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, 2002
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
incorporation or organization) Identification No.)
The Bellevue 19102
200 S. Broad St. (Zip Code)
Philadelphia, Pennsylvania
(Address of principal executive offices)
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 |X|.
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes |X| No |_|
The aggregate market value, as of June 28, 2002, of the shares of beneficial
interest, par value $1.00 per share, of the Registrant held by non-affiliates of
the Registrant was $446,308,379. (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 26, 2003, 16,738,195 shares of the Registrant were outstanding.
Documents Incorporated by Reference
Portions of the Registrant's definitive proxy statement for its 2003 Annual
Meeting are incorporated by reference in Part III of this Form 10-K.
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2002
TABLE OF CONTENTS
PART I
Page
FORWARD LOOKING STATEMENTS.....................................................................................3
Item 1. Business.......................................................................................................4
Item 2. Properties....................................................................................................24
Item 3. Legal Proceedings.............................................................................................24
Item 4. Submission of Matters to a Vote of
Security Holders..............................................................................................24
PART II
Item 5. Market for Our Common Equity and Related Shareholder Matters..................................................25
Item 6. Selected Financial Data.......................................................................................26
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.................................................................................................27
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.....................................................39
Item 8. Financial Statements and Supplementary Data...................................................................40
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..........................40
PART III
Item 10. Trustees and Executive Officers of the Trust..................................................................40
Item 11. Executive Compensation........................................................................................40
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters................41
Item 13. Certain Relationships and Related Transactions................................................................41
Item 14. Controls and Procedures.......................................................................................41
PART IV
Item 15. Exhibits, Financial Statements, Schedules and Reports on Form 8-K.............................................42
2
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K for the year ended December 31, 2002,
together with other statements and information publicly disseminated by us,
contains certain "forward-looking statements" within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. Forward-looking statements relate to expectations, beliefs, projections,
future plans and strategies, anticipated events or trends and other matters that
are not historical facts. These forward-looking statements reflect our current
views about future events and are subject to risks, uncertainties and changes in
circumstances that may cause future events, achievements or results to differ
materially from those expressed or implied by the forward-looking statement. In
particular, the pending transactions described in this report may not be
consummated on terms that are favorable to us, or at all. If one or more of the
transactions are not consummated, or if individual components of a transaction
are not consummated, it may cause our actual results to differ materially from
those expressed or implied in any related forward-looking statement. Other
factors that may cause our actual results to differ materially from those
expressed or implied by our forward-looking statements include, but are not
limited to:
o the timing and full realization of the expected benefits from the
proposed transactions;
o the cost, timing and difficulty of integrating the properties proposed
to be acquired into our business; and
o greater than expected operating costs, financing costs and business
disruption associated with the proposed transactions, including without
limitation, difficulties in maintaining relationships with employees and
tenants following the consummation of the proposed transactions.
In addition, our business may be affected by uncertainties affecting
real estate businesses generally including, among other factors:
o general economic, financial and political conditions, including the
possibility of war or terrorist attacks;
o changes in local market conditions or other competitive factors;
o existence of complex regulations, including those relating to our status
as a REIT, and the adverse consequences if we were to fail to qualify as
a REIT;
o risks relating to construction and development activities;
o our ability to maintain and increase property occupancy and rental
rates;
o dependence on our tenants' business operations and their financial
stability;
o possible environmental liabilities;
o financing risks;
o our ability to raise capital through public and private offerings of
debt and/or equity securities and the availability of adequate funds at
reasonable cost; and
o our short- and long-term liquidity position.
Additional factors that may cause our actual results to differ
materially from those expressed or implied in our forward-looking statements
include those discussed in the section entitled "Item 1. Business - Risk
Factors." We do not intend to and disclaim any duty or obligation to update or
revise any forward-looking statements to reflect new information, future events
or otherwise.
3
PART I
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" or the "Operating Partnership"), a Delaware
limited partnership. As used in this report, unless the context requires
otherwise, the terms "Company," "we," "us," and "our" include 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 in the Eastern United States.
As of December 31, 2002, we owned interests in 22 shopping centers
containing an aggregate of approximately 11.8 million square feet, 19
multifamily properties containing an aggregate of 7,242 units and four
industrial properties with an aggregate of approximately 0.3 million square
feet. We also own interests in two shopping centers currently under development,
which we expect to contain an aggregate of approximately 0.8 million square feet
upon completion. We cannot assure you that these development properties will be
completed successfully.
We also provide management, leasing and development services to
affiliated or third-party property owners with respect to 18 retail properties
containing approximately 6.9 million square feet, six office buildings
containing approximately 1.1 million square feet and two multifamily properties
containing 137 units.
Our business objective is to produce long-term profitability for our
shareholders. We expect to achieve our business objective through a focus on the
selective acquisition, development, redevelopment, renovation, management and
expansion of income-producing real estate properties. If the proposed
transactions described below are completed, we expect these real estate
properties to consist almost entirely of regional retail properties. In
addition, we also may pursue the disposition of certain real estate assets and
utilize the proceeds to repay debt, to reinvest in other real estate assets and
developments and for other corporate purposes. In pursuing our objective, we
will continue to seek to acquire and develop high quality, well-located retail
properties with strong prospects for future cash flow growth and capital
appreciation, particularly where our management and leasing capabilities can
enhance the value of these properties. We believe that this objective will
provide the benefits of enhanced investment opportunities, economies of scale,
access to capital, and the ability to attract and retain talented personnel.
There can be no assurance that we will achieve our business objective generally
or that we will be able to consummate the specific proposed transactions
described below.
Our principal executive offices are located at The Bellevue, 200 S.
Broad Street, Philadelphia, PA 19102. We maintain a website with the address
www.preit.com. We are not including or incorporating by reference the
information contained on our website into this report. We make available on our
website, free of charge and as soon as practicable after filing with the SEC,
copies of our most recently filed Annual Report on Form 10-K and all Quarterly
Reports on Form 10-Q and Current Reports on Form 8-K filed thereafter, including
all amendments to these reports.
Our Structure
The Company's interests in its properties are held through its
operating partnership, PREIT Associates. The Company is the sole general partner
of the Operating Partnership, and as of December 31, 2002, held a 90.4%
controlling interest in the Operating Partnership and consolidates the Operating
Partnership for financial reporting purposes.
4
The following is a diagram of our structure as of December 31, 2002:
+----------------------------+
| Pennsylvania Real Estate |
| Investment Trust (1) |
+----------------------------+
|90.4%
|
|
|
| +---------------------+
| | Minority |
| | Limited (2) |
| 9.6% ------------ | Partners |
| | +---------------------+
| |
| |
| |
| |
| |
+-------------------------------------+
+-----------------| PREIT Associates, L.P. |+----------------|
| |-------------------------------------+ |
| | |
| | |
+----------------------+ | +---------------------+
| PREIT | +----------------------+ | PREIT- |
| Services, LLC | | | | RUBIN, Inc. |
| | | 47 Properties (3) | +---------------------+
| | +----------------------+
+----------------------+
(1) Sole general partner of PREIT Associates. Of our 90.4% 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 1,290,372 Units, 7.6% of the Units outstanding at
December 31, 2002, owned by the persons who were shareholders and affiliates of
The Rubin Organization before our acquisition of The Rubin Organization in 1997.
Under the terms of our acquisition of The Rubin Organization, these individuals
have the right to receive up to 135,000 additional Units depending on the final
determination of our adjusted funds from operations over the nine month period
commencing on January 1, 2002 and ending on September 30, 2002. In addition,
these individuals have the right to receive additional Units in respect of their
interests in other properties we acquired rights to as part of the acquisition.
(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 or indirectly by PREIT
Associates. PREIT Associates' economic interest in these properties ranges from
30% to 100%.
Recent Developments
As part of our strategy of strengthening our focus on retail
properties, we recently entered into the following transactions, each of which
is expected to close in 2003:
Proposed Sale of Multifamily Portfolio
On March 3, 2003, we entered into an agreement to sell all of our 7,242
apartment units to Morgan Properties of King of Prussia, Pennsylvania
("Morgan"), for $420 million. The $420 million sale price of the multifamily
portfolio includes a mix of cash payable at closing and Morgan's agreement to
assume or pay off indebtedness related to the properties. As of December 31,
2002, approximately $213.7 million of the $420 million sale price would be
payable in cash and approximately $206.3 million would be payable in the form of
assumed indebtedness. The portion attributable to cash is expected to increase
and the portion attributable to assumed indebtedness is expected to decrease by
the amount of our principal payments on this indebtedness between January 1,
2003 and closing.
5
The sale price is subject to adjustment in the following circumstances:
o If our adjusted net operating income attributable to the
properties and joint venture interests, as determined from our
audited 2002 financial statements, is more than 1% below our
projected adjusted net operating income attributable to the
properties and joint venture interests, then the sale price will
be reduced by the difference based on a 7.95% capitalization
rate; and
o If, with respect to any of the properties or joint venture
interests, (1) we are in material breach of our representations
and warranties and do not cure the breach, (2) we are shown not
to have good and marketable title on which Morgan can obtain
customary title insurance and we do not cure the problem, (3) we
are unable to obtain a consent required to sell the properties
from our lenders (including bond holders) or joint venture
partners or (4) joint venture partners exercise rights of first
refusal and choose to purchase our joint venture interest, then
Morgan may elect to remove the affected property or joint venture
interest from the purchased assets and the sale price payable by
Morgan will be reduced by the amount attributable to that
property or joint venture interest.
Morgan has paid an initial $10 million deposit toward the sale price.
Until 12:00 noon E.S.T. on April 4, 2003, Morgan can terminate the agreement if
it has failed to obtain debt and equity financing by forfeiting to us $3 million
of its initial $10 million deposit. If Morgan does not terminate the agreement
by this time, then it is required to increase its initial $10 million deposit by
an additional $5 million. We can terminate the agreement for any reason until
1:00 p.m. E.S.T. on April 4, 2003 upon returning Morgan's deposit and paying
Morgan an additional $3 million. Thereafter, for us to terminate the agreement,
we would be required to return Morgan's $15 million deposit and to pay Morgan an
additional $15 million and, for Morgan to terminate the agreement, it would be
required to forfeit its entire $15 million deposit to us.
If we complete the sale of our multifamily portfolio to Morgan, then we
will be liable to Morgan for breaches of representations and warranties to the
extent that these breaches exceed $500,000, up to a maximum aggregate liability
of $15 million, unless Morgan was aware of the breach and elected to close the
transaction despite the breach. The threshold and cap amounts are subject to
adjustment in proportion to any downward adjustments in the sale price for the
properties as described above. Morgan is unaffiliated with us and the sale price
and terms of the transaction were determined through an arm's length negotiation
between Morgan and us. The sale of the multifamily portfolio is expected to
close by July 31, 2003.
Proposed Acquisition of Retail Properties
On March 7, 2003, we entered into Agreements of Purchase and Sale to
acquire Cherry Hill Mall, Moorestown Mall, Plymouth Meeting Mall, Gallery at
Market East, Exton Square Mall and Echelon Mall from affiliated companies of The
Rouse Company ("Rouse"). We intend, upon the execution of definitive agreements
with New Castle Associates, to assign our rights under the Agreement of Purchase
and Sale to acquire Cherry Hill Mall to New Castle Associates. The partners of
New Castle Associates include Ronald Rubin, our Chairman and Chief Executive
Officer, and George Rubin, President of our management subsidiaries,
PREIT-RUBIN, Inc. and PREIT Services, LLC, and one of our Trustees.
Rouse and New Castle Associates have entered into a separate Agreement
of Purchase and Sale whereby Rouse has agreed to acquire Christiana Mall from
New Castle Associates, and the partners of New Castle Associates have agreed
amongst themselves to accept Cherry Hill Mall as a replacement property for
Christiana Mall. Accordingly, assuming we are able to enter into an agreement
with New Castle Associates providing for our assignment of the Cherry Hill Mall
agreement to New Castle Associates, New Castle Associates would acquire Cherry
Hill Mall from Rouse in exchange for the interest of New Castle Associates in
Christiana Mall, the assumption by New Castle Associates of mortgage debt on
Cherry Hill Mall and a cash payment by New Castle Associates. In connection with
the acquisition of Cherry Hill Mall by New Castle Associates, we intend to
acquire equity interests in New Castle Associates from partners of New Castle
Associates, and we may agree to provide the cash portion of the purchase price
of Cherry Hill Mall to New Castle Associates as a loan or for additional equity
interests in New Castle Associates.
6
The aggregate purchase price for our acquisition of the six Rouse
properties, assuming we were to acquire all of the equity of New Castle
Associates, would be $548 million, including approximately $233 million in cash,
the assumption of $277 million in non-recourse mortgage debt and $38 million in
Units. All of the Units would be issued as part of the consideration for our
acquisition of the equity of New Castle Associates. Upon the sale of Christiana
Mall by New Castle Associates, our management and leasing agreement for that
property will be terminated, and we will receive a brokerage fee of
approximately $2 million from New Castle Associates.
The closing of our acquisition of each of the Rouse properties is
expected to occur no later than the first week in May 2003, and is conditioned
on, among other things, our acquiring the Rouse properties other than Cherry
Hill Mall, New Castle Associates acquiring Cherry Hill Mall and Rouse acquiring
Christiana Mall as well as the parties obtaining a number of lender and other
third-party consents. Adjustments are provided for in the terms of our purchase
from Rouse of Echelon and Plymouth Meeting Malls in the event that Rouse is
unable to secure necessary lender consents to sell these malls by closing. If
Rouse is unable to secure the requisite lender consent for the transfer of
Echelon Mall, the price to be paid for the mall will be reduced by approximately
$225,000 per month for a period of up to six months while Rouse continues to
attempt to obtain this consent. Thereafter, we will be under no obligation to
purchase, and Rouse will be under no obligation to sell, the mall. Should Rouse
be unable to secure the requisite lender consent to transfer the leasehold
interest with respect to Plymouth Meeting Mall prior to closing, then we will
purchase the fee title interest in Plymouth Meeting Mall and the terms of the
purchase will be modified to provide us with a mechanism to purchase the
leasehold interest on or before November 1, 2007, when the loan becomes due.
Under this scenario, the purchase price for the leasehold interest may be
reduced by up to $7.4 million depending on when the leasehold closing occurs,
and we will lease the property on behalf of Rouse during this deferral period.
The agreements prohibit Rouse from marketing the six Rouse properties
for sale, or from entering into discussions or negotiations with respect to the
sale of the properties. Under the agreements, if we fail to close the
transactions in breach of our obligation to do so, including through a decision
not to enter into the contemplated agreements with New Castle Associates if we
do not acquire 100% of its equity, we will forfeit our $2 million deposit to
Rouse. If Rouse fails to close the transactions in breach of its obligation to
do so, we will be entitled to a return of our $2 million deposit and the
reimbursement of certain expenses incurred in connection with the transactions
up to a maximum of $2 million.
The transactions between Rouse and us were approved by a special
committee of all five of our independent trustees. The special committee also
has approved our acquisition of all of the equity interests in New Castle
Associates. We currently are negotiating with the partners of New Castle
Associates regarding the transfer of the Agreement of Purchase and Sale for
Cherry Hill Mall to New Castle Associates and our acquisition of equity
interests in New Castle Associates, but we cannot assure you that we will be
able to enter into definitive agreements with New Castle Associates regarding
these transactions.
As part of our strategy to strengthen our focus on the retail sector,
we also intend to pursue acquisitions of additional shopping malls and we
currently are in discussions with another party to acquire a significant
shopping mall portfolio.
Timing and Effects of Transactions
We currently expect to use the proceeds from an acquisition term loan
to finance the purchase of the six Rouse malls, and we are in discussions with
several institutional lenders regarding the acquisition term loan. We expect to
repay the term loan primarily with the cash proceeds from the sale of our
multifamily portfolio - which is not expected to close until after the Rouse
transaction closes - and with additional fixed-rate, non-recourse debt secured
by assets acquired from Rouse on an unencumbered basis.
If we consummate the proposed transactions, we cannot assure you:
o that we will succeed in integrating the properties to be
acquired into our existing business;
o that we will have access to the funds required to operate the
combined business on terms that are favorable to us, or at
all; or
o that we will achieve the advantages that we expect to achieve
through the transactions, including the accretion of various
financial measurements that we expect to result from the
transactions.
In addition, our results of operations and financial condition
following consummation of the transactions may differ from prior periods as a
result of, among other things, an expected higher debt level after the
consummation of the transactions.
7
We cannot assure you that we will consummate the proposed transactions
on the terms described above, on terms that otherwise are favorable to us, or at
all. Factors that could cause us not to consummate the transactions, or to
consummate them on different terms, include, without limitation, the
availability of adequate financing at reasonable cost, the ability of Morgan to
obtain financing for its purchase of the multifamily portfolio and the
satisfaction of closing conditions applicable to the transactions, some of which
are beyond our control. Under certain circumstances described above, we may be
required to pay from $2 million up to a maximum aggregate amount of $17 million
if the transactions are not consummated.
Properties
As of December 31, 2002, we had four reportable segments: (1) retail
properties, (2) multifamily properties, (3) development and other, and (4)
corporate. Revenues, operating income or loss and other information on each of
our reportable segments are set forth in Note 12 to the consolidated financial
statements included elsewhere in this Annual Report on Form 10-K. We anticipate
that the multifamily properties segment will be accounted for in future
quarterly reports and annual reports as a discontinued operation in accordance
with Statement of Financial Accounting Standards No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets," and that future quarterly reports
and annual reports will reflect the remaining three reportable segments as
continuing operations.
All information regarding our properties is as of December 31, 2002,
and does not reflect any changes that may occur as a result of the proposed
transactions discussed under "-Recent Developments" above.
Retail Properties
As of December 31, 2002, we had interests in 22 retail properties
containing an aggregate of approximately 11.8 million square feet. PREIT
Services currently manages 12 of these properties, all of which are wholly owned
by the Company. PREIT-RUBIN also manages three of the properties, each of which
is owned by a joint venture in which the Company is a party. The remaining seven
properties also are 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. Fifteen of the 22 retail
properties (containing an aggregate of approximately 9.1 million square feet)
are located in Pennsylvania, two (containing an aggregate of approximately 0.8
million square feet) are located in South Carolina, and one is located in each
of Delaware, Florida, Maryland, Massachusetts and New Jersey (containing an
aggregate of approximately 1.9 million square feet).
The following table presents information regarding our retail properties as of
December 31, 2002, and does not include information regarding the properties we
are attempting to acquire as described under "-- Recent Developments" above.
Percent
Year Built Leased &
or Total Sq. Owned Sq. Total Occupied Anchors/
Percent Renovated Feet Feet GLA GLA Primary
Real Property Location Owned* (1) (2) (2) (2),(3) (2),(3),(4) Tenants (5)
- -----------------------------------------------------------------------------------------------------------------------------------
Pennsylvania
- ------------
Crest Plaza (6) Allentown 100% 1959/91 155,294 155,294 72,631 47% Weis Market,
Eckerd
Drug Store,
Target (7)
Lehigh Valley Mall Allentown 50% 1977/96 1,051,145 679,159 655,211 97% JC Penney,
Macy's,
Strawbridges
Whitehall Mall Allentown 50% 1964/98 533,721 533,721 522,786 98% Sears, Kohl's,
Bed Bath &
Beyond
Palmer Park Mall Easton 50% 1972/98 447,397 447,397 427,875 96% The Bon-Ton,
Boscov's
8
Festival at Exton Exton 100% 1991 142,610 142,610 141,543 99% Sears Hardware,
Clemen's
Paxton Towne Centre Harrisburg 100% 2001 719,034 445,976 399,876 90% Target, Kohl's,
Centre (6)
Bed Bath &
Beyond, Costco
Laurel Mall Hazleton 40% 1973/95 558,802 558,802 536,622 96% Boscov's,
K-mart
Red Rose Commons Lancaster 50% 1998 463,042 263,452 261,291 99% Weis Market,
Home Depot
The Court at Langhorne 50% 1996 704,486 456,862 456,862 100% Dick's Sporting
Oxford Valley Goods,
Best Buy,
Home Depot,
BJ's Wholesale
Club
Beaver Valley Mall (8) Monaca 100% 1970/91 1,163,886 959,116 878,367 92% Boscov's,
JC Penney,
Sears,
Kaufmann's
Northeast Tower Philadelphia 100% 1997/98 472,102 433,424 319,154 74% Home Depot,
Center (6) Dicks
Sporting Goods,
PetSmart, Wal-Mart (7)
Metroplex Shopping Plymouth
Center Meeting 50% 2001 778,190 477,461 477,461 100% Target, Lowes,
Giant
Springfield I & II (9) Springfield 50% 1963/97/ 268,500 122,831 111,339 91% Target, Bed
98 Bath & Beyond
Creekview Shopping Warrington 100% 2001 425,002 136,086 136,086 100% Target,
Center Lowes
Willow Grove Park (10) Willow Grove 30% 1982/ 1,203,629 561,768 542,809 97% Sears, Macy's
2001 Strawbridge's,
Bloomingdales
South Carolina
- --------------
Magnolia Mall Florence 100% 1979/92 562,186 562,186 531,125 95% JC Penney, Sears,
Belk, Roses,
Best Buy
The Commons at Florence 100% 1991/2002 230,644 104,444 100,752 97% Goody's Family
Magnolia Clothings
Delaware
- --------
Christiana Power Center Newark 100% 1998 302,409 302,409 302,409 100% Costco, Dick's
Phase I Sporting Goods
Florida
- -------
South Blanding Village Jacksonville 100% 1986 106,657 106,657 103,857 97% Food Lion,
Staples
9
Massachusetts
- -------------
Dartmouth Mall Dartmouth 100% 1971/87/ 627,038 627,038 494,100 79% JC Penney,
2000 Sears
General Cinema
Maryland
- --------
Prince Georges Plaza Hyattsville 100% 1959/90 743,465 743,465 661,270 89% JC Penney,
Hechts
New Jersey
- ----------
Rio Grande Mall Rio Grande 60% 1973/92 158,937 158,937 158,281 99% K-mart, Staples
---------- --------- --------- ---
Total/Weighted Average (22 Properties) 11,818,176 8,979,095 8,291,707 92%
========== ========= ========= ===
*By PREIT Associates; we own approximately 90.4% 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, total leased & occupied GLA feet and Percent Leased exclude such
space.
