colorado which is scheduled to open in November 2001. These eight projects have an aggregate projected cost of approximately $350.2 million. All of these projects have commenced development and are currently scheduled for completion during 2002. Construction has been substantially completed and the centers are open for business at the Deer Park, Illinois; Plainville, Connecticut; Round Rock, Texas and San Antonio, Texas locations. The Company is currently financing five of these projects through the Prudential/DDR Retail Value Fund. This fund, which is owned 74.25% by Prudential, 24.75% by the Company and 1% by Coventry (which is 79% indirectly owned by the Company), invests in retail properties within the United States that are in need of substantial retenanting and market repositioning and may also make equity and debt investments in companies owning or managing retail properties, as well as third party development projects that provide significant growth opportunities. These projects are located in Long Beach, California (CityPlace); Plainville, 34 Connecticut; Deer Park, Illinois; Round Rock, Texas and San Antonio, Texas. The remaining three projects are located in Littleton, Colorado; Coon Rapids, Minnesota and St. Louis, Missouri. DISPOSITIONS During the nine month period ended September 30, 2001, the Company sold certain real estate assets and received aggregated proceeds of approximately $53 million. In January 2001, the Company sold a 190,000 square foot shopping center in Ahoskie, North Carolina, for a purchase price of approximately $8.3 million. In April 2001, the Company sold a 35,500 square foot shopping center in Rapid City, South Dakota, to a private investor for approximately $2.4 million. In June 2001, the Company sold a 250,000 square foot shopping center in Highland Heights, Ohio, for approximately $27.5 million. In July 2001, the Company sold a 190,000 square foot shopping center in Toledo, Ohio (Airport Square), for approximately $14.8 million. In addition, in October 2001, the Company sold a 13,000 square foot shopping center in Zanesville, Ohio, for approximately $1.2 million. Proceeds from the above sales were used to repay amounts outstanding on the Company's revolving credit facilities. During the nine month period ended September 30, 2001, the Company's joint ventures sold certain real estate assets and received aggregate proceeds of approximately $9 million of which the Company received approximately $6 million. In June 2001, a former Best Products location was sold in El Paso, Texas for approximately $1.9 million and a land parcel in San Diego, California for approximately $3 million. In August 2001, a former Best Products location was sold in Lawrenceville, New Jersey for approximately $3.8 million. In addition, in October 2001, a former Best Products location was sold in Dayton, Ohio for approximately $1.8 million. STRATEGIC TRANSACTIONS The Company completed its previously announced merger with AIP following AIP shareholders' approval of the plan of merger on May 14, 2001. AIP's shareholders also approved the sale of 31 industrial assets to an affiliate of Lend Lease Real Estate Investments, Inc. ("Lend Lease") for $292.2 million, which closed on May 14, 2001, immediately prior to the merger. Under the merger agreement, all common shareholders' interests, other than DDR, were effectively redeemed and each shareholder received a final cash payment equal to $12.89 per share which was funded from proceeds received from the asset sale to Lend Lease. In addition, in January 2001, all AIP shareholders, including DDR, received a special dividend of $1.27 per share associated with the sale of the Manhattan Towers office building in November 2000 for $55.3 million. The merger of a subsidiary of DDR (DDR Transitory Sub, Inc.) into AIP provides DDR with complete ownership of AIP's 39 remaining properties after the sale to Lend Lease. This portfolio is comprised of 31 industrial properties, six office properties, two retail properties and 23.7 acres of undeveloped land. DDR intends to operate the assets as part of its portfolio and at the same time pursue opportunities to sell some or all of the industrial and office assets through an orderly strategic disposition program. From the date of the merger, the AIP assets, liabilities and operating results are consolidated in the Company's financial statements. Prior to the merger and since 1999 the Company owned a 46% common stock interest which was accounted for under the equity method of accounting. The Company's effective purchase of the remaining interest in AIP through the redemption of all other shareholders, as previously described, was accounted for as a step acquisition. FINANCINGS In January 2001, the Company entered into a $100 million, two year swap agreement, converting a portion of the variable rate debt on the Company's Unsecured Credit Facility to a fixed rate of approximately 6.3%. In April 2001, the Company entered into a 10 year, $156 million financing agreement secured by five properties with a fixed coupon interest rate of approximately 6.9%. Proceeds were effectively used to repay 35 amounts outstanding on the Company's revolving credit facilities and to repay an $8.1 million mortgage scheduled to mature in July 2001. CAPITALIZATION At September 30, 2001, the Company's capitalization consisted of $1.4 billion of debt (excluding the Company's proportionate share of joint venture mortgage debt aggregating $374.3 million), $518.8 million of preferred shares and preferred operating partnership units and $1.0 billion of market equity (market equity is defined as common shares and common operating partnership units outstanding multiplied by the closing price per common share on the New York Stock Exchange at September 30, 2001, of $17.95), resulting in a debt to total market capitalization ratio of 0.48 to 1.0. At September 30, 2001, the Company's total debt consisted of $1,001.4 million of fixed rate debt and $384.8 million of variable rate debt. It is management's intention to operate such that the Company has access to the capital resources necessary to expand and develop its business. Accordingly, the Company may seek to obtain funds through additional equity offerings or debt financing or joint venture capital in a manner consistent with its intention to operate with a conservative debt capitalization policy and maintain its investment grade ratings with Moody's Investor Services and Standard and Poor's. As of September 30, 2001, the Company had $750 million available under its shelf registration statement. In December 2001, we sold 3.2 million common shares using our shelf registration statement. Therefore, as of December 31, 2001 the Company had approximately $691 million available under the shelf registration statement. In addition, as of September 30, 2001, the Company had cash of $12.3 million. In addition, as of December 31, 2001, we had approximately $174 million available on our primary unsecured $550 million revolving credit facility. On September 30, 2001, the Company also had 125 operating properties with $148.8 million, or 59.2%, of the total revenue for the nine month period ended September 30, 2001, which were unencumbered, thereby providing a potential collateral base for future borrowings. INFLATION Substantially all of the Company's long-term leases contain provisions designed to mitigate the adverse impact of inflation. Such provisions include clauses enabling the Company to receive percentage rentals based on tenants' gross sales, which generally increase as prices rise, and/or escalation clauses, which generally increase rental rates during the terms of the leases. Such escalation clauses are often related to increases in the consumer price index or similar inflation indices. In addition, many of the Company's leases provide for fixed rate rental increases or are for terms of less than ten years, which permits the Company to seek increased rents upon re-rental at market rates. Most of the Company's leases require the tenants to pay their share of operating expenses, including common area maintenance, real estate taxes, insurance and utilities, thereby reducing the Company's exposure to increases in costs and operating expenses resulting from inflation. ECONOMIC CONDITIONS Historically, real estate has been subject to a wide range of cyclical economic conditions which affect various real estate sectors and geographic regions with differing intensities and at different times. In 2001, many regions of the United States have experienced varying degrees of economic recession. A continuation of the economic recession, or further adverse changes in general or local economic conditions, could result in the inability of some existing tenants of the Company to meet their lease obligations and could otherwise adversely affect the Company's ability to attract or retain tenants. The shopping centers are typically anchored by discount department stores (Wal-Mart, Kmart or Target), off-price department stores (Kohl's, TJ Maxx/ Marshalls), home improvement stores (Home Depot, Lowes) and supermarkets which generally offer day-to-day necessities rather than high-priced luxury items. Since these merchants typically perform better in an economic recession than those who market high priced luxury items, the percentage rents received by the Company have remained relatively stable. In addition, the Company seeks to reduce its operating and leasing risks through ownership of a portfolio of properties with a diverse geographic and tenant base. 36 As indicated above, many regions have experienced various conditions of economic recession and the tragic events of September 11, 2001, may have accelerated certain recessionary trends. The Company believes, however, that these events should not have a material effect on the Company's portfolio due to the quality of the real estate and the strength of the tenant mix. During 2001, several value-oriented retailers consistently posted positive same store sales results. This reflected consumers' pronounced shift toward discount and value- oriented retailers rather than traditional department stores and enclosed mall specialty retailers, which continued to display weakening sales trends. According to Merrill Lynch (Retail Real Estate Same Store Monitor, January 20, 2002) community center retailers posted same store sales increases of 5.4% to 7.0% during the December 2001 holiday shopping season. In contrast enclosed mall anchors displayed same store sales decreases of 2.4% and enclosed mall specialty retailers' same store sales fell 5.1%. We expect that value-oriented community shopping center tenants will open slightly more stores in 2002 than they did in 2001. The retail-shopping sector has been impacted by the competitive nature of the retail business and the competition for market share where the stronger retailers have out-positioned some of the weaker retailers. This positioning is taking market share away from weaker retailers and forcing them, in some cases, to declare bankruptcy or close stores. In January 2002, Kmart, the Company's second largest retailer representing approximately 2.8% of the Company proportionate share of shopping center base rental revenues as of September 30, 2001, filed for protection from its creditors under Chapter 11 of the bankruptcy code. The Company and its joint ventures have 26 leases involving Kmart aggregating 2,256,960 square feet. The Company's weighted average proportionate share of base rent per square foot is $3.11 as of September 30, 2001. Considering the low cost per square foot that Kmart pays combined with the shopping center locations, the Company does not expect to incur any significant losses resulting from this bankruptcy. In addition, certain retailers such as Toys-R-Us, OfficeMax and Charming Shoppes have also announced store closings. Notwithstanding such closures, the Company does not expect to have any significant losses associated with these tenants. Furthermore, retailers that close stores are still contractually obligated to pay rent. Overall, the industry trends for the Company's portfolio and business is strong and the portfolio continues to be stable. The negative news relating to the tenants tend to attract attention, yet vacancies created by unsuccessful tenants may also create opportunities to increase rent. The Company has experienced a temporary decrease in occupancy rates due to certain bankruptcies (i.e., HomePlace and various other retailers), yet leasing activity continues to be strong. The Company believes that it will benefit from a growing shift to stronger retailers in the retail environment. 37 POLICIES WITH RESPECT TO CERTAIN ACTIVITIES THE FOLLOWING IS A DISCUSSION OF OUR POLICIES WITH RESPECT TO CERTAIN ACTIVITIES, ACQUISITION AND INVESTMENT POLICIES AND FINANCING POLICIES. OUR POLICIES WITH RESPECT TO THESE ACTIVITIES HAVE BEEN DETERMINED BY OUR EXECUTIVE OFFICERS AND MAY BE AMENDED OR REVISED FROM TIME TO TIME AT THE DISCRETION OF THE BOARD OF DIRECTORS WITHOUT A VOTE OF OUR SHAREHOLDERS, EXCEPT FOR THOSE POLICIES IN OUR CODE OF REGULATIONS WHICH REQUIRE A MAJORITY OF SHAREHOLDER APPROVAL TO AMEND. POLICIES WITH RESPECT TO CERTAIN ACTIVITIES It is our intention to have access to the capital resources necessary to expand our business. Accordingly, we may seek to obtain funds through additional equity offerings or debt financings in a manner consistent with our intention to operate with a conservative debt capitalization policy and maintain our investment grade ratings with Moody's Investor Services and Standard & Poor's. We have a shelf registration statement available to us to issue common shares or other securities, some of which may be senior to the common shares. As of December 31, 2001, we had approximately $691 million of remaining availability on the shelf registration statement. In addition as of December 31, 2001 we had approximately $174 million available under our primary unsecured $550 million revolving credit facility. Except as described in "Acquisition and Investment Policies" and "Certain Relationships and Related Party Transactions," we have not made loans to our officers and directors, during the past three years. As described in "Acquisition and Investment Policies," we may participate with other entities in property ownership, through joint ventures or other types of co-ownership. We have made, and in the future may continue to make, loans to such entities for development and acquisition purposes. Under our Code of Regulations, all transactions (including lending or borrowing money) between any employee of ours and us must be approved by a majority of our directors who are "Independent" (which is generally defined in our articles of incorporation as a non-employee director who is not an affiliate of the Company). During the last three years, we have not engaged in trading, underwriting or agency distribution or resale of securities of other issuers and do not intend to do so. While we have not offered securities in exchange for other securities or properties, we may do so in the future and may do so as described in this prospectus. While we are not currently authorized by our Board of Directors to repurchase our common shares, from October 1999 through January 2001 we repurchased in open market transactions, approximately 6.6 million common shares at prices ranging from $11.61 to $14.88 per share. We have provided and intend to continue to provide our shareholders with an annual report containing the information required by Rule 14a-3 of the Securities Exchange Act of 1934, as amended, including, financial statements audited by a "big 5" accounting firm. ACQUISITION AND INVESTMENT POLICIES Our investment objective is to increase cash flow and the value of our portfolio of properties and to seek continued growth through the selective acquisition, development, redevelopment, renovation and expansion of income-producing real estate properties, primarily shopping centers. In pursuing our investment objective, we will seek to acquire high quality, well-located shopping centers with attractive initial yields and strong prospects for future cash flow growth and capital appreciation, where our financial strength and management and leasing capabilities can enhance value. See "The Company -- Strategy and Philosophy." We may develop new properties, purchase or lease income-producing properties for long-term investment, expand and improve the properties we own or sell such properties, in whole or in part, when circumstances warrant. We may also participate with other entities in property ownership, through joint ventures or other types of co-ownership and make advances and loans to such joint venture partners in accordance with their governing documents at interest rates ranging from prime plus 1% to 12%. Equity investments may be subject to existing mortgage financing and other indebtedness, which have priority over our equity interest and our advances and loans. While we have emphasized equity real estate investments, we may, in our discretion, invest in mortgage and other real estate interests. We have not previously invested in mortgages and we do not presently intend to invest to a significant extent in mortgages or deeds of trust, but may invest in participating or convertible 38 mortgages if we conclude that we may benefit from the cash flow or any appreciation in the value of the subject property. Such mortgages are similar to equity participation. Subject to the percentage of ownership limitations and gross income tests which must be satisfied to qualify as a REIT (see "Federal Income Tax Considerations -- Taxation of the Company -- Requirements for Qualification"), we may also invest in securities of concerns engaged in real estate activities or securities of other issuers. We do not intend to invest in the securities of any other issuer for the purpose of exercising control. However, we may in the future acquire all or substantially all of the securities or assets of other REITs, management companies or similar entities where such investments would be consistent with our investment policies. In any event, we do not intend that our investments in securities would require us to register as an investment company under the Investment Company Act of 1940, and we would divest securities before any such registration would be required. FINANCING POLICIES We intend to maintain a conservative debt capitalization with a ratio of debt to total market capitalization of less than 50%. Fluctuations in the market price of our stock, however, may cause this ratio to vary from time to time. Additionally, we may from time to time reevaluate our debt capitalization policy in light of then current economic conditions, relative to costs of debt and equity capital, market values of our properties, acquisition, development and expansion opportunities and other factors, and we may modify our debt financing policy and we may increase or decrease our ratio of debt to total market capitalization. To the extent that our Board of Directors determines to obtain additional capital, we may raise such capital through additional equity offerings, debt financing, retention of cash flow (subject to provisions in the Code concerning taxability of undistributed REIT income) or a combination of these methods. To the extent that the Board of Directors determines to obtain additional debt financing, we intend to do so generally through mortgages on our properties in a manner consistent with our conservative debt capitalization policy. These mortgages may be recourse, non-recourse or cross-collateralized. We do not have a policy limiting the number or amount of mortgages that may be placed on any particular property, but mortgage financing instruments usually limit additional indebtedness on such properties. We may seek to obtain new lines of credit for the purpose of making acquisitions or capital improvements or to provide working capital, subject to our general policy on conservative debt capitalization. We may also determine to issue our own debt securities (which may be convertible into capital stock or be accompanied by warrants to purchase capital stock) or to sell or securitize our lease receivables. We may also determine to finance acquisitions through the exchange of properties or issuance of stock or other securities. MANAGEMENT OF THE COMPANY'S INVESTMENTS We are a self-administered and self-managed REIT. As such, we manage all of our real estate investments. In appropriate circumstances, we have retained the services of third party service providers for such services as leasing, maintenance and operational management. We always maintain control over such service providers. We have retained DDR Sansone Development Ventures LLC, ("Sansone"), located at 120 South Central, Suite 100, St. Louis, Missouri 63105, to provide us with operational management and leasing services for our properties in the St. Louis area. Sansone is a real estate management and development company, of which we own a 50% interest. In 2001, we paid Sansone $1.4 million for management and leasing services provided to us. BUSINESS AND PROPERTIES At September 30, 2001, our portfolio properties included 194 shopping centers, 57 of which are owned through joint ventures. The shopping centers consisted of 182 community shopping centers and 12 enclosed mini-malls. The shopping centers aggregated approximately 39.3 million square feet of Company-owned GLA (approximately 52.5 million square feet of total GLA) and were located in 39 states, principally in the East and Midwest, with significant concentrations in California, Florida, Michigan, Minnesota, Missouri, North 39 Carolina, Ohio, South Carolina and Utah. Our portfolio of properties also included 38 office and industrial properties containing 4.6 million square feet of GLA which are primarily located in Texas. One office property was owned in a joint venture. We believe our properties are adequately covered by insurance. Subsequent to September 30, 2001, we sold properties located in Zanesville, Ohio; South Dayton, Ohio; Gahanna (New Albany), Ohio and San Diego, California. The sales of these assets do not materially impact the figures reported on the portfolio as of September 30, 2001. Our portfolio properties also included several parcels of undeveloped land held for future development. This undeveloped land consisted primarily of outlots, retail pads and expansion pads and was primarily located adjacent to certain of the shopping centers. We are pursuing an active marketing program to lease, develop or sell our undeveloped acres. At September 30, 2001, we also managed 44 retail properties owned by third parties, containing an aggregate of approximately 5.5 million square feet of GLA. Subsequent to September 30, 2001, we ceased management responsibilities on eight properties, which were sold by their owners. Our shopping centers are designed to attract local area customers and are typically anchored by one or more discount department stores and often include a supermarket, drug store, junior department store and/or other major "category-killer" discount retailers as additional anchors. Most of the shopping centers are anchored by a Wal-Mart, Kmart or Kohl's, and the majority of centers are anchored by two or more national or regional tenants. The tenants of the shopping centers typically offer day-to-day necessities rather than high-priced luxury items. As one of the nation's largest owners and operators of shopping centers, we have established close relationships with a large number of major national and regional retailers, many of which occupy space in the shopping centers. Shopping centers make up the largest portion of our retail portfolio, comprising 36.3 million (92.4%) square feet of Company-owned retail GLA and enclosed mini-malls account for 3.0 million (7.6%) square feet of Company-owned retail GLA. On September 30, 2001, the average annualized base rent per square foot of Company-owned GLA of the shopping centers, including those owned through joint ventures, was $9.85. The following table sets forth, as of September 30, 2001, information as to anchor and/or national retail tenants which individually accounted for at least 1.0% of total annualized base rent of the retail properties, including our proportionate share of properties owned through joint ventures:
% OF SHOPPING CENTER % OF COMPANY-OWNED BASE RENTAL REVENUES SHOPPING CENTER GLA -------------------- ------------------- Wal-Mart........................................ 5.1% 8.4% Kmart........................................... 2.8% 6.5% Kohl's Dept. Store.............................. 2.5% 2.6% OfficeMax....................................... 2.1% 1.9% Bed Bath & Beyond............................... 1.9% 1.4% T. J. Maxx/Marshall's........................... 1.8% 2.0% Petsmart........................................ 1.6% 1.2% Lowe's Home Centers............................. 1.6% 2.1% Best Buy........................................ 1.4% 0.9% Toys R Us....................................... 1.4% 1.4% Gap/Old Navy.................................... 1.4% 0.9% Home Depot...................................... 1.3% 1.3% Cinemark Theatre................................ 1.3% 0.8% Barnes & Noble/B. Dalton........................ 1.2% 0.7% Circuit City.................................... 1.2% 0.8% Michaels........................................ 1.1% 0.9%
40 In addition, as of September 30, 2001, unless otherwise indicated, with respect to the 194 shopping centers: - 48 of these properties were developed by DDG, 25 were developed by us and the balance were acquired by us; - 65 of these properties were anchored by a Wal-Mart, Kmart or Kohl's store; - these properties ranged in size from 4,000 square feet to approximately 771,000 square feet of GLA (with 20 properties exceeding 400,000 square feet of GLA); - approximately 59% of the Company-owned GLA of these retail properties was leased to national chains, including subsidiaries, with approximately 24% of the Company-owned retail GLA leased to regional chains and approximately 10% of the Company-owned retail GLA leased to local tenants; - approximately 93.7% of the aggregate Company-owned GLA of these retail properties was occupied as of September 30, 2001 (and, with respect to the properties owned by us at December 31, for each of the five years beginning with 1996, between 95.7% and 96.3% of aggregate Company-owned GLA of these properties was occupied); - two properties were being expanded by us, and we are pursuing the expansion of additional properties. TENANT LEASE EXPIRATIONS AND RENEWALS The following table shows tenant lease expirations for the next ten years (as of September 30, 2001) at our shopping centers (including joint ventures), office and industrial properties, assuming that none of the tenants exercise any of their renewal options:
ANNUALIZED AVERAGE BASE PERCENTAGE OF PERCENTAGE OF BASE RENT RENT PER TOTAL LEASED TOTAL BASE APPROXIMATE UNDER SQ. FOOT SQ. FOOTAGE RENTAL REVENUES NO. OF LEASE AREA IN EXPIRING UNDER REPRESENTED REPRESENTED EXPIRATION LEASES SQUARE FEET LEASES EXPIRING BY EXPIRING BY EXPIRING YEAR EXPIRING (000S) (000S) LEASES LEASES LEASES ---------- -------- ------------- ---------- ------------ ------------- --------------- 2001 (Remaining).......... 275 1,092 $ 9,725 $ 8.91 2.50% 2.48% 2002...................... 607 2,561 24,194 9.45 5.86 6.16 2003...................... 649 3,304 31,040 9.40 7.56 7.91 2004...................... 579 2,937 28,610 9.74 6.72 7.29 2005...................... 459 3,511 32,949 9.38 8.03 8.39 2006...................... 378 2,369 26,371 11.13 5.42 6.72 2007...................... 157 1,777 19,418 10.93 4.07 4.95 2008...................... 115 1,533 14,416 9.40 3.51 3.67 2009...................... 131 2,259 22,421 9.92 5.17 5.71 2010...................... 175 2,593 27,978 10.79 5.93 7.13 2011...................... 154 3,403 35,812 10.52 7.78 9.12 ----- ------ -------- ------ ----- ----- Total................. 3,679 27,340 $272,935 $ 9.98 62.54% 69.53% ===== ====== ======== ====== ===== =====
The rental payments under several of these leases will remain constant until the expiration of their base terms, regardless of inflationary increases. There can be no assurance that any of these leases will be renewed or that any new tenants will be obtained if not renewed. 41
DEVELOPERS DIVERSIFIED REALTY CORPORATION SHOPPING CENTER PROPERTY LIST SEPTEMBER 30, 2001 TYPE OF ZIP PROPERTY OWNERSHIP YEAR CENTER/PROPERTY LOCATION CODE (1) INTEREST DEVELOPED --------------------- ------------------------------ -------- -------- --------- --------- ALABAMA 1 Birmingham, AL Brook Highland Plaza 35242 SC Fee 1994 (Brookhighland) 5291 Hwy 280 South 2 Birmingham, AL Eastwood Festival Center 35210 SC Fee 1989 (Eastwood) 7001 Crestwood Blvd 3 Huntsville, AL Enterprise Plaza 35806 SC Fee 1995 6140-A University Dr ARIZONA 4 Ahwatukee, AZ Foothills Towne Ctr (II) 85044 SC Fee(3) 1996 4711 East Ray Road 5 Phoenix, AZ (Deer Deer Valley Towne Center 85027 SC Fee(3) 1996 Valley) 2805 West Agua Fria Freeway 6 Phoenix, AZ (Peoria) Arrowhead Crossing 85382 SC Fee(3) 1995 7553 West Bell Road ARKANSAS 7 Fayetteville, AR Spring Creek Centre 72703 SC Fee 1997 464 E. Joyce Boulevard 8 N. Little Rock, AR McCain Plaza 72117 SC Fee 1991 4124 East McCain Boulevard DEVELOPERS DIVERSIFIED REALTY CORPORATION SHOPPING CENTER PROPERTY LIST SEPTEMBER 30, 2001 COMPANY AVERAGE DDR GROSS TOTAL BASE RENT YEAR OWNERSHIP LEASABLE ANNUALIZED (PER SF) PERCENT ACQUIRED INTEREST AREA (SF) BASE RENT (2) LEASED ANCHOR TENANTS (LEASE EXPIRATION) -------- --------- ---------- ------------ --------- ------- --------------------------------- 1 1994 100.00% 509,891 $ 4,192,888 $ 8.28 99.3% Winn Dixie Stores (2014), Rhodes/Marks Fitzgerald (2004), Goody's (2004), Wal-Mart Stores (2014), Regal Cinemas, Inc. (2014), Stein Mart (2011), OfficeMax (2011), Michael's (2009), Books-A-Million-4 (2005) 2 1995 100.00% 301,074 $ 1,938,482 $ 8.20 78.5% Office Depot (2004), Burlington Coat Factory (2003), Regal Cinemas, Inc. (2006), Western Supermarkets (not owned), Home Depot (not owned) 3 1995 100.00% 41,000 $ 485,050 $11.83 100.0% Wal-Mart (not owned) 4 1997 50.00% 647,916 $ 8,380,918 $14.10 91.7% Joann, Etc. (2010), Best Buy (2014), Stein Mart (2011), Bassett Furniture (2010), Babies 'R Us (2007), Ross Stores, Inc. (2007), Barnes & Noble (2012), AMC Theatre (2021), OfficeMax (2012) 5 1999 50.00% 203,509 $ 2,748,830 $13.95 96.8% Ross Stores (2009), OfficeMax (2013), Petsmart (2014), Michaels (2009), Target (not owned), AMC Theatres (not owned) 6 1996 50.00% 346,430 $ 3,777,081 $11.52 94.6% Mac Frugal's (2010), Barnes & Noble (2011), T.J. Maxx (2005), Circuit City (2016), Oshman's Sporting Goods, Inc. (2017), Linens 'N Things (2011), Comp USA (2013), Bassett Furniture (2009), Staples (2009), Fry's (not owned) 7 1997 100.00% 262,862 $ 2,512,519 $10.19 93.8% Goody's (2013), Old Navy (2005), Bed, Bath & Beyond (2009), T.J. Maxx (2005), Best Buy (2017), Home Depot (not owned), Wal-Mart Super Center (not owned) 8 1994 100.00% 294,357 $ 1,772,481 $ 6.56 91.8% T.J. Maxx (2007), Cinemark Theatre-Tandy 10 (2011), Burlington Coat Factory Whse (2014)
42
DEVELOPERS DIVERSIFIED REALTY CORPORATION SHOPPING CENTER PROPERTY LIST SEPTEMBER 30, 2001 TYPE OF ZIP PROPERTY OWNERSHIP YEAR CENTER/PROPERTY LOCATION CODE (1) INTEREST DEVELOPED --------------------- ------------------------------ -------- -------- --------- --------- 9 Russellville, AR Valley Park Centre 72801 SC Fee 1992 3093 East Main Street CALIFORNIA 10 Cameron Park, CA Cameron Park 95682 SC Fee(3) 1999 4082-4092 Cameron Park Drive 11 City of Industry, CA Plaza at Puente Hills 91748 SC Fee(3) 1987 17647-18271 Gale Avenue 12 Fullerton, CA La Mancha 92632 SC Fee(3) 1973 North Harbor Blvd. 13 Lancaster, CA Valley Central-Discount 93536 SC Fee(3) 1990 44707-44765 Valley Central Way 14 Mission Viejo, CA Olympiad Plaza 93691 SC Fee(3) 1989 23002-23072 Alicia Parkway 15 Oceanside, CA Ocean Place Cinemas 92054 SC Fee 2000 401-409 Mission Avenue 16 Pleasant Hill, CA Downtown Pleasant Hill 94523 SC Fee(3) 1999 17 Richmond, CA Richmond City Center 94801 SC Fee(3) 1993 MacDonald Avenue 18 San Diego, CA Carmel Mountain Plaza 92128 SC Fee(3) 1993 11610 Carmel Mountain Road 19 San Ysidro, CA San Diego Factory Outlet 92173 SC Fee(3) 1988 COLORADO 20 Alamosa, CO Alamosa Plaza 81101 SC Fee 1986 145 Craft Drive DEVELOPERS DIVERSIFIED REALTY CORPORATION SHOPPING CENTER PROPERTY LIST SEPTEMBER 30, 2001 COMPANY AVERAGE DDR GROSS TOTAL BASE RENT YEAR OWNERSHIP LEASABLE ANNUALIZED (PER SF) PERCENT ACQUIRED INTEREST AREA (SF) BASE RENT (2) LEASED ANCHOR TENANTS (LEASE EXPIRATION) -------- --------- ---------- ------------ --------- ------- --------------------------------- 9 1994 100.00% 272,245 $ 1,724,289 $ 6.39 99.1% Wal-Mart Stores (2011), Stage (2005), J.C. Penney (2012) 10 2001 20.00% 103,439 $ 1,229,034 $14.04 84.6% Safeway (2020) 11 2001 20.00% 518,938 $ 6,380,315 $13.62 90.3% Miller's Outpost/Hub Dist (2008), Office Depot, Inc. (2012), Home Depot (2036), Ikea (2007), Circuit City (2009), Wal-Mart/ Sam's Club (2036), Toys "R" Us (2036) 12 2001 20.00% 109,358 $ 658,496 $ 7.70 78.2% Ralphs Grocery Store (2020) 13 2001 20.00% 459,529 $ 4,330,078 $ 9.68 97.4% Wal-Mart (2010), Movies 12/ Cinemark (2017), Home Base (2008), Costco (2050), Wal-Mart (2000), Michael's (2004), Marshalls (2007), Circuit City (2011), Staples (2003), Costco (not owned) 14 2001 20.00% 45,600 $ 1,152,533 $25.27 100.0% 15 1* 100.00% 74,132 $ 1,089,414 $16.16 91.0% Regal Cinemas (2014) 16 2001 20.00% 340,566 $ 4,032,375 $12.67 93.5% Albertson's (2020), Borders Book & Music (2015), Bed, Bath & Beyond (2009), Ross Stores, Inc (2010) 17 2001 20.00% 76,692 $ 1,094,806 $14.28 100.0% Walgreens (2033), Food 4 Less/ FoodsCo (2013) 18 1995 20.00% 440,228 $ 6,578,075 $15.08 99.1% Pacific Theatres (2013), Sportsmart (2008), Circuit City (2009), Marshalls (2009), Ross Dress For Less (2004), Michael's (2004), Kmart (2018), Mervyn's (not owned) 19 2000 20.00% 258,003 $ 3,331,161 $13.18 97.9% Mikasa Storage (2003), Kmart (2006), Mikasa Inc. (2003), Nike (2004), Levi's/Dockers (2002), Levi's (2002), Calvin Klein (2008), Guess (2001) 20 2* 100.00% 19,875 $ 161,535 $ 8.69 93.5% City Market (not owned), Wal- Mart (not owned)
43
DEVELOPERS DIVERSIFIED REALTY CORPORATION SHOPPING CENTER PROPERTY LIST SEPTEMBER 30, 2001 TYPE OF ZIP PROPERTY OWNERSHIP YEAR CENTER/PROPERTY LOCATION CODE (1) INTEREST DEVELOPED --------------------- ------------------------------ -------- -------- --------- --------- 21 Denver, CO 7777 E. Hampden 80231 SC Fee 1976 22 Denver, CO (Broadway Broadway Market Place 80223 SC Fee(3) 1993 Market) 505 South Broadway 23 Denver, CO Centennial Promenade 80223 SC Fee 1997 (Centennial) 9555 E. County Line Road 24 Trinidad, CO Trinidad Plaza 81082 SC Fee 1986 Hwy 239 @ 125 Frontage Road CONNECTICUT 25 Plainville, CT Connecticut Commons 06062 SC Fee(3) 1999 I-84 & Rte 9 26 Waterbury, CT Kmart Plaza 06705 SC GL 1973 899 Wolcott Street FLORIDA 27 Bayonet Point, FL Point Plaza US 19 & SR 52 34667 SC Fee 1985 28 Brandon, FL Kmart Shopping Center 33511 SC GL 1972 1602 Brandon Bl 29 Cape Coral, FL Del Prado Mall 33904 SC Fee 1985 1420 Delprado Blvd. 30 Crystal River, FL Crystal River Plaza 33523 SC Fee 1986 420 Sun Coast Hwy 31 Daytona Beach, FL Volusia 32114 SC Fee 1984 1808 W. International Speedway 32 Fern Park, FL Fern Park Shopping Center 32720 SC Fee 1970 6735 US #17-92 South 33 Jacksonville, FL Jacksonville Regional 32218 SC Fee 1988 3000 Dunn Avenue 34 Marianna, FL The Crossroads 32446 SC Fee 1990 2814-2822 Highway 71 35 Melbourne, FL Melbourne Shopping Center 32935 SC Fee 1978 750-850 Apollo Boulevard DEVELOPERS DIVERSIFIED REALTY CORPORATION SHOPPING CENTER PROPERTY LIST SEPTEMBER 30, 2001 COMPANY AVERAGE DDR GROSS TOTAL BASE RENT YEAR OWNERSHIP LEASABLE ANNUALIZED (PER SF) PERCENT ACQUIRED INTEREST AREA (SF) BASE RENT (2) LEASED ANCHOR TENANTS (LEASE EXPIRATION) -------- --------- ---------- ------------ --------- ------- --------------------------------- 21 2001 100.00% 165,701 $ 1,475,871 $12.92 68.9% The Gap, Inc. (2003), Mann Theatres (2001) 22 1995 20.00% 387,536 $ 3,882,671 $10.06 99.6% Albertson's (2019), OfficeMax (2010), Kmart (2019), Pep Boys (2014), Wal-Mart/Sam's (2018) 23 1997 100.00% 418,637 $ 5,303,211 $14.59 86.8% Golfsmith Golf Center (2007), Soundtrack (2017), Ross Dress For Less (2008), OfficeMax (2013), Michael's (2007), Toys R Us (2011), Borders (2017), R.E.I. (not owned), American Furniture Superstore (not owned) 24 2* 100.00% 63,836 $ 130,157 $ 5.23 39.0% Big "R" (not owned) 25 1* 24.75% 465,453 $ 4,408,308 $ 9.94 95.3% Lowe's of Plainville (2019), Kohl's (2022), Kmart Corporation (2019), A.C. Moore (2014), Old Navy (2010), Levitz Furniture (2015), Linens 'n Things (2017), Loew's Theatre (not owned) 26 2* 100.00% 124,310 $ 417,500 $ 3.36 100.0% Kmart (2003), Jo-Ann Stores (2010) 27 2* 100.00% 203,580 $ 1,096,683 $ 5.81 92.7% T.J. Maxx (2010), Publix Super Markets (2005), Beall's (2002) 28 2* 100.00% 161,900 $ 537,257 $ 3.32 100.0% Kmart (2002), Scotty's (not owned) 29 2* 100.00% 74,202 $ 561,300 $ 7.56 100.0% OfficeMax (2012), T.J. Maxx (2007) 30 2* 100.00% 147,005 $ 593,145 $ 4.35 92.8% Beall's (2001), Beall's Outlet (2006), Scotty's (2008) 31 2001 100.00% 75,386 $ 871,073 $11.93 96.8% TJMF, Inc. (2004), Marshalls of MA, Inc. (2005) 32 2* 100.00% 16,000 $ 98,504 $ 7.70 80.0% 33 1995 100.00% 219,073 $ 1,532,821 $ 7.19 97.4% J.C. Penney (2007), Winn Dixie Stores (2009) 34 2* 100.00% 63,894 $ 439,845 $ 7.48 92.1% Beall's (2005), Wal-Mart (not owned) 35 2* 100.00% 121,913 $ 117,135 $ 5.01 19.2%
44
DEVELOPERS DIVERSIFIED REALTY CORPORATION SHOPPING CENTER PROPERTY LIST SEPTEMBER 30, 2001 TYPE OF ZIP PROPERTY OWNERSHIP YEAR CENTER/PROPERTY LOCATION CODE (1) INTEREST DEVELOPED --------------------- ------------------------------ -------- -------- --------- --------- 36 Naples, FL Carillon Place 33942 SC Fee(3) 1994 5010 Airport Road North 37 Ocala, FL Kmart Plaza 32671 SC Fee 1974 3711 Silver Springs NE 38 Orlando, FL Westside Crossing 32808 SC Fee 1989 (Westside) 5028-5290 West Colonial Drive 39 Ormond Beach, FL Ormond Towne Square 32174 SC Fee 1993 1458 West Granada Blvd 40 Oviedo, FL Oviedo Park Crossing 32765 SC Fee 1999 Rte 417 & Red Bug Lake Road 41 Palm Harbor, FL The Shoppes Of Boot Ranch 34685 SC Fee 1990 300 East Lakeroad 42 Pensacola, FL Palafox Square 32534 SC Fee 1998 8934 Pensacola Blvd 43 Spring Hill, FL Mariner Square 34613 SC Fee 1988 13050 Cortez Blvd. 44 Tampa, FL (Dale) North Pointe Plaza 33618 SC Fee 1990 15001-15233 North Dale Mabry 45 Tampa, FL (Waters) Town N' Country 33634 SC Fee 1990 7021-7091 West Waters Avenue 46 Tarpon Springs, FL Tarpon Square 34689 SC Fee 1974 41232 U.S. 19, North 47 West Pasco, FL Pasco Square 34653 SC Fee 1986 7201 County Road 54 GEORGIA 48 Atlanta, GA (Duluth) Pleasant Hill Plaza 30136 SC Fee 1990 1630 Pleasant Hill Road 49 Atlanta, GA Perimeter Pointe 30136 SC Fee(3) 1995 (Perimeter) 1155 Mt. Vernon Highway 50 Marietta, GA Town Center Prado 30066 SC Fee(3) 1995 2609 Bells Ferry Road DEVELOPERS DIVERSIFIED REALTY CORPORATION SHOPPING CENTER PROPERTY LIST SEPTEMBER 30, 2001 COMPANY AVERAGE DDR GROSS TOTAL BASE RENT YEAR OWNERSHIP LEASABLE ANNUALIZED (PER SF) PERCENT ACQUIRED INTEREST AREA (SF) BASE RENT (2) LEASED ANCHOR TENANTS (LEASE EXPIRATION) -------- --------- ---------- ------------ --------- ------- --------------------------------- 36 1995 20.00% 267,838 $ 3,014,675 $11.26 100.0% Winn Dixie (2014), T.J. Maxx (2009), Service Merchandise (2015), Ross Dress For Less (2005), Circuit City (2015), OfficeMax (2010) 37 2* 100.00% 19,280 $ 53,700 $ 3.93 71.0% Kmart (not owned) 38 2* 100.00% 177,037 $ 822,333 $ 8.22 56.5% Wal-Mart (not owned) 39 1994 100.00% 234,045 $ 1,885,989 $ 8.13 99.1% Kmart (2018), Beall's (2004), Publix Super Markets (2013) 40 1* 100.00% 186,212 $ 1,800,826 $ 9.78 98.9% OfficeMax (2014), Ross Dress For Less (2010), Michael's (2009), T.J. Maxx (2010), Linens 'N Things (2011), Lowe's (not owned) 41 1995 100.00% 52,395 $ 818,416 $16.05 97.3% Albertson's (not owned), Target (not owned) 42 1* 100.00% 17,150 $ 212,615 $12.40 100.0% 43 2* 100.00% 192,073 $ 1,320,138 $ 7.25 94.8% Beall's (2006), Publix Super Markets (2008), Wal-Mart (not owned) 44 2* 100.00% 104,473 $ 1,153,866 $11.41 96.8% Publix Super Markets (2010), Wal-Mart (not owned) 45 2* 100.00% 134,366 $ 1,039,449 $ 8.33 92.8% Beall's (2005), Kash 'N Karry-2 Store (2010), Wal-Mart (not owned) 46 2* 100.00% 198,797 $ 1,218,241 $ 6.17 99.4% Kmart (2009), Big Lots (2007), Staples Superstore (2013) 47 2* 100.00% 135,421 $ 1,025,757 $ 7.87 96.3% Beall's (2002), Publix Super Markets (2006), Beall's (not owned) 48 1994 100.00% 99,025 $ 1,342,230 $13.55 100.0% Office Depot (2005), Salon Etc. (2002), Wal-Mart (not owned) 49 1995 20.00% 343,115 $ 3,572,415 $15.47 67.3% Stein Mart (2010), Babies R Us, (2007), Office Depot (2012), St. Joseph's Hospital/Atlanta (2006), United Artists Theatre (2015) 50 1995 20.00% 318,038 $ 2,858,039 $11.91 75.5% Stein Mart (2007), Publix (2015), Crunch Fitness International (2011)
45
DEVELOPERS DIVERSIFIED REALTY CORPORATION SHOPPING CENTER PROPERTY LIST SEPTEMBER 30, 2001 TYPE OF ZIP PROPERTY OWNERSHIP YEAR CENTER/PROPERTY LOCATION CODE (1) INTEREST DEVELOPED --------------------- ------------------------------ -------- -------- --------- --------- IDAHO 51 Idaho Falls, ID Country Club Mall 83401 SC Fee 1976 1515 Northgate Mile 52 Meridian, ID Family Center at Meridian 83642 SC Fee 1999 Eagle and Fairview Road ILLINOIS 53 Deer Park, IL Deer Park, IL 60074 SC Fee(3) 2000 20503 North Rand Road 54 Harrisburg, IL Arrowhead Point 62946 SC Fee 1991 701 North Commercial 55 Mount Vernon, IL Times Square Mall 62864 MM Fee 1974 42nd and Broadway 56 Schaumburg, IL Woodfield Village Green 60173 SC Fee(3) 1993 1430 East Golf Road INDIANA 57 Bedford, IN Town Fair Center 47421 SC Fee 1993 1320 James Avenue 58 Connersville, IN Whitewater Trade Center 47331 SC Fee 1991 2100 Park Road 59 Highland, IN Highland Grove Shopping Center 46322 SC Fee 1995 Highway 41 & Main Street IOWA 60 Cedar Rapids, IA Northland Square 303 -367 52404 SC Fee 1984 Collins Road, NE 61 Ottumwa, IA Quincy Place Mall 52501 MM Fee 1990 1110 Quincy Avenue DEVELOPERS DIVERSIFIED REALTY CORPORATION SHOPPING CENTER PROPERTY LIST SEPTEMBER 30, 2001 COMPANY AVERAGE DDR GROSS TOTAL BASE RENT YEAR OWNERSHIP LEASABLE ANNUALIZED (PER SF) PERCENT ACQUIRED INTEREST AREA (SF) BASE RENT (2) LEASED ANCHOR TENANTS (LEASE EXPIRATION) -------- --------- ---------- ------------ --------- ------- --------------------------------- 51 1998 100.00% 148,593 $ 779,595 $ 5.77 90.9% OfficeMax (2011), Gottschalks Dept. Stores (2006), Fred Meyer (not owned) 52 1* 100.00% 282,010 $ 2,718,444 $10.00 96.3% Ross Dress For Less (2012), Sportsman's Warehouse (2015), Bed Bath & Beyond (2011), Old Navy (2005), Shopko Stores, Inc. (2020), Office Depot (2010) 53 1* 24.75% 225,707 $ 6,199,941 $27.47 100.0% Noodles & Company (2011), Gap (2010) 54 1994 100.00% 168,424 $ 875,912 $ 5.45 95.4% Wal-Mart Stores (2011), Mad- Pricer Store/Roundy's (2011) 55 2* 100.00% 268,263 $ 937,137 $ 3.77 92.7% Sears (2013), Country Fair Market Fresh (2004), J.C. Penney (2002) 56 1995 20.00% 501,092 $ 7,315,992 $14.75 99.0% Home Depot (not owned) (2019), Circuit City (2009), Off 5th (2006), Service Merchandise (2014), OfficeMax (2010), Container Store (2011), Nordstrom Rack (2009), Borders Books (2009), Sports Authority Store (2013), Marshalls (2009), Costco (not owned), Prairie Rock (not owned) 57 2* 100.00% 223,431 $ 1,338,648 $ 5.99 100.0% Buehler's Buy Low (2010), Kmart (2008), Goody's (2003), J.C. Penney (2008) 58 2* 100.00% 141,791 $ 819,343 $ 5.78 100.0% Cox New Market-4 (2011), Wal-Mart Stores (2011) 59 1996 100.00% 295,516 $ 3,022,921 $10.88 94.0% Marshall's (2011), Kohl's (2016), Circuit City (2016), OfficeMax (2012), Borders (not owned), Target (not owned), Jewel (not owned) 60 1998 100.00% 187,068 $ 1,760,537 $ 9.41 100.0% TJ Maxx (2004), OfficeMax (2010), Barnes & Noble (2010), Kohl's (2021) 61 2* 100.00% 194,703 $ 1,365,964 $ 7.48 93.8% Herberger's (2005), J.C. Penney (2005), OfficeMax (2015), Wal- Mart (not owned), Target (not owned)
46
DEVELOPERS DIVERSIFIED REALTY CORPORATION SHOPPING CENTER PROPERTY LIST SEPTEMBER 30, 2001 TYPE OF ZIP PROPERTY OWNERSHIP YEAR CENTER/PROPERTY LOCATION CODE (1) INTEREST DEVELOPED --------------------- ------------------------------ -------- -------- --------- --------- KANSAS 62 Leawood, KS Town Center Plaza 66209 SC Fee(3) 1990 5100 W 119th Street 63 Merriam, KS Merriam Town Center 66202 SC Fee(3) 1998 5700 Antioch Road 64 Olathe, KS Devonshire Village 66062 SC Fee(3) 1987 127th Street & Mur-Len Road 65 Overland Park, KS Cherokee North Shopping Center 66212 SC Fee(3) 1987 8800-8934 W 95th Street 66 Shawnee, KS Ten Quivera Shopping Center 66216 SC Fee(3) 1992 63rd Street & Quivira Road 67 Shawnee, KS Ten Quivera Parcel 66216 SC Fee(3) 1972 63rd St. & Quivira Road KENTUCKY 68 Hazard, KY Grand Vue Plaza 41701 SC Fee 1978 Kentucky Highway 80 MAINE 69 Brunswick, ME Cook's Corners 42071 SC GL 1965 172 Bath Road MARYLAND 70 Hagerstown, MD The Centre at Hagerstown 21740 SC Fee(3) 2000 I-81 and Route 40 71 Salisbury, MD The Commons 21801 SC Fee 1999 E. North Point Drive 72 Salisbury, MD The Commons(Phase III) North 21801 SC Fee(3) 2000 Pointe Drive DEVELOPERS DIVERSIFIED REALTY CORPORATION SHOPPING CENTER PROPERTY LIST SEPTEMBER 30, 2001 COMPANY AVERAGE DDR GROSS TOTAL BASE RENT YEAR OWNERSHIP LEASABLE ANNUALIZED (PER SF) PERCENT ACQUIRED INTEREST AREA (SF) BASE RENT (2) LEASED ANCHOR TENANTS (LEASE EXPIRATION) -------- --------- ---------- ------------ --------- ------- --------------------------------- 62 1998 50.00% 388,962 $ 7,237,310 $19.98 93.1% Barnes & Noble (2011), Jacobson (2021) 63 1* 50.00% 344,009 $ 3,907,307 $11.36 100.0% Cinemark/Tinseltown 20 (2018), Hen House (2018), Marshalls (2008), Petsmart (2019), OfficeMax (2013), Dick's Sporting Goods (2016), Home Depot (not owned) 64 1998 23.75% 48,900 $ 352,251 $ 7.91 91.1% 65 1998 23.75% 52,096 $ 370,281 $ 9.23 77.0% Aldi, Inc (2003) 66 1998 23.75% 151,570 $ 883,821 $ 6.57 88.7% Price Chopper Foods (2000) 67 1998 23.75% 12,000 $ 183,790 $15.32 100.0% 68 2* 100.00% 111,492 $ 376,447 $ 4.11 82.1% Kmart (2003) 69 1997 100.00% 314,620 $ 2,319,902 $ 7.67 96.1% Hoyts Cinemas Brunswick (2010), Brunswick Bookland (2004), TJ Maxx (2004), Sears (2012) 70 1* 24.75% 285,655 $ 3,429,151 $12.13 99.0% Borders Books & Music (2020), Marshalls (2010), A.C. Moore (2015), OfficeMax (2015), Bed Bath and Beyond (2011), Circuit City (2021), Dicks Sporting Goods (2015) 71 1* 100.00% 91,715 $ 1,119,722 $12.21 100.0% OfficeMax (2013), Michael's (2009), Target (not owned), Home Depot (not owned) 72 1* 50.00% 27,500 $ 346,500 $12.60 100.0%
47
DEVELOPERS DIVERSIFIED REALTY CORPORATION SHOPPING CENTER PROPERTY LIST SEPTEMBER 30, 2001 TYPE OF ZIP PROPERTY OWNERSHIP YEAR CENTER/PROPERTY LOCATION CODE (1) INTEREST DEVELOPED --------------------- ------------------------------ -------- -------- --------- --------- MASSACHUSETTS 73 Framingham, MA Shopper's World 01701 SC Fee(3) 1994 1 Worcester Road MICHIGAN 74 Bad Axe, MI Huron Crest Plaza 48413 SC Fee 1991 850 North Van Dyke Road 75 Cheboygan, MI Kmart Shopping Plaza 49721 SC Fee 1988 1109 East State 76 Detroit, MI Belair Center 48234 SC GL 1989 8400 E. Eight Mile Road 77 Gaylord, MI Pine Ridge Square 49735 SC Fee 1991 1401 West Main Street 78 Houghton, MI Copper Country Mall 49931 MM Fee 1981 Highway M26 79 Howell, MI Grand River Plaza 48843 SC Fee 1991 3599 East Grand River 80 Mt. Pleasant, MI Indian Hills Plaza 48858 SC Fee 1990 4208 E. Blue Grass Road 81 Sault St. Marie, MI Cascade Crossings 49783 SC Fee 1993 4516 I-75 Business Spur 82 Walker, MI Green Ridge Square 49504 SC Fee 1989 3390-B Alpine Ave NW MINNESOTA 83 Bemidji, MN Paul Bunyan Mall 56601 MM Fee 1977 1201 Paul Bunyan Drive 84 Brainerd, MN Westgate Mall 56401 MM Fee 1985 1200 Highway 210 West DEVELOPERS DIVERSIFIED REALTY CORPORATION SHOPPING CENTER PROPERTY LIST SEPTEMBER 30, 2001 COMPANY AVERAGE DDR GROSS TOTAL BASE RENT YEAR OWNERSHIP LEASABLE ANNUALIZED (PER SF) PERCENT ACQUIRED INTEREST AREA (SF) BASE RENT (2) LEASED ANCHOR TENANTS (LEASE EXPIRATION) -------- --------- ---------- ------------ --------- ------- --------------------------------- 73 1995 20.00% 768,555 $ 12,380,354 $16.11 100.0% DSW Shoe Warehouse (2007), A.C. Moore (2007), Marshalls (2011), Bobs (2011), Linens 'N Things (2011), Sports Authority (2015), OfficeMax (2011), Best Buy (2014), Barnes & Noble (2011), Bradlee's (2005), General Cinema (2014), Toys R Us (2020), Jordon Marsh/Federated (2020), TJ Maxx (2010), Sears Homelife (2004) 74 2* 100.00% 63,415 $ 468,270 $ 8.16 90.5% Great A & P Tea (2012), Wal- Mart (not owned) 75 2* 100.00% 95,094 $ 417,568 $ 4.39 100.0% Carter's Food Center (2004), Kmart (2005), Kmart (not owned) 76 1998 100.00% 343,502 $ 2,378,299 $ 8.62 80.3% Builders Square (2014), Phoenix Theaters (2011), Kids "R" Us, Inc. (2013), Toys "R" Us, Inc. (2021), Target (not owned) 77 2* 100.00% 190,482 $ 1,026,768 $ 5.39 100.0% Wal-Mart Stores (2010), Buy Low/Roundy's (2011) 78 2* 100.00% 257,863 $ 1,181,493 $ 4.94 92.8% Kmart (2005), J.C. Penney (2005), OfficeMax (2014) 79 2* 100.00% 215,047 $ 1,277,646 $ 5.94 100.0% Wal-Mart Stores (2011), Kroger (2012) 80 2* 100.00% 248,963 $ 1,416,096 $ 6.13 92.8% Wal-Mart Stores (2009), Big Lots (2003), Kroger (2011) 81 1994 100.00% 270,761 $ 1,786,526 $ 6.60 100.0% Wal-Mart Stores (2012), J.C. Penney (2008), OfficeMax(2013), Glen's Market (2013) 82 1995 100.00% 133,981 $ 1,469,651 $10.97 100.0% T.J. Maxx (2005), Office Depot (2005), Toys R Us (not owned), Media Play (not owned), Target (not owned), Circuit City (not owned) 83 2* 100.00% 297,586 $ 1,416,452 $ 5.10 93.3% Kmart (2002), Herberger's (2005), J.C. Penney (2003) 84 2* 100.00% 260,199 $ 1,852,327 $ 7.15 99.6% Kmart (2004), Herberger's (2013), Movies 10/Westgate Mall (2011)
