Exhibit 13.              Annual report to security holders

 

The annual report toshareholders has not been completed as of this filing and will be furnished tothe Securities and Exchange Commission in its entirety on or before April 29,2004.

 

The financial section of theannual report, which is incorporated by reference, is final and is enclosed asExhibit 13.  This financial sectionincludes the information incorporated by reference in Parts I, II and IV ofthis Form 10-K Annual Report for the fiscal year ended December 31, 2003.

 

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*The Rouse Company and Subsidiaries*

STATEMENT ON RESPONSIBILITIES FOR ACCOUNTING,

AUDITING AND FINANCIAL REPORTING

 

The financialstatements and other information included in the financial review section ofthis annual report to shareholders have been prepared by management.  Financial information presented elsewhere inthis report is consistent with the information presented in the financialreview section.

The consolidatedfinancial statements have been prepared using accounting principles generallyaccepted in the United States of America considered appropriate in thecircumstances.  Preparation of thefinancial statements and other financial information requires the use ofestimation and judgment.  We have madethese estimates and judgments based on extensive experience and substantiveunderstanding of relevant events and transactions.  The primary objective of financial reporting is to provide usersof financial statements with sufficient, relevant information to enable them toevaluate our financial position and results of operations.

In fulfilling ourresponsibility for the reliability and integrity of financial information, wehave established and maintain a system of internal control.  We believe that this system providesreasonable assurance regarding achievement of our objectives with respect tothe reliability of financial reporting, the effectiveness and efficiency ofoperations and compliance with applicable laws and regulations.  This system is supported by our businessethics policy and is regularly tested by internal auditors.  The independent auditors also consider thesystem of internal control to the extent necessary to determine the nature,timing and extent of their audit procedures.

The AuditCommittee of the Board of Directors is composed of directors who are neitherofficers nor employees of the Company. The Committee meets periodically with management, our internal auditorsand the independent auditors to review the work and conclusions of each.  The internal auditors and the independentauditors have full and free access to the Audit Committee and meet with it,with and without management present, to discuss accounting, auditing andfinancial reporting matters.  The AuditCommittee may retain at Company expense such legal, accounting or otheradvisors as it deems necessary.  TheAudit Committee appoints the independent auditors.

 

1

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#### ***The Rouse Company and Subsidiaries***

CONSOLIDATED**BALANCESHEETS

#### ***December 31, 2003 and 2002***

*(in thousands, except share data)*

 
|                                                                                                                                         |   | **2003**  |      | **2002**  |   |
|----------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------|-----------|-----------|--------|
| **Assets:**                                                                                                                                  |   |      |      |      |   |
| Property and property-related deferred  costs:                                                                                               |   |      |      |      |   |
| Operating properties:                                                                                                                        |   |      |      |      |   |
| Property                                                                                                                                     |   | $         | 5,351,748 |      | $      | 5,710,945 |   |
| Less accumulated depreciation                                                                                                                |   | 897,277   |      | 896,963   |   |
|                                                                                                                                         |   | 4,454,471 |      | 4,813,982 |   |
|                                                                                                                                         |   |      |      |      |   |
| Deferred costs                                                                                                                               |   | 238,122   |      | 201,959   |   |
| Less accumulated amortization                                                                                                                |   | 94,424    |      | 84,713    |   |
|                                                                                                                                         |   | 143,698   |      | 117,246   |   |
| Net operating properties                                                                                                                     |   | 4,598,169 |      | 4,931,228 |   |
|                                                                                                                                         |   |      |      |      |   |
| Properties in development                                                                                                                    |   | 167,073   |      | 176,214   |   |
| Properties held for sale                                                                                                                     |   | 138,823   |      | —    |   |
| Investment land and land held for  development and sale                                                                                      |   | 414,666   |      | 321,744   |   |
| Total property and property-related  deferred costs                                                                                          |   | 5,318,731 |      | 5,429,186 |   |
|                                                                                                                                         |   |      |      |      |   |
| Investments in unconsolidated real estate  ventures                                                                                          |   | 628,305   |      | 422,735   |   |
| Advances to unconsolidated real estate  ventures                                                                                             |   | 19,562    |      | 19,670    |   |
| Prepaid expenses, receivables under finance  leases and other assets                                                                         |   | 479,409   |      | 391,897   |   |
| Accounts and notes receivable                                                                                                                |   | 53,694    |      | 56,927    |   |
| Investments in marketable securities                                                                                                         |   | 22,313    |      | 32,103    |   |
| Cash and cash equivalents                                                                                                                    |   | 117,230   |      | 41,633    |   |
| **Total assets**                                                                                                                             |   | $         | 6,639,244 |      | $      | 6,394,151 |   |
|                                                                                                                                         |   |      |      |      |   |
| **Liabilities:**                                                                                                                             |   |      |      |      |   |
| Debt:                                                                                                                                        |   |      |      |      |   |
| Property debt not carrying a Parent Company  guarantee of repayment                                                                          |   | $         | 2,768,288 |      | $      | 3,271,437 |   |
| Debt secured by properties held for sale                                                                                                     |   | 110,935   |      | —    |   |
| Parent Company debt and debt carrying a  Parent Company guarantee of repayment:                                                              |   |      |      |      |   |
| Property debt                                                                                                                                |   | 179,150   |      | 158,258   |   |
| Other debt                                                                                                                                   |   | 1,386,119 |      | 1,011,782 |   |
|                                                                                                                                         |   | 1,565,269 |      | 1,170,040 |   |
| Total debt                                                                                                                                   |   | 4,444,492 |      | 4,441,477 |   |
|                                                                                                                                         |   |      |      |      |   |
| Accounts payable and accrued expenses                                                                                                        |   | 179,530   |      | 216,647   |   |
| Other liabilities                                                                                                                            |   | 611,042   |      | 487,603   |   |
|                                                                                                                                         |   |      |      |      |   |
| Parent Company-obligated mandatorily  redeemable preferred securities of a trust holding solely Parent Company  subordinated debt securities |   | 79,216    |      | 136,340   |   |
|                                                                                                                                         |   |      |      |      |   |
| **Shareholders’ equity:**                                                                                                               |   |      |      |      |   |
| Series B Convertible Preferred stock with a  liquidation preference of $202,500                                                              |   | 41        |      | 41        |   |
| Common stock of 1¢ par value per share;  250,000,000 shares authorized; issued 91,759,723 shares in 2003 and  86,909,700 shares in 2002 |   | 918       |      | 869       |   |
| Additional paid-in capital                                                                                                                   |   | 1,346,890 |      | 1,234,848 |   |
| Accumulated deficit                                                                                                                          |   | (10,991   | )         | (109,740  | )      |
| Accumulated other comprehensive income  (loss):                                                                                              |   |      |      |      |   |
| Minimum pension liability adjustment                                                                                                         |   | (4,628    | )         | (3,665    | )      |
| Unrealized net losses on derivatives  designated as cash flow hedges                                                                         |   | (7,266    | )         | (10,269   | )      |
| Total shareholders’ equity                                                                                                              |   | 1,324,964 |      | 1,112,084 |   |
| **Total liabilities and shareholders’ equity**                                                                                          |   | $         | 6,639,244 |      | $      | 6,394,151 |   |

 

The accompanying notes are an integral partof these statements.

 

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*The Rouse Company and Subsidiaries*

CONSOLIDATED STATEMENTS OF OPERATIONSAND COMPREHENSIVE INCOME

*Years ended December 31, 2003, 2002 and 2001*

*(in thousands, except per share data)*

 
|                                                                                                                                                                                                                                                     |   | **2003**  |    | **2002** |   | **2001** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------|---------|----------|--------|----------|--------|
| Revenues:                                                                                                                                                                                                                                                |   |      |    |     |   |     |   |
| Rents from tenants                                                                                                                                                                                                                                       |   | $         | 765,641 |     | $      | 655,998  |   | $ | 525,237 |   |
| Land sales                                                                                                                                                                                                                                               |   | 284,840   |    | 238,341  |   | 218,179  |   |
| Other                                                                                                                                                                                                                                                    |   | 54,385    |    | 54,889   |   | 58,534   |   |
| Total revenues                                                                                                                                                                                                                                           |   | 1,104,866 |    | 949,228  |   | 801,950  |   |
|                                                                                                                                                                                                                                                     |   |      |    |     |   |     |   |
| Operating expenses, exclusive of provision  for bad debts, depreciation and amortization:                                                                                                                                                                |   |      |    |     |   |     |   |
| Operating properties                                                                                                                                                                                                                                     |   | (322,444  | )       | (283,345 | )      | (239,921 | )      |
| Land sales operations                                                                                                                                                                                                                                    |   | (167,538  | )       | (154,809 | )      | (140,260 | )      |
| Other                                                                                                                                                                                                                                                    |   | (52,527   | )       | (44,762  | )      | (35,005  | )      |
| Total operating expenses, exclusive of  provision for bad debts, depreciation and amortization                                                                                                                                                           |   | (542,509  | )       | (482,916 | )      | (415,186 | )      |
| Interest expense                                                                                                                                                                                                                                         |   | (222,766  | )       | (209,993 | )      | (181,898 | )      |
| Provision for bad debts                                                                                                                                                                                                                                  |   | (11,267   | )       | (7,129   | )      | (6,559   | )      |
| Depreciation and amortization                                                                                                                                                                                                                            |   | (173,280  | )       | (131,594 | )      | (102,361 | )      |
| Other income (loss), net                                                                                                                                                                                                                                 |   | 9,339     |    | 2,137    |   | (209     | )      |
| Other provisions and losses, net                                                                                                                                                                                                                         |   | (32,513   | )       | (37,631  | )      | (816     | )      |
| Impairment losses on operating properties                                                                                                                                                                                                                |   | (7,900    | )       | —   |   | (374     | )      |
| **Earnings before income taxes, equity in  earnings of unconsolidated real estate ventures, net gains (losses) on  dispositions of interests in operating properties, discontinued operations  and cumulative effect of change in accounting principle** |   | 123,970   |    | 82,102   |   | 94,547   |   |
| Income taxes, primarily deferred                                                                                                                                                                                                                         |   | (42,500   | )       | (29,013  | )      | (26,639  | )      |
| Equity in earnings of unconsolidated real  estate ventures                                                                                                                                                                                               |   | 31,421    |    | 33,259   |   | 32,561   |   |
| **Earnings before net gains (losses) on  dispositions of interests in operating properties, discontinued operations  and cumulative effect of change in accounting principle**                                                                           |   | 112,891   |    | 86,348   |   | 100,469  |   |
|                                                                                                                                                                                                                                                     |   |      |    |     |   |     |   |
| Net gains (losses) on dispositions of  interests in operating properties                                                                                                                                                                                 |   | 26,632    |    | 48,946   |   | (58      | )      |
|                                                                                                                                                                                                                                                     |   |      |    |     |   |     |   |
| **Earnings from continuing operations**                                                                                                                                                                                                                  |   | 139,523   |    | 135,294  |   | 100,411  |   |
| Discontinued operations                                                                                                                                                                                                                                  |   | 121,066   |    | 4,557    |   | 10,706   |   |
| Cumulative effect at January 1, 2001 of  change in accounting for derivative instruments and hedging activities                                                                                                                                          |   | —    |    | —   |   | (411     | )      |
| **Net earnings**                                                                                                                                                                                                                                         |   | 260,589   |    | 139,851  |   | 110,706  |   |
| Other items of comprehensive income (loss):                                                                                                                                                                                                              |   |      |    |     |   |     |   |
| Minimum pension liability adjustment                                                                                                                                                                                                                     |   | (963      | )       | (750     | )      | (9       | )      |
| Unrealized gains (losses) on derivatives  designated as cash flow hedges                                                                                                                                                                                 |   | 3,003     |    | (6,883   | )      | (3,386   | )      |
|                                                                                                                                                                                                                                                     |   |      |    |     |   |     |   |
| **Comprehensive income**                                                                                                                                                                                                                                 |   | $         | 262,629 |     | $      | 132,218  |   | $ | 107,311 |   |
|                                                                                                                                                                                                                                                     |   |      |    |     |   |     |   |
| **Net earnings applicable to common  shareholders**                                                                                                                                                                                                      |   | $         | 248,439 |     | $      | 127,701  |   | $ | 98,556 |   |
|                                                                                                                                                                                                                                                     |   |      |    |     |   |     |   |
| **Earnings per share of common stock**                                                                                                                                                                                                                   |   |      |    |     |   |     |   |
| Basic:                                                                                                                                                                                                                                                   |   |      |    |     |   |     |   |
| Continuing operations                                                                                                                                                                                                                                    |   | $         | 1.43    |     | $      | 1.44     |   | $ | 1.28 |   |
| Discontinued operations                                                                                                                                                                                                                                  |   | 1.37      |    | .05      |   | .15      |   |
| Cumulative effect of change in accounting  principle                                                                                                                                                                                                     |   | —    |    | —   |   | (.01     | )      |
| Total                                                                                                                                                                                                                                                    |   | $         | 2.80    |     | $      | 1.49     |   | $ | 1.42 |   |
|                                                                                                                                                                                                                                                     |   |      |    |     |   |     |   |
| Diluted:                                                                                                                                                                                                                                                 |   |      |    |     |   |     |   |
| Continuing operations                                                                                                                                                                                                                                    |   | $         | 1.40    |     | $      | 1.42     |   | $ | 1.26 |   |
| Discontinued operations                                                                                                                                                                                                                                  |   | 1.33      |    | .05      |   | .15      |   |
| Cumulative effect of change in accounting  principle                                                                                                                                                                                                     |   | —    |    | —   |   | (.01     | )      |
| Total                                                                                                                                                                                                                                                    |   | $         | 2.73    |     | $      | 1.47     |   | $ | 1.40 |   |

 

The accompanying notes are an integral partof these statements.

 

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*The Rouse Company and Subsidiaries*

CONSOLIDATED STATEMENTS OF CHANGES INSHAREHOLDERS’ EQUITY

*Years ended December 31, 2003, 2002 and 2001*

*(in thousands, except per share data)*

 
|                                                                                            |   | **Series B  Preferred  stock** |   | **Common  stock** |   | **Additional  paid-in  capital** |   | **Accumulated  deficit** |      | **Accumulated  other  comprehensive  income (loss)** |   | **Total** |   |
|-------------------------------------------------------------------------------------------------|--------|--------------------------------|--------|-------------------|--------|----------------------------------|--------|--------------------------|-----------|------------------------------------------------------|--------|-----------|--------|
|                                                                                            |   |                           |   |              |   |                             |   |                     |      |                                                 |   |      |   |
| **Balance at December 31, 2000**                                                                |   | $                              | 41     |              | $      | 679                              |   | $                        | 735,669   |                                                 | $      | (103,015  | )      | $ | (2,906 | ) | $ | 630,468 |   |
|                                                                                            |   |                           |   |              |   |                             |   |                     |      |                                                 |   |      |   |
| Net earnings                                                                                    |   | —                         |   | —            |   | —                           |   | 110,706                  |      | —                                               |   | 110,706   |   |
| Other comprehensive income (loss)                                                               |   | —                         |   | —            |   | —                           |   | —                   |      | (3,395                                               | )      | (3,395    | )      |
| Dividends declared:                                                                             |   |                           |   |              |   |                             |   |                     |      |                                                 |   |      |   |
| Common stock-$1.42 per share                                                                    |   | —                         |   | —            |   | —                           |   | (97,966                  | )         | —                                               |   | (97,966   | )      |
| Preferred stock-$3.00 per share                                                                 |   | —                         |   | —            |   | —                           |   | (12,150                  | )         | —                                               |   | (12,150   | )      |
| Purchases of common stock                                                                       |   | —                         |   | (11               | )      | (28,188                          | )      | —                   |      | —                                               |   | (28,199   | )      |
| Common stock issued pursuant to Contingent  Stock Agreement                                     |   | —                         |   | 16                |   | 40,804                           |   | —                   |      | —                                               |   | 40,820    |   |
| Proceeds from exercise of stock options                                                         |   | —                         |   | 9                 |   | 8,863                            |   | —                   |      | —                                               |   | 8,872     |   |
| Common stock issued in acquisition of  voting interests in majority financial interest ventures |   | —                         |   | 1                 |   | 3,499                            |   | —                   |      | —                                               |   | 3,500     |   |
| Lapses of restrictions on common stock  awards                                                  |   | —                         |   | —            |   | 2,704                            |   | —                   |      | —                                               |   | 2,704     |   |
|                                                                                            |   |                           |   |              |   |                             |   |                     |      |                                                 |   |      |   |
| **Balance at December 31, 2001**                                                                |   | 41                             |   | 694               |   | 763,351                          |   | (102,425                 | )         | (6,301                                               | )      | 655,360   |   |
|                                                                                            |   |                           |   |              |   |                             |   |                     |      |                                                 |   |      |   |
| Net earnings                                                                                    |   | —                         |   | —            |   | —                           |   | 139,851                  |      | —                                               |   | 139,851   |   |
| Other comprehensive income (loss)                                                               |   | —                         |   | —            |   | —                           |   | —                   |      | (7,633                                               | )      | (7,633    | )      |
| Dividends declared:                                                                             |   |                           |   |              |   |                             |   |                     |      |                                                 |   |      |   |
| Common stock-$1.56 per share                                                                    |   | —                         |   | —            |   | —                           |   | (135,016                 | )         | —                                               |   | (135,016  | )      |
| Preferred stock-$3.00 per share                                                                 |   | —                         |   | —            |   | —                           |   | (12,150                  | )         | —                                               |   | (12,150   | )      |
| Purchases of common stock                                                                       |   | —                         |   | (7                | )      | (21,181                          | )      | —                   |      | —                                               |   | (21,188   | )      |
| Common stock issued pursuant to Contingent  Stock Agreement                                     |   | —                         |   | 6                 |   | 19,350                           |   | —                   |      | —                                               |   | 19,356    |   |
| Proceeds from exercise of stock options                                                         |   | —                         |   | 9                 |   | 14,339                           |   | —                   |      | —                                               |   | 14,348    |   |
| Other common stock issuances                                                                    |   | —                         |   | 167               |   | 456,180                          |   | —                   |      | —                                               |   | 456,347   |   |
| Lapses of restrictions on common stock  awards                                                  |   | —                         |   | —            |   | 2,809                            |   | —                   |      | —                                               |   | 2,809     |   |
|                                                                                            |   |                           |   |              |   |                             |   |                     |      |                                                 |   |      |   |
| **Balance at December 31, 2002**                                                                |   | 41                             |   | 869               |   | 1,234,848                        |   | (109,740                 | )         | (13,934                                              | )      | 1,112,084 |   |
|                                                                                            |   |                           |   |              |   |                             |   |                     |      |                                                 |   |      |   |
| Net earnings                                                                                    |   | —                         |   | —            |   | —                           |   | 260,589                  |      | —                                               |   | 260,589   |   |
| Other comprehensive income (loss)                                                               |   | —                         |   | —            |   | —                           |   | —                   |      | 2,040                                                |   | 2,040     |   |
| Dividends declared:                                                                             |   |                           |   |              |   |                             |   |                     |      |                                                 |   |      |   |
| Common stock-$1.68 per share                                                                    |   | —                         |   | —            |   | —                           |   | (149,690                 | )         | —                                               |   | (149,690  | )      |
| Preferred stock-$3.00 per share                                                                 |   | —                         |   | —            |   | —                           |   | (12,150                  | )         | —                                               |   | (12,150   | )      |
| Purchases of common stock                                                                       |   | —                         |   | (19               | )      | (71,945                          | )      | —                   |      | —                                               |   | (71,964   | )      |
| Common stock issued pursuant to Contingent                                                      |   |                           |   |              |   |                             |   |                     |      |                                                 |   |      |   |
| Stock Agreement                                                                                 |   | —                         |   | 19                |   | 66,766                           |   | —                   |      | —                                               |   | 66,785    |   |
| Proceeds from exercise of stock options                                                         |   | —                         |   | 49                |   | 109,706                          |   | —                   |      | —                                               |   | 109,755   |   |
| Lapses of restrictions on common stock  awards                                                  |   | —                         |   | —            |   | 7,515                            |   | —                   |      | —                                               |   | 7,515     |   |
|                                                                                            |   |                           |   |              |   |                             |   |                     |      |                                                 |   |      |   |
| **Balance at December 31, 2003**                                                                |   | $                              | 41     |              | $      | 918                              |   | $                        | 1,346,890 |                                                 | $      | (10,991   | )      | $ | (11,894 | ) | $ | 1,324,964 |   |

 

The accompanyingnotes are an integral part of these statements.

 

4

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*The Rouse Company and Subsidiaries*

CONSOLIDATED STATEMENTS OF CASH FLOWS

*Years ended December 31, 2003, 2002 and 2001*

*(in thousands)*

 
|                                                                               |   | **2003** |    | **2002** |   | **2001** |   |
|------------------------------------------------------------------------------------|--------|----------|---------|----------|--------|----------|--------|
| **Cash flows from operating activities:**                                          |   |     |    |     |   |     |   |
| Rents from tenants and other revenues  received                                    |   | $        | 878,048 |     | $      | 863,166  |   | $ | 743,394 |   |
| Proceeds from land sales and notes  receivable from land sales                     |   | 273,788  |    | 231,220  |   | 193,064  |   |
| Interest received                                                                  |   | 7,623    |    | 9,883    |   | 6,711    |   |
| Operating expenditures                                                             |   | (445,730 | )       | (427,155 | )      | (353,972 | )      |
| Land development and acquisition  expenditures                                     |   | (136,955 | )       | (105,199 | )      | (99,407  | )      |
| Interest paid                                                                      |   | (231,135 | )       | (233,403 | )      | (213,781 | )      |
| Income taxes paid                                                                  |   | (5,440   | )       | (1,409   | )      | (2,665   | )      |
| Operating distributions from unconsolidated  real estate ventures                  |   | 35,767   |    | 39,041   |   | 28,410   |   |
|                                                                               |   |     |    |     |   |     |   |
| Net cash provided by operating activities                                          |   | 375,966  |    | 376,144  |   | 301,754  |   |
|                                                                               |   |     |    |     |   |     |   |
| **Cash flows from investing activities:**                                          |   |     |    |     |   |     |   |
| Expenditures for properties in development                                         |   | (168,341 | )       | (172,718 | )      | (146,103 | )      |
| Expenditures for improvements to existing  properties                              |   | (71,456  | )       | (53,751  | )      | (48,473  | )      |
| Expenditures for acquisitions of interests  in properties and other assets         |   | (396,891 | )       | (889,776 | )      | —   |   |
| Proceeds from dispositions of interests in  properties                             |   | 355,572  |    | 252,036  |   | 4,594    |   |
| Other distributions from unconsolidated  real estate ventures                      |   | —   |    | 44,853   |   | 109,329  |   |
| Expenditures for investments in  unconsolidated real estate ventures               |   | (27,051  | )       | (35,715  | )      | (45,955  | )      |
| Other                                                                              |   | 19,562   |    | (8,640   | )      | 13       |   |
|                                                                               |   |     |    |     |   |     |   |
| Net cash used by investing activities                                              |   | (288,605 | )       | (863,711 | )      | (126,595 | )      |
|                                                                               |   |     |    |     |   |     |   |
| **Cash flows from financing activities:**                                          |   |     |    |     |   |     |   |
| Proceeds from issuance of property debt                                            |   | 315,967  |    | 195,164  |   | 259,401  |   |
| Repayments of property debt:                                                       |   |     |    |     |   |     |   |
| Scheduled principal payments                                                       |   | (74,272  | )       | (76,058  | )      | (58,681  | )      |
| Other payments                                                                     |   | (436,314 | )       | (209,453 | )      | (234,381 | )      |
| Proceeds from issuance of other debt                                               |   | 389,919  |    | 812,691  |   | 28,000   |   |
| Repayments of other debt                                                           |   | (3,000   | )       | (509,689 | )      | (37,872  | )      |
| Purchases of Parent Company-obligated  mandatorily redeemable preferred securities |   | (57,124  | )       | (625     | )      | —   |   |
| Purchases of common stock                                                          |   | (71,964  | )       | (21,188  | )      | (28,199  | )      |
| Proceeds from issuance of common stock                                             |   | —   |    | 456,347  |   | —   |   |
| Proceeds from exercise of stock options                                            |   | 109,755  |    | 14,348   |   | 8,872    |   |
| Dividends paid                                                                     |   | (161,840 | )       | (147,166 | )      | (110,116 | )      |
| Other                                                                              |   | (22,891  | )       | (17,294  | )      | 15,198   |   |
|                                                                               |   |     |    |     |   |     |   |
| Net cash provided (used) by financing  activities                                  |   | (11,764  | )       | 497,077  |   | (157,778 | )      |
|                                                                               |   |     |    |     |   |     |   |
| Net increase in cash and cash equivalents                                          |   | 75,597   |    | 9,510    |   | 17,381   |   |
|                                                                               |   |     |    |     |   |     |   |
| Cash and cash equivalents at beginning of  year                                    |   | 41,633   |    | 32,123   |   | 14,742   |   |
|                                                                               |   |     |    |     |   |     |   |
| Cash and cash equivalents at end of year                                           |   | $        | 117,230 |     | $      | 41,633   |   | $ | 32,123 |   |

 

The accompanying notes are an integral partof these statements.

 

5

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*The Rouse Company and Subsidiaries*

CONSOLIDATED STATEMENTS OF CASH FLOWS

*Years ended December 31, 2003, 2002 and 2001*

*(in thousands)*

* *
|                                                                                                                                                                                     |   | **2003** |    | **2002** |   | **2001** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|---------|----------|--------|----------|--------|
| **Reconciliation of Net Earnings to Net Cash  Provided by  Operating Activities:**                                                                                                  |   |     |    |     |   |     |   |
|                                                                                                                                                                                     |   |     |    |     |   |     |   |
| **Net earnings**                                                                                                                                                                         |   | $        | 260,589 |     | $      | 139,851  |   | $ | 110,706 |   |
| Adjustments to reconcile net earnings to  net cash provided by operating activities:                                                                                                     |   |     |    |     |   |     |   |
| Depreciation and amortization                                                                                                                                                            |   | 188,171  |    | 162,922  |   | 133,542  |   |
| Change in undistributed earnings of  unconsolidated real estate  ventures                                                                                                           |   | 5,246    |    | 5,763    |   | (4,151   | )      |
| Net losses (gains) on dispositions of  interests in operating properties                                                                                                                 |   | (112,155 | )       | (81,958  | )      | 58       |   |
| Impairment losses on operating properties  and other assets                                                                                                                              |   | 7,900    |    | 53,746   |   | 374      |   |
| Losses (gains) on extinguishment of debt                                                                                                                                                 |   | (19,654  | )       | 7,679    |   | 451      |   |
| Cumulative effect of change in accounting  principle                                                                                                                                     |   | —   |    | —   |   | 411      |   |
| Participation expense pursuant to  Contingent Stock Agreement                                                                                                                            |   | 64,293   |    | 52,870   |   | 32,904   |   |
| Land development expenditures in excess of  cost of land sales                                                                                                                           |   | (37,782  | )       | (33,668  | )      | (12,025  | )      |
| Provision for bad debts                                                                                                                                                                  |   | 11,964   |    | 9,059    |   | 8,992    |   |
| Debt assumed by purchasers of land                                                                                                                                                       |   | (19,595  | )       | (16,186  | )      | (24,634  | )      |
| Deferred income taxes                                                                                                                                                                    |   | 41,214   |    | 26,919   |   | 25,402   |   |
| Decrease (increase) in accounts and notes  receivable                                                                                                                                    |   | (14,038  | )       | 24,049   |   | 11,213   |   |
| Decrease in other assets                                                                                                                                                                 |   | 6,877    |    | 3,450    |   | 2,531    |   |
| Increase (decrease) in accounts payable,  accrued expenses and other   liabilities                                                                                                  |   | (7,351   | )       | 7,155    |   | 18,439   |   |
| Other, net                                                                                                                                                                               |   | 287      |    | 14,493   |   | (2,459   | )      |
|                                                                                                                                                                                     |   |     |    |     |   |     |   |
| **Net cash provided by operating activities**                                                                                                                                            |   | $        | 375,966 |     | $      | 376,144  |   | $ | 301,754 |   |
|                                                                                                                                                                                     |   |     |    |     |   |     |   |
| **Schedule of Noncash Investing and Financing  Activities:**                                                                                                                             |   |     |    |     |   |     |   |
|                                                                                                                                                                                     |   |     |    |     |   |     |   |
| Common stock issued pursuant to Contingent  Stock Agreement                                                                                                                              |   | $        | 66,785  |     | $      | 19,356   |   | $ | 40,820 |   |
| Capital lease obligations incurred                                                                                                                                                       |   | 7,504    |    | 12,720   |   | 3,359    |   |
| Lapses of restrictions on common stock awards                                                                                                                                            |   | 7,515    |    | 2,809    |   | 2,704    |   |
| Debt assumed by purchasers of land and  other assets                                                                                                                                     |   | 19,595   |    | 16,656   |   | 24,634   |   |
| Debt assumed by purchasers of operating  properties                                                                                                                                      |   | 286,186  |    | —   |   | —   |   |
| Debt and other liabilities assumed and  consolidated in acquisition of assets from Rodamco North America N.V. and  other partners’ interests in unconsolidated real estate ventures |   | 95,770   |    | 915,976  |   | 547,531  |   |
| Property and other assets contributed to  unconsolidated real estate ventures                                                                                                            |   | 164,306  |    | 196,920  |   | —   |   |
| Debt and other liabilities related to  property and other assets contributed to unconsolidated real estate ventures                                                                      |   | 163,406  |    | 129,801  |   | —   |   |
| Debt and other liabilities assumed or  issued in other acquisitions of assets                                                                                                            |   | 289,208  |    | —   |   | 105,195  |   |
| Common stock issued in acquisition of  voting interests in majority financial interest ventures                                                                                          |   | —   |    | —   |   | 3,500    |   |
| Property and other assets obtained in  acquisition of majority financial interest ventures                                                                                               |   | —   |    | —   |   | 884,572  |   |

 

6

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*TheRouse Company and Subsidiaries*

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS

*December31, 2003, 2002 and 2001*

 

***(1)   Summary ofsignificant accounting policies***

 

***(a) Basis of presentation***

The consolidatedfinancial statements include the accounts of The Rouse Company, oursubsidiaries and ventures (“we,” “Rouse” or “us”) in which we have a majorityvoting interest and control.  We alsoconsolidate the accounts of variable interest entities that are consideredspecial purpose entities and where we are the primary beneficiary.  We account for investments in other venturesusing the equity or cost methods as appropriate in the circumstances.  Significant intercompany balances andtransactions are eliminated in consolidation.

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand judgments that affect the reported amounts of assets and liabilities anddisclosures of contingencies at the date of the financial statements andrevenues and expenses recognized during the reporting period.  Significant estimates are inherent in thepreparation of our financial statements in a number of areas, including thecost ratios and completion percentages used for land sales, evaluation ofimpairment of long-lived assets (including operating properties and propertiesheld for development or sale), evaluation of collectibility of accounts andnotes receivable and allocation of the purchase price of acquired properties.Actual results could differ from these and other estimates.

Certain amountsfor prior years have been reclassified to conform to the presentation methodsused for 2003.

 

***(b) Description of business***

Through our subsidiariesand affiliates, we acquire, develop and manage operating properties locatedthroughout the United States and develop and sell land for residential,commercial and other uses primarily in master-planned communities.  The operating properties consist of retailcenters, office and industrial buildings and mixed-use and otherproperties.  The retail centers areprimarily regional shopping centers in suburban market areas, but also includespecialty marketplaces in certain downtown areas and several community retailcenters.  The office and industrial propertiesare located primarily in the Baltimore-Washington and Las Vegas markets or arecomponents of large-scale mixed-use properties (which include retail, parkingand other uses) located in other urban markets.  Land development and sales operations are predominantly relatedto large-scale, long-term community development projects in and aroundColumbia, Maryland, Summerlin, Nevada and Houston, Texas.

 

***(c) Property and property-related deferred costs***

Properties to bedeveloped or held and used in operations are carried at cost reduced forimpairment losses, where appropriate. Acquisition, development and construction costs of properties indevelopment are capitalized including, where applicable, salaries and relatedcosts, real estate taxes, interest and preconstruction costs directly relatedto the project. The preconstruction stage of development of an operatingproperty (or an expansion of an existing property) includes efforts and relatedcosts to secure land control and zoning, evaluate feasibility and completeother initial tasks which are essential to development. Provisions are made forcosts of potentially unsuccessful preconstruction efforts by charges tooperations.  Development andconstruction costs and costs of significant improvements and replacements andrenovations at operating properties are capitalized, while costs of maintenanceand repairs are expensed as incurred.

Direct costsassociated with leasing of operating properties are capitalized as deferredcosts and amortized using the straight-line method over the terms of therelated leases.

Depreciation ofeach operating property is computed using the straight-line method.  The annual rate of depreciation for eachretail center (with limited exceptions) is based on a 55-year composite lifeand a salvage value of approximately 10%. Office buildings and other properties are depreciated using compositelives of 40 years.  Furniture andfixtures and certain common area improvements are depreciated using estimateduseful lives ranging from 2 to 10 years.

If events orcircumstances indicate that the carrying value of an operating property to beheld and used may be impaired, a recoverability analysis is performed based onestimated undiscounted future cash flows to be generated from the property.  If the analysis indicates that the carryingvalue is not recoverable from future cash flows, the property is written downto estimated fair value and an impairment loss is recognized.  Fair values are determined based onappraisals and/or estimated future cash flows using appropriate discount andcapitalization rates.

 

7

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Properties heldfor sale are carried at the lower of their carrying values (i.e. cost lessaccumulated depreciation and any impairment loss recognized, where applicable)or estimated fair values less costs to sell. The net carrying values of operating properties are classified asproperties held for sale when the properties are actively marketed, their saleis considered probable within one year and various other criteria relating totheir disposition are met.  Depreciationof these properties is discontinued at that time, but operating revenues,interest and other operating expenses continue to be recognized until the dateof sale. We adopted Statement of Financial Accounting Standards, No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”)effective January 1, 2002.  Inaccordance with SFAS 144, revenues and expenses of properties that areclassified as held for sale or sold on or after January 1, 2002 are presentedas discontinued operations for all periods presented in the statements ofoperations if the properties will be or have been sold on terms where we havelimited or no continuing involvement with them after the sale.  If active marketing ceases or the propertiesno longer meet the criteria to be classified as held for sale, the propertiesare reclassified as operating, depreciation is resumed, depreciation for theperiod the properties were classified as held for sale is recognized anddeferred selling costs, if any, are charged to expense. Additionally, wepresent other assets and liabilities of properties classified as held for saleseparately in the balance sheet, if material.

Gains from sales ofoperating properties are recognized using the full accrual method provided thatvarious criteria relating to the terms of the transactions and any subsequentinvolvement by us with the properties sold are met.  Gains relating to transactions that do not meet the establishedcriteria are deferred and recognized when the criteria are met or using theinstallment or cost recovery methods, as appropriate in the circumstances.

 

***(d) Acquisitions of operating properties***

We allocate the purchase priceof acquired properties to tangible and identified intangible assets based ontheir fair values.  In making estimatesof fair values for purposes of allocating purchase price, we use a number ofsources, including independent appraisals that may be obtained in connectionwith the acquisition or financing of the respective property and other marketdata.  We also consider informationobtained about each property as a result of our pre-acquisition due diligence,marketing and leasing activities in estimating the fair value of the tangibleand intangible assets acquired.

