| RISK FACTORS The Economic Performance and Value of the Company’s Shopping Centers Depend on Many Factors, Each of Which Could Have an Adverse Impact on Its Cash Flows and Operating Results The economic performance and value of the Company’s real estate holdings can be affected by many factors, including the following: • Changes in the national, regional and local economic climate; • Local conditions such as an oversupply of space or a reduction in demand for real estate in the area; • The attractiveness of the properties to tenants; • Competition from other available space; • The Company’s ability to provide adequate management services and to maintain its properties; • Increased operating costs, if these costs cannot be passed through to tenants and • The expense of periodically renovating, repairing and reletting spaces |
| The Company’s properties consist primarily of community and neighborhood shopping centers and, therefore, its performance is linked to general economic conditions in the market for retail space |
| The market for retail space has been and may continue to be adversely affected by weakness in the national, regional and local economies, the adverse financial condition of some large retailing companies, the ongoing consolidation in the retail sector, the excess amount of retail space in a number of markets and increasing consumer purchases through catalogues and the Internet |
| To the extent that any of these conditions occur, they are likely to affect market rents for retail space |
| In addition, the Company may face challenges in the management and maintenance of the properties or encounter increased operating costs, such as real estate taxes, insurance and utilities, which may make its properties unattractive to tenants |
| The loss of rental revenues from a number of the Company’s tenants and its inability to replace such tenants may adversely affect the Company’s profitability and ability to meet its debt and other financial obligations and make distributions to the shareholders |
| The Company’s Dependence on Rental Income May Adversely Affect Its Ability to Meet Its Debt Obligations and Make Distributions to the Shareholders Substantially all of the Company’s income is derived from rental income from real property |
| As a result, the Company’s performance depends on its ability to collect rent from tenants |
| The Company’s income and funds for distribution would be negatively affected if a significant number of its tenants, or any of its major tenants (as discussed in more detail below): • Experience a downturn in their business that significantly weakens their ability to meet their obligations to the Company; 6 _________________________________________________________________ [56]Table of Contents • Delay lease commencements; • Decline to extend or renew leases upon expiration; • Fail to make rental payments when due or • Close stores or declare bankruptcy |
| Any of these actions could result in the termination of the tenant’s leases and the loss of rental income attributable to the terminated leases |
| Lease terminations by an anchor tenant or a failure by that anchor tenant to occupy the premises could also result in lease terminations or reductions in rent by other tenants in the same shopping centers under the terms of some leases |
| In addition, the Company cannot be sure that any tenant whose lease expires will renew that lease or that it will be able to re-lease space on economically advantageous terms |
| The loss of rental revenues from a number of the Company’s tenants and its inability to replace such tenants may adversely affect the Company’s profitability and its ability to meet debt and other financial obligations and make distributions to the shareholders |
| The Company Relies on Major Tenants, Making It Vulnerable to Changes in the Business and Financial Condition of, or Demand for Its Space by, Such Tenants As of December 31, 2005, the annualized base rental revenues from Wal-Mart, Tops Market (Royal Ahold), Mervyns, PETsMART, TJ Maxx, Bed Bath & Beyond, Kohl’s and Lowe’s represented 5dtta4prca, 3dtta1prca, 2dtta8prca, 2dtta0prca, 1dtta9prca, 1dtta7prca, 1dtta7prca and 1dtta7prca, respectively, of the Company’s aggregate annualized shopping center base rental revenues, including its proportionate share of joint venture aggregate annualized shopping center base rental revenues |
| The Company’s income and ability to meet its financial obligations could be adversely affected in the event of the bankruptcy or insolvency of, or a significant downturn in the business of, one of these tenants or any of the Company’s other major tenants |
| In addition, the Company’s results could be adversely affected if any of these tenants does not renew multiple lease terms as they expire |
| The Company’s Acquisition Activities May Not Produce the Cash Flows That It Expects and May Be Limited by Competitive Pressures or Other Factors The Company intends to acquire existing retail properties to the extent that suitable acquisitions can be made on advantageous terms |
| Acquisitions of commercial properties entail risks such as: • The Company’s estimates on expected occupancy and rental rates may differ from actual conditions; • The Company’s estimates of the costs of any redevelopment or repositioning of acquired properties may prove to be inaccurate; • The Company may be unable to operate successfully in new markets where acquired properties are located, due to a lack of market knowledge or understanding of local economies; • The Company may be unable to successfully integrate new properties into its existing operations; or • The Company may have difficulty obtaining financing on acceptable terms or paying the operating expenses and debt service associated with acquired properties prior to sufficient occupancy |
| In addition, the Company may not be in a position or have the opportunity in the future to make suitable property acquisitions on advantageous terms due to competition for such properties with others engaged in real estate investment who may have greater financial resources than the Company |