48
DEVELOPERS DIVERSIFIED REALTY CORPORATION SHOPPING CENTER PROPERTY LIST SEPTEMBER 30, 2001 TYPE OF ZIP PROPERTY OWNERSHIP YEAR CENTER/PROPERTY LOCATION CODE (1) INTEREST DEVELOPED --------------------- ------------------------------ -------- -------- --------- --------- 85 Coon Rapids, MN Riverdale Village 55433 SC Fee(3) 1999 12921 Riverdale Drive 86 Eagan, MN Eagan Promenade 55122 SC Fee(3) 1997 1299 Promenade Place 87 Hutchinson, MN Hutchinson Mall 55350 MM Fee 1981 1060 SR 15 88 Minneapolis, MN Maple Grove Crossing 55369 SC Fee(3) 1995 (Maple Grove) Weaver Lake Road & I-94 89 St. Paul, MN Midway Marketplace 55104 SC Fee 1995 1450 University Avenue West 90 Worthington, MN Northland Mall 56187 MM Fee 1977 1635 Oxford Street MISSISSIPPI 91 Starkville, MS Starkville Crossing 39759 SC Fee 1990 882 Highway 12 West 92 Tupelo, MS Big Oaks Crossing 38801 SC Fee 1992 3850 N Gloster St MISSOURI 93 Fenton, MO Fenton Plaza 63206 SC Fee 1970 Gravois & Highway 141 94 Independence, MO Independence Commons 64057 SC Fee(3) 1995 900 East 39th Street 95 Kansas City, MO Brywood Center 64133 SC Fee(3) 1972 8600 E. 63rd Street 96 Kansas City, MO Shops of Willow Creek 64114 SC Fee(3) 1973 101st Terrace & Wornall Road 97 Springfield, MO Morris Corners 65804 SC GL 1989 1425 East Battlefield 98 St. Louis, MO Plaza at Sunset Hill 63128 SC Fee 1997 (Sunset) 10980 Sunset Plaza DEVELOPERS DIVERSIFIED REALTY CORPORATION SHOPPING CENTER PROPERTY LIST SEPTEMBER 30, 2001 COMPANY AVERAGE DDR GROSS TOTAL BASE RENT YEAR OWNERSHIP LEASABLE ANNUALIZED (PER SF) PERCENT ACQUIRED INTEREST AREA (SF) BASE RENT (2) LEASED ANCHOR TENANTS (LEASE EXPIRATION) -------- --------- ---------- ------------ --------- ------- --------------------------------- 85 1* 25.00% 174,022 $ 875,780 $ 5.03 100.0% Kohl's (2020), Jo-Ann Stores (2010), Linens 'N Things (2016), Costco (not owned), Sears (not owned) 86 1997 50.00% 278,510 $ 2,685,923 $12.02 80.2% TJ Maxx (2007), Byerly's (2016), Barnes & Noble (2012), OfficeMax (2013), Ethan Allen (not owned) 87 2* 100.00% 121,001 $ 781,349 $ 7.07 91.4% J.C. Penney (2006), Kmart (not owned) 88 1996 50.00% 250,436 $ 2,087,371 $10.57 78.8% Kohl's (2016), Barnes & Noble (2011), Gander Mountain (2011), Cub Foods (not owned) 89 1997 100.00% 324,354 $ 2,575,430 $ 7.94 100.0% Kmart (2022), Cub Foods (2015), Petsmart (2011), Mervyn's (2016), Herberger's (not owned) 90 2* 100.00% 185,658 $ 903,770 $ 6.80 71.6% J.C. Penney (2007), Hy Vee Food Stores (2011) 91 1994 100.00% 234,652 $ 1,226,461 $ 5.34 97.8% Wal-Mart Stores (2015), J.C. Penney (2010), Kroger (2012) 92 1994 100.00% 348,236 $ 1,940,481 $ 5.57 100.0% Sam's Wholesale Club (2012), Goody's (2002), Wal-Mart Stores (2012) 93 2* 100.00% 93,548 $ 798,632 $ 9.73 87.7% 94 1995 20.00% 382,830 $ 4,331,794 $11.35 99.7% Kohl's Department (2016), Bed, Bath & Beyond (2012), Marshalls (2012), Rhodes Furniture, Inc. (2016), Barnes & Noble (2011), AMC Theatre (2015) 95 1998 23.75% 208,234 $ 962,772 $ 5.12 90.3% Big Lots (2004) 96 1998 23.75% 15,205 $ 247,988 $16.31 100.0% 97 1998 100.00% 56,033 $ 289,062 $ 6.28 82.1% Toys R Us (2013) 98 1998 100.00% 420,867 $ 3,976,674 $10.87 86.9% Marshalls of Sunset Hills (2012), Home Depot (2023), Petsmart (2012), Borders (2011), Toys R Us (2013), Comp USA Computer Super (2013)
49
DEVELOPERS DIVERSIFIED REALTY CORPORATION SHOPPING CENTER PROPERTY LIST SEPTEMBER 30, 2001 TYPE OF ZIP PROPERTY OWNERSHIP YEAR CENTER/PROPERTY LOCATION CODE (1) INTEREST DEVELOPED --------------------- ------------------------------ -------- -------- --------- --------- 99 St. Louis, MO Clocktower Place 63033 SC Fee(3) 1998 (Clocktower) 11298 W. Florissant Ave. 100 St. Louis, MO Keller Plaza 63129 SC Fee 1987 Keller Plaza 4500 Lemay Ferry Road 101 St. Louis, MO American Plaza 63139 SC Fee 1998 American Plaza 3144 South Kingshighway 102 St. Louis, MO Promenade At Brentwood 63144 SC Fee 1998 Brentwood Promenade 1 Brentwood Promenade Court 103 St. Louis, MO Gravois Village 63049 SC Fee 1983 Gravois Village 4523 Gravois Village Plaza 104 St. Louis, MO Home Quarters 63123 SC Fee 1992 Home Quarters 6303 S. Linbergh Blvd 105 St. Louis, MO Olympic Oaks Village 63121 SC Fee 1985 Olympic Oaks Vil. 12109 Manchester Road NEVADA 106 Las Vegas, NV Family Center @ Las Vegas 89102 SC Fee 1973 (Decatur) 14833 West Charleston Blvd. 107 Reno, NV East 1st Street And Sierra 89505 SC Fee 2000 NEW HAMPSHIRE 108 Salem, NH Salem, NH Shopping Center 03079 SC Fee(3) 1999 14 Kelly Road NEW JERSEY 109 Eatontown, NJ 90 Highway 36 07724 SC Fee(3) 1981 110 Princeton, NJ Nassau Park Shopping Center 42071 SC Fee 1995 Route 1 & Quaker Bridge Road 111 Princeton, NJ Nassau Park Pavilion 42071 SC Fee 1999 (Pavilion) Route 1 and Quaker Bridge Road NEW MEXICO 112 Los Alamos, NM Mari Mac Village 87533 SC Fee 1978 800 Trinity Drive DEVELOPERS DIVERSIFIED REALTY CORPORATION SHOPPING CENTER PROPERTY LIST SEPTEMBER 30, 2001 COMPANY AVERAGE DDR GROSS TOTAL BASE RENT YEAR OWNERSHIP LEASABLE ANNUALIZED (PER SF) PERCENT ACQUIRED INTEREST AREA (SF) BASE RENT (2) LEASED ANCHOR TENANTS (LEASE EXPIRATION) -------- --------- ---------- ------------ --------- ------- --------------------------------- 99 1998 50.00% 211,045 $ 2,119,858 $10.12 99.2% TJ Maxx (2002), Office Depot (2008), Dierberg's Marketplace, Inc. (2007) 100 1998 100.00% 52,842 $ 169,023 $ 7.40 43.2% Sam's (not owned) 101 1998 100.00% 0 $ 46,000 $ 0.00 0.0% 102 1998 100.00% 299,584 $ 3,914,797 $13.07 100.0% Target (2023), Bed Bath & Beyond (2004), Petsmart (2014), Sports Authority (2013) 103 1998 100.00% 110,992 $ 626,250 $ 5.75 98.1% Kmart (2008) 104 1998 100.00% 118,611 $ 0 $ 0.00 0.0% 105 1998 100.00% 92,372 $ 1,095,632 $12.04 98.5% TJ Maxx (2006) 106 1998 100.00% 49,555 $ 548,032 $11.06 100.0% Albertson's (not owned) 107 2000 100.00% 52,589 $ 22,284 $ 0.43 98.9% Century Theatre, Inc. (2014) 108 1* 24.75% 170,270 $ 2,741,370 $16.10 100.0% Comp USA (2014), Linens 'N Things (2015), MVP Sports (2019), Michael's (2009), Best Buy (2020) 109 1999 83.75% 68,196 $ 1,332,111 $19.53 100.0% Bed Bath & Beyond (2015), Circuit City Super (2020) 110 1997 100.00% 211,784 $ 3,365,262 $17.79 89.3% Borders (2011), Best Buy (2012), Linens 'N Things (2011), Petsmart (2011), Sam's (not owned), Wal-Mart (not owned), Home Depot (not owned), Target (not owned) 111 1* 100.00% 187,897 $ 2,643,223 $14.56 96.6% Dick's Sporting Goods (2015), Michael's (2009), Kohl's Department Store (2019), Wegman's Market (not owned) 112 2* 100.00% 97,970 $ 528,517 $ 6.05 89.1% Furr's Supermarkets (2002), Furr's Pharmacy (2003)
50
DEVELOPERS DIVERSIFIED REALTY CORPORATION SHOPPING CENTER PROPERTY LIST SEPTEMBER 30, 2001 TYPE OF ZIP PROPERTY OWNERSHIP YEAR CENTER/PROPERTY LOCATION CODE (1) INTEREST DEVELOPED --------------------- ------------------------------ -------- -------- --------- --------- NORTH CAROLINA 113 Durham, NC Oxford Commons 27702 SC Fee 1990 3500 Oxford Road 114 Durham, NC (New Hope New Hope Commons 27707 SC Fee(3) 1995 Commons) 5428-B New Hope Commons 115 Jacksonville, NC Western Plaza 28540 SC Fee 1989 US Hwy 17 & Western Avenue 116 New Bern, NC Rivertowne Square 28561 SC Fee 1989 3003 Claredon Blvd 117 Washington, NC Pamlico Plaza 27889 SC Fee 1990 536 Pamlico Plaza 118 Waynesville, NC Lakeside Plaza 28721 SC Fee 1990 201 Paragon Parkway 119 Wilmington, NC University Centre 28403 SC Fee 1989 S. College Rd. & New Centre Dr. NORTH DAKOTA 120 Dickinson, ND Prairie Hills Mall 58601 MM Fee 1978 1681 Third Avenue 121 Grand Forks, ND 2500 S Columbia Road 58201 SC Fee(3) 1978 OHIO 122 Ashland, OH Kmart Plaza 44805 SC Fee 1977 US Route 42 123 Aurora, OH Barrington Town Square 44202 SC Fee 1996 70-130 Barrington Town Square 124 Bellefontaine, OH South Main Street Plaza 43311 SC Fee 1995 2250 South Main Street 125 Boardman, OH Southland Crossing 44514 SC Fee 1997 I-680 & US Route 224 126 Canton, OH Belden Parke Crossings 44720 SC Fee(3) 1995 Dressler Rd DEVELOPERS DIVERSIFIED REALTY CORPORATION SHOPPING CENTER PROPERTY LIST SEPTEMBER 30, 2001 COMPANY AVERAGE DDR GROSS TOTAL BASE RENT YEAR OWNERSHIP LEASABLE ANNUALIZED (PER SF) PERCENT ACQUIRED INTEREST AREA (SF) BASE RENT (2) LEASED ANCHOR TENANTS (LEASE EXPIRATION) -------- --------- ---------- ------------ --------- ------- --------------------------------- 113 2* 100.00% 205,699 $ 1,423,324 $ 6.97 99.2% Food Lion (2010), Lowe's Home Centers, (2011), Wal-Mart (not owned) 114 1995 20.00% 408,292 $ 4,724,954 $11.64 99.4% Wal-Mart (2015), Marshalls Store (2011), Linens 'n Things (2011), Best Buy (2011), OfficeMax (2010), Barnes & Noble Store (2011), Dick's (not owned) 115 2* 100.00% 62,996 $ 592,424 $ 9.40 100.0% OfficeMax (2014), Wal-Mart (not owned) 116 2* 100.00% 68,130 $ 556,902 $ 8.17 100.0% Goody's (2007), Wal-Mart (not owned) 117 2* 100.00% 93,527 $ 455,182 $ 5.02 97.0% Wal-Mart Stores (2009), Wal- Mart (not owned) 118 2* 100.00% 181,894 $ 1,130,012 $ 6.21 100.0% Wal-Mart Store (2011), Food Lion (2011) 119 2* 100.00% 321,385 $ 2,418,995 $ 7.83 96.2% Barnes & Noble (2007), Lowe's Home Center (2014), Goody's (2005), Hamrick's (2002), Sam's (not owned) 120 2* 100.00% 267,506 $ 1,172,273 $ 4.55 96.4% Kmart (2003), Herberger's (2005), J.C. Penney (2003) 121 1999 83.75% 31,812 $ 159,060 $ 5.00 100.0% Office Depot (2010) 122 2* 100.00% 110,656 $ 238,773 $ 2.16 100.0% Kmart (2002), Quality Stores (2005) 123 1* 100.00% 65,373 $ 705,613 $12.90 83.7% Heinen's (not owned) 124 1998 100.00% 52,399 $ 432,292 $ 8.25 100.0% Goody's Store (2010), Staples (2010) 125 1* 100.00% 506,254 $ 4,105,708 $ 8.18 99.1% Lowe's Companies (2016), Babies "R" Us (2009), Staples Store (2012), Dicks Clothing & Sporting (2012), Wal-Mart Stores (2017), Petsmart (2013), Giant Eagle, Inc (2018) 126 1* 50.00% 230,065 $ 2,462,536 $11.17 95.8% Dick's Clothing & Sporting (2010), DSW Shoe Warehouse (2011), Kohl's Department Store (2016), Target (not owned)
51
DEVELOPERS DIVERSIFIED REALTY CORPORATION SHOPPING CENTER PROPERTY LIST SEPTEMBER 30, 2001 TYPE OF ZIP PROPERTY OWNERSHIP YEAR CENTER/PROPERTY LOCATION CODE (1) INTEREST DEVELOPED --------------------- ------------------------------ -------- -------- --------- --------- 127 Canton, OH Belden Park Crossings (II) 44720 SC Fee 1997 (Phase II) Dressler Road 128 Chillicothe, OH Lowe's Shopping Center 45601 SC GL 1974 867 N Bridge Street 129 Cincinnati, OH Glenway Crossing 45238 SC Fee 1990 5100 Glencrossing Way 130 Cleveland, OH Kmart Plaza -- West 65th 44102 SC Fee 1977 (West 65th) 3250 West 65th Street 131 Columbus, OH (Dublin Dublin Village Center 43017 SC Fee(3) 1987 Village) 6561-6815 Dublin Center Drive 132 Columbus, OH (Easton Easton Market 43230 SC Fee 1998 Market) 3740 Easton Market 133 Columbus, OH (Lennox Lennox Town Center 43212 SC Fee(3) 1997 Town) 1647 Olentangy River Road 134 Columbus, OH Sun Center 43017 SC Fee(3) 1995 (Sun Center) 3622-3860 Dublin Granville Rd 135 Dayton, OH Washington Park 45458 SC Fee(3) 1990 615-799 Lyons Road 136 Dublin, OH Perimeter Center 43017 SC Fee 1996 (Perimeter Center) 6644-6804 Perimeter Loop Road 137 Eastlake, OH Kmart Plaza 44094 SC Fee 1971 33752 Vine Street 138 Elyria, OH Hills Shopping Center 44035 SC Fee 1977 825 Cleveland 139 Gahanna, OH Rogers Market Retail Center 43230 SC Fee 1995 (New Albany-Hoggi's) 1370-1399 E. Johnstown Road 140 Grove City, OH Derby Square Shopping Center 43123 SC Fee 1992 (Derby Square) 2161-2263 Stringtown Road 141 Hamilton, OH Roundy's 43450 SC Fee 1986 (Roundy's) 1371 Main Street 142 Hillsboro, OH Hillsboro Shopping Center 45133 SC Fee 1979 1100 North High Street DEVELOPERS DIVERSIFIED REALTY CORPORATION SHOPPING CENTER PROPERTY LIST SEPTEMBER 30, 2001 COMPANY AVERAGE DDR GROSS TOTAL BASE RENT YEAR OWNERSHIP LEASABLE ANNUALIZED (PER SF) PERCENT ACQUIRED INTEREST AREA (SF) BASE RENT (2) LEASED ANCHOR TENANTS (LEASE EXPIRATION) -------- --------- ---------- ------------ --------- ------- --------------------------------- 127 1* 100.00% 231,424 $ 1,090,798 $ 6.52 72.3% Value City Furniture (2011), Jo- Ann Stores (2008), Petsmart (2013) 128 2* 100.00% 236,009 $ 1,813,190 $ 7.68 100.0% Lowe's Home Centers (2015), Kroger (2016), OfficeMax (2012) 129 2* 100.00% 235,616 $ 2,142,156 $ 9.28 98.0% Winn Dixie Stores (2010), Service Merchandise (2006) 130 2* 100.00% 49,420 $ 274,185 $ 5.55 100.0% Great A & P Tea (2002), Kmart (not owned) 131 1998 80.01% 326,912 $ 2,788,169 $10.32 82.7% AMC Theatre (2007), DSW Shoe Warehouse (2006), Phar-Mor (2018), Michael's (2004), B.J.'s Wholesale Club (not owned) 132 1998 100.00% 509,611 $ 5,872,185 $11.52 100.0% CompUSA, Inc (2013), Staples, Inc. (2013), Petsmart, Inc. (2015), Golfsmith Golf Center (2013), Michael's (2013), Galyan's (2013), DSW Shoe Warehouse (2012), Kittle's Home Furnishings (2012), Bed Bath & Beyond, Inc. (2014), TJ Maxx (2008) 133 1998 50.00% 352,913 $ 3,182,807 $ 9.02 100.0% Target (2016), Barnes & Noble (2007), Staples (2011), AMC Theatres Lennox (2021) 134 1998 79.45% 317,581 $ 2,862,543 $10.84 83.2% Babies R Us (2011), Rhodes Furniture (2012), Stein Mart (2007), Big Bear (2016), Staples (2010) 135 1998 49.29% 212,369 $ 1,408,863 $ 8.56 77.5% Books A Million (2005), Phar-Mor (2008) 136 1998 100.00% 137,610 $ 1,528,967 $11.22 99.0% Big Bear (2016) 137 2* 100.00% 4,000 $ 68,400 $17.10 100.0% 138 2* 100.00% 150,200 $ 761,970 $ 5.07 100.0% Ames Store (2003), First Nat'l Supermarket (2010) 139 1998 100.00% 30,110 $ 470,695 $15.63 100.0% 140 1998 100.00% 128,050 $ 1,286,185 $10.16 98.9% Big Bear (2012) 141 1998 100.00% 40,000 $ 230,000 $ 5.75 100.0% Roundy's (2006) 142 2* 100.00% 58,583 $ 175,422 $ 3.27 91.5% Kmart (2004), Bob & Carl's (not owned)
52
DEVELOPERS DIVERSIFIED REALTY CORPORATION SHOPPING CENTER PROPERTY LIST SEPTEMBER 30, 2001 TYPE OF ZIP PROPERTY OWNERSHIP YEAR CENTER/PROPERTY LOCATION CODE (1) INTEREST DEVELOPED --------------------- ------------------------------ -------- -------- --------- --------- 143 Huber Hts., OH North Heights Plaza 45424 SC Fee 1990 8280 Old Troy Pike 144 Lebanon, OH Countryside Place 45036 SC Fee 1990 1879 Deerfield Road 145 Macedonia, OH Macedonia Commons Macedonia 44056 SC Fee(3) 1994 Commons Blvd. 146 Macedonia, OH (Phase Macedonia Commons 44056 SC Fee 1999 II) (Phase II) 8210 Macedonia Commons 147 N. Olmsted, OH 26520 Lorain Avenue 44070 SC Fee(3) 1978 148 Niles, OH 909 Great East Plaza 44446 SC Fee(3) 1980 149 North Olmsted, OH Great Northern Plaza North 44070 SC Fee 1958 150 Pataskala, OH Village Market/Rite Aid Center 43062 SC Fee 1980 78-80 Oak Meadow Drive 151 Pickerington, OH Shoppes at Turnberry 43147 SC Fee 1990 1701-1797 Hill Road North 152 S. Dayton, OH 8336 Springboro Pike 45342 SC Fee(3) 1978 153 Solon, OH Uptown Solon 44139 SC Fee 1998 Kruse Drive 154 Stow, OH Stow Community Shopping Center 44224 SC Fee 1997 Kent Road 155 Tiffin, OH Tiffin Mall 44883 MM Fee 1980 870 West Market Street 156 Toledo, OH Springfield Community Center 43615 SC Fee 1999 5245 Airport Highway 157 Westlake, OH West Bay Plaza 44145 SC Fee 1974 30100 Detroit Road 158 Wilmington, OH South Ridge Shopping Center 45177 SC Fee 1977 1025 S South Street DEVELOPERS DIVERSIFIED REALTY CORPORATION SHOPPING CENTER PROPERTY LIST SEPTEMBER 30, 2001 COMPANY AVERAGE DDR GROSS TOTAL BASE RENT YEAR OWNERSHIP LEASABLE ANNUALIZED (PER SF) PERCENT ACQUIRED INTEREST AREA (SF) BASE RENT (2) LEASED ANCHOR TENANTS (LEASE EXPIRATION) -------- --------- ---------- ------------ --------- ------- --------------------------------- 143 2* 100.00% 163,741 $ 1,693,377 $10.34 100.0% Cub Foods (2011), Wal-Mart (not owned) 144 2* 100.00% 26,500 $ 211,915 $ 9.77 81.9% Wal-Mart (not owned), ERB Lumber (not owned) 145 1994 50.00% 233,639 $ 2,374,753 $10.29 98.8% First Natl. Supermarkets (2018), Kohl's (2016), Wal-Mart (not owned) 146 1* 100.00% 169,481 $ 1,601,734 $ 9.45 100.0% Cinemark (2019), Home Depot (2020) 147 1999 83.75% 43,835 $ 240,000 $ 5.48 100.0% Babies "R" Us (2011) 148 1999 83.75% 23,500 $ 0 $ 0.00 0.0% 149 1997 100.00% 623,640 $ 6,265,180 $11.67 86.1% Kids R Us (2008), Petsmart (2003), Home Depot USA (2019), Jo-Ann Stores (2009), Marc's (2012), Comp USA Inc. (2007), Best Buy (2010), Marshalls/TJX Company (2005), Kronheims Furniture (2009), Tops Supermarket (not owned) 150 1998 100.00% 33,270 $ 189,600 $ 5.70 100.0% Cardinal (Gardners/Lancaster) (2007) 151 1998 100.00% 59,495 $ 742,493 $13.80 90.5% 152 1999 83.75% 33,379 $ 239,250 $ 7.17 100.0% National City Mortgage Company (2008) 153 1* 100.00% 183,288 $ 2,810,463 $15.33 100.0% Mustard Seed Mkt & Cafe (2019), Bed, Bath and Beyond (2009), Borders (2018) 154 1* 100.00% 405,751 $ 2,887,095 $ 7.19 98.9% Kmart (2006), Giant Eagle, Inc. (2017), Bed Bath and Beyond (2011), Kohl's (2019), Office Max (2011), Target (not owned) 155 2* 100.00% 232,021 $ 895,325 $ 4.18 92.3% Kmart (2005), J.C. Penney (2005), Heilig-Meyers Furniture (2004) 156 1* 100.00% 209,829 $ 2,140,308 $10.20 100.0% Kohl's (2019), Gander Mountain, L.L.C. (2014), Bed Bath & Beyond (2010), Old Navy (2005), Babies R Us (not owned) 157 2* 100.00% 162,330 $ 1,272,975 $ 7.84 100.0% Marc's (2004), Kmart (2004) 158 2* 100.00% 55,130 $ 225,710 $ 4.22 97.1% Super Valu Stores, Inc (2003)
53
DEVELOPERS DIVERSIFIED REALTY CORPORATION SHOPPING CENTER PROPERTY LIST SEPTEMBER 30, 2001 TYPE OF ZIP PROPERTY OWNERSHIP YEAR CENTER/PROPERTY LOCATION CODE (1) INTEREST DEVELOPED --------------------- ------------------------------ -------- -------- --------- --------- 159 Xenia, OH West Park Square 45385 SC Fee 1994 1700 West Park Square 160 Zanesville, OH Kmart Plaza 43701 SC Fee 1990 3431 N Maple Ave OREGON 161 Portland, OR Tanasbourne Town Center 97006 SC Fee(3) 1995 NW Evergreen Pkwy & NW Ring Rd PENNSYLVANIA 162 E. Norriton, PA Kmart Plaza 19401 SC Fee 1975 2700 Dekalb Pike 163 Erie (Peach Street), Peach Street Square 16509 SC GL 1995 PA 1902 Keystone Drive 164 Erie, PA Hills Plaza West 16506 SC GL 1973 2301 West 38th Street SOUTH CAROLINA 165 Anderson, SC Northtowne Center 29621 SC Fee 1993 3812 Liberty Highway 166 Camden, SC Springdale Plaza 29020 SC Fee 1990 1671 Springdale Drive 167 Columbia, SC East Forest Plaza 29206 SC Fee 1995 5420 Forest Drive 168 Mt. Pleasant, SC Wando Crossing 29465 SC Fee 1992 1500 Highway 17 North 169 N. Charleston, SC North Pointe Plaza 29406 SC Fee 1989 7400 Rivers Avenue 170 Orangeburg, SC North Road Plaza 29115 SC Fee 1994 2795 North Road 171 S. Anderson, SC Crossroads Plaza 29624 SC Fee 1990 406 Highway 28 By-Pass 172 Simpsonville, SC Fairview Station 29681 SC Fee 1990 621 Fairview Road DEVELOPERS DIVERSIFIED REALTY CORPORATION SHOPPING CENTER PROPERTY LIST SEPTEMBER 30, 2001 COMPANY AVERAGE DDR GROSS TOTAL BASE RENT YEAR OWNERSHIP LEASABLE ANNUALIZED (PER SF) PERCENT ACQUIRED INTEREST AREA (SF) BASE RENT (2) LEASED ANCHOR TENANTS (LEASE EXPIRATION) -------- --------- ---------- ------------ --------- ------- --------------------------------- 159 1* 100.00% 97,373 $ 676,701 $ 7.63 91.0% Kroger (2019), Wal-Mart (not owned) 160 2* 100.00% 13,283 $ 109,654 $10.66 77.4% Theater (not owned), Kmart (not owned) 161 1996 50.00% 308,699 $ 3,988,865 $15.63 82.7% Barnes & Noble (2011), Office Depot (2010), Haggan's (2021), Ross Dress for Less (2008), Michael's (2009), Target (not owned), Mervyn's (not owned), Nordstrom (not owned) 162 2* 100.00% 174,969 $ 1,083,542 $ 7.90 78.4% Kmart (2005) 163 1* 100.00% 538,103 $ 4,614,730 $ 8.58 100.0% Mervyn's (not owned) (2016), Wal-Mart Stores (2015), Cinemark (2011), Petsmart (2015), Circuit City Superstore (2020), Lowe's Home Ctr (2015), Media Play (2011), Home Depot (not owned) 164 2* 100.00% 96,000 $ 277,770 $ 5.09 56.9% West Telemarketing Corp. (2005) 165 1995 100.00% 14,250 $ 122,050 $ 8.56 100.0% Sam's (not owned), Wal-Mart (not owned) 166 2* 100.00% 180,127 $ 1,028,881 $ 6.03 94.7% Winn Dixie Stores (2011), Belk (2015), Wal-Mart Super Center (not owned) 167 1995 100.00% 46,700 $ 478,900 $10.96 93.6% Wal-Mart Super Center (not owned), Sam's (not owned) 168 1995 100.00% 208,176 $ 1,494,804 $ 9.49 75.6% Piggly Wiggly (2012), Office Depot (2010), T.J. Maxx (2007), Wal-Mart (not owned) 169 2* 100.00% 294,471 $ 1,953,973 $ 6.64 100.0% Wal-Mart Stores (2009), OfficeMax(2007), Helig Meyers (not owned), Service Merchandise (not owned) 170 1995 100.00% 50,760 $ 475,667 $ 9.37 100.0% Goody's (2008), Wal-Mart (not owned) 171 1994 100.00% 163,809 $ 408,104 $ 4.30 58.0% Wal-Mart Stores (2010) 172 1994 100.00% 142,133 $ 719,905 $ 5.50 92.1% Ingles Markets (2011), Kmart (2015)
54
DEVELOPERS DIVERSIFIED REALTY CORPORATION SHOPPING CENTER PROPERTY LIST SEPTEMBER 30, 2001 TYPE OF ZIP PROPERTY OWNERSHIP YEAR CENTER/PROPERTY LOCATION CODE (1) INTEREST DEVELOPED --------------------- ------------------------------ -------- -------- --------- --------- 173 Union, SC West Towne Plaza 29379 SC Fee 1990 U.S. Hwy 176 By-Pass #1 SOUTH DAKOTA 174 Watertown, SD Watertown Mall 56401 MM Fee 1977 1300 9th Avenue TENNESSEE 175 Brentwood, TN Cool Springs Pointe 37027 SC Fee 1999 (Cool Springs) I-65 and Moore's Lane TEXAS 176 Ft. Worth, TX Eastchase Market 76112 SC Fee(3) 1995 SWC Eastchase Pkwy & I-30 177 Roundrock, TX La Frontera 78728 SC Fee(3) 2000 Sundance Parkway & Parker Ave. 178 San Antonio, TX La Plaza Del Norte 78216 SC Fee(3) 1996 125 NE Loop 410 179 San Antonio, TX Bandera Point (South) 78227 SC Fee(3) 2001 (Bandera Pt) UTAH 180 Logan, UT Family Place @ Logan 84321 SC Fee 1975 400 North Street 181 Midvale, UT Family Center at Fort Union 84047 SC Fee 1973 900 East Ft Union Blvd 182 Ogden, UT Family Center at Ogden 5-Point 84404 SC Fee 1977 21-129 Harrisville Road DEVELOPERS DIVERSIFIED REALTY CORPORATION SHOPPING CENTER PROPERTY LIST SEPTEMBER 30, 2001 COMPANY AVERAGE DDR GROSS TOTAL BASE RENT YEAR OWNERSHIP LEASABLE ANNUALIZED (PER SF) PERCENT ACQUIRED INTEREST AREA (SF) BASE RENT (2) LEASED ANCHOR TENANTS (LEASE EXPIRATION) -------- --------- ---------- ------------ --------- ------- --------------------------------- 173 2* 100.00% 184,331 $ 980,772 $ 5.51 96.5% Wal-Mart Stores (2009), Belk Stores Services, Inc. (2010), Winn Dixie Stores (2010) 174 2* 100.00% 285,470 $ 1,502,104 $ 5.32 98.9% Kmart (2002), Herberger's (2004), J.C. Penney (2003), Hy Vee Supermarket (not owned) 175 2000 100.00% 201,516 $ 2,441,924 $12.12 100.0% Best Buy (2014), The Sports Authority (2013), Linens 'n Things (2014), DSW Shoe Warehouse (2008) 176 1996 50.00% 205,017 $ 2,472,164 $12.12 99.5% United Artists Theatre (2012), Petsmart (2011), Ross Dress for Less (2006), MJ Designs (2011), Office Depot (not owned), Target (not owned), Toys R Us (not owned) 177 1* 24.75% 388,007 $ 5,076,818 $13.14 99.6% Office Depot (2015), Marshalls (2010), Bed Bath & Beyond (2011), Old Navy (2005), Barnes & Noble Books (2011), Hobby Lobby (2015), Circuit City (2016), Sam's (not owned), Lowe's (not owned), Kohl's (not owned) 178 1997 35.00% 310,394 $ 3,251,072 $12.83 81.6% Ross Stores, Inc. (2007), DSW Shoe Warehouse (2007), Best Buy Company (2012), Oshman's Sporting Goods (2016) 179 1* 24.75% 189,875 $ 2,546,048 $13.41 100.0% T.J. Maxx (2011), Linens 'n Things (2012), Lowe's (not owned), Target (not owned) 180 1998 100.00% 19,200 $ 206,341 $10.75 100.0% Rite Aid (not owned) 181 1998 100.00% 664,120 $ 6,965,588 $10.54 99.5% Mervyn's (2005), Babies R Us (2013), OfficeMax (2007), Smith's Food & Drugs (2024), Media Play (2016), Bed Bath & Beyond (2014), Ross Dress for Less (2011), Wal-Mart Stores (2015) 182 1998 100.00% 162,316 $ 852,208 $ 5.62 93.4% Harmons (2012)
55
DEVELOPERS DIVERSIFIED REALTY CORPORATION SHOPPING CENTER PROPERTY LIST SEPTEMBER 30, 2001 TYPE OF ZIP PROPERTY OWNERSHIP YEAR CENTER/PROPERTY LOCATION CODE (1) INTEREST DEVELOPED --------------------- ------------------------------ -------- -------- --------- --------- 183 Orem, UT Family Center at Orem 84058 SC Fee 1991 1300 South Street 184 Riverdale, UT Family Center At Riverdale 84405 SC Fee 1995 1050 West Riverdale Road 185 Salt Lake City, UT Family Place @ 33rd South 84115 SC Fee 1978 (33rd) 3300 South Street 186 Taylorsville, UT Family Center At Midvalley 84123 SC Fee 1982 5600 South Redwood VERMONT 187 Berlin, VT Berlin Mall 05602 MM Fee 1986 282 Berlin Mall Rd., Unit #28 VIRGINIA 188 Fairfax, VA Fairfax Towne Center 22033 SC Fee(3) 1994 12210 Fairfax Towne Center 189 Martinsville, VA Liberty Fair Mall 24112 MM Fee(3) 1989 240 Commonwealth Boulevard 190 Pulaski, VA Memorial Square 24301 SC Fee 1990 1000 Memorial Drive 191 Winchester, VA Apple Blossom Corners 22601 SC Fee 1990 2190 S. Pleasant Valley WASHINGTON 192 Bellingham, WA Meridian Village Shopping Ctr 98226 SC Fee(3) 1979 NE Corner G Meridian/Telegraph 193 Everett, WA Puget Park 520 98204 SC Fee(3) 1981 128th Street SW DEVELOPERS DIVERSIFIED REALTY CORPORATION SHOPPING CENTER PROPERTY LIST SEPTEMBER 30, 2001 COMPANY AVERAGE DDR GROSS TOTAL BASE RENT YEAR OWNERSHIP LEASABLE ANNUALIZED (PER SF) PERCENT ACQUIRED INTEREST AREA (SF) BASE RENT (2) LEASED ANCHOR TENANTS (LEASE EXPIRATION) -------- --------- ---------- ------------ --------- ------- --------------------------------- 183 1998 100.00% 147,976 $ 1,204,263 $ 9.81 83.0% Kids R Us (2011), Media Play (2015), Office Depot (2008), Toys R Us (not owned), R.C. Willey (not owned) 184 1998 100.00% 590,313 $ 4,526,598 $ 7.81 98.2% Target Superstore (2017), Wal- Mart Stores (2011), OfficeMax (2008), Gart Sports (2012), Sportman's Warehouse (2009), Media Play (2016), Circuit City (2016) 185 1998 100.00% 36,694 $ 260,231 $ 8.48 83.6% 186 1998 100.00% 771,033 $ 7,045,771 $ 9.87 92.6% Media Play (2015), OfficeMax (2008), Circuit City (2016), Petsmart (2012), Shopko (2014), Gart Sports (2017), Plitt Midvalley Cinemas (2025), Plitt Theaters Expansion (2025), Bed, Bath & Beyond(2015), Jolene's (2002), Harmons Superstore (not owned) 187 2* 100.00% 174,731 $ 1,461,462 $ 8.67 96.4% Wal-Mart Stores(2014), J.C. Penney (2009) 188 1995 20.00% 253,941 $ 4,242,870 $16.71 100.0% Safeway (2019), T.J. Maxx (2009), Tower Records (2009), Bed, Bath & Beyond (2010), United Artists (2014) 189 2* 50.00% 434,506 $ 2,792,416 $ 7.07 90.9% Goody's (2006), Belk/Leggetts (2009), J.C. Penney (2009), Sears (2009), OfficeMax (2012), Kroger (2017) 190 2* 100.00% 143,299 $ 918,378 $ 6.41 100.0% Wal-Mart Stores (2011), Food Lion (2011) 191 2* 100.00% 230,940 $ 2,078,512 $ 9.15 98.4% Books-A-Million (2008), Martin's Food Store (2040), Kohl's (2018), OfficeMax (2012) 192 2000 20.00% 208,422 $ 2,009,083 $ 9.86 97.7% Circuit City (2015), Home Depot Inc., (2013), Payless Drug (2004) 193 2001 20.00% 40,988 $ 329,371 $14.89 54.0% Albertson's (not owned)
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DEVELOPERS DIVERSIFIED REALTY CORPORATION SHOPPING CENTER PROPERTY LIST SEPTEMBER 30, 2001 TYPE OF ZIP PROPERTY OWNERSHIP YEAR CENTER/PROPERTY LOCATION CODE (1) INTEREST DEVELOPED --------------------- ------------------------------ -------- -------- --------- --------- WEST VIRGINIA 194 Barboursville, WV OfficeMax Center 25504 SC GL 1985 5-13 Mall Road DEVELOPERS DIVERSIFIED REALTY CORPORATION SHOPPING CENTER PROPERTY LIST SEPTEMBER 30, 2001 COMPANY AVERAGE DDR GROSS TOTAL BASE RENT YEAR OWNERSHIP LEASABLE ANNUALIZED (PER SF) PERCENT ACQUIRED INTEREST AREA (SF) BASE RENT (2) LEASED ANCHOR TENANTS (LEASE EXPIRATION) -------- --------- ---------- ------------ --------- ------- --------------------------------- 194 1998 100.00% 70,900 $ 287,237 $ 4.05 100.0% Discount Emporium (2006), OfficeMax (2006), Value City (not owned)
--------------- 1* Property Developed by the Company 2* Original IPO Property (1) "SC" indicates a power center or a community shopping center, and "MM" indicates an enclosed mini-mall. (2) Calculated as total annualized base rentals divided by Company-owned GLA actually leased as of September 30, 2001. (3) One of the fifty-seven (57) properties owned through joint ventures which serve as collateral for joint venture mortgage debt aggregately approximately $1,175.0 million (of which the Company's proportionate share is $374.3 million) as of September 30, 2001 and which is not reflected in the consolidated indebtedness. 57
DEVELOPERS DIVERSIFIED REALTY CORPORATION OFFICE AND INDUSTRIAL PROPERTY LIST SEPTEMBER 30, 2001 ZIP TYPE OF OWNERSHIP YEAR CENTER/PROPERTY LOCATION CODE PROPERTY(1) INTEREST DEVELOPED ------------------- ------------------------------------ ----- ----------- --------- --------- ARIZONA 1 Phoenix, AZ Gateway West 85038 BC Fee 1974 3838 East Van Buren Street 2 Phoenix, AZ Washington Business 85054 BC Fee 1985 5324 East Washington Street CALIFORNIA 3 San Diego, CA 10505 Sorrento Valley 92121 BC Fee 1982 4 San Diego, CA 3985 Sorrento Valley Blvd. 92121 BC Fee 1976 FLORIDA 5 Orlando, FL 801 S. Orlando Avenue 32792 BC Fee 1985 MARYLAND 6 Silver Springs, MD Tech Center 29 (Phase I) 20904 BC Fee 1970 2120-2162 Tech Road 7 Silver Springs, MD Tech Center 29 (Phase II) 20904 BC Fee 1991 2180 Industrial Parkway 8 Silver Springs, MD Tech Center 29 (Phase III) 20904 BC Fee 1988 12200 Tech Road MASSACHUSETTS 9 Chelmsford, MA Apollo Drive Office Building 01824 BC Fee 1987 300 Apollo Drive MISSOURI 10 St. Louis, MO 1881 Pine St. 63103 BC Fee 1987 OHIO 11 Streetsboro, OH Alumax Building 44241 BC Fee 1982 3000 Crane Center Drive 12 Aurora, OH Hardline Service Building 44202 BC Fee 1974 180 Lena Drive 13 Twinsburg, OH Heritage Business I 44087 BC Fee 1990 9177 Dutton Drive 14 Mentor, OH Steris Building 44060 BC Fee 1980 9450 Pineneedle Drive 15 Twinsburg, OH VSA Building 44087 BC Fee 1989 9300 Dutton Drive TEXAS 16 Dallas, TX 2121 Glenville 75080 BC Fee 1984 17 Dallas, TX Beltline Business Center 75063 BC Fee 1984 6210 Beltline Road 18 Dallas, TX Carpenter Center 75247 BC Fee 1983 8701 Carpenter Freeway 19 Grand Prairie, TX Carrier Place 75050 BC Fee 1984 1517 W. North Carrier DEVELOPERS DIVERSIFIED REALTY CORPORATION OFFICE AND INDUSTRIAL PROPERTY LIST SEPTEMBER 30, 2001 COMPANY DDR GROSS TOTAL AVERAGE YEAR OWNERSHIP LEASABLE AREA ANNUALIZED BASE RENT PERCENT ACQUIRED INTEREST (SF) BASE RENT (PER SF)(2) LEASED -------- --------- ------------- ----------- ----------- ------- 1 2001 100% 128,590 $ 2,109,938 $16.41 100.0% 2 2001 100% 76,577 $ 731,124 $ 9.55 100.0% 3 2001 100% 54,095 $ 1,151,574 $21.29 100.0% 4 2001 100% 58,800 $ 677,376 $11.52 100.0% 5 2001 100% 104,298 $ 1,149,537 $11.02 100.0% 6 2001 100% 166,970 $ 1,517,383 $ 9.09 100.0% 7 2001 100% 58,280 $ 793,882 $13.62 100.0% 8 2001 100% 55,901 $ 1,208,487 $21.62 100.0% 9 2001 100% 291,424 $ 3,715,656 $12.75 100.0% 10 2001 100% 117,310 $ 1,614,836 $13.77 100.0% 11 2* 100% 66,200 $ 311,140 $ 4.70 100.0% 12 2* 100% 236,225 $ 744,109 $ 3.15 100.0% 13 2* 100% 29,734 $ 263,886 $ 8.87 100.0% 14 2* 100% 0 $ 0 $ 0.00 0.0% 15 2* 100% 171,600 $ 416,130 $ 2.43 100.0% 16 2001 100% 20,645 $ 221,934 $10.75 100.0% 17 2001 100% 54,083 $ 728,823 $13.48 100.0% 18 2001 100% 46,473 $ 235,990 $ 5.08 100.0% 19 2001 100% 75,904 $ 438,386 $ 5.78 100.0%
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DEVELOPERS DIVERSIFIED REALTY CORPORATION OFFICE AND INDUSTRIAL PROPERTY LIST SEPTEMBER 30, 2001 ZIP TYPE OF OWNERSHIP YEAR CENTER/PROPERTY LOCATION CODE PROPERTY(1) INTEREST DEVELOPED ------------------- ------------------------------------ ----- ----------- --------- --------- 20 Houston, TX Commerce Center 77074 BC Fee 1974 9000 Southwest Freeway 21 Houston, TX Commerce Park North 77090 BC Fee 1984 15621 Blue Ash Drive 22 Grapevine, TX DFW North 76051 BC Fee 1985 1702 Old Minter's Chapel Road 23 Irving, TX Gateway 5 and 6 75063 BC Fee 1985 6025 Commerce Drive 24 Arlington, TX Meridian Street Warehouse 76011 BC Fee 1981 2019-25 Meridian Street 25 Dallas, TX Northgate II 75238 BC Fee 1983 10305-10345 Brockwood 26 Dallas, TX Northgate III 75243 BC Fee 1980 11901-45 Forestgate Dr. 27 Plano, TX Parkway Tech Center 75074 BC Fee 1984 1825 E. Plano Parkway 28 Houston, TX Plaza Southwest 77036 BC Fee 1975 7302 Harwin 29 Dallas, TX Shady Trail Business Center 75229 BC Fee 1984 11056 Shady Trail 30 Houston, TX Technipark Ten Service Center 77084 BC Fee 1984 16155 Park Row 31 Dallas, TX Valley View Commerce Park 75234 BC Fee 1986 12901 Hutton 32 Carrollton, TX Valwood II Business Center 75006 BC Fee 1984 2210 Hutton Dr. 33 Houston, TX Westchase Park 77042 BC Fee 1984 3130 Rogerdal Road UTAH 34 Salt Lake City, UT The Hermes Building 84111 BC Fee 1985 455 East 500 South Street VIRGINIA 35 Chesapeake, VA Greenbrier Circle Center 23320 BC Fee 1981 1801 Sara Drive 36 Chesapeake, VA Greenbrier Technology Center 23320 BC Fee 1981 814 Greenbrier Circle 37 Norfolk, VA Norfolk Commerce Center 23513 BC Fee 1981 5505 Robin Hood Road WISCONSIN 38 Menomenee Falls, WI Northwest Business Park 53051 BC Fee 1986 N56 W. 13365-13405 Silver Spring Rd. DEVELOPERS DIVERSIFIED REALTY CORPORATION OFFICE AND INDUSTRIAL PROPERTY LIST SEPTEMBER 30, 2001 COMPANY DDR GROSS TOTAL AVERAGE YEAR OWNERSHIP LEASABLE AREA ANNUALIZED BASE RENT PERCENT ACQUIRED INTEREST (SF) BASE RENT (PER SF)(2) LEASED -------- --------- ------------- ----------- ----------- ------- 20 2001 100% 271,439 $ 1,534,578 $ 5.65 100.0% 21 2001 100% 80,642 $ 495,963 $ 6.15 100.0% 22 2001 100% 47,127 $ 226,593 $ 4.81 100.0% 23 2001 100% 79,011 $ 530,585 $ 6.72 100.0% 24 2001 100% 72,072 $ 202,524 $ 2.81 100.0% 25 2001 100% 228,057 $ 876,604 $ 3.84 100.0% 26 2001 100% 173,273 $ 828,177 $ 4.78 100.0% 27 2001 100% 70,146 $ 446,705 $ 6.37 100.0% 28 2001 100% 155,159 $ 685,403 $ 4.42 100.0% 29 2001 100% 61,276 $ 285,275 $ 4.66 100.0% 30 2001 100% 71,647 $ 524,324 $ 7.32 100.0% 31 2001 100% 122,698 $ 831,982 $ 6.78 100.0% 32 2001 100% 26,735 $ 151,710 $ 5.67 100.0% 33 2001 100% 40,650 $ 305,451 $ 7.51 100.0% 34 1998 100% 53,469 $ 704,784 $17.00 77.5% 35 2001 100% 186,281 $ 2,030,351 $10.90 100.0% 36 2001 100% 86,573 $ 779,654 $ 9.01 100.0% 37 2001 100% 250,374 $ 2,513,481 $10.04 100.0% 38 2001 100% 110,279 $ 640,708 $ 5.81 100.0%
--------------- (1) "BC" indicates a business center. (2) Calculated as total annualized base rentals divided by Company-owned GLA actually leased as of September 30, 2001. 2* Original IPO Property. 59 CERTAIN FEDERAL INCOME TAX CONSIDERATIONS The following summary of material federal income tax considerations regarding Developers Diversified Realty Corporation and the common shares we are registering is based on current law, is for general information only and is not tax advice. The information set forth below, to the extent that it constitutes matters of law, summaries of legal matters or legal conclusions, is the opinion of Baker & Hostetler LLP. The tax treatment to holders of common shares will vary depending on a holder's particular situation, and this discussion does not purport to deal with all aspects of taxation that may be relevant to a holder of common shares in light of his or her personal investments or tax circumstances, or to certain types of shareholders subject to special treatment under the federal income tax laws except to the extent discussed under the headings "Taxation of Tax Exempt Shareholders" and "Taxation of Non-U.S. Shareholders." Shareholders subject to special treatment include, without limitation, insurance companies, financial institutions or broker dealers, tax-exempt organizations, shareholders holding common shares as part of a conversion transaction, or a hedge or hedging transaction or as a position in a straddle for tax purposes, foreign corporations or partnerships and persons who are not citizens or residents of the United States. In addition, the summary below does not consider the effect of any foreign, state, local or other tax laws that may be applicable to holders of our common shares. The information in this section is based on the Code, current, temporary and proposed Treasury Regulations promulgated under the Code, the legislative history of the Code, current administrative interpretations and practices of the Internal Revenue Service (the "IRS") (including its practices and policies as expressed in certain private letter rulings which are not binding on the IRS except with respect to the particular taxpayers who requested and received such rulings), and court decisions, all as of the date of this prospectus. Future legislation, Treasury Regulations, administrative interpretations and practices and/or court decisions may adversely affect, perhaps retroactively, the tax considerations described herein. We have not requested, and do not plan to request, any rulings from the IRS concerning our tax treatment and the statements in this prospectus are not binding on the IRS or a court. Thus, we can provide no assurance that these statements will not be challenged by the IRS or sustained by a court if challenged by the IRS. YOU ARE ADVISED TO CONSULT YOUR TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO YOU OF THE ACQUISITION, OWNERSHIP AND SALE OF OUR COMMON SHARES, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH DISPOSITION, ACQUISITION, OWNERSHIP AND SALE AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS. TAXATION OF THE COMPANY General. We elected to be taxed as a REIT under Sections 856 through 860 of the Code, commencing with our taxable year ended December 31, 1993. We believe we have been organized and have operated in a manner which allows us to qualify for taxation as a REIT under the Code commencing with our taxable year ended December 31, 1993. We intend to continue to operate in this manner. However, our qualification and taxation as a REIT depends upon our ability to meet (through actual annual operating results, asset diversification, distribution levels and diversity of stock ownership) the various qualification tests imposed under the Code. Accordingly, there is no assurance that we have operated or will continue to operate in a manner so as to qualify or remain qualified as a REIT. Similarly, American Industrial Properties, a significant subsidiary, has elected to be taxed as a REIT and is therefore subject to the same qualification tests. See "Failure to Qualify." The law firm of Baker & Hostetler LLP has acted as our tax counsel in connection with our election to be taxed as a REIT. It is the opinion of Baker & Hostetler LLP to the effect that, beginning with its initial taxable year ended December 31, 1993 DDR was organized in conformity with the requirements for qualification as a REIT under the Code, and that its actual method of operation has enabled, and its proposed method of operation will enable, it to meet the requirements for qualification and taxation as a REIT. A copy of this opinion is filed as an exhibit to the registration statement of which this prospectus is a part. It must be emphasized that the opinion of Baker & Hostetler LLP is based on various assumptions relating to the organization and operation of DDR, and is conditioned upon representations and covenants made by the 60 management of DDR regarding its assets and the past, present and future conduct of its business operations. While DDR intends to operate so that it will qualify as a REIT, given the highly complex nature of the rules governing REITs, the ongoing importance of factual determinations, and the possibility of future changes in the circumstances of DDR, no assurance can be given by Baker & Hostetler LLP or DDR that DDR will so qualify for any particular year. The opinion will be expressed as of the date issued, and will not cover subsequent periods. Baker & Hostetler LLP will have no obligation to advise DDR or the holders of DDR common shares of any subsequent change in the matters stated, represented or assumed, or of any subsequent change in the applicable law. You should be aware that opinions of counsel are not binding on the IRS, and no assurance can be given that the IRS will not challenge the conclusions set forth in such opinions. Qualification and taxation as a REIT depends on the ability of DDR to meet on a continuing basis, through actual operating results, distribution levels, and diversity of stock ownership, various qualification requirements imposed upon REITs by the Code, the compliance with which will not be reviewed by Baker & Hostetler LLP. In addition, DDR's ability to qualify as a REIT depends in part upon the operating results, organizational structure and entity classification for federal income tax purposes of certain affiliated entities, including affiliates that have made elections to be taxed as REITs, the status of which may not have been reviewed by Baker & Hostetler LLP. DDR's ability to qualify as a REIT also requires that it satisfies certain asset tests, some of which depend upon the fair market values of assets directly or indirectly owned by DDR. Such values may not be susceptible to a precise determination. Accordingly, no assurance can be given that the actual results of DDR's operations for any taxable year satisfy such requirements for qualification and taxation as a REIT. The following summarizes the material aspects of the tax laws that govern the federal income tax treatment of a REIT and its shareholders. If we qualify for taxation as a REIT, we generally will not be subject to federal corporate income taxes on our taxable income that is currently distributed to our shareholders. This treatment substantially eliminates the "double taxation" (once at the corporate level when earned and once again at the shareholder level when distributed) that generally results from an investment in a corporation. However, Developers Diversified Realty Corporation will be subject to federal income tax as follows: First, we will be taxed at regular corporate rates on any undistributed taxable income, including undistributed net capital gains. Second, we may be subject to the "alternative minimum tax" on our items of tax preference under certain circumstances. Third, if we have (a) net income from the sale or other disposition of "foreclosure property" (defined generally as property we acquired through foreclosure or after a default on a loan secured by the property or a lease of the property) which is held primarily for sale to customers in the ordinary course of business or (b) other nonqualifying income from foreclosure property, we will be subject to tax at the highest corporate rate on this income. Fourth, we will be subject to a 100% tax on any net income from prohibited transactions (which are, in general, certain sales or other dispositions of property held primarily for sale to customers in the ordinary course of business other than foreclosure property). Fifth, we will be subject to a 100% tax on an amount equal to (a) the gross income attributable to the greater of the amounts by which we fail the 75% or 95% gross income tests multiplied by (b) a fraction intended to reflect our profitability, if we fail to satisfy the 75% or 95% gross income test (as discussed below), but have maintained our qualification as a REIT because we satisfied certain other requirements. Sixth, we will be subject to a 4% excise tax on the excess of the required distribution over the amounts actually distributed if we fail to distribute during each calendar year at least the sum of (a) 85% of our REIT ordinary income for the year, (b) 95% of our REIT capital gain net income for the year (other than certain long-term capital gains for which we make a Capital Gains Designation (defined below) and on which we pay the tax), and (c) any undistributed taxable income from prior periods. 