2 0 1 7 A N N U A L R E P O R T
actionscreatingmomentum
The following pages detail PREIT’s continued evolution and the
remarkable transformation of the Company’s portfolio having
made difficult decisions to be a first-mover in a rapidly-changing
industry. In an uncertain environment, we had a choice to make
— to sit still and wait for clarity before choosing a course of
action or to take action and shape the future. This is a story of a
Company that takes action when others sit and wait and how these
actions are creating momentum that yield improved results.
PREIT (NYSE:PEI) is a publicly traded real estate investment trust that owns and manages quality properties
in compelling markets. PREIT’s robust portfolio of carefully curated retail and lifestyle offerings mixed with destination
dining and entertainment experiences are located primarily in the eastern US with concentrations in the mid-Atlantic’s
top MSAs. Since 2012, the Company has driven a transformation guided by an emphasis on portfolio quality and bal-
ance sheet strength driven by disciplined capital expenditures. Additional information is available at preit.com or on
Twitter or LinkedIn.
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
(in thousands, except per share amounts)
2017 2016
Year ended December 31,
2015
Total revenue
Net loss
Net loss attributable to common shareholders
Net loss per share — basic and diluted
Funds from operations*
Investment in real estate, at cost
Total assets
Distributions paid per common share
Number of common shares and OP Units outstanding
Total market capitalization
$
$
367,490
$ (32,848)
$ (61,292)
$ (0.89)
123,120
$ 3,299,702
$ 2,588,771
0.84
$
78,256
$ 3,212,328
$
399,946
$ (12,713)
$ (27,196)
$ (0.40)
$
146,426
$ 3,300,014
$ 2,616,832
0.84
$
77,866
$ 3,653,193
425,411
$
$ (129,567)
$ (132,531)
$ (1.93)
$ 136,246
$ 3,367,889
$ 2,800,392
0.84
$
77,535
$ 3,950,597
* Reconciliation to GAAP can be found on page 59.
01
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2017 WAS ANOTHER YEAR OF ACTION FOR PREIT
AND THE RESULTS ARE EVIDENT IN OUR CORE
OPERATIONS, CONFIRMING THAT OUR STRATEGY
TO CRAFT A HIGHER QUALITY PORTFOLIO WAS
THE RIGHT APPROACH.
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And 2017 was another year of action for
PREIT and the results are evident in our
core operations. Despite the headwinds
our industry is facing, these results
confirm that our strategy to craft a higher
quality portfolio was the right approach
and that our instincts to pursue certain
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2017 was a significant year of structural
the first to aggressively take on replacing
change in retail. The US saw legacy
underperforming department stores.
retailers file for bankruptcy, significant
store closures and department store at-
trition. At PREIT, we believe that we will
do best by our shareholders to be a step
ahead of the changes, taking swift ac-
tion and maintaining an in depth under-
standing of our markets.
We have demonstrated this in a number
initiatives ahead of many of our peers
of ways over the years — we were the
were spot on and position the portfo-
first to pursue and conclude a large scale
lio well for the future. At the 17 malls
low-productivity mall disposition pro-
we sold, 25 anchors have closed or
gram; we have been bringing in dining,
are set to close. These properties are
entertainment and various other uses
generally located in markets where fur-
to our properties for years and we were
ther capital investment would not align
with our strategy.
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JO S EPH F. C O RAD INO Chair man & Chi ef Ex ecutiv e Off icer
MOORE STOWN MALL, MOORE STOW N, NJ
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While taking swift action is important,
having a strong portfolio vision is critical
ceed changing consumer expectations
— not just meet them but to offer them
in this environment. Our vision is to ex-
a pleasant surprise. Traditional apparel
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DEMAND FOR QUALITY SPACE IS ROBUST AND
WE HAVE CAPITALIZED ON THIS, HAVING EXE-
CUTED 76% MORE NEW LEASING THAN IN 2016,
FOR A RECORD AMOUNT OF SPACE IN 2017. AS
A RESULT OF OUR TENANT DIVERSIFICATION
STRATEGY, THE TENANCY TAKES A NEW SHAPE
THAN IN YEARS PAST.
it includes health and wellness which
continues to garner mindshare by way
of diet and exercise as well as health and
beauty items; sporting and leisure retail
offerings; dining and grocery options
which include the rising quick service
has always been a survival of the fittest
restaurant industry offerings, the irre-
game — and as consumers shift their al-
placeable sit-down dining experience,
legiances from certain brands, we have
niche grocers and mass market grocers;
seized the opportunity to re-purpose our
and entertainment which is probably the
real estate and offer more.
fastest growing segment in the space
Realizing this vision takes proactively
curating a tenant mix that extends well
beyond traditional mall tenants to include
off-price tenants that offer the “thrill of
because it offers something people in
an increasingly digital world crave — a
social interaction with friends and family
that is based on the premise of fun.
the hunt” experience where consumers
Demand for quality space is robust
can find designer brands at a discount;
and we have capitalized on this, having
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LEGOLAND AT PLYMOUTH MEETING , PLYM OUT H ME ET I N G, PA
05
Categories of New Leases Signed in 2017
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AS 2017 KICKED OFF, PREIT HAD 11 VACANT
ANCHORS. DURING 2017 AND JANUARY 2018,
5 OF THESE ANCHORS HAVE BEEN REPLACED
WITH OPERATING TENANTS. AS I WRITE THIS,
WE HAVE EXECUTED LEASES FOR 4 ADDITIONAL
REPLACEMENTS, LEAVING 2 VACANCIES, BOTH
WITH LEASES PENDING EXECUTION.
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While vacant boxes are abundant
throughout the country, we have adeptly
dealt with closings, many of which we
pre-planned. As 2017 kicked off, PREIT
had 11 vacant anchors. During 2017 and
January 2018, five of these anchors
have been replaced with operating
tenants. As I write this, we have ex-
ecuted leases for four additional re-
placements, leaving two vacancies, both
with leases pending execution.
The results of this initiative are 17 sought
after tenants spanning seven diverse
uses, paying rents eight times greater
than the space previously generated. But
the story expands beyond these im-
pressive figures — in replacing dated
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executed 76% more new leasing than in
2016, for a record amount of space in
2017. As a result of our tenant diversifi-
cation strategy, the tenancy takes a new
shape than in years past.
As we look at the leases we signed in
2017, excluding the few traditional de-
partment stores we signed, two-thirds
of the space we leased was committed
to a mix of tenants that are the founda-
tion of the mall of the future: Dining &
Entertainment made up 19%, Off Price
tenants accounted for 14%, Fitness was
9%, Sporting Goods accounted for 8%,
Fast Fashion was also 8% and Shoes
and Accessories made up 9%.
06
Dining & Entertainment 19%
Off Price
Fitness
Sporting Goods
Fast Fashion
14%
9%
9%
8%
Shoes & Accessories 9%
Other Categories
32%
CHE RRY HILL MALL, CHERRY HILL, NJ
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department stores, we are trans-
repositioning
forming our properties, driving new cus-
effort, our exposure to potential addi-
tomers and reinventing our platform!
Through our portfolio
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OUR VISION IS TO EXCEED CHANGING CON-
SUMER EXPECTATIONS — TO NOT JUST MEET
THEM BUT TO OFFER THEM A PLEASANT SUR-
PRISE. TRADITIONAL APPAREL HAS ALWAYS
BEEN A SURVIVAL OF THE FITTEST GAME — AND
AS CONSUMERS SHIFT THEIR ALLEGIANCES
FROM CERTAIN BRANDS, WE HAVE SEIZED THE
OPPORTUNITY TO RE-PURPOSE OUR REAL
ESTATE AND OFFER MORE.
position to drive revenue into the future,
having executed leases for future open-
ings for 33% more space than we had at
this time last year.
We are also continuing to evolve our
tional department store closures has
sustainability efforts — in 2017, we add-
been dramatically
reduced and we
ed three new solar arrays to the two
continue to look to proactively take
that existed in our portfolio and now of-
back stores where prudent.
35
30
25
20
15
10
5
0
JCPenney
Sears
Macy’s
n 12.31.12 n 12.31.17
fer electric vehicle charging stations at
four properties. PREIT properties now
produce more than 8 million kWh of
electricity from solar panels per year. At
Woodland Mall, we recycled more than
20,000 tons of concrete from demolition
Bon •Ton
to be reused as building pads, parking
lot base and site grading during the ex-
As we move into 2018, we are in a strong
pansion phase of the mall.
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EXT ON SQUARE, EXTON, PA
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in
WE DELIVERED ON OUR ANCHOR REPLACEMENT
STRATEGY, LEADING THE INDUSTRY IN LEASING
9 OF 11 VACANT STORES, SETTING THE STAGE
FOR FUTURE GROWTH AND STRENGTHENING
OUR FOUNDATION; WE DELIVERED STRONG
SAME STORE NOI AND OCCUPANCY GROWTH
ALONG WITH RECORD NEW LEASING ACTIVITY
IN THE FACE OF A CONTRACTING RETAILER
ENVIRONMENT.
We also delivered on renewal spreads
— in the 4th quarter, we improved our
average renewal spreads to 10.8% for
tenants under 10,000 sq ft to end the
year at a solid 5.1%.
As we move into 2018, the momen-
tum is building as key redevelopment
projects are coming online. Our portfo-
lio stands to benefit this year from the
completion of Mall at Prince Georges’
remerchandising work, anchor replace-
ments at Valley Mall and Moorestown
Mall and the opening of the much-
anticipated Fashion District here
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VI EW MO N T MA LL, SCRANTON, PA
Our 2017 results and our projections for
and securing liquidity to fund our value-
2018 and beyond prove that we have
creating redevelopment program.
distinguished ourselves as a quality mall
REIT, having delivered on all elements
of our strategy. We delivered on our an-
chor replacement strategy, leading the
industry in leasing 9 of 11 vacant stores,
setting the stage for future growth and
strengthening our foundation; we de-
livered strong Same Store NOI and oc-
cupancy growth along with record new
leasing activity in the face of a contract-
ing retailer environment.
And we have done this while improving the
condition of our balance sheet by execut-
ing on our capital plan to raise over $450
million, reducing our borrowing costs
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new district to be noted for fashion, fun,
food and cultural experiences.
Throughout our well-located portfolio,
we continue to work with third parties to
explore opportunities to add other uses
to our sites including multifamily
housing, hotels and office space. Dense,
mixed-use sites that better utilize real
estate are key to the future.
With good real estate and a vision to
diversify our tenant base, catering to a
future consumer that embraces a sharing
economy and experiences over goods,
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WITH GOOD REAL ESTATE AND A VISION TO
DIVERSIFY OUR TENANT BASE, CATER TO A
FUTURE CONSUMER THAT EMBRACES A SHARING
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HOLDERS.
ECONOMY AND EXPERIENCES OVER GOODS, THE
FUTURE LOOKS BRIGHT AND WE MOVE INTO IT
KNOWING THE ACTIONS WE HAVE TAKEN ARE
THAT SHOULD TRANSLATE TO OUR SHARE-
CREATING MOMENTUM FOR OUR PORTFOLIO
out the relentless pursuit of our team
lio that should translate into shareholder
our shareholders. We look forward to
at PREIT, the support of our Board and
enhancing these relationships and cel-
None of this would be possible with-
returns.
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ebrating victories in the years to come.
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JOSEPH F. CORADINO
Chairman & Chief Executive Officer
April 2, 2018
13
downtown Philadelphia, which promises
the future looks bright and we move into
to re-shape the retail experience in
it knowing the actions we have taken
Philadelphia and re-route patrons to a
are creating momentum for our portfo-
FASHION DISTRICT PHILADELPHIA, PHILADE LPH I A , PA
Sales Per Square Foot Growth
480
Total Shareholder Return Performance
225
$481
$464
$432
470
460
450
440
430
420
D
o
l
l
a
r
s
410
400
390
380
370
$374
360
$396
$383
200
175
150
I
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e
x
V
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l
125
100
75
12.31.12
12.31.13
12.31.14
12.31.15
12.31.16
12.31.17
12.12
12.13
12.14
12.15
12.16
1.31.18
PREIT
S&P 500
NAREIT Equity
Russell 2000
Sales growth is a leading indicator in our business, indicative of our ability
to drive rents and net operating income in the future.
The five-year performance graph above compares our cumulative total shareholder return with the S&P 500
Index, the NAREIT Equity Index and the Russell 2000 Index. Equity real estate investment trusts are defined
as those which derive more than 75% of their income from equity investments in real estate assets.
The graph assumes that the value of the investment in each of the four was $100 on the
last trading day of 2009 and that all dividends were reinvested.
Enclosed Malls As of December 31, 2017
CAPITAL CITY MALL
Camp Hill, PA
Ownership Interest
Acquired
Square Feet
100%
2003
605,000
CHERRY HILL MALL
Cherry Hill, NJ
Ownership Interest
Acquired
Square Feet
100%
2003
1,314,000
CUMBERLAND MALL
Vineland, NJ
Ownership Interest
Acquired
Square Feet
100%
2005
951,000
DARTMOUTH MALL
Dartmouth, MA
Ownership Interest
Acquired
Square Feet
100%
1997
672,000
EXTON SQUARE
Exton, PA
Ownership Interest
Acquired
Square Feet
100%
2003
1,046,000
FRANCIS SCOTT KEY MALL
Frederick, MD
Ownership Interest
Acquired
Square Feet
100%
2003
754,000
FASHION DISTRICT
Philadelphia, PA
Ownership Interest
Acquired
Square Feet
50%
2003
838,000
JACKSONVILLE MALL
Jacksonville, NC
Ownership Interest
Acquired
Square Feet
100%
2003
495,000
LEHIGH VALLEY MALL
Whitehall, PA
Ownership Interest
Acquired
Square Feet
50%
1973
1,170,000
MAGNOLIA MALL
Florence, SC
Ownership Interest
Acquired
Square Feet
100%
1997
574,000
MOORESTOWN MALL
Moorestown, NJ
Ownership Interest
Acquired
Square Feet
100%
2003
873,000
PATRICK HENRY MALL
Newport News, VA
Ownership Interest
Acquired
Square Feet
100%
2003
718,000
PLYMOUTH MEETING
Plymouth Meeting, PA
Ownership Interest
Acquired
Square Feet
100%
2003
737,000
THE MALL AT PRINCE GEORGES
Hyattsville, MD
Ownership Interest
Acquired
Square Feet
100%
1998
920,000
SPRINGFIELD MALL
Springfield, PA
Ownership Interest
Acquired
Square Feet
50%
2005
611,000
SPRINGFIELD TOWN CENTER
Springfield, VA
Ownership Interest
Acquired
Square Feet
100%
2015
1,374,000
VALLEY MALL
Hagerstown, MD
Ownership Interest
Acquired
Square Feet
100%
2003
793,000
VALLEY VIEW MALL
La Crosse, WI
Ownership Interest
Acquired
Square Feet
100%
2003
629,000
VIEWMONT MALL
Scranton, PA
Ownership Interest
Acquired
Square Feet
WILLOW GROVE PARK
Willow Grove, PA
Ownership Interest
Acquired
Square Feet
100%
2000 / 2003
1,175,000
100%
2003
689,000
WOODLAND MALL
Grand Rapids, MI
Ownership Interest
Acquired
Square Feet
100%
2005
850,000
WYOMING VALLEY MALL
Wilkes-Barre, PA
Ownership Interest
Acquired
Square Feet
100%
1997
909,000
Other Retail Properties
As of December 31, 2017
GLOUCESTER PREMIUM OUTLETS
Gloucester Township, NJ
Ownership Interest
Acquired
Square Feet
25%
2015
370,000
RED ROSE COMMONS
Lancaster, PA
Ownership Interest
Acquired
Square Feet
50%
1998
463,000
METROPLEX SHOPPING CENTER
Plymouth Meeting, PA
Ownership Interest
Acquired
Square Feet
50%
1997
778,000
THE COURT AT OXFORD VALLEY
Langhorne, PA
Ownership Interest
Acquired
Square Feet
50%
1997
705,000
Total square feet represents entire property. PREIT-owned square footage may be less.
MALLS
OTHER RETAIL
PROPERTIES
18,697,000
2,316,000
TOTAL GLA
21,013,000
WOODLAND MALL, GRAND RAPIDS, MI
Financial Contents
Selected Financial Information
Consolidated Financial Statements
Notes to Consolidated Financial Statements
Management’s Report on Internal Control Over Financial Reporting
Reports of Independent Registered Public Accounting Firm
Management’s Discussion and Analysis
Trustees and Officers
Investor Information
20
21
27
49
49
51
69
70
PLYMOUTH ME ETING, PLYMOUTH MEETING , PA
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2017 ANNUAL REPORT
19
SELECTED FINANCIAL INFORMATION (UNAUDITED)
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
Year Ended December 31,
Operating results
Total revenue
Loss from continuing operations
Net (loss) income
Net (loss) income attributable to PREIT common shareholders
Loss from continuing operations per share –
basic and diluted
Net (loss) earnings per share – basic and diluted
Cash flows
Cash provided by operating activities
Cash (used in) provided by investing activities
Cash (used in) provided by financing activities
Cash distributions
Cash distributions per share – common shares
Cash distributions per share – Series A Preferred shares
Cash distributions per share – Series B Preferred shares
Cash distributions per share – Series C Preferred shares
Cash distributions per share – Series D Preferred shares
Funds From Operations(1)
Net (loss) income
Dividends on preferred shares
Loss on redemption of preferred shares
Gain on sale of real estate by equity method investee
Gains on sales of interests in real estate
Gains on sales of discontinued operations
Impairment of assets
Depreciation and amortization of real estate assets:
Wholly owned and consolidated partnerships, net
Unconsolidated partnerships
Discontinued operations
2017
$ 367,490
(32,848 )
$
(32,848 )
$
(61,292 )
$
2016
399,946
$ (12,713 )
$ (12,713 )
$ (27,196 )
2015
$ 425,411
$ (129,567 )
$ (129,567 )
$ (132,531 )
2014
$ 432,703
(14,262 )
$
(14,262 )
$
(29,678 )
$
2013
$ 438,678
(20,449 )
$
$ 37,213
$ 20,011
$
$
(0.89 )
(0.89 )
$
$
(0.40 )
(0.40 )
$
$
(1.93 )
(1.93 )
$
$
(0.44 )
(0.44 )
$
$
(0.56 )
0.31
$ 136,409
(98,279 )
$
(32,585 )
$
$ 147,609
$
1,971
$ (162,632 )
$ 135,661
$ (379,099 )
$ 225,860
$ 145,075
$ 31,650
$ (170,522 )
$ 136,219
$ 30,741
$ (166,720 )
$
$
$
$
$
$
0.84
1.7016
1.8438
1.5900
0.4488
(32,848 )
(27,845 )
(4,103 )
(6,539 )
361
—
55,793
$
0.84
$ 2.0625
$ 1.8438
—
$
—
$
$
$
$
$
$
0.84
2.0625
1.8438
—
—
$
0.80
$ 2.0625
$ 1.8438
—
$
—
$
$
0.74
$ 2.0625
$ 1.8438
—
$
—
$
$ (12,713 )
(15,848 )
—
—
(23,022 )
—
62,603
$ (129,567 )
(15,848 )
—
—
(12,362 )
—
140,318
$
(14,262 )
(15,848 )
—
—
(12,699 )
—
19,695
$ 37,213
(15,848 )
—
—
—
(78,512 )
29,966
127,327
10,974
—
125,192
10,214
—
141,142
12,563
—
142,683
9,850
—
139,748
7,373
1,161
Funds from operations
$ 123,120
$ 146,426
$ 136,246
$ 129,419
$ 121,101
Weighted average number of shares outstanding
Weighted average effect of full conversion OP Units
Effect of common share equivalents
69,364
8,297
93
69,086
8,324
191
68,740
6,830
485
68,217
2,128
696
Total weighted average shares outstanding including OP Units
77,754
77,601
76,055
71,041
Funds from operations per diluted share and OP Unit
$
1.58
$
1.89
$
1.79
$
1.82
63,662
2,194
876
66,732
1.81
$
(in thousands, except per share amounts)
Assets:
Investments in real estate, at cost:
Operating properties
Construction in progress
Land held for development
Total investments in real estate
Accumulated depreciation
Net investments in real estate
Investments in Partnerships, at equity:
Other Assets:
Cash and cash equivalents
Tenant and other receivables (net of allowance for doubtful accounts of $7,248 and $6,236
at December 31, 2017 and 2016, respectively)
Intangible assets (net of accumulated amortization of $13,117 and $11,064 at
December 31, 2017 and 2016, respectively)
Deferred costs and other assets, net
Assets held for sale
Total assets
Liabilities:
Mortgage loans payable
Term Loans
2013 Revolving Facility
Tenants’ deposits and deferred rent
Distributions in excess of partnership investments
Fair value of derivative instruments
Liabilities on assets held for sale
Accrued expenses and other liabilities
Total liabilities
Commitments and Contingencies (Note 11)
December 31,
2017
December 31,
2016
$ 3,180,212
113,609
5,881
$ 3,196,529
97,575
5,910
3,299,702
(1,111,007 )
3,300,014
(1,060,845 )
2,188,695
2,239,169
216,823
168,608
15,348
9,803
38,166
39,026
17,693
112,046
—
19,746
93,800
46,680
$ 2,588,771
$ 2,616,832
$ 1,056,084
547,758
53,000
11,446
97,868
20
—
61,604
$ 1,222,859
397,043
147,000
13,262
61,833
1,520
2,658
68,251
1,827,780
1,914,426
Equity:
Series A Preferred Shares, $.01 par value per share; 25,000 shares authorized at December 31, 2017 and
2016; 4,600 shares issued and outstanding at December 31, 2016
—
46
Series B Preferred Shares, $.01 par value per share; 25,000 shares authorized; 3,450 shares issued and
outstanding at December 31, 2017 and 2016; liquidation preference of $86,250
35
35
Series C Preferred Shares, $.01 par value per share; 25,000 shares authorized; 6,900 shares issued and
outstanding at December 31, 2017; liquidation preference of $172,500
69
—
As of December 31,
Series D Preferred Shares, $.01 par value per share; 25,000 shares authorized; 5,000 shares issued and
outstanding at December 31, 2017; liquidation preference of $125,000
50
—
2017
2016
2015
2014
2013
$ 3,299,702
$3,300,014
$3,367,889
$ 3,285,404
$3,527,868
$ 2,588,771
$ 2,616,832
$ 2,800,392
$ 2,539,703
$ 2,718,581
$ 1,059,438
53,000
$
$ 550,000
$1,227,385
$ 147,000
$ 400,000
$ 1,325,495
65,000
$
$ 400,000
$ 1,407,947
—
$
$ 130,000
$ 1,502,650
$ 130,000
—
$
Shares of beneficial interest, $1.00 par value per share; 200,000 shares authorized; 69,983 issued and
outstanding shares at December 31, 2017 and 69,553 shares at December 31, 2016
Capital contributed in excess of par
Accumulated other comprehensive income
Distributions in excess of net income
Total equity – Pennsylvania Real Estate Investment Trust
Noncontrolling interest
Total equity
69,983
1,663,966
7,226
(1,117,290 )
624,039
136,952
69,553
1,481,787
1,622
(997,789)
555,254
147,152
760,991
702,406
$ 2,588,771
$ 2,616,832
$ 235,672
$ 201,509
$ 202,074
$ 190,310
$ 198,451
Total liabilities and equity
(in thousands)
Balance sheet items
Investments in real estate, at cost
Total assets
Long term debt
Consolidated properties:
Mortgage loans payable
Revolving facilities
Term loans
Company’s share of partnerships:
Mortgage loans payable
(1) The National Association of Real Estate Investment Trusts (“NAREIT”) defines Funds From Operations (“FFO”), which is a non-GAAP measure commonly used by REITs, as net income excluding
gains and losses on sales of operating properties, plus real estate depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures to reflect funds from
operations on the same basis. We compute FFO in accordance with standards established by NAREIT, which may not be comparable to FFO reported by other REITs that do not define the term
in accordance with the current NAREIT definition, or that interpret the current NAREIT definition differently than we do. For additional information about FFO, please refer to page 60.
See accompanying notes to consolidated financial statements.
20 SELECTED FINANCIAL INFORMATION
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2017 ANNUAL REPORT
21
CONSOLIDATED STATEMENTS OF OPERATIONS
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
EARNINGS PER SHARE
(in thousands of dollars)
Revenue:
Real estate revenue:
Base rent
Expense reimbursements
Percentage rent
Lease termination revenue
Other real estate revenue
Total real estate revenue
Other income
Total revenue
Expenses:
Operating expenses:
Property operating expenses:
CAM and real estate taxes
Utilities
Other
Total property operating expenses
Depreciation and amortization
General and administrative expenses
Provision for employee separation expense
Project costs and other expenses
Total operating expenses
Interest expense, net
Impairment of assets
Total expenses
For The Year Ended December 31,
2017
2016
2015
(in thousands of dollars, except per share amounts)
Net loss
Preferred dividends
Loss on redemption of preferred shares
Noncontrolling interest
Dividends on restricted shares
For The Year Ended December 31,
$
2017
(32,848 )
(27,845 )
(4,103 )
3,504
(372 )
2016
2015
$
(12,713 )
(15,848 )
—
1,365
(322 )
$ (129,567 )
(15,848 )
—
12,884
(315 )
Net loss used to calculate earnings per share – basic and diluted
$
(61,664 )
$
(27,518 )
$ (132,846 )
Basic and diluted loss per share
$
(0.89 )
$
(0.40 )
$
(1.93 )
(in thousands of shares)
Weighted average shares outstanding – basic
Effect of dilutive common share equivalents(1)
Weighted average shares outstanding – diluted
69,364
—
69,086
—
68,740
—
69,364
69,086
68,740
(1) For the years ended December 31, 2017, 2016 and 2015, there are net losses allocable to common shareholders, so the effect of common share equivalents of 93, 191 and 485 for
the years ended December 31, 2017, 2016 and 2015, respectively, is excluded from the calculation of diluted (loss) earnings per share, as their inclusion would be anti-dilutive.
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
$ 230,898
109,454
4,366
2,760
14,046
$ 252,115
118,880
5,245
4,460
13,897
$ 271,957
125,505
5,724
2,014
14,997
361,524
5,966
394,597
5,349
420,197
5,214
367,490
399,946
425,411
(111,275 )
(16,151 )
(12,879 )
(140,305 )
(128,822 )
(36,736 )
(1,299 )
(768 )
(124,690 )
(17,053 )
(14,475 )
(156,218 )
(126,669 )
(35,269 )
(1,355 )
(1,700 )
(133,912 )
(19,674 )
(16,461 )
(170,047 )
(142,647 )
(34,836 )
(2,087 )
(6,108 )
(307,930 )
(58,430 )
(55,793 )
(321,211 )
(70,724 )
(62,603 )
(355,725 )
(81,096 )
(140,318)
(422,153 )
(454,538 )
(577,139 )
(in thousands of dollars)
Loss before equity in income of partnerships and gains on sales of real estate
and non operating real estate
Equity in income of partnerships
Gain on sale of real estate by equity method investee
(Losses) gains on sales of real estate, net
Gains on sales of non-operating real estate
Net loss
Less: net loss attributed to noncontrolling interest
Net loss attributable to PREIT
Less: preferred share dividends
Less: loss on redemption on preferred shares
(54,663 )
14,367
6,539
(361 )
1,270
(32,848 )
3,504
(29,344 )
(27,845 )
(4,103 )
(54,592 )
18,477
—
23,022
380
(12,713 )
1,365
(11,348 )
(15,848 )
—
(151,728 )
9,540
—
12,362
259
(129,567 )
12,884
(116,683 )
(15,848 )
—
Net loss attributable to PREIT common shareholders
$
(61,292 )
$
(27,196 )
$ (132,531 )
See accompanying notes to consolidated financial statements.
Comprehensive loss:
Net loss
Unrealized gain on derivatives
Amortization of losses on settled swaps, net of gains
Total comprehensive loss
Less: Comprehensive loss attributable to noncontrolling interest
Comprehensive loss attributable to PREIT
See accompanying notes to consolidated financial statements.
