T W E N T Y E I G H T E E N A N N U A L R E P O R T
R E D E F I N I N G T H E M A L L
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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)
2018 2017
Year ended December 31,
2016
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
$
$
362,400
$ (126,503)
$ (137,704)
$ (1.98)
111,496
$ 3,184,594
$ 2,405,114
0.84
$
78,767
$ 2,874,955
$
367,490
$ (32,848)
$ (57,901)
$ (0.84)
$
123,120
$ 3,299,702
$ 2,588,771
0.84
$
78,256
$ 3,212,328
$ 399,946
$ (12,713)
$ (25,511)
$ (0.37)
$ 146,426
$ 3,300,014
$ 2,616,832
0.84
$
77,866
$ 3,653,483
* Reconciliation to GAAP can be found on page 60.
01
JO S EPH F. C O RAD INO Chair man & Chi ef Ex ecutiv e Off icer
agile
/aj nuhl, nahyl/
adjective
able to move quickly and easily.
DEAR FELLOW SHAREHOLDERS
For too long we have allowed malls to
and soon… live… ALL in addition to
be defined in a homogenous manner,
shopping for a selection of trend-driven
as homogenous as their tenancy has
merchandise.
historically been. At PREIT, we have
changed the definition of the “mall.” No
longer just a place to shop for the latest
trends from the variety of ubiquitous
stores, now a destination for an array of
conveniences and social experiences —
a place where you can grab a quick bite
or sit for a high quality meal, have fun
with family or friends catching a movie,
bowling or playing video games, shop
for groceries, seek and find brand name
merchandise at a discount, practice a
healthy lifestyle with a workout, find
Most people on our management team
would say they can’t recall a year with as
many challenges as 2018, but we also
view it as a year that extended more
opportunity to re-craft our industry than
ever before. 2018 was a very busy year
marked by achievements that are leading
us toward many milestones in 2019. As I
write this, we are a different company —
different than we once were and different
than our peers. This is because we have
remained AGILE.
unique limited-time merchandise from
This industry has been moving quickly.
local artisans and merchants, even work
And we continue to fortify our first-
02
MOORESTOWN MALL, MOOREST OWN, NJ
anchor
/ang nker/
noun
a person or thing that provides stability
or confidence in an otherwise uncertain
situation.
mover-advantage status which puts us
redefined the mall. We’ve taken the
in a position to capitalize on the momen-
opportunity to INNOVATE, and in doing
tum we’ve created. Having been first and
so, created a stronger platform for to-
fastest in disposing of low-productivity
morrow.
assets has enabled us to position the
Company to be proactive with respect
to ANCHOR repositioning. This program
has brought OVER TWO DOZEN NEW
TENANTS into 11 former department
stores in just two years.
We ended the year with core mall SALES
PER SQUARE FOOT AT $510, core mall
leased space of 96.6%, NO UNLEASED
ANCHORS in our core portfolio and
strong prospects for adding over 5,000
MULTIFAMILY UNITS to our properties.
As consumer behavior changes and
We have differentiated ourselves.
certain department stores have fallen out
of favor, we seized the opportunity to
deliver what our customers are looking
for — variety, value, experiences and so-
cial interaction.
We are in the early stages of seeing the
benefits of the differentiated tenant base
we have created. At properties where we
had replaced anchors prior to the 2018
holiday season, traffic was up notably
In repositioning our anchors and remer-
over 5% on average. And over 50% of
chandising our properties, we have
the leases we signed in 2018 were for
05
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P LYM OUT H MEETING MA LL, PLYM OUTH ME ETING, PA
curating
/kyoo nreyt ning/
verb
to take charge of (an asset) or organize
(a tenant mix).
diverse uses that have not historically
Our existing unique blend of tenants
been located in malls.
Looking to our future, we are optimis-
tic that the many MILESTONES that are
foundationally changing our Company
and the quality of our properties, will
enhance the quality of our earnings
stream going forward.
and experiences, which include DAVE &
BUSTER’S, WHOLE FOODS MARKET,
one of nine LEGOLAND DISCOVERY
CENTERS in the country, accentuated by
an AMC MOVIE THEATRE, four sit-down
restaurants and popular apparel and
accessory brands, earned the mall a
place among Chain Store Age’s Top 10
At PLYMOUTH MEETING MALL, we will
Retail Destinations in the country. This
cement the creation of a truly unique
property is a model for the new mall
experience with the opening of five
paradigm having integrated entertain-
exciting tenants in the former Macy’s
ment, dining, grocery and fitness, driving
box — DICK’S SPORTING GOODS,
unique visitors to the mall regularly.
BURLINGTON, EDGE FITNESS, MILLER’S
ALE HOUSE AND MICHAEL’S — this
lineup underscores the diversity in mall
tenancy we have been CURATING and
will drive significant traffic and sales.
Our strong
track record
in anchor
replacement activity comes to life at
VALLEY MALL where we will we will open
four diverse uses in three former depart-
06
SALES PER SQUARE FOOT GROW TH
% OF GLA EX ECUTED FOR FU TUR E OPE NINGS B Y CATE GORY
525
500
475
450
D
o
l
l
a
r
s
425
400
375
350
$510
$493
$464
$457
$394
$380
$372
12.12
12.13
12.14
12.15
12.16
12.17(1)
1.31.18 (1)
(1) Represents 2019 core malls only
28% Sports & Leisure
Arts & Crafts 8%
19% Dining & Entertainment
Fast Fashion 6%
17% Off Price
Health & Wellness 6%
VALLEY MALL, HAGERSTOWN, MD
innovate
/in nuh nveyt/
verb
make changes in something established,
especially by introducing new methods, ideas
or products.
ment store spaces in just two years, suc-
mall. REGAL CINEMA will be remodeled
cessfully replacing over 300,000 square
this year to introduce luxury reclining
feet. We have integrated ONELIFE FIT-
seating in a stadium format, and PREIT
NESS, a FULL SERVICE, HIGH-QUALITY
recently upgraded dining amenities at the
FITNESS FACILITY with an indoor-out-
mall with the addition of BJ’s Brewhouse
door swimming pool and an extensive
and the recently executed Black Rock
array of fitness classes and they joined
Bar & Grill, joining Primanti Bros., Mission
TILT STUDIO, a 48,000 SQUARE FOOT
BBQ and Red Robin.
FAMILY-ORIENTED ENTERTAINMENT
DESTINATION offering rides, bowling
and arcade games, in the former Macy’s
space. BELK opened its first store in
the region here in 2018, replacing The
Bon-Ton. In 2020, we will add DICK’S
SPORTING GOODS, in place of a for-
mer Sears, to complete the project.
The new anchor concepts complement
PREIT’s ongoing transformation of the
The grand reopening of WOODLAND
MALL is also on the horizon — this proj-
ect has been underway for two years
and we are clearly solidifying our posi-
tion as the premier destination in Grand
Rapids, MI. Along with VON MAUR, the
project will include the region’s only REI,
THE CHEESECAKE FACTORY, URBAN
OUTFITTERS, and BLACK ROCK BAR
& GRILL which will join existing tenants
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W OO DLAN D M A LL, GRAND RAPID S, MI
milestones
/mahyl n stohn/
noun
a significant or important event, e.g. in the
history of a country or in somebody’s life.
APPLE, ALTAR’D STATE, THE NORTH
SEPTA’s Jefferson Station and new
FACE, LUSH and many others. With the
Jefferson University headquarters, the
addition of a fashion department store,
project will be a vibrant metropolitan
the region’s only Apple store and The
destination for shopping, dining, social-
Cheesecake Factory, this property will
izing and playing, cementing the next
take its place as a trophy destination,
generation of consumer experiences.
solidifying its position as one of PREIT’s
top-performing properties.
As the retail landscape evolves to further
integrate lifestyle and dining concepts,
In the spirit of saving the best for last,
the project has adopted four brand pil-
we
look
forward to the September
lars: STYLE, DINING, ENTERTAINMENT,
2019 opening of our marquee project,
AND ARTS & CULTURE. With a unique
FASHION DISTRICT, here in our home-
combination of flagship, off-price, fast-
town, Philadelphia. Spanning three city
fashion, traditional full price and branded
blocks in downtown Philadelphia, with
outlet stores, Fashion District will offer
a prime location just steps away from
mass appeal to a diverse customer base,
Philadelphia’s historic district and con-
combining a high quality experience
nected to Reading Terminal Market,
with accessible style. CITY WINERY, a
the Pennsylvania Convention Center,
culinary and cultural wine destination
12
FASHION DISTRICT, PHILADELPHIA, PA
sustainable
/suh n stey n nuh nbuhl/
adjective
able to be maintained or kept going, as an
action or process.
offering intimate concerts, food and
SUSTAINABLE growth well into the fu-
wine classes, private events and fine
ture. We have started a new book, while
dining, will open its seventh location in
many think a chapter is coming to an
the country, kick starting the revitaliza-
end. We are truly invigorated to deliver
tion of Filbert Street, where al fresco din-
the new model as it is accepted and em-
ing and outdoor events will transform the
braced across the country.
street into a hub for interactive experi-
ences. Fashion District will also feature a
dedicated third-floor entertainment zone
with AMC THEATRES — Center City’s
first movie theatre since 2002 — and
ROUND 1 ENTERTAINMENT. As dining
and entertainment continue to capture
consumer spending, these concepts will
support local demand for social experi-
ences.
Our vision to redefine the mall has
become a reality and positions us for
None of this would be possible without
the ingenuity and resilience of our team
at PREIT, the support of our trustees and
our shareholders. Thank you all for join-
ing us on this journey.
JOSEPH F. CORADINO
Chairman & Chief Executive Officer
April 1, 2019
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EN C LOS ED M ALLS A S OF DECE MBE R 31, 2018
CAPITAL CITY MALL
Camp Hill, PA
Ownership Interest
Acquired
Square Feet
100%
2003
612,000
CHERRY HILL MALL
Cherry Hill, NJ
Ownership Interest
Acquired
Square Feet
100%
2003
1,315,000
CUMBERLAND MALL
Vineland, NJ
Ownership Interest
Acquired
Square Feet
100%
2005
951,000
DARTMOUTH MALL
Dartmouth, MA
Ownership Interest
Acquired
Square Feet
100%
1997
673,000
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
1,175,000
MAGNOLIA MALL
Florence, SC
Ownership Interest
Acquired
Square Feet
100%
1997
602,000
MOORESTOWN MALL
Moorestown, NJ
Ownership Interest
Acquired
Square Feet
100%
2003
913,000
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
728,000
THE MALL AT PRINCE GEORGES
Hyattsville, MD
Ownership Interest
Acquired
Square Feet
100%
1998
926,000
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
VALLEY VIEW MALL
La Crosse, WI
Ownership Interest
Acquired
Square Feet
100%
2003
520,000
VIEWMONT MALL
Scranton, PA
Ownership Interest
Acquired
Square Feet
WILLOW GROVE PARK
Willow Grove, PA
Ownership Interest
Acquired
Square Feet
100%
2000 / 2003
1,047,000
100%
2003
689,000
100%
2003
798,000
WOODLAND MALL
Grand Rapids, MI
Ownership Interest
Acquired
Square Feet
WYOMING VALLEY MALL
Wilkes-Barre, PA
Ownership Interest
Acquired
Square Feet
100%
1997
823,000
100%
2005
834,000
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
OTHER RETAIL PROPE R T IE S AS OF DECEM BE R 3 1, 2 018
Total square feet represents entire property. PREIT-owned square footage may be less.
MALLS
OTHER RETAIL
PROPERTIES
18,451,000
2,461,000
TOTAL GLA
20,912,000
CHERRY HILL MALL, CHERRY HILL, NJ
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
16
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2018 ANNUAL REPORT
19
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS2017 ANNUAL REPORTPENNSYLVANIA REAL ESTATE INVESTMENT TRUST SELECTED FINANCIAL INFORMATION (UNAUDITED)
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
Year Ended December 31,
Operating results(1)
Total revenue
Net loss
Net loss attributable to PREIT common shareholders
Net loss per share – basic and diluted
Cash flow data(1)
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)(2)
Net loss
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, net
Impairment of real estate assets
Depreciation and amortization of real estate assets:
Consolidated partnerships
Unconsolidated partnerships
Funds From Operations
2018
$ 362,400
$ (126,503 )
$ (137,704)
(1.98 )
$
2017
367,490
$ (32,848 )
$ (57,901 )
(0.84 )
$
2016
$ 399,946
(12,713 )
$
(25,511 )
$
(0.37 )
$
2015
$ 425,411
$ (129,567 )
$ (131,129 )
(1.91 )
$
2014
$ 432,703
(14,262 )
$
(29,201 )
$
(0.43 )
$
$ 134,864
(41,567 )
$
(94,805 )
$
$ 142,091
$ (105,418 )
$ (32,585 )
$ 154,931
$
(4,878)
$ (162,632 )
$ 141,108
$ (382,291 )
$ 225,860
$ 148,164
$ 31,298
$ (170,522 )
$
$
$
$
$
$
$
$
$
$
$
0.84
—
1.8438
1.80
1.719
$ (126,503 )
(27,375 )
—
(2,772 )
(1,525 )
129,365
$
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
—
$
—
$
(12,713 )
(15,848 )
—
—
(23,022 )
62,603
$ (129,567 )
(15,848 )
—
—
(12,362 )
140,318
$
(14,262 )
(15,848 )
—
—
(12,699 )
19,695
131,694
8,612
127,327
10,974
125,192
10,214
141,142
12,563
142,683
9,850
$ 111,496
$ 123,120
$ 146,426
$ 136,246
$ 129,419
Weighted average number of shares outstanding
Weighted average effect of full conversion OP Units
Effect of common share equivalents
69,749
8,273
203
69,364
8,297
93
69,086
8,324
191
68,740
6,830
485
Total weighted average shares outstanding including OP Units
78,225
77,754
77,601
76,055
Funds from operations per diluted share and OP Unit
$
1.43
$
1.58
$
1.89
$
1.79
68,217
2,128
696
71,041
1.82
$
(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 $6,597 and $7,248
at December 31, 2018 and 2017, respectively)
Intangible assets (net of accumulated amortization of $15,543 and $13,117 at
December 31, 2018 and 2017, respectively)
Deferred costs and other assets, net
Assets held for sale
Total assets
Liabilities:
Mortgage loans payable, net
Term Loans, net
Revolving Facilities
Tenants’ deposits and deferred rent
Distributions in excess of partnership investments
Fair value of derivative instruments
Accrued expenses and other liabilities
Total liabilities
Commitments and Contingencies (Note 11)
December 31,
2018
December 31,
2017
$ 3,063,531
115,182
5,881
$ 3,180,212
113,609
5,881
3,184,594
(1,118,582 )
3,299,702
(1,111,007 )
2,066,012
2,188,695
131,124
216,823
18,084
15,348
38,914
38,166
17,868
110,805
22,307
17,693
112,046
—
$ 2,405,114
$ 2,588,771
$ 1,047,906
547,289
65,000
15,400
92,057
3,010
87,901
$ 1,056,084
547,758
53,000
11,446
97,868
20
61,604
1,858,563
1,827,780
Equity:
Series B Preferred Shares, $.01 par value per share; 25,000 shares authorized; 3,450 shares issued and
outstanding at December 31, 2018 and 2017; 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
(in thousands)
Balance sheet items
Investments in real estate, at cost
Total assets
Long term debt excluding unamortized debt costs
Consolidated properties:
Mortgage loans payable
Revolving facilities
Term loans
Company’s share of partnerships:
Mortgage loans payable
As of December 31,
outstanding at December 31, 2018 and 2017; liquidation preference of $172,500
69
69
2018
2017
2016
2015
2014
$ 3,184,594
$3,299,702
$3,300,014
$3,367,889
$ 3,285,404
$ 2,405,114
$ 2,588,771
$ 2,616,832
$ 2,800,392
$ 2,539,703
$ 1,050,970
$
65,000
$ 550,000
$1,059,439
$ 53,000
$ 550,000
$ 1,227,385
$ 147,000
$ 400,000
$ 1,325,495
$ 65,000
$ 400,000
$ 1,407,947
$
—
$ 130,000
$ 232,355
$ 235,672
$ 201,509
$ 202,074
$ 190,310
Series D Preferred Shares, $.01 par value per share; 25,000 shares authorized; 5,000 shares issued and
outstanding at December 31, 2018 and 2017; liquidation preference of $125,000
50
50
Shares of beneficial interest, $1.00 par value per share; 200,000 shares authorized; 70,495 shares issued and
outstanding at December 31, 2018 and 69,983 shares issued and outstanding at December 31, 2017
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
Total liabilities and equity
See accompanying notes to consolidated financial statements.
