SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________to ____________
Commission File No. 1-6300
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
(Exact name of Registrant as specified in its charter)
Pennsylvania 23-6216339
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
The Bellevue 19102
200 S. Broad St. (Zip Code)
Philadelphia, Pennsylvania
(address of principal executive office)
Registrant's telephone number, including area code: (215) 875-0700
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class Name of each exchange on which registered
------------------- -----------------------------------------
(1) Shares of Beneficial Interest, par value $1.00 per share New York Stock Exchange
(2) Rights to Purchase Shares of Beneficial Interest New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None
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 such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K |_|.
The aggregate market value, as of March 20, 2002, of the voting shares held by
non-affiliates of the Registrant was $415,426,237. (Aggregate market value is
estimated solely for the purposes of this report and shall not be construed as
an admission for the purposes of determining affiliate status.)
On March 20, 2002, 16,054,145 Shares of Beneficial Interest, par value $1.00 per
share (the "Shares"), of Pennsylvania Real Estate Investment Trust were
outstanding.
Documents Incorporated by Reference
The Registrant's definitive proxy statement for its May 9, 2002 Annual Meeting
is incorporated by reference in Part III hereof.
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
TABLE OF CONTENTS
PART I
Page
----
Item 1. Business.........................................................................................3
Item 2. Properties......................................................................................17
Item 3. Legal Proceedings...............................................................................17
Item 4. Submission of Matters to a Vote of Security Holders.............................................17
PART II
Item 5. Market for Our Common Equity and Related Shareholder Matters....................................18
Item 6. Selected Financial Data.........................................................................19
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...........19
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.......................................26
Item 8. Financial Statements and Supplementary Data.....................................................26
Item 9. Disagreements on Accounting and Financial Disclosure............................................26
PART III
Item 10. Trustees and Executive Officers of the Trust....................................................27
Item 11. Executive Compensation..........................................................................27
Item 12. Security Ownership of Certain Beneficial Owners and Management..................................27
Item 13. Certain Relationships and Related Transactions..................................................27
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................................28
2
Item 1. Business
Pennsylvania Real Estate Investment Trust, a Pennsylvania business trust
("PREIT"), conducts substantially all of its operations through PREIT
Associates, L.P. ("PREIT Associates"), a Delaware limited partnership. As used
in this report, unless the context requires otherwise, the terms "Company,"
"we," "us," and "our" includes PREIT, PREIT Associates and their subsidiaries
and affiliates, including PREIT-RUBIN, Inc. ("PREIT-RUBIN" or "PRI", formerly
The Rubin Organization, Inc.) and PREIT Services, LLC ("PREIT Services"), which
together comprise our commercial property development and management business.
The Company
PREIT, which is organized as a business trust under Pennsylvania law, is a fully
integrated, self-administered and self-managed real estate investment trust,
founded in 1960, which acquires, develops, redevelops and operates retail,
multifamily and industrial properties.
As of December 31, 2001, we owned interests in 22 shopping centers containing an
aggregate of approximately 10.9 million square feet, 19 multifamily properties
containing an aggregate of 7,242 units and 4 industrial properties with an
aggregate of approximately 0.3 million square feet. We also own interests in 4
shopping centers currently under development, which we expect to contain an
aggregate of approximately 1.3 million square feet upon completion. We cannot
assure you that all 4 development properties will be completed successfully.
We also provide management, leasing and development services to 19 retail
properties containing approximately 8.3 million square feet, 7 office buildings
containing approximately 1.8 million square feet and 2 multifamily properties
containing 137 units for affiliated or third-party owners.
Recent Developments
In March 2002, we refinanced a mortgage secured by our Camp Hill multifamily
property located in Camp Hill, Pennsylvania. The mortgage amount was $12.8
million, has a 10 year term and bears interest at the rate of 7.015% per annum.
Our Structure
PREIT Associates holds substantially all of our assets. As the sole general
partner of PREIT Associates, we have the exclusive power to manage and conduct
PREIT Associates' business, subject to limited exceptions. As of December 31,
2001, we owned approximately 90.1% of PREIT Associates. We anticipate that all
of our acquisitions of interests in real estate will be owned, directly or
indirectly, by PREIT Associates.
3
The following is a diagram of our structure as of December 31, 2001, which
reflects the January 1, 2001 acquisition by PREIT Associates of the minority
interest in PREIT-RUBIN:
+--------------------------+
| Pennsylvania Real Estate |
| Investment Trust (1) |
+--------------------------+
|90.1%
| +------------------+
| | Minority |
| 9.9%-------------| Limited (2) |
| | | Partners |
| | +------------------+
| |
| |
| |
+--------------------------+
+-------------------------| PREIT Associates, L.P. |-------------------+
| +--------------------------+ |
| | |
| | |
| | |
| | |
+--------------------+ +--------------------+ +--------------------+
| PREIT | | (2) | | PREIT- |
| Services LLC | | 49 Properties | | RUBIN, Inc |
+--------------------+ +--------------------+ +--------------------+
- -----------------
(1) Sole general partner of PREIT Associates. Of our 90.1% interest in
PREIT Associates, we hold 99.99% of our units of limited partnership
interest ("Units") as a limited partner and 0.01% as the sole general
partner.
(2) Includes an aggregate of 1,138,758 Units, 6.9% of the Units
outstanding at December 31, 2001, owned by the persons who were
shareholders and affiliates of The Rubin Organization before our
acquisition of The Rubin Organization. Under the terms of our
acquisition of The Rubin Organization, these individuals have the
right to receive up to 302,500 additional Units in respect of their
former ownership interest in The Rubin Organization, depending on our
adjusted funds from operations over the one year, nine month period
commencing on January 1, 2001, until September 30, 2002 and also to
receive additional Units in respect of their interest in other
properties we acquired rights to as part of the acquisition. Although
not yet issued, the former shareholders and affiliates of The Rubin
Organization are entitled to 167,500 units for the 12 month period
from January 1, 2001 through December 31, 2001.
(3) Interests in some of these properties are owned directly by PREIT
under arrangements in which the entire economic benefit of ownership
has been pledged to PREIT Associates, rather than being owned directly
by PREIT Associates. PREIT Associates' economic interest in these
properties ranges from 0.01% to 100%.
Retail Properties
As of December 31, 2001, we had interests in 22 retail properties containing an
aggregate of approximately 10.9 million square feet. PREIT Services currently
manages 12 of these properties, all of which are wholly owned by the Company.
PREIT-RUBIN manages 3 of the properties, each of which is owned by a joint
venture in which the Company is a party. The remaining 7 properties are also
owned by joint ventures in which the Company is a party and are managed by our
joint venture partners, or by an entity we or our joint venture partners
designate, and in many instances a change in the management of the property
requires the concurrence of both partners. Fourteen of the 22 retail properties
(containing an aggregate of approximately 7.9 million square feet) are located
in Pennsylvania, two (containing an aggregate of approximately 0.3 million
square feet) are located in Florida, two (containing an aggregate of
approximately 0.8 million square feet) are located in South Carolina, and one is
located in each of Delaware, Maryland, Massachusetts and New Jersey (containing
an aggregate of approximately 1.8 million square feet).
4
The following table presents information regarding our retail properties as of
December 31, 2001:
Total
Leased & Percent
Total Owned Occupied Leased &
Percent Year Built or Square Square GLA(3) Occupied
Real Property Location Owned* Renovated(1) Feet(2) Feet(2) Square Ft. (4) Anchors/Primary Tenants
- ------------- -------- ------- ------------- ------- ------- ---------- --- -----------------------
Lehigh Valley Mall Allentown, PA 50% 1977/1996 1,051,153 679,167 666,930 98% JC Penney, Strawbridges,
Macy's
The Court at Langhorne, PA 50% 1996 704,486 456,862 402,766 88% Dick's Sporting Goods, Best
Oxford Valley Buy, Pharmor, The Home
Depot, BJ Wholesale Club
Dartmouth Mall North 100% 1971/1987/2000 621,470 621,470 578,853 93% JC Penney, Sears, Ames,
Dartmouth, MA General Cinema
Festival at Exton Exton, PA 100% 1991 145,009 145,009 140,312 97% Sears Hardware, Clemen's
Whitehall Mall Allentown, PA 50% 1964/82/98/99 533,721 533,721 521,552 98% Sears, Kohl's, Bed, Bath &
Beyond
Magnolia Mall Florence, SC 100% 1979/1992 579,064 579,064 561,754 97% JC Penney, Sears, Belk,
Rose's
Laurel Mall Hazleton, PA 40% 1973/1995 558,801 558,801 532,518 95% Boscov's, Kmart, JC Penney
Palmer Park Mall Easton, PA 50% 1972/1998 446,241 446,241 418,179 94% The Bon-Ton, Boscov's
Mandarin Corners Jacksonville, FL 100% 1986/1994 240,009 216,161 192,928 89% Walmart, Marshall's
Springfield Park Springfield, PA 50% 1963/1997/1998 268,500 122,831 84,769 69% Target, Bed Bath & Beyond
I & II(5)
Rio Mall Rio Grande, NJ 60% 1973/1992 158,937 158,937 158,281 100% Kmart, Staples
Crest Plaza Allentown, PA 100% 1959/1991 152,294 152,294 83,356 55% Weis Market, Eckerd Drug
Store
South Blanding Jacksonville, FL 100% 1986 106,857 106,857 105,857 99% Food Lion, Staples
Village
Northeast Tower Philadelphia, PA 89% 1997/1998 472,296 433,618 310,460 72% Home Depot, Dick's Sporting
Center (6)(7) Goods
Prince Georges Plaza Hyattsville, MD 100% 1959/1990 756,050 756,050 653,886 87% JC Penney, Hecht's
Red Rose Commons Lancaster, PA 50% 1998 463,042 263,452 261,291 99% Weis Market, Home Depot
Florence Commons Florence, SC 100% 1991 229,515 104,134 55,825 54% Goody's Family Clothings
Christiana Power Newark, DE 100% 1998 302,409 302,409 299,326 99% Costco, Dick's Sporting
Center Phase I Goods
Paxton Towne Harrisburg, PA 100% 2001 714,884 441,796 365,246 83% Target, Kohl's, Bed, Bath &
Centre(7) Beyond, Costco
Creekview Shopping Warrington, PA 100% 2001 424,786 135,870 67,880 50% Target, Lowe's
Center(7)(8)
Metroplex Shopping Plymouth 50% 2001 778,190 477,461 477,461 100% Target, Lowe's, Giant
Center(7) Meeting, PA
Willow Grove Park(9) Willow Grove, 0.01% 1982/2001 1,203,340 561,479 548,584 98% Sears, Bloomingdales,
PA --------- ------- ------- --- Strawbridge's, Macy's
Total Weighted Average (22 properties) 10,911,054 8,253,684 7,488,014 91%
========== ========= ========= ===
* By PREIT Associates; we own approximately 90.1% of PREIT Associates.
(1) Year initially completed and, where applicable, the most recent year in
which the property was renovated substantially or an additional phase of
the property was completed.
(2) Total Square Feet includes space owned by the tenant; Owned Square Feet and
Percent Leased excludes such space.
(3) GLA stands for Gross Leasable Area.
(4) Percent Leased is calculated as a percent of Owned Square Feet for which
leases were in effect as of December 31, 2001.
(5) With respect to Phase I, we have an undivided one-half interest in one of
three floors in a freestanding department store.
(6) We expect to acquire the remaining 11% ownership interest in 2002.
(7) Property is income producing as of 12/31/01, with development activity in
2001.
(8) Development was completed in January 2002, property is 100% leased and
occupied as of January 31, 2002.
(9) The percentage of our ownership interest in Willow Grove Park is nominal
until the satisfaction of certain conditions.
5
The following table presents information regarding the primary tenant in each of
our retail properties:
Primary Tenant, Square Footage and Annualized Base Rent
as of December 31, 2001
Number of GLA of Annualized
Primary Tenant Stores Stores Leased Base Rent
- -------------- ------ ------------- ---------
The Limited Stores, Inc. (1) 28 181,966 $4,114,853
The Gap, Inc./Old Navy (1) 14 193,199 3,461,647
Dick's Sporting Goods 4 199,576 2,967,688
Bed Bath & Beyond 4 156,909 2,135,399
Barnes & Noble/B. Dalton 5 92,933 1,761,570
Best Buy 2 105,330 1,751,845
PetSmart 4 104,797 1,706,953
Venator Group 17 51,286 1,608,931
Circuit City 3 97,509 1,568,020
Boscov's 2 375,110 1,436,000
Toys R Us 4 132,890 1,389,214
Costco 1 140,814 1,300,588
Home Depot 1 136,633 1,250,000
Giant 1 67,185 1,228,142
Kmart 2 233,587 1,211,008
Weis Markets 3 158,075 1,019,908
Sears 6 609,118 887,614
Payless Shoe Source 13 37,567 867,156
Trans World Entertainment Corp. 8 32,450 851,530
Office Max 2 60,926 843,014
- --------- -----------
Total 124 3,167,860 $33,361,080
=== ========= ===========
(1) Includes lease(s) in which the tenant pays rent based on a percentage of
sales in lieu of minimum rent. No annualized base rent has been estimated
for these leases.
6
The following table presents, as of December 31, 2001, scheduled lease
expirations with respect to our retail properties for the next 10 years,
assuming that none of the tenants exercise renewal options or termination
rights:
Percentage of
Total
Annualized Approximate Average Base Leased GLA (1)
Number of Base Rent GLA Rent Per Square Represented By
Year Ending Leases of Expiring of Expiring Foot of Expiring
December 31 Expiring Leases Leases Expiring Leases Leases
----------- -------- ------ ------ --------------- ------
Prior (2) 38 $828,848 53,932 $15.37 0.72%
2002 89 4,514,188 436,082 10.35 5.82%
2003 81 4,910,546 239,216 20.53 3.19%
2004 78 7,670,776 450,107 17.04 6.01%
2005 86 8,078,608 452,679 17.85 6.05%
2006 87 8,455,042 659,451 12.82 8.81%
2007 53 5,648,178 579,929 9.74 7.74%
2008 54 6,161,573 667,155 9.24 8.91%
2009 48 5,640,675 281,199 20.06 3.76%
2010 65 6,226,790 275,504 22.60 3.68%
2011 71 13,522,685 885,055 15.28 11.82%
-- ---------- --------- ------- ------
750 $71,657,909 4,980,309 $14.39 66.51%
=== =========== ========= ======= ======
(1) Percentage of total leased GLA is calculated by dividing the approximate
GLA of expiring leases by the total leased GLA, which is 7,488,014.
(2) Includes all tenant leases which have already expired and are on a
month-to-month basis.
7
Development Properties
We have rights in 4 development properties -Christiana Power Center Phase II,
Newark, DE; New Garden, New Garden Township, PA; South Brunswick, South
Brunswick, NJ; and Pavilion at Market East, Philadelphia, PA.
The following table presents information, as of December 31, 2001, regarding the
development properties:
Planned Planned
Ownership Approximate Owned Expected
Development Property Location Interest* Square Feet Square Feet Status Completion
- -------------------- -------- --------- ----------- ----------- ------ ----------
Christiana Power Center II Newark, DE 100% 355,670 355,670 Predevelopment 3Q04
New Garden New Garden 100% 479,034 479,034 Predevelopment 1Q04
Township, PA
South Brunswick South Brunswick, NJ 100% 210,325 210,325 Predevelopment 3Q03
Pavilion at Market East Philadelphia, PA 50% 297,314 148,657 Predevelopment Uncertain
------- -------
TOTAL: 1,342,343 1,193,686
========= =========
* By PREIT Associates; we currently own approximately 90.1% of PREIT Associates.
We acquired our rights to Christiana Power Center Phase II when we acquired The
Rubin Organization, and we hold our rights subject to a contribution agreement
executed in connection with that acquisition. The contribution agreement
provides for PREIT Associates to issue Units to former affiliates of The Rubin
Organization as consideration for their rights in this property according to the
formula described below. As Christiana Power Center Phase II is completed and
leased, it will be valued based on the following principles:
o all space leased and occupied by credit-worthy tenants will be valued
at ten times adjusted cash flow, computed as specified in the
contribution agreement;
o all space leased to a credit-worthy tenant but unoccupied will be
valued at ten times adjusted cash flow calculated as though the space
was built and occupied as shown in the property's budget; and
o space not leased or occupied, whether built or unbuilt, will be valued
as mutually agreed upon or, failing agreement, by appraisal.
Additional provisions exist for valuing triple net lease/purchase arrangements.
No consideration will be paid until the earlier of:
o the completion of the property;
o our abandonment of the project; or
o September 30, 2002.
If the project is not completed by September 30, 2002, we will value the project
and PREIT Associates will issue Units equal in value to 50% of the amount, if
any, by which the value of PREIT Associates' interest in the project exceeds the
aggregate cost of the project at the time of completion. Negative amounts
arising in connection with the completion or abandonment of the project will be
netted back against earlier completed projects in order of completion. Units
issued in respect of the foregoing valuations of the project will be valued at
the greater of (1) the average of the closing prices of the Shares for the
twenty trading days before the date of the completion valuation and (2) $19.00.
If the average of the closing prices of the shares on the 20 trading days before
each valuation is less than $19.00, PREIT Associates will issue additional
Units, of a new class but equal in value to those Units not issued because of
the operation of the pricing limitation.
Multifamily Properties
We have interests in 19 multifamily properties with an aggregate of 7,242 units.
In 2001, we managed 14 of these multifamily properties, and the remaining 5
multifamily properties were managed by one or more of our partners. Effective
January 1, 2002, we began managing one of the properties that was previously
managed by our partner in the property. If our partners currently managing the
remaining 4 multifamily properties become unable or unwilling to perform their
obligations or responsibilities, we are capable of managing these properties
with our own staff.
8
The following table presents information, as of December 31, 2001, regarding the
19 multifamily properties in which we have an interest:
Approx.
Year Number Rentable 2001
Multifamily Percent Built/ Of Area Percent Average Rent
Property Location Owned* Renov(1) Units(2) (Sq. Ft.) Occupied per Unit
- -------- -------- ------ -------- -------- --------- -------- --------
Emerald Point Virginia Beach, VA 100% 1965/1993/2000 862 846,000 94% $618
Boca Palms Boca Raton, FL 100% 1970/1994 522 673,000 92% 1,004
Lakewood Hills Harrisburg, PA 100% 1972/1988 562 630,000 95% 690
Regency Lakeside Omaha, NE 50% 1970/1990 433 492,000 94% 1,004
Kenwood Gardens Toledo, OH 100% 1951/1989 504 404,000 92% 502
Fox Run Bear, DE 100% 1988 414 359,000 92% 770
Eagle's Nest Coral Springs, FL 100% 1989 264 343,000 96% 988
Palms of Pembroke Pembroke Pines, 100% 1989/1995 348 340,000 97% 964
FL
Hidden Lakes Dayton, OH 100% 1987/1994 360 306,000 91% 630
Cobblestone Pompano Beach, FL 100% 1986/1994 384 297,000 95% 799
Countrywood Tampa, FL 50% 1977/1997 536 295,000 96% 536
Shenandoah Village West Palm Beach, 100% 1985/1993 220 286,000 96% 996
FL
Marylander Baltimore, MD 100% 1951/1989 507 279,000 99% 574
Camp Hill Plaza Camp Hill, PA 100% 1967/1994 300 277,000 92% 721
Fox Run, Warminster Warminster, PA 50% 1969/1992 196 232,000 98% 732
Cambridge Hall West Chester, PA 50% 1967/1993 233 186,000 98% 723
Will-O-Hill Reading, PA 50% 1970/1986 190 152,000 97% 607
2031 Locust Street Philadelphia, PA 100% 1929/1986 87 89,000 100% 1,408
The Woods Ambler, PA 100% 1974 320 235,000 95% 875
------ --------- --- ----
Total/Weighted Average (19 properties) 7,242 6,721,000 95% $749
====== ========= === ====
* By PREIT Associates; we currently own approximately 90.1% of PREIT Associates.
(1) Year initially completed and most recently renovated, and where
applicable, year(s) in which additional phases were completed at the
property.
(2) Includes all apartment and commercial units occupied or available for
occupancy at December 31, 2001.
9
Other Properties
We own four industrial properties that we acquired shortly after our
organization. We have not acquired any property of this type in over 28 years.
We do not consider these properties to be strategically held assets. These
properties, in the aggregate, contributed less than 1% of our net rental income
in our fiscal year ended December 31, 2001. We have been implementing a program
providing for the orderly disposition of these assets.
The following table shows information, as of December 31, 2001, regarding the
remaining four industrial properties:
Year Percent Square Percentage
Property and Location Acquired Owned* Feet Leased
- --------------------- -------- ------ ---- ------
Warehouse 1962 100% 12,034 100%
Pennsauken, NJ
Warehouse 1962 100% 16,307 100%
Allentown, PA
Warehouse 1963 100% 29,450 100%
Pennsauken, NJ
Warehouse and Plant 1963 100% 197,000 100%
Lowell, MA
-------
Total 254,791
=======
* By PREIT Associates; we currently own approximately 90.1% of PREIT Associates.
