Summary of CEDAR SHOPPING CENTERS INC

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the Company's consolidated financial statements and related notes thereto included elsewhere in this report.
Executive Summary
The Company is a fully-integrated real estate investment trust which focuses primarily on ownership, operation, development and redevelopment of supermarket-anchored shopping centers in nine mid-Atlantic and New England states. At June 30, 2008, the Company had a portfolio of 119 operating properties totaling approximately 12.0 million square feet of gross leasable area ("GLA"), including 109 wholly-owned properties comprising approximately 10.8 million square feet and ten properties owned in joint venture comprising approximately 1.2 million square feet. The entire 119 property portfolio was approximately 92% leased at June 30, 2008; the 109 property "stabilized" portfolio (including properties wholly-owned and in joint venture) was approximately 96% leased at that date. The Company also owns approximately 382 acres of land parcels a significant portion of which are under development. In addition, the Company has a 76.3% interest (increased from 49.0% effective April 1, 2008) in an unconsolidated joint venture which owns a single-tenant office property in Philadelphia, Pennsylvania.
The Company had previously decided in May 2007 to dispose of Stadium Plaza, located in East Lansing, Michigan, and, for all periods presented, that property had been classified as "held for sale" on the Company's consolidated balance sheets, and its results of operations had been classified as "discontinued operations" in the consolidated statements of income. In May 2008, the Company reconsidered its decision to sell the property and, as a result, the property has been reclassified as "held and used". For all periods presented, the property is no longer included in "properties held for sale" or "discontinued operations". In April 2008, Value City, the only tenant at the Value City Shopping Center, located in Wyoming, Michigan, vacated its premises at the end of the lease term. In keeping with the Company's redevelopment plans for the property, the vacant building was subsequently razed and, accordingly, the property has now been reclassified as "land under/held for development", and is no longer included as one of the Company's operating properties.
The Company, organized as a Maryland corporation, has established an umbrella partnership structure through the contribution of substantially all of its assets to the Operating Partnership, organized as a limited partnership under the laws of Delaware. The Company conducts substantially all of its business through the Operating Partnership. At June 30, 2008, the Company owned 95.7% of the Operating Partnership and is its sole general partner. OP Units are economically equivalent to the Company's common stock and are convertible into the Company's common stock at the option of the holders on a one-to-one basis.
The Company derives substantially all of its revenues from rents and operating expense reimbursements received pursuant to long-term leases. The Company's operating results therefore depend on the ability of its tenants to make the payments required by the terms of their

Table of Contents

leases. The Company focuses its investment activities on supermarket-anchored community shopping centers and drug store-anchored convenience centers. The Company believes that, because of the need of consumers to purchase food and other staple goods and services generally available at such centers, its type of "necessities"-based properties should provide relatively stable revenue flows even during difficult economic times.
The Company continues to seek opportunities to acquire properties suited for development and/or redevelopment, and, to a lesser extent than in the recent past, stabilized properties, where it can utilize its experience in shopping center construction, renovation, expansion, re-leasing and re-merchandising to achieve long-term cash flow growth and favorable investment returns. The Company would also consider investment opportunities in regions beyond its present markets in the event such opportunities were consistent with its focus, could be effectively controlled and managed, have the potential for favorable investment returns, and would contribute to increased shareholder value. Summary of Critical Accounting Policies
The preparation of the consolidated financial statements in conformity with GAAP requires the Company to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, management evaluates its estimates, including those related to revenue recognition and the allowance for doubtful accounts receivable, real estate investments and purchase accounting allocations related thereto, asset impairment, and derivatives used to hedge interest-rate risks. Management's estimates are based both on information that is currently available and on various other assumptions management believes to be reasonable under the circumstances. Actual results could differ from those estimates and those estimates could be different under varying assumptions or conditions.
The Company has identified the following critical accounting policies, the application of which requires significant judgments and estimates:
Revenue Recognition
Rental income with scheduled rent increases is recognized using the straight-line method over the respective terms of the leases. The aggregate excess of rental revenue recognized on a straight-line basis over base rents under applicable lease provisions is included in straight-line rents receivable on the consolidated balance sheet. Leases also generally contain provisions under which the tenants reimburse the Company for a portion of property operating expenses and real estate taxes incurred; such income is recognized in the periods earned. In addition, certain operating leases contain contingent rent provisions under which tenants are required to pay a percentage of their sales in excess of a specified amount as additional rent. The Company defers recognition of contingent rental income until those specified targets are met.
The Company must make estimates as to the collectibility of its accounts receivable related to base rent, straight-line rent, expense reimbursements and other revenues. Management analyzes accounts receivable by considering tenant creditworthiness, current economic