| The Company’s inability to successfully acquire new properties may affect the Company’s ability to achieve anticipated return on investment, which could have an adverse effect on its results of operations |
| The Company’s Articles of Incorporation Contain Limitations on Acquisitions and Changes in Control In order to maintain the Company’s status as a REIT, its articles of incorporation prohibit any person, except for certain existing shareholders at the time of its initial public offering, from owning more than 5prca of the Company’s outstanding common shares |
| This restriction is likely to discourage third parties from acquiring 7 _________________________________________________________________ [57]Table of Contents control of DDR without consent of its board of directors even if a change in control was in the interest of shareholders |
| Real Estate Property Investments Are Illiquid, and Therefore the Company May Not Be Able to Dispose of Properties When Appropriate or on Favorable Terms Real estate property investments generally cannot be disposed of quickly |
| In addition, the federal tax code imposes restrictions on the ability of a REIT to dispose of properties that are not applicable to other types of real estate companies |
| Therefore, the Company may not be able to vary its portfolio in response to economic or other conditions promptly or on favorable terms, which could cause the Company to incur extended losses and reduce its cash flows and adversely affect distributions to shareholders |
| The Company’s Development and Construction Activities Could Affect Its Operating Results The Company intends to continue the selective development and construction of retail properties in accordance with its development and underwriting policies as opportunities arise |
| The Company’s development and construction activities include risks that: • The Company may abandon development opportunities after expending resources to determine feasibility; • Construction costs of a project may exceed the Company’s original estimates; • Occupancy rates and rents at a newly completed property may not be sufficient to make the property profitable; • Rental rates per square foot could be less than projected; • Financing may not be available to the Company on favorable terms for development of a property; • The Company may not complete construction and lease-up on schedule, resulting in increased debt service expense and construction costs and • The Company may not be able to obtain, or may experience delays in obtaining necessary zoning, land use, building, occupancy and other required governmental permits and authorizations |
| Additionally, the time frame required for development, construction and lease-up of these properties means that the Company may have to wait years for a significant cash return |
| If any of the above events occur, the development of properties may hinder the Company’s growth and have an adverse effect on its results of operations |
| In addition, new development activities, regardless of whether or not they are ultimately successful, typically require substantial time and attention from management |
| The Company Has Variable Rate Debt and Is Subject to Interest Rate Risk The Company has a substantial amount of mortgage debt with interest rates that vary depending upon the market index |
| In addition, the Company has a revolving credit facility that bears interest at a variable rate on all amounts drawn on the facility |
| The Company may incur additional variable rate debt in the future |
| Increases in interest rates on variable rate debt would increase the Company’s interest expense, which would adversely affect net earnings and cash available for payment of its debt obligations and distributions to the shareholders |
| The Company’s Ability to Increase Its Debt Could Adversely Affect Its Cash Flow At December 31, 2005, the Company had outstanding debt of approximately dlra3dtta9 billion (excluding its proportionate share of joint venture mortgage debt aggregating dlra510dtta5 million) |
| The Company intends to continue to maintain a conservative debt capitalization with a ratio of debt to total market capitalization (the sum of the aggregate market value of the Company’s common shares, the liquidation preference on any preferred shares outstanding and its total indebtedness) of less than 50prca |
| In addition, the Company is subject to limitations under its credit facilities and indentures relating to its ability to incur further debt; however, the Company’s organizational documents do not contain any limitation on the amount or percentage of indebtedness it may incur |
| 8 _________________________________________________________________ [58]Table of Contents If the Company were to become more highly leveraged, its cash needs to fund debt service would increase accordingly |
| Under such circumstances, the Company’s risk of decreases in cash flow, due to fluctuations in the real estate market, reliance on its major tenants, acquisition and development costs and the other factors discussed above could subject the Company to an even greater adverse impact on its financial condition and results of operations |
| In addition, increased leverage could increase the risk of default on the Company’s debt obligations, which could further reduce its cash available for distribution and adversely affect its ability to dispose of its portfolio on favorable terms, which could cause the Company to incur extended losses and reduce its cash flows |
| The Company’s Cash Flows and Operating Results Could Be Adversely Affected by Required Payments of Debt or Related Interest and Other Risks of Its Debt Financing The Company is generally subject to risks associated with debt financing |
