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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 2002
-------------------
[ ] Transition Report Pursuant To Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from ______________________ to _______________________
Commission File Number 1-6300
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Pennsylvania Real Estate Investment Trust
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(Exact name of Registrant as specified in its charter)
Pennsylvania 23-6216339
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
200 South Broad Street, Third Floor, Philadelphia, PA 19102-3803
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (215) 875-0700
---------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the last 90 days.
Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares of beneficial interest outstanding at August 1, 2002: 16,558,942
------------
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PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONTENTS
Page
Part I. Financial Information
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets--June 30, 2002
and December 31, 2001 1-2
Consolidated Statements of Income--Three and Six Months
Ended June 30, 2002 and June 30, 2001 3
Consolidated Statements of Cash Flows--Six Months
Ended June 30, 2002 and June 30, 2001 4
Notes to Unaudited Consolidated Financial Statements 5-14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15-22
Item 3. Quantitative and Qualitative Disclosures about Market Risk 22
Part II. Other Information 23
Item 1. Legal Proceedings 23
-
Item 2. Not Applicable
Item 3. Not Applicable -
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 24
Exhibit Index 25
Part I. Financial Information
Item 1. Financial Statements
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
ASSETS
(In thousands)
June 30, 2002 December 31, 2001
------------- -----------------
INVESTMENTS IN REAL ESTATE, at cost:
Retail properties $ 427,827 $ 347,269
Multifamily properties 256,421 254,138
Industrial properties 2,504 2,504
Construction in progress 17,092 46,549
--------- ---------
Total investments in real estate 703,844 650,460
Less accumulated depreciation (122,610) (112,424)
--------- ---------
581,234 538,036
INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS AND
JOINT VENTURES, at equity 26,692 13,680
--------- ---------
607,926 551,716
OTHER ASSETS:
Cash and cash equivalents 8,765 10,258
Rents and sundry receivables (net of allowance for doubtful accounts of
$935 and $727, respectively) 8,425 10,293
Deferred costs and other assets, net 45,224 30,361
--------- ---------
$ 670,340 $ 602,628
========= =========
(Continued)
- 1 -
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED BALANCE SHEETS (UNAUDITED) (CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY
(In thousands)
June 30, 2002 December 31, 2001
------------- -----------------
LIABILITIES:
Mortgage notes payable $ 310,143 $ 257,873
Bank loan payable 118,500 98,500
Construction loan payable -- 4,000
Tenants' deposits and deferred rents 3,104 3,908
Accrued expenses and other liabilities 22,197 21,294
--------- ---------
Total liabilities 453,944 385,575
--------- ---------
MINORITY INTEREST 32,553 36,768
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDERS' EQUITY:
Shares of beneficial interest, $1 par; 100,000 authorized;
issued and outstanding 16,463 shares
at June 30, 2002 and 15,876 shares at
December 31, 2001 16,463 15,876
Capital contributed in excess of par 211,206 198,398
Deferred compensation (3,204) (1,386)
Accumulated other comprehensive loss (3,316) (3,520)
Distributions in excess of net income (37,306) (29,083)
--------- ---------
Total shareholders' equity 183,843 180,285
--------- ---------
$ 670,340 $ 602,628
========= =========
The accompanying notes are an integral part of these statements.
- 2 -
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share data)
Three Months Ended Six Months Ended
---------------------------------- ----------------------------------
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
---------------- ----------------- ----------------- ----------------
REVENUE:
Real estate revenues:
Base rent $ 23,929 $ 20,919 $ 45,604 $ 41,482
Percentage rent 227 238 601 571
Expense reimbursements 3,282 2,278 5,975 5,074
Lease termination revenue 566 845 646 975
Other real estate revenues 838 854 1,647 1,715
-------- -------- -------- --------
Total real estate revenues 28,842 25,134 54,473 49,817
Management company revenue 2,152 2,313 4,325 4,465
Interest and other income 355 91 375 253
-------- -------- -------- --------
Total revenues 31,349 27,538 59,173 54,535
-------- -------- -------- --------
EXPENSES:
Property operating expenses:
Property payroll and benefits 1,859 1,702 3,793 3,481
Real estate and other taxes 2,239 1,884 4,244 3,799
Utilities 942 991 2,015 2,234
Other operating expenses 4,053 3,493 7,397 6,925
-------- -------- -------- --------
Total property operating expenses 9,093 8,070 17,449 16,439
Depreciation and amortization
5,454 4,337 10,412 8,629
General and administrative expenses:
Corporate payroll and benefits 3,536 3,186 7,046 6,403
Other general and administrative expenses 2,611 2,460 5,080 4,442
-------- -------- -------- --------
Total general and administrative expenses 6,147 5,646 12,126 10,845
Interest expense 7,608 6,707 13,453 13,346
-------- -------- -------- --------
Total expenses 28,302 24,760 53,440 49,259
-------- -------- -------- --------
Income before equity in income of partnerships
and joint ventures, minority interest, gains on
sales of interests in real estate and
extraordinary loss 3,047 2,778 5,733 5,276
Equity in income of partnerships and joint
ventures 1,893 1,370 3,459 2,815
-------- -------- -------- --------
Income before minority interest, gains on sales of
interests in real estate and extraordinary loss 4,940 4,148 9,192 8,091
Minority interest in operating partnership (498) (543) (946) (1,199)
Gains on sales of interests in real estate -- 301 -- 2,107
-------- -------- -------- --------
Income before extraordinary loss 4,442 3,906 8,246 8,999
Extraordinary loss -- -- (77) --
-------- -------- -------- --------
NET INCOME $ 4,442 $ 3,906 $ 8,169 $ 8,999
======== ======== ======== ========
BASIC INCOME PER SHARE $ 0.27 $ 0.29 $ 0.51 $ 0.66
======== ======== ======== ========
DILUTED INCOME PER SHARE $ 0.27 $ 0.29 $ 0.51 $ 0.66
======== ======== ======== ========
The accompanying notes are an integral part of these statements.
- 3 -
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Six months ended
--------------------------------
June 30, 2002 June 30, 2001
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,169 $ 8,999
Adjustments to reconcile net income to net cash
provided by operating activities-
Depreciation and amortization 10,412 8,629
Amortization of deferred financing costs 493 480
Provision for doubtful accounts 208 100
Amortization of deferred compensation 891 596
Gains on sales of interests in real estate -- (2,107)
Loss on early extinguishment of debt 77 --
Change in assets and liabilities-
Net change in other assets (6,357) (4,548)
Net change in other liabilities 627 2,899
-------- --------
Net cash provided by operating activities 14,520 15,048
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in wholly-owned real estate (18,564) (2,473)
Investments in construction in progress (5,990) (10,638)
Investments in partnerships and joint ventures (1,605) (967)
Cash proceeds from sale of interest in partnership -- 1,080
Cash proceeds from sale of real estate -- 1,808
Net cash received from PREIT-RUBIN, Inc. -- 1,616
Cash distributions from partnerships and joint ventures
in excess of equity in income 2,222 6,740
-------- --------
Net cash used in investing activities (23,937) (2,834)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal installments on mortgage notes payable (2,465) (2,240)
Repayment of mortgage note payable (6,066) --
Proceeds from mortgage note payable 12,800 15,000
Net (payment) borrowing from construction loan payable (4,000) 70
Net borrowing (repayment) of credit facility 20,000 (7,300)
Shares of beneficial interest issued 5,168 535
Payment of deferred financing costs (76) (419)
Distributions paid to shareholders (16,391) (13,854)
Distributions paid to OP Unit holders in excess of minority interest (1,046) (734)
-------- --------
Net cash provided by (used in) financing activities 7,924 (8,942)
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS (1,493) 3,272
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 10,258 6,091
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 8,765 $ 9,363
======== ========
The accompanying notes are an integral part of these statements.
