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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] Quarterly Report Pursuant To Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 1998
--------------
[ ] 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
- -----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-6216339
- ------------------------------------------------------ ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
455 Pennsylvania Avenue, Suite 135, Ft. Washington, PA 19034
- ------------------------------------------------------ ------------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (215) 542-9250
-----------------------------
N/A
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(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the last 90 days. Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares of beneficial interest outstanding at May 7, 1998: 13,294,723
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This report includes a total of 17 pages.
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PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
-----------------------------------------
CONTENTS
--------
Page
----
Part I. Financial Information
Financial Statements (Unaudited):
Consolidated Balance Sheets--March 31, 1998
and August 31, 1997 (Audited) 1-2
Consolidated Statements of Income--Three Months
Ended March 31, 1998 and February 28, 1997 3
Consolidated Statements of Cash Flows--Three Months
Ended March 31, 1998 and February 28, 1997 4
Notes to Consolidated Financial Statements 5-10
Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-15
Part II. Other Information
Item 1. Legal Proceedings 16
Item 2. Not Applicable -
Item 3. Not Applicable -
Item 4. Not Applicable -
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
Part I. Financial Information
---------------------
Item 1. Financial Statements
---------------------
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
-----------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(Note 1)
--------
ASSETS
------
March 31, August 31,
1998 1997
------------ ------------
(Unaudited)
INVESTMENTS IN REAL ESTATE, at cost:
Multifamily properties $161,907,000 $159,967,000
Industrial properties 5,078,000 5,078,000
Retail properties 120,347,000 37,398,000
Properties under development 10,042,000 --
------------ ------------
Total investments in real estate 297,374,000 202,443,000
Less- Accumulated depreciation 55,193,000 50,711,000
------------ ------------
242,181,000 151,732,000
INVESTMENT IN PREIT-RUBIN, INC. (Note 3) 4,535,000 --
INVESTMENTS IN PARTNERSHIPS AND JOINT VENTURES, at equity (Note 4)
15,353,000 1,039,000
ADVANCES TO PREIT-RUBIN, INC. (Note 2) 3,613,000 --
------------ ------------
265,682,000 152,771,000
Less- Allowance for possible losses 1,723,000 1,831,000
------------ ------------
263,959,000 150,940,000
OTHER ASSETS:
Cash and cash equivalents 456,000 1,399,000
Rents and sundry receivables 604,000 590,000
Deferred costs, prepaid real estate taxes and expenses, net 8,377,000 7,393,000
Deposits on properties -- 5,335,000
------------ ------------
$273,396,000 $165,657,000
============ ============
(Continued)
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
-----------------------------------------
CONSOLIDATED BALANCE SHEETS (CONTINUED)
---------------------------------------
(Note 1)
--------
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
March 31, August 31,
1998 1997
------------- -------------
(Unaudited)
LIABILITIES:
Mortgage notes payable $ 65,121,000 $ 83,528,000
Bank and other loans payable 49,526,000 33,884,000
Tenants' deposits and deferred rents 1,194,000 1,346,000
Accrued pension and retirement benefits 969,000 1,091,000
Accrued expenses and other liabilities 3,826,000 4,369,000
------------- -------------
120,636,000 124,218,000
------------- -------------
MINORITY INTEREST (Note 4) 15,773,000 540,000
------------- -------------
COMMITMENTS AND CONTINGENCIES (Note 8) -- --
SHAREHOLDERS' EQUITY (Note 5):
Shares of beneficial interest, $1 par; authorized
unlimited; issued and outstanding 13,294,723
shares at March 31, 1998, and 8,685,098
shares at August 31, 1997 13,295,000 8,685,000
Capital contributed in excess of par 144,854,000 53,599,000
Distributions in excess of net income (21,162,000) (21,385,000)
------------- -------------
136,987,000 40,899,000
------------- -------------
$ 273,396,000 $ 165,657,000
============= =============
The accompanying notes are an integral part of these statements.
