Financial Statements of GRI-Regency, LLC

EX-99.1 15 dex991.htm FINANCIAL STATEMENTS OF GRI-REGENCY, LLC Financial Statements of GRI-Regency, LLC

Exhibit 99.1

GRI – Regency, LLC

Index to Financial Statements

GRI – Regency, LLC


Report of Independent Auditors			1
Consolidated Balance Sheets as of December 31, 2010 (unaudited) and 2009			2
Consolidated Statements of Operations for the years ended December 31, 2010 (unaudited), 2009, and 2008 (unaudited)			3
Consolidated Statements of Changes in Members’ Capital for the years ended December 31, 2010 (unaudited), 2009, and 2008 (unaudited)			4
Consolidated Statements of Cash Flows for the years ended December 31, 2010 (unaudited), 2009, and 2008 (unaudited)			5
Notes to Consolidated Financial Statements			6

All other schedules are omitted because of the absence of conditions under which they are required, materiality or because information required therein is shown in the consolidated financial statements or notes thereto.

Report of Independent Auditors

To the Members of

GRI – Regency, LLC:

In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, of members’ capital and of cash flows present fairly, in all material respects, the financial position of GRI—Regency, LLC (formerly Macquarie Countrywide-Regency II, LLC) and its subsidiaries (collectively the “Company”) at December 31, 2009, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

/s/PricewaterhouseCoopers

Mclean, Virginia

March 31, 2010, except for note 4,

as to which the date is February 22, 2011

GRI – Regency, LLC

Consolidated Balance Sheets

December 31, 2010 (unaudited) and 2009

(in thousands)


	2010		2009
	(unaudited)
Assets
Real estate investments, at cost (note 3):
Land	$	679,602	$	714,652
Buildings and improvements		1,598,208		1,686,575
Construction in progress		766		1,013

		2,278,576		2,402,240
Less: accumulated depreciation		349,133		318,544

Net real estate investments		1,929,443		2,083,696
Cash and cash equivalents		34,636		12,730
Restricted cash		4,727		1,830
Tenant receivables, less allowance for doubtful accounts of $2,647 and $4,238, respectively		18,582		22,354
Straight line rent receivables, net of reserve of $634 and $706, respectively		16,115		14,723
Deferred costs, less accumulated amortization of $14,142 and $13,566, respectively		17,266		15,924
Acquired lease intangible assets, less accumulated amortization of $168,720 and $167,348, respectively (note 5)		30,916		42,325
Other assets		12,564		3,363
Assets held for sale		12,023		—

Total assets	$	2,076,272	$	2,196,945


Liabilities and Members' Capital
Liabilities:
Mortgages payable (notes 6 and 8)	$	1,108,005	$	1,491,640
Accounts payable and other liabilities (note 11)		38,451		46,238
Acquired lease intangible liabilities, less accumulated accretion of $59,633 and $57,710, respectively (note 5)		19,512		26,307
Tenants’ security deposits and prepaid rent		4,607		4,831
Liabilities associated with assets held for sale		10,428		—

Total liabilities		1,181,003		1,569,016


Members' capital (note 9):
Macquarie CountryWide (US) No. 2, LLC		—		188,379
Regency Centers, L.P.		358,107		156,982
Global Retail Investors, LLC		537,162		282,568

Total members' capital		895,269		627,929

Total liabilities and members' capital	$	2,076,272	$	2,196,945

The accompanying notes are an integral part of these consolidated financial statements.

GRI – Regency, LLC

Consolidated Statements of Operations

For the years ended December 31, 2010 (unaudited), 2009, and 2008 (unaudited)

(in thousands)


	2010			2009			2008
	(unaudited)						(unaudited)
Revenues:
Minimum rent (note 10)	$	164,602		$	166,042		$	168,579
Recoveries from tenants and other income		53,521			50,275			51,737
Gain on sale of properties and outparcels		2,374			—			117

Total revenues		220,497			216,317			220,433


Operating expenses:
Depreciation and amortization		77,490			80,440			86,199
Operating and maintenance		24,025			21,177			20,979
General and administrative (note 1)		2,848			3,785			1,874
Real estate taxes		27,102			28,633			28,276
Property management fees (note11)		8,206			7,618			7,498
Provision for doubtful accounts		1,705			4,986			1,254
Loss on sale of properties and outparcels		—			329			—
Provision for impairment		21,917			77,798			—

Total operating expenses		163,293			224,766			146,080


Other expense:
Interest expense, net of interest income of $9, $98, and $668, respectively		65,191			75,591			75,479
Early extinguishment of debt		—			78			—

Total other expense		65,191			75,669			75,479

Net loss from continuing operations		(7,987	)		(84,118	)		(1,126	)

Discontinued operations, net (note 4):
Operating loss from discontinued operations		(12,504	)		(26,901	)		(303	)
Gain on sale of operating properties		5,377			—			8,870
Early extinguishment of debt		—			—			(1,692	)

Net (loss) income from discontinued operations		(7,127	)		(26,901	)		6,875


Net (loss) income	$	(15,114	)	$	(111,019	)	$	5,749

The accompanying notes are an integral part of these consolidated financial statements.

