FRT-9.30.2011-Q3
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 
___________________________
FORM 10-Q
___________________________
ý
QUARTERLY REPORT PURSUANT TO THE SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2011
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number: 1-07533 
FEDERAL REALTY INVESTMENT TRUST
(Exact Name of Registrant as Specified in its Declaration of Trust) 
Maryland
 
52-0782497
(State of Organization)
 
(IRS Employer
Identification No.)
 
 
1626 East Jefferson Street,
Rockville, Maryland
 
20852
(Address of Principal Executive Offices)
 
(Zip Code)
(301) 998-8100
(Registrant’s Telephone Number, Including Area Code) 
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.    ý  Yes    ¨  No
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ý  Yes    ¨  No
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:
 
Large Accelerated Filer
ý
Accelerated Filer
¨
 
 
 
 
Non-Accelerated Filer
o  (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     ¨  Yes    ý  No
The number of Registrant’s common shares outstanding on October 31, 2011 was 63,500,437.

Table of Contents

FEDERAL REALTY INVESTMENT TRUST
QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2011
TABLE OF CONTENTS
 
Item 1.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
 


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PART I—FINANCIAL INFORMATION
 
ITEM 1.
FINANCIAL STATEMENTS
The following balance sheet as of December 31, 2010, which has been derived from audited financial statements, and unaudited interim financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles (GAAP) have been omitted pursuant to those rules and regulations, although the company believes that the disclosures made are adequate to make the information not misleading. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in the company’s latest Annual Report on Form 10-K. In the opinion of management, all adjustments (consisting of normal, recurring adjustments) necessary for a fair presentation for the periods presented have been included. The results of operations for the three and nine months ended September 30, 2011 are not necessarily indicative of the results that may be expected for the full year.


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Federal Realty Investment Trust
Consolidated Balance Sheets
 
 
September 30,
2011
 
December 31,
2010
 
(In thousands, except share data)
 
(Unaudited)
 
 
ASSETS
 
 
 
Real estate, at cost
 
 
 
Operating (including $68,930 and $78,846 of consolidated variable interest entities, respectively)
$
3,812,705

 
$
3,695,848

Construction-in-progress
207,715

 
163,200

Assets held for sale/disposal (discontinued operations) (including $0 and $18,311 of consolidated variable interest entities, respectively)
4,203

 
36,894

 
4,024,623

 
3,895,942

Less accumulated depreciation and amortization (including $4,727 and $4,431 of consolidated variable interest entities, respectively)
(1,102,997
)
 
(1,035,204
)
Net real estate
2,921,626

 
2,860,738

Cash and cash equivalents
22,070

 
15,797

Accounts and notes receivable, net
78,503

 
68,997

Mortgage notes receivable, net
56,076

 
44,813

Investment in real estate partnerships
57,828

 
51,606

Prepaid expenses and other assets
109,421

 
110,686

Debt issuance costs, net of accumulated amortization of $8,384 and $9,075, respectively
9,324

 
6,916

TOTAL ASSETS
$
3,254,848

 
$
3,159,553

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Liabilities
 
 
 
Mortgages payable (including $22,287 and $22,785 of consolidated variable interest entities, respectively)
$
484,502

 
$
529,501

Capital lease obligations
63,455

 
59,940

Notes payable
178,232

 
97,881

Senior notes and debentures
1,004,686

 
1,079,827

Accounts payable and accrued expenses
89,623

 
102,574

Dividends payable
44,195

 
41,601

Security deposits payable
12,038

 
11,751

Other liabilities and deferred credits
54,990

 
55,348

Total liabilities
1,931,721

 
1,978,423

Commitments and contingencies (Note 8)

 

Shareholders’ equity
 
 
 
Preferred shares, authorized 15,000,000 shares, $.01 par: 5.417% Series 1 Cumulative Convertible Preferred Shares, (stated at liquidation preference $25 per share), 399,896 shares issued and outstanding
9,997

 
9,997

Common shares of beneficial interest, $.01 par, 100,000,000 shares authorized, 63,494,277 and 61,526,418 shares issued and outstanding, respectively
635

 
615

Additional paid-in capital
1,824,254

 
1,666,803

Accumulated dividends in excess of net income
(542,480
)
 
(527,582
)
Total shareholders’ equity of the Trust
1,292,406

 
1,149,833

Noncontrolling interests
30,721

 
31,297

Total shareholders’ equity
1,323,127

 
1,181,130

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
3,254,848

 
$
3,159,553


The accompanying notes are an integral part of these consolidated statements.

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Federal Realty Investment Trust
Consolidated Statements of Operations
(Unaudited)

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2011
 
2010
 
2011
 
2010
 
(In thousands, except per share data)
REVENUE
 
 
 
 
 
 
 
Rental income
$
134,014

 
$
129,527

 
$
401,452

 
$
389,988

Other property income
2,341

 
2,824

 
6,577

 
11,243

Mortgage interest income
1,309

 
1,095

 
3,564

 
3,232

Total revenue
137,664

 
133,446

 
411,593

 
404,463

EXPENSES
 
 
 
 
 
 
 
Rental expenses
26,595

 
27,030

 
81,130

 
82,334

Real estate taxes
15,047

 
15,185

 
46,001

 
45,040

General and administrative
7,197

 
5,904

 
19,643

 
17,409

Depreciation and amortization
32,068

 
29,431

 
94,355

 
89,224

Total operating expenses
80,907

 
77,550

 
241,129

 
234,007

OPERATING INCOME
56,757

 
55,896

 
170,464

 
170,456

Other interest income
136

 
18

 
171

 
233

Interest expense
(23,795
)
 
(25,299
)
 
(72,744
)
 
(76,679
)
Early extinguishment of debt

 

 
296

 
(2,801
)
Income from real estate partnerships
434

 
125

 
1,201

 
506

INCOME FROM CONTINUING OPERATIONS
33,532

 
30,740

 
99,388

 
91,715

DISCONTINUED OPERATIONS
 
 
 
 
 
 
 
Discontinued operations - income
13

 
270

 
943

 
807

Discontinued operations - gain on deconsolidation of VIE

 

 
2,026

 

Discontinued operations - gain on sale of real estate
14,757

 

 
14,800

 
1,000

Results from discontinued operations
14,770

 
270

 
17,769

 
1,807

INCOME BEFORE GAIN ON SALE OF REAL ESTATE
48,302

 
31,010

 
117,157

 
93,522

Gain on sale of real estate

 

 

 
410

NET INCOME
48,302

 
31,010

 
117,157

 
93,932

Net income attributable to noncontrolling interests
(1,249
)
 
(1,370
)
 
(4,161
)
 
(3,958
)
NET INCOME ATTRIBUTABLE TO THE TRUST
47,053

 
29,640

 
112,996

 
89,974

Dividends on preferred shares
(136
)
 
(136
)
 
(406
)
 
(406
)
NET INCOME AVAILABLE FOR COMMON SHAREHOLDERS
$
46,917

 
$
29,504

 
$
112,590

 
$
89,568

EARNINGS PER COMMON SHARE, BASIC
 
 
 
 
 
 
 
Continuing operations
$
0.51

 
$
0.48

 
$
1.52

 
$
1.42

Discontinued operations
0.23

 

 
0.28

 
0.03

Gain on sale of real estate

 

 

 
0.01

 
$
0.74

 
$
0.48

 
$
1.80

 
$
1.46

EARNINGS PER COMMON SHARE, DILUTED
 
 
 
 
 
 
 
Continuing operations
$
0.51

 
$
0.48

 
$
1.52

 
$
1.41

Discontinued operations
0.23

 

 
0.28

 
0.03

Gain on sale of real estate

 

 

 
0.01

 
$
0.74

 
$
0.48

 
$
1.80

 
$
1.45


The accompanying notes are an integral part of these consolidated statements.


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Federal Realty Investment Trust
Consolidated Statement of Shareholders’ Equity
For the Nine Months Ended September 30, 2011
(Unaudited)
 
 
Shareholders’ Equity of the Trust
 
 
 
 
 
Preferred Shares
 
Common Shares
 
Additional
Paid-in
Capital
 
Accumulated
Dividends in
Excess of Net
Income
 
Noncontrolling Interests
 
Total Shareholders' Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
(In thousands, except share data)
BALANCE AT DECEMBER 31, 2010
399,896

 
$
9,997

 
61,526,418

 
$
615

 
$
1,666,803

 
$
(527,582
)
 
$
31,297

 
$
1,181,130

Net income/comprehensive income

 

 

 

 

 
112,996

 
4,161

 
117,157

Dividends declared to common shareholders

 

 

 

 

 
(127,488
)
 

 
(127,488
)
Dividends declared to preferred shareholders

 

 

 

 

 
(406
)
 

 
(406
)
Distributions declared to noncontrolling interests

 

 

 

 

 

 
(4,055
)
 
(4,055
)
Common shares issued

 

 
1,662,185

 
17

 
139,320

 

 

 
139,337

Exercise of stock options

 

 
194,586

 
2

 
12,677

 

 

 
12,679

Shares issued under dividend reinvestment plan

 

 
21,680

 

 
1,777

 

 

 
1,777

Share-based compensation expense, net

 

 
89,408

 
1

 
6,104

 

 

 
6,105

Conversion and redemption of OP units

 

 

 

 
(96
)
 

 
(55
)
 
(151
)
Purchase of noncontrolling interest

 

 

 

 
(2,331
)
 

 
(207
)
 
(2,538
)
Deconsolidation of VIE

 

 

 

 

 

 
(420
)
 
(420
)
BALANCE AT SEPTEMBER 30, 2011
399,896

 
$
9,997

 
63,494,277

 
$
635

 
$
1,824,254

 
$
(542,480
)
 
$
30,721

 
$
1,323,127

The accompanying notes are an integral part of these consolidated statements.


