SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended: September 30, 2003
Commission File No. 0-14510
CEDAR SHOPPING CENTERS, INC.
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(Exact name of registrant as specified in its charter)
Maryland 42-1241468
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
44 South Bayles Avenue, Port Washington, New York 11050
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(Address of principal executive offices) (Zip Code)
(516) 767-6492
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(Registrant's telephone number, including area code)
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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
--- ---
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes No X
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at November 12, 2003
--------------- --------------------------------
Common Shares 14,431,166
Cedar Shopping Centers, Inc.
INDEX
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 2003
(unaudited) and December 31, 2002
Consolidated Statements of Shareholders' Equity -
September 30, 2003 (unaudited) and December 31, 2002
Consolidated Statements of Operations - Three and Nine
Month Periods Ended September 30, 2003 and 2002
(unaudited)
Consolidated Statements of Cash Flows - Nine Month
Period Ended September 30, 2003 and 2002 (unaudited)
Notes to Consolidated Financial Statements - September
30, 2003 (unaudited)
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure of Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
2
Part I. Financial Information
Item1. Financial Statements
Cedar Shopping Centers, Inc.
Consolidated Balance Sheets
September 30,
2003 December 31,
(unaudited) 2002
------------- -------------
Assets
Real estate
Land $ 36,896,000 $ 24,741,000
Buildings and improvements 148,527,000 98,893,000
------------- -------------
185,423,000 123,634,000
Less accumulated depreciation (4,829,000) (2,396,000)
------------- -------------
Real estate, net 180,594,000 121,238,000
Cash and cash equivalents 2,740,000 3,827,000
Cash at joint ventures and restricted cash 2,784,000 2,883,000
Property deposits and advance closing costs 3,593,000 344,000
Real estate tax deposits 891,000 627,000
Rents and other receivables, net 211,000 304,000
Prepaid expenses, net 1,499,000 496,000
Straight line rent receivable 947,000 432,000
Deferred charges, net 5,448,000 2,987,000
------------- -------------
Total Assets $ 198,707,000 $ 133,138,000
============= =============
Liabilities and Shareholders' Equity
Liabilities
Mortgage loans payable $ 139,411,000 $ 93,537,000
Loans payable 13,555,000 7,464,000
Accounts payable and accrued expenses 2,844,000 1,767,000
Security deposits 483,000 335,000
Deferred liabilities 9,399,000 5,195,000
Advance tenant payments 982,000 468,000
------------- -------------
Total Liabilities 166,674,000 108,766,000
------------- -------------
Minority Interests 19,633,000 10,238,000
Limited partner's interest in consolidated
Operating Partnership 6,650,000 7,889,000
Series A preferred 9% convertible, redeemable
Operating Partnership units 3,000,000 3,000,000
------------- -------------
9,650,000 10,889,000
Shareholders' Equity
Common stock ($0.06 par value,
50,000,000 shares authorized,
238,000 and 232,000 shares issued
and outstanding, respectively) 14,000 14,000
Accumulated other comprehensive loss (227,000) (65,000)
Additional paid-in-capital 2,963,000 3,296,000
------------- -------------
Total Shareholders' Equity 2,750,000 3,245,000
------------- -------------
Total Liabilities and Shareholders' Equity $ 198,707,000 $ 133,138,000
============= =============
Total Shareholders' Equity in the Company,
limited partner's (equity) interest in
Operating Partnership, and minority interests $ 32,033,000 $ 24,372,000
============= =============
See the accompanying notes to the consolidated financial statements.
3
Cedar Shopping Centers, Inc.
Consolidated Statements of Shreholders' Equity
(unaudited)
Common Stock Accumulated
---------------------- Additional Other Total
$0.06 par Paid-in Comprehensive Shareholders'
Shares value Capital Loss Equity
-------- --------- ---------- ------------- -------------
Balance at December 31, 2002 232,000 $ 14,000 $ 3,296,000 $ (65,000) $ 3,245,000
Unrealized loss on change of
fair value of interest rate hedge - - - (162,000) (162,000)
Issuance of warrants - - 39,000 - 39,000
Issuance of stock 6,000 - 95,000 - 95,000
Conversion of OP units to stock 46,000 3,000 500,000 - 503,000
Conversion of stock to OP units (46,000) (3,000) (500,000) - (503,000)
Net loss - - (467,000) - (467,000)
------- -------- ----------- ---------- -----------
Balance at September 30, 2003 238,000 $ 14,000 $ 2,963,000 $ (227,000) $ 2,750,000
======= ======== =========== ========== ===========
See the accompanying notes to the consolidated financial statements.
4
Cedar Shopping Centers, Inc.
Consolidated Statements of Operations
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
------ ------ ------ ------
REVENUE
Rents $5,199,000 $2,820,000 $14,122,000 $6,675,000
Expense Recoveries 1,452,000 786,000 3,912,000 2,087,000
Interest and Other 20,000 8,000 60,000 19,000
---------- ---------- ----------- ----------
Total Revenue 6,671,000 3,614,000 18,094,000 8,781,000
---------- ---------- ----------- ----------
EXPENSES
Operating, Maintenance and Management 1,594,000 790,000 4,784,000 2,021,000
Real Estate Taxes 662,000 446,000 1,895,000 1,039,000
General and Administrative 355,000 192,000 1,542,000 720,000
Depreciation and Amortization 1,150,000 607,000 2,917,000 1,720,000
Interest 3,243,000 1,593,000 7,533,000 4,049,000
Debt Repayment Fee - - - 269,000
---------- ---------- ----------- ----------
Total Expenses 7,004,000 3,628,000 18,671,000 9,818,000
---------- ---------- ----------- ----------
Loss before the following: (333,000) (14,000) (577,000) (1,037,000)
Minority interests (367,000) (142,000) (790,000) (21,000)
Limited partner's interest 490,000 96,000 939,000 787,000
Distribution to preferred shareholders (net of
limited partner's share of $43,000 and $91,000) (18,000) - (39,000) -
Loss on sale of Southpoint Parkway - - - (49,000)
---------- ---------- ----------- ----------
Net loss ($228,000) ($60,000) ($467,000) ($320,000)
========== ========== =========== ==========
Net loss per share ($0.96) ($0.26) ($1.78) ($1.39)
========== ========== =========== ==========
Weighted average number of shares outstanding 238,000 231,000 263,000 231,000
========== ========== =========== ==========
See the accompanying notes to the consolidated financial statements.
5
Cedar Shopping Centers, Inc.
Consolidated Statements of Cash Flows
(unaudited)
Nine Months Ended
September 30, September 30,
2003 2002
----------- -----------
Cash Flow From Operating Activities
Net loss $ (467,000) $ (320,000)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Minority interests 790,000 21,000
Limited partner's interest in Operating Partnership (939,000) (787,000)
Loss on sale of Southpoint Parkway - 49,000
Distributions to partners (1,145,000) (737,000)
Depreciation and amortization 2,917,000 1,720,000
Straight line rent (515,000) (248,000)
Amortization of intangible lease liabilities (590,000) -
Changes in operating assets and liabilities:
Decrease (increase) in rent and other receivables 93,000 (344,000)
Increase in prepaid expenses (1,003,000) (867,000)
(Increase) decrease in taxes held in escrow (264,000) 60,000
Increase in accounts payable and accrued expenses 1,077,000 812,000
Increase in security deposits 148,000 43,000
Increase in advance tenant payments 514,000 193,000
----------- -----------
Net cash provided by (used in) operating activities 616,000 (405,000)
----------- -----------
Cash Flow From Investing Activities
Expenditures for real estate and improvements (57,468,000) (9,663,000)
Increase in property deposits and advance closing costs (3,249,000) (684,000)
Decrease in cash at joint ventures and restricted cash 99,000 98,000
Sale of Southpoint Parkway - 4,353,000
----------- -----------
Net cash used in investing activities (60,618,000) (5,896,000)
----------- -----------
Cash Flow From Financing Activities
Proceeds from mortgage financing 46,927,000 20,000,000
Repayment of mortgage financing - (17,900,000)
Contributions from minority interest partners 9,661,000 8,030,000
Proceeds from line of credit and other borrowings 11,041,000 500,000
Repayment of line of credit and other loans payable (4,950,000) (5,093,000)
Principal portion of scheduled mortgage payments (1,053,000) (253,000)
Deferred financing, legal and other costs, net (2,711,000) (221,000)
----------- -----------
Net cash provided by financing activities 58,915,000 5,063,000
----------- -----------
Net decrease in cash and cash equivalents (1,087,000) (1,238,000)
Cash and cash equivalents at beginning of the period 3,827,000 2,872,000
----------- -----------
Cash and cash equivalents at end of period $ 2,740,000 $ 1,634,000
=========== ===========
Supplemental Disclosure of Cash Activities
Interest paid $ 6,119,000 $ 3,529,000
=========== ===========
See the accompanying notes to the consolidated financial statements.
6
Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
September 30, 2003
(unaudited)
Note 1. Organization
Cedar Shopping Centers, Inc. (the "Company"), formerly Cedar Income
Fund, Ltd., was organized in 1984 and qualified to operate as a real estate
investment trust ("REIT"). The Company focuses on the ownership, operation and
redevelopment of community and neighborhood shopping centers located primarily
in Pennsylvania. As of September 30, 2003, the Company owned 15 properties,
aggregating approximately 2.5 million square feet of gross leasable area
("GLA").