-2-
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
-----------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(Note 1)
--------
(Unaudited)
-----------
Three Months Ended
----------------------------------------
March 31, February 28,
1998 1997
------------ ------------
REVENUES:
Gross revenues from real estate $ 13,526,000 $ 10,117,000
Interest and other income 121,000 69,000
------------ ------------
13,647,000 10,186,000
------------ ------------
EXPENSES:
Property operating expenses 5,040,000 4,175,000
Depreciation and amortization 2,138,000 1,555,000
General and administrative expenses 738,000 824,000
Interest expense 1,978,000 2,248,000
Provision for losses on investments -- 500,000
------------ ------------
9,894,000 9,302,000
------------ ------------
Income before equity in unconsolidated entities,
gains on sales of interests in real estate and
minority interest 3,753,000 884,000
EQUITY IN LOSS OF PREIT-RUBIN, INC. (Notes 2 and 3) (358,000) --
EQUITY IN INCOME OF PARTNERSHIPS AND JOINT VENTURES (Note 4)
1,475,000 719,000
GAINS ON SALES OF INTERESTS IN REAL ESTATE -- 1,461,000
------------ ------------
Income before minority interest 4,870,000 3,064,000
MINORITY INTEREST (277,000) (83,000)
------------ ------------
NET INCOME $ 4,593,000 $ 2,981,000
============ ============
BASIC INCOME PER SHARE (Note 5) $ .35 $ .34
============ ============
DILUTED INCOME PER SHARE (Note 5) $ .34 $ .34
============ ============
The accompanying notes are an integral part of these statements.
-3-
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
-----------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(NOTES 1 AND 7)
---------------
Three Months Ended
--------------------------------------
March 31, February 28,
1998 1997
---- ----
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,593,000 $ 2,981,000
Adjustments to reconcile net income to net cash
provided by operating activities-
Minority interest 277,000 83,000
Depreciation and amortization 2,138,000 1,555,000
Gains on sales of interests in real estate -- (1,461,000)
Equity in loss of PREIT-RUBIN, INC. 358,000 --
Decrease in allowance for possible losses (47,000) (67,000)
Change in assets and liabilities-
Rents and sundry receivables (162,000) 166,000
Deferred costs, prepaid real estate taxes and expenses (448,000) (194,000)
Accrued pension and retirement benefits (42,000) 23,000
Accrued expenses and other liabilities (204,000) 323,000
Tenants' deposits and deferred rents (124,000) 65,000
------------ ------------
Net cash provided by operating activities 6,339,000 3,474,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in wholly owned real estate (776,000) (996,000)
Investments in property under development (8,711,000) --
Investment in and advances to PREIT-RUBIN, INC. (200,000) --
Investments in partnerships and joint ventures (1,121,000) (125,000)
Decrease in notes receivable -- 1,649,000
Cash proceeds from sale of interest in partnership -- 2,069,000
Cash distributions from partnerships and joint ventures
in excess of equity in income 272,000 752,000
Cash distributions to minority partners (6,000) (76,000)
------------ ------------
Net cash (used in) provided by investing activities (10,542,000) 3,273,000
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal installments on mortgage notes payable (562,000) (271,000)
Repayment of mortgage notes payable (33,681,000) --
Proceeds from bank loans payable 44,951,000 --
Repayment of bank loans payable -- (88,000)
Shares of beneficial interest issued 113,000 --
Payment of equity offering costs (934,000) --
Distributions paid to shareholders (6,248,000) (4,079,000)
Distributions paid to OP Unit holders (304,000) --
------------ ------------
Net cash provided by (used in) financing activities 3,335,000 (4,438,000)
------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (868,000) 2,309,000
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,324,000 2,026,000
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 456,000 $ 4,335,000
============ ============
The accompanying notes are an integral part of these statements.
-4-
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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THREE MONTHS ENDED MARCH 31, 1998 AND FEBRUARY 28, 1997
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1. BASIS OF PRESENTATION:
---------------------
The consolidated financial statements have been prepared by the Registrant,
without audit, except as to the balance sheet as of August 31, 1997, 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 generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Registrant believes that the disclosures are adequate to make the information
presented not misleading. It is suggested that these consolidated financial
statements be read in conjunction with the audited financial statements and the
notes thereto included in the Registrant's latest annual report on Form 10-K. In
the opinion of the Registrant, all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the consolidated financial
position and the consolidated results of its operations and its cash flows, have
been included. The results of operations for such interim periods are not
necessarily indicative of the results for the full year.