Table of Contents

conditions, and changes in tenants' payment patterns when evaluating the adequacy of the allowance for doubtful accounts receivable. These estimates have a direct impact on net income, because a higher bad debt allowance would result in lower net income, whereas a lower bad debt allowance would result in higher net income.
Real Estate Investments
Real estate investments are carried at cost less accumulated depreciation. The provision for depreciation is calculated using the straight-line method based on estimated useful lives. Expenditures for maintenance, repairs and betterments that do not materially prolong the normal useful life of an asset are charged to operations as incurred. Expenditures for betterments that substantially extend the useful lives of real estate assets are capitalized. Real estate investments include costs of development and redevelopment activities, and construction in progress. Capitalized costs, including interest and other carrying costs during the construction and/or renovation periods, are included in the cost of the related asset and charged to operations through depreciation over the asset's estimated useful life. The Company is required to make subjective estimates as to the useful lives of its real estate assets for purposes of determining the amount of depreciation to reflect on an annual basis. These assessments have a direct impact on net income. A shorter estimate of the useful life of an asset would have the effect of increasing depreciation expense and lowering net income, whereas a longer estimate of the useful life of an asset would have the effect of reducing depreciation expense and increasing net income.
The Company's capitalization policy on its development and redevelopment properties is guided by SFAS No. 34, "Capitalization of Interest Cost" and SFAS No. 67, "Accounting for Costs and Initial Rental Operations of Real Estate Projects". A variety of costs are incurred in the acquisition, development and leasing of a property, such as pre-construction costs essential to the development of the property, development costs, construction costs, interest costs, real estate taxes, salaries and related costs, and other costs incurred during the period of development. After a determination is made to capitalize a cost, it is allocated to the specific component of a project that is benefited. The Company ceases capitalization on the portions substantially completed and occupied, or held available for occupancy, and capitalizes only those costs associated with the portions under construction. The Company considers a construction project as substantially completed and held available for occupancy upon the completion of tenant improvements, but not later than one year from cessation of major construction activity. Determination of when a development project is substantially complete and capitalization must cease involves a degree of judgment. The effect of a longer capitalization period would be to increase capitalized costs and would result in higher net income, whereas the effect of a shorter capitalization period would be to reduce capitalized costs and would result in lower net income.
The Company applies SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangibles", in valuing real estate acquisitions. In connection therewith, the fair value of real estate acquired is allocated to land, buildings and improvements. In addition, the fair value of in-place leases is allocated to intangible lease assets and liabilities. The fair value of the tangible assets of an acquired property is determined by valuing the property as if it were vacant, which value is then allocated to land, buildings and improvements based on management's determination of the relative fair values of such assets. In valuing an acquired

