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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 June 30, 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
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(Exact name of Registrant as specified in its charter)
Pennsylvania 23-6216339
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(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
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N/A
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(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 August 9, 2001: 15,703,227
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PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
-----------------------------------------
CONTENTS
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Page
----
Part I. Financial Information
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets--June 30, 2001
and December 31, 2000 1-2
Consolidated Statements of Income--Three Months
and Six Months Ended June 30, 2001 and June 30, 2000 3
Consolidated Statements of Cash Flows--Six Months
Ended June 30, 2001 and June 30, 2000 4
Notes to Unaudited Consolidated Financial Statements 5-14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15-21
Item 3. Quantitative and Qualitative Disclosures about Market Risk 21
Part II. Other Information 22
Item 1. Not Applicable -
-
Item 2. Not Applicable
Item 3. Not Applicable -
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
Exhibits Index 24
Part I. Financial Information
---------------------
Item 1. Financial Statements
--------------------
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
-----------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
ASSETS
------
(In thousands)
(Unaudited)
June 30, December 31,
2001 2000
----------------- -----------------
INVESTMENTS IN REAL ESTATE, at cost:
Multifamily properties $ 251,073 $ 249,349
Retail properties 335,068 328,637
Industrial properties 2,504 2,504
Properties under development 37,948 31,776
----------------- -----------------
Total investments in real estate 626,593 612,266
Less- Accumulated depreciation (103,447) (95,026)
----------------- -----------------
523,146 517,240
INVESTMENT IN AND ADVANCES TO PREIT-RUBIN, INC. -- 8,739
INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS AND JOINT VENTURES, at equity 16,423 21,470
----------------- -----------------
539,569 547,449
OTHER ASSETS:
Cash and cash equivalents 9,363 6,091
Rents and sundry receivables (net of allowance for doubtful accounts of
$844 and $733, respectively) 7,254 7,508
Deferred costs and other assets, net 33,314 15,615
----------------- -----------------
$ 589,500 $ 576,663
================= =================
(Continued)
-1-
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
-----------------------------------------
CONSOLIDATED BALANCE SHEETS (CONTINUED)
---------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
(In thousands)
(Unaudited)
June 30, December 31,
2001 2000
----------------- -----------------
LIABILITIES:
Mortgage notes payable $ 260,209 $ 247,449
Bank loan payable 103,000 110,300
Construction loan payable 24,717 24,647
Tenants' deposits and deferred rents 3,378 3,118
Accrued pension and retirement benefits 945 992
Accrued expenses and other liabilities 18,040 16,485
----------------- -----------------
410,289 402,991
----------------- -----------------
MINORITY INTEREST 40,631 29,766
----------------- -----------------
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDERS' EQUITY:
Shares of beneficial interest, $1 par; authorized unlimited; issued and
outstanding 13,702 shares at June 30, 2001 and 13,628 shares at
December 31, 2000 13,702 13,628
Capital contributed in excess of par 152,523 151,117
Restricted stock (1,681) (1,812)
Accumulated other comprehensive income (loss) (2,082) --
Distributions in excess of net income (23,882) (19,027)
------------------ -----------------
138,580 143,906
----------------- -----------------
$ 589,500 $ 576,663
================= =================
The accompanying notes are an integral part of these statements.
-2-
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
-----------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(Unaudited)
-----------
(In thousands, except per share data)
Three Months Ended Six Months Ended
-------------------------------------------------------------------
June 30, June 30, June 30, June 30,
2001 2000 2001 2000
---------------- ---------------- ----------------- ----------------
REVENUES:
Real estate revenues
Base rent $ 20,919 $ 19,494 $ 41,482 $ 39,380
Percentage rent 238 147 571 424
Expense reimbursements 2,278 2,035 5,074 4,240
Lease termination revenue 845 5,557 975 5,637
Other real estate revenues 854 888 1,715 1,661
------------- --------------- ------------- -------------
Total real estate revenue 25,134 28,121 49,817 51,342
Management company revenue 2,313 -- 4,465 --
Interest and other income 91 325 253 556
------------- --------------- ------------- -------------
27,538 28,446 54,535 51,898
------------- --------------- ------------- -------------
EXPENSES:
Property operating expenses
Property payroll and benefits 1,702 1,568 3,481 3,333
Real estate and other taxes 1,884 1,823 3,799 3,575
Utilities 991 979 2,234 2,138
Other operating expenses 3,493 3,055 6,925 6,558
------------- --------------- ------------- -------------
Total property operating expenses 8,070 7,425 16,439 15,604
Depreciation and amortization 4,386 3,594 8,729 7,182
General and administrative expenses
Corporate payroll and benefits 3,186 706 6,403 1,166
Other general and administrative expenses 2,460 699 4,442 1,275
------------- --------------- ------------- -------------
Total general and administrative expenses 5,646 1,405 10,845 2,441
Interest expense 6,658 5,765 13,246 11,731
------------- --------------- ------------- -------------
24,760 18,189 49,259 36,958
------------- --------------- ------------- -------------
Income before equity in unconsolidated entities,
gains on sales of interests in real estate and
minority interest 2,778 10,257 5,276 14,940
EQUITY IN LOSS OF PREIT-RUBIN, INC. -- (1,898) -- (3,387)
EQUITY IN INCOME OF PARTNERSHIPS
AND JOINT VENTURES 1,370 1,808 2,815 3,480
GAINS ON SALES OF INTERESTS IN REAL
ESTATE 301 6,648 2,107 8,911
------------- --------------- ------------- -------------
Income before minority interest 4,449 16,815 10,198 23,944
MINORITY INTEREST IN OPERATING
PARTNERSHIP (543) (1,732) (1,199) (2,471)
------------- --------------- ------------- -------------
NET INCOME $ 3,906 $ 15,083 $ 8,999 $ 21,473
============= =============== ============= =============
BASIC INCOME PER SHARE $ 0.29 $ 1.13 $ 0.66 $ 1.61
============= =============== ============= =============
DILUTED INCOME PER SHARE $ 0.29 $ 1.13 $ 0.66 $ 1.61
============= =============== ============= =============
The accompanying notes are an integral part of these statements.
