SITE Centers - 10-Q quarterly report FY

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q

DEVELOPERS DIVERSIFIED REALTY CORPORATION
(Exact name of registrant as specified in its charter)

Indicated by check # whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days Yes # No

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common shares as of the latest practicable date.

      55,203,580 common shares, without par value, outstanding as of August 8, 2001

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PART I
FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Condensed Consolidated Balance Sheets as of June 30, 2001 and December 31, 2000.

Condensed Consolidated Statements of Operations for the Three Month Periods ended June 30, 2001 and 2000.

Condensed Consolidated Statements of Operations for the Six Month Periods ended June 30, 2001 and 2000.

Condensed Consolidated Statements of Cash Flows for the Six Month Periods ended June 30, 2001 and 2000.

Notes to Condensed Consolidated Financial Statements.

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DEVELOPERS DIVERSIFIED REALTY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited)

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

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DEVELOPERS DIVERSIFIED REALTY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTH PERIOD ENDED JUNE 30,
(Dollars in thousands, except per share amounts)
(Unaudited)

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

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DEVELOPERS DIVERSIFIED REALTY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTH PERIOD ENDED JUNE 30,
(Dollars in thousands, except per share amounts)
(Unaudited)

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

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DEVELOPERS DIVERSIFIED REALTY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIOD ENDED JUNE 30,
(Dollars in thousands)
(Unaudited)

Supplemental disclosure of non cash investing and financing activities:

During the six month period ended June 30, 2001, in conjunction with the merger of American Industrial Properties, the Company recorded real estate assets with a fair value of $283.1 million, other assets of $9.0 million, debt of $147.6 million and other liabilities of $15.0 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 (Footnote 3). In addition, at June 30, 2001, included in accounts payable is $20.4 million of dividends declared. Included in other liabilities is approximately $4.2 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 six month period ended June 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 June 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.

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DEVELOPERS DIVERSIFIED REALTY CORPORATION

Notes to 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 six months ended June 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 June 30, 2001 and 2000 was $29,215,000 and $18,713,000, respectively. Comprehensive income for the six month periods ended June 30, 2001 and 2000 was $47,604,000 and $56,690,000, respectively.

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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.

      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.

2. EQUITY INVESTMENTS IN JOINT VENTURES

      At June 30, 2001, the Company owned various joint ventures and joint venture interests held through equity affiliates which own fifty-six operating shopping center properties and six shopping center properties under development.

      Combined condensed financial information of the Company’s joint venture investments and joint venture investments held through an equity affiliate of the Company are as follows (in thousands):

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      Included in management fee income for the six month period ended June 30, 2001 and 2000, is approximately $3.5 and $2.8 million, respectively, of management fees earned by the Company for services rendered to the joint ventures. Also included in revenues for the six month period ended June 30, 2001 and 2000, is approximately $1.7 million and $1.3 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 11 west coast retail properties for approximately $268 million 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 June 30, 2001, nine properties were acquired at an aggregate cost of approximately $251 million. The joint venture’s equity investment as of June 30, 2001 is approximately $115 million. The Company will earn fees for managing and leasing the properties, all of which are located in western states. One additional property purchase is expected to close in August 2001 at an aggregate cost of approximately $12 million and the remaining property will not be acquired due to certain operating partnership issues.

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.

      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

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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 six month periods ended June 30, 2000, as reflected on the accounts of AIP, were as follows (in thousands):

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      For the period from January 1, 2001 through May 14, 2001 and the six month period ended June 30, 2000, the Company recorded equity in net income from minority equity investment of $1.6 million and $2.9 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 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 six months ended June 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.

5. SHAREHOLDERS’ EQUITY AND OPERATING PARTNERSHIP UNITS

      The following table summarizes the changes in shareholders’ equity since December 31, 2000 (in thousands):

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      Dividends declared were $0.37 and $0.36 per common share for the six month periods ended June 30, 2001 and 2000, respectively.

      At June 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.

6. OTHER ASSETS

      Other assets consist of the following (in thousands):

7. 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 June 30, 2001, $381.0 million was outstanding under this facility with a weighted average interest rate, excluding the effects of any interest rate swaps, of 5.1%.

      The Company also maintains a secured revolving credit facility with National City Bank of $25 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 June 30, 2001, $22.5 million was outstanding under this facility with a weighted average interest rate of 5.0%.