GRI – Regency, LLC

Consolidated Statements of Changes in Members' Capital and Comprehensive Income (Loss)

For the years ended December 31, 2010 (unaudited), 2009, and 2008 (unaudited)

(in thousands)


	Macquarie CountryWide (US) No. 2, LLC			Regency Centers, L.P.			Macquarie—Regency Management, LLC			Global Retail Investors, LLC			Total Members' Capital
Balance at December 31, 2007 (unaudited)	$	656,038		$	217,804		$	875		$	—		$	874,717
Comprehensive income (loss):
Net (loss) income		(3,555	)		1,432			7,872			—			5,749
Change in fair value of derivative instruments		(336	)		(112	)		—			—			(448	)

Total comprehensive income														5,301
Cash distributions from sale of real estate		(13,422	)		(4,456	)		(18	)		—			(17,896	)
Cash distributions from operations		(41,182	)		(13,672	)		(55	)		—			(54,909	)
Preferred cash distribution		7,867			—			(7,867	)		—			—


Balance at December 31, 2008 (unaudited)		605,410			200,996			807			—			807,213
Members' ownership change		(294,357	)		654			(654	)		294,357			—
Comprehensive income (loss):
Net (loss) income		(85,571	)		(26,932	)		4,814			(3,330	)		(111,019	)
Change in fair value of derivative instruments		797			320			1			163			1,281

Total comprehensive loss														(109,738	)
Contribution of real estate, net of liabilities assumed, at fair value		(2,775	)		(922	)		(4	)		—			(3,701	)
Cash distribution from debt re-financing		(3,212	)		(1,066	)		(4	)		—			(4,282	)
Cash distributions from operations		(37,354	)		(15,349	)		(42	)		(8,818	)		(61,563	)
Preferred cash distribution		5,441			(719	)		(4,918	)		196			—


Balance at December 31, 2009		188,379			156,982			—			282,568			627,929
Members' ownership change		(183,986	)		94,204			—			89,782			—
December 2009 income adjustment		15			(15	)		—			—			—
Net loss		(1,561	)		(5,100	)		—			(8,453	)		(15,114	)
Cash contributions		—			228,450			—			342,675			571,125
Cash distributions from operations		(2,847	)		(27,730	)		—			(38,748	)		(69,325	)
Cash distribution from debt financing		—			(79,600	)		—			(119,401	)		(199,001	)
Cash distributions from sale of real estate		—			(8,138	)		—			(12,207	)		(20,345	)
Preferred cash distribution		—			(946	)		—			946			—

Balance at December 31, 2010 (unaudited)	$	—		$	358,107		$	—		$	537,162		$	895,269

The accompanying notes are an integral part of these consolidated financial statements.

GRI – Regency, LLC

Consolidated Statements of Cash Flows

For the years ended December 31, 2010 (unaudited), 2009, and 2008 (unaudited)

(in thousands)


	2010			2009			2008
	(unaudited)						(unaudited)
Cash flows from operating activities:
Net (loss) income	$	(15,114	)	$	(111,019	)	$	5,749
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization		80,003			84,126			92,467
Net amortization and accretion of above and below market lease intangibles		(2,958	)		(4,458	)		(5,466	)
Amortization of deferred loan costs and debt premium		881			1,097			1,058
Net gain on sale of real estate investments		(5,377	)		—			(8,870	)
Net loss (gain) on sale of outparcels		(2,374	)		329			(117	)
Provision for doubtful accounts		1,842			5,599			1,304
Provision for impairment		36,250			104,416			—
Dead deal costs		—			1,333			—
Early extinguishment of debt		—			(35	)		1,692
Changes in assets and liabilities:
Tenant receivables, net		(686	)		(5,337	)		(36	)
Accounts payable and other liabilities		(6,384	)		(719	)		(1,212	)
Other assets		(9,233	)		(848	)		(226	)

Net cash provided by operating activities		76,850			74,484			86,343


Cash flows from investing activities:
Restricted cash		(2,897	)		6			(295	)
Deferred leasing costs		(3,354	)		(5,256	)		(5,138	)
Proceeds from sale of real estate investments		60,071			982			50,399
Capital improvements		(12,696	)		(9,022	)		(28,682	)

Net cash provided by (used in) investing activities		41,124			(13,290	)		16,284


Cash flows from financing activities:
Cash contributions from members		571,125			—			—
Cash distributions to members		(288,671	)		(65,845	)		(72,805	)
Proceeds from mortgage payables		202,000			7,500			—
Repayments on mortgage payables		(576,310	)		(3,500	)		(32,315	)
Scheduled principal payments on mortgage payables		(701	)		(97	)		(439	)
Deferred loan costs		(3,576	)		(217	)		(69	)
Security deposits and prepaid rent		65			(111	)		132

Net cash used in financing activities		(96,068	)		(62,270	)		(105,496	)

Net increase (decrease) in cash and cash equivalents		21,906			(1,076	)		(2,869	)

Cash and cash equivalents at beginning of the year		12,730			13,806			16,675


Cash and cash equivalents at end of the year	$	34,636		$	12,730		$	13,806


Supplemental disclosure of cash flow information:
Cash paid for interest	$	66,119		$	76,999		$	79,893


Supplemental disclosure of non-cash transactions:
Liabilities contributed, net of real estate (note 3)	$	—		$	(3,701	)	$	—


Mortgage loan transferred in sale of real estate	$	—		$	—		$	53,674


Mortgage debt assumed in connection with contribution of real estate	$	—		$	—		$	—


Change in fair value of derivative instrument	$	—		$	1,281		$	(448	)


Accrued PP & E	$	475		$	678		$	1,158

The accompanying notes are an integral part of these consolidated financial statements.