Name Change
During the second quarter of 2003, the Company changed its name from
Cedar Income Fund, Ltd. to Cedar Shopping Centers, Inc. At the same time, the
name of the operating partnership, of which the Company is the sole general
partner, was changed from Cedar Income Fund Partnership, L.P. to Cedar Shopping
Centers Partnership, L.P. (the "Operating Partnership"). The Board of Directors
(the "Board") and management determined that the new name more accurately
reflects the nature of the current operations and activities of the Company and
of the Operating Partnership.
Stock Split and Reverse Stock Split
On June 25, 2003, the Company announced a 2-for-1 split of the
Company's common shares. The split was effected to maintain the minimum "float"
requirement for purposes of the Company's listing on the NASDAQ small cap
market. The Company paid a stock dividend of one new share for each share of
common stock outstanding, payable July 14, 2003 to shareholders of record on
July 7, 2003. On October 20, 2003 the Company effectuated a 1-for-6 "reverse"
stock split in connection with a public Offering of its common shares. The
reverse stock split was intended to facilitate efficient trading of the
Company's stock which was listed on the New York Stock Exchange (see Note 2
below). The accompanying financial statements have been adjusted to give
retroactive effect to the stock dividend and the reverse stock split.
Stock Based Compensation
In December 2002, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting
for Stock-Based Compensation-Transition and Disclosure" ("SFAS 148"). SFAS 148
amends SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), to
provide alternative methods of transition for an entity that voluntarily adopts
the fair value recognition method of recording stock option expense. SFAS 148
also amends the disclosure provisions of SFAS 123 and Accounting Principles
Board ("APB") Opinion No. 28, "Interim Financial Reporting", to require
disclosure in the summary of significant accounting policies of the effects of
an entity's accounting policy with respect to stock options on reported net
income and earnings per share in annual and interim financial statements.
7
Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
September 30, 2003
(unaudited)
Note 1. Organization (continued)
Stock Based Compensation (continued)
The following table sets forth, on a pro forma basis, the net loss and
net loss per share as if the fair value method of accounting defined in SFAS 123
had been applied:
Pro Forma Basic Net Loss Per Share
Nine Months Ended
September 30, September 30,
2003 2002
------ ------
Net loss as reported $ 467,000 $ 320,000
Adjustment to amortize the value of options granted 12,000 12,000
--------- ---------
Pro forma net loss $ 479,000 $ 332,000
========= =========
Weighted average number of shares outstanding 238,000 232,000
========= =========
Pro forma basic net loss per share $ (2.01) $ (1.43)
========= =========
Note 2. Offering, New York Stock Exchange listing, and related transactions
During October 2003, the Company completed an Offering (the "Offering")
of 13,500,000 shares of its common stock at a price of $11.50 per share pursuant
to a registration statement filed with the Securities and Exchange Commission
and received approximately $145,000,000 after underwriting fees and Offering
costs. The Company's shares were listed on the New York Stock Exchange on
October 24, 2003, and commenced trading on that date. The listing of the
Company's stock on the NASDAQ was simultaneously terminated. In addition to the
transactions described in Note 12, the following transactions are expected to be
completed during the fourth quarter of 2003 as a result of the completion of the
Offering. On November 11, 2003, the underwriter exercised its over-allotment
option to purchase an additional 2,025,000 shares at $11.50 per share less the
underwriters' discount.
Transactions with CBRA, SKR and Brentway, the Company's Advisors
Prior to the equity Offering, the Company was an externally advised
REIT, and in this connection Cedar Bay Realty Advisors, Inc. ("CBRA"), SKR
Management Corp. ("SKR") and Brentway Management LLC ("Brentway") provided
advisory, management and legal services to the Company. Immediately prior to the
Offering, CBRA and SKR merged into the Company and Brentway merged into the
Operating Partnership. Each of the Company's executive officers was also a
principal or officer of the Company's advisors and each became an employee of
the Company upon consummation of the Offering. An independent committee of the
Board, consisting of disinterested directors, retained a financial advisor who
advised them as to the fairness of the consideration to be paid in connection
with the merger of the Company's advisors from a financial perspective. The
merger was submitted to and approved by the Company's
8
Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
September 30, 2003
(unaudited)
Note 2. Offering, New York Stock Exchange listing, and related transactions
(continued)
Transactions with CBRA, SKR and Brentway, the Company's Advisors (continued)
stockholders at the annual meeting of stockholders held on October 9, 2003. With
more than 70% of the Company's outstanding shares voting, approximately 93% of
the shares were voted in favor of the merger. The total consideration for CBRA,
SKR and Brentway in connection with the mergers was 1,040,000 shares of common
stock and units of the Operating Partnership which will be distributed to the
owners, who are also executive officers of the Company; and to other executive
officers and employees of the Company. Each share of common stock and each
Operating Partnership unit issued pursuant to the merger is valued at $11.50 per
share/unit, the Offering price for the shares.
Transactions with Cedar Bay Company
In addition to the acquisition of certain shopping center transactions
more fully described in Note 12, Cedar Bay Company ("CBC"), which as of
September 30, 2003 owned approximately 78% of the Company's common stock and
units on a fully-diluted basis, received $9.0 million of the proceeds from the
Offering in connection with the repurchase of all of the units of the Operating
Partnership owned by CBC, representing a price of $15.87 per unit. The
aforementioned independent committee of the Board retained the same financial
advisor who advised them as to the fairness of the consideration to be paid to
CBC for the repurchase of the units. After the Offering, CBC owned less than 1%
of the then-outstanding common stock.
Affiliates of CBC currently own a 50% interest in The Point Shopping
Center. The Company will use $2.4 million of the proceeds from the Offering to
purchase this 50% interest. The purchase price for this interest was arrived at
through negotiation with CBC.
Affiliates of CBC currently own Golden Triangle Shopping Center. The
Company will use $1.5 million, plus closing costs, of the proceeds from the
Offering to purchase this property and will assume the then-remaining balance,
estimated at $9.9 million, of the existing first mortgage.
In connection with the Company's lease agreement to obtain operating
control of South Philadelphia Shopping Plaza, in August 2003, an affiliate of
CBC loaned the Company $750,000 to make a portion of the deposit in connection
with the proposed transaction. The loan matured in October 2003 and bore
interest at a rate of 15%. A portion of the proceeds of the Offering was used to
repay this loan.
In connection with the acquisition of the Red Lion partnership interest
from an affiliate of CBC, the Company agreed to pay $888,000 in three equal
annual installments of $296,000 plus interest at 7.5%. The owner of the
affiliate agreed to extend the payment of the installment of $296,000 due in May
2003 until October 30, 2003. This loan was paid in full with the proceeds from
the Offering.
9
Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
September 30, 2003
(unaudited)
Note 2. Offering, New York Stock Exchange listing, and related transactions
(continued)
Transactions with Homburg Invest
On December 18, 2002, the Company entered into a subscription
agreement with Homburg Invest (USA) Inc. ("Homburg Invest") pursuant to which
the Company issued in a private placement to Homburg Invest, 3,300 preferred
units at a purchase price of $909.09 per preferred unit, for an aggregate
purchase price of $3.0 million. The Company had a redemption option for these
preferred units at $1,200 per unit. The Company used $3.96 million of the
proceeds from the Offering to redeem the preferred units owned by Homburg Invest
in accordance with the terms relating to such units.
Homburg Invest supplied substantially all the equity (through the
purchase of joint venture interests) in connection with the Company's
acquisition of Pine Grove Shopping Center, Swede Square Shopping Center and
Wal-Mart Shopping Center. Homburg Invest received a 10% origination fee for
providing the equity in each acquisition. Under the partnership agreement for
each property, Homburg Invest was to receive a 12% preferential return on its
investment. The Company had the option to buy the Homburg Invest limited
partnership interest in the Wal-Mart Shopping Center for 120% of Homburg
Invest's original investment plus the 12% preferential return. In the case of
Pine Grove and Swede Square, the Company had the option to purchase the Homburg
Invest limited partnership interests provided that Homburg Invest received a 15%
annualized rate of return from the date each center was acquired. The Company
exercised these options and used the proceeds from the Offering to purchase the
Homburg Invest limited partnership interests.
In connection with the Company's lease agreement to obtain operating
control of South Philadelphia Shopping Plaza, in August 2003, Homburg Invest
loaned the Company $1.1 million to make a portion of the deposit in connection
with the proposed transaction. Proceeds from the Offering were used to repay
this loan.
Line of Credit
The Company obtained a commitment for a three-year $75 million secured
revolving credit facility from Fleet Bank. Under the terms of this commitment,
the Company expects to have available a $40 million bridge loan, with the
remaining $35 million to be available upon syndication of the facility prior to
December 31, 2003 subject to the satisfaction of certain covenants. Borrowings
under the facility will incur interest at a rate of LIBOR plus 2.25% - 2.75%
depending upon the Company's leverage (loan to value). The facility will be
subject to customary financial covenants and limits on leverage. The Company
will have the ability to extend the payments of amounts drawn under the facility
for an additional one year period. Security for such facility is expected to be
first mortgages on properties which will be otherwise unencumbered after the
Offering. There can be no assurances that the lenders will determine that the
proffered collateral will be sufficient to support the entire facility, that the
syndication will be completed, or that the Company will be able to comply with
all of the loan covenants. To the extent available, the Company expects to use
the facility to, among other things, finance
10
Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
September 30, 2003
(unaudited)
Note 2. Offering, New York Stock Exchange listing, and related transactions
(continued)
Line of Credit (continued)
(a) certain expected acquisitions of shopping centers or interim purchase
deposits with respect to new acquisitions, (b) certain expected acquisitions of
optioned properties, (c) capital improvements, (d) costs of redevelopment and
new development projects and properties, and (e) working capital and other
corporate purposes.