| These risks include: • The Company’s cash flow may not satisfy required payments of principal and interest; • The Company may not be able to refinance existing indebtedness on its properties as necessary or the terms of the refinancing may be less favorable to the Company than the terms of existing debt; • Required debt payments are not reduced if the economic performance of any property declines; • Debt service obligations could reduce funds available for distribution to the Company’s shareholders and funds available for acquisitions; • Any default on the Company’s indebtedness could result in acceleration of those obligations and possible loss of property to foreclosure and • The risk that necessary capital expenditures for purposes such as re-leasing space cannot be financed on favorable terms |
| If a property is mortgaged to secure payment of indebtedness and the Company cannot make the mortgage payments, it may have to surrender the property to the lender with a consequent loss of any prospective income and equity value from such property |
| Any of these risks can place strains on the Company’s cash flows, reduce its ability to grow and adversely affect its results of operations |
| The Company’s Financial Condition Could Be Adversely Affected by Financial Covenants The Company’s credit facilities and the indentures under which its senior and subordinated unsecured indebtedness is, or may be, issued contain certain financial and operating covenants, including, among other things, certain coverage ratios, as well as limitations on the Company’s ability to incur secured and unsecured indebtedness, sell all or substantially all of its assets and engage in mergers and consolidations and certain acquisitions |
| These covenants could limit the Company’s ability to obtain additional funds needed to address cash shortfalls or pursue growth opportunities or transactions that would provide substantial return to its shareholders |
| In addition, a breach of these covenants could cause a default under or accelerate some or all of the Company’s indebtedness, which could have a material adverse effect on its financial condition |
| The Company’s Ability to Continue to Obtain Permanent Financing Cannot Be Assured In the past, the Company has financed certain acquisitions and certain development activities in part with proceeds from its credit facilities or offerings of its debt securities |
| These financings have been, and may continue to be, replaced by more permanent financing |
| However, the Company may not be able to obtain more permanent financing for future acquisitions or development activities on acceptable terms |
| If market interest rates were to increase or other unfavorable market conditions exist at a time when amounts were outstanding under the Company’s credit facilities, or if other variable rate debt was outstanding, the Company’s debt interest costs would increase, causing potentially adverse effects on its financial condition and results of operations |
| 9 _________________________________________________________________ [59]Table of Contents If the Company Fails to Qualify as a REIT in Any Taxable Year, It Will Be Subject to US Federal Income Tax as a Regular Corporation and Could Have Significant Tax Liability The Company intends to operate in a manner that allows it to qualify as a REIT for US federal income tax purposes |
| However, REIT qualification requires that the Company satisfy numerous requirements (some on an annual or quarterly basis) established under highly technical and complex provisions of the Internal Revenue Code of 1986, as amended, or the Code, for which there are a limited number of judicial or administrative interpretations |
| The Company’s status as a REIT requires an analysis of various factual matters and circumstances that are not entirely within its control |
| Accordingly, it is not certain the Company will be able to qualify and remain qualified as a REIT for US federal income tax purposes |
| Even a technical or inadvertent violation of the REIT requirements could jeopardize the Company’s REIT qualification |
| Furthermore, Congress or the Internal Revenue Service, or IRS, might change the tax laws or regulations and the courts might issue new rulings, in each case potentially having retroactive effect that could make it more difficult or impossible for the Company to qualify as a REIT If the Company fails to qualify as a REIT in any tax year, then: • the Company would be taxed as a regular domestic corporation, which, among other things, means that it would be unable to deduct distributions to its shareholders in computing its taxable income and would be subject to US federal income tax on its taxable income at regular corporate rates; • any resulting tax liability could be substantial and would reduce the amount of cash available for distribution to shareholders, and could force the Company to liquidate assets or take other actions that could have a detrimental effect on its operating results; and • unless the Company was entitled to relief under applicable statutory provisions, it would be disqualified from treatment as a REIT for the four taxable years following the year during which the Company lost its qualification, and its cash available for distribution to its shareholders therefore would be reduced for each of the years in which the Company does not qualify as a REIT Even if the Company remains qualified as a REIT, it may face other tax liabilities that reduce its cash flow |
| The Company may also be subject to certain US federal, state and local taxes on its income and property either directly or at the level of its subsidiaries |
| Any of these taxes would decrease cash available for distribution to the Company’s shareholders |
| Compliance with REIT Requirements May Negatively Affect the Company’s Operating Decisions To maintain its status as a REIT for US federal income tax purposes, the Company must meet certain requirements, on an on-going basis, including requirements regarding its sources of income, the nature and diversification of its assets, the amounts the Company distributes to its shareholders and the ownership of its shares |
| The Company may also be required to make distributions to its shareholders when it does not have funds readily available for distribution or at times when the Company’s funds are otherwise needed to fund capital expenditures |
