UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 2001
---------------
[ ] Transition Report Pursuant To Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from ______________________ to _______________________
Commission File Number 1-6300
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Pennsylvania Real Estate Investment Trust
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Pennsylvania 23-6216339
- ----------------------------------------------------------------------- ----------------------------------------------
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
200 South Broad Street, Third Floor, Philadelphia, PA 19102-3803
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (215) 875-0700
---------------------------------------------------------
N/A
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report)
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 last 90 days.
Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares of beneficial interest outstanding at May 10, 2001: 13,689,185
- --------------------------------------------------------------------------------
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONTENTS
Page
----
Part I. Financial Information
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets--March 31, 2001
and December 31, 2000 1-2
Consolidated Statements of Income--Three Months
Ended March 31, 2001 and March 31, 2000 3
Consolidated Statements of Cash Flows--Three Months
Ended March 31, 2001 and March 31, 2000 4
Notes to Unaudited Consolidated Financial Statements 5-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-17
Item 3. Quantitative and Qualitative Disclosures about Market Risk 18
Part II. Other Information 19
Item 1. Not Applicable -
Item 2. Not Applicable -
Item 3. Not Applicable -
Item 4. Not Applicable -
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
Exhibits Index 21
Part I. Financial Information
Item 1. Financial Statements
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED BALANCE SHEETS
ASSETS
(In thousands)
(Unaudited)
March 31, December 31,
2001 2000
---------- ----------
INVESTMENTS IN REAL ESTATE, at cost:
Multifamily properties $ 250,134 $ 249,349
Retail properties 334,208 328,637
Industrial properties 2,504 2,504
Properties under development 35,097 31,776
---------- ----------
Total investments in real estate 621,943 612,266
Less- Accumulated depreciation (99,193) (95,026)
---------- ----------
522,750 517,240
INVESTMENT IN AND ADVANCES TO PREIT-RUBIN, INC. --- 8,739
INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS AND JOINT VENTURES, at
equity 21,318 21,470
---------- ----------
544,608 547,449
OTHER ASSETS:
Cash and cash equivalents 9,844 6,091
Rents and sundry receivables (net of allowance for doubtful accounts of
$837 and $703, respectively) 6,985 7,508
Deferred costs and other assets, net 32,112 15,615
---------- ----------
$ 593,009 $ 576,663
========== ==========
(Continued)
-1-
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY
(In thousands)
(Unaudited)
March 31, December 31,
2001 2000
---------- ----------
LIABILITIES:
Mortgage notes payable $ 261,368 $ 247,449
Bank and other loans payable 100,500 110,300
Construction loan payable 28,119 24,647
Tenants' deposits and deferred rents 3,735 3,118
Accrued pension and retirement benefits 943 992
Accrued expenses and other liabilities 16,333 16,485
---------- ----------
410,998 402,991
---------- ----------
MINORITY INTEREST 41,133 29,766
COMMITMENTS AND CONTINGENCIES (Note 7)
SHAREHOLDERS' EQUITY:
Shares of beneficial interest, $1 par; authorized unlimited; issued and
outstanding 13,688 shares at March 31, 2001 and 13,628 shares at
December 31, 2000 13,688 13,628
Capital contributed in excess of par 152,211 151,117
Restricted stock (1,893) (1,812)
Accumulated other comprehensive loss (2,316) ---
Distributions in excess of net income (20,812) (19,027)
---------- ----------
140,878 143,906
---------- ----------
$ 593,009 $ 576,663
========== ==========
The accompanying notes are an integral part of these statements.
-2-
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
Three Months Ended
------------------------------
March 31, March 31,
2001 2000
---------- ----------
REVENUES:
Real Estate Revenues:
Base rent $ 20,563 $ 19,886
Percentage rent 333 277
Expense reimbursements 2,797 2,205
Lease termination revenue 129 80
Other real estate revenue 861 774
---------- ----------
Total real estate revenue 24,683 23,222
Management company revenue 2,152 --
Interest and other income 161 230
---------- ----------
26,996 23,452
---------- ----------
EXPENSES:
Property Operating Expenses:
Property payroll and benefits 1,779 1,765
Real estate and other taxes 1,915 1,753
Utilities 1,243 1,158
Other operating expenses 3,431 3,504
---------- ----------
Total property operating expenses 8,368 8,180
Depreciation and amortization 4,570 3,710
General and administrative expenses:
Corporate payroll and benefits 3,218 459
Other general and administrative expenses 1,982 576
Interest expense 6,360 5,844
---------- ----------
24,498 18,769
---------- ----------
Income before equity in unconsolidated entities, gains on sales of
interests in real estate and minority interest
in operating partnership 2,498 4,683
EQUITY IN LOSS OF PREIT-RUBIN, INC. -- (1,489)
EQUITY IN INCOME OF PARTNERSHIPS AND JOINT VENTURES
1,444 1,672
GAINS ON SALES OF INTERESTS IN REAL ESTATE 1,806 2,263
---------- ----------
Income before minority interest in
operating partnership 5,748 7,129
MINORITY INTEREST IN OPERATING PARTNERSHIP (656) (740)
---------- ----------
NET INCOME $ 5,092 $ 6,389
========== ==========
BASIC INCOME PER SHARE $ 0.37 $ 0.48
========== ==========
DILUTED INCOME PER SHARE $ 0.37 $ 0.48
========== ==========
The accompanying notes are an integral part of these statements.