70,495
1,671,042
5,408
(1,306,318 )
440,781
105,770
69,983
1,663,966
7,226
(1,109,469 )
631,860
129,131
546,551
760,991
$ 2,405,114
$ 2,588,771
(1) Certain prior period amounts for net income (loss) attributable to PREIT common shareholders, basic and diluted earnings per share, noncontrolling interest, total equity — PREIT and cash flow
amounts were adjusted to reflect immaterial financial statement error corrections and new accounting rules as discussed in Note 1 to our consolidated financial statements.
(2) 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.
20 SELECTED FINANCIAL INFORMATION
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2018 ANNUAL REPORT
21
CONSOLIDATED STATEMENTS OF OPERATIONS
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
EARNINGS PER SHARE
For The Year Ended December 31,
2018
2017
2016
(in thousands of dollars, except per share amounts)
Net loss
Noncontrolling interest
Preferred share dividends
Loss on redemption of preferred shares
Dividends on unvested restricted shares
For The Year Ended December 31,
2018
2017
2016
$ (126,503 )
16,174
(27,375 )
—
(542 )
$
$
(32,848 )
6,895
(27,845 )
(4,103 )
(372 )
(12,713 )
3,050
(15,848 )
—
(322 )
(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 property operating expenses
Total property operating expenses
Depreciation and amortization
General and administrative expenses
Provision for employee separation expense
Project costs and other expenses
Insurance recoveries, net
Total operating expenses
Interest expense, net
Impairment of assets
Total expenses
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 sales of real estate by equity method investee
Gains (losses) 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
$ 226,609
106,522
4,291
8,729
12,078
$ 230,898
109,454
4,366
2,760
14,046
$ 252,115
118,880
5,245
4,460
13,897
358,229
4,171
361,524
5,966
394,597
5,349
362,400
367,490
399,946
(113,235 )
(15,990 )
(12,007 )
(141,232 )
(133,116 )
(38,342 )
(1,139 )
(693 )
689
(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 )
—
(313,833 )
(61,355 )
(137,487 )
(307,930 )
(58,430 )
(55,793 )
(321,211 )
(70,724 )
(62,603 )
(512,675 )
(422,153 )
(454,538 )
(150,275 )
11,375
2,772
1,525
8,100
(126,503 )
16,174
(110,329 )
(27,375 )
—
(54,663 )
14,367
6,539
(361 )
1,270
(32,848 )
6,895
(25,953 )
(27,845 )
(4,103 )
(54,592 )
18,477
—
23,022
380
(12,713 )
3,050
(9,663 )
(15,848 )
—
Net loss used to calculate earnings per share – basic and diluted
$ (138,246 )
$
(58,273 )
$
(25,833 )
Basic and diluted loss per share
(in thousands of shares)
Weighted average shares outstanding – basic
Effect of dilutive common share equivalents(1)
Weighted average shares outstanding – diluted
$
(1.98 )
$
(0.84 )
$
(0.37 )
69,749
—
69,364
—
69,086
—
69,749
69,364
69,086
(1) For the years ended December 31, 2018, 2017 and 2016, there were net losses allocable to common shareholders, so the effect of common share equivalents of 203, 93 and 191 for
the years ended December 31, 2018, 2017 and 2016, 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
(in thousands of dollars)
Comprehensive loss:
Net loss
Unrealized (loss) 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,
2018
2017
2016
$ (126,503 )
(2,755 )
721
(128,537 )
16,390
$
(32,848 )
5,415
859
(26,574 )
6,225
$
(12,713 )
6,007
503
(6,203 )
2,355
$ (112,147 )
$
(20,349 )
$
(3,848 )
Net loss attributable to PREIT common shareholders
$ (137,704 )
$
(57,901 )
$
(25,511 )
See accompanying notes to consolidated financial statements.
22 CONSOLIDATED FINANCIAL STATEMENTS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2018 ANNUAL REPORT
23
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016
PREIT Shareholders
PREIT Shareholders
(9,487)
—
—
—
—
—
—
—
(9,487 )
—
50
69,983
1,663,966
7,226 (1,109,469 )
129,131
(1,219 )
6,035
—
—
—
—
—
—
($0.84 per unit)
(6,970 )
—
—
—
—
Other contributions from
noncontrolling
interest, net
18
—
—
—
—
(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, 2016
$ 784,630
$ 46
$ 35
$ —
$ —
$ 69,197
$1,476,397
$(4,193 ) $(909,476) $152,624
Net loss
Other comprehensive
income
Shares issued upon
redemption of Operating
Partnership Units
Shares issued under
employee compensation
plans, net of shares
(12,713)
—
—
6,510
—
—
—
—
—
—
—
—
—
—
—
(889)
6,035
—
—
—
—
—
—
—
—
—
—
26
330
—
—
—
—
(9,663 )
(3,050)
5,815
— 695
574
—
—
(600)
retired
Amortization of deferred
compensation
Dividends paid to Series
A preferred
shareholders
($2.0625 per share)
Dividends paid to Series
B preferred
shareholders
Net loss
Other comprehensive
income
Preferred shares issued in
Series C and D
preferred share
offerings, net
Preferred shares
redeemed
Amortization of deferred
compensation
Shares issued upon
redemption of Operating
Partnership Units
Shares issued under
employee compensation
plan, net of shares retired
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)
($1.8438 per share)
(6,361)
—
—
—
—
Dividends paid to
common shareholders
($0.84 per share)
(58,372)
—
—
—
—
Noncontrolling interests:
Distributions paid to
Operating Partnership
unit holders
($0.84 per unit)
Other contributions
from noncontrolling
interest, net
(6,991)
—
—
—
—
44
—
—
—
—
—
—
—
—
—
—
—
—
—
(6,361 )
—
(58,372 )
—
—
—
—
(6,991)
—
— 44
December 31, 2016
702,406
(32,848)
46
—
35
—
—
—
6,274
—
—
—
—
—
—
69,553
1,481,787
1,622
(993,359) 142,722
286,848
—
—
69
50
(115,000)
(46)
—
5,709
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
39
—
—
—
(25,953 )
(6,895)
5,604
— 670
286,729
—
—
(110,851 )
—
(4,103 )
5,709
—
—
—
—
—
375
—
—
(414)
608
—
—
—
—
391
217
—
—
(7,827)
—
—
—
—
(6,361)
—
—
—
—
(10,971)
—
—
—
—
—
—
—
—
—
—
—
(7,827 )
—
(6,361 )
—
(10,971 )
—
—
—
—
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
(in thousands of dollars,
except per share amounts)
Dividends paid to Series D
preferred shareholders
($0.4488 per share)
Dividends paid to
common shareholders
(2,244 )
—
—
—
—
($0.84 per share)
(58,651 )
—
—
—
—
Noncontrolling interests:
Distributions paid to
Operating Partnership
unit holders
—
—
—
—
—
—
—
—
—
(2,244 )
—
(58,651 )
—
—
—
—
(6,970)
—
—
18
December 31, 2017
760,991
Net loss
Other comprehensive
(126,503 )
—
—
35
—
69
—
loss
(2,034 )
—
—
—
—
—
Shares issued under
employee compensation
plan, net of shares retired
Amortization of deferred
compensation
663
—
—
—
—
6,925
—
—
—
—
—
—
512
—
—
—
151
6,925
—
(110,329 )
(16,174 )
(1,818 )
—
(216 )
—
—
—
—
—
—
Dividends paid to Series
B preferred
shareholders
($1.8438 per share)
Dividends paid to Series
C preferred
shareholders
($1.80 per share)
Dividends paid to Series
D preferred
shareholders
(6,361 )
—
—
—
—
—
—
—
(6,361 )
—
(12,420 )
—
—
—
—
—
—
—
(12,420 )
—
($1.719 per share)
(8,594 )
—
—
—
—
Dividends paid to
common shareholders
($0.84 per share)
(59,145 )
—
—
—
—
Noncontrolling interests:
Distributions paid to
Operating Partnership
unit holders
($0.84 per unit)
Other distributions to
noncontrolling
interest, net
(6,949 )
—
—
—
—
(22 )
—
—
—
—
—
—
—
—
—
—
—
—
—
(8,594 )
—
(59,145 )
—
—
—
—
(6,949 )
—
—
(22 )
December 31, 2018 $546,551
$ —
$35
$69
$50
$70,495
$1,671,042
$5,408 $(1,306,318) $105,770
See accompanying notes to consolidated financial statements.
24 CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2018 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
Non-cash lease termination revenue
Gain on insurance proceeds, net
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
Gain on sale of real estate by equity method investee
Cash distributions from partnerships
Amortization of historic tax credits
Impairment of real estate assets
Impairment of mortgage loan receivable
Change in assets and liabilities:
Net change in other assets
Net change in other liabilities
For the Year Ended December 31,
2018
2017
2016
$ (126,503 )
$
(32,848 )
$
(12,713 )
121,644
14,554
(1,989 )
2,461
(4,200 )
(689 )
6,925
—
(9,625 )
(11,375 )
(2,772 )
9,421
(829 )
129,365
8,122
(5,998 )
6,352
119,441
12,057
(2,686 )
1,763
—
—
5,709
—
(909 )
(14,367 )
(6,539 )
16,849
(1,768 )
55,793
—
(5,652 )
(4,752 )
125,426
3,981
(2,602 )
1,357
—
—
6,035
143
(23,402 )
(18,477 )
—
22,094
(1,768 )
62,603
—
4,566
(12,312 )
Net cash provided by operating activities
134,864
142,091
154,931
Cash flows from investing activities:
Investments in consolidated real estate acquisitions
Cash proceeds from sales of real estate
Proceeds from insurance claims related to damage to real estate assets
Cash distributions from partnerships of proceeds from real estate sold
Distribution of refinancing proceeds from equity method investee
Additions to construction in progress
Investments in real estate improvements
Additions to leasehold improvements and corporate fixed assets
Investments in equity method investees
Capitalized leasing costs
(17,611 )
13,730
700
19,727
123,000
(75,649 )
(35,170 )
(160 )
(58,112 )
(12,022 )
—
77,778
—
30,265
35,221
(116,550 )
(51,949 )
(683 )
(73,434 )
(6,066 )
—
154,758
—
—
—
(88,161 )
(49,942 )
(522 )
(14,910 )
(6,101 )
Net cash used in investing activities
(41,567 )
(105,418 )
(4,878 )
Cash flows from financing activities:
Net proceeds from issuance of preferred shares
Redemption of Series A Preferred Shares
Repayments under revolving facilities
Proceeds from mortgage loans
Repayment of mortgage loans
Principal installments on mortgage loans
Payment of deferred financing costs
Value of shares of beneficial interest issued
Dividends paid to common shareholders
Dividends paid to preferred shareholders
Distributions paid to Operating Partnership unit holders and noncontrolling interest
Value of shares retired under equity incentive plans, net of shares issued
Net cash used in financing activities
Net change in cash, cash equivalents, and restricted cash
Cash, cash equivalents, and restricted cash, beginning of period
—
—
12,000
10,185
—
(18,655 )
(5,529 )
1,410
(59,145 )
(27,375 )
(6,949 )
(747 )
286,847
(115,000 )
56,000
—
(150,000 )
(17,945 )
(71 )
2,085
(58,651 )
(27,403 )
(6,970 )
(1,477 )
—
—
82,000
139,000
(280,327 )
(17,868 )
(3,337 )
1,288
(58,372 )
(15,848 )
(6,991 )
(2,177 )
(94,805 )
(32,585 )
(162,632 )
(1,508 )
33,953
4,088
29,865
(12,579 )
42,444
Cash, cash equivalents, and restricted cash, end of period
$ 32,445
$ 33,953
$ 29,865
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2018, 2017 and 2016
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, 2018, our portfolio consisted of a total of 27 properties
located in nine states, including 21 shopping malls, four other retail prop-
erties and two 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 2019 and stabilize in 2021. One property in our
portfolio is classified as under development, however we do not currently
have any activity occurring at this property. The above property counts do
not include undeveloped land parcels located in Gainesville, Florida and
New Garden Township, Pennsylvania because these properties were classi-
fied as “held for sale” as of December 31, 2018.
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, 2018, held an 89.5% 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
immediately. If all of the outstanding OP Units held by limited partners had
been redeemed for cash as of December 31, 2018, the total amount that
would have been distributed would have been $49.1 million, which is cal-
culated using our December 31, 2018 closing share price on the New York
Stock Exchange of $5.94 multiplied by the number of outstanding OP Units
held by limited partners, which was 8,272,635 as of December 31, 2018.
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 gener-
ally 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 consolidated. 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
intercompany accounts and transactions have been eliminated in consoli-
dation.
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, 2018, 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
CONSOLIDATED FINANCIAL STATEMENTS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2018 ANNUAL REPORT
27
STATEMENTS OF CASH FLOWS We consider all highly liquid short-term
investments with a maturity of three months or less at purchase or acqui-
sition to be cash equivalents. At December 31, 2018 and 2017, cash and
cash equivalents and restricted cash totaled $32.4 million and $34.0 mil-
lion, respectively, and included tenant security deposits of $2.3 million
and $2.4 million, respectively. Cash paid for interest was $58.4 million,
$55.4 million and $67.9 million for the years ended December 31, 2018,
2017 and 2016, respectively, net of amounts capitalized of $6.4 million,
$7.6 million and $3.2 million, respectively.
The following table provides a summary of cash, cash equivalents, and
restricted cash within the statement of cash flows as of December 31,
2018, 2017, and 2016,
As of December 31,
(in thousands of dollars)
2018
2017
2016
Cash and cash
equivalents
Restricted cash
included in other assets
Total cash, cash
equivalents, and restricted
cash shown in the
statement of cash flows
$18,084
$ 15,348
$ 9,803
14,361
18,605
20,062
$32,445
$33,953
$29,865
Our restricted cash consists of cash held in escrow by banks for real
estate taxes and other purposes.
SIGNIFICANT NON-CASH TRANSACTIONS During the second quarter
of 2018, we received the building and improvements formerly occupied by
one of our tenants as part of the consideration for the termination of that
tenant’s lease. We recorded non-cash lease termination income of $4.2
million in connection with this transaction, which we determined was the
fair value of the building and improvements.
Paydowns of the 2014 5-Year Term Loan and the 2015 5-Year Term Loan
of $150.0 million each were made in the year ended December 31, 2018,
which were directly paid from the 2018 Term Loan Facility borrowing and
are considered to be non-cash transactions.
