UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 2003
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[ ] Transition Report Pursuant To Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from ______________________ to _______________________
Commission File Number 1-6300
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Pennsylvania Real Estate Investment Trust
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(Exact name of Registrant as specified in its charter)
Pennsylvania 23-6216339
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
200 South Broad Street, Third Floor, Philadelphia, PA 19102-3803
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (215) 875-0700
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the last 90 days.
Yes |X| No |_|
Indicate by check mark whether registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act).
Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares of beneficial interest outstanding at August 8, 2003: 16,927,734
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PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONTENTS
Page
----
Part I. Financial Information
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets--June 30, 2003
and December 31, 2002 1-2
Consolidated Statements of Income--Three and Six Months
Ended June 30, 2003 and June 30, 2002 3-4
Consolidated Statements of Cash Flows--Six Months
Ended June 30, 2003 and June 30, 2002 5
Notes to Unaudited Consolidated Financial Statements 6-18
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19-30
Item 3. Quantitative and Qualitative Disclosures about Market Risk 31
Item 4. Controls and Procedures 31
Part II. Other Information 32
Item 1. Not Applicable -
Item 2. Changes in Securities and Use of Proceeds 32
Item 3. Not Applicable -
Item 4. Submission of Matters to a Vote of Security Holders 32
Item 5. Not Applicable -
Item 6. Exhibits and Reports on Form 8-K 32
Signatures 33
Exhibit Index 34
Part I. Financial Information
Item 1. Financial Statements
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
ASSETS
(In thousands)
June 30, 2003 December 31, 2002
------------- -----------------
INVESTMENTS IN REAL ESTATE, at cost:
Retail properties $ 953,825 $ 423,046
Multifamily properties - 290,607
Construction in progress 11,601 23,272
Industrial properties 2,504 2,504
----------- -----------
Total investments in real estate 967,930 739,429
Less accumulated depreciation (48,988) (136,733)
----------- -----------
918,942 602,696
INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS
AND JOINT VENTURES, at equity 29,695 25,361
----------- -----------
948,637 628,057
OTHER ASSETS:
Assets held for sale 50,360 -
Cash and cash equivalents 8,712 13,553
Rents and sundry receivables (net of allowance for
doubtful accounts of $1,591 and $965 respectively) 13,900 13,243
Intangible assets, net 45,494 12,794
Deferred costs and other assets, net 38,910 36,016
----------- -----------
$ 1,106,013 $ 703,663
=========== ===========
(Continued)
-1-
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED BALANCE SHEETS (UNAUDITED) (CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY
(In thousands, except per share amounts)
June 30, 2003 December 31, 2002
------------- -----------------
LIABILITIES:
Mortgage notes payable $ 509,588 $ 319,751
Bank loans payable 138,150 130,800
Liabilities related to assets held for sale 35,008 -
Tenants' deposits and deferred rents 4,760 5,046
Accrued expenses and other liabilities 32,020 27,581
----------- --------
Total liabilities 719,526 483,178
----------- ---------
MINORITY INTEREST:
Minority interest in properties 5,681 127
Minority interest in Operating Partnership 56,147 32,345
----------- ---------
Total minority interest 61,828 32,472
----------- ---------
COMMITMENTS AND CONTINGENCIES (Note 9)
SHAREHOLDERS' EQUITY:
Shares of beneficial interest, $1 par value per
share; 100,000 authorized; issued and
outstanding 16,837 shares at June 30, 2003
and 16,697 shares at December 31, 2002 16,837 16,697
Capital contributed in excess of par 220,081 216,769
Deferred compensation (3,121) (2,513)
Accumulated other comprehensive loss (3,239) (4,366)
Distributions in excess of net income 94,101 (38,574)
----------- ----------
Total shareholders' equity 324,659 188,013
----------- ----------
$ 1,106,013 $ 703,663
=========== ==========
See accompanying notes to unaudited consolidated financial statements.
-2-
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(in thousands of dollars, except per share data)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2003 2002 2003 2002
------ ------ ------ ------
REVENUE:
Real estate revenues:
Base rent $ 21,568 $ 11,726 $ 33,493 $ 21,221
Percentage rent 205 227 478 589
Expense reimbursements 8,933 3,177 12,835 5,798
Lease termination revenue - 496 259 502
Other real estate revenues 787 301 1,121 572
--------- -------- --------- ---------
Total real estate revenues 31,493 15,927 48,186 28,682
Management company revenue 3,792 2,152 5,973 4,325
Interest and other income 193 355 335 375
--------- -------- --------- ---------
Total revenue 35,478 18,434 54,494 33,382
--------- -------- --------- ---------
EXPENSES:
Property operating expenses:
Property payroll and benefits 1,622 824 2,635 1,744
Real estate and other taxes 2,916 1,090 4,211 1,948
Utilities 1,214 245 1,492 420
Other operating expenses 4,779 1,673 7,093 3,077
--------- -------- --------- ---------
Total property operating expenses 10,531 3,832 15,431 7,189
Depreciation and amortization 6,994 3,267 10,507 6,042
General and administrative expenses:
Corporate payroll and benefits 3,948 3,536 7,584 7,046
Other general and administrative expenses 3,569 2,611 6,259 5,080
--------- -------- --------- ---------
Total general and administrative expenses 7,517 6,147 13,843 12,126
Interest expense 9,097 4,325 13,143 7,003
--------- -------- --------- ---------
Total expenses 34,139 17,571 52,924 32,360
Income before equity in income of
partnerships and joint ventures, gains
on sales of real estate and discontinued
operations 1,339 863 1,570 1,022
Equity in income of partnerships
and joint ventures 2,023 1,893 3,800 3,459
Gains on sales of interests in real estate 4,321 - 5,513 -
--------- -------- --------- ---------
Income before minority interest and
discontinued operations 7,683 2,756 10,883 4,481
Minority interest in operating partnership (823) (307) (1,110) (465)
--------- -------- --------- ---------
Income from continuing operations 6,860 2,449 9,773 4,016
Discontinued operations:
Income from discontinued operations 3,227 2,184 5,527 4,635
Minority interest (15,650) (191) (15,886) (482)
Gains on sales of real estate 150,201 - 150,201 -
--------- -------- --------- ---------
Total discontinued operations 137,778 1,993 139,842 4,153
--------- -------- --------- ---------
NET INCOME $ 144,638 $ 4,442 $ 149,615 $ 8,169
========= ======== ========= =========
See accompanying notes to unaudited consolidated financial statements.
-3-
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (CONTINUED)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2003 2002 2003 2002
---------- -------- -------- ---------
Basic earnings per share
Income from continuing operations per share $ 0.41 $ 0.15 $ 0.59 $ 0.25
Income from discontinued operations per share 8.29 0.12 8.43 0.26
--------- -------- -------- ---------
Net income per share $ 8.70 $ 0.27 $ 9.02 $ 0.51
========= ======== ======== =========
Diluted earnings per share
Income from continuing operations per share $ 0.40 $ 0.15 $ 0.58 $ 0.25
Income from discontinued operations per share 8.14 0.12 8.29 0.26
--------- -------- -------- ---------
Net income per share $ 8.54 $ 0.27 $ 8.87 $ 0.51
========= ======== ======== =========
See accompanying notes to unaudited consolidated financial statements.
-4-
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In Thousands)
Six Months Ended
----------------
June 30, June 30,
2003 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 149,615 $ 8,169
Adjustments to reconcile net income to net cash (used in)
provided by operating activities-
Minority interest, net of distributions 14,894 --
Depreciation and amortization 12,816 10,412
Amortization of deferred financing costs 1,407 493
Provision for doubtful accounts 724 208
Amortization of deferred compensation 947 891
Gains on sales of interests in real estate (155,714) --
Change in assets and liabilities-
Net change in other assets 660 (6,280)
Net change in other liabilities 8,252 627
--------- --------
Net cash (used in) provided by operating activities 33,601 14,520
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in wholly-owned real estate (158,076) (18,564)
Investments in construction in progress (9,902) (5,990)
Investments in partnerships and joint ventures (4,489) (1,605)
Cash proceeds from sale of interest in partnership 4,469 --
Cash proceeds from sale of real estate 163,136 --
Cash distributions from partnerships and joint ventures
in excess of equity in income 88 2,222
--------- --------
Net cash provided by (used in) investing activities (4,774) (23,937)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal installments on mortgage notes payable (2,420) (2,465)
Repayment of mortgage notes payable (157,800) (6,066)
Proceeds from mortgage notes payable 134,250 12,800
Net repayment of construction loan payable -- (4,000)
Net borrowing of credit facility 7,350 20,000
Shares of beneficial interest issued 3,860 5,168
Shares of beneficial interest repurchased (543) --
Payment of deferred financing costs (1,425) (76)
Distributions paid to shareholders (16,940) (16,391)
Distributions paid to OP Unit holders and minority partners
in excess of minority interest -- (1,046)
--------- --------
Net cash (used in) provided by financing activities (33,668) 7,924
--------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS (4,841) (1,493)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 13,553 10,258
--------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 8,712 $ 8,765
========= ========
See accompanying notes to unaudited consolidated financial statements.
-5-
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2003
1. BASIS OF PRESENTATION:
Pennsylvania Real Estate Investment Trust ("PREIT" or the "Company")
prepared the consolidated financial statements pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted pursuant to such rules and regulations,
although we believe that the disclosures are adequate to make the information
presented not misleading. The consolidated financial statements should be read
in conjunction with the audited financial statements and the notes thereto
included in PREIT's Current Report on Form 8-K filed on August 12, 2003. In
management's opinion, all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the consolidated financial position of
the Company and the consolidated results of its operations and its cash flows,
are included. The results of operations for such interim periods are not
necessarily indicative of the results for the full year.
PREIT is organized as a Pennsylvania business trust and is a fully
integrated self-administered and self-managed real estate investment trust.
The Company's interest in its properties is held through PREIT
Associates, L.P. (the "Operating Partnership"). The Company is the sole general
partner of the Operating Partnership, and as of June 30, 2003, held an 89.1%
controlling interest in the Operating Partnership and consolidates it for
reporting purposes.
Certain prior period amounts have been reclassified to conform with the
current period presentation.
2. RECENT ACCOUNTING PRONOUNCEMENTS:
In May 2003, the FASB issued Statement of Financial Accounting
Standards No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity ("SFAS 150"). SFAS 150
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances) because that financial instrument embodies an obligation of the
issuer. This statement is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003, except for mandatorily
redeemable financial instruments of nonpublic entities. The Company believes
that the adoption of SFAS 150 will not have a material effect on the Company's
financial position or results of operations.
In January 2003, the FASB issued Financial Interpretation No. 46,
Consolidation of Variable Interest Entities ("FIN No. 46"). 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. Based upon the current assessment of the
Company's investments in partnerships and joint ventures, the impact of FIN No.
46 did not have a material effect to Company's results of operations or
shareholders' equity in the first six months of 2003, and is not expected to be
material to the Company's future results of operations or shareholders' equity.