GRI – Regency, LLC

Notes to consolidated Financial Statements

December 31, 2010 (unaudited) and 2009

1.	Summary of Significant Accounting Policies

(a)

Organization and Principles of Consolidation

General

GRI – Regency, LLC (“the Company”), formerly Macquarie CountryWide – Regency, LLC, was formed on June 1, 2005 for the purpose of owning, acquiring, managing, leasing, financing and ultimately disposing of commercial real estate properties, primarily grocery-anchored neighborhood shopping centers. The operations of the Company are governed by the Second Amended and Restated Limited Liability Company Agreement of Macquarie CountryWide—Regency II, LLC (the “Agreement”). At December 31, 2010, the Company owned 83 shopping centers.

Ownership of the Company

At formation, the Company was 64.95% owned by Macquarie CountryWide (US) No. 2, LLC (“MCW”), 34.95% owned by Regency Centers, L.P. (“RCLP” or “Regency”), and 0.1% owned by Macquarie-Regency Management (“MRM”). MCW was a wholly owned subsidiary of Macquarie CountryWide Trust of Australia. RCLP is a consolidated subsidiary of Regency Centers Corporation. MRM was owned by Macquarie Real Estate Inc. (50%) and RCLP (50%).

On January 1, 2006, RCLP sold 10.05% of its interest in the Company to MCW. After the sale, the Company was 75% owned by MCW, 24.9% owned by RCLP, and 0.1% owned by MRM.

On July 17, 2009, MCW agreed to sell 60% of the partnership’s interest to Global Retail Investors, LLC (“GRI”), a joint venture between the California Public Employees’ Retirement System (“CalPERS”) and an affiliate of First Washington Realty, Inc., in two closings. The first closing was completed on July 31, 2009, with GRI purchasing a 45% ownership interest in the real estate partnership. As part of the closing, Regency acquired MRM’s 0.1% ownership of the Company. The transaction increased Regency’s ownership in the Company to 25% from 24.95%.

As part of the original agreement with MCW, Regency negotiated two separate options to acquire an additional 15% interest in the partnership. In November 2009, Regency exercised its two options with the closing contingent upon obtaining lender consents. On March 30, 2010, Regency closed on its options increasing its ownership interest in the real estate partnership to 40% with an effective date of December 1, 2009.

On March 11, 2010, an amendment was filed with the state of Delaware to change the name of the Company from Macquarie CountryWide – Regency II, LLC to GRI – Regency, LLC.

On April 30, 2010, GRI closed on the purchase of its remaining 15% interest from Charter Hall Retail REIT, formerly MCW, increasing its total ownership in the real estate partnership to 60%. As of December 31, 2010, the Company was 60% owned by GRI and 40% owned by RCLP. RCLP and GRI are hereafter referred to collectively as the Members.

GRI – Regency, LLC

Notes to Consolidated Financial Statements

December 31, 2010 (unaudited) and 2009

Method of Accounting

The accompanying consolidated financial statements are prepared on the accrual basis of accounting.

Estimates, Risks, and Uncertainties

The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The most significant estimates in the Company’s financial statements relate to the carrying values of its investments in real estate and tenant receivables, net. Each of these items could be significantly affected by the continued weak economy.

Because of the challenging conditions that currently exist in the real estate markets, as well as, the credit and financial markets, it is possible that the estimates and assumptions that have been utilized in the preparation of the consolidated financial statements could change significantly. Specifically as it relates to the Company’s business, the current uncertain economic period is expected to result in the continuation of a higher level of retail store closings nationally, which could reduce the demand for leasing space in the Company’s shopping centers and result in a decline in occupancy and rental revenues in its real estate portfolio.

Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions are eliminated.

(b)

Revenues

The Company leases space to tenants under agreements with varying terms. Leases are accounted for as operating leases with minimum rent recognized on a straight-line basis over the term of the non-cancellable lease period regardless of when payments are due. Rental income has been adjusted to reflect the effects of recognized rent on a straight-line basis.

Substantially all of the lease agreements with anchor tenants contain provisions that provide for additional rents based on tenants’ sales volume (percentage rent) and reimbursement of the tenants’ share of real estate taxes, insurance, and common area maintenance (“CAM”) costs. Percentage rents are recognized when the tenants achieve the specified targets as defined in their lease agreements. Recovery of real estate taxes, insurance, and CAM costs are recognized as the respective costs are incurred in accordance with the lease agreements.

GRI – Regency, LLC

Notes to Consolidated Financial Statements

December 31, 2010 (unaudited) and 2009

As part of the leasing process, the Company may provide the lessee with an allowance for the construction of leasehold improvements. These leasehold improvements are capitalized and recorded as tenant improvements, and depreciated over the shorter of the useful life of the improvements or the lease term. If the allowance represents a payment for a purpose other than funding leasehold improvements, or in the event the Company is not considered the owner of the improvements, the allowance is considered to be a lease incentive and is recognized over the lease term as a reduction of minimum rent. Factors considered during this evaluation include, among other things, who holds legal title to the improvements as well as other controlling rights provided by the lease agreement and provisions for substantiation of such costs (e.g. unilateral control of the tenant space during the build-out process). Determination of the appropriate accounting for the payment of a tenant allowance is made on a lease-by-lease basis, considering the facts and circumstances of the individual tenant lease. When the Company is the owner of the leasehold improvements, recognition of lease revenue commences when the lessee is given possession of the leased space upon completion of tenant improvements. However, when the leasehold improvements are owned by the tenant, the lease inception date is the date the tenant obtains possession of the leased space for purposes of constructing its leasehold improvements, and revenue recognition begins on this date.

