Glimcher Realty Trust 10-K 2011
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2010
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-12482
GLIMCHER REALTY TRUST
(Exact name of registrant as specified in its charter)
Registrant’s telephone number, including area code: (614) 621-9000
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [X] No [ ]>
Indicated by check mark if the Registrant is not required to file reports pursuant to Section 12 or Section 15(d) of the Securities Exchange Act of 1934. Yes [_] No [X]>
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark whether the registrant 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ ] No [ ]>
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [_].
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 the definitions of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check One): Large accelerated filer [_] Accelerated filer [X] Non-accelerated filer [_] (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 [_] No [X]>
As of February 22, 2011, there were 99,879,778 Common Shares of Beneficial Interest outstanding, par value $0.01 per share.
The aggregate market value of the voting stock held by non-affiliates of the Registrant, based on the closing price of the Registrant’s Common Shares of Beneficial Interest as quoted on the New York Stock Exchange on June 30, 2010, was $400,149,499.
Documents Incorporated By Reference
Portions of the Registrant’s Proxy Statement to be filed with the Securities and Exchange Commission within 120 days after the end of the year covered by this Form 10-K with respect to the Annual Meeting of Shareholders to be held on May 5, 2011 are incorporated by reference into Part III of this Report.
GRT, Glimcher Properties Limited Partnership (the “Operating Partnership,” “OP” or “GPLP”) and entities directly or indirectly owned or controlled by GRT, on a consolidated basis, are hereinafter referred to as the “Company,” “we,” “us,” or “our.”
Special Note Regarding Forward Looking Statements
This Form 10-K, together with other statements and information publicly disseminated by Glimcher Realty Trust (“GRT” or the “Registrant”), contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such statements are based on assumptions and expectations which may not be realized and are inherently subject to risks and uncertainties, many of which cannot be predicted with accuracy and some of which might not even be anticipated.
Forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1955, as amended. Statements that do not relate strictly to historical or current facts are forward-looking and are generally identifiable by the use of forward-looking terminology such as “may”, “will”, “should”, “potential”, “intend”, “expect”, “endeavor”, “seek”, “anticipate”, “estimate”, “overestimate”, “underestimate”, “believe”, “plans”, “could”, “project”, “predict”, “continue”, “trend”, “opportunity”, “pipeline”, “comfortable”, “current”, “position”, “assume”, “outlook”, “remain”, “maintain”, “sustain”, “achieve”, “would” or other similar words or expressions. Such statements are based on assumptions and expectations which may not be realized and are inherently subject to risks and uncertainties, many of which cannot be predicted with accuracy and some of which might not even be anticipated.
Forward-looking statements speak only as of the date they are made and are qualified in their entirety by reference to the factors discussed throughout this annual report. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or the occurrence of unanticipated events except as required by applicable law. Future events and actual results, financial and otherwise, may differ from the results discussed in the forward-looking statements. Risks and other factors that might cause differences, some of which could be material, include, but are not limited to: changes in political, economic or market conditions generally and the real estate and capital markets specifically; impact of increased competition; availability of capital and financing; failure to complete the proposed amendments to the Registrant’s corporate credit facility; tenant or joint venture partner(s) bankruptcies; failure to increase mall store occupancy and same-mall operating income; rejection of leases by tenants in bankruptcy; financing and development risks; construction and lease-up delays; cost overruns; the level and volatility of interest rates; the rate of revenue increases as compared to expense increases; the financial stability of tenants within the retail industry; the failure to make additional investments in regional mall properties and to redevelop properties; failure to complete proposed or anticipated acquisitions; the failure to sell properties as anticipated and to obtain estimated sale prices; the failure to upgrade our tenant mix; restrictions in current financing arrangements; inability to exercise available extension options on debt instruments; failure to comply or remain in compliance with the covenants in GRT’s debt instruments, including, but not limited to, the covenants under its corporate credit facility; the failure to fully recover tenant obligations for common area maintenance (“CAM”), insurance, taxes and other property expenses; the impact of changes to tax legislation and, generally, our tax position; the failure of GRT to qualify as a real estate investment trust (“REIT”); the failure to refinance debt at favorable terms and conditions; an increase in impairment charges with respect to other properties as well as impairment charges with respect to properties for which there has been a prior impairment charge; failure to achieve projected returns on development properties; loss of key personnel; material changes in GRT’s dividend rates on its securities or the ability to pay its dividend on its common shares or other securities; possible restrictions on our ability to operate or dispose of any partially-owned properties; failure to achieve earnings/funds from operations targets or estimates; conflicts of interest with existing joint venture partners; changes in generally accepted accounting principles or interpretations thereof; terrorist activities and international hostilities, which may adversely affect the general economy, domestic and global financial and capital markets, specific industries and us; the unfavorable resolution of legal proceedings; the impact of future acquisitions and divestitures; significant costs related to environmental issues, bankruptcies of lending institutions within GRT’s construction loans and corporate credit facility as well as other risks listed from time to time in its press releases, and in GRT’s other reports and statements filed with the Securities and Exchange Commission (“SEC”).
(a) General Development of Business
GRT is a fully-integrated, self-administered and self-managed Maryland real estate investment trust (“REIT”) which was formed on September 1, 1993 to continue the business of The Glimcher Company (“TGC”) and its affiliates, of owning, leasing, acquiring, developing and operating a portfolio of retail properties consisting of regional and super regional malls, and community shopping centers. Enclosed regional and super regional malls and open-air lifestyle centers in which we hold an ownership position (including joint venture interests) are referred to as “Malls” and community shopping centers in which we hold an ownership position (including joint venture interests) are referred to as “Community Centers.” The Malls and Community Centers may from time to time be individually referred to herein as a “Property” and collectively referred to herein as the “Properties.” On January 26, 1994, GRT consummated an initial public offering (the “IPO”) of 18,198,000 of its common shares of beneficial interest (the “Common Shares” or “Common Stock”) including 2,373,750 over allotment option shares. The net proceeds of the IPO were used by GRT primarily to acquire (at the time of the IPO) an 86.2% interest in the Operating Partnership, a Delaware limited partnership of which Glimcher Properties Corporation (“GPC”), a Delaware corporation and a wholly-owned subsidiary of GRT, is sole general partner. At December 31, 2010, GRT held a 96.4% interest in the Operating Partnership. GRT has completed several secondary public offerings of Common Shares since the IPO.
The Company does not engage or pay a REIT advisor. Management, leasing, accounting, legal, design and construction supervision and expertise is provided through its own personnel, or, where appropriate, through outside professionals.
(b) Narrative Description of Business
General: The Company is a recognized leader in the ownership, management, acquisition and development of malls, which includes enclosed regional malls and open-air lifestyle centers, as well as community centers. At December 31, 2010, the Properties consisted of 23 Malls (18 wholly-owned and 5 partially owned through joint ventures) containing an aggregate of 20.5 million square feet of gross leasable area (“GLA”) and 4 Community Centers (three wholly-owned and one partially owned through a joint venture) containing an aggregate of 779,000 square feet of GLA.
For purposes of computing occupancy statistics, anchors are defined as tenants whose space is equal to or greater than 20,000 square feet of GLA. This definition is consistent with the industry’s standard definition determined by the International Council of Shopping Centers (“ICSC”). All tenant spaces less than 20,000 square feet and all outparcels are considered to be non-anchor. The Company computes occupancy on an economic basis, which means only those spaces where the store is open and/or the tenant is paying rent are considered occupied, excluding all tenants with leases having an initial term of less than one year. The Company includes GLA in its occupancy statistics for certain anchors and outparcels that are owned by third parties. Mall anchors, which are owned by third parties and are open and/or are obligated to pay the Company charges, are considered occupied when reporting occupancy statistics. Community Center anchors owned by third parties are excluded from the Company’s GLA. These differences in treatment between Malls and Community Centers are consistent with industry practice. Outparcels at both Community Center and Mall Properties are included in GLA if the Company owns the land or building. The outparcels where a third party owns the land and building, but contributes only nominal ancillary charges are excluded from GLA.