Note 3. Basis of Presentation
The Operating Partnership is the entity through which the Company
conducts substantially all of its business and owns (either directly or through
subsidiaries) substantially all of its assets. At September 30, 2003 the Company
owned an approximate 30% economic interest in, and is the sole general partner
of, the Operating Partnership. As of September 30, 2003, the consolidated
financial statements of the Company include the accounts and operations of the
Company and the Operating Partnership. The Operating Partnership has a 50%
general partnership interest in The Point Shopping Center ("The Point"); a 20%
general partnership interest in the Red Lion Shopping Center ("Red Lion"); a 25%
general partnership interest in the Loyal Plaza Shopping Center ("Loyal Plaza");
30% general partnership interests in Fairview Plaza ("Fairview"), Halifax Plaza
("Halifax"), and Newport Plaza ("Newport"); and 15% general partnership
interests in Pine Grove Plaza Shopping Center ("Pine Grove"); Swede Square
Shopping Center ("Swede Square") and the Wal-Mart Shopping Center ("Wal-Mart").
As discussed in Note 2, the Company has purchased, or will purchase, the
following interests held by Homburg Invest and CBC and related entities with
Offering proceeds:
70% limited partnership interest in The Operating Partnership
50% limited partnership interest in The Point Shopping Center
85% limited partnership interest in Pine Grove Plaza Shopping Center
85% limited partnership interest in Swede Square Shopping Center
85% limited partnership interest in Wal-Mart Shopping Center
The Company owned 97% of the Operating Partnership after (i) the
Offering, (ii) the conversion of the Realty Enterprise loan into Operating
Partnership units, and (iii) the merger of the Advisors.
The accompanying interim unaudited financial statements have been
prepared by the Company's management pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosure normally included in the financial statements prepared in accordance
with accounting principles generally accepted in the United States ("GAAP") may
have been condensed or omitted pursuant to such rules and regulations, although
management believes that the disclosures are adequate to make the information
11
Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
September 30, 2003
(unaudited)
Note 3. Basis of Presentation (continued)
presented not misleading. The unaudited financial statements as of September 30,
2003, and for the three and nine month periods ended September 30, 2003 and
2002, include, in the opinion of management, all adjustments, consisting of
normal recurring adjustments, necessary to present fairly the financial
information set forth herein. The results of operations for the interim periods
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2003. These financial statements should be read in
conjunction with the Company's audited financial statements and the notes
thereto included in the Company's Form 10-K for the year ended December 31, 2002
and the prospectus filed with the Securities and Exchange Commission on October
23, 2003.
SFAS 123, as amended by SFAS 148, establishes financial accounting and
reporting standards for stock-based employee compensation plans, including all
arrangements by which employees receive shares of stock or other equity
instruments of the employer or the employer incurs liabilities to employees in
amounts based on the price of the employer's stock. SFAS 123 defines a fair
value based method of accounting for an employee stock option or similar equity
instrument and encourages all entities to adopt that method of accounting for
all of their employee stock compensation plans. However, it also allows an
entity to continue to measure compensation cost using the intrinsic value based
method of accounting prescribed by APB Opinion No. 25 ("Opinion No. 25"),
"Accounting for Stock Issued to Employees". The Company has elected to continue
using Opinion No. 25 and to make pro forma disclosures of net income and
earnings per share as if the fair value method of accounting defined in SFAS 123
had been applied.
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the disclosure
of contingent assets and liabilities and the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from these estimates.
Recent Accounting Developments
In May 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" ("SFAS 145"). SFAS 145 generally provided for various technical
corrections to previously issued accounting pronouncements. The only impact to
the Company related to SFAS 145 provided that early extinguishment of debt,
including the write-off of unamortized deferred loan costs, are generally no
longer considered extraordinary items. The Company has adopted the provisions of
SFAS 145 and has presented all previous early write-offs of unamortized loan
costs as a component of interest expense.
12
Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
September 30, 2003
(unaudited)
Note 3. Basis of Presentation (continued)
Recent Accounting Developments (continued)
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities". The Interpretation clarifies the application of
existing accounting pronouncements to certain entities in which the equity
investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. The
provisions of the Interpretation are immediately effective for all variable
interest entities created after January 31, 2003. The Company has evaluated the
effects of the issuance of the Interpretation on the accounting for its
ownership interest in its joint venture partnerships created after January 31,
2003, and has concluded that all such joint ventures should be included in the
consolidated financial statements. The Company is currently in the process of
evaluating the impact that this Interpretation will have on its financial
statements for all joint ventures created before January 31, 2003 and final
implementation will be completed during the fourth quarter of 2003.
On April 30, 2003, the FASB issued SFAS No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS 149").
SFAS 149 amends and clarifies the accounting guidance on (1) derivative
instruments (including certain derivative instruments embedded in other
contracts) and (2) hedging activities that fall within the scope of SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 149 also amends certain other existing pronouncements, which will
result in more consistent reporting of contracts that are derivatives in their
entirety, or that contain embedded derivatives that warrant separate accounting.
SFAS 149 is effective (1) for contracts entered into or modified after June 30,
2003, with certain exceptions, and (2) for hedging relationships designated
after June 30, 2003. The guidance is to be applied prospectively. Management
does not expect the adoption of SFAS 149 to have a material impact on the
Company's financial condition, results of operations or cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("SFAS 150"). This Statement, which establishes standards for the classification
and measurement of certain financial instruments with characteristics of both
liabilities and equity, was originally effective for financial instruments
entered into or modified after May 31, 2003 and otherwise was effective at the
beginning of the first interim period starting after June 15, 2003. It was to be
implemented by reporting the cumulative effect of a change in an accounting
principle for financial instruments created before the issuance date of the
Statement and still existing at the beginning of the interim period of adoption.
On October 29, 2003 the FASB indefinitely deferred the implementation of SFAS
150 to non-controlling interests in limited-life consolidated entities.
13
Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
September 30, 2003
(unaudited)
Note 4. Supplemental Cash Flow Disclosures
During the first quarter of 2003, 46,000 shares of common stock were
issued in exchange for 552 Series A cumulative redeemable preferred Operating
Partnership units, and 6,333 shares of common stock were issued at $15.00 per
share to vendors for services rendered. During the second quarter of 2003, the
46,000 shares issued in the first quarter were converted back to 552 Series A
cumulative redeemable preferred Operating Partnership units.
Note 5. Cash in Joint Ventures and Restricted Cash
Joint venture partnership agreements require, among other things, that
the Company maintain separate cash accounts for the operation of each joint
venture and that distributions to the general and limited partners be strictly
controlled. To date, these arrangements have not resulted in any significant
liquidity shortfalls at the Company or the partnership level; however, the
Company or any combination of the joint venture partnerships could experience a
liquidity shortage while other members of the group have sufficient liquidity.
Cash in joint ventures and restricted cash amounted to approximately $2,784,000
at September 30, 2003.
Note 6. Acquisition Activity
During August 2003, the Company acquired, subject to a ground lease
that expires in 2072, a 15% general partnership interest in the Wal-Mart
Shopping Center a 154,700 square foot community shopping center in Southington
CT, of which Wal-Mart represents approximately 94,400 square feet with a lease
extending through 2018. The purchase price for the property was approximately
$8.35 million, plus closing costs. The Company obtained a junior loan of $2.9
million and a senior loan of $5.4 million for the purchase of this property.
Both loans were scheduled to mature in two years. The junior loan bore interest
at a rate of 12%, while the senior loan bears interest at a spread of 250 basis
points over 30-day LIBOR. Substantially all of the net cash flow from the
property was required to be applied to the outstanding principal balance of the
junior loan until it is paid in full. Additionally, the Company is required to
pay an exit fee of $88,000 upon repayment. The junior loan was repaid in full
from the proceeds of the Offering completed during October 2003 (See Note 2).
During June 2003, the Company acquired Valley Plaza Shopping Center
("Valley Plaza") in Hagerstown, MD, a 191,000 square foot shopping center, for
approximately $9.5 million. The purchase price plus certain lender fees were
financed by a $6.4 million two-year interest-only senior bank loan with interest
at LIBOR plus 250 basis points, and a two-year $3.4 million junior bank loan
with interest at 12.5% annually. Commitment fees of $65,000 for the senior bank
loan and $346,000 for the junior bank loan were included in the loan amounts.
Substantially all of the net cash flow from the property was required to be
applied to the outstanding principal balance of the junior loan until it was
paid in full. Additionally, the Company was required to pay an exit fee of
$103,000 upon repayment. The junior loan was repaid in full from the proceeds
of the Offering completed during October 2003 (See Note 2).
14
Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
September 30, 2003
(unaudited)
Note 6. Acquisition Activity (continued)
During April and May 2003, the Company acquired a 15% general
partnership interest in both Pine Grove, a 79,000 square foot shopping center in
Pemberton Township, NJ, and Swede Square, a 95,000 square foot shopping center
in East Norriton, PA. The purchase prices for these properties, including
closing costs, were approximately $8.0 million and $8.6 million, respectively.
Pine Grove was financed by a seven-year LIBOR-based first mortgage loan for $6.0
million, with level principal payments of $12,500 per month. The Company entered
into an interest rate swap with the lender fixing the interest rate at 6.24%
annually for the term of the loan.
Swede Square was purchased subject to a two-year, first mortgage
construction/acquisition loan with a balance of $5.6 million and fixed
interest-only payments at 7.25% annually. The loan provides for additional
borrowings up to a total loan amount of $7.5 million to provide for tenant
improvements and leasing commissions as vacant space is occupied.
