SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

BRADLEY OPERATING LIMITED PARTNERSHIP

(Exact name of registrant as specified in its charter)

 

 

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 o No  ý.

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.  Yes ý No o.

 

 

BRADLEY OPERATING LIMITED PARTNERSHIP

 

INDEX TO FORM 10-Q

 

PART I
ITEM 1. Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Cash Flows
Notes to Condensed Consolidated Financial Statements
ITEM 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
ITEM 3: Quantitative and Qualitative Disclosures About Market Risk
ITEM 4: Controls and Procedures
PART II — OTHER INFORMATION
ITEM 1. Legal Proceedings
ITEM 2. Changes in Securities
ITEM 3. Defaults upon Senior Securities
ITEM 4. Submission of Matters to a Vote of Security Holders
ITEM 5. Other Information
ITEM 6. Exhibits and Reports on Form 8-K
SIGNATURES
CERTIFICATIONS

 

1

 

BRADLEY OPERATING LIMITED PARTNERSHIP

 

PART I

 

ITEM 1.  Financial Statements

 

Consolidated Balance Sheets
September 30, 2004 and December 31, 2003
(Unaudited and in thousands of dollars except for unit data)

 

		September 30, 2004			December 31, 2003
Assets
Real estate investments, net		$	1,267,052		$	1,282,989
Real estate investment held for sale		6,983			—
Cash and cash equivalents		1,790			1,715
Accounts receivable, net of allowance for doubtful accounts of $4,333 in 2004 and $4,243 in 2003		25,507			16,592
Intercompany advance		50,941			—
Prepaids and other assets		15,035			3,578
Investment in joint venture		3,335			—
Deferred financing and leasing costs		9,212			7,767
Total assets		$	1,379,855		$	1,312,641
Liabilities and Partners’ Capital
Liabilities:
Mortgage loans payable		$	140,792		$	141,670
Unsecured notes payable		201,490			201,490
Line of credit facility		213,000			243,000
Related party note payable		200,000			—
Accrued expenses and other liabilities		46,484			38,982
Accrued distributions		17,913			17,735
Total liabilities		819,679			642,877
Minority interest		2,425			2,425
Redeemable partnership units, 332,456 and 340,270 common units outstanding at September 30, 2004 and December 31, 2003, respectively, at redemption value		9,698			9,681
Redeemable Series B Preferred Units (liquidation preference $25.00 per unit); 2,000,000 units issued and outstanding at December 31, 2003		—			50,000
Redeemable Series C Preferred Units (liquidation preference $25.00 per unit); 1,000,000 units issued and outstanding at December 31, 2003		—			25,000
Partners’ capital:
General partner; 32,568,441 and 32,560,627 units outstanding at September 30, 2004 and December 31, 2004, respectively		529,982			563,338
Limited partner; 1,219,782 units outstanding		18,071			19,320
Total partners’ capital		548,053			582,658
Total liabilities and partners’ capital		$	1,379,855		$	1,312,641

 

See accompanying notes to condensed consolidated financial statements.

 

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BRADLEY OPERATING LIMITED PARTNERSHIP

 

Consolidated Statements of Operations
Nine Months ended September 30, 2004 and 2003
(Unaudited and in thousands, except per-unit data)

 

		Nine Months Ended September 30,
		2004			2003
Revenue:
Rentals and recoveries		$	139,812		$	139,338
Interest and other		206			27
Total revenue		140,018			139,365
Expenses:
Property operating expenses		19,917			20,279
Real estate taxes		23,215			22,154
Depreciation and amortization		37,469			35,634
Interest		28,472			24,760
General and administrative		9,935			9,220
Total expenses		119,008			112,047
Income before gain on sale of real estate investment		21,010			27,318
Gain on sale of real estate investment		25			—
Income before discontinued operations		21,035			27,318
Discontinued operations:
Income from discontinued operations		294			208
Income before preferred distributions		21,329			27,526
Preferred distributions		(2,176		)	(4,992		)
Net income attributable to common unitholders		$	19,153		$	22,534
Basic and diluted earnings per common unit:
Net income attributable to common unitholders		$	0.56		$	0.67
Weighted average common units outstanding		34,121			33,773

 

See accompanying notes to condensed consolidated financial statements.

 

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BRADLEY OPERATING LIMITED PARTNERSHIP

 

Consolidated Statements of Operations
Three Months ended September 30, 2004 and 2003
(Unaudited and in thousands, except per-unit data)

 

		Three Months Ended September 30,
		2004			2003
Revenue:
Rentals and recoveries		$	46,737		$	46,592
Interest and other		195			8
Total revenue		46,932			46,600
Expenses:
Property operating expenses		6,075			6,771
Real estate taxes		7,675			8,104
Depreciation and amortization		12,573			12,028
Interest		10,557			8,218
General and administrative		3,381			2,754
Total expenses		40,261			37,875
Income before gain on sale of real estate investment		6,671			8,725
Gain on sale of real estate investment		25			—
Income before discontinued operations		6,696			8,725
Discontinued operations:
Income from discontinued operations		131			72
Income before preferred distributions		6,827			8,797
Preferred distributions		(413		)	(1,664		)
Net income attributable to common unitholders		$	6,414		$	7,133
Basic and diluted earnings per common unit:
Net income attributable to common unitholders		$	0.19		$	0.21
Weighted average common units outstanding		34,121			33,773

 

See accompanying notes to condensed consolidated financial statements.

 

4

 

BRADLEY OPERATING LIMITED PARTNERSHIP

 

Consolidated Statements of Cash Flows
Nine months ended September 30, 2004 and 2003
(unaudited and in thousands of dollars)

 

		Nine months ended September 30,
		2004			2003
Cash flows from operating activities:
Net income		$	21,329		$	27,526
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		37,623			35,824
Amortization of deferred debt financing costs		930			930
Amortization of debt premiums		(438		)	(350		)
Net gain on sale of real estate investment		(25		)	—
Changes in operating assets and liabilities		(7,792		)	(3,756		)
Net cash provided by operating activities		51,627			60,174
Cash flows from investing activities:
Acquisitions of and additions to real estate investments		(21,480		)	(12,205		)
Expenditures for investment in joint venture		(3,321		)	—
Investment in mortgage loan receivable		(9,188		)	—
Net proceeds from sales of real estate investments		7,205			—
Expenditures for capitalized leasing commissions		(2,241		)	(2,414		)
Net cash used for investing activities		(29,025		)	(14,619		)
Cash flows from financing activities:
Repayments of mortgage loans payable		(10,847		)	(9,182		)
Proceeds from line of credit facility		280,000			66,000
Repayments of line of credit facility		(310,000		)	(34,000		)
Proceeds from related party note payable		200,000			—
Intercompany advances		(56,006		)	(17,810		)
Repayment of intercompany advances		5,065			17,810
Distributions paid to general partner		(51,287		)	(50,797		)
Distributions paid to limited partners		(4,452		)	(7,388		)
Redemption of Series B and C Preferred Units		(75,000		)	—
Net cash used for financing activities		(22,527		)	(35,367		)
Net increase in cash and cash equivalents		75			10,188
Cash and cash equivalents:
Beginning of period		1,715			650
End of period		$	1,790		$	10,838

 

See accompanying notes to condensed consolidated financial statements.

