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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from____________________ to ____________________
Commission file number 1-9876
------
WEINGARTEN REALTY INVESTORS
---------------------------
(Exact name of registrant as specified in its charter)
Texas 74-1464203
- ---------------------------------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2600 Citadel Plaza Drive, P.O. Box 924133, Houston, Texas 77292-4133
- ---------------------------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 866-6000
--------------
____________________________________________
(Former name, former address and former fiscal
year, if changed since last report)
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 X . No .
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes X . No .
----- -----
As of April 30, 2004, there were 85,602,210 common shares of beneficial
interest of Weingarten Realty Investors, $.03 par value, outstanding.
PART 1
FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
WEINGARTEN REALTY INVESTORS
STATEMENTS OF CONSOLIDATED INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS THAT ARE REPORTED ON A
POST-SPLIT BASIS)
Three Months Ended
March 31,
------------------------
2004 2003
---------- ----------
Revenues:
Rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 116,001 $ 96,383
Interest income . . . . . . . . . . . . . . . . . . . . . . . 276 246
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,571 1,018
---------- ----------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . 117,848 97,647
---------- ----------
Expenses:
Depreciation and amortization . . . . . . . . . . . . . . . . 26,663 21,057
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . 27,733 19,439
Operating . . . . . . . . . . . . . . . . . . . . . . . . . . 17,214 14,047
Ad valorem taxes. . . . . . . . . . . . . . . . . . . . . . . 14,527 11,419
General and administrative. . . . . . . . . . . . . . . . . . 4,026 3,057
---------- ----------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . 90,163 69,019
---------- ----------
Operating Income. . . . . . . . . . . . . . . . . . . . . . . . 27,685 28,628
Equity in Earnings of Joint Ventures. . . . . . . . . . . . . . 1,286 1,038
Income Allocated to Minority Interests. . . . . . . . . . . . . (879) (895)
Gain on Sale of Properties. . . . . . . . . . . . . . . . . . . 317 9
---------- ----------
Income Before Discontinued Operations . . . . . . . . . . . . . 28,409 28,780
---------- ----------
Operating Income from Discontinued Operations . . . . . . . . . 240
Gain on Sale of Properties. . . . . . . . . . . . . . . . . . . 871
---------- ----------
Income From Discontinued Operations. . . . . . . . . . . 1,111
---------- ----------
Net Income. . . . . . . . . . . . . . . . . . . . . . . . . . . 28,409 29,891
Dividends on Preferred Shares . . . . . . . . . . . . . . . . . (1,266) (4,922)
---------- ----------
Net Income Available to Common Shareholders . . . . . . . . . . $ 27,143 $ 24,969
========== ==========
Net Income Per Common Share - Basic:
Income Before Discontinued Operations . . . . . . . . . . . . $ .33 $ .31
Income From Discontinued Operations . . . . . . . . . . . . . .01
---------- ----------
Net Income. . . . . . . . . . . . . . . . . . . . . . . . . . $ .33 $ .32
========== ==========
Net Income Per Common Share - Diluted:
Income Before Discontinued Operations . . . . . . . . . . . . $ .32 $ .31
Income From Discontinued Operations . . . . . . . . . . . . . .01
---------- ----------
Net Income. . . . . . . . . . . . . . . . . . . . . . . . . . $ .32 $ .32
========== ==========
Net Income. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 28,409 $ 29,891
---------- ----------
Other Comprehensive Income (Loss):
Unrealized derivative gain (loss) on interest rate swaps. . . (1,450) 529
Amortization of forward-starting interest rate swaps. . . . . (22) (40)
Unrealized derivative loss on forward-starting
interest rate swaps . . . . . . . . . . . . . . . . . . . . (4,257)
---------- ----------
Other Comprehensive Income (Loss) . . . . . . . . . . . . . . . (5,729) 489
---------- ----------
Comprehensive Income. . . . . . . . . . . . . . . . . . . . . . $ 22,680 $ 30,380
========== ==========
See Notes to Consolidated Financial Statements.
Page 2
WEINGARTEN REALTY INVESTORS
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
March 31, December 31,
2004 2003
------------ ------------
ASSETS
Property. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,447,492 $ 3,200,091
Accumulated Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (549,714) (527,375)
------------ ------------
Property - net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,897,778 2,672,716
Investment in Real Estate Joint Ventures. . . . . . . . . . . . . . . . . . . . . 35,671 35,085
------------ ------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,933,449 2,707,801
Notes Receivable from Real Estate Joint Ventures and Partnerships . . . . . . . . 41,705 36,825
Unamortized Debt and Lease Costs. . . . . . . . . . . . . . . . . . . . . . . . . 78,170 70,895
Accrued Rent and Accounts Receivable (net of allowance for doubtful
accounts of $4,146 in 2004 and $4,066 in 2003). . . . . . . . . . . . . . . . . 29,244 40,325
Cash and Cash Equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,455 20,255
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,152 46,993
------------ ------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,169,175 $ 2,923,094
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,947,070 $ 1,810,706
Preferred Shares Subject to Mandatory Redemption, net . . . . . . . . . . . . . . 109,378 109,364
Accounts Payable and Accrued Expenses . . . . . . . . . . . . . . . . . . . . . . 52,466 78,986
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77,558 52,671
------------ ------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,186,472 2,051,727
------------ ------------
Minority Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,033 49,804
------------ ------------
Commitments and Contingencies
Shareholders' Equity:
Preferred Shares of Beneficial Interest - par value, $.03 per share;
shares authorized: 10,000
6.75% Series D cumulative redeemable preferred shares of
beneficial interest; 100 shares issued and outstanding in 2004
and 2003; liquidation preference $75,000. . . . . . . . . . . . . . . . 90 90
Common Shares of Beneficial Interest - par value, $.03 per share;
shares authorized: 150,000; shares issued and outstanding:
85,578 in 2004 and 81,889 in 2003 . . . . . . . . . . . . . . . . . . . . . 2,562 2,488
Capital Surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,112,768 993,570
Accumulated Dividends in Excess of Net Income . . . . . . . . . . . . . . . . . (182,670) (174,234)
Accumulated Other Comprehensive Loss. . . . . . . . . . . . . . . . . . . . . . (6,080) (351)
------------ ------------
Shareholders' Equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 926,670 821,563
------------ ------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,169,175 $ 2,923,094
============ ============
See Notes to Consolidated Financial Statements.