As of December 31, 2010, the occupancy rate for all of the Properties was 94.6% of GLA. The occupied GLA was leased at 81.8%, 9.7%, and 8.5% to national, regional, and local retailers, respectively. The Company’s focus is to maintain high occupancy rates for the Properties by capitalizing on management’s long-standing relationships with national and regional tenants and its extensive experience in marketing to local retailers.
As of December 31, 2010, the Properties had annualized minimum rents of $230.6 million. Approximately 75.5%, 8.4%, and 16.1% of the annualized minimum rents of the Properties as of December 31, 2010 were derived from national, regional, and local retailers, respectively. No single tenant represented more than 2.4% of the aggregate annualized minimum rents of the Properties as of December 31, 2010.
Malls: The Malls provide a broad range of shopping alternatives to serve the needs of customers in all market segments. Each Mall is anchored by multiple department stores such as Belk’s, The Bon-Ton, Boscov’s, Dillard’s, Elder-Beerman, Herberger’s, JCPenney, Kohl’s, Macy’s, Nordstrom, Saks, Sears, and Von Maur. Mall stores, most of which are national retailers, include Abercrombie & Fitch, American Eagle Outfitters, Apple, Banana Republic, Barnes & Noble, Bath & Body Works, Finish Line, Foot Locker, Forever 21, Gap, Hallmark, Kay Jewelers, The Limited, Express, Old Navy, Pacific Sunwear, Radio Shack, and Victoria’s Secret. To provide a complete shopping, dining and entertainment experience, the Malls generally have at least one restaurant, a food court which offers a variety of fast food alternatives, and, in certain Malls, multiple screen movie theaters, fitness centers and other entertainment activities. Our largest operating Mall has approximately 1.6 million square feet of GLA and approximately 180 stores, while our smallest has approximately 420,000 square feet of GLA and approximately 68 stores. The Malls also have additional restaurants and retail businesses, such as Benihana, Cheesecake Factory, The Palm, P.F. Chang’s, and Red Lobster, located along the perimeter of the parking areas.
As of December 31, 2010, the Malls accounted for 96.3% of the total GLA, 96.2% of the aggregate annualized minimum rents of the Properties, and had an overall occupancy rate of 94.6%.
Community Centers: The Company’s Community Centers are designed to attract local and regional area customers and are typically anchored by a combination of discount department stores or supermarkets which attract shoppers to each center’s smaller shops. The tenants at the Company’s Community Centers typically offer day-to-day necessities and value-oriented merchandise. Community Center anchors include nationally recognized retailers such as Best Buy, Old Navy and Target, and supermarkets such as Kroger. Many of the Community Centers have retail businesses or restaurants located along the perimeter of the parking areas.
As of December 31, 2010, Community Centers accounted for 3.7% of the total GLA, 3.8% of the aggregate annualized minimum rents of the Properties, and had an overall occupancy rate of 94.7%.
Growth Strategies and Operating Policies: Management of the Company believes per share growth in both net income and funds from operations (“FFO”) are important factors in enhancing shareholder value. The Company believes that the presentation of FFO provides useful information to investors and a relevant basis for comparison among REITs. Specifically, the Company believes that FFO is a supplemental measure of the Company’s operating performance as it is a recognized standard in the real estate industry, in particular, REITs. The National Association of Real Estate Investment Trusts (“NAREIT”) defines FFO as net income (loss) available to common shareholders (computed in accordance with Generally Accepted Accounting Principles (“GAAP”)), excluding gains or losses from sales of depreciable property, plus real estate related depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures. FFO does include impairment losses for properties held-for-use and held-for-sale. The Company’s FFO may not be directly comparable to similarly titled measures reported by other REITs. FFO does not represent cash flow from operating activities in accordance with GAAP and should not be considered as an alternative to net income (determined in accordance with GAAP) as an indication of the Company’s financial performance or to cash flow from operating activities (determined in accordance with GAAP) as a measure of the Company’s liquidity, nor is it indicative of funds available to fund the Company’s cash needs, including its ability to make cash distributions. A reconciliation of FFO to net income (loss) to common shareholders is provided in Item 7 of this Form 10-K.
GRT intends to operate in a manner consistent with the requirements of the Internal Revenue Code of 1986, as amended (the “Code”), applicable to REITs and related regulations with respect to the composition of the Company’s portfolio and the derivation of income unless, because of circumstances or changes in the Code (or any related regulation), the GRT Board of Trustees determines that it is no longer in the best interests of GRT to qualify as a REIT.
The Company’s growth strategy is to upgrade the quality of our portfolio of assets. We focus on selective acquisitions, redevelopment of our core Mall assets, the disposition of non-strategic assets, and ground-up development in markets with high growth potential. Our development and acquisition strategy is focused on dominant anchored retail properties within the top 100 metropolitan markets by population that have near-term upside potential or offer advantageous opportunities for the Company.
The Company acquires and develops its Properties as long-term investments. Therefore, its focus is to provide for regular maintenance of its Properties and to conduct periodic renovations and refurbishments to preserve and increase Property values while also increasing the retail sales prospects of its tenants. The projects usually include renovating existing facades, installing uniform signage, updating interior decor, replacement of roofs and skylights, resurfacing parking lots and increasing parking lot lighting. To meet the needs of existing or new tenants and changing consumer demands, the Company also reconfigures and expands its Properties, including utilizing land available for expansion and development of outparcels or the addition of new anchors. In addition, the Company works closely with its tenants to renovate their stores and enhance their merchandising capabilities.
Financing Strategies: At December 31, 2010, the Company had a total-debt-to-total-market-capitalization ratio of 57.8% based upon the closing price of the Common Shares on the New York Stock Exchange (“NYSE”). The Company also looks at other metrics to assess overall leverage levels including debt to total asset value and total debt to EBITDA ratios. The Company expects that it may, from time to time, re-evaluate its strategy with respect to leverage in light of the current economic conditions; relative costs of debt and equity capital; market values of its Properties; acquisition, development and expansion opportunities; and other factors, including meeting the taxable income distribution requirement for REITs under the Code in the event the Company has taxable income without receipt of cash sufficient to enable the Company to meet such distribution requirements. The Company’s preference is to obtain fixed rate, long-term debt for its Properties. At December 31, 2010, 85.5% of total Company debt was fixed rate. Shorter term and variable rate debt typically is employed for Properties anticipated to be expanded or redeveloped.
Competition: All of the Properties are located in areas that have competing shopping centers and/or malls and other retail facilities. Generally, there are other retail properties within a five-mile radius of a Property. The amount of rentable retail space in the vicinity of the Company’s Properties could have a material adverse effect on the amount of rent charged by the Company and on the Company’s ability to rent vacant space and/or renew leases at such Properties. There are numerous commercial developers, real estate companies and major retailers that compete with the Company in seeking land for development, properties for acquisition and tenants for properties, some of which may have greater financial resources than the Company and more operating or development experience than that of the Company. There are numerous shopping facilities that compete with the Company’s Properties in attracting retailers to lease space. In addition, retailers at the Properties may face increasing competition from e-commerce, outlet malls, discount shopping clubs, catalog companies, direct mail, telemarketing and home shopping networks.
Employees: At December 31, 2010, the Company had 1,040 employees, of which 388 were part-time.
Seasonality: The shopping center industry is seasonal in nature, particularly in the fourth quarter during the holiday season when retailer occupancy and retail sales are typically at their highest levels. In addition, shopping malls achieve a substantial portion of their specialty (temporary retailer) rents during the holiday season.
Tax Status: GRT believes it has been organized and operated in a manner that qualifies for taxation as a REIT and intends to continue to be taxed as a REIT under Sections 856 through 860 of the Code. As such, GRT generally will not be subject to federal income tax to the extent it distributes at least 90.0% of its REIT ordinary taxable income to its shareholders. Additionally, GRT must satisfy certain requirements regarding its organization, ownership and certain other conditions, such as a requirement that its shares be transferable. Moreover, GRT must meet certain tests regarding its income and assets. At least 75.0% of GRT’s gross income must be derived from passive income closely connected with real estate activities. In addition, 95.0% of GRT’s gross income must be derived from these same sources, plus dividends, interest and certain capital gains. To meet the asset test, at the close of each quarter of the taxable year, at least 75.0% of the value of the total assets must be represented by real estate assets, cash and cash equivalent items (including receivables), and government securities. Additionally, to qualify as a REIT, there are several rules limiting the amount and type of securities that GRT can own, including a requirement that not more than 25.0% of the value of its total assets can be represented by securities. If GRT fails to meet the requirements to qualify for REIT status, GRT may cease to qualify as a REIT and may be subject to certain penalty taxes. If GRT fails to qualify as a REIT in any taxable year, then it will be subject to federal income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate rates. As a qualified REIT, GRT is subject to certain state and local taxes on its income and property and to federal income and excise taxes on its undistributed income.