61 Seventh, if we acquire any asset (a "Built-In Gain Asset") from a corporation which is or has been a C corporation (i.e., generally a corporation subject to full corporate-level tax) in a transaction in which the basis of the Built-In Gain Asset in our hands is determined by reference to the basis of the asset in the hands of the C corporation, and we subsequently recognize gain on the disposition of the asset during the ten-year period (the "Recognition Period") beginning on the date on which we acquired the asset, then we will be subject to tax at the highest regular corporate tax rate on this gain to the extent of the Built-In Gain (i.e., the excess of (a) the fair market value of the asset over (b) our adjusted basis in the asset, in each case determined as of the beginning of the Recognition Period). The results described in this paragraph with respect to the recognition of Built-In Gain assume that we will not make an election pursuant to temporary Treasury Regulation Section 1.337-7T to recognize such Built-in Gain at the time we acquire the asset. Requirements for Qualification as a REIT. The Code defines a REIT as a corporation, trust or association: (1) that is managed by one or more trustees or directors; (2) that issues transferable shares or transferable certificates to evidence its beneficial ownership; (3) that would be taxable as a domestic corporation, but for Sections 856 through 859 of the Code; (4) that is not a financial institution or an insurance company within the meaning of certain provisions of the Code; (5) that is beneficially owned by 100 or more persons; (6) not more than 50% in value of the outstanding stock of which is owned, actually or constructively, by five or fewer individuals (as defined in the Code to include certain entities) during the last half of each taxable year; (7) that meets certain other tests, described below, regarding the nature of its income and assets and the amount of its distributions; and (8) that elects to be a REIT, or has made such election for a previous year, and satisfies the applicable filing and administrative requirements to maintain qualification as a REIT. The Code provides that conditions (1) to (4), inclusive, must be met during the entire taxable year and that condition (5) must be met during at least 335 days of a taxable year of twelve months, or during a proportionate part of a taxable year of less than twelve months. Conditions (5) and (6) do not apply until after the first taxable year for which an election is made to be taxed as a REIT. For purposes of condition (6), pension funds and certain other tax exempt entities are treated as individuals, subject to a "look-through" exception with respect to pension funds. We believe that we have satisfied each of the above conditions. In addition, our charter provides for restrictions regarding ownership and transfer of shares. These restrictions are intended to assist us in continuing to satisfy the share ownership requirements described in (5) and (6) above. These ownership and transfer restrictions are described in "Description of Capital Stock -- Restrictions on Ownership and Transfer of Capital Stock." These restrictions, however, may not ensure that we will, in all cases, be able to satisfy the share ownership requirements described in (5) and (6) above. If we fail to satisfy these share ownership requirements, our status as a REIT will terminate. However, if we comply with the rules contained in applicable Treasury Regulations that require us to ascertain the actual ownership of our shares and we do not know, or would not have known through the exercise of reasonable diligence, that we failed to meet the requirement described in condition (6) above, we will be treated as having met this requirement. See "Failure to Qualify." In addition, a corporation may not elect to become a REIT unless its taxable year is the calendar year. We have and will continue to have a calendar taxable year. Ownership of Interests in Partnerships and Qualified REIT Subsidiaries and Taxable REIT Subsidiaries. In the case of a REIT which is a partner in a partnership, Treasury Regulations provide that the REIT will be 62 deemed to own its proportionate share of the assets of the partnership. Also, the REIT will be deemed to be entitled to the income of the partnership attributable to its proportionate share. The assets and items of gross income of the partnership retain the same character in the hands of the REIT for purposes of Section 856 of the Code, including satisfying the gross income tests and the asset tests. Thus, our proportionate share of the assets and items of income of partnerships (and limited liability companies taxed as partnerships) in which we own, directly or indirectly through other partnerships (or limited liability companies taxed as partnerships), less than all of the outstanding ownership interests, are treated as our assets and items of income for purposes of applying the requirements described in this prospectus (including the income and asset tests described below). Developers Diversified Realty Corporation owns 100% of the stock of a number of corporate subsidiaries that are qualified REIT subsidiaries (each, a "QRS") and may acquire stock of one or more new subsidiaries. A corporation will qualify as a QRS if 100% of its stock is held by Developers Diversified Realty Corporation. A QRS will not be treated as a separate corporation, and all assets, liabilities and items of income, deduction and credit of a QRS will be treated as assets, liabilities and items (as the case may be) of Developers Diversified Realty Corporation for all purposes of the Code, including the REIT qualification tests. For this reason, references under "Certain Federal Income Tax Considerations" to our income and assets shall include the income and assets of any QRS. A QRS will not be subject to federal income tax, and our ownership of the voting stock of a QRS will not violate the restrictions against ownership of securities of any one issuer which constitute more than 10% of such issuer's securities (by vote or value) or more than 5% of the value of our total assets, as described below under "Asset Tests." A REIT, in general, may jointly elect with subsidiary corporations, whether or not wholly-owned, to treat the subsidiary corporation as a taxable REIT subsidiary ("TRS"). The separate existence of a TRS or other taxable corporation, unlike a disregarded subsidiary, is not ignored for federal income tax purposes. Accordingly, such an entity would generally be subject to corporate income tax on its earnings, which may reduce the cash flow generated by DDR and its subsidiaries in the aggregate, and DDR's ability to make distributions to its stockholders. A parent REIT is not treated as holding the assets of a TRS or as receiving any income that the TRS earns. Rather, the stock issued by the subsidiary is an asset in the hands of the parent REIT, and the REIT recognizes as income, the dividends, if any, that it receives from the TRS. This treatment can affect the income and asset test calculations that apply to the REIT. Because a parent REIT does not include the assets and income of such TRS in determining the parent's compliance with the REIT requirements, such entities may be used by the parent REIT to indirectly undertake activities that the REIT rules might otherwise preclude it from doing directly or through pass-through subsidiaries (for example, activities that give rise to certain categories of income such as management fees or foreign currency gains). Income Tests. We must satisfy two gross income requirements annually to maintain our qualification as a REIT. First, in each taxable year we must derive directly or indirectly at least 75% of our gross income (excluding gross income from prohibited transactions) from certain investments relating to real property or mortgages on real property (including "rents from real property" and, in certain circumstances, interest) or from certain types of temporary investments. Second, each taxable year we must derive at least 95% of our gross income (excluding gross income from prohibited transactions) from these real property investments, dividends, interest or gain from the sale or disposition of stock or securities (or from any combination of the foregoing). The term "interest" generally does not include any amount received or accrued (directly or indirectly) if the determination of the amount depends in whole or in part on the income or profits of any person. However, an amount received or accrued generally will not be excluded from the term "interest" solely by reason of being-based on a fixed percentage or percentages of receipts or sales. Rents we receive will qualify as "rents from real property" in satisfying the gross income requirements for a REIT described above only if the following conditions are met: - The amount of rent must not be based in whole or in part on the income or profits of any person. However, an amount received or accrued generally will not be excluded from the term "rents from real property" solely by reason of being based on a fixed percentage or percentages of receipts or sales; 63 - The Code provides that rents received from a tenant other than a TRS will not qualify as "rents from real property" in satisfying the gross income tests if the REIT, or an actual or constructive owner of 10% or more of the REIT, actually or constructively owns 10% or more of such tenant; - If rent attributable to personal property leased in connection with a lease of real property is greater than 15% of the total rent received under the lease, then the portion of rent attributable to personal property will not qualify as "rents from real property"; and - For rents received to qualify as "rents from real property," the REIT generally must not operate or manage the property or furnish or render services to the tenants of the property (subject to a 1% de minimis exception), other than through an independent contractor from whom the REIT derives no revenue or through a TRS. The REIT may, however, directly perform certain services that are "usually or customarily rendered" in connection with the rental of space for occupancy only and are not otherwise considered "rendered to the occupant" of the property. If we fail to satisfy one or both of the 75% or 95% gross income tests for any taxable year, we may nevertheless qualify as a REIT for the year if we are entitled to relief under certain provisions of the Code. Generally, we may avail ourselves of the relief provisions if: (i) our failure to meet these tests is due to reasonable cause and not due to willful neglect; (ii) we attach a schedule of the sources of our income to our federal income tax return; and (iii) any incorrect information on the schedule is not due to fraud with intent to evade tax. We do not intend to charge rent for any property that is based in whole or in part on the net income or profits of any person (except by reason of being based on a percentage of gross receipts or sales, as heretofore described), and we do not intend to rent any personal property (other than personal property leased in connection with the lease of real property, the amount of which is less than 15% of the total rent received under the lease). We directly perform services under certain of our leases, but such services are not rendered to the occupant of the property. Furthermore, these services are usual and customary management services provided by landlords renting space for occupancy in the geographic areas in which we own property. To the extent that the performance of any services provided by us would cause amounts received from our tenants to be excluded from rents from real property, we intend to hire independent contractors from whom we derive no revenue to perform such services or a TRS. It is not possible, however, to state whether in all circumstances we would be entitled to the benefit of these relief provisions. For example, if we fail to satisfy the gross income tests because nonqualifying income that we intentionally incur exceeds the limits on nonqualifying income, the IRS could conclude that our failure to satisfy the tests was not due to reasonable cause. If these relief provisions do not apply to a particular set of circumstances, we will not qualify as a REIT. As discussed above in "Taxation of the Company -- General," even if these relief provisions apply, and we retain our status as a REIT, a tax would be imposed with respect to our excess net income. We may not always be able to maintain compliance with the gross income tests for REIT qualification despite our periodic monitoring of our income. Prohibited Transaction Income. Any gain realized by us on the sale of any property other than foreclosure property held as inventory or any property held primarily for sale to customers in the ordinary course of business will be treated as income from a prohibited transaction that is subject to a 100% penalty tax. Whether property is held as inventory or primarily for sale to customers in the ordinary course of a trade or business depends on all the facts and circumstances surrounding the particular transaction. Asset Tests. At the close of each quarter of each taxable year, we also must satisfy three tests relating to the nature and diversification of our assets. First, at least 75% of the value of our total assets must be represented by real estate assets, cash, cash items and government securities. For purposes of this test, real estate assets include stock or debt instruments that are purchased with the proceeds of a stock offering or a long-term (at least five years) public debt offering, but only for the one-year period beginning on the date we receive such proceeds. Second, not more than 25% of our total assets may be represented by securities, other than those securities includable in the 75% asset test. Third, of the investments included in the 25% asset class, 64 the value of any one issuer's securities may not exceed 5% of the value of our total assets and we may not own more than 10% of the outstanding securities by vote or value of any one issuer (other than a wholly owned subsidiary or a TRS). Certain "straight" debt securities of a partnership in which we own at least a 20% profits interest are excluded for purposes of applying the 10% test. In addition, no more than 20% of our value may be comprised of securities of one or more TRS. An entity (other than a REIT or certain lodging or health care corporations) owned in whole or in part by us may file a joint election with us to be treated as a TRS. A corporation (other than a REIT or a non-electing wholly owned subsidiary) owned more than 35% by a TRS is treated as a TRS regardless of whether an election is filed with respect to such corporation. A TRS is subject to federal income tax and is limited in its ability to deduct interest payments made to us. Should a TRS pay an amount to us that exceeds the amount that would be paid to an unrelated party in an arm's length transaction, we generally will be subject to an excise tax equal to 100% of such excess. After initially meeting the asset tests at the close of any quarter, we will not lose our status as a REIT for failure to satisfy the asset tests at the end of a later quarter solely by reason of changes in asset values. If we fail to satisfy the asset tests because we acquire securities or other property during a quarter, we can cure this failure by disposing of sufficient nonqualifying assets within 30 days after the close of that quarter. We believe we have maintained and intend to continue to maintain adequate records of the value of our assets to ensure compliance with the asset tests and to take such other actions within the 30 days after the close of any quarter as may be required to cure any noncompliance. If we fail to cure noncompliance with the asset tests within this time period, we would cease to qualify as a REIT. Annual Distribution Requirements. To maintain our qualification as a REIT, we are required to distribute dividends (other than capital gain dividends) to our shareholders in an amount at least equal to the sum of 90% of our "REIT taxable income" (computed without regard to the dividends paid deduction and our net capital gain) and 90% of our net income (after tax), if any, from foreclosure property, minus the excess of the sum of certain items of noncash income (i.e., income attributable to leveled stepped rents, original issue discount on purchase money debt, or a like-kind exchange that is later determined to be taxable) over 5% of "REIT taxable income" as described above. These distributions must be paid in the taxable year to which they relate, or in the following taxable year if they are declared before we timely file our tax return for such year and if paid on or before the first regular dividend payment after such declaration. Except as provided below, these distributions are taxable to our shareholders (other than tax-exempt entities, as discussed below) in the year in which they are paid. This is so even though these distributions relate to the prior year for purposes of our 90% distribution requirement. However, dividends declared in October, November or December and payable to shareholders of record in such a month are deemed to have been paid and received on December 31 of that year so long as they are actually paid during January of the following year. The amount distributed must not be preferential -- e.g., every shareholder of the class of stock to which a distribution is made must be treated the same as every other shareholder of that class, and no class of stock may be treated otherwise than in accordance with its dividend rights as a class. To the extent that we do not distribute all of our net capital gain or distribute at least 90%, but less than 100%, of our "REIT taxable income," as adjusted, we will be subject to tax thereon at regular ordinary and capital gain corporate tax rates. We believe we have made and intend to continue to make timely distributions sufficient to satisfy these annual distribution requirements. We generally expect that our REIT taxable income will be less than our cash flow due to the allowance of depreciation and other non-cash charges in computing REIT taxable income. Accordingly, we anticipate that we will generally have sufficient cash or liquid assets to enable us to satisfy the distribution requirements described above. However, from time to time, we may not have sufficient cash or other liquid assets to meet these distribution requirements due to timing differences between the actual receipt of income and actual payment of deductible expenses, and the inclusion of income and deduction of expenses in arriving at our taxable income. If these timing differences occur, in order to meet the distribution requirements, we may need to arrange for short-term, or possibly long-term, borrowings or need to pay dividends in the form of taxable share dividends. 65 Under certain circumstances, we may be able to rectify a failure to meet the distribution requirement for a year by paying "deficiency dividends" to shareholders in a later year, which may be included in our deduction for dividends paid for the earlier year. Thus, we may be able to avoid being taxed on amounts distributed as deficiency dividends. However, we will be required to pay interest based upon the amount of any deduction taken for deficiency dividends. Furthermore, we would be subject to a 4% excise tax on the excess of the required distribution over the amounts actually distributed if we should fail to distribute during each calendar year (or in the case of distributions with declaration and record dates falling in the last three months of the calendar year, by the end of January immediately following such year) at least the sum of 85% of our REIT ordinary income for such year, 95% of our REIT capital gain income for the year (other than certain long-term capital gains for which we make a Capital Gains Designation and on which we pay the tax), and any undistributed taxable income from prior periods. Any REIT taxable income and net capital gain on which this excise tax is imposed for any year is treated as an amount distributed during that year for purposes of calculating such tax. Earnings and Profits Distribution Requirement. In order to qualify as a REIT, we cannot have at the end of any taxable year any undistributed "earnings and profits" that are attributable to a "C corporation" taxable year (i.e., a year in which a corporation is neither a REIT nor an S corporation). FAILURE TO QUALIFY If we fail to qualify for taxation as a REIT in any taxable year, and the relief provisions do not apply, we will be subject to tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates. Distributions to shareholders in any year in which we fail to qualify will not be deductible by us, and we will not be required to distribute any amounts to our shareholders. As a result, our failure to qualify as a REIT would reduce the cash available for distribution by us to our shareholders. In addition, if we fail to qualify as a REIT, all distributions to shareholders will be taxable as ordinary income to the extent of our current and accumulated earnings and profits, and subject to certain limitations of the Code, corporate distributees may be eligible for the dividends received deduction. Unless entitled to relief under specific statutory provisions, we will also be disqualified from taxation as a REIT for the four taxable years following the year during which we lost our qualification. It is not possible to state whether in all circumstances we would be entitled to this statutory relief. TAX ASPECTS OF JOINT VENTURES General. We hold certain investments indirectly through partnerships, limited liability companies (taxed as partnerships), and joint ventures (the "Joint Ventures"). In general, partnerships and limited liability companies (taxed as partnerships) in which we own an interest are "pass-through" entities which are not subject to federal income tax. Rather, partners or owners are allocated their proportionate shares of the items of income, gain, loss, deduction and credit of a partnership, and are potentially subject to tax thereon, without regard to whether the partners receive a distribution from the partnership. We will include in our income our proportionate share of the foregoing partnership or limited liability company items for purposes of the various REIT income tests and in the computation of our REIT taxable income. Entity Classification. Our interests in the Joint Ventures involve special tax considerations, including the possibility of a challenge by the IRS of the status of a Joint Venture as a partnership (as opposed to an association taxable as a corporation) for federal income tax purposes. If a Joint Venture were treated as an association, it would be taxable as a corporation and therefore be subject to an entity-level tax on its income. In such a situation, the character of our assets and items of gross income would change and preclude us from satisfying the asset tests and possibly the income tests (see "Taxation of the Company -- Asset Tests" and "-- Income Tests"). This, in turn, would prevent us from qualifying as a REIT. See "Failure to Qualify" for a discussion of the effect of our failure to meet these tests for a taxable year. In addition, a change in a Joint Venture's status for tax purposes might be treated as a taxable event. If so, we might incur a tax liability without any related cash distributions. 66 Treasury Regulations that apply for tax periods beginning on or after January 1, 1997 provide that a domestic business entity not otherwise classified as a corporation and which has at least two members (an "Eligible Entity") may elect to be taxed as a partnership for federal income tax purposes. Unless it elects otherwise, an Eligible Entity in existence prior to January 1, 1997 will have the same classification for federal income tax purposes that it claimed under the entity classification Treasury Regulations in effect prior to this date. In addition, an Eligible Entity which did not exist, or did not claim a classification, prior to January 1, 1997, will be classified as a partnership for federal income tax purposes unless it elects otherwise. We believe all of our Joint Ventures will be classified as partnerships for federal income tax purposes. TAXATION OF TAXABLE U.S. SHAREHOLDERS As used below, the term "U.S. Shareholder" means a holder of shares who (for United States federal income tax purposes): (i) is a citizen or resident of the United States; (ii) is a corporation or partnership (including an entity treated as a corporation or partnership for United States federal income tax purposes) created or organized in or under the laws of the United States or of any state thereof or in the District of Columbia, unless, in the case of a partnership, Treasury Regulations provide otherwise; (iii) is an estate the income of which is subject to United States federal income taxation regardless of its source; or (iv) is a trust whose administration is subject to the primary supervision of a United States court and which has one or more United States persons who have the authority to control all substantial decisions of the trust. Notwithstanding the preceding sentence, to the extent provided in Treasury Regulations, certain trusts in existence on August 20, 1996, and treated as United States persons prior to this date that elect to continue to be treated as United States persons, shall also be considered U.S. Shareholders. Distributions Generally. As long as we qualify as a REIT, distributions out of our current or accumulated earnings and profits, other than capital gain dividends discussed below, will constitute dividends taxable to our taxable U.S. Shareholders as ordinary income. These distributions will not be eligible for the dividends-received deduction in the case of U.S. Shareholders that are corporations. For purposes of determining whether distributions to holders of shares are out of current or accumulated earnings and profits, our earnings and profits will be allocated first to our outstanding preferred shares and then to the common shares. To the extent that we make distributions in excess of our current and accumulated earnings and profits, these distributions will be treated first as a tax-free return of capital to each U.S. Shareholder. This treatment will reduce the adjusted basis that each U.S. Shareholder has in his shares of stock for tax purposes by the amount of the distribution (but not below zero). Distributions in excess of a U.S. Shareholder's adjusted basis in his shares will be taxable as capital gains (provided that the shares have been held as a capital asset) and will be taxable as long-term capital gain if the shares have been held for more than one year. Dividends we declare in October, November, or December of any year and payable to a shareholder of record on a specified date in any of these months shall be treated as both paid by us and received by the shareholder on December 31 of that year, provided we actually pay the dividend on or before January 31 of the following calendar year. Shareholders may not include in their own income tax returns any of our net operating losses or capital losses. Capital Gain Distributions. Distributions that we properly designate as capital gain dividends (and undistributed amounts for which we properly make a Capital Gains Designation) will be taxable to U.S. Shareholders as gains (to the extent that they do not exceed our actual net capital gain for the taxable year) from the sale or disposition of a capital asset. Depending on the period of time we have held the assets which produced these gains, and on certain designations, if any, which we may make, these gains may be taxable to 67 non-corporate U.S. Shareholders at a 20% or 25% rate. U.S. Shareholders that are corporations may, however, be required to treat up to 20% of certain capital gain dividends as ordinary income. Under the Taxpayer Relief Act of 1997, as amended, the maximum tax rate for individual taxpayers on net long-term capital gains (i.e., the excess of net long-term capital gain over net short-term capital loss) is 20% for most assets. A lower rate of 18% may apply for assets held more than five years. Also, so-called "unrecaptured section 1250 gain" is subject to a maximum federal income tax rate of 25%. "Unrecaptured section 1250 gain" generally includes the long-term capital gain realized on the sale of a real property asset described in Section 1250 of the Code, but not in excess of the amount of depreciation (less the gain, if any, treated as ordinary income under Code Section 1250) taken on such asset. In the case of individuals whose ordinary income is taxed at a 15% rate, the 20% rate is reduced to 10% and the 18% rate for assets held more than five years is reduced to 8%. Certain aspects of the new legislation are currently unclear, including how the reduced rates will apply to gains earned by REITs such as us. The Taxpayer Relief Act of 1997 gives the IRS authority to apply the Act's new rules on taxation of capital gains to sales by pass-through entities, including REITs. It is possible that the IRS could provide in such regulations, as it did in IRS Notice 97-64 (superseded by the Internal Revenue Service Restructuring and Reform Act of 1998), that REIT capital gain dividends must be determined by looking through to the assets sold by the REIT and treated by REIT shareholders as "long-term capital gain" and "unrecaptured section 1250 gain" to the extent of such respective gain realized by the REIT. No regulations have yet been issued. Such regulations, if and when issued, may have a retroactive effect. Passive Activity Losses and Investment Interest Limitations. Distributions we make and gain arising from the sale or exchange by a U.S. Shareholder of our shares will not be treated as passive activity income. As a result, U.S. Shareholders generally will not be able to apply any "passive losses" against this income or gain. Distributions we make (to the extent they do not constitute a return of capital) generally will be treated as investment income for purposes of computing the investment interest limitation. Gain arising from the sale or other disposition of our shares, however, will not be treated as investment income under certain circumstances. Retention of Net Long-Term Capital Gains. We may elect to retain, rather than distribute as a capital gain dividend, our net long-term capital gains. If we make this election a "Capital Gains Designation," we would pay tax on our retained net long-term capital gains. In addition, to the extent we make a Capital Gains Designation, a U.S. Shareholder generally would: (i) include its proportionate share of our undistributed long-term capital gains in computing its long-term capital gains in its return for its taxable year in which the last day of our taxable year falls (subject to certain limitations as to the amount that is includable); (ii) be deemed to have paid the capital gains tax imposed on us on the designated amounts included in the U.S. Shareholder's long-term capital gains; (iii) receive a credit or refund for the amount of tax deemed paid by it; (iv) increase the adjusted basis of its common shares by the difference between the amount of includable gains and the tax deemed to have been paid by it; and (v) in the case of a U.S. Shareholder that is a corporation, appropriately adjust its earnings and profits for the retained capital gains in accordance with Treasury Regulations to be prescribed by the IRS. DISPOSITIONS OF SECURITIES If you are a U.S. Shareholder and you sell or dispose of your shares, you will recognize gain or loss for federal income tax purposes in an amount equal to the difference between the amount of cash and the fair market value of any property you receive on the sale or other disposition and your adjusted basis in the shares for tax purposes. This gain or loss will be capital if you have held the shares as a capital asset and will be long-term capital gain or loss if you have held the shares for more than one year. However, if you are a U.S. Shareholder and you recognize loss upon the sale or other disposition of shares that you have held for six 68 months or less (after applying certain holding period rules), the loss you recognize will be treated as a long-term capital loss, to the extent you received distributions from us which were required to be treated as long-term capital gains. BACKUP WITHHOLDING We report to our U.S. Shareholders and the IRS the amount of dividends paid during each calendar year, and the amount of any tax withheld. Under the backup withholding rules, a shareholder may be subject to backup withholding at the rate of 31% with respect to dividends paid unless the holder is a corporation or comes within certain other exempt categories and, when required, demonstrates this fact, or provides a taxpayer identification number, certifies as to no loss of exemption from backup withholding, and otherwise complies with applicable requirements of the backup withholding rules. A U.S. Shareholder that does not provide us with his correct taxpayer identification number may also be subject to penalties imposed by the IRS. Backup withholding is not an additional tax. Any amount paid as backup withholding will be creditable against the shareholder's income tax liability. In addition, we may be required to withhold a portion of capital gain distributions to any shareholders who fail to certify their non-foreign status. See "-- Taxation of Non-U.S. Shareholders." TAXATION OF TAX-EXEMPT SHAREHOLDERS The IRS has ruled that amounts distributed as dividends by a qualified REIT do not constitute unrelated business taxable income ("UBTI") when received by a tax-exempt entity. Based on that ruling, dividend income from us will not be UBTI to a tax-exempt shareholder, so long as the tax-exempt shareholder (except certain tax-exempt shareholders described below) has not held its shares as "debt financed property" within the meaning of the Code (generally, shares, the acquisition of which was financed through a borrowing by the tax exempt shareholder) and the shares are not otherwise used in a trade or business. Similarly, income from the sale of shares will not constitute UBTI unless a tax-exempt shareholder has held its shares as "debt financed property" within the meaning of the Code or has used the shares in its trade or business. For tax-exempt shareholders which are social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts, and qualified group legal services plans exempt from federal income taxation under Code Sections 501(c)(7), (c)(9), (c)(17) and (c)(20), respectively, income from an investment in our shares will constitute UBTI unless the organization is able to properly deduct amounts set aside or placed in reserve for certain purposes so as to offset the income generated by its investment in our shares. These prospective investors should consult their own tax advisors concerning these "set aside" and reserve requirements. Notwithstanding the above, however, a portion of the dividends paid by a "pension held REIT" shall be treated as UBTI as to certain types of trusts which hold more than 10% (by value) of the interests in the REIT. A REIT will not be a "pension held REIT" if it is able to satisfy the "not closely held" requirement without relying upon the "look-through" exception with respect to certain trusts. We do not expect to be classified as a "pension held REIT." TAXATION OF NON-U.S. SHAREHOLDERS The preceding discussion does not address the rules governing United States federal income taxation of the ownership and disposition of shares by persons that are not U.S. Shareholders ("Non-U.S. Shareholders"). In general, Non-U.S. Shareholders may be subject to special tax withholding requirements on distributions from Developers Diversified Realty Corporation and with respect to their sale or other disposition of shares of Developers Diversified Realty Corporation, except to the extent reduced or eliminated by an income tax treaty between the United States and the Non-U.S. Shareholder's country. A Non-U.S. Shareholder who is a shareholder of record and is eligible for reduction or elimination of withholding must file an appropriate form with Developers Diversified Realty Corporation in order to claim such treatment. Non-U.S. Shareholders should consult their own tax advisors concerning the federal income tax consequences to 69 them of an acquisition of shares, including the federal income tax treatment of dispositions of interests in, and the receipt of distributions from, Developers Diversified Realty Corporation. OTHER TAX CONSEQUENCES State and Local Tax Consequences. We may be subject to state or local taxation or withholding in various state or local jurisdictions, including those in which we transact business and our shareholders may be subject to state or local taxation or withholding in various state or local jurisdictions, including those in which they reside. Our state and local tax treatment may not conform to the federal income tax consequences discussed above. In addition, your state and local tax treatment may not conform to the federal income tax consequences discussed above. Consequently, you should consult your own tax advisors regarding the effect of state and local tax laws on an investment in our shares. Federal Estate Tax. Shares owned or treated as owned by an individual who is not a citizen or a "resident" (as specifically defined for U.S. federal estate tax purposes) of the United States at the time of death will be includable in the individual's gross estate for U.S. federal estate tax purposes, unless an applicable estate tax treaty provides otherwise. Such individual's estate may be subject to U.S. federal estate tax on the property includable in the estate for U.S. federal estate tax purposes. SECURITIES ISSUED IN EXCHANGE FOR PROPERTY Under the terms of the BP Purchase Agreement, upon closing of the transactions contemplated thereby DDR will acquire from the BP Entities for consideration consisting of at least $15.1 million in cash and, at DDR's option, some or all of the common shares offered hereby or additional cash, two real property assets (or ownership interest therein). DDR's acquisition of the two real property assets from the BP Entities will not result in a taxable event to DDR. DDR will have a basis in the properties equal to the purchase price. However, the exchange will be a fully taxable transaction to BP. BP will recognize gain on the transaction in an amount equal to the excess of the purchase price over its adjusted basis in the properties transferred. BP will recognize loss on the transaction in an amount equal to the excess of its adjusted basis in the properties over the purchase price. The recognition of any loss is subject to a number of limitations set forth in the Code. The character of any gain or loss as capital or ordinary will depend upon the nature of the properties in the hands of BP at the time of the exchange. 70 MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The following table shows the high and low sales price of our common shares on the New York Stock Exchange (the "NYSE") composite tape for the quarterly periods indicated and the dividends declared per common share with respect to each such quarter:
HIGH LOW DIVIDENDS ------ ------- --------- 2001 First.................................................... $15.20 $12.875 $ .37 Second................................................... 18.60 14.23 .37 Third.................................................... 19.22 15.76 .37 Fourth................................................... 19.38 17.16 .37 ----- $1.48 ===== 2000 First.................................................... $13 7/8 $ 11 $ .36 Second................................................... 15 7/8 13 1/2 .36 Third.................................................... 16 1/4 12 3/4 .36 Fourth................................................... 13 3/4 11 5/8 .36 ----- $1.44 ===== 1999 First.................................................... $18 1/2 $13 5/8 $ .35 Second................................................... 17 1/2 13 7/8 .35 Third.................................................... 16 5/8 13 5/16 .35 Fourth................................................... 14 7/8 12 5/16 .35 ----- $1.40 =====
The approximate number of record holders of our common shares (our only class of common equity) on December 31, 2001, was 520 and the approximate number of beneficial owners of such shares was 23,000. We intend to continue to declare quarterly dividends on our common shares. However, no assurances can be made as to the amounts of future dividends, since such dividends are subject to our cash flow from operations, earnings, financial condition, capital requirements and such other factors as the Board of Directors considers relevant. We are required by the Code to distribute at least 90% of our REIT taxable income. The amount of cash available for dividends is impacted by capital expenditures and debt service requirements to the extent that we were to fund such items out of cash flow from operations. On February 20, 2002, the last reported sale price on the NYSE was $19.89 per common share. 71 DESCRIPTION OF COMMON SHARES GENERAL Our articles of incorporation authorize us to issue up to 100,000,000 common shares, without par value. As of December 31, 2001, we had 59,454,648 common shares issued and outstanding. In addition, we have reserved an aggregate of 4,845,933 common shares for issuance upon the exercise of options under our employee share option plan (the "Stock Option Plan"), under our Equity-Based Award Plans, and for issuance upon the exercise of options granted to our directors and others. Our common shares are listed on the New York Stock Exchange under the symbol "DDR." National City Bank, Cleveland, Ohio, is the transfer agent and registrar of the common shares. The following description of our common shares sets forth certain of their general terms and provisions. The following description of our common shares is in all respects subject to and qualified by reference to the applicable provisions of the Articles and our Code of Regulations (the "Code of Regulations"). Holders of our common shares are entitled to receive dividends when, as, and if declared by our Board of Directors, out of funds legally available therefor. Any payment and declaration of dividends by us on our common shares and purchases thereof will be subject to certain restrictions if we fail to pay dividends on any outstanding preferred shares. If we are liquidated, dissolved or involved in any winding-up, the holders of our common shares are entitled to receive ratably any assets remaining after we have fully paid all of our liabilities, including the preferential amounts we owe with respect to any preferred shares. Holders of our common shares possess ordinary voting rights, with each share entitling the holder to one vote. Holders of our common shares have cumulative voting rights in the election of directors. Holders of our common shares do not have preemptive rights, which means that they have no right to acquire any additional common shares that we may subsequently issue. All of our common shares now outstanding are, and any common shares offered hereby when issued will be, fully paid and nonassessable. RESTRICTIONS ON OWNERSHIP In order for us to qualify as a REIT under the Code, not more than 50% in value of our outstanding capital stock may be owned, directly or indirectly, by five or fewer individuals during the last half of a taxable year. Individual is defined in the Code to include certain entities. In addition, our capital stock must be beneficially owned by 100 or more persons during at least 335 days of a taxable year of 12 months or during a proportionate part of a shorter taxable year. Additionally, certain other requirements must be satisfied. To assure that five or fewer individuals do not own more than 50% in value of our outstanding common shares, our Articles provide that, subject to certain exceptions, no holder may own, or be deemed to own by virtue of the attribution provisions of the Code, more than 5% (the "Ownership Limit") of our outstanding common shares. Shareholders whose ownership exceeded the Ownership Limit immediately after the initial public offering ("IPO") may continue to own common shares in excess of the Ownership Limit and may acquire additional shares through the Stock Option Plan, through any dividend reinvestment plan adopted by us (a "Dividend Reinvestment Plan") or from other existing shareholders who exceed the Ownership Limit, but may not acquire additional shares from those sources if the result would be that the five largest beneficial owners of common shares hold more than 49.6% of our outstanding common shares. In addition, because rent from a Related Party Tenant (any tenant 10% of which is owned, directly or constructively, by a REIT, including an owner of 10% or more of a REIT) is not qualifying rent for purposes of the gross income tests under the Code, our Articles provide that no individual or entity may own, or be deemed to own by virtue of the attribution provisions of the Code (which differ from the attribution provisions applied to the Ownership Limit), in excess of 9.8% of our outstanding common shares (the "Related Party Limit"). Our Board of Directors may waive the Ownership Limit and the Related Party Limit (the Related Party Limit has been waived with respect to the shareholders who exceeded the Related Party Limit immediately after the IPO) if an opinion of counsel or a ruling from the IRS is provided to the Board of Directors to the effect that that ownership will not then or in the future jeopardize our status as a REIT. As a condition of any waiver, our 72 Board of Directors will require appropriate representations and undertakings from the applicant with respect to preserving our REIT status. The preceding restrictions on transferability and ownership of common shares may not apply if our Board of Directors determines that it is no longer in our best interests to continue to qualify as a REIT. The Ownership Limit and the Related Party Limit will not be automatically removed even if the REIT provisions of the Code are changed to no longer contain any ownership concentration limitation or if the ownership concentration limitation is increased. In addition to preserving our status as a REIT, the effects of the Ownership Limit and the Related Party Limit are to prevent any person or small group of persons from acquiring unilateral control of us. Any change in the Ownership Limit requires an amendment to the Articles, even if our Board of Directors determines that maintenance of REIT status is no longer in our best interests. Amendments to the Articles require the affirmative vote of holders owning a majority of our outstanding common shares. If it is determined that an amendment would materially and adversely affect the holders of any class of preferred shares, that amendment also would require the affirmative vote of holders of two-thirds of the affected class of preferred shares. If common shares in excess of the Ownership Limit or the Related Party Limit, or common shares which would cause the REIT to be beneficially or constructively owned by less than 100 persons or would result in us being "closely held" within the meaning of Section 856(h) of the Code, are issued or transferred to any person, the issuance or transfer will be null and void to the intended transferee. The intended transferee will not acquire rights to the shares. Common shares transferred or proposed to be transferred in excess of the Ownership Limit or the Related Party Limit or which would otherwise jeopardize our REIT status ("Excess Shares") will be subject to repurchase by us. The purchase price of any Excess Shares will be equal to the lesser of (i) the price in the proposed transaction and (ii) the fair market value of the shares reflected in the last reported sale price for the common shares on the trading day immediately preceding the date on which we or our designee determine to exercise our repurchase right, if the shares are then listed on a national securities exchange, or such price for the shares on the principal exchange, if they are then listed on more than one national securities exchange, or, if the common shares are not then listed on a national securities exchange, the latest bid quotation for the common shares if they are then traded over-the-counter, or, if such quotation is not available, the fair market value as determined by our Board of Directors in good faith, on the last trading day immediately preceding the day on which notice of the proposed purchase is sent by us. From and after the date fixed for purchase of Excess Shares by us, the holder of the Excess Shares will cease to be entitled to distribution, voting rights and other benefits with respect to the Excess Shares except the right to payment of the purchase price for the Excess Shares. Any dividend or distribution paid to a proposed transferee on Excess Shares will be repaid to us upon demand. If the foregoing transfer restrictions are determined to be void or invalid by virtue of any legal decision, statute, rule or regulation, then the intended transferee of any Excess Shares may be deemed, at our option, to have acted as an agent on our behalf in acquiring the Excess Shares and to hold the Excess Shares on our behalf. All certificates representing our common shares bear a legend referring to the restrictions described above. Our Articles provide that all persons who own, directly or by virtue of the attribution provisions of the Code, more than 5% of our outstanding common shares must file an affidavit with us containing information specified in the Articles each year by January 31. In addition, each of those shareholders will upon demand be required to disclose to us in writing such information with respect to the direct, indirect and constructive ownership of shares as our Board of Directors deems necessary for us to comply with the provisions of the Code as applicable to a REIT or to comply with the requirements of any taxing authority or governmental agency. 73 CERTAIN ANTI-TAKEOVER PROVISIONS OF OHIO LAW Certain provisions of Ohio law may have the effect of discouraging or rendering more difficult an unsolicited acquisition of a corporation or its capital stock to the extent the corporation is subject to those provisions. We have opted out of two such provisions. We remain subject to the provisions described below. Chapter 1704 of the Ohio Revised Code prohibits certain transactions, including mergers, sales of assets, issuances or purchases of securities, liquidation or dissolution, or reclassifications of the then outstanding shares of an Ohio corporation with fifty or more shareholders involving, or for the benefit of, certain holders of shares representing 10% or more of the voting power of the corporation (any such shareholder, a "10% Shareholder"), unless: (i) the transaction is approved by the directors before the 10% Shareholder becomes a 10% Shareholder; (ii) the acquisition of 10% of the voting power is approved by the directors before the 10% Shareholder becomes a 10% Shareholder; or (iii) the transaction involves a 10% Shareholder who has been a 10% Shareholder for at least three years and is approved by holders of two-thirds of our voting power and the holders of a majority of the voting power not owned by the 10% Shareholder, or certain price and form of consideration requirements are met. Chapter 1704 of the Ohio Revised Code may have the effect of deterring certain potential acquisitions of us which might be beneficial to shareholders. Section 1707.041 of the Ohio Revised Code regulates certain "control bids" for corporations in Ohio with 50 or more shareholders that have significant Ohio contacts and permits the Ohio Division of Securities to suspend a control bid if certain information is not provided to offerees. LEGAL PROCEEDINGS Other than as described in Risk Factors on page 2 under the caption "Our Results of Operations may be Affected by a Judgment Entered Against Us" and other than routine litigation and administrative proceedings arising in the ordinary course of business, we are not presently involved in any litigation nor, to our knowledge, is any litigation threatened against us or our properties which is reasonably likely to have a material adverse effect on our liquidity or results of operations. 74 PRINCIPAL SHAREHOLDERS OF THE COMPANY The following table sets forth certain information regarding the beneficial ownership of common shares of the Company as of December 31, 2001, except as otherwise disclosed in the notes below, by (a) the Company's directors and director nominees, (b) each other person who is known by the Company to own beneficially more than 5% of the outstanding common shares based on a review of filings with the Securities and Exchange Commission, (c) the Company's Chief Executive Officer and the Company's other executive officers named in the Summary Compensation Table, and (d) the Company's executive officers and directors as a group. Except as otherwise described in the notes below, the following beneficial owners have sole voting power and sole investment power with respect to all common shares set forth opposite their respective names.