Table of Contents

property's intangibles, factors considered by management include an estimate of carrying costs during the expected lease-up periods, such as real estate taxes, insurance, other operating expenses, and estimates of lost rental revenue during the expected lease-up periods based on its evaluation of current market demand. Management also estimates costs to execute similar leases, including leasing commissions, tenant improvements, legal and other related costs.
The value of in-place leases is measured by the excess of (i) the purchase price paid for a property after adjusting existing in-place leases to market rental rates, over (ii) the estimated fair value of the property as if vacant. Above-market and below-market in-place lease values are recorded based on the present value (using a discount rate which reflects the risks associated with the leases acquired) of the difference between the contractual amounts to be received and management's estimate of market lease rates, measured over the non-cancelable terms of the respective leases. The value of other intangibles is amortized to expense, and the above-market and below-market lease values are amortized to rental income, over the remaining non-cancelable terms of the respective leases. If a lease were to be terminated prior to its stated expiration, all unamortized amounts relating to that lease would be recognized in operations at that time.
Management is required to make subjective assessments in connection with its valuation of real estate acquisitions. These assessments have a direct impact on net income, because (i) above-market and below-market lease intangibles are amortized to rental income, and (ii) the value of other intangibles is amortized to expense. Accordingly, higher allocations to below-market lease liability and other intangibles would result in higher rental income and amortization expense, whereas lower allocations to below-market lease liability and other intangibles would result in lower rental income and amortization expense.
The Company applies SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", to recognize and measure impairment of long-lived assets. Management reviews each real estate investment for impairment whenever events or circumstances indicate that the carrying value of a real estate investment may not be recoverable. The review of recoverability is based on an estimate of the future cash flows that are expected to result from the real estate investment's use and eventual disposition. These estimates of cash flows consider factors such as expected future operating income, trends and prospects, as well as the effects of leasing demand, competition and other factors. If an impairment event exists due to the projected inability to recover the carrying value of a real estate investment, an impairment loss is recorded to the extent that the carrying value exceeds estimated fair value. A real estate investment held for sale is carried at the lower of its carrying amount or estimated fair value, less the cost of a potential sale. Depreciation and amortization are suspended during the period the property is held for sale. Management is required to make subjective assessments as to whether there are impairments in the value of its real estate properties. These assessments have a direct impact on net income, because an impairment loss is recognized in the period that the assessment is made.
Stock-Based Compensation
SFAS No. 123R, "Share-Based Payments", establishes financial accounting and reporting standards for stock-based employee compensation plans, including all arrangements by which

Table of Contents

employees receive shares of stock or other equity instruments of the employer, or the employer incurs liabilities to employees in amounts based on the price of the employer's stock. The statement also defines a fair value-based method of accounting for an employee stock option or similar equity instrument.
The Company's 2004 Stock Incentive Plan (the "Incentive Plan") provides for the granting of incentive stock options, stock appreciation rights, restricted shares, performance units and performance shares. The maximum number of shares of the Company's common stock that may be issued pursuant to the Incentive Plan, as amended, is 2,750,000, and the maximum number of shares that may be granted to a participant in any calendar year is 250,000. Substantially all grants issued pursuant to the Incentive Plan are "restricted stock grants" which specify vesting (i) upon the third anniversary of the date of grant for time-based grants, or (ii) upon the completion of a designated period of performance for performance-based grants. Time-based grants are valued according to the market price for the Company's common stock at the date of grant. For performance-based grants, the Company engages an independent appraisal company to determine the value of the shares at the date of grant, taking into account the underlying contingency risks associated with the performance criteria. These value estimates have a direct impact on net income, because higher valuations would result in lower net income, whereas lower valuations would result in higher net income. The value of such grants is being amortized on a straight-line basis over the respective vesting periods, as adjusted for fluctuations in the market value of the Company's common stock, in accordance with the provisions of EITF No. 97-14, "Accounting for Deferred Compensation Arrangements Where Amounts Earned Are Held in a Rabbi Trust and Invested". Results of Operations
Differences in results of operations between 2008 and 2007, respectively, were primarily the result of the Company's property acquisition program and continuing development/redevelopment activities. During the period January 1, 2007 through June 30, 2008, the Company acquired 22 shopping and convenience centers aggregating approximately 2.1 million sq. ft. of GLA, purchased the joint venture minority interests in four properties, and acquired approximately 174 acres of land for expansion and/or future development, for a total cost of approximately $381.6 million. In addition, the Company placed into service one ground-up development having an aggregate cost of approximately $3.6 million. Income before minority and limited partners' interests and preferred distribution requirements was $3.7 million during the three months ended June 30, 2008 as compared with $5.3 million during the three months ended June 30, 2007. Income before minority and limited partners' interests and preferred distribution requirements was $9.7 million during the six months ended June 30, 2008 as compared with $11.5 million during the six months ended June 30, 2007.