 

5

 

BRADLEY OPERATING LIMITED PARTNERSHIP

 

Notes to Condensed Consolidated Financial Statements

 

1.              Organization

 

Basis of Presentation

 

Bradley Operating Limited Partnership (the “Operating Partnership”) is the entity through which Heritage Property Investment Trust, Inc. (“Heritage”, or the “Company”) conducts substantially all of its business in the Midwestern United States. Through a wholly-owned subsidiary, Heritage acquired all of the general partner units of the Operating Partnership issued to Bradley Real Estate Inc., the former general partner of the Operating Partnership, on September 18, 2000. Through the acquisition, Heritage became the general partner of the Operating Partnership and held 22,140,487 general partner common units through a wholly-owned subsidiary and directly held 26,199 limited partner common units from acquisition until Heritage’s initial public offering (“IPO”). At September 30, 2004 and December 31, 2003, the Operating Partnership owned (either directly or through subsidiaries) 106 and 105 neighborhood and community shopping centers, respectively.

 

Heritage is a Maryland Corporation organized as a real estate investment trust (“REIT”). Heritage was formed on July 1, 1999 and commenced operations on July 9, 1999 through the contribution of $550 million of real estate investments and related assets, net of liabilities, by Net Realty Holding Trust, a wholly-owned subsidiary of the New England Teamsters & Trucking Industry Pension Fund (“NETT”) and $25 million of cash from the Prudential Insurance Company of America (“Prudential”). Heritage qualifies as a REIT under Sections 856-860 of the Internal Revenue Code of 1986, as amended (the “Code”).

 

The condensed consolidated financial statements of the Operating Partnership contained in this report were prepared from the books and records of the Operating Partnership without audit in accordance with the rules and regulations of the Securities and Exchange Commission, and in the opinion of management, include all adjustments (consisting of only normal recurring accruals) necessary to present a fair statement of results for the interim periods presented.  However, amounts presented in the condensed consolidated balance sheet as of December 31, 2003 are derived from the audited financial statements of the Operating Partnership at that date.  Interim results are not necessarily indicative of results for a full year.  The results of operations for properties disposed of during the three and nine-month periods ended September 30, 2004 have been reported as discontinued operations for the prior comparable periods.

 

The condensed consolidated financial statements of the Operating Partnership include the accounts and operations of the Operating Partnership and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. These financial statements should be read in conjunction with the Operating Partnership’s financial statements as of and for the year ended December 31, 2003 and notes thereto as filed with the Securities and Exchange Commission. In addition, these financial statements should be read in conjunction with the separate consolidated financial statements of Heritage as of and for the three and nine-month periods ended September 30, 2004, which include the Operating Partnership's results, as contained in Heritage’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004.

 

2.              Supplemental Cash Flow Information

 

During the nine-month periods ended September 30, 2004 and 2003, interest paid was $25.6 million and $24.5 million, respectively.

 

During the nine-month period ended September 30, 2004, the Operating Partnership assumed $10.4 million of existing debt in connection with the acquisition of Long Meadow Commons, as described in note 3.

 

During the nine-month period ended September 30, 2004, 7,814 exchangeable limited partnership units were exchanged for 7,814 shares of common stock of Heritage pursuant to the Operating Partnership’s limited partnership agreement.

 

Included in accrued expenses and other liabilities at September 30, 2004 and December 31, 2003 are accrued expenditures for real estate investments of $5.6 million and $5.7 million, respectively.

 

3.              Real Estate Investments

 

A summary of real estate investments follows (in thousands of dollars):

 

		September 30, 2004				December 31, 2003
Land		$		204,773		$	204,571
Land improvements		115,748				115,733
Buildings and improvements		1,072,348				1,069,106
Tenant improvements		30,381				23,309
Improvements in process		13,712				7,829
		1,436,962				1,420,548
Accumulated depreciation and amortization		(169,910			)	(137,559			)
Net carrying value		$	1,267,052			$		1,282,989

 

6

 

Acquisitions

 

In April 2004, the Operating Partnership acquired a 118,000 square foot grocer-anchored community shopping center located in Mundelein, Illinois (a northern Chicago suburb) known as Long Meadow Commons.  The acquisition price for Long Meadow Commons was $18.5 million and was funded through the assumption of $10.4 million of debt and borrowings under the Operating Partnership’s line of credit.

 

Real estate assets held for sale

 

In June 2004, the Operating Partnership entered into a purchase and sale agreement for the sale of Camelot Shopping Center, a 151,000 square foot shopping center located in Louisville, Kentucky for a purchase price of $7.4 million.  The sale was completed on October 1, 2004 and resulted in a gain of $0.4 million.  The Camelot Shopping Center has been reported as held for sale on the accompanying consolidated balance sheet as of September 30, 2004. The results of operations, consisting of $0.3 million and $0.2 million for the nine-month periods ended September 30, 2004 and 2003, respectively, and $0.1 million for each of the three-month periods ended September 30, 2004 and 2003, respectively, have been reported as discontinued operations in the accompanying statement of operations.

 

4.              Investment in Joint Venture

 

In May 2004, the Operating Partnership acquired a 50% interest in a joint venture for the development and construction of a 302,000 square foot shopping center, of which the joint venture will own 210,000 square feet, to be located in a suburb of Grand Rapids, Michigan.  The Operating Partnership made an initial equity investment of $3.3 million, which is being accounted for under the equity method of accounting and provided a short-term bridge loan of approximately $9.2 million, which had an original maturity date of August 20, 2004 and was subsequently extended for 90 days.   The operations of the joint venture, consisting of minor activity related to operating restaurants located on out parcels, are being reported on a 90-day lag basis.  Accordingly, the operations for the period from May 17, 2004 (acquisition date) through June 30, 2004 are included in the accompanying consolidated statement of operations in as Interest and Other.  The bridge loan receivable is included in prepaids and other assets in the accompanying 2004 condensed consolidated balance sheet and the interest earned on the loan, to the extent attributable to the outside interest in the joint venture, is recorded as Interest and Other.

 

5.              Debt

 

Line of Credit

 

On April 29, 2002, the Operating Partnership and Heritage Property Investment Limited Partnership (“Heritage OP”), Heritage’s other operating partnership subsidiary, entered as co-borrowers on a joint and several basis into a $350 million unsecured line of credit with a group of lenders and Fleet National Bank, as agent. Heritage and certain of Heritage’s other subsidiaries have guaranteed this line of credit. This line of credit is being used principally to fund growth opportunities and for working capital purposes. At September 30, 2004 and December 31, 2003, $213 million and $243 million was outstanding under the line of credit, respectively, all of which is reported on the Operating Partnership’s balance sheets.

