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 September 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
------------------------------------------------
Pennsylvania Real Estate Investment Trust
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Pennsylvania 23-6216339
- -------------------------------- -------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
200 South Broad Street,
Third Floor, Philadelphia, PA 19102-3803
--------------------------------------- ------------------------------------
(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 November 12, 2001: 15,865,199
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONTENTS
Page
----
Part I. Financial Information
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets--September 30, 2001
and December 31, 2000 1-2
Consolidated Statements of Income--Three Months
and Nine Months Ended September 30, 2001 and September 30, 2000 3
Consolidated Statements of Cash Flows--Nine Months
Ended September 30, 2001 and September 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. Not Applicable -
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)
September 30, December 31,
2001 2000
--------- ---------
INVESTMENTS IN REAL ESTATE, at cost:
Multifamily properties $ 252,429 $ 249,349
Retail properties 345,812 328,637
Industrial properties 2,504 2,504
Properties under development 37,868 31,776
--------- ---------
Total investments in real estate 638,613 612,266
Less- Accumulated depreciation (107,809) (95,026)
--------- ---------
530,804 517,240
INVESTMENT IN AND ADVANCES TO PREIT-RUBIN, INC -- 8,739
INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS AND JOINT VENTURES, at equity 15,570 21,470
--------- ---------
546,374 547,449
OTHER ASSETS:
Cash and cash equivalents 7,051 6,091
Rents and sundry receivables (net of allowance for doubtful
accounts of $760 and $733, respectively) 8,573 7,508
Deferred costs and other assets, net 33,336 15,615
--------- ---------
$ 595,334 $ 576,663
========= =========
(Continued)
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY
(In thousands)
(Unaudited)
September 30, December 31,
2001 2000
--------- ---------
LIABILITIES:
Mortgage notes payable $ 259,111 $ 247,449
Bank loan payable 88,000 110,300
Construction loan payable 4,000 24,647
Tenants' deposits and deferred rents 3,213 3,118
Accrued pension and retirement benefits 760 992
Accrued expenses and other liabilities 22,615 16,485
--------- ---------
377,699 402,991
--------- ---------
MINORITY INTEREST 40,171 29,766
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDERS' EQUITY:
Shares of beneficial interest, $1 par; authorized
unlimited; issued and outstanding 15,734 shares
at September 30, 2001 and 13,628 shares at
December 31, 2000 15,734 13,628
Capital contributed in excess of par 195,561 151,117
Restricted stock (1,791) (1,812)
Accumulated other comprehensive income (loss) (4,348) --
Distributions in excess of net income (27,692) (19,027)
--------- ---------
177,464 143,906
--------- ---------
$ 595,334 $ 576,663
========= =========
The accompanying notes are an integral part of these statements.
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share data)
Three Months Ended Nine Months Ended
------------------------------------------------------------
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
-------- -------- -------- --------
REVENUES:
Real estate revenues
Base rent $ 21,148 $ 20,042 $ 62,630 $ 59,422
Percentage rent 211 144 783 567
Expense reimbursements 2,446 2,055 7,521 6,296
Lease termination revenue 110 83 1,084 5,720
Other real estate revenues 975 879 2,689 2,541
-------- -------- -------- --------
Total real estate revenue 24,890 23,203 74,707 74,546
Management company revenue 2,545 -- 7,010 --
Interest and other income 102 454 355 1,010
-------- -------- -------- --------
27,537 23,657 82,072 75,556
-------- -------- -------- --------
EXPENSES:
Property operating expenses
Property payroll and benefits 1,817 1,647 5,298 4,980
Real estate and other taxes 1,980 1,773 5,779 5,349
Utilities 941 985 3,175 3,122
Other operating expenses 3,467 3,643 10,392 10,201
-------- -------- -------- --------
Total property operating expenses 8,205 8,048 24,644 23,652
Depreciation and amortization 4,501 3,551 13,229 10,733
General and administrative expenses
Corporate payroll and benefits 3,240 542 9,644 1,708
Other general and administrative expenses 2,360 397 6,801 1,672
-------- -------- -------- --------
Total general and administrative expenses 5,600 939 16,445 3,380
Interest expense 5,924 5,855 19,170 17,586
-------- -------- -------- --------
24,230 18,393 73,488 55,351
-------- -------- -------- --------
Income before equity in unconsolidated entities,
gains on sales of interests in real estate and
minority interest 3,307 5,264 8,584 20,205
EQUITY IN LOSS OF PREIT-RUBIN, INC -- (1,634) -- (5,021)
EQUITY IN INCOME OF PARTNERSHIPS
AND JOINT VENTURES 1,343 1,853 4,157 5,333
GAINS ON SALES OF INTERESTS IN REAL
ESTATE -- 1,388 2,107 10,298
-------- -------- -------- --------
Income before minority interest 4,650 6,871 14,848 30,815
MINORITY INTEREST IN OPERATING
PARTNERSHIP (501) (709) (1,700) (3,180)
-------- -------- -------- --------
NET INCOME $ 4,149 $ 6,162 $ 13,148 $ 27,635
======== ======== ======== ========
BASIC INCOME PER SHARE $ 0.27 $ 0.46 $ 0.92 $ 2.07
======== ======== ======== ========
DILUTED INCOME PER SHARE $ 0.27 $ 0.46 $ 0.92 $ 2.07
======== ======== ======== ========
The accompanying notes are an integral part of these statements.
