The following analysis of our consolidated financial condition and results of
operations should be read in conjunction with our unaudited 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 real estate investment trusts ("REITs") in
the United States, has a primary investment focus on retail shopping malls
located in the eastern half of the United States, primarily in the Mid-Atlantic
region. Our portfolio currently consists of a total of 49 properties in 13
states, including 38 enclosed malls, eight strip and power centers and three
development properties. The operating retail properties have a total of
approximately 33.1 million square feet. The operating retail properties that we
consolidate for financial reporting purposes have a total of approximately
28.5 million square feet, of which we own approximately 22.8 million square
feet. The operating retail properties that are owned by unconsolidated
partnerships with third parties have a total of approximately 4.6 million square
feet, of which 3.1 million square feet are owned by such partnerships. The
development portion of our portfolio contains three properties in two states,
with two classified as "mixed use" (a combination of retail and other uses) and
one classified as "other."
Our primary business is owning and operating retail shopping malls, which we
primarily do through our operating partnership, PREIT Associates, L.P. ("PREIT
Associates"). We provide management, leasing and real estate development
services through PREIT Services, LLC ("PREIT Services"), which generally
develops and manages properties that we consolidate for financial reporting
purposes, and PREIT-RUBIN, Inc. ("PRI"), which generally develops and manages
properties that we do not consolidate for financial reporting purposes,
including properties we own interests in through partnerships with third parties
and properties that are owned by third parties in which we do not have an
interest. PRI is a taxable REIT subsidiary, as defined by federal tax laws,
which means that it is able to offer additional services to tenants without
jeopardizing our continuing qualification as a REIT under federal tax law.
Our revenue consists primarily of fixed rental income, additional rent in the
form of expense reimbursements, and percentage rent (rent that is based on a
percentage of our tenants' sales or a percentage of sales in excess of
thresholds that are specified in the leases) derived from our income producing
properties. We also receive income from our real estate partnership investments
and from the management and leasing services PRI provides.
Net loss for the three months ended June 30, 2012 was $12.4 million, a decrease
of $6.6 million compared to a net loss of $19.0 million for the three months
ended June 30, 2011. This decrease was primarily due to lower depreciation and
amortization expenses and lower interest expenses. Net loss for the six months
ended June 30, 2012 was $22.8 million, a decrease of $11.1 million compared to a
net loss of $33.9 million for the six months ended June 30, 2011. This decrease
was primarily due to lower depreciation and amortization expenses and lower
interest expenses.
We evaluate operating results and allocate resources on a property-by-property
basis, and do not distinguish or evaluate our consolidated operations on a
geographic basis. We do not have any significant revenue or asset
concentrations, and thus the individual properties have been aggregated into one
reportable segment based upon their similarities with regard to the nature of
our properties and the nature of our tenants and operational processes, as well
as long-term financial performance. In addition, no single tenant accounts for
10% or more of our consolidated revenue, and none of our properties are located
outside the United States.
We hold our interests in our portfolio of properties through our operating
partnership, PREIT Associates. We are the sole general partner of PREIT
Associates and, as of June 30, 2012, held a 96.0% interest in the Class A and
Class B limited partnership units of PREIT Associates. We consolidate PREIT
Associates for financial reporting purposes. We hold our investments in seven of
the 46 retail properties and one of the three development properties in our
portfolio through unconsolidated partnerships with third parties in which we own
a 40% to 50% interest. We hold a noncontrolling interest in each unconsolidated
partnership, and account for such partnerships using the equity method of
accounting. We do not control any of these equity method investees for the
following reasons:
• Except for two properties that we co-manage with our partner, all of
the other entities are managed on a day-to-day basis by one of our
other partners as the managing general partner in each of the
respective partnerships. In the case of the co-managedproperties, all
decisions in the ordinary course of business are made jointly.
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• The managing general partner is responsible for establishing the
operating and capital decisions of the partnership, including budgets,
in the ordinary course of business.
• All major decisions of each partnership, such as the sale,
refinancing, expansion or rehabilitation of the property,require the
approval of all partners.
• Voting rights and the sharing of profits and losses are generally in
proportion to the ownership percentages of each partner.
We record the earnings from the unconsolidated partnerships using the equity
method of accounting under the statements of operations caption entitled "Equity
in income of partnerships," rather than consolidating the results of the
unconsolidated partnerships with our results. Changes in our investments in
these entities are recorded in the balance sheet caption entitled "Investment in
partnerships, at equity." In the case of deficit investment balances, such
amounts are recorded in "Distributions in excess of partnership investments."
We hold our interest in three of our unconsolidated partnerships through tenancy
in common arrangements. For each of these properties, title is held by us and
another person or persons, and each has an undivided interest in the property.
With respect to each of the three properties, under the applicable agreements
between us and the other persons with ownership interests, we and such other
persons have joint control because decisions regarding matters such as the sale,
refinancing, expansion or rehabilitation of the property require the approval of
both us and the other person (or at least one of the other persons) owning an
interest in the property. Hence, we account for each of the properties using the
equity method of accounting. The balance sheet items arising from these
properties appear under the caption "Investments in partnerships, at equity."
The statements of operations items arising from these properties appear in
"Equity in income of partnerships."
For further information regarding our unconsolidated partnerships, see note 3 to
our unaudited consolidated financial statements.
Current Economic Conditions and Our Leverage
The conditions in the economy and the disruptions in the financial markets have
caused fluctuations and variations in business and consumer confidence, resulted
in continued levels of relatively high unemployment and, in turn, have
negatively affected consumer spending on retail goods. We continue to adjust our
plans and actions to take into account the current environment.
The conditions in the economy and their effect on retail sales, as well as our
significant leverage resulting from use of debt to fund our redevelopment
program and other development activity, have combined to necessitate that we
consider various approaches to obtaining, using and recycling capital. In light
of these conditions, we are focusing on appropriately managing our liquidity. We
intend to consider all of our available options for accessing the capital
markets, given our position and constraints. We believe that we have access to
sufficient capital to fund our remaining redevelopment project and our other
foreseeable capital improvement projects.
We continue to contemplate ways to reduce our leverage through a variety of
means available to us, subject to and in accordance with the terms of our
Amended, Restated and Consolidated Senior Secured Credit Agreement (as amended,
the "2010 Credit Facility"). These steps might include obtaining additional
equity capital, including through the issuance of common or preferred equity
securities if market conditions are favorable, through our contribution of
assets to joint ventures or other partnerships or arrangements with
institutional investors, private equity investors or other REITs, through sales
of properties or interests in properties with values in excess of their mortgage
loans or allocable debt and application of the excess proceeds to debt
reduction, through refinancing of properties in amounts that exceed prior
mortgage balances or through other actions.
Capital Improvements and Development Projects
We might make capital improvements at our operating properties. Such
improvements vary in cost and complexity, and can include building out new or
existing space for individual tenants, upgrading common areas or exterior areas
such as parking lots, or redeveloping the entire property, among other projects.
Project costs are accumulated in "Construction in progress" on our consolidated
balance sheet until the asset is placed into service, and amounted to $93.3
million as of June 30, 2012.
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We are also engaged in several types of development projects. However, we do not
expect to make any significant investment in these projects in the short term.
As of June 30, 2012, we had incurred $57.3 million of costs (net of impairment
charges recorded in prior years) related to our activity at development
properties.
As of June 30, 2012, we had unaccrued contractual and other commitments related
to our capital improvement projects and development projects of $12.5 million in
the form of tenant allowances, lease termination fees, and contracts with
general service providers and other professional service providers.
Dispositions
We did not dispose of any properties during the six months ended June 30, 2012.
CRITICAL ACCOUNTING POLICIES
Critical Accounting Policies are 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 might change in subsequent periods. In preparing the
unaudited 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 revenue and
expenses during the reporting periods. In preparing the financial statements,
management has utilized available information, including our past history,
industry standards and the current economic environment, among other factors, in
forming its estimates and judgments, giving due consideration to materiality.