-3-
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
------------------------
March 31, March 31,
2001 2000
-------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,092 $ 6,389
Adjustments to reconcile net income to net cash
provided by operating activities-
Minority interest, net of distributions -- 82
Depreciation and amortization 4,570 3,710
Provision for doubtful accounts 129 426
Amortization for deferred compensation 384 --
Gains on sales of interests in real estate (1,806) (2,263)
Equity in loss of PREIT-RUBIN, Inc. -- 1,489
Change in assets and liabilities-
Net change in other assets (2,848) (1,312)
Net change in other liabilities 3,648 (579)
-------- ---------
Net cash provided by operating activities 9,169 7,942
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in wholly-owned real estate (1,568) (8,577)
Investments in property under development (7,734) (2,867)
Investment in and advances to PREIT-RUBIN, Inc. -- (1,102)
Investments in partnerships and joint ventures (843) (1,013)
Cash proceeds from sale of interest in partnership 1,080 2,940
Net cash received from PREIT-RUBIN, Inc. 1,355 --
Cash distributions from partnerships and joint ventures
in excess of equity in income 1,721 376
-------- ---------
Net cash used in investing activities (5,989) (10,243)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal installments on mortgage notes payable (1,081) (1,021)
Proceeds from mortgage notes payable 15,000 --
Proceeds from construction loans payable 3,472 3,341
Net (payment) borrowing from credit facility (9,800) 6,700
Shares of beneficial interest issued 241 183
Payment of deferred financing costs (132) --
Distributions paid to shareholders (6,877) (6,270)
Distributions paid to OP Unit holders in excess of minority interest (250) --
-------- ---------
Net cash provided by financing activities 573 2,933
-------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 3,753 632
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 6,091 3,235
-------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 9,844 $ 3,867
======== =========
The accompanying notes are an integral part of these statements.
-4-
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2001
(Unaudited)
(Dollar amounts, in thousands, except per share data)
1. BASIS OF PRESENTATION:
Pennsylvania Real Estate Investment Trust ("PREIT" or the "Company") prepared
the consolidated financial statements pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although we believe that the disclosures
are adequate to make the information presented not misleading. The consolidated
financial statements should be read in conjunction with the audited financial
statements and the notes thereto included in PREIT's latest annual report on
Form 10-K. In management's opinion, all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the consolidated financial
position and the consolidated results of its operations and its cash flows, have
been included. The results of operations for such interim periods are not
necessarily indicative of the results for the full year.
PREIT is organized as a Pennsylvania business trust, and is a fully integrated
self-administrated and self-managed real estate investment trust.
The Company's interest in its properties is held through PREIT Associates, L.P.
(the "Operating Partnership"). The Company is the sole general partner of the
Operating Partnership, and as of March 31, 2001, held an 87.9% interest in the
Operating Partnership.
Certain prior period amounts have been reclassified to conform with current
period presentation.
2. PREIT-RUBIN, INC. AND PREIT SERVICES, LLC:
In January 2001, PREIT Services, LLC ("Services") was created to develop and
manage properties wholly-owned by the Company. Services is wholly-owned by the
Operating Partnership and is consolidated by the Company. As such, Services does
not charge management, development or leasing fees to the Company's wholly-owned
properties as they would be eliminated in consolidation.
On January 1, 2001, the Company acquired the remaining 5% minority interest in
PREIT-RUBIN, Inc. ("PRI"), representing all of the voting common stock of PRI,
in exchange for Company shares valued at approximately $0.5 million. As of
December 31, 2000, the Company held a 95% economic interest in PRI through its
ownership of 95% of PRI's stock, which represented all of PRI's non-voting
stock.
Effective January 1, 2001, PRI is wholly-owned by the Operating Partnership and
is consolidated by the Company. PRI was also converted to a taxable REIT
subsidiary as defined by federal tax laws. PRI is now capable of offering an
expanded menu of services to tenants without jeopardizing the Company's
continued qualification as a real estate investment trust. Prior to January 1,
2001, PRI was accounted for using the equity method of accounting.
PRI is responsible for various activities, including management, leasing and
real estate development for certain properties in which the Company is a joint
venture partner, for properties owned by third parties and, prior to January 1,
2001, for certain of PREIT's properties. Prior to January 1, 2001, PREIT's
properties paid management fees and leasing and development fees to PRI. Amounts
paid for these services were $194 and $152, respectively, for the quarter ended
March 31, 2000.
-5-
Leasing and development fees paid by PREIT's properties to PRI were capitalized
and amortized to expense in accordance with PREIT's normal accounting policies.
Intercompany profits earned by PRI related to such activities were deferred and
amortized to income over the same periods as such expenses were amortized.
PRI also provides management, leasing and development services for partnerships
and other ventures in which certain officers of PREIT and PRI have either direct
or indirect ownership interests. Total revenues earned by PRI for such services
were $573 and $672 for the three-month periods ended March 31, 2001 and 2000,
respectively.
Summarized unaudited financial information for PRI as of and for the three-month
period ended March 31, 2000 is as follows:
For the Three
Months Ended
March 31, 2000
Total assets $ 4,968
================
Management fees $ 990
Leasing commissions 945
Development fees 63
Other revenue 389
----------------
Total revenue $ 2,387
================
Net loss $ (1,565)
================
PREIT's share of net loss $ (1,489)
================
Financial information for 2001 is not presented because PRI is consolidated as
of January 1, 2001.