 

This line of credit bears interest at either the lender’s base rate or a floating rate based on a spread over LIBOR ranging from 80 basis points to 135 basis points, depending upon Heritage’s debt rating, and requires monthly payments of interest. The variable rates in effect at September 30, 2004 and December 31, 2003, including the lender’s margin of 105 basis points, and borrowings outstanding at the base rate, were 2.76% and 2.78% respectively. In addition, this line of credit has a facility fee based on the amount committed but not drawn ranging from 15 basis points to 25 basis points, depending upon Heritage’s debt rating, and is required to be paid quarterly.

 

This line of credit requires the borrowers to maintain specific financial ratios and restricts the incurrence of indebtedness and the funding of investments. This line of credit also, except under some circumstances (including as necessary to maintain Heritage’s status as a REIT) limits Heritage’s ability to make distributions in excess of 90% of annual funds from operations, as defined. As of September 30, 2004 and December 31, 2003, the borrowers were in compliance with all of the financial covenants under the line of credit facility.

 

Selected financial information of Heritage OP, the co-borrower, is as follows as of and for the nine-month period ended September 30, 2004 (unaudited) and as of and for the year ended December 31, 2003 (in thousands):

 

7

 

Description		September  30, 2004			December 31, 2003
		(unaudited)
Real estate investments, net		$	907,652		$	874,243
Other assets		58,188			40,691
Total assets		965,840			914,934
Indebtedness (excluding line of credit) (a)		485,144			491,295
Other liabilities		105,573			49,836
Partners’ capital		375,123			267,683
Total revenue (excluding discontinued operations)		102,948			113,020
Net income		15,011			10,780

 

(a)          The Operating Partnership and the Heritage OP are co-borrowers under the line of credit; however, for purposes of the above footnote, amounts due under the line of credit are not included as the entire outstanding balance has been included on the accompanying Operating Partnership’s balance sheet.

 

Unsecured Notes Payable

 

The Operating Partnership previously issued unsecured notes payable consisting of a $100 million, 7% fixed-rate issue maturing on November 15, 2004; a $100 million, 7.2% fixed-rate issue maturing on January 15, 2008; and $1.5 million of other unsecured notes payable.

 

Guaranty of Unsecured Debt

 

On April 1, 2004, Heritage issued $200 million aggregate principal unsecured senior notes (the “Notes”) at an interest rate of 5.125%. Heritage used the proceeds of the Notes of $196.4 million net of original issue discount and estimated offering costs, to repay a portion of the outstanding balance under the Operating Partnership’s and Heritage OP’s combined line of credit. The Operating Partnership and Heritage’s subsidiary acting as general partner of the Operating Partnership, entered into a $200 million intercompany note in conjunction with the transfer of the proceeds used to pay down the line of credit at terms substantially identical to the Notes.

 

The Notes mature on April 15, 2014, and interest is payable each April 15, and October 15, commencing on October 15, 2004. The Notes are senior unsecured obligations of Heritage and are guaranteed jointly and severally by the Operating Partnership and Heritage OP. Such guarantees are unsecured senior obligations of the Operating Partnership and Heritage OP and rank equally with all existing and future unsecured senior indebtedness of the Operating Partnership and Heritage OP. The Notes also contain certain financial and operating covenants, including limitations on the amount and type of indebtedness that may be incurred by Heritage, the Operating Partnership, and Heritage OP.

 

6.              Redeemable Preferred Units

 

On September 7, 2004 the Operating Partnership redeemed all 1,000,000 of its outstanding 8.875% Series C Cumulative Redeemable Perpetual Preferred Units, at a redemption price of $25.00 per unit, plus approximately $0.413 of accrued and unpaid distributions.  There were no unamortized issuance costs associated with the Series C Preferred Units, therefore, the Operating Partnership did not incur a charge in connection with this redemption.

 

On February 23, 2004, the Operating Partnership redeemed all 2,000,000 of its outstanding 8.875% Series B Cumulative Redeemable Perpetual Preferred Units, at a redemption price of $25.00 per unit, plus approximately $0.3266 of accrued and unpaid distributions.  There were no unamortized issuance costs associated with the Series B Preferred Units, therefore, the Operating Partnership did not incur a charge in connection with this redemption.

 

7.              Subsequent Event

 

Issuance of New Debt Securities

 

On October 15, 2004, Heritage completed the issuance and sale of $150 million principal amount of 4.50% notes due 2009.

 

8

 

These notes were issued pursuant to the terms of an indenture Heritage entered into with LaSalle National Bank, as trustee.  These notes may be redeemed at any time at Heritage’s option, in whole or in part, at a redemption price equal to the sum of (1) the principal amount of the notes being redeemed plus accrued interest on the notes to the redemption date and (2) a make-whole amount, if any, with respect to the notes that is designed to provide yield maintenance protection to the holders of these notes.  In addition, these notes have been guaranteed by the Operating Partnership and Heritage OP.  The indenture contains various covenants, including covenants that restrict the amount of indebtedness that may be incurred by Heritage and its subsidiaries.  The proceeds of the issuance and sale of these notes were used to repay a portion of the outstanding balance under the Operating Partnership’s and Heritage OP’s combined line of credit. The Operating Partnership has provided Heritage’s subsidiary acting as general partner of the Operating Partnership, with an intercompany note with terms identical to these notes.

 

In August 2004, in anticipation of completing an unsecured debt financing, Heritage entered into forward starting interest rate swaps with a total notional amount of $146,600,000.  The purpose of these forward swaps was to mitigate the risk of changes in interest rates prior to the pricing of our debt offering.  These forward swaps terminated upon pricing of the debt offering and the Heritage made a payment to the counterparties of $1.7 million in connection with the termination of these swaps.

 

9

 

ITEM 2:                        Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion should be read in conjunction with the historical consolidated financial statements and related notes thereto. Some of the statements contained in this discussion constitute forward-looking statements. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts.  The forward-looking statements reflect our current views about future events and are subject to risks, uncertainties, assumptions and changes in circumstances that may cause our actual results to differ significantly from those expressed in any forward-looking statement. You should not rely on forward-looking statements since they involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond our control and which could materially affect actual results.  The factors that could cause actual results to differ materially from current expectations include financial performance and operations of our shopping centers, including our tenants, real estate conditions, current and future bankruptcies of our tenants, execution of shopping center redevelopment programs, our ability to finance our operations, successful completion of renovations, completion of pending acquisitions, the availability of additional acquisitions, execution of joint venture opportunities, changes in economic, business, competitive market and regulatory conditions, acts of terrorism or war and other risks detailed from time to time in filings with the Securities and Exchange Commission.  The forward-looking statements contained herein represent our judgment as of the date of this report, and we caution readers not to place undue reliance on such statements.

 

All references to “we,” “us,” “our,” “ours” or “Heritage” in this report refer to Heritage Property Investment Trust, Inc. and its consolidated subsidiaries, unless the context indicates otherwise.  All references to “Bradley OP” or the “Operating Partnership” in this report refer to Bradley Operating Limited Partnership, a subsidiary of Heritage, and its subsidiaries.