3. REAL ESTATE ACTIVITIES:
Acquisitions
2003 Acquisitions
In April 2003, the Company acquired Moorestown Mall, The Gallery at
Market East and Exton Square Mall from affiliated entities of The Rouse Company
("Rouse") and, in June 2003, the Company acquired Echelon Mall and Plymouth
Meeting Mall from Rouse. On June 5, 2003, the Company also acquired the ground
lessor's interest in Plymouth Meeting Mall from the Teachers Insurance and
Annuity Association ("TIAA"). In addition, on April 28, 2003, New Castle
Associates acquired Cherry Hill Mall from Rouse in exchange for New Castle
Associates' interest in Christiana Mall, cash and the assumption by New Castle
Associates of mortgage debt on Cherry Hill Mall. On that same date, the Company
acquired an approximate 73% interest in New Castle Associates and an option to
acquire the remaining 27% ownership interest. The aggregate purchase price for
the Company's acquisition of the five malls from Rouse, for TIAA's ground lease
interest in Plymouth Meeting Mall and for its interest in New Castle Associates
(including the additional purchase price expected to be paid upon exercise of
the Company's option to acquire the remaining interests in New Castle
Associates) was $549.4 million, including approximately $237.4 million in cash,
the assumption of $277.0 million in non-recourse mortgage debt and the issuance
of approximately $35.0 million in units of limited partnership interest in the
Company's Operating Partnership ("OP Units"). Approximately $17.1 million of the
OP Units were issued as part of the initial consideration for the Company's
acquisition of its interest in New Castle Associates and the Company plans to
issue approximately $17.8 million of OP Units to acquire the remaining 27%
interest in New Castle Associates.
-6-
In connection with the sale of Christiana Mall by New Castle Associates
to Rouse, PRI received a brokerage fee of $2 million pursuant to a pre-existing
management and leasing agreement between PRI and New Castle Associates. This fee
was received by PRI prior to the Company's acquisition of its ownership interest
in New Castle Associates.
Pan American Associates, the former sole general partner of New Castle
Associates and one of the remaining limited partners of New Castle Associates,
is controlled by Ronald Rubin, PREIT's Chairman and Chief Executive Officer, and
one of the remaining limited partners of New Castle Associates and George Rubin,
a trustee of PREIT and President of PREIT's management subsidiaries,
PREIT-RUBIN, Inc. ("PRI") and PREIT Services, LLC.
PREIT's acquisition of its interest in New Castle Associates consisted
of acquiring 49% of the aggregate partnership interests in New Castle Associates
from partners of New Castle Associates other than Pan American Associates on
April 28, 2003, in exchange for an aggregate of 585,422 OP Units valued at $17.1
million. Subsequently, PREIT increased its aggregate ownership interest in New
Castle Associates to approximately 73% by acquiring additional ownership
interests directly from New Castle Associates in exchange for a cash investment
in New Castle Associates of approximately $30.8 million. This cash investment
was used by New Castle Associates to pay to Rouse the majority of the cash
portion of the purchase price and associated costs for the acquisition of Cherry
Hill Mall.
New Castle Associates is consolidated for financial reporting purposes.
The cost basis of New Castle Associates reflects the Company's investment in the
joint venture at fair value, based on its 73% ownership, plus its minority
partners' investment, based on their 27% ownership, at their historical cost.
PREIT also obtained an option, exercisable commencing April 30, 2004
and expiring October 27, 2004, to acquire the remaining interests in New Castle
Associates, including that of Pan American Associates, in exchange for an
aggregate of 609,317 additional OP Units. If PREIT does not exercise this
option, the remaining partners of New Castle Associates will have the right,
beginning April 28, 2008 and expiring October 25, 2008, to require PREIT to
acquire the remaining interests in New Castle Associates in exchange for an
aggregate of 670,248 additional OP Units. Unless and until PREIT acquires the
remaining interests in New Castle Associates, the remaining partners of New
Castle Associates other than PREIT will be entitled to receive a cumulative
preferred distribution from New Castle Associates equal to approximately $1.2
million in the aggregate per annum, subject to certain downward adjustments
based upon certain capital distributions by New Castle Associates. If PREIT does
not exercise its call right, this preferred distribution will increase by 50%
beginning October 30, 2004 and by an additional 5% over the amount for the
preceding year beginning January 1, 2005 and annually thereafter. If the
remaining New Castle Associates partners do not exercise their put rights, this
preferred distribution will terminate on April 28, 2008.
In connection with PREIT's acquisition of its interest in New Castle
Associates, Pan American Associates ceased to be a general partner of New Castle
Associates and PREIT designated one of its affiliates as the sole general
partner. Certain former partners of New Castle Associates not affiliated with
PREIT exercised their special right to redeem for cash an aggregate of 261,349
OP Units issued to such partners at closing, and PREIT paid to those partners an
aggregate amount of approximately $7.7 million. In addition, PREIT granted
registration rights to the partners of New Castle Associates with respect to the
PREIT shares underlying the OP Units issued or to be issued to them, other than
those redeemed for cash following the closing.
To facilitate the exchange of Christiana Mall for Cherry Hill Mall,
PREIT waived any right of first refusal that it may have had with respect to the
sale of Christiana Mall by New Castle Associates.
PREIT also entered into a new management and leasing agreement with New
Castle Associates for Cherry Hill Mall, which provides for a fee of
approximately 5.25% of all rents and other revenues received by New Castle
Associates from the Cherry Hill Mall.
2002 Acquisitions
In April 2002, the Company purchased Beaver Valley Mall located in
Monaca, PA for a purchase price of $60.8 million. The purchase was financed
primarily through a $48.0 million mortgage and a $10.0 million bank borrowing.
The $10.0 million bank borrowing was subsequently repaid. Also in April 2002,
the Company exercised an option to purchase a portion of the land on which
Beaver Valley Mall is situated for $0.5 million.
Pro forma Impact of Acquisitions
Pro forma revenues, net income, basic net income per share and diluted
net income per share for the three-month and six-month periods ended June 30,
2003 and 2002, reflecting the acquisitions of Beaver Valley Mall, Cherry Hill
Mall, Echelon Mall, Exton Square Mall, Gallery at Market East, Moorestown Mall
and Plymouth Meeting Mall as if the purchases took place on January 1, 2002, are
as follows (thousands of dollars, except per share data):
-7-
Three Months Ended Six Months Ended
June 30, 2003 June 30, 2002 June 30, 2003 June 30, 2002
--------------- --------------- ---------------- ---------------
Revenues $ 46,635 $ 43,163 $ 92,002 $ 86,016
=============== =============== ================ ===============
Net income $ 147,737 $ 11,442 $ 160,068 $ 22,866
=============== =============== ================ ===============
Basic net income per share $ 8.89 $ 0.71 $ 9.65 $ 1.42
=============== =============== ================ ===============
Diluted net income per share $ 8.73 $ 0.70 $ 9.49 $ 1.42
=============== =============== ================ ===============
Dispositions
The Company has presented as discontinued operations the results of
wholly owned properties either sold or designated as assets held for sale during
2003 for all periods presented in these financial statements.
In May 2003, the Company completed the sale of 13 of its wholly-owned
multifamily properties to MPM Acquisition Corp., an affiliate of Morgan
Properties, Ltd. (together, "Morgan"), for a total sale price of $314.0 million
(approximately $151.5 million of which consisted of assumed indebtedness). The
19 properties in the Company's multifamily portfolio (aggregating to a total of
7,242 apartment units), consisted of 15 properties that were wholly-owned by the
Company and four multifamily properties in which the Company held a 50% joint
venture interest. The remaining two wholly owned multifamily properties were
sold subsequent to June 30, 2003. The sales of the Company's wholly owned
multifamily properties resulted in a gain of $150.2 million.
The Company has sold its 50% interest in the following two joint
venture multifamily properties: (1) Cambridge Hall Apartments in West Chester,
Pennsylvania; sold in May 2003 to the Company's joint venture partner for $6.7
million, inclusive of $2.5 million in assumed indebtedness; and (2) Countrywood
Apartments in Tampa, Florida; sold in May 2003 to Countrywood Apartments General
Partnership (the Company's joint venture partner) for $9.1 million, inclusive of
$7.3 million in assumed indebtedness. A gain of $4.4 million was recorded on the
sale of Cambridge Hall Apartments and a gain of $4.5 million from the sale of
Countrywood Apartments was deferred as the buyer's initial investment did not
meet the criteria for gain recognition under SFAS No. 66, "Accounting for Sales
of Real Estate." Such gain is expected to be recorded after the repayment of a
$1.4 million note that is due in December 2003. The results of operations of
equity method investments and the resultant gain on sale are presented in
continuing operations for all periods presented.
The Company has entered into agreements to sell its interests in the
other two joint venture multifamily properties to its joint venture partners for
an aggregate of approximately $8.6 million, inclusive of approximately $3.5
million of assumed indebtedness. Closing of these two sales is expected to occur
no later than the third quarter of 2003. As equity method investments, the
results of operations of these properties have been presented in continuing
operations for all periods presented.
A substantial portion of the gain on the sale of the multifamily
properties met the requirements for a tax deferred exchange with the properties
acquired by the Company in 2003.
In January 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 recognized a gain of $1.1 million in 2003 as a result
of this sale.
In July 2002, the Company sold Mandarin Corners shopping center located
in Jacksonville, Florida for $16.3 million. The Company recorded a gain on the
sale of approximately $4.1 million.
Discontinued Operations
In accordance with the provisions of SFAS No. 144, the operating
results of the wholly-owned multifamily properties and Mandarin Corners are
included in discontinued operations for all periods presented. The following
table summarizes revenue and expense information for properties accounted for as
discontinued operations (thousands of dollars):
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
2003 2002 2003 2002
---- ---- ---- ----
Real estate revenues $ 9,896 $ 12,914 $ 23,769 $ 25,791
Expenses
Property operating expenses 4,928 5,261 10,892 10,260
Depreciation and amortization (1) - 2,187 2,309 4,369
Interest expense 1,741 3,282 5,041 6,527
--------- -------- --------- --------
Total expenses 6,669 10,730 18,242 21,156
Income from discontinued operations 3,227 2,184 5,527 4,635
Gains on sales of real estate 150,201 - 150,201 -
Minority interest in discontinued operations (15,650) (191) (15,886) (482)
--------- -------- --------- --------
Total discontinued operations $ 137,778 $ 1,993 $ 139,842 $ 4,153
========= ======== ========= ========
(1) The Company reclassified the wholly owned multifamily properties as assets
held for sale as of March, 31, 2003 and ceased depreciation on these
properties.
-8-
Development Activity
As of June 30, 2003, the Company has capitalized $11.4 million of costs
for development activities for properties under construction. Of this amount,
$9.9 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, certain internal costs, environmental testing costs, traffic and
feasibility studies and deposits on land purchase contracts. Deposits on land
purchase contracts were $1.4 million at June 30, 2003, of which $0.1 million was
refundable and $1.3 million was non-refundable.
Refinancing
In May 2003, the Company entered into a mortgage note payable secured
by Dartmouth Mall, in Dartmouth, Massachusetts. The $70 million mortgage has a
10-year term and bears interest at the fixed rate of 4.95% per annum. The
proceeds from the mortgage note payable were used to pay down amounts
outstanding under the Company's bank loans.
In June 2003, the Company refinanced its mortgage note payable secured
by Moorestown Mall, in Moorestown, New Jersey. The $64.3 million mortgage has a
10-year term and bears interest at the fixed rate of 4.95% per annum. The
proceeds from the mortgage note payable were used to repay the previously
existing mortgage note secured by Moorestown Mall and to pay down amounts
outstanding under the Company's bank loans.
In January 2003, the mortgage on the Woods Apartments in Ambler,
Pennsylvania in the amount of $6.2 million was repaid with proceeds from the
Company's secured credit facility.
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 were written off in
the consolidated statements of income.
Lease Termination Payment
In January 2003, the Company paid $1.8 million to terminate its lease
with the Ames department store located at the Dartmouth Mall in Dartmouth,
Massachusetts. This payment is being amortized over the remaining term of the
Ames lease. The Company recorded amortization expense of $0.2 million in the
first six months of 2003, which is recorded as a reduction in base rents.
