SITE Centers - 10-Q quarterly report FY

 

(Exact name of registrant as specified in its charter)

(Address of principal executive offices — zip code)

(216) 755-5500

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

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ      Accelerated filer o      Non-accelerated filer o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o No þ

     As of November 1, 2006, the registrant had 108,897,597 outstanding common shares, without par value.

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

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

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

     Supplemental disclosure of non-cash investing and financing activities:

     For the nine-months ended September 30, 2006, in connection with the adoption of EITF 04-05, as of January 1, 2006, the Company consolidated real estate assets of $41.4 million and a mortgage payable of $17.1 million. In conjunction with the acquisition of its partners’ interests in four shopping centers, the Company acquired real estate assets of $212.6 million and assumed debt of $104.1 million. For the nine-months ended September 30, 2006, in conjunction with the acquisition of its partners’ interests in 52 assets, the Company acquired real estate assets of $156.3 million, other assets of $25.9 million and assumed debt of $28.8 million. For the nine-months ended September 30, 2006, minority interests with a book value of approximately $14.2 million were converted into approximately 0.4 million common shares of the Company, resulting in an increase of approximately $8.2 million to real estate assets. At September 30, 2006, dividends payable were $71.2 million. Other liabilities include approximately $1.4 million, which represents the fair value of the Company’s interest rate swap. The foregoing transactions did not provide for or require the use of cash for the nine-month period ended September 30, 2006.

     For the nine-months ended September 30, 2005, in conjunction with the acquisition of 15 assets, the Company assumed mortgage debt at a fair value of approximately $673.2 million and other liabilities of approximately $4.4 million. At September 30, 2005, dividends payable were $65.8 million. Included in other assets and debt is approximately $0.6 million, which represents the fair value of the Company’s reverse interest rate swaps at September 30, 2005. In January 2005, in accordance with a performance unit plan, the Company issued 200,000 restricted shares to the Chairman and Chief Executive Officer, of which 30,000 shares vested as of the date of issuance. The remaining 170,000 shares will vest in 2006 through 2009. The foregoing transactions did not provide for or require the use of cash for the nine-month period ended September 30, 2005.

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

     Developers Diversified Realty Corporation and its related real estate joint ventures and subsidiaries (collectively, the “Company” or “DDR”) are engaged in the business of acquiring, expanding, owning, developing, redeveloping, leasing, and managing shopping centers.

     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

     These financial statements have been prepared by the Company in accordance with generally accepted accounting principles for interim financial information and the applicable rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all information and footnotes required by generally accepted accounting principles for complete financial statements. However, in the opinion of management, the interim financial statements include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the results of the periods presented. The results of the operations for the three and nine-months ended September 30, 2006 and 2005 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 Form 10-K for the year ended December 31, 2005.

     The Company consolidates certain entities in which it owns less than a 100% equity interest if it is deemed to be the primary beneficiary in a variable interest entity (“VIE”), as defined in FASB Interpretation No. 46(R) “Consolidation of Variable Interest Entities” (“FIN 46(R)”). For those entities that are not a VIE as described in FIN 46(R), the Company also consolidates certain entities in which it has effective control. The equity method of accounting is applied to entities in which the Company is not the primary beneficiary as defined by FIN 46(R), or does not have effective control, but can exercise influence over the entity with respect to its operations and major decisions.

     In May 2005, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS 154”), which replaces APB Opinions No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements — An Amendment of APB Opinion No. 28.” SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application, on the latest practicable date, as the required method for reporting a change in accounting principle and the reporting of a correction of an error. SFAS 154 was effective for the Company in the

first quarter of 2006. The adoption of this standard did not have a material impact on the Company’s financial position, results of operations or cash flows.

     In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” — an interpretation of FASB Statement No. 109, “Accounting for Income Taxes” (“FIN 48”), regarding accounting for and disclosure of uncertain tax positions. This guidance seeks to reduce the diversity in practice associated with certain aspects of the recognition, disclosure and measurement related to accounting for income taxes. This interpretation is effective for fiscal years beginning after December 15, 2006. Although the Company is assessing the impact of FIN 48, it does not expect the adoption to have a material impact on the Company’s results of operations, cash flows and financial position.

     In September 2006, the SEC staff issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” in order to address the observed diversity in quantification practices with respect to annual financial statements. This bulletin should be applied for the annual financial statements for the first fiscal year ending after November 15, 2006. The Company does not expect the application of this bulletin to have a material impact on the Company’s results of operations, cash flows and financial position.