Intellectual Property: GRT, by and through its affiliates, holds service marks registered with the United States Patent and Trademark Office for the term GLIMCHER® (expiration date January 2019), certain of its Property names such as Scottsdale Quarter® (expiration date November 2019) and Jersey Gardens® (expiration date February 2014), and other marketing terms, phrases, and materials it uses to promote its business, services, and Properties.
(c) Available Information
GRT files this Form 10-K and other periodic reports and statements electronically with the SEC. The SEC maintains an Internet site that contains reports, statements and proxy and information statements, and other information provided by issuers at http://www.sec.gov. GRT’s reports, including amendments, are also available free of charge on its website, www.glimcher.com, as soon as reasonably practicable after such reports are filed with the SEC. The information contained on our website is not incorporated by reference into this report and such information should not be considered a part of this report.
A number of factors affect our business and the results of our operations, many of which are beyond our control. The following is a description of the most significant factors that might cause the actual results of operations in future periods to differ materially from those currently expected or desired.
We are subject to risks inherent in owning real estate investments.
Real property investments are subject to varying degrees of risk. Our ability to make dividend distributions, the amount or timing of any distribution or dividend, and our operating results, may be adversely affected by the economic climate, business conditions, and certain local conditions including:
· oversupply of space or reduced demand for rental space and newly developed properties;
· the attractiveness of our properties compared to other retail space;
· our ability to provide adequate maintenance to our properties; and
· fluctuations in real estate taxes, insurance, and other operating costs.
Applicable laws, including tax laws, interest rate levels and the availability of financing, may adversely affect our income and real estate values. In addition, real estate investments are relatively illiquid and, therefore, our ability to sell our properties quickly may be limited. We cannot be sure that we will be able to lease space as tenants move out or as to the rents we may be able to charge new tenants entering such space.
Some of our potential losses may not be covered by insurance.
We maintain broad property, business interruption, and third-party liability insurance on our consolidated real estate assets as well as those held in joint ventures in which we have an investment interest. Regardless of our insurance coverage, insured losses could cause a serious disruption to our business and reduce or delay our operations and receipt of revenue. In addition, certain catastrophic perils are subject to very large deductibles that may cause an adverse impact on our operating results. Lastly, some types of losses, including lease and other contractual claims, are not currently covered by our insurance policies. If an uninsured loss or a loss in excess of insured limits occurs, we could lose all or a portion of the capital that we have invested in a property. If this happens, we may still remain obligated for any mortgage debt or other financial obligations related to the property or group of impacted properties.
Our insurance policies include coverage for acts of terrorism by foreign or domestic agents. The United States government provides reinsurance coverage to insurance companies following a declared terrorism event under the Terrorism Risk Insurance Program Reauthorization Act (the “Act”) which extended the effectiveness of the Terrorism Risk Insurance Extension Act of 2005. The Act is designed to reinsure the insurance industry from declared terrorism events that cause or create in excess of $100 million in damages or losses. The United States government could terminate its reinsurance of terrorism, thus increasing the risk of uninsured exposure to the Company for such acts.
Some of our Properties depend on anchor stores or major tenants to attract shoppers and could be adversely affected by the loss of or a store closure by one or more of these tenants.
At December 31, 2010, our three largest tenants were Gap, Inc., Limited Brands, Inc., and Foot Locker, Inc. representing 2.4%, 2.1%, and 2.0% of our annualized minimum rents, respectively. No other tenant represented more than 2.0% of the aggregate annualized minimum rents of our properties as of such date. Our financial position, operating results, and ability to make distributions may be adversely affected by the bankruptcy, insolvency or general downturn in the business of any such tenant as well as requests from such tenants for significant rent relief or other lease concessions, or if any such tenant does not renew a number of its leases at our properties as they expire.
Bankruptcy of our tenants or downturns in our tenants’ businesses may reduce our cash flow.
Since we derive almost all of our income from rental payments and other tenant charges, our cash available for distribution as well as our operating results would be adversely affected if a significant number of our tenants were unable to meet their obligations to us, or if we were unable to lease vacant space in our properties on economically favorable terms. A tenant may seek the protection of the bankruptcy laws which could result in the termination of its lease causing a reduction in our cash available for distribution. Furthermore, certain of our tenants, including anchor tenants, hold the right under their lease(s) to terminate their lease(s) or reduce their rental rate if certain occupancy conditions are not met, if certain anchor tenants close, if certain sales levels or profit margins are not achieved, or if an exclusive use provision is violated, which all could be triggered in the event of one or more tenant bankruptcies. A significant increase in the number of tenant bankruptcies, particularly amongst anchor tenants, may make it more difficult for us to lease the remainder of the property or properties in which the bankrupt tenant operates and adversely impact our ability to successfully execute our re-leasing strategy.
Prolonged instability or volatility in the United States economy, on a regional or national level, may adversely impact consumer spending and therefore our operating results.
A continued downturn in the United States (“U.S.”) economy, on a regional or national level, and reduced consumer spending could continue to impact our tenants’ ability to meet their lease obligations due to poor operating results, lack of liquidity or other reasons and therefore decrease the revenue generated by our properties or the value of our properties. Our ability to lease space, negotiate lease terms, and maintain favorable rents could also be negatively impacted by a continued prolonged instability, volatility, or weakness in the U.S. economy. Moreover, the demand for leasing space in our existing shopping centers as well as our development properties could also significantly decline during additional downturns in the U.S. economy which could result in a decline in our occupancy percentage and reduction in rental revenues.
We face significant competition that may decrease the occupancy and rental rates of our properties as well as our operating results.
We compete with many commercial developers, real estate companies and major retailers. Some of these entities develop or own malls, open-air lifestyle centers, value-oriented retail properties, and community shopping centers with whom we compete for tenants. We face competition for prime locations and for tenants. New regional malls, open-air lifestyle centers, or other retail shopping centers with more convenient locations or better rents may attract tenants or cause them to seek more favorable lease terms at or prior to renewal. Retailers at our properties may face increasing competition from other retailers, e-commerce, outlet malls, discount shopping clubs, catalog companies, direct mail, telemarketing and home shopping networks, all of which could adversely impact their profitability or desire to occupy one or more of our properties.
The failure to fully recover cost reimbursements for common area maintenance, taxes and insurance from tenants could adversely affect our operating results.
The computation of cost reimbursements from tenants for CAM, insurance and real estate taxes is complex and involves numerous judgments including interpretation of lease terms and other tenant lease provisions. Most tenants make monthly fixed payments of CAM, real estate taxes and other cost reimbursement items. After the end of the calendar year, we compute each tenant’s final cost reimbursements and issue a bill or credit for the full amount, after considering amounts paid by the tenants during the year. The billed amounts could be disputed by the tenant(s) or become the subject of a tenant audit or even litigation. Final adjustments for the year ended December 31, 2010 have not yet been determined. At December 31, 2010, our recorded accounts receivable reflected $2.8 million of 2010 costs that we expect to recover from tenants during the first six months of 2011. There can be no assurance that we will collect all or substantially all of this amount.
The results of operations for our properties depend on the economic conditions of the regions of the United States in which they are located.
Our results of operations and distributions to our shareholders will generally be subject to economic conditions in the regions in which our properties are located. For the year ended December 31, 2010, approximately 30% of annualized minimum rents came from our properties located in Ohio.
We may be unable to successfully redevelop, develop or operate our properties.
As a result of economic and other conditions and required approvals from governmental entities, lenders, or our joint venture partners, development projects may not be pursued or may be completed later or at higher costs than anticipated. In the event of an unsuccessful development project, our loss could exceed our investment in the project. Development and redevelopment activities involve significant risks, including:
We could incur significant costs related to environmental issues.