On October 14, 1997, the Registrant filed a Form 8-K announcing its intention to
change its fiscal year-end from August 31 to December 31. On February 17, 1998,
the Registrant filed a Transition Report on Form 10-Q for the transition period
from September 1, 1997 to December 31, 1997. As such, the consolidated financial
statements herein include the Registrant's new calendar quarter and most
comparable prior fiscal quarter.
Certain reclassifications of prior period amounts have been made to conform with
current year presentation.
2. THE TRO TRANSACTION:
-------------------
On September 30, 1997, the Registrant completed a series of related transactions
pursuant to which the Registrant: (i) transferred substantially all of its real
estate interests to a newly formed operating partnership (the "Operating
Partnership"), of which the Registrant is the sole general partner; (ii) the
Operating Partnership acquired all of the non-voting common shares of The Rubin
Organization, Inc. ("TRO"), a commercial real estate development and management
firm (renamed "PREIT-RUBIN, Inc."), constituting 95% of the total equity of
PREIT-RUBIN, Inc. in exchange for the issuance of 200,000 Class A Operating
Partnership ("OP") Units and a provision to issue up to 800,000 additional Class
A OP Units over the next five years according to a formula based upon the
Company's per share growth in adjusted funds from operations; (iii) the
Operating Partnership acquired the interests of certain affiliates of TRO ("TRO
Affiliates") in The Court at Oxford Valley, Magnolia Mall, North Dartmouth Mall
and Springfield Park; (iv) the Operating Partnership agreed to
-5-
acquire the interests of TRO Affiliates in Hillview Shopping Center, for which
construction is substantially complete, and Northeast Tower Center, which is
currently under construction, at prices based upon a pre-determined formula; and
(v) the Operating Partnership acquired the development rights of certain TRO
Affiliates, subject to related obligations, in Christiana Power Center (Phases I
and II), Red Rose Commons and Blue Route Metroplex.
All of the acquisitions described above have been recorded by the Registrant
using the purchase method of accounting. The Registrant accounts for its
non-controlling investment in PREIT-RUBIN, Inc. using the equity method. The
excess of purchase price of PREIT-RUBIN, Inc. over the fair value of net
tangible assets acquired is being amortized over thirty five years.
The following table summarizes the consideration paid to acquire the assets and
businesses described above:
Net Other Total
Class A Cash Paid Liabilities Transaction Purchase
OP Units (Received) Assumed Costs Price
------------- --------------- ------------- --------------- ----------------
Investment in
PREIT-RUBIN, Inc. $ 4,680,000 $ (878,000) $ -- $ 793,000 $ 4,595,000
Investment in The Court at
Oxford Valley 5,458,000 683,000 -- 688,000 6,829,000
Magnolia Mall 5,000,000 15,165,000 25,154,000 977,000 46,296,000
North Dartmouth Mall -- 35,000,000 -- 986,000 35,986,000
Development Properties -- 6,446,000 -- 1,859,000 8,305,000
------------- --------------- ------------- --------------- ----------------
$ 15,138,000 $ 56,416,000 $ 25,154,000 $ 5,303,000 $ 102,011,000
============= =============== ============= =============== ================
3. INVESTMENT IN PREIT-RUBIN, INC.:
--------------------------------
PREIT-RUBIN, Inc. is responsible for various activities including: management,
leasing and real estate development of the Registrant's properties and for
properties on behalf of third parties. Total management fees paid by the
Registrant's properties to PREIT-RUBIN, Inc. are included in property operating
expenses in the accompanying consolidated statements of income and amounted to
$55,000 for the three-month period ended March 31, 1998.