8. DERIVATIVE FINANCIAL INSTRUMENTS

      The Company has 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

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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 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 June 30, 2001, the aggregate fair value of the Company’s interest rate swaps was a liability of $4.2 million which is included in other liabilities in the condensed consolidated balance sheets. For the six months ended June 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 reclassify as earnings $3.5 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.

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9. 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 both income before extraordinary item 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 have been no significant changes to dilutive securities from those disclosed in the Company’s annual report for the year ended December 31, 2000 other than outlined below.

10. SEGMENT INFORMATION

      As a result of the acquisition of AIP’s business centers in connection with the AIP merger on May 14, 2001, the Company now has two reportable business segments, shopping centers and business centers, in accordance with SFAS No, 131, “Disclosures about Segments of an Enterprise and Related Information.” Accordingly, segment information is not presented 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.

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      The table below presents information about the Company’s reportable segments for the three and six month periods ended June 30, 2001.

11. SUBSEQUENT EVENTS

      In July 2001, the Company sold a 190,000 square foot shopping center in Toldeo, Ohio (Airport Square) for approximately $14.8 million. Proceeds from this sale were used to repay amounts outstanding on the Company’s revolving credit facilities.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

      The following discussion should be read in conjunction with the condensed consolidated financial statements and the notes thereto. Historical results and percentage relationships set forth in the condensed consolidated financial statements, including trends which might appear, should not be taken as indicative of future operations. The Company considers portions of this information to be “forward-looking statements” within the meaning of Section 27A of the Securities Exchange Act of 1933 and Section 21E of the Securities Exchange Act of 1934, both as amended, with respect to the Company’s expectations for future periods. Forward-looking statements include, without limitation, statements related to acquisitions (including any related pro forma financial information) and other business development activities, future capital expenditures, financing sources and availability and the effects of environmental and other regulations. Although the Company believes that the expectations reflected in those forward-looking statements are based upon reasonable assumptions, it can give no assurance that its 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. Readers should exercise caution in interpreting and relying on forward-looking statements since they involve known and unknown risks, uncertainties and other factors which are, in some cases, beyond the Company’s control and could materially affect the Company’s 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:

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Results of Operations

      Revenues from Operations

      Total revenues increased $6.6 million, or 9.2%, to $78.6 million for the three month period ended June 30, 2001 from $72.0 million for the same period in 2000. Total revenues increased $12.7 million, or 9.0% to $153.7 million for the six month period ended June 30, 2001 from $141.0 million for the same period in 2000. Base rental revenues for the three month period ended June 30, 2001 increased $5.1 million, or 10.1%, to $55.7 million as compared to $50.6 million for the same period in 2000. Base rental revenues increased $7.9 million, or 7.9%, to $107.6 million for the six month period ended June 30, 2001 from $99.7 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 $1.5 million, or 1.7%, for the six month period ended June 30, 2001 as compared to the same period in 2000. 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 $3.7 million and the merger of the American Industrial Properties (“AIP”) contributed $4.3 million. These increases were offset by a $2.4 million decrease from the sale/transfer of four properties and three Wal-Mart stores in 2000 and 2001.

      At June 30, 2001, the in-place occupancy rate of the Company’s portfolio was 95.0%, as compared to 94.8% at June 30, 2000 and 95.7% at December 31, 2000. The average annualized retail base rent per leased square foot, including those properties owned through joint ventures, was $9.71 at June 30, 2001 as compared to $9.20 at June 30, 2000. Same store sales, for those tenants required to report such information, representing approximately 19.0 million square feet, increased approximately 2.0% to $241 per square foot for the twelve month period ended June 30, 2001.

      Recoveries from tenants for the three month period ended June 30, 2001 increased $0.2 million, or 1.9%, to $14.3 million as compared to $14.1 million for the same period in 2000. Recoveries from tenants for the six month period ended June 30, 2001 increased $1.8 million, or 6.5%, to $29.1 million as compared to $27.3 million in 2000. This increase was primarily related to the

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increase in operating and maintenance expenses and real estate taxes associated with the 2000 and 2001 shopping center acquisitions and developments. Recoveries were approximately 86.2% and 91.0% of operating expenses and real estate taxes for the six month periods ended June 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 expense as discussed below.