The fairvalues of tangible assets are determined on an “if-vacant” basis.  The “if-vacant” fair value is allocated toland, where applicable, buildings, tenant improvements and equipment based onproperty tax assessments and other relevant information obtained in connectionwith the acquisition of the property.

The fairvalues of intangible assets include leases with above- or below-market rentsand, where applicable, other in-place lease and customer relationship values.

Above-marketand below-market in-place lease values are recorded based on the present value(using an interest rate which reflects the risks associated with the leasesacquired) of the difference between (i) the contractual amounts to be receivedpursuant to the in-place leases and (ii) our estimate of fair market leaserates for the corresponding space, measured over a period equal to theremaining non-cancelable term of the lease (including those under bargainrenewal options).  The capitalizedabove- and below-market lease values are amortized as adjustments to rentalincome over the remaining terms of the respective leases (including periodsunder bargain renewal options).

The aggregatefair values of other identified intangible assets acquired is measured based onthe difference between (i) the property valued with existing in-place leasesadjusted to market rental rates and (ii) the property valued as if vacant.  This value is allocated to in-place leaseand customer relationship assets (both anchor stores and tenants).  The fair value of in-place leases is basedon our estimates of carrying costs during the expected lease-up periods andcosts to execute similar leases.  Ourestimate of carrying costs includes real estate taxes, insurance and otheroperating expenses and lost rentals during the expected lease-up periodsconsidering current market conditions. Our estimate of costs to execute similar leases includes leasingcommissions, legal and other related costs. The fair value of anchor store agreements is determined based on ourexperience negotiating similar relationships (not in connection with propertyacquisitions).  The fair value of tenantrelationships is based on our evaluation of the specific characteristics ofeach tenant’s lease and our overall relationship with that respectivetenant.  Characteristics we consider indetermining these values include the nature and extent of our existing businessrelationships with the tenant, growth prospects for developing new business withthe tenant, the tenant’s credit quality and expectations of lease renewals,among other factors.  The value ofin-place leases is amortized to expense over the initial term of the respectiveleases, primarily ranging from two to ten years.  The value of anchor store agreements is amortized to expense overthe estimated term of the anchor store’s occupancy in the property.  Should an anchor store vacate the premises,the unamortized portion of the related intangible is charged to expense.  The value of tenant relationship intangiblesis amortized to expense over the initial term and any renewal periods in therespective leases, but in no event does the amortization period exceed theremaining depreciable life of the building. Should a tenant terminate its lease, the unamortized portion of thein-place lease value and customer relationship intangibles is charged toexpense.

The aggregatepurchase price of properties acquired in 2003 and 2002 was allocated tointangible assets and liabilities as follows (in millions):

 
|                    |   | **2003** |   | **2002** |   |
|-------------------------|--------|----------|--------|----------|--------|
|                    |   |     |   |     |   |
| Above-market leases     |   | $        | 1.1    |     | $      | 24.2 |   |
| In-place lease assets   |   | 2.0      |   | 11.3     |   |
| Tenant relationships    |   | 0.6      |   | 6.8      |   |
| Below-market leases     |   | 4.7      |   | 24.6     |   |
| Anchor store agreements |   | 2.5      |   | 60.6     |   |
|                         |        |          |        |          |        |  |  |

 

8

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***(e) Leases***

Leases which transfersubstantially all the risks and benefits of ownership to tenants are consideredfinance leases and the present values of the minimum lease payments and theestimated residual values of the leased properties, if any, are accounted foras receivables.  Leases which transfersubstantially all the risks and benefits of ownership to us are consideredcapital leases and the present values of the minimum lease payments are accountedfor as assets and liabilities.

 

***(f) Income taxes***

We elected to be taxed asa real estate investment trust (“REIT”) pursuant to the Internal Revenue Codeof 1986, as amended, effective January 1, 1998.  In general, a corporation that distributes at least 90% of itsREIT taxable income to shareholders in any taxable year and complies withcertain other requirements (relating primarily to the nature of its assets andthe sources of its revenues) is not subject to Federal income taxation to theextent of the income which it distributes. We believe that we met the qualifications for REIT status as of December31, 2003 and intend to meet the qualifications in the future and to distributeat least 90% of our REIT taxable income (determined after taking into accountany net operating loss deduction) to shareholders in 2004 and subsequentyears.  As discussed in note 10, weacquired all of the voting stock of the majority financial interest venturesowned by a trust, of which certain employees are beneficiaries (“Trust”) in2001.  We and these now wholly ownedsubsidiaries made a joint election to treat the subsidiaries as taxable REITsubsidiaries (“TRS”), which are subject to Federal and state income taxes.  Except with respect to the TRS, we do notbelieve that we will be liable for significant income taxes at the Federallevel or in most of the states in which we operate in 2004 and future years.

Deferred incometaxes relate primarily to the TRS and are accounted for using the asset andliability method.  Under this method,deferred income taxes are recognized for temporary differences between thefinancial reporting bases of assets and liabilities of the TRS and theirrespective tax bases and for their interest, operating loss and tax creditcarryforwards based on enacted tax rates expected to be in effect when suchamounts are realized or settled. However, deferred tax assets are recognized only to the extent that itis more likely than not that they will be realized based on consideration ofavailable evidence, including tax planning strategies and other factors.

 

***(g) Investments in marketable securities andcash and cash equivalents***

Our investment policydefines authorized investments and establishes various limitations on thematurities, credit quality and amounts of investments held.  Authorized investments include U.S.government and agency obligations, certificates of deposit, bankersacceptances, repurchase agreements, commercial paper, money market mutual fundsand corporate debt and equity securities. We may also invest in mutual funds to closely match the investmentselections of participants in nonqualified deferred compensation plans.

Debt securityinvestments with maturities at dates of purchase in excess of three months areclassified as marketable securities and carried at amortized cost as it is ourintention to hold these investments until maturity.  Short-term investments with maturities at dates of purchase ofthree months or less are classified as cash equivalents, except that any suchinvestments purchased with the proceeds of loans which may be expended only forspecified purposes are classified as investments in marketable securities.  Investments in marketable equity securitiesare classified as trading securities and are carried at market value withchanges in values recognized in earnings.

Other income (loss), net in2003, 2002 and 2001 is summarized as follows (in thousands):

 
|                                              |   | **2003** |   | **2002** |   | **2001** |   |
|---------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                              |   |     |   |     |   |     |   |
| Interest income                                   |   | $        | 2,324  |     | $      | 4,326    |   | $ | 651 |   |
| Dividends                                         |   | 232      |   | 271      |   | 563      |   |
| Gains (losses) on marketable and securities,  net |   | 6,783    |   | (2,460   | )      | (1,423   | )      |
|                                              |   | $        | 9,339  |     | $      | 2,137    |   | $ | (209 | ) |
|                                                   |        |          |        |          |        |          |        |  |  |  |  |

 

***(h) Revenue recognition and related matters***

Minimum rent revenues arerecognized on a straight-line basis over the terms of the leases.  Rents based on tenant sales are recognizedwhen tenant sales exceed contractual thresholds.

Revenues forrecoveries from tenants of real estate taxes, utilities, maintenance, insuranceand other expenses pursuant to leases are recognized in the period in which therelated expenses are incurred.  Leasetermination fees are recognized when the related agreements are executed.  Management fee revenues are calculated as afixed percentage of revenues of the managed property and are recognized as therevenues are earned.

Revenues from landsales are recognized using the full accrual method provided that variouscriteria relating to the terms of the transactions and any subsequentinvolvement by us with the land sold are met. Revenues relating to transactions that do not meet the establishedcriteria are deferred and recognized when the criteria are met or using theinstallment or cost recovery methods, as appropriate in the circumstances.  For land sale transactions under the termsof which we are required to perform additional services and incur significantcosts after title has passed, revenues and cost of sales are recognized on apercentage of completion basis.

Cost of land salesis determined as a specified percentage of land sales revenues recognized foreach community development project.  Thecost ratios used are based on actual costs incurred and estimates ofdevelopment costs and sales revenues to completion of each project.  The ratios are reviewed regularly andrevised for changes in sales and cost estimates or development plans.  Significant changes in these estimates ordevelopment plans, whether due to changes in market conditions or otherfactors, could result in changes to the cost ratio used for a specificproject.  The specific identificationmethod is used to determine cost of sales for certain parcels of land,including acquired parcels we do not intend to develop or for which developmentis complete at the date of acquisition.

 

***(i) Derivative financial instruments***

We use derivative financial instruments to reduce riskassociated with movements in interest rates. We may choose to reduce cash flow and earnings volatility associatedwith interest rate risk exposure on variable-rate borrowings and/or forecastedfixed-rate borrowings.  In someinstances, lenders may require us to do so. In order to limit interest rate risk on variable-rate borrowings, we mayenter into interest rate swaps or interest rate caps to hedge specificrisks.  In order to limit interest raterisk on forecasted borrowings, we may enter into forward-rate agreements,forward starting swaps, interest rate locks and interest rate collars.  We may also use derivative financialinstruments to reduce risk associated with movements in currency exchange ratesif and when we are exposed to such risk. We do not use derivative financial instruments for speculative purposes.

 

9

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Under interestrate cap agreements, we make initial premium payments to the counterparties inexchange for the right to receive payments from them if interest rates exceedspecified levels during the agreement period. Under interest rate swapagreements, we and the counterparties agree to exchange the difference betweenfixed-rate and variable-rate interest amounts calculated by reference tospecified notional principal amounts during the agreement period.  Notional principal amounts are used toexpress the volume of these transactions, but the cash requirements and amountssubject to credit risk are substantially less.

Parties tointerest rate exchange agreements are subject to market risk for changes ininterest rates and risk of credit loss in the event of nonperformance by thecounterparty.  We do not require anycollateral under these agreements but deal only with highly rated financialinstitution counterparties (which, in certain cases, are also the lenders onthe related debt) and expect that all counterparties will meet theirobligations.

Effective January1, 2001, we adopted Statement of Financial Accounting Standards No. 133,“Accounting for Derivative Financial Instruments and Hedging Activities” (“SFAS133”), as amended, which requires, among other things, that all derivativeinstruments be measured at fair value and recognized as assets or liabilitiesin the balance sheet.  Derivativeinstruments held by us at January 1, 2001 consisted solely of interest rate capagreements designated as hedges of interest rates on specific loans.  The cumulative effect at January 1, 2001 ofthe change in accounting for derivative financial instruments and hedgingactivities was to increase liabilities and reduce net earnings by approximately$0.4 million.  The effect of the changeon net earnings was not material for 2001. The effect of the change on other comprehensive income (loss) was a lossof approximately $3.4 million in 2001.

All of theinterest rate swap and other derivative financial instruments we used in 2003,2002 and 2001 qualified as cash flow hedges and hedged our exposure toforecasted interest payments on variable-rate LIBOR-based debt or theforecasted issuance of fixed-rate debt. Accordingly, the effective portion of the instruments’ gains or lossesis reported as a component of other comprehensive income and reclassified intoearnings when the related forecasted transactions affect earnings.  If we discontinue a cash flow hedge becauseit is probable that the original forecasted transaction will not occur, the netgain or loss in accumulated other comprehensive income is immediatelyreclassified into earnings.  If we discontinuea cash flow hedge because the variability of the probable forecastedtransaction has been eliminated, the net gain or loss in accumulated othercomprehensive income is reclassified to earnings over the term of thedesignated hedging relationship.

We have not recognizedany losses as a result of hedge discontinuance, and the expense that werecognized related to changes in the time value of interest rate cap agreementswas insignificant for 2003, 2002 and 2001.

Amounts receivableor payable under interest rate cap and swap agreements are accounted for asadjustments to interest expense on the related debt.

 

***(j) Other information about financialinstruments***

Fair values of financial instruments approximate theircarrying values in the financial statements except for debt and Parent Company-obligatedmandatorily redeemable preferred securities, for which fair value informationis provided in notes 7 and 8.

 

***(k) Earnings per share of common stock***

Basic earnings per share (“EPS”) is computed bydividing net earnings applicable to common shareholders by the weighted-averagenumber of common shares outstanding. Diluted EPS is computed after adjusting the numerator and denominator ofthe basic EPS computation for the effects of all dilutive potential commonshares during the period.  The dilutive effectsof convertible securities are computed using the “if-converted” method and thedilutive effects of options, warrants and their equivalents (including fixedawards and nonvested stock issued under stock-based compensation plans) arecomputed using the “treasury stock” method.

 

10

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***(l) Stock-based compensation***

We apply the intrinsic value-based method ofaccounting prescribed by Accounting Principles Board (“APB”) Opinion No. 25,“Accounting for Stock Issued to Employees,” and related interpretations toaccount for stock-based employee compensation plans.  Under this method, compensation cost is recognized for awards ofshares of common stock or stock options to our officers and employees only ifthe quoted market price of the stock at the grant date (or other measurementdate, if later) is greater than the amount the grantee must pay to acquire thestock.  The following table summarizesthe pro forma effects on net earnings (in thousands) and earnings per share ofcommon stock of using an optional fair value-based method, rather than theintrinsic value-based method, to account for stock-based compensation awardsmade since 1995.

 
|                                                                                                                                                   |   | **2003** |    | **2002** |   | **2001** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|---------|----------|--------|----------|--------|
|                                                                                                                                                   |   |     |    |     |   |     |   |
| Net earnings, as  reported                                                                                                                             |   | $        | 260,589 |     | $      | 139,851  |   | $ | 110,706 |   |
|                                                                                                                                                   |   |     |    |     |   |     |   |
| Add: Stock-based  employee compensation expense included in reported net earnings, net of  related tax effects and amounts capitalized                 |   | 4,585    |    | 3,235    |   | 1,379    |   |
|                                                                                                                                                   |   |     |    |     |   |     |   |
| Deduct: Total  stock-based employee compensation expense determined under fair value-based  method, net of related tax effects and amounts capitalized |   | (13,653  | )       | (10,237  | )      | (6,268   | )      |
| Pro forma net earnings                                                                                                                                 |   | $        | 251,521 |     | $      | 132,849  |   | $ | 105,817 |   |
|                                                                                                                                                   |   |     |    |     |   |     |   |
| Earnings per share of  common stock:                                                                                                                   |   |     |    |     |   |     |   |
| Basic:                                                                                                                                                 |   |     |    |     |   |     |   |
| As reported                                                                                                                                            |   | $        | 2.80    |     | $      | 1.49     |   | $ | 1.42 |   |
| Pro forma                                                                                                                                              |   | $        | 2.70    |     | $      | 1.41     |   | $ | 1.35 |   |
|                                                                                                                                                   |   |     |    |     |   |     |   |
| Diluted:                                                                                                                                               |   |     |    |     |   |     |   |
| As reported                                                                                                                                            |   | $        | 2.73    |     | $      | 1.47     |   | $ | 1.40 |   |
| Pro forma                                                                                                                                              |   | $        | 2.65    |     | $      | 1.39     |   | $ | 1.35 |   |

 

The per shareweighted-average estimated fair values of options granted during 2003, 2002 and2001 were $4.06, $3.48 and $3.41, respectively.  These fair values were estimated on the dates of each grant usingthe Black-Scholes option-pricing model with the following assumptions:

 
|                    |   | **2003** |   | **2002** |   | **2001** |   |
|-------------------------|--------|----------|--------|----------|--------|----------|--------|
| Risk-free interest rate |   | 3.2      | %      | 4.4      | %      | 5.1      | %      |
| Dividend yield          |   | 5.0      |   | 5.5      |   | 5.5      |   |
| Volatility factor       |   | 20.0     |   | 20.0     |   | 20.0     |   |
| Expected life in years  |   | 6.1      |   | 6.7      |   | 6.4      |   |

 

***(m) Deferred financing costs***

We defer direct costsassociated with borrowings and amortize them using the interest method (orother methods which approximate the interest method) over the terms of therelated financings.

 

***(2) Discontinued operations***

We sell interestsin retail centers that are not consistent with our long-term businessstrategies or not meeting our investment criteria and office and otherproperties that are not located in our master-planned communities or not partof urban mixed-use properties.  We mayalso dispose of properties for other reasons.

In December 2003,as part of an agreement to acquire interests in entities developing TheWoodlands (see note 3), we agreed to dispose of Hughes Center, a master-plannedbusiness park in Las Vegas, Nevada, comprising eight office buildings totalingapproximately 1.1 million square feet, nine ground leases andapproximately 13 acres of developable land. The sales of two of the office buildings and two of the ground leasesclosed in December 2003.  We recordedaggregate gains on these sales of approximately $10.1 million.  The remaining properties in Hughes Centerwere classified as held for sale at December 31, 2003 and most were sold in thefirst quarter of 2004.  We expect tosell the remaining assets in Hughes Center in April 2004.

In August 2003, wesold The Jacksonville Landing, a retail center in Jacksonville, Florida, fornet proceeds of $4.8 million.  Werecognized a gain of $2.8 million relating to this sale.  We recorded an impairment loss of $3.3million in the fourth quarter of 2002 related to this property. We also soldthree small neighborhood retail properties in Columbia, Maryland in the thirdquarter of 2003 for aggregate proceeds of $2.2 million and recognized aggregategains of $0.9 million.  In May and June2003, we sold eight office and industrial buildings in the Baltimore-Washingtoncorridor for net proceeds of $46.6 million.  We recognized aggregate gains of $4.4 million relating to thesales of these properties.

 

11

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In April and May2003, we sold six retail centers in the Philadelphia metropolitan area and, ina related transaction, acquired Christiana Mall from a party related to thepurchaser.  In connection with thesetransactions, we received net cash proceeds of $218.4 million, thepurchaser assumed $276.6 million of property debt, and we assumed aparticipating mortgage secured by Christiana Mall.  We recognized aggregate gains of $65.4 million relating to themonetary portions of these transactions. We recorded an impairment loss of$38.8 million in the fourth quarter of 2002 related to one of the retailcenters sold.

We also recorded anet gain of $26.9 million related to the extinguishment of debt secured by twoof the properties sold in the Philadelphia metropolitan area when the lenderreleased the mortgages for a cash payment by us of less than the aggregatecarrying amount of the debt.

In December 2002,we sold our interest in Tampa Bay Center and our interest in a Summerlincommunity retail center for net proceeds of $22.8 million and $25.1 million,respectively.  We recorded gains of $2.5million and $2.8 million (net of deferred income taxes of $1.5 million),respectively, on these transactions.

In April 2002, wesold our interests in 12 community retail centers in Columbia, Maryland for netproceeds of $111.1 million.  We recordeda gain on this transaction of approximately $32.0 million, net of deferredincome taxes of $18.4 million.  Ourinterests in one of the community retail centers were reported inunconsolidated real estate ventures and the gain on the sale of our interestsin this property ($4.3 million, net of deferred income taxes of $2.0 million)is included in continuing operations (see note 13).  The remaining gain on this transaction ($27.7 million, net ofdeferred income taxes of $16.4 million) is classified as a component ofdiscontinued operations.  Inanticipation of the sale of the community retail centers, we repaid debtsecured by these properties in March 2002 and incurred a loss on this repaymentof $5.3 million, including prepayment penalties of $4.6 million.

 

The operatingresults of the properties included in discontinued operations are summarized asfollows (in thousands):

 
|                                                            |   | **2003** |    | **2002** |   | **2001** |   |
|-----------------------------------------------------------------|--------|----------|---------|----------|--------|----------|--------|
|                                                            |   |     |    |     |   |     |   |
| Revenues                                                        |   | $        | 79,755  |     | $      | 156,618  |   | $ | 163,538 |   |
| Operating expenses, exclusive of depreciation  and amortization |   | (36,155  | )       | (69,363  | )      | (72,736  | )      |
| Interest expense                                                |   | (19,773  | )       | (37,511  | )      | (46,669  | )      |
| Depreciation and amortization                                   |   | (14,891  | )       | (31,328  | )      | (31,181  | )      |
| Gains (losses) on extinguishment of debt,  net                  |   | 26,896   |    | (5,346   | )      | —   |   |
| Impairment losses on operating properties                       |   | —   |    | (42,123  | )      | —   |   |
| Gains on dispositions of operating  properties, net             |   | 85,523   |    | 33,012   |   | —   |   |
| Income tax benefit (provision), primarily  deferred             |   | (289     | )       | 598      |   | (2,246   | )      |
| Discontinued operations                                         |   | $        | 121,066 |     | $      | 4,557    |   | $ | 10,706 |   |

 

***(3) Unconsolidated real estate ventures***

 

Investments in andadvances to unconsolidated real estate ventures at December 31, 2003 and 2002were $647.9 million and $442.4 million, respectively.  Our equity in earnings of unconsolidatedreal estate ventures was $31.4 million, $33.3 million and $32.6 million for theyears ended December 31, 2003, 2002 and 2001, respectively.

We own interestsin unconsolidated real estate ventures that own and/or develop properties,including master-planned communities. We use these ventures to limit our risk associated with individualproperties and to reduce our capital requirements.  We may also contribute interests in properties we own tounconsolidated ventures for cash distributions and interests in the ventures toprovide liquidity as an alternative to outright property sales.  We account for the majority of theseventures using the equity method because we have joint interest and control ofthese properties with our venture partners. For those ventures where we own less than a 5% interest and havevirtually no influence on the venture’s operating and financial policies, weaccount for our investments using the cost method.   At December 31, 2003 and 2002, unconsolidated real estate ventureswere primarily partnerships and corporations which own retail centers andventures developing the master-planned communities known as The Woodlands, nearHouston, Texas, and Fairwood, in Prince George’s County, Maryland.  We manage most of the operating propertiesowned by these ventures.

On December 31,2003 we acquired, for approximately $185 million, certain office buildings anda 52.5% economic interest in entities (which we refer to as the “WoodlandsEntities”) that own The Woodlands, a master-planned community in the Houston,Texas, metropolitan area.  Assets ownedby the Woodlands Entities include approximately 5,500 acres of land, three golfcourse complexes, a resort conference center, a hotel, interests in sevenoffice buildings and other assets.

In December 2003,we acquired a 50% interest in the retail component and certain officecomponents of Mizner Park, a mixed-use property in Boca Raton, Florida, forapproximately $34 million.  In January2004, we acquired a 50% interest in the remaining office components of MiznerPark for approximately $18 million.

In December 2003,we sold our investment in Kravco Investments, L.P. for approximately $52million.

In August 2003, weacquired the remaining interest in Staten Island Mall, a regional retail centerin Staten Island, New York, for approximately $148 million cash and assumptionof the other venturer’s share of debt (approximately $53 million) encumberingthe property.  We consolidated thisproperty from the date of acquisition.

 

12

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In April 2003, weacquired Christiana Mall subject to a participating mortgage.  We subsequently conveyed a 50% interest inthe property to the holder of the participating mortgage (which we repaid fromproceeds of a new mortgage loan) and report our remaining 50% interest inunconsolidated real estate ventures.

In November 2002,we acquired our partners’ controlling financial interests in entities that ownRidgedale Center, a regional retail center in suburban Minneapolis, Minnesota,and Southland Center, a regional retail center in suburban Detroit, Michigan,for an aggregate purchase price of $215.8 million (cash of $63.1 million andassumption of our partners’ share of debt of $152.7 million).  We owned 10% noncontrolling interests inthese entities prior to this transaction. We consolidated these properties fromthe date of acquisition.

In October 2002,we contributed our ownership interest in Perimeter Mall to a joint venture inexchange for a 50% interest in the venture and a distribution of $67.1 million.  As a result, we report our interest in thisproperty in unconsolidated real estate ventures from the date of contribution.

In May 2002, weacquired partial, noncontrolling ownership interests in Oakbrook Center, WaterTower Place and certain other assets from Rodamco North America N.V.(“Rodamco”) (see note 18). Additionally, we acquired from Rodamco the remaining interests inproperties (Collin Creek, North Star, Perimeter Mall and Willowbrook) in whichwe previously owned noncontrolling interests.  As a result, we consolidated these properties in our financialstatements from the date of the acquisition.

In April 2002, wesold our interest in Franklin Park, a regional retail center in Toledo, Ohio,for $20.5 million and the buyer assumed our share of the center’s debt ($44.7million).

We received $44.9million and $109.3 million of distributions of financing proceeds fromunconsolidated real estate ventures in 2002 and 2001, respectively.  We did not receive any similar distributionsin 2003.

As a result ofthese transactions and the ongoing operations of the ventures, the net increasein investments in and advances to unconsolidated real estate ventures was$205.5 million and $172.8 million in 2003 and 2002, respectively.  Cumulative distributions, primarily fromfinancing proceeds, from certain of these ventures exceed our investments inthem.  At December 31, 2003 and2002, these balances aggregated $26.7 million and $26.3 million, respectively,and were included in other liabilities.

The condensed,combined balance sheets of ventures accounted for using the equity method as ofDecember 31, 2003 and 2002 and the condensed, combined statements of operationsof these ventures and others during periods that they were accounted for usingthe equity method during 2003, 2002 and 2001 are summarized as follows (inthousands):

 
|                                               |   | **2003**  |      | **2002** |   |
|----------------------------------------------------|--------|-----------|-----------|----------|--------|
|                                               |   |      |      |     |   |
| Net property and property-related deferred costs   |   | $         | 2,776,448 |     | $      | 2,075,720 |   |
| Investments in unconsolidated real estate ventures |   | 50,570    |      | 78,717   |   |
| Accounts and notes receivable                      |   | 75,059    |      | 20,502   |   |
| Prepaid expenses and other assets                  |   | 246,034   |      | 40,633   |   |
| Cash and cash equivalents                          |   | 61,333    |      | 38,729   |   |
| Total assets                                       |   | $         | 3,209,444 |     | $      | 2,254,301 |   |
|                                               |   |      |      |     |   |
| Nonrecourse property debt                          |   | $         | 1,681,252 |     | $      | 1,195,359 |   |
| Property debt guaranteed by us                     |   | 100,000   |      | 175,180  |   |
| Accounts payable and other liabilities             |   | 384,503   |      | 134,206  |   |
| Venturers’ equity                             |   | 1,043,689 |      | 749,556  |   |
| Total liabilities and venturers’ equity       |   | $         | 3,209,444 |     | $      | 2,254,301 |   |

 
|                                                 |   | **2003** |    | **2002** |   | **2001** |   |
|------------------------------------------------------|--------|----------|---------|----------|--------|----------|--------|
| Revenues                                             |   | $        | 335,855 |     | $      | 307,486  |   | $ | 322,646 |   |
| Equity in earnings of  unconsolidated investments    |   | 15,990   |    | 9,651    |   | —   |   |
| Operating and interest  expenses                     |   | (220,297 | )       | (207,263 | )      | (219,183 | )      |
| Depreciation and  amortization                       |   | (67,069  | )       | (49,020  | )      | (41,105  | )      |
| Loss on early extinguishment  of debt                |   | (269     | )       | (260     | )      | (556     | )      |
| Cumulative effect of  change in accounting principle |   | —   |    | —   |   | (292     | )      |
| Net earnings                                         |   | $        | 64,210  |     | $      | 60,594   |   | $ | 61,510 |   |

 

We previouslyguaranteed the repayment of a construction loan of the unconsolidated realestate venture that owns the Village of Merrick Park.  In October 2003, the venture repaid this loan with proceeds froma $194 million mortgage loan.  We haveguaranteed $100 million of the mortgage loan. The amount of the guarantee may be reduced or eliminated upon theachievement of certain lender requirements. Additionally, venture partners have provided guarantees to us for theirshare (60%) of the loan guarantee.

 

13

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***(4)   Property***

 

Operating properties atDecember 31, 2003 and 2002 are summarized as follows (in thousands):

 
|                        |   | **2003** |      | **2002** |   |
|-----------------------------|--------|----------|-----------|----------|--------|
|                        |   |     |      |     |   |
| Buildings and  improvements |   | $        | 4,679,036 |     | $      | 5,019,394 |   |
| Land                        |   | 637,409  |      | 664,326  |   |
| Furniture and equipment     |   | 35,303   |      | 27,225   |   |
| Total                       |   | $        | 5,351,748 |     | $      | 5,710,945 |   |

 

Depreciationexpense for 2003, 2002 and 2001 was $151.6 million, $117.8 million and $91.6million, respectively.  Amortizationexpense for 2003, 2002, and 2001 was $21.7 million, $13.8 million, and $10.8million, respectively.

Properties indevelopment include construction and development in progress andpreconstruction costs.  Construction anddevelopment in progress includes land and land improvements of $86.6 millionand $55.3 million at December 31, 2003 and 2002, respectively.

Investment landand land held for development and sale at December 31, 2003 and 2002 aresummarized as follows (in thousands):

 
|                    |   | **2003** |    | **2002** |   |
|-------------------------|--------|----------|---------|----------|--------|
|                    |   |     |    |     |   |
| Land under development  |   | $        | 300,553 |     | $      | 208,675 |   |
| Finished land           |   | 68,956   |    | 63,753   |   |
| Investment and raw land |   | 45,157   |    | 49,316   |   |
| Total                   |   | $        | 414,666 |     | $      | 321,744 |   |

 

14

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***(5)   Accounts andnotes receivable***

 

Accounts and notesreceivable at December 31, 2003 and 2002 are summarized as follows (inthousands):

 
|                                                      |   | **2003** |   | **2002** |   |
|-----------------------------------------------------------|--------|----------|--------|----------|--------|
|                                                      |   |     |   |     |   |
| Accounts receivable,  primarily rents under tenant leases |   | $        | 65,295 |     | $      | 66,853 |   |
| Notes receivable from  sales of operating properties      |   | 281      |   | 538      |   |
| Notes receivable from  sales of land                      |   | 18,978   |   | 16,733   |   |
|                                                      |   | 84,554   |   | 84,124   |   |
| Less allowance for  doubtful receivables                  |   | 30,860   |   | 27,197   |   |
| Total                                                     |   | $        | 53,694 |     | $      | 56,927 |   |

 

Accounts and notesreceivable due after one year were $1.5 million and $8.8 million at December31, 2003 and 2002, respectively.

Credit risk withrespect to receivables from tenants is not highly concentrated due to the largenumber of tenants and the geographic diversification of our operatingproperties.  We perform creditevaluations of prospective new tenants and require security deposits or bankletters of credit in certain circumstances. Tenants’ compliance with the terms of their leases is monitored closely,and the allowance for doubtful receivables is established based on analyses ofthe risk of loss on specific tenant accounts, historical trends and otherrelevant information.  Notes receivablefrom sales of land are primarily attributable to land sales in Las Vegas andSummerlin, Nevada.  We perform creditevaluations of the builders and generally require substantial down payments (atleast 20%) on all land sales that we finance. These notes and notes from sales of operating properties are generallysecured by first liens on the related properties.

 

***(6)   Pension,postretirement and deferred compensation plans***

 

We have a qualifieddefined benefit pension plan (“funded plan”) covering substantially all employees,and nonqualified unfunded defined benefit pension plans primarily coveringparticipants in the funded plan whose defined benefits exceed the plan’s limits(“supplemental plan”).  In April 2003,we modified our funded plan and our supplemental plan so that covered employeeswould not earn additional benefits for future services.  The curtailment of the funded andsupplemental plans required us to immediately recognize substantially allunamortized prior service cost and unrecognized transition obligation andresulted in a curtailment loss of $10.2 million in 2003.  We also incurred settlement losses of $10.8million and $8.3 million in 2003 and 2002, respectively, related to lump-sumdistributions made primarily to employees retiring as a result of organizationalchanges and early retirement programs offered in those years and a change inthe senior management organizational structure in March 2003.  The lump-sum distributions were paid toparticipants primarily from assets of our funded plan, or with respect to thesupplemental plan, from contributions made by us.

We have aqualified defined contribution plan and a nonqualified supplemental definedcontribution plan available to substantially all employees.  In 2003 and 2002, we matched 100% ofparticipating employees’ pre-tax contributions up to a maximum of 3% ofeligible compensation and 50% of participating employees’ pre-tax contributionsup to an additional maximum of 2% of eligible compensation.  In 2001, we matched 50% of participatingemployees’ pre-tax contributions up to a maximum of 6% of eligiblecompensation.

In an actionrelated to the curtailment of the funded and supplemental plans, we added newcomponents to the defined contribution plans under which we either make oraccrue discretionary contributions to the plans for all employees.  Expenses related to these plans were $6.1million, $2.6 million and $1.8 million in 2003, 2002 and 2001, respectively.

We also have aretiree benefits plan that provides postretirement medical and life insurancebenefits to full-time employees who meet minimum age and servicerequirements.  We pay a portion of thecost of participants’ life insurance coverage and make contributions to thecost of participants’ medical coverage based on years of service, subject to amaximum annual contribution.