 

Overview

 

Bradley Operating Limited Partnership, or Bradley OP, is one of the legal entities through which Heritage Property Investment Trust, Inc., or Heritage, a fully integrated, self-administered and self-managed real estate investment trust, or “REIT,” conducts substantially all of its business and owns (either directly or through subsidiaries) substantially all of its assets.  Heritage is one of the nation’s largest owners of neighborhood and community shopping centers, with properties located in the Eastern, Midwestern and Southwestern United States. As of September 30, 2004, Heritage had a shopping center portfolio consisting of 164 shopping centers, located in 29 states and totaling approximately 33.2 million square feet of GLA, of which approximately 27.9 million square feet was Company-owned GLA.

 

Heritage conducts its business exclusively through its subsidiaries and primarily through its two operating partnerships, Heritage Property Investment Limited Partnership, or Heritage OP, and Bradley OP. Bradley OP is a Delaware limited partnership and is the primary entity through which Heritage conducts its operations in the Midwest.  As of September 30, 2004, Bradley OP and its subsidiaries owned 106 shopping centers, located in 21 states and totaling approximately 17.5 million square feet of Company-owned GLA.

 

Although we generally manage the affairs of Bradley OP and Heritage OP in the same manner, we are operating two distinct operating partnerships as we have elected not to merge or combine Heritage OP and Bradley OP as a legal matter at this time. We continue to act as the sole general partner and hold of all of the partnership interests in Heritage OP. Through our wholly-owned subsidiary, we are also the sole general partner of Bradley OP and manage and conduct the business of Bradley OP and its portfolio of real estate properties in accordance with the Bradley OP limited partnership agreement. Our board of directors manages the affairs of Bradley OP by directing the affairs of Heritage.  Unless otherwise specifically stated, the discussion below refers to Heritage and Bradley OP together.

 

Our operating strategy is to own and manage a quality portfolio of community and neighborhood shopping centers that will provide stable cash flow and investment returns.  Our focus is to own grocer-anchored centers with a diverse and multi-anchored tenant base in attractive geographic locations with strong demographics.  We derive substantially all of our revenues from rentals and recoveries received from tenants under existing leases on each of our properties.  Our operating results therefore depend primarily on the ability of our tenants to make required rental payments.

 

Generally, we do not expect that our net operating income will deviate significantly in the short-term.  This is because our leases with our tenants provide us a stable cash flow over the long-term.  In addition, other than in circumstances such as higher than anticipated snow removal costs, utility expenses or real estate taxes, our operating expenses generally remain predictable.

 

However, as an owner of community and neighborhood shopping centers, our performance is linked to economic conditions in the retail industry in those markets in which our centers are located.  The retail sector continues to change dramatically as a result of continued industry consolidation due to the continuing strength of Wal-Mart and large retail bankruptcies resulting in an excess amount of available retail space and greater competition.  We believe that the nature of the properties that we primarily own and invest in—grocer-anchored neighborhood and community shopping centers—provides a more stable revenue flow in uncertain economic times, as they are more resistant to economic down cycles.  This stability is due to the fact that consumers still need to purchase food and other goods found at grocers, even in difficult economic times.

 

10

 

In the face of these challenging market conditions, we follow a dual growth strategy.  First, we continue to focus on increasing our internal growth by leveraging our existing tenant relationships to improve the performance of our existing shopping center portfolio.  We believe that there are meaningful opportunities to increase our cash flow from our existing properties because of their desirable locations.  For instance, during 2002, 2003, and the first quarter of 2004, we were adversely affected by large retail bankruptcies that created vacant space within our portfolio and by the increasingly competitive leasing environment resulting from the economic downturn during the early part of this decade.  However, as a result of our efforts to re-let space, including space recovered from bankrupt tenants, as well as the improvement in the overall performance of our portfolio and improving economic conditions within our markets, we experienced an increase of approximately 1.6% in our same property net operating income during the first nine months of 2004 (after deducting lease termination activity).  We anticipate our same property operating performance during the remainder of 2004 and into 2005 will be consistent with our performance during the first nine months of 2004.

 

During the first nine months of 2004, in order to re-let vacant space within our portfolio, we incurred higher non-recurring capital expenditures than in prior periods as we re-positioned several of our centers for future growth.  In addition, we anticipate incurring additional non-recurring capital expenditures during the remainder of 2004 as we seek further opportunities to reposition vacant space.

 

Secondly, we focus on achieving external growth by the expansion of our portfolio and we will continue to pursue targeted acquisitions of primarily grocer-anchored neighborhood and community shopping centers in attractive markets with strong economic and demographic characteristics.  We will pursue acquisitions in our existing markets as well as in new markets where a portfolio of properties might be available to enable us to establish a platform for further growth.  In recent years, the market for acquisitions has been particularly competitive with a greater number of potential buyers pursuing fewer properties.  The low interest rate environment and reduced costs of funds have further served to dramatically increase prices paid for shopping center properties.  As a result, during 2004, our effort to expand the portfolio through acquisition has been adversely affected.  We expect that as long as the interest rate environment continues to be favorable to buyers, this competitive acquisition environment will continue.

 

As a means of increasing our access to potential acquisitions and alternative sources of capital to fund future acquisitions, we are pursuing joint venture arrangements with third party developers and institutional investors.  We completed our first joint venture arrangement with a third party developer during the second quarter of 2004.  However, with respect to joint venture arrangements with third party developers, in most cases, we do not anticipate that it will recognize the full economic benefit of such arrangements for 2-3 years.

 

In the near future, to take advantage of favorable market conditions, we intend to dispose of properties that are not a strategic fit within our overall portfolio.  The disposition of shopping center properties may lead to short-term decreases in net operating income.  However, we intend to offset any such decreases by re-investing the proceeds of such sales to grow our existing portfolio, whether through acquisition or joint venture.  We may also use these sale proceeds to reduce our outstanding indebtedness, improving the quality of our balance sheet.

 

During 2004, as reflected below, our general and administrative expenses have been higher than anticipated as a result of various business initiatives aimed at future growth, the increased costs associated with being a public company and unanticipated severance costs.  In particular, the costs associated with our review of our internal controls to ensure compliance with Section 404 of the Sarbanes-Oxley Act have been significantly higher than expected.  We expect these increased non-severance general and administrative costs to continue during the balance of 2004.

 

We currently expect to incur additional debt in connection with future acquisitions of real estate.  As of September 30, 2004, we had $1.2 billion of indebtedness, of which, approximately $612.9 million was unsecured indebtedness.  Although we expect to assume additional secured debt in connection with the acquisition of real estate, in the future, we intend to finance our operations and growth primarily through borrowings under our line of credit facility, unsecured private or public debt offerings or by additional equity offerings. We may also pursue joint venture arrangements aimed at providing alternative sources of capital.

 

Critical Accounting Policies

 

In response to guidance of the SEC, we have identified the following critical accounting policies that affect the more significant judgments and estimates used in the preparation of Bradley OP’s consolidated financial statements. The preparation of these consolidated financial statements in conformity with GAAP requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities.

 

On an ongoing basis, we evaluate our estimates, including those related to revenue recognition and the allowance for doubtful

 

11

 

accounts receivable, real estate investments and asset impairment, and derivatives used to hedge interest-rate and credit rate risks. We state these accounting policies in the notes to our consolidated financial statements and at relevant sections in this discussion and analysis. Our estimates are based on information that is currently available to us and on various other assumptions that we believe are reasonable under the circumstances. Actual results could differ from those estimates and those estimates could be different under varying assumptions or conditions.