Page 3
WEINGARTEN REALTY INVESTORS
STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
Three Months Ended
March 31,
--------------------------
2004 2003
----------- -----------
Cash Flows from Operating Activities:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 28,409 $ 29,891
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . 26,663 21,199
Equity in earnings of joint ventures. . . . . . . . . . . . . (1,286) (1,038)
Income allocated to minority interests. . . . . . . . . . . . 879 895
Gain on sale of properties. . . . . . . . . . . . . . . . . . (317) (880)
Changes in accrued rent and accounts receivable . . . . . . . 11,082 7,690
Changes in other assets . . . . . . . . . . . . . . . . . . . (13,683) (7,023)
Changes in accounts payable and accrued expenses. . . . . . . (24,668) (36,418)
Other, net. . . . . . . . . . . . . . . . . . . . . . . . . . 195 236
----------- -----------
Net cash provided by operating activities . . . . . . . 27,274 14,552
----------- -----------
Cash Flows from Investing Activities:
Investment in properties. . . . . . . . . . . . . . . . . . . . . . (199,741) (56,088)
Notes Receivable:
Advances. . . . . . . . . . . . . . . . . . . . . . . . . . . (7,027) (3,678)
Collections . . . . . . . . . . . . . . . . . . . . . . . . . 2,087 131
Proceeds from sales and disposition of property . . . . . . . . . . 593 1,716
Real estate joint ventures and partnerships:
Investments . . . . . . . . . . . . . . . . . . . . . . . . . (643) (60)
Distributions . . . . . . . . . . . . . . . . . . . . . . . . 1,134 904
----------- -----------
Net cash used in investing activities . . . . . . . . . (203,597) (57,075)
----------- -----------
Cash Flows from Financing Activities:
Proceeds from issuance of:
Debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207,250 136,013
Common shares of beneficial interest. . . . . . . . . . . . . 119,076 1,050
Principal payments of debt. . . . . . . . . . . . . . . . . . . . . (98,946) (54,883)
Common and preferred dividends paid . . . . . . . . . . . . . . . . (36,846) (35,404)
Other, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (11) (43)
----------- -----------
Net cash provided by financing activities . . . . . . . 190,523 46,733
----------- -----------
Net increase in cash and cash equivalents . . . . . . . . . . . . . . . 14,200 4,210
Cash and cash equivalents at January 1. . . . . . . . . . . . . . . . . 20,255 27,420
----------- -----------
Cash and cash equivalents at March 31 . . . . . . . . . . . . . . . . . $ 34,455 $ 31,630
=========== ===========
See Notes to Consolidated Financial Statements.
Page 4
WEINGARTEN REALTY INVESTORS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. INTERIM FINANCIAL STATEMENTS
The consolidated financial statements included in this report are
unaudited; however, amounts presented in the balance sheet as of December
31, 2003 are derived from our audited financial statements at that date. In
our opinion, all adjustments necessary for a fair presentation of such
financial statements have been included. Such adjustments consisted of
normal recurring items. Interim results are not necessarily indicative of
results for a full year.
The consolidated financial statements and notes are presented as permitted
by Form 10-Q and do not contain certain information included in our annual
financial statements and notes. These Consolidated Financial Statements
should be read in conjunction with our Annual Report on Form 10-K for the
year ended December 31, 2003.
Certain reclassifications of prior year's amounts have been made to conform
to the current year presentation.
2. STOCK-BASED COMPENSATION
On January 1, 2003, we adopted SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement
No. 123", and began recognizing stock-based employee compensation as new
shares were awarded. With respect to share options awarded prior to January
1, 2003, we accounted for stock-based employee compensation using the
intrinsic value method set forth in Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees", and related
interpretations. In accordance with APB Opinion No. 25, no stock-based
employee compensation had been recognized in our financial statements prior
to January 1, 2003.
Page 5
The following table illustrates the effect on net income available to
common shareholders and net income per common share if the fair value-based
method had been applied to all outstanding and unvested awards in each
period (in thousands, except per share amounts):
Three Months Ended
March 31,
------------------------
2004 2003
---------- ----------
Net income available to common shareholders. . . . . . . . $ 27,143 $ 24,969
Stock-based employee compensation included in
net income available to common shareholders. . . . . . . 47
Stock-based employee compensation determined
under the fair value-based method for all awards . . . . (140) (101)
---------- ----------
Pro forma net income available to
common shareholders. . . . . . . . . . . . . . . . . . . $ 27,050 $ 24,868
========== ==========
Net income per common share:
Basic - as reported. . . . . . . . . . . . . . . . . $ .33 $ .32
========== ==========
Basic - pro forma. . . . . . . . . . . . . . . . . . $ .33 $ .32
========== ==========
Net income per common share:
Diluted - as reported. . . . . . . . . . . . . . . . $ .32 $ .32
========== ==========
Diluted - pro forma. . . . . . . . . . . . . . . . . $ .32 $ .32
========== ==========
3. PER SHARE DATA
Net income per common share - basic is computed using net income available
to common shareholders and the weighted average shares outstanding, which
have been adjusted for the three-for-two share split described in Note 12.
Net income per common share - diluted includes the effect of potentially
dilutive securities for the periods indicated, as follows (in thousands):
Three Months Ended
March 31,
------------------------
2004 2003
---------- ----------
Numerator:
Net income available to common shareholders - basic . . . . . $ 27,143 $ 24,969
Income attributable to operating partnership units. . . . . . 826 832
---------- ----------
Net income available to common shareholders - diluted . . . . $ 27,969 $ 25,801
========== ==========
Denominator:
Weighted average shares outstanding - basic . . . . . . . . . 83,143 78,136
Effect of dilutive securities:
Share options and awards. . . . . . . . . . . . . . . . 957 596
Operating partnership units . . . . . . . . . . . . . . 2,181 2,294
---------- ----------
Weighted average shares outstanding - diluted . . . . . . . . 86,281 81,026
========== ==========
Page 6
Options to purchase 1,950 common shares for the first quarter ended March
31, 2003 were not included in the calculation of net income per common
share - diluted as the exercise prices were greater than the average market
price. No common shares have been excluded from the first quarter ended
March 31, 2004 calculation of net income per common share - diluted.
4. NEWLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In January 2003, FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities", which was reissued as Interpretation No. 46R
in December 2003. FIN 46R requires a variable interest entity to be
consolidated by a company if that company absorbs a majority of the
variable interest entity's expected losses, receives a majority of the
entity's expected residual returns, or both. It further requires
disclosures about variable interest entities that a company is not required
to consolidate, but in which it has a significant variable interest. We
have applied FIN 46R to our joint ventures and concluded that it did not
require consolidation of additional entities.
5. DISCONTINUED OPERATIONS
In 2003, we sold five retail projects located in San Antonio (1), McKinney
(1), Nacogdoches (1) and Houston (2), Texas. Also, a warehouse building in
Memphis, Tennessee and a retail building in Houston, Texas were sold. The
operating results and the gain on sale of these properties have been
reclassified and reported as discontinued operations in the Statements of
Consolidated Income and Comprehensive Income in accordance with SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets." For
the three months ended March 31, 2004, we had no dispositions to be
reported as discontinued operations.
The discontinued operations reported in 2003 had no debt that was required
to be repaid upon their disposition. In addition, we elected not to
allocate other consolidated interest to discontinued operations since the
interest savings to be realized from the proceeds of the sale of these
operations was not material.