NUMBER OF COMMON SHARES PERCENTAGE BENEFICIALLY OWNED OWNERSHIP ------------------ ---------- Bert L. and Iris S. Wolstein................................ 4,398,490 7.0% 34555 Chagrin Boulevard Moreland Hills, Ohio 44022 LaSalle Investment Management (Securities), LP.............. 3,417,334(1) 5.5 200 East Randolph Drive Chicago, Illinois 60601 LaSalle Investment Management, Inc.......................... 738,071(1) 1.2 200 East Randolph Drive Chicago, Illinois 60601 Stichting Pensioenfonds ABP................................. 3,143,026(2) 5.0 Oude Lindestraat 70 Postbus 2889 6401 DL Heerlen, The Netherlands Scott A. Wolstein........................................... 3,541,314(3) 5.7 James A. Schoff............................................. 724,235(4) 1.2 David M. Jacobstein......................................... 249,865(5) * Daniel B. Hurwitz........................................... 164,030(6) * Joan U. Allgood............................................. 151,001(7) * William H. Schafer.......................................... 189,842(8) * Eric M. Mallory............................................. 89,390(9) * Joseph G. Padanilam......................................... 16,646(10) * Richard E. Brown............................................ 23,457(11) * Albert T. Adams............................................. 30,816(12) * Dean S. Adler............................................... 10,816(13) * Terrance R. Ahern........................................... 6,816(14) * Robert H. Gidel............................................. 9,816(15) * William N. Hulett III....................................... 21,166(16) * Barry A. Sholem............................................. 10,816(13) * All Current Executive Officers, Directors and Director Nominees as a Group (15 persons).......................... 5,240,026 8.4%
--------------- * Less than 1% (1) According to a report on Schedule 13G filed with the Securities and Exchange Commission on February 13, 2001, LaSalle Investment Management, Inc. ("LaSalle Investment"), a registered investment adviser, beneficially owned 738,071 of the common shares outstanding as of December 31, 2000, and LaSalle Investment Management (Securities), L.P. ("LaSalle Securities"), a registered investment adviser, beneficially owned 3,417,334 common shares as of December 31, 2000. In that 75 Schedule 13G: (a) LaSalle Investment disclosed that it has sole voting and dispositive power over 178,571 of those common shares, and shared voting and dispositive power over 559,500 of those common shares; and (b) LaSalle Securities disclosed that it has sole voting power over 254,300 of those common shares, shared voting power over 3,048,538 of those common shares, sole dispositive power over 207,200 of those common shares and shared dispositive power over 3,210,134 of those common shares. In that Schedule 13G LaSalle Investment and LaSalle Securities disclosed that they are a "group" for federal securities law purposes. (2) According to a report on Schedule 13D filed with the Securities and Exchange Commission on August 17, 2000, Stichting Pensioenfonds ABP ("Stichting"), a Netherlands-based entity whose principal business is investing funds held on behalf of public sector employees of The Kingdom of the Netherlands, beneficially owned 3,143,026 of the common shares outstanding. In that Schedule 13D Stichting disclosed that it has sole voting and dispositive power with respect to all 3,143,026 common shares. (3) Includes 2,221,768 common shares subject to options currently exercisable or exercisable within 60 days. (4) Includes the following common shares, beneficial ownership of which is disclaimed by Mr. Schoff: (a) 805 common shares owned by Mr. Schoff's daughter, (b) 1,997 common shares owned by Mr. Schoff's son, (c) 816 common shares owned by an individual retirement account held by Mr. Schoff's wife, and (d) 2,000 common shares owned by a partnership in which Mr. Schoff owns a one-half interest. Includes 173,073 common shares subject to options currently exercisable or exercisable within 60 days. (5) Includes 300 common shares held in a custodial account for the benefit of Mr. Jacobstein's nephew and 226,906 common shares subject to options currently exercisable or exercisable within 60 days. (6) Includes 149,892 common shares subject to options currently exercisable or exercisable within 60 days. (7) Includes 2,000 common shares owned by Mrs. Allgood's husband, beneficial ownership of which is disclaimed by Mrs. Allgood. Includes 80,743 common shares subject to options currently exercisable or exercisable within 60 days. (8) Includes the following common shares, beneficial ownership of which is disclaimed by Mr. Schafer: (a) 100 common shares owned by Mr. Schafer's father and (b) 100 common shares owned by Mr. Schafer's father-in-law. Includes 135,296 common shares subject to options currently exercisable or exercisable within 60 days. (9) Includes 1,900 common shares held in custodial accounts for Mr. Mallory's two children and 72,104 common shares subject to options currently exercisable or exercisable within 60 days. (10) Includes 12,993 common shares subject to options currently exercisable or exercisable within 60 days. (11) Includes 20,376 common shares subject to options currently exercisable or exercisable within 60 days. (12) Includes 30,666 common shares subject to options currently exercisable or exercisable within 60 days. (13) Includes 10,666 common shares subject to options currently exercisable or exercisable within 60 days. (14) Includes 6,666 common shares subject to options currently exercisable or exercisable within 60 days. (15) Includes 3,000 shares owned by a partnership in which Mr. Gidel and his wife have a one-half interest and 6,666 common shares subject to options currently exercisable or exercisable within 60 days. (16) Includes 20,666 common shares subject to options currently exercisable or exercisable within 60 days. 76 DIRECTORS AND EXECUTIVE OFFICERS
PERIOD OF SERVICE NAME AND AGE POSITION AND OFFICE WITH THE COMPANY AS DIRECTOR ------------ ------------------------------------ --------------- Scott A. Wolstein.................... Chairman of the Board of Directors of the 11/92 - Present 49 Company and Chief Executive Officer of the Company James A. Schoff...................... Vice Chairman of the Board of Directors of 11/92 - Present 55 the Company and Chief Investment Officer of the Company David M. Jacobstein.................. President and Chief Operating Officer of the 5/00 - Present 55 Company and a Director William N. Hulett III................ Director 2/93 - Present 58 Albert T. Adams...................... Director 4/96 - Present 51 Dean S. Adler........................ Director 5/97 - Present 44 Barry A. Sholem...................... Director 5/98 - Present 46 Terrance R. Ahern.................... Director 5/00 - Present 46 Robert H. Gidel...................... Director 5/00 - Present 50 Daniel B. Hurwitz.................... Executive Vice President of the Company 37 Joan U. Allgood...................... Senior Vice President and General Counsel of 49 the Company and Secretary William H. Schafer................... Senior Vice President and Chief Financial 43 Officer of the Company and Treasurer Eric M. Mallory...................... Senior Vice President of Development of the 41 Company Richard E. Brown..................... Senior Vice President of Asset Management and 50 Operations of the Company Joseph G. Padanilam.................. Vice President of Investment and Planning of 35 the Company
Scott A. Wolstein has been the Chief Executive Officer and a Director of the Company since its organization in 1992. Mr. Wolstein has been Chairman of the Board of Directors of the Company since May 1997 and was President of the Company from its organization until May 1999, when Mr. Jacobstein joined the Company. Prior to the organization of the Company, Mr. Wolstein was a principal and executive officer of DDG, the Company's predecessor. Mr. Wolstein is a graduate of the Wharton School at the University of Pennsylvania and of the University of Michigan Law School. He is currently a member of the Board of the National Association of Real Estate Investment Trusts (NAREIT), the International Council of Shopping Centers, the Real Estate Roundtable, the Zell-Lurie Wharton Real Estate Center and Cleveland Tomorrow and serves as the Chairman of the State of Israel Bonds, Cleveland Chapter. Mr. Wolstein is also a member of the Urban Land Institute and the Pension Real Estate Association (PREA). He has also served as President of the Board of Trustees of the United Cerebral Palsy Association of Greater Cleveland and as a member of the Board of the Great Lakes Theater Festival, The Park Synagogue and the Convention and Visitors Bureau of Greater Cleveland. 77 James A. Schoff has been the Vice Chairman of the Board of Directors and Chief Investment Officer of the Company since March 1998. From the organization of the Company until March 1998, Mr. Schoff served as Executive Vice President, Chief Operating Officer and a Director of the Company. Prior to the organization of the Company, Mr. Schoff was a principal and executive officer of DDG. After graduating from Hamilton College and Cornell University Law School, Mr. Schoff practiced law with the firm of Thompson, Hine and Flory LLP in Cleveland, Ohio, where he specialized in the acquisition and syndication of real estate properties. Mr. Schoff serves as a member of the Executive Committee and the Board of Trustees for the Western Reserve Historical Society and the National Conference for Community and Justice. David M. Jacobstein has been the President and Chief Operating Officer of the Company since May 1999. From 1986 until the time he joined the Company, Mr. Jacobstein was employed by Wilmorite, Inc., a Rochester, New York-based shopping center developer where most recently he served as Vice Chairman and Chief Operating Officer. Mr. Jacobstein is a graduate of Colgate University and George Washington University Law School. Prior to joining Wilmorite, Mr. Jacobstein practiced law with the firms of Thompson, Hine & Flory in Cleveland, Ohio, and Harris, Beach & Wilcox in Rochester, where he specialized in corporate and securities law. William N. Hulett III has been managing member of Fame Development, Ltd., a residential real estate developer since June 1999. From June 1997 to June 1998, Mr. Hulett served as President and Chief Executive Officer of BridgeStreet Accommodations, Inc. ("BridgeStreet"), an American Stock Exchange listed company in the extended stay lodging industry and from June 1998 to June 1999 he served as Vice Chairman of the Board of Directors of BridgeStreet. From September 1995 to May 1997, Mr. Hulett was the Co-Chairman and Chief Executive Officer of the Rock and Roll Hall of Fame and Museum in Cleveland, Ohio. From May 1981 to May 1993, Mr. Hulett was the President of Stouffer Hotel Company, the owner of a national hotel chain. Prior to that time, Mr. Hulett served as Vice President of Operations for Westin Hotels, then based in Seattle, Washington. Mr. Hulett is also a director of Cuyahoga Community College. Albert T. Adams has been a partner with the law firm of Baker & Hostetler LLP in Cleveland, Ohio, since 1984 and has been associated with the firm since 1977. Mr. Adams is a graduate of Harvard College, Harvard Business School and Harvard Law School. He serves as a member of the Board of Trustees of the Greater Cleveland Roundtable and of the Western Reserve Historical Society. Mr. Adams also serves as a director of Associated Estates Realty Corporation, Boykin Lodging Company, Captec Net Lease Realty, Inc., and Dairy Mart Convenience Stores, Inc. Dean S. Adler is currently a principal with Lubert-Adler Partners, L.P. ("Lubert-Adler"), a private equity real estate investment company which he co-founded in 1997. Lubert-Adler currently manages over $1 billion in equity and $3 billion in assets. From 1987 through 1996, Mr. Adler was a principal and co-head of the private equity group of CMS Companies. Mr. Adler is a graduate of the Wharton School and the University of Pennsylvania Law School. He was an instructor at the Wharton School between 1981 and 1983. He currently serves as a member of the Board of Directors of The Lane Company, Electronics Boutique, Inc., and Trans World Entertainment Corporation. Mr. Adler has served on such community boards as the UJA National Young Leadership Cabinet and he is currently a member of the Alexis de Tocqueville Society and is co-chairman of The Walt Frazier Youth Foundation. Barry A. Sholem is currently the Co-Chairman and Managing Director of Donaldson, Lufkin & Jenrette, Inc. Real Estate Capital Partners, a $2 billion real estate fund which invests in a broad range of real estate-related assets, which he formed in January 1995. Prior to joining Donaldson, Lufkin & Jenrette, Inc., Mr. Sholem was with Goldman, Sachs & Co. for 15 years and was head of the Real Estate Principal Investment Area for Goldman, Sachs & Co. on the West Coast. Mr. Sholem is a graduate of Brown University and Northwestern University's J.L. Kellogg Graduate School of Management. He is currently active in the Urban Land Institute (RCMF Council), the International Council of Shopping Centers, the U.C. Berkeley Real Estate Advisory Board and the Business Roundtable. Terrance R. Ahern is a co-founder and principal of The Townsend Group, an institutional real estate consulting firm formed in 1986 which represents primarily tax-exempt clients such as public and private pension plans, endowment, foundation and multi-manager investments. Mr. Ahern was formerly a member of 78 the Board of Directors of PREA and the Board of Governors of NAREIT. Prior to founding The Townsend Group, Mr. Ahern was a Vice President of a New York-based real estate investment firm and was engaged in the private practice of law. Mr. Ahern received a B.A. and J.D. from Cleveland State University. Robert H. Gidel is the managing partner of Liberty Partners, LP, an investment partnership formed to purchase securities interests in private and public real estate companies. From 1997 through 1998, he was President and Chief Executive Officer of Meridian Point VIII, an industrial REIT based in San Francisco. Prior to Meridian, he was President and Chief Operating Officer of Paragon Group, a multi-family REIT based in Dallas, Texas, from 1995 through 1997. During 1993 through 1995, he was President and Chief Executive Officer of Brazos Partners based in Dallas, Texas. Prior to this, Mr. Gidel was a managing director and member of the board of directors of Alex. Brown Kleinwort Benson Realty Advisors, a real estate investment management firm formed in 1990 as a result of the merger of Alex. Brown Realty Advisors (commonly known as ABRA) and Financial Investment Advisors. Mr. Gidel had been president of ABRA since 1986. From 1981 through 1985, Mr. Gidel served in a wide range of positions at Heller Financial and its subsidiary, Abacus Real Estate Finance. He is a graduate of the University of Florida's Warrington College of Business with a major in real estate. Mr. Gidel is currently the chairman of the Real Estate Advisory Board at the Warrington College of Business and a Hoyt Fellow at the Homer Hoyt Institute. Daniel B. Hurwitz was appointed Executive Vice President in June 1999. Mr. Hurwitz most recently served as Senior Vice President and Director of Real Estate and Development for Reading, Pennsylvania based Boscov's Department Store, Inc., a privately held department store chain, from 1991 until he joined the Company. Prior to Boscov's, Mr. Hurwitz served as Development Director for The Shopco Group, a New York City based developer of regional shopping malls. Mr. Hurwitz is a graduate of Colgate University, and the Wharton School of Business Executive Management Program at the University of Pennsylvania. He is a member of the International Council of Shopping Centers, Urban Land Institute, and has served as a Board member of the Colgate University Alumni Corporation, Reading JCC, American Cancer Society (Regional), and the Greater Berk's Food Bank. Joan U. Allgood has been a Senior Vice President and General Counsel of the Company since May 1999, a Vice President and General Counsel of the Company since its organization as a public company in 1993 and General Counsel of its predecessor entities since 1987. Mrs. Allgood practiced law with the firm of Thompson, Hine and Flory LLP from 1983 to 1987, and is a graduate of Denison University and Case Western Reserve University School of Law. William H. Schafer has been a Senior Vice President and Chief Financial Officer of the Company since May 1999, Vice President and Chief Financial Officer of the Company since its organization as a public company in 1993 and the Chief Financial Officer of its predecessor entities since April 1992. Mr. Schafer joined the Cleveland, Ohio, office of the Price Waterhouse LLP accounting firm in 1983 and served there as a Senior Manager from July 1990 until he joined the organization in 1992. Mr. Schafer graduated from the University of Michigan with a Bachelor of Arts degree in Business Administration. Eric M. Mallory has been the Senior Vice President of Development since May 1999, and Vice President of Development since April 1999. Prior to that Mr. Mallory was Executive Vice President of PREIT-Rubin, Inc. in Philadelphia since 1993. Mr. Mallory is a graduate of the University of Pittsburgh and received his MBA from the University of Evansville. Richard E. Brown has been the Senior Vice President of Asset Management and Operation since February 2001 and Vice President of the department since January 2000. Prior to joining the Company, Mr. Brown was Vice President of Asset Management of PREIT-Rubin, Inc., in Philadelphia, Pennsylvania since 1996 and Vice President of Retail Asset Management of the Balcor Company, in Chicago since 1987. Mr. Brown is a Canadian chartered accountant and received his Bachelor of Commerce from Carleton University, in Ottawa, Canada. Joseph G. Padanilam has been Vice President of Investment and Planning since July 2000, and Vice President of Tax since October 1998. Prior to that Mr. Padanilam most recently served as a Senior Manager at 79 PricewaterhouseCoopers LLP, which he joined in 1990. Mr. Padanilam is a graduate of the University of Notre Dame and received his MBA from Washington University in St. Louis. COMMITTEES OF THE BOARD OF DIRECTORS During the fiscal year ended December 31, 2001, the Board of Directors held four meetings. The Board of Directors has a Dividend Declaration Committee, an Executive Compensation Committee, a Granting Committee, a Nominating Committee, a Pricing Committee and an Audit Committee. Except for Mr. Adler, each director attended more than 75% of the aggregate number of meetings of the Board of Directors and committees on which he served in 2001. DIVIDEND DECLARATION COMMITTEE The Dividend Declaration Committee, which consists of Messrs. Wolstein, Adams and Jacobstein, determines if and when the Company should declare dividends on its capital stock and the amount thereof, consistent with the dividend policy adopted by the Board of Directors. The Dividend Declaration Committee held four meetings in 2001. EXECUTIVE COMPENSATION COMMITTEE The Executive Compensation Committee, which consists of Messrs. Adams, Adler, Gidel and Sholem, determines compensation for the Company's executive officers and administers the Company's stock option and equity-based award plans. The Executive Compensation Committee held three meetings in 2001. GRANTING COMMITTEE The Granting Committee was established in order to comply with Rule 16b-3 promulgated under the Securities Exchange Act of 1934. The Granting Committee, which consists of Messrs. Adler, Hulett and Sholem, determines if and when the Company should grant stock options and other equity-based awards to executive officers, and the terms of such awards, consistent with the policy adopted by the Board of Directors and pursuant to the terms of the Developers Diversified Realty Corporation 1992 Employees' Share Option Plan, the 1996 Developers Diversified Realty Corporation Equity-Based Award Plan and the 1998 Developers Diversified Realty Corporation Equity-Based Award Plan. The Granting Committee held one meeting in 2001. NOMINATING COMMITTEE The Nominating Committee, which consists of Messrs. Adams, Adler, Ahern and Hulett, nominates candidates for election to the Board of Directors and will consider suggestions forwarded by shareholders to the Secretary of the Company concerning qualified candidates for election as directors. The Nominating Committee held two meetings in 2001. PRICING COMMITTEE The Pricing Committee, which consists of Messrs. Wolstein, Adams, and Schoff, is authorized to approve the price and terms of offerings of the Company's debt and equity securities. The Pricing Committee did not hold any meetings in 2001. AUDIT COMMITTEE The Audit Committee, which consists of Messrs. Ahern, Gidel and Sholem, makes recommendations concerning the engagement of independent public accountants, reviews with the independent public accountants the audit plans and results of the audit engagement, approves professional services provided by the independent public accountants and reviews the independence of the independent public accountants. The Audit Committee held two meetings in 2001. 80 COMPENSATION OF DIRECTORS During 2001, the Company paid an annual fee of $20,000, plus a fee of $1,000 for each Board and/or committee meeting attended, or $500 for each telephonic meeting attended, to its directors who are not employees or officers of the Company. Each non-employee director received options to purchase 5,000 common shares. Each non-employee director is also reimbursed for expenses incurred in attending meetings. Non-employee directors are permitted to defer all or a portion of their fees pursuant to the Company's Directors' Deferred Compensation Plan. The plan is unfunded and participants' contributions are converted to units, the value of which fluctuates according to the market value of the common shares. Messrs. Adams, Adler and Ahern elected to defer their 2001 fees pursuant to the plan. During their terms as directors, Messrs. Adams, Adler, Ahern and Hulett have deferred compensation represented by 14,745, 4,700, 2,652 and 6,591 units, respectively. As of December 31, 2001, those units were valued at $281,620 for Mr. Adams, $89,767 for Mr. Adler, $50,663 for Mr. Ahern and $125,894 for Mr. Hulett. Pursuant to a previous election, Mr. Hulett received a payment from the Company in 2001, for 2,111 of his units which was valued at $40,170. 81 EXECUTIVE COMPENSATION The following information is set forth with respect to the Company's Chief Executive Officer and the other four most highly compensated executive officers, each of whom was serving as an executive officer at December 31, 2001 (the "named executive officers"). SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION AWARDS ----------------------- RESTRICTED SECURITIES ANNUAL COMPENSATION STOCK UNDERLYING OTHER FISCAL ----------------------- AWARD(S) OPTIONS/ COMPENSATION NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($)(1) ($)(2) SARS(#) ($)(3) --------------------------- ------ --------- ----------- ---------- ---------- ------------ Scott A. Wolstein.............. 2001 566,667 431,250 517,587 140,197 58,401 Chairman and Chief 2000 527,082 393,750 516,866 164,063 53,460 Executive Officer 1999 511,458 383,594 432,677 164,063 62,441 James A. Schoff................ 2001 358,333 180,000 147,890 40,056 37,879 Vice Chairman and 2000 352,082 175,000 147,660 46,875 33,718 Chief Investment Officer 1999 336,458 168,299 123,622 46,875 37,520 David M. Jacobstein............ 2001 375,000 192,500 137,317 47,195 21,386 President and Chief Operating 2000 327,082 162,500 137,137 43,527 17,816 Officer(4) 1999 203,125 101,563 0 300,000 39,879 Daniel B. Hurwitz.............. 2001 325,000 165,000 84,505 22,889 12,820 Executive Vice President(4) 2000 302,082 150,000 84,410 26,786 12,905 1999 164,808 107,404(5) 0 200,000 19,215 Joan U. Allgood................ 2001 229,167 57,500 52,812 14,306 8,923 Senior Vice President and 2000 226,520 56,250 56,254 17,857 6,499 General Counsel 1999 197,917 49,479 47,101 17,857 4,245
--------------- (1) For a description of the method used in determining the bonuses paid to executive officers, see "Employment Agreements" and "Report of the Executive Compensation Committee of the Board of Directors." The 2001 bonus amounts are preliminary and subject to change. (2) On November 29, 1999, Mr. Wolstein was granted 31,325 restricted common shares, Mr. Schoff was granted 8,950 restricted common shares and Mrs. Allgood was granted 3,410 restricted common shares. On March 1, 2000, Mr. Wolstein was granted 44,700 restricted common shares, Mr. Schoff was granted 12,770 restricted common shares, Mr. Jacobstein was granted 11,860 restricted common shares, Mr. Hurwitz was granted 7,300 restricted common shares and Mrs. Allgood was granted 4,865 restricted common shares. On February 27, 2001, Mr. Wolstein was granted 38,820 restricted Common Shares, Mr. Schoff was granted 11,092 restricted Common Shares, Mr. Jacobstein was granted 10,299 restricted Common Shares, Mr. Hurwitz was granted 6,338 restricted Common Shares and Mrs. Allgood was granted 3,961 restricted Common Shares. One-fifth of each grant vested on the date of the grant and an additional one-fifth vests on each anniversary date following the date of grant. Dividends on these restricted shares are paid to the individuals in cash. (3) The dollar value, at December 31, 2001, of contributions made pursuant to the Company's Profit Sharing Plan and Trust Plan equaled $2,038, $2,028 $1,889 and $2,033, respectively, for Messrs. Wolstein, Schoff, Jacobstein and Hurwitz. The dollar value of contributions made pursuant to the Company's Elective Deferred Compensation Plan equaled $12,410, $5,986, $3,500, $2,634 and $3,438, respectively, for Messrs. Wolstein, Schoff, Jacobstein, Hurwitz and Mrs. Allgood. Messrs. Wolstein and Schoff each received $10,000 allowances and Mr. Jacobstein received a $2,675 allowance relating to fiscal year 2001 tax and financial planning expenses, and Messrs. Wolstein and Schoff received $15,429 and $4,473, respectively, for taxable payments on split dollar life insurance pursuant to their employment agreements, and Messrs. Wolstein, Schoff, Jacobstein, Hurwitz and Mrs. Allgood received $3,715, $4,477, $7,328, $2,159 and $2,800, respectively, relating to automobile lease payments pursuant to their employment 82 agreements. Messrs. Wolstein, Schoff, Jacobstein, Hurwitz and Mrs. Allgood received $14,809, $10,915, $5,994, $5,994 and $2,685, respectively, for the payment of country club dues. (4) Mr. Jacobstein joined the Company in May 1999 and Mr. Hurwitz joined the Company in June 1999. (5) Includes a $25,000 signing bonus paid to Mr. Hurwitz when he joined the Company. OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth information with respect to the awarding of options to purchase common shares in 2001 to the executive officers named in the Summary Compensation Table.
NUMBER OF PERCENT OF SECURITIES TOTAL OPTIONS UNDERLYING GRANTED TO EXERCISE GRANT DATE OPTIONS EMPLOYEES IN PRICE PRESENT NAME (#)(1) FISCAL YEAR(2) ($/SH) EXPIRATION DATE VALUE($) ---- ---------- -------------- -------- ----------------- ---------- Scott A. Wolstein............ 140,197 25.8% $13.333 February 27, 2011 $ 91,913(3) James A. Schoff.............. 40,056 7.4 13.333 February 27, 2011 26,261(3) David M. Jacobstein.......... 37,195 6.8 13.333 February 27, 2011 24,385(3) Daniel B. Hurwitz............ 22,889 4.2 13.333 February 27, 2011 15,006(3) Joan U. Allgood.............. 14,306 2.6 13.333 February 27, 2011 9,379(3)
--------------- (1) Options vest in one-third increments on each of the first three consecutive anniversaries of the date of grant and may be exercised, if at all, only with respect to those options that are vested. (2) Based on options to purchase an aggregate of 543,604 common shares granted to employees during 2001. (3) Based on the Black-Scholes options pricing model, adapted for use in valuing stock options granted to executives. The following assumptions were used in determining the values set forth in the table: (a) expected volatility of 26.4222% which reflects the daily closing prices of the common shares on the New York Stock Exchange for the 12-month period ended February 27, 2001, (b) risk-free rates of return of 5.26% for the options which expire in February 2011 (the "Options") (which percentage represents the yield on a United States Government Zero Coupon bond with a 10-year maturity prevailing on the date on which the Options were granted), (c) dividend yield of 11.18% for the Options (which percentage represents an annualized distribution of $1.48 per Common Share divided by the exercise price of the Options), and (d) the exercise of the options at the end of their 10-year term. No adjustments were made for nontransferability or risk of forfeiture of the options. The calculations were made using a price per Common Share and option exercise price of $13.333 for the Options. The estimated present values in the table are not intended to provide, nor should they be interpreted as providing, any indication or assurance concerning future values of the common shares. AGGREGATE OPTION EXERCISES IN 2001 AND 2001 YEAR-END OPTION VALUES The following table sets forth information with respect to the value of options held by the executive officers named in the Summary Compensation Table on December 31, 2001.
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS OPTIONS AT 2001 AT 2001(1) YEAR- YEAR-END(#) END($) SHARES ---------------------- -------------------- ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/ NAME EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE ---- ----------- ----------- ---------------------- -------------------- Scott A. Wolstein.............. 0 0 2,120,348/304,261 3,611,743/1,922,100 James A. Schoff................ 14,478 75,756 144,096/86,932 622,533/549,172 David M. Jacobstein............ 14,509 94,288 199,999/166,214 507,397/686,929 Daniel B. Hurwitz.............. 8,927 58,154 133,334/107,414 380,007/456,606 Joan U. Allgood................ 50,000 205,462 70,023/32,164 307,964/203,713
83 --------------- (1) Based on the market price at $19.10 per Common Share at the close of trading on December 31, 2001. EMPLOYMENT AGREEMENTS The Company has entered into separate employment agreements with seven of its executive officers, including each of the named executive officers. The agreements with Messrs. Wolstein and Schoff were amended and restated in April 1999. Each of the employment agreements contains an "evergreen" provision which provides for an automatic extension of the agreement for an additional year at the end of each calendar year, subject to the right of either party to terminate by giving one year's prior written notice in the case of Messrs. Wolstein and Schoff, or by the Company giving 90 days' prior written notice in the case of Mr. Jacobstein, Mr. Hurwitz and Mrs. Allgood. Pursuant to their respective agreements, each of the named executive officers are required to devote their entire business time to the Company. The agreements provide for current annual base salaries of $575,000, $360,000, $385,000, $330,000 and $230,000 for Messrs. Wolstein, Schoff, Jacobstein and Hurwitz and Mrs. Allgood, respectively. The Messrs. Wolstein, Schoff, Jacobstein and Hurwitz agreements provide for the use of an automobile and membership in a golf club and, in the case of Messrs. Wolstein and Schoff, membership in a business club. The agreements of Messrs. Wolstein, Schoff and Jacobstein include an allowance of $10,000 for each of Messrs. Wolstein and Schoff, and $5,000 for Mr. Jacobstein, for tax return preparation and financial planning services. Pursuant to the agreements, Mr. Wolstein is entitled to a bonus of from 50% to 125% of his annual base salary, Mr. Schoff is entitled to a bonus of from 25% to 100% of his annual base salary, Mr. Jacobstein is entitled to a bonus of from 25% to 100% of his annual base salary, Mr. Hurwitz is entitled to a bonus of from 25% to 75% of his base salary and Mrs. Allgood is entitled to a bonus of from 15% to 50% of her base salary. See "Report of the Executive Compensation Committee of the Board of Directors -- Components of the Compensation Plan -- Bonuses" for a discussion of the methods used to determine these bonuses. CHANGE IN CONTROL AGREEMENTS The Company has entered into a Change in Control Agreement with each executive officer who has an employment agreement, including each of the named executive officers. Under the agreements, certain benefits are payable by the Company if a "Triggering Event" occurs within two years (or three years for Messrs. Wolstein and Schoff) after a "Change in Control." A "Triggering Event" occurs if within two years (or three years in the case of Messrs. Wolstein and Schoff) after a Change in Control (a) the Company terminates the employment of the named executive officer, other than in the case of a "Termination For Cause" (as defined in the applicable Change in Control Agreement); (b) the Company reduces the named executive officer's title, responsibilities, power or authority in comparison with his or her title, responsibilities, power or authority at the time of the Change in Control; (c) the Company assigns the named executive officer duties which are inconsistent with the duties assigned to the named executive officer on the date on which the Change in Control occurred and which duties the Company persists in assigning to the named executive officer despite the prior written objection of that officer; (d) the Company reduces the named executive officer's base compensation, his or her group health, life, disability or other insurance programs (including any such benefits provided to Executive's family), his or her pension, retirement or profit-sharing benefits or any benefits provided by the Company's Equity-Based Award Plans, or any substitute therefor, or excludes him or her from any plan, program or arrangement in which the other executive officers of the Company are included; or (e) the Company requires the named executive officer to be based at or generally work from any location more than 50 miles from the geographical center of Cleveland, Ohio. A "Change in Control" occurs if (a) any person or group of persons, acting alone or together with any of its affiliates or associates, acquires a legal or beneficial ownership interest, or voting rights, in 20% or more of the outstanding common shares; (b) at any time during a period of 24 consecutive months, individuals who were directors of the Company at the beginning of the period no longer constitute a majority of the members of the Board of Directors unless the election, or the nomination for election by the Company's shareholders, of each director who was not a director at the beginning of the period is approved by at least a majority of the 84 directors who are in office at the time of the election or nomination and were directors at the beginning of the period; or (c) a record date is established for determining shareholders of the Company entitled to vote upon (i) a merger or consolidation of the Company with another real estate investment trust, partnership, corporation or other entity in which the Company is not the surviving or continuing entity or in which all or a substantial part of the outstanding shares are to be converted into or exchanged for cash, securities, or other property, (ii) a sale or other disposition of all or substantially all of the assets of the Company or (iii) the dissolution of the Company. The agreements of Messrs. Hurwitz and Mallory each provide that if certain conditions are met, a spin-off of the Company's real estate development business is not a Change in Control. Within 30 days after the occurrence of a Triggering Event, the Company must pay the named executive officer an amount equal to the sum of two times (or three times in the case of Messrs. Wolstein and Schoff) the maximum annual salary and bonus then payable to the officer. In addition, the Company agreed to continue to provide life and health insurance benefits that are comparable to or better than those provided to the named executive officer at the time of the Change in Control until the earlier of two years from the date of the Triggering Event and the date the named executive officer becomes eligible to receive comparable or better benefits from a new employer. The Company also agreed to continue its guarantees of loans described under the caption "Certain Transactions -- Guarantees of Loans" until the time such loans are repaid and not to direct or take any action to cause those loans to be accelerated or called prior to the maturity of the loans. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The members of the Executive Compensation Committee were Albert T. Adams, Dean S. Adler, Robert H. Gidel and Barry A. Sholem. For a discussion of certain transactions between the Company and Mr. Adams, see "Certain Transactions." 85 PERFORMANCE GRAPH Set forth below is a line graph comparing the cumulative total return of a hypothetical investment in the common shares with the cumulative total return of a hypothetical investment in each of the Russell 2000 Index and the NAREIT Equity REIT Total Return Index based on the respective market prices of each such investment on the dates shown below, assuming an initial investment of $100 on January 1, 1997 and the reinvestment of dividends. [PERFORMANCE GRAPH]
---------------------------------------------------------------------------------------------------------------- 1/1/97 12/31/97 12/31/98 12/31/99 12/31/00 12/31/01 ---------------------------------------------------------------------------------------------------------------- Developers Diversified Realty Corporation $100.00 $109.86 $109.20 $ 87.21 $100.02 $156.14 Russell 2000 Index $100.00 $122.36 $119.25 $144.60 $140.89 $144.40 NAREIT Equity Total Return Index $100.00 $120.26 $ 99.21 $ 94.63 $119.58 $136.24
REPORT OF THE EXECUTIVE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS INTRODUCTION The compensation of the Company's executive officers is currently determined by the Executive Compensation Committee of the Company's Board of Directors (the "Committee"). In 2001, the Committee was comprised of Dean S. Adler, Chairman of the Committee, Albert T. Adams, Robert H. Gidel and Barry A. Sholem. PHILOSOPHY The primary objectives of the Committee in determining executive compensation for 2001 were (a) to provide a competitive total compensation package that enables the Company to attract and retain qualified executives and align their compensation with the Company's overall business strategies and (b) to provide each executive officer with a significant equity stake in the Company through stock options and grants of restricted common shares. The Committee determines compensation for those officers considered "executive officers" under the rules and regulations of the Securities and Exchange Commission. To this end, the Committee determined executive compensation consistent with a philosophy of compensating executive officers based on their responsibilities, the Company's performance and the achievement of established annual goals. The primary components of the Company's executive compensation 86 program are (a) base salaries and certain other annual compensation, (b) bonuses and (c) grants of stock options, restricted common shares and performance units. Each of these elements is discussed below. COMPONENTS OF THE COMPENSATION PROGRAM BASE SALARIES AND CERTAIN OTHER ANNUAL COMPENSATION The base salaries and certain other annual compensation for the Company's executive officers in 2001 were determined with reference to the experience of the officers as compared to other executives in the REIT industry, the Company's past practice and comparisons of compensation paid by companies in two peer groups: REITs of similar size to the Company and REITs with retail assets as their primary focus. The Company engaged an outside consultant to assess the competitiveness of the Company's existing compensation plan. Fundamental requirements of the program include the establishment of competitive compensation levels and the setting of rewards consistent with individual contributions. After analysis, and based upon the recommendation of the Company's outside consultant, the Committee determined that, for 2001, the base salary of Mr. Wolstein should be increased to $575,000 per year in light of the compensation being paid to other chief executive officers in the REIT industry generally. Pursuant to their employment agreements, Messrs. Wolstein, Schoff, Jacobstein and Hurwitz receive certain additional benefits described under the heading "Executive Compensation -- Employment Agreements." The Committee believes that these benefits assist the Company by facilitating the development of important relationships between officers and members of the business community. BONUSES The Company bases annual performance bonuses upon the participants' levels of responsibility and salary, overall corporate performance and individual or qualitative performances. These bonus possibilities are in the form of threshold, target and maximum incentive opportunities which are attained if the Company reaches certain pre-determined performance benchmarks tied to Funds From Operations per Common Share and if the participants are given a favorable qualitative assessment of their individual contributions and efforts. The Committee determined that, although the Company achieved its Funds From Operations targets, the relative stability in the price of the common shares mandated that long-term incentive compensation, including bonuses, be awarded to executives at targeted levels and not at the higher maximum level. In 2001, Mr. Wolstein earned a bonus equal to 75% of his 2001 base salary, Messrs. Schoff, Jacobstein, and Herwitz, each earned a bonus equal to 50% of his 2001 base salary and Mrs. Allgood earned a bonus equal to 25% of her 2001 base salary. RESTRICTED SHARES AND PERFORMANCE UNITS All of the Company's executive officers are eligible to receive awards of restricted common shares of the Company and performance units pursuant to the 1996 Developers Diversified Realty Corporation Equity-Based Award Plan (the "1996 Award Plan") and the 1998 Developers Diversified Realty Corporation Equity-Based Award Plan (the "1998 Plan"). Grants of performance units and restricted common shares reinforce the long-term goal of increasing shareholder value by providing the proper nexus between the interests of management and the interests of the Company's shareholders. To date, all of the Company's awards of restricted common shares have been service-based awards which may be earned over a period of time to encourage the participant's continued employment with the Company. Mr. Wolstein has received three awards of restricted common shares in the past three years and two awards of performance units from the Company. Mr. Wolstein was granted 31,325 restricted common shares on November 29, 1999. The shares vest annually in 20% increments with the first 6,265 shares vesting on the date of the award. Mr. Wolstein was granted 44,700 restricted common shares on March 1, 2000. The shares vest annually in 20% increments with the first 8,940 shares vesting on the date of the award. Mr. Wolstein was granted 38,820 restricted common shares on February 27, 2001. The shares vest annually in 20% increments with the first 7,764 shares vesting on the date of the award. Based on the recommendations of the Company's 87 outside compensation consultant, in 2001 the Company granted an aggregate of 41,813 restricted common shares to its named executive officers (not including Mr. Wolstein) and an aggregate of 10,123 restricted common shares to certain executive officers of the Company in addition to Messrs. Wolstein, Schoff, Jacobstein, Hurwitz and Mrs. Allgood. In 2000, Mr. Wolstein was granted 30,000 performance units that will convert to a number of common shares based on the performance of the common shares over a four-year period ending December 31, 2004. Pursuant to the conversion formula, the minimum number of common shares Mr. Wolstein will receive is 30,000 and the maximum number is 200,000. The minimum 30,000 common shares received upon the conversion of the performance units granted in 2000 will vest on December 31, 2005 and the remaining common shares awarded will vest annually in 20% increments with the first 20% vesting on December 31, 2006. The grant of performance units to Mr. Wolstein was recommended by the Company's outside compensation consultant. STOCK OPTIONS All of the Company's executive officers are eligible to receive options to purchase common shares of the Company pursuant to the Developers Diversified Realty Corporation 1992 Employees' Share Option Plan (the "Employees' Share Option Plan"), the 1996 Award Plan and the 1998 Plan. The Company believes that stock option grants are a valuable motivating tool and provide a long-term incentive to management. Stock option grants reinforce the long-term goal of increasing shareholder value by providing the proper nexus between the interests of management and the interests of the Company's shareholders. EXECUTIVE COMPENSATION COMMITTEE Dean S. Adler, Chairman Albert T. Adams Robert H. Gidel Barry A. Sholem 88 CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS GUARANTEES OF LOANS In November 1998, the Company guaranteed obligations of certain of its executive officers under a personal loan program provided to those executive officers by The First National Bank of Chicago, as agent, and certain other banks. The executive officers used proceeds of the loans to purchase common shares from the Company and to exercise options to purchase common shares. Each loan is an unsecured obligation of the respective officer. Each executive officer has agreed to reimburse the Company for any amounts paid by the Company to satisfy that executive officer's obligations under the loan program as a result of the Company's guarantee. The Company guaranteed loans, which mature in November 2003, in the amount listed after the executive officer's name, for the following: Scott A. Wolstein -- $8,250,000, James A. Schoff -- $3,750,000, William H. Schafer -- $550,000. These loans require quarterly interest payments. In addition, the Company guaranteed a loan in the amount of $750,000 to Loren Henry, an employee of Coventry Real Estate Partners, Ltd., a partnership in which the Company has an economic interest. In addition, the Company guaranteed loans, in amounts ranging from $25,250 to $1,000,000, for two other executive officers and four other executive officers who have subsequently resigned from the Company. The amounts guaranteed have not changed since the date of the loan. The aggregate amount of such guarantees is $1,587,000. None of these loans have yet been repaid. LOANS TO EXECUTIVE OFFICERS In August 1998, the Board of Directors authorized the Company to, from time to time, lend Scott A. Wolstein up to $400,000 to reduce the outstanding principal balance of, and to prevent the sale of common shares from a margin account loan secured by common shares owned by Mr. Wolstein. Any such loan is evidenced by a promissory note, bears interest at an annual rate of LIBOR plus the applicable spread based on the Company's revolving credit facility, which approximates the Company's cost of borrowing, and is payable 90 days from the date of the loan. No such loans have been made since 1999. The largest principal amount outstanding during 1999 was $90,000. In connection with certain executive officers joining the Company we have loaned such officers funds to assist them with certain expenses incurred with their relocation. Those loans, which require annual payments and mature after five years, are described in the table below.