(c)

Real Estate Investments

Land, buildings, and improvements are recorded at their respective fair value and carried at cost. Major additions and improvements to real estate investments are capitalized to the property accounts, while replacements, maintenance, and repairs that do not improve or extend the useful lives of the respective assets are recorded in operating and maintenance expense.

The Company incurs costs including contract deposits, as well as legal, engineering, and other external professional fees related to evaluating the feasibility of developing or re-developing a shopping center. These pre-development costs are included in construction in progress in the accompanying Consolidated Balance Sheets. If the Company determines that the development or re-development of a particular shopping center is no longer probable, any related pre-development costs previously capitalized are immediately expensed in general and administrative expenses in the accompany Consolidated Statements of Operations. During the years ended December 31, 2010 and 2009, the Company expensed pre-development costs of approximately $16,000 and $1.3 million, respectively. There were no pre-development costs expensed during the year ended December 31, 2008.

Depreciation is computed using the straight-line method over estimated useful lives of approximately 40 years for buildings and improvements and the shorter of the useful life or the remaining lease term subject to a maximum of 10 years for tenant improvements.

The Company accounts for business combinations using the acquisition method by recognizing and measuring the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at their acquisition date fair values. The Company expenses transaction costs associated with business combinations in the period incurred.

The Company’s methodology includes estimating an “as-if vacant” fair value of the physical

GRI – Regency, LLC

Notes to Consolidated Financial Statements

December 31, 2010 (unaudited) and 2009

property, which includes land, building, and improvements. In addition, the Company determines the estimated fair value of identifiable intangible assets, considering the following three categories: (i) value of in-place leases, (ii) above and below-market value of in-place leases, and (iii) customer relationship value.

The value of in-place leases is estimated based on the value associated with the costs avoided in originating leases compared to the acquired in-place leases as well as the value associated with lost rental and recovery revenue during the assumed lease-up period. The value of in-place leases is recorded to amortization expense over the remaining initial term of the respective leases.

Above-market and below-market in-place lease values for acquired properties are recorded based on the present value of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for comparable in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. The value of above-market leases is amortized as a reduction of minimum rent over the remaining terms of the respective leases and the value of below-market leases is accreted to minimum rent over the remaining terms of the respective leases, including below-market renewal options, if applicable. The Company does not assign value to customer relationship intangibles if it or Regency has pre-existing business relationships with the major retailers at the acquired property since they do not provide incremental value over the Company’s existing relationships.

The Company classifies an operating property as held-for-sale when it determines that the property is available for immediate sale in its present condition, the property is being actively marketed for sale, and management believes it is probable that a sale will be consummated within one year. Given the nature of all real estate sales contracts, it is not unusual for such contracts to allow prospective buyers a period of time to evaluate the property prior to formal acceptance of the contract. In addition, certain other matters critical to the final sale, such as financing arrangements, often remain pending even upon contract acceptance. As a result, properties under contract may not close within the expected time period, or may not close at all. Therefore, any properties categorized as held-for-sale represent only those properties that management has determined are probable to close within the requirements set forth above. Operating properties held-for-sale are carried at the lower of cost or fair value less costs to sell. The recording of depreciation and amortization expense is suspended during the held-for-sale period. If circumstances arise that previously were considered unlikely and, as a result, the Company decides not to sell a property previously classified as held-for-sale, the property is reclassified as held and used and is measured individually at the lower of its (i) carrying amount before the property was classified as held-for-sale, adjusted for any depreciation and amortization expense that would have been recognized had the property been continuously classified as held and used or (ii) the fair value at the date of the subsequent decision not to sell. Any required adjustment to the carrying amount of the property reclassified as held and used is included in income from continuing operations in the period of the subsequent decision not to sell. If a property is reclassified as held and used, the results of operations of the property previously reported in discontinued operations are reclassified and included in income from continuing operations for all periods presented.

When the Company sells a property or classifies a property as held-for-sale and will not

GRI – Regency, LLC

Notes to Consolidated Financial Statements

December 31, 2010 (unaudited) and 2009

have significant continuing involvement in the operation of the property, the operations of the property are eliminated from ongoing operations and classified in discontinued operations. Its operations, including any mortgage interest and gain on sale, are reported in discontinued operations so that the operations are clearly distinguished. Prior periods are also reclassified to reflect the operations of the property as discontinued operations. One property was classified as held-for-sale at December 31, 2010; however, there were no properties held-for-sale as of December 31, 2009.

The Company reviews its real estate portfolio for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. For properties to be “held and used” for long term investment, the Company estimates undiscounted future cash flows over the expected investment term including the estimated future proceeds from the sale at the end of the investment period. Future sales proceeds are generally determined by applying a market-based capitalization rate to the estimated future net operating income in the final year of the expected investment term. If after applying this method a property is determined to be impaired, the Company determines the provision for impairment based upon applying a market capitalization rate to current estimated net operating income as if the sale were to occur immediately. For properties “held-for-sale”, the Company estimates current resale values through appraisal information and other market data, less expected costs to sell. These methods of determining fair value can fluctuate significantly as a result of a number of factors, including changes in the general economy for those markets in which the Company operates, the Company’s estimated holding period of the property, tenant credit quality, and demand for new retail stores. If as a result of a change in the Company’s strategy for a specific property which the Company owns, a property previously classified as held and used is changed to held-for-sale, or if its estimated holding period changes, such change could cause the Company to determine that the property is impaired and a provision for impairment would be recorded by the Company. During 2010 and 2009, the Company established a provision for impairment of $36.3 million and $104.4 million, respectively, of which $14.4 million and $26.6 million is included in discontinued operations for the years ended December 31, 2010 and 2009, respectively. No impairment was recorded for the year ended December 31, 2008. See Note 8 for further discussion.