 

15

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The normal datefor measurement of our pension plan obligations is December 31 of each year,unless more recent measurements of both plan assets and obligations are available,or if a significant event occurs, such as a plan amendment or curtailment, thatwould ordinarily call for such measurements. Information relating to the obligations, assets and funded status of theplans at December 31, 2003 and 2002 and for the years then ended is summarizedas follows (dollars in thousands):

 
|                                                                                   |   | **Pension Plans**          |   | **Postretirement  Plan** |   |
|----------------------------------------------------------------------------------------|--------|----------------------------|--------|--------------------------|--------|
| **Funded**                                                                             |   | **Supplemental and Other** |
|                                                                                   |   | **2003**                   |   | **2002**                 |   | **2003** |   | **2002** |   | **2003** |   | **2002** |   |
| Projected benefit obligation at end of year                                            |   | $                          | 56,228 |                     | $      | 70,491 |   | $ | 17,855 |   | $ | 19,799 |   | $ | N/A |   | $ | N/A |   |
| Accumulated benefit obligation at end of year                                          |   | 56,228                     |   | 63,148                   |   | 17,846 |   | 18,641 |   | 17,555 |   | 16,732 |   |
|                                                                                   |   |                       |   |                     |   |   |   |   |   |   |   |   |   |
| Change in benefit obligations:                                                         |   |                       |   |                     |   |   |   |   |   |   |   |   |   |
| Benefit obligations at beginning of year                                               |   | $                          | 70,491 |                     | $      | 64,208 |   | $ | 19,799 |   | $ | 21,767 |   | $ | 16,732 |   | $ | 23,551 |   |
| Service cost                                                                           |   | —                     |   | 4,744                    |   | 1 |   | 1,069 |   | 395 |   | 342 |   |
| Interest cost                                                                          |   | 3,620                      |   | 4,592                    |   | 1,134 |   | 1,663 |   | 1,031 |   | 1,070 |   |
| Plan amendment                                                                         |   | —                     |   | 2,398                    |   | 9 |   | 96 |   | — |   | (6,598 | ) |
| Actuarial loss (gain)                                                                  |   | 6,173                      |   | 4,532                    |   | 1,873 |   | 2,315 |   | 403 |   | (646 | ) |
| Benefits paid                                                                          |   | (235                       | )      | (226                     | )      | (129 | ) | (135 | ) | (1,006 | ) | (987 | ) |
| Benefit obligations before special events                                              |   | 80,049                     |   | 80,248                   |   | 22,687 |   | 26,775 |   | 17,555 |   | 16,732 |   |
| Special events—                                                                   |   |                       |   |                     |   |   |   |   |   |   |   |   |   |
| Settlements                                                                            |   | (15,087                    | )      | (9,757                   | )      | (3,746 | ) | (6,976 | ) | — |   | — |   |
| Curtailments                                                                           |   | (8,734                     | )      | —                   |   | (1,086 | ) | — |   | — |   | — |   |
| Benefit obligations at end of year                                                     |   | 56,228                     |   | 70,491                   |   | 17,855 |   | 19,799 |   | 17,555 |   | 16,732 |   |
|                                                                                   |   |                       |   |                     |   |   |   |   |   |   |   |   |   |
| Change in plan assets:                                                                 |   |                       |   |                     |   |   |   |   |   |   |   |   |   |
| Fair value of plan assets at beginning of year                                         |   | 63,625                     |   | 57,808                   |   | — |   | — |   | — |   | — |   |
| Actual return on plan assets                                                           |   | 12,469                     |   | (8,183                   | )      | — |   | — |   | — |   | — |   |
| Employer contribution                                                                  |   | 6,475                      |   | 24,165                   |   | 4,622 |   | 8,056 |   | 1,006 |   | 987 |   |
| Benefits paid                                                                          |   | (235                       | )      | (226                     | )      | (129 | ) | (135 | ) | (1,006 | ) | (987 | ) |
| Settlements                                                                            |   | (16,995                    | )      | (9,939                   | )      | (4,493 | ) | (7,921 | ) | — |   | — |   |
| Fair value of plan assets at end of year                                               |   | 65,339                     |   | 63,625                   |   | — |   | — |   | — |   | — |   |
|                                                                                   |   |                       |   |                     |   |   |   |   |   |   |   |   |   |
| Funded status                                                                          |   | 9,111                      |   | (6,866                   | )      | (17,855 | ) | (19,799 | ) | (17,555 | ) | (16,732 | ) |
| Unrecognized net actuarial loss                                                        |   | 19,825                     |   | 39,925                   |   | 4,637 |   | 4,823 |   | 4,019 |   | 3,729 |   |
| Unamortized prior service cost                                                         |   | —                     |   | 5,655                    |   | 166 |   | 4,919 |   | (2,450 | ) | (2,692 | ) |
| Unrecognized transition obligation                                                     |   | —                     |   | 199                      |   | — |   | — |   | — |   | — |   |
| Net amount recognized                                                                  |   | $                          | 28,936 |                     | $      | 38,913 |   | $ | (13,052 | ) | $ | (10,057 | ) | $ | (15,986 | ) | $ | (15,695 | ) |
|                                                                                   |   |                       |   |                     |   |   |   |   |   |   |   |   |   |
| Amounts recognized in the balance sheets consist of:                                   |   |                       |   |                     |   |   |   |   |   |   |   |   |   |
| Prepaid benefit cost                                                                   |   | $                          | 28,936 |                     | $      | 38,913 |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Accrued benefit liability                                                              |   | —                     |   | —                   |   | (17,846 | ) | (18,641 | ) | (15,986 | ) | (15,695 | ) |
| Intangible asset                                                                       |   | —                     |   | —                   |   | 166 |   | 4,919 |   | — |   | — |   |
| Accumulated other comprehensive income item—minimum  pension liability adjustment |   | —                     |   | —                   |   | 4,628 |   | 3,665 |   | — |   | — |   |
| Net amount recognized                                                                  |   | $                          | 28,936 |                     | $      | 38,913 |   | $ | (13,052 | ) | $ | (10,057 | ) | $ | (15,986 | ) | $ | (15,695 | ) |
|                                                                                   |   |                       |   |                     |   |   |   |   |   |   |   |   |   |
| Weighted-average assumptions at year end:                                              |   |                       |   |                     |   |   |   |   |   |   |   |   |   |
| Discount rate                                                                          |   | 6.00                       | %      | 6.50                     | %      | 6.00 | % | 6.50 | % | 6.00 | % | 6.50 | % |
| Lump sum rate                                                                          |   | 6.00                       |   | 6.50                     |   | 6.00 |   | 6.50 |   | — |   | — |   |
| Expected rate of return on plan assets                                                 |   | 8.00                       |   | 8.00                     |   | — |   | — |   | — |   | — |   |
| Rate of compensation increase                                                          |   | N/A                        |   | 4.50                     |   | N/A |   | 4.50 |   | N/A |   | N/A |   |
|                                                                                   |   |                       |   |                     |   |   |   |   |   |   |   |   |   |
| Weighted-average assumptions used to  determine net periodic benefit cost:        |   |                       |   |                     |   |   |   |   |   |   |   |   |   |
| Discount rate                                                                          |   | 6.50                       | %      | 7.25                     | %      | 6.50 | % | 7.25 | % | 6.50 | % | 7.25 | % |
| Lump sum rate                                                                          |   | 6.00                       |   | 6.50                     |   | 6.00 |   | 6.50 |   | — |   | — |   |
| Expected rate of return on plan assets                                                 |   | 8.00                       |   | 8.00                     |   | — |   | — |   | — |   | — |   |
| Rate of compensation increase                                                          |   | 4.50                       |   | 4.50                     |   | 4.50 |   | 4.50 |   | N/A |   | N/A |   |
|                                                                                        |        |                            |        |                          |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

16

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The assets of thefunded plan consist primarily of fixed income and marketable equitysecurities.  The primary investmentobjective for the funded plan has been to provide for growth of capital with amoderate level of volatility by investing in assets in accordance with thetarget allocations indicated below.  Asecondary objective has been to invest in securities that can be readily andefficiently sold to meet all expected or unexpected cash needs related to thefunded plan pension benefit obligations. The composition of plan assets as ofDecember 31, 2003 and 2002 and target allocations are summarized as follows:

 
|                             |   | **Target Allocation** |   | **Allocation of Plan Assets  (%)** |   |
|----------------------------------|--------|-----------------------|--------|------------------------------------|--------|
|                             |   | **(%)**               |   | **2003**                           |   | **2002** |   |
| Equity securities                |   | 35–75            |   | 59.0                               |   | 45.5 |   |
| Debt securities                  |   | 20–45            |   | 28.4                               |   | 23.2 |   |
| International equity  securities |   | 5–20             |   | 7.5                                |   | 9.3 |   |
| Cash                             |   | 0–20             |   | 5.1                                |   | 22.0 |   |
| Total                            |   |                  |   | 100.0                              |   | 100.0 |   |

 

Theweighted-average expected long-term rate of return for the funded plan’s totalassets is based on the expected return of each of the above categories,weighted based on the median of the target allocation for each investmentclass. Based on historical experience, we expect that the funded plan’s assetmanagers will provide a modest (0.5% - 1.0% per annum) premium to theirrespective market benchmark indices.

The amendment tothe pension plans in 2002 changed the compensation base on which pensionbenefits are calculated.  The amendmentto the postretirement plan in 2002 reduced certain medical and life insurancebenefits.

 

The net pensioncost includes the following components (in thousands):

 
|                                            |   | **2003** |   | **2002** |   | **2001** |   |
|-------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                            |   |     |   |     |   |     |   |
| Service cost                                    |   | $        | 1      |     | $      | 5,813    |   | $ | 4,890 |   |
| Interest cost on  projected benefit obligations |   | 4,754    |   | 6,255    |   | 5,719    |   |
| Expected return on  funded plan assets          |   | (4,701   | )      | (4,690   | )      | (4,622   | )      |
| Prior service cost  recognized                  |   | 403      |   | 1,538    |   | 1,554    |   |
| Net actuarial loss  recognized                  |   | 2,494    |   | 2,525    |   | 1,712    |   |
| Amortization of  transition obligation          |   | 17       |   | 68       |   | 201      |   |
| Net pension cost before  special events         |   | 2,968    |   | 11,509   |   | 9,454    |   |
| Special events:                                 |   |     |   |     |   |     |   |
| Settlement losses                               |   | 10,889   |   | 8,324    |   | —   |   |
| Curtailment loss                                |   | 10,212   |   | —   |   | —   |   |
| Net pension cost                                |   | $        | 24,069 |     | $      | 19,833   |   | $ | 9,454 |   |

 

The curtailmentloss in 2003 and settlement losses of $10.8 million in 2003 and $8.3 million in2002 are included in other provisions and losses, net, in the consolidatedstatements of operations.

 

The netpostretirement benefit cost includes the following components (in thousands):

 
|                                              |   | **2003** |   | **2002** |   | **2001** |   |
|---------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                              |   |     |   |     |   |     |   |
| Service cost                                      |   | $        | 395    |     | $      | 342      |   | $ | 451 |   |
| Interest cost on  accumulated benefit obligations |   | 1,031    |   | 1,070    |   | 1,553    |   |
| Net actuarial loss  recognized                    |   | 112      |   | 85       |   | 115      |   |
| Amortization of prior  service cost               |   | (241     | )      | (241     | )      | —   |   |
| Amortization of  transition obligation            |   | —   |   | —   |   | 333      |   |
| Net postretirement  benefit cost                  |   | $        | 1,297  |     | $      | 1,256    |   | $ | 2,452 |   |

 

17

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Assumed healthcare cost trend rates have an effect on the amounts reported for thepostretirement plan.  Actuarialassumptions used to determine amounts reported for the postretirement planincluded health care costs increasing at 5% per year, representing the ultimatetrend rate.  A one-percentage-pointchange in assumed health care cost trend rates would have the following effects(in thousands):

 
|                                                     |   | **1% Increase** |   | **1% Decrease** |   |
|----------------------------------------------------------|--------|-----------------|--------|-----------------|--------|
|                                                     |   |            |   |            |   |
| Effect on total of  service and interest cost components |   | $               | 13     |            | $      | 11 |   |
|                                                     |   |            |   |            |   |
| Effect on  postretirement benefit obligation             |   | $               | 217    |            | $      | 197 |   |

 

We also have adeferred compensation program which permits directors and certain managementemployees to defer portions of their compensation on a pre-tax basis.  The effect of this program on net earningswas insignificant in 2003, 2002 and 2001.

In February2004, we adopted a plan to terminate our funded and supplemental plans effectiveMay 1, 2004.  When we terminate theplans, we will be required to settle the obligations of the funded plan bypaying accumulated benefits to eligible participants.  Depending on the market value of the assets of the funded planand the relevant interest rates at the time of settlement, we may be requiredto make additional contributions to that plan, which could be significant.  At December 31, 2003, the funded plan hadsufficient assets to settle its obligations without additional contributions byus.  At the time of settlement of theobligations of the funded plan, we will recognize any unrecognized lossesassociated with that plan.  At December31, 2003, these unrecognized losses were approximately $19.8 million.  However, we expect the unrecognized losseswill increase due to the acceleration of payments of benefits as a result oftermination of the plan and may also change depending on the market value ofplan assets, interest rates and other factors. We expect that a portion of these losses will be recognized prior to thefinal distribution of plan assets as plan participants retire or otherwiseterminate employment in the normal course of business.  The termination of the funded plan issubject to approvals by the Pension Benefit Guaranty Corporation and theInternal Revenue Service, and while the timing is uncertain, we expect tosettle all of the plan’s remaining obligations in late 2004.  In connection with the funded plantermination, we expect to transfer the assets of the funded plan to highly-liquid,low-risk investments to mitigate market risk during the period prior todistributions to participants.

Concurrent withthe distribution of funded plan assets, we will transfer credits for benefitsearned under the supplemental plan to a deferred compensation plan andrecognize settlement losses equal to any unrecognized loss at the date oftransfer.  At December 31, 2003, theseunrecognized losses were approximately $4 million and may change depending oninterest rates and other factors.  We expectto fund these benefits as participants retire or terminate.  The supplemental plan obligations were $16.9million at December 31, 2003.

 

***(7)   Debt***

 

Debt is classified asfollows:

(a)                                  “Propertydebt not carrying a Parent Company guarantee of repayment” which is subsidiarycompany debt having no express written obligation which would require theParent Company to repay the principal amount of such debt during the full termof the loan (“nonrecourse loans”); and

(b)                                 “ParentCompany debt and debt carrying a Parent Company guarantee of repayment” whichis our debt and subsidiary company debt with an express written obligation fromthe Parent Company to repay the principal amount of such debt during the fullterm of the loan.

With respect tononrecourse loans, we have in the past and may in the future, under somecircumstances, support those subsidiary companies whose annual expenditures,including debt service, exceed their operating revenues.  At December 31, 2003 and 2002, nonrecourseloans include $240.7 million and $278.2 million, respectively, of subsidiarycompanies’ mortgages and bonds which are subject to agreements with lendersrequiring us to provide support for operating and debt service costs, wherenecessary, for defined periods or until specified conditions relating to theoperating results of the related properties are met.  At December 31, 2003, approximately $1.0 billion of the totaldebt was payable to one lender.

Debt at December31, 2003 and 2002 is summarized as follows (in thousands):

 
|                        |   | **2003**  |      | **2002** |   |
|-----------------------------|--------|-----------|-----------|----------|--------|
|                        |   |      |      |     |   |
| Mortgages and bonds         |   | $         | 3,025,802 |     | $      | 3,410,257 |   |
| Medium-term notes           |   | 45,500    |      | 48,500   |   |
| Credit facility  borrowings |   | 271,000   |      | 242,690  |   |
| Other loans                 |   | 1,102,190 |      | 740,030  |   |
| Total                       |   | $         | 4,444,492 |     | $      | 4,441,477 |   |

 

18

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Mortgages andbonds are secured by deeds of trust or mortgages on properties and generalassignments of rents.  This debt maturesat various dates through 2031 and, at December 31, 2003, bears interest at aweighted-average effective rate of 6.2%. At December 31, 2003 andDecember 31, 2002, approximately $83 million of our debt provided for paymentsof additional interest based on operating results of the related properties inexcess of stated levels.  Theparticipating debt primarily relates to a retail center where the lenderreceives a fixed interest rate of 7.625% and a 5% participation in cashflows.  The lender also will receive apayment at maturity (November 2004) equal to the greater 5% of the value of theproperty in excess of the debt balance or the amount required to provide aninternal rate of return of 8.375% over the term of the loan.  The internal rate of return of the lender islimited to 12.5%.  We recognize interestexpense on this debt at a rate required to provide the lender the requiredminimum internal rate of return (8.375%) and monitor the accrued liability andthe fair value of the projected payment due at maturity.  Based on our analysis, we believe that thepayment at maturity will be the balance needed to provide the specified minimuminternal rate of return.

We have issuedunsecured, medium-term notes.  The notesbear interest at fixed interest rates. The notes outstanding at December 31, 2003 mature at various datesfrom 2005 to 2007, bear interest at a weighted-average effective rate of 8.3%and have a weighted-average maturity of 1.4 years.

We have a creditfacility with a group of lenders that is secured by the stock of some of ourTRS and guaranteed by some of our subsidiaries.  In July 2003, we negotiated an amendment to the facility.  The amount that may be borrowed under thisfacility increased from $450 million to $900 million and the amended facilitywill be available until July 2006, subject to a one-year renewal at ouroption.  The facility bears interest atLIBOR plus a margin.  The margin isdetermined based on the ratings assigned to our senior unsecured long-term debtsecurities by Moody’s Investors Service, Inc. (Moody’s) and/or Standard &Poor’s Credit Market Services (S&P) and may range from 0.60% to 1.25%.  At December 31, 2003, our seniorunsecured long-term debt securities were rated Baa3 by Moody’s and BBB- byS&P.  These ratings resulted in amargin of 0.90% on our credit facility. The revolving credit facility may be used for various purposes,including land and project development costs, property acquisitions, liquidityand other corporate needs.  It may alsobe used to pay some portion of existing debt, including secured debt.  Availability under the facility was $629million at December 31, 2003.

Other loans atDecember 31, 2003 include $350 million of 5.375% Notes due in 2013 which weissued in November 2003 for net proceeds of $347.7 million. Other loans alsoinclude $400 million of 7.20% Notes issued in September 2002 which are due in2012, $200 million of 8% Notes due in 2009, various property acquisitionloans and certain other borrowings. These loans include aggregate unsecured borrowings of $1,069.7 millionand $733.5 million at December 31, 2003 and 2002, respectively, and at December31, 2003, bear interest at a weighted-average effective rate of 6.8%.

The agreementsrelating to various loans impose limitations on us.  The most restrictive of these limit the levels and types of debtwe and our affiliates may incur and require us and our affiliates to maintainspecified minimum levels of debt service coverage and net worth.  The agreements also impose restrictions onthe dividend payout ratio and on sale, lease and certain other transactions,subject to various exclusions and limitations. These restrictions have not limited our normal business activities.

The annualmaturities of debt at December 31, 2003 are summarized as follows (inthousands):

 
|               |   | **Nonrecourse  Loans** |      | **Parent  Company  and  Recourse  Loans** |   | **Total** |   |
|--------------------|--------|------------------------|-----------|-------------------------------------------|--------|-----------|--------|
|               |   |                   |      |                                      |   |      |   |
| 2004               |   | $                      | 388,787   |                                      | $      | 127,948   |   | $ | 516,735 |   |
| 2005               |   | 387,778                |      | 111,732                                   |   | 499,510   |   |
| 2006               |   | 338,146                |      | 288,673                                   |   | 626,819   |   |
| 2007               |   | 478,199                |      | 15,066                                    |   | 493,265   |   |
| 2008               |   | 429,858                |      | 65,055                                    |   | 494,913   |   |
| Subsequent to 2008 |   | 856,455                |      | 956,795                                   |   | 1,813,250 |   |
| Total              |   | $                      | 2,879,223 |                                      | $      | 1,565,269 |   | $ | 4,444,492 |   |

 

The annualmaturities reflect the terms of existing loan agreements except whererefinancing commitments from outside lenders have been obtained.  In these instances, maturities are based onthe terms of the refinancing commitments. The debt due in 2004 consists of a $30.8 million note, $412.1 million ofballoon payments on mortgages and construction loans on four retail centers,four office buildings and one commercial development property and $73.8 millionof regularly scheduled principal payments. We expect to make the balloon payments at or before the scheduledmaturity dates of the related loans from proceeds of property refinancings(including refinancings of the maturing mortgages), credit facility borrowings,proceeds from corporate debt offerings or other available corporate funds.  In January and February of 2004, we repaid$199.6 million of the mortgages and construction loans due in 2004 and $240.3million of the construction loans due in 2005 using proceeds from creditfacility borrowings.  The regularlyscheduled principal payments will be paid from operating cash flows.

 

19

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At December 31,2003, we had interest rate swap agreements and forward-starting swap agreementsin place that effectively fix the LIBOR rate on a portion of our variable-ratedebt through December 2006.  Informationrelated to the swap agreements as of December 31, 2003 and 2002 is asfollows (dollars in millions):

 
|                                                           |   | **2003** |   | **2002** |   |
|----------------------------------------------------------------|--------|----------|--------|----------|--------|
|                                                           |   |     |   |     |   |
| Total notional amount                                          |   | $        | 561.9  |     | $      | 315.6 |   |
| Average fixed effective rate (pay rate)                        |   | 3.5      | %      | 5.7      | %      |
| Average variable interest rate of related  debt (receive rate) |   | 2.7      | %      | 3.3      | %      |
|                                                                |        |          |        |          |        |  |  |

 

In accordance withSFAS 133, the net unrealized gains (losses) on derivatives designated as cashflow hedges (including our share of unrealized gains (losses) on derivativesheld by unconsolidated real estate ventures accounted for using the equitymethod) of $3.0 million and ($6.9 million) for 2003 and 2002, respectively,have been recognized as other comprehensive income (loss).  We expect $6.5 million of the amountrecorded in other comprehensive income (loss) at December 31, 2003 to berecognized in net earnings during 2004 and the remainder before December2006.  Interest rate exchange agreementsdid not have a material effect on the weighted-average effective interest rateson debt at December 31, 2003, 2002 and 2001 or interest expense for 2003, 2002and 2001. The fair value of our derivative financial instruments was a liabilityof approximately $5.0 million at December 31, 2003. The fair value of interestrate cap agreements was insignificant at December 31, 2003.

Total interestcosts included in continuing operations were $260.6 million in 2003, $248.1million in 2002 and $217.6 million in 2001, of which $37.8 million,$38.1 million and $35.7 million were capitalized, respectively.

We recognized netgains on the early extinguishment of debt of $21.3 million in 2003, includinggains of discontinued operations of $26.9 million.  We recognized net losses on the early extinguishment of debt of$7.7 million in 2002 and $0.5 million in 2001, including losses of discontinuedoperations of $5.3 million in 2002.  Thesources of funds used to pay the debt and fund the prepayment penalties, whereapplicable, were refinancings of properties, proceeds from the sale ofproperties secured by extinguished debt and the issuance of the 7.20% Notes.

We estimated fairvalues of debt instruments based on quoted market prices for publicly-tradeddebt and on the discounted estimated future cash payments to be made for otherdebt.  The discount rates usedapproximate current market rates for loans or groups of loans with similarmaturities and credit quality. The estimated future payments include scheduledprincipal and interest payments and lenders’ participations in operatingresults, where applicable.

The carryingamount and estimated fair value of our debt at December 31, 2003 and 2002 aresummarized as follows (in thousands):

 
|               |   | **2003**             |      | **2002**                  |   |
|--------------------|--------|----------------------|-----------|---------------------------|--------|
|               |   | **Carrying  Amount** |      | **Estimated Fair  Value** |   | **Carrying  Amount** |   | **Estimated Fair  Value** |   |
|               |   |                 |      |                      |   |   |   |   |   |
| Fixed-rate debt    |   | $                    | 3,336,678 |                      | $      | 3,623,390 |   | $ | 3,216,998 |   | $ | 3,409,037 |   |
| Variable-rate debt |   | 1,107,814            |      | 1,107,814                 |   | 1,224,479 |   | 1,224,479 |   |
| Total              |   | $                    | 4,444,492 |                      | $      | 4,731,204 |   | $ | 4,441,477 |   | $ | 4,633,516 |   |

 

Fair valueestimates are made at a specific point in time, are subjective in nature andinvolve uncertainties and matters of significant judgment.  Settlement of our debt obligations at fairvalue may not be possible and may not be a prudent management decision.

 

***(8)   ParentCompany-obligated mandatorily redeemable preferred securities***

 

The redeemable preferredsecurities consist of Cumulative Quarterly Income Preferred Securities(preferred securities) at December 31, 2003 and 2002, respectively, with aliquidation amount of $25 per security, which were issued in November 1995 by astatutory business trust.  The trustused the proceeds of the preferred securities and other assets to purchase atpar $141.8 million of our junior subordinated debentures (“debentures”) due inNovember 2025, which are the sole assets of the trust.  The terms of the preferred securities matchthe terms of the debentures.

Payments to bemade by the trust on the preferred securities are dependent on payments that wehave undertaken to make, particularly the payments to be made by us on thedebentures.  Our compliance with ourundertakings, taken together, would have the effect of providing a full,irrevocable and unconditional guarantee of the trust’s obligations under thepreferred securities.

Distributions onthe preferred securities are payable from interest payments received on thedebentures and are due quarterly at an annual rate of 9.25% of the liquidationamount, subject to deferral for up to five years under certain conditions.  Distributions payable are included inoperating expenses.  Redemptions of thepreferred securities are payable at the liquidation amount from redemptionpayments received on the debentures.

 

20

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We may redeem thedebentures at par at any time, but redemptions at or prior to maturity arepayable only from the proceeds of issuance of our capital stock or ofsecurities substantially comparable in economic effect to the preferredsecurities.  During 2003, we redeemedapproximately $57.1 million of the securities using proceeds from the exerciseof stock options.  We recognized a lossof $1.7 million related to unamoritized issuance costs upon the redemptionof the securities.  In January 2004, weredeemed approximately $56.4 million of the securities using proceeds from theexercise of stock options, and in February 2004, called for the redemption ofthe remaining securities effective March 17, 2004.  We will recognize aggregate losses of $2.2 million related tounamortized issuance costs relating to the redeemed securities as a result ofthese transactions.

The estimated fairvalue of the outstanding redeemable preferred securities was $116.1 million and$216.7 million at December 31, 2003 and 2002, respectively.

 

***(9)   Segmentinformation***

 

We have five businesssegments:  retail centers, office andother properties, community development, commercial development andcorporate.  The retail centers segmentincludes the operation and management of regional shopping centers, downtownspecialty marketplaces, the retail components of mixed-use projects andcommunity retail centers.  The officeand other properties segment includes the operation and management of officeand industrial properties and the nonretail components of the mixed-useprojects.  The community developmentsegment includes the development and sale of land, primarily in large-scale,long-term community development projects in and around Columbia, Maryland,Summerlin, Nevada and Houston, Texas. The commercial development segment includes the evaluation of allpotential new development projects (including expansions of existingproperties) and acquisition opportunities and the management of them throughthe development or acquisition process. The corporate segment is responsible for shareholder and directorservices, financial management, strategic planning and certain other generaland support functions.  Our businesssegments offer different products or services and are managed separatelybecause each requires different operating strategies or management expertise.

The operatingmeasure used to assess operating results for the business segments is NetOperating Income (“NOI”). Prior to July 1, 2003, we included certain incometaxes in our definition of NOI. Effective July 1, 2003, we revised ourdefinition to exclude these amounts from NOI, affecting primarily thepresentation of our community development activities.  We made this change because we now assess the operating resultsof our segments on a pre-tax basis and believe this revised measure betterreflects the performance of the underlying assets.  Amounts for prior periods have been reclassified to conform tothe current definition.

The accounting policies of the segments are the same as those describedin note 1, except that:

•                            weaccount for real estate ventures in which we have joint interest and controland certain other minority interest ventures (“proportionate share ventures”)using the proportionate share method rather than the equity method;

•                            weinclude our share of NOI less interest expense and ground rent expense of otherunconsolidated minority interest ventures (“other ventures”) in revenues; and

•                            weinclude discontinued operations and minority interests in NOI rather thanpresenting them separately.

These differencesaffect only the reported revenues and operating expenses of the segments andhave no effect on our reported net earnings.

Operating resultsfor the segments are summarized as follows (in thousands):

 
|               |   | **Retail  Centers** |    | **Office  and Other  Properties** |   | **Community  Development** |   | **Commercial  Development** |    | **Corporate** |   | **Total** |   |
|--------------------|--------|---------------------|---------|-----------------------------------|--------|----------------------------|--------|-----------------------------|---------|---------------|--------|-----------|--------|
| 2003               |   |                |    |                              |   |                       |   |                        |    |          |   |      |   |
| Revenues           |   | $                   | 843,241 |                              | $      | 200,994                    |   | $                           | 291,439 |          | $      | —    |   | $ | — |   | $ | 1,335,674 |   |
| Operating expenses |   | 334,336             |    | 78,810                            |   | 167,549                    |   | 13,833                      |    | 18,969        |   | 613,497   |   |
| NOI                |   | $                   | 508,905 |                              | $      | 122,184                    |   | $                           | 123,890 |          | $      | (13,833   | )      | $ | (18,969 | ) | $ | 722,177 |   |
|               |   |                |    |                              |   |                       |   |                        |    |          |   |      |   |
| 2002               |   |                |    |                              |   |                       |   |                        |    |          |   |      |   |
| Revenues           |   | $                   | 775,513 |                              | $      | 205,191                    |   | $                           | 240,992 |          | $      | —    |   | $ | — |   | $ | 1,221,696 |   |
| Operating expenses |   | 305,686             |    | 80,195                            |   | 154,827                    |   | 12,986                      |    | 16,324        |   | 570,018   |   |
| NOI                |   | $                   | 469,827 |                              | $      | 124,996                    |   | $                           | 86,165  |          | $      | (12,986   | )      | $ | (16,324 | ) | $ | 651,678 |   |
|               |   |                |    |                              |   |                       |   |                        |    |          |   |      |   |
| 2001               |   |                |    |                              |   |                       |   |                        |    |          |   |      |   |
| Revenues           |   | $                   | 637,211 |                              | $      | 203,716                    |   | $                           | 218,322 |          | $      | —    |   | $ | — |   | $ | 1,059,249 |   |
| Operating expenses |   | 261,494             |    | 75,814                            |   | 140,317                    |   | 6,871                       |    | 13,138        |   | 497,634   |   |
| NOI                |   | $                   | 375,717 |                              | $      | 127,902                    |   | $                           | 78,005  |          | $      | (6,871    | )      | $ | (13,138 | ) | $ | 561,615 |   |

 

Segment revenuesexclude corporate interest income and gains (losses) on marketable securities classifiedas trading. Segment operating expenses include provision for bad debts, losses(gains) on marketable securities and net losses (gains) on sales of propertiesdeveloped for sale and exclude income taxes, ground rent expense, distributionson Parent Company-obligated mandatorily redeemable preferred securities andother subsidiary preferred stock and real estate depreciation and amortization.

 

21

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Reconciliations oftotal revenues and operating expenses reported above to the related amounts inthe consolidated financial statements and of NOI reported above to earningsbefore net gains (losses) on dispositions of interests in operating properties,discontinued operations and cumulative effect of change in accounting principlein the consolidated financial statements are summarized as follows (inthousands):

 
|                                                                                                                                                                                                                           |   | **2003** |      | **2002** |   | **2001**  |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|-----------|----------|--------|-----------|--------|
|                                                                                                                                                                                                                           |   |     |      |     |   |      |   |
| Revenues:                                                                                                                                                                                                                      |   |     |      |     |   |      |   |
| Total reported above                                                                                                                                                                                                           |   | $        | 1,335,674 |     | $      | 1,221,696 |   | $ | 1,059,249 |   |
| Our share of revenues  of unconsolidated real estate ventures                                                                                                                                                                  |   | (151,229 | )         | (117,123 | )      | (97,789   | )      |
| Revenues of  discontinued operations                                                                                                                                                                                           |   | (79,755  | )         | (156,618 | )      | (163,538  | )      |
| Other                                                                                                                                                                                                                          |   | 176      |      | 1,273    |   | 4,028     |   |
| Total in consolidated  financial statements                                                                                                                                                                                    |   | $        | 1,104,866 |     | $      | 949,228   |   | $ | 801,950 |   |
|                                                                                                                                                                                                                           |   |     |      |     |   |      |   |
| Operating expenses,  exclusive of provision for bad debts, depreciation and  amortization:                                                                                                                                |   |     |      |     |   |      |   |
| Total reported above                                                                                                                                                                                                           |   | $        | 613,497   |     | $      | 570,018   |   | $ | 497,634 |   |
| Our share of operating  expenses of unconsolidated real estate ventures                                                                                                                                                        |   | (50,914  | )         | (36,907  | )      | (27,987   | )      |
| Operating expenses of  discontinued operations                                                                                                                                                                                 |   | (34,592  | )         | (67,027  | )      | (70,676   | )      |
| Other                                                                                                                                                                                                                          |   | 14,518   |      | 16,832   |   | 16,215    |   |
| Total in consolidated  financial statements                                                                                                                                                                                    |   | $        | 542,509   |     | $      | 482,916   |   | $ | 415,186 |   |
|                                                                                                                                                                                                                           |   |     |      |     |   |      |   |
| Operating results:                                                                                                                                                                                                             |   |     |      |     |   |      |   |
| NOI reported above                                                                                                                                                                                                             |   | $        | 722,177   |     | $      | 651,678   |   | $ | 561,615 |   |
| Interest expense                                                                                                                                                                                                               |   | (222,766 | )         | (209,993 | )      | (181,898  | )      |
| NOI of discontinued  operations                                                                                                                                                                                                |   | (45,163  | )         | (89,591  | )      | (92,862   | )      |
| Depreciation and  amortization                                                                                                                                                                                                 |   | (173,280 | )         | (131,594 | )      | (102,361  | )      |
| Other provisions and  losses, net                                                                                                                                                                                              |   | (32,513  | )         | (37,631  | )      | (816      | )      |
| Impairment losses on  operating properties                                                                                                                                                                                     |   | (7,900   | )         | —   |   | (374      | )      |
| Income taxes, primarily  deferred                                                                                                                                                                                              |   | (42,500  | )         | (29,013  | )      | (26,639   | )      |
| Our share of interest  expense, ground rent expense, depreciation and amortization,  other provisions and losses, net, income  taxes and gains on operating properties   of unconsolidated real estate ventures, net |   | (68,894  | )         | (46,957  | )      | (37,241   | )      |
| Other                                                                                                                                                                                                                          |   | (16,270  | )         | (20,551  | )      | (18,955   | )      |
|                                                                                                                                                                                                                           |   |     |      |     |   |      |   |
| Earnings before net  gains (losses) on dispositions of interests in operating  properties, discontinued operations and  cumulative effect of change in   accounting principle in consolidated financial statements   |   | $        | 112,891   |     | $      | 86,348    |   | $ | 100,469 |   |

 

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The assets bysegment and the reconciliation of total segment assets to the total assets inthe consolidated financial statements at December 31, 2003, 2002 and 2001 aresummarized as follows (in thousands):

 
|                                                                       |   | **2003**   |      | **2002**  |   | **2001**  |   |
|----------------------------------------------------------------------------|--------|------------|-----------|-----------|--------|-----------|--------|
|                                                                       |   |       |      |      |   |      |   |
| Retail centers                                                             |   | $          | 5,069,644 |      | $      | 5,183,442 |   | $ | 3,459,666 |   |
| Office and other  properties                                               |   | 1,165,599  |      | 1,105,636 |   | 1,053,789 |   |
| Community development                                                      |   | 835,525    |      | 461,403   |   | 472,226   |   |
| Commercial development                                                     |   | 114,439    |      | 67,228    |   | 134,627   |   |
| Corporate                                                                  |   | 327,294    |      | 153,836   |   | 125,613   |   |
| Total segment assets                                                       |   | 7,512,501  |      | 6,971,545 |   | 5,245,921 |   |
| Our share of assets of  unconsolidated proportionate share ventures        |   | (1,464,329 | )         | (923,372  | )      | (587,733  | )      |
| Investment in and  advances to unconsolidated proportionate share ventures |   | 591,072    |      | 345,978   |   | 225,295   |   |
| Total assets in  consolidated financial statements                         |   | $          | 6,639,244 |      | $      | 6,394,151 |   | $ | 4,883,483 |   |

 

Investments in andadvances to unconsolidated real estate ventures, by segment, are summarized asfollows (in thousands):

 
|                         |   | **2003** |    | **2002** |   | **2001** |   |
|------------------------------|--------|----------|---------|----------|--------|----------|--------|
|                         |   |     |    |     |   |     |   |
| Retail centers               |   | $        | 345,486 |     | $      | 320,849  |   | $ | 219,159 |   |
| Office and other  properties |   | 158,360  |    | 98,005   |   | 30,700   |   |
| Community development        |   | 144,021  |    | 23,551   |   | 19,714   |   |
| Total                        |   | $        | 647,867 |     | $      | 442,405  |   | $ | 269,573 |   |

 

Additions tolong-lived assets of the segments are summarized as follows (in thousands):

 
|                                            |   | **2003** |      | **2002**  |   | **2001**  |   |
|-------------------------------------------------|--------|----------|-----------|-----------|--------|-----------|--------|
|                                            |   |     |      |      |   |      |   |
| Retail centers:                                 |   |     |      |      |   |      |   |
| Redevelopment,  expansions and renovations      |   | $        | 98,940    |      | $      | 128,660   |   | $ | 126,171 |   |
| Improvements for  tenants and other             |   | 54,895   |      | 36,813    |   | 44,274    |   |
| Acquisitions                                    |   | 382,775  |      | 864,776   |   | —    |   |
|                                            |   | 536,610  |      | 1,030,249 |   | 170,445   |   |
| Office and other  properties:                   |   |     |      |      |   |      |   |
| Improvements for  tenants and other             |   | 19,652   |      | 19,381    |   | 14,894    |   |
| Acquisitions                                    |   | 122,534  |      | 25,000    |   | —    |   |
|                                            |   | 142,186  |      | 44,381    |   | 14,894    |   |
| Community development:                          |   |     |      |      |   |      |   |
| Land development  expenditures                  |   | 103,651  |      | 109,139   |   | 116,753   |   |
| Acquisitions                                    |   | 320,398  |      | —    |   | —    |   |
|                                            |   | 424,049  |      | 109,139   |   | 116,753   |   |
| Commercial development  - costs of new projects |   | 79,196   |      | 98,873    |   | 77,025    |   |
| Total                                           |   | $        | 1,182,041 |      | $      | 1,282,642 |   | $ | 379,117 |   |

 

Approximately$36.5 million, $75.0 million and $70.6 million of the additions (exclusive ofacquisitions) in 2003, 2002 and 2001, respectively, relate to properties ownedby unconsolidated real estate ventures.