Management has also considered events and changes in property, market and
economic conditions, estimated future cash flows from property operations and
the risk of loss on specific accounts or amounts in determining its estimates
and judgments. Actual results may differ from these estimates. In addition,
other companies may utilize different estimates, which may affect comparability
of our results of operations to those of companies in similar businesses. The
estimates and assumptions made by management in applying critical accounting
policies have not changed materially during 2012 and 2011, except as otherwise
noted, and none of these estimates or assumptions have proven to be materially
incorrect or resulted in our recording any significant adjustments relating to
prior periods. We will continue to monitor the key factors underlying our
estimates and judgments, but no change is currently expected.
For additional information regarding our Critical Accounting Policies, see
"Critical Accounting Policies" in Part II, Item 7 of our Annual Report on Form
10-K, as amended, for the year ended December 31, 2011.
OFF BALANCE SHEET ARRANGEMENTS
We have no material off-balance sheet items other than the partnerships
described in note 3 to the unaudited consolidated financial statements and in
the "Overview" section above.
RESULTS OF OPERATIONS
Occupancy
The table below sets forth certain occupancy statistics for our properties as of
June 30, 2012 and 2011:
Occupancy (1) as of June 30,
Consolidated Unconsolidated
Properties Properties Combined (2)
2012 2011 2012 2011 2012 2011
Retail portfolio weighted average:
Total excluding anchors 86.7 % 86.1 % 93.1 % 92.1 % 87.7 % 87.1 %
Total including anchors 91.5 % 90.2 % 95.1 % 94.1 % 91.9 % 90.6 %
Malls weighted average:
Total excluding anchors 86.4 % 85.8 % 92.5 % 94.1 % 86.8 % 86.3 %
Total including anchors 91.3 % 89.9 %
94.9 % 95.3 % 91.5 % 90.2 %
Strip and power centers weighted average 97.2 % 97.0 % 95.2 % 93.4 % 95.8 % 94.5 %
(1) Occupancy for both periods presented includes all tenants irrespective of the
terms of their agreements.
(2) Combined occupancy is calculated by using occupied gross leasable area
("GLA") for consolidated and unconsolidated properties and dividing by total
GLA for consolidated and unconsolidated properties.
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Leasing Activity
The table below sets forth summary leasing activity information with respect to
our consolidated and unconsolidated properties for the six months ended June 30,
2012:
Annualized
Average Base Rent Increase (Decrease) in Tenant
psf Base Rent psf Improvements
Number GLA Previous New Dollar Percentage (1) psf (1)
New Leases-Previously Leased Space:
1st Quarter (2) 32 119,188 $ 20.58 $ 21.54 $ 0.96 4.7 % $ 3.02
2nd Quarter (3) 33 103,243 31.36 29.49 (1.87 ) (6.0 %) 2.92
Total/Average 65 222,431 $ 25.58 $ 25.23 $ (0.35 ) (1.4 %) $ 2.97
New Leases-Previously Vacant Space: (4)
1st Quarter 35 124,425 N/A $ 28.60 $ 28.60 N/A $ 3.82
2nd Quarter 35 168,069 N/A 17.98 17.98 N/A 3.79
Total/Average 70 292,494 N/A $ 22.50 $ 22.50 N/A $ 3.80
Renewal: (5)
1st Quarter (2) 139 481,428 $ 22.28 $ 22.92 $ 0.64 2.9 % $ -
2nd Quarter (3) 172 538,905 26.48 27.71 1.23 4.6 % 0.01
Total/Average 311 1,020,333 $ 24.50 $ 25.45 $ 0.95 3.9 % $ 0.01
Anchor New:
1st Quarter 3 285,136 N/A $ 13.87 $ 13.87 N/A $ 3.40
2nd Quarter - - N/A - - N/A -
Total/Average 3 285,136 N/A $ 13.87 $ 13.87 N/A $ 3.40
Anchor Renewal:
1st Quarter 1 100,115 $ 3.13 $ 3.13 $ - - $ -
2nd Quarter 1 212,000 0.35 0.35 - - -
Total/Average 2 312,115 $ 1.24 $ 1.24 $ - - $ -
(1) These leasing costs are presented as annualized costs per square foot and
are spread uniformly over the initial lease term.
(2) Leasing spreads on a gross rent basis (base rent plus common area
maintenance, real estate taxes and other charges) were -1.3% for New
Leases-Previously Leased Space and 0.0% for Renewals.
(3) Leasing spreads on a gross basis were -8.1% for New Leases-Previously Leased
Space and 1.5% for Renewals.
(4) This category includes newly constructed and recommissioned space.
(5) This category includes expansions, relocations and lease extensions.
As of June 30, 2012, for non-anchor leases, the average base rent per square
foot as of the expiration date was $28.79 for the renewing leases in "Holdover"
status and $25.52 for leases expiring in 2012.
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The following information sets forth our results of operations for the three and
six months ended June 30, 2012 and 2011.
Financial Overview
Net loss for the three months ended June 30, 2012 was $12.4 million, a decrease
of $6.6 million compared to a net loss of $19.0 million for the three months
ended June 30, 2011. Net loss for the six months ended June 30, 2012 was $22.8
million, a decrease of $11.1 million compared to a net loss of $33.9 million for
the six months ended June 30, 2011. Our June 30, 2012 results of operations were
primarily affected by decreased depreciation and amortization expense and
decreased interest expense.
Three months ended % Change Six months ended % Change
June 30, 2011 to June 30, 2011 to
(in thousands of dollars) 2012 2011 2012 2012 2011 2012
Real estate revenue $ 108,237 $ 107,391 1% $ 217,093 $ 216,953 0%
Interest and other income 884 809 9% 1,645 1,727 (5%)
Operating expenses (47,204 ) (47,467 )
(1%) (93,601 ) (96,560 ) (3%)
Depreciation and amortization
(33,400 ) (36,614 )
(9%) (67,118 ) (71,124 ) (6%)
General and administrative expenses
(10,240 ) (10,433 )
(2%) (20,124 ) (20,015 ) 1%
Provision for executive separation expenses (796 )
- N/A (796 ) - N/A
Project costs and other expenses (39 ) (353 )
(89%) (397 ) (497 ) (20%)
Interest expense, net
(31,795 ) (34,941 )
(9%) (63,464 ) (68,554 ) (7%)
Equity in income of partnerships
1,952 1,147 70% 3,945 2,690 47%
Gains on sales of real estate - 1,450 (100%) - 1,450 (100%)
Net loss $ (12,401 ) $ (19,011 ) (35%) $ (22,817 ) $ (33,930 ) (33%)
The amounts in the preceding table reflect our consolidated properties and our
unconsolidated properties, which are presented under the equity method of
accounting in the line item "Equity in income of partnerships."
Real Estate Revenue
Real estate revenue increased by $0.8 million, or 1%, in the three months ended
June 30, 2012 compared to the three months ended June 30, 2011, primarily due
to:
• an increase of $1.5 million in base rent, including a $0.6 million
increase in straight line rent resulting from write-offs associated with
the Borders Group, Inc. liquidation during the three months ended June 30,
2011 that did not recur in 2012. Base rent also increased due to new store
openings at Cherry Hill Mall and Crossroads Mall;
• a decrease of $0.4 million in expense reimbursements, primarily due to a
$0.4 million decrease in utilities expense; and
• partially offset by a decrease of $0.2 million in percentage rent, primarily due to lease renewals with higher base rent and corresponding
higher sales breakpoints for calculating percentage rent.