(3) GLA stands for Gross Leasable Area, which is measured in square feet.
(4) Percent Leased is calculated as a percent of Owned Square Feet for
which leases were in effect as of December 31, 2002.
(5) Includes anchors and primary tenants who own their stores and do not
pay rent.
(6) Property is income producing as of December 31, 2002, with development
activity in 2002.
(7) Store is not yet open as of December 31, 2002.
(8) The Company acquired Beaver Valley Mall in April 2002.
(9) With respect to Phase I, we have an undivided one-half interest in one
of three floors in a freestanding department store.
(10) We are the managing general partner of the partnership that owns Willow
Grove Park. With respect to the partnership's quarterly cash flow, our
joint venture partner is first entitled to a 9% cumulative return on
its 70% interest in the partnership, and we are then entitled to a 9%
cumulative return on our 30% interest. Any remaining cash flow is
divided equally between our joint venture partner and us. Upon a
refinancing, sale of assets or dissolution of the partnership, the
proceeds are first allocated between our joint venture partner and us
in proportion to each party's capital account until each party receives
its adjusted capital balance. Any remaining funds are distributed first
to our joint venture partner until it has received a 12% internal rate
of return on its investment, and then to us until we have received a
12% internal rate of return on our investment. Any further remaining
funds in the case of a refinancing or sale of assets are shared equally
between our joint venture partner and us or, in the case of a
dissolution, are shared by our joint venture partner and us according
to our respective positive capital account balances.
The following table presents information regarding the primary tenants in each
of our retail properties as of December 31, 2002, and does not include
information regarding the properties we are attempting to acquire as described
under "-Recent Developments" above.
Number of GLA of Annualized
Primary Tenant Stores Stores Leased Base Rent
- -------------- ---------- -------------- ------------
The Gap, Inc./Old Navy 18 258,697 $3,124,971
The Limited Stores, Inc. 25 166,569 2,236,569
Dick's Sporting Goods 4 199,694 2,135,594
Bed Bath & Beyond 6 203,543 1,816,558
Footlocker, Inc. 20 100,600 1,566,035
Boscov's 3 569,608 1,444,400
Circuit City 4 116,730 1,406,335
JC Penney 6 536,647 1,363,220
Costco 1 140,814 1,300,588
Home Depot 1 136,633 1,250,000
Best Buy 3 137,397 1,220,923
Sears 6 799,877 1,089,384
PetSmart 4 104,755 1,083,724
Zales 23 19,443 939,743
Weis Markets 3 158,075 931,408
Toys R Us 4 132,890 909,345
Barnes & Noble/B Dalton 4 89,933 817,391
Trans World Entertainment 10 47,712 746,057
Giant 1 67,185 614,071
K-Mart 2 233,587 600,387
--------- -----------
Total 4,220,389 $26,596,703
========= ===========
10
The following table presents, as of December 31, 2002, 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, and does not include information regarding the properties we are
attempting to acquire as described under "- Recent Developments" above:
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
----------- ----------- ----------- ------------ ----------------- ---------------
2002 and prior (2) 26 $1,266,186 87,463 $14.48 1.05%
2003 77 4,710,982 387,833 12.15 4.61%
2004 87 6,134,150 456,920 13.42 5.51%
2005 103 8,839,985 489,794 18.05 5.91%
2006 96 9,327,642 846,537 11.02 10.21%
2007 100 7,340,638 657,071 11.17 7.92%
2008 60 6,404,093 676,334 9.47 8.16%
2009 54 5,948,590 291,059 20.44 3.51%
2010 79 7,307,019 341,654 21.39 4.12%
2011 87 15,391,230 906,538 16.98 10.93%
2012 72 9,560,220 647,190 14.77 7.81%
--- ----------- --------- ------ -----
Total 841 $82,230,735 5,788,393 $14.21 69.04%
=== =========== ========= ====== =====
(1) Percentage of total leased GLA is calculated by dividing the
approximate GLA of expiring leases by the total leased GLA, which is
8,291,707 square feet.
(2) Includes all tenant leases which had already expired as of December 31,
2002 and are on a month-to-month basis.
Development Properties
We have rights in two development properties - Christiana Power Center
Phase II, Newark, DE and New Garden, New Garden Township, PA. The following
table presents information, as of December 31, 2002, regarding these 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 Development 1st Qtr 2005
New Garden New Garden 100% 394,355 394,355 Development 4th Qtr 2004
Township, PA
------- -------
Total 750,025 750,025
======= =======
* By PREIT Associates; we currently own approximately 90.4% of PREIT Associates.
11
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, as well as Christiana Power Center Phase I, Metroplex Shopping Center
and Red Rose Commons. These three additional properties were previously
completed and, together with Christiana Power Center Phase II, were to 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.
Christiana Power Center Phase II was not completed by the September 30,
2002 deadline. Accordingly, the contribution agreement calls for the project to
be valued and for PREIT Associates to 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
are to be netted back against the three earlier completed projects in order of
completion. Units issued in respect of the foregoing valuations of each project
are to be valued at the greater of (1) the average of the closing prices of our
shares for the 20 trading days before the date of the completed valuation or (2)
$19.00. If the average of the closing prices of our shares for the 20 trading
days before the completed valuation were to be less than $19.00, the
Contribution Agreement calls for PREIT Associates would issue additional Units
of a new class but equal in value to those Units not issued because of the
operation of the pricing limitation. A special committee of disinterested
members of our Board of Trustees will determine the values attributable to these
properties based on the provisions of the contribution agreement and other
factors that the special committee deems relevant.
Right of First Refusal Properties
In connection with our acquisition of The Rubin Organization in 1997,
we obtained rights of first refusal with respect to the interests of some of the
former affiliates of The Rubin Organization in the three retail properties
listed below:
Percentage Interest
Gross Leasable Subject to the Right
Property/Location Area of First Refusal
- ----------------- -------------- ---------------------
Christiana Mall, 1,102,000 (1)
Newark, DE
Cumberland Mall, 806,000 50%
Vineland, NJ
Fairfield Mall, (2) 50%
Chicopee, MA
(1) The interest subject to the right of first refusal was subject to
adjustment in connection with the refinancing of the participating mortgage
that encumbers the property. This property is expected to be sold by its
owners pursuant to the proposed transaction described under "--Recent
Developments - Proposed Acquisition of Retail Properties," and we have
waived our rights of first refusal with respect to such sale.
(2) The property currently is 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.
12
Multifamily Properties
As of December 31, 2002, we had interests in 19 multifamily properties
with an aggregate of 7,242 units. PREIT Services currently manages 15 of these
multifamily properties, all of which are wholly owned by the Company.
PREIT-RUBIN currently manages one multifamily property, which is owned by a
joint venture in which the Company is a party. The remaining three multifamily
properties are also owned by joint ventures in which the Company is a party and
are managed by our joint venture partners. We currently intend to sell our
multifamily portfolio in a proposed transaction described under "- Recent
Developments - Proposed Sale of Multifamily Portfolio."
The following table presents information, as of December 31, 2002, regarding the
19 multifamily properties in which we had an interest:
2002
Approx. Average
Number Rentable Monthly
Multifamily Percent Year Built/ Of Area Percent Rent
Property Location Owned* Or Renov(1) Units(2) (Sq. Ft.) Occupied Per Unit
- ---------- -------- ------- ----------- --------- --------- -------- --------
Pennsylvania
- -------------
2031 Locust Street Philadelphia 100% 1929/1986 87 89,000 100% $1,829
Cambridge Hall West Chester 50% 1967/1993 233 186,000 99% 732
Camp Hill Plaza Camp Hill 100% 1967/1994 300 277,000 88% 724
Fox Run Warminster 50% 1969/1992 196 232,000 99% 745
Lakewood Hills Harrisburg 100% 1972/1988 562 630,000 94% 701
Will-O-Hill Reading 50% 1970/1986 190 152,000 95% 606
The Woods Ambler 100% 1974/2002 320 235,000 96% 894
Florida
- -------
Boca Palms Boca Raton 100% 1970/1994 522 673,000 94% 1,006
Cobblestone Pompano Beach 100% 1986/1994 384 297,000 95% 807
Countrywood Tampa 50% 1977/1997 536 295,000 92% 545
Eagle's Nest Coral Springs 100% 1989 264 343,000 95% 1,001
Palms of Pembroke Pembroke Pines 100% 1989/1995 348 340,000 94% 981
Shenandoah Village West Palm Beach 100% 1985/1993 220 286,000 98% 1,007
Ohio
- ----
Hidden Lakes Dayton 100% 1987/1994 360 306,000 94% 636
Kenwood Gardens Toledo 100% 1951/1989 504 404,000 92% 514
Delaware
- --------
Fox Run Bear 100% 1988 414 359,000 93% 786
Maryland
- --------
Marylander Baltimore 100% 1951/1989 507 279,000 96% 598
Nebraska
- --------
Regency Lakeside (3) Omaha 100% 1970/1990 433 492,000 93% 1,003
Virginia
- --------
Emerald Point Virginia Beach 100% 1965/2001 862 846,000 96% 640
----- --------- --- -----
Total/Weighted Average (19 properties) 7,242 6,721,000 94% $ 751
===== ========= === =====
* By PREIT Associates; we currently own approximately 90.4% of PREIT
Associates.
13
(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) Includes all apartment and commercial units occupied or available for
occupancy at December 31, 2002.
(3) We acquired the 50% interest in the Regency Lakeside property during 2002
that we did not previously own.
Industrial Properties
We own four industrial properties and 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 for our fiscal year ended December 31, 2002.
The following table shows information, as of December 31, 2002,
regarding these 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 90.4% of PREIT Associates.
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 and a
contingent obligation to issue up to 800,000 additional Class A Units over
the next five years, discussed below; and
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 discussed in
" -- Properties--Development Properties," above. Subsequent to September
30, 1997, by mutual agreement with the former affiliates of The Rubin
Organization, PREIT Associates did not acquire Hillview Shopping Center.
14
The 800,000 additional Class A Units discussed above were 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 Class A Units would be issued. For
the period beginning October 1, 1997 through December 31, 2001, 665,000
contingent Class A Units were issued, resulting in an additional purchase price
of approximately $12.9 million. A special committee of disinterested members of
our Board of Trustees will determine whether the remaining 135,000 Class A Units
for the period from January 1, 2002 to September 30, 2002 have been earned.
Under the contribution agreement, the hurdles and targets were adjusted on
December 29, 1998 (after the issuance of 32,500 Class A 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 Class A Units Class A 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 Class A
Units would be issued in respect of that period;
o if the target for any earn-out period is met, the maximum number of
contingent Class A Units for that period would 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 Class A Units for that period, plus a pro rata portion of
the number of contingent Class A Units by which the maximum contingent
Class A Units exceeded the base contingent Class A 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 Class A 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
Class A 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 made 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 that was pending when the contribution agreement was entered
into.
"Adjusted funds from operations" is defined as our consolidated net
income for any period, plus, to the extent deducted in computing such net
income:
15
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 addition to adjusting the hurdle and target levels of adjusted funds
from operations for the 2001 period as discussed above, the special committee
may 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
Our results of operations and our ability to make distributions to our
shareholders and pay debt service on our indebtedness may be affected by the
risk factors set forth below.
Real Estate Industry
We face risks associated with general economic conditions and 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 the types of properties
that we own 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, sales and property tax laws;
o availability and costs of financing;
o construction costs; and
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. All of
our properties are also subject to significant local competition. Our portfolio
of retail properties faces competition from internet-based operations that may
be capable of providing lower-cost alternatives to customers. Further, our
multifamily properties compete 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. If we expand our portfolio
to include additional types of properties, we may face additional risks that are
specific to those property types.
Commercial tenants leasing our retail properties can face significant
competition from other operators. This competition may adversely impact portions
of rental streams payable to us based on a tenant's revenues.
We are subject to significant regulation that restricts our activities
Local zoning and land 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
16
There are risks associated with our development activities in addition
to those generally associated with the ownership and operation of established
retail centers and multifamily properties. These risks include:
o the risk that we will not obtain required zoning, occupancy and other
governmental approvals;
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 construction or in the
receipt of zoning or other regulatory approvals; and
o inability to obtain permanent financing upon completion of development
activities.
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. We may be unable to obtain this financing on terms that are favorable
to us, if at all.
Furthermore, we must acquire and develop suitable high traffic
properties at costs consistent with the overall economics of the project.
Because real estate development is extremely competitive, we cannot assure you
that we will be able to acquire additional 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 multifamily properties have not been renovated in the last
ten years. Some of our multifamily properties lack amenities that are
customarily included in modern construction, such as dishwashers, central air
conditioning and microwave ovens. Some of our retail and multifamily properties
are difficult to lease because they are too large, too small or inappropriately
proportioned for today's market. We may be unable to remedy some forms of
obsolescence.
The proposed transactions may not be completed, which could negatively impact
our stock price, future business and operations
The proposed transactions discussed under "-Recent Developments" are
subject to a number of closing conditions, some of which are beyond our control.
There can be no assurance that these conditions will be met or that the
transactions will be completed. If the transactions are not completed for any
reason, we may be subject to a number of material risks, including the
following:
o If the Rouse transactions are not completed, we would not realize the
benefits we expect from acquiring the additional retail properties.
o The market price of our shares may decline to the extent that the current
market price of our shares reflects a market assumption that the proposed
transactions will be completed.
o Under certain circumstances, we may have to forfeit a deposit of $2
million to The Rouse Company if the Rouse transactions are not
consummated.
o Under certain circumstances we may have to pay up to $15 million to Morgan
if the multifamily transaction is not consummated.
o Certain costs relating to the pending transactions, such as legal and
accounting fees, must be paid even if the transactions are not completed.
Capital requirements necessary to implement the proposed transactions or other
acquisitions could pose risks
The proposed transactions discussed under "-Recent Developments"
require us to obtain additional debt financing. Since the terms and availability
of this financing depends to a large degree upon general economic conditions and
third parties over which we have no control, we can give no assurance that we
will obtain the needed financing or that we will obtain such financing on
favorable terms. In addition, our ability to obtain financing depends on a
number of other factors, many of which are beyond our control, such as interest
rates and national and local business conditions. If the cost of obtaining
needed financing is too high or the terms of such financing are otherwise
unacceptable, we may decide to forgo the Rouse transaction.
We may experience adverse consequences if we are only able to consummate one or
the other of our pending transactions
17
If the proposed transaction with Rouse is consummated but the
proposed sale of the multifamily portfolio does not occur, we may be unable to
generate enough cash to service the increased debt incurred in connection with
the Rouse transaction. We may attempt to repay the debt incurred in the Rouse
transaction with the proceeds of a later sale of some or all of our multifamily
portfolio, a sale of equity or other securities or otherwise. However, we cannot
assure you that such proceeds will be available on terms that are favorable to
us, if at all. Alternatively, if we sell our multifamily portfolio without a
corresponding purchase from Rouse or another party, then we will incur
substantial tax liability.
We may acquire new properties, and this may create risks
We may seek to acquire individual properties, portfolios of properties,
or other real estate companies when we believe that an acquisition is consistent
with our strategies. We may, however, be unable to consummate such desired
acquisitions for a number of reasons, many of which may be beyond our control.
We also might not succeed in leasing newly acquired properties at rents
sufficient to cover our costs of acquisition and operations. In addition, at
times we may attempt to expand our operations into markets where we do not
currently operate. We may fail to accurately gauge conditions in a new market
prior to entering it, and therefore may not achieve anticipated results. If this
occurs, cash flows and results of operations may be adversely affected.
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 portfolio. 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.
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. Moreover, if the
transactions currently proposed are consummated, because of their size and
complexity, integration may be a difficult process that will require substantial
management attention that could detract attention from our day-to-day business.
In addition, the proposed transactions as well as any other future acquisitions
we may make are subject to, among others risks, risk of loss of key personnel,
and difficulties associated with assimilating ongoing businesses or properties
and maintaining relationships with tenants following the consummation of a
transaction. We may not successfully overcome these risks or any other problems
that may be encountered in connection with future acquisitions. Accordingly, it
is uncertain whether we will receive the benefits we anticipate from these
acquisitions and we may not realize value from these acquisitions comparable to
the resources we invest in them. Any difficulties associated with the transition
and integration process could have an adverse effect on our cash flows and
results of operations.
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; and
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 may 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 retail property 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.
18
Future terrorist activity or other acts of violence or war 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 and may negatively affect
investment in our securities. A decrease in demand would make it difficult for
us to renew or re-lease our properties at lease rates equal 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 and results of operations. 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 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 in an effort
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
additional security personnel at our properties could increase the costs of
operating our properties with a materially adverse impact on our cash flows and
results of operations.
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 losses related to
terrorism, which generally are not covered by insurance. 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, the
possibility of losses in excess of our insurance coverage may increase and we
may not be able to comply with covenants under our debt agreements.
Marked changes in the insurance industry resulting from changes in risk
assessment, and losses resulting from such circumstances as September 11th,
2001, new environmental liabilities, and changes in corporate governance are
expected to result in increases to our insurance premiums. These increases may
have a material adverse impact on our cash flow and results of operations.
Furthermore, associated changes within the industry may mean we are unable to
purchase policies in the future with coverage limits and deductibles similar to
those that we have been able to purchase previously.
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; and
o claims of losses due to allegations of mismanagement.
The occurrence of one or more of these risks could have a material
adverse effect on our cash flows and results of operations.
We face risks due to lack of geographic diversity
Our properties are concentrated 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 these 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.
19
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 we are not
aware of any material remaining potential liability relating to these
environmental matters. We may be required in the future to perform testing
relating to these matters. We cannot assure you that the amounts that we have
reserved for these matters of $0.1 million will be adequate to cover future
environmental costs.
At five properties in which we currently have an interest, and at two
properties in which we formerly had an interest, environmental conditions 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. Soil contamination has been identified at two of the dry cleaning
properties. Groundwater contamination was found at the third 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. 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 are aware of environmental concerns at one of our development
properties. Our present view is that our share of any remediation costs
necessary in connection with the development of this property will be within the
budgets for the development. We 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 the
property.
We are a party to a number of agreements for the sale of property, as
buyer, but we are under no specific performance obligation to purchase any of
these properties being considered for development. Initial environmental
investigations conducted on some of the properties revealed environmental risk
factors that might require remediation by the owner, or prior owners, of the
property.
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, 2005.
Financing Risks
We face risks generally associated with our debt
We finance parts of our operations and acquisitions through debt.
There are risks associated with this debt, including:
o a decline in funds from operations from increases in rates on
our floating-rate debt;
o forced disposition of assets resulting from a failure to repay
or refinance existing debt;
o refinancing terms that are less favorable than the terms of
existing debt;
o default or foreclosure due to failure to meet required
payments of principal and interest;
o limitations on our ability to obtain financing in the future;
o much of our cash flow could be dedicated to interest
obligations and unavailable for other purposes; and
o limitations on our flexibility to deal with changing economic,
business and competitive conditions.
At December 31, 2002, we had approximately $450.6 million in total
debt outstanding. In connection with the proposed transactions described under
"-Recent Developments" and other acquisitions or property developments, we
expect to incur substantially more debt than we have in the past because of the
need to finance the proposed transactions or other future acquisitions or in
connection with the assumption of debt related to the proposed transactions or
other future acquisitions.
20
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 credit facility that expires on December 28, 2003
and that is secured by certain of our properties for working capital,
acquisitions, construction of our development properties, and renovations and
capital improvements to our properties. The credit facility currently requires
our operating partnership, PREIT Associates, to maintain certain asset and
income to debt ratios and minimum income and net worth levels. If, in the
future, PREIT Associates fails to meet any one or more of these requirements, we
would be in default. If we were to complete the Rouse transaction without
obtaining the consent of our lenders, the increased indebtedness incurred in
connection with the Rouse transaction would put us in default under our credit
facility. The lenders, in their sole discretion, may waive a default incurred in
connection with the Rouse transaction or otherwise, or we might secure
alternative or substitute financing. We cannot assure you, however, that we can
obtain waivers or alternative financing in connection with the Rouse transaction
or otherwise. 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 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. Further, these agreements
expire in December of 2003 and we may be unable to replace them on favorable
terms, if at all.
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 other 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. Additionally, we may elect to pay a
partnership's or joint venture's obligation to protect our equity interest in
its properties and assets.
Some of our properties are held by special purpose entities and are not
generally available to satisfy creditors' claims in bankruptcy
Some of our properties are owned or ground-leased by subsidiaries that
we created solely for that purpose. The mortgaged properties and related assets
are restricted solely for the payment of the related loans and are not available
to pay our other debts. The cash flow from these properties, however, is
available for our general use so long as no event of default has occurred and
after we have paid any debt services and provided for any required reserves
under the applicable loan agreement.
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-parties 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 the 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.
21
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; and
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 on our shares of beneficial
interest, which is 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 shareholder rights plan that may deter a potential acquiror
from attempting to acquire us.
We have entered into agreements that may limit 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, with respect to certain of these
properties, we have agreed to indemnify the former property owners against tax
liability that they may incur if we sell these properties within a certain
number of years after we acquired them. In some cases, these agreements may make
it uneconomical for us to sell these properties, even in circumstances in which
it otherwise would be advantageous to do so.
We may issue preferred shares with greater rights than our shares of beneficial
interest
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 our shares of beneficial interest.
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.
These policies may be amended or revised without notice to shareholders.
Accordingly, shareholders may not have control over changes in our policies. If
the proposed transactions described under "-Recent Developments" are completed,
we plan to strengthen the focus of our growth strategy on retail properties,
primarily regional malls. 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 in connection with our acquisition of The Rubin
Organization have been redeemed, the holders of partnership interests issued on
September 30, 1997 are entitled to vote, along with our shareholders as a single
class, on any proposal to merge, consolidate or sell substantially all of our
assets. Our partnership interest in PREIT Associates is not included for
purposes of determining when half of the partnership interests issued on
September 30, 1997 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. We have a Key Man Life Insurance Policy in the amount of $5.0
million that covers Mr. Rubin, but we cannot assure you that this would
compensate us for the loss of Mr. Rubin's services.
22
Our officers who both work for us and have interests in properties that we
manage may have conflicts of interest
We provide management, leasing and development services for
partnerships and other ventures in which some of our officers, including Ronald
Rubin, our Chairman and Chief Executive Officer, have either direct or indirect
ownership interests. In addition, we lease substantial office space from
Bellevue Associates, an entity in which some of our officers have an interest.