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
----------------------------------
September 30, September 30,
2001 2000
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 13,148 $ 27,635
Adjustments to reconcile net income to net cash
provided by operating activities-
Minority interest, net of distributions -- 987
Depreciation and amortization 13,229 10,733
Amortization of deferred financing costs 528 370
Provision for doubtful accounts 15 187
Amortization of deferred compensation 937 353
Gains on sales of interests in real estate (2,107) (10,298)
Equity in loss of PREIT-RUBIN, Inc. -- 5,021
Decrease in allowance for possible losses -- (435)
Change in assets and liabilities-
Net change in other assets (6,088) (4,487)
Net change in other liabilities 6,023 4,195
-------- --------
Net cash provided by operating activities 25,685 34,261
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in wholly-owned real estate (6,209) (34,239)
Investments in property under development (20,154) (3,058)
Investment in and advances to PREIT-RUBIN, Inc. -- (3,366)
Investments in partnerships and joint ventures (935) (4,575)
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 20,044
Net cash received from PREIT-RUBIN, Inc. 1,616 --
Cash distributions from partnerships and joint ventures
in excess of equity in income 7,561 1,108
-------- --------
Net cash used in investing activities (15,233) (21,146)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal installments on mortgage notes payable (3,337) (3,247)
Proceeds from mortgage note payable 15,000 --
Net (payment) borrowing from construction loan payable (20,648) 13,619
Net repayment of credit facility (22,300) (3,300)
Shares of beneficial interest issued 45,201 564
Payment of deferred financing costs (421) --
Distributions paid to shareholders (21,812) (18,832)
Distributions paid to OP Unit holders in excess of minority interest (1,175) --
-------- --------
Net cash used in financing activities (9,492) (11,196)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 960 1,919
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 6,091 7,165
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 7,051 $ 9,084
======== ========
The accompanying notes are an integral part of these statements.
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2001
(Unaudited)
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 September 30, 2001, held an 89.3% 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.
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 also 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. For the three and nine months ended
September 30, 2000, PREIT's properties paid management fees to PRI of $0.2
million and $0.6 million, respectively, and leasing and development fees to PRI
of $0.5 million and $0.9 million, respectively. Effective January 1, 2001, PREIT
no longer pays these fees to PRI.
Previously, 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 $0.8 million and $2.0 million for the three and nine-month periods ended
September 30, 2001, respectively, and $0.9 million and $2.4 million for the
three and nine-month periods ended September 30, 2000.
Summarized unaudited financial information for PRI as of and for the three and
nine-month periods ended September 30, 2000 is as follows:
(In thousands)
For the Three For the Nine
Months Ended Months Ended
September 30, 2000 September 30, 2000
Total assets $ 5,629 $ 5,629
======== ========
Management fees $ 832 $ 2,814
Leasing commissions 1,096 3,029
Development fees 298 477
Other revenue 870 1,976
--------- ----------
Total revenue $ 3,096 $ 8,296
======== ========
Net loss $ (1,643) $ (5,055)
========= =========
PREIT's share of net loss $ (1,634) $ (5,021)
========= =========
Financial information for 2001 is not presented because PRI is consolidated as
of January 1, 2001.