-3-
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
-----------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(In thousands)
(Unaudited)
-----------
Six Months Ended
--------------------------------
June 30, June 30,
2001 2000
------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,999 $ 21,473
Adjustments to reconcile net income to net cash
provided by operating activities-
Minority interest, net of distributions -- 1,013
Depreciation and amortization 8,729 7,182
Amortization of deferred financing costs 380 245
Provision for doubtful accounts 100 429
Amortization of deferred compensation 596 --
Gains on sales of interests in real estate (2,107) (8,911)
Equity in loss of PREIT-RUBIN, Inc. -- 3,387
Change in assets and liabilities-
Net change in other assets (4,548) (2,093)
Net change in other liabilities 2,899 197
------------- -------------
Net cash provided by operating activities 15,048 22,922
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in wholly-owned real estate (2,473) (13,141)
Investments in property under development (10,638) (9,342)
Investment in and advances to PREIT-RUBIN, Inc. -- (2,430)
Investments in partnerships and joint ventures (967) (2,136)
Cash proceeds from sale of interest in partnership 1,080 2,940
Cash proceeds from sale of interest in wholly-owned real estate 1,808 7,631
Net cash received from PREIT-RUBIN, Inc. 1,616 --
Cash distributions from partnerships and joint ventures
in excess of equity in income 6,740 483
------------- -------------
Net cash used in investing activities (2,834) (15,995)
-------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal installments on mortgage notes payable (2,240) (2,237)
Proceeds from mortgage note payable 15,000 --
Proceeds from construction loans payable 70 8,017
Net (payment) borrowing from credit facility (7,300) 1,200
Shares of beneficial interest issued 535 374
Payment of deferred financing costs (419) --
Distributions paid to shareholders (13,854) (12,549)
Distributions paid to OP Unit holders in excess of minority interest (734) --
-------------- --------------
Net cash used in financing activities (8,942) (5,195)
-------------- --------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 3,272 1,732
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 6,091 7,165
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 9,363 $ 8,897
============= =============
The accompanying notes are an integral part of these statements.
-4-
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
-----------------------------------------
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2001
------------------------------
(Unaudited)
(In thousands, except per share data unless otherwise noted)
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 of the Company 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 June 30, 2001, held an 87.9% interest in the
Operating Partnership.
Certain prior period amounts have been reclassified to conform with current
period presentation.
2. INVESTMENT IN PREIT-RUBIN, INC.:
--------------------------------
In January 2001, PREIT Services, LLC ("Services") was created to develop, manage
and lease 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 of $0.2 million and $0.4 million, respectively,
and leasing and development fees of $0.3 million and $0.4 million, respectively,
to PRI, for the quarter and six months ended June 30, 2000.
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 $0.7 million and $1.2 million for the three and six-month periods ended
June 30, 2001, respectively, and $0.9 million and $1.6 million for the three and
six-month periods ended June 30, 2000.
-5-
Summarized unaudited financial information for PRI as of and for the three and
six-month periods ended June 30, 2000 is as follows:
For the Three For the Six
Months Ended Months Ended
June 30, 2000 June 30, 2000
------------- --------------
Total assets $ 5,389 $ 5,389
============= ==============
Management fees $ 991 $ 1,981
Leasing commissions 987 1,933
Development fees 117 179
Other revenue 719 1,108
------------- --------------
Total revenue $ 2,814 $ 5,201
============= ==============
Net loss $ 1,901 $ 3,412
============= ==============
PREIT's share of net loss $ 1,898 $ 3,387
============= ==============
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 16 partnerships and joint ventures
(including 3 properties with development activity) at June 30, 2001, and 17
partnerships and joint ventures (including 3 properties with development
activity) at December 31, 2000, and PREIT's equity in income for the three and
six-months ended June 30, 2001 and 2000:
June 30, December 31,
2001 2000
---------------- -----------------
ASSETS
------
Investments in real estate, at cost:
Multifamily properties $ 57,447 $ 57,200
Retail properties 419,192 410,745
Properties under development 15,310 28,477
---------------- -----------------
Total investments in real estate 491,949 496,422
Less: Accumulated depreciation (83,640) (78,025)
----------------- ------------------
408,309 418,397
Cash and cash equivalents 2,825 5,788
Deferred costs, prepaid real estate taxes and expenses, and other
assets, net 47,480 56,012
---------------- -----------------