-6-
3. INVESTMENTS IN PARTNERSHIPS AND JOINT VENTURES:
The following table presents summarized financial information as to PREIT's
equity in the assets and liabilities of 15 partnerships and joint ventures and 3
properties with development activity at March 31, 2001, and 16 partnerships and
joint ventures and 3 properties with development activity at December 31, 2000
and PREIT's equity in income for the three months ended March 31, 2001 and 2000:
March 31, December 31,
2001 2000
----------- ------------
ASSETS
Investments in real estate, at cost:
Multifamily properties $ 57,393 $ 57,200
Retail properties 419,166 410,745
Properties under development 10,602 28,477
----------- ------------
Total investments in real estate 487,161 496,422
Less-Accumulated depreciation (80,097) (78,025)
----------- ------------
407,064 418,397
Cash and cash equivalents 6,614 5,788
Deferred costs, prepaid real estate taxes and expenses, and other
assets, net 50,520 56,012
----------- ------------
Total assets 464,198 480,197
----------- ------------
LIABILITIES AND PARTNERS' EQUITY
Mortgage notes payable 325,514 327,684
Construction loans payable 61,222 61,857
Other liabilities 20,498 33,127
----------- ------------
Total liabilities 407,234 422,668
----------- ------------
Net equity 56,964 57,529
Less: Partners' share 35,710 36,578
----------- ------------
Investment in partnerships and joint ventures 21,254 20,951
Advances 64 519
----------- ------------
Investment in and advances to partnerships and joint ventures
$ 21,318 $ 21,470
=========== ============
-7-
EQUITY IN INCOME OF PARTNERSHIPS AND JOINT VENTURES
Three Months Ended
--------------------------------
March 31, March 31,
2001 2000
----------- ------------
Gross revenues from real estate $ 22,408 $ 16,423
----------- ------------
Expenses:
Property operating expenses 7,986 5,468
Mortgage and bank loan interest 7,285 5,113
Depreciation and amortization 4,182 2,531
----------- ------------
19,453 13,112
----------- ------------
2,955 3,311
Partners' share (1,511) (1,639)
----------- ------------
Equity in income of partnerships and joint ventures $ 1,444 $ 1,672
=========== ============
In January 2001, a partnership in which the Company owns a 50% interest sold an
undeveloped parcel of land adjacent to the Metroplex Shopping Center, which is
owned by the partnership, for approximately $7.6 million. The Company recorded a
nominal gain on the land sale.
In March 2001, the Company sold its interest in the Ingleside Center, located in
Thorndale, PA for $5.1 million, of which $0.9 million was used to pay off the
mortgage on the property. The Company's proportionate share of the gain on the
sale was approximately $1.8 million.
4. EARNINGS PER SHARE:
Basic Earnings Per Share is based on the weighted average number of common
shares outstanding during the period. Diluted Earnings Per Share is based on the
weighted average number of shares outstanding during the year, adjusted to give
effect to common share equivalents. A reconciliation between Basic and Diluted
Earnings Per Share is shown below:
For the Three Months Ended
March 31, 2001
----------------------------------------------
Per Share
Income Shares Amount
------ ------ ------
BASIC EARNINGS PER SHARE:
Net income $ 5,092 13,668,943 $ 0.37
============= ========== =============
DILUTED EARNINGS PER SHARE:
Net income $ 5,092 13,668,943
Effect of share options issued -- 19,504
------------- ----------
$ 5,092 13,688,447 $ 0.37
============= ========== =============
-8-
For the Three Months Ended
March 31, 2000
----------------------------------------------
Per Share
Income Shares Amount
------ ------ ------
BASIC EARNINGS PER SHARE:
Net income $ 6,389 13,339,873 $ .48
============= ========== =============
DILUTED EARNINGS PER SHARE:
Net income $ 6,389 13,339,873
Effect of share options issued -- 464
------------- ----------
$ 6,389 13,340,337 $ .48
============= ========== =============
5. DISTRIBUTIONS:
The per-share amount declared at the date of this report and the per-share
amount declared in the comparable period for distribution are as follows:
Amount
Per
Date Declared Record Date Payment Date Share
------------- ----------- ------------ -----
May 10, 2001 May 31, 2001 June 15, 2001 $.51
May 10, 2000 May 31, 2000 June 15, 2000 $.47
6. CASH FLOW INFORMATION:
Cash paid for interest was $5,373 (net of capitalized interest of $817) and
$5,562 (net of capitalized interest of $821) for the three month periods ended
March 31, 2001 and March 31, 2000, respectively.
Significant non-cash transactions
The Company issued OP units valued at $5,993 in connection with the acquisition
of land on which the Christiana Power Center (Phase I) is built.
The Company issued OP units valued at $3,203 in connection with the Contribution
Agreement (see Note 7) earn-out provisions.
7. COMMITMENTS AND CONTINGENCIES:
Environmental matters have arisen at certain properties in which PREIT has an
interest for which reserves have previously been established. No additional
material incremental cost is expected to be incurred on these properties.
As part of the acquisition of The Rubin Organization in 1997, PREIT entered
into a contribution agreement (the "Contribution Agreement") which includes a
provision for PREIT Associates, L.P., (PREIT's operating partnership) to issue
up to 800,000 additional Class A Operating Partnership ("OP") units over the
five-year period beginning October 1, 1997 and ending September 30, 2002
according to a formula based upon PREIT's adjusted funds from operations per
share during the five-year period. The Contribution Agreement establishes
"hurdle" and "target" levels for PREIT's adjusted funds from operations per
share during specified earn-out periods to determine whether, and to what
extent, the contingent OP units will be issued. As of March 31, 2001, 497,500 of
the 800,000 OP units for the period covering October 1, 1997 to December 31,
2000 had been earned. These OP units earned resulted in an additional purchase
price of approximately $8.9 million. PREIT intends to account for the further
issuance of contingent OP units as additional purchase price when such
additional amounts are determinable.