For The Year Ended December 31,
2017
2016
2015
$
(32,848 )
5,415
859
(26,574)
2,834
$
(12,713 )
6,007
503
(6,203 )
670
$ (129,567 )
690
1,337
(127,540 )
12,666
$
(23,740 )
$
(5,533 )
$ (114,874 )
22 CONSOLIDATED FINANCIAL STATEMENTS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2017 ANNUAL REPORT
23
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 & 2015
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 & 2015
PREIT Shareholders
PREIT Shareholders
Amortization of deferred
compensation
Dividends paid to Series
A preferred
shareholders
($2.0625 per share)
Dividends paid to Series
B preferred
shareholders
(in thousands of dollars,
except per share amounts)
Total Equity
Series A
Series B
Series C
Series D
Preferred Shares $.01 par
Shares of
Beneficial
Interest,
$1.00 par
Capital
Contributed
in Excess
of par
Accumulated
Other
Comprehensive
Income (Loss)
Distributions
in Excess of
Net Income
Non-
controlling
interest
January 1, 2015
$ 844,737
$ 46
$ 35
$ —
$ —
$ 68,801
$1,474,183
$(6,002 ) $(721,605) $29,279
Net loss
Other comprehensive
income
(129,567)
—
—
2,027
—
—
—
—
—
—
Shares issued upon
redemption of Operating
Partnership Units
Shares issued under
employee compensation
plans, net of shares
—
—
—
—
—
retired
(4,383)
—
—
6,284
—
—
—
—
—
—
—
—
34
362
—
—
—
—
(116,683 )
(12,884)
1,809
—
218
675
—
—
(709)
(4,745 )
6,284
—
—
—
—
—
—
(9,487)
—
—
—
—
—
—
—
(9,487 )
—
($1.8438 per share)
(6,361)
—
—
—
—
Dividends paid to
common shareholders
($0.84 per share)
Distributions paid to
Operating Partnership
unit holders
(58,085)
—
—
—
—
—
—
—
—
—
(6,361 )
—
(58,085 )
—
—
($0.84 per unit)
(5,703)
—
—
—
—
—
—
—
—
(5,703)
Noncontrolling interests:
Operating partnership
units issued in
connection with
Springfield
Town Center
Other distributions to
noncontrolling
interest, net
145,188
—
—
—
—
(20)
—
—
—
—
—
—
—
—
—
—
145,188
—
—
(20)
December 31, 2015
784,630
(12,713)
46
—
35
—
—
—
6,510
—
—
—
—
—
—
—
—
—
69,197
1,476,397
(4,193 )
(912,221) 155,369
—
—
—
—
26
—
—
—
(11,348 )
(1,365)
5,815
—
(695)
574
—
—
(600)
(889)
—
—
6,035
—
—
—
—
—
—
330
(1,219)
—
6,035
—
—
—
—
—
—
(9,487)
—
—
—
—
—
($1.8438 per share)
(6,361)
—
—
—
—
—
—
—
—
(9,487 )
—
—
(6,361 )
—
Net loss
Other comprehensive
income
Shares issued upon
redemption of Operating
Partnership Units
Shares issued under
employee compensation
plans, net of shares
retired
Amortization of deferred
compensation
Dividends paid to Series
A preferred
shareholders
($2.0625 per share)
Dividends paid to Series
B preferred
shareholders
(in thousands of dollars,
except per share amounts)
Dividends paid to
common shareholders
($0.84 per share)
Noncontrolling interests:
Distributions paid to
Operating Partnership
unit holders
($0.84 per unit)
Other distributions to
noncontrolling
interest, net
Total Equity
Series A
Series B
Series C
Series D
Preferred Shares $.01 par
Shares of
Beneficial
Interest,
$1.00 par
Capital
Contributed
in Excess
of par
Accumulated
Other
Comprehensive
Income (Loss)
Distributions
in Excess of
Net Income
Non-
controlling
interest
(58,372)
—
—
—
—
—
—
—
(58,372 )
—
(6,991)
—
—
—
—
44
—
—
—
—
—
—
—
—
—
—
(6,991 )
—
—
44
December 31, 2016
702,406
(32,848 )
46
—
35
—
—
—
6,274
—
—
—
—
—
286,848
—
—
69
50
(115,000 )
(46)
—
—
—
—
69,553
1,481,787
1,622
(997,789 )
147,152
—
—
—
—
—
—
—
(29,344 )
(3,504 )
5,604
—
670
286,729
—
—
(110,851 )
—
(4,103 )
—
—
—
—
—
—
—
39
375
—
—
(414 )
608
—
—
5,709
—
—
—
—
—
—
391
—
217
5,709
—
—
—
—
—
—
(7,827 )
—
—
—
—
—
—
—
(7,827 )
—
(6,361 )
—
—
—
—
—
—
—
(6,361 )
—
(10,971 )
—
—
—
—
—
—
—
(10,971 )
—
($0.4488 per share)
(2,244 )
—
—
—
—
Dividends paid to
common shareholders
($0.84 per share)
Noncontrolling interests:
Distributions paid to
Operating Partnership
unit holders
($0.84 per unit)
Other distributions to
noncontrolling
interest, net
(58,651 )
—
—
—
—
(6,970 )
—
—
—
—
18
—
—
—
—
—
—
—
—
—
—
—
—
—
(2,244 )
—
(58,651 )
—
—
—
—
(6,970 )
—
—
18
December 31, 2017
$760,991
$ —
$35
$69
$50
$69,983
$1,663,966
$7,226 $(1,117,290) $136,952
Net loss
Other comprehensive
income
Preferred shares
issued in Series C
and D preferred share
offerings, net
Preferred shares
redeemed
Shares issued upon
redemption of
Operating Partnership
Units
Shares issued under
employee compensation
plans, net of shares
retired
Amortization of deferred
compensation
Dividends paid to Series
A preferred
shareholders
($1.7016 per share)
Dividends paid to Series
B preferred
shareholders
($1.8438 per share)
Dividends paid to Series
C preferred
shareholders
($1.5900 per share)
Dividends paid to Series
D preferred
shareholders
24 CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2017 ANNUAL REPORT
25
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation
Amortization
Straight-line rent adjustments
Provision for doubtful accounts
Amortization of deferred compensation
Loss on hedge ineffectiveness
Gain on sales of interests in real estate and non-operating real estate, net
Equity in income of partnerships in excess of distributions
Amortization of historic tax credits
Impairment of assets and expensed project costs
Change in assets and liabilities:
Net change in other assets
Net change in other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Cash proceeds from sales of real estate investments
Proceeds from real estate sold by equity method investee
Distribution of refinancing proceeds from equity method investee
Investments in consolidated real estate acquisitions
Additions to construction in progress
Investments in real estate improvements
Additions to leasehold improvements
Investments in partnerships
Capitalized leasing costs
Decrease (increase) in cash escrows
Cash distributions from partnerships in excess of equity in income
Net cash (used in) provided by investing activities
Cash flows from financing activities:
Net proceeds from issuance of Series C and D Preferred Shares
Redemption of Series A Preferred Shares
Borrowings from Term Loans
Net borrowings from 2013 Revolving Facility
Proceeds from mortgage loans
Repayment of mortgage loans
Principal installments on mortgage loans
Payment of deferred financing costs
Common shares issued
Dividends paid to common shareholders
Dividends paid to preferred shareholders
Distributions paid to Operating Partnership unit holders and noncontrolling interest
Value of shares issued under equity incentive plans, net of shares retired
Net cash (used in) provided by financing activities
Net change in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
See accompanying notes to consolidated financial statements.
For the Year Ended December 31,
2017
2016
2015
$
(32,848 )
$
(12,713 )
$ (129,567 )
119,441
12,057
(2,686 )
1,763
5,709
—
(7,448 )
(3,200 )
(1,768 )
55,793
(5,652 )
(4,752 )
136,409
77,778
30,265
35,221
—
(116,550 )
(51,949 )
(683 )
(73,434 )
(6,066 )
1,457
5,682
(98,279 )
286,847
(115,000 )
—
56,000
—
(150,000 )
(17,945 )
(71 )
2,085
(58,651 )
(27,403 )
(6,970 )
(1,477 )
125,426
3,981
(2,602 )
1,357
6,035
143
(23,402 )
(3,705 )
(1,768 )
62,603
4,566
(12,312 )
147,609
154,758
—
—
—
(88,161 )
(49,942 )
(522 )
(14,910 )
(6,101 )
(473 )
7,322
132,347
12,907
(1,874 )
2,510
6,284
512
(12,621 )
(2,312 )
(1,589 )
140,790
5,337
(17,063)
135,661
52,956
—
—
(319,986 )
(30,684 )
(52,790 )
(486 )
(25,046 )
(6,255 )
(1,996 )
5,188
1,971
(379,099 )
—
—
—
82,000
139,000
(280,327 )
(17,868 )
(3,337 )
1,288
(58,372 )
(15,848 )
(6,991 )
(2,177 )
—
—
120,000
215,000
272,044
(272,650 )
(20,761 )
(3,754 )
1,393
(58,085 )
(15,848 )
(5,703 )
(5,776 )
(32,585 )
(162,632 )
225,860
5,545
9,803
(13,052 )
22,855
(17,578 )
40,433
$ 15,348
$
9,803
$ 22,855
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2017, 2016 and 2015
1. Organization and Summary of Significant Accounting Policies
NATURE OF OPERATIONS Pennsylvania Real Estate Investment Trust
(“PREIT”), a Pennsylvania business trust founded in 1960 and one of the
first equity real estate investment trusts (“REITs”) in the United States, has a
primary investment focus on retail shopping malls located in the eastern half
of the United States, primarily in the Mid-Atlantic region. As of December 31,
2017, our portfolio consisted of a total of 29 properties located in 10 states
and operating in nine states, including 21 shopping malls, four other retail
properties and four development or redevelopment properties. We have one
property under redevelopment classified as “retail” (redevelopment of The
Gallery at Market East into Fashion District Philadelphia). This redevelop-
ment is expected to open in 2018 and stabilize in 2020. Three properties
in our portfolio are classified as under development, however we do not
currently have any activity occurring at these properties. In 2017, we sold
three of our wholly owned mall properties.
We hold our interest in our portfolio of properties through our operating
partnership, PREIT Associates, L.P. (“PREIT Associates” or the “Operating
Partnership”). We are the sole general partner of the Operating Partnership
and, as of December 31, 2017, held an 89.4% controlling interest in the
Operating Partnership, and consolidated it for reporting purposes. The
presentation of consolidated financial statements does not itself imply that
the assets of any consolidated entity (including any special-purpose entity
formed for a particular project) are available to pay the liabilities of any
other consolidated entity, or that the liabilities of any consolidated entity
(including any special-purpose entity formed for a particular project) are
obligations of any other consolidated entity.
Pursuant to the terms of the Operating Partnership’s partnership agreement,
each of its limited partners has the right to redeem such partner’s units of
limited partnership interest in the Operating Partnership (“OP Units”) for
cash or, at our election, we may acquire such OP Units in exchange for our
common shares on a one-for-one basis, in some cases beginning one year
following the respective issue date of the OP Units, and in other cases imme-
diately. If all of the outstanding OP Units held by limited partners had been
redeemed for cash as of December 31, 2017, the total amount that would
have been distributed would have been $98.4 million, which is calculated
using our December 31, 2017 closing share price on the New York Stock
Exchange of $11.89 multiplied by the number of outstanding OP Units held
by limited partners, which was 8,272,636 as of December 31, 2017.
We provide management, leasing and real estate development services
through two of our subsidiaries: PREIT Services, LLC (“PREIT Services”),
which generally develops and manages properties that we consolidate
for financial reporting purposes, and PREIT-RUBIN, Inc. (“PRI”), which
generally develops and manages properties that we do not consolidate for
financial reporting purposes, including properties owned by partnerships in
which we own an interest, and properties that are owned by third parties
in which we do not have an interest. PREIT Services and PRI are consol-
idated. 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.
We evaluate operating results and allocate resources on a property-by-prop-
erty basis, and do not distinguish or evaluate our consolidated operations
on a geographic basis. Due to the nature of our operating properties, which
involve retail shopping, we have concluded that our individual properties
have similar economic characteristics and meet all other aggregation cri-
teria. Accordingly, we have aggregated our individual properties into one
reportable segment. In addition, no single tenant accounts for 10% or more
of our consolidated revenue, and none of our properties are located outside
the United States.
CONSOLIDATION We consolidate our accounts and the accounts of the
Operating Partnership and other controlled subsidiaries, and we reflect the
remaining interest in such entities as noncontrolling interest. All significant inter-
company accounts and transactions have been eliminated in consolidation.
The operating partnership meets the criteria as a variable interest entity. The
Company’s significant asset is its investment in the Operating Partnership, and
consequently, substantially all of the Company’s assets and liabilities represent
those assets and liabilities of the Operating Partnership. All of the Company’s
debt is also an obligation of the Operating Partnership.
PARTNERSHIP INVESTMENTS We account for our investments in part-
nerships that we do not control using the equity method of accounting.
These investments, each of which represents a 25% to 50% noncon-
trolling ownership interest at December 31, 2017, are recorded initially at
our cost, and subsequently adjusted for our share of net equity in income
and cash contributions and distributions. We do not control any of these
equity method investees for the following reasons:
n
n
n
n
Except for two properties that we co-manage with our partner, 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 oper-
ating 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, expan-
sion or rehabilitation of the property, require the approval of all partners.
Voting rights and the sharing of profits and losses are in proportion to the
ownership percentages of each partner.
We do not have a direct legal claim to the assets, liabilities, revenues or
expenses of the unconsolidated partnerships beyond our rights as an equity
owner, in the event of any liquidation of such entity, and our rights as a
tenant in common owner of certain unconsolidated properties.
We record the earnings from the unconsolidated partnerships using the
equity method of accounting in the consolidated statements of operations
in the caption entitled “Equity in income of partnerships,” rather than con-
solidating the results of the unconsolidated partnerships with our results.
Changes in our investments in these entities are recorded in the consoli-
dated 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 legal title to a property owned by one of our unconsolidated part-
nerships through a tenancy in common arrangement. For this property,
such legal title is held by us and another entity, and each has an undi-
vided interest in title to the property. With respect to this property, under
the applicable agreement between us and the other entity with an owner-
ship interest, we and such other entity 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 entity owning
an interest in the property. Hence, we account for this property like our other
unconsolidated partnerships using the equity method of accounting. The
balance sheet items arising from the properties appear under the caption
“Investments in partnerships, at equity.”
For further information regarding our unconsolidated partnerships, see
note 3.
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2017 ANNUAL REPORT
27
STATEMENTS OF CASH FLOWS We consider all highly liquid short-term
investments with an original maturity of three months or less to be cash
equivalents. At December 31, 2017 and 2016, cash and cash equivalents
totaled $15.3 million and $9.8 million, respectively, and included tenant
security deposits of $2.4 million and $3.1 million, respectively. Cash paid
for interest was $55.4 million, $67.9 million and $76.5 million for the years
ended December 31, 2017, 2016 and 2015, respectively, net of amounts
capitalized of $7.6 million, $3.2 million and $1.9 million, respectively.
SIGNIFICANT NON-CASH TRANSACTIONS During 2017, a $150.0 mil-
lion paydown of the 2013 Revolving Facility was made, which was directly
paid from an additional borrowing from our 2014 7-Year Term Loan, and is
considered to be a non-cash transaction.
In connection with our acquisition of Springfield Town Center in March
2015, we issued 6,250,000 OP Units with a value of $145.2 million as
partial consideration for the purchase.
In our statement of cash flows, we report cash flows on our revolving
facilities on a net basis. Aggregate borrowings on our revolving facilities
were $309.0 million, $290.0 million and $310.0 million, and aggregate
repayments were $403.0 million, $208.0 million and $245.0 million for
the years ended December 31, 2017, 2016 and 2015, respectively.
Accrued construction costs decreased by $8.3 million in the year ended
December 31, 2017, increased by $13.4 million in the year ended
December 31, 2016 and decreased by $1.6 million in the year ended
December 31, 2015, representing non-cash changes in construction in
progress.
ACCOUNTING POLICIES USE OF ESTIMATES The preparation of finan-
cial statements in conformity with accounting principles generally accepted
in the United States of America requires our management to make esti-
mates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements, and the reported amounts of rev-
enue and expense during the reporting periods. Actual results could differ
from those estimates. We believe that our most significant and subjective
accounting estimates and assumptions are those relating to asset impair-
ment, fair value and accounts receivable reserves.
Our management makes complex or subjective assumptions and judg-
ments in applying its critical accounting policies. In making these
judgments and assumptions, our management considers, among other
factors, 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.
REVENUE RECOGNITION We derive over 95% of our revenue from
tenant rent and other tenant-related activities. Tenant rent includes
base rent (recorded on a straight-line basis), percentage rent, expense
reimbursements (such as reimbursements of costs of common area main-
tenance (“CAM”), real estate taxes and utilities), and the amortization of
above-market and below-market lease intangibles (as described below
under “Intangible Assets”) and straight-line rent. We record base rent on
a straight-line basis, which means that the monthly base rent revenue
according to the terms of our leases with our tenants is adjusted so that
an average monthly rent is recorded for each tenant over the term of its
lease. When tenants vacate prior to the end of their lease, we accelerate
amortization of any related unamortized straight-line rent balances, and
unamortized above-market and below-market intangible balances are
amortized as a decrease or increase to real estate revenue, respectively.
The straight-line rent adjustment increased revenue by $2.7 million, $2.6
million and $2.0 million in the years ended December 31, 2017, 2016 and
2015, respectively. The straight-line rent receivable balances included in
tenant and other receivables on the accompanying consolidated balance
sheet as of December 31, 2017 and 2016 were $25.4 million and $23.7
million, respectively.
Percentage rent represents rental revenue that the tenant pays based on
a percentage of its sales, either as a percentage of its total sales or as a
percentage of sales over a certain threshold. In the latter case, we do not
record percentage rent until the sales threshold has been reached.
Revenue for rent received from tenants prior to their due dates is deferred
until the period to which the rent applies.
In addition to base rent, certain lease agreements contain provisions that
require tenants to reimburse a fixed or pro rata share of certain CAM
costs, real estate taxes and utilities. Tenants generally make monthly
expense reimbursement payments based on a budgeted amount deter-
mined at the beginning of the year. During the year, our income increases
or decreases based on actual expense levels and changes in other factors
that influence the reimbursement amounts, such as occupancy levels. As
of December 31, 2017 and 2016, our tenant accounts receivable included
accrued income of $3.1 million and $2.3 million, respectively, because
actual reimbursable expense amounts eligible to be billed to tenants under
applicable contracts exceeded amounts actually billed.
Certain lease agreements contain co-tenancy clauses that can change the
amount of rent or the type of rent that tenants are required to pay, or, in
some cases, can allow a tenant to terminate their lease, in the event that
certain events take place, such as a decline in property occupancy levels
below certain defined levels or the vacating of an anchor store. Co-tenancy
clauses do not generally have any retroactive effect when they are trig-
gered. The effect of co-tenancy clauses is applied on a prospective basis
to recognize the new rent that is in effect.
Payments made to tenants as inducements to enter into a lease are treated
as deferred costs that are amortized as a reduction of rental revenue over
the term of the related lease.
Lease termination fee revenue is recognized in the period when a termi-
nation agreement is signed, collectibility is assured, and we are no longer
obligated to provide space to the tenant. In the event that a tenant is in
bankruptcy when the termination agreement is signed, termination fee
income is deferred and recognized when it is received.
We also generate revenue by providing management services to third
parties, including property management, brokerage, leasing and develop-
ment. Management fees generally are a percentage of managed property
revenue or cash receipts. Leasing fees are earned upon the consumma-
tion of new leases. Development fees are earned over the time period of
the development activity and are recognized on the percentage of comple-
tion method. These activities are collectively included in “Other income” in
the consolidated statements of operations.
FAIR VALUE Fair value accounting applies to reported balances that
are required or permitted to be measured at fair value under relevant
accounting authority.
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 measure-
ments, 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 (observ-
able 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 iden-
tical 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.
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).
FINANCIAL INSTRUMENTS Carrying amounts reported on the consolidated
balance sheet for cash and cash equivalents, tenant and other receivables,
accrued expenses, other liabilities and the 2013 Revolving Facility approx-
imate fair value due to the short-term nature of these instruments. Most of
our variable rate debt is subject to interest rate derivative instruments that
have effectively fixed the interest rates on the underlying debt. The estimated
fair value for fixed rate debt, which is calculated for disclosure purposes, is
based on the borrowing rates available to us for fixed rate mortgage loans
with similar terms and maturities.
IMPAIRMENT OF ASSETS Real estate investments and related intangible
assets are reviewed for impairment whenever events or changes in circum-
stances indicate that the carrying amount of the property might not be
recoverable, which is referred to as a “triggering event.” In connection with
our review of our long-lived assets for impairment, we utilize qualitative and
quantitative factors in order to estimate fair value. The significant qualitative
factors that we use include age and condition of the property, market con-
ditions in the property’s trade area, competition with other shopping centers
within the property’s trade area and the creditworthiness and performance
of the property’s tenants. The significant quantitative factors that we use
include historical and forecasted financial and operating information relating
to the property, such as net operating income, occupancy statistics, vacancy
projections and tenants’ sales levels. Our fair value assumptions relating to
real estate assets are within Level 3 of the fair value hierarchy.
If there is a triggering event in relation to a property to be held and used, we
will estimate the aggregate future cash flows, net of estimated capital expen-
ditures, 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 the effects of such changes could materially affect our net
income. If the estimated undiscounted cash flows are less than the carrying value
of the property, the carrying value is written down to its fair value.
In determining the estimated undiscounted cash flows of the properties that
are being analyzed for impairment of assets, we take the sum of the esti-
mated undiscounted cash flows, generally assuming a holding period of 10
years, plus a terminal value calculated using the estimated net operating
income in the eleventh year and terminal capitalization rates, which in 2017
ranged from 5.8% to 13.0%, in 2016 ranged from 5.0% to 10.0% and in
2015 ranged from 4.5% to 15.5%. As further detailed in note 2, in 2017,
2016 and 2015, as a result of our analysis, we determined that four, five and
seven properties, respectively, had incurred impairment of assets.
Assessment of our ability to recover certain lease related costs must be
made when we have a reason to believe that a 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 consid-
ered 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 recorded as a reduction to income.
We conduct an annual review of our goodwill balances for impairment to deter-
mine whether an adjustment to the carrying value of goodwill is required. We
have determined the fair value of our properties and the amount of goodwill
that is associated with certain of our properties, and we have concluded that
goodwill was not impaired as of December 31, 2017. Fair value is determined
by applying a capitalization rate to our estimate of projected income at those
properties. We also consider qualitative factors such as property sales perfor-
mance, market position and current and future operating results. This amount
is compared to the aggregate of the property basis and the goodwill that has
been assigned to that property. If the fair value is less than the property basis
and the goodwill, we evaluate whether impairment has occurred.
REAL ESTATE Land, buildings, fixtures and tenant improvements are recorded
at cost and stated at cost less accumulated depreciation. Expenditures for
maintenance and repairs are charged to operations as incurred. Renovations
or replacements, which improve or extend the life of an asset, are capital-
ized and depreciated over their estimated useful lives. For financial reporting
purposes, properties are depreciated using the straight-line method over the
estimated useful lives of the assets. The estimated useful lives are as follows:
Buildings
Land improvements
Furniture/fixtures
Tenant improvements
20-40 years
15 years
3-10 years
Lease term
We are required to make subjective assessments as to the useful lives of our
real estate assets for purposes of determining the amount of depreciation
to reflect on an annual basis with respect to those assets based on various
factors, including industry standards, historical experience and the condition
of the asset at the time of acquisition. These assessments affect our annual
net income. If we were to determine that a different estimated useful life was
appropriate for a particular asset, it would be depreciated over the newly esti-
mated useful life, and, other things being equal, result in changes in annual
depreciation expense and annual net income.
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2017 ANNUAL REPORT
29
Gains from sales of real estate properties and interests in partnerships generally
are recognized using the full accrual method, provided that various criteria are
met relating to the terms of sale and any subsequent involvement by us with
the properties sold.
REAL ESTATE ACQUISITIONS We account for our property acquisitions by
allocating the purchase price of a property to the property’s assets based on
management’s estimates of their fair value. Debt assumed in connection with
property acquisitions is recorded at fair value at the acquisition date, and any
resulting premium or discount is amortized through interest expense over the
remaining term of the debt, resulting in a non-cash decrease (in the case of a
premium) or increase (in the case of a discount) in interest expense. The deter-
mination of the fair value of intangible assets requires significant estimates by
management and considers many factors, including our expectations about the
underlying property, the general market conditions in which the property oper-
ates and conditions in the economy. The judgment and subjectivity inherent
in such assumptions can have a significant effect on the magnitude of the
intangible assets or the changes to such assets that we record.
INTANGIBLE ASSETS Our intangible assets on the accompanying consoli-
dated balance sheets as of December 31, 2017 and 2016 each included $5.2
million (in each case, net of $1.1 million of amortization expense recognized
prior to January 1, 2002) of goodwill recognized in connection with the acqui-
sition of The Rubin Organization in 1997.
Changes in the carrying amount of goodwill for the three years ended
December 31, 2017 were as follows:
Above-market and below-market in-place lease values for acquired prop-
erties are recorded based on the present value of the difference between
(i) the contractual amounts to be paid pursuant to the in-place leases and
(ii) management’s estimates of fair market lease rates for comparable in-place
leases, based on factors such as historical experience, recently executed
transactions and specific property issues, measured over a period equal to
the remaining non-cancelable term of the lease. Above-market lease values
are amortized as a reduction of rental income over the remaining terms
of the respective leases. Below-market lease values are amortized as an
increase to rental income over the remaining terms of the respective leases,
including any below-market optional renewal periods, and are included in
“Accrued expenses and other liabilities” in the consolidated balance sheets.
We allocate purchase price to customer relationship intangibles based on
management’s assessment of the fair value of such relationships.
The following table presents our intangible assets and liabilities, net of accu-
mulated amortization, as of December 31, 2017 and 2016:
As of December 31,
(in thousands of dollars)
2017
2016
Value of in-place lease intangibles, net
Above-market lease intangibles, net
$ 12,369
75
Subtotal
Goodwill, net
Total intangible assets
12,444
5,249
$17,693
$ 14,369
128
14,497
5,249
$ 19,746
$ (901 )
(in thousands of dollars)
Basis
Accumulated
Amortization
Total
Below-market lease intangibles, net
$ (636 )
January 1, 2015
Goodwill divested
Goodwill impaired
December 31, 2015
Goodwill divested
December 31, 2016
Goodwill divested
December 31, 2017
$ 6,735
(137)
(276)
6,322
—
6,322
—
$ 6,322
$ 5,662
$ (1,073)
—
(137)
— (276)
(1,073)
—
5,249
—
5,249
—
(1,073)
—
$ (1,073)
$ 5,249
In 2015, we recognized an impairment loss of goodwill of $0.3 million in connection
with the impairment review of Palmer Park Mall. Also in 2015, we divested goodwill
of $0.1 million in connection with the sale of Springfield Park (see note 3).
We allocate a portion of the purchase price of a property to intangible assets.
Our methodology for this allocation includes estimating an “as-if vacant” fair
value of the physical property, which is allocated to land, building and improve-
ments. The difference between the purchase price and the “as-if vacant” fair
value is allocated to intangible assets. There are three categories of intangible
assets to be considered: (i) value of in-place leases, (ii) above- and below-
market value of in-place leases and (iii) customer relationship value.
The value of in-place leases is estimated based on the value associated with
the costs avoided in originating leases comparable to the acquired in-place
leases, as well as the value associated with lost rental revenue during the
assumed lease-up period. The value of in-place leases is amortized as real
estate amortization over the remaining lease term.
Amortization of in-place lease intangibles was $2.0 million, $2.4 million and $1.9
million for the years ended December 31, 2017, 2016 and 2015, respectively.
Net amortization of above-market and below-market lease intangibles
increased revenue by $0.1 million, $0.1 million and $0.3 million for the
years ended December 31, 2017, 2016 and 2015, respectively. In the
normal course of business, our intangible assets will amortize in the next five
years and thereafter as follows:
(in thousands of dollars)
For the Year Ending December 31,
Value of In-Place
Lease Intangibles
Above/(Below )
Market Leases, net
2018
2019
2020
2021
2022
2023 and thereafter
Total
$ 1,768
1,742
1,708
1,580
1,445
4,126
$12,369
$ (69 )
(89 )
(109 )
(86 )
(54 )
(154 )
$ (561 )
ASSETS CLASSIFIED AS HELD FOR SALE The determination to classify
an asset as held for sale requires significant estimates by us about the
property and the expected market for the property, which are based on
factors including recent sales of comparable properties, recent expressions
of interest in the property, financial metrics of the property and the physical
condition of the property. We must also determine if it will be possible under
those market conditions to sell the property for an acceptable price within
one year. When assets are identified by our management as held for sale,
we discontinue depreciating the assets and estimate the sales price, net of
selling costs, of such assets. We generally consider operating properties to
be held for sale when they meet criteria such as whether the sale transac-
tion has been approved by the appropriate level of management and there
are no known material contingencies relating to the sale such that the sale
is probable and is expected to qualify for recognition as a completed sale
within one year. If the expected net sales price of the asset that has been
identified as held for sale is less than the net book value of the asset, the
asset is written down to fair value less the cost to sell. Assets and liabilities
related to assets classified as held for sale are presented separately in the
consolidated balance sheet. If we determine that a property no longer meets
the held-for-sale criteria, we reclassify the property’s assets and liabilities to
their original locations on the consolidated balance sheet and record depre-
ciation and amortization expense for the period that the property was in
held-for-sale status.
In June 2017, we determined that Valley View Mall in LaCrosse, Wisconsin
met the criteria to classify it as held for sale. Effective December 31, 2017,
we determined that it did not meet the held-for-sale criteria because we are
no longer actively marketing the property, so we no longer believe that it is
likely that we will complete a sale of the property within one year. In the
fourth quarter of 2017, we recorded depreciation and amortization expense
of $1.0 million for the period that Valley View Mall was classified as held for
sale.