- 4 -
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2002
1. BASIS OF PRESENTATION:
Pennsylvania Real Estate Investment Trust ("PREIT" or the "Company") prepared
the consolidated financial statements pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States have been
condensed or omitted pursuant to such rules and regulations, although we believe
that the disclosures are adequate to make the information presented not
misleading. The consolidated financial statements should be read in conjunction
with the audited financial statements and the notes thereto included in PREIT's
latest annual report on Form 10-K. In management's opinion, all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly the
consolidated financial position of the Company and the consolidated results of
its operations and its cash flows, have been included. The results of operations
for such interim periods are not necessarily indicative of the results for the
full year.
PREIT is organized as a Pennsylvania business trust and is a fully integrated
self-administered and self-managed real estate investment trust.
The Company's interest in its properties is held through PREIT Associates, L.P.
(the "Operating Partnership"). The Company is the sole general partner of the
Operating Partnership, and as of June 30, 2002, held an 91.1% interest in the
Operating Partnership.
Certain prior period amounts have been reclassified to conform with the current
period presentation.
2. REAL ESTATE ACTIVITIES:
Acquisitions
In April 2002, the Company purchased Beaver Valley Mall located in Monaca, PA
for a purchase price of $60.8 million. The purchase was financed primarily
through a $48.0 million mortgage and a $10.0 million bank borrowing. Also in
April 2002, the Company exercised an option to purchase a portion of the land on
which Beaver Valley Mall is situated for $0.5 million.
Pro forma revenues, net income, basic net income per share and diluted net
income per share for the three and six-month periods ended June 30, 2002 and
2001, reflecting the purchase of Beaver Valley Mall as if its purchase took
place on January 1, 2001 are as follows:
(In thousands, except per share data)
Three Months Ended Six Months Ended
-------------------------------- ------------------- -------------
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
------------- ------------- ------------- -------------
Revenues $ 31,441 $ 30,244 $ 62,011 $ 59,984
=========== ========== =========== ==========
Net income $ 4,457 $ 4,433 $ 8,658 $ 10,113
=========== ========== =========== ==========
Basic net income per share $ 0.27 $ 0.32 $ 0.54 $ 0.74
=========== ========== =========== ==========
Diluted net income per share $ 0.27 $ 0.32 $ 0.54 $ 0.74
=========== ========== =========== ==========
In 2000, the Company entered into an agreement giving it a partnership interest
in Willow Grove Park, a 1.2 million square foot regional mall in Willow Grove,
Pennsylvania. 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 was $16.6 million, including $2.3 million that was funded in
July 2002. In June 2002, the Company contributed the expansion asset to the
partnership. As a result of this contribution, the Company increased its capital
interest in the partnership that owns Willow Grove Park to 30% and its
management interest in the partnership to 50% retroactive to November 2001, and
became the managing general partner of the partnership.
- 5 -
Development Activity
As of June 30, 2002, the Company has capitalized $8.5 million for development
activities for properties under construction. Of this amount, $7.0 million of
these costs are included in deferred costs and other assets in the accompanying
consolidated balance sheets, and the remaining $1.5 million is included in
investments in and advances to partnerships and joint ventures. The Company
capitalizes direct costs for such properties such as legal fees, interest,
surveys, civil engineering surveys, environmental testing costs, traffic and
feasibility studies and deposits on land purchase contracts. Deposits on land
purchase contracts were $1.5 million at June 30, 2002, of which $0.6 million was
refundable and $0.9 million was non-refundable.
Refinancing
In March 2002, the mortgage on Camp Hill Plaza Apartments in Camp Hill,
Pennsylvania, was refinanced. The $12.8 million mortgage has a 10-year term and
bears interest at the fixed rate of 7.02% per annum. In connection with the
refinance, unamortized deferred finance costs of $77,000 were written off and
reflected as extraordinary loss in the consolidated statements of income.
3. MANAGEMENT COMPANIES:
The Company's management, leasing and real estate development activities are
performed by two companies: PREIT Services, LLC ("Services") that manages
properties wholly owned by the Company, and PREIT-RUBIN, Inc. ("PRI"), that
manages properties not wholly owned by the Company, including properties owned
by joint ventures in which the Company participates. Services and PRI are
consolidated. Services does not charge management, leasing or development fees
to the properties it manages as such costs would be eliminated in consolidation.
PRI is a taxable REIT subsidiary as defined by federal tax laws. PRI is capable
of offering a broad menu of services to tenants without jeopardizing the
Company's continued qualification as a real estate investment trust.
PRI provides management, leasing and development services for partnerships and
other ventures in which certain officers and trustees of PREIT and certain
officers and directors of PRI have either direct or indirect ownership
interests. Total revenues earned by PRI for such services were $1.0 million and
$0.7 million in the three-month periods ended June 30, 2002 and 2001 and $1.6
million and $1.2 million in the six-month periods ended June 30, 2002 and 2001.