Although we believe that the terms of these transactions are no less favorable
to us than the terms of our other similar agreements, our officers who have
interests in both sides of these transactions face a conflict of interest in
deciding to enter into or renew these agreements and in negotiating their terms.
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 with such
requirements 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 subject to adverse legislative or regulatory tax changes that could
reduce the market price of our shares
On January 7, 2003, the President of the United States, through his
administration, released a proposal that would exclude corporate dividends from
an individual's taxable income, to the extent that corporate income tax has been
paid on the earnings from which the dividends are paid. REIT dividends would not
be exempt from income tax in the hands of an individual shareholder because
REITs' income generally is not subject to corporate-level tax. This proposal
could cause investments in REITs to lose an investment advantage relative to
non-REITs. We can make no assurance regarding the form in which this proposal
ultimately will be enacted or whether it will in fact be enacted. If enacted,
the proposal could have an adverse effect on the market price of our shares.
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. In addition, we are subject to a tax on the undistributed
portion of our income at regular corporate rates and may also be subject to a 4%
excise tax on this undistributed income. We could be required to seek 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.
Legislative actions, higher insurance cost and potential new accounting
pronouncements are likely to cause our operating expenses to increase and impact
our future financial position and results of operations
In order to comply with the Sarbanes-Oxley Act of 2002, as well as
proposed changes to listing standards by the New York Stock Exchange, and
proposed accounting changes by the Securities and Exchange Commission, we are
enhancing our internal controls, hiring additional personnel and utilizing
additional outside legal, accounting and advisory services. These activities
will cause our operating expenses to increase. Insurers are likely to increase
premiums as a result of higher claims rates incurred over the past year, and so
our premiums for our various insurance policies, including our directors' and
officers' insurance policies, are likely to increase.
We can not foresee the impact that proposed accounting pronouncements,
such as the proposed accounting treatment that would require merger costs to be
expensed in the period in which they are incurred, could have on our future
financial position or results of operations.
23
Employees
We employed approximately 502 people on a full-time basis as of
December 31, 2002.
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 42,681 square feet of space for its principal
offices at 200 S. Broad Street, Philadelphia, PA, under a lease with Bellevue
Associates, a related party, with a remaining term of 7 years. The weighted
average base rent is $19.80 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.
We refer you to Schedule III, "Real Estate and Accumulated Depreciation
- - December 31, 2002," 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 the properties are carried and the amount of
the accumulated depreciation.
Item 3. Legal Proceedings.
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.
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, net of any
deductibles, 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,
results of operations or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
24
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, 2002 $25.50 $22.63 $.51
Quarter ended June 30, 2002 $27.20 $24.90 .51
Quarter ended September 30, 2002 $27.11 $20.55 .51
Quarter ended December 31, 2002 $26.45 $22.52 .51
-----
$2.04
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
As of December 31, 2002, there were approximately 1,300 holders of
record of our shares and 13,300 beneficial holders 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.
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.
25
Unregistered Offerings
During 2002, the Operating Partnership issued the following Units:
o 167,500 Class A OP Units on April 8, 2002 to the former affiliates of TRO
under the TRO earnout.
o 24,337 Class A OP Units on July 10, 2002 to former affiliates of TRO to
acquire the remaining 11% interest in Northeast Tower Center.
o 25,372 Class A OP Units on October 18, 2002 to the former owners of the
land on which Christiana Power Center (Phase I) is built to complete the
acquisition thereof.
Also during 2002, we issued the following shares in return for an equal
number of Units tendered for redemption by limited partners of the Operating
Partnership:
o 9,223 shares on February 4, 2002 in redemption of Class A OP Units
tendered by a former affiliate of TRO.
o 868 shares on April 11, 2002 in redemption of Class B OP Units tendered by
former owners of Prince George's Plaza, which we acquired for Class B OP
Units in September 1998.
o 301,380 shares on May 31, 2002 in redemption of Class A OP Units tendered
by the former owners of the land on which Christiana Power Center (Phase
I) is built, which we acquired for Class A OP units in September 1997.
o 29,000 shares on July 9, 2002 in redemption of Class A OP Units tendered
by a former affiliate of TRO.
o 2,000 shares on July 29, 2002 in redemption of Class A OP Units tendered
by a former affiliate of TRO.
All of the foregoing Units and shares were issued under exemptions
provided by Section 4(2) of the Securities Act of 1933 and Regulation D
promulgated under the Securities Act.
Item 6. Selected Financial Data.
The following table sets forth Selected Financial Data for the Company
as of and for the years ended December 31, 2002, 2001, 2000, 1999 and 1998.
Information for 2001, 2000, 1999 and 1998 has been restated in accordance with
the discontinued operations provisions of SFAS No. 144. The information set
forth below should be read in conjunction with "Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
consolidated financial statements and notes thereto appearing elsewhere in this
Annual Report on Form 10-K.
For the Year Ended December 31,
----------------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(dollars in thousands, except per share results)
Operating results:
Total revenues $126,313 $111,912 $98,832 $88,223 $60,292
Income from continuing operations $19,862 $19,591 $30,920 $20,155 $22,723
Net income $23,678 $19,789 $32,254 $20,739 $23,185
Income from continuing operations per
share-basic $1.23 $1.34 $2.31 $1.56 $1.74
Income from continuing operations per
share-diluted $1.21 $1.34 $2.31 $1.56 $1.74
Net income per share - basic $1.47 $1.35 $2.41 $1.56 $1.74
Net income per share - diluted $1.44 $1.35 $2.41 $1.56 $1.74
Balance sheet data:
Investments in real estate, at
cost $739,429 $636,294 $612,266 $577,521 $509,406
Total assets $703,663 $602,628 $576,663 $547,590 $481,615
Total mortgage, bank and
construction loans payable $450,551 $360,373 $382,396 $364,634 $302,276
Minority interest $32,472 $36,768 $29,766 $32,489 $28,045
Shareholders' equity $188,013 $180,285 $143,906 $133,412 $137,082
Other data
Cash flows from operating activities $28,541 $37,655 $44,473 $29,437 $31,302
Cash flows from investing activities (24,047) (25,428) (36,350) (64,873) (159,734)
Cash flows from financing activities (1,199) (8,060) (9,197) 29,662 133,407
Cash distributions per share $2.04 $2.04 $1.92 $1.88 $1.88
26
Property acquisitions and dispositions are primarily responsible for the
significant fluctuations in the Company's historical financial condition and
results of operations. See Item 7 for further discussion.
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.
Except where specifically indicated, the following Management's
Discussion and Analysis of Financial Condition and Results of Operations does
not include the anticipated effects of the proposed transactions described under
"Item 1. Business - Recent Developments."
OVERVIEW
As of December 31, 2002, the Company owned interests in 22 retail
properties containing an aggregate of approximately 11.8 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 two retail properties currently under development, which are
expected to contain an aggregate of approximately 0.8 million square feet upon
completion.
The Company also provides management, leasing and development services
for affiliated and third-party property owners with respect to 18 retail
properties containing approximately 6.9 million square feet, six office
buildings containing approximately 1.1 million square feet and two multifamily
properties with 137 units.
The Company has achieved significant growth since 1997 with the
acquisition of The Rubin Organization ("TRO") and the formation of PRI. During
2002, the Company continued this trend with two retail properties in its
development pipeline, and same store net operating income growth of 6.5% and
1.0% in the retail and multifamily sectors, respectively. Please refer to "Item
1. Business - Recent Developments" and Note 14 to the consolidated financial
statements for a discussion of certain currently proposed transactions and other
significant events related to our growth strategy. If the proposed transactions
are consummated, management, anticipates that it will need to devote significant
resources to integrating the properties to be acquired into the Company's
existing retail portfolio. This integration process could impact the Company's
day-to-day business.
The Company's net income increased by $3.9 million to $23.7 million for
the year ended December 31, 2002 as compared to $19.8 million for the year ended
December 31, 2001. Real estate properties sold in 2002 generated gains of $4.1
million as compared to $2.1 million for the properties sold in 2001. Property
acquisitions and the placement in service in 2002 of properties previously under
development resulted in an increase in Company real estate revenues, with a
corresponding increase in property operating expenses, and depreciation,
amortization and interest expenses.
27
The Company has investments in 14 unconsolidated 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 14 Joint Venture properties, the
Company managed four of the properties and other parties, including several of
the Company's Joint Venture partners, manage the remaining 10 properties. None
of the Company's Joint Venture partners are affiliates of the Company. One of
the Company's key strategic objectives is to obtain managerial control of all
its assets, although the Company cannot assure you that it will do so. The
Company holds a non-controlling interest in each Joint Venture, 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 3 to the consolidated financial statements.
CRITICAL ACCOUNTING POLICIES
In preparing the consolidated financial statements, management has made
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. In preparing these financial
statements, management has utilized available information including the
Company's past history, industry standards and the current economic environment,
among other factors, in forming its estimates and judgments, giving due
consideration to materiality. Actual results may differ from those estimates. In
addition, other companies may utilize different estimates, which may impact
comparability of the Company's results of operations to those of companies in
similar businesses. Set forth below is a summary of the accounting policies that
management believes are critical to the preparation of the consolidated
financial statements. This summary should be read in conjunction with the more
complete discussion of the Company's accounting policies included in Note 1 to
the consolidated financial statements of the Company.
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. The straight-line rent adjustment increased revenue
by approximately $1.0 million in 2002, $0.8 million in 2001 and $1.2 million in
2000. 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. Certain lease agreements
contain provisions that require tenants to reimburse a pro rata share of real
estate taxes and certain common area maintenance costs. Deferred revenue
represents rental revenue received from tenants prior to their due dates.
Expense reimbursement payments generally are 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 2002, the Company accrued $0.6 million of income because reimbursable
expense levels were greater than amounts billed. 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. Termination fee
income is recognized in the period when a termination agreement is signed. In
the event that a tenant is in bankruptcy when the termination agreement is
signed, termination fee income is recognized when it is received.
The Company's other significant source of revenues comes from
management activities, including property management, leasing and development.
Management fees generally are 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 collectively are referred to as "management fees" in the
consolidated statement of income. There are no significant cash versus accrual
differences for these activities.
28
Allowance for Doubtful Accounts Receivable
The Company makes estimates of the collectibility of its accounts
receivables related to tenant rents including base rents, straight line rentals,
expense reimbursements and other revenue or income. The Company specifically
analyzes accounts receivable, historical bad debts, customer credit worthiness,
current economic trends and changes in customer payment terms when evaluating
the adequacy of the allowance for doubtful accounts. In addition, with respect
to tenants in bankruptcy, the Company makes estimates of the expected recovery
of pre-petition and post-petition claims in assessing the estimated
collectibility of the related receivable. In some cases, the time required to
reach an ultimate resolution of these claims can exceed one year. These
estimates have a direct impact on the Company's net income because a higher bad
debt reserve results in less net income.
Real Estate
Land, buildings and fixtures and tenant improvements are recorded at
cost and stated at cost less accumulated depreciation. Expenditures for
maintenance and repairs are charged to operations as incurred. Renovations
and/or replacements, which improve or extend the life of the asset, are
capitalized and depreciated over their estimated useful lives.
Properties are depreciated using the straight line method over the
estimated useful lives of the assets. The estimated useful lives are as follows:
Buildings 30-50 years
Land Improvements 15 years
Furniture/Fixtures 3-10 years
Tenant Improvements Lease term
The Company is required to make subjective assessments as to the useful
life of its properties for purposes of determining the amount of depreciation to
reflect on an annual basis with respect to those properties. These assessments
have a direct impact on the Company's net income. If the Company were to
lengthen the expected useful life of a particular asset, it would be depreciated
over more years, and result in less depreciation expense and higher annual net
income.
Assessment by the Company of certain other lease related costs must be
made when the Company has a reason to believe that the tenant may not be able to
perform under the terms of the lease as originally expected. This requires
management to make estimates as to the recoverability of such assets. Gains from
sales of real estate properties generally are recognized using the full accrual
method in accordance with the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 66 - "Accounting for Real Estate Sales," provided that
various criteria are met relating to the terms of sale and any subsequent
involvement by the Company with the properties sold.
Off Balance Sheet Arrangements
The Company has a number of off balance sheet joint ventures and other
unconsolidated arrangements with varying structures described more fully in Note
3 to the consolidated financial statements. All of these arrangements are
accounted for under the equity method because the Company has the ability to
exercise significant influence, but not control over the operating and financial
decisions of the joint ventures. Accordingly, the Company's share of the
earnings of these joint ventures and companies is reflected in consolidated net
income based upon the Company's estimated economic ownership percentage.
To the extent that the Company contributes assets to a joint venture,
the Company's investment in the joint venture is recorded at the Company's cost
basis in the assets that were contributed to the joint venture. To the extent
that the Company's cost basis is different than the basis reflected at the joint
venture level, the basis difference is amortized over the life of the related
asset and reflected in the Company's share of equity in net income of joint
ventures.
29
Assets Held for Sale
The Company adopted the provisions of SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" effective January 1, 2002. This
standard addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. When assets are identified by management as held
for sale, the Company discontinues depreciating the assets and estimates the
sales price, net of selling costs of such assets. If, in management's opinion,
the net sales price of the assets that have been identified for sale is less
than the net book value of the assets, a valuation allowance is established. The
Company generally considers assets to be held for sale when the transaction has
been approved by the appropriate level of management and there are no known
material contingencies relating to the sale such that the sale is probable
within one year. Accordingly, the results of operations of operating properties
disposed of or classified as held for sale subsequent to January 1, 2002 for
which the Company has no significant continuing involvement, are reflected as
discontinued operations.
Asset Impairment
On a periodic basis, management assesses whether there are any
indicators that the value of the real estate properties may be impaired. A
property's value is impaired only if management's estimate of the aggregate
future cash flows - undiscounted and without interest charges - to be generated
by the property are less than the carrying value of the property. These
estimates consider factors such as expected future operating income, trends and
prospects, as well as the effects of demand, competition and other factors. In
addition, these estimates may consider a probability weighted cash flow
estimation approach when alternative courses of action to recover the carrying
amount of a long lived asset are under consideration or when a range is
estimated. The determination of undiscounted cash flows requires significant
estimates by management and considers the expected course of action at the
balance sheet date. Subsequent changes in estimated undiscounted cash flows
arising from changes in anticipated action could impact the determination of
whether an impairment exists and whether the effects could materially impact the
Company's net income. To the extent impairment has occurred, the loss will be
measured as the excess of the carrying amount of the property over the fair
value of the property.
The Company conducts an annual review of goodwill balances for
impairment and to determine whether any adjustments to the carrying value of
goodwill are recognized.
LIQUIDITY AND CAPITAL RESOURCES
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 $200 million revolving credit
facility (the "Credit Facility") with a group of banks. The obligations of the
Company's operating partnership under the Credit Facility are secured by a pool
of 11 properties and have been guaranteed by the Company. There was $130.8
million outstanding under the Credit Facility at December 31, 2002. The Credit
Facility expires in December 2003. The initial term of the Credit Facility may
be extended for an additional year on the lender's approval. The Company has not
yet determined if it will seek to extend the existing Credit Facility or if it
will seek another financing alternative.
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. As of December 31, 2002, the margin was set at 165 basis points.
30
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: (1) a maximum Leverage Ratio of 65%;
(2) a maximum Borrowing Base Value (as defined in the Credit Facility) of 70%;
(3) a minimum weighted average collateral pool property occupancy of 85%; (4)
minimum Tangible Net Worth (as defined in the Credit Facility) of $262 million
plus 75% of cumulative net proceeds from the sale of equity securities; (5)
minimum ratios of earnings before interest, taxes, depreciation, and
amortization ("EBITDA") to Debt Service and Interest Expense (as defined in the
Credit Facility) of 1.55:1 and 1.90:1, respectively, at December 31, 2002; (6)
maximum floating rate debt of $200 million; and (7) 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, 2002, the Company was in
compliance with all debt covenants.
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 the
Company's 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 expenses as a result of borrowing incurred in order
to finance long-term capital requirements such as property and portfolio
acquisitions;
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; and
o disputes with tenants over common area maintenance and other charges.
The Company expects to meet certain long-term capital requirements such
as property and portfolio 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
Credit Facility by placing acquired or developed 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 interest coverage ratios; and
o reduction in the Company's consolidated earnings before interest, taxes,
depreciation and amortization (EBITDA).
At December 31, 2002 the Company had outstanding borrowings of $130.8
million under its Credit Facility and had pledged $0.7 million under the Credit
Facility as collateral for several letters of credit. Of the unused portion of
the Credit Facility of approximately $68.5 million, as of December 31, 2002, the
Company's loan covenant restrictions allowed the Company to borrow approximately
an additional $22.6 million based on the existing property collateral pool. As
noted, one of the additional means of increasing the Company's borrowing
capacity under the Credit 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 by 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
and acquisition commitments, other than with respect to the proposed Rouse
transactions, as well as any short-term liquidity needs that are not fulfilled
by cash flows from operations.
31
Proposed Transactions
The Company currently expects to incur approximately $285 million of
new and assumed indebtedness in order to complete the Rouse transactions
described under "Item 1. Business - Recent Developments." The Company currently
expects to use the proceeds from an acquisition term loan to finance the
purchase of the Rouse malls, and is in discussions with several institutional
lenders regarding the loan. The Company will need to obtain the consent of the
lenders under the Credit Facility to incur indebtedness under the acquisition
term loan and to waive the effect of the proposed Rouse transactions under the
debt covenants of the Credit Facility. This consent is not a condition to
closing the Rouse transactions, so the Company may be required to terminate the
Rouse transactions and forfeit its $2 million deposit to Rouse if the Company is
unable to secure the acquisition term loan or obtain the consent of its lenders.
If the acquisition term loan and consent of the Company's lenders is secured,
and if the Rouse transactions are consummated, the Company will have a higher
debt level and interest expense.
The Company expects to reduce indebtedness by repayment or assumption
by Morgan of approximately $206.3 million of indebtedness in connection with the
sale of its multifamily portfolio to Morgan described under "Item 1. Business -
Recent Developments." In addition, the Company expects to substantially repay
the acquisition term loan that it expects to obtain in connection with the Rouse
transactions primarily with the cash proceeds from the sale of the multifamily
portfolio, which is not expected to close until after the Rouse transaction
closes. The Company expects to finance the remainder of the Rouse transaction
with additional fixed-rate, non-recourse debt secured by assets acquired from
Rouse on an unencumbered basis. If the sale of the multifamily portfolio to
Morgan does not occur, then the Company may attempt to repay the term loan with
the proceeds of a later sale of some or all of the multifamily portfolio, a sale
of equity or other securities or otherwise. The Company cannot assure you that
such proceeds will be available on terms that are favorable to the Company, if
at all.
A substantial portion of the expected gain from the sale of our
multifamily portfolio to Morgan has been designed under Section 1031 of the
Internal Revenue Code to meet the requirements for a tax-deferred exchange. If
the Company sells its multifamily portfolio without a corresponding purchase
from Rouse or another party, then the Company will incur substantial tax
liability, including an obligation to indemnify the former owners of one of the
properties included in the multifamily portfolio against the tax consequences of
the sale.
Mortgage Notes
Mortgage notes payable, which are secured by 19 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 4.70% to 8.70% with a weighted
average interest rate of 7.32% at December 31, 2002. The following table
outlines the timing of payment requirements related to the Company's mortgage
notes and Credit Facility as of December 31, 2002 (in thousands):
Payments by Period
-----------------------------------------------------------------------
Up to More than
Total 1 Year 2-3 Years 4-5 Years 5 Years
-----------------------------------------------------------------------
Fixed Rate Mortgages $ 319,751(1) $ 10,924 $ 22,794 $ 85,585 $ 200,448
Revolving Credit Facility 130,800 130,800 - - -
-----------------------------------------------------------------------
$ 450,551 $141,724 $ 22,794 $ 85,585 $ 200,448
=======================================================================
(1) Includes approximately $206.3 million of mortgages related to the
multifamily portfolio.
The foregoing table includes $18.7 million of balloon payments that
come due under the Company's mortgage notes during the next three years. Of this
amount, $6.2 million, representing the mortgage on The Woods Apartments, was
repaid in January 2003. Also, 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 a 40% interest.
Eight of the Company's multifamily communities are financed with $104
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 2009. If the
proposed multifamily sale is consummated on its current terms, then we expect
that this debt will be assumed by the purchaser as described under "Item 1.
Business - Recent Developments - Proposed Sale of Multifamily Portfolio."
In March 2002, the mortgage on Camp Hill Plaza Apartments in Camp Hill,
Pennsylvania, was refinanced. The new $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
refinancing, unamortized deferred financing costs of $0.1 million were written
off and are reflected as interest expense in the consolidated statements of
income in accordance with the provisions of SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" ("SFAS No. 145"), which was adopted by the Company in 2002. If the
proposed multifamily sale is consummated on its current terms, then we expect
that this mortgage will be assumed by the purchaser as described under "Item 1.
Business - Recent Developments - Proposed Sale of Multifamily Portfolio."
32
Commitments
At December 31, 2002, the Company had approximately $15.0 million
committed to complete current development and redevelopment projects. This
amount is expected to be financed through the Credit Facility or through
short-term construction loans. In connection with certain development
properties acquired as part of the Company's acquisition of TRO, the Company
will be required to issue additional Units in its operating partnership to the
former owners of the properties upon final determination of the values
attributable to the properties. Further, an additional 135,000 Units may have
been earned by the former TRO affiliates for the period from January 1, 2002 to
September 30, 2002, depending upon the final determination of the Company's
adjusted funds of operations for such period.
Cash Flows
During the year ended December 31, 2002, the Company generated $28.5
million in cash flows from operating activities. Financing activities used cash
of $1.2 million including: (1) $33.2 million of distributions to shareholders,
(2) $13.0 million and $4.0 million of repayments on a mortgage note payable and
a construction loan payable, respectively, (3) $5.0 million of
mortgage notes payable principal installments, (4) $1.7 million of net
distributions to OP unit holders and minority partners and (5) $0.2 million
payment of deferred financing costs offset by (1) $10.8 million of net proceeds
from shares of beneficial interest issued, (2) $32.3 million of net bank loan
borrowings and (3)$12.8 million of proceeds from a mortgage loan. Investing
activities used cash of $24.0 million including: (1) $25.2 million of
investments in wholly-owned real estate assets, (2) $10.0 million of investments
in property under development and (3) $1.7 million of investments in
partnerships and joint ventures; offset by (1) cash proceeds from sales of real
estate interests of $8.9 million and (2) cash distributions from partnerships
and joint ventures in excess of equity in income of $4.0 million.
