| GLIMCHER REALTY TRUST Item 1A Risk Factors There are many factors that affect our business and the results of our operations, many of which are beyond our control |
| The following is a description of the most significant factors that might cause the actual results of operations in future periods to differ materially from those currently expected or desired |
| We are subject to risks inherent in owning real estate investments |
| Real property investments are subject to varying degrees of risk |
| If our properties do not generate sufficient income to meet expenses, our ability to make dividend distributions to you and the value of your shares will be adversely affected by the economic climate and certain local conditions including: ● oversupply of space or reduced demand for rental space and newly developed properties; ● the attractiveness of our properties compared to other space; ● our ability to provide adequate maintenance; and ● fluctuations in real estate taxes, insurance and other operating costs |
| Applicable laws, including tax laws, interest rate levels and the availability of financing, may adversely affect our income and real estate values |
| In addition, real estate investments are relatively illiquid and, therefore, our ability to sell our properties quickly may be limited |
| We cannot be sure that we will be able to lease space as tenants move out or as to the rents we may be able to charge new tenants at such space |
| Our insurance coverage in the future may not include adequate amounts of terrorism insurance |
| Our all risk property insurance policies include coverage for foreign and domestic acts of terrorism on our consolidated real estate assets through January 1, 2007 |
| In the future, insurers may limit the amount of coverage available to us for terrorism insurance on our properties (or we may not be able to obtain such insurance at all), or the cost of property and liability insurance policies including coverage for acts of terrorism may be unreasonable |
| As a result, there can be no assurance that we will be able to obtain adequate amounts of terrorism insurance on our properties after January 1, 2007 or, if we can, that the premiums for the insurance will be reasonable |
| We rely on major tenants |
| At December 31, 2005, our three largest tenants were Gap, Inc, Limited Brands, Inc |
| and Foot Locker, Inc, representing 3dtta2prca, 2dtta8prca and 2dtta7prca of our annualized minimum rents, respectively |
| No other tenant represented more than 2dtta5prca of the aggregate annualized minimum rents of our properties as of such date |
| Our financial position and ability to make distributions may be adversely affected by the bankruptcy, insolvency, or general downturn in the business of any such tenant, or in the event any such tenant does not renew a number of its leases as they expires |
| Bankruptcy of our tenants or downturns in our tenants’ businesses may reduce our cash flow |
| Since we derive almost all of our income from rental payments, our cash available for distribution would be adversely affected if a significant number of our tenants were unable to meet their obligations to us, or if we were unable to lease vacant space in our properties on economically favorable terms |
| A tenant may seek the protection of the bankruptcy laws, which could result in the termination of its lease causing a reduction in our cash available for distribution |
| A downturn in a tenant’s business may result in a reduction in the rent based on a percentage of the tenant’s sales |
| Furthermore, certain of our tenants, including anchor tenants, hold the right under their lease(s) to terminate their lease(s) or reduce their rental rate if certain occupancy conditions are not met, if certain anchor tenants are closed, if certain sales levels or profit margins are not achieved, or if an exclusive use provision is violated |
| 7 _________________________________________________________________ We face significant competition that may decrease the occupancy and rental rates of our properties |
| We compete with many commercial developers, real estate companies and major retailers |
| Some of these entities develop or own malls, value-oriented retail properties and community shopping centers that compete for tenants |
| We face competition for prime locations and for tenants |
| New regional malls or other retail shopping centers with more convenient locations or better rents may attract tenants or cause them to seek more favorable lease terms at or prior to renewal |
| Retailers at our properties may face increasing competition from other retailers, e-commerce, outlet malls, discount shopping clubs, catalog companies, direct mail, telemarketing and home shopping networks all of which could affect their ability to pay rent or desire to occupy the property |
| The failure to fully recover from tenants cost reimbursements for common area maintenance (“CAM”), taxes and insurance could adversely affect our operating results |
| The computation of cost reimbursements from tenants for CAM, insurance and real estate taxes is complex and involves numerous judgments including interpretation of terms and other tenant lease provisions |
| Most tenants make monthly fixed payments of CAM, real estate taxes and other cost reimbursements items |
| After the end of the calendar year, we compute each tenant’s final cost reimbursements and issue a bill or credit for the full amount, after considering amounts paid by the tenants during the year |
| Final adjustments for the year ended December 31, 2005 have not yet been determined |