Right of First Refusal Properties.
We obtained rights of first refusal with respect to the interests of some of the
former affiliates of The Rubin Organization, after our acquisition of The Rubin
Organization, in the three retail properties listed below:
Percentage Interest
Gross Leasable Subject to the Right
Property/Location Sq. Ft. of First Refusal
- ----------------- ------- ----------------
Christiana Mall, 1,101,000 (1)
Newark, DE
Cumberland Mall, 829,000 50%
Vineland, NJ
Fairfield Mall, (2) 50%
Chicopee, MA
(1) The interest subject to the right of first refusal is subject to adjustment
in connection with the refinancing of the participating mortgage that
currently encumbers this property.
(2) The property is currently undergoing a renovation. A portion of the
property was sold in 2001. The post-renovation Gross Leasable area of the
remaining property has not been determined.
Acquisition of The Rubin Organization
On September 30, 1997, we completed a series of related transactions in which:
o we transferred substantially all of our real estate interests to PREIT
Associates;
o PREIT Associates acquired all of the nonvoting common shares of The
Rubin Organization, Inc., a commercial real estate development and
management firm (renamed PREIT-RUBIN, Inc.), constituting 95% of the
total equity of PREIT-RUBIN in exchange for the issuance of 200,000
Class A units of limited partnership interest in PREIT Associates
("Units") and a contingent obligation to issue up to 800,000
additional Units over the next five years, discussed below; and
10
o PREIT Associates acquired the interests of some of the former
affiliates of The Rubin Organization in The Court at Oxford Valley,
Magnolia Mall, North Dartmouth Mall, Springfield Park, Hillview
Shopping Center and Northeast Tower Center at prices based upon a
pre-determined formula; and subject to related obligations, in
Christiana Power Center (Phase I and II), Red Rose Commons and
Metroplex Shopping Center. Subsequent to September 30, 1997, by mutual
agreement with the former affiliates of The Rubin Organization, PREIT
Associates did not acquire Hillview Shopping Center.
The 800,000 additional Units discussed above are to be issued over the
five-year period beginning October 1, 1997 and ending September 30, 2002
according to a formula based on our adjusted funds from operations per share
during the five year period. The contribution agreement established "hurdles"
and "targets" during specified "earn-out periods" to determine whether, and to
what extent, the contingent Units will be issued. For the period beginning
October 1, 1997 through December 31, 2001, 665,000 contingent OP units had been
earned, resulting in an additional purchase price of approximately $12.9
million. Under the contribution agreement, the hurdles and targets were adjusted
on December 29, 1998 (after the issuance of 32,500 OP units for the period ended
December 31, 1997) to account for the dilutive effect of our December 1997
public offering, as follows:
Per Share Adjusted
FFO Base No. Max. No.
Contingent Contingent
Earnout Period Hurdle Target TRO OP Units TRO OP Units
- -------------- ------ ------ ------------ ------------
1-1-98 to 12-31-98 $2.13 $2.39 20,000 130,000
1-1-99 to 12-31-99 $2.30 $2.58 57,500 167,500
1-1-00 to 12-31-00 $2.43 $2.72 57,500 167,500
1-1-01 to 12-31-01 $2.72 $3.03 57,500 167,500
1-1-02 to 9-30-02 $2.19 $2.43 52,500 135,000
------- -------
Total 245,000 767,500
======= =======
Following our July 2001 public offering, the hurdle and target for the
2001 period were further adjusted to $2.63 and $2.94, respectively, to account
for the dilutive effect of our July 2001 public offering.
In general:
o if the hurdle for any earn-out period is not met, no contingent Units
will be issued in respect of that period;
o if the target for any earn-out period is met, the maximum number of
contingent Units for that period will be issued; and
o if adjusted funds from operations for any earn-out period is between
the hurdle and the target for the period, PREIT Associates would issue
the base contingent Units for that period, plus a pro rata portion of
the number of contingent Units by which the maximum contingent Units
exceeded the base contingent Units for that period equal to the amount
by which the per share adjusted funds from operations exceeded the
hurdle but was less than the target.
The foregoing is subject to the right to carry back to prior earn-out periods
amounts in excess of the target in the current period, thereby earning
additional contingent Units, but never more than the maximum aggregate amount,
and to carry forward into the next, but only the next, earn-out period amounts
of per share adjusted funds from operations which exceed the target in any such
period, provided, in all cases, no amounts in excess of the target in any period
may be applied to result in the issuance of additional contingent Units in any
other period until first applied to eliminate all shortfalls from targets in all
prior periods.
The contribution agreement provides that if we declared a share split, share
dividend or other similar change in our capitalization, the "hurdle" and
"target" levels will be proportionately adjusted. The contribution agreement
also provides for the creation of a special committee of independent Trustees to
consider, among other matters, whether other equitable adjustments, either
upward or downward, should be effected in the "hurdle" and "target" levels to
reflect:
o our incurrence of non-project specific indebtedness or our raising of
equity capital;
o our breach of any of our representations or warranties in the
contribution agreement which may adversely affect adjusted funds from
operations; and
o the effect on adjusted funds from operations of any adverse judgment
in litigation pending against us.
11
Through December 31, 2001, 465,000 of the 767,500 units described above have
been issued, and another 167,500 units have been earned, but not yet issued. For
the nine month period commencing January 1, 2002 and ending September 30, 2002,
we may be required to issue the remaining 135,500 Units, depending on our per
share "adjusted funds from operations" during this period. "Adjusted funds from
operations" is defined as our consolidated net income for any period, plus, to
the extent deducted in computing such net income:
o depreciation attributable to real property;
o certain amortization expenses;
o the expenses of the acquisition of The Rubin Organization;
o losses on the sale of real estate;
o material write-downs on real estate, including predevelopment costs;
o material prepayment fees; and
o rents currently due in excess of rents reported, minus:
o rental revenue reported in excess of amounts currently due;
o lease termination fees; and
o gains on the sale of real estate.
In connection with adjusting the hurdle and target for the 2001 period as
discussed above, the special committee also indicated that it will consider a
request to adjust the hurdle and target for the 2002 period in order to account
for the dilutive effect of our July 2001 public offering.
Risk Factors
Real Estate Industry
We face risks associated with local real estate conditions in areas where we own
properties
We may be affected adversely by general economic conditions and local real
estate conditions. For example, an oversupply of retail space or apartments in a
local area or a decline in the attractiveness of our properties to shoppers,
residents or tenants would have a negative effect on us.
Other factors that may affect general economic conditions or local real estate
conditions include:
o population trends
o income tax laws
o availability and costs of financing
o construction costs
o weather conditions that may increase or decrease energy costs
We may be unable to compete with our larger competitors and other alternatives
to our portfolio of properties
The real estate business is highly competitive. We compete for interests in
properties with other real estate investors and purchasers, many of whom have
greater financial resources, revenues and geographical diversity than we have.
Furthermore, we compete for tenants with other property owners. Our apartment
properties portfolio competes with providers of other forms of housing, such as
single family housing. Competition from single family housing increases when
lower interest rates make mortgages more affordable. All of our shopping center
and apartment properties are subject to significant local competition. Further,
our portfolio of retail properties faces competition from internet-based
operations that may be capable of providing lower-cost alternatives to
customers.
We are subject to significant regulation that restricts our activities
Local zoning and use laws, environmental statutes and other governmental
requirements restrict our expansion, rehabilitation and reconstruction
activities. These regulations may prevent us from taking advantage of economic
opportunities.
Legislation such as the Americans with Disabilities Act may require us to modify
our properties. Future legislation may impose additional requirements. We cannot
predict what requirements may be enacted.
Our Properties
We face risks that may restrict our ability to develop properties
There are risks associated with our development activities in addition to those
generally associated with the ownership and operation of established shopping
centers and multifamily properties. These risks include:
o expenditure of money and time on projects that may never be completed
o higher than estimated construction costs
o late completion because of unexpected delays in zoning approvals,
other land use approvals, construction or other factors
outside of our control
o failure to obtain zoning, occupancy or other governmental approvals
12
The risks described above are compounded by the fact that we must distribute 90%
of our taxable income in order to maintain our qualification as a REIT. As a
result of these distribution requirements, new developments are financed
primarily through lines of credit or other forms of construction financing.
Because we incur debt to finance the developments, our loss could exceed our
equity investment in these developments.
Furthermore, we must acquire and develop suitable high traffic retail sites at
costs consistent with the overall economics of the project. Because retail
development is extremely competitive, we cannot assure you that we can contract
for appropriate sites within our geographic markets.
Some of our properties are old and in need of maintenance and/or renovation
Some of the properties in which we have an interest were constructed or last
renovated more than 10 years ago. Older properties may generate lower rentals or
may require significant capital expense for renovations. More than forty percent
of our apartment communities have not been renovated in the last ten years. Some
of our apartments lack amenities that are customarily included in modern
construction, such as dishwashers, central air conditioning and microwave ovens.
Some of our facilities are difficult to lease because they are too large, too
small or inappropriately proportioned for today's market. We generally consider
renovation of properties when renovation will enhance or maintain the long-term
value of our properties.
We may be unable to successfully integrate and effectively manage the properties
we acquire
Subject to the availability of financing and other considerations, we intend to
continue to acquire interests in properties that we believe will be profitable
or will enhance the value of our portfolios. Some of these properties may have
unknown characteristics or deficiencies. Therefore, it is possible that some
properties will be worth less or will generate less revenue than we believe at
the time of acquisition. It is also possible that the operating performance of
some of our properties will decline.
To manage our growth effectively, we must successfully integrate new
acquisitions. We cannot assure you that we will be able to successfully
integrate or effectively manage additional properties.
When we acquire properties, we also take on other risks, including:
o financing risks (some of which are described below)
o the risk that we will not meet anticipated occupancy or rent levels
o the risk that we will not obtain required zoning, occupancy and other
governmental approvals
o the risk that there will be changes in applicable zoning and land use
laws that affect adversely the operation or
development of our properties
We may be unable to renew leases or relet space as leases expire
When a lease expires, a tenant may refuse to renew it. We may not be able to
relet the property on similar terms, if we are able to relet the property at
all. We have established an annual budget for renovation and reletting expenses
that we believe is reasonable in light of each property's operating history and
local market characteristics. This budget, however, may not be sufficient to
cover these expenses.
We have been and may continue to be affected negatively by tenant bankruptcies
and leasing delays
At any time, a tenant may experience a downturn in its business that may weaken
its financial condition. As a result, our tenants may delay lease commencement,
fail to make rental payments when due, or declare bankruptcy. Any such event
could result in the termination of that tenant's lease and losses to us.
We receive a substantial portion of our shopping center income as rents under
long-term leases. If retail tenants are unable to comply with the terms of their
leases because of rising costs or falling sales, we may modify lease terms to
allow tenants to pay a lower rental or a smaller share of operating costs and
taxes.
For example, in 2001 we were impacted by bankruptcies of retail tenants under
multi-year lease agreements, including tenants expected to occupy space yet to
be constructed, such as Bradlees, Inc., which was scheduled to begin occupancy
on February 1, 2001 at Northeast Tower Center in Pennsylvania, and Lechter's,
Inc., which was scheduled to begin occupancy on July 1, 2001 at Creekview
Shopping Center in Warrington, Pennsylvania and existing tenants such as
Homeplace, Inc., which ceased paying rent on July 1, 2001 at The Court at Oxford
Valley in Langhorne, Pennsylvania. In addition, as a result of the weakening
economy, we entered into an agreement, which included payments to JC Penney
Company, Inc., to induce it to keep its store open at Prince George's Plaza in
Hyattsville, Maryland beyond the scheduled expiration of its lease in July 2001.
The amount of rent and expense reimbursements that we would have received under
the four lease agreements, as well as the cost of the inducement that we agreed
to pay, totaled $2.6 million in 2001. We have secured replacement tenants for
the Creekview Shopping Center and The Court at Oxford Valley spaces noted above,
with some tenants occupying the space as of December 31, 2001, and with others
expected to take possession of the space in 2002. We are currently negotiating
with a prospective tenant to occupy the space at Northeast Tower Center. We do
not anticipate that rent payments from this tenant will begin in 2002.
Future terrorist activity may have an adverse affect on our financial condition
and operating results.
Future terrorist attacks in the United States, such as the attacks that occurred
in New York and Washington, D.C. on September 11, 2001 and other acts of
terrorism or war, may result in declining economic activity, which could harm
the demand for and the value of our properties. A decrease in demand would make
it difficult for us to renew or re-lease our properties at lease rates equal
13
to or above historical rates. Terrorist activities also could directly impact
the value of our properties through damage, destruction or loss, and the
availability of insurance for such acts may be less, or cost more, which would
adversely affect our financial condition. To the extent that our tenants are
impacted by future attacks, their businesses similarly could be adversely
affected, including their ability to continue to honor their existing leases.
These acts may further erode business and consumer confidence and spending, and
may result in increased volatility in national and international financial
markets and economies. Any one of these events may decrease demand for real
estate, decrease or delay the occupancy of our new or renovated properties,
increase our operating expenses due to increased physical security for our
properties and limit our access to capital or increase our cost of raising
capital. We apply comprehensive planning and operational measures to enhance the
security of our employees, tenants and visitors at our properties. This effort,
a strong component of our operational program before September 11th, undergoes
regular review and,where necessary and appropriate, improvement and enhancement.
The need to enhance security measures and add additional security personnel at
our properties could increase the costs of operating our properties with a
materially adverse impact on our cash flow.
We face risks associated with PREIT-RUBIN's management of properties owned by
third parties
PREIT-RUBIN manages a substantial number of properties owned by third parties.
Risks associated with the management of properties owned by third parties
include:
o the property owner's termination of the management contract
o loss of the management contract in connection with a property sale
o non-renewal of the management contract after expiration
o renewal of the management contract on terms less favorable than
current terms
o decline in management fees as a result of general real estate market
conditions or local market factors
o claims of losses due to allegations of mismanagement
Coverage under our existing insurance policies may be inadequate to cover losses
We generally maintain insurance policies related to our business, including
casualty, general liability and other policies covering our business operations,
employees and assets. However, we could be required to bear all losses that are
not adequately covered by insurance, including terrorism coverage. Although we
believe that our insurance programs are adequate, we cannot assure you that we
will not incur losses in excess of our insurance coverage, if we are unable to
obtain insurance in the future at acceptable levels and reasonable cost, or that
compliance with covenants under our debt agreements will be met.
Insurance payouts resulting from the terrorist attacks occurring on September
11, 2001 could significantly reduce the insurance industry's reserves. Moreover,
the demand for higher levels of insurance coverage will likely increase because
of these attacks. As a result, we expect our insurance premiums to increase in
the future, which may have a materially adverse impact on our cash flow and
results of operations. Furthermore, we may not be able to purchase policies in
the future with coverage limits and deductibles similar to those that were
available before the attacks. Because it is not possible to determine what kind
of policies will be available in the future and at what prices, there is no
guarantee that we will be able to maintain our pre-September 11, 2001 insurance
coverage levels.
We face risks due to lack of geographic diversity
Most of our properties are located in the eastern United States. A majority of
the properties are located either in Pennsylvania or Florida. General economic
conditions and local real estate conditions in these geographic regions have a
particularly strong effect on us. Other REITs may have a more geographically
diverse portfolio and thus may be less susceptible to downturns in one or more
regions.
We face possible environmental liabilities
Current and former real estate owners and operators may be required by law to
investigate and clean up hazardous substances released at the properties they
own or operate. They may also be liable to the government or to third parties
for substantial property damage, investigation costs and cleanup costs. In
addition, some environmental laws create a lien on the contaminated site in
favor of the government for damages and costs the government incurs in
connection with the contamination. Contamination may affect adversely the
owner's ability to sell or lease real estate or to borrow with the real estate
as collateral.
From time to time, we respond to inquiries from environmental authorities with
respect to properties both currently and formerly owned by us. We cannot assure
you of the results of pending investigations, but we do not believe that
resolution of these matters will have a material adverse effect on our financial
condition or results of operations.
We have no way of determining at this time the magnitude of any potential
liability to which we may be subject arising out of unknown environmental
conditions or violations with respect to the properties we formerly owned.
Environmental laws today can impose liability on a previous owner or operator of
a property that owned or operated the property at a time when hazardous or toxic
substances were disposed of, or released from, the property. A conveyance of the
property, therefore, does not relieve the owner or operator from liability.
We are aware of certain environmental matters at some of our properties,
including ground water contamination, above-normal radon levels and the presence
of asbestos containing materials and lead-based paint. We have, in the past,
performed remediation of such environmental matters, and at December 31, 2001,
we are not aware of any significant remaining potential liability relating to
these environmental matters. We may be required in the future to perform testing
relating to these matters. We have reserved approximately $100,000 to cover such
costs if they are necessary. We cannot assure you that these amounts will be
adequate to cover future environmental costs.
14
At five properties in which we currently have an interest, and at two properties
in which we formerly had an interest, environmental conditions that have been or
continue to be investigated and have not been fully remediated. At five of these
properties, groundwater contamination has been found. At two of the properties
with groundwater contamination, the former owners of the properties are
remediating the groundwater contamination. Dry cleaning operations were
performed at three of the properties in which we currently or formerly had an
interest. At two of the dry cleaning properties, soil contamination has been
identified and groundwater contamination was found at the other dry cleaning
property. Although the properties with contamination arising from dry cleaning
operations may be eligible under a state law for remediation with state funds,
we cannot assure you that sufficient funds will be available under the
legislation to pay the full costs of any such remediation.
There are asbestos-containing materials in a number of our properties, primarily
in the form of floor tiles and adhesives. The floor tiles and adhesives are
generally in good condition. Fire-proofing material containing asbestos is
present at some of our properties in limited concentrations or in limited areas.
At properties where radon has been identified as a potential concern, we have
remediated or are performing additional testing. Lead-based paint has been
identified at certain of our multifamily properties and we have notified tenants
under applicable disclosure requirements. Based on our current knowledge, we do
not believe that the future liabilities associated with asbestos, radon and
lead-based paint at the foregoing properties will be material.
We have limited environmental liability coverage for the types of environmental
liabilities described above. The policy covers liability for pollution and
on-site remediation limited to $2 million for any single claim and further
limited to $4 million in the aggregate. The policy expires on December 1, 2002.
We are aware of environmental concerns at two of our development properties. Our
present view is that our share of any remediation costs necessary in connection
with the development of these properties will be within the budgets for
development of these properties (or, in the case of one of these properties, our
prospective partner, who also is the current owner of such property, will
address the environmental concerns prior to the commencement of the development
process), but the final costs and necessary remediation are not known and may
cause us to decide not to develop one or more of these properties.
Financing Risks
We face risks generally associated with our debt
We finance parts of our operations and acquisitions through debt. This debt
creates risks, including:
o rising interest rates on our floating-rate debt
o failure to prepay or refinance existing debt, which may result in
forced disposition of properties on disadvantageous terms
o refinancing terms less favorable than the terms of existing debt
o failure to meet required payments of principal and interest
We may not be able to comply with leverage ratios imposed by our credit facility
or to use our credit facility when credit markets are tight
We currently use a three-year secured credit facility for working capital,
acquisitions, construction of our development pipeline, renovations and capital
improvements to our properties. The credit facility is secured by 11 properties
and currently requires our operating partnership, PREIT Associates, to maintain
certain asset and income to debt ratios and minimum income and net worth levels.
As of December 31, 2001, we were in compliance with all debt covenants. If, in
the future, PREIT Associates fails to meet any one or more of these
requirements, we would be in default. The lenders, in their sole discretion, may
waive a default. We might secure alternative or substitute financing. We cannot
assure you, however, that we can obtain waivers or alternative financing. Any
default may have a materially adverse effect on our operations and financial
condition.
When the credit markets are tight, we may encounter resistance from lenders when
we seek financing or refinancing for some of our properties. If our credit
facility is reduced significantly or withdrawn, our operations would be affected
adversely. If we are unable to increase our borrowing capacity under the credit
facility, our ability to make acquisitions and grow would be affected adversely.
We cannot assure you as to the availability or terms of financing for any
particular property.
We have entered into agreements limiting the interest rate on portions of our
credit facility. If other parties to these agreements fail to perform as
required by the agreements, we may suffer credit loss.
We may be unable to obtain long-term financing required to finance our
partnerships and joint ventures
The profitability of each partnership or joint venture in which we are a partner
or co-venturer that has short-term financing or debt requiring a balloon payment
is dependent on the availability of long-term financing on satisfactory terms.
If satisfactory long-term financing is not available, we may have to rely on
other sources of short-term financing, equity contributions or the proceeds of
refinancing the existing properties to satisfy debt obligations. Although we do
not own the entire interest in connection with many of the properties held by
such partnerships or joint ventures, we may be required to pay the full amount
of any obligation of the partnership or joint venture that we have guaranteed in
whole or in part to protect our equity interest in the property owned by the
partnership or joint venture. Additionally, we may determine to pay a
partnership's or joint venture's obligation to protect our equity interest in
its assets.