 

Revenue Recognition

 

Rental income with scheduled rent increases is recognized using the straight-line method over the term of the leases. The aggregate excess of rental revenue recognized on a straight-line basis over cash received under applicable lease provisions is included in accounts receivable. Leases for both retail and office space generally contain provisions under which the tenants reimburse us for a portion of property operating expenses and real estate taxes incurred by us. In addition, certain of our operating leases for retail space contain contingent rent provisions under which tenants are required to pay a percentage of their sales in excess of a specified amount as additional rent. We defer recognition of contingent rental income until the Operating Partnership is certain those specified targets are met.

 

We must make estimates of the uncollectibility of our accounts receivable related to minimum rent, deferred rent, expense reimbursements and other revenue or income. We specifically analyze accounts receivable and historical bad debts, tenant concentrations, tenant credit worthiness, current economic trends and changes in our tenant payment terms when evaluating the adequacy of the allowance for doubtful accounts receivable. These estimates have a direct impact on our net revenue and income, because a higher bad debt allowance would result in lower net income.

 

Real Estate Investments

 

Acquisitions of real estate investments are recorded at cost. Expenditures that substantially extend the useful life of a real estate investment are capitalized. Expenditures for maintenance, repairs and betterments that do not materially extend the useful life of a real estate investment are charged to operations as incurred.

 

The provision for depreciation and amortization has been calculated using the straight-line method over the following estimated useful lives:

 

Land improvements	15 years
Buildings and improvements	20-39 years
Tenant improvements	Shorter of useful life or term of related lease

 

We are required to make subjective assessments as to the useful lives of our properties for purposes of determining the amount of depreciation to reflect on an annual basis with respect to our properties. These assessments have a direct impact on our net income because if we were to shorten the expected useful life of our properties or improvements, we would depreciate them over fewer years, resulting in more depreciation expense and lower net income on an annual basis during these periods.

 

We apply Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, to recognize and measure impairment of long-lived assets. We review each real estate investment for impairment whenever events or circumstances indicate that the carrying value of a real estate investment may not be recoverable. The review of recoverability is based on an estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the real estate investment’s use and eventual disposition. These cash flows consider factors such as expected future operating income, trends and prospects, as well as the effects of leasing demand, competition and other factors. If impairment exists due to the inability to recover the carrying value of a real estate investment, an impairment loss is recorded to the extent that the carrying value exceeds estimated fair market value. No such impairment losses have been recognized to date.

 

Real estate investments held for sale are carried at the lower of carrying amount or fair value, less cost to sell. In addition, the operations of the real estate investments are reflected as discontinued operations on a restated basis. Depreciation and amortization are suspended during the period held for sale.

 

We are required to make subjective assessments as to whether there are impairments in the value of our real estate properties. These assessments have a direct impact on our net income, because taking an impairment loss results in an immediate negative adjustment to net income.

 

We apply Statement of Financial Accounting Standards No. 141, Business Combinations, to property acquisitions. Accordingly, the fair value of the real estate acquired is allocated to the acquired tangible assets, and identified intangible assets and liabilities. Identified intangibles consist of the value of above-market and below-market leases, other value of in-place leases and

 

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value of tenant relationships, based in each case on their fair values.

 

The fair value of the tangible assets of an acquired property is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated based on management’s determination of the relative fair values of these assets. Management determines the as-if-vacant fair value of a property using methods similar to those used by independent appraisers. Factors considered by management in performing these analyses include an estimate of carrying costs during the expected lease-up periods considering current market conditions and costs to execute similar leases. In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses and estimates of lost rental revenue during the expected lease-up periods based on current market demand. Management also estimates costs to execute similar leases including leasing commissions, legal and other related costs.

 

In allocating the fair value of the identified intangible assets and liabilities of an acquired property, above-market and below-market in-place lease values are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease. The capitalized above-market lease values are amortized as a reduction of rental income over the remaining non-cancelable terms of the respective leases. The capitalized below-market lease values are amortized as an increase to rental income over the initial term and any fixed rate renewal periods in the respective leases.

 

The aggregate value of other acquired intangible assets, consisting of in-place leases and tenant relationships, is measured by the excess of (i) the purchase price paid for a property after adjusting existing in-place leases to market rental rates over (ii) the estimated fair value of the property as if vacant, determined as set forth above. This aggregate value is allocated between in-place lease values and tenant relationships, if any, based on management’s evaluation of the specific characteristics of each tenant’s lease. To date, no value attributed to tenant relationships has been identified. Should future acquisitions of properties result in allocating material amounts to the value of tenant relationships, an amount would be separately allocated and amortized over the estimated life of the relationship. The value of in-place leases exclusive of the value of above-market and below-market in-place leases is amortized to expense over the remaining non-cancelable periods of the respective leases. If leases were to be terminated prior to its stated expiration, all or a portion of, unamortized amounts relating to that lease would be written off.

 

Investment in Joint Venture

 

Except for ownership interests in a variable interest entity, we account for our investments in joint ventures under the equity method of accounting as we exercise significant influence, but do not control these entities. These investments are recorded initially at cost, as Investments in Joint Ventures, and subsequently adjusted for equity in earnings and cash contributions and distributions. Under the equity method of accounting, our net equity is reflected on the consolidated balance sheets, and our share of net income or loss, if material, from the joint ventures is included on the consolidated statements of operations. The joint venture agreements may designate different percentage allocations among investors for profits and losses, however, our recognition of joint venture income or loss generally follows the joint venture’s distribution priorities, which may change upon the achievement of certain investment return thresholds.

 

Hedging Activities

 

From time to time, we use derivative financial instruments to limit our exposure to changes in interest rates. Bradley OP was not a party to any hedging agreement with respect to our floating rate debt as of September 30, 2004. We have in the past used derivative financial instruments to manage, or hedge, interest rate risks related to our borrowings, from lines of credit to medium and long-term financings. We require that hedging derivative instruments are effective in reducing the interest rate risk exposure that they are designed to hedge. We do not use derivatives for trading or speculative purposes and only enter into contracts with major financial institutions based on their credit rating and other factors.

 

If interest rate assumptions and other factors used to estimate a derivative’s fair value or methodologies used to determine hedge effectiveness were different, amounts reported in earnings and other comprehensive income and losses expected to be reclassified into earnings in the future could be affected. Furthermore, future changes in market interest rates and other relevant factors could increase the fair value of a liability for a derivative, increase future interest expense, and result in lower net income.

 

Results of Operations

 

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The results of operations described below are those of Bradley OP and its subsidiaries on a consolidated basis. The results below do not reflect the results of Heritage and its other subsidiaries, including Heritage OP.  The operations of Bradley OP and its subsidiaries comprise approximately 56% of Heritage’s total net operating income for the nine-month period ended September 30, 2004.  For a discussion of the consolidated results of operations of Heritage and its subsidiaries, including Bradley OP, for the three and nine-month periods ended September 30, 2004 and 2003, see Heritage’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 as filed with the SEC.

