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 three month period ended March 31, 2004
[ ] Transition Report Pursuant To Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ______________________ to _____________________
Commission File Number 1-6300
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PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
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(Exact name of Registrant as specified in its charter)
Pennsylvania 23-6216339
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
200 South Broad Street, Third Floor, Philadelphia, PA 19102-3803
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (215) 875-0700
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the last 90 days. Yes |X| No |_|
Indicate 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 May 3, 2004: 35,807,324
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONTENTS
Part I. Financial Information Page
----
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets--March 31, 2004
and December 31, 2003 1-2
Consolidated Statements of Income--Three Months
Ended March 31, 2004 and March 31, 2003 3-4
Consolidated Statements of Cash Flows--Three Months
Ended March 31, 2004 and March 31, 2003 5
Notes to Unaudited Consolidated Financial Statements 6-18
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19-37
Item 3. Quantitative and Qualitative Disclosures About Market Risk 38
Item 4. Controls and Procedures 38
Part II. Other Information 38
Item 1. Legal Proceedings 38
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities 38-39
Item 3. Not Applicable -
Item 4. Not Applicable
Item 5. Not Applicable -
Item 6. Exhibits and Reports on Form 8-K 40
Signatures 41
Exhibits
Part I. Financial Information
Item 1. Financial Statements
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars, except per share amounts)
March 31, 2004 December 31, 2003
-------------- -----------------
ASSETS:
(Unaudited)
INVESTMENTS IN REAL ESTATE, at cost:
Retail properties $ 2,302,970 $ 2,263,866
Land held for development 9,398 -
Construction in progress 21,850 20,231
Industrial properties 2,504 2,504
------------- -------------
Total investments in real estate 2,336,722 2,286,601
Less accumulated depreciation (98,534) (78,416)
------------- -------------
2,238,188 2,208,185
------------- -------------
INVESTMENTS IN AND ADVANCES TO PARTNERSHIPS AND JOINT
VENTURES, at equity 31,788 29,166
------------- -------------
2,269,976 2,237,351
OTHER ASSETS:
Assets held for sale 133,832 156,574
Cash and cash equivalents 32,565 48,629
Rents and sundry receivables (net of allowance
for doubtful accounts of $8,791 and $5,379,
respectively) 26,130 27,675
Intangible assets (net of accumulated amortization
of $17,649 and $11,432, respectively) 171,994 181,544
Deferred costs and other assets, net 53,242 49,764
------------- -------------
$ 2,687,739 $ 2,701,537
============= =============
(Continued)
1
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED BALANCE SHEET (CONTINUED)
(in thousands of dollars, except per share amounts)
March 31, 2004 December 31, 2003
-------------- -----------------
LIABILITIES:
(Unaudited)
Mortgage notes payable $ 1,146,133 $ 1,150,054
Debt premium on mortgage notes payable 66,502 71,127
Bank loan payable 182,000 170,000
Liabilities of assets held for sale 68,949 71,341
Tenants' deposits and deferred rents 15,183 13,099
Accrued expenses and other liabilities 80,076 89,630
------------- -------------
Total liabilities 1,558,843 1,565,251
------------- -------------
MINORITY INTEREST
Minority interest in properties 4,547 8,591
Minority interest in Operating Partnership 112,836 104,061
------------- -------------
117,383 112,652
------------- -------------
COMMITMENTS AND CONTINGENCIES (Note 9)
SHAREHOLDERS' EQUITY:
Shares of beneficial interest, $1 par value per share;
100,000,000 shares authorized; issued and outstanding
35,782,000 shares at March 31, 2004 and 35,544,000
shares at December 31, 2003 35,782 35,544
Non-convertible senior preferred shares, 11.00%
cumulative, $.01 par value per share; 2,475,000 shares
authorized, issued and outstanding at March 31, 2004
and December 31, 2003 25 25
Capital contributed in excess of par 884,677 877,445
Deferred compensation (9,311) (3,196)
Accumulated other comprehensive loss (1,928) (2,006)
Retained earnings 102,268 115,822
------------- -------------
Total shareholders' equity 1,011,513 1,023,634
------------- -------------
$ 2,687,739 $ 2,701,537
============= =============
See accompanying notes to the unaudited consolidated financial statements.
2
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF INCOME
(in thousands of dollars)
For the Three Months Ended March 31,
---------------------------------------
2004 2003
----------- -----------
REVENUE: (Unaudited) (Unaudited)
Real estate revenues:
Base rent $ 60,600 $ 11,924
Expense reimbursements 28,530 3,902
Percentage rent 2,172 273
Lease termination revenue 27 259
Other real estate revenues 2,676 334
---------- --------
Total real estate revenues 94,005 16,692
Management company revenue 2,458 2,181
Interest and other income 254 142
---------- --------
Total revenue 96,717 19,015
---------- --------
EXPENSES:
Property operating expenses:
Property payroll and benefits (6,697) (1,013)
Real estate and other taxes (8,581) (1,295)
Utilities (6,322) (277)
Other operating expenses (14,431) (2,314)
---------- --------
Total property operating expenses (36,031) (4,899)
Depreciation and amortization (25,344) (3,513)
General and administrative expenses:
Corporate payroll (6,692) (3,636)
Other general and administrative expenses (4,119) (2,690)
---------- --------
Total general and administrative expenses (10,811) (6,326)
Interest expense (17,807) (4,046)
---------- --------
Total expenses (89,993) (18,784)
Income before equity in income of partnerships and joint ventures,
gains on sales of interests in real estate,
minority interest and discontinued operations 6,724 231
Equity in income of partnerships and joint ventures 1,765 1,778
Gains on sales of interests in real estate - 1,191
---------- --------
Income before minority interest and discontinued operations 8,489 3,200
Minority interest in properties (419) -
Minority interest in Operating Partnership (784) (287)
---------- --------
Income from continuing operations 7,286 2,913
Discontinued operations:
Income from discontinued operations 2,415 2,300
Adjustment to gains on sales of real estate (550) -
Minority interest in properties (8) -
Minority interest in Operating Partnership (180) (236)
---------- --------
Income from discontinued operations 1,677 2,064
---------- --------
Net income 8,963 4,977
Dividends on preferred shares (3,403) -
---------- --------
Net income available to common shareholders $ 5,560 $ 4,977
========== ========
See accompanying notes to the unaudited consolidated financial statements.
3
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
EARNINGS PER SHARE
(in thousands of dollars, except per share amounts)
For the Three Months Ended
March 31,
2004 2003
-------- ------
(Unaudited) (Unaudited)
Income from continuing operations $ 7,286 $ 2,913
Dividends on preferred shares (3,403) -
------- -------
Income from continuing operations available to
common shareholders $ 3,883 $ 2,913
======= =======
Income from discontinued operations $ 1,677 $ 2,064
======= =======
Basic earnings per share:
Income from continuing operations $ 0.11 $ 0.18
Income from discontinued operations 0.05 0.12
------- -------
$ 0.16 $ 0.30
======= =======
Diluted earnings per share:
Income from continuing operations $ 0.11 $ 0.18
Income from discontinued operations 0.05 0.12
------- -------
$ 0.16 $ 0.30
======= =======
(in thousands)
Weighted-average shares outstanding - basic 35,403 16,545
Effect of unvested restricted shares and share options issued 377 273
------- -------
Weighted-average shares outstanding - diluted 35,780 16,818
======= =======
See accompanying notes to the unaudited consolidated financial statements.
4
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
For the Three Months Ended
March 31,
2004 2003
----------- -------------
Cash Flows from Operating Activities: (Unaudited) (Unaudited)
Net Income $ 8,963 $ 4,977
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 25,413 5,822
Amortization of deferred financing costs 376 297
Provision for doubtful accounts 2,681 156
Amortization of deferred compensation 651 581
Minority interest 1,392 522
Gains on sales of interests in real estate 550 (1,191)
Change in assets and liabilities:
Net change in other assets (212) (2,893)
Net change in other liabilities (9,890) (7,539)
------- -------
Net cash provided by operating activities 29,924 732
Cash Flows from Investing Activities:
Investments in wholly-owned real estate, net of cash acquired (13,238) (711)
Investment in construction in progress (8,521) (7,263)
Investments in partnerships and joint ventures (3,030) (194)
Cash distributions from partnerships and joint ventures less than
equity in income (289) -
Cash proceeds from sales of wholly-owned real estate - 2,855
------- ------
Net cash used in investing activities (25,078) (5,313)
Cash Flows from Financing Activities:
Principal installments on mortgage notes payable (9,316) (1,279)
Repayment of mortgage notes payable - (6,297)
Borrowing from revolving credit facility 12,000 16,100
Payment of deferred financing costs (101) -
Shares of beneficial interest issued, net of issuance costs 1,527 444
Shares of beneficial interest repurchased (25) (538)
Distributions paid to common and preferred shareholders (22,517) (8,457)
Distributions paid to OP Unit holders and minority partners (2,478) (830)
-------- -------
Net cash used in financing activities (20,910) (857)
-------- -------
Net change in cash and cash equivalents (16,064) (5,438)
Cash and cash equivalents, beginning of period 48,629 13,553
------- -------
Cash and cash equivalents, end of period $32,565 $ 8,115
======= =======
See accompanying notes to the unaudited consolidated financial statements.
5
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
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 the Company believes 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 Annual Report on Form 10-K filed on March 15,
2004. 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.
The Company, a Pennsylvania business trust founded in 1960 and one of
the first equity REITs in the United States, has a primary investment focus on
retail shopping malls and power centers located in the eastern United States.
The retail properties have a total of approximately 33.4 million square feet, of
which the Company and its joint venture partners own approximately 26.4 million
square feet. The Company's portfolio currently consists of 58 properties in 14
states and includes 40 shopping malls, 14 strip and power centers and four
industrial properties.
The Company's interests in its properties are held through PREIT
Associates, L.P. (the "Operating Partnership"). The Company is the sole general
partner of the Operating Partnership and, as of March 31, 2004, the Company held
a 90.3% interest in the Operating Partnership and consolidated it for reporting
purposes. The presentation of consolidated financial statements does not itself
imply that the assets of any consolidated entity (including any special-purpose
entity formed for a particular project) are available to pay the liabilities of
any other consolidated entity, or that the liabilities of any consolidated
entity (including any special-purpose entity formed for a particular project)
are obligations of any other consolidated entity.
Pursuant to the terms of the partnership agreement, each of the other
limited partners of the Operating Partnership has the right to redeem his/her
interest in the Operating Partnership for cash or, at the election of the
Company, for shares of the Company on a one-for-one basis, in some cases
beginning one year following the respective issue date of the interest in the
Operating Partnership and in some cases immediately.
The Company's management, leasing and real estate development
activities are performed by two companies: PREIT Services, LLC ("PREIT
Services") which manages properties wholly owned by the Company, and
PREIT-RUBIN, Inc. ("PRI") which manages properties not wholly owned by the
Company, including properties owned by joint ventures in which the Company
participates. PREIT Services and PRI are consolidated. 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.
Certain prior period amounts have been reclassified to conform with
the current period presentation.
6
2. RECENT ACCOUNTING PRONOUNCEMENTS:
In January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46, ("FIN 46") (revised December 2003 ("FIN 46R")),
"Consolidation of Variable Interest Entities", which addresses how a business
enterprise should evaluate whether it has controlling financial interest in an
entity through means other than voting rights and accordingly should consolidate
the entity. FIN 46R replaces FIN 46. FIN 46R is applicable immediately to a
variable interest entity created after January 31, 2003 and, as of the first
interim period ending after March 15, 2004, to those variable interest entities
created before February 1, 2003 and not already consolidated under FIN 46 in
previously issued financial statements. The Company did not create any variable
interest entities after January 31, 2003. The Company has analyzed the
applicability of this interpretation to its entities created before February 1,
2003 and management believes that none of the Company's joint ventures are
variable interest entities.
3. REAL ESTATE ACTIVITIES:
Investments in real estate as of March 31, 2004 and December 31, 2003
were comprised of the following (in thousands of dollars):
March 31, December 31,
2004 2003
----------- -----------
Buildings and improvements $1,945,370 $1,882,735
Land 391,352 403,866
---------- ----------
Total investments in real estate 2,336,722 2,286,601
Accumulated depreciation (98,534) (78,416)
---------- ----------
Net investments in real estate $2,238,188 $2,208,185
========== ==========
Significant Acquisitions
The Company records its acquisitions based on estimates of fair value as
determined by management, based on information available and on assumptions of
future performance. These allocations are subject to revisions, in accordance
with GAAP, during the twelve-month periods following the closings of the
respective acquisitions.
Crown Merger
On November 20, 2003, the Company announced the closing of the merger of
Crown American Realty Trust ("Crown") with and into the Company (the "Merger")
in accordance with an Agreement and Plan of Merger (the "Merger Agreement")
dated as of May 13, 2003, by and among the Company, PREIT Associates, L.P.,
Crown and Crown American Properties, L.P. ("CAP"), a limited partnership of
which Crown was the sole general partner before the Merger. Through the Merger
and related transactions, the Company acquired 26 wholly-owned regional shopping
malls and the remaining 50% interest in Palmer Park Mall in Easton,
Pennsylvania.