4. MANAGEMENT COMPANIES:
The Company's management, leasing and real estate development
activities are performed by two companies: PREIT Services, LLC ("Services") that
manages properties wholly owned by the Company, and PREIT-RUBIN, Inc. ("PRI")
that manages properties not wholly owned by the Company, including properties
owned by joint ventures in which the Company participates. Services and PRI are
consolidated. Services does not charge management, leasing or development fees
to the properties it manages because such costs would be eliminated in
consolidation. Because PRI is a taxable REIT subsidiary as defined by federal
tax laws, it is capable of offering a broad range of services to tenants without
jeopardizing the Company's continued qualification as a real estate investment
trust.
-9-
5. INVESTMENTS IN PARTNERSHIPS AND JOINT VENTURES:
The following table presents summarized financial information regarding
the Company's equity investments in 12 unconsolidated partnerships and joint
ventures as of June 30, 2003 and 14 unconsolidated partnerships and joint
ventures at December 31, 2002 (thousands of dollars):
June 30, December 31,
-------- ------------
2003 2002
------- --------
ASSETS
Investments in real estate, at cost:
Retail properties $457,948 $457,532
Multifamily properties 11,896 29,458
Construction in progress 1,506 1,506
-------- --------
Total investments in real estate 471,350 488,496
-------- --------
Less: accumulated depreciation 93,495 93,004
-------- --------
377,855 395,492
-------- --------
Cash and cash equivalents 9,660 8,982
Deferred costs, prepaid real estate taxes and expenses and other
assets, net 34,646 36,734
-------- --------
Total assets $422,161 $441,208
======== ========
LIABILITIES AND PARTNERS' EQUITY
Mortgage notes payable $359,178 $381,872
Other liabilities 14,348 16,977
-------- --------
Total liabilities 373,526 $398,849
-------- --------
Net equity 48,635 42,359
Less: partner's share 20,140 17,103
-------- --------
Company's share 28,495 25,256
Advances 1,200 105
-------- --------
Investment in and advances to partnerships and joint ventures (1) $ 29,695 $ 25,361
======== ========
(1) Amounts include joint venture investments with deficit balances of $18.8
million and $20.7 million at June 30, 2003 and December 31, 2002,
respectively. These deficit balances are primarily the result of
distributions received by the Company in excess of its investments and its
equity in income of the joint ventures.
The following table summarizes the Company's equity in income of partnerships
and joint ventures for the three-month and six-month periods ended June 30, 2003
and 2002 (thousands of dollars):
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ---------------------------
2003 2002 2003 2002
--------- -------- -------- --------
Gross revenue from real estate $ 22,916 $ 24,268 $ 46,626 $ 48,064
--------- -------- -------- --------
Expenses
Property management expenses 7,373 8,111 15,790 16,437
Mortgage interest expense 7,286 7,920 14,790 15,816
Depreciation and amortization 3,990 4,705 8,233 8,818
--------- -------- -------- --------
Total expenses 18,649 20,736 38,813 41,071
--------- -------- -------- --------
Net revenues from real estate 4,267 3,532 7,813 6,993
Partner's share 2,244 1,639 4,013 3,534
--------- -------- -------- --------
Equity in income of partnerships and joint ventures $ 2,023 $ 1,893 $ 3,800 $ 3,459
========= ======== ======== ========
-10-
6. EARNINGS PER SHARE:
The following table shows the Company's Basic Earnings Per Share
("EPS") and Diluted EPS for the three-month and six-month periods ended June 30,
2003 and 2002. Basic EPS is based on the weighted average number of common
shares outstanding during the period. Diluted EPS is based on the weighted
average number of shares outstanding during the period, adjusted to give effect
to common share equivalents (thousands of dollars, except per share amounts):
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ---------------------------
2003 2002 2003 2002
--------- -------- -------- --------
Income from continuing operations $ 6,860 $ 2,449 $ 9,773 $ 4,016
Income from discontinued operations 137,778 1,993 139,842 4,153
--------- -------- -------- --------
$ 144,638 $ 4,442 $149,615 $ 8,169
========= ======== ======== ========
Basic earnings per share
Income from continuing operations $ 0.41 $ 0.15 $ 0.59 $ 0.25
Income from discontinued operations 8.29 0.12 8.43 0.26
--------- -------- -------- --------
$ 8.70 $ 0.27 $ 9.02 $ 0.51
========= ======== ======== ========
Diluted earnings per share
Income from continuing operations $ 0.40 $ 0.15 $ 0.58 $ 0.25
Income from discontinued operations 8.14 0.12 8.29 0.26
--------- -------- -------- --------
$ 8.54 $ 0.27 $ 8.87 $ 0.51
========= ======== ======== ========
A reconciliation between basic and diluted weighted average shares
outstanding for the three-month and six-month periods ended June 30, 2003 and
2002 is shown below (in thousands):
Three months ended
------------------
June 30, 2003 June 30, 2002
------------- -------------
Basic Diluted Basic Diluted
Weighted average shares outstanding 16,615 16,615 16,216 16,216
Effect of unvested restricted shares
and share options outstanding -- 164 -- --
Incremental shares for diluted EPS -- 152 -- 66
------- ------- ------- -------
Total weighted average shares outstanding 16,615 16,931 16,216 16,282
======= ======= ======= =======
Six months ended
----------------
June 30, 2003 June 30, 2002
------------- -------------
Basic Diluted Basic Diluted
Weighted average shares outstanding 16,579 16,579 16,072 16,072
Effect of unvested restricted shares
and share options outstanding -- 173 -- --
Incremental shares for diluted EPS -- 122 -- 35
------- ------- ------- -------
Total weighted average shares outstanding 16,579 16,874 16,072 16,107
======= ======= ======= =======
-11-
7. DISTRIBUTIONS:
The per-share amount declared for distribution and not yet distributed
as of the date of this report and the per-share amount declared for distribution
and not yet distributed as of August 14, 2002 are as follows:
Amount
Date Declared Record Date Payment Date per Share
- --------------- ------------- --------------- ---------
July 11, 2002 August 30, 2002 September 16, 2002 $0.51
July 24, 2003 August 29, 2003 September 15, 2003 $0.51
8. CASH FLOW INFORMATION:
Cash paid for interest was $8.4 million (net of capitalized interest of
$1.1 million) and $13.1 million (net of capitalized interest of $0.7 million),
respectively, for the six months ended June 30, 2003 and 2002.
Significant non-cash transactions
In connection with real estate acquisitions in the first six months of
2003, the Company assumed mortgage notes payable of $277.0 million.
In the first six months of 2003, the Company caused the issuance of
units of limited partnership interest ("OP Units") in PREIT Associates, L.P.,
the Company's operating partnership (the "Operating Partnership") valued at
$17.1 million in connection with the Company's acquisition of its interest in
New Castle Associates (see Note 3).
In the first six months of 2002, the Company caused the issuance of OP
Units in the Operating Partnership valued at $4.5 million in connection with the
earnout provisions in the Contribution Agreement entered into in connection with
the acquisition of The Rubin Organization (see Note 9).
9. 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 $2.7 million and $1.0 million for the three month periods
ended June 30, 2003 and 2002, respectively, and $3.4 million and $1.6 million
for the six month periods ended June 30, 2003 and 2002, respectively. The 2003
amounts include the $2.0 million brokerage fee received in connection with the
sale of Christiana Mall (see Note 3).
Acquisition of The Rubin Organization
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 Class A 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 Class A Units
also will be payable with respect to development and predevelopment 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 other factors that the special committee
deems relevant. The special committee has retained independent legal and
accounting advisors in connection with its review of the payments owed to the
former TRO affiliates. The special committee and its advisors and the former TRO
affiliates and their advisors have engaged in discussions concerning the
appropriate number of Class A Units to be issued in respect of the nine month
period ended September 30, 2002 and the development and predevelopment
properties. The discussions between the special committee, the former TRO
affiliates and their respective advisors are continuing.
New Castle Associates
Officers of the Company, including Ronald Rubin and George Rubin, also
were parties to the Rouse transaction through their ownership interest in New
Castle Associates (see Note 3).
Development Activities
The Company is involved in a number of development and redevelopment
projects that may require equity funding by the Company, 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 lines of credit, which limit the
Company's involvement in joint venture projects. At June 30, 2003, the Company
had commitments of approximately $9.7 million related to construction activities
at current development and redevelopment projects, which is expected to be
financed through the Company's $200 million secured credit facility or through
short-term construction loans.
-12-
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.
In June and July respectively, of 2003, a former administrative
employee and a former building engineer of PREIT-Rubin Inc. ("PREIT-Rubin") pled
guilty to criminal charges related to the misappropriation of funds at a
property owned by a third-party for which PREIT-Rubin provided certain
management services. The former employees worked under the supervision of the
Director of Real Estate for the third-party, who earlier pled guilty to criminal
charges. Together with other individuals, the former PREIT-Rubin employees and
the third-party's Director of Real Estate misappropriated funds from the
third-party through a series of schemes. The third-party has estimated its
losses at approximately $15 million, and has alleged that PREIT-Rubin is
responsible for such losses under its management agreement. However, no claim
has been filed against PREIT-Rubin. The Company believes that restitution to be
paid by the individual participants and the fidelity policy carried by the
third-party owner will result in mitigation of the third-party's losses. In
addition, the Company believes that PREIT-Rubin has valid defenses to any
potential claims of the third-party and that it has insurance to cover some or
all of any potential claims. The Company is unable to determine an estimate or
the likelihood of any loss.
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.
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. The Company has insurance coverage
for environmental claims up to $2.0 million per occurrence and up to $4.0
million in the aggregate.
Guarantees
In November 2002, the Financial Accounting Standards Board issued
Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees; including Guarantees of Indebtedness of Others. This interpretation
requires the recognition of a liability 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 that 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 as follows:
o The Company has guaranteed $5.4 million of the mortgage at Laurel
Mall, an unconsolidated joint venture.
o The Company has guaranteed the amounts outstanding under bank
loans payable ($138.2 million at June 30, 2003).
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.
Because the Woods Apartments were sold in connection with the
disposition of the multifamily portfolio and because that
transaction was treated as a tax-free exchange in connection with
the acquisition of Exton Square Mall, The Gallery at Market East
and Moorestown Mall from The Rouse Company, the Company is now
obligated to provide tax protection to the former owner of the
Woods Apartments if the Company sells any of Exton Square Mall,
The Gallery at Market East or Moorestown Mall prior to August
2006.
10. STOCK-BASED COMPENSATION
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 income.
Under the modified prospective method of adoption selected by the
Company under the provisions of SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of SFAS #123,
compensation costs have been 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).
-13-
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2003 2002 2003 2002
------ ------ ------ ------
Net Income $ 144,638 $ 4,442 $ 149,615 $ 8,169
Add: Stock-based employee compensation
expense included in reported net income 422 439 947 888
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards (456) (473) (1,016) (957)
--------- -------- --------- -------
Proforma Net Income $ 144,604 $ 4,408 $ 149,546 $ 8,100
========= ======== ========= =======
Earnings per share:
Basic - as reported $ 8.70 $ 0.27 $ 9.02 $ 0.51
========= ======== ========= =======
Basic - pro forma $ 8.70 $ 0.27 $ 9.02 $ 0.50
========= ======== ========= =======
Diluted - as reported $ 8.54 $ 0.27 $ 8.87 $ 0.51
========= ======== ========= =======
Diluted - pro forma $ 8.54 $ 0.27 $ 8.87 $ 0.50
========= ======== ========= =======
11. 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 28 regional and community
shopping centers (17 wholly-owned, one consolidated joint venture and 10 owned
in unconsolidated joint venture form). The multifamily segment included the
operation and management of 19 apartment communities (15 wholly-owned and four
owned in joint venture form). Thirteen of the wholly owned multifamily
properties and two of the joint venture multifamily properties were divested
during May 2003. The remaining two wholly-owned multifamily properties were
divested in the third quarter of 2003 and the Company has entered into
agreements to sell the remaining two joint venture multifamily properties. The
other segment includes the operation and management of two retail properties
under development and four 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 its equity method investments.
