SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarter Ended: March 31, 2004
Commission File No. 1-07533

FEDERAL REALTY INVESTMENT TRUST

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.   þ Yes       o No

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

FEDERAL REALTY INVESTMENT TRUST
S.E.C. FORM 10-Q

MARCH 31, 2004

INDEX

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FEDERAL REALTY INVESTMENT TRUST
S.E.C. FORM 10-Q

March 31, 2004

PART I.

FINANCIAL INFORMATION

     The following unaudited financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in conformity with rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included and the information contained in these financial statements fairly presents, in all material respects, the financial condition and results of operations of Federal Realty Investment Trust (“the Trust”). The results of operations for the three months ended March 31, 2004, are not necessarily indicative of the results that may be expected for the full year. These financial statements should be read in conjunction with our audited consolidated financial statements and footnotes thereto included in the Trust’s Annual Report on
Form 10-K for the fiscal year ended December 31, 2003.

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Federal Realty Investment Trust

CONSOLIDATED BALANCE SHEETS

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

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Federal Realty Investment Trust

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

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

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Federal Realty Investment Trust

CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS’ EQUITY
(unaudited)

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)

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2004
(unaudited)

NOTE  A — ACCOUNTING POLICIES AND OTHER DATA

     We are an equity real estate investment trust specializing in the ownership, management, development and redevelopment of high quality retail and mixed-use properties. As of March 31, 2004, we owned or had an interest in 63 community and neighborhood shopping centers, including the acquisition of Westgate Mall in March 2004, comprising approximately 14.2 million square feet, primarily located in densely populated and affluent communities throughout the Northeast and Mid-Atlantic United States. In addition, we own 49 urban and retail mixed-use properties comprising over 2.7 million square feet and one apartment complex, primarily located in strategic metropolitan markets in the Northeast and Mid-Atlantic regions and California. In total, our properties were 93.3% leased at March 31, 2004. We have paid quarterly dividends to our shareholders continuously since our founding in 1962, and have increased our dividend rate for 36 consecutive years.

     The accompanying unaudited financial statements have been prepared in conformity with generally accepted accounting principles in the United States (“GAAP”) for interim financial information, as well as in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the information and footnotes required by GAAP for complete financial statements are not included. In management’s opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the unaudited interim financial statements are included. Operating results for interim periods reflected do not necessarily indicate the results that may be expected for a full fiscal year. You should read these financial statements in conjunction with the financial statements and the accompanying notes included in the Company’s Form 10-K for the year ended December 31, 2003.

     The following table sets forth the reconciliation between basic and diluted EPS (in thousands):

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Reclassifications. Certain components of rental income, other property income, rental expense, real estate tax expense and depreciation and amortization expense on the March 31, 2003 Consolidated Statements of Operations have been reclassified to Income From Operations of Discontinued Assets to assure comparability of all periods presented. In addition, certain December 31, 2003 Balance Sheet accounts and components of the March 31, 2004 Consolidated Statement of Cash Flows have been reclassified to assure comparability of all periods presented.

Stock-Based Compensation. In December 2002 the FASB issued SFAS No. 148, “Accounting for Stock Based Compensation-Transition and Disclosure” amending FASB Statement No. 123, “Accounting for Stock-Based Compensation”. SFAS No. 148 amends the disclosure provisions to require prominent disclosure about the effects on reported net income of an entity’s accounting policy decisions with respect to stock-based compensation. We account for stock options using the intrinsic method in accordance with APB No. 25, “Accounting for Stock Issued to Employees,” as interpreted, whereby if options are priced at fair market value or above at the date of grant, no compensation expense is recognized.

     The pro forma information is as follows:

(in thousands except for earnings per share)

Statement of Financial Accounting Standards No. 149. In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” which clarifies the accounting and reporting for derivative instruments. The statement is effective for contracts entered into or modified after June 30, 2003. The adoption of SFAS No. 149 has not had a material effect on the Trust’s financial statements.

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Statement of Financial Accounting Standards No. 150. In May 2003, the FASB issued SFAS No. 150 “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” SFAS No. 150 addresses the classification and measurement of freestanding financial instruments, including mandatory redeemable preferred and common stock, and requires an issuer to classify certain instruments as liabilities. The adoption of SFAS No. 150 has not had a material effect on the Trust’s financial Statements.