CAPITALIZATION OF COSTS Costs incurred in relation to development
and redevelopment projects for interest, property taxes and insurance are
capitalized only during periods in which activities necessary to prepare the
property for its intended use are in progress. Costs incurred for such items
after the property is substantially complete and ready for its intended use
are charged to expense as incurred. Capitalized costs, as well as tenant
inducement amounts and internal and external commissions, are recorded
in construction in progress. We capitalize a portion of development depart-
ment employees’ compensation and benefits related to time spent involved
in development and redevelopment projects.
We capitalize payments made to obtain options to acquire real property.
Other related costs that are incurred before acquisition that are expected
to have ongoing value to the project are capitalized if the acquisition of the
property is probable. If the property is acquired, other expenses related to
the acquisition are recorded to project costs and other expenses. When it is
probable that the property will not be acquired, capitalized pre-acquisition
costs are charged to expense.
We capitalize salaries, commissions and benefits related to time spent by
leasing and legal department personnel involved in originating leases with
third-party tenants.
The following table summarizes our capitalized salaries, commissions and
benefits, real estate taxes and interest for the years ended December 31,
2017, 2016 and 2015:
For the Year Ended December 31,
(in thousands of dollars)
2017
2016
2015
Development/Redevelopment:
Salaries and benefits
Real estate taxes
Interest
Leasing:
Salaries, commissions and benefits
$ 1,296
1,035
7,620
$ 1,138 $ 1,001
4
1,883
246
3,191
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. For straight-line rent, the collectibility analysis considers the probability
of collection of the unbilled deferred rent receivable, given our experience
regarding such amounts.
We have a mortgage note receivable secured by Wiregrass Commons Mall
in Dothan, Alabama with an outstanding balance of $16.5 million as of
December 31, 2017. The note was issued in connection with our 2016 sale
of Wiregrass Commons Mall. The note has a fixed interest rate of 6.0% and
we recorded $1.0 million and $0.7 million of interest income in the years
ended December 31, 2017 and 2016, respectively. We review this note
quarterly for impairment purposes and have determined that the current
carrying value approximates the fair value of the mortgage loan.
INCOME TAXES We have elected to qualify as a real estate investment trust,
or REIT, under Sections 856-860 of the Internal Revenue Code of 1986, as
amended, and intend to remain so qualified.
In some instances, we follow methods of accounting for income tax purposes
that differ from generally accepted accounting principles. Earnings and profits,
which determine the taxability of distributions to shareholders, will differ from
net income or loss reported for financial reporting purposes due to differ-
ences in cost basis, differences in the estimated useful lives used to compute
depreciation, and differences between the allocation of our net income or loss
for financial reporting purposes and for tax reporting purposes.
The following table summarizes the aggregate cost basis and depreciated
basis for federal income tax purposes of our investment in real estate as of
December 31, 2017 and 2016:
As of December 31,
(in millions of dollars)
2017
2016
Aggregate cost basis for federal
income tax purposes
$ 3,174.7
$ 3,303.2
Aggregate depreciated basis for
federal income tax purposes
2,284.0
2,380.8
We could be subject to a federal excise tax computed on a calendar year basis
if we were not in compliance with the distribution provisions of the Internal
Revenue Code. We have, in the past, distributed a substantial portion of
our taxable income in the subsequent fiscal year and might also follow this
policy in the future. No provision for excise tax was made for the years ended
December 31, 2017, 2016 and 2015, as no excise tax was due in those years.
The per share distributions paid to common shareholders had the following
components for the years ended December 31, 2017, 2016 and 2015:
As of December 31,
2017
2016
2015
6,066
6,101
6,255
Ordinary income
Non-dividend distributions
$ —
0.84
$ — $ —
0.84
0.84
RECEIVABLES We make estimates of the collectibility of our tenant receiv-
ables 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
Per-share distributions
$ 0.84
$ 0.84 $ 0.84
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2017 ANNUAL REPORT
31
The per share distributions paid to Series A, Series B, Series C and Series
D preferred shareholders had the following components for the years
ended December 31, 2017, 2016 and 2015:
Series A Preferred Share Dividends
Ordinary income
Non-dividend distributions
Series B Preferred Share Dividends
Ordinary income
Non-dividend distributions
Series C Preferred Share Dividends
Ordinary income
Non-dividend distributions
Series D Preferred Share Dividends
Ordinary income
Non-dividend distributions
For the Year Ended December 31,
2017
2016
2015
$ —
1.70
$ —
2.06
$ —
2.06
$ 1.70
$ 2.06
$ 2.06
$ —
1.84
$ —
1.84
$ —
1.84
$ 1.84
$ 1.84
$ 1.84
$ —
1.59
$ —
—
$ —
—
$ 1.59
$ —
$ —
$ —
0.45
$ —
—
$ —
—
$ 0.45
$ —
$ —
We follow accounting requirements that prescribe a recognition threshold
and measurement attribute for the financial statement recognition and
measurement of a tax position taken in a tax return. We must determine
whether it is “more likely than not” that a tax position will be sustained
upon examination, including resolution of any related appeals or litiga-
tion processes, based on the technical merits of the position. Once it is
determined that a position meets the “more likely than not” recognition
threshold, the position is measured at the largest amount of benefit that
is greater than 50% likely to be realized upon settlement to determine the
amount of benefit to recognize in the consolidated financial statements.
PRI is subject to federal, state and local income taxes. We had a nominal
federal income tax provision in the year ended December 31, 2017, and
no provision or benefit for federal or state income taxes in the years ended,
December 31, 2016 and 2015. We had net deferred tax assets of $18.0 mil-
lion and $25.6 million for the years ended December 31, 2017 and 2016,
respectively. The deferred tax assets are primarily the result of net operating
losses. A valuation allowance has been established for the full amount of the
net deferred tax assets, since it is more likely than not that these assets will not
be realized because we anticipate that the net operating losses that we have
historically experienced at our taxable REIT subsidiaries will continue to occur.
The deferred tax assets were remeasured for the year ended December 31,
2017 to account for the tax provisions in H. R. 1, which was signed into law on
December 22, 2017. We believe this reassessment to be the final adjustment
to these amounts in connection with the passage of H. R. 1.
DEFERRED FINANCING COSTS Deferred financing costs include fees
and costs incurred to obtain financing. Such costs are amortized to interest
expense over the terms of the related indebtedness. Interest expense is
determined in a manner that approximates the effective interest method in
the case of costs associated with mortgage loans, or on a straight line basis
in the case of costs associated with our 2013 Revolving Facility and Term
Loans (see note 4).
DERIVATIVES In the normal course of business, we are exposed to
financial market risks, including interest rate risk on our interest-bearing
liabilities. We attempt to limit these risks by following established risk man-
agement policies, procedures and strategies, including the use of derivative
financial instruments. We do not use derivative financial instruments for
trading or speculative purposes.
Currently, we use interest rate swaps to manage our interest rate risk. The
valuation of these instruments is determined using widely accepted valuation
techniques, including discounted cash flow analysis on the expected cash flows
of each derivative. This analysis reflects the contractual terms of the derivatives,
including the period to maturity, and uses observable market-based inputs.
Derivative financial instruments are recorded on the consolidated balance
sheet as assets or liabilities based on the fair value of the instrument. Changes
in the fair value of derivative financial instruments are recognized currently
in earnings, unless the derivative financial instrument meets the criteria for
hedge accounting. If the derivative financial instruments meet the criteria for
a cash flow hedge, the gains and losses in the fair value of the instrument are
deferred in other comprehensive income. Gains and losses on a cash flow
hedge are reclassified into earnings when the forecasted transaction affects
earnings. A contract that is designated as a hedge of an anticipated trans-
action that is no longer likely to occur is immediately recognized in earnings.
The anticipated transaction to be hedged must expose us to interest rate
risk, and the hedging instrument must reduce the exposure and meet
the requirements for hedge accounting. We must formally designate the
instrument as a hedge and document and assess the effectiveness of the
hedge at inception and on a quarterly basis. Interest rate hedges that are
designated as cash flow hedges are designed to mitigate the risks associ-
ated with future cash outflows on debt.
We incorporate credit valuation adjustments to appropriately reflect both
our own nonperformance risk and the respective counterparty’s nonper-
formance risk in the fair value measurements. In adjusting the fair value
of our derivative contracts for the effect of nonperformance risk, we have
considered the impact of netting and any applicable credit enhancements.
Although we have determined that the majority of the inputs used to value
our derivatives fall within Level 2 of the fair value hierarchy, the credit valua-
tion adjustments associated with our derivatives utilize Level 3 inputs, such
as estimates of current credit spreads, to evaluate the likelihood of default
by us and our counterparties. As of December 31, 2017, we have assessed
the significance of the effect of the credit valuation adjustments on the
overall valuation of our derivative positions and have determined that the
credit valuation adjustments are not significant to the overall valuation of our
derivatives. As a result, we have determined that our derivative valuations in
their entirety are classified in Level 2 of the fair value hierarchy.
OPERATING PARTNERSHIP UNIT REDEMPTIONS Shares issued upon
redemption of OP Units are recorded at the book value of the OP Units
surrendered.
SHARE-BASED COMPENSATION EXPENSE Share based payments
to employees and non-employee trustees, including grants of restricted
shares and share options, are valued at fair value on the date of grant, and
are expensed over the applicable vesting period.
EARNINGS PER SHARE The difference between basic weighted average
shares outstanding and diluted weighted average shares outstanding is the
dilutive effect of common share equivalents. Common share equivalents
consist primarily of shares that are issued under employee share compen-
sation programs and outstanding share options whose exercise price is less
than the average market price of our common shares during these periods.
NEW ACCOUNTING DEVELOPMENTS In August 2017, the FASB
issued ASU 2017-12, Derivatives and Hedging: Targeted Improvements
to Accounting for Hedging Activities (ASU 2017-12). The purpose of this
updated guidance is to better align a company’s financial reporting for
hedging activities with the economic objectives of those activities. ASU
2017-12 is effective for public business entities for fiscal years begin-
ning after December 15, 2018, with early adoption, including adoption
in an interim period, permitted. The Company adopted ASU 2017-12 on
January 1, 2018. ASU 2017-12 requires a modified retrospective transition
method in which the Company will recognize the cumulative effect of the
change on the opening balance of each affected component of equity in
the statement of financial position as of the date of adoption. The adop-
tion of this standard did not have a material impact on our consolidated
financial statements.
In January 2017, the Financial Accounting Standards Board (“FASB”)
issued ASU No. 2017-01 - Business Combinations (Topic 805): Clarifying
the Definition of a Business. The update adds further guidance that
assists preparers in evaluating whether a transaction will be accounted for
as an acquisition of an asset or a business. We expect that future property
acquisitions will generally qualify as asset acquisitions under the standard,
which requires the capitalization of acquisition costs to the underlying
assets. The Company adopted this new guidance effective January 1,
2017. This new guidance did not have a significant impact on our finan-
cial statements.
In November 2016 the FASB issued ASU No. 2016-18, Statement of
Cash Flows (Topic 230), which provides guidance on the presentation
of restricted cash or restricted cash equivalents within the statement of
cash flows. Accordingly, amounts generally described as restricted cash
and restricted cash equivalents should be included with cash and cash
equivalents when reconciling the beginning-of-period and end-of-period
total amounts shown on the statement of cash flows. The Company
adopted this standard effective January 1, 2018. The adoption of ASU
No. 2016-18 will change the presentation of the statement of cash flows
for the Company and we will utilize a retrospective transition method for
each period presented within financial statements for periods subsequent
to the date of adoption.
In August 2016, the FASB issued ASU No. 2016-15 - Statement of Cash
Flows (Topic 230): Classification of Certain Cash Receipts and Cash
Payments, which is intended to reduce diversity in the practice of how
certain transactions are classified in the statement of cash flows, including
classification guidance for distributions received from equity method
investments. The standard requires the use of the retrospective transition
method. The Company adopted this guidance effective January 1, 2017.
This new guidance did not have a significant impact on the Company’s
financial statements.
In March 2016, the FASB issued guidance intended to simplify various
aspects related to how share-based payments are accounted for and
presented in the financial statements. The new guidance allows for enti-
ties to make an entity-wide accounting policy election to either estimate
the number of awards that are expected to vest or account for forfeitures
when they occur. In addition, the guidance allows employers to withhold
shares to satisfy minimum statutory tax withholding requirements up to
the employees’ maximum individual tax rate without causing the award to
be classified as a liability. The guidance also stipulates that cash paid by
an employer to a taxing authority when directly withholding shares for tax
withholding purposes should be classified as a financing activity on the
statement of cash flows. The Company adopted this guidance effective
January 1, 2017. This new guidance did not have a significant impact on
the Company’s financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic
842), which will result in lessees recognizing most leased assets and
corresponding lease liabilities on the balance sheet. Leases of land and
other arrangements where we are the lessee will be recognized on our
balance sheet. Lessor accounting will remain substantially similar to the
current accounting; however, certain refinements were made to conform
the standard with the recently issued revenue recognition guidance in
ASU 2014-09, specifically related to the allocation and recognition of
contract consideration earned from lease and non-lease revenue com-
ponents. Substantially all of our revenue and the revenues of our equity
method investments are earned from arrangements that are within the
scope of ASU 2016-02, thus we anticipate that the timing of recognition
and financial statement presentation of certain revenues, particularly
those that relate to consideration from non-lease components, including
fixed common area maintenance arrangements, may be affected. Upon
adoption of ASU 2016-02, consideration related to these non-lease
components will be accounted for using the guidance in ASU 2014-09.
Leasing costs that are eligible to be capitalized as initial direct costs are
also limited by ASU 2016-02; such costs totaled approximately $5.3 mil-
lion and $5.1 million for the years ended December 31, 2017 and 2016,
respectively. We will adopt ASU 2016-02 on January 1, 2019 using the
modified retrospective approach required by the standard. We are cur-
rently evaluating the ultimate impact that the adoption of the new standard
will have on our consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts
with Customers (Topic 606). The objective of this new standard is to
establish a single comprehensive model for entities to use in accounting
for revenue arising from contracts with customers. The core principle of
this new standard is that an entity recognizes revenue to depict the transfer
of promised goods or services to customers in an amount that reflects
the consideration that the entity expects to receive in exchange for those
goods or services. In March 2016, the FASB issued ASU No 2016-08,
which updates Topic 606 to clarify principal versus agent considerations
(reporting revenue gross versus net). The types of our revenues that will
be impacted by the new standard include management, development and
leasing fee revenues for services performed for third-party owned proper-
ties and for certain of our joint ventures, , and certain billings to tenants for
reimbursement of property operating expenses and marketing expenses.
We expect that the amount and timing of the revenues that are impacted
by this standard will be generally consistent with our current measure-
ment and pattern of recognition. We do not expect the adoption of this
new standard to have a significant impact on our consolidated financial
statements. Expanded quantitative and qualitative disclosures regarding
revenue recognition will be required for contracts that are subject to this
pronouncement. We adopted the standard effective January 1, 2018 using
the modified retrospective approach, which requires a cumulative adjust-
ment as of the date of the adoption, if applicable. We did not record any
such cumulative adjustment in connection with the implementation of the
new pronouncement.
In February 2017, the FASB issued ASU 2017-05, Other Income- Gains
and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-
20): Clarifying the Scope of Asset Derecognition Guidance. ASU 2017-05
focuses on recognizing gains and losses from the transfer of nonfinancial
assets with noncustomers. It provides guidance as to the definition of an
“in substance nonfinancial asset,” and provides guidance for sales of real
estate, including partial sales. The Company adopted this new guidance
effective January 1, 2018. We do not expect this new guidance to have a
significant impact on our financial statements other than in future partial
sale transactions, should they occur.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2017 ANNUAL REPORT
33
2. Real Estate Activities
Investments in real estate as of December 31, 2017 and 2016 were com-
prised of the following:
As of December 31,
(in thousands of dollars)
2017
2016
Buildings, improvements and
construction in progress
Land, including land held
for development
$ 2,808,622
$ 2,794,213
491,080
505,801
Total investments in real estate
Accumulated depreciation
3,299,702
(1,111,007 )
3,300,014
(1,060,845 )
Net investments in real estate
$ 2,188,695
$ 2,239,169
IMPAIRMENT OF ASSETS During the years ended December 31, 2017,
2016, and 2015, we recorded asset impairment losses of $55.8 million, $62.6
million and $140.3 million, respectively. Such impairment losses are recorded
in “Impairment of assets” for the years ended 2017, 2016 and 2015. The assets
that incurred impairment losses and the amount of such losses are as follows:
(in thousands of dollars)
2017
2016
2015
For the Year Ended December 31,
Logan Valley Mall
Valley View Mall
Gainesville land
Sunrise Plaza land
White Clay Point land
Beaver Valley Mall
Washington Crown Center
Crossroads Mall
Office building located at Voorhees
Town Center
Gadsden Mall, New River Valley Mall
and Wiregrass Commons Mall
Voorhees Town Center
Lycoming Mall
Uniontown Mall
Palmer Park Mall
Other
$ 38,720
15,521
1,275
226
—
—
—
—
$ —
—
—
—
20,786
18,055
14,117
9,038
$ —
—
—
—
—
—
—
—
—
607
—
—
—
—
—
—
51
—
—
—
—
—
—
63,904
39,242
28,345
7,394
1,383
50
Total Impairment of Assets
$55,793
$62,603
$140,318
LOGAN VALLEY MALL In 2017, we recorded an aggregate loss on impair-
ment of assets on Logan Valley Mall, in Altoona, Pennsylvania of $38.7
million in connection with negotiations with the potential buyer of the prop-
erty. In connection with these negotiations, we determined that the holding
period of the property was less than previously estimated, which we con-
cluded was a triggering event, leading us to conduct an analysis of possible
impairment at this property. Based upon the negotiations, we determined
that the estimated undiscounted cash flows, net of capital expenditures for
the property, were less than the carrying value of the property, and recorded
a loss on impairment of assets. We sold Logan Valley Mall in August 2017.
VALLEY VIEW MALL In 2017, we recorded a loss on impairment of assets
on Valley View Mall, in La Crosse, Wisconsin of $15.5 million in connec-
tion with our decision to market the property for sale. In connection with
this decision, we determined that the holding period of the property was
less than previously estimated, which we concluded was a triggering event,
leading us to conduct an analysis of possible impairment at this property.
Based upon our estimates, we determined that the estimated undiscounted
cash flows, net of capital expenditures for the property, were less than
the carrying value of the property, and recorded a loss on impairment of
assets. Our fair value analysis was based on an estimated capitalization
rate of approximately 12% for Valley View Mall, which was determined using
management’s assessment of property operating performance and general
market conditions.
GAINESVILLE LAND In 2017, we recorded a loss on impairment of
assets on a land parcel located in Gainesville, Florida of $1.3 million in
connection with negotiations with the potential buyer of the property. In
connection with these negotiations, we determined that the holding period
of the property was less than previously estimated, which we concluded
was a triggering event, leading us to conduct an analysis of possible
impairment at this property. Based upon the negotiations, we determined
that the estimated undiscounted cash flows, net of capital expenditures
for the property, were less than the carrying value of the property, and
recorded a loss on impairment of assets.
SUNRISE PLAZA LAND In 2017, we recorded a loss on impairment of
assets on a land parcel located at Sunrise Plaza in Forked River, New
Jersey of $0.2 million in connection with negotiations with the potential
buyer of the property. In connection with these negotiations, we determined
that the holding period of the property was less than previously estimated,
which we concluded was a triggering event, leading us to conduct an anal-
ysis of possible impairment at this property. Based upon the negotiations,
we determined that the estimated undiscounted cash flows, net of capital
expenditures for the property, were less than the carrying value of the prop-
erty, and recorded a loss on impairment of assets.
WHITE CLAY POINT LAND In 2016, we recorded a loss on impairment
of assets on White Clay Point land, in New Garden Township, Pennsylvania
of $20.8 million. In connection with our decision to market the property,
which we concluded was a triggering event, we conducted an analysis of
possible impairment at this property. We determined that the estimated
proceeds from a potential sale of the property, would likely be less than the
carrying value of the property, and recorded a loss on impairment of assets.
BEAVER VALLEY MALL In 2016, we recorded a loss on impairment of
assets on Beaver Valley Mall, in Monaca, Pennsylvania of $18.1 million in
connection with negotiations with the buyer of the property. In connec-
tion with these negotiations, we determined that the holding period of the
property was less than previously estimated, which we concluded was a
triggering event, leading us to conduct an analysis of possible impairment
at this property. Based upon the negotiations, we determined that the esti-
mated undiscounted cash flows, net of capital expenditures for the property,
were less than the carrying value of the property, and recorded a loss on
impairment of assets. The property was classified as “held for sale” as of
December 31, 2016. The property was sold in January 2017.
WASHINGTON CROWN CENTER In 2016, we recorded a loss on impair-
ment of assets on Washington Crown Center, in Washington, Pennsylvania
of $14.1 million in connection with negotiations with the buyer of the prop-
erty. In connection with these negotiations, we determined that the holding
period of the property was less than previously estimated, which we con-
cluded was a triggering event, leading us to conduct an analysis of possible
impairment at this property. Based upon the negotiations, we determined
that the estimated undiscounted cash flows, net of capital expenditures for
the property, were less than the carrying value of the property, and recorded
a loss on impairment of assets. The property was sold in August 2016.
CROSSROADS MALL In 2016, we recorded a loss on impairment of assets
on Crossroads Mall, in Beckley, West Virginia of $9.0 million in connection
with negotiations with the buyer of the property. In connection with these
negotiations, we determined that the holding period of the property was
less than previously estimated, which we concluded was a triggering event,
leading us to conduct an analysis of possible impairment at this property.
Based upon the negotiations, we determined that the estimated undis-
counted cash flows, net of capital expenditures for the property, were less
than the carrying value of the property, and recorded a loss on impairment
of assets. The property was classified as “held for sale” as of December 31,
2016. The property was sold in January 2017.
OFFICE BUILDING LOCATED AT VOORHEES TOWN CENTER In 2016,
we recorded a loss on impairment of assets on an office building located
in Voorhees, New Jersey of $0.6 million in connection with negotiations
with a the buyer of the property. In connection with these negotiations, we
determined that the holding period of the property was less than previously
estimated, which we concluded was a triggering event, leading us to con-
duct an analysis of possible impairment at this property. Based upon the
negotiations, we determined that the estimated undiscounted cash flows,
net of capital expenditures for the property, were less than the carrying
value of the property, and recorded a loss on impairment of assets. The
property was sold in September 2016.
GADSDEN MALL, NEW RIVER VALLEY MALL AND WIREGRASS
COMMONS MALL In 2015, we recorded aggregate losses on impairment
of assets on Gadsden Mall in Gadsden, Alabama, New River Valley Mall in
Christiansburg, Virginia and Wiregrass Commons Mall in Dothan, Alabama
of $63.9 million in connection with negotiations with a prospective buyer
of the properties. As a result of these negotiations, we determined that
the holding period for the properties was less than had been previously
estimated, which we concluded was a triggering event, leading us to con-
duct an analysis of possible asset impairment at these properties. Based
upon the purchase and sale agreement with the prospective buyer of the
properties and subsequent further negotiations, we determined that the
estimated aggregate undiscounted cash flows, net of estimated capital
expenditures, for Gadsden Mall, New River Valley Mall and Wiregrass
Commons Mall were less than the aggregate carrying value of the prop-
erties, and recorded a loss on impairment of assets. The properties were
sold in March 2016.
VOORHEES TOWN CENTER In 2015, we recorded a loss on impairment of
assets on Voorhees Town Center in Voorhees, New Jersey of $39.2 million
in connection with negotiations with the buyer of the property. In connec-
tion with these negotiations, we determined that the holding period for the
property was less than had been previously estimated, which we concluded
was a triggering event, leading us to conduct an analysis of possible asset
impairment at this property. Based upon the purchase and sale agreement
with the buyer of the property, we determined that the estimated undis-
counted cash flows, net of estimated capital expenditures, for Voorhees
Town Center were less than the carrying value of the property, and recorded
a loss on impairment of assets. The property was sold in October 2015.
LYCOMING MALL In 2015, we recorded aggregate losses on impairment
of assets on Lycoming Mall in Pennsdale, Pennsylvania of $28.3 million in
connection with negotiations with a prospective buyer of the property. In
connection with these negotiations, we determined that the holding period
for the property was less than had been previously estimated, which we
concluded was a triggering event, leading us to conduct an analysis of pos-
sible asset impairment at this property. Based upon the initial purchase and
sale agreement with the prospective buyer of the property, as well as a sub-
sequent purchase and sale agreement, we determined that the estimated
undiscounted cash flows, net of estimated capital expenditures, for Lycoming
Mall were less than the carrying value of the property, and recorded a loss on
impairment of assets. The property was sold in March 2016.
UNIONTOWN MALL In 2015, we recorded aggregate losses on impairment
of assets on Uniontown Mall in Uniontown, Pennsylvania of $7.4 million. In
connection with negotiations with the buyer of the property, we had deter-
mined that the holding period for the property was less than had been
previously estimated, which we concluded was a triggering event, leading
us to conduct an analysis of possible asset impairment at this property.
Based upon the original purchase and sale agreement with the buyer of
the property and subsequent further negotiations, we determined that the
estimated undiscounted cash flows, net of estimated capital expenditures,
for Uniontown Mall were less than the carrying value of the property, and
recorded both an initial loss on impairment of assets and a subsequent addi-
tional loss on impairment of assets. The property was sold in August 2015.
PALMER PARK MALL In 2015, we recorded a loss on impairment of
assets on Palmer Park Mall in Easton, Pennsylvania of $1.4 million. In con-
nection with negotiations with the buyer of the property, we had determined
that the holding period for the property was less than had been previously
estimated, which we concluded was a triggering event, leading us to con-
duct an analysis of possible asset impairment at this property. Based upon
the purchase and sale agreement with the buyer of the property and subse-
quent further negotiations, we determined that the estimated undiscounted
cash flows, net of estimated capital expenditures, for Palmer Park Mall were
less than the carrying value of the property, and recorded a loss on impair-
ment of assets. The property was sold in February 2016.
ACQUISITIONS In 2017, we purchased vacant anchor stores from Macy’s
located at Moorestown Mall, Valley View Mall and Valley Mall for an aggregate
of $13.9 million. We executed a lease with a replacement tenant for the Valley
View Mall location and this tenant opened in September 2017. We also have
replacement tenants for the Moorestown Mall and Valley Mall former anchors
and currently have redevelopment activities at these locations.
In connection with the March 2015 acquisition of Springfield Town Center,
the previous owner of the property is potentially entitled to receive consid-
eration (the “Earnout”) under the terms of the Contribution Agreement
which will be calculated as of March 31, 2018. As of December 31, 2017,
the estimated value of the Earnout is zero.
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2017 ANNUAL REPORT
35
DISPOSITIONS The table below presents our dispositions since January 1, 2015. Proceeds from property sales were used for general corporate purposes,
repayment of mortgage loans that secured the properties (if applicable) and repayment of then-outstanding amounts on our Credit Agreements (see note
4), unless otherwise noted.
Sale Price Gain/(Loss)
Sale Date
Property and Location
Description of Real Estate Sold
Capitalization Rate
(in millions of dollars)
2017 Activity:
January
August
2016 Activity:
February
March
June
August
2015 Activity:
August
October
Beaver Valley Mall,
Monaca, PA
Crossroads Mall,
Beckley, WV
Logan Valley Mall,
Altoona, PA
Palmer Park Mall,
Easton, PA
Gadsden Mall,
Gadsden, AL
New River Valley Mall,
Christiansburg, VA and
Wiregrass Commons Mall,
Dothan, AL(1)
Lycoming Mall,
Pennsdale, PA
Street retail located on
Walnut and Chestnut Streets,
Philadelphia, PA
Washington Crown Center,
Washington, PA
Uniontown Mall,
Uniontown, PA
Voorhees Town Center,
Voorhees, NJ
Mall
Mall
Mall
Mall
Three Malls (single combined
transaction)
Mall
Street Retail
Mall
Mall
Mall
15.6 %
$ 24.2
$ —
15.5 %
24.8
—
16.5 %
33.2
—
13.6 %
18.0
0.1
17.4 %
66.0
1.6
18.0 %
26.4
0.3
3.2 %
45.0
20.3
14.5 %
20.0
(0.1 )
17.5 %
10.3 %
23.0
13.4
—
—
(1) In connection with this transaction, we issued a mortgage loan to the buyer for $17.0 million, which is recorded in “Deferred costs and other assets, net” on our consolidated balance
sheet. The mortgage loan is secured by Wiregrass Commons Mall, bears interest at a fixed rate of 6.00% per annum and has a maturity of April 2026. As of December 31, 2017, the bal-
ance of the mortgage loan was $16.5 million.
DISPOSITIONS – OTHER ACTIVITY In 2017, we sold three non operating
parcels located at Beaver Valley Mall, Exton Square Mall and Valley Mall
for an aggregate of $6.4 million and recorded aggregate gains of $1.3
million on these parcels.