Total assets 458,614 480,197
---------------- -----------------
LIABILITIES AND PARTNERS' EQUITY
--------------------------------
Mortgage notes payable 333,077 327,684
Construction loans payable 62,400 61,857
Other liabilities 20,254 33,127
---------------- -----------------
Total liabilities 415,731 422,668
---------------- -----------------
Net equity 42,883 57,529
Less: Partners' share (26,715) (36,578)
----------------- ------------------
Investment in partnerships and joint ventures 16,168 20,951
Advances 255 519
---------------- -----------------
Investment in and advances to partnerships and joint ventures $ 16,423 $ 21,470
================ =================
-7-
EQUITY IN INCOME OF PARTNERSHIPS AND JOINT VENTURES
Three Months Ended Six Months Ended
---------------------------------- ------------------------------------
June 30, June 30, June 30, June 30,
2001 2000 2001 2000
--------------- --------------- --------------- -----------------
Gross revenues from real estate $ 23,082 $ 19,343 $ 45,145 $ 35,767
--------------- ------------- --------------- ----------------
Expenses:
Property operating expenses 8,050 6,255 16,035 11,723
Mortgage and bank loan interest 7,404 6,503 14,689 11,617
Refinancing prepayment penalty 510 -- 510 --
Depreciation and amortization 4,480 3,217 8,627 5,713
--------------- ------------- --------------- ----------------
20,444 15,975 39,861 29,053
--------------- ------------- --------------- ----------------
2,638 3,368 5,284 6,714
Partners' share (1,268) (1,560) (2,469) (3,234)
---------------- ------------- ---------------- ----------------
Equity in income of partnerships and joint
ventures
$ 1,370 $ 1,808 $ 2,815 $ 3,480
=============== ============= =============== ================
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:
Three Months Ended Six Months Ended
-------------------------------- -----------------------------------
June 30, June 30, June 30, June 30,
2001 2000 2001 2000
--------------- ------------- --------------- ---------------
Net income $ 3,906 $ 15,083 $ 8,999 $ 21,473
=============== ============= =============== ===============
Weighted average shares outstanding 13,692 13,385 13,680 13,362
Effect of share options issued 23 -- 5 1
--------------- ------------- --------------- ---------------
Total weighted average shares outstanding 13,715 13,385 13,685 13,363
=============== ============= =============== ===============
Net income per share - Basic $ 0.29 $ 1.13 $ 0.66 $ 1.61
=============== ============== ================ ================
Net income per share - Diluted $ 0.29 $ 1.13 $ 0.66 $ 1.61
=============== ============== ================ ================
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
Date Declared Record Date Payment Date per Share
------------- ----------- ------------ ---------
July 13, 2000 August 31, 2000 September 15, 2000 $0.47
July 16, 2001 August 31, 2001 September 17, 2001 $0.51
-8-
6. CASH FLOW INFORMATION:
----------------------
Cash paid for interest was $12.1 million (net of capitalized interest of $1.6
million) and $11.2 million (net of capitalized interest of $1.7 million) for the
six months ended June 30, 2001 and 2000, respectively.
Significant non-cash transactions for the six months ended June 30, 2001 include
the following:
The Company issued OP units valued at $6.0 million in connection with the
acquisition of land on which the Christiana Power Center (Phase I) is built.
The Company issued OP units valued at $3.2 million in connection with the
Contribution Agreement (see Note 8) earn-out provisions.
7. DISPOSITIONS:
------------
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. The Company's proportionate share of the gain on
the sale was approximately $1.8 million.
In May 2001, the Company sold its interest in a parcel of land located at the
Paxton Towne Centre in Harrisburg, PA for approximately $6.3 million, resulting
in a gain of $1.3 million.
In June 2001, the Company sold its interest in a parcel of land at the Florence
Commons Shopping Center in Florence, SC. The Company received cash at the
closing of approximately $1.3 million, and will receive a development fee of
$1.5 million for the construction of the store that will be built on the site,
for total proceeds from the transaction, upon completion of the development, of
$2.8 million. The Company recorded a loss of $1.0 million on the transaction.
8. 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 June 30, 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.
At June 30, 2001, PREIT had commitments of approximately $28.2 million 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.
-9-
9. REFINANCING:
------------
In January 2001, the mortgage on Eagle's Nest Apartments in Coral Springs, FL,
was refinanced. The $15.0 million mortgage has a 10-year term and bears interest
at the rate of 7.52% per annum.
In May 2001, the mortgage on Countrywood Apartments in Tampa, FL was refinanced.
The Company owns a 50% interest in Countrywood Apartments. The Company's share
of the net proceeds of $4.3 million from the refinancing was used to pay down
debt. The mortgage has a 10-year term and bears interest at the rate of 6.81%
per annum.