Table of Contents

Comparison of the quarter ended June 30, 2008 to the quarter ended June 30, 2007

                                                                                                                                 Properties
                                               Three months ended Jun 30,        Increase/      Percentage                        held in
                                                 2008              2007         (decrease)        change       Acquisitions     both periods

Total revenues                               $ 42,915,000     $ 36,950,000     $ 5,965,000            16 %     $ 6,290,000      $  (325,000 )
Property operating expenses                    11,872,000        9,313,000       2,559,000            27 %       2,105,000          454,000
Depreciation and amortization                  14,007,000        9,898,000       4,109,000            42 %       2,069,000        2,040,000
General and administrative                      2,323,000        3,220,000        (897,000 )         -28 %             n/a              n/a
Non-operating income and expense, net (i)      10,980,000        9,182,000       1,798,000            20 %             n/a              n/a

(i) Non-operating income and expense consists principally of interest expense (including amortization of deferred financing costs), and equity in income of an unconsolidated joint venture.

Properties held in both periods. The Company held 99 properties throughout the three months ended June 30, 2008 and 2007. The comparative differences in the operating results for those properties are as follows:

Explanation Total revenues - The decrease reflects principally reductions in revenues in conjunction with the commencement of re-development activities at certain properties, the termination of a lease in the fourth quarter of 2007 which the Company expects to replace on more favorable terms, and reductions in percentage rent. These reductions were partially offset by scheduled increases in base rents.
Property operating expenses - Increase due to increased real estate taxes as a result of higher assessments, higher other operating expenses subject to recovery from tenants, and a higher provision for doubtful accounts, a non-recoverable expense, principally relating to one fitness center operator. Depreciation and amortization - Increase due principally to a one-time depreciation charge of $1.9 million taken for the demolition of a building on the Company's property in Wyoming, Michigan as part of the redevelopment plans for the property, and the depreciation adjustment relating to the East Lansing, Michigan property reclassified as "held and used".
General and administrative expenses - Decrease primarily due to the costs of the retirement of the former Chief Financial Officer and hiring of his replacement in the second quarter of 2007 ($1,535,000), partially offset by higher costs in the three months ended June 30, 2008 for compensation (including costs related to stock-based compensation), accounting and other professional expenses, and bank fees related to the Company's new cash management system (formerly netted in interest income).
Non-operating income and expense, net - Increase primarily the result of increased interest costs from borrowings related to property acquisitions and development/redevelopment activities, partially offset by the lower cost of borrowing under the Company's secured revolving credit facility.

Table of Contents

Comparison of the six months ended June 30, 2008 to the six months ended

June 30, 2007

                                                                                                                                 Properties
                                               Six months ended Jun 30,         Increase/       Percentage                        held in
                                                 2008             2007          decrease)         change       Acquisitions     both periods

Total revenues                              $ 86,550,000     $ 73,141,000     $ 13,409,000            18 %    $ 14,287,000      $  (878,000 )
Property operating expenses                   24,783,000       19,967,000        4,816,000            24 %       4,314,000          502,000
Depreciation and amortization                 25,536,000       19,781,000        5,755,000            29 %       4,215,000        1,540,000
General and administrative                     4,514,000        5,218,000         (704,000 )         -13 %             n/a              n/a
Non-operating income and expense, net (i)     22,056,000       16,671,000        5,385,000            32 %             n/a              n/a

(i) Non-operating income and expense consists principally of interest expense (including amortization of deferred financing costs), and equity in income of an unconsolidated joint venture.