Variable Interest Entities. On January 31, 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”). FIN 46 clarifies existing accounting for whether interest entities should be consolidated in financial statements based upon the investee’s ability to finance its activities without additional financial support and whether investors possess characteristics of a controlling financial interest. We have evaluated the applicability of FIN 46 to our investments in certain restaurant joint ventures established in 2001 and 2002 at Santana Row and have determined that these joint ventures do not meet the definition of a Variable Interest Entity and therefore consolidation of these ventures is not required. Accordingly, these investments will continue to be accounted for using the equity method.

NOTE  B — REAL ESTATE ASSETS AND ENCUMBRANCES

     During the first quarter of 2003 an action was filed by a local governmental authority to condemn a shopping center in Rockville, Maryland, owned by one of our partnerships, to facilitate the authority’s redevelopment of its town center. The shopping center has a cost basis of $10.5 million and contributes less than 1% to our rental income. We have agreed with the governmental authority on a condemnation value of $14.3 million, subject to certain terms, and anticipate closing of this transaction in mid-2004. Because the anticipated condemnation proceeds are in excess of our carrying value, we have not recorded any impairment in value of the property.

NOTE  C — MORTGAGES AND CONSTRUCTION LOANS PAYABLE, NOTES PAYABLE AND OTHER LONG TERM DEBT

On October 8, 2003, we closed on a new $550 million unsecured credit facility which replaced our $300 million revolving credit facility and $125 million term loan, both of which were due to mature on December 19, 2003. The new credit facility consists of a $150 million five-year term loan, a $100 million three-year term loan, and a $300 million three-year revolving credit facility, with a one-year extension option. The term loans currently bear interest at LIBOR plus 95 basis points, while the revolving facility currently bears interest at LIBOR plus 75 basis points. The spread over LIBOR is subject to adjustment based on our credit rating.

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     At March 31, 2004 there was $165 million borrowed under our $300 million revolving credit facility of which $98 million was repaid on April 7, 2004 using proceeds from a common equity offering. The maximum amount drawn during the first three months of 2004 was $165 million. The weighted average interest rate on borrowings under the revolving credit facility for the three months ended March 31, 2004 was 1.98%. The facility requires us to comply with various financial and other covenants, including the maintenance of a minimum shareholders’ equity and a maximum ratio of debt to net worth. At March 31, 2004, we were in compliance with all loan covenants.

NOTE  D — SHAREHOLDERS’ EQUITY

     On April 7, 2004 we issued 2,186,749 common shares at a net price of $45.33 (after taking into account underwriters discount and commissions) netting approximately $99 million in cash proceeds. The proceeds were used to repay borrowings outstanding under our revolving credit facility that we used to acquire Westgate Mall and for general corporate purposes.

NOTE  E — INTEREST EXPENSE

     We incurred interest totaling $22.6 million during the first three months of 2004 and $22.8 million during the first three months of 2003, of which $1.3 million and $5.2 million, respectively, was capitalized in connection with development projects. Interest paid was $17.8 million in the first three months of 2004 and $17.2 million in the first three months of 2003.

NOTE  F — COMMITMENTS AND CONTINGENCIES

     We are involved in various lawsuits and environmental matters arising in the normal course of business. Management believes that such matters will not have a material effect on our financial condition or results of operations.

     We are committed to invest approximately $8.0 million in restaurant joint ventures at Santana Row, of which $7.8 million has been invested by March 31, 2004. These restaurant joint ventures are accounted for using the equity method as described in Note A, “Accounting Policies and Other Data — Variable Interest Entities.”

     Under the terms of the Congressional Plaza partnership agreement, from and after January 1, 1986, an unaffiliated third party has the right to require us and the two other minority partners to purchase from half to all of its 29.47% interest in Congressional Plaza at the interest’s then-current fair market value. Based on management’s current estimate of fair market value, our estimated liability upon exercise of the put option is approximately $21.0 million. In conjunction with the construction of the apartments at the property that were completed in 2003, 8.03% of the third party’s interest in Congressional Plaza was re-allocated to us, effective January 1, 2004, thereby lowering the third party’s ownership percentage from 37.5% to its current level of 29.47%, as a result of our having funded approximately $7 million of the third party’s share of the redevelopment cost.