Contingent Liabilities
The Company along with certain of its joint venture partners has
guaranteed debt totaling $5.5 million. The debt matures in 2003 (see Note 3 to
the consolidated financial statements).
ACQUISITIONS, DISPOSITIONS AND DEVELOPMENT ACTIVITIES
The Company is actively involved in pursuing and evaluating a number of
individual property and portfolio acquisition opportunities. Please refer to
"Item 1. Business - Recent Developments" and Note 14 to the consolidated
financial statements for a discussion of certain currently proposed transactions
and other significant events. 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 was 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. 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%, and became the managing general partner of the partnership.
In 2000, the Company acquired the remaining 35% interest in Emerald
Point, a multifamily property located in Virginia Beach, Virginia. The Company
paid approximately $11.0 million for the interest, including $5.7 million in
assumed debt and $5.3 million borrowed under the Credit Facility.
In April 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. The bank borrowing was subsequently repaid. 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.
In July 2002, the Company acquired the remaining 11% interest in
Northeast Tower Center pursuant to the Contribution Agreement entered into in
connection with the acquisition of The Rubin Organization. The purchase price
for the acquisition consisted of 24,337 Units in the Company's operating
partnership, PREIT Associates, L.P.
In October 2002, the Company acquired the remaining 50% interest in
Regency Lakeside Apartments. The Company paid approximately $14.2 million for
the interest, including $9.6 million in the form of an assumed mortgage, $2.5
million borrowed under the Credit Facility and $2.1 million in cash.
33
Dispositions
In 2001, the Company sold parcels of land located at Paxton Towne
Centre in Harrisburg, Pennsylvania and Commons at Magnolia in Florence, South
Carolina and an undeveloped parcel of land adjacent to the Metroplex Shopping
Center in Plymouth Meeting, Pennsylvania. 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, Pennsylvania, and in
2000, the Company sold the CVS Warehouse and Distribution Center in Alexandria,
Virginia; Valleyview Shopping Center in Wilmington, Delaware; Forestville
Shopping Center in Forestville, Maryland and the Company's 50% interest in Park
Plaza Shopping Center in Pinellas Park, Florida.
In July 2002, the Company sold Mandarin Corners shopping center in
Jacksonville, Florida for $16.3 million. The Company recorded a gain on the sale
of approximately $4.1 million. In accordance with the provisions of Statement of
Financial Accounting Standards No. 144, the operating results and gain on sale
of Mandarin Corners Shopping Center are included in discontinued operations for
all periods presented.
In 2003, the Company sold a parcel of land located at Crest Plaza
Shopping Center located in Allentown, Pennsylvania for a purchase price of $3.2
million. The Company will recognize a gain of approximately $2.0 million in 2003
as a result of this sale.
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 11 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/OFF BALANCE SHEET ARRANGEMENTS
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. As discussed in "Item 1.
Business - Recent Developments," the Company expects that one such management
agreement, with respect to Christiana Mall, will be cancelled and that the
Company will receive a $2 million brokerage fee from the sale of that mall if
the Rouse transaction is consummated.
The Company has no material off-balance sheet transactions other than
the Joint Ventures described in Note 3 of the consolidated financial statements
and the "Overview" section above, and the interest rate swap agreements
discussed in "Item 7A. Quantitative and Qualitative Disclosure About Market
Risk." 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 Bellevue
Associates, an affiliate of certain officers of the Company, including Ronald
Rubin, the Company's Chairman and Chief Executive Officer. In the third quarter
of 2002, the Company expanded this lease to include additional space within the
same building. Management believes that the lease terms were established at
market rates at the commencement of the lease.
In connection with the Company's acquisition of TRO in 1997, the
Company issued 200,000 Class A Units in its operating partnership, and agreed to
issue up to 800,000 additional Units over a five-year period ended September 30,
2002 contingent on the Company achieving specified performance targets. Through
December 31, 2001, 665,000 Class A Units had been issued. A special committee of
disinterested members of the Company's Board of Trustees will determine whether
the remaining 135,000 Class A Units for the period from January 1, 2002 to
September 30, 2002 have been earned. Additional Units also will be payable with
respect to development properties acquired in the TRO transaction in an amount
to be determined by the special committee based on the Contribution Agreement
under which the Company acquired its interest in the properties and on the other
factors that the special committee deems relevant. The recipients of the Class A
Units include officers of the Company, including Ronald Rubin, who were partners
of TRO at the time of the Company's acquisition of TRO. Officers of the Company,
including Ronald Rubin, also are parties to the Rouse transaction through their
ownership interest in New Castle Associates, as described in "Item 1. Business -
Recent Developments."
34
RESULTS OF OPERATIONS
Year Ended December 31, 2002 compared with Year Ended December 31, 2001
Net income increased by $3.9 million to $23.7 million ($1.47 per share)
for the year ended December 31, 2002 as compared to $19.8 million ($1.35 per
share) for the year ended December 31, 2001. This increase was primarily because
of increased gains on the sale of real estate interests and increased net
operating income from properties placed in service or acquired in 2002.
Revenues increased by $14.4 million or 13% to $126.3 million for the
year ended December 31, 2002 from $111.9 million for the year ended December 31,
2001. Gross revenues from real estate increased by $14.4 million to $114.6
million for the year ended December 31, 2002 from $100.2 million for the year
ended December 31, 2001. This increase in gross revenues resulted from an $11.2
million increase in base rents, a $3.1 million increase in expense
reimbursements and a $0.2 million increase in percentage rents. Base rents
increased due to a $9.5 million increase in retail rents, resulting primarily
from the inclusion of rents from the newly acquired Beaver Valley Mall ($6.4
million) and two properties under development in 2001 that were placed in
service ($2.0 million), and higher rents due to new and renewal leases at higher
rates in 2002. Base rents also increased due to a $1.6 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 $0.3 million. Interest and
other income increased by $0.3 million due to increased interest on notes
receivable from Joint Ventures.
Property operating expenses increased by $4.5 million to $37.5 million
for the year ended December 31, 2002 compared to $33.0 million for the year
ended December 31, 2001. Real estate and other taxes increased by $1.5 million
due to higher property tax rates. Payroll expense increased $0.7 million due to
normal salary increases and increased benefit costs. Utilities increased by $0.1
million. Other operating expenses increased by $2.2 million due primarily to
increased insurance and repairs and maintenance expenses. Property operating
expenses also were generally higher due to the newly acquired Beaver Valley
Mall.
Depreciation and amortization expense increased by $4.0 million to
$21.4 million for the year ended December 31, 2002 from $17.4 million for the
year ended December 31, 2001 due to $1.2 million from the newly acquired Beaver
Valley Mall, $1.1 million from two properties under development in 2001 that
were placed in service, and $1.7 million from additional property improvements.
General and administrative expenses increased by $1.1 million to $24.7
million for the year ended December 31, 2002 from $23.6 million for the year
ended December 31, 2001 primarily due to a $0.8 million increase in payroll and
benefits and a $0.3 million increase in marketing costs.
Interest expense increased by $3.5 million to $28.0 million for the
year ended December 31, 2002 as compared to $24.5 million for the year ended
December 31, 2001. Mortgage interest increased by $1.7 million. This was
primarily due to $2.7 million interest expense for the Beaver Valley Mall
mortgage and increased interest expense at Camp Hill Apartments of $0.6 million
due to a mortgage refinancing at a higher rate in 2002, partially offset by a
$1.4 million reduction in interest expense associated with the repayment of a
construction note payable at Paxton Towne Centre. Bank loan interest expense
increased by $1.8 million because of greater weighted average amounts
outstanding in 2002 as compared to 2001.
Equity in income of partnerships and joint ventures increased by $0.9
million to $7.4 million for the year ended December 31, 2002 from $6.5 million
for the year ended December 31, 2001. The increase was primarily due to
increased rental revenues, partially offset by increased property operating,
depreciation and mortgage interest expense.
Gains on sales of interests in real estate were $2.1 million in the
year 2001 resulting from the sale of the Company's interests in Ingleside Center
in Thorndale, Pennsylvania and land parcels at Commons at Magnolia and Paxton
Towne Centre in 2001.
Minority interest in the operating partnership decreased $0.3 million
to $2.2 million for the year ended December 31, 2002 from $2.5 million for the
year ended December 31, 2001.
Income from discontinued operations increased $3.6 million in the
year ended 2002 compared with the year ended 2001. This increase resulted from
the $4.1 million gain on the sale of Mandarin Corners Shopping Center, partially
offset by a $0.1 decrease in results of operations and by minority interest.
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.
35
Revenues increased by $13.1 million or 13% to $111.9 million for the
year ended December 31, 2001 from $98.8 million for the year ended December 31,
2000. Gross revenues from real estate increased by $2.8 million to $100.2
million for the year ended December 31, 2001 from $97.4 million for the year
ended December 31, 2000. This increase in gross revenues resulted from a $4.7
million increase in base rents, a $0.3 million increase in percentage rents and
a $1.5 million increase in expense reimbursements. Offsetting this increase is a
$3.7 million decrease in lease termination fees from $4.9 million in 2000 to
$1.2 million in 2001. Lease termination fees in 2000 included a $4.0 million fee
received in connection with the sale of the CVS Warehouse and Distribution
Center. Base rents increased due to a $3.3 million increase in retail rents,
resulting from two properties under development in 2000 that were placed in
service, and higher rents due to new and renewal leases at higher rates in 2001.
These increases include an offset from 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 and Distribution Center.
Percentage rents increased due to higher tenant sales levels. Expense
reimbursements increased due to two properties under development in 2000 that
were 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 $33.0
million for the year ended December 31, 2001 from $32.3 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.
Depreciation and amortization expense increased by $2.3 million to
$17.4 million for the year ended December 31, 2001 from $15.1 million for the
year ended December 31, 2000 primarily 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 $1.0 million in the aggregate.
Interest expense increased by $1.1 million to $24.5 million for the
year ended December 31, 2001 as compared to $23.4 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 amortization
of mortgage balances. Multifamily mortgage interest decreased by $0.1 million
due to amortization of mortgage balances. Bank loan interest expense increased
by $0.8 million because of higher amounts outstanding in 2001 as compared to
2000, and because of lower capitalized interest in 2001 due to 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 $0.8
million to $6.5 million in the year ended December 31, 2001 from $7.3 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 $1.1 million
to $2.5 million in the year ended December 31, 2001 from $3.6 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 the Commons at Magnolia 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.
36
SAME STORE PROPERTIES
Retail sector net operating income, for the year ended December 31,
2002 for the properties owned since January 1, 2001 (the "Same Store
Properties"), increased by $3.0 million or 6.5% over the year ended December 31,
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 net operating income growth was $0.3 million or 1.0% for the
year ended December 31, 2002 due to revenue increases of 1.4% which were
partially offset by increases in real estate taxes, utilities, apartment
turnover expenses, repairs and maintenance and insurance costs.
Net operating income is derived from revenues (determined in accordance
with GAAP) minus property operating expenses (determined in accordance with
GAAP). Net operating income does not represent cash generated from operating
activities in accordance with GAAP and should not be considered to be an
alternative to net income (determined in accordance with GAAP) as an indication
of the Company's financial performance or to be 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 for the Company's
cash needs, including its ability to make cash distributions. The Company
believes that net income is the most directly comparable GAAP measurement to net
operating income. The Company believes that net operating income is helpful to
investors as a measure of operating performance because it is an indicator of
the return on investment on the properties, and provides a comparison
measurement of the properties over time.
Set forth below is a schedule comparing the net operating income for
the Same Store Properties for the year ended December 31, 2002, as compared to
the year ended December 31, 2001 (in thousands):
For the year ended For the year ended
December 31, 2002 December 31, 2001
--------------------------------------- ----------------------------------------
Same Store Total Same Store Total
--------------------------------------- ----------------------------------------
Retail
Revenues $ 67,272 $ 100,393 $ 63,897 $ 79,951
Expenses (18,823) (28,534) (18,423) (22,108)
---------------------------- -----------------------------
NOI $ 48,449 $ 71,859 $ 45,474 $ 57,843
============================ =============================
Multifamily
Revenues $ 57,168 $ 57,582 $ 56,394 $ 56,394
Expenses (23,888) (24,103) (23,456) (23,456)
---------------------------- -----------------------------
NOI $ 33,280 $ 33,479 $ 32,938 $ 32,938
============================ =============================
A reconciliation of total net operating income to net income is
presented in Note 12 of the consolidated financial statements.
FUNDS FROM OPERATIONS
Funds from Operations ("FFO") is an important and widely used financial
measure of the operating performance of real estate companies and is provided
here as a supplemental measure of operating performance. FFO is not specifically
defined by accounting principles generally accepted in the United States
("GAAP"). Given the nature of our business as a real estate company, we believe
that FFO is helpful to investors as a measure of operational performance because
it excludes various items included in net income that do not relate to or are
not indicative of our operating performance such as various non-recurring items,
gains and losses on sales of real estate and related depreciation and
amortization, which can make periodic and peer analyses of operating performance
more difficult to conduct.
FFO is defined as income before gains (losses) on property sales and
extraordinary items (computed in accordance with GAAP) plus real estate
depreciation and similar adjustments for unconsolidated joint ventures after
adjustments for non-real estate depreciation and amortization of financing
costs.
37
The Company computes FFO in accordance with standards established by
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 make cash distributions.
FFO increased 14.5% to $51.2 million for the year ended December 31,
2002, as compared to $44.7 million in 2001. The increase was primarily due to
completed development projects, the acquisition of a 30% interest in Willow
Grove Park; the acquisition of Beaver Valley Mall; and internal growth in the
Company's retail portfolio.
The following information is provided to reconcile net income, which we
believe is the most directly comparable GAAP number, to FFO, and to show the
items included in our FFO for the past periods indicated (in thousands, except
per share data):
Rounded
For the year ended December 31,
2002 per share 2001 per share
--------------------- ---------------------
Net income $23,678 1.32 $19,789 1.20
Minority interest in operating partnership 2,194 0.12 2,499 0.15
Minority interest in discontinued operations 421 0.02 25 -
Gains on sales of interests in real estate - - (2,107) (0.13)
Gains on dispositions of discontinued operations (4,085) (0.23) - -
Depreciation and amortization:
Wholly owned & consolidated partnership 21,151 1.18 (1) 17,145 1.04 (1)
Unconsolidated partnerships & joint ventures 7,446 0.42 (1) 6,264 0.38 (1)
Discontinued operations 285 0.02 406 0.02
Excess purchase price over net assets acquired - - 423 0.02
Prepayment fee 77 - 255 0.02 (2)
--------------------- ---------------------
FUNDS FROM OPERATIONS $51,167 2.85 (3) $44,699 2.70 (3)
===================== =====================
Weighted average number of shares outstanding 16,162 14,657
Weighted average effect of full conversion of OP Units 1,805 1,869
------- -------
Total weighted average shares outstanding, including OP Units 17,967 16,526
------- -------
1) Excludes depreciation of non-real estate assets, amortization of deferred
financing costs and discontinued operations.
2) Prepayment fee for the refinancing of the mortgage on Camp Hill Apartments
in 2002 and Countrywood Apartments in 2001.
3) Includes the non-cash effect of straight-line rents of $1.0 million and
$1.1 million for year to date 2002 and 2001, respectively.
CAPITAL EXPENDITURES
Substantially all of the Company's recurring capital expenditures in
2002 related to its multifamily properties. The multifamily properties expended
$2.5 million for recurring capital expenditures, ($340 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 2002, $1.8 million ($251 per unit owned adjusted for
partnership interests) was expended for floor covering and $0.7 million ($101
per unit owned adjusted for partnership interests) 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 as well as single family housing
alternatives 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. Some of our
properties are of the same type and are within the same market area as other
competitive properties. This results in the competition for both acquisition
of prime sites and for tenants to occupy the space that we and our competitors
develop and manage. The existence of competitive properties could have a
material adverse effect on our ability to lease space and on the level of rents
we can obtain.
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.
38
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. However, during
times when inflation is greater than increases in rent as provided for in
leases, net increases may not keep up with inflation.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.
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, 2002, the Company's consolidated debt
portfolio consisted of $319.8 million in fixed rate mortgage notes and $130.8
million borrowed under its Revolving Facility, which has a variable interest
rate.
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 fair
value, 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 fair value. The
sensitivity analysis related to the fixed debt portfolio assumes an immediate
100 basis point move in interest rates from their actual December 31, 2002
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 $15.6 million at December 31, 2002. A 100 basis point decrease in
market interest rates would result in an increase in the net financial
instrument position of $16.6 million at December 31, 2002. Based on the
variable-rate debt included in the Company's debt portfolio, including two
interest rate swap agreements, as of December 31, 2002, a 100 basis point
increase in interest rates would have resulted in an additional $0.6 million in
interest incurred in 2002. A 100 basis point decrease would have reduced
interest incurred by $0.6 million in 2002.
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 debt. 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.
Mortgage notes payable, which are secured by 19 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 4.70% to 8.70% with a weighted
average interest rate of 7.32% at December 31, 2002.
The following table summarizes the notional values and fair values of
the Company's derivative financial instruments at December 31, 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.
Fixed Interest Rate
Notional Amount vs. 30-day LIBOR Maturity Date
- -------------- ------------------ --------------
$20 million 6.02% December 2003
$55 million 6.00% December 2003
As of December 31, 2002, the derivative instruments were reported at
their fair value as a liability of $3.5 million. This amount is included in
accrued expenses and other liabilities on the accompanying consolidated balance
sheet.
39
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 incur interest
expense of approximately $2.9 million of the current balance held in accumulated
other comprehensive income/loss.
DISCLOSURE OF LIMITATIONS
As the information presented above includes only those exposures that
exist as of December 31, 2002, it does not consider those exposures or positions
which could arise after that date. The information represented herein has
limited predictive value. As a result, the ultimate realized gain or loss with
respect to interest rate fluctuations will depend on the exposures that arise
during the period, the hedging strategies at the time and interest rates.
Item 8. Financial Statements and Supplementary Data.
Our consolidated balance sheets as of December 31, 2002 and 2001, and
the related consolidated statements of income, shareholders' equity and
comprehensive income and cash flows for the years ended December 31, 2002, 2001
and 2000, and the notes thereto, and the report of independent auditors thereon,
and our summary of unaudited quarterly financial information for the years ended
December 31, 2002 and 2001, and the financial statement schedules begin on page
F-1 of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
On July 16, 2002, our Audit Committee approved the dismissal of Arthur
Andersen LLP as our independent auditors. On July 18, 2002, our Board of
Trustees, upon the recommendation of our Audit Committee, appointed KPMG LLP to
serve as our independent auditors for 2002.
Arthur Andersen's reports on our consolidated financial statements for
each of the two fiscal years preceding its dismissal did not contain an adverse
opinion or disclaimer of opinion, nor were such reports qualified or modified as
to uncertainty, audit scope or accounting principles.
During each of our two most recent fiscal years preceding our dismissal
of Arthur Andersen, and through the date of such dismissal, there were: (1) no
disagreements with Arthur Andersen on any matter of accounting principle or
practice, financial statement disclosure, or auditing scope or procedure which,
if not resolved to Arthur Andersen's satisfaction, would have caused them to
make reference to the subject matter in connection with their reports on our
consolidated financial statements for such years; and (2) no reportable events
as defined in Item 304(a)(1)(v) of Regulation S-K.
We provided Arthur Andersen with a copy of the foregoing disclosures
and requested that Arthur Andersen provide us with a copy of the letter required
by Item 304(a)(3) of Regulation S-K confirming whether it agrees or disagrees
with such disclosures. After reasonable efforts to obtain such letter, we were
advised that Arthur Andersen no longer has the ability to provide such a letter,
and therefore we rely on the provisions of Item 304T(b)(2) of Regulation S-K to
excuse our inability to comply with the requirements of Item 304(a)(3) of
Regulation S-K.
During each of our two most recent fiscal years preceding our
appointment of KPMG LLP, and through the date of such appointment, we did not
consult KPMG LLP with respect to the application of accounting principles to a
specified transaction, either completed or proposed, or the type of audit
opinion that might be rendered on our consolidated financial statements, or any
other matters or reportable events as set forth in Items 304(a)(2)(i) and (ii)
of Regulation S-K.
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, 2003, and thus we have omitted such
information 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, 2003, and thus we have omitted such
information in accordance with General Instruction G(3) to Form 10-K.
40
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Shareholders Matters
The information required by this Item concerning security ownership 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, 2003, and
thus we have omitted such information in accordance with General Instruction
G(3) to Form 10-K.
Equity Compensation Plans
The following table summarizes our equity compensation plans as of December 31,
2002:
Number of securities
remaining available for
future issuance under
Number of securities to Weighted-average equity compensation
be issued upon exercise exercise price of plans (excluding
of outstanding options, outstanding options, securities reflected in
warrants and rights warrants and rights column (a))
------------------------- -------------------------- ------------------------- ------
(a) (b) (c)
Equity compensation
Plans approved by
Security holders 761,110 (1) $ 23.24 477,227 (2)
-------- ------- --------
Equity compensation
plans not approved by
Security holders -- (3) -- 45,000
-------- ------- --------
Total 761,110 $ 23.24 522,227
======== ======= ========
(1) Does not include 185,907 restricted shares awarded under our 1999 Equity
Incentive Plan that were outstanding and unvested at December 31, 2002.
(2) Includes 194,211 shares available for awards under our 1999 Equity
Incentive Plan, 19,500 shares available for awards under our 1990 Stock
Option Plan for Non-Employee Trustees and 263,516 shares available for
issuance under our Employee Share Purchase Plans, in each case as of
December 31, 2002. In addition, shares that are subject to options under
our 1990 Incentive and Nonqualified Stock Option Plan and 1997 Stock
Option Plan, and the PREIT-RUBIN, Inc. 1998 Stock Option Plan, that expire
or otherwise terminate according to their terms automatically are made
available for awards under the 1999 Plan.