During the year ended December 31, 2010, the Company sold two outparcels for gross proceeds of $3.0 million and a net gain of $2.4 million which is recognized in gain on sale of properties and outparcels.

(d)

Cash and Cash Equivalents

Any instruments that have an original maturity of 90 days or less when purchased are considered cash equivalents. At times, cash and cash equivalent balances may exceed the insurance limit of the Federal Deposit Insurance Corporation. Management believes it mitigates its risk of loss by investing in or through major financial institutions.

(e)

Restricted Cash

Restricted cash includes amounts restricted and held in escrow for tenant improvements, taxes and insurance as required by the terms of related mortgages payables.

GRI – Regency, LLC

Notes to Consolidated Financial Statements

December 31, 2010 (unaudited) and 2009

(f)

Tenant Receivables

Accrued rents are included in tenant receivables. The Company estimates the collectibility of the accounts receivable related to base rents, straight-line rents, expense reimbursements, and other revenue taking into consideration the Company’s experience in the retail sector, available internal and external tenant credit information, payment history, industry trends, tenant credit-worthiness, and remaining lease terms. In some cases, primarily related to straight-line rents, the ultimate collection of these amounts is associated with increased rents to be collected in future years which extend beyond one year. During 2009, the Company experienced an increase in tenant defaults, as well as, deterioration in tenant receivable collection rates, as compared to historical collection rates. As a result, the Company increased its allowance for doubtful accounts based on its policy to both fully reserve for specifically identified tenant defaults and record an allowance based upon a percentage of aging of total revenues billed to its tenants. The following table reports allowance for doubtful accounts activity for the years ended December 31, 2010, 2009, and 2008 (in thousands):


	2010			2009			2008
Allowance for doubtful accounts at beginning of the year	$	4,238		$	1,364		$	1,165
Provision for doubtful accounts		1,914			5,599			1,304
Write offs		(3,618	)		(2,815	)		(1,227	)
Recoveries		113			90			122

Allowance for doubtful accounts at end of the year	$	2,647		$	4,238		$	1,364

(g)

Deferred Costs

Deferred costs include leasing costs and loan costs, net of accumulated amortization. Such costs are amortized over the periods through lease expiration or loan maturity, respectively. If the lease is terminated early, or if the loan is repaid prior to maturity, the remaining leasing costs or loan costs are written off. Deferred leasing costs consist of external commissions associated with leasing the Company’s shopping centers. Net deferred leasing costs were $12.8 million and $14.0 million at December 31, 2010 and 2009, respectively. Deferred loan costs consist of initial direct and incremental costs associated with financing activities and are amortized as a component of interest expense over the life of the debt using the straight-line method, which approximates the effective interest method. Net deferred loan costs were $4.5 million and $1.9 million at December 31, 2010 and 2009, respectively.

(h)

Derivative Financial Instruments

The Company held interest rate swaps that expired on September 1, 2009 which were designated as cash flow hedges of the variability in interest payments on certain notes payable. The Company formally assessed whether the derivative instruments were highly effective in offsetting changes in the related interest payments at hedge inception and an ongoing basis. The changes in fair value of derivative instruments that were highly effective and were designated as cash flow hedges were recorded in other comprehensive

GRI – Regency, LLC

Notes to Consolidated Financial Statements

December 31, 2010 (unaudited) and 2009

income. Over time, the unrealized gains and losses held in accumulated other comprehensive income were reclassified to earnings. This reclassification occurs when the related interest payments are also recognized in earnings. See Note 7 for further discussion.

(i)

Asset Retirement Obligations

The Company recognizes a liability for the fair value of conditional asset retirement obligations if the fair value of the liability can be reasonably estimated. Recorded conditional asset retirement obligations at December 31, 2010 and 2009 were $6.2 million and $6.1 million, respectively. Related accretion was approximately $200,000, $191,000, and $198,000 of expense for the years ended December 31, 2010, 2009, and 2008, respectively.

(j)

Income Taxes

The Company, with the consent of its members, has elected under the Internal Revenue Code to be taxed as a partnership. Accordingly, income is allocated to the members for inclusion in their tax returns and no provision or liability for Federal and state income taxes has been included in the consolidated financial statements.

On January 1, 2009, the Company adopted the authoritative guidance on accounting for disclosure of uncertainty in tax positions which requires the Company to determine whether a tax position is more likely than note to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. For tax positions meeting the more than likely than not threshold, the tax amount recognized in the financial statements is reduced by the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement with the relevant taxing authority. The Company has determined that there was not a material effect on the financial statements from the adoption of this authoritative guidance. The Company has evaluated the tax positions and determined that no liability exists as of December 31, 2010.

The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal, state, and local jurisdictions, where applicable. As of December 31, 2010, the tax years that remain subject to examination by the major tax jurisdictions under the statute of limitations is from the year 2007 forward (with limited exceptions).

