================================================================================
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, 1999
[ ] 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
Pennsylvania Real Estate Investment Trust
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-6216339
- --------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
200 South Broad Street, Third Floor, Philadelphia, PA 19102-3803
- ------------------------------------------------------ ----------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (215) 875-0700
N/A
----------------------------------------------------
(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 [ ] No [X]
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 10, 1999: 13,314,223
================================================================================
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONTENTS
Page
Part I. Financial Information
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets--March 31, 1999
and December 31, 1998 1
Consolidated Statements of Income--Three Months
Ended March 31, 1999 and March 31, 1998 2
Consolidated Statements of Cash Flows--Three Months
Ended March 31, 1999 and March 31, 1998 3
Notes to Consolidated Financial Statements 4-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-17
Item 3. Quantitative and Qualitative Disclosures about Market Risk 18
Part II. Other Information 19
Item 1. Not Applicable -
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Not Applicable -
Item 4. Not Applicable -
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19-20
Signatures 21
Part I. Financial Information
Item 1. Financial Statements
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED BALANCE SHEETS
(Note 1)
ASSETS
(Unaudited)
March 31, December 31,
1999 1998
------------ ------------
INVESTMENTS IN REAL ESTATE, at cost:
Multifamily properties $232,256,000 $230,997,000
Retail properties 260,026,000 261,823,000
Industrial properties 5,078,000 5,078,000
Land and properties under development 18,480,000 11,508,000
------------ ------------
Total investments in real estate 515,840,000 509,406,000
Less- Accumulated depreciation 74,186,000 71,129,000
------------ ------------
441,654,000 438,277,000
INVESTMENT IN PREIT-RUBIN, INC. (Note 2) 6,833,000 5,372,000
INVESTMENTS IN PARTNERSHIPS AND JOINT VENTURES, at equity (Note 3)
13,282,000 13,439,000
ADVANCES TO PREIT-RUBIN, INC. 4,860,000 4,074,000
------------ ------------
466,629,000 461,162,000
Less- Allowance for possible losses 1,536,000 1,572,000
------------ ------------
465,093,000 459,590,000
OTHER ASSETS:
Cash and cash equivalents 2,998,000 6,135,000
Rents and sundry receivables (net of allowance for
doubtful accounts of $698,000 and $372,000, respectively) 3,353,000 3,498,000
Deferred costs, prepaid real estate taxes and expenses, net 15,395,000 12,392,000
------------ ------------
$486,839,000 $481,615,000
============ ============
LIABILITIES:
Mortgage notes payable $166,274,000 $167,003,000
Bank and other loans payable 142,973,000 135,273,000
Tenants' deposits and deferred rents 2,141,000 1,827,000
Accrued pension and retirement benefits 989,000 972,000
Accrued expenses and other liabilities 7,200,000 11,413,000
------------ ------------
319,577,000 316,488,000
------------ ------------
MINORITY INTEREST (Note 3) 30,228,000 28,045,000
COMMITMENTS AND CONTINGENCIES (Note 7)
SHAREHOLDERS' EQUITY (Note 4):
Shares of beneficial interest, $1 par; authorized
unlimited; issued and outstanding 13,314,223 shares
at March 31, 1999 and 13,299,723 shares at
December 31, 1998 13,314,000 13,300,000
Capital contributed in excess of par 145,428,000 145,103,000
Distributions in excess of net income (21,708,000) (21,321,000)
------------ ------------
137,034,000 137,082,000
------------ ------------
$486,839,000 $481,615,000
============ ============
The accompanying notes are an integral part of these statements.
-1-
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF INCOME
(Note 1)
(Unaudited)
Three Months Ended
-------------------------------
March 31, March 31,
1999 1998
----------- -----------
REVENUES:
Gross revenues from real estate $21,100,000 $13,526,000
Interest and other income 163,000 121,000
----------- -----------
21,263,000 13,647,000
----------- -----------
EXPENSES:
Property operating expenses 7,377,000 5,093,000
Depreciation and amortization 3,216,000 2,138,000
General and administrative expenses 853,000 738,000
Interest expense 5,105,000 1,978,000
----------- -----------
16,551,000 9,947,000
----------- -----------
Income before equity in unconsolidated
entities, gains on sales of interests in real
estate and minority interest in operating
partnership
4,712,000 3,700,000
EQUITY IN LOSS OF PREIT-RUBIN, INC. (Note 2) (1,092,000) (358,000)
EQUITY IN INCOME OF PARTNERSHIPS AND JOINT VENTURES (Note 3) 1,466,000 1,475,000
GAINS ON SALES OF INTERESTS IN REAL ESTATE 1,346,000 --
----------- -----------
Income before minority interest in
operating partnership 6,432,000 4,817,000
MINORITY INTEREST IN OPERATING PARTNERSHIP (562,000) (224,000)
----------- -----------
NET INCOME $ 5,870,000 $ 4,593,000
=========== ===========
BASIC INCOME PER SHARE (Note 4) $ .44 $ .35
=========== ===========
DILUTED INCOME PER SHARE (Note 4) $ .44 $ .34
=========== ===========
The accompanying notes are an integral part of these statements.