(3) Does not include 5,000 restricted shares awarded under our Restricted
Share Plan for Non-Employee Trustees that were outstanding and unvested at
December 31, 2002. Our Restricted Share Plan for Non-Employee Trustees is
our only equity compensation plan not approved by our shareholders. The
Restricted Share Plan for Non-Employee Trustees was adopted by our Board
of Trustees in 2002, and authorizes us to issue to our Trustees who are
not employees of PREIT or any of our affiliates up to an aggregate of
50,000 restricted shares. The plan provides for the automatic grant of
1,000 shares to each non-employee Trustee on January 31 of each year, and
5,000 restricted shares had been granted under the plan as of December 31,
2002. The restricted shares vest in three approximately equal annual
installments so long as the recipient remains our Trustee. The plan is
administered by our Executive Compensation and Human Resources Committee.
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, 2003, and thus we have omitted such
information in accordance with General Instruction G(3) to Form 10-K.
Item 14. Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer have evaluated the
effectiveness of the our disclosure controls and procedures as of a date within
90 days of the filing date of this report, and have concluded as follows:
o Our disclosure controls and procedures are designed to ensure that the
information that we are required to disclose in our Exchange Act reports
is recorded, processed, summarized and reported accurately and on a timely
basis.
o Information that we are required to disclose in our Exchange Act reports
is accumulated and communicated to management as appropriate to allow
timely decisions regarding required disclosure.
There have not been any significant changes in our internal controls or in
other factors, including any corrective actions with regard to significant
deficiencies and material weaknesses, that could significantly affect these
controls after the date of the evaluation described above.
41
PART IV
Item 15. Exhibits, Financial Statements, Schedules and Reports on Form 8-K
The following documents are filed as part of this report:
(1) Financial Statements
Independent Auditors' Report F-1
Consolidated Balance Sheets as of December 31, 2002 and 2001 F-2
Consolidated Statements of Income for the years ended
December 31, 2002, 2001 and 2000 F-3 to F-4
Consolidated Statements of Shareholders' Equity and Comprehensive Income
for the years ended December 31, 2002, 2001 and 2000 F-5
Consolidated Statements of Cash Flows for the years
ended December 31, 2002, 2001 and 2000 F-6
Notes to Consolidated Financial Statements F-7-F-29
Opinion of Independent Auditors for Lehigh Valley Associates F-30
Opinion of Independent Auditors for Lehigh Valley Associates F-31
(2) Financial Statement Schedules
II - Valuation and Qualifying Accounts S-1
III - Real Estate and Accumulated Depreciation S-2-S-3
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.
42
(3) Exhibits
Exhibit No. Description
- ---------- -----------
2.1* Agreement of Purchase and Sale among The Rouse Company of Nevada, LLC,
The Rouse Company of New Jersey, LLC and PR Cherry Hill Limited
Partnership, dated as of March 7, 2003.
2.2* Agreement of Purchase and Sale among Echelon Mall Joint Venture and
Echelon Acquisition, LLC and PR Echelon Limited Partnership, dated as
of March 7, 2003.
2.3* Agreement of Purchase and Sale among Gallery at Market East, LLC and PR
Gallery I Limited Partnership, dated as of March 7, 2003.
2.4* Agreement of Purchase and Sale among The Rouse Company Of Nevada, LLC,
The Rouse Company Of New Jersey, LLC and PR Moorestown Limited
Partnership, dated as of March 7, 2003.
2.5* Agreement of Purchase and Sale between Plymouth Meeting Property, LLC
and PR Plymouth Meeting Limited Partnership, dated as of March 7, 2003.
2.6* Agreement of Purchase and Sale between The Rouse Company, L.P. and PR
Exton Limited Partnership, dated as of March 7, 2003.
3.1 Trust Agreement as Amended and Restated on December 16, 1997, filed as
Exhibit 3.2 to PREIT's Current Report on Form 8-K dated December 16,
1997, is incorporated herein by reference.
3.2* By-Laws of PREIT as amended through October 30, 2002.
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
PREIT'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 PREIT'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 PREIT'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 PREIT'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 PREIT and American
Stock Transfer and Trust Company, as Rights Agent, filed as exhibit 1
to PREIT'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 PREIT'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 PREIT and Sylvan M. Cohen, filed as exhibit 10.36 to
PREIT's Current Report on Form 8-K dated October 14, 1997, is
incorporated herein by reference.
+10.3 PREIT's 1990 Incentive Stock Option Plan, filed as Appendix A to
Exhibit "A" to PREIT's Quarterly Report on Form 10-Q for the quarterly
period ended November 30, 1990, is incorporated herein by reference.
43
+10.4 PREIT's Amended and Restated 1990 Stock Option Plan for Non-Employee
Trustees, filed as Appendix A to PREIT'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 PREIT's 1990 Stock Option Plan for Non-Employee
Trustees, filed as exhibit 10.9 to PREIT'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 PREIT and Jonathan B. Weller, filed as exhibit 10.6 to PREIT's
Annual Report on Form 10-K for the fiscal year ended December 31, 2001
is incorporated herein by reference.
+10.7 PREIT's Amended Incentive and Non Qualified Stock Option Plan, filed as
exhibit A to PREIT'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 PREIT, filed as exhibit 10.40 to PREIT's Current Report on Form 8-K
dated October 14, 1997, is incorporated herein by reference.
+10.9 Amendment No. 1 to PREIT's 1990 Incentive and Non-Qualified Stock
Option Plan, filed as exhibit 10.16 to PREIT's Annual Report on Form
10-K for the year ended December 31, 1998, is incorporated herein by
reference.
+10.10 PREIT's 1993 Jonathan B. Weller Non Qualified Stock Option Plan, filed
as exhibit B to PREIT'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 PREIT and Jeffrey Linn, filed as exhibit 10.11 to PREIT's
Annual Report on Form 10-K for the fiscal year ended December 31, 2001
is incorporated herein by reference.
10.12 PREIT Contribution Agreement and General Assignment and Bill of Sale,
dated as of September 30, 1997, by and between PREIT and PREIT
Associates, L.P., filed as exhibit 10.15 to PREIT'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 PREIT, as grantor, and
PREIT, as initial trustee, filed as exhibit 10.16 to PREIT's Current
Report on Form 8-K dated October 14, 1997, is incorporated herein by
reference.
10.14 TRO Contribution Agreement, dated as of July 30, 1997, among PREIT,
PREIT Associates, L.P., and the persons and entities named therein,
filed as exhibit 10.17 to PREIT'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 PREIT'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 PREIT, PREIT
Associates, L.P., Rubin Oxford, Inc. and Rubin Oxford Valley
Associates, L.P., filed as exhibit 10.19 to PREIT's Current Report on
Form 8-K dated October 14, 1997, is incorporated herein by reference.
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 PREIT'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 PREIT'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 PREIT, PREIT Associates, L.P., Roosevelt Blvd. Co., Inc. and the
individuals named therein, filed as exhibit 2.2 to PREIT's Current
Report on Form 8-K dated January 7, 1999, is incorporated herein by
reference.
44
10.20 Contribution Agreement (relating to the pre-development properties
named therein), dated as of July 30, 1997, among PREIT, PREIT
Associates, L.P., and TRO Predevelopment, LLC, filed as exhibit 10.23
to PREIT'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 PREIT'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 PREIT'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 PREIT 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 PREIT'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 PREIT'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 PREIT's Current Report 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
PREIT and the persons listed on Schedule A thereto, filed as exhibit
10.30 to PREIT'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
PREIT and Florence Mall Partners, filed as exhibit 10.31 to PREIT'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 PREIT'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 PREIT's Current
Report on Form 8-K dated October 14, 1997, is incorporated herein by
reference.
+10.30 Amended and Restated Employment Agreement, dated as of April 2, 2002,
between PREIT and Ronald Rubin, filed as exhibit 10.1 to the Trust's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2002, is
incorporated herein by reference.
+10.31 Employment Agreement effective January 1, 1999 between PREIT and Edward
Glickman, filed as exhibit 10.30 to PREIT's Annual Report on Form 10-K
for the fiscal year ended December 31, 2000, is incorporated herein by
reference.
+10.32 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 PREIT's Current Report on Form
8-K dated October 14, 1997, is incorporated herein by reference.
+10.33 PREIT-RUBIN, Inc. Stock Bonus Plan, filed as exhibit 10.39 PREIT's
Current Report on Form 8-K dated October 14, 1997, is incorporated
herein by reference.
+10.34 1997 Stock Option Plan, filed as exhibit 10.41 to PREIT's Current
Report on Form 8-K dated October 14, 1997, is incorporated herein by
reference.
+10.35 Amendment No. 1 to PREIT's 1997 Stock Option Plan, filed as Exhibit
10.48 to PREIT's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998, is incorporated herein by reference.
45
10.36 PREIT'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
PREIT's Current Report on Form 8-K dated December 18, 1998, is
incorporated herein by reference.
+10.37 PREIT's 1998 Non-Qualified Employee Share Purchase Plan, filed as
exhibit 4 to PREIT's Form S-3 dated January 6, 1999, is incorporated
herein by reference.
+10.38 Amendment No. 1 to PREIT's Non-Qualified Employee Share Purchase Plan,
filed as exhibit 10.52 to PREIT's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998, is incorporated herein by
reference.
+10.39 PREIT's 1998 Qualified Employee Share Purchase Plan, filed as exhibit 4
to PREIT's Form S-8 dated December 30, 1998, is incorporated herein by
reference.
+10.40 Amendment No. 1 to PREIT's Qualified Employee Share Purchase Plan,
filed as exhibit 10.54 to PREIT's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998, is incorporated herein by
reference.
+10.41 PREIT-RUBIN Inc. 1998 Stock Option Plan, filed as Exhibit 4 to PREIT's
Form S-3 dated March 19, 1999, is incorporated herein by reference.
+10.42 Amendment No. 1 to the PREIT-RUBIN, Inc. 1998 Stock Option Plan, filed
as exhibit 10.56 to PREIT's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998, is incorporated herein by reference.
10.43 Promissory Note, dated April 13, 1999, by and between PREIT and GMAC
Commercial Mortgage Corporation, a California corporation ("GMAC"),
filed as exhibit 10.1 to the PREIT's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1999, is incorporated herein by reference.
10.44 Mortgage and Security Agreement, dated April 13, 1999, by and between
the Registrant and GMAC, filed as exhibit 10.2 to PREIT's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999, is
incorporated herein by reference.
10.45 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.
10.46 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
PREIT'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 Kenwood Gardens LLC, a Delaware limited liability
company ("PR Kenwood Gardens"), and GMAC, filed as exhibit 10.5 to
PREIT's Quarterly Report on Form 10-Q for the quarter ended March 31,
1999, is incorporated herein by reference.
10.48 Mortgage and Security Agreement, dated April 13, 1999, by and between
PR Kenwood Gardens and GMAC, filed as exhibit 10.6 to PREIT's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999, is
incorporated herein by reference.
10.49 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 PREIT's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999, is incorporated herein by reference.
10.50 Mortgage and Security Agreement, dated April 13, 1999, by and between
GP Stones and GMAC, filed as exhibit 10.8 to PREIT's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1999, is incorporated
herein by reference.
10.51 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 PREIT's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999, is incorporated herein by reference.
46
10.52 Mortgage and Security Agreement, dated April 13, 1999, by and between
PR Boca Palms and GMAC, filed as exhibit 10.10 to PREIT's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999, is
incorporated herein by reference.
10.53 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 PREIT's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999, is incorporated herein by reference.
10.54 Mortgage and Security Agreement, dated April 13, 1999, by and between
PR Pembroke and GMAC, filed as exhibit 10.12 to PREIT's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999, is
incorporated herein by reference.
10.55 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 PREIT's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999, is incorporated herein by
reference.
10.56 Mortgage and Security Agreement, dated April 13, 1999, by and between
PR Hidden Lakes and GMAC, filed as exhibit 10.14 to PREIT's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999, is
incorporated herein by reference.
10.57 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 PREIT's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999, is incorporated herein by reference.
10.58 Mortgage and Security Agreement, dated April 13, 1999, by and between
PREIT Associates and GMAC, filed as exhibit 10.16 to PREIT's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999, is
incorporated herein by reference.
+10.59 PREIT's 1999 Equity Incentive Plan, filed as Appendix A to PREIT's
definitive proxy statement for the Annual Meeting of Shareholders on
April 29, 1999 filed on March 30, 1999, is incorporated herein by
reference.
10.60 Credit Agreement, dated as of December 28, 2000, among PREIT
Associates, PREIT, each Subsidiary Borrower (as defined therein) and
the leading institution named therein, filed as exhibit 10.67 to
PREIT's Current Report on Form 8-K filed on January 5, 2001, is
incorporated herein by reference.
10.61 Form of Revolving Note, dated December 28, 2000, filed as exhibit 10.68
to PREIT's Current Report on Form 8-K filed on January 5, 2001, is
incorporated herein by reference.
10.62 Swingline Note, dated December 28, 2000, filed as exhibit 10.69 to
PREIT's Current Report on Form 8-K filed on January 5, 2001, is
incorporated herein by reference.
10.63 Guaranty, dated as of December 28, 2000, executed by PREIT and certain
direct or indirect subsidiaries of PREIT, filed as exhibit 10.70 to
PREIT's Current Report on Form 8-K filed on January 5, 2001, is
incorporated herein by reference.
+10.64 PREIT's Restricted Share Plan for Non-Employee Trustees, effective
January 1, 2002.
+10.65 PREIT's 2002-2004 Long-Term Incentive Plan, effective January 1, 2002.
+10.66 Amended and Restated Employment Agreement, dated as of March 22, 2002,
between PREIT and David J. Bryant, filed as exhibit 10.67 to PREIT's
Annual Report on Form 10-K for the fiscal year ended December 31, 2001
is incorporated herein by reference.
+10.67 Amended and Restated Employment Agreement, dated as of March 22, 2002,
between PREIT and Raymond J. Trost, filed as exhibit 10.68 to PREIT's
Annual Report on Form 10-K for the fiscal year ended December 31, 2001
is incorporated herein by reference.
+10.68 Employment Agreement, dated as of March 22, 2002, between PREIT and
Bruce Goldman, filed as exhibit 10.69 to PREIT's Annual Report on Form
10-K for the fiscal year ended December 31, 2001 is incorporated herein
by reference.
47
+10.69 Amended and Restated Employment Agreement, dated as of March 22, 2002,
between PREIT Services, LLC and George Rubin, filed as exhibit 10.70 to
PREIT's Annual Report on Form 10-K for the fiscal year ended December
31, 2001 is incorporated herein by reference.
+10.70 Amended and Restated Employment Agreement, dated as of March 22, 2002,
between PREIT Services, LLC and Douglas Grayson, filed as exhibit 10.71
to PREIT's Annual Report on Form 10-K for the fiscal year ended
December 31, 2001 is incorporated herein by reference.
+10.71 Amended and Restated Employment Agreement, dated as of March 22, 2002,
between PREIT Services, LLC and Joseph Coradino, filed as exhibit 10.72
to PREIT's Annual Report on Form 10-K for the fiscal year ended
December 31, 2001 is incorporated herein by reference.
10.72* Agreement of Purchase and Sale between New Castle Associates and
Christiana Mall, LLC, dated as of March 7, 2003.
21* Listing of subsidiaries.
23.1* Consent of KPMG LLP (Independent Auditors of the Company).
23.2* Consent of Ernst & Young LLP (Independent Auditors of Lehigh Valley
Associates).
23.3* Consent of Ernst & Young LLP (Independent Auditors of Lehigh Valley
Associates).
99.1* Certification of Chief Executive Officer pursuant to section 906 of
Sarbanes-Oxley Act of 2002.
99.2* Certification of Chief Financial Officer pursuant to section 906 of
Sarbanes-Oxley Act of 2002.
+ Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this form.
* Filed herewith.
(b) Report on Form 8-K.
No reports on Form 8-K were filed during the quarter ended December 31, 2002.
48
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 31, 2003 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 therefore, 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 and Trustee March 31, 2003
- ------------------------------------
Ronald Rubin
/s/ Jonathan B. Weller President, Chief Operating Officer and Trustee March 31, 2003
- ------------------------------------
Jonathan B. Weller
/s/ George Rubin Trustee March 31, 2003
- ------------------------------------
George Rubin
/s/ Lee H. Javitch Trustee March 27, 2003
- ------------------------------------
Lee H. Javitch
/s/ Leonard I. Korman Trustee March 31, 2003
- ------------------------------------
Leonard I. Korman
/s/ Jeffrey P. Orleans Trustee March 31, 2003
- ------------------------------------
Jeffrey P. Orleans
/s/ Rosemarie B. Greco Trustee March 31, 2003
- ------------------------------------
Rosemarie B. Greco
/s/ Ira M. Lubert Trustee March 31, 2003
- ------------------------------------
Ira M. Lubert
/s/ Edward Glickman Executive Vice President and Chief March 31, 2003
- ------------------------------------ Financial Officer (principal
Edward Glickman financial officer)
/s/ David J. Bryant Senior Vice President - Finance March 31, 2003
- ------------------------------------ and Treasurer (principal accounting
David J. Bryant officer)
49
CERTIFICATION
I, Ronald Rubin, certify that:
1. I have reviewed this annual report on Form 10-K of Pennsylvania Real Estate
Investment Trust;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual
report whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 27, 2003 /s/ Ronald Rubin
-------------- ----------------
Name: Ronald Rubin
Title: Chief Executive Officer
CERTIFICATION
I, Edward A. Glickman, certify that:
1. I have reviewed this annual report on Form 10-K of Pennsylvania Real Estate
Investment Trust;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual
report whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 31, 2003 /s/ Edward A. Glickman
-------------------------------
Name: Edward A. Glickman
Title: Chief Financial Officer
Independent Auditors' Report
The Shareholders and Trustees
Pennsylvania Real Estate Investment Trust:
We have audited the consolidated financial statements of Pennsylvania Real
Estate Investment Trust (a Pennsylvania business trust) and subsidiaries as
listed in the accompanying index. In connection with our audits of the
consolidated financial statements, we have also audited the financial statement
schedules listed in the accompanying index. These consolidated financial
statements and financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement 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 consolidated financial statements using the equity
method of accounting. The Company's investment in Lehigh Valley Mall Associates
at December 31, 2002 and 2001 was a deficit of ($16.0 million) and ($15.9
million), respectively, and the equity in net income of Lehigh Valley Mall
Associates was $3.6 million, $3.3 million, and $3.3 million for the years ended
December 31, 2002, 2001, and 2000 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 of America. 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 and the report of
the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors, the
consolidated 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, 2002 and 2001, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, the
related financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
As discussed in Notes 1 and 2, the Company has adopted Statement of Financial
Accounting Standards No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, and Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets as of January 1, 2002.
/s/ KPMG LLP
Philadelphia, Pennsylvania
March 27, 2003
F-1
CONSOLIDATED BALANCE SHEETS
As of December 31, As of December 31,
2002 2001
------------------ -------------------
ASSETS: (thousands of dollars, except per share amounts)
Investments in real estate, at cost:
Retail properties $ 423,046 $ 347,269
Multifamily properties 290,607 254,138
Construction in progress 23,272 32,383
Industrial properties 2,504 2,504
------------ -----------
Total investments in real estate 739,429 636,294
Less: Accumulated depreciation 136,733 112,424
------------ -----------
602,696 523,870
Investments in and advances to partnerships and joint
ventures, at equity 25,361 27,846
------------ -----------
628,057 551,716
Other assets:
Cash and cash equivalents 13,553 10,258
Rents and sundry receivables (net of allowance for
doubtful accounts of $965 and $727, respectively) 13,243 10,293
Deferred costs, prepaid real estate taxes
and expenses, net 48,810 30,361
------------ -----------
$ 703,663 $ 602,628
============ ===========
LIABILITIES:
Mortgage notes payable $ 319,751 $ 257,873
Bank loan payable 130,800 98,500
Construction loan payable -- 4,000
Tenants' deposits and deferred rents 5,046 3,908
Accrued expenses and other liabilities 27,581 21,294
------------ -----------
483,178 385,575
------------ -----------
Minority interest 32,472 36,768
------------ -----------
Commitments and contingencies
SHAREHOLDERS' EQUITY:
Shares of beneficial interest, $1 par value per share; 100,000
authorized; issued and outstanding 16,697 and
15,876, respectively 16,697 15,876
Capital contributed in excess of par 216,769 198,398
Deferred compensation (2,513) (1,386)
Accumulated other comprehensive loss (4,366) (3,520)
Distributions in excess of net income (38,574) (29,083)
------------ -----------
Total shareholders' equity 188,013 180,285
------------ -----------
$ 703,663 $ 602,628
============ ===========
See accompanying notes to consolidated financial statements.
F-2
CONSOLIDATED STATEMENTS OF INCOME Year Ended December 31,
-------------------------------------------------------
2002 2001 2000
---------- ---------- ----------
(restated) (restated)
REVENUES: (thousands of dollars, except per share amounts)
Real estate revenue
Base rent $ 94,636 $ 83,439 $ 78,685
Expense reimbursements 13,068 9,964 8,477
Percentage rent 1,948 1,680 1,369
Lease termination revenue 1,034 1,162 4,926
Other real estate revenues 3,913 3,970 3,990
--------- --------- ---------
Total real estate revenue 114,599 100,215 97,447
Management company revenue 11,003 11,336 --
Interest and other income 711 361 1,385
--------- --------- ---------
Total revenues 126,313 111,912 98,832
--------- --------- ---------
EXPENSES:
Property operating expenses:
Property payroll and benefits 7,819 7,059 6,609
Real estate and other taxes 9,057 7,597 7,030
Utilities 4,282 4,189 4,296
Other operating expenses 16,390 14,192 14,316
--------- --------- ---------
Total property operating expenses 37,548 33,037 32,251
Depreciation and amortization 21,411 17,370 15,083
General and administrative expenses:
Corporate payroll and benefits 14,138 13,286 2,703
Other general and administrative expenses 10,609 10,291 2,250
--------- --------- ---------
Total general and administrative expenses 24,747 23,577 4,953
Interest expense 28,000 24,485 23,355
--------- --------- ---------
Total expenses 111,706 98,469 75,642
--------- --------- ---------
14,607 13,443 23,190
Equity in income of PREIT - RUBIN, Inc. -- -- (6,307)
Equity in income of partnerships
and joint ventures 7,449 6,540 7,366
Gains on sales of interests in real estate -- 2,107 10,298
--------- --------- ---------
Income before minority interest and
discontinued operations 22,056 22,090 34,547
Minority interest in operating partnership (2,194) (2,499) (3,627)
--------- --------- ---------
Income from continuing operations 19,862 19,591 30,920
Income from discontinued operations 152 223 1,491
Minority interest in discontinued operations (421) (25) (157)
Gains on sales of interests in real estate 4,085 -- --
--------- --------- ---------
Income from discontinued operations 3,816 198 1,334
--------- --------- ---------
NET INCOME $ 23,678 $ 19,789 $ 32,254
========= ========= ==========
See accompanying notes to consolidated financial statements.
