PENNSYLVANIA REAL ESTATE INVESTMENT TRUST – 10-K – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
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The following analysis of our consolidated financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this report.
OVERVIEW
Pennsylvania Real Estate Investment Trust , aPennsylvania business trust founded in 1960 and one of the first equity real estate investment trusts ("REITs") inthe United States , has a primary investment focus on retail shopping malls and strip and power centers located in the eastern half ofthe 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 33.1 million square feet. The operating retail properties that we consolidate for financial reporting purposes have a total of 28.5 million square feet, of which we own 22.8 million square feet. The operating retail properties that are owned by unconsolidated partnerships with third parties have a total of 4.6 million square feet, of which 2.9 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 and strip and power centers, which we do primarily through our operating partnership,PREIT Associates, L.P. ("PREIT Associates "). We provide management, leasing and real estate development services throughPREIT Services, LLC ("PREIT Services"), which generally develops and manages properties that we consolidate for financial reporting purposes, andPREIT-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. Our net loss increased by$39.5 million to$93.9 million for the year endedDecember 31, 2011 from$54.4 million for the year endedDecember 31, 2010 . Our 2011 results of operations were primarily affected by$52.3 million of impairment charges, partially offset by decreases in interest expense, depreciation and amortization expense and operating expenses. We also recorded a gain on sale of discontinued operations of$19.1 million in 2010 that did not recur in 2011. 43
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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 outsidethe United States . We hold our interests in our portfolio of properties through our operating partnership,PREIT Associates . We are the sole general partner ofPREIT Associates and, as ofDecember 31, 2011 , held a 96.0% controlling interest inPREIT Associates . We consolidatePREIT 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 non-controlling 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-managed properties, all decisions in
the ordinary course of business are made jointly. • 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 consolidated financial statements.
Current Economic and Capital Market Conditions, Our Leverage and Our Near Term Capital Needs
The conditions in the economy and the disruptions in the financial markets have reduced employment and have caused fluctuations and variations in business and consumer confidence and consumer spending on retail goods. As a result, as compared to past years, the sales and profit performance of certain retailers has fluctuated and we have experienced delays or deferred decisions regarding the openings of new retail stores and lease renewals. We continue to adjust our plans and actions to take into account the current environment. In addition, credit markets have experienced significant dislocations and liquidity disruptions. These circumstances have materially affected liquidity in the debt markets, making financing terms for borrowers less attractive, and in certain cases have resulted in the limited availability or unavailability of certain types of debt financing. 44
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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 use of debt to fund our redevelopment program and other development activity, have combined to necessitate that we vary our approach 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 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 joint ventures or other partnerships or arrangements involving our contribution of assets 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, or through other actions.
Capital Improvement Projects and Development
At our operating properties, we might engage in various types of capital improvement projects. Such projects 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$91.5 million as ofDecember 31, 2011 . At our development properties, we are also engaged in several types of projects. However, we do not expect to make any significant investment in these projects in the short term. As ofDecember 31, 2011 , we had incurred$56.3 million of costs (net of impairment charges recorded in prior years) related to our activity at development properties. As ofDecember 31, 2011 , we had unaccrued contractual and other commitments related to our capital improvement projects and development projects of$7.1 million in the form of tenant allowances, lease termination fees, and contracts with general service providers and other professional service providers.
Impairment of Assets
If there is a triggering event in relation to a property to be held and used, we will estimate the aggregate future cash flows, less estimated capital expenditures, to be generated by the property, undiscounted and without interest charges. In addition, this estimate may consider a probability weighted cash flow estimation approach when alternative courses of action to recover the carrying amount of a long-lived asset are under consideration or when a range of possible values is estimated. The determination of undiscounted cash flows requires significant estimates by our management, including the expected course of action at the balance sheet date that would lead to such cash flows. Subsequent changes in estimated undiscounted cash flows arising from changes in the anticipated action to be taken with respect to the property could affect the determination of whether an impairment exists and whether the effects of such changes could materially affect our net income. To the extent estimated undiscounted cash flows are less than the carrying value of the property, a further comparison is performed to determine if the fair value of the property is less than the carrying amount of the property. In determining the estimated undiscounted cash flows of the properties that are being analyzed for impairment of assets, we take the sum of the estimated undiscounted cash flows, assuming a holding period of ten years, plus a terminal value calculated using the estimated net operating income in the eleventh year and terminal capitalization rates, which in 2011 ranged from 8.25% to 11.5%. In 2011, we estimated the fair value of the properties that experienced impairment of assets using discount rates applied to estimated cash flows ranging from 13% to 14%. 45
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Table of Contents 2011 ImpairmentsNorth Hanover Mall In 2011, we recorded a loss on impairment of assets atNorth Hanover Mall inHanover, Pennsylvania of$24.1 million to write down the carrying value of the property's long-lived assets to their estimated fair value of$22.5 million . In 2008, we had constructed a department store that was to be leased and occupied by Boscov's, Inc. ("Boscov's"). Prior to taking occupancy of the newly built store, Boscov's declared bankruptcy, and the lease was subsequently rejected. Since then, we have attempted to execute a lease with a suitable retail replacement or non-retail user for this anchor location. In 2011, a newly-constructed power center opened in the trade area, increasing the competition for new tenants. After entering into lease negotiations in 2011, inJanuary 2012 , we entered into a lease withJCPenney Corporation, Inc. for it to move from its current location at the mall to occupy a significant portion of the newly constructed anchor space. The economic terms of this transaction are less favorable than the terms of the original Boscov's lease. During the third quarter of 2011, in connection with our 2012 business plan and budgeting process, we concluded that there was a low likelihood that we would be able to lease the vacant department store on favorable terms. We further concluded that these factors constituted a triggering event, leading us to conduct an analysis of possible asset impairment at this property. Using updated assumptions based on these factors, we determined that the estimated undiscounted cash flows, net of estimated capital expenditures, forNorth Hanover Mall were less than the carrying value of the property, and recorded the impairment loss.
In 2011, we recorded a loss on impairment of assets atPhillipsburg Mall inPhillipsburg, New Jersey of$28.0 million to write down the carrying value of the property to the property's estimated fair value of$15.0 million . During 2011,Phillipsburg Mall experienced significant decreases in non-anchor occupancy and net operating income as a result of unfavorable economic conditions in thePhillipsburg, New Jersey trade area, combined with negative trends in the retail sector. The occupancy declines resulted from store closings from underperforming tenants. Net operating income at this property was also affected by an increase in the number of tenants paying a percentage of their sales in lieu of minimum rent, combined with declining tenant sales. As a result of these conditions, during the third quarter of 2011, in connection with the preparation of our 2012 business plan and budgets, we determined that the estimated undiscounted future cash flows, net of estimated capital expenditures, to be generated by the property were less than the carrying value of the property, and recorded the impairment loss.
2009 Impairments
<location>Orlando Fashion Square
During 2009,Orlando Fashion Square experienced significant decreases in non-anchor occupancy and net operating income as a result of unfavorable economic conditions in theOrlando market combined with negative trends in the retail sector. The occupancy declines resulted from store closings from bankrupt and underperforming tenants. Net operating income at this property was also affected by an increase in the number of tenants paying a percentage of their sales in lieu of minimum rent, combined with declining tenant sales. As a result of these conditions, in connection with the preparation of the our 2010 business plan and budgets, we determined that the estimated undiscounted future cash flows, net of estimated capital expenditures, to be generated by the property was less than the carrying value of the property. As a result, we determined that the property was impaired and we recorded an impairment loss of$62.7 million to write down the property's estimated fair value to$40.2 million . 46
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Springhills
Springhills is a mixed use development project located inGainesville, Florida . During the fourth quarter of 2009, in connection with our 2010 business planning process, which included a strategic review of our future development projects, we determined that the development plans for Springhills were uncertain. Consequently, we recorded an impairment loss of$11.5 million to write down the carrying amount of the project to its estimated fair value of$22.0 million . Dispositions
See note 2 to our unaudited consolidated financial statements for a description of our dispositions in 2011, 2010 and 2009.