6. DERIVATIVES AND HEDGING
We hedge the future cash flows of our debt transactions, as well as changes
in the fair value of our debt instruments, principally through interest
rate swaps with major financial institutions. As of March 31, 2004, we had
two interest rate swap contracts, which fix interest rates at 7.7% on an
aggregate notional amount of $20 million and expire in June 2004. We have
determined that these swap contracts are highly effective in offsetting
future variable interest cash flows of the revolving credit debt and,
accordingly, they have been designated as cash flow hedges with a fair
value, net of accrued interest, of $ .2 million at March 31, 2004 and are
included in Other Liabilities. In March 2004, we entered into two interest
rate swaps with an aggregate notional amount of $50 million that convert
fixed interest rate payments to variable interest payments. At March 31,
2004, we have twelve interest rate swap contracts with an aggregate
notional amount of $142.5 million that convert fixed interest payments at
rates ranging from 4.2% to 7.4% to variable interest payments. These
contracts have been designated as fair value hedges. We have determined
that they are highly effective in limiting our risk of changes in the fair
value of fixed-rate notes attributable to changes in variable interest
rates.
In December 2003, we entered into two forward-starting interest rate swaps
with an aggregate notional amount of $97.0 million in anticipation of the
issuance of fixed-rate medium term notes subsequent to year-end. These
contracts were designated as a cash flow hedge of forecasted interest
payments for $100 million of unsecured notes with a coupon of 4.9% that
were sold in February 2004. Concurrent with the sale of the 4.9% notes, we
settled our $97.0 million forward-starting interest rate swap contracts,
resulting in a loss of $.9 million, which is being amortized as a reduction
Page 7
to earnings over the life of the 4.9% notes. In January 2004, we entered
into four additional forward-starting interest rate swaps with an aggregate
notional amount of $194.0 million in anticipation of the issuance of
fixed-rate medium term notes. A medium term note totaling $50 million was
issued in January 2004, at which time one of the four forward-starting
interest rate swaps with a notional amount of $48.5 million was settled at
a loss of $.7 million. This $.7 million loss is being amortized as a
reduction to earnings over the life of the related medium term note. An
additional medium term note totaling $50 million was issued in March 2004,
at which time the second of the four forward-starting interest rate swaps
with a notional amount of $48.5 million was settled at a loss of $2.7
million. This $2.7 million loss is being amortized as a reduction to
earnings over the life of the related medium term note. Subsequent to
quarter-end, the remaining two forward-starting interest rate swaps with an
aggregate notional amount of $97 million were settled at a net loss of $.7
million. This loss will be amortized as a reduction to earnings over the
life of the related medium term notes, which were also issued subsequent to
quarter-end.
On March 31, 2004, the derivative instruments designated as cash flow
hedges were reported at their fair values as Other Liabilities, net of
accrued interest, of $2.4 million. The derivative instruments designated as
fair value hedges on March 31, 2004 were reported at their fair values as
Other Assets, net of accrued interest, of $5.3 million and as Other
Liabilities, net of accrued interest, of $.6 million.
Within the next twelve months, we expect to reclassify to earnings as
interest expense approximately $0.7 million of the current balance held in
accumulated other comprehensive loss. As of March 31, 2004, the balance in
accumulated other comprehensive loss relating to the derivatives was $5.5
million. With respect to fair value hedges, both changes in fair market
value of the derivative hedging instrument and changes in the fair value of
the hedged item will be recorded in earnings each reporting period. These
amounts should completely offset with no impact to earnings, except for the
portion of the hedge that proves to be ineffective, if any.
7. DEBT
Our debt consists of the following (in thousands):
March 31, December 31,
2004 2003
------------ ------------
Fixed-rate debt payable to 2030 at 4.5% to 8.9%. . . . . . . . . . $ 1,735,754 $ 1,510,294
Unsecured notes payable under revolving credit agreements. . . . . 170,000 259,050
Obligations under capital leases . . . . . . . . . . . . . . . . . 33,458 33,458
Industrial revenue bonds payable to 2015 at 1.1% to 3.0% . . . . . 7,858 7,904
------------ ------------
Total . . . . . . . . . . . . . . . . . . . . . . . $ 1,947,070 $ 1,810,706
============ ============
As of March 31, 2004, we had a $400 million unsecured revolving credit
facility that matures in November 2006. At March 31, 2004, the variable
interest rate of the $400 million revolving credit facility was 1.5%. At
March 31, 2004, we had no amounts outstanding under the $20 million
revolving credit agreement.
For the three months ended March 31, 2004, we issued a total of $200
million of ten-year unsecured fixed-rate medium term notes at a weighted
average interest rate of 5.2%, net of the effect of related interest rate
swaps. Proceeds received were used to pay down amounts outstanding under
our $400 million revolving credit facility.
Page 8
Subsequent to quarter-end, we issued an additional $125 million of
unsecured fixed-rate medium term notes with a weighted average life of 8.8
years at a weighted average interest rate of 5.2%, net of the effect of
related interest rate swaps. Proceeds received were used to pay down
amounts outstanding under our $400 million revolving credit facility.
Our debt can be summarized as follows (in thousands):
March 31, December 31,
2004 2003
------------ ------------
As to interest rate (including the effects of
interest rate swaps):
Fixed-rate debt . . . . . . . . . . . . . . $ 1,634,252 $ 1,458,792
Variable-rate debt. . . . . . . . . . . . . 312,818 351,914
------------ ------------
Total . . . . . . . . . . . . . . . . . $ 1,947,070 $ 1,810,706
============ ============
As to collateralization:
Unsecured debt. . . . . . . . . . . . . . . $ 1,327,390 $ 1,216,998
Secured debt. . . . . . . . . . . . . . . . 619,680 593,708
------------ ------------
Total . . . . . . . . . . . . . . . . . $ 1,947,070 $ 1,810,706
============ ============
8. PREFERRED SHARES SUBJECT TO MANDATORY REDEMPTION
In 2003, we adopted SFAS No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". SFAS No.
150 requires that certain financial instruments that incorporate an
obligation by the issuer to transfer assets or issue equity be reported as
liabilities. Financial instruments that fall within the scope of SFAS No.
150 include equity shares and non-controlling interests in subsidiaries
that are mandatorily redeemable. Our 7.0% Series C Cumulative Redeemable
Preferred Shares fall within the scope of SFAS No. 150, since they are
mandatorily redeemable and redemption is through transfer of cash or a
variable number of our common shares.
Preferred Shares Subject to Mandatory Redemption at March 31, 2004 of
$109.4 million represents the redemption value, net of unamortized issuance
costs totaling $3.5 million, of the 7.0% Series C Cumulative Redeemable
Preferred Shares. These shares, with a liquidation preference of $50 per
share and no stated maturity, can be redeemed by the holder only upon their
death in either cash or a variable number of common shares at our option.
There are limitations on the number of shares per shareholder and in the
aggregate that may be redeemed per year. These shares are also redeemable
by us any time on or after March 15, 2004. On March 2, 2004, we called for
redemption of all of these shares effective April 1, 2004.
Page 9
9. PROPERTY
Our property consists of the following (in thousands):
March 31, December 31,
2004 2003
------------ ------------
Land . . . . . . . . . . . . . . $ 652,625 $ 603,972
Land held for development. . . . 21,226 21,112
Land under development . . . . . 20,291 22,459
Buildings and improvements . . . 2,677,209 2,483,414
Construction in-progress . . . . 76,141 69,134
------------ ------------
Total. . . . . . . . $ 3,447,492 $ 3,200,091
============ ============
Interest and ad valorem taxes capitalized to land under development or
buildings under construction was $1.6 million and $2.2 million for the
quarters ended March 31, 2004 and 2003, respectively.