In January and February 2003, the Company completed the acquisition of
a 30% general partnership interest in Fairview, Newport and Halifax, with an
aggregate gross leaseable area of approximately 190,000 square feet, the
properties are all anchored by Giant supermarkets and are all located in the
Harrisburg, Pennsylvania area. The centers cost approximately $20.8 million. The
Company's general partnership interest cost $1.16 million and the limited
partner, who is affiliated with the limited partner in the Loyal Plaza
partnership, invested $3.74 million. The terms of the partnership agreement
provide that the limited partner will receive a preferential return of 12.5% on
its investment before the Company is entitled to receive any distributions. The
balance of the purchase price was financed by three separate mortgage loans
aggregating approximately $15.9 million. The loan on Fairview was in the amount
of $6.1 million with a term of ten years, and has a fixed annual rate of 5.64%.
The Company entered into interest rate swaps for the entire amount of the first
loan, and for the seven-year terms of the other two loans (approximately $ 4.3
million and $5.5 million for the Newport and Halifax properties, respectively),
resulting in a fixed annual rate of 6.43%. The blended annual interest rate for
the three loans is 6.09%.
15
Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
September 30, 2003
(unaudited)
Note 7. Mortgage Loans, Other Loans Payable, and Line of Credit
Mortgage loans outstanding consist of the following:
Balance outstanding at
-----------------------------
Original Interest September 30 December 31,
Property Amount Rate Maturity 2003 2002
- ----------------------------------------------------------------------------------------------------------------
The Point Shopping Center $ 20,000,000 7.63% Jun 2027 $ 19,650,000 $ 19,864,000
Harrisburg, PA
Red Lion Shopping Center 16,800,000 8.86% Feb 2010 16,624,000 16,715,000
Philadelphia, PA
Camp Hill Mall 14,000,000 4.74%(1) Nov 2004 14,000,000 14,000,000
Camp Hill, PA
Loyal Plaza 13,877,000 7.18% Jun 2011 13,712,000 13,814,000
Williamsport, PA
Port Richmond Village 11,610,000 7.17% Mar 2008 11,330,000 11,439,000
Philadelphia, PA
Academy Plaza 10,715,000 7.28% Mar 2013 10,458,000 10,558,000
Philadelphia, PA
Washington Center Shoppes 6,236,000 7.53% Nov 2027 5,845,000 5,900,000
Washington Township, NJ
LA Fitness Center (2) 5,000,000 LIBOR+2.75% Dec 2007 2,427,000 1,247,000
Fort Washington, PA
Fairview Plaza 6,080,000 5.64% Feb 2013 6,036,000 N/A
New Cumberland, PA
Halifax Plaza 4,265,000 6.43% Jan 2010 4,213,000 N/A
Halifax, PA
Newport Plaza 5,424,000 6.43% Feb 2010 5,373,000 N/A
Newport, PA
Pine Grove Shopping Center 6,000,000 6.24% Apr 2010 5,938,000 N/A
Pemberton Township, NJ
Swede Square Shopping Center 5,560,000 7.25% May 2005 5,560,000 N/A
East Norriton, PA
Valley Plaza Shopping Center 6,430,000 LIBOR+2.50% Jun 2005 6,408,000 N/A
Hagerstown, MD 3,462,000 12.00% Jun 2005 3,462,000
Wal-Mart Shopping Center 5,444,000 LIBOR+2.50% Aug 2005 5,444,000 N/A
Southington, CT 2,931,000 12.00% Aug 2005 2,931,000
- ----------------------------------------------------------------------------------------------------------------
Totals $ 143,834,000 $ 139,411,000 $ 93,537,000
================================================================================================================
16
Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
September 30, 2003
(unaudited)
Note 7. Mortgage Loans, Other Loans Payable, and Line of Credit (continued)
(1) The interest rate on the entire loan amount is fixed via an interest
rate swap at 4.74% through November 2003 and $7.0 million of the loan
is fixed at that same rate through maturity. The remaining $7.0 million
portion of the loan will float at the 30-day LIBOR rate plus 195 basis
points from November 2003 through maturity. The Company has agreed in
connection with this loan to maintain a minimum net worth of $13.0
million (including minority and limited partner interests) and
consolidated liquid assets of at least $1.0 million.
(2) The Company obtained a $5.0 million LIBOR-based construction loan in
connection with the LA Fitness development project. The loan is due on
December 31, 2007, has a two-year extension option, and carries
interest at LIBOR plus 275 basis points. Construction is scheduled to
be completed during 2003.
During November 2002, the Company entered into a financing agreement
with SWH for a $6.0 million loan. The SWH loan was scheduled to mature on
November 30, 2005 and carried an annual interest rate of 12.5% through November
30, 2003. During August 2003, the Company refinanced the SWH loan and such
refinancing provided the Company with approximately $2.0 million in cash after
payment of certain fees. The refinancing also carried interest at the annual
rate of 12.5%. This loan together with certain exit fees was paid with the
proceeds from the Offering completed in October 2003 (See Note 2).
In connection with the acquisition of the Red Lion partnership interest
from a related party, the Company agreed to pay $888,000 in three equal annual
installments of $296,000 plus interest at 7.5%. The related party agreed to
extend the payment of the current installment of $296,000 through October 30,
2003. This loan was repaid with the proceeds from the Offering completed in
October 2003 (See Note 2).
During March 2003, the Company entered into a new credit facility with
North Fork Bank for a one-year period. The line of credit bore interest at the
greater of 6% or the bank's prime rate plus 1%. The credit facility has a $2.0
million limit. The outstanding balance of the borrowings under this line was
repaid with the proceeds from the Offering completed in October 2003 (See
Note 2).
Homburg Invest provided to the Company a one-year, $1.1 million 9%
interest-only loan. The loan included a $100,000 entrance fee and required
payment of a $220,000 exit fee. The loan was used to partially fund the deposit
requirements for the South Philadelphia Shopping Plaza. This loan was repaid
with the proceeds from the Offering completed in October 2003 (See Note 2).
17
Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
September 30, 2003
(unaudited)
Note 7. Mortgage Loans, Other Loans Payable, and Line of Credit (continued)
During the second quarter of 2003, Selbridge Corporation, an affiliate
of CBC, a related party, provided the Company with a $750,000 loan. The
principal plus interest, calculated at an annual rate of 15%, was payable on or
before October 31, 2003. The loan was used to partially fund the deposit
requirements for the South Philadelphia Shopping Plaza. This loan was paid in
full with the proceeds from the Offering completed in October 2003 (See Note 2).
During August 2003, The Company obtained a $1.0 million loan from
Realty Enterprise Fund, LLC, which was used to fund the deposit for the
acquisition of Columbus Crossing Shopping Center and River View Plaza I, II and
III. The loan bore interest at the rate of 9% annually and was due on the
earlier to occur of one year from the date of the advance or five days after
completion of any public Offering. The Company agreed to pay an exit fee of 20%
of the principal advanced. The lender had the right to convert the loan to units
in the Operating Partnership valued at the public Offering price, less the
underwriting commission. During October 2003 the lender exercised its right to
convert the principal of the loan to Operating Partnership units and the Company
paid the exit fee and accrued interest from the proceeds of the Offering (See
Note 2).
Note 8. Intangible Lease Asset/Liability
On July 1, 2001 and January 1, 2002, the Company adopted SFAS No. 141
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangibles",
respectively. As part of the acquisition of real estate assets subsequent to
January 1, 2002, the fair value of the real estate acquired is allocated to the
acquired tangible assets, consisting of land, building and building
improvements, and identified intangible assets and liabilities, consisting of
the value of above-market and below-market leases, other value of in-place
leases, and 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 to land, building and building improvements 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.
18
Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
September 30, 2003
(unaudited)
Note 8. Intangible Lease Asset/Liability (continued)
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 remaining initial terms 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 based on management's evaluation
of the specific characteristics of each tenant's lease; however, the value of
tenant relationships has not been separated from in-place lease value because
such value and its consequence to amortization expense is immaterial for these
particular acquisitions. 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 a lease were to be
terminated prior to its stated expiration, all unamortized amounts relating to
that lease would be written off.
As a result of adopting the standards, amounts totaling $5,117,000 and
$4,321,000 have been recorded as intangible lease liabilities for properties
acquired in 2002 and 2003, respectively, and are included in deferred
liabilities in the accompanying consolidated balance sheet. The intangible
assets and liabilities are amortized over the remaining terms of the respective
leases to rental income. Such amortization amounted to $169,000, $143,000 and
$278,000 during the first three quarters of 2003, respectively, $0 during each
of the first three quarters of 2002, and $146,000 of amortization in the fourth
quarter of 2002. The weighted average amortization period for the intangible
lease liabilities is approximately eleven years.
19
Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
September 30, 2003
(unaudited)
Note 8. Intangible Lease Asset/Liability (continued)
These intangibles will be amortized as follows:
For the year ending December 31:
2003 $ 253,000
2004 994,000
2005 822,000
2006 669,000
2007 763,000
Thereafter 5,201,000
----------
$8,702,000
==========
Note 9. Related Party Transactions
Prior to the Offering described in Note 2, the Company had no
administrative or executive employees and accordingly relied on CBRA and its
affiliates to manage the affairs of the Company. The Company was referred to as
an "advised" REIT.