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 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 2011, 2010 and 2009, 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. Set forth below is a summary of the accounting policies that management believes are critical to the preparation of the consolidated financial statements. This summary should be read in conjunction with the more complete discussion of our accounting policies included in note 1 to our consolidated financial statements.
Fair Value
Fair value accounting applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements.
Fair value measurements are determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, these accounting requirements establish a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity's own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access.
Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs might include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals.
Level 3 inputs are unobservable inputs for the asset or liability, and are typically based on an entity's own assumptions, as there is little, if any, related market activity.
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In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability. We utilize the fair value hierarchy in our accounting for derivatives (Level 2), and financial instruments (Level 2), and in our reviews for impairment of real estate assets (Level 3) and goodwill (Level 3).
Asset Impairment
Real estate investments and related intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the property might not be recoverable. A property to be held and used is considered impaired only if our management's estimate of the aggregate future cash flows, less estimated capital expenditures, to be generated by the property, undiscounted and without interest charges, are less than the carrying value of the property. This estimate takes into consideration factors such as expected future operating income, trends and prospects, as well as the effects of demand, competition and other factors. In addition, these estimates may consider a probability weighted cash flow estimation approach when alternative courses of action to recover the carrying amount of a long-lived asset are under consideration or when a range of possible values is estimated. The determination of undiscounted cash flows requires significant estimates by management, including the expected course of action at the balance sheet date that would lead to such cash flows. Subsequent changes in estimated undiscounted cash flows arising from changes in the anticipated action to be taken with respect to the property could impact the determination of whether an impairment exists and whether the effects could materially affect our net income. To the extent estimated undiscounted cash flows are less than the carrying value of the property, the loss will be measured as the excess of the carrying amount of the property over the estimated fair value of the property. Assessment of our ability to recover certain lease related costs must be made when we have a reason to believe that the tenant might not be able to perform under the terms of the lease as originally expected. This requires us to make estimates as to the recoverability of such costs. An other than temporary impairment of an investment in an unconsolidated joint venture is recognized when the carrying value of the investment is not considered recoverable based on evaluation of the severity and duration of the decline in value. To the extent impairment has occurred, the excess carrying value of the asset over its estimated fair value is charged to income.
Tenant Receivables
We make estimates of the collectibility of our tenant receivables related to tenant rent including base rent, straight-line rent, expense reimbursements and other revenue or income. We specifically analyze accounts receivable, including straight-line rent receivable, historical bad debts, customer creditworthiness and current economic and industry trends when evaluating the adequacy of the allowance for doubtful accounts. The receivables analysis places particular emphasis on past-due accounts and considers the nature and age of the receivables, the payment history and financial condition of the payor, the basis for any disputes or negotiations with the payor, and other information that could affect collectibility. In addition, with respect to tenants in bankruptcy, we make estimates of the expected recovery of pre-petition and post-petition claims in assessing the estimated collectibility of the related receivable. In some cases, the time required to reach an ultimate resolution of these claims can exceed one year. These estimates have a direct effect on our net income because higher bad debt expense results in less net income, other things being equal. For straight-line rent, the collectibility analysis considers the probability of collection of the unbilled deferred rent receivable given our experience regarding such amounts.
OFF BALANCE SHEET ARRANGEMENTS
We have no material off-balance sheet items other than the partnerships described in note 3 to the consolidated financial statements and in the "Overview" section above.
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RESULTS OF OPERATIONS
The following information sets forth our results of operations for the years ended
Overview
Net loss for the year endedDecember 31, 2011 was$93.9 million , an increase of$39.5 million compared to a net loss for the year endedDecember 31, 2010 of$54.4 million . Our 2011 and 2010 results of operations were affected by the following:
• impairment charges of
to
Phillipsburg Mall inPhillipsburg, New Jersey ;
• a decrease of
primarily due to certain lease intangibles and tenant improvements at 30
properties purchased during 2003 and 2004 that became fully amortized during
2010 and 2011; • a decrease of$6.7 million in interest expense in 2011 compared to 2010 resulting from lower overall debt balances offset by higher interest rates; • a decrease of$6.4 million in net operating income (presented using the
"proportionate-consolidation method;" see "-Net Operating Income") in 2011 as
compared to 2010;
• a
with the Valley View Downs project;
• gains on sales of real estate of
sales at
Plaza in
the mall atVoorhees Town Center inVoorhees, New Jersey ;
• gain on the sale of discontinued operations in 2010 of
sale of five power centers;
• issuance of 10,350,000 shares in 2010 in a public equity offering and the use
of the proceeds from the offering for the repayment of a portion of the
amounts outstanding under the 2010 Credit Facility; and
• accelerated amortization of
in connection with the permanent repayment of a portion of the amounts
outstanding under the 2010 Credit Facility using the proceeds from the public
equity offering and the repayment of mortgage loans secured by properties
involved in the sale of five power centers.
Net loss for the year endedDecember 31, 2010 was$54.4 million , a decrease of$35.7 million compared to a net loss for the year endedDecember 31, 2009 of$90.1 million . Our 2010 and 2009 results of operations were affected by the following:
• gain on the sale of discontinued operations in 2010 of
sale of five power centers;
• issuance of 10,350,000 shares in 2010 in a public equity offering and the use
of the proceeds of the offering for the repayment of a portion of the amounts
outstanding under the 2010 Credit Facility, and issuance of 4,300,000 shares
in 2009 in connection with transactions to repurchase our 4.00% Senior
Exchangeable Notes dueJune 1, 2012 ("Exchangeable Notes");
• gains on extinguishment of debt of
repurchase of
Notes, which did not recur in 2010;
• impairment charges of
to
the Springhills development inGainesville, Florida ;
• gains on the sale of discontinued operations in 2009 of
sale of interests in two properties;
• gain on the sale of real estate of
the sale of a parcel at
Pennsylvania ; • a decrease of$6.7 million in net operating income (presented using the
"proportionate-consolidation method;" see "-Net Operating Income") in 2010 as
compared to 2009; and • an increase in interest expense of$11.5 million in 2010, primarily due to
higher applicable stated interest rates, decreased capitalized interest and
including
costs using the proceeds of the public equity offering and the repayment of
mortgage loans secured by properties involved in the sale of five power
centers. 49
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Occupancy
The table below sets forth certain occupancy statistics for our properties as of
Occupancy (1) as of
Consolidated Unconsolidated Properties Properties Combined (2) 2011 2010 2009
2011 2010 2009 2011 2010 2009 Retail portfolio weighted average: Total excluding anchors
89.5 % 89.2 % 87.7 %
94.6 % 94.1 % 88.9 % 90.2 % 90.0 % 87.8 % Total including anchors
92.9 % 92.1 % 91.2 %
94.1 % 95.6 % 91.2 % 93.0 % 92.5 % 91.2 % Enclosed malls weighted average: Total excluding anchors
89.3 % 89.0 % 87.5 %
95.5 % 95.4 % 92.7 % 89.7 % 89.4 % 87.9 % Total including anchors
92.8 % 91.9 % 91.1 % 96.5 % 96.4 % 94.3 % 92.9 % 92.1 % 91.2 % Strip and Power Center weighted average: 96.2 % 96.1 % 93.0 % 92.8 % 95.2 % 89.6 % 93.8 % 95.5 % 91.3 %
(1) Occupancy for all 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.