During 2017, a $150.0 million 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 our statement of cash flows, we report cash flows on our revolving facil-
ities on a net basis. Aggregate borrowings on our revolving facilities were
$65.0 million, $309.0 million and $290.0 million, and aggregate repay-
ments were $53.0 million, $403.0 million and $208.0 million for the years
ended December 31, 2018, 2017 and 2016, respectively.
Accrued construction costs increased by $15.7 million in the year ended
December 31, 2018, decreased by $8.3 million in the year ended
December 31, 2017 and increased by $13.4 million in the year ended
December 31, 2016, 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, percentage rent, expense reimbursements (such as reimbursements
of costs of common area maintenance (“CAM”), real estate taxes and
utilities), and the amortization of above-market and below-market lease
intangibles (as described below under “Intangible Assets”). 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 accel-
erate 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 $2.0 million, $2.7
million and $2.6 million in the years ended December 31, 2018, 2017 and
2016, respectively. The straight-line rent receivable balances included in
tenant and other receivables on the accompanying consolidated balance
sheet as of December 31, 2018 and 2017 were $27.2 million and $25.4
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, 2018 and 2017, our tenant accounts receivable
included accrued income of $1.9 million and $3.1 million, respectively,
because actual reimbursable expense amounts eligible to be billed to ten-
ants under applicable contracts exceeded amounts actually billed. We
record reimbursement revenue from tenants whose leases include fixed
CAM provisions in accordance with the contractual terms of the respective
leases.
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 the 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 termina-
tion agreement is signed, collectibility is assured, and the tenant has vacated
the space. 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 par-
ties, including property management, brokerage, leasing and development.
Management fees generally are a percentage of managed property revenue
or cash receipts. Leasing fees are earned upon the consummation of new
leases. Development fees are earned over the time period of the develop-
ment activity and are recognized on the percentage of completion method.
These activities are collectively included in “Other income” in the consoli-
dated 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 measurements,
these accounting requirements establish a fair value hierarchy that distin-
guishes between market participant assumptions based on market data
obtained from sources independent of the reporting entity (observable
inputs that are classified within Levels 1 and 2 of the hierarchy) and the
reporting entity’s own assumptions about market participant assumptions
(unobservable inputs classified within Level 3 of the hierarchy).
Level 1 inputs utilize quoted prices (unadjusted) in active markets for 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 typ-
ically 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 2018 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 bal-
ance 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 determi-
nation 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. 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
considered recoverable based on evaluation of the severity and duration of
the decline in value. To the extent impairment has occurred, the excess
carrying value of the asset over its estimated fair value is recorded as a
reduction to income.
MANAGEMENT’S RESPONSIBILITY TO EVALUATE THE COMPANY’S
ABILITY TO CONTINUE AS A GOING CONCERN When preparing financial
statements for each annual and interim reporting period, management has
the responsibility to evaluate whether there are conditions or events, con-
sidered in the aggregate, that raise substantial doubt about the Company’s
ability to continue as a going concern within one year after the date that the
financial statements are issued. No such conditions or events were identified
as of the issuance date of the financial statements contained in this Annual
Report.
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 capitalized 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.
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2018 ANNUAL REPORT
29
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
estimated useful life, and, other things being equal, result in changes in
annual depreciation expense and annual net income.
We recognize gains from sales of real estate properties and interests in
partnerships when an enforceable contract is in place, control of the asset
transfers to a buyer and it is probable that we will collect the consideration
due in exchange for transferring the asset.
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 connec-
tion 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 determination 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 operates 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 consol-
idated balance sheets as of December 31, 2018 and 2017 each included
$5.2 million (in each case, net of $1.1 million of amortization expense recog-
nized prior to January 1, 2002) of goodwill recognized in connection with the
acquisition of The Rubin Organization in 1997. Approximately $1.5 million
of this goodwill balance is allocated to three equity method investees with
negative investment balances.
Changes in the carrying amount of goodwill for the three years ended
December 31, 2018 were as follows:
(in thousands of dollars)
Basis
Amortization
Total
Accumulated
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
improvements. 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 leases, (ii) above- and
below-market value of in-place leases and (iii) customer relationship value,
including operating covenants.
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.
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, 2018 and 2017:
As of December 31,
(in thousands of dollars)
2018
2017
Intangible Assets:
Value of lease intangibles, net
Above-market lease intangibles, net
Subtotal
Goodwill, net
Total intangible assets
Intangible Liabilities
Below-market lease intangibles, net
Above-market ground lease
Total intangible liabilities
$ 12,594
25
12,619
5,249
$17,868
$ 403
5,484
$ 5,887
$ 12,369
75
12,444
5,249
$ 17,693
$ 636
5,590
$ 6,226
January 1, 2016
Goodwill divested
$ 6,322
—
$ (1,073)
—
$ 5,249
—
Amortization of lease intangibles was $2.4 million, $2.0 million and $2.4 million
for the years ended December 31, 2018, 2017 and 2016, respectively.
December 31, 2016
Goodwill divested
6,322
—
(1,073)
—
5,249
—
December 31, 2017
Goodwill divested
6,322
—
(1,073)
—
5,249
—
December 31, 2018
$ 6,322
$ (1,073)
$ 5,249
Net amortization of above-market and below-market lease intangibles increased revenue by $0.2 million, $0.1 million and $0.1 million for the years ended
December 31, 2018, 2017 and 2016, respectively. Amortization of above-market ground lease intangibles increased revenue by $0.1 million for each of the
years ended December 31, 2018, 2017 and 2016, 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,
2019
2020
2021
2022
2023
2024 and thereafter
Total
Value of Lease
Intangibles
Customer
Relationship Value
Above/(Below)
Market Leases, net
Above Market
Ground Leases
$ 1,852
1,819
1,697
1,561
1,522
3,121
$11,572
$ 945
77
—
—
—
—
$ 1,022
$ (73)
(76)
(56)
(19)
(19)
(135)
$ (378)
$ (106)
(106)
(106)
(106)
(106)
(4,954)
$(5,484)
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 liabili-
ties 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 liabil-
ities to their original locations on the consolidated balance sheet and record
depreciation and amortization expense for the period that the property was
in held-for-sale status.
In June 2018, we determined that the land parcel in Gainesville, Florida
met the criteria to classify it as held for sale. This determination was made
because the property is under contract, and we believe that it is likely that
we will complete a sale of the property within one year.
In December 2018, we determined that the land parcel in New Garden
Township, Pennsylvania met the criteria to classify it as held for sale. This
determination was made because we have been in advanced negotiations
with a buyer and we believe that it is likely that we will complete a sale of the
property within one year.
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 also capitalize interest on
equity method investments while the investee is engaged in activities neces-
sary to commence its planned principal activities.
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-acquisi-
tion 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,
2018, 2017 and 2016:
(in thousands of dollars)
2018
2017
2016
For the Year Ended December 31,
Development/Redevelopment:
Salaries and benefits
Real estate taxes
Interest
Leasing:
Salaries, commissions and benefits
$ 1,380
$ 1,296
$ 1,198 $ 1,035
$ 6,395
$ 1,138
$ 246
$ 7,620 $ 3,191
$ 7,022
$ 6,066
$ 6,101
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 pay-
ment history and financial condition of the payor, the basis for any disputes
or negotiations with the payor, and other information that could affect
collectibility. In addition, with respect to tenants in bankruptcy, we make
estimates of the expected recovery of pre-petition and post-petition claims
in assessing the estimated collectibility of the related receivable. In some
cases, the time required to reach an ultimate resolution of these claims can
exceed one year. For straight-line rent, the collectibility analysis considers
the probability of collection of the unbilled deferred rent receivable, given
our experience regarding such amounts.
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2018 ANNUAL REPORT
31
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 pur-
poses 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 pur-
poses due to differences in cost basis, differences in the estimated useful
lives used to compute depreciation, and differences between the alloca-
tion of our net income or loss for financial reporting purposes and for tax
reporting purposes.
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, 2018, 2017 and 2016, 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, 2018, 2017 and 2016:
For the Year Ended December 31,
2018
2017
2016
Ordinary income
Non-dividend distribution
$ 0.25
0.59
$ —
0.84
$ —
0.84
Per-share distributions
$ 0.84
$ 0.84
$ 0.84
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, 2018, 2017 and 2016:
Series A Preferred Share Dividends(1)
Ordinary income
Non-dividend distributions
For the Year Ended December 31,
2018
2017
2016
$ —
1.70
$ —
2.06
$ 1.70
$ 2.06
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
$ 1.84
—
$ —
1.84
$ —
1.84
$ 1.84
$ 1.84
$ 1.84
$ 1.80
—
$ —
1.59
$ N/A
N/A
$ 1.80
$ 1.59
$ N/A
$ 1.72
—
$ —
0.45
$ N/A
N/A
$ 1.72
$ 0.45
$ N/A
(1) The Series A Preferred Shares were redeemed in 2017.
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/benefit in the year ended December 31, 2018,
and no provision or benefit for federal or state income taxes in the years
ended December 31, 2017 and 2016. We had net deferred tax assets of
$16.7 million and $18.0 million for the years ended December 31, 2018
and 2017, 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 based on recent earnings history for
our taxable REIT subsidiaries. The deferred tax assets were remeasured
for the year ended December 31, 2017 to account for the tax provisions
in H.R. 1 (the Tax Cuts and Jobs Act), which was signed into law on
December 22, 2017.
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 2018 Revolving Facility (and
in prior years, 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 valua-
tion 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 transaction 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 val-
uation 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, 2018, 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 val-
uations 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.
In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted
Improvements. This guidance provided entities with an additional (and
optional) transition method for the new lease accounting standard. Under
this new transition method, an entity is permitted to initially adopt the new
leases standard at the adoption date and recognize a cumulative-effect
adjustment to the opening balance of retained earnings in the period of
adoption. The guidance also provides lessors with a series of practical
expedients to apply when adopting the new lease accounting standard.
In July 2018, the FASB issued ASU 2018-10, Codification Improvements
to Topic 842, Leases. These amendments affect narrow aspects of the
guidance issued in ASU 2016-02. We adopted ASU 2016-02, ASU 2018-
10, ASU 2018-11, ASU 2018-19 and ASU 2018-20 effective January
1, 2019 using the optional transition method and the following practical
expedients:
n
We have elected to not separate non-lease components such as CAM
from the associated lease component (base rent). Instead, will account
for the lease and non-lease components as a single component because
such non-lease components would otherwise be accounted for under
the new revenue guidance (ASC 606) and both (1) the timing and
pattern of transfer are the same for the nonlease components and asso-
ciated lease component and (2) the lease component, if accounted for
separately, would be classified as an operating lease.
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.
n
We have also elected the package of practical expedients that allows us
to not reassess whether any expired or existing contracts are or contain
leases; to not reassess the lease classification for any expired or existing
leases; and to not reassess initial direct costs for any existing leases.
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 equiv-
alents consist primarily of shares that are issued under employee share
compensation 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 LEASE ACCOUNTING RELATED
In February 2016, the Financial Accounting Standards Board (the “FASB”)
issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic
842), which will result in lessees recognizing most leased assets and cor-
responding lease liabilities in their financial statements. 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
current accounting under ASU 840. Subsequent to the issuance of ASU
2016-02, the FASB has issued additional clarifying guidance as set forth
in the following paragraphs. Topic 842, incorporating all associated guid-
ance, became effective on January 1, 2019.
In December 2018, the FASB issued ASU 2018-20, Leases (Topic 842):
Narrow-Scope Improvements for Lessors. The purpose of this guidance
was to address certain issues facing lessors when applying the new
leasing standard. The guidance clarified, among other things, that lessors
should exclude lessor costs from revenue, such as real estate taxes paid
by lessees directly to third parties.
In November 2018, the FASB issued ASU 2018-19, Codification of
Improvements to Topic 326, Financial Instruments — Credit Losses. This
guidance clarified, among other things, that receivables arising from oper-
ating leases are not within the scope of the credit losses standards, but
rather, should be accounted for in accordance with the leases standard.
For leases under which the Company is a lessee (effective January 1,
2019), we will record a right of use asset estimated to be between $23.0
million and $27.0 million and corresponding lease liability for all leases pre-
viously accounted for as operating leases under ASU 840. The Company
will derecognize an unfavorable ground lease liability of $5.5 million and
reduce the corresponding ROU asset by the same amount.
Effective January 1, 2019, the Company will recognize fixed CAM reve-
nues on a straight-line basis; previously, such amounts were recognized as
billed in accordance with the terms of the respective leases.
For leases under which the Company is a lessor, certain leasing costs that
were previously capitalized under ASC 840 will be recorded as period
costs under ASC 842. Such costs totaled approximately $5.1 million, $4.6
million and $4.6 million for the years ended December 31, 2018, 2017
and 2016, respectively. We will continue to amortize previously capitalized
initial direct costs over the remaining terms of the associated leases.
REVENUE ACCOUNTING RELATED On January 1, 2018, we adopted
ASC 606, Revenue from Contracts with Customers. ASC 606 provides
a single comprehensive model to use in accounting for revenue arising
from contracts with customers, and gains and losses arising from trans-
fers of non-financial assets including sales of property and equipment,
real estate, and intangible assets. We adopted ASC 606 for all applicable
contracts using the modified retrospective method, which would have
required a cumulative-effect adjustment, if any, as of the date of adoption.
The adoption of ASC 606 did not have a material impact on our consol-
idated financial statements as of the date of adoption, and therefore a
cumulative-effect adjustment was not required.
The majority of our revenues are derived from leases and are not subject
to ASC 606; rather, they were governed by ASC 840 through December
31, 2018 and will be subject to ASC 842, which we adopted effective
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2018 ANNUAL REPORT
33
January 1, 2019. Property operating revenues are disaggregated on the
consolidated statement of operations into the categories of base rent,
expense reimbursements, percentage rent, lease termination revenue
and other real estate revenue, primarily in the amounts that correspond to
these different categories as documented in various tenant leases.
The types of our revenues that were impacted by ASC 606 include prop-
erty management and development revenues for services performed for
third-party owned properties and for certain of our joint ventures, and cer-
tain billings to tenants for reimbursement of property marketing expenses.
The amount and timing of the revenues that are impacted by ASC 606
were consistent with our previous measurement and pattern of recogni-
tion.
Revenue from the reimbursement of marketing expenses is gener-
ated through tenant leases that require tenants to reimburse a defined
amount of property marketing expenses. Our contractual performance
obligations are fulfilled as marketing expenditures are made. Tenant pay-
ments are received monthly as required by the respective lease terms.
We defer income recognition if the reimbursements exceed the aggre-
gate marketing expenditures made through that date. Deferred marketing
reimbursement revenue is recorded in tenants’ deposits and deferred
rent on the consolidated balance sheet, and was $0.2 million and $0.3
million as of December 31, 2018 and 2017, respectively. The marketing
reimbursements are recognized as revenue at the time that the marketing
expenditures occur. Marketing revenue, included in other real estate reve-
nues in the consolidated statements of operations, was $3.9 million, $4.4
million and $4.5 million for the years ended December 31, 2018, 2017
and 2016, respectively.
Property management revenue from management and development
activities is generated through contracts with third party owners of real
estate properties or with certain of our joint ventures, and is recorded
in other income in the consolidated statement of operations. In the case
of management fees, our performance obligations are fulfilled over time
as the management services are performed and the associated revenues
are recognized on a monthly basis when the customer is billed. In the
case of development fees, our performance obligations are fulfilled over
time as we perform certain stipulated development activities as set forth
in the respective development agreements and the associated revenues
are recognized on a monthly basis when the customer is billed. Property
management fee revenue was $0.7 million, $0.9 million and $1.9 million
for the years ended December 31, 2018, 2017 and 2016, respectively.