In 2016, we sold an office building adjacent to Voorhees Town Center, three
non operating parcels and one operating parcel located at Beaver Valley
Mall, Francis Scott Key Mall, Monroe Retail Center and Sunrise Plaza for
aggregate of $9.3 million, and recorded aggregate gains of $0.9 million.
In 2015, we sold two operating parcels and one non operating parcel for
an aggregate sales price of $5.1 million. We recorded net gains on sales
of real estate of $0.6 million on these transactions.
DEVELOPMENT ACTIVITIES As of December 31, 2017 and 2016,
we had capitalized amounts related to construction and development
activities. The following table summarizes certain capitalized construc-
tion and development information for our consolidated properties as of
December 31, 2017 and 2016:
As of December 31,
(in thousands of dollars)
2017
2016
Construction in progress
Land held for development
Deferred costs and other assets
$ 113,609
5,881
2,182
$ 97,575
5,910
2,752
Total capitalized construction
and development activities
$121,672
$ 106,237
3. Investments in Partnerships
The following table presents summarized financial information of our equity
investments in unconsolidated partnerships as of December 31, 2017 and
2016:
As of December 31,
(in thousands of dollars)
2017
2016
$ 612,689
293,102
$ 649,960
160,699
ASSETS:
Investments in real estate, at cost:
Retail properties
Construction in progress
Total investments in real estate
Accumulated depreciation
Net investments in real estate
Cash and cash equivalents
Deferred costs and other assets, net
Total assets
905,791
(202,424 )
703,367
26,158
34,345
763,870
LIABILITIES AND PARTNERS’ EQUITY:
Mortgage loans
Other liabilities
$ 513,139
37,971
Total liabilities
Net equity
Partners’ share
Company’s share
Excess investment(1)
551,110
212,760
106,886
105,874
13,081
810,659
(207,987 )
602,672
27,643
37,705
668,020
$ 445,224
23,945
469,169
198,851
101,045
97,806
8,969
Net investments and advances
$ 118,955
$ 106,775
Investment in partnerships, at equity
Distributions in excess of
partnership investments
$ 216,823
$ 168,608
(97,868 )
(61,833 )
Net investments and advances
$ 118,955
$ 106,775
(1) Excess investment represents the unamortized difference between our investment and
our share of the equity in the underlying net investment in the partnerships. The excess
investment is amortized over the life of the properties, and the amortization is included in
“Equity in income of partnerships.”
We record distributions from our equity investments up to an amount equal to
the equity in income of partnerships as cash from operating activities. Amounts
in excess of our share of the income in the equity investments are treated as
a return of partnership capital and recorded as cash from investing activities.
The following table summarizes our share of equity in income of partner-
ships for the years ended December 31, 2017, 2016 and 2015:
For the Year Ended December 31,
(in thousands of dollars)
2017
2016
2015
$115,118
$117,912
$105,813
Real estate revenue
Expenses:
Property operating expenses
(33,273 )
(25,251 )
Depreciation and amortization (24,872 )
Interest expense
(33,597 )
(21,573 )
(23,326 )
(39,134 )
(21,021 )
(25,718 )
Total expenses
(83,396 )
(78,496 )
(85,873 )
Net income
31,722
39,416
19,940
Less: Partners’ share
(17,607 )
(21,137 )
(10,128 )
Company’s share
Amortization of excess
investment
Equity in income of
partnerships
14,115
18,279
9,812
252
198
(272 )
$14,367
$ 18,477
$9,540
DISPOSITIONS In September 2017, a partnership in which we hold a
50% ownership share sold its condominium interest in 801 Market Street
in Philadelphia, Pennsylvania for $61.5 million. The partnership recorded
a gain on sale of $13.1 million, of which our share is $6.5 million. The
partnership distributed to us proceeds of $30.3 million in connection with
this transaction in September 2017, which is recorded in gain on sale of
real estate by equity method investee in the accompanying consolidated
statement of operations.
In July 2015, we sold our entire 50% interests in the Springfield Park
shopping center in Springfield, Pennsylvania for $20.2 million, rep-
resenting a capitalization rate of 7.0%, and recognized a gain of $12.0
million. In connection with our interest in the property, we had an ongoing
obligation to sublet approximately 10,100 square feet of space at the prop-
erty, which we transferred as part of the transaction. In connection with
the sale, a mortgage loan of approximately $9.0 million, of which our share
was 50%, was assumed by the buyer of our interests. We divested $0.1
million of goodwill in connection with this transaction. We used the net
proceeds from the transaction for general corporate purposes. See note
10 regarding the related party aspect of this transaction.
TERM LOAN In January 2018, we along with Macerich, our partner in
the Fashion District Philadelphia redevelopment project, entered into a
$250.0 million term loan (the “FDP Term Loan”). The initial term of the
FDP Term Loan is five years and bears interest at a variable rate of 2.00%
over LIBOR. PREIT and Macerich have secured the FDP Term Loan by
pledging their respective equity interests of 50% each in the entities that
own Fashion District Philadelphia. The initial draw on the FDP Term Loan
was $150.0 million, and we received $73.0 million as a distribution of our
share of the draw in January 2018. The project intends to withdraw the
remaining $100.0 million available under the FDP Term Loan during 2018
to fund capital expenditures for this redevelopment project.
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2017 ANNUAL REPORT
37
MORTGAGE LOANS OF UNCONSOLIDATED PROPERTIES Mortgage loans, which are secured by seven of the unconsolidated properties (including one
property under development), are due in installments over various terms extending to the year 2025. Five of the mortgage loans bear interest at a fixed
interest rate and two of the mortgage loans bear interest at a variable interest rate. The balances of the fixed interest rate mortgage loans have interest
rates that range from 4.06% to 5.56% and had a weighted average interest rate of 4.56% at December 31, 2017. The balances of the variable interest rate
mortgage loans have interest rates that range from 2.76% to 4.19% and had a weighted average interest rate of 2.95% at December 31, 2017. The weighted
average interest rate of all unconsolidated mortgage loans was 4.39% at December 31, 2017. The liability under each mortgage loan is limited to the uncon-
solidated partnership that owns the particular property. Our proportionate share, based on our respective partnership interest, of principal payments due in
the next five years and thereafter is as follows:
(in thousands of dollars)
For the Year Ending December 31,
2018
2019
2020
2021
2022
2023 and thereafter
Company’s Proportionate Share
Principal
Amortization
$ 3,798
4,107
4,287
4,040
3,738
13,720
Balloon
Payments
$ 24,232
—
79,789
38,160
—
59,801
Total
$ 28,030
4,107
84,076
42,200
3,738
73,521
Total principal payments
$33,690
$ 201,982
$ 235,672
Less: Unamortized debt issuance costs
Carrying value of mortgage notes payable
Property
Total
$ 99,650
8,215
168,151
84,401
7,476
147,040
514,933
1,794
$513,139
The following table presents the mortgage loans secured by the unconsolidated properties entered into since January 1, 2016:
Financing Date
Property
(in millions of dollars)
Stated Interest Rate
Maturity
Amount Financed
or Extended
2018 Activity:
February
2017 Activity:
October
Pavilion at Market East(1)
$ 8.3 LIBOR plus 2.85%
February 2021
Lehigh Valley Mall(2)(3)
200.0
Fixed 4.06%
November 2027
(1) We own a 40% partnership interest in Pavilion at Market East and our share of this mortgage loan is $3.3 million.
(2) The proceeds were used to repay the existing $124.6 million mortgage loan plus accrued interest. We own a 50% partnership interest in Lehigh Valley Mall and our share of this mortgage loan is
$100.0 million.
(3) We received $35.3 million of proceeds as a distribution in connection with the financing. In connection with this new mortgage loan financing, the unconsolidated entity recorded $3.1 million of
prepayment penalty and accelerated the amortization of $0.1 million of unamortized financing costs in the fourth quarter of 2017.
SIGNIFICANT UNCONSOLIDATED SUBSIDIARY We have a 50% part-
nership interest in Lehigh Valley Associates LP, the owner of Lehigh Valley
Mall, which met the definition of a significant unconsolidated subsidiary in
the year ended December 31, 2016. Lehigh Valley Mall did not meet the
definition of a significant subsidiary as of or for the years ended December
31, 2017 or 2015. Summarized financial information as of or for the years
ended December 31, 2017, 2016 and 2015 for this property, which is
accounted for by the equity method, is as follows:
As of or for the years ended December 31,
(in thousands of dollars)
2017
2016
2015
Total assets
Mortgage payable
Revenue
Property operating
expenses
Interest expense
Net income
PREIT’s share of equity in
income of partnership
$ 43,850
199,451
34,945
$ 49,264
126,520
36,923
$ 49,919
128,883
36,497
9,038
10,907
11,389
8,659
7,570
17,264
9,599
7,708
15,844
5,695
8,632
7,922
4. Financing Activity
CREDIT AGREEMENTS We have entered into four credit agreements (col-
lectively, as amended, the “Credit Agreements”), as further discussed and
defined below: (1) the 2013 Revolving Facility, (2) the 2014 7-Year Term
Loan, (3) the 2014 5-Year Term Loan, and (4) the 2015 5-Year Term Loan.
The 2014 7-Year Term Loan, the 2014 5-Year Term Loan and the 2015
5-Year Term Loan are collectively referred to as the “Term Loans.”
As of December 31, 2017, the Company had borrowed $550.0 million under
the Term Loans and $53.0 million under the 2013 Revolving Facility. The
carrying value of the Term Loans on our consolidated balance sheet includes
$2.2 million of unamortized debt issuance costs. Following recent property
sales, the net operating income (“NOI”) from the Company’s remaining
unencumbered properties is at a level such that within the Unencumbered
Debt Yield covenant (as described below) under the Credit Agreements,
the maximum unsecured amount that was available to the Company as
of December 31, 2017 was $144.5 million. Following the $53.0 million
repayment of the 2013 Revolving Facility in January 2018, the maximum
unsecured amount that is available to be borrowed by the Company under
the Credit Agreements is $197.5 million.
Interest expense and the deferred financing fee amortization related to the
Credit Agreements for the years ended December 31, 2017, 2016 and 2015
was as follows:
(in thousands of dollars)
2017
2016
2015
For the Year Ended December 31,
2013 Revolving Facility:
Interest expense
Deferred financing
amortization
Accelerated financing fee
Term Loans:
Interest expense
Deferred financing
amortization
$ 2,463
$ 3,209
$ 2,914
796
—
795
—
1,187
193
14,935
12,262
8,965
759
619
396
2013 REVOLVING FACILITY, AS AMENDED In April 2013, PREIT, PREIT
Associates and PRI (collectively, the “Borrower” or “we”) entered into a
credit agreement (as amended, the “2013 Revolving Facility”) with Wells
Fargo Bank, National Association, and the other financial institutions signa-
tory thereto, for a $400.0 million senior unsecured revolving credit facility. In
December 2013, we amended the 2013 Revolving Facility to make certain
terms of the 2013 Revolving Facility consistent with the terms of the 2014
Term Loans (as defined below). In June 2015, we further amended the 2013
Revolving Facility to lower the interest rates in the applicable pricing grid,
modify one covenant and to extend the Termination Date to June 26, 2018.
All capitalized terms used in this note 4 and not otherwise defined herein
have the meanings ascribed to such terms in the 2013 Revolving Facility.
Pursuant to the June 2015 amendment, the initial maturity of the 2013
Revolving Facility is June 26, 2018, and the Borrower has options for two
one-year extensions of the initial maturity date, subject to certain condi-
tions and to the payment of extension fees of 0.15% and 0.20% of the
Facility Amount for the first and second options, respectively. We expect
to exercise the first of these one-year extension options or negotiate an
extension of the maturity date during the first half of 2018.
Subject to the terms of the Credit Agreements, the Borrower has the option to
increase the maximum amount available under the 2013 Revolving Facility,
through an accordion option, from $400.0 million to as much as $600.0
million, in increments of $5.0 million (with a minimum increase of $25.0
million), based on Wells Fargo Bank’s ability to obtain increases in Revolving
Commitments from the current lenders or Revolving Commitments from
new lenders. No increase to the maximum amount available under the
2013 Revolving Facility has been exercised by the Borrower.
TERM LOANS 2015 5-YEAR TERM LOAN In June 2015, the Borrower
entered into a five year term loan agreement (the “2015 5-Year Term
Loan”) with Wells Fargo Bank, National Association, PNC Bank, National
Association and the other financial institutions signatory thereto, for a
$150.0 million senior unsecured five year term loan facility. The maturity
date of the 2015 5-Year Term Loan is June 2020. At closing, the Borrower
borrowed the entire $150.0 million under the 2015 5-Year Term Loan, and
used the proceeds to repay $150.0 million of the then outstanding balance
under the Borrower’s 2013 Revolving Facility.
2014 TERM LOANS In January 2014, the Borrower entered into two unse-
cured term loans in the initial aggregate amount of $250.0 million, comprised of:
(1) a 5 Year Term Loan Agreement (the “2014 5-Year Term Loan”) with
Wells Fargo Bank, National Association, U.S. Bank National Association
and the other financial institutions signatory thereto, for a $150.0 mil-
lion senior unsecured 5 year term loan facility; and
(2) a 7 Year Term Loan Agreement (the “2014 7-Year Term Loan” and,
together with the 2014 5-Year Term Loan, the “2014 Term Loans”)
with Wells Fargo Bank, National Association, Capital One, National
Association and the other financial institutions signatory thereto, for a
$100.0 million senior unsecured 7 year term loan facility.
In May 2017, we borrowed an additional $150.0 million on the 2014 7-Year
Term Loan, which was used to repay borrowings under the 2013 Revolving
Facility. The carrying value of the Term Loans on our consolidated balance
sheet is net of $2.4 million of unamortized debt issuance costs.
In June 2016, the Borrower entered into an Amendment (the “Amendment”)
to the 2014 7-Year Term Loan. The Amendment increased potential bor-
rowing under the 2014 7-Year Term Loan from $100.0 million to $250.0
million, and expanded the accordion feature of the 2014 7-Year Term Loan
from up to $200.0 million to up to $400.0 million. Among other things, the
Amendment lowered the interest rates in the applicable pricing grid and
extended the maturity date from January 7, 2021 to December 29, 2021.
Pursuant to the Amendment, amounts borrowed under the 2014 7-Year
Term Loan bear interest at a rate between 1.35% and 1.90% per annum,
depending on PREIT’s leverage, in excess of LIBOR, which is a reduction
from the former range of 1.80% to 2.35%.
In June 2015, the Borrower entered into an amendment to each of the
2014 Term Loans under which PREIT is required to maintain, on a consoli-
dated basis, minimum Unencumbered Debt Yield of 11.0%, versus 12.0%
previously, consistent with the amendment to the covenant in the 2013
Revolving Facility, and the provision of the 2015 5-Year Term Loan. The
cross-default provisions in the 2014 Term Loans were also amended to
add the 2015 5-Year Term Loan.
Subject to the terms of the Credit Agreements, the Borrower has the option
to increase the maximum amount available under the 2014 Term Loans,
through an accordion option (subject to certain conditions), in increments
of $5.0 million (with a minimum increase of $25.0 million), based on
Wells Fargo Bank’s ability to obtain increases in commitments from the
current lenders or from new lenders. The 2014 5-Year Term Loan may be
increased from $150.0 million to as much as $300.0 million, and the 2014
7-Year Term Loan may be increased from $200.0 million to as much as
$400.0 million, as set forth in the Amendment discussed above.
IDENTICAL COVENANTS AND COMMON PROVISIONS CONTAINED IN
THE CREDIT AGREEMENTS Each of the Credit Agreements contains cer-
tain affirmative and negative covenants and other provisions, which are
identical to those contained in the other Credit Agreements, and which are
described in detail below.
The 2015 5-Year Term Loan also contains an additional covenant that
prohibits us prior to receiving an investment grade credit rating, if any,
from allowing the amount of the Gross Asset Value attributable to assets
directly owned by PREIT, PREIT Associates, PRI and the guarantors to be
less than 95% of Gross Asset Value excluding assets owned by Excluded
Subsidiaries or Unconsolidated Affiliates.
Amounts borrowed under the Credit Agreements bear interest at the rate
specified below per annum, depending on PREIT’s leverage, in excess of
LIBOR, unless and until the Borrower receives an investment grade credit
rating and provides notice to the Administrative Agent (the “Rating Date”),
after which alternative rates would apply. In determining PREIT’s leverage
(the ratio of Total Liabilities to Gross Asset Value), the capitalization rate
used to calculate Gross Asset Value is 6.50% for each Property having
an average sales per square foot of more than $500 for the most recent
period of 12 consecutive months, and (b) 7.50% for any other Property.
The 2013 Revolving Facility is subject to a facility fee, which is currently
0.25%, depending on leverage, and is recorded in interest expense in the
consolidated statements of operations. In the event that we seek and obtain
an investment grade credit rating, alternative facility fees would apply.
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2017 ANNUAL REPORT
39
Level Ratio of Total Liabilities to Gross Asset Value
1
2
3
4
Less than 0.450 to 1.00
Equal to or greater than 0.450 to 1.00
but less than 0.500 to 1.00(1)
Equal to or greater than 0.500 to 1.00
but less than 0.550 to 1.00
Equal to or greater than 0.550 to 1.00
(1) The rate in effect at December 31, 2017.
Applicable Margin (above LIBOR)
2013
Revolving Facility
2014 7-Year
Term Loan
2014 5-Year
Term Loan
2015 5-Year
Term Loan
1.20%
1.35%
1.35%
1.35%
1.25%
1.30%
1.55%
1.45%
1.60%
1.90%
1.45%
1.45%
1.60%
1.90%
1.60%
1.90%
These covenants and restrictions limit PREIT’s ability to incur additional
indebtedness, grant liens on assets and enter into negative pledge agree-
ments, merge, consolidate or sell all or substantially all of its assets and
enter into certain transactions with affiliates. The Credit Agreements are
subject to customary events of default and are cross-defaulted with one
another. As of December 31, 2017, the Borrower was in compliance with
all such financial covenants.
PREIT and the subsidiaries of PREIT that either (1) account for more than
2.5% of adjusted Gross Asset Value (other than an Excluded Subsidiary),
(2) own or lease an Unencumbered Property, (3) own, directly or indirectly,
a subsidiary described in (2), or (4) with respect to the Term Loans, are
guarantors under the 2013 Revolving Facility, as amended, will serve as
guarantors for funds borrowed under the Credit Agreements. In the event
that we seek and obtain an investment grade credit rating, if any, PREIT
may request that a subsidiary guarantor be released, unless such guarantor
becomes obligated in respect of the debt of the Borrower or another sub-
sidiary or owns Unencumbered Property or incurs recourse debt.
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
Credit Agreements immediately due and payable, and the Commitments
of the lenders to make further loans under the 2013 Revolving Facility and
the 2014 Term Loans will terminate. Upon the occurrence of a voluntary or
involuntary bankruptcy proceeding of PREIT, PREIT Associates, PRI, any
Material Subsidiary, any subsidiary that owns or leases an Unencumbered
Property or certain other subsidiaries, all outstanding amounts will auto-
matically become immediately due and payable and the Commitments of
the lenders to make further loans will automatically terminate.
The Borrower may prepay any of the Credit Agreements at any time
without premium or penalty, subject to reimbursement obligations for the
lenders’ breakage costs for LIBOR borrowings. The Borrower must repay
the entire principal amount outstanding under the 2013 Revolving Facility
at the end of its term, as the term may be extended.
The Credit Agreements contain certain affirmative and negative covenants
that are identical, including, without limitation, requirements that PREIT
maintain, on a consolidated basis: (1) minimum Tangible Net Worth of
not less than 75% of the Company’s tangible net worth on December 31,
2012, plus 75% of the Net Proceeds of all Equity Issuances effected at
any time after December 31, 2012; (2) maximum ratio of Total Liabilities to
Gross Asset Value of 0.60:1, provided that it will not be a Default if the ratio
exceeds 0.60:1 but does not exceed 0.625:1, for more than two consec-
utive quarters on more than two occasions during the term; (3) minimum
ratio of Adjusted EBITDA to Fixed Charges of 1.50:1 (4) minimum
Unencumbered Debt Yield of 11.0%; (5) minimum Unencumbered NOI
to Unsecured Interest Expense of 1.75:1; (6) maximum ratio of Secured
Indebtedness to Gross Asset Value of 0.60:1; (7) maximum Investments
in unimproved real estate and predevelopment costs not in excess of
5.0% of Gross Asset Value; (8) maximum Investments in Persons other
than Subsidiaries, Consolidated Affiliates and Unconsolidated Affiliates not
in excess of 5.0% of Gross Asset Value; (9) maximum Mortgages in favor
of the Borrower or any other Subsidiary not in excess of 5.0% of Gross
Asset Value; (10) the aggregate value of the Investments and the other
items subject to the preceding clauses (7) through (9) not in excess of
10.0% of Gross Asset Value; (11) maximum Investments in Consolidation
Exempt Entities not in excess of 25.0% of Gross Asset Value; (12) max-
imum Projects Under Development not in excess of 15.0% of Gross
Asset Value; (13) the aggregate value of the Investments and the other
items subject to the preceding clauses (7) through (9) and (11) and (12)
not in excess of 35.0% of Gross Asset Value; (14) Distributions may not
exceed (A) with respect to our preferred shares, the amounts required by
the terms of the preferred shares, and (B) with respect to our common
shares, the greater of (i) 95.0% of Funds From Operations and (ii) 110%
of REIT taxable income for a fiscal year; and (15) PREIT may not permit
the amount of the Gross Asset Value attributable to assets directly owned
by PREIT, PREIT Associates, PRI and the guarantors to be less than 95%
of Gross Asset Value excluding assets owned by Excluded Subsidiaries or
Unconsolidated Affiliates.
(1) This balloon payments represents the principal balance of a mortgage loan that is secured
by Francis Scott Key Mall, in Frederick, Maryland, which was refinanced in January 2018
(see below).
The estimated fair values of our consolidated mortgage loans based on
year-end interest rates and market conditions at December 31, 2017 and
2016 are as follows:
2017 2016
(in millions of dollars)
Carrying
Value
Fair
Value
Carrying
Value
Fair
Value
Mortgage loans(1)
$ 1,056.1 $ 1,029.7 $ 1,222.9 $ 1,189.6
(1) The carrying value of consolidated mortgage loans has been reduced by unamortized
debt issuance costs of $3.4 million and $4.5 million as of December 31, 2017 and 2016,
respectively.
The consolidated mortgage loans contain various customary default pro-
visions. As of December 31, 2017, we were not in default on any of the
consolidated mortgage loans.
CONSOLIDATED MORTGAGE LOANS Our consolidated mortgage
loans, which are secured by 11 of our consolidated properties, are due
in installments over various terms extending to the year 2025. Eight of
these mortgage loans bear interest at fixed interest rates that range from
3.88% to 5.95% and had a weighted average interest rate of 4.28% at
December 31, 2017. Three of our mortgage loans bear interest at variable
rates and had a weighted average interest rate of 3.60% at December 31,
2017. The weighted average interest rate of all consolidated mortgage
loans was 4.12% at December 31, 2017. Mortgage loans for properties
owned by unconsolidated partnerships are accounted for in “Investments
in partnerships, at equity” and “Distributions in excess of partnership
investments,” and are not included in the table below.
The following table outlines the timing of principal payments and balloon
payments pursuant to the terms of our consolidated mortgage loans of our
consolidated properties as of December 31, 2017:
(in thousands of dollars)
Principal
For the Year Ending December 31, Amortization
Balloon
Payments
Total
2018
2019
2020
2021
2022
2023 and thereafter
Total principal
payments
Less: Unamortized
debt issuance costs
Carrying value of
mortgage notes payable
$ 18,487
19,517
19,791
19,162
14,163
18,705
$ 68,469 (1) $ 86,956
19,517
46,952
197,762
424,902
283,350
—
27,161
178,600
410,739
264,645
$ 109,825
$949,614 $1,059,439
3,355
$ 1,056,084
MORTGAGE LOAN ACTIVITY The following table presents the mortgage loans we have entered into or extended since January 1, 2016 relating to our
consolidated properties:
Financing Date
2018 Activity:
January
2016 Activity:
March
April
Property
Amount Financed
or Extended
(in millions of dollars)
Stated Interest Rate
Maturity
Francis Scott Key Mall(1)
$ 68.5
LIBOR plus 2.60%
January 2022
Viewmont Mall(2)
Woodland Mall(3)
9.0
130.0
LIBOR plus 2.35%
LIBOR plus 2.00%
March 2021
April 2021
(1) The $68.5 million mortgage loan’s maturity date was extended to January 2022, and has a one-year extension option that would further extend the maturity date to January 2023.
(2) The mortgage was increased by $9.0 million to $57.0 million, and the interest rate was lowered to LIBOR plus 2.35% and the maturity date was extended to March 2021.
(3) The proceeds from the new mortgage loan were used to pay down a portion of the Credit Facility borrowings that were used to repay the previous $141.2 million mortgage loan plus accrued
interest. Interest only payments.
OTHER MORTGAGE LOAN ACTIVITY In March 2017, we repaid a $150.6
million mortgage loan plus accrued interest secured by The Mall at Prince
Georges in Hyattsville, Maryland using $110.0 million from our 2013
Revolving Facility and the balance from available working capital.
In March 2016, we repaid a $32.8 million mortgage loan plus accrued
interest secured by Lycoming Mall in Pennsdale, Pennsylvania in connec-
tion with the March 2016 sale of the property using proceeds from the
sale and available working capital.
In March 2016, we repaid a $79.3 million mortgage loan plus accrued
interest secured by Valley Mall in Hagerstown, Maryland using $50.0
million from our 2013 Revolving Facility and the balance from available
working capital.
In March 2016, we repaid a $28.1 million mortgage loan plus accrued
interest secured by New River Valley Mall in Christiansburg, Virginia in
connection with the March 2016 sale of the property using proceeds from
the sale.
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2017 ANNUAL REPORT
41
5. Equity Offerings
PREFERRED SHARE OFFERINGS In January 2017, we issued 6,900,000
7.20% Series C Cumulative Redeemable Perpetual Preferred Shares (the
“Series C Preferred Shares”) in a public offering at $25.00 per share. We
received net proceeds from the offering of approximately $166.3 million after
deducting payment of the underwriting discount of $5.4 million ($0.7875
per Series C Preferred Share) and offering expenses of $0.8 million. We
used a portion of the net proceeds from this offering to repay all $117.0
million of then-outstanding borrowings under the 2013 Revolving Facility.
In September and October 2017, we issued an aggregate of 5,000,000
6.875% Series D Cumulative Redeemable Perpetual Preferred Shares
(the “Series D Preferred Shares”) in a public offering at $25.00 per share,
including 200,000 shares that were issued pursuant to the underwriter’s
exercise of an overallotment option. We received aggregate net proceeds
from the offering of approximately $120.5 million after deducting payment
of the underwriting discount of $4.0 million ($0.7875 per Series D Preferred
Share) and offering expenses of $0.5 million. We used the net proceeds
from the offering of our Series D Preferred Shares to redeem all of our then
outstanding 8.25% Series A Cumulative Redeemable Perpetual Preferred
Shares (the “Series A Preferred Shares”) and for general corporate purposes.
We may not redeem the Series C Preferred Shares and the Series D
Preferred Shares before January 27, 2022 and September 15, 2022,
respectively, except to preserve our status as a REIT or upon the occurrence
of a Change of Control, as defined in the Trust Agreement addendums
designating the Series C Preferred Shares and Series D Preferred Shares.
On and after January 27, 2022 for the Series C Preferred Shares and
September 15, 2022 for the Series D Preferred Shares, we may redeem
any or all of the Series C Preferred Shares or Series D Preferred Shares
at $25.00 per share plus any accrued and unpaid dividends. In addition,
upon the occurrence of a Change of Control, we may redeem any or all of
the Series C Preferred Shares or Series D Preferred Shares for cash within
120 days after the first date on which such Change of Control occurred, at
$25.00 per share plus any accrued and unpaid dividends. The Series C
Preferred Shares and Series D Preferred Shares have no stated maturity,
are not subject to any sinking fund or mandatory redemption provisions,
and will remain outstanding indefinitely unless we redeem or otherwise
repurchase them or they are converted.
PREFERRED SHARE REDEMPTION On October 12, 2017 (the
“Redemption Date”), the Company redeemed all 4,600,000 of its Series A
Preferred Shares remaining issued and outstanding as of the Redemption Date,
for $115.0 million (the redemption price of $25.00 per share) plus accrued
and unpaid dividends of $0.7 million (the amount equal to all accrued and
unpaid dividends on the Series A Preferred Shares (whether or not declared)
from September 15, 2017 up to but excluding the Redemption Date). The
Series A Preferred Shares were initially issued in April 2012. As a result of this
redemption, the $4.1 million excess of the redemption price over the carrying
amount of the Series A Preferred Shares was deducted from Net income (loss)
attributed to PREIT common shareholders in the fourth quarter of 2017.
6. Derivatives
In the normal course of business, we are exposed to financial market risks,
including interest rate risk on our interest bearing liabilities. We attempt to limit
these risks by following established risk management policies, procedures
and strategies, including the use of financial instruments such as derivatives.