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Federal Realty Investment Trust
Consolidated Statements of Cash Flows
(Unaudited)
 
 
Nine Months Ended
 
September 30,
 
2011
 
2010
 
(In thousands)
OPERATING ACTIVITIES
 
Net income
$
117,157

 
$
93,932

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Depreciation and amortization, including discontinued operations
94,715

 
89,701

Gain on sale of real estate
(14,800
)
 
(1,410
)
Gain on deconsolidation of VIE
(2,026
)
 

Early extinguishment of debt
(296
)
 
2,801

Income from real estate partnerships
(1,201
)
 
(506
)
Other, net
2,702

 
1,554

Changes in assets and liabilities, net of effects of acquisitions and dispositions
 
 
 
(Increase) decrease in accounts receivable
(6,143
)
 
1,668

Decrease (increase) in prepaid expenses and other assets
1,986

 
(4,056
)
Decrease in accounts payable and accrued expenses
(17,532
)
 
(1,840
)
Decrease in security deposits and other liabilities
(1,611
)
 
(2,159
)
Net cash provided by operating activities
172,951

 
179,685

INVESTING ACTIVITIES
 
 
 
Acquisition of real estate
(26,304
)
 
(17,582
)
Capital expenditures - development and redevelopment
(57,026
)
 
(34,775
)
Capital expenditures - other
(32,316
)
 
(21,873
)
Proceeds from sale of real estate
20,669

 

Investment in real estate partnerships
(6,947
)
 
(16,930
)
Distribution from real estate partnership in excess of earnings
442

 
167

Leasing costs
(9,130
)
 
(7,094
)
Repayment (issuance) of mortgage and other notes receivable, net
9,299

 
(13,218
)
Net cash used in investing activities
(101,313
)
 
(111,305
)
FINANCING ACTIVITIES
 
 
 
Net borrowings under revolving credit facility, net of costs
76,841

 
26,550

Issuance of senior notes, net of costs

 
148,457

Purchase and retirement of senior notes
(75,000
)
 

Issuance of mortgages, capital leases and notes payable, net of costs

 
9,950

Repayment of mortgages, capital leases and notes payable
(88,955
)
 
(259,342
)
Issuance of common shares
153,793

 
5,997

Dividends paid to common and preferred shareholders
(125,306
)
 
(121,823
)
Distributions to noncontrolling interests
(6,738
)
 
(4,384
)
Net cash used in financing activities
(65,365
)
 
(194,595
)
Increase (decrease) in cash and cash equivalents
6,273

 
(126,215
)
Cash and cash equivalents at beginning of year
15,797

 
135,389

Cash and cash equivalents at end of period
$
22,070

 
$
9,174


The accompanying notes are an integral part of these consolidated statements.


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Federal Realty Investment Trust
Notes to Consolidated Financial Statements
September 30, 2011
(Unaudited)

NOTE 1—BUSINESS AND ORGANIZATION
Federal Realty Investment Trust (the “Trust”) is an equity real estate investment trust (“REIT”) specializing in the ownership, management, and redevelopment of retail and mixed-use properties. Our properties are located primarily in densely populated and affluent communities in strategically selected metropolitan markets in the Mid-Atlantic and Northeast regions of the United States, as well as in California. As of September 30, 2011, we owned or had a majority interest in community and neighborhood shopping centers and mixed-use properties which are operated as 85 predominantly retail real estate projects.
We operate in a manner intended to enable us to qualify as a REIT for federal income tax purposes. A REIT that distributes at least 90% of its taxable income to its shareholders each year and meets certain other conditions is not taxed on that portion of its taxable income which is distributed to its shareholders. Therefore, federal income taxes on our taxable income have been and are generally expected to be immaterial. We are obligated to pay state taxes, generally consisting of franchise or gross receipts taxes in certain states. Such state taxes also have not been material.

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
Our consolidated financial statements include the accounts of the Trust, its corporate subsidiaries, and all entities in which the Trust has a controlling interest or has been determined to be the primary beneficiary of a variable interest entity (“VIE”). The equity interests of other investors are reflected as noncontrolling interests. All significant intercompany transactions and balances are eliminated in consolidation. We account for our interests in joint ventures, which we do not control, using the equity method of accounting. Certain 2010 amounts have been reclassified to conform to current period presentation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, referred to as “GAAP,” requires management to make estimates and assumptions that in certain circumstances affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and revenues and expenses. These estimates are prepared using management’s best judgment, after considering past, current and expected events and economic conditions. Actual results could differ from these estimates.
Acquisition of Real Estate
Our methodology of allocating the cost of acquisitions to assets acquired and liabilities assumed is based on estimated fair values, replacement cost and/or appraised values. When we acquire operating real estate properties, the purchase price is allocated to land, building, improvements, intangibles such as in-place leases, and to current assets and liabilities acquired, if any. The value allocated to in-place leases is amortized over the related lease term and reflected as rental income in the statement of operations. We consider qualitative and quantitative factors in evaluating the likelihood of a tenant exercising a below market renewal option and include such renewal options in the calculation of in-place lease value when we consider these to be bargain renewal options. If the value of below market lease intangibles includes renewal option periods, we include such renewal periods in the amortization period utilized. If a tenant vacates its space prior to contractual termination of its lease, the unamortized balance of any in-place lease value is written off to rental income.
Recently Issued Accounting Pronouncements
In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” The pronouncement was issued to provide a uniform framework for fair value measurements and related disclosures between U.S. GAAP and International Financial Reporting Standards (“IFRS”). ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements particularly for level 3 fair value measurements. This pronouncement is effective for us in the first quarter of 2012 and is not expected to have a significant impact to our consolidated financial statements.
In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income.” ASU 2011-05 eliminates the option to present components of other comprehensive income as part of the statement of shareholders’ equity and requires the presentation of components of net income and components of other comprehensive

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income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This pronouncement is effective for us in the first quarter of 2012 and will not have a significant impact to our consolidated financial statements.
Consolidated Statements of Cash Flows—Supplemental Disclosures
The following table provides supplemental disclosures related to the Consolidated Statements of Cash Flows:

 
Nine Months Ended September 30,
 
2011
 
2010
 
(In thousands)
SUPPLEMENTAL DISCLOSURES:
 
 
 
Total interest costs incurred
$
78,560

 
$
81,272

Interest capitalized
(5,816
)
 
(4,593
)
Interest expense
$
72,744

 
$
76,679

Cash paid for interest, net of amounts capitalized
$
76,520

 
$
77,773

Cash paid for income taxes
$
690

 
$
240

NON-CASH INVESTING AND FINANCING TRANSACTIONS:
 
 
 
Mortgage loan assumed with acquisition
$
42,938

 
$

Deconsolidation of VIE
$
18,311

 
$

Capital lease obligations
$
4,556

 
$


NOTE 3—REAL ESTATE
On January 19, 2011, we acquired the fee interest in Tower Shops located in Davie, Florida for a net purchase price of $66.1 million which includes the assumption of a mortgage loan with a face amount of $41.0 million and a fair value of approximately $42.9 million. The property contains approximately 372,000 square feet of gross leasable area on 67 acres and is shadow-anchored by Home Depot and Costco. Approximately $1.2 million and $4.4 million of net assets acquired were allocated to other assets for “above market leases” and other liabilities for “below market leases”, respectively. We incurred a total of $0.4 million of acquisition costs of which $0.2 million were incurred in 2011 and are included in “general and administrative expenses” for the nine months ended September 30, 2011.
In conjunction with the acquisition, we entered into a reverse Section 1031 like-kind exchange agreement with a third party intermediary which is for a maximum of 180 days and allows us, for tax purposes, to defer gains on sale of other properties identified and sold within this period. Until July 12, 2011, the third party intermediary was the legal owner of the property. However, we controlled the activities that most significantly impacted the property and retained all of the economic benefits and risks associated with the property. Therefore, we were the primary beneficiary of this VIE and consolidated the property and its operations as of January 19, 2011.
On July 12, 2011, we sold Feasterville Shopping Center located in Feasterville, Pennsylvania for a sales price of $20.0 million resulting in a gain of $14.8 million. The operations of this property are included in “discontinued operations” in the consolidated statements of operations for all periods presented and included in “assets held for sale/disposal” in our consolidated balance sheet as of December 31, 2010. The sale was completed as a Section 1031 tax deferred exchange transaction with the acquisition of Tower Shops.

NOTE 4—MORTGAGE NOTES RECEIVABLE
Prior to June 30, 2011, we were the lender on a first and second mortgage loan on a shopping center and an adjacent commercial building in Norwalk, Connecticut. Our carrying amount of the loans was approximately $18.3 million. The loans were in default and foreclosure proceedings had been filed, however, we were in negotiations with the borrower to refinance the loans. On June 30, 2011, we refinanced the existing loans with a first mortgage loan which has a principal balance of $11.9 million, bears interest at 6.0%, and matures on June 30, 2014, subject to a one year extension option. The loan is secured by the shopping center in Norwalk, Connecticut. As part of the refinancing, we received approximately $8.7 million in cash.
Because the loans were in default, we had certain rights under the first mortgage loan agreement that gave us the ability to direct the activities that most significantly impacted the shopping center. Although we did not exercise those rights, the existence of those rights in the loan agreement resulted in the entity being a VIE. Additionally, given our investment in both the first and second mortgage on the property, the overall decline in fair market value since the loans were initiated, and the default

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status of the loans, we also had the obligation to absorb losses or rights to receive benefits that could potentially be significant to the VIE. Consequently, we were the primary beneficiary of this VIE and consolidated the shopping center and adjacent building from March 30, 2010 to June 29, 2011. Our investment in the property is included in “assets held for sale/disposal” in the consolidated balance sheet at December 31, 2010 and the operations of the entity are included in “discontinued operations” for all periods presented.
In conjunction with the refinancing of the loans, we re-evaluated our status as the primary beneficiary of the VIE. Because the loan is not in default, we no longer have certain rights that give us the ability to control the activities that most significantly impact the shopping center. Our current involvement in the property is solely as the lender on the mortgage loan with protective rights as the lender. Therefore, we are no longer the primary beneficiary and deconsolidated the entity as of June 30, 2011. The mortgage loan receivable was recorded at its estimated fair value of $11.9 million and we recognized a $2.0 million gain on deconsolidation as part of the refinancing which is included in “discontinued operations - gain on deconsolidation of VIE” for the nine months ended September 30, 2011. As of September 30, 2011, the loan was performing and the carrying amount of the mortgage loan was $11.7 million and is included in “mortgage notes receivable” on the balance sheet. This amount also reflects our maximum exposure to loss related to this investment.
The change in design of the entity including the refinancing of the loan was a VIE reconsideration event. Given that the loan is no longer in default, we, as lender, do not have the power to direct the activities that most significantly impact the entity, and the additional equity investment at risk provided by the entity’s equity holders, the entity is no longer a VIE.