| As a REIT, the Company must distribute at least 90prca of its annual net taxable income (excluding net capital gains) to its shareholders |
| To the extent that the Company satisfies this distribution requirement, but distributes less than 100prca of its net taxable income, the Company will be subject to US federal corporate income tax on its undistributed taxable income |
| In addition, the Company will be subject to a 4prca nondeductible excise tax if the actual amount that it pays to its shareholders in a calendar year is less than a minimum amount specified under US federal tax laws |
| From time to time, the Company may generate taxable income greater than its income for financial reporting purposes, or its net taxable income may be greater than its cash flow available for distribution to its shareholders |
| If the Company does not have other funds available in these situations, it could be required to borrow funds, sell a portion of its securities at unfavorable prices or find other sources of funds in order to meet the REIT distribution requirements and to avoid corporate income tax and the 4prca excise tax |
| In addition, the REIT provisions of the Code impose a 100prca tax on income from “prohibited transactions |
| ” Prohibited transactions generally include sales of assets that constitute inventory or other property held for sale to customers in the ordinary course of business, other than foreclosure property |
| This 100prca tax could impact the Company’s decisions to sell property if it believes such sales could be treated as a 10 _________________________________________________________________ [60]Table of Contents prohibited transaction |
| However, the Company would not be subject to this tax if it were to sell assets through a taxable REIT subsidiary |
| The Company will also be subject to a 100prca tax on certain amounts if the economic arrangements between the Company and a taxable REIT subsidiary are not comparable to similar arrangements among unrelated parties |
| Dividends Paid by REITs Generally Do Not Qualify for Reduced Tax Rates In general, the maximum US federal income tax rate for dividends paid to individual US shareholders is 15prca (through 2008) |
| Unlike dividends received from a corporation that is not a REIT, the Company’s distributions to individual shareholders generally are not eligible for the reduced rates |
| Property Ownership Through Partnerships and Joint Ventures Could Limit the Company’s Control of Those Investments and Reduce Its Expected Return Partnership or joint venture investments may involve risks not otherwise present for investments made solely by the Company, including the possibility that the Company’s partner or co-venturer might become bankrupt, that its partner or co-venturer might at any time have different interests or goals than the Company, and that its partner or co-venturer may take action contrary to the Company’s instructions, requests, policies or objectives, including the Company’s policy with respect to maintaining its qualification as a REIT Other risks of joint venture investments include impasse on decisions, such as a sale, because neither the Company’s partner or co-venturer nor the Company would have full control over the partnership or joint venture |
| These factors could limit the return that the Company receives from such investments or cause its cash flows to be lower than its estimates |
| There is no limitation under the Company’s amended and restated articles of incorporation, or its code of regulations as to the amount of funds that the Company may invest in partnerships or joint ventures |
| As of December 31, 2005, the Company had approximately dlra275dtta1 million of investments in and advances to unconsolidated partnerships and joint ventures holding 163 operating shopping centers |
| The Company’s Inability to Realize the Anticipated Returns from Its Retail Real Estate Assets Outside the United States Could Adversely Affect Its Results of Operations The Company may not realize the intended benefits of the transactions outside the United States as the Company may not have any prior experience with local economies or culture |
| The assets may not perform as well as the Company anticipated or may not be successfully integrated, or the Company may not realize the improvements in occupancy and operating results that it anticipated |
| In addition, the Company could be subject to local laws governing these properties, with which it has no prior experience, and which may present new challenges for the management of the Company’s operations |
| Each of these factors may adversely affect the Company’s ability to achieve anticipated return on investment, which could have an adverse effect on its results of operations |
| The Company’s Real Estate Investments May Contain Environmental Risks That Could Adversely Affect Its Operating Results The acquisition of certain of the assets may subject the Company to liabilities, including environmental liabilities |
| The Company’s operating expenses could be higher than anticipated due to the cost of complying with existing or future environmental laws and regulations |
| In addition, under various federal, state and local laws, ordinances and regulations, the Company may be considered an owner or operator of real property or to have arranged for the disposal or treatment of hazardous or toxic substances |
| As a result, the Company may become liable for the costs of removal or remediation of certain hazardous substances released on or in its property |
| The Company may also be liable for other potential costs that could relate to hazardous or toxic substances (including governmental fines and injuries to persons and property) |
| The Company may incur such liability whether or not it knew of, or was responsible for, the presence of such hazardous or toxic substances |
| Such liability could be of substantial magnitude and divert management’s attention from other aspects of the Company’s business and, as a result, could have a material adverse effect on the Company’s operating results and financial condition, as well as its ability to make distributions to the shareholders |