(k)

Assets and Liabilities Measured at Fair Value

Fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement is determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, the Company uses a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from independent sources (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the Company’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy). The three levels of inputs used to measure fair value are as follows:

•

Level 1—Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access.

GRI – Regency, LLC

Notes to Consolidated Financial Statements

December 31, 2010 (unaudited) and 2009

•

Level 2—Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.

•

Level 3—Unobservable inputs for the asset or liability, which are typically based on the Company’s own assumptions, as there is little, if any, related market activity.

The Company also remeasures nonfinancial assets and nonfinancial liabilities, initially measured at fair value in a business combination or other new basis event, at fair value in subsequent periods.

(l)

Recent Accounting Pronouncements

In January 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-06, “Fair Value Measurements and Disclosures (820)—Improving Disclosures about Fair Value Measurements” (“ASU 2010-06”). ASU 2010-06 provides amendments to Subtopic 820-10 and requires new disclosures for transfers in and out of Levels 1 and 2 and activity in Level 3 fair value measurements. ASU 2010-06 also clarifies existing disclosure requirements for the level of disaggregation for each class of assets and liabilities and for the inputs and valuation techniques used to measure fair value. ASU 2010-06 is effective for financial statements issued for interim and annual periods ending after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements which is effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company adopted this ASU on December 31, 2009.

(m)

Reclassifications

Certain reclassifications have been made to the 2009 financial information to conform to the 2010 presentation. These reclassifications include a reclassification of the straight line rent receivables of $16.1 million and $14.7 million as of December 31, 2010 and 2009, respectively, that were previously reported in tenant receivables.

2.	Concentration of Risk

Management of the Company performs ongoing credit evaluations of its tenants. At December 31, 2010, approximately 26%, 21%, and 14% of the Company’s consolidated revenues are generated in California, Virginia and Maryland, respectively. No other state generates more than 7% of the Company’s consolidated revenues. No single tenant generates more than 2% of the Company’s consolidated revenues.

3.	Real Estate Investments

No members contributed property during 2010. During 2009, the members’ contributed a property with an asset value of $6.8 million. The property was contributed subject to a mortgage payable of $10.5 million and security deposits of approximately $30,000. The operating results of the property are included in the Company’s accompanying Consolidated Statements of Operations from its contribution date of June 1, 2009.

GRI – Regency, LLC

Notes to Consolidated Financial Statements

December 31, 2010 (unaudited) and 2009

The book value of the property contributed is as follows (in thousands):


Land	$	1,787
Buildings and improvements, net		4,931
Straight-line rent		44
Deferred leasing costs, net		66
Deferred loan costs, net		1

Total assets contributed		6,829
Liabilities contributed		10,530

Net liabilities contributed	$	3,701

4.	Discontinued Operations

During the years ended December 31, 2010 and 2008, the Company sold three and seven properties, respectively. There were no properties sold during the year ended December 31, 2009. The combined operating income and gain on the sale of these properties and the property classified as held for sale were reclassified to discontinued operations. The components of the net (loss) income from discontinued operations for the years ended December 31, 2010, 2009, and 2008 are as follows (in thousands):


	2010 (unaudited)			2009			2008 (unaudited)
Revenues	$	9,418		$	11,408		$	16,439
Expenses		(21,922	)		(38,309	)		(16,742	)

Operating loss from discontinued operations		(12,504	)		(26,901	)		(303	)
Gain on sale of properties		5,377			—			8,870
Early extinguishment of debt		—			—			(1,692	)

Net (loss) income from discontinued operations	$	(7,127	)	$	(26,901	)	$	6,875

5.	Acquired Lease Intangibles

The Company has acquired lease intangible assets, net of amortization, of $30.9 million and $42.3 million at December 31, 2010 and 2009, respectively, of which $21.8 million and $31.0 million relates to in-place leases. These in-place leases have a remaining weighted average amortization period of 7 years and the aggregate amortization expense recorded for these in-place leases was $7.5 million, $11.7 million, and $18.5 million for the years ended December 31, 2010, 2009, and 2008, respectively. The Company has above-market lease intangible assets, net of amortization, of $9.1 million and $11.3 million at December 31, 2010 and 2009. The remaining weighted average amortization period is 10 years and the aggregate amortization expense recorded as a reduction to minimum rent for these above-market leases was $2.2 million, $2.9 million, and $4.1 million for the years ended December 31, 2010, 2009, and 2008, respectively.

The Company has acquired lease intangible liabilities, net of accretion, of $19.5 million and $26.3 million at December 31, 2010 and 2009. The remaining weighted average accretion period is 7 years and the aggregate amount accreted as an increase to minimum rent for these below-market rents was $5.1 million, $7.4 million, and $9.5 million for the years ended December 31, 2010, 2009, and 2008, respectively.

GRI – Regency, LLC

Notes to Consolidated Financial Statements

December 31, 2010 (unaudited) and 2009

The estimated aggregate amortization and net accretion amounts from acquired lease intangibles for each of the next five years are as follows (in thousands):


Year Ending December 31,	Amortization Expense		Net Accretion
2011	$	7,384	$	4,155
2012		5,914		3,465
2013		4,681		3,086
2014		3,347		2,672
2015		2,372		2,122
Thereafter		7,218		4,012

Total	$	30,916	$	19,512

6.	Mortgages Payable

Mortgages payable consist of mortgage loans secured by properties. Mortgage loans may be prepaid, but could be subject to yield maintenance premiums. Mortgage loans are generally due in monthly installments of principal and interest or interest only, and mature over various terms through 2019. Fixed interest rates on mortgage loans range from 4.68% to 6.75% and average 5.36%.