In the Merger, each Crown common share was automatically converted into
the right to receive 0.3589 of a PREIT common share in a tax-free,
share-for-share transaction. Accordingly, the Company issued approximately
11,725,175 of its common shares to the former holders of Crown common shares. In
addition, the Company issued 2,475,000 11% non-convertible senior preferred
shares to the former holders of Crown preferred shares in connection with the
Merger. Also as part of the Merger, options to purchase a total of 30,000 Crown
common shares were replaced with options to purchase a total of 10,764 PREIT
common shares with a weighted average exercise price of $21.13 per share and
options to purchase a total of 421,100 units of limited partnership interest in
CAP were replaced with options to purchase a total of 151,087 PREIT common
shares with a weighted average exercise price of $17.23 per share. In addition,
a warrant to purchase 100,000 Crown common shares automatically was converted
into a replacement warrant to purchase 35,890 PREIT common shares at an exercise
price of $25.08 per share.
7
Immediately after the closing of the Merger, CAP contributed the
remaining interest in all of its assets - excluding a portion of its interest in
two partnerships - and substantially all of its liabilities to the Company's
Operating Partnership in exchange for 1,703,214 units of limited partnership
interest in the Operating Partnership ("OP Units"). The interest in the two
partnerships retained by CAP is subject to a put-call arrangement involving
341,297 additional OP Units (see Note 9 under "Other").
The value of shares of beneficial interest, preferred shares, OP Units,
options and warrants issued in connection with the merger with Crown were
determined based on the closing market value of the related securities on May
13, 2003, the date on which the financial terms of the merger with Crown were
substantially complete.
In connection with the Merger, the Company also assumed from Crown
approximately $443.8 million of a first mortgage loan that has a final maturity
date of September 10, 2025 and is secured by a portfolio of 15 properties at an
interest rate of 7.43% per annum. This rate remains in effect until September
10, 2008, the anticipated repayment date, at which time the loan can be prepaid
without penalty. If not prepaid at that time, the interest rate thereafter will
be equal to the greater of (i) 10.43% per annum, or (ii) the Treasury Rate plus
3.0% per annum. PREIT also assumed an additional $152.9 million in mortgages on
certain properties with interest rates between 3.12% and 7.61% per annum. The
Company also paid off all $154.9 million of outstanding indebtedness under a
Crown line of credit facility with borrowings under its credit facility.
During the first quarter of 2004, the Company recorded additional
basis in the properties acquired in the Crown merger of $1.3 million. This
amount was allocated to the properties in continuing operations on a pro rata
basis based on amounts originally allocated in 2003.
Six of the properties acquired in connection with the Merger are
considered to be non-strategic, and are currently being marketed and held-
for-sale (the "Non-Core Properties"). The Non-Core Properties are: Bradley
Square Mall in Cleveland, Tennessee; Martinsburg Mall in Martinsburg, West
Virginia; Mount Berry Square Mall in Rome, Georgia; Schuylkill Mall in
Frackville, Pennsylvania; Shenango Valley Mall in Sharon, Pennsylvania; and West
Manchester Mall in York, Pennsylvania.
As of December 31, 2003, the Company's allocation of the purchase
price of the Crown merger was preliminary. During the first three months of
2004, the Company reallocated $20.0 million of the purchase price that was
originally allocated to the Non-Core Properties. This amount was reallocated
among the 20 properties acquired in the Crown merger that are classified in
continuing operations.
Additional 2004 and 2003 Acquisitions
In March 2004, the Company acquired a 25 acre parcel of land in
Florence, South Carolina from the General Electric Company. The purchase price
for the parcel was $3.8 million in cash, including related closing costs. The
parcel is situated across the street from Magnolia Mall and The Commons at
Magnolia, both wholly-owned PREIT properties.
In September 2003, the Company completed its acquisition of Willow
Grove Park in Willow Grove, Pennsylvania. The Company entered into a joint
venture with Pennsylvania State Employee Retirement System ("PaSERS") in
February 2000 to acquire Willow Grove Park. The Company's interest was 0.01% at
the time it entered the partnership that owns the property. Effective November
2001, the Company increased its ownership in the partnership that owns the
property to 30%. In September 2003, the Company acquired the remaining 70%
partnership interest from PaSERS. The purchase price of the 70% partnership
interest was $45.5 million in cash, which the Company paid using a portion of
the net proceeds of the Company's August 2003 equity offering. As of the date of
the acquisition of the 70% interest, the partnership had $109.7 million in debt
($76.9 million of which is attributable to the acquisition of the remaining 70%
interest), with an interest rate of 8.39% maturing in March 2006.
Also in September 2003, the Company purchased a 6.08 acre parcel and a
vacant 160,000 square foot two story building adjacent to the Plymouth Meeting
Mall in Plymouth Meeting, Pennsylvania for $15.8 million, which included $13.5
million in cash paid to IKEA from the Company's August 2003 equity offering and
approximately 72,000 OP Units paid to the holder of an option to acquire the
parcel.
8
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. In June 2003, the Company also acquired the ground
lessor's interest in Plymouth Meeting Mall from the Teachers Insurance and
Annuity Association ("TIAA"). In addition, in April 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 a
49.9% ownership interest in New Castle Associates and, through subsequent
contributions to New Castle Associates, increased its ownership interest to
approximately 73%. The Company also obtained an option to acquire the remaining
ownership interest in New Castle Associates (see Note 9 under "Other"). 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 $276.6 million in
non-recourse mortgage debt and the issuance of approximately $35.0 million in OP
Units. Certain former partners of New Castle Associates not affiliated with the
Company exercised their special right to redeem for cash an aggregate of 261,349
OP Units issued to such partners at closing, and the Company paid to those
partners an aggregate amount of approximately $7.7 million. In addition, the
Company granted registration rights to the partners of New Castle Associates
with respect to the shares underlying the OP Units issued or to be issued to
them, other than those redeemed for cash following the closing.
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, the Company's chairman and chief executive
officer, and George Rubin, a trustee of the Company and president of the
Company's management subsidiaries, PREIT-RUBIN, Inc. and PREIT Services, LLC.
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 approximate 73%
ownership, plus its minority partners' investment, based on their approximate
27% ownership, at their historical cost.
In connection with the sale of Christiana Mall by New Castle
Associates to Rouse, PRI received a brokerage fee of $2.0 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. PRI also entered into a new
management and leasing agreement with New Castle Associates for Cherry Hill
Mall, which provides for a fee of 5.25% of all rents and other revenues received
by New Castle Associates from the Cherry Hill Mall.
Pro Forma Information
Pro forma revenues, net income, basic net income per share and diluted
net income per share for the quarter ended March 31, 2003, reflecting the
purchases of the Crown properties, the Rouse properties and the remaining
interest in Willow Grove Park, described above, as if the purchases took place
on January 1, 2003, are presented below. The unaudited pro forma information
presented within this footnote is not necessarily indicative of the results
which actually would have occurred if the acquisitions had been completed on
January 1, 2003, nor does the pro forma information purport to represent the
results of operations for future periods (in thousands of dollars, except per
share amounts):
For the Three Months
Ended March 31, 2003
--------------------
Revenues $ 95,430
Net income available to
common shareholders $ 12,084
Basic net income per share $ 0.43
Diluted net income per share $ 0.42
9
Dispositions
The Company disposed of its entire portfolio of multifamily
properties, which consisted of 15 wholly-owned properties and four properties in
which the Company had a 50% joint venture interest, during the second and third
quarters of 2003. During May and July 2003, the Company sold its 15 wholly-owned
multifamily properties to MPM Acquisition Corp., an affiliate of Morgan
Properties, Ltd., for a total sale price of $392.1 million (approximately $185.3
million of which consisted of assumed indebtedness). The sales of the Company's
wholly-owned multifamily properties resulted in a gain of $178.1 million in
2003. During the second quarter of 2004, three claims were made against the
Company by the purchaser of the 15 wholly-owned multifamily properties (see Note
9 "Legal Actions"), and the Company is in discussions with the purchaser
regarding a potential settlement. The results of operations of these
wholly-owned properties and the resulting gains on sale are presented as
discontinued operations in the accompanying consolidated statements of income
for all periods presented.
The Company sold its 50% interest in the four joint venture
multifamily properties to its respective joint venture partners. Cambridge Hall
Apartments in West Chester, Pennsylvania was sold in May 2003 for $6.7 million,
inclusive of $2.5 million in assumed indebtedness. A gain of $4.4 million was
recorded on the sale. Countrywood Apartments in Tampa, Florida was sold in May
2003 for $9.1 million, inclusive of $7.3 million in assumed indebtedness. A gain
of $4.5 million was recorded on the sale. Fox Run Apartments in Warminster,
Pennsylvania was sold in September 2003 for $5.0 million, inclusive of $2.7
million in assumed indebtedness. A gain of $3.9 million was recorded on the
sale. Will-O-Hill Apartments in Reading, Pennsylvania was sold in September 2003
for $3.6 million, inclusive of $0.8 million in assumed indebtedness. A gain of
$2.2 million was recorded on the sale. The results of operations of these equity
method investments and the resultant gains on sales are presented in continuing
operations for all periods presented.
A substantial portion of the gain on the sale of the wholly-owned
multifamily properties met the requirements for a tax deferred exchange with the
properties acquired from Rouse.
In January 2003, the Company sold a parcel of land located at Crest
Plaza Shopping Center located in Allentown, Pennsylvania for $3.2 million. The
Company recognized a gain of $1.2 million in the first three months of 2003 as a
result of this sale.
Discontinued Operations
In accordance with Statement of Financial Accounting Standards No. 144
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed of", the Company has presented as discontinued operations the operating
results of (i) its wholly-owned multifamily portfolio and (ii) the Non-Core
Properties.
The following table summarizes revenue and expense information for the
wholly-owned multifamily portfolio and the Non-Core Properties (in thousands of
dollars):
For the Three Months Ended March 31,
------------------------------------
2004 2003
---- ----
Real Estate Revenues $ 7,536 $ 13,873
Expenses
Property Operating Expenses (4,229) (5,963)
Depreciation and Amortization - (2,309)
Interest Expense (892) (3,301)
--------- ---------
Total Expenses (5,121) (11,573)
Income from discontinued operations 2,415 2,300
Adjustment to gains on sales of real estate (550) -
Minority Interest (188) (236)
---------- ---------
Income from discontinued operations $ 1,677 $ 2,064
========== =========
10
Development Activity
As of March 31, 2004, the Company had capitalized $12.5 million for
proposed development activities. Of this amount, $11.0 million is included in
deferred costs and other assets in the accompanying consolidated balance sheets,
and the remaining $1.5 million is included in investments in and advances to
partnerships and joint ventures. The Company capitalizes direct costs associated
with development activities such as legal fees, interest, real estate taxes,
certain internal costs, surveys, civil engineering surveys, environmental
testing costs, traffic and feasibility studies and deposits on land purchase
contracts. Deposits on land purchase contracts were $1.3 million at March 31,
2004, of which $0.1 million was refundable and $1.2 million was non-refundable.
4. EQUITY OFFERING:
In August 2003, the Company issued 6,325,000 common shares in a public
offering at $29.75 per share. The Company received net proceeds from the
offering of approximately $183.9 million after deducting payment of the
underwriting discount of $0.25 per share and offering expenses. The Company used
approximately $45.5 million of the net proceeds for the Willow Grove Park
acquisition, approximately $13.5 million for a land parcel acquisition (See Note
3), $94.9 million to repay amounts outstanding under the Company's line of
credit and the remainder for other working capital purposes.
5. INVESTMENTS IN PARTNERSHIPS AND JOINT VENTURES:
The following table presents summarized financial information regarding
the Company's equity investments in nine unconsolidated partnerships and joint
ventures including one property under development, as of March 31, 2004 and
December 31, 2003 (in thousands of dollars):
March 31, December 31,
2004 2003
----------- ------------
Assets
Investments in real estate, at cost:
Retail properties $ 252,790 $ 252,789
Construction in progress 1,506 1,506
--------- ---------
Total investments in real estate 254,296 254,295
Less: accumulated depreciation (64,825) (63,647)
--------- ---------
189,471 190,648
Cash and cash equivalents 6,739 5,616
Deferred costs, prepaid real estate taxes and other, net 28,580 29,151
--------- ---------
Total assets $ 224,790 $ 225,415
--------- ---------
Liabilities and Partners' equity
Mortgage notes payable $ 222,780 $ 223,763
Other liabilities 11,135 11,414
--------- ---------
Total liabilities 233,915 235,177
--------- ---------
Net equity (deficit) (9,125) (9,762)
Less: Partners' share (5,127) (5,461)
--------- ---------
Company's share (3,998) (4,301)
Excess investment (1) 12,718 9,316
Advances 7,701 8,094
--------- ---------
$ 16,421 $ 13,109
========= =========
Investment in and advances to partnerships and
joint ventures $ 31,788 $ 29,166
Deficit investments in partnerships and joint ventures
included in accrued expenses and other liabilities (15,367) (16,057)
--------- ---------
$ 16,421 $ 13,109
========= =========
11
(1) Excess investment represents the unamortized difference of the Company's
investment over the Company's share of the equity in the underlying net
investment in the joint ventures. The excess investment is amortized over
the life of the properties, and the amortization is included in equity in
income of partnerships and joint ventures.