Total occupancy for our retail portfolio increased 50 basis points to 93.0%, and mall occupancy increased 80 basis points to 92.9%, including consolidated and unconsolidated properties (and including all tenants irrespective of the term of their agreement). Sales per square foot in our portfolio increased by 4.3%, including consolidated and unconsolidated properties, and there were increases at 31 of our 38 malls, which helped our leasing activity. In addition, we have successfully re-leased all but one of the 11 stores previously operated byBorders Group, Inc. , which filed for bankruptcy protection and liquidated in 2011, through new leases, expansions and combinations. 50
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Leasing Activity
The table below sets forth summary leasing activity information with respect to our properties for the year ended
Annualized Average Base Rent psf Increase (Decrease) in Base Rent psf Tenant Improvements Number GLA Previous New Dollar Percentage psf (1) New Leases - Previously Leased Space: 1st Quarter (2) 21 77,140 $ 22.24 $ 19.68 $ (2.56 ) (11.5 %) $ 1.39 2nd Quarter (3) 27 82,868 21.79 21.97 0.18 0.8 % 1.45 3rd Quarter (4) 30 102,554 24.39 18.87 (5.52 ) (22.6 %) 0.82 4th Quarter (5) 35 110,812 19.58 18.71 (0.87 ) (4.4 %) 0.60 Total/Average 113 373,374 $ 21.94 $ 19.68 $ (2.26 ) (10.3 %) $ 1.01 New Leases - Previously Vacant Space: (6) 1st Quarter 20 86,463 N/A $ 16.86 $ 16.86 N/A $ 2.05 2nd Quarter 39 110,003 N/A 18.38 18.38 N/A 3.40 3rd Quarter 41 225,145 N/A 16.56 16.56 N/A 2.28 4th Quarter 23 74,087 N/A 20.08 20.08 N/A 2.86 Total/Average 123 495,698 N/A $ 17.54 $ 17.54 N/A $ 2.58 Renewal: (7) 1st Quarter (2) 81 310,673 $ 22.22 $ 22.23 $ 0.01 0.0 % $ 0.09 2nd Quarter (3) 92 321,947 22.37 22.89 0.52 2.3 % 0.05 3rd Quarter (4) 109 367,407 21.59 21.70 0.11 0.5 % 0.05 4th Quarter (5) 109 409,349 18.97 19.83 0.86 4.5 % - Total/Average 391 1,409,376 $ 21.15 $ 21.55 $ 0.40 1.9 % $ 0.04 Anchor New: 1st Quarter - - - - - - - 2nd Quarter - - - - - - - 3rd Quarter 1 113,692 N/A $ 1.89 $ 1.89 N/A $ - 4th Quarter - - - - - - - Total/Average 1 113,692 N/A $ 1.89 $ 1.89 N/A $ - Anchor Renewal: 1st Quarter 5 367,162 $ 2.73 $ 2.73 $ - - $ - 2nd Quarter 4 436,916 2.40 2.40 - - - 3rd Quarter 1 155,392 1.56 1.56 - - - 4th Quarter 3 321,974 2.26 2.26 - - 0.16 Total/Average 13 1,281,444 $ 2.36 $ 2.36 $ - - $ 0.04
(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 (5.6%) for New
Leases-Previously Leased Space and (6.0%) for Renewals.
(3) Leasing spreads on a gross rent basis were 2.2% for New Leases-Previously
Leased Space and (2.3%) for Renewals.
(4) Leasing spreads on a gross rent basis were (14.8%) for New Leases-Previously
Leased Space and 0.3% for Renewals.
(5) Leasing spreads on a gross rent basis were (14.0%) for New Leases
-Previously Leased Space and 3.5% for Renewals.
(6) This category includes newly constructed and recommissioned space.
(7) This category includes expansions, relocations and lease extensions.
See "Item 2. Properties-Retail Lease Expiration Schedule" for information regarding average minimum rent on expiring leases.
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The following table forth our results of operations for the years ended
For the Year % For the Year % For the Year Ended Change Ended Change Ended December 31, 2010 to
2011 2011 2010 2010 2009 Results of operations: Real estate revenue $ 449,848 0 % $ 450,365 0 % $ 448,271 Interest and other income 6,712 27 % 5,276 74 % 3,035 Operating expenses (193,833 ) (1 %) (195,273 ) 2 % (190,968 ) General and administrative expenses (38,901 ) 0 % (38,973 ) 4 % (37,558 ) Impairment of assets (52,336 ) - - (100 %) (74,254 ) Project costs and other expenses (964 ) (15 %) (1,137 ) 23 % (927 ) Interest expense, net (132,256 ) (7 %) (142,730 ) 9 % (131,236 ) Depreciation and amortization (140,430 ) (13 %) (161,592 ) 0 % (161,690 ) Equity in income of partnerships 6,635 (27 %) 9,050 (10 %) 10,102 Gain on extinguishment of debt - - - (100 %) 27,047 Gains on sales of real estate 1,590 - - (100 %) 4,311 Loss from continuing operations (93,935 ) 25 % (75,014 ) (28 %) (103,867 ) Operating results from discontinued operations - (100 %) 1,557 (64 %) 4,273 Gains on sales of discontinued operations - (100 %) 19,094 101 % 9,503 Net loss $ (93,935 ) 73 % $ (54,363 ) (40 %) $ (90,091 ) The amounts in the preceding table reflect our consolidated properties, with the exception of properties that are classified as discontinued operations that are presented in the line item "Income from discontinued operations," and unconsolidated properties that are presented under the equity method of accounting in the line item "Equity in income of partnerships."
Real Estate Revenue
Real estate revenue decreased by
• a decrease of
in straight line rent primarily resulting from
associated with theBorders Group, Inc. liquidation. This decrease was partially offset by other base rent increases at our properties;
• an increase of
store sales increases at our consolidated properties to$354 per square foot in 2011 from$339 per square foot in 2010; • a decrease of$0.8 million in expense reimbursements. At many of our malls, we have continued to recover a lower proportion of common area maintenance and real estate tax 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. In recent years, we have entered
into agreements with some tenants experiencing financial difficulties to
convert their leases to gross leases or percentage of sales leases,
resulting in lower expense reimbursements; • a decrease of$1.2 million in lease termination revenue; and
• an increase of
increase in promotional income and a
center revenue related to the opening of a location at Washington Crown Center inNovember 2010 . 52
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Real estate revenue increased by
• an increase of
$6.1 million increase at three completed redevelopment projects,Cherry Hill Mall ,Plymouth Meeting Mall andThe Gallery at Market East , due to
increased occupancy from newly opened tenants. This increase was partially
offset by base rent at our other properties, which decreased because of
decreased occupancy and leases that were converted to percentage rent in
lieu of minimum rent; • an increase of$0.9 million in lease termination revenue; and
• a decrease of
in expense reimbursements noted above.
Operating Expenses
Operating expenses decreased by
• a decrease of$2.0 million in bad debt expense due to favorable collections resulting in lower accounts receivable balances;
• a decrease of
due to an aggregate
properties where electric rates have decreased as a result of deregulation
and alternate supplier contracts executed over the past 12 months; • an increase of$0.2 million in common area maintenance expenses as a
result of stipulated annual contractual increases in housekeeping and
security services, partially offset by lower common area utility and snow
removal expenses; and
• an increase of
property tax rates and increased property assessments at some of our properties.
Operating expenses increased by
• an increase of
result of stipulated annual contractual increases in housekeeping and
security services, as well as an increase in common area utility expense; • an increase of$2.0 million in non-common area utility expense, primarily
due to an aggregate
properties where electricity rate caps expired onJanuary 1, 2010 ; • an increase of$1.0 million in real estate tax expense; and • a decrease of$1.3 million in bad debt expense due to favorable
collections resulting in lower accounts receivable balances, as well as
fewer tenant bankruptcies in 2010 as compared to 2009.
