Pan Pacific Retail Properties, Inc

10-K/A 1 d10ka.htm PAN PACIFIC RETAIL PROPERTIES, INC - FORM 10-K/A Pan Pacific Retail Properties, Inc - Form 10-K/A

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

(Amendment No. 1)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES AND EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2001

Commission File Number: 001-13243

PAN PACIFIC RETAIL PROPERTIES, INC.

(Exact Name of Registrant as Specified in Its Charter)

Maryland		33-0752457
(State of Incorporation)		(I.R.S. Employer Identification No.)

1631-B South Melrose Drive, Vista, California		92083
(Address of Principal Executive Offices)		(zip code)

Registrant’s telephone number, including area code: (760) 727-1002

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class		Name of Each Exchange on Which Registered
Common Stock, $0.01 par value		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

The aggregate market value of the shares of common stock held by non-affiliates was approximately $999,392,000 based upon the closing price on the New York Stock Exchange for such shares of $30.29 on March 18, 2002.

As of March 18, 2002, the number of shares of the Registrant’s common stock outstanding was 33,277,564.

DOCUMENTS INCORPORATED BY REFERENCE

Part III of this report on Form 10-K incorporates by reference information from our definitive proxy statement for our 2002 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days of the close of our fiscal year.

The following items are amended:

Item 6. Selected Consolidated Financial Data

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Financial Pages

PART II

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following table sets forth our selected financial data on a historical basis. The following data should be read in connection with management’s discussion and analysis of financial condition and results of operations and the consolidated financial statements and notes thereto located elsewhere in this report.

SELECTED CONSOLIDATED FINANCIAL DATA (1)

(Amounts in thousands, except per share data)

	Years Ended December 31,
	2001		2000		1999		1998		1997
	(revised) (2)		(revised) (2)		(revised) (2)		(revised) (2)
STATEMENTS OF INCOME DATA:
Total revenue	$	182,489	$	119,554	$	99,916	$	78,784	$	46,710
Operating and general and administrative expenses		46,382		28,705		25,360		19,657		14,216
Merger related expenses		—		3,204		—		—		—
Depreciation and amortization		28,980		20,224		17,371		14,273		8,928
Interest expense		46,196		32,112		23,939		18,295		14,057
Income from continuing operations (3)		62,539		33,190		32,088		26,298		9,356
Discontinued operations		1,683		610		488		336		—
Income before extraordinary item		64,222		33,800		32,576		26,634		9,356
Net income		64,222		33,800		32,576		26,634		8,313
Per share data:
Income from continuing operations—diluted		1.92		1.46		1.51		1.34		—
Discontinued operations—diluted		0.05		0.02		0.03		0.01		—
Income before extraordinary item–diluted (4)		1.97		1.48		1.54		1.35		0.55
Net income—diluted (4)		1.97		1.48		1.54		1.35		0.49
Distributions declared		1.82		1.54		1.60		1.52		0.58

	As of December 31,
	2001		2000		1999		1998		1997
BALANCE SHEET DATA:
Properties, net	$	1,233,189	$	1,194,824	$	748,061	$	667,478	$	455,514
Total assets		1,339,618		1,297,690		784,537		705,541		487,220
Notes payable		229,135		233,911		228,490		144,024		108,316
Line of credit and term loan payable		165,300		267,650		128,800		138,500		62,450
Senior notes		273,800		124,850		—		—		—
Minority interests		20,748		41,754		23,347		17,318		1,521
Stockholders’ equity		622,458		606,998		381,866		383,088		301,055

(1)

The financial data as of the dates and for the periods prior to August 13, 1997 represents the combined financial data of predecessor entities prior to our initial public offering.

(2)

Our consolidated statements of income and consolidated statements of cash flows have been revised from those originally reported for the years ended December 31, 2001, 2000, 1999 and 1998 to reflect separately the results of discontinued operations for properties that were sold during the nine months ended September 30, 2002. The revision had no impact on our consolidated balance sheets or statements of stockholders’ equity. The revision had no impact on net income or net income per share of common stock for the years ended December 31, 2001, 2000, 1999 and 1998.

(3)

Income from continuing operations includes minority interests and gain on sale of real estate.

(4)

The 1997 data is calculated as if the shares were outstanding for the entire year based on the diluted number of shares assumed to be outstanding.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

Revision of Consolidated Statements of Income and Consolidated Statements of Cash Flows

Our consolidated statements of income and consolidated statements of cash flows have been revised from those originally reported for the years ended December 31, 2001, 2000 and 1999 to separately reflect the results of discontinued operations for properties that were sold during the nine months ended September 30, 2002. The revision had no impact on our consolidated balance sheets or statements of stockholders’ equity. The revision had no impact on net income or net income per share of common stock for the years ended December 31, 2001, 2000 and 1999. See the discussions of discontinued operations in the “Results of Operations” section below.

Cautionary Language

The discussions in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 which reflect management’s current views with respect to future events and financial performance. Forward-looking statements are subject to risks and uncertainties. Factors that could cause actual results to differ materially from expectations include market valuations of our stock, financial performance and operations of our shopping centers, real estate conditions, execution of shopping center development programs, successful completion of renovations, completion of pending acquisitions, changes in the availability of additional acquisitions, changes in local or national economic conditions, acts of terrorism or war and other risks detailed from time to time in reports filed with the Securities and Exchange Commission.

Critical Accounting Policies

The following discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, and the notes thereto, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make a number of estimates and assumptions that affect the reported amounts and disclosures in the consolidated financial statements. On an ongoing basis, we evaluate our estimates and assumptions based upon historical experience and various other factors and circumstances. We believe that our estimates and assumptions are reasonable for our current circumstances; however, actual results may differ from these estimates and assumptions under different future conditions.

We believe that the estimates and assumptions that are most important to the portrayal of our financial condition and results of operations, in that they require our most subjective judgments, form the basis for the accounting policies deemed to be most critical. These critical accounting policies include our estimates of useful lives in calculating depreciation expense on our shopping center properties and the ultimate recoverability, or impairment, of each shopping center asset. If actual useful lives are different from our estimates this could result in changes to the results of our operations. Future adverse changes in market conditions or poor operating results of our shopping center properties could result in losses or an inability to recover the carrying value of the properties that may not be reflected in the properties’ current carrying value, thereby possibly requiring an impairment charge in the future.

Overview

We receive income primarily from rental revenue from shopping center properties, including recoveries from tenants, offset by operating and overhead expenses. Primarily as a result of our acquisition program, including the acquisition of Western Properties Trust described below, which included interests in 50 shopping centers, the financial data shows increases in total revenue and total expenses from period to period.

During the year ended December 31, 2001, eight non-strategic assets were sold. The cash proceeds were used toward the purchase of four shopping center assets.

On November 13, 2000, we acquired Western Properties Trust, a California real estate investment trust. The transaction was a stock for stock exchange whereby Western common shares and units were exchanged into newly issued common shares and operating subsidiary units, based upon a fixed exchange ratio of 0.62 of a share of our common stock per Western share or operating subsidiary unit. As a result, we issued 10,754,776 shares of our common stock to holders of Western common shares. We are also currently obligated to issue 288,867 shares of our common stock upon the exchange of operating subsidiary units held by limited partners of Pan Pacific (Kienows), L.P., formerly Western/Kienow, L.P., and Pan Pacific (Pinecreek), L.P., formerly Western/Pinecreek, L.P., or pay a cash amount, at our discretion. In connection with this transaction, we assumed $135,000,000 of Western’s debt obligations.

We expect that the more significant part of our growth in the next year or two will come from additional acquisitions, rent increases from re-leasing and re-tenanting initiatives of the assets acquired in the Western acquisition and the stabilization of other properties acquired during 2001 and 2000.

Results of Operations

Comparison of the Year Ended December 31, 2001 to the Year Ended December 31, 2000.

Total revenue increased by $62,935,000, or 52.6%, to $182,489,000 for the year ended December 31, 2001, from $119,554,000 for the year ended December 31, 2000.

Rental revenue, which includes base rent and percentage rent, increased by $47,234,000, or 50.3%, to $141,215,000 for the year ended December 31, 2001, from $93,981,000 for the year ended December 31, 2000. The increase in rental revenue resulted principally from four property acquisitions in 2001, three property acquisitions in 2000 and the acquisition of Western in November 2000.

Recoveries from tenants increased by $10,801,000, or 50.3%, to $32,288,000 for the year ended December 31, 2001, from $21,487,000 for the year ended December 31, 2000. This increase resulted primarily from the 2001 and 2000 acquisitions including Western. Recoveries from tenants were 90.6% of property operating expenses and property taxes for the year ended December 31, 2001 compared to 93.2% for the year ended December 31, 2000. The decrease in the recovery percentage from prior year was primarily the result of a decrease in average portfolio occupancy during 2001 as a result of the Western acquisition. In addition, the language in the Western leases does not provide for as many costs to be recoverable from tenants as the language in the Pan Pacific leases.

Other income increased by $4,427,000, or 118.9%, to $8,149,000 for the year ended December 31, 2001, from $3,722,000 for the year ended December 31, 2000. The increase resulted principally from approximately $3,674,000 of interest income on corporate notes receivable related to real estate activities that were acquired as part of the Western acquisition.

Property operating expenses increased by $7,796,000, or 55.1%, to $21,955,000 for the year ended December 31, 2001, from $14,159,000 for the year ended December 31, 2000. The increase in property operating expenses was primarily attributable to the 2001 and 2000 acquisitions, including Western. Property taxes increased by $4,800,000, or 54.0%, to $13,685,000 from $8,885,000 for the year ended December 31, 2001, compared to the year ended December 31, 2000. The increase in property taxes was also primarily the result of the 2001 and 2000 acquisitions including Western.

Depreciation and amortization increased by $8,756,000, or 43.3%, to $28,980,000 for the year ended December 31, 2001, from $20,224,000 for the year ended December 31, 2000. This was primarily due to the 2001 and 2000 acquisitions, including Western.

Interest expense increased by $14,084,000, or 43.9%, to $46,196,000 for the year ended December 31, 2001, from $32,112,000 for the year ended December 31, 2000, primarily as a result of the debt obligations assumed upon the acquisition of Western and interest expense relating to funds drawn on our Revolving Credit Agreement to finance the seven other properties acquired during 2001 and 2000. Interest expense also increased as a result of our issuance of $150,000,000, in aggregate principal amount, of senior notes in April 2001. The stated interest rate of 7.95% on the senior notes is higher than our cost to borrow funds under the Revolving Credit Agreement and Term Credit Agreement which were paid down with the net proceeds of the notes offering. These increases were partially offset by a reduction in the LIBOR component of our borrowing cost under the Revolving Credit Agreement and Term Credit Agreement over the comparable period in the prior year.

General and administrative expenses increased by $4,063,000, or 79.6%, to $9,168,000 for the year ended December 31, 2001, from $5,105,000 for the year ended December 31, 2000. This increase resulted primarily from an increase in salaries and benefits and other related expenses resulting from the acquisition of Western as well as annual compensation increases in the first quarter of 2001. As a percentage of total revenue, general and administrative expenses were 5.0% for the year ended December 31, 2001 and 4.3% for the year ended December 31, 2000.