Under some environmental laws, a current or previous owner or operator of real property, and parties that generate or transport hazardous substances that are disposed of on real property, may be liable for the costs of investigating and remediating these substances on or under the property. In connection with the ownership or operation of our properties, we could be liable for such costs, which could be substantial and even exceed the value of such property or the value of our aggregate assets. We could incur such costs or be liable for such costs during a period after we dispose of or transfer a property. The failure to remediate toxic substances may adversely affect our ability to sell or rent any of our properties or to borrow funds. In addition, environmental laws may require us to expend substantial sums in order to use our properties or operate our business. Lastly, in connection with certain mortgage loans encumbering our properties, GPLP, singly, or together with certain affiliates has executed environmental indemnification agreements to indemnify the respective lender(s) for those loans against losses or costs to remediate damage to the mortgaged property caused by the presence or release of hazardous materials. The costs of investigating, perhaps litigating, or remediating these substances on or under the property in question could be substantial and even exceed the value of such property, the unpaid balance of the mortgage, or the value of our aggregate assets.
We have established a contingency reserve for one environmental matter as noted in Note 15 of our consolidated financial statements.
Our assets may be subject to impairment charges that may materially affect our financial results.
We evaluate our real estate assets and other assets for impairment indicators whenever events or changes in circumstances indicate that recoverability of our investment in the asset is not reasonably assured. This evaluation is conducted periodically, but no less frequently than quarterly. Our determination of whether a particular held-for-use asset is impaired is based upon the undiscounted projected cash flows used for the impairment analysis and our determination of the asset’s estimated fair value, that in turn are based upon our plans for the respective asset and our views of market and economic conditions. With respect to assets held-for-sale, our determination of whether such an asset is impaired is based upon market and economic conditions. If we determine that a significant impairment has occurred, then we would be required to make an adjustment to the net carrying value of the asset, which could have a material adverse effect on our results of operations and funds from operations in the accounting period in which the adjustment is made. Furthermore, changes in estimated future cash flows due to a change in our plans, policies, or views of market and economic conditions could result in the recognition of additional impairment losses for already impaired assets, which, under the applicable accounting guidance, could be substantial.
We may incur significant costs of complying with the Americans with Disabilities Act and similar laws.
We may be required to expend significant sums of money to comply with the Americans with Disabilities Act of 1990, as amended (“ADA”), and other federal and local laws in order for our properties to meet requirements related to access and use by physically challenged persons.
Our failure to qualify as a REIT would have serious adverse consequences.
GRT believes that it has qualified as a REIT under the Code since 1994, but cannot be sure that it will remain so qualified. Qualification as a REIT involves the application of highly technical and complex Code provisions, and the determination of various factual matters and circumstances not entirely within GRT’s control that may impact GRT’s ability to qualify as a REIT under the Code. In addition, GRT cannot be sure that new laws, regulations and judicial decisions will not significantly change the tax laws relating to REITs, or the federal income tax consequences of REIT qualification.
If GRT fails to qualify as a REIT, it would be subject to federal income tax (including any applicable alternative minimum tax) on taxable income at regular corporate income tax rates. Additionally, unless entitled to relief under certain statutory provisions, GRT would also be disqualified from electing to be treated as a REIT for the four taxable years following the year during which the qualification is lost, thereby reducing net earnings available for investment or distribution to our shareholders because of the additional tax liability imposed for the year or years involved. Lastly, GRT would no longer be required by the Code to make any dividend distributions as a condition to REIT qualification. To the extent that dividend distributions to our shareholders may have been made in anticipation of qualifying as a REIT, we might be required to borrow funds or to liquidate certain of our investments to pay the applicable tax and as a result defer or eliminate one or more scheduled dividend payments.
Our ownership interests in certain partnerships and other ventures are subject to certain tax risks.
Some of our property interests and other investments are made or held through entities in which we have an interest (the “Subsidiary Partnerships”). The tax risks of this type of ownership include possible challenge by the Internal Revenue Service of allocations of income and expense items which could affect the computation of our taxable income, a challenge to the status of any such entities as partnerships (as opposed to associations taxable as corporations) for federal income tax purposes, and the possibility of action being taken by tax regulators or the entities themselves could adversely affect GRT’s qualification as a REIT, for example, by requiring the sale by such entity of a property. We believe that the entities in which we have an interest have been and will be treated for tax purposes as partnerships (and not treated as associations taxable as corporations). If our ownership interest in any entity taxable as a corporation exceeded 10% (in terms of vote or value) of such entity’s outstanding securities (unless such entity were a “taxable REIT subsidiary,” or a “qualified REIT subsidiary,” as those terms are defined in the Code) or the value of interest in any such entity exceeded 5% of the value of our assets, then GRT would cease to qualify as a REIT; distributions from any of these entities would be treated as dividends, to the extent of earnings and profits, and we would not be able to deduct our share of losses, if any, generated by such entity in computing our taxable income.
We may not have access to other sources of funds necessary to meet our REIT distribution requirements.
In order to qualify to be taxed as a REIT, we must make annual distributions to our shareholders of at least 90% of our taxable income (determined by excluding any net capital gain). The amount available for distribution will be affected by a number of factors, including the operation of our properties. We have sold a number of assets and may in the future sell additional selected non-core assets or monetize all or a portion of our investment in our other properties. The loss of rental income associated with our properties sold will in turn affect net income and FFO. In order to maintain REIT status, we may be required to make distributions in excess of net income and FFO. In such a case, it may be necessary to arrange for short or long term borrowings, to sell assets, or to issue common or preferred stock or other securities in order to raise funds, which may not be possible.
Debt financing could adversely affect our performance.
As of December 31, 2010, we had $1.4 billion of total indebtedness outstanding. As of December 31, 2010, we have borrowed $153.6 million from our $200.0 million secured credit facility. A number of our outstanding loans will require lump sum or “balloon” payments for the outstanding principal balance at maturity, and we may finance future investments that may be structured in the same manner. Our ability to repay indebtedness at maturity, or otherwise, may depend on our ability to either refinance such indebtedness or to sell certain properties. Additionally, our ability to repay any indebtedness secured by properties the maturity of which is accelerated upon any default may adversely affect our ability to obtain debt financing for such properties or to own such properties. If we are unable to repay any of our debt at or before maturity, then we may have to borrow from our credit facility, to the extent it has availability thereunder, to make such repayments. In addition, a lender could foreclose on one or more of our properties to collect its debt. This could cause us to lose part or all of our investment, which could reduce the value of the Common Shares or preferred shares and the distributions payable to our shareholders. Furthermore, we have agreements with each of our derivative counterparties that contain a provision where if we either default or are capable of being declared in default on any of our consolidated indebtedness, then we could also be declared in default on our derivative obligations and would be required to settle our derivative obligations under the agreements at their termination value.
Volatility, uncertainty, or instability in the credit markets could adversely affect our ability to fund our development projects and cause us to seek financing from alternative sources.
The state of the credit markets and requirements to obtain credit may negatively impact our ability to access capital or to finance our future expansions of existing properties as well as future acquisitions, development activities, and redevelopment projects. A prolonged downturn in the credit markets or overly stringent or restrictive requirements to obtain credit may cause us to seek alternative sources of potentially less attractive financing from smaller lending institutions or non-traditional lending entities that may be subject to greater market risk and may require us to adjust our business plan(s) or financing objectives accordingly. Weakness in the credit markets may also negatively affect the credit ratings of our securities and promote a perceived decline in the value of our properties based on deteriorating general and retail economic conditions which could adversely affect the amount and type of financing available for our properties and operations as well as the terms of such financing.
Our access to funds under our credit facility is dependent on the ability of the bank participants to meet their funding commitments.
Banks that are a party to our credit facility may have incurred substantial losses or be in danger of incurring substantial losses as a result of previous loans to other borrowers, a decline in the value of certain securities they hold, or their other business dealings and investments. As a result, these banks may become capital constrained, more restrictive in their lending or funding standards, or become insolvent, in which case these banks might not be able to meet their funding commitments under our credit facility.