     In September 2006, the FASB issued SFAS 157, that establishes how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under GAAP. This Statement addresses the need for increased consistency and comparability in fair value measurements and for expanded disclosures about fair value measurements. The key changes to current practice are: (1) the definition of fair value which focuses on an exit price rather than entry price; (2) the methods used to measure fair value such as emphasis that fair value is a market-based measurement, not an entity-specific measurement, as well as the inclusion of an adjustment for risk, restrictions and credit standing; and (3) the expanded disclosures about fair value measurements.

     This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those years. The Company is currently evaluating the impact of this Statement on its financial statements.

     Comprehensive income (in thousands) for the three-month periods ended September 30, 2006 and 2005 was $57,145 and $69,991, respectively. Comprehensive income (in thousands) for the nine-month periods ended September 30, 2006 and 2005 was $187,054 and $244,334, respectively (Note 8).

     At September 30, 2006 and December 31, 2005, the Company had ownership interests in various unconsolidated joint ventures, which owned 108 and 112 shopping center properties,

respectively, and 51 and 55 shopping center sites, respectively, formerly owned by Service Merchandise Company, Inc.

     Combined condensed financial information of the Company’s unconsolidated joint venture investments is as follows (in thousands):

     Advances to and investments in joint ventures include the following items, which represent the difference between the Company’s investment and its proportionate share of the joint ventures underlying net assets (in millions):

     The Company’s proportionate share of service fees earned through the management, acquisition and financing, leasing and development activities performed related to the Company’s joint ventures are as follows (in millions):

     During the second quarter of 2006, the Company sold six properties, aggregating 0.8 million owned square feet, to the MDT Preferred Joint Venture, a newly formed joint venture with Macquarie DDR Trust, for approximately $122.7 million and recognized gains totaling approximately $38.5 million of which $32.5 million represented merchant building gains from recently developed shopping centers.

     Under the terms of the new MDT Preferred Joint Venture, MDT receives a 9% preferred return on its preferred equity investment of approximately $12.2 million and then receives a 10% return on its common equity investment of approximately $20.8 million before DDR receives a 10% return on an agreed upon common equity investment of $3.5 million, which has not been recognized in the condensed consolidated balance sheet due to the terms of its subordination. DDR is then entitled to a 20% promoted interest in any cash flow achieved above a 10% leveraged internal rate of return on all common equity. The Company recognizes its proportionate share of equity in earnings of the MDT Preferred Joint Venture at an amount equal to increases in its common equity investment based upon an assumed liquidation including consideration of cash received, of the joint venture at its depreciated book value as of the end of each reporting period. The Company has not recorded any equity in earnings from the MDT Preferred Joint Venture as of September 30, 2006.

     The Company has been engaged to perform all day-to-day operations of the properties and earns and/or may be entitled to receive ongoing fees for property management, leasing and construction management, in addition to a promoted interest, along with other periodic fees such as financing fees.

     In July 2006, the Company sold two additional expansion areas in McDonough, Georgia and Coon Rapids, Minnesota to the MDT Joint Venture for approximately $10.1 million. These expansion areas are adjacent to shopping centers currently owned by the MDT Joint Venture. The Company recognized an aggregate merchant build gain of $3.1 million, and deferred gains of approximately $0.5 million relating to the Company’s effective 14.5% ownership interest in the venture.

     In March 2006, the Company sold newly developed expansion areas located in Birmingham, Alabama and Monaca, Pennsylvania, aggregating 0.1 million square feet, to the MDT Joint Venture for approximately $14.6 million. The Company recognized an aggregate gain of $5.5 million and deferred gains of approximately $1.0 million relating to the Company’s effective 14.5% ownership interest in the venture. These expansion areas are adjacent to shopping centers owned by the MDT Joint Venture.

     In September 2005, the Company formed the Mervyns Joint Venture, a consolidated joint venture with MDT, which acquired the underlying real estate of certain operating Mervyns stores. The Mervyns Joint Venture is effectively owned 50% by the Company and 50% by MDT. The Mervyns Joint Venture purchased one additional site in 2006 for approximately $11.0 million.

     As further discussed below, the Coventry II Joint Venture acquired 51 assets formerly occupied by Service Merchandise from the Company in September 2006.