Summarized unaudited financial information for PREIT-RUBIN, Inc. as of and for
the three-month period ended March 31, 1998 is as follows:
For the Three
Months Ended
March 31, 1998
--------------
Total assets $ 12,740,000
Total revenue $ 3,321,000
Net loss $ 377,000
Registrant's share of net loss $ 358,000
-6-
4. INVESTMENTS IN PARTNERSHIPS AND JOINT VENTURES:
----------------------------------------------
The following table presents summarized financial information as to the
Registrant's equity in the assets and liabilities of 24 partnerships and joint
ventures and 4 properties under development at March 31, 1998, and 22
partnerships and joint ventures at August 31, 1997, and the Registrant's equity
in income for the three months ended March 31, 1998 and February 28, 1997:
March 31, August 31,
1998 1997
------------- -------------
(Unaudited)
ASSETS
------
Investments in real estate, at cost:
Multifamily properties $ 109,138,000 $ 107,604,000
Industrial property 1,275,000 1,264,000
Retail properties 159,254,000 117,960,000
Properties under development 20,886,000 --
Land 4,446,000 4,446,000
------------- -------------
Total investments in real estate 294,999,000 231,274,000
Less- Accumulated depreciation 72,924,000 71,938,000
------------- -------------
222,075,000 159,336,000
Cash and cash equivalents 6,920,000 6,031,000
Deferred costs, prepaid real estate taxes and expenses, and other
assets, net 18,796,000 8,528,000
------------- -------------
Total assets $ 247,791,000 $ 173,895,000
============= =============
LIABILITIES AND PARTNERS' EQUITY
--------------------------------
Mortgage notes payable $ 211,926,000 $ 162,097,000
Bank loans payable 6,768,000 8,770,000
Due to the Trust 3,380,000 3,118,000
Other liabilities 7,496,000 4,341,000
------------- -------------
Total liabilities 229,570,000 178,326,000
------------- -------------
Net equity (deficit) 18,221,000 (4,431,000)
Partners' share (2,868,000) (5,470,000)
------------- -------------
Investment in partnerships and joint ventures $ 15,353,000 $ 1,039,000
============= =============
-7-
EQUITY IN INCOME OF PARTNERSHIPS AND JOINT VENTURES
---------------------------------------------------
Three Months Ended
---------------------------------------
March 31, February 28,
1998 1997
---- ----
(Unaudited)
Gross revenues from real estate $ 14,737,000 $ 12,957,000
------------------ ------------------
Expenses:
Property operating expenses 5,403,000 5,376,000
Mortgage and bank loan interest 4,233,000 3,379,000
Refinancing prepayment penalty -- 1,038,000
Depreciation and amortization 2,071,000 1,651,000
------------------ ------------------
11,707,000 11,444,000
------------------ ------------------
3,030,000 1,513,000
Partners' share (1,555,000) (794,000)
------------------ ------------------
Equity in income of partnerships and joint ventures $ 1,475,000 $ 719,000
================== ==================
One partnership, Emerald Point, in which the Registrant is a general partner and
has control as provided in the partnership agreement, has been consolidated for
financial statement presentation. All of the assets and liabilities of such
partnership are included in the consolidated financial statements at 100%. The
minority partner's interest is 35%.
5. EARNINGS PER SHARE:
------------------
In 1997, the Registrant adopted SFAS No. 128, "Earnings Per Share." The adoption
of this statement had no impact on previously reported earnings per share for
the three months ended February 28, 1997.
For the Three Months Ended
March 31, 1998
----------------------------------------------
Per Share
Income Shares Amount
------------- ------------- -------------
BASIC EARNINGS PER SHARE:
Net income $ 4,593,000 13,291,936 $ .35
============= ============= =============
DILUTED EARNINGS PER SHARE:
Net income $ 4,593,000 13,291,936
Share options issued -- 41,786
------------- -------------
$ 4,593,000 13,333,722 $ .34
============= ============= =============
-8-
For the Three Months Ended
February 28, 1997
----------------------------------------------
Per Share
Income Shares Amount
------------- ------------- -------------
BASIC EARNINGS PER SHARE:
Net income $ 2,981,000 8,678,098 $ .34
============= ============= =============
DILUTED EARNINGS PER SHARE:
Net income $ 2,981,000 8,678,098
Share options issued -- 26,221
------------- -------------
$ 2,981,000 8,704,319 $ .34
============= ============= =============
6. DISTRIBUTIONS:
The per-share amount declared at the date of this report and the per-share
amount declared in the comparable period for distribution are as follows:
Amount
Per
Date Declared Record Date Payment Date Share
------------- ----------- ------------ -----
April 30, 1998 May 31, 1998 June 15, 1998 $.47
April 15, 1997 April 30, 1997 May 15, 1997 $.47
7. CASH FLOW INFORMATION:
---------------------
Cash paid for interest was $2,395,000 (net of capitalized interest of $311,000)
and $2,138,000 for the three months ended March 31, 1998 and February 28, 1997,
respectively.