We do not use financial instruments for trading or speculative purposes.
CASH FLOW HEDGES OF INTEREST RATE RISK Our outstanding deriv-
atives have been designated under applicable accounting authority as cash
flow hedges. The effective portion of changes in the fair value of deriva-
tives designated as, and that qualify as, cash flow hedges is recorded in
“Accumulated other comprehensive income (loss)” and is subsequently
reclassified into earnings in the period that the hedged forecasted transac-
tion affects earnings. To the extent these instruments are ineffective as cash
flow hedges, changes in the fair value of these instruments are recorded in
“Interest expense, net.” We recognize all derivatives at fair value as either
assets or liabilities in the accompanying consolidated balance sheets. Our
derivative assets are recorded in “Deferred costs and other assets” and our
derivative liabilities are recorded in “Fair value of derivative instruments.”
Amounts reported in “Accumulated other comprehensive income (loss)”
that are related to derivatives will be reclassified to “Interest expense, net”
as interest payments are made on our corresponding debt. During the
next twelve months, we estimate that $2.0 million will be reclassified as a
decrease to interest expense in connection with derivatives.
INTEREST RATE SWAPS As of December 31, 2017, we had entered
into 30 interest rate swap agreements with a weighted average interest
swap rate of 1.35% on a notional amount of $749.6 million maturing on
various dates through December 2021, and one forward starting interest
rate swap agreement with a base interest rate of 1.42% on a notional
amount of $48.0 million, which became effective starting January 2018
and will mature in February 2021. Also in January 2018, we entered into
an interest rate swap agreement with an interest swap rate of 2.41% on a
notional amount of $64.8 million with an effective date of February 1, 2018
and an expiration date of December 1, 2021.
We entered into these interest rate swap agreements in order to hedge the
interest payments associated with our issuances of variable interest rate
long term debt. We have assessed the effectiveness of these interest rate
swap agreements as hedges at inception and do so on a quarterly basis.
As of December 31, 2017, we considered these interest rate swap agree-
ments to be highly effective as cash flow hedges. The interest rate swap
agreements are net settled monthly.
In the years ended December 31, 2016 and 2015, we recorded net losses
on hedge ineffectiveness of $0.1 million and $0.5 million, respectively.
In 2016, in connection with the sale of, and repayment of, the mortgage
loan secured by Lycoming Mall, we recorded a net loss on hedge ineffec-
tiveness of $0.1 million.
Following our July 2014 repayment of the $25.8 million mortgage loan
secured by 801 Market Street, Philadelphia, Pennsylvania, we anticipated
that we would not have sufficient 1-month LIBOR based interest payments
to meet the entire swap notional amount related to two of our swaps, and we
estimated that this condition would exist until approximately March 2015,
when we planned to incur variable rate debt as part of the consideration for
Springfield Town Center. These swaps, with an aggregate notional amount
of $40.0 million, did not qualify for ongoing hedge accounting for the period
from July 2014 to March 2015 as a result of the unrealized forecasted trans-
actions. We recognized mark-to-market interest expense on these two swaps
of $0.5 million for the period from January 2015 to March 31, 2015.
Accumulated other comprehensive income (loss) as of December 31,
2017 includes a net loss of $0.7 million relating to forward-starting swaps
that we cash settled in prior years that are being amortized over 10 year
periods commencing on the closing dates of the debt instruments that are
associated with these settled swaps.
The following table summarizes the terms and estimated fair values of our interest rate swap derivative instruments at December 31, 2017 and 2016. The
notional values provide an indication of the extent of our involvement in these instruments, but do not represent exposure to credit, interest rate or market risks.
(in millions of dollars)
Notional Value
Interest Rate Swaps
$28.1
48.0
7.6
55.0
30.0
25.0
20.0
20.0
20.0
20.0
20.0
25.0
25.0
25.0
20.0
20.0
20.0
20.0
20.0
20.0
9.0
35.0
35.0
20.0
20.0
20.0
50.0
25.0
25.0
25.0
25.0
Forward Starting Swap
$48.0
Fair Value at
December 31, 2017 (1)
Fair Value at
December 31, 2016 (1)
Interest Rate
Effective Date
Maturity Date
1.38%
$ —
N/A
1.12%
$ — (0.1)
1.00%
—
—
1.12%
— (0.1)
1.78%
— (0.3)
0.3 0.70%
—
1.78%
— (0.2)
1.78%
— (0.2)
1.79%
— (0.2)
1.79%
— (0.2)
1.79%
— (0.2)
1.16%
0.1
0.2
1.16%
0.1
0.2
1.16%
0.1
0.2
1.16%
—
0.1
1.23%
0.2
0.4
1.23%
0.2
0.4
1.23%
0.2
0.4
1.23%
0.2
0.4
1.24%
0.2
0.4
1.19%
0.2
0.2
1.01%
0.9
1.1
1.02%
0.9
1.1
1.01%
0.5
0.6
0.5
0.6
1.02%
0.5 1.02%
0.6
1.75%
N/A
0.7
1.75%
N/A
0.3
1.75%
N/A
0.3
1.75%
N/A
0.3
1.75%
N/A
0.3
January 2, 2017
January 1, 2018
January 1, 2018
January 1, 2018
January 2, 2019
January 2, 2019
January 2, 2019
January 2, 2019
January 2, 2019
January 2, 2019
January 2, 2019
January 2, 2019
January 2, 2019
January 2, 2019
January 2, 2019
June 26, 2020
June 26, 2020
June 26, 2020
June 26, 2020
June 26, 2020
February 1, 2021
March 1, 2021
March 1, 2021
March 1, 2021
March 1, 2021
March 1, 2021
December 29, 2021
December 29, 2021
December 29, 2021
December 29, 2021
December 29, 2021
0.9
$ 9.7
N/A
$ 3.6
1.42%
January 2, 2018
February 1, 2021
(1) As of December 31, 2017 and December 31, 2016, derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy and we do not have any significant recurring fair value
measurements related to derivative instruments using significant unobservable inputs (Level 3).
The table below presents the effect of our derivative financial instruments on our consolidated statements of operations for the years ended December 31,
2017, 2016 and 2015:
(in millions of dollars)
Derivatives in cash flow hedging relationships:
Interest rate products
Gain (loss) recognized in Other Comprehensive
Income (Loss) on derivatives
Loss reclassified from Accumulated Other
For the Year Ended December 31,
2017
2016
Consolidated Statements of
Operations Location
2015
$ 4.0
$ 1.5
$ (2.4 )
N/A
Comprehensive Income (Loss) into income (effective portion)
2.3
5.1
5.0
Interest expense
Loss recognized in income on derivatives
(ineffective portion and amount excluded from effectiveness testing)
—
(0.1)
(0.5)
Interest expense
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2017 ANNUAL REPORT
43
CREDIT-RISK-RELATED CONTINGENT FEATURES We have agreements
with some of our derivative counterparties that contain a provision pursuant
to which, if our entity that originated such derivative instruments defaults
on any of its indebtedness, including default where repayment of the
indebtedness has not been accelerated by the lender, then we could also
be declared in default on our derivative obligations. As of December 31,
2017, we were not in default on any of our derivative obligations.
We have an agreement with a derivative counterparty that incorporates
the loan covenant provisions of our loan agreement with a lender affiliated
with the derivative counterparty. Failure to comply with the loan covenant
provisions would result in our being in default on any derivative instrument
obligations covered by the agreement.
As of December 31, 2017, the fair value of derivatives in a liability position,
which excludes accrued interest but includes any adjustment for nonperfor-
mance risk related to these agreements, was less than $0.1 million. If we had
breached any of the default provisions in these agreements as of December 31,
2017, we might have been required to settle our obligations under the agree-
ments at their termination value (including accrued interest) of less than $0.1
million. We had not breached any of these provisions as of December 31, 2017.
7. Benefit Plans
401(k) PLAN We maintain a 401(k) Plan (the “401(k) Plan”) in which
substantially all of our employees are eligible to participate. The 401(k)
Plan permits eligible participants, as defined in the 401(k) Plan agree-
ment, to defer up to 30% of their compensation, and we, at our discretion,
may match a specified percentage of the employees’ contributions. Our
and our employees’ contributions are fully vested, as defined in the 401(k)
Plan agreement. Our contributions to the 401(k) Plan were $0.9 million,
$1.0 million and $1.1 million for the years ended December 31, 2017,
2016 and 2015 respectively.
SUPPLEMENTAL RETIREMENT PLANS We maintain Supplemental
Retirement Plans (the “Supplemental Plans”) covering certain senior man-
agement employees. Expenses under the provisions of the Supplemental
Plans were $0.3 million, $0.4 million, and $0.4 million for the years ended
December 31, 2017, 2016 and 2015, respectively.
EMPLOYEE SHARE PURCHASE PLAN We maintain a share purchase
plan through which our employees may purchase common shares at a 15%
discount to the fair market value (as defined therein). In the years ended
December 31, 2017, 2016 and 2015, approximately 38,000, 24,000 and
25,000 shares, respectively, were purchased for total consideration of $0.4
million, $0.5 million and $0.5 million for the years ended December 31,
2017, 2016 and 2015, respectively. We recorded expense of $0.1 million in
each of the years ended December 31, 2017, 2016 and 2015, related to the
share purchase plan.
8. Share Based Compensation
SHARE BASED COMPENSATION PLANS As of December 31, 2017, we
make share based compensation awards using our Second Amended and
Restated 2003 Equity Incentive Plan, which is a share based compensa-
tion plan that was approved by our shareholders in 2012 (the “2003 Equity
Incentive Plan”). Previously, we maintained five other plans pursuant to
which we granted equity awards in various forms. Certain restricted shares
and certain options granted under these previous plans remain subject to
restrictions or remain outstanding and exercisable, respectively. In addi-
tion, we previously maintained two plans pursuant to which we granted
options to our non-employee trustees.
We recognize expense in connection with share based awards to
employees and trustees by valuing all share based awards at their fair
value on the date of grant, and then expensing them over the applicable
vesting period.
For the years ended December 31, 2017, 2016 and 2015, we recorded
aggregate compensation expense for share based awards of $5.7 mil-
lion (including a net reversal of $0.2 million of amortization relating to
employee separation), $6.0 million (including $0.3 million of accelerated
amortization relating to employee separation) and $6.3 million, (including
$0.2 million of accelerated amortization related to employee separation),
respectively, in connection with the equity incentive programs described
below. There was no income tax benefit recognized in the income state-
ment for share based compensation arrangements. For the years ended
December 31, 2017, 2016 and 2015, we capitalized compensation costs
related to share based awards of $0.1 million, $0.2 million, and $0.2 mil-
lion, respectively.
2003 EQUITY INCENTIVE PLAN Subject to any future adjustments for
share splits and similar events, the total remaining number of common
shares that may be issued to employees or trustees under our 2003 Equity
Incentive Plan (pursuant to options, restricted shares, shares issuable pur-
suant to current or future RSU Programs, or otherwise) was 677,384 as of
December 31, 2017. The share based awards described in this footnote
were all made under the 2003 Equity Incentive Plan.
RESTRICTED SHARES The aggregate fair value of the restricted shares
that we granted to our employees in 2017, 2016 and 2015 was $4.0 mil-
lion, $4.3 million and $4.0 million, respectively. As of December 31, 2017,
there was $4.0 million of total unrecognized compensation cost related
to unvested share based compensation arrangements granted under the
2003 Equity Incentive Plan. The cost is expected to be recognized over a
weighted average period of 0.8 years. The total fair value of shares vested
during the years ended December 31, 2017, 2016 and 2015 was $3.9
million, $3.6 million and $3.7 million, respectively.
A summary of the status of our unvested restricted shares as of
December 31, 2017 and changes during the years ended December 31,
2017, 2016 and 2015 is presented below:
Shares
Weighted Average
Grant Date Fair Value
Unvested at January 1, 2015
Shares granted
Shares vested
Shares forfeited
December 31, 2015
Shares granted
Shares vested
Shares forfeited
December 31, 2016
Shares granted
Shares vested
Shares forfeited
December 31, 2017
438,049
195,255
(282,125 )
(8,849 )
342,330
264,989
(206,480 )
(14,427 )
386,412
336,296
(238,859 )
(34,427 )
449,422
$ 19.11
23.38
17.12
21.32
23.13
19.27
20.77
19.60
21.88
14.95
19.56
18.00
$ 16.85
The aggregate fair values of the RSU awards in 2017, 2016 and 2015 were
determined using a Monte Carlo simulation probabilistic valuation model,
and are presented in the table below. The table also sets forth the assump-
tions used in the Monte Carlo simulations used to determine the aggregate
fair values of the RSU awards in 2017, 2016 and 2015 by grant date:
RSUs and assumptions by Grant Date
(in thousands of dollars,
except per share data)
February 27 , February 23 , February 24 ,
2017
2016
2015
RSUs granted
Aggregate fair value of shares
granted
Weighted average fair value
per share
Volatility
Risk free interest rate
PREIT Stock Beta
compared to Dow Jones
US Real Estate Index
140,490 127,421 94,014
$ 1,620 $ 1,914 $ 2,074
$ 11.53 $ 15.02 $ 22.06
25.8 %
1.42 %
25.3%
0.90%
25.3%
0.97%
0.706 1.184 1.221
Compensation cost relating to the RSU awards is expensed ratably over the
applicable three year vesting period. We recorded $1.3 million (including
a reversal of $0.4 million of amortization relating to employee separation),
$1.8 million (including $0.3 million of accelerated amortization relating to
employee separation), and $1.8 million of compensation expense related
to the RSU Programs for the years ended December 31, 2017, 2016 and
2015, respectively. We will record future aggregate compensation expense
of $1.6 million related to the existing awards under the RSU Programs (not
including the effect of the 2018 RSUs described below, the valuation for
which has not yet been determined).
For the years ended December 31, 2017 and 2016, no shares were issued
from the 2015-2017 and 2014-2016 RSU programs because the required
criteria were not met. For the year ended December 31, 2015, the number
of shares issued to employees resulting from the measurement of the
2013-2015 RSU program was 134,733.
On January 19, 2018, the Board of Trustees established the 2018-2020
RSU program, and the Company granted 231,227 RSUs to employees
(the “2018 RSUs”) with an aggregate fair value of $3.1 million. The 2018
RSUs have a three-year measurement period that ends on December
31, 2020 or a shorter period ending upon the change in control of the
Company.
RESTRICTED SHARES SUBJECT TO TIME BASED VESTING In 2017,
2016 and 2015, we made grants of restricted shares subject to time based
vesting. The awarded shares vest over periods of one to three years, typically
in equal annual installments, provided the recipient is our employee on the
vesting date. For all grantees, the shares generally vest immediately upon
death or disability. Recipients are entitled to receive an amount equal to
the dividends on the shares prior to vesting. We granted a total of 245,950,
230,429 and 169,131 restricted shares subject to time based vesting
to our employees in 2017, 2016 and 2015, respectively. The weighted
average grant date fair values of time based restricted shares was $16.43
per share in 2017, $18.67 per share in 2016 and $23.55 per share in
2015. Compensation cost relating to time based restricted share awards is
recorded ratably over the respective vesting periods. We recorded $3.9 mil-
lion (including $0.2 million of accelerated amortization relating to employee
separation), $3.3 million (including $0.2 million of accelerated amortization
relating to employee separation) and $3.9 million (including $0.2 million
of accelerated amortization relating to employee separation) of compensa-
tion expense related to time based restricted shares for the years ended
December 31, 2017, 2016 and 2015, respectively.
On January 19, 2018, the Company granted 392,697 time-based
restricted shares to employees with a grant date fair value of $4.3 million
that vest over periods of two to three years in annual installments.
We will record future compensation expense in connection with the
vesting of existing time based restricted share awards to employees as
follows (including restricted shares issued in 2018):
(in thousands of dollars)
For the Year Ending December 31,
Future Compensation
Expense
2018
2019
2020
2021
Total
$ 3,960
2,776
1,420
151
$ 8,307
RESTRICTED SHARE UNIT PROGRAMS In 2017, 2016, 2015, 2014 and
2013, our Board of Trustees established the 2017-2019 RSU program,
2016-2018 RSU program, 2015-2017 RSU Program, the 2014-2016
RSU Program, and the 2013-2015 RSU Program, respectively (the “RSU
Programs”).
Under the RSU Programs, we may make awards in the form of market
based performance-contingent restricted share units, or RSUs. The RSUs
represent the right to earn common shares in the future depending on
our performance in terms of total return to shareholders (as defined in
the RSU Programs) for applicable three year periods or a shorter period
ending upon the date of a change in control of the Company (each, a
“Measurement Period”) relative to the total return to shareholders, as
defined, for the applicable Measurement Period of companies comprising
an index of real estate investment trusts (the “Index REITs”). Dividends
are deemed credited to the participants’ RSU accounts and are applied
to “acquire” more RSUs for the account of the participants at the 20-day
average price per common share ending on the dividend payment date. If
earned, awards will be paid in common shares in an amount equal to the
applicable percentage of the number of RSUs in the participant’s account
at the end of the applicable Measurement Period.
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2017 ANNUAL REPORT
45
RESTRICTED SHARES AWARDED TO NON-EMPLOYEE TRUSTEES As
part of the compensation we pay to our non-employee trustees for their
service, we grant restricted shares subject to time based vesting. The
awarded shares vest over a one-year period. These annual awards are
made under the 2003 Equity Incentive Plan. We granted a total of 64,358,
34,560, and 26,124 restricted shares subject to time based vesting to
our non-employee trustees in 2017, 2016, and 2015, respectively. The
aggregate fair value of the restricted shares in 2017, 2016 and 2015 was
$0.7 million, $0.8 million and $0.6 million, respectively. We recorded $0.5
million, $0.6 million and $0.6 million of compensation expense related
to time based vesting of non-employee trustee restricted share awards
in 2017, 2016 and 2015, respectively. As of December 31, 2017, there
was $0.6 million of total unrecognized compensation expense related to
unvested restricted share grants to non-employee trustees. The total fair
value of shares granted to non-employee trustees that vested was $0.8
million, $0.8 million, and $1.1 million for the years ended December 31,
2017, 2016 and 2015, respectively. In 2018, we will record compensation
expense of $0.6 million in connection with the vesting of existing non-em-
ployee trustee restricted share awards.
OPTIONS OUTSTANDING Options, when granted, are typically granted
with an exercise price equal to the fair market value of the underlying
shares on the date of the grant. The options vest and are exercisable over
periods determined by us, but in no event later than ten years from the
grant date. We have six plans under which we have historically granted
options. We have not granted any options to our employees since 2003.
From 2003 to 2013, we only made option grants to non-employee trustees
on the date they became trustees in accordance with past practice (under
the 2003 Equity Incentive Plan). No options were granted to non-em-
ployee trustees since 2013. In 2013, the Board of Trustees determined
that it would no longer grant options to new non-employee trustees. The
following table presents the changes in the number of options outstanding
from January 1, 2015 through December 31, 2017:
Options outstanding at January 1, 2015
15,000
Options forfeited (weighted average exercise price of $38.00)
(5,000)
Options outstanding at December 31, 2015
Options forfeited
10,000
—
Options outstanding at December 31, 2016
Options forfeited
10,000
—
Options outstanding at December 31, 2017(1)
10,000
Outstanding exercisable and unexercisable options 10,000
The following table summarizes information relating to all options out-
standing as of December 31, 2017:
Options Outstanding and Exercisable as of
December 31, 2017
Exercise Price
(Per Share)
$ 12.87
$ 20.40
Weighted Average
Remaining
Life (Years)
4.4
5.3
Number of
Shares
5,000
5,000
9. Leases
AS LESSOR Our retail properties are leased to tenants under operating
leases with various expiration dates ranging through 2037. Future min-
imum rent under noncancelable operating leases with terms greater than
one year at our consolidated properties is as follows:
(in thousands of dollars)
For the Year Ending December 31,
2018
2019
2020
2021
2022
2023 and thereafter
$ 191,313
172,239
150,072
131,732
114,916
364,705
$ 1,124,977
The total future minimum rent as presented does not include amounts that
may be received as tenant reimbursements for certain operating costs or
contingent amounts that may be received as percentage rent.
AS LESSEE We have operating leases for our corporate office space
(see note 10) and for various computer, office and mall equipment.
Furthermore, we are the lessee under third-party ground leases for por-
tions of the land at Springfield Town Center and at Plymouth Meeting Mall.
Total amounts expensed relating to such leases were $2.5 million, $2.4
million and $2.5 million for the years ended December 31, 2017, 2016
and 2015, respectively. We account for ground rent and operating lease
expense on a straight line basis. Minimum future lease payments due in
each of the next five years and thereafter are as follows:
Average exercise price per share
$ 16.63
Aggregate exercise price(2)
$ 166
(in thousands of dollars)
For the Year Ending December 31,
Intrinsic value of options outstanding(2)
—
(1) The weighted average remaining contractual life of these outstanding options is 4.86
years (weighted average exercise price of $16.63 per share and an aggregate exercise
price of $0.2 million).
(2) Amounts in thousands of dollars.
2018
2019
2020
2021
2022
2023 and thereafter
Operating
Leases
$ 2,075
1,762
346
149
15
—
Ground
Leases
$ 1,021
1,184
1,384
1,584
1,584
42,300
$ 4,347
$ 49,057
10. Related Party Transactions
GENERAL In 2016 and 2015, we provided management, leasing and
development services for properties owned by partnerships and other
entities in which certain of our officers or current or former trustees or
members of their immediate family and affiliated entities have indirect
ownership interests. As of December 31, 2016, we no longer manage any
of these properties. Total revenue earned by PRI for such services was
$0.3 million and $0.8 million for the years ended December 31, 2016 and
2015, respectively.
OFFICE LEASE We lease our principal executive offices from Bellevue
Associates, an entity that is owned by Ronald Rubin, one of our trustees,
collectively with members of his immediate family and affiliated entities.
Total rent expense under this lease was $1.3 million, $1.4 million and
$1.3 million for the years ended December 31, 2017, 2016 and 2015,
respectively.
SPRINGFIELD PARK DISPOSITION As disclosed in note 3, we sold our
entire 50% interest in Springfield Park shopping center in Springfield,
Pennsylvania in July 2015. The buyer, Rubin Retail Acquisitions, L.P., is
an entity controlled by Ronald Rubin, a Trustee of PREIT. In accordance
with PREIT’s Related Party Transactions Policy, a Special Committee con-
sisting exclusively of independent members of PREIT’s Board of Trustees
considered and approved the terms of the transaction. The disinterested
members of PREIT’s Board of Trustees also approved the transaction.
11. Commitments and Contingencies
CONTRACTUAL OBLIGATIONS As of December 31, 2017, we had
unaccrued contractual and other commitments related to our capital
improvement projects and development projects of $110.4 million in the
form of tenant allowances and contracts with general service providers and
other professional service providers. In addition, our operating partner-
ship, PREIT Associates, has jointly and severally guaranteed the obligations
of the joint venture we formed with Macerich to develop Fashion District
Philadelphia to commence and complete a comprehensive redevelopment
of that property costing not less than $300.0 million within 48 months
after commencement of construction, which was March 14, 2016. As of
December 31, 2017, we expect to meet this obligation.
EMPLOYMENT AGREEMENTS Two officers of the Company currently
have employment agreements with terms that renew automatically each
year for additional one-year terms. These employment agreements pro-
vided for aggregate base compensation for the year ended December 31,
2017 of $1.2 million, subject to increases as approved by the Executive
Compensation and Human Resources Committee of our Board of Trustees
in future years, as well as additional incentive compensation.
PROVISION FOR EMPLOYEE SEPARATION EXPENSE We recorded $1.3
million, $1.4 million and $2.1 million of employee separation expense in
2017, 2016 and 2015, respectively, in connection with the termination of
certain employees. As of December 31, 2017, $1.1 million of these amounts
were accrued and unpaid.
OTHER In 2015, in connection with the acquisition of Springfield Town
Center in Springfield, Virginia, we recorded a contingent liability representing
the estimated fair value of additional consideration that the seller would
potentially be eligible to receive (the “Earnout”). As of December 31, 2015,
the estimated fair value of the Earnout was $8.6 million. In September 2016,
based on revised leasing assumptions and other factors, we revised our esti-
mate and determined that the entire contingent liability associated with the
Earnout should be eliminated. The change in the estimated fair value of this
contingent liability is recorded as a component of depreciation and amorti-
zation expense in the accompanying consolidated statement of operations.
LEGAL ACTIONS In the normal course of business, we have and might
become involved in legal actions relating to the ownership and operation of
our properties and the properties we manage for third parties. In manage-
ment’s opinion, the resolutions of any such pending legal actions are not
expected to have a material adverse effect on our consolidated financial
position or results of operations.
ENVIRONMENTAL We are aware of certain environmental matters at some
of our properties. We have, in the past, performed remediation of such envi-
ronmental matters, and are not aware of any significant remaining potential
liability relating to these environmental matters. We might be required in the
future to perform testing relating to these matters. We do not expect these
matters to have any significant impact on our liquidity or results of opera-
tions. However, we can provide no assurance that the amounts reserved will
be adequate to cover further environmental costs. We have insurance cov-
erage for certain environmental claims up to $25.0 million per occurrence
and up to $25.0 million in the aggregate.
TAX PROTECTION AGREEMENTS In connection with the acquisition
of Springfield Town Center on March 31, 2015, PREIT Associates, L.P.
agreed to provide tax protection to Vornado Realty, L.P. (“VRLP”) in the
event of the future taxable sale or disposition of the property. The tax
protection is in an amount equal to VRLP’s pre-existing tax protection
to Meshulam Riklis (“MR”), the original contributor of the property, plus
documented out-of-pocket reasonable costs and expenses. Tax protec-
tion ends when VRLP’s liability under the MR tax protection agreement
ceases, which will be either (a) upon the death of MR or (b) upon the
execution of an amendment releasing VRLP from any liability to MR in the
event of a sale or disposition of the property.
There were no other tax protection agreements in effect as of December
31, 2017.
12. Historic Tax Credits
In the second quarter of 2012, we closed a transaction with a Counterparty
(the “Counterparty”) related to the historic rehabilitation of an office
building located at 801 Market Street in Philadelphia, Pennsylvania (the
“Project”). The Project has two stages of development. The Counterparty
contributed a total of $5.5 million of equity to the first stage of the project
through December 31, 2013, and $5.8 million to the second stage of the
project through September 30, 2014, and we recorded these contributions
in “Accrued expenses and other liabilities” as of December 31, 2014. In
exchange for its contributions into the Project, the Counterparty received
substantially all of the historic rehabilitation tax credits associated with the
Project as a distribution. The Counterparty does not have a material interest
in the underlying economics of the Project. The transaction also includes a
put/call option whereby we might be obligated or entitled to repurchase the
Counterparty’s ownership interest in the Project at a stated value of $1.7
million. We believe that the put option will be exercised by the Counterparty,
and an amount attributed to that option is included in the recorded balance
of “Accrued expenses and other liabilities.”
Based on the contractual arrangements that obligate us to deliver tax
credits and provide other guarantees to the Counterparty and that entitle
us, through fee arrangements, to receive substantially all available cash flow
from the Project, we concluded that the Project should be consolidated. We
also concluded that capital contributions received from the Counterparty
are, in substance, consideration that we received in exchange for the put
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2017 ANNUAL REPORT
47
option and our obligation to deliver tax credits to the Counterparty. The
Counterparty’s contributions, other than the amounts allocated to the put
option, are classified as “Accrued expenses and other liabilities” and rec-
ognized as “Other income” in the consolidated financial statements as our
obligation to deliver tax credits is relieved.
The tax credits are subject to a five year credit recapture period, as defined
in the Internal Revenue Code of 1986, as amended, beginning one year
after the completion of the Project, of which the first stage was completed
in the second quarter of 2012, and the second stage was completed in the
second quarter of 2013. Our obligation to the Counterparty with respect to
the tax credits is ratably relieved annually in the third quarter of each year,
upon the expiration of each portion of the recapture period and the satis-
faction of other revenue recognition criteria. In each of the third quarters
of 2017, 2016 and 2015, we recognized $0.9 million, related to the fifth
(and final), fourth and third recapture periods of the first stage, and $1.0
13. Summary of Quarterly Results (Unaudited)
million $1.0 million and $1.2 million and $1.0 million, respectively, related
to the fourth, third and second recapture periods of the second stage, of
the contribution received from the Counterparty, as “Other income” in the
consolidated statements of operations. We also recorded $0.2 million, $0.2
million and $0.3 million of priority returns earned by the Counterparty during
each of the third quarters 2017, 2016 and 2015, respectively.
In aggregate, we recorded net income of $1.8 million to “Other income”
in each of the consolidated statements of operations in connection with
the Project in 2017, 2016 and 2015, respectively. Pursuant to terms
customarily found in such agreements, we have agreed to indemnify the
Counterparty for its contributions, penalties and interest in the event all or
a portion of the historic tax credits are disallowed.