| At December 31, 2005, we had recorded in accounts receivables dlra5dtta5 million of costs expected to be recovered from tenants during the first six months of 2006 |
| There can be no assurance that we will collect all or substantially all of this amount |
| The results of operations for our properties depend on the economic conditions of the regions of the United States in which they are located |
| Our results of operations and distributions to you will be subject generally to economic conditions in the regions in which our properties are located |
| For the year ended December 31, 2005, approximately 31prca of annualized minimum rents came from our properties located in Ohio |
| We may be unable to successfully develop properties or operate developed properties |
| As a result of economic and other conditions and required government approvals, development projects may not be pursued or may be completed later or with higher costs than anticipated |
| Development activities involve significant risks, including: · the expenditure of funds on and devotion of time to projects which may not come to fruition; · increased construction costs, possibly making the project uneconomical; · an inability to obtain construction financing and permanent financing on favorable terms; and · occupancy rates and rents not sufficient to make a project profitable |
| In the event of an unsuccessful development project, our loss could exceed our investment in the project |
| We could incur significant costs related to environmental issues |
| Under some environmental laws, a current or previous owner or operator of real property, and parties that generate or transport hazardous substances that are disposed of on real property, may be liable for the costs of investigating and remediating these substances on or under the property |
| In connection with the ownership or operation of our properties, we could be liable for such costs which could be substantial and even exceed the value of such property or the value of our aggregate assets |
| The failure to remediate toxic substances may adversely affect our ability to sell or rent any of our properties or to borrow funds |
| In addition, environmental laws may require us to expend substantial sums in order to use our properties or operate our business |
| 8 _________________________________________________________________ We have established a contingency reserve for one environmental matter as noted in Note 13 of our consolidated financial statements |
| We may incur significant costs of complying with the Americans with Disabilities Act and similar laws |
| We may be required to expend significant sums of money to comply with the Americans with Disabilities Act of 1990, as amended (“ADA”), and other federal and local laws in order for our properties to meet requirements related to access and use by disabled persons |
| We may incur additional costs when complying with the ADA in the future |
| Our failure to qualify as a REIT would have serious adverse consequences to you |
| GRT believes that it has qualified as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”), since 1994, but cannot be sure that it will remain so qualified |
| Qualification as a REIT involves the application of highly technical and complex Code provisions, and the determination of various factual matters and circumstances not entirely within GRT’s control may impact GRT’s ability to qualify as a REIT under the Code |
| In addition, GRT cannot be sure that new laws, regulations and judicial decisions will not significantly change the tax laws relating to REITs, or the federal income tax consequences of REIT qualification |
| If GRT fails to qualify as a REIT, it will be subject to federal income tax (including any applicable alternative minimum tax) on taxable income at regular corporate income tax rates |
| Additionally, unless entitled to relief under certain statutory provisions, GRT will also be disqualified from electing to be treated as a REIT for the four taxable years following the year during which the qualification is lost, thereby reducing net earnings available for investment or distribution to you because of the additional tax liability imposed for the year or years involved |
| Lastly, GRT would no longer be required by the Code to make any dividend distributions as a condition to REIT qualification |
| To the extent that dividend distributions to you may have been made in anticipation of qualifying as a REIT, we might be required to borrow funds or to liquidate certain of our investments to pay the applicable tax |
| Our ownership interests in certain partnerships and other ventures are subject to certain tax risks |
| Some of our property interests and other investments are made or held through entities in which we have an interest (the “Subsidiary Partnerships”) |
| The tax risks of this type of ownership include possible challenge by the Internal Revenue Service of allocations of income and expense items which could affect the computation of our taxable income, or a challenge to the status of any such entities as partnerships (as opposed to associations taxable as corporations) for federal income tax purposes, as well as the possibility of action being taken by such entities that could adversely affect GRT’s qualification as a REIT, for example, by requiring the sale of a property |
| We believe that the entities in which we have an interest have been and will be treated for tax purposes as partnerships (and not treated as associations taxable as corporations) |