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 September 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
nine-months ended September 30, 2001 and 2000:
(In thousands)
September 30, December 31,
2001 2000
--------- ---------
ASSETS
------
Investments in real estate, at cost:
Multifamily properties $ 56,906 $ 57,200
Retail properties 419,640 410,745
Properties under development 17,682 28,477
--------- ---------
Total investments in real estate 494,228 496,422
Less: Accumulated depreciation (85,679) (78,025)
--------- ---------
408,549 418,397
Cash and cash equivalents 6,378 5,788
Deferred costs, prepaid real estate taxes and expenses,
and other assets, net 48,713 56,012
--------- ---------
Total assets 463,640 480,197
--------- ---------
LIABILITIES AND PARTNERS' EQUITY
--------------------------------
Mortgage notes payable 337,580 327,684
Construction loans payable 62,400 61,857
Other liabilities 18,056 33,127
--------- ---------
Total liabilities 418,036 422,668
--------- ---------
Net equity 45,604 57,529
Less: Partners' share (30,184) (36,578)
--------- ---------
Investment in partnerships and joint ventures 15,420 20,951
Advances 150 519
--------- ---------
Investment in and advances to partnerships and joint
ventures $ 15,570 $ 21,470
========= =========
EQUITY IN INCOME OF PARTNERSHIPS AND JOINT VENTURES
(In thousands)
Three Months Ended Nine Months Ended
-----------------------------------------------------------------------
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
-------- -------- -------- --------
Gross revenues from real estate $ 22,651 $ 16,381 $ 67,796 $ 55,942
-------- -------- -------- --------
Expenses:
Property operating expenses 8,190 5,468 24,226 18,604
Mortgage and bank loan interest 7,652 5,113 22,342 18,150
Refinancing prepayment penalty -- -- 510 --
Depreciation and amortization 4,273 2,531 12,866 8,592
-------- -------- -------- --------
20,115 13,112 59,944 45,346
-------- -------- -------- --------
2,536 3,269 7,852 10,596
Partners' share (1,193) (1,416) (3,695) (5,263)
-------- -------- -------- --------
Equity in income of partnerships and joint
ventures $ 1,343 $ 1,853 $ 4,157 $ 5,333
======== ======== ======== ========
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:
(In thousands, except per share data)
Three Months Ended Nine Months Ended
----------------------------------------------------------------------
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
------- ---------- ------- ----------
Net income $ 4,149 $ 6,162 $13,148 $ 27,635
======= ========== ======= ==========
Weighted average shares outstanding 15,391 13,387 14,257 13,371
Effect of share options issued 28 -- 27 --
------- ---------- ------- ----------
Total weighted average shares outstanding 15,419 13,387 14,284 13,371
======= ========== ======= ==========
Net income per share - Basic $ 0.27 $ 0.46 $ 0.92 $ 2.07
======= ========== ======= ==========
Net income per share - Diluted $ 0.27 $ 0.46 $ 0.92 $ 2.07
======= ========== ======= ==========
5. DISTRIBUTIONS:
--------------
The per-share amount declared for distribution at the date of this report and
the per-share amount declared for distribution in the comparable period of the
prior year are as follows:
Amount
Date Declared Record Date Payment Date per Share
---------------- ----------------- ----------------- ---------
November 7, 2000 November 30, 2000 December 15, 2000 $0.51
October 18, 2001 November 30, 2001 December 17, 2001 $0.51
6. CASH FLOW INFORMATION:
----------------------
Cash paid for interest was $17.8 million (net of capitalized interest of $2.3
million) and $16.0 million (net of capitalized interest of $2.7 million) for the
nine-months ended September 30, 2001 and 2000, respectively.
Significant non-cash transactions for the nine months ended September 30, 2001
consisted of 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 earnout provisions of the Contribution Agreement (see Note 8).
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 is entitled to 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 September 30, 2001,
497,500 of the 800,000 OP units for the period covering October 1, 1997 to
December 31, 2000 had been earned. The issuance of these 497,500 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 September 30, 2001, PREIT had commitments of approximately $21.6 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. 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. EQUITY OFFERING:
----------------
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 was used
to repay an existing construction loan and $16.5 million was used to pay
outstanding indebtedness under the Company's Credit Facility. The balance of the
proceeds was used to fund projects currently under development.
11. 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.