NOTE 5—REAL ESTATE PARTNERSHIPS
Federal/Lion Venture LP
We have a joint venture arrangement (the “Partnership”) with affiliates of a discretionary fund created and advised by ING Clarion Partners (“Clarion”). We own 30% of the equity in the Partnership and Clarion owns 70%. We hold a general partnership interest, however, Clarion also holds a general partnership interest and has substantive participating rights. We cannot make significant decisions without Clarion’s approval. Accordingly, we account for our interest in the Partnership using the equity method. As of September 30, 2011, the Partnership owned seven retail real estate properties. We are the manager of the Partnership and its properties, earning fees for acquisitions, dispositions, management, leasing, and financing. Intercompany profit generated from fees is eliminated in consolidation. We also have the opportunity to receive performance-based earnings through our Partnership interest. Accounting policies for the Partnership are similar to accounting policies followed by the Trust. The Partnership is subject to a buy-sell provision which is customary for real estate joint venture agreements and the industry. Either partner may initiate this provision at any time, which could result in either the sale of our interest or the use of available cash or borrowings to acquire Clarion’s interest.
The following tables provide summarized operating results and the financial position of the Partnership:
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2011
 
2010
 
2011
 
2010
 
(In thousands)
OPERATING RESULTS
 
 
 
 
 
 
 
Revenue
$
4,743

 
$
4,510

 
$
14,387

 
$
13,688

Expenses
 
 
 
 
 
 
 
Other operating expenses
1,276

 
1,322

 
4,260

 
4,664

Depreciation and amortization
1,296

 
1,259

 
3,864

 
3,771

Interest expense
846

 
849

 
2,542

 
2,551

Total expenses
3,418

 
3,430

 
10,666

 
10,986

Net income
$
1,325

 
$
1,080

 
$
3,721

 
$
2,702

Our share of net income from real estate partnership
$
452

 
$
355

 
$
1,253

 
$
901



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September 30,
2011
 
December 31,
2010
 
(In thousands)
BALANCE SHEETS
 
 
 
Real estate, net
$
178,585

 
$
181,565

Cash
4,678

 
3,054

Other assets
6,268

 
7,336

Total assets
$
189,531

 
$
191,955

Mortgages payable
$
57,429

 
$
57,584

Other liabilities
4,825

 
5,439

Partners’ capital
127,277

 
128,932

Total liabilities and partners’ capital
$
189,531

 
$
191,955

Our share of unconsolidated debt
$
17,229

 
$
17,275

Our investment in real estate partnership
$
35,028

 
$
35,504


Taurus Newbury Street JV II Limited Partnership
In May 2010, we formed Taurus Newbury Street JV II Limited Partnership (“Newbury Street Partnership”), a joint venture with an affiliate of Taurus Investment Holdings, LLC (“Taurus”), to acquire, operate and redevelop properties located primarily in the Back Bay section of Boston, Massachusetts. We hold an 85% limited partnership interest in Newbury Street Partnership and Taurus holds a 15% limited partnership interest and serves as general partner. As general partner, Taurus is responsible for the operation and management of the properties, subject to our approval on major decisions. We have evaluated the entity and determined that it is not a VIE. Accordingly, given Taurus’ role as general partner, we account for our interest in Newbury Street Partnership using the equity method. Accounting policies for the Newbury Street Partnership are similar to accounting policies followed by the Trust. Intercompany profit generated from interest income on loans we have provided to the partnership is eliminated in consolidation. All amounts contributed and advanced to Newbury Street Partnership are included in “Investment in real estate partnerships” in the consolidated balance sheets.
Newbury Street Partnership is subject to a buy-sell provision which is customary for real estate joint venture agreements and the industry. The buy-sell can be exercised only in certain circumstances through May 2014 and may be initiated by either party at anytime thereafter which could result in either the sale of our interest or the use of available cash or borrowings to acquire Taurus’ interest.
On May 26, 2011, Newbury Street Partnership acquired the fee interest in a 6,700 square foot building located on Newbury Street for a purchase price of $6.2 million. We contributed approximately $2.8 million towards the acquisition and provided a $3.1 million interest-only loan secured by the building. This loan and the $8.8 million loan secured by the other two buildings owned by the partnership bear interest at LIBOR plus 400 basis points and mature on May 25, 2012, subject to a one-year extension option. This purchase increased Newbury Street Partnership’s portfolio to three buildings all located on Newbury Street with a total of approximately 41,000 square feet of mixed-use gross leasable area. Our investment in Newbury Street Partnership was $22.8 million and $16.1 million, respectively, at September 30, 2011 and December 31, 2010. Due to the timing of receiving financial information from the general partner, our share of operating earnings is recorded one quarter in arrears. Our share of earnings in the consolidated statements of operations for the nine months ended September 30, 2011 and 2010 was a loss of $0.1 million and $0.4 million, respectively.

NOTE 6—DEBT
In connection with the acquisition of Tower Shops on January 19, 2011, we assumed a mortgage loan with a face amount of $41.0 million and a fair value of approximately $42.9 million. The mortgage loan bore interest at 6.52%, had a scheduled maturity of July 1, 2015 and was contractually pre-payable after June 2011 with a 3% prepayment premium. On March 24, 2011, the lender unexpectedly allowed us to repay the $41.0 million mortgage loan prior to the permitted prepayment date including the 3% prepayment premium of $1.2 million. The $0.3 million of income from early extinguishment of debt in the nine months ended September 30, 2011, relates to the early payoff of this loan and includes the write-off of the unamortized debt premium of $1.7 million net of the 3% prepayment premium and unamortized debt fees. The mortgage loan was repaid with funds borrowed on our $300.0 million revolving credit facility.
On February 15, 2011, we repaid our $75.0 million 4.50% senior notes on the maturity date using funds borrowed on our $300.0 million revolving credit facility.
On April 29, 2011, we repaid the $31.7 million mortgage loan on Federal Plaza which had an original maturity date of June 1,

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2011. This loan was repaid with funds borrowed on our $300.0 million revolving credit facility.
On June 1, 2011, we repaid the $5.6 million mortgage loan on Tysons Station which had an original maturity date of September 1, 2011. This loan was repaid with funds borrowed on our $300.0 million revolving credit facility.
On July 7, 2011, we replaced our existing $300.0 million revolving credit facility with a new $400.0 million unsecured revolving credit facility. This new revolving credit facility matures on July 6, 2015, subject to a one-year extension at our option, and bears interest at LIBOR plus 115 basis points. The spread over LIBOR is subject to adjustment based on our credit rating.
During the three and nine months ended September 30, 2011, the maximum amount of borrowings outstanding under our revolving credit facility was $219.0 million and $265.0 million, respectively, the weighted average amount of borrowings outstanding was $184.6 million and $186.0 million, respectively, and the weighted average interest rate, before amortization of debt fees, was 1.31% and 0.89%, respectively. At September 30, 2011, there was $158.0 million outstanding on our revolving credit facility.
Our revolving credit facility and certain notes require us to comply with various financial covenants, including the maintenance of minimum shareholders’ equity and debt coverage ratios and a maximum ratio of debt to net worth. As of September 30, 2011, we were in compliance with all loan covenants.

NOTE 7—FAIR VALUE OF FINANCIAL INSTRUMENTS
Except as disclosed below, the carrying amount of our financial instruments approximates their fair value. The fair value of our mortgages payable, notes payable and senior notes and debentures is sensitive to fluctuations in interest rates. Quoted market prices were used to estimate the fair value of our marketable senior notes and debentures and discounted cash flow analysis is generally used to estimate the fair value of our mortgages and notes payable. Considerable judgment is necessary to estimate the fair value of financial instruments. The estimates of fair value presented herein are not necessarily indicative of the amounts that could be realized upon disposition of the financial instruments. A summary of the carrying amount and fair value of our mortgages payable, notes payable and senior notes and debentures is as follows:

 
September 30, 2011
 
December 31, 2010
Carrying
Value
 
Fair Value
 
Carrying
Value
 
Fair Value
(In thousands)
Mortgages and notes payable
$
662,734

 
$
722,164

 
$
627,382

 
$
685,552

Senior notes and debentures
$
1,004,686

 
$
1,089,081

 
$
1,079,827

 
$
1,168,679


NOTE 8—COMMITMENTS AND CONTINGENCIES
We are currently a party to various legal proceedings. Other than as described below, we do not believe that the ultimate outcome of these matters, either individually or in the aggregate, could have a material adverse effect on our financial position or overall trends in results of operations; however, litigation is subject to inherent uncertainties. Also under our leases, tenants are typically obligated to indemnify us from and against all liabilities, costs and expenses imposed upon or asserted against us (1) as owner of the properties due to certain matters relating to the operation of the properties by the tenant, and (2) where appropriate, due to certain matters relating to the ownership of the properties prior to their acquisition by us.
In March 2011, we paid the final judgment of $16.2 million related to a previously disclosed lawsuit regarding a parcel of land located adjacent to Santana Row. The final judgment was previously accrued and is included in “accounts payable and accrued expenses” in our consolidated balance sheet at December 31, 2010.
Under the terms of certain partnership agreements, the partners have the right to exchange their operating partnership units for cash or the same number of our common shares, at our option. A total of 360,314 operating partnership units are outstanding which have a total fair value of $29.7 million, based on our closing stock price on September 30, 2011.

NOTE 9—SHAREHOLDERS’ EQUITY
The following table provides a summary of dividends declared and paid per share:


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Nine Months Ended September 30,
 
2011
 
2010
 
Declared
 
Paid
 
Declared
 
Paid
Common shares
$
2.030

 
$
2.010

 
$
1.990

 
$
1.980

5.417% Series 1 Cumulative Convertible Preferred
$
1.016

 
$
1.016

 
$
1.016

 
$
1.016


On February 24, 2011, we entered into an at the market (“ATM”) equity program in which we may from time to time offer and sell common shares having an aggregate offering price of up to $300.0 million. We intend to use the net proceeds to fund potential acquisition opportunities, fund our development and redevelopment pipeline, repay amounts outstanding under our revolving credit facility and/or for general corporate purposes. For the three months ended September 30, 2011, we issued 576,427 common shares at a weighted average price per share of $86.73 for net cash proceeds of $49.2 million and paid $0.7 million in commissions related to the sales of these common shares. For the nine months ended September 30, 2011, we issued 1,662,038 common shares at a weighted average price per share of $85.26 for net cash proceeds of $139.3 million and paid $2.1 million in commissions related to the sales of these common shares.