15
Governance
We may be unable to effectively manage our partnerships and joint ventures due
to disagreements with our partners and joint venturers
Generally, we hold interests in our portfolio properties through PREIT
Associates. In many cases we hold properties through joint ventures or
partnerships with third-party partners and joint venturers and, thus, we hold
less than 100% of the ownership interests in these properties. Of the properties
with respect to which our ownership is partial, most are owned by partnerships
in which we are a general partner. The remaining properties are owned by joint
ventures in which we have substantially the same powers as a general partner.
Under the terms of the partnership and joint venture agreements, major
decisions, such as a sale, lease, refinancing, expansion or rehabilitation of a
property, or a change of property manager, require the consent of all partners
or co-venturers. Necessary actions may be delayed significantly because
decisions must be unanimous. It may be difficult or even impossible to change a
property manager if a partner or co-venturer is serving as property manager.
Business disagreements with partners may arise. We may incur substantial
expenses in resolving these disputes. To preserve our investment, we may be
required to make commitments to or on behalf of a partnership or joint venture
during a dispute. Moreover, we cannot assure you that our resolution of a
dispute with a partner will be on terms that are favorable to us.
Other risks of investments in partnerships and joint ventures include:
o partners or co-venturers might become bankrupt or fail to fund their
share of required capital contributions
o partners or co-venturers might have business interests or goals that
are inconsistent with our business interests or goals
o partners or co-venturers may be in a position to take action contrary
to our policies or objectives
o potential liability for the actions of our partners or co-venturers
We are subject to restrictions that may impede our ability to effect a change in
control
Our Trust Agreement restricts the possibility of our sale or change in control,
even if a sale or change in control were in our shareholders' interest. These
restrictions include the ownership limit designed to ensure qualification as a
REIT, the staggered terms of our Trustees and our ability to issue preferred
shares. Additionally, we have adopted a rights plan that may deter a potential
acquiror from attempting to acquire us.
We have entered into agreements restricting our ability to sell some of our
properties
Some limited partners of PREIT Associates may suffer adverse tax consequences if
certain properties owned by PREIT Associates are sold. As the general partner of
PREIT Associates, we have agreed from time to time, subject to certain
exceptions, that the consent of the holders of a majority (or all) of certain
limited partner interests issued by PREIT Associates in exchange for a property
is required before that property may be sold. These agreements may result in our
being unable to sell one or more properties, even in circumstances in which it
would be advantageous to do so.
We may issue preferred shares with greater rights than your shares
Our Board of Trustees may issue up to 25,000,000 preferred shares without
shareholder approval. Our Board of Trustees may determine the relative rights,
preferences and privileges of each class or series of preferred shares. Because
our Board of Trustees has the power to establish the preferences and rights of
the preferred shares, preferred shares may have preferences, distributions,
powers and rights senior to your rights as a shareholder.
We may amend our business policies without your approval
Our Board of Trustees determines our growth, investment, financing,
capitalization, borrowing, REIT status, operating and distribution policies.
Although the Board of Trustees has no present intention to amend or revise any
of these policies, these policies may be amended or revised without notice to
shareholders. Accordingly, shareholders may not have control over changes in our
policies. We cannot assure you that changes in our policies will serve fully the
interests of all shareholders.
Limited partners of PREIT Associates may vote on fundamental changes we propose
Our assets are generally held through PREIT Associates, a Delaware limited
partnership of which we are the sole general partner. We currently hold a
majority of the limited partner interests in PREIT Associates. However, PREIT
Associates may from time to time issue additional limited partner interests in
PREIT Associates to third parties in exchange for contributions of property to
PREIT Associates. These issuances will dilute our percentage ownership of PREIT
Associates. Limited partner interests in PREIT Associates generally do not carry
a right to vote on any matter voted on by our shareholders, although limited
partner interests may, under certain circumstances, be redeemed for our shares.
However, before the date on which at least half of the partnership interests
issued on September 30, 1997 have been redeemed, the holders of partnership
interests issued on September 30, 1997 are entitled to vote, along with our
shareholders, on any proposal to merge, consolidate or sell substantially all of
our assets. Our partnership interests are not included for purposes of
determining when half of the partnership interests have been redeemed, nor are
they counted as votes. We cannot assure you that we will not agree to extend
comparable rights to other limited partners in PREIT Associates.
Our success depends in part on Ronald Rubin
We are dependent on the efforts of Ronald Rubin, our Chairman and Chief
Executive Officer. The loss of his services could have an adverse effect on our
operations.
16
Our employees who work both for us and for PREIT-RUBIN may have conflicts of
interest
There are numerous potential conflicts of interest relating to our ownership of
PREIT-RUBIN. PREIT-RUBIN renders management, development, leasing and related
services to a substantial number of properties in which affiliates of
PREIT-RUBIN retain equity interests. In such instances, the interests of our
management who are also PREIT-RUBIN affiliates may differ from our own. We
believe that PREIT-RUBIN's management arrangements with these entities, executed
after arms-length negotiation of business terms, are at least as favorable to
PREIT-RUBIN as the average of management arrangements with parties unrelated to
PREIT-RUBIN. In addition, PREIT-RUBIN leases substantial office space from an
entity in which our affiliates have an interest.
Other Risks
We may fail to qualify as a REIT and you may incur tax liabilities as a result.
If we fail to qualify as a REIT, we will be subject to Federal income tax at
regular corporate rates. In addition, we might be barred from qualification as a
REIT for the four years following disqualification. The additional tax incurred
at regular corporate rates would reduce significantly the cash flow available
for distribution to shareholders and for debt service.
To qualify as a REIT, we must comply with certain highly technical and complex
requirements. We cannot be certain we have complied because there are few
judicial and administrative interpretations of these provisions. In addition,
facts and circumstances that may be beyond our control may affect our ability to
qualify as a REIT. We cannot assure you that new legislation, regulations,
administrative interpretations or court decisions will not change the tax laws
significantly with respect to our qualification as a REIT or with respect to the
federal income tax consequences of qualification. We believe that we have
qualified as a REIT since our inception and intend to continue to qualify as a
REIT. However, we cannot assure you that we have been qualified or will remain
qualified.
We may be unable to comply with the strict income distribution requirements
applicable to REITs
To obtain the favorable treatment associated with qualifying as a REIT, we are
required each year to distribute to our shareholders at least 90% of our net
taxable income. We could be required to borrow funds on a short-term basis to
meet the distribution requirements that are necessary to achieve the tax
benefits associated with qualifying as a REIT, even if conditions are not
favorable for borrowing.
Employees
We employ approximately 497 people on a full-time basis.
Item 2. Properties
We refer you to the tables under "Item 1. Business" for the properties we own,
both wholly and those in which we have a percentage interest.
PREIT-RUBIN leases 11,421 square feet (2nd Floor) and 28,064 square feet (3rd
Floor) of space for its principal offices at 200 S. Broad Street, Philadelphia,
PA, under a lease with a remaining term of 8 years. The base rent is $19.50 per
square foot.
Titles to all of our real estate investments have been searched and reported to
us by reputable title companies. The exceptions listed in the title reports will
not, in our opinion, interfere materially with our use of the respective
properties for the intended purposes.
Schedule of Real Estate and Accumulated Depreciation
We refer you to Schedule III, "Real Estate and Accumulated Depreciation -
December 31, 2001," of the financial statement schedules set forth herein for
the amount of encumbrances, initial cost of the properties to us, cost of
improvements, the amount at which carried and the amount of the accumulated
depreciation.
Item 3. Legal Proceedings
From time to time, we are a plaintiff or defendant in various matters arising
out of our usual and customary business of owning and investing in real estate,
both directly and through joint ventures and partnerships. We expect to be
covered against any such liability by our liability insurance, though we cannot
assure you to this effect. We cannot assure you of the results of pending
litigation, but we do not believe that resolution of these matters will have a
material adverse effect on our financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
17
PART II
Item 5. Market for Our Common Equity and Related Shareholder Matters
Shares
Our shares of beneficial interest began trading on the New York Stock Exchange
on November 14, 1997 (ticker symbol: PEI). Before then, our shares were traded
on the American Stock Exchange.
The following table presents the high and low sales prices for our shares, as
reported by the New York Stock Exchange, and cash distributions paid for the
periods indicated:
Distributions
High Low Paid
---- --- ----
Quarter ended March 31, 2001 $22.36 $18.94 $.51
Quarter ended June 30, 2001 $24.70 $20.50 .51
Quarter ended September 30, 2001 $25.05 $18.25 .51
Quarter ended December 31, 2001 $23.90 $20.50 .51
-----
$2.04
Distributions
High Low Paid
---- --- ----
Quarter ended March 31, 2000 $17.25 $14.63 $.47
Quarter ended June 30, 2000 $18.50 $16.00 .47
Quarter ended September 30, 2000 $18.06 $16.88 .47
Quarter ended December 31, 2000 $19.75 $16.81 .51
-----
$1.92
As of December 31, 2001, there were approximately 1,300 holders of
record of our shares.
We currently anticipate that cash distributions will continue to be paid in the
future in March, June, September and December; however, our future payment of
distributions will be at the discretion of our Board of Trustees and will depend
on numerous factors, including our cash flow, financial condition, capital
requirements, annual distribution requirements under the real estate investment
trust provisions of the Internal Revenue Code and other factors that our Board
of Trustees deems relevant.
On February 8, 2002 the Company announced a quarterly cash dividend of $0.51 per
share. The dividend was paid on March 15, 2002 to shareholders and unitholders
of record on February 28, 2002. This marks the 40th anniversary of the Company's
first dividend payment and represents the Company's 100th consecutive
distribution since its initial dividend payment. Throughout its history the
Company has never omitted or reduced a shareholder dividend.
To commemorate the Company's 100th dividend payment, Company officials
participated in the closing bell-ringing ceremony at the New York Stock Exchange
on Thursday, March 14, 2002.
Units
Class A and Class B Units of PREIT Associates are redeemable by PREIT Associates
at the election of the limited partner holding the Units, at the time and for
the consideration set forth in PREIT Associates' partnership agreement. In
general, and subject to exceptions and limitations, beginning one year following
the respective issue dates, "qualifying parties" may give one or more notices of
redemption with respect to all or any part of the Class A Units then held by
that party. Class B Units are redeemable at the option of the holder at any time
after issuance.
If a notice of redemption is given, we have the right to elect to acquire the
Units tendered for redemption for our own account, either in exchange for the
issuance of a like number of our shares, subject to adjustments for stock
splits, recapitalizations and like events, or a cash payment equal to the
average of the closing prices of our shares on the ten consecutive trading days
immediately before our receipt, in our capacity as general partner of PREIT
Associates, of the notice of redemption. If we decline to exercise this right,
then on the tenth day following tender for redemption, PREIT Associates will pay
a cash amount equal to the number of Units so tendered multiplied by such
average closing price.
PREIT Associates issued the Units under exemptions provided by Section 4(2) of
the Securities Act of 1933 and Regulation D promulgated under the Securities
Act.
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Item 6. Selected Financial Data
Selected Financial Information
(Thousands of dollars, except per share results)
For the For the For the For the For the 4-Month For the Fiscal
Year Ended Year Ended Year Ended Year Ended Period Ended Year Ended
December 31, December 31, December 31, December 31, December 31, August 31,
2001 2000 1999 1998 1997(1) 1997
---- ---- ---- ---- ------- ----
Operating Results
Total revenues $113,582 $101,856 $90,364 $62,395 $17,252 $40,485
Net income $19,789 $32,254 $20,739 $23,185 $5,962 $10,235
Net income per share $1.35 $2.41 $1.56 $1.74 $0.66 $1.18
Balance Sheet Data
Investments in real estate,
at Cost $650,460 $612,266 $577,521 $509,406 $287,926 $202,443
Total assets $602,628 $576,663 $547,590 $481,615 $265,566 $165,657
Total mortgage, bank and
construction loans
payable $360,373 $382,396 $364,634 $302,276 $103,939 $117,412
Minority interest $36,768 $29,766 $32,489 $28,045 $15,805 $540
Shareholders' equity $180,285 $143,906 $133,412 $137,082 $138,530 $40,899
Other Data
Cash flows from operating
activities $37,655 $44,473 $29,437 $31,302 $4,237 $15,219
Cash distributions per share $2.04 $1.92 $1.88 $1.88 $0.47 $1.88
(1) We changed from a fiscal year end to a calendar year end in 1997.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the Consolidated
Financial Statements and the notes thereto included elsewhere in this report.
OVERVIEW
The Company owns interests in 22 shopping centers containing an aggregate of
approximately 10.9 million square feet, 19 multifamily properties containing
7,242 units and four industrial properties with an aggregate of approximately
0.3 million square feet. The Company also owns interests in four shopping
centers currently under development, which are expected to contain an aggregate
of approximately 1.3 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 1.8 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").
During 2001, the Company continued this trend with four retail properties in its
development pipeline, and same store net operating income growth of 4.9% and
3.7% in the retail and multifamily sectors, respectively, excluding the impact
of lease termination fees in the retail sector, which were excluded because they
were unusually high in 2000.
The Company's net income decreased by $12.5 million to $19.8 million for the
year ended December 31, 2001 as compared to $32.3 million for the year ended
December 31, 2000. Operating results in 2000 included larger gains on sales of
real estate and higher lease termination fees than in 2001. Specifically, the
properties sold in 2000 generated gains of $10.3 million as compared to $2.1
million for the properties sold in 2001. Lease termination revenues were $6.0
million in 2000 compared to $1.2 million in 2001.
In 2001, the placement in service of properties previously under development
generated net income in excess of the net income lost as a result of the sale of
properties in 2000 and 2001. The net result was an increase in Company real
estate revenues, with a corresponding increase in property operating expenses,
and depreciation, amortization and interest expenses.
Also in 2001, the Company implemented a structural change in accordance with
changes to REIT tax laws authorized by the REIT Modernization Act of 1999.
Specifically, effective January 1, 2001, the Company began consolidating the
activities of its commercial property development and management affiliates,
PREIT Services, LLC and PREIT-RUBIN, Inc. The result is reflected in the
Company's Consolidated Financial Statements as new management fees, the
elimination of intercompany interest income, an increase in general and
administrative expenses (not all of which is attributable to the consolidation),
and the elimination of Equity in Loss of PREIT-Rubin, Inc.
19
The Company has investments in 16 partnerships and joint ventures (the "Joint
Ventures"). The purpose of the Joint Ventures is to own and operate real estate.
It is a common practice in the real estate industry to invest in real estate in
this manner. Of the 16 Joint Venture properties, the Company manages 5 of the
properties and other parties, including several of the Company's Joint Venture
partners, manage the remaining 11 properties. None of the Company's Joint
Venture partners are affiliates of the Company. The Company holds a
non-controlling interest in the Joint Ventures, and accounts for the Joint
Ventures using the equity method of accounting. Under this accounting method,
the Company does not consolidate the Joint Ventures. Instead, the Company
records the earnings from the Joint Ventures under the income statement caption
entitled "Equity in income of partnerships and joint ventures". Changes in the
Company's investment in these entities are recorded in the balance sheet caption
entitled "Investment in and advances to partnerships and joint ventures, at
equity". For further information regarding the Company's Joint Ventures, see
Note 2 to the Consolidated Financial Statements.
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 "Offering").
Net proceeds from the Offering after deducting the underwriting discount of $1.5
million and other expenses of approximately $0.2 million were approximately
$44.3 million. Proceeds from the Offering were used to repay $20.7 million
outstanding on an existing construction loan and $16.5 million of outstanding
indebtedness under the Company's Credit Facility. The remaining proceeds were
used to fund projects then under development.
CREDIT FACILITY
The Company's operating partnership has entered into a $250 million credit
facility (the "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. 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 130 to 180 basis points, 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. At December 31,
2001, the margin was set at 165 basis points.
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 December 31, 2001; (vi) maximum
floating rate debt of $250 million; and (vii) maximum commitments for properties
under development not in excess of 25% of Gross Asset Value (as defined in the
Credit Facility). As of December 31, 2001, the Company was in compliance with
all debt covenants.
LIQUIDITY AND CAPITAL RESOURCES
The Company expects to meet its short-term liquidity requirements generally
through its available working capital and net cash provided by operations. The
Company believes that its net cash provided by operations will be sufficient to
allow the Company to make any distributions necessary to enable the Company to
continue to qualify as a REIT under the Internal Revenue Code of 1986, as
amended. The Company also believes that the foregoing sources of liquidity will
be sufficient to fund its short-term liquidity needs for the foreseeable future,
including capital expenditures, tenant improvements and leasing commissions. The
following are some of the risks that could impact Company cash flows and require
the funding of future distributions, capital expenditures, tenant improvements
and/or leasing commissions with sources other than operating cash flows:
o Increase in tenant bankruptcies reducing revenue and operating cash
flows
o Increase in interest rates affecting the Company's net cost of
borrowing
o Increase in insurance premiums and/or the Company's portion of claims
o Eroding market conditions in one or more of our primary geographic
regions adversely affecting property operating cash flows
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 increase the funds available under the Revolving Facility and the
Construction Facility by placing development properties into the collateral pool
upon the achievement of prescribed criteria so as to fund acquisitions,
development activities and capital improvements. In general, when the credit
markets are tight, the Company may encounter resistance from lenders when the
Company seeks financing or refinancing for properties or proposed acquisitions.
The Company also may be unable to sell additional equity securities on terms
that are favorable to the Company, if at all. Additionally, the following are
some of the potential impediments to accessing additional funds under the Credit
Facility:
o Reduction in occupancy at one or more properties in the collateral
pool
o Reduction in appraised value of one or more properties in the
collateral pool
o Reduction in net operating income at one or more of the properties in
the collateral pool
o Constraining leverage covenants under the Credit Facility
o Increased interest rates affecting our interest coverage ratios
o Reduction in the Company's consolidated earnings before interest,
taxes, depreciation and amortization (EBITDA)
20
At December 31, 2001 the Company had outstanding borrowings of $98.5 million
under its Revolving Facility and had pledged $1.7 million under the Revolving
Facility as collateral for several letters of credit. Of the unused portion of
the Revolving Facility of approximately $74.8 million, as of December 31, 2001,
the Company's loan covenant restrictions allowed the Company to borrow
approximately an additional $4.8 million based on the existing property
collateral pool. As noted, one of the additional means of increasing the
Company's borrowing capacity via the Revolving Facility is the addition of
unencumbered acquisition and/or development properties to the collateral pool.
For example, during the first quarter of 2002, the Company placed Creekview
Shopping Center, a recently completed retail development project, into the
collateral pool, which increased the Company's borrowing capacity to
approximately $20 million. The Company expects to place additional projects into
the collateral pool to provide additional borrowing capacity, as necessary. The
Company believes that the anticipated placement of properties into the
collateral pool will allow for sufficient availability of borrowing capacity to
fund the development pipeline commitments as well as any short-term liquidity
needs.
Mortgage Notes
In addition to amounts due under the Credit Facility, a balloon payment of $22.1
million, of which the Company's proportionate share is $8.8 million, comes due
in December 2003 with respect to a mortgage loan secured by a property owned by
a partnership in which the Company has an interest. Construction and mortgage
loans on properties wholly-owned by the Company also mature by their terms.
Balloon payments, due in the next three years, on these loans total $6.2 million
for a mortgage loan and $4.0 million for a construction loan. The Company is
pursuing long-term financing for the construction loan which has a balloon
payment coming due in 2002.
Mortgage notes payable which are secured by 18 of the Company's wholly-owned
properties are due in installments over various terms extending to the year 2025
with interest at rates ranging from 5.90% to 9.50% with a weighted average
interest rate of 7.45% at December 31, 2001. Principal payments are due as
follows (thousands of dollars):
Year Ended 12/31 Principal Amortization Balloon Payments Total
- ---------------- ---------------------- ---------------- -----
2002 $4,917 $-- $4,917
2003 5,080 6,201 11,281
2004 5,274 -- 5,274
2005 5,674 12,500 18,174
2006 6,074 -- 6,074
2007 and thereafter 15,789 196,364 212,153
------ ------- -------
$42,808 $215,065 $257,873
======= ======== ========
Eight of the Company's multifamily communities are financed with $105 million of
permanent, fixed-rate, long-term debt. This debt carries a weighted average
fixed interest rate of approximately 6.77%. The eight properties secure the
non-recourse loans, which amortize over 30 years and mature in May 2009.
Commitments
At December 31, 2001, the Company had approximately $13.4 million committed to
complete current development and redevelopment projects, which is expected to be
financed through the Revolving Facility or through short-term construction
loans. In connection with certain development properties, including those
development properties acquired as part of the Company's acquisition of TRO, 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
targets.
Cash Flows
During the year ended December 31, 2001, the Company generated $37.7 million in
cash flows from operating activities. Financing activities used cash of $8.1
million including: (i) $29.8 million of distributions to shareholders, (ii)
$20.6 million and $11.8 million of repayments on a construction loan and the
Revolving Facility, respectively, (iii) $4.6 million of mortgage notes payable
principal installments, (iv) $4.1 million of net distributions to OP unit
holders and minority partners and (v) $0.4 million payment of deferred financing
costs offset by (i) $48.3 million of net proceeds from shares of beneficial
interest issued, including amounts raised through the Offering described above
and (ii) $15.0 million of proceeds from a mortgage loan. Investing activities
used cash of $25.4 million including: (i) $14.5 million of investments in
wholly-owned real estate assets, (ii) $29.2 million of investments in property
under development and (iii) $1.7 million of investments in partnerships and
joint ventures; offset by (i) cash proceeds from sales of real estate interests
of $10.2 million, (ii) cash distributions from partnerships and joint ventures
in excess of equity in income of $8.2 million and (iii) cash from the
consolidation of PRI of $1.6 million.