(In thousands)
Development Adjustments
and to Equity Total
Three-months Ended Retail Multifamily Other Corporate Total Method Consolidated
September 30, 2001 --------- --------- --------- --------- --------- --------- ---------
Real estate operating revenues $ 19,392 $ 14,216 $ 83 $ -- $ 33,691 $ (8,801) $ 24,890
Real estate operating expenses (5,396) (5,937) (2) -- (11,335) 3,130 (8,205)
--------- --------- --------- --------- --------- --------- ---------
Net operating income 13,996 8,279 81 -- 22,356 (5,671) 16,685
--------- --------- --------- --------- --------- --------- ---------
Management company revenues -- -- -- 2,545 2,545 -- 2,545
Interest income -- -- -- 102 102 -- 102
General and administrative expenses -- -- -- (5,600) (5,600) -- (5,600)
--------- --------- --------- --------- --------- --------- ---------
EBIDTA 13,996 8,279 81 (2,953) 19,403 (5,671) 13,732
--------- --------- --------- --------- --------- --------- ---------
Interest expense (5,178) (3,435) -- -- (8,613) 2,689 (5,924)
Depreciation and amortization (3,799) (2,328) (13) -- (6,140) 1,639 (4,501)
Gains on sales of interests in real -- -- -- -- -- -- --
estate
Minority interest in operating
partnership -- -- -- (501) (501) -- (501)
Equity in income of partnerships and
joint ventures -- -- -- -- -- 1,343 1,343
--------- --------- --------- --------- --------- --------- ---------
Net income $ 5,019 $ 2,516 $ 68 $ (3,454) $ 4,149 $ -- $ 4,149
========= ========= ========= ========= ========= ========= =========
Investments in real estate, at cost $ 494,247 $ 281,132 $ 48,267 $ -- $ 823,646 $(185,033) $ 638,613
========= ========= ========= ========= ========= ========= =========
Total assets $ 466,810 $ 208,667 $ 46,315 $ 25,723 $ 747,515 $(152,181) $ 595,334
========= ========= ========= ========= ========= ========= =========
Recurring capital expenditures $ 6 $ 964 $ -- $ -- $ 970 $ (69) $ 901
========= ========= ========= ========= ========= ========= =========
Development Adjustments
Three-months Ended and to Equity Total
September 30, 2000 Retail Multifamily Other Corporate Total Method Consolidated
--------- --------- --------- --------- --------- --------- ---------
Real estate operating revenues $ 17,200 $ 13,457 $ 80 $ -- $ 30,737 $ (7,534) $ 23,203
Real estate operating expense (4,972) (5,602) (3) -- (10,577) 2,529 (8,048)
--------- --------- --------- --------- --------- --------- ---------
Net operating income 12,228 7,855 77 -- 20,160 (5,005) 15,155
--------- --------- --------- --------- --------- --------- ---------
General and administrative expenses -- -- -- (939) (939) -- (939)
Interest income -- -- -- 454 454 -- 454
PRI net operating loss -- -- -- (1,165) (1,165) 1,165 --
--------- --------- --------- --------- --------- --------- ---------
EBIDTA 12,228 7,855 77 (1,650) 18,510 (3,840) 14,670
--------- --------- --------- --------- --------- --------- ---------
Interest expense (4,454) (3,448) -- (414) (8,316) 2,461 (5,855)
Depreciation and amortization (2,702) (1,813) (13) (183) (4,711) 1,160 (3,551)
Gains on sales of interests in real 1,388 -- -- -- 1,388 -- 1,388
estate
Minority income in operating
partnership -- -- -- (709) (709) -- (709)
Equity in interest of partnerships and
joint ventures -- -- -- -- -- 1,853 1,853
Equity in loss of PRI -- -- -- -- -- (1,634) (1,634)
--------- --------- --------- --------- --------- --------- ---------
Net income $ 6,460 $ 2,594 $ 64 $ (2,956) $ 6,162 $ -- $ 6,162
========= ========= ========= ========= ========= ========= =========
Investments in real estate, at cost $ 408,119 $ 276,761 $ 97,667 $ -- $ 782,547 $(183,291) $ 599,256
========= ========= ========= ========= ========= ========= =========
Total assets $ 390,815 $ 215,269 $ 97,161 $ 13,837 $ 717,082 $(146,034) $ 571,048
========= ========= ========= ========= ========= ========= =========
Recurring capital expenditures $ 334 $ 733 $ -- $ -- $ 1,067 $ (261) $ 806
========= ========= ========= ========= ========= ========= =========
(In thousands)
Development Adjustments
and to Equity Total
Nine-months Ended Retail Multifamily Other Corporate Total Method Consolidated
September 30, 2001 --------- --------- --------- --------- --------- --------- ---------