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     Under the terms of various other partnerships which own shopping center properties with a cost of approximately $88.5 million, including one of the two shopping centers purchased in the first quarter of 2003, the partners have the right to exchange their operating units for cash or the same number of our common shares, at our option. On January 5, 2004 we paid $199,000 to redeem 5,100 of these operating units and on March 3, 2004 we paid $200,000 to redeem 4,667 of these operating units. As of March 31, 2004, a total of 842,455 operating units remain outstanding.

     Under the terms of four other partnerships which own street retail properties in southern California with a cost of approximately $61 million, if certain leasing and revenue levels are obtained for the properties owned by the partnerships, the other partners may require us to purchase their partnership interests at a formula price based upon property operating income. The purchase price may be paid in cash, or for two of the partnerships, a limited number of our common shares at the election of the other partners. In those partnerships, if the other partners do not redeem their interests, we may choose to purchase the limited partnership interests upon the same terms.

     Street Retail San Antonio LP, a wholly-owned subsidiary of the Trust, entered into a Development Agreement (the “Agreement”) on March 13, 2000 with the City of San Antonio, Texas (the “City”) related to the redevelopment of land and buildings that we own along Houston Street. Houston Street and the surrounding area have been designated by the City as a Reinvestment Zone (the “Zone”). The City agreed to facilitate redevelopment of the Zone by undertaking and financing certain public improvements based on our agreement to redevelop our properties in the Zone. Under the terms of the Agreement, the City issued debt to fund specific public improvements within the Zone. The initial and primary source of funding to the City for repayment of the debt and debt service is the incremental tax revenue that accretes to the City as the taxable value of the redeveloped properties within the Zone increases. We are required to issue an annual letter of credit, commencing on October 1, 2002 through September 30, 2014, that covers our designated portion of the debt service should the incremental tax revenue generated in the Zone not cover the debt service. We posted a letter of credit with the City on September 25, 2002 for $795,000. Our obligation under this agreement is estimated to range from $1.6 million to $3.0 million of which approximately $360,000 was funded in 2003. We have accrued for additional payments of $1.2 million as part of the project costs in anticipation of a shortfall of incremental tax revenues to the City. We could be required to provide funding beyond the $1.2 million currently accrued under the Agreement prior to its expiration on September 30, 2014. We do not anticipate that such obligation would exceed $600,000 in any year nor exceed $3.0 million in total. If the Zone creates sufficient tax increment funding to repay the City’s debt prior to the expiration of the Agreement, we will be eligible to receive reimbursement of amounts paid for debt service shortfalls together with interest thereon.

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NOTE  G — COMPONENTS OF RENTAL INCOME

     The components of rental income for the periods ended March 31 are as follows:

(in thousands)

      Minimum rents include $713,000 and $373,000 for the quarters ended March 31, 2004 and March 31, 2003, respectively, to recognize rent on a straight-line basis. Residential minimum rents comprises the rents at Rollingwood Apartments, Crest Apartments at Congressional Plaza and the residential rents at Santana Row.

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NOTE  H — SEGMENT INFORMATION

     We operate our portfolio of properties in three geographic operating regions: Northeast, Mid-Atlantic and West, which constitute our segments under Statement of Financial Accounting Standard No. 131, “Disclosures about Segments of an Enterprise and Related Information.”

     A summary of our operations by geographic region is presented below (in thousands):

     There are no transactions between geographic areas.

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The following discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing in Item 1 of this report.

     This Quarterly Report on 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.” The risk factors describe risks that may affect these statements but are not all-inclusive, particularly with respect to possible future events. Many things can happen that can cause actual results to be different from those we describe. These factors include, but are not limited to:

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     Given these uncertainties, readers are cautioned not to place undue reliance on these forward-looking statements or those incorporated into this Quarterly Report on Form 10-Q. We also make no promise to update any of the forward-looking statements. You should carefully review the risks and the risk factors incorporated herein by reference from our Form 8-K filed on March 11, 2004, as well as the other information in our Annual Report on Form 10-K or in this Quarterly Report on Form 10-Q before making any investment in us.