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Real estate revenue increased by $0.1 million, or 0%, in the six months ended
June 30, 2012 compared to the six months ended June 30, 2011, primarily due to:
• an increase of $1.8 million in base rent, primarily due to increases at
Cherry Hill Mall and at Crossroads Mall due to new store openings and a
straight line rent increase of $0.5 million resulting from write-offs
associated with the Borders Group, Inc. liquidation during the six months
ended June 30, 2011 that did not recur in 2012;
• an increase of $0.7 million in lease terminations, primarily due to
termination payments received from three tenants totaling $1.1 million
during the six months ended June 30, 2012;
• a decrease of $2.2 million in expense reimbursements, primarily due to a$1.3 million decrease in common area maintenance, real estate tax and
utilities expenses. Our properties continue to experience a trend towards
more gross leases (leases that provide that tenants pay a higher minimum
rent in lieu of contributing toward common area maintenance costs and real
estate taxes), as well as more leases that provide for the rent amount to
be determined on the basis of a percentage of sales in lieu of minimum
rent or any contribution toward common area maintenance or real estate tax
expenses; and
• a decrease of $0.3 million in percentage rent, primarily due to lease renewals with higher base rent and corresponding higher sales breakpoints
for calculating percentage rent.
Operating Expenses
Operating expenses decreased by $0.3 million, or 1%, in the three months ended
June 30, 2012 compared to the three months ended June 30, 2011, primarily due
to:
• a decrease of $0.4 million in non-common area utility expense due to lower
electric rates as a result of deregulation and alternate supplier
contracts executed over the past 12 months;
• a decrease of $0.3 million in bad debt expense due to favorable collections resulting in lower accounts receivable balances, as well as
fewer tenant bankruptcies compared to the three months ended June 30,
2011; and
• partially offset by an increase of $0.6 million in common area maintenance
expenses, including a $0.3 million increase in housekeeping and security
services as a result of stipulated annual contractual increases.
Operating expenses decreased by $3.0 million, or 3%, in the six months ended
June 30, 2012 compared to the six months ended June 30, 2011, primarily due to:
• a decrease of $1.4 million in bad debt expense due to favorable
collections resulting in lower accounts receivable balances, as well as
fewer tenant bankruptcies compared to the six months ended June 30, 2011;
• a decrease of $0.9 million in non-common area utility expense due in part
to a mild winter with above average temperatures across the Mid-Atlantic
states where many of our properties are located, and in part to lower
electric rates as a result of deregulation and alternate supplier
contracts executed over the past 12 months; and
• a decrease of $0.8 million in common area maintenance expenses, including
decreases of $1.7 million in snow removal expense and $0.4 million in
common area utilities expense resulting from a mild and dry winter across
the Mid-Atlantic states where many of our properties are located,
partially offset by increases of $0.7 million in repairs and maintenance
expense, and $0.5 million in housekeeping and security services as a
result of stipulated annual contractual increases.
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Net Operating Income ("NOI")
NOI (a non-GAAP measure) is derived from real estate revenue (determined in
accordance with generally accepted accounting principles, or GAAP, including
lease termination revenue) minus operating expenses (determined in accordance
with GAAP), plus our share of revenue and operating expenses of our partnership
investments, and includes real estate revenue and operating expenses from
properties included in discontinued operations, if any. It 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 our financial performance or to be an alternative to
cash flow from operating activities (determined in accordance with GAAP) as a
measure of our liquidity. It is not indicative of funds available for our cash
needs, including our ability to make cash distributions. We believe that NOI is
helpful to management and 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. We believe that net income
is the most directly comparable GAAP measurement to NOI.
NOI excludes interest and other income, general and administrative expenses,
interest expense, depreciation and amortization, gains on sales of interests in
real estate, gains on sales of non-operating real estate, gains on sales of
discontinued operations, gain on extinguishment of debt, impairment losses,
project costs and other expenses.
The following table presents NOI for the three and six months ended June 30,
2012 and 2011. The results are presented using the "proportionate-consolidation
method" (a non-GAAP measure), which presents our share of the results of our
partnership investments. Under GAAP, we account for our partnership investments
under the equity method of accounting. Operating results for retail properties
that we owned for the full periods presented ("Same Store") exclude properties
acquired or disposed of during the periods presented. A reconciliation of NOI to
net loss determined in accordance with GAAP appears under the heading
"Reconciliation of GAAP Net Loss to Non-GAAP Measures."
Same Store Non Same Store Total
Three months ended Three months ended Three months ended
June 30, June 30, June 30,
% % %
(in thousands of dollars) 2012 2011 Change
2012 2011 Change 2012 2011 Change
Real estate revenue $ 117,021 $ 116,166 1 % $ 480 $ 470 2 % $ 117,501 $ 116,636 1 %
Operating expenses (49,377 ) (49,884 ) (1 %) (482 ) (465 ) 4 % (49,859 ) (50,349 ) (1 %)
Net Operating Income $ 67,644 $ 66,282 2 % $ (2 ) $ 5 (140 %) $ 67,642 $ 66,287 2 %
Same Store Non Same Store Total
Six months ended Six months ended Six months ended
June 30, June 30, June 30,
% % %
(in thousands of dollars) 2012 2011 Change 2012 2011 Change 2012 2011 Change
Real estate revenue $ 235,000 $ 234,543 0 % $ 967 $ 954 1 % $ 235,967 $ 235,497 0 %
Operating expenses (98,260 ) (101,498 ) (3 %) (942 ) (951 ) (1 %) (99,202 ) (102,449 ) (3 %)
Net Operating Income $ 136,740 $ 133,045 3 % $ 25 $ 3 733 % $ 136,765 $ 133,048 3 %
Total NOI increased by $1.4 million, or 2%, in the three months ended June 30,
2012 compared to the three months ended June 30, 2011, driven by a $1.4 million
increase in Same Store NOI. See "-Real Estate Revenue" and "-Operating Expenses"
above for further information about our consolidated properties.
Total NOI increased by $3.7 million, or 3%, in the six months ended June 30,
2012 compared to the six months ended June 30, 2011, driven by a $3.7 million
increase in Same Store NOI. See "-Real Estate Revenue" and "-Operating Expenses"
above for further information about our consolidated properties.
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NOI includes lease termination revenue of $0.8 million and $0.7 million for the
three months ended June 30, 2012 and 2011, respectively, and $1.4 million and
$0.7 million for the six months ended June 30, 2012 and 2011, respectively.
Depreciation and Amortization
Depreciation and amortization expense decreased by $3.2 million, or 9%, in the
three months ended June 30, 2012 compared to the three months ended June 30,
2011, primarily due to:
• a decrease of $1.9 million resulting from tenant improvement and deferred
leasing commission write-offs recorded during the three months ended
June 30, 2011, including $1.0 million associated with the Borders Group,
Inc. liquidation, that did not recur in 2012; and
• a decrease of $1.1 million because certain lease intangibles at four
properties purchased during 2004 and 2005 became fully amortized after
June 30, 2011.
Depreciation and amortization expense decreased by $4.0 million, or 6%, in the
six months ended June 30, 2012 compared to the six months ended June 30, 2011,
primarily due to:
• a decrease of $1.7 million resulting from tenant improvement and deferred
leasing commission write-offs associated with the Borders Group, Inc.
liquidation recorded during the six months ended June 30, 2011 that did
not recur in 2012; and
• a decrease of $2.0 million because certain lease intangibles at four
properties purchased during 2004 and 2005 became fully amortized after
June 30, 2011.
Provision for Executive Separation Expense
In connection with the appointment of Joseph F. Coradino as Chief Executive
Officer in June 2012, conditions in President and Chief Operating Officer Edward
Glickman's employment agreement were triggered that caused us to record a
provision for executive separation expense of $0.5 million in June 2012. Upon
Mr. Rubin's cessation of service as Chief Executive Officer of the Company, and
the beginning of Mr. Coradino's service in that position on June 7, 2012, Edward
Glickman became contractually entitled to voluntarily terminate his employment
for good reason during the period from December 4, 2012 to June 2, 2013.
Mr. Glickman would be entitled to a cash payment, all time based equity awards
made to him would vest, and all outstanding performance-based equity awards
would remain outstanding and would vest or be forfeited based on the terms of
such awards as if Mr. Glickman's employment had not terminated. Mr. Glickman
also would be entitled to receive other benefits as set forth in his employment
agreement. Through December 2012, we expect to record a total provision of $4.0
million related to Mr. Glickman's employment agreement.