The following is a schedule of acquisition and disposition fees paid,
accrued, or deferred by the Company to CBRA for the nine-month period ended
September 30, 2003 and for the year ended December 31, 2002:
Property Paid Accrued Total
- ------------------------- --------- --------- ---------
2003 Transactions
- -----------------
Fairview Plaza, Halifax
Plaza and Newport Plaza $ - $ 180,000 $ 180,000
Pine Grove 74,000 - 74,000
Swede Square 79,000 - 79,000
Valley Plaza 92,000 - 92,000
Wal-Mart Shopping Center 83,500 - 83,500
--------- --------- ---------
Totals $ 328,500 $ 180,000 $ 508,500
========= ========= =========
2002 Transactions
- -----------------
Southpoint $ 47,000 $ - $ 47,000
Red Lion 44,000 - 44,000
Loyal Plaza - 183,000 183,000
Camp Hill - 172,000 172,000
LA Fitness 60,000 - 60,000
--------- --------- ---------
Totals $ 151,000 $ 355,000 $ 506,000
========= ========= =========
20
Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
September 30, 2003
(unaudited)
Note 9. Related Party Transactions (continued)
The following is a schedule of management, administrative, advisory,
legal, leasing, and loan placement fees paid or accrued to CBRA or its
affiliates:
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
2003 2002 2003 2002
------ ------ ------ ------
Management Fees $ 237,633 $ 202,000 $ 630,633 $ 421,000
Construction Management $ - $ 20,000 $ 2,000 $ 20,000
Leasing Fees $ - $ 260,000 $ 17,000 $ 276,000
Administrative and Advisory $ 159,000 $ 90,000 $ 543,000 $ 270,000
Legal $ 85,735 $ 87,000 $ 167,735 $ 128,000
Loan Placement Fees $ - $ 100,000 $ - $ 100,000
In connection with the Offering completed during October 2003, CBRA
was merged into the Company and the Company has become a self-administered REIT
(See Note 2).
Homburg Invest purchased, on December 24, 2002, for $3.0 million, 3,300
convertible Series A preferred Operating Partnership units at $909.09 with a
liquidation value of $1,000 each and a preferred distribution rate of 9%. In
connection with such acquisition of securities by Homburg Invest, the Company's
Board of Directors elected Richard Homburg a director.
During the second and third quarters of 2003, Homburg Invest provided
the equity financing in the form of an 85% limited partnership interest with
respect to the acquisitions of the Pine Grove ($2.1 million), Swede Square ($3.0
million) and Wal-Mart Shopping Center ($825,000) properties and jointly and
severally with the Company guaranteed the junior debt financing for Valley Plaza
($3.4 million) and the Wal-Mart Shopping Center ($2.9 million). Homburg Invest
received from the third party lender a $320,000 placement fee for the loans and
is entitled to receive from the lender 40% of the interest accrued on the junior
loans and an exit fee of $96,000. Homburg invest also received a 10% placement
fee on the equity financings and a 12% preferential return on its limited
partnership interests. During October 2003, the Company exercised its option to
buy the Homburg Invest limited partnership interest in the Wal-Mart Shopping
Center for $990,000 and exercised its option to buy the Homburg Invest limited
partnership interests in Pine Grove and Swede Square pursuant to a 15% look-back
IRR provision in the partnership agreements.
During June 2003, Homburg provided to the Company a one-year $1.1
million, 9% interest-only loan that was used to partially fund the deposit
requirements for the South Philadelphia Shopping Plaza transaction. The loan
included a 10% placement fee and provided for a 20% exit fee.
21
Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
September 30, 2003
(unaudited)
Note 9. Related Party Transactions
In connection with the acquisition of the Red Lion partnership interest
from Silver Circle Management Corp, a party related to CBC, the limited partner
of the Operating Partnership, the Company agreed to pay $888,000 in three equal
annual installments of $296,000 plus interest at 7.5%.
During the second quarter of 2003, Selbridge Corporation, a party
related to CBC, provided the Company with a $750,000 loan. The principal, plus
interest calculated at an annual rate of 15%, was payable on or before October
31, 2003.
All of the related party junior loans and certain third party
indebtedness were repaid together with the agreed-upon exit fees and accrued
interest from the proceeds of the public Offering.
Note 10. Interest Rate Hedges
During 2002, the Company completed one interest rate swap transaction
to hedge the Company's exposure to changes in interest rates with respect to
$14.0 million of LIBOR-based variable rate debt. The swap agreement provides for
a fixed all-in rate of 4.74% (including a credit spread of 1.95%). The swap
agreement extends through November 19, 2003 on $7.0 million of principal and
through November 19, 2004 on the remaining $7.0 million of principal.
During the first quarter of 2003, the Company entered into two interest
rate swaps to hedge the Company's exposure to changes in interest rates with
respect to $9.8 million of LIBOR-based variable rate debt. The swap agreements
provide for a fixed all-in rate of 6.43% for the seven-year term of the Halifax
and Newport loans. During the second quarter of 2003, the Company entered into
one swap agreement to hedge a $6.0 million LIBOR-based variable rate loan for
Pine Grove. The agreement fixes the rate at 6.24% for the seven-year term of the
loan.
As of September 30, 2003, the Company has interest rate swaps on four
of its mortgage loans. These derivatives had a fair value of approximately
$697,000 of which $227,000 has been recognized in accumulated other
comprehensive loss and the remaining $470,000 has been recorded in the limited
partner's interest in consolidated Operating Partnership.
The Company's interest rate hedges are designated as cash flow hedges
and hedge the future cash outflows on debt. Interest rate swaps that convert
variable payments to fixed payments, such as those held by the Company, as well
as interest rate caps, floors, collars, and forwards are cash flow hedges. The
unrealized gains/losses in the fair value of these hedges are reported on the
balance sheet with a corresponding adjustment to either accumulated other
comprehensive loss or results of operations. For cash flow hedges, the
ineffective portion of a derivative's change in fair value is immediately
recognized in results of operations.
22
Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
September 30, 2003
(unaudited)
Note 11. Earnings Per Share
In accordance with SFAS No. 128, "Earnings Per Share" ("SFAS 128"),
basic earnings per share ("EPS") are computed by dividing income available to
common shareholders by the weighted average number of shares of common stock
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. As the Company reported a
net loss during the first three quarters of 2003 and 2002, diluted EPS are not
presented.
Note 12. Commitments, Contingencies and Subsequent Events
South Philadelphia Shopping Plaza
During October 2003, the Company entered into a net lease with regard
to the South Philadelphia Shopping Plaza, located in Philadelphia, PA.
Simultaneously with the execution of the net lease, the Operating Partnership
made a loan to the existing owner in the amount of $39.0 million, secured by a
first mortgage on the owner's fee interest in the property. The Company has the
right to exercise an option to purchase the property at fair market value at any
time after ten years, subject to acceleration of its right to exercise the
purchase option in certain instances. In connection with this transaction, the
current owner of this center has agreed that the Company may offset rent due
under the net lease in the event a certain 7,600 square foot space is vacant at
the property during the three years subsequent to the transaction.
South Philadelphia Shopping Plaza is a 283,000 square foot shopping
center built in 1950 with a 54,000 square foot Shop Rite as the anchor tenant.
Additional tenants include Bally's Total Fitness, Ross Dress For Less and
Strauss Auto Zone.
Proceeds from the Offering were used to fund this transaction (See
Note 2).
Golden Triangle Shopping Center
In September 2003, the Company entered into an agreement to acquire
from affiliates of CBC, the Golden Triangle Shopping Center in Lancaster, PA.
This is an approximately 229,000 square foot shopping center built in 1960 with
a 30,000 square foot Marshalls and a 24,000 square foot Staples. The shopping
center has entered into a lease for a 46,000 square foot L.A. Fitness Center and
is negotiating leases for a 30,000 square foot in line vacancy. The Company also
expects to redesign the parking lot and install new facades and signage.
Construction of the L.A. Fitness facility requires consent of one or more
existing tenants at the center, which consent has not yet been obtained.
Management believes such consents will be forthcoming; however, there can be no
assurances that such consents will ultimately be received.
23
Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
September 30, 2003
(unaudited)
Note 12. Commitments, Contingencies and Subsequent Events (continued)
Golden Triangle Shopping Center (continued)
The purchase price for the property will be approximately $11.4
million, plus defeasance costs with respect to existing financing of
approximately $1.9 million, and closing costs. Defeasance will require a 90-day
prior notice to the existing lender, which the Company intends to give upon
closing its line of credit facility. Proceeds from the Offering and/or the
Company's line of credit will be used to fund this acquisition which is expected
to close during the first quarter of 2004 (see Note 2).
Columbus Crossing Center
On or about November 21, 2003, the Company will acquire operating
control of Columbus Crossing Shopping Center in Philadelphia, PA. This is a new,
fully leased approximately 142,000 square foot shopping center completed in 2001
with a 62,000 square foot Super Fresh Supermarket as the principal anchor
tenant. Additional tenants include a 25,000 square foot Old Navy, a 22,000
square foot A.C. Moore and a 10,000 square foot Famous Footwear. The property
abuts adjacent free-standing Wal-Mart and Home Depot stores, which the Company
is not acquiring.
In connection with the transaction, the Operating Partnership will make
a $6.4 million loan to the owners, which must be repaid at the time their
interests in the partnership are redeemed. The Company has the option to redeem
those interests in ten years. The transaction will be entered into subject to a
$17.5 million first mortgage loan. Proceeds from the Offering will be used to
fund this transaction (See Note 2), which is expected to close during November
2003.