     In September 2006, the Coventry II Joint Venture acquired an 88 acre site located in Bloomfield Hills, Michigan at a cost of approximately $68.4 million. The Company anticipates commencing construction of a 600,000 square foot lifestyle center.

     In May 2006, the Coventry II Joint Venture acquired three assets located in Cincinnati, Ohio; Benton Harbor, Michigan and Allen, Texas at an aggregate cost of approximately $225 million.

     The Company is generally responsible for day-to-day operations of the properties and receives its share of ongoing fees for property management, certain leasing, construction management, and construction oversight, in addition to a promoted interest in the properties acquired.

     In August 2006, the Company purchased its then partners’ approximate 75% interest in the remaining 52 assets formerly occupied by Service Merchandise owned by the KLA/SM Joint Venture at a gross purchase price of approximately $138 million relating to the partners’ approximate 75% ownership interest, based on a total valuation of approximately $185 million for all remaining assets, including outstanding indebtedness.

     In September 2006, the Company sold 51 of the assets formerly occupied by Service Merchandise to the Coventry II Joint Venture at a gross purchase price of approximately $185 million and assumed debt of approximately $29 million. The Company has a 20% interest in the joint venture. The Company recorded a gain of approximately $6.4 million.

     In September 2006, one of the Company’s Retail Value Investment Program (“RVIP”) joint ventures, in which the Company has an effective 25.5% ownership interest, sold a 41,000 square foot shopping center in Everett, Washington for approximately $8.1 million. The joint venture recorded an aggregate gain of $3.7 million of which approximately $1.2 million represents the Company’s share of the gain.

     In August 2006, the joint venture shopping center in Kildeer, Illinois, of which the Company owned a 10% interest, was sold for approximately $47.3 million. The joint venture recorded a gain of approximately $17.7 million. The Company recorded a gain of approximately $7.3 million which includes promoted income from the sale of the asset of approximately $5.5 million.

     In August 2006, the Company acquired its partner’s 20% ownership interest in a development in Apex, North Carolina for approximately $3.5 million.

     In May 2006, one of the Company’s RVIP joint ventures, in which the Company has an effective 25.5% ownership, sold four shopping centers in Kansas City, Kansas and Kansas City, Missouri aggregating 0.4 million square feet for approximately $20.0 million. The joint venture recognized a loss of approximately $1.8 million, of which the Company’s proportionate share was approximately $0.5 million.

     In April 2006, the Company acquired its partner’s 50% ownership interest in Deer Valley Towne Center located in Phoenix, Arizona for approximately $15.6 million in addition to assuming the partner’s proportionate share of the $17.3 million of existing mortgage debt (or $8.65 million). The total shopping center, excluding the mortgage debt, was valued at approximately $48.2 million.

     In March 2006, the Company acquired its partner’s 50% ownership interest in a shopping center located in Salisbury, Maryland, which is adjacent to one of the Company’s properties, for $1.5 million in addition to assuming the partner’s proportionate share of the $1.8 million of existing mortgage debt (or $0.9 million) which was repaid following the acquisition. The total shopping center, excluding the mortgage debt, was valued at approximately $4.7 million.

     In January 2006, the Company acquired its partner’s 75% ownership interest in a shopping center located in Pasadena, California for $55.9 million in addition to assuming the partner’s

proportionate share of the $85 million of existing mortgage debt (or $63.75 million), which was repaid following the acquisition. The total shopping center, excluding mortgage debt, was valued at approximately $175 million.

     Following the date of acquisition these previously unconsolidated joint ventures have been consolidated into the Company’s consolidated financial statements.

     As a result of the adoption of EITF 04-5, the Company consolidated one limited partnership with total assets and liabilities of $24.4 million and $17.7 million, respectively, which were consolidated into the Company’s financial statements at January 1, 2006.

     In January 2005, the Company completed the acquisition of 15 retail real estate assets in Puerto Rico from Caribbean Property Group, LLC and related entities (“CPG”), for approximately $1.2 billion (“CPG Properties”). The financing for the transaction was provided by the assumption of approximately $660 million of existing debt, line of credit borrowings on the Company’s unsecured credit facility and the application of a $30 million deposit funded in 2004. Included in the assets acquired are the land, building and tenant improvements associated with the underlying real estate. The other assets allocation of $12.6 million relates primarily to in-place leases, leasing commissions, tenant relationships and tenant improvements of the properties (Note 4). There was a separate allocation in the purchase price of $2.3 million for above-market leases and $9.1 million for below-market leases. The Company entered into this transaction to obtain a shopping center portfolio in Puerto Rico, a market where the Company previously did not own or manage any assets.