Contingent Liabilities
The Company along with certain of its joint venture partners has guaranteed debt
totaling $5.8 million. The debt matures in 2003 (see Note 2 to the consolidated
financial statements).
Interest Rate Protection
In order to limit exposure to variable interest rates, the Company has entered
into interest rate swap agreements as follows:
21
Fixed Interest Rate
Notional Amount vs. 30-day LIBOR Maturity Date
- --------------- ---------------- -------------
$20 million 6.02% December 2003
$55 million 6.00% December 2003
Financial Instruments Sensitivity Analysis
The analysis below presents the sensitivity of the market value of the Company's
financial instruments to selected changes in market interest rates. In order to
mitigate the impact of fluctuation in market interest rates, the Company entered
into two interest rate swap agreements with notional amounts totaling $75.0
million. All derivative instruments are entered into for other than trading
purposes. As of December 31, 2001, the Company's consolidated debt portfolio
consisted of $257.9 million in fixed rate mortgage notes, $98.5 million borrowed
under its Revolving Facility and $4.0 million of construction notes payable.
Changes in market interest rates have different impacts on the fixed and
variable portions of the Company's debt portfolio. A change in market interest
rates on the fixed portion of the debt portfolio impacts the net financial
instrument position, but it has no impact on interest incurred or cash flows. A
change in market interest rates on the variable portion of the debt portfolio
impacts the interest incurred and cash flows, but does not impact the net
financial instrument position. The sensitivity analysis related to the fixed
debt portfolio assumes an immediate 100 basis point move in interest rates from
their actual December 31, 2001 levels, with all other variables held constant. A
100 basis point increase in market interest rates would result in a decrease in
the net financial instrument position of $10.9 million at December 31, 2001. A
100 basis point decrease in market interest rates would result in an increase in
the net financial instrument position of $11.7 million at December 31, 2001.
Based on the variable-rate debt included in the Company's debt portfolio,
including two interest rate swap agreements, as of December 31, 2001, a 100
basis point increase in interest rates would result in an additional $0.2
million in interest incurred at December 31, 2001. A 100 basis point decrease
would reduce interest incurred by $0.2 million at December 31, 2001.
ACQUISITIONS, DISPOSITIONS AND DEVELOPMENT ACTIVITES
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, the Company is considering the possible acquisition
of these outside interests. In certain cases where that opportunity does not
exist, the Company is considering the disposition of its interests. There can be
no assurance that the Company will consummate any such acquisition or
disposition.
Acquisitions
In 2000, the Company entered into an agreement giving it a joint venture
interest in Willow Grove Park, a 1.2 million square foot regional mall in Willow
Grove, PA. Under the agreement, the Company is responsible for the expansion of
the property to include a new Macy's store and decked parking. The total cost of
the expansion through December 31, 2001 was $14.1 million. In 2002, the Company
expects to make an additional cash contribution of approximately $3.1 million
and contribute the expansion asset to the joint venture in return for a
subordinated 50% general partnership interest. Also, in 2000, the Company
purchased the remaining 35% interest in the Emerald Point multifamily community
in Virginia Beach, VA.
Dispositions
In 2001, the Company sold parcels of land located at Paxton Town Centre in
Harrisburg, PA and Commons at Magnolia in Florence, SC and an undeveloped parcel
of land adjacent to the Metroplex Shopping Center in Plymouth Meeting, PA.
Consistent with management's stated long-term strategic plan to review and
evaluate all joint venture real estate holdings and non-core properties, during
2001 and 2000 the Company sold its interests in several properties. Under this
plan, in 2001, the Company sold its interest in the Ingleside Shopping Center in
Thorndale, PA, and in 2000, the Company sold the CVS Warehouse and Distribution
Center in Alexandria, VA, Valleyview Shopping Center in Wilmington, DE,
Forestville Shopping Center in Forestville, MD and the Company's 50% interest in
Park Plaza Shopping Center in Pinellas Park, FL.
Development, Expansions and Renovations
The Company is involved in a number of development and redevelopment projects,
which may require equity funding by the Company or third-party debt or equity
financing (see Note 10 to the Consolidated Financial Statements). In each case,
the Company 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, the Company's flexibility in funding the project may be
governed by the joint venture agreement or the covenants existing in its line of
credit, which limit the Company's involvement in joint venture projects.
RELATED PARTY TRANSACTIONS
The Company provides management, leasing and development services for
partnerships and other ventures in which certain officers of the Company have
either direct or indirect ownership interests, including Ronald Rubin, the
Company's Chairman and Chief Executive Officer. The Company believes that the
terms of the management agreements for these services are no less favorable to
the Company than its agreements with non-affiliates.
The Company has no off-balance sheet transactions other than those discussed in
the Interest Rate Protection section. No officer or employee of the Company
benefits from or has benefited from any off-balance sheet transactions with or
involving the Company.
The Company leases its corporate home office space from an affiliate of certain
officers of the Company. The lease terms were established at market rates at the
commencement date.
In connection with the Company's acquisition of The Rubin Organization ("TRO")
in 1997, the Company agreed to issue up to 800,000 limited partnership units
over a five-year period ended September 30, 2002 contingent on the Company
achieving specified performance targets. Through December 31, 2001, 497,500
contingent limited partnership units had been issued. An additional 167,500
22
contingent limited partnership units were earned in 2001 but have not yet been
issued. The remaining 135,000 units may be earned in 2002. The recipients of the
contingent limited partnership units include officers of the Company, including
Ronald Rubin, the Company's Chairman and Chief Executive Officer, who were
partners of TRO at the time of TRO's acquisition.
SIGNIFICANT ACCOUNTING POLICIES
The Company's significant accounting policies are described in Note 1 to the
Consolidated Financial Statements of the Company. The Company believes that the
most critical accounting policies include revenue recognition and asset
impairment.
Revenue Recognition
The Company derives over 89% of its revenues from tenant rents and other tenant
related activities. Tenant rents include base rents, percentage rents, expense
reimbursements (such as common area maintenance, real estate taxes and
utilities) and straight-line rents. The Company records base rents on a
straight-line basis, which means that the monthly base rent income according to
the terms of the Company's leases with its tenants is adjusted so that an
average monthly rent is recorded for each tenant over the term of its lease. The
difference between base rent and straight-line rent is a non-cash increase or
decrease to rental income. In 2001, non-cash straight line rent income was $0.8
million. Percentage rents represent rental income that the tenant pays based on
a percentage of its sales. Tenants that pay percentage rent usually pay in one
of two ways, either a percentage of their total sales or a percentage of sales
over a certain threshold. In the latter case, the Company does not record
percentage rent until the sales threshold has been reached. Expense
reimbursement payments are generally made monthly based on a budgeted amount
determined at the beginning of the year. During the year, the Company's income
increases or decreases based on actual expense levels and changes in other
factors that influence the reimbursement amounts, such as occupancy levels. In
2001, the Company accrued $0.9 million of income because reimbursable expense
levels were greater than amounts billed. These increases/ decreases are non-cash
changes to rental income. Shortly after the end of the year, the Company
prepares a reconciliation of the actual amounts due from tenants. The difference
between the actual amount due and the amounts paid by the tenant throughout the
year is billed or credited to the tenant, depending on whether the tenant paid
too much or too little during the year.
The Company's other significant source of revenues comes from management
activities, including property management, leasing and development. Management
fees are generally a percentage of managed property revenues or cash receipts.
Leasing fees are earned upon the consummation of new leases. Development fees
are earned over the time period of the development activity. These activities
are collectively referred to as Management fees in the consolidated statement of
income. There are no significant cash versus accrual differences for these
activities.
Evaluation of Asset Impairment
The Company periodically evaluates its real estate assets for potential
impairment indicators. Judgments regarding the existence of impairment
indicators are based on legal factors, market conditions and the operational
performance of the properties. Future events could cause the Company to conclude
that impairment indicators exist and that a property's value is impaired. Any
resulting impairment loss would be measured by comparing the individual
property's fair value to its carrying value and reflected in the Company's
consolidated statements of income.
RESULTS OF OPERATIONS
Year Ended December 31, 2001 compared with Year Ended December 31, 2000
Net income decreased by $12.5 million to $19.8 million ($1.35 per share) for the
year ended December 31, 2001 as compared to $32.3 million ($2.41 per share) for
the year ended December 31, 2000.
Revenues increased by $11.7 million or 11% to $113.6 million in the year ended
December 31, 2001 from $101.9 million for the year ended December 31, 2000.
Gross revenues from real estate increased by $1.4 million to $101.9 million for
the year ended December 31, 2001 from $100.5 million for the year ended December
31, 2000. This increase in gross revenues resulted from a $4.5 million increase
in base rents, a $0.3 million increase in percentage rents and a $1.4 million
increase in expense reimbursements. Offsetting this increase is a $4.8 million
decrease in lease termination fees from $6.0 million in 2000 to $1.2 million in
2001. Lease termination fees in 2000 included an unusually large $4.0 million
fee received in connection with the sale of the CVS Warehouse and Distribution
Center. Base rents increased due to a $3.1 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 were partially offset by the sale of two retail properties
that were sold in the third quarter of 2000, resulting in a $0.8 million
reduction in base rents. Base rents also increased due to a $1.8 million
increase in multifamily rents, resulting from rental rate increases and higher
occupancy rates. The increase in base rents was offset by a $0.4 million
decrease in industrial rents due to the sale of the CVS Warehouse. 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 recovery of 2000 renovation costs
over 10 years at Dartmouth Mall. Management fees were $11.3 million for the year
ended December 31, 2001. This entire amount represents an increase in
consolidated revenues in 2001 because PRI was not consolidated in 2000. Interest
and other income decreased by $1.0 million because interest income on a loan
with PRI was eliminated in 2001 due to the consolidation of PRI effective
January 1, 2001. Without the effects of the consolidation of PRI, the Company's
revenues for 2001 would have increased by $1.4 million over revenues in 2000.
Property operating expenses increased by $0.7 million or 2% to $33.4 million for
the year ended December 31, 2001 from $32.7 million for the year ended December
31, 2000. Payroll expense increased $0.4 million or 7% due to normal salary
increases and increased benefit costs. Real estate and other taxes increased by
$0.5 million as two properties under development in 2000 were placed in service
and tax rates were slightly higher for properties owned during both periods,
partially offset by savings from 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.
23
Depreciation and amortization expense increased by $2.3 million to $18.0 million
for the year ended December 31, 2001 from $15.7 million for the year ended
December 31, 2000 due to $0.9 million from two properties under development in
2000 now placed in service, and $1.4 million from a higher asset base, of which
$0.9 million is attributable to the 2000 renovation at Dartmouth Mall.
General and administrative expenses increased by $18.6 million to $23.6 million
for the year ended December 31, 2001 from $5.0 million for the year ended
December 31, 2000. The primary reason for the increase is the consolidation of
PRI in 2001, which accounted for $16.3 million of the increase. General and
administrative expenses also increased primarily due to a $1.2 million increase
in payroll and benefits expenses, as well as minor increases in several other
expense categories totaling $1.1 million in the aggregate.
Interest expense increased by $1.1 million to $25.0 million for the year ended
December 31, 2001 as compared to $23.9 million for the year ended December 31,
2000. Retail mortgage interest increased by $0.4 million. Of this amount, $0.6
million was due to a full year of interest on a mortgage for a property placed
in service in 2000, offset by $0.2 million due to expected amortization of
mortgage balances. Multifamily mortgage interest decreased by $0.1 million due
to expected amortization of mortgage balances. Bank loan interest expense
increased by $0.8 million because of higher amounts outstanding in 2001 as
compared to 2000, plus development assets placed in service in 2001.
Equity in loss of PREIT-RUBIN, Inc. was $6.3 million in the year ended December
31, 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 $0.9 million to
$6.5 million in the year ended December 31, 2001 from $7.4 million in the year
ended December 31, 2000. The decrease was primarily due to a mortgage prepayment
fee of $0.3 million, and increased interest and bad debt expenses.
Minority interest in the operating partnership decreased $1.3 million to $2.5
million in the year ended December 31, 2001 from $3.8 million in the year ended
December 31, 2000.
Gains on sales of interests in real estate were $2.1 million and $10.3 million,
respectively, in the years ended December 31, 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.
Year Ended December 31, 2000 compared with Year Ended December 31, 1999
Net income increased by $11.6 million to $32.3 million ($2.41 per share) for the
year ended December 31, 2000 as compared to $20.7 million ($1.56 per share) for
the year ended December 31, 1999.
Revenues increased by $11.5 million or 13% to $101.9 million in the year ended
December 31, 2000 from $90.4 million for the year ended December 31, 1999. Gross
revenues from real estate increased by $11.3 million to $100.5 million for the
year ended December 31, 2000 from $89.2 million in 1999. This increase is due to
a $4.0 million increase in base rents, a $5.7 million increase in lease
termination fees, a $0.2 million increase in percentage rents and a $1.3 million
increase in expense reimbursements. Base rents increased due to a $2.9 million
increase in retail rents, resulting from 1999 property acquisitions and
development properties placed in service in 2000 and higher rents due to new and
renewal leases at higher rates in 2000. Base rents also increased due to a $1.9
million increase in multifamily rents, resulting from rental rate increases and
higher occupancy rates. Industrial rents decreased $0.8 million due to the sale
of the CVS Warehouse and Distribution Center in Alexandria, Va in April 2000.
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 and $1.6 million received in connection with the termination of several
retail leases, that are also considered non-recurring. Percentage rents
increased due to higher tenant sales levels. Expense reimbursements increased
due to 1999 property acquisitions and development properties placed in service
in 2000 and increased property operating expenses. Other revenues increased due
to increased miscellaneous income from the multifamily properties. Interest and
other income increased by $0.3 million to $1.4 million for the year ended
December 31, 2000 from $1.1 million for the year ended December 31, 1999 due to
increased interest income on the loan to PRI.
Property operating expenses increased by $0.9 million or 3% to $32.7 million for
the year ended December 31, 2000 from $31.8 million for the year ended December
31, 1999. Real estate and other taxes increased by $0.5 million due to 1999
property acquisitions and development properties placed in service in 2000 and
slightly higher tax rates for properties owned during both periods. Other
operating expenses increased by $0.4 million due to development properties
placed in service in 2000.
Depreciation and amortization expense increased by $1.8 million to $15.7 million
for the year ended December 31, 2000 from $13.9 million for the year ended
December 31, 1999. The property acquisitions and development properties placed
in service referred to above resulted in increased depreciation expense of $0.5
million. Depreciation and amortization expense for properties owned during both
periods increased by $1.3 million due to a higher asset base for properties
owned during both periods.
24
General and administrative expenses increased by $1.4 million to $5.0 million
for the year ended December 31, 2000 from $3.6 million for the year ended
December 31, 1999 primarily due to increased payroll and benefits expense.
Interest expense increased by $1.7 million to $23.9 million for the year ended
December 31, 2000 from $22.2 million for the year ended December 31, 1999.
Multifamily mortgages that were originated in April 1999 resulted in an increase
of $1.7 million. Retail mortgage interest increased by $0.6 million because
development properties were placed in service. These increases were partially
offset by a decrease in bank loan interest expense of $0.6 million resulting
from the capitalization of more interest in 2000 than in 1999 due to development
activity.
Equity in income of partnerships and joint ventures increased by $1.2 million to
$7.4 million in 2000 primarily attributable to increased income from Whitehall
Mall which was under redevelopment in 1999.
Equity in net loss of PREIT-RUBIN, Inc. for the 2000 period was $6.3 million
compared with $4.0 million for the 1999 period. The $2.3 million increase in the
equity in net loss was primarily due to decreases in non-recurring brokerage
commissions of $1.2 million, management fees of $1.0 million, publication fees
of $0.4 million and depreciation and amortization expense of $0.2 million,
partially offset by decreased operating expenses of $0.5 million due to a $0.3
million decrease in publication costs and a $0.2 million decrease in
professional services.
Minority interest in the operating partnership increased $1.7 million to $3.8
million primarily as a result of increased earnings and 167,500 additional
contingent OP units earned under the Contribution Agreement related to the
acquisition of TRO in 1997.
Gains from the sale of interests in real estate were $10.3 million and $1.8
million for 2000 and 1999, respectively. The 2000 period reflects a gain on the
sale of interest in Park Plaza Shopping Center in Pinellas Park, FL, the CVS
Warehouse and Distribution Center in Alexandria, VA, and the Valleyview Shopping
Center in Wilmington, DE. The 1999 period includes gains on the sale of
interests in 135 Commerce Drive, Fort Washington, PA and an undeveloped land
parcel at Crest Plaza in Allentown, PA.
SAME STORE PROPERTIES
Retail sector operating income, excluding the impact of certain lease
termination fees for the year ended December 31, 2001 for the properties owned
since January 1, 2000 (the "Same Store Properties"), increased by $2.2 million
or 4.9% over the year ended December 31, 2000. This increase resulted from new
and renewal leases at higher rates, higher occupancy and higher percentage rents
in 2001 as compared to 2000. Multifamily sector same store growth was $1.2
million or 3.7% for the year ended December 31, 2001 due to revenue increases of
4.0% which were partially offset by increases in real estate taxes, utilities,
apartment turnover expenses, repairs and maintenance and insurance costs.
Certain retail lease terminations were excluded from this comparison because
they were unusually large in 2000.
Set forth below is a schedule comparing the net operating income (excluding the
impact of retail lease termination fees) for the Same Store Properties for the
year ended December 31, 2001, as compared to the year ended December 31, 2000.
(In thousands)
Year Ended December 31,
-----------------------------
2001 2000
----------- ------------
Retail Sector:
Revenues $67,629 $64,342
Property operating expenses 20,140 19,057
------- -------
Net operating income $47,489 $45,285
======= =======
Multifamily Sector:
Revenues $56,394 $54,199
Property operating expenses 23,455 22,448
------- -------
Net operating income $32,939 $31,751
======= =======
FUNDS FROM OPERATIONS
Funds from operations ("FFO") is defined as income before gains (losses) on
property sales and extraordinary items (computed in accordance with generally
accepted accounting principles "GAAP") plus real estate depreciation and similar
adjustments for unconsolidated joint ventures after adjustments for non-real
estate depreciation and amortization of financing costs.
The Company computes funds from operations in accordance with standards
established by NAREIT, which may not be comparable to funds from operations
reported by other REITs that do not define the term in accordance with the
current NAREIT definition, or that interpret the current NAREIT definition
differently than the Company. Funds from operations does not represent cash
generated from operating activities in accordance with GAAP and should not be
considered as an alternative to net income (determined in accordance with GAAP)
as an indication of the Company's financial performance or as an alternative to
cash flow from operating activities (determined in accordance with GAAP) as a
measure of the Company's liquidity, nor is it indicative of funds available to
fund the Company's cash needs, including its ability to make cash distributions.
Funds from operations decreased 2% to $44.7 million for the year ended December
31, 2001, as compared to $45.8 million in 2000. The decrease was primarily due
to a $4.8 million decrease in lease termination fees offset in part by an
improvement in net operating income from same store retail and residential
properties, and newly acquired/placed in service properties in 2000.
25
CAPITAL EXPENDITURES
Substantially all of the Company's recurring capital expenditures in 2001
related to its multifamily communities. The multifamily communities expended
$3.0 million for recurring capital expenditures, ($409 per unit owned adjusted
for partnership interests). The Company's policy is to capitalize expenditures
for floor coverings, appliances and major exterior preparation and painting for
apartments. During the year, $1.7 million ($241 per unit owned) was expended for
floor covering and $0.7 million ($91 per unit owned) for appliances.
COMPETITION
The Company's shopping centers compete with other shopping centers in their
trade areas as well as alternative retail formats, including catalogues, home
shopping networks and internet commerce. Apartment properties compete for
tenants with other multifamily properties in their markets. Economic factors,
such as employment trends and the level of interest rates, impact shopping
center sales as well as a prospective tenant's choice to rent or own his/her
residence.
SEASONALITY
Shopping center leases often provide for the payment of rents based on a
percentage of sales over certain levels. Income from such rents is recorded only
after the minimum sales levels have been met. The sales levels are often met in
the fourth quarter, during the December holiday season.
INFLATION
Inflation can have many effects on the financial performance of the Company.
Shopping center leases often provide for the payment of rents based on a
percentage of sales, which may increase with inflation. Leases may also provide
for tenants to bear all or a portion of operating expenses, which may reduce the
impact of such increases on the Company. Apartment leases are normally for a
one-year term, which may allow the Company to seek increased rents as leases are
renewed or when new tenants are obtained.