-2-
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(NOTES 1 AND 6)
(Unaudited)
Three Months Ended
---------------------------
March 31, March 31,
1999 1998
---------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $5,870,000 $ 4,593,000
Adjustments to reconcile net income to net cash
provided by operating activities-
Minority interest in operating partnership 562,000 224,000
Depreciation and amortization 3,216,000 2,138,000
Provision for doubtful accounts 326,000 10,000
Gains on sales of interests in real estate (1,346,000) --
Equity in loss of PREIT-RUBIN, Inc. 1,092,000 358,000
Decrease in allowance for possible losses (37,000) (47,000)
Change in assets and liabilities-
Rents and sundry receivables 181,000 (172,000)
Deferred costs, prepaid real estate taxes and expenses (2,274,000) (448,000)
Accrued pension and retirement benefits 16,000 (42,000)
Accrued expenses and other liabilities (1,329,000) (204,000)
Tenants' deposits and deferred rents 314,000 (124,000)
Others 93,000 53,000
---------- ------------
Net cash provided by operating activities 6,322,000 6,339,000
---------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in wholly-owned real estate (3,765,000) (776,000)
Investments in property under development (5,133,000) (8,711,000)
Investment in and advances to PREIT-RUBIN, Inc. (786,000) (200,000)
Investments in partnerships and joint ventures (300,000) (1,121,000)
Cash proceeds from sale of interest in partnership 1,093,000 --
Cash distributions from partnerships and joint ventures
in excess of equity in income 267,000 272,000
---------- ------------
Net cash used in investing activities (8,624,000) (10,536,000)
---------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal installments on mortgage notes payable (729,000) (562,000)
Repayment of mortgage notes payable -- (33,681,000)
Proceeds from bank loans payable 7,700,000 44,951,000
Shares of beneficial interest issued -- 113,000
Payment of deferred financing and equity offering costs (888,000) (934,000)
Distributions paid to shareholders (6,258,000) (6,248,000)
Distributions paid to OP Unit holders (529,000) (304,000)
Distributions to minority partners (131,000) (6,000)
---------- ------------
Net cash (used in) provided by financing activities (835,000) 3,329,000
---------- ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,137,000) (868,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 6,135,000 1,324,000
---------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $2,998,000 $ 456,000
========== ============
The accompanying notes are an integral part of these statements.
-3-
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1999
1. BASIS OF PRESENTATION:
The Registrant 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 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.
Certain prior period amounts have been reclassified to conform with current
period presentation.
2. INVESTMENT IN PREIT-RUBIN, INC.:
PREIT-RUBIN, Inc. ("PRI") is responsible for various activities, including
management, leasing and real estate development of certain of the Registrant's
properties and for properties on behalf of third parties. Total management fees
paid by the Registrant's properties to PRI are included in property operating
expenses in the accompanying consolidated statements of income and amounted to
$98,000 and $71,000 for the three-month periods ended March 31, 1999 and 1998,
respectively. The Registrant's properties also paid leasing and development fees
to PRI totaling $216,000 and $137,000 for the three-month periods ended March
31, 1999 and 1998.
Leasing and development fees paid by the Registrant's properties to PRI are
capitalized and amortized to expense in accordance with the Registrant's normal
accounting policies. Intercompany profits earned by PRI related to such
activities are deferred and will be amortized to income over these same periods
in order to more properly match revenues and expenses.
PRI also provides management, leasing and development services for partnerships
and other ventures in which certain officers of the Registrant and PRI have
either direct or indirect ownership interests. Total revenues earned by PRI for
such services were $847,000 and $850,000 for the three-month periods ended March
31, 1999 and 1998, respectively.