The Company’s outstanding debt at December 31, 2010 and 2009 consists of the following (in thousands):


	2010		2009
Notes payable:
Fixed rate mortgage loans	$	1,107,662		1,443,927
Variable rate mortgage loans		—		47,235

Total notes payable		1,107,662		1,491,162
Unamortized debt market premiums		343		478

Total	$	1,108,005		1,491,640

As of December 31, 2010, scheduled principal repayments on notes payable were as follows (in thousands):


Schedule Principal Payments by Year:	Scheduled Principal Payments		Mortgage Loan Maturities		Total
2011	$	2,320		430,382		432,702
2012		4,452		229,237		233,689
2013		5,662		20,695		26,357
2014		5,985		9,800		15,785
2015		6,008		35,598		41,606
Beyond 5 Years		16,537		340,986		357,523
Unamortized debt market premiums		—		343		343

Total	$	40,964		1,067,041		1,108,005

GRI – Regency, LLC

Notes to Consolidated Financial Statements

December 31, 2010 (unaudited) and 2009

The Company is required to comply, and is in compliance with, certain financial and other covenants customary with these types of mortgage financings.

On April 30, 2010, the Company prepaid, without penalty, $514.8 million of mortgage loans that would have matured in June and July 2010. The Members each contributed capital for their respective share of the repayment. On June 2, 2010, the Company closed on $202.0 million of new ten year secured mortgage loans and distributed the proceeds to the Members in proportion to their ownership interests. On September 30, 2010, the Company locked the interest rate on $340.0 million of mortgage loan financings secured by 19 properties to refinance a portion of the $430.4 million secured debt maturing in mid-2011. The refinance includes a weighted average interest rate of 4.9% over a weighted average 11-year term and is interest-only for the first year. This loan is approximately 65% of combined property values.

7.	Derivative Financial Instruments

On August 17, 2007, the Company entered into an interest rate swap to mitigate the interest rate risk on $47.2 million of variable rate debt held by the Company. The Company expected the cash flows related to the swaps to be highly effective in offsetting the changes in the cash flows of the variable rate debt, therefore, the Company elected to designate the swaps as cash flow hedges of the variable rate debt.

The swap expired on September 1, 2009. The Company recognized a net loss of $1.5 million, and a net loss of approximately $750,000 on the interest rate swap for the years ended December 31, 2009 and 2008, respectively, which has been recognized as a component of interest expense.

The (decrease)/increase in fair value of approximately ($1.3) million and approximately 448,000 has been recorded through other comprehensive income for the years ended December 31, 2009 and 2008, respectively.

8.	Fair Value Measurements

Impairment of Long-lived Assets

Long-lived assets held and used are comprised primarily of real estate. The Company has recorded a provision for impairment of long-lived assets of $36.3 million and $104.4 million for the years ended December 31, 2010 and 2009, respectively, of which $14.4 million and $26.6 million is included in discontinued operations for the years ended December 31, 2010 and 2009, respectively. The principal triggering event that led to the impairment charges were changes in hold periods for certain properties targeted to sell over the next three years. As a result, the Company evaluated the current fair market value of and recorded a provision for impairment. Additional impairments may be necessary in the future in the event that market conditions continue to deteriorate and impact the factors used to estimate fair value, the Company reduces the holding period on properties held and used, or it decides to classify properties as held for sale where they were previously classified as held and used. See Note 1(b) for a discussion of the inputs used in determining the fair value of long-lived assets. As of December 31, 2010, all of the Company’s assets and liabilities that are measured at fair value on a recurring and non-recurring basis were derived using primarily Level 3 inputs.

GRI – Regency, LLC

Notes to Consolidated Financial Statements

December 31, 2010 (unaudited) and 2009

The Company’s assets measured at fair value on a nonrecurring basis are those assets for which the Company has recorded a provision for impairment during 2010 and 2009. The assets measured at fair value on a nonrecurring basis had a fair market value of $120.1 million and $161.5 million at the date of impairment during 2010 and 2009, respectively.

The following represent additional fair value disclosures for other assets and liabilities that are included in the accompanying consolidated financial statements.

Mortgages Payable

The fair value of the Company’s mortgages payable are estimated based on the current rates available to the Company for debt of the same terms and remaining maturities. Based on the borrowing rates currently available to the Company for loans with similar terms and average maturities, the fair value of the mortgages payable and other financing arrangements is $1.1 billion and $1.5 billion at December 31, 2010 and 2009, respectively.

9.	Members’ Capital

Additional contributions may be made by RCLP in the form of properties and/or cash and by GRI in the form of cash. Written approval of the Members is required prior to additional contributions. If, at any time, the Members agree that additional funds are needed for any purpose, the Members shall make such additional contributions in accordance with their respective percentage interest.

Distributions of net operating cash flow are made to the Members each month in proportion to their percentage interest as of the end of the month for which the distributions are being made. Distributions are adjusted quarterly in accordance with the Agreement for preferred distributions related to the Performance Amount and/or the Base Amount as defined in the Agreement.

Distributions of proceeds from debt refinancing or property sale transactions are made in accordance with their respective percentage interest.