-9-
At March 31, 2001, PREIT had approximately $28.6 million committed to complete
current development and redevelopment projects. In connection with certain
development properties, PREIT Associates, L.P. may be required to issue
additional OP units upon the achievement of certain financial results.
8. SEGMENT INFORMATION:
PREIT has four reportable segments: (1) retail properties, (2) multifamily
properties, (3) development and other, and (4) corporate. The retail segment
includes the operation and management of 22 regional and community shopping
centers (12 wholly owned and 10 owned in joint venture form). The multifamily
segment includes the operation and management of 19 apartment communities (14
wholly owned and 5 owned in joint venture form). The development and other
segment includes the operation and management of 6 retail properties under
development (5 wholly owned and 1 owned in joint venture form) and 4 industrial
properties (all wholly owned). The corporate segment is responsible for cash and
investment management and certain other general support functions.
The accounting policies for the segments are the same as those PREIT uses for
its consolidated financial reporting, except that for segment reporting
purposes, PREIT uses the "proportionate-consolidation method" of accounting (a
non-GAAP measure) for joint venture properties instead of the equity method of
accounting. PREIT calculates the proportionate-consolidation method by applying
its percentage ownership interest to the historical financial statements of its
equity method investments.
The chief operating decision making group for the Company's retail, multifamily,
development and other and corporate segments is comprised of the Company's
president, chief executive office and the lead executives of each segment. The
segments are managed separately because they each represent a specific property
type, as well as properties under development and corporate services.
-10-
(In thousands)
Adjustments
to Equity Total
Three Months Ended Retail Multifamily Other Corporate Total Method Consolidated
- ------------------- --------- ----------- ----- --------- --------- ---------- ------------
March 31, 2001
- --------------
Real estate operating revenues $ 19,253 $ 13,950 $ 79 -- $ 33,282 $ (8,599) $ 24,683
Real estate operating expenses 5,597 5,771 3 -- 11,371 (3,003) 8,368
--------- ----------- -------- -------- --------- ---------- ------------
Net operating income 13,656 8,179 76 -- 21,911 (5,596) 16,315
--------- ----------- -------- -------- --------- ---------- ------------
Management company revenues -- -- -- 2,152 2,152 -- 2,152
Interest income -- -- -- 161 161 -- 161
General and administrative expenses -- -- -- (5,200) (5,200) -- (5,200)
--------- ----------- -------- -------- --------- ---------- ------------
EBIDTA 13,656 8,179 76 (2,887) 19,024 (5,596) 13,428
--------- ----------- -------- -------- --------- ---------- ------------
Interest expense (5,501) (3,345) -- (63) (8,909) 2,549 (6,360)
Depreciation and amortization (3,620) (2,312) (13) (228) (6,173) 1,603 (4,570)
Gains on sales of interests in
real estate 1,806 -- -- -- 1,806 -- 1,806
Minority interest in operating
partnership -- -- -- (656) (656) -- (656)
Equity in income of partnerships
and joint ventures -- -- -- -- -- 1,444 1,444
--------- ----------- -------- -------- --------- ---------- ------------
Net income $ 6,341 $ 2,522 $ 63 $ (3,834) $ 5,092 $ -- $ 5,092
--------- ----------- -------- -------- --------- ---------- ------------
Investments in real estate, at cost $ 476,504 $ 279,081 $ 51,691 $ -- $ 807,276 $ (185,333) $ 621,943
--------- ----------- -------- -------- --------- ---------- ------------
Total assets $ 457,468 $ 210,991 $ 49,770 $ 24,734 $ 742,963 $ (149,954) $ 593,009
--------- ----------- -------- -------- --------- ---------- ------------
Recurring capital expenditures $ -- $ 450 $ -- $ -- $ 450 $ (63) $ 387
--------- ----------- -------- -------- --------- ---------- ------------
Adjustments
to Equity Total
Three Months Ended Retail Multifamily Other Corporate Total Method Consolidated
- ------------------- --------- ----------- ----- --------- --------- ---------- ------------
March 31, 2000
- --------------
Real estate operating revenues $ 16,689 $ 13,462 $ 379 -- $ 30,530 $ (7,308) $ 23,222
Real estate operating expenses 5,197 5,348 5 -- 10,550 (2,370) 8,180
--------- ----------- -------- -------- --------- ---------- ------------
Net operating income 11,492 8,114 374 -- 19,980 (4,938) 15,042
--------- ----------- -------- -------- --------- ---------- ------------
General and administrative expenses -- -- -- (1,035) (1,035) -- (1,035)
Interest income -- -- -- 230 230 -- 230
PRI net operating loss -- -- -- (1,129) (1,129) 1,129 --
--------- ----------- -------- -------- --------- ---------- ------------
EBIDTA 11,492 8,114 374 (1,934) 18,046 (3,809) 14,237
--------- ----------- -------- -------- --------- ---------- ------------
Interest expense (4,392) (3,553) -- (228) (8,173) 2,329 (5,844)
Depreciation and amortization (2,666) (2,020) (24) (297) (5,007) 1,297 (3,710)
Gains on sales of interests in
real estate 2,263 -- -- -- 2,263 -- 2,263
Minority interest in operating
partnership -- -- -- (740) (740) -- (740)
Equity in interest of partnerships
and joint ventures -- -- -- -- -- 1,672 1,672
Equity in loss of PRI -- -- -- -- -- (1,489) (1,489)
--------- ----------- -------- -------- --------- ---------- ------------
Net income $ 6,697 $ 2,541 $ 350 $ (3,199) $ 6,389 $ -- $ 6,389
--------- ----------- -------- -------- --------- ---------- ------------
Investments in real estate, at cost $ 401,747 $ 271,793 $ 83,638 $ -- $ 757,178 $ (169,678) $ 587,500
--------- ----------- -------- -------- --------- ---------- ------------
Total assets $ 383,304 $ 213,003 $ 80,713 $ 14,772 $ 691,792 $ (137,031) $ 554,761