The following table summarizes the Company's equity in income of
partnerships and joint ventures for the three months ended March 31, 2004 and
2003 (in thousands of dollars):
Three Months Ended
March 31,
2004 2003
------- -------
Gross revenues from real estate $14,612 $23,710
------- -------
Expenses:
Property operating expenses (4,634) (8,416)
Interest expense (4,188) (7,504)
Depreciation and amortization (2,140) (4,243)
------- -------
Total expenses (10,962) (20,163)
------- -------
Net income 3,650 3,547
Less: Partners' share 1,830 1,760
------- -------
Company's share 1,820 1,787
Amortization of excess investment (55) (9)
------- -------
Company's share of equity in income of partnerships
and joint ventures $ 1,765 $ 1,778
======= =======
6. 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 May 14, 2003 are as follows:
Date Declared Record Date Payment Date Amount per share
-------------------------------- ---------------- ------------------ -------------------
Shares of beneficial interest
May 14, 2003 May 30, 2003 June 16, 2003 $ 0.51
April 14, 2004 June 1, 2004 June 15, 2004 $ 0.54
Preferred shares
April 14, 2004 June 1, 2004 June 15, 2004 $1.375
7. CASH FLOW INFORMATION:
Cash paid for interest was $16.6 million (net of capitalized interest
of $0.2 million) and $6.7 million (net of capitalized interest of $0.4 million),
respectively, for the three months ended March 31, 2004 and 2003, respectively.
Significant non-cash transactions
The Company's 1997 acquisition of The Rubin Organization entitled the
former affiliates of The Rubin Organization (including Ronald Rubin, George F.
Rubin and several of the Company's other executive officers, the "TRO
Affiliates") to receive up to 800,000 additional units of limited partnership
interest in the Operating Partnership based on the Company's funds from
operations for the five-year period beginning September 30, 1997. All 665,000
units attributable to the period beginning September 30, 1997 and ending
December 31, 2001 were issued to the TRO Affiliates. The determination regarding
the remaining 135,000 units attributable to the period from January 1, 2002
through September 30, 2002 was deferred until March of 2004. In March of 2004, a
special committee of disinterested members of the Company's board of trustees
(the "Special TRO Committee") determined that 76,622 of these 135,000 units
should be issued. Because the issuance of these units was deferred until March
of 2004, the Company also paid to the TRO Affiliates $0.3 million in cash in
respect of distributions that would have been paid on the units, plus interest.
The fair market value of the units and the portion of the cash payment that
represented distributions were recorded as a $3.0 million increase to goodwill.
The portion of the cash payment that represented interest of $0.1 million was
recorded as interest expense.
12
The TRO Affiliates also were eligible to receive additional units in
respect of the Company's payment for certain development and predevelopment
properties acquired as part of the Company's acquisition of The Rubin
Organization. In December of 2003, in exchange for the remaining 11% interest in
a parcel related to Northeast Tower Center - one of the development properties -
Ronald Rubin received 4,552 units and George F. Rubin received 1,738 units. The
fair market value of the units was recorded as a $0.1 million increase to
investment in real estate. In March of 2004, the Special TRO Committee
determined that 37,549 units should be issued to the TRO Affiliates in respect
of the development properties. Because the issuance of these units was deferred
until March of 2004, the Company also paid to the TRO Affiliates $0.4 million in
cash in respect of distributions that would have been paid on the units from the
completion date of the applicable property through March 25, 2004, plus
interest. The fair market value of the units and the portion of the cash payment
that represented distributions were recorded as a $1.7 million increase to
investment in real estate. The portion of the cash payment that represented
interest of $0.1 million was recorded as interest expense. Also, in March of
2004, the Special TRO Committee determined that 165,739 units were issuable to
the TRO Affiliates in respect of the predevelopment properties. Because the
issuance of these units was deferred until March of 2004, the Company also paid
to the TRO Affiliates $1.6 million in cash in respect of distributions that
would have been paid on the units from the completion date of the applicable
property through March 25, 2004, plus interest. The fair market value of the
units and the portion of the cash payment that represented distributions were
recorded as a $4.6 million increase to investment in real estate and a $2.9
million increase to investment in partnerships and joint ventures. The portion
of the cash payment that represented interest of $0.2 million was recorded as
interest expense.
In connection with the Special TRO Committee's determinations to issue
the units and make the cash payments in March of 2004 as described above, the
following former TRO affiliates who are officers of the Company received the
following consideration: (1) Ronald Rubin received 104,282 units and $819,561 in
cash; (2) George F. Rubin received 46,336 units and $362,535 in cash; (3) Joseph
F. Coradino received 19,133 units and $150,105 in cash; (4) Edward A. Glickman
received 11,272 units and $87,792 in cash; (5) Douglas S. Grayson received 5,529
units and $42,920 in cash; and (6) David J. Bryant received 1,277 units and
$59,772 in cash ($50,000 of which was allocated to Mr. Bryant by the TRO
Affiliates for his services on behalf of the TRO Affiliates in connection with
the determination of the final payments). The TRO Affiliates have agreed in
writing that they are not entitled to any additional consideration in respect of
the Company's acquisition of The Rubin Organization.
8. RELATED PARTY TRANSACTIONS:
Related Party Transactions
General
PRI provides management, leasing and development services for 13
properties owned by partnerships and other ventures in which certain officers of
the Company and PRI have indirect ownership interests. Total revenues earned by
PRI for such services were $0.3 million and $0.7 million for the three months
ended March 31, 2004 and 2003, respectively.
The Company leases office space from an affiliate of certain officers
of the Company. Total rent expense under this lease, which expires in 2009, was
$0.3 million and $0.2 million for the three months ended March 31, 2004 and
2003, respectively.
The Rubin Organization
See Note 7 under "Significant non-cash transactions."
13
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).
Crown Merger
Mark E. Pasquerilla, who was elected as a trustee of the Company
following the Crown merger, had a substantial ownership interest in Crown and
its operating partnership and, as a consequence of the merger, directly or
indirectly received a significant number of OP Units and shares of the Company.
In addition, Mr. Pasquerilla is a party to several continuing arrangements with
the Company, including the right to receive additional consideration related to
the merger as described in Note 9 under "Other", as well as the following:
o a lease with and contract for information technology support
services to the Company by an entity controlled by Mr.
Pasquerilla with respect to space in Crown's former
headquarters in connection with the Company's post-closing
transition activities, and continuing negotiations for the
sale of certain personal property in Crown's former
headquarters by the Company to an entity controlled by Mr.
Pasquerilla;
o the tax protection agreement described in Note 9 under
"Guarantees";
o agreements by Mr. Pasquerilla not to acquire additional
shares of the Company or to seek to acquire control of the
Company within specified time periods and to forfeit certain
benefits under the tax protection agreement upon selling
shares of the Company within specified time periods or in
excess of specified amounts; and
o a registration rights agreement covering the shares acquired
and to be acquired by Mr. Pasquerilla in connection with the
merger, an agreement by Mr. Pasquerilla not to compete with
the Company for a period of time following the merger and an
agreement to allow Mr. Pasquerilla and his affiliates to use
certain intellectual property and domain names associated
with the Crown name and logo.
9. COMMITMENTS AND CONTINGENCIES
Development Activities
The Company is involved in a number of development and redevelopment
projects that may require equity funding by the Company or third-party debt or
equity financing. In each case, the Company will evaluate the financing
opportunities available to it at the time the project requires funding. In cases
where the project is undertaken with a joint venture partner, the Company's
flexibility in funding the project may be governed by the joint venture
agreement or the covenants existing in its line of credit, which limit the
Company's involvement in joint venture projects. At March 31, 2004, the Company
had commitments of approximately $17.0 million related to construction
activities at current development and redevelopment projects, which is expected
to be financed through the Company's $500 million unsecured credit facility or
through short-term construction loans.
Legal Actions
In the normal course of business, the Company becomes involved in legal
actions relating to the ownership and operations of its properties and the
properties it manages for third parties. In management's opinion, the
resolutions of these legal actions are not expected to have a material adverse
effect on the Company's consolidated financial position or results of
operations.
14
In June and July respectively, of 2003, a former administrative
employee and a former building engineer of PRI pled guilty to criminal charges
related to the misappropriation of funds at a property owned by Independence
Blue Cross ("IBC") for which PRI provided certain management services. PRI
provided these services from January 1994 to December 2001. The former employees
worked under the supervision of the Director of Real Estate for IBC, who earlier
pled guilty to criminal charges. Together with other individuals, the former PRI
employees and IBC's Director of Real Estate misappropriated funds from IBC
through a series of schemes. IBC has estimated its losses at approximately $14
million, and has alleged that PRI is responsible for such losses under the terms
of a management agreement. To date, no lawsuit has been filed against PRI. The
Company understands that IBC has recovered $5 million under fidelity policies
issued by IBC's insurance carriers. In addition, the Company understands that
several defendants in the criminal proceedings have forfeited assets having an
estimated value of approximately $5 million which have been or will be
liquidated by the United States Justice Department and applied toward
restitution. The restitution and insurance recoveries result in a significant
mitigation of IBC's losses and potential claims against PRI, although PRI may be
subject to subrogation claims from IBC's insurance carriers for all or a portion
of the amounts paid by them to IBC. The Company believes that PRI has valid
defenses to any potential claims by IBC and that PRI has insurance to cover some
or all of any potential payments to IBC. The Company is unable to estimate or
determine the likelihood of any loss to the Company.
In April 2002, a joint venture in which we hold a 50% interest, 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 Christiana Power Center Phase II
project. In October 2003, the Court decided that the Department did breach the
terms of the 1992 Settlement Agreement and remitted the matter to the Superior
Court of the State of Delaware for a determination of damages. The Delaware
Department of Transportation appealed the Chancery Court's decision to the
Delaware Supreme Court, which, in April 2004, affirmed The Chancery Court's
decision. The Company is not in a position to predict the outcome of the
Superior Court's determination of damages or its ultimate effect on the
construction of the Christiana Power Center Phase II project.
Following the Company's sale of its 15 wholly-owned multifamily
properties, the purchaser of those properties has made three separate claims
against the Company seeking unspecified damages from the Company related to
alleged breaches of representations and warranties under the sale agreement and
an alleged breach by the Company of the Company's covenant to operate the
multifamily properties in the ordinary course between when the sale agreement
was entered into and when the transactions closed. The Company has denied
liability on all three claims and is discussing a potential settlement with the
purchaser.
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, 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
Financial Accounting Standards Board Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees; including
Guarantees of Indebtedness of Others" ("FIN 45"), requires that a liability be
recognized at the inception of a guarantee issued or modified after December 31,
2002 whether or not payment under the guarantee is probable. For guarantees
entered into prior to December 31, 2002, the interpretation requires that
certain information related to the guarantees be disclosed in the guarantor's
financial statements. In the course of its business, the Company has guaranteed
certain indebtedness of others as follows:
o The Company and its subsidiaries are guarantors of the Operating
Partnership's $500 million unsecured credit facility, which had $182.0
million outstanding at March 31, 2004.
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.
15
o In connection with the Company's merger with Crown, the Company entered
into a tax protection agreement with Mark E. Pasquerilla and entities
affiliated with Mr. Pasquerilla (the "Pasquerilla Group"). Under this tax
protection agreement, the Company agreed not to dispose of certain
protected properties acquired in the merger in a taxable transaction until
November 20, 2011 or, if earlier, until the Pasquerilla Group collectively
owns less that 25% of the aggregate of the shares and OP Units that they
acquired in the merger. If the Company violates the tax protection
agreement during the first five years of the protection period, it would
owe as damages the sum of the hypothetical tax owed by the Pasquerilla
Group, plus an amount intended to make the Pasquerilla Group whole for
taxes that may be due upon receipt of those damages. From the end of the
first five years through the end of the tax protection period, damages are
intended to compensate the affected parties for interest expense incurred
on amounts borrowed to pay the taxes incurred on the prohibited sale. If
the Company were to sell properties in violation of the tax protection
agreement, the amounts that the Company would be required to pay to the
Pasquerilla Group could be substantial.
The Company did not enter into any other guarantees in connection with its
merger, acquisition or disposal activities in 2004 and 2003.