F-3
EARNINGS PER SHARE
Year Ended December 31,
----------------------------------------------
2002 2001 2000
---- ---- ----
Basic earnings per share
Income from continuing operations $1.23 $1.34 $2.31
Income from discontinued operations 0.24 0.01 0.10
------- ------ ------
Net income per share - basic $1.47 $1.35 $2.41
======= ====== ======
Diluted earnings per share
Income from continuing operations $1.21 $1.34 $2.31
Income from discontinued operations 0.23 0.01 0.10
------- ------ ------
Net income per share - diluted $1.44 $1.35 $2.41
======= ====== ======
See accompanying notes to consolidated financial statements.
F-4
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
For the Years Ended December 31, 2002, 2001 and 2000
Accumulated
Shares of Capital Other Distributions Total
Beneficial Contributed in Deferred Comprehensive In Excess Shareholders'
$1 Par Excess of Par Compensation Loss Of Net Income Equity
----------- -------------- ------------ ------------- ------------- --------------
(thousands of dollars, except per share amounts)
Balance, January 1, 2000 $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,
net of retirements 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 -- -- -- (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,
net of retirements 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
---------- ---------- ---------- ---------- ---------- -----------
Comprehensive Income:
Net Income -- -- -- -- 23,678 23,678
Other comprehensive income -- -- -- 566 -- 566
Hedging activity attributable
to development activities -- -- -- (1,412) -- (1,412)
-----------
Total comprehensive income 22,832
Shares issued upon exercise of options 121 2,421 -- -- -- 2,542
Shares issued upon conversion of
operating partnership units 316 7,087 -- -- -- 7,403
Shares issued under distribution
reinvestment and share purchase plan 249 5,884 -- -- -- 6,133
Shares issued under share purchase plans 17 326 -- -- -- 343
Shares issued under equity incentive plan,
net of retirements 118 2,653 (3,137) -- -- (366)
Amortization of deferred compensation -- -- 2,010 -- -- 2,010
Distributions paid to shareholders
($2.04 per share) -- -- -- -- (33,169) (33,169)
---------- ---------- ---------- ---------- ---------- -----------
Balance, December 31, 2002 $16,697 $216,769 ($2,513) ($4,366) ($38,574) $188,013
========== =========== ========== ========== =========== ===========
See accompanying notes to consolidated financial statements.
F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
2002 2001 2000
---- ---- ----
(thousands of dollars)
Cash Flows from Operating Activities:
Net income $ 23,678 $ 19,789 $ 32,254
Adjustments to reconcile net income to
net cash provided by operating activities:
Minority interest, net of distributions - - 667
Depreciation and amortization 21,411 17,974 15,661
Amortization of deferred financing costs 1,156 672 494
Provision for doubtful accounts 837 533 752
Amortization of deferred compensation 2,010 1,156 350
Gains on sales of interests in real estate (4,085) (2,107) (10,298)
Equity in loss of PREIT-RUBIN, Inc. - - 6,307
Change in assets and liabilities,
Net change in other assets (19,078) (5,615) (3,351)
Net change in other liabilities 2,612 5,253 1,637
--------- --------- ---------
Net cash provided by operating activities 28,541 37,655 44,473
--------- --------- ---------
Cash Flows from Investing Activities:
Investments in wholly-owned real estate (25,206) (14,463) (24,886)
Investments in construction in progress (10,043) (29,234) (25,657)
Investments in partnerships and joint ventures (1,686) (1,732) (5,093)
Investments in and advances to PREIT-RUBIN, Inc. - - (5,036)
Cash distributions from partnerships and joint
ventures in excess of equity in income 3,958 8,232 1,338
Cash proceeds from sales of interests in partnerships - 3,095 2,940
Cash proceeds from sales of wholly-owned real estate 8,930 7,058 20,044
Net cash received from PREIT-RUBIN, Inc. - 1,616 -
--------- --------- ---------
Net cash used in investing activities (24,047) (25,428) (36,350)
--------- --------- ---------
Cash Flows from Financing Activities:
Principal installments on mortgage notes payable (5,014) (4,575) (4,440)
Proceeds from mortgage notes payable 12,800 15,000 -
Proceeds from construction loan payable - - 17,843
Repayment of mortgage notes payable (13,039) - (14,942)
Repayment of construction loan payable (4,000) (20,647) -
Net (payment) borrowing from revolving credit facility 32,300 (11,800) 19,300
Payment of deferred financing costs (154) (432) (1,594)
Shares of beneficial interest issued, net of issuance costs 10,784 48,348 294
Distributions paid to shareholders (33,169) (29,845) (25,658)
Distributions paid to OP unit holders and minority partners,
in excess of minority interest (1,707) (4,109) -
--------- --------- ---------
Net cash used in financing activities (1,199) (8,060) (9,197)
--------- --------- ---------
Net change in cash and cash equivalents 3,295 4,167 (1,074)
Cash and cash equivalents, beginning of period 10,258 6,091 7,165
--------- --------- ---------
Cash and cash equivalents, end of period $ 13,553 $ 10,258 $ 6,091
========= ========= =========
See accompanying notes to consolidated financial statements.
F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2002, 2001 and 2000
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"), founded in 1960, which acquires, develops, redevelops and operates
retail, multifamily and industrial 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, 2002, the Company
held a 90.4% 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 of the Company on a one-for-one basis, in some cases
beginning one year following the respective issue date of the interest in the
Operating Partnership and in some cases immediately.
Investment in PREIT-RUBIN, Inc.
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. 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 accounted for using the equity
method of accounting through December 31, 2000. See Note 4 for further
discussion. The excess of the Company's investment over the underlying equity in
the net assets of PRI ($16.7 million at December 31, 2002) was amortized using a
35 year life. Effective January 1, 2002, this amount is no longer amortized (see
Goodwill and Other Intangible Assets, below).
Consolidation
The Company consolidates its accounts and the accounts of the Operating
Partnership and other controlled subsidiaries and ventures and reflects the
remaining interest in the Operating Partnership as minority interest. All
significant intercompany accounts and transactions have been eliminated in
consolidation. Certain prior period amounts have been reclassified to conform
with current year presentations.
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 30% to 60% noncontrolling ownership interests at
December 31, 2002, 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 $27.7 million, $23.7 million and $24.1
million for the years ended December 31, 2002, 2001 and 2000, respectively. At
December 31, 2002 and 2001, cash and cash equivalents totaling $13.6 million and
$10.3 million, respectively, included tenant escrow deposits of $0.9 million and
$1.0 million, respectively.
F-7
Significant Non-Cash Transactions
The Company assumed long-term debt in the amount of $9.6 million and
$5.7 million resulting from property acquisitions in 2002 and 2000. There were
no property acquisitions in 2001.
Real Estate Acquisitions
The Company has adopted the provisions of SFAS 141, Business
Combinations. This statement makes significant changes to the accounting for
business combinations, goodwill, and intangible assets. Among other provisions,
SFAS 141 requires that a portion of the purchase price of real estate
acquisitions be assigned to the fair value of an intangible asset for above
market operating leases or a liability for below market operating leases. The
origination intangible asset represents the fair value of the cost of acquiring
leases with existing tenants in place. Management reviews the carrying value of
intangible assets for impairment on an annual basis. The market value represents
the amount by which future cash flows under the contractual lease terms are
either above or below market at the date of acquisition. Such intangible assets
or liabilities are then required to be amortized into revenue over the remaining
life of the related leases. Above or below market leases are computed utilizing
a discounted cash flow model.
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, 2002, 2001 and
2000, the Company capitalized interest of $0.7 million, $2.0 million and $3.3
million, respectively, and real estate taxes of $0.1 million, $0.1 million and
$0.3 million, respectively.
The Company capitalizes as deferred costs certain expenditures related
to the financing and leasing of certain properties. Capitalized financing costs
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
certain internal costs associated with properties held for future development.
These costs were approximately $0.7 million, $0.1 million and $0.1 million for
the years ended December 31, 2002, 2001 and 2000, respectively.
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.
Real Estate
The Company, for financial reporting purposes, depreciates its
buildings, equipment and leasehold improvements over their estimated useful
lives of 3 to 50 years, using the straight-line method of depreciation.
Depreciation expense was $21.4 million, $17.4 million and $15.1 million for the
years ended December 31, 2002, 2001 and 2000, respectively. For federal income
tax purposes, the Company uses the straight-line method of depreciation and the
useful lives prescribed by the Internal Revenue Code.
Land, buildings and fixtures and tenant improvements are recorded at
cost and stated at cost less accumulated depreciation. Expenditures for
maintenance and repairs are charged to operations as incurred. Renovations
and/or replacements, which improve or extend the life of the asset, are
capitalized and depreciated over their estimated useful lives.
Properties are depreciated using the straight line method over the
estimated useful lives of the assets. The estimated useful lives are as follows:
Buildings 30-50 years
Land Improvements 15 years
Furniture/Fixtures 3-10 years
Tenant Improvements Lease term
The Company is required to make subjective assessments as to the useful
life of its properties for purposes of determining the amount of depreciation to
reflect on an annual basis with respect to those properties. These assessments
have a direct impact on the Company's net income. If the Company were to
lengthen the expected useful life of a particular asset, it would be depreciated
over more years, and result in less depreciation expense and higher annual net
income.
F-8
Assessment by the Company of certain other lease related costs must be
made when the Company has a reason to believe that the tenant may not be able to
perform under the terms of the lease as originally expected. This requires
management to make estimates as to the recoverability of such assets.
Gains from sales of real estate properties generally are recognized
using the full accrual method in accordance with the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 66 - "Accounting for Real Estate
Sales," provided that various criteria are met relating to the terms of sale and
any subsequent involvement by the Company with the properties sold.
Long Lived Assets
Statement of Financial Standards No. 144 ("SFAS 144"), Accounting for
the Impairment or Disposal of Long-Lived Assets, provides a single accounting
model for long-lived assets as held-for-sale, broadens the scope of businesses
to be disposed of that qualify for reporting as discontinued operations and
changes the timing of recognizing losses on such operations. The Company adopted
SFAS 144 on January 1, 2002. The adoption of SFAS 144 did not materially affect
the Company's consolidated financial statements.
When assets are identified by management as held for sale, the Company
discontinues depreciating the assets and estimates the sales price, net of
selling costs of such assets. If, in management's opinion, the net sales price
of the assets that have been identified for sale is less than the net book value
of the assets, a valuation allowance is established.
Assets to be disposed of are separately presented in the balance sheet
and reported at the lower of the carrying amount of fair value less costs to
sell, and are no longer depreciated. The other assets and liabilities related to
assets classified as held-for-sale are presented separately in the consolidated
balance sheet.
On a periodic basis, management assesses whether there are any
indicators that the value of the real estate properties may be impaired. A
property's value is impaired only if management's estimate of the aggregate
future cash flows - undiscounted and without interest charges - to be generated
by the property are less than the carrying value of the property. These
estimates consider factors such as expected future operating income, trends and
prospects, as well as the effects of demand, competition and other factors. In
addition, these estimates may consider a probability weighted cash flow
estimation approach when alternative courses of action to recover the carrying
amount of a long lived asset are under consideration or when a range is
estimated. The determination of undiscounted cash flows requires significant
estimates by management and considers the expected course of action at the
balance sheet date. Subsequent changes in estimated undiscounted cash flows
arising from changes in anticipated action could impact the determination of
whether an impairment exists and whether the effects could materially impact the
Company's net income. To the extent impairment has occurred, the loss will be
measured as the excess of the carrying amount of the property over the fair
value of the property.
Prior to adoption of SFAS 144, the Company accounted for the impairment
of long-lived assets in accordance with SFAS 121, Accounting for Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of.
Derivative Financial Instruments
The Company accounts for its derivative financial instruments under
Statement of Financial Accounting Standard's ("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 an effective 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.
F-9
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.
No provision for excise tax was made for the years ended December 31,
2002 or 2001, as no tax was due in those years. A provision for excise tax of
$0.2 million was recorded for the year ended December 31, 2000.
The tax status of per share distributions paid to shareholders was
composed of the following for the years ended December 31, 2002, 2001, and 2000:
Year Ended December 31,
2002 2001 2000
------- ------- -------
Ordinary income $1.83 $1.80 $1.14
Capital gains .08 0.24 0.78
Return of capital .13 -- --
----- ----- -----
$2.04 $2.04 $1.92
===== ===== =====
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 $672 million and $581 million at
December 31, 2002 and 2001, respectively.
Fair Value of Financial Instruments
Carrying amounts reported on the balance sheet for cash, accounts
receivable, accounts payable and accrued expenses, and borrowings under the
Credit Facility approximate fair value due to the nature of these instruments.
Accordingly, these items have been excluded from the fair value disclosures. The
estimated fair value for fixed rate debt is based on the borrowing rates
available to the Company for fixed rate mortgages payable with similar terms and
average maturities. The Company's variable rate debt has an estimated fair value
that is approximately the same as the recorded amounts in the balance sheets.
Although management is not aware of any factors that would significantly affect
these fair value amounts, such amounts have not been comprehensively revalued
for purposes of these financial statements since that date and current estimates
of fair value may differ significantly from the amounts presented herein.
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. The straight-line rent adjustment increased revenue
by approximately $1.0 million in 2002, $0.8 million in 2001 and $1.2 million in
2000. 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. 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. Deferred revenue
represents rental revenue received from tenants prior to their due dates.
Expense reimbursement payments generally are 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. These increases/ decreases are non-cash changes to rental income. In
2002, the Company accrued $0.6 million of income because reimbursable expense
levels were greater than amounts billed. 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 credited or billed to the tenant, depending on whether
the tenant paid too much or too little during the year. Termination fee income
is recognized in the period when a termination agreement is signed. In the event
that a tenant is in bankruptcy when the termination agreement is signed,
termination fee income is recognized when it is received.
The Company's other significant source of revenues comes from
management activities, including property management, leasing and development.
Management fees generally are 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 collectively are referred to as "management fees" in the
consolidated statement of income. There are no significant cash versus accrual
differences for these activities.
F-10
No tenant represented 10% or more of the Company's rental revenue in
any period presented.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires the
Company's 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.
Goodwill and Other Intangible Assets
On January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets." SFAS No. 142 requires the Company to cease amortizing
goodwill 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 December 31, 2002 and December 31,
2001 include $16.7 million and $12.9 million, respectively (net of $1.1 million
of amortization expense recognized prior to January 1, 2002) of goodwill
recognized in connection with the acquisition of The Rubin Organization in 1997.
The impact of goodwill amortization recorded in 2001 and 2000 is as
follows (thousands of dollars, except per share data):
Year Ended December 31,
2001 2000
----- -----
Net income $ 19,789 $ 32,254
Impact of goodwill amortization 140 76
--------- ---------
Adjusted net income $ 19,929 $ 32,330
========= =========
Basic earnings per share $ 1.35 $ 2.41
Impact of goodwill amortization 0.01 0.01
--------- ---------
Adjusted basic earnings per share $ 1.36 $ 2.42
========= =========
Diluted earnings per share $ 1.35 $ 2.41
Impact of goodwill amortization 0.01 0.01
--------- ---------
Adjusted diluted earnings per share $ 1.36 $ 2.42
========= =========
Off Balance Sheet Arrangements
The Company has a number of off balance sheet joint ventures and other
unconsolidated arrangements with varying structures described more fully in Note
3 below. All of these arrangements are accounted for under the equity method
because the Company has the ability to exercise significant influence, but not
control over the operating and financial decisions of the joint ventures.
Accordingly, the Company's share of the earnings of these joint ventures and
companies is included in consolidated net income.
To the extent that the Company contributes assets to a joint venture,
the Company's investment in the joint venture is recorded at the Company's cost
basis in the assets that were contributed to the joint venture. To the extent
that the Company's cost basis is different than the basis reflected at the joint
venture level, the basis difference is amortized over the life of the related
asset and reflected in the Company's share of equity in net income of joint
ventures.
Discontinued Operations
The Company adopted the provisions of SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" effective January 1, 2002. This
standard addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. It also retains the basic provisions for
presenting discontinued operations in the income statement but broadened the
scope to include a component of an entity rather than a segment of a business.
Pursuant to the definition of a component of an entity in SFAS No. 144, assuming
no significant continuing involvement, the sale of a retail or industrial
property is now considered a discontinued operation. In addition, properties
classified as held for sale are considered discontinued operations. The Company
generally considers assets to be held for sale when the transaction has been
approved by the appropriate level of management and there are no known material
contingencies relating to the sale such that the sale is probable within one
year. Accordingly, the results of operations of operating properties disposed of
or classified as held for sale subsequent to January 1, 2002 for which the
Company has no significant continuing involvement, are reflected as discontinued
operations. Properties classified in this manner for 2002 were reclassified as
such in the accompanying Statements of Operations for each of the three years
ended December 31, 2002. Interest expense, which is specifically identifiable to
the property, is used in the computation of interest expense attributable to
discontinued operations. Certain prior periods amounts have been restated to
conform with current year presentation in accordance with SFAS No. 144. Please
refer to Note 2 below for a description of the properties included in
discontinued operations as of December 31, 2002.
F-11
Stock-based Compensation Expense
Effective January 1, 2003, the Company adopted the expense recognition
provisions of SFAS No. 123, Accounting for Stock-Based Compensation. The Company
values stock options issued using the Black-Scholes option-pricing model and
recognizes this value as an expense over the period in which the options vest.
Under this standard, recognition of expense for stock options is prospectively
applied to all options granted after the beginning of the year of adoption.
Prior to 2003, the Company followed the intrinsic method set forth in APB
Opinion 25, Accounting for Stock Issued to Employees. The compensation expense
associated with the stock options is included in general and administrative
expenses in the accompanying consolidated statements of operations.
In December 2002, SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123" amended FASB Statement No. 123, "Accounting for Stock-Based Compensation,"
to provide alternative methods of transition for a voluntary change to the fair
value method of accounting for stock-based employee compensation. In addition,
this Statement amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements. Certain
of the disclosure modifications are required for fiscal years ending after
December 15, 2002 and are included in the notes to these consolidated financial
statements.
Under the modified prospective method of adoption selected by the
Company under the provisions of SFAS No. 148, compensation cost will be
recognized in 2003 as if the recognition provisions of SFAS No. 123 had been
applied from the date of adoption. The following table illustrates the effect on
net income and earnings per share if the fair value based method had been
applied to all outstanding and unvested awards in each period (thousands of
dollars, except per share amounts).
Year Ended December 31
----------------------
2002 2001 2000
-----------------------------------------------
Net Income $23,678 $19,789 $32,254
Add: Stock-based employee compensation
expense included in reported net income 2,008 1,156 350
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards (2,159) (1,306) (499)
-----------------------------------------------
$23,527 $19,639 $32,105
===============================================
Earnings per share:
Basic - as reported
$ 1.47 $ 1.35 $ 2.41
===============================================
Basic - pro forma
$ 1.46 $ 1.34 $ 2.40
===============================================
Diluted - as reported
$ 1.44 $ 1.35 $ 2.41
===============================================
Diluted - pro forma
$ 1.44 $ 1.34 $ 2.40
===============================================
Recent Accounting Pronouncements
In November 2002, the Financial Accounting Standards Board ("FASB")
issued Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees; including Guarantees of Indebtedness of Others."
This interpretation requires that a liability be recognized at the inception of
a guarantee issued or modified after December 31, 2002 whether or not payment
under the guarantee is probable. For guarantees entered into prior to December
31, 2002, the interpretation requires certain information related to the
guarantees be disclosed in the guarantor's financial statements. The disclosure
requirements of this interpretation are effective for fiscal years ending after
December 15, 2002. In the normal course of business, the Company has guaranteed
certain indebtedness of others. These guarantees have historically been
disclosed by the Company. Therefore the impact of the disclosure requirements
will not be material to the Company's financial condition. The impact of
adoption of the recognition provisions is not expected to be material to the
Company's financial condition or results of operations as the Company
historically has provided guarantees on a limited basis.
F-12
In January 2003, the FASB issued Financial Interpretation No. 46, ("FIN
No. 46"), "Consolidation of Variable Interest Entities." The consolidation
requirements of FIN No. 46 apply immediately to variable interest entities
created after January 31, 2003 and applies to existing variable interest
entities in the first fiscal year or interim period beginning after June 15,
2003. FIN No. 46 requires that a variable interest entity be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or is entitled to receive a majority of
the entity's residual returns or both. The impact of FIN No. 46 is not expected
to be material to the Company's results of operations or shareholders' equity.
During 2002, the FASB issued SFAS Nos. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" ("SFAS No. 145"), and No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS No. 146"). SFAS No. 145 eliminates the
requirement that gains and losses from the extinguishment of debt be aggregated
and, if material, classified as an extraordinary item, net of the related income
tax effect. SFAS No. 145 is effective for fiscal years beginning after May 15,
2002. The Company has historically incurred these costs and expects it will
continue to incur these costs as it refinances term debt prior to its maturity.
The Company adopted this accounting standard effective December 31, 2002. SFAS
No. 146 addresses financial accounting and reporting for exit and disposal
costs. SFAS No. 146 is effective for exit or disposal activities that are
initiated after December 31, 2002. The impact of the adoption of SFAS No. 146 is
not expected to be material to the Company's financial condition or results of
operations.
2. REAL ESTATE ACTIVITIES
Investments in real estate as of December 31, 2002 and 2001 are
comprised of the following (in thousands):
2002 2001
------ ------
Buildings and improvements $ 608,544 $ 519,864
Land 130,885 116,430
--------- ---------
739,429 636,294
Accumulated depreciation (136,733) (112,424)
-------- --------
Net investments in real estate $602,696 $523,870
======== ========
Acquisitions
In April 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. The bank borrowing was subsequently repaid. 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.