| If our ownership interest in any entity taxable as a corporation exceeded 10prca (in terms of vote or value) of such entity’s outstanding securities (unless such entity were a “taxable REIT subsidiary,” or a “qualified REIT subsidiary,” as those terms are defined in the Code) or the value of interest in any such entity exceeded 5prca of the value of our assets, then GRT would cease to qualify as a REIT; distributions from any of these entities would be treated as dividends, to the extent of earnings and profits; and we would not be able to deduct our share of losses, if any, generated by such entity in computing our taxable income |
| We may not have to access other sources of funds in order to meet our REIT distribution requirements |
| In order to qualify to be taxed as a REIT, we must make annual distributions to our shareholders of at least 90prca of our taxable income (determined by excluding any net capital gain) |
| The amount available for distribution will be affected by a number of factors, including the operation of our properties |
| We have sold a number of non-core assets and intend in the future to sell additional selected non-core assets |
| The loss of rental income associated with our properties sold will in turn affect net income and FFO In order to maintain REIT status, we may be required to make distributions in excess of net income and FFO In such a case, it may be necessary to arrange for short-term (or possibly long-term) borrowings, or to issue preferred or other securities, to raise funds, which may not be possible |
| 9 _________________________________________________________________ Debt financing could adversely affect our performance |
| As of December 31, 2005, we had dlra1dtta5 billion of combined mortgage indebtedness and outstanding borrowings under our credit facility, of which dlra99dtta9 million matures during 2006 |
| After the refinancing of a dlra30dtta0 million loan on January 13, 2006, dlra69dtta9 million remains scheduled to mature in 2006 |
| As of December 31, 2005, we have borrowed dlra150dtta0 million from our credit facility, which matures on August 21, 2008 |
| A number of outstanding loans will require lump sum or “balloon” payments for the outstanding principal balance at maturity, and we may finance future investments that may be structured in the same manner |
| Our ability to repay indebtedness at maturity, or otherwise, may depend on our ability to either refinance such indebtedness or to sell our properties |
| If we are unable to repay any of our debt at or before maturity, then we may have to borrow against our properties that are not encumbered or from our credit facility, to the extent it has availability thereunder, to make such repayments |
| In addition, a lender could foreclose on one or more of our properties to collect its debt |
| This could cause us to lose part or all of our investment, which could reduce the value of the Common Shares and the distributions payable to you |
| Certain of our financing arrangements contain limitations on the amount of debt that we may incur |
| Our dlra300 million unsecured credit facility is the most restrictive of our financing arrangements |
| Accordingly, at December 31, 2005, the additional amount that may be borrowed from this facility or other sources based upon the restrictive covenants in the credit facility is dlra260dtta5 million |
| Additional amounts could be borrowed based upon the use of proceeds |
| The ratio of total-debt-to-total-market capitalization was 56dtta1prca as of December 31, 2005 |
| As used herein, “total market capitalization” means the sum of the outstanding amount of all indebtedness, the total liquidation preference of all preferred shares and the total market value of the outstanding Common Shares and the units of partnership interest in GPLP (“OP Units”) (based on the closing price of the Common Shares on December 31, 2005) |
| Our financial condition and distributions could be adversely affected by financial covenants |
| Our mortgage indebtedness and credit facility impose certain financial and operating restrictions on our properties and restrictions on secured subordinated financing and financings on properties |
| These restrictions include restrictions on borrowings, prepayments and distributions |
| Additionally, our credit facility requires certain financial tests to be met and some of our mortgage indebtedness provides for prepayment penalties, each of which could restrict financial flexibility |
| Our variable rate debt obligations may impede our operating performance and put us at a competitive disadvantage, as well as adversely affect our ability to pay distributions to you |
| Required repayments of debt and related interest can adversely affect our operating performance |
| As of December 31, 2005, approximately dlra254dtta4 million of our indebtedness bears interest at a variable rate |
| Accordingly, an increase in interest rates on our existing indebtedness would increase interest expense, which could adversely affect our cash flow and ability to pay distributions |
| For example, if market rates of interest on our variable rate debt outstanding as of December 31, 2005, increased by 100 basis points, the increase in interest expense on our existing variable rate debt would decrease future earnings and cash flows by approximately dlra2dtta5 million annually |
| An increase in interest rates or total-debt-to-total market capitalization could cause a decrease in the market price of the outstanding Common Shares |