Real estate operating revenues $ 58,605 $ 42,192 $ 242 $ -- $ 101,039 $ (26,332) $ 74,707
Real estate operating expenses (16,117) (17,605) (7) -- (33,729) 9,085 (24,644)
--------- --------- --------- --------- --------- --------- ---------
Net operating income 42,488 24,587 235 -- 67,310 (17,247) 50,063
--------- --------- --------- --------- --------- --------- ---------
Management company revenues -- -- -- 7,010 7,010 -- 7,010
Interest income -- -- -- 355 355 -- 355
General and administrative expenses -- -- -- (16,445) (16,445) -- (16,445)
--------- --------- --------- --------- --------- --------- ---------
EBIDTA 42,488 24,587 235 (9,080) 58,230 (17,247) 40,983
--------- --------- --------- --------- --------- --------- ---------
Interest expense (16,741) (10,456) -- (76) (27,273) 8,103 (19,170)
Depreciation and amortization (11,174) (7,001) (39) (2) (18,216) 4,987 (13,229)
Gains on sales of interests in real 2,107 -- -- -- 2,107 -- 2,107
estate
Minority interest in operating
partnership -- -- -- (1,700) (1,700) -- (1,700)
Equity in income of partnerships and
joint ventures -- -- -- -- -- 4,157 4,157
--------- --------- --------- --------- --------- --------- ---------
Net income $ 16,680 $ 7,130 $ 196 $ (10,858) $ 13,148 $ -- $ 13,148
========= ========= ========= ========= ========= ========= =========
Investments in real estate, at cost $ 494,247 $ 281,132 $ 48,267 $ -- $ 823,646 $(185,033) $ 638,613
========= ========= ========= ========= ========= ========= =========
Total assets $ 466,810 $ 208,667 $ 46,315 $ 25,723 $ 747,515 $(152,181) $ 595,334
========= ========= ========= ========= ========= ========= =========
Recurring capital expenditures $ 4 $ 1,574 $ -- $ -- $ 1,578 $ (179) $ 1,399
========= ========= ========= ========= ========= ========= =========
Development Adjustments
Nine-months Ended and to Equity Total
September 30, 2000 Retail Multifamily Other Corporate Total Method Consolidated
--------- --------- --------- --------- --------- --------- ---------
Real estate operating revenues $ 51,663 $ 40,387 $ 4,626 $ -- $ 96,676 $ (22,130) $ 74,546
Real estate operating expense (14,262) (16,428) (42) -- (30,732) 7,080 (23,652)
--------- --------- --------- --------- --------- --------- ---------
Net operating income 37,401 23,959 4,584 -- 65,944 (15,050) 50,894
--------- --------- --------- --------- --------- --------- ---------
General and administrative expenses -- -- -- (3,380) (3,380) -- (3,380)
Interest income -- -- -- 1,010 1,010 -- 1,010
PRI net operating loss -- -- -- (3,732) (3,732) 3,732 --
--------- --------- --------- --------- --------- --------- ---------
EBIDTA 37,401 23,959 4,584 (6,102) 59,842 (11,318) 48,524
--------- --------- --------- --------- --------- --------- ---------
Interest expense (13,189) (10,456) -- (1,142) (24,787) 7,201 (17,586)
Depreciation and amortization (8,021) (5,897) (50) (570) (14,538) 3,805 (10,733)
Gains on sales of interest in real estate 3,650 -- 6,648 -- 10,298 -- 10,298
Minority interest in operating
partnership -- -- -- (3,180) (3,180) -- (3,180)
Equity in income of partnerships and
joint ventures -- -- -- -- -- 5,333 5,333
Equity in loss of PRI -- -- -- -- -- (5,021) (5,021)
--------- --------- --------- --------- --------- --------- ---------
Net income $ 19,841 $ 7,606 $ 11,182 $ (10,994) $ 27,635 $ -- $ 27,635
========= ========= ========= ========= ========= ========= =========
Investments in real estate, at cost $ 408,119 $ 276,761 $ 97,667 $ -- $ 782,547 $(183,291) $ 599,256
========= ========= ========= ========= ========= ========= =========
Total assets $ 390,815 $ 215,269 $ 97,161 $ 13,837 $ 717,082 $(146,034) $ 571,048
========= ========= ========= ========= ========= ========= =========
Recurring capital expenditures $ 637 $ 2,217 $ -- $ -- $ 2,854 $ (584) $ 2,270
========= ========= ========= ========= ========= ========= =========
12. 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 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 $2.3 million and $3.7 million to
recognize the change in value during the three-month and nine-month periods
ending September 30, 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.