Overview

     We are an equity real estate investment trust specializing in the ownership, management, development and redevelopment of high quality retail and mixed-use properties. As of March 31, 2004, we owned or had an interest in 63 community and neighborhood shopping centers comprising approximately 14.2 million square feet, primarily located in densely populated and affluent communities throughout the Northeast and Mid-Atlantic United States. In addition, we owned 49 urban and retail mixed-use properties comprising over 2.7 million square feet and one apartment complex, primarily located in strategic metropolitan markets in the Northeast and Mid-Atlantic regions and California. In total, our properties were 93.3% leased at March 31, 2004, 93.1% leased at December 31, 2003 and 94.3% leased at March 31, 2003.

2004 Property Acquisitions

     On March 31, 2004, we acquired Westgate Mall, a 637,000 square foot shopping center located in San Jose, California. The purchase price of the property of approximately $97.0 million was paid from borrowings under our revolving credit facility, which were subsequently repaid from the proceeds of our April 2004 common equity offering.

2004 Financing Developments

     On January 21, 2004, we issued $75 million of fixed rate notes which mature in February 2011 and bear interest at 4.50%. The proceeds of this note offering were used to pay down our revolving credit facility.

     Also in January 2004, to hedge our exposure to interest rates on our $150 million term loan issued in October 2003, we entered into an interest rate swap, which fixed the LIBOR portion of the interest rate on the term loan at 2.401% through October 2006. The interest rate on the term loan as of December 31, 2003 was 2.1% based on LIBOR plus 95 basis points. Upon entering into the swap, the interest rate was fixed at 3.351% (2.401% plus 0.95%) on notional amounts totaling $150 million at the next interest reset date.

     We paid off our 6.74% Medium Term Notes on their due date of March 10, 2004 for their full principal balance of $39.5 million.

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     On April 7, 2004, we issued 2,186,749 common shares at a net price of $45.33 per share (after taking into account underwriters discount and commissions) netting approximately $99 million in cash proceeds. The proceeds were used to repay borrowings outstanding under our revolving credit facility that we used to acquire Westgate Mall and for general corporate purposes.

Santana Row

     Phases I and II of Santana Row, our 42 acre multi-phase, mixed-use property in San Jose, California, came into service in 2002 and 2003. Seven of the eight buildings of Phase I that included retail, residential and a 213-room hotel, opened in 2002. The retail portion of the remaining building, “Building 7”, opened in early 2003. The delay in opening Building 7 was the result of a fire in August 2002 that destroyed all but 11 of the planned 246 residential units located in that building. The re-build of the residential units on Building 7 has commenced and when completed in 2006, Building 7 will include 96 townhomes and 160 flats. Phase II of the project, which includes approximately 84,000 square feet of retail space, was completed in late 2003 and Phase III, which consists of an arts cinema and 4,000 square feet of retail space, will be completed later this year. The total cost of Phase I is estimated to be $443 million (excluding the Building 7 reconstruction), the cost of Phase II is estimated to be approximately $27 million, Phase III will cost approximately $4 million, and the cost of the Building 7 reconstruction, Phase IV, is estimated to be approximately $58 million.

     The financial success of Santana Row will depend on many factors which cannot be assured. These factors include among others, the demand for retail and residential space at rates that give an adequate return, the ongoing cost of operations and maintenance and the general economy, particularly around Silicon Valley.

Results of Operations

     Throughout this section, we have provided certain information on a “same center” basis. Information provided on a same center basis is provided only for those properties owned and operated for the entirety of both periods being compared and includes properties which were redeveloped or expanded during the periods being compared. Santana Row (which has not yet stabilized), properties purchased or sold, properties under development and properties not owned and operated for the entirety of the periods being compared are excluded from our same center analysis.

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Comparison of First Quarter 2004 to First Quarter 2003

REVENUES

     Total revenues in the first quarter 2004 were $96.2 million compared to $84.5 million for the first three months of 2003. This increase of $11.6 million is due largely to the impact of properties acquired but also to increased revenues on a same center basis and the recognition of $1.1 million of rental income resulting from the portion of the settlement of our insurance claim for the August 2002 fire at Santana Row that related to lost rent. On a same center basis, total revenues increased $2.2 million, or 2.8% in the first three months of 2004 when compared with the first three months of 2003. The primary components of this increase in total revenues are discussed below.