Pro forma revenues, net income, basic net income per share and diluted
net income per share for the twelve month periods ended December 31, 2002 and
2001, reflecting the purchase of Beaver Valley Mall as if the purchase took
place at the beginning of the respective periods indicated, are presented below.
The unaudited pro forma information presented within this footnote is not
necessarily indicative of the results which actually would have occurred if the
acquisition had been completed at the beginning of the respective periods
indicated, nor does the pro forma information purport to represent the results
of operations for future periods (thousands of dollars, except per share data):
Year Ended December 31,
----------------------------
2002 2001
--------- ---------
Revenues $129,136 $122,907
======== ========
Net income $ 24,274 $ 22,444
======== ========
Net income per share - basic $ 1.50 $ 1.53
======== ========
Net income per share - diluted $ 1.48 $ 1.53
======== ========
With respect to the Beaver Valley Acquisition, the Company recorded in
other assets on the accompanying consolidated balance sheet an intangible asset
related to the origination value of acquired leases of $1.8 million and a net
intangible asset of $1.0 million for market values of acquired leases.
Amortization expense recorded during the period ended December 31, 2002 for the
origination value of acquired leases totaled $0.2 million. The amortization of
market leases resulted in a net reduction in rental income of $0.1 million
during the period ended December 31, 2002.
The Beaver Valley Mall acquisition was accounted for by the purchase
method of accounting. Beaver Valley Mall's results of operations have been
included from its purchase date.
In July 2002, pursuant to the Contribution Agreement entered into in
connection with the acquisition of The Rubin Organization in September 1997, the
Company acquired the 11% interest in Northeast Tower Center that it did not
previously own. This property is a retail power center located in Philadelphia,
Pennsylvania. The purchase price for the acquisition consisted of 24,337 units
of limited partnership interest in the Operating Partnership, valued at $0.6
million.
In October 2002, the Company acquired the 50% interest in Regency
Lakeside Apartments that the Company did not previously own and consolidated the
results of this property from the date of acquisition. The Company paid
approximately $14.2 million for the interest, including $9.6 million in the form
of an assumed mortgage, $2.5 million borrowed under its Credit Facility and $2.1
million in cash. Amounts related to the assumed mortgage have been excluded from
the statements of cash flows as non-cash items.
F-13
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 was responsible for the
expansion of the property to include a new Macy's store and decked parking. In
June 2002, the Company contributed the expansion asset to the partnership. The
total cost of the expansion was $16.6 million. 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%, and
became the managing general partner of the partnership.
During 2000, the Company acquired the 35% interest that it did not
previously own in Emerald Point, a multifamily property located in Virginia
Beach, Virginia. The Company paid approximately $11.0 million for the interest,
including $5.7 million in assumed debt and $5.3 million borrowed under its
Credit Facility.
Dispositions
In July 2002, the Company sold Mandarin Corners shopping center in
Jacksonville, Florida for $16.3 million. The Company recorded a gain on the sale
of approximately $4.1 million. In accordance with the provisions of SFAS No.144,
the operating results and gain on sale of Mandarin Corners shopping center are
included in discontinued operations for all periods presented, and the Company
has restated the financial statements for 2001 and 2000 to present the
comparative results as discontinued operations.
In January 2001, a partnership in which the Company owns a 50% interest
sold an undeveloped parcel of land adjacent to the Company-owned Metroplex
Shopping Center in Plymouth Meeting, Pennsylvania, 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, Pennsylvania for $5.1 million. The Company
recorded a gain on the sale of the property of approximately $1.8 million.
In May 2001, the Company sold a parcel of land at Paxton Towne Centre
in Harrisburg, Pennsylvania 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, South Carolina. The Company received cash at the closing of
approximately $1.3 million, and after the completion of the project, received a
development fee of $1.5 million for the construction of the store that was built
on the site, for total proceeds from the transaction, of $2.8 million. The
Company recorded a loss on this transaction of $1.0 million.
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 were approximately
$23.0 million. The property sales resulted in gains totaling approximately $10.3
million.
Discontinued Operations
In accordance with SFAS No. 144, the Company has restated its
statements of operations for 2001 and 2000 to present as discontinued operations
the operating results of Mandarin Corners, which was sold in 2002, and in which
the Company does not have significant continuing involvement.
F-14
The following table summarizes revenue and expense information for
Mandarin Corners (thousands of dollars):
Year Ended December 31,
2002 2001 2000
-------- -------- --------
Real estate revenues $ 1,005 $ 1,670 $ 3,024
Expenses:
Property operating expenses 189 365 424
Depreciation and amortization 285 478 531
Interest expense 379 604 578
-------- -------- --------
Total expenses 853 1,447 1,533
Income from discontinued operations
before gain on sale and minority
interest 152 223 1,491
Gain on sale 4,085 -- --
Minority interest (421) (25) (157)
-------- -------- --------
Income from discontinued
operations $ 3,816 $ 198 $ 1,334
======== ======== ========
Development Activity
As of December 31, 2002, the Company has capitalized $10.1 million for
development activities for properties under construction. Of this amount, $8.6
million is 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 associated with development activities such as legal
fees, interest, real estate taxes, certain internal costs, surveys, civil
engineering surveys, environmental testing costs, traffic and feasibility
studies and deposits on land purchase contracts. Deposits on land purchase
contracts were $1.9 million at December 31, 2002, of which $0.5 million was
refundable and $1.4 million was non-refundable.
3. INVESTMENTS IN PARTNERSHIPS & JOINT VENTURES
The following table presents summarized financial information of the
equity investments in the Company's 15 unconsolidated partnerships and joint
ventures as of December 31, 2002 and 2001(thousands of dollars):
Year Ended December 31,
2002 2001
-------- ---------
Assets
Investments in real estate, at cost:
Retail properties $457,532 $444,534
Multifamily properties 29,458 57,281
Construction in progress 1,506 5,986
--------- ---------
Total investments in real estate 488,496 507,801
Less: Accumulated depreciation 93,004 86,356
--------- ---------
395,492 421,445
Cash and cash equivalents 8,982 4,390
Deferred costs, prepaid real
estate taxes and other, net 36,734 51,666
--------- ---------
Total assets 441,208 477,501
--------- ---------
Liabilities and Partners' equity
Mortgage notes payable 381,872 401,193
Other liabilities 16,977 18,036
--------- ---------
Total liabilities 398,849 419,229
--------- ---------
Net equity 42,359 58,272
Less: Partners' share 17,103 30,576
--------- ---------
Company's share 25,256 27,696
--------- ---------
Advances 105 150
--------- ---------
Investment in and advances to partnerships and
joint ventures(1) $25,361 $27,846
========= =========
(1) Amounts include $20.7 million and $21.2 million at December 31, 2002 and
2001, respectively, of joint venture investments with deficit balances.
These deficit balances are primarily the result of distributions
received by the Company in excess of its investment and its equity in
income of the joint ventures.
F-15
Mortgage notes payable, which are secured by 13 of the joint venture
properties, are due in installments over various terms extending to the year
2016 with interest rates ranging from 6.55% to 8.39% and a weighted average
interest rate of 7.68% at December 31, 2002. The Company's proportionate share,
based on its respective partnership interest, of principal payments due in the
next five years and thereafter is as follows (thousands of dollars):
Year Ended December 31, Principal Amortization Balloon Payments Total
- ----------------------- ---------------------- ---------------- -----
2003 $ 2,199 $ 8,832 $ 11,031
2004 2,414 -- 2,414
2005 2,646 -- 2,646
2006 3,534 53,943 57,477
2007 2,278 -- 2,278
2008 and thereafter 7,386 83,496 90,882
-------- --------- ----------
$ 20,457 $ 146,271 $ 166,728
======== ========= ==========
The liability under each mortgage note is limited to the particular
property, except $5.5 million of the mortgage at Laurel Mall, which is
guaranteed by Laurel Mall's partners, including the Company.
The Company is the managing general partner of the partnership that
owns Willow Grove Park. With respect to the partnership's quarterly cash flow,
the Company's joint venture partner is first entitled to a 9% cumulative return
on its 70% interest in the partnership, and the Company is then entitled to a 9%
cumulative return on its 30% interest. Any remaining cash flow is divided
equally between the Company and its joint venture partner. Upon a refinancing,
sale of assets or dissolution of the partnership, the proceeds are first
allocated between the Company and its joint venture partner in proportion to
their capital accounts until each party receives its adjusted capital balance.
Any remaining funds are distributed first to the Company's joint venture partner
until it has received a 12% internal rate of return on its investment, and then
to the Company until the Company has received a 12% internal rate of return on
its investment. Any further remaining funds in the case of a refinancing or sale
of assets are shared equally between the Company and its joint venture partner
or, in the case of a dissolution, are shared by the Company and its joint
venture partner according to their respective positive capital account balances.
The Company has an option to acquire the interest of its joint venture
partner in the partnership that owns Willow Grove Park in 2003 at a price equal
to a 12% internal rate of return on its joint venture partner's investment in
the partnership. If the Company does not elect to acquire this interest in 2003,
then its joint venture partner will have an option to exchange its interest in
the partnership that owns Willow Grove Park for the Company's interest in Paxton
Towne Centre, a shopping center located in Harrisburg, Pennsylvania. If the
Company's joint venture partner exercises this option, the value of (i) the net
operating income of Paxton Towne Centre for the preceding twelve months
capitalized at 9% will be compared with (ii) the amount required to achieve a
12% internal rate of return on the Company's joint venture partner's investment
in the Willow Grove partnership. If (i) is greater than (ii), then the Company's
joint venture partner will pay the difference to the Company in cash. If (ii) is
greater than (i), then the Company will pay the difference to its joint venture
partner in cash.
The following table summarizes the Company's equity in income for the
years ended December 31, 2002, 2001 and 2000 (thousands of dollars):
Year Ended December 31,
2002 2001 2000
------- ------- -------
Gross revenues from real estate $97,903 $94,272 $80,303
------- ------- -------
Expenses:
Property operating expenses 33,868 33,981 27,267
Interest expense 31,417 30,229 25,477
Refinancing prepayment penalty -- 510 --
Depreciation and amortization 17,434 16,363 12,436
------- ------- -------
Total expenses 82,719 81,083 65,180
------- ------- -------
Net income 15,184 13,189 15,123
Partners' share (7,735) (6,649) (7,757)
------- ------- -------
Company's share of equity in income of partnerships
and joint ventures $ 7,449 $ 6,540 $ 7,366
======= ======= =======
F-16
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, 2002, 2001 and 2000 for this investment, which is
accounted for by the equity method, is as follows (thousands of dollars):
Year Ended December 31, 2002
2002 2001 2000
------- ------- -------
Total assets $18,882 $19,729 $21,148
Mortgages payable 48,520 49,599 50,596
Revenues 18,180 18,076 17,295
Property operating expenses 6,225 6,678 5,888
Interest expense 3,868 3,957 4,068
Net income 7,287 6,690 6,565
Company's share of equity in income of partnership 3,644 3,345 3,282
4. INVESTMENT IN PREIT-RUBIN, INC.
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. The Company did not pay management, leasing or development
fees to PRI in 2002 or 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. Management fees paid by the Company's
properties to PRI were included in property operating expenses in the
accompanying consolidated statements of income for the year ended December 31,
2000 and amounted to $0.9 million. The Company's properties also paid leasing
and development fees to PRI totaling $1.3 million for the year ended December
31, 2000. The Company has recorded additional purchase price in connection with
its acquisition of The Rubin Organization (see Note 11).
Summarized financial information for PRI as of and for the year ended
December 31, 2000 is as follows (2002 and 2001 information is not presented
because PRI was consolidated effective January 1, 2001) (thousands of dollars):
Year Ended December 31, 2000
----------------------------
Management fees $3,739
Leasing commissions 4,113
Development fees 617
Other revenues 3,620
-------
Total revenue $12,089
=======
Net loss $(6,624)
=======
Company's share of net loss $(6,307)
=======
5. MORTGAGE NOTES, BANK AND CONSTRUCTION LOANS PAYABLE
Mortgage Notes Payable
Mortgage notes payable, which are secured by 19 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 4.70% to 8.70% and a weighted
average interest rate of 7.32% at December 31, 2002. Principal payments are due
as follows (thousands of dollars):
F-17
Year Ended December 31, Principal Amortization Balloon Payments Total
--------------------------------------------------------------
2003 $ 4,723 $ 6,201 $ 10,924
2004 4,939 -- 4,939
2005 5,355 12,500 17,855
2006 5,762 -- 5,762
2007 4,341 75,482 79,823
2008 and thereafter 17,801 182,647 200,448
--------------------------------------------------------------
$ 42,921 $ 276,830 $ 319,751
==============================================================
The fair value of the mortgage notes payable was approximately $347.7
million at December 31, 2002 based on year-end interest rates and market
conditions.
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
refinancing, unamortized deferred financing costs of $0.1 million were written
off and reflected as interest expense in the consolidated statements of income.
Credit Facility
In December 2000, the Operating Partnership entered into a Credit
Facility that, as of December 31, 2002 consisted of a $200 million revolving
credit facility that expires on December 28, 2003. 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.
As of December 31, 2002, the Credit Facility was secured by eleven of
the Company's existing retail and industrial properties. The Credit 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 Credit Facility may be extended for an additional year with the lenders'
approval.
As of December 31, 2002 and 2001, $130.8 million and $98.5 million
respectively, was outstanding on the Credit Facility. The weighted average
interest rate based on amounts borrowed on the Company's credit facilities was
3.43%, 5.84% and 8.07% for the years ended December 31, 2002, 2001 and 2000,
respectively. The interest rate at December 31, 2002 was 3.07%. Derivative
instruments fixed the base interest rate on $75.0 million of the $130.8 million
outstanding at December 31, 2002 (see Note 6 ).
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: (1) a maximum Leverage Ratio of 65%;
(2) a maximum Borrowing Base Value (as defined in the Credit Facility) of 70%
under the Credit Facility; (3) a minimum weighted average collateral pool
property occupancy of 85%; (4) minimum Tangible Net Worth (as defined in the
Credit Facility) of $262 million plus 75% of cumulative net proceeds from the
sale of equity securities; (5) minimum ratios of EBITDA to Debt Service and
Interest Expense (as defined in the Credit Facility) of 1.55:1 and 1.90:1,
respectively, at December 31, 2002; (6) maximum floating rate debt of $200
million; and (7) 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, 2002, the Company was in compliance with all debt covenants.
6. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
As of January 1, 2001, the adoption of SFAS 133 resulted in derivative
instruments reported on the Company's consolidated balance sheet as liabilities
of $0.6 million; and an adjustment of $0.6 million to accumulated other
comprehensive loss. The Company recorded additional other comprehensive gain of
$0.6 million and other comprehensive loss of $3.4 million, respectively, net of
minority interest of $0.1 million in each year to recognize the change in value
of these derivative instruments during the years ended December 31, 2002 and
2001, respectively.
F-18
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 in 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 debt. 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.
The following table summarizes the notional values and fair values of
the Company's derivative financial instruments at December 31, 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 ($0.9 million)
2.) Swap - Cash Flow $55.0 million 6.00% 12/15/03 ($2.6 million)
As of December 31, 2002 and 2001, the estimated unrealized loss
attributed to the cash flow hedges was $3.5 million and $4.0 million
respectively and has been included in other liabilities in 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 incur interest
expense of approximately $2.9 million of the current balance held in
accumulated other comprehensive income/loss.
For the Company's cash flow hedges, the fair value is recognized
temporarily as a component of equity and subsequently recognized in earnings
over the hedged transaction as interest expense or depreciation expense over the
life of the constructed asset for hedged borrowings associated with development
activities. Approximately $1.4 million of the amount in accumulated other
comprehensive income is attributable to development activities at December 31,
2002.
F-19
7. EARNINGS 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.
Earnings per share is calculated as follows (in thousands, except per
share data):
Year Ended December 31,
----------------------------------------------
2002 2001 2000
---- ---- ----
Income from continuing operations $ 19,862 $ 19,591 $ 30,920
Income from discontinued operations 3,816 198 1,334
-------- -------- ---------
Net income $ 23,678 $ 19,789 $ 32,254
======== ======== =========
Basic earnings per share
Income from continuing operations $ 1.23 $ 1.34 $ 2.31
Income from discontinued operations 0.24 0.01 0.10
-------- -------- ---------
Net income per share - basic $ 1.47 $ 1.35 $ 2.41
======== ======== =========
Diluted earnings per share
Income from continuing operations $ 1.21 $ 1.34 $ 2.31
Income from discontinued operations 0.23 0.01 0.10
-------- -------- ---------
Net income per share - diluted $ 1.44 $ 1.35 $ 2.41
======== ======== =========
A reconciliation between basic and diluted weighted average shares
outstanding is shown below (in thousands):
Year Ended December 31,
2002 2001 2000
---- ---- ----
Basic Diluted Basic Diluted Basic Diluted
Weighted average shares outstanding 16,162 16,162 14,657 14,657 13,403 13,403
Effect of unvested restricted shares and
share options issued -- 226 -- 27 -- --
------ ------ ------ ------ ------ ------
Total weighted average
shares outstanding 16,162 16,388 14,657 14,684 13,403 13,403
====== ====== ====== ====== ====== ======
8. 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 specified
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, 2002, 2001 and 2000
were $274,000, $247,000 and $25,000, respectively.
The Company also maintains Supplemental Retirement Plans (the
"Supplemental Plans") covering certain senior management employees. The
Supplemental Plans provide eligible employees through normal retirement date, as
defined in the Supplemental Plans, 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 $89,000, $62,000 and $65,000 for the years ended December 31,
2002, 2001 and 2000, respectively.
The Company also maintains share purchase plans through which the
Company's employees may purchase shares of beneficial interest at a 15% discount
to the fair market value. In 2002, 2001 and 2000, 17,000, 47,000 and 43,000
shares, respectively, were purchased for total consideration of $0.3 million,
$0.9 million and $0.6 million, respectively.
F-20
9. STOCK-BASED COMPENSATION
The Company has six plans that provide for the granting of restricted
stock awards and 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 Restricted Share 1997 1993 1990 1990
Equity Incentive Plan for Non-Employee Stock Option Stock Option Employees Nonemployee
Plan Trustees Plan Plan Plan Trustee Plan
Authorized shares 400,000 50,000 455,000 100,000 400,000 100,000
------- ------ ------- ------- ------- -------
Available for grant
at December 31, 2002 194,211(1) 45,000 -- -- -- 64,500
------- ------ ------- ------- ------- -------
(1) Amount is net of 136,427, 41,036 and 118,500 restricted stock
awards issued to certain employees as incentive compensation in 2002,
2001 and 2000, respectively. The restricted stock was awarded at its
fair value that ranged from $23.12 to $25.55 per share in 2002, $21.93
to $23.58 per share in 2001 and $18.16 to $18.56 per share in 2000 for
a total value of $3.2 million in 2002, $0.7 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 $2.0
million in 2002, $1.2 million in 2001 and $0.4 million in 2000 related
to these restricted stock awards.
Weighted 1999 1997 1993 1990 1990
Equity
Average Exercise Incentive Stock Option Stock Option Employees Nonemployee
Price Plan Plan Plan Plan Trustee Plan
Options outstanding at 1/1/2000 $ 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 12/31/2000 $ 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 12/31/2001 $ 22.64 100,000 360,000 100,000 244,250 53,375
======= ======== ======= ======= ======== ========
Options granted -- -- -- -- -- --
Options exercised $ 20.37 -- -- -- (95,515) (1,000)
------- -------- ------- ------- -------- --------
Options outstanding at 1/1/2002 $ 23.24 100,000 360,000 100,000 148,735 52,375
======= ======== ======= ======= ======== ========
At December 31, 2002, options for 703,860 shares of beneficial interest
with an aggregate exercise price of $16.6 million (average of $23.62 per share)
were exercisable.
Outstanding options as of December 31, 2002 have a weighted average
remaining contractual life of 4.3 years, a weighted average exercise price of
$23.24 per share and an aggregate exercise price of $17.7 million.
The following table summarizes information relating to all options outstanding
at December 31, 2002.
Options Outstanding at Options Exercisable at
December 31, 2002 December 31, 2002
----------------------------- --------------------------------
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 - $18.99 149,375 $ 17.82 104,375 $ 17.86 5.6
$19.00 - $20.99 39,000 20.35 38,000 20.36 3.2
$21.00 - $22.99 49,500 22.31 38,250 22.52 4.4
$23.00 - $24.99 160,235 24.34 160,235 24.34 1.6
$25.00 - $25.41 363,000 25.41 363,000 25.41 4.7
------- -------
761,110 703,860
======= =======
F-21
The fair value of each option granted in 2001 and 2000 was estimated on
the grant date using the Black-Scholes options pricing model and the assumptions
presented below:
2001 2000
Weighted average fair value $0.52 $0.81
Expected life in years 5 5
Risk-free interest rate 4.60% 5.80%
Volatility 12.99% 17.34%
Dividend yield 9.42% 10.04%
No options were granted in 2002.
10. 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
and industrial properties are leased to tenants under operating leases with
various expiration dates extending at the outside of the range to the year 2025.
Future minimum rentals under noncancelable operating leases with terms
greater than one year are as follows (in thousands):
Years ended December 31,
2003 $ 43,986
2004 42,126
2005 39,286
2006 33,394
2007 30,081
2008 and thereafter 163,416
--------
Total $352,289
========
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.
F-22
11. COMMITMENTS AND CONTINGENCIES
Related Party Transactions
PRI 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 $3.5 million, $2.9 million and $3.2 million for the years
ended December 31, 2002, 2001 and 2000, respectively. As of December 31, 2002
and 2001, $0.7 million and $0.3 million, respectively, was due from these
affiliates. Of these amounts, approximately $0.6 million and $0.3 million,
respectively, were collected subsequent to December 31, 2002 and 2001. 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.
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, $0.9 million and $0.7 million for the years ended December 31,
2002, 2001 and 2000, respectively. Minimum rental payments under this lease are
$0.8 million per year from 2003 to 2010.