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 as described below, and includes real estate revenue and operating expenses from properties included in discontinued operations. 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. 53
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NOI excludes interest and other income, general and administrative expenses, interest expense, depreciation and amortization, gains on sales of interests in real estate, gains or 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 years endedDecember 31, 2011 , 2010 and 2009. 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 calculated in accordance with GAAP appears under the heading "Reconciliation of GAAP Net Loss to Non-GAAP Measures." For the Year Ended For the Year Ended For the Year Ended December 31, 2011 December 31, 2010 December 31, 2009 Real Net Real Net Real Net Estate Operating Operating Estate Operating Operating Estate Operating Operating (in thousands of dollars) Revenue Expenses Income Revenue Expenses Income Revenue Expenses Income Same Store $ 485,781 $ (203,536 ) $ 282,245 $ 486,345 $ (205,411 ) $ 280,934 $ 483,086 $ (200,976 ) $ 282,110 Non Same Store 1,901 (1,752 ) 149 11,609 (3,736 ) 7,873 18,928 (5,572 ) 13,356 Total $ 487,682 $ (205,288 ) $ 282,394 $ 497,954 $ (209,147 ) $ 288,807 $ 502,014 $ (206,548 ) $ 295,466 % Change % Change 2011 vs. 2010 2010 vs. 2009 Same Same Store Total Store Total
Real estate revenue 0 % (2 %) 1 % (1 %) Operating expenses (1 %) (2 %) 2 % 1 % NOI 1 % (2 %) 0 % (2 %)
Total NOI decreased by
• a
of Operations - Real Estate Revenue" and "Results of Operations -
Operating Expenses" above for further information about our consolidated
properties; • a$0.1 million increase in NOI from unconsolidated properties; and
• lease termination revenue in 2011 was
million in 2010.
Total NOI decreased by
• a
of Operations - Real Estate Revenue" and "Results of Operations -
Operating Expenses" above for further information about our consolidated
properties; partially offset by • a$0.8 million increase in NOI from unconsolidated properties. NOI from
unconsolidated properties increased primarily due to a
increase in base rent resulting from increased occupancy; and 54
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• lease termination revenue in 2010 was
million in 2009. Interest and Other Income Interest and other income increased by$1.4 million , or 27%, in 2011 as compared to 2010 primarily due to a$1.5 million bankruptcy settlement received in 2011 in connection with the Valley View Downs project in westernPennsylvania . Interest and other income increased by$2.2 million , or 74%, in 2010 as compared to 2009 due to income recognized from a transaction involving historic tax credits and interest earned from a tenant note receivable that was repaid in full in 2010.
General and Administrative Expenses
General and administrative expenses decreased by
General and administrative expenses increased by
Impairment of Assets
As further described in the "Overview" section and in note 2 to our consolidated financial statements, in 2011, we recorded impairment of assets of$28.0 million onPhillipsburg Mall inPhillipsburg, New Jersey , and$24.1 million onNorth Hanover Mall inHanover, Pennsylvania .
As further described in note 2 to our consolidated financial statements, in 2009, we recorded impairment of assets of
Interest Expense
Interest expense decreased by$10.5 million , or 7%, in 2011 as compared to 2010. Of this amount,$3.7 million was due to accelerated amortization of deferred financing costs in 2010 associated with the repayment of a portion of the 2010 Credit Facility and the repayment of mortgage loans secured by properties involved in the sale of five power centers inSeptember 2010 that did not recur in 2011. The remaining decrease was primarily due to a lower overall debt balance (an average of$2,195.3 million in 2011 compared to$2,353.7 million in 2010), partially offset by slightly higher applicable stated interest rates. Our weighted average effective borrowing rate was 6.12% for the year endedDecember 31, 2011 as compared to 6.17% for the year endedDecember 31, 2010 . Interest expense increased by$11.5 million , or 9%, in 2010 as compared to 2009. This increase was primarily due to higher applicable stated interest rates and decreased capitalized interest after assets were placed in service. Our weighted average effective borrowing rate was 6.17% in 2010 compared to 5.35% in 2009. Assets with a cost basis of$102.9 million were placed in service in 2010. Interest on these assets was capitalized during construction periods for our development and redevelopment projects, and was expensed during periods after the improvements were placed in service. We also incurred$3.7 million of accelerated amortization of deferred financing costs associated with the repayment of a portion of the 2010 Credit Facility and the repayment of mortgage loans secured by properties involved in the sale of five power centers inSeptember 2010 . The effect of higher stated interest rates was partially offset by a lower aggregate debt balance (an average of$2,353.7 million in 2010 compared to$2,565.0 million in 2009).
Depreciation and Amortization
Depreciation and amortization expense decreased by$21.2 million , or 13%, in 2011 as compared to 2010, primarily because certain lease intangibles and tenant improvements at 30 properties purchased during 2003 and 2004 became fully amortized during 2010 and 2011. Depreciation and amortization expense decreased by$0.1 million , or 0%, in 2010 as compared to 2009, primarily because certain lease intangibles and tenant improvements at 28 properties purchased during 2003 became fully amortized in 2010, offset by an increase of$7.5 million primarily due to a higher asset base resulting from capital improvements at our properties, particularly at properties that were placed in service. 55
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Gains on Sales of Real Estate
Gains on sales of real estate were
• a$0.7 million gain from the sale of a parcel and related land improvements atPitney Road Plaza inLancaster, Pennsylvania ; and
• a
Town Center in
There were no gains on sales of real estate in the year ended
Gains on sales of real estate were
• a gain of$1.4 million from the sale of two outparcels and related
improvements adjacent to
• a gain of$2.7 million from the sale of a parcel and related land improvements atPitney Road Plaza inLancaster, Pennsylvania .
Discontinued Operations
We have presented as discontinued operations the operating results of the five power centers that were sold inSeptember 2010 : Creekview Center,Monroe Marketplace , New River Valley Center,Pitney Road Plaza andSunrise Plaza ; and two properties that were sold in 2009:Crest Plaza and a controlling interest in Northeast Tower Center. Operating results and gains on sales of discontinued operations for the properties in discontinued operations for the periods presented were as follows: For the Year Ended December 31, (in thousands of dollars) 2010 2009 Operating results of: Monroe Marketplace $ 755 $ 1,217 Sunrise Plaza 573 627 Pitney Road Plaza 377 192 Creekview Center (71 ) (431 ) New River Valley Center (77 ) 465 Northeast Tower Center - 1,820 Crest Plaza - 383 Operating results from discontinued operations 1,557 4,273 Gains on sales of discontinued operations 19,094 9,503 Income from discontinued operations $ 20,651 $ 13,776 56
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Gains on Sales of Discontinued Operations
There were no gains on sales of discontinued operations in 2011.
Gains on sales of discontinued operations were
Gains on sales of discontinued operations were$9.5 million in 2009 due to the gain on the sale of a controlling interest in Northeast Tower Center of$6.1 million and a gain on the sale ofCrest Plaza of$3.4 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 income before gains and losses on sales of operating properties, extraordinary items (computed in accordance with GAAP) and significant non-recurring events that materially distort the comparative measurement of company performance over time; plus real estate depreciation; plus or minus adjustments for unconsolidated partnerships 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. NAREIT guidance issued in 2003 provides that excluding impairment write downs of depreciable real estate is consistent with the definition of FFO. Certain regulatory staff had indicated, however, a view that impairment write downs were required to be included in FFO. In late 2011, NAREIT updated its guidance to reflect that certain regulatory staff has conveyed that it no longer holds that view, and NAREIT reiterated its original guidance that excluding such impairments is consistent with the NAREIT definition. In this report, prior period FFO amounts have been revised to reflect this updated NAREIT guidance regarding impairment write downs. 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 does not include gains and losses on sales of operating real estate assets or impairment write-downs of depreciable real estate, 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 years endedDecember 31, 2011 , 2010 and 2009 to show the effect of accelerated amortization of deferred financing costs and gain on extinguishment of debt, which had a significant effect on our results of operations, but are not, in our opinion, indicative of our operating performance. 57
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The following table presents FFO and FFO per diluted share and OP Unit, and Funds From Operations, as adjusted, and Funds From Operations per diluted share and OP Unit, as adjusted, for the years ended
For the Year Ended
% % Change Change 2010 to 2009 to
(in thousands of dollars, except per share amounts) 2011 2011
2010 2010 2009 Funds from operations(1) $ 105,585 6 % $ 99,214 (33 %) $ 147,341 Accelerated amortization of deferred financing costs - 3,652 - Gain on extinguishment of debt - - (27,047 ) Funds from operations, as adjusted $ 105,585 3 % $ 102,866 (14 %) $ 120,294
Funds from operations per diluted share and OP Unit
(1 %) $ 1.86 (45 %) $ 3.41 Accelerated amortization of deferred financing costs - 0.07 - Gain on extinguishment of debt - - (0.63 )
Funds from operations per diluted share and OP Unit as adjusted
$ 1.84 (5 %) $ 1.93 (31 %) $ 2.78 Weighted average number of shares outstanding 54,639 50,642 40,953 Weighted average effect of full conversion of OP Units 2,329 2,329 2,268 Effect of common share equivalents 502 502 12 Total weighted average shares outstanding, including OP Units 57,470 53,473 43,233
(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 amounts have been revised to reflect
this updated NAREIT guidance.