- 6 -
4. INVESTMENTS IN PARTNERSHIPS AND JOINT VENTURES:
The following table presents summarized financial information as to PREIT's
equity in the assets and liabilities of 15 partnerships and joint ventures at
June 30, 2002 (including one property with development activity) and at December
31, 2001, and PREIT's equity in income for the three and six-month periods ended
June 30, 2002 and 2001:
(In thousands)
June 30, 2002 December 31, 2001
------------- -----------------
ASSETS
- ------
Investments in real estate, at cost:
Retail properties $ 448,737 $ 430,368
Multifamily properties 57,750 57,281
Construction in progress 1,506 5,986
--------- ---------
Total investments in real estate 507,993 493,635
Less: Accumulated depreciation (93,644) (86,356)
--------- ---------
414,349 407,279
Cash and cash equivalents 9,427 4,390
Deferred costs, prepaid real estate taxes and expenses and other assets, net 46,450 51,666
--------- ---------
Total assets 470,226 463,335
--------- ---------
LIABILITIES AND PARTNERS' EQUITY
- --------------------------------
Mortgage notes payable 403,618 401,193
Other liabilities 16,250 18,036
--------- ---------
Total liabilities 419,868 419,229
--------- ---------
Net equity 50,358 44,106
Less: Partners' share (24,024) (30,576)
--------- ---------
Investment in partnerships and joint ventures 26,334 13,530
Advances 358 150
--------- ---------
Investment in and advances to partnerships and joint ventures $ 26,692 $ 13,680
========= =========
EQUITY IN INCOME OF PARTNERSHIPS AND JOINT VENTURES
(In thousands)
Three Months Ended Six Months Ended
---------------------------- ----------------------------
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
-------- -------- -------- --------
Gross revenues from real estate $ 24,268 $ 23,082 $ 48,064 $ 45,145
-------- -------- -------- --------
Expenses:
Property operating expenses 8,111 8,050 16,437 16,035
Mortgage and bank loan interest 7,920 7,404 15,816 14,689
Refinancing prepayment penalty -- 510 -- 510
Depreciation and amortization 4,705 4,480 8,818 8,627
-------- -------- -------- --------
Total expenses 20,736 20,444 41,071 39,861
-------- -------- -------- --------
Net income before partners' share 3,532 2,638 6,993 5,284
Other partners' share (1,639) (1,268) (3,534) (2,469)
-------- -------- -------- --------
Equity in income of partnerships and
joint ventures
$ 1,893 $ 1,370 $ 3,459 $ 2,815
======== ======== ======== ========
- 7 -
5. EARNINGS PER SHARE:
Basic Earnings Per Share is based on the weighted average number of common
shares outstanding during the period. Diluted Earnings Per Share is based on the
weighted average number of shares outstanding during the period, adjusted to
give effect to common share equivalents. A reconciliation between Basic and
Diluted Earnings Per Share is shown below:
(In thousands, except per share data)
Three Months Ended Six Months Ended
------------------------------ -----------------------------
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
---------- ---------- -------- ----------
Income from continuing operations $ 4,442 $ 3,605 $ 8,246 $ 6,892
Gains on sales of interest in real estate -- 301 -- 2,107
---------- ---------- -------- ----------
Income before extraordinary loss $ 4,442 $ 3,906 $ 8,246 $ 8,999
Extraordinary loss -- -- (77) --
---------- ---------- -------- ----------
Net income $ 4,442 $ 3,906 $ 8,169 $ 8,999
========== ========== ======== ==========
Weighted average shares outstanding 16,216 13,692 16,072 13,680
Effect of share options issued 66 24 35 5
---------- ---------- -------- ----------
Total weighted average shares outstanding 16,282 13,716 16,107 13,685
Basic earnings per share
Income from continuing operations per share $ 0.27 $ 0.27 $ 0.51 $ 0.51
Gains on sales of interest in real estate per -- 0.02 -- 0.15
---------- ---------- -------- ----------
Income before extraordinary loss per share 0.27 0.29 0.51 0.66
Extraordinary loss per share -- -- -- --
---------- ---------- -------- ----------
Net income per share $ 0.27 $ 0.29 $ 0.51 $ 0.66
========== ========== ======== ==========
Diluted earnings per share
Income from continuing operations per share $ 0.27 $ 0.27 $ 0.51 $ 0.51
Gains on sales of interest in real estate per
share -- 0.02 -- 0.15
---------- ---------- -------- ----------
Income before extraordinary loss per share 0.27 0.29 0.51 0.66
Extraordinary loss per share -- -- -- --
---------- ---------- -------- ----------
Net income per share $ 0.27 $ 0.29 $ 0.51 $ 0.66
========== ========== ======== ==========
- 8 -
6. DISTRIBUTIONS:
The per-share amount declared for distribution as of the date of this report and
the per-share amount declared for distribution in the comparable period of the
prior year are as follows:
Amount
Date Declared Record Date Payment Date per Share
------------- ----------- ------------ ---------
July 16, 2001 August 31, 2001 September 17, 2001 $0.51
July 11, 2002 August 30, 2002 September 16, 2002 $0.51
7. CASH FLOW INFORMATION:
Cash paid for interest was $13.1 million (net of capitalized interest of $0.7
million) and $12.1 million (net of capitalized interest of $1.6 million),
respectively for the six months ended June 30, 2002 and 2001.
Significant non-cash transactions
In the first six months of 2002 and 2001, the Company issued OP units valued at
$3.9 million and $3.2 million, respectively in connection with the Contribution
Agreement (see Note 8) earn-out provisions.
In the first six months of 2001, the Company issued OP units valued at $6.0
million in connection with the acquisition of land on which the Christiana Power
Center (Phase I) is built.
8. COMMITMENTS AND CONTINGENCIES:
Environmental matters exist at certain properties in which PREIT had an interest
for which reserves have previously been established. No additional material
incremental cost is expected to be incurred on these properties.
As part of the acquisition of The Rubin Organization in 1997, PREIT entered into
a contribution agreement (the "Contribution Agreement") which includes a
provision for the Operating Partnership to issue up to 800,000 additional Class
A Operating Partnership ("OP") units over the five-year period from October 1,
1997 to September 30, 2002 according to a formula based upon PREIT's adjusted
funds from operations per share during the five-year period. The Contribution
Agreement establishes "hurdle" and "target" levels for PREIT's adjusted funds
from operations per share during specified earn-out periods to determine
whether, and to what extent, the contingent OP units will be issued. As of June
30, 2002, 665,000 of the 800,000 OP units for the period covering October 1,
1997 to December 31, 2001 had been earned. The issuance of these 665,000 OP
units earned resulted in an additional purchase price of approximately $12.9
million. PREIT intends to account for the further issuance of contingent OP
units as additional purchase price when such additional amounts are
determinable.
At June 30, 2002, PREIT had commitments of approximately $31.1 million to
complete current construction in progress, development and redevelopment
projects. In connection with certain construction in progress and development
properties, PREIT Associates, L.P. may be required to issue additional OP units
upon the achievement of certain financial results.
On April 10, 2002, a joint venture, of which a subsidiary of the Company is a
partner, filed a complaint in the Court of Chancery of the State of Delaware
against the Delaware Department of Transportation and its Secretary alleging
failure of the Department and the Secretary to take actions agreed upon in a
1992 Settlement Agreement necessary for development of the joint venture's
Christiana Phase II project. The Company is not in a position to predict the
outcome of this litigation or its ultimate effect on the construction of the
Christiana Phase II project.
9. EQUITY OFFERING:
On July 11, 2001, the Company completed a public offering of 2.0 million shares
of beneficial interest at a price of $23.00 per share. At the completion of the
public offering the Company had approximately 15.7 million shares outstanding.
Net proceeds to the Company from the offering after deducting the underwriting
discount of $1.5 million and other expenses of the offering of approximately
$0.2 million were approximately $44.3 million, of which $20.7 million was used
to repay an existing construction loan and $16.5 million was used to pay
outstanding indebtedness under the Company's Credit Facility. The balance of the
proceeds was used to fund projects then under development.
- 9 -
10. SEGMENT INFORMATION:
PREIT has four reportable segments: (1) retail properties, (2) multifamily
properties, (3) construction in progress and other, and (4) corporate. As of
June 30, 2002, the retail segment included the operation and management of 23
regional and community shopping centers (13 wholly owned and 10 owned through
joint ventures). The multifamily segment included the operation and management
of 19 apartment communities (14 wholly owned and five owned through joint
ventures). The development and other segment includes the operation and
management of three retail properties under development (all wholly owned) and
four industrial properties (all wholly owned). The corporate segment is
responsible for cash and investment management and certain other general support
functions.