Net gain on sale of real estate totaling $4,129,000 resulted from the sale of eight non-strategic assets during the year ended December 31, 2001.

Discontinued operations for the years ended December 31, 2001 and 2000 of $1,683,000 and $610,000 respectively, reflects the operating results of the five non-strategic assets that were sold during the nine months ended September 30, 2002.

Comparison of the Year Ended December 31, 2000 to the Year Ended December 31, 1999.

Total revenue increased by $19,638,000, or 19.7%, to $119,554,000 for the year ended December 31, 2000, from $99,916,000 for the year ended December 31, 1999.

Rental revenue increased by $14,448,000, or 18.2%, to $93,981,000 for the year ended December 31, 2000, from $79,533,000 for the year ended December 31, 1999. The increase in rental revenue resulted principally from six property acquisitions in 1999, three property acquisitions in 2000 and the acquisition of Western in November 2000.

Recoveries from tenants increased by $3,736,000, or 21.0%, to $21,487,000 for the year ended December 31, 2000, from $17,751,000 for the year ended December 31, 1999. This increase resulted primarily from the 2000 and 1999 property acquisitions. Recoveries from tenants were 93.2% of property operating expenses and property taxes for the year ended December 31, 2000 compared to 89.7% of the same expenses for the same period in 1999. The increase in the recovery percentage was primarily the result of enhanced lease recovery language during the renewal and re-leasing process.

Property operating expenses increased by $1,727,000, or 13.9%, to $14,159,000 for the year ended December 31, 2000, from $12,432,000 for the year ended December 31, 1999. The increase in property operating expenses was primarily attributable to the 2000 and 1999 property acquisitions. Property taxes increased by $1,520,000, or 20.6%, to $8,885,000 from $7,365,000 for the year ended December 31, 2000, compared to the year ended December 31, 1999. The increase in property taxes was also primarily the result of the 2000 and 1999 property acquisitions.

Depreciation and amortization increased by $2,853,000, or 16.4%, to $20,224,000 for the year ended December 31, 2000, from $17,371,000 for the year ended December 31, 1999. This was primarily due to the 2000 and 1999 property acquisitions.

Interest expense increased by $8,173,000, or 34.1%, to $32,112,000 for the year ended December 31, 2000, from $23,939,000 for the year ended December 31, 1999, primarily as a result of interest expense relating to amounts drawn on our Revolving Credit Agreement and Term Credit Agreement to finance the 2000 and 1999 property acquisitions, interest expense on the fixed-rate mortgage assumed related to Rancho Las Palmas in the third quarter

of 1999 and interest expense on the fixed-rate mortgage on Lakewood Village which was assumed as part of the Western acquisition in November 2000. Interest expense also increased as a result of an increase in the LIBOR component of the borrowing cost on our Revolving Credit Agreement over the comparable period in 1999.

General and administrative expenses decreased by $210,000, or 4.0%, to $5,105,000 for the year ended December 31, 2000, from $5,315,000 for the year ended December 31, 1999. This decrease was primarily attributable to one-time executive severance costs recorded in 1999 and an increase in internal capitalized leasing costs recorded in 2000, which offset related general and administrative expenses, offset by annual compensation increases in 2000. As a percentage of total revenue, general and administrative expenses were 4.3% for the year ended December 31, 2000 and 5.3% for the year ended December 31, 1999.

Merger related expenses were incurred during 2000 in connection with the acquisition of Western. The Company incurred approximately $3,204,000 of these expenses which are non-recurring.

Discontinued operations for the years ended December 31, 2000 and 1999 of $610,000 and $488,000 respectively, reflects the operating results of the five non-strategic assets that were sold during the nine months ended September 30, 2002.

Funds from Operations

The White Paper on Funds from Operations approved by the Board of Governors of the National Association of Real Estate Investment Trusts (“NAREIT”) in March 1995 (the “White Paper”) defines Funds from Operations as net income (loss) (computed in accordance with generally accepted accounting principles), excluding gains (or losses) from debt restructuring and sales of property, plus real estate related depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures. We consider Funds from Operations an appropriate measure of performance of an equity REIT because it is predicated on cash flow analyses. We compute Funds from Operations in accordance with standards established by the White Paper. Our computation of Funds from Operations may, however, differ from the methodology for calculating Funds from Operations used by other equity REITs and, therefore, may not be comparable to these other REITs. Funds from Operations should not be considered as an alternative to net income (determined in accordance with GAAP) as a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to make distributions.

The following table presents our Funds from Operations:

	For the years ended December 31,
	2001			2000			1999
Net income	$	64,222,000		$	33,800,000		$	32,576,000
Add:
Depreciation and amortization		28,980,000			20,224,000			17,371,000
Depreciation on discontinued operations		298,000			150,000			105,000
Depreciation of unconsolidated partnerships		83,000			21,000			8,000
Operating subsidiary minority interests		2,521,000			2,106,000			1,530,000
Provision for loss on impairment		—			250,000			—
Less:
Net gain on sale of real estate		(4,129,000	)		—			(400,000	)
Depreciation of non-real estate corporate assets		(523,000	)		(428,000	)		(392,000	)

Funds from Operations	$	91,452,000		$	56,123,000		$	50,798,000

Weighted average number of shares of common stock outstanding (assuming dilution)		33,875,339			24,000,935			22,122,659

Cash Flows

Comparison of the Year Ended December 31, 2001 to the Year Ended December 31, 2000.

Net cash provided by operating activities increased by $22,252,000 to $77,096,000 for the year ended December 31, 2001, as compared to $54,844,000 for the year ended December 31, 2000. The increase was primarily the result of an increase in operating income due to property acquisitions including Western. This increase was offset by an increase in accrued interest to note receivable, an increase in other assets and an increase in net gain on sale of real estate.

Net cash used in investing activities decreased by $27,823,000 to $46,127,000 for the year ended December 31, 2001, as compared to $73,950,000 for the year ended December 31, 2000. The decrease was primarily the result of an increase in proceeds from sale of real estate, a decrease in costs associated with the acquisition of Western and a decrease in other assets, offset by an increase in acquisitions of and additions to properties and an increase in notes receivable.

Net cash used in financing activities increased by $49,629,000 to $31,017,000 for the year ended December 31, 2001, as compared to net cash provided by financing activities of $18,612,000 for the year ended December 31, 2000. The increase primarily resulted from a decrease in line of credit proceeds, an increase in repurchase of common shares and an increase in distributions paid, offset by an increase in issuance of senior notes and issuance of common shares.

Comparison of the Year Ended December 31, 2000 to the Year Ended December 31, 1999.

Net cash provided by operating activities increased by $9,017,000 to $54,844,000 for the year ended December 31, 2000, as compared to $45,827,000 for the year ended December 31, 1999. The increase was primarily the result of an increase in operating income due to property acquisitions and an increase in accounts payable, accrued expenses and other liabilities.

Net cash used in investing activities decreased by $3,675,000 to $73,950,000 for the year ended December 31, 2000, as compared to $77,625,000 for the year ended December 31, 1999. The decrease was primarily the result of a reduction in acquisitions of and additions to operating properties and a decrease in proceeds from sale of real estate, offset by an increase in other assets and cash expended on the acquisition of Western.

Net cash provided by financing activities decreased by $10,657,000 to $18,612,000 for the year ended December 31, 2000, as compared to $29,269,000 for the year ended December 31, 1999. The decrease primarily resulted from an increase in line of credit payments and a decrease in notes payable proceeds, offset by an increase in line of credit and term loan proceeds.

Liquidity and Capital Resources

Our total market capitalization at December 31, 2001, was approximately $1,639,717,000, based on the market closing price of our common stock at December 31, 2001 of $28.72 per share (assuming the conversion of 1,036,072 operating subsidiary units to common stock) and the debt outstanding of approximately $668,235,000 (exclusive of accounts payable and accrued expenses). As a result, our debt to total market capitalization ratio was approximately 40.8% at December 31, 2001. Our Board of Directors adopted a policy of limiting our indebtedness to approximately 50% of our total market capitalization. However, we may from time to time modify our debt policy in light of current economic or market conditions including but not limited to the relative costs of debt and equity capital, market conditions for debt and equity securities and fluctuations in the market price of our common stock. Accordingly, we may increase or decrease our debt to market capitalization ratio beyond the limit described above.

In connection with our acquisition of Western in November 2000, we entered into a new financing arrangement including a $300,000,000 Revolving Credit Agreement and a $100,000,000 Term Credit Agreement. The Revolving Credit Agreement matures in January 2004 and the Term Credit Agreement was scheduled to mature in November 2001. At December 31, 2001, we had $134,700,000 available under our Revolving Credit Agreement and the Term Credit Agreement had been repaid in full. At our option, amounts borrowed under the Revolving Credit Agreement bear interest at either LIBOR plus 1.10% or a reference rate. At our option, amounts borrowed under the Term Credit Agreement bore interest at either LIBOR plus 1.20% or a reference rate. The weighted average interest rate

for short-term LIBOR contracts under the Revolving Credit Agreement at December 31, 2001 was 3.23%. We will continue to use the Revolving Credit Agreement to take advantage of select acquisition opportunities as well as to provide funds for general corporate purposes. In April 2001, we issued $150,000,000 of 7.95% senior notes due April 15, 2011. The net proceeds were used to repay borrowings under the Revolving Credit Agreement and the Term Credit Agreement.

All of our indebtedness is reflected in our consolidated financial statements, and the notes thereto, appearing elsewhere in this report. We are not a party to any off-balance sheet financing arrangements. Our indebtedness outstanding at December 31, 2001 includes regularly scheduled principal reductions, balloon payments and scheduled senior note redemptions as follows:

Year	Amount
2002	$	4,323,000
2003	$	4,605,000
2004	$	232,683,000
2005	$	11,818,000
2006	$	58,927,000
2007	$	76,545,000
2008	$	26,873,000
2009	$	47,779,000
2010	$	48,364,000
2011	$	150,320,000
2012	$	5,836,000

The payments due in the year 2004 include the balance drawn on the Revolving Credit Agreement at December 31, 2001 of $165,300,000. With regard to the payments noted above, it is likely that we will not have sufficient funds on hand to repay these amounts at maturity. Therefore, we expect to refinance this debt either through additional debt financings secured by individual properties or groups of properties, by unsecured private or public debt offerings or by additional equity offerings.

We could enter into derivative financial instruments such as interest rate swaps, caps and treasury locks in order to mitigate our interest rate risk on a related financial instrument. We are not a party to any derivative financial instruments at December 31, 2001. Further, we do not enter into derivative or interest rate transactions for speculative or trading purposes nor do we enter into energy or commodity contracts.

We have future obligations relating to leases for real estate and office equipment under operating leases expiring at various dates through 2021. Rental expense was $770,000 and $892,000 for the years ended December 31, 2001 and 2000, respectively. Minimum rentals under noncancellable operating leases in effect at December 31, 2001 were as follows:

2002	$	770,000
2003		769,000
2004		764,000
2005		763,000
2006		763,000
2007 and subsequent		2,883,000

	$	6,712,000

We have entered into certain related party transactions with executive officers and affiliates of the Company. We believe that all related party agreements were entered into at arms length. Information on these related party transactions can be found in our consolidated financial statements, and the notes thereto, appearing elsewhere in this report.