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     Rental Income. Rental income consists of minimum rent, percentage rent and cost recoveries from tenants of common area maintenance, insurance and real estate taxes. The increase in rental income of $10.4 million, or 13.1%, for the three months ended March 31, 2004, as compared to the three months ended March 31, 2003, is mainly attributable to:

     Other Property Income. Other property income includes items, which although recurring, tend to fluctuate more than rental income from period to period, such as utility reimbursements, lease termination fees and temporary tenant income. Other property income was $5.1 million for the quarter ended March 31, 2004 compared to $4.1 million for the quarter ended March 31, 2003. This $1.0 million or 24.7% increase is due primarily to increased reimbursements, increased parking revenues, increased lease termination fees and increased sponsorship income at Santana Row.

     Interest and Other Income. Interest and other income includes interest earned on mortgage and other notes receivable and overnight cash investments. Interest and other income increased $0.2 million from the first quarter 2003 to the first quarter 2004 due primarily to an increase in the balance of mortgage notes receivable.

EXPENSES

     Total property operating expenses increased $2.4 million to $31.6 million for the three months ended March 31, 2004, as compared to $29.3 million for the three months ended March 31, 2003. The 8.1% increase in total property operating expenses is related primarily to the additional costs at properties which were acquired in the past year as discussed below. On a same center basis, property operating expenses were flat in first quarter 2004 when compared with the first quarter of 2003.

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      Rental Expense. The increase in rental expense of $0.9 million, or 4.1%, for the three months ended March 31, 2004, as compared to the three months ended March 31, 2003, is mainly attributable to:

     Rental expense as a percentage of rental income plus other property income decreased to 23.6% for the first quarter of 2004 compared to 25.8% for the first quarter of 2003. This improved expense ratio is due partly to the lower snow removal costs but also to the improvement at Santana Row which had higher revenues in the first quarter of 2004 compared to the first quarter of 2003 on higher occupancy, during which it was still being phased into service.

     Real Estate Taxes. Real estate taxes have increased $1.5 million, or 19.2%, for the three months ended March 31, 2004, as compared to the three months ended March 31, 2003. Of this increase, $0.9 million is attributable to taxes at properties acquired since January 1, 2003 and at Santana Row and the remainder, approximately $0.6 million, is primarily attributable to overall increases in tax assessments at same center properties.

     Property Operating Income. Property operating income was $64.5 million for the quarter ended March 31, 2004, an increase of almost $9.3 million, or 16.8%, compared to $55.3 million in the first quarter of 2003 as a result of the variances explained above. Same center property operating income increased $2.2 million or 4.0% for the three months ended March 31, 2004 compared to the same period in the prior year. Excluding contributions from properties being redeveloped or expanded, same center property operating income increased 3.7% over the same period.

     Interest Expense. We incurred total interest costs of $22.6 million in the first quarter of 2004 of which $1.3 million was capitalized, yielding interest expense of $21.3 million for the period, as compared to total interest costs incurred of $22.8 million in the first quarter of 2003, of which $5.2 million was capitalized yielding interest expense of $17.6 million for the period. The decrease in capitalized interest of $3.9 million is attributable primarily to the phasing into service of Santana Row and the consequent decrease in interest attributable to the development of this project being capitalized.

     The ratio of earnings to combined fixed charges (consisting of interest on borrowed funds, including capitalized interest, amortization of debt discount and expenses and the portion of rent expense representing an interest factor) and preferred dividends was 1.50 and 1.22 for the first three months of 2004 and 2003, respectively.

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     Administrative Expense. The increase in administrative expense of $0.9 million for the three months ended March 31, 2004, as compared to the three months ended March 31, 2003, is due largely to increased expense associated with performance and other share grants issued under our long-term incentive plan. The increase in grant expense is attributable primarily to the increase in our share price during the first quarter of 2004 which increases the expense on shares anticipated to vest in 2004. In addition to grant expense, expenses have increased as a result of a smaller portion of administrative costs at Santana Row being capitalized in the first quarter of 2004 as development activity decreased.

     Depreciation and Amortization Expense. Depreciation and amortization expense increased $3.3 million, or 19.0%, to $20.6 million for the three months ended March 31, 2004, as compared to the three months ended March 31, 2003. This increase primarily reflects:

Other

     Minority Interests. Minority interests represents the minority partners’ financial interest in the income of certain properties. Minority interest in results of operations increased slightly as an increase in net income realized in the first quarter resulted in an increased allocation to operating unit holders.