 

23

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***(10) Income taxes***

 

The REIT ModernizationAct (“RMA”) was included in the Tax Relief Extension Act of 1999 (“Act”), whichwas enacted into law on December 17, 1999. RMA includes numerous amendments to the provisions governing the qualificationand taxation of REITs, and these amendments were effective January 1,2001.  The Act provided, among otherthings, for the creation of taxable REIT subsidiaries (“TRS”).  TRS are corporations that are permitted toengage in nonqualifying REIT activities. A REIT is permitted to own up to 100% of the voting stock of a TRS.  Previously, a REIT could not own more than10% of the voting stock of a corporation conducting nonqualifyingactivities.  Relying on thislegislation, in January 2001, we acquired all of the voting stock of themajority financial interest ventures owned by a trust, of which certainemployees are beneficiaries.  We andthese now wholly owned subsidiaries made a joint election to treat the subsidiariesas TRS for Federal and certain state income tax purposes beginning January 2,2001.

As a REIT, wegenerally will not be subject to corporate level Federal income tax on taxableincome we distribute currently to our stockholders.  If we fail to qualify as a REIT in any taxable year, we will besubject to Federal income taxes at regular corporate rates (including anyapplicable alternative minimum tax) and may not be able to qualify as a REITfor the next four subsequent taxable years. Even if we qualify for taxation as a REIT, we may be subject to certainstate and local taxes on our income and property and to Federal income andexcise taxes on our undistributed taxable income.  In addition, taxable income of a TRS is subject to Federal, stateand local income taxes.  Current Federalincome taxes of the TRS are likely to increase in future years as we exhaustthe net loss carryforwards of certain TRS and complete certain land developmentprojects.  These increases could besignificant.

In connection withour election to be taxed as a REIT, we have also elected to be subject to the“built-in gain” rules on the assets of our Qualified REIT Subsidiaries (“QRS”).Under these rules, taxes will be payable at the time and to the extent that thenet unrealized gains on our assets at the date of our conversion to REIT status(January 1, 1998) are recognized in taxable dispositions of such assets in theten-year period following conversion. Such net unrealized gains were approximately $2.5 billion on January 1,1998.  We believe that we will not be requiredto make significant payments of taxes on built-in gains throughout the ten-yearperiod due to the availability of our net operating loss carryforward to offsetbuilt-in gains which might be recognized and the potential for us to makenontaxable dispositions through like-kind exchanges, if necessary.  It may be necessary to recognize a liabilityfor such taxes in the future if our plans and intentions with respect to QRSasset dispositions, or the related tax laws, change.

The income taxprovisions (benefits) for the years ended December 31, 2003, 2002 and 2001 aresummarized as follows (in thousands):

 
|                     |   | **2003**    |   | **2002**     |   | **2001**  |   |
|--------------------------|--------|-------------|--------|--------------|--------|-----------|--------|
|                     |   | **Current** |   | **Deferred** |   | **Total** |   | **Current** |   | **Deferred** |   | **Total** |   | **Current** |   | **Deferred** |   | **Total** |   |
| Continuing operations:   |   |        |   |         |   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating income         |   | $           | 1,286  |         | $      | 41,214    |   | $ | 42,500 |   | $ | 1,496 |   | $ | 27,517 |   | $ | 29,013 |   | $ | 3,483 |   | $ | 23,156 |   | $ | 26,639 |   |
| Gains on dispositions    |   | 934         |   | 2,091        |   | 3,025     |   | — |   | 2,010 |   | 2,010 |   | — |   | — |   | — |   |
|                     |   |        |   |         |   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Discontinued operations: |   |        |   |         |   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating income         |   | 289         |   | —       |   | 289       |   | — |   | (598 | ) | (598 | ) | — |   | 2,246 |   | 2,246 |   |
| Gains on dispositions    |   | —      |   | 618          |   | 618       |   | — |   | 17,938 |   | 17,938 |   | — |   | — |   | — |   |
|                     |   | $           | 2,509  |         | $      | 43,923    |   | $ | 46,432 |   | $ | 1,496 |   | $ | 46,867 |   | $ | 48,363 |   | $ | 3,483 |   | $ | 25,402 |   | $ | 28,885 |   |

 

Income tax expenseattributable to continuing operations is reconciled to the amount computed byapplying the Federal corporate tax rate as follows (in thousands):

 
|                                                                              |   | **2003** |   | **2002** |   | **2001** |   |
|-----------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                                                              |   |     |   |     |   |     |   |
| Tax at statutory rate  on earnings from continuing operations before income taxes |   | $        | 64,767 |     | $      | 58,208   |   | $ | 44,488 |   |
| Increase (decrease) in  valuation allowance, net                                  |   | (10,304  | )      | 1,284    |   | 1,613    |   |
| State income taxes, net  of Federal income tax benefit                            |   | 1,218    |   | 1,056    |   | 1,376    |   |
| Tax at statutory rate  on earnings not subject to Federal income taxes and other  |   | (10,156  | )      | (29,525  | )      | (20,838  | )      |
| Income tax expense                                                                |   | $        | 45,525 |     | $      | 31,023   |   | $ | 26,639 |   |

 

Each TRS is a taxpaying component for purposes of classifying deferred tax assets andliabilities.  At December 31, 2003, ournet deferred tax assets were $91.0 million and our net deferred tax liabilitieswere $86.4 million.  Our net deferredtax liabilities were $92.4 million at December 31, 2002.  The amounts are summarized as follows (inthousands):

 
|                                   |   | **2003** |    | **2002** |   |
|----------------------------------------|--------|----------|---------|----------|--------|
|                                   |   |     |    |     |   |
| Total deferred tax  assets             |   | $        | 184,060 |     | $      | 31,132 |   |
| Total deferred tax  liabilities        |   | (177,261 | )       | (111,010 | )      |
| Valuation allowance                    |   | (2,230   | )       | (12,534  | )      |
| Net deferred tax assets  (liabilities) |   | $        | 4,569   |     | $      | (92,412 | ) |

 

24

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The tax effects oftemporary differences and loss carryforwards included in the net deferred taxassets (liabilities) at December 31, 2003 and 2002 are summarized as follows(in thousands):

 
|                                                                                                                                               |   | **2003** |     | **2002** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|----------|----------|--------|
|                                                                                                                                               |   |     |     |     |   |
| Property, primarily  differences in depreciation and amortization, the tax basis of land assets  and treatment of interest and certain other costs |   | $        | (164,292 | )        | $      | (103,853 | ) |
| Interest deduction  carryforwards                                                                                                                  |   | 162,569  |     | 13,484   |   |
| Operating loss and tax  credit carryforwards                                                                                                       |   | 12,319   |     | 13,111   |   |
| Other                                                                                                                                              |   | (6,027   | )        | (15,154  | )      |
| Total                                                                                                                                              |   | $        | 4,569    |     | $      | (92,412 | ) |

 

In September 2003,we acquired a controlling financial interest in an entity (in which wepreviously held a minority interest acquired from Rodamco) whose assetsinclude, among other things, approximately $400 million of temporarydifferences (primarily interest deduction carryforwards).  We believe that it is more likely than notthat we will realize these assets and, accordingly, recorded a deferred taxasset of approximately $140 million.  Wealso recorded a deferred credit of approximately $122 million in accordancewith EITF Issue 98-11, “Accounting for Acquired Temporary Differences inCertain Purchase Transactions That Are Not Accounted for as BusinessCombinations.”  This deferred creditwill reduce income tax expense when the deferred tax asset is realized.

As indicatedabove, the deferred tax assets relate primarily to differences in the book andtax bases of property (particularly land assets) and to operating loss andinterest deduction carryforwards for Federal income tax purposes.  A valuation allowance has been establisheddue to the uncertainty of realizing operating loss and interest deductioncarryforwards of certain TRS.  Prior tothe third quarter of 2003, we had recorded valuation allowances related tocertain deferred tax assets  that wecould not conclude were more likely than not to be realized.  A significant portion of these assetsrelated to temporary differences, primarily net operating loss carryforwards,attributed to a TRS that is an investor in the planned community ofFairwood.  Land sales at Fairwood beganin the fourth quarter of 2001.  Based onour experience through the third quarter of 2003 and our projections tocompletion of the project, we determined that it is more likely than not thatwe will realize substantially all of these deferred tax assets.  Accordingly, in the third quarter of 2003,we eliminated $8.1 million of the valuation allowance related to these deferredtax assets.  Reversals of other valuationallowances of $3.4 million in 2003 and $1.8 million in 2002 related to certaintax credit carryforwards that we were previously unable to conclude were morelikely than not to be realized.  Basedon projections of future taxable income, management believes that it is morelikely than not that the deferred tax assets at December 31, 2003, net of thevaluation allowance, will be realized. The amount of the deferred tax assets considered realizable could bereduced in the near term, however, if estimates of future taxable income arereduced.  Deferred income taxes willbecome payable as temporary differences reverse (primarily due to thecompletion of land development projects) and TRS net operating loss carryforwardsare exhausted.

At December 31,2003, the income tax bases of our assets and liabilities were approximately$5.7 billion and $5.6 billion, respectively. The REIT net operating loss carryforward at December 31, 2003 forFederal income tax purposes aggregated approximately $208.6 million and willexpire from 2005 to 2011.  The TRS netoperating and capital loss carryforwards at December 31, 2003 for Federalincome tax purposes aggregated approximately $36.1 million and will begin toexpire in 2007.  The TRS interestdeduction carryforwards at December 31, 2003 for Federal income tax purposesaggregated approximately $464.5 million and do not expire.

 

***(11)   Other provisionsand losses, net***

 

Other provisions andlosses, net are summarized as follows (in thousands):

 
|                                                             |   | **2003** |   | **2002** |   | **2001** |   |
|------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                                             |   |     |   |     |   |     |   |
| Pension plan  curtailment loss (see note 6)                      |   | $        | 10,212 |     | $      | —   |   | $ | — |   |
| Pension plan settlement  losses (see note 6)                     |   | 10,827   |   | 8,267    |   | —   |   |
| Provision for  organizational changes and early retirement costs |   | 7,982    |   | 13,549   |   | —   |   |
| Losses on early  extinguishment of debt                          |   | 7,242    |   | 2,333    |   | 451      |   |
| Impairment provision -  MerchantWired                            |   | —   |   | 11,623   |   | —   |   |
| Gain on foreign  exchange derivatives                            |   | —   |   | (1,134   | )      | —   |   |
| Other                                                            |   | (3,750   | )      | 2,993    |   | 365      |   |
| Total                                                            |   | $        | 32,513 |     | $      | 37,631   |   | $ | 816 |   |

 

The provision fororganizational changes related primarily to costs incurred to reduce the sizeof our workforce (including executive management) in 2003 and 2002 and to ourconsolidation of the management of our Property Operations and Commercial andOffice Development divisions into a single Asset Management Group in 2002.  In connection with these changes, we adoptedvoluntary early retirement programs in which employees who met certain criteriawere eligible to participate.  The costsrelating to these organizational changes and the early retirement program,primarily severance and other benefit costs, aggregated $8.0 million in 2003and $13.5 million in 2002.  Theseamounts include $2.7 million and $8.6 million related to changes inexecutive management in 2003 and 2002, respectively.

 

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We recognized netlosses, primarily prepayment penalties and unamortized issuance costs, of $7.2million, $2.3 million and $0.5 million in 2003, 2002 and 2001, respectively,related to the extinguishment of debt not associated with discontinuedoperations prior to scheduled maturity.

MerchantWired wasan unconsolidated joint venture with other real estate companies to providebroadband telecommunication services to tenants.  In the second quarter of 2002, we and the other real estatecompanies decided to discontinue the operations of MerchantWired.  Accordingly, we recorded an impairmentprovision for the entire amount of our net investment in the venture.

A portion of thepurchase price for the acquisition of assets from Rodamco (see note 18) waspayable in euros.  In January 2002, weacquired options to purchase 601 million euros at a weighted-average per europrice of $0.8819.  These transactionswere executed to reduce our exposure to movements in currency exchange ratesbetween the date of the purchase agreement and the closing date.  The contracts were scheduled to expire inMay 2002 and had an aggregate cost of $11.3 million.  In April 2002, we sold the contracts for net proceeds of $10.2million and recognized a loss of $1.1 million. We also executed and subsequently sold a euro forward contract andrealized a gain of $2.2 million.  As ofDecember 31, 2003, we owned no foreign currency or financial instruments thatexposed us to risk of movements in currency exchange rates.

In 2003, we earneda fee of $4.0 million on the facilitation of a real estate transaction betweentwo parties that are unrelated to us.

In 2002, we agreedto pay $3.0 million of costs incurred by an entity that sold us a portfolio ofoffice and industrial buildings in 1998 to resolve certain tax-related mattersarising from the transaction.

 

***(12) Impairment losses on operating properties reported in continuingoperations***

 

In 2003, we recognized animpairment loss of $6.5 million on Westdale Mall, a retail center in CedarRapids, Iowa.  We also recognizedimpairment losses aggregating $1.4 million on two office properties in HuntValley, Maryland.  In 2001, we recognizedan additional impairment loss ($0.4 million) on our investment in a retailcenter (Randhurst) that we and the other venturer intend to dispose.  We changed our plans and intentions as tothe manner in which these properties would be operated in the future andrevised estimates of the most likely holding periods.  As a result, we evaluated the recoverability of the carryingamounts of the properties, determined that the carrying amounts were notrecoverable from the future cash flows and recognized the impairment losses.

 

***(13)   Net gains(losses) on dispositions of interests in operating properties***

 

Net gains (losses) ondispositions of interests in operating properties included in earnings fromcontinuing operations are summarized as follows (in thousands):

 
|                    |   | **2003** |   | **2002** |   | **2001** |   |
|-------------------------|--------|----------|--------|----------|--------|----------|--------|
|                    |   |     |   |     |   |     |   |
| Regional retail centers |   | $        | 21,561 |     | $      | 42,582   |   | $ | — |   |
| Community retail center |   | —   |   | 4,316    |   | —   |   |
| Other                   |   | 5,071    |   | 2,048    |   | (58      | )      |
| Total                   |   | $        | 26,632 |     | $      | 48,946   |   | $ | (58 | ) |

 

In 2003, in atransaction related to the sale of retail centers in the Philadelphiametropolitan area (see note 2), we acquired Christiana Mall from a partyrelated to the purchaser and assumed a participating mortgage secured byChristiana Mall.  The participatingmortgage had a fair value of $160.9 million. The holder of this mortgage had the right to receive $120 million incash and participation in cash flows and the right to convert thisparticipation feature into a 50% equity interest in Christiana Mall.  The holder exercised this right in June2003.  We recorded a portion of the costof Christiana Mall based on the historical cost of the properties we exchangedto acquire this property because a portion of the transaction was considerednonmonetary under EITF Issue 01-2, “Interpretations of APB Opinion No.29.”  As a consequence, when we subsequentlydisposed of the 50% interest in the property, we recognized a gain of $21.6million.

Also in 2003, wesold our investment in Kravco Investments, L.P. for approximately $52million.  We recorded a gain on thistransaction of approximately $4.6 million, net of taxes of approximately $3.0million.

In April 2002, wesold our interests in 12 community retail centers (see note 2). Our interestsin one of the community retail centers were reported in unconsolidated realestate ventures and the gain on the sale of our interests in this property($4.3 million, net of deferred income taxes of $2.0 million) is included incontinuing operations.  The remaininggain on this transaction is classified as a component of discontinuedoperations. In April 2002, we sold our interest in Franklin Park, a regionalretail center in Toledo, Ohio, for $20.5 million and the buyer assumed ourshare of the center’s debt ($44.7 million). Our interest in this property was reported in unconsolidated real estateventures and, accordingly, the gain of $42.6 million that we recorded onthis transaction is included in continuing operations.

 

26

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***(14)   Preferred stock***

 

We have authorized50,000,000 shares of Preferred stock of 1¢ par value per share of which, atDecember 31, 2003 (a) 4,505,168 shares were classified as Series A ConvertiblePreferred; (b) 4,600,000 shares were classified as Series B ConvertiblePreferred; (c) 10,000,000 shares were classified as Increasing Rate CumulativePreferred; and (d) 37,362 shares were classified as 10.25% Junior Preferred,Series 1996.

The shares ofSeries B Convertible Preferred stock have a liquidation preference of $50 pershare and earn dividends at an annual rate of 6% of the liquidationpreference.  At the option of theholders, each share of the Series B Convertible Preferred stock is convertibleinto shares of our common stock at a conversion price of $38.125 per share(equivalent to a conversion rate of approximately 1.311 shares of common stockfor each share of Preferred stock).  Theconversion price is subject to adjustment in certain circumstances such asstock dividends, stock splits, rights offerings, mergers and similartransactions.  In addition, these sharesof Preferred stock are redeemable for shares of common stock at our option,subject to certain conditions related to the market price of our commonstock.  There were 4,047,555 shares and4,050,000 shares of Preferred stock issued and outstanding at December 31, 2003and 2002, respectively. On January 7, 2004, we called for the redemption of alloutstanding shares of the Series B Convertible Preferred stock pursuant to theterms of its issuance and established February 10, 2004 as the redemptiondate.  In January and February 2004, weissued 5,306,797 shares of common stock upon conversion or redemption of all ofthe outstanding shares of Series B Convertible Preferred stock.

Shares of theIncreasing Rate Cumulative Preferred stock are issuable only to former Hughesowners or their successors pursuant to the Contingent Stock Agreement describedin note 15.  These shares are issuableonly in limited circumstances and no shares have been issued.  There were no shares of the Series AConvertible Preferred stock or 10.25% Junior Preferred stock, Series 1996,outstanding at December 31, 2003 and 2002. In February 2004, our Board of Directors adopted resolutions rescindingthe classification of the Series A Convertible Preferred Stock, the Series BConvertible Preferred Stock and the 10.25% Junior Preferred Stock.

 

***(15)   Common stock***

 

At December 31, 2003,shares of authorized and unissued common stock are reserved as follows:  (a) 9,692,408 shares for issuance under theContingent Stock Agreement discussed below; (b) 10,800,024 shares for issuanceunder our stock option and stock bonus plans and (c) 5,306,797 shares forconversion of the Series B Convertible Preferred stock.

In connection withthe acquisition of The Hughes Corporation (“Hughes”) in 1996, we entered into aContingent Stock Agreement (“Agreement”) for the benefit of the former Hughesowners or their successors (“beneficiaries”). Under terms of the Agreement, additional shares of common stock (or incertain circumstances, Increasing Rate Cumulative Preferred stock) are issuableto the beneficiaries based on the appraised values of four defined groups ofacquired assets at specified “termination dates” to 2009 and/or cash flowsgenerated from the development and/or sale of those assets prior to thetermination dates (“earnout periods”). The distributions of additional shares, based on cash flows, aredetermined and payable semiannually as of June 30 and December 31.  At December 31, 2003, approximately 333,000shares ($15.3 million) were issuable to the beneficiaries, representing theirshare of cash flows for the semiannual period ended December 31, 2003.

The Agreement is,in substance, an arrangement under which we and the beneficiaries will share incash flows from development and/or sale of the defined assets during theirrespective earnout periods, and we will issue additional shares of common stockto the beneficiaries based on the value, if any, of the defined asset groups atthe termination dates.  We account forthe beneficiaries’ shares of earnings from the assets subject to the agreementas an operating expense. We account for any distributions to the beneficiariesas of the termination dates related to assets we own as of the terminationdates as additional investments in the related assets (i.e., contingentconsideration).  At the time ofacquisition of Hughes, we reserved 20,000,000 shares of common stock forpossible issuance under the Agreement. The number of shares reserved was determined based on estimates inaccordance with the provisions of the Agreement.  The actual number of shares issuable will be determined only fromevents occurring over the term of the Agreement and could differ significantlyfrom the number of shares reserved.  Allshares of common stock repurchased in 2003, 2002 and 2001 were subsequentlyissued pursuant to the Contingent Stock Agreement.

In 1999, our Boardof Directors authorized the repurchase of common shares for up to $250 million,subject to certain pricing restrictions. No shares were repurchased under this program in 2003, 2002 or 2001.

In January andFebruary 2002, we issued 16.675 million shares of common stock for net proceedsof $456.3 million ($27.40 per share less issuance costs) under our effectiveshelf registration statement.  We usedthe proceeds of the stock issuance to repay property and other debt and to funda portion of the purchase price of the acquisition of the assets of Rodamco(see note 18).

Under our stockoption plans, options to purchase shares of common stock and stock appreciationrights may be awarded to our directors, officers and employees.  Stock options are generally granted with anexercise price equal to the market price of the common stock on the date ofgrant, typically vest over a three- to five-year period, subject to certainconditions, and have a maximum term of ten years.  We have not granted any stock appreciation rights.  Changes in options outstanding under theplans are summarized as follows:

 

27

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|                         |   | **2003**   |   | **2002**                                |   | **2001**   |       |
|------------------------------|--------|------------|--------|-----------------------------------------|--------|------------|------------|
|                         |   | **Shares** |   | **Weighted-  average  Exercise  Price** |   | **Shares** |       | **Weighted-  average  Exercise  Price** |   | **Shares** |   | **Weighted-  average  Exercise  Price** |   |
|                         |   |       |   |                                    |   |       |       |   |   |   |   |   |   |
| Balance at beginning of year |   | 10,124,004 |   | $                                       | 26.72  |       | 8,813,085  |   | $ | 25.58 |   | 7,841,881 |   | $ | 24.78 |   |
| Options granted              |   | 2,941,137  |   | 32.53                                   |   | 2,769,932  |       | 29.14 |   | 2,370,888 |   | 25.97 |   |
| Options exercised            |   | (6,191,184 | )      | 27.32                                   |   | (1,307,854 | )          | 24.06 |   | (1,296,434 | ) | 21.64 |   |
| Options expired or cancelled |   | (55,861    | )      | 27.40                                   |   | (151,159   | )          | 27.32 |   | (103,250 | ) | 23.15 |   |
| Balance at end of year       |   | 6,818,096  |   | $                                       | 30.10  |       | 10,124,004 |   | $ | 26.72 |   | 8,813,085 |   | $ | 25.58 |   |

 

Information aboutstock options outstanding at December 31, 2003 is summarized as follows:

 
| **Options Outstanding**        |   | **Options Exercisable** |   |
|--------------------------------|--------|-------------------------|--------|
| **Range of  Exercise  Prices** |   | **Shares**              |   | **Weighted-  average  Remaining  Life (Years)** |   | **Weighted-  average  Exercise  Price** |   | **Shares** |   | **Weighted-  average  Exercise  Price** |   |
| $18.00-26.50                   |   | 2,066,374               |   | 6.2 |   | $ | 23.26 |   | 582,072 |   | $ | 22.37 |   |
| $26.51-39.70                   |   | 4,006,709               |   | 7.5 |   | 30.97 |   | 1,309,554 |   | 31.38 |   |
| $39.71-47.00                   |   | 745,013                 |   | 4.8 |   | 44.40 |   | 745,013 |   | 44.40 |   |
|                           |   | 6,818,096               |   | 6.8 |   | $ | 30.10 |   | 2,636,639 |   | $ | 33.07 |   |

 

At December 31,2002 and 2001, options to purchase 4,767,166 and 3,728,711 shares,respectively, were exercisable at per share weighted-average prices of $27.68and $26.95, respectively.

The option priceswere greater than or equal to the market prices at the date of grant for all ofthe options granted in 2003, 2002 and 2001 and, because we use the intrinsicvalue-based method of accounting for stock options, no compensation cost hasbeen recognized for stock options granted to our directors, officers andemployees.  Expense recognized for stockoptions granted to employees of our unconsolidated ventures was insignificant.

Under our stockbonus plans, shares of common stock may be awarded to our directors, officersand employees.  Shares awarded under theplans are typically subject to forfeiture restrictions which lapse at definedannual rates. Awards granted in 2003, 2002 and 2001 aggregated 145,800 shares,146,950 shares and 266,850 shares, respectively, with a weighted-average marketvalue per share of $32.64, $28.14 and $24.84, respectively.  In connection with certain stock bonus planawards, we made loans (when permissible) to the recipients for the payment ofrelated income taxes, which loans were forgiven (when permissible) subject tothe recipients’ continued employment. The total loans outstanding at December 31, 2002 and 2001 were $0.1million and $0.5 million, respectively. There were no such loans outstanding at December 31, 2003.  We recognize amortization of the fair valueof the stock awarded and any forgiven loans as compensation costs on astraight-line basis over the terms of the awards.  Such costs amounted to $6.3 million in 2003, $5.5 million in 2002and $3.2 million in 2001.

The tax status ofdividends per share of common stock was as follows:

 
|                                   |   | **2003** |   | **2002** |   | **2001** |   |
|----------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                   |   |     |   |     |   |     |   |
| Ordinary income                        |   | $        | 0.50   |     | $      | 1.56     |   | $ | 1.27 |   |
| Qualified dividend income-15% tax rate |   | 0.64     |   | —   |   | —   |   |
| Return of capital                      |   | 0.54     |   | —   |   | 0.15     |   |
| Total                                  |   | $        | 1.68   |     | $      | 1.56     |   | $ | 1.42 |   |

 

28

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***(16)   Earnings pershare***

 

Information relating tothe calculations of earnings per share (“EPS”) of common stock is summarized asfollows (in thousands):

 
|                                                      |   | **2003**  |    | **2002**    |   | **2001**  |   |
|-----------------------------------------------------------|--------|-----------|---------|-------------|--------|-----------|--------|
|                                                      |   | **Basic** |    | **Diluted** |   | **Basic** |   | **Diluted** |   | **Basic** |   | **Diluted** |   |
|                                                      |   |      |    |        |   |      |   |   |   |   |   |   |   |
| Earnings from continuing operations                       |   | $         | 139,523 |        | $      | 139,523   |   | $ | 135,294 |   | $ | 135,294 |   | $ | 100,411 |   | $ | 100,411 |   |
| Dividends on unvested common stock awards and other       |   | (660      | )       | (660        | )      | (860      | )      | (860 | ) | (679 | ) | (679 | ) |
| Dividends on Series B Convertible Preferred stock         |   | (12,150   | )       | (12,150     | )      | (12,150   | )      | (12,150 | ) | (12,150 | ) | (12,150 | ) |
| Adjusted earnings from continuing operations              |   | $         | 126,713 |        | $      | 126,713   |   | $ | 122,284 |   | $ | 122,284 |   | $ | 87,582 |   | $ | 87,582 |   |
|                                                      |   |      |    |        |   |      |   |   |   |   |   |   |   |
| Weighted average shares outstanding                       |   | 88,453    |    | 88,453      |   | 84,954    |   | 84,954 |   | 68,637 |   | 68,637 |   |
| Dilutive securities:                                      |   |      |    |        |   |      |   |   |   |   |   |   |   |
| Options, unvested common stock awards and other           |   | —    |    | 2,155       |   | —    |   | 1,492 |   | — |   | 932 |   |
| Adjusted weighted-average shares used in EPS  computation |   | 88,453    |    | 90,608      |   | 84,954    |   | 86,446 |   | 68,637 |   | 69,569 |   |

 

Effects ofpotentially dilutive securities are presented only in periods in which they aredilutive.

 

29

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***(17)   Leases***

 

We, as lessee, haveentered into operating leases, primarily for land at operating properties,expiring at various dates through 2076. Rents under such leases at properties included in continuing operationsand discontinued operations aggregated $7.5 million in 2003, $8.6 million in2002 and $8.8 million in 2001, including contingent rents, based on theoperating performance of the related properties, of $1.5 million, $2.2 millionand $2.5 million, respectively.  Inaddition, we are responsible for real estate taxes, insurance and maintenanceexpenses.  Minimum rent payments dueunder operating leases in effect at properties included in continuingoperations at December 31, 2003 are summarized as follows (in thousands):

 

| 2004               |   | $       | 4,960   |   |
|--------------------|--------|---------|---------|--------|
| 2005               |   | 4,960   |    |
| 2006               |   | 4,960   |    |
| 2007               |   | 4,960   |    |
| 2008               |   | 4,960   |    |
| Subsequent to 2008 |   | 177,139 |    |
| Total              |   | $       | 201,939 |   |

 

We lease space inour operating properties to tenants primarily under operating leases.  In addition to minimum rents, the majorityof the retail center leases provide for percentage rents when the tenants’sales volumes exceed stated amounts, and the majority of the retail center andoffice leases provide for other rents which reimburse us for certain of ouroperating expenses.  Rents from tenantsat properties included in earnings from continuing operations are summarized asfollows (in thousands):

 

|                                                         |   | **2003** |    | **2002** |   | **2001** |   |
|--------------------------------------------------------------|--------|----------|---------|----------|--------|----------|--------|
|                                                         |   |     |    |     |   |     |   |
| Minimum rents                                                |   | $        | 502,598 |     | $      | 436,600  |   | $ | 355,276 |   |
| Percentage rents                                             |   | 9,276    |    | 9,521    |   | 7,589    |   |
| Other rents, primarily reimbursements of operating  expenses |   | 253,767  |    | 209,877  |   | 162,372  |   |
| Total                                                        |   | $        | 765,641 |     | $      | 655,998  |   | $ | 525,237 |   |

 

Minimum rents tobe received from tenants under operating leases in effect at propertiesincluded in continuing operations at December 31, 2003 are summarized asfollows (in thousands):

 

| 2004               |   | $       | 487,613   |   |
|--------------------|--------|---------|-----------|--------|
| 2005               |   | 435,128 |      |
| 2006               |   | 380,925 |      |
| 2007               |   | 330,597 |      |
| 2008               |   | 274,469 |      |
| Subsequent to 2008 |   | 798,132 |      |
| Total              |   | $       | 2,706,864 |   |

 

Rents underfinance leases aggregated $8.7 million in 2003, 2002 and 2001.  The net investment in finance leases atDecember 31, 2003 and 2002 is summarized as follows (in thousands):

 

|                                                         |   | **2003** |   | **2002** |   |
|--------------------------------------------------------------|--------|----------|--------|----------|--------|
|                                                         |   |     |   |     |   |
| Total minimum rent  payments to be received over lease terms |   | $        | 94,378 |     | $      | 103,113 |   |
| Estimated residual  values of leased properties              |   | 788      |   | 788      |   |
| Unearned income                                              |   | (33,557  | )      | (38,857  | )      |
| Net investment in  finance leases                            |   | $        | 61,609 |     | $      | 65,044 |   |

 

Minimum rentpayments to be received from tenants under finance leases in effect at December31, 2003 are summarized as follows (in thousands):

 

| 2004               |   | $      | 8,931  |   |
|--------------------|--------|--------|--------|--------|
| 2005               |   | 8,970  |   |
| 2006               |   | 8,472  |   |
| 2007               |   | 8,444  |   |
| 2008               |   | 8,444  |   |
| Subsequent to 2008 |   | 51,117 |   |
| Total              |   | $      | 94,378 |   |

 

30

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***(18)   Acquisition ofassets from Rodamco***

 

In January 2002, we,Simon Property Group, Inc. (“Simon”) and Westfield America Trust (“Westfield”)announced that affiliates of each (collectively, the “Purchasers”) entered intoa Purchase Agreement with Rodamco North America N.V. (“Rodamco”) to purchasesubstantially all of the assets of Rodamco for an aggregate purchase price of approximately2.48 billion euros and the assumption of substantially all of Rodamco’sliabilities.  In connection with thePurchase Agreement, affiliates of the Purchasers entered into a Joint PurchaseAgreement that specified the assets each would acquire and set forth the basisupon which the portion of the aggregate purchase price to be paid to Rodamco byeach Purchaser would be determined.  OnMay 3, 2002, the purchase closed.

The primary assetswe acquired include direct or indirect ownership interests in eight regionalretail centers, leased primarily to national retailers, which we intend tocontinue to operate, and are described below:

*** ***
| **Property**                   |   | **Interest   Acquired  (%)** |   | **Leasable  Mall  Square Feet** |   | **Department  Store  Square Feet** |   | **Location**          |   |
|--------------------------------|--------|------------------------------|--------|---------------------------------|--------|------------------------------------|--------|-----------------------|--------|
| Collin Creek (1)               |   | 70                           |   | 331,000                         |   | 790,000                            |   | Plano, TX             |   |
| Lakeside Mall                  |   | 100                          |   | 516,000                         |   | 961,000                            |   | Sterling  Heights, MI |   |
| North Star (2)                 |   | 96                           |   | 435,000                         |   | 816,000                            |   | San Antonio, TX       |   |
| Oakbrook Center (4)            |   | 47                           |   | 842,000                         |   | 1,425,000                          |   | Oakbrook, IL          |   |
| Perimeter Mall (1), (5)        |   | 50                           |   | 502,000                         |   | 779,000                            |   | Atlanta, GA           |   |
| The Streets at South Point (3) |   | 94                           |   | 590,000                         |   | 730,000                            |   | Durham, NC            |   |
| Water Tower Place (4)          |   | 52                           |   | 310,000                         |   | 510,000                            |   | Chicago, IL           |   |
| Willowbrook (1)                |   | 62                           |   | 500,000                         |   | 1,028,000                          |   | Wayne, NJ             |   |

 

Notes:

 

(1)          Propertieswere owned by existing joint ventures or through tenancies in common betweenRodamco and us.  As a result, we owned100% interests in these properties upon acquisition.

(2)          In2000, we transferred a 33.95% ownership interest in North Star to our jointventure partner (an affiliate of Rodamco) and retained a 3.55% ownershipinterest in the property.  We alsorelinquished our rights to jointly control the operation of the property andterminated our property management agreement. We received a cash distribution of approximately $82.5 million in thistransaction.  We accounted for thistransaction as a partial sale of real estate. Accordingly, we realized a gain for the difference between the salesvalue and the proportionate cost (90.5%) of the partial interest sold.  We deferred recognition of this gain due toour continuing involvement with the venture related to our guarantee of up to$25 million of its debt obligations.  Weallocated the cost of the acquisition of Rodamco to the acquired assets(including acquired interests in North Star) and liabilities assumed based ontheir estimated fair values at the time of acquisition.  As a result, the $25 million deferred gainwas recorded as a reduction in our investment in North Star.

(3)          Propertybegan operations in March 2002.

(4)          Propertyalso contains significant office space.

(5)          InOctober 2002, we contributed our ownership interest in Perimeter Mall to ajoint venture in exchange for a 50% interest in that joint venture and acash distribution of $67.1 million.

 

Other primaryassets we acquired include a 100% interest in a parcel of land and building atCollin Creek that is leased to Dillard’s department store and a 99%noncontrolling limited partnership interest in an entity that leased land fromus to redevelop a portion of Fashion Show (a retail center in Las Vegas,Nevada).  The first phase of theredevelopment project opened in November 2002. A subsidiary of a trust, of which certain employees are beneficiaries(an entity that we neither own nor control), owned the controlling interest inthe limited partnership.  Prior toopening, we acquired the controlling interest for $0.1 million.  In connection with the acquisition, we consolidatedthe accounts of the limited partnership, including $100.8 million of propertydebt.