If one or more banks do not meet their funding commitments under our credit facility, then we may be unable to draw sufficient funds under our credit facility for capital to operate our business or other needs and will not be able to utilize the full capacity under the credit facility until replacement lenders are located or one or more of the remaining lenders under the credit facility agrees to fund any shortfall, both of which may be difficult. Accordingly, for all practical purposes under such a scenario, the borrowing capacity under our credit facility may be reduced by the amount of unfunded bank commitments. Our inability to access funds under our credit facility for these reasons could result in our deferring development and redevelopment projects or other capital expenditures, not being able to satisfy debt maturities as they become due or satisfy loan requirements to reduce the amounts outstanding under certain loans, reducing or eliminating future cash dividend payments or other discretionary uses of cash, or modifying significant aspects of our business strategy.
Certain of our financing arrangements contain limitations on the amount of debt that we may incur.
Our existing credit facility is the most restrictive of our financing arrangements. Accordingly, at December 31, 2010, the aggregate amount that, based upon the restrictive covenants in the credit facility, may be borrowed through financing arrangements is $44.7 million. Additional amounts could be borrowed as long as we maintain a ratio of total-debt-to-total-asset value, as defined in the credit agreement that complies with the restrictive covenants of the credit facility. We would also be required to maintain certain coverage covenants on a prospective basis which could impact our ability to borrow these additional amounts. Management believes we are in compliance with all covenants under our financing arrangements at December 31, 2010.
Our ability to borrow and make distributions could be adversely affected by financial covenants.
Our mortgage indebtedness and existing credit facility impose certain financial and operating restrictions on our properties, on our secured subordinated financing, and on additional financings on properties. These restrictions include restrictions on borrowings, prepayments, and distributions. Additionally, our existing credit facility requires certain financial tests be met, such as the total amount of recourse indebtedness to which we are permitted to take on, and some of our mortgage indebtedness provides for prepayment penalties, either of which could restrict our financial flexibility. Our existing credit facility also has payment requirements to reduce the amount that may be outstanding at any one time which could restrict our financial flexibility and liquidity. Moreover, our failure to satisfy certain financial covenants in our financing arrangements may result in a decrease in the market price of our common or preferred stock which could negatively impact our capital raising strategies.
The state of financial markets could affect our financial condition and results of operations, our ability to obtain financing, or have other adverse effects on us or the market or trading price of our outstanding securities.
Extreme volatility and instability in the U.S. and global equity and credit markets could result in significant price volatility and liquidity disruptions causing the market prices of stocks to fluctuate substantially and the credit spreads on prospective debt financings to widen considerably. These circumstances could have a significantly negative impact on liquidity in the financial markets, making terms for certain financings less attractive or unavailable to us. Continued uncertainty in the equity and credit markets will negatively impact our ability to access additional financing at reasonable terms or at all. In the event of a debt financing, our cost of borrowing in the future will likely be significantly higher than historical levels. In the case of a common equity financing, the disruptions in the financial markets could continue to have a material adverse effect on the market value of our Common Shares, potentially requiring us to issue more shares than we would otherwise have issued with a higher market value for our Common Shares. These financial market circumstances will negatively affect our ability to make acquisitions, undertake new development projects and refinance our debt. These circumstances have also made it more difficult for us to sell properties (including outparcels) and may adversely affect the price we receive for properties that we do sell, as prospective buyers are experiencing increased costs of financing and difficulties in obtaining financing. There is a risk that government responses to the disruptions in the financial markets will not restore consumer confidence, stabilize the markets or increase liquidity and the availability of equity or credit financing.
Current market conditions are also adversely affecting many of our tenants and their businesses, including their ability to pay rents when due. Tenants may also involuntarily terminate or stop paying on leases prior to the lease termination date due to bankruptcy. Tenants may decide not to renew leases and we may not be able to re-let the space the tenant vacates. The terms of renewals, including the cost of required improvements or concessions, may be less favorable than current lease terms. As a result, our cash flow could decrease and our ability to make distributions to our shareholders could be adversely affected.
Our variable rate debt obligations may impede our operating performance and put us at a competitive disadvantage, as well as adversely affect our ability to pay distributions to you.
Required repayments of debt and related interest can adversely affect our operating performance. As of December 31, 2010, approximately $202.2 million of our indebtedness bears interest at variable rates. An increase in interest rates on our existing variable rate indebtedness would increase interest expense, which could adversely affect our cash flow and ability to pay distributions as well as the amount of any distributions. For example, if market rates of interest on our variable rate debt outstanding as of December 31, 2010 increased by 100 basis points, the increase in interest expense on our existing variable rate debt would decrease future earnings and cash flows by approximately $0.5 million annually which could impact our earnings and financial results.
We may not be able to effect the proposed amendments to our credit facility.
We are currently negotiating amendments to our existing credit facility to, among other things, increase the borrowing availability and extend the term of the facility an additional year. As of February 11, 2011, we have received the required level of non-binding commitments from lenders in support of proposed amendments to our credit facility. The amendments to our credit facility are now subject to the execution of definitive documentation. There is no assurance that we will be able to effect the proposed amendments. Failure to effect the proposed amendments to the credit facility could adversely affect our business strategies, operations, liquidity, credit ratings, and cash reserves. The reduction of the borrowing availability under the corporate credit facility could adversely impact our ability to fund developments, acquisitions, joint venture initiatives, other debt financing, and our overall operations. In the event that we are unable to fund the payments or fail to satisfy other conditions required to extend the term of our credit facility or refinance the facility at maturity, we would need to repay the balance at maturity which would adversely affect our liquidity and cash reserves. Moreover, under such circumstances we may be unable to obtain replacement financing for our credit facility at the same amount, at favorable interest rates, or upon favorable financing terms. Additionally, our failure to secure replacement financing with a term in excess of one year may result in an adverse change in the credit ratings provided for certain of our securities. Lastly, our inability to find replacement financing for our credit facility also could adversely affect our ability to fund our operations and REIT distribution requirements.
The Board of Trustees has unlimited authority to increase the amount of debt that we may incur.
The Board of Trustees (the “Board”) determines financing objectives and the amount of the indebtedness that we may incur and may make revisions to these objectives at any time without a vote of our shareholders. Although the Board has no present intention to change these objectives, revisions could result in a more highly leveraged company with an increased risk of default on indebtedness, an increase in debt service charges, and the addition of new financial covenants that restrict our business.
We may issue debt and equity securities or securities convertible into equity securities, any of which may be senior to our Common Shares as to distributions and in liquidation, which could negatively affect the value of our Common Shares.
In the future, we may attempt to increase our capital resources by entering into debt or debt-like financing that is unsecured or secured by up to all of our assets, or by issuing additional debt or equity securities, which could include issuances of secured or unsecured commercial paper, medium-term notes, senior notes, subordinated notes, guarantees, preferred shares, hybrid securities, or securities convertible into or exchangeable for equity securities. In the event of our liquidation, our lenders and holders of our debt and preferred securities would receive distributions of our available assets before distributions to the holders of our Common Shares. Because our decision to incur debt and issue securities in future secondary offerings may be influenced by market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing, or nature of our future secondary offerings or debt financings. Further, market conditions could require us to accept less favorable terms for the issuance of our securities in the future.
There may be future dilution of our Common Shares and resales of our Common Shares in the public market following any secondary offering we do that may cause the market price for our Common Shares to decline.
Our Amended and Restated Declaration of Trust (the “Declaration of Trust”) authorizes the Board to, among other things, issue additional common or preferred shares or securities convertible or exchangeable into equity securities, without shareholder approval. We may issue such additional equity or convertible securities to raise additional capital. The issuance of any additional common or preferred shares or convertible securities could be substantially dilutive to our common shareholders. Moreover, to the extent that we issue restricted share units, share appreciation rights, options, or warrants to purchase our Common Shares in the future and those share appreciation rights, options, or warrants are exercised or the restricted share units vest, our common shareholders may experience further dilution. Holders of our Common Shares have no preemptive rights that entitle them to purchase their pro rata share of any offering of shares of any class or series and, therefore, such sales or offerings could result in increased dilution to our common shareholders. Furthermore, the resale by shareholders of our Common Shares in the public market following any secondary offering could have the effect of depressing the market price for our Common Shares.
The return on our investment in Scottsdale Quarter may be adversely impacted by inherent risks related to financing, new competing developments or operations, and the condition of the local and regional economy.