     Operating Income from Discontinued Operations. Operating income from properties sold is required to be reported separately from the results of ongoing operations. While no properties were sold in the first quarter of 2004, the reported expense of $48,000 reflects costs and adjustments for properties which were sold prior to 2004. The reported operating income of $350,000 for the first quarter of 2003 represents the operating results of properties sold for that period.

     Gain on Sale of Real Estate Net of Loss on Abandoned Developments Held for Sale. The gain on sale of real estate of $57,000 reported for the first quarter of 2004 is primarily the result of a sale of land to a government authority to be used as a bus stop.

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Segment Results

     We operate our business on an asset management model, where focused teams are responsible for a portfolio of assets. We have divided our portfolio of properties into three operating regions: the Northeast, Mid-Atlantic and West. Each region is operated under the direction of an asset manager, with dedicated leasing, property management and financial staff and operates largely autonomously with respect to day to day operating decisions. Incentive compensation, throughout the regional teams, is tied to the property operating income of the respective portfolios.

     The following selected key segment data presented is for the three months ended March 31, 2004 and March 31, 2003, except real estate assets and gross leasable area which is presented as of quarter end. The results of properties which have been sold are excluded from property operating income below in accordance with SFAS No. 144.

     Property operating income consists of rental income, other property income and interest income, less rental expenses and real estate taxes. The measure is used internally to evaluate the performance of our regional operations and we consider it to be a significant measure.

(in thousands)

Key Segment Financial Data

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MID-ATLANTIC

     The Mid-Atlantic region extends roughly from Baltimore south through metropolitan Washington, D.C. and further south through Virginia and North Carolina. Two properties in Florida are also included in this region. As of March 31, 2004, the Mid-Atlantic included 35 properties.

     Total revenue grew $2.8 million to $41.6 million in the first quarter of 2004 compared to the first quarter of 2003. The increase in total revenue of 7.2% is largely attributable to:

     The percentage leased was 92% at March 31, 2004 compared to 94% at March 31, 2003 reflecting the impact of several anchor closings, including K-Mart, and an increase in re-development activity which will keep leasable space out of service until the redevelopments are complete.

     The ratio of operating income to total revenue in the first quarter of 2004 was almost unchanged from 2003 as increased real estate taxes and other expenses was more than offset by the lower snow removal costs.

NORTHEAST

     The Northeast region extends from suburban Philadelphia north through New York and its suburbs into New England. This region also includes several properties located in Illinois and one located in Michigan. As of March 31, 2004, the Northeast region had 42 properties.

     In the Northeast, total revenue has increased $2.3 million or 7.1%. This increase is primarily attributable to:

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     The percentage leased was 95% and 97% at March 31, 2004 and March 31, 2003, respectively. The decrease reflects the closing of several anchor tenants, including K-Mart, and the acquisition of Mercer Mall, the leased rate of which is currently below that of the rest of the region and an increase in redevelopment activity which has taken leaseable space out of service.

     Property operating income as a percent of total revenue was 66.1% and 64.9% in the first quarter of 2004 and 2003, respectively. Property expenses increased $0.4 million due to higher property taxes and maintenance costs that were partly offset by lower snow removal costs and bad debt expense.

WEST

     As of March 31, 2004, 35 of our properties, including Westgate Mall acquired on March 31, 2004, were located in the West region. The West region extends from Texas to the West Coast.

     Total revenue increased $6.6 million to $20.0 million in the first quarter of 2004 from $13.5 million in the first quarter of 2003. Excluding $1.1 million of rental income from the lost rents recovered through fire insurance proceeds, total revenue increased $5.5 million. This increase is almost exclusively due to increases at Santana Row of minimum rents, cost recoveries and other income. On a Same Center basis, total rental revenue for the region increased $100,000 as higher lease termination fees and increased rental income in San Antonio offset lower income at a property in Hollywood, California and lower rental income at 150 Post which is being renovated.

     For the West Region, the percentage leased was 91% and 83% at March 31, 2004 and March 31, 2003, respectively. The improved leased rate is due primarily to increases at Santana Row and Houston Street in San Antonio, Texas and the impact of Westgate Mall which has higher leased rates than the rest of the region.