FFO was$105.6 million for the year endedDecember 31, 2011 , an increase of$6.4 million , or 6%, compared to$99.2 million for 2010. This increase primarily was due to: • a decrease in interest expense of$6.0 million in 2011 compared to 2010
resulting from lower overall debt balances offset partially by higher
average interest rates;
• accelerated amortization of
2010 in connection with the repayment of a portion of the 2010 Credit
Facility and the repayment of mortgage loans secured by properties involved in the sale of five power centers;
• an increase of
"proportionate-consolidation method;" see "-Net Operating Income");
• a
the Valley View Downs project; • gains on sales of non-operating real estate of$0.9 million in 2011; offset by
• a decrease of
"proportionate-consolidation method;" see "-Net Operating Income") in 2011
as compared to 2010, resulting from the sale of five power centers.
FFO per diluted share decreased$0.02 per share to$1.84 per share for the year endedDecember 31, 2011 , compared to$1.86 per share for the year endedDecember 31, 2010 . The weighted average shares outstanding used to determine FFO per diluted share reflects our issuance of 10,350,000 common shares in a public offering inMay 2010 . FFO was$99.2 million for the year endedDecember 31, 2010 , a decrease of$48.1 million , or 33%, compared to$147.3 million for 2009. This decrease primarily was due to:
• gains on extinguishment of debt of
the repurchase of$104.6 million in aggregate principal amount of Exchangeable Notes, that did not recur in 2010;
• an increase in interest expense of
higher average interest rates and decreased capitalized interest; 58
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• accelerated amortization of
2010 in connection with the repayment of a portion of the 2010 Credit
Facility and the repayment of mortgage loans secured by properties involved in the sale of five power centers;
• a decrease of
"proportionate-consolidation method;" see "-Net Operating Income") in 2010 as compared to 2009; and
• gains on sales of non-operating real estate of
did not recur in 2010.
FFO per diluted share decreased$1.55 per share to$1.86 per share for the year endedDecember 31, 2010 , compared to$3.41 per share for the year endedDecember 31, 2009 . The weighted average shares outstanding used to determine FFO per diluted share reflects our issuance of 10,350,000 common shares in a public offering inMay 2010 .
Reconciliation of GAAP Net Loss to Non-GAAP Measures
The preceding discussions compare our 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. 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 ongoing operations, such as gains on extinguishment of debt and accelerated amortization of deferred financing costs. 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.
The following information is provided to reconcile NOI and FFO, which are non-GAAP measures, to net loss, a GAAP measure:
For the Year Ended December 31, 2011 Share of Unconsolidated Discontinued (in thousands of dollars) Consolidated Partnerships
Operations Total Real estate revenue $ 449,848 $ 37,834 $ - $ 487,682 Operating expenses (193,833 ) (11,455 ) - (205,288 ) Net operating income 256,015 26,379 - 282,394 General and administrative expenses (38,901 ) - - (38,901 ) Interest and other income 6,712 - - 6,712 Project costs and other expenses (964 ) - - (964 ) Interest expense, net (132,256 ) (11,341 ) - (143,597 ) Gain on sales of non-operating real estate 850 - - 850 Depreciation of non real estate assets (909 ) - - (909 ) Funds from operations 90,547 15,038 - 105,585 Gains on sales of real estate 740 - - 740 Depreciation of real estate assets (139,521 ) (8,403 ) - (147,924 ) Impairment of assets (52,336 ) - - (52,336 ) Equity in income of partnerships 6,635 (6,635 ) - - Net loss $ (93,935 ) $ - $ - $ (93,935 ) 59
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Consolidated
Consolidated Consolidated Consolidated
For the Year
Ended
Share of Unconsolidated Discontinued (in thousands of dollars) Consolidated Partnerships Operations Total Real estate revenue $ 450,365 $ 38,092 $ 9,497 $ 497,954 Operating expenses (195,273 ) (11,767 ) (2,107 ) (209,147 ) Net operating income 255,092 26,325 7,390 288,807 General and administrative expenses (38,973 ) - - (38,973 ) Interest and other income 5,276 - - 5,276 Project costs other expenses (1,137 ) - - (1,137 ) Interest expense, net (142,730 ) (8,619 ) (1,926 ) (153,275 ) Depreciation of non real estate assets (1,484 ) - - (1,484 ) Funds from operations 76,044 17,706 5,464 99,214 Depreciation of real estate assets (160,108 ) (8,656 ) (3,907 ) (172,671 ) Equity in income of partnerships 9,050 (9,050 ) - - Operating results from discontinued operations 1,557 - (1,557 ) - Gain on sale of discontinued operations 19,094 - - 19,094 Net loss $ (54,363 ) $ - $ - $ (54,363 ) Consolidated Consolidated Consolidated Consolidated For the Year
Ended
Share of Unconsolidated Discontinued (in thousands of dollars) Consolidated Partnerships Operations Total Real estate revenue $ 448,271 $
37,296 $ 16,447 $ 502,014 Operating expenses
(190,968 ) (11,789 ) (3,791 ) (206,548 ) Net operating income 257,303 25,507 12,656 295,466 General and administrative expenses (37,558 ) - - (37,558 ) Interest and other income 3,035 - - 3,035 Project costs and other expenses (927 ) - - (927 ) Interest expense, net (131,236 ) (7,261 ) (2,328 ) (140,825 ) Gain on extinguishment of debt 27,047 - - 27,047 Gains on sales of non operating real estate 3,388 - - 3,388 Depreciation of non real estate assets (2,285 ) - - (2,285 ) Funds from operations 118,767 18,246 10,328 147,341 Impairment of assets (74,254 ) - - (74,254 ) Gains on sales of real estate 923 - - 923 Depreciation of real estate assets (159,405 ) (8,144 ) (6,055 ) (173,604 ) Equity in income of partnerships 10,102 (10,102 ) - - Operating results from discontinued operations 4,273 - (4,273 ) - Gains on sales of discontinued operations 9,503 - - 9,503 Net loss $ (90,091 ) $ - $ - $ (90,091 ) 60
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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." 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.
Capital Resources
We expect to meet our short-term liquidity requirements, including distributions to 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 common shareholders and OP Unitholders in 2011 were$34.8 million , based on distributions of$0.60 per share and OP Unit. For the first quarter of 2012, we have announced a distribution of$0.15 per share. 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 vary our approach 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. 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. 61
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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 are contemplating 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 joint ventures or other partnerships or arrangements involving our contribution of assets 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, or through other actions. InJanuary 2012 , theSEC 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. However, we may be unable to issue securities under the shelf registration statement, or otherwise, on terms that are favorable to us, or at all.
2010 Credit Facility, As Amended
InMarch 2010 , we entered into the 2010 Credit Facility (as defined below), which was comprised of (1) an aggregate$520.0 million term loan made up of a$436.0 million term loan ("Term Loan A") toPREIT Associates, L.P. andPREIT-RUBIN, Inc. and a separate$84.0 million term loan ("Term Loan B") to two other subsidiaries (collectively, the "2010 Term Loan"), and (2) a$150.0 million revolving line of credit (the "Revolving Facility," and, together with the 2010 Term Loan, and as amended as described below, the "2010 Credit Facility"). All capitalized terms used and not otherwise defined in the description set forth herein of the 2010 Credit Facility, as amended by the amendment, have the meanings ascribed to such terms in the 2010 Credit Facility. We used the proceeds of ourMay 2010 issuance of 10,350,000 common shares in a public offering plus available working capital and some of the proceeds of ourSeptember 2010 sale of five power centers to repay borrowings under the 2010 Credit Facility. Prior to entering into the amendment described below,$340.0 million was outstanding under the 2010 Term Loan. InJune 2011 , we amended our 2010 Credit Facility, whereby the capacity of the Revolving Facility was increased by$100.0 million to$250.0 million . We borrowed$100.0 million under the Revolving Facility and we repaid$100.0 million of the 2010 Term Loan, after which the 2010 Term Loan had a balance of$240.0 million and the Revolving Facility had a balance of$100.0 million .