-4-
Summarized unaudited financial information for PREIT-RUBIN, Inc. as of and for
the three-month periods ended March 31, 1999 and 1998 is as follows:
For the Three For the Three
Months Ended Months Ended
March 31, 1999 March 31, 1998
-------------- --------------
Total assets $10,644,000 $12,740,000
=========== ===========
Management fees $ 1,238,000 $ 1,278,000
Leasing commissions 1,070,000 1,224,000
Development fees 242,000 190,000
Other revenues 488,000 629,000
----------- -----------
Total revenue $ 3,038,000 $ 3,321,000
=========== ===========
Net loss $(1,150,000) $ (377,000)
=========== ===========
Registrant's share of net loss $(1,092,000) $ (358,000)
=========== ===========
3. 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 18 partnerships and joint
ventures and 5 properties under development at March 31, 1999, and 24
partnerships and joint ventures and 4 properties under development at December
31, 1998, and the Registrant's equity in income for the three months ended
March 31, 1999 and 1998:
-5-
March 31, December 31,
1999 1998
------------ ------------
ASSETS
Investments in real estate, at cost:
Multifamily properties $ 54,663,000 $ 54,396,000
Retail properties 197,145,000 185,900,000
Industrial property -- 1,275,000
Properties under development 21,045,000 25,601,000
Land 926,000 926,000
------------ ------------
Total investments in real estate 273,779,000 268,098,000
Less- Accumulated depreciation 65,241,000 64,478,000
------------ ------------
208,538,000 203,620,000
Cash and cash equivalents 7,683,000 7,107,000
Deferred costs, prepaid real estate taxes and expenses,
and other assets, net 32,047,000 34,923,000
------------ ------------
Total assets $248,268,000 $245,650,000
============ ============
LIABILITIES AND PARTNERS' EQUITY
Mortgage notes payable $222,038,000 218,278,000
Bank loans payable 3,315,000 3,260,000
Other liabilities 8,824,000 9,675,000
------------ ------------
Total liabilities 234,177,000 231,213,000
------------ ------------
Net equity 14,091,000 14,437,000
Less: Partners' share 809,000 998,000
------------ ------------
Investment in partnerships and joint ventures $ 13,282,000 $ 13,439,000
============ ============
-6-
EQUITY IN INCOME OF PARTNERSHIPS AND JOINT VENTURES
Three Months Ended
----------------------------------
March 31, March 31,
1999 1998
----------- -----------
Gross revenues from real estate $14,158,000 $14,737,000
----------- -----------
Expenses:
Property operating expenses 4,852,000 5,403,000
Mortgage and bank loan interest 4,188,000 4,233,000
Depreciation and amortization 2,154,000 2,071,000
----------- -----------
11,194,000 11,707,000
----------- -----------
2,964,000 3,030,000
Partners' share (1,498,000) (1,555,000)
----------- -----------
Equity in income of partnerships
and joint ventures $ 1,466,000 $ 1,475,000
=========== ===========
4. EARNINGS PER SHARE:
Basic Earnings Per Share is based on the weighted average number of common
shares outstanding during the year. Diluted Earnings Per Share is based on the
weighted average number of shares outstanding during the year, adjusted to give
effect to common share equivalents. A reconciliation between basic and diluted
Earnings Per Share is shown below:
For the Three Months Ended
March 31, 1999
-----------------------------------------
Per Share
Income Shares Amount
---------- ---------- ---------
BASIC EARNINGS PER SHARE:
Net income $5,870,000 13,308,584 $ .44
========== ========== =========
DILUTED EARNINGS PER SHARE:
Net income $5,870,000 13,308,584
Share options issued -- 7,052
---------- ----------
$5,870,000 13,315,636 $ .44
========== ========== =========
-7-
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
========== ========== =========
5. 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 29, 1999 May 28, 1999 June 15, 1999 $.47
April 30, 1998 May 31, 1998 June 15, 1998 $.47
6. CASH FLOW INFORMATION:
Cash paid for interest was $4,943,000 (net of capitalized interest of $419,000)
and $2,395,000 (net of capitalized interest of $311,000) for the three month
periods ended March 31, 1999 and March 31, 1998, respectively.
7. 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.
-8-
As part of the merger with PREIT-RUBIN, Inc. (formerly The Rubin Organization,
Inc.), the Registrant entered into a contribution agreement (the "Contribution
Agreement") which includes a provision for PREIT Associates, L.P., the
Registrant's operating partnership, to issue up to 800,000 additional Class A
operating partnership ("OP") units over the five-year period, beginning October
1, 1997 and ending September 30, 2002 according to a formula based upon the
Registrant's adjusted funds from operations per share during the five-year
period. The Contribution Agreement establishes "hurdle" and "target" levels for
the Registrant's adjusted funds from operations per share during specified
earn-out periods to determine whether, and to what extent, the contingent OP
units will be issued. The Registrant intends to account for the issuance of
contingent OP units as additional purchase price when such amounts are
determinable.
At March 31, 1999, the Registrant had approximately $17.0 million committed to
complete current development and redevelopment projects. In connection with
certain development properties, PREIT Associates, L.P. may be required to issue
additional OP units upon the achievement of certain financial results.
8. SEGMENT INFORMATION:
In 1998, the Registrant adopted Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information." This
Statement established standards for reporting financial information about
operating segments in interim and annual financial reports and provides for a
"management approach" in identifying the reportable segments.