The following presents a summary of the unaudited quarterly financial information for the years ended December 31, 2017 and 2016:
(in thousands of dollars, except per share amounts)
For the Year Ended December 31, 2017
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter (1)
Total
Total revenue
Net (loss) income(2)(3)
Net (loss attributable) income available to PREIT(2)(3)
Basic and diluted (loss) earnings per share
$ 89,264
(486 )
(434 )
(0.10 )
$ 89,250
(53,277 )
(47,608 )
(0.79 )
$ 89,211
12,300
10,995
0.05
$99,765
8,615
7,703
(0.05 )
$ 347,490
(32,848 )
(29,344 )
(0.89 )
(in thousands of dollars, except per share amounts)
For the Year Ended December 31, 2016
Total revenue
Net income (loss)(2)(3)
Net income (loss) attributable to PREIT(3)
Basic and diluted (loss) per share
1st Quarte r
2nd Quarter
3rd Quarter
4th Quarter (1)
Total
$ 101,972
1,929
1,721
(0.03 )
$ 94,253
9,169
8,187
0.06
$ 98,860
2,916
2,604
(0.02 )
$ 104,861
(26,727 )
(23,860 )
(0.40 )
$ 399,946
(12,713 )
(11,348 )
(0.40 )
(1) Fourth Quarter revenue includes a significant portion of annual percentage rent as most percentage rent minimum sales levels are met in the fourth quarter.
(2) Includes impairment losses of $53.9 million (2nd Quarter 2017), $1.8 million (3rd Quarter 2017), $0.1 million (4th Quarter 2017), $0.6 million (1st Quarter 2016), $14.1 million (2nd Quarter
2016), $9.9 million (3rd Quarter 2016) and $38.0 million (4th Quarter 2016).
(3) Includes gains on sales of interests in real estate by equity method investee of $6.7 million (3rd Quarter 2017), adjustment to gain of equity method investee of $0.2 million (4th Quarter 2017),
gains on sale of interests in real estate of $2.0 million (1st Quarter 2016), $20.9 million (2nd Quarter 2016) and gains on sales of non operating real estate of $0.8 million (4th Quarter 2017).
MANAGEMENT’S REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Management of Pennsylvania Real Estate Investment Trust (“us” or the
“Company”) is responsible for establishing and maintaining adequate
internal control over financial reporting. As defined in the rules of the
Securities and Exchange Commission, internal control over financial
reporting is a process designed by, or under the supervision of, our prin-
cipal executive and principal financial officers and effected by our Board of
Trustees, management and other personnel, to provide reasonable assur-
ance regarding the reliability of financial reporting and the preparation of
consolidated financial statements for external purposes in accordance
with U.S. generally accepted accounting principles.
Our internal control over financial reporting includes those policies and
procedures that:
(1) Pertain to the maintenance of records that, in reasonable detail, accu-
rately and fairly reflect the Company’s transactions and the dispositions
of assets of the Company;
(2) Provide reasonable assurance that transactions are recorded as nec-
essary to permit preparation of consolidated financial statements in
accordance with generally accepted accounting principles, and that
receipts and expenditures of the Company are being made only in
accordance with authorizations of the Company’s management and
trustees; and
(3) Provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company’s assets that
could have a material effect on the consolidated financial statements.
Because of its inherent limitations, a system of internal control over finan-
cial reporting can provide only reasonable assurance with respect to
financial statement preparation and presentation and may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inade-
quate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In connection with the preparation of the Company’s annual consolidated
financial statements, management has conducted an assessment of the
effectiveness of our internal control over financial reporting based on the
framework set forth in Internal Control—Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Management’s assessment included an evaluation
of the design of the Company’s internal control over financial reporting
and testing of the operational effectiveness of those controls. Based on
this evaluation, we have concluded that, as of December 31, 2017, our
internal control over financial reporting was effective to provide reasonable
assurance regarding the reliability of financial reporting and the prepara-
tion of financial statements for external purposes in accordance with U.S.
generally accepted accounting principles.
Our independent registered public accounting firm, KPMG LLP, inde-
pendently assessed the effectiveness of the Company’s internal control
over financial reporting. KPMG LLP has issued a report on the effective-
ness of internal control over financial reporting that is included on page
50 in this report.
To the Shareholders and Board of Trustees
Pennsylvania Real Estate Investment Trust:
OPINION ON THE CONSOLIDATED FINANCIAL STATEMENTS We have
audited the accompanying consolidated balance sheets of Pennsylvania
Real Estate Investment Trust and subsidiaries (the “Company”) as of
December 31, 2017 and 2016, the related consolidated statements of
operations, comprehensive income, equity, and cash flows for each of
the years in the three-year period ended December 31, 2017, and the
related notes (collectively, the “consolidated financial statements”). In our
opinion, the consolidated financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 2017
and 2016, and the results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 2017, in confor-
mity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States) (“PCAOB”),
the Company’s internal control over financial reporting as of December
31, 2017, based on criteria established in Internal Control - Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations
of the Treadway Commission, and our report dated February 16, 2018
expressed an unqualified opinion on the effectiveness of the Company’s
internal control over financial reporting.
BASIS FOR OPINION These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to
express an opinion on these consolidated financial statements based on
our audits. We are a public accounting firm registered with the PCAOB
and are required to be independent with respect to the Company in accor-
dance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial state-
ments are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of mate-
rial misstatement of the consolidated financial statements, whether due
to error or fraud, and performing procedures that respond to those risks.
Such procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the consolidated financial statements. Our
audits also included evaluating the accounting principles used and signif-
icant estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements. We believe that our
audits provide a reasonable basis for our opinion.
KPMG LLP
We have served as the Company’s auditor since 2002.
Philadelphia, Pennsylvania
February 16, 2018
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2017 ANNUAL REPORT
49
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
DEFINITION AND LIMITATIONS OF INTERNAL CONTROL OVER
FINANCIAL REPORTING A company’s internal control over financial
reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial state-
ments for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the mainte-
nance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) pro-
vide reasonable assurance that transactions are recorded as necessary
to permit preparation of financial statements in accordance with gener-
ally accepted accounting principles, and that receipts and expenditures
of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reason-
able assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have
a material effect on the financial statements. Because of its inherent lim-
itations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
KPMG LLP
Philadelphia, Pennsylvania
February 16, 2018
To the Shareholders and Board of Trustees
Pennsylvania Real Estate Investment Trust:
OPINION ON INTERNAL CONTROL OVER FINANCIAL REPORTING
We have audited Pennsylvania Real Estate Investment Trust and
Subsidiaries’ (the “Company”) internal control over financial reporting as
of December 31, 2017, based on criteria established in Internal Control
- Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission. In our opinion, the Company
maintained, in all material respects, effective internal control over finan-
cial reporting as of December 31, 2017, based on criteria established in
Internal Control - Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States) (“PCAOB”), the
consolidated balance sheets of the Company as of December 31, 2017
and 2016, the related consolidated statements of operations, comprehen-
sive income, equity, and cash flows for each of the years in the three-year
period ended December 31, 2017, and the related notes (collectively, the
“consolidated financial statements”), and our report dated February 16,
2018 expressed an unqualified opinion on those consolidated financial
statements.
BASIS FOR OPINION The Company’s management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s Report on Internal Control
over Financial Reporting. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on our audit. We
are a public accounting firm registered with the PCAOB and are required
to be independent with respect to the Company in accordance with the
U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to obtain rea-
sonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit of internal
control over financial reporting included obtaining an understanding of
internal control over financial reporting, assessing the risk that a mate-
rial weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit
also included performing such other procedures as we considered neces-
sary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
The following analysis of our consolidated financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and the notes thereto included elsewhere in this report.
Overview
Pennsylvania Real Estate Investment Trust, a Pennsylvania business trust
founded in 1960 and one of the first equity real estate investment trusts
(“REITs”) in the United States, has a primary investment focus on retail
shopping malls located in the eastern half of the United States, primarily
in the Mid-Atlantic region.
We currently own interests in 29 retail properties, of which 25 are operating
properties and four are development or redevelopment properties. The 25
operating properties include 21 shopping malls and four other retail proper-
ties, have a total of 20.2 million square feet and are located in nine states.
We and partnerships in which we hold an interest own 15.5 million square
feet at these properties (excluding space owned by anchors or third parties).
There are 19 operating retail properties in our portfolio that we consoli-
date for financial reporting purposes. These consolidated properties have
a total of 16.0 million square feet, of which we own 12.6 million square
feet. The six operating retail properties that are owned by unconsolidated
partnerships with third parties have a total of 4.1 million square feet, of
which 2.8 million square feet are owned by such partnerships. “Same
Store” properties are properties that have been owned for the full periods
presented and exclude properties acquired or disposed of or under rede-
velopment during the periods presented.
We have one property under redevelopment classified as “retail” (redevel-
opment of The Gallery at Market East into Fashion District Philadelphia,
formerly referred to as Fashion Outlets of Philadelphia). This redevelop-
ment is expected to open in 2018 and stabilize in 2020. We have three
properties in our portfolio that are classified as under development, how-
ever we do not currently have any activity occurring at these properties.
Our primary business is owning and operating retail shopping malls, which
we do primarily through our operating partnership, PREIT Associates, L.P.
(“PREIT Associates” or the “Operating Partnership”). We provide man-
agement, leasing and real estate development services through PREIT
Services, LLC (“PREIT Services”), which generally develops and manages
properties that we consolidate for financial reporting purposes, and PREIT-
RUBIN, Inc. (“PRI”), which generally develops and manages properties
that we do not consolidate for financial reporting purposes, including prop-
erties owned by partnerships in which we own an interest, 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 pro-
ducing 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 $20.1 million to a net loss of $32.8 million for
the year ended December 31, 2017 from a net loss of $12.7 million for
the year ended December 31, 2016. The change in our 2017 results of
operations was primarily due to gains from real estate sales of $23.0 mil-
lion in 2016, as well as a $18.2 million decrease in non same store net
operating income due to property sales in 2016 and 2017. These factors
were partially offset by a $12.3 million decrease in interest expense and a
$6.8 million decrease in impairment of assets.
We evaluate operating results and allocate resources on a proper-
ty-by-property basis, and do not distinguish or evaluate our consolidated
operations on a geographic basis. Due to the nature of our operating prop-
erties, which involve retail shopping, we have concluded that our individual
properties have similar economic characteristics and meet all other aggre-
gation criteria. Accordingly, we have aggregated our individual properties
into one reportable segment. In addition, no single tenant accounts for
10% or more of our consolidated revenue, and none of our properties are
located outside the United States.
We hold our interest in our portfolio of properties through the Operating
Partnership. We are the sole general partner of the Operating Partnership
and, as of December 31, 2017, held a 89.4% controlling interest in the
Operating Partnership, and consolidated it for reporting purposes. We
hold our investments in six of the 25 operating retail properties and two
of the four development and redevelopment properties in our portfolio
through unconsolidated partnerships with third parties in which we own a
25% to 50% interest.
ACQUISITIONS AND DISPOSITIONS See note 2 to our consolidated
financial statements for a description of our dispositions and acquisition in
2017, 2016 and 2015.
CURRENT ECONOMIC CONDITIONS AND OUR NEAR TERM CAPITAL
NEEDS Conditions in the economy have caused fluctuations and variations
in business and consumer confidence, retail sales, and consumer spending
on retail goods. Further, traditional mall tenants, including department
store anchors and smaller format retail tenants face significant challenges
resulting from changing consumer expectations, the convenience of e-com-
merce shopping, competition from fast fashion retailers, the expansion of
outlet centers, and declining mall traffic, among other factors. In recent
years, there has been an increased level of tenant bankruptcies and store
closings by tenants who have been significantly impacted by these factors.
50
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2017 ANNUAL REPORT
51
The table below sets forth information related to our tenants in bankruptcy for our consolidated and unconsolidated properties (excluding tenants in bank-
ruptcy at sold properties):
Pre-bankruptcy
Units Closed
Year
2017
Consolidated properties
Unconsolidated properties
Total
2016
Consolidated properties
Unconsolidated properties
Total
Number of
Tenants(1)
Number of
locations
impacted
PREIT’s Share of
Annualized
Gross Rent(3)
(in thousands)
GLA(2)
Number of
locations
closed
PREIT’s Share of
Annualized
Gross Rent(3)
16
9
18
7
6
9
75
16
91
38
10
48
341,701
191,538
$ 10,837.3
2,103.1
533,239
$ 12,940.4
137,111
86,012
$ 6,738.7
1,166.9
223,123
$ 7,905.6
19
7
26
20
4
24
95,812
82,713
$ 3,327.6
974.3
178,525
$ 4,301.9
73,011
64,809
$ 3,181.5
471.4
137,820
$ 3,652.9
(1)Total represents unique tenants.
(2) Gross Leasable Are Ana (“GLA”) in square feet.
(3) Includes our share of tenant gross rent from partnership properties based on PREIT’s ownership percentage in the respective equity method investments as of December 31, 2017
ANCHOR REPLACEMENTS: In recent years, through property dispositions, proactive store recaptures, lease terminations and other activities, we have made
efforts to reduce our risks associated with certain department store concentrations. In December 2016, we acquired the Sears property at Woodland Mall
and we recaptured the Sears premises at Capital City Mall and Magnolia Mall in 2017. In 2017, we purchased the Macy’s locations at Moorestown Mall, Valley
View Mall and Valley Mall locations. We have entered into a ground lease for the land associated with the Macy’s store located at Plymouth Meeting Mall, and
are in negotiations with replacement tenants for that location.
The table below sets forth information related to our anchor replacement program:
Former/Existing Anchors
GLA
‘000’s
Date Store
Closed/
Closing
Name
Date
Decomissioned
Name
Property
Completed:
Replacement Tenant(s)
Cumberland Mall
Exton Square Mall
Viewmont Mall
JCPenney
JCPenney
Sears
51
118
193
Q3 15
Q2 15
Q3 16
Q3 15
n/a
Q2 17
Dick’s Sporting Goods
Round 1
Dick’s Sporting Goods;
Field & Stream;
HomeGoods
Capital City Mall
Sears
101
Q1 17
Q2 17
Dick’s Sporting Goods;
Magnolia Mall
Valley View Mall
Exton Square Mall
Sears
Macy’s
K-Mart
91
100
96
Q1 17
Q1 17
Q1 16
Q2 17
Q2 17
Q2 16
In Process:
Woodland Mall
Sears
313
Q2 17
Q2 17
Magnolia Mall
Moorestown Mall
Sears
Sears
Macy’s
See above
200
Q1 17
Valley Mall
Macy’s
Bon•Ton
JCPenney
Willow Grove Park
Pending:
Plymouth Meeting
120
123
125
Q1 16
Q1 18
Q3 17
Mall
(1)Property is third party-owned and is subject to a ground lease dated June 23, 2017.
Macy’s(1)
Q1 17
215
Sears Appliance;
Fine Wine and Spirits
Burlington
Herberger’s
Whole Foods
Von Maur
Restaurants and
small shop space
Home Goods
Five Below
n/a
n/a
Sierra Trading Post
HomeSense
Grocer and other tenant
One Life Fitness
Tilt
n/a Belk
n/a
Movie theater and
entertainment
n/a
Various large format tenants
153
Q4 19
GLA
‘000’s
50
58
113
88
46
100
58
%
Q4 16
Q4 16
Q3 17
Q3 17
Q4 17
Q4 17
Q3 17
Q3 17
Q1 18
86
Q4 19
TBD
22
8
19
28
32
70
48
123
93
Q4 19
Q2 18
Q2 18
Q1 19
Q4 18
Q4 18
Q3 18
Q3 18
Q4 18
Q3 19
In response to anchor store closings and other trends in the retail space,
we have been changing the mix of tenants at our properties. We have
been reducing the percentage of traditional mall tenants and increasing
the share of space dedicated to dining, entertainment, fast fashion, off
price, and large format box tenants. Some of these changes may result
in the redevelopment of all or a portion of our properties. See “—Capital
Improvements, Redevelopment and Development Projects.”
To fund the capital necessary to replace anchors and to maintain a rea-
sonable level of leverage, we expect to use a variety of means available to
us, subject to and in accordance with the terms of our Credit Agreements.
These steps might include (i) making additional borrowings under our
Credit Agreements, (ii) obtaining construction loans on specific projects,
(iii) selling properties or interests in properties with values in excess of
their mortgage loans (if applicable) and applying the excess proceeds to
fund capital expenditures or for debt reduction, (iv) obtaining capital from
joint ventures or other partnerships or arrangements involving our con-
tribution of assets with institutional investors, private equity investors or
other REITs, or (v) obtaining equity capital, including through the issuance
of common or preferred equity securities if market conditions are favor-
able, or through other actions.
CAPITAL IMPROVEMENT PROJECTS AND DEVELOPMENT We might
engage in various types of capital improvement projects at our operating
properties. 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 $113.6 million as of
December 31, 2017.
As of December 31, 2017, we had unaccrued contractual and other com-
mitments related to our capital improvement projects and development
projects at our consolidated and unconsolidated properties of $110.4 mil-
lion in the form of tenant allowances and contracts with general service
providers and other professional service providers.
In 2014, we entered into a 50/50 joint venture with The Macerich
Company (“Macerich”) to redevelop Fashion District Philadelphia. As we
redevelop Fashion District Philadelphia, operating results in the short term,
as measured by sales, occupancy, real estate revenue, property operating
expenses, NOI and depreciation, will continue to be affected until the
newly constructed space is completed, leased and occupied.
In January 2018, we along with Macerich, our partner in the Fashion
District Philadelphia redevelopment project, entered into a $250.0 million
term loan (the “FDP Term Loan”). The initial term of the FDP Term Loan
is five years, and bears interest at a variable rate of 2.00% over LIBOR.
PREIT and Macerich have secured the FDP Term Loan by pledging their
respective equity interests of 50% each in the entities that own the Fashion
District Philadelphia. The initial draw on the FDP Term Loan was $150.0
million, and we received $73.0 million as a distribution of our share of the
draw in January 2018. The project intends to draw the remaining $100.0
million available under the FDP Term Loan during 2018 in connection with
further development of the redevelopment project.
We are also engaged in several types of projects at our development prop-
erties. However, we do not expect to make any significant investment in
these projects in the short term other than Fashion District Philadelphia.
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 consolidated financial statements, and the
reported amounts of revenue and expenses during the reporting periods.
In preparing the consolidated financial statements, management has uti-
lized 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 oper-
ations and the risk of loss on specific accounts or amounts in determining
its estimates and judgments. Actual results may differ from these esti-
mates. In addition, other companies may utilize different estimates, which
may affect comparability of our results of operations to those of companies
in a similar business. The estimates and assumptions made by manage-
ment in applying critical accounting policies have not changed materially
during 2017, 2016 and 2015, 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 esti-
mates and judgments, but no change is currently expected.
Set forth below is a summary of the accounting policy that manage-
ment believes is 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.
ASSET IMPAIRMENT Real estate investments and related intangible
assets are reviewed for impairment whenever events or changes in cir-
cumstances indicate that the carrying amount of the property might not
be recoverable. A property to be held and used is considered impaired
only if management’s estimate of the aggregate future cash flows, less
estimated capital expenditures, to be generated by the property, undis-
counted 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.
The determination of undiscounted cash flows requires significant esti-
mates 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 car-
rying value of the asset over its estimated fair value is charged to income.
52
MANAGEMENT’S DISCUSSION AND ANALYSIS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2017 ANNUAL REPORT
53
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 con-
sideration or when a range of possible values is estimated.
In determining the estimated undiscounted cash flows of the property
or properties that are being analyzed for impairment of assets, we take
the sum of the estimated undiscounted cash flows, generally assuming
a holding period of 10 years, plus a terminal value calculated using the
estimated net operating income in the eleventh year and terminal capi-
talization rates, which in 2017 ranged from 5.8% to 13.0%, 2016 ranged
from 5.0% to 10.0% and in 2015 ranged from 4.5% to 15.5%. As further
detailed in note 2 to our consolidated financial statements, in 2017, 2016
and 2015, as a result of our analysis, we determined that four, five and
seven properties, respectively, had incurred impairment of assets.
NEW ACCOUNTING DEVELOPMENTS See note 1 to our consolidated
financial statements for descriptions of new accounting developments.
Off-Balance Sheet Arrangements
We have no material off-balance sheet items other than (i) the partner-
ships described in note 3 to our consolidated financial statements and in
the “Overview” section above and (ii) specifically with respect to our joint
venture formed with Macerich to develop Fashion District Philadelphia, our
operating partnership, PREIT Associates, has jointly and severally guar-
anteed the obligations of the joint venture to commence and complete a
comprehensive redevelopment of that property costing not less than $300.0
million within 48 months after commencement of construction, which was
March 14, 2016, and has severally guaranteed its 50% share of the FDP
Term Loan (see note 3 to our consolidated financial statements), which cur-
rently has $150.0 million outstanding (our share of which is $75.0 million).
Results of Operations
OVERVIEW Net loss for the year ended December 31, 2017 was $32.8 mil-
lion, compared to a net loss for the year ended December 31, 2016 of $12.7
million. The change in our 2017 results of operations was primarily due to
gains from real estate sales of $23.0 million in 2016, as well as a $18.2 million
decrease in non same store net operating income due to property sales in
2016 and 2017. These factors were partially offset by a $12.3 million decrease
in interest expense and a $6.8 million decrease in impairment of assets.
Net loss for the year ended December 31, 2016 was $12.7 million, compared
to net loss for the year ended December 31, 2015 of $129.6 million. The
change in our 2016 results of operations from the prior year was primarily due
to a decrease in impairment of assets of $77.7 million, a decrease of $16.0
million in depreciation and amortization, an increase in gains on sales of inter-
ests in real estate of $10.7 million and a decrease in interest expense of $10.4
million, partially offset by a decrease of $5.3 million of NOI.
LEASING ACTIVITY The table below sets forth summary leasing activity information with respect to our properties for the year ended December 31, 2017,
including anchor and non-anchor space at consolidated and unconsolidated properties:
Non Anchor
Number
GLA
Term
(in years)
Initial
Rent psf
Previous
Rent psf
Initial Gross
Rent Spread(1)
Avg Rent
Spread(2)
$
%
%
Annualized
Tenant
Improvements
psf(3)
New Leases
Under 10,000 sf
Over 10,000 sf
Total New Leases
Renewal Leases
Under 10,000 sf
150
20
170
283,036
464,204
747,240
242
475,599
Over 10,000 sf
16
336,453
6.6
10.2
8.8
3.7
3.3
$ 48.02
15.17
$27.61
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
$62.64
$61.47
$ 1.17
1.9 %
5.1%
$ 0.18
16.49
17.14
(0.65) (3.8%)
0.9%
—
Total Fixed Rent
258
812,052
3.5
$43.52
$43.10
$0.42
1.0 %
Percentage in Lieu
15
91,809
Total Renewal Leases
273
903,861
1.9
3.3
15.86
22.69
(6.83 )
(30.1 )%
40.71
$41.03
$(0.32)
(0.8 )%
N/A
4.4%
N/A
$0.11
—
Total Non Anchor(4)(5)
443
1,651,101
5.8
$34.78
Anchor
New Leases
Renewal Leases
5
8
349,972
1,071,158
11.0
7.1
$ 7.70
5.31
N/A
$ 5.28
N/A
$0.03
N/A
0.6 %
N/A
N/A
$1.38
—
Total
13
1,421,130
8.1
$ 5.90
(1) Initial gross rent renewal spread is computed by comparing the initial rent per square foot in the new lease to the final rent per square foot amount in the expiring lease. For purposes of this
computation, the rent amount includes minimum rent, common area maintenance (“CAM”) reimbursements, estimated real estate tax reimbursements and marketing charges, but excludes
percentage rent. In certain cases, a lower rent amount may be payable for a period of time until specified conditions in the lease are satisfied.
(2) Average renewal spread is computed by comparing the average rent per square foot over the new lease term to the final rent per square foot amount in the expiring lease. For purposes of this computation,
the rent amount includes minimum rent and fixed CAM reimbursements, but excludes pro rata CAM reimbursements, estimated real estate tax reimbursements, marketing charges and percentage rent.
(3) These leasing costs are presented as annualized costs per square foot and are spread uniformly over the initial lease term.
(4) Includes 41 leases and 188,624 square feet of GLA with respect to our unconsolidated partnerships. We own a 25% to 50% interest in each of our unconsolidated properties and do not
control such properties. Our percentage ownership is not necessarily indicative of the legal and economic implications of our ownership interest. See “—Use of Non GAAP Measures” for
further details on our ownership interests in our unconsolidated properties.
(5) Includes 19 leases totaling 51,697 square feet with respect to tenants whose leases were restructured and extended following a bankruptcy filing. Excluding these leases, the initial gross rent
spread was 2.4% for leases under 10,000 square feet and (0.6)% for all non-anchor leases. Excluding these leases, the average rent spread was 5.2% for leases under 10,000 square feet
and 4.5% for all non-anchor leases.
See our Annual Report on Form 10-K for the year ended December 31, 2017 “Item 2. Properties—Retail Lease Expiration Schedule” for information
regarding average minimum rent on expiring leases.
OCCUPANCY The tables below set forth certain occupancy statistics for our retail properties as of December 31, 2017, 2016 and 2015:
Occupancy(1) as of December 31,
Consolidated Properties Unconsolidated Properties Combined(2)
2017
2016
2015
2017
2016
2015
2017
2016
2015
Retail portfolio weighted average:
Total excluding anchors
Total including anchors
Malls weighted average:
Total excluding anchors
Total including anchors
Other Retail Properties
weighted average:
93.6 %
95.8 %
93.4 %
95.8 %
93.2 %
94.9 %
92.2 %
93.6 %
94.2 %
95.3%
96.1 %
96.8 %
93.3 %
95.4%
93.6 %
95.7 %
93.9 %
95.2 %
94.2 %
96.2 %
93.4 %
95.8 %
93.2 %
94.9 %
90.2 %
93.3 %
94.8 %
96.4 %
95.8 %
97.1 %
93.8%
95.9%
93.5 %
95.9 %
93.5 %
95.1 %
36.7 %
N/A
N/A
93.8 %
94.4 %
96.6 %
91.4%
94.4 %
96.6 %
(1) Occupancy for all periods presented includes all tenants irrespective of the term of their agreement.
(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.
From 2016 to 2017, total occupancy for our retail portfolio decreased 30 basis points to 95.4%, and mall occupancy remained at 95.9%, including consolidated
and unconsolidated properties (and including all tenants irrespective of the term of their agreement).
54 MANAGEMENT’S DISCUSSION AND ANALYSIS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2017 ANNUAL REPORT
55
The following table sets forth our results of operations for the years ended December 31, 2017, 2016 and 2015:
(in thousands of dollars)
Results of operations:
Total real estate revenue
Other income
Total property operating expenses
General and administrative expenses
Provision for employee separation
Project costs and other expenses
Interest expense, net
Depreciation and amortization
Impairment of assets
Equity in income of partnerships
Gain on sale of real estate by equity method investee
(Losses) gains on sales of interests in real estate, net
Gains on sales of non-operating real estate
For the Year Ended
December 31, 2017
% Change
2016 to 2017
For the Year Ended
December 31, 2016
% Change
For the Year Ended
2015 to 2016 December 31, 2015
$ 361,524
5,966
(140,305 )
(36,736 )
(1,299 )
(768)
(58,430)
(128,822 )
(55,793 )
14,367
6,539
(361)
1,270
(8 )%
12 %
(10 )%
4 %
(4 )%
(55 )%
(17 )%
2 %
(11 )%
(22 )%
— %
(102 )%
234 %
$ 394,597
5,349
(156,218 )
(35,269 )
(1,355 )
(1,700 )
(70,724 )
(126,669 )
(62,603 )
18,477
—
23,022
380
(6 )%
3 %
(8 )%
1 %
(35 )%
(72 )%
(13 )%
(11 )%
(55 )%
94 %
— %
86 %
47 %
$ 420,197
5,214
(170,047)
(34,836)
(2,087 )
(6,108 )
(81,096)
(142,647)
(140,318)
9,540
—
12,362
259
Net loss
$ (32,848 )
158 %
$ (12,713 )
(90) %
$ (129,567 )
The amounts in the preceding table reflect our consolidated properties and our unconsolidated properties. Our unconsolidated properties are presented
under the equity method of accounting in the consolidated statements of operations in the line item “Equity in income of partnerships.”
REAL ESTATE REVENUE Real estate revenue decreased by $33.1 mil-
lion, or 8%, in 2017 as compared to 2016, primarily due to:
n
n
a decrease of $32.6 million in real estate revenue related to properties
sold in 2016 and 2017;
a decrease of $2.4 million in same store common area expense reim-
bursements, due to lower occupancy at some properties, rental conces-
sions made to some tenants under which the terms of their leases were
modified such that they no longer pay expense reimbursements, and a
decrease in common area expense for tenants who do not pay a fixed
amount for common area expense reimbursement (see “—Property
Operating Expenses”);
n
a decrease of $1.7 million in lease termination revenue, including $2.9
million received from one tenant for two locations during 2016;
n a decrease of $0.7 million in same store utility reimbursements due to
a combination of lower tenant electric billing rates as set by the Public
Utility Commission, as well as a decrease in electric consumption; and
n
n
a decrease of $0.6 million in same store percentage rent due to lease
renewals with higher base rents and corresponding higher sales break-
points for calculating percentage rent, as well as lower sales from some
tenants that paid percent rent during 2016; partially offset by
an increase of $3.6 million in same store base rent due to $5.7 million
from net new store openings over the previous twelve months, partially
offset by a $1.8 million decrease related to tenant bankruptcies in 2016
and 2017, as well as a $0.3 million decrease related to co-tenancy con-
cessions due to anchor closings in 2016 and 2017; and
n
an increase of $1.1 million in same store ancillary income.