The Purchasersalso jointly acquired interests in several other assets.  Our share of these jointly held assets is27.285%.  These assets included:

 

•                  A40% interest in River Ridge, a retail center in Lynchburg, VA, that thepurchasers disposed of in July 2003;

•                  SawmillPlace Plaza, a retail center in Columbus, OH, that was sold by the Purchaserson November 15, 2002;

•                  A50% interest in Durham Associates, a partnership that owned and operated SouthSquare Mall, a regional shopping center in Durham, NC that was subject to acontract of sale at the closing date and was sold by the Purchasers on August2, 2002;

•                  A59.17% interest in Kravco Investments, L.P., a limited partnership that ownsinvestments in retail centers, primarily in the greater Philadelphia area.  We sold our share of the interest in KravcoInvestments, L.P. to Simon in December 2003;

•                  UrbanRetail Properties Co., a property management company that manages propertiesowned by others;

•                  Purchasemoney notes receivable that arose from the sales of other assets by Rodamco;and

•                  A50% interest in Westin New York, a hotel in New York City that began operationsin October 2002.

 

31

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The allocation ofthe purchase cost is summarized as follows (in thousands):

 

| Property and property-related deferred costs                         |   | $         | 1,156,129 |   |
|----------------------------------------------------------------------|--------|-----------|-----------|--------|
| Properties in development                                            |   | 2,059     |      |
| Investments in and advances to unconsolidated real  estate ventures  |   | 248,928   |      |
| Prepaid expenses, receivables under finance leases and  other assets |   | 79,078    |      |
| Accounts and notes receivable                                        |   | 1,998     |      |
| Total assets                                                         |   | 1,488,192 |      |
| Less-Debt and other liabilities                                      |   | 672,903   |      |
| Cash required                                                        |   | $         | 815,289   |   |

 

We paidapproximately 605 million euros (approximately $546 million based on exchangerates then in effect) to Rodamco at closing. We also paid approximately $269 million to retire some of theobligations of Rodamco and to pay our share of transaction costs.  Our share of the purchase price was based onthe allocated prices of the properties that we acquired, directly orindirectly, our share of the jointly held assets and our share of Rodamco’sobligations retired and the transaction expenses.  The aggregate purchase price was determined as a result ofnegotiations between Rodamco and the Purchasers; our portion of the aggregatepurchase price was determined as a result of negotiations among the Purchasers.

Funds for paymentof our portion of the purchase price were provided as follows (in thousands):

 

| Sale of Columbia community retail centers              |   | $       | 111,120 |   |
|--------------------------------------------------------|--------|---------|---------|--------|
| Sale of interest in Franklin Park                      |   | 20,500  |    |
| Issuance of common stock in January and February  2002 |   | 279,347 |    |
| Borrowings under bridge loan facility                  |   | 392,500 |    |
| Cash on hand                                           |   | 11,822  |    |
| Cash required                                          |   | $       | 815,289 |   |

 

In connection withthe purchase, we borrowed $392.5 million under a bridge loan facility providedby Banc of America Securities LLC and Banc of America Mortgage CapitalCorporation.  The facility provided forno additional availability and had an initial maturity of November 2002 whichwas extended to May 2003.  We repaidapproximately $220.4 million of the bridge loan facility with a portion of theproceeds from the issuance of the 7.20% Notes in September 2002 (see note 7).  Additionally, in October 2002, werepaid $111.2 million of the facility with the distribution proceeds from twounconsolidated real estate ventures (see note 2).  In November and December 2002, we repaid the remaining borrowingsunder the facility using proceeds from borrowings under our revolving creditfacility.

 

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The consolidatedstatement of operations for the year ended December 31, 2002 includes revenuesand costs and expenses of the assets acquired from Rodamco from the date ofacquisition.  We prepared pro formaconsolidated results of operations for the years ended December 31, 2002 and2001, assuming the acquisition of assets from Rodamco and the sales of assetsused to fund a portion of the cash requirement of the acquisition occurred onJanuary 1, 2001.  The net gains relatedto these sales of assets are excluded from the pro forma results.  The unaudited pro forma results aresummarized as follows (in thousands, except per share data):

 

|                                                                                                                                                                       |   | **2002** |      | **2001** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|-----------|----------|--------|
|                                                                                                                                                                       |   |     |      |     |   |
| Revenues                                                                                                                                                                   |   | $        | 1,005,534 |     | $      | 947,586 |   |
| Equity in earnings of unconsolidated real  estate ventures                                                                                                                 |   | 32,995   |      | 35,073   |   |
| Earnings before net gains (losses) on  dispositions of interests in operating properties, discontinued operations  and cumulative effect of change in accounting principle |   | 96,310   |      | 122,886  |   |
| Net earnings                                                                                                                                                               |   | 77,438   |      | 130,890  |   |
|                                                                                                                                                                       |   |     |      |     |   |
| Earnings per share of common stock                                                                                                                                         |   |     |      |     |   |
| Basic:                                                                                                                                                                     |   |     |      |     |   |
| Continuing operations                                                                                                                                                      |   | $        | 1.00      |     | $      | 1.37 |   |
| Discontinued operations                                                                                                                                                    |   | (.25     | )    | .13      |   |
| Cumulative effect of change in accounting  principle                                                                                                                       |   | —   |      | (.01     | )      |
| Net earnings                                                                                                                                                               |   | $        | .75       |     | $      | 1.49 |   |
|                                                                                                                                                                       |   |     |      |     |   |
| Diluted:                                                                                                                                                                   |   |     |      |     |   |
| Continuing operations                                                                                                                                                      |   | $        | .99       |     | $      | 1.35 |   |
| Discontinued operations                                                                                                                                                    |   | (.25     | )    | .13      |   |
| Cumulative effect of change in accounting  principle                                                                                                                       |   | —   |      | (.01     | )      |
| Net earnings                                                                                                                                                               |   | $        | .74       |     | $      | 1.47 |   |

 

The pro formarevenues, equity in earnings of unconsolidated real estate ventures and netearnings summarized above are not necessarily indicative of the results thatwould have occurred if the acquisition and sales had been consummated atJanuary 1, 2001 or of future results of operations.

 

***(19)   Othercommitments and contingencies***

 

Other commitments andcontingencies (that are not reflected in the consolidated balance sheet) atDecember 31, 2003 are summarized as follows (in millions):

 

| Guarantee of debt of unconsolidated real estate ventures:                                           |   |   |   |
|-----------------------------------------------------------------------------------------------------|--------|--------|--------|
| Village of Merrick Park                                                                             |   | $      | 100.0  |   |
| Hughes Airport-Cheyenne Centers                                                                     |   | 28.8   |   |
| Construction contracts for properties in  development:                                              |   |   |   |
| Consolidated subsidiaries, primarily related to  Fashion Show and The Shops at  La  Cantera    |   | 103.1  |   |
| Our share of unconsolidated real estate ventures,  primarily related to the Village of Merrick Park |   | 9.5    |   |
| Contract to purchase an interest in Mizner Park                                                     |   | 18.0   |   |
| Construction and purchase contracts for land  development                                           |   | 83.1   |   |
| Our share of long-term ground lease obligations of  unconsolidated real estate ventures             |   | 121.1  |   |
| Bank letters of credit and other                                                                    |   | 14.9   |   |
|                                                                                                |   | $      | 478.5  |   |

 

We previouslyguaranteed the repayment of a construction loan of the unconsolidated realestate venture that owns the Village of Merrick Park.  In October 2003, the venture repaid this loan with proceeds froma $194 million mortgage loan.  We haveguaranteed $100 million of the mortgage loan. The amount of the guarantee may be reduced or eliminated upon theachievement of certain lender requirements. The fair value of the guarantee is not material.  Additionally, venture partners have providedguarantees to us for their share (60%) of the loan guarantee.

At December 31,2003, we had a shelf registration statement for the future sale of up to anaggregate of $680 million (based on the public offering price) of common stock,Preferred stock and debt securities. Securities may be issued pursuant to this registration statement inamounts and on terms to be determined at the time of offering.

 

33

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We and certain ofour subsidiaries are defendants in various litigation matters arising in theordinary course of business, some of which involve claims for damages that aresubstantial in amount.  Some of theselitigation matters are covered by insurance. We are also aware of claims arising from disputes in the ordinary courseof business.  We record provisions forlitigation matters and other claims when we believe a loss is probable and canbe reasonably estimated.  At December31, 2003, recorded aggregate liabilities related to these claims were notsignificant.  We further believe thatany losses we may suffer for litigation and other claims in excess of therecorded aggregate liabilities are not material.  Accordingly, in our opinion, adequate provision has been made forlosses with respect to litigation matters and other claims, and the ultimateresolution of these matters is not likely to have a material effect on ourconsolidated financial position or results of operations.  Our assessment of the potential outcomes ofthese matters involves significant judgment and is subject to change based onfuture developments.

 

***(20)   Subsequentevents***

 

In January 2004, weacquired our partners’ interests in entities developing Fairwood forapproximately $32 million.

In January andFebruary of 2004, we disposed of most of our remaining assets at Hughes Centerfor approximately $172 million and recognized gains, net of taxes, ofapproximately $39.5 million.

In January 2004,we acquired a 50% interest in additional office components at Mizner Park forapproximately $18 million.

In January andFebruary 2004, we redeemed, or called for redemption, all remaining outstandingParent Company-obligated mandatorily redeemable preferred securities (see note8).

In January andFebruary 2004, we redeemed all outstanding shares of Series B ConvertiblePreferred Stock (see note 14).

In February 2004,we adopted a plan to terminate our funded and supplemental defined benefitpension plans (see note 6).

On February 9,2004, we issued, in a public offering, 4.0 million shares of common stock forproceeds of approximately $193.2 million ($48.30 per share).  We also granted to the underwriter an optionto purchase 0.6 million shares of common stock to cover over-allotments.  The underwriter exercised this option, andwe issued 0.6 million shares on February 23, 2004 for proceeds of approximately$29.0 million ($48.30 per share).  Theoffering was made under our effective shelf registration statement.  After issuance of these shares of commonstock, availability under our effective shelf registration statement wasapproximately $457 million.

In February 2004,we agreed to purchase Providence Place, a regional retail center in Providence,Rhode Island.  We expect to assumemortgage debt with a face value of approximately $240 million and a payment inlieu of real estate taxes loan of approximately $47 million and to pay$270 million to the seller, using the proceeds of the common stock offeringdiscussed above and borrowings under our revolving credit facility.  We expect this transaction to close in March2004.

 

***(21)   New financialaccounting standards***

 

In June 2002, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards No. 146, “Accounting for Costs Associated with Exit orDisposal Activities” (“SFAS 146”).  SFAS146 addresses financial accounting and reporting for costs associated with exitor disposal activities and requires that a liability for a cost associated withan exit or disposal activity be recognized when the liability is incurred.  The provisions of SFAS 146 are effective forexit or disposal activities initiated after December 31, 2002.  Our adoption of SFAS 146 in January 2003 didnot have a material effect on our results of operations or financial condition.

In November 2002,the FASB issued Interpretation No. 45, “Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers” (“FIN 45”).  FIN 45 elaborateson the disclosures required by a guarantor in its interim and annual financialstatements about obligations under certain guarantees that it has issued.  It also clarifies that a guarantor isrequired to recognize liabilities for the fair values of obligations undertakenin guarantees issued or modified after December 31, 2002.  As of December 31, 2003, we had not enteredinto guarantees since January 1, 2003 that have had a material effect on ourbalance sheet, and the adoption of FIN 45 did not have a material effect on ourfinancial position or results of operations.

In December 2002,the FASB issued Statement of Financial Accounting Standards No. 148,“Accounting for Stock-Based Compensation – Transition and Disclosure” (“SFAS148”).  SFAS 148 amends Statement ofFinancial Accounting Standards No. 123, “Accounting for Stock-BasedCompensation” (“SFAS 123”).  SFAS 148provides alternative methods of transition for a voluntary change to the fairvalue-based method of accounting for stock-based compensation and requiresdisclosure in both annual and interim financial statements about the method ofaccounting for stock-based compensation and the effect of the method used onreported results.  We have adopted thedisclosure provisions of SFAS 148.  Wehave not determined whether we will change to the fair value-based method ofaccounting for stock-based compensation and, if so, which of the alternativemethods of transition we would adopt.

 

34

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In January 2003,the FASB issued Interpretation No. 46, “Consolidation of Variable InterestEntities” (“FIN 46”).  FIN 46 addressesthe consolidation of variable interest entities (“VIEs”) in which the equityinvestors lack one or more of the essential characteristics of a controllingfinancial interest or where the equity investment at risk is not sufficient forthe entity to finance its activities without additional subordinated financialsupport.  In December 2003, the FASBissued Interpretation No. 46 (revised December 2003), “Consolidation ofVariable Interest Entities” (“FIN 46R”). FIN 46R or FIN 46 applies in the fourth quarter of 2003 to all specialpurpose entities (“SPEs”) and to VIEs formed after January 31, 2003 and in thefirst quarter of 2004 to all other VIEs. Application of FIN 46 in 2003 had no effect on our financial statementsas we previously consolidated the SPE that issued our Parent Company-obligatedmandatorily redeemable preferred securities and, at December 31, 2003, held nointerests in other VIEs formed after January 31, 2003.  Based on our preliminary analysis, we do notanticipate that full application of FIN 46R in the first quarter of 2004 willhave a material effect on our results of operations or financial condition.

In April 2003, theFASB issued Statement of Financial Accounting Standards No. 149, “Amendment ofStatement 133 on Derivative Instruments and Hedging Activities” (“SFAS149”).  SFAS 149 was effective forcontracts entered into or modified after June 30, 2003.  Implementation had no effect on our reportedresults of operations or financial position.

In May 2003,the FASB issued Statement of Financial Accounting Standards No. 150,  “Accounting for Certain FinancialInstruments with Characteristics of both Liabilities and Equity” (“SFAS150”).  SFAS 150 establishes standardsfor the classification and measurement of certain financial instruments withcharacteristics of both liabilities and equity.  It requires that an issuer classify a financial instrument thatis within its scope as a liability (or an asset in some circumstances).  In particular, it requires that mandatorilyredeemable financial instruments be classified as liabilities and reported at fairvalue and that changes in their fair values be reported as interest cost.  SFAS 150 was effective for us as of July 1,2003.  On October 29, 2003, the FASBindefinitely delayed the provision of the statement related to non-controllinginterests in consolidated limited-life entities formed prior to November 5,2003.  Based on the FASB’s deferral ofthis provision, adoption of SFAS 150 did not affect our financialstatements.  We determined that severalof our consolidated partnerships are limited-life entities.  We estimate the fair values of minorityinterests in these partnerships at December 31, 2003 aggregated approximately$56.6 million.  The aggregate carryingvalues of the minority interests were approximately $28.5 million at December31, 2003.

 

35

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**FiveYear Comparison of Selected Financial Data (Notes 1, 2, 3 and 4)**

Years endedDecember 31, (in thousands, except per share data)

 
|                                                                                                          |   | **2003**  |      | **2002**  |   | **2001**  |   | **2000**  |    | **1999**  |   |
|---------------------------------------------------------------------------------------------------------------|--------|-----------|-----------|-----------|--------|-----------|--------|-----------|---------|-----------|--------|
|                                                                                                          |   |      |      |      |   |      |   |      |    |      |   |
| Operating results data:                                                                                       |   |      |      |      |   |      |   |      |    |      |   |
| Revenues from continuing operations                                                                           |   | $         | 1,104,866 |      | $      | 949,228   |   | $         | 801,950 |      | $      | 498,218 |   | $ | 505,254 |   |
| Earnings from continuing operations                                                                           |   | 139,523   |      | 135,294   |   | 100,411   |   | 171,663   |    | 150,785   |   |
| Basic earnings from continuing operations applicable  to common shareholders per  share of  common stock |   | 1.43      |      | 1.44      |   | 1.28      |   | 2.29      |    | 1.93      |   |
| Diluted earnings from continuing operations  applicable to common shareholders per share of common stock      |   | 1.40      |      | 1.42      |   | 1.26      |   | 2.25      |    | 1.90      |   |
| Balance sheet data:                                                                                           |   |      |      |      |   |      |   |      |    |      |   |
| Total assets                                                                                                  |   | 6,639,244 |      | 6,394,151 |   | 4,883,483 |   | 4,175,538 |    | 4,233,101 |   |
| Debt and capital leases                                                                                       |   | 4,464,377 |      | 4,461,901 |   | 3,501,398 |   | 3,058,038 |    | 3,155,312 |   |
| Shareholders’ equity                                                                                     |   | 1,324,964 |      | 1,112,084 |   | 655,360   |   | 630,468   |    | 638,580   |   |
| Shareholders’ equity per share of common stock (note  4)                                                 |   | 13.65     |      | 12.06     |   | 8.78      |   | 8.61      |    | 8.40      |   |
| Other selected data:                                                                                          |   |      |      |      |   |      |   |      |    |      |   |
| Net cash provided (used) by:                                                                                  |   |      |      |      |   |      |   |      |    |      |   |
| Operating activities                                                                                          |   | 375,966   |      | 376,144   |   | 301,754   |   | 261,240   |    | 197,288   |   |
| Investing activities                                                                                          |   | (288,605  | )         | (863,711  | )      | (126,595  | )      | (275      | )       | 28,629    |   |
| Financing activities                                                                                          |   | (11,764   | )         | 497,077   |   | (157,778  | )      | (273,713  | )       | (237,389  | )      |
| Dividends per share of common stock                                                                           |   | 1.68      |      | 1.56      |   | 1.42      |   | 1.32      |    | 1.20      |   |
| Dividends per share of convertible Preferred stock                                                            |   | 3.00      |      | 3.00      |   | 3.00      |   | 3.00      |    | 3.00      |   |
| Market price per share of common stock at year end                                                            |   | 47.00     |      | 31.70     |   | 29.29     |   | 25.50     |    | 21.25     |   |
| Market price per share of convertible Preferred  stock at year end                                            |   | 61.30     |      | 46.03     |   | 43.50     |   | 36.63     |    | 32.63     |   |
| Weighted-average common shares outstanding (basic)                                                            |   | 88,453    |      | 84,954    |   | 68,637    |   | 69,475    |    | 71,705    |   |
| Weighted-average common shares outstanding (diluted)                                                          |   | 90,608    |      | 86,446    |   | 69,569    |   | 72,153    |    | 75,787    |   |
|                                                                                                               |        |           |           |           |        |           |        |           |         |           |        |  |  |  |  |  |

 

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**Notes:**

 

(1)          Referenceis made to note 18 of the consolidated financial statements for informationrelated to the acquisition of properties and other assets from Rodamco in 2002.

(2)          In2001, we acquired all of the voting stock of the majority financial interestventures owned by a trust. The majority financial interest ventures wereinitiated on December 31, 1997, at which time we began accounting for ourinvestment in them using the equity method. Subsequent to acquisition in 2001,we consolidated these entities in our financial statements.  Reference is made to note 10 of theconsolidated financial statements for information related to the acquisition ofthe majority financial interest ventures in 2001.

(3)          Referenceis made to note 2 of the consolidated financial statements for informationrelated to the reclassification of prior year operating results to discontinuedoperations.

(4)          Shareholders’equity per share of common stock assumes conversion of the Series B ConvertiblePreferred stock issued in 1997.

 

36

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**InterimFinancial Information (Unaudited)**

Interim consolidated results of operations are summarized as follows(in thousands, except per share data):

 
|                                 |   | **Quarter ended** |    |
|--------------------------------------|--------|-------------------|---------|
|                                 |   | **2003**          |    | **2002** |   |
|                                 |   | **December 31**   |    | **September 30** |   | **June 30** |   | **March 31** |   | **December 31** |   | **September 30** |   | **June 30** |   | **March 31** |   |
|                                 |   |              |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenues                             |   | $                 | 290,549 |   | $ | 265,438 |   | $ | 285,195 |   | $ | 263,684 |   | $ | 271,788 |   | $ | 258,569 |   | $ | 216,353 |   | $ | 202,518 |   |
| Operating income                     |   | 40,292            |    | 35,552 |   | 17,871 |   | 19,176 |   | 25,731 |   | 26,270 |   | 20,469 |   | 13,878 |   |
| Earnings from continuing operations  |   | 44,848            |    | 35,824 |   | 39,445 |   | 19,406 |   | 25,692 |   | 26,431 |   | 68,179 |   | 14,992 |   |
| **Net earnings (loss)**              |   | 57,865            |    | 40,492 |   | 138,092 |   | 24,140 |   | (5,300 | ) | 32,299 |   | 98,149 |   | 14,703 |   |
|                                 |   |              |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Earnings (loss) per common share** |   |              |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic:                               |   |              |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Continuing operations                |   | $                 | .47     |   | $ | .37 |   | $ | .41 |   | $ | .19 |   | $ | .26 |   | $ | .27 |   | $ | .76 |   | $ | .14 |   |
| Discontinued operations              |   | .14               |    | .05 |   | 1.13 |   | .05 |   | (.36 | ) | .07 |   | .34 |   | — |   |
| **Total**                            |   | $                 | .61     |   | $ | .42 |   | $ | 1.54 |   | $ | .24 |   | $ | (.10 | ) | $ | .34 |   | $ | 1.10 |   | $ | .14 |   |
|                                 |   |              |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Diluted:                             |   |              |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Continuing operations                |   | $                 | .45     |   | $ | .36 |   | $ | .40 |   | $ | .19 |   | $ | .26 |   | $ | .26 |   | $ | .72 |   | $ | .14 |   |
| Discontinued operations              |   | .14               |    | .05 |   | 1.10 |   | .05 |   | (.36 | ) | .07 |   | .32 |   | — |   |
| **Total**                            |   | $                 | .59     |   | $ | .41 |   | $ | 1.50 |   | $ | .24 |   | $ | (.10 | ) | $ | .33 |   | $ | 1.04 |   | $ | .14 |   |

----

**Note:**                   Quarterly amounts have been restatedto reflect consolidated properties that we sold in 2003 or 2002 and where wedid not have a continuing involvement, as discontinued operations.    Net earnings for the second quarter of2003 include gains on the sales of retail properties of approximately $65.4million ($0.75 per share basic and $0.73 per share diluted), a gain on thedisposal of an interest in a retail property of $21.6 million ($0.25 per sharebasic and $0.24 per share diluted) and a gain on the extinguishment of debt of$26.9 million ($0.31 per share basic and $0.30 per share diluted).  Net earnings for the third quarter of 2003include an impairment loss on a retail center of $6.5 million ($0.07 per sharebasic and diluted).  Net earnings forthe fourth quarter of 2003 include impairment losses on two office propertiesof $1.4 million ($0.02 per share basic and diluted) and a gain on sale ofoffice and related properties of $10.1 million ($ 0.11 per share basic anddiluted).  Net earnings for the secondquarter of 2002 include a gain on the disposition of our interest in a retailcenter of $42.6 million ($0.50 per share basic and $0.45 per share diluted).  Net loss for the fourth quarter of 2002includes impairment losses on two retail centers of $42.1 million ($0.49 pershare basic and diluted).

 

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**Priceof Common Stock and Dividends**

Our common stock is traded on the New York Stock Exchange.   The prices and dividends per share were asfollows:

 
|      |   | **Quarter ended** |   |
|-----------|--------|-------------------|--------|
|      |   | **2003**          |   | **2002** |   |
|      |   | **December 31**   |   | **September 30** |   | **June 30** |   | **March 31** |   | **December 31** |   | **September 30** |   | **June 30** |   | **March 31** |   |
|      |   |              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| High      |   | $                 | 47.22  |   | $ | 41.90 |   | $ | 39.40 |   | $ | 35.19 |   | $ | 31.79 |   | $ | 32.70 |   | $ | 33.35 |   | $ | 30.98 |   |
| Low       |   | 41.90             |   | 38.13 |   | 34.33 |   | 30.45 |   | 28.25 |   | 28.47 |   | 31.16 |   | 27.50 |   |
| Dividends |   | .42               |   | .42 |   | .42 |   | .42 |   | .39 |   | .39 |   | .39 |   | .39 |   |
|           |        |                   |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Numberof Holders of Common Stock**

The number of holders of recordof our common stock as of March 1, 2004 was 1,751.

 

37

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*The Rouse Company and Subsidiaries*MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS

 

***General***

 

Through our subsidiaries and affiliates, we acquire, develop and managea diversified portfolio of operating properties located throughout the UnitedStates and develop and sell land for residential, commercial and other uses,primarily in our master-planned communities.

We have three operating lines of business:

 

•                  retailcenter operations;

•                  mixed-use,office and industrial operations; and

•                  communitydevelopment and land sales.

 

We own most of our interests in our operating properties through TheRouse Company LP, which we refer to as the “operating partnership.”  One of our wholly owned subsidiaries is the solegeneral partner and another wholly owned subsidiary is the sole limited partnerof the operating partnership.  We owninterests in our master-planned communities, some operating properties and ourmanagement company (which manages operating properties not wholly owned by us)in taxable REIT subsidiaries (“TRS”). This operating partnership structure, which we refer to as the “UPREITstructure,” is designed to allow us to acquire properties in exchange forlimited partnership interests in the operating partnership.  Using the UPREIT structure, we could issuelimited partnership interests of the operating partnership to personstransferring properties to us who wish to defer taxes on the transfers, and whowant to receive a right to convert their limited partnership interests intoshares of our common stock at a future date in a taxable transaction.  We have agreed with the lenders under someof our credit facilities that, when and if the operating partnership issueslimited partnership interests to unrelated parties in exchange for propertiesor we transfer to the operating partnership all or substantially all of theproperties not held by the operating partnership, the operating partnershipwill become jointly and severally liable for all of our obligations under thosecredit facilities.  Concurrently, wewill cause the operating partnership to become jointly and severally liable forour obligations under all of our outstanding public debt.

Revenues from our retail center operations and office, mixed-use andindustrial operations are derived primarily from tenant rents.  Tenant leases in our retail centersgenerally provide for minimum rent, additional rent based on tenant sales inexcess of stated levels and reimbursement of real estate taxes and other operatingexpenses.  Tenant leases in our officeand other properties generally provide for minimum rent and reimbursement ofreal estate taxes and other operating expenses in excess of stated amounts.  The profitability of our retail centersdepends primarily on occupancy and rent levels which, in turn, are affected bythe profitability of the tenants. Tenant profitability depends on a number of factors, including consumerspending, business and consumer confidence, competition and general economicconditions in the markets in which they and we operate.  The profitability of our office and otherproperties also depends on occupancy and rent levels and is affected by anumber of factors, including tenants’ profitability and space needs due togrowth or contraction in employment levels, business confidence and competitionand general economic conditions in the markets in which they and we operate.

Revenues from our community development and land sales business arederived primarily from land sales to developers and participations withbuilders in their sales of finished homes to homebuyers.  The profitability of our communitydevelopment business is affected by demand for housing, mortgage interestrates, consumer confidence, and general economic conditions in theBaltimore-Washington, Las Vegas and Houston metropolitan areas.

 

38

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Our strategies include improving the quality of our retail portfolio,expanding and diversifying our community development business and increasingthe number of our operating properties unencumbered by mortgage debt.  Actions we have taken or plan to take toimplement these strategies include the following:

 

•                  Acquiringor developing premier retail properties and dispose of other retail propertiesas appropriate.  Since the early 1990’s,we have upgraded the quality of our portfolio of retail properties by acquiringinterests in premier retail centers, expanding and improving our existingcenters and disposing of properties that were not consistent with our long-termbusiness strategies or not meeting our investment criteria.  We use an internal rating system based onsales volume, productivity, anchor performance, regional demographics, qualityof tenancy and competitive position in the local market to evaluate each of ourshopping centers.

•                  Realigningour office and industrial portfolio by disposing interests in buildings notlocated in our master-planned communities of Columbia, Maryland and Summerlin,Nevada, or not part of class “A” urban mixed-use projects.

•                  Acquiringstrategically located landholdings in and around major metropolitan areas inthe United States.  During 2003, wepurchased land for community development near Houston, Texas and an interest inThe Woodlands, a master-planned community also near Houston.  We intend to use our experience andresources to develop and sell finished lots or tracts including infrastructureand amenities within our planned communities, in addition to undevelopedproperty, to housing developers.  Wealso intend to continue to sell finished and undeveloped lots to commercialdevelopers and develop commercial property ourselves.  In addition, we have increased the profitability of our communitydevelopment business by increasing participations with builders in their salesof finished homes to homebuyers.

•                  Increasingthe number of our operating properties unencumbered by mortgage debt.  By doing so, we expect that we will be ableto receive a higher senior unsecured debt credit rating.  In the near term, we intend to refinance aportion of the Company’s maturing secured debt on an unsecured basis.  We also intend to use proceeds fromdispositions of assets to reduce our overall leverage.  In 2003, we repaid $215.4 million of debtsecured by our operating properties using proceeds from the issuance ofunsecured notes.

•                  Inearly 2004, we have repaid approximately $439.9 million of debt secured by ouroperating properties.

 

Our strategies and our plans for the future are based on our beliefsthat:

 

•                  spacein high-quality, dominant retail centers in densely populated, affluent areaswill continue to be in demand by retailers and that these retail centers arebetter able to withstand difficult conditions in the overall economy and in thereal estate and retail industries;

•                  demandfor housing in the metropolitan areas of Las Vegas, Houston and theBaltimore-Washington corridor will remain strong, particularly for housing inhigh-quality, master-planned communities; and

•                  officeand industrial properties will provide capacity for employment growth in ourmaster-planned communities.

 

39

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*Operating Properties*

 

Our primary business strategies relating to operating propertiesinclude (1) owning and operating premier properties – shopping centers andlarge-scale mixed-use projects in major markets across the United States and(2) owning and operating geographically concentrated office and industrialbuildings, principally complementing community development activities.  In order to execute our strategies, withrespect to operating properties, we evaluate opportunities to acquire ordevelop properties and to redevelop, expand and/or renovate properties in ourportfolio.  We have made and plan tocontinue making substantial investments to acquire, develop and expand and/orrenovate properties as follows:

 

•                  InMay 2002, we acquired interests in eight high-quality operating properties fromRodamco North America N.V. (“Rodamco”).

•                  InNovember 2002, we acquired our partners’ interests in Ridgedale Center, aregional retail center in Minneapolis, Minnesota, and Southland Center, aregional retail center near Detroit, Michigan.

•                  InNovember 2002, we opened the first phase of the redevelopment of FashionShow, a retail center on “the Strip” in Las Vegas, Nevada.  We opened the second phase of this projectin October 2003 and expect to open other components of this project in2005.

•                  InApril 2003, we acquired Christiana Mall, a regional retail center inNewark, Delaware.  We subsequentlyconveyed a 50% interest in this property in June 2003 pursuant to theterms of a participating mortgage that we assumed in the acquisition.

•                  InAugust 2003, we acquired the remaining interest in Staten Island Mall, aregional retail center in Staten Island, New York.

•                  InDecember 2003, we acquired a 50% interest in the retail component andcertain office components of Mizner Park, a mixed-use property in Boca Raton,Florida.

•                  InFebruary 2004, we agreed to acquire Providence Place, a regional retailcenter in Providence, Rhode Island.

•                  Weare an investor in a joint venture that is developing The Shops at La Cantera,a regional retail center in San Antonio, Texas, expected to open in 2005.

•                  Weplan to develop a regional retail center in Summerlin, Nevada (currentlyexpected to open in 2006).

 

We continually assess whether properties in which we own interests areconsistent with our business strategies. We have disposed of interests in morethan 50 retail centers and numerous other properties since 1993 (at times usingtax-deferred exchanges or joint ventures) and may continue to dispose ofselected properties that are not meeting or are not considered to have thepotential to continue to meet our investment criteria.  We may also dispose of interests inproperties for other reasons.  We havedisposed of interests in the following properties during 2002 and 2003:

 

•                  InApril 2002, we sold our interests in 12 community retail centers inColumbia, Maryland and our interest in Franklin Park (a retail center inToledo, Ohio).

•                  InDecember 2002, we sold our interest in Tampa Bay Center, a retail centerin Tampa, Florida, and our interest in a Summerlin community retail center inLas Vegas, Nevada.

•                  InApril and May 2003, we sold six retail centers in the Philadelphiametropolitan area (Cherry Hill Mall, Echelon Mall, Exton Square, Gallery atMarket East, Moorestown Mall and Plymouth Meeting).

•                  InMay and June 2003, we sold eight office and industrial buildings in theBaltimore-Washington corridor.

•                  InAugust 2003, we sold The Jacksonville Landing, a retail center inJacksonville, Florida.

•                  InDecember 2003, we disposed two office properties and two leased restaurantpads in Hughes Center, a master-planned business park in Las Vegas, Nevada, inconnection with our acquisition of a 52.5% economic interest in The Woodlands,a master-planned community in Houston, Texas. We disposed most of our remaining assets in Hughes Center in the firstquarter of 2004.

 

40

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Our 2003, 2002 and 2001 acquisition, disposition and developmentactivity is summarized as follows:

 

Acquisitions

 
| **Retail Centers**             |   | **Interest  Acquired** |   | **Interest After  Acquisition** |   | **Acquisition  Date** |   |
|--------------------------------|--------|------------------------|--------|---------------------------------|--------|-----------------------|--------|
|                           |   |                   |   |                            |   |                  |   |
| Collin Creek                   |   | 70                     | %      | 100                             | %      | May 2002              |   |
| Lakeside Mall                  |   | 100                    | %      | 100                             | %      | May 2002              |   |
| North Star                     |   | 96                     | %      | 100                             | %      | May 2002              |   |
| Oakbrook Center (1)            |   | 47                     | %      | 47                              | %      | May 2002              |   |
| Perimeter Mall (2)             |   | 50                     | %      | 100                             | %      | May 2002              |   |
| The Streets at South Point (3) |   | 94                     | %      | 94                              | %      | May 2002              |   |
| Water Tower Place (1)          |   | 52                     | %      | 52                              | %      | May 2002              |   |
| Willowbrook                    |   | 62                     | %      | 100                             | %      | May 2002              |   |
| Ridgedale Center               |   | 90                     | %      | 100                             | %      | November 2002    |   |
| Southland Center               |   | 90                     | %      | 100                             | %      | November 2002    |   |
| Christiana Mall (4)            |   | 50                     | %      | 50                              | %      | April 2003       |   |
| Staten Island Mall             |   | 56                     | %      | 100                             | %      | August 2003      |   |
| Mizner Park (1)                |   | 50                     | %      | 50                              | %      | December 2003    |   |

 

Notes:

(1)          Propertyalso contains significant office space.

(2)          We subsequently disposedof this acquired interest in October 2002 and own a 50% interest in theretail center.

(3)          Propertybegan operations in March 2002.

(4)          We acquired a 100% interestin April 2003 and subsequently conveyed a 50% interest in this property inJune 2003 pursuant to the terms of a participating mortgage that weassumed in the acquisition.