The accounting policies for the segments are the same as those PREIT uses for
its consolidated financial reporting, except that for segment reporting
purposes, PREIT uses the "proportionate-consolidation method" of accounting (a
non-GAAP measure) for joint venture properties instead of the equity method of
accounting. PREIT calculates the proportionate-consolidation method by applying
its percentage ownership interest to the historical financial statements of its
equity method investments.
The chief operating decision making group for the Company's retail, multifamily,
development and other and corporate segments is comprised of the Company's chief
executive officer, president and the lead executives of each segment. The
segments are managed separately because they either represent a specific
property type (retail or multifamily) or represent operations that are unique to
that segment, such as construction in progress ("CIP") and corporate services.
- 10 -
(In thousands)
CIP Adjustments
Three Months Ended and to Equity Total
June 30, 2002 Retail Multifamily Other Corporate Total Method Consolidated
- ------------------ --------- --------- --------- --------- --------- --------- ---------
Real estate operating revenues $ 27,175 $ 14,153 $ 82 $ -- $ 41,410 $ (12,568) $ 28,842
Real estate operating expenses (7,438) (5,852) (6) -- (13,296) 4,203 (9,093)
--------- --------- --------- --------- --------- --------- ---------
Net operating income 19,737 8,301 76 -- 28,114 (8,365) 19,749
--------- --------- --------- --------- --------- --------- ---------
Management company revenues -- -- -- 2,152 2,152 -- 2,152
Interest income -- -- -- 355 355 -- 355
General and administrative expenses -- -- -- (6,147) (6,147) -- (6,147)
--------- --------- --------- --------- --------- --------- ---------
EBITDA 19,737 8,301 76 (3,640) 24,474 (8,365) 16,109
--------- --------- --------- --------- --------- --------- ---------
Interest expense (8,193) (3,551) -- 11 (11,733) 4,125 (7,608)
Depreciation and amortization (5,491) (2,298) (12) -- (7,801) 2,347 (5,454)
Gains on sales of interests in real
estate -- -- -- -- -- -- --
Minority interest in operating
partnership -- -- -- (498) (498) -- (498)
Equity in income of partnerships and
joint ventures -- -- -- -- -- 1,893 1,893
--------- --------- --------- --------- --------- --------- ---------
Net income $ 6,053 $ 2,452 $ 64 $ (4,127) $ 4,442 $ -- $ 4,442
--------- --------- --------- --------- --------- --------- ---------
Investments in real estate, at cost $ 629,448 $ 285,546 $ 21,566 $ -- $ 936,560 $(232,716) $ 703,844
--------- --------- --------- --------- --------- --------- ---------
Total assets $ 596,788 $ 205,371 $ 19,603 $ 33,759 $ 855,521 $(185,181) $ 670,340
--------- --------- --------- --------- --------- --------- ---------
Recurring capital expenditures $ 39 $ 843 $ -- $ -- $ 882 $ (100) $ 782
--------- --------- --------- --------- --------- --------- ---------
CIP Adjustments
Three Months Ended and to Equity Total
June 30, 2001 Retail Multifamily Other Corporate Total Method Consolidated
- ------------------ --------- --------- --------- --------- --------- --------- ---------
Real estate operating revenues $ 19,960 $ 14,025 $ 80 $ -- $ 34,065 $ (8,931) $ 25,134
Real estate operating expenses (5,123) (5,897) (2) -- (11,022) 2,952 (8,070)
--------- --------- --------- --------- --------- --------- ---------
Net operating income 14,837 8,128 78 -- 23,043 (5,979) 17,064
--------- --------- --------- --------- --------- --------- ---------
Management company revenues -- -- -- 2,313 2,313 -- 2,313
Interest income -- -- -- 91 91 -- 91
General and administrative expenses -- -- -- (5,646) (5,646) -- (5,646)
--------- --------- --------- --------- --------- --------- ---------
EBITDA 14,837 8,128 78 (3,242) 19,801 (5,979) 13,822
--------- --------- --------- --------- --------- --------- ---------
Interest expense (5,917) (3,723) -- -- (9,640) 2,933 (6,707)
Depreciation and amortization (3,687) (2,313) (13) -- (6,013) 1,676 (4,337)
Gains on sales of interests in real
estate 301 -- -- -- 301 -- 301
Minority interest in operating
partnership -- -- -- (543) (543) -- (543)
Equity in income of partnerships and
joint ventures -- -- -- -- -- 1,370 1,370
--------- --------- --------- --------- --------- --------- ---------
Net income $ 5,534 $ 2,092 $ 65 $ (3,785) $ 3,906 $ -- $ 3,906
--------- --------- --------- --------- --------- --------- ---------
Investments in real estate, at cost $ 483,346 $ 279,930 $ 48,357 $ -- $ 811,633 $(185,040) $ 626,593
--------- --------- --------- --------- --------- --------- ---------
Total assets $ 460,390 $ 208,769 $ 46,426 $ 26,047 $ 741,632 $(152,132) $ 589,500
--------- --------- --------- --------- --------- --------- ---------
Recurring capital expenditures $ -- $ 450 $ -- $ -- $ 450 $ (63) $ 387
--------- --------- --------- --------- --------- --------- ---------
- 11 -
(In thousands)
CIP Adjustments
Six Months Ended and to Equity Total
June 30, 2002 Retail Multifamily Other Corporate Total Method Consolidated
- ---------------- --------- --------- --------- --------- --------- --------- ---------
Real estate operating revenues $ 47,559 $ 28,236 $ 164 $ -- $ 75,959 $ (21,486) $ 54,473
Real estate operating expenses (13,235) (11,471) (10) -- (24,716) 7,267 (17,449)
--------- --------- --------- --------- --------- --------- ---------
Net operating income 34,324 16,765 154 -- 51,243 (14,219) 37,024
--------- --------- --------- --------- --------- --------- ---------
Management company revenues -- -- -- 4,325 4,325 -- 4,325
Interest income -- -- -- 375 375 -- 375
General and administrative expenses -- -- -- (12,126) (12,126) -- (12,126)
--------- --------- --------- --------- --------- --------- ---------
EBITDA 34,324 16,765 154 (7,426) 43,817 (14,219) 29,598
--------- --------- --------- --------- --------- --------- ---------
Interest expense (13,485) (6,987) -- 104 (20,368) 6,915 (13,453)
Depreciation and amortization (9,655) (4,576) (26) -- (14,257) 3,845 (10,412)
Gains on sales of interests in real
estate -- -- -- -- -- -- --
Minority interest in operating
partnership -- -- -- (946) (946) -- (946)
Extraordinary loss -- -- -- (77) (77) -- (77)
Equity in income of partnerships and
joint ventures -- -- -- -- -- 3,459 3,459
--------- --------- --------- --------- --------- --------- ---------
Net income $ 11,184 $ 5,202 $ 128 $ (8,345) $ 8,169 $ -- $ 8,169
--------- --------- --------- --------- --------- --------- ---------
Investments in real estate, at cost $ 629,448 $ 285,546 $ 21,566 $ -- $ 936,560 $(232,716) $ 703,844
--------- --------- --------- --------- --------- --------- ---------
Total assets $ 596,788 $ 205,371 $ 19,603 $ 33,759 $ 855,521 $(185,181) $ 670,340
--------- --------- --------- --------- --------- --------- ---------
Recurring capital expenditures $ 41 $ 1,496 $ -- $ -- $ 1,537 $ (156) $ 1,381
--------- --------- --------- --------- --------- --------- ---------
CIP Adjustments
Six Months Ended and to Equity Total