NOTE 10—COMPONENTS OF RENTAL INCOME
The principal components of rental income are as follows:

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2011
 
2010
 
2011
 
2010
 
(In thousands)
Minimum rents
 
 
 
 
 
 
 
Retail and commercial
$
98,654

 
$
94,550

 
$
293,622

 
$
282,826

Residential (1)
5,746

 
5,475

 
16,958

 
16,125

Cost reimbursement
25,714

 
25,912

 
80,083

 
80,751

Percentage rent
1,673

 
1,313

 
4,598

 
3,763

Other
2,227

 
2,277

 
6,191

 
6,523

Total rental income
$
134,014

 
$
129,527

 
$
401,452

 
$
389,988

_____________________
(1)
Residential minimum rents consist of the rental amounts for residential units at Rollingwood Apartments, The Crest at Congressional Plaza Apartments, Santana Row and Bethesda Row.

Minimum rents include the following:
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2011
 
2010
 
2011
 
2010
 
(In millions)
Straight-line rents
$
1.6

 
$
1.1

 
$
3.9

 
$
3.6

Amortization of above market leases
(0.6
)
 
(0.5
)
 
(1.8
)
 
(1.5
)
Amortization of below market leases
$
0.9

 
$
0.9

 
$
2.8

 
$
2.8


NOTE 11—DISCONTINUED OPERATIONS
Results of properties disposed or held for disposal which meet certain requirements, constitute discontinued operations and as such, the operations of these properties are classified as discontinued operations for all periods presented. A summary of the financial information for the discontinued operations is as follows:
 

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Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2011
 
2010
 
2011
 
2010
 
(In millions)
Revenue from discontinued operations
$
0.2

 
$
0.6

 
$
2.2

 
$
1.9

Income from discontinued operations
$

 
$
0.3

 
$
0.9

 
$
0.8


NOTE 12—SHARE-BASED COMPENSATION PLANS
A summary of share-based compensation expense included in net income is as follows:

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2011
 
2010
 
2011
 
2010
 
(In thousands)
Share-based compensation incurred
 
 
 
 
 
 
 
Grants of common shares
$
1,847

 
$
1,244

 
$
5,433

 
$
3,996

Grants of options
210

 
287

 
672

 
849

 
2,057

 
1,531

 
6,105

 
4,845

Capitalized share-based compensation
(167
)
 
(192
)
 
(525
)
 
(576
)
Share-based compensation expense
$
1,890

 
$
1,339

 
$
5,580

 
$
4,269


NOTE 13—EARNINGS PER SHARE
We have calculated earnings per share (“EPS”) under the two-class method. The two-class method is an earnings allocation methodology whereby EPS for each class of common stock and participating securities is calculated according to dividends declared and participation rights in undistributed earnings. We had 0.3 million weighted average unvested shares outstanding for the three and nine months ended September 30, 2011 and 0.2 million weighted average unvested shares outstanding for the three and nine months ended September 30, 2010 which are considered participating securities. Therefore, we have allocated our earnings for basic and diluted EPS between common shares and unvested shares; the portion of earnings allocated to the unvested shares is reflected as “earnings allocated to unvested shares” in the reconciliation below.
In the dilutive EPS calculation, dilutive stock options were calculated using the treasury stock method consistent with prior periods; stock options of less than 0.1 million and 0.1 million for the three months ended September 30, 2011 and 2010, respectively, and stock options of 0.1 million and 0.3 million for the nine months ended September 30, 2011 and 2010, respectively, have been excluded as they were anti-dilutive. The conversions of downREIT operating partnership units and 5.417% Series 1 Cumulative Convertible Preferred Shares are anti-dilutive for all periods presented and accordingly, have been excluded from the weighted average common shares used to compute diluted EPS.


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Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2011
 
2010
 
2011
 
2010
 
(In thousands, except per share data)
NUMERATOR
 
 
 
 
 
 
 
Income from continuing operations
$
33,532

 
$
30,740

 
$
99,388

 
$
91,715

Less: Preferred share dividends
(136
)
 
(136
)
 
(406
)
 
(406
)
Less: Income from continuing operations attributable to noncontrolling interests
(1,249
)
 
(1,370
)
 
(3,941
)
 
(3,958
)
Less: Earnings allocated to unvested shares
(207
)
 
(136
)
 
(509
)
 
(404
)
Income from continuing operations available for common shareholders
31,940

 
29,098

 
94,532

 
86,947

Results from discontinued operations attributable to the Trust
14,770

 
270

 
17,549

 
1,807

Gain on sale of real estate

 

 

 
410

Net income available for common shareholders, basic and diluted
$
46,710

 
$
29,368

 
$
112,081

 
$
89,164

DENOMINATOR
 
 
 
 
 
 
 
Weighted average common shares outstanding—basic
62,818

 
61,215

 
62,172

 
61,158

Effect of dilutive securities:
 
 
 
 
 
 
 
Stock options
172

 
144

 
169

 
139

Weighted average common shares outstanding—diluted
62,990

 
61,359

 
62,341

 
61,297

EARNINGS PER COMMON SHARE, BASIC
 
 
 
 
 
 
 
Continuing operations
$
0.51

 
$
0.48

 
$
1.52

 
$
1.42

Discontinued operations
0.23

 

 
0.28

 
0.03

Gain on sale of real estate

 

 

 
0.01

 
$
0.74

 
$
0.48

 
$
1.80

 
$
1.46

EARNINGS PER COMMON SHARE, DILUTED
 
 
 
 
 
 
 
Continuing operations
$
0.51

 
$
0.48

 
$
1.52

 
$
1.41

Discontinued operations
0.23

 

 
0.28

 
0.03

Gain on sale of real estate

 

 

 
0.01

 
$
0.74

 
$
0.48

 
$
1.80

 
$
1.45

Income from continuing operations attributable to the Trust
$
32,283

 
$
29,370

 
$
95,447

 
$
87,757


NOTE 14—SUBSEQUENT EVENT
On October 31, 2011, our Newbury Street Partnership sold its three buildings for $44.0 million.  As part of the sale, we received $34.6 million of the net proceeds which includes the repayment of our $11.8 million loans.


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
The following discussion should be read in conjunction with the consolidated interim financial statements and notes thereto appearing in Item 1 of this report and the more detailed information contained in our Annual Report on Form 10-K for the year ended December 31, 2010 filed with the Securities and Exchange Commission (the “SEC”) on February 15, 2011.
This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. When we refer to forward-looking statements or information, sometimes we use words such as “may,” “will,” “could,” “should,” “plans,” “intends,” “expects,” “believes,” “estimates,” “anticipates” and “continues.” Forward-looking statements are not historical facts or guarantees of future performance and involve certain known and unknown risks, uncertainties, and other factors, many of which are outside our control, that could cause actual results to differ materially from those we describe.
Given these uncertainties, readers are cautioned not to place undue reliance on any forward-looking statements that we make,

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including those in this Quarterly Report on Form 10-Q. Except as may be required by law, we make no promise to update any of the forward-looking statements as a result of new information, future events or otherwise. You should carefully review the risks and the risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2010 and under Part II, Item 1A in this Quarterly Report on Form 10-Q, before making any investments in us.
Overview
We are an equity real estate investment trust (“REIT”) specializing in the ownership, management, and redevelopment of high quality retail and mixed-use properties located primarily in densely populated and affluent communities in strategically selected metropolitan markets in the Northeast and Mid-Atlantic regions of the United States, as well as in California. As of September 30, 2011, we owned or had a majority interest in community and neighborhood shopping centers and mixed-use properties which are operated as 85 predominantly retail real estate projects comprising approximately 18.6 million square feet. In total, the real estate projects were 93.3% leased and 92.2% occupied at September 30, 2011. A joint venture in which we own a 30% interest owned seven retail real estate projects totaling approximately 1.0 million square feet as of September 30, 2011. In total, the joint venture properties in which we own a 30% interest were 91.5% leased and occupied at September 30, 2011.
2011 Significant Property Acquisitions and Disposition
On January 19, 2011, we acquired the fee interest in Tower Shops located in Davie, Florida for a net purchase price of $66.1 million which includes the assumption of a mortgage loan with a face amount of $41.0 million and a fair value of approximately $42.9 million. The property contains approximately 372,000 square feet of gross leasable area on 67 acres and is shadow-anchored by Home Depot and Costco. Approximately $1.2 million and $4.4 million of net assets acquired were allocated to other assets for “above market leases” and other liabilities for “below market leases”, respectively. We incurred a total of $0.4 million of acquisition costs of which $0.2 million were incurred in 2011 and are included in “general and administrative expenses” for the nine months ended September 30, 2011.
In conjunction with the acquisition, we entered into a reverse Section 1031 like-kind exchange agreement with a third party intermediary which is for a maximum of 180 days and allows us, for tax purposes, to defer gains on sale of other properties identified and sold within this period. Until July 12, 2011, the third party intermediary was the legal owner of the property. However, we controlled the activities that most significantly impacted the property and retained all of the economic benefits and risks associated with the property. Therefore, we were the primary beneficiary of this VIE and consolidated the property and its operations as of January 19, 2011.
On May 26, 2011, Newbury Street Partnership acquired the fee interest in a 6,700 square foot building located on Newbury Street in Boston, Massachusetts, for a purchase price of $6.2 million. We contributed approximately $2.8 million towards the acquisition and provided a $3.1 million interest-only loan secured by the building. The loan bears interest at LIBOR plus 400 basis points and matures on May 25, 2012, subject to a one-year extension option. This purchase increased Newbury Street Partnership’s portfolio to three buildings all located on Newbury Street with a total of approximately 41,000 square feet of mixed-use gross leasable area. On October 31, 2011, our Newbury Street Partnership sold its three buildings for $44.0 million.  As part of the sale, we received $34.6 million of the net proceeds which includes the repayment of our $11.8 million loans.
On July 12, 2011, we sold Feasterville Shopping Center located in Feasterville, Pennsylvania for a sales price of $20.0 million resulting in a gain of $14.8 million. The operations of this property are included in “discontinued operations” in the consolidated statements of operations for all periods presented and included in “assets held for sale/disposal” in our consolidated balance sheet as of December 31, 2010. The sale was completed as a Section 1031 tax deferred exchange transaction with the acquisition of Tower Shops.
2011 Significant Debt, Equity and Other Transactions
In connection with the acquisition of Tower Shops on January 19, 2011, we assumed a mortgage loan with a face amount of $41.0 million and a fair value of approximately $42.9 million. The mortgage loan bore interest at 6.52%, had a scheduled maturity on July 1, 2015 and was contractually pre-payable after June 2011 with a 3% prepayment premium. On March 24, 2011, the lender unexpectedly allowed us to repay the $41.0 million mortgage loan prior to the permitted prepayment date including the 3% prepayment premium of $1.2 million. The $0.3 million of income from early extinguishment of debt in the nine months ended September 30, 2011, relates to the early payoff of this loan and includes the write-off of the unamortized debt premium of $1.7 million net of the 3% prepayment premium and unamortized debt fees. The mortgage loan was repaid with funds borrowed on our $300.0 million revolving credit facility.
On February 15, 2011, we repaid our $75.0 million 4.50% senior notes on the maturity date using funds borrowed on our $300.0 million revolving credit facility.
On February 24, 2011, we entered into an at the market (“ATM”) equity program in which we may from time to time offer and