 

Dispositions

 
| **Retail  Centers**                                |   | **Disposition  Date** |   | **Office and Other Properties**           |   | **Disposition  Date** |   |
|----------------------------------------------------|--------|-----------------------|--------|-------------------------------------------|--------|-----------------------|--------|
|                                               |   |                  |   |                                      |   |                  |   |
| 12 Community Retail  Centers in Columbia, Maryland |   | April 2002       |   | Hunt Valley Business  Center (1 building) |   | April 2001       |   |
| Franklin Park                                      |   | April 2002       |   | Inglewood Business  Center (7 buildings)  |   | May 2003              |   |
| Tampa Bay Center                                   |   | December 2002    |   | Hunt Valley Business  Center (1 building) |   | June 2003        |   |
| Cherry Hill Mall                                   |   | April 2003       |   | Hughes Center (note)                      |   | December 2003    |   |
| Exton Square                                       |   | April 2003       |   |                                      |   |                  |   |
| The Gallery at Market  East                        |   | April 2003       |   |                                      |   |                  |   |
| Moorestown Mall                                    |   | April 2003       |   |                                      |   |                  |   |
| Echelon Mall                                       |   | May 2003              |   |                                      |   |                  |   |
| Plymouth Meeting                                   |   | May 2003              |   |                                      |   |                  |   |
| The Jacksonville  Landing                          |   | August 2003      |   |                                      |   |                  |   |
|                                               |   |                  |   |                                      |   |                  |   |

 

Note:

We transferred two office properties and two leased restaurant pads inHughes Center, a master-planned business park in Las Vegas, Nevada, concurrentwith our acquisition of a 52.5% economic interest in The Woodlands.  We disposed of most of our remaining assetsin Hughes Center in the first quarter of 2004.

 

Disposition decisions and related transactions and changes in expectedholding periods or use may cause us to recognize gains or losses that couldhave material effects on reported net earnings in future quarters or fiscalyears, and, taken together with the use of sales proceeds, may have a materialeffect on our overall consolidated financial position.

 

41

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Development Projects

 
| **Retail  Centers**                                       |   | **Date  Opened**    |   | **Office and Other Properties**     |   | **Date Opened**    |   |
|-----------------------------------------------------------|--------|---------------------|--------|-------------------------------------|--------|--------------------|--------|
|                                                      |   |                |   |                                |   |               |   |
| The Mall in Columbia  Expansion                           |   | May 2001            |   | Summerlin Town Center  (1 building) |   | January 2001  |   |
| Centerpointe Plaza (1)                                    |   | September 2001 |   | Summerlin Town Center  (1 building) |   | February 2001 |   |
| Village of Merrick Park  (2)                              |   | September 2002 |   | Summerlin Town Center  (1 building) |   | June 2003     |   |
| Fashion Show  Redevelopment–Phase I                  |   | November 2002  |   | Summerlin Town Center  (1 building) |   | November 2003 |   |
| Canyon Pointe–Summerlin  Community Retail Center (3) |   | August 2002    |   |                                |   |               |   |
| Fashion Show  Redevelopment– Phase II                |   | October 2003   |   |                                |   |               |   |

 

Notes:

 

(1)          We have a 50% interestin this village center in Summerlin, Nevada.

(2)          We have a 40% interestin this project in Coral Gables, Florida. Project also has office and parking operations.

(3)          We sold our interest inthis project in December 2002.

 

*CommunityDevelopment*

 

Our primary business strategy relating to community development is toexpand and diversify this line of business and to develop and sell land in ourplanned communities in a manner that increases the value of the remaining landto be developed and sold and to provide current cash flows.  Our major land development projects includecommunities in and around Columbia in Howard County, Maryland, Summerlin,Nevada and Houston, Texas.  In addition,at December 31, 2003, we were an investor in an unconsolidated real estateventure that is developing Fairwood, a planned community in Prince George’sCounty, Maryland.  In January 2004,we acquired our partners’ interests in this joint venture, increasing ourownership interest to 100%.  To leverageour experience and provide further growth and diversification, we seek and evaluateopportunities to acquire new and/or existing community developmentprojects.  In May 2003, we purchasedapproximately 8,060 acres of investment land and land to be held fordevelopment and sale in the Houston, Texas metropolitan area.  In September 2003 andDecember 2003, we purchased additional parcels of 642 acres and 85 acres,respectively, of contiguous land.  Weexpect to begin significant development activities on this land in 2004 and tobegin selling this land in 2005.  InDecember 2003, we acquired a 52.5% economic interest in The Woodlands, amaster-planned community in the Houston, Texas metropolitan area, whichincludes, among other assets, approximately 5,500 acres of saleable land.

We acquired Summerlin, our master-planned community in suburban LasVegas, Nevada, in the acquisition of The Hughes Corporation (“Hughes”) in1996.  In connection with theacquisition of Hughes, we entered into a Contingent Stock Agreement(“Agreement”) for the benefit of the former Hughes owners or their successors(“beneficiaries”).  Under terms of theAgreement, shares of common stock are issuable to the beneficiaries based onthe appraised values of defined asset groups, including Summerlin, at specifiedtermination dates to 2009 and/or cash flows from the development and/or sale ofthose assets prior to the termination dates. We account for the beneficiaries’ share of earnings from the assets asan operating expense.

 

42

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***Operating results***

 

The following discussion and analysis of operating results covers eachof our business segments, as management believes that a segment analysisprovides the most effective means of understanding our business.  It also provides information about otherelements of the consolidated statement of operations that are not included inthe segment results.  You should referto the consolidated statements of operations, note 9 to the consolidatedfinancial statements and the Five Year Summary of Net Operating Income (“NOI”)and Net Earnings on page 62 when reading this discussion and analysis.

Comparisons ofNOI and net earnings from one year to another are affected significantly by theproperty acquisition, disposition and development activity summarized above. Asdiscussed in more detail below, other factors that have contributed to ouroperating results in 2003, 2002 and 2001 include the following:

 

•                  maintenanceof high occupancy levels in retail properties;

•                  higherrents on re-leased space;

•                  strongdemand for land in and around Columbia and Summerlin;

•                  refinancingsof project-related debt at lower interest rates;

•                  adecline in average interest rates on variable-rate debt;

•                  repaymentsof debt;

•                  costreduction measures;

•                  costsrelated to organizational changes; and

•                  pensionplan curtailment and settlement losses.

 

The operating measure used to assess operating results for the businesssegments is NOI.  We define NOI assegment revenues (exclusive of corporate interest income) less segmentoperating expenses (including provision for bad debts, losses (gains) onmarketable securities and net losses (gains) on sales of properties developedfor sale, but excluding income taxes, ground rent expense, distributions onParent Company-obligated mandatorily redeemable preferred securities and othersubsidiary preferred stock and real estate depreciation and amortization).  Additionally, discontinued operations,equity in earnings of unconsolidated real estate ventures and minorityinterests are adjusted to reflect NOI on the same basis.  Prior to July 1, 2003, we includedcertain income taxes in our definition of NOI. Effective July 1, 2003, we revised our definition to exclude theseamounts from NOI, affecting primarily the presentation of our communitydevelopment activities.  We made thischange because we now assess the operating results of our segments on a pre-taxbasis and believe this revised measure better reflects the performance of theunderlying assets.  Amounts for priorperiods have been reclassified and conform to the current definition.

The accounting policies of the segments are the same as those used toprepare our consolidated financial statements, except that:

 

•                  weaccount for real estate ventures in which we have joint interest and controland certain other minority interest ventures (“proportionate share ventures”)using the proportionate share method rather than the equity method;

•                  weinclude our share of NOI less interest expense and ground rent expense of otherunconsolidated minority interest ventures (“other ventures”) in revenues; and

•                  we includediscontinued operations and minority interests in NOI rather than presentingthem separately.

 

These differences affect only the reported revenues and operatingexpenses of the segments and have no effect on our reported net earnings.

 

43

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Operating results for the segments are summarized as follows (inmillions):

 
|               |   | **Retail  Centers** |   | **Office  and Other  Properties** |   | **Community  Development** |   | **Commercial  Development** |   | **Corporate** |   | **Total** |   |
|--------------------|--------|---------------------|--------|-----------------------------------|--------|----------------------------|--------|-----------------------------|--------|---------------|--------|-----------|--------|
|               |   |                |   |                              |   |                       |   |                        |   |          |   |      |   |
| 2003               |   |                |   |                              |   |                       |   |                        |   |          |   |      |   |
| Revenues           |   | $                   | 843.2  |                              | $      | 201.0                      |   | $                           | 291.5  |          | $      | —    |   | $ | — |   | $ | 1,335.7 |   |
| Operating expenses |   | 334.3               |   | 78.8                              |   | 167.6                      |   | 13.8                        |   | 19.0          |   | 613.5     |   |
| NOI                |   | $                   | 508.9  |                              | $      | 122.2                      |   | $                           | 123.9  |          | $      | (13.8     | )      | $ | (19.0 | ) | $ | 722.2 |   |
|               |   |                |   |                              |   |                       |   |                        |   |          |   |      |   |
| 2002               |   |                |   |                              |   |                       |   |                        |   |          |   |      |   |
| Revenues           |   | $                   | 775.5  |                              | $      | 205.2                      |   | $                           | 241.0  |          | $      | —    |   | $ | — |   | $ | 1,221.7 |   |
| Operating expenses |   | 305.7               |   | 80.2                              |   | 154.8                      |   | 13.0                        |   | 16.3          |   | 570.0     |   |
| NOI                |   | $                   | 469.8  |                              | $      | 125.0                      |   | $                           | 86.2   |          | $      | (13.0     | )      | $ | (16.3 | ) | $ | 651.7 |   |
|               |   |                |   |                              |   |                       |   |                        |   |          |   |      |   |
| 2001               |   |                |   |                              |   |                       |   |                        |   |          |   |      |   |
| Revenues           |   | $                   | 637.2  |                              | $      | 203.7                      |   | $                           | 218.3  |          | $      | —    |   | $ | — |   | $ | 1,059.2 |   |
| Operating expenses |   | 261.5               |   | 75.8                              |   | 140.3                      |   | 6.9                         |   | 13.1          |   | 497.6     |   |
| NOI                |   | $                   | 375.7  |                              | $      | 127.9                      |   | $                           | 78.0   |          | $      | (6.9      | )      | $ | (13.1 | ) | $ | 561.6 |   |
|                    |        |                     |        |                                   |        |                            |        |                             |        |               |        |           |        |  |  |  |  |  |  |  |

 

Segment revenues exclude corporate interest income and gains (losses)on marketable securities classified as trading. Segment operating expensesinclude provision for bad debts, losses (gains) on marketable securities andnet losses (gains) on sales of properties developed for sale and exclude incometaxes, ground rent expense, distributions on Parent Company-obligatedmandatorily redeemable preferred securities and other subsidiary preferredstock and real estate depreciation and amortization.

 

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Reconciliations of total revenues and operating expenses reported aboveto the related amounts in the consolidated financial statements and of NOIreported above to earnings before net gains (losses) on dispositions ofinterests in operating properties, discontinued operations and cumulativeeffect of change in accounting principle in the consolidated financialstatements are summarized as follows (in millions):

 
|                                                                                                                                                                                                                     |   | **2003** |    | **2002** |   | **2001** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|---------|----------|--------|----------|--------|
| Revenues:                                                                                                                                                                                                                |   |     |    |     |   |     |   |
| Total reported above                                                                                                                                                                                                     |   | $        | 1,335.7 |     | $      | 1,221.7  |   | $ | 1,059.2 |   |
| Our share of revenues of unconsolidated  real estate ventures                                                                                                                                                            |   | (151.2   | )       | (117.1   | )      | (97.8    | )      |
| Revenues of discontinued operations                                                                                                                                                                                      |   | (79.8    | )       | (156.6   | )      | (163.5   | )      |
| Other                                                                                                                                                                                                                    |   | 0.2      |    | 1.2      |   | 4.1      |   |
| Total in consolidated financial statements                                                                                                                                                                               |   | $        | 1,104.9 |     | $      | 949.2    |   | $ | 802.0 |   |
| Operating expenses, exclusive of provision  for bad debts, depreciation and amortization:                                                                                                                                |   |     |    |     |   |     |   |
| Total reported above                                                                                                                                                                                                     |   | $        | 613.5   |     | $      | 570.0    |   | $ | 497.6 |   |
| Our share of operating expenses of  unconsolidated real estate ventures                                                                                                                                                  |   | (50.9    | )       | (36.9    | )      | (28.0    | )      |
| Operating expenses of discontinued  operations                                                                                                                                                                           |   | (34.6    | )       | (67.0    | )      | (70.7    | )      |
| Other                                                                                                                                                                                                                    |   | 14.5     |    | 16.8     |   | 16.3     |   |
| Total in consolidated financial statements                                                                                                                                                                               |   | $        | 542.5   |     | $      | 482.9    |   | $ | 415.2 |   |
| Operating results:                                                                                                                                                                                                       |   |     |    |     |   |     |   |
| NOI reported above                                                                                                                                                                                                       |   | $        | 722.2   |     | $      | 651.7    |   | $ | 561.6 |   |
| Interest expense                                                                                                                                                                                                         |   | (222.8   | )       | (210.0   | )      | (181.9   | )      |
| NOI of discontinued operations                                                                                                                                                                                           |   | (45.2    | )       | (89.6    | )      | (92.8    | )      |
| Depreciation and amortization                                                                                                                                                                                            |   | (173.3   | )       | (131.6   | )      | (102.4   | )      |
| Other provisions and losses, net                                                                                                                                                                                         |   | (32.5    | )       | (37.6    | )      | (0.8     | )      |
| Impairment losses on operating properties                                                                                                                                                                                |   | (7.9     | )       | —   |   | (0.4     | )      |
| Income taxes, primarily deferred                                                                                                                                                                                         |   | (42.5    | )       | (29.0    | )      | (26.6    | )      |
| Our share of interest expense, ground rent  expense, depreciation and   amortization, other provisions and losses, net, income taxes and gains  on operating properties of unconsolidated real estate ventures, net |   | (68.9    | )       | (47.0    | )      | (37.2    | )      |
| Other                                                                                                                                                                                                                    |   | (16.2    | )       | (20.6    | )      | (19.0    | )      |
| Earnings before net gains (losses) on  dispositions of interests in operating properties, discontinued operations  and cumulative effect of change in   accounting principle in consolidated financial statements   |   | $        | 112.9   |     | $      | 86.3     |   | $ | 100.5 |   |

 

The reasons for significant changes in revenues and expenses comprisingNOI are discussed in the Business Segment Information section beginning onpage 46.

 

***Impact of the terrorist attacks of September 11, 2001***

 

We were largely spared direct losses caused by the terrorist attacks ofSeptember 11, 2001.  Operationswere disrupted only at South Street Seaport, a retail center in lower Manhattanthat we own and operate.  The center wasclosed for a week following the attacks for use as a staging and rest area forrescue workers.  It did not sustainsignificant physical damage.  Customertraffic, tenant sales and rents at South Street Seaport are generally affectedby the level of pedestrian and other traffic and other commercial activity inlower Manhattan.  It is difficult topredict with certainty when, if ever, customer traffic, tenant sales and rentswill return to historical levels.

Customer traffic at our other retail centers was lighter than usual forseveral days after the attacks but has since recovered.  Las Vegas, where we have a substantialconcentration of assets, experienced a significant decline in visitor activityin the weeks immediately following the attacks but has since also recovered.

 

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**Business Segment Information**

 

***OperatingProperties:*** We report the results of our operating properties in two segments:  (1) retail centers and (2) office and otherproperties.  Our tenant leases providethe foundation for the performance of our operating properties.  In addition to minimum rents, the majorityof retail and office tenant leases provide for other rents which reimburse usfor certain operating expenses. Substantially all of our retail leases also provide for additional rent(percentage rent) based on tenant sales in excess of stated levels.  As leases expire, space is re-leased,minimum rents are adjusted to market rates, expense reimbursement provisionsare updated and new percentage rent levels are established for retailleases.  Expense reimbursementprovisions in our retail leases have historically required tenants to pay theirvariable shares of a property’s operating costs.  In new retail leases, we have begun revising the expensereimbursement provisions so that tenants continue to pay their shares of aproperty’s real estate tax and utility expenses while paying stated rates forall other operating expenses.  Thestated rate increases annually based on negotiated amounts or the consumerprice index.  We believe this newleasing strategy will simplify lease negotiations, facilitate collections andover the longer-term, allow us to reduce our lease administration costs.

Some portions of our discussion and analysis focus on “comparable”properties.  Comparable propertiesexclude those that have been acquired or disposed of, newly developed orundergone significant expansion in either of the two years being compared and,for the reasons discussed above, South Street Seaport.

 

***Retail Centers:***  Operating results of retail centers aresummarized as follows (in millions):

 
|               |   | **2003** |   | **2002** |   | **2001** |   |
|--------------------|--------|----------|--------|----------|--------|----------|--------|
|               |   |     |   |     |   |     |   |
| Revenues           |   | $        | 843.2  |     | $      | 775.5    |   | $ | 637.2 |   |
| Operating expenses |   | 334.3    |   | 305.7    |   | 261.5    |   |
| NOI                |   | $        | 508.9  |     | $      | 469.8    |   | $ | 375.7 |   |

 

The $67.7 million increase in segment revenues in 2003 was attributableprimarily to:

•                  theacquisitions of interests in properties in 2003 and 2002 ($111.9 million);

•                  theopenings of Village of Merrick Park in 2002 and the first and second phases ofFashion Show expansion in 2003 and 2002 ($22.7 million); and

•                  higherrents on re-leased space at comparable retail centers.

 

These increases were partially offset by the effects of thedispositions of interests in properties in 2003 and 2002 ($75.2 million)and lower management contract termination income as 2002 included a payment($4.8 million) that did not recur in 2003.  Our comparable properties had average occupancy levels ofapproximately 92.4% in 2003 and 2002.

 

The $138.3 million increase in segment revenues in 2002 wasattributable primarily to:

•                  theacquisitions of interests in properties in 2002 ($135.0 million);

•                  theopenings of the first phase of Fashion Show expansion and Village of MerrickPark ($6.9 million);

•                  higherrents on re-leased space at comparable retail centers; and

•                  thereceipt of a management contract termination payment for Town & CountryCenter in Miami, Florida ($4.8 million).

 

These increases were partially offset by the effects of thedispositions of interests in properties in 2002 ($20.1 million) and lower leasetermination income ($2.2 million) at comparable properties.  Our comparable properties had averageoccupancy levels of approximately 92.4% during 2002 and 2001.

 

The $28.6million increase in segment operating expenses in 2003 was attributableprimarily to:

•                  theacquisitions of interests in properties in 2003 and 2002 ($42.0 million) and

•                  theopenings of Village of Merrick Park in 2002 and the first and second phases ofFashion Show expansion in 2003 and 2002 ($13.1 million).

 

These increases were partially offset by the effects of thedispositions of interests in properties in 2003 and 2002 ($30.4 million)and lower bad debt expenses at comparable retail centers ($1.5 million).

 

46

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The $44.2million increase in segment operating expenses in 2002 was attributableprimarily to:

•                  theacquisitions of interests in properties in 2002 ($46.4 million); and

•                  theopenings of Village of Merrick Park and the first phase of Fashion Showexpansion ($3.6 million).

 

Theseincreases were partially offset by the effects of lower expenses due to thesale of interests in properties in 2002 ($7.5 million).

 

In summary, the $39.1 million increase in NOI in 2003 was attributableprimarily to:

•                  interestsin properties acquired ($69.9 million);

•                  theopenings of Village of Merrick Park and the first and second phases of FashionShow expansion ($9.6 million); and

•                  anincrease in NOI at comparable properties ($11.4 million) due primarily tohigher rents on re-leased space.

 

Theseincreases in NOI were partially offset by the effects of dispositions ofinterests in properties ($44.8 million) and management contract terminationincome in 2002 ($4.8 million) that did not recur in 2003.

 

In summary, the $94.1 million increase in NOI in 2002 was attributableprimarily to:

•                  interestsin properties acquired ($88.6 million);

•                  theopenings of Village of Merrick Park and the first phase of Fashion Showexpansion ($3.3 million);

•                  thereceipt of a management contract termination fee ($4.8 million); and

•                  anincrease in NOI at the remaining properties ($9.9 million) primarily due tohigher rents on re-leased space.

 

These increases in NOI were partially offset by dispositions ofinterests in properties ($12.6 million) and lower lease termination paymentsreceived ($1.8 million).

 

We believe that the ability to increase rents and maintain high averageoccupancy levels at our comparable retail centers in spite of difficulteconomic conditions is indicative of the high demand that retailers have forour space.

We anticipate continued growth in NOI from retail centers in 2004, aswe expect to benefit from the 2003 acquisitions of interests in ChristianaMall, Staten Island Mall and Mizner Park, and from the 2003 and expected 2004openings of additional space at Fashion Show. We also expect to complete the acquisition of Providence Place.  Additionally, we expect to maintain high occupancylevels in our comparable retail properties and to achieve higher rents onre-leased space.  These increases willbe partially offset by the NOI of the properties we disposed of in 2003.

 

***Office and Other Properties:***  Operating results of office and otherproperties are summarized as follows (in millions):

 
|               |   | **2003** |   | **2002** |   | **2001** |   |
|--------------------|--------|----------|--------|----------|--------|----------|--------|
|               |   |     |   |     |   |     |   |
| Revenues           |   | $        | 201.0  |     | $      | 205.2    |   | $ | 203.7 |   |
| Operating expenses |   | 78.8     |   | 80.2     |   | 75.8     |   |
| NOI                |   | $        | 122.2  |     | $      | 125.0    |   | $ | 127.9 |   |

 

Segment revenues decreased $4.2 million in 2003 and increased $1.5million in 2002.  The decrease in 2003was attributable primarily to the sale of eight office and industrial buildingsin the Baltimore-Washington corridor and lower average occupancy levels atcomparable properties (87.4% in 2003 and 88.4% in 2002).  These decreases more than offset the effectsof the interests in properties acquired from Rodamco in 2002.  The increase in 2002 was attributable to theinterests in properties acquired from Rodamco ($4.5 million), partially offsetby decreases due to lower average occupancy levels at comparable properties(88.4% in 2002 versus 91.9% in 2001).

Segment operating expenses decreased $1.4 million in 2003 andincreased $4.4 million in 2002.  Thedecrease in 2003 was attributable primarily to the disposition of the officeand industrial buildings described above and lower operating expenses atcomparable office properties.  Theincrease in 2002 was attributable to the interests in properties acquired fromRodamco ($2.5 million) and higher general and administrative expenses.

Difficult general economic conditions and weakening office demand ledto higher vacancy rates in our office portfolio in 2003 and 2002.  We expect NOI from our office and otherproperties segment to decline in 2004, due to the disposal of properties in2003 and 2004, as well as what we believe is a continuing national trend ofweakened demand for office space.

 

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***Community Development:***  Community development operations relate tothe communities of Summerlin, Nevada; Columbia, Emerson and Stone Lake in HowardCounty, Maryland; and Fairwood in Prince George’s County, Maryland.  We have also recently acquired developableland in the Houston, Texas metropolitan area and expect to begin significantdevelopment activities on this land in 2004 and to begin selling this land in2005.  Also, on December 31, 2003,we acquired a 52.5% economic interest in The Woodlands, a master-plannedcommunity near Houston, Texas.

Revenues andoperating income from land sales are affected by such factors as theavailability to purchasers of construction and permanent mortgage financing atacceptable interest rates, consumer and business confidence, regional economicconditions in the Baltimore, Las Vegas and Houston metropolitan areas, levelsof homebuilder inventory, availability of saleable land for particular uses andour decisions to sell, develop or retain land. We believe that land sales in 2002 and 2003 benefited from low interestrates and availability of mortgage financing, and in 2003, growing consumerconfidence.  Should interest ratesincrease significantly or consumer confidence decline, land sales may beadversely affected.  Revenues forcommunity development include land sales to developers and participations withbuilders in their sales of finished homes to homebuyers.

Operating results of community development are summarized as follows(in millions):

 
|                                          |   | **2003** |   | **2002** |   | **2001** |   |
|-----------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Nevada Operations:                            |   |     |   |     |   |     |   |
| Revenues:                                     |   |     |   |     |   |     |   |
| Summerlin                                     |   | $        | 220.6  |     | $      | 129.7    |   | $ | 148.7 |   |
| Other                                         |   | 0.9      |   | 46.2     |   | 5.6      |   |
| Operating costs and expenses:                 |   |     |   |     |   |     |   |
| Summerlin                                     |   | 141.0    |   | 93.1     |   | 108.3    |   |
| Other                                         |   | 3.8      |   | 37.4     |   | 5.4      |   |
| NOI                                           |   | $        | 76.7   |     | $      | 45.4     |   | $ | 40.6 |   |
| Columbia Operations:                          |   |     |   |     |   |     |   |
| Revenues                                      |   | $        | 70.0   |     | $      | 65.1     |   | $ | 64.0 |   |
| Operating costs and expenses                  |   | 22.8     |   | 24.3     |   | 26.6     |   |
| NOI                                           |   | $        | 47.2   |     | $      | 40.8     |   | $ | 37.4 |   |
| Total:                                        |   |     |   |     |   |     |   |
| Revenues                                      |   | $        | 291.5  |     | $      | 241.0    |   | $ | 218.3 |   |
| Operating costs and expenses                  |   | 167.6    |   | 154.8    |   | 140.3    |   |
| NOI                                           |   | $        | 123.9  |     | $      | 86.2     |   | $ | 78.0 |   |
|                                          |   |     |   |     |   |     |   |
| Operating Margins (NOI divided by  Revenues): |   |     |   |     |   |     |   |
| Summerlin                                     |   | 36.1     | %      | 28.2     | %      | 27.2     | %      |
| Columbia                                      |   | 67.4     |   | 62.7     |   | 58.4     |   |

 

Revenues from Summerlin operations increased $90.9 million and NOIincreased $43.0 million in 2003.  Theseincreases were attributable to higher prices on land sold for residential andcommercial purposes.  In 2002, revenuesfrom Summerlin decreased $19.0 million and NOI decreased $3.8 million.  These decreases were attributable to a lowersupply of saleable residential land in 2002 due to our decision to temporarilyreduce land development expenditures in anticipation of reduced demandfollowing the events of September 11, 2001.  In the second half of 2002, we resumed our development pace.  The increase in operating margins in 2003and 2002 was due primarily to the effects of higher pricing resulting fromincreased demand and the limited availability of land for similar uses in thearea.  Our revenues from other Nevadaoperations decreased $45.3 million and NOI decreased $11.7 million in2003.  Our revenues and NOI relating toother Nevada operations land holdings in 2002 were attributable to sales ofinvestment land and the recognition of deferred revenue upon the collection ofa subordinated note receivable from a 1997 sale of land in California.  There were no significant sales of investmentland in 2003.

Revenues from Columbia operations increased $4.9 million and NOIincreased $6.4 million in 2003.  Theseincreases were attributable to increased residential land sales in our HowardCounty communities and a $4.3 million increase in our share of earnings atFairwood.  These increases werepartially offset by lower levels of sales for commercial uses.  In 2002, revenues from Columbia operationsland sales increased $1.1 million and NOI increased $3.4 million.  In 2002, revenues and NOI increased $2.6million from our share of earnings from residential sales at Fairwood.  Land sales at the community began in thefourth quarter of 2001.  The increase inrevenues was partially offset by a decrease in residential land sales in ourother community development projects. This decrease was attributable primarily to a lower supply of saleableland as we began new development in the communities of Emerson and StoneLake.  However, due to the sale ofcertain parcels of land with low cost bases, our NOI increased despite thelower revenues from these communities.

We expect the results of community development to remain strong in2004, assuming continued favorable market conditions in the Las Vegas andHoward and Prince George’s County regions. We also expect to benefit from our 2003 acquisition of an interest inThe Woodlands and our 2004 acquisition of our partners’ interests in Fairwood.

 

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***Commercial Development:***  Commercial development expenses were $13.8million in 2003, $13.0 million in 2002 and $6.9 million in 2001.  These costs consist primarily ofpreconstruction expenses and new business costs, net of gains on sales ofproperties we developed for sale.

Preconstruction expenses relate to retail and office and other propertydevelopment opportunities which may not go forward to completion.  Preconstruction expenses were $2.6 millionin 2003, $7.0 million in 2002 and $3.1 million in 2001.  The higher level of expenses in 2002 wasprimarily attributable to costs for retail project opportunities which wedecided not to pursue.

New business costs relate primarily to the evaluation of potentialacquisition opportunities and the closings of acquisitions, feasibility studiesof development opportunities and disposition activities.  These costs were $11.2 million in 2003,$10.3 million in 2002 and $5.5 million in 2001.  New business costs increased in 2003 and 2002 primarily as aresult of internal costs related to the increased acquisition activity in thoseyears.

In 2002, we recognized a gain of $4.3 million (excluding relateddeferred income taxes) on the sale of a community retail center in Summerlinthat we developed with the intent of selling. In 2001, we recognized a gain of $1.5 million (excluding relateddeferred income taxes) on a build-to-suit office building that we sold uponcompletion of construction.

 

***Corporate: ***Corporateoperating expenses consist of costs associated with Company-wide activitieswhich include shareholder relations, the Board of Directors, financialmanagement, strategic planning and equity in operating results of miscellaneouscorporate investments.

Corporate operating expenses were $19.0 million in 2003, $16.3 millionin 2002 and $13.1 million in 2001.  Theincreases in 2003 and 2002 were attributable primarily to higher informationtechnology expenses and expenses incurred relating to corporate governanceinitiatives.

 

**OtherOperating Information**

 

***Continuing operations***

 

***Interest:***  Interest expense increased $12.8 million and $28.1 million in2003 and 2002, respectively.  Theincrease in 2003 was attributable primarily to interest costs on debt issuedand debt assumed related to acquisitions in 2003 and 2002.  The increase in 2002 was attributableprimarily to an increase in the average debt balance (primarily resulting fromthe Rodamco transaction), partially offset by lower average interest rates onvariable-rate debt.

 

***Depreciation andamortization:*** Depreciation and amortization expense increased $41.7 million and $29.2million in 2003 and 2002, respectively. In 2003, the increase was attributable to 2003 and 2002 propertyacquisitions and the openings of  TheVillage of Merrick Park and Fashion Show expansion.  In 2002, the increase was attributable primarily to theacquisition of properties from Rodamco.

 

***Other provisions and losses (gains), net:***  The other provisions and losses, net aresummarized as follows (in millions):

 
|                                                             |   | **2003** |   | **2002** |   | **2001** |   |
|------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                                             |   |     |   |     |   |     |   |
| Pension plan curtailment loss                                    |   | $        | 10.2   |     | $      | —   |   | $ | — |   |
| Pension plan settlement losses                                   |   | 10.8     |   | 8.3      |   | —   |   |
| Provision for organizational changes and  early retirement costs |   | 8.0      |   | 13.5     |   | —   |   |
| Losses on early extinguishment of debt                           |   | 7.2      |   | 2.3      |   | 0.5      |   |
| Impairment provision-MerchantWired                               |   | —   |   | 11.6     |   | —   |   |
| Gain on foreign exchange derivatives                             |   | —   |   | (1.1     | )      | —   |   |
| Net other                                                        |   | (3.7     | )      | 3.0      |   | 0.3      |   |
|                                                             |   | $        | 32.5   |     | $      | 37.6     |   | $ | 0.8 |   |

 

In April 2003, we modified certain of our defined benefit pensionplans so that covered employees would not earn additional benefits for futureservice.  The curtailment of the plansrequired us to immediately recognize substantially all unamortized priorservice cost and unrecognized transition obligation and resulted in acurtailment loss of $10.2 million in 2003. We also incurred settlement losses of $10.8 million and $8.3 million in2003 and 2002, respectively, related to lump-sum distributions made primarilyto employees retiring as a result of early retirement programs offered in thoseyears and a change in the senior management organizational structure inMarch 2003.

 

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InFebruary 2004, we adopted a plan to terminate our funded and supplemental planseffective May 1, 2004.  When weterminate the plans, we will be required to settle the obligations of thefunded plan by paying accumulated benefits to eligible participants.  Depending on the market value of the assetsof the funded plan and the relevant interest rates at the time of settlement,we may be required to make additional contributions to that plan, which couldbe significant.  At December 31, 2003,the funded plan had sufficient assets to settle its obligations withoutadditional contributions by us.  At thetime of settlement of the obligations of the funded plan, we will recognize anyunrecognized losses associated with that plan. At December 31, 2003, these unrecognized losses were approximately $19.8million.  However, we expect theunrecognized losses will increase due to the acceleration of payments ofbenefits as a result of termination of the plan and may also change dependingon the market value of plan assets, interest rates and other factors.  We expect that a portion of these losseswill be recognized prior to the final distribution of plan assets as planparticipants retire or otherwise terminate employment in the normal course of business.  The termination of the funded plan issubject to approvals by the Pension Benefit Guaranty Corporation and theInternal Revenue Service, and while the timing is uncertain, we expect tosettle all of the plan’s remaining obligations in late 2004.  In connection with the funded plantermination, we expect to transfer the assets of the funded plan tohighly-liquid, low-risk investments to mitigate market risk during the periodprior to distributions to participants.

Concurrentwith the distribution of funded plan assets, we will transfer credits forbenefits earned under the supplemental plan to a deferred compensation plan andrecognize settlement losses equal to any unrecognized loss at the date oftransfer.  At December 31, 2003, theseunrecognized losses were approximately $4 million and may change depending oninterest rates and other factors.  Weexpect to fund these benefits as participants retire or terminate.  The supplemental plan obligations were $16.9million at December 31, 2003.

The provision for organizational changes related primarily to costsincurred to reduce the size of our workforce (including executive management)in 2003 and 2002 and to our consolidation of the management of our PropertyOperations and Commercial and Office Development divisions into a single AssetManagement Group in 2002.  In connectionwith these changes, we adopted voluntary early retirement programs in whichemployees who met certain criteria were eligible to participate.  The costs relating to these organizationalchanges and the early retirement program, primarily severance and other benefitcosts, aggregated $8.0 million in 2003 and $13.5 million in 2002.  These amounts include $2.7 million and $8.6million related to changes in executive management in 2003 and 2002,respectively.

We recognized net losses, primarily prepayment penalties andunamortized issuance costs, of $7.2 million, $2.3 million and $0.5 million in2003, 2002 and 2001, respectively, related to debt not associated withdiscontinued operations prior to scheduled maturity.

MerchantWired was an unconsolidated joint venture with other realestate companies to provide broadband telecommunication services totenants.  In the second quarter of 2002,we and the other real estate companies decided to discontinue the operations ofMerchantWired.  Accordingly, we recordedan impairment provision for the entire amount of our net investment in theventure.

A portion of the purchase price for the acquisition of assets fromRodamco was payable in euros.  InJanuary 2002, we acquired options to purchase 601 million euros at aweighted average per euro price of $0.8819. These transactions were executed to reduce our exposure to movements incurrency exchange rates between the date of the purchase agreement and theclosing date.  The contracts werescheduled to expire in May 2002 and had an aggregate cost of $11.3million.  In April 2002, we soldthe contracts for net proceeds of $10.2 million and recognized a loss of $1.1million.  We also executed and subsequentlysold a euro forward contract and realized a gain of $2.2 million.  As of December 31, 2003, we owned noforeign currency or financial instruments that exposed us to risk of movementsin currency exchange rates.

In 2003, we earned a fee of $4.0 million on the facilitation of a realestate transaction between two parties that are unrelated to us.

In 2002, we agreed to pay $3.0 million of costs incurred by an entitythat sold us a portfolio of office and industrial buildings in 1998 to resolvecertain tax-related matters arising from the transaction.

 

***Impairment losses onoperating properties reported in continuing operations: ***In 2003, werecognized an impairment loss of $6.5 million on Westdale Mall, a retail centerin Cedar Rapids, Iowa.  We also recognizedimpairment losses aggregating $1.4 million on two office properties in HuntValley, Maryland.  In 2001, werecognized an additional impairment loss ($0.4 million) on our investment in aretail center (Randhurst) that we and the other venturer intend todispose.  We changed our plans andintentions as to the manner in which these properties would be operated in thefuture and revised estimates of the most likely holding periods.  As a result, we evaluated the recoverabilityof the carrying amounts of the properties, determined that the carrying amountswere not recoverable from the future cash flows and recognized the impairmentlosses.