June 30, 2001 Retail Multifamily Other Corporate Total Method Consolidated
- ---------------- --------- --------- --------- --------- --------- --------- ---------
Real estate operating revenues $ 39,213 $ 27,975 $ 159 $ -- $ 67,347 $ (17,530) $ 49,817
Real estate operating expense (10,720) (11,668) (5) -- (22,393) 5,954 (16,439)
--------- --------- --------- --------- --------- --------- ---------
Net operating income 28,493 16,307 154 -- 44,954 (11,576) 33,378
--------- --------- --------- --------- --------- --------- ---------
Management company revenues -- -- -- 4,465 4,465 -- 4,465
Interest income -- -- -- 253 253 -- 253
General and administrative expenses -- -- -- (10,845) (10,845) -- (10,845)
--------- --------- --------- --------- --------- --------- ---------
EBITDA 28,493 16,307 154 (6,127) 38,827 (11,576) 27,251
--------- --------- --------- --------- --------- --------- ---------
Interest expense (11,418) (7,119) -- (291) (18,828) 5,482 (13,346)
Depreciation and amortization (7,308) (4,574) (26) -- (11,908) 3,279 (8,629)
Gains on sales of interests in real
estate 2,107 -- -- -- 2,107 -- 2,107
Minority interest in operating
partnership -- -- -- (1,199) (1,199) -- (1,199)
Equity in income of partnerships and
joint ventures -- -- -- -- -- 2,815 2,815
--------- --------- --------- --------- --------- --------- ---------
Net income $ 11,874 $ 4,614 $ 128 $ (7,617) $ 8,999 $ -- $ 8,999
--------- --------- --------- --------- --------- --------- ---------
Investments in real estate, at cost $ 483,346 $ 279,930 $ 48,357 $ -- $ 811,633 $(185,040) $ 626,593
--------- --------- --------- --------- --------- --------- ---------
Total assets $ 460,390 $ 208,769 $ 46,426 $ 26,047 $ 741,632 $(152,132) $ 589,500
--------- --------- --------- --------- --------- --------- ---------
Recurring capital expenditures $ -- $ 450 $ -- $ -- $ 450 $ (63) $ 387
--------- --------- --------- --------- --------- --------- ---------
- 12 -
11. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES:
The Company recorded adjustments to other comprehensive income/loss, which are
gains and losses not affecting distributions in excess of net income, of a gain
of $0.2 million and a loss of $1.4 million in the six-month periods ended June
30, 2002 and 2001, respectively and loss of $1.4 million and a gain of $0.2
million in the three-month periods ended June 30, 2002 and 2001, respectively,
to recognize the change in value of derivative instruments during these periods.
Upon the adoption of SFAS 133 on January 1, 2001, the Company recorded an
adjustment of $0.6 million to accumulated other comprehensive loss.
The Company has written policies and procedures to document its interest rate
risk management policy that were adopted by the Company's management and Board
of Trustees. Board of Trustee approval is required in order to enter into
contracts to hedge interest rate risk.
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 to 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.
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.
The following table summarizes the notional values and fair values of the
Company's derivative financial instruments at June 30, 2002. 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 ($1.0 million)
2.) Swap - Cash Flow $55.0 million 6.00% 12/15/03 ($2.7 million)
On June 30, 2002, the derivative instruments were reported at their fair value
as a net liability of $3.7 million. This amount is included in accrued expenses
and other liabilities on the accompanying consolidated balance sheets.
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 recognized in earnings. Within
the next twelve months, the Company expects to record a charge to earnings of
approximately $2.8 million of the current balance held in accumulated other
comprehensive income/loss.
12. RECENT ACCOUNTING PRONOUNCEMENTS
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142
requires the Company to cease amortizing goodwill that existed as of June 30,
2001, effective January 1, 2002.
Under SFAS No. 142, 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 other assets on the accompanying
consolidated balance sheets at June 30, 2002 and December 31, 2001 include $16.7
million (net of $1.1 million of amortization expense recognized prior to January
1, 2002) of goodwill recognized in connection with the acquisition of PRI in
1997. The Company recognized approximately $0.1 million and $0.2 million of
goodwill amortization expense for the three and six-month periods ended June 30,
2001, respectively.
- 13 -
The Company has completed the first step of the goodwill transitional impairment
test including a comparison of the fair values of all reporting units to their
carrying values as required under SFAS No. 142 and has concluded that goodwill
is not impaired at January 1, 2002.
Goodwill amortization recorded in 2001 is as follows:
(In thousands, except per share data)
Three Months Ended Six Months Ended
------------------------------ ------------------------------
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
--------- --------- --------- ---------
Income before extraordinary loss $ 4,442 $ 3,906 $ 8,246 $ 8,999
Impact of goodwill amortization -- 106 -- 212
--------- --------- --------- ---------
Adjusted income before extraordinary loss $ 4,442 $ 4,012 $ 8,246 $ 9,211
========= ========= ========= =========
Net income $ 4,442 $ 3,906 $ 8,169 $ 8,999
Impact of goodwill amortization -- 106 -- 212
--------- --------- --------- ---------
Adjusted net income $ 4,442 $ 4,012 $ 8,169 $ 9,211
========= ========= ========= =========
Basic earnings per share $ 0.27 $ 0.29 $ 0.51 $ 0.66
Impact of goodwill amortization -- 0.01 -- 0.02
--------- --------- --------- ---------
Adjusted basic earnings per share $ 0.27 $ 0.30 $ 0.51 $ 0.68
========= ========= ========= =========
Diluted earnings per share $ 0.27 $ 0.29 $ 0.51 $ 0.66
Impact of goodwill amortization -- 0.01 -- 0.02
--------- --------- --------- ---------
Adjusted diluted earnings per share $ 0.27 $ 0.30 $ 0.51 $ 0.68
========= ========= ========= =========
On January 1, 2002, the Company adopted 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, including discontinued operations 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
Accounting Principles Board ("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. This Statement requires that operations that have been sold or properties
that are intended to be sold be presented as discontinued operations in the
statement of income for all periods presented and properties intended to be sold
are to be designated as "Held for Sale" on the balance sheet.
13. SUBSEQUENT EVENTS
In July 2002, the Company sold Mandarin Corners shopping center in
Jacksonville, FL for $16.3 million. The Company expects to record a gain on the
sale of approximately $4.0 million. This property was classified as an asset
held for use at June 30, 2002 because contingencies existed that were beyond the
Company's control that would have prevented the sale. These contingencies were
resolved subsequent to June 30, 2002.