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sell common shares having an aggregate offering price of up to $300.0 million. We intend to use the net proceeds to fund potential acquisition opportunities, fund our development and redevelopment pipeline, repay amounts outstanding under our revolving credit facility and/or for general corporate purposes. For the three months ended September 30, 2011, we issued 576,427 common shares at a weighted average price per share of $86.73 for net cash proceeds of $49.2 million and paid $0.7 million in commissions related to the sales of these common shares. For the nine months ended September 30, 2011, we issued 1,662,038 common shares at a weighted average price per share of $85.26 for net cash proceeds of $139.3 million and paid $2.1 million in commissions related to the sales of these common shares.
In March 2011, we paid the final judgment of $16.2 million related to a previously disclosed lawsuit regarding a parcel of land located adjacent to Santana Row. The final judgment was previously accrued and is included in “accounts payable and accrued expenses” in our consolidated balance sheet at December 31, 2010.
On April 29, 2011, we repaid the $31.7 million mortgage loan on Federal Plaza which had an original maturity date of June 1, 2011. This loan was repaid with funds borrowed on our $300.0 million revolving credit facility.
On June 1, 2011, we repaid the $5.6 million mortgage loan on Tysons Station which had an original maturity date of September 1, 2011. This loan was repaid with funds borrowed on our $300.0 million revolving credit facility.
On July 7, 2011, we replaced our existing $300.0 million revolving credit facility with a new $400.0 million unsecured revolving credit facility. This new revolving credit facility matures on July 6, 2015, subject to a one-year extension at our option, and bears interest at LIBOR plus 115 basis points. The spread over LIBOR is subject to adjustment based on our credit rating.
Mortgage Loan Receivable Refinancing
Prior to June 30, 2011, we were the lender on a first and second mortgage loan on a shopping center and an adjacent commercial building in Norwalk, Connecticut. Our carrying amount of the loans was approximately $18.3 million. The loans were in default and foreclosure proceedings had been filed, however, we were in negotiations with the borrower to refinance the loans. On June 30, 2011, we refinanced the existing loans with a first mortgage loan which has a principal balance of $11.9 million, bears interest at 6.0%, and matures on June 30, 2014, subject to a one year extension option. The loan is secured by the shopping center in Norwalk, Connecticut. As part of the refinancing, we received approximately $8.7 million in cash.
Because the loans were in default, we had certain rights under the first mortgage loan agreement that gave us the ability to direct the activities that most significantly impacted the shopping center. Although we did not exercise those rights, the existence of those rights in the loan agreement resulted in the entity being a VIE. Additionally, given our investment in both the first and second mortgage on the property, the overall decline in fair market value since the loans were initiated, and the default status of the loans, we also had the obligation to absorb losses or rights to receive benefits that could potentially be significant to the VIE. Consequently, we were the primary beneficiary of this VIE and consolidated the shopping center and adjacent building from March 30, 2010 to June 29, 2011. Our investment in the property is included in “assets held for sale/disposal” in the consolidated balance sheet at December 31, 2010 and the operations of the entity are included in “discontinued operations” for all periods presented.
In conjunction with the refinancing of the loans, we re-evaluated our status as the primary beneficiary of the VIE. Because the loan is not in default, we no longer have certain rights that give us the ability to control the activities that most significantly impact the shopping center. Our current involvement in the property is solely as the lender on the mortgage loan with protective rights as the lender. Therefore, we are no longer the primary beneficiary and deconsolidated the entity as of June 30, 2011. The mortgage loan receivable was recorded at its estimated fair value of $11.9 million and we recognized a $2.0 million gain on deconsolidation as part of the refinancing which is included in “discontinued operations - gain on deconsolidation of VIE” for the nine months ended September 30, 2011. As of September 30, 2011, the loan was performing and the carrying amount of the mortgage loan was $11.7 million which is included in “mortgage notes receivable” on the balance sheet. This amount also reflects our maximum exposure to loss related to this investment.
The change in design of the entity including the refinancing of the loan was a VIE reconsideration event. Given that the loan is no longer in default, we, as lender, do not have the power to direct the activities that most significantly impact the entity, and the additional equity investment at risk provided by the entity’s equity holders, the entity is no longer a VIE.
Capitalized Costs
We capitalized external and internal costs related to both development and redevelopment activities of $60 million and $3 million, respectively, for the nine months ended September 30, 2011 and $42 million and $2 million, respectively, for the nine months ended September 30, 2010. We capitalized external and internal costs related to other property improvements of $30

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million and $1 million, respectively, for the nine months ended September 30, 2011 and $22 million and $1 million, respectively, for the nine months ended September 30, 2010. We capitalized external and internal costs related to leasing activities of $6 million and $4 million, respectively, for the nine months ended September 30, 2011 and $5 million and $3 million, respectively, for the nine months ended September 30, 2010. The amount of capitalized internal costs for salaries and related benefits for development and redevelopment activities, other property improvements, and leasing activities were $2 million, $1 million, and $3 million, respectively, for the nine months ended September 30, 2011 and $2 million, $1 million, and $3 million, respectively, for the nine months ended September 30, 2010.
Outlook
We seek growth in earnings, funds from operations, and cash flows primarily through a combination of the following:
growth in our portfolio from property redevelopments,
expansion of our portfolio through property acquisitions, and
growth in our same-center portfolio.
Our properties are located in densely populated or affluent areas with high barriers to entry which allow us to take advantage of redevelopment opportunities that enhance our operating performance through renovation, expansion, reconfiguration, and/or retenanting. We evaluate our properties on an ongoing basis to identify these types of opportunities. In 2011 and 2012, we expect to have redevelopment projects stabilizing with projected costs of approximately $48 million and $59 million, respectively.
Additionally, we continue to invest in the development at Assembly Row which is a long-term development project we expect to be involved in over the coming years. The carrying value of the development portion of this project at September 30, 2011 is approximately $128 million. The project currently has zoning entitlements to build 2.3 million square feet of commercial-use buildings, 2,100 residential units, and a 200 room hotel. We expect that we will structure any future development in a manner designed to mitigate our risk which may include transfers of entitlements or co-developing with other companies. We have entered into a preliminary agreement with a residential developer for the first phase of development and continue our current predevelopment work and infrastructure work. We expect to invest between $25 million and $35 million related to the development in 2011. However, we do not intend to move forward with construction of the first phase of the project until the Massachusetts Bay Transit Authority (“MBTA”) has received qualified bids from contractors showing that a new orange line T-stop can be built at the property for no more than the public and private funding that has been committed for this T-stop and the contingencies to releasing those funds have been satisfied. During the third quarter, the MBTA received qualified bids to build the T-stop within the funding requirements and is currently in contract negotiations.  While we expect construction to commence in early 2012, if certain contingencies to releasing the public funds for the T-stop construction are not satisfied, it is unlikely we would commence construction and be able to recover our basis in the property and as a result, would be required to record an impairment.
We continue to review acquisition opportunities in our primary markets that complement our portfolio and provide long-term growth opportunities. Generally, our acquisitions do not initially contribute significantly to earnings growth; however, they provide long-term re-leasing growth, redevelopment opportunities, and other strategic opportunities. Any growth from acquisitions is contingent on our ability to find properties that meet our qualitative standards at prices that meet our financial hurdles. Changes in interest rates may affect our success in achieving earnings growth through acquisitions by affecting both the price that must be paid to acquire a property, as well as our ability to economically finance the property acquisition. Generally, our acquisitions are initially financed by available cash and/or borrowings under our revolving credit facility which may be repaid later with funds raised through the issuance of new equity or new long-term debt. On occasion we also finance our acquisitions through the issuance of common shares, preferred shares, or downREIT units as well as through assumed mortgages.
Our same-center growth is primarily driven by increases in rental rates on new leases and lease renewals and changes in portfolio occupancy. Over the long-term, the infill nature and strong demographics of our properties provide a strategic advantage allowing us to maintain relatively high occupancy and increase rental rates. The current economic environment may, however, impact our ability to increase rental rates in the short-term and may require us to decrease some rental rates. This will have a long-term impact over the contractual term of the lease agreement, which on average is between five and ten years. We expect to continue to see small changes in occupancy over the short term and expect increases in occupancy to be a driver of our same-center growth over the long term as we are able to re-lease vacant spaces. We seek to maintain a mix of strong national, regional, and local retailers. At September 30, 2011, no single tenant accounted for more than 2.6% of annualized base rent.
The current economic environment has impacted the success of our tenants’ retail operations and therefore the amount of rent and expense reimbursements we receive from our tenants. While we believe the locations of our centers and diverse tenant base