The Registrant has four reportable segments: (1) retail properties, (2)
multifamily properties, (3) other, and (4) corporate. The retail segment
includes the operation and management of 20 regional and community shopping
centers (10 wholly owned and 10 owned in joint venture form). The multifamily
segment includes the operation and management of 19 apartment communities (14
wholly owned and 5 owned in joint venture form). The other segment includes the
operation and management of 5 retail properties under development (3 wholly
owned and 2 owned in joint venture form), 5 industrial properties, (all wholly
owned) and 3 land parcels (1 wholly owned and 2 joint ventures). The corporate
segment is responsible for cash and investment management and certain other
general support functions.
The accounting policies for the segments are the same as those the Registrant
uses for its consolidated financial reporting, except that for segment reporting
purposes, the Registrant uses the "proportionate-consolidation method" of
accounting (a non-GAAP measure) for joint venture properties, instead of the
equity method of accounting. The Registrant calculates the
proportionate-consolidation method by applying its percentage ownership interest
to the historical financial statements of its equity method investments.
-9-
(In thousands)
Adjustments
to Equity Total
Three Months Ended March 31, 1999 Retail Multifamily Other Corporate Total Method Consolidated
- --------------------------------- --------- ----------- --------- --------- --------- ----------- ------------
Real estate operating revenues $ 14,876 $ 12,804 $ 396 $ -- $ 28,076 $ (6,976) $ 21,100
Real estate operating expense 4,552 5,205 4 -- 9,761 (2,384) 7,377
-------- -------- ------- ------- -------- --------- --------
Net operating income 10,324 7,599 392 -- 18,315 (4,592) 13,723
-------- -------- ------- ------- -------- --------- --------
General and administrative expenses -- -- -- (853) (853) -- (853)
Interest income -- -- -- 163 163 -- 163
PRI net operating income -- -- -- (800) (800) 800 --
-------- -------- ------- ------- -------- --------- --------
EBIDTA 10,324 7,599 392 (1,490) 16,825 (3,792) 13,033
-------- -------- ------- ------- -------- --------- --------
Interest expense (4,595) (2,233) (163) (354) (7,345) 2,240 (5,105)
Depreciation and amortization (2,326) (1,839) (26) (307) (4,498) 1,282 (3,216)
PRI income taxes -- -- -- 104 104 (104) --
Gains on sales of interests in real
estate 445 -- 901 -- 1,346 -- 1,346
Minority interest in operating
partnership -- -- -- (562) (562) -- (562)
Equity in interest of partnerships
and joint ventures -- -- -- -- -- 1,466 1,466
Equity in loss of PRI -- -- -- -- -- (1,092) (1,092)
-------- -------- ------- ------- -------- --------- --------
Net income $ 3,848 $ 3,527 $ 1,104 $(2,609) $ 5,870 $ -- $ 5,870
-------- -------- ------- ------- -------- --------- --------
Investments in real estate, at cost $260,026 $232,256 $23,558 $ -- $515,840 $ -- $515,840
-------- -------- ------- ------- -------- --------- --------
Total assets $348,305 $203,715 $34,812 $15,777 $602,609 $(115,770) $486,839
-------- -------- ------- ------- -------- --------- --------
Recurring capital expenditures $ 137 $ 815 $ -- $ -- $ 952 $ (140) $ 812
-------- -------- ------- ------- -------- --------- --------
Adjustments
to Equity Total
Three Months Ended March 31, 1998 Retail Multifamily Other Corporate Total Method Consolidated
- --------------------------------- --------- ----------- --------- --------- --------- ----------- ------------
Real estate operating revenues $ 9,041 $ 11,222 $ 404 $ -- $ 20,667 $ (7,141) $ 13,526
Real estate operating expense 2,921 4,771 5 -- 7,697 (2,604) 5,093
-------- -------- ------- ------- -------- --------- --------
Net operating income 6,120 6,451 399 -- 12,970 (4,537) 8,433
-------- -------- ------- ------- -------- --------- --------
General and administrative expenses -- -- -- (738) (738) -- (738)
Interest income -- -- -- 122 122 (1) 121
PRI net operating income -- -- -- (221) (221) 221 --
-------- -------- ------- ------- -------- --------- --------
EBIDTA 6,120 6,451 399 (837) 12,133 (4,317) 7,816
-------- -------- ------- ------- -------- --------- --------
Interest expense (2,009) (1,730) (228) (210) (4,177) 2,199 (1,978)
Depreciation and amortization (1,345) (1,679) (29) (305) (3,358) 1,220 (2,138)
PRI income taxes -- -- -- 219 219 (219) --
Minority interest in operating
partnership -- -- -- (224) (224) -- (224)
Equity in interest of partnerships
and joint ventures -- -- -- -- -- 1,475 1,475
Equity in income of PRI -- -- -- -- -- (358) (358)
-------- -------- ------- ------- -------- --------- --------
Net income $ 2,766 $ 3,042 $ 142 $(1,357) $ 4,593 $ -- $ 4,593
-------- -------- ------- ------- -------- --------- --------
Investments in real estate, at cost $120,347 $161,907 $15,120 $ -- $297,374 $ -- $297,374
-------- -------- ------- ------- -------- --------- --------
Total assets $176,165 $169,947 $29,841 $ 9,746 $385,699 $(112,303) $273,396
-------- -------- ------- ------- -------- --------- --------
Recurring capital expenditures $ 112 $ 541 $ -- $ -- $ 653 $ (165) $ 488
-------- -------- ------- ------- -------- --------- --------
-10-
9. RECENT ACCOUNTING PRONOUNCEMENTS:
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The Statement
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. This Statement will be effective for the
Registrant's calendar year 2000. This Statement must be applied to (a)
derivative instruments and (b) certain derivative instruments embedded in hybrid
contracts that were issued, acquired, or substantively modified after December
31, 1997. The Registrant does not expect the adoption of this statement to have
a material impact on its financial position or results of operations.