On August 13, 2002 the Company filed a shelf registration statement
with the Securities and Exchange Commission that will permit it, from time to
time, to offer and sell various types of securities, including shares of
beneficial interest, preferred shares of beneficial interest, senior debt
securities, senior subordinated debt securities, subordinated debt securities,
warrants and units, having an aggregate sales price of up to $300 million.
- 14 -
Item 2.
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
As of June 30, 2002, the Company owned interests in 23 shopping centers
containing an aggregate of approximately 12.1 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
owned interests in three shopping centers currently under development, which are
expected to contain an aggregate of approximately 1.0 million square feet upon
completion.
As of June 30, 2002, the Company also provided management, leasing and
development services to 19 additional retail properties containing approximately
7.4 million square feet, six office buildings containing approximately 1.1
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 the second quarter of 2002, the Company continued its growth by acquiring
Beaver Valley Mall, increasing its investment in Willow Grove Park, continuing
its development of three retail properties in its development pipeline, and
increasing its second quarter 2002 same store net operating income by 6.2% and
2.1% in the retail and multifamily sectors, respectively over the corresponding
period of 2001.
The Company's net income increased by $0.5 million to $4.4 million for the
quarter ended June 30, 2002 as compared to $3.9 million for the quarter ended
June 30, 2001. The increase was primarily due to increased operating income from
properties placed in service and acquired in 2002.
As of June 30, 2002, the Company had investments in 15 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 15 Joint Venture properties, the
Company manages four 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 4 to the Unaudited 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 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 eleven 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 June 30,
2002, 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 earnings before interest, taxes, depreciation and
- 15 -
amortization ("EBITDA") to Debt Service and Interest Expense (as defined in the
Credit Facility) of 1.40:1 and 1.75:1, respectively, at June 30, 2002; (vi)
maximum floating rate debt of $250 million; and (vii) maximum commitments for
properties under development not in excess of 25% of Gross Asset Value (as
defined in the Credit Facility). As of June 30, 2002, 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 the Company's primary
geographic regions adversely affecting property operating cash flows
The Company expects to meet its 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 properties in the
collateral pool
o Constraining leverage covenants under the Credit Facility
o Increased interest rates affecting the Company's interest coverage
ratios
o Inability to maintain consolidated EBITDA at a level that complies
with the required ratios under the Credit Facility
At June 30, 2002 the Company had outstanding borrowings of $118.5 million under
its Revolving Facility and had pledged $1.2 million under the Revolving Facility
as collateral for several letters of credit. Of the unused portion of the
Revolving Facility of approximately $55.3 million, as of June 30, 2002, the
Company's loan covenant restrictions allowed the Company to borrow approximately
an additional $34.4 million based on the June 30, 2002 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. In the second quarter of
2002, Paxton Towne Centre was added to the collateral pool. In the future, the
Company may 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 long-term liquidity needs.
On August 13, 2002 the Company filed a shelf registration statement with the
Securities and Exchange Commission that will permit it, from time to time, to
offer and sell various types of securities, including shares of beneficial
interest, preferred shares of beneficial interest, senior debt securities,
senior subordinated debt securities, subordinated debt securities, warrants and
units, having an aggregate sales price of up to $300 million.
Refinancing
In March 2002, the mortgage on Camp Hill Plaza Apartments in Camp Hill,
Pennsylvania, was refinanced. The $12.8 million mortgage has a 10-year term and
bears interest at the fixed rate of 7.02% per annum.
Commitments
At June 30, 2002, the Company had approximately $31.1 million committed to
complete current construction in progress, development and redevelopment
projects, which is expected to be financed through the Revolving Facility or
through short-term construction loans. In connection with certain construction
in progress and development properties, including those development properties
acquired as part of the Company's 1997 acquisition of TRO, the Company may be
required to issue additional units of limited partner interest in PREIT
Associates, L.P. ("the Operating Partnership") upon the achievement of certain
financial targets.
- 16 -
Cash Flows
During the six months ended June 30, 2002, the Company generated $14.5 million
in cash flows from operating activities. Financing activities generated cash of
$7.9 million including: (i) $12.8 million of proceeds from a mortgage loan, (ii)
net borrowings of $20.0 million under the Revolving Facility and (iii) $5.2
million of net proceeds from shares of beneficial interest issued, offset by (i)
$16.4 million of distributions to shareholders, (ii) $4.0 million and $6.1
million of repayments on a construction loan and a mortgage payable,
respectively, (iii) $2.5 million of principal payments on mortgage notes, (iv)
$1.0 million of net distributions to Operating Partnership unit holders and
minority partners and (v) $0.1 million payment of deferred financing costs.
Investing activities used cash of $23.9 million including: (i) $18.6 million of
investments in wholly-owned real estate assets, (ii) $6.0 million of investments
in construction in progress and (iii) $1.6 million of investments in
partnerships and joint ventures; offset by cash distributions from partnerships
and joint ventures in excess of equity in income of $2.2 million.
Contingent Liabilities
The Company along with certain of its joint venture partners has guaranteed debt
totaling $5.6 million. This debt matures in December 2003.
Interest Rate Protection
In order to limit exposure to variable interest rates, the Company has entered
into derivative instruments as follows (also refer to Note 12 of the Unaudited
Consolidated Financial Statements):
Fixed Interest Rate
Hedge Type Notional Value vs. 30-day LIBOR Maturity Date
- ----------- -------------- ---------------- -------------
1.) Swap - Cash Flow $20.0 million 6.02% 12/15/03
2.) Swap - Cash Flow $55.0 million 6.00% 12/15/03
The Company accounts for its derivative instruments under the guidance of SFAS
No. 133. Under SFAS No. 133, the Company records the change in the fair market
value of its derivative instruments as a change to other comprehensive
income/loss. The notional amounts of the derivative instruments provide an
indication of the Company's involvement in these interests at June 30, 2002, but
do not represent the Company's exposure to credit, interest rate or market
risks. Therefore, the notional amounts of the Company's derivative instruments
are not included on the Company's consolidated balance sheets.
ACQUISITIONS, DISPOSITIONS AND DEVELOPMENT ACTIVITIES
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 partnership interest
in Willow Grove Park, a 1.2 million square foot regional mall in Willow Grove,
Pennsylvania. 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 was $16.6 million, including $2.3 million that was funded in
July 2002. In June 2002, the Company contributed the expansion asset to the
partnership. As a result of this contribution, the Company increased its capital
interest in the partnership that owns Willow Grove Park to 30% and its
management interest in the partnership to 50% retroactive to November 2001, and
became the managing general partner of the partnership.
In 2002, the Company purchased Beaver Valley Mall located in Monaca,
Pennsylvania for a purchase price of $60.8 million. The purchase was financed
primarily through a $48.0 million mortgage and a $10.0 million bank borrowing.
Also in 2002, the Company exercised an option to purchase a portion of the land
on which Beaver Valley Mall is situated for $0.5 million.