Other
In connection with the Crown merger, Crown's former operating
partnership retained an 11% interest in the capital and 1% interest in the
profits of two partnerships that own 14 shopping malls. This retained interest
entitles Crown's former operating partnership to a quarterly cumulative
preferred distribution of $184,300 and is subject to a put-call arrangement
between Crown's former operating partnership and the Company, pursuant to which
the Company has the right to require Crown's former operating partnership to
contribute the retained interest to the Company following the 36th month after
the closing of the Merger and Crown's former operating partnership has the right
to contribute the retained interest to the Company following the 40th month
after the closing of the Merger, in each case in exchange for 341,297 additional
OP Units. Mark E. Pasquerilla and his affiliates control Crown's former
operating partnership.
In connection with the Company's acquisition of its interest in New
Castle Associates, the Company 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. The Company exercised the
option in the second quarter of 2004 and expects to close the acquisition by the
end of May 2004. Until closing of the acquisition of the remaining interest,
each of the remaining partners of New Castle Associates other than the Company
is entitled to a cumulative preferred distribution from New Castle Associates on
their remaining interests in New Castle Associates equal to $1.2 million in the
aggregate per annum, subject to certain downward adjustments based upon certain
capital distributions by New Castle Associates. By reason of their interest in
Pan American Associates, Ronald Rubin has a 9.37% indirect limited partner
interest in New Castle Associates and George F. Rubin has a 1.43% indirect
limited partner interest in New Castle Associates.
10. SEGMENT INFORMATION:
The Company has three reportable segments: (1) retail properties, (2)
development and other, and (3) corporate. As of March 31, 2004, the retail
segment included the operation and management of 54 regional and community
shopping centers (45 wholly-owned, one consolidated joint venture and eight
owned in unconsolidated joint venture form). The Company formerly had a fourth,
multifamily segment, which included the operation and management of 19 apartment
communities (15 wholly-owned and four owned in joint venture form) that were
sold in 2003. The development and other segment includes the operation and
management of three retail properties under development (two wholly-owned and
one in joint venture form), four industrial properties and various
pre-development activities (all wholly-owned). The corporate segment includes
cash and investment management, unallocable real estate management costs,
taxable REIT subsidiary activities, and certain other general support functions.
16
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 entitled "Reconcile to GAAP" 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,
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 chief operating decision-making group defines net
operating income as real estate operating revenues minus real estate operating
expenses (including allocable general and administrative expenses). 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.
Three months ended Development Reconcile Total
March 31, 2004 Retail and Other Corporate Total To GAAP Consolidated
- -----------------------------------------------------------------------------------------------------------
(thousands of dollars)
Real estate operating
revenues $ 108,632 $ 97 $ - $ 108,729 $(14,724) $ 94,005
Real estate operating expense (42,969) (12) - (42,981) 6,950 (36,031)
---------- ------- -------- ----------
Net operating income 65,663 85 - 65,748
Management company revenue - - 2,458 2,458 - 2,458
Interest and other income - - 254 254 - 254
General and administrative
expenses - - (10,811) (10,811) - (10,811)
---------- ------- -------- ----------
Earnings before interest,
taxes depreciation and
amortization 65,663 85 (8,099) 57,649
Interest expense (19,092) - (1,658) (20,750) 2,943 (17,807)
Depreciation and amortization (26,409) (13) - (26,422) 1,078 (25,344)
Equity in income of
partnerships and joint ventures - - - - 1,765 1,765
Minority interest - - - - (1,203) (1,203)
Discontinued operations (550) (550) 2,227 1,677
---------- ------- -------- ---------- --------- ----------
Net income $ 20,162 $ 72 $(10,307) $ 9,927 $ (964) $ 8,963
========== ======= ======== ========== ========= ==========
Investments in real estate,
at cost $2,535,400 $35,258 $ - $2,570,658 $(233,936) $2,336,722
========== ======= ======== ========== ========= ==========
Total assets $2,690,907 $44,186 $ 50,215 $2,785,308 $ (97,569) $2,687,739
========== ======= ======== ========== ========= ==========
Capital Expenditures $ 6,248 $ - $ - $ 6,248 $ - $ 6,248
========== ======= ======== ========== ========= ==========
17
Three months ended Development Reconcile Total
March 31, 2003 Retail Multifamily and Other Corporate Total To GAAP Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
(thousands of dollars)
Real estate operating revenues $ 26,108 $ 14,923 $ 83 $ - $ 41,114 $ (24,422) $ 16,692
Real estate operating expense (8,481) (6,440) (4) - (14,925) 10,026 (4,899)
---------- ---------- -------- ------- ---------
Net operating income 17,627 8,483 79 - 26,189
Management company revenue - - - 2,181 2,181 - 2,181
Interest and other income - - - 142 142 - 142
General and administrative
expenses - - - (6,326) (6,326) - (6,326)
---------- ---------- -------- ------- ---------
Earnings before interest,
taxes depreciation and
amortization 17,627 8,483 79 (4,003) 22,186
Interest expense (6,780) (3,716) - (91) (10,587) 6,541 (4,046)
Depreciation and amortization (4,822) (2,455) (13) - (7,290) 3,777 (3,513)
Equity in income of
partnerships and joint ventures - - - - - 1,778 1,778
Minority interest in Operating
Partnership - - - - - (287) (287)
Discontinued operations - 2,064 2,064
Gains on sales of real estate 1,191 - - - 1,191 - 1,191
---------- ---------- -------- ------- --------- --------- ---------
Net income $ 7,216 $ 2,312 $ 66 $(4,094) $ 5,500 $ (523) $ 4,977
========== ========= ======== ========= ========= ========= =========
Investments in real estate,
at cost $ 623,889 $ 306,456 $ 23,295 $ - $ 953,640 $(505,476) $ 448,164
========== ========= ======== ========= ========= ========= =========
Total assets $ 593,736 $ 217,159 $ 21,269 $39,433 $ 871,597 $(172,350) $ 699,247
========== ========= ======== ========= ========= ========= =========
Capital Expenditures $ 2,196 $ 1,118 $ - $ - $ 3,314 $ (170) $ 3,144
========== ========= ======== ========= ========= ========= =========
11. PENDING TRANSACTIONS:
The Company has executed an agreement to purchase the Gallery at Market
East II in Philadelphia, Pennsylvania for $32 million. The purchase is expected
to close in the second quarter of 2004.
18
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following analysis of our consolidated financial condition and
results of operations should be read in conjunction with our consolidated
financial statements and the notes thereto included elsewhere in this report.
OVERVIEW
Pennsylvania Real Estate Investment Trust, a Pennsylvania business
trust founded in 1960 and one of the first equity REITs in the United States,
has a primary investment focus on retail shopping malls and power centers
located in the eastern United States. The retail properties have a total of
approximately 33.4 million square feet, of which we and our joint venture
partners own approximately 26.4 million square feet. Our portfolio currently
consists of 58 properties in 14 states and includes 40 shopping malls, 14 strip
and power centers and four industrial properties.
We hold our interests in our portfolio of properties through our
operating partnership, PREIT Associates, L.P. We are the sole general partner of
PREIT Associates and, as of March 31, 2004, held a 90.3% controlling interest in
PREIT Associates. We consolidate PREIT Associates for financial reporting
purposes. We hold our investments in nine of the 58 properties in our portfolio
through joint ventures with third parties. Eight of these joint venture
properties are classified as unconsolidated and one is consolidated. We hold a
non-controlling interest in each unconsolidated joint venture, and account for
them using the equity method of accounting. Under this accounting method, rather
than consolidating the results of the unconsolidated joint ventures with our
results, we instead record the earnings from the unconsolidated joint ventures
under the income statement caption entitled "Equity in income of partnerships
and joint ventures." Changes in our investment in these entities are recorded in
the balance sheet caption entitled "Investment in and advances to partnerships
and joint ventures, at equity" (in the case of deficit investment balances, such
amounts are recorded in "accrued expenses and other liabilities"). For further
information regarding our joint ventures, see Note 5 to the consolidated
financial statements.
We provide our management, leasing and development services through
PREIT Services, LLC, which develops and manages our wholly-owned properties, and
PREIT-RUBIN, Inc. ("PRI"), which develops and manages properties that we own
interests in through joint ventures with third parties and properties that are
owned by third parties in which we do not have an interest. Of our eight
unconsolidated joint venture properties, we manage one of the properties and
other parties - in some cases our joint venture partners - manage the remaining
seven properties. One of our key strategic long-term objectives is to obtain
managerial control of all of our assets. Although we intend to continue to
pursue this objective, we cannot assure you that we will be successful in the
future.
In 2003, we transformed our strategic focus to the retail sector by
completing the following transactions:
o merged with Crown American Realty Trust, which owned 26 shopping malls
and a 50% interest in Palmer Park Mall in Easton, Pennsylvania through
a pre-existing joint venture with us;
o acquired six shopping malls in the Philadelphia area from The Rouse
Company;
o acquired our partner's 70% share in Willow Grove Park, Willow Grove,
Pennsylvania;
o acquired a 6.08 acre parcel adjacent to Plymouth Meeting Mall,
Plymouth Meeting, Pennsylvania;
o disposed of our 19 property multifamily portfolio;
o issued 6,325,000 common shares through a public offering;
o completed a $500 million unsecured revolving Line of Credit; and
o completed mortgage financing transactions on Dartmouth Mall,
Dartmouth, Massachusetts, and Moorestown Mall, Moorestown, New Jersey.
Due to the acquisitions listed above, management has devoted, and
expects to continue to devote, significant attention to integrating the newly
acquired properties with our existing operations. Our merger with Crown poses
particular challenges because it requires the integration of two large and
complex real estate companies that formerly operated independently. We expect
these integration activities to impact our day-to-day operations and, unless our
integration efforts are successful, we may be unable to realize some of the
expected benefits of these acquisitions.
19
In addition, we have incurred, and expect to continue to incur,
significant expenses with respect to our integration activities for consulting,
compensation and other services. As a result of the completion of our merger
with Crown and other acquisition activities, we recognized expenses of $6.4
million through December 31, 2003, $0.1 million in the first quarter of 2004,
and we expect to incur additional expenses of approximately $1.0 million in the
remainder of 2004 as a result of the merger.
The transactions listed above expanded our retail portfolio and both
strengthened our position and increased our concentration in the Mid-Atlantic
region. In addition, in 2003, we decreased our debt to market capitalization
ratio, which, combined with our borrowing capacity under our new $500 million
unsecured revolving Line of Credit, positions us to pursue strategic
opportunities as they arise.
In 2004, we created a five-person Office of the Chairman that we
believe will enable the Company to maximize the talent and experience of our
management team to further support our growth initiatives.
In consultation with our outside counsel and tax advisor, we have
completed a review of our corporate structure and have strengthened our
compliance procedures pertaining to the creation or acquistion of new entities
and the documentation of transactions. Procedures applicable to outside counsel
also have been formalized. In addition, our Audit Committee has selected
independent outside advisors who are reviewing these procedures to assure their
adequacy for the future.
Our revenues consist primarily of fixed rental income and additional
rent in the form of expense reimbursements and percentage rents (rents that are
based on a percentage of our tenants' sales) derived from our income producing
retail properties. We receive income from our joint venture real estate
investments, in which we have equity interests that range from 40% to 60%. We
also receive income from PRI derived from the management and leasing services it
provides to properties owned by third parties and to properties owned by joint
ventures in which we have an interest.
Our net income increased by $4.0 million to $9.0 million for the three
months ended March 31, 2004 from $5.0 million for the three months ended March
31, 2003. The sale of a real estate parcel in the first quarter of 2003
generated a gain of $1.2 million. During the second quarter of 2004, three
claims were made against the Company by the purchaser of the 15 wholly-owned
multifamily properties, and the Company is in discussions with the purchaser
regarding a potential settlement. Our 2003 property acquisitions caused an
increase in our real estate revenues, with a corresponding increase in property
operating expenses, depreciation and amortization expense and interest expense
for the three months ended March 31, 2004 as compared to the three months ended
March 31, 2003. These increases were partially offset by decreases resulting
from the sale of our multifamily portfolio in the second and third quarters of
2003.
ACQUISITIONS, DISPOSITIONS AND DEVELOPMENT ACTIVITIES
The Company is actively involved in pursuing and evaluating a number of
individual property and portfolio acquisition opportunities. The Company records
its acquisitions based on estimates of fair value as determined by management,
based on information available and on assumptions of future performance. These
allocations are subject to revisions, in accordance with GAAP, during the
twelve-month periods following the closings of the respective acquisitions.
2004 Pending Acquisition
The Company has executed an agreement to purchase the Gallery at Market
East II in Philadelphia, Pennsylvania for $32 million. The purchase is expected
to close in the second quarter of 2004.
Crown Merger
On November 20, 2003, the Company announced the closing of the merger of
Crown American Realty Trust ("Crown") with and into the Company (the "Merger")
in accordance with an Agreement and Plan of Merger (the "Merger Agreement")
dated as of May 13, 2003, by and among the Company, PREIT Associates, L.P.,
Crown and Crown American Properties, L.P., a limited partnership of which Crown
was the sole general partner before the Merger ("CAP"). Through the Merger and
related transactions, the Company acquired 26 wholly-owned regional shopping
malls and the remaining 50% interest in Palmer Park Mall in Easton,
Pennsylvania.