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mitigates the negative impact of the economic environment, any reduction in our tenants’ abilities to pay base rent, percentage rent or other charges, will adversely affect our financial condition and results of operations. We expect our occupancy rate will decrease in the short term as we seek to re-lease approximately 130,000 square feet of space that became vacant in April and September 2011 due to the rejection of four leases by Borders Group and the rejection of five leases by Blockbuster in their respective bankruptcy proceedings. We are currently working to re-lease the spaces but expect the leasing and final occupancy of the spaces to take several quarters. Since the latter part of 2010, we have seen signs of improvement for some of our tenants as well as increased interest from prospective tenants for our retail spaces; however, there can be no assurance that these positive signs will continue. We continue to monitor our tenants’ operating performances as well as trends in the retail industry to evaluate any future impact.
At September 30, 2011, the leasable square feet in our properties was 92.2% occupied and 93.3% leased. The leased rate is higher than the occupied rate due to leased spaces that are being redeveloped or improved or that are awaiting permits and, therefore, are not yet ready to be occupied. Our occupancy and leased rates are subject to variability over time due to factors including acquisitions, the timing of the start and stabilization of our redevelopment projects, lease expirations and tenant bankruptcies.
Lease Rollovers
In third quarter 2011, we signed leases for a total of 385,000 square feet of retail space including 353,000 square feet of comparable space leases (leases for which there was a prior tenant) at an average rental increase of 8% on a cash basis and 18% on a straight-line basis. New leases for comparable spaces were signed for 162,000 square feet at an average rental increase of 1% on a cash basis and 10% on a straight-line basis. Renewals for comparable spaces were signed for 191,000 square feet at an average rental increase of 12% on a cash basis and 23% on a straight-line basis.
For the nine months ended September 30, 2011, we signed leases for a total of 1,162,000 square feet of retail space including 1,063,000 square feet of comparable space leases (leases for which there was a prior tenant) at an average rental increase of 8% on a cash basis and 19% on a straight-line basis. New leases for comparable spaces were signed for 443,000 square feet at an average rental increase of 10% on a cash basis and 20% on a straight-line basis. Renewals for comparable spaces were signed for 620,000 square feet at an average rental increase of 7% on a cash basis and 19% on a straight-line basis.
The rental increases associated with comparable spaces generally include all leases signed in arms-length transactions reflecting market leverage between landlords and tenants during the period. The comparison between average rent for expiring leases and new leases is determined by including minimum rent and percentage rent paid on the expiring lease and minimum rent and in some instances, projections of first lease year percentage rent, to be paid on the new lease. In some instances, management exercises judgment as to how to most effectively reflect the comparability of spaces reported in this calculation. The change in rental income on comparable space leases is impacted by numerous factors including current market rates, location, individual tenant creditworthiness, use of space, market conditions when the expiring lease was signed, capital investment made in the space and the specific lease structure.
The leases signed in third quarter 2011 generally become effective over the following two years though some may not become effective until 2014 and beyond. Further, there is risk that some new tenants will not ultimately take possession of their space and that tenants for both new and renewal leases may not pay all of their contractual rent due to operating, financing or other matters. However, these increases do provide information about the tenant/landlord relationship and the potential increase we may achieve in rental income over time.
In 2011, we expect a similar level of leasing activity compared to prior years with overall positive increases in rental income. However, changes in rental income associated with individual signed leases on comparable spaces may be positive or negative, and we can provide no assurance that the rents on new leases will continue to increase at the above disclosed levels, if at all.
Same-Center
Throughout this section, we have provided certain information on a “same-center” basis. Information provided on a same-center basis includes the results of properties that we owned and operated for the entirety of both periods being compared except for properties for which significant redevelopment or expansion occurred during either of the periods being compared and properties classified as discontinued operations.



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RESULTS OF OPERATIONS—THREE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010
 
 
 
 
 
 
Change
 
2011
 
2010
 
Dollars
 
%
 
(Dollar amounts in thousands)
Rental income
$
134,014

 
$
129,527

 
$
4,487

 
3.5
 %
Other property income
2,341

 
2,824

 
(483
)
 
(17.1
)%
Mortgage interest income
1,309

 
1,095

 
214

 
19.5
 %
Total property revenue
137,664

 
133,446

 
4,218

 
3.2
 %
Rental expenses
26,595

 
27,030

 
(435
)
 
(1.6
)%
Real estate taxes
15,047

 
15,185

 
(138
)
 
(0.9
)%
Total property expenses
41,642

 
42,215

 
(573
)
 
(1.4
)%
Property operating income
96,022

 
91,231

 
4,791

 
5.3
 %
Other interest income
136

 
18

 
118

 
655.6
 %
Income from real estate partnerships
434

 
125

 
309

 
247.2
 %
Interest expense
(23,795
)
 
(25,299
)
 
1,504

 
(5.9
)%
General and administrative expense
(7,197
)
 
(5,904
)
 
(1,293
)
 
21.9
 %
Depreciation and amortization
(32,068
)
 
(29,431
)
 
(2,637
)
 
9.0
 %
Total other, net
(62,490
)
 
(60,491
)
 
(1,999
)
 
3.3
 %
Income from continuing operations
33,532

 
30,740

 
2,792

 
9.1
 %
Discontinued operations - income
13

 
270

 
(257
)
 
(95.2
)%
Discontinued operations - gain on sale of real estate
14,757

 

 
14,757

 
100.0
 %
Net income
48,302

 
31,010

 
17,292

 
55.8
 %
Net income attributable to noncontrolling interests
(1,249
)
 
(1,370
)
 
121

 
(8.8
)%
Net income attributable to the Trust
$
47,053

 
$
29,640

 
$
17,413

 
58.7
 %

Property Revenues
Total property revenue increased $4.2 million, or 3.2%, to $137.7 million in the three months ended September 30, 2011 compared to $133.4 million in the three months ended September 30, 2010. The percentage occupied at our shopping centers decreased to 92.2% for September 30, 2011 compared to 93.3% for September 30, 2010. Changes in the components of property revenue are discussed below.
Rental Income
Rental income consists primarily of minimum rent, cost reimbursements from tenants and percentage rent. Rental income increased $4.5 million, or 3.5%, to $134.0 million in the three months ended September 30, 2011 compared to $129.5 million in the three months ended September 30, 2010 due primarily to the following:
an increase of $2.0 million attributable to properties acquired in 2010 and 2011,
an increase of $1.5 million at redevelopment properties due primarily to increased occupancy at certain properties and higher rental rates on new leases, and
an increase of $1.1 million at same-center properties due primarily to higher rental rates on new and renewal leases and an increase in percentage rent partially offset by a decrease in recovery income.
Other Property Income
Other property income decreased $0.5 million, or 17.1%, to $2.3 million in the three months ended September 30, 2011 compared to $2.8 million in the three months ended September 30, 2010. Included in other property income are items which, although recurring, tend to fluctuate more than rental income from period to period, such as lease termination fees. This decrease is primarily due to a decrease in lease termination fees at same-center properties.
Property Expenses
Total property expenses decreased $0.6 million, or 1.4%, to $41.6 million in the three months ended September 30, 2011

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compared to $42.2 million in the three months ended September 30, 2010. Changes in the components of property expenses are discussed below.
Rental Expenses
Rental expenses decreased $0.4 million, or 1.6%, to $26.6 million in the three months ended September 30, 2011 compared to $27.0 million in the three months ended September 30, 2010. This decrease is primarily due to the following:
a decrease of $0.6 million in bad debt expense at same-center properties, and
a decrease of $0.6 million in ground rent due to the fourth quarter 2010 purchases of the fee interest in the land under Pentagon Row and a portion of Bethesda Row,
partially offset by
an increase of $0.5 million in marketing expense primarily due to our Assembly Row project and certain same-center properties, and
an increase of $0.4 million related to properties acquired in 2010 and 2011.
As a result of the changes in rental income, other property income and rental expenses as discussed above, rental expenses as a percentage of rental income plus other property income decreased to 19.5% in the three months ended September 30, 2011 from 20.4% in the three months ended September 30, 2010.
Real Estate Taxes
Real estate tax expense decreased $0.1 million, or 0.9% to $15.0 million in the three months ended September 30, 2011 compared to $15.2 million in the three months ended September 30, 2010 due primarily to lower assessments at same-center properties partially offset by properties acquired in 2010 and 2011.
Property Operating Income
Property operating income increased $4.8 million, or 5.3%, to $96.0 million in the three months ended September 30, 2011 compared to $91.2 million in the three months ended September 30, 2010. This increase is primarily due to growth in earnings at same-center and redevelopment properties and properties acquired in 2010 and 2011.
Other
Interest Expense
Interest expense decreased $1.5 million, or 5.9%, to $23.8 million in the three months ended September 30, 2011 compared to $25.3 million in the three months ended September 30, 2010. This decrease is due primarily to the following:
a decrease of $1.5 million due to a lower overall weighted average borrowing rate, and
an increase of $0.6 million in capitalized interest,
partially offset by
an increase of $0.6 million due to higher borrowings.
Gross interest costs were $26.0 million and $26.9 million in the three months ended September 30, 2011 and 2010, respectively. Capitalized interest was $2.2 million and $1.6 million in the three months ended September 30, 2011 and 2010, respectively.
General and Administrative Expense
General and administrative expense increased $1.3 million, or 21.9%, to $7.2 million in the three months ended September 30, 2011 from $5.9 million in the three months ended September 30, 2010. This increase is due primarily to higher personnel related costs.
Depreciation and Amortization
Depreciation and amortization expense increased $2.6 million, or 9.0%, to $32.1 million in the three months ended September 30, 2011 from $29.4 million in the three months ended September 30, 2010. This increase is due primarily to 2010 and 2011 acquisitions, accelerated depreciation due to the change in use of certain redevelopment buildings, and capital improvements at same-center properties.

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Discontinued Operations— Income
Income from discontinued operations represents the operating income of properties that have been disposed or will be disposed, which is required to be reported separately from results of ongoing operations. The reported operating income of less than $0.1 million and $0.3 million for the three months ended September 30, 2011 and 2010, respectively, primarily represents the operating income for the period during which we owned properties sold/disposed of or held for sale in 2011 and 2010.
Discontinued Operations—Gain on Sale of Real Estate
The $14.8 million gain on sale of real estate from discontinued operations for the three months ended September 30, 2011 is due to the sale of Feasterville Shopping Center on July 12, 2011.