10. 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 chief
executive officer, president 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)
Development Adjustments
and to Equity Total
Three Months Ended Retail Multifamily Other Corporate Total Method Consolidated
- ------------------- -------- ----------- ----- --------- --------- ----------- ------------
June 30, 2001
- -------------
Real estate operating revenues $ 19,960 $ 14,025 $ 80 $ -- $ 34,065 $ (8,931) $ 25,134
Real estate operating expenses 5,123 5,897 2 -- 11,022 (2,952) 8,070
-------- --------- -------- --------- --------- --------- ----------
Net operating income 14,837 8,128 78 -- 23,043 (5,979) 17,064
-------- --------- -------- --------- --------- --------- ----------
Management company revenues -- -- -- 2,313 2,313 -- 2,313
Interest income -- -- -- 91 91 -- 91
General and administrative expenses -- -- -- (5,646) (5,646) -- (5,646)
-------- --------- -------- --------- --------- --------- ----------
EBIDTA 14,837 8,128 78 (3,242) 19,801 (5,979) 13,822
-------- --------- -------- --------- --------- --------- ----------
Interest expense (5,848) (3,674) -- -- (9,522) 2,864 (6,658)
Depreciation and amortization (3,756) (2,362) (13) -- (6,131) 1,745 (4,386)
Gains on sales of interests in real
estate 301 -- -- 301 -- 301
Minority interest in operating
partnership -- -- -- (543) (543) -- (543)
Equity in income of partnerships and
joint ventures -- -- -- -- -- 1,370 1,370
-------- --------- -------- --------- --------- --------- ----------
Net income $ 5,534 $ 2,092 $ 65 $ (3,785) $ 3,906 $ -- $ 3,906
-------- --------- -------- --------- --------- --------- ----------
Investments in real estate, at cost $483,346 $ 279,930 $ 48,357 $ -- $ 811,633 $(185,040) $ 626,593
-------- --------- -------- --------- --------- --------- ----------
Total assets $460,390 $ 208,770 $ 46,409 $ 26,063 $ 741,632 $(152,132) $ 589,500
-------- --------- -------- --------- --------- --------- ----------
Recurring capital expenditures $ -- $ 450 $ -- $ -- $ 450 $ (63) $ 387
-------- --------- -------- --------- --------- --------- ----------
Three Months Ended Development Adjustments
- ------------------- and to Equity Total
June 30, 2000 Retail Multifamily Other Corporate Total Method Consolidated
- ------------- --------- ----------- ----- --------- --------- ----------- ------------
Real estate operating revenues $ 17,774 $ 13,467 $ 4,167 $ -- $ 35,408 $ (7,287) $ 28,121
Real estate operating expense 4,092 5,479 34 -- 9,605 (2,180) 7,425
-------- --------- -------- --------- --------- --------- ----------
Net operating income 13,682 7,988 4,133 -- 25,803 (5,107) 20,696
-------- --------- -------- --------- --------- --------- ----------
General and administrative expenses -- -- -- (1,405) (1,405) -- (1,405)
Interest income -- -- -- 325 325 -- 325
PRI net operating loss -- -- -- (1,437) (1,437) 1,437 --
-------- --------- -------- ---------- --------- --------- ----------
EBIDTA 13,682 7,988 4,133 (2,517) 23,286 (3,670) 19,616
-------- --------- -------- --------- --------- --------- ----------
Interest expense (4,344) (3,454) -- (377) (8,175) 2,410 (5,765)
Depreciation and amortization (2,653) (2,065) (13) (213) (4,944) 1,350 (3,594)
Gains on sales of interests in real
estate -- -- 6,648 -- 6,648 -- 6,648
Minority interest in operating
partnership -- -- -- (1,732) (1,732) -- (1,732)
Equity in interest of partnerships and
joint ventures -- -- -- -- -- 1,808 1,808
Equity in loss of PRI -- -- -- -- -- (1,898) (1,898)
-------- --------- -------- --------- --------- --------- ----------
Net income $ 6,685 $ 2,469 $ 10,768 $ (4,839) $ 15,083 $ -- $ 15,083
-------- --------- -------- --------- --------- --------- ----------
Investments in real estate, at cost $404,142 $ 276,018 $ 96,440 $ -- $ 776,600 $(175,986) $ 600,614
-------- --------- -------- --------- --------- --------- -----------
Total assets $384,423 $ 216,262 $ 94,985 $ 13,833 $ 709,503 $(141,598) $ 567,905
-------- --------- -------- --------- --------- --------- ----------
Recurring capital expenditures $ 184 $ 780 $ -- $ -- $ 964 $ (162) $ 802
-------- --------- -------- --------- --------- --------- ----------
-11-
(In thousands)
Development Adjustments
and to Equity Total
Six Months Ended Retail Multifamily Other Corporate Total Method Consolidated
- ----------------- --------- ----------- ----- --------- --------- ----------- ------------
June 30, 2001
- -------------
Real estate operating revenues $ 39,213 $ 27,975 $ 159 $ -- $ 67,347 $ (17,530) $ 49,817
Real estate operating expenses 10,720 11,668 5 -- 22,393 (5,954) 16,439
-------- ---------- -------- --------- ---------- --------- ----------
Net operating income 28,493 16,307 154 -- 44,954 (11,576) 33,378
-------- ---------- -------- --------- ---------- --------- ----------
Management company revenues -- -- -- 4,465 4,465 -- 4,465
Interest income -- -- -- 253 253 -- 253
General and administrative expenses -- -- -- (10,845) (10,845) -- (10,845)
-------- ---------- -------- --------- ---------- --------- ----------
EBIDTA 28,493 16,307 154 (6,127) 38,827 (11,576) 27,251
-------- ---------- -------- --------- ---------- ---------- ----------
Interest expense (11,349) (7,019) -- (291) (18,659) 5,413 (13,246)
Depreciation and amortization (7,377) (4,674) (26) -- (12,077) 3,348 (8,729)
Gains on sales of interests in real
estate 2,107 -- -- -- 2,107 -- 2,107
Minority interest in operating
partnership -- -- -- (1,199) (1,199) -- (1,199)
Equity in income of partnerships and
joint ventures -- -- -- -- -- 2,815 2,815
-------- ---------- -------- --------- ----------- --------- ----------