 

The comparison of operating results for the three and nine-month periods ended September 30, 2004 and 2003 show changes in revenue and expenses resulting from net operating income for properties that Bradley OP owned for each period compared (we refer to this comparison as our “Same Property Portfolio” for the applicable period) and the changes for income before net gains attributable to our Total Portfolio. Unless otherwise indicated, increases in revenue and expenses attributable to the Total Portfolio are due to the acquisition of properties during the periods being compared. In addition, amounts reported as discontinued operations in the accompanying consolidated financial statements related to properties that have been sold prior to September 30, 2004 are excluded from the Same Property Portfolio and Total Portfolio information.  Amounts reported as discontinued operations in the accompanying consolidated financial statements related to the classification of a property as held for sale are included in the Same Property Portfolio and are excluded from the Total Portfolio information.

 

Comparison of the nine-month period ended September 30, 2004 to the nine-month period ended September 30, 2003.

 

The table below shows selected operating information for Total Portfolio and the 104 properties acquired prior to January 1, 2003 that remained in the Total Portfolio through September 30, 2004, which constitute the Same Property Portfolio for the nine-month periods ended September 30, 2004 and 2003, (in thousands):

 

		Same Property Portfolio													Total Portfolio
		2004				2003			Increase/ (Decrease)				% Change		2004			2003			Increase/ (Decrease)			% Change
Revenue:
Rentals		$	100,663			$	100,262		$	401			0.4	%	$	102,520		$	102,177		$	343		0.3	%
Percentage rent		1,664				1,855			(191			)	(10.3	)%	1,819			1,951			(132		)	(6.8	)%
Recoveries		33,438				32,865			573				1.7	%	34,501			34,151			350			1.0	%
Other property		972				1,059			(87			)	(8.2	)%	972			1,059			(87		)	(8.2	)%
Total revenue		136,737				136,041			696				0.5	%	139,812			139,338			474			0.3	%
Expenses:
Property operating expenses		19,602				19,974			(372			)	(1.9	)%	19,917			20,279			(362		)	(1.8	)%
Real estate taxes		22,385				21,506			879				4.1	%	23,215			22,154			1,061			4.8	%
Net operating income		$		94,750		$	94,561		$		189		0.2	%	96,680			96,905			(225		)	(0.2	)%
Add:
Interest and other income															206			27			179			663.0	%
Gain on sale of real estate investment															25			—			25			100.0	%
Deduct:
Depreciation and amortization															37,469			35,634			1,835			5.1	%
Interest															28,472			24,760			3,712			15.0	%
General and administrative															9,935			9,220			715			7.8	%
Income before discontinued operations															$	21,035		$	27,318		$	(6,283	)	(29.5)	%

 

The increase in rental revenue, including termination fees, for our Same Property Portfolio is primarily the result of a decrease in the provision for allowance for doubtful accounts of $0.7 million offset by a decrease in minimum rent of $0.3 million.  A lower provision was required for the nine-month period ended September 30, 2004 as compared with the nine-

 

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month period ended September 30, 2003 as a result of a decrease in large tenant bankruptcies and recoveries of amounts previously written off.  Minimum rent decreased slightly as a result of increased vacancies offset by new leases and renewals of existing tenants at higher rental rates.

 

Percentage rent revenue decreased for our Same Property Portfolio primarily due to lower sales volume for leases with significant percentage rent provisions and the uncertainty of realization that certain tenant sales thresholds have been met.

 

Recoveries revenue increased for our Same Property Portfolio primarily due to an overall increase in real estate tax recovery income of $0.5 million, a decrease in the provision for doubtful accounts of $0.2 million offset by a decrease in property operating expense recovery income of $0.3 million.  Real estate recovery income increased primarily as a result of an increase in real estate tax expense as well as an increase in the real estate tax expense recovery rates due to true-ups related to the annual reconciliation process.  Property operating expense recovery income decreased primarily as a result of a decrease in property operating expenses and lower recovery rates. The lower recovery rates were due to lower occupancies and lower anchor tenant recoveries.

 

Property operating expenses decreased primarily as a result of a $0.5 million lease buy-out expense recorded in the prior year, a $0.2 million decrease in insurance expense, and a $0.1 million decrease in cleaning expense.  These decreases were partially offset by a $0.2 million increase in repairs and maintenance expense and a $0.1 million increase in snow removal expense.

 

Real estate tax expense increased primarily as a result of increase valuations assessed for certain properties located in the state of Illinois.

 

The increase in interest and other income in the Total Portfolio is primarily due to an increase in interest income on a bridge loan provided to our joint venture as well as other joint venture income.

 

Interest expense increased primarily as a result of an increase in indebtedness resulting from property acquisitions in 2003 and in 2004 and the issuance of a related party note payable to replace variable rate indebtedness.

 

General and administrative expenses increased by $0.7 million for the nine-month period ended September 30, 2004 as compared with the nine-month period ended September 30, 2003.  Heritage allocates 100% of its general and administrative expenses to its subsidiaries, including costs associated with Bradley OP.  For costs specifically identifiable to a subsidiary, Heritage performs a direct allocation.  Remaining costs are allocated based on the square footage of properties owned by each subsidiary.  For the nine-month periods ended September 30, 2004 and 2003, Heritage allocated 64% and 66%, respectively of these remaining costs to Bradley OP.

 

Comparison of the three-month period ended September 30, 2004 to the three-month period ended September 30, 2003.

 

The table below shows selected operating information for Bradley OP’s Total Portfolio and the 104 properties acquired prior to July 1, 2003 that remained in the Total Portfolio through September 30, 2004, which constitute the Same Property Portfolio for the three-month periods ended September 30, 2004 and 2003, (in thousands):

 

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		Same Property Portfolio													Total Portfolio
		2004			2003				Increase/ (Decrease)				% Change		2004				2003				Increase/ (Decrease)				% Change
Revenue:
Rentals		$	33,737		$		33,807		$		(70	)	(0.2	)%	$	34,516			$	34,281			$	235			0.7	%
Percentage rent		439			410				29				7.1	%	489				409				80				19.6	%
Recoveries		11,033			11,071				(38			)	(0.3	)%	11,431				11,494				(63			)	(0.5	)%
Other property		301			408				(107			)	(26.2	)%	301				408				(107			)	(26.2	)%
Total revenue		45,510			45,696				(186			)	(0.4	)%	46,737				46,592				145				0.3	%
Expenses:
Property operating expenses		5,993			6,684				(691			)	(10.3	)%	6,075				6,771				(696			)	(10.3	)%
Real estate taxes		7,344			7,856				(512			)	(6.5	)%	7,675				8,104				(429			)	(5.3	)%
Net operating income		$	32,173		$	31,156			$	1,017			3.3	%	32,987				31,717				1,270				4.0	%
Add:
Interest and other income															195				8				187				2,337.5	%
Gain on sale of real estate investment															25				—				25				100.0	%
Deduct:
Depreciation and amortization															12,573				12,028				545				4.5	%
Interest															10,557				8,218				2,339				28.5	%
General and administrative															3,381				2,754				627				22.8	%
Income before discontinued operations															$		6,696		$		8,725		$		(2,029	)	(23.3	)%

 

Rental revenue remained relatively flat for our Same Property Portfolio primarily as a result of a decrease in the provision for allowance for doubtful accounts of $0.2 million offset by a decrease in minimum rent of $0.3 million.  Minimum rent decreased as a result of an increase in vacancies offset by new leases and renewals of existing tenants at higher rental rates.  A lower provision was required for the three-month period ended September 30, 2004 as compared with the three-month period ended September 30, 2003 as a result of a decrease in large tenant bankruptcies and recoveries of amounts previously written off.