Also, in April 2012, Ronald Rubin executed a new employment agreement which
required us to record a provision for executive separation expense of $0.3
million in June 2012. We expect to record a total provision for executive
separation of $4.5 million ($2.6 million through December 2012 and an additional
$1.9 million through June 2013) related to Mr. Rubin's employment agreement.
Interest Expense
Interest expense decreased by $3.1 million, or 9%, in the three months ended
June 30, 2012 compared to the three months ended June 30, 2011. This decrease
was primarily due to lower applicable stated interest rates and lower weighted
average debt balance. Our weighted average effective borrowing rate was 6.08%
for the three months ended June 30, 2012 compared to 6.41% for the three months
ended June 30, 2011. Our weighted average debt balance was $2,129.2 million for
the three months ended June 30, 2012 compared to $2,202.2 for the three months
ended June 30, 2011.
Interest expense decreased by $5.1 million, or 7%, in the six months ended June
30, 2012 compared to the six months ended June 30,2011. This decrease was
primarily due to lower applicable stated interest rates and lower weighted
average debt balance. Our weighted average borrowing rate was 6.02% for the six
months ended June 30, 2012 compared to 6.26% for the six months ended June 30,
2011. Our weighted average debt balance was $2,214.3 million for the six months
ended June 30, 2012 compared to $2,142.9 for the six months ended June 30, 2011.
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Equity in Income of Partnerships
Equity in income of partnerships increased by $0.8 million, or 70%, for the
three months ended June 30, 2012 compared to the three months ended June 30,
2011. The increase was primarily due to a decrease in depreciation and
amortization expense of the partnerships of $0.5 million and a decrease in other
expenses of $0.3 million.
Equity in income of partnerships increased by $1.3 million, or 47%, for the six
months ended June 30, 2012 compared to the six months ended June 30, 2011. The
increase was primarily due to a decrease in depreciation and amortization
expense of the partnerships of $0.6 million, an increase in revenue of $0.4
million and a decrease in other expenses of $0.3 million.
Funds From Operations
The National Association of Real Estate Investment Trusts ("NAREIT") defines
Funds From Operations ("FFO"), which is a non-GAAP measure commonly used by
REITs, as net income excluding gains and losses on sales of operating properties
(computed in accordance with GAAP), plus real estate depreciation and
amortization; and after adjustments for unconsolidated partnerships and joint
ventures to reflect funds from operations on the same basis. We compute 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 we do. In 2011, NAREIT reiterated its established guidance that
excluding impairment write downs of depreciable real estate is consistent with
the NAREIT definition.
We use FFO and FFO per diluted share and unit of limited partnership interest in
our operating partnership ("OP Unit") in measuring our performance against our
peers and as one of the performance measures for determining incentive
compensation amounts earned under certain of our performance-based executive
compensation programs. FFO is a commonly used measure of operating performance
and profitability among REITs, and we use FFO and FFO per diluted share and OP
Unit as supplemental non-GAAP measures to compare our performance for different
periods to that of our industry peers.
FFO does not include gains and losses on sales of operating real estate assets
which are included in the determination of net income in accordance with GAAP.
Accordingly, FFO is not a comprehensive measure of our operating cash flows. In
addition, since FFO does not include depreciation on real estate assets, FFO may
not be a useful performance measure when comparing our operating performance to
that of other non-real estate commercial enterprises. We compensate for these
limitations by using FFO in conjunction with other GAAP financial performance
measures, such as net income and net cash provided by operating activities, and
other non-GAAP financial performance measures, such as NOI. 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 our financial performance or to be an
alternative to cash flow from operating activities (determined in accordance
with GAAP) as a measure of our liquidity, nor is it indicative of funds
available for our cash needs, including our ability to make cash distributions.
We believe that net income is the most directly comparable GAAP measurement to
FFO.
We also present Funds From Operations, as adjusted, and Funds From Operations
per diluted share and OP Unit, as adjusted, which are non-GAAP measures, for the
three and six months ended June 30, 2012 and 2011 to show the effect of the
provision for executive separation expense, which had a significant effect on
our results of operations, but is not, in our opinion, indicative of our
operating performance.
We believe that FFO is helpful to management and 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
gains on sales of operating real estate and depreciation and amortization of
real estate, among others. We believe that Funds From Operations, as adjusted,
is helpful to management and investors as a measure of operating performance
because it adjusts FFO to exclude items that management does not believe are
indicative of its operating performance, such as provision for executive
separation expense.
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The following table presents FFO and FFO per diluted share and OP Unit and FFO,
as adjusted, and FFO per diluted share and OP Unit, as adjusted, for the three
months ended June 30, 2012 and 2011:
Three Three
Months % Months
Ended Change Ended
June 30, 2011 to June 30,
(in thousands of dollars, except per share amounts) 2012 2012 2011
Funds from operations (1) $ 20,838 8 % $ 19,224
Provision for executive separation expenses 796 - -
Funds from operations, as adjusted $ 21,634
13 % $ 19,224
Funds from operations per diluted share and OP Unit $ 0.36
9 % $ 0.33
Provision for executive separation expenses 0.01 - -
Funds from operations per diluted share and OP
Unit, as adjusted $ 0.37
12 % $ 0.33
Weighted average number of shares outstanding 55,143 54,680
Weighted average effect of full conversion of OP
Units 2,309 2,329
Effect of common share equivalents 1,007 851
Total weighted average shares outstanding,
including OP Units 58,459 57,860
(1) In accordance with updated NAREIT guidance regarding the definition of FFO,
impairment losses of depreciable real estate are excluded from FFO. Prior
period FFO and FFO per diluted share and OP Unit amounts have been revised
to reflect this updated NAREIT guidance.
FFO was $20.8 million for the three months ended June 30, 2012, an increase of
$1.6 million, or 8%, compared to $19.2 million for the three months ended
June 30, 2011. This increase primarily was due to:
• a decrease in interest expense of $3.2 million;
• an increase of $1.4 million in NOI (presented using the
"proportionate-consolidation" method; See "-Net Operating Income"); and
offset by
• preferred dividends of $1.8 million related to the preferred shares issued
in April 2012;
• provision for executive separation expense of $0.8 million recorded in the
three months ended June 30, 2012; and
• gains on sales of real estate of $0.7 million in the three months ended
June 30, 2011 that did not recur in 2012.
FFO per diluted share increased $0.03 per share to $0.36 per share for the three
months ended June 30, 2012, compared to $0.33 per share for the three months
ended June 30, 2011.
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The following table presents FFO and FFO per diluted share and OP Unit, and FFO,
as adjusted, and FFO per diluted share and OP Unit, as adjusted, for the six
months ended June 30, 2012 and 2011:
Six Six
Months % Months
Ended Change Ended
June 30, 2011 to June 30,
(in thousands of dollars, except per share amounts) 2012 2012 2011
Funds from operations (1) $ 45,800 13 % $ 40,533
Provision for executive separation expenses 796 - -
Funds from operations, as adjusted $ 46,596
15 % $ 40,533
Funds from operations per diluted share and OP Unit $ 0.79
13 % $ 0.70
Provision for executive separation expenses 0.01 - -
Funds from operations per diluted share and OP
unit, as adjusted $ 0.80
14 % $ 0.70
Weighted average number of shares outstanding 55,026 54,567
Weighted average effect of full conversion of OP
Units 2,318 2,329
Effect of common share equivalents 947 922
Total weighted average shares outstanding,
including OP Units 58,291 57,818
(1) In accordance with updated NAREIT guidance regarding the definition of FFO,
impairment losses of depreciable real estate are excluded from FFO. Prior
period FFO and FFO per diluted share and OP Unit amounts have been revised
to reflect this updated NAREIT guidance.