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 transaction occurs, expires or is
otherwise terminated.
As of September 30, 2001, $4.3 million in deferred losses were included in
accumulated other comprehensive income/loss, a shareholders' equity account.
The following table summarizes the notional values and fair values of the
Company's derivative financial instruments at September 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 ($1.1 million)
2.) Swap - Cash Flow $55.0 million 6.00% 12/15/03 ($3.2 million)
On September 30, 2001, the derivative instruments were reported at their fair
value as a liability of $4.3 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/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 $2.6 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.
13. 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. The Company's
annual expense from the amortization of goodwill is $0.4 million. This
amortization will cease on December 31, 2001. PREIT has not yet quantified any
additional impact of SFAS No. 142 on its consolidated financial statements.
14. SUBSEQUENT EVENT
----------------
In October 2001, the construction loan for the Metroplex Shopping Center in
Plymouth Meeting, PA was refinanced with a mortgage payable in the amount of
$65.5 million. The Company owns 50% of the Metroplex Shopping Center. The
Company, along with its joint venture partner, was jointly and severally liable
for the construction loan, which was repaid from the mortgage proceeds. The
mortgage bears interest at the rate of 7.25% per annum and matures in 2011.
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 interests 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
additional retail properties containing approximately 8.3 million square feet,
seven office buildings containing approximately 1.9 million square feet and two
additional 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 third quarter of 2001, the Company continued this trend with six retail
properties in its development pipeline, and same store net operating income
growth of 4.0% and 5.4% 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 is entitled to receive a development fee of $1.5
million for the construction of the store that will be built on the site, for
total proceeds expected 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.
In June 2001, the Company entered into agreements to take over the management
and leasing operations of two retail properties and one apartment complex. On
July 15, 2001, the Company began 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 balance of the proceeds was used to
fund projects currently under development.
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 September 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 September 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.
At September 30, 2001, the Company had $88.0 million of outstanding borrowings
against its Revolving Facility and had pledged $1.1 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 $85.9 million, as of September 30, 2001, the Company's loan
covenant restrictions allowed the Company to borrow approximately an additional
$23.2 million based on the existing property collateral pool.
Commitments
At September 30, 2001, the Company had approximately $21.6 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.
Interest Rate Protection
In order to reduce exposure to variable interest rates, the Company has entered
into interest rate swap agreements as follows:
Notional Fixed Interest Rate Maturity
Amount vs. 30-day LIBOR Date
------ ---------------- -----
$20.0 million 6.02% December 2003
$55.0 million 6.00% December 2003
Results of Operations
Quarter Ended September 30, 2001 and 2000
Net income decreased by $2.1 million to $4.1 million ($0.27 per share) for the
quarter ended September 30, 2001 as compared to $6.2 million ($0.46 per share)
for the quarter ended September 30, 2000.
Revenues increased by $3.8 million or 16% to $27.5 million in the quarter ended
September 30, 2001 from $23.7 million for the quarter ended September 30, 2000.
Gross revenues from real estate increased to $24.9 million for the quarter ended
September 30, 2001 from $23.2 million for the quarter ended September 30, 2000.
This increase resulted from a $1.1 million increase in base rents, a $0.1
million increase in percentage rents and a $0.4 million increase in expense
reimbursements. Base rents increased due to a $0.5 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 sold in the third quarter of 2000. Base rents also increased due to a $0.6
million increase in multifamily rents, resulting from rental rate increases and
higher occupancy rates. 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. PRI's
revenue was $2.5 million for the quarter ended September 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 $0.3 million
because interest income on a loan with PRI is eliminated in 2001 due to the
consolidation of PRI effective January 1, 2001.
Property operating expenses increased by $0.2 million or 3% to $8.2 million for
the quarter ended September 30, 2001 from $8.0 million for the quarter ended
September 30, 2000. Payroll expense increased $0.2 million. Real estate and
other taxes increased by $0.2 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 decreased by $0.1 million. Other operating expenses decreased by $0.1
million due to decreased repairs and maintenance expenses.
Depreciation and amortization expense increased by $0.9 million to $4.5 million
for the quarter ended September 30, 2001 from $3.6 million for the quarter ended
September 30, 2000. Depreciation and amortization expense for retail properties
increased by $0.5 million due to $0.2 million from two properties under
development in 2000 now placed in service, and $0.3 million from a higher asset
base, of which $0.2 million is attributable to the 2000 renovation at Dartmouth
Mall. Depreciation and amortization expense for multifamily properties increased
by $0.4 million due to a higher asset base for properties owned during both
periods.