We expect to make distributions from net cash provided by operations. Operating cash flows in excess of amounts to be used for distributions will be invested primarily in short-term investments such as collateralized securities of the United States government or its agencies, high-grade commercial paper and bank deposits or used to pay down outstanding balances on our Revolving Credit Agreement, if any.

The following table provides recent historical distribution information:

Quarter Ended	Date Declared	Record Date	Date Paid	Distribution Per Share
March 31, 1999	February 10, 1999	March 17, 1999	April 16, 1999	$0.400
June 30, 1999	June 15, 1999	June 28, 1999	July 16, 1999	$0.400
September 30, 1999	September 9, 1999	September 24, 1999	October 22, 1999	$0.400
December 31, 1999	December 9, 1999	December 22, 1999	January 21, 2000	$0.400
March 31, 2000	February 9, 2000	March 17, 2000	April 14, 2000	$0.420
June 30, 2000	June 13, 2000	June 26, 2000	July 21, 2000	$0.420
September 30, 2000	September 15, 2000	September 25, 2000	October 20, 2000	$0.420
December 31, 2000	October 30, 2000	November 3, 2000	November 15, 2000	$0.280	⁽¹⁾
March 31, 2001	January 30, 2001	February 16, 2001	March 15, 2001	$0.455
June 30, 2001	May 16, 2001	May 25, 2001	June 15, 2001	$0.455
September 30, 2001	August 14, 2001	August 31, 2001	September 14, 2001	$0.455
December 31, 2001	November 13, 2001	November 30, 2001	December 14, 2001	$0.455

(1) During the fourth quarter of 2000 we distributed a special, two-month dividend of $0.28 a share. This dividend was in connection with the Western acquisition, and was paid to our stockholders of record before the merger transaction was closed to address the two-month shift in timing for the payment of our normal quarterly dividend in future periods.

We expect to meet our short-term liquidity requirements generally through our current working capital and net cash provided by operations. We believe that our net cash provided by operations will be sufficient to allow us to make the distributions necessary to enable us to continue to qualify as a REIT. We also believe that the foregoing sources of liquidity will be sufficient to fund our short-term liquidity needs for the foreseeable future.

We expect to meet our long-term liquidity requirements such as property acquisition and development, scheduled debt maturities, renovations, expansions and other non-recurring capital improvements through long-term secured and unsecured indebtedness, the issuance of additional equity or debt securities and the use of net proceeds from the disposition of non-strategic assets. We also expect to use funds available under the Revolving Credit Agreement to finance acquisition and development activities and capital improvements on an interim basis.

Inflation

Substantially all of our leases provide for the recovery of real estate taxes and operating expenses we incur. In addition, many of the leases provide for fixed base rent increases or indexed escalations (based on the consumer price index or other measures) and percentage rent. We believe that inflationary increases in expenses will be substantially offset by expense reimbursements, contractual rent increases and percentage rent.

The Revolving Credit Agreement bears interest at a variable rate, which will be influenced by changes in short-term interest rates, and will be sensitive to inflation.

Controls and Procedures

Evaluation of Disclosure Controls and Procedure

We maintain disclosure controls and procedures (as defined in Securities Exchange Act 1934 Rules 13a-14(c) and 15d-14(c)) that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Within 90 days prior to the date of this amended annual report, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the

foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.

Changes in Internal Controls

There have not been any significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. There were no significant deficiencies or material weaknesses, and therefore no corrective actions were taken.

CERTIFICATIONS

I, Stuart A. Tanz, certify that:

1. I have reviewed this amendment to the annual report on Form 10-K/A of Pan Pacific Retail Properties, Inc. for the year ended December 31, 2001;

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6 The registrant’s other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 11, 2002

/s/ Stuart A. Tanz

Stuart A. Tanz

Chairman, Chief Executive Officer

and President

I, Joseph B. Tyson, certify that:

1. I have reviewed this amendment to the annual report on Form 10-K/A of Pan Pacific Retail Properties, Inc. for the year ended December 31, 2001;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 11, 2002

/s/ Joseph B. Tyson

Joseph B. Tyson, CPA

Executive Vice President, Chief Financial

Officer and Secretary

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on November 11, 2002.

PAN PACIFIC RETAIL PROPERTIES, INC.

By:	/s/ Stuart A. Tanz	By:	/s/ Joseph B. Tyson
	Stuart A. Tanz Director, Chairman, Chief Executive Officer and President		Joseph B. Tyson, CPA Executive Vice President, Chief Financial Officer and Secretary (Principal Financial and Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date

/s/ Mark J. Riedy	Director	November 11, 2002

Mark J. Riedy

/s/ Bernard M. Feldman	Director	November 11, 2002

Bernard M. Feldman

/s/ David P. Zimel	Director	November 11, 2002

David P. Zimel

/s/ Joseph P. Colmery	Director	November 11, 2002

Joseph P. Colmery

INDEPENDENT AUDITORS’ REPORT

The Board of Directors

Pan Pacific Retail Properties, Inc.:

We have audited the accompanying consolidated balance sheets of Pan Pacific Retail Properties, Inc. and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2001. In connection with our audits of the consolidated financial statements, we also have audited the accompanying financial statement schedule III. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Pan Pacific Retail Properties, Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule III, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

KPMG LLP

San Diego, California

January 23, 2002, except as to Note 3

to the consolidated financial statements,

which is as of October 31, 2002

PAN PACIFIC RETAIL PROPERTIES, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

ASSETS:	December 31, 2001			December 31, 2000

Properties, at cost:
Land	$	349,694		$	350,604
Buildings and improvements		946,188			887,353
Tenant improvements		36,069			30,762

		1,331,951			1,268,719
Less accumulated depreciation and amortization		(98,762	)		(73,895	)

		1,233,189			1,194,824

Investments in unconsolidated partnerships		1,580			6,816
Cash and cash equivalents		3,765			1,932
Accounts receivable (net of allowance for doubtful accounts of $1,680 and $1,404, respectively)		8,006			7,107
Accrued rent receivable (net of allowance for doubtful accounts of $1,928 and $1,588, respectively)		17,351			14,288
Notes receivable		47,892			37,944
Deferred lease commissions (including unamortized related party amounts of $4,279 and $2,978, respectively, and net of accumulated amortization of $3,368 and $2,415, respectively)		6,352			4,836
Prepaid expenses		10,305			9,133
Other assets		11,178			20,810

	$	1,339,618		$	1,297,690


LIABILITIES AND EQUITY:

Notes payable	$	229,135		$	233,911
Line of credit and term loan payable		165,300			267,650
Senior notes		273,800			124,850
Accounts payable, accrued expenses and other liabilities		28,177			22,527

		696,412			648,938
Minority interests		20,748			41,754


Stockholders’ equity:
Common stock par value $.01 per share, 100,000,000 authorized shares, 32,789,913 and 32,074,368 shares issued and outstanding, net of 1,000,000 and 0 treasury shares, at December 31, 2001 and 2000, respectively		328			321
Paid in capital in excess of par value		714,615			705,265
Accumulated deficit		(92,485	)		(98,588	)

		622,458			606,998

	$	1,339,618		$	1,297,690

See accompanying notes to consolidated financial statements.

PAN PACIFIC RETAIL PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except share data)

	For the Years Ended December 31,
	2001			2000			1999
	(revised)			(revised)			(revised)
REVENUE:
Base rent	$	138,520		$	93,236		$	78,777
Percentage rent		2,695			745			756
Recoveries from tenants		32,288			21,487			17,751
Income from unconsolidated partnerships		837			364			341
Other		8,149			3,722			2,291

		182,489			119,554			99,916


EXPENSES:
Property operating		21,955			14,159			12,432
Property taxes		13,685			8,885			7,365
Depreciation and amortization		28,980			20,224			17,371
Interest		46,196			32,112			23,939
General and administrative		9,168			5,105			5,315
Merger related expenses		—			3,204			—
Other		1,574			556			248

		121,558			84,245			66,670


INCOME FROM CONTINUING OPERATIONS BEFORE MINORITY INTERESTS, GAIN ON SALE OF REAL ESTATE AND DISCONTINUED OPERATIONS		60,931			35,309			33,246
Minority interests		(2,521	)		(2,119	)		(1,558	)
Gain on sale of real estate		4,129			—			400
Discontinued operations		1,683			610			488


NET INCOME	$	64,222		$	33,800		$	32,576


Basic earnings per share:
Income from continuing operations	$	1.96		$	1.46		$	1.51
Discontinued operations	$	0.06		$	0.03		$	0.03
Net income	$	2.02		$	1.49		$	1.54

Diluted earnings per share:
Income from continuing operations	$	1.92		$	1.46		$	1.52
Discontinued operations	$	0.05		$	0.02		$	0.02
Net income	$	1.97		$	1.48		$	1.54

See accompanying notes to consolidated financial statements.

PAN PACIFIC RETAIL PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except share data)

	Common stock					Paid in capital in excess of par value			Accumulated deficit			Total
	Shares		Amount			Paid in capital in excess of par value			Accumulated deficit			Total
Balance at December 31, 1998	21,162,012		$	212		$	481,182		$	(98,306	)	$	383,088
Issuance and vesting of restricted stock	90,500			1			130			—			131
Net income	—			—			—			32,576			32,576
Cash distributions paid and declared	—			—			—			(33,929	)		(33,929	)

Balance at December 31, 1999	21,252,512			213			481,312			(99,659	)		381,866
Vesting of restricted stock	—			—			1,615			—			1,615
Stock issued in acquisition of Western	10,754,256			107			221,027			—			221,134
Stock grant	6,000			—			120			—			120
Stock issued on exercise of options	61,600			1			1,191			—			1,192
Net income	—			—			—			33,800			33,800
Cash distributions paid and declared	—			—			—			(32,729	)		(32,729	)

Balance at December 31, 2000	32,074,368			321			705,265			(98,588	)		606,998
Repurchase of common stock	(1,000,000	)		(10	)		(20,840	)		—			(20,850	)
Conversion of operating subsidiary units to common stock	921,322			9			18,252			—			18,261
Stock issued in acquisition of Western	520			—			11			—			11
Issuance and vesting of restricted stock	217,800			2			920			—			922
Stock issued on exercise of options	575,903			6			11,007			—			11,013
Net income	—			—			—			64,222			64,222
Cash distributions paid and declared	—			—			—			(58,119	)		(58,119	)

Balance at December 31, 2001	32,789,913		$	328		$	714,615		$	(92,485	)	$	622,458

See accompanying notes to consolidated financial statements.