20
In the Merger, each Crown common share automatically was converted into
the right to receive 0.3589 of a PREIT common share in a tax-free,
share-for-share transaction. Accordingly, the Company issued approximately
11,725,175 of its common shares to the former holders of Crown common shares. In
addition, the Company issued 2,475,000 11% non-convertible senior preferred
shares to the former holders of Crown preferred shares in connection with the
Merger. Also as part of the Merger, options to purchase a total of 30,000 Crown
common shares were replaced with options to purchase a total of 10,764 PREIT
common shares with a weighted average exercise price of $21.13 per share and
options to purchase a total of 421,100 units of limited partnership interest in
CAP were replaced with options to purchase a total of 151,087 PREIT common
shares with a weighted average exercise price of $17.23 per share. In addition,
a warrant to purchase 100,000 Crown common shares automatically was converted
into a replacement warrant to purchase 35,890 PREIT common shares at an exercise
price of $25.08 per share.
During the first quarter of 2004, the Company recorded additional basis
in the properties acquired in the Crown merger of $1.3 million primarily
relating to additional professional fees. This amount was allocated to the
properties in continuing operations on a pro rata basis based on amounts
originally allocated in 2003.
Immediately after the closing of the Merger, CAP contributed the
remaining interest in all of its assets - excluding a portion of its interest in
two partnerships - and substantially all of its liabilities to PREIT Associates
in exchange for 1,703,214 units of limited partnership in the Company's
operating partnership ("OP Units"). The interest in the two partnerships
retained by CAP is subject to a put-call arrangement described below under
"Commitments".
In connection with the Merger, the Company also assumed from Crown
approximately $443.8 million of a first mortgage loan that has a final maturity
date of September 10, 2025 and is secured by a portfolio of 15 properties at an
interest rate of 7.43% per annum. This rate remains in effect until September
10, 2008, the anticipated repayment date, at which time the loan can be prepaid
without penalty. If not repaid at that time, the interest rate thereafter will
be equal to the greater of (i) 10.43% per annum or (ii) the Treasury Rate plus
3.0% per annum. The Company also assumed an additional $152.9 million in
mortgages on certain properties with interest rates between 3.12% and 7.61% per
annum, and paid off all $154.9 million of outstanding indebtedness under a Crown
line of credit facility with borrowings under a new credit facility described
below under "Liquidity and Capital Resources - Credit Facility."
Six of the properties acquired in connection with the Merger are
considered to be non-strategic, and are currently being marketed and held-for-
sale (the "Non-Core Properties"). The Non-Core Properties are: Bradley Square
Mall in Cleveland, Tennessee; Martinsburg Mall in Martinsburg, West Virginia;
Mount Berry Square Mall in Rome, Georgia; Schuylkill Mall in Frackville,
Pennsylvania; Shenango Valley Mall in Sharon, Pennsylvania; and West Manchester
Mall in York, Pennsylvania. During the first quarter of 2004, the Company
reallocated $20.0 million of the purchase price that was originally allocated to
the Non-Core Properties. This amount was reallocated among the 20 properties
acquired in the Crown merger that are classified in continuing operations.
Additional 2004 and 2003 Acquisitions
In March 2004, the Company acquired a 25 acre parcel of land in
Florence, South Carolina from the General Electric Company. The purchase price
for the parcel was $3.8 million in cash, including related closing costs. The
parcel, which is zoned for commercial development, is situated across the street
from Magnolia Mall and The Commons at Magnolia, both wholly-owned PREIT
properties.
In September 2003, the Company completed its acquisition of Willow
Grove Park in Willow Grove, Pennsylvania. The Company entered into a joint
venture with Pennsylvania State Employee Retirement System ("PaSERS") in
February 2000 to acquire Willow Grove Park. The Company's interest was 0.01% at
the time it entered the partnership that owns the property. In November 2001,
the Company increased its ownership in the partnership that owns the property to
30%. Effective September 2003, the Company acquired the remaining 70%
partnership interest from PaSERS. The purchase price of the 70% partnership
interest was $45.5 million in cash, which the Company paid using a portion of
the net proceeds of the Company's August 2003 equity offering. As of the date of
the acquisition of the 70% interest, the partnership had $109.7 million in debt
($76.9 million of which is attributable to the acquisition of the remaining 70%
interest) with an interest rate of 8.39% maturing in March 2006.
21
Also in September 2003, the Company purchased a 6.08 acre parcel and a
vacant 160,000 square foot two story building adjacent to the Plymouth Meeting
Mall in Plymouth Meeting, Pennsylvania for $15.8 million, which included $13.5
million in cash paid to IKEA from the Company's August 2003 equity offering and
approximately 72,000 OP Units paid to the holder of an option to acquire the
parcel.
In April 2003, the Company acquired Moorestown Mall, The Gallery at
Market East and Exton Square Mall from affiliates of The Rouse Company ("Rouse")
and, in June 2003, the Company acquired Echelon Mall and Plymouth Meeting Mall
from Rouse. In June 2003, the Company also acquired the ground lessor's interest
in Plymouth Meeting Mall from the Teachers Insurance and Annuity Association
("TIAA"). In addition, in April 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 a 49.9% ownership
interest in New Castle Associates and, through subsequent contributions to New
Castle Associates, increased its ownership interest to approximately 73%. The
Company also obtained an option to acquire the remaining ownership interest in
New Castle Associates as described below under "Commitments." The Company
exercised this option in May 2004 and expects to close the acquisition by the
end of May 2004. 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 $276.6 million
in non-recourse mortgage debt and the issuance of approximately $35.0 million in
OP Units. Certain former partners of New Castle Associates not affiliated with
the Company exercised their special right to redeem for cash an aggregate of
261,349 OP Units issued to such partners at closing, and the Company paid to
those partners an aggregate amount of approximately $7.7 million. In addition,
the Company granted registration rights to the partners of New Castle Associates
with respect to the shares underlying the OP Units issued or to be issued to
them, other than those redeemed for cash following the closing.
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 approximate 73%
ownership, plus its minority partners' investment, based on its approximate 27%
ownership, at their historical cost.
In connection with the sale of Christiana Mall by New Castle
Associates to Rouse, PRI received a brokerage fee of $2.0 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. PRI also entered into a new
management and leasing agreement with New Castle Associates for Cherry Hill
Mall, which provides for a fee of 5.25% of all rents and other revenues received
by New Castle Associates from the Cherry Hill Mall.
Dispositions
The Company disposed of its entire portfolio of multifamily
properties, which consisted of 15 wholly-owned properties and four properties in
which the Company had a 50% joint venture interest, during the second and third
quarters of 2003. During May and July 2003, the Company sold its 15 wholly-owned
multifamily properties to MPM Acquisition Corp., an affiliate of Morgan
Properties, Ltd., for a total sale price of $392.1 million (approximately $185.3
million of which consisted of assumed indebtedness). The sales of the Company's
wholly-owned multifamily properties resulted in a gain of $178.1 million. In
2004, the Company recorded a $0.6 million reduction to the gain on the sale of
the portfolio as a result of claims made against the Company by the purchaser of
the properties (see Note 9 "Legal Actions"). The results of operations of these
properties and the resulting gains on sales are included in discontinued
operations.
The Company sold its 50% interest in the four joint venture
multifamily properties to its respective joint ventures partners. Cambridge Hall
Apartments in West Chester, Pennsylvania was sold in May 2003 for $6.7 million,
inclusive of $2.5 million in assumed indebtedness. A gain of $4.4 million was
recorded on the sale. Countrywood Apartments in Tampa, Florida was sold in May
2003 for $9.1 million, inclusive of $7.3 million in assumed indebtedness. A gain
of $4.5 million was recorded on the sale. Fox Run Apartments in Warminster,
Pennsylvania was sold in September 2003 for $5.0 million, inclusive of $2.7
million in assumed indebtedness. A gain of $3.9 million was recorded on the
sale. Will-O-Hill Apartments in Reading, Pennsylvania was sold in September 2003
for $3.6 million, inclusive of $0.8 million in assumed indebtedness. A gain of
$2.2 million was recorded on the sale. The results of operations of these equity
method investments and the resultant gains on sales are presented in continuing
operations for all periods presented.
22
A substantial portion of the gain on the sale of the wholly-owned
multifamily properties met the requirements for a tax deferred exchange with the
properties acquired from Rouse.
In January 2003, the Company sold a parcel of land located at Crest
Plaza Shopping Center located in Allentown, Pennsylvania for $3.2 million. The
Company recognized a gain of $1.2 million in the first three months of 2003 as a
result of this sale.
Development, Expansions and Renovations
The Company is involved in a number of development and redevelopment
projects that may require funding by the Company. 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.
OFF BALANCE SHEET ARRANGEMENTS
The Company has no material off-balance sheet transactions other than
the unconsolidated joint ventures described in Note 5 to the consolidated
financial statements and in the "Overview" section above. No officer or employee
of the Company benefits from or has benefited from any off-balance sheet
transactions with or involving the Company.
In the course of its business, the Company has guaranteed certain
indebtedness of others as follows:
o The Company and its subsidiaries have guaranteed the operating
partnership's $500 million unsecured credit facility, which had $182.0
million outstanding at March 31, 2004.
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.
23
o In connection with the Company's merger with Crown, the Company
entered into a tax protection agreement with Mark E. Pasquerilla and
entities affiliated with Mr. Pasquerilla (the "Pasquerilla Group").
Under this tax protection agreement, the Company agreed not to dispose
of certain protected properties acquired in the merger in a taxable
transaction until November 20, 2011 or, if earlier, until the
Pasquerilla Group collectively owns less that 25% of the aggregate of
the shares and OP Units that they acquired in the merger. If the
Company violates the tax protection agreement during the first five
years of the protection period, it would owe as damages the sum of the
hypothetical tax owed by the Pasquerilla Group, plus an amount
intended to make the Pasquerilla Group whole for taxes that may be due
upon receipt of those damages. From the end of the first five years
through the end of the tax protection period, damages are intended to
compensate the affected parties for interest expense incurred on
amounts borrowed to pay the taxes incurred on the prohibited sale. If
the Company were to sell properties in violation of the tax protection
agreement, the amounts that the Company would be required to pay to
the Pasquerilla Group could be substantial.
The Company did not enter into any other guarantees in connection with
its merger, acquisition or disposal activities in 2004 and 2003.
RELATED PARTY TRANSACTIONS
PRI provides management, leasing and development services for 13
properties in which certain officers of the Company have ownership interests,
including Ronald Rubin, the Company's chairman and chief executive officer. The
Company believes that the terms of the management agreements for these services
are no less favorable to the Company than its agreements with non-affiliates.
The Company 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 currently is negotiating a significant expansion of this
office space, which is expected to significantly increase the annual payments
made to Bellevue Associates.
The Company's 1997 acquisition of The Rubin Organization entitled the
former affiliates of The Rubin Organization (including Ronald Rubin, George F.
Rubin and several of the Company's other executive officers, the "TRO
Affiliates") to receive up to 800,000 additional units of limited partnership
interest in the Operating Partnership based on the Company's funds from
operations for the five-year period beginning September 30, 1997. All 665,000
units attributable to the period beginning September 30, 1997 and ending
December 31, 2001 were issued to the TRO Affiliates. The determination regarding
the remaining 135,000 units attributable to the period from January 1, 2002
through September 30, 2002 was deferred until March of 2004. In March of 2004, a
special committee of disinterested members of the Company's board of trustees
(the "Special TRO Committee") determined that 76,622 of these 135,000 units
should be issued. Because the issuance of these units was deferred until March
of 2004, the Company also paid to the TRO Affiliates $0.3 million in cash in
respect of distributions that would have been paid on the units, plus interest.
The fair market value of the units and the portion of the cash payment that
represented distributions were recorded as a $3.0 million increase to goodwill.
The portion of the cash payment that represented interest of $0.1 million was
recorded as interest expense.
24
The TRO Affiliates also were eligible to receive additional units in
respect of the Company's payment for certain development and predevelopment
properties acquired as part of the Company's acquisition of The Rubin
Organization. In December of 2003, in exchange for the remaining 11% interest in
a parcel related to Northeast Tower Center - one of the development properties -
Ronald Rubin received 4,552 units and George F. Rubin received 1,738 units. The
fair market value of the units was recorded as a $0.1 million increase to
investment in real estate. In March of 2004, the Special TRO Committee
determined that 37,549 units should be issued to the TRO Affiliates in respect
of the development properties. Because the issuance of these units was deferred
until March of 2004, the Company also paid to the TRO Affiliates $0.4 million in
cash in respect of distributions that would have been paid on the units from the
completion date of the applicable property through March 25, 2004, plus
interest. The fair market value of the units and the portion of the cash payment
that represented distributions were recorded as a $1.7 million increase to
investment in real estate. The portion of the cash payment that represented
interest of $0.1 million was recorded as interest expense. Also, in March of
2004, the Special TRO Committee determined that 165,739 units were issuable to
the TRO Affiliates in respect of the predevelopment properties. Because the
issuance of these units was deferred until March of 2004, the Company also paid
to the TRO Affiliates $1.6 million in cash in respect of distributions that
would have been paid on the units from the completion date of the applicable
property through March 25, 2004, plus interest. The fair market value of the
units and the portion of the cash payment that represented distributions were
recorded as a $4.6 million increase to investment in real estate and a $2.9
million increase to investment in partnerships and joint ventures. The portion
of the cash payment that represented interest of $0.2 million was recorded as
interest expense.