River View Plaza I, II, and III
In November 2003, the Company acquired operating control of River View
Plaza I, River View Plaza II and River View Plaza III shopping centers in
Philadelphia, PA. These shopping centers consist of three separate properties
with an aggregate of approximately 246,600 square feet of GLA. River View I is
anchored by a 77,000 square foot United Artists Theatre, River View II is
anchored by Staples and West Marine and River View III is anchored by Pep Boys
and Athlete's Foot.
All three properties are also located on the opposite side of the
boulevard from the Columbus Crossing property. There is a northbound exit from
Route I-95 adjacent to the properties.
24
Cedar Shopping Centers, Inc.
Notes to Consolidated Financial Statements
September 30, 2003
(unaudited)
Note 12. Commitments, Contingencies and Subsequent Events (continued)
River View Plaza I, II, and III (continued)
In connection with the transaction, the Operating Partnership made a
$26.7 million loan to the former owners, which must be repaid at the time their
interests in the partnership are redeemed. The Company has the option to redeem
those interests in ten years. The transaction was entered into subject to a
$22.5 million first mortgage loan, which the Company repaid at the closing.
Proceeds from the Offering were used to fund this transaction (See Note 2).
The Point Shopping Center
The Company has entered into an agreement to acquire from affiliates of
CBC, the 50% interest in The Point Shopping Center in Harrisburg, PA not
previously owned by us for a purchase price of approximately $2.4 million,
subject to a $19.7 million first mortgage. This property contains approximately
255,000 square feet of GLA. This acquisition will be financed from the proceeds
of the Offering, and is expected to close in November 2003.
Lake Raystown Plaza and Huntingdon Plaza
In August 2003, the Company entered into agreements to purchase, from
the same owner, Lake Raystown Plaza for approximately $7.0 million and
Huntingdon Plaza for approximately $4.0 million. During November 2003, the
agreements to purchase these properties were terminated. The Company expects
that the earnest money deposits made with respect to these properties,
aggregating $100,000, will be refunded with the exception of $50,000, used to
extend the due diligence period, which has been forfeited.
25
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
Statements made or incorporated in this Form 10-Q include certain
forward-looking statements. Forward-looking statements include, without
limitation, statements containing the words "anticipates," "believes,"
"expects," "intends," "future," and words of similar import which express the
Company's belief, expectations or intentions regarding future performance or
future events or trends. You should be cautioned that, while forward-looking
statements reflect good faith beliefs, they are not guarantees of future
performance and involve known and unknown risks, uncertainties and other
factors, which may cause actual results, performance or achievements to differ
materially from anticipated future results, performance or achievements
expressed or implied by such forward-looking statements as a result of factors
outside of the Company's control. Certain factors that might cause such a
difference include, but are not limited to, the following: real estate
investment considerations, such as the effect of economic and other conditions
in general and in the eastern United States in particular; the financial
viability of the tenants; the continuing availability of retail center
acquisitions, development and redevelopment opportunities on favorable terms;
the availability of equity and debt capital in the public markets; the fact that
returns from development, redevelopment and acquisition activity may not be at
expected levels; the Company's potential inability to realize the level of
proceeds from property sales as initially expected; inherent risks in ongoing
redevelopment and development projects including, but not limited to, cost
overruns resulting from weather delays, changes in the nature and scope of
redevelopment and development efforts, and market factors involved in the
pricing of material and labor; the need to renew leases or relet space upon the
expiration of current leases; and the financial flexibility to refinance debt
obligations when due.
Summary of Critical Accounting Policies
The preparation of the consolidated financial statements in conformity
with accounting principles generally accepted in the United States ("GAAP")
requires the Company 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. In response to recent guidance
from the Securities and Exchange Commission, the Company has identified the
following critical accounting policies, the application of which requires
significant judgments and estimates.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities". The Interpretation clarifies the application of
existing accounting pronouncements to certain entities in which the equity
investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. The
provisions of the Interpretation are immediately effective for all variable
interest entities created after January 31, 2003. The Company has evaluated the
effects of the issuance of the Interpretation on the accounting for its
ownership interest in its joint venture partnerships created after January 31,
2003, and has concluded that all of the Company's joint ventures should be
included in the consolidated financial statements. The Company is currently in
the process of evaluating the impact that this Interpretation will have on its
financial statements for all joint ventures created
26
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Summary of Critical Accounting Policies (continued)
before January 31, 2003 and final implementation will be completed during the
fourth quarter of 2003.
On an ongoing basis, management evaluates its estimates, including
those related to revenue recognition and the allowance for doubtful accounts
receivable, real estate investments and asset impairment, and derivatives used
to hedge interest-rate risks. These accounting policies are further described in
the notes to the consolidated financial statements. Management's estimates are
based on information that is currently available and on various other
assumptions that the Company believes to be 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 straight line rent receivable. Leases generally
contain provisions under which the tenants reimburse the Company for a portion
of property operating expenses and real estate taxes incurred. In addition,
certain operating leases 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. The Company defers recognition of contingent rental income
until those specified targets are met.
The Company must make estimates as to the collectibility of its
accounts receivable related to minimum rent, deferred rent, expense
reimbursements and other revenue. Management analyzes accounts receivable and
historical bad debts, tenant creditworthiness, current economic trends and
changes in the tenant's payment patterns when evaluating the adequacy of the
allowance for doubtful accounts receivable. These estimates have a direct impact
on net income, because a higher bad debt allowance would result in lower net
income.
Real Estate Investments
Real estate investments are carried at cost less accumulated
depreciation. The provision for depreciation and amortization is calculated
using the straight-line method based upon the estimated useful lives of assets.
Expenditures for maintenance, repairs and betterments that do not materially
prolong the normal useful life of an asset are charged to operations as
incurred. Additions and betterments that substantially extend the useful lives
of the properties are capitalized.
The Company is required to make subjective estimates as to the useful
lives of its properties for purposes of determining the amount of depreciation
to reflect on an annual basis. These assessments have a direct impact on net
income. A shorter estimate of the useful life of an investment would have the
effect of increasing depreciation expense and lowering net income, whereas a
longer estimate of the useful life of the investment would have the effect of
reducing depreciation expense and increasing net income.
27
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Summary of Critical Accounting Policies (continued)
Real Estate Investments (continued)
On July 1, 2001 and January 1, 2002, the Company adopted SFAS No. 141
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangibles",
respectively. As part of the acquisition of real estate assets subsequent to
January 1, 2002, the fair value of the real estate acquired is allocated to the
acquired tangible assets, consisting of land, building and building
improvements, and identified intangible assets and liabilities, consisting of
the value of above-market and below-market leases, other value of in-place
leases, and 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 to land, building and building improvements 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 remaining initial terms 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 based on management's evaluation
of the specific characteristics of each tenant's lease; however, the value of
tenant relationships has not been separated from in-place lease value because
such value and its consequence to amortization expense is immaterial. 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
28
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Summary of Critical Accounting Policies (continued)
Real Estate Investments (continued)
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 a lease
were to be terminated prior to its stated expiration, all un-amortized amounts
relating to that lease would be written off.
The Company applies SFAS No. 144 to recognize and measure impairment of
long-lived assets. Management reviews 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 cash flows that are 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. Real estate investments held for sale are
carried at the lower of carrying amount or fair value, less cost to sell.
Depreciation and amortization are suspended during the period held for sale.
Management is required to make subjective assessments as to whether there are
impairments in the value of its real estate properties. These assessments have a
direct impact on net income, because an impairment loss is recognized in the
period that the assessment is made.
Hedging Activities
From time to time, the Company uses derivative financial instruments to
limit its exposure to changes in interest rates related to variable rate
borrowings. Derivative instruments are carried on the consolidated financial
statements at their estimated fair value and a change in the value of a
derivative is reported as accumulated other comprehensive income or loss. If
interest rate assumptions and other factors used to estimate a derivative's fair
value or methodologies used to determine a derivative's effectiveness were
different, amounts included in the determination of net income or accumulated
other comprehensive income or loss could be affected.
Results of Operations
During the third quarter of 2003, the Company acquired a 15% general
partnership interest in one shopping center with an aggregate cost of
approximately $9.1 million. During the second quarter of 2003, the Company
acquired a 100% interest in one shopping center with an aggregate cost of $9.5
million, and 15% general partnership interests in two shopping centers with an
aggregate cost of approximately $16 million. During the first quarter of 2003,
the Company acquired a 30% general partnership interest in three shopping
centers with an aggregate cost of $20.8 million. During the fourth quarter of
2002, the Company acquired a 100% interest in one shopping center with an
aggregate cost of approximately $17.2 million. During the third quarter of
2002, the Company acquired a 25% general partnership interest in one shopping
center with an aggregate cost of $19.3 million. During the second quarter of
2002, the Company acquired a 20% general partnership interest in one shopping
center from a related
29
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Results of Operations (continued)
party, based on a property value of $23 million. The Company also sold one
office property during the second quarter of 2002 for a gross sales price of
approximately $4.4 million, which resulted in a loss of $49,000 during that
quarter.
Results of operations for the nine month period ended September 30, 2003
compared to September 30, 2002
Differences in results of operations between the first nine months of
2003 and the first nine months of 2002 were attributable primarily to the
Company's acquisition and disposition activities. Net loss before the loss on
sale of properties, distributions to preferred shareholders, and income
allocated to minority interest and limited partner, decreased approximately
$460,000 from a net loss of $1,037,000 in the first nine months of 2002 to a net
loss of $577,000 in the first nine months of 2003. Net loss attributable to
common shareholders increased approximately $147,000, from a net loss of
$320,000 in the first nine months of 2002 to a net loss of $467,000 in the first
nine months of 2003. Net loss per share increased $0.39, from a net loss per
share of $1.39 in the first nine months of 2002 to a net loss per share of $1.78
in the first nine months of 2003.