     The following supplemental pro forma operating data is presented for the nine-month period ended September 30, 2005 as if the acquisition of properties from CPG was completed on January 1, 2005. Pro forma operating data is not presented for the three and nine-month periods ended September 30, 2006, and the three-month period ended September 30, 2005 as the Company’s acquisitions for these periods are not considered material. The supplemental pro forma operating data is not necessarily indicative of what the actual results of operations of the Company would have been assuming the transactions had been completed as set forth above, nor do they purport to represent the Company’s results of operations for future periods. In addition, the following supplemental pro forma operating data does not present the sale of assets through September 30, 2006. The Company accounted for the acquisition of assets utilizing the purchase method of accounting.

Other assets consist of the following (in thousands):

     The Company maintains its primary unsecured revolving credit facility with a syndicate of financial institutions, for which JP Morgan serves as the administrative agent (the “Unsecured Credit Facility”). The facility was amended in June 2006. As a result of the amendment, the facility was increased from $1.0 billion to $1.2 billion, provided for an accordion feature of a future expansion to $1.4 billion, extended the maturity date to June 2010, with a one-year extension option and amended the pricing. The facility includes a competitive bid option for up to 50% of the facility. The Company’s borrowings under this facility bear interest at variable rates at the Company’s election, based on the prime rate, as defined in the facility, or LIBOR, plus a specified spread (0.60% at September 30, 2006). The specified spread over LIBOR varies depending on the Company’s long-term senior unsecured debt rating from Standard and Poor’s and Moody’s Investors Service. The Company is required to comply with certain covenants relating to total outstanding indebtedness, secured indebtedness, maintenance of unencumbered real estate assets and fixed charge coverage. The Company was in compliance with these covenants at September 30, 2006. The facility also provides for a facility fee of 0.15% on the entire facility. At September 30, 2006, total borrowings under this facility aggregated $120.0 million with a weighted average interest rate of 5.3%.

     The Company also maintains a $60 million unsecured revolving credit facility with National City Bank. This facility was amended in June 2006 to extend the maturity date to June 2010 and to reflect terms consistent with those contained in the Unsecured Credit Facility. Borrowings under the facility bear interest at variable rates based on the prime rate, as defined in the facility, or LIBOR plus a specified spread (0.60% at September 30, 2006). The specified spread over LIBOR is dependent on the Company’s long-term senior unsecured debt rating from Standard and Poor’s and Moody’s Investors Service. The Company is required to comply with certain covenants relating to total outstanding indebtedness, secured indebtedness, maintenance of unencumbered real estate assets and fixed charge coverage. The Company was in compliance with these covenants at September 30, 2006. At September 30, 2006, total borrowings under this facility aggregated $5.0 million with a weighted average interest rate of 6.0%.

     In July 2006, the Company repaid its $200.0 million variable rate term loan with funds drawn on the Unsecured Credit Facility. This facility was terminated upon repayment.

     The Company also maintains its primary secured term loan agreement with a syndicate of financial institutions, for which KeyBank Capital Markets serves as the administrative agent. This term loan was amended in March and June 2006. The facility was amended to add an accordion feature to increase the loan, at the Company’s option, up to $500 million and covenant modifications. At September 30, 2006, total borrowings under this facility aggregated $400.0 million with a weighted average interest rate of 6.1%.

     In August 2006, the Company issued $250 million of Senior Convertible Notes due 2011 (the “Senior Convertible Notes”). The Senior Convertible Notes were issued at par and pay interest in cash semi-annually in arrears on February 15 and August 15 of each year, beginning on February 15, 2007. The Senior Convertible Notes are unsecured unsubordinated obligations and rank equally with all other unsecured and unsubordinated indebtedness. The Senior Convertible Notes have an initial conversion price of $65.11 per share. The Senior Convertible Notes may only be converted prior to maturity: (i) during any calendar quarter beginning after September 30, 2006 if the closing price of the