--------- ----------- -------- -------- --------- ---------- ------------
Recurring capital expenditures $ 119 $ 704 $ -- $ -- $ 823 $ (161) $ 622
--------- ----------- -------- -------- --------- ---------- ------------
-11-
9. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES:
Significant Accounting Policies: Derivative/Financial Instruments
In the normal course of business, the Company uses a variety of derivative
financial instruments to manage, or hedge, interest rate risk. The Company
requires that hedging derivative instruments are effective in reducing the
interest rate risk exposure that they are designated to hedge. This
effectiveness is essential for qualifying for hedge accounting. Some derivative
instruments are associated with the hedge of an anticipated transaction. In
those cases, hedge effectiveness criteria also require that it be probable that
the underlying transaction occurs. Instruments that meet these hedging criteria
are formally designated as hedges at the inception of the derivative contract.
When the terms of an underlying transaction are modified, or when the underlying
hedged item ceases to exist, all changes in the fair value of the instrument are
marked-to-market with changes in value included in net income each period until
the instrument matures. Any derivative instrument used for risk management that
does not meet the hedging criteria is marked-to-market each period.
To determine the fair values of derivative instruments, the Company uses a
variety of methods and assumptions that are based on market conditions and risks
existing at each balance sheet date. For the majority of financial instruments
including most derivatives, long-term investments and long-term debt, standard
market conventions and techniques such as discounted cash flow analysis, option
pricing models, replacement cost, and termination cost are used to determine
fair value. All methods of assessing fair value result in a general
approximation of value, and such value may never actually be realized.
Accounting Changes: Standards Implemented and Transition Adjustment
On January 1, 2001, the Company adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," and SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities - an Amendment of FASB
Statement No. 133". Specifically, SFAS No.133 requires an entity to recognize
all derivatives as either assets or liabilities in the statement of financial
position and to measure those instruments at fair value. Additionally, the fair
value adjustments will affect either shareholders' equity or net income
depending on whether the derivative instrument qualifies as a hedge for
accounting purposes and, if so, the nature of the hedging activity.
As of January 1, 2001, the adoption of the new standard resulted in derivative
instruments reported on the balance sheet as liabilities of $640; and an
adjustment of $640 to accumulated other comprehensive loss, which are gains and
losses not affecting retained earnings.
Financial Instruments: Derivatives and Hedging
In the normal course of business, the Company is exposed to the effect of
interest rate changes. The Company limits these risks by following established
risk management policies and procedures including the use of derivatives. For
interest rate exposures, derivatives are used primarily to align rate movements
between interest rates associated with the Company's leasing income and other
financial assets with interest rates on related debt, and manage the cost of
borrowing obligations.
The Company has a policy of only entering into contracts with major financial
institutions based upon their credit ratings and other factors. When viewed in
conjunction with the underlying and offsetting exposure that the derivatives are
designed to hedge, the Company has not sustained a material loss from those
instruments nor does it anticipate any material adverse effect on its net income
or financial position in the future from the use of derivatives.
To manage interest rate risk, the Company may employ options, forwards, interest
rate swaps, caps and floors or a combination thereof depending on the underlying
exposure. The Company undertakes a variety of borrowings: from lines of credit,
to medium- and long-term financings. To reduce overall interest cost, the
Company uses interest rate instruments, typically interest rate swaps, to
convert a portion of its variable rate debt to fixed rate debt, or even a
portion of its fixed-rate debt to variable rate. Interest rate differentials
that arise under these swap contracts are recognized in interest expense over
the life of the contracts. The resulting cost of funds is expected to be lower
than that which would have been available if debt with matching characteristics
was issued directly.
-12-
The Company may employ forwards or purchased options to hedge qualifying
anticipated transactions. Gains and losses are deferred and recognized in net
income in the same period that the underlying transactions occurs, expires or is
otherwise terminated.
As of March 31, 2001, $2.3 million in deferred losses were included in
accumulated other comprehensive loss, a shareholders' equity account.
The following tables summarize the notional values and fair values of the
company's derivative financial instruments at March 31, 2001. The notional value
provides an indication of the extent of the Company's involvement in these
instruments at that time, but does not represent exposure to credit, interest
rate or market risks.
Fair
Hedge Type Notional Value Interest Rate Maturity Value
- ----------- -------------- ------------- -------- --------
1) Swap - Cash Flow $20,000 6.12% 6/18/01 ($66)
2) Swap - Cash Flow $20,000 6.02% 12/15/03 ($608)
3) Swap - Cash Flow $55,000 6.00% 12/15/03 ($1,600)
On March 31, 2001, the derivative instruments were reported at their fair value
as a liability of $2.3 million.