In connection with the Special TRO Committee's determinations to issue
the units and make the cash payments in March of 2004 as described above, the
following former TRO affiliates who are officers of the Company received the
following consideration: (1) Ronald Rubin received 104,282 units and $819,561 in
cash; (2) George F. Rubin received 46,336 units and $362,535 in cash; (3) Joseph
F. Coradino received 19,133 units and $150,105 in cash; (4) Edward A. Glickman
received 11,272 units and $87,792 in cash; (5) Douglas S. Grayson received 5,529
units and $42,920 in cash; and (6) David J. Bryant received 1,277 units and
$59,772 in cash ($50,000 of which was allocated to Mr. Bryant by the TRO
Affiliates for his services on behalf of the TRO Affiliates in connection with
the determination of the final payments). The TRO Affiliates have agreed in
writing that they are not entitled to any additional consideration in respect of
the Company's acquisition of The Rubin Organization.
Ronald Rubin and George Rubin, through their ownership interest in New
Castle Associates, also were parties to the Rouse transaction described in
"Acquisitions, Dispositions and Development Activities - Additional 2004 and
2003 Acquisitions." The transaction with New Castle Associates was approved by a
special committee of independent members of the Company's board of trustees.
Mark E. Pasquerilla, who was elected as a trustee of the Company
following the Crown merger, had a substantial ownership interest in Crown and
its operating partnership and, as a consequence of the merger, directly or
indirectly received a significant number of OP Units and shares of the Company.
In addition, Mr. Pasquerilla is a party to several continuing arrangements with
the Company, including the right to receive additional consideration related to
the merger as described in "Commitments," as well as the following:
o a lease with and contract for information technology support services
to the Company by an entity controlled by Mr. Pasquerilla with respect
to space in Crown's former headquarters in connection with the
Company's post-closing transition activities, and continuing
negotiations for the sale of certain personal property in Crown's
former headquarters by the Company to an entity controlled by Mr.
Pasquerilla;
o the tax protection agreement described above in "Off Balance Sheet
Arrangements";
o agreements by Mr. Pasquerilla not to acquire additional shares of the
Company or to seek to acquire control of the Company within specified
time periods and to forfeit certain benefits under the tax protection
agreement upon selling shares of the Company within specified time
periods or in excess of specified amounts; and
o a registration rights agreement covering the shares acquired and to be
acquired by Mr. Pasquerilla in connection with the merger, an
agreement by Mr. Pasquerilla not to compete with the Company for a
period of time following the merger and an agreement to allow Mr.
Pasquerilla and his affiliates to use certain intellectual property
and domain names associated with the Crown name and logo.
CRITICAL ACCOUNTING POLICIES
Pursuant to the Securities and Exchange Commission ("SEC") disclosure
guidance for "Critical Accounting Policies," the SEC defines Critical Accounting
Policies as those that require the application of management's most difficult,
subjective, or complex judgments, often because of the need to make estimates
about the effect of matters that are inherently uncertain and that may change in
subsequent periods. 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 and in the Company's Form
10-K for the year ended December 31, 2003.
25
Real Estate Acquisitions
The Company accounts for its property acquisitions under the
provisions of Statement of Financial Accounting Standards No. 141, "Business
Combinations" ("SFAS No. 141"). Pursuant to SFAS No. 141, the purchase price of
a property is allocated to the property's assets based on management's estimates
of their fair value based on information available and on assumptions of future
performance. These allocations are subject to revisions, in accordance with
GAAP, during the twelve-month periods following the closings of the respective
acquisitions. The determination of the fair value of intangible assets requires
significant estimates by management and considers many factors involving the
Company's expectations about the underlying property and the general market
conditions in which the property operates. The judgment and subjectivity
inherent in such assumptions can have a significant impact on the magnitude of
the intangible assets that the Company records.
SFAS No. 141 provides guidance on allocating a portion of the purchase
price of a property to intangible assets. The Company's methodology for this
allocation includes estimating an "as-if vacant" fair value of the physical
property, which is allocated to land, building and improvements. The difference
between the purchase price and the "as-if vacant" fair value is allocated to
intangible assets. There are three categories of intangible assets to be
considered, (i) value of in-place leases, (ii) above- below-market value of
in-place leases and (iii) customer relationship value.
The value of in-place leases is estimated based on the value
associated with the costs avoided in originating leases comparable to the
acquired in-place leases as well as the value associated with lost rental
revenue during the assumed lease-up period. The value of in-place leases is
amortized as real estate amortization over the estimated weighted-average
remaining lease lives. The Company generally uses a weighted-average life of
seven years for this purpose.
Above-market and below-market in-place lease values for acquired
properties are recorded based on the present value of the difference between (i)
the contractual amounts to be paid pursuant to the in-place leases and (ii)
management's estimates of fair market lease rates for the comparable in-place
leases, measured over a period equal to the remaining non-cancelable term of the
lease. The value of above-market lease values is amortized as a reduction of
rental income over the remaining terms of the respective leases. The value of
below-market lease values is amortized as an increase to rental income over the
remaining terms of the respective leases including renewal options.
The Company allocates no value to customer relationship intangibles if
the Company has pre-existing business relationships with the major retailers in
the acquired property because the customer relationships associated with the
properties acquired provide no incremental value over the Company's existing
relationships.
The following table presents the Company's intangible assets and liabilities as
of March 31, 2004 (in thousands of dollars):
Real Estate Held Non-Core
for Investment Properties(4) Total
----------------- ------------- --------
Value of in-place lease intangibles $ 147,318 (1) $ 34,902 $ 182,220
Above-market lease intangibles 12,590 (2) 821 13,411
----------- --------- ---------
Sub-total 159,908 35,723 195,631
Goodwill 12,086 - 12,086
----------- --------- ---------
Total intangible assets $ 171,994 $ 35,723 $ 207,717
=========== ========= =========
Below-market lease intangibles $ (12,266)(3) $ (743) $ (13,009)
=========== ========= =========
26
(1) Includes $116.4 million related to properties acquired in connection with
the Crown merger, $19.8 million related to properties acquired in
connection with the acquisitions from The Rouse Company and $11.1 million
related to other acquisitions.
(2) Includes $7.6 million related to properties acquired in connection with the
Crown merger, $4.2 million related to properties acquired in connection
with the acquisitions from The Rouse Company and $0.8 million related to
other acquisitions.
(3) Includes $8.1 million related to properties acquired in connection with the
Crown merger, $3.2 million related to properties acquired in connection
with the acquisitions from the Rouse Company and $0.9 million related to
other acquisitions.
(4) Represents amounts recorded related to the acquisition of the Non-Core
Properties in connection with the Crown merger.
Amortization expense recorded during the quarters ended March 31, 2004
and 2003 for the value of in-place leases totaled $4.7 million and $0.1 million,
respectively. The amortization of above/below market leases resulted in a net
reduction in rental income of $0.2 million in the first quarter of 2004.
The Company's intangible assets will amortize in the next five years
and thereafter as follows (in thousands of dollars):
In-Place Above/ (Below)
Lease Intangibles(1) Market Leases
-------------------- --------------
Remainder of 2004 $ 18,251 $ 545
2005 23,943 760
2006 22,429 468
2007 21,925 387
2008 21,925 448
2009 and thereafter 38,845 (2,206)
-------- -------
Total $147,318 $ 402
======== =======
(1) In accordance with SFAS No.144, in-place lease intangibles of properties
held-for-sale are not amortized.
LIQUIDITY AND CAPITAL RESOURCES
Equity Offering
In August 2003, the Company issued 6,325,000 common shares in a public
offering at $29.75 per share. The Company received net proceeds from the
offering of approximately $183.9 million after deducting payment of the
underwriting discount of $0.25 per share and offering expenses. The Company used
approximately $45.5 million of the net proceeds for the Willow Grove Park
acquisition; approximately $13.5 million for the IKEA acquisition; $94.9 million
to repay amounts outstanding under the Company's line of credit; and the
remainder for working capital purposes.
Credit Facility
On November 20, 2003, the Company completed the replacement of its
$200 million secured line of credit with a $500 million unsecured revolving line
of credit (the "Credit Facility") with an option to increase the Credit Facility
to $650 million under prescribed conditions. The Credit Facility bears interest
at a rate between 1.5% and 2.5% per annum over LIBOR based on the Company's
leverage. The availability of funds under the Credit Facility is subject to the
Company's compliance with financial and other covenants and agreements, some of
which are described below. Completion of the Credit Facility was timely as the
previous revolving line of credit was set to expire in December 2003. It has
positioned the Company with substantial liquidity to fund the Company's business
plan and to pursue strategic opportunities as they arise. The Credit Facility
has a term of three years with an additional one year extension provided that
there is no event of default at that time. At March 31, 2004, $182.0 million was
outstanding under the Credit Facility.
27
The Credit Facility contains affirmative and negative covenants
customarily found in facilities of this type, as well as requirements that the
Company maintain, on a consolidated basis (all capitalized terms used in this
paragraph shall have the meanings ascribed to such terms in the Credit
Agreement): (1) a minimum Tangible Net Worth of not less than 80% of the
Tangible Net Worth of the Company as of December 31, 2003 plus 75% of the Net
Proceeds of all Equity Issuances effected at any time after December 31, 2003 by
the Company or any of its Subsidiaries minus the carrying value attributable to
any Preferred Stock of the Company or any Subsidiary redeemed after December 31,
2003; (2) a maximum ratio of Total Liabilities to Gross Asset Value of 0.65:1;
(3) a minimum ratio of EBITDA to Interest Expense of 1.90:1; (4) a minimum ratio
of Adjusted EBITDA to Fixed Charges of 1.50:1; (5) maximum Investments in
unimproved real estate not in excess of 5.0% of Gross Asset Value; (6) maximum
Investments in Persons other than Subsidiaries and Unconsolidated Affiliates not
in excess of 10.0% of Gross Asset Value; (7) maximum Investments in Indebtedness
secured by Mortgages in favor of the Company or any Subsidiary, not in excess of
5.0% of Gross Asset Value; (8) maximum Investments in Subsidiaries that are not
Wholly-owned Subsidiaries and Investments in Unconsolidated Affiliates not in
excess of 10.0% of Gross Asset Value; (9) maximum Investments subject to the
limitations in the preceding clauses (5) through (8) not in excess of 15.0% of
Gross Asset Value; (10) a maximum Gross Asset Value attributable to any one
Property not in excess of 15.0% of Gross Asset Value; (11) a maximum Total
Budgeted Cost Until Stabilization for all properties under development not in
excess of 10.0% of Gross Asset Value; (12) an aggregate amount of projected
rentable square footage of all development properties subject to binding leases
of not less than 50% of the aggregate amount of projected rentable square
footage of all such development properties; (13) a maximum Floating Rate
Indebtedness in an aggregate outstanding principal amount not in excess of
one-third of all Indebtedness of the Company, its Subsidiaries and its
Unconsolidated Affiliates; (14) a maximum ratio of Secured Indebtedness of the
Company, its Subsidiaries and its Unconsolidated Affiliates to Gross Asset Value
of 0.60:1; (15) a maximum ratio of recourse Secured Indebtedness of the Borrower
or Guarantors to Gross Asset Value of 0.25:1; and (16) a minimum ratio of EBITDA
to Indebtedness of 0.130:1. As of March 31, 2004, the Company was in compliance
with all of these debt covenants.
Mortgage Financing Activity
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 fund a portion of the
purchase price for Plymouth Meeting Mall in Plymouth Meeting, Pennsylvania and
Echelon Mall in Voorhees, New Jersey.
In May 2003, the Company entered into a mortgage note payable secured
by Dartmouth Mall, in Dartmouth, Massachusetts. The $70.0 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 fund a portion of the
purchase price for Plymouth Meeting Mall and Echelon Mall.
Acquisition Credit Facility
The Company financed a significant part 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, and the revolving line of credit expired by its
terms on October 27, 2003. The fees paid to Wells Fargo for the term loan and
the revolving line of credit were $1.3 million and $0.2 million, respectively.