OCTOBER 31, 2001 EXECUTIVE OFFICER YEAR OF RELOCATION/LOAN LOAN BALANCE INTEREST RATE ----------------- ----------------------- ---------------- ------------- 1. Daniel B. Hurwitz......................... 1999 $95,423 6.2% 2. David M. Jacobstein....................... 1999 $29,815 6.2% 3. Eric M. Mallory........................... 1999 $22,510 6.52% 4. Richard E. Brown.......................... 2000 $17,750 4.94%
MANAGEMENT FEES The Company received management and leasing fee income of approximately $199,816 in 2000 pursuant to management agreements with certain partnerships owned by Mr. B. Wolstein, the father of Mr. Scott A. Wolstein and the founder of the Company. LEASE OF CORPORATE HEADQUARTERS As a result of its rapid growth and expansion, the Company moved to a new headquarters in 1999. However, the Company continues to make payments required under the lease of its prior corporate headquarters in Moreland Hills, Ohio, which was leased from the spouse of Mr. B. Wolstein and the mother of Mr. Scott A. Wolstein. Mr. B. Wolstein is a principal shareholder of the Company. Annual rental payments aggregating $599,723 were made in 2000 by the Company; however, the Company subleases a portion of this 89 space and, as a result, the Company received $373,702 in payments from third parties. Rental payments made by the Company under the lease include the payment of all maintenance and insurance expenses, real estate taxes and operating expenses over a base year amount. The Company occupied the space pursuant to the terms of a lease which expires on December 31, 2009. PROPERTY ACQUISITIONS AND TRANSFERS In August 2000, the Company paid approximately $1,255,500 for residual land at the Company's shopping center in Aurora, Ohio, to a limited partnership owned by Mr. B. Wolstein. In September 1999, the Company transferred its interest in a shopping center under development in Coon Rapids, Minnesota, a suburb of Minneapolis, to a joint venture in which the Company retained a 25% economic interest. The remaining 75% economic interest is held by private equity funds ("Funds") controlled by Dean S. Adler, a director of the Company. Mr. Alder holds a 0.5% economic interest in the Funds. In 2001, the Funds reimbursed the Company $0.9 million for payment against prior advances. The Company has a management agreement and performs certain administrative functions for the joint venture pursuant to which the Company earned management and development fees of $706,223 and interest income of $1,404,660 in 2001. On December 31, 2001, the joint venture obtained a non-recourse loan and the Company was reimbursed approximately $21 million for loans made to the joint venture. SERVICE AS LIQUIDATION AGENT Coventry Real Estate Partners, which is owned 79% by us, and DDR Realty Services, Inc., another affiliate of ours, serve as liquidation agents at market rates pursuant to BP's Plan of Liquidation. The aggregate liquidation agent fees from BP in 2001 were approximately $1,170,000. In addition, Coventry and we (through our affiliate) have provided property management services for BP's portfolio and have received property management, asset management, leasing and development fees from BP at market rates for our services. LEGAL REPRESENTATION Albert T. Adams, a director of the Company, is a partner of the law firm Baker & Hostetler LLP in Cleveland, Ohio. The Company retained that firm during 2001 to provide various legal services. The Company expects that Baker & Hostetler LLP will continue to provide such services during 2002. LIMITATIONS OF LIABILITY The Ohio Revised Code authorizes Ohio corporations to indemnify officers and directors against liability if the officer or director acted in good faith and in a manner reasonably believed by the officer or director to be in or not opposed to the best interests of the corporation, and, with respect to any criminal actions, if the officer or director had no reason to believe his action was unlawful. In the case of an action by or on behalf of a corporation, indemnification may not be made (i) if the person seeking indemnification is adjudged liable for negligence or misconduct, unless the court in which such action was brought determines such person is fairly and reasonably entitled to indemnification, or (ii) if the liability asserted against such person concerns certain unlawful distributions. The indemnification provisions of the Ohio Revised Code require indemnification if a director or officer has been successful on the merits or otherwise in defense of any action, suit or proceeding that he was a party to by reason of the fact that he is or was a director or officer of the corporation. The indemnification authorized under Ohio law is not exclusive and is in addition to any other rights granted to officers and directors under the articles of incorporation or code of regulations of the corporation or any agreement between the officers and directors and the corporation. A corporation may maintain insurance or furnish similar protection on behalf of any officer or director against any liability asserted against him and incurred by him in his capacity, or arising out of his status, as an officer or director, whether or not the corporation would have the power to indemnify him against such liability under the Ohio Revised Code. The Company's Code of Regulations provides for the indemnification of directors and officers of the Company to the maximum extent permitted by Ohio law, as authorized by the Board of Directors of the Company, and for the advancement of expenses incurred in connection with the defense of any action, suit or proceeding that he was a party to by reason of the fact that he is or was a director or officer of the Company 90 upon the receipt of an undertaking to repay such amount unless it is ultimately determined that the director or officer is entitled to indemnification. The Company's Code of Regulations provides that the indemnification is not deemed exclusive of any other rights to which those seeking indemnification may be entitled under the Articles of Incorporation or the Code of Regulations or any agreement, vote of shareholders or disinterested directors, or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office and shall continue as to a person who has ceased to be a director, trustee, officer, employee, or agent and shall inure to the benefit of the heirs, executors, and administrators of such a person. The Company maintains a directors' and officers' insurance policy which insures the directors and officers of the Company from claims arising out of an alleged wrongful act by such persons in their respective capacities as directors and officers of the Company, subject to certain exceptions. The Company has entered into indemnification agreements with its directors and officers which provide for indemnification to the fullest extent permitted under Ohio law. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers or persons controlling the registrant pursuant to the foregoing provisions, the registrant has been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is therefore unenforceable. EXPERTS The financial statements as of December 31, 2000 and 1999 and for each of the three years in the period ended December 31, 2000 included in this Registration Statement and the financial statement schedule included in this Registration Statement have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. LEGAL MATTERS The validity of the common shares will be passed upon for us by Baker & Hostetler LLP, Cleveland, Ohio. Albert T. Adams, a director of DDR, is a partner of Baker & Hostetler LLP. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's primary market risk exposure is interest rate risk. At September 30, 2001 and 2000, approximately 72.2% and 54.0%, respectively, of the Company's debt (excluding joint venture debt) bore interest at fixed rates with a weighted average maturity of approximately 6.6 years and 8.0 years, respectively, and a weighted average interest rate of approximately 7.4% and 7.5%, respectively. The remainder of the Company's debt bears interest at variable rates with a weighted average maturity of approximately 1.4 years and 1.7 years, respectively, and a weighted average interest rate of approximately 4.9% and 7.9%, respectively, at September 30, 2001 and 2000. As of September 30, 2001 and 2000, the Company's joint ventures' indebtedness aggregated $862.6 million and $738.1 million, respectively, of fixed rate debt, of which the Company's proportionate share was $295.1 million and $271.9 million, respectively, and $312.5 million and $242.0 million, respectively, of variable rate debt, of which the Company's proportionate share was $79.2 million and $68.5 million, respectively. The Company intends to utilize variable rate indebtedness available under its revolving credit facilities and construction loans in order to initially fund future acquisitions, developments and expansions of shopping centers. Thus, to the extent the Company incurs additional variable rate indebtedness, its exposure to increases in interest rates in an inflationary period would increase. The Company believes, however, that in no event would increases in interest expense as a result of inflation significantly impact the Company's distributable cash flow. At September 30, 2001, the interest rate risk on $200.0 million of variable rate debt has been mitigated through the use of interest rate swap agreements (the "Swaps") with major financial institutions. The Company is exposed to credit risk in the event of non-performance by the counter-parties to the Swaps. The 91 Company believes it mitigates its credit risk by entering into these Swaps with major financial institutions. The fair value of the three interest rate swaps represents a liability of $8.0 million at September 30, 2001, carry a notional amount of $50 million, $50 million, and $100 million and convert variable rate debt to a fixed rate of 6.47%, 6.4725%, and 5.24% respectively. The fair value of the swaps is calculated based upon expected changes in future LIBOR rates. At September 30, 2001 and 2000, the fair value of the Company's fixed rate debt, including the $200 million which was swapped to a fixed rate, amounted to a liability of $1,021.9 million and $631.3 million, respectively, (excluding joint venture debt and including the fair value of the interest rate swaps which was a liability of $208.0 million at September 30, 2001), compared to its carrying amount of $1,001.4 million and $661.8 million, respectively. The fair value of the Company's proportionate share of joint venture fixed rate debt was $303.1 million and $262.9 million, respectively, compared to its carrying amount of $295.1 million and $271.9 million, respectively. The Company estimates that a 100 basis point decrease in market interest rates at September 30, 2001 and 2000, would have changed the fair value of the Company's fixed rate debt to a liability of $1,071.4 million and $659.5 million, respectively, (which includes a change in the fair value of the interest rate swaps to a liability of $210.3 million at September 30, 2001), and would have changed the fair value of the Company's proportionate share of joint ventures' fixed rate debt to a liability of $314.8 million and $273.7 million, respectively. Further, a 100 basis point increase in market interest rates at September 30, 2001 and 2000 would result in an increase in interest expense of $2.9 million and $4.2 million, respectively, for the Company and $0.6 million and $0.5 million, respectively, representing the Company's proportionate share of the joint ventures' interest expense relating to variable rate debt. The estimated increase in interest expense for the nine month period does not give effect to possible changes in the daily balance of the Company's or joint ventures' outstanding variable rate debt. The sensitivity to changes in interest rate of the Company's fixed rate debt was determined utilizing a valuation model based upon factors that measure the net present value of such obligations which arise from the hypothetical estimate as discussed above. The Company also has made advances to several partnerships in the form of notes receivable which accrue interest at rates ranging from LIBOR plus 1.10% to fixed rate loans of 12%. Maturity dates range from payment on demand to November 2005. The total amount receivable at September 30, 2001 and 2000 was $45.1 million and $84.0 million, respectively, of which approximately 47.5% and 15.6% were fixed rate loans with the remainder at variable rates. At September, 2001 and 2000, the fair value of the Company's fixed rate loan receivables was $21.9 million and $13.0 million, respectively. The Company estimates that a 100 basis point decrease in market interest rates at September 30, 2001 and 2000 would have changed the fair value of the Company's fixed rate loan receivables to an asset of $22.4 million and $13.5 million, respectively. Further, a 100 basis point decrease in market interest rates at September 30, 2001 and 2000 would result in a decrease in interest income for the nine month period of $0.2 million and $0.5 million, respectively, relating to the variable rate loan receivables. The estimated increase in interest income does not give effect to possible changes in the daily outstanding balance of the variable rate loan receivables. The Company intends to continuously monitor and actively manage interest costs on its variable rate debt portfolio and may enter into swap positions based on market fluctuations. As previously discussed, in October 2000 and January 2001, the Company entered into three interest rate swap agreements, each for two year terms, aggregating $200 million, converting a portion of the variable rate debt on the Company's unsecured line of credit facility to a fixed rate of approximately 6.96%. In addition, the Company believes that it has the ability to obtain funds through additional equity and/or debt offerings, including the issuance of medium term notes and joint venture capital. Accordingly, the cost of obtaining such protection agreements in relation to the Company's access to capital markets will continue to be evaluated. WHERE YOU CAN FIND MORE INFORMATION We file annual, quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission (the "SEC"). You may read and copy any document we file with the SEC at the SEC's public reference rooms at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 92 1-800-SEC-0330 for further information on the public reference rooms. The SEC also maintains a web site that contains reports, proxy and information statements, and other information regarding registrants that file electronically with the SEC (http://www.sec.gov). You can inspect reports and other information we file at the offices of the New York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005. We have filed a registration statement of which this prospectus is a part and related exhibits with the SEC under the Securities Act of 1933, as amended (the "Securities Act"). The registration statement contains additional information about us and the securities. You may inspect the registration statement and exhibits without charge at the office of the SEC or at one of the SEC's public reference rooms listed above or at the SEC's web site listed above, and you may obtain copies from the SEC at prescribed rates. 93 DEVELOPERS DIVERSIFIED REALTY CORPORATION INDEX TO FINANCIAL STATEMENTS
PAGE ---- AUDITED FINANCIAL STATEMENTS Financial Statements: Report of Independent Accountants......................... F-2 Consolidated Balance Sheets at December 31, 2000 and 1999................................................... F-3 Consolidated Statements of Operations for the three years ended December 31, 2000................................ F-4 Consolidated Statements of Shareholders' Equity for the three years ended December 31, 2000.................... F-5 Consolidated Statements of Cash Flows for the three years ended December 31, 2000................................ F-6 Notes to Consolidated Financial Statements.................. F-7 Financial Statement Schedule: III -- Real Estate and Accumulated Depreciation at December 31, 2000...................................... F-37 UNAUDITED FINANCIAL STATEMENTS Condensed Consolidated Balance Sheets as of September 30, 2001 and December 31, 2000................................ F-42 Condensed Consolidated Statements of Operations for the three month periods ending September 30, 2001 and 2000.... F-43 Condensed Consolidated Statements of Operations for the nine month periods ending September 30, 2001 and 2000.......... F-44 Condensed Consolidated Statements of Cash Flows for the nine month periods ending September 30, 2001 and 2000.......... F-45 Notes to Unaudited Condensed Consolidated Financial Statements................................................ F-46
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. Financial statements of the Company's unconsolidated joint venture companies have been omitted because each of the joint venture's proportionate share of the income from continuing operations is less than 20% of the respective consolidated amount, and the investment in and advances to each joint venture is less than 20% of consolidated total assets. F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Developers Diversified Realty Corporation: In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Developers Diversified Realty Corporation and its subsidiaries at December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and the financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. /s/ PRICEWATERHOUSECOOPERS LLP Cleveland, Ohio February 21, 2001 F-2 DEVELOPERS DIVERSIFIED REALTY CORPORATION CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ------------------------- 2000 1999 ----------- ----------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ASSETS Real estate rental property: Land...................................................... $ 358,270 $ 342,859 Buildings................................................. 1,579,866 1,542,333 Fixtures and tenant improvements.......................... 40,906 34,176 Land under development.................................... 31,323 53,213 Construction in progress.................................. 151,445 95,693 ---------- ---------- 2,161,810 2,068,274 Less accumulated depreciation............................. (297,247) (249,912) ---------- ---------- Real estate, net...................................... 1,864,563 1,818,362 Cash and cash equivalents................................... 4,243 5,992 Accounts receivable, net.................................... 44,590 39,262 Notes receivable............................................ 4,824 5,590 Advances to and investments in joint ventures............... 260,927 299,176 Minority equity investment.................................. 135,028 137,234 Deferred charges, net....................................... 5,958 3,916 Other assets................................................ 11,888 11,328 ---------- ---------- $2,332,021 $2,320,860 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Unsecured indebtedness: Fixed rate senior notes................................... $ 492,431 $ 592,311 Revolving credit facility................................. 419,500 272,000 ---------- ---------- 911,931 864,311 ---------- ---------- Secured indebtedness: Revolving credit facility................................. 21,000 18,775 Mortgage and other secured indebtedness................... 294,644 268,965 ---------- ---------- 315,644 287,740 ---------- ---------- Total indebtedness.......................................... 1,227,575 1,152,051 Accounts payable and accrued expenses....................... 53,818 49,860 Dividends payable........................................... 19,757 20,826 Other liabilities........................................... 11,319 29,867 ---------- ---------- 1,312,469 1,252,604 ---------- ---------- Minority equity interests................................... 8,198 8,219 Preferred operating partnership minority interests.......... 207,111 104,736 Operating partnership minority interests.................... 20,493 102,956 ---------- ---------- 1,548,271 1,468,515 ---------- ---------- Commitments and contingencies (Note 14) Shareholders' equity: Class A -- 9.5% cumulative redeemable preferred shares, without par value, $250 liquidation value; 750,000 shares authorized; 421,500 shares issued and outstanding at December 31, 2000 and 1999........................... 105,375 105,375 Class B -- 9.44% cumulative redeemable preferred shares, without par value, $250 liquidation value; 750,000 shares authorized; 177,500 shares issued and outstanding at December 31, 2000 and 1999........................... 44,375 44,375 Class C -- 8.375% cumulative redeemable preferred shares, without par value, $250 liquidation value; 750,000 shares authorized; 400,000 shares issued and outstanding at December 31, 2000 and 1999........................... 100,000 100,000 Class D -- 8.68% cumulative redeemable preferred shares, without par value, $250 liquidation value; 750,000 shares authorized; 216,000 shares issued and outstanding at December 31, 2000 and 1999........................... 54,000 54,000 Common shares, without par value, $.10 stated value; 100,000,000 shares authorized; 61,481,736 and 61,364,035 shares issued at December 31, 2000 and 1999, respectively............................................ 6,148 6,136 Paid-in-capital........................................... 676,150 674,735 Accumulated distributions in excess of net income......... (112,357) (105,757) Less: Unearned compensation -- restricted stock........... (1,239) (674) Common stock in treasury at cost: 6,601,250 and 1,860,300 shares at December 31, 2000 and 1999, respectively........................................... (88,702) (25,845) ---------- ---------- 783,750 852,345 ---------- ---------- $2,332,021 $2,320,860 ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. F-3 DEVELOPERS DIVERSIFIED REALTY CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, --------------------------------- 2000 1999 1998 --------- --------- --------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Revenues from operations: Minimum rents............................................. $201,233 $189,613 $168,182 Percentage and overage rents.............................. 4,990 4,226 2,746 Recoveries from tenants................................... 54,524 47,786 43,071 Ancillary income.......................................... 1,252 774 697 Other property related income............................. 686 930 567 Management fee income..................................... 6,971 5,148 3,653 Development fee income.................................... 2,649 4,065 1,722 Interest.................................................. 4,333 6,361 5,056 Other..................................................... 9,155 5,030 2,474 -------- -------- -------- 285,793 263,933 228,168 -------- -------- -------- Rental operation expenses: Operating and maintenance................................. 27,019 24,648 20,070 Real estate taxes......................................... 33,403 27,248 26,510 General and administrative................................ 20,450 17,774 12,918 Interest.................................................. 77,030 68,023 57,196 Depreciation and amortization............................. 54,201 50,083 42,957 -------- -------- -------- 212,103 187,776 159,651 -------- -------- -------- Income before equity in net income of joint ventures, minority equity investment, gain (loss) on disposition of real estate and investments, minority interests and extraordinary item........................................ 73,690 76,157 68,517 Equity in net income of joint ventures...................... 17,072 18,993 12,461 Equity in net income from minority equity investment........ 6,224 5,720 890 Gain (loss) on disposition of real estate and investments... 23,440 (1,664) 248 -------- -------- -------- Income before minority interests and extraordinary item..... 120,426 99,206 82,116 Minority interests: Minority equity interests................................. (166) (111) (244) Preferred operating partnership minority interests........ (15,301) (5,157) (186) Operating partnership minority interests.................. (4,126) (6,541) (2,882) -------- -------- -------- (19,593) (11,809) (3,312) -------- -------- -------- Income before extraordinary item............................ 100,833 87,397 78,804 Extraordinary item -- extinguishment of debt-deferred finance costs written-off................................. -- -- (882) Net income.................................................. 100,833 87,397 77,922 -------- -------- -------- Net income applicable to common shareholders................ $ 73,571 $ 60,135 $ 57,969 ======== ======== ======== Per share data: Earnings per common share -- basic: Income before extraordinary item........................ $ 1.31 $ 0.99 $ 1.03 Extraordinary item...................................... -- -- (0.01) -------- -------- -------- Net income.............................................. $ 1.31 $ 0.99 $ 1.02 ======== ======== ======== Earnings per common share -- diluted: Income before extraordinary item........................ $ 1.31 $ 0.95 $ 1.00 Extraordinary item...................................... -- -- (0.02) -------- -------- -------- Net income.............................................. $ 1.31 $ 0.95 $ 0.98 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-4 DEVELOPERS DIVERSIFIED REALTY CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
PREFERRED COMMON ACCUMULATED UNEARNED SHARES SHARES DISTRIBUTIONS COMPENSATION TREASURY ($250 STATED ($.10 STATED PAID-IN IN EXCESS OF RESTRICTED STOCK, VALUE) VALUE) CAPITAL NET INCOME STOCK AT COST TOTAL ------------ ------------ -------- ------------- ------------ -------- -------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Balance, December 31, 1997(1)....... $149,750 $2,769 $580,509 $ (63,517) $ (461) $ -- $669,050 Issuance of 1,077,994 common shares(2) for cash related to exercise of stock options, employee 401(k) plan, executive stock purchase plan and dividend reinvestment plan................. -- 108 15,782 -- -- -- 15,890 Issuance of 3,669,639 common shares(2) for cash -- underwritten offerings........ -- 367 77,404 -- -- -- 77,771 Stated value of shares issued in connection with a two-for-one stock split....................... -- 2,861 (2,861) -- -- -- -- Issuance of 616,000 Class C and Class D preferred shares for cash -- underwritten offerings.... 154,000 -- (5,720) -- -- -- 148,280 Vesting of restricted stock......... -- -- -- -- 154 -- 154 Conversion of debentures into 236,779 common shares(2).......... -- 24 6,747 -- -- -- 6,771 Issuance of warrant................. -- -- 2,049 -- -- -- 2,049 Net income.......................... -- -- -- 77,922 -- -- 77,922 Dividends declared -- common shares............................ -- -- -- (75,730) -- -- (75,730) Dividends declared -- preferred shares............................ -- -- -- (19,372) -- -- (19,372) -------- ------ -------- --------- ------- -------- -------- Balance, December 31, 1998.......... 303,750 6,129 673,910 (80,697) (307) -- 902,785 Issuance of 26,256 common shares for cash related to exercise of stock options, employee 401(k) plan, and dividend reinvestment plan........ -- 2 108 -- -- -- 110 Issuance of 47,095 common shares related to restricted stock plan.............................. -- 5 646 -- (521) -- 130 Vesting of restricted stock......... -- -- -- -- 154 -- 154 Conversion of OP Units and debentures into 1,498 common shares............... -- -- 71 -- -- -- 71 Purchase of 1,860,300 common shares............................ -- -- -- -- -- (25,845) (25,845) Net income.......................... -- -- -- 87,397 -- -- 87,397 Dividends declared -- common shares............................ -- -- -- (85,195) -- -- (85,195) Dividends declared -- preferred shares............................ -- -- -- (27,262) -- -- (27,262) -------- ------ -------- --------- ------- -------- -------- Balance, December 31, 1999.......... 303,750 6,136 674,735 (105,757) (674) (25,845) 852,345 Issuance of 26,476 common shares for cash related to exercise of stock options, employee 401(k) plan and dividend reinvestment plan........ -- 3 369 -- -- -- 372 Issuance of 91,975 common shares related to restricted stock plan.............................. -- 9 1,046 -- (849) 9 215 Vesting of restricted stock......... -- -- -- -- 284 -- 284 Purchases of 4,741,700 common shares............................ -- -- -- -- -- (62,866) (62,866) Net income.......................... -- -- -- 100,833 -- -- 100,833 Dividends declared -- common shares............................ -- -- -- (80,171) -- -- (80,171) Dividends declared -- preferred shares............................ -- -- -- (27,262) -- -- (27,262) -------- ------ -------- --------- ------- -------- -------- Balance, December 31, 2000.......... $303,750 $6,148 $676,150 $(112,357) $(1,239) $(88,702) $783,750 ======== ====== ======== ========= ======= ======== ========
--------------- (1) Share amounts do not reflect the effect of the July 1998 stock split. (2) Share amounts reflect issuances both pre and post the July 1998 stock split. The accompanying notes are an integral part of these consolidated financial statements. F-5 DEVELOPERS DIVERSIFIED REALTY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, --------------------------------- 2000 1999 1998 --------- --------- --------- (DOLLARS IN THOUSANDS) Cash flow operating activities: Net income................................................ $ 100,833 $ 87,397 $ 77,922 Adjustments to reconcile net income to net cash flow provided by operating activities net of contributions to joint ventures: Depreciation and amortization......................... 54,201 50,083 42,957 Amortization of deferred finance costs................ 1,882 1,524 1,474 Write-off of deferred finance costs................... -- -- 882 Equity in net income of joint ventures................ (17,072) (18,993) (12,461) Equity in net income from minority equity investment.......................................... (6,224) (5,720) (890) Cash distributions from joint ventures................ 18,580 20,277 19,643 Cash distributions from minority equity investment.... 8,498 7,209 442 Preferred operating partnership minority interest expense............................................. 15,301 5,157 186 Operating partnership minority interest expense....... 4,126 6,541 2,882 (Gain) loss on disposition of real estate and investments......................................... (23,440) 1,664 (248) Net change in accounts receivable..................... (2,187) (15,540) (7,743) Net change in accounts payable and accrued expenses... 707 (165) 11,936 Net change in other operating assets and liabilities......................................... (8,933) 13,496 3,096 --------- --------- --------- Total adjustments..................................... 45,439 65,533 62,156 --------- --------- --------- Net cash flow provided by operating activities...... 146,272 152,930 140,078 --------- --------- --------- Cash flow from investing activities: Real estate developed or acquired......................... (88,488) (182,496) (569,566) Equity contributions to joint ventures.................... (82,584) (134,746) (130,592) Advances to joint ventures................................ (15,941) (17,184) (17,559) Acquisition of minority equity interest................... -- -- (16,293) (Issuance) repayment of notes receivable, net............. (297) 21,427 (44,928) Proceeds resulting from contribution of properties to joint ventures and repayments of advances from affiliates.............................................. 33,765 81,821 233,986 Joint venture distribution from refinancing proceeds...... -- 7,552 -- Proceeds from disposition of real estate and investments............................................. 132,966 13,918 6,663 --------- --------- --------- Net cash flow used for investing activities......... (20,579) (209,708) (538,289) --------- --------- --------- Cash flow from financing activities: Proceeds from (repayment of) revolving credit facilities and temporary bridge loans, net......................... 127,725 158,775 (7,700) Proceeds from construction loans and other mortgage debt.................................................... 40,101 60,332 29,732 Principal payments on rental property debt................ (22,293) (45,630) (17,029) Repayment of senior notes................................. (100,000) -- -- Repayment of convertible debentures....................... -- (40,040) -- Proceeds from issuance of medium term notes, net of underwriting commissions and $400 of offering expenses................................................ -- -- 198,012 Payment of deferred finance costs (bank borrowings)....... (3,808) (150) (1,193) Proceeds from issuance of common shares, net of underwriting commissions and $400 of offering expenses................. -- -- 77,771 Proceeds from issuance of preferred shares, net of underwriting commissions and $459 of offering expenses.............................................. -- -- 148,280 Proceeds from issuance of preferred operating partnership units (and warrant in 1998) net of $450 and $850 of offering expenses paid in 1999 and 1998, respectively... 102,375 72,675 34,150 Repurchase of operating partnership minority interests.... (82,465) (278) -- Proceeds of issuance of common shares in conjunction with exercise of stock options, 401(k) plan, dividend reinvestment plan and restricted stock plan............. 871 394 16,044 Purchase of treasury stock................................ (62,866) (25,845) -- Distributions to preferred and operating partnership minority interests...................................... (18,580) (8,020) (2,585) Dividends paid.............................................. (108,502) (111,703) (75,029) --------- --------- --------- Net cash (used for) provided by financing activities.......................................... (127,442) 60,510 400,453 --------- --------- --------- (Decrease) increase in cash and cash equivalents.... (1,749) 3,732 2,242 Cash and cash equivalents, beginning of year.............. 5,992 2,260 18 --------- --------- --------- Cash and cash equivalents, end of year.................... $ 4,243 $ 5,992 $ 2,260 ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. F-6 DEVELOPERS DIVERSIFIED REALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS Developers Diversified Realty Corporation, related real estate joint ventures and its minority equity investment (the "Company" or "DDR"), are engaged in the business of acquiring, expanding, owning, developing, managing and operating shopping centers, enclosed malls and business centers. The Company's shopping centers are typically anchored by discount department stores (Wal-Mart, Kmart, Target), off price department stores (Kohl's, T.J. Maxx/Marshall's), home improvement stores (Home Depot, Lowes), supermarkets, book stores, office supply stores, electronic stores and drug stores which usually offer day-to-day necessities. At December 31, 2000, the Company owned shopping centers in 41 states. The tenant base includes primarily national and regional retail chains and local retailers, consequently, the Company's credit risk is concentrated in the retail industry. Revenues derived from the Company's two largest tenants, Wal-Mart and Kmart, aggregated 10.5%, 10.9% and 11.3% of total revenues for the years ended December 31, 2000, 1999 and 1998, respectively, as follows:
YEAR WAL-MART KMART ---- -------- ----- 2000........................................................ 6.8% 3.7% 1999........................................................ 7.6% 3.3% 1998........................................................ 6.6% 4.7%
The total percentage of Company-owned gross leasable area ("GLA") attributed to Wal-Mart and Kmart was 10.3% and 7.9%, respectively, at December 31, 2000. The Company's ten largest tenants comprised 24.8%, 22.6% and 24.4% of total revenues for the years ended December 31, 2000, 1999 and 1998, respectively. Management believes the Company's portfolio is diversified in terms of location of its shopping centers and its tenant profile. Adverse changes in general or local economic conditions could result in the inability of some existing tenants to meet their lease obligations and could otherwise adversely affect the Company's ability to attract or retain tenants. During 2000 and 1999, certain national and regional retailers experienced financial difficulties and several filed for protection under bankruptcy laws. Although the Company has experienced a number of tenants filing for protection under bankruptcy laws, the Company has not incurred any significant losses through February 21, 2001 with regard to the Company's portfolio of tenants. PRINCIPLES OF CONSOLIDATION All majority-owned subsidiaries and affiliates where the Company has financial and operating control are included in the consolidated financial statements. All significant intercompany balances and transactions have been eliminated in consolidation. Investments in real estate joint ventures and companies for which the Company has the ability to exercise significant influence over but does not have financial or operating control are accounted for using the equity method of accounting. Accordingly, the Company's share of the earnings of these joint ventures and companies is included in consolidated net income. Other investments included in other assets are accounted for using the cost method of accounting. STATEMENT OF CASH FLOWS AND SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING INFORMATION The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. F-7 DEVELOPERS DIVERSIFIED REALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Non-cash investing and financing activities are summarized as follows (in millions):
FOR THE YEAR ENDED DECEMBER 31, --------------------- 2000 1999 1998 ----- ----- ----- Contribution of net assets to joint ventures................ $ 7.6 $21.2 $27.6 Consolidation of the net assets of joint ventures previously reported on the equity method of accounting............... 21.5 -- -- Minority interests and operating partnership units issued relating to shopping center acquisitions.................. 0.3 2.7 108.5 Acquisition of a minority equity investment................. -- -- 7.4 Mortgages assumed, shopping center acquisitions............. 16.6 18.0 133.9 Other liabilities assumed, shopping center acquisitions..... -- -- 2.8 Accounts payable related to construction in progress........ 0.2 0.2 6.6 Two-for-one stock split..................................... -- -- 2.9 Conversion of debentures and related deferred finance costs..................................................... -- -- 6.7 Dividends declared, not paid................................ 19.8 20.8 20.1 Notes receivable exchanged for the purchase of a shopping center and common shares of the minority equity investment................................................ -- 22.0 -- Common stock received in settlement of bankruptcy claims.... 2.9 -- -- Real estate property assumed in conjunction with tenant lease termination......................................... 0.6 -- --
The foregoing transactions did not provide or use cash and, accordingly, they are not reflected in the consolidated statements of cash flows. REAL ESTATE 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 and amortization are provided on a straight-line basis over the estimated useful lives of the assets as follows:
BUILDINGS 18 TO 31 YEARS --------- -------------- Furniture/Fixtures and Tenant Improvements............. Useful lives, which approximate lease terms, where applicable
Depreciation expense was $54.2 million, $50.1 million and $43.0 million for the years ended December 31, 2000, 1999 and 1998, respectively. Expenditures for maintenance and repairs are charged to operations as incurred. Renovations which improve or extend the life of the asset are capitalized. Included in land at December 31, 2000, was undeveloped real estate, generally outlots or expansion pads adjacent to the shopping centers owned by the Company (excluding shopping centers owned through joint ventures), which aggregated approximately 100 acres. Construction in progress includes shopping center developments and significant expansions and redevelopments. The Company capitalizes interest on funds used for the construction, expansion or redevelopment of shopping centers, including funds advanced to joint ventures with qualifying development activities. Capitalization of interest ceases when construction activities are completed and the property is available for occupancy by tenants. For the years ended December 31, 2000, 1999 and 1998, the Company capitalized interest of $18.2 million, $13.5 million, and $9.9 million, respectively. In addition, the Company capitalized certain construction administration costs of $3.2 million, $2.5 million and $1.8 million in 2000, 1999 and 1998, respectively. F-8 DEVELOPERS DIVERSIFIED REALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DEFERRED FINANCING COSTS Costs incurred in obtaining long-term financing are included in deferred charges in the accompanying balance sheets and are amortized over the terms of the related debt agreements; such amortization is reflected as interest expense in the consolidated statements of operations. REVENUE RECOGNITION Minimum rents from tenants are recognized monthly using the straight-line method. Percentage and overage rents are recognized after a tenant's reported sales have exceeded the applicable sales breakpoint set forth in the applicable lease. Revenues associated with tenant reimbursements are recognized in the period in which the expenses are incurred based upon the tenant lease provision. Ancillary and other property related income which primarily relates to the leasing of vacant space to temporary tenants, is recognized in the period earned. Lease termination fees are included in other income and recognized upon termination of a tenant's lease, which generally coincides with the final settlement. ACCOUNTS RECEIVABLE Accounts receivable, other than straight-line rents receivable, are expected to be collected within one year and are net of estimated unrecoverable amounts of approximately $2.6 million and $2.1 million at December 31, 2000 and 1999, respectively. At December 31, 2000 and 1999, straight-line rent receivables, net of a provision for uncollectible amounts, aggregated $12.9 million and $8.3 million, respectively. DISPOSITION OF REAL ESTATE AND REAL ESTATE INVESTMENTS Disposition of real estate relates to the sale of outlots and land adjacent to existing shopping centers, shopping center properties and real estate investments and is generally recognized at closing when the earnings process is deemed to be complete. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses include internal leasing and legal salaries and related expenses which are charged to operations as incurred. INTEREST AND REAL ESTATE TAXES Interest and real estate taxes incurred during the development and significant expansion of shopping centers are capitalized and depreciated over the life of the building. Interest paid during the years ended December 31, 2000, 1999 and 1998, aggregated $93.1 million, $79.4 million and $63.4 million, respectively. INTANGIBLE ASSETS Intangible assets consist primarily of goodwill and property management contracts and rights to certain development projects obtained through the acquisitions of real estate management businesses, which are amortized on the straight-line basis over their estimated useful lives of 15 years. The carrying value of intangible assets is periodically reviewed by the Company and impairments are recognized when the expected future operating cash flows derived from such intangible assets is less than their carrying value. INVESTMENTS Included in other assets are investments accounted for using the cost method of accounting. Significant estimates were utilized by the Company in the determination of fair value of the securities. Management F-9 DEVELOPERS DIVERSIFIED REALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) periodically evaluates the carrying amount of such securities to determine if a permanent impairment in value has occurred. At December 31, 2000, the Company believes all recorded amounts are fully recoverable. ADVANCES TO AND INVESTMENTS IN JOINT VENTURES The Company's investment in joint ventures is recorded at the Company's cost basis in the assets which were contributed to the joint venture. To the extent that the Company's cost basis is different than the basis reflected at the joint venture level the basis difference is amortized over the life of the related asset and included in the Company's share of equity in net income of joint venture. In accordance with the provisions of Statement of Position 78-9, we recognize gains on the contribution of real estate to joint ventures, relating solely to the outside partner's interest, to the extent the economic substance of the transaction is a sale. DERIVATIVE FINANCIAL INSTRUMENTS The Company may from time to time enter into interest rate swap contracts as hedges against increasing rates on its variable rate debt. The Company does not utilize these arrangements for trading or speculative purposes. To qualify for hedge accounting, the contracts must meet defined correlation and effectiveness criteria, be designated as a hedge and result in cash flows and financial statement effects which substantially offset those of the position being hedged. The Company records net amounts received or paid under these contracts as adjustments to interest expense. In 2000, the Company entered into two interest rate swap contracts. At December 31, 1999, there were no interest rate swap contracts or other similar derivative instruments outstanding. See Note 3 for a description of the Company's funding commitment relating to its minority equity investment. FEDERAL INCOME TAXES The Company has elected to be taxed as a qualified Real Estate Investment Trust ("REIT") under the Internal Revenue Code of 1986, as amended. As a REIT, the Company is entitled to a tax deduction for the amount of dividends paid to its shareholders, thereby effectively subjecting the distributed net income of the Company to taxation at the shareholder level only, provided it distributes at least 95% of its taxable income and meets certain other REIT qualification requirements. As the Company distributed sufficient taxable income for the years ended December 31, 2000, 1999 and 1998, no U.S. Federal income or excise taxes were incurred. The Company is subject to state and local income and franchise taxes in certain states and municipalities which are reflected in operating and maintenance expenses. The tax basis of assets and liabilities exceeds the amounts reported in the accompanying financial statements by approximately $141 million, $122 million and $110 million at December 31, 2000, 1999 and 1998, respectively. BUSINESS SEGMENT The principal business of the Company and its consolidated affiliates is the ownership, development and operation of retail shopping centers. The Company does not distinguish or group its operations on a geographical basis for purposes of measuring performance. Accordingly, the Company believes it has a single reportable segment for disclosure purposes in accordance with generally accepted accounting principles. Further, all operations are within the United States and significant tenant revenues have been previously disclosed. COMPREHENSIVE INCOME For the years ended December 31, 2000, 1999 and 1998, the Company had no items of other comprehensive income requiring additional disclosure. F-10 DEVELOPERS DIVERSIFIED REALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) TREASURY STOCK The Company's share repurchases are reflected as treasury stock utilizing the cost method of accounting and are presented as a reduction to consolidated shareholders' equity. STOCK SPLIT The Company's Board of Directors approved a two-for-one stock split to shareholders of record on July 27, 1998. On August 3, 1998, each such shareholder received one common share for each share held. This stock split was effected in the form of a stock dividend. Accordingly, $2.9 million was transferred from additional paid in capital to common stock, representing the stated value of additional shares issued. All share and per share data and Operating Partnership Units ("OP Units") included in these consolidated financial statements including all related disclosures have been adjusted to reflect this split, except as indicated. NEW ACCOUNTING STANDARDS In June, 1998, the FASB issued Statement of Financial Accounting Standard ("SFAS") No. 133 -- "Accounting for Derivative Instruments and Hedging Activities." This statement requires fair value accounting for all derivatives including recognizing all such instruments on the balance sheet with an offsetting amount recorded in the income statement or as part of comprehensive income. The new standard becomes effective for the Company for the year ending December 31, 2001. SFAS No. 137 deferred the effective date from December 31, 2000. The Company does not expect this pronouncement to have a material impact on the Company's financial position or cash flows. In December, 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," which among other things, provides guidance on lessors' accounting for contingent rent. This bulletin clarifies that contingent rental income should be recognized once the factors that trigger payment actually occur. The adoption of this bulletin did not have a material impact on the Company's results of operations or financial position. In March, 2000, the FASB issued Interpretation No. 44 "Accounting for Certain Transactions Involving Stock Compensation." This interpretation clarified the application of APB Opinion No. 25, "Accounting for Stock Issued to Employees" for certain issues. This interpretation became effective for the Company on July 1, 2000. The adoption of this interpretation did not have a material impact on the Company's results of operations or financial position. RECLASSIFICATION Certain reclassifications have been made to the 1999 and 1998 financial statements to conform to the 2000 presentation. USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during the year. Actual results could differ from those estimates. F-11 DEVELOPERS DIVERSIFIED REALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2. ADVANCES TO AND INVESTMENTS IN JOINT VENTURES Combined condensed financial information of the Company's joint venture investments and joint venture investments held through an equity affiliate of the Company are summarized as follows (in thousands):
DECEMBER 31, ----------------------- COMBINED BALANCE SHEETS 2000 1999 ----------------------- ---------- ---------- Land........................................................ $ 301,409 $ 262,485 Buildings................................................... 1,055,704 917,507 Fixtures and tenant improvements............................ 10,412 3,976 Construction in progress.................................... 102,353 187,825 ---------- ---------- 1,469,878 1,371,793 Accumulated depreciation.................................... (106,964) (82,481) ---------- ---------- Real estate, net............................................ 1,362,914 1,289,312 Other assets................................................ 91,182 77,207 ---------- ---------- $1,454,096 $1,366,519 ========== ========== Mortgage debt............................................... $ 942,451 $ 887,650 Amounts payable to DDR...................................... 105,527 123,743 Other liabilities........................................... 29,154 48,913 ---------- ---------- 1,077,132 1,060,306 Accumulated equity.......................................... 376,964 306,213 ---------- ---------- $1,454,096 $1,366,519 ========== ========== Company's proportionate share of accumulated equity......... $ 126,114 $ 153,745 ========== ==========
FOR THE YEAR ENDED DECEMBER 31, --------------------------------- COMBINED STATEMENTS OF OPERATIONS 2000 1999 1998 --------------------------------- --------- --------- --------- Revenues from operations............................. $193,274 $170,714 $109,752 -------- -------- -------- Rental operation expenses............................ 56,834 51,170 28,045 Depreciation and amortization expense................ 27,270 22,949 16,009 Interest expense..................................... 67,539 58,894 40,942 -------- -------- -------- 151,643 133,013 84,996 -------- -------- -------- Income before gain on sale of real estate and investments........................................ 41,631 37,701 24,756 (Loss) gain on sales of real estate and investments, net of tax......................................... (86) 344 314 -------- -------- -------- Net income........................................... $ 41,545 $ 38,045 $ 25,070 ======== ======== ======== Company's proportionate share of net income.......... $ 18,769 $ 20,621 $ 12,888 ======== ======== ========
The Company has made advances to several partnerships in the form of notes receivable which accrue interest at rates ranging from LIBOR plus 1.10% to fixed rate loans of 12%. Maturity dates range from payment on demand to December 2008. In December 1999, one of the Company's joint ventures refinanced its secured mortgage and entered into a ten-year fixed rate mortgage for $21.3 million with interest at 8.46%. Additional proceeds from this refinancing, aggregating $6.4 million, were used to partially repay a note payable to the Company. Included in the Company's accounts receivable is approximately $1.2 million and $1.4 million at December 31, 2000 and 1999, respectively, due from affiliates related to construction receivables. F-12 DEVELOPERS DIVERSIFIED REALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Advances to and investments in joint ventures include the following items which represent the difference between the Company's investment and its proportionate share of the joint ventures underlying net assets (in millions):
FOR THE YEAR ENDED DECEMBER 31, ------------------- 2000 1999 -------- -------- Basis differential*......................................... $ 45.1 $ 44.1 Deferred development fees, net of portion relating to the Company's interest........................................ (2.1) (2.6) Basis differential upon transfer of assets*................. (24.3) (19.9) Notes receivable from investments........................... 10.6 --
--------------- * Basis differentials occur primarily when the Company has purchased an interest in existing joint ventures at fair market values which differ from their proportionate share of the historical net assets of the joint ventures. In addition, certain acquisition, transactions and other costs, including capitalized interest, may not be reflected in the net assets at the joint venture level. Basis differentials upon transfer of assets is primarily associated with assets previously owned by the Company which have been transferred into a joint venture at fair value. This amount represents the aggregate difference between the Company's historical cost basis and the value reflected at the joint venture level. Certain basis differentials indicated above are amortized over the life of the related asset and included in the Company's share of equity in net income of joint ventures. Service fees earned by the Company through management, leasing, development and financing activities performed related to the Company's joint ventures, are as follows (in millions):
FOR THE YEAR ENDED DECEMBER 31, ------------------ 2000 1999 1998 ---- ---- ---- Management fees and leasing commissions..................... $6.7 $5.7 $3.2 Development fees............................................ 2.6 1.4 1.7 Interest income............................................. 3.4 4.4 2.4