8. COMMITMENTS AND CONTINGENCIES:
-----------------------------
Environmental matters have arisen at certain properties in which the Registrant
has an interest for which reserves have previously been established. In
management's opinion, no material incremental cost will be incurred on these
properties.
The Registrant has been named as a defendant in a suit brought by persons and
their affiliates who are partners of the Registrant in three partnerships. The
Registrant is vigorously defending the suit and has denied the plaintiffs'
allegations. The Registrant also believes that it has viable claims against
certain of the same partners (or their affiliates) which it is asserting. As the
pleadings are not yet closed and discovery is ongoing, it is not possible to
judge the ultimate outcome of these suits at this time. However, management does
not believe that resolution of these matters will have a material adverse effect
on the Registrant's financial condition or results of operations.
-9-
9. ACQUISITIONS:
------------
On January 26, 1998, the Registrant acquired the remaining 50% interest in a
shopping center under construction located in Newark, Delaware, for a purchase
price of at least $8.7 million consisting of $6 million in cash, $2.7 million to
be paid through the issuance of operating partnership (OP) units upon completion
of the shopping center, and a contingent payment to issue additional OP units
upon completion of construction based on a predetermined formula which
calculates the agreed-upon value of the center.
10. SUBSEQUENT EVENT:
----------------
On April 1, 1998, the Registrant sold its 40% interest in Charter Pointe
Apartments (formerly Windsong Apartments) located in Altamonte Springs, Florida.
Total net gain on the sale of the property was approximately $4.4 million of
which the Registrant's proportionate share is approximately $1.7 million.
11. RECENT ACCOUNTING PRONOUNCEMENTS:
--------------------------------
In March 1998, the Emerging Issues Task Force ("EITF") issued 97-11, "Accounting
for Internal Costs Relating to Real Estate Property Acquisition." The EITF
concluded that internal costs related to the acquisition of operating properties
should be expensed as incurred. The adoption of this pronouncement will have no
impact on the Registrant as the Registrant has not previously capitalized
internal costs relating to the acquisition of operating properties.
-10-
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
-----------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
The TRO Transaction
- -------------------
On September 30, 1997, the Registrant acquired The Rubin Organization, Inc.
("TRO", renamed "PREIT-RUBIN, Inc."), a commercial property development and
management firm, and certain related real estate interests (the "TRO
Transaction").
As part of the TRO Transaction, the Registrant acquired Magnolia Mall, located
in Florence, South Carolina, North Dartmouth Mall, located in North Dartmouth,
Massachusetts and a 50% interest in the Court at Oxford Valley, located in
Langhorne, Pennsylvania. The Registrant also acquired the development rights of
certain affiliates of TRO ("TRO Affiliates"), subject to related obligations, in
Christiana Power Center (Phases I and II), Red Rose Commons and Blue Route
Metroplex. In addition, the Registrant agreed to acquire the interests of TRO
Affiliates in Hillview Shopping Center, for which construction is substantially
complete, and Northeast Tower Center, which is currently under construction, at
prices based upon a pre-determined formula.
The TRO Transaction was financed through the issuance of 646,286 Class A
Operating Partnership Units in PREIT Associates, L.P. (the "Operating
Partnership), assumption of mortgage indebtedness at Magnolia Mall of
approximately $25.2 million, and $61.2 million of cash including transaction
costs. The cash was obtained primarily from borrowings under a new $150 million
Credit Facility entered into by the Operating Partnership coincident with the
September 30, 1997 closing of the TRO Transaction with a group of banks. The
obligations of the Operating Partnership under the new Credit Facility have been
guaranteed by the Registrant.
