CX_Rouse Cover 4/14/99 3:03 PM Page III THE ROUSE COMPAN Y Creating a ortfolio Pof Quality A N N U AL REPORT 1998 CX_Rouse Cover 4/14/99 3:03 PM Page IV Creating a ortfolio Pof Quality HE ROUSE COMPA N Y traces its founding back to 1939 as a mortg a g e Tbanking firm. Since the mid-1950s, the Company’s primary business has been the development and management of commercial real estate proj e c t s , st a r ting out with retail centers and later including new communities and office and industrial projects. Among the Company’s well-known retail projects are Faneuil Hall Marketplace in Boston, South Street Seaport in New York, Harborplace in Bal t i m o r e, The Fashion Sho w in Las Vegas, Beachwood Place in Cleve- land and Perimeter Mall in Atlanta. Well-known, mixed-use projects include Pioneer Place in Portland, Westlake Center in Seattle and Arizona Center in Phoenix. The Company, through its affiliates, is also developer of two of the most successful new communities in the United States: Columbia, Maryland and Summerlin, Nevada. The Company views the development, prop e r ty management and acquisition/disposition efforts as long term value creation opportu n i t i e s . Beginning on page 7, a special section of this rep o r t is devoted to the Com- pa n y ’s overall objectives and some of the developments, acquisitions, dispo- sitions and management strategies that create and enhance the value of this po r tfolio of prop e rt i e s . Highlights Operating Results 1998 1997 Revenues (note 1) $ 977,243,000 $ 927,930,000 Funds from Operations (note 2) $ 204,842,000 $ 181,390,000 Net Earnings $ 104,902,000 $ 167,336,000 Financial Position Total Assets (note 1) $ 5,783,296,000 $ 4,179,555,000 Debt and Capital Leases (note 1) $ 4,401,920,000 $ 2,965,551,000 Shareholders’ Equity $ 628,926,000 $ 465,515,000 Other Selected Data Net Earnings Per Share—Diluted $ 1.34 $ 2.29 Funds from Operations Per Share—Diluted $ 2.69 $ 2.47 Weighted Average Common Shares Outstanding Used in Diluted Per Share Calculations: Earnings Per Share 68,859,000 76,005,000 Funds from Operations Per Share 78,748,000 76,376,000 Dividends Per Share: Common stock $ 1.12 $ 1.00 Preferred stock $ 3.00 $ 2.65 Number of Employees 4,126 4,040 Note 1—Amounts are adjusted to include unconsolidated real estate ventures in which the Company holds a majority of the financial interest, but does not own a majority voting interest. Revenues also include the Company’s share of Funds from Operations of unconsolidated real estate ventures in which it holds a minority interest. See note 3 of the notes to the consolidated financial statements for a descrip- tion of these ventures. Note 2—Funds from Operations (FFO) represents revenues less operating, interest and certain current income tax expenses. FFO is also adjusted to include the Company’s share of FFO of unconsolidated real estate ventures. See the “Funds from Operations” section of Manage- ment’s Discussion and Analysis of Financial Condition and Results of Operations on page 64 for a full discussion of FFO. C O N T E N T S Hig h l i g h t s 1 Letter to Sha re h o l d e r s 2 Financial Rev i e w 2 3 Man a g e m e n t ’s An a l y s i s 5 8 1 CX_Rouse P1-P22_new2 4/20/99 11:39 AM Page 2 Letter to Shareholders HE PAST YEAR WAS A PERIOD OF SIGNIFICANT CHANGE and accomplishment for Th e At year-end, occupancy of the Company’s retail centers, historically the highest in the Rouse Company. On Jan u a r y 1st, after 42 years as a public “C” Corporation, The Rou s e in d u s t r y, was 95.2%, compared to 94.1% at December 31, 1997. Comparable space sales of Company began operating as a real estate investment trust (REIT). This new corporate struc - me r chants in the Company’s retail centers increased by almost 5% in 1998, while compara- tu r e allows the Company to pursue strategic objectives in a more competitive format. Dur i n g ble merchant sales on a per square foot basis increased to $371 from $341 at the end of 1997. the yea r , the Company completed two large acquisitions: the $1.0 billion purchase of five pr emier retail centers from Tri ze c H ahn Centers, Inc.; and the $373 