The column titled "Adjustments" in the charts below reconciles the
amounts presented under the proportionate-consolidation method and in
discontinued operations 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 and corporate services.
Discontinued Develop-
Three months ended Multi- ment Total
June 30, 2003 Retail Family and Other Corporate Total Adjustments Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
(thousands of dollars)
Real estate operating revenues $ 40,837 $ 10,640 $ 83 $ - $ 51,560 $ (20,067) $ 31,493
Real estate operating expenses (13,877) (5,263) (4) - (19,144) 8,613 (10,531)
-----------------------------------------------------------------------------------------
Net operating income 26,960 5,377 79 - 32,416 (11,454) 20,962
Management company revenue - - - 3,792 3,792 - 3,792
Interest and other income - - - 193 193 - 193
General and administrative
expenses - - - (7,517) (7,517) - (7,517)
-----------------------------------------------------------------------------------------
Earnings before interest, taxes
depreciation and amortization 26,960 5,377 79 (3,532) 28,884 (11,454) 17,430
Interest expense (12,089) (1,887) - - (13,976) 4,879 (9,097)
Depreciation and amortization (8,306) - (13) - (8,319) 1,325 (6,994)
Equity in income of partnerships
and joint ventures - - - - - 2,023 2,023
Minority interest in operating
partnership - - - (823) (823) - (823)
Gains on sales of real estate (80) 4,401 4,321 4,321
Discontinued operations - - - (15,650) (15,650) 3,227 (12,423)
Gains on sales of
discontinued operations - 150,201 - - 150,201 - 150,201
-----------------------------------------------------------------------------------------
Net income $ 6,485 $ 158,092 $ 66 $(20,005) $144,638 $ - $144,638
=========================================================================================
Investments in real estate, at cost $1,151,324 $ 72,411 $ 15,665 $ - $1,239,400 $(271,470) $967,930
=========================================================================================
Total assets $1,166,782 $ 53,651 $ 23,504 $ 23,187 $1,267,124 $(161,111) $1,106,013
=========================================================================================
Recurring capital expenditures $ 86 $ 676 $ - $ - $ 762 $ - $ 762
=========================================================================================
-14-
Discontinued Develop-
Three months ended Multi- ment Total
June 30, 2002 Retail family and Other Corporate Total Adjustments Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
(thousands of dollars)
Real estate operating revenues $ 26,722 $ 14,153 $ 82 $ - $ 40,957 $ (25,030) $ 15,927
Real estate operating expenses (7,337) (5,852) (6) - (13,195) 9,363 (3,832)
-----------------------------------------------------------------------------------------
Net operating income 19,385 8,301 76 - 27,762 (15,667) 12,095
Management company revenue - - - 2,152 2,152 - 2,152
Interest and other income - - - 355 355 - 355
General and administrative
expenses - - - (6,147) (6,147) - (6,147)
-----------------------------------------------------------------------------------------
Earnings before interest, taxes
depreciation and amortization 19,385 8,301 76 (3,640) 24,122 (15,667) 8,455
Interest expense (8,031) (3,551) - 10 (11,572) 7,247 (4,325)
Depreciation and amortization (5,370) (2,298) (13) - (7,681) 4,414 (3,267)
Equity in income of partnerships
and joint ventures - - - - - 1,893 1,893
Minority interest in operating
partnership - - - (307) (307) - (307)
Gains on sales of real estate - - - - - - -
Discontinued operations 71 - - (191) (120) 2,113 1,993
Gains on sales of discontinued
operations - - - - - - -
-----------------------------------------------------------------------------------------
Net income $ 6,055 $ 2,452 $ 63 $ (4,128) $ 4,442 $ - $ 4,442
=========================================================================================
Investments in real estate, at cost $ 629,448 $ 285,546 $ 21,566 $ - $ 936,560 $(232,716) $703,844
=========================================================================================
Total assets $ 596,788 $ 205,371 $ 19,603 $ 33,759 $ 855,521 $(185,181) $670,340
=========================================================================================
Recurring capital expenditures $ 39 $ 843 $ - $ - $ 882 $ (100) $ 782
=========================================================================================
Discontinued Develop-
Six months ended Multi- ment Total
June 30, 2003 Retail family and Other Corporate Total Adjustments Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
(thousands of dollars)
Real estate operating revenues $ 66,945 $ 25,563 $ 166 $ - $ 92,674 $ (44,488) $ 48,186
Real estate operating expenses (22,358) (11,703) (8) - (34,069) 18,638 (15,431)
-------------------------------------------------------------------------------------------
Net operating income 44,587 13,860 158 - 58,605 (25,850) 32,755
Management company revenue - - - 5,973 5,973 - 5,973
Interest and other income - - - 335 335 - 335
General and administrative
expenses - - - (13,843) (13,843) - (13,843)
-------------------------------------------------------------------------------------------
Earnings before interest, taxes
depreciation and amortization 44,587 13,860 158 (7,535) 51,070 (25,850) 25,220
Interest expense (18,870) (5,603) - (91) (24,564) 11,421 (13,143)
Depreciation and amortization (13,128) (2,455) (26) - (15,609) 5,102 (10,507)
Equity in income of partnerships
and joint ventures - - - - - 3,800 3,800
Minority interest in operating
partnership - - - (1,110) (1,110) - (1,110)
Gains on sales of real estate 1,112 4,401 - - 5,513 - 5,513
Discontinued operations - - - (15,886) (15,886) 5,527 (10,359)
Gains on sales of discontinued
operations - 150,201 - - 150,201 - 150,201
-------------------------------------------------------------------------------------------
Net income $ 13,701 $ 160,404 $ 132 $(24,622) $ 149,615 $ - $149,615
===========================================================================================
Investments in real estate, at cost $1,151,324 $ 72,411 $ 15,665 $ - $1,239,400 $(271,470) $967,930
===========================================================================================
Total assets $1,166,782 $ 53,651 $ 23,504 $ 23,187 $1,267,124 $(161,111) $1,106,013
===========================================================================================
Recurring capital expenditures $ 96 $ 1,163 $ - $ - $ 1,259 $ (13) $ 1,246
===========================================================================================
-15-
Discontinued Develop-
Six months ended Multi- ment Total
June 30, 2002 Retail family and Other Corporate Total Adjustments Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
(thousands of dollars)
Real estate operating revenues $ 47,559 $ 28,236 $ 164 $ - $ 75,959 $ (47,277) $ 28,682
Real estate operating expenses (13,235) (11,471) (10) - (24,716) 17,527 (7,189)
-------------------------------------------------------------------------------------------
Net operating income 34,324 16,765 154 - 51,243 (29,750) 21,493
Management company revenue - - - 4,325 4,325 - 4,325
Interest and other income - - - 375 375 - 375
General and administrative
expenses - - - (12,126) (12,126) - (12,126)
-------------------------------------------------------------------------------------------
Earnings before interest, taxes
depreciation and amortization 34,324 16,765 154 (7,426) 43,817 (29,750) 14,067
Interest expense (13,485) (6,987) - 27 (20,445) 13,442 (7,003)
Depreciation and amortization (9,655) (4,576) (26) - (14,257) 8,215 (6,042)
Equity in income of partnerships
and joint ventures - - - - - 3,459 3,459
Minority interest in operating
partnership - - - (946) (946) 481 (465)
Gains on sales of real estate - - - - - - -
Discontinued operations - - - - - 4,153 4,153
Gains on sales of discontinued
operations - - - - - - -
-------------------------------------------------------------------------------------------
Net income $ 11,184 $ 5,202 $ 128 $ (8,345) $ 8,169 $ - $ 8,169
===========================================================================================
Investments in real estate, at $ 629,448 $ 285,546 $ 21,566 $ - $ 936,560 $(232,716) $ 703,844
===========================================================================================
Total assets $ 596,788 $ 205,371 $ 19,603 $ 33,759 $ 855,521 $(185,181) $ 670,340
===========================================================================================
Recurring capital expenditures $ 41 $ 1,496 $ - $ - $ 1,537 $ (156) $ 1,381
===========================================================================================
-16-
12. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES:
In the normal course of business, the Company is exposed to the effect
of interest rate changes. One of the ways 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 these derivative instruments are effective (as defined in
SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities") 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 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 June 30, 2003. 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 ($0.5 million)
2.) Swap - Cash Flow $55.0 million 6.00% 12/15/03 ($1.4 million)
As of June 30, 2003, the estimated unrealized loss attributed to the
cash flow hedges was $1.9 million and has been included in other liabilities in
the accompanying consolidated balance sheet.
Approximately $1.4 million and $0.5 million of the amount in change in
OCI and minority interest in the Operating Partnership, respectively is
attributable to unrealized losses.
Interest rate hedges that are designated as cash flow hedges manage 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 $1.9 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 $1.8 million of the amount in accumulated other
comprehensive income is attributable to development activities at June 30, 2003.
-17-
13. PENDING TRANSACTIONS:
In May 2003, the Company and Crown American Realty Trust ("Crown")
jointly announced that the Company, its operating partnership, Crown and Crown
American Properties, L.P., a limited partnership of which Crown is the sole
general partner ("CAP"), entered into an Agreement and Plan of Merger, dated as
of May 13, 2003. The merger agreement provides for the merger of Crown with and
into the Company.
14. SUBSEQUENT EVENTS:
In July 2003, the Company completed the sale of its remaining two
wholly-owned multifamily properties, Emerald Point in Virginia Beach, Virginia
and Regency Lakeside in Omaha, Nebraska, to Morgan. The aggregate proceeds were
approximately $81.4 million, including assumed debt of $33.8 million, with net
proceeds of $44.3 million. A substantial portion of the net proceeds were used
to pay off the remaining amounts borrowed under the Company's unsecured
acquisition credit facility entered into in connection with the Company's
acquisition of six malls from affiliated companies of The Rouse Company. The
Company expects to record a gain of approximately $28.3 million in the third
quarter of 2003 in connection with the sale of these properties. The net
proceeds include a purchase price credit of $3 million to Morgan awarded upon
the closing of the sale of all fifteen of PREIT's wholly-owned multifamily
properties to Morgan.
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Item 2.
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
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 merger with Crown American
Realty Trust described in "Proposed Transactions."
OVERVIEW
As of June 30, 2003, the Company owned interests in 28 retail
properties containing an aggregate of approximately 17.5 million square feet,
four multifamily properties containing 1,682 units (two of which were sold in
July 2003 and two of which are the subject of agreements of sale) 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 15 retail
properties containing approximately 5.2 million square feet, and four office
buildings containing approximately 0.9 million square feet.
The Company has achieved significant growth since 1997 with the
acquisition of The Rubin Organization ("TRO") and the formation of PREIT-RUBIN,
Inc. ("PRI"). During 2003, the Company continued this trend with the acquisition
of six retail properties from The Rouse Company, as described below in
"Acquisitions, Dispositions and Development Activities - Acquisitions," and
management expects to devote even more attention to the integration of Crown's
operations with the Company's operations. These integration activities are
expected to impact the Company's day-to-day operations. The Company expects to
incur expenses with respect to its integration activities for consulting,
compensation and other services. These expenses are expected to impact Company
general and administrative expenses.