Net income $ 11,874 $ 4,614 $ 128 $ (7,617) $ 8,999 $ -- $ 8,999
--------- ---------- -------- --------- ---------- --------- ----------
Investments in real estate, at cost $483,346 $ 279,930 $ 48,357 $ -- $ 811,633 $(185,040) $ 626,593
--------- ---------- -------- --------- ---------- --------- -----------
Total assets $460,390 $ 208,770 $ 46,409 $ 26,063 $ 741,632 $(152,132) $ 589,500
-------- ---------- -------- --------- ---------- --------- ----------
Recurring capital expenditures $ -- $ 450 $ -- $ -- $ 450 $ (63) $ 387
-------- ---------- -------- --------- ---------- --------- ----------
Six Months Ended Development Adjustments
- ----------------- and to Equity Total
June 30, 2000 Retail Multifamily Other Corporate Total Method Consolidated
- ------------- --------- ----------- ----- --------- ----------- ----------- ------------
Real estate operating revenues $ 34,463 $ 26,929 $ 4,545 $ -- $ 65,937 $ (14,595) $ 51,342
Real estate operating expense 9,290 10,826 39 -- 20,155 (4,551) 15,604
-------- ---------- -------- --------- ---------- --------- ----------
Net operating income 25,173 16,103 4,506 -- 45,782 (10,044) 35,738
-------- ---------- -------- --------- ---------- --------- ----------
General and administrative expenses -- -- -- (2,441) (2,441) -- (2,441)
Interest income -- -- -- 556 556 -- 556
PRI net operating loss -- -- -- (2,567) (2,567) 2,567 --
-------- ---------- -------- ---------- ---------- --------- ----------
EBIDTA 25,173 16,103 4,506 (4,452) 41,330 (7,477) 33,853
-------- ---------- -------- --------- ---------- --------- ----------
Interest expense (8,735) (7,007) -- (728) (16,470) 4,739 (11,731)
Depreciation and amortization (5,319) (4,084) (37) (387) (9,827) 2,645 (7,182)
Gains on sales of interests in real
estate 2,263 -- 6,648 -- 8,911 -- 8,911
Minority interest in operating
partnership -- -- -- (2,471) (2,471) -- (2,471)
Equity in interest of partnerships and
joint ventures -- -- -- -- -- 3,480 3,480
Equity in loss of PRI -- -- -- -- -- (3,387) (3,387)
-------- ---------- -------- --------- ---------- --------- ----------
Net income $ 13,382 $ 5,012 $ 11,117 $ (8,038) $ 21,473 $ -- $ 21,473
-------- ---------- -------- ---------- ---------- --------- ----------
Investments in real estate, at cost $404,142 $ 276,018 $ 96,440 $ -- $ 776,600 $(175,986) $ 600,614
-------- ---------- -------- --------- ---------- --------- ----------
Total assets $384,423 $ 216,262 $ 94,985 $ 13,833 $ 709,503 $(141,598) $ 567,905
-------- ---------- -------- --------- ---------- --------- ----------
Recurring capital expenditures $ 303 $ 1,484 $ -- $ -- $ 1,787 $ (323) $ 1,464
-------- ---------- -------- --------- ---------- --------- ----------
-12-
11. 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. 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 with unrealized gains and losses reported to
earnings.
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 $0.6 million; and an
adjustment of $0.6 million to accumulated other comprehensive loss, which are
gains and losses not affecting retained earnings. The Company recorded
additional other comprehensive loss of $1.4 million to recognize the change in
value during the six-month periods ending June 30, 2001. The Company recorded
other comprehensive income of $0.2 million to recognize the change in value in
the second quarter of 2001.
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 any material adverse effect on
its net income or financial position 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.
-13-
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 June 30, 2001, $2.1 million in deferred losses were included in
accumulated other comprehensive income/loss, a shareholders' equity account.
The following tables summarize the notional values and fair values of the
Company's derivative financial instruments at June 30, 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.
Hedge Type Notional Value Interest Rate Maturity Fair Value
----------- -------------- ------------- -------- --------------
1.) Swap - Cash Flow $20.0 million 6.02% 12/15/03 ($0.6 million)
2.) Swap - Cash Flow $55.0 million 6.00% 12/15/03 ($1.5 million)
On June 30, 2001, the derivative instruments were reported at their fair value
as a liability of $2.1 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/loss 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 $0.8 million of the current balance held in accumulated
other comprehensive income/loss.
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.
12. RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------------
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that
the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. SFAS No. 142, which is effective January 1, 2002,
changes the accounting for goodwill from an amortization method to assessing
impairment on a fair-value-based test approach on an annual basis. PREIT has not
yet quantified the impact, if any, of SFAS No. 142 on its consolidated financial
statements.
13. SUBSEQUENT EVENTS
-----------------
On July 11, 2001, the Company completed a public offering of 2.0 million shares
of beneficial interest at a price of $23.00 per share. At the completion of the
public offering the Company had approximately 15.7 million shares outstanding.
Net proceeds to the Company from the offering after deducting the underwriting
discount of $1.5 million and other expenses of the offering of approximately
$0.3 million were approximately $44.2 million, of which $20.7 million were used
to repay an existing construction loan and $16.5 million of outstanding
indebtedness under the Company's Credit Facility.