 

Percentage rent revenue increased for our Same Property Portfolio primarily due to the timing of the certainty of realization that certain tenant sales thresholds have been met offset by lower sales volume.

 

Recoveries revenue remained relatively flat for our Same Property Portfolio primarily due to an increase in property operating expense recovery income of $0.2 million offset by a decrease in real estate tax recovery income of $0.3 million.  Property operating expense recovery income increased primarily as a result of an increase in recovery rates due to true-ups related to the annual reconciliation process offset by a decrease in property operating expenses.  Real estate tax recovery income decreased primarily as a result of a decrease in real estate tax expense offset by an increase in recovery rates due to true-ups related to the annual reconciliation process.

 

Property operating expenses decreased primarily as a result of a $0.5 million lease buy-out expense recorded in the prior year and a $0.1 million decrease in insurance expense, offset by a $0.1 million increase in utility expense.

 

Real estate tax expense decreased primarily as a result of a significant upward adjustment for a two-year period assessed in 2003 for one property, offset by increased valuations assessed for certain properties located in the state of Illinois.

 

The increase in interest and other income in the Total Portfolio is primarily due to an increase in interest income on a bridge loan provided to our joint venture as well as other joint venture income.

 

Interest expense increased primarily as a result of an increase in indebtedness resulting from property acquisitions in 2003 and in 2004 and the issuance of a related party note payable to replace variable rate indebtedness.

 

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General and administrative expenses increased by $0.6 million for the three-month period ended September 30, 2004 as compared with the three-month period ended September 30, 2003.  Heritage allocates 100% of its general and administrative expenses to its subsidiaries, including costs associated with Bradley OP.  For costs specifically identifiable to a subsidiary, Heritage performs a direct allocation.  Remaining costs are allocated based on the square footage of properties owned by each subsidiary.  For the three-month periods ended September 30, 2004 and 2003, Heritage allocated 63% and 66%, respectively of these remaining costs to Bradley OP.

 

Liquidity and Capital Resources

 

At September 30, 2004, Heritage had $5.9 million and Bradley OP had $1.8 million in available cash and cash equivalents. As a REIT, Heritage is required to distribute at least 90% of its taxable income to its stockholders on an annual basis. Bradley OP also generally distributes all of its taxable income. Therefore, as a general matter, it is unlikely that either Heritage or Bradley OP will have any substantial cash balances that could be used to meet its respective liquidity needs. Instead, these needs must be met from cash generated from operations and external sources of capital.

 

At September 30, 2004, Heritage had $1.2 billion of indebtedness. This indebtedness had a weighted average interest rate of 6.26% with an average maturity of 4.8 years.  As of September 30, 2004, Heritage’s market capitalization was $2.6 billion, resulting in a debt-to-total market capitalization ratio of approximately 47.4%.

 

At September 30, 2004, Bradley OP had $755 million of indebtedness, including the full balance of amounts outstanding under the line of credit facility. This indebtedness had a weighted average interest rate of 5.29% with an average maturity of 5.61 years.

 

Short-Term Liquidity Requirements

 

The short-term liquidity requirements of Heritage and Bradley OP are substantially identical and are referred to together in the discussion below. These short-term liquidity requirements consist primarily of funds necessary to pay for operating expenses and other expenditures directly associated with our properties, including:

 

•                                           Recurring maintenance capital expenditures necessary to properly maintain our properties;

 

•                                           Interest expense and scheduled principal payments on outstanding indebtedness;

 

•                                          Capital expenditures incurred to facilitate the leasing of space at our properties, including tenant improvements and leasing commissions; and

 

•                                           Future distributions paid to our stockholders and partners.

 

We incur maintenance capital expenditures at our properties, which include such expenses as parking lot improvements, roof repairs and replacements and other non-revenue enhancing capital expenditures. Maintenance capital expenditures were approximately $5.6 million, or $0.20 per square foot, for the nine months ended September 30, 2004, of which, approximately $4.4 million, or $0.16 per square foot, related to properties within the Bradley OP portfolio. We expect total maintenance capital expenditures to be approximately $2.3 million, or $0.08 per square foot, for the remainder of 2004, of which approximately $0.9 million, or $0.05 per square foot, will relate to properties within the Bradley OP portfolio. We also expect to incur revenue enhancing capital expenditures such as tenant improvements and leasing commissions in connection with the leasing and re-leasing of retail space. During the first nine months of 2004, in order to re-let vacant space within our portfolio, we incurred higher non-recurring capital expenditures than in prior periods as we re-positioned several of our centers for future growth.  In addition, we anticipate incurring additional non-recurring capital expenditures during the remainder of 2004 and into 2005 as we seek further opportunities to reposition vacant space.

 

We believe that we qualify and we intend to continue to qualify as a REIT under the Internal Revenue Code. As a REIT, we are allowed to reduce taxable income by all or a portion of our distributions paid to shareholders. We believe that our existing working capital and cash provided by operations will be sufficient to allow us to pay distributions necessary to enable us to continue to qualify as a REIT. However, under some circumstances, we may be required to pay distributions in excess of cash available for those distributions in order to meet these distribution requirements, and we may need to borrow funds, including under our line of credit facility, to pay distributions in the future.

 

Historically, we have satisfied our short-term liquidity requirements through our existing working capital and cash provided by our operations as well as with borrowings under our line of credit facility.  As of September 30, 2004 we had an outstanding balance on our line of credit facility of $213 million.  However, subsequent to September 30, 2004, all of the net proceeds of Heritage’s recent $150 million unsecured debt offering were used to reduce the outstanding balance under this line of credit facility.  We believe that our existing working capital and cash provided by operations should be sufficient to meet our short-term liquidity requirements.  Cash flows provided by operating activities decreased to $51.6 million for the nine months ended September

 

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30, 2004 from $60.2 million for the nine months ended September 30, 2003. The decrease in cash flows from operations is primarily attributable to the combined effect of an increase in accounts receivable and other assets and a decrease in accounts payable.

 

As of September 30, 2004, we had 6 tenants operating under bankruptcy protection. The leases directly impacted by these bankruptcy filings totaled approximately 0.4% of our annualized base rent for all leases in which tenants were in occupancy at September 30, 2004, of which 0.2% relates to properties within Bradley OP’s portfolio.