Company’s common stock reaches 125% of the conversion price for 20 trading days during a specified period, or (ii) if specified distributions to holders of the Company’s common stock are made or specified corporate transactions occur, or (iii) if the trading price of the Senior Convertible Notes was less than 98% of the product of the closing sale price of our common shares multiplied by the applicable conversion rate; or (iv) during the last month prior to maturity of the applicable notes. Upon conversion, a holder would receive: (i) cash equal to the lesser of the principal amount of the note or the conversion value and (ii) to the extent the conversion value exceeds the principal amount of the note, shares of the Company’s common stock. In addition, upon a change in control, as defined, the holders may require the Company to purchase for cash all or a portion of their notes for 100% of the principal amount of the notes plus accrued and unpaid interest, if any, plus a number of additional make-whole shares of the Company’s common stock, as set forth in the applicable indenture. The indentures under which the Senior Convertible Notes were issued contain customary covenants. A total of $48.3 million of the net proceeds from Senior Convertible Notes were used to repurchase common stock.

     Concurrent with the issuance of the Senior Convertible Notes, the Company purchased an option on its common stock in a private transaction. This option allow the Company to receive shares of the Company’s common stock, up to a maximum of approximately 480,000 shares, from counterparties equal to the amounts of common stock and/or cash related to the excess conversion value that it would pay to the holders of the Senior Convertible Notes upon conversion. The option will terminate upon the earlier of the maturity dates of the related Senior Convertible Notes or the first day all of the related Senior Convertible Notes are no longer outstanding due to conversion or otherwise. The option, which cost $10.3 million, was recorded as a reduction of shareholders’ equity.

     In September 2006, the Company entered into two interest rate swaps each with a notional amount of $100 million for a three-year and four-year terms. These swaps were executed to hedge a portion of our interest rate risk associated with variable rate borrowing. The four-year swap was effective at September 30, 2006 and converts certain floating rate debt into a fixed rate of approximately 5.3%. In March 2006, the Company entered into an interest rate swap with a notional amount of $200 million for a four-year term, effectively converting certain floating rate debt into a fixed rate of approximately 6.0% through June 2010. As of September 30, 2006, the aggregate fair value of the Company’s interest rate swaps was a liability of $1.4 million, which is included in other liabilities in the condensed consolidated balance sheets. For the nine-month period ended September 30, 2006, the amount of hedge ineffectiveness was not material.

     All components of the interest rate swaps were included in the assessment of hedge effectiveness. The Company expects that within the next 12 months it will reflect as an increase to earnings $0.4 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 contracts at the reporting date and is determined using interest rate market pricing models.

     The Company and its subsidiaries are subject to various legal proceedings which, taken together, are not expected to have a material adverse effect on the Company. The Company is also

subject to a variety of legal actions for personal injury or property damage arising in the ordinary course of its business, most of which are covered by insurance. While the resolution of all matters cannot be predicted with certainty, management believes that the final outcome of such legal proceedings and claims will not have a material adverse effect on the Company’s liquidity, financial position or results of operations.

     The following table summarizes the changes in shareholders’ equity since December 31, 2005 (in thousands):

     Common share dividends declared, per share, were $0.59 and $0.54 for the three-month periods ended September 30, 2006 and 2005, respectively, and were $1.77 and $1.62 for the nine-month periods ended September 30, 2006 and 2005, respectively.

     In August 2006, the Company’s Board of Directors authorized the Company to repurchase 909,000 common shares of the Company at a cost of $53.15 per share in connection with the convertible debt financing (Note 7).

     In 2006, the vesting of restricted stock grants to certain officers and directors of the Company, approximating 23,000 shares of common stock of the Company, was deferred through the Company’s non-qualified deferred compensation plans and, accordingly, the Company recorded $0.8 million in deferred obligations.

     In February 2006, the Company issued approximately 0.4 million common shares in exchange for operating partnership units (“OP Units”) issued in conjunction with the assets acquired from Benderson Development Company. The conversion of OP Units into the Company’s common shares was recorded in the Company’s condensed consolidated financial statements as a purchase of minority interest.

     Other income for the three and nine-month periods ended September 30, 2006 and 2005 was comprised of the following (in millions):

     Included in discontinued operations for the three and nine-month periods ended September 30, 2006 and 2005, is one property sold in 2006, aggregating 0.2 million square feet, three properties classified as held for sale at September 30, 2006, aggregating 0.5 million square feet, and ten shopping centers and 25 business centers sold in 2005, aggregating 3.8 million square feet. The balance sheet relating to the assets held for sale and the operating results relating to assets sold and held for sale are as follows (in thousands):

     In 2006, the Company sold six shopping center properties and four newly developed expansion areas to the MDT Preferred Joint Venture and the MDT Joint Venture, respectively, that are not reflected in discontinued operations due to the Company’s continuing involvement. In addition, the Company’s sale of the Service Merchandise portfolio to the Coventry II Joint Venture is not reflected in discontinued operations due to the Company’s continuing involvement.