 

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***Net gains (losses)on dispositions of interests in operating properties:***  Net gains (losses) on dispositions ofinterests in operating properties included in earnings from continuingoperations are summarized as follows (in millions):

 
|                     |   | **2003** |   | **2002** |   | **2001** |   |
|--------------------------|--------|----------|--------|----------|--------|----------|--------|
|                     |   |     |   |     |   |     |   |
| Regional retail centers  |   | $        | 21.6   |     | $      | 42.6     |   | $ | — |   |
| Community retail centers |   | —   |   | 4.3      |   | —   |   |
| Other                    |   | 5.0      |   | 2.0      |   | (0.1     | )      |
|                     |   | $        | 26.6   |     | $      | 48.9     |   | $ | (0.1 | ) |

 

In 2003, in a transaction related to the sale of retail centers in thePhiladelphia metropolitan area, we acquired Christiana Mall from a partyrelated to the purchaser and assumed a participating mortgage secured byChristiana Mall.  The participatingmortgage had a fair value of $160.9 million. The holder of this mortgage had the right to receive $120 million incash and participation in cash flows and the right to convert thisparticipation feature into a 50% equity interest in Christiana Mall.  The holder exercised this right inJune 2003.  We recorded a portionof the cost of Christiana Mall based on the historical cost of the propertieswe exchanged to acquire this property because a portion of the transaction wasconsidered nonmonetary under EITF Issue 01-2, “Interpretations of APB OpinionNo. 29.”  As a consequence, when wesubsequently disposed of the 50% interest in the property to the holder of themortgage, we recognized a gain of $21.6 million.

Also in 2003, we sold our share of investments in Kravco Investments,L.P. for approximately $52 million.  Werecorded a gain on this transaction of approximately $4.6 million, net of taxesof approximately $3.0 million.

In April 2002, we sold our interests in 12 community retailcenters. Our interests in one of the community retail centers were reported inunconsolidated real estate ventures and the gain on the sale of our interestsin this property ($4.3 million, net of deferred income taxes of $2.0 million)is included in continuing operations. The remaining gain on this transaction is classified as a component ofdiscontinued operations. In April 2002, we sold our interest in FranklinPark, a regional retail center in Toledo, Ohio, for $20.5 million and the buyerassumed our share of the center’s debt ($44.7 million).  Our interest in this property was reportedin unconsolidated real estate ventures and, accordingly, the gain of$42.6 million that we recorded on this transaction is included incontinuing operations.

 

***Income taxes:***  In January 2001, we acquired all of thevoting stock of the majority financial interest ventures owned by a trust, ofwhich certain of our employees are beneficiaries.  On January 2, 2001, we and these now wholly ownedsubsidiaries made a joint election to treat the subsidiaries as taxable REITsubsidiaries (“TRS”) for Federal and certain state income tax purposes, whichelection allows us to engage in certain non-qualifying REIT activities.  With respect to the TRS, we are liable forincome taxes at the Federal and state levels. Our current and deferred income tax provisions relate primarily to theearnings of the TRS.  The income taxprovisions from continuing operations (excluding taxes related to gains onsales of operating properties) were $42.5 million, $29.0 million and$26.6 million in 2003, 2002 and 2001, respectively, and related primarilyto the earnings of TRS.

Our net deferred tax assets were $91.0 million and our net deferred taxliabilities were $86.4 million at December 31, 2003.  Our net deferred tax liabilities were $92.4million at December 31, 2002.  InSeptember 2003, we acquired a controlling financial interest in an entity(in which we previously held a minority interest acquired from Rodamco) whoseassets include, among other things, approximately $400 million of temporarydifferences (primarily interest deduction carryforwards).  We believe that it is more likely than notthat we will realize these assets and, accordingly, recorded a deferred taxasset of approximately $140 million.  Wealso recorded a deferred credit of approximately $122 million in accordancewith EITF Issue 98-11, “Accounting for Acquired Temporary Differences inCertain Purchase Transactions That Are Not Accounted for as BusinessCombinations.”  This deferred creditwill reduce income tax expense when the deferred tax asset is realized.  Deferred tax liabilities will become payableas TRS net operating loss carryforwards are exhausted and temporary differencesreverse (primarily due to completion of land development projects).

We had previously recorded valuation allowances related to certaindeferred tax assets that we could not conclude were more likely than not to berealized.  A significant portion ofthese assets related to temporary differences, primarily net operating losscarryforwards, attributed to a TRS that is an investor in the planned communityof Fairwood.  Land sales at Fairwoodbegan in the fourth quarter of 2001. Based on our experience through the third quarter of 2003 and ourprojections to completion of the project, we determined that it is more likelythan not that we will realize substantially all of these deferred taxassets.  Accordingly, in the thirdquarter of 2003, we eliminated $8.1 million of the valuation allowance relatedto these deferred tax assets.  Reversalsof other valuation allowances of $3.4 million in 2003 and $1.8 million in 2002related to certain tax credit carryforwards that we were previously unable toconclude were more likely than not to be realized.

 

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As discussed above, we conduct our community development activities inTRS.  Income tax expense is likely toincrease in future years as we expand our community development activities inSummerlin.  Significant operatingexpenses at Summerlin related to the Contingent Stock Agreement are notdeductible for Federal income tax purposes. Accordingly, we also expect our effective tax rate relating to communitydevelopment activities to increase.

 

***Equity in earnings of unconsolidated real estate ventures***:  Equity in earnings of unconsolidated realestate ventures is summarized as follows (in millions):

 
|                                                       |   | **2003** |   | **2002** |   | **2001** |   |
|------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                                       |   |     |   |     |   |     |   |
| Net operating income                                       |   | $        | 100.3  |     | $      | 80.2     |   | $ | 69.8 |   |
| Ground rent expense                                        |   | (1.6     | )      | (1.3     | )      | (1.3     | )      |
| Interest expense                                           |   | (33.9    | )      | (25.9    | )      | (23.9    | )      |
| Depreciation and amortization                              |   | (33.2    | )      | (19.2    | )      | (11.8    | )      |
| Losses on extinguishment of debt, net                      |   | (0.2     | )      | (0.5     | )      | (0.2     | )      |
| Equity in earnings of unconsolidated real  estate ventures |   | $        | 31.4   |     | $      | 33.3     |   | $ | 32.6 |   |

 

For segment reporting purposes, our share of the NOI of unconsolidatedreal estate ventures is included in the operating results of retail centers,office and other properties, community development and commercial developmentas discussed above in this Management’s Discussion and Analysis.  The increases in NOI and depreciation andamortization expense in 2003 and 2002 were primarily attributable to theacquisition of assets from Rodamco.  In connectionwith this transaction, we acquired interests in several properties and otherinvestments that are accounted for as unconsolidated real estate ventures(Oakbrook Center, Water Tower Place, River Ridge, Kravco Investments, L.P. andWestin Hotel).  We also acquired fromRodamco the remaining interests in properties (Collin Creek, North Star,Perimeter Mall and Willowbrook) in which we previously had a noncontrollinginterest and accounted for as unconsolidated real estate ventures.  Also, we disposed of a 50% interest inFranklin Park in April 2002, opened the Village of Merrick Park inSeptember 2002, admitted a 50% joint venture partner in Perimeter Mall inOctober 2002, acquired the controlling financial interests in RidgedaleCenter and Southland Center in November 2002 and, in the second quarter of2003, completed transactions that resulted in our ownership of a 50% interestin Christiana Mall.

 

***Discontinued operations:***The operating results of properties included in discontinued operations are summarizedas follows (in millions):

 
|                                                             |   | **2003** |   | **2002** |   | **2001** |   |
|------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                                             |   |     |   |     |   |     |   |
| Revenues                                                         |   | $        | 79.8   |     | $      | 156.6    |   | $ | 163.5 |   |
| Operating expenses, exclusive of  depreciation and amortization  |   | (36.2    | )      | (69.4    | )      | (72.7    | )      |
| Interest expense                                                 |   | (19.8    | )      | (37.5    | )      | (46.7    | )      |
| Depreciation and amortization                                    |   | (14.9    | )      | (31.3    | )      | (31.2    | )      |
| Gains (losses) on extinguishment of debt,  net                   |   | 26.9     |   | (5.3     | )      | —   |   |
| Impairment losses on operating properties                        |   | —   |   | (42.1    | )      | —   |   |
| Gains on dispositions of interests in  operating properties, net |   | 85.6     |   | 33.0     |   | —   |   |
| Income tax benefit (provision), primarily  deferred              |   | (0.3     | )      | 0.6      |   | (2.2     | )      |
| Discontinued operations                                          |   | $        | 121.1  |     | $      | 4.6      |   | $ | 10.7 |   |

 

We sell interests in retail centers that are not consistent with ourlong-term business strategies or not meeting our investment criteria and officeand other properties that are not located in our master-planned communities ornot part of urban mixed-use properties. We may also dispose of properties for other reasons.  Discontinued operations include theoperating results of properties sold during 2003 and 2002 in which we do nothave significant continuing involvement. Discontinued operations also include the operating results of HughesCenter properties, which are included in properties held for sale atDecember 31, 2003.  For segmentreporting purposes, our share of the NOI of the properties in discontinuedoperations is included in the operating results of retail centers, office andother properties or commercial development as discussed above in thisManagement’s Discussion and Analysis.

In December 2003, as part of an agreement to acquire interests inentities developing The Woodlands, we agreed to dispose of Hughes Center, amaster-planned business park in Las Vegas, Nevada, comprising eight officebuildings totaling approximately 1.1 million square feet, nine ground leasesand approximately 13 acres of developable land.  The sales of two of the office buildings and two of the groundleases closed in December 2003.  Werecorded net gains on these transactions of approximately $10.1 million.  The remaining properties in Hughes Centerwere classified as held for sale at December 31, 2003 and most were soldin the first quarter of 2004.  We expectto sell the remaining assets in Hughes Center in April 2004.

 

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In August 2003, we sold The Jacksonville Landing, a retail centerin Jacksonville, Florida, for net proceeds of $4.8 million.  We recognized a gain of $2.8 millionrelating to this sale.  We recorded animpairment loss of $3.3 million in the fourth quarter of 2002 related to thisproperty. We also sold three small neighborhood retail properties in Columbia,Maryland in the third quarter of 2003 for aggregate proceeds of $2.2 millionand recognized aggregate gains of $0.9 million.

In May and June 2003, we sold eight office and industrialbuildings in the Baltimore-Washington corridor for net proceeds of $46.6million.  We recognized gains onoperating properties of $4.4 million relating to the sales of these properties.

In April and May 2003, we sold six retail centers in thePhiladelphia metropolitan area and, in a related transaction, acquiredChristiana Mall from a party related to the purchaser.  In connection with these transactions, we receivednet cash proceeds of $218.4 million, the purchaser assumed or repaid atsettlement $276.6 million of property debt, and we assumed a participatingmortgage secured by Christiana Mall.  Werecognized aggregate gains of $65.4 million relating to the monetary portionsof these transactions. We recorded an impairment loss of $38.8 million in thefourth quarter of 2002 related to one of the retail centers sold.

We also recorded a net gain of $26.9 million related to theextinguishment of debt secured by two of the properties sold in the Philadelphiametropolitan area when the lender released the mortgages for a cash payment byus of less than the aggregate carrying amount of the debt.

In December 2002, we sold our interest in Tampa Bay Center and ourinterest in a Summerlin community retail center for net proceeds of $22.8million and $25.1 million, respectively. We recorded gains of $2.5 million and $2.8 million (net of deferredincome taxes of $1.5 million), respectively, on these transactions.

In April 2002, we sold our interests in 12 community retailcenters in Columbia, Maryland for net proceeds of $111.1 million.  We recorded a gain on this transaction ofapproximately $32.0 million, net of deferred income taxes of $18.4 million.  Our interests in one of the community retailcenters were reported in unconsolidated real estate ventures and the gain onthe sale of our interests in this property ($4.3 million, net of deferredincome taxes of $2.0 million) is included in continuing operations.  The remaining gain on this transaction($27.7 million, net of deferred income taxes of $16.4 million) is classified asa component of discontinued operations. In anticipation of the sale of the community retail centers, we repaiddebt secured by these properties in March 2002 and incurred a loss on thisrepayment of $5.3 million, including prepayment penalties of $4.6 million.

 

***Net earnings:***  Net earnings were $260.6 million in 2003,$139.9 million in 2002 and $110.7 million in 2001.  The increases in net earnings were attributable to the factorsdiscussed above, including gains on dispositions of interests in operatingproperties, impairment losses and gains (losses) on extinguishment of debt.

 

***Funds From Operations:***  We use Funds From Operations (“FFO”) as asupplement to our reported net earnings. Historical cost accounting for real estate assets implicitly assumesthat the value of real estate assets diminishes over time as reflected throughdepreciation and amortization expenses. We believe that the value of real estate assets does not diminish predictablyover time, as historical cost accounting implies, and instead fluctuates due tomarket and other conditions. Accordingly, we believe FFO provides investors with useful informationabout our operating performance because it excludes real estate depreciationand amortization expense.  We use thedefinition of FFO adopted by the National Association of Real Estate InvestmentTrusts.  Accordingly, FFO is defined asnet earnings (computed in accordance with accounting principles generallyaccepted in the United States of America), excluding gains (losses) ondispositions of interests in depreciated operating properties and real estatedepreciation and amortization expense. Also, beginning July 1, 2003, we include impairment losses onoperating properties in FFO. FFO for all periods presented conforms to thisdefinition.  Our calculation of FFO maynot be comparable to similarly titled measures reported by other companiesbecause all companies do not calculate FFO in the same manner.  FFO is not a liquidity measure and shouldnot be considered as an alternative to cash flows or indicative of cashavailable for distribution.  It alsoshould not be considered an alternative to net earnings, as determined inaccordance with GAAP, as an indication of our financial performance.

Net earnings is reconciled to FFO as follows (in millions):

 
|                                                                     |   | **2003** |   | **2002** |   | **2001** |   |
|--------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                                                     |   |     |   |     |   |     |   |
| Net earnings                                                             |   | $        | 260.6  |     | $      | 139.9    |   | $ | 110.7 |   |
| Depreciation and amortization                                            |   | 221.4    |   | 182.1    |   | 145.3    |   |
| Net losses (gains) on dispositions of  interests in operating properties |   | (112.2   | )      | (79.1    | )      | 0.1      |   |
| Funds From Operations                                                    |   | $        | 369.8  |     | $      | 242.9    |   | $ | 256.1 |   |

 

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Depreciation and amortization and net gains on dispositions ofinterests in operating properties include our share of the depreciation andamortization and net gains on dispositions of interests in operating propertiesof unconsolidated real estate ventures and of those properties classified indiscontinued operations.

The changes in FFO in 2003, 2002 and 2001 were attributable to factorsdiscussed above in this Management’s Discussion and Analysis.

 

***Financial condition, liquidity and capital resources:*** Our primary cash requirements are foroperating expenses, debt service, development of new properties, expansions andimprovements to existing properties and acquisitions.  We believe that our liquidity and capital resources are adequatefor our near-term and longer-term requirements.   We had cash and cash equivalents and investments in marketablesecurities totaling $139.5 million and $73.7 million at December 31, 2003and 2002, respectively.

We rely primarily on fixed-rate, nonrecourse loans from privateinstitutional lenders to finance most of our operating properties. We have alsomade use of the public equity and debt markets to meet our capital needs,principally to repay or refinance corporate and project-secured debt and toprovide funds for project development and acquisition costs and other corporatepurposes.  We have a credit facilitywith a group of lenders that provides for borrowings of up to$900 million.  The facility isavailable to December 2006, subject to a one-year renewal option.  We are continually evaluating sources ofcapital and believe that there are satisfactory sources available for allrequirements.  Selective dispositions ofproperties and interests in properties are expected to provide capitalresources in 2004 and may also provide them in subsequent years.

Most of our debt consists of mortgages collateralized by operatingproperties.  Scheduled principalpayments on property debt were $74.3 million, $76.1 million and $58.7 millionin 2003, 2002 and 2001, respectively.

Our contractual cash obligations and construction cost commitments aresummarized as follows at December 31, 2003 (in millions):

 
|                                                                       |   | **2004** |   | **2005** |   | **2006** |   | **2007** |   | **2008** |   | **After  2008** |   |
|----------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|-----------------|--------|
| Debt:                                                                      |   |     |   |     |   |     |   |     |   |     |   |            |   |
| Scheduled principal  payments                                              |   | $        | 74     |     | $      | 84       |   | $        | 60     |     | $      | 45              |   | $ | 38 |   | $ | 173 |   |
| Balloon payments                                                           |   | 443      |   | 416      |   | 567      |   | 448      |   | 457      |   | 1,639           |   |
| Total debt                                                                 |   | 517      |   | 500      |   | 627      |   | 493      |   | 495      |   | 1,812           |   |
| Capital lease  obligations                                                 |   | 4        |   | 3        |   | 2        |   | 2        |   | —   |   | 9               |   |
| Parent  Company–obligated mandatorily redeemable preferred securities |   | 56       |   | —   |   | —   |   | —   |   | —   |   | —          |   |
| Operating leases                                                           |   | 5        |   | 5        |   | 5        |   | 5        |   | 5        |   | 177             |   |
| Land purchase  commitment                                                  |   | 32       |   | —   |   | —   |   | —   |   | —   |   | —          |   |
| Commitment to purchase  interest in Mizner Park                            |   | 18       |   | —   |   | —   |   | —   |   | —   |   | —          |   |
| Construction  commitments:                                                 |   |     |   |     |   |     |   |     |   |     |   |            |   |
| Properties in  development                                                 |   | 100      |   | 3        |   | —   |   | —   |   | —   |   | —          |   |
| Land development                                                           |   | 51       |   | —   |   | —   |   | —   |   | —   |   | —          |   |
| Total                                                                      |   | $        | 783    |     | $      | 511      |   | $        | 634    |     | $      | 500             |   | $ | 500 |   | $ | 1,998 |   |

 

The balloon payments due in 2004 consist of $412.1 million of mortgagesand construction loans on four retail centers, four office buildings and onecommercial development property and a $30.8 million note.  The balloon payments due in 2005 consist of$416 million of debt related primarily to four retail centers andcorporate notes.  In January andFebruary 2004, we repaid $199.6 million of the mortgages and construction loansdue in 2004 and $240.3 million of the debt due in 2005 using proceeds fromcredit facility borrowings.  We expectto repay the remaining mortgages and notes with proceeds from propertyrefinancings, credit facility borrowings, proceeds from the issuance of publicdebt, equity or other available corporate funds.

We expect to spend more than $200 million (including the constructioncommitments set forth above) for new developments, expansions and improvementsto existing properties in 2004.  Asubstantial portion of these expenditures relates to new retail properties andretail center redevelopment/expansions, and it is expected that most of thesecosts will be financed by debt, including borrowings under existingproperty-specific construction loans and/or our credit facility.  In addition, we are an investor in severalunconsolidated joint ventures that are developing certain projects, with theother venturers funding a portion of development costs.  We expect to invest approximately $40million in these joint ventures in 2004.

In addition to the commitments summarized above, we have variousstanding or renewable contracts with vendors for goods and services.  These contracts generally have terms of oneyear or less and are cancelable with immaterial or no penalties.

In February 2004, we agreed to acquire Providence Place, a regionalretail center in Providence, Rhode Island for $270 million in cash andassumption of debt.  We expect to useapproximately $222 million of the proceeds from the February 2004 issuance of4.6 million shares of our common stock to pay a portion of the cash required atclosing.

 

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Net cash provided by operating activities was $376.0 million in 2003,$376.1 million in 2002 and $301.8 million in 2001.  Net cash provided in 2003 was consistent with 2002.  Increases in proceeds from land sales andthe operating cash flows of the properties acquired in 2003 and 2002 wereoffset by the effects of the properties sold in 2003 and 2002 and theacquisition of community development land in the Houston, Texas metropolitanarea in 2003.  The increase in net cashprovided of $74.3 million in 2002 was attributable to operating cash flows ofthe properties acquired from Rodamco in 2002 and higher proceeds from landsales.  The level of cash flows providedby operating activities is affected by the timing of receipts of rents,proceeds from land sales and other revenues and payment of operating andinterest expenses and community development costs.  The level of cash provided by operating distributions fromunconsolidated real estate ventures is affected by the timing of receipt oftheir revenues (including land sales revenues), payment of operating andinterest expenses and other sources and uses of cash.

Net cash used by investing activities was $288.6 million in 2003,$863.7 million in 2002 and $126.6 million in 2001.  The decrease of $575.1 million in 2003 was due primarily to adecrease in purchases of property interests and an increase in proceeds fromdispositions of interests in properties. The increase of $737.1 million in 2002 was attributable primarily to theacquisition of assets from Rodamco and lower distributions of financingproceeds from unconsolidated ventures, partially offset by an increase inproceeds from dispositions of interests in properties.

Cash used by investing activities also includes expenditures forproperties in development and improvements to existing properties. Theseexpenditures related to project development activity, primarily retail propertyredevelopment/expansions.  A substantialportion of the costs of properties in development was financed withconstruction or similar loans and/or credit facility borrowings.  In some cases, long-term fixed-rate debtfinancing is arranged before completion of construction.  Improvements to existing properties consistprimarily of costs of renovation and remerchandising programs and other tenantimprovement costs.

 

Net cash used by investing activities in 2003 was attributableprimarily to:

 

•                  Acquisitionof an interest in The Woodlands ($183.8 million);

•                  Acquisitionof remaining interest in Staten Island Mall ($148.3 million);

•                  Acquisitionof an interest in Mizner Park ($33.8 million); and

•                  Expendituresfor properties in development ($168.3 million, primarily Fashion Showexpansion, Kendall Town Center and The Shops at La Cantera).

 

These expenditures were partially offset by proceeds from dispositionsof interests in properties, primarily the net proceeds of the sales of sixretail centers in the Philadelphia metropolitan area ($218.4 million, net ofthe acquisition of Christiana Mall), our interest in Kravco Investments, L.P.($51.8 million), eight office and industrial buildings in theBaltimore-Washington corridor ($46.6 million), two office buildings and twoground leased parcels at Hughes Center ($29.0 million) and TheJacksonville Landing ($4.8 million).

 

Net cash used by investing activities in 2002 was attributableprimarily to:

 

•                  Acquisitionof eight high-quality operating properties and other assets in May 2002 fromRodamco ($815.3 million);

•                  Acquisitionof our partners’ controlling financial interests in Ridgedale Center andSouthland Center ($63.1 million); and

•                  Expenditures forproperties in development and investments in unconsolidated ventures ($208.4million, primarily Fashion Show expansion and Village of Merrick Park).

 

These expenditures were partially offset by proceeds from dispositionsof all or parts of our interests in 12 community retail centers in Columbia,Maryland ($111.1 million), Perimeter Mall ($67.1 million), Tampa BayCenter ($22.8 million) and Franklin Park ($20.5 million).  We also received proceeds of $25.1 millionfrom the sale of a newly constructed community retail center built in Summerlinwith the intention to sell and distributions of financing proceeds fromunconsolidated real estate ventures ($44.9 million).

Net cash used by investing activities in 2001 was attributableprimarily to expenditures for properties in development ($146.1 million,primarily Fashion Show expansion), expenditures for improvements to existingproperties ($48.5 million) and expenditures for investments in unconsolidatedreal estate ventures ($46.0 million, primarily Village at Merrick Park),partially offset by distributions of financing proceeds from unconsolidatedreal estate ventures ($109.3 million).

 

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Net cash used by financing activities was $11.7 million and $157.8million in 2003 and 2001, respectively. Net cash provided by financing activities was $497.1 million in 2002.  The change of $508.8 million in 2003 relatedprimarily to our issuance of 16.675 million shares of common stock for netproceeds of $456.3 million under our shelf registration statement inJanuary and February 2002 and the issuance of 7.20% Notes for netproceeds of $397 million in September 2002.  The change was also attributable to repayments of property debtin 2003, offset by proceeds from the exercise of stock options and the issuanceof public debt.  The change of $654.9million in 2002 was attributed to the issuance of common shares and netborrowings under our credit facility.

 

Net cash used by financing activities in 2003 was attributableprimarily to:

 

•                  Repaymentof property debt, primarily debt secured by North Star ($155 million) andChristiana Mall ($120 million);

•                  Paymentof dividends on common stock and preferred stock ($161.8 million);

•                  Purchases ofcommon stock ($72.0 million); and

•                  Repayments ofParent Company-obligated mandatorily redeemable preferred securities ($57.1million).

 

These payments were partially offset by proceeds from the exercise ofstock options ($109.8 million), proceeds from the issuance of the 5.375% Notes(approximately $347 million) and proceeds from the issuance of property debt  (primarily debt secured by Christiana Mall,$120 million, and Staten Island Mall, $85 million).

 

Net cash provided by financing activities in 2002 was attributableprimarily to:

 

•                  Proceedsfrom issuance of 16.675 million shares of common stock ($456.3 million) inJanuary and February 2002;

•                  Proceedsfrom the issuance of the 7.20% Notes in September 2002 ($397 million); and

•                  Proceedsfrom the issuance of property debt ($195.2 million).

 

These proceeds were partially offset by repayments of property debt($285.5 million) and the payment of dividends on common stock and preferredstock ($147.2 million).

 

Net cash used by financing activities in 2001 was attributableprimarily to:

 

•                  Repaymentof property debt, primarily debt secured by Exton Square ($99.0 million),Faneuil Hall Marketplace ($52.3 million) and South Street Seaport ($52.0million) and

•                  Paymentof dividends on common stock and preferred stock ($110.1 million).

 

These payments were partially offset by proceeds from the issuance ofproperty debt, primarily debt secured by Exton Square ($106.6 million), FaneuilHall Marketplace ($55.0 million) and South Street Seaport ($45.0 million).

 

In addition to our unrestricted cash and cash equivalents andinvestments in marketable securities, we have other sources of capital.   Availability under our credit facility was$629 million at December 31, 2003. This credit facility can be used for various purposes, including landand project development costs, property acquisitions, liquidity and othercorporate needs.  Also, we have aneffective shelf registration statement for the sale of up to an aggregate ofapproximately $2.25 billion (based on the public offering price) of commonstock, Preferred stock and debt securities. At December 31, 2003, we had issued approximately $1.57billion of common stock and debt securities under the shelf registrationstatement.  We had approximately $680million of availability under the shelf registration statement atDecember 31, 2003, $223 million of which we used in connection with apublic offering of common stock in February 2004.  At March 1, 2004, we had approximately$457 million of availability remaining under the shelf registration statement.

At December 31, 2003, we were holding for sale properties inHughes Center, which we agreed to sell in connection with the acquisition of aninterest in The Woodlands.  We sold mostof these properties in the first quarter of 2004.  We also consider certain investment and other land assets assignificant sources of liquidity.  InJanuary 2004, we sold a parcel of land in California that we were holdingfor sale for approximately $25 million.

In 1999, our Board of Directors authorized the repurchase of commonshares of up to $250 million, subject to certain pricing restrictions.  No shares were repurchased under thisprogram in 2003, 2002 or 2001.  Allshares of common stock repurchased in 2003, 2002 and 2001 were subsequentlyissued pursuant to the Contingent Stock Agreement.

 

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The agreements relating to various loans impose limitations on us.  The most restrictive of these limit thelevels and types of debt we may incur and require us to maintain specifiedminimum levels of debt service coverage and net worth.  The agreements also impose restrictions onour dividend payout ratio and on sale, lease and certain other transactions,subject to various exclusions and limitations. These restrictions have not limited our normal business activities andare not expected to do so in the foreseeable future.

 

***Off-balance sheet arrangements and unconsolidated ventures:***  We own interests in unconsolidated realestate ventures that own and/or develop properties, including master-plannedcommunities.  We use these ventures tolimit our risk associated with individual properties and to reduce our capitalrequirements.  We may also contributeour interests in properties to unconsolidated ventures for cash distributionsand interests in the ventures to provide liquidity as an alternative to outrightproperty sales.  These ventures ownproperties managed by us for a fee and are controlled jointly by our venturepartners and us.  At December 31,2003, these ventures also include joint ventures that are developing theplanned communities of Fairwood and The Woodlands.  These ventures are accounted for using the equity or cost method,as appropriate.

At December 31, 2003, we had other commitments and contingenciesrelated to unconsolidated ventures. These commitments and contingencies are summarized as follows (inmillions):

 
| Guarantee of debt:                                    |   |   |   |
|-------------------------------------------------------|--------|--------|--------|
| Village of Merrick Park                               |   | $      | 100.0  |   |
| Hughes Airport-Cheyenne  Centers                      |   | 28.8   |   |
| Construction contracts  for properties in development |   | 9.5    |   |
| Long-term ground lease  obligations                   |   | 121.1  |   |
|                                                  |   | $      | 259.4  |   |

 

We previously guaranteed the repayment of a construction loan of theunconsolidated real estate venture that owns the Village of Merrick Park.  In October 2003, the venture repaidthis loan with proceeds from a $194 million mortgage loan.  We have guaranteed $100 million of themortgage loan.  The amount of theguarantee may be reduced or eliminated upon the achievement of certain lenderrequirements.  Additionally, venturepartners have provided guarantees to us for their share (60%) of the loanguarantee.

 

***Market risk information:***  The market risk associated with financialinstruments and derivative financial and commodity instruments is the risk ofloss from adverse changes in market prices or rates.  Our market risk arises primarily from interest rate risk relatingto variable-rate borrowings used to maintain liquidity (e.g., credit facilityadvances) or finance project development costs (e.g., construction loanadvances).  Our interest rate riskmanagement objective is to limit the impact of interest rate changes onearnings and cash flows.  In order toachieve this objective, we rely primarily on long-term, fixed-rate debt.  We also use interest rate exchangeagreements, including interest rate swaps and caps, to mitigate our interestrate risk on variable-rate debt, including borrowings under our revolvingcredit facility. The fair value of these and other derivative financialinstruments was a liability of approximately $5.0 million atDecember 31, 2003.  We do notenter into interest rate exchange agreements for speculative purposes.

Our interest rate risk is monitored closely by management.  The table below presents the annualmaturities, weighted-average interest rates on outstanding debt at the end ofeach year (based on a LIBOR rate of 1.1%) and fair values required to evaluateour expected cash flows under debt agreements and our sensitivity to interestrate changes at December 31, 2003. Information relating to debt maturities is based on expected maturitydates and is summarized as follows (in millions):

 
|                     |   | **2004** |   | **2005** |   | **2006** |   | **2007** |   | **2008** |   | **Thereafter** |   | **Total** |   | **Fair  Value** |   |
|--------------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------------|--------|-----------|--------|-----------------|--------|
|                     |   |     |   |     |   |     |   |     |   |     |   |           |   |      |   |            |   |
| Fixed-rate debt          |   | $        | 286    |     | $      | 176      |   | $        | 342    |     | $      | 233            |   | $         | 492    |            | $      | 1,807 |   | $ | 3,336 |   | $ | 3,623 |   |
| Average interest rate    |   | 7.1      | %      | 7.0      | %      | 6.9      | %      | 6.8      | %      | 6.8      | %      | 6.8            | %      | 6.8       | %      |            |   |
|                     |   |     |   |     |   |     |   |     |   |     |   |           |   |      |   |            |   |
| Variable-rate LIBOR debt |   | $        | 231    |     | $      | 324      |   | $        | 285    |     | $      | 260            |   | $         | 2      |            | $      | 6 |   | $ | 1,108 |   | $ | 1,108 |   |
| Average interest rate    |   | 2.8      | %      | 2.4      | %      | 2.6      | %      | 3.3      | %      | 3.6      | %      | 3.6            | %      | 2.8       | %      |            |   |

 

At December 31, 2003, approximately $400.5 million of ourvariable-rate LIBOR debt relates to borrowings under construction loans.  We repaid approximately $258 million of thisdebt in January 2004 using proceeds from credit facility borrowings.  We expect to repay the remaining constructionloans with proceeds of long-term, fixed-rate debt in 2004 and 2006 when we expectto complete construction of the related projects.

We had interest rate swap agreements and forward-starting swapagreements in place at December 31, 2003 and we entered into similaragreements in January 2004.  Theseswap agreements and forward-starting swap agreements effectively fix the LIBORrate on a portion of our variable-rate debt through December 2006.  The weighted-average notional amounts ofthese agreements and their terms are summarized as follows (in millions):

 
|                                                                                                        |   | **2004** |   | **2005** |   | **2006** |   |
|-------------------------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                                                                                        |   |     |   |     |   |     |   |
| Weighted-average notional amount                                                                            |   | $        | 275.8  |     | $      | 20.5     |   | $ | 10.4 |   |
| Weighted-average fixed effective rate (pay  rate)                                                           |   | 3.9      | %      | 6.0      | %      | 6.8      | %      |
| Weighted-average variable interest rate of  related debt (receive rate) based on LIBOR at December 31, 2003 |   | 2.6      | %      | 2.9      | %      | 3.2      | %      |
|                                                                                                             |        |          |        |          |        |          |        |  |  |  |

 

Based on our outstanding variable-rate LIBOR debt and interest rateswaps in effect at December 31, 2003, a hypothetical LIBOR increase of 1% wouldcause annual interest expense to increase $8.3 million.

Our investments in marketable securities closely match our liabilitiesrelated to certain deferred compensation plans.  As a result, changes in the market values of these investments donot have a significant effect on our earnings.

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***2004 developments:***  In January 2004, we acquired ourpartners’ interests in entities developing Fairwood for approximately $32million.

In January and February of 2004, we disposed of most of ourremaining assets at Hughes Center for approximately $172 million and recognizedgains, net of taxes, of approximately $39.5 million.

In January 2004, we acquired a 50% interest in additional officecomponents at Mizner Park for approximately $18 million.

In January and February 2004, we redeemed, or called forredemption, all remaining outstanding Parent Company-obligated mandatorilyredeemable preferred securities.

In January and February 2004, we converted all outstandingshares of Series B Convertible Preferred Stock to approximately 5.3 millionshares of our common stock.

In February 2004, we adopted a plan to terminate our funded andsupplemental defined benefit pension plans.

On February 9, 2004, we issued, in a public offering, 4.0 millionshares of common stock for proceeds of approximately $193.2 million ($48.30 pershare).  We also granted to theunderwriter an option to purchase 0.6 million shares of common stock to coverover-allotments.  The underwriterexercised this option, and we issued 0.6 million shares on February 23,2004 for proceeds of approximately $29.0 million ($48.30 per share).  The offering was made under our effectiveshelf registration statement.  Afterissuance of these shares of common stock, availability under our effectiveshelf registration statement was approximately $457 million.

In February 2004, we agreed to purchase Providence Place, aregional retail center in Providence, Rhode Island.  We expect to assume mortgage debt with a face value ofapproximately $240 million and a payment in lieu of real estate taxes loan ofapproximately $47 million and to pay $270 million to the seller, using theproceeds of the common stock offering discussed above and borrowings under ourrevolving credit facility.  We expectthis transaction to close in March 2004.

 

***Critical accounting policies***:  Critical accounting policies are those thatare both important to the presentation of our financial condition and resultsof operations and require management’s most difficult, complex or subjectivejudgments.  Our critical accountingpolicies are those applicable to the evaluation of impairment of long-livedassets, the evaluation of the collectibility of accounts and notes receivable,profit recognition on land sales and allocation of the purchase price ofacquired properties.