General and administrative expenses increased by $4.7 million to $5.6 million
for the quarter ended September 30, 2001 from $0.9 million for the quarter ended
September 30, 2000. The primary reason for the increase is the consolidation of
PRI in 2001, which accounted for $3.9 million of the increase. General and
administrative expenses also increased primarily due to a $0.3 million increase
in payroll and benefits expenses, as well as minor increases in several other
expense categories totaling $0.5 million in the aggregate.
Interest expense was unchanged at $5.9 million for the quarter ended September
30, 2001 as compared to the comparable period in the prior year. Retail mortgage
interest decreased by $0.1 million and multifamily mortgage interest decreased
by $0.1 million both due to expected amortization of mortgage balances, offset
primarily by an increase in bank loan interest expense of $0.2 million because
development assets were placed into service.
Equity in loss of PREIT-RUBIN, Inc. was $1.6 million in the quarter ended
September 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 $0.6 million to
$1.3 million in the quarter ended September 30, 2001 from $1.9 million in the
quarter ended September 30, 2000. The decrease was primarily due to increased
interest and bad debt expenses.
There were no sales of interests in real estate in the third quarter of 2001.
The Valley View Shopping Center was sold in the third quarter of 2000 resulting
in a gain of $1.4 million. The Forestville Shopping Center was also sold in the
third quarter of 2000 with no impact on earnings because a loss of $0.3 million
had previously been reserved.
Nine Month Period Ended September 30, 2001 and 2000
Net income decreased by $14.5 million to $13.1 million ($0.92 per share) for the
nine-month period ended September 30, 2001 as compared to $27.6 million ($2.07
per share) for the nine-month period ended September 30, 2000.
Revenues increased by $6.5 million or 9% to $82.1 million in the nine-month
period ended September 30, 2001 from $75.6 million for the nine-month period
ended September 30, 2000. Gross revenues from real estate increased by $0.2
million to $74.7 million for the nine-month period ended September 30, 2001 from
$74.5 million in 2000. This increase is due to a $3.2 million increase in base
rents, a $0.2 million increase in percentage rents, a $1.2 million increase in
expense reimbursements, and a $0.2 million increase in other revenues.
Offsetting this increase is a $4.6 million decrease in lease termination fees
from $5.7 million in 2000 to $1.1 million in 2001. Lease termination fees in
2000 included a non-recurring $4.0 million fee received in connection with the
sale of the CVS Warehouse and Distribution Center. Base rents increased due to a
$2.1 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 sold in the third quarter of 2000.
Base rents also increased due to a $1.4 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 $7.0 million for the nine-month period
ended September 30, 2001. This entire amount represents an increase in revenues
in 2001 because PRI was not consolidated in 2000. Interest and other income
decreased $0.7 million because interest income on a loan with PRI is eliminated
in 2001 due to the consolidation of PRI effective January 1, 2001.
Property operating expenses increased by $0.9 million or 4% to $24.6 million for
the nine-month period ended September 30, 2001 from $23.7 million for the
nine-month period ended September 30, 2000. Payroll expense increased $0.3
million due to annual salary increases. Real estate and other taxes increased by
$0.4 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
$0.1 million due to increased repairs and maintenance expenses.
Depreciation and amortization expense increased by $2.5 million to $13.2 million
for the nine-month period ended September 30, 2001 from $10.7 million for the
nine-month period ended September 30, 2000. Depreciation and amortization
expense for retail properties increased by $1.7 million. Of that amount, $0.8
million was due to two properties under development in 2000 now placed in
service, partially offset by a decrease of $0.2 million due to the sale of two
properties in 2000. Retail depreciation increased by $1.1 million for properties
owned during both periods primarily because of the 2000 renovation at Dartmouth
Mall. Depreciation and amortization expense for multifamily properties increased
by $0.8 million due to a higher asset base for properties owned during both
periods.
General and administrative expenses increased by $13.0 million to $16.4 million
for the nine-month period ended September 30, 2001 from $3.4 million for the
nine-month period ended September 30, 2000. The primary reason for the increase
is the consolidation of PRI in 2001, which accounted for $11.3 million of the
increase. General and administrative expenses also increased primarily due to a
$1.4 million increase in payroll and benefits expenses as well as minor
increases in several other expense categories totaling $0.3 million in the
aggregate.