In February, 2000, the Company entered into an agreement to sell 60% of its half interest in the Community Centers Joint Venture to DRA Advisors, Inc. at a price of $163 million comprised of cash of $66 million and debt assumed of approximately $97 million. In conjunction with this transaction, the Company recognized a gain of approximately $16.1 million. Subsequent to this transaction, the Company maintains an effective ownership interest of 20% with investment funds advised by DRA Advisors, Inc., owning 80%. The Company continues to be responsible for the day-to-day management of the shopping centers owned by the joint venture and receives fees for such services. In February, 2000, the Company formed a joint venture with DRA Advisors, Inc. whereby the Company contributed a wholly-owned shopping center property in Phoenix, Arizona valued at approximately $26.7 million and related mortgage debt of $18.0 million and, in exchange, received a 50% equity ownership interest in the joint venture and cash proceeds of approximately $4.3 million. In conjunction with this transaction, the Company recognized a gain of approximately $0.5 million associated with the sale of its partial interest. The Company continues to manage and operate the shopping center and receives fees for such services. In September, 1999, the Company transferred its interest in a shopping center under development in Coon Rapids, Minnesota, a suburb of Minneapolis, to a joint venture in which the Company retained a 25% ownership interest. The Company effectively sold a 75% interest in this project and was reimbursed $2.5 million relating to development costs previously incurred on this project. See also Transactions with Related Parties (Note 13). F-13 DEVELOPERS DIVERSIFIED REALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In April, 1999, the Company acquired a 50% interest in a 206,000 square foot shopping center in St. Louis, Missouri. The joint venture's aggregate purchase price was approximately $16.6 million. In November 1999, the Company acquired, through a 50% owned joint venture, the fourth phase of a shopping center in Phoenix, Arizona which aggregates 125,000 square feet. The joint venture's aggregate purchase price for the fourth phase of this center was approximately $15.6 million. In January, 1999, the Company loaned $49.2 million to a 50% owned joint venture. The joint venture entered into a corresponding mortgage note payable to the Company bearing an interest rate of LIBOR plus 2.75%. In addition, the Company received a loan origination fee for this transaction of $0.4 million which is included in other revenue in the consolidated statements of operations. In March, 1999, the joint venture obtained a bridge loan, which was converted into a permanent mortgage in June, 1999, and used the proceeds to repay the mortgage note to the Company. The Company's joint venture agreements generally include provisions whereby each partner has the right to trigger a purchase or sale of its interest in the joint ventures (Reciprocal Purchase Rights) or to initiate a purchase or sale of the properties (Property Purchase Rights) after a certain number of years or if either party is in default of the joint venture agreements. In addition, certain of the joint venture agreements include a provision whereby the Company's joint venture partners may convert all, or a portion of, their respective interest in such joint ventures into common shares of the Company. The terms of the conversion are set forth in the governing documents of such joint ventures. However, if the joint venture partners elect to convert their respective interest into common shares, the Company will have the option to pay cash instead of issuing common shares. If the Company agrees to the issuance of common shares, the agreement provides that the converting joint venture partner will execute a lock-up arrangement acceptable to the Company. THE COMPANY'S INVESTMENTS IN THE COMBINED STATEMENTS ABOVE REFLECT THE FOLLOWING: Retail Value Fund In February, 1998, the Company and an equity affiliate of the Company, entered into an agreement with Prudential Real Estate Investors ("PREI") and formed the Retail Value Fund (the "Fund"). The Fund's ownership interests in each of the projects, unless discussed otherwise, are generally structured with the Company owning a 24.75% limited partnership interest, PREI owning a 74.25% limited partnership interest and Coventry Real Estate Partners ("Coventry"), which is 79% owned by an equity affiliate of the Company, owning a 1% general partnership interest. The Fund invests in retail properties within the United States that are in need of substantial retenanting and market repositioning and may also make equity and debt investments in companies owning or managing retail properties as well as in third party development projects that provide significant growth opportunities. The retail property investments may include enclosed malls, neighborhood and community centers or other potential commercial development and redevelopment opportunities. Since 1998, the Fund has invested approximately $430 million in real estate assets. In 1998, the Fund acquired an ownership interest in 33 retail sites formerly occupied by Best Products. Through June, 1999, the Fund had sold all of its interest in these sites, 20 of which were sold to various third parties, and the remaining 13 sites were sold, at an aggregate price of $29.7 million, to DD Development Company ("DD Dev"), a management service company in which DDR owns a 95% economic ownership interest. The Fund acquired six operating retail shopping centers in Kansas and Missouri in September, 1999. In 1999 and 2000, the Company entered into separate agreements with the Fund to acquire the Company's 50% joint venture interest relating to the development of six shopping centers located in Plainville, Connecticut; Deer Park, Illinois; Hagerstown, Maryland; Salem, New Hampshire; Round Rock, Texas and San Antonio; Texas. During 2000 and 1999, the Company was reimbursed approximately $33.8 million and $74.3 million, respectively, relating to advances previously made to these joint ventures, associated with F-14 DEVELOPERS DIVERSIFIED REALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) development costs incurred on each of these projects. With the exception of the San Antonio, Texas project, all of the projects were substantially completed at December 31, 2000. The Fund has also commenced the redevelopment of a retail site in Long Beach, California that will create approximately 446,000 square feet of retail space. In 2000, the Fund entered into an agreement to acquire 11 properties, located in western states, at an aggregate cost of approximately $266 million from Burnham Pacific Properties, Inc. ("Burnham"). Two of the properties were acquired in December, 2000; the Company's 20% ownership interest aggregated $9.7 million. Four of the properties were acquired through February 21, 2001; the Company's 20% interest aggregated $11.2 million. The remaining five properties are expected to close in the first half of 2001. The Company will earn fees for managing and leasing the properties. The Company and Coventry were also selected by Burnham to serve as its liquidation agent pursuant to Burnham's plan of liquidation. The liquidation portfolio includes 47 properties aggregating 5.8 million square feet. The Company is providing property management services for this portfolio and is receiving property management, leasing and development fees for its services at market rates. The appointment of Coventry and the Company was effective on December 15, 2000 following approval from Burnham's shareholders. As discussed above, Coventry generally owns a 1% interest in each of the Fund's investments and, except for the Fund's investment associated with properties acquired from Burnham, as discussed above, Coventry generally is also entitled to receive an annual asset management fee equal to 0.5% of total assets (except for San Antonio, Texas, where such 0.5% fee is not applicable) plus one third of all profits, once the limited partners have received a 10% preferred return and all capital previously advanced. The remaining two thirds of the profits in excess of the 10% preferred return is split proportionately among the limited partners. With regard to the Fund's investment associated with the acquisition of shopping centers from Burnham, Coventry, in addition to its 1% general partnership interest, will be entitled to receive from the Fund a $1 million acquisition fee once approximately $200 million of assets are acquired from Burnham for services performed in conjunction with the due diligence and related closing of the acquisition. In addition, Coventry will receive annual asset management fees equal to 0.8% of total revenue collected from these assets plus a minimum of 25% of all amounts in excess of a 10% annual preferred return to the limited partners which could increase to 35% if returns to the limited partners exceed 20%. As previously discussed, Coventry is providing liquidation services for Burnham and will receive asset management fees at market rates in relation to the liquidation portfolio. Management Service Companies The Company owns a 95% economic interest in two management service companies of which the Company owns 1% of the voting and 100% of the non-voting common stock. At December 31, 2000, these equity affiliates own: (i) a 20% to 25% joint venture interest in various Fund investments discussed above, (ii) an 83.75% joint venture interest which owns seven retail sites formerly occupied by Best Products, five of which were fully leased and one is partially leased, and (iii) certain assets, as discussed below, were received in settlement of advances made to DDR OliverMcMillan, which include: - A 100% interest in a retail site under development in Long Beach, California; - A 100% interest in residual land in San Diego, California; and - A $1.1 million note receivable, secured by certain real estate. See discussion below regarding the Company's termination of its entity level investment with DDR OliverMcMillan. In 2000, the joint venture disposed of six former Best Products sites with aggregate proceeds of approximately $25.1 million and recognized a gain, net of tax, of approximately $1.7 million. This gain was offset, in part, by a $1.8 million impairment write-off, net of tax, of an investment in a technology company. F-15 DEVELOPERS DIVERSIFIED REALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company also owns a 50% equity ownership interest in a management company and a development company in St. Louis, Missouri. The Company is entitled to the first $1 million of net operating income through 2003, as defined in the agreement, on an annual basis. Shopping Center Joint Ventures The Company owns an 80% equity ownership interest in two joint ventures each owning an operating shopping property in Columbus, Ohio of which the Company does not have financial or operating control. The Company owns a 50% equity ownership interest in 11 different joint ventures which, in the aggregate, own 15 operating shopping centers. The Company also owns a 50% equity ownership interest in two joint ventures, each of which is developing a shopping center in Jefferson Country, Missouri and Salisbury, Maryland, respectively. The Company owns a 35% equity ownership interest in a joint venture which owns an operating shopping center property in San Antonio, Texas. The Company owns a 25% ownership interest in a joint venture which owns a shopping center property under development located in Coon Rapids, Minnesota. The Company owns an effective 20% equity interest in the Community Centers Joint Venture which, in the aggregate, owns ten operating shopping center properties. As described above, prior to February 29, 2000, the Company owned a 50% joint venture interest. As previously discussed, the Company provides property management, leasing and development services to each of the joint ventures at market rates. DDR OliverMcMillan In December, 2000, the Company through an equity affiliate terminated its entity level investment with DDR OliverMcMillan. In settlement of advances to DDR OliverMcMillan, the Company and an equity affiliate of the Company, received two operating properties, one of which is located in Reno, Nevada and the other located in Oceanside, California; a development project in Long Beach, California; residual land located in San Diego, California; and notes receivable, secured by real estate. The aggregate value associated with these assets was approximately $37 million of which approximately $18 million is reflected within the Company's consolidated real estate assets and the remaining $19 million is reflected within advances to and investments in joint ventures. The Company believes the aggregate value of these assets received approximates the advances outstanding at the date of settlement. 3. MINORITY EQUITY INVESTMENT At December 31, 2000 and 1999, the Company owned 9,656,650 common shares in American Industrial Properties REIT (NYSE: IND) ("AIP") representing approximately 46.0% of AIP's total common shares. In 1999, the Company acquired 1,897,844 common shares of AIP at prices ranging from $14.93 to $15.50 per share. On November 1, 2000, DDR Transitory Sub, Inc. ("DDR Sub"), a subsidiary of the Company, and AIP entered into an agreement and plan of merger. Pursuant to the merger agreement, DDR Sub will be merged with and into AIP and AIP will become a wholly-owned subsidiary of the Company. In connection with the merger agreement, AIP also entered into: (i) an agreement to sell 31 properties to client accounts managed by Lend Lease Real Estate Investment, Inc. ("Lend Lease") for a gross purchase price, including assumed debt, of approximately $292.5 million and (ii) an agreement to sell an office building to a third party for a gross purchase price, including assumed debt, of approximately $55.4 million which was sold by AIP in F-16 DEVELOPERS DIVERSIFIED REALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) November 2000. The property sales listed in (i) and (ii) of the immediately preceding sentence are conditions to the closing of the merger, which is expected to occur in the second quarter of 2001. Upon closing of the merger, each of AIP's common shares (other than shares owned in treasury, by the Company, DDR Sub or dissenting shareholders), will be converted into the right to receive not less than $12.47 per share subject to certain adjustments. Each common share of DDR Sub will be converted into one common share of AIP in connection with the merger, resulting in the Company being the majority shareholder of AIP. The effect of the aforementioned transactions is that upon consummation, the Company will (through AIP) own and control AIP's 39 remaining properties. The closing of these transactions are subject to customary conditions in addition to the approval of AIP's shareholders. The Company's investment is accounted for using the equity method of accounting. The aggregate acquisition price for the shares held by the Company exceeded the Company's share of the historical underlying net assets of AIP by approximately $28.6 million which has been assigned principally to real estate with the remainder to goodwill. The portion attributable to real estate is being amortized over 40 years and the amount associated with goodwill is being amortized over 15 years. Accordingly, the Company's equity in net income from minority equity investment is adjusted to reflect the gain or loss on sale of real estate and the amortization of amounts resulting from these basis differences. At December 31, 2000, AIP's share price closed on the NYSE at $12.25 per share which was adjusted to reflect the $1.27 per share dividend payable at December 31, 2000. At December 31, 2000, the Company's aggregate market investment in AIP, including the dividend receivable, was approximately $130.6 million. Pursuant to the terms of the original purchase agreement, AIP may, under certain circumstances and subject to certain limitations, exercise a put right that would require the Company to purchase additional common or convertible preferred shares of AIP for a total amount not to exceed $200 million at a price not to exceed $15.50 and $14.00 per share, respectively. AIP can only exercise its right to put these additional shares for the purpose of financing property acquisitions approved by AIP's Board of Trust Managers. This right was scheduled to expire on November 20, 2000. At November 1, 2000, the date the merger agreement was signed, $166.6 million remained outstanding pursuant to this put right. If the merger does not close by May 31, 2001 due to a breach of the merger agreement by the Company or DDR Sub, AIP will retain its right to cause the Company to purchase up to $166.6 million in common or convertible preferred shares from AIP. AIP's right would be extended for a period of time from its original termination date of November 20, 2000, by the number of days between June 19, 2000 and the later of (i) the date on which the breach occurs or (ii) the first date on which a trust manager, not designated by the Company, becomes aware of the breach. F-17 DEVELOPERS DIVERSIFIED REALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Summarized financial information, as reflected on the accounts of AIP is as follows (in thousands):
DECEMBER 31, ------------------- 2000 1999 -------- -------- Balance sheet: Land...................................................... $150,108 $159,566 Buildings................................................. 453,168 482,620 -------- -------- 603,276 642,186 Less accumulated depreciation............................. (55,341) (46,931) -------- -------- Real estate, net.......................................... 547,935 595,255 Other assets.............................................. 44,103 25,427 -------- -------- $592,038 $620,682 ======== ======== Mortgage debt............................................. $284,924 $334,873 Other liabilities and minority interests.................. 41,912 27,321 -------- -------- 326,836 362,194 Accumulated equity........................................ 265,202 258,488 -------- -------- $592,038 $620,682 ======== ========
FOR THE YEAR ENDED FOR THE PERIOD DECEMBER 31, JULY 30, 1998 TO ----------------- DECEMBER 31, 2000 1999 1998 ------- ------- ---------------- Statement of operations: Revenues from operations.......................... $90,414 $87,617 $ 25,460 ------- ------- -------- Rental operation expenses......................... 31,357 31,512 10,405 Depreciation and amortization expense............. 13,552 14,535 4,219 Interest expense(1)............................... 25,506 26,562 7,766 Provisions for losses on real estate.............. -- -- 10,060 ------- ------- -------- 70,415 72,609 32,450 ------- ------- -------- Income (loss) from operations..................... 19,999 15,008 (6,990) Minority interests................................ (580) (313) 166 Equity in net income of joint ventures............ 120 624 -- (Gain) loss on sales of real estate............... 26,803 (200) -- ------- ------- -------- Income (loss) before charge for change in control and extraordinary item......................... 46,342 15,119 (6,824) Charge for change in control...................... -- -- (5,780) ------- ------- -------- Income (loss) before extraordinary item........... 46,342 15,119 (12,604) Extraordinary item................................ (329) (513) -- ------- ------- -------- Net income (loss).............................. $46,013 $14,606 $(12,604) ======= ======= ========
--------------- (1) Interest expense includes $0.1 million and $0.7 million in 1999 and 1998, respectively, paid to the Company on advances made at an interest rate of 10.25%. For the year ended December 31, 2000, 1999 and for the period from July 30, 1998 to December 31, 1998, the Company recorded equity in net income from minority equity investment of $6.2 million, $5.7 million and $0.9 million, respectively. The difference between the Company's share in net income as reported in the financial statements of AIP is attributable to adjustments relating to depreciation and amortization and gain (loss) on sales of real estate associated with the $28.6 million basis adjustments discussed above. In addition, the $6.2 million net income from minority equity investment recorded in 2000 includes a $4.9 million impairment loss relating to the pending sale of 31 properties to Lend Lease partially F-18 DEVELOPERS DIVERSIFIED REALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) offset by a $3.6 million gain, as adjusted, from the sale of an office building in the fourth quarter of 2000. Also, for the period July 30, 1998 to December 31, 1998, the $0.9 million reported by the Company represents the Company's equity in AIP's $3.2 million of income before provisions for loss on real estate and change in control charges. In 1998, the real estate impairment and change in control charges detailed above are reconciling items between the Company's proportionate share of AIP's reported results of operations and the amount reflected in the Company's financial statements as equity in net income from minority equity investment. These amounts were considered in DDR's allocation of purchase price associated with its investment in AIP as discussed above. 4. ACQUISITIONS AND PRO FORMA FINANCIAL INFORMATION During the years ended December 31, 2000, 1999 and 1998, the Company completed the acquisition of 39 shopping centers, excluding those acquired through joint ventures as discussed in Note 2, (one in 2000, three in 1999, and 35 in 1998) at a total purchase price of approximately $850 million. These acquisitions were accounted for using the purchase method of accounting. Significant acquisitions were as follows: In 1998, in a single transaction with Continental Real Estate Companies of Columbus, Ohio, the Company completed the acquisition of 13 shopping centers, four of which were acquired through joint ventures. The 13 shopping centers total 2.2 million gross square feet of Company-owned retail space. The aggregate cost of these centers was $222.3 million of which the Company's share was $184.4 million. The Company's net investment was initially funded through its revolving credit facilities, cash and liabilities assumed of approximately $92.7 million, mortgages assumed of approximately $82.9 million (including $54.7 million of joint venture mortgage debt) and the issuance of OP Units valued at approximately $8.8 million. In certain circumstances and at the option of the Company, these units are exchangeable into 438,561 shares of the Company's common stock of which 385,993 units remain outstanding at December 31, 2000. In July 1998, the Company acquired from Hermes Associates of Salt Lake City, Utah, nine shopping centers, one office building and eight additional expansion, development or redevelopment projects. The nine shopping centers aggregate 2.4 million square feet of total GLA. The total consideration for this portfolio was approximately $309 million comprised of $30.6 million of debt assumed, the issuance of 3.6 million OP Units, valued at $73 million, $194.2 million of cash and $11.2 million of other liabilities assumed, including contingently issuable OP Units valued at approximately $8.9 million. In July, 2000, the Company acquired all of the OP Units originally issued including contingently issuable OP Units for approximately $81.9 million. In July, 1998, the Company also acquired 13 shopping centers aggregating approximately 1.6 million square feet in the St. Louis, Missouri area, at an aggregate cost of $152.5 million. Two of these centers were subsequently sold at an aggregate price of approximately $4.4 million. The Company also acquired a 50% ownership interest in the Sansone Group's management company and development company. The Company's net investment in this portfolio aggregated $162.6 million comprised of $27.6 million of debt assumed and $135 million of cash. The operating results of the acquired shopping centers are included in the results of operations of the Company from the date of purchase, including the acquisition of properties owned through joint ventures, discussed in Note 2. The properties owned through joint ventures are included in equity in net income of joint ventures in the consolidated statements of operations. The following unaudited supplemental pro forma information is presented to reflect the effects of the common share offerings, preferred share offerings, debt offerings and the property acquisitions consummated through December 31, 1999, including the joint venture formations and acquisitions (Note 2), as if all such transactions had occurred on January 1, 1998 with regard to the 1998 and 1999 acquisitions. Pro forma F-19 DEVELOPERS DIVERSIFIED REALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) information is not presented for the year ended December 31, 2000 and 1999, as the shopping centers acquired in 2000 and 1999 were either under development or in the lease-up phase and, accordingly, the related operating information for such centers does not exist prior to acquisition or would not be meaningful. The pro forma financial information is presented for informational purposes only and may not be indicative of what actual results of operations would have been had the acquisitions occurred as indicated nor does it purport to represent the results of the operations for future periods (in thousands, except per share data):
FOR THE YEAR ENDED DECEMBER 31, 1998(a) -------------------- (UNAUDITED) Pro forma revenues.......................................... $229,678 ======== Pro forma income before extraordinary item.................. $ 80,994 ======== Pro forma net income applicable to common shareholders...... $ 55,547 ======== Pro forma net income applicable to common shareholders: Basic..................................................... $ 0.97 ======== Diluted................................................... $ 0.93 ========
--------------- (a) Reflects revenues and expenses of the properties acquired in 1999 and 1998 for the period January 1, 1998 through the effective date of acquisition. Operating results for the Company's acquired properties located in Columbus (Easton Market), Ohio; Princeton, New Jersey; Portland, Oregon; St. Louis (American Plaza) Missouri; St. Louis (Promenade at Brentwood), Missouri; Florence, Kentucky; Fayetteville, Arkansas; Salisbury, Maryland and Phoenix, Arizona are not reflected in the 1998 pro forma information prior to their respective acquisition dates because these shopping centers were either under development or in the lease-up phase and, accordingly, the related operating information for such centers either does not exist or would not be meaningful. In addition, the 1998 pro forma information does not include the results of shopping center expansions occurring at five of the shopping centers acquired by the Company. 5. DISPOSITION OF REAL ESTATE AND INVESTMENTS During 2000, the Company recorded a gain on disposition of real estate and investments which aggregated $23.4 million. The Company sold several properties including shopping centers located in Stone Mountain, Georgia; Florence, Kentucky; a portion of a shopping center in Las Vegas, Nevada and Wal-Mart stores in Camden, South Carolina and New Bern and Washington, North Carolina and its 50% joint venture interest in a recently developed shopping center in Fenton, Missouri. The aggregate net gain from the aforementioned transactions was $6.8 million. In addition, the Company sold 60% of its half interest in a joint venture which owns 10 operating shopping centers and recognized a gain of approximately $16.1 million. In connection with the formation of one joint venture, the Company sold one property, received cash and a 50% partnership interest and recognized a gain of approximately $0.5 million for the 50% interest deemed to be sold. Net proceeds received in conjunction with the above sales aggregated $133.0 million. During 1999, the Company recorded a loss on disposition of real estate and investments aggregating $2.2 million relating to the sale of a shopping center and residual land in Pensacola, Florida to a major retailer. In connection with this disposition, the Company developed a 17,000 square foot shopping center adjacent to the site sold. In addition, the Company sold four properties at an aggregate gain of approximately $0.5 million which offsets the previously described loss within the consolidated statements of operations. Net proceeds received in conjunction with the above sales aggregated $13.9 million. During 1998, the Company sold various outlots adjacent to the Company's shopping centers and recognized an aggregate gain of $0.2 million and received net proceeds of $6.7 million. F-20 DEVELOPERS DIVERSIFIED REALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. NOTES RECEIVABLE The Company has issued notes receivable, including accrued interest, aggregating $4.8 million and $5.6 million at December 31, 2000 and 1999, respectively. The notes are secured by certain rights in future development projects, partnership interests and personal guaranties. The notes bear interest ranging from 10.5% to 12.0% with maturity dates ranging from May 2001 to December 2002. 7. DEFERRED CHARGES Deferred charges consist of the following (in thousands):
DECEMBER 31, ----------------- 2000 1999 ------- ------- Deferred financing costs.................................... $ 9,561 $ 7,298 Less-accumulated amortization............................... (3,603) (3,382) ------- ------- $ 5,958 $ 3,916 ======= =======
The Company incurred deferred finance costs aggregating $3.8 million and $0.2 million in 2000 and 1999, respectively, primarily relating to the Company's unsecured revolving credit agreements (Note 8). Amortization of deferred charges was $1.8 million, $1.5 million and $1.4 million for the years ended December 2000, 1999 and 1998, respectively. During 1998, the Company wrote off $0.9 million (none in 2000 and 1999) of unamortized deferred finance costs in conjunction with the amendment and restructuring of its Unsecured Revolving Credit Facility (Note 8) and the repayment of certain secured indebtedness. 8. REVOLVING CREDIT FACILITIES Since May 1995, the Company has maintained an unsecured revolving credit facility from a syndicate of financial institutions for which Bank One, NA serves as agent (the "Unsecured Credit Facility"). During 2000, the Company renegotiated, expanded and extended this facility and increased the available borrowing capacity to $550 million from $375 million, adjusted the spread over LIBOR to 1.10%, modified certain covenants and extended the term for an additional two years to May 31, 2003. The Unsecured Credit Facility includes a competitive bid option for up to 50% of the facility amount. Borrowings under this facility bear interest at variable rates based on the prime rate or LIBOR plus a specified spread (1.10% at December 31, 2000). The spread is dependent on the Company's long term senior unsecured debt rating from Standard and Poor's and Moody's Investors Service. The Company is required to comply with certain covenants relating to total outstanding indebtedness, secured indebtedness, net worth, maintenance of unencumbered real estate assets, debt service coverage and fixed charge coverage. The facility also provides for a facility fee of 0.2% on the entire facility. The Unsecured Credit Facility is used to finance the acquisition and development of real estate, to provide working capital and for general corporate purposes. At December 31, 2000 and 1999, total borrowings under this facility aggregated $419.5 million and $272.0 million, respectively, with a weighted average interest rate, excluding the effects of the interest rate swaps in 2000, of 7.8% and 7.3%, respectively. During the first quarter of 1998, the Company recognized a non-cash extraordinary charge of approximately $0.9 million ($0.01 per common share), relating to the write-off of unamortized deferred finance costs associated with the former revolving credit facility. In September 1996, the Company entered into a three-year $10 million unsecured revolving credit facility with National City Bank, (together with the $550 million Unsecured Credit Facility, the "Revolving Credit Facilities"). In 1999 and 2000, the Company amended this facility to increase the available borrowings to $25 million, to convert it to a secured revolving credit facility and to extend the agreement through F-21 DEVELOPERS DIVERSIFIED REALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) November 2002. This credit facility is secured by certain partnership investments. The Company maintains the right to reduce this facility to $20 million and to convert the borrowings to an unsecured revolving credit facility. Borrowings under this facility bear interest at variable rates based on the prime rate or LIBOR plus a specified spread (1.10% at December 31, 2000). The spread is dependent on the Company's long term senior unsecured debt rating from Standard and Poor's and Moody's Investors Service. The Company is required to comply with certain covenants relating to total outstanding indebtedness, secured indebtedness, net worth, maintenance of unencumbered real estate assets, debt service coverage and fixed charge coverage. The facility also provides for commitment fees of 0.15% on the unused credit amount. At December 31, 2000 and 1999, total borrowings under this facility aggregated $21.0 million and $18.8 million, respectively, with a weighted average interest rate of 7.5% and 7.3%, respectively. Total fees paid by the Company on its Revolving Credit Facilities in 2000, 1999 and 1998, aggregated approximately $0.9 million, $0.6 million and $0.5 million, respectively. 9. FIXED RATE SENIOR NOTES The following is a summary of the Company's outstanding unsecured fixed rate senior notes:
DECEMBER 31, ------------------- 2000 1999 -------- -------- Unsecured Fixed Rate Senior Notes(1)........................ $417,519 $517,470 Pass-Through Asset Trust Securities(2)...................... 74,912 74,841 -------- -------- $492,431 $592,311 ======== ========
--------------- (1) Two of the senior notes were issued at a discount. One matured and was repaid in May, 2000. The unamortized discount aggregated $0.2 million at December 31, 2000 and 1999. The effective interest rates of these notes range from 6.65% to 7.67% per annum. (2) In March 1997, the Company issued, through a grantor trust, $75 million of Pass-Through Asset Trust Securities (PATS), due March 2002, at a discount of 99.53%. These certificates are secured by fifteen-year notes maturing March 2012, issued by the Company to the trust. The trust sold an option which enables the option holder to re-market the certificates upon maturity in March 2002. Simultaneously with the sale of the certificates, the trust purchased the notes from the Company for a premium in the amount of the option payment. This premium, $1.1 and $1.2 million at December 31, 2000 and 1999, respectively, is being amortized over the fifteen-year life of the notes and is included in other liabilities in the consolidated balance sheet. If the option holder does not elect to remarket the certificates, then they become due and payable in March 2002. Interest is paid semi-annually in arrears on March 15 and September 15. The above fixed rate senior notes have maturities ranging from February 2001 to July 2018. Interest rates ranged from approximately 6.58% to 7.5% (averaging 7.2% at December 31, 2000 and 1999). These notes may not be redeemed by the Company prior to maturity and will not be subject to any sinking fund requirements. The fixed rate senior notes were issued pursuant to an indenture dated May 1, 1994 which contains certain covenants including limitation on incurrence of debt, maintenance of unencumbered real estate assets and debt service coverage. Interest is paid semi-annually in arrears on May 15 and November 15. 10. MORTGAGES PAYABLE AND SCHEDULED PRINCIPAL REPAYMENTS At December 31, 2000, mortgages payable, collateralized by certain notes receivable, investments and real estate with a net book value of approximately $866.7 million and related tenant leases, are generally due in monthly installments of principal and/or interest and mature at various dates through 2027. Interest rates F-22 DEVELOPERS DIVERSIFIED REALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) ranged from approximately 6.0% to 9.75% (averaging 8.3% at December 31, 2000 and 1999). Variable rate debt obligations, included in mortgages payable at December 31, 2000 and 1999, totaled approximately $127.5 million and $110.6 million, respectively. Interest rates on the variable rate debt averaged 8.2% and 7.3% at December 31, 2000 and 1999, respectively. As of December 31, 2000, the scheduled principal payments of the Revolving Credit Facilities, fixed rate senior notes and mortgages payable for the next five years and thereafter are as follows:
YEAR AMOUNT ---- ---------- 2001........................................................ $ 157,687 2002........................................................ 102,994 2003........................................................ 456,451 2004........................................................ 71,167 2005........................................................ 7,366 Thereafter.................................................. 431,910 ---------- $1,227,575 ==========
Principal payments in the year 2002 and 2003 include $21.0 million and $419.5 million, respectively, associated with the maturing of the Revolving Credit Facilities. Principal payments in the year 2002 assume that the PATS option holder (Note 9) will not exercise the option to re-market the certificates and the trust will therefore put the certificates to the Company to finance the reacquisition of the PATS at maturity. 11. FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Company in estimating fair value disclosures of financial instruments: CASH AND CASH EQUIVALENTS, ACCOUNTS RECEIVABLE, ACCOUNTS PAYABLE, ACCRUALS AND OTHER LIABILITIES The carrying amounts reported in the balance sheet for these financial instruments approximated fair value because of their short maturities. The carrying amount of straight-line rents receivable does not materially differ from their fair market value. NOTES RECEIVABLE AND ADVANCES TO AFFILIATES The fair value is estimated by discounting the current rates at which similar loans would be made. At December 31, 2000 and 1999, the carrying amounts reported in the balance sheet approximate fair value. DEBT The carrying amounts of the Company's borrowings under its Revolving Credit Facilities approximate fair value because such borrowings are at variable rates. The fair value of the fixed rate senior notes is based on borrowings with a similar remaining maturity based on the Company's estimated interest rate spread over the applicable treasury rate. Fair value of the mortgages payable is estimated using a discounted cash flow analysis, based on the Company's incremental borrowing rates for similar types of borrowing arrangements with the same remaining maturities. F-23 DEVELOPERS DIVERSIFIED REALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) INTEREST RATE SWAPS The Company intends to continuously monitor and actively manage interest costs on its variable rate debt portfolio. The Company may, from time to time, enter into interest rate hedge agreements to manage interest costs and risks associated with changing interest rates. In October, 2000, the Company entered into two interest rate swaps aggregating $100 million. These swaps effectively convert $100 million of variable rate debt to a fixed rate of approximately 7.6% through October 2002. The Company is exposed to credit risk in the event of non-performance by the counter-parties to the swaps. The fair value of interest rate swaps is based upon the estimated amounts that the Company would receive or pay to terminate the contract at the reporting date. Fair value of the swaps is estimated using a binomial pricing model. Considerable judgment is necessary to develop estimated fair values of financial instruments. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize on disposition of the financial instruments. Financial instruments at December 31, 2000 and 1999, with carrying values that are different than estimated fair values are summarized as follows (in thousands):
2000 1999 ---------------------------- ---------------------------- CARRYING AMOUNT FAIR VALUE CARRYING AMOUNT FAIR VALUE --------------- ---------- --------------- ---------- Fixed Rate Senior Notes........... $492,431 $471,448 $592,311 $565,871 Mortgages payable................. 294,645 301,761 268,965 273,343 -------- -------- -------- -------- 787,076 773,209 861,276 839,214 Derivatives -- interest rate swaps........................... (55) 1,433 -- -- -------- -------- -------- -------- $787,021 $744,642 $861,276 $839,214 ======== ======== ======== ========
12. MINORITY EQUITY INTERESTS, PREFERRED OPERATING PARTNERSHIP MINORITY INTERESTS, OPERATING PARTNERSHIP MINORITY INTERESTS, PREFERRED SHARES AND COMMON SHARES MINORITY EQUITY INTERESTS The Company owns a majority ownership interest in a shopping center and development parcels in Utah. The minority partners' equity interest in this partnership is $8.2 million at December 31, 2000 and 1999. Minority equity interest expense includes approximately $0.2 million, $0.1 million and $0.1 million for the years ended December 31, 2000, 1999, and 1998, respectively, related to the minority partner's share of net income. PREFERRED OPERATING PARTNERSHIP MINORITY INTERESTS In 1998, the Company issued $35 million of preferred operating partnership minority interests to a private investment partnership. These securities are a combination of preferred equity securities and a warrant to purchase approximately 1.6 million common shares of the Company at a price of $21.625 per share or 1.4 million Class D cumulative redeemable preferred shares at a price of $25 per share. The Company recorded $32.9 million as preferred operating partnership minority interests and $2.1 million to additional paid in capital in respect of the warrant. The preferred equity securities are structured as 8.5% cumulative redeemable preferred units of DDRC Great Northern L.P., a wholly owned, consolidated partnership. The preferred units are redeemable without restriction by the investment partnership, for cash or common shares at the option of the Company, and redeemable after five years by DDRC Great Northern L.P. for cash or common shares at the investment partnership's option. In addition, if the warrant is exercised, the Company has the right to redeem the preferred units. Generally, the warrant has a perpetual term, but will expire upon redemption of the preferred units. F-24 DEVELOPERS DIVERSIFIED REALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In September, 1999 and May, 2000, the Company completed, through a consolidated partnership, a $75 million and $105 million private placement of 8.875% and 9.0%, cumulative perpetual preferred "down-REIT" preferred partnership units, respectively, together with the preferred units discussed above, ("Preferred Units"), with an institutional investor. The units may be exchanged, under certain circumstances, for Class K and Class J, 8.875% and 9.0%, respectively, cumulative preferred shares of the Company. The units may be exchangeable into common shares if the Company fails to pay dividends for six consecutive quarters. The net proceeds of approximately $175.1 million were effectively used to repay approximately $25.8 million in mortgage indebtedness and $40.1 million in convertible debentures which matured on August 15, 1999 and $109.2 million was used to repay variable rate borrowings under the Company's Revolving Credit Facilities. The Company reflected $15.3 million, $5.2 million and $0.2 million as a charge to preferred operating partnership minority interest in the consolidated statements of operations relating to the accrued return associated with these Preferred Units at December 31, 2000, 1999 and 1998, respectively. OPERATING PARTNERSHIP MINORITY INTERESTS At December 31, 2000 and 1999, the Company had 1,051,310 and 4,702,282 OP Units outstanding, respectively. During 2000 and 1999 the Company acquired, through subsidiary partnerships, a majority ownership interest in one shopping center and additional phases of three shopping centers previously acquired. In conjunction with these acquisitions, the Company issued 23,326 and 139,276 OP Units in 2000 and 1999, respectively, which are exchangeable, under certain circumstances and at the option of the Company, into an equivalent number of the Company's common shares or for the equivalent amount of cash. In 2000 and 1999, the Company purchased 3,674,298 and 18,098, respectively, of OP Units for cash aggregating $82.5 million and $0.3 million, respectively. These transactions were treated as a purchase of minority interest. The difference between the recorded amount of the minority interest and the cash paid was not material. In connection with the Company's purchase of certain shopping centers during 1998 and the related issuance of approximately 3.6 million of the above mentioned OP Units, the Company provided a guarantee of the value of the OP Units, which included the aggregate value derived from both the value of the OP Units and the distributions received pursuant to the terms of the OP Units. The purchase of these shopping centers were recorded at the estimated fair value of the guaranteed amount. During 1999, the agreement was amended to revise certain aspects of the settlement method. Through the date of the amendment, contingently issuable OP Units were considered in weighted average shares outstanding for purposes of determining diluted earnings per share (Note 17). The OP Unit holders are entitled to receive distributions, per OP Unit, equal to the per share distributions on the Company's common shares. During 2000, 1999 and 1998, the unit holders received distributions aggregating $4.1 million, $6.5 million and $2.9 million, respectively, which has been reflected as a charge to operating partnership minority interest in the consolidated statements of operations. PREFERRED SHARES The Class A, B, C and D depository shares represent 1/10 of a share of their respective preferred class of shares. The Class A and Class B depository shares are redeemable by the Company at December 31, 2000. The Class C and Class D depository shares are not redeemable by the Company prior to July 7, 2003 and August 20, 2003, respectively, except in certain circumstances relating to the preservation of the Company's status as a REIT. The Company's authorized preferred shares consist of the following: - 750,000 Class A Cumulative Redeemable Preferred Shares, without par value - 750,000 Class B Cumulative Redeemable Preferred Shares, without par value F-25 DEVELOPERS DIVERSIFIED REALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) - 750,000 Class C Cumulative Redeemable Preferred Shares, without par value - 750,000 Class D Cumulative Redeemable Preferred Shares, without par value - 750,000 Class E Cumulative Redeemable Preferred Shares, without par value - 750,000 Class F Cumulative Redeemable Preferred Shares, without par value - 750,000 Class G Cumulative Redeemable Preferred Shares, without par value - 750,000 Class H Cumulative Redeemable Preferred Shares, without par value - 750,000 Class I Cumulative Redeemable Preferred Shares, without par value - 750,000 Class J Cumulative Redeemable Preferred Shares, without par value - 750,000 Class K Cumulative Redeemable Preferred Shares, without par value - 750,000 Non Cumulative preferred shares, without par value COMMON SHARES The Board of Directors of the Company approved a two-for-one stock split to shareholders of record on July 27, 1998. On August 3, 1998, each such shareholder received one share of common stock for each share of common stock held. This stock split was effected in the form of a stock dividend. Accordingly, $2.9 million was transferred from additional paid in capital to common stock, representing the stated value of additional shares issued. In April 1998, the Company issued 1,339,278 common shares at $18.8612 per share and received aggregate net proceeds of approximately $25.2 million. In December 1998, the Company issued 3,000,000 common shares at $18.5625 per share and received aggregate net proceeds of approximately $52.6 million. The aggregate net proceeds of $77.8 million from these two offerings were primarily used to repay amounts outstanding on the Revolving Credit Facilities and for general corporate purposes. STOCK REPURCHASE PROGRAM In 1999 and 2000, the Company's Board of Directors authorized the officers of the Company to implement a common share repurchase program in response to what the Company believed was a distinct undervaluation of the Company's common shares in the public market. At December 31, 2000 and 1999, treasury stock recorded on the Company's consolidated balance sheet consisted of 6,601,250 and 1,860,300 common shares, respectively, at a cost of $88.7 million and $25.8 million, respectively. 13. TRANSACTIONS WITH RELATED PARTIES In August, 2000, the Company purchased residual land adjacent to its shopping center in Aurora, Ohio from a limited partnership owned by the founder of the Company and former Chairman of Board who is also the father of the current Chairman of the Board and Chief Executive Officer. The purchase price was $1.3 million. In September, 1999, the Company transferred its interest in a shopping center under development in Coon Rapids, Minnesota, a suburb of Minneapolis, to a joint venture and simultaneously sold a 75% interest to an entity owned in part by a director of the Company. The Company retained a 25% interest. The Company was reimbursed $2.5 million by the joint venture partner relating to development costs previously incurred on this development. In addition, the Company received a development fee of approximately $0.5 million in 1999 from the entity's joint venture partner. F-26 DEVELOPERS DIVERSIFIED REALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In September, 1998, the Company sold two properties to a principal of one of the Company's joint venture partners. These properties aggregated approximately 33,000 square feet and were sold for approximately $4.4 million. In June, 1998, the Company acquired, from a partnership owned by the former Chairman of the Board and an Officer of the Company, approximately 18 acres of land, adjacent to a shopping center owned through one of the Company's joint ventures, at a purchase price of approximately $4.4 million. In February, 1998, the Company acquired a shopping center located in Idaho Falls, Idaho from a limited partnership in which the former Chairman of the Board, the Chairman of the Board and Chief Executive Officer, and the Vice-Chairman of the Board owned, in the aggregate, through a separate partnership, a 1% general partnership interest. The shopping center aggregates approximately 0.2 million square feet. The initial purchase price of the property was approximately $6.5 million. In accordance with the purchase agreement, the Company paid an earnout of $0.6 million upon the leasing of vacant space in the center in January 1999. In addition, in 1998 the Company paid to a partnership owned by the former Chairman of the Board approximately $0.1 million for leasing/sales commissions associated with leasing or sale of certain shopping center outlots. Also, the Company paid approximately $0.1 million and $0.7 million in 1999 and 1998, respectively, to a company owned by the brother-in-law of the Chairman of the Board and Chief Executive Officer relating to fees and commissions earned from the Company's acquisition of several shopping centers. In 1998, the Chairman of the Board and Chief Executive Officer of the Company received 100,000 stock options in his role as Chairman of AIP's Board of Trustees. All benefits associated with these options were assigned to the Company. In conjunction with the establishment of DDR's equity investment in certain entities (described in Note 2 as entities in which the Company has a 95% economic interest at December 31, 2000), the Company's Chairman of the Board and Chief Executive Officer retained the majority of the voting shares. These entities were structured in this format in order to meet certain REIT qualification requirements. During 1999 and 1998, the Company periodically advanced funds to the Chairman of the Board and Chief Executive Officer in amounts up to $0.4 million. The advances, which were made to reduce the outstanding principal balance of, and to prevent the sale of, common shares in the Company from a margin account loan, were outstanding for periods ranging from five to forty days with an interest rate of LIBOR plus the applicable spread based on the Company's rate of borrowing on the Revolving Credit Facilities. In addition, in 1999 the Company advanced approximately $0.2 million to certain officers of the Company in connection with certain relocation costs and related payroll taxes. In 1998, eleven of the Company's executives, either through the exercise of previously granted stock options or through the direct purchase of unissued shares, acquired 974,663 of the Company's common shares. The purchase of such shares was financed by a five-year personal loan program aggregating approximately $15 million (at market interest rates) from Bank One, NA. These loans are guaranteed by the Company. Four of these executives have subsequently resigned from the Company. The Company has agreed to maintain the guarantee. The individuals participating in the program are responsible for repayment of these personal loans and have fully indemnified the Company should the Company's guarantee be called upon. The Company entered into a lease for office space owned by one of its principal shareholders. General and administrative rental expense associated with this office space, aggregated $0.6 million, $0.7 million, and $0.7 million for the years ended December 31, 2000, 1999 and 1998, respectively. The Company continues to have management agreements with various partnerships and performs certain administrative functions on behalf of entities owned in part by a related party, in which management fee and leasing fee income of $0.2 million was earned in 2000, 1999 and 1998. Transactions with the Company's equity affiliates have been described in Notes 2 and 3. F-27 DEVELOPERS DIVERSIFIED REALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 14. COMMITMENTS AND CONTINGENCIES The Company is engaged in the operation of shopping centers which are either owned or, with respect to certain shopping centers, operated under long-term ground leases which expire at various dates through 2070, with renewal options. Space in the shopping centers is leased to tenants pursuant to agreements which provide for terms ranging generally from one to 30 years and, in some cases, for annual rentals which are subject to upward adjustments based on operating expense levels, sales volume, or contractual increases as defined in the lease agreements. The scheduled future minimum revenues from rental properties under the terms of all noncancelable tenant leases, assuming no new or renegotiated leases or option extensions for such premises, for the subsequent five years ending December 31, are as follows (in thousands): 2001........................................................ $ 193,782 2002........................................................ 183,460 2003........................................................ 169,270 2004........................................................ 157,563 2005........................................................ 144,563 Thereafter.................................................. 1,017,672 ---------- $1,866,310 ==========
Scheduled minimum rental payments under the terms of all non-cancelable operating leases in which the Company is the lessee, principally for office space and ground leases, for the subsequent five years ending December 31, are as follows (in thousands): 2001........................................................ $ 1,964 2002........................................................ 1,915 2003........................................................ 1,910 2004........................................................ 1,899 2005........................................................ 2,106 Thereafter.................................................. 21,088 ------- $30,882 =======
There were no capital leases in which the Company is the lessee at December 31, 2000 or 1999. In conjunction with the development and expansion of various shopping centers, the Company has entered into agreements for the construction of the shopping centers aggregating approximately $26.2 million as of December 31, 2000. As discussed in Note 2, the Company and certain equity affiliates have entered into several joint ventures with various third party developers. In conjunction with certain joint venture agreements, the Company and/or its equity affiliate has agreed to fund the required capital associated with approved development projects aggregating approximately $16.6 million. The Company and/or its equity affiliate is entitled to receive a priority return on capital advances at rates ranging from 10.5% to 12.0%. As discussed in Note 13, the Company has provided certain guarantees relating to officer loans. F-28 DEVELOPERS DIVERSIFIED REALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 15. OTHER INCOME Other income was comprised of the following (in thousands):
FOR THE YEAR ENDED DECEMBER 31, -------------------------------- 2000 1999 1998 -------- -------- -------- Lease termination........................................ $8,950 $3,425 $1,621 Financing fees........................................... -- 420 21 Sales commissions........................................ -- 412 346 Other, net............................................... 205 773 486 ------ ------ ------ $9,155 $5,030 $2,474 ====== ====== ======
16. BENEFIT PLANS STOCK OPTION AND OTHER EQUITY BASED PLANS The Company's stock option and equity-based award plans provide for the grant, to employees of the Company the following: Incentive and non-qualified stock options to purchase common shares of the Company, rights to receive the appreciation in value of common shares, awards of common shares subject to restrictions on transfer, awards of common shares issuable in the future upon satisfaction of certain conditions and rights to purchase common shares and other awards based on common shares. Under the terms of the award plans, awards may be granted with the respect to an aggregate of not more than 7,313,806 common shares. Options may be granted at per share prices not less than fair market value at the date of grant, and in the case of incentive options, must be exercisable within ten years thereof (or, with respect to options granted to certain shareholders, within five years thereof). Options granted under the plans generally become exercisable in the year after the date of grant as to one-third of the optioned shares, with the remaining options being exercisable over the following two-year period. In 1997, the Board of Directors approved the issuance of 900,000 stock options to the Company's Chief Executive Officer which vested upon issuance of the options. In addition, 700,000 of these options were issued outside of a qualified plan. In addition to the stock option and equity-based award plans described above, the Company granted options totaling 975,000 shares to its directors and certain officers who are not employees of the Company. Such options were granted at the fair market value on the date of grant. Options with respect to 50,000 shares were exercisable one year from the date of grant, and options with respect to the remaining 925,000 shares become exercisable one year after the date of grant as to one third of the 925,000 shares with the remaining options being exercisable over the following two-year period. F-29 DEVELOPERS DIVERSIFIED REALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table reflects the stock option activity described above (in thousands):
NUMBER OF OPTIONS --------------------------------- WEIGHTED-AVERAGE EXECUTIVE ---------------------------- EMPLOYEES DIRECTORS OFFICER EXERCISE PRICE FAIR VALUE --------- --------- --------- --------------- ---------- Balance December 31, 1997....... 3,416 920 700 $16.18 Granted....................... 540 10 -- 19.95 $1.43 Exercised..................... (1,093) -- -- 13.31 Canceled...................... (72) -- -- 18.44 ------ ---- --- ------ Balance December 31, 1998....... 2,791 930 700 17.32 Granted....................... 1,083 20 -- 15.42 $1.42 Exercised..................... (13) -- -- 14.48 Canceled...................... (385) -- -- 19.49 ------ ---- --- ------ Balance December 31, 1999....... 3,476 950 700 16.75 Granted....................... 696 5 -- 12.19 $1.21 Exercised..................... (11) -- -- 14.27 Canceled...................... (139) (1) -- 17.08 ------ ---- --- ------ Balance December 31, 2000....... 4,022 954 700 $16.19 ====== ==== === ======
The following table summarizes the characteristics of the options outstanding at December 31, 2000 (in thousands):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------ ------------------------------ OUTSTANDING WEIGHTED-AVERAGE EXERCISABLE RANGE OF AS OF REMAINING WEIGHTED-AVERAGE AS OF WEIGHTED-AVERAGE EXERCISABLE PRICES 12/31/00 CONTRACTUAL LIFE EXERCISE PRICE 12/31/00 EXERCISE PRICE --------------------- ----------- ---------------- ---------------- ----------- ---------------- $11.00-$16.50 3,417 6.4 $14.05 2,248 $14.43 $16.50-$24.00 2,259 7.5 $19.42 1,989 $19.70 ----- --- ------ ----- ------ 5,676 6.8 $16.19 4,237 $16.90
As of December 31, 2000, 1999 and 1998, 4,237, 3,589 and 2,848 options (in thousands), respectively, were exercisable. The weighted average exercise prices of these exercisable options were $16.90, $16.69 and $16.36 at December 31, 2000, 1999 and 1998, respectively. During 1998, the Company's executive committee purchased approximately 0.9 million of the shares exercised (See Note 13). In 1996 and 2000, the Board of Directors approved a grant of 30,000 Performance Units to the Company's Chief Executive Officer. The 30,000 Performance Units issued in 1996 were converted into 30,000 common shares in January, 2001 based upon the achievement of certain performance objectives determined as of December 31, 2000. The shares issued were based upon the average annual total shareholder's return during the five-year period ending December 31, 2000. The 30,000 Performance Units granted in 2000 will be converted to a common share equivalent ranging from 30,000 to 200,000 Performance Units based on the annualized total shareholder's return for the five-year period ending December 31, 2004. In 1996, 1999 and 2000, the Board of Directors approved a grant of 50,000, 47,095 and 91,975 restricted shares of common stock to several executives and outside directors of the Company, respectively. The restricted stock grants vest in equal annual amounts over a five-year period and had a weighted average fair value at the date of a grant ranging from $11.56 to $15.31, which was equal to the market value of the Company's stock at the date of grant. During 2000 and 1998, approximately $0.5 million and $0.8 million, respectively, was charged to expense associated with awards under the equity based award plan relating to restricted stock and Performance Units. During 1999, the Company reduced its accrual relating to the Performance Unit award by approximately $1.3 million; expense associated with restricted shares aggregated $0.3 million in 1999. F-30 DEVELOPERS DIVERSIFIED REALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company applies APB 25, "Accounting for Stock Issued to Employees" in accounting for its plans. Accordingly, the Company does not recognize compensation cost for stock options when the option exercise price equals or exceeds the market value on the date of the grant. The compensation cost which is required to be charged against income for all of the above mentioned plans was $1.5 million, $1.8 million and $1.8 million for 2000, 1999 and 1998, respectively. Had compensation cost for the Company's stock-based compensation plans been determined based on the fair values of the options granted at the grant dates, consistent with the method set forth in the SFAS No. 123, "Accounting for Stock Based Compensation," the Company's net income and earnings per share would have been as follows (dollars in thousands, except per share data):
2000 1999 1998 ------- ------- ------- Net income applicable to As reported $73,351 $60,135 $57,969 common shareholders...................... Pro forma $72,049 $58,370 $56,168 Basic earnings As reported $ 1.31 $ 0.99 $ 1.02 per share................................ Pro forma $ 1.29 $ 0.96 $ 0.99 Diluted earnings As reported $ 1.31 $ 0.95 $ 0.98 per share................................ Pro forma $ 1.29 $ 0.92 $ 0.95
For purposes of the pro forma presentation, the fair value of each option grant was estimated on the date of grant using the Black-Scholes options pricing model using the following assumptions:
FOR THE YEAR ENDED DECEMBER 31, --------------------------------------- 1999 1998 1997 ----------- ----------- ----------- Risk free interest rate or (range)......... 5.0%-6.8% 5.6%-6.4% 4.7%-5.8% Dividend yield (range)..................... 10.8%-12.5% 8.5%-10.9% 6.4%-7.5% Expected life (range)...................... 4-10 years 7-10 years 6-10 years Expected volatility (range)................ 21.7%-26.2% 20.2%-31.8% 13.2%-19.1%
401(K) PLAN The Company has a 401(k) defined contribution plan covering substantially all of the officers and employees of the Company which permits participants to defer up to a maximum of 15% of their compensation. The Company will match 25% of the employee's contribution up to a maximum of 6% of an employee's annual compensation. The Company may also make additional discretionary contributions. Employees' contributions are fully vested and the Company's matching contributions vest 20% per year. Once an employee has been with the Company five years, all matching contributions are fully vested. The Company's contributions to the plan for the year ended December 31, 2000, 1999 and 1998 were made by the issuance of Company stock with a market value of $0.07 million, $0.06 million and $0.05 million, respectively. Effective December 31, 2000, the Company elected to fund all future matching contributions with cash. The 401(k) plan is fully funded at December 31, 2000. ELECTIVE DEFERRED COMPENSATION PLAN The Company has a non-qualified elective deferred compensation plan for certain key executives which permits eligible employees to defer up to 25% of their compensation. The Company will match 25% of an employee's contribution up to a maximum of 6% of an employee's annual compensation, after deducting contributions, if any, made in conjunction with the Company's 401(k) plan. Through March 31, 1998, both the deferred and matching contributions were made in Company performance units as well as the gains and losses resulting from the fluctuation in the Company's quoted share price. In April 1998, the Company elected to amend the investment elections available to employees such that election of the Company's stock is no longer permitted. Deferred compensation charged to expense related to an employee contribution is fully vested and the Company's matching contribution vests 20% per year. Once an employee has been with the Company five years, all matching contributions are fully vested. The Company's contribution for the years F-31 DEVELOPERS DIVERSIFIED REALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) ended December 31, 2000, 1999 and 1998 was $0.03 million, $0.02 million and $0.06 million, respectively. For the year ended December 31, 1998, this contribution included earnings attributable to the employees' accounts. At December 31, 2000, 1999 and 1998, deferred compensation under this plan aggregated approximately $1.1 million, $0.9 million and $0.5 million, respectively. The plan is fully funded at December 31, 2000. 17. EARNINGS AND DIVIDENDS PER SHARE Earnings Per Share ("EPS") have been computed pursuant to the provisions of SFAS No. 128. Further, as discussed in Note 1, in 1998, the Company effected a stock split in the form of a stock dividend in which each shareholder received one share of common stock for each share of common stock held. All years presented reflects this stock split. The following table provides a reconciliation of both income before extraordinary item and the number of common shares used in the computations of "basic" EPS, which utilizes the weighted average of common shares outstanding without regard to dilutive potential common shares, and "diluted" EPS, which includes all such shares.