Our development at Scottsdale Quarter, a premium retail and office complex consisting of approximately 600,000 square feet of gross leasable area, in Scottsdale, Arizona, is our most significant real estate development project at December 31, 2010. We commenced development of the project and have financed construction through a $220 million construction loan for which we, through the Operating Partnership, provided a limited payment and performance guaranty of 50% of the applicable borrowing availability. Delays in completing the various phases of the development due to construction, financing, or development difficulties may adversely impact our ability to effectively lease the development because some tenants may have clauses in their leases which permit them to delay opening or payment of lease charges until certain portions of the development or certain other tenants are open and operating. Leasing delays can also adversely impact our return on our investment, the operation of the development, and its profitability. Lastly, the development is located in a growing part of the state of Arizona and subject to the economic trends of the area. If the economic condition of the area materially deteriorates, then the ability of retailers and other tenants to meet their lease obligations due to reduced consumer spending, poor operating results, diminished liquidity, unavailability of inventory financing, or other reasons could decrease the revenue generated by the development or its value which could increase the impairment risk with respect to the property and adversely impact our return on our investment in the development as well as its profitability.
Clauses in leases with certain tenants of our recent development properties, such as Scottsdale Quarter, frequently include reduced rent that can reduce our rents and funds from operations. As a result, these development properties are more likely to achieve lower returns during their stabilization periods than our development properties historically have.
The leases for a number of the tenants that have opened stores in Scottsdale Quarter include reduced rent from co-tenancy clauses that allow those tenants to pay reduced rent until occupancy reaches certain thresholds and/or certain named co-tenants open stores. In addition, many office tenants have rent abatement clauses that may delay rent commencement a few months after initial occupancy. The effect of these clauses is to reduce our rents and FFO while they are applicable. We expect to continue to offer co-tenancy and rent abatement clauses in the future to attract tenants to our development properties. As a result, our current and future development properties are more likely to achieve lower returns during their stabilization periods than our development properties historically have, which may adversely impact our investment in such developments.
The market value or trading price of our preferred and Common Shares could decrease based upon uncertainty in the marketplace and market perception.
The market price of our common and preferred shares may fluctuate widely as a result of a number of factors, many of which are outside our control or influence. In addition, the stock market is subject to fluctuations in share prices and trading volumes that affect the market prices of the shares of many companies. These broad market fluctuations have adversely affected and may continue to adversely affect the market price of our common and preferred shares. Among the factors that could adversely affect the market price of our common and preferred shares are:
We may change the dividend policy for our Common Shares in the future.
A recent Internal Revenue Service, or IRS, revenue procedure allows us to satisfy our REIT distribution requirement with respect to a taxable year ending on or before December 31, 2011 by distributing up to 90% of our dividends in common shares in lieu of paying dividends entirely in cash. Although we reserve the right to utilize this procedure with respect to a taxable year ending on or before December 31, 2011, we have not done so and do not currently have any intention to do so with respect to any of our regular quarterly dividends. The issuance of common shares in lieu of paying dividends in cash could have a dilutive effect on our earnings per share and FFO per share and could result in the resale by shareholders of our Common Shares in the public market following such a distribution, which could have the effect of depressing the market price for our Common Shares.
In the event that we pay a portion of a dividend in common shares, taxable U.S. shareholders would be required to pay tax on the entire amount of the dividend, including the portion paid in common shares, in which case such shareholders might have to pay the tax using cash from other sources. If a U.S. shareholder sells the common shares it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our common shares at the time of the sale. Furthermore, with respect to non-U.S. shareholders, we may be required to withhold U.S. tax with respect to such dividend, including with respect to all or a portion of such dividend that is payable in common shares. In addition, if a significant number of our shareholders sell our common shares in order to pay taxes owed on dividends or for other purposes, such sales may put downward pressure on the market price of our Common Shares.
The decision to declare and pay dividends on our Common Shares in the future, as well as the timing, amount and composition of any such future dividends, will be at the sole discretion of the Board and will depend on our earnings, FFO, liquidity, financial condition, capital requirements, contractual prohibitions or other limitations under our indebtedness, the distribution requirement necessary for us to both maintain our REIT qualification under the Code, and avoid (and/or minimize) the income and/or excise tax liability that we would otherwise incur under the rules applicable to REITs on our taxable income and gain in the event we do not distribute, state law and such other factors as the Board deems relevant. Under our existing credit facility, distributions on our Common Shares are limited to the greater of $0.40 per Common Share annually or the minimum amount required to maintain REIT status which could result in one or more adjustments in our dividend policy. Any change to our dividend policy for our Common Shares could have a material adverse effect on the market price of our Common Shares.
The terms of our existing credit facility may prevent us from distributing 100% of our REIT taxable income, which could cause us to be subject to corporate income tax on our undistributed income.
Under our current credit facility, distributions on our Common Shares are limited to the greater of $0.40 per Common Share annually or the minimum amount required to maintain REIT status. We are generally required to distribute an amount equal to 90% of our REIT taxable income to maintain REIT status, and may be restricted from distributing 100% of our REIT taxable income pursuant to the terms of our facility. To the extent that we distribute at least 90%, but less than 100%, of our REIT taxable income, we would be subject to tax on undistributed amounts at regular corporate rates.
Our hedging interest rate protection arrangements may not effectively limit our interest rate risk.
We manage our exposure to interest rate risk by a combination of interest rate protection agreements to effectively fix or cap a portion of our variable rate debt. Additionally, we refinance fixed rate debt at times when we believe rates and terms are appropriate. Our efforts to manage these exposures may not be successful. Our use of interest rate hedging arrangements to manage risk associated with interest rate volatility may expose us to additional risks, including a risk that a counterparty to a hedging arrangement may fail to honor its obligations. Additionally, pending regulatory and legislative initiatives as well as recently imposed requirements on counterparties we transact with may increase the costs and time to negotiate and execute hedging arrangements and therefore negate some or all of the benefits of such transactions. Developing an effective interest rate risk strategy is complex and no strategy can completely insulate us from risks associated with interest rate fluctuations. There can be no assurance that our hedging activities will have the desired beneficial impact on our results of operations or financial condition. The unscheduled termination of these hedging agreements typically involves costs, such as transaction fees or breakage costs.
Our ability to operate or dispose of any partially-owned properties that we may acquire may be restricted.
Our ownership of properties through partnership or joint venture investments may involve risks not otherwise present for wholly-owned properties. These risks include the possibility that our partners or co-venturers might become bankrupt, might have economic or other business interests or goals which are inconsistent with our business interests or goals and may be in a position to take action contrary to our instructions or make requests contrary to our policies or objectives, including our policy to maintain our qualification as a REIT. We may need the consent of our partners for major decisions affecting properties that are partially-owned. Joint venture agreements may also contain provisions that could cause us to sell all or a portion of our interest in, or buy all or a portion of our partners’ interests in, such entity or property. These provisions may be triggered at a time when it is not advantageous for us to either buy our partners’ interests or sell our interest. Additionally, if we serve as the managing member of a property-owning joint venture, we may have certain fiduciary responsibilities to the other participants in such entity. There is no limitation under our organizational documents as to the amount of funds that may be invested in partnerships or joint ventures; however, covenants of our credit facility limit the amount of capital that we may invest in joint ventures at any one time.
If our Common Stock is delisted from the NYSE because it trades below $1.00 for an extended period of time there could be a negative effect on our business that could significantly impact our financial condition, our operating results, and our ability to service our debt obligations.
Although the per share price of our Common Stock has remained above $1.00 in 2010, if the average per share closing price of our common stock is below $1.00 for 30 consecutive days, our common stock could be delisted from the NYSE. The threat of delisting our common stock could have adverse effects by, among other things:
Our charter and bylaws and the laws of the state of our formation contain provisions that may delay, defer or prevent a change in control or other transactions that could provide shareholders with the opportunity to realize a premium over the then-prevailing market price for our Common Shares.
In order to maintain GRT’s qualification as a REIT for federal income tax purposes, not more than 50% in value of the outstanding Common Shares may be owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include certain entities) at any time during the last half of the taxable year. Additionally, 100 or more persons must beneficially own the outstanding Common Shares during the last 335 days of a taxable year of 12 months or during a proportionate part of a shorter tax year.