The Company's net income increased by $140.2 million to $144.6 million
for the quarter ended June 30, 2003 as compared to $4.4 million for the quarter
ended June 30, 2002. The sale of the multifamily portfolio in the second quarter
of 2003 generated a gain of approximately $154.5 million (not including the
impact of minority interest). Property acquisitions resulted in an increase
in Company real estate revenues, with a corresponding increase in property
operating expenses, and depreciation, amortization and interest expenses.
The Company has investments in 13 partnerships and joint ventures.
Twelve of the 13 investments are classified as unconsolidated joint ventures
(the "Unconsolidated Joint Ventures") and one is consolidated (the "Consolidated
Joint Venture" and together with the Unconsolidated Joint Ventures, the "Joint
Ventures"). Eleven of the 13 Joint Venture investments are retail properties;
two are multifamily properties which are the subject of agreements of sale. 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 12 Unconsolidated Joint Venture properties, the Company managed three of the
properties and other parties, including several of the Company's Joint Venture
partners, manage the remaining nine properties. None of the Company's
Unconsolidated Joint Venture partners are affiliates of the Company, although
the Company's partner in the Consolidated Joint Venture includes affiliates of
the Company as described in "Related Party Transaction/off Balance Sheet
Arrangements". One of the Company's key strategic long-term 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
Unconsolidated Joint Venture, and accounts for each Unconsolidated Joint Venture
using the equity method of accounting. Under this accounting method, the Company
does not consolidate each Unconsolidated Joint Venture. Instead, the Company
records the earnings from the Unconsolidated 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 5 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. A summary of the accounting policies that management
believes are critical to the preparation of the consolidated financial
statements is set forth below. 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 in the Company's Current Report
on Form 8-K filed on August 12, 2003.
-19-
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 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 sold properties.
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 creditworthiness,
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.
Assets Held for Sale
When assets are identified by management as held for sale, the Company
discontinues depreciating the assets and estimates the sale price, net of
selling costs of such assets. If, in management's opinion, the net sale 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 to occur
within one year. Accordingly, the results of operations of operating properties
disposed of or classified as held for sale subsequent to June 30, 2003 for which
the Company has no significant continuing involvement, are reflected as
discontinued operations.
Intangible Assets
The value of intangible assets acquired is measured based on the
difference between (i) acquired prices of the properties and (ii) the properties
valued as-if vacant. Factors considered by the Company in its analysis of the
"as-if-vacant" value include lost rentals at market rates during an expected
lease-up period, which primarily ranges from two to six months, and costs to
execute similar leases including leasing commissions, tenant allowances and
legal and other related expenses.
The total amount of other intangible assets acquired is allocated to
in-place lease values and above-market and below-market lease values. The
Company does not assign any value to customer relationship intangibles as the
Company has pre-existing business relationships with substantially all of the
major retailers in the properties acquired and the properties acquired provide
no incremental value over such existing relationships.
-20-
Above-market and below-market in-place lease values for acquired
properties are recorded based on the present value (using an interest rate that
reflects the risks associated with the property acquired) of the difference
between (i) the contractual amounts to be paid pursuant to the in-place leases
and (ii) the Company's estimates of fair market lease rates for the
corresponding in-place leases, measured over a period equal to the remaining
non-cancelable term of the lease. The capitalized above-market lease values are
amortized as a reduction of rental income over the remaining non-cancelable
terms of the respective leases. The capitalized below-market lease values are
amortized as an increase to rental income over the initial term and any
fixed-rate renewal periods of the respective leases.
The value of in-place leases is amortized to expense over the remaining
portion of the current term of the respective leases, primarily ranging from two
to ten years. Should a tenant terminate its lease, the unamortized portion of
the in-place lease value would be charged to expense.
Asset Impairment
On a periodic basis, management assesses whether there are any
indicators that the value of the Company's 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 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.
Off Balance Sheet Arrangements
The Company has a number of off balance sheet joint ventures and other
unconsolidated arrangements with varying structures. 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.
Revenue Recognition
The Company derives over 88% 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 $0.9 million and $0.4 million in the second quarters of 2003
and 2002. 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. During the year,
the Company's income increases or decreases based on actual expense levels and
changes in other factors that influence the reimbursement amounts, such as
occupancy levels. In the second quarter of 2003, the Company accrued $0.9
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. 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.
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 statements of income. There are no significant cash versus accrual
differences for these activities.
-21-
LIQUIDITY AND CAPITAL RESOURCES
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 $117.9
million outstanding under the Credit Facility at June 30, 2003. 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 190 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 June 30, 2003, the margin was set at 190 basis points.
The Credit Facility, as amended in the second quarter of 2003, 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 0.70:1; (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 June 30, 2003; (6) maximum floating rate debt of $400
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
the date of this report, the Company is in compliance with all of these debt
covenants. An amendment to the Credit Facility in the second quarter of 2003
modified, among other things, the definition of Total Liabilities to exclude the
debt premiums on the properties acquired from The Rouse Company resulting from
the above-market interest rates on the assumed debt. In connection with
obtaining such amendment, the Company agreed to pay each lender under the
Credit Facility a fee of 0.15% of each lender's existing revolving commitment
amount, which fees totaled $300,000.
Refinancings
In May 2003, the Company entered into a mortgage note payable secured
by Dartmouth Mall, in Dartmouth, Massachusetts. The $70 million mortgage has a
10 year term and bears interest at the fixed rate of 4.95% per annum. The
proceeds from the mortgage note payable were used to pay down amounts
outstanding under the Company's bank loans.
In June 2003, the Company refinanced its mortgage note payable secured
by Moorestown Mall, in Moorestown, New Jersey. The $64.3 million mortgage has a
10 year term and bears interest at the fixed rate of 4.95% per annum. The
proceeds from the mortgage note payable were used to repay the previously
existing mortgage note secured by Moorestown Mall and to pay down amounts
outstanding under the Company's bank loans.
Acquisition Credit Facility
The Company financed a significant portion of the cash portion of the
purchase price for its acquisition of six malls from Rouse through an unsecured
credit facility (the "Acquisition Credit Facility") with Wells Fargo, National
Association ("Wells Fargo"). The Acquisition Credit Facility included a $175
million term loan and a $25 million unsecured revolving line of credit. PREIT
applied a substantial portion of the proceeds from the sale of its multifamily
portfolio to repay in full all amounts borrowed under the Acquisition Credit
Facility as of July 25, 2003. The unsecured revolving line of credit remains
available for future borrowings until it expires on October 27, 2003. Upon the
payment of an extension fee of 0.20% of the amount then outstanding, the
revolving line of credit may be extended for an additional 90 days, after which
time any outstanding amounts will need to be repaid. The unsecured revolving
line of credit provides for full recourse to the Company and its subsidiary
guarantors. The fees paid to Wells Fargo for the term loan and the revolving
line of credit were $1,312,500 and $187,500, respectively. At PREIT's option,
the revolving line of credit bears interest at either the Base Rate (the greater
of Wells Fargo's prime rate or the Federal Funds Rate plus 0.5%) or the LIBOR
rate for which deposits are offered to Wells Fargo for one-, two-, three- or
six-month periods, plus margins ranging from 2.5% to 3.0%, depending on PREIT's
ratio of Total Liabilities to Gross Asset Value (as defined in the credit
agreement for the Acquisition Credit Facility). As of June 30, 2003, the margins
for the LIBOR loans were set at 3.0%.
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:
-22-
o unexpected changes in operations that could result from the
proposed merger with Crown;
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, expenses associated with 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 issue 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).
In addition, although the Company may borrow up to $25 million under
the revolving line of credit included in the Acquisition Credit Facility, any
such borrowings would need to be repaid by October 27, 2003 unless the revolving
line of credit is extended for up to an additional 90 days upon the payment of
an extension fee of 0.20% of the amount then outstanding.
At June 30, 2003 the Company had outstanding borrowings of $117.9
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 $81.4 million, as of June 30, 2003, the
Company's loan covenant restrictions allowed the Company to borrow approximately
an additional $1.6 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. 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 as well as any short-term liquidity needs that are not
fulfilled by cash flows from operations.
At August 14, 2003 the Company had outstanding borrowings of $94.9
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
approximately $104.4 million, as of August 14, 2003, the Company's loan covenant
restrictions allowed the Company to borrow approximately an additional $24.6
million based on the existing property collateral pool.
The Company also had $25 million available under the Acquisition Credit
Facility unsecured revolving line of credit for total borrowing availability of
$49.6 million at August 14, 2003.
Proposed Transactions
On May 14, 2003, the Company and Crown American Realty Trust ("Crown")
announced that they entered into a definitive merger agreement under which Crown
would merge into the Company. Under the terms of the agreement, the Company will
issue to Crown shareholders 0.3589 common shares of the Company for each
outstanding share of Crown in a tax-free, share-for-share transaction and, will
issue 0.2053 OP Units of the Operating Partnership for each Crown OP unit. In
addition, the Company will issue 2.475 million new preferred shares for the same
amount of existing Crown non-convertible senior preferred shares. As of June 30,
2003, the Company had 16.8 million common shares outstanding and 2.1 million OP
units outstanding, and Crown had 32.3 million common shares outstanding and
10.0 million OP units. Assuming all Crown shares and OP units are exchanged at
the stated exchange ratios, the Company expects to have approximately 28.4
million common shares, 4.1 million OP units and 2.475 million preferred shares
outstanding immediately after the merger. The transaction includes a $20 million
termination fee payable to either the Company or Crown if the merger is not
completed in certain specified circumstances. The Company expects to assume
Crown's debt, aggregating $ 753,689 million as of June 30, 2003, and to
refinance Crown's $175 million line of credit facility of which $144,728 million
was outstanding as of June 30, 2003.
The Crown portfolio consists of 26 wholly owned malls and a 49.9%
interest in a mall in which the Company owns the remaining 50.1% interest.
Following the merger, the Company intends to reposition or dispose of six of the
Crown properties.
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 5.0% to 10.6% with a weighted
average interest rate of 7.03% at June 30, 2003. The following table outlines
the timing of payment requirements related to the Company's mortgage notes,
credit facility and acquisition credit facility as of June 30, 2003 (in
thousands):
-23-
7/1/03 to 1/1/04 to 1/1/06 to Payments Total Debt
12/31/03 12/31/05 12/31/07 Thereafter Payments Due Premium Total Debt
---------------------------------------------------------------------------------------------------
Fixed Rate Mortgages (1) $ 3,390 $155,596 $ 68,101 $ 264,079 $491,166 $ 18,422 $509,588
Credit Facility 127,900 - - - 127,900 - 127,900
Acquisition Credit Facility 10,250 - - - 10,250 - 10,250
--------------------------------------------------------------------------------------------------
$141,540 $155,596 $ 68,101 $ 264,079 $629,316 $ 18,422 $647,738
==================================================================================================
(1) Includes approximately $33.9 million of mortgages related to two
wholly-owned multifamily properties held for sale at June 30, 2003 and
subsequently sold.
The foregoing table includes $140.9 million of balloon payments that
come due under the Company's mortgage notes during the next three years. The
foregoing table does not include 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.
Commitments
At June 30, 2003, the Company had approximately $9.7 million committed
to complete current development and redevelopment projects. PREIT expects to
finance this amount through borrowings under the Credit Facility or through
short-term construction loans.