The amendment extended the term of the 2010 Credit Facility by one year to
The amendment lowered the interest rate range to between 2.75% and 4.00% per annum overLIBOR , depending on our leverage. Previously, the interest rate range was between 4.00% and 4.90% per annum overLIBOR . Initially, the new rate in effect was 4.00% per annum overLIBOR , and the interest rate remained 4.00% overLIBOR atDecember 31, 2011 . In determining our leverage (the ratio of Total Liabilities to Gross Asset Value), the capitalization rate used to calculate Gross Asset Value is 8.00%. The unused portion of the Revolving Facility is subject to a fee of 0.40% per annum.
The obligations under the 2010 Term Loan are secured by first priority mortgages on 18 of our properties and by first priority leasehold mortgages on two properties ground leased by two subsidiaries. The foregoing properties constitute substantially all of our previously unencumbered retail properties.
We and certain of our subsidiaries that are not otherwise prevented from doing so serve as guarantors for funds borrowed under the 2010 Credit Facility.
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As ofDecember 31, 2011 ,$95.0 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$155.0 million atDecember 31, 2011 . InFebruary 2012 , we utilized proceeds from the new mortgage loan onCapital City Mall to repay$65.0 million of our Revolving Facility. Following this pay down, there was$30.0 million outstanding under our Revolving Facility, and the unused portion that was available to us was$220.0 million . Interest expense related to the Revolving Facility was$2.6 million and$1.6 million for the years endedDecember 31, 2011 and 2010, respectively, excluding non-cash amortization of deferred financing fees. The weighted average interest rate on outstanding Revolving Facility borrowings as ofDecember 31, 2011 was 4.32%. As ofDecember 31, 2011 ,$240.0 million was outstanding under the 2010 Term Loan. Interest expense related to the 2010 Term Loan was$17.5 million and$19.0 million , respectively, for the years endedDecember 31, 2011 and 2010, respectively, excluding non-cash amortization of deferred financing fees. The weighted average effective interest rates based on amounts borrowed under the 2010 Term Loan for the year endedDecember 31, 2011 was 5.58% and forMarch 10, 2010 (the closing date) throughDecember 31, 2010 was 5.83%. Deferred financing fee amortization associated with the 2010 Credit Facility was$3.7 million and$5.5 million for the years endedDecember 31, 2011 and 2010, respectively. A Collateral Property will be released as security upon a sale or refinancing, subject to payment of the Release Price and the absence of any default or Event of Default. If, after release of a Collateral Property (and giving pro forma effect thereto), the Facility Debt Yield will be less than 11.00%, the Release Price will be the Minimum Release Price plus an amount equal to the lesser of (A) the amount that, when paid and applied to the 2010 Term Loan, would result in a Facility Debt Yield equal to 11.00% and (B) the amount by which the greater of (1) 100.0% of net cash proceeds and (2) 90.0% of the gross sales proceeds exceeds the Minimum Release Price. The Minimum Release Price is 110% (120% if, after the Release, there will be fewer than 10Collateral Properties ) multiplied by the proportion that the value of the property to be released bears to the aggregate value of all of theCollateral Properties on the closing date of the 2010 Credit Facility, multiplied by the amount of the then Revolving Commitments plus the aggregate principal amount then outstanding under the 2010 Term Loan. In general, upon release of a Collateral Property, the post-release Facility Debt Yield must be greater than or equal to the pre-release Facility Debt Yield. Release payments must be used to pay down and permanently reduce the amount of the Term Loan. The 2010 Credit Facility contains affirmative and negative covenants customarily found in facilities of this type, including, without limitation, requirements that we maintain, on a consolidated basis: (1) minimum Tangible Net Worth of not less than$483.1 million , minus non-cash impairment charges with respect to the Properties recorded in the quarter endedDecember 31, 2009 , plus 75% of the Net Proceeds of all Equity Issuances effected at any time afterSeptember 30, 2009 ; (2) maximum ratio of Total Liabilities to Gross Asset Value of 0.70:1; (3) minimum ratio of EBITDA to Interest Expense of 1.60:1; (4) minimum ratio of Adjusted EBITDA to Fixed Charges of 1.35:1; (5) maximum Investments in unimproved real estate and predevelopment costs not in excess of 5.0% of Gross Asset Value; (6) maximum Investments in Persons other than Subsidiaries, Consolidated Affiliates and Unconsolidated Affiliates not in excess of 5.0% of Gross Asset Value; (7) maximum Investments in Indebtedness secured by Mortgages in favor of the Company, the Borrower or any other Subsidiary not in excess of 5.0% of Gross Asset Value on the basis of cost; (8) the aggregate value of the Investments and the other items subject to the preceding clauses (5) through (7) shall not exceed 10.0% of Gross Asset Value; (9) maximum Investments in Consolidation Exempt Entities not in excess of 20.0% of Gross Asset Value; (10) a maximum Gross Asset Value attributable to any one Property not in excess of 15.0% of Gross Asset Value; (11) maximumProjects Under Development not in excess of 10.0% of Gross Asset Value; (12) maximum Floating Rate Indebtedness in an aggregate outstanding principal amount not in excess of one-third of all Indebtedness of the Company, its Subsidiaries, its Consolidated Affiliates and its Unconsolidated Affiliates; (13) minimum Corporate Debt Yield of (i) 9.50% untilMarch 30, 2012 , (ii) 9.75% fromMarch 31, 2012 untilMarch 30, 2013 , and (iii) 10.00% thereafter; and (14) Distributions may not exceed 110% of REIT taxable income for a fiscal year, or 95% of FFO (unless necessary for the Company to retain its status as a REIT). We are required to maintain our status as a REIT at all times. As ofDecember 31, 2011 , we were in compliance with all of these covenants. Under specified conditions, including that leverage has been below 65% for two consecutive quarters, and subject to certain financial covenants, the range of applicable stated interest rates may be further reduced at our option to between 2.00% and 3.00% per annum overLIBOR , we will have an option to extend the maturity date of the 2010 63
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Credit Facility by one year toMarch 10, 2015 , and we may increase the maximum amount available under the Revolving Facility from$250.0 million to$350.0 million , if commitments can be obtained, and provided that the minimum facility debt yield will be increased to 11.00%. We may prepay any future borrowings under the Revolving Facility at any time without premium or penalty. We must repay the entire principal amount outstanding under the 2010 Credit Facility at the end of its term, as the term may be extended. Upon the expiration of any applicable cure period following an event of default, the lenders may declare all of the obligations in connection with the 2010 Credit Facility immediately due and payable, and the Commitments of the lenders to make further loans under the 2010 Credit Facility will terminate. Upon the occurrence of a voluntary or involuntary bankruptcy proceeding of the Company,PREIT Associates , PRI, any owner of a Collateral Property or any Material Subsidiary, all outstanding amounts will automatically become immediately due and payable and the Commitments of the lenders to make further loans will automatically terminate.