      Ancillary and other property related income for the three month period ended June 30, 2001 increased $0.2 million, or 45.9%, to $0.5 million as compared to $0.3 million for the same period in 2000. Ancillary and other property related income for the six month period ended June 30, 2001 increased $0.3 million, or 45.4%, to $1.0 million as compared to $0.7 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 June 30, 2001 increased $1.5 million, to $2.9 million as compared to $1.4 million for the same period in 2000. Management fee income for the six month period ended June 30, 2001 increased $3.0 million, or 96.3%, to $6.0 million as compared to $3.0 million in 2000. This increase was primarily associated with the Company assuming property management responsibilities for all of the real estate assets of Burnham Pacific Properties (“Burnham”) 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 June 30, 2001 increased $0.4 million, to $0.7 million as compared to $0.3 million for the same period in 2000. Development fee income for the six month period ended June 30, 2001 decreased $0.2 million, or 16.1%, to $1.0 million as compared to $1.2 million in 2000. This decrease 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 Long Beach, CA; Coon Rapids, MN; Littleton, CO and expects to enter into another development joint venture associated with a 455,000 square foot development project in Long Beach, CA later this year for which developemt fees are anticipated.

      Interest income for the three month period ended June 30, 2001 increased $1.3 million, to $1.7 million as compared to $0.4 million for the same period in 2000. Interest income for the six month period ended June 30, 2001, increased $1.7 million, or 93.2%, to $3.5 million as compared to $1.8 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 June 30, 2001 decreased $1.9 million, to $2.1 million as compared to $4.0 million for the same period in 2000. Other income for the six month period ended June 30, 2001 decreased $0.6 million, to $3.8 million as compared to $4.4 million in 2000. This decrease is due to a decrease in lease termination revenues aggregating approximately $1.0 million.

Expenses from Operations

      Rental operating and maintenance expenses for the three month period ended June 30, 2001 increased $1.3 million, or 20.9%, to $7.7 million as compared to $6.4 million for the same period in 2000. Rental operating and maintenance expenses increased $3.8 million, or 28.9%, to $16.9 million for the six month period ended June 30, 2001 from $13.1 million for the same period in 2000. An increase of $0.8 million is attributable to the nine shopping centers acquired and developed in 2001 and

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2000, $0.4 million attributable to the merger of the AIP properties and $3.0 million is primarily attributable to nonrecoverable operating expenses including an increase in the Company’s provisions for bad debt expense of approximately $1.8 million and various maintenance items in the Core Portfolio Properties. These increases were offset by a decrease of $0.4 million relating to the sale/transfer of four properties and three Wal-Mart stores in 2000 and 2001.

      Real estate taxes for the three month period ended June 30, 2001 decreased $0.7 million, or 8.0%, to $8.6 million as compared to $9.3 million for the same period in 2000. Real estate taxes decreased $0.1 million, or 0.5%, to $16.8 million for the six month period ended June 30, 2001 from $16.9 million for the same period in 2000. Increases of $0.4 million related to the nine shopping centers acquired and developed in 2001 and 2000 and $0.6 million related to the merger of the AIP properties, were offset by a decrease of $0.1 million relating to the sale/transfer of four properties and three Wal-Mart stores in 2000 and 2001 and the remaining $1.0 million decrease is primarily associated with the Core Portfolio Properties.

      General and administrative expenses increased $1.1 million, or 22.6%, to $6.2 million for the three month period ended June 30, 2001 as compared to $5.1 million in 2000. General and administrative expenses increased $1.7 million, or 17.3%, to $11.9 million for the six month period ended June 30, 2001 from $10.2 million for the same period in 2000. Total general and administrative expenses were approximately 4.4% of total revenues, including total revenues of joint ventures, for the six month periods ended June 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 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 Burnham in the fourth quarter of 2000. The Company continues to maintain a conservative policy with regard to the expensing of all internal leasing salaries, legal salaries and related expenses associated with the leasing and re-leasing of existing space.

      Depreciation and amortization expense increased $0.9 million, or 6.6%, to $14.5 million for the three month period ended June 30, 2001, as compared to $13.6 million for the same period in 2000. Depreciation and amortization expense increased $1.5 million, or 5.7%, to $28.4 million for the six month period ended June 30, 2001 from $26.9 million for the same period in 2000. An increase of $0.4 million is related to the nine shopping centers acquired and developed in 2001 and 2000, $0.6 million is related to Core Portfolio Properties and $0.9 million is 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 four properties and three Wal-Mart stores in 2000 and 2001.