10. SUBSEQUENT EVENT:
On April 13, 1999, the Registrant completed the financing of eight multifamily
communities with $108 million of permanent, fixed-rate, long-term debt. The
financing replaces short-term floating rate debt with loans with a weighted
average fixed interest rate of 6.77%. The loans, secured with the eight
properties, amortize over 30 years and mature May 2009. Approximately an $88
million portion of the proceeds was used to repay outstanding amounts under the
Registrant's Credit Facility. As a result of this repayment, a balance of
approximately $60 million of the Registrant's Credit Facility remained
outstanding. The balance of the proceeds was used to pay off a short-term
floating rate loan of approximately $17 million which was secured by the
recently acquired Northeast Tower Center located in Philadelphia, Pennsylvania
and fund the financing costs of approximately $3 million.
The Properties secured by this permanent debt are as follows:
Property Name Location Units Loan Amount (1)
- ------------------------- ------------------ ----- ---------------
Boca Palms Apartments Boca Raton, FL 522 $ 22,600,000
Cobblestone Apartments Pompano Beach, FL 384 13,850,000
Palms of Pembroke Pembroke Pines, FL 348 16,600,000
Marylander Apartments Baltimore, MD 508 12,300,000
Hidden Lakes Apartments Dayton, OH 360 10,700,000
Kenwood Gardens Toledo, OH 504 7,250,000
Lakewood Hills Apartments Harrisburg, PA 562 18,750,000
2031 Locust Street Philadelphia, PA 87 5,950,000
----- ------------
3,275 $108,000,000
===== ============
(1) Each loan is non-recourse and the loans are not cross-collateralized.
-11-
Item 2.
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
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 Internal
Revenue 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 long-term secured and unsecured
indebtedness and the issuance of additional equity securities.
The Credit Facility
As of March 31, 1999, $146.2 million of borrowings under the Credit Facility
were outstanding ($143.0 million directly by the Registrant and $3.2 million
through partnerships and joint ventures) and, subject to the terms and
conditions of the Credit Facility, up to $3.8 million was available to fund
property acquisitions, scheduled debt maturities and other uses. At March 31,
1999 the interest rate on the Credit Facility was 6.81%.
-12-
Mortgage Notes
In order to secure additional funds for its acquisition and development
activities, on April 13, 1999, the Registrant concluded the financing of eight
multifamily communities with $108 million of permanent, fixed-rate, long-term
debt. With the financing, the Registrant replaced short-term floating rate debt
with fixed rate, mortgage debt. The new debt carries a weighted average fixed
interest rate of approximately 6.77%, equating to a spread of 158 basis points
over the yield on the ten year U. S. Treasury Notes at the time rates were
locked. The eight properties (see Note 10 of the Consolidated Financial
Statements) secure the non-recourse loans, which amortize over 30 years and
mature in May 2009. Proceeds from these newly-placed loans were used to 1) repay
approximately $88 million of the Credit Facility, 2) pay off a short-term
floating rate loan of approximately $17 million and 3) fund approximately $3
million in closing costs. As a result of the repayment of the Registrant's
Credit Facility, a balance of approximately $60 million of the Registrant's
Credit Facility remained outstanding.
In addition to amounts due under the Credit Facility prior to December 31, 2000,
construction and 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 $26 million of which the Registrant's
proportionate share is $13 million. Construction and mortgage loans on
properties wholly-owned by the Registrant also mature by their terms. Balloon
payments on these loans total $32 million.