PAN PACIFIC RETAIL PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	For the Years Ended December 31,
	2001			2000			1999
	(revised)			(revised)			(revised)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	64,222		$	33,800		$	32,576
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		28,980			20,224			17,371
Amortization of prepaid financing costs		999			700			707
Net gain on sale of real estate		(4,129	)		—			(400	)
Income from unconsolidated partnerships		(837	)		(364	)		(341	)
Income from discontinued operations		(1,683	)		(610	)		(488	)
Minority interests		2,521			2,119			1,558
Vesting of restricted stock		922			1,615			—
Stock grant		—			120			—
Changes in assets and liabilities, net of the effects of the acquisition of Western:
Increase in accounts receivable		(899	)		(2,230	)		(337	)
Increase in accrued rent receivable		(3,063	)		(1,897	)		(2,748	)
Increase in accrued interest to note receivable		(3,057	)		—			—
Increase in deferred lease commissions		(2,735	)		(1,757	)		(1,785	)
Increase in prepaid expenses		(358	)		(505	)		(732	)
Increase in other assets		(9,046	)		(1,569	)		(948	)
Increase in accounts payable, accrued expenses and other liabilities		5,259			5,198			1,394

Net cash provided by operating activities		77,096			54,844			45,827


CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of and additions to properties		(63,717	)		(49,890	)		(81,173	)
Proceeds from sale of real estate		36,423			198			12,915
Increase (decrease) in construction accounts payable and accrued expenses		391			116			(2,573	)
Distributions from unconsolidated partnerships		584			355			84
Acquisition of Western		(1,952	)		(14,371	)		—
Acquisition of interest in unconsolidated partnership		—			—			(7,163	)
Acquisition of minority interests		(2,252	)		(570	)		(204	)
Increase in other assets		—			(13,339	)		(841	)
Collections of notes receivable		3,678			6,224			1,599
Increases in notes receivable		(19,282	)		(2,673	)		(269	)

Net cash used in investing activities		(46,127	)		(73,950	)		(77,625	)


CASH FLOWS FROM FINANCING ACTIVITIES:
Line of credit proceeds		168,300			346,260			106,962
Line of credit payments		(270,650	)		(279,910	)		(116,662	)
Notes payable proceeds		—			—			91,300
Notes payable payments		(4,776	)		(4,207	)		(14,949	)
Prepaid financing costs		(1,700	)		(1,267	)		(2,719	)
Issuance of senior notes, net		148,837			—			—
Repurchase of common shares		(20,850	)		—			—
Issuance of common shares		11,013			1,192			—
Distributions paid		(61,191	)		(43,456	)		(34,663	)

Net cash (used in) provided by financing activities		(31,017	)		18,612			29,269


DECREASE IN CASH AND CASH EQUIVALENTS		(48	)		(494	)		(2,529	)
Cash from discontinued operations		1,881			737			547


NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		1,833			243			(1,982	)

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		1,932			1,689			3,671


CASH AND CASH EQUIVALENTS AT END OF YEAR	$	3,765		$	1,932		$	1,689

(Continued)

PAN PACIFIC RETAIL PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(In thousands)

	For the Years Ended December 31,
	2001		2000		1999
	(revised)		(revised)		(revised)

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest (net of amounts capitalized of $1,539, $202 and $231, respectively)	$	45,547	$	30,699	$	22,995

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Transfer from investment in unconsolidated partnerships to property	$	—	$	—	$	15,775
Transfer of other assets to properties	$	20,107	$	—	$	—
Transfer of note receivable to property	$	11,113	$	—	$	—
Notes receivable issued upon sales of properties	$	2,400	$	1,801	$	1,962
Conversion of operating subsidiary units to common stock	$	18,261	$	—	$	—
Stock issued in acquisition of Western	$	11	$	221,134	$	—
Assumption of senior notes and line of credit	$	—	$	197,350	$	—
Notes payable assumed upon acquisition of properties and Western	$	—	$	9,628	$	12,523
Minority interest from acquisition of properties and Western	$	—	$	18,751	$	6,134
Accrued liability for acquisition of partnership interests	$	—	$	126	$	—
Distributions payable	$	—	$	—	$	8,960
Note payable assumed by buyer upon sale of property	$	—	$	—	$	4,408

See accompanying notes to consolidated financial statements.

PAN PACIFIC RETAIL PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years Ended December 31, 2001, 2000 and 1999

(Tabular amounts are in thousands, except option and share data)

1. Organization and basis of presentation

Pan Pacific Retail Properties, Inc. (together with its subsidiaries, the “Company”) is an equity real estate investment trust (“REIT”) that owns, leases and manages neighborhood and community shopping centers. As of December 31, 2001, the Company owned a portfolio comprised of 108 properties located primarily in the Western region of the United States. Commencing with its taxable year ended December 31, 1997, the Company believes it qualifies as a REIT under Sections 856 through 860 of the Internal Revenue Code.

In 1998 and 1999, the Company formed certain operating subsidiaries to acquire shopping center properties. The Company is the managing member and in exchange for the properties which were contributed to the operating subsidiaries, units were issued to the non-managing members. These operating subsidiaries were primarily formed for tax planning purposes for the non-managing members who contributed the properties. A non-managing member can seek redemption of the units after the first anniversary of the date of issuance. The Company, at its option, may redeem the units by either (i) issuing common stock at the rate of one share of common stock for each unit, or (ii) paying cash to the non-managing member based on the average trading price of its common stock. Distributions are made to the non-managing members at a rate equal to the distribution being paid by the Company on a share of common stock. Net income or loss is allocated to the non-managing members in an amount equal to the cumulative distributions earned by such members. All remaining net income or loss is allocated to the Company as the managing member. The following table summarizes the activity for these operating subsidiaries as of December 31, 2001:

Operating subsidiary	Units originally issued	Units converted	Units outstanding
Pan Pacific (Portland), LLC	832,617	400,000	432,617
Pan Pacific (Rancho Las Palmas), LLC	314,587	0	314,587

On November 13, 2000, the Company acquired Western Properties Trust (“Western”), a real estate investment trust, at a cost of approximately $440,000,000. The transaction was a stock for stock exchange including assumption of debt whereby Western common shares and units were exchanged into newly issued Company common shares and units, based upon a price of $20.5625 per share/unit issued and a 0.62 exchange ratio. As a result, the Company issued 10,754,776 common shares and 911,934 operating subsidiary units to Western’s equity holders. The Company accounted for this transaction using the purchase method of accounting; accordingly, the Company’s results of operations for the period from November 13, 2000 through December 31, 2000 include Western.

PAN PACIFIC RETAIL PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years Ended December 31, 2001, 2000 and 1999

(Tabular amounts are in thousands, except option and share data)

1. Organization and basis of presentation (continued)

In connection with the acquisition of Western, the Company has an investment in certain operating partnerships. Pan Pacific (Kienows), L.P., formerly Western/Kienow, L.P., issued units convertible into shares of Company common stock or cash, at the Company’s option. Distributions are made to the limited partners at a rate equal to the distribution being paid by the Company on a share of common stock. Net income or loss is allocated to the limited partners in an amount equal to the cumulative distributions earned by such partners. All remaining net income or loss is allocated to the Company as general partner. Pan Pacific (Pinecreek), L.P., formerly Western/Pinecreek, L.P., issued units convertible into shares of Company common stock or cash, at the Company’s option. Distributions are made to the limited partners after a 10% preferred return to the Company as general partner. Net income is allocated to the Company, as general partner, and to the limited partners in amounts equal to the cumulative distributions earned by such partners and thereafter based on their ownership interests. Losses are allocated 99% to the Company as general partner and 1% to the limited partners. The following table summarizes the activity for these operating subsidiaries as of December 31, 2001:

Operating subsidiary	Units originally issued	Units converted	Units outstanding
Pan Pacific (Kienows), L.P.	857,065	623,067	233,998	(a)
Pan Pacific (Pinecreek), L.P.	54,869	0	54,869

(a)

All remaining units were converted for $6,721,000 cash in January 2002.

Unaudited pro forma information reflecting the acquisition of Western is presented in the following table. The amounts included therein assume that the acquisition had taken place at the beginning of the year.

	For the years ended December 31,
	2000		1999
	(Pro forma, unaudited)
Total revenue	$	181,497	$	166,614
Total expenses	$	120,151	$	108,749
Net income	$	61,346	$	57,865
Basic earnings per share	$	1.92	$	1.81
Diluted earnings per share	$	1.89	$	1.81

PAN PACIFIC RETAIL PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years Ended December 31, 2001, 2000 and 1999

(Tabular amounts are in thousands, except option and share data)

2. Summary of significant accounting policies and practices

(a) Principles

of consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany transactions and balances have been eliminated. The Company consolidated entities the Company controls and recorded a minority interest for the portions not owned by the Company.

(b)

Cash and cash equivalents

For purposes of reporting cash flows, highly liquid investments with an original maturity of three months or less are considered cash equivalents. Restricted cash totaled $252,000 and $331,000 at December 31, 2001 and 2000, respectively.

(c)

Income recognition

Rental revenue is recognized on a straight-line basis over the terms of the leases, less an allowance for doubtful accounts relating to accounts receivable and accrued rent receivable for amounts deemed uncollectible and for leases which may be terminated before the end of the contracted term. The Company considers tenant retention in determining an appropriate allowance to record. Percentage rent is recorded at the time tenants meet specified sales thresholds. The Company receives reimbursement for real estate taxes and certain other operating expenses. Such reimbursements are generally recognized at the time the related expenses are incurred.

Bad debt expense, included in property operating expenses in the Company’s financial statements, was $1,765,000, $441,000 and $702,000 for the years ended December 31, 2001, 2000 and 1999, respectively.

(d)

Capitalization of costs

The Company capitalizes certain acquisition and development related costs to the carrying costs of the property acquired or developed. These costs are being depreciated over the estimated useful lives of the properties. The capitalized costs associated with unsuccessful acquisitions are charged to expense when the acquisition is abandoned.

(e)

Depreciation and amortization

Depreciation on buildings and improvements is provided using a forty-year straight-line basis. Management believes forty years is an appropriate estimated useful life for buildings and improvements. Tenant improvements and costs incurred in obtaining leases are depreciated on a straight-line basis over the lives of the respective leases.

Prepaid financing costs are amortized over the lives of the loans and the related amortization expense is included as a component of interest expense. Premiums and discounts on indebtedness are amortized over the life of the related debt using the straight-line method, which approximates the effective interest method.

PAN PACIFIC RETAIL PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years Ended December 31, 2001, 2000 and 1999

(Tabular amounts are in thousands, except option and share data)

2. Summary of significant accounting policies and practices (continued)

(f)

Impairment of long-lived assets and long-lived assets to be disposed of

The Company reviews long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows, undiscounted and without interest, expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

(g)

Income taxes

As of April 16, 1997, the Company elected to be taxed as a REIT pursuant to the Internal Revenue Code, as amended. In general, a corporation that distributes at least 90% of its REIT taxable income to stockholders in any taxable year and complies with certain other requirements (relating primarily to the nature of its assets and the sources of its revenue) is not subject to federal income taxation to the extent of the income which it distributes. Management believes that the Company has qualified and intends for it to continue to qualify as a REIT in the future. As discussed more fully in Note 8, management also does not expect that the Company will pay income taxes on “built-in gains” on certain of its assets. Based on these considerations, management does not believe that the Company will be liable for income taxes at the federal level or in most of the states in which it operates in future years.