28
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. In addition, the Company believes that net cash provided by
operations will be sufficient to permit the Company to pay the $13.6 million of
annual dividends payable on the preferred shares issued in connection with the
Crown merger. The Company also believes that the foregoing sources of liquidity
will be sufficient to fund its short-term liquidity needs for the foreseeable
future, including capital expenditures, tenant improvements and leasing
commissions. The Company expects to have capital expenditures relating to
leasing and property improvements in 2004 of approximately $25 million. The
following are some of the risks that could impact the Company's cash flows and
require the funding of future distributions, capital expenditures, tenant
improvements and/or leasing commissions with sources other than operating cash
flows:
o unexpected changes in operations that could result from the
integration of the properties acquired in 2003;
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. 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 following are some of the potential impediments to accessing
additional funds under the Credit Facility:
o constraining leverage covenants under the Credit Facility;
o increased interest rates affecting coverage ratios; and
o reduction in the Company's consolidated earnings before interest,
taxes, depreciation and amortization "EBITDA" affecting coverage
ratios.
At March 31, 2004 the Company had $182.0 million outstanding under its
Credit Facility. The Company had pledged $1.2 million under the Credit Facility
as collateral for two letters of credit. The unused portion of the Credit
Facility available to the Company was $316.8 million as of March 31, 2004.
In December 2003, the Company announced that the SEC had declared
effective a $500 million universal shelf registration statement. The Company may
use the shelf registration to offer and sell shares of beneficial interest,
preferred shares and various types of debt securities, among other types of
securities, to the public. However, the Company may be unable to issue
securities under the shelf registration statement, or otherwise, on terms that
are favorable to the Company, if at all.
Mortgage Notes
Fixed-rate mortgage notes payable, which are secured by 29 of the
Company's wholly-owned properties, are due in installments over various terms
extending to the year 2013 with interest at rates ranging from 5.0% to 10.6 %
with a weighted average interest rate of 7.28% at March 31, 2004. Mortgage notes
payable for properties classified as discontinued operations are accounted for
in liabilities held-for-sale on the consolidated balance sheet.
One property is secured by a variable rate mortgage note payable.
During the first quarter of 2004, the note had a daily weighted average interest
rate of 3.11%. This note matures in 2005.
29
RESULTS OF OPERATIONS
Three Months Ended March 31, 2004 and 2003
Overview
The results of operations for the three months ended March 31, 2004
and 2003 show significant fluctuations due primarily to the acquisition and
disposition of real estate properties during 2003. In 2003, we acquired 32
retail properties plus the remaining joint venture interest in two other
properties. Also in 2003, we disposed of our multifamily portfolio, consisting
of 15 wholly-owned properties and joint venture interests in four other
properties. Accordingly, the increase in the Company's results for the three
months ended March 31, 2004 as compared to the three months ended March 31, 2003
are not necessarily indicative of expected future increases in results. The
Company's results of operations include property operating results starting on
the date on which each property was acquired.
The amounts reflected as income from continuing operations in the
table presented below reflect the Company's wholly-owned and consolidated joint
venture retail and industrial properties, with the exception of the retail
properties that meet the classification of discontinued operations. The results
of operations for the Non-Core Properties are included in discontinued
operations for the three months ended March 31, 2004, and the Company's
wholly-owned multifamily properties' operations are included in discontinued
operations for the three months ended March 31, 2003. The Company's
unconsolidated joint ventures are presented under the equity method of
accounting in equity in income of partnerships and joint ventures and include
the four multifamily joint ventures that the Company sold in 2003.
The following information summarizes our results of operations for the
three months ended March 31, 2004 and 2003(in thousands of dollars).
Three Months Ended March 31, % Change
2004 2003 2003 to 2004
-------------------------------------------------------
Real estate revenues $94,005 $16,692 463%
Property operating expenses (36,031) (4,899) 635%
Management company revenue 2,458 2,181 13%
Interest and other income 254 142 79%
General and administrative expenses (10,811) (6,326) 71%
Interest expense (17,807) (4,046) 340%
Depreciation and amortization (25,344) (3,513) 621%
Equity in income of partnerships and joint
ventures 1,765 1,778 (1)%
Gains on sales of interests in real estate - 1,191 (100)%
Minority interest in properties (419) - n/a
Minority interest in Operating Partnership (784) (287) 173%
---------- ------- -------
Income from continuing operations 7,286 2,913 150%
Discontinued operations 1,677 2,064 (19)%
---------- ------- -------
Net income $8,963 $4,977 80%
========== ======= =======
30
Real Estate Revenues
Real estate revenues increased by $77.3 million or 463% in the first
three months of 2004 as compared to the first three months of 2003 primarily due
to property acquisitions. Revenues related to the properties acquired from The
Rouse Company, which were acquired after the completion of the first quarter of
2003, provided $26.3 million of real estate revenues in the first three months
of 2004. In addition, the properties acquired in the Crown merger, which were
acquired after the completion of the first three months of 2003, provided $44.6
million of real estate revenues. Willow Grove Park provided $5.7 million of real
estate revenues in the first three months of 2004. The Company acquired its
joint venture partner's interest in Willow Grove Park after the completion of
the first quarter of 2003. Real estate revenues from properties that were
acquired by the Company prior to January 1, 2003 increased by $0.7 million due
to increases of $0.6 million and $0.3 million in base rents and reimbursables,
respectively, offset by a $0.2 million decrease in lease termination fees.
Property Operating Expenses
Property operating expenses increased by $31.1 million or 635% in the
first three months of 2004 as compared to the first three months of 2003
primarily due to property acquisitions. Property operating expenses related to
the properties acquired from The Rouse Company were $12.9 million in the first
three months of 2004. Property operating expenses related to the properties
acquired in the Crown merger were $16.0 million in the first three months of
2004. Property operating expenses related to Willow Grove Park were $1.9 million
in the first three months of 2004. Property operating expenses for properties
that were acquired by the Company prior to January 1, 2003 increased in the
first three months of 2004 by $0.3 million primarily due to an increase in
repairs and maintenance expense.
General and Administrative Expenses
In the first three months of 2004, general and administrative expenses
increased by $4.5 million or 71% compared to the first three months of 2003.
Corporate payroll and related expenses increased by $3.1 million, which included
$0.8 million from transitional employees related to the Company's merger and
acquisition activities, $0.5 million related to an executive long-term incentive
plan, and $1.8 million due to annual salary increases and additional employees.
Other general and administrative expenses increased by $1.4 million, which
included merger expenses of $0.1 million, transitional office expenses of $0.4
million, increases in legal and accounting fees of $0.2 million, increases in
shareholder relations costs of $0.1 million, and increases in benefits and
payroll taxes of $0.6 million.
Interest Expense
Interest expense increased by $13.8 million in the first three months
of 2004 as compared to the first three months of 2003. The Company assumed new
mortgages in connection with the merger with Crown, the purchases of Cherry Hill
Mall and Exton Square Mall, and inherited a mortgage related to Willow Grove
Park in connection with the Company's acquisition of its former partner's
interest in that property, resulting in additional mortgage interest expense of
$12.1 million in the first three months of 2004. The Company engaged in mortgage
financing transactions at Moorestown Mall and Dartmouth Mall, resulting in
increased interest expenses of $1.7 million in 2004.
Amortization of debt premiums was $4.6 million and $0.1 million in the
first three months of 2004 and 2003, respectively. The increase in 2004
amortization expense was due to property acquisitions in which the Company
assumed mortgage debt with above-market interest rates. The Company records debt
premiums in order to recognize the fair value of debt assumed in connection with
property acquisitions. Debt premiums are amortized over the remaining term of
the debt instrument with which they are associated, and result in a non-cash
decrease in interest expense.
31
Depreciation and Amortization
Depreciation and amortization expense increased by $21.8 million in
the first three months of 2004 as compared to the first three months of 2003
primarily due to $21.0 million related to new properties (including $4.1 million
relating to amortization of value of in-place leases). Depreciation and
amortization expense from properties that were acquired by the Company prior to
January 1, 2003 increased by $0.8 million primarily due to a higher asset base
resulting from capital improvements to properties.
Gains on Sales of Interests in Real Estate
In the first three months of 2003, we sold a land parcel at the Crest
Plaza Shopping Center in Allentown, Pennsylvania for a gain of $1.2 million. We
had no sales of interests in real estate in the first three months of 2004.
Discontinued Operations
Property operating results, gains on sales of discontinued operations
and related minority interest for the properties in discontinued operations for
the periods presented were as follows (in thousands of dollars):
For the Three Months ended
March 31,
2004 2003
---- ----
Property operating results of
wholly-owned multifamily properties $ - $ 2,300
Property operating results of
Non-Core Properties 2,415 -
-------- --------
2,415 2,300
Adjustment to gains on sales of
discontinued operations (550) -
Minority interest in properties (8) -
Minority interest in Operating Partnership (180) (236)
-------- --------
Total $ 1,677 $ 2,064
========= ========
The decrease in multifamily operating results in the first three months
of 2004 was due to the sale of the wholly-owned multifamily properties portfolio
in mid-2003. The Non-Core Properties were acquired in the Crown merger in
November 2003.
NET OPERATING INCOME
Net operating income ("NOI") 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 property investment, and provides a method of
comparing property performance 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 on sales of interests in real estate.
32
The following table presents net operating income results for the
first three months of 2004 and 2003. The results are presented using the
"proportionate consolidation method," which presents the Company's share of its
joint venture investments. Retail Same Store results represent property
operating results for retail properties that the Company owned for the full
periods presented. Same store results exclude the results of properties that
have undergone or were undergoing redevelopment during the applicable periods,
as well as properties acquired or disposed of during the periods presented (in
thousands of dollars).
For the For the
Three Months Ended Three Months Ended
March 31, 2004 March 31, 2003 % Change
-------------- -------------- --------
Retail Non Retail Non Retail
Same Same Same Same Same
Store Store Total Store Store Total Store Total
------- ----- -------- ------ ------- -------- ------- -----
Real estate revenues $21,372 $ 79,821 $101,193 $ 20,971 $ 6,270 $ 27,241 2% 271%
Property operating
expenses (6,341) (32,404) (38,745) (6,205) (2,757) (8,962) 2% 332%
-------- -------- --------- -------- -------- --------
$15,031 $ 47,417 $ 62,448 $ 14,766 $ 3,513 $ 18,279 2% 242%
======== ======== ======== ======== ======== ========
The increases in total real estate revenues, real estate operating
expenses and net operating income are primarily due to the property acquisitions
described above. Retail Same Store revenues increased by $0.4 million. Increases
in Same Store base rents and percentage rents were partially offset by decreases
in straight-line rents and lease termination fees. Retail Same Store expenses
increased by $0.1 million. This increase was due to higher bad debt expense,
partially offset by decreases in other operating expenses and real estate taxes.
The following information is provided to reconcile net income to property level
net operating income (in thousands of dollars):
For the three months ended March 31,
2004 2003
----------- ---------
Net income $ 8,963 $ 4,977
Minority interest in Operating Partnership 784 287
Equity in income from partnerships and joint ventures (1,765) (1,778)
Company's proportionate share of partnerships and
joint ventures net operating income 4,893 6,486
Gains on sales of interests in real estate - (1,191)
Income from discontinued operations (1,677) (2,064)
Depreciation and amortization 25,344 3,513
Interest expense 17,807 4,046
Interest and other income (254) (142)
Management company revenue (2,458) (2,181)
Total general and administrative expenses 10,811 6,326
----------- ---------
Net operating income $ 62,448 $ 18,279
=========== =========
FUNDS FROM OPERATIONS
The National Association of Real Estate Investment Trusts ("NAREIT")
defines Funds From Operations ("FFO") as income before gains (losses) on sales
of property and extraordinary items (computed in accordance with GAAP); plus
real estate depreciation; plus or minus adjustments for unconsolidated
partnership and joint ventures to reflect funds from operations on the same
basis. The Company computes FFO in accordance with standards established by
NAREIT, which may not be comparable to FFO reported by other REITs that do not
define the term in accordance with the current NAREIT definition, or that
interpret the current NAREIT definition differently than the Company. FFO does
not represent cash generated from operating activities in accordance with GAAP
and should not be considered 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 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 non-recurring items, gains
on sales of real estate and depreciation and amortization of real estate.
33
FFO increased 190% to $33.4 million for the first three months of
2004, as compared to $11.5 million in the first three months of 2003. The
increase was primarily due to operating results attributable to the properties
acquired in 2003.
The following information is provided to reconcile net income to FFO,
and to show the items included in our FFO for the periods presented (in
thousands of dollars, except per share amounts):
Three months ended March 31,
per share and per share
2004 OP Unit 2003 and OP Unit
--------- --------------- --------- ----------------
Net income $ 8,963 $0.23 $ 4,977 $0.27
Minority interest in Operating Partnership 784 0.02 287 0.02
Minority interest in Operating Partnership - discontinued
operations 180 0.00 236 0.01
Dividends on preferred shares (3,403) (0.09) - -
Gains on sales of interests in real estate - - (1,191) (0.07)
Adjustment to gains on dispositions of discontinued
operations 550 0.01 - -
Depreciation and amortization:
Wholly owned & consolidated partnership, net (a) 25,279 0.65 3,448 0.19
Unconsolidated partnerships & joint ventures (a) 1,078 0.03 1,468 0.08
Discontinued operations - - 2,309 0.13
------- ----- ------- -----
FUNDS FROM OPERATIONS (b) $33,431 $0.85 $11,534 $0.63
======= ===== ======= =====
Weighted average number of shares outstanding 35,403 16,545
Weighted average effect of full conversion of OP units 3,836 1,763
------- -------
Total weighted average shares outstanding, including OP units 39,239 18,308
------- -------
(a) Excludes depreciation of non-real estate assets, amortization
of deferred financing costs and discontinued operations.