Funds from Operations
Funds from operations (FFO) increased by $1,411,000 for the three months ended
March 31, 1999, as compared to the three months ended March 31, 1998, as
follows:
Three Months Ended
------------------------------
March 31, March 31,
Funds from Operations(1) 1999 1998
- -------------------------------------------------------- ----------- -----------
Income before minority interest in operating partnership $6,432,000 $ 4,817,000
Less: Gains on sales of interests in real estate (1,346,000) --
Add:
Depreciation and amortization-
Wholly-owned and consolidated partnerships 3,156,000 2,088,000
Unconsolidated partnerships and joint ventures 1,059,000 998,000
Excess purchase price over net assets acquired 53,000 29,000
Less:
Depreciation of non-real estate assets (60,000) (58,000)
Amortization of deferred financing costs (139,000) (130,000)
----------- -----------
Funds from operations $ 9,155,000 $ 7,744,000
=========== ===========
Weighted average number of shares outstanding 13,308,584 13,291,936
Weighted average effect of full conversion of OP Units 1,273,514 646,286
----------- -----------
14,582,098 13,938,222
=========== ===========
-13-
(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 similar measures reported by other companies.
Cash Flows
During the three months ended March 31, 1999, the Registrant generated $6.3
million in cash flow from operating activities. Investing activities used cash
of $9.0 million including (i) $5.1 million in investments in property under
development, (ii) $3.8 million in investments in wholly-owned real estate
assets, (iii) $1.0 million in investments in the affiliated management company
and partnerships, offset by (iv) cash proceeds from the sale of a partnership
interest of $1.0 million and (v) distributions from partnerships in excess of
equity in income of $0.3 million. Financing activities used cash flow of $0.8
million and included (i) $7.7 million in borrowings under the Company's Credit
Facility, offset by (ii) $6.9 million of distributions to shareholders, OP unit
holders and minority interests, (iii) payments of deferred financing costs of
$0.9 million, and (iv) principal installments on mortgages of $0.7 million.
Commitments
At March 31, 1999, the Registrant had approximately $17 million committed to
complete current development and redevelopment projects. In connection with
certain development properties, PREIT Associates, L.P. may be required to issue
additional OP units upon the achievement of certain financial results.
-14-
Interest Rate Protection
In order to reduce exposure to variable interest rates, the Registrant entered
into a six-year interest rate swap agreement with First Union, on $20 million of
indebtedness which fixes a rate of 6.12% per annum versus 30-day LIBOR until
2001.
Contingent Liability
The Registrant along with certain of its joint venture partners has guaranteed
debt totaling $7 million.
Results of Operations
Three Month Periods Ended March 31, 1999 and March 31, 1998
Gross revenues from real estate increased by $7,574,000 to $21,100,000 for the
three-month period ended March 31, 1999, as compared to the corresponding period
in 1998. The 1999 period included $7,234,000 of revenues attributable to the
acquisitions made by the Registrant during 1998 (the "1998 Acquisitions") as
described in the Registrant's 1998 Form 10-K. Revenues from properties owned
during both periods increased by $341,000 primarily as a result of an increase
in apartment revenues.
Property operating expenses increased by $2,284,000 to $7,377,000. The 1999
period included $2,266,000 of expenses attributable to the 1998 Acquisitions.
Operating expenses from properties owned during both periods increased by
$19,000.
Depreciation and amortization increased by $1,078,000 to $3,216,000 primarily as
a result of 1998 Acquisitions and increased amortization of financing costs.
Depreciation for properties owned during both periods decreased by $73,000.
Interest expense increased by $3,127,000 to $5,105,000. Interest expense
attributable to mortgaged properties increased by $1,754,000 due to the 1998
Acquisitions. Interest expense incurred against the Registrant's Credit Facility
increased by $1,373,000 also due to the 1998 Acquisitions.
Equity in income of partnerships and joint ventures decreased by $9,000 to
$1,466,000. The 1999 period includes $194,000 of equity in income attributable
to the 1998 Acquisitions. The 1999 period also includes loss from properties
sold during 1998 in the amount of $58,000. Equity in income of properties owned
during both periods decrease by $145,000 as a result of a decrease of $178,000
in net income from Whitehall Mall which is currently being redeveloped.
Equity in net loss of PREIT-RUBIN, Inc. for the 1999 period was $1,092,000 as
compared to $358,000 in the 1998 period.
Minority interest in the operating partnership increased by $338,000 to $562,000
as a result of OP units issued in connection with five acquisitions during 1998
and additional contingent OP units issued under the Contribution Agreement.
-15-
Net income for the quarter ended March 31, 1999 increased to $1,277,000 from
$5,870,000 as reported in the comparable period in the prior year.
Acquisitions
The Registrant is actively involved in pursing and evaluating a number of
individual property and portfolio acquisition opportunities. In addition, the
Registrant has stated that a key strategic goal is to obtain managerial control
of all of its assets. In certain cases where existing joint venture assets are
managed by outside partners, the Registrant is considering the possible
acquisition of these outside interests. In certain cases where that opportunity
does not exist, the Registrant is considering the disposition of its interests.
There can be no assurance that the Registrant will consummate any such
acquisition or disposition.