Properties held in both periods. The Company held 97 properties throughout the six months ended June 30, 2008 and 2007. The comparative differences in the operating results for those properties are as follows:

Explanation Total revenues - The decrease reflects principally reductions in revenues in conjunction with the commencement of re-development activities at certain properties, the termination of a lease in the fourth quarter of 2007 which the Company expects to replace on more favorable terms, a reduction in percentage rent, and reductions due to number of non-continuing items in the first quarter of 2007 that led to higher revenue in that period including, principally, lease terminations that increased other revenue and amortization of intangible lease liabilities. These decreases were partially offset by scheduled increases in base rents.
Property operating expenses - Increase due to increased real estate taxes as a result of higher assessments and higher other operating expenses subject to recovery from tenants, partially offset by a lower provision for doubtful accounts, a non-recoverable expense.
Depreciation and amortization - Increase due principally to a one-time depreciation charge of $1.9 million taken for the demolition of a building on the Company's property in Wyoming, Michigan as part of the redevelopment plans for the property, and the depreciation adjustment relating to the East Lansing, Michigan property reclassified as "held and used", partially offset by a higher level of lease terminations by tenants in the six months ended June 30, 2007 that accelerated depreciation and amortization of tenant improvements and deferred lease origination fees applicable to those tenants.
General and administrative expenses - Decrease primarily due to the costs of the retirement of the former Chief Financial Officer and hiring of his replacement in the second quarter of 2007 ($1,535,000), partially offset by higher costs in the six months ended June 30, 2008 for compensation (including costs related to stock-based compensation), accounting and other

Table of Contents

professional expenses, and bank fees related to the Company's new cash management system (formerly netted in interest income).
Non-operating income and expense, net - Increase primarily the result of increased interest costs from borrowings related to property acquisitions and development/redevelopment activities, partially offset by the lower cost of borrowing under the Company's secured revolving credit facility. Liquidity and Capital Resources
The Company funds operating expenses and other short-term liquidity requirements, including debt service, tenant improvements, leasing commissions, and preferred and common dividend distributions, primarily from operating cash flows; the Company has also used its secured revolving credit facility for these purposes. The Company expects to fund long-term liquidity requirements for property acquisitions, development and/or redevelopment costs, capital improvements, and maturing debt initially with the secured revolving credit facility and construction financing, and ultimately through a combination of issuing and/or assuming additional mortgage debt, the sale of equity securities, the issuance of additional OP Units, and the sale of properties or interests therein (including joint venture arrangements).
The Company has a $300 million secured revolving credit facility with Bank of America, N.A. (as agent) and several other banks, pursuant to which the Company has pledged certain of its shopping center properties as collateral for borrowings thereunder; the facility, as amended, is expandable to $400 million, subject to certain conditions, including acceptable collateral, and will expire in January 2009, subject to a one-year extension option. As of June 30, 2008, based on covenant measurements and collateral in place, the Company was permitted to draw up to approximately $299.3 million, of which approximately $44.9 million remained available as of that date. The credit facility is used to fund acquisitions, development and redevelopment activities, capital expenditures, mortgage repayments, dividend distributions, working capital and other general corporate purposes. The facility is subject to customary financial covenants, including limits on leverage and distributions (limited to 95% of funds from operations, as defined), and other financial statement ratios.
The Company has a $150 million secured revolving credit construction facility with KeyBank, National Association (as agent) and several other banks, pursuant to which the Company is in the process of pledging certain of its development and redevelopment projects as collateral for borrowings to be made thereunder. This facility is expandable to $250 million, subject to certain conditions, including acceptable collateral, and will expire in June 2011, subject to a one-year extension option. As of June 30, 2008, there were no borrowings outstanding under this facility, which is subject to similar financial covenants as contained in the Bank of America, N.A. loan agreement.
The Company expects to fund its liquidity requirements principally from the following: (i) cash and cash equivalents, (ii) availability under its secured . . .