Real estate revenue decreased by $25.6 million, or 6%, in 2016 as com-
pared to 2015, primarily due to:
n
a decrease of $40.8 million in real estate revenue related to properties
and real estate interests sold in 2015 and 2016; and
n
a decrease of $3.2 million in Same Store expense reimbursements,
due to decreases in utility expense and snow removal expense (see
“— Property Operating Expenses”), as well as lower occupancy at some
properties and rental concessions made to some tenants under which
the terms of their leases were modified such that they no longer pay
expense reimbursements; partially offset by
n
an increase of $14.6 million in real estate revenue from the acquisition
of Springfield Town Center in March 2015;
n
an increase of $2.5 million in Same Store lease terminations;
n
an increase of $0.8 million in Same Store base rent due to increases from
new store openings and lease renewals with higher base rental amounts,
with notable increases at Moorestown Mall and Capital City Mall; and
n
an increase of $0.4 million in Same Store partnership marketing revenue
PROPERTY OPERATING EXPENSES Property operating expenses
decreased by $15.9 million, or 10%, in 2017 as compared to 2016,
primarily due to:
n
n
n
n
a decrease of $14.3 million in property operating expenses related to
properties sold in 2016 and 2017;
a decrease of $3.4 million in same store common area maintenance
expense, including a $2.7 million decrease in personnel costs; and
a decrease of $0.3 million in same store tenant utility expense due to lower
electricity usage, partially offset by an increase in electricity rates; partially
offset by
an increase of $1.5 million in same store real estate tax expense due to a
combination of increases in the real estate tax assessment value and the
real estate tax rate; partially offset by a successful real estate tax appeal
at one property; and
n
an increase of $0.5 million in same store bad debt expense due to an
increase in the number of tenant bankruptcies during 2017.
Property operating expenses decreased by $13.8 million, or 8%, in 2016
as compared to 2015, primarily due to:
n
n
n
n
n
n
a decrease of $17.3 million in property operating expenses related to
properties and real estate interests sold in 2015 and 2016;
a decrease of $1.1 million in Same Store non-common area utility
expense as a result of warmer temperatures across the Mid-Atlantic
States during the first quarter of 2016, resulting in lower electricity usage
compared to the first quarter of 2015. In addition, there was a significant
increase in electric rates during February 2015 due to extreme cold
weather that particularly affected our properties located in Pennsylvania,
New Jersey and Maryland. These effects were partially offset by a
warmer summer in the three months ended September 30, 2016;
a decrease of $0.8 million in Same Store common area maintenance
expense, including a decrease of $0.7 million in snow removal expense; and
a decrease of $0.4 million in Same Store bad debt expense; partially
offset by
an increase of $5.6 million in property operating expenses from the
acquisition of Springfield Town Center in March 2015; and
an increase of $0.4 million in Same Store real estate tax expenses due
to a combination of higher property assessments and higher tax rates at
some properties.
IMPAIRMENT OF ASSETS During the years ended December 31, 2017,
2016, and 2015, we recorded impairment of assets of $55.8 million,
$62.6 million and $140.3 million, respectively. The assets that incurred
impairments and the amount of such impairments are as follows:
(in thousands of dollars)
2017
2016
2015
For the Year Ended December 31,
Logan Valley Mall
Valley View Mall
Gainesville land
Sunrise Plaza land
White Clay Point land
Beaver Valley Mall
Washington Crown Center
Crossroads Mall
Office building located at Voorhees
Town Center
Gadsden Mall, New River Valley Mall
and Wiregrass Commons Mall
Voorhees Town Center
Lycoming Mall
Uniontown Mall
Palmer Park Mall
Other
$ 38,720
15,521
1,275
226
—
—
—
—
$ —
—
—
—
20,786
18,055
14,117
9,038
$ —
—
—
—
—
—
—
—
—
607
—
—
—
—
—
—
51
—
—
—
—
—
—
63,904
39,242
28,345
7,394
1,383
50
Total Impairment of Assets
$55,793
$62,603
$140,318
See note 2 to our consolidated financial statements for a further discus-
sion of impairment of assets.
PROJECT COSTS AND OTHER EXPENSES Project costs and other
expenses decreased by $0.9 million, or 55% in 2017 as compared to
2016 primarily due to a decrease of $0.5 million related to professional
fees and decreased project costs of $0.3 million.
Project costs and other expenses decreased by $4.4 million, or 72% in
2016 as compared to 2015 primarily due to a decrease of $3.3 million
in acquisition costs primarily related to Springfield Town Center and a
decrease of $1.4 million of professional fees, partially offset by an increase
of $0.4 million related to project costs.
INTEREST EXPENSE Interest expense decreased by $12.3 million, or
17%, in 2017 as compared to 2016. Our weighted average debt balance
was reduced to $1,648.5 million in 2017 compared to $1,760.5 million
in 2016 due to the application of cash proceeds from property sales in
2016 and 2017, along with the net proceeds from our 2017 Series C and
Series D Preferred Share issuances, net of the redemption of the Series
A Preferred Shares, and capital expenditures related to anchor replace-
ments and redevelopment spending. Also we had lower weighted average
effective borrowing rate (4.01% for 2017 as compared to 4.19% for 2016).
Interest expense decreased by $10.4 million, or 13%, in 2016 as com-
pared to 2015. The decrease was primarily due to a lower weighted
average effective borrowing rate (4.19% for 2016 as compared to 4.63%
for 2015) and a lower overall debt balance (an average of $1,760.5 million
in 2016 compared to $1,780.8 million in 2015). In 2016, we also recorded
a loss on hedge ineffectiveness of $0.1 million.
DEPRECIATION AND AMORTIZATION Depreciation and amortization
expense increased by $2.2 million, or 2%, in 2017 as compared to 2016,
primarily because of:
n
n
an $8.7 million benefit recognized in 2016 due to a change in an esti-
mated contingent liability recorded in connection with a property acqui-
sition that did not recur in 2017; and
an increase of $1.4 million due to a higher asset base resulting from cap-
ital improvements related to new tenants at our same store properties, as
well as accelerated amortization of capital improvements associated with
store closings; partially offset by
n
a decrease of $7.9 million related to properties sold in 2016 and 2017.
Depreciation and amortization expense decreased by $16.0 million, or
11%, in 2016 as compared to 2015, primarily because of:
n
a decrease of $19.9 million related to properties sold in 2015 and 2016; and
n
n
n
a decrease of $8.7 million due to a change in an estimated contingent liability
recorded in connection with a property acquisition; partially offset by
an increase of $4.7 million related to the March 2015 acquisition of
Springfield Town Center; and
an increase of $7.9 million due to a higher asset base resulting from cap-
ital improvements related to new tenants at our Same Store properties, as
well as accelerated amortization of capital improvements associated with
store closings.
EQUITY IN INCOME OF PARTNERSHIPS Equity in income of partner-
ships decreased by $4.1 million, or 22%, in 2017 as compared to 2016.
This decrease was primarily due to a $1.6 million mortgage prepayment
penalty incurred by Lehigh Valley Mall, a $1.3 million decrease in lease
termination income and an aggregate decrease of $1.0 million related to
2017 bankruptcies.
Equity in income of partnerships increased by $8.9 million, or 94%, in
2016 as compared to 2015. This increase was primarily due to a $4.2
million increase in equity in income from Fashion District Philadelphia due
56 MANAGEMENT’S DISCUSSION AND ANALYSIS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2017 ANNUAL REPORT
57
to recovery of previously expensed amounts and lower operating costs, a
$1.7 million increase of income from Gloucester Premium Outlets, which
opened during the third quarter of 2015, a decrease of $1.2 million in
depreciation and amortization from Metroplex as a result of fully depre-
ciated assets, a $1.3 million increase at Red Rose Commons and The
Court at Oxford Valley due to an increase in lease termination revenue
and a $0.7 million increase at Lehigh Valley Mall due to a combination of
increased base rent and lower operating expenses, including reductions
in snow removal expense, utility expense and bad debt expense, partially
offset by a $0.4 million decrease from properties sold in 2015.
GAIN ON SALES OF INTERESTS IN REAL ESTATE, NET Gain on sales
of interests of real estate, net was $23.0 million in 2016, primarily as a
result of a $20.3 million gain on the sale of two street retail properties in
Philadelphia, Pennsylvania.
Gain on sales of interests of real estate, net was $12.4 million in 2015,
primarily as a result of a $12.0 million gain on the sale of our 50% interest
in Springfield Park.
NON-GAAP SUPPLEMENTAL FINANCIAL MEASURES
OVERVIEW The preceding discussion analyzes our financial condition and
results of operations in accordance with generally accepted accounting
principles, or GAAP, for the periods presented. We also use Net Operating
Income (“NOI”) and Funds from Operations (“FFO”) which are non-GAAP
financial measures, to supplement our analysis and discussion of our
operating performance:
n
n
We believe that NOI is helpful to management and investors as a mea-
sure of operating performance because it is an indicator of the return
on property investment and provides a method of comparing property
performance over time. When we use and present NOI, we also do so
on a same store (Same Store NOI) and non-same store (Non Same
Store NOI) basis to differentiate between properties that we have owned
for the full periods presented and properties acquired, sold or under
redevelopment during those periods. Furthermore, our use and presen-
tation of NOI combines NOI from our consolidated properties and NOI
attributable to our share of unconsolidated properties in order to arrive
at total NOI. We believe that this is also helpful information because it
reflects the pro rata contribution from our unconsolidated properties
that are owned through investments accounted for under GAAP as
equity in income of partnerships. See “Unconsolidated Properties and
Proportionate Financial Information” below.
We believe that FFO is also 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 oper-
ating performance, such as gains on sales of operating real estate and
depreciation and amortization of real estate, among others. In addition
to FFO and FFO per diluted share and OP Unit, we also present FFO, as
adjusted and FFO per diluted share and OP Unit, as adjusted to show the
effect of items such as loss on redemption of preferred shares, provision
for employee separation expense, prepayment penalties and accelerated
amortization of financing costs, loss on hedge ineffectiveness and acqui-
sition costs.
NOI and FFO are commonly used non-GAAP financial measures of
operating performance in the real estate industry, and we use them as
supplemental non-GAAP measures to compare our performance between
different periods and to compare our performance to that of our industry
peers. Our computation of NOI, FFO and other non-GAAP financial mea-
sures, such as Same Store NOI, Non Same Store NOI, NOI attributable to
our share of unconsolidated properties, and FFO, as adjusted, may not be
comparable to other similarly titled measures used by our industry peers.
None of these measures are measures of performance in accordance with
GAAP, and they have limitations as analytical tools. They should not be con-
sidered as alternative measures of our net income, operating performance,
cash flow or liquidity. They are not indicative of funds available for our cash
needs, including our ability to make cash distributions. Please see below
for a discussion of these non-GAAP measures and their respective reconcil-
iation to the most directly comparable GAAP measure.
UNCONSOLIDATED PROPERTIES AND PROPORTIONATE FINANCIAL
INFORMATION The non-GAAP financial measures presented below incor-
porate financial information attributable to our share of unconsolidated
properties. This proportionate financial information is non-GAAP financial
information, but we believe that it is helpful information because it reflects
the pro rata contribution from our unconsolidated properties that are owned
through investments accounted for under GAAP using the equity method
of accounting. Under such method, earnings from these unconsolidated
partnerships are recorded in our statements of operations prepared in
accordance with GAAP under the caption entitled “Equity in income of
partnerships.”
To derive the proportionate financial information reflected in the tables below
as “unconsolidated,” we multiplied the percentage of our economic interest
in each partnership on a property-by-property basis by each line item.
Under the partnership agreements relating to our current unconsolidated
partnerships with third parties, we own a 25% to 50% economic interest in
such partnerships, and there are generally no provisions in such partner-
ship agreements relating to special non-pro rata allocations of income or
loss, and there are no preferred or priority returns of capital or other similar
provisions. While this method approximates our indirect economic interest
in our pro rata share of the revenue and expenses of our unconsolidated
partnerships, we do not have a direct legal claim to the assets, liabilities,
revenues or expenses of the unconsolidated partnerships beyond our rights
as an equity owner in the event of any liquidation of such entity. Our per-
centage ownership is not necessarily indicative of the legal and economic
implications of our ownership interest. Accordingly, NOI and FFO results
based on our share of the results of unconsolidated partnerships do not
represent cash generated from our investments in these partnerships.
We have determined that we hold a noncontrolling interest in each of our
unconsolidated partnerships, and account for such partnerships using the
equity method of accounting, because:
n
n
n
n
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, expan-
sion 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 hold legal title to a property owned by one of our unconsolidated part-
nerships through a tenancy in common arrangement. For this property,
such legal title is held by us and another entity, and each has an undivided
interest in title to the property. With respect this property, under the appli-
cable agreements between us and the entity with ownership interests,
we and such other entity 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 entity owning an
interest in the property. Hence, we account for this property like our other
unconsolidated partnerships using the equity method of accounting. The
balance sheet items arising from this property appear under the caption
“Investments in partnerships, at equity.”
For further information regarding our unconsolidated partnerships, see
note 3 to our consolidated financial statements.
NET OPERATING INCOME (“NOI”) NOI (a non-GAAP measure) is
derived from real estate revenue (determined in accordance with GAAP,
including lease termination revenue), minus property operating expenses
(determined in accordance with GAAP), plus our pro rata share of rev-
enue and property operating expenses of our unconsolidated partnership
investments. NOI 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 NOI is
helpful to management and investors as a measure of operating perfor-
mance 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 measure
to NOI. NOI excludes other income, general and administrative expenses,
provision for employee separation expenses, interest expense, depreci-
ation and amortization, gains on sales of real estate by equity method
investees, gain on sale of non operating real estate, gain on sale of interest
in real estate, impairment of assets, project costs and other expenses.
Same Store NOI is calculated using retail properties owned for the full
periods presented and excludes properties acquired or disposed of or
under redevelopment during the periods presented. Non Same Store NOI
is calculated using the retail properties excluded from the calculation of
Same Store NOI.
The table below reconciles net income (loss) to NOI of our consolidated
properties for the years ended 2017, 2016 and 2015:
(in thousands of dollars)
2017
2016
2015
For the Year Ended December 31,
36,736
$ (32,848 )
(5,966 )
128,822
Net loss
Other income
Depreciation and amortization
General and administrative
expenses
Provision for employee
1,299
separation expenses
768
Project costs and other expenses
58,430
Interest expense, net
55,793
Impairment of assets
Equity in income of Partnerships (14,367 )
Gain on sale of real estate by
equity method investee
Losses (gains) on sales of
interests in real estate
(6,539 )
361
$(12,713 ) $(129,567 )
(5,214 )
142,647
(5,349 )
126,669
35,269
34,836
1,355
1,700
70,724
62,603
(18,477 )
2,087
6,108
81,096
140,318
(9,540 )
—
—
(23,022 )
(12,362 )
Gains on sales of
non operating real estate
Net operating income from
consolidated properties
(1,270 )
(380 )
(259 )
$221,219 $ 238,379
$ 250,150
The table below reconciles equity in income of partnerships to NOI of our
share of unconsolidated properties for the years ended 2017, 2016 and
2015:
For the Year Ended December 31,
(in thousands of dollars)
2017
2016
2015
Equity in income of
partnerships
Other income
Depreciation and amortization
Interest and other expenses
Net operating income from
equity method investments
at ownership share
$ 14,367
(594 )
10,974
12,013
$ 18,477
—
10,214
10,306
$ 9,540
—
12,563
10,415
$ 36,760
$ 38,997
$ 32,518
The table below presents total NOI and total NOI excluding lease terminations for the years ended December 31, 2017 and 2016:
NOI from consolidated properties
NOI from equity method investments
at ownership share
Total NOI
Less: lease termination revenue
Total NOI - excluding lease
termination
Same Store
Non Same Store Total (non-GAAP)
2017
2016
2017
2016
2017
2016
$ 216,403 $215,321
$ 4,816 $23,058
$ 221,219 $238,379
30,266
32,579
6,494
6,418
36,760 38,997
$246,669 $247,900
6,009
3,142
$ 11,310 $29,476
183
85
$257,979 $277,376
6,192
3,227
$ 243,527 $241,891
$ 11,225 $29,293
$254,752 $271,184
Total NOI decreased by $19.4 million, or 7.0%, in 2017 as compared to 2016. NOI from Non Same Store properties decreased $18.2 million. This decrease
was primarily due to the properties sold in 2017 and 2016. NOI from Same Store properties decreased $1.2 million primarily due to decreased lease termina-
tion income, partially offset by the property results as discussed in “—Results of Operations—Real Estate Revenue” and “—Property Operating Expenses”
58 MANAGEMENT’S DISCUSSION AND ANALYSIS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2017 ANNUAL REPORT
59
The table below presents total NOI and total NOI excluding lease terminations for the years ended December 31, 2016 and 2015:
Same Store
Non Same Store Total (non-GAAP)
(in thousands of dollars)
2016
2015
2016
2015
2016
2015
NOI from consolidated properties
NOI from equity method investments
at ownership share
Total NOI
Less: lease termination revenue
Total NOI - excluding lease
termination revenue
$ 203,107 $200,352
$ 35,272 $49,798
$ 238,379 $250,150
29,281
26,822
9,716
5,696
38,997 32,518
232,388 227,174
1,813
5,825
44,988 55,494
275
367
277,376 282,668
2,088
6,192
$ 226,563 $225,361
$ 44,621 $55,219
$271,184 $280,580
Total NOI decreased by $5.3 million or 1.9%, in 2016 as compared to 2015. NOI from Same Store properties increased $5.2 million primarily due to
increased lease termination income. NOI from Non Same Store properties decreased by $10.5 million. This decrease was primarily due to the properties
sold in 2016 and 2105. See the “— Results of Operations – Real Estate Revenue” and “Property Operation Expenses” discussions above for further infor-
mation about property results.
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 ended December 31, 2017, 2016 and
2015, respectively, to show the effect of such items as loss on redemption
of preferred shares, provision for employee separation expense, prepay-
ment penalties and accelerated amortization of financing costs, loss on
hedge ineffectiveness and acquisition costs, which had an effect on our
results of operations, but are not, in our opinion, indicative of our operating
performance.
We believe that FFO is helpful to management and investors as a measure
of operating performance because it excludes various items included in
net income that do not relate to or are not indicative of operating perfor-
mance, 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 mea-
sure of operating performance because it adjusts FFO to exclude items that
management does not believe are indicative of our operating performance,
such as loss on redemption of preferred shares, provision for employee
separation expense, prepayment penalties and accelerated amortization of
financing costs, loss on hedge ineffectiveness and acquisition costs.
FUNDS FROM OPERATIONS The National Association of Real Estate
Investment Trusts (“NAREIT”) defines Funds From Operations (“FFO”),
which is a non-GAAP measure commonly used by REITs, as net income
(computed in accordance with GAAP) excluding gains and losses on sales
of operating properties, plus real estate depreciation and amortization,
and after adjustments for unconsolidated partnerships and joint ventures
to reflect funds from operations on the same basis. We compute FFO
in accordance with standards established by NAREIT, which may not be
comparable to FFO reported by other REITs that do not define the term
in accordance with the current NAREIT definition, or that interpret the
current NAREIT definition differently than we do. NAREIT’s established
guidance provides that excluding impairment write downs of depreciable
real estate is consistent with the NAREIT definition.
FFO is a commonly used measure of operating performance and profitability
among REITs. 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 con-
junction 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.
The following table presents a reconciliation of net income (loss) determined in accordance with GAAP to FFO attributable to common shareholders and OP
Unit holders, FFO attributable to common shareholders and OP Unit holders per diluted share and OP Unit, FFO attributable to common shareholders and
OP Unit holders, as adjusted and FFO attributable to common shareholders and OP Unit holders, as adjusted per diluted share and OP Unit, for the years
ended December 31, 2017, 2016 and 2015:
(in thousands, except per share amounts)
Net loss
Adjustments:
Depreciation and amortization on real estate
Consolidated
Unconsolidated
Gain on sale of real estate by equity method investee
Losses (gains) on sales of real estate, net
Impairment of assets
Dividends on preferred shares
Loss on redemption of preferred shares
Funds from operations attributable to
common shareholders and OP Unit holders
Loss on redemption of preferred shares
Provision for employee separation expense
Prepayment penalty and accelerated
amortization of deferred financing costs
Loss on hedge ineffectiveness
Acquisition costs
Funds from operations attributable to
common shareholders and OP Unit
holders, as adjusted
Funds from operations attributable to
common shareholders and OP Unit
holders per diluted share and OP Unit
Funds from operations attributable to
common shareholders and OP Unit holders,
as adjusted, per diluted share and OP Unit
Weighted average number
of shares outstanding
Weighted average effect of
full conversion of OP Units
Effect of common share equivalents
Total weighted average shares outstanding,
including OP Units
2017
% Change
2016 to 2017
2016
% Change
2015 to 2016
$ (32,848)
$ (12,713)
127,327
10,974
(6,539 )
361
55,793
(27,845 )
(4,103 )
123,120
4,103
1,299
1,557
—
—
(15.9 %)
125,192
10,214
—
(23,022)
62,603
(15,848 )
—
146,426
—
1,355
—
143
—
7.5 %
2015
$ (129,567 )
141,142
12,563
—
(12,362 )
140,318
(15,848 )
—
136,246
—
2,087
1,071
512
3,470
$130,079
(12.1% ) $147,924
3.2%
$ 143,386
$ 1.58
(16.4%)
$ 1.89
5.6%
$ 1.79
$ 1.67
(12.6%)
$ 1.91
1.1%
$ 1.89
69,364
8,297
93
77,754
69,086
8,324
191
77,601
68,740
6,830
485
76,055
FFO was $123.1 million for 2017, a decrease of $23.3 million, or 15.9%,
compared to $146.4 million for 2016. This decrease was primarily due to:
n a $18.2 million decrease in Non Same Store NOI primarily due to properties sold;
n a $10.4 million decrease in interest expense (including our proportionate
share of interest expense of our partnership properties and the effects of
loss on hedge ineffectiveness) resulting from lower average interest rates
and lower overall debt balances;
n a $12.0 million increase in preferred share dividends; and
n a $5.2 million increase in Same Store NOI; and
n a $4.1 million loss on preferred share redemption in 2017; partially offset by
n a $4.5 million decrease in project costs and other expenses; partially
n a $12.3 million decrease in interest expense; and
n a $1.2 million increase in Same Store NOI.
FFO per diluted share and OP Unit decreased $0.31 per share to $1.58
per share for 2017, compared to $1.89 per share for 2016 due to the
factors noted above.
FFO was $146.4 million for 2016, an increase of $10.2 million, or 7.5%,
compared to $136.2 million for 2015. This increase was primarily due to:
offset by
n a $10.5 million decrease in Non Same Store NOI due to properties sold.
FFO per diluted share increased $0.10 per share to $1.89 per share for
2016, compared to $1.79 per share for 2015 primarily due to the impact
of the 6,250,000 OP Units issued in connection with the March 2015
acquisition of Springfield Town Center.
60 MANAGEMENT’S DISCUSSION AND ANALYSIS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2017 ANNUAL REPORT
61
Liquidity and Capital Resources
This “Liquidity and Capital Resources” section contains certain “for-
ward-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 in
our Annual Report on Form 10-K 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 require-
ments, including distributions to shareholders, recurring capital expenditures,
tenant improvements and leasing commissions, but excluding acquisitions
and redevelopment and development projects, generally through our available
working capital and net cash provided by operations and our 2013 Revolving
Facility, subject to the terms and conditions of our 2013 Revolving 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 aggre-
gate distributions made to preferred shareholders, common shareholders
and OP Unit holders for 2017 were $93.0 million, based on distributions of
$1.7016 per Series A Preferred Share, distributions of $1.8438 per Series B
Preferred Share, distributions of $1.5900 per Series C Preferred Share, dis-
tributions of $0.4488 per Series D Preferred Share and $0.84 per common
share and OP Unit. For the first quarter of 2018, we have announced a dis-
tribution of $0.21 per common share and OP Unit.
In December 2017, our universal shelf registration statement was filed
with the SEC and became effective. We may use the availability under
our shelf registration statement to offer and sell common shares of benefi-
cial interest, preferred shares and various types of debt securities, among
other types of securities, to the public.
During 2017, we raised capital from a number of sources, including
proceeds of $117.2 million from our share of asset sales (by us and our
unconsolidated subsidiaries), and $286.8 million from the issuances of
Series C and D Preferred Shares, part of which was used to redeem our
Series A Preferred Shares in October 2017. We also received $35.3 million
in net proceeds after an early mortgage refinancing by one of our uncon-
solidated subsidiaries.
The following are some of the factors that could affect our cash flows and
require the funding of future cash distributions, recurring capital expen-
ditures, tenant improvements or leasing commissions with sources other
than operating cash flows:
n 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;
n deterioration in our tenants’ business operations and financial stability,
including anchor or non-anchor tenant bankruptcies, leasing delays or
terminations, or lower sales, causing deferrals or declines in rent, per-
centage rent and cash flows;
n inability to achieve targets for, or decreases in, property occupancy and
rental rates, resulting in lower or delayed real estate revenue and oper-
ating income;
n increases in operating costs, including increases that cannot be passed on
to tenants, resulting in reduced operating income and cash flows; and
n increases in interest rates, resulting in higher borrowing costs.
We expect to meet certain of our longer-term requirements, such as obli-
gations to fund redevelopment and development projects, certain capital
requirements (including scheduled debt maturities), future property and
portfolio acquisitions, renovations, expansions and other non-recurring
capital improvements, through a variety of capital sources, subject to the
terms and conditions of our Credit Agreements, as further described below.
CREDIT AGREEMENTS We have entered into four credit agreements (col-
lectively, as amended, the “Credit Agreements”), as further discussed and
defined below: (1) the 2013 Revolving Facility, (2) the 2014 7-Year Term
Loan, (3) the 2014 5-Year Term Loan, and (4) the 2015 5-Year Term Loan.
The 2014 7-Year Term Loan, the 2014 5-Year Term Loan and the 2015
5-Year Term Loan are collectively referred to as the “Term Loans.”
As of December 31, 2017, the Company had borrowed $550.0 million
under the Term Loans and $53.0 million under the 2013 Revolving Facility.
Following recent property sales, the net operating income (“NOI”) from
the Company’s remaining unencumbered properties is at a level such that
within the Unencumbered Debt Yield covenant (see note 4 in the notes
to our consolidated financial statements) under the Credit Agreements,
the maximum amount that was available to be borrowed by the Company
under the 2013 Revolving Facility as of December 31, 2017 was $144.5
million. Following the $53.0 million repayment of the 2013 Revolving Facility
in January 2018, the maximum unsecured amount that is available to be
borrowed by the Company under the Credit Agreements is $197.5 million.
Subject to the terms of the Credit Agreements, we have the option to
increase the maximum amount available under the 2013 Revolving Facility,
through an accordion option, from $400.0 million to as much as $600.0
million, in increments of $5.0 million (with a minimum increase of $25.0
million), based on Wells Fargo Bank’s ability to obtain increases in Revolving
Commitments (as defined in the 2013 Revolving Facility) from the current
lenders or Revolving Commitments from new lenders. No increase to the
maximum amount available under the 2013 Revolving Facility has been
exercised by the Borrower.
Pursuant to the June 2015 amendment, the initial maturity of the 2013
Revolving Facility is June 26, 2018, and the Borrower has options for two
one-year extensions of the initial maturity date, subject to certain conditions
and to the payment of extension fees of 0.15% and 0.20% of the Facility
Amount for the first and second options, respectively. We expect to exer-
cise the first of these one-year extension options or negotiate an extension
of the maturity date during the first half of 2018. We expect to either refi-
nance the 2014 5-Year Term Loan upon its maturity in January 2019, or
repay it using borrowings from the 2013 Revolving Facility.
IDENTICAL COVENANTS AND COMMON PROVISIONS CONTAINED
IN THE CREDIT AGREEMENTS See note 4 in the notes to our consoli-
dated financial statements for a description of the identical covenants and
common provisions contained in the Credit Agreements.
As of December 31, 2017, we were in compliance with all such financial
covenants.