Net income is allocated to the Members in proportion to their respective percentage interest except for special quarterly allocations related to preferred distributions. These special allocations are intended to return the Members capital accounts to an amount equal to their respective percentage interest, which represents hypothetical liquidation at book value.

10.

Leases

The Company has entered into noncancelable operating leases with nonrelated parties, as tenants of its properties. Future minimum rents under noncancelable operating leases as of December 31, 2010, excluding both tenant reimbursements of operating expenses and additional percentage rent based on tenants’ sales volume, are as follows (in thousands):

GRI – Regency, LLC

Notes to Consolidated Financial Statements

December 31, 2010 (unaudited) and 2009


Year Ending December 31,	Amount
2011	$	147,669
2012		131,453
2013		107,446
2014		86,756
2015		67,092
Thereafter		224,356

Total	$	764,772

In connection with the property acquisitions on June 1, 2005, the Company assumed a capital lease for certain land parcels and a related note payable and accrued interest totaling $4.8 million. The Company recorded a debt premium of $1.1 million to reflect the assumed debt at its fair value. The note payable accrues interest at a fixed rate of 7.9%, and the principal and accrued interest balance matures August 1, 2018, at which time the Company has the option to purchase the land, or the lessor has the right to put the land to the Company for $6.5 million plus the outstanding note payable and accrued interest.

The note payable, accrued interest, and debt premium are recorded in accounts payable and other liabilities in the accompanying Consolidated Balance Sheets. Assets under the capital lease are included in real estate investments as land with the recorded value of $5.7 million at December 31, 2010 and 2009.

Future minimum lease payments under the capital lease as of December 31, 2010 are as follows (in thousands):


Year Ending December 31,	Amount
2011	$	292
2012		292
2013		292
2014		292
2015		292
Thereafter		7,251

		8,711
Less: amount representing interest		(4,701	)

Total	$	4,011

11.	Related Party Transactions

For each new property acquired by the Company from a third party that is not an affiliate of the Members, the Company shall pay RCLP an acquisition fee equal to 1% of the total purchase price of the property plus reimbursement of its third party acquisition costs, which will be added to the Company’s basis in the property. No such fees were incurred during the years ended December 31, 2010, 2009, and 2008.

For each new property acquired by the Company directly from an affiliated joint venture, the Company shall pay RCLP an acquisition fee equal to 1% of the total purchase price multiplied by the percentage of the equity ownership interest in such affiliated joint venture that is not directly or

GRI – Regency, LLC

Notes to Consolidated Financial Statements

December 31, 2010 (unaudited) and 2009

indirectly owned by a Member or its affiliate plus reimbursement of its third party acquisition costs, which will be added to the Company’s basis in the property. No such fees were incurred during the years ended December 31, 2010, 2009, and 2008.

For each new property acquired by the Company directly from RCLP or its affiliates, the Company shall pay RCLP an acquisition fee, which will be separately agreed upon by the Members. No such fees were incurred for the years ended December 31, 2010, 2009, and 2008.

Per the Agreement, the Company shall pay RCLP a fee for capital restructuring and consulting services provided in connection with any new financing, as defined by the Agreement, for the Company. The fee is equal to 50 basis points of the total amount of the original principal amount of such financing less any third party brokerage fees. During the year ended December 31, 2010, the Company paid approximately $73,000 in fees to RCLP for their services related to the $202.0 million debt portfolio that closed on June 2, 2010. No such fees were incurred during the years ended December 31, 2009 and 2008.

Regency Realty Group, Inc. (RRG), an affiliate of RCLP, has entered into a management agreement whereby RRG provides property management services to the Company for the properties owned by the Company as detailed in the management agreement. RRG receives, as compensation for property management services, an annual sum equal to 4% of effective gross income of the properties, as defined by the Agreement. During the years ended December 31, 2010, 2009, and 2008, the Company incurred $8.5 million, $8.0 million and $8.1 million respectively, for such services, of which approximately $705,000, $742,000, and $703,000 are included in accounts payable and other liabilities at 2010, 2009, and 2008, respectively.

Per the Agreement, the Company incurs a due diligence fee payable to RCLP for due diligence services provide in connection with the Company’s acquisition or disposition of properties. The fee is equal to 25 basis points of the purchase price or sale price, as the case may be, of any property. In addition, RCLP shall be reimbursed for its third party costs. No such fees were incurred during the years ended December 31, 2010, 2009, and 2008.

The management agreement also states that RCLP is entitled to a construction supervision fee of 5% of project costs in excess of $25,000 on any future development or construction project undertaken by the Company. During the years ended December 31, 2010, 2009 and 2008, the Company incurred fees of approximately $364,000, $461,000, and $1.1 million, respectively, for such services, of which approximately $10,000, $5,000 and $123,000 are included in accounts payable and other liabilities at December 31, 2010, 2009, and 2008, respectively.

12.	Commitments and Contingencies

The Company is involved in litigation and other legal proceedings arising in the course of its normal business activities. The Company believes that any liability resulting from these matters, after taking into consideration its insurance coverages and amounts recorded in the accompanying consolidated financial statements, will not have a material adverse effect on its consolidated financial position, cash flows, or results from operations.

GRI – Regency, LLC

Notes to Consolidated Financial Statements

December 31, 2010 (unaudited) and 2009

13.	Subsequent Events (unaudited)

The Company has evaluated subsequent events through February 22, 2011.