Liquidity and Capital Resources
- -------------------------------
Borrowings under the Credit Facility increased from approximately $34 million at
August 31, 1997 to approximately $90 million at September 30, 1997, following
the consummation of the TRO Transaction. On December 23, 1997, the Registrant
sold 4,600,000 common shares of beneficial interest at a price of $22.375 per
share. The net proceeds to the Registrant from the public offering, after
deducting underwriting discounts and commissions were approximately $97 million.
The Registrant used the net proceeds to prepay the $8.8 million mortgage loan
(8.25%) secured by Cobblestone Apartments in Pompano Beach, Florida (the
"Cobblestone Mortgage") and to repay approximately $88 million of amounts then
outstanding under the Credit Facility.
As of September 30, 1997, the interest rate on the Credit Facility was set at a
margin equal to 1.7% over 30-day LIBOR. As a result of the reduction in the
Registrant's Leverage Ratio, following the December 1997 public offering, the
interest rate was reduced by 30 basis points to a margin of 1.4% over 30-day
LIBOR. In addition, the maturity date for the Credit Facility was extended from
September 30, 1999 to December 31, 2000.
-11-
On March 20, 1998, the Registrant borrowed $33.7 million under the Credit
Facility to repay the term loan outstanding which matured in March 1998. The
term loan accrued interest at a fixed rate of 8.62% and was secured by three
properties. At March 31, 1998 the interest rate on the Credit Facility was
7.09%.
As of March 31, 1998, $55.3 million of borrowings under the Credit Facility were
outstanding ($49.5 million directly by the Operating Partnership and $5.8
million through partnerships and joint ventures) and, subject to the terms and
conditions of the Credit Facility, up to $94.7 million was available to fund
property acquisitions, scheduled debt maturities and other uses.
In addition to amounts due under the Credit Facility during the next three
years, mortgage loans secured by properties owned by four partnerships in which
the Registrant has an interest mature by their terms. Balloon payments on these
loans total $17.0 million, of which the Registrant's proportionate share is $8.5
million.
The Registrant expects to meet its short-term liquidity requirements generally
through its available working capital and net cash provided by operations. The
Registrant believes that the net cash provided by operations will be sufficient
to make distributions to continue to qualify as a REIT under the Code. The
Registrant 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 Registrant expects to meet certain long-term liquidity requirements such as
property acquisitions, scheduled debt maturities, renovations, expansions and
other non-recurring capital improvements through borrowings under the Credit
Facility, long-term secured and unsecured indebtedness and the issuance of
additional equity securities.
-12-
Funds from operations (FFO) increased by $2,580,000 for the three months ended
March 31, 1998, as compared to the three months ended February 28, 1997, as
follows:
Three Months Ended
----------------------------------------
March 31, February 28,
Funds from Operations(1) 1998 1997
- --------------------------------------------------------------- ------------ ------------
Income before minority interest $ 4,870,000 $ 3,064,000
Less: Gains on sales of interests in real estate -- (1,461,000)
Minority interest in consolidated partnership (53,000) (83,000)
Add: Provision for losses on investments -- 500,000
Depreciation and amortization-
Wholly owned and consolidated partnerships (2) 2,088,000 1,489,000
Unconsolidated partnerships and joint ventures 998,000 799,000
Refinancing prepayment fees -- 519,000
Excess purchase price over net assets acquired 29,000 --
Less:
Depreciation of non-real estate assets (58,000) (58,000)
Amortization of deferred financing costs (130,000) (68,000)
------------ ------------
Funds from operations $ 7,744,000 $ 4,701,000
============ ============
Funds from operations per share and OP Units $ .56 $ .54
============ ============
Weighted average number of shares outstanding 13,291,936 8,678,098
Weighted average effect of full conversion of OP Units 646,286 --
------------ ------------
13,938,222 8,678,098
============ ============
(1) Funds from operations ("FFO") is defined as income before gains (losses) on
investments and extraordinary items (computed in accordance with generally
accepted accounting principles "GAAP") plus real estate depreciation and similar
adjustments for unconsolidated joint ventures after adjustments for non-real
estate depreciation and amortization of financing costs. FFO should not be
construed as an alternative to net income (as determined in accordance with
GAAP) as an indicator of the Registrant's operating performance, or to cash
flows from operating activities (as determined in accordance with GAAP) as a
measure of liquidity. In addition, the Registrant's measure of FFO as presented
may not be comparable to similarly titled measures reported by other companies.