million purchase of 67 Office, Mi xe d - Use and Ot h e r The Company’s portfolio of office, mixed-use and other prop e r ties produced rec o r d Funds office/industrial buildings and 107 acres of commercially zoned land from Rou s e - Te a c h e r s Pro p e rties Re p o rt Sixth From Operations for 1998 of $35.1 million, a 32% increase over $26.6 million in 1997. Prop e r ties, Inc.. In addition to these milestones, each of the Company’s operating lines of Year of St rong Grow t h Similar to the Company’s retail centers, higher rents on re-leasing and high occupancy business produced a rec o r d year of financial perfo r m a n c e . l e vels we re significant factors in this growth. New projects in Las Vegas, improved oper- T Total Funds From Operations for the year wer e ations of the retail segments of the mixed-use projects and lower interest expenses we re $204.8 million, a 13% increase over $181.4 million in also important factors. 1997. On a diluted per share basis, Funds Fro m During the yea r , 1.6 million square feet of space was leased, and occupancy at yea r - Operations totaled $2.69, up from $2.47 a year ago. Net end was almost 96% for office space and 95% for industrial space (excluding new buildings Earnings wer e $104.9 million, down from 1997’s $167.3 opened during 1998). The combination of strong demand in our markets and six new build- million, which included a one time rev ersal of $124.2 ings coming on stream gives confidence that 1999 will set the seventh consecutive rec o r d yea r million of net deferred income tax liabilities related to the for earnings. A N T H O N Y W. DE E R I N G co n v ersion to REIT status. Ch a i r man of the Board and This outstanding operating performance was Community De ve l o p m e n t The Company’s two major community development projects, the master-planned com- Chief Executive Officer accompanied by significant prog r ess on projects in the Results On Target, munities of Columbia, Mar yland, and Summerlin, Nev ada, had excellent years again in co m m e r cial development pipeline. Openings during 1998 Another New Re c o rd 1998. Total land sales from community development operations wer e $197.7 million, while included a new regional shopping center, eight depart- Funds From Operations wer e a rec o r d $48.8 million, as compared to $47.1 million in 1997. ment store additions to existing centers, five new Both communities had years of exceptional prog r ess, and both continue to experience out- office/industrial buildings, three complete ren o vations of standing market recognition and demand. Columbia, now approaching the 32nd anniver - village centers in Columbia, Mar yland and two new village centers in Summerlin, Neva d a . sa r y of its first residents, is in a more mature phase than Summerlin, but there is still sufficient Cur r ent Value Sha re h o l d e r s ’ Equity increased to $2.4 billion or $33.15 per share, up saleable acreage to produce substantial rev enues and earnings fr om $2.1 billion or $31.80 per share at the end of 1997. well into the first quarter of the next century. In 1998, The Board of Dir ectors, in recognition of the outstanding year and of the Company’s Summerlin was the best-selling master-planned community fu t u r e prospects, approved an increase in the common stock dividend to $.30 per share per in the United States for the sixth time in the last seven yea r s . qu a rt e r , or $1.20 on an annual basis. This 7% increase rep r esents the 19th increase in the Its population is now approximately 33,000 out of an antic- dividend rate over the 21 years since the program began. ipated 160,000 at completion, so there is now opportu n i t y not only for residential growth, but also for expansion of the Retail Centers Post Funds From Operations from the Company’s portfolio of operating retail centers totaled a co m m u n i t y ’s commercial base. Another Re c o rd Ye a r rec o r d $140.1 million, a 14% increase over $123.1 million for 1997. Higher rents from The Company’s 1999 community deve l o p m e n t re-leased space and higher average occupancy rates wer e the primary factors in this growt h .