| We believe that investors generally perceive REIT’s as yield-driven investments and compare the annual yield from distributions by REITs with yields on various other types of financial instruments |
| Thus, an increase in market interest rates generally could adversely affect the market price of Common Shares |
| Additionally, investors may react negatively to an increase in total-debt-to-total-market capitalization |
| 10 _________________________________________________________________ The Board of Trustees has unlimited authority to increase the amount of debt that we may incur |
| The Board of Trustees (the “Board”) determines financing objectives and the amount of the indebtedness that we may incur and may make revisions to these objectives at any time without a vote of our shareholders |
| Although the Board has no present intention to change these objectives, revisions could result in a more highly leveraged company with an increased risk of default on indebtedness and an increase in debt service charges |
| Our issuance of additional Common Shares may affect prevailing market prices for the outstanding Common Shares |
| Future sales or the anticipation of such sales of additional Common Shares may have an adverse effect on the market price of our Common Shares |
| Our ownership of properties through partnership or joint venture investments may involve risks not otherwise present for wholly-owned properties |
| These risks include the possibility that our partners or co-venturers might become bankrupt, might have economic or other business interests or goals which are inconsistent with our business interests or goals and may be in a position to take action contrary to our instructions or requests contrary to our policies or objectives, including our policy to maintain our qualification as a REIT We may need the consent of our partners for major decisions affecting properties that are partially-owned |
| Joint venture agreements may also contain provisions that could force us to sell all of our interest in, or buy all of our partners’ interests in, such entity or property |
| These provisions may be triggered at a time when it is not advantageous for us to either buy our partners’ interests or sell our interest |
| Additionally, if we serve as the managing member of a property-owning joint venture, we may have certain fiduciary responsibilities to the other participants in such entity |
| There is no limitation under our organizational documents as to the amount of funds that may be invested in partnerships or joint ventures |
| We are subject to certain limitations on property sales and conflicts of interest |
| GPLP may not enter into certain transactions, including the sale of all or substantially all of its assets, without consent from the holders of a majority (excluding GRT) of the OP Units |
| This majority vote requirement effectively means that Herbert Glimcher, the Chairman of the Board and his sons, David Glimcher and Michael Glimcher, the President, Chief Executive Officer and a Trustee of GRT, must approve any such transaction because, together with their spouses, they own approximately 4dtta9prca of the OP Units (which constitutes a majority of the OP Units other than those owned by GRT) outstanding as of December 31, 2005 |
| This veto right may limit our ability to enter into a liquidating transaction that may be in your best interest |
| As a result of Herbert Glimcher’s, David Glimcher’s and Michael Glimcher’s status as holders of both Common Shares and OP Units, they have interests that conflict with GRT shareholders with respect to business decisions affecting GRT and GPLP In particular, as holders of OP Units, they may suffer different and/or more adverse tax consequences than GRT upon the sale or refinancing of some of our properties due to unrealized gains attributable to these properties |
| Therefore, GRT may have objectives different from Herbert Glimcher, David Glimcher and Michael Glimcher regarding the appropriate pricing and timing of any sale or refinancing of certain of our properties |
| Although GRT (through a wholly owned subsidiary), as the sole general partner of GPLP, has the exclusive authority as to whether and on what terms to sell, refinance, or seek to purchase an interest in an individual property, Herbert Glimcher, David Glimcher and Michael Glimcher might seek to influence decisions with respect to these actions, even though those actions might otherwise be financially advantageous or adverse to GRT They also may seek to influence management to refinance one or more of our properties with a higher level of debt than would be in GRT’s best interests |
| 11 _________________________________________________________________ Our charter and bylaws and the laws of the state of our incorporation contain provisions that may delay, defer or prevent a change in control or other transactions that could provide shareholders with the opportunity to realize a premium over the then-prevailing market price for our Common Shares |
| In order to maintain GRT’s qualification as a REIT for federal income tax purposes, not more than 50prca in value of the outstanding Common Shares may be owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include certain entities) at any time during the last half of the taxable year |
| Additionally, 100 or more persons must beneficially own the outstanding Common Shares during the last 335 days of a taxable year of 12 months or during a proportionate part of a shorter tax year |