FORWARD-LOOKING STATEMENTS
The matters discussed in this report, as well as news releases issued from time
to time by the Company use 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 the Company'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 the Company's results to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements. The Company 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 7A. Quantitative and Qualitative Disclosure About Market Risk
See Item 7 under the heading "Financial Instruments Sensitivity Analysis" for a
discussion of our market risk.
Item 8. Financial Statements and Supplementary Data
Our consolidated balance sheets as of December 31, 2001 and 2000, and the
related consolidated statements of income, shareholders' equity and cash flows
for the years ended December 31, 2001, 2000 and 1999, and the notes thereto, and
the report of independent public accountants thereon, and our summary of
unaudited quarterly financial information for the years ended December 31, 2001
and 2000, and the financial statement schedules are set forth on pages F-1
through F-21 of this report.
Item 9. Disagreements on Accounting and Financial Disclosure
None.
26
PART III
Item 10. Trustees and Executive Officers of the Trust.
The information required by this item is incorporated by reference to, and will
be contained in, our definitive proxy statement, which we anticipate will be
filed no later than April 30, 2002, and thus we have omitted the Item in
accordance with General Instruction G(3) to Form 10-K.
Item 11. Executive Compensation
The information required by this Item is incorporated by reference to, and will
be contained in, our definitive proxy statement, which we anticipate will be
filed no later than April 30, 2002, and thus we have omitted the item in
accordance with General Instruction G(3) to Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is incorporated by reference to, and will
be contained in, our definitive proxy statement, which we anticipate will be
filed no later than April 30, 2002, and thus we have omitted the item in
accordance with General Instruction G(3) to Form 10-K.
Item 13. Certain Relationships and Related Transactions.
The information required by this Item is incorporated by reference to, and will
be contained in, our definitive proxy statement, which we anticipate will be
filed no later than April 30, 2002, and thus we have omitted the item in
accordance with General Instruction G(3) to Form 10-K.
27
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
The following documents are filed as part of this report:
(1) Financial Statements
Report of Independent Public Accountants F-1
Consolidated Balance Sheets as of December 31, 2001 and 2000 F-2
Consolidated Statements of Income for the years ended
December 31, 2001, 2000 and 1999 F-3
Consolidated Statements of Shareholders' Equity for
the years ended December 31, 2001, 2000 and 1999 F-4
Consolidated Statements of Cash Flows for the years
ended December 31, 2001, 2000 and 1999 F-5
Notes to Consolidated Financial Statements F-6 - F-18
(2) Financial Statement Schedules
II - Valuation and Qualifying Accounts F-19
III - Real Estate and Accumulated Depreciation F-20 - F-21
All other schedules are omitted because they are not
applicable, not required or because the required information
is reported in the consolidated financial statements or
notes thereto.
28
(3) Exhibits
3.1 Trust Agreement as Amended and Restated on December 16, 1997,
filed as Exhibit 3.2 to the Trust's Current Report on Form 8-K
dated December 16, 1997, is incorporated herein by reference.
3.2 By-Laws of the Trust as amended through December 16, 1997, filed
as exhibit 3.3 to the Trust's Current Report on Form 8-K dated
December 17, 1997, is incorporated herein by reference.
4.1 First Amended and Restated Agreement of Limited Partnership,
dated September 30, 1997, of PREIT Associates, L.P., filed as
exhibit 4.15 to the Trust's Current Report on Form 8-K dated
October 14, 1997, is incorporated herein by reference.
4.2 First Amendment to the First Amended and Restated Agreement of
Limited Partnership, dated September 30, 1997, of PREIT
Associates, L.P., filed as exhibit 4.1 to the Trust's Current
Report on Form 10-Q for the quarterly period ended September 30,
1998, is incorporated herein by reference.
4.3 Second Amendment to the First Amended and Restated Agreement of
Limited Partnership, dated September 30, 1997, of PREIT
Associates, L.P., filed as exhibit 4.2 to the Trust's Current
Report on Form 10-Q for the quarterly period ended September 30,
1998, is incorporated herein by reference.
4.4 Third Amendment to the First Amended and Restated Agreement of
Limited Partnership, dated September 30, 1997, of PREIT
Associates, L.P., filed as exhibit 4.3 to the Trust's Current
Report on Form 10-Q for the quarterly period ended September 30,
1998, is incorporated herein by reference.
4.5 Rights Agreement dated as of April 30, 1999 between the Trust and
American Stock Transfer and Trust Company, as Rights Agent, filed
as exhibit 1 to the Trust's Registration Statement on Form 8-A
dated April 29, 1999, is incorporated herein by reference.
+10.1 Employment Agreement, dated as of January 1, 1990, between the
Trust and Sylvan M. Cohen, filed as exhibit 10.1 to the Trust's
Annual Report on Form 10-K for the fiscal year ended August 31,
1990, incorporated herein by reference.
+10.2 Second Amendment to Employment Agreement, dated as of September
29, 1997, between the Trust and Sylvan M. Cohen, filed as exhibit
10.36 to the Trust's Current Report on Form 8-K dated October 14,
1997, is incorporated herein by reference.
10.3 Trust's 1990 Incentive Stock Option Plan, filed as Appendix A to
Exhibit "A" to the Trust's Quarterly Report on Form 10-Q for the
quarterly period ended November 30, 1990, is incorporated herein
by reference.
+10.4 Trust's Amended and Restated 1990 Stock Option Plan for
Non-Employee Trustees, filed as Appendix A to the Trust's
definitive proxy statement for the Annual Meeting of Shareholders
on December 16, 1997 filed on November 18, 1997, is incorporated
herein by reference.
+10.5 Amendment No. 2 to the Trust's 1990 Stock Option Plan for
Non-Employee Trustees, filed as exhibit 10.9 to the Trust's
annual Report on Form 10-K for the fiscal year ended December 31,
2000, is incorporated herein by reference.
+10.6 Amended and Restated Employment Agreement, dated as of March 22,
2002 between the Trust and Jonathan B. Weller.
10.7 The Trust's Amended Incentive and Non Qualified Stock Option
Plan, filed as exhibit A to the Trust's definitive proxy
statement for the Annual Meeting of Shareholders on December 15,
1994 filed on November 17, 1994, is incorporated herein by
reference.
10.8 Amended and Restated 1990 Incentive and Non-Qualified Stock
Option Plan of the Trust, filed as exhibit 10.40 to the Trust's
Current Report on Form 8-K dated October 14, 1997, is
incorporated herein by reference.
10.9 Amendment No. 1 to the Trust's 1990 Incentive and Non-Qualified
Stock Option Plan, filed as exhibit 10.16 to the Trust's Annual
Report on Form 10-K for the year ended December 31, 1998, is
incorporated herein by reference.
+10.10 The Trust's 1993 Jonathan B. Weller Non Qualified Stock Option
Plan, filed as exhibit B to the Trust's definitive proxy
statement for the Annual Meeting of Shareholders on December 15,
1994 which was filed November 17, 1994, as incorporated herein by
reference.
+10.11 Amended and Restated Employment Agreement, dated as of March 22,
2002 between the Trust and Jeffrey Linn.
10.12 PREIT Contribution Agreement and General Assignment and Bill of
Sale, dated as of September 30, 1997, by and between the Trust
and PREIT Associates, L.P., filed as exhibit 10.15 to the Trust's
Current Report on Form 8-K dated October 14, 1997, is
incorporated herein by reference.
10.13 Declaration of Trust, dated June 19, 1997, by Trust, as grantor,
and Trust, as initial trustee, filed as exhibit 10.16 to the
Trust's Current Report on Form 8-K dated October 14, 1997, is
incorporated herein by reference.
29
10.14 TRO Contribution Agreement, dated as of July 30, 1997, among the
Trust, PREIT Associates, L.P., and the persons and entities named
therein, filed as exhibit 10.17 to the Trust's Current Report on
Form 8-K dated October 14, 1997, is incorporated herein by
reference.
10.15 First Amendment to TRO Contribution Agreement, dated September
30, 1997, filed as exhibit 10.18 to the Trust's Current Report on
Form 8-K dated October 14, 1997, is incorporated herein by
reference.
10.16 Contribution Agreement (relating to the Court at Oxford Valley,
Langhorne, Pennsylvania), dated as of July 30, 1997, among the
Trust, PREIT Associates, L.P., Rubin Oxford, Inc. and Rubin
Oxford Valley Associates, L.P., filed as exhibit 10.19 to the
Trust's Current Report on Form 8-K dated October 14, 1997, is
incorporated herein byreference.
10.17 First Amendment to Contribution Agreement (relating to the Court
at Oxford Valley, Langhorne, Pennsylvania), dated September 30,
1997, filed as exhibit 10.20 to the Trust's Current Report on
Form 8-K dated October 14, 1997, is incorporated herein by
reference.
10.18 Contribution Agreement (relating to Northeast Tower Center,
Philadelphia, Pennsylvania), dated as of July 30, 1997, among the
Trust, PREIT Associates, L.P., Roosevelt Blvd. Co., Inc. and the
individuals named therein, filed as exhibit 10.22 to the Trust's
Current Report on Form 8-K dated October 14, 1997, is
incorporated herein by reference.
10.19 First Amendment to Contribution Agreement (relating to Northeast
Tower Center, Philadelphia, Pennsylvania), dated as of December
23, 1998, among the Trust, PREIT Associates, L.P., Roosevelt
Blvd. Co., Inc. and the individuals named therein, filed as
exhibit 2.2 to the Trust's Current Report on Form 8-K dated
January 7, 1999, is incorporated herein by reference.
10.20 Contribution Agreement (relating to the pre-development
properties named therein), dated as of July 30, 1997, among the
Trust, PREIT Associates, L.P., and TRO Predevelopment, LLC, filed
as exhibit 10.23 to the Trust's Current Report on Form 8-K dated
October 14, 1997, is incorporated herein by reference.
10.21 First Amendment to Contribution Agreement (relating to the
pre-development properties), dated September 30, 1997, filed as
exhibit 10.24 to the Trust's Current Report on Form 8-K dated
October 14, 1997, is incorporated herein by reference.
10.22 First Refusal Rights Agreement, effective as of September
30, 1997, by Pan American Associates, its partners and all
persons having an interest in such partners with and for the
benefit of PREIT Associates, L.P., filed as exhibit 10.25 to the
Trust's Current Report on Form 8-K dated October 14, 1997, is
incorporated herein by reference.
10.23 Contribution Agreement among the Woods Associates, a Pennsylvania
limited partnership, certain general, limited and special limited
partners thereof, PREIT Associates, L.P., a Delaware limited
partnership, and the Trust dated as of July 24, 1998, as amended
by Amendment #1 to the Contribution Agreement, dated as of August
7, 1998, filed as exhibit 2.1 to the Trust's Current Report on
Form 8-K dated August 7, 1998, is incorporated herein by
reference.
10.24 Purchase and Sale and Contribution Agreement dated as of
September 17, 1998 by and among Edgewater Associates #3 Limited
Partnership, an Illinois Limited partnership, Equity-Prince
George's Plaza, Inc., an Illinois corporation, PREIT Associates,
L.P., a Delaware limited partnership and PR PGPlaza LLC, a
Delaware limited liability company, filed as exhibit 2.1 to the
Trust's Current Report on Form 8-K dated September 17, 1998 is
incorporated herein by reference.
10.25 Purchase and Sale Agreement dated as of July 24, 1998 by and
between Oaklands Limited Partnership, a Pennsylvania limited
partnership, and PREIT Associates, L.P. a Delaware limited
partnership, filed as exhibit 2.1 to the Trust's Current Repot on
Form 8-K dated August 27, 1998 is incorporated herein by
reference.
10.26 Registration Rights Agreement, dated as of September 30, 1997,
among the Trust and the persons listed on Schedule A thereto,
filed as exhibit 10.30 to the Trust's Current Report on Form 8-K
dated October 14, 1997, is incorporated herein by reference.
10.27 Registration Rights Agreement, dated as of September 30, 1997,
between the Trust and Florence Mall Partners, filed as exhibit
10.31 to the Trust's Current Report on Form 8-K dated October 14,
1997, is incorporated herein by reference.
10.28 Letter Agreement, dated March 26, 1996, by and among The
Goldenberg Group, The Rubin Organization, Inc., Ronald Rubin and
Kenneth Goldenberg, filed as exhibit 10.32 to the Trust's Current
Report on Form 8-K dated October 14, 1997, is incorporated herein
by reference.
10.29 Letter Agreement dated July 30, 1997, by and between The
Goldenberg Group and Ronald Rubin, filed as exhibit 10.33 to the
Trust's Current Report on Form 8-K dated October 14, 1997, is
incorporated herein by reference.
30
+10.30 Employment Agreement, dated September 30, 1997, between the
Trust and Ronald Rubin, filed as exhibit 10.34 to the Trust's
Current Report on Form 8-K dated October 14, 1997, is
incorporated herein by reference.
+10.31 Employment Agreement effective January 1, 1999 between the Trust
and Edward Glickman.
+10.32 Trust Incentive Bonus Plan, effective as of January 1, 1998,
filed as exhibit 10.37 to the Trust's Current Report on Form 8-K
dated October 14, 1997, is incorporated herein by reference.
+10.33 PREIT-RUBIN, Inc. Stock Bonus Plan Trust Agreement, effective as
of September 30, 1997, by and between PREIT-RUBIN, Inc. and
CoreStates Bank, N.A., filed as exhibit 10.38 to the Trust's
Current Report on Form 8-K dated October 14, 1997, is
incorporated herein by reference.
+10.34 PREIT-RUBIN, Inc. Stock Bonus Plan, filed as exhibit 10.39 to the
Trust's Current Report on Form 8-K dated October 14, 1997, is
incorporated herein by reference.
+10.35 1997 Stock Option Plan, filed as exhibit 10.41 to the Trust's
Current Report on Form 8-K dated October 14, 1997, is
incorporated herein by reference.
+10.36 Amendment No. 1 to the Trust's 1997 Stock Option Plan, filed as
Exhibit 10.48 to the Trust's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998, is incorporated herein by
reference.
+10.37 The Trust's Special Committee of the Board of Trustees' Statement
Regarding Adjustment of Earnout Performance Benchmarks Under the
TRO Contribution Agreement, dated December 29, 1998, filed as
Exhibit 10.1 to the Trust's Current Report on Form 8-K dated
December 18, 1998, is incorporated herein by reference.
+10.38 The Trust's 1998 Non-Qualified Employee Share Purchase Plan,
filed as exhibit 4 to the Trust's Form S-3 dated January 6, 1999,
is incorporated herein by reference.
+10.39 Amendment No. 1 to the Trust's Non-Qualified Employee Share
Purchase Plan, filed as exhibit 10.52 to the Trust's Annual
Report on Form 10-K for the fiscal year ended December 31, 1998,
is incorporated herein by reference.
+10.40 The Trust's 1998 Qualified Employee Share Purchase Plan, filed as
exhibit 4 to the Trust's Form S-8 dated December 30, 1998, is
incorporated herein by reference.
+10.41 Amendment No. 1 to the Trust's Qualified Employee Share Purchase
Plan, filed as exhibit 10.54 to the Trust's Annual Report on Form
10-K for the fiscal year ended December 31, 1998, is incorporated
herein by reference.
+10.42 PREIT-RUBIN Inc. 1998 Stock Option Plan, filed as Exhibit 4 to
the Trust's Form S-3 dated March 19, 1999, is incorporated herein
by reference.
+10.43 Amendment No. 1 to the PREIT-RUBIN, Inc. 1998 Stock Option Plan,
filed as exhibit 10.56 to the Trust's Annual Report on Form 10-K
for the fiscal year ended December 31, 1998, is incorporated
herein by reference.
10.44 Promissory Note, dated April 13, 1999, by and between the
Registrant and GMAC Commercial Mortgage Corporation, a California
corporation ("GMAC"), filed as exhibit 10.1 to the Trust's
Quarterly Report on Form 10-Q for the quarter ended March 31,
1999, is incorporated herein by reference.
10.45 Mortgage and Security Agreement, dated April 13, 1999, by and
between the Registrant and GMAC, filed as exhibit 10.2 to the
Trust's Quarterly Report on Form 10-Q for the quarter ended March
31, 1999, is incorporated herein by reference.
10.46 Promissory Note, dated April 13, 1999, by and between PR
Marylander LLC, a Delaware limited liability company ("PR
Maryland"), and GMAC, filed as exhibit 10.3 to the Trust's
Quarterly Report on Form 10-Q for the quarter ended March 31,
1999, is incorporated herein by reference.
10.47 Indemnity Deed of Trust and Security Agreement, dated April 13,
1999, by and between PR Marylander and GMAC, filed as exhibit
10.4 to the Trust's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1999, is incorporated herein by reference.
10.48 Indemnity Deed of Trust and Security Agreement, dated April 13,
1999, by and between PR Kenwood Gardens LLC, a Delaware limited
liability company ("PR Kenwood Gardens"), and GMAC, filed as
exhibit 10.5 to the Trust's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999, is incorporated herein by
reference.
10.49 Mortgage and Security Agreement, dated April 13, 1999, by and
between PR Kenwood Gardens and GMAC, filed as exhibit 10.6 to the
Trust's Quarterly Report on Form 10-Q for the quarter ended March
31, 1999, is incorporated herein by reference.
10.50 Promissory Note, dated April 13, 1999, by and between GP Stones
Limited Partnership, a Florida limited partnership ("GP Stones"),
and GMAC, filed as exhibit 10.7 to the Trust's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1999, is
incorporated herein by reference.
31
10.51 Mortgage and Security Agreement, dated April 13, 1999, by and
between GP Stones and GMAC, filed as exhibit 10.8 to the Trust's
Quarterly Report on Form 10-Q for the quarter ended March 31,
1999, is incorporated herein by reference.
10.52 Promissory Note, dated April 13, 1999, by and between PR Boca
Palms LLC, a Delaware limited liability company ("PR Boca
Palms"), and GMAC, filed as exhibit 10.9 to the Trust's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999, is
incorporated herein by reference.
10.53 Mortgage and Security Agreement, dated April 13, 1999, by and
between PR Boca Palms and GMAC, filed as exhibit 10.10 to the
Trust's Quarterly Report on Form 10-Q for the quarter ended March
31, 1999, is incorporated herein by reference.
10.54 Promissory Note, dated April 13, 1999, by and between PR Pembroke
LLC, a Delaware limited liability company ("PR Pembroke"), and
GMAC, filed as exhibit 10.11 to the Trust's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1999, is incorporated
herein by reference.
10.55 Mortgage and Security Agreement, dated April 13, 1999, by and
between PR Pembroke and GMAC, filed as exhibit 10.12 to the
Trust's Quarterly Report on Form 10-Q for the quarter ended March
31, 1999, is incorporated herein by reference.
10.56 Promissory Note, dated April 13, 1999, by and between PR Hidden
Lakes LLC, a Delaware limited liability company ("PR Hidden
Lakes"), and GMAC, filed as exhibit 10.13 to the Trust's
Quarterly Report on Form 10-Q for the quarter ended March 31,
1999, is incorporated herein by reference.
10.57 Mortgage and Security Agreement, dated April 13, 1999, by and
between PR Hidden Lakes and GMAC, filed as exhibit 10.14 to the
Trust's Quarterly Report on Form 10-Q for the quarter ended March
31, 1999, is incorporated herein by reference.
10.58 Promissory Note, dated April 13, 1999, by and between PREIT
Associates L.P., a Delaware limited partnership ("PREIT
Associates"), and GMAC, filed as exhibit 10.15 to the Trust's
Quarterly Report on Form 10-Q for the quarter ended March 31,
1999, is incorporated herein by reference.
10.59 Mortgage and Security Agreement, dated April 13, 1999, by and
between PREIT Associates and GMAC, filed as exhibit 10.16 to the
Trust's Quarterly Report on Form 10-Q for the quarter ended March
31, 1999, is incorporated herein by reference.
+10.60 The Trust's 1999 Equity Incentive Plan, filed as Appendix A to
the Trust's definitive proxy statement for the Annual Meeting of
Shareholders on April 29, 1999 filed on March 30, 1999, is
incorporated herein by reference.
10.61 Credit Agreement, dated as of December 28, 2000, among PREIT
Associates, the Trust, each Subsidiary Borrower (as defined
therein) and the leading institution named therein, filed as
exhibit 10.67 to the Trust's Current Report on Form 8-K filed on
January 5, 2001, is incorporated herein by reference.
10.62 Form of Revolving Note, dated December 28, 2000, filed as exhibit
10.68 to the Trust's Current Report on Form 8-K filed on January
5, 2001, is incorporated herein by reference.
10.63 Swingline Note, dated December 28, 2000, filed as exhibit 10.69
to the Trust's Current Report on Form 8-K filed on January 5,
2001, is incorporated herein by reference.
10.64 Guaranty, dated as of December 28, 2000, executed by the Trust
and certain direct or indirect subsidiaries of the Trust, filed
as exhibit 10.70 to the Trust's Current Report on Form 8-K filed
on January 5, 2001, is incorporated herein by reference.
+10.65 The Trust's Restricted Share Plan for Non-Employee Trustees,
effective January 1, 2002.
32
+10.66 The Trust's 2002-2004 Long-Term Incentive Plan, effective
January 1, 2002.