     The West region’s property operating income as a percent of total revenue improved to 62.7% in the first three months of 2004 from 53.7% in the first three months of 2003. This improvement is due almost entirely to Santana Row where operating and start-up costs were high in 2003 but rental and other revenues were still continuing to grow.

     The success of Santana Row and Houston Street in San Antonio, Texas will depend on many factors which are not entirely within our control. We monitor current and long-term economic forecasts for these markets in order to evaluate the long-term financial returns of these projects. The overall return on investment in the West segment significantly lags the Northeast and Mid-Atlantic due to the phasing into service of Santana Row and Houston Street. We expect that the returns on investment in the West will continue to rise as these projects come into service but not necessarily to the same level of overall returns as generated in the other segments.

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Liquidity and Capital Resources

     Due to the nature of our business and our strategy, we are generally in a position to generate significant amounts of cash from operations. The cash generated from operations is primarily paid to shareholders in the form of dividends. Our status as a REIT requires that we distribute at least 90% of our REIT taxable income each year. Therefore, cash needs for executing our strategy and investing in new properties as well as payment of debt maturities must come from cash not distributed to shareholders, from proceeds of property dispositions, or from the proceeds derived from raising new capital by issuing equity or debt securities.

     It is management’s intention that we continually have access to the capital resources necessary to expand and develop our business. As such 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. We may, from time to time, seek to obtain funds through additional equity offerings, unsecured debt financing and/or mortgage financings and other debt and equity alternatives, including formation of joint ventures, in a manner consistent with our intention to operate with a conservative debt structure.

     Cash and cash equivalents were $27.9 million and $35.0 million at March 31, 2004 and December 31, 2003, respectively.

Summary of Cash Flows

(in thousands)

     The cash provided by operating activities is primarily attributable to the operation of our properties and the change in working capital related to our operations. Of the $39.0 million cash from operations, $2.0 million comes from changes in working capital and the remainder from results of operations.

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     We used cash of $120.9 million during the first quarter of 2004 in investing activities including the following:

     Our financing activities provided $74.9 million of cash, which was composed of:

     In the second quarter of 2004, we issued approximately 2.2 million common shares netting approximately $99 million in cash proceeds. The proceeds were used to repay borrowings outstanding under our revolving credit facility which were used to acquire Westgate Mall and for general corporate purposes.

      Off-Balance Sheet Arrangements. Other than as disclosed in the Contractual Obligations table below, we have no off-balance sheet arrangements that are reasonably likely to have a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

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     The following table provides a summary of our fixed, noncancelable obligations as of March 31, 2004.

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Debt Financing Arrangements

      As of March 31, 2004, we had total debt outstanding of $1.4 billion.

     The following is a summary of our total debt outstanding as of March 31, 2004:

(dollars in thousands)

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     Our credit facility and other debt agreements include financial covenants that may limit our operating activities in the future. These covenants require us to comply with a number of financial provisions using calculations of ratios and other amounts that are not normally useful to a financial statement reader and are calculated in a manner that is not in accordance with GAAP. Accordingly, the numeric information set forth below is calculated as required by our various loan agreements rather than in accordance with GAAP. We have not included a reconciliation of this information to GAAP information because, in this case, there is no directly comparable GAAP measure, similarly titled GAAP measures are not relevant in determining whether or not we are in compliance with our financial covenants and we believe that the ratios on our material covenants are relevant to the reader. These covenants require us to:

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     We are also obligated to comply with other covenants, including, among others, provisions:

     As of March 31, 2004, we were in compliance with all of the listed financial covenants. If we were to breach any of our debt covenants, including the listed covenants, and did not cure the breach within any applicable cure period, our lenders could require us to repay the debt immediately, and, if the debt is secured, could immediately begin proceedings to take possession of the property securing the loan. Many of our debt arrangements, including our public notes and our credit facility, are cross-defaulted which means that the lenders under those debt arrangements can put us in default and require immediate repayment of their debt if we breach and fail to cure a covenant under certain of our other debt obligations. As a result, any default under our debt covenants could have an adverse effect on our financial condition, our results of operations, our ability to meet our obligations and the market value of our shares.

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     Below are the aggregate principal payments required as of March 31, 2004 under our debt financing arrangements by year. Scheduled principal installments and amounts due at maturity are included.

(in thousands)

     Our organizational documents do not limit the level or amount of debt that we may incur.