Dispositions
Consistent with management's stated long-term strategic plan to review and
evaluate all Joint Venture real estate holdings and non-core properties, during
the first quarter of 2001, the Company sold its interests in the Ingleside
Shopping Center in Thorndale, Pennsylvania.
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. 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 limited 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 and trustees of the
Company have either direct or indirect ownership interests, including Ronald
Rubin, the Company's
- 17 -
Chairman and Chief Executive Officer and Edward A. Glickman, the Company's Chief
Financial 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 material off-balance sheet transactions other than the Joint
Ventures described in Note 4 of the Unaudited Consolidated Financial Statements
and the Overview above, and those discussed in the Interest Rate Protection
section, above. 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 of the lease.
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.
In connection with the Company's acquisition of TRO in 1997, the Operating
Partnership 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 June 30, 2002, 665,000 contingent
Operating Partnership units had been earned. The remaining 135,000 units may be
earned in 2002. The recipients of the contingent Operating Partnership units
include officers of the Company, including Ronald Rubin, the Company's Chairman
and Chief Executive Officer, who were shareholders of TRO at the time of the TRO
acquisition.
SIGNIFICANT ACCOUNTING POLICIES
The Company believes that the most critical accounting policies include revenue
recognition and asset impairment.
Revenue Recognition
The Company derives over 90% 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 the first six months of 2002, non-cash straight
line rent income was $0.4 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 the six months of 2002, the Company accrued $0.2 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 each 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 company revenue 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 and other long-term 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 financial statements.
- 18 -
RESULTS OF OPERATIONS
Quarter Ended June 30, 2002 compared with Quarter Ended June 30, 2001
Net income increased by $0.5 million to $4.4 million ($0.27 per share) for the
quarter ended June 30, 2002 as compared to $3.9 million ($0.29 per share) for
the quarter ended June 30, 2001. This increase was primarily due to properties
placed in service or acquired in 2002.
Revenues increased by $3.8 million or 14% to $31.3 million in the quarter ended
June 30, 2002 from $27.5 million for the quarter ended June 30, 2001. Gross
revenues from real estate increased by $3.7 million to $28.8 million for the
quarter ended June 30, 2002 from $25.1 million for the quarter ended June 30,
2001. This increase in gross revenues resulted from a $3.0 million increase in
base rents and a $1.0 million increase in expense reimbursements, partially
offset by a $0.3 million decrease in lease termination fees Base rents increased
due to a $2.9 million increase in retail rents, resulting from the purchase of
Beaver Valley Mall ($2.0 million), two properties under development in 2001 now
placed in service ($0.5 million), and higher rents due to new and renewal leases
at higher rates in 2002. Base rents also increased due to a $0.1 million
increase in multifamily rents, resulting primarily from rental rate increases.
Expense reimbursements increased due to an increase in reimbursable property
operating expenses. Management company revenue decreased by $0.1 million to $2.2
million for the quarter ended June 30, 2002 from $2.3 million for the quarter
ended June 30, 2001. Interest and other income increased by $0.3 million due to
increased interest on advances to Joint Ventures.
Property operating expenses increased by $1.0 million to $9.1 million for the
second quarter of 2002 compared to $8.1 million for the second quarter of 2001.
Payroll expense increased $0.2 million or 9% due to normal salary increases and
increased benefit costs. Real estate and other taxes increased by $0.4 million
due to slightly higher property tax rates. Other operating expenses increased by
$0.6 million due to increased repairs and maintenance expenses. Property
operating expenses were also generally higher in 2002 due to the acquisition of
Beaver Valley Mall.
Depreciation and amortization expense increased by $1.2 million to $5.5 million
for the quarter ended June 30, 2002 from $4.3 million for the quarter ended June
30, 2001 due to $0.4 million from the newly acquired Beaver Valley Mall, $0.3
million from two properties under development in 2001 now placed in service, and
$0.5 million from property improvements.
General and administrative expenses increased by $0.5 million to $6.1 million
for the quarter ended June 30, 2002 from $5.6 million for the quarter ended June
30, 2001. The primary reasons for the increase are a $0.4 million increase in
payroll and benefits and a $0.1 million increase in development reserves.
Interest expense increased by $0.9 million to $7.6 million for the quarter ended
June 30, 2002 as compared to $6.7 million for the quarter ended June 30, 2001.
Mortgage interest increased by $0.4 million. Of this amount, $1.0 million was
due to interest at Beaver Valley Mall, offset by a $0.6 million decrease due to
the repayment of a $21 million construction note payable at Paxton Towne Centre.
Bank loan interest expense increased by $0.5 million because of greater amounts
outstanding in 2002 as compared to 2001.
Equity in income of partnerships and joint ventures increased by $0.5 million to
$1.9 million in the quarter ended June 30, 2002 from $1.4 million in the quarter
ended June 30, 2001. The increase was primarily due to increased rental
revenues, partially offset by increased property operating, depreciation and
mortgage interest expense.
Minority interest in the operating partnership remained constant at $0.5 million
in the quarters ended June 30, 2002 and 2001.
Gains on sales of interests in real estate were $0.3 million in the second
quarter of 2001 resulting from the sale of land parcels at Commons at Magnolia
and Paxton Towne Centre. No property sales occurred in the second quarter of
2002.
Six Month Period Ended June 30, 2002 and 2001
Net income decreased by $0.8 million to $8.2 million ($0.51 per share) for the
six-month period ended June 30, 2002 as compared to $9.0 million ($0.66 per
share) for the six-month period ended June 30, 2001. This decrease was primarily
because the Company had a gain on the sale of real estate interests in the first
quarter of 2001 of $2.1 million ($0.15 per share) and no comparable gains in the
first quarter of 2002, partially offset by increased net operating income from
properties placed in service or acquired in 2002.
Revenues increased by $4.7 million or 9% to $59.2 million in the quarter ended
June 30, 2002 from $54.5 million for the six-month period ended June 30, 2001.
Gross revenues from real estate increased by $4.7 million to $54.5 million for
the six-month period ended June 30, 2002 from $49.8 million for the six-month
period ended June 30, 2001. This increase in gross revenues resulted from a $4.1
million increase in base rents and a $0.9 million increase in expense
reimbursements, partially offset by a $0.3 million decrease in lease termination
fees. Base rents increased due to a $3.7 million increase in retail rents,
resulting from the acquisition of Beaver Valley Mall ($2.0 million) and two
properties under development in 2001 now placed in service ($1.1 million), and
higher rents due to new and renewal leases at higher rates in 2002. Base rents
also increased due to a $0.4 million increase in multifamily rents, resulting
primarily from rental rate increases. Expense reimbursements
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increased due to an increase in reimbursable property operating expenses.
Management company revenue decreased by $0.1 million. Interest and other income
increased by $0.1 million due to increased interest on notes receivable from
Joint Ventures.
Property operating expenses increased by $1.0 million to $17.4 million for the
second quarter of 2002 compared to $16.4 million for the second quarter of 2001.