(h)

Credit and concentration risk

The Company predominantly operates in one industry segment: real estate ownership, management and development. No single tenant accounts for 10% or more of rental revenue. Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments and receivables. The Company places its temporary cash investments with financial institutions which the Company believes are of high credit quality. Concentration of credit risk with respect to receivables is limited due to the large number of tenants comprising the Company’s customer base, and their dispersion across many areas within the Western region of the United States. At December 31, 2001 and 2000, the Company had no significant concentration of credit risk.

(i)

Net income per share

Basic earnings per share (“EPS”) is computed by dividing earnings available to common stockholders during the period by the weighted average number of common shares outstanding during each period. Diluted EPS is computed by dividing the adjusted amount of earnings available to common stockholders during the period by the weighted average number of shares that would have been outstanding assuming the issuance of common shares for all dilutive potential common shares outstanding during the reporting period, net of shares assumed to be repurchased using the treasury stock method.

PAN PACIFIC RETAIL PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years Ended December 31, 2001, 2000 and 1999

(Tabular amounts are in thousands, except option and share data)

2. Summary of significant accounting policies and practices (continued)

The following is a reconciliation of the numerator and denominator for the calculation of basic and diluted EPS (all net income is available to common stockholders for the periods presented):

	For the years ended December 31,
	2001		2000		1999
Income available to common stockholders:
Basic	$	64,222	$	33,800	$	32,576
Add-back income allocated to dilutive operating subsidiary units		1,864		585		1,530

Diluted	$	66,086	$	34,385	$	34,106


Weighted average shares:
Basic		31,857,903		22,695,877		21,196,238
Incremental shares from assumed:
Exercise of dilutive stock options		294,006		35,765		8,478
Conversion of dilutive operating subsidiary units		1,408,843		436,677		917,943

Diluted		33,560,752		23,168,319		22,122,659

At December 31, 2001 and 2000, 0 and 310,167 stock options, respectively, were excluded from the calculation of diluted weighted average shares because they were anti-dilutive. At December 31, 2001 and 2000, 314,587 and 832,617 operating subsidiary units were excluded from the calculation of diluted weighted average shares because they were anti-dilutive.

(j)

Stock plans

The Company accounts for its stock plans in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations. As such, compensation expense is recorded on the date of option grants only if the current market price of the underlying stock exceeds the exercise price. Compensation expense for restricted stock grants is determined on the grant date based on the market price and is recognized over the vesting period. Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”), permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the annual pro forma disclosures required by SFAS No. 123.

PAN PACIFIC RETAIL PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years Ended December 31, 2001, 2000 and 1999

(Tabular amounts are in thousands, except option and share data)

2. Summary of significant accounting policies and practices (continued)

(k)

Use of estimates

Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reporting of revenue and expenses during the reporting period to prepare these financial statements in conformity with accounting principles generally accepted in the United States of America. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and reported amounts of revenue and expenses that are not readily apparent from other sources. Actual results could differ from those estimates under different assumptions or conditions.

Management considers those estimates and assumptions that are most important to the portrayal of the Company’s financial condition and results of operations, in that they require management’s most subjective judgments, to form the basis for the accounting policies deemed to be most critical to the Company. These critical accounting policies include management’s estimates of useful lives in calculating depreciation expense on its shopping center properties and the ultimate recoverability (or impairment) of each shopping center asset. If the useful lives of buildings and improvements are different from 40 years, it could result in changes to the future results of operations of the Company. Future adverse changes in market conditions or poor operating results of shopping center properties could result in losses or an inability to recover the carrying value of the properties that may not be reflected in the properties’ current carrying value, thereby possibly requiring an impairment charge in the future.

(l)

Reclassifications

Certain reclassifications of 2000 and 1999 amounts have been made in order to conform to 2001 presentation.

PAN PACIFIC RETAIL PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years Ended December 31, 2001, 2000 and 1999

(Tabular amounts are in thousands, except option and share data)

3. Discontinued operations

In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144). In accordance with SFAS No. 144, we report each individual property as a component for determining discontinued operations. The operating results of five properties sold during the third quarter of 2002 were reported as income from discontinued operations in 2002, and their respective 2001, 2000, and 1999 results of operations were reclassified to income from discontinued operations. The following is a summary of our income from discontinued operations for the years ended December 31, 2001, 2000 and 1999:

	For the years ended December 31,
	2001			2000			1999
Revenue	$	2,376		$	939		$	746
Property operating expenses		(395	)		(179	)		(153	)
Depreciation and amortization expenses		(298	)		(150	)		(105	)

Discontinued operations	$	1,683		$	610		$	488

The carrying values of the five properties sold (including the related asset groups, as defined in SFAS 144) were as follows:

	As of December 31,
	2001		2000
Properties, net of accumulated depreciation and amortization	$	15,647	$	15,366
Accounts receivable	$	197	$	62
Accrued rent receivable	$	196	$	96
Deferred lease commissions	$	66	$	42
Prepaid expenses	$	66	$	65
Accounts payable, accrued expenses and other liabilities	$	126	$	120

4. Investments in unconsolidated partnerships

The accompanying consolidated financial statements include investments in partnerships in which the Company exerts significant influence but does not own a controlling interest. At December 31, 2001, the Company owned a 50% general partner interest in North Coast Health Center. During December 2001, the Company sold its 30% undivided co-tenant interest in Serra Center. At December 31, 2000, the Company owned a 50% general partner interest in North Coast Health Center and a 30% undivided co-tenant interest in Serra Center. These investments are reported using the equity method.

PAN PACIFIC RETAIL PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years Ended December 31, 2001, 2000 and 1999

(Tabular amounts are in thousands, except option and share data)

5. Indebtedness

(a)

Notes payable

	December 31,
	2001		2000
Notes payable secured by properties consist of the following:
Bank notes payable, secured by deeds of trust, bearing interest at 7.10% with monthly principal and interest payments of $391, due in August 2009	$	54,545	$	55,333
Bank notes payable, secured by a mortgage and deeds of trust, bearing interest at 8.17% with monthly principal and interest payments of $404, due in January 2007		52,004		52,524
Bank notes payable, secured by deeds of trust, bearing interest at 7.21% with monthly principal and interest payments of $252, due in July 2006		33,680		34,254
Bank note payable, secured by a deed of trust, bearing interest at 7.72% with monthly principal and interest payments of $190, due in January 2010		26,080		26,331
Bank note payable, secured by deeds of trust, bearing interest at 8.73% with monthly principal and interest payments of $144, due in February 2007 (a)		16,448		16,704
Bank note payable, secured by a deed of trust, bearing interest at 8.10% with monthly principal and interest payments of $94, due in August 2007		12,230		12,367
Bank note payable, secured by a deed of trust, bearing interest at 7.80% with monthly principal and interest payments of $107, due in December 2005		9,779		10,280
Bank note payable, secured by a deed of trust, bearing interest at 7.61% with monthly principal and interest payments of $80, due in May 2004		9,357		9,591
Bank note payable, secured by a deed of trust, bearing interest at 7.65% with monthly principal and interest payments of $54, due in October 2012 (b)		7,327		7,413
Bank note payable, secured by a deed of trust, bearing interest at 7.00% with monthly principal and interest payments of $37, due in March 2004		4,334		4,411
Bank note payable, secured by a deed of trust, bearing interest at 7.88% with monthly principal and interest payments of $56, due in August 2008		1,988		3,136

		227,772		232,344
Unamortized note payable premiums		1,363		1,567

	$	229,135	$	233,911

(a)

Excludes unamortized note payable premium of $1,082 and $1,266 at December 31, 2001 and 2000, respectively.

(b)

Excludes unamortized note payable premium of $281 and $301 at December 31, 2001 and 2000, respectively.

PAN PACIFIC RETAIL PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years Ended December 31, 2001, 2000 and 1999

(Tabular amounts are in thousands, except option and share data)

5. Indebtedness (continued)

Principal payments under these notes payable are due as follows:

2002	$	4,323
2003		4,605
2004		17,383
2005		11,818
2006		33,927
2007 and subsequent		155,716

	$	227,772

(b)

Line of credit and term loan payable

In November 2000, the Company entered into an unsecured $300,000,000 Revolving Credit Agreement which bears interest, at the Company’s option, at either LIBOR plus 1.10% or a reference rate and expires in January 2004. At December 31, 2001 and 2000, the amount drawn on this line of credit was $165,300,000 and $167,650,000, respectively, and the interest rate was 3.23% and 7.89%, respectively. The credit facility requires a quarterly fee of 0.20% per annum on the total aggregate commitment.

In November 2000, the Company also executed an unsecured $100,000,000 Term Credit Agreement which bore interest, at the Company’s option, at either LIBOR plus 1.20% or a reference rate and was to expire in November 2001 with a three month option to extend at the Company’s discretion. At December 31, 2000, the full amount was drawn on this loan. The Company paid off the loan in full in July 2001.

(c)

Senior notes

In April 2001, the Company issued $150,000,000 in aggregate principal amount of 7.95% senior notes due April 2011. The Company sold these notes at 99.225% of the principal amount. The Company used the net proceeds from the offering to repay borrowings under its term loan and line of credit.

In November 2000, in connection with the acquisition of Western, the Company assumed $49,952,000 of 7.88% senior notes due 2004, $24,977,000 of 7.10% senior notes due 2006, $24,958,000 of 7.20% senior notes due 2008 and $24,958,000 of 7.30% senior notes due 2010. The senior notes were assumed net of a $155,000 discount which represents the amount of the principal reduction recorded by Western to achieve the required yield at pricing of the debt. The effective yields approximated fair value at the date of the merger.

6. Financial instruments

The following methods and assumptions were used to estimate fair value of each class of financial instruments:

(a)

Cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued expenses and other liabilities

The carrying amounts approximate fair values because of the short-term nature of these instruments.

PAN PACIFIC RETAIL PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years Ended December 31, 2001, 2000 and 1999

(Tabular amounts are in thousands, except option and share data)

6. Financial instruments (continued)

(b)

Notes receivable

The carrying amounts of notes receivable with balances of $859,000 and $2,486,000 at December 31, 2001 and 2000, respectively, approximate fair values because of the short-term nature of these instruments.

It was not practicable to estimate the fair value of notes receivable with balances of $41,784,000 and $32,999,000 at December 31, 2001 and 2000, respectively, due to the uncertainty of the timing of repayment. One of the notes had a balance of $41,127,000 and $19,593,000 at December 31, 2001 and 2000, respectively. The note bears interest at 9.00% on the first $26,500,000 and at 10.50% thereafter. The security interest in the related asset is considered to be in excess of the credit risk associated with the note balance. The principal balance on the note may be repaid earlier than its scheduled maturity of 2007. In addition, the note agreement provides for 25% of the cash flow after debt service to be paid to the Company for seven years.

The fair value of notes receivable with balances of $5,249,000 and $2,459,000 at December 31, 2001 and 2000, respectively, approximates the carrying amounts based on market rates for the same or other instruments with similar risk, security and remaining maturities.

(c)

Notes payable, line of credit and senior notes payable

The fair value of notes payable, line of credit and senior notes payable approximates the carrying amount based on the current rates offered for loans with similar risks and maturities.