+10.67 Amended and Restated Employment Agreement, dated as of March 22,
2002, between the Trust and David J. Bryant.
+10.68 Amended and Restated Employment Agreement, dated as of March 22,
2002, between the Trust and Raymond J. Trost.
+10.69 Employment Agreement, dated as of March 22, 2002, between the
Trust and Bruce Goldman.
+10.70 Amended and Restated Employment Agreement, dated as of
March 22, 2002, between PREIT Services, LLC and George Rubin.
+10.71 Amended and Restated Employment Agreement, dated as of
March 22, 2002, between PREIT Services, LLC and Douglas Grayson.
+10.72 Amended and Restated Employment Agreement, dated as of
March 22, 2002, between PREIT Services, LLC and Joseph Coradino.
21 Listing of subsidiaries
23 Consent of Arthur Andersen LLP (Independent Public Accountants of
the Company).
99 Letter Regarding Arthur Andersen LLP
+ Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this form.
(b) Report on Form 8-K.
None
33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Annual Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
Date: March 27, 2002 By: /s/ Jonathan B. Weller
--------------------------
Jonathan B. Weller
President and Chief Operating Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Ronald Rubin and Jonathan B. Weller, or either of them,
his true and lawful attorney-in-fact and agent, with full power of substitution
and resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this Annual Report on Form 10-K,
and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agents, and either of them, full power and authority
to do and perform each and every act and thing requisite and necessary to be
done in and about the premises, as fully as he might or could do in person,
hereby ratifying and confirming all that said attorney-in-fact and agents, or
either of them or any substitute therefor, may lawfully do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
Name Capacity Date
---- -------- ----
/s/ Ronald Rubin Chairman and Chief Executive Officer March 27, 2002
- ----------------
Ronald Rubin
/s/ Jonathan B. Weller President, Chief Operating Officer and Trustee March 27, 2002
- ----------------------
Jonathan B. Weller
/s/ George Rubin Trustee March 27, 2002
- ----------------
George Rubin
/s/ Lee Javitch Trustee March 27, 2002
- ---------------
Lee Javitch
/s/ Leonard I. Korman Trustee March 27, 2002
- ---------------------
Leonard I. Korman
/s/ Jeffrey P. Orleans Trustee March 27, 2002
- ----------------------
Jeffrey P. Orleans
/s/ Rosemarie B. Greco Trustee March 27, 2002
- ----------------------
Rosemarie B. Greco
/s/ Ira M. Lubert Trustee March 27, 2002
- -----------------
Ira M. Lubert
/s/ Edward Glickman Executive Vice President and Chief March 27, 2002
- ------------------- Financial Officer (principal
Edward Glickman financial officer)
/s/ David J. Bryant Senior Vice President - Finance March 27, 2002
- ------------------- and Treasurer (principal accounting
David J. Bryant officer)
34
Report of Independent Public Accountants
To the Shareholders and Trustees of Pennsylvania Real Estate Investment Trust:
We have audited the accompanying consolidated balance sheets of Pennsylvania
Real Estate Investment Trust (a Pennsylvania Business Trust) and subsidiaries as
of December 31, 2001 and 2000, and the related consolidated statements of
income, shareholders' equity and cash flows for each of the three years in the
period ended December 31, 2001. These financial statements and the schedules
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and schedules based on our audits. We did not audit the financial
statements of Lehigh Valley Mall Associates, a partnership in which the Company
has a 50% interest, which is reflected in the accompanying financial statements
using the equity method of accounting. The equity in net income of Lehigh Valley
Mall Associates represents 17%, 10% and 15%, of net income for the years ended
December 31, 2001, 2000, and 1999, respectively. The financial statements of
Lehigh Valley Mall Associates were audited by other auditors whose report has
been furnished to us and our opinion, insofar as it relates to the amounts
included for Lehigh Valley Mall Associates, is based solely on the report of the
other auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, based on our audits, and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Pennsylvania Real Estate Investment Trust and
subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules listed in the index to the
financial statement schedules in Item 14 are presented for purposes of complying
with the Securities and Exchange Commission's rules and are not part of the
basic consolidated financial statements. These schedules have been subjected to
the auditing procedures applied in the audit of the basic financial statements
and, in our opinion, fairly state in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
Arthur Andersen LLP
Philadelphia, Pennsylvania
March 6, 2002
F-1
CONSOLIDATED BALANCE SHEETS
As of 12/31 As of 12/31
2001 2000
Thousands of dollars, except per share amounts
Assets
Investments in real estate, at cost:
Retail properties $347,269 $328,637
Multifamily properties 254,138 249,349
Industrial properties 2,504 2,504
Land and properties under development 46,549 31,776
-------- --------
Total investments in real estate 650,460 612,266
Less: Accumulated depreciation 112,424 95,026
-------- --------
538,036 517,240
Investment in and advances to PREIT-RUBIN, Inc. -- 8,739
Investments in and advances to partnerships and joint
ventures, at equity 13,680 21,470
-------- --------
551,716 547,449
Other assets:
Cash and cash equivalents 10,258 6,091
Rents and sundry receivables (net of allowance for
doubtful accounts of $727 and $733, respectively) 10,293 7,508
Deferred costs, prepaid real estate taxes
and expenses, net 30,361 15,615
-------- --------
$602,628 $576,663
======== ========
Liabilities and Shareholders' Equity
Mortgage notes payable $257,873 $247,449
Bank loan payable 98,500 110,300
Construction loan payable 4,000 24,647
Tenants' deposits and deferred rents 3,908 3,118
Accrued expenses and other liabilities 21,294 17,477
-------- --------
385,575 402,991
-------- --------
Minority interest 36,768 29,766
-------- --------
Commitments and contingencies (Note 10)
Shareholders' equity:
Shares of beneficial interest, $1 par; authorized
unlimited; issued and outstanding 15,876 and
13,628, respectively 15,876 13,628
Capital contributed in excess of par 198,398 151,117
Deferred compensation (1,386) (1,812)
Accumulated other comprehensive loss (3,520) --
Distributions in excess of net income (29,083) (19,027)
-------- --------
Total shareholders' equity 180,285 143,906
-------- --------
$602,628 $576,663
======== ========
The accompanying notes are an integral part of these financial statements.
F-2
CONSOLIDATED STATEMENTS OF INCOME Year Ended Year Ended Year Ended
Thousands of dollars, except per share amounts 12/31/2001 12/31/2000 12/31/1999
REVENUES:
Real estate revenue
Base rent $84,689 $80,161 $76,156
Percentage rent 1,787 1,477 1,333
Expense reimbursements 10,215 8,743 7,415
Lease termination revenue 1,162 6,040 291
Other real estate revenues 4,032 4,050 4,025
------- ------- -------
Total real estate revenue 101,885 100,471 89,220
Management fees 11,336 -- --
Interest and other income 361 1,385 1,144
------- ------- -------
Total revenues 113,582 101,856 90,364
------- ------- -------
EXPENSES:
Property operating expenses:
Property payroll and benefits 7,077 6,626 6,589
Real estate and other taxes 7,750 7,210 6,668
Utilities 4,201 4,308 4,413
Other operating expenses 14,374 14,531 14,113
------- ------- -------
Total property operating expenses 33,402 32,675 31,783
Depreciation and amortization 17,974 15,661 13,853
General and administrative expenses:
Corporate payroll and benefits 13,286 2,703 1,488
Other general and administrative expenses 10,291 2,250 2,072
------- ------- -------
Total general and administrative expenses 23,577 4,953 3,560
Interest expense 24,963 23,886 22,212
------- ------- -------
Total expenses 99,916 77,175 71,408
------- ------- -------
Income before equity in unconsolidated entities, gains on sales of
interests in real estate and minority interest 13,666 24,681 18,956
Equity in loss of PREIT-RUBIN, Inc. -- (6,307) (4,036)
Equity in income of partnerships and joint ventures 6,540 7,366 6,178
Gains on sales of interests in real estate 2,107 10,298 1,763
------- ------- -------
Income before minority interest 22,313 36,038 22,861
Minority interest in operating partnership (2,524) (3,784) (2,122)
------- ------- -------
Net income $19,789 $32,254 $20,739
======= ======= =======
Basic income per share $1.35 $2.41 $1.56
===== ====== ======
Diluted income per share $1.35 $2.41 $1.56
===== ====== ======
The accompanying notes are an integral part of these financial statements.
F-3
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the Years Ended December 31,
2001, 2000 and 1999
Thousands of dollars, except per share
amounts Shares of Capital Accumulated Distributions Total
Beneficial Contributed in Deferred Other In Excess Shareholder's
Interest Excess of Par Compensation Comprehensive Of Net Equity
$1 Par Loss Income
Balance, January 1, 1999 $13,300 $145,103 $ -- $ -- $ (21,321) $137,082
Net income -- -- -- -- 20,739 20,739
Shares issued under share purchase plans 23 270 -- -- -- 293
Shares issued upon conversion of operating
partnership units 15 324 -- -- -- 339
Distributions paid to shareholders
($1.88 per share) -- -- -- -- (25,041) (25,041)
------- -------- -------- ------- --------- --------
Balance, December 31, 1999 13,338 145,697 -- -- (25,623) 133,412
Net income -- -- -- -- 32,254 32,254
Shares issued upon exercise of options 13 211 -- -- -- 224
Shares issued upon conversion of
operating partnership units 116 2,588 -- -- -- 2,704
Shares issued under share purchase plans 43 601 -- -- -- 644
Shares issued under equity incentive plan 118 2,020 (2,162) -- -- (24)
Amortization of deferred compensation -- -- 350 -- -- 350
Distributions paid to shareholders
($1.92 per share) -- -- -- -- (25,658) (25,658)
------- -------- -------- ------- --------- --------
Balance, December 31, 2000 13,628 151,117 (1,812) -- (19,027) 143,906
Comprehensive Income:
Net Income -- -- -- -- 19,789 19,789
Other comprehensive loss (Note 5) -- -- -- (3,520) -- (3,520)
------- -------- -------- ------- --------- --------
Total comprehensive income 16,269
Shares issued under equity offering 2,000 42,274 -- -- -- 44,274
Shares issued upon exercise of options 7 129 -- -- -- 136
Shares issued upon conversion of
operating partnership units 130 2,730 -- -- -- 2,860
Shares issued under share purchase plans 47 855 -- -- -- 902
Shares issued under equity incentive plan 64 1,293 (730) -- -- 627
Amortization of deferred compensation -- -- 1,156 -- -- 1,156
Distributions paid to shareholders
($2.04 per share) -- -- -- -- (29,845) (29,845)
------- -------- -------- ------- --------- --------
Balance, December 31, 2001 $15,876 $198,398 $ (1,386) $(3,520) $ (29,083) $180,285
======= ======== ======== ======= ========= ========
The accompanying notes are an integral part of these financial statements.
F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended Year Ended Year Ended
Thousands of dollars 12/31/2001 12/31/2000 12/31/1999
Cash Flows from Operating Activities:
Net income $ 19,789 $ 32,254 $ 20,739
Adjustments to reconcile net income to
net cash provided by operating activities:
Minority interest, net of distributions -- 667 --
Depreciation and amortization 17,974 15,661 13,853
Amortization of deferred financing costs 672 494 370
Provision for doubtful accounts 533 752 1,298
Amortization of deferred compensation 1,156 350 --
Gains on sales of interests in real estate (2,107) (10,298) (1,763)
Equity in loss of PREIT-RUBIN, Inc. -- 6,307 4,036
Decrease in allowance for possible losses -- -- (98)
Change in assets and liabilities, net of effects from acquisitions:
Net change in other assets (5,615) (3,351) (9,474)
Net change in other liabilities 5,253 1,637 476
-------- ------- -------
Net cash provided by operating activities 37,655 44,473 29,437
-------- ------- -------
Cash Flows from Investing Activities:
Net investments in wholly-owned real estate (14,463) (24,886) (36,971)
Investments in property under development (29,234) (25,657) (26,802)
Investments in partnerships and joint ventures (1,732) (5,093) (8,299)
Investments in and advances to PREIT-RUBIN, Inc. -- (5,036) (2,126)
Cash distributions from partnerships and joint
ventures in excess of equity in income 8,232 1,338 3,789
Cash proceeds from sales of interests in partnerships 3,095 2,940 1,491
Cash proceeds from sales of wholly-owned real estate 7,058 20,044 4,045
Net cash received from PREIT-RUBIN, Inc. 1,616 -- --
-------- ------- -------
Net cash used in investing activities (25,428) (36,350) (64,873)
-------- ------- -------
Cash Flows from Financing Activities:
Principal installments on mortgage notes payable (4,575) (4,440) (3,672)
Proceeds from mortgage notes payable 15,000 -- 120,500
Proceeds from construction loan payable -- 17,843 6,804
Repayment of mortgage notes payable -- (14,942) (17,000)
Repayment of construction loan payable (20,647) -- --
Net (payment) borrowing from revolving credit facility (11,800) 19,300 (47,873)
Payment of deferred financing costs (432) (1,594) (1,438)
Shares of beneficial interest issued, net of issuance costs 48,348 294 293
Distributions paid to shareholders (29,845) (25,658) (25,041)
Distributions paid to OP unit holders and minority partners,
in excess of minority interest (4,109) -- (789)
-------- ------- -------
Net cash (used in) provided by financing activities (8,060) (9,197) 31,784
-------- ------- -------
Net change in cash and cash equivalents 4,167 (1,074) (3,652)
Cash and cash equivalents, beginning of period 6,091 7,165 10,817
-------- ------- -------
Cash and cash equivalents, end of period $ 10,258 $ 6,091 $ 7,165
======== ======= =======
The accompanying notes are an integral part of these financial statements.
F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2001, 2000 and 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Pennsylvania Real Estate Investment Trust, a Pennsylvania business trust
(collectively with its subsidiaries, the "Company") is a fully integrated,
self-administered and self-managed real estate investment trust ("REIT") which
acquires, rehabilitates, develops, and operates retail and multifamily
properties. Substantially all of the Company's properties are located in the
Eastern United States, with concentrations in the Mid-Atlantic states and in
Florida.
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 December 31, 2001, the Company held a 90.1%
interest in the Operating Partnership.
Pursuant to the terms of the partnership agreement, each of the other limited
partners of the Operating Partnership has the right to convert his/her interest
in the Operating Partnership into cash or, at the election of the Company, into
shares on a one-for-one basis, in some cases beginning one year following the
respective issue date and in some cases immediately.
Investment in PRI
As of December 31, 2000, the Operating Partnership held a 95% economic interest
in PREIT-RUBIN, Inc. ("PRI") through its ownership of 95% of PRI's stock, which
represented all of the nonvoting common stock of PRI.
Effective January 1, 2001, in exchange for Company shares valued at
approximately $0.5 million, the Operating Partnership acquired the 5% minority
interest representing all of the voting common stock in PRI, which is now 100%
owned by the Operating Partnership, and consolidated. Also effective January 1,
2001, PRI was converted to a Taxable REIT Subsidiary, as defined under the
Internal Revenue Code. As a Taxable REIT Subsidiary, PRI is able to pursue
certain business opportunities not previously available under the rules
governing REITs. On January 1, 2001, the Company also formed PREIT Services, LLC
("PREIT Services") for the purpose of managing the Company's properties that
were previously managed by PRI.
The Company's investment in PRI was previously accounted for using the equity
method. See Note 3 for further discussion. The excess of the Company's
investment over the underlying equity in the net assets of PRI ($12.8 million at
December 31, 2001) was amortized using a 35 year life. Effective January 1,
2002, this amount is no longer amortized (see Recent Accounting Pronouncements,
below).
Consolidation
The Company consolidates its accounts and the accounts of the Operating
Partnership and reflects the remaining interest in the Operating Partnership as
minority interest. All significant intercompany accounts and transactions have
been eliminated in consolidation.
Partnership and Joint Venture Investments
The Company accounts for its investment in partnerships and joint ventures which
it does not control using the equity method of accounting. These investments,
which represent a 0.01% noncontrolling interest in Willow Grove Park (See Note
11) and 40% to 60% noncontrolling ownership interests in the Company's other
partnerships and joint ventures, are recorded initially at the Company's cost
and subsequently adjusted for the Company's net equity in income and cash
contributions and distributions.
Statements of Cash Flows
The Company considers all highly liquid short-term investments with an original
maturity of three months or less to be cash equivalents. Cash paid for interest,
net of amounts capitalized, was $23.7 million, $24.1 million and $22.1 million
for the years ended December 31, 2001, 2000 and 1999, respectively. At December
31, 2001 and 2000, cash and cash equivalents totaling $10.3 million and $6.1
million, respectively included tenant escrow deposits of $1.0 million and $1.2
million, respectively.
Capitalization of Costs
It is the Company's policy to capitalize interest and real estate taxes related
to properties under development and to depreciate these costs over the life of
the related assets. For the years ended December 31, 2001, 2000 and 1999, the
Company capitalized interest of $2.6 million, $3.3 million and $2.3 million,
respectively and real estate taxes of $0.1 million, $0.3 million and $0.1
million, respectively.
The Company capitalizes as deferred costs certain expenditures related to the
financing and leasing of certain properties. Capitalized loan fees are amortized
over the term of the related loans and leasing commissions are amortized over
the term of the related leases.
The Company records certain deposits associated with planned future purchases of
real estate as assets when paid. These deposits are transferred to the
properties upon consummation of the transaction. The Company capitalizes costs
associated with properties held for future development.
The Company capitalizes repairs and maintenance costs that extend the useful
life of the asset and that meet certain minimum cost thresholds. Costs that do
not meet these thresholds, or do not extend the asset lives are expensed as
incurred.
F-6
Depreciation
The Company, for financial reporting purposes, depreciates its buildings,
equipment and leasehold improvements over their estimated useful lives of 5 to
50 years, using the straight-line method of depreciation. For federal income tax
purposes, the Company uses the straight-line method of depreciation and the
useful lives prescribed by the Internal Revenue Code. Depreciation expense was
$17.7 million, $15.3 million and $13.4 million for the years ended December 31,
2001, 2000 and 1999, respectively.
Allowance for Possible Losses
The Company reviews the carrying value of long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount of
the asset, an impairment loss is recognized. Measurement of an impairment loss
for these assets is based on the estimated fair market value of the assets. No
impairment losses were recognized in the years ended December 31, 2001, 2000 or
1999.
Derivative Financial Instruments
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 the Company to recognize
all derivatives as either assets or liabilities in the consolidated balance
sheet 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.
Income Taxes
The Company has elected to qualify as a real estate investment trust under
Sections 856-860 of the Internal Revenue Code and intends to remain so
qualified. Accordingly, no provision for federal income taxes has been reflected
in the accompanying consolidated financial statements.
Earnings and profits, which determine the taxability of distributions to
shareholders, will differ from net income reported for financial reporting
purposes due to differences in cost basis, differences in the estimated useful
lives used to compute depreciation and differences between the allocation of the
Company's net income and loss for financial reporting purposes and for tax
reporting purposes.
The Company is subject to a federal excise tax computed on a calendar year
basis. The excise tax equals 4% of the excess, if any, of 85% of the Company's
ordinary income plus 95% of the Company's capital gain net income for the year
plus 100% of any prior year shortfall over cash distributions during the year,
as defined by the Internal Revenue Code. The Company has in the past distributed
a substantial portion of its taxable income in the subsequent fiscal year and
may also follow this policy in the future.
A provision for excise tax of $0.2 million was recorded for the year ended
December 31, 2000. No provision for excise tax was made for the years ended
December 31, 2001 or 1999, as no tax was due in those years.
The tax status of per share distributions paid to shareholders was composed of
the following for the years ended December 31, 2001, 2000, and 1999:
Year Ended Year Ended Year Ended
12/31/2001 12/31/2000 12/31/1999
Ordinary income $1.80 $1.14 $1.67
Capital gains 0.24 0.78 0.21
---- ---- ----
$2.04 $1.92 $1.88
===== ===== =====
PRI is subject to federal, state and local income taxes. The operating results
of PRI include a provision or benefit for income taxes. Tax benefits are
recorded by PRI to the extent realizable.
The aggregate cost for federal income tax purposes of the Company's investment
in real estate was approximately $581 million and $543 million at December 31,
2001 and 2000, respectively.
Fair Value of Financial Instruments
Carrying amounts reported in the balance sheet for cash, accounts receivable,
accounts payable and accrued expenses, and borrowings under the Credit Facility
and the construction loan payable approximate fair value due to the nature of
these instruments. Accordingly, these items have been excluded from the fair
value disclosures.
Revenue Recognition
Rental revenue is recognized on a straight-line basis over the lease term
regardless of when payments are due. The straight-line rent adjustment increased
revenue by approximately $0.8 million in 2001, $1.2 million in 2000, and $0.7
million in 1999. Certain lease agreements contain provisions that require
tenants to reimburse a pro rata share of real estate taxes and certain common
area maintenance costs. Percentage rents are recorded after annual tenant sales
targets are met.
No tenant represented 10% or more of the Company's rental revenue in any period
presented.