Acquisitions of properties are accounted for utilizing the purchase method
(as set forth in SFAS No. 141 and SFAS No. 142) and, accordingly, the
results of operations are included in our results of operations from the
respective dates of acquisition. We have used estimates of future cash
flows and other valuation techniques to allocate the purchase price of
acquired property among land, buildings on an "as if vacant" basis, and
other identifiable intangibles. Other identifiable intangibles include the
effect of out-of-market leases, the value of having leases in place and
out-of-market assumed mortgages. At March 31, 2004, deferred charges of
$6.4 million for above-market leases are included in Other Assets, deferred
credits of $5.6 million for below-market leases and $27.7 million for
out-of-market assumed mortgages are included in Other Liabilities and
deferred charges of $18.8 million for lease origination costs are included
in Unamortized Debt and Lease Costs. These identifiable debit and credit
intangibles are amortized over the terms of the acquired leases or the
remaining lives of the mortgages.
We purchased seven shopping centers during the first quarter of 2004,
comprising 1.5 million square feet, and representing a total investment of
$230.4 million. These purchases included two each in North Carolina and
Florida and one each in California, Texas and Kentucky.
With respect to new development, we have 13 shopping centers in various
stages of development in Arizona, Colorado, Louisiana, Nevada, Texas and
Utah, and we anticipate that the majority of them will come on-line during
the remainder of 2004 and into 2005.
Page 10
10. INVESTMENTS IN REAL ESTATE JOINT VENTURES
We own interests in joint ventures or limited partnerships in which we do
not exercise financial and operating control. These partnerships are
accounted for under the equity method since we exercise significant
influence. Our interests in these joint ventures and limited partnerships
range from 20% to 75% and, with the exception of one partnership, which
owns seven industrial properties, each venture owns a single real estate
asset. Combined condensed financial information of these ventures (at 100%)
is summarized as follows (in thousands):
March 31, December 31,
2004 2003
------------ ------------
Combined Balance Sheets
Property . . . . . . . . . . . . $ 237,256 $ 229,285
Accumulated depreciation . . . . (28,024) (26,845)
------------ ------------
Property - net. . . . . . . 209,232 202,440
Other assets . . . . . . . . . . 13,942 15,088
------------ ------------
Total. . . . . . . . . $ 223,174 $ 217,528
============ ============
Debt . . . . . . . . . . . . . . $ 94,969 $ 92,839
Amounts payable to WRI . . . . . 37,814 35,062
Other liabilities. . . . . . . . 2,929 4,729
Accumulated equity . . . . . . . 87,462 84,898
------------ ------------
Total. . . . . . . . . $ 223,174 $ 217,528
============ ============
Combined Statements of Income
Three Months Ended
March 31,
------------------------
2004 2003
---------- ----------
Revenues. . . . . . . . . . . . . . . . . $ 7,666 $ 6,142
---------- ----------
Expenses:
Depreciation and amortization . . . . . 1,559 1,058
Operating . . . . . . . . . . . . . . . 1,117 778
Interest. . . . . . . . . . . . . . . . 1,999 1,518
Ad valorem taxes. . . . . . . . . . . . 992 782
General and administrative. . . . . . . 64 38
---------- ----------
Total. . . . . . . . . . . . . . . . 5,731 4,174
---------- ----------
Net Income. . . . . . . . . . . . . . . . $ 1,935 $ 1,968
========== ==========
Page 11
Our investment in real estate joint ventures, as reported on the balance
sheets, differs from our proportionate share of the joint ventures'
underlying net assets due to basis differentials, which arose upon the
transfer of assets from us to the joint ventures. This basis differential,
which totaled $4.8 million at March 31, 2004 and December 31, 2003,
respectively, is depreciated over the useful lives of the related assets.
Fees earned by us for the management of these joint ventures totaled $.2
million and $.1 million for the quarters ended March 31, 2004 and 2003,
respectively.
11. SEGMENT INFORMATION
The operating segments presented are the segments for which separate
financial information is available and operating performance is evaluated
regularly by senior management in deciding how to allocate resources and in
assessing performance. We evaluate the performance of our operating
segments based on net operating income that is defined as total revenues
less operating expenses and ad valorem taxes. Management does not consider
the effect of gains or losses from the sale of property in evaluating
ongoing operating performance.
The shopping center segment is engaged in the acquisition, development and
management of real estate, primarily neighborhood and community shopping
centers, located in Texas, California, Louisiana, Arizona, Nevada,
Arkansas, New Mexico, Oklahoma, Tennessee, Kansas, Colorado, Missouri,
Illinois, Florida, North Carolina, Mississippi, Georgia, Utah, Kentucky and
Maine. The customer base includes supermarkets, discount retailers,
drugstores and other retailers who generally sell basic necessity-type
commodities. The industrial segment is engaged in the acquisition,
development and management of bulk warehouses and office/service centers.
Its properties are currently located in Texas, Nevada, Georgia, Florida,
California and Tennessee, and the customer base is diverse. Included in
"Other" are corporate-related items, insignificant operations and costs
that are not allocated to the reportable segments.
Information concerning our reportable segments is as follows (in
thousands):
SHOPPING
CENTER INDUSTRIAL OTHER TOTAL
---------- ----------- --------- ------------
Three Months Ended
March 31, 2004:
Revenues . . . . . . . . . . . . . . . . . . . $ 105,563 $ 11,591 $ 694 $ 117,848
Net operating income . . . . . . . . . . . . . 77,451 8,248 408 86,107
Equity in earnings of joint ventures . . . . . 1,242 35 9 1,286
Investment in real estate joint ventures . . . 35,228 443 35,671
Total assets . . . . . . . . . . . . . . . . . 2,617,028 294,864 257,283 3,169,175
Three Months Ended
March 31, 2003:
Revenues . . . . . . . . . . . . . . . . . . . $ 87,447 $ 9,708 $ 492 $ 97,647
Net operating income . . . . . . . . . . . . . 65,160 6,872 149 72,181
Equity in earnings of joint ventures . . . . . 977 92 (31) 1,038
Investment in real estate joint ventures . . . 28,299 275 28,574
Total assets . . . . . . . . . . . . . . . . . 2,090,813 236,932 151,306 2,479,051
Page 12
Net operating income reconciles to income before discontinued operations as
shown on the Statements of Consolidated Income and Comprehensive Income as
follows (in thousands):
Three Months Ended
March 31,
------------------------
2004 2003
---------- ----------
Total segment net operating income. . . . . . . . . $ 86,107 $ 72,181
Less:
Depreciation and amortization. . . . . . . . . 26,663 21,057
Interest . . . . . . . . . . . . . . . . . . . 27,733 19,439
General and administrative . . . . . . . . . . 4,026 3,057
Income allocated to minority interests . . . . 879 895
Equity in earnings of joint ventures . . . . . (1,286) (1,038)
Gain on sale of properties . . . . . . . . . . (317) (9)
---------- ----------
Income Before Discontinued Operations . . . . . . . $ 28,409 $ 28,780
========== ==========
12. COMMON SHARES OF BENEFICIAL INTEREST
In February 2004, a three-for-two share split, to be effected in the form
of a 50% share dividend, was declared for shareholders of record on March
16, 2004, payable March 30, 2004. We issued 28.5 million common shares of
beneficial interest as a result of the share split. All references to the
number of shares and per share amounts have been restated to reflect the
share split, and an amount equal to the par value of the number of common
shares issued have been reclassified to common shares of beneficial
interest from accumulated dividends in excess of net income.