PREFERRED SHARES We have 3,450,000 7.375% Series B Cumulative
Redeemable Perpetual Preferred Shares (the “Series B Preferred Shares”)
outstanding, 6,900,000 7.20% Series C Cumulative Redeemable
Perpetual Preferred Shares (the “Series C Preferred Shares”) outstanding
and 5,000,000 6.875% Series D Cumulative Redeemable Perpetual
Preferred Shares (the “Series D Preferred Shares”) outstanding. Upon 30
days notice, we may redeem any or all of the Series B Preferred Shares at
$25.00 per share plus any accrued and unpaid dividends. We may not
redeem the Series C Preferred Shares and the Series D Preferred Shares
before January 27, 2022 and September 15, 2022, respectively, except
to preserve our status as a REIT or upon the occurrence of a Change of
Control, as defined in the Trust Agreement addendums designating the
Series C and Series D Preferred Shares, respectively. On and after January
27, 2022 and September 15, 2022, we may redeem any or all of the
Series C Preferred Shares or the Series D Preferred Shares, respectively,
at $25.00 per share plus any accrued and unpaid dividends. In addition,
upon the occurrence of a Change of Control, we may redeem any or all
of the Series C Preferred Shares or the Series D Preferred Shares for
cash within 120 days after the first date on which such Change of Control
occurred at $25.00 per share plus any accrued and unpaid dividends. The
Series B Preferred Shares, the Series C Preferred Shares and the Series
D Preferred Shares have no stated maturity, are not subject to any sinking
fund or mandatory redemption and will remain outstanding indefinitely
unless we redeem or otherwise repurchase them or they are converted.
MORTGAGE LOAN ACTIVITY—CONSOLIDATED PROPERTIES The following table presents the mortgage loans we have entered into or extended since
January 1, 2016 related to our consolidated properties:
Financing Date
2018 Activity:
January
2016 Activity:
March
April
Property
Amount Financed
or Extended
(in millions of dollars)
Stated Interest Rate
Maturity
Francis Scott Key Mall(1)
$ 68.5
LIBOR plus 2.60%
January 2022
Viewmont Mall(2)
Woodland Mall(3)
9.0
130.0
LIBOR plus 2.35%
LIBOR plus 2.00%
March 2021
April 2021
(1) In January 2018, the $68.5 million mortgage loan secured by Francis Scott Key was amended to extend the initial maturity date to January 2022, and has a one-year extension option
that would further extend the maturity date to January 2023.
(2) The mortgage was increased by $9.0 million and the interest rate was lowered to LIBOR plus 2.35% and the maturity date was extended to March 2021.
(3) The proceeds from the new mortgage loan were used to pay down a portion of the Credit Facility borrowings that were used to repay the previous $141.2 million mortgage loan. Interest only
payments.
In March 2017, we repaid a $150.6 million mortgage loan plus accrued interest secured by The Mall at Prince Georges in Hyattsville, Maryland using $110.0
million from our 2013 Revolving Facility and the balance from available working capital.
In March 2016, we repaid a $79.3 million mortgage loan plus accrued interest secured by Valley Mall in Hagerstown, Maryland using $50.0 million from our
2013 Revolving Facility and the balance from available working capital.
In March 2016, we repaid a $32.8 million mortgage loan plus accrued interest secured by Lycoming Mall in Pennsdale, Pennsylvania in connection with the
March 2016 sale of the property using proceeds from the sale and available working capital.
In March 2016, we repaid a $28.1 million mortgage loan plus accrued interest secured by New River Valley Mall in Christiansburg, Virginia in connection
with the March 2016 sale of the property using proceeds from the sale.
MORTGAGE LOANS Our mortgage loans, which are secured by 11 of our consolidated properties, are due in installments over various terms extending
to the year 2025. Eight of these mortgage loans bear interest at fixed interest rates that range from 3.88% to 5.95% and had a weighted average interest
rate of 4.28% at December 31, 2017. Three of our mortgage loans bear interest at variable rates and had a weighted average interest rate of 3.60% at
December 31, 2017. The weighted average interest rate of all consolidated mortgage loans was 4.12% at December 31, 2017. Mortgage loans for properties
owned by unconsolidated partnerships are accounted for in “Investments in partnerships, at equity” and “Distributions in excess of partnership invest-
ments,” and are not included in the table below.
The following table outlines the timing of principal payments and balloon payments pursuant to the terms of our mortgage loans on our consolidated prop-
erties as of December 31, 2017:
Payments by Period
(in thousands of dollars)
Total
2018
2019
2020
2021-2022
Thereafter
Consolidated mortgage loans:
Principal payments
Balloon payments(1)
$ 109,825
949,614
$ 18,487
68,469
$ 19,517
—
$ 19,791
27,161
$ 33,325
589,339
$ 18,705
264,645
Total consolidated mortgage
$ 1,059,439
$ 86,956
$ 19,517
$ 46,952
$ 622,664
$ 283,350
Less: Unamortized debt issuance costs
3,355
Carrying value of mortgage notes payable
$ 1,056,084
(1) The 2018 period includes $68.5 million related to the mortgage loan on Francis Scott Key Mall for which the maturity date was extended to 2022 in January 2018.
62 MANAGEMENT’S DISCUSSION AND ANALYSIS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2017 ANNUAL REPORT
63
CONTRACTUAL OBLIGATIONS The following table presents our consolidated aggregate contractual obligations as of December 31, 2017 for the periods
presented:
(in thousands of dollars)
Mortgage loans
Term Loans
2013 Revolving Facility
Interest on indebtedness(2)
Operating leases
Ground leases
Development and
Total
2018
2019
2020
2021-2022
Thereafter
$ 1,059,438
550,000
53,000
261,908
4,347
49,057
$ 86,956 (1)
—
53,000
60,593
2,075
1,021
$ 19,517
150,000
—
54,810
1,762
1,184
$ 46,952
150,000
$ 622,664
250,000
—
51,173
346
1,384
—
66,756
164
3,168
$ 283,350
—
—
28,576
—
42,300
redevelopment commitments(3)
110,390
109,904
486
—
—
—
Total
$2,088,140
$313,549
$227,759
$249,855
$942,752
$354,226
(1) The 2018 period includes $68.5 million related to the mortgage loan on Francis Scott Key Mall for which the maturity date was extended to 2022 in January 2018.
(2) Includes interest payments expected to be made on consolidated debt, including those in connection with interest rate swap agreements. Includes payments due under the mortgage loan on Francis
Scott Key Mall which was extended in January 2018.
(3) The timing of the payments of these amounts is uncertain. We expect that more than half of such payments will be made prior to December 31, 2018, but cannot provide any assurance that changed
circumstances at these projects will not delay the settlement of these obligations. In addition, our operating partnership, PREIT Associates, has jointly and severally guaranteed the obligations of the joint
venture we formed with Macerich to develop Fashion District Philadelphia to commence and complete a comprehensive redevelopment of that property costing not less than $300.0 million within 48
months after commencement of construction, which was March 14, 2016.
MORTGAGE LOAN ACTIVITY—UNCONSOLIDATED PROPERTIES The following table presents the mortgage loans secured by our unconsolidated prop-
erties entered into since January 1, 2016:
Financing Date
2018 Activity:
February
2017 Activity:
October
Property
(in millions of dollars)
Stated Interest Rate
Maturity
Amount Financed
or Extended
Pavilion at Market East(1)
$ 8.3
LIBOR plus 2.85%
February 2021
Lehigh Valley Mall(2)(3)
200.0
Fixed 4.06%
November 2027
(1) We own a 40% partnership interest in Pavilion at Market East and our share of this mortgage loan is $3.3 million.
(2) The proceeds were used to repay the existing $124.6 million mortgage loan plus accrued interest. We own a 50% partnership interest in Lehigh Valley Mall and our share of this mortgage loan
is $100.0 million.
(3) We received $35.3 million of proceeds as a distribution in connection with the financing. In connection with this new mortgage loan financing, the unconsolidated entity recorded $3.1 million
of prepayment penalty and accelerated the amortization of $0.1 million of unamortized financing costs in the fourth quarter of 2017.
INTEREST RATE DERIVATIVE AGREEMENTS As of December 31, 2017,
we had entered into 30 interest rate swap agreements with a weighted
average interest swap rate of 1.35% on a notional amount of $749.6 mil-
lion maturing on various dates through December 2021, and one forward
starting interest rate swap agreement with a base interest rate of 1.42%
on a notional amount of $48.0 million. We entered into these interest rate
swap agreements in order to hedge the interest payments associated with
our issuances of variable rate long term debt. We assessed the effective-
ness of these swap agreements as hedges at inception and do so on a
quarterly basis. On December 31, 2017, we considered these interest rate
swap agreements to be highly effective as cash flow hedges. The interest
rate swap agreements are net settled monthly.
As of December 31, 2017, 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 less than $0.1 mil-
lion. The carrying amount of the associated assets are recorded in “Deferred
costs and other assets,” liabilities are 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 $136.4 million for 2017
compared to $147.6 million for 2016 and $135.7 million for 2015. The
decrease in cash from operating activities in 2017 was primarily due to
a decrease in net operating income as a result of property sales. The
increase in cash from operating activities in 2016 was primarily due to a
decrease in cash paid for interest.
Cash flows used in investing activities were $98.3 million for 2017 com-
pared to cash flows provided by investing activities of $2.0 million for 2016
and cash flows used in investing activities of $379.1 million for 2015.
Investing activities in 2017 included investment in construction in progress
of $116.6 million, investments in partnerships of $73.4 million (primarily at
Fashion District Philadelphia) and real estate improvements of $51.9 mil-
lion (primarily related to ongoing improvements at our properties), partially
offset by $77.8 million of proceeds from sales of Logan Valley Mall, Beaver
Valley Mall, Crossroads Mall and two non operating parcels, $35.2 million
of distributions of refinancing proceeds from Lehigh Valley Mall, and $30.3
million of proceeds from the sale of 801 Market Street by the Fashion
District Philadelphia joint venture.
Investing activities for 2016 included proceeds totaling $154.8 million
from the sale of seven operating properties and two outparcels, partially
offset by investment in construction in progress of $88.2 million and real
estate improvements of $49.9 million, primarily related to tenant allow-
ances, recurring capital expenditures and ongoing improvements at our
properties.
Investing activities for 2015 included $320.0 million used in acquiring
Springfield Town Center, investment in construction in progress of $30.7
million and real estate improvements of $52.8 million, offset by aggregate
proceeds from sales of real estate investments totaling $53.0 million.
Cash flows used in financing activities were $32.6 million for 2017 com-
pared to cash flows used in financing activities of $162.6 million for 2016
and cash flows provided by financing activities of $225.9 million for 2015.
Cash flows provided by financing activities for 2017 included $286.8
million of proceeds from our 2017 Series C and D Preferred Share offer-
ings and $56.0 million of net borrowings on our 2013 Revolving Facility,
partially offset by the mortgage loan repayments of The Mall of Prince
Georges of $150.0 million, the Series A Preferred Share redemption of
$115.0 million, aggregate dividends and distributions of $93.0 million, and
principal installments on mortgage loans of $17.9 million.
Cash flows used in financing activities in 2016 included the mortgage
loan repayment of $140.5 million on Woodland Mall, the mortgage loan
repayment of $79.0 million on Valley Mall, the $32.8 million repayment
of the mortgage loan on Lycoming Mall, the $28.1 million repayment of
the mortgage loan on New River Valley Mall, dividends and distributions
of $81.2 million, and principal installments on mortgage loans of $17.9
million, partially offset by net borrowing of $82.0 million from our 2013
Revolving Facility, $130.0 million from the mortgage loan on Woodland
Mall and a $9.0 million additional draw borrowed on the mortgage loan
secured by Viewmont Mall.
Cash flows provided by financing activities for 2015 included net borrowing
of $215.0 million from our 2013 Revolving Facility, proceeds from mort-
gage loans of $272.0 million (Willow Grove park, Patrick Henry Mall and
Magnolia Mall), $120.0 million of net borrowings from our Term Loans,
offset by mortgage loan repayments of $272.7 million (Willow Grove Park,
Patrick Henry Mall and Francis Scott Key Mall), dividends and distribu-
tions of $79.6 million, and principal installments on mortgage loans of
$20.8 million.
See note 1 to our consolidated financial statements for details regarding
costs capitalized during 2017 and 2016.
Commitments
As of December 31, 2017, we had unaccrued contractual and other
commitments related to our capital improvement projects and develop-
ment projects of $110.4 million in the form of tenant allowances, lease
termination fees, and contracts with general service providers and other
professional service providers. In addition, our operating partnership,
PREIT Associates, has jointly and severally guaranteed the obligations
of the joint venture we formed with Macerich to develop Fashion District
Philadelphia to commence and complete a comprehensive redevelopment
of that property costing not less than $300.0 million within 48 months
after commencement of construction, which was March 14, 2016.
Environmental
We are aware of certain environmental matters at some of our proper-
ties. We have, in the past, performed remediation of such environmental
matters, and we are not aware of any significant remaining potential lia-
bility relating to these environmental matters or of any obligation to satisfy
requirements for further remediation. We may be required in the future to
perform testing relating to these matters. We have insurance coverage for
certain environmental claims up to $25.0 million per occurrence and up
to $25.0 million in the aggregate. See our Annual Report on Form 10-K for
the year ended December 31, 2017 in the section entitled “Item 1A. Risk
Factors—We might incur costs to comply with environmental laws, which
could have an adverse effect on our results of operations.”
Competition And Tenant Credit Risk
Competition in the retail real estate market is intense. We compete with
other public and private retail real estate companies, including companies
that own or manage malls, power centers, strip 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 sev-
eral factors, including location and rent charged. We compete with these
companies to attract customers to our properties, as well as to attract
anchor and non-anchor store and other tenants. We also compete to
acquire land for new site development or to acquire parcels or properties
64 MANAGEMENT’S DISCUSSION AND ANALYSIS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2017 ANNUAL REPORT
65
to add to our existing properties. Our malls and our other operating prop-
erties 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, including internet retailers. 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 existence or development of competing retail properties and the related
increased competition for tenants might, subject to the terms and condi-
tions of the Credit Agreements, 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 prime devel-
opment sites or sites adjacent to our properties, including institutional
pension funds, other REITs and other owner-operators of retail properties.
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, better cash flow
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 mate-
rial 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 signif-
icant to us than the bankruptcy or store closings of other tenants. See
our Annual Report on Form 10-K for the year ended December 31, 2017
in the section entitled “Item 2. Properties—Major Tenants.” 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. 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.
Seasonality
There is seasonality in the retail real estate industry. Retail property leases
often provide for the payment of all or a portion of rent based on a per-
centage of a tenant’s sales revenue, or 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 and second quarters. Our concentration in the retail
sector increases our exposure to seasonality and has resulted, 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 might 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
n concentration of our properties in the Mid-Atlantic region;
This Annual Report for the year ended December 31, 2017, together with
other statements and information publicly disseminated by us, contain
certain “forward-looking statements” within the meaning of the federal
securities laws. Forward-looking statements relate to expectations, beliefs,
projections, future plans, strategies, anticipated events, trends and other
matters that are not historical facts. When used, the words “anticipate,”
“believe,” “estimate,” “target,” “goal,” ”expect,” “intend,” “may,” “plan,”
“project,” “result,” “should,” “will,” and similar expressions, which do not
relate solely to historical matters, are intended to identify forward looking
statements. 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:
n changes in the retail industry, including consolidation and store closings,
particularly among anchor tenants;
n 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;
n increases in operating costs that cannot be passed on to tenants;
n current economic conditions and the state of employment growth and
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;
n the effects of online shopping and other uses of technology on our retail
tenants;
n risks related to our development and redevelopment activities;
n acts of violence at malls, including our properties, or at other similar
spaces, and the potential effect on traffic and sales;
n our ability to identify and execute on suitable acquisition opportunities
and to integrate acquired properties into our portfolio;
n our partnerships and joint ventures with third parties to acquire or
develop properties;
n changes in local market conditions, such as the supply of or demand for
retail space, or other competitive factors;
n changes to our corporate management team and any resulting modifica-
tions to our business strategies;
n our ability to sell properties that we seek to dispose of or our ability to
obtain prices we seek;
n our substantial debt and the liquidation preference value of our preferred
shares and our high leverage ratio;
n constraining leverage, unencumbered debt yield, interest and tangible
net worth covenants under our principal credit agreements;
n potential losses on impairment of certain long-lived assets, such as real
estate, or of intangible assets, such as goodwill, including such losses
that we might be required to record in connection with any dispositions
of assets;
n our ability to refinance our existing indebtedness when it matures, on
favorable terms or at all;
n our ability to raise capital, including through joint ventures or other part-
nerships, through sales of properties or interests in properties, through
the issuance of equity or equity-related securities if market conditions
are favorable, or through other actions;
n our short- and long-term liquidity position;
n potential dilution from any capital raising transactions or other equity
issuances; and
n general economic, financial and political conditions, including credit and
capital market conditions, changes in interest rates or unemployment.
Additional factors that might cause future events, achievements or results
to differ materially from those expressed or implied by our forward-looking
statements include those discussed in our Annual Report on Form 10-K
for the year ended December 31, 2017 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.
66 MANAGEMENT’S DISCUSSION AND ANALYSIS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2017 ANNUAL REPORT
67
in order to hedge the interest payments associated with our issuances of
variable interest rate long-term debt.
Changes in market interest rates have different effects on the fixed and
variable portions of our debt portfolio. A change in market interest rates
applicable to the fixed portion of the debt portfolio affects the fair value,
but it has no effect on interest incurred or cash flows. A change in market
interest rates applicable to the variable portion of the debt portfolio affects
the interest incurred and cash flows, but does not affect the fair value.
The following sensitivity analysis related to the fixed debt portfolio, which
includes the effects of our interest rate swap agreements, assumes an
immediate 100 basis point change in interest rates from their actual
December 31, 2017 levels, with all other variables held constant.
A 100 basis point increase in market interest rates would have resulted
in a decrease in our net financial instrument position of $50.5 million at
December 31, 2017. A 100 basis point decrease in market interest rates
would have resulted in an increase in our net financial instrument posi-
tion of $53.1 million at December 31, 2017. Based on the variable rate
debt included in our debt portfolio at December 31, 2017 a 100 basis
point increase in interest rates would have resulted in an additional $1.1
million in interest expense annually. A 100 basis point decrease would
have reduced interest incurred by $1.1 million annually. Because the infor-
mation presented above includes only those exposures that existed as of
December 31, 2017, it does not consider changes, exposures or positions
which could arise after that date. The information presented herein has
limited predictive value. As a result, the ultimate realized gain or loss or
expense with respect to interest rate fluctuations will depend on the expo-
sures that arise during the period, our hedging strategies at the time and
interest rates.
Quantitative and Qualitative Disclosures About Market Risk
The analysis below presents the sensitivity of the market value of our financial
instruments to selected changes in market interest rates. As of December 31,
2017, our consolidated debt portfolio consisted primarily of $1,056.1 million
(net of unamortized debt issuance costs) of fixed and variable rate mortgage
loans, $150.0 million borrowed under our 2015 5-Year Term Loan, which
bore interest at 2.81%, $150.0 million borrowed under our 2014 5-Year Term
Loan, which bore interest at a rate of 2.81%, $250.0 million borrowed under
our 2014 7-Year Term Loan, which bore interest at a rate of 2.81% and $53.0
million borrowed under our 2013 Revolving Facility, which bore interest at a
rate of 2.74%.
Our mortgage loans, which are secured by 11 of our consolidated properties,
are due in installments over various terms extending to the year 2025. Eight
of these mortgage loans bear interest at fixed interest rates that range from
3.88% to 5.95% and had a weighted average interest rate of 4.28% at
December 31, 2017. Three of our mortgage loans bear interest at variable
rates and had a weighted average interest rate of 3.60% at December 31,
2017. The weighted average interest rate of all consolidated mortgage loans
was 4.12% at December 31, 2017. Mortgage loans for properties owned by
unconsolidated partnerships are accounted for in “Investments in partner-
ships, at equity” and “Distributions in excess of partnership investments,”
and are not included in the table below.
Our interest rate risk is monitored using a variety of techniques. The table
below presents the principal amounts, including balloon payments, of the
expected annual maturities and the weighted average interest rates for the
principal payments in the specified periods:
Fixed Rate Debt
Variable Rate Debt
(in thousands of dollars)
For the Year Ending
December 31,
Weighted
Principal
Payments
Average
Interest Rate
Weighted
Average
Principal
Payments Interest Rate(1)
$ 16,807
2018
$ 17,837
2019
$ 45,272
2020
2021
$ 18,602
2022 and thereafter $708,252
4.25 % $123,149
4.25 % $151,680
5.03 % $151,680
4.20 % $429,160
4.21 % $ —
3.61%
2.88%
2.82%
2.89%
—%
(1) Based on the weighted average interest rate in effect as of December 31, 2017 and does
not include the effect of our interest rate swap derivative instruments as described below.
At December 31, 2017, we had $855.7 million of variable rate debt. To
manage interest rate risk and limit overall interest cost, we may employ
interest rate swaps, options, forwards, caps and floors, or a combination
thereof, depending on the underlying exposure. Interest rate differentials
that arise under swap contracts are recognized in interest expense over
the life of the contracts. If interest rates rise, the resulting cost of funds is
expected to be lower than that which would have been available if debt
with matching characteristics was issued directly. Conversely, if interest
rates fall, the resulting costs would be expected to be higher. We may
also employ forwards or purchased options to hedge qualifying anticipated
transactions. Gains and losses are deferred and recognized in net income
in the same period that the underlying transaction occurs, expires or is
otherwise terminated. See note 6 to our consolidated financial statements.
As of December 31, 2017, we had entered into 30 interest rate swap
agreements with a weighted average interest swap rate of 1.35% on a
notional amount of $749.6 million maturing on various dates through
December 2021. We entered into these interest rate swap agreements
TRUSTEES
UPPER ROW (FROM LEFT TO RIGHT)
GEORGE J. ALBURGER (3) Trustee Since 2017
Former Executive Vice President and CFO of Liberty Property Trust
JOSEPH F. CORADINO Trustee Since 2006
Chairman and Chief Executive Officer
Pennsylvania Real Estate Investment Trust
MICHAEL J. DEMARCO (2)(4) Trustee Since 2015
Chief Executive Officer
Mack-Cali Realty Corp
JOANNE E. EPPS (1) Trustee Since 2018
Executive Vice President and Provost
Temple University
LEONARD I. KORMAN (2)(4) Trustee Since 1996
Chairman and Chief Executive Officer
Korman Commercial Properties, Inc.
LOWER ROW (FROM LEFT TO RIGHT)
MARK PASQUERILLA (2)(3) Trustee Since 2003
President
Pasquerilla Enterprises, LP
CHARLES P. PIZZI (1)(2) Trustee Since 2013
Former President and Chief Executive Officer
Tasty Baking Company
JOHN J. ROBERTS (3)(4) Trustee Since 2003
Former Global Managing Partner
PricewaterhouseCoopers LLP
RONALD RUBIN
Former Chairman
Pennsylvania Real Estate Investment Trust
(1) Nominating & Governance Committee
(2) Executive Compensation & Human Resources Committee
(3) Audit Committee
(4) Special Committee
BOLD indicates Committee Chairperson
OFFICERS
JOSEPH F. CORADINO
Chief Executive Officer
ROBERT F. MCCADDEN
Executive Vice President
and Chief Financial Officer
JOSEPH J. ARISTONE
Executive Vice President
Leasing
ANDREW M. IOANNOU
Executive Vice President
Finance and Acquisitions
MARIO C. VENTRESCA, JR.
Executive Vice President
Operations
JONATHEN BELL
Senior Vice President
and Chief Accounting Officer
HEATHER CROWELL
Senior Vice President
Strategy and Communicationss
DANIEL M. HERMAN
Senior Vice President
Development
LISA M. MOST
Senior Vice President
General Counsel and
Chief Compliance Officer
RUDOLPH ALBERTS, JR.
Vice President
Asset Management
SAM COLLIER
Vice President
Leasing
BETH DESISTA
Vice President
Specialty Leasing
JOHANNA DIDIO
Vice President
Legal
ANTHONY DILORETO
Regional Vice President
Leasing
MICHAEL A. FENCHAK
Vice President
Asset Management
MARK GAMBILL
Vice President
Development
BRADFORD HUGHART
Vice President
Information Technology
WILLIAM INGRAHAM
Vice President
Partnership and Property Marketing
MICHAEL A. KHOURI
Vice President
Leasing
DAVID MARSHALL
Vice President
Financial Services
SEAN MULROY
Vice President
Business Analytics
DANIEL PASCALE
Vice President
Development
DANIEL RUBIN
Vice President
Outparcel Leasing
JOSHUA SCHRIER
Vice President
Acquisitions
JEFFREY SNEDDON
Vice President
Leasing
JOSHUA TALLEY
Vice President
Legal
VINCE VIZZA
Regional Vice President
Leasing
68 MANAGEMENT’S DISCUSSION AND ANALYSIS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2017 ANNUAL REPORT
69
Investor Information
HEADQUARTERS
200 South Broad Street, Third Floor
Philadelphia, PA 19102-3803
215.875.0700
215.875.7311 Fax
866.875.0700 Toll Free
preit.com
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
1601 Market Street
Philadelphia, PA 19103–2499
LEGAL COUNSEL
Drinker Biddle & Reath LLP
One Logan Square, Ste. 2000
Philadelphia, PA 19103–6996
TRANSFER AGENT AND REGISTRAR
For change of address, lost dividend checks, shareholder records and
other shareholder matters, contact:
Mailing Address
EQ Shareowner Services
P.O. Box 64874
St. Paul, MN 55164-0874
651.450.4064 (outside the United States)
651.450.4085 Fax
800.468.9716 Toll Free
shareowneronline.com
Street or Courier Address
1110 Centre Pointe Curve, Suite 101
MAC N9173 -010
Mendota Heights, MN 55120
DISTRIBUTION REINVESTMENT AND SHARE PURCHASE PLAN
The Company has a Distribution Reinvestment and Share Purchase Plan
for common shares (NYSE:PEI) that allows investors to invest directly in
shares of the Company at a 1% discount with no transaction fee, and to
reinvest their dividends at no cost to the shareholder. The minimum initial
investment is $250, the minimum subsequent investment is $50, and the
maximum monthly amount is $5,000, without a waiver.
Further information and forms are available on our web site at preit.com
under Investor Relations, DRIP/Stock Purchase. You may also contact
the Plan Administrator, Wells Fargo Shareowner Services, at 800.468.9716
or 651.450.4064.
INVESTOR INQUIRIES
Shareholders, prospective investors and analysts seeking information
about the Company should direct their inquiries to:
Investor Relations
Pennsylvania Real Estate Investment Trust
200 South Broad Street, Third Floor
Philadelphia, PA 19102–3803
215.875.0735
215.546.1271 Fax
866.875.0700 ext. 50735 Toll Free
email: investorinfo@preit.com
preit.com
FORMS 10-K AND 10-Q; CEO AND CFO CERTIFICATIONS
The Company’s Annual Report on Form 10-K, including financial state-
ments and a schedule, and Quarterly Reports on Form 10-Q, which are
filed with the Securities and Exchange Commission, may be obtained
without charge from the Company.
The Company’s chief executive officer certified to the New York Stock
Exchange (NYSE) that, as of June 30, 2017, he was not aware of any
violation by the Company of the NYSE’s corporate governance listing
standards.
70 MANAGEMENT’S DISCUSSION AND ANALYSIS
The certifications of our chief executive officer and chief financial officer
required under Section 302 of the Sarbanes-Oxley Act of 2002 were filed
as Exhibits 31.1 and 31.2, respectively, to our Annual Report on Form
10-K for the year ended December 31, 2017.
NYSE MARKET PRICE AND DISTRIBUTION RECORD
The following table shows the high and low prices for the Company’s
common shares and cash distributions paid for the periods indicated.
Quarter Ended
Calendar Year 2017
March 31
June 30
September 30
December 31
Quarter Ended
Calendar Year 2016
March 31
June 30
September 30
December 31
High
$ 19.92
$ 15.34
$ 13.02
$ 12.11
High
$ 21.95
$ 23.99
$ 25.67
$ 22.86
Distributions
Paid per
Common
Share
$0.21
0.21
0.21
0.21
$0.84
Low
$ 13.76
$ 10.00
$ 9.75
$ 9.32
Distributions
Paid per
Common
Share
$0.21
0.21
0.21
0.21
$0.84
Low
$ 16.42
$ 20.36
$ 21.32
$ 18.12
In February 2018, our Board of Trustees declared a cash dividend of
$0.21 per share payable in March 2018. Our future payment of distri-
butions will be at the discretion of our Board of Trustees and will depend
on numerous factors, including our cash flow, financial condition,
capital requirements, annual distribution requirements under the REIT
provisions of the Internal Revenue Code and other factors that our
Board of Trustees deems relevant.
As of December 31, 2017, there were approximately 2,000 registered
shareholders and 20,000 beneficial holders of record of the Company’s
common shares of beneficial interest. The Company had an aggregate
of approximately 297 employees as of December 31, 2017.
STOCK MARKET
New York Stock Exchange
Common Ticker Symbol: PEI
ANNUAL MEETING
The Annual Meeting of Shareholders is scheduled for 11AM on
Thursday, May 31, 2018 at the Hyatt at the Bellevue, 200 South Broad
Street, Philadelphia, Pennsylvania.
PREIT IS A MEMBER OF
National Association of Real Estate Investment Trusts
International Council of Shopping Centers
Pension Real Estate Association
Urban Land Institute
The paper used in this report contains 10% recycled post-
consumer waste. The use of this recycled paper is consistent
with PREIT’s Green Enterprise Initiative.
FPO