Exchangeable Notes
Our 4.00% Senior Exchangeable Notes dueJune 1, 2012 ("Exchangeable Notes") had a balance of$136.9 million as of bothDecember 31, 2011 and 2010 (excluding debt discount of$0.8 million and$2.8 million , respectively). Interest expense related to the Exchangeable Notes was$5.5 million ,$5.5 million and$8.6 million (excluding non-cash amortization of debt discount of$2.0 million ,$1.9 million and$2.8 million and the non-cash amortization of deferred financing fees of$0.7 million ,$0.7 million and$1.0 million ) for the years endedDecember 31, 2011 , 2010 and 2009, respectively. The Exchangeable Notes bear interest at a contractual rate of 4.00% per annum. The Exchangeable Notes had an effective interest rate of 5.95% for the year endedDecember 31, 2011 , including the effect of the debt discount amortization and deferred financing fee amortization. In 2009, we repurchased$104.6 million in aggregate principal amount of our Exchangeable Notes in privately negotiated transactions in exchange for an aggregate$47.2 million in cash and 4.3 million common shares, with a fair market value of$25.0 million . We terminated an equivalent notional amount of the related capped calls in 2009. We did not repurchase any Exchangeable Notes in 2011 or 2010. We recorded gains on extinguishment of debt of$27.0 million in 2009. In connection with the repurchases, we retired an aggregate of$5.4 million of deferred financing costs and debt discount. We intend to repay in full the Exchangeable Notes on or before their maturity inJune 2012 . Subject to the terms of the 2010 Credit Facility, we intend to review all available options to address their maturity, including the use of internally generated cash flows, the Revolving Facility, excess refinancing proceeds, or the refinancing, with new securities or from other sources, or extending of, the Exchangeable Notes in a similar or modified form. Our plans with regard to the maturity of the Exchangeable Notes are subject to change.
The following table presents the mortgage loans we have entered into since
Amount Financed or Extended (in millions of Financing Date Property dollars) Stated Rate Maturity 2012 Activity: January New River Valley Mall $ 28.1 LIBOR plus 3.00% January 2019 February Capital City Mall 65.8 5.30% fixed March 2022 2011 Activity: July 801 Market Street(1) 27.7 LIBOR plus 2.10% July 2016 2010 Activity: January New River Valley Mall(2) 30.0 LIBOR plus 4.50% January 2013 March Lycoming Mall(3) 2.5 6.84% fixed June 2014 July Valley View Mall(4) 32.0 5.95% fixed June 2020 2009 Activity: March New River Valley Center(5) 16.3 LIBOR plus 3.25% March 2012 June Pitney Road Plaza(5) 6.4 LIBOR plus 2.50% June 2010 June Lycoming Mall(3) 33.0 6.84% fixed June 2014 September Northeast Tower Center(6) 20.0 LIBOR plus 2.75% September 2011
(1) The mortgage loan has a five year term and two one-year extension options.
Payments are of principal and interest based on a 25 year amortization
schedule, with a balloon payment due in
(2) Interest only. The mortgage loan has a three year term and one one-year
extension option. We made principal payments of
million in
(3) The mortgage loan agreement provides for a maximum loan amount of $38.0
million. The initial amount of the mortgage loan was
additional draws of
2010. Payments are of principal and interest based on a 25 year amortization
schedule, with a balloon payment due in
(4) Payments are of principal and interest based on a 30 year amortization
schedule, with a balloon payment in
mortgage loan financing, we repaid the
(5) In
of five power centers (including this one).
(6) In
Tower Center in connection with the sale of a controlling interest in this
property. Other 2011 Activity InJune 2011 , we exercised the first of two one-year extension options on the$45.0 million mortgage loan secured by Christiana Center inNewark, Delaware . In connection with the extension, we now pay principal and interest on the mortgage loan based on a 25 year amortization schedule. InJune 2011 , in connection with the amendment of the 2010 Credit Facility, the lenders released the second mortgage onNew River Valley Mall inChristiansburg, Virginia , and that property is no longer one of theCollateral Properties securing the 2010 Credit Facility.
In
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InNovember 2011 , we repaid a$48.1 million mortgage loan onCapital City Mall inCamp Hill, Pennsylvania using$40.0 million from our Revolving Facility and$8.1 million of available working capital.
Other 2010 Activity
InJanuary 2010 , the unconsolidated partnership that ownsSpringfield Park inSpringfield, Pennsylvania repaid a mortgage loan with a balance of$2.8 million . Our share of the mortgage loan repayment was$1.4 million .
In
InFebruary 2008 , we entered into theOne Cherry Hill Plaza mortgage loan in connection with the acquisition ofBala Cynwyd Associates, L.P. The original maturity date of the mortgage loan wasAugust 2009 , with two separate one year extension options. InJune 2009 , we made a principal payment of$2.4 million and exercised the first extension option. InJuly 2010 , we made a principal payment of$0.7 million and exercised the second extension option.
Other 2009 Activity
InJanuary 2009 , we repaid a$15.7 million mortgage loan onPalmer Park Mall inEaston, Pennsylvania using funds from the 2003 Credit Facility and the 2008 Term Loan. Mortgage Loans Twenty-five mortgage loans, which are secured by 23 of our consolidated properties, are due in installments over various terms extending to the year 2020. Sixteen 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 7.50% and had a weighted average interest rate of 5.77% atDecember 31, 2011 . The nine variable rate mortgage loan balances had a weighted average interest rate of 2.48% atDecember 31, 2011 . The weighted average interest rate of all consolidated mortgage loans was 4.91% atDecember 31, 2011 . 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 and balloon payments related to our mortgage loans as of
Payments by Period (in thousands of dollars) Total 2012 2013
2014 2015-2016 Thereafter Principal payments $ 64,544 $ 20,059 $ 14,557 $ 12,930 $ 14,284 $ 2,714 Balloon payments(1) 1,626,555 409,997 425,773 99,203 514,421 177,161 Total $ 1,691,099 $ 430,056 $ 440,330 $ 112,133 $ 528,705 $ 179,875
(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,
extension options in the respective loan agreements; however, we might be
required to repay a portion of the principal balance in order to exercise the extension options. 65
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Contractual Obligations
The following table presents our consolidated aggregate contractual obligations as of
(in thousands of dollars) Total 2012 2013 2014 2015-2016 Thereafter Mortgage loans(1) $ 1,691,099 $ 430,056 $ 440,330 $ 112,133 $ 528,705 $ 179,875 Exchangeable Notes(2) 136,900 136,900 - - - - 2010 Term Loan(3) 240,000 - - 240,000 - - Revolving Facility(3) 95,000 - - 95,000 - - Interest on indebtedness(4) 315,506 108,107 95,433 51,245 50,483 10,238 Operating leases 5,917 2,261 1,986 1,505 165 - Ground leases 43,735 774 637 658 1,310 40,356 Development and redevelopment commitments(5) 7,110 7,110 - - - - Total $ 2,535,267 $ 685,208 $ 538,386 $ 500,541 $ 580,663 $ 230,469
(1) We have six mortgage loans secured by five properties that are scheduled to
mature by their terms in 2012 with an aggregate balance of
of
Mall that had an aggregate balance of
2011. 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) We intend to repay in full the Exchangeable Notes on or before their
maturity in
intend to review all available options to address their maturity, including
the use of internally generated cash flows, the Revolving Facility, excess
refinancing proceeds, or the refinancing, with new securities or from other
sources, or extending of, the Exchangeable Notes in a similar or modified
form. Our plans with regard to the maturity of the Exchangeable Notes are subject to change. (3) 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
(4) Includes payments expected to be made in connection with interest rate
swaps, caps and forward starting interest rate swap agreements.
(5) The timing of the payments of these amounts is uncertain. We expect that the
majority of such payments will be made prior to
cannot provide any assurances that changed circumstances at these projects
will not delay the settlement of these obligations.