In March 2004, we issued an additional 3.6 million common shares of
beneficial interest. Net proceeds to us totaled $118.0 million based on a
price of $33.64 per share. The proceeds from this offering were used
primarily to redeem our 7.0% Series C Cumulative Redeemable Preferred
Shares on April 1, 2004.
In October 2003, we issued 1.7 million common shares of beneficial
interest. Net proceeds to us totaled $50.9 million based on a price of
$30.33 per share. In November 2003, we issued an additional 1.5 million
common shares of beneficial interest. Net proceeds to us totaled $44.5
million based on a price of $30.47 per share. The proceeds from the above
offerings were used primarily to redeem our 7.125% Series B Cumulative
Redeemable Preferred Shares in December 2003.
13. PREFERRED SHARES
In February 1998, we issued $75 million of 7.44% Series A Cumulative
Redeemable Preferred Shares with a liquidation preference of $25 per share,
which were called for redemption in April 2003. The redemption in May 2003
was financed through the issuance of $75 million of depositary shares in
April 2003. Each depositary share represents one-thirtieth of a Series D
Cumulative Redeemable Preferred Share. The depositary shares are
redeemable, in whole or in part, for cash on or after April 30, 2008 at our
option, at a redemption price of $25 per depositary share, plus any accrued
and unpaid dividends thereon. The depositary shares are not convertible or
exchangeable for any of our other property or securities. The Series D
preferred shares pay a 6.75% annual dividend and have a liquidation value
of $750 per share.
Page 13
14. EMPLOYEE BENEFIT PLANS
In December 2003, FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirements Benefits" as amended. SFAS No. 132
revises employers' disclosures about pension plans and other postretirement
benefit plans to include disclosures of the amount of net periodic benefit
cost and the total amount of employers' contributions made.
The components of net periodic benefit cost are as follows (in thousands):
Three Months Ended
March 31,
--------------------
2004 2003
-------- --------
Service cost . . . . . . . . . . . . . . $ 151 $ 48
Interest cost. . . . . . . . . . . . . . 259 82
Expected return on plan assets . . . . . (240) (76)
Prior service cost . . . . . . . . . . . (38) (12)
Recognized loss. . . . . . . . . . . . . 67 21
-------- --------
Total . . . . . . . . . . . . . . . $ 199 $ 63
======== ========
We contributed approximately $850,000 to the plan subsequent to
quarter-end. We will make no additional payments in 2004.
15. BANKRUPTCY REMOTE PROPERTIES
We had 42 properties, having a net book value of approximately $730.8
million at March 31, 2004 (collectively the "Bankruptcy Remote Properties",
and each a "Bankruptcy Remote Property"), which are wholly owned by various
"Bankruptcy Remote Entities". Each Bankruptcy Remote Entity is either a
direct or an indirect subsidiary of us. The assets of each Bankruptcy
Remote Entity, including the respective Bankruptcy Remote Property or
Properties owned by each, are owned by that Bankruptcy Remote Entity alone
and are not available to satisfy claims that any creditor may have against
us, our affiliates, or any other person or entity. No Bankruptcy Remote
Entity has agreed to pay or make its assets available to pay our creditors,
any of its affiliates, or any other person or entity. Neither we nor any of
our affiliates have agreed to pay or make its assets available to pay
creditors of any Bankruptcy Remote Entity (other than any agreement by a
Bankruptcy Remote Entity to pay its own creditors). No affiliate of any
Bankruptcy Remote Entity has agreed to pay or make its assets available to
pay creditors of any Bankruptcy Remote Entity.
The accounts of the Bankruptcy Remote Entities are included in our
consolidated financial statements because we exercise financial and
operating control over each of these entities.
*****
Page 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto and the comparative summary of selected
financial data appearing elsewhere in this Form 10-Q. Historical results and
trends which might appear should not be taken as indicative of future
operations. Our results of operations and financial condition, as reflected in
the accompanying statements and related footnotes, are subject to management's
evaluation and interpretation of business conditions, retailer performance,
changing capital market conditions and other factors which could affect the
ongoing viability of our tenants.
EXECUTIVE OVERVIEW
We focus on increasing Funds from Operations and dividend payments to our common
shareholders through hands-on leasing and management of the existing portfolio
of properties and through disciplined growth from selective acquisitions and new
developments. We are also committed to maintaining a conservative balance
sheet, a well-staggered debt maturity schedule and strong credit agency ratings.
At March 31, 2004, we owned or operated under long-term leases, either directly
or through our interests in joint ventures, 331 developed income-producing
properties and three properties that are currently under development, which are
located in 20 states that span the southern half of the United States from coast
to coast. Included in the portfolio are 273 shopping centers and 61 industrial
properties. We have approximately 6,800 leases and 4,900 different tenants.
Leases for our properties range from less than a year for smaller spaces to over
25 years for larger tenants. Leases generally include minimum lease payments
that often increase over the lease term, reimbursements of property operating
expenses, including ad valorem taxes, and additional rent payments based on a
percentage of the tenants' sales. The majority of our anchor tenants are
supermarkets, value-oriented apparel/discount stores and other retailers or
service providers who generally sell basic necessity-type goods and services.
The stability of our anchor tenants, combined with convenient locations,
attractive and well-maintained properties, high quality retailers and a strong
tenant mix, should ensure the long-term success of our merchants and the
viability of our portfolio.
In assessing the performance of our properties, management carefully tracks the
occupancy of our portfolio. Occupancy for the total portfolio was 93.5% at
March 31, 2004 compared to 91.8% at March 31, 2003. Another important indicator
of performance is the increase in rental rates on a same-space basis as we
complete new leases and renew existing leases. We completed 264 new leases or
renewals for the first quarter of 2004 totaling 1.0 million square feet,
increasing rental rates an average of 8.5% on a same-space basis. Net of
capital costs, the average increase in rental rates was 6.4%.
With respect to external growth through acquisitions and new developments,
management closely monitors movements in returns in relation to its blended
weighted average cost of capital, the amount of product in its acquisition and
new development pipelines and the geographic areas in which opportunities are
present. We purchased seven shopping centers during the first quarter of 2004,
comprising 1.5 million square feet, and representing a total investment of
$230.4 million. These purchases included two each in North Carolina and Florida
and one each in California, Texas and Kentucky. Kentucky represents the 20th
state in which we operate, and was a logical expansion given our geographic
footprint in the southern part of the United States from coast to coast.
With respect to new development, we have 13 shopping centers in various stages
of development in Arizona, Colorado, Louisiana, Nevada, Texas and Utah, and we
anticipate that the majority of them will come on-line during the remainder of
2004 and into 2005.