FFO was $45.8 million for the six months ended June 30, 2012, an increase of
$5.3 million, or 13%, compared to $40.5 million for the six months ended
June 30, 2011. This increase primarily was due to:
• a decrease in interest expense of $5.1 million;
• an increase of $3.7 million in NOI (presented using the
"proportionate-consolidation" method; See "-Net Operating Income"); and
offset by
• preferred dividends of $1.8 million related to the preferred shares issued
in April 2012;
• provision for executive separation expense of $0.8 million recorded in the
six months ended June 30, 2012; and
• gains on sales of real estate of $0.7 million in the six months endedJune 30, 2011 that did not recur in 2012.
FFO per diluted share increased $0.09 per share to $0.79 per share for the six
months ended June 30, 2012, compared to $0.70 per share for the six months ended
June 30, 2011.
Reconciliation of GAAP Net Loss to Non-GAAP Measures
The preceding discussions compare our unaudited Consolidated Statements of
Operations results for different periods based on GAAP. Also, the non-GAAP
measures of NOI and FFO are discussed. We believe that NOI is helpful to
management and 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. We believe that FFO is helpful to
management and 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 gains on sales of operating real
estate and depreciation and amortization of real estate, among others. FFO is a
commonly used measure of operating performance and profitability among REITs,
and we use FFO and FFO per diluted share and OP Unit as supplemental non-GAAP
measures to compare our performance for different periods to that of our
industry peers.
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The following information is provided to reconcile NOI and FFO, which are
non-GAAP measures, to net loss, a GAAP measure:
Three months ended June 30, 2012
PREIT's share of
unconsolidated
(in thousands of dollars) Consolidated partnerships Total
Real estate revenue $ 108,237 $ 9,264 $ 117,501
Operating expenses (47,204 ) (2,655 ) (49,859 )
Net operating income 61,033 6,609 67,642
General and administrative expenses (10,240 ) - (10,240 )
Provision for executive separation
expenses (796 ) - (796 )
Interest and other income 884 - 884
Project costs and other expenses (39 ) - (39 )
Interest expense, net (31,795 ) (2,817 ) (34,612 )
Depreciation on non real estate
assets (156 ) - (156 )
Preferred share dividends (1,845 ) (1,845 )
Funds from operations 17,046 3,792 20,838
Depreciation on real estate assets (33,244 ) (1,840 ) (35,084 )
Equity in income of partnerships 1,952 (1,952 ) -
Preferred share dividends 1,845 - 1,845
Net loss $ (12,401 ) $ - $ (12,401 )
Three months ended June 30, 2011
PREIT's share of
unconsolidated
(in thousands of dollars) Consolidated partnerships Total
Real estate revenue $ 107,391 $ 9,245 $ 116,636
Operating expenses (47,467 ) (2,882 ) (50,349 )
Net operating income 59,924 6,363 66,287
General and administrative expenses (10,433 ) - (10,433 )
Interest and other income 809 - 809
Project costs and other expenses (128 ) - (128 )
Interest expense, net (34,941 ) (2,858 ) (37,799 )
Gains on sales of non operating real
estate 710 - 710
Depreciation on non real estate
assets (222 ) - (222 )
Funds from operations 15,719 3,505 19,224
Gains on sales of real estate 740 - 740
Depreciation on real estate assets (36,392 ) (2,358 ) (38,750 )
Impairment of assets (225 ) - (225 )
Equity in income of partnerships 1,147 (1,147 ) -
Net loss $ (19,011 ) $ - $ (19,011 )
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Six months ended June 30, 2012
PREIT's share of
unconsolidated
(in thousands of dollars) Consolidated partnerships Total
Real estate revenue $ 217,093 $ 18,874 $ 235,967
Operating expenses (93,601 ) (5,601 ) (99,202 )
Net operating income 123,492 13,273 136,765
General and administrative expenses (20,124 ) - (20,124 )
Provision for executive separation
expenses (796 ) - (796 )
Interest and other income 1,645 - 1,645
Project costs and other expenses (397 ) - (397 )
Interest expense, net (63,464 ) (5,637 ) (69,101 )
Depreciation on non real estate
assets (347 ) - (347 )
Preferred share dividends (1,845 ) - (1,845 )
Funds from operations 38,164 7,636 45,800
Depreciation on real estate assets (66,771 ) (3,691 ) (70,462 )
Equity in income of partnerships 3,945 (3,945 ) -
Preferred share dividends 1,845 1,845
Net loss $ (22,817 ) $ - $ (22,817 )
Six months ended June 30, 2011
PREIT's share of
unconsolidated
(in thousands of dollars) Consolidated partnerships Total
Real estate revenue $ 216,953 $ 18,544 $ 235,497
Operating expenses (96,560 ) (5,889 ) (102,449 )
Net operating income 120,393 12,655 133,048
General and administrative expenses (20,015 ) - (20,015 )
Interest and other income 1,727 - 1,727
Project costs and other expenses (272 ) - (272 )
Interest expense, net (68,554 ) (5,637 ) (74,191 )
Gains on sales of non operating real
estate 710 - 710
Depreciation on non real estate
assets (474 ) - (474 )
Funds from operations 33,515 7,018 40,533
Gains on sales of real estate 740 - 740
Depreciation on real estate assets (70,650 ) (4,328 ) (74,978 )
Impairment of assets (225 ) - (225 )
Equity in income of partnerships 2,690 (2,690 ) -
Net loss $ (33,930 ) $ - $ (33,930 )
LIQUIDITY AND CAPITAL RESOURCES
This "Liquidity and Capital Resources" section contains certain "forward-looking
statements" that relate to expectations and projections that are not historical
facts. These forward-looking statements reflect our current views about our
future liquidity and capital resources, and are subject to risks and
uncertainties that might cause our actual liquidity and capital resources to
differ materially from the forward-looking statements. Additional factors that
might affect our liquidity and capital resources include those discussed in the
section entitled "Item 1A. Risk Factors" in our Annual Report on Form 10-K, as
amended, for the year ended December 31, 2011 filed with the Securities and
Exchange Commission. We do not intend to update or revise any forward-looking
statements about our liquidity and capital resources to reflect new information,
future events or otherwise.
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Capital Resources
We expect to meet our short-term liquidity requirements, including distributions
to common and preferred shareholders, recurring capital expenditures, tenant
improvements and leasing commissions, but excluding development and
redevelopment projects, generally through our available working capital and net
cash provided by operations, and subject to the terms and conditions of our 2010
Credit Facility. We believe that our net cash provided by operations will be
sufficient to allow us to make any distributions necessary to enable us to
continue to qualify as a REIT under the Internal Revenue Code of 1986, as
amended. The aggregate distributions made to preferred shareholders, common
shareholders and OP Unit holders for the first six months of 2012 were $19.4
million, based on distributions of $0.3151 per preferred share and $0.31 per
common share and OP Unit. The following are some of the factors that could
affect our cash flows and require the funding of future cash distributions,
recurring capital expenditures, tenant improvements or leasing commissions with
sources other than operating cash flows:
• adverse changes or prolonged downturns in general, local or retail
industry economic, financial, credit or capital market or competitive
conditions, leading to a reduction in real estate revenue or cash
flows or an increase in expenses;
• deterioration in our tenants' business operations and financial
stability, including anchor or in-line tenant bankruptcies, leasing
delays or terminations, or lower sales, causing deferrals or declines
in rent, percentage rent and cash flows;
• inability to achieve targets for, or decreases in, property occupancy
and rental rates, resulting in lower or delayed real estate revenue
and operating income;
• increases in operating costs, including increases that cannot be
passed on to tenants, resulting in reduced operating income and cash
flows; and
• increases in interest rates resulting in higher borrowing costs.
We expect to meet certain of our longer-term requirements, such as remaining
obligations to fund development and redevelopment projects and certain capital
requirements, including scheduled debt maturities, future property and portfolio
acquisitions, expenses associated with acquisitions and renovations, expansions
and other non-recurring capital improvements, through a variety of capital
sources, subject to the terms and conditions of our 2010 Credit Facility.