7. Net gain on sale of real estate

The Company recorded a net gain on sale of real estate of $4,129,000 during the year ended December 31, 2001. The gain related to the sale of a non-core shopping center, five single tenant assets, a 30% interest in a shopping center (Note 4) and four parcels of land. The total sales proceeds of $38,823,000 were received in cash and a note receivable.

The Company recorded a net gain on sale of real estate of $400,000 during the year ended December 31, 1999. The gain related to the sale of two shopping centers and one single tenant asset. The total sales proceeds of $12,970,000 were received in cash and notes receivable.

8. Stock plans

In August 1997, the Company established the 1997 Stock Option and Incentive Plan (the “1997 Plan”) pursuant to which the Company’s Board of Directors may grant stock, restricted stock awards and stock options to officers, directors and key employees. The 1997 Plan authorizes grants of stock, restricted stock and options to purchase up to 1,620,000 shares of authorized but unissued common stock. In March 2000, the Company established the 2000 Stock Incentive Plan (the “2000 Plan”) pursuant to which the Company’s Board of Directors may grant stock, restricted stock awards and stock options to officers, directors and key employees. The 2000 Plan authorizes grants of stock, restricted stock and options to purchase up to 489,971 shares of authorized but unissued common stock. The 2000 Plan was approved by the Company’s stockholders at the annual meeting held in May 2000. In November 2000, the number of shares available for grant pursuant to the 2000 Plan was increased to 1,786,695 shares upon approval by the Company’s stockholders in connection with the merger with Western. At December 31, 2001, there were 1,057,075 additional shares available for grant under the 1997 Plan and the 2000 Plan.

PAN PACIFIC RETAIL PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years Ended December 31, 2001, 2000 and 1999

(Tabular amounts are in thousands, except option and share data)

8. Stock plans (continued)

(a)

Stock options

Stock options are granted with an exercise price equal to the stock’s fair value at the date of grant. The stock options have seven-year terms and vest 33 1/3% per year over three years from the date of grant, except for the options granted to the independent directors which vest 33 1/3% immediately, with the remainder vesting ratably over two years. In connection with the acquisition of Western, all issued and outstanding stock options became fully vested.

The per share weighted average fair value of stock options granted during 2001, 2000 and 1999 were $2.14, $1.71 and $1.64, respectively, on the dates of grant using the Black-Scholes option-pricing model using the following weighted average assumptions:

	2001		2000		1999
Expected distribution yield	7.80	%	8.30	%	8.50	%
Risk-free interest rate	5.00	%	5.00	%	5.00	%
Expected volatility	22.48	%	22.88	%	23.90	%
Expected life (years)	6.8		5.9		6.5

The Company applies APB Opinion No. 25 in accounting for the 1997 Plan and 2000 Plan and, accordingly, no compensation cost has been recognized for its stock options in the financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company’s net income would have been reduced to the pro forma amounts indicated below:

	2001				2000				1999
	As Reported		Pro Forma		As Reported		Pro Forma		As Reported		Pro Forma
Net income	$	64,222	$	63,795	$	33,800	$	32,535	$	32,576	$	31,481
Diluted earnings per share	$	1.97	$	1.96	$	1.48	$	1.43	$	1.54	$	1.49

Pro forma net income reflects options granted since adoption of the 1997 Plan and the 2000 Plan.

PAN PACIFIC RETAIL PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years Ended December 31, 2001, 2000 and 1999

(Tabular amounts are in thousands, except option and share data)

8. Stock plans (continued)

Stock option activity during the periods presented is as follows:

	Number of Options		Weighted Average Exercise Price
Balance at December 31, 1998	1,215,167		$	20.2265
Granted	283,000		$	17.6250
Exercised	—		$	—
Forfeited	(17,000	)	$	20.0600
Expired	(3,333	)	$	19.5000

Balance at December 31, 1999	1,477,834		$	19.7750
Granted	173,000		$	18.6250
Exercised	(61,600	)	$	19.3478
Forfeited	(15,333	)	$	19.4743
Expired	(10,667	)	$	20.0192

Balance at December 31, 2000	1,563,234		$	19.6605
Granted	425,486		$	21.5500
Exercised	(575,903	)	$	19.1051
Forfeited	(7,000	)	$	21.5500
Expired	(8,000	)	$	21.8901

Balance at December 31, 2001	1,397,817		$	20.4240

At December 31, 2001, the range of exercise prices for outstanding options was $17.625 to $22.1875 and the weighted average exercise price and weighted average remaining contractual life of outstanding options were $20.4240 and 4.1 years, respectively. The weighted average exercise price of exercisable outstanding options was $19.9809. At December 31, 2001, 1,002,152 of the 1,397,817 outstanding options were exercisable.

(b)

Restricted stock and stock grants

During 2001, the Company granted 212,000 shares of restricted stock to certain officers and key employees pursuant to the 1997 Plan and the 2000 Plan. The restricted shares vest over five years from the date of grant. During 2001, the Company granted 5,000 shares of restricted stock to the independent directors of the Board pursuant to the 1997 Plan. The restricted shares vest over one year from the date of grant. During 2001, the Company granted 800 shares of restricted stock to an independent director of the Board pursuant to the 1997 Plan. The restricted shares vest 33 1/3% immediately, with the remainder vesting ratably over two years. Compensation expense for the portion that vested during 2001 has been recognized in general and administrative expenses. Compensation expense related to these grants to be recognized in future periods is $3,910,000 at December 31, 2001.

In November 2000, the Company’s Board of Directors granted a total of 6,000 shares of stock to the independent directors of the Board. Expense related to this grant has been recognized in merger related expenses. During 1999, the Company granted 90,500 shares of restricted stock to certain officers and key employees pursuant to the 1997 Plan. The restricted shares vest over five years from the date of grant. Compensation expense, for the portion that vested during 1999 and 2000 prior to the acquisition of Western, has been recognized in general and administrative expenses. In connection with the acquisition of Western, the restricted shares became fully vested and the remaining compensation expense of $1,305,000 has been recognized in merger related expenses.

PAN PACIFIC RETAIL PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years Ended December 31, 2001, 2000 and 1999

(Tabular amounts are in thousands, except option and share data)

9. Income taxes

As discussed in Note 2(g), the Company elected to be taxed as a REIT, effective April 16, 1997. Management believes that the Company qualified and management’s intent is to continue to qualify as a REIT and therefore does not expect the Company will be liable for income taxes at the federal level or in most states in future years. Accordingly, for the years ended December 31, 2001, 2000 and 1999, no provision was recorded for federal or substantially all state income taxes.

In connection with its election to be taxed as a REIT, the Company also elected to be subject to the “built-in gain” rules. Under these rules, taxes may be payable at the time and to the extent that the net unrealized gains on the Company’s assets at the date of conversion to REIT status are recognized in taxable dispositions of such assets in the ten-year period following conversion. Such net unrealized gains were approximately $50,000,000 at December 31, 2001, 2000 and 1999. Management believes that the Company will not be required to make payments of income taxes on built-in gains during the ten-year period ending December 31, 2007. It is the intent and ability of the Company to defer asset dispositions to periods when related gains will not be subject to the built-in gains income taxes or to use tax planning ideas available to defer recognition of the built-in gains. However, it may be necessary to recognize a liability for such income taxes in the future if management’s plans and intentions with respect to asset dispositions, or the related tax laws, change.

The following unaudited table reconciles the Company’s book net income to REIT taxable income before dividends paid deduction:

	For the years ended December 31,
	2001 Estimate			2000 Actual			1999 Actual
Book net income	$	64,222		$	33,800		$	32,576
Less: Differences between book and tax net income for REIT subsidiaries		(2,225	)		3,993			(2,261	)

		61,997			37,793			30,315
Add: Book depreciation and amortization (a)		29,278			20,374			17,476
Less: Tax depreciation and amortization		(26,145	)		(16,513	)		(14,667	)
Less: Straight-line rent adjustments		(3,157	)		(1,898	)		(3,071	)
Book/tax difference on gains/losses from capital transactions		(136	)		(81	)		(1,024	)
Other book/tax differences, net		(925	)		1,504			(698	)

Taxable ordinary income before adjustments		60,912			41,179			28,331
Less: Other adjustments (b)		(7,478	)		(7,478	)		—

REIT taxable income before dividends paid deduction	$	53,434		$	33,701		$	28,331

(a)

Includes depreciation of properties in discontinued operations (see Note 3).

(b)

Based on other adjustments permitted by the Internal Revenue Code.

PAN PACIFIC RETAIL PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years Ended December 31, 2001, 2000 and 1999

(Tabular amounts are in thousands, except option and share data)

9. Income taxes (continued)

The Company pays distributions quarterly to the stockholders. The following presents the federal income tax characterization of distributions paid or deemed to be paid to stockholders:

	For the years ended December 31,
	2001				2000				1999
Ordinary income	$	1.73	94.94	%	$	1.67	86.18	%	$	1.46	92.15	%
Return of capital		0.09	5.06	%		0.27	13.82	%		0.12	7.85	%

	$	1.82	100.00	%	$	1.94	100.00	%	$	1.58	100.00	%

10. Future lease revenue

Total future minimum lease receipts under noncancellable operating tenant leases in effect at December 31, 2001 are as follows:

2002	$	136,693
2003		125,039
2004		111,293
2005		95,972
2006		78,382
2007 and subsequent		410,116

	$	957,495

11. Related party transactions

(a) On January 4, 2001, the Company purchased 1,000,000 shares of its common stock from Revenue Properties (U.S.), Inc., an affiliate of the Company. The Company purchased the stock at a price of $20.85 per share and financed the transaction through a draw under its line of credit.

(b) Distributions on common stock paid to Revenue Properties (U.S.), Inc., an affiliate of the Company, during 2001 and 2000 were $7,004,000 and $20,968,000, respectively.

(c) The Company received $15,000, $85,000 and $150,000 for the years ended December 31, 2001, 2000 and 1999, respectively, which represent a reimbursement of costs incurred by the Company in providing financial services to Revenue Properties (U.S.), Inc. These amounts are included as a reduction of general and administrative expenses.

(d) The Company had notes receivable of $735,000 and $687,000 due from executive officers at December 31, 2001 and 2000, respectively. These notes were part of the acquisition of Western and replaced notes previously held by officers of Western. These notes bore interest at 7.50% and were repaid in January 2002. In addition, the Company had notes receivable of $124,000 and $116,000 due from executive officers at December 31, 2001 and 2000, respectively. These notes, which bear interest at 7.00%, are due on demand. In addition, during 2000 notes receivable of $297,000 were issued to executive officers. These notes bore interest at 7.00% and were forgiven in November 2000 as a result of the acquisition of Western and were a component of merger related expenses. The Company had notes receivable at December 31, 1999 of $260,000 due from executive officers. The notes bore interest at 7.00% and were forgiven in 2000 as a component of annual compensation.