FOR THE YEAR ENDED DECEMBER 31, ----------------------------------------- 2000 1999 1998 ----------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Income before extraordinary item................... $100,833 $ 87,397 $ 78,804 Less: Preferred stock dividend..................... (27,262) (27,262) (19,953) -------- -------- -------- Basic EPS -- Income before extraordinary item applicable to common shareholders................ 73,571 60,135 58,851 Effect of dilutive share securities: Joint Venture Partnerships....................... -- -- (632) -------- -------- -------- Diluted EPS -- Income before extraordinary item applicable to common shareholders plus assumed conversions...................................... $ 73,571 $ 60,135 $ 58,219 ======== ======== ======== Number of Shares: Basic -- average shares outstanding.............. 55,959 60,985 56,949 Effect of dilutive securities: Joint venture partnerships and minority interests................................... -- 2,246 1,056 Stock options................................. 138 138 499 Performance Units............................. 30 70 -- Restricted stock.............................. 49 29 5 -------- -------- -------- Diluted -- average shares outstanding............ 56,176 63,468 58,509 ======== ======== ======== Per share amount: Income before extraordinary item Basic......................................... $ 1.31 $ 0.99 $ 1.03 Diluted....................................... $ 1.31 $ 0.95 $ 1.00
Options to purchase 5,676,477, 5,125,764 and 4,420,981 shares of common stock were outstanding at December 31, 2000, 1999 and 1998, respectively (Note 16), a portion of which has been reflected above using the treasury stock method. The weighted average contingently issuable OP units which were exchangeable, in certain circumstances into common shares, aggregated 2.2 million and 0.7 million for the years ended December 31, 1999 and 1998, respectively. The Company settled these contingently issuable OP Units for cash in 2000 (Note 12). F-32 DEVELOPERS DIVERSIFIED REALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Restricted shares totaling 101,612, 47,676 and 20,000, respectively, were not vested at December 31, 2000, 1999 and 1998 and consequently, were not included in the computation of basic EPS for all years presented (Note 16). Performance Units issued in 1996, convertible into 30,000 common shares of the Company, were not included in the computation of diluted EPS for 1998 because the effect was antidilutive (Note 16). Convertible debentures, which were convertible prior to their August 1999 maturity, into common shares of the Company at a price of $16.6875, were not included in the computation of diluted EPS for all years prior to maturity because the effect was antidilutive. For certain joint ventures where the joint venture partner has the right to convert its interest in the partnership to common shares of the Company or cash, at the election of the Company, it is the Company's intent to settle these conversions, if any, in cash. For the year ended December 31, 1998, significant estimates were utilized by the Company to determine the number of common shares assumed to be issued by the Company upon conversion, for purpose of determining dilution, if any. The joint venture in Merriam, Kansas was the only partnership conversion included in diluted EPS in 1998 because the impact was dilutive. The exchange into common stock of the minority interests was not included in the computation of diluted EPS for all years presented because the effect of assuming conversion was antidilutive (Note 12). The redemption of the Preferred Units, including those exercisable through the exercise of the warrant into common shares, was not included in the computation of diluted EPS for all years presented because the effect was antidilutive or they were considered contingently issuable (Note 12). Dividends declared per share for the years ended December 31, 2000, 1999 and 1998 are summarized as follows:
GROSS ORDINARY CAPITAL GAIN TOTAL 2000 DIVIDENDS DATE PAID INCOME DISTRIBUTIONS DIVIDENDS -------------- --------- -------------- ------------- --------- 4th quarter 1999*...................... 01/06/00 $0.1900 $0.0800 $0.2700 1st quarter............................ 04/07/00 0.2548 0.1052 0.3600 2nd quarter............................ 07/03/00 0.2548 0.1052 0.3600 3rd quarter............................ 10/02/00 0.2548 0.1052 0.3600 4th quarter**.......................... 01/04/01 0.1617 0.0667 0.2284 ------- ------- ------- $1.1161 $0.4623 $1.5784 ======= ======= =======
GROSS ORDINARY CAPITAL GAIN TOTAL 1999 DIVIDENDS DATE PAID INCOME DISTRIBUTIONS DIVIDENDS -------------- --------- -------------- ------------- --------- 4th quarter 1998....................... 01/04/99 $0.0684 $ -- $0.0684 1st quarter............................ 04/05/99 0.3500 -- 0.3500 2nd quarter............................ 07/02/99 0.3500 -- 0.3500 3rd quarter............................ 10/04/99 0.3500 -- 0.3500 4th quarter............................ 01/06/00 0.0800 -- 0.0800 ------- ------- ------- $1.1984 $ -- $1.1984 ======= ======= =======
F-33 DEVELOPERS DIVERSIFIED REALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
GROSS ORDINARY CAPITAL GAIN TOTAL 1998 DIVIDENDS DATE PAID INCOME DISTRIBUTIONS DIVIDENDS -------------- --------- -------------- ------------- --------- 1st quarter............................ 03/31/98 $0.3200 $0.0075 $0.3275 2nd quarter............................ 06/30/98 0.3200 0.0075 0.3275 3rd quarter............................ 10/01/98 0.3200 0.0075 0.3275 4th quarter............................ 01/04/99 0.2456 0.0060 0.2516 ------- ------- ------- $1.2056 $0.0285 $1.2341 ======= ======= =======
--------------- * A portion of the fourth quarter 1999 dividend paid on January 6, 2000 was reported to shareholders in 2000, of which $0.19 per share was reported as ordinary income and $0.08 per share was reported as capital gain income for the year ended December 31, 2000. ** A portion of the fourth quarter 2000 dividend paid on January 4, 2001 was reported to shareholders in 2000, of which $0.1617 per share was reported as ordinary income and $0.0667 per share was reported as capital gain income for the year ended December 31, 2000. The remaining portion of the January 4, 2001 dividend payment of $0.1316 per share will be reported to shareholders in 2001. 18. SUBSEQUENT EVENTS In January, 2001, the Company entered into a $100 million, two-year swap agreement, effectively converting a portion of the variable rate debt on the Company's unsecured credit facility to a fixed rate of approximately 6.3%. In January, 2001, the Company sold a 190,000 square foot shopping center in Ahoskie, North Carolina for a purchase price of approximately $8.3 million and recognized a gain of approximately $1.8 million. Proceeds from this sale were used to repay amounts outstanding on the Company's Revolving Credit Facility. Through February 21, 2001, the Company purchased a 20% interest in four properties, three located in California and one located in Washington, through the Fund. The Company's net investment in these properties is approximately $11.2 million. F-34 DEVELOPERS DIVERSIFIED REALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 19. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following table sets forth the quarterly results of operations for the years ended December 31, 2000 and 1999 (in thousands, except per share amounts):
FIRST SECOND THIRD FOURTH TOTAL ------- ------- ------- ------- -------- 2000: Revenues from operations.............................. $68,806 $71,710 $71,363 $73,914 $285,793 Income before equity in net income of joint ventures, minority equity investment, gain on disposition of real estate and investments, minority interests and extraordinary item.................................. 18,148 18,947 18,527 18,068 73,690 Income before extraordinary item...................... 37,977 18,713 21,025 23,118 100,833 Net income............................................ 37,977 18,713 21,025 23,118 100,833 Net income applicable to common shareholders.......... 31,161 11,898 14,209 16,303 73,571 Basic: Income before extraordinary item per common share... $ 0.53 $ 0.22 $ 0.26 $ 0.30 $ 1.31 Net income per common share......................... $ 0.53 $ 0.22 $ 0.26 $ 0.30 $ 1.31 Weighted average number of shares................... 59,034 55,222 54,793 54,802 55,959 Diluted: Income before extraordinary item per common share... $ 0.51 $ 0.21 $ 0.26 $ 0.30 $ 1.31 Net income per common share......................... $ 0.51 $ 0.21 $ 0.26 $ 0.30 $ 1.31 Weighted average number of shares................... 63,815 55,477 55,103 54,879 56,176 1999: Revenues from operations.............................. $65,138 $64,314 $66,226 $68,255 $263,933 Income before equity in net income of joint ventures, minority equity investment, loss on disposition of real estate and investments, minority interests and extraordinary item.................................. 18,530 19,560 20,066 18,001 76,157 Income before extraordinary item...................... 21,868 21,142 22,636 21,751 87,397 Net income............................................ 21,868 21,142 22,636 21,751 87,397 Net income applicable to common shareholders.......... 15,053 14,326 15,821 14,935 60,135 Basic: Income before extraordinary item per common share... $ 0.25 $ 0.23 $ 0.26 $ 0.25 $ 0.99 Net income per common share......................... $ 0.25 $ 0.23 $ 0.26 $ 0.25 $ 0.99 Weighted average number of shares................... 61,302 61,311 61,327 60,006 60,985 Diluted: Income before extraordinary item per common share... $ 0.24 $ 0.22 $ 0.25 $ 0.24 $ 0.95 Net income per common share......................... $ 0.24 $ 0.22 $ 0.25 $ 0.24 $ 0.95 Weighted average number of shares................... 64,016 63,992 66,448 62,626 63,468
20. PRICE RANGE OF COMMON SHARES (UNAUDITED) The high and low sale prices per share of the Company's common shares, as reported on the New York Stock Exchange Composite tape, and declared dividends per share for the quarterly periods indicated were as follows:
2000: HIGH LOW DIVIDENDS ----- ------ -------- --------- First...................................................... $13 7/8 $ 11 $.36 Second..................................................... 15 7/8 13 1/2 .36 Third...................................................... 16 1/4 12 3/4 .36 Fourth..................................................... 13 3/4 11 5/8 .36
F-35 DEVELOPERS DIVERSIFIED REALTY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1999: HIGH LOW DIVIDENDS ----- ------ -------- --------- First...................................................... $18 1/2 $ 13 5/8 $.35 Second..................................................... 17 1/2 13 7/8 .35 Third...................................................... 16 5/8 13 5/16 .35 Fourth..................................................... 14 7/8 12 5/16 .35
As of March 1, 2001, there were 465 recordholders and approximately 21,000 beneficial owners of the Company's common shares. F-36 SCHEDULE III DEVELOPERS DIVERSIFIED REALTY CORPORATION REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 2000
INITIAL COST TOTAL COST(a) ----------------------- ------------- BUILDINGS & BUILDINGS & ACCUMULATED LAND IMPROVEMENTS IMPROVEMENTS LAND IMPROVEMENTS TOTAL DEPRECIATION -------- ------------ ------------ -------- ------------- ---------- ------------ (IN THOUSANDS) Brandon, FL.................... $ 0 $ 4,111 $ 0 $ 0 $ 5,817 $ 5,817 $ 3,943 Stow, OH....................... 1,036 9,028 0 993 22,355 23,347 3,721 Fern Park, FL (Orlando)........ 446 303 97 446 409 855 290 Eastlake, OH................... 40 141 0 40 144 184 130 Highland Hts., OH.............. 3,987 7,896 0 3,987 13,627 17,614 2,081 Westlake, OH................... 424 3,803 203 424 6,025 6,449 3,462 Waterbury, CT.................. 0 3,048 0 0 3,226 3,226 2,818 Zanesville, OH................. 0 619 0 0 619 619 206 E. Norriton, PA................ 80 4,698 233 80 8,126 8,206 4,178 Palm Harbor, FL................ 1,137 4,089 0 1,137 4,166 5,303 797 Tarpon Springs, FL............. 248 7,382 81 248 11,345 11,593 6,743 Bayonet Pt., FL................ 2,113 8,181 128 2,220 8,405 10,625 4,335 Starkville, MS................. 1,271 8,209 0 1,112 9,648 10,760 1,856 Tupelo, MS..................... 2,282 14,979 0 2,282 15,635 17,917 3,055 Jacksonville, FL............... 3,005 9,425 0 3,028 9,487 12,515 1,746 Brunswick, MA.................. 3,836 15,459 0 3,836 17,885 21,721 1,914 Oceanside, CA.................. 0 10,643 0 0 10,643 10,643 0 Reno, NV....................... 0 366 0 0 366 366 0 Salisbury, MD.................. 1,073 6,216 0 1,454 8,607 10,062 295 Atlanta, GA.................... 475 9,374 0 475 9,610 10,086 2,143 Erie, PA....................... 10,880 19,201 0 6,629 40,989 47,618 5,613 Erie, PA....................... 0 2,564 13 0 3,690 3,690 2,384 Chillicothe, OH................ 43 2,549 2 1,266 11,811 13,077 2,861 Ocala, FL...................... 27 351 25 27 382 409 341 Tampa, FL (Waters)............. 4,105 6,640 324 3,905 7,392 11,298 2,377 Macedonia, OH.................. 4,392 10,885 0 4,392 10,992 15,383 560 Winchester, VA................. 618 13,903 0 618 19,531 20,149 3,686 Huber Heights, OH.............. 757 14,469 1 757 14,664 15,421 3,476 Lebanon, OH.................... 651 911 31 651 1,049 1,700 344 Wilmington, OH................. 157 1,616 51 157 1,752 1,909 1,310 Hillsboro, OH.................. 80 1,985 0 80 1,986 2,066 1,423 Canton, OH Phase II............ 5,672 18,390 0 6,394 18,541 24,934 1,570 Xenia, OH...................... 948 3,938 0 673 6,266 6,939 1,116 Boardman, OH................... 9,025 27,983 0 8,152 28,013 36,165 3,042 Solon, OH...................... 6,220 7,454 0 6,220 20,680 26,900 1,065 Cincinnati, OH................. 2,399 11,238 172 2,399 12,440 14,840 3,024 Bedford, IN.................... 706 8,425 6 1,067 10,016 11,083 2,115 Watertown, SD.................. 63 6,443 442 63 8,686 8,749 5,365 Connersville, IN............... 540 6,458 0 540 6,551 7,091 1,484 TOTAL COST, NET OF DEPRECIABLE DATE OF ACCUMULATED LIVES CONSTRUCTION(c) DEPRECIATION ENCUMBRANCES (YEARS)(1) ACQUISITION(a) ------------ ------------ ----------- --------------- (IN THOUSANDS) Brandon, FL.................... $ 1,874 $ 0 S/L 30 1972(c) Stow, OH....................... 19,627 0 S/L 30 1969(c) Fern Park, FL (Orlando)........ 565 0 S/L 30 1970(c) Eastlake, OH................... 54 0 S/L 30 1971(c) Highland Hts., OH.............. 15,533 0 S/L 31.5 1995(c) Westlake, OH................... 2,988 0 S/L 30 1974(c) Waterbury, CT.................. 408 0 S/L 30 1973(c) Zanesville, OH................. 413 0 S/L 31.5 1990(c) E. Norriton, PA................ 4,028 0 S/L 30 1975(c) Palm Harbor, FL................ 4,507 0 S/L 31.5 1995(a) Tarpon Springs, FL............. 4,850 0 S/L 30 1974(c) Bayonet Pt., FL................ 6,290 5,327 S/L 30 1985(c) Starkville, MS................. 8,904 0 S/L 31.5 1994(a) Tupelo, MS..................... 14,862 0 S/L 31.5 1994(a) Jacksonville, FL............... 10,768 0 S/L 31.5 1995(a) Brunswick, MA.................. 19,807 0 S/L 30 1973(c) Oceanside, CA.................. 10,643 0 S/L 31.5 2000(c) Reno, NV....................... 366 0 S/L 31.5 2000(c) Salisbury, MD.................. 9,766 0 S/L 31.5 1999(a) Atlanta, GA.................... 7,942 0 S/L 31.5 1994(a) Erie, PA....................... 42,005 0 S/L 31.5 1995(c) Erie, PA....................... 1,306 0 S/L 30 1973(c) Chillicothe, OH................ 10,215 0 S/L 30 1974(c) Ocala, FL...................... 68 0 S/L 30 1974(c) Tampa, FL (Waters)............. 8,921 0 S/L 31.5 1990(c) Macedonia, OH.................. 14,823 0 S/L 31.5 1998(c) Winchester, VA................. 16,464 0 S/L 31.5 1993(a) Huber Heights, OH.............. 11,946 0 S/L 31.5 1993(a) Lebanon, OH.................... 1,356 0 S/L 31.5 1993(a) Wilmington, OH................. 599 0 S/L 30 1977(c) Hillsboro, OH.................. 643 0 S/L 30 1979(c) Canton, OH Phase II............ 23,365 0 S/L 31.5 1995(a) Xenia, OH...................... 5,824 0 S/L 31.5 1994(a) Boardman, OH................... 33,123 0 S/L 31.5 1997(a) Solon, OH...................... 25,835 0 S/L 31.5 1998(c) Cincinnati, OH................. 11,816 0 S/L 31.5 1993(a) Bedford, IN.................... 8,968 0 S/L 31.5 1993(a) Watertown, SD.................. 3,383 0 S/L 30 1977(c) Connersville, IN............... 5,607 0 S/L 31.5 1993(a)
F-37
INITIAL COST TOTAL COST(a) ----------------------- ------------- BUILDINGS & BUILDINGS & ACCUMULATED LAND IMPROVEMENTS IMPROVEMENTS LAND IMPROVEMENTS TOTAL DEPRECIATION -------- ------------ ------------ -------- ------------- ---------- ------------ (IN THOUSANDS) Ashland, OH.................... 210 2,273 0 143 2,389 2,531 1,844 Pensacola, FL.................. 1,805 4,010 273 945 2,735 3,681 150 W. 65th Cleveland, OH.......... 90 1,463 15 90 1,542 1,632 1,174 Los Alamos, NM................. 725 3,500 30 725 4,692 5,417 2,006 North Olmsted, OH.............. 12,209 45,009 14 12,209 60,717 72,926 6,756 Tampa, FL (Dale)............... 4,269 5,368 205 4,269 6,093 10,361 1,905 Waynesville, NC................ 432 8,089 131 432 8,247 8,679 2,032 Ahoskie, NC.................... 270 7,776 3 270 7,804 8,073 1,711 Pulaski, VA.................... 528 6,396 2 528 6,405 6,934 1,565 St. Louis, MO (Sunset)......... 10,496 31,531 0 10,743 32,514 43,257 2,583 St. Louis, MO (Sunset)......... 2,294 6,874 0 2,461 7,377 9,839 572 St. Louis, MO (Brentwood)...... 10,628 32,053 0 10,018 31,956 41,974 2,614 Cedar Rapids, IA............... 4,219 12,697 0 4,219 13,026 17,245 1,074 St. Louis, MO (Olympic)........ 2,775 8,370 0 2,775 8,461 11,236 680 St. Louis, MO (Gravois)........ 1,336 4,050 0 1,525 4,707 6,232 356 St. Louis, MO (Morris)......... 0 2,048 0 0 2,051 2,051 161 St. Louis, MO (Keller)......... 1,632 4,936 0 1,632 4,942 6,574 394 St. Louis, MO (Southtown)...... 6,048 0 0 6,051 0 6,051 0 St. Louis, MO.................. 1,405 4,255 0 1,405 4,866 6,271 348 St. Louis, MO (American)....... 244 771 0 514 546 1,060 49 Aurora, OH..................... 832 7,560 0 1,688 8,465 10,153 870 Worthington, MN................ 374 6,404 441 374 7,765 8,139 4,868 Harrisburg, IL................. 550 7,619 0 550 7,896 8,446 1,705 Idaho Falls, ID................ 1,302 5,703 0 1,418 5,717 7,135 505 Mt. Vernon, IL................. 1,789 9,399 111 1,789 14,636 16,425 2,673 Fenton, MO..................... 414 4,244 476 430 6,679 7,109 3,105 Melbourne, FL.................. 0 3,085 117 0 3,207 3,207 2,316 Simpsonville, SC............... 431 6,563 0 431 6,564 6,995 1,459 Camden, SC..................... 627 7,519 7 1,016 9,192 10,208 1,904 Union, SC...................... 685 7,629 1 685 7,649 8,334 1,836 N. Charleston, SC.............. 911 11,346 1 1,081 14,955 16,036 3,046 S. Anderson, SC................ 1,366 6,117 13 1,366 6,150 7,516 1,353 Anderson, SC................... 204 940 0 204 940 1,144 172 Orangeburg, SC................. 318 1,693 0 318 3,408 3,726 418 Mt. Pleasant, SC............... 2,584 10,470 0 2,589 10,448 13,037 1,910 Columbia, SC................... 600 3,263 0 600 3,263 3,863 535 Sault Ste. Marie, MI........... 1,826 13,710 0 1,826 15,033 16,859 2,882 Cheboygan, MI.................. 127 3,612 0 127 3,775 3,902 821 Grand Rapids, MI............... 1,926 8,039 0 1,926 8,243 10,169 1,332 Detroit, MI.................... 6,738 26,988 27 6,738 27,022 33,760 2,440 Houghton, MI................... 440 7,301 1,821 440 11,269 11,709 6,872 Bad Axe, MI.................... 184 3,647 0 184 4,040 4,224 931 Gaylord, MI.................... 270 8,728 2 270 9,107 9,376 2,130 Howell, MI..................... 332 11,938 1 332 12,401 12,733 2,840 Mt. Pleasant, MI............... 767 7,769 20 767 11,491 12,258 2,435 TOTAL COST, NET OF DEPRECIABLE DATE OF ACCUMULATED LIVES CONSTRUCTION(c) DEPRECIATION ENCUMBRANCES (YEARS)(1) ACQUISITION(a) ------------ ------------ ----------- --------------- (IN THOUSANDS) Ashland, OH.................... 687 0 S/L 30 1977(c) Pensacola, FL.................. 3,530 0 S/L 30 1988(c) W. 65th Cleveland, OH.......... 458 0 S/L 30 1977(c) Los Alamos, NM................. 3,411 0 S/L 30 1978(c) North Olmsted, OH.............. 66,170 0 S/L 31.5 1997(a) Tampa, FL (Dale)............... 8,457 0 S/L 31.5 1990(c) Waynesville, NC................ 6,647 0 S/L 31.5 1993(a) Ahoskie, NC.................... 6,363 0 S/L 31.5 1994(a) Pulaski, VA.................... 5,368 0 S/L 31.5 1993(a) St. Louis, MO (Sunset)......... 40,674 0 S/L 31.5 1998(a) St. Louis, MO (Sunset)......... 9,266 0 S/L 31.5 1998(a) St. Louis, MO (Brentwood)...... 39,360 0 S/L 31.5 1998(a) Cedar Rapids, IA............... 16,171 11,071 S/L 31.5 1998(a) St. Louis, MO (Olympic)........ 10,556 4,602 S/L 31.5 1998(a) St. Louis, MO (Gravois)........ 5,875 2,746 S/L 31.5 1998(a) St. Louis, MO (Morris)......... 1,890 0 S/L 31.5 1998(a) St. Louis, MO (Keller)......... 6,180 2,478 S/L 31.5 1998(a) St. Louis, MO (Southtown)...... 6,051 0 S/L 31.5 1998(a) St. Louis, MO.................. 5,923 3,321 S/L 31.5 1998(a) St. Louis, MO (American)....... 1,011 0 S/L 31.5 1998(a) Aurora, OH..................... 9,283 0 S/L 31.5 1995(c) Worthington, MN................ 3,270 0 S/L 30 1977(c) Harrisburg, IL................. 6,741 0 S/L 31.5 1994(a) Idaho Falls, ID................ 6,631 0 S/L 31.5 1998(a) Mt. Vernon, IL................. 13,752 0 S/L 31.5 1993(a) Fenton, MO..................... 4,004 0 S/L 30 1983(a) Melbourne, FL.................. 891 0 S/L 30 1978(c) Simpsonville, SC............... 5,536 0 S/L 31.5 1994(a) Camden, SC..................... 8,304 0 S/L 31.5 1993(a) Union, SC...................... 6,498 0 S/L 31.5 1993(a) N. Charleston, SC.............. 12,990 0 S/L 31.5 1993(a) S. Anderson, SC................ 6,163 0 S/L 31.5 1994(a) Anderson, SC................... 972 0 S/L 31.5 1995(a) Orangeburg, SC................. 3,308 0 S/L 31.5 1995(a) Mt. Pleasant, SC............... 11,127 6,346 S/L 31.5 1995(a) Columbia, SC................... 3,327 0 S/L 31.5 1995(a) Sault Ste. Marie, MI........... 13,977 5,716 S/L 31.5 1994(a) Cheboygan, MI.................. 3,081 0 S/L 31.5 1993(a) Grand Rapids, MI............... 8,837 0 S/L 31.5 1995(a) Detroit, MI.................... 31,320 13,876 S/L 31.5 1998(a) Houghton, MI................... 4,836 0 S/L 30 1980(c) Bad Axe, MI.................... 3,293 0 S/L 31.5 1993(a) Gaylord, MI.................... 7,246 0 S/L 31.5 1993(a) Howell, MI..................... 9,892 0 S/L 31.5 1993(a) Mt. Pleasant, MI............... 9,823 0 S/L 31.5 1993(a)
F-38
INITIAL COST TOTAL COST(a) ----------------------- ------------- BUILDINGS & BUILDINGS & ACCUMULATED LAND IMPROVEMENTS IMPROVEMENTS LAND IMPROVEMENTS TOTAL DEPRECIATION -------- ------------ ------------ -------- ------------- ---------- ------------ (IN THOUSANDS) Elyria, OH..................... 352 5,693 0 352 5,693 6,045 2,780 Midvalley, UT.................. 25,662 56,759 0 25,662 59,602 85,263 4,637 Taylorsville, UT............... 24,327 53,686 0 25,394 56,399 81,793 4,258 Orem, UT....................... 5,428 12,259 0 5,428 12,717 18,145 974 Logan, UT...................... 774 1,651 0 774 1,652 2,426 132 Salt Lake City, UT............. 986 2,132 0 986 2,133 3,120 174 Riverdale, UT.................. 15,845 36,479 0 15,845 42,005 57,850 3,040 Bemidji, MN.................... 442 8,229 500 442 9,195 9,637 5,385 The Hermes Building............ 2,801 5,997 0 2,801 6,257 9,059 482 Ogden, UT...................... 3,620 7,716 0 3,620 7,748 11,368 617 Las Vegas, NV.................. 2,142 4,562 0 1,629 3,660 5,288 292 Rapid City, SD................. 758 1,625 0 758 1,745 2,503 143 Cape Coral, FL................. 1,287 2,548 150 1,287 5,257 6,544 1,693 Trindad, CO.................... 411 2,579 198 411 2,742 3,153 1,323 Hazard, KY..................... 403 3,271 297 403 3,584 3,986 2,480 Birmingham, AL................. 3,726 13,974 0 3,726 16,300 20,026 2,532 Birmingham, AL................. 10,573 26,002 0 11,434 33,821 45,255 5,797 Huntsville, AL................. 600 3,058 0 600 3,070 3,670 494 Brentwood, TN.................. 4,981 17,703 0 4,981 17,703 22,684 383 Jacksonville, NC............... 521 3,999 173 391 6,017 6,408 1,265 Ormond Beach, FL............... 1,048 15,812 4 1,048 16,220 17,269 3,395 Alamosa, CO.................... 161 1,034 211 161 1,224 1,386 677 Wilmington, NC................. 4,785 16,852 1,183 4,287 24,637 28,924 6,932 Berlin, VT..................... 859 10,948 24 866 13,768 14,634 5,199 Brainerd, MN................... 703 9,104 272 1,182 13,342 14,524 3,175 Spring Hill, FL................ 1,084 4,816 266 2,096 8,104 10,200 2,368 Tiffin, OH..................... 432 5,908 435 432 6,844 7,277 4,368 Toledo, OH..................... 2,491 10,583 0 2,491 10,684 13,175 1,961 Toledo, OH..................... 6,202 11,645 0 6,202 11,660 17,861 632 Denver,CO...................... 7,833 35,550 0 7,833 49,699 57,532 4,443 Dickinson, ND.................. 57 6,864 355 51 7,713 7,764 5,679 West Pasco, FL................. 1,422 6,552 9 1,358 6,443 7,800 3,049 Marianna, FL................... 1,496 3,500 130 1,496 3,641 5,138 1,206 Hutchinson, MN................. 402 5,510 657 427 6,552 6,979 4,139 New Bern, NC................... 780 8,204 72 441 4,991 5,431 1,389 Highland, IN................... 4,003 20,101 0 4,003 22,943 26,947 3,050 Princeton, NJ (Park)........... 7,121 29,783 0 7,121 30,029 37,150 2,636 Princeton, NJ (Pavillion)...... 6,327 22,936 0 6,327 22,936 29,263 1,101 St. Paul, MN................... 4,468 18,084 0 4,470 19,407 23,877 2,192 Russellville, AR............... 624 13,391 0 624 13,494 14,118 2,891 N. Little Rock, AR............. 907 17,160 0 907 17,495 18,402 3,746 Fayetteville, AK............... 2,366 9,503 0 6,677 17,050 23,728 1,371 Ottumwa, IA.................... 338 8,564 103 276 12,590 12,866 3,387 Washington, NC................. 991 3,118 34 878 4,547 5,424 1,240 Ovideo, FL..................... 6,010 6,439 0 4,394 10,905 15,298 267 TOTAL COST, NET OF DEPRECIABLE DATE OF ACCUMULATED LIVES CONSTRUCTION(c) DEPRECIATION ENCUMBRANCES (YEARS)(1) ACQUISITION(a) ------------ ------------ ----------- --------------- (IN THOUSANDS) Elyria, OH..................... 3,265 0 S/L 30 1977(c) Midvalley, UT.................. 80,626 0 S/L 31.5 1998(a) Taylorsville, UT............... 77,534 0 S/L 31.5 1998(a) Orem, UT....................... 17,171 8,067 S/L 31.5 1998(a) Logan, UT...................... 2,294 911 S/L 31.5 1998(a) Salt Lake City, UT............. 2,946 0 S/L 31.5 1998(a) Riverdale, UT.................. 54,810 9,814 S/L 31.5 1998(a) Bemidji, MN.................... 4,252 0 S/L 30 1977(c) The Hermes Building............ 8,576 1,420 S/L 31.5 1998(a) Ogden, UT...................... 10,751 0 S/L 31.5 1998(a) Las Vegas, NV.................. 4,996 0 S/L 31.5 1998(a) Rapid City, SD................. 2,360 425 S/L 31.5 1998(a) Cape Coral, FL................. 4,851 0 S/L 30 1985(c) Trindad, CO.................... 1,830 0 S/L 30 1986(c) Hazard, KY..................... 1,506 0 S/L 30 1978(c) Birmingham, AL................. 17,495 0 S/L 31.5 1994(a) Birmingham, AL................. 39,457 0 S/L 31.5 1995(a) Huntsville, AL................. 3,176 0 S/L 31.5 1995(a) Brentwood, TN.................. 22,301 16,361 S/L 31.5 2000(a) Jacksonville, NC............... 5,143 0 S/L 31.5 1989(c) Ormond Beach, FL............... 13,874 0 S/L 31.5 1994(a) Alamosa, CO.................... 709 0 S/L 30 1986(c) Wilmington, NC................. 21,992 0 S/L 31.5 1989(c) Berlin, VT..................... 9,436 4,940 S/L 30 1986(c) Brainerd, MN................... 11,349 585 S/L 31.5 1991(a) Spring Hill, FL................ 7,833 5,849 S/L 30 1988(c) Tiffin, OH..................... 2,908 0 S/L 30 1980(c) Toledo, OH..................... 11,214 0 S/L 31.5 1995(a) Toledo, OH..................... 17,230 23,000 S/L 31.5 1997(c) Denver,CO...................... 53,089 0 S/L 31.5 1997(c) Dickinson, ND.................. 2,086 0 S/L 30 1978(c) West Pasco, FL................. 4,752 4,784 S/L 30 1986(c) Marianna, FL................... 3,932 0 S/L 31.5 1990(c) Hutchinson, MN................. 2,840 4,734 S/L 30 1981(c) New Bern, NC................... 4,042 0 S/L 31.5 1989(c) Highland, IN................... 23,896 0 S/L 31.5 1997(a) Princeton, NJ (Park)........... 34,514 27,220 S/L 31.5 1998(a) Princeton, NJ (Pavillion)...... 28,162 0 S/L 31.5 2000(c) St. Paul, MN................... 21,685 0 S/L 31.5 1997(a) Russellville, AR............... 11,227 0 S/L 31.5 1994(a) N. Little Rock, AR............. 14,656 0 S/L 31.5 1994(a) Fayetteville, AK............... 22,356 0 S/L 31.5 1997(a) Ottumwa, IA.................... 9,479 0 S/L 31.5 1990(c) Washington, NC................. 4,184 0 S/L 31.5 1990(c) Ovideo, FL..................... 15,032 0 S/L 31.5 1997(c)
F-39
INITIAL COST TOTAL COST(a) ----------------------- ------------- BUILDINGS & BUILDINGS & ACCUMULATED LAND IMPROVEMENTS IMPROVEMENTS LAND IMPROVEMENTS TOTAL DEPRECIATION -------- ------------ ------------ -------- ------------- ---------- ------------ (IN THOUSANDS) Orlando, FL.................... 4,792 11,674 84 4,792 12,513 17,305 4,737 Durham, NC..................... 2,210 11,671 278 2,210 12,706 14,917 4,031 Crystal River, FL.............. 1,217 5,796 365 1,219 5,984 7,204 2,890 Bellefontaine, OH.............. 998 3,221 0 998 5,500 6,498 385 Dublin, OH..................... 3,609 11,546 0 3,609 11,661 15,271 1,025 Grove City, OH................. 2,848 9,132 0 2,848 9,132 11,980 801 Hamilton, OH................... 495 1,618 0 495 1,618 2,113 141 Gahanna, OH.................... 1,029 3,320 0 1,029 3,320 4,349 289 Pataskala, OH.................. 514 1,679 0 514 1,679 2,193 146 Pickerington, OH............... 1,896 6,086 0 1,896 6,086 7,982 531 Barboursville, OH.............. 431 1,417 2 431 1,419 1,851 124 Columbus, OH................... 11,087 44,494 0 11,866 47,787 59,653 3,582 Portfolio Balance (DDR)........ 11,574 127,923 9,235 30,859 176,636 207,495 2,992 -------- ---------- ------- -------- ---------- ---------- -------- $367,197 $1,487,588 $20,557 $389,593 $1,772,220 $2,161,817 $297,249 ======== ========== ======= ======== ========== ========== ======== TOTAL COST, NET OF DEPRECIABLE DATE OF ACCUMULATED LIVES CONSTRUCTION(c) DEPRECIATION ENCUMBRANCES (YEARS)(1) ACQUISITION(a) ------------ ------------ ----------- --------------- (IN THOUSANDS) Orlando, FL.................... 12,568 0 S/L 31.5 1989(c) Durham, NC..................... 10,886 0 S/L 31.5 1990(c) Crystal River, FL.............. 4,314 0 S/L 30 1986(c) Bellefontaine, OH.............. 6,112 2,923 S/L 31.5 1998(a) Dublin, OH..................... 14,246 10,336 S/L 31.5 1998(a) Grove City, OH................. 11,179 7,605 S/L 31.5 1998(a) Hamilton, OH................... 1,972 0 S/L 31.5 1998(a) Gahanna, OH.................... 4,059 0 S/L 31.5 1998(a) Pataskala, OH.................. 2,047 716 S/L 31.5 1998(a) Pickerington, OH............... 7,452 5,015 S/L 31.5 1998(a) Barboursville, OH.............. 1,726 0 S/L 31.5 1998(a) Columbus, OH................... 56,070 0 S/L 31.5 1998(a) Portfolio Balance (DDR)........ 204,503 74,457 ---------- -------- $1,864,563 $264,645 ========== ========
--------------- (1) S/L refers to straight-line depreciation. (a) The Aggregate Cost for Federal Income Tax purposes was approximately $2.2 billion at December 31, 2000 F-40 The changes in Total Real Estate Assets for the three years ended December 31, 2000 are as follows:
2000 1999 1998 ---------- ---------- ---------- Balance, Beginning of Year....................... $2,068,274 $1,896,763 $1,325,743 Acquisitions and Transfers From Joint Ventures... 81,087 78,318 688,431 Developments, Improvements and Expansions........ 67,707 131,977 58,566 Changes in Land Under Development and Construction in Progress....................... 33,862 (1,169) 98,277 Sales, Retirements and Transfers to Joint Ventures....................................... (89,118) (37,615) (274,254) ---------- ---------- ---------- Balance, End of Year............................. $2,161,812 $2,068,274 $1,896,763 ========== ========== ==========
The changes in Accumulated Depreciation and Amortization for the three years ended December 31, 2000 are as follows:
2000 1999 1998 -------- -------- -------- BALANCE, BEGINNING OF YEAR........................... $249,912 $203,097 $171,737 DEPRECIATION FOR YEAR................................ 54,201 49,998 42,952 SALES AND RETIREMENTS................................ (6,866) (3,183) (11,592) -------- -------- -------- BALANCE, END OF YEAR................................. $297,247 $249,912 $203,097 ======== ======== ========
F-41 DEVELOPERS DIVERSIFIED REALTY CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31, 2001 2000 --------------- -------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) ASSETS Real estate rental property: Land.................................................... $ 415,150 $ 358,270 Buildings............................................... 1,812,361 1,579,866 Fixtures and tenant improvements........................ 49,176 40,906 Land under development.................................. 26,243 31,323 Construction in progress................................ 177,664 151,445 ---------- ---------- 2,480,594 2,161,810 Less accumulated depreciation........................... (336,144) (297,247) ---------- ---------- Real estate, net........................................ 2,144,450 1,864,563 Cash and cash equivalents................................... 12,324 4,243 Investments in and advances to joint venture................ 275,973 260,927 Minority equity investment.................................. -- 135,028 Notes receivable............................................ 6,967 4,824 Other assets................................................ 68,874 62,436 ---------- ---------- $2,508,588 $2,332,021 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Unsecured indebtedness: Fixed rate senior notes................................. 425,803 492,431 Revolving credit facility............................... 403,500 419,500 ---------- ---------- 829,303 911,931 ---------- ---------- Secured indebtedness: Revolving credit facility............................... 21,500 21,000 Mortgage and other secured indebtedness................. 535,334 294,644 ---------- ---------- 556,834 315,644 ---------- ---------- Total indebtedness.................................... 1,386,137 1,227,575 Accounts payable and accrued expenses....................... 60,170 53,818 Dividends payable........................................... 20,460 19,757 Other liabilities........................................... 19,484 11,319 ---------- ---------- 1,486,251 1,312,469 Minority equity interest.................................... 23,488 8,198 Preferred operating partnership interests................... 207,111 207,111 Operating partnership minority interests.................... 20,256 20,493 ---------- ---------- 1,737,106 1,548,271 ---------- ---------- Commitments and contingencies Shareholders' equity: Class A -- 9.5% cumulative redeemable preferred shares, without par value, $250 liquidation value; 750,000 shares authorized; 421,500 shares issued and outstanding at September 30, 2001 and December 31, 2000............. 105,375 105,375 Class B -- 9.44% cumulative redeemable preferred shares, without par value, $250 liquidation value; 750,000 shares authorized; 177,500 shares issued and outstanding at September 30, 2001 and December 31, 2000............. 44,375 44,375 Class C -- 8.375% cumulative redeemable preferred shares, without par value, $250 liquidation value; 750,000 shares authorized; 400,000 shares issued and outstanding at September 30, 2001 and December 31, 2000............. 100,000 100,000 Class D -- 8.68% cumulative redeemable preferred shares, without par value, $250 liquidation value; 750,000 shares authorized; 216,000 shares issued and outstanding at September 30, 2001 and December 31, 2000............. 54,000 54,000 Common shares, without par value, $.10 stated value; 100,000,000 shares authorized; 61,936,045 and 61,481,736 shares issued at September 30, 2001 and December 31, 2000, respectively...................................... 6,194 6,148 Paid-in-capital......................................... 682,550 676,150 Accumulated distributions in excess of net income....... (121,915) (112,357) Accumulated other comprehensive income.................. (8,004) -- Less: Unearned compensation -- restricted stock....... (1,883) (1,239) Common stock in treasury at cost: 6,638,457 and 6,601,250 shares at September 30, 2001 and December 31, 2000, respectively.................. (89,210) (88,702) ---------- ---------- 771,482 783,750 ---------- ---------- $2,508,588 $2,332,021 ========== ==========
The accompanying notes are an integral part of these condensed consolidated financial statements. F-42 DEVELOPERS DIVERSIFIED REALTY CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTH PERIODS ENDING SEPTEMBER 30, -------------------------- 2001 2000 ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) Revenues from operations: Minimum rents.......................................... $59,480 $50,928 Percentage and overage rents........................... 532 648 Recoveries from tenants................................ 15,042 13,008 Ancillary income....................................... 373 284 Other property related income.......................... 393 243 Management fee income.................................. 2,797 1,754 Development fee income................................. 698 45 Interest income........................................ 1,226 761 Other.................................................. 2,460 4,433 ------- ------- 83,001 72,104 ------- ------- Rental operation expenses: Operating and maintenance.............................. 8,244 7,212 Real estate taxes...................................... 9,418 8,054 General and administrative............................. 5,907 4,751 Interest............................................... 20,861 19,792 Impairment charge...................................... 2,895 -- Depreciation and amortization.......................... 16,869 13,768 ------- ------- 64,194 53,577 ------- ------- Income before equity in net income of joint ventures and minority equity investment, gain on disposition of real estate and real estate investments and minority interests................................................. 18,807 18,527 Equity in net income of joint ventures...................... 4,076 3,568 Equity in net income from minority equity investment........ -- 2,227 Gain on disposition of real estate and real estate investments............................................... 3,015 1,890 ------- ------- Income before minority interests............................ 25,898 26,212 Minority interests: Minority equity interests.............................. (404) (31) Preferred operating partnership minority interests..... (4,770) (4,770) Operating partnership minority interests............... (372) (386) ------- ------- (5,546) (5,187) ------- ------- Net income.................................................. $20,352 $21,025 ======= ======= Net income applicable to common shareholders................ $13,537 $14,210 ======= ======= Per share data: Earnings per common share -- Basic.................................................. $ 0.25 $ 0.26 ======= ======= Diluted................................................ $ 0.24 $ 0.26 ======= =======
The accompanying notes are an integral part of these condensed consolidated financial statements. F-43 DEVELOPERS DIVERSIFIED REALTY CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTH PERIODS ENDING SEPTEMBER 30, ----------------------- 2001 2000 ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) Revenues from operations: Minimum rents.......................................... $167,041 $150,637 Percentage and overage rents........................... 2,212 3,384 Recoveries from tenants................................ 44,153 40,349 Ancillary income....................................... 1,039 731 Other property related income.......................... 765 510 Management fee income.................................. 8,816 4,820 Development fee income................................. 1,724 1,268 Interest income........................................ 4,724 2,572 Other.................................................. 6,225 8,790 -------- -------- 236,699 213,061 Rental operation expenses: Operating and maintenance.............................. 25,177 20,346 Real estate taxes...................................... 26,241 24,966 General and administrative............................. 17,838 14,919 Interest............................................... 61,867 56,582 Impairment charge...................................... 2,895 -- Depreciation and amortization.......................... 45,259 40,625 -------- -------- 179,277 157,438 -------- -------- Income before equity in net income of joint ventures and minority equity investment, gain on disposition of real estate and real estate investments and minority interests................................................. 57,422 55,623 Equity in net income of joint ventures...................... 13,431 12,402 Equity in net income from minority equity investment........ 1,550 5,136 Gain on disposition of real estate and real estate investments............................................... 15,761 18,979 -------- -------- Income before minority interests............................ 88,164 92,140 Minority interests: Minority equity interests.............................. (530) (138) Preferred operating partnership minority interests..... (14,311) (10,531) Operating partnership minority interests............... (1,147) (3,756) -------- -------- (15,988) (14,425) -------- -------- Net income.................................................. $ 72,176 $ 77,715 ======== ======== Net income applicable to common shareholders................ $ 51,729 $ 57,268 ======== ======== Per share data: Earnings per common share -- Basic.................................................. $ 0.94 $ 1.02 ======== ======== Diluted................................................ $ 0.93 $ 1.01 ======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements. F-44 DEVELOPERS DIVERSIFIED REALTY CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDING SEPTEMBER 30, ----------------------- 2001 2000 ---------- ---------- (DOLLARS IN THOUSANDS) (UNAUDITED) Net cash flow provided by operating activities.............. $135,918 $114,249 -------- -------- Cash flow from investing activities: Real estate developed or acquired...................... (75,336) (61,305) Investments in and advances to joint ventures and minority equity investment, net....................... (30,435) (46,654) Repayment of notes receivable............................. 2,565 3,376 Repayment of (advances to) affiliates.................. 5,993 (21,691) Proceeds from disposition of real estate and real estate investments.................................... 51,603 98,311 -------- -------- Net cash flow used for investing activities................. (45,610) (27,963) -------- -------- Cash flow from financing activities: (Repayment of) proceeds from revolving credit facilities and temporary bridge loans, net............ (65,500) 158,975 Proceeds from construction loans and mortgages......... 220,020 -- Repayment of senior notes.............................. (66,700) (100,000) Principal payments on rental property debt............. (76,817) (7,989) Payment of deferred finance costs...................... (1,406) (3,643) Net proceeds from issuance of preferred operating partnership units..................................... -- 102,375 Repurchase of operating partnership minority interests............................................. -- (81,901) Proceeds from issuance of common shares in conjunction with exercise of stock options, the Company's 401(k) plan, dividend reinvestment plan and restricted stock plan.................................................. 5,402 700 Purchase of treasury stock............................. (508) (62,866) Distributions to preferred and operating partnership minority interests.................................... (15,781) (13,468) Dividends paid......................................... (80,937) (81,927) -------- -------- Net cash flow used for financing activities................. (82,227) (89,744) -------- -------- Increase (decrease) in cash and cash equivalents............ 8,081 (3,458) Cash and cash equivalents, beginning of period.............. 4,243 5,992 -------- -------- Cash and cash equivalents, end of period.................... $ 12,324 $ 2,534 ======== ========
Supplemental disclosure of non cash investing and financing activities: During the nine month period ended September 30, 2001, in conjunction with the merger of American Industrial Properties, the Company recorded real estate assets with a fair value of $285.7 million, other assets of $5.9 million, debt of $147.6 million and other liabilities of $14.5 million. The consolidation of the aforementioned assets and liabilities also resulted in the elimination of the Company's minority equity investment of $129.5 million (Note 3). In addition, at September 30, 2001, included in accounts payable is $20.5 million of dividends declared. Included in other liabilities is approximately $8.0 million which represents the aggregate fair value of the Company's interest rate swaps. The foregoing transactions did not provide for or require the use of cash. During the nine month period ended September 30, 2000, in conjunction with the formation of a joint venture, the Company transferred property to the joint venture with a net book value of $25.6 million and debt of $18.0 million in exchange for a 50% equity interest. In conjunction with the acquisition of a shopping center the Company assumed mortgage debt and other liabilities of approximately $16.6 million. Due to the consolidation of certain joint venture interests previously accounted for under the equity method, the Company recorded property with a net book value of $39.2 million and debt of $24.9 million. Included in accounts payable was approximately $0.2 million relating to construction in progress and $19.8 million of dividends declared at September 30, 2000. The foregoing transactions did not provide for or require the use of cash. The accompanying notes are an integral part of these condensed consolidated financial statements. F-45 DEVELOPERS DIVERSIFIED REALTY CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF BUSINESS AND FINANCIAL STATEMENT PRESENTATION Developers Diversified Realty Corporation, related real estate joint ventures and subsidiaries (collectively the "Company" or "DDR"), are engaged in the business of acquiring, expanding, owning, developing, managing and operating neighborhood and community shopping centers, enclosed malls and business centers. RECLASSIFICATIONS Certain reclassifications have been made to the 2000 financial statements to conform to the 2001 presentation. USE OF ESTIMATES The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. UNAUDITED INTERIM FINANCIAL STATEMENTS The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and all majority owned subsidiaries and investments where the Company has financial and operating control. Investments in real estate joint ventures and companies for which the Company has the ability to exercise significant influence over but does not have financial and operating control are accounted for using the equity method of accounting. These financial statements have been prepared by the Company in accordance with generally accepted accounting principles for interim financial information and the applicable rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. However, in the opinion of management, the interim financial statements include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the results of the periods presented. The results of the operations for the three and nine months ended September 30, 2001 and 2000 are not necessarily indicative of the results that may be expected for the full year. These condensed consolidated financial statements should be read in conjunction with the Company's audited financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. COMPREHENSIVE INCOME Comprehensive income for the three month periods ended September 30, 2001 and 2000 was $16,567,000 and $21,025,000, respectively. Comprehensive income for the nine month periods ended September 30, 2001 and 2000 was $64,172,000 and $77,715,000, respectively. NEW ACCOUNTING STANDARDS In June 2001, the FASB issued Statement of Financial Accounting Standard ("SFAS") No. 141 -- "Business Combinations" which addresses financial accounting and reporting for business combinations. This standard also addresses financial accounting and reporting for goodwill and other intangible assets acquired in a business combination at acquisition. The provisions of this SFAS apply to all business combinations initiated after June 30, 2001. The Company does not expect this pronouncement to have a material impact on the Company's financial position or cash flows. F-46 DEVELOPERS DIVERSIFIED REALTY CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In June 2001, the FASB issued SFAS No. 142 -- "Goodwill and Other Intangibles" which addresses financial accounting and reporting for intangible assets acquired individually or with a group of other assets (but not those acquired in a business combination) at acquisition. This standard also addresses financial accounting and reporting for goodwill and other intangible assets subsequent to their acquisition. The new standard becomes effective for the Company for the year ending December 31, 2002. The Company does not expect this pronouncement to have a material impact on the Company's financial position or cash flows. In October 2001, the FASB issued Statement of Financial Accounting Standard ("SFAS") No. 144 -- "Accounting for the Impairment or Disposal of Long-Lived Assets" which addresses financial accounting and reporting for the impairment or disposal of long lived assets. This standard harmonizes the accounting for impaired assets and resolves some of the implementation issues as originally described in SFAS 121. The new standard become effective for the Company for the year ending December 31, 2002. The Company does not expect this pronouncement to have a material impact on the Company's financial position or cash flows. 2. EQUITY INVESTMENTS IN JOINT VENTURES At September 30, 2001, the Company owned various joint ventures which own fifty-five operating shopping center properties and five shopping center properties under development. Combined condensed financial information of the Company's joint venture investments are as follows (in thousands):
SEPTEMBER 30, DECEMBER 31, 2001 2000 ------------- ------------ Combined Balance Sheets: Land...................................................... $ 366,580 $ 301,409 Buildings................................................. 1,240,316 1,055,704 Fixtures and tenant improvements.......................... 13,447 10,412 Construction in progress.................................. 139,445 102,353 ---------- ---------- 1,759,788 1,469,878 Less accumulated depreciation............................. (131,954) (106,964) ---------- ---------- Real estate, net.......................................... 1,627,834 1,362,914 Receivables, net.......................................... 53,376 39,567 Investment in joint ventures.............................. 17,327 13,156 Other assets.............................................. 55,512 38,459 ---------- ---------- $1,754,049 $1,454,096 ========== ========== Mortgage debt............................................. $1,137,821 $ 942,451 Amounts payable to DDR.................................... 98,052 105,527 Other liabilities......................................... 47,098 29,154 ---------- ---------- 1,282,971 1,077,132 Accumulated equity........................................ 471,078 376,964 ---------- ---------- $1,754,049 $1,454,096 ========== ========== Company's proportionate share of accumulated equity....... $ 148,175 $ 126,114 ========== ==========
F-47 DEVELOPERS DIVERSIFIED REALTY CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
THREE MONTH PERIODS NINE MONTH PERIODS ENDING SEPTEMBER 30, ENDING SEPTEMBER 30, --------------------- --------------------- 2001 2000 2001 2000 --------- --------- --------- --------- Combined Statements of Operations: Revenues from operations................... $61,282 $47,298 $180,272 $139,558 ------- ------- -------- -------- Rental operation expenses.................. 20,304 15,295 56,244 41,606 Depreciation and amortization expense of real estate investments................. 9,873 6,726 26,620 19,468 Interest expense........................... 19,618 17,269 59,014 49,465 ------- ------- -------- -------- 49,795 39,290 141,878 110,539 ------- ------- -------- -------- Income before loss on sale of real estate.................................. 11,487 8,008 38,394 29,019 Gain (loss) on sale of real estate......... -- 1,336 (97) 1,336 ------- ------- -------- -------- Net income................................. $11,487 $ 9,344 $ 38,297 $ 30,355 ======= ======= ======== ======== Company's proportionate share of net income*.................................... $ 4,154 $ 3,591 $ 14,256 $ 13,806 ======= ======= ======== ========
--------------- * For the three month periods ended at September 30, 2001 and 2000, the slight difference between the $4.2 million and $3.6 million, respectively, of the Company's proportionate share of net income reflected above, and $4.1 million and $3.6 million, respectively, of equity in net income of joint ventures reflected in the Company's statement of operations is attributable to additional depreciation associated with basis differentials. For the nine month periods ended at September 30, 2001 and 2000, the difference between the $14.3 million and $13.8 million, respectively, of the Company's proportionate share of net income reflected above, and $13.4 million and $12.4 million, respectively, of equity in net income of joint ventures reflected in the Company's statement of operations is attributable to additional depreciation associated with basis differentials. Basis differentials occur primarily when the Company has purchased an interest in existing joint ventures at fair market values which differ from their proportionate share of the historical net assets of the joint venture. Included in management fee income for the nine month period ended September 30, 2001 and 2000, is approximately $5.2 and $4.2 million, respectively, of management fees earned by the Company for services rendered to the joint ventures. Also included in revenues for the nine month period ended September 30, 2001 and 2000, is approximately $2.5 million and $1.7 million, respectively, of development fee income and commissions for services rendered to the joint ventures, net of amounts eliminated related to the Company's proportionate ownership share. In 2000, the Company announced its intention to acquire several west coast retail properties from Burnham Pacific Properties, Inc. ("Burnham") through a joint venture with Prudential Real Estate Investors ("PREI") and Coventry Real Estate Partners ("Coventry"). The joint venture was funded as follows: 1% by Coventry, 20% by DDR, and 79% by Prudential. As of September 30, 2001, ten properties were acquired at an aggregate cost of approximately $264 million. The joint venture's equity investment as of September 30, 2001 is approximately $123 million. The Company earns fees for managing and leasing the properties, all of which are located in western states. 3. MINORITY EQUITY INVESTMENT The Company completed its previously announced merger with American Industrial Properties ("AIP") following AIP shareholder's approval of the plan of merger on May 14, 2001. AIP shareholders also approved the sale of 31 industrial assets to an affiliate of Lend Lease Real Estate Investments, Inc. ("Lend Lease") for $292.2 million, which closed on May 14, 2001, immediately prior to the merger. F-48 DEVELOPERS DIVERSIFIED REALTY CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Under the merger agreement, all common shareholders' interest, other than DDR, were effectively redeemed and each shareholder received a final cash payment equal to $12.89 per share which was funded from proceeds received from the asset sale to Lend Lease. In addition, in January 2001, all AIP shareholders, including DDR, received a special dividend of $1.27 per share associated with the sale of the Manhattan Towers office building in November 2000 for $55.3 million. The merger of a wholly owned subsidiary of DDR (DDR Transitory Sub, Inc.) into AIP provides DDR with complete ownership of all AIP's 39 remaining properties after the sale to Lend Lease. This portfolio is comprised of 31 industrial properties, six office properties, two retail properties and 23.7 acres of undeveloped land. DDR intends to implement an orderly strategic disposition of the industrial and office assets. From the date of the merger, the AIP assets, liabilities and operating results are consolidated in the Company's financial statements. Prior to the merger and since 1999, the Company owned a 46% common stock interest which was accounted for under the equity method of accounting. The Company's effective purchase of the remaining interest in AIP through the redemption of all other shareholders, as previously described, was accounted for as a step acquisition. The summarized balance sheet of AIP as of December 31, 2000 and results of operations through the date of the merger and for the three and nine month periods ended September 30, 2000, as reflected on the accounts of AIP, were as follows (in thousands):
DECEMBER 31, 2000 ------------ Balance Sheet: Land...................................... $150,108 Buildings................................. 453,168 -------- 603,276 Less accumulated depreciation............. (55,341) -------- Real estate, net.......................... 547,935 Other assets.............................. 44,103 -------- $592,038 ======== Mortgage debt............................. $284,924 Other liabilities......................... 41,912 -------- 326,836 Accumulated equity........................ 265,202 -------- $592,038 ========
F-49 DEVELOPERS DIVERSIFIED REALTY CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
THREE MONTH FOR THE PERIOD NINE MONTH PERIOD ENDED JANUARY 1, 2001 PERIOD ENDED SEPTEMBER 30, TO MAY 14, SEPTEMBER 30, 2000 2001 2000 ------------- --------------- ------------- Statement of Operations: Revenues from operations................... $22,896 $34,029 $67,403 ------- ------- ------- Rental operation expenses.................. 7,776 12,057 23,195 Restructuring costs........................ -- 4,920 -- Depreciation and amortization expense...... 3,253 3,437 10,580 Interest expense........................... 6,434 7,480 19,390 ------- ------- ------- 17,463 27,894 53,165 ------- ------- ------- 5,433 6,135 14,238 Minority interests......................... (190) (281) (385) Equity earnings in joint venture........... 50 -- 120 (Loss) gain on disposition of real estate.................................. (104) (2,130) 2,906 ------- ------- ------- Income before extraordinary item........... 5,189 3,724 16,879 Extraordinary item......................... -- -- (329) ------- ------- ------- Net income................................. $ 5,189 $ 3,724 $16,550 ======= ======= =======
For the period from January 1, 2001 through May 14, 2001 and the nine month period ended September 30, 2000, the Company recorded equity in net income from minority equity investment of $1.6 million and $5.1 million, respectively. The difference between the Company's share in net income as reported in the financial statements of AIP and that reflected on the Company's accounts is attributable to adjustments relating to depreciation and amortization and gain (loss) on disposition of real estate associated with basis adjustments. 4. ACQUISITIONS AND PRO FORMA FINANCIAL INFORMATION As discussed in Note 3, on May 14, 2001, the Company completed the merger with AIP. In conjunction with this merger, the Company gained control of 39 properties aggregating approximately 4.5 million of Company-owned gross leasable square feet (GLA). The operating results of the 39 properties are included in the results of operations of the Company from the effective date of the merger. The following unaudited supplemental pro forma operating data is presented for the nine months ended September 30, 2001 and 2000 as if the merger of the AIP properties, net of the Lend Lease sale, had occurred on January 1, 2001 and 2000, respectively.