-14-
Item 2.
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
-----------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
Overview
- --------
The Company owns interests in 22 shopping centers containing an aggregate of
approximately 10.7 million square feet, 19 multifamily properties containing
7,242 units and four industrial properties with an aggregate of approximately
300,000 square feet. The Company also owns interest in six shopping centers
currently under development, which are expected to contain an aggregate of
approximately 1.6 million square feet upon completion.
The Company also provides management, leasing and development services to 19
retail properties containing approximately 8.3 million square feet, seven office
buildings containing approximately 1.9 million square feet and two multifamily
properties with 137 units for affiliated and third-party owners.
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 second quarter of 2001, the Company continued this trend with six retail
properties in its development pipeline, and same store net operating income
growth of 4.7% and 1.8% in the retail and multifamily sectors, respectively,
excluding the impact of lease termination fees in the retail sector.
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. The Company's proportionate share of the gain on
the sale of the property was approximately $1.8 million.
In May 2001, the Company sold a parcel of land at Paxton Towne Centre in
Harrisburg, PA for $6.3 million resulting in a gain of $1.3 million.
In June 2001, the Company sold a parcel of land at its Florence Commons Shopping
Center in Florence, SC. The Company received cash at the closing of
approximately $1.3 million, and will receive a development fee of $1.5 million
for the construction of the store that will be built on the site, for total
proceeds from the transaction, upon completion of the development, of $2.8
million. The Company recorded a loss on this transaction of $1.0 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 Credit Facility
covenants which limit the use of borrowed funds in joint venture projects.
-15-
In June 2001, the Company entered into agreements to take over the management
and leasing operations of two retail properties and one apartment complex.
Starting on July 15, 2001, the Company is managing the 837,000 square-foot
Harrisburg East Mall, located in Harrisburg, PA and owned by the Prudential
Insurance Company of America. Starting on January 1, 2002, the Company will also
manage the 250,000 square foot Home Depot Plaza, located in Clifton Heights, PA.
In addition, beginning on January 1, 2002, the Company will manage and lease a
233-unit apartment complex located in West Chester, PA, which is owned by a
partnership between the Company and another entity.
Equity Offering
- ---------------
On July 11, 2001, The Company issued, through a public offering, 2.0 million
shares of beneficial interest at a price of $23.00 per share. The sole
underwriter of the offering was Lehman Brothers. Net proceeds from the offering
after deducting the underwriting discount of $1.5 million and other expenses of
the offering of approximately $0.3 million were approximately $44.2 million.
Proceeds from the offering of $20.7 million were used to repay an existing
construction loan and $16.5 million of outstanding indebtedness under the
Company's Credit Facility (see below).
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.
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 June 30, 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 June 30, 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.
-16-
At June 30, 2001, the Company had borrowed $103.0 million against its Revolving
Facility and had pledged $5.6 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 $66.4 million, as of June 30,
2001, the Company's loan covenant restrictions allowed the Company to borrow
approximately an additional $3.8 million based on the existing property
collateral pool. Subsequent repayments of $16.5 million of the amounts
outstanding under the Credit Facility and a reduction of the Company's letters
of credit of $4.5 million increased the amount the Company may borrow to $24.8
million.
Commitments
- -----------
At June 30, 2001, the Company had approximately $28.2 million committed to
complete current development and redevelopment projects, which is expected to be
financed through the Construction Facility. 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 June 30, 2001 and 2000
- ------------------------------------
Net income decreased by $11.2 million to $3.9 million ($0.29 per share) for the
quarter ended June 30, 2001 as compared to $15.1 million ($1.13 per share) for
the quarter ended June 30, 2000. The decrease resulted primarily from decreased
gains on sales of interest in real estate and lease termination fees.
Revenues decreased by $0.9 million or 3% to $27.5 million in the quarter ended
June 30, 2001 from $28.4 million for the quarter ended June 30, 2000. Gross
revenues from real estate decreased to $25.1 million for the quarter ended June
30, 2001 from $28.1 million for the quarter ended June 30, 2000. This decrease
resulted from a $4.8 million decrease in lease termination fees from $5.6
million in 2000 to $0.8 million in 2001. Lease termination fees in 2000 included
the $4.0 million fee received in connection with the sale of the CVS Warehouse
and Distribution Center. Amounts offsetting this decrease are a $1.4 million
increase in base rents, a $0.1 million increase in percentage rents and a $0.3
million increase in expense reimbursements. Base rents increased due to a $1.0
million increase in retail rents, resulting from two properties under
development in 2000 now placed in service, and higher rents due to new and
renewal leases at higher rates in 2001. These positive influences are offset by
the sale of two retail properties that were owned during the second quarter of
2000 and sold in the third quarter of 2000. Base rents also increased due to a
$0.5 million increase in multifamily rents, resulting from rental rate increases
and higher occupancy rates. Industrial property base rents decreased $0.1
million due to the sale of the CVS Warehouse and Distribution Center in 2000.
Percentage rents increased due to higher tenant sales levels. 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. PRI's revenue was $2.3 million for the
quarter ended June 30, 2001. This entire amount represents an increase in
revenues in 2001 because PRI was not consolidated in 2000. Interest and other
income decreased by $0.2 million because of lower cash balances in 2001
generating less interest income.