Dispositions
Consistent with management's stated long-term strategic plan to review and
evaluate all joint venture real estate holdings, on March 2, 1999 the Registrant
sold its 50% interest in 135 Commerce Drive located in Fort Washington,
Pennsylvania. The gain on the sale of this industrial property was approximately
$1.8 million, of which $0.9 million was the Registrant's share. The proceeds
from this sale were applied to reduce outstanding borrowings under the
Registrant's Credit Facility.
Development, Expansions and Renovations
The Registrant is involved in a number of development and redevelopment
projects, which may require equity funding by the Registrant or third-party debt
or equity financing. In each case, the Registrant 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 Registrant'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 use of
borrowed funds in joint venture projects.
Year 2000 Issue
Many existing computer programs use only two digits to identify a year in the
date field. Those programs were designed and developed at a time when data
storage was expensive, and the impact of the upcoming century change was not
considered. If not corrected, many programs may fail or provide inaccurate
results at and after the turn of the century. The Registrant (and tenants that
provide the Registrant with a significant percentage of its income) use
information systems and control systems which may be affected by the two digit
date.
The Registrant established a Year 2000 Remediation Plan consisting of the
following phases: inventorying systems and devices including information
technology ("IT") and non-IT systems that are vulnerable to the Year 2000
problem, assessment of the criticality of the inventoried items, remediation of
the noncompliant items, and testing of the corrections that have been applied.
The Registrant has completed the first phase of its Remediation Plan for IT
systems and has determined that its accounting and payroll systems, which the
Registrant believes to be its mission critical systems, are year 2000 compliant.
In addition, the Registrant has begun the first phase of its Remediation Plan
for its non-IT systems (such as elevators, HVAC and lighting systems) and is
currently completing an inventory of non-IT systems and
-16-
assessing the potential risks of noncompliance. Some of the Registrant's
business partners, suppliers and tenants are also being surveyed relative to
their Year 2000 compliance to mitigate the potential impact of Year 2000 issues.
The amount of remediation effort is not anticipated to be extensive due to the
Registrant's use of readily available, off-the-shelf software and hardware
products that are supported by the manufacturers. After evaluating the
Registrant's compliance efforts, appropriate contingency plans will be developed
based on the outcome of the assessment phase and the survey of some of its major
suppliers and tenants. The Registrant expects to complete the Year 2000
Remediation Plan, including final testing by the beginning of the fourth quarter
of 1999.
Management has determined the approximate total cost of its Year 2000
Remediation Plan and the potential related impact on operations. Amounts
incurred to date have been less than $100,000 and the estimated remaining
expenses of Year 2000 remediation are expected to be less than $200,000.
Costs associated with a Year 2000 issue could have a material impact on the
operations of the Registrant.
Forward-Looking Statements
The matters discussed in this report, as well as news releases issued from time
to time by the Registrant include use of forward-looking terminology such as
"may," "will," "should," "expect," "anticipate," "estimate," "plan," or
"continue" or the negative thereof or other variations thereon, or comparable
terminology which constitute "forward-looking statements." Such forward-looking
statements (including without limitation, information concerning the
Registrant's planned acquisition, development and divestiture activities, short-
and long-term liquidity position, ability to raise capital through public and
private offerings of debt and/or equity securities, availability of adequate
funds at reasonable cost, revenues and operating expenses for some or all of the
properties, leasing activities, occupancy rates, changes in local market
conditions or other competitive factors) involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of the Registrant's results to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements. The Registrant disclaims any obligation to update
any such factors or to publicly announce the result of any revisions to any of
the forward-looking statements contained herein to reflect future events or
developments.
-17-
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in the net financial instrument position or
sensitivity to market risk since December 31, 1998 as reported by
the Registrant in its Form 10-K for the year ended December 31, 1998.
-18-
PART II
OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(b) The Registrant's Board of Trustees adopted a Rights Agreement dated
as of April 30, 1999 by and between the Registrant and American Stock Transfer
and Trust Company as Rights Agent (the "Rights Agreement"). The Registrant
incorporates the relevant information pertaining to the Rights Agreement by
reference to its current report on Form 8-K filed on May 3, 1999 and its
registration statement on Form 8-A filed on May 3, 1999.
Item 5. Other Information
The Registrant issued a press release on April 13, 1999 containing
financial information for the quarter ended March 31, 1999. A copy of the press
release is attached hereto as Exhibit 99.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4 Form of the Registrant's share certificate, as amended
April 14, 1999.
10.1 Promissory Note, dated April 13, 1999, by and between
the Registrant and GMAC Commercial Mortgage Corporation,
a California corporation ("GMAC").
10.2 Mortgage and Security Agreement, dated April 13, 1999,
by and between the Registrant and GMAC.
10.3 Promissory Note, dated April 13, 1999, by and between PR
Marylander LLC, a Delaware limited liability company
("PR Marylander"), and GMAC.
10.4 Indemnity Deed of Trust and Security Agreement, dated
April 13, 1999, by and between PR Marylander and GMAC.