NINE MONTH PERIODS ENDING SEPTEMBER 30, --------------------- 2001 2000 --------- --------- (IN THOUSANDS, EXCEPT PER SHARE) Pro forma revenues.......................................... $252,710 $243,965 ======== ======== Pro forma income before extraordinary item.................. $ 75,217 $ 80,690 ======== ======== Pro forma net income applicable to common shareholders...... $ 54,771 $ 60,244 ======== ======== Per share data: Earnings per common share Basic.................................................. $ 1.00 $ 1.07 ======== ======== Diluted................................................ $ 0.99 $ 1.06 ======== ========
F-50 DEVELOPERS DIVERSIFIED REALTY CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. IMPAIRMENT CHARGE During the second quarter of 2001, one of the Company's retail tenants announced it was liquidating its inventory and closing its remaining stores. In assessing recoverability of its recorded assets associated with this tenant, the Company had initially estimated, based upon its prior experience with similar liquidations, that proceeds relating to the Company's claims in liquidation would be sufficient to recover the aggregate recorded assets for this tenant. However, in the third quarter, the tenant completed its sale of inventory and auction of its real estate. The Company has not yet been informed of the tenant's formal plan of liquidation. However, the Company believes that based on (i) lack of significant proceeds received by the tenant on its auction of real estate and the other assets, and (ii) lack of positive information disseminated from the tenant that would indicate lack of probable recoverability of certain recorded amounts, a provision of $2.9 million has been recorded and reflected as an impairment charge within the statement of operations. At September 30, 2001, there was a $0.5 million in remaining amounts related to this tenant which the Company believes to be realizable. 6. SHAREHOLDERS' EQUITY AND OPERATING PARTNERSHIP UNITS The following table summarizes the changes in shareholders' equity since December 31, 2000 (in thousands):
COMMON ACCUMULATED ACCUMULATED UNEARNED PREFERRED SHARES DISTRIBUTIONS OTHER COMPENSATION SHARES ($.10 STATED PAID-IN IN EXCESS OF COMPREHENSIVE RESTRICTED ($250 STATED VALUE) VALUE) CAPITAL NET INCOME INCOME STOCK ------------------- ------------ -------- ------------- ------------- ------------ Balance December 31, 2000....... $303,750 $6,148 $676,150 $(112,357) $ -- $(1,239) Net income...................... 72,176 Cumulative effect of FAS 133 transition adjustment......... (1,433) Change in fair value of interest rate swaps.................... (6,571) Dividends declared -common shares........................ (61,288) Dividends declared -preferred shares........................ (20,446) Vesting of restricted stock..... 216 Issuance of restricted stock.... 8 1,066 (860) Purchases of common shares...... Issuance of common shares related to exercise of stock options, performance units and dividend reinvestment plan.... 38 5,334 -------- ------ -------- --------- ------- ------- Balance September 30, 2001...... $303,750 $6,194 $682,550 $(121,915) $(8,004) $(1,883) ======== ====== ======== ========= ======= ======= TREASURY STOCK AT COST TOTAL -------- -------- Balance December 31, 2000....... $(88,702) $783,750 Net income...................... 72,176 Cumulative effect of FAS 133 transition adjustment......... (1,433) Change in fair value of interest rate swaps.................... (6,571) Dividends declared -common shares........................ (61,288) Dividends declared -preferred shares........................ (20,446) Vesting of restricted stock..... 216 Issuance of restricted stock.... 214 Purchases of common shares...... (508) (508) Issuance of common shares related to exercise of stock options, performance units and dividend reinvestment plan.... 5,372 -------- -------- Balance September 30, 2001...... $(89,210) $771,482 ======== ========
Dividends declared were $0.37 and $0.36 for the three month periods ended September 30, 2001 and 2000, respectively. Dividends declared were $1.11 and $1.08 per common share for the nine month periods ended September 30, 2001 and 2000, respectively. At September 30, 2001 and December 31, 2000, treasury stock recorded on the Company's condensed consolidated balance sheet consisted of 6,638,457 and 6,601,250 common shares at a cost of $89.2 million and $88.7 million, respectively, acquired pursuant to the Company's common share repurchase program, which expired June 30, 2001. F-51 DEVELOPERS DIVERSIFIED REALTY CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. OTHER ASSETS Other assets consist of the following (in thousands):
SEPTEMBER 30, DECEMBER 31, 2001 2000 ------------- ------------ Accounts receivable, net(1)................................. $50,440 $44,590 Deferred charges, net....................................... 6,383 5,958 Prepaids, deposits and other assets......................... 12,051 11,888 ------- ------- $68,874 $62,436 ======= =======
--------------- (1) Includes straight line rent receivables, net, of $15.5 million and $12.9 million at September 30, 2001 and December 31, 2000, respectively. 8. REVOLVING CREDIT FACILITIES The Company maintains its primary unsecured revolving credit facility with a syndicate of financial institutions, for which Bank One, NA serves as the administrative agent (the "Unsecured Credit Facility"). This facility provides for available borrowing capacity of $550 million and matures on May 31, 2003. The Unsecured Credit Facility includes a competitive bid option for up to 50% of the facility amount. The Company's borrowings under this facility bear interest at variable rates based on the prime rate or LIBOR plus a specified spread (currently 1.10%), depending on the Company's long term senior unsecured debt rating from Standard and Poor's and Moody's Investors Service. The Unsecured Credit Facility is used to finance the acquisition and development of properties, to provide working capital and for general corporate purposes. At September 30, 2001, $403.5 million was outstanding under this facility with a weighted average interest rate, excluding the effects of any interest rate swaps, of 4.5%. The Company also maintains a secured revolving credit facility with National City Bank of $30 million. This credit facility is secured by certain partnership investments. The Company maintains the right to reduce this facility to $20 million and to convert the borrowings to an unsecured revolving credit facility. Borrowings under this facility bear interest at variable rates based on the prime rate or LIBOR plus a specified spread (currently 1.10%) depending on the Company's long term senior unsecured debt rating from Standard and Poor's and Moody's Investors Service. At September 30, 2001, $21.5 million was outstanding under this facility with a weighted average interest rate of 4.0%. 9. DERIVATIVE FINANCIAL INSTRUMENTS The Company purchased interest rate swaps to minimize significant unplanned fluctuations in earnings that are caused by interest rate volatility. The Company does not utilize these arrangements for trading or speculative purposes. The principal risk to the Company through its interest rate hedging strategy is the potential inability of the financial institutions from which the interest rate swaps were purchased to cover all of their obligations. To mitigate this exposure, the Company purchases its interest rate swaps from major financial institutions. All derivatives, which have historically been limited to interest rate swaps designated as cash flow hedges, are recognized on the balance sheet at their fair value. On the date that the Company enters into an interest rate swap, it designates the derivative as a hedge against the variability of cash flows that are to be paid in connection with a recognized liability. Subsequent changes in the fair value of a derivative designated as a cash flow hedge that is determined to be highly effective is recorded in other comprehensive income, until F-52 DEVELOPERS DIVERSIFIED REALTY CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) earnings are affected by the variability of cash flows of the hedged transaction. Any hedge ineffectiveness is reported in current earnings. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. The Company formally assesses (both at the hedge's inception and on an ongoing basis) whether the derivatives that are used in hedging transactions have been highly effective in offsetting changes in the cash flows of the hedged items and whether those derivatives may be expected to remain highly effective in future periods. Should it be determined that a derivative is not (or has ceased to be) highly effective as a hedge, the Company will discontinue hedge accounting on a prospective basis. In October 2000 and January 2001, the Company entered into three interest rate swap agreements, each for two year terms, aggregating $200 million, converting a portion of the outstanding variable rate debt under the Unsecured Credit Facility to a weighted average fixed rate of approximately 6.96%. On January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133 (FAS 133), Accounting for Derivative Instruments and Hedging Activities. At that time, the Company designated all of its interest rate swaps as cash flow hedges in accordance with the requirements of FAS 133. The aggregate fair value of the derivatives on January 1, 2001 of $1.4 million was recorded in other liabilities on the condensed consolidated balance sheet with an offset to other comprehensive income representing the cumulative effect of the transition adjustment pursuant to the provisions of Accounting Principles Board Opinion No. 20, Accounting Changes. As of September 30, 2001, the aggregate fair value of the Company's interest rate swaps was a liability of $8.0 million which is included in other liabilities in the condensed consolidated balance sheet. For the nine months ended September 30, 2001, as the critical terms of the interest rate swaps and the hedged items are the same, no ineffectiveness was recorded in the condensed consolidated statements of operations. All components of the interest rate swaps were included in the assessment of hedge effectiveness. The Company expects that within the next twelve months it will reflect as a charge to earnings $6.3 million of the amount recorded in accumulated other comprehensive income. The fair value of the interest rate swaps is based upon the estimated amounts the Company would receive or pay to terminate the contract at the reporting date and is determined using interest rate market pricing models. 10. EARNINGS AND DIVIDENDS PER SHARE Earnings Per Share (EPS) have been computed pursuant to the provisions of SFAS No. 128. The following table provides a reconciliation of net income and the number of common shares used in the computations of "basic" EPS, which utilizes the weighted average number of common shares outstanding without regard to dilutive potential common shares, and "diluted" EPS, which includes all such shares. There F-53 DEVELOPERS DIVERSIFIED REALTY CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) have been some changes to dilutive securities from those disclosed in the Company's annual report for the year ended December 31, 2000 other than outlined below.
THREE MONTH PERIODS NINE MONTH PERIODS ENDING SEPTEMBER 30, ENDING SEPTEMBER 30, --------------------- --------------------- 2001 2000 2001 2000 --------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net income..................................... $20,352 $21,025 $72,176 $77,715 Less: Preferred stock dividend................. (6,815) (6,815) (20,447) (20,447) ------- ------- ------- ------- Basic and diluted -- Net income applicable to common shareholders.......................... $13,537 $14,210 $51,729 $57,268 ======= ======= ======= ======= NUMBER OF SHARES: Basic -- average shares outstanding............ 55,131 54,793 54,960 56,347 Effect of dilutive securities: Stock options................................ 835 271 516 170 Restricted stock............................. 43 39 51 65 ------- ------- ------- ------- Diluted -- average shares outstanding.......... 56,009 55,103 55,527 56,582 ======= ======= ======= ======= PER SHARE AMOUNT: Net income: Basic........................................ $ 0.25 $ 0.26 $ 0.94 $ 1.02 ======= ======= ======= ======= Diluted...................................... $ 0.24 $ 0.26 $ 0.93 $ 1.01 ======= ======= ======= =======
11. SEGMENT INFORMATION As a result of the acquisition of AIP's business centers in connection with the AIP merger on May 14, 2001 (Note 3), the Company has two reportable business segments, shopping centers and business centers, determined in accordance with SFAS No, 131, "Disclosures about Segments of an Enterprise and Related Information." Accordingly, segment information is not presented for periods prior to this merger. The shopping center segment consists of 194 shopping centers in 39 states aggregating approximately 39.3 million square feet of Company-owned GLA. These shopping centers range in size from approximately 15,000 square feet to 650,000 square feet of Company-owned GLA. The business center segment consists of 38 business centers in 11 states aggregating approximately 4.6 million square feet of Company-owned GLA. These business centers range in size from approximately 20,000 square feet to 800,000 square feet of Company-owned GLA. The table below presents information about the Company's reportable segments for the three and nine month periods ended September 30, 2001. F-54 DEVELOPERS DIVERSIFIED REALTY CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
THREE MONTHS ENDED SEPTEMBER 30, 2001 --------------------------------------- BUSINESS SHOPPING CENTERS CENTERS OTHER TOTAL -------- -------- ------- ------- Total Revenues................................. $10,491 $72,510 $83,001 Operating expenses............................. (3,216) (14,446) (17,662) ------- ------- ------- 7,275 58,064 65,339 Unallocated expenses(a)........................ (46,532) (46,532) Equity in net income of joint ventures......... 4,076 4,076 Minority interests............................. (5,546) (5,546) Gain on sale of real estate and real estate investments.................................. 3,105 3,015 ------- Net income..................................... $20,352 =======
NINE MONTHS ENDED SEPTEMBER 30, 2001 --------------------------------------------- BUSINESS SHOPPING CENTERS CENTERS OTHER TOTAL -------- ---------- -------- ---------- Total Revenues(b)....................... $ 15,321 $ 221,378 $ 236,699 Operating expenses(b)................... (4,446) (46,972) (51,418) -------- ---------- ---------- 10,875 174,406 185,281 Unallocated expenses(a)................. (127,859) (127,859) Equity in net income of joint ventures and minority investment............... 14,981 14,981 Minority interests...................... (15,988) (15,988) Gain on sale of real estate and real estate investments.................... 15,761 15,761 ---------- Net income.............................. $ 72,176 ========== Total real estate assets................ $273,526 $2,207,068 $2,480,594 ======== ========== ==========
--------------- (a) Unallocated expenses consist of general and administrative, interest, impairment charge and depreciation and amortization as listed in the condensed consolidated statement of operations. (b) Reflects operating activity for the 39 AIP properties for the period May 15, 2001 through September 30, 2001. 12. CONTINGENCIES In September 2001, the U.S. district court entered a judgment in the amount of $9.0 million, plus attorney fees, against the Company and three other defendants, in respect of a verdict reached in a civil trial regarding a claim filed by a movie theater relating to a property owned by the Company. The court awarded $4.0 million in punitive and $5.0 million in compensatory damages to the plaintiff. The other defendants include the former chairman of the board (who is also a significant shareholder of the Company), a former executive of the Company and a real estate development partnership (the "Partnership") owned by these two individuals. The Partnership sold the property to the Company in 1994. The claim alleged breach of contract and fraud during the lease negotiation process that took place prior to and after the Company's acquisition of the property. The verdict is subject to various post-trial motions and appeal. Management believes that it is probable the verdict will ultimately be reversed, in whole or in substantial part, and accordingly no provision has been recorded in the accompanying financial statements. Although there can be no assurances as to the ultimate F-55 DEVELOPERS DIVERSIFIED REALTY CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) outcome, management does not believe that an adverse final determination, if any, will be material in relation to the Company's cash flows, liquidity or financial condition. However, amounts awarded, if any, to the plaintiff upon final resolution of this matter, could adversely affect the Company's results of operations in the period it is recorded. Further, a determination has not been made as to the proportionate distribution of the contingent loss, if any, between the defendants. 13. TRANSACTIONS WITH RELATED PARTIES In addition to the items reflected in Note 2, in September 2001, the Company's joint venture development in Coon Rapids, Minnesota, which is owned 25% by the Company and 75% by an entity owned in part by a director of the Company, received a $0.9 million equity contribution from the joint venture partner which was remitted to the Company for payment against advances previously make to the joint venture. F-56 TABLE OF CONTENTS
PAGE ---- Risk Factors................................................ 1 Forward-Looking Information................................. 5 The Company................................................. 6 Use of Proceeds............................................. 9 Plan of Distribution........................................ 9 Selected Financial Information.............................. 10 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 12 Policies with Respect to Certain Activities................. 38 Business and Properties..................................... 39 Certain Federal Income Tax Considerations................... 60 Market Price of and Dividends on the Registrant's Common Equity and Related Stockholder Matters.................... 71 Description of Common Shares................................ 72 Certain Anti-Takeover Provisions of Ohio Law................ 74 Legal Proceedings........................................... 74 Principal Shareholders of the Company....................... 75 Directors and Executive Officers............................ 77 Executive Compensation...................................... 82 Certain Relationships and Related Party Transactions........ 89 Limitations of Liability.................................... 90 Experts..................................................... 91 Legal Matters............................................... 91 Quantitative and Qualitative Disclosures About Market Risk...................................................... 91 Where You Can Find More Information......................... 92 Index to Financial Statements............................... F-1
PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the fees and expenses in connection with the issuance and distribution of the securities to be registered. Except for the SEC registration fee, all amounts are estimates.
FEES AND EXPENSES AMOUNT ----------------- ------- SEC Registration Fee........................................ $12,262 ------- NYSE Listing Fee............................................ $ 4,000 ------- Accounting fees and expenses................................ $40,000 ------- Legal fees and expenses..................................... $50,000 ------- Printing fees............................................... $25,000 ------- Miscellaneous............................................... $10,000 -------
ITEM 32. SALES TO SPECIAL PARTIES Not applicable. ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES Not applicable. ITEM 34. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Ohio Revised Code authorizes Ohio corporations to indemnify officers and directors against liability if the officer or director acted in good faith and in a manner reasonably believed by the officer or director to be in or not opposed to the best interests of the corporation, and, with respect to any criminal actions, if the officer or director had no reason to believe his action was unlawful. In the case of an action by or on behalf of a corporation, indemnification may not be made (i) if the person seeking indemnification is adjudged liable for negligence or misconduct, unless the court in which such action was brought determines such person is fairly and reasonably entitled to indemnification, or (ii) if the liability asserted against such person concerns certain unlawful distributions. The indemnification provisions of the Ohio Revised Code require indemnification if a director or officer has been successful on the merits or otherwise in defense of any action, suit or proceeding that he was a party to by reason of the fact that he is or was a director or officer of the corporation. The indemnification authorized under Ohio law is not exclusive and is in addition to any other rights granted to officers and directors under the articles of incorporation or code of regulations of the corporation or any agreement between the officers and directors and the corporation. A corporation may maintain insurance or furnish similar protection on behalf of any officer or director against any liability asserted against him and incurred by him in his capacity, or arising out of his status, as an officer or director, whether or not the corporation would have the power to indemnify him against such liability under the Ohio Revised Code. The Company's Code of Regulations provides for the indemnification of directors and officers of the Company to the maximum extent permitted by Ohio law, as authorized by the Board of Directors of the Company, and for the advancement of expenses incurred in connection with the defense of any action, suit or proceeding that he was a party to by reason of the fact that he is or was a director or officer of the Company upon the receipt of an undertaking to repay such amount unless it is ultimately determined that the director or officer is entitled to indemnification. The Company's Code of Regulations provides that the indemnification is not deemed exclusive of any other rights to which those seeking indemnification may be entitled under the Articles of Incorporation or the Code of Regulations or any agreement, vote of shareholders or disinterested II-1 directors, or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office and shall continue as to a person who has ceased to be a director, trustee, officer, employee, or agent and shall inure to the benefit of the heirs, executors, and administrators of such a person. The Company maintains a directors' and officers' insurance policy which insures the directors and officers of the Company from claims arising out of an alleged wrongful act by such persons in their respective capacities as directors and officers of the Company, subject to certain exceptions. The Company has entered into indemnification agreements with its directors and officers which provide for indemnification to the fullest extent permitted under Ohio law. ITEM 35. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED Not applicable. ITEM 36. FINANCIAL STATEMENTS AND EXHIBITS (a) Financial Statements See page F-1 of this prospectus for a list of the financial statements included herein. (b) Exhibits 2 -- Purchase and Sale Agreement, dated as of December 17, 2001, among the Company and Burnham Pacific Properties, Inc., Burnham Pacific Operating Partnership, L.P., and BPP/Van Ness, L.P.* 3(a) -- Amended and Restated Articles of Incorporation of the Company(1) 3(b) -- Code of Regulations of the Company(1) 4(a) -- Specimen Certificate for Common Shares(2) 4(b) -- Specimen Certificate for Depositary Shares Relating to 9.5% Class A Cumulative Redeemable Preferred Shares(3) 4(c) -- Specimen Certificate for 9.5% Class A Cumulative Redeemable Preferred Shares(3) 4(d) -- Specimen Certificate for Depositary Shares Relating to 9.44% Class B Cumulative Redeemable Preferred Shares(3) 4(e) -- Specimen Certificate for 9.44% Class B Cumulative Redeemable Preferred Shares(3) 4(f) -- Form of Indemnification Agreement(2) 4(g) -- Indenture dated as of May 1, 1994 by and between the Company and Chemical Bank, as Trustee(4) 4(h) -- Indenture dated as of May 1, 1994 by and between the Company and National City Bank, as Trustee (the "NCB Indenture")(4) 4(i) -- First Supplement to NCB Indenture(4) 4(j) -- Shareholder Rights Agreement dated as of May 26, 1999 between the Company and National City Bank(1) 4(k) -- Specimen Senior Note due May 15, 2000(3) 4(l) -- Loan Agreement dated as of May 15, 1997, between Community Centers One L.L.C., Community Centers Two L.L.C., Shoppers World Community Center, L.P. and Lehman Brothers Holdings Inc., d/b/a/ Lehman Capital, a Division of Lehman Brothers Holdings, Inc.(5) 4(m) -- Amended and Restated Promissory Note, dated as of May 15, 1997, between Community Centers Two L.L.C. and Shoppers World Community Center L.P. and Lehman Brothers Holdings Inc., d/b/a/ Lehman Capital, a Division of Lehman Brothers Holdings, Inc.(5) 4(n) -- Amended and Restated Promissory Note, dated as of May 15, 1997, between Community Centers One L.L.C. and Lehman Brothers Holdings Inc., d/b/a/ Lehman Capital, a Division of Lehman Brothers Holdings, Inc.(5) 4(o) -- Second Amended and Restated Credit Agreement among the Company and The First National Bank of Chicago and other lenders named therein(6)
II-2 4(p) -- Form of Fixed Rate Senior Medium-Term Note(4) 4(q) -- Form of Floating Rate Senior Medium-Term Note(4) 4(r) -- Form of Fixed Rate Subordinated Medium-Term Note(4) 4(s) -- Form of Floating Rate Subordinated Medium-Term Note(4) 4(t) -- First Amendment to the Second Amended and Restated Credit Agreement among the Company and The First National Bank of Chicago and other lenders named therein(4) 4(u) -- Specimen Certificate for Depositary Shares Relating to 8 3/8% Class C Cumulative Redeemable Preferred Shares(7) 4(v) -- Specimen Certificate for 8 3/8% Class C Cumulative Redeemable Preferred Shares(7) 4(w) -- Specimen Certificate for Depositary Shares Relating to 8.68% Class D Cumulative Redeemable Preferred Shares(8) 4(x) -- Specimen Certificate for 8.68% Class D Cumulative Redeemable Preferred Shares(8) 4(y) -- Third Amended and Restated Credit Agreement dated as of June 27, 2000 among the Company and Banc One Capital Markets, Inc., and other lenders named therein(9) 4(z) -- Term Loan Agreement dated as of May 12, 2000 between the Company and Bank of America, National Association(9) 5 -- Opinion of Baker & Hostetler LLP* 8 -- Opinion of Baker & Hostetler LLP regarding tax matters* 10(a) -- Registration Rights Agreement(2) 10(b) -- Stock Option Plan(10) 10(c) -- Employment Agreement dated as of April 2, 1999 between the Company and Scott A. Wolstein(11) 10(d) -- Employment Agreement dated as of April 2, 1999 between the Company and James A. Schoff(11) 10(e) -- Limited Partnership Agreement dated as of November 16, 1995 among DD Community Centers Three, Inc. and certain other parties named therein(3) 10(f) -- Amended and Restated Limited Liability Company Agreement dated as of November 17, 1995 among DD Community Centers One, Inc. and certain other parties named therein(3) 10(g) -- Amended and Restated Limited Liability Company Agreement dated as of November 17, 1995 among DD Community Centers Two, Inc. and certain other parties named therein(3) 10(h) -- Limited Liability Company Agreement dated as of November 17, 1995 among the Company and certain other parties named therein(3) 10(i) -- Purchase and Sale Agreement dated as of October 16, 1995 among the Company and certain other parties named therein(3) 10(j) -- Directors' Deferred Compensation Plan(12) 10(k) -- Amended and Restated Directors' Deferred Compensation Plan(13) 10(l) -- Elective Deferred Compensation Plan(12) 10(m) -- Developers Diversified Realty Corporation Equity-Based Award Plan(14) 10(n) -- Restricted Shares Agreement, dated July 17, 1996, between the Company and Scott A. Wolstein(5) 10(o) -- Performance Units Agreement, dated July 17, 1996, between the Company and Scott A. Wolstein(5) 10(p) -- Program Agreement for Retail Value Investment Program, dated as of February 11, 1998, among Retail Value Management, Ltd., the Company and The Prudential Insurance Company of America(15) 10(q) -- Share Option Agreement, dated April 15, 1997, between the Company and Scott A. Wolstein(15) 10(r) -- Share Option Agreement, dated May 12, 1997, between the Company and Scott A. Wolstein(15) 10(s) -- Form of Medium-Term Note Distribution Agreement(4) 10(t) -- Amended and Restated 1998 Developers Diversified Realty Corporation Equity-Based Award Plan(16)
II-3
(u) 10 -- Form of Change of Control Agreement dated as of March 24, 1999 between the Company and each of Joan U. Allgood, Loren F. Henry, John R. McGill and William H. Schafer(17) 10(v) -- Form of Change of Control Agreement dated as of March 24, 1999 between the Company and each of Scott A. Wolstein and James A. Schoff(17) 10(w) -- Agreement and Release between the Company and Richard J. Kaplan dated as of March 9, 1999(17) 10(x) -- Employment Agreement dated as of April 21, 1999 between the Company and David M. Jacobstein(1) 10(y) -- Change of Control Agreement as of May 17, 1999 between the Company and David M. Jacobstein(1) 10(z) -- Employment Agreement dated as of April 12, 1999 between the Company and Eric M. Mallory(1) 10(aa) -- Change of Control Agreement dated as of April 12, 1999 between the Company and Eric M. Mallory(1) 10(bb) -- Employment Agreement dated as of May 25, 1999 between the Company and Daniel B. Hurwitz(1) 10(cc) -- Change of Control Agreement dated as of May 25, 1999 between the Company and Daniel B. Hurwitz(1) 10(dd) -- Employment Agreement dated as of March 1, 2000 between the Company and Joan U. Allgood(13) 10(ee) -- Employment Agreement dated as of March 1, 2000 between the Company and William H. Schafer(13) 10(ff) -- Form of Directors' Restricted Shares Agreement, dated January 1, 2000* 12(a) -- Calculation of Ratio of Earnings to Fixed Charges(18) 12(b) -- Calculation of Ratio of Earnings to Combined Fixed Charges and Preferred Share Dividends(18) 21 -- List of Subsidiaries* 23(a) -- Consent of PricewaterhouseCoopers LLP 23(b) -- Consent of Baker & Hostetler LLP* 23(c) -- Consent of Ulmer & Berne LLP* 24 -- Power of Attorney* 25(a) -- Statement of Eligibility of Trustee on Form T-1 for National City Bank(18) 25(b) -- Statement of Eligibility of Trustee on Form T-1 for The Chase Manhattan Bank(18)
--------------- * Previously Filed. (1) Incorporated by reference from the Company's Quarterly Report on Form 10-Q (filed with the SEC on August 16, 1999). (2) Incorporated by reference from the Company's Form S-11 Registration No. 33-54930 (filed with the SEC on November 23, 1992). (3) Incorporated by reference from the Company's Annual Report on Form 10-K (filed with the SEC on March 30, 1996). (4) Incorporated by reference from the Company's Annual Report on Form 10-K (filed with the SEC on March 30, 2000). (5) Incorporated by reference from the Company's Current Report on Form 8-K (filed with the SEC on June 18, 1997). (6) Incorporated by reference from the Company's Current Report on Form 8-K (filed with the SEC on March 8, 1999). (7) Incorporated by reference from the Company's Form 8-A Registration Statement (filed with the SEC on July 2, 1998). II-4 (8) Incorporated by reference from the Company's Form 8-A Registration Statement (filed with the SEC on August 18, 1998). (9) Incorporated by reference from the Company's Quarterly Report on Form 10-Q (filed with the SEC on August 14, 2000). (10) Incorporated by reference from the Company's Form S-8 Registration No. 33-74562 (filed with the SEC on January 28, 1994). (11) Incorporated by reference from the Company's Quarterly Report on Form 10-Q (filed with the SEC on September 30, 1999). (12) Incorporated by reference from the Company's Annual Report on Form 10-K (filed with the SEC on April 1, 1995). (13) Incorporated by reference from the Company's Annual Report on Form 10-K (filed with the SEC on April 2, 2001. (14) Incorporated by reference from the Company's Current Report on Form 8-K (filed with the SEC on January 14, 1997). (15) Incorporated by reference from the Company's Annual Report on Form 10-K (filed with the SEC on March 31, 1998). (16) Incorporated by reference from the Company's Form S-8 Registration No. 333-76537 (filed with the SEC on April 19, 1999). (17) Incorporated by reference from the Company's Quarterly Report on Form 10-Q (filed with the SEC on May 17, 1999). (18) Incorporated by reference from the Company's Form S-3 Registration No. 333-72519 (filed with the SEC on March 2, 1999). ITEM 37. UNDERTAKINGS Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-5 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-11 and has duly caused this Amendment No. 2 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Beachwood, State of Ohio, on the 22nd day of February, 2002. DEVELOPERS DIVERSIFIED REALTY CORPORATION By: /s/ SCOTT A. WOLSTEIN ------------------------------------ Scott A. Wolstein, Chief Executive Officer Pursuant to the requirement of the Securities Act of 1933, this Amendment No. 2 to the Registration Statement has been signed on February 22, 2002, by the following persons in the capacities indicated: /s/ SCOTT A. WOLSTEIN Chairman of the Board, Chief Executive ------------------------------------------------------ Officer and Director (Principal Executive Scott A. Wolstein Officer) /s/ JAMES A. SCHOFF* Vice Chairman of the Board, Chief Investment ------------------------------------------------------ Officer and Director James A. Schoff /s/ DAVID M. JACOBSTEIN* President, Chief Operating Officer and ------------------------------------------------------ Director David M. Jacobstein /s/ WILLIAM H. SCHAFER* Senior Vice President and Chief Financial ------------------------------------------------------ Officer (Principal Financial Officer and William H. Schafer Principal Accounting Officer) /s/ ALBERT T. ADAMS* Director ------------------------------------------------------ Albert T. Adams /s/ DEAN S. ADLER* Director ------------------------------------------------------ Dean S. Adler /s/ TERRANCE R. AHERN* Director ------------------------------------------------------ Terrance R. Ahern /s/ ROBERT H. GIDEL* Director ------------------------------------------------------ Robert H. Gidel
II-6 /s/ WILLIAM N. HULETT III* Director ------------------------------------------------------ William N. Hulett III Director ------------------------------------------------------ Barry A. Sholem *By: /s/ SCOTT A. WOLSTEIN ------------------------------------------------------ Scott A. Wolstein, Attorney-in-fact
II-7 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION ------- ----------- 2 -- Purchase and Sale Agreement, dated as of December 17, 2001, among the Company and Burnham Pacific Properties, Inc., Burnham Pacific Operating Partnership, L.P., and BPP/Van Ness, L.P.* 3(a) -- Amended and Restated Articles of Incorporation of the Company(1) 3(b) -- Code of Regulations of the Company(1) 4(a) -- Specimen Certificate for Common Shares(2) 4(b) -- Specimen Certificate for Depositary Shares Relating to 9.5% Class A Cumulative Redeemable Preferred Shares(3) 4(c) -- Specimen Certificate for 9.5% Class A Cumulative Redeemable Preferred Shares(3) 4(d) -- Specimen Certificate for Depositary Shares Relating to 9.44% Class B Cumulative Redeemable Preferred Shares(3) 4(e) -- Specimen Certificate for 9.44% Class B Cumulative Redeemable Preferred Shares(3) 4(f) -- Form of Indemnification Agreement(2) 4(g) -- Indenture dated as of May 1, 1994 by and between the Company and Chemical Bank, as Trustee(4) 4(h) -- Indenture dated as of May 1, 1994 by and between the Company and National City Bank, as Trustee (the "NCB Indenture")(4) 4(i) -- First Supplement to NCB Indenture(4) 4(j) -- Shareholder Rights Agreement dated as of May 26, 1999 between the Company and National City Bank(1) 4(k) -- Specimen Senior Note due May 15, 2000(3) 4(l) -- Loan Agreement dated as of May 15, 1997, between Community Centers One L.L.C., Community Centers Two L.L.C., Shoppers World Community Center, L.P. and Lehman Brothers Holdings Inc., d/b/a/ Lehman Capital, a Division of Lehman Brothers Holdings, Inc.(5) 4(m) -- Amended and Restated Promissory Note, dated as of May 15, 1997, between Community Centers Two L.L.C. and Shoppers World Community Center L.P. and Lehman Brothers Holdings Inc., d/b/a/ Lehman Capital, a Division of Lehman Brothers Holdings, Inc.(5) 4(n) -- Amended and Restated Promissory Note, dated as of May 15, 1997, between Community Centers One L.L.C. and Lehman Brothers Holdings Inc., d/b/a/ Lehman Capital, a Division of Lehman Brothers Holdings, Inc.(5) 4(o) -- Second Amended and Restated Credit Agreement among the Company and The First National Bank of Chicago and other lenders named therein(6) 4(p) -- Form of Fixed Rate Senior Medium-Term Note(4) 4(q) -- Form of Floating Rate Senior Medium-Term Note(4) 4(r) -- Form of Fixed Rate Subordinated Medium-Term Note(4) 4(s) -- Form of Floating Rate Subordinated Medium-Term Note(4) 4(t) -- First Amendment to the Second Amended and Restated Credit Agreement among the Company and The First National Bank of Chicago and other lenders named therein(4) 4(u) -- Specimen Certificate for Depositary Shares Relating to 8 3/8% Class C Cumulative Redeemable Preferred Shares(7) 4(v) -- Specimen Certificate for 8 3/8% Class C Cumulative Redeemable Preferred Shares(7) 4(w) -- Specimen Certificate for Depositary Shares Relating to 8.68% Class D Cumulative Redeemable Preferred Shares(8) 4(x) -- Specimen Certificate for 8.68% Class D Cumulative Redeemable Preferred Shares(8) 4(y) -- Third Amended and Restated Credit Agreement dated as of June 27, 2000 among the Company and Banc One Capital Markets, Inc., and other lenders named therein(9) 4(z) -- Term Loan Agreement dated as of May 12, 2000 between the Company and Bank of America, National Association(9) 5 -- Opinion of Baker & Hostetler LLP*
EXHIBIT NO. DESCRIPTION ------- ----------- 8 -- Opinion of Baker & Hostetler LLP regarding tax matters* 10(a) -- Registration Rights Agreement(2) 10(b) -- Stock Option Plan(10) 10(c) -- Employment Agreement dated as of April 2, 1999 between the Company and Scott A. Wolstein(11) 10(d) -- Employment Agreement dated as of April 2, 1999 between the Company and James A. Schoff(11) 10(e) -- Limited Partnership Agreement dated as of November 16, 1995 among DD Community Centers Three, Inc. and certain other parties named therein(3) 10(f) -- Amended and Restated Limited Liability Company Agreement dated as of November 17, 1995 among DD Community Centers One, Inc. and certain other parties named therein(3) 10(g) -- Amended and Restated Limited Liability Company Agreement dated as of November 17, 1995 among DD Community Centers Two, Inc. and certain other parties named therein(3) 10(h) -- Limited Liability Company Agreement dated as of November 17, 1995 among the Company and certain other parties named therein(3) 10(i) -- Purchase and Sale Agreement dated as of October 16, 1995 among the Company and certain other parties named therein(3) 10(j) -- Directors' Deferred Compensation Plan(12) 10(k) -- Amended and Restated Directors' Deferred Compensation Plan(13) 10(l) -- Elective Deferred Compensation Plan(12) 10(m) -- Developers Diversified Realty Corporation Equity-Based Award Plan(14) 10(n) -- Restricted Shares Agreement, dated July 17, 1996, between the Company and Scott A. Wolstein(5) 10(o) -- Performance Units Agreement, dated July 17, 1996, between the Company and Scott A. Wolstein(5) 10(p) -- Program Agreement for Retail Value Investment Program, dated as of February 11, 1998, among Retail Value Management, Ltd., the Company and The Prudential Insurance Company of America(15) 10(q) -- Share Option Agreement, dated April 15, 1997, between the Company and Scott A. Wolstein(15) 10(r) -- Share Option Agreement, dated May 12, 1997, between the Company and Scott A. Wolstein(15) 10(s) -- Form of Medium-Term Note Distribution Agreement(4) 10(t) -- Amended and Restated 1998 Developers Diversified Realty Corporation Equity-Based Award Plan(16) 10(u) -- Form of Change of Control Agreement dated as of March 24, 1999 between the Company and each of Joan U. Allgood, Loren F. Henry, John R. McGill and William H. Schafer(17) 10(v) -- Form of Change of Control Agreement dated as of March 24, 1999 between the Company and each of Scott A. Wolstein and James A. Schoff(17) 10(w) -- Agreement and Release between the Company and Richard J. Kaplan dated as of March 9, 1999(17) 10(x) -- Employment Agreement dated as of April 21, 1999 between the Company and David M. Jacobstein(1) 10(y) -- Change of Control Agreement as of May 17, 1999 between the Company and David M. Jacobstein(1) 10(z) -- Employment Agreement dated as of April 12, 1999 between the Company and Eric M. Mallory(1) 10(aa) -- Change of Control Agreement dated as of April 12, 1999 between the Company and Eric M. Mallory(1) 10(bb) -- Employment Agreement dated as of May 25, 1999 between the Company and Daniel B. Hurwitz(1) 10(cc) -- Change of Control Agreement dated as of May 25, 1999 between the Company and Daniel B. Hurwitz(1)
EXHIBIT NO. DESCRIPTION ------- ----------- 10(dd) -- Employment Agreement dated as of March 1, 2000 between the Company and Joan U. Allgood(13) 10(ee) -- Employment Agreement dated as of March 1, 2000 between the Company and William H. Schafer(13) 10(ff) -- Form of Directors' Restricted Shares Agreement, dated January 1, 2000* 12(a) -- Calculation of Ratio of Earnings to Fixed Charges(18) 12(b) -- Calculation of Ratio of Earnings to Combined Fixed Charges and Preferred Share Dividends(18) 21 -- List of Subsidiaries* 23(a) -- Consent of PricewaterhouseCoopers LLP 23(b) -- Consent of Baker & Hostetler LLP* 23(c) -- Consent of Ulmer & Berne LLP* 24 -- Power of Attorney* 25(a) -- Statement of Eligibility of Trustee on Form T-1 for National City Bank(18) 25(b) -- Statement of Eligibility of Trustee on Form T-1 for The Chase Manhattan Bank(18)
--------------- * Previously Filed. (1) Incorporated by reference from the Company's Quarterly Report on Form 10-Q (filed with the SEC on August 16, 1999). (2) Incorporated by reference from the Company's Form S-11 Registration No. 33-54930 (filed with the SEC on November 23, 1992). (3) Incorporated by reference from the Company's Annual Report on Form 10-K (filed with the SEC on March 30, 1996). (4) Incorporated by reference from the Company's Annual Report on Form 10-K (filed with the SEC on March 30, 2000). (5) Incorporated by reference from the Company's Current Report on Form 8-K (filed with the SEC on June 18, 1997). (6) Incorporated by reference from the Company's Current Report on Form 8-K (filed with the SEC on March 8, 1999). (7) Incorporated by reference from the Company's Form 8-A Registration Statement (filed with the SEC on July 2, 1998). (8) Incorporated by reference from the Company's Form 8-A Registration Statement (filed with the SEC on August 18, 1998). (9) Incorporated by reference from the Company's Quarterly Report on Form 10-Q (filed with the SEC on August 14, 2000). (10) Incorporated by reference from the Company's Form S-8 Registration No. 33-74562 (filed with the SEC on January 28, 1994). (11) Incorporated by reference from the Company's Quarterly Report on Form 10-Q (filed with the SEC on September 30, 1999). (12) Incorporated by reference from the Company's Annual Report on Form 10-K (filed with the SEC on April 1, 1995). (13) Incorporated by reference from the Company's Annual Report on Form 10-K (filed with the SEC on April 2, 2001. (14) Incorporated by reference from the Company's Current Report on Form 8-K (filed with the SEC on January 14, 1997). (15) Incorporated by reference from the Company's Annual Report on Form 10-K (filed with the SEC on March 31, 1998). (16) Incorporated by reference from the Company's Form S-8 Registration No. 333-76537 (filed with the SEC on April 19, 1999). (17) Incorporated by reference from the Company's Quarterly Report on Form 10-Q (filed with the SEC on May 17, 1999). (18) Incorporated by reference from the Company's Form S-3 Registration No. 333-72519 (filed with the SEC on March 2, 1999).