Development fee revenue was $0.8 million, $0.9 million and $0.3 million
for years ended December 31, 2018, 2017 and 2016, respectively.
OTHER ACCOUNTING In October 2018, the FASB issued ASU 2018-16,
Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight
Financing Rate (SOFR) Overnight Index Swap (OIS) as a Benchmark
Interest Rate for Hedge Accounting. This ASU adds the OIS rate based
on SOFR as a U.S. benchmark interest rate to facilitate the LIBOR to
SOFR transition and provide sufficient lead time for entities to prepare
for changes to interest rate hedging strategies for both risk management
and hedge accounting purposes. Because we adopted ASU 2017-12,
this guidance became effective January 1, 2019. The adoption of this
guidance will not have a material impact on our consolidated financial
statements.
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. We early adopted ASU 2017-12 on January 1, 2018. ASU
2017-12 requires a modified retrospective transition method in which we
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 adoption of this standard did not have a
material impact on our consolidated financial statements.
In January 2017, the 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 busi-
ness. 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. We adopted this new guidance
effective January 1, 2017. This new guidance did not have a significant
impact on our financial 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 equiv-
alents when reconciling the beginning-of-period and end-of-period total
amounts shown on the statement of cash flows. We adopted this standard
effective January 1, 2018. The adoption of ASU No. 2016-18 changed our
presentation of the statement of cash flows to provide additional details
regarding changes in restricted cash and we utilized a retrospective tran-
sition method for each period presented within financial statements. In
applying the retrospective transition method, net cash used in investing
activities for the year ended December 31, 2017 increased by $1.5 million
and net cash provided by investing activities for the year ended December
31, 2017 increased by $0.5 million, as the change in escrow accounts
is now included directly in net change in cash, cash equivalents and
restricted cash. See note 1 for details regarding cash and restricted cash
as presented within the consolidated statement of cash flows.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows
(Topic 230): Classification of Certain Cash Receipts and Cash Payments.
ASU 2016-15 is intended to reduce diversity in the practice of how certain
transactions are classified in the statement of cash flows, including classifi-
cation guidance for distributions received from equity method investments.
We adopted this new standard effective January 1, 2018 using the ret-
rospective transition method. The statement of cash flows for the years
ended December 31, 2017 and 2016 has been restated to reflect the
adoption of ASU 2016-15. Upon adoption, we changed the prior period
presentation of the statement of cash flows for the years ended December
31, 2017 and 2016 for $5.7 million and $7.3 million, respectively, of cash
distributions from partnerships that was previously presented within net
cash used in investing activities to now be reflected within net cash pro-
vided by operating activities for the years ended December 31, 2017 and
2016 using the nature of the distribution approach.
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. We adopted this new guidance effective
January 1, 2018. This new guidance did not have a significant impact on
our financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill
and Other (Topic 350) —Simplifying the Test for Goodwill Impairment.
ASU 2017-04 simplifies the accounting for goodwill impairments by elim-
inating the requirement to compare the implied fair value of goodwill with
its carrying amount as part of step two of the goodwill impairment test
referenced in ASC 350, Intangibles—Goodwill and Other. As a result,
an entity should perform its annual, or interim, goodwill impairment test
by comparing the fair value of a reporting unit with its carrying amount.
An impairment charge should be recognized for the amount by which
the carrying amount exceeds the reporting unit’s fair value. However, the
impairment loss recognized should not exceed the total amount of good-
will allocated to that reporting unit. In January 2018, we elected to early
adopt ASU 2017-04 effective January 1, 2018. This new guidance did not
have any impact on our financial statements.
IMMATERIAL ERROR CORRECTION The Consolidated Statements of
Operations and the Consolidated Statements of Comprehensive Income
for the years ended December 31, 2017 and 2016 include the impact of
correcting the reporting of net loss (income) attributable to noncontrolling
interest and common shareholders. Specifically, the correction adjusts for a
computational error by reducing net income (and comprehensive income)
or by increasing the net loss (and comprehensive loss) attributable to non-
controlling interest by $3.4 million and $1.7 million for the years ended
December 31, 2017 and 2016, respectively. The 2018 and 2017 quarterly
results were also adjusted by increasing the net loss (and comprehensive
loss) attributable to noncontrolling interest in the amount of $0.7 million
for each of the three months ended March 31, 2018 and 2017; $0.7
million and $0.8 million for the three months ended June 30, 2018 and
2017, respectively; $0.8 million for the three months ended September
30, 2017, and $1.2 million for the three months ended December 31,
2017. The adjustments also increased the amount of net income (and
comprehensive income) or decreased the amount of loss (and compre-
hensive loss) attributable to PREIT and PREIT common shareholders by
the corresponding amounts. The adjustments also increased the amount
of basic and diluted earnings per share or decreased the amount of basic
and diluted loss per share by $0.05 for the year ended December 31,
2017 and $0.02 for the year ended December 31, 2016. The 2018 and
2017 quarterly results were also adjusted by increasing the amount of
basic and diluted earnings per share or decreased the amount of basic
and diluted loss per share by $0.01 for each of the three months ended
March 31, 2018 and 2017; June 30, 2018 and 2017; September 30,
2017, and $0.02 for the three months ended December 31, 2017.
The Consolidated Statement of Equity for the years ended December 31,
2018, 2017 and 2016 included the cumulative impact of $9.3 million,
$7.8 million and $4.4 million, respectively, which corrected the reporting
of noncontrolling interest by decreasing noncontrolling interest and
increasing Total Equity - Pennsylvania Real Investment Trust by the cor-
responding amount.
These corrections had no impact on the previously reported amounts of
net income (loss), total equity, and consolidated cash flows from oper-
ating, investing or financing activities.
We evaluated these corrections and determined, based on quantitative
and qualitative factors, that the changes were not material to the con-
solidated financial statements taken as a whole for any previously filed
consolidated financial statements.
2. Real Estate Activities
Investments in real estate as of December 31, 2018 and 2017 were com-
prised of the following:
As of December 31,
(in thousands of dollars)
2018
2017
Buildings, improvements and
construction in progress
Land, including land held
for development
$ 2,719,400
$ 2,808,622
465,194
491,080
Total investments in real estate
Accumulated depreciation
3,184,594
(1,118,582 )
3,299,702
(1,111,007 )
Net investments in real estate
$ 2,066,012
$ 2,188,695
IMPAIRMENT OF ASSETS During the years ended December 31, 2018,
2017, and 2016, we recorded asset impairment losses of $137.5 million,
$55.8 million and $62.6 million, respectively. Such impairment losses are
recorded in “Impairment of assets” for the years ended 2018, 2017 and
2016. The assets that incurred impairment losses and the amount of such
losses are as follows:
For the Year Ended December 31,
(in thousands of dollars)
2018
2017
2016
Exton Square Mall
Wyoming Valley Mall
Valley View Mall
Wiregrass Mall mortgage
loan receivable
New Garden Township land
Gainesville land
Logan Valley Mall
Sunrise Plaza land
Beaver Valley Mall
Washington Crown Center
Crossroads Mall
Office building located at Voorhees
Town Center
Other
$ 73,218
32,177
14,294
$ —
—
15,521
$ —
—
—
8,122
7,567
2,089
—
—
—
—
—
—
20
—
—
1,275
38,720
226
—
—
—
—
20,786
—
—
—
18,055
14,117
9,038
—
51
607
—
Total Impairment of Assets
$137,487
$55,793
$62,603
WYOMING VALLEY MALL In connection with the preparation of our
financial statements as of and for the quarter ended June 30, 2018,
we recorded a loss on impairment of assets on Wyoming Valley Mall
in Wilkes-Barre, Pennsylvania of $32.2 million as we determined that
the pending closure of two anchor stores at the property (as further
discussed in Note 4) was a triggering event, leading us to conduct an
analysis of possible impairment at this property. Based upon our esti-
mates, 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 discounted estimated future cash flows at
the property, using a discount rate of 10.5% and a terminal capitalization
rate of 9.0%, which was determined using management’s assessment of
property operating performance and general market conditions and were
classified in Level 3 of the fair value hierarchy.
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2018 ANNUAL REPORT
35
EXTON SQUARE MALL In connection with the preparation of our
annual financial statements for the year ended December 31, 2018, we
recorded a loss on impairment of assets on Exton Square Mall in Exton,
Pennsylvania of $73.2 million. In conjunction with the preparation of our
annual business plan, we anticipated decreases in occupancy and net
operating income at this property as a result, which led us to conduct
an analysis of possible impairment at this property. Based upon our esti-
mates, 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 discounted estimated future cash flows for the mall
parcel, using a discount rate of 10.5% and a terminal capitalization rate
of 10.0% for the mall parcel, and a direct capitalization rate of 5.5% for
a parcel adjacent to the mall. The discount and capitalization rates were
determined using management’s assessment of property operating per-
formance and general market conditions and were classified in Level 3 of
the fair value hierarchy.
WIREGRASS MORTGAGE LOAN RECEIVABLE In connection with the
sale of three malls in 2016, we received a $17.0 million mortgage note
secured by Wiregrass Commons Mall in Dothan, Alabama. The note has
a fixed interest rate of 6.0% and we recorded $1.0 million, $1.0 million
and $0.7 million of interest income in the years ended December 31,
2018, 2017 and 2016, respectively. During 2018, the original buyer sold
Wiregrass Commons Mall to an unrelated party and the mortgage note
was assumed by this new buyer as part of that sale transaction. In the
fourth quarter of 2018, we reclassified the mortgage note receivable from
held-to-maturity to held-for-sale. In connection with this reclassification,
we recorded an impairment loss of $8.1 million to reduce the $16.1 million
carrying value of the mortgage note receivable to its estimated fair value
of $8.0 million based on negotiations with a buyer. This mortgage note
receivable was sold in February 2019 for $8.0 million.
NEW GARDEN TOWNSHIP DEVELOPMENT LAND PARCEL In 2018, we
recorded a loss on impairment of assets on a land parcel located in New
Garden Township, Pennsylvania of $7.6 million in connection with nego-
tiations with a potential buyer of the property. In connection with these
negotiations, we determined that the estimated proceeds from the sale
of the property would be less than the carrying value of the property, and
recorded a loss on impairment of assets. This land parcel is classified as
held-for-sale in our consolidated balance sheet.
In 2016, we previously recorded a loss on impairment of assets on this
land parcel 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 potential sales of the property would likely
be less than the carrying value of the property, and recorded a loss on
impairment of assets.
GAINESVILLE DEVELOPMENT LAND PARCEL In 2018 and 2017, we
recorded losses on impairment of assets on a land parcel located in
Gainesville, Florida of $2.1 million and $1.3 million, respectively, in connec-
tion with negotiations with a potential buyer of the property. In connection
with these 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 losses on impairment of
assets. This land parcel is classified as held-for-sale in our consolidated
balance sheet.
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 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 impair-
ment 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 connection with the preparation of our annual
financial statements for the year ended December 31, 2018, we recorded
a loss on impairment of assets on Valley View Mall in La Crosse, Wisconsin
of $14.3 million. In the fourth quarter of 2018, Sears ceased operations
at this mall. In conjunction with the preparation of our annual business
plan, we anticipated decreases in occupancy and net operating income
at this property resulting from lower co-tenancy rents from other tenants
in 2019 and beyond, which led 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, based on a probability-weighted assessment were less
than the carrying value of the property, and recorded a loss on impairment
of assets. Our fair value analysis was based on a direct capitalization rate
of 12.0% on stabilized NOI of the property. The capitalization rate was
determined using management’s assessment of property operating per-
formance and general market conditions and was classified in Level 3 of
the fair value hierarchy.
We previously recorded a loss on impairment of assets on Valley View
Mall in La Crosse, Wisconsin of $15.5 million in 2017 in connection with
our decision to market the property for sale. In connection with this deci-
sion, 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.
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 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.
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 con-
nection 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 impair-
ment 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 classified as “held for
sale” as of December 31, 2016 and 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
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. 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 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
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 classified as “held for
sale” as of December 31, 2016, and the property was sold 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 the buyer of the property. In connection with these negotiations, we
determined that the holding period of the property was less than previ-
ously 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 car-
rying value of the property, and recorded a loss on impairment of assets.
The property was sold in September 2016.
ACQUISITIONS In 2018, we purchased certain real estate and related
improvements at Moorestown Mall and Valley Mall for a total of $17.6 million.
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 and subsequently
closed in the third quarter of 2018. 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 was potentially entitled to receive con-
sideration (the “Earnout”) under the terms of the Contribution Agreement
which were to be calculated as of March 31, 2018. As of December 31,
2017, the estimated value of the Earnout is zero and no amounts were paid
out after March 31, 2018.
DISPOSITIONS The table below presents our dispositions since January 1, 2016. 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 Date
Property and Location
Description of Real Estate Sold
Capitalization Rate
(in millions of dollars)
Sale Price Gain/(Loss)
2017 Activity:
January
August
2016 Activity:
February
March
June
August
Beaver Valley Mall, Monaca, PA
Crossroads Mall, Beckley, WV
Logan Valley Mall, Altoona, PA
Mall
Mall
Mall
Palmer Park Mall, Easton, PA
Gadsden Mall, Gadsden, AL
New River Valley Mall,
Christiansburg, VA and
Wiregrass Commons Mall, Dothan, AL
Lycoming Mall, Pennsdale, PA
Street retail located on
Walnut and Chestnut Streets,
Philadelphia, PA
Washington Crown Center,
Washington, PA
15.6 %
15.5 %
16.5 %
13.6 %
17.4 %
$ 24.2
24.8
33.2
$ —
—
—
18.0
66.0
0.1
1.6
Mall
Three Malls (single combined
transaction)
Mall
Street Retail
18.0 %
3.2 %
26.4
45.0
0.3
20.3
Mall
14.5 %
20.0
(0.1 )
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2018 ANNUAL REPORT
37
DISPOSITIONS – OTHER ACTIVITY In 2018, we sold a parcel located
adjacent to Exton Square Mall in Exton, Pennsylvania for $10.3 million. We
recorded a gain of $8.1 million on this sale in the fourth quarter of 2018.
In 2018, we sold an outparcel on which two operating restaurants are
located at Valley Mall in Hagerstown, Maryland for $2.4 million. We
recorded a gain of $1.0 million on this sale in the fourth quarter of 2018.
In 2018, we sold an outparcel on which an operating restaurant is located
at Magnolia Mall in Florence, South Carolina for $1.7 million. We recorded
a gain of $0.7 million on this sale in the second quarter of 2018.
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.
DEVELOPMENT ACTIVITIES As of December 31, 2018 and 2017, we had
capitalized amounts related to construction and development activities.
The following table summarizes certain capitalized construction and devel-
opment information for our consolidated properties as of December 31,
2018 and 2017:
As of December 31,
(in thousands of dollars)
2018
2017
Construction in progress
Land held for development
Deferred costs and other assets
$ 115,182
5,881
6,487
$ 113,609
5,881
2,182
As of December 31,
(in thousands of dollars)
2018
2017
LIABILITIES AND PARTNERS’ INVESTMENT:
Mortgage loans payable, net
FDP Term Loan, net
Other liabilities
$ 507,090
247,901
34,463
$ 513,139
—
37,971
Total liabilities
$789,454
$551,110
Net investment
Partners’ share
PREIT’s share
Excess investment(1)
$ 44,887
21,583
23,304
15,763
$ 212,760
106,886
105,874
13,081
Net investments and advances
$ 39,067
$118,955
Investment in partnerships, at equity $ 131,124
Distributions in excess of
partnership investments
(92,057 )
$216,823
(97,868)
Net investments and advances
$ 39,067
$118,955
(1) Excess investment represents the unamortized difference between our investment and our
share of the equity in the underlying net investment in the unconsolidated partnerships.