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 Class A 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 Class A Units
also will be payable with respect to development and predevelopment 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 other factors that the special committee
deems relevant. The special committee has retained independent legal and
accounting advisors in connection with its review of the payments owed to the
former TRO affiliates. The special committee and its advisors and the former TRO
affiliates and their advisors have engaged in discussions concerning the
appropriate number of Class A Units to be issued in respect of the nine month
period ended September 30, 2002 and the development and predevelopment
properties. The discussions between the special committee, the former TRO
affiliates and their respective advisors are continuing.
Cash Flows
During the six months ended June 30, 2003, the Company generated $33.6
million in cash flows from operating activities.
Financing activities used cash of $33.7 million including:
o $157.8 million of repayments on mortgage notes payable.
o $16.9 million of distributions to shareholders.
o $2.4 million of mortgage notes payable principal installments.
o $1.4 million of payments of deferred financing costs.
These uses were partially offset by the following sources of cash:
o $134.3 million of mortgage notes payable.
o $7.3 million of net bank loan borrowings.
o $3.2 million generated by the issuance of shares of beneficial
interest.
Investing activities used cash of $4.8 million including:
o $158.1 million of investments in wholly-owned real estate assets.
o $9.9 million of investments in properties with construction in
progress.
o $4.5 million of investments in partnerships and joint ventures.
These uses were partially offset by the following sources of cash:
o $167.6 million of cash proceeds from sales of real estate interests.
o $0.1 million of cash distributions from partnerships and joint
ventures in excess of equity in income.
Contingent Liabilities
The Company along with certain of its joint venture partners has
guaranteed debt on Laurel Mall, a retail property, totaling $5.4 million. The
debt matures in December 2003 (see Note 9 to the consolidated financial
statements).
In June and July respectively, of 2003, a former administrative
employee and a former building engineer of PREIT-Rubin Inc. ("PREIT-Rubin") pled
guilty to criminal charges related to the misappropriation of funds at a
property owned by a third-party for which PREIT-Rubin provided certain
management services. The former employees worked under the supervision of the
Director of Real Estate for the third-party, who earlier pled guilty to criminal
charges. Together with other individuals, the former PREIT-Rubin employees and
the third-party's Director of Real Estate misappropriated funds from the
third-party through a series of schemes. The third-party has estimated its
losses at approximately $15 million, and has alleged that PREIT-Rubin is
responsible for such losses under its management agreement. However, no claim
has been filed against PREIT-Rubin. The Company believes that restitution to be
paid by the individual participants and the fidelity policy carried by the
third-party owner will result in mitigation of the third-party's losses. In
addition, the Company believes that PREIT-Rubin has valid defenses to any
potential claims of the third-party and that it has insurance to cover some or
all of any potential claims. The Company is unable to determine an estimate or
the likelihood of any loss.
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.
ACQUISITIONS, DISPOSITIONS AND DEVELOPMENT ACTIVITIES
The Company is actively involved in pursuing and evaluating a number of
individual property and portfolio acquisition opportunities. In addition, the
Company has stated that a key strategic goal is to obtain managerial control of
all of its assets. In certain cases where existing joint venture assets are
managed by outside partners, the Company is considering the possible acquisition
of these outside interests. In certain cases where that opportunity does not
exist, the Company is considering the disposition of its interests. There can be
no assurance that the Company will consummate any such acquisition or
disposition.
-24-
Acquisitions
2003
On April 28, 2003, the Company acquired Moorestown Mall, The Gallery at
Market East and Exton Square Mall from affiliated entities of The Rouse Company
("Rouse"), and on June 5, 2003, the Company acquired Echelon Mall and Plymouth
Meeting Mall from Rouse. On June 5, 2003, the Company also acquired the ground
lessor's interest in Plymouth Meeting Mall from the Teachers Insurance and
Annuity Association ("TIAA"). In addition, on April 28, 2003, New Castle
Associates acquired Cherry Hill Mall from Rouse in exchange for New Castle
Associates' interest in Christiana Mall, cash and the assumption by New Castle
Associates of mortgage debt on Cherry Hill Mall. On that same date, the Company
acquired an approximate 73% ownership interest in New Castle Associates and an
option to acquire the remaining ownership interests in New Castle Associates.
The aggregate purchase price for the Company's acquisition of the five malls
from Rouse, for TIAA's ground lease interest in Plymouth Meeting Mall and for
its interest in New Castle Associates (including the additional purchase price
expected to be paid upon exercise of the Company's option to acquire the
remaining interests in New Castle Associates) was $549.4 million, including
approximately $237.4 million in cash, the assumption of $277.0 million in
non-recourse mortgage debt and the issuance of $35.0 million in units of limited
partnership interest in the Company's operating partnership ("OP Units"). The
cash components of the acquisitions were financed using the Acquisition Credit
Facility and the proceeds of the refinancings of Dartmouth and Moorestown Malls.
Approximately $17.1 million of the OP Units were issued as part of the initial
consideration for the Company's acquisition of its interest in New Castle
Associates and the Company plans to issue approximately $17.8 million of its OP
Units to acquire the remaining 27% interest in New Castle Associates.
In connection with the sale of Christiana Mall by New Castle Associates
to Rouse, PRI received a brokerage fee of $2 million pursuant to a pre-existing
management and leasing agreement between PRI and New Castle Associates. This fee
was received by PRI prior to the Company's acquisition of its ownership interest
in New Castle Associates.
Pan American Associates, the former sole general partner of New Castle
Associates and one of the remaining limited partners in New Castle Associates,
is controlled by Ronald Rubin, PREIT's Chairman and Chief Executive Officer, and
George Rubin, a trustee of PREIT and President of PREIT's management
subsidiaries, PREIT-RUBIN, Inc. and PREIT Services, LLC. A special committee of
the Company's board of trustees was formed to consider the fairness of the New
Castle contribution transaction (including the relevant elements of the Rouse
transaction). The special committee, which was composed of all of the Company's
independent trustees at that time, approved those transactions.
PREIT's acquisition of its interest in New Castle Associates consisted
of acquiring 49% of the aggregate partnership interests in New Castle Associates
from partners of New Castle Associates other than Pan American Associates on
April 28, 2003, in exchange for an aggregate of 585,422 OP Units valued at $17.1
million. Subsequently, PREIT increased its aggregate ownership interest in New
Castle Associates to approximately 73% by acquiring additional ownership
interests directly from New Castle Associates in exchange for a cash investment
in New Castle Associates of approximately $30.8 million. This cash investment
was used by New Castle Associates to pay to Rouse the majority of the cash
portion of the purchase price and associated costs for the acquisition of Cherry
Hill Mall.
PREIT also obtained an option, exercisable commencing April 30, 2004
and expiring October 27, 2004, to acquire the remaining interests in New Castle
Associates, including that of Pan American Associates, in exchange for an
aggregate of 609,317 additional OP Units. If PREIT does not exercise this
option, the remaining partners of New Castle Associates will have the right,
beginning April 28, 2008 and expiring October 25, 2008, to require PREIT to
acquire the remaining interests in New Castle Associates in exchange for an
aggregate of 670,248 additional OP Units. Unless and until PREIT acquires the
remaining interests in New Castle Associates, the remaining partners of New
Castle Associates other than PREIT will be entitled to receive a cumulative
preferred distribution from New Castle Associates equal to approximately $1.2
million in the aggregate per annum, subject to certain downward adjustments
based upon certain capital distributions by New Castle Associates. If PREIT does
not exercise its call right, this preferred distribution will increase by 50%
beginning October 30, 2004 and by an additional 5% over the amount for the
preceding year beginning January 1, 2005 and annually thereafter. If the
remaining New Castle Associates partners do not exercise their put rights, this
preferred distribution will terminate on April 28, 2008.
In connection with PREIT's acquisition of its interest in New Castle
Associates, Pan American Associates ceased to be a general partner of New Castle
Associates and PREIT designated one of its affiliates as the sole general
partner. Certain former partners of New Castle Associates not affiliated with
PREIT exercised their special right to redeem for cash an aggregate of 261,349
OP Units issued to such partners at closing, and PREIT paid to those partners an
aggregate amount of approximately $7.7 million. In addition, PREIT granted
registration rights to the partners of New Castle Associates with respect to the
PREIT shares underlying the OP Units issued or to be issued to them, other than
those redeemed for cash following the closing.
To facilitate the exchange of Christiana Mall for Cherry Hill Mall, the
Company waived any right of first refusal that it may have had with respect to
the sale of Christiana Mall by New Castle Associates.
The Company also entered into a new management and leasing agreement
with New Castle Associates for Cherry Hill Mall, which provides for a fee of
approximately 5.25% of all rents and other revenues received by New Castle
Associates from the Cherry Hill Mall.
2002
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.
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 OP Units.
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.
Dispositions
On May 30, 2003, the Company completed the sale of 13 out of 15 of its
wholly-owned multifamily properties to MPM Acquisition Corp., an affiliate of
Morgan Properties, Ltd. (together, "Morgan"), for a total sale price of $314
million (approximately $151.5 million of which consisted of assumed
indebtedness). The 19 properties in the Company's multifamily portfolio
(aggregating to a total of 7,242 apartment units), consisted of 15 properties
that were wholly-owned by the Company and four multifamily properties in which
the Company held a 50% joint venture interest. On July 25, 2003, the Company
completed the sale of the two remaining wholly-owned properties to Morgan for
$81.4 million, inclusive of $33.8 million in assumed indebtedness and before
giving effect to a $3 million purchase price credit. Morgan's cash deposit of
approximately $3.1 million was returned to Morgan upon the closing of the two
remaining wholly-owned properties. The net cash proceeds received by the Company
were $44.3 million.
-25-
The Company sold its interest in two of the joint venture multifamily
properties for an aggregate of $15.8 million, including $9.8 million in assumed
indebtedness. A gain of $4.4 million was recorded and an additional gain of $4.5
million was deferred, and is expected to be recorded after the repayment of a
note that is due in December 2003. The Company has entered into agreements to
sell the other two joint venture multifamily properties to its joint venture
partners for an aggregate of approximately $8.6 million, inclusive of
approximately $3.5 million of assumed indebtedness. Closing of these two sales
is expected to occur no later than the third quarter of 2003. As equity method
investments, the results of operations of these properties and resultant gain or
loss on sale have been or will be presented in continuing operations for all
periods presented.
In January 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 recognized a gain of $1.1 million in 2003 as a result
of this sale.
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.
Development, Expansions and Renovations
The Company is involved in a number of development and redevelopment
projects, which may require equity funding by the Company or third-party debt or
equity financing. In each case, the Company will evaluate the financing
opportunities available to it at the time a project requires funding. In cases
where the project is undertaken with a joint venture partner, the Company's
flexibility in funding the project may be 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
"Acquisitions, Dispositions and Developmental Activity -- Acquisitions," one
such management agreement, with respect to Christiana Mall, was canceled upon
the sale of the mall in April 2003. PRI received a $2.0 million brokerage fee in
connection with that transaction.
The Company has no material off-balance sheet transactions other than
the Joint Ventures described in Note 5 of the consolidated financial statements
and the "Overview" section above, and the interest rate swap agreements
discussed in Note 11 to the consolidated financial statements. 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. Management believes
that the lease terms were established at market rates at the commencement of the
lease.
The Company's acquisition of TRO involved related parties as described
in "Liquidity and Capital Resources-Commitments." Officers of the Company,
including Ronald Rubin, also are parties to the Rouse transaction through their
ownership interest in New Castle Associates, as described above in
"Acquisitions, Dispositions and Development Activities - Acquisitions."