The conditions in the market for debt capital and commercial mortgage loans
(including the commercial mortgage backed securities market and the state of
domestic and international bank and life insurance company real estate lending),
and the conditions in the economy and their effect on retail sales, as well as
our significant leverage resulting from debt incurred to fund our redevelopment
program and other development activity, have combined to necessitate that we
consider various approaches to obtaining, using and recycling capital. In light
of these conditions, we are focusing on appropriately managing our liquidity. We
intend to consider all of our available options for accessing the capital
markets, given our position and constraints. We believe that we have sufficient
capital to fund our remaining redevelopment project and our other foreseeable
capital improvement projects.
In the past, one avenue available to us to finance our obligations or new
business initiatives has been to obtain unsecured debt, based in part on the
existence of properties in our portfolio that were not subject to mortgage
loans. The terms of the 2010 Credit Facility include our grant of a security
interest consisting of a first lien on 20 properties. As a result, we have very
few remaining assets that we could use to support unsecured debt financing. Our
lack of properties in the portfolio that could be used to support unsecured debt
might limit our ability to obtain capital in this way.
We continue to contemplate ways to reduce our leverage through a variety of
means available to us, and subject to and in accordance with the terms and
conditions of the 2010 Credit Facility. These steps might include obtaining
equity capital, including through the issuance of common or preferred equity
securities if market conditions are favorable, through our contribution of
assets to joint ventures or other partnerships or arrangements with
institutional investors, private equity investors or other REITs, through sales
of properties or interests in properties with values in excess of their mortgage
loans or allocable debt and application of the excess proceeds to debt
reduction, through refinancing of properties in amounts that exceed prior
mortgage balances, or through other actions.
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In January 2012, the SEC declared effective our $1.0 billion universal shelf
registration statement. We may use the availability under our shelf registration
statement to offer and sell common shares of beneficial interest, preferred
shares and various types of debt securities, among other types of securities, to
the public. In April 2012, we issued $115.0 million of preferred shares in an
underwritten public offering under this registration statement. However, in the
future, we may be unable to issue securities under the shelf registration
statement, or otherwise, on terms that are favorable to us, or at all.
Amended, Restated and Consolidated Senior Secured Credit Agreement
Our credit facility consists of a revolving line of credit with a capacity of
$250.0 million (the "Revolving Facility") and term loans with an aggregate
balance as of June 30, 2012 of $240.0 million (collectively, the "2010 Term
Loan" and, together with the Revolving Facility and as amended, the "2010 Credit
Facility").
As of June 30, 2012, $65.0 million was outstanding under our Revolving Facility.
No amounts were pledged as collateral for letters of credit, and the unused
portion that was available to us was $185.0 million at June 30, 2012.
The weighted average interest rate on outstanding Revolving Facility borrowings
as of June 30, 2012 was 4.25%. Interest expense related to the Revolving
Facility was $0.6 million for each of the three months ended June 30, 2012 and
2011, respectively, and $1.5 million and $0.7 million for the six months ended
June 30, 2012 and 2011, respectively, excluding non-cash amortization of
deferred financing fees.
As of June 30, 2012, $240.0 million was outstanding under the 2010 Term Loan.
The weighted average effective interest rates based on amounts borrowed under
the 2010 Term Loan for the three and six months ended June 30, 2012 were 4.99%
and 5.01%, respectively. Interest expense, excluding non-cash amortization of
deferred financing fees related to the 2010 Term Loan, was $3.9 million and $5.6
million, respectively, for the three months ended June 30, 2012 and 2011, and
$7.2 million and $10.7 million, respectively, for the six months ended June 30,
2012 and 2011.
Amounts borrowed under the 2010 Credit Facility bear interest at a rate between
2.75% and 4.00% per annum, depending on our leverage, in excess of LIBOR. The
rate in effect at June 30, 2012 was 4.00%. We expect this rate to decrease to
3.50% in the third quarter of 2012. The following table presents the applicable
credit spread over LIBOR at various leverage levels:
Less than 50% 2.75 %
Equal to or greater than 50% but less than 55% 3.00 %
Equal to or greater than 55% but less than 60% 3.25 %
Equal to or greater than 60% but less than 65% 3.50 %
Equal to or greater than 65% but less than 70% 4.00 %
Deferred financing fee amortization associated with the 2010 Credit Facility for
the three months ended June 30, 2012 and 2011 was $0.9 million and $1.0 million,
respectively. Deferred financing fee amortization associated with the 2010
Credit Facility for the six months ended June 30, 2012 and 2011 was $1.8 million
and $1.9 million, respectively.
The 2010 Credit Facility contains affirmative and negative covenants of the type
customarily found in credit facilities of this nature. As of June 30, 2012, we
were in compliance with all financial covenants.
Exchangeable Notes
In June 2012, we repaid in full the $136.9 million of our Exchangeable Notes
outstanding upon their maturity and accrued interest of $2.7 million using $74.6
million in cash and $65.0 million from our Revolving Facility.
Interest expense related to our Exchangeable Notes for the three months ended
June 30, 2012 and 2011 was $0.9 million and $1.4 million, respectively,
excluding the non-cash amortization of debt discount of $0.3 million and $0.5
million, respectively, and the non-cash amortization of deferred financing fees
of $0.1 million and $0.2 million, respectively.
Interest expense related to our Exchangeable Notes for the six months ended
June 30, 2012 and 2011 was $2.3 million and $2.7 million, respectively,
excluding the non-cash amortization of debt discount of $0.8 million and $1.0
million, respectively, and the non-cash amortization of deferred financing fees
of $0.3 million and $0.4 million, respectively.
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Preferred Share Offering
In April 2012, we issued 4,600,000 8.25% Series A Cumulative Redeemable
Perpetual Preferred Shares (the "Preferred Shares") in a public offering at
$25.00 per share. We received net proceeds from the offering of $110.7 million
after deducting payment of the underwriting discount of $3.6 million ($0.7875
per Preferred Share) and estimated offering expenses of $0.7 million. We used a
portion of the net proceeds from this offering to repay $30.0 million of
then-outstanding borrowings under the Revolving Facility.
We may not redeem the Preferred Shares before April 20, 2017, except under
circumstances intended to preserve our status as a real estate investment trust,
or REIT, for federal and/or state income tax purposes, and except upon the
occurrence of a Change of Control, as defined in the Trust Agreement addendum
designating the Preferred Shares. On and after April 20, 2017, we may, at our
option, redeem any or all of the Preferred Shares for cash at $25.00 per share
plus, subject to exceptions, any accrued and unpaid dividends to but excluding
the date fixed for redemption. In addition, upon the occurrence of a Change of
Control, we may, at our option, redeem any or all of the Preferred Shares for
cash within 120 days after the first date on which such Change of Control
occurred at $25.00 per share plus, subject to certain exceptions, any accrued
and unpaid dividends to but excluding the date fixed for redemption. The
Preferred Shares have no stated maturity, are not subject to any sinking fund or
mandatory redemption and will remain outstanding indefinitely unless we redeem
or otherwise repurchase them or they become convertible and are converted.
Interest Rate Derivative Agreements
As of June 30, 2012, we had entered into nine interest rate swap agreements with
a weighted average interest rate of 2.93% on a notional amount of $617.3 million
maturing on various dates through November 2013, and two forward starting
interest rate swap agreements that have a weighted average interest rate of
1.25% on a notional amount of $53.1 million maturing on various dates through
January 2017.
We entered into these interest rate swap agreements (including the forward
starting swap agreements) in order to hedge the interest payments associated
with the 2010 Credit Facility and our issuances of variable interest rate
long-term debt. We have assessed the effectiveness of these interest rate swap
agreements as hedges at inception and on a quarterly basis. On June 30, 2012, we
considered these interest rate swap agreements to be highly effective as cash
flow hedges. The interest rate swap agreements are net settled monthly.