Interest rate hedges that are designated as cash flow hedges hedge the future
cash outflows on debt. Interest rate swaps that convert variable payments to
fixed payments, interest rate caps, floors, collars, and forwards are cash flow
hedges. The unrealized gains/losses in the fair value of these hedges are
reported on the balance sheet with a corresponding adjustment to either
accumulated other comprehensive income or in earnings depending on the type of
hedging relationship. If the hedging transaction is a cash flow hedge, then the
offsetting gains and losses are reported in accumulated other comprehensive
income. Over time, the unrealized gains and losses held in accumulated other
comprehensive income will be reclassified to earnings. This reclassification is
consistent with when the hedged items are also recognized in earnings. Within
the next twelve months, the Company expects to reclassify to earnings
approximately $896 of the current balance held in accumulated other
comprehensive income.
The Company may hedge its exposure to the variability in future cash flows for
forecasted transactions over a maximum period of 12 months. During the
forecasted period, unrealized gains and losses in the hedging instrument will be
reported in accumulated other comprehensive income. Once the hedged transaction
takes place, the hedge gains and losses will be reported in earnings during the
same period in which the hedged item is recognized in earnings.
10. SUBSEQUENT EVENTS
In May 2001, the Company sold a parcel of land at Paxton Towne Centre in
Harrisburg, PA for $6.3 million. Proceeds from the sale will be used to pay down
debt. The Company expects to record a nominal gain on the sale.
-13-
Item 2.
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
The Company has achieved significant growth since 1997 with the acquisition of
The Rubin Organization ("TRO") and the formation of PREIT-RUBIN, Inc. ("PRI").
In the first quarter of 2001, the Company continued this trend with the
continued development of six retail properties and same store growth of 7.1% and
0.8% in the retail and multifamily sectors, respectively.
At March 31, 2001, the Company owned interests in 45 operating properties
comprised of 8.6 million commercial square feet, 7,242 multifamily units and six
development properties.
Acquisitions and Dispositions
The Company is actively involved in pursuing and evaluating a number of
individual property and portfolio acquisition opportunities. In addition, the
Company has stated that a key strategic goal is to obtain managerial control of
all of its assets. In certain cases where existing joint venture assets are
managed by outside partners, PREIT is considering the possible acquisition of
these outside interests. In certain cases where that opportunity does not exist,
PREIT is considering the disposition of its interests. There can be no assurance
that PREIT will consummate any such acquisition or disposition.
In January 2001, a partnership in which the Company owns a 50% interest sold an
undeveloped parcel of land adjacent to the Metroplex Shopping Center, which is
owned by the partnership, for approximately $7.6 million. The Company recorded a
nominal gain on the land sale.
In March 2001, the Company sold its interest in the Ingleside Center, located in
Thorndale, PA for $5.1 million, of which $0.9 million was used to pay off the
mortgage for the property. The Company's proportionate share of the gain on the
sale of the property was approximately $1.8 million.
Development, Expansions and Renovations
PREIT is involved in a number of development and redevelopment projects that may
require equity funding by PREIT or third-party debt or equity financing. In each
case, PREIT will evaluate the financing opportunities available to it at the
time a project requires funding. In cases where the project is undertaken with a
joint venture partner, PREIT's flexibility in funding the project may be
governed by the joint venture agreement and the Company's line of credit
covenants which limit the use of borrowed funds in joint venture projects.
The Credit Facility
The Company's operating partnership has entered into a $250 million Credit
Facility consisting of a $175 million Revolving Credit Facility (the "Revolving
Facility") and a $75 million construction facility (the "Construction Facility")
with a group of banks led by Wells Fargo Bank National Association. The
obligations of the Company's operating partnership under the Credit Facility are
secured by a pool of ten properties and have been guaranteed by the Company.
The Credit Facility bears interest at the London Interbank Offered Rate (LIBOR)
plus margins ranging from 1.3% to 1.8%, depending on the ratio of the Company's
consolidated liabilities to gross asset value (the "Leverage Ratio"), each as
determined pursuant to the terms of the Credit Facility.
-14-
The Credit Facility contains affirmative and negative covenants customarily
found in facilities of this type, as well as requirements that the Company
maintain, on a consolidated basis: (i) a maximum Leverage Ratio of 65%; (ii) a
maximum Borrowing Base Value (as defined in the Credit Facility) of 70% under
the Revolving Facility; (iii) a minimum weighted average collateral pool
property occupancy of 85%; (iv) minimum tangible net worth of $229 million plus
75% of cumulative net proceeds from the sale of equity securities; (v) minimum
ratios of EBITDA to Debt Service and Interest expense (as defined in the Credit
Facility) of 1.40:1 and 1.75:1, respectively, at March 31, 2001; (vi) maximum
floating rate debt of $250 million; and (vii) maximum commitments for properties
under development not in excess of 25% of Gross Asset Value (as defined in the
Credit Facility). As of March 31, 2001, the Company was in compliance with all
debt covenants.
Liquidity and Capital Resources
The Company expects to meet its short-term liquidity requirements generally
through its available working capital and net cash provided by operations. The
Company believes that its net cash provided by operations will be sufficient to
allow the Company to make any distributions necessary to enable the Company to
continue to qualify as a REIT under the Internal Revenue Code of 1986, as
amended. The Company also believes that the foregoing sources of liquidity will
be sufficient to fund its short-term liquidity needs for the foreseeable future,
including capital expenditures, tenant improvements and leasing commissions.