Interest expense increased by $1.6 million to $19.2 million for the nine-month
period ended September 30, 2001 from $17.6 million for the nine-month period
ended September 30, 2000. Retail mortgage interest increased by $1.1 million due
to properties 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 $0.7 million due to a
larger amount outstanding under the Credit Facility and due to development
assets being placed into service
Equity in loss of PRI was $5.0 million in the first nine-months of 2000. There
was no corresponding amount in the 2001 period due to the consolidation of PRI
in 2001.
Equity in income of partnerships and joint ventures decreased by $1.1 million to
$4.2 million in the nine-month period ended September 30, 2001 from $5.3 million
in the nine-month period ended September 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 $10.3 million,
respectively, in the first nine-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, the CVS
Warehouse and Distribution Center, Valley View Shopping Center and Forestville
Shopping Center in 2000.
Same Store Properties
Retail sector operating income, excluding the impact of lease termination fees
for the three and nine-month periods ended September 30, 2001 for the properties
owned since January 1, 2000 (the "Same Store Properties"), increased by $0.4
million and $1.8 million or 4.0% and 5.3% over corresponding periods in 2000 due
to new and renewal leases at higher rates, higher occupancy and higher
percentage rents in the 2001 period as compared to the 2000 period. Multifamily
sector same store growth was approximately $0.4 million and $0.6 million or 5.4%
and 2.6% for the three and nine-month period ended September 30, 2001 due to
revenue increases of 5.6% and 4.5% which were partially offset by increases in
real estate taxes, utilities, turnover expenses, repairs and maintenance and
insurance costs.
Set forth below is a schedule comparing the net operating income (excluding the
impact of lease termination fees) for the Same Store Properties for the three
and nine-months ended September 30, 2001, as compared to the three and
nine-months ended September 30, 2000.
(In thousands)
Three Months Ended Nine-months Ended
---------------------------------- ------------------------------
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
------------- ------------- ------------- -------------
Retail Sector:
Revenues $ 16,251 $ 15,759 $ 49,693 $ 47,382
Property operating expenses 4,762 4,710 14,552 13,997
------------- ------------- ------------- -------------
Net operating income $ 11,489 $ 11,049 $ 35,141 $ 33,385
============= ============= ============= =============
Multifamily Sector:
Revenues $ 14,216 $ 13,457 $ 42,190 $ 40,386
Property operating expenses 5,937 5,602 17,605 16,429
------------- ------------- ------------- -------------
Net operating income $ 8,279 $ 7,855 $ 24,585 $ 23,957
============= ============= ============= =============
Cash Flows
During the nine-month period ended September 30, 2001, PREIT generated $25.7
million in cash flow from operating activities. Investing activities during the
nine-month period ended September 30, 2001 used cash of $15.2 million resulting
from (i) $20.1 million in investments in property under development, (ii) $6.2
million in investments in wholly-owned real estate assets, (iii) $0.9 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 $7.6
million. Financing activities used cash of $9.5 million and included (i) a
mortgage borrowing of $15.0 million and (ii) proceeds from common shares issued
of $45.2 million, offset by (iii) $23.0 million of distributions to shareholders
and OP unit holders, (iv) net Credit Facility repayments of $22.3 million, (v)
principal installments on mortgages of $3.3 million, (vi) construction loan
repayments of $20.6 million and (vii) payment of deferred financing costs of
$0.4 million.
Contingent Liabilities
PREIT, along with certain of its joint venture partners, has guaranteed debt
totaling $5.8 million.
Also, PREIT and its joint venture partner jointly and severally guaranteed the
construction loan payable on a development project. The balance of the loan at
September 30, 2001 was $62.4 million and the remaining commitment from the
lender was $3.6 million for a total credit line of $66.0 million. The
construction loan was subsequently repaid from a mortgage financing in October
2001.
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
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.
PART II
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None.
Item 5. Other Information
-----------------
PREIT issued a press release on November 8, 2001 containing financial
information for the nine-month period ended September 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 November 8, 2001 containing financial
information for the nine-month period ended September 30,
2001.
(b) Reports on Form 8-K
Current Report on Form 8-K dated July 3, 2001 and filed on
July 1, 2001.
Current Report in Form 8-K dated July 10, 2001 and filed on
July 11, 2001.
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)
Exhibit Index
-------------
Exhibit
Number Description
- ------- -----------
99 Press Release, issued November 8, 2001, containing financial
information for the nine-month period ended September 30, 2001