Page 15
Management is also committed to maintaining a strong, conservative capital
structure, which provides constant access to a variety of capital sources. The
strength of our balance sheet is evidenced by unsecured debt ratings of "A" by
Standard and Poor's and "A3" by Moody's rating services, the highest combined
ratings of any public REIT. We carefully balance obtaining low cost financing
with minimizing exposure to interest rate movements, matching long-term
liabilities with the long-term assets acquired or developed and maintaining
adequate debt to market capitalization, fixed charge coverage and other ratios
as necessary to retain our current credit ratings. In executing this strategy,
we redeemed our Series C Cumulative Redeemable Preferred Shares on April 1, 2004
and issued 3.6 million common shares of beneficial interest, respectively. We
also issued $200 million of ten-year unsecured fixed-rate medium term notes
during the first quarter of 2004 at a weighted average rate of 5.2%, net of the
effect of related interest rate swaps. Subsequent to quarter-end, an additional
$125 million of unsecured fixed-rate medium term notes with a weighted average
life of 8.8 years at a weighted average interest rate of 5.2%, net of the effect
of related interest rate swaps, were issued.
SUMMARY OF CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of financial condition and results of operations is
based on our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities
and contingencies as of the date of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. We evaluate our
assumptions and estimates on an on-going basis. We base our estimates on
historical experience and on various other assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. We believe the following
critical accounting policies affect our more significant judgments and estimates
used in the preparation of our consolidated financial statements.
Valuation of Receivables
An allowance for the uncollectible portion of accrued rents and accounts
receivable is determined based upon an analysis of balances outstanding,
historical bad debt levels, tenant credit worthiness and current economic
trends. Balances outstanding include base rents, tenant reimbursements and
receivables attributable to the straight-lining of rental commitments.
Additionally, estimates of the expected recovery of pre-petition and
post-petition claims with respect to tenants in bankruptcy is considered in
assessing the collectibility of the related receivables.
Property
Real estate assets are stated at cost less accumulated depreciation, which, in
the opinion of management, is not in excess of the individual property's
estimated undiscounted future cash flows, including estimated proceeds from
disposition. Depreciation is computed using the straight-line method, generally
over estimated useful lives of 18-50 years for buildings and 10-20 years for
parking lot surfacing and equipment. Major replacements where the improvement
extends the useful life of the asset are capitalized and the replaced asset and
corresponding accumulated depreciation are removed from the accounts. All other
maintenance and repair items are charged to expense as incurred.
Upon acquisitions of real estate, we assess the fair value of acquired assets
(including land, buildings on an "as if vacant" basis, acquired out-of-market
and in-place leases, and tenant relationships) and acquired liabilities, and
allocate the purchase price based on these assessments. We assess fair value
based on estimated cash flow projections that utilize appropriate discount and
capitalization rates and available market information. Estimates of future cash
flows are based on a number of factors including the historical operating
results, known trends, and specific market/economic conditions that may affect
the property.
Page 16
Property also includes costs incurred in the development of new operating
properties. These costs include preacquisition costs directly identifiable with
the specific project, development and construction costs, interest and real
estate taxes. Indirect development costs, including salaries and benefits,
travel and other related costs that are clearly attributable to the development
of the property, are also capitalized. The capitalization of such costs ceases
at the earlier of one year from the completion of major construction or when the
property, or any completed portion, becomes available for occupancy.
Our properties are reviewed for impairment if events or changes in circumstances
indicate that the carrying amount of the property may not be recoverable. In
such an event, a comparison is made of the current and projected operating cash
flows of each such property into the foreseeable future on an undiscounted basis
to the carrying amount of such property. Such carrying amount would be
adjusted, if necessary, to estimated fair value to reflect an impairment in the
value of the asset.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2004 TO THE THREE MONTHS ENDED
MARCH 31, 2003
Revenues
Total revenues increased by $20.2 million or 20.7% in 2004 ($117.8 million in
2004 versus $97.6 million in 2003). This increase resulted primarily from the
increase in rental revenues of $19.6 million and other income of $.6 million.
Property acquisitions and new development activity contributed $17.7 million of
the rental income increase with the remainder of $2.5 million due to the
activity at our existing properties, as described below.
Occupancy (leased space) of the total portfolio increased as compared to the
prior year as follows:
MARCH 31,
--------------------
2004 2003
-------- --------
Shopping Centers. . . . . 93.5% 92.6%
Industrial. . . . . . . . 93.2% 89.0%
Total . . . . . . . . . . 93.5% 91.8%
In 2004, we completed 264 renewals and new leases comprising 1.0 million square
feet at an average rental rate increase of 8.5%. Net of the amortized portion
of capital costs for tenant improvements, the increase averaged 6.4%.
Other income increased by $.6 million or 60.0% in 2004 ($1.6 million in 2004
versus $1.0 million in 2003). This increase is due primarily to an increase in
lease cancellation payments from various tenants.
Expenses
Total expenses increased by $21.2 million or 30.7% in 2004 ($90.2 million in
2004 versus $69.0 million in 2003).
The increases in 2004 for depreciation and amortization expense ($5.6 million),
operating expenses ($3.2 million) and ad valorem taxes ($3.1 million) are
primarily a result of the properties acquired and developed during the year.
Overall, direct operating costs and expenses (operating and ad valorem tax
expense) of operating our properties as a percentage of rental revenues
increased to 27% in 2004 from 26% in 2003.
Page 17
Interest expense as reported represents the gross interest expense on our
indebtedness plus interest expense on our preferred shares classified as
liabilities less interest that is capitalized for properties under development
and over-market interest payments on mortgages assumed through acquisitions.
Interest expense as reported in 2004 increased by $8.3 million due to the
combination of increased gross interest expense, increased interest expense from
preferred shares, decreased interest capitalization and increased over-market
interest. Gross interest expense increased by $6.9 million in 2004 due to an
increase in the average debt outstanding from $1.4 billion in 2003 to $1.9
billion in 2004. This was offset by a decrease in the weighted-average interest
rate between the two periods from 6.2% in 2003 to 6.0% in 2004. Interest on
preferred shares increased by $2.0 million and represents the dividends paid or
accrued as of March 31, 2004 on the Series C Cumulative Redeemable Preferred
Shares that are classified as liabilities, as a result of the adoption of SFAS
No. 150. Interest capitalized in 2004 decreased by $.5 million versus 2003 due
to completion of new development projects in 2003. Interest from our
over-market mortgages increased from zero in 2003 to $1.1 million in 2004.
General and administrative expenses increased by $.9 million or 29.0% in 2004
($4.0 million in 2004 versus $3.1 million in 2003). This increase results
primarily from normal compensation increases as well as increases in staffing
necessitated by the growth in the portfolio. General and administrative expense
as a percentage of rental revenues was 3% in 2004 and 2003, respectively.