As of June 30, 2012, the aggregate estimated unrealized net loss attributed to
these interest rate derivatives was $16.8 million. The carrying amount of the
derivative assets is reflected in "Deferred costs and other assets," the
associated liabilities are reflected in "Accrued expenses and other liabilities"
and the net unrealized loss is reflected in "Accumulated other comprehensive
loss" in the accompanying balance sheets.
As of June 30, 2012, the fair value of derivatives in a net liability position,
which excludes accrued interest but includes any adjustment for nonperformance
risk related to these agreements, was $16.8 million. If we had breached any of
the default provisions in these agreements as of June 30, 2012, we might have
been required to settle our obligations under the agreements at their
termination value (including accrued interest) of $18.6 million. We had not
breached any of the provisions as of June 30, 2012.
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Mortgage Loan Activity
The following table presents the mortgage loans we have entered into since
January 1, 2012 relating to our consolidated properties:
Amount
Financed or
Extended (in
millions of
Financing Date Property dollars) Stated Rate Maturity
January New River Valley Mall $ 28.1 LIBOR plus 3.00% January 2019
February Capital City Mall 65.8 5.30% fixed March 2022
July Christiana Center 50.0 4.64% fixed August 2022
Other 2012 Activity
In June 2012, we exercised our remaining one-year extension option on the
mortgage loan secured by Paxton Town Centre in Harrisburg, Pennsylvania. In
connection with the exercise of this extension option, we repaid $4.0 million of
the outstanding balance, which reduced the principal balance to $50.0 million.
Mortgage Loans
Twenty-six mortgage loans, which are secured by 24 of our consolidated
properties, are due in installments over various terms extending to the year
2032. Seventeen of the mortgage loans bear interest at a fixed rate and nine of
the mortgage loans bear interest at variable rates.
The balances of the fixed rate mortgage loans have interest rates that range
from 4.95% to 9.36% and had a weighted average interest rate of 5.81% at
June 30, 2012. The nine variable rate mortgage loan balances had a weighted
average interest rate of 2.44% at June 30, 2012. The weighted average interest
rate of all consolidated mortgage loans was 4.97% at June 30, 2012. Mortgage
loans for properties owned by unconsolidated partnerships are accounted for in
"Investments in partnerships, at equity" and "Distributions in excess of
partnership investments" on the consolidated balance sheets and are not included
in the table below.
The following table outlines the timing of principal payments related to our
mortgage loans as of June 30, 2012:
Payments by Period
(in thousands of dollars) Total 2012 2013-2014 2015-2016 Thereafter
Principal payments $ 64,458 $ 9,569 $ 29,347 $ 16,350 $ 9,192
Balloon payments (1) 1,677,271 313,732 546,926 514,421 302,192
Total $ 1,741,729 $ 323,301 $ 576,273 $ 530,771 $ 311,384
(1) Due dates for certain of the balloon payments set forth in this table may be
extended pursuant to the terms of the respective loan agreements. Of the
balloon payments coming due in 2012, $44.3 million was refinanced in July
2012.
The following table presents the mortgage loans secured by our unconsolidated
properties entered into since January 1, 2012:
Amount
Financed
(in millions
Financing Date Property of dollars) Stated Rate Maturity
July Pavilion East(1) $ 9.4 LIBOR plus 2.75% August 2017
(1) The unconsolidated entity that owns Pavilion East entered into the mortgage
loan. Our interest in the unconsolidated entity is 40%. The mortgage loan
has a term of five years.
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Contractual Obligations
The following table presents our aggregate contractual obligations as of
June 30, 2012 for the periods presented:
Remainder of
(in thousands of dollars) Total 2012 2013-2014 2015-2016 Thereafter
Mortgage loans (1) $ 1,741,729 $ 323,301 $ 576,273 $ 530,771 $ 311,384
2010 Term Loan (2) 240,000 - 240,000 - -
Revolving Facility (2) 65,000 - 65,000 - -
Interest on indebtedness (3) 295,508 54,091 153,568 59,881 27,968
Operating leases 11,119 1,018 3,491 2,822 3,788
Ground leases 43,278 316 1,295 1,310 40,357
Development and redevelopment
commitments (4) 12,471 11,102 1,369 - -
Total $ 2,409,105 $ 389,828 $ 1,040,996 $ 594,784 $ 383,497
(1) We have four mortgage loans secured by three properties that are scheduled to
mature by their terms in 2012 with an aggregate balance of $315.2 million as
of June 30, 2012, including the mortgage loans secured by Cherry Hill Mall
that had an aggregate balance of $231.9 million as of June 30, 2012. We
expect to refinance these mortgage loans with new mortgage loans secured by
the underlying properties, or to extend the maturity according to the terms
of the specific mortgage loan, or, to the extent that we are unable to obtain
mortgage loans for these properties on terms that are satisfactory to us, or
at all, we expect to utilize the Revolving Facility and other capital
resources to repay the amounts outstanding under such mortgage loans.
(2) The 2010 Credit Facility, which is comprised of the 2010 Term Loan and the
Revolving Facility, has a variable interest rate that ranges between 2.75%
and 4.00% plus LIBOR depending on our total leverage ratio.
(3) Includes payments expected to be made in connection with interest rate swaps
and forward starting interest rate swap agreements.
(4) The timing of the payments of these amounts is uncertain. We expect that the
majority of such payments will be made prior to December 31, 2012, but cannot
provide any assurances that changed circumstances at these projects will not
delay the settlement of these obligations.
Preferred Share Dividends
Annual dividends on 4,600,000 of our Preferred Shares are expected to be $9.5
million. In 2012, we expect to pay preferred share dividends of $6.2 million,
including $1.4 million paid in June 2012 and a $2.4 million dividend ($.515625
per preferred share) that was declared in July 2012 and payable on September 17,
2012 to preferred shareholders of record as of August 31, 2012.
CASH FLOWS
Net cash provided by operating activities totaled $63.0 million for the six
months ended June 30, 2012 compared to $51.8 million for the six months ended
June 30, 2011. This increase in cash from operating activities was primarily due
to increased net operating income, lower interest expense, and other working
capital changes.
Cash flows used in investing activities were $42.5 million for the six months
ended June 30, 2012 compared to cash flows provided by investing activities of
$0.1 million for the six months ended June 30, 2011. Investing activities for
the six months ended June 30, 2012 reflected investment in construction in
progress of $19.7 million and real estate improvements of $10.2 million,
primarily related to ongoing maintenance of our properties. Investing activities
for the six months ended June 30, 2011 reflected investment in construction in
progress of $5.0 million and real estate improvements of $17.3 million.
Investing activities for the six months ended June 30, 2011 reflected $7.3
million of proceeds from sales of real estate and $14.9 million in proceeds
related to mortgage loans at two of our unconsolidated properties.
Cash flows used in financing activities were $27.7 million for the six months
ended June 30, 2012 compared to cash flows used in financing activities of $70.0
million for the six months ended June 30, 2011. Cash flows used in financing
activities for the six months ended June 30, 2012 included the repayment of
exchangeable notes of $136.9 million, dividends and distributions of $19.4
million, principal installments on mortgage loans of $11.1 million and a net
$30.0 million pay down of the Revolving Facility. We also received $110.7
million in net proceeds from the issuance of preferred shares and $65.8 million
in proceeds from a mortgage loan on Capital City Mall in the six months ended
June 30, 2012. Cash flows used in financing activities for the six months ended
June 30, 2011 reflected dividends and distributions of $17.4 million and
principal installments on mortgage loans of $10.3 million.
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COMMITMENTS
As of June 30, 2012, we had unaccrued contractual and other commitments related
to our capital improvement projects and development projects of $12.5 million in
the form of tenant allowances, lease termination fees, and contracts with
general service providers and other professional service providers.