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RESULTS OF OPERATIONS—NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

 
 
 
 
 
Change
 
2011
 
2010
 
Dollars
 
%
 
(Dollar amounts in thousands)
Rental income
$
401,452

 
$
389,988

 
$
11,464

 
2.9
 %
Other property income
6,577

 
11,243

 
(4,666
)
 
(41.5
)%
Mortgage interest income
3,564

 
3,232

 
332

 
10.3
 %
Total property revenue
411,593

 
404,463

 
7,130

 
1.8
 %
Rental expenses
81,130

 
82,334

 
(1,204
)
 
(1.5
)%
Real estate taxes
46,001

 
45,040

 
961

 
2.1
 %
Total property expenses
127,131

 
127,374

 
(243
)
 
(0.2
)%
Property operating income
284,462

 
277,089

 
7,373

 
2.7
 %
Other interest income
171

 
233

 
(62
)
 
(26.6
)%
Income from real estate partnerships
1,201

 
506

 
695

 
137.4
 %
Interest expense
(72,744
)
 
(76,679
)
 
3,935

 
(5.1
)%
Early extinguishment of debt
296

 
(2,801
)
 
3,097

 
(110.6
)%
General and administrative expense
(19,643
)
 
(17,409
)
 
(2,234
)
 
12.8
 %
Depreciation and amortization
(94,355
)
 
(89,224
)
 
(5,131
)
 
5.8
 %
Total other, net
(185,074
)
 
(185,374
)
 
300

 
(0.2
)%
Income from continuing operations
99,388

 
91,715

 
7,673

 
8.4
 %
Discontinued operations - income
943

 
807

 
136

 
16.9
 %
Discontinued operations - gain on deconsolidation of VIE
2,026

 

 
2,026

 
100.0
 %
Discontinued operations - gain on sale of real estate
14,800

 
1,000

 
13,800

 
1,380.0
 %
Gain on sale of real estate

 
410

 
(410
)
 
(100.0
)%
Net income
117,157

 
93,932

 
23,225

 
24.7
 %
Net income attributable to noncontrolling interests
(4,161
)
 
(3,958
)
 
(203
)
 
5.1
 %
Net income attributable to the Trust
$
112,996

 
$
89,974

 
$
23,022

 
25.6
 %

Property Revenues
Total property revenue increased $7.1 million, or 1.8%, to $411.6 million in the nine months ended September 30, 2011 compared to $404.5 million in the nine months ended September 30, 2010. The percentage occupied at our shopping centers decreased to 92.2% for September 30, 2011 compared to 93.3% for September 30, 2010. Changes in the components of property revenue are discussed below.
Rental Income
Rental income consists primarily of minimum rent, cost reimbursements from tenants and percentage rent. Rental income increased $11.5 million, or 2.9%, to $401.5 million in the nine months ended September 30, 2011 compared to $390.0 million in the nine months ended September 30, 2010 due primarily to the following:
an increase of $5.9 million attributable to properties acquired in 2010 and 2011,
an increase of $3.8 million at redevelopment properties due primarily to increased occupancy at certain properties and higher rental rates on new leases, and
an increase of $1.7 million at same-center properties due primarily to higher rental rates on new and renewal leases and an increase in percentage rent partially offset by lower recoveries.
Other Property Income
Other property income decreased $4.7 million, or 41.5%, to $6.6 million in the nine months ended September 30, 2011 compared to $11.2 million in the nine months ended September 30, 2010. Included in other property income are items which, although recurring, tend to fluctuate more than rental income from period to period, such as lease termination fees. This decrease is primarily due to a decrease in lease termination fees at same-center and redevelopment properties.

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Property Expenses
Total property expenses decreased $0.2 million, or 0.2%, to $127.1 million in the nine months ended September 30, 2011 compared to $127.4 million in the nine months ended September 30, 2010. Changes in the components of property expenses are discussed below.
Rental Expenses
Rental expenses decreased $1.2 million, or 1.5%, to $81.1 million in the nine months ended September 30, 2011 compared to $82.3 million in the nine months ended September 30, 2010. This decrease is primarily due to the following:
a decrease of $2.8 million in bad debt expense at same-center and redevelopment properties, and
a decrease of $1.7 million in ground rent due to the fourth quarter 2010 purchases of the fee interest in the land under Pentagon Row and a portion of Bethesda Row,
partially offset by
an increase of $1.5 million in marketing expense primarily due to our Assembly Row project and redevelopment and same-center properties,
an increase of $1.3 million related to properties acquired in 2010 and 2011, and
an increase of $0.8 million in other operating costs at same-center and redevelopment properties primarily due to higher legal and demolition costs.
As a result of the changes in rental income, other property income and rental expenses as discussed above, rental expenses as a percentage of rental income plus other property income decreased to 19.9% in the nine months ended September 30, 2011 from 20.5% in the nine months ended September 30, 2010.
Real Estate Taxes
Real estate tax expense increased $1.0 million, or 2.1% to $46.0 million in the nine months ended September 30, 2011 compared to $45.0 million in the nine months ended September 30, 2010 due primarily to properties acquired in 2010 and 2011.
Property Operating Income
Property operating income increased $7.4 million, or 2.7%, to $284.5 million in the nine months ended September 30, 2011 compared to $277.1 million in the nine months ended September 30, 2010. This increase is primarily due to growth in earnings at same-center and redevelopment properties and properties acquired in 2010 and 2011 partially offset by a decrease in lease termination fees at redevelopment properties.
Other
Income from Real Estate Partnerships
Income from real estate partnerships increased $0.7 million, or 137.4%, to $1.2 million in the nine months ended September 30, 2011 compared to $0.5 million in the nine months ended September 30, 2010. This increase is primarily due to $0.4 million of formation and acquisition related expenses from our Newbury Street Partnership in 2010.
Interest Expense
Interest expense decreased $3.9 million, or 5.1%, to $72.7 million in the nine months ended September 30, 2011 compared to $76.7 million in the nine months ended September 30, 2010. This decrease is due primarily to the following:
a decrease of $6.2 million due to a lower overall weighted average borrowing rate, and
an increase of $1.2 million in capitalized interest,
partially offset by
an increase of $3.5 million due to higher borrowings.
Gross interest costs were $78.6 million and $81.3 million in the nine months ended September 30, 2011 and 2010, respectively. Capitalized interest was $5.8 million and $4.6 million in the nine months ended September 30, 2011 and 2010, respectively.
Early Extinguishment of Debt
The $0.3 million of income from early extinguishment of debt in the nine months ended September 30, 2011 is due to the write-

24

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off of unamortized debt premium net of a 3.0% prepayment premium and unamortized debt fees related to the payoff of our mortgage loan on Tower Shops prior to its contractual prepayment date. The $2.8 million early extinguishment of debt expense in the nine months ended September 30, 2010 is due to the write-off of unamortized debt fees related to the $250.0 million payoff of the term loan prior to its maturity date.
General and Administrative Expense
General and administrative expense increased $2.2 million, or 12.8%, to $19.6 million in the nine months ended September 30, 2011 from $17.4 million in the nine months ended September 30, 2010. This increase is due primarily to higher personnel related costs, higher acquisition costs as a result of expensing all transaction costs on higher acquisitions volume partially offset by lower legal fees primarily as a result of litigation regarding certain rights to acquire the land under Pentagon Row which was fully resolved in fourth quarter 2010.
Depreciation and Amortization
Depreciation and amortization expense increased $5.1 million, or 5.8%, to $94.4 million in the nine months ended September 30, 2011 from $89.2 million in the nine months ended September 30, 2010. This increase is due primarily to 2010 and 2011 acquisitions, accelerated depreciation due to the change in use of certain redevelopment buildings, and capital improvements at same-center and redevelopment properties.
Discontinued Operations— Income
Income from discontinued operations represents the operating income of properties that have been disposed or will be disposed, which is required to be reported separately from results of ongoing operations. The reported operating income of $0.9 million and $0.8 million for the nine months ended September 30, 2011 and 2010, respectively, primarily represents the operating income for the period during which we owned properties sold/disposed of or held for sale in 2011 and 2010.
Discontinued Operations— Gain on Deconsolidation of VIE
The $2.0 million gain on deconsolidation of VIE for the nine months ended September 30, 2011, is the result of the refinancing of a mortgage note receivable on a shopping center in Norwalk, Connecticut, resulting in us no longer being the primary beneficiary of the VIE. See Note 4 to the consolidated financial statements for further discussion of this transaction.
Discontinued Operations—Gain on Sale of Real Estate
The $14.8 million gain on sale of real estate from discontinued operations for the nine months ended September 30, 2011 relates to the sale of Feasterville Shopping Center on July 12, 2011. The $1.0 million gain on sale of real estate from discontinued operations for the nine months ended September 30, 2010 relates to the final settlement reached with the contractors responsible for performing defective work in previous years related to the work done in connection with the sale of certain condominium units at Santana Row.
Gain on Sale of Real Estate
The $0.4 million gain on sale of real estate for the nine months ended September 30, 2010 is due to condemnation proceeds, net of costs, at one of our Northern Virginia properties in order to expand a local road.
Recently Issued Accounting Pronouncements
In May 2011, the FASB issued Accounting Standards Update (“ASU”) 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” The pronouncement was issued to provide a uniform framework for fair value measurements and related disclosures between U.S. GAAP and International Financial Reporting Standards (“IFRS”). ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements particularly for level 3 fair value measurements. This pronouncement is effective for us in the first quarter of 2012 and is not expected to have a significant impact to our consolidated financial statements.
In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income.” ASU 2011-05 eliminates the option to present components of other comprehensive income as part of the statement of shareholders’ equity and requires the presentation of components of net income and components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This pronouncement is effective for us in the first quarter of 2012 and will not have a significant impact to our consolidated financial statements.