Payroll expense increased $0.3 million or 9% due to normal salary increases and
increased benefit costs. Real estate and other taxes increased by $0.4 million
due to slightly higher property tax rates. Utilities decreased by $0.2 million.
Other operating expenses increased by $0.5 million or 7% due to increased
repairs and maintenance expenses. Property operating expenses were also
generally higher due to the acquisition of Beaver Valley Mall.
Depreciation and amortization expense increased by $1.8 million to $10.4 million
for the six-month period ended June 30, 2002 from $8.6 million for the six-month
period ended June 30, 2001 due to $0.4 million from the acquisition of Beaver
Valley Mall and $0.6 million from two properties under development in 2001 now
placed in service, and $0.8 million from property improvements.
General and administrative expenses increased by $1.3 million to $12.1 million
for the six-month period ended June 30, 2002 from $10.8 million for the
six-month period ended June 30, 2001. The primary reasons for the increase are a
$0.6 million increase in payroll and benefits, a $0.3 million increase in
development reserves, a $0.2 million increase in corporate meeting and marketing
costs, a $0.1 million increase in professional fees, as well as minor increases
in several other expense categories totaling $0.1 million in the aggregate.
Interest expense increased by $0.2 million to $13.5 million for the six-month
period ended June 30, 2002 as compared to $13.3 million for the six-month period
ended June 30, 2001. Mortgage interest decreased by $0.3 million. Of this
amount, $1.2 million was due to the repayment of a $21 million construction note
payable at Paxton Towne Centre, as well as a $0.1 million due to expected
amortization of mortgage balances, partially offset by $0.9 million of interest
related to the Beaver Valley Mall mortgage. Bank loan interest expense increased
by $0.5 million because of greater amounts outstanding in 2002 as compared to
2001.
Equity in income of partnerships and joint ventures increased by $0.7 million to
$3.5 million in the quarter ended June 30, 2002 from $2.8 million in the quarter
ended June 30, 2001. The increase was primarily due to increased rental
revenues, partially offset by increased property operating, depreciation and
mortgage interest expense.
Minority interest in the operating partnership decreased $0.3 million to $0.9
million in the quarter ended June 30, 2002 from $1.2 million in the quarter
ended June 30, 2001 primarily due to the change in net income.
Gains on sales of interests in real estate were $2.1 million in the first six
months of 2001 resulting from the sale of the Company's interest in Ingleside
Center in Thorndale, Pennsylvania and land parcels at Commons at Magnolia and
Paxton Towne Centre. No property sales occurred in the first six months of 2002.
SAME STORE PROPERTIES
Retail sector operating income for the quarter ended June 30, 2002 for the
properties owned since January 1, 2001 (the "Same Store Properties"), excluding
the impact of lease terminations, increased by $0.7 million and $1.2 million or
6.2% and 5.2%, respectively over the three and six-month periods ended June 30,
2001. This increase resulted from new and renewal leases at higher rates, higher
occupancy and higher percentage rents in 2002 as compared to 2001. Multifamily
sector same store growth was $0.2 million and $0.5 million or 2.1% and 2.8%,
respectively for the three and six-month periods ended June 30, 2002. This was
due to net revenue increases and expense decreases of $0.2 million, for the
three-month period ended June 30, 2002, and revenue increases of $0.3 million
and expense decreases of $0.2 million for the six-month period ended June 30,
2002.
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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
three and six-month periods ended June 30, 2002, as compared to the three and
six-month periods ended June 30, 2001.
In thousands Three Months Ended Six Months Ended
--------------------------------- ---------------------------------
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
------------- ------------- ------------- -------------
Retail Sector:
Revenues $ 16,584 $ 15,712 $ 35,015 $ 33,391
Property operating expenses (4,497) (4,334) (10,012) (9,616)
-------- -------- -------- --------
Net operating income $ 12,087 $ 11,378 $ 25,003 $ 23,775
======== ======== ======== ========
Multifamily Sector:
Revenues $ 14,153 $ 14,025 $ 28,236 $ 27,975
Property operating expenses (5,852) (5,897) (11,471) (11,668)
-------- -------- -------- --------
Net operating income $ 8,301 $ 8,128 $ 16,765 $ 16,307
======== ======== ======== ========
FUNDS FROM OPERATIONS
Funds from operations ("FFO") is defined as income before gains or 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 FFO in accordance with standards established by the
National Association of Real Estate Investment Trusts ("NAREIT"), which may not
be comparable to FFO 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. FFO 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 pay dividends.
FFO increased 21% to $12.7 million for the quarter ended June 30, 2002, as
compared to $10.5 million in the first quarter of 2001. The increase was
primarily due to newly acquired/placed in service properties in 2002.
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/DEFLATION
Inflation/deflation 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 and decrease with
deflation. 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.
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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 disposition 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in the net financial instrument position or
sensitivity to market risk since December 31, 2001 as reported by PREIT in its
Form 10-K for the year then ended.
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PART II
OTHER INFORMATION
Item 1. Legal Proceedings
See Note 8 to the Unaudited financial statements for the quarter ended
June 30, 2002 included elsewhere in this report for a description of certain
litigation pending against the Department of Transportation and its Secretary
with respect to the Christiana Phase II project.
Item 4. Submission of Matters to a Vote of Security Holders
The 2002 Annual Meeting of Holders of Certificates of Beneficial
Interest of PREIT was held on May 9, 2002. At such meeting, Messrs. Lee H.
Javitch and Jonathan B. Weller were reelected to PREIT's Board of Trustees to
serve for a term ending at the Annual Meeting to be held in the spring of 2005
and until their respective successors are elected and qualified. In such
election 13,835,140 votes were cast for Mr. Javitch and 13,718,492 votes were
cast for Mr. Weller. Under PREIT's Trust Agreement, votes cannot be cast against
a candidate. Proxies filed at the 2002 Annual Meeting by holders of 200,911
shares withheld authority to vote for Mr. Javitch and those filed by the holders
of 317,560 shares withheld authority to vote for Mr. Weller.
Also at such meeting, PREIT's shareholders voted to approve certain
terms of the Pennsylvania Real Estate Investment Trust 2002-2004 Long-Term
Incentive Plan (13,166,765 votes for, 690,943 votes against and 178,330
abstentions).
Item 5. Other Information
PREIT issued a press release on August 8, 2002 containing financial
information for the quarter ended June 30, 2002.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
Current Report on Form 8-K dated April 4, 2002, filed on
April 11, 2002 and amended on April 30, 2002.
Current Report on Form 8-K dated June 28, 2002 and filed on
July 25, 2002.
Current Report on Form 8-K dated July 16, 2002 and filed on
July 19, 2002.
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SIGNATURE OF REGISTRANT
-----------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
By /s/ Ronald Rubin
-----------------------------------
Ronald Rubin
Chief Executive Officer
By /s/ Edward A. Glickman
-----------------------------------
Edward A. Glickman
Executive Vice President and
Chief Financial Officer
By /s/ David J. Bryant
-----------------------------------
David J. Bryant
Senior Vice President and Treasurer
(Principal Accounting Officer)
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Exhibit Index
-------------
Exhibit
Number Description
- ------ -----------
None.
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