The Company expects to meet certain long-term capital requirements such as
property acquisitions, scheduled debt maturities, renovations, expansions and
other non-recurring capital improvements through long-term secured and unsecured
indebtedness and the issuance of additional equity securities. The Company also
expects to use the remaining funds available under the Revolving Facility and
the Construction Facility to fund acquisitions, development activities and
capital improvements on an interim basis.
At March 31, 2001, the Company had borrowed $101 million against its Revolving
Facility and had pledged $6 million under the Revolving Facility as collateral
for several letters of credit. The proceeds of the borrowings were used to fund
acquisitions from 1997 to 2000 and several development projects. Of the unused
portion of the Revolving Facility of approximately $68 million, as of March
31, 2001, the Company's loan covenant restrictions allowed the Company to borrow
approximately an additional $14 million based on the existing property
collateral pool.
Commitments
At March 31, 2001, the Company had approximately $28.6 million committed to
complete current development and redevelopment projects. Of this amount,
approximately $26.7 million is expected to be financed through the Construction
Facility and $1.9 million is expected to be financed using construction loans.
In connection with certain development properties, including those development
properties acquired as part of the Company's acquisition of The Rubin
Organization, the Company may be required to issue additional units of limited
partner interest in its operating partnership ("OP Units") upon the achievement
of certain financial results.
Results of Operations
Quarter Ended March 31, 2001 and 2000
Net income decreased by $1.3 million to $5.1 million ($0.37 per share) or 20%
for the quarter ended March 31, 2001 as compared to $6.4 million ($0.48 per
share) for the quarter ended March 31, 2000. The decrease resulted primarily
from increased interest expense and non-cash depreciation and amortization, and
decreased gains on sales of interests in real estate.
Revenues increased by $3.5 million or 15% to $27.0 million for the quarter ended
March 31, 2001 from $23.5 million in 2000. Gross revenues from real estate
increased to $24.7 million in 2001 from $23.2 million for the quarter ended
March 31, 2000. This increase resulted from a $0.7 million increase in base
rents, a $0.05 million increase in percentage rents, a $0.6 million increase in
expense reimbursements, a $0.05 million increase in lease terminations and a
$0.1 million increase in other revenues. Base rents increased due to a $0.6
million increase in retail rents, caused by two properties under development in
2000 now placed in service and higher rents due to new and renewal leases at
higher rates in 2001 and less overall vacancies in the retail portfolio. Revenue
also increased due to a $0.4 million increase in multifamily rents, caused by
rental rate increases and higher occupancy rates. These positive influences are
offset by the sale of two properties in 2000 and a $0.3 million decrease in
industrial rents, caused by the sale or the industrial property in Alexandria,
Va in April 2000. Percentage rents increased due to higher tenant sales levels.
-15-
Expense reimbursements increased due to two properties under development in 2000
now placed in service, increased property operating expenses and the charge back
of 2000 renovation costs over 10 years at Dartmouth Mall. This is partially
offset by the sale of two properties in 2000. Lease terminations increased
primarily due to one time fees received from a tenant at Prince George's Plaza.
Other revenues increased due to higher retail marketing revenues and increased
other revenue from the multifamily properties. PRI's revenue was $2.2 million
for the quarter ended March 31, 2001. This entire amount represents an increase
in revenues in 2001 because PRI was not consolidated in 2000.
Property operating expenses increased by $0.2 million or 2% to $8.4 million for
the quarter ended March 31, 2001 from $8.2 million for the quarter ended March
31, 2000. Payroll expense was unchanged. Real estate and other taxes increased
by $0.2 million due to two properties under development in 2000 now placed in
service and slightly higher tax rates for properties owned during both periods,
partially offset by the sale of two properties in 2000. Utilities increased by
$0.1 million due to higher utility rates. Other operating expenses decreased by
$0.1 million due to overall expense savings.
Depreciation and amortization expense increased by $0.9 million to $4.6 million
for the quarter ended March 31, 2001 from $3.7 million for the quarter ended
March 31, 2000. Depreciation and amortization expense for retail properties
increased by $0.7 million due to two properties under development in 2000 now
placed in service, partially offset by the sale of two properties in 2000.
Retail depreciation increased by $0.4 million for properties owned during both
periods because of a higher asset base. Of this amount, $0.2 million relates to
the 2000 renovation at Dartmouth Mall. Depreciation and amortization expense for
multifamily properties increased by $0.2 million due to a higher asset base for
properties owned during both periods.
General and administrative expenses increased by $4.2 million to $5.2 million
for the quarter ended March 31, 2001 from $1.0 million for the quarter ended
March 31, 2000. The primary reason for the increase is due to the consolidation
of the Management Company in 2001, which accounted for $3.6 million of the
increase. General and administrative expenses also increased primarily due to a
$0.5 million increase in payroll and benefits expenses.
Interest expense increased by $0.5 million to $6.3 million for the quarter ended
March 31, 2001 from $5.8 million for the quarter ended March 31, 2000. Retail
mortgage interest increased by $0.6 million due to a property under development
in 2000 now placed in service. Multifamily mortgage interest decreased by $0.1
million due to expected amortization of mortgage balances. Bank loan interest
expense was unchanged.
Equity in loss of PREIT-RUBIN, Inc. was $1.5 million in the first quarter of
2000. There was no corresponding amount in 2001 due to the consolidation of PRI
in 2001.