Other
We began reporting discontinued operations effective January 2002 based on the
guidelines established in SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", which broadened the definition of discontinued
operations to include components of an entity whose operations and cash flows
are clearly distinguishable from the rest of the entity for operational and
financial reporting purposes. Income from discontinued operations decreased
$1.1 million in 2004. Included in this caption for 2003 are the operating
results and gain from the disposition of seven properties in 2003 totaling
371,000 square feet of gross leasable area with no such activity present in
2004.
CAPITAL RESOURCES AND LIQUIDITY
We anticipate that cash flows from operating activities will continue to provide
adequate capital for all dividend payments in accordance with REIT requirements.
Cash on hand, internally-generated cash flow, borrowings under our existing
credit facilities, issuance of secured and unsecured debt, as well as other debt
and equity alternatives, should provide the necessary capital to maintain and
operate our properties, refinance debt maturities and achieve planned growth,
which are our primary liquidity needs.
Investing Activities - Acquisitions
We invested $230.4 million for the acquisition of seven centers during the first
quarter of 2004.
In January 2004, we acquired three supermarket-anchored shopping centers.
Greenhouse Marketplace, located in San Leandro, California, is a 100% leased
151,000 square foot shopping center anchored by Safeway and Longs Drugs, which
are corporately-owned, and includes other retailers such as 99 Cents Only,
Factory 2-U and Big Lots. Leesville Town Centre is a 114,000 square foot center
located in Raleigh, North Carolina that is 100% occupied, and is anchored by
Harris Teeter and Blockbuster. Harrison Pointe Center is a 124,000 square foot
center anchored by Harris Teeter and Staples and is located in Cary, North
Carolina, a suburb of Raleigh. All of these acquisitions were acquired in
limited partnerships utilizing a DownREIT structure and are included in our
consolidated financial statements because we exercise financial and operating
control.
In March 2004, we completed the acquisition of a portfolio of four shopping
centers. First Colony Commons is a 410,000 square foot community center located
in Sugar Land, Texas, a suburb of Houston, and is anchored by Home Depot,
Michael's, Office Depot, Babies R Us and Conn's Appliances. T.J. Maxx Plaza is
a 162,000 square foot center anchored by T.J. Maxx and Winn Dixie and is located
in Kendall, Florida, a suburb of Miami. Largo Mall, a 378,000 square foot
community center, is anchored by a corporately-owned Albertson's and Target, as
well as Marshall's, Bed, Bath & Beyond, PetsMart, Staples and Michael's and is
Page 18
located near St. Petersburg, Florida. Tates Creek is a 185,000 square foot
shopping center located in Lexington, Kentucky, which represents the 20th state
in which we operate. Kroger and Rite Aid anchor the center.
Investing Activities - New Development and Capital Expenditures
With respect to new development, we have 13 projects at various stages of
construction. These projects, upon completion, will represent an investment of
approximately $129 million and will add .9 million square feet to the portfolio.
We expect to invest approximately $24.7 million in these properties during 2004.
These projects will continue to come on-line during the remainder of 2004 and
into 2005.
Financing Activities - Debt
Total debt outstanding increased to $1.9 billion at March 31, 2004 from $1.8
billion at December 31, 2003. This increase was primarily due to the funding of
acquisitions and ongoing development and redevelopment efforts. Included in
total debt outstanding of $1.9 billion at March 31, 2004 is variable-rate debt
of $312.8 million, after recognizing the net effect of $162.5 million of
interest rate swaps.
For the three months ended March 31, 2004, we issued a total of $200 million of
ten-year unsecured fixed-rate medium term notes at a weighted average interest
rate of 5.2%, net of the effect of related interest rate swaps. Proceeds
received were used to pay down amounts outstanding under our $400 million
revolving credit facility.
Subsequent to quarter-end, we issued an additional $125 million of unsecured
fixed-rate medium term notes with a weighted average life of 8.8 years at a
weighted average interest rate of 5.2%, net of the effect of related interest
rate swaps. Proceeds received were used to pay down amounts outstanding under
our $400 million revolving credit facility.
In December 2003, we entered into two forward-starting interest rate swaps with
an aggregate notional amount of $97.0 million in anticipation of the issuance of
fixed-rate medium term notes subsequent to year-end. These contracts were
designated as a cash flow hedge of forecasted interest payments for $100 million
of unsecured notes with a coupon of 4.9% that were sold in February 2004.
Concurrent with the sale of the 4.9% notes, we settled our $97.0 million
forward-starting interest rate swap contracts, resulting in a loss of $.9
million, which is being amortized as a reduction to earnings over the life of
the 4.9% notes. In January 2004, we entered into four additional
forward-starting interest rate swaps with an aggregate notional amount of $194.0
million in anticipation of the issuance of fixed-rate medium term notes. A
medium term note totaling $50 million was issued in January 2004, at which time
one of the four forward-starting interest rate swaps with a notional amount of
$48.5 million was settled at a loss of $.7 million. This $.7 million loss is
being amortized as a reduction to earnings over the life of the related medium
term note. An additional medium term note totaling $50 million was issued in
March 2004, at which time the second of the four forward-starting interest rate
swaps with a notional amount of $48.5 million was settled at a loss of $2.7
million. This $2.7 million loss is being amortized as a reduction to earnings
over the life of the related medium term note. Subsequent to quarter-end, the
remaining two forward-starting interest rate swaps with an aggregate notional
amount of $97 million were settled at a net loss of $.7 million. This loss will
be amortized as a reduction to earnings over the life of the related medium term
notes, which were also issued subsequent to quarter-end.
In April 2003, the SEC declared effective our $1 billion shelf registration
statement, of which $505.9 million was available as of March 31, 2004. We will
continue to closely monitor both the debt and equity markets and carefully
consider our available financing alternatives, including both public and private
placements.
Financing Activities - Equity
Our Board of Trust Managers approved a quarterly dividend of $.415 per common
share for the first quarter of 2004. Our dividend payout ratio on common equity
for the first quarter of 2004 and 2003 was 68% and 69%, respectively, based on
funds from operations for the applicable period.
In February 2004, a three-for-two share split, to be effected in the form of a
50% share dividend, was declared for shareholders of record on March 16, 2004,
payable March 30, 2004. We issued 28.5 million common shares of beneficial
interest as a result of the share split. All references to the number of shares
and per share amounts have been restated to reflect the share split, and an
amount equal to the par value of the number of common shares issued have been
reclassified to common shares of beneficial interest from accumulated dividends
in excess of net income.
Page 19
In March 2004, we issued an additional 3.6 million common shares of beneficial
interest. Net proceeds to us totaled $118.0 million based on a price of $33.64
per share. The proceeds from this offering were used primarily to redeem our
7.0% Series C Cumulative Redeemable Preferred Shares on April 1, 2004.