Results of operations for properties consolidated for financial
reporting purposes and held throughout both the first nine months of 2002 and
the first nine months of 2003 included four properties. As of September 30, 2002
and 2003, the Company owned 6 properties and 15 properties, respectively.
30
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Results of operations for the nine month period ended September 30, 2003
compared to September 30, 2002 (continued)
Revenue and Expenses
Nine Months Ended
September 30, September 30, Acquisitions/ Held in
2003 2002 Difference Dispositions both years
-----------------------------------------------------------------------------
Rents and expense recoveries $ 18,034,000 $ 8,762,000 $ 9,272,000 $ 8,877,000 $ 395,000
Property expenses 6,679,000 3,060,000 3,619,000 3,257,000 362,000
Depreciation and amortization 2,917,000 1,720,000 1,197,000 1,475,000 (278,000)
Interest expense 7,533,000 4,049,000 3,484,000 2,774,000 710,000
General and administrative expense 1,542,000 720,000 822,000 - -
Results attributable to acquisition activities
Rents and expense recoveries increased from approximately $8,762,000 in
the first nine months of 2002 to approximately $18,034,000 in the first nine
months of 2003, a net increase of approximately $9,272,000 or 106%. Such net
increase is attributable primarily to the Company's acquisition and disposition
activities.
Property expenses, excluding depreciation, amortization and interest
expense, increased from approximately $3,060,000 in the first nine months of
2002 to approximately $6,679,000 in the first nine months of 2003, a net
increase of approximately $3,619,000, or 118%. Such increase reflects
approximately $3,257,000 attributable to the Company's acquisition activities,
and approximately $362,000 attributable to properties held in both years.
Depreciation and amortization increased from approximately $1,720,000
in the first nine months of 2002 to approximately $2,917,000 in the first nine
months of 2003, a net increase of approximately $1,197,000, or 70%. Such
increase is attributable to the Company's acquisition activities and is offset,
in part, by the reduction in amortization expense at The Point.
Interest expense increased from approximately $4,049,000 in the first
nine months of 2002 to approximately $7,533,000 in the first nine months of
2003, a net increase of approximately $3,484,000, or 86%. Such increase reflects
approximately $2,774,000 attributable to the Company's acquisition activities,
and approximately $710,000 attributable primarily to the interest on the
Company's short-term borrowings and the related write off of deferred financing
charges, as well as the refinancing of The Point loan.
General and administrative expense increased approximately $822,000 to
$1,542,000 in the first nine months of 2003 from approximately $720,000 in the
first nine months of 2002, a change of 114%. This is attributable to overall
growth of the Company resulting in an increase in advisory fees of $273,000, an
increase in legal and accounting fees of approximately $409,000, an increase in
directors' fees of approximately $14,000, and an increase in other
administrative costs of $126,000.
31
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Results for properties fully operating throughout the first nine months of both
years
Rental income for Port Richmond L.L.C. 1 ("Port Richmond"), Academy
Plaza L.L.C. 1 ("Academy Plaza"), Washington Center L.L.C. 1 ("Washington
Center"), and The Point Associates, L.P. ("The Point"), the only properties
fully operating throughout the first nine months of both years, increased by
approximately $395,000 from $6,624,000 in the first nine months of 2002 to
$7,019,000 in the first nine months of 2003. Property expenses increased
$362,000, from approximately $2,319,000 during the first nine months of 2002 to
$2,681,000 during the first nine months of 2003. The increase in property
expenses for the nine-month period ended September 30, 2003 is primarily
attributable to (1) an increase in snow removal costs of approximately $94,000,
(2) an increase in real estate taxes of $88,000 resulting from a second quarter
2002 reassessment following the completion of The Point redevelopment project
and a $30,000 increase in real estate taxes at Port Richmond, (3) an increase in
insurance expense of $49,000, and (4) the write off of $94,000 of accounts
receivable principally attributable to common area maintenance charges disputed
with a major tenant. These increases will, in part, be recovered through future
tenant escalations.
Results of operations for the three months ended September 30, 2003 compared to
September 30, 2002
Differences in results of operations between the third quarter of 2003
and the third quarter of 2002 were driven largely by the Company's acquisition
and disposition activities. Net loss before income allocated to minority
interest and limited partner, increased approximately $319,000, from a net loss
of $14,000 in the third quarter of 2002 to a net loss of $333,000 in the third
quarter of 2003. Net loss attributable to common shareholders increased
approximately $168,000 from a net loss of $60,000 in the third quarter of 2002
to a net loss of $228,000 in the third quarter of 2003. Net loss per share
increased $0.70, from a net loss per share of $0.26 in the third quarter of 2002
to a net loss per share of $0.96 in the third quarter of 2003.
Results of operations for properties consolidated for financial
reporting purposes and held throughout both the third quarter of 2002 and the
third quarter of 2003 included six properties. As of September 30, 2002 and
2003, the Company owned 6 properties and 15 properties, respectively.
Revenue and Expenses
Quarter Ended
September 30, September 30, Acquisitions/ Held in
2003 2002 Difference Dispositions both years
-----------------------------------------------------------------------------
Rents and expense recoveries $ 6,651,000 $ 3,606,000 $ 3,045,000 $ 2,879,000 $ 166,000
Property expenses 2,256,000 1,236,000 1,020,000 996,000 24,000
Depreciation and amortization 1,150,000 607,000 543,000 507,000 36,000
Interest expense 3,243,000 1,593,000 1,650,000 786,000 864,000
General and administrative expense 355,000 192,000 163,000 - -
32
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Results attributable to acquisition and disposition activities
Rents and expense recoveries increased from approximately $3,606,000 in
the third quarter of 2002 to approximately $6,651,000 in the third quarter of
2003, a net increase of approximately $3,045,000 or 84%. Such net increase is
attributable primarily to the Company's acquisition and disposition activities.
Property expenses, excluding depreciation, amortization and interest
expense, increased from approximately $1,236,000 in the third quarter of 2002 to
approximately $2,256,000 in the third quarter of 2003, a net increase of
approximately $1,020,000 or 83%. Such increase is attributable to the Company's
acquisition and disposition activities.
Depreciation and amortization increased from approximately $607,000 in
the third quarter of 2002 to approximately $1,150,000 in the third quarter of
2003, a net increase of approximately $543,000 or 89%. Such increase is
attributable primarily to the Company's acquisition activities.
Interest expense increased from approximately $1,593,000 during the
third quarter of 2002 to approximately $3,243,000 in the third quarter of 2003,
a net increase of approximately $1,650,000 or 104%. Such increase reflects
approximately $786,000 attributable to the Company's acquisition activities, and
approximately $864,000 is principally attributable to the interest on the
Company's short-term borrowings and the related write off of deferred financing
charges.
General and administrative expense increased approximately $163,000 to
$355,000 in the third quarter of 2003 from approximately $192,000 in the third
quarter of 2002, a change of 85%. The increase is primarily attributable to the
Company's growth resulting in increases in advisory fees of $69,000 and an
increase in legal and accounting fees of $94,000.
Results for properties fully operating throughout the third quarter of both
years
Rental income for Port Richmond, Academy Plaza, Washington Center, The
Point, Red Lion and Loyal Plaza, the only properties fully operating throughout
the third quarter of both years, increased by approximately $166,000, from
$3,606,000 in the third quarter of 2002 to $3,772,000 in the third quarter of
2003. Property expenses for those properties increased $24,000 from
approximately $1,236,000 during the third quarter of 2002 to $1,260,000 during
the third quarter of 2003.
33
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Net Cash Flows
Operating Activities
Net cash flow (used in) provided by operating activities increased from
$(405,000) during the first nine months of 2002 to $616,000 during the first
nine months of 2003. The increase of $1,021,000 is attributable to the decrease
in net loss before minority interests, limited partner's interest,
distributions, and loss on sale for the period, as well as the increases
/decreases in rent and other receivables, prepaid expenses, taxes held in
escrow, accounts payable and accrued expenses, security deposits, and advanced
tenant payments, all principally associated with the properties acquired since
September 2002.
Investing Activities
Net cash flow used in investing activities was $(60,618,000) during the
first nine months of 2003, compared to approximately $(5,896,000) during the
first nine months of 2002. During the first nine months of 2003, the Company
completed the purchase of seven shopping center properties aggregating
approximately 718,000 square feet at a cost of approximately $57,000,000, while
the Company purchased two properties during the first nine months of 2002 with
an aggregate purchase price of approximately $8,583,000 and sold one property
for approximately $4,350,000 in May 2002.
Financing Activities
Cash flow provided by financing activities increased to approximately
$58,915,000 in the first nine months of 2003 from approximately $5,063,000 of
cash provided during the first nine months of 2002. The change of approximately
$54,000,000 was primarily the result of the Company obtaining mortgage financing
of approximately $47,000,000, proceeds from a line of credit and other short
term borrowings of approximately $11,000,000, and the receipt of $10,000,000 in
equity contributions from limited partners to fund the acquisitions of six
shopping centers, including the capital expenditures necessary to improve and
lease the Company's properties. This increase is offset, in part, by payments of
scheduled mortgage amortization and the repayment of a line of credit.