The following table presents the mortgage loans secured by our unconsolidated properties entered into since
Amount Financed or Extended (in millions of Financing Date Property dollars) Stated Rate Maturity 2011 Activity: June Red Rose Commons(1) $ 29.9 5.14% fixed July 2021 June The Court at Oxford Valley(2) 60.0 5.56% fixed July 2021 September Metroplex Shopping Center(3) 87.5
5.00% fixed
2010 Activity: April Springfield Park/Springfield East(4) 10.0 LIBOR plus 2.80% March 2015 May Red Rose Commons(5) 0.3 LIBOR plus 4.00% October 2011 June Lehigh Valley Mall(6) 140.0 5.88% fixed July 2020 November Springfield Mall(7) 67.0
2009 Activity: October Red Rose Commons(5) 23.9 LIBOR plus 4.00% October 2011 (1) The unconsolidated entity that ownsRed Rose Commons entered into the mortgage loan. Our interest in the unconsolidated entity is 50%. In
connection with this new mortgage loan financing, the unconsolidated entity
repaid the previous
mortgage loan. After the repayment of the prior mortgage loan, the entity
distributed to us excess proceeds of
(2) The unconsolidated entity that owns The Court at
the mortgage loan. Our interest in the unconsolidated entity is 50%. In
connection with this new mortgage loan financing, the unconsolidated entity
repaid the previous
mortgage loan. After the repayment of the prior mortgage loan, the entity
distributed to us excess proceeds of
(3) The unconsolidated entity that owns
the mortgage loan. Our interest in the unconsolidated entity is 50%. In
connection with this new mortgage loan financing, the unconsolidated entity
repaid the previous
mortgage loan. After the repayment of the prior mortgage loan, the
partnership distributed to us excess proceeds of
(4) The unconsolidated entities that own
entered into the mortgage loan. Our interest in these unconsolidated entities
is 50%. The mortgage loan has a term of five years, with one five-year
extension option.
(5) The unconsolidated partnership that owns
mortgage loan. Our interest in the unconsolidated partnership is 50%. This
loan is for interest only in its initial term. The 2010 transaction was an
additional draw of
stated interest rate on the mortgage loan is
of 6.00%. The rate in effect for 2010 and 2011 was 6.00%. The mortgage loan
was repaid and replaced with the new mortgage loan entered into in
(6) The unconsolidated partnership that owns
mortgage loan. Our interest in the unconsolidated entity is 50%. In
connection with this new mortgage loan financing, the unconsolidated entity
repaid the previous
mortgage loan, available working capital and partner contributions. Our share
of the partner contributions was
(7) The unconsolidated entity that owns
mortgage loan. Our interest in the unconsolidated entity is 50%. In
connection with this new mortgage loan financing, the unconsolidated entity
repaid the previous
mortgage loan, available working capital and partner contributions. Our share
of the partner contributions was
Interest Rate Derivative Agreements
As ofDecember 31, 2011 , we had entered into nine interest rate swap agreements and one cap agreement that have a weighted average interest rate of 2.54% on a notional amount of$633.6 million maturing on various dates throughNovember 2013 and one forward starting interest rate swap agreement that has a rate of 2.96% on a notional amount of$200.0 million maturing inMarch 2013 . Three interest rate swap agreements that were outstanding as ofDecember 31, 2010 expired in the year endedDecember 31, 2011 . We entered into these interest rate swap agreements and cap agreement in order to hedge the interest payments associated with the 2010 Credit Facility and our issuances of variable rate long-term debt. We assessed the effectiveness of these swap agreements and cap agreement as hedges at inception and on a quarterly basis. OnDecember 31, 2011 , we considered these interest rate swap agreements and cap agreement to be highly effective as cash flow hedges. The interest rate swap agreements and cap agreement are net settled monthly. 66
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As ofDecember 31, 2011 , 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$21.1 million in the aggregate. The carrying amount of the associated liabilities is reflected in "Fair value of derivative instruments" and the net unrealized loss is reflected in "Accumulated other comprehensive loss" in the accompanying consolidated balance sheets and consolidated statements of comprehensive income.
CASH FLOWS
Net cash provided by operating activities totaled$105.3 million for the year endedDecember 31, 2011 compared to$116.8 million and$136.1 million for the years endedDecember 31, 2010 and 2009, respectively. This decrease in cash from operating activities was primarily due to decreased net operating income from five power centers sold in 2010 and decreased lease termination revenue offset by increases in NOI from Same Store properties. Cash flows used in investing activities were$21.8 million for the year endedDecember 31, 2011 compared to cash flows provided by investing activities of$81.0 million for the year endedDecember 31, 2010 and cash flows used in investing activities of$103.4 million for the year endedDecember 31, 2009 . Investing activities for the year endedDecember 31, 2011 reflect investment in construction in progress of$25.4 million and real estate improvements of$36.0 million , primarily relating to ongoing maintenance of our properties, and$7.6 million of proceeds from sales of real estate. Investing activities also reflect$30.4 million in proceeds from mortgage loans at three of our unconsolidated properties. Investing activities for the year endedDecember 31, 2010 reflect$134.7 million in proceeds from the sale of five power centers, as well as a$10.0 million decrease in a note receivable from one tenant that was repaid. Investing activities for the year endedDecember 31, 2010 also reflect investment in construction in progress of$32.2 million and real estate improvements of$23.4 million . Cash flows used in financing activities were$104.0 million for the year endedDecember 31, 2011 compared to cash flows used in financing activities of$229.7 million for the year endedDecember 31, 2010 and cash flows provided by financing activities of$31.7 million for the year endedDecember 31, 2009 . Cash flows used in financing activities for the year endedDecember 31, 2011 included dividends and distributions of$34.8 million , principal installments on mortgage loans of$21.2 million and$58.0 million of mortgage loan repayments and pay downs on theCapital City Mall ,One Cherry Hill Plaza andLogan Valley Mall mortgage loans. Cash flows used in financing activities also reflect a net$5.0 million pay down of the Revolving Facility and a$7.2 million pay down of the 2010 Term Loan. We also received$27.7 million in proceeds from a mortgage loan on801 Market Street in the year endedDecember 31, 2011 . Cash flows used in financing activities for the year endedDecember 31, 2010 reflected the refinancing of our 2003 Credit Facility and 2008 Term Loan. We replaced the$486.0 million outstanding on the 2003 Credit Facility and the$170.0 million 2008 Term Loan with$590.0 million in proceeds from the 2010 Credit Facility. We paid$17.4 million in deferred financing costs in the year endedDecember 31, 2010 , primarily relating to this refinancing. We also received$64.5 million in proceeds from a$32.0 million mortgage loan onValley View Mall , a$30.0 million mortgage loan onNew River Valley Mall and an additional$2.5 million draw on the mortgage loan atLycoming Mall in the year endedDecember 31, 2010 .
COMMITMENTS
As ofDecember 31, 2011 , we had unaccrued contractual and other commitments related to our capital improvement projects and development projects of$7.1 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. See "Item 1. Business-Environmental." 67
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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 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. See "Item 2. Properties-Major 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. 68
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InFebruary 2011 ,Borders Group, Inc. ("Borders") filed for bankruptcy protection. At that time, we had 11 stores operated by Borders in our portfolio, three of which closed prior toJune 30, 2011 , including one store that had a lease expiration inMarch 2011 . InJuly 2011 , Borders determined to liquidate operations, and as a result of this action, the eight remaining stores operated by Borders in our portfolio closed during 2011. In connection with the liquidation, in the three months endedJune 30, 2011 , we recorded write-offs of$0.7 million of straight line rent and$1.0 million of tenant allowances. The liquidation of Borders and subsequent closures of the remaining stores in our portfolio resulted in the loss of annual rental revenue from those stores, but we have successfully re-leased all but one of the stores through new leases, expansions and combinations. 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 Annual Report on Form 10-K for the year endedDecember 31, 2011 , 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; 69
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• changes in the retail industry, including consolidation and store
closings, particularly among anchor tenants;
• 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 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 Annual Report on Form 10-K to "we," "our," "us," the "Company" and "PREIT" refer toPennsylvania Real Estate Investment Trust and its subsidiaries, including our operating partnership,PREIT Associates, L.P. References in this Annual Report on Form 10-K to "PREIT Associates " refer toPREIT Associates, L.P. References in this Annual Report on Form 10-K to "PRI" refer toPREIT-RUBIN, Inc. , which is a taxable REIT subsidiary of the Company. 70
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ARCH CAPITAL GROUP LTD. – 10-K – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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