As of December 31, 2002, 12 executive officers of the Company had
employment agreements with terms of two to three years that provided for
aggregate base compensation for 2002 of $2.9 million subject to increases as
approved by the Company's compensation committee, as well as additional
incentive compensation.
Acquisition of The Rubin Organization
In connection with the Company's 1997 acquisition of The Rubin
Organization ("TRO") and certain other related 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 were 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 issued, resulting in additional purchase price of
approximately $12.9 million. A special committee of disinterested members of the
Company's Board of Trustees will determine whether the remaining 135,000
contingent OP units for the period from January 1, 2002 through September 30,
2002 have been earned, and any related payment will be accounted for as
additional purchase price. Issuance of additional Class A OP Units has been
excluded from the statements of cash flows as non-cash items.
In connection with certain development properties acquired in the TRO
transaction, the Company will be required to issue additional units of limited
partnership interest in the Operating Partnership ("OP units") to the former
owners of the properties upon final determination by the special committee of
the values attributable to the properties.
F-23
Development Activities
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, 2002, the
Company had approximately $15.0 million committed to complete current
development and redevelopment projects, which is expected to be financed through
the Company's Credit Facility or through short-term construction loans.
Legal Actions
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.
Environmental
The Company's management is aware of certain environmental matters at
some of the Company's 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 the Company's management 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's management can make no assurances that the
amounts that have been reserved for these matters of $0.1 million will be
adequate to cover future environmental costs.
F-24
Guarantees
The Company has provided the following guarantees:
o The Company has guaranteed $5.5 million of the mortgage at Laurel Mall,
an unconsolidated joint venture.
o The Company has guaranteed the amounts outstanding under the credit
facility ($130.8 million at December 31, 2002).
o The Company has provided tax protection of up to approximately $5.0
million related to the August 1998 acquisition of the Woods Apartments
for a period of eight years ending in August 2006. The seller of the
Woods Apartments received $1.7 million worth of Class A Units as
partial consideration for the sale of the property.
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 (15 wholly-owned and 4 owned in joint venture form). The other
segment includes the operation and management of 2 retail properties under
development 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 the
Company uses for consolidated financial reporting, 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
column titled "Adjustments to the Equity Method" in the charts below reconciles
the amounts presented under the proportionate-consolidation method to the
consolidated amounts reflected on the Company's consolidated balance sheets and
consolidated statements of income.
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 with a focus on net
operating income. The operating segments are managed separately because each
operating segment represents a different property type (retail or multifamily),
as well as construction in progress ("CIP") and corporate services.
F-25
Adjustment
Development to Equity Total
Year Ended December 31, 2002 Retail Multifamily and Other Corporate Total Method Consolidated
- -------------------------------------- -------- ------------ -------------- --------- ------- ---------- -------------
(thousands of dollars)
Real estate operating revenue $ 100,393 $ 57,582 $ 329 $ - $158,304 $ (43,705) $ 114,599
Real estate operating expense (28,534) (24,103) (24) - (52,661) 15,113 (37,548)
--------- -------- -------- -------- -------- --------- ---------
Net operating income 71,859 33,479 305 - 105,643 (28,592) 77,051
Management company revenue - - - 11,003 11,003 - 11,003
Interest and other income - - - 711 711 - 711
General and administrative
expenses - - - (24,747) (24,747) - (24,747)
--------- -------- -------- -------- -------- --------- ---------
71,859 33,479 305 (13,033) 92,610 (28,592) 64,018
Interest expense (27,542) (14,258) - 103 (41,697) 13,697 (28,000)
Depreciation and amortization (19,502) (9,303) (52) - (28,857) 7,446 (21,411)
Equity in income of partnerships
and joint ventures - - - - - 7,449 7,449
Minority interest in operating
partnership - - - (2,194) (2,194) - (2,194)
Discontinued operations 152 - - (421) (269) - (269)
Gains on sales of real estate 4,085 - - - 4,085 - 4,085
--------- -------- -------- -------- -------- --------- ---------
Net income $ 29,052 $ 9,918 $ 253 $(15,545) $ 23,678 $ - $ 23,678
========= ======== ======== ======== ======== ========= =========
Investments in real estate, at cost $620,346 $305,336 $ 27,330 $ - $953,012 $(213,583) $ 739,429
========= ======== ======== ======== ======== ========= =========
Total assets $592,167 $218,718 $ 25,310 $ 41,214 $877,409 $(173,746) $ 703,663
========= ======== ======== ======== ======== ========= =========
Recurring capital expenditures $ 114 $ 2,790 $ - $ - $ 2,904 $ (363) $ 2,541
========= ======== ======== ======== ======== ========= =========
Adjustments
Development to Equity Total
Year Ended December 31, 2001 Retail Multifamily and Other Corporate Total Method Consolidated
- ---------------------------- ------ ----------- ------------ ---------- ------ ------------ -------------
(thousands of dollars)
Real estate operating revenue $79,951 $56,394 $ 324 $ - $ 136,669 $ (36,454) $ 100,215
Real estate operating expense (22,108) (23,456) (14) - (45,578) 12,541 (33,037)
---------- --------- -------- -------- ---------- ---------- ----------
Net operating income 57,843 32,938 310 - 91,091 (23,913) 67,178
Management company revenue - - - 11,336 11,336 - 11,336
Interest and other income - - - 361 361 - 361
General and administrative
expenses - - - (23,577) (23,577) - (23,577)
---------- --------- -------- -------- ---------- ---------- ----------
57,843 32,938 310 (11,880) 79,211 (23,913) 55,298
Interest expense (21,416) (14,102) - (76) (35,594) 11,109 (24,485)
Depreciation and amortization (14,456) (9,126) (52) - (23,634) 6,264 (17,370)
Equity in income of partnerships
and joint ventures - - - - - 6,540 6,540
Minority interest in operating
partnership - - - (2,499) (2,499) - (2,499)
Discontinued operations 223 - - (25) 198 - 198
Gains on sales of real estate 2,107 - - - 2,107 - 2,107
---------- --------- -------- -------- ---------- ---------- ----------
Net income $ 24,301 $ 9,710 $ 258 $(14,480) $ 19,789 $ - $ 19,789
========== ========= ======== ======== ========== ========= =========
Investments in real estate, at cost $510,531 $283,028 $ 40,850 $ - $ 834,409 $(198,115) $ 636,294
========== ========= ======== ======== ========== ========= =========
Total assets $482,727 $206,016 $ 38,743 $ 28,336 $ 755,822 $(153,194) $ 602,628
========== ========= ======== ======== ========== ========= =========
Recurring capital expenditures $ 18 $ 2,965 $ - $ - $ 2,983 $ (293) $ 2,690
========== ========= ======== ======== ========== ========= =========
F-26
Adjustments
Development to Equity Total
Year Ended December 31, 2000 Retail Multifamily and Other Corporate Total Method Consolidated
- ----------------------------- ------ ----------- ---------- --------- ------ ---------- ------------
(thousands of dollars)
Real estate operating revenue $69,749 $ 54,199 $ 4,707 $ - $ 128,655 $ (31,208) $ 97,447
Real estate operating expense (19,864) (22,448) (45) - (42,357) 10,106 (32,251)
-------- -------- -------- -------- ---------- --------- ---------
Net operating income 49,885 31,751 4,662 - 86,298 (21,102) 65,196
PREIT-RUBIN Net Operating Loss - - - (4,498) (4,498) 4,498 -
Interest and other income - - - 1,385 1,385 - 1,385
General and administrative
expenses - - - (4,953) (4,953) - (4,953)
-------- -------- -------- -------- ---------- --------- ---------
49,885 31,751 4,662 (8,066) 78,232 (16,604) 61,628
Interest expense (17,845) (14,068) - (2,402) (34,315) 10,960 (23,355)
Depreciation and amortization (10,674) (8,931) (63) - (19,668) 4,585 (15,083)
Equity in loss of PREIT-RUBIN - - - - - (6,307) (6,307)
Equity in income of partnerships
and joint ventures - - - - - 7,366 7,366
Minority interest in operating
partnership - - - (3,627) (3,627) - (3,627)
Discontinued operations 1,491 - - (157) 1,334 - 1,334
Gains on sales of real estate 3,650 - 6,648 - 10,298 - 10,298
-------- -------- -------- -------- ---------- --------- ---------
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
======== ======== ======== ======== ========= ========== =========
F-27
13. SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
The following presents a summary of the unaudited quarterly financial
information for the years ended December 31, 2002 and 2001. The amounts
presented below for 2001 have been restated for discontinued operations.
Year Ended December 31, 2002
In thousands of dollars, except per share data 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter(3) Total
Revenues $ 27,392 $ 30,895 $ 31,677 $ 36,349 $ 126,313
============= ============== ============== ============== ==============
Net income (1) $ 3,727 $ 4,442 $ 8,178 $ 7,331 $ 23,678
============= ============== ============== ============== ==============
Net income per share - basic (2) $ 0.23 $ 0.27 $ 0.49 $ 0.45 $ 1.47
============= ============== ============== ============== ==============
Net income per share - diluted (2) $ 0.23 $ 0.27 $ 0.49 $ 0.44 $ 1.44
============= ============== ============== ============== ==============
First and Second Quarters 2002 - Impact of Discontinued Operations
In thousands of dollars, except per share data 1st Quarter 2nd Quarter
Revenues $ 432 $ 454
============= ==============
Income from discontinued operations $ 26 $ 71
============= ==============
Basic income from discontinued operations
per share $ - $ -
============= ==============
Diluted income from discontinued operations
per share $ - $ -
============= ==============
Year Ended December 31, 2001 - Restated
In thousands of dollars, except per share data 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total
Revenues $ 26,638 $ 27,159 $ 27,142 $ 30,973 $ 111,912
============= ============== ============== ============== ==============
Net income (1) $ 5,092 $ 3,906 $ 4,149 $ 6,642 $ 19,789
============= ============== ============== ============== ==============
Net income per share - basic $ 0.37 $ 0.29 $ 0.27 $ 0.42 $ 1.35
============= ============== ============== ============== ==============
Net income per share - diluted $ 0.37 $ 0.29 $ 0.27 $ 0.42 $ 1.35
============= ============== ============== ============== ==============
Year Ended December 31, 2001 - Impact of Discontinued Operations
In thousands of dollars, except per share data 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total
Revenues $ 358 $ 379 $ 395 $ 538 $ 1,670
============= ============== ============== ============== ==============
Income from discontinued operations $ (12) $ 25 $ 21 $ 189 $ 223
============= ============== ============== ============== ==============
Basic income from discontinued operations
per share $ - $ - $ - $ 0.01 $ 0.01
============= ============== ============== ============== ==============
Diluted income from discontinued operations
per share $ - $ - $ - $ 0.01 $ 0.01
============= ============== ============== ============== ==============
(1) Includes gains on sale of real estate of approximately $4.1 million
(3rd Quarter 2002), $1.8 million (1st Quarter 2001) and $0.3 million
(2nd Quarter 2001).
(2) Results for the full year do not necessarily equal the summation of the
quarterly amounts due to rounding.
(3) Fourth quarter revenues include a significant portion of annual
percentage rents as most percentage rent minimum sales levels are
met in the fourth quarter. Also, fourth quarter net income includes the
impact of the capitalization of $0.6 million of internal costs
related to development activities.
F-28
14. PENDING TRANSACTIONS
On March 3, 2003, the Company entered into an agreement to sell all of
its 7,242 apartment units to Morgan Properties of King of Prussia, Pennsylvania
(together, "Morgan"), for $420 million. The $420 million sale price of the
multifamily portfolio includes a mix of cash payable at closing and Morgan's
agreement to assume or pay off indebtedness related to the properties. As of
December 31, 2002, approximately $213.7 million of the $420 million sale price
would be payable in cash and approximately $206.3 million would be payable in
the form of assumed indebtedness. The portion attributable to cash is expected
to increase and the portion attributable to assumed indebtedness is expected to
decrease by the amount of the Company's principal payments on this indebtedness
between January 1, 2003 and closing. The multifamily portfolio was not
classified as held for sale at December 31, 2002 because the Company was not
actively marketing these properties, nor was there an agreement between the
Company and Morgan at December 31, 2002.
On March 7, 2003, the Company entered into Agreements of Purchase and
Sale to acquire Cherry Hill Mall, Moorestown Mall, Plymouth Meeting Mall,
Gallery at Market East, Exton Square Mall and Echelon Mall from affiliated
companies of The Rouse Company ("Rouse"). The Company intends, upon the
execution of definitive agreements with New Castle Associates, to assign its
rights under the Agreement of Purchase and Sale to acquire Cherry Hill Mall to
New Castle Associates. The partners of New Castle Associates include Ronald
Rubin, our Chairman and Chief Executive Officer, and George Rubin, our Trustee
and President of our management subsidiaries, PREIT-RUBIN, Inc. and PREIT
Services, LLC.
The aggregate purchase price for the acquisition of the six Rouse
properties, assuming the Company was to acquire all of the equity of New Castle
Associates, would be $548 million, including approximately $233 million in cash,
the assumption of $277 million in non-recourse mortgage debt and $38 million in
Units. All of the Units would be issued as part of the consideration for the
Company's acquisition of the equity of New Castle Associates. Upon the sale of
Christiana Mall by New Castle Associates, the Company's management and leasing
agreement for that property will be terminated, and the Company will receive a
brokerage fee of approximately $2 million from New Castle Associates.
15. SUBSEQUENT EVENT
In 2003, the Company sold a parcel of land located at Crest Plaza
Shopping Center located in Allentown, PA for a purchase price of $3.2 million.
The Company expects to recognize a gain of approximately $2.0 million in 2003 as
a result of this sale.
F-29
OPINION OF INDEPENDENT AUDITORS
To the Partners of
Lehigh Valley Associates
We have audited the accompanying balance sheets of Lehigh Valley Associates (a
limited partnership) as of December 31, 2002 and 2001, and the related
statements of operations, partners' deficiency, and cash flows for the years
then ended. These financial statements are the responsibility of Lehigh Valley
Associates' management. Our responsibility is to express an opinion on these
financial statements based on our audits.
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, the financial statements referred to above present fairly, in
all material respects, the financial position of Lehigh Valley Associates at
December 31, 2002 and 2001, and the results of its operations and its cash flows
for the years then ended, in conformity with accounting principles generally
accepted in the United States.
/s/ ERNST & YOUNG
Philadelphia, Pennsylvania
January 21, 2003
F-30
OPINION OF INDEPENDENT AUDITORS
To the Partners of
Lehigh Valley Associates
We have audited the accompanying balance sheets of Lehigh Valley Associates (a
limited partnership) as of December 31, 2001 and 2000, and the related
statements of operations, partners' deficiency, and cash flows for the years
then ended. These financial statements are the responsibility of Lehigh Valley
Associates' management. Our responsibility is to express an opinion on these
financial statements based on our audits.
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, the financial statements referred to above present fairly, in
all material respects, the financial position of Lehigh Valley Associates at
December 31, 2001 and 2000, and the results of its operations and its cash flows
for the years then ended, in conformity with accounting principles generally
accepted in the United States.
/s/ ERNST & YOUNG
Philadelphia, Pennsylvania
January 15, 2002
F-31
Schedule II
Pennsylvania Real Estate Investment Trust
Valuation and Qualifying Accounts
(in thousands)
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 (1) of Period
------------ ---------------- -------------- ------------- -----------
Allowance for Possible Losses:
Year ended December 31, 2002 $93 $-- $-- $-- $93
Year ended December 31, 2001 $93 $-- $-- $-- $93
Year ended December 31, 2000 $528 $-- $-- ($435) $93
Allowance for Doubtful Accounts:
Year ended December 31, 2002 $727 $837 ($599) $965
Year ended December 31, 2001 $733 $533 $-- ($539) $727
Year ended December 31, 2000 $582 $752 $-- ($601) $733
(1) Principally write-offs of tenant receivable balances.
S-1
Schedule III
Real Estate as of December 31, 2002
Initial Cost of Current Date
Initial Cost of Improvements Accum. Current of Life
Cost of Building & Net of Balance of Building & Depr. Encumb. Construction/ of
Land Improvement Retirements Land Improvements Balance Balance Acquisition Depr.
------------------------------------------------------------------------------------------------------------
(Thousands of dollars)
MULTIFAMILY PROPERTIES:
2031 Locust St $ 100 $ 1,028 $ 2,717 $100 $3,745 $3,072 $5,708 1961 25
Boca Palms 7,107 28,444 3,823 7,107 32,267 9,146 21,682 1994 39
Camp Hill 336 3,060 2,533 336 5,594 4,383 12,725 1969 33
Cobblestone
Apartments 2,791 9,697 3,329 2,791 13,026 4,379 13,287 1992 40
Eagles Nest 4,021 17,615 2,832 4,021 20,448 6,660 14,727 1998 39
Emerald Point 3,062 18,645 12,512 3,789 30,430 8,591 15,152 1993 39
Fox Run - Bear 1,355 19,959 2,862 1,355 22,821 7,904 13,565 1998 39
Hidden Lakes 1,225 11,794 1,644 1,225 13,438 3,867 10,265 1994 39
Kenwood Gardens 489 3,235 4,175 489 7,410 6,036 6,955 1963 38
Lakewood Hills 501 11,402 6,139 501 17,541 11,861 17,988 1972-80 45
Palms of Pembroke 4,869 17,384 2,324 4,869 19,707 5,210 15,925 1994 39
Regency Lakeside 5,364 8,617 17,300 5,364 25,917 8,494 19,059 2002 40
Shenandoah Village 2,200 8,975 2,934 2,200 11,909 3,438 7,815 1993 39
The Marylander 117 4,340 3,948 117 8,287 6,922 11,800 1962 39
The Woods 4,234 17,268 2,302 4,234 19,570 2,301 6,321 1998 39
INDUSTRIAL PROPERTIES:
ARA-Allentown 3 82 - 3 82 81 - 1962 40
ARA -Pennsauken 20 190 - 20 190 166 - 1962 50
InterstateCommerce 34 364 1,404 34 1,768 1,435 - 1963 50
Sears 25 206 176 25 382 343 - 1963 50
RETAIL PROPERTIES:
Beaver Valley Mall 13,606 14,971 32,615 13,196 47,997 1,207 47,740
Christiana Power Center 9,347 23,089 2,737 12,828 22,344 3,535 - 1998 39
Commons at Magnolia 577 3,436 5,779 601 9,191 491 - 1999 39
Crest Plaza 332 2,349 13,191 282 15,590 4,540 - 1964 40
Creekview (Warrington) 1,380 4,825 12,384 1,380 17,208 1,006 - 1998 40
Dartmouth Mall 7,199 28,945 13,576 7,199 42,521 6,997 - 1998 39
Festival Shopping Center 3,728 14,988 268 3,728 15,256 1,718 - 1998 39
Magnolia Mall 9,279 37,358 7,719 10,379 43,978 6,043 21,658 1998 39
Northeast Tower Center 7,864 18,338 4,658 8,265 22,596 2,036 - 1998 39
Northeast Tower - 2,716 10,863 - 2,716 10,863 1,018 12,500 1999 39
Home Depot
Paxton Tower Center 15,719 29,222 6,948 15,719 36,170 2,800 - 1998 40
Prince George's Plaza 13,066 57,678 6,069 13,066 63,747 8,076 44,879 1998 39
South Blanding Village 2,946 6,138 414 2,946 6,551 2,977 - 1988 40
---------------------------------------------------------------------------------------
TOTAL INVESTMENT $125,612 $434,505 $179,312 $130,885 $608,544 $136,733 $319,751
=======================================================================================
S-2
The aggregate cost for Federal income tax purposes of the Company's investment
in real estate was approximately $672 million and $581 million at December 31,
2002 and 2001, respectively. The changes in total real estate and accumulated
depreciation for the years ended December 31, 2002 and 2001 are as follows:
Total Real Estate Assets
------------------------
Year Ended December 31,
2002 2001 2000
---- ---- ----
BALANCE, beginning of period $636,294 $612,266 $577,521
Acquisitions and development 99,025 15,068 41,477
Improvements 36,326 16,007 10,584
Dispositions (32,216) (7,047) (17,316)
--------- -------- --------
BALANCE, end of period $739,429 $636,294 $612,266
Accumulated Depreciation
------------------------
Year Ended December 31,
2002 2001 2000
---- ---- ----
BALANCE, beginning of period $112,424 $95,026 $84,577
Depreciation expense 21,037 17,688 15,335
Acquisitions 8,368 -- --
Dispositions (5,096) (290) (4,886)
--------- -------- --------
BALANCE, end of period $136,733 $112,424 $95,026
S-3
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
2.1* Agreement of Purchase and Sale among The Rouse Company of Nevada, LLC,
The Rouse Company of New Jersey, LLC and PR Cherry Hill Limited
Partnership, dated as of March 7, 2003.
2.2* Agreement of Purchase and Sale among Echelon Mall Joint Venture and
Echelon Acquisition, LLC and PR Echelon Limited Partnership, dated as
of March 7, 2003.
2.3* Agreement of Purchase and Sale among Gallery at Market East, LLC and PR
Gallery I Limited Partnership, dated as of March 7, 2003.
2.4* Agreement of Purchase and Sale among The Rouse Company Of Nevada, LLC,
The Rouse Company Of New Jersey, LLC and PR Moorestown Limited
Partnership, dated as of March 7, 2003.
2.5* Agreement of Purchase and Sale between Plymouth Meeting Property, LLC
and PR Plymouth Meeting Limited Partnership, dated as of March 7, 2003.
2.6* Agreement of Purchase and Sale between The Rouse Company, L.P.
and PR Exton Limited Partnership, dated as of March 7, 2003.
3.2* By-Laws of PREIT as amended through October 30, 2002.
10.72* Agreement of Purchase and Sale between New Castle Associates and
Christiana Mall, LLC, dated as of March 7, 2003.
21* Listing of subsidiaries.
23.1* Consent of KPMG LLP (Independent Auditors of the Company).
23.2* Consent of Ernst & Young LLP (Independent Auditors of Lehigh Valley
Associates).
23.3* Consent of Ernst & Young LLP (Independent Auditors of Lehigh Valley
Associates).
99.1* Certification of Chief Executive Officer pursuant to section 906 of
Sarbanes-Oxley Act of 2002.
99.2* Certification of Chief Financial Officer pursuant to section 906 of
Sarbanes-Oxley Act of 2002.
* Filed herewith