ENVIRONMENTAL
We are aware of certain environmental matters at some of our properties,
including ground water contamination and the presence of asbestos containing
materials. We have, in the past, performed remediation of such environmental
matters, and we are not aware of any significant remaining potential liability
relating to these environmental matters. We may be required in the future to
perform testing relating to these matters. We have insurance coverage for
certain environmental claims up to $10.0 million per occurrence and up to $20.0
million in the aggregate.
COMPETITION AND TENANT CREDIT RISK
Competition in the retail real estate industry is intense. We compete with other
public and private retail real estate companies, including companies that own or
manage malls, strip centers, power centers, lifestyle centers, factory outlet
centers, theme/festival centers and community centers, as well as other
commercial real estate developers and real estate owners, particularly those
with properties near our properties, on the basis of several factors, including
location and rent charged. We compete with these companies to attract customers
to our properties, as well as to attract anchor and in-line store and other
tenants. We also compete to acquire land for new site development, during more
favorable economic conditions. Our malls and our strip and power centers face
competition from similar retail centers, including more recently developed or
renovated centers that are near our retail properties. We also face competition
from a variety of different retail formats, including internet retailers,
discount or value retailers, home shopping networks, mail order operators,
catalogs, and telemarketers. Our tenants face competition from companies at the
same and other properties and from other retail formats as well. This
competition could have a material adverse effect on our ability to lease space
and on the amount of rent and expense reimbursements that we receive.
The development of competing retail properties and the related increased
competition for tenants might, subject to the terms and conditions of the 2010
Credit Facility, require us to make capital improvements to properties that we
would have deferred or would not have otherwise planned to make and might also
affect the total sales, sales per square foot, occupancy and net operating
income of such properties. Any such capital improvements, undertaken
individually or collectively, would involve costs and expenses that could
adversely affect our results of operations.
We compete with many other entities engaged in real estate investment activities
for acquisitions of malls, other retail properties and other prime development
sites, including institutional pension funds, other REITs and other
owner-operators of retail properties. Our efforts to compete for acquisitions
are also subject to the terms and conditions of our 2010 Credit Facility. Given
current economic, capital market and retail industry conditions, however, there
has been substantially less competition with respect to acquisition activity in
recent quarters. When we seek to make acquisitions, competitors might drive up
the price we must pay for properties, parcels, other assets or other companies
or might themselves succeed in acquiring those properties, parcels, assets or
companies. In addition, our potential acquisition targets might find our
competitors to be more attractive suitors if they have greater resources, are
willing to pay more, or have a more compatible operating philosophy. In
particular, larger REITs might enjoy significant competitive advantages that
result from, among other things, a lower cost of capital, a better ability to
raise capital, a better ability to finance an acquisition, and enhanced
operating efficiencies. We might not succeed in acquiring retail properties or
development sites that we seek, or, if we pay a higher price for a property
and/or generate lower cash flow from an acquired property than we expect, our
investment returns will be reduced, which will adversely affect the value of our
securities.
We receive a substantial portion of our operating income as rent under leases
with tenants. At any time, any tenant having space in one or more of our
properties could experience a downturn in its business that might weaken its
financial condition. Such tenants might enter into or renew leases with
relatively shorter terms. Such tenants might also defer or fail to make rental
payments when due, delay or defer lease commencement, voluntarily vacate the
premises or declare bankruptcy, which could result in the termination of the
tenant's lease or preclude the collection of rent in connection with the space
for a period of time, and could result in material losses to us and harm to our
results of operations. Also, it might take time to terminate leases of
underperforming or nonperforming tenants and we might incur costs to remove such
tenants. Some of our tenants occupy stores at multiple locations in our
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portfolio, and so the effect of any bankruptcy or store closings of those
tenants might be more significant to us than the bankruptcy or store closings of
other tenants. Given current conditions in the economy, certain industries and
the capital markets, in some instances retailers that have sought protection
from creditors under bankruptcy law have had difficulty in obtaining
debtor-in-possession financing, which has decreased the likelihood that such
retailers will emerge from bankruptcy protection and has limited their
alternatives. In addition, under many of our leases, our tenants pay rent based,
in whole or in part, on a percentage of their sales. Accordingly, declines in
these tenants' sales directly affect our results of operations. Also, if tenants
are unable to comply with the terms of their leases, or otherwise seek changes
to the terms, including changes to the amount of rent, we might modify lease
terms in ways that are less favorable to us.
SEASONALITY
There is seasonality in the retail real estate industry. Retail property leases
often provide for the payment of a portion of rent based on a percentage of a
tenant's sales revenue over certain levels. Income from such rent 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. Also, many new
and temporary leases are entered into later in the year in anticipation of the
holiday season and a higher number of tenants vacate their space early in the
year. As a result, our occupancy and cash flows are generally higher in the
fourth quarter and lower in the first quarter. Our concentration in the retail
sector increases our exposure to seasonality and is expected to continue to
result in a greater percentage of our cash flows being received in the fourth
quarter.
INFLATION
Inflation can have many effects on financial performance. Retail property leases
often provide for the payment of rent based on a percentage of sales, which
might increase with inflation. Leases may also provide for tenants to bear all
or a portion of operating expenses, which might reduce the impact of such
increases on us. However, rent increases might not keep up with inflation, or if
we recover a smaller proportion of property operating expenses, we might bear
more costs if such expenses increase because of inflation.
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, together
with other statements and information publicly disseminated by us, contain
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,
strategies, anticipated events, trends and other matters that are not historical
facts. These forward-looking statements reflect our current views about future
events, achievements or results and are subject to risks, uncertainties and
changes in circumstances that might cause future events, achievements or results
to differ materially from those expressed or implied by the forward-looking
statements. In particular, our business might be materially and adversely
affected by uncertainties affecting real estate businesses generally as well as
the following, among other factors:
• our substantial debt and our high leverage ratio;
• constraining leverage, interest and tangible net worth covenants under
our 2010 Credit Facility;
• our ability to refinance our existing indebtedness when it matures, on favorable terms or at all, due in part to the effects on us of
dislocations and liquidity disruptions in the capital and credit
markets;
• our ability to raise capital, including through the issuance of equity
or equity-related securities if market conditions are
favorable,
through joint ventures or other partnerships, through sales of
properties or interests in properties, or through other actions;
• our short- and long-term liquidity position;
• current economic conditions and their effect on employment, consumer
confidence and spending and the corresponding effects on tenant
business performance, prospects, solvency and leasing
decisions and on
our cash flows, and the value and potential impairment of our
properties;
• general economic, financial and political conditions, including credit
market conditions, changes in interest rates or unemployment;
• changes in the retail industry, including consolidation and store
closings, particularly among anchor tenants;
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• our ability to maintain and increase property occupancy, sales and
rental rates, in light of the relatively high number of leases that
have expired or are expiring in the next two years;
• increases in operating costs that cannot be passed on to tenants;
• risks relating to development and redevelopment activities;
• the effects of online shopping and other uses of technology on our
retail tenants;
• concentration of our properties in the Mid-Atlantic region;
• changes in local market conditions, such as the supply of or demand
for retail space, or other competitive factors;
• potential dilution from any capital raising transactions;
• possible environmental liabilities;
• our ability to obtain insurance at a reasonable cost; and
• existence of complex regulations, including those relating to our
status as a REIT, and the adverse consequences if we were to fail to
qualify as a REIT.
Additional factors that might cause future events, achievements or results to
differ materially from those expressed or implied by our forward-looking
statements include those discussed in our Annual Report on Form 10-K for the
year ended December 31, 2011, as amended, in the section entitled "Item 1A. Risk
Factors." We do not intend to update or revise any forward-looking statements to
reflect new information, future events or otherwise.
Except as the context otherwise requires, references in this Quarterly Report on
Form 10-Q to "we," "our," "us," the "Company" and "PREIT" refer to Pennsylvania
Real Estate Investment Trust and its subsidiaries, including our operating
partnership, PREIT Associates, L.P. References in this Quarterly Report on Form
10-Q to "PREIT Associates" refer to PREIT Associates, L.P.