The excess investment is amortized over the life of the properties, and the amortization is
included in “Equity in income of partnerships.”
We present distributions from our equity investments using the nature of
the distributions approach in the accompanying consolidated statement
of cash flows.
The following table summarizes our share of equity in income of partner-
ships for the years ended December 31, 2018, 2017 and 2016:
$127,550
$ 121,672
For the Year Ended December 31,
(in thousands of dollars)
2018
2017
2016
Total capitalized construction
and development activities
3. Investments in Partnerships
The following table presents summarized financial information of our equity
investments in unconsolidated partnerships as of December 31, 2018 and
2017:
As of December 31,
(in thousands of dollars)
2018
2017
ASSETS:
Investments in real estate, at cost:
Operating 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
$ 575,149
420,771
995,920
(212,574 )
783,346
20,446
30,549
$ 612,689
293,102
905,791
(202,424)
703,367
26,158
34,345
Total assets
$834,341
$763,870
Real estate revenue
Expenses:
Property operating and
other expenses
(30,839 )
(23,373 )
Depreciation and amortization (19,393 )
Interest expense
(33,273 )
(25,251 )
(24,872 )
(33,597 )
(21,573 )
(23,326 )
Total expenses
(73,605 )
(83,396 )
(78,496 )
Net income
25,176
31,722
39,416
Less: Partners’ share
(13,719 )
(17,607 )
(21,137 )
PREIT’s share
Amortization of excess
investment
Equity in income of
partnerships
11,457
14,115
18,279
(82 )
252
198
$ 11,375
$ 14,367
$18,477
DISPOSITIONS In February 2018, a partnership in which we hold a 50%
ownership share sold its office condominium interest in 907 Market Street
in Philadelphia, Pennsylvania for $41.8 million. The partnership recorded
a gain on sale of $5.5 million, of which our share was $2.8 million, which
is recorded in gain on sale of real estate by equity method investee in the
accompanying consolidated statement of operations. The partnership dis-
tributed to us proceeds of $19.7 million in connection with this transaction.
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 was $6.5 million. The partnership distrib-
uted 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.
TERM LOAN In January 2018, we along with The Macerich Company
(“Macerich”), our partner in the Fashion District Philadelphia redevelopment
project, entered into a $250.0 million term loan (the “FDP Term Loan”). We
own a 50% partnership interest in Fashion District Philadelphia. The FDP
Term Loan matures in January 2023, and bears interest at a variable rate
of LIBOR plus 2.00%. PREIT and Macerich secured the FDP Term Loan
by pledging their respective equity interests in the entities that own Fashion
District Philadelphia. The entire $250.0 million available under the FDP
Term Loan was drawn during the first quarter of 2018, and we received an
aggregate $123.0 million as a distribution of our share of the draws in 2018.
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 2027. 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 4.55% at December 31, 2018. The balances of the variable interest rate mort-
gage loans have interest rates that range from 3.85% to 5.29% and had a weighted average interest rate of 4.04% at December 31, 2018. The weighted
average interest rate of all unconsolidated mortgage loans was 4.50% at December 31, 2018. 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,
2019
2020
2021
2022
2023
2024 and thereafter
Company’s Proportionate Share
Principal
Amortization
$ 4,204
4,386
4,049
3,738
3,620
10,099
Balloon
Payments
$ —
—
41,170
21,500
33,502
106,087
Total
$ 4,204
4,386
45,219
25,238
37,122
116,186
Less: Unamortized debt issuance costs
Carrying value of mortgage notes payable
The following table presents the mortgage loans secured by the unconsolidated properties entered into since January 1, 2017:
Financing Date
Property
Amount Financed
or Extended
(in millions of dollars)
Stated Interest Rate
Maturity
2018 Activity:
February
March
2017 Activity:
October
Pavilion at Market East(1)
Gloucester Premium Outlets(2)
$ 8.3 LIBOR plus 2.85%
$ 86.0 LIBOR plus 1.50%
February 2021
March 2022
Lehigh Valley Mall(3)(4)
$ 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 $3.2 million.
(2) We own a 25% partnership interest in Gloucester Premium Outlets and our share of this mortgage loan is $21.5 million.
(3) 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.
(4) 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.
Property
Total
$ 8,453
8,822
91,945
93,476
74,245
232,373
509,314
2,224
$507,090
$98,781
$115,118
$117,912
Total principal payments
$30,096
$ 202,259
$ 232,355
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2018 ANNUAL REPORT
39
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, 2018 or 2017. Summarized financial information as of or for the years
ended December 31, 2018, 2017 and 2016 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)
2018
2017
2016
Total assets
Mortgage payable
Revenue
Property operating
expenses
Interest expense
Net income
PREIT’s share of equity in
income of partnership
$ 52,255
196,328
35,662
$ 43,850
199,451
34,945
$ 49,264
126,520
36,923
9,014
8,222
15,605
9,038
10,907
11,389
8,659
7,570
17,264
7,803
5,695
8,632
4. Financing Activity
CREDIT AGREEMENTS We have entered into two credit agreements
(collectively, as amended, the “Credit Agreements”): (1) the 2018 Credit
Agreement, which, as described in more detail below, includes (a) the
2018 Revolving Facility, and (b) the 2018 Term Loan Facility, and (2) the
2014 7-Year Term Loan. The 2018 Term Loan Facility and the 2014 7-Year
Term Loan are collectively referred to as the “Term Loans.”
As of December 31, 2018, we had borrowed $550.0 million under the
Term Loans and $65.0 million under the 2018 Revolving Facility (with
$5.1 million pledged as collateral for letters of credit at December 31,
2018). The carrying value of the Term Loans on our consolidated balance
sheet as of December 31, 2018 is net of $2.7 million of unamortized debt
issuance costs. The net operating income (“NOI”) from our unencum-
bered 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 us as of December 31,
2018 was $179.3 million.
Interest expense and the deferred financing fee amortization related to the
Credit Agreements for the years ended December 31, 2018, 2017 and
2016 were as follows:
(in thousands of dollars)
2018
2017
2016
For the Year Ended December 31,
Revolving Facilities:
Interest expense
Deferred financing
amortization
Term Loans:
Interest expense
Deferred financing
amortization
Accelerated financing fee
$ 1,807
$ 2,463
$ 3,209
1,052
796
795
17,585
14,935
12,262
763
363
759
—
619
—
CREDIT AGREEMENTS On May 24, 2018, we entered into an Amended
and Restated Credit Agreement (the “2018 Credit Agreement”) with Wells
Fargo Bank, National Association, U.S. Bank National Association, Citizens
Bank, N.A., and the other financial institutions signatory thereto, for an
aggregate $700.0 million senior unsecured facility consisting of (i) a $400
million senior unsecured revolving credit facility (the “2018 Revolving
Facility”), which replaced our previously existing $400 million revolving
credit agreement (the “2013 Revolving Facility”), and (ii) a $300 million
term loan facility (the “2018 Term Loan Facility”), which was used to pay
off a previously existing $150 million five year term loan (the “2014 5-Year
Term Loan”) and a second $150 million five year term loan (the “2015
5-Year Term Loan”). The maturity date of the 2018 Revolving Facility is
May 23, 2022, subject to two six-month extensions at our election, and
the maturity date of the 2018 Term Loan Facility is May 23, 2023. In
connection with this activity, we recorded accelerated amortization of
financing costs of $0.4 million.
As of December 31, 2018, $250.0 million was outstanding under the
2014 7-Year Term Loan, which matures on December 29, 2021.
On June 5, 2018, we entered into the Fifth Amendment (the “Amendment”)
to the 2014 7-Year Term Loan. The Amendment was entered into to make
certain provisions of the 2014 7-Year Term Loan consistent with the 2018
Credit Agreement. Among other things, the Amendment (i) adds and
updates certain definitions and provisions, including tax-related provi-
sions, relating to foreign lenders under the 2014 7-Year Term Loan, (ii)
updates the definition of “Existing Credit Agreement” to refer to the 2018
Credit Agreement, which updates the cross defaults between the 2014
7-Year Term Loan and the 2018 Credit Agreement (replacing such cross
defaults to the agreements the 2018 Credit Agreement replaced), (iii)
adds and amends provisions consistent with those provided in the 2018
Credit Agreement for determining an alternative rate of interest to LIBOR,
when and if required, and (iv) adjusts or eliminates some of the covenants
applicable to the Borrower, as defined therein. The Amendment does not
extend the maturity date of the 2014 7-Year Term Loan or change the
amounts that can be borrowed thereunder.
IDENTICAL COVENANTS AND COMMON PROVISIONS CONTAINED IN
THE CREDIT AGREEMENTS Each of the Credit Agreements contains
certain 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.
Amounts borrowed under the Credit Agreements bear interest at the
rate specified below per annum, depending on our leverage, in excess
of LIBOR, unless and until we receive an investment grade credit rating
and provide notice to the Administrative Agent (the “Rating Date”), after
which alternative rates would apply, as described below. In determining
our leverage (the ratio of Total Liabilities to Gross Asset Value), the cap-
italization 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. Capitalized terms used and not otherwise defined in
this Annual Report on Form 10-K have the meanings ascribed to such
terms in the applicable credit agreement document. The 2018 Revolving
Facility is subject to a facility fee, which is currently 0.30%, depending
upon leverage, and is recorded as interest expense in the consolidated
statements of operations. In the event we seek and obtain an investment
grade credit rating, alternative facility fees would apply.
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
Equal to or greater than 0.500 to 1.00
but less than 0.550 to 1.00(1)
Equal to or greater than 0.550 to 1.00
Revolving Loans that Revolving Loans that
are LIBOR Loans are Base Rate Loans
Term Loans that Term Loans that are
are LIBOR Loans
Base Rate Loans
Applicable Margin
1.20%
1.25%
1.30%
1.55%
0.20%
0.25%
0.30%
0.55%
1.35%
0.35%
1.45%
0.45%
1.60%
1.90%
0.60%
0.90%
(1) The rates in effect under the Credit Agreements were based upon the Level 3 Ratio of Total Liabilities to Gross Asset Value as of December 31, 2018.
We may prepay the amounts due under the Credit Agreements at any time
without premium or penalty, subject to reimbursement obligations for the
lenders’ breakage costs for LIBOR borrowings.
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, 2018:
(in thousands of dollars)
Principal
For the Year Ending December 31, Amortization
Balloon
Payments
Total
2019
2020
2021
2022
2023
2024 and thereafter
$ 18,561
19,759
20,685
15,082
8,030
10,811
$ — $ 18,561
46,920
209,470
425,786
128,076
222,157
27,161
188,785
410,704
120,046
211,346
Total principal payments
$ 92,928
$958,042 $1,050,970
Less: Unamortized
debt issuance costs
3,064
Carrying value of mortgage notes payable
$ 1,047,906
The estimated fair values of our consolidated mortgage loans based on
year-end interest rates and market conditions at December 31, 2018 and
2017 are as follows:
2018 2017
(in millions of dollars)
Consolidated
mortgage loans(1)
Carrying
Value
Fair
Value
Carrying
Value
Fair
Value
$1,047.9
$ 1,002.3
$1,056.1
$1,029.7
(1) The carrying value of consolidated mortgage loans has been reduced by unamortized
debt issuance costs of $3.1 million and $3.4 million as of December 31, 2018 and 2017,
respectively.
The consolidated mortgage loans contain various customary default pro-
visions. As of December 31, 2018, we were not in default on any of the
consolidated mortgage loans.
The Credit Agreements contain certain affirmative and negative cove-
nants, including, without limitation, requirements that PREIT maintain,
on a consolidated basis: (1) Minimum Tangible Net Worth of $1,463.2
million, plus 75% of the Net Proceeds of all Equity Issuances effected
at any time after March 31, 2018; (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 consecutive 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 (a) 11.0% through and including
June 30, 2020, (b) 11.25% any time after June 30, 2020 through and
including June 30, 2021, and (c) 11.50% anytime thereafter; (5) min-
imum Unencumbered NOI to Unsecured Interest Expense of 1.75:1; (6)
maximum ratio of Secured Indebtedness to Gross Asset Value of 0.60:1;
and (7) 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 (FFO) and (ii) 110% of REIT taxable income for a fiscal
year. The covenants and restrictions in the Credit Agreements limit our
ability to incur additional indebtedness, grant liens on assets and enter
into negative pledge agreements, merge, consolidate or sell all or substan-
tially all of our assets, and enter into transactions with affiliates. The Credit
Agreements are subject to customary events of default and are cross-de-
faulted with one another.
As of December 31, 2018, we were in compliance with all such financial
covenants.
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, 2018. Three of our mortgage loans bear interest at variable
rates and had a weighted average interest rate of 4.60% at December 31,
2018. The weighted average interest rate of all consolidated mortgage
loans was 4.36% at December 31, 2018. 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.
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2018 ANNUAL REPORT
41
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
February
2016 Activity:
March
April
Property
Francis Scott Key Mall(1)
Viewmont Mall(2)
Viewmont Mall(2)
Woodland Mall(3)
Amount Financed
or Extended
(in millions of dollars)
Stated Interest Rate
Maturity
$ 68.5
$ 10.2
$ 9.0
$ 130.0
LIBOR plus 2.60%
LIBOR plus 2.35%
January 2022
March 2021
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) In 2018, the mortgage was increased by $10.2 million to $67.2 million. In 2016, 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.
OTHER MORTGAGE LOAN ACTIVITY As a result of its Chapter 11
bankruptcy filing, the Bon-Ton anchor store at Wyoming Valley Mall in
Wilkes-Barre, Pennsylvania closed on August 31, 2018. In addition, the
Sears store at Wyoming Valley Mall ceased operations on July 15, 2018
and Sears vacated the premises on August 1, 2018, the date its lease
expired. We have received a notice of transfer of servicing, dated July 9,
2018, from the special servicer for the mortgage loan secured by Wyoming
Valley Mall, which had a balance of $73.8 million as of December 31,
2018. Our subsidiary that is the borrower under the loan has also received
a notice of default on the loan from the lender, dated December 14, 2018.
The loan is subject to a cash sweep arrangement as a result of an anchor
tenant trigger event. We are working with the special servicer regarding
a potential deed in lieu of foreclosure, but make no assurances as to
whether an agreement will ultimately be reached. The lender’s recourse
is limited to foreclosing on the property and we have not guaranteed the
payment of principal or interest on the mortgage loan.
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 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 $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.
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 occur-
rence 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”), we 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 mil-
lion 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 For derivatives that have
been designated and that qualify as cash flow hedges of interest rate risk, the
gain or loss on the derivative is recorded in “Accumulated other comprehen-
sive income” and subsequently reclassified into “Interest expense, net” in
the same periods during which the hedged transaction affects earnings. As
of December 31, 2018, all of our outstanding derivatives were designated as
cash flow hedges. 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.”
During 2019, we estimate that $4.9 million will be reclassified as a
decrease to interest expense in connection with derivatives. The recog-
nition of these amounts could be accelerated in the event that we repay
amounts outstanding on the debt instruments and do not replace them
with new borrowings.
INTEREST RATE SWAPS As of December 31, 2018, we had interest rate
swap agreements outstanding with a weighted average base interest rate of
1.55% on a notional amount of $797.3 million, maturing on various dates
through May 2023, and forward starting interest rate swap agreements
with a weighted average base interest rate of 2.71% on a notional amount
of $250.0 million, with effective dates from January 2019 through June
2020, and maturity dates in May 2023. 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. The interest rate swap
agreements are net settled monthly.