10.5 Promissory Note, dated April 13, 1999, by and between PR
Kenwood Gardens LLC, a Delaware limited liability
company ("PR Kenwood Gardens"), and GMAC.
10.6 Mortgage and Security Agreement, dated April 13, 1999,
by and between PR Kenwood Gardens and GMAC.
-19-
10.7 Promissory Note, dated April 13, 1999, by and between GP
Stones Limited Partnership, a Florida limited
partnership ("GP Stones"), and GMAC.
10.8 Mortgage and Security Agreement, dated April 13, 1999,
by and between GP Stones and GMAC.
10.9 Promissory Note, dated April 13, 1999, by and between PR
Boca Palms LLC, a Delaware limited liability company
("PR Boca Palms"), and GMAC.
10.10 Mortgage and Security Agreement, dated April 13, 1999,
by and between PR Boca Palms and GMAC.
10.11 Promissory Note, dated April 13, 1999, by and between PR
Pembroke LLC, a Delaware limited liability company ("PR
Pembroke"), and GMAC.
10.12 Mortgage and Security Agreement, dated April 13, 1999,
by and between PR Pembroke and GMAC.
10.13 Promissory Note, dated April 13, 1999, by and between PR
Hidden Lakes LLC, a Delaware limited liability company
("PR Hidden Lakes"), and GMAC.
10.14 Mortgage and Security Agreement, dated April 13, 1999,
by and between PR Hidden Lakes and GMAC.
10.15 Promissory Note, dated April 13, 1999, by and between
PREIT Associates L.P., a Delaware limited partnership
("PREIT Associates"), and GMAC.
10.16 Mortgage and Security Agreement, dated April 13, 1999,
by and between PREIT Associates and GMAC.
27. Financial Data Schedule (included in electronic filing
format).
99. Press Release, issued May 13, 1999, containing financial
information for the quarter ended March 31, 1999.
(b) Reports on Form 8-K
(i) Report on Form 8-K dated December 23, 1998 and filed on
January 7, 1999, as amended by Form 8-K/A-1 dated
December 23, 1998 and filed on March 8, 1999.
-20-
SIGNATURES
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 hereunto 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/ Dante J. Massimini
-------------------------------------
Dante J. Massimini
Senior Vice President
and Treasurer
May 14, 1999
-21-
Exhibit Index
Exhibit
Number Description
- ------- -----------
4 Form of the Registrant's share certificate, as amended April 14,
1999.
10.1 Promissory Note, dated April 13, 1999, by and between the Registrant
and GMAC Commercial Mortgage Corporation, a California corporation
("GMAC").
10.2 Mortgage and Security Agreement, dated April 13, 1999, by and
between the Registrant and GMAC.
10.3 Promissory Note, dated April 13, 1999, by and between PR Marylander
LLC, a Delaware limited liability company ("PR Marylander"), and
GMAC.
10.4 Indemnity Deed of Trust and Security Agreement, dated April 13,
1999, by and between PR Marylander and GMAC.
10.5 Promissory Note, dated April 13, 1999, by and between PR Kenwood
Gardens LLC, a Delaware limited liability company ("PR Kenwood
Gardens"), and GMAC.
10.6 Mortgage and Security Agreement, dated April 13, 1999, by and
between PR Kenwood Gardens and GMAC.
10.7 Promissory Note, dated April 13, 1999, by and between GP Stones
Limited Partnership, a Florida limited partnership ("GP Stones"),
and GMAC.
10.8 Mortgage and Security Agreement, dated April 13, 1999, by and
between GP Stones and GMAC.
10.9 Promissory Note, dated April 13, 1999, by and between PR Boca Palms
LLC, a Delaware limited liability company ("PR Boca Palms"), and
GMAC.
10.10 Mortgage and Security Agreement, dated April 13, 1999, by and
between PR Boca Palms and GMAC.
10.11 Promissory Note, dated April 13, 1999, by and between PR Pembroke
LLC, a Delaware limited liability company ("PR Pembroke"), and GMAC.
10.12 Mortgage and Security Agreement, dated April 13, 1999, by and
between PR Pembroke and GMAC.
10.13 Promissory Note, dated April 13, 1999, by and between PR Hidden
Lakes LLC, a Delaware limited liability company ("PR Hidden Lakes"),
and GMAC.
-22-
10.14 Mortgage and Security Agreement, dated April 13, 1999, by and
between PR Hidden Lakes and GMAC.
10.15 Promissory Note, dated April 13, 1999, by and between PREIT
Associates L.P., a Delaware limited partnership ("PREIT
Associates"), and GMAC.
10.16 Mortgage and Security Agreement, dated April 13, 1999, by and
between PREIT Associates and GMAC.
27. Financial Data Schedule (included in electronic filing format).
99. Press Release, issued May 13, 1999, containing financial information
for the quarter ended March 31, 1999.
-23-