     As discussed in Note 2, in August 2006, the Company purchased its partners’ approximate 75% interest in the Service Merchandise Joint Venture which was managed by Lubert-Adler Real Estate Funds, which is owned in part by a Director of the Company.

     In September 2005, the Company entered into the Mervyns Joint Venture, which acquired the underlying real estate of 36 operating Mervyns stores (Note 2). In 2006, the Mervyns Joint Venture purchased an additional site for approximately $11.0 million. Additionally, the Company purchased an additional site for approximately $12.4 million in 2006. The assets were acquired from several funds, one of which was managed by Lubert-Adler Real Estate Funds, which is owned in part by a Director of the Company.

     Prior to January 1, 2006, the Company followed APB 25, “Accounting for Stock Issued to Employees.” Accordingly, the Company did not recognize compensation cost for stock options when the option exercise price equaled or exceeded the market value on the date of the grant. No stock-based employee compensation cost for stock options was reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The Company recorded compensation expense related to its restricted stock plan and its performance unit awards.

     In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment” (“SFAS 123(R)”). SFAS 123(R) is an amendment of SFAS 123 and requires that the compensation cost relating to share-based payment transactions be recognized in the financial statements on the grant date using an option pricing model. The value of the portion of the restricted stock and performance awards issued prior to the adoption of SFAS 123(R) that is ultimately expected to vest is recognized as expense

on a straight-line attribution basis over the requisite service periods in the Company’s condensed consolidated financial statements. SFAS 123(R) requires forfeitures to be estimated at the time of grant in order to estimate the amount of share-based awards that will ultimately vest. The forfeiture rate is based on historical rates.

     The Company adopted SFAS 123(R) as required on January 1, 2006, using the modified prospective method. The Company’s condensed consolidated financial statements as of and for the three and nine-months ended September 30, 2006, reflect the impact of SFAS 123(R). In accordance with the modified prospective method, the Company’s condensed consolidated financial statements for prior periods have not been restated to reflect the impact of SFAS 123(R). Share-based compensation expense recognized in the Company’s condensed consolidated financial statements for the three and nine-months ended September 30, 2006, includes (i) compensation expense for share-based payment awards granted prior to, but not yet vested as of December 31, 2005, based on the grant-date fair value and (ii) compensation expense for the share-based payment awards granted subsequent to December 31, 2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R).

     On January 1, 2006, the Company adopted SFAS 123(R), the effect of which changed the balance sheet and resulted in decreasing other liabilities by $11.6 million, eliminating unearned compensation- restricted stock (included in shareholder’s equity) of $13.1 million, resulting in an increase to shareholder’s equity of $11.6 million. These balance sheet changes relate to deferred compensation under the performance unit plans and unvested restricted stock awards. Under SFAS 123(R), deferred compensation is no longer recorded at the time unvested shares are issued. Share-based compensation is now recorded over the requisite service period on a straight-line attribution basis with an offsetting credit to equity (generally paid-in-capital).

     The compensation cost recognized under SFAS 123(R) was approximately $2.7 million and $7.0 million for the three and nine-months ended September 30, 2006, respectively. There were no significant capitalized stock-based compensation costs at September 30, 2006. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS 148 “Accounting for Stock-Based Compensation — Transition and Disclosure an amendment of SFAS No. 123,” for the three and nine-months ended September 30, 2005 (in thousands, except per share amounts):

     The Company’s stock option and equity-based award plans provide for grants to employees of the Company of: Incentive and non-qualified stock options to purchase common shares of the Company, rights to receive the appreciation in value of common shares, awards of common shares subject to restrictions on transfer, awards of common shares issuable in the future upon satisfaction of certain conditions and rights to purchase common shares and other awards based on common shares. Under the terms of the award plans, awards available for grant approximated 2.2 million shares at September 30, 2006. Options may be granted at per share prices not less than fair market value at the date of grant, and in the case of incentive options, must be exercisable within the maximum contractual term of 10 years thereof (or, with respect to incentive options granted to certain shareholders, within five years thereof). Options granted under the plans generally vest one year after the date of grant as to one-third of the optioned shares, with the remaining options vesting over the following two-year period.