The following table summarizes the terms and estimated fair values of our interest rate swap derivative instruments designated as cash flow hedges of
interest rate risk at December 31, 2018 and December 31, 2017 based on the year they mature. 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.
Aggregate Notional Value at
December 31, 2018
(in millions of dollars )
Aggregate Fair Value at
December 31, 2018 (1)
(in millions of dollars)
Aggregate Fair Value at
December 31, 2017
(in millions of dollars )
Weighted Average
Interest Rate
Maturity Date
Interest Rate Swaps
2018
2019
2020
2021
2022
2023
Forward Starting Swaps
2023
N/A
$ 250.0
100.0
397.3
—
50.0
N/A
$ —
1.9
8.1
—
(0.4)
250.0
(2.6)
$ —
0.8
1.9
7.0
N/A
N/A
N/A
$ 9.7
N/A
1.44%
1.23%
1.57%
—
2.62%
2.71%
1.83%
Total
$1,047.3
$ 7.0
The tables below present the effect of derivative financial instruments on accumulated other comprehensive income and on our consolidated statements
of operations for the years ended December 31, 2018 and 2017:
Amount of Gain or (Loss)
Recognized in Other
Comprehensive Income on
Derivative Instruments
Amount of Gain or (Loss)
Reclassified from Accumulated
Other Comprehensive Income into
Interest Expense
(in millions of dollars)
2018
2017
2016
2018
2017
2016
Derivatives in Cash Flow Hedging Relationships
Interest rate products
$(0.4)
$4.0
$1.5
$2.4
$2.3
$5.1
(in millions of dollars)
Total interest expense presented in the consolidated statements
of operations in which the effects of cash flow hedges are recorded
Amount of gain reclassified from accumulated other
comprehensive income into interest expense
For the Year Ended December 31,
2018
2017
2016
$ (61.4)
$ (58.4)
$ (70.7)
$ 2.4
$ 2.3
$ 5.1
In the years ended December 31, 2017 and 2016, 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 ineffectiveness
of $0.1 million.
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2018 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 indebt-
edness has not been accelerated by the lender, then we could also be
declared to be in default on our derivative obligations. As of December 31,
2018, 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, 2018, the fair value of derivatives in a liability posi-
tion, which excludes accrued interest but includes any adjustment for
nonperformance risk related to these agreements, was $3.0 million. If
we had breached any of the default provisions in these agreements as
of December 31, 2018, we might have been required to settle our obliga-
tions under the agreements at their termination value (including accrued
interest) of $3.2 million. We had not breached any of these provisions as
of December 31, 2018.
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,
$0.9 million and $1.0 million for the years ended December 31, 2018,
2017 and 2016, 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 $0.2 million, $0.3 million, and $0.4 million for the years ended
December 31, 2018, 2017 and 2016, 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, 2018, 2017 and 2016, approximately 31,000, 38,000 and
24,000 shares, respectively, were purchased for total consideration of $0.2
million, $0.4 million and $0.5 million, respectively. We recorded expense of
approximately $43,000 in the year ended December 31, 2018 and $0.1
million in each of the years ended December 31, 2017 and 2016, related to
the share purchase plan.
8. Share Based Compensation
SHARE BASED COMPENSATION PLANS As of December 31, 2018, we
make share based compensation awards using our 2018 Equity Incentive
Plan, which is a share based compensation plan that was approved by our
shareholders in 2018. Previously, we maintained six 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 addition, 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, 2018, 2017 and 2016, we recorded
aggregate compensation expense for share based awards of $6.9 million
(including $0.1 million of accelerated amortization relating to employee
separation), $5.7 million (including a net reversal of $0.2 million of amor-
tization relating to employee separation) and $6.0 million, (including
$0.3 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, 2018, 2017 and 2016, we capitalized compensation costs
related to share based awards of $0.1 million, $0.1 million, and $0.2 mil-
lion, respectively.
2018 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 2018 Equity
Incentive Plan (pursuant to options, restricted shares, shares issuable pur-
suant to current or future RSU Programs, or otherwise) was 1,718,352 as
of December 31, 2018. The share based awards described in this footnote
were made under the 2003 Equity Incentive Plan and the 2018 Equity
Incentive Plan.
RESTRICTED SHARES SUBJECT TO TIME BASED VESTING The aggre-
gate fair value of the restricted shares that we granted to our employees
and non-employee trustees in 2018, 2017 and 2016 was $5.1 million,
$4.8 million, and $5.1 million, respectively, based on the share price on the
date of the grant. As of December 31, 2018, there was $4.3 million of total
unrecognized compensation cost related to unvested share based compen-
sation arrangements granted under the 2003 Equity Incentive Plan and the
2018 Equity Incentive Plan. The cost is expected to be recognized over a
weighted average period of 0.7 years.
A summary of the status of our unvested restricted shares as of
December 31, 2018 and changes during the years ended December 31,
2018, 2017 and 2016 is presented below:
Shares
Weighted Average
Grant Date Fair Value
Unvested at January 1, 2016
Shares granted
Shares vested
Shares forfeited
December 31, 2016
Shares granted
Shares vested
Shares forfeited
December 31, 2017
Shares granted
Shares vested
Shares forfeited
December 31, 2018
342,330
264,989
(206,480 )
(14,427 )
386,412
336,296
(238,859 )
(34,427 )
449,422
461,395
(260,178 )
(29,241 )
621,398
$ 23.13
19.27
20.77
19.60
21.88
14.95
19.56
18.00
16.85
11.02
16.58
14.17
$ 13.29
RESTRICTED SHARES AWARDED TO EMPLOYEES In 2018, 2017 and
2016, 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 392,697,
245,950 and 230,429 restricted shares subject to time based vesting to our
employees in 2018, 2017 and 2016, respectively. The weighted average
grant date fair values of time based restricted shares was $10.99 per share
in 2018, $16.43 per share in 2017 and $18.67 per share in 2016. The
aggregate fair value of the restricted shares in 2018, 2017, and 2016 were
$4.3 million, $4.0 million, and $4.3 million, respectively. Compensation cost
relating to time based restricted share awards is recorded ratably over the
respective vesting periods. We recorded $4.3 million (including $0.1 million
of accelerated amortization relating to employee separation), $3.9 million
(including $0.2 million of accelerated amortization relating to employee sep-
aration) and $3.3 million (including $0.2 million of accelerated amortization
relating to employee separation) of compensation expense related to time
based restricted shares for the years ended December 31, 2018, 2017 and
2016, respectively. The total fair value of shares vested during the years
ended December 31, 2018, 2017 and 2016 was $2.0 million, $3.9 million
and $3.6 million, respectively.
On January 29, 2019, the Company granted 683,570 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. Of the time-based
restricted shares granted, 517,783 have Outperformance Units (“OPUs”)
attached to them. The OPUs will entitle the employees to receive additional
shares tied to a multiple of the employee’s time-based restricted share
award if the Company achieves certain specified operating performance
metrics measured over a three-year period. If any shares are issued in
respect of the OPUs at the end of the three-year measurement period, 50%
will vest immediately, 25% will be subject to an additional one-year vesting
requirement, and 25% will be subject to an additional two-year vesting
requirement. Dividend equivalents on the common shares will accrue
on any awarded OPUs and are credited to “acquire” more OPUs for the
account of the employee at the 20-day average closing price per common
share ending on the dividend payment date, but will vest only if performance
measures are achieved.
RESTRICTED SHARES AWARDED TO NON-EMPLOYEE TRUSTEES As
part of the compensation we pay to our non-employee trustees for their ser-
vice, we grant restricted shares subject to time based vesting. The awarded
shares vest over a one-year period. These annual awards have been made
under the 2003 Equity Incentive Plan and the 2018 Equity Incentive Plan.
We granted a total of 68,698, 64,358, and 34,560 restricted shares subject
to time based vesting to our non-employee trustees in 2018, 2017, and
2016, respectively. The weighted average grant date fair values of time
based restricted shares was $11.17 per share in 2018, $11.45 per share
in 2017 and $23.29 per share in 2016. The aggregate fair value of the
restricted shares in 2018, 2017 and 2016 were $0.8 million, $0.7 million
and $0.8 million, respectively, based on the share price on the date of the
grant. Compensation cost relating to time based restricted share awards is
recorded ratably over the respective vesting periods. We recorded $0.5 mil-
lion, $0.5 million and $0.6 million of compensation expense related to time
based vesting of non-employee trustee restricted share awards in 2018,
2017 and 2016, respectively. As of December 31, 2018, there was $0.3
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 $0.6 million, $0.8
million, and $0.8 million for the years ended December 31, 2018, 2017 and
2016, respectively. In 2019, we will record compensation expense of $0.3
million in connection with the amortization of existing non-employee trustee
restricted share awards.
We will record future compensation expense in connection with the vesting
of existing time based restricted share awards to employees and non-em-
ployee trustees as follows (including restricted shares issued in 2019):
Future Compensation Expense
(in thousands of dollars)
For the Year Ending
December 31,
Employees
Non-Employee
Trustees
2019
2020
2021
2022
Total
$ 3,949
2,827
1,431
157
$8,364
$ 300
—
—
—
Total
$ 4,249
2,827
1,431
157
$ 300
$8,664
RESTRICTED SHARE UNIT PROGRAMS In 2018, 2017, 2016, 2015 and
2014, our Board of Trustees established the 2018-2020 RSU Program,
2017-2019 RSU Program, 2016-2018 RSU Program, 2015-2017 RSU
Program, and the 2014-2016 RSU Program, respectively (collectively, 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”). In 2018,
only one half of the awarded RSUs were tied to our relative total return to
shareholders compared to the Index REITs, with the other half of the RSUs
were tied to our absolute level of total return to shareholders. 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
2018 ANNUAL REPORT
45
The aggregate fair values of the RSU awards in 2018, 2017 and 2016 were determined using a Monte Carlo simulation probabilistic valuation model, and
are presented in the table below. The table also sets forth the assumptions used in the Monte Carlo simulations used to determine the aggregate fair values
of the RSU awards in 2018, 2017 and 2016 by grant date:
(in thousands of dollars, except per share data)
RSUs and assumptions by Grant Date
Grant Date:
Measurement Basis:
RSUs granted
Aggregate fair value of shares granted
Weighted average fair value per share (4)
Volatility
Risk free interest rate
PREIT Stock Beta compared to Dow
Jones US Real Estate Index(1)
January 29, 2018
February 27, 2017
February 23, 2016
Absolute TSR RSUs
Relative TSR RSUs
Relative TSR RSUs
Relative TSR RSUs
115,614
$ 1,336
$ 10.93
31.6 %
2.19 %
N/A
115,614
$ 1,779
$ 14.56
31.6 %
2.19 %
N/A
140,490
$ 1,620
$ 11.53
25.8 %
1.42 %
127,421
$ 1,914
$ 15.02
25.3 %
0.90 %
0.706
1.184
(1) 2018’s RSU Award valuation used a matrix approach, where the correlation was calculated between PREIT and each of its peers and each peer against all other peers.
Compensation cost relating to the RSU awards is expensed ratably over the
applicable three year vesting period. We recorded $2.1 million, $1.3 million
(including a reversal of $0.4 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, 2018, 2017 and
2016, respectively. We will record future aggregate compensation expense
of $5.6 million related to the existing awards under the RSU Programs
(including the effect of the 2019 RSUs described below).
For the years ended December 31, 2018, 2017 and 2016, no shares were
issued from the 2016-2018, 2015-2017, and 2014-2016 RSU programs
because the required criteria were not met.
On January 29, 2019, the Board of Trustees established the 2019-2021
Equity Award program, and the Company granted 420,385 RSUs to
employees (the “2019 RSUs”) with an aggregate fair value of $3.1 mil-
lion. The 2019 RSUs have a three-year measurement period that ends on
December 31, 2021 or a shorter period ending upon the change in control
of the Company. One half of the 2019 RSU awards are tied to our relative
total return to shareholders compared to the Index REITs, and the other half
are tied to our absolute level of total return to shareholders.
9. Leases
AS LESSOR Our retail properties are leased to tenants under operating
leases with various expiration dates ranging through 2095. Future minimum
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,
2019
2020
2021
2022
2023
2024 and thereafter
$ 187,007
166,056
149,007
131,519
113,845
337,516
$ 1,084,950
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 incurred relating to such leases were $2.8 million, $2.5
million and $2.4 million for the years ended December 31, 2018, 2017
and 2016, 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:
(in thousands of dollars)
For the Year Ending December 31,
2019
2020
2021
2022
2023
2024 and thereafter
10. Related Party Transactions
Operating
Leases
$ 1,823
461
272
89
9
—
Ground
Leases
$ 1,184
1,384
1,584
1,584
1,584
33,959
$ 2,654
$ 41,279
GENERAL In 2016, 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 for the
year ended December 31, 2016.
OFFICE LEASES We currently lease our principal executive offices from
Bellevue Associates, an entity that is owned by Ronald Rubin, one of our
former trustees, collectively with members of his immediate family and
affiliated entities. Total rent expense under this lease was $1.3 million,
$1.3 million and $1.4 million for the years ended December 31, 2018,
2017 and 2016, respectively. This lease expires in October 2019.
In December 2018, we entered into a lease for new office space at One
Commerce Square, which is located at 2005 Market Street, Philadelphia,
Pennsylvania, with Brandywine Realty Trust. Our lead independent trustee
is also a Trustee of Brandywine Realty Trust. The lease commencement
date and our corporate office relocation date is expected to occur during
the third quarter of 2019.
EMPLOYEE HEALTH INSURANCE We purchase healthcare benefits for
our employees through Independence Blue Cross (“IBX”). Our lead inde-
pendent trustee became chairman of the board of directors of IBX during
2018. We paid total insurance healthcare premiums of $2.7 million to IBX
during 2018.
11. Commitments and Contingencies
CONTRACTUAL OBLIGATIONS As of December 31, 2018, we had
unaccrued contractual and other commitments related to our capital
improvement projects and development projects of $117.9 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, 2018, 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,
2018 of $1.3 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 $1.1
million, $1.3 million and $1.4 million of employee separation expense in
2018, 2017 and 2016, respectively, in connection with the termination of
certain employees. As of December 31, 2018, $1.1 million of these amounts
was accrued and unpaid.
PROPERTY DAMAGE FROM NATURAL DISASTER During September
2018, Jacksonville Mall in Jacksonville, North Carolina incurred property
damage and an interruption of business operations as a result of Hurricane
Florence. The property was closed for business during and immediately
after the natural disaster, however, significant remediation efforts were
quickly undertaken and the mall was reopened shortly thereafter.
During the twelve months ended December 31, 2018, we recorded recov-
eries, net in excess of losses, of approximately $0.7 million. This amount
consisted of combined estimated property impairment and remediation
losses of $2.3 million, offset by a corresponding insurance claim recovery
of $3.0 million. Our current insurance policies contain business interruption
coverage. To date, we have not recorded any recoveries of such business
interruption losses, as such recoveries will be recorded at such time that the
recovery is probable.
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
estimate and eliminated the entire contingent liability associated with the
Earnout. The change in the estimated fair value of this contingent liability
was recorded as a component of depreciation and amortization expense in
the accompanying consolidated statement of operations. The measurement
period for the contingent consideration ended on March 31, 2018 and no
amounts were paid as additional consideration.
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 protection ends when
VRLP’s liability under the MR tax protection agreement ceases, which will
be either (a) upon the death of MR, which occurred after December 31,
2018 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, 2018.
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”).
In December 2018, the historic tax credit arrangement ended when the
Counterparty exercised its put option and the Project paid a total of $1.0 mil-
lion, comprised of $0.9 million in exchange for the Counterparty’s ownership
interest and an additional $0.1 million in accrued priority returns for 2018.