| 11 _________________________________________________________________ [61]Table of Contents An Uninsured Loss or a Loss That Exceeds the Policies on the Company’s Properties Could Subject the Company to Lost Capital or Revenue on Those Properties Under the terms and conditions of the leases currently in force on the Company’s properties, tenants generally are required to indemnify and hold the Company harmless from liabilities resulting from injury to persons, air, water, land or property, on or off the premises, due to activities conducted on the properties, except for claims arising from the negligence or intentional misconduct of the Company or its agents |
| Additionally, tenants are generally required, at the tenant’s expense, to obtain and keep in full force during the term of the lease, liability and full replacement value property damage insurance policies |
| The Company has obtained comprehensive liability, casualty, flood and rental loss insurance policies on the properties |
| All of these policies may involve substantial deductibles and certain exclusions |
| In addition, the Company cannot assure the shareholders that the tenants will properly maintain their insurance policies or have the ability to pay the deductibles |
| Should a loss occur that is uninsured or in an amount exceeding the combined aggregate limits for the policies noted above, or in the event of a loss that is subject to a substantial deductible under an insurance policy, the Company could lose all or part of its capital invested in, and anticipated revenue from, one or more of the properties, which could have a material adverse effect on the Company’s operating results and financial condition, as well as its ability to make distributions to the shareholders |
| Compliance with the Americans with Disabilities Act and Fire, Safety and Other Regulations May Require the Company to Make Unintended Expenditures That Adversely Affect the Company’s Cash Flows All of the Company’s properties are required to comply with the Americans with Disabilities Act, (“ADA”) |
| The ADA has separate compliance requirements for “public accommodations” and “commercial facilities,” but generally requires that buildings be made accessible to people with disabilities |
| Compliance with the ADA requirements could require removal of access barriers, and non-compliance could result in imposition of fines by the US government or an award of damages to private litigants, or both |
| While the tenants to whom the Company leases properties are obligated by law to comply with the ADA provisions, and typically under tenant leases are obligated to cover costs associated with compliance, if required changes involve greater expenditures than anticipated, or if the changes must be made on a more accelerated basis than anticipated, the ability of these tenants to cover costs could be adversely affected |
| As a result, the Company could be required to expend funds to comply with the provisions of the ADA, which could adversely affect the results of operations and financial condition and its ability to make distributions to shareholders |
| In addition, the Company is required to operate the properties in compliance with fire and safety regulations, building codes and other land use regulations, as they may be adopted by governmental agencies and bodies and become applicable to the properties |
| The Company may be required to make substantial capital expenditures to comply with those requirements, and these expenditures could have a material adverse effect on its ability to meet the financial obligations and make distributions to the shareholders |
| Changes in Market Conditions Could Adversely Affect the Market Price of the Company’s Publicly Traded Securities As with other publicly traded securities, the market price of the Company’s publicly traded securities depends on various market conditions, which may change from time to time |
| Among the market conditions that may affect the market price of the Company’s publicly traded securities are the following: • The extent of institutional investor interest in the Company; • The reputation of REITs generally and the reputation of REITs with similar portfolios; • The attractiveness of the securities of REITs in comparison to securities issued by other entities (including securities issued by other real estate companies); • The Company’s financial condition and performance; • The market’s perception of the Company’s growth potential and potential future cash dividends; 12 _________________________________________________________________ [62]Table of Contents • An increase in market interest rates, which may lead prospective investors to demand a higher distribution rate in relation to the price paid for the Company’s shares and • General economic and financial market conditions |
| The Company Can Issue Additional Securities Without Shareholder Approval The Company can issue preferred, equity and common stock without shareholder approval subject to certain limitations in the Company’s articles of incorporation |
| Holders of preferred stock have priority over holders of common stock, and the issuance of additional shares of stock reduces the interest of existing holders in the Company |
| The Company’s Executive Officers Have Agreements That Provide Them with Benefits in the Event of a Change in Control of the Company or if Their Employment Agreements are Not Renewed The Company has entered into employment agreements with certain executive officers that provide them with severance benefits if their employment ends under certain circumstances following a change in control of the Company or if the Company terminates the executive officer “without cause” as defined in the employment agreements |
| These benefits could increase the cost to a potential acquirer of the Company and thereby prevent or deter a change in control of the Company that might involve a premium price for the common shares or otherwise affect the interests of the shareholders |