(b) Includes the non-cash effect of straight-line rents of
$1.3 million and $0.4 million for the first three months of
2004 and 2003, respectively.
34
CASH FLOWS
Operating Activities: Net cash provided by operating activities
totaled $29.9 million for the first three months of 2004, compared to $0.7
million provided in the first three months of 2003. Net cash provided by
operating activities in 2004 was impacted by the increase in real estate
revenues of $77.8 million from the acquisition of the Rouse and Crown
properties. These revenues were partially offset by increases in property
operating expenses of $33.1 million, payments of transitional salaries relating
to the Crown merger of $0.8 million and other merger related payments of $0.1
million.
Investing Activities: Cash used by investing activities was $25.1
million for the first three months of 2004, compared to $5.3 million used in the
first three months of 2003. Investing activities in the first three months of
2004 reflect investment in real estate of $13.2 million, investment in
construction in progress of $8.5 million and investment in partnerships and
joint ventures of $3.0 million.
Financing Activities: Cash used by financing activities was $20.9
million for the first three months of 2004, compared to $0.8 million used in
2003. Cash flows provided by financing activities in the first three months of
2004 were impacted by line of credit borrowings of $12.0 million, and shares
issued of $1.5 million. This was offset by distributions paid of $25.0 million,
and principal installments on mortgage notes payable of $9.3 million.
COMMITMENTS
At March 31, 2004, the Company had approximately $17.0 million
committed to complete current development and redevelopment projects. The
Company 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 its interest in New
Castle Associates, the Company 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. The Company exercised the
option in the second quarter of 2004 and expects to close the acquisition by the
end of May 2004. Until closing of the acquisition of the remaining interest,
each of the remaining partners of New Castle Associates other than the Company
is entitled to a cumulative preferred distribution from New Castle Associates on
their remaining interests in New Castle Associates equal to $1.2 million in the
aggregate per annum, subject to certain downward adjustments based upon certain
capital distributions by New Castle Associates. By reason of their interest in
Pan American Associates, Ronald Rubin has a 9.37% indirect limited partner
interest in New Castle Associates and George F. Rubin has a 1.43% indirect
limited partner interest in New Castle Associates.
In connection with the Crown merger, Crown's former operating
partnership retained an 11% interest in the capital and 1% interest in the
profits of two partnerships that own 14 shopping malls. This retained interest
entitles Crown's former operating partnership to a quarterly cumulative
preferred distribution of $184,300 and is subject to a put-call arrangement
between Crown's former operating partnership and the Company, pursuant to which
the Company has the right to require Crown's former operating partnership to
contribute the retained interest to the Company following the 36th month after
the closing of the Merger and Crown's former operating partnership has the right
to contribute the retained interest to the Company following the 40th month
after the closing of the Merger, in each case in exchange for 341,297 additional
OP Units. Mark E. Pasquerilla and his affiliates control Crown's former
operating partnership.
CONTINGENT LIABILITIES
In June and July respectively, of 2003, a former administrative
employee and a former building engineer of PRI pled guilty to criminal charges
related to the misappropriation of funds at a property owned by Independence
Blue Cross ("IBC") for which PRI provided certain management services. PRI
provided these services from January 1994 to December 2001. The former employees
worked under the supervision of the Director of Real Estate for IBC, who earlier
pled guilty to criminal charges. Together with other individuals, the former PRI
employees and IBC's Director of Real Estate misappropriated funds from IBC
through a series of schemes. IBC has estimated its losses at approximately $14
million, and has alleged that PRI is responsible for such losses under the terms
of a management agreement. To date, no lawsuit has been filed against PRI. The
Company understands that IBC has recovered $5 million under fidelity policies
issued by IBC's insurance carriers. In addition, the Company understands that
several defendants in the criminal proceedings have forfeited assets having an
estimated value of approximately $5 million which have been or will be
liquidated by the United States Justice Department and applied toward
restitution. The restitution and insurance recoveries result in a significant
mitigation of IBC's losses and potential claims against PRI, although PRI may be
subject to subrogation claims from IBC's insurance carriers for all or a portion
of the amounts paid by them to IBC. The Company believes that PRI has valid
defenses to any potential claims by IBC and that PRI has insurance to cover some
or all of any potential payments to IBC. The Company is unable to estimate or
determine the likelihood of any loss to the Company.
35
Following the Company's sale of its 15 wholly-owned multifamily
properties, the purchaser of those properties has made three separate claims
against the Company seeking unspecified damages from the Company related to
alleged breaches of representations and warranties under the sale agreement and
an alleged breach by the Company of the Company's covenant to operate the
multifamily properties in the ordinary course between when the sale agreement
was entered into and when the transactions closed. The Company has denied
liability on all three claims and is discussing a potential settlement with the
purchaser.
LITIGATION
In April 2002, a joint venture, of which we hold a 50% interest, 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 Christiana Power Center Phase II
project. In October 2003, the Court decided that the Department did breach the
terms of the 1992 Settlement Agreement and remitted the matter to the Superior
Court of the State of Delaware for a determination of damages. The Delaware
Department of Transportation appealed the Chancery Court's decision to the
Delaware Supreme Court, which, in April 2004, affirmed the Chancery Court's
decision. The Company is not in a position to predict the outcome of the
Superior Court's determination of damages or its ultimate effect on the
construction of the Christiana Power Center Phase II project.
COMPETITION AND CREDIT RISK
The Company's retail properties compete with other retail properties
in their trade areas as well as alternative retail formats, including catalogs,
home shopping networks and internet commerce. Economic factors, such as
employment trends and the level of interest rates, impact retail property sales.
Some of the Company's 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 the
Company and its competitors develop and manage. The existence of competitive
properties could have a material adverse effect on the Company's ability to
lease space and on the level of rents it can obtain. The Company is vulnerable
to credit risk if retailers that lease space from the Company are unable to
continue operating in its retail properties due to bankruptcies or other
factors. The Company is also vulnerable to the extent that certain categories of
tenants could experience economic declines.
SEASONALITY
There is seasonality in the retail real estate industry. Retail
property 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. The Company's recent decision to
concentrate on the retail sector increased the Company's exposure to seasonality
and is expected to result in a greater percentage of the Company's cash flows
being received in the fourth quarter as compared to prior years.
INFLATION
Inflation can have many effects on the financial performance of the
Company. Retail property 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 a lease, rent
increases may not keep up with inflation.
36
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q for the three months ended March
31, 2004, together with other statements and information publicly disseminated
by the Company, contains certain "forward-looking statements" within the meaning
of the U.S. Private Securities Litigation Reform Act of 1995, 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 the Company's
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
statements. In particular, the Company's business may be affected by
uncertainties affecting real estate businesses generally as well as the
following, 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 the
Company's status as a REIT, and the adverse consequences if the
Company 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 the Company's ability to acquire additional properties and our ability
to integrate acquired properties into our existing portfolio;
o dependence on the Company's tenants' business operations and their
financial stability;
o possible environmental liabilities;
o the Company's ability to raise capital through public and private
offerings of debt and/or equity securities and other financing risks,
including the availability of adequate funds at reasonable cost; and
o the Company's short- and long-term liquidity position.
Investors are also directed to consider the risks and uncertainties
discussed in documents we have filed with the Securities and Exchange
Commission, and in particular, our Annual Report on Form 10-K for the year ended
December 31, 2003. The Company does not intend to and disclaim any duty or
obligation to update or revise any forward-looking statements to reflect new
information, to reflect future events or otherwise.
37
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company is exposed to interest rate changes associated with
variable rate debt as well as refinancing risk on its fixed rate debt. The
Company attempts to limit its exposure to some or all of these market risks
through the use of various financial instruments. There were no significant
changes in the Company's market risk exposures during the first three months of
2004. These activities are discussed in further detail in Part II, Item 7A,
"Quantitative and Qualitative Disclosures About Market Risk" of our Annual
Report on Form 10-K for the year ended December 31, 2003.
Item 4. Controls And Procedures.
We are committed to providing accurate and timely disclosure in
satisfaction of our SEC reporting obligations. In 2002, we established a
Disclosure Committee to formalize our disclosure controls and procedures. Our
Chief Executive Officer and Chief Financial Officer have evaluated the
effectiveness of our disclosure controls and procedures as of March 31, 2004,
and have concluded as follows:
o Our disclosure controls and procedures are designed to ensure
that the information that we are required to disclose in our
reports under the Securities Exchange Act of 1934 (the "Exchange
Act") is recorded, processed, summarized and reported accurately
and on a timely basis.
o Information that we are required to disclose in our Exchange Act
reports is accumulated and communicated to management as
appropriate to allow timely decisions regarding required
disclosure.
There was no change in our 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, our internal controls
over financial reporting.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
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 April 2002, a joint venture in which we hold a 50% interest, 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 Christiana Power Center Phase II
project. In October 2003, the Court decided that the Department did breach the
terms of the 1992 Settlement Agreement and remitted the matter to the Superior
Court of the State of Delaware for a determination of damages. The Delaware
Department of Transportation appealed the Chancery Court's decision to the
Delaware Supreme Court, which, in April 2004, affirmed The Chancery Court's
decision. The Company is not in a position to predict the outcome of the
Superior Court's determination of damages or its ultimate effect on the
construction of the Christiana Power Center Phase II project.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities.
Class A and Class B Units of PREIT Associates are redeemable by PREIT
Associates at the election of the limited partner holding the Units at the time
and for the consideration set forth in PREIT Associates' partnership agreement.
In general, and subject to exceptions and limitations, beginning one year
following the respective issue dates, "qualifying parties" may give one or more
notices of redemption with respect to all or any part of the Class A Units then
held by that party. Class B Units are redeemable at the option of the holder at
any time after issuance.
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If a notice of redemption is given, we have the right to elect to
acquire the Units tendered for redemption for our own account, either in
exchange for the issuance of a like number of our shares, subject to adjustments
for stock splits, recapitalizations and like events, or a cash payment equal to
the average of the closing prices of our shares on the ten consecutive trading
days immediately before our receipt, in our capacity as general partner of PREIT
Associates, of the notice of redemption. If we decline to exercise this right,
then on the tenth business day following tender for redemption, PREIT Associates
will pay a cash amount equal to the number of Units so tendered multiplied by
such average closing price.
Unregistered Offerings
During the first three months of 2004, PREIT Associates issued 279,910
Class A Units on March 25, 2004 to the former affiliates of The Rubin
Organization as part of the final consideration payable with respect to our 1997
acquisition of The Rubin Organization. Also during the first three months of
2004, we issued 1,712 shares in return for Units tendered for redemption by
limited partners of PREIT Associates. All of the foregoing Units and shares were
issued under exemptions provided by Section 4(2) of the Securities Act of 1933
or Regulation D promulgated under the Securities Act.
Issuer Purchases of Equity Securities
The following table shows the total number of shares that we acquired
in the first three months of 2004 and the average price paid per share. All of
the purchases reflected in the table were pursuant to our employees' use of
shares to pay the exercise price of options and to pay the withholding taxes
payable upon the exercise of options or the vesting of restricted shares.
(d) Maximum Number
(c) Total Number of (or Approximate
Shares Purchased as Dollar Value) of
(a) Total Number (b) Average part of Publicly Shares that May Yet
of Shares Price Paid per Announced Plans or Be Purchased Under
Period Purchased Share Programs the Plans or Programs
------ ---------------- -------------- ------------------- ---------------------
January 1 - January 31, 2004 - $ - - $ -
February 1 - February 29, 2004 23,559 $35.78 - -
March 1 - March 31, 2004 4,714 $36.10 - -
------ ------ ------ ------
Total 28,273 $35.83 - $ -
====== ====== ====== ======
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1* Certification pursuant to Exchange Act Rules 13a-14(a)/15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2* Certification pursuant to Exchange Act Rules 13a-14(a)/15d-14(a), as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1* Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2* Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
* Filed herewith.
(b) Reports on Form 8-K
During the three months ended March 31, 2004, 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 filed on January 29, 2004, Items 5 and 7 - Regarding intention to create
Office of the Chairman
o filed on February 6, 2004, Item 5 - Regarding withdrawal of equity offering
o filed on February 9, 2004, Item 5 - Regarding IRS grant of retroactive relief
o furnished on February 25, 2004, Item 12 - Regarding quarterly earnings release
o furnished on March 3, 2004, Item 12 - Regarding quarterly supplemental
disclosure and other matters
o furnished on May 5, 2004, Item 12 - Regarding quarterly earnings release
40
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)
41