F-7
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Reclassifications
Certain prior period amounts have been reclassified to conform with the current
year presentation.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 141, "Business Combinations" and SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires the use
of the purchase method of accounting for business combinations initiated after
June 30, 2001. SFAS No. 142 requires the Company to cease amortizing goodwill
that existed as of June 30, 2001, effective January 1, 2002. Recorded goodwill
balances will be reviewed for impairment at least annually and written down if
the carrying value of the goodwill balance exceeds its fair value.
For goodwill recorded prior to June 30, 2001, the Company will adopt the
provisions of SFAS No. 141 and SFAS No. 142 as of January 1, 2002, and
accordingly, goodwill will no longer be amortized after December 31, 2001. The
Company will conduct an annual review of the goodwill balances for impairment
and determine whether any adjustments to the carrying value of goodwill are
required. The Company's consolidated balance sheet at December 31, 2001 includes
$12.8 million (net of $1.1 million of accumulated amortization expense) of
goodwill recognized in connection with the acquisition of PRI in 1997. In
accordance with the provisions of these statements, the Company amortized this
goodwill through the end of 2001, recognizing approximately $0.4 million of
goodwill amortization expense for the year ended December 31, 2001.
While the Company has not yet completed all of the valuation and other work
necessary to adopt these accounting standards, it is believed that, except for
the impact of discontinuing the amortization of goodwill, there will not be a
significant impact on the Company's financial condition or operating results.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS No. 144"). This Statement addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets and supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" and the accounting and
reporting provisions of APB Opinion No. 30, "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions" ("APB
30") for the disposal of a segment of a business as previously defined in APB
30. The provisions of SFAS No. 144 are effective for financial statements issued
for fiscal years beginning after December 15, 2001 and interim periods within
those fiscal years, with earlier application encouraged. The provisions of the
Statement generally are to be applied prospectively. The Company is in the
process of evaluating the financial statement impact of the adoption of SFAS No.
144.
F-8
2. INVESTMENTS IN PARTNERSHIPS & JOINT VENTURES
The following table presents summarized financial information of the equity
investments in the Company's 16 partnerships and joint ventures as of December
31, 2001 and 2000, including 3 properties with development activity.
Year Ended Year Ended
12/31/2001 12/31/2000
Thousands of dollars
Assets
Investments in real estate, at cost:
Multifamily properties $57,281 $ 57,200
Retail properties 430,368 410,745
Properties under development 5,986 28,477
------- --------
Total investments in real estate 493,635 496,422
Less: Accumulated depreciation 86,356 78,025
------- --------
407,279 418,397
Cash and cash equivalents 4,390 5,788
Deferred costs, prepaid real
estate taxes and other, net 51,666 56,012
------- --------
Total assets 463,335 480,197
------- --------
Liabilities and Partners' Equity
Mortgage notes payable 401,193 327,684
Construction loans payable -- 61,857
Other liabilities 18,036 33,127
------- --------
Total liabilities 419,229 422,668
------- --------
Net equity 44,106 57,529
Less: Partners' share 30,576 36,578
------- --------
Company's share 13,530 20,951
------- --------
Advances 150 519
------- --------
Investment in and advances to partnerships and
Joint ventures $13,680 $ 21,470
======= ========
Mortgage notes payable, which are secured by 14 of the related properties, are
due in installments over various terms extending to the year 2016 with interest
rates ranging from 6.40% to 8.39% with a weighted average interest rate of 7.42%
at December 31, 2001. The Company's proportionate share of principal payments
due in the next five years and thereafter is as follows (thousands of dollars):
Year Ended 12/31 Principal Amortization Balloon Payments Total
- ---------------- ---------------------- ---------------- -----
2002 $2,606 $-- $2,606
2003 2,392 8,832 11,224
2004 2,620 -- 2,620
2005 2,860 -- 2,860
2006 2,948 21,760 24,708
2007 and thereafter 16,119 85,665 101,784
------ ------ -------
$29,545 $116,257 $145,802
======= ======== ========
The liability under each mortgage note is limited to the particular property,
except for a loan with a balance of $5.8 million, which is guaranteed by the
partners of the respective partnerships, including the Company.
In 2001, the Company and its joint venture partner secured a mortgage for a
property previously under development. The proceeds from the mortgage were used
to repay the construction loan on the property. The balance of the loan at
December 31, 2001 was $65.4 million. This loan bears an interest rate of 7.25%
and matures in October 2011.
The Company's investments in certain partnerships and joint ventures reflect
cash distributions in excess of the Company's net investments totaling $1.8
million and $2.1 million as of December 31, 2001 and 2000, respectively.
F-9
The following table summarizes the Company's equity in income for the years
ended December 31, 2001, 2000 and 1999 (thousands of dollars):
Year Ended Year Ended Year Ended
12/31/2001 12/31/2000 12/31/1999
Gross revenues from real estate $94,272 $80,303 $58,817
------- ------- -------
Expenses:
Property operating expenses 33,981 27,267 19,785
Interest expense 30,229 25,477 17,475
Refinancing prepayment penalty 510 -- --
Depreciation and amortization 16,363 12,436 9,131
------- ------- -------
Total expenses 81,083 65,180 46,391
------- ------- -------
Net income 13,189 15,123 12,426
Partners' share (6,649) (7,757) (6,248)
------- ------- -------
Equity in income of partnerships and joint ventures $ 6,540 $ 7,366 $ 6,178
======= ======= =======
The Company has a 50% partnership interest in Lehigh Valley Mall Associates
which is included in the amounts above. Summarized financial information as of
December 31, 2001, 2000 and 1999 for this investment, which is accounted for by
the equity method, is as follows (thousands of dollars):
Year Ended Year Ended Year Ended
12/31/2001 12/31/2000 12/31/1999
Total assets $19,729 $21,148 $23,283
Mortgages payable 49,599 50,596 51,518
Revenues 18,076 17,295 17,296
Property operating expenses 6,678 5,888 6,057
Interest expense 3,957 4,068 4,103
Net income 6,690 6,565 6,356
Equity in income of partnership 3,345 3,282 3,178
3. INVESTMENT IN PRI
PRI is responsible for various activities, including management, leasing and
real estate development of properties on behalf of third parties. Prior to
January 1, 2001, PRI also provided these services to certain of the Company's
properties. Management fees paid by the Company's properties to PRI were
included in property operating expenses in the accompanying consolidated
statements of income and amounted to $0.9 million and $0.6 million for the years
ended December 31, 2000 and 1999. The Company's properties also paid leasing and
development fees to PRI totaling $1.3 million and $0.5 million for the years
ended December 31, 2000 and 1999. The Company did not pay management, leasing or
development fees to PRI in 2001 because it became a consolidated entity on
January 1, 2001. Effective January 1, 2001, management services previously
provided by PRI for certain of the Company's properties are provided by PREIT
Services, which is 100% owned by the Company.
In July 1998, PRI issued 134,500 non-qualified stock options to its employees
("PRI options") to purchase shares of beneficial interest in the Company at a
price equal to fair market value of the shares ($23.85) on the grant date. The
options vest in four equal annual installments commencing July 15, 1999. At the
same time, the Company sold an option to PRI which will enable PRI to purchase
an equal number of shares from the Company with the same terms and conditions as
the PRI options. The purchase price for the options was determined based on the
Black-Scholes option pricing model and was valued at $1.20 per option. There
were no stock options issued in 2001, 2000 or 1999.
PRI also provides management, leasing and development services for partnerships
and other ventures in which certain officers of the Company and PRI have either
direct or indirect ownership interests. Total revenues earned by PRI for such
services were $2.9 million, $3.2 million and $3.6 million for the years ended
December 31, 2001, 2000 and 1999, respectively. As of December 31, 2001 and
2000, $0.3 million and $0.7 million, respectively, was due from these
affiliates. Of these amounts, approximately $0.2 million and $0.7 million,
respectively, were collected subsequent to December 31, 2001 and 2000. Market
rate interest is charged on the remaining related party receivable balance of
$0.1 million. PRI holds a note receivable from a related party with a balance of
$0.1 million that is due in installments through 2010 and bears an interest rate
of 10% per annum.
F-10
Summarized financial information for PRI as of and for the years ended December
31, 2000 and 1999 is as follows (2001 information is not presented because PRI
was consolidated effective January 1, 2001):
(Thousands of dollars):
Year Ended Year Ended
12/31/2000 12/31/1999
Total assets $ 6,782 $ 7,185
======= =======
Management fees $ 3,739 $ 4,526
Leasing commissions 4,113 5,312
Development fees 617 691
Other revenues 3,620 4,382
------- -------
Total revenue $12,089 $14,911
======= =======
Net loss $(6,624) $(4,237)
======= =======
Company's share of net loss $(6,307) $(4,036)
======= =======
4. MORTGAGE NOTES, BANK AND CONSTRUCTION LOANS PAYABLE
Mortgage Notes Payable
Mortgage notes payable which are secured by 18 of the Company's properties are
due in installments over various terms extending to the year 2025 with interest
at rates ranging from 5.90% to 9.50% with a weighted average interest rate of
7.45% at December 31, 2001. Principal payments are due as follows (thousands of
dollars):
Year Ended 12/31 Principal Amortization Balloon Payments Total
- ---------------- ---------------------- ---------------- -----
2002 $4,917 $-- $4,917
2003 5,080 6,201 11,281
2004 5,274 -- 5,274
2005 5,674 12,500 18,174
2006 6,074 -- 6,074
2007 and thereafter 15,789 196,364 212,153
------ ------- -------
$42,808 $215,065 $257,873
======= ======== ========
The fair value of the mortgage notes payable was approximately $259.1 million at
December 31, 2001 based on year-end interest rates and market conditions.
Credit Facility
In December 2000, the Operating Partnership entered into a Credit Facility
consisting of a $175 million three-year revolving credit facility (the
"Revolving Facility") and a $75 million two-year construction finance facility
(the "Construction Facility"). The obligations of the Operating Partnership
under the Credit Facility are secured by a pool of properties and have been
guaranteed by the Company.
The Credit Facility bears interest at the London Interbank Offered Rate
("LIBOR") plus margins ranging from 130 to 180 basis points, depending on the
Company's consolidated Leverage Ratio, as defined by the Credit Facility.
The Credit Facility is secured by 10 of the Company's existing retail and
industrial properties. The facility contains covenants and agreements which
affect, among other things, the amount of permissible borrowings and other
liabilities of the Company. The initial term of the Revolving Facility may be
extended for an additional year on the lenders' approval or, alternatively, may
be converted by the Company into a two-year amortizing term loan at the
beginning of the third year. In addition, at the Company's discretion,
properties financed under the Construction Facility may be placed in the
collateral pool for the Revolving Facility upon their completion.
As of December 31, 2001 and 2000, the Operating Partnership had $98.5 million
and $110.3 million outstanding on the Revolving Facility. The weighted average
interest rate based on amounts borrowed on the Company's credit facilities (old
and new) was 5.84%, 8.22% and 6.95% for the years ended December 31, 2001, 2000
and 1999, respectively. The interest rate at December 31, 2001 was 3.52%.
Derivative instruments fixed the interest rate on $75.0 million of the $98.5
million outstanding at December 31, 2001 (see Note 5).
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 December 31, 2001; (vi) maximum
floating rate debt of $250 million; and (vii) maximum commitments for properties
under development not in excess of 25% of Gross Asset Value (as defined in the
Credit Facility). As of December 31, 2001, the Company was in compliance with
all debt covenants.
F-11
Construction Loan Payable
The Company has a construction loan outstanding with a balance of $4.0 million
and $24.6 million at December 31, 2001 and 2000. The construction loan bears
interest at the rate of LIBOR plus 1.75% or 3.62%, at December 31, 2001. The
loan is secured by a first mortgage on the property under development. The loan
maturity was extended to 2002, and the Company is currently pursuing long-term
financing for the property.
5. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
As of January 1, 2001, the adoption of SFAS 133 resulted in derivative
instruments reported on the consolidated 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 distributions in excess of net
income. The Company recorded additional other comprehensive loss of $3.4 million
to recognize the change in value during the year ending December 31, 2001.
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.
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. Instruments that meet 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 in 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.
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 limit overall interest cost, the Company
may use 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 also 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 December 31, 2001, $4.0 million in deferred losses were recognized, $3.5
million of which is included in accumulated other comprehensive loss, a
component of shareholders' equity, with the remainder credited to minority
interest.
The following table summarizes the notional values and fair values of the
Company's derivative financial instruments at December 31, 2001. The notional
value provides an indication of the extent of the Company's involvement in these
instruments at that time, but does not represent exposure to credit, interest
rate or market risks.
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 ($2.9 million)
On December 31, 2001, the derivative instruments were reported at their fair
value as a liability of $4.0 million. This amount is included in accrued
expenses and other liabilities on the accompanying consolidated balance sheet.
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 consolidated balance sheet with a corresponding adjustment to
either accumulated other comprehensive income or earnings depending on the type
of hedging relationship. If the hedging transaction is a cash flow hedge, then
the offsetting gains/losses are reported in accumulated other comprehensive
income/loss. Over time, the unrealized gains and losses held in accumulated
other comprehensive income/loss will be charged to earnings. This treatment
matches the adjustment recorded when the hedged items are also recognized in
earnings. Within the next twelve months, the Company expects to record a charge
to earnings of approximately $2.7 million of the current balance held in
accumulated other comprehensive income/loss.
F-12
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.
6. NET INCOME PER SHARE
Basic Earnings Per Share ("EPS") is based on the weighted average number of
common shares outstanding during the year. Diluted EPS 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 EPS is
shown below.
Year Ended Year Ended Year Ended
12/31/2001 12/31/2000 12/31/1999
Basic Diluted(1) Basic Diluted(1) Basic Diluted(1)
(Thousands of dollars, except per share amounts)
Net income $19,789 $19,789 $32,254 $32,254 $20,739 $20,739
======== ======== ======== ======== ======== =======
Weighted average shares outstanding 14,657 14,657 13,403 13,403 13,318 13,318
Effect of share options issued -- 27 -- -- -- --
-- -- -- -- -- --
Total weighted average
shares outstanding 14,657 14,684 13,403 13,403 13,318 13,318
======= ======= ======= ======= ======= ======
Net income per share $1.35 $1.35 $2.41 $2.41 $1.56 $1.56
===== ===== ===== ===== ===== =====
(1) OP Unit conversions in 2001, 2000 and 1999 have no effect on diluted
earnings per share.
7. BENEFIT PLANS
The Company maintains a 401(k) Plan (the "Plan") in which substantially all of
its officers and employees are eligible to participate. The Plan permits
eligible participants, as defined in the Plan agreement, to defer up to 15% of
their compensation, and the Company, at its discretion, may match a percentage
of the employees' contributions. The Company's and its employees' contributions
are fully vested, as defined in the Plan agreement. The Company's contributions
to the Plan for the years ended December 31, 2001, 2000 and 1999 were $247,000,
$25,000 and $34,000, respectively.
The Company also maintains a Supplemental Retirement Plan (the "Supplemental
Plan") covering certain senior management employees. The Supplemental Plan
provides eligible employees through normal retirement date, as defined in the
Supplemental Plan agreement, a benefit amount similar to the amount that would
have been received under the provisions of a pension plan that was terminated in
1994. Contributions recorded by the Company under the provisions of this plan
were $62,000, $65,000 and $62,000 for the years ended December 31, 2001, 2000
and 1999, respectively.
The Company also maintains share purchase plans through which the Company's
employees may purchase shares of beneficial interest at a 15% discount of the
fair market value. In 2001, 2000 and 1999, 47,000, 43,000 and 23,000 shares were
purchased for total consideration of $0.9 million, $0.6 million and $0.3
million, respectively.
8. STOCK OPTION PLANS
The Company has five plans that provide for the granting of options to purchase
shares of beneficial interest to key employees and nonemployee trustees of the
Company. Options are granted at the fair market value of the shares on the date
of the grant. The options vest and are exercisable over periods determined by
the Company, but in no event later than 10 years from the grant date. Changes in
options outstanding are as follows:
1999 1997 1993 1990 1990
Equity Incentive Stock Option Stock Option Employees Nonemployee
Plan Plan Plan Plan Trustee Plan
Authorized shares 400,000 455,000 100,000 400,000 100,000
------- ------- ------- ------- -------
Available for grant at December 31, 2001 326,300 (1) -- -- -- 19,500
----------- -- -- -- ------
(1) Amount is net of 41,036 and 118,500 restricted stock awards issued to
certain employees as incentive compensation in 2001 and 2000. The
restricted stock was awarded at its fair value that ranged from $21.93 to
$23.58 per share in 2001 and $18.16 to $18.56 per share in 2000 for a total
value of $0.9 million in 2001 and $2.2 million in 2000. Restricted stock
vests ratably over periods of three to five years. The Company recorded
compensation expense of $1.2 million in 2001 and $0.4 million in 2000
related to these restricted stock awards.
F-13
Weighted 1999 1997 1993 1990 1990
Average Exercise Equity Incentive Stock Option Stock Option Employees Nonemployee
Price Plan Plan Plan Plan Trustee Plan
Options outstanding at 1/1/99 $23.17 -- 432,000 100,000 346,875 37,000
====== ======= ======= ======= ======= ======
Options granted $20.00 -- -- -- -- 5,000
Options forfeited $25.28 -- (72,000) -- (500) (5,500)
------ ------- ------- ------- ------- ------
Options outstanding at 12/31/99 $23.19 -- 360,000 100,000 346,375 36,500
====== ======= ======= ======= ======= ======
Options granted $17.84 100,000 -- -- -- 12,500
Options exercised $15.94 -- -- -- (12,625) (4,000)
Options forfeited $21.10 -- -- -- (89,500) --
------ ------- ------- ------- ------- ------
Options outstanding at 12/31/00 $22.64 100,000 360,000 100,000 244,250 45,000
====== ======= ======= ======= ======= ======
Options granted $21.50 -- -- -- -- 17,500
Options exercised $19.15 -- -- -- -- (7,125)
Options forfeited $25.06 -- -- -- -- (2,000)
------ ------- ------- ------- ------- ------
Options outstanding at 12/31/01 $22.64 100,000 360,000 100,000 244,250 53,375
====== ======= ======= ======= ======= ======
At December 31, 2001, options for 657,750 shares of beneficial interest with an
aggregate purchase price of $14.9 million (average of $22.71 per share) were
exercisable.
Outstanding options as of December 31, 2001 have a weighted average remaining
contractual life of 5.2 years, an average exercise price of $22.64 per share and
an aggregate purchase price of $19.4 million.
The following table summarizes information relating to all options outstanding
at December 31, 2001.
Options Outstanding at Options Exercisable at
December 31, 2001 December 31, 2001
----------------------------- ------------------------------
Weighted
Weighted Weighted Average
Average Average Remaining
Range of Exercise Number of Exercise Price Number of Exercise Price Contractual
Prices (Per Share) Shares (Per Share) Shares (Per Share) Life (Years)
- ------------------------------------------------------------------------------------------------
$17.00 - $18.99 224,125 $17.93 156,625 $17.97 5.8
$19.00 - $20.99 53,500 20.35 51,500 20.37 2.5
$21.00 - $22.99 34,500 22.11 17,000 22.75 7.5
$23.00 - $24.99 182,500 23.71 177,625 23.70 2.3
$25.00 - $25.41 363,000 25.41 255,000 25.41 6.5
---------- ---------
857,625 657,750
=========== ==========
The fair value of each option granted was estimated on the grant date using the
Black-Scholes options pricing model and the assumptions presented below:
2001 2000 1999
Weighted average fair value $0.52 $0.81 $1.06
Expected life in years 5 5 5
Risk-free interest rate 4.60% 5.80% 4.59%
Volatility 12.99% 17.34% 19.05%
Dividend yield 9.42% 10.04% 9.40%
The Company accounts for stock-based compensation using the intrinsic value
method in APB Opinion No. 25 as permitted under SFAS No. 123, "Accounting for
Stock-Based Compensation". If compensation cost for these plans had been
determined using the fair value method prescribed by SFAS No. 123, the impact on
the Company's net income and net income per share would have been immaterial.
F-14
9. OPERATING LEASES
The Company's multifamily apartment units are typically leased to residents
under operating leases for a period of one year. The Company's retail properties
are leased to tenants under operating leases with expiration dates extending to
the year 2025.
Future minimum rentals under noncancelable operating leases with terms greater
than one year are as follows:
Years Ended 12/31
2002 $ 35,844
2003 34,110
2004 32,018
2005 29,439
2006 24,472
2007 and thereafter 143,902
The total future minimum rentals as presented do not include amounts that may be
received as tenant reimbursements for charges to cover increases in certain
operating costs or contingent amounts that may be received as percentage rents.
10. COMMITMENTS AND CONTINGENCIES
The Company leases office space from an affiliate of certain officers of the
Company. Total rent expense under this lease, which expires in 2010, was $0.9
million, $0.7 million and $0.6 million for the years ended December 31, 2001,
2000 and 1999, respectively. Minimum rental payments under this lease are $0.7
million per year from 2002 to 2010.