Equity in income of partnerships and joint ventures decreased by $0.3 million to
$1.4 million in 2001 from $1.7 million in 2000. The decrease was primarily due
to increased utility costs and bad debt expenses.
Gains on sales of interests in real estate were $1.8 million and $2.3 million,
respectively, in the first quarters of 2001 and 2000 resulting from the sales of
the Company's interests in Ingleside Center in 2001 and Park Plaza in 2000.
Same Store Properties
Property level operating income for the quarter ended March 31, 2001 for the
properties owned since January 1, 2000 (the "Same Store Properties") increased
by $0.5 million or 2.8% over the first quarter of 2000. Retail sector same store
growth was approximately $0.8 million or 7.1% due to new and renewal leases at
higher rates in 2001 than in 2000, higher occupancy and higher percentage rents.
Multifamily sector same store growth was approximately $0.1 million or 0.8% for
the quarter ended March 31, 2001 due to revenue increases of 3.6% offset by
increases in real estate taxes, utilities and insurance costs. Corporate and
other sector same store results decreased by $0.3 million for the quarter ended
March 31, 2001 due to the sale of the CVS Warehouse and Distribution Center in
2000.
-16-
Set forth below is a schedule comparing the property level net operating income
for the Same Store Properties for the quarters ended March 31, 2001 and 2000.
(In thousands)
Three Months Ended
-----------------------------
March 31, March 31,
2001 2000
------------- -------------
Retail Sector:
Revenues $ 16,940 $ 16,152
Property Operating Expenses 5,101 5,100
------------- -------------
Net Operating Income $ 11,839 $ 11,052
============= =============
Multifamily Sector:
Revenues $ 13,949 $ 13,462
Property Operating Expenses $ 5,771 $ 5,348
------------- -------------
Net Operating Income $ 8,178 $ 8,114
============= =============
Cash Flows
During the three months ended March 31, 2001, PREIT generated $9.2 million in
cash flow from operating activities. Investing activities during the three
months ended March 31, 2001 used cash of $6.0 million including (i) $7.7 million
in investments in property under development, (ii) $1.6 million in investments
in wholly-owned real estate assets, (iii) $0.8 million in investments in joint
ventures and partnerships, offset by (iv) cash proceeds from the sale of a
partnership interest of $1.1 million, (v) cash received in connection with the
consolidation of PREIT-RUBIN, Inc. of $1.4 million, and (vi) distributions from
partnerships in excess of equity in income of $1.7 million. Financing activities
provided cash flow of $0.6 million and included (i) $3.5 million proceeds from
construction loans, (ii) a mortgage borrowing of $15.0 million and (iii)
proceeds from common shares issued of $0.2 million, offset by (iv) $7.1 million
of distributions to shareholders and OP unit holders, (v) net Credit Facility
repayments of $9.8 million, (vi) principal installments on mortgages of $1.1
million, and (vii) payment of deferred financing costs of $0.1 million.
Contingent Liabilities
PREIT along with certain of its joint venture partners has guaranteed debt
totaling $6.1 million.
Also, PREIT and its joint venture partner have jointly and severally guaranteed
the construction loan payable on a development project. The balance of the loan
at March 31, 2001 was $61.2 million and the remaining commitment from the lender
was $4.8 for a total credit line of $66.0 million.
Forward-Looking Statements
The matters discussed in this report, as well as news releases issued from time
to time by PREIT include use of forward-looking terminology such as "may,"
"will," "should," "expect," "anticipate," "estimate," "plan," or "continue" or
the negative thereof or other variations thereon, or comparable terminology
which constitute "forward-looking statements." Such forward-looking statements
(including without limitation, information concerning PREIT's continuing
dividend levels, planned acquisition, development and divestiture activities,
short- and long-term liquidity position, ability to raise capital through public
and private offerings of debt and/or equity securities, availability of adequate
funds at reasonable cost, revenues and operating expenses for some or all of the
properties, leasing activities, occupancy rates, changes in local market
conditions or other competitive factors) involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of PREIT's results to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. PREIT disclaims any obligation to update any such
factors or to publicly announce the result of any revisions to any of the
forward-looking statements contained herein to reflect future events or
developments.
-17-
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in the net financial instrument position or
sensitivity to market risk since December 31, 2000 as reported by PREIT in its
Form 10-K for the year ended December 31, 2000.
-18-
PART II
OTHER INFORMATION
Item 5. Other Information
PREIT issued a press release on May 9, 2001 containing financial
information for the quarter ended March 31, 2001. A copy of the press release is
attached hereto as Exhibit 99.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit
99 Press Release, issued May 9, 2001 containing financial information
for the quarter ended March 31, 2001.
(b) Reports on Form 8-K
On January 4, 2001, PREIT filed a Current Report on Form 8-K reporting
the completion of the refinancing of its line of credit with a new
credit facility.
-19-
SIGNATURE OF REGISTRANT
Pursuant to the requirements 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.
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
By /s/ Ronald Rubin
---------------------------------
Ronald Rubin
Chief Executive Officer
By /s/ Edward A. Glickman
---------------------------------
Edward A. Glickman
Executive Vice President and
Chief Financial Officer
By /s/ David J. Bryant
---------------------------------
David J. Bryant
Senior Vice President and Treasurer
(Principal Accounting Officer)
-20-
Exhibit Index
Exhibit
Number Description
- ------ -----------
99 Press Release, issued May 9, 2001, containing financial information
for the period ended March 31, 2001
-21-