PAN PACIFIC RETAIL PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years Ended December 31, 2001, 2000 and 1999

(Tabular amounts are in thousands, except option and share data)

12. Employee benefit plan

All employees of the Company who meet certain minimum age and period of service requirements are eligible to participate in a Section 401(k) plan as defined by the Internal Revenue Code. The employee benefit plan, sponsored by the Company, allows eligible employees to defer up to 15% of their annual compensation. The amounts contributed by employees are immediately vested and non-forfeitable. The Company, at management’s discretion, may match employee contributions. The Company’s cost for the years ended December 31, 2001, 2000 and 1999 was approximately $64,000, $58,000 and $23,000, respectively.

13. Commitments and contingencies

(a) The Company leases certain real estate and office equipment under operating leases expiring at various dates through 2021. Rental expense was $770,000, $892,000 and $769,000 for the years ended December 31, 2001, 2000 and 1999, respectively. Minimum rentals under noncancellable operating leases in effect at December 31, 2001 were as follows:

2002	$	770
2003		769
2004		764
2005		763
2006		763
2007 and subsequent		2,883

	$	6,712

(b) In connection with the acquisition of Western, the Company was named in a complaint alleging, among other things, that the merger terms between the Company and Western were unfair and violated fiduciary obligations to Western’s shareholders. Management believes, based in part upon discussions with legal counsel, that these claims are without merit and intends to vigorously defend against this action; however, the outcome of any litigation is by its nature unpredictable and we therefore cannot assure that we will successfully defend this action.

(c) Various claims and legal proceedings arise in the ordinary course of business. The ultimate amount of liability from all claims and actions cannot be determined with certainty, but in the opinion of management, the ultimate liability from all pending and threatened legal claims will not materially affect the consolidated financial statements taken as a whole.

14. Segment reporting

The Company predominantly operates in one industry segment - real estate ownership, management and development. As of December 31, 2001 and 2000, the Company owned 108 and 110 community shopping centers, respectively, primarily located in the Western United States (see Note 1). Management reviews operating and financial data for each property separately and independently from all other properties when making resource allocation decisions and measuring performance. Therefore, the Company defines operating segments as individual properties with no segment representing more than 10% of the net operating income of the Company. No single tenant accounts for 10% or more of rental revenue and none of the shopping centers are located in a foreign country.

PAN PACIFIC RETAIL PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Years Ended December 31, 2001, 2000 and 1999

(Tabular amounts are in thousands, except option and share data)

15. Quarterly financial data (unaudited)

The following summarizes the condensed quarterly financial information for the Company:

	Quarters ended 2001
	December 31		September 30		June 30		March 31
Revenue	$	48,642	$	46,633	$	48,596	$	45,123
Expenses and minority interests		31,831		30,117		32,235		30,589


Net income	$	16,811	$	16,516	$	16,361	$	14,534


Basic earnings per share	$	0.52	$	0.52	$	0.52	$	0.46
Diluted earnings per share	$	0.51	$	0.50	$	0.51	$	0.45

	Quarters ended 2000
	December 31		September 30		June 30		March 31
Revenue	$	38,021	$	28,044	$	27,365	$	27,063
Expenses and minority interests		29,669		19,320		18,951		18,753


Net income	$	8,352	$	8,724	$	8,414	$	8,310


Basic and diluted earnings per share	$	0.31	$	0.41	$	0.40	$	0.39

PAN PACIFIC RETAIL PROPERTIES, INC.

SCHEDULE III

PROPERTIES AND ACCUMULATED DEPRECIATION

December 31, 2001

(In thousands)

	Encumbrances		Initial Costs				Costs Capitalized Subsequent to Acquisition				Total Costs						Accumulated Depreciation (2) (3)		Date of Acquis.(A) Constr.(C)
Description	Encumbrances		Land		Buildings and Improvements(2)		Improvements(2)		Carrying Costs		Land		Buildings and Improvements		Total (1) (2) (3)		Accumulated Depreciation (2) (3)		Date of Acquis.(A) Constr.(C)
PROPERTIES:

Albany Plaza Albany, OR	$	—	$	1,525	$	4,638	$	1,191	$	—	$	1,525	$	5,829	$	7,354	$	461	1999	(A)

Anderson Square Anderson, CA		—		827		2,480		76		—		827		2,556		3,383		81	2000	(A)

Angels Camp Town Center Angels Camp, CA		—		1,153		3,485		23		—		1,153		3,508		4,661		100	2000	(A)

Arlington Courtyard Riverside, CA		—		401		753		87		—		401		840		1,241		246	1994	(A)

Auburn North Auburn, WA		—		2,275		8,053		1,616		—		2,275		9,669		11,944		836	1999	(A)

Bear Creek Plaza Medford, OR		—		3,275		9,825		1,579		—		3,275		11,404		14,679		1,227	1998	(A)

Blaine International Center Blaine, WA		—		1,951		5,255		13		—		1,951		5,268		7,219		149	2000	(A)

Blossom Valley Turlock, CA		—		2,494		7,483		9		—		2,494		7,492		9,986		209	2000	(A)

Brookhurst Anaheim, CA		—		6,152		14,364		—		—		6,152		14,364		20,516		90	2001	(A)

Brookvale Center Fremont, CA		—		3,161		9,489		1,017		—		3,161		10,506		13,667		1,173	1997	(A)

Cable Park Orangevale, CA		—		3,042		9,174		31		—		3,042		9,205		12,247		449	1999	(A)

Canal Farms Las Brunos, CA		—		1,576		4,728		54		—		1,576		4,782		6,358		138	2000	(A)

Canby Square Canby, OR		—		2,503		7,518		59		—		2,503		7,577		10,080		23	2001	(A)

Canyon Ridge Plaza Kent, WA		—		2,457		—		8,638		—		2,904		8,191		11,095		1,390	1992 1995	(A) (C)

Canyon Square Plaza Santa Clarita, CA		—		2,725		8,338		102		—		2,725		8,440		11,165		522	1999	(A)

Caughlin Ranch Reno, NV		—		2,283		6,852		840		—		2,283		7,692		9,975		194	2000	(A)

Centennial Plaza Hartford, CA		—		2,761		8,286		13		—		2,761		8,299		11,060		235	2000	(A)

Century Center Modesto, CA		—		4,780		14,337		57		—		4,780		14,394		19,174		407	2000	(A)

Cheyenne Commons Las Vegas, NV		—		8,540		26,810		3,280		—		8,540		30,090		38,630		5,071	1995	(A)

Chico Crossroads Chico, CA		—		3,600		17,063		24		—		3,600		17,087		20,687		2,083	1997	(A)

Chino Town Square Chino, CA		26,080		8,801		10,297		26,898		—		21,093		24,903		45,996		4,465	1992	(A)

Claremont Village Everett, WA		—		2,319		6,987		234		—		2,319		7,221		9,540		835	1997	(A)

Cobblestone Redding, CA		—		1,869		5,609		64		—		1,869		5,673		7,542		166	2000	(A)

Commonwealth Square Folsom, CA		—		4,425		13,274		28		—		4,425		13,302		17,727		374	2000	(A)

Country Club Center Rio Rancho, NM		3,166		566		2,514		917		—		566		3,431		3,997		1,199	1992	(A)

Country Gables Granite Bay, CA		—		4,621		10,806		87		—		4,621		10,893		15,514		310	2000	(A)

Creekside Center Hayward, CA		—		1,500		4,500		634		—		1,500		5,134		6,634		464	1998	(A)

Currier Square Oroville, CA		—		1,591		4,771		—		—		1,591		4,771		6,362		135	2000	(A)

(Continued)

PAN PACIFIC RETAIL PROPERTIES, INC.

SCHEDULE III

PROPERTIES AND ACCUMULATED DEPRECIATION (Continued)

December 31, 2001

(In thousands)

	Encumbrances	Initial Costs		Costs Capitalized Subsequent to Acquisition			Total Costs			Accumulated Depreciation (2) (3)	Date of Acquis.(A) Constr.(C)
Description	Encumbrances	Land	Buildings and Improvements(2)	Improvements(2)		Carrying Costs	Land	Buildings and Improvements	Total (1) (2) (3)	Accumulated Depreciation (2) (3)	Date of Acquis.(A) Constr.(C)
PROPERTIES:

Dodge Center Fallon, NV	—	422	1,267	—		—	422	1,267	1,689	36	2000	(A)

Dublin Retail Center Dublin, CA	—	4,053	12,159	216		—	4,053	12,375	16,428	29	2000	(A)

Eagle Station Carson City, NV	—	2,455	7,363	33		—	2,455	7,396	9,851	212	2000	(A)

East Burnside Portland, OR	—	1,583	3,691	114		—	1,583	3,805	5,388	117	2000	(A)

Eastridge Plaza Porterville, CA	—	1,170	3,513	4		—	1,170	3,517	4,687	98	2000	(A)

Elko Junction Elko, NV	—	3,274	9,822	43		—	3,274	9,865	13,139	280	2000	(A)

Elverta Crossing Sacramento, CA	—	3,080	9,236	107		—	3,080	9,343	12,423	270	2000	(A)

Encinitas Marketplace Encinitas, CA	—	3,529	8,385	342		—	3,529	8,727	12,256	372	2000	(A)

Fairmont Shopping Center Fairmont, CA	—	3,420	8,003	355		—	3,420	8,358	11,778	1,062	1997	(A)

Fashion Faire San Leandro, CA	—	2,862	8,588	242		—	2,862	8,830	11,692	817	1998	(A)

Foster Square Portland, OR	—	348	811	427		—	348	1,238	1,586	65	2000	(A)

Garrison Square Vancouver, WA	—	1,487	4,466	36		—	1,487	4,502	5,989	27	2001	(A)

Gateway Shopping Center Mill Creek, WA	—	3,937	12,044	33		—	3,937	12,077	16,014	201	2000	(A)

Glenbrook Center Sacramento, CA	—	1,538	3,659	94		—	1,538	3,753	5,291	110	2000	(A)

Glen Cove Center Vallejo, CA	—	1,925	5,775	58		—	1,925	5,833	7,758	471	1998	(A)

Granary Square Valencia, CA	—	5,479	12,940	121		—	5,479	13,061	18,540	446	2000	(A)

Green Valley Town & Country Henderson, NV	—	4,096	12,333	115		—	4,096	12,448	16,544	1,390	1997	(A)

Heritage Park Suison City, CA	—	3,449	10,348	69		—	3,449	10,417	13,866	295	2000	(A)

Heritage Place Tulare, CA	—	2,098	6,298	29		—	2,098	6,327	8,425	180	2000	(A)

Hermiston Plaza Hermiston, OR	—	1,930	5,791	1,547		—	1,930	7,338	9,268	625	1998	(A)

Hood River Center Hood River, OR	—	1,169	3,507	2,695		—	1,169	6,202	7,371	311	1998	(A)

Kmart Center Sacramento, CA	—	1,130	3,392	121		—	1,130	3,513	4,643	109	2000	(A)

Laguna 99 Plaza Elk Grove, CA	—	3,244	9,730	7		—	3,244	9,737	12,981	274	2000	(A)
Laguna Village Sacramento, CA	—	3,226	—	15,986		1,644	3,448	17,408	20,856	3,219	1992 1996/97	(A) (C)

Lakewood Shopping Center Lakewood, CA	—	2,363	7,125	65		—	2,363	7,190	9,553	852	1997	(A)

Lakewood Village Windsor, CA	9,357	5,347	12,476	67		—	5,347	12,543	17,890	355	2000	(A)

Laurentian Center Ontario, CA	4,334	2,767	6,445	(390	)	—	2,767	6,055	8,822	851	1994/96	(A)

(Continued)

PAN PACIFIC RETAIL PROPERTIES, INC.