     The following table reflects the stock option activity and summarizes the characteristics of the options outstanding at September 30, 2006, as described above (in thousands):

     The fair value of each option grant was estimated using the Black-Scholes option pricing model. Expected volatilities are based on historical volatility of the Company’s stock. The expected term of the options granted was derived from historical exercises of options. The risk-free rate is based upon a U.S. Treasury Strip with a maturity date that approximates the expected term of the option.

     The following table represents the factors that existed on the date of grant and weighted average fair values during the nine-month period ended September 30, 2006:

     The following table reflects the activity for unvested stock option awards for the nine-month period ended September 30, 2006 (in thousands):

     As of September 30, 2006, there was $3.1 million of total unrecognized compensation cost related to unvested share-based compensation arrangements related to stock options granted under the plans. The cost is expected to be recognized over a weighted-average period of approximately 1.1 years.

     The total intrinsic value of options exercised for the nine-months ended September 30, 2006 was approximately $14.3 million. The total cash received from employees as a result of employee stock option exercises for the nine-months ended September 30, 2006 was approximately $7.9 million. The Company settles employee stock options exercises primarily with newly issued common shares and, occasionally, with treasury shares.

     In 2000, the Board of Directors approved a grant of 30,000 Performance Units to the Company’s Chief Executive Officer. Pursuant to the provisions of the Plan, the 30,000 Performance Units were converted on December 31, 2004 to common share equivalents of 200,000 common shares based on the annualized total shareholders’ return for the five-year period ended December 31, 2004. These shares will vest over the following five-year period. In 2002, the Board of Directors approved grants aggregating 70,000 Performance Units to the Company’s Chief Executive Officer, President and Senior Executive Vice President. The 70,000 Performance Units granted in 2002 will be converted to common share equivalents ranging from 70,000 to 466,666 common shares based on the annualized total shareholders’ return, as defined by the Plan, for the five-year period ending December 31, 2006.

     The fair value of each performance unit grant was estimated on the date of grant using a simulation approach model using the following assumptions:

      As of September 30, 2006, there was $0.2 million and $1.4 million of total unrecognized compensation cost related to the 2000 and 2002 Performance Units, respectively, granted and expected to be recognized over a 3.25 and 5.25 year term, respectively.

     In December 2005 and August 2006, the Board of Directors approved a grant of outperformance long-term incentive plan agreements with certain executive officers. The outperformance agreements provide for awards of the Company’s common shares or an equivalent amount in cash, at the Company’s option to certain officers of the Company if stated performance metrics are achieved.

     With respect to the award plans granted to the Company’s Chief Executive Officer and Senior Executive Vice President (the “Senior Executive Officers”), the performance metrics are as follows; (a) a specified level of growth in the Company’s funds from operations (the “FFO Target”), (b) an increase in the market price of the Company’s common shares (the “Share Price Target”), (c) an increase in the market price of the Company’s common shares relative to the increase in the market prices of the relative common stock of companies included in a specified peer group (the “Comparative Share Price Target”, together with the Share Price Target, the “Share Price Metrics”), and (d) non-financial performance criteria established by the Compensation Committee of the Board of Directors of the Company (the “Discretionary Metrics”, and, together with the FFO Target and the Share Price Metrics, the “Senior Executive Officer Targets”). The beginning of the measurement period for the Senior Executive Officer Targets is January 1, 2005 because the prior performance award measurement period of the Chief Executive Officer ended December 31, 2004. The current measurement period ends the earlier of December 31, 2007 or the date of a change in control.

     If one or both of the Share Price Metrics are achieved, the Company will issue to the officer a number of shares set forth in the agreement, depending on whether one or both of the Share Price Metrics have been achieved, or the equivalent amount of cash, at the Company’s option, as soon as practicable following the applicable vesting date, March 1, 2008. The value of the number of common shares or equivalent amount paid in cash with respect to the Share Price Metrics that may be paid is capped at the amount specified in each Senior Executive Officer’s outperformance agreement.

     If in the discretion of the Compensation Committee, the Discretionary Metrics have been achieved, the Company will issue to the officer a number of common shares equal to (a) the dollar value assigned to the Discretionary Metrics set forth in such Senior Executive Officer’s outperformance agreement, divided by (b) the greater of (i) the average closing price for the common shares over the twenty trading days ending on the Valuation Date (as defined in the outperformance agreements) or (ii) the closing price per common share on the last trading date before the senior officer valuation date (as defined in the outperformance agreements), or the equivalent amount of cash, at the Company’s option, as soon as practicable following the applicable vesting date, March 1, 2008.