The Company is involved in a number of development and redevelopment projects
which may require equity funding by the Company, or third-party debt or equity
financing. In each case, the Company will evaluate the financing opportunities
available to it at the time the project requires funding. In cases where the
project is undertaken with a joint venture partner, the Company's flexibility in
funding the project may be governed by the joint venture agreement or the
covenants existing in its line of credit which limit the Company's involvement
in joint venture projects. At December 31, 2001, the Company had approximately
$13.4 million committed to complete current development and redevelopment
projects, which is expected to be financed through the Company's Revolving
Facility or through short-term construction loans.
In connection with certain development properties, the Company may be required
to issue additional OP units upon the achievement of certain financial results.
Further, the Company is obligated to acquire the remaining 11% interest in a
retail property in 2002.
In the normal course of business, the Company becomes involved in legal actions
relating to the ownership and operations of its properties and the properties it
manages for third parties. In management's opinion, the resolutions of these
legal actions are not expected to have a material adverse effect on the
Company's consolidated financial position or results of operations.
The Company is aware of certain environmental matters at certain of its
properties, including ground water contamination, above-normal radon levels and
the presence of asbestos containing materials and lead-based paint. The Company
has, in the past, performed remediation of such environmental matters, and, at
December 31, 2001, the Company is not aware of any significant remaining
potential liability relating to these environmental matters. The Company may be
required in the future to perform testing relating to these matters. The Company
has reserved approximately $0.1 million to cover possible environmental costs at
a property formerly owned by the Company.
As of December 31, 2001, eleven executive officers of the Company had employment
agreements that provided for aggregate initial base compensation of $2.7 million
subject to increases as approved by the Company's compensation committee, among
other incentive compensation.
11. ACQUISITIONS AND 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 Ingleside Shopping 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 Commons of Magnolia 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.
In 2000, the Company entered into an agreement giving it a 0.01% joint venture
interest in Willow Grove Park, a 1.2 million square foot regional mall in Willow
Grove, PA. Under the agreement, the Company was responsible for the expansion of
the property to include a new Macy's store and decked parking. The total cost of
the expansion through December 31, 2001 was $14.1 million. In 2002, the Company
expects to make an additional cash contribution of approximately $3.1 million
and contribute the expansion asset to the joint venture in return for a
subordinated 50% general partnership interest.
F-15
During 2000, the Company acquired the remaining 35% interest in a multifamily
property, (Emerald Point). The Company paid approximately $11.0 million for the
interest, including $5.7 million in assumed debt and $5.3 million borrowed under
the line of credit.
During 2000, the Company sold Forestville Shopping Center, Valley View Shopping
Center, CVS Warehouse and Distribution Center, and its 50% interest in Park
Plaza Shopping Center. Total proceeds from these sales was approximately $23.0
million. The property sales resulted in gains totaling approximately $10.3
million.
During 1999, the Company acquired two shopping centers (Home Depot at Northeast
Tower Center and Florence Commons), three shopping center development sites
(Creekview Shopping Center, Paxton Town Centre and Metroplex Shopping Center),
and an additional 10% interest in Rio Mall, in which it now owns a 60% interest.
The Company paid approximately $51.4 million, consisting of $28.0 million in
cash, $12.5 million in assumed debt, $9.9 million borrowed under the line of
credit and $1.0 million of OP units.
Each of these acquisitions was accounted for by the purchase method of
accounting. The results of operations for the acquired properties have been
included from their respective purchase dates. The 2001, 2000 and 1999
acquisitions did not result in a requirement to present pro forma information.
In connection with the Company's 1997 acquisition of The Rubin Organization
("TRO") and certain other property interests, the Company agreed to issue up to
800,000 additional Class A OP units over a five-year period ending September 30,
2002, if certain earnings are achieved. The Company accounts for the issuance of
contingent OP units as additional purchase price when such amounts are
determinable. Through December 31, 2001, 665,000 contingent OP units had been
earned, resulting in additional purchase price of approximately $12.9 million.
12. SEGMENT INFORMATION
The Company 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 other segment includes the
operation and management of 4 retail properties under development (3
wholly-owned and 1 owned in joint venture form) and 4 industrial properties (all
wholly-owned). The corporate segment includes cash and investment management,
real estate management and certain other general support functions.
The accounting policies for the segments are the same as those described in Note
1, except that, for segment reporting purposes, the Company uses the
"proportionate-consolidation method" of accounting (a non-GAAP measure) for
joint venture properties, instead of the equity method of accounting. The
Company calculates the proportionate-consolidation method by applying its
percentage ownership interest to the historical financial statements of their
equity method investments.
The chief operating decision-making group for the Company's Retail, Multifamily,
Development and Other and Corporate segments is comprised of the Company's
President, Chief Executive Officer and the lead executives of each of the
Company's operating segments. The lead executives of each operating segment also
manage the profitability of each respective segment. The operating segments are
managed separately because each operating segment represents different property
types, as well as properties under development and corporate services.
(In thousands of dollars) Development Adjustments Total
Year Ended 12/31/01 Retail Multifamily and Other Corporate Total to Equity Consolidated
Real estate operating revenues $ 81,621 $ 56,394 $ 324 $ -- $138,339 ($ 36,454) $101,885
Property operating expenses 22,473 23,456 14 -- 45,943 (12,541) 33,402
-------- -------- ------- --------- -------- --------- --------
Net operating income 59,148 32,938 310 -- 92,396 (23,913) 68,483
-------- -------- ------- --------- -------- --------- --------
Management fees -- -- -- 11,336 11,336 -- 11,336
General and administrative expenses -- -- -- (23,577) (23,577) -- (23,577)
Interest and other income -- -- -- 361 361 -- 361
-------- -------- ------- --------- -------- --------- --------
EBITDA 59,148 32,938 310 (11,880) 80,516 (23,913) 56,603
-------- -------- ------- --------- -------- --------- --------
Interest expense (22,023) (13,861) -- -- (35,884) 10,921 (24,963)
Depreciation and amortization (15,027) (9,367) (32) -- (24,426) 6,452 (17,974)
Gains on sales of interests in real
estate 2,107 -- -- -- 2,107 -- 2,107
Minority interest in operating
partnership -- -- -- (2,524) (2,524) -- (2,524)
Equity in income of partnerships and
joint ventures -- -- -- -- -- 6,540 6,540
-------- -------- ------- --------- -------- --------- --------
Net income $ 24,205 $ 9,710 $ 278 $ (14,404) $ 19,789 $ -- $ 19,789
======== ======== ======= ========= ======== ========= ========
Investments in real estate, at cost $496,365 $283,028 $55,016 $ -- $834,409 ($183,949) $650,460
======== ======== ======= ========= ======== ========= ========
Total assets $468,561 $206,016 $52,909 $28,335 $755,821 ($153,193) $602,628
======== ======== ======= ========= ======== ========= ========
Recurring capital expenditures $ 18 $ 2,965 $ -- $ -- $ 2,983 ($ 293) $ 2,690
======== ======== ======= ========= ======== ========= ========
F-16
Development Adjustments to Total
Year Ended 12/31/00 Retail Multifamily and Other Corporate Total Equity Method Consolidated
Real estate operating revenues $ 72,773 $ 54,199 $ 4,707 $ -- $131,679 ($ 31,208) $100,471
Property operating expenses 20,289 22,448 45 -- 42,782 (10,107) 32,675
-------- -------- ------- -------- -------- --------- --------
Net operating income 52,484 31,751 4,662 -- 88,897 (21,101) 67,796
-------- -------- ------- -------- -------- --------- --------
General and administrative expenses -- -- -- (4,953) (4,953) -- (4,953)
Interest and other income -- -- -- 1,385 1,385 -- 1,385
PREIT-RUBIN, Inc. net operating loss -- -- -- (4,498) (4,498) 4,498 --
-------- -------- ------- -------- -------- --------- --------
EBITDA 52,484 31,751 4,662 (8,066) 80,831 (16,603) 64,228
-------- -------- ------- -------- -------- --------- --------
Interest expense (18,476) (13,869) -- (1,141) (33,486) 9,600 (23,886)
Depreciation and amortization (11,151) (9,130) (63) (1,261) (21,605) 5,944 (15,661)
Gains on sales of interests in real
estate 3,650 -- 6,648 -- 10,298 -- 10,298
Minority interest in operating
partnership -- -- -- (3,784) (3,784) -- (3,784)
Equity in income of partnerships and
joint ventures -- -- -- -- -- 7,366 7,366
Equity in loss of PREIT-RUBIN, Inc. -- -- -- -- -- (6,307) (6,307)
-------- -------- ------- -------- -------- --------- --------
Net income $26,507 $8,752 $11,247 ($14,252) $ 32,254 $ -- $ 32,254
======== ======== ======= ======== ======== ========= ========
Investments in real estate, at cost $464,633 $278,199 $60,727 $ -- $803,559 ($191,293) $612,266
======== ======== ======= ======== ======== ========= ========
Total assets $448,720 $211,328 $58,820 $15,771 $734,639 ($157,976) $576,663
======== ======== ======= ======== ======== ========= ========
Recurring capital expenditures $ 642 $ 3,464 $ -- $ -- $ 4,106 ($ 627) $ 3,479
======== ======== ======= ======== ======== ========= ========
Development Adjustments to Total
Year Ended 12/31/99 Retail Multifamily and Other Corporate Total Equity Method Consolidated
Real estate operating revenues $ 64,870 $ 51,891 $ 1,534 $ -- $118,295 ($ 29,075) $ 89,220
Property operating expenses 19,857 21,617 31 -- 41,505 (9,722) 31,783
-------- -------- ------- ------- -------- -------- --------
Net operating income 45,013 30,274 1,503 -- 76,790 (19,353) 57,437
-------- -------- ------- ------- -------- -------- --------
General and administrative expenses -- -- -- (3,560) (3,560) -- (3,560)
Interest and other income -- -- -- 1,144 1,144 -- 1,144
PREIT-RUBIN, Inc. net operating loss -- -- -- (2,504) (2,504) 2,504 --
-------- -------- ------- ------- -------- -------- --------
EBITDA 45,013 30,274 1,503 (4,920) 71,870 (16,849) 55,021
-------- -------- ------- ------- -------- -------- --------
Interest expense (17,261) (12,534) (263) (1,477) (31,535) 9,323 (22,212)
Depreciation and amortization (10,615) (7,712) (98) (868) (19,293) 5,440 (13,853)
PREIT-RUBIN, Inc. income taxes -- -- -- 56 56 (56) --
Gains on sales of interests in real
estate 445 -- 1,318 -- 1,763 -- 1,763
Minority interest in operating
partnership -- -- -- (2,122) (2,122) -- (2,122)
Equity in income of partnerships and
joint ventures -- -- -- -- -- 6,178 6,178
Equity in loss of PREIT-RUBIN, Inc. -- -- -- -- -- (4,036) (4,036)
-------- -------- ------- ------- -------- -------- --------
Net income $ 17,582 $ 10,028 $ 2,460 ($ 9,331) $ 20,739 $ -- $ 20,739
======== ======== ======= ======= ======== ======== ========
Investments in real estate, at cost $402,154 $265,165 $75,819 $ -- $743,138 ($165,617) $577,521
======== ======== ======= ======= ======== ======== ========
Total assets $384,417 $208,020 $72,796 $15,812 $681,045 ($133,455) $547,590
======== ======== ======= ======= ======== ======== ========
Recurring capital expenditures $ 293 $ 3,332 $ -- $ -- $ 3,625 ($ 432) $ 3,193
======== ======== ======= ======= ======== ======== ========
F-17
13. SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
The following presents a summary of the unaudited quarterly financial
information for the years ended December 31, 2001 and 2000.
Year Ended 12/31/01
In thousands of dollars, except per share data 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total
Revenues $26,996 $27,538 $27,537 $31,511 $113,582
======= ======= ======= ======= ========
Net income (1) $5,092 $3,906 $4,149 $6,642 $19,789
====== ====== ====== ====== =======
Basic net income per share $0.37 $0.29 $0.27 $0.42 $1.35
===== ===== ===== ===== =====
Diluted income per share $0.37 $0.29 $0.27 $0.42 $1.35
===== ===== ===== ===== =====
Year Ended 12/31/00
In thousands of dollars, except per share data 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total
Revenues (2) $23,452 $28,446 $23,657 $26,301 $101,856
======= ======= ======= ======= ========
Net income (1) $6,389 $15,084 $6,162 $4,619 $32,254
====== ======= ====== ====== =======
Basic net income per share $0.48 $1.13 $0.46 $0.34 $2.41
===== ===== ===== ===== =====
Diluted income per share $0.48 $1.13 $0.46 $0.34 $2.41
===== ===== ===== ===== =====
(1) Includes gains on sale of real estate of approximately $1.8 million (1st
Quarter 2001), $0.3 million (2nd Quarter 2001), $2.3 million (1st Quarter
2000), $6.6 million (2nd Quarter 2000), and $1.3 million (3rd Quarter
2000).
(2) Includes lease termination fees of approximately $6.0 million in 2nd
Quarter.
F-18
Schedule II
Pennsylvania Real Estate Investment Trust
Valuation and Qualifying Accounts
Column A Column B Column C Column D Column E
Additions
---------
Description Balance
Beginning Charged to Costs Charged to Balance End
of Period and Expenses Other Accounts Deductions of Period
--------- ------------ -------------- ---------- ---------
Allowance for Possible Losses:
Year ended December 31, 2001 $93 $-- $-- $-- $93
Year ended December 31, 2000 $528 $-- $-- ($435) $93
Year ended December 31, 1999 $1,572 $-- $135 ($1,179) $528
Allowance for Doubtful Accounts:
Year ended December 31, 2001 $733 $533 $-- ($539) $727
Year ended December 31, 2000 $582 $752 $-- ($601) $733
Year ended December 31, 1999 $372 $1,298 $-- ($1,088) $582
F-19
Schedule III PREIT - Investment in
Real Estate as of December 31, 2001
(Thousands of dollars)
Initial Cost of Balance of
Initial Cost of Improvements Balance of Building &
Cost of Building & Net of Land Improvements
Land Improvemnt Retirements @ 12/31/01 @ 12/31/01
MULTIFAMILY
PROPERTIES:
2031 Locust St $ 100 $ 1,028 $ 2,637 $ 100 $ 3,665
Boca Palms 7,107 28,444 3,180 7,107 31,624
Camp Hill 336 3,060 2,368 336 5,428
Cobblestone Apartments 2,791 9,697 3,121 2,791 12,818
Eagles Nest 4,021 17,615 2,367 4,021 19,982
Emerald Point 3,062 18,645 11,695 3,789 29,613
Fox Run - Bear 1,355 19,959 2,618 1,355 22,577
Hidden Lakes 1,225 11,794 1,348 1,225 13,142
Kenwood Gardens 489 3,235 3,869 489 7,104
Lakewood Hills 501 11,402 5,658 501 17,060
Palms of Pembroke 4,869 17,384 2,127 4,869 19,511
Shenandoah Village 2,200 8,975 2,579 2,200 11,554
The Marylander 117 4,340 3,540 117 7,880
The Woods 4,234 17,268 1,777 4,234 19,045
INDUSTRIAL
PROPERTIES:
ARA - Allentown 3 82 -- 3 82
ARA - Pennsauken 20 190 -- 20 190
Interstate Commerce 34 364 1,404 34 1,768
Sears 25 206 176 25 382
RETAIL PROPERTIES:
Christiana Power Center 9,348 23,089 4,874 12,952 24,359
Commons at Magnolia 577 3,436 997 601 4,409
Crest Plaza 332 2,349 4,065 282 6,463
Creekview (Warrington) 1,380 4,825 12,606 1,380 17,431
Dartmouth Mall 7,199 28,945 12,222 7,199 41,168
Festival Shopping Center 3,728 14,988 268 3,728 15,256
Magnolia Mall 9,279 37,358 3,020 9,279 40,378
Mandarin Corner 4,891 10,168 1,694 4,891 11,862
Northeast Tower Center 4,205 16,824 2,064 4,606 18,487
Northeast Tower -
Home Depot 2,716 10,863 -- 2,716 10,863
Paxton Tower Center 15,719 29,222 4,682 15,719 33,905
Prince George's Plaza 13,066 57,678 5,024 13,066 62,703
South Blanding Village 2,946 6,138 402 2,946 6,540
DEVELOPMENT
PROPERTIES:
Northeast Tower 3,659 1,514 -- 3,659 1,514
PR New Garden, LP 52 755 -- 52 755
PR Dover LLC 138 346 -- 138 346
Willow Grove -- 14,166 -- -- 14,166
-------- -------- -------- -------- --------
TOTAL INVESTMENT $111,724 $436,352 $102,382 $116,430 $534,030
======== ======== ======== ======== ========
(RESTUBBED TABLE)
Date
Current Current of Life
Deprec. Encumbrance Construction of
Balance Balance Acquisition Depreciation
MULTIFAMILY
PROPERTIES:
2031 Locust St $ 2,921 $ 5,782 1961 25
Boca Palms 7,793 21,964 1994 39
Camp Hill 4,170 6,111 1969 33
Cobblestone Apartments 3,788 13,460 1992 40
Eagles Nest 5,963 14,862 1998 39
Emerald Point 7,399 15,533 1993 39
Fox Run - Bear 7,176 13,855 1998 39
Hidden Lakes 3,373 10,399 1994 39
Kenwood Gardens 5,791 7,046 1963 38
Lakewood Hills 11,264 18,222 1972-80 45
Palms of Pembroke 4,469 16,132 1994 39
Shenandoah Village 2,937 7,980 1993 39
The Marylander 6,750 11,954 1962 39
The Woods 1,659 6,591 1998 39
INDUSTRIAL
PROPERTIES:
ARA - Allentown 79 -- 1962 40
ARA - Pennsauken 164 -- 1962 50
Interstate Commerce 1,391 -- 1963 50
Sears 340 -- 1963 50
RETAIL PROPERTIES:
Christiana Power Center 2,615 -- 1998 39
Commons at Magnolia 217 -- 1999 39
Crest Plaza 4,370 -- 1964 40
Creekview (Warrington) 107 -- 1998 40
Dartmouth Mall 4,899 -- 1998 39
Festival Shopping Center 1,294 -- 1998 39
Magnolia Mall 4,737 22,444 1998 39
Mandarin Corner 4,845 7,180 1988 39
Northeast Tower Center 1,467 -- 1998 39
Northeast Tower -
Home Depot 747 12,500 1999 39
Paxton Tower Center 1,490 4,000 1998 40
Prince George's Plaza 5,448 45,858 1998 39
South Blanding Village 2,761 -- 1988 40
DEVELOPMENT
PROPERTIES:
Northeast Tower -- -- 1998
PR New Garden, LP -- -- 2000
PR Dover LLC -- -- 2001
Willow Grove -- -- 2000
-------- --------
TOTAL INVESTMENT $112,424 $261,873
======== ========
F-20
The aggregate cost for Federal income tax purposes of the Company's investment
in real estate was approximately $581 million and $543 million at December 31,
2001 and 2000, respectively. The changes in total real estate and accumulated
depreciation for the years ended December 31, 2001 and 2000 are as follows:
Total Real Estate Assets
------------------------
Calendar Year Ended Calendar Year Ended Calendar Year Ended
December 31, 2001 December 31, 2000 December 31, 1999
----------------- ----------------- -------------------
BALANCE, beginning of period $612,266 $577,521 $509,406
Acquisitions and development 29,234 41,477 55,830
Improvements 16,007 10,584 12,285
Dispositions (7,047) (17,316) --
-------- -------- --------
Balance, end of period $650,460 $612,266 $577,521
Accumulated Depreciation
------------------------
Calendar Year Ended Calendar Year Ended Calendar Year Ended
December 31, 2001 December 31, 2000 December 31, 1999
----------------- ----------------- -------------------
BALANCE, beginning of period $95,026 $84,577 $71,129
Depreciation expense 17,688 15,335 13,448
Dispositions (290) (4,886) --
-------- ------- -------
Balance, end of period $112,424 $95,026 $84,577
F-21
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
+10.6 Amended and Restated Employment Agreement, dated as of March 22, 2002, between the Trust and Jonathan Weller.
+10.11 Amended and Restated Employment Agreement, dated as of March 22, 2002, between the Trust and Jeffrey Linn.
+10.65 The Trust's Restricted Share Plan for Non-Employee Trustees, effective January 1, 2002.
+10.66 The Trust's 2002-2004 Long-Term Incentive Plan, effective January 1, 2002.
+10.67 Amended and Restated Employment Agreement, dated as of March 22, 2002, between the Trust and David J. Bryant.
+10.68 Amended and Restated Employment Agreement, dated as of March 22, 2002, between the Trust and Raymond J. Trost.
+10.69 Employment Agreement, dated as of March 22, 2002, between the Trust and Bruce Goldman.
+10.70 Amended and Restated Employment Agreement, dated as of March 22, 2002, between PREIT Services, LLC and George Rubin.
+10.71 Amended and Restated Employment Agreement, dated as of March 22, 2002, between PREIT Services, LLC and Douglas Grayson.
+10.72 Amended and Restated Employment Agreement, dated as of March 22, 2002, between PREIT Services, LLC and Joseph Coradino.
21 Listing of subsidiaries
23 Consent of Arthur Andersen LLP
99 Letter Regarding Arthur Andersen LLP