(2) Net of minority interest of $50,000 in 1998 and $66,000 in 1997.
Net cash provided by operating activities increased to $6,339,000 from
$3,474,000 for the three months ended March 31, 1998, as compared to the three
months ended February 28, 1997. The increase is primarily attributable to
additional operating income provided by Magnolia Mall and North Dartmouth Mall
which the Registrant acquired on September 30, 1997, offset by accrued bank
interest on debt repaid in December 1997 and the timing of other working capital
changes.
-13-
Net cash used in investing activities was $10,542,000 for the three months ended
March 31, 1998, as compared to net cash provided by investing activities of
$3,273,000 for the three months ended February 28, 1997. Investing activities in
the 1998 period include payment of costs related to properties under development
of $8.7 million. Investing activities in the 1997 period included $2,000,000 of
proceeds from the sale of three shopping centers located in Pennsylvania in
Lancaster, Waynesburg and Beaver Falls.
Net cash provided by financing activities was $3,335,000 for the three months
ended March 31, 1998, as compared to $4,438,000 used for the three months ended
February 28, 1997. Financing activities in the 1998 period include proceeds from
the Registrant's credit facility in the amount of $44,951,000 of which
$33,681,000 was used to repay bank mortgage notes payable, dividends paid to
shareholders and OP unit holders of approximately $6,552,000 and payment of
equity offering costs of $934,000. Financing activities in the 1997 period
include dividends paid to shareholders in the amount of $4.1 million.
Results of Operations
- ---------------------
Three Month Periods Ended March 31, 1998 and February 28, 1997
- --------------------------------------------------------------
Gross revenues from real estate increased by $3,409,000 to $13,526,000 for the
three-month period ended March 31, 1998, as compared to the three-month period
ended February 28, 1997. The 1998 period included $3,352,000 of revenues
attributable to Magnolia Mall and North Dartmouth Mall, which the Registrant
acquired on September 30, 1997. Revenues from properties owned during both
periods increased by $57,000 primarily as a result of an increase in apartment
revenues of $86,000.
Property operating expenses increased by $865,000 to $5,040,000. The 1998 period
included $1,124,000 of expenses attributable to Magnolia Mall and North
Dartmouth Mall which the Registrant acquired on September 30, 1997. Operating
expenses from properties owned during both periods decreased by $259,000
primarily due to decreases in utility and other operating costs for apartments
of $220,000.
Depreciation and amortization increased by $583,000 to $2,138,000 primarily as a
result of depreciation of $411,000 on the addition of the Magnolia Mall and
North Dartmouth Mall properties and increased amortization of financing costs.
Depreciation from properties owned during both periods increased by $115,000.
Interest expense decreased by $270,000 to $1,978,000. Interest expense
attributable to properties increased by $316,000 due to the acquisition of North
Dartmouth Mall, which the Registrant acquired on September 30, 1997 offset by
the repayment of the mortgage on Cobblestone Apartments in December 1997.
Interest expense incurred against the Registrant's Credit Facility decreased by
$586,000 as a result of interest savings from the repayment of amounts borrowed
under the Credit Facility from proceeds of a public offering in December 1997.
Equity in income of partnerships and joint ventures increased by $756,000 to
$1,475,000 as a result of the Registrant's purchase of a 50% interest in Oxford
Valley Road Associates on September 30, 1997, the income of which was $120,000,
and the non-recurrence in the 1997 period of a prepayment penalty in the amount
of $519,000 due to the refinancing of debt at Regency Apartments. The 1997
period also includes income from properties sold during
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1997 in the amount of $29,000. Equity in the income of properties owned during
both periods increased by $146,000.
Equity in net loss of PREIT-RUBIN for the 1998 period was $358,000.