     With respect to nine additional executive officers (the “Officers”), the performance metrics are as follows: (a) the FFO Target, (b) a total return to the Company’s shareholders target (the “TRS Target”), and (c) a total return to the Company’s shareholders target relative to that of the total return to shareholders of companies included in a specified peer group (the “Comparative TRS Target”, together with the TRS Target, the “TRS Metrics” and, together with the FFO Target and the TRS Target, the “Officer Targets”). The measurement period for the Officer Targets is January 1, 2005 through the earlier of December 31, 2009 or the date of a change in control.

     If the FFO Target is achieved, the Company will issue to the Officer a number of common shares equal to (a) the dollar value assigned to the FFO Target set forth in such officer’s outperformance agreement, and (b) divided by the greater of (i) the average closing price for the common shares over the twenty trading days ending on the valuation date (as defined in the outperformance agreements) or (ii) the closing price per common share on the last trading date before the officer valuation date (as defined in the outperformance agreements), or the equivalent amount of

cash, at the Company’s option, as soon as practicable following the applicable vesting date, March 1, 2010.

     If one or both of the TRS Metrics are achieved, the Company will issue to the Officer a number of shares set forth in the agreement, depending on whether one or both of the TRS Metrics have been achieved, or the equivalent amount of cash, at the Company’s option, as soon as practicable following the applicable vesting date. The value of the number of common shares or equivalent amount paid in cash with respect to the TRS Metrics that may be paid is capped at the amount specified in each Officer’s outperformance agreement.

     The fair value of each outperformance unit grant for the Share Price Metrics was estimated on the date of grant using a monte carlo approach model using the following assumptions:

      As of September 30, 2006, there was $1.4 million and $1.2 million of total unrecognized compensation cost related to the Senior Executive Officers and the Officers outperformance plans, respectively, granted and expected to be recognized over a 1.4 and 3.4 year term, respectively.

     For the nine-month period ended September 30, 2006, the Board of Directors approved a grant of 64,940 restricted shares of common stock to several executives of the Company which vest in equal annual amounts over a five-year period. Restricted stock awards have the same cash dividend and voting rights as other common stock and are considered to be currently issued and outstanding. This grant has a weighted average fair value at the date of grant of $50.81 per share, which was equal to the market value of the Company’s stock at the date of grant.

     The following table reflects the activity for unvested restricted stock awards for the nine-month period ended September 30, 2006 (in thousands):

     As of September 30, 2006, there was $6.6 million of total unrecognized compensation cost related to unvested restricted stock award arrangements granted under the plans. The cost is expected to be recognized over a weighted-average period of approximately 1.3 years.

     Earnings Per Share (EPS) have been computed pursuant to the provisions of SFAS No. 128, “Earnings per Share.” The following table provides a reconciliation of net income and the number of common shares used in the computations of “basic” EPS, which utilizes the weighted average number of common shares outstanding without regard to dilutive potential common shares, and “diluted” EPS, which includes all such shares.

     The exchange into common stock of the minority interest associated with OP Units was not included in the computation of diluted EPS for the three-months ended September 30, 2005 and 2006 and the nine-months ended September 30, 2006 because the effect of assuming conversion was anti-dilutive.

     The Senior Convertible Notes, issued in August 2006, which are convertible into common shares of the Company at a price of $65.11, were not included in the computation of diluted EPS for the three and nine-months ended September 30, 2006 as the Company’s stock price did not exceed the strike price of the conversion feature in the Senior Convertible Notes

     The Company had two reportable business segments, shopping centers and business centers, determined in accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.” The Company sold the majority of its business center assets in September 2005. Each shopping center is considered a separate operating segment; however, each shopping center on a stand-alone basis is less than 10% of the revenues, profit or loss, and assets of the combined reported operating segment and meets the majority of the aggregation criteria under SFAS 131.

     At September 30, 2006, the shopping center segment consisted of 460 shopping centers (including 159 owned through joint ventures and 39 of which are consolidated by the Company), in 44 states, plus Puerto Rico. At September 30, 2006, the Company owned seven business centers in five states.

     The table below presents information about the Company’s reportable segments for the three and nine-month periods ended September 30, 2006 and 2005.