RESULTS OF OPERATIONS
Quarter Ended June 30, 2003 compared with Quarter Ended June 30, 2002
Net income increased by $140.2 million to $144.6 million ($8.70 per
share) for the quarter ended June 30, 2003 as compared to $4.4 million ($0.27
per share) for the quarter ended June 30, 2002. This increase was primarily
because of $154.5 million of gains on the sale of real estate interests (not
including the impact of minority interest) in 2003 with no property sales in the
second quarter of 2002 and income generated from properties acquired in 2003.
Revenues increased by $17.1 million or 93% to $35.5 million for the
quarter ended June 30, 2003 from $18.4 million for the quarter ended June 30,
2002. Gross revenues from real estate increased by $15.6 million to $31.5
million for the quarter ended June 30, 2003 from $15.9 million for the quarter
ended June 30, 2002. This increase in gross revenues resulted from a $9.9
million increase in base rents and a $5.7 million increase in expense fees
reimbursements and a $0.5 million increase in other real estate revenues, offset
by a $0.5 million decrease in lease terminations. Base rents increased primarily
due to the inclusion of rents from newly acquired properties ($9.3 million) and
higher rents due to new and renewal leases at higher rates in 2003. Expense
reimbursements increased due to newly acquired properties ($5.7 million) and an
increase in reimbursable property operating expenses of other properties.
Management company revenue increased by $1.6 million or 76% to $3.8 million for
the quarter ended June 30, 2003 as compared to $2.2 for the quarter ended June
30, 2002. The increase was primarily due to the $2.0 million brokerage fee
received in connection with the sale of the Christiana Mall, offset by lost
management fees at Christiana Mall. Interest and other income decreased by $0.2
due to decreased interest income on partnership notes receivable.
-26-
Property operating expenses increased by $6.7 million to $10.5 million
for the quarter ended June 30, 2003 compared to $3.8 million for the quarter
ended June 30, 2002. Property operating expenses were generally higher due to
the newly acquired properties. Real estate and other taxes increased by $1.8
million, payroll expense increased $0.8 million, utilities increased by $1.0
million and other operating expenses increased by $3.1 million.
Depreciation and amortization expense increased by $3.7 million to $7.0
million for the quarter ended June 30, 2003 from $3.3 million for the quarter
ended June 30, 2002 due to newly acquired properties.
General and administrative expenses increased by $1.4 million to $7.5
million for the quarter ended June 30, 2003 from $6.1 million for the quarter
ended June 30, 2002 due to a $0.4 million increase in payroll and benefits and a
$1.0 million increase in other general and administrative expenses, which was
due to a $0.6 million increase in legal and other professional fees, a $0.1
million increase in shareholder relations fees and $0.3 million increase in
other charges that are individually immaterial.
Interest expense increased by $4.8 million to $9.1 million for the
quarter ended June 30, 2003 as compared to $4.3 million for the quarter ended
June 30, 2002. Mortgage interest increased by $3.0 million. This was primarily
due to $2.8 million interest expense for mortgages on newly acquired properties
and $0.3 million on the new mortgage at Dartmouth Mall, partially offset by a
$0.1 million reduction in interest expense associated with mortgage principal
amortization. Bank loan interest expense increased by $1.8 million because of a
$1.1 million increase in amortization of deferred financing fees and a $0.7
million increase in interest related to the Acquisition Credit Facility.
Equity in income of partnerships and joint ventures increased by $0.1
million to $2.0 million for the quarter ended June 30, 2003 from $1.9 million
for the quarter ended June 30, 2002. 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 $4.3 million in the
second quarter of 2003 resulting from the sale of the joint venture multifamily
properties. This amount does not include gains on sales of the wholly owned
multifamily properties because they were classified as held for sale and such
gains are reported in discontinued operations.
Minority interest in the operating partnership increased $0.5 million
to $0.8 million for the quarter ended June 30, 2003 from $0.3 million for the
quarter ended June 30, 2002 due to the issuance of operating partnership units
in connection with New Castle Associates and due to increased income of
continuing operations.
Income from discontinued operations increased $135.8 million in the
second quarter of 2003 compared with the second quarter of 2002 primarily due to
the gain resulting from the sale of the wholly owned multifamily properties.
Six Months Ended June 30, 2003 compared with Six Months Ended June 30, 2002
Net income increased by $141.4 million to $149.6 million ($9.02 per
share) for the six months ended June 30, 2003 as compared to $8.2 million ($0.51
per share) for the six months ended June 30, 2002. This increase was primarily
because of $155.7 million of gains on the sale of real estate interests (not
including the impact of minority interest) in 2003 with no property sales in the
first six months of 2002, and increased income generated from properties
acquired in 2002 and 2003.
Revenues increased by $21.1 million or 63% to $54.5 million for the six
months ended June 30, 2003 from $33.4 million for the six months ended June 30,
2002. Gross revenues from real estate increased by $19.5 million to $48.2
million for the six months ended June 30, 2003 from $28.7 million for the six
months ended June 30, 2002. This increase in gross revenues resulted from a
$12.3 million increase in base rents, a $7.0 million increase in expense
reimbursements and a $0.5 million increase in other real estate revenue, offset
by a $0.2 million decrease in lease termination fees and a $0.1 million decrease
in percentage rents. Base rents increased primarily due to the newly acquired
properties ($11.4 million) and higher rents due to new and renewal leases at
higher rates in 2003. Expense reimbursements increased due to the newly acquired
properties ($6.3 million) and an increase in reimbursable property operating
expenses at other properties. Management company revenue increased by $1.6
million (38%) due to the $2.0 million brokerage fee received in connection with
the sale of Christiana Mall, offset by lost management fees at Christiana Mall.
Interest and other income was unchanged.
Property operating expenses increased by $8.2 million to $15.4 million
for the six months ended June 30, 2003 compared to $7.2 million for the six
months ended June 30, 2002. Property operating expenses were generally higher
due to the newly acquired properties. Real estate and other taxes increased by
$2.3 million, payroll expense increased $0.9 million, utilities increased by
$1.1 million and other operating expenses increased by $4.0 million.
Depreciation and amortization expense increased by $4.5 million to
$10.5 million for the six months ended June 30, 2003 from $6.0 million for the
six months ended June 30, 2002 due to $4.0 million from the newly acquired
properties, and $0.5 million from additional property improvements.
General and administrative expenses increased by $1.7 million to $13.8
million for the six months ended June 30, 2003 from $12.1 million for the six
months ended June 30, 2002 primarily due to a $0.5 million increase in payroll
and benefits, a $0.5 million increase in legal and other professional fees, a
$0.2 million increase in shareholder relations expenses, and a $0.5 million
increase in other general and administrative expenses that are individually
immaterial.
-27-
Interest expense increased by $6.1 million to $13.1 million for the six
months ended June 30, 2003 as compared to $7.0 million for the six months ended
June 30, 2002. Mortgage interest increased by $3.8 million. This was primarily
due to $3.7 million interest expense for the mortgages on newly acquired
properties and $0.3 million on the new mortgage at Dartmouth Mall, partially
offset by a $0.2 million reduction in interest expense associated with mortgage
principal amortization. Bank loan interest expense increased by $2.3 million
because of a $0.8 million increase in amortization of deferred financing fees, a
$0.7 million increase in interest relating to the Acquisition Credit Facility, a
$0.5 million increase in interest relating to the Credit Facility and a $0.3
million increase due to higher bank fees.
Equity in income of partnerships and joint ventures increased by $0.3
million to $3.8 million for the six months ended June 30, 2003 from $3.5 million
for the six months ended June 30, 2002. 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 $5.5 million in the
first six months of 2003 resulting from the sale of two joint venture
multifamily properties and a parcel of land at the Crest Plaza Shopping Center
in Allentown, Pennsylvania. This amount does not include gains on sales of the
wholly owned multifamily properties because they were classified as held for
sale and such gains are reported in discontinued operations.
Minority interest in the operating partnership increased $0.6 million
to $1.1 million for the six months ended June 30, 2003 from $0.5 million for the
six months ended June 30, 2002 due to the issuance of operating partnership
units in connection with New Castle Associates.
Income from discontinued operations increased $135.7 million in the six
months ended June 30, 2003 as compared with the six months ended June 30, 2002
due to the gain on the sale of the wholly-owned multifamily properties.
SAME STORE PROPERTIES
Retail sector net operating income for the quarter ended June 30, 2003
for the retail properties owned since April 1, 2002 (the "Same Store
Properties"), decreased by $0.3 million or 2.4% over the quarter ended June 30,
2002. This decrease resulted from lease termination fees which were received
in 2002 which did not recur in 2003.
Retail sector net operating income for the six months ended June 30,
2003 for the retail properties owned since January 1, 2002 (the "Same Store
Properties"), increased by $0.1 million or 0.5% over the six months ended June
30, 2002. This increase resulted from increased rental income due to leasing
previously vacant space, lease renewals at higher rates and scheduled rent
increases.
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. Net operating income excludes general
and administrative expenses, management company revenues, interest income,
interest expense, depreciation and amortization, income from discontinued
operations and gains or sale of interests in real estate.
Set forth below is a schedule comparing the net operating income for
the retail Same Store Properties for the quarter ended June 30, 2003, as
compared to the quarter ended June 30, 2002 and for the six months ended June
30, 2003 as compared to June 30, 2002 (in thousands). Totals are provided for
reconciliation purposes:
Three months ended June 30, 2003 Three months ended June 30, 2002
Same Store Total Same Store Total
------------------- ----------- ---------------- --------------
Retail
Revenues $15,236 $40,837 $15,111 $26,722
Expenses (3,913) (13,877) (3,511) (7,337)
------- ------- ------- -------
NOI $11,323 $26,960 $11,600 $19,385
======= ======= ======= =======
Six months ended June 30, 2003 Six months ended June 30, 2002
Same Store Total Same Store Total
------------------- ----------- ---------------- --------------
Retail
Revenues $31,168 $66,945 $29,918 $47,559
Expenses (8,515) (22,358) (7,369) (13,235)
------- ------- ------- -------
NOI $22,653 $44,587 $22,549 $34,324
======= ======= ======= =======
A reconciliation of total net operating income to net income is
presented in Note 11 of the consolidated financial statements.
-28-
FUNDS FROM OPERATIONS
The National Association of Real Estate Investment Trusts ("NAREIT")
defines Funds from Operations ("FFO") as net 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. 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 than the Company.
FFO 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,
not 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 FFO. The Company believes that
FFO is helpful to investors as a measure of operating performance because it
excludes various items included in net income that do not relate to or are not
indicative of operating performance, such as various nonrecurring items, gains
on real estate and depreciation and amortization of real estate.
FFO increased 17% to $14.8 million for the quarter ended June 30, 2003,
as compared to $12.7 million in the quarter ended June 30, 2002. The increase
was primarily due to the new acquisitions.
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):
Three months ended June 30,
------------------------------------------------------------
2003 per share 2002 per share
-------------------------- --------------------
Net income $144,638 $ 7.77 $4,442 $ 0.24
Minority interest in operating partnership 823 0.05 307 0.02
Minority interest in discontinued operations 15,650 0.84 191 0.01
Gains on sales of interests in real estate (4,321) (0.23) - -
Gains on dispositions of discontinued operations (150,201) (8.07) - -
Depreciation and amortization:
Wholly owned and consolidated partnership, net (a) 6,929 0.37 3,202 0.18
Unconsolidated partnerships and joint ventures (a) 1,325 0.07 2,347 0.13
Discontinued operations - - 2,187 0.12
------------------------ --------------------
FUNDS FROM OPERATIONS (b) $ 14,843 $ 0.80 $12,676 $ 0.70
======================== ====================
FUNDS FROM OPERATIONS PER SHARE AND OP UNITS $0.80 $0.70
======== =======
Weighted average number of shares outstanding 16,616 16,216
Weighted average effect of full conversion of OP units 1,999 1,808
-------- -------
Total weighted average shares outstanding, including OP units 18,615 18,024
======== ======
a) Excludes depreciation of non-real estate assets, amortization of deferred
financing costs and discontinued operations.
b) Includes the non-cash effect straight-line rents of $612 and $228 for the
second quarter of 2003 and 2002 respectively.