Liquidity and Capital Resources
The Company funds its operating expenses primarily from operating cash
flows, although, if needed, the Company may also use its bank line of credit for
this purpose. The Company funds acquisitions, developments, and other capital
expenditures primarily from available cash, property-specific mortgage
indebtedness, joint venture partner equity contributions, its line of credit
and, to a lesser extent, operating cash flows. The Company may also acquire
properties through the issuance of limited partnership units of the Operating
34
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Liquidity and Capital Resources (continued)
Partnership. Additionally, the Company may dispose of certain properties,
reinvesting the proceeds from such dispositions into properties with better
growth potential or that are more consistent with its strategic focus.
During October 2003, the Company completed an Offering, the net
proceeds of which amounted to approximately $145,000,000, and in November 2003,
the underwriter exercised its over-allotment option to purchase an additional
2,025,000 shares at $11.50 per share less the underwriters' discount. In
connection with the Offering, the Company obtained a commitment for a three-year
$75 million secured revolving credit facility from Fleet Bank. Under the terms
of this commitment the Company expects to have available a $40 million bridge
loan, with the remaining $35 million to be available upon syndication of the
facility prior to December 31, 2003 subject to the satisfaction of certain
covenants. Borrowings under the facility will incur interest at a rate of LIBOR
plus 2.25% - 2.75% depending upon the Company's leverage (loan to value). The
facility will be subject to customary financial covenants and limits on
leverage. The Company will have the ability to extend the payments of amounts
drawn under the facility for an additional one year period. Security for such
facility is expected to be first mortgages on properties which will be otherwise
unencumbered after the Offering. There can be no assurances that the lenders
will determine that the proffered collateral will be sufficient to support the
entire facility, that the syndication will be completed, or that the Company
will be able to comply with all of the loan covenants. To the extent available,
the Company expects to use the facility to, among other things, finance (a)
certain expected acquisitions of shopping centers or interim purchase deposits
with respect to new acquisitions, (b) certain expected acquisitions of optioned
properties, (c) capital improvements, (d) costs of redevelopment and new
development projects and properties, and (e) working capital and other corporate
purposes.
The Company believes that it has the ability to fund its operations for
at least the next twelve months, including required property-level capital
expenditures, tenant improvements, leasing costs, and mortgage and other
scheduled principal payments.
Capital Strategy
The Company focuses its investment activities on community and
neighborhood shopping centers, primarily located in Pennsylvania, anchored
principally by regional and national grocery store chains. The Company continues
to seek acquisition opportunities in which it can utilize its experience in
shopping center renovation, expansion, re-leasing and re-merchandising to
achieve long-term cash flow growth and favorable investment returns. The Company
also would consider investment opportunities in markets beyond the Pennsylvania
area, provided such opportunities were consistent with its focus, had the
potential to create favorable investment returns and increased value to its
shareholders, and could be effectively controlled and managed.
35
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Funds from Operations
Management believes that funds from operations ("FFO") is a widely
recognized and appropriate measure of performance of an equity REIT. Although
FFO is a non-GAAP financial measure, Management believes it provides useful
information to shareholders, potential investors, and management. Management
computes FFO in accordance with the standards established by the National
Association of Real Estate Investment Trusts ("NAREIT"). FFO is defined by
NAREIT as net income or loss excluding gains or losses from debt restructuring
and sales of properties plus real estate depreciation and amortization, and
after adjustments for unconsolidated partnerships and joint ventures. FFO does
not represent cash generated from operating activities in accordance with
accounting principles generally accepted in the United States and is not
indicative of cash available to fund cash needs. FFO should not be considered as
an alternative to net income as an indicator of the Company's operating
performance or as an alternative to cash flow as a measure of liquidity.
As not all companies and analysts calculate FFO in a similar fashion,
the Company's calculation of FFO presented herein may not be comparable to
similarly titled measures as reported by other companies.
36
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Cedar Shopping Centers, Inc.
The following table represents the Company's FFO calculation for the following
periods:
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---------- ---------- ------------ ------------
Net loss before limited partner's
interest in Operating Partnership $ (718,000) $ (156,000) $ (1,406,000) $ (1,107,000)
Add (less):
Limited partner's interest in the
Operating Partnership 490,000 96,000 939,000 787,000
---------- ---------- ------------ ------------
Net loss available to common shareholders (228,000) (60,000) (467,000) (320,000)
Add (less) Company's share of the following items:
Depreciation 274,000 147,000 730,000 333,000
Loss on sale - - - 14,000
Minority interest 110,000 41,000 237,000 6,000
Amount distributable to minority partners (214,000) (100,000) (521,000) (109,000)
---------- ---------- ------------ ------------
Basic and diluted funds from operations $ (58,000) $ 28,000 $ (21,000) $ (76,000)
========== ========== ============ ============
Weighted average shares outstanding 238,000 231,000 263,000 231,000
The following table represents the Operating Partnership's FFO calculation for
the following periods:
Three Months Ended Nine Months Ended
September30, September 30,
2003 2002 2003 2002
---------- ---------- ------------ ------------
Net loss before limited partner's
interest in Operating Partnership $ (718,000) $ (156,000) $ (1,406,000) $ (1,107,000)
Add (less):
Limited partner's interest in the
Operating Partnership 490,000 96,000 939,000 787,000
---------- ---------- ------------ ------------
Net loss available to common shareholders (228,000) (60,000) (467,000) (320,000)
Add (less) Company's share of the following items:
Limited partner's interest (490,000) (96,000) (939,000) (787,000)
Limited Partners share of Series A preferred
distribution (43,000) - (91,000) -
Depreciation 914,000 506,000 2,434,000 1,148,000
Loss on sale 49,000
Minority interest 367,000 142,000 790,000 21,000
Amount distributable to minority partners (714,000) (345,000) (1,738,000) (376,000)
---------- ---------- ------------ ------------
Basic and diluted funds from operations $ (194,000) $ 147,000 $ (11,000) $ (265,000)
========== ========== ============ ============
Weighted average shares/units outstanding 806,000 799,000 831,000 799,000
37
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The primary market risk facing the Company is variable interest rate
risk on its loans payable and mortgage notes payable. The Company will, when
advantageous, hedge its interest rate risk using financial instruments. The
Company is not subject to foreign currency risk.
The Company is exposed to interest rate changes primarily as a result
of (1) the line of credit used to maintain liquidity, fund capital expenditures
and expand its real estate investment portfolio and (2) the Camp Hill, L.A.
Fitness Center, Valley Plaza and Wal-Mart acquisition financing. The Company's
interest rate risk management objectives are to limit the impact of interest
rate changes on earnings and cash flows and to lower its overall borrowing
costs. To achieve these objectives, the Company borrows primarily at fixed rates
and may enter into derivative financial instruments such as interest rate swaps,
caps and treasury locks in order to mitigate its interest rate risk on a related
financial instrument. The Company does not enter into derivative or interest
rate transactions for speculative purposes.
The Company will recognize all derivatives on the balance sheet at fair
value. Derivatives that are not hedges will be adjusted to fair value through
income. If a derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of the derivative will either be offset against the
change in fair value of the hedged assets, liability or firm commitment through
earnings, or recognized in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a derivative's change in fair
value will be immediately recognized in earnings. As of September 30, 2003, the
Company has interest rate swaps on four of its mortgage loans. These derivatives
had a fair value of approximately $697,000 of which $227,000 was recognized in
other comprehensive income and the remaining $470,000 was recognized as the
limited partner's interest in the consolidated Operating Partnership.
The Company's interest rate risk is monitored using a variety of
techniques. As of September 30, 2003, long-term debt consisted of fixed-rate
secured mortgage indebtedness, fixed-rate unsecured notes, variable rate secured
mortgage notes, and a variable rate line of credit facility. The average
interest rate on the $125,000,000 of fixed rate secured mortgage indebtedness
outstanding at September 30, 2003 was 7.3%, with maturities at various dates
through 2013. The average interest rate on the Company's line of credit at
September 30, 2003 was 6%. There was $1,000,000 outstanding balance on the line
of credit at September 30, 2003.
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures and internal
controls designed to ensure that information required to be disclosed in its
filings under the Securities Exchange Act of 1934 is reported within the time
periods specified in the Securities and Exchange Commission's ("SEC") rules and
forms. In this regard, the Company has formed a Disclosure Committee currently
comprised of all of the Company's executive officers as well as certain other
employees with knowledge of information that may be considered in the SEC
reporting process. The Committee has responsibility for the development and
assessment of the financial and non-financial information to be included in the
reports filed by the Company with the SEC and assists the Company's Chief
Executive Officer and Chief Financial Officer in connection with their
certifications contained in the Company's SEC reports.
38
Item 4. Controls and Procedures (continued)
The Committee meets regularly and reports to the Audit Committee on at
least a quarterly basis. The Company's Chief Executive and Chief Financial
Officers have evaluated the effectiveness of the Company's disclosure controls
and procedures as of September 30, 2003 and have determined that such disclosure
controls and procedures are effective as of the end of the period covered by
this report.
During the quarter ended September 30, 2003, there have been no
significant changes in the internal controls or in other factors that could
significantly affect these controls subsequent to the date of their evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
39
Cedar Shopping Centers, Inc.
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K
None
Exhibit 31.1 Section 302 Certifications
Exhibit 32.1 Section 906 Certifications
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
CEDAR SHOPPING CENTERS, INC.
/s/ Leo S. Ullman /s/ Thomas J O'Keeffe
- ----------------------------------- -------------------------------------
Leo S. Ullman Thomas J O'Keeffe
Chairman of the Board and President Chief Financial Officer
(Principal executive officer) (Principal financial officer)
/s/ Ann Maneri
- -----------------------------------
Ann Maneri
Controller
(Principal accounting officer)
November 13, 2003
41