Property operating expenses increased by $0.7 million or 9% to $8.1 million for
the quarter ended June 30, 2001 from $7.4 million for the quarter ended June 30,
2000. Payroll expense increased $0.1 million. Real estate and other taxes
increased by $0.1 million as two properties under development in 2000 were
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 were
unchanged. Other operating expenses increased by $0.5 million due to increased
repairs and maintenance expenses and increased insurance expenses.
Depreciation and amortization expense increased by $0.8 million to $4.4 million
for the quarter ended June 30, 2001 from $3.6 million for the quarter ended June
30, 2000. Depreciation and amortization expense for retail properties increased
by $0.6 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
-17-
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 $5.6 million
for the quarter ended June 30, 2001 from $1.4 million for the quarter ended June
30, 2000. The primary reason for the increase is due to the consolidation of PRI
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, as well as minor increases in several other
expense categories.
Interest expense increased by $0.9 million to $6.7 million for the quarter ended
June 30, 2001 from $5.8 million for the quarter ended June 30, 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 increased by $0.4 million due to a higher borrowing base and because
development assets were placed into service.
Equity in loss of PREIT-RUBIN, Inc. was $1.9 million in the quarter ended June
30, 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 $0.4 million to
$1.4 million in the quarter ended June 30, 2001 from $1.8 million in the quarter
ended June 30, 2000. The decrease was primarily due to increased interest
and bad debt expenses.
Gains on sales of interests in real estate were $0.3 million and $6.6 million,
respectively, in the second quarter of 2001 and 2000 resulting from the sales of
the land parcels at Florence Commons Shopping Center and Paxton Towne Centre in
the second quarter of 2001 and the CVS Warehouse and Distribution Center in the
second quarter of 2000.
Six Month Period Ended June 30, 2001 and 2000
- ---------------------------------------------
Net income decreased by $12.5 million to $9.0 million ($0.66 per share) for the
six-month period ended June 30, 2001 as compared to $21.5 million ($1.61 per
share) for the six-month period ended June 30, 2000. The decrease resulted
primarily from increased interest expense, non-cash depreciation and
amortization, and decreased gains on sales of interests in real estate and lease
termination fees.
Revenues increased by $2.6 million or 5% to $54.5 million in the six-month
period ended June 30, 2001 from $51.9 million for the six-month period ended
June 30, 2000. Gross revenues from real estate decreased to $49.8 million for
the six-month period ended June 30, 2001 from $51.3 million in 2000. This
decrease resulted from a $4.6 million decrease in lease termination fees from
$5.6 million in 2000 to $1.0 million in 2001. Lease termination fees in 2000
included the $4.0 million fee received in connection with the sale of the CVS
Warehouse and Distribution Center. Offsetting this decrease are a $2.1 million
increase in base rents, a $0.1 million increase in percentage rents, a $0.8
million increase in expense reimbursements, and a $0.1 million increase in other
revenues. Base rents increased due to a $1.6 million increase in retail rents,
resulting from two properties under development in 2000 now placed in service
and higher rents due to new and renewal leases at higher rates in 2001. These
positive influences are offset by the sale of two retail properties that were
owned during the second quarter of 2000 and sold in the third quarter of 2000.
Base rents also increased due to a $0.8 million increase in multifamily rents,
resulting from rental rate increases and higher occupancy rates. Industrial
rents decreased $0.3 million due to the sale of the CVS Warehouse and
Distribution Center in Alexandria, Va in April 2000. Percentage rents increased
due to higher tenant sales levels. 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.
Other revenues increased due to increased miscellaneous income from the
multifamily properties. PRI's revenue was $4.4 million for the six-month period
ended June 30, 2001. This entire amount represents an increase in revenues in
2001 because PRI was not consolidated in 2000. Interest and other income
decreased $0.3 million due to lower cash balances in 2001 generating less
interest income.
-18-
Property operating expenses increased by $0.8 million or 5% to $16.4 million for
the six-month period ended June 30, 2001 from $15.6 million for the six-month
period ended June 30, 2000. Payroll expense increased $0.2 million due to normal
salary increases. 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 increased by $0.3 million due to
increased repairs and maintenance expenses.
Depreciation and amortization expense increased by $1.5 million to $8.7 million
for the six-month period ended June 30, 2001 from $7.2 million for the six-month
period ended June 30, 2000. Depreciation and amortization expense for retail
properties increased by $1.2 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 $0.8 million for properties owned during
both periods because of a higher asset base. Of this amount, $0.3 million
relates to the 2000 renovation at Dartmouth Mall. Depreciation and amortization
expense for multifamily properties increased by $0.3 million due to a higher
asset base for properties owned during both periods.
General and administrative expenses increased by $8.4 million to $10.8 million
for the six-month period ended June 30, 2001 from $2.4 million for the six-month
period ended June 30, 2000. The primary reason for the increase is due to the
consolidation of PRI in 2001, which accounted for $7.2 million of the increase.
General and administrative expenses also increased primarily due to a $1.0
million increase in payroll and benefits expenses as well as minor increases in
several other expense categories.