Six months ended June 30,
------------------------------------------------------------
2003 per share 2002 per share
-------------------------- --------------------
Net income $149,615 $ 8.10 $8,169 $ 0.46
Minority interest in operating partnership 1,110 0.06 465 0.03
Minority interest in discontinued operations 15,886 0.86 482 0.03
Gains on sales of interests in real estate (5,513) (0.30) - -
Gains on dispositions of discontinued operations (150,201) (8.14) - -
Depreciation and amortization:
Wholly owned and consolidated partnership, net (a) 9,579 0.52 5,912 0.33
Unconsolidated partnerships and joint ventures (a) 3,591 0.20 3,844 0.21
Discontinued operations 2,309 0.13 4,369 0.24
Prepayment refinancing fee - - 77 0.00
------------------------ --------------------
FUNDS FROM OPERATIONS (b) $ 26,376 1.43 $23,318 $1.30
======================== ====================
FUNDS FROM OPERATIONS PER SHARE AND OP UNITS $1.43 $1.30
======== =======
Weighted average number of shares outstanding 16,579 16,072
Weighted average effect of full conversion of OP units 1,882 1,862
-------- -------
Total weighted average shares outstanding, including OP units 18,461 17,934
======== =======
a) Excludes depreciation of non-real estate assets, amortization of deferred
financing costs and discontinued operations.
b) Includes the non-cash effect straight-line rents of $985 and $482 for the
first six months of 2003 and 2002 respectively.
-29-
COMPETITION
The Company's retail properties compete with other retail properties in
their trade areas as well as alternative retail formats, including catalogues,
home shopping networks and internet commerce. Economic factors, such as
employment trends and the level of interest rates, impact shopping center sales.
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
There is seasonality in the retail real estate industry. Shopping
center leases often provide for the payment of rents based on a percentage of
sales over certain levels. Income from such rents is recorded only after the
minimum sales levels have been met. The sales levels are often met in the fourth
quarter, during the December holiday season.
INFLATION
Inflation can have many effects on the financial performance of the
Company. Shopping center leases often provide for the payment of rents based on
a percentage of sales, which may increase with inflation. Leases may also
provide for tenants to bear all or a portion of operating expenses, which may
reduce the impact of such increases on the Company. However, during times when
inflation is greater than increases in rent as provided for in leases, net
increases may not keep up with inflation.
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q for the quarter ended June 30, 2003,
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.
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 any
pending or proposed transactions;
o the cost, timing and difficulty of integrating the properties
acquired or to be acquired into our business; and
o greater than expected operating costs, financing costs and business
disruption associated with the pending or proposed transactions,
including without limitation, difficulties in maintaining
relationships with employees and tenants following the consummation
of the 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 the Company's ability to maintain and increase property occupancy
and rental rates;
o dependence on the Company's tenants' business operations and their
financial stability;
o possible environmental liabilities;
o financing risks;
o the Company's 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 the Company's short- and long-term liquidity position.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company is exposed to interest rate changes through its variable
rate debt as well as through the refinancing risk on its fixed rate debt. In the
second quarter of 2003, the Company entered into an unsecured $200 million
acquisition credit facility to finance the cash portion of the purchase of six
malls from The Rouse Company. In connection with the acquisition credit
facility, the Company entered into an amendment of its existing $200 million
secured credit facility that resulted in an increase in the Company's borrowing
rate under the credit facility from LIBOR plus 1.65% to LIBOR plus 1.90% as of
April 28, 2003. The acquisition credit facility consisted of a $175 million term
loan that has been repaid in full and a $25 million revolving line of credit
that is available for future borrowings until it expires on October 27, 2003.
Upon the payment of an extension fee of 0.20% of the amount then outstanding,
the revolving line of credit may be extended for an additional 90 days, after
which time any outstanding amounts will need to be repaid. Also in the second
quarter of 2003, (i) the Company sold 13 of its 15 wholly owned multifamily
properties and its interests in two of its four multifamily joint venture
properties, resulting in a $152.1 million decrease in mortgage debt, and (ii)
the Company acquired six retail properties from The Rouse Company, resulting in
a $313.9 million increase in mortgage debt. As of June 30, 2003, the Company's
consolidated debt portfolio consisted of $509.5 million in fixed mortgage notes
and $138.1 million borrowed under its secured and unsecured credit facilities.
The analysis below presents the sensitivity of the market value of the Company's
financial instruments to selected changes in market interest rates in light of
the transactions described above.
Changes in market interest rates have different impacts on the fixed
and variable portions of the Company's debt portfolio. A change in market
interest rates on the fixed portion of the debt portfolio impacts the net
financial instrument position, but it has no impact on interest incurred or cash
flows. A change in market interest rates on the variable portion of the debt
portfolio impacts the interest incurred and cash flows, but does not impact the
net financial instrument position. The sensitivity analysis related to the fixed
debt portfolio assumes an immediate 100 basis point move in interest rates from
their actual June 30, 2003 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 $24.8 million at June 30, 2003. A 100 basis
point decrease in market interest rates would result in an increase in the net
financial instrument position of $26.6 million at June 30, 2003. Based on the
variable rate debt included in the Company's debt portfolio, including two
interest rate swap agreements, as of June 30, 2003 a 100 point increase in
interest rates would result in an additional $0.6 million in interest incurred
on an annual basis at June 30, 2003. A 100 basis point decrease would reduce
interest incurred by $0.6 million on an annual basis.
The Company attempts to limit its exposure to some or all of these
market risks through the use of various financial instruments. These activities
are discussed in further detail in Part II, Item 7A, "Quantitative and
Qualitative Disclosures About Market Risk" of the Company's Annual Report on
Form 10-K for the year ended December 31, 2002.
Item 4. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer have evaluated
the effectiveness of the Company's disclosure controls and procedures as of June
30, 2003, and have concluded as follows:
o The Company's disclosure controls and procedures are designed to ensure
that the information that the Company is required to disclose in its
Exchange Act reports is recorded, processed, summarized and reported
accurately and on a timely basis.
o Information that the Company is required to disclose in its Exchange Act
reports is accumulated and communicated to management as appropriate to
allow timely decisions regarding required disclosure.
There was no change in the Company's internal controls over financial reporting
that occurred during the period covered by this report that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
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PART II
OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
Units
Class A and Class B Units of PREIT Associates L.P. (the "Operating
Partnership") are redeemable by the Operating Partnership at the election of the
limited partner holding the Units, at the time and for the consideration set
forth in the Operating Partnership's 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, the Company has the right to elect
to acquire the Units tendered for redemption for its own account, either in
exchange for the issuance of a like number of its shares, subject to adjustments
for stock splits, recapitalization and like events, or a cash payment equal to
the average of the closing prices of the Company's shares on the ten consecutive
trading days immediately before the Company's receipt, in its capacity as
general partner of the Operating Partnership, of the notice of redemption. If
the Company declines to exercise this right, then on the tenth day following
tender for redemption, the Operating Partnership will pay a cash amount equal to
the number of Units so tendered multiplied by such average closing price.
Unregistered Offerings
On April 28, 2003, the Operating Partnership issued 585,422 Class B
Units in connection with the acquisition of interests in New Castle Associates.
During the second quarter of 2003, the Company issued the following
shares in return for an equal number of Units tendered for redemption by limited
partners of the Operating Partnership:
o 844 shares on April 8, 2003 in redemption of Class B Units
tendered by former owners of Prince George's Plaza, which we
acquired for Class B Units in September 1998; and
o 23,777 shares on May 30, 2003 in redemption of Class A Units
tendered by a former affiliate of TRO.
All of the foregoing Units and shares were issued under exemptions from
registration provided by Section 4(2) of the Securities Act of 1933 and
Regulation D promulgated under the Securities Act.
Item 4. Submission of Matters to a Vote of Security Holders
The 2003 Annual Meeting of Holders of Certificates of Beneficial
Interest of the Company was held on June 5, 2003. At such meeting, Messrs.
Ronald Rubin, Leonard I. Korman and Jeffrey P. Orleans were reelected to the
Company's Board of Trustees to serve for a term ending at the Annual Meeting to
be held in the spring of 2006 and until their respective successors are elected
and qualified. In such election, 12,886,905 votes were cast for Mr. Rubin,
14,826,180 votes were cast for Mr. Korman and 14,826,148 votes were cast for Mr.
Orleans. Under the Company's Trust Agreement, votes cannot be cast against a
candidate. Proxies filed at the 2003 Annual Meeting by holders of 2,113,736
shares withheld authority to vote for Mr. Rubin, 174,460 shares withheld
authority to vote for Mr. Korman and 174,493 shares withheld authority to vote
for Mr. Orleans. In addition to Messrs. Rubin, Korman and Orleans, the
continuing members of the Company's Board of Trustees following the June 5,
2003 Annual Meeting include Ms. Rosemarie Greco and Messrs. Lee H. Javitch, Ira
M. Lubert, George F. Rubin and Jonathan B. Weller. In addition, at a meeting of
the Board of Trustees following the June 5, 2003 Annual Meeting, Mr. John J.
Roberts was appointed to the Company's Board of Trustees.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Amendment No. 1 to 2002-2004 Long-Term Incentive Plan
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive
Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial
Officer
32.1 Section 1350 Certification of Chief Executive Officer
32.2 Section 1350 Certification of Chief Financial Officer
(b) Reports on Form 8-K
During the quarter ended June 30, 2003, and between such date and
the filing of this Form 10-Q, the Company filed or furnished the
following reports on Form 8-K:
o dated April 4, 2003, Item 5 - containing Regulation FD
disclosure relating to the Company's disposition of its
multifamily portfolio of properties;
o dated April 28, 2003, Item 2 and Item 7 - containing
information relating to the acquisition of six malls (amended
on June 20, 2003);
o dated April 29, 2003, Item 9 - containing Regulation FD
disclosure;
o dated May 13, 2003, Item 5 - containing information relating to
the proposed merger with Crown American Realty Trust;
o dated May 14, 2003, Item 12 (furnished under Item 9) -
containing the 2003 first quarter earnings release;
o dated May 30, 2003, Item 2 and Item 7 - containing information
relating to the Company's disposition of its multifamily
portfolio of properties (amended on August 8, 2003);
o dated June 27, 2003, Item 5 - containing reissued Items of
Form 10-K; and
o dated August 11, 2003, Item 12 - containing the 2003 second
quarter earnings release.
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SIGNATURE OF REGISTRANT
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
By /s/ Ronald Rubin
-----------------------------------
Ronald Rubin
Chief Executive Officer
By /s/ Edward A. Glickman
-----------------------------------
Edward A. Glickman
Executive Vice President and
Chief Financial Officer
By /s/ David J. Bryant
-----------------------------------
David J. Bryant
Senior Vice President and Treasurer
(Principal Accounting Officer)
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Exhibit Index
Exhibit
Number Description
- ------- -----------
10.1 Amendment No. 1 to 2002-2004 Long-Term Incentive Plan
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.1 Section 1350 Certification of Chief Executive Officer
32.2 Section 1350 Certification of Chief Financial Officer
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