| To ensure that GRT will not fail to qualify as a REIT under this test, GRT’s organizational documents authorize the Board to take such action as may be required to preserve GRT’s qualification as a REIT and to limit any person, other than Herbert Glimcher, David Glimcher (only with respect to the limitation on the ownership of outstanding Common Shares) and any entities or persons approved by the Board, to direct or indirect ownership exceeding (i) 8dtta0prca of the lesser of the number or value of the outstanding Common Shares, (ii) 9dtta9prca of the lesser of the number or value of the total 8¾% Series F Cumulative Redeemable Preferred Shares of Beneficial Interest (“Series F Preferred Shares”) outstanding and (iii) 9dtta9prca of the lesser of the number or value of the total 8⅛% Series G Cumulative Redeemable Preferred Shares of Beneficial Interest (“Series G Preferred Shares”) outstanding |
| Herbert Glimcher and David Glimcher are limited to an aggregate of 25prca direct or indirect ownership of Common Shares outstanding without approval of the Board |
| The Board has also granted an exemption to Cohen & Steers Capital Management, Inc, permitting them to own, directly or indirectly, of record or beneficially (i) up to 600cmam000 Series F Preferred Shares and (ii) up to 14dtta9prca of the lesser of the number or value of the outstanding shares of any other class of the GRT’s equity securities |
| However, in no event, shall they be permitted to own, directly or indirectly, of record or beneficially, more than 14dtta9prca of the lesser of the number or value of all outstanding shares of GRT’s equity securities |
| Despite these provisions, GRT cannot be sure that there will not be five or fewer individuals who will own more than 50prca in value of its outstanding Common Shares, thereby causing GRT to fail to qualify as a REIT The ownership limits may also discourage a change of control in GRT The members of the Board are currently divided into three nearly equal classes whose terms expire in 2006, 2007 and 2008, respectively |
| Each year one class of trustees are elected by GRT’s shareholders to hold office for three years |
| The staggered terms for Board members may affect the ability of GRT shareholders to change control of GRT even if a change in control were in the interests of the shareholders |
| GRT’s Amended and Restated Declaration of Trust, as amended (the “Declaration of Trust”) authorizes the Board to establish one or more series of preferred shares, in addition to those currently outstanding, and to determine the preferences, rights and other terms of any series |
| The Board could authorize GRT to issue other series of preferred shares that could deter or impede a merger, tender offer or other transaction that some, or a majority, of GRT shareholders might believe to be in their best interest or in which GRT shareholders might receive a premium for their shares over the then current market price of such shares |
| On March 9, 1999, GRT adopted a shareholder rights plan |
| Under the terms of the rights plan, the Board can in effect prevent a person or group from acquiring more than 15prca of the outstanding Common Shares |
| Unless the Board approves of such person’s purchase, after that person acquires more than 15prca of the outstanding Common Shares, all other shareholders will have the right to purchase Common Shares from GRT at a price that is half of their then fair market value |
| These purchases by the other shareholders would substantially reduce the value and influence of the Common Shares owned by the acquiring person |
| This gives the Board significant discretion to approve or disapprove of a person’s efforts to acquire a large interest in GRT and, accordingly, may discourage a change in control of GRT 12 _________________________________________________________________ The Declaration of Trust and Amended and Restated Bylaws also contain other provisions that may delay or prevent a transaction or a change in control that might involve a premium price for the Common Shares or otherwise be in the best interests of GRT’s shareholders |
| As a Maryland REIT, GRT is subject to the provisions of the Maryland REIT law which imposes restrictions on some business combinations and requires compliance with statutory procedures before some mergers and acquisitions can occur, thus delaying or preventing offers to acquire GRT or increasing the difficulty of completing an acquisition of GRT, even if the acquisition is in the best interests of GRT’s shareholders |
| Risks associated with information systems may interfere with our operations |
| We are continuing to implement new information systems and problems with the design or implementation of these new systems could interfere with our operations |
| Our operations could be affected if we any lose key management personnel |
| Our executive officers have substantial experience in owning, operating, managing, acquiring and developing shopping centers |
| Success depends in large part upon the efforts of these executives, and we cannot guarantee that they will remain with us |
| The loss of key management personnel in leasing, finance, legal and operations could have a negative impact on our operations |
| In addition, except for isolated examples, there are generally no restrictions on the ability of these executives to compete with us after termination of their employment |
| Inflation may influence our operations |
| Inflation risks could impact our operations due to increases in construction costs |
| This would primarily impact our development and redevelopment expenditures |