To ensure that GRT will not fail to qualify as a REIT under this test, GRT’s organizational documents authorize the Board to take such action as may be required to preserve GRT’s qualification as a REIT and to limit any person, other than Herbert Glimcher, David Glimcher (only with respect to the limitation on the ownership of outstanding common shares) and any entities or persons approved by the Board, to direct or indirect ownership exceeding: (i) 8.0% of the lesser of the number or value of GRT’s outstanding shares of beneficial interest (including common and preferred shares), (ii) 9.9% of the lesser of the number or value of the total 8¾% Series F Cumulative Redeemable Preferred Shares of Beneficial Interest (“Series F Preferred Shares”) outstanding, and (iii) 9.9% of the lesser of the number or value of the total 8⅛% Series G Cumulative Redeemable Preferred Shares of Beneficial Interest (“Series G Preferred Shares”) outstanding. Herbert Glimcher and David Glimcher are limited to an aggregate of 25% direct or indirect ownership of common shares outstanding without approval of the Board. The Board has also granted an exemption to the aforementioned restrictions to Cohen & Steers Capital Management, Inc., permitting it to own, directly or indirectly, of record or beneficially (i) up to 600,000 Series F Preferred Shares and (ii) up to 14.9% of the lesser of the number or value of the outstanding shares of any other class of the GRT’s equity securities. The Board has granted an exemption to RREEF America, L.L.C., permitting it to own, directly or indirectly, of record or beneficially (i) up to 600,000 Series F Preferred Shares, (ii) up to 14.9% of the lesser of the number or value of the then issued and outstanding Common Shares, and (iii) up to 14.9% of the lesser of the number or value of the then issued and outstanding shares of any class of GRT’s equity securities other than the Series F Preferred Shares, Common Shares, or any GRT’s equity securities convertible into Common Shares. The Board has granted an exemption to Neuberger Berman permitting them to own, directly or indirectly, of record or beneficially 608,800 Series G Preferred Shares. Lastly, the Board has also granted an exemption to The Vanguard Group, Inc, permitting it to own, directly or indirectly, of record or beneficially, subject to certain limitations, up to 14.9% of the lesser of the number or value of the then issued and outstanding Common Shares.
Despite these provisions, GRT cannot be sure that there will not be five or fewer individuals who will own more than 50% in value of its outstanding Common Shares, thereby causing GRT to fail to qualify as a REIT. The ownership limits may also discourage a change in control in GRT.
The members of the Board are currently divided into three equal classes whose terms expire in 2011, 2012 and 2013, respectively. Each year one class of trustees is elected by GRT’s shareholders to hold office for three years. The staggered terms for Board members may affect the ability of GRT shareholders to change control of GRT even if a change in control were in the interests of the shareholders.
GRT’s Declaration of Trust authorizes the Board to establish one or more series of preferred shares, in addition to those currently outstanding, and to determine the preferences, rights and other terms of any series. The Board could authorize GRT to issue other series of preferred shares that could deter or impede a merger, tender offer or other transaction that some, or a majority, of GRT shareholders might believe to be in their best interest or in which GRT shareholders might receive a premium for their shares over the prevailing market price of such shares.
The Declaration of Trust and our Amended and Restated Bylaws also contain other provisions that may delay or prevent a transaction or a change in control that might involve a premium price for the common shares or otherwise be in the best interests of GRT’s shareholders. As a Maryland REIT, GRT is subject to the provisions of the Maryland REIT law which imposes restrictions on some business combinations and requires compliance with statutory procedures before some mergers and acquisitions can occur, thus delaying or preventing offers to acquire GRT or increasing the difficulty of completing an acquisition of GRT, even if the acquisition is in the best interests of GRT’s shareholders.
Risks associated with information systems may interfere with our operations.
We are continuing to implement new information systems and problems with the design or implementation of these new systems could interfere with our operations.
Our operations could be affected if we lose any key management personnel.
Our executive officers have substantial experience in owning, operating, managing, acquiring and developing shopping centers. Success depends in large part upon the efforts of these executives, and we cannot guarantee that they will remain with us. The loss of key management personnel in leasing, finance, legal, construction, development, or operations could have a negative impact on our operations. Additionally, there are generally no restrictions on the ability of these executives to compete with us after termination of their employment.
Inflation or deflation may adversely affect our financial condition and results of operations.
Increased inflation could impact our operations due to increases in construction costs as well as other costs pertinent to our business, including, but not limited to, the cost of insurance and utilities. These costs could increase at a rate higher than our rents. Also, inflation may adversely affect tenant leases with stated rent increases, which could be lower than the increase in inflation at any given time. Inflation could also have an adverse effect on consumer spending which could impact our tenants' sales and, in turn, our percentage rents, where applicable.
Deflation can result in a decline in general price levels, often caused by a decrease in the supply of money or credit. The predominant effects of deflation are high unemployment, credit contraction and weakened consumer demand. Restricted lending practices could impact our ability to obtain financings or refinancings for our properties and our tenants’ ability to obtain credit. Decreases in consumer demand can have a direct impact on our tenants and the rents we receive.
Item 1B. Unresolved Staff Comments
The Company has received no written comments regarding its periodic or current reports from the staff of the SEC that were issued 180 days or more preceding the end of its 2010 fiscal year and that remain unresolved.
Item 2. Properties
The Company’s headquarters are located at 180 East Broad Street, Columbus, Ohio 43215, and its telephone number is 614.621.9000. In addition, the Company maintains management offices at each of its Malls.
At December 31, 2010, the Company managed and leased a total of 27 Properties in which the Company had an ownership interest (21 wholly-owned and 6 partially owned through joint ventures). The Properties are located in 14 states as follows: Ohio (9), West Virginia (3), Arizona (2), California (2), Florida (2), Hawaii (1), Kentucky (1), Minnesota (1), New Jersey (1), Oklahoma (1), Oregon (1), Pennsylvania (1), Tennessee (1) and Washington (1).
Twenty-three of the Properties are Malls that range in size from approximately 420,000 square feet of GLA to 1.6 million square feet of GLA. Seven of the Malls are located in Ohio and 16 are located throughout the country in the states of California (2), Florida (2), West Virginia (2), Arizona (1), Hawaii (1), Kentucky (1), Minnesota (1), New Jersey (1), Oklahoma (1), Oregon (1), Pennsylvania (1), Tennessee (1) and Washington (1). The location, general character and major tenant information are set forth below.
Summary of Operating Malls at December 31, 2010
(b) Community Centers
Four of the Properties are Community Centers ranging in size from approximately 18,000 to 443,000 square feet of GLA. They are located in three states as follows: Ohio (2), Arizona (1), and West Virginia (1). The location, general character and major tenant information are set forth below.
Summary of Community Centers at December 31, 2010
Our lease expirations, total number of tenants whose leases will expire (shown by No. of Leases), the total area in square feet covered by such leases, the annual base rental (“Base Rent”), and the percentage of gross annual rental represented by such leases (% of Total Base Rent) for the next ten years for our total portfolio of Properties (including wholly-owned as well as joint venture Properties) are disclosed in the chart below:
The average base rent per square foot for tenants at December 31, 2010 for the Company’s portfolio of Properties (including wholly-owned Properties as well as joint venture Properties) is $6.94 per square foot for anchor stores and $27.30 per square foot for non-anchor stores.
(d) Significant Properties
Jersey Gardens in Elizabeth, New Jersey, Polaris Fashion Place in Columbus, Ohio (“Polaris”), and Scottsdale Quarter in Scottsdale, Arizona each have a net book value of more than 10% of the Company’s total assets. Jersey Gardens and Polaris also contribute in excess of 10% of the Company’s consolidated revenue.
(e) Properties Subject to Indebtedness
At December 31, 2010, 23 of the Properties as listed below, consisting of 21 Malls (16 wholly-owned and 5 partially owned through joint ventures), and 2 Community Centers (one partially owned through a joint venture), were encumbered by mortgages. The information listed for Joint Venture Properties represents our proportionate ownership share of the encumbered property indebtedness. In addition, to facilitate the funding of working capital requirements and to finance the acquisition and development of the Properties, the Company has entered into a secured revolving line of credit with several financial institutions which is collateralized with first mortgage liens on four other Properties (2 Malls and 2 Community Centers) having a net book value of approximately $42.4 million, and other assets with a net book value of approximately $33.8 million. Our unencumbered assets and developments have a net book value of $5.2 million at December 31, 2010.