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Liquidity and Capital Resources
Due to the nature of our business and strategy, we typically generate significant amounts of cash from operations. The cash generated from operations is primarily paid to our common and preferred shareholders in the form of dividends. As a REIT, we must generally make annual distributions to shareholders of at least 90% of our taxable income.
Our short-term liquidity requirements consist primarily of normal recurring operating expenses, obligations under our capital and operating leases, regular debt service requirements (including debt service relating to additional or replacement debt, as well as scheduled debt maturities), recurring expenditures, non-recurring expenditures (such as tenant improvements and redevelopments) and dividends to common and preferred shareholders. Our long-term capital requirements consist primarily of maturities under our long-term debt agreements, development and redevelopment costs and potential acquisitions.
We intend to operate with and maintain a conservative capital structure that will allow us to maintain strong debt service coverage and fixed-charge coverage ratios as part of our commitment to investment-grade debt ratings. In the short and long term, we may seek to obtain funds through the issuance of additional equity, unsecured and/or secured debt financings, joint venture relationships relating to existing properties or new acquisitions, and property dispositions that are consistent with this conservative structure.
On February 24, 2011, we entered into an ATM equity program in which we may from time to time offer and sell common shares having an aggregate offering price of up to $300.0 million. Through September 30, 2011, we have issued 1,662,038 common shares for net cash proceeds of $139.3 million under the program.
Cash and cash equivalents increased $6.3 million to $22.1 million at September 30, 2011; however, cash and cash equivalents are not the only indicator of our liquidity. We also have a $400.0 million unsecured revolving credit facility which had an outstanding balance of $158.0 million at September 30, 2011. In addition, we have an option to increase the credit facility through an accordion feature to $800 million.
For the nine months ended September 30, 2011, the maximum amount of borrowings outstanding under our revolving credit facility was $265.0 million, the weighted average amount of borrowings outstanding was $186.0 million and the weighted average interest rate, before amortization of debt fees, was 0.89%. Also, as of September 30, 2011, we had the capacity to issue up to $158.3 million in common shares under our ATM equity program. As of September 30, 2011, we have no debt maturities related to mortgages payable or senior notes and debentures during the remainder of 2011. We currently believe that cash flows from operations, cash on hand, our ATM equity program and our revolving credit facility will be sufficient to finance our operations and fund our capital expenditures.
Our overall capital requirements during the remainder of 2011 will depend upon acquisition opportunities, the level of improvements and redevelopments on existing properties and the timing and cost of development of Assembly Row and future phases of existing properties. While the amount of future expenditures will depend on numerous factors, we expect to incur at least similar levels of capital expenditures in 2011 compared to prior periods which will be funded on a short-term basis with cash flow from operations, cash on hand, our revolving credit facility and/or shares issued under our ATM equity program, and on a long-term basis, with long-term debt or equity. If necessary, we may access the debt or equity capital markets to finance significant acquisitions. Given our past success as well as the status of the capital markets, we expect debt or equity to be available to us. Although there is no intent at this time, if market conditions deteriorate, we may also delay the timing of certain development and redevelopment projects as well as limit future acquisitions, reduce our operating expenditures, or re-evaluate our dividend policy.
In addition to conditions in the capital markets which could affect our ability to access those markets, the following factors could affect our ability to meet our liquidity requirements:
restrictions in our debt instruments or preferred shares may limit us from incurring debt or issuing equity at all, or on acceptable terms under then-prevailing market conditions; and
we may be unable to service additional or replacement debt due to increases in interest rates or a decline in our operating performance.

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Summary of Cash Flows
 
 
Nine Months Ended September 30,
 
2011
 
2010
 
(In thousands)
Cash provided by operating activities
$
172,951

 
$
179,685

Cash used in investing activities
(101,313
)
 
(111,305
)
Cash used in financing activities
(65,365
)
 
(194,595
)
Increase (decrease) in cash and cash equivalents
6,273

 
(126,215
)
Cash and cash equivalents, beginning of year
15,797

 
135,389

Cash and cash equivalents, end of period
$
22,070

 
$
9,174


Net cash provided by operating activities decreased $6.7 million to $173.0 million during the nine months ended September 30, 2011 from $179.7 million during the nine months ended September 30, 2010. The decrease was primarily attributable to the $16.2 million payment of the final judgment related to a previously disclosed lawsuit offset by higher net income before certain non-cash items.
Net cash used in investing activities decreased $10.0 million to $101.3 million during the nine months ended September 30, 2011 from $111.3 million during the nine months ended September 30, 2010. The decrease was primarily attributable to:
$20.7 million in proceeds from sales of real estate primarily from the sale of Feasterville Shopping Center in July 2011,
$10.5 million acquisition of a first mortgage loan in March 2010,
$10.0 million decrease in contributions to the Newbury Street Partnership due to the $16.7 million initial investment in 2010, and
$8.7 million payment received in June 2011 related to the refinancing of a mortgage loan receivable,
partially offset by
$32.7 million increase in capital investments, and
$8.7 million increase in acquisitions of real estate.

Net cash used in financing activities decreased $129.2 million to $65.4 million during the nine months ended September 30, 2011 from $194.6 million during the nine months ended September 30, 2010. The decrease was primarily attributable to:
$170.4 million decrease in repayment of mortgages, capital leases and notes payable due substantially to the $250.0 million payoff of our term loan in 2010 offset by the payoff of two mortgages totaling $37.4 million in 2011,
$147.8 million increase in net proceeds from the issuance of common shares due primarily to the sale of 1.7 million shares under our ATM equity program entered into in February 2011, and
$50.3 million increase in net borrowings on our revolving credit facility, net of financing costs,
partially offset by
$148.5 million in net proceeds from the issuance of 5.90% senior notes in March 2010 and no issuances in 2011,
$75.0 million repayment of 4.50% senior notes in February 2011, and
$10.0 million in public funding received for the development at Assembly Row in April 2010.
Off-Balance Sheet Arrangements
We have a joint venture arrangement (the “Partnership”) with affiliates of a discretionary fund created and advised by ING Clarion Partners (“Clarion”). We own 30% of the equity in the Partnership and Clarion owns 70%. We hold a general partnership interest, however, Clarion also holds a general partnership interest and has substantive participating rights. We cannot make significant decisions without Clarion’s approval. Accordingly, we account for our interest in the Partnership using the equity method. As of September 30, 2011, the Partnership owned seven retail real estate properties. We are the manager of the Partnership and its properties, earning fees for acquisitions, management, leasing and financing. We also have the

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opportunity to receive performance-based earnings through our Partnership interest. The Partnership is subject to a buy-sell provision which is customary in real estate joint venture agreements and the industry. Either partner may initiate this provision at any time, which could result in either the sale of our interest or the use of available cash or borrowings to acquire Clarion’s interest. Accounting policies for the Partnership are similar to accounting policies followed by the Trust. At September 30, 2011, our investment in the Partnership was $35.0 million and the Partnership had approximately $57.4 million of mortgages payable outstanding. Our share of principal and interest payments is as follows:

 
Joint Venture Commitments Due by Period
Total
 
Less Than
1 Year
 
1-3
Years
 
3-5
Years
 
After 5
Years
(In thousands)
Fixed rate debt (principal and interest)
$
21,322

 
$
1,056

 
$
5,634

 
$
14,632

 
$


In May 2010, we formed Taurus Newbury Street JV II Limited Partnership (“Newbury Street Partnership”), a joint venture with an affiliate of Taurus Investment Holdings, LLC (“Taurus”), to acquire, operate and redevelop properties located primarily in the Back Bay section of Boston, Massachusetts. We hold an 85% limited partnership interest in Newbury Street Partnership and Taurus holds a 15% limited partnership interest and serves as general partner. As general partner, Taurus is responsible for the operation and management of the properties, subject to our approval on major decisions. We have evaluated the entity and determined that it is not a VIE. Accordingly, given Taurus’ role as general partner, we account for our interest in Newbury Street Partnership using the equity method. Accounting policies for the Newbury Street Partnership are similar to accounting policies followed by the Trust. The entity is subject to a buy-sell provision which is customary for real estate joint venture agreements and the industry. The buy-sell can be exercised only in certain circumstances through May 2014 and may be initiated by either party at anytime thereafter which could result in either the sale of our interest or the use of available cash or borrowings to acquire Taurus’ interest.
As of September 30, 2011, Newbury Street Partnership owned three buildings all located on Newbury Street with a total of approximately 41,000 square feet of mixed-use gross leasable area. We had invested approximately $23.7 million in Newbury Street Partnership including $11.8 million in mortgage loans at September 30, 2011. The mortgage loans are secured by the three buildings, bear interest at LIBOR plus 400 basis points and mature on May 25, 2012, subject to a one-year extension option.

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Debt Financing Arrangements
The following is a summary of our total debt outstanding as of September 30, 2011:

Description of Debt
Original
Debt
Issued
 
Principal Balance as of September 30, 2011
 
Stated Interest Rate as of September 30, 2011
 
Maturity Date
 
(Dollars in thousands)
 
 
 
 
Mortgages payable (1)
 
 
 
 
 
 
 
Secured fixed rate
 
 
 
 
 
 
 
Courtyard Shops
Acquired

 
$
7,108

 
6.87
%
 
July 1, 2012
Bethesda Row
Acquired

 
19,993

 
5.37
%
 
January 1, 2013
Bethesda Row
Acquired

 
4,053

 
5.05
%
 
February 1, 2013
White Marsh Plaza (2)
Acquired

 
9,360

 
6.04
%
 
April 1, 2013
Crow Canyon
Acquired

 
20,065

 
5.40
%
 
August 11, 2013
Idylwood Plaza
16,910

 
16,345

 
7.50
%
 
June 5, 2014
Leesburg Plaza
29,423

 
28,440

 
7.50
%
 
June 5, 2014
Loehmann’s Plaza
38,047

 
36,776

 
7.50
%
 
June 5, 2014
Pentagon Row
54,619

 
52,794

 
7.50
%
 
June 5, 2014
Melville Mall (3)
Acquired

 
22,515

 
5.25
%
 
September 1, 2014
THE AVENUE at White Marsh
Acquired

 
56,909

 
5.46
%
 
January 1, 2015
Barracks Road
44,300

 
39,215

 
7.95
%
 
November 1, 2015
Hauppauge
16,700

 
14,783

 
7.95
%
 
November 1, 2015
Lawrence Park
31,400

 
27,796

 
7.95
%
 
November 1, 2015
Wildwood
27,600

 
24,432

 
7.95
%
 
November 1, 2015
Wynnewood
32,000

 
28,327

 
7.95
%
 
November 1, 2015
Brick Plaza
33,000

 
28,929

 
7.42
%
 
November 1, 2015
Rollingwood Apartments
24,050

 
23,322

 
5.54
%
 
May 1, 2019
Shoppers’ World
Acquired

 
5,482

 
5.91
%
 
January 31, 2021
Mount Vernon (4)
13,250

 
10,652

 
5.66
%
 
April 15, 2028
Chelsea
Acquired

 
7,670

 
5.36
%
 
January 15, 2031
Subtotal
 
 
484,966

 
 
 
 
Net unamortized discount
 
 
(464
)
 
 
 
 
Total mortgages payable
 
 
484,502

 
 
 
 
Notes payable
 
 
 
 
 
 
 
Unsecured fixed rate
 
 
 
 
 
 
 
Various (5)
15,308

 
10,832

 
3.32
%
 
Various through 2013
Unsecured variable rate
 
 
 
 
 
 
 
Revolving credit facility (6)
400,000

 
158,000

 
LIBOR + 1.15%

 
July 6, 2015
Escondido (Municipal bonds) (7)
9,400

 
9,400

 
0.16
%
 
October 1, 2016