Interest expense increased by $1.5 million to $13.2 million for the six-month
period ended June 30, 2001 from $11.7 million for the six-month period ended
June 30, 2000. Retail mortgage interest increased by $1.2 million due to a
property under development in 2000 now placed in service. Multifamily mortgage
interest decreased by $0.2 million due to expected amortization of mortgage
balances. Bank loan interest expense increased by $0.5 million due to a larger
amount outstanding under the Credit Facility and due to development assets being
placed into service
Equity in loss of PREIT-RUBIN, Inc. was $3.4 million in the first six months 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 $0.7 million to
$2.8 million in the six-month period ended June 30, 2001 from $3.5 million in
the six-month period ended June 30, 2000. The decrease was primarily due to
increased interest expense, utility costs and bad debt expenses.
Gains on sales of interests in real estate were $2.1 million and $8.9 million,
respectively, in the first six months of 2001 and 2000 resulting from the sales
of the Company's interests in Ingleside Center and land parcels at Florence
Commons Shopping Center and Paxton Towne Centre in 2001, and Park Plaza and the
CVS Warehouse and Distribution Center in 2000.
Same Store Properties
- ---------------------
Retail sector operating income excluding the impact of lease termination fees
for the three and six-month periods ended June 30, 2001 for the properties owned
since January 1, 2000 (the "Same Store Properties") increased by $0.5 million
and $1.3 million or 4.7% and 5.9% over corresponding periods in 2000 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 and $0.2 million or 1.8% and 1.3% for the three and six-month
period ended June 30, 2001 due to revenue increases of 4.1% and 3.9% limited by
increases in real estate taxes, utilities, turnover expenses, repairs and
maintenance and insurance costs.
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Set forth below is a schedule comparing the property level net operating income
(excluding the impact of lease termination fees) for the Same Store Properties
for the three and six months ended June 30, 2001, as compared to the three and
six months ended June 30, 2000.
(In thousands)
Three Months Ended Six Months Ended
--------------------------- --------------------------------
June 30, June 30, June 30, June 30,
2001 2000 2001 2000
------------- ------------- ---------------- --------------
Retail Sector:
Revenues $ 16,502 $ 15,471 $ 33,442 $ 31,623
Property operating expenses 4,688 4,187 9,790 9,287
------------- ------------- ------------- -------------
Net operating income $ 11,814 $ 11,284 $ 23,652 $ 22,336
============= ============= ============= =============
Multifamily Sector:
Revenues $ 14,025 $ 13,467 $ 27,974 $ 26,929
Property operating expenses $ 5,897 $ 5,479 $ 11,668 $ 10,827
------------- ------------- ------------- -------------
Net operating income $ 8,128 $ 7,988 $ 16,306 $ 16,102
============= ============= ============= =============
Cash Flows
- ----------
During the six-month period ended June 30, 2001, PREIT generated $15.0 million
in cash flow from operating activities. Investing activities during the
six-month period ended June 30, 2001 used cash of $2.8 million including (i)
$10.6 million in investments in property under development, (ii) $2.5 million in
investments in wholly-owned real estate assets, (iii) $1.0 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 proceeds from
sale of interest in wholly-owned real estate of $1.8 million, (vi) cash received
in connection with the consolidation of PREIT-RUBIN, Inc. of $1.6 million, and
(vii) distributions from partnerships in excess of equity in income of $6.7
million. Financing activities used cash of $8.9 million and included a mortgage
borrowing of $15.0 million and (ii) proceeds from common shares issued of $0.5
million, offset by (iii) $14.5 million of distributions to shareholders and OP
unit holders, (iv) net Credit Facility repayments of $7.3 million, (v) principal
installments on mortgages of $2.2 million, and (vi) payment of deferred
financing costs of $0.4 million.
Contingent Liabilities
- ----------------------
PREIT along with certain of its joint venture partners has guaranteed debt
totaling $5.9 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 June 30, 2001 was $62.4 million and the remaining commitment from the lender
was $3.6 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. Certain factors that could cause actual results to
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differ materially from expected results include uncertainties affecting real
estate businesses generally, the effects of complex regulations relating to our
status as a REIT, environmental risks and others, many of which are outside of
our control. 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.
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.
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PART II
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The 2001 Annual Meeting of Holders of Certificates of Beneficial
Interest of the Company was held on May 10, 2001. At such meeting, Messrs.
William R. Dimeling and George F. Rubin and Ms. Rosemarie B. Greco were
reelected to the Board of Trustees of the Company to serve for a term ending at
the Annual Meeting of Holders of Certificates of Beneficial Interest to be held
in the spring of 2004 and until their respective successors are elected and
qualified. In such election, 12,286,475 votes were cast for Mr. Dimeling,
12,235,391 votes were cast for Mr. Rubin, and 12,325,571 votes were cast for Ms.
Greco. Under the Company's Trust Agreement, votes cannot be cast against a
candidate. Proxies filed at the 2001 Annual Meeting by holders of 233,261 shares
withheld authority to vote for Mr. Dimeling, those filed by the holders of
284,346 shares withheld authority to vote for Mr. Rubin, and those filed by the
holders of 194,165 shares withheld authority to vote for Ms. Greco.
Item 5. Other Information
-----------------
PREIT issued a press release on August 9, 2001 containing financial
information for the six-month period ended June 30, 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 August 9, 2001 containing financial
information for the six-month period ended June 30, 2001.
(b) Reports on Form 8-K
None
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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)
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Exhibit Index
Exhibit
Number Description
- ------- -----------
99 Press Release, issued August 9, 2001, containing financial
information for the period ended June 30, 2001
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