      Interest expense increased $2.3 million, or 12.7%, to $21.0 million for the three month period ended June 30, 2001, as compared to $18.7 million for the same period in 2000. Interest expense increased $4.2 million, or 11.5%, to $41.0 million for the six month period ended June 30, 2001 from $36.8 million for the same period in 2000. The overall increase in interest expense for the six month period ended June 30, 2001, as compared to the same period in 2000 is primarily related to the acquisition and development of shopping centers during 2001 and 2000. The weighted average debt outstanding during the six month period ended June 30, 2001 and related weighted average interest rate was $1.3 billion and 7.2%, respectively, compared to $1.1 billion and 7.6%, respectively, for the same period in 2000. Interest costs capitalized, in conjunction with development, expansion projects and development joint venture interests, were $3.4 million and $6.9 million for the three and six month periods ended June 30, 2001, as compared to $4.4 million and $8.4 million for the same periods in 2000.

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      Equity in net income/loss of joint ventures increased $1.0 million, or 29.3%, to $4.4 million for the three month period ended June 30, 2001, as compared to $3.4 million for the same period in 2000. Equity in net income of joint ventures increased $0.5 million, or 5.9%, to $9.3 million for the six month period ended June 30, 2001 from $8.8 million for the same period in 2000. An increase of $0.8 million is primarily related to the joint venture formed in 2000 to acquire the Burnham properties. This increase was offset by a decrease of $0.6 million relating to the Company’s sale of 60% of its half interest in the Community Centers joint venture in February 2000. The remaining increase of $0.3 million primarily relates to joint ventures formed to develop shopping centers which began operation in the fourth quarter of 2000.

      Equity in net income/loss of minority equity investment decreased $2.7 million, to a loss of $1.4 million for the three month period ended June 30, 2001, as compared to income of $1.3 million for the same period in 2000. Equity in net income of minority equity investment decreased $1.3 million, or 46.7%, to $1.6 million for the six month period ended June 30, 2001 from $2.9 million for the same period in 2000. The overall decrease for the six 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 $0.2 million, or 2.9%, to $5.3 million for the three month period ended June 30, 2001, as compared to $5.1 million for the same period in 2000. Minority equity interest expense increased $1.2 million, or 13.0%, to $10.4 million for the six month period ended June 30, 2001 from $9.2 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. 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.

      Gain on disposition on real estate and real estate investments aggregated $12.7 million for the six month period ended June 30, 2001, which relates to the sale of three shopping center properties in Ahoskie, North Carolina; Rapid City, South Dakota and Highland Heights, Ohio.

      Gain on disposition of real estate and real estate investments aggregated $17.1 million for the six month period ended June 30, 2000. The Company sold a shopping center property located in Stone Mountain, Georgia. The Company also sold 60% of its half interest in the Community Centers 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 increased $10.6 million, or 56.6%, to $29.3 million for the three month period ended June 30, 2001, as compared to net income of $18.7 million for the same period in 2000. Net income decreased $4.9 million, or 8.6%, to $51.8 million for the six month period ended June 30, 2001 from $56.7 million for the same period in 2000. The decrease in net income of $4.9 million is primarily attributable to the decrease in gain on sale of real estate and real estate investments of $4.4 million, offset by increases in net operating revenues (total revenues less operating and maintenance, real estate taxes and general and administrative expense) aggregating $7.3 million, resulting from new leasing, retenanting and expansion of Core Portfolio Properties and the nine shopping centers acquired

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and developed in 2000 and 1999 and a decrease of $0.9 million relating to equity in net income from joint ventures and minority equity investment. This aggregate decrease was offset by increases in depreciation, interest and minority interest expense of $1.5 million, $4.2 million and $1.2 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 June 30, 2001, FFO increased $0.8 million, to $33.2 million as compared to $32.4 million for the same period in 2000. For the six month period ended June 30, 2001, FFO decreased $1.0 million, to $65.6 million as compared to $66.6 million for the same period in 2000 as adjusted to comply with NAREIT’s revised definition of FFO effective January 1, 2000. The Company’s calculation of FFO is as follows (in thousands):