The tax credits received by the Counterparty were subject to five year credit
recapture periods that ended in 2018. Our obligation to the Counterparty
with respect to the tax credits was ratably relieved annually each year. In
each of the third quarters of 2018, 2017 and 2016, we recognized $1.0
million, $1.9 million, and $1.9 million, respectively, as “Other income” in the
consolidated statements of operations.
We also recorded $0.2 million of priority returns earned by the Counterparty
during each of the third quarters 2018, 2017 and 2016, respectively.
In aggregate, we recorded $0.8 million, $1.8 million and $1.8 million in net
income to “Other income” in the consolidated statements of operations in
connection with the Project during the years ended December 31, 2018,
2017 and 2016, respectively.
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2018 ANNUAL REPORT
47
13. Summary of Quarterly Results (Unaudited)
The following presents a summary of the unaudited quarterly financial information for the years ended December 31, 2018 and 2017:
(in thousands of dollars, except per share amounts)
For the Year Ended December 31, 2018
Total revenue
Net loss(2)(3)
Net loss attributable to PREIT(2)(3)(4)
Basic and diluted (loss) earnings per share(4)
(in thousands of dollars, except per share amounts)
For the Year Ended December 31, 2017
Total revenue
Net income (loss)(2)(3)
Net income (loss) attributable to PREIT(3)(4)
Basic and diluted (loss) earnings per share(4)
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter (1)
Total
$ 86,282
(3,712 )
(2,601 )
(0.14 )
$ 91,973
(32,321 )
(28,201 )
(0.50 )
$ 88,103
(1,636 )
(745 )
(0.11 )
$96,042
(88,834 )
(78,782 )
(1.23 )
$ 362,400
(126,503 )
(110,329 )
(1.98 )
1st Quarte r
2nd Quarter
3rd Quarter
4th Quarter (1)
Total
$ 89,264
(486 )
227
(0.09 )
$ 89,250
(53,277 )
(46,856 )
(0.78 )
$ 89,211
12,300
11,793
0.06
$ 99,765
8,615
8,883
(0.03 )
$ 367,490
(32,848 )
(25,953 )
(0.84 )
(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 $34.2 million (2nd Quarter 2018), $103.2 million (4th quarter 2018), $53.9 million (2nd Quarter 2017), $1.8 million (3rd Quarter 2017) and 0.1 million (4th
Quarter 2017).
(3) Includes gains on sales of interests in real estate by equity method investee of $2.8 million (1st Quarter 2018) and $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 $0.7 million (2nd Quarter 2018) and gains on sales of non operating real estate of $8.1 million (4th Quarter 2018).
(4) Certain prior period amounts for net income (loss) attributable to PREIT common shareholders, basic and diluted earnings per share, noncontrolling interest, total equity - PREIT and cash flow
amounts were adjusted to reflect immaterial financial statement error corrections and new accounting rules as discussed in Note 1 to our consolidated financial statements.
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, 2018, 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, 2018 and 2017, 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, 2018, 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, 2018
and 2017, and the results of its operations and its cash flows for each of
the years in the three-year period ended December 31, 2018, 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,
2018, 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 25, 2019
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 25, 2019
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2018 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 limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evalua-
tion 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 25, 2019
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 sub-
sidiaries’ (the “Company”) internal control over financial reporting as of
December 31, 2018, 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, 2018, 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 con-
solidated balance sheets of the Company as of December 31, 2018 and
2017, 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, 2018, and the related notes (collectively, the
consolidated financial statements), and our report dated February 25,
2019 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 27 retail properties, of which 25 are operating
properties and two are development or redevelopment properties. The 25
operating properties include 21 shopping malls and four other retail proper-
ties, have a total of 20.1 million square feet and are located in nine states.
We and partnerships in which we hold an interest own 15.7 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 12.9 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 excluding Wyoming Valley Mall and properties acquired or dis-
posed of or under redevelopment 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).
This redevelopment is expected to open in 2019 and stabilize in 2021. We
have one property in our portfolio that is classified as under development,
however we do not currently have any activity occurring at this property.
The above property counts do not include undeveloped land parcels
located in Gainesville, Florida and New Garden Township, Pennsylvania
because these properties were classified as “held for sale” as of December
31, 2018.
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 $93.7 million to a net loss of $126.5 million for the
year ended December 31, 2018 from a net loss of $32.8 million for the year
ended December 31, 2017. The change in our 2018 results of operations
was primarily due to increased impairment losses in 2018 as compared to
2017 and dilution from asset sales.
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, 2018, held a 89.5% 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 the
two 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 acquisitions
in 2018, 2017 and 2016.
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
2018 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
2018
Consolidated properties
Unconsolidated properties
Total
2017
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)
(in thousands)
GLA(2)
10
3
10
16
9
18
43
5
48
75
16
91
1,221,433
14,977
$
7,072
402
1,236,410
$
7,474
341,701
191,538
$
10,837
2,103
533,239
$
12,940
4
–
4
27
9
36
265,399
–
$ 1,549
–
265,399
$ 1,549
176,221
164,228
340,449
$ 4,809
1,581
$ 6,390
(1)Total represents unique tenants and includes both tenant-owned and landlord-owned stores.
(2) Gross Leasable Area (“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, 2018.
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 entered into a ground lease for the land associated with the Macy’s store located at Plymouth Meeting Mall in 2017,
and have executed leases with replacement tenants for that location in 2018.
The table below sets forth information related to our anchor replacement program:
Former/Existing Anchors
Name
GLA
‘000’s
Date
Closed/
Closing
Date
Decomissioned
Name
Replacement Tenant(s)
Actual/Targeted
Occupancy
Date
GLA
‘000’s
Property
Completed:
Valley Mall
Macy’s
Bon-Ton
Moorestown Mall
Macy’s
Magnolia Mall
Sears
Exton Square Mall
K-mart
In Process:
120
123
200
91
96
Q1 16
Q1 18
Q1 17
Q1 17
Q1 16
n/a
n/a
n/a
Q2 17
Q2 16
Tilt
Onelife Fitness
Belk
HomeSense
Five Below
Burlington
HomeGoods
Five Below
Whole Foods
48
70
123
28
9
46
22
8
55
Woodland Mall
Sears
313
Q2 17
Q2 17
Plymouth Meeting Mall Macy’s(1)
215
Q1 17
Moorestown Mall
Macy’s
Valley Mall
Sears
200
123
Q1 17
Q3 17
Willow Grove Park
JCPenney
125
Q3 17
(1)Property is subject to a ground lease.
Burlington
86
Von Maur
20
REI
8
Urban Outfitters
Restaurants and small shop space 22
41
58
26
38
7
19
25
50
49
Dick’s Sporting Goods
Michael’s
Edge Fitness
Miller’s Ale House
Sierra Trading Post
Michael’s
Q2 18 Dick’s Sporting Goods
n/a
n/a
Studio Movie Grill
n/a Entertainment and
small shop space
44
Q4 19
Q3 18
Q1 19
Q4 18
Q3 18
Q4 18
Q3 17
Q2 18
Q2 18
Q1 18
Q4 19
Q4 19
Q4 19
Q4 19
Q4 19
Q4 19
Q4 19
Q4 19
Q4 19
Q1 19
Q3 19
Q1 20
Q2 20
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 IMPROVEMENTS, REDEVELOPMENT AND DEVELOPMENT
PROJECTS We might engage in various types of capital improvement
projects at our operating properties. Such projects vary in cost and com-
plexity, 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 bal-
ance sheet until the asset is placed into service, and amounted to $115.2
million as of December 31, 2018.
As of December 31, 2018, we had unaccrued contractual and other com-
mitments related to our capital improvement projects and development
projects at our consolidated and unconsolidated properties of $117.9 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 secured the FDP Term Loan by pledging their
respective equity interests of 50% each in the entities that own Fashion
District Philadelphia. The entire $250.0 million available under the FDP
Term Loan was drawn during the first quarter of 2018, and we received an
aggregate $123.0 million as a distribution of our share of the draw in 2018.
We also own one development property, but we do not expect to make any
significant investment at this property in the short term.
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 2018, 2017 and 2016, 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.
52
MANAGEMENT’S DISCUSSION AND ANALYSIS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2018 ANNUAL REPORT
53
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 dura-
tion of the decline in value. To the extent impairment has occurred, the
excess carrying value of the asset over its estimated fair value is charged
to income.
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 currently has $150.0 million outstanding (our share of which is
$75.0 million).
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.
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
Results of Operations
OVERVIEW Net loss for the year ended December 31, 2018 was $126.5
million, compared to a net loss for the year ended December 31, 2017 of
$32.8 million. The change in our 2018 results of operations was primarily
due to increased impairment losses in 2018 as compared to 2017 and
dilution from asset sales.
Net loss for the year ended December 31, 2017 was $32.8 million, com-
pared to 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.
OCCUPANCY The tables below set forth certain occupancy statistics for our retail properties in total and our Core Malls as of December 31, 2018, 2017
and 2016:
Occupancy(1) as of December 31,
Consolidated Properties Unconsolidated Properties Combined(2)
2018
2017
2016
2018
2017
2016
2018
2017
2016
Retail portfolio weighted average:(3)
Total excluding anchors
Total including anchors
Core Malls weighted average:(4)
Total excluding anchors
Total including anchors
93.2 %
92.8 %
93.6 %
95.8 %
93.4 %
95.7 %
90.5 %
92.2 %
92.2 %
93.6 %
94.2 %
95.3 %
92.6 %
92.7 %
93.3 %
95.4 %
93.6 %
95.6 %
94.3 %
96.5 %
94.7 %
96.7 %
94.1 %
96.5 %
88.4 %
92.0 %
90.2 %
93.3 %
94.8 %
96.4 %
93.6%
96.0%
94.2 %
96.3 %
94.2 %
96.5 %
(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.
(3) Retail portfolio includes all retail properties excluding Fashion District Philadelphia because that property is under redevelopment.
(4) Core Malls excludes Fashion District Philadelphia, Exton Square Mall, Valley View Mall, Wyoming Valley Mall, power centers and Gloucester Premium Outlets.
From 2017 to 2018, total occupancy for our retail portfolio, including consolidated and unconsolidated properties (and including all tenants irrespective of the
term of their agreement), decreased 270 basis points to 92.7%.
From 2017 to 2018, total occupancy for our Core Malls, including consolidated and unconsolidated properties, decreased 30 basis points to 96.0%.
.
54 MANAGEMENT’S DISCUSSION AND ANALYSIS
LEASING ACTIVITY The table below sets forth summary leasing activity information with respect to our properties for the year ended December 31, 2018,
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
Over 10,000 sf
105
16
121
128
12
343,594
378,155
721,749
7.3
10.5
9.0
$ 44.46
19.67
$31.47
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
$ 10.85
4.43
6.92
305,119
306,229
3.4
5.3
$55.14
21.32
$55.16
20.64
$ (0.20 )
— %
0.67 3.3 %
5.0%
11.9%
$ 0.19
2.45
Total Fixed Rent
140
611,348
4.3
$38.20
$37.87
$0.33
0.9 %
6.9 %
$1.58
Percentage in Lieu
46
130,276
1.7
35.27
44.02
(8.75 )
(19.9 )%
N/A
—
Total Renewal Leases(4)
186
741,624
3.9
$ 37.69
$38.95
$(1.27)
(3.3 )%
6.9%
$1.46
Total Non Anchor(5)
307
1,463,373
6.4
$34.62
Anchor
New Leases
Renewal Leases
Total
2
4
6
99,258
512,858
10.0
5.6
$ 13.30
3.28
N/A
$ 3.36
N/A
(0.08 )
N/A
(2.4)%
N/A
N/A
$0.40
–
612,116
7.1
$ 4.90
(1) I nitial 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 7 leases and 11,102 square feet of GLA with respect to tenants whose leases were restructured and extended following a bankruptcy filing. Excluding those leases, the initial gross
rent spread was 1.0% for leases under 10,000 square feet and (2.4%) for all non anchor leases. Excluding these leases, the average rent spreads were 6.2% for leases under 10,000 square
feet and 7.8% for all non anchor leases.
(5) Includes 53 leases and 172,994 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.
See our Annual Report on Form 10-K for year ended December 31, 2018 “Item 2. Properties—Retail Lease Expiration Schedule” for information regarding
average minimum rent on expiring leases.
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2018 ANNUAL REPORT
55
The following table sets forth our results of operations for the years ended December 31, 2018, 2017 and 2016:
(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 expense
Project costs and other expenses
Insurance recoveries, net
Interest expense, net
Depreciation and amortization
Impairment of assets
Equity in income of partnerships
Gain on sale of real estate by equity method investee
Gains (losses) on sales of interests in real estate, net
Gains on sales of non-operating real estate
For the Year Ended
December 31, 2018
% Change
2017 to 2018
For the Year Ended
December 31, 2017
% Change
For the Year Ended
2016 to 2017 December 31, 2016
$ 358,229
4,171
(141,232 )
(38,342 )
(1,139 )
(693 )
689
(61,355 )
(133,116 )
(137,487 )
11,375
2,772
1,525
8,100
(1 )%
(30 ) %
1 %
4 %
(12 )%
(10 )%
N/A
5 %
3 %
146 %
(21 )%
(58 )%
522 %
538 %
$ 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 )%
N/A
(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
Net loss
$ (126,503 )
285 %
$ (32,848 )
158 %
$ (12,713 )
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 $3.3 million,
or 1%, in 2018 as compared to 2017, primarily due to:
n
n
a decrease of $8.5 million in real estate revenue related to sold proper-
ties;
a decrease of $2.4 million in same store common area expense reim-
bursements, due to a decrease in common area 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;
n
a decrease of $0.9 million in same store partnership marketing revenue;
n a decrease of $0.6 million in same store utility reimbursements due to a
decrease in tenant electric consumption, partially offset by an increase
in tenant electric billing rates established by each state’s public utility
commission;
n
n
n
n
a decrease of $0.5 million at Wyoming Valley Mall due to two anchor store
closings and associated co-tenancy concessions during 2018; and
a decrease of $0.2 million in same store marketing revenue; partially
offset by
an increase of $6.0 million in same store lease termination revenue,
including $8.6 million from the termination of leases with three tenants
during 2018, partially offset by $2.4 million received from four tenants
during 2017;
an increase of $2.3 million in same store real estate tax reimbursements,
due to an increase in real estate tax expense (see “—Property Operating
Expenses”), partially offset by 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 reimburse-
ments; and
n
an increase of $1.6 million in same store base rent due to $3.4 million
from net new store openings over the previous twelve months, partially
offset by a $1.0 million decrease related to tenant bankruptcies in 2017
and 2018, as well as a $0.8 million decrease related to co-tenancy con-
cessions due to anchor closings.
Real estate revenue decreased by $33.1 million, or 8%, in 2017 as com-
pared to 2016, primarily due to:
n
n
n
n
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”);
a decrease of $1.7 million in lease termination revenue, including $2.9
million received from one tenant for two locations during 2016;
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
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.
PROPERTY OPERATING EXPENSES Property operating expenses
increased by $0.9 million, or 1%, in 2018 as compared to 2017, pri-
marily due to:
an increase of $6.7 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, as well as a successful real estate tax appeal at
one of our properties resulting in lower real estate tax expense during
2017; and;
an increase of $0.1 million in same store other property operating
expenses, including a $0.9 million increase in bad debt expense due
to increased reserves for bankruptcy and other troubled tenants and a
$0.2 million increase in non-reimbursable maintenance costs, partially
offset by a $1.0 million decrease in personnel costs; partially offset by
and the mall was reopened shortly thereafter.