The gains on the sales of interests in real estate of $1,461,000 in the 1997
period relates to the sale of the Registrant's interest in three shopping
centers located in Pennsylvania, in Lancaster, Waynesburg and Beaver Falls.
Minority interest increased by $194,000 to $277,000 as a result of the Class A
OP units issued in connection with the TRO Transaction.
Net income for the quarter ended March 31, 1998 increased to $4,593,000 from
$2,981,000 as reported in the comparable period in the prior year.
Year 2000 Issue
- ---------------
The Registrant has recognized the need to ensure that its systems, equipment and
operations will not be adversely impacted by the change to the calendar year
2000. The Registrant has initiated the process of identifying potential areas of
risk and the related effects on planning, purchasing and daily operations. No
estimates can be made as to the potential adverse impact resulting from the
failure of third-party suppliers and tenants to prepare for the year 2000.
However, the Registrant does not anticipate the total cost of successfully
converting all internal systems, equipment and operations to the year 2000 to
have a material adverse effect on its financial position or results of
operations.
-15-
Part II. Other Information
Item 1. Legal Proceedings
Reference is made to the litigation between the Registrant and affiliates of the
Registrant and Daniel Berman and Robert Berman and/or entities owned or
controlled by them (collectively, the "Bermans") most recently described in Item
3 of the Registrant's Report on Form 10-K for its fiscal year ended August 31,
1997, filed with the Securities and Exchange Commission on November 28, 1997.
In December 1997, the court in the Delaware Litigation issued an opinion
granting partial summary judgment in favor of the Registrant and certain of its
affiliates on certain counterclaims of the Bermans in that action (which
counterclaims are substantially similar to the claims made by the Bermans as
plaintiffs in the Pennsylvania Litigation). Under the court's decision: the
Bermans would be liable for one-half of (i) the costs incurred at Eagles' Nest
and in respect of the 14 acre undeveloped tract in Coral Gables, Florida, and
(ii) reasonable environmental clean-up costs at Fox Run; and the counterclaims
of the Bermans relating to Eagles' Nest and Fox Run were dismissed. The court
did not dismiss counterclaims by the Bermans in the Delaware Litigation alleging
that (i) there had been an oral modification of the management agreement
relating to Fox Run (and the court therefore permitted the Bermans to continue
to manage that project until that claim is resolved), and (ii) the environmental
clean up costs incurred by certain of the Registrant's affiliates at Fox Run
were excessive.
The Registrant intends to continue to vigorously defend plaintiffs' claims in
the Pennsylvania Litigation and the defendants' remaining counterclaims in the
Delaware Litigation and to pursue the claims asserted by the Registrant in the
Delaware Litigation. Management does not believe that resolution of these
matters will have a material adverse effect on the Registrant's financial
position or results of operations.
Item 5. Other Information
-----------------
On January 26, 1998, a wholly owned affiliate of PREIT Associates, L.P., the
operating partnership of the Registrant, effectively acquired both the fee
interest in the land for Phase I of the Registrant's Christiana Power Center
retail project and the 50% interest in the project not previously owned by the
Registrant. The consideration paid for the acquisition of such land and interest
was $6.0 million plus the right of the transferror to receive Limited Partner
units in PREIT Associates, L.P. upon completion of the Center. The value of the
limited partner units to be issued will be equal to approximately $2.7 million
plus 50% of the equity value of the Center to be computed following completion
based upon an agreed-upon formula. Units of limited partner interest in PREIT
Associates, L.P. are redeemable for cash equal to the price of the Registrant's
shares at the time of redemption, or, at the option of the Registrant, shares of
the Registrant on a one-for-one basis. Construction of Phase I commenced in the
fourth quarter of 1997 and substantial portions of the Center are expected to be
completed in the fourth quarter of 1998.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits (27.) Financial Data Schedule (included in
electronic filing format)
(b) Reports on Form 8-K - none.
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PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
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
-----------------------------------------
Registrant
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/ Dante J. Massimini
-------------------------------------
Dante J. Massimini
Senior Vice President and Treasurer
Date: May 14, 1998
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