CONTRACTUAL OBLIGATIONS
The following table summarizes our principal contractual obligations as of March
31, 2004 (in thousands):
Remainder
of
2004 2005 2006 2007 2008 Thereafter Total
--------- ------- --------- --------- --------- ----------- -----------
Unsecured Debt: (1)
Medium Term Notes . . . . . . $ 50,000 $ 52,500 $ 37,000 $ 79,000 $ 36,000 $ 700,500 $ 955,000
7% 2011 Bonds . . . . . . . . 200,000 200,000
Revolving Credit Facilities . 170,000 170,000
Secured Debt. . . . . . . . . . . . 41,459 30,146 21,769 20,114 164,446 341,746 619,680
Ground Lease Payments . . . . . . . 1,217 1,464 1,230 1,059 1,029 25,426 31,425
Construction Contracts on
Development Projects. . . . . . . 24,725 24,725
--------- ------- --------- --------- --------- ----------- -----------
Total Contractual Obligations . . . $ 117,401 $ 84,110 $ 229,999 $ 100,173 $ 201,475 $ 1,267,672 $ 2,000,830
========= ======== ========= ========= ========= =========== ===========
- -------
(1) Total unsecured debt obligations as shown above are $2.4 million less than total unsecured debt as
reported due to amortization of the discount on medium term notes and the fair value of interest rate
swaps.
As of March 31, 2004 and 2003, we did not have any off-balance sheet
arrangements.
FUNDS FROM OPERATIONS
The National Association of Real Estate Investment Trusts (NAREIT) defines funds
from operations (FFO) as net income (loss) computed in accordance with generally
accepted accounting principles, excluding gains or losses from sales of
property, plus real estate related depreciation and amortization, and after
adjustments for unconsolidated partnerships and joint ventures. In addition,
NAREIT recommends that extraordinary items not be considered in arriving at FFO.
We calculate FFO in a manner consistent with the NAREIT definition. We believe
FFO is an appropriate supplemental measure of operating performance because it
helps investors compare the operating performance to similarly titled measures
of other REITs. There can be no assurance that FFO presented by us is
comparable to similarly titled measures of other REITs. FFO should not be
considered as an alternative to net income or other measurements under GAAP as
an indicator of our operating performance or to cash flows from operating,
investing, or financing activities as a measure of liquidity. FFO does not
reflect working capital changes, cash expenditures for capital improvements or
principal payments on indebtedness.
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Funds from operations is calculated as follows (in thousands):
Three Months Ended
March 31,
------------------------
2004 2003
---------- ----------
Net income available to common shareholders . . . . . . . . . . . . . . . . . $ 27,143 $ 24,969
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . 24,754 19,392
Depreciation and amortization of unconsolidated joint ventures. . . . . . . . 657 434
Gain on sale of properties. . . . . . . . . . . . . . . . . . . . . . . . . . (317) (880)
---------- ----------
Funds from operations . . . . . . . . . . . . . . . . . . . . . 52,237 43,915
Funds from operations attributable to operating partnership units . . . . . . 1,330 1,263
---------- ----------
Funds from operations assuming conversion of OP units . . . . . $ 53,567 $ 45,178
========== ==========
Weighted average shares outstanding - basic . . . . . . . . . . . . . . . . . 83,143 78,136
Effect of dilutive securities:
Share options and awards. . . . . . . . . . . . . . . . . . . . . . . . 957 596
Operating partnership units . . . . . . . . . . . . . . . . . . . . . . 2,181 2,294
---------- ----------
Weighted average shares outstanding - diluted . . . . . . . . . . . . . . . . 86,281 81,026
========== ==========
NEWLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In January 2003, FASB issued Interpretation No. 46, "Consolidation of Variable
Interest Entities", which was reissued as Interpretation No. 46R in December
2003. FIN 46R requires a variable interest entity to be consolidated by a
company if that company absorbs a majority of the variable interest entity's
expected losses, receives a majority of the entity's expected residual returns,
or both. It further requires disclosures about variable interest entities that
a company is not required to consolidate, but in which it has a significant
variable interest. We have applied FIN 46R to our joint ventures and concluded
that it did not require consolidation of additional entities.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We use fixed and floating-rate debt to finance our capital requirements. These
transactions expose us to market risk related to changes in interest rates.
Derivative financial instruments are used to manage a portion of this risk,
primarily interest rate swap agreements with major financial institutions.
These swap agreements expose us to credit risk in the event of non-performance
by the counter-parties to the swaps. We do not engage in the trading of
derivative financial instruments in the normal course of business. At March 31,
2004, we had fixed-rate debt of $1.6 billion and variable-rate debt of $312.8
million, after adjusting for the net effect of $162.5 million of interest rate
swaps.
ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES
Under the supervision and with the participation of our principal executive
officer and principal financial officer, management has evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934) as of March 31, 2004. Based on that evaluation, our
principal executive officer and our principal financial officer have concluded
that our disclosure controls and procedures were effective as of March 31, 2004.
In January 2004, we determined that a newly-released accounting standard
governing financial instruments having characteristics of both liabilities and
equity needed to be applied in a manner different from that previously applied
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in our financial statements for the period ended September 30, 2003. Steps have
been taken to enhance our internal controls to ensure that we properly apply new
accounting standards including access to enhanced accounting research tools. We
will continue to evaluate the effectiveness of our disclosure controls over
financial reporting on an on-going basis and will take further action as
appropriate.
Other than described above, there has been no change to our internal control
over financial reporting during the quarter ended March 31, 2004 that has
materially affected, or is reasonably likely to materially affect our internal
control over financial reporting.
Page 22
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
12.1 A statement of computation of ratios of earnings and
funds from operations to combined fixed charges
and preferred dividends.
31.1 Certification pursuant to Section 302(a) of the
Sarbanes-Oxley Act of 2002 (Chief Executive
Officer).
31.2 Certification pursuant to Section 302(a) of the
Sarbanes-Oxley Act of 2002 (Chief Financial
Officer).
32.1 Certification pursuant to 18 U.S.C. Sec. 1350, as adopted
pursuant to Sec. 906 of the Sarbanes-Oxley Act of
2002 (Chief Executive Officer).
32.2 Certification pursuant to 18 U.S.C. Sec. 1350, as
adopted pursuant to Sec. 906 of the Sarbanes-Oxley
Act of 2002 (Chief Financial Officer).
(b) Reports on Form 8-K
A Form 8-K, dated February 24, 2004, was filed in
response to Item 7. Exhibits and Item 12.
Results of Operation and Financial Condition.
Page 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WEINGARTEN REALTY INVESTORS
-----------------------------
(Registrant)
BY: /s/ Andrew M. Alexander
---------------------------------
Andrew M. Alexander
President/Chief Executive Officer
(Principal Executive Officer)
BY: /s/ Joe D. Shafer
---------------------------------
Joe D. Shafer
Vice President/Controller
(Principal Accounting Officer)
DATE: May 10, 2004
Page 24
EXHIBIT INDEX
EXHIBIT
NUMBER
- ------
12.1 A statement of computation of ratios of earnings and funds from
operations to combined fixed charges and preferred dividends.
31.1 Certification pursuant to Section 302(a) of the Sarbanes-Oxley
Act of 2002 (Chief Executive Officer).
31.2 Certification pursuant to Section 302(a) of the Sarbanes-Oxley
Act of 2002 (Chief Financial Officer).
32.1 Certification pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant
to Sec. 906 of the Sarbanes-Oxley Act of 2002 (Chief
Executive Officer).
32.2 Certification pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant
to Sec. 906 of the Sarbanes-Oxley Act of 2002 (Chief
Financial Officer).
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