During the twelve months ended December 31, 2018, we recorded recov-
eries, net in excess of losses, of approximately $0.7 million. This amount
consisted of combined estimated property impairment and remediation
losses of $2.3 million, offset by a corresponding insurance claim recovery
of $3.0 million. Our current insurance policies contain business inter-
ruption coverage. To date, we have not recorded any recoveries of such
business interruption losses, as such recoveries will be recorded at such
time that the recovery is probable.
IMPAIRMENT OF ASSETS During the years ended December 31, 2018,
2017, and 2016, we recorded impairment of assets of $137.5 million,
$55.8 million and $62.6 million, respectively. The assets that incurred
impairments and the amount of such impairments are as follows:
a decrease of $4.0 million in property operating expenses related to sold
properties; and
(in thousands of dollars)
2018
2017
2016
For the Year Ended December 31,
n
n
n
n
a decrease of $1.8 million in same store common area maintenance
expense, including a $1.7 million decrease in housekeeping, mainte-
nance and loss prevention expense due to negotiated rate reductions
with the service providers and a $1.2 million decrease in personnel
costs, partially offset by a $0.4 million increase in common area electric
expense and a $0.2 million increase in snow removal expense due to
extremely cold temperatures during January 2018 and higher snow fall
amounts across the Mid-Atlantic states, where many of our properties
are located.
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.
GENERAL AND ADMINISTRATIVE EXPENSES General and administra-
tive expenses increased by $1.6 million, or 4%, in 2018 as compared to
2017, primarily due to increases in employee salaries, short-term incentive
compensation expense and long-term deferred compensation amortiza-
tion, as well as an increase in professional fee expense.
General and administrative expenses increased by $1.5 million, or 4%, in
2017 as compared to 2016, primarily due to increases in employee costs
and increases in professional fee expense.
INSURANCE RECOVERIES, NET During September 2018, Jacksonville
Mall in Jacksonville, North Carolina incurred property damage and an
interruption of business operations as a result of Hurricane Florence. The
property was closed for business during and immediately after the natural
disaster, however, significant remediation efforts were quickly undertaken
Exton Square Mall
Wyoming Valley Mall
Valley View Mall
Wiregrass Mall mortgage
note receivable
New Garden land
Gainesville land
Logan Valley Mall
Sunrise land
Beaver Valley Mall
Washington Crown Center
Crossroads Mall
Office building located at Voorhees
Town Center
Other
$ 73,218
32,177
14,294
8,122
7,567
2,089
—
—
—
—
—
—
20
$ —
—
15,521
$ —
—
—
—
—
1,275
38,720
226
—
—
—
—
20,786
—
—
—
18,055
14,117
9,038
—
51
607
—
Total impairment of assets
$137,487
$55,793
$62,603
See note 2 to our consolidated financial statements for a further discus-
sion of impairment of assets.
INTEREST EXPENSE Interest expense increased by $2.9 million, or 5%,
in 2018 as compared to 2017 due to a decrease in capitalized interest and
higher weighted average effective interest rates (4.15% in 2018 compared
to 4.01% in 2017), partially offset by lower weighted average debt balance
($1,624.6 million in 2018 compared to $1,648.5 million in 2017).
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 mil-
lion 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 expen-
ditures related to anchor replacements and redevelopment spending. In
2017, we also had lower weighted average effective interest rates than in
2016 (4.01% for 2017 as compared to 4.19% for 2016).
DEPRECIATION AND AMORTIZATION Depreciation and amortization
expense increased by $4.3 million, or 3%, in 2018 as compared to 2017,
primarily because of:
n
an increase of $5.7 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
56 MANAGEMENT’S DISCUSSION AND ANALYSIS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2018 ANNUAL REPORT
57
n
a decrease of $1.4 million related to sold properties.
NON-GAAP SUPPLEMENTAL FINANCIAL MEASURES
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 capital
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.
EQUITY IN INCOME OF PARTNERSHIPS Equity in income of partner-
ships decreased by $3.0 million, or 21%, in 2018 as compared to 2017.
This decrease was primarily due to unamortized below-market lease intan-
gibles written off in 2017 related to Fashion District Philadelphia, partially
offset by a $1.6 million mortgage prepayment penalty incurred at Lehigh
Valley Mall in 2017 that did not recur.
Equity in income of partnerships 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 at Lehigh Valley Mall in 2017, a $1.3
million decrease in lease termination income in 2017 as compared to 2016,
and an aggregate decrease of $1.0 million related to 2017 bankruptcies.
GAINS ON SALE OF REAL ESTATE BY EQUITY METHOD INVESTEE
Gain on sale of real estate by equity method investee was $2.8 million
in 2018, which resulted from our 50% share of a $5.5 million gain on
the sale of a condominium interest in 907 Market Street in Philadelphia,
Pennsylvania recorded by a partnership in which we hold a 50% owner-
ship interest.
Gain on sale of real estate by equity method investee was $6.5 million
in 2017, which resulted from our 50% share of a $13.1 million gain on
the sale of a condominium interest in 801 Market Street in Philadelphia,
Pennsylvania recorded by a partnership in which we hold a 50% owner-
ship interest.
GAINS (LOSSES) ON SALES OF REAL ESTATE Gain on sale of real
estate was $1.5 million in 2018, which was primarily due to a $1.0 million
gain on the sale of an outparcel on which two restaurants are located at
Valley Mall in Hagerstown, Maryland and a $0.7 million gain on the sale of
an outparcel on which a restaurant is located at Magnolia Mall in Florence,
South Carolina, partially offset by adjustment to gains from properties sold
in prior periods.
Gain (losses) on sale of real estate, net in 2017 was $(0.4) million, which
was primarily due to adjustments to gains of sales from properties sold in
prior periods.
Gain on sale of real estate, net in 2016 was $23.0 million, which was
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 NON-OPERATING REAL ESTATE, NET Gain on
sales of non-operating real estate was $8.1 million in 2018, which was
primarily due to the sale of a parcel adjacent to Exton Square Mall in
Exton, Pennsylvania.
Gain on sales of non-operating real estate was $1.3 million in 2017, which
was primarily due to the sale of three non-operating parcels located at
Beaver Valley Mall, Exton Square Mall and Valley Mall.
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 oper-
ating 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 perfor-
mance 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 presentation 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 impairment of mortgage asset, provision
for employee separation expense, insurance recoveries, prepayment
penalties, accelerated amortization of deferred financing costs, loss on
redemption of preferred shares and loss on hedge ineffectiveness.
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 incorporate financial
information attributable to our share of unconsolidated properties. This pro-
portionate financial information is non-GAAP financial information, but we
believe that it is helpful information because it reflects the pro rata contribu-
tion 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 unconsol-
idated partnerships with third parties, we own a 25% to 50% economic
interest in such partnerships, and there are generally no provisions in
such partnership 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 percentage 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 loss to NOI of our consolidated properties
for the years ended 2018, 2017 and 2016:
(in thousands of dollars)
2018
2017
2016
For the Year Ended December 31,
$ (126,503 )
(4,171 )
133,116
$(32,848 )
(5,966 )
128,822
$(12,713 )
(5,349 )
126,669
38,342
36,736
35,269
Net loss
Other income
Depreciation and amortization
General and administrative
expenses
Provision for employee
separation expenses
Project costs and other expenses
Insurance recoveries, net
1,139
693
(689 )
61,355
Interest expense, net
Impairment of assets
137,487
Equity in income of Partnerships (11,375 )
Gain on sales of real estate by
equity method investee
Gains (losses) on sales of
interests in real estate
(1,525 )
(2,772 )
1,299
768
—
58,430
55,793
(14,367 )
1,355
1,700
—
70,724
62,603
(18,477 )
(6,539 )
—
361
(23,022 )
Gains on sales of
non-operating real estate
Net operating income from
consolidated properties
(8,100 )
(1,270 )
(380 )
$216,997
$ 221,219 $ 238,379
The table below reconciles equity in income of partnerships to NOI of our
share of unconsolidated properties for the years ended 2018, 2017 and
2016:
For the Year Ended December 31,
(in thousands of dollars)
2018
2017
2016
Equity in income of
partnerships
Other income
Depreciation and amortization
Interest and other expenses
Net operating income from
equity method investments
at ownership share
$ 11,375
(82 )
8,612
10,828
$ 14,367
(594 )
10,974
12,013
$ 18,477
—
10,214
10,306
$ 30,733
$ 36,760
$ 38,997
58 MANAGEMENT’S DISCUSSION AND ANALYSIS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2018 ANNUAL REPORT
59
The table below presents total NOI and total NOI excluding lease terminations for the years ended December 31, 2018 and 2017:
(in thousands of dollars)
2018
2017
2018
2017
2018
2017
Same Store
Non Same Store Total (non-GAAP)
NOI from consolidated properties
NOI from equity method investments
at ownership share
Total NOI
Less: lease termination revenue
Total NOI - excluding lease
termination revenue
$210,112 $209,244
$6,885 $ 11,975
$ 216,997 $ 221,219
30,161
30,266
572
6,494
30,733
36,760
$240,273 $239,510
3,142
9,183
$7,457 $18,469
85
35
$247,730 $257,979
3,227
9,218
$231,090 $236,368
$7,422 $18,384
$238,512 $254,752
Total NOI decreased by $10.2 million, or 4.0%, in 2018 as compared to 2017. NOI from Non Same Store properties decreased by $11.0 million. This
decrease was primarily due to the properties sold in 2018 and 2017. NOI from Same Store properties increased by $0.8 million primarily due to property
results as discussed in “—Results of Operations—Real Estate Revenue” and “—Property Operating Expenses.”
The table below presents total NOI and total NOI excluding lease terminations for the years ended December 31, 2017 and 2016:
Same Store
Non Same Store Total (non-GAAP)
(in thousands of dollars)
2017
2016
2017
2016
2017
2016
NOI from consolidated properties
NOI from equity method investments
at ownership share
Total NOI
Less: lease termination revenue
Total NOI - excluding lease
termination revenue
$ 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 by $18.2 million. This decrease
was primarily due to the properties sold in 2017 and 2016. NOI from Same Store properties decreased by $1.2 million primarily due to decreased lease termi-
nation income, partially offset by the property results as discussed in “—Results of Operations—Real Estate Revenue” and “—Property Operating Expenses”.
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 profit-
ability among REITs. We use FFO and FFO per diluted share and unit of
limited partnership interest in our operating partnership (“OP Unit”) in mea-
suring 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 (including
development land parcels), which are included in the determination of net
income in accordance with GAAP. Accordingly, FFO is not a comprehen-
sive measure of our operating cash flows. In addition, since FFO does not
include depreciation on real estate assets, FFO may not be a useful per-
formance measure when comparing our operating performance to that of
other non-real estate commercial enterprises. We compensate for these
limitations by using FFO in conjunction with other GAAP financial perfor-
60 MANAGEMENT’S DISCUSSION AND ANALYSIS
mance 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 oper-
ating activities (determined in accordance with GAAP) as a measure of our
liquidity, nor is it indicative of funds available for our cash needs, including
our ability to make cash distributions. We believe that net income is the
most directly comparable GAAP measurement to FFO.
We also present Funds From Operations, as adjusted, and Funds From
Operations per diluted share and OP Unit, as adjusted, which are non-
GAAP measures, for the years ended December 31, 2018, 2017 and 2016,
respectively, to show the effect of such items as impairment of mortgage
asset, provision for employee separation expense, insurance recoveries,
prepayment penalties, accelerated amortization of deferred financing
costs, loss on redemption of preferred shares and loss on hedge ineffec-
tiveness which had an effect on our results of operations, but are not, in our
opinion, indicative of our ongoing 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 impairment of mortgage asset, provision for employee separation
expense, insurance recoveries, prepayment penalties, accelerated amortization of deferred financing costs, loss on redemption of preferred shares and loss
on hedge ineffectiveness.
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, 2018, 2017 and 2016:
For the Year Ended December 31,
(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
Gains (losses) on sales of real estate, net
Impairment of real estate assets
Dividends on preferred shares
Loss on redemption of preferred shares
Funds from operations attributable to
common shareholders and OP Unit holders
Impairment of mortgage loan receivable
Provision for employee separation expense
Insurance recoveries, net
Prepayment penalty and accelerated
amortization of deferred financing costs
Loss on redemption of preferred shares
Loss on hedge ineffectiveness
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
2018
% Change
2017 to 2018
$ (126,503)
131,694
8,612
(2,772 )
(1,525 )
129,365
(27,375 )
—
111,496
8,122
1,139
(689 )
363
—
—
(9.4 %)
% Change
2016 to 2017
(15.9%)
2017
$ (32,848)
127,327
10,974
(6,539 )
361
55,793
(27,845 )
(4,103 )
123,120
—
1,299
—
1,557
4,103
—
2016
$ (12,713 )
125,192
10,214
—
(23,022 )
62,603
(15,848 )
—
146,426
—
1,355
—
—
—
143
$ 120,431
(7.4% ) $130,079
(12.1%)
$ 147,924
$ 1.43
(9.5%)
$ 1.58
(16.4%)
$ 1.89
$ 1.54
(7.8%)
$ 1.67
(12.6%)
$ 1.91
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
69,749
8,273
203
78,225
69,364
8,297
93
77,754
69,086
8,324
191
77,601
FFO was $111.5 million for 2018, a decrease of $11.6 million, or 9.4%,
compared to $123.1 million for 2017. This decrease was primarily due to:
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 $11.0 million decrease in Non Same Store NOI primarily due to properties sold;
n a $18.2 million decrease in Non Same Store NOI primarily due to prop-
and
erties sold;
n a $8.1 million impairment on a mortgage loan receivable asset; partially
n a $12.0 million increase in preferred share dividends; and
offset by
n a $4.1 million loss on preferred share redemption in 2017; partially offset
n a $4.1 million loss on preferred share redemption in 2017;
by
n a $1.7 million decrease in interest expense; and
n a $10.5 million decrease in interest expense; and
n a $0.8 million increase in Same Store NOI.
n a $1.2 million increase in Same Store NOI.
FFO per diluted share and OP Unit decreased $0.15 per share to $1.43
per share for 2018, compared to $1.58 per share for 2017 due to the
factors noted above and higher share count in the 2018 period.
FFO per diluted share decreased $0.31 per share to $1.58 per share for
2017, compared to $1.89 per share for 2016 primarily due to the factors
noted above.
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2018 ANNUAL REPORT
61
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 two credit agreements
(collectively, as amended, the “Credit Agreements”): (1) the 2018 Credit
Agreement, which, as described in more detail below, includes (a) the
2018 Revolving Facility, and (b) the 2018 Term Loan Facility, and (2) the
2014 7-Year Term Loan. The 2018 Term Loan Facility and the 2014 7-Year
Term Loan are collectively referred to as the “Term Loans.”
As of December 31, 2018, we had borrowed $550.0 million under the
Term Loans and $65.0 million under the 2018 Revolving Facility (with $5.1
million pledged as collateral for letters of credit at December 31, 2018).
The carrying value of the Term Loans on our consolidated balance sheet as
of December 31, 2018 is net of $2.7 million of unamortized debt issuance
costs. The net operating income (“NOI”) from our unencumbered proper-
ties 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 bor-
rowed by us under the 2018 Revolving Facility as of December 31, 2018
was $179.3 million.
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, 2018, 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.
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 cur-
rent 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 dis-
cussed in our Annual Report on Form 10-K for the year ended December
31, 2018 in the section entitled “Item 1A. Risk Factors.” We do not intend
to update or revise any forward-looking statements about our liquidity and
capital resources to reflect new information, future events or otherwise.
CAPITAL RESOURCES We expect to meet our short-term liquidity 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 2018 