 

Impairment oflong-lived assets:  Ifevents or changes in circumstances indicate that the carrying values ofoperating properties, properties in development or land held for developmentand sale may be impaired, a recovery analysis is performed based on theestimated undiscounted future cash flows to be generated from theproperty.  If the analysis indicatesthat the carrying value of the tested property is not recoverable fromestimated future cash flows, the property is written down to estimated fairvalue and an impairment loss is recognized. Fair values are determined based on estimated future cash flows usingappropriate discount and capitalization rates. The estimated cash flows used for the impairment analyses and todetermine estimated fair values are based on our plans for the tested asset andour views of market and economic conditions. The estimates consider matters such as current and historical rentalrates, occupancies for the tested property and comparable properties and recentsales data for comparable properties. Changes in estimated future cash flows due to changes in our plans orviews of market and economic conditions could result in recognition ofimpairment losses which, under the applicable accounting guidance, could besubstantial.

Properties held for sale, including land held for sale, are carried atthe lower of their carrying values (i.e., cost less accumulated depreciationand any impairment loss recognized, where applicable) or estimated fair valuesless costs to sell.  Accordingly,decisions by us to sell certain operating properties, properties in developmentor land held for development and sale will result in impairment losses ifcarrying values of the specific properties exceed their estimated fair valuesless costs to sell.  The estimates offair value consider matters such as recent sales data for comparable propertiesand, where applicable, contracts or the results of negotiations withprospective purchasers.  These estimatesare subject to revision as market conditions and our assessment of them change.

 

Collectibility ofaccounts and notes receivable:  The allowance for doubtful accounts and notes receivable isestablished based on quarterly analysis of the risk of loss on specificaccounts.  The analysis placesparticular emphasis on past-due accounts and considers information such as thenature and age of the receivables, the payment history of the tenants or otherdebtors, the financial condition of the tenants and management’s assessment oftheir ability to meet their lease obligations, the basis for any disputes andthe status of related negotiations, among other things.  Our estimate of the required allowance issubject to revision as these factors change and is sensitive to the effects ofeconomic and market conditions on tenants.

 

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Profit recognitionon land sales:  Costof land sales is determined as a specified percentage of land sales revenuesrecognized for each community development project. The cost ratios used arebased on actual costs incurred and estimates of development costs and salesrevenues to completion of each project. The ratios are reviewed regularly and revised for changes in sales andcost estimates or development plans. Significant changes in these estimates or development plans, whether dueto changes in market conditions or other factors, could result in changes tothe cost ratio used for a specific project. The specific identification method is used to determine cost of salesfor certain parcels of land, including acquired parcels we do not intend todevelop or for which development is complete at the date of acquisition.

 

Allocation ofthe purchase price of acquired properties:  We allocate the purchase price of acquiredproperties to tangible and identified intangible assets based on their fairvalues. In making estimates of fair values for purposes of allocating purchaseprice, we use a number of sources, including independent appraisals that may beobtained in connection with the acquisition or financing of the respectiveproperty and other market data. We also consider information obtained abouteach property as a result of our pre-acquisition due diligence, marketing andleasing activities in estimating the fair value of the tangible and intangibleassets acquired.

The fair valuesof tangible assets are determined on an “if-vacant” basis.  The "if-vacant" fair value isallocated to land, where applicable, buildings, tenant improvements andequipment based on property tax assessments and other relevant informationobtained in connection with the acquisition of the property.

The fairvalues of intangible assets include leases with above- or below-market rentsand, where applicable, other in-place lease and customer relationship values.

Above-marketand below-market in-place lease values are recorded based on the present value(using an interest rate which reflects the risks associated with the leasesacquired) of the difference between (i) the contractual amounts to be receivedpursuant to the in-place leases and (ii) our estimate of fair market leaserates for the corresponding space, measured over a period equal to theremaining non-cancelable term of the lease (including those under bargainrenewal options). The capitalized above- and below-market lease values areamortized as adjustments to rental income over the remaining terms of therespective leases (including periods under bargain renewal options).

The aggregatefair values of other identified intangible assets acquired is measured based onthe difference between (i) the property valued with existing in-place leasesadjusted to market rental rates and (ii) the property valued as if vacant. Thisvalue is allocated to in-place lease and customer relationship assets (bothanchor stores and tenants). The fair value of in-place leases is based on ourestimates of carrying costs during the expected lease-up periods and costs toexecute similar leases. Our estimate of carrying costs includes real estatetaxes, insurance and other operating expenses and lost rentals during theexpected lease-up periods considering current market conditions. Our estimateof costs to execute similar leases includes leasing commissions, legal andother related costs. The fair value of anchor store agreements is determinedbased on our experience negotiating similar relationships (not in connectionwith property acquisitions). The fair value of tenant relationships is based onour evaluation of the specific characteristics of each tenant’s lease and ouroverall relationship with that respective tenant. Characteristics we considerin determining these values include the nature and extent of our existingbusiness relationships with the tenant, growth prospects for developing newbusiness with the tenant, the tenant’s credit quality and expectations of leaserenewals, among other factors. The value of in-place leases is amortized toexpense over the initial term of the respective leases, primarily ranging fromtwo to ten years. The value of anchor store agreements is amortized to expenseover the estimated term of the anchor store’s occupancy in the property.  Should an anchor store vacate the premises,the unamortized portion of the related intangible is charged to expense.  The value of tenant relationship intangiblesis amortized to expense over the initial term and any renewal periods in therespective leases, but in no event does the amortization period exceed theremaining depreciable life of the building. Should a tenant terminate its lease, the unamortized portion of thein-place lease value and customer relationship intangibles is charged toexpense.

 

***New financial accounting standards:*** InJune 2002, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards No. 146, “Accounting for CostsAssociated with Exit or Disposal Activities” (“SFAS 146”).  SFAS 146 addresses financial accounting andreporting for costs associated with exit or disposal activities and requiresthat a liability for a cost associated with an exit or disposal activity berecognized when the liability is incurred. The provisions of SFAS 146 are effective for exit or disposal activitiesinitiated after December 31, 2002. Our adoption of SFAS 146 in January 2003 did not have a materialeffect on our results of operations or financial condition.

In November 2002, the FASB issued Interpretation No. 45,“Guarantor’s Accounting and Disclosure Requirements for Guarantees, IncludingIndirect Guarantees of Indebtedness of Others” (“FIN 45”).  FIN 45 elaborates on the disclosuresrequired by a guarantor in its interim and annual financial statements aboutobligations under certain guarantees that it has issued.  It also clarifies that a guarantor isrequired to recognize liabilities for the fair values of obligations undertakenin guarantees issued or modified after December 31, 2002.  As of December 31, 2003, we had notentered into guarantees since January 1, 2003 that have had a materialeffect on our balance sheet, and the adoption of FIN 45 did not have a materialeffect on our financial position or results of operations.

 

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In December 2002, the FASB issued Statement of FinancialAccounting Standards No. 148, “Accounting for Stock-Based Compensation–Transition and Disclosure” (“SFAS 148”). SFAS 148 amends Statement of Financial Accounting Standards No. 123,“Accounting for Stock-Based Compensation” (“SFAS 123”).  SFAS 148 provides alternative methods oftransition for a voluntary change to the fair value-based method of accountingfor stock-based compensation and requires disclosure in both annual and interimfinancial statements about the method of accounting for stock-basedcompensation and the effect of the method used on reported results.  We have adopted the disclosure provisions ofSFAS 148.  We have not determinedwhether we will change to the fair value-based method of accounting forstock-based compensation and, if so, which of the alternative methods oftransition we would adopt.

In January 2003, the FASB issued Interpretation No. 46,“Consolidation of Variable Interest Entities” (“FIN 46”).  FIN 46 addresses the consolidation ofvariable interest entities (“VIEs”) in which the equity investors lack one ormore of the essential characteristics of a controlling financial interest orwhere the equity investment at risk is not sufficient for the entity to financeits activities without additional subordinated financial support.  In December 2003, the FASB issuedInterpretation No. 46 (revised December 2003), “Consolidation of VariableInterest Entities” (“FIN 46R”).  FIN 46Ror FIN 46 applies in the fourth quarter of 2003 to all special purpose entities(“SPEs”) and to VIEs formed after January 31, 2003 and in the firstquarter of 2004 to all other VIEs. Application of FIN 46 in 2003 had no effect on our financial statementsas we previously consolidated the SPE that issued our Parent Company-obligatedmandatorily redeemable preferred securities and, at December 31, 2003, held nointerests in other VIEs formed after January 31, 2003.  Based on our preliminary analysis, we do notanticipate that full application of FIN 46R in the first quarter of 2004 willhave a material effect on our results of operations or financial condition.

In April 2003, the FASB issued Statement of Financial AccountingStandards No. 149, “Amendment of Statement 133 on Derivative Instruments andHedging Activities” (“SFAS 149”).  SFAS149 was effective for contracts entered into or modified after June 30,2003, and implementation had no effect on our reported results of operations orfinancial condition.

In May 2003, the FASB issued Statement of Financial AccountingStandards No. 150,  “Accounting forCertain Financial Instruments with Characteristics of both Liabilities andEquity” (“SFAS 150”).  SFAS 150establishes standards for the classification and measurement of certainfinancial instruments with characteristics of both liabilities and equity.  It requires that an issuer classify afinancial instrument that is within its scope as a liability (or an asset insome circumstances).  In particular, itrequires that mandatorily redeemable financial instruments be classified asliabilities and reported at fair value and that changes in their fair values bereported as interest cost.  SFAS 150 waseffective for us as of July 1, 2003.  On October 29, 2003, the FASB indefinitely delayed theprovision of the statement related to non-controlling interests in consolidatedlimited-life entities formed prior to November 5, 2003.  Based on the FASB’s deferral of thisprovision, adoption of SFAS 150 did not affect our financial statements.  We determined that several of ourconsolidated partnerships are limited-life entities.  We estimate the fair values of minority interests in thesepartnerships at December 31, 2003 aggregated approximately $56.6million.  The aggregate carrying valuesof the minority interests were approximately $28.5 million at December 31,2003.

 

***Impact of inflation: ***The major portion of our operating properties, ourretail centers, is substantially protected from declines in the purchasingpower of the dollar.  Retail leasesgenerally provide for minimum rents plus percentage rents based on sales over aminimum base.  In many cases, increasesin tenant sales (whether due to increased unit sales or increased prices fromdemand or general inflation) will result in increased rental revenue.  A substantial portion of the tenant leases(retail and office) also provide for other rents which reimburse us for certainoperating expenses; consequently, increases in these costs do not have asignificant impact on our operating results. We have a significant amount of fixed-rate debt which, in a period ofinflation, will result in a holding gain since debt will be paid off withdollars having less purchasing power.

 

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***Information relating to forward-looking statements: ***This Annual Report toShareholders includes forward-looking statements which reflect our currentviews with respect to future events and financial performance.  Such forward-looking statements include,among others, statements regarding our strategy, statements regardingexpectations as to operating results from our retail centers, our office andother properties, and our community development activities, expectations as toour ability to lease vacating and expiring space, expectations as to thecompletion of pending purchase and sale transactions, expectations as tooperating results from acquisitions, expectations regarding income taxes infuture years and our beliefs as to our liquidity and capital resources and asto our expenditures for new developments, expansions and improvements.

Forward-looking statements are subject to certain risks anduncertainties, including those identified below which could cause actual resultsto differ materially from historical results or those anticipated.  The words “will,” “plan,” “believe,”“expect,” “anticipate,” “target,” “intend” and similar expressions identifyforward-looking statements.  Readers arecautioned not to place undue reliance on these forward-looking statements,which speak only as of their dates.  Weundertake no obligation to publicly update or revise any forward-lookingstatements, whether as a result of new information, future events orotherwise.  The following are among thefactors that could cause actual results to differ materially from historicalresults or those anticipated: (1) changes in the economic climate; (2) ourdependence on rental income from real property; (3) uncertainty from terroristattacks and volatility in the financial markets; (4) our lack of geographicaldiversification; (5) possible environmental liabilities; (6) special localeconomic and environmental risks in Nevada; (7) real estate development andinvestment risks; (8) the effect of uninsured loss; (9) the cost and adequacyof insurance; (10) the illiquidity of real estate investments; (11)competition; (12) real estate investment trust risks; (13) changes in tax lawsor regulations; and (14) risks associated with the acquisition of assets fromRodamco.  Further, domestic orinternational incidents could affect general economic conditions and ourbusiness.  For a more detaileddiscussion of these and other factors, see Exhibit 99.2 of our Form 10-K forthe fiscal year ended December 31, 2003.

 

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*TheRouse Company and Subsidiaries*

FIVE YEAR SUMMARYOF NET OPERATING INCOME AND NET EARNINGS

Years endedDecember 31, (in thousands)

 
|                             |   | **2003**  |    | **2002**  |   | **2001**  |   | **2000**  |    | **1999**  |   |
|----------------------------------|--------|-----------|---------|-----------|--------|-----------|--------|-----------|---------|-----------|--------|
| Segment revenues:                |   |      |    |      |   |      |   |      |    |      |   |
| Retail centers:                  |   |      |    |      |   |      |   |      |    |      |   |
| Minimum and percentage rents     |   | $         | 497,946 |      | $      | 454,277   |   | $         | 367,756 |      | $      | 369,253 |   | $ | 363,233 |   |
| Other rents and other revenues   |   | 345,295   |    | 321,236   |   | 269,455   |   | 262,450   |    | 264,103   |   |
|                             |   | 843,241   |    | 775,513   |   | 637,211   |   | 631,703   |    | 627,336   |   |
|                             |   |      |    |      |   |      |   |      |    |      |   |
| Office and other properties:     |   |      |    |      |   |      |   |      |    |      |   |
| Minimum and percentage rents     |   | 155,447   |    | 156,407   |   | 157,831   |   | 167,033   |    | 159,158   |   |
| Other rents and other revenues   |   | 45,547    |    | 48,784    |   | 45,885    |   | 49,198    |    | 46,264    |   |
|                             |   | 200,994   |    | 205,191   |   | 203,716   |   | 216,231   |    | 205,422   |   |
|                             |   |      |    |      |   |      |   |      |    |      |   |
| Community development            |   | 291,439   |    | 240,992   |   | 218,322   |   | 215,459   |    | 197,159   |   |
|                             |   | 1,335,674 |    | 1,221,696 |   | 1,059,249 |   | 1,063,393 |    | 1,029,917 |   |
|                             |   |      |    |      |   |      |   |      |    |      |   |
| Segment operating expenses:      |   |      |    |      |   |      |   |      |    |      |   |
| Retail centers                   |   | 334,336   |    | 305,686   |   | 261,494   |   | 263,365   |    | 262,013   |   |
| Office and other properties      |   | 78,810    |    | 80,195    |   | 75,814    |   | 77,538    |    | 74,662    |   |
| Community development            |   | 167,549   |    | 154,827   |   | 140,317   |   | 145,594   |    | 143,524   |   |
| Commercial development           |   | 13,833    |    | 12,986    |   | 6,871     |   | 7,701     |    | 3,706     |   |
| Corporate                        |   | 18,969    |    | 16,324    |   | 13,138    |   | 9,357     |    | 9,021     |   |
|                             |   | 613,497   |    | 570,018   |   | 497,634   |   | 503,555   |    | 492,926   |   |
|                             |   |      |    |      |   |      |   |      |    |      |   |
| Net operating income by segment: |   |      |    |      |   |      |   |      |    |      |   |
| Retail centers                   |   | 508,905   |    | 469,827   |   | 375,717   |   | 368,338   |    | 365,323   |   |
| Office and other properties      |   | 122,184   |    | 124,996   |   | 127,902   |   | 138,693   |    | 130,760   |   |
| Community development            |   | 123,890   |    | 86,165    |   | 78,005    |   | 69,865    |    | 53,635    |   |
| Commercial development           |   | (13,833   | )       | (12,986   | )      | (6,871    | )      | (7,701    | )       | (3,706    | )      |
| Corporate                        |   | (18,969   | )       | (16,324   | )      | (13,138   | )      | (9,357    | )       | (9,021    | )      |
|                             |   |      |    |      |   |      |   |      |    |      |   |
| Net Operating Income (note 1)    |   | $         | 722,177 |      | $      | 651,678   |   | $         | 561,615 |      | $      | 559,838 |   | $ | 536,991 |   |

 

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|                                                                                                                                                                                                                                                                                                             |   | **2003** |    | **2002** |   | **2001** |   | **2000** |    | **1999** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|---------|----------|--------|----------|--------|----------|---------|----------|--------|
|                                                                                                                                                                                                                                                                                                             |   |     |    |     |   |     |   |     |    |     |   |
| Reconciliation to net earnings:                                                                                                                                                                                                                                                                                  |   |     |    |     |   |     |   |     |    |     |   |
| Net Operating Income (note 1)                                                                                                                                                                                                                                                                                    |   | $        | 722,177 |     | $      | 651,678  |   | $        | 561,615 |     | $      | 559,838 |   | $ | 536,991 |   |
| Ground rent, interest and other financing  expenses (note 2)                                                                                                                                                                                                                                                     |   | (295,908 | )       | (293,233 | )      | (274,786 | )      | (295,745 | )       | (291,464 | )      |
| Depreciation and amortization                                                                                                                                                                                                                                                                                    |   | (173,280 | )       | (131,594 | )      | (102,361 | )      | (71,796  | )       | (81,904  | )      |
| Income taxes, primarily deferred                                                                                                                                                                                                                                                                                 |   | (42,500  | )       | (29,013  | )      | (26,639  | )      | (92      | )       | (88      | )      |
| Net gains (losses) on dispositions of  interests in  operating properties                                                                                                                                                                                                                                   |   | 26,632   |    | 48,946   |   | (58      | )      | 42,601   |    | 69,315   |   |
| Impairment losses on operating properties                                                                                                                                                                                                                                                                        |   | (7,900   | )       | —   |   | (374     | )      | (8,858   | )       | (6,223   | )      |
| Our share of depreciation and amortization,  impairment losses, gains (losses) on dispositions of interests in  operating properties, gains (losses) on  early  extinguishment of debt and  income taxes, primarily deferred, of unconsolidated real estate ventures and  discontinued operations, net |   | 63,881   |    | (69,302  | )      | (45,464  | )      | (57,872  | )       | (76,332  | )      |
| Other (provisions and losses) gains, net                                                                                                                                                                                                                                                                         |   | (32,513  | )       | (37,631  | )      | (816     | )      | 2,409    |    | (14,998  | )      |
| Cumulative effect at January 1, 2001  of change in accounting for derivative instruments and hedging activities                                                                                                                                                                                             |   | —   |    | —   |   | (411     | )      | —   |    | —   |   |
|                                                                                                                                                                                                                                                                                                             |   |     |    |     |   |     |   |     |    |     |   |
| Net earnings                                                                                                                                                                                                                                                                                                     |   | $        | 260,589 |     | $      | 139,851  |   | $        | 110,706 |     | $      | 170,485 |   | $ | 135,297 |   |

 

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**Notes:**

 

(1)                                  Net Operating Income(“NOI”) data included in this five-year summary are presented by segment.  Consistent with the requirements ofStatement of Financial Accounting Standards No. 131, “Disclosures aboutSegments of an Enterprise and Related Information,” segment data are reportedusing the performance measure and accounting policies used for internalreporting to management.  Theperformance measure is Net Operating Income. We define NOI as net earnings (computed in accordance with accountingprinciples generally accepted in the United States of America), excludingcumulative effects of changes in accounting principles, net gains (losses) ondispositions of interests in operating properties not developed for sale net ofincome taxes, impairment losses on operating properties, other provisions andlosses, real estate depreciation and amortization, current and deferred incometaxes and interest and other financing expenses.  Other financing expenses are defined in note 2.  The accounting policies of the segments arethe same as those of the Company, except that we account for the majorityfinancial interest ventures (prior to our 2001 acquisition of voting stock) ona consolidated basis rather than using the equity method; we account for realestate ventures in which we have joint interest and control and certain otherminority interest ventures (“proportionate share ventures”) using theproportionate share method rather than the equity method; we include our shareof NOI less interest and other financing expenses of other unconsolidatedminority interest ventures (“other ventures”) in revenues; and we includediscontinued operations and minority interests in NOI rather than presentingthem separately.  These differences affectonly the reported revenues and operating expenses of the segments and have noeffect on our reported net earnings.

 

(2)                                  Ground rent, interestand other financing expenses include interest expense, distributions on ParentCompany-obligated mandatorily redeemable preferred securities and other subsidiarypreferred stock, ground rent expense and certain preference returns topartners, net of interest income earned on corporate investments, and aredetermined using the segment accounting policies discussed in note 1.

 

(3)                                  NOI is not a measureof operating results or cash flows from operating activities as defined byaccounting principles generally accepted in the United States of America.  Additionally, NOI is not indicative of cashavailable to fund cash needs, including the payment of dividends, and shouldnot be considered an alternative to cash flows as a measure of liquidity.

 

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**OPERATINGPROPERTIES OF THE ROUSE COMPANY**

 
| **Consolidated Retail Centers (Note  1)** |   | **Date of  Opening or  Acquisition  (Note 3)** |   | **Department Stores/Anchor Tenants**                                                                               |   |       |   |
|-------------------------------------------|--------|------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------|--------|------------|--------|
| **Retail Square Footage**                 |
| **Total  Center**                         |   | **Mall Only**                                  |
|                                      |   |                                           |   |                                                                                                               |   |       |   |   |   |
| Arizona Center, Phoenix, AZ               |   | 11/90                                          |   | AMC Arizona Center 24                                                                                              |   | 160,000    |   | 160,000 |   |
| Augusta Mall, Augusta, GA                 |   | 8/78                                           |   | Dillard’s; JCPenney; Rich’s-Macy’s; Sears; Rich’s Furniture                                    |   | 1,066,000  |   | 317,000 |   |
| Bayside Marketplace, Miami, FL            |   | 4/87                                           |   | —                                                                                                             |   | 225,000    |   | 225,000 |   |
| Beachwood Place, Cleveland, OH            |   | 8/78                                           |   | Dillard’s; Nordstrom; Saks Fifth Avenue                                                                       |   | 914,000    |   | 350,000 |   |
| Collin Creek, Plano, TX                   |   | 9/95                                           |   | Dillard’s; Foley’s; JCPenney; Mervyn’s;  Sears                                                 |   | 1,118,000  |   | 328,000 |   |
| The Mall in Columbia, Columbia, MD        |   | 8/71                                           |   | Hecht’s; JCPenney; Lord & Taylor; Nordstrom; Sears;  L.L.Bean; AMC Columbia 14                       |   | 1,389,000  |   | 583,000 |   |
| Faneuil Hall Marketplace, Boston, MA      |   | 8/76                                           |   | —                                                                                                             |   | 198,000    |   | 198,000 |   |
| Fashion Place, Salt Lake City, UT         |   | 10/98                                          |   | Dillard’s; Nordstrom; Sears                                                                                   |   | 876,000    |   | 310,000 |   |
| Fashion Show, Las Vegas, NV               |   | 6/96                                           |   | Dillard’s; Macy’s; Neiman Marcus; Nordstrom; Robinsons-May; Saks  Fifth Avenue; Bloomingdale’s Home |   | 1,751,000  |   | 517,000 |   |
| The Gallery at Harborplace, Baltimore, MD |   | 9/87                                           |   | —                                                                                                             |   | 135,000    |   | 135,000 |   |
| Governor’s Square, Tallahassee, FL   |   | 8/79                                           |   | Burdines-Macy’s; Dillard’s; JCPenney; Sears                                                              |   | 1,029,000  |   | 337,000 |   |
| Harborplace, Baltimore, MD                |   | 7/80                                           |   | —                                                                                                             |   | 138,000    |   | 138,000 |   |
| Hulen Mall, Ft. Worth, TX                 |   | 8/77                                           |   | Dillard’s; Foley’s; Sears                                                                                |   | 942,000    |   | 345,000 |   |
| Lakeside Mall, Sterling Heights, MI       |   | 5/02                                           |   | JCPenney; Lord & Taylor; Marshall Field’s Men & Home;  Marshall Field’s Women; Sears             |   | 1,458,000  |   | 508,000 |   |
| Mall St. Matthews, Louisville, KY         |   | 3/62                                           |   | Dillard’s (two stores); JCPenney; Lord & Taylor                                                           |   | 1,094,000  |   | 358,000 |   |
| Mondawmin Mall, Baltimore, MD             |   | 10/56                                          |   | —                                                                                                             |   | 454,000    |   | 454,000 |   |
| North Star, San Antonio, TX               |   | 9/60                                           |   | Dillard’s; Foley’s; Macy’s; Mervyn’s; Saks Fifth Avenue                                        |   | 1,257,000  |   | 463,000 |   |
| Oakwood Center, Gretna, LA                |   | 10/82                                          |   | Dillard’s; JCPenney; Mervyn’s; Sears; Marshalls                                                          |   | 952,000    |   | 354,000 |   |
| Oviedo Marketplace, Orlando, FL           |   | 3/98                                           |   | Burdines-Macy’s; Dillard’s; Sears;   Regal Cinemas 22                                               |   | 952,000    |   | 434,000 |   |
| Owings Mills, Baltimore, MD               |   | 7/86                                           |   | Hecht’s; JCPenney; Macy’s;  AMC  Owings Mills 17                                                    |   | 1,285,000  |   | 504,000 |   |
| Paramus Park, Paramus, NJ                 |   | 3/74                                           |   | Macy’s; Sears; Fortunoff                                                                                      |   | 771,000    |   | 312,000 |   |
| Pioneer Place, Portland, OR               |   | 3/90                                           |   | Saks Fifth Avenue                                                                                                  |   | 369,000    |   | 309,000 |   |
| Ridgedale Center, Minneapolis, MN         |   | 1/89                                           |   | JCPenney; Marshall Field’s Men & Home; Marshall Field’s Women;  Sears                                |   | 1,037,000  |   | 332,000 |   |
| Riverwalk, New Orleans, LA                |   | 8/86                                           |   | —                                                                                                             |   | 186,000    |   | 186,000 |   |
| South Street Seaport, New York, NY        |   | 7/83                                           |   | —                                                                                                             |   | 285,000    |   | 285,000 |   |
| Southland Center, Taylor, MI              |   | 1/89                                           |   | JCPenney; Marshall Field’s; Mervyn’s                                                                     |   | 866,000    |   | 283,000 |   |
| Staten Island Mall, Staten Island, NY     |   | 11/80                                          |   | JCPenney; Macy’s; Sears; Macy’s Home                                                                     |   | 1,274,000  |   | 617,000 |   |
| The Streets at South Point, Durham, NC    |   | 5/02                                           |   | Hecht’s; JCPenney; Nordstrom; Sears; Belk                                                                     |   | 1,326,000  |   | 579,000 |   |
| The Village of Cross Keys, Baltimore, MD  |   | 9/65                                           |   | —                                                                                                             |   | 81,000     |   | 81,000 |   |
| Westdale Mall, Cedar Rapids, IA           |   | 10/98                                          |   | JCPenney; Younkers; Von Maur                                                                                       |   | 844,000    |   | 373,000 |   |
| Westlake Center, Seattle, WA              |   | 10/88                                          |   | —                                                                                                             |   | 106,000    |   | 106,000 |   |
| White Marsh, Baltimore, MD                |   | 8/81                                           |   | Hecht’s; JCPenney; Lord & Taylor ; Macy’s; Sears                                                     |   | 1,152,000  |   | 367,000 |   |
| Willowbrook, Wayne, NJ                    |   | 9/69                                           |   | Bloomingdale’s; Lord & Taylor; Macy’s; Sears                                                         |   | 1,514,000  |   | 486,000 |   |
| Woodbridge Center, Woodbridge, NJ         |   | 3/71                                           |   | JCPenney; Lord & Taylor; Macy’s; Sears; Fortunoff; Galyan’s                                          |   | 1,633,000  |   | 548,000 |   |
|                                      |   |                                           |   | Total Consolidated Centers in Operation                                                                            |   | 28,837,000 |   | 11,882,000 |   |

 

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| **Proportionate Share Retail Centers  (Note 2)** |   | **Date of Opening or Acquisition (Note 3)** |   | **Department Stores/Anchor Tenants**                                                                 |   |       |   |
|--------------------------------------------------|--------|---------------------------------------------|--------|------------------------------------------------------------------------------------------------------|--------|------------|--------|
| **Retail Square Footage**                        |
| **Total  Center**                                |   | **Mall  Only**                              |
|                                             |   |                                        |   |                                                                                                 |   |       |   |   |   |
| Bridgewater Commons, Bridgewater, NJ             |   | 12/98                                       |   | Bloomingdale’s; Lord & Taylor; Macy’s                                                  |   | 881,000    |   | 378,000 |   |
| Christiana Mall, Newark, DE                      |   | 5/03                                        |   | JCPenney; Lord & Taylor; Macy’s; Strawbridge’s                                         |   | 1,083,000  |   | 312,000 |   |
| Highland Mall, Austin, TX                        |   | 8/71                                        |   | Dillard’s (two stores); Foley’s; JCPenney                                                  |   | 1,082,000  |   | 363,000 |   |
| Mizner Park, Boca Raton, FL                      |   | 12/03                                       |   | Robb & Stucky                                                                                    |   | 236,000    |   | 156,000 |   |
| Oakbrook Center, Oak Brook, IL                   |   | 5/02                                        |   | Lord & Taylor; Marshall Field’s; Neiman Marcus; Nordstrom; Sears;  Bloomingdale’s Home |   | 2,014,000  |   | 824,000 |   |
| Park Meadows, Littleton, CO                      |   | 7/98                                        |   | Dillard’s; Foley’s; JCPenney; Lord & Taylor; Nordstrom; Galyan’s                  |   | 1,630,000  |   | 607,000 |   |
| Perimeter Mall, Atlanta, GA                      |   | 8/71                                        |   | Bloomingdale’s; Nordstrom; Rich’s-Macy’s                                              |   | 1,284,000  |   | 498,000 |   |
| Towson Town Center, Baltimore, MD                |   | 10/98                                       |   | Hecht’s; Nordstrom; Nordstrom Rack                                                              |   | 937,000    |   | 518,000 |   |
| Village Centers in Summerlin, NV (3)             |   | —                                      |   | —                                                                                               |   | 383,000    |   | 383,000 |   |
| Village of Merrick Park, Coral Gables, FL        |   | 9/02                                        |   | Neiman Marcus; Nordstrom                                                                             |   | 706,000    |   | 376,000 |   |
| Water Tower Place, Chicago, IL                   |   | 5/02                                        |   | Lord & Taylor; Marshall Field’s                                                             |   | 712,000    |   | 286,000 |   |
|                                             |   |                                        |   | Total Proportionate Share Centers in Operation                                                       |   | 10,948,000 |   | 4,701,000 |   |
|                                             |   |                                        |   |                                                                                                 |   |       |   |   |   |
|                                             |   |                                        |   | Total Retail Centers in Operation                                                                    |   | 39,785,000 |   | 16,583,000 |   |

 

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**Office and Other Properties in Operation**

 
| **Consolidated Office and Other Properties (Note 1)**                                                    |   | **Location**                                          |   | **Square Feet**           |   |
|----------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------|--------|---------------------------|--------|
| Arizona Center  Garden Office Pavilion  One Arizona Center Office Tower  Two Arizona Center Office Tower |   | Phoenix, AZ                                           |   | 118,000  322,000  453,000 |   |
|                                                                                                     |   |                                                  |   |                      |   |
| The Gallery at Harborplace  Office Tower                                                                 |   | Baltimore, MD                                         |   | 261,000                   |   |
| Pioneer Place  Office Tower                                                                              |   | Portland, OR                                          |   | 282,000                   |   |
| Village of Cross Keys  Village Square Offices  Quadrangle Offices                                        |   | Baltimore, MD                                         |   | 65,000  108,000           |   |
| Westlake Center  Office Tower                                                                            |   | Seattle, WA                                           |   | 344,000                   |   |
| Columbia Industrial (6 buildings)                                                                        |   | Columbia, MD                                          |   | 306,000                   |   |
| Columbia Office (11 buildings)                                                                           |   | Columbia, MD                                          |   | 1,055,000                 |   |
| Hunt Valley Business Center (19 buildings)                                                               |   | Baltimore, MD                                         |   | 1,429,000                 |   |
| Owings Mills Town Center (4 buildings)                                                                   |   | Baltimore, MD                                         |   | 716,000                   |   |
| Rutherford Business Center (20 buildings)                                                                |   | Baltimore, MD                                         |   | 783,000                   |   |
| Summerlin Commercial (28 buildings)                                                                      |   | Summerlin, NV                                         |   | 1,110,000                 |   |
| Woodlands Office (2 buildings)                                                                           |   | Houston, TX                                           |   | 132,000                   |   |
| Other Office Projects (6 buildings)                                                                      |   | Various                                               |   | 451,000                   |   |
|                                                                                                     |   | Total Consolidated Office and Other Properties        |   | 7,935,000                 |   |
|                                                                                                     |   |                                                  |   |                      |   |
| **Proportionate Share Office and Other Properties (Note 2)**                                             |   | **Location**                                          |   | **Square Feet**           |   |
| Mizner Park                                                                                              |   | Boca Raton, FL                                        |   | 268,000                   |   |
| Oakbrook Center Office                                                                                   |   | Oak Brook, IL                                         |   | 240,000                   |   |
| Village of Merrick Park                                                                                  |   | Coral Gables, FL                                      |   | 101,000                   |   |
| Water Tower Place Office                                                                                 |   | Chicago, IL                                           |   | 86,000                    |   |
| Woodlands Office/Industrial (5 buildings)                                                                |   | Houston, TX                                           |   | 388,000                   |   |
|                                                                                                     |   | Total Proportionate Share Office and Other Properties |   | 1,083,000                 |   |
|                                                                                                     |   |                                                  |   |                      |   |
|                                                                                                     |   | Total Office and Other Properties in Operation        |   | 9,018,000                 |   |

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Note 1 - Includes projects wholly owned by subsidiaries of the Companyand projects in which the Company has a majority interest and control.

Note 2 - Includes projects owned by joint ventures or partnerships inwhich the Company’s interest is at least 30%.

Note 3 - Date of acquisition is the date the Company first acquired aninterest in the center.

 

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|                                              |   |                                                   |   | **Project Square Footage** |   |
|---------------------------------------------------|--------|--------------------------------------------------------|--------|----------------------------|--------|
| **Projects Under Construction or in Development** |   | **Department Stores/Anchor Tenants**                   |   | **Total**                  |   | **Tenant Space** |   |
| Bridgewater Commons Expansion, Bridgewater, NJ    |   | Macy’s Expansion                                  |   | 140,000                    |   | 90,000 |   |
| Fashion Show, Las Vegas, NV (Phase II)            |   | Retail                                                 |   | 125,000                    |   | 100,000 |   |
| Kendall Town Center, Miami, FL                    |   | Dillard’s; Muvico 20                              |   | 778,000                    |   | 140,000 |   |
| Perimeter Mall, Atlanta, GA                       |   | Dillard’s                                         |   | 200,000                    |   | — |   |
| The Shops at La Cantera, San Antonio, TX          |   | Dillard’s; Foley’s; Neiman Marcus; Nordstrom |   | 1,300,000                  |   | 380,000 |   |
| Summerlin Centre, Summerlin, NV (Phase I)         |   | 2-3 Anchors                                            |   | 850,000                    |   | 350,000 |   |
| The Crossing Business Center, Summerlin, NV       |   | Office/Industrial                                      |   | 55,000                     |   | 55,000 |   |
|                                              |   | Total Projects Under Construction or in Development    |   | 3,448,000                  |   | 1,115,000 |   |

 

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