Various Mortgage Loans
The following table sets forth certain information regarding the mortgages which encumber various Properties. Except as otherwise stated, all of the mortgages are first mortgage liens on the Properties. The information is as of December 31, 2010 (dollars in thousands).
Item 3. Legal Proceedings
The Company is involved in lawsuits, claims and proceedings which arise in the ordinary course of business. The Company is not presently involved in any material litigation. In accordance with Topic 450 – “Contingencies” in the ASC, the Company makes a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated.
Item 4. Reserved
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
(a) Market Information
The Common Shares are currently listed and traded on the NYSE under the symbol “GRT.” On February 22, 2011, the last reported sales price of the Common Shares on the NYSE was $9.10. The following table shows the high and low sales prices for the Common Shares on the NYSE for the 2010 and 2009 quarterly periods indicated as reported by the NYSE Composite Tape and the cash distributions per Common Share paid by GRT with respect to such period:
For 2010 and 2009, the Common Share dividend declared in December and paid in January will be reported in the 2011 and 2010 tax years, respectively.
The number of holders of record of the Common Shares was 816 as of February 22, 2011.
Future distributions paid by GRT on the Common Shares will be at the discretion of the GRT Board of Trustees and will depend upon the actual cash flow of GRT, its financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Code and such other factors as the GRT Board of Trustees deem relevant.
GRT has implemented a Distribution Reinvestment and Share Purchase Plan under which its shareholders or Operating Partnership unit holders may elect to purchase additional Common Shares at fair value and/or automatically reinvest their distributions in Common Shares at fair value. In order to fulfill its obligations under the plan, GRT may purchase Common Shares in the open market or issue Common Shares that have been registered and authorized specifically for the plan. As of December 31, 2010, 2,100,000 Common Shares were authorized, of which 413,306 Common Shares have been issued.
The following table sets forth Selected Financial Data for the Company. This information should be read in conjunction with the consolidated financial statements of the Company and Management’s Discussion and Analysis of the Financial Condition and Results of Operations, each included elsewhere in this Form 10-K.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
GRT is a self-administered and self-managed REIT which commenced business operations in January 1994 at the time of its initial public offering. The “Company,” “we,” “us” and “our” are references to GRT, Glimcher Properties Limited Partnership (“GPLP” or “Operating Partnership”), as well as entities in which the Company has an interest. We own, lease, manage and develop a portfolio of retail properties (“Properties”) consisting of enclosed regional malls, super regional malls, and open-air lifestyle centers (“Malls”) and community shopping centers (“Community Centers”). As of December 31, 2010, we owned interests in and managed 27 Properties located in 14 states, consisting of 23 Malls (five of which are partially owned through joint ventures) and four Community Centers (one of which is partially owned through a joint venture). The Properties contain an aggregate of approximately 21.3 million square feet of gross leasable area (“GLA”) of which approximately 94.6% was occupied at December 31, 2010.
Our primary business objective is to achieve growth in net income and Funds From Operations (“FFO”) by developing and acquiring retail properties, improving the operating performance and value of our existing portfolio through selective expansion and renovation of our Properties, maintaining high occupancy rates, increasing minimum rents per square-foot of GLA, and aggressively controlling costs.
Key elements of our growth strategies and operating policies are to:
Our strategy is to be a leading REIT focusing on enclosed malls and other anchored retail properties located primarily in the top 100 metropolitan statistical areas by population. We expect to continue investing in select development opportunities and in strategic acquisitions of mall properties that provide growth potential while disposing of non-strategic assets.
Critical Accounting Policies and Estimates
Management’s Discussion and Analysis of Financial Condition and Results of Operations are based upon our consolidated financial statements, which have been prepared in accordance with Generally Accepted Accounting Principles (“GAAP”). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Senior management has discussed the development, selection and disclosure of these estimates with the Audit Committee of the Board of Trustees and the Company’s independent registered public accounting firm. Actual results may differ from these estimates under different assumptions or conditions.
An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made and if different estimates that are reasonably likely to occur could materially impact the financial statements. Management believes the critical accounting policies discussed in this section reflect its more significant estimates and assumptions used in preparation of the consolidated financial statements.
The Company’s revenue recognition policy relating to minimum rents does not require the use of significant estimates. Minimum rents are recognized on an accrual basis over the term of the related leases on a straight-line basis. Percentage rents, tenant reimbursements, and components of other revenue associated with the margins related to outparcel sales include estimates.
Percentage rents, which are based on tenants’ sales as reported to the Company, are recognized once the sales reported by such tenants exceed any applicable breakpoints as specified in the tenants’ leases. The percentage rents are recognized based upon the measurement dates specified in the leases which indicate when the percentage rent is due.
Estimates are used to record cost reimbursements from tenants for CAM, real estate taxes, utilities and insurance. We recognize revenue based upon the amounts to be reimbursed from our tenants for these items in the same period these reimbursable expenses are incurred. Differences between estimated cost reimbursements and final amounts billed are recognized in the subsequent year. Leases are not uniform in dealing with such cost reimbursements and variations exist in computations between Properties and tenants. The Company analyzes the balance of its estimated accounts receivable for real estate taxes, CAM and insurance for each of its Properties by comparing actual reimbursements versus actual expenses. Adjustments are also made throughout the year to these receivables and the related cost reimbursement income based upon the Company’s best estimate of the final amounts to be billed and collected. Final billings to tenants for CAM, real estate taxes, utilities and insurance in 2009 and 2008, which were billed in 2010 and 2009, respectively, did not vary significantly as compared to the estimated receivable balances. If management’s estimate of the percent of recoverable expenses that can be billed to the tenants in 2010 differs from actual amounts billed by 1%, the amount of income recorded during 2010 would increase or decrease by approximately $913,000.
The Company sells outparcels at its various Properties. The estimated cost used to calculate the margin from these sales involves a number of estimates. The estimates made are based either upon assigning a proportionate value based upon historical cost paid for the total parcel to the portion of the parcel that is sold, or by incorporating the relative sales value method. The proportionate share of actual cost is derived through consideration of numerous factors. These factors include items such as ease of access to the parcel, visibility from high traffic areas, acreage of the parcel as well as other factors that may differentiate the desirability of the particular section of the parcel that is sold.
Tenant Accounts Receivable and Allowance for Doubtful Accounts
The allowance for doubtful accounts reflects the Company’s estimate of the amount of the recorded accounts receivable at the balance sheet date that will not be recovered from cash receipts in subsequent periods. The Company’s policy is to record a periodic provision for doubtful accounts based on total revenues. The Company also periodically reviews specific tenant balances and determines whether an additional allowance is necessary. In recording such a provision, the Company considers a tenant’s creditworthiness, ability to pay, probability of collections and consideration of the retail sector in which the tenant operates. The allowance for doubtful accounts is reviewed and adjusted periodically based upon the Company’s historical experience.
Investment in Real Estate
Carrying Value of Assets
The Company maintains a diverse portfolio of real estate assets. The portfolio holdings have increased as a result of both acquisitions and the development of Properties and have been reduced by selected sales of assets. The amounts to be capitalized as a result of acquisition and developments and the periods over which the assets are depreciated or amortized are determined based on the application of accounting standards that may require estimates as to fair value and the allocation of various costs to the individual assets. The Company allocates the cost of the acquisition based upon the estimated fair value of the net assets acquired. The Company also estimates the fair value of intangibles related to its acquisitions. The valuation of the fair value of the intangibles involves estimates related to market conditions, probability of lease renewals and the current market value of in-place leases. This market value is determined by considering factors such as the tenant’s industry, location within the Property and competition in the specific market in which the Property operates. Differences in the amount attributed to the fair value estimate for intangible assets can be significant based upon the assumptions made in calculating these estimates.
Management evaluates the recoverability of its investment in real estate assets as required by Topic 360 - “Property, Plant and Equipment” in the Accounting Standards Codification (“ASC”). Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that recoverability of the investment in the asset is not reason