Interest Rate Hedging

     We enter into derivative contracts, which qualify as cash flow hedges under SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities”, in order to manage interest rate risk. Derivatives are not purchased for speculation.

     In January 2004, to hedge our exposure to interest rate fluctuations on our $150 million, five-year term loan issued in October 2003, we entered into interest rate swaps, which fixed the LIBOR portion of the interest rate on the term loan at 2.401% through October 2006. The interest rate on the term loan as of March 31, 2004 was 2.1% based on LIBOR plus 95 basis points. Upon entering into the swap, the interest rate was fixed, assuming no change to our debt rating, at 3.351% on notional amounts totaling $150 million through October 2006. On the January 2004 hedge, we are exposed to credit loss in the event of non-performance by the counterparty to the interest rate protection agreement should interest rates exceed the cap. However, management does not anticipate non-performance by the counterparty. The counterparty has a long-term debt rating of “A” by Standard and Poor’s Ratings Service (“S&P”) and “A1” by Moody’s Investors Service (“Moody’s”) as of March 31, 2004. Although our swap is not exchange traded, there are a number of financial institutions which enter into these types of transactions as part of their day-to-day activities. The swap has been documented as a cash flow hedge and designated as effective at interception of the swap contract.

     Consequently, the unrealized gain or loss upon measuring the swap at its fair value will be recorded as a component of other comprehensive income with shareholders’ equity and either a derivative instrument asset or liability is recorded on the balance sheet.

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Liquidity Requirements

     Short-term liquidity requirements consist primarily of obligations under capital and operating leases, normal recurring operating expenses, regular debt service requirements (including debt service relating to additional or replacement debt, as well as scheduled debt maturities), recurring corporate expenditures, non-recurring corporate expenditures (such as tenant improvements and redevelopments) and dividends to common and preferred shareholders. Overall capital requirements in 2004 will depend upon acquisition opportunities, the level of improvements and redevelopments on existing properties and the timing and cost of future phases of Santana Row. We expect to fund our capital requirements, as well as our development and redevelopment costs, acquisitions and normal recurring operating costs through a combination of cash provided by operating activities, borrowings under our credit facility and other funding sources which may consist of additional and replacement debt, both secured and unsecured, additional equity, joint venture relationships and property dispositions.

     We expect to fund our long-term capital requirements, which consist primarily of maturities under our long-term debt, development and redevelopment costs and potential acquisition opportunities through a combination of funding sources which we believe will be available to us including debt, both secured and unsecured, additional equity, joint venture relationships and property dispositions.

     The following factors could affect our ability to meet our liquidity requirements:

REIT Qualification

     We intend to maintain our qualification as a REIT under Section 856(c) of the Code. As a REIT, we generally will not be subject to corporate federal income taxes as long as we satisfy certain technical requirements of the Code, including the requirement to distribute 90% of our REIT taxable income to our shareholders.

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Funds From Operations

     We have historically reported our FFO available for common shareholders in addition to our net income and net cash provided by operating activities. FFO is a supplemental non-GAAP financial measure of real estate companies’ operating performance. NAREIT defines FFO as follows: income available for common shareholders before depreciation and amortization of real estate assets and before extraordinary items less gains on sale of real estate. NAREIT developed FFO as a relative measure of performance and liquidity of an equity REIT in order to recognize that the value of income-producing real estate historically has not depreciated on the basis determined under GAAP. However, FFO:

     We consider FFO available for common shareholders a meaningful, additional measure of operating performance because it primarily excludes the assumption that the value of the real estate assets diminishes predictably over time, and because industry analysts have accepted it as a performance measure. Comparison of our presentation of FFO to similarly titled measures for other REITs may not necessarily be meaningful due to possible differences in the application of the NAREIT definition used by such REITs.

     An increase or decrease in FFO available for common shareholders does not necessarily result in an increase or decrease in aggregate distributions because our Board of Trustees is not required to increase distributions on a quarterly basis unless necessary for us to maintain REIT status. However, we must distribute 90% of our REIT taxable income (as defined in the Code) to remain qualified as a REIT. Therefore, a significant increase in FFO will generally require an increase in distributions to shareholders although not necessarily on a proportionate basis.

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     The reconciliation of net income available for common shareholders to funds from operations is as follows:

(in thousands)