 

On April 1, 2003, Fleming filed for bankruptcy protection. As part of this bankruptcy, Fleming’s motion to reject leases at three of our 13 Fleming store locations was allowed by the Bankruptcy Court on that date. The three rejected leases aggregated approximately 178,000 square feet and represented approximately 0.6% of total annualized base rent for all leases in which tenants were in occupancy on March 31, 2003.

 

In June 2003, leases at four of our store locations aggregating 234,000 square feet were assumed by Fleming and assigned to Roundy’s, Inc., as part of Roundy’s acquisition of Rainbow Foods.  In December 2003, a fifth lease was assumed by Knowlan’s Food.  A motion filed with the Bankruptcy Court to permit three leases to be assumed by Fleming and assigned to a third party independent grocer was allowed in September 2004.  The two remaining leases, aggregating 95,000 square feet were rejected on March 25, 2004.  We are actively pursuing permanent tenants to lease the five locations that have been rejected.

 

Long-Term Liquidity Requirements

 

The long-term liquidity requirements of Heritage and Bradley OP are substantially identical and are referred to together in the discussion below. These long-term liquidity requirements consist primarily of funds necessary to pay for scheduled debt maturities, renovations, redevelopment, expansions and other non-recurring capital expenditures that are required periodically to our properties, and the costs associated with acquisitions of properties and third party developer joint venture opportunities that we pursue.

 

Historically, we have satisfied our long-term liquidity requirements through various sources of capital, including our existing working capital, cash provided by operations, our credit facility, bridge financing, through the issuance of additional debt and equity securities and through long-term property mortgage indebtedness.  We believe that these sources of capital will continue to be available to us in the future to fund our long-term liquidity requirements. We may also enter into joint ventures with institutional investors as an alternative source of capital.  Although we expect to assume additional secured debt in connection with the acquisition of real estate, in the future we intend to satisfy our long-term liquidity requirements primarily through the other sources outlined above.  Heritage engages in financing and other transactions utilizing these sources of capital exclusively for its subsidiaries’, including Bradley OP’s, use.

 

However, there are certain factors that may have a material adverse effect on our access to these capital sources.  Our ability to incur additional debt is dependent upon a number of factors, including our degree of leverage, the value of our unencumbered assets, Heritage’s credit rating and borrowing restrictions imposed by existing lenders.  Currently, Heritage has a credit rating from three major rating agencies—Standard & Poor’s, which has given us a rating of BBB-, Moody’s Investor Service, which has given us a rating of Baa3, and Fitch Ratings, which has given us a rating of BBB-, all three have stated the outlook as stable.  A downgrade in outlook or rating by a rating agency can occur at any time if the agency perceives adverse change in Heritage’s financial condition, results of operations or ability to service our debt.

 

Based on our internal valuation of our properties, the estimated value of our properties exceeds the outstanding amount of mortgage debt encumbering those properties as of September 30, 2004. Therefore, at this time, we believe that additional funds could be obtained, either in the form of additional unsecured borrowings or mortgage debt.  In addition, we believe that we could obtain additional financing without violating the financial covenants contained in our unsecured public notes.

 

Heritage’s ability to raise funds through the issuance of equity securities is dependent upon, among other things, general market conditions for REITs and market perceptions about us.  We will continue to analyze which source of capital is most advantageous to us at any particular point in time, but the equity markets may not be consistently available on terms that are attractive or at all.

 

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Commitments

 

The following table summarizes our repayment obligations under our indebtedness outstanding as of September 30, 2004 (in thousands):

 

		2004 (1)		2005		2006		2007		2008		Thereafter		Total (2) (3)
Mortgage loans:
The Commons of Chancellor Park		$12,075		—		—		—		—		—		$	12,075
Franklin Square		113		13,583		—		—		—		—		13,696
*Williamson Square		83		10,833		—		—		—		—		10,916
Riverchase Village Shopping Center		80		9,764		—		—		—		—		9,844
Meridian Village Plaza		70		292		4,841		—		—		—		5,203
*Spring Mall		29		120		8,021		—		—		—		8,170
*Southport Centre		38		160		171		9,593		—		—		9,962
*Longmeadow Commons		75		317		344		8,717		—		—		9,453
Innes Street Market		83		352		380		12,098		—		—		12,913
*Southgate Shopping Center		26		110		119		2,166		—		—		2,421
*Salem Consumer Square		104		453		501		555		8,806		—		10,419
*St. Francis Plaza		45		191		207		225		243		—		911
Buckingham Place		15		63		69		74		79		5,054		5,354
County Line Plaza		49		205		222		240		256		16,002		16,974
Trinity Commons		41		171		185		200		214		13,776		14,587
8 shopping centers, cross collateralized		406		1,705		1,843		1,993		2,154		72,132		80,233
*Montgomery Commons		17		79		86		94		100		7,437		7,813
*Warminster Towne Center		58		260		283		307		329		18,657		19,894
Clocktower Place		29		121		132		144		154		12,009		12,589
545 Boylston St. and William J. McCarthy Bldg.		155		655		711		772		838		31,808		34,939
29 shopping centers, cross collateralized		611		2,520		2,728		2,955		3,147		224,115		236,076
Spradlin Farm		46		189		203		219		232		16,440		17,329
*Berkshire Crossing		129		532		552		573		593		12,279		14,658
*Grand Traverse Crossing		86		366		394		424		457		11,643		13,370
*Salmon Run Plaza		76		319		349		381		417		3,192		4,734
*Elk Park Center		71		297		321		346		374		6,906		8,315
*Grand Traverse Crossing - Wal-Mart		40		165		179		193		208		4,415		5,200
Montgomery Towne Center		90		382		393		307		335		5,626		7,133
*Bedford Grove - Wal-Mart		36		152		164		178		191		3,382		4,103
*Berkshire Crossing - Home Depot/ Wal-Mart		57		239		258		278		300		5,542		6,674
Total mortgage loans		$14,833		44,595		23,656		43,032		19,427		470,415		$	615,958
Unsecured notes (3)		100,000				1,490				100,000		200,000		401,490
Line of credit facility (4)				213,000										213,000
Total indebtedness		$114,833		257,595		25,146		43,032		119,427		670,415		$	1,230,448

 

(*)                                 Designates indebtedness of Bradley OP or one of its subsidiaries. Total indebtedness as of September 30, 2004 for Bradley OP and its subsidiaries was $751,504, which does not reflect the unamortized mortgage loan premiums totaling $3,778 related to the assumption of four mortgage loans with above-market contractual interest rates.

 

(1)                                  Represents the period from October 1, 2004 through December 31, 2004.

 

(2)                                  The aggregate repayment amount for mortgage loans of $615,958 does not reflect the unamortized mortgage loan premiums of $9,978 related to the assumption of eleven mortgage loans with above-market contractual interest rates.

 

(3)                                  The aggregate repayment amount for unsecured loans of $401,490 does not reflect the unamortized original issue discount of $1,636 related to the April 2004 bond issuance.  Bradley OP has issued unsecured notes payable in an aggregate amount of $201,490, which mature in 2004, 2006 and 2008. Heritage has issued unsecured notes payable in an aggregate amount of $200,000, which mature in 2010. Bradley OP and Heritage

 

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