SCHEDULE III

PROPERTIES AND ACCUMULATED DEPRECIATION (Continued)

December 31, 2001

(In thousands)

	Encumbrances	Initial Costs		Costs Capitalized Subsequent to Acquisition			Total Costs			Accumulated Depreciation (2) (3)	Date of Acquis.(A) Constr.(C)
Description	Encumbrances	Land	Buildings and Improvements(2)	Improvements(2)		Carrying Costs	Land	Buildings and Improvements	Total (1) (2) (3)	Accumulated Depreciation (2) (3)	Date of Acquis.(A) Constr.(C)
PROPERTIES:

Manteca Marketplace Manteca, CA	—	3,904	11,713	620		—	3,904	12,333	16,237	1,293	1998	(A)

Marina Village Huntington Beach, CA	—	3,531	10,933	247		—	3,531	11,180	14,711	779	1999	(A)

Maysville Marketsquare Maysville, KY	5,181	3,454	2,001	3,731		79	3,299	5,966	9,265	1,470	1992 1993	(A) (C)

Melrose Village Vista, CA	8,937	5,125	11,621	27		—	5,125	11,648	16,773	2,771	1999	(A)

Memphis Retail Center Memphis, TN	—	1,204	3,780	(28	)	—	1,204	3,752	4,956	893	1992	(A)

Menlo Park Portland, OR	—	3,056	7,231	1,050		—	3,056	8,281	11,337	224	2000	(A)

Milwaukie Marketplace Milwaukie, OR	—	3,184	9,551	544		—	3,184	10,095	13,279	1,071	1998	(A)

Mira Loma Shopping Center Reno, NV	—	1,925	5,775	289		—	1,925	6,064	7,989	507	1998	(A)

Mission Ridge Plaza Manteca, CA	—	2,880	8,640	1		—	2,880	8,641	11,521	243	2000	(A)

Monterey Plaza San Jose, CA	16,955	7,688	18,761	485		—	7,702	19,232	26,934	2,397	1997	(A)

North Hills Reno, NV	—	2,500	—	—		—	2,500	—	2,500	—	2000	(A)

Northridge Plaza Fair Oaks, CA	—	1,658	4,977	48		—	1,658	5,025	6,683	146	2000	(A)

Olympia Square Olympia, WA	13,625	3,737	11,580	1,032		—	3,737	12,612	16,349	3,939	1992	(A)

Olympia West Center Olympia, WA	1,988	2,736	8,295	142		—	2,736	8,437	11,173	957	1997	(A)

Olympic Place Walnut Creek, CA	—	9,681	9,427	—		—	9,681	9,427	19,108	—	2000	(A)

Oregon City Shopping Center Oregon City, OR	9,817	4,426	13,272	2,210		—	4,426	15,482	19,908	1,145	1998	(A)

Oregon Trail Gresham, OR	—	3,593	10,779	3,387		—	3,593	14,166	17,759	1,284	1998	(A)

Pacific Commons Shopping Center Spanaway, WA	—	3,419	10,256	88		—	3,419	10,344	13,763	915	1998	(A)

Palmdale Center Palmdale, CA	—	1,150	3,454	244		—	1,150	3,698	4,848	398	1997	(A)

Panther Lake Shopping Center Kent, WA	—	1,950	5,850	278		—	1,950	6,128	8,078	635	1998	(A)

Park Place Vallejo, CA	—	4,020	9,381	2		—	4,020	9,383	13,403	263	2000	(A)

Pine Creek Shopping Center Grass Valley, CA	—	5,000	15,000	153		—	5,000	15,153	20,153	440	2000	(A)

Pioneer Plaza Springfield, OR	—	1,864	5,591	143		—	1,864	5,734	7,598	577	1998	(A)

Plaza 580 Livermore, CA	—	4,010	12,031	52		—	4,010	12,083	16,093	338	2000	(A)

Powell Valley Junction Gresham, OR	—	1,546	4,639	1,094		—	1,546	5,733	7,279	506	1998	(A)

Powell Villa Portland, OR	—	850	2,553	2		—	850	2,555	3,405	15	2001	(A)

Rainbow Promenade Las Vegas, NV	19,246	9,390	21,774	262		—	9,381	22,045	31,426	2,384	1997	(A)

(Continued)

PAN PACIFIC RETAIL PROPERTIES, INC.

SCHEDULE III

PROPERTIES AND ACCUMULATED DEPRECIATION (Continued)

December 31, 2001

(In thousands)

	Encumbrances	Initial Costs		Costs Capitalized Subsequent to Acquisition		Total Costs			Accumulated Depreciation (2) (3)	Date of Acquis.(A) Constr.(C)
Description	Encumbrances	Land	Buildings and Improvements(2)	Improvements(2)	Carrying Costs	Land	Buildings and Improvements	Total (1) (2) (3)	Accumulated Depreciation (2) (3)	Date of Acquis.(A) Constr.(C)
PROPERTIES:

Raleigh Hills Raleigh Hills, OR	—	1,774	5,376	3	—	1,774	5,379	7,153	150	2000	(A)

Raley’s Fallon, NV	—	848	2,546	—	—	848	2,546	3,394	72	2000	(A)

Raley’s Shopping Center Yuba City, CA	—	2,107	6,321	4	—	2,107	6,325	8,432	178	2000	(A)

Rancho Las Palmas Rancho Mirage, CA	12,230	5,025	15,235	836	—	5,025	16,071	21,096	893	1999	(A)

Rockwood Plaza Gresham, OR	—	1,179	3,537	831	—	1,179	4,368	5,547	129	2000	(A)

Sahara Pavilion North Las Vegas, NV	30,032	11,920	28,560	857	—	11,920	29,417	41,337	7,856	1992	(A)

Sahara Pavilion South Las Vegas, NV	—	4,833	12,988	1,157	—	4,833	14,145	18,978	4,030	1992	(A)

San Dimas Market Place San Dimas, CA	14,434	5,699	17,100	214	—	5,699	17,314	23,013	1,732	1998	(A)

Sandy Marketplace Sandy, OR	4,558	2,046	6,064	448	—	2,046	6,512	8,558	532	1998	(A)

Shops at Lincoln School Modesto, CA	—	1,672	5,067	4	—	1,672	5,071	6,743	285	1999	(A)

Shute Park Plaza Hillsboro, OR	—	994	2,981	222	—	994	3,203	4,197	345	1998	(A)

Sky Park Plaza Chico, CA	—	3,566	10,700	2	—	3,566	10,702	14,268	302	2000	(A)

Southgate Center Milwaukie, OR	3,155	1,423	4,268	497	—	1,423	4,765	6,188	368	1998	(A)

St. John’s Portland, OR	—	2,005	2,005	127	—	2,005	2,132	4,137	57	2000	(A)

Sunset Mall Portland, OR	7,608	2,996	8,989	114	—	2,982	9,117	12,099	723	1998	(A)

Sunset Square Bellingham, WA	—	6,100	18,647	2,393	—	6,100	21,040	27,140	6,093	1992	(A)

Sycamore Plaza Anaheim, CA	—	1,856	5,601	59	—	1,856	5,660	7,516	193	2000	(A)

Tacoma Central Tacoma, WA	9,779	5,314	16,288	439	—	5,314	16,727	22,041	1,763	1997	(A)

Tacoma Shopping Center Portland, OR	—	838	1,955	3	—	838	1,958	2,796	55	2000	(A)

Tanasbourne Village Hillsboro, OR	18,262	5,573	13,861	1,219	—	5,573	15,080	20,653	3,918	1992	(A)

Tustin Heights Tustin, CA	10,391	3,675	10,776	465	—	3,675	11,241	14,916	1,203	1997	(A)

Ukiah Crossroads Ukiah, CA	—	1,869	5,609	—	—	1,869	5,609	7,478	157	2000	(A)

Victorian Walk Fresno, CA	—	1,676	5,025	—	—	1,676	5,025	6,701	142	2000	(A)

Vineyard Village East Ontario, CA	—	649	2,716	137	—	649	2,853	3,502	625	1994	(A)

West Town Winnemucca, NV	—	1,085	3,258	—	—	1,085	3,258	4,343	92	2000	(A)

Westwood Village Shopping Center Redding, CA	—	1,131	3,393	441	—	1,131	3,834	4,965	458	1998	(A)

Winterwood Pavilion Las Vegas, NV	—	4,573	13,015	1,736	—	4,573	14,751	19,324	4,507	1992	(A)

(Continued)

PAN PACIFIC RETAIL PROPERTIES, INC.

SCHEDULE III

PROPERTIES AND ACCUMULATED DEPRECIATION (Continued)

December 31, 2001

(In thousands)

	Encumbrances		Initial Costs				Costs Capitalized Subsequent to Acquisition				Total Costs						Accumulated Depreciation (2) (3)		Date of Acquis.(A) Constr.(C)
Description	Encumbrances		Land		Buildings and Improvements(2)		Improvements(2)		Carrying Costs		Land		Buildings and Improvements		Total (1) (2) (3)		Accumulated Depreciation (2) (3)		Date of Acquis.(A) Constr.(C)
PROPERTIES:
Yreka Junction Yreka, CA		—		2,436		7,304		7		—		2,436		7,311		9,747		208	2000	(A)

	$	229,135	$	336,897	$	894,906	$	98,425	$	1,723	$	349,694	$	982,257	$	1,331,951	$	98,762

Notes:

(1)

The aggregate gross cost of the properties owned by Pan Pacific Retail Properties, Inc. for federal income tax purposes, approximated $1,274,376 as of December 31, 2001.

(2)

Net of write-offs of fully depreciated assets.

(3)

The following table reconciles the historical cost and related accumulated depreciation and amortization of Pan Pacific Retail Properties, Inc. from January 1, 1999 through December 31, 2001:

	For the years ended December 31,
Cost of properties	2001			2000			1999
Balance, beginning of year	$	1,268,719		$	805,086		$	709,522
Additions (acquisition, improvements, etc.)		93,180			467,848			109,613
Interest capitalized		1,539			202			231
Deductions (write-off of tenant improvements, cost of real estate sold and provision for loss on impairment)		(31,487	)		(4,417	)		(14,280	)

Balance, end of year	$	1,331,951		$	1,268,719		$	805,086


	For the years ended December 31,
Accumulated depreciation and amortization	2001			2000			1999
Balance, beginning of year	$	73,895		$	57,025		$	42,044
Additions (depreciation and amortization expense)		27,536			19,083			17,782
Deductions (write-off of accumulated depreciation of tenant improvements and cost of real estate sold)		(2,669	)		(2,213	)		(2,801	)

Balance, end of year	$	98,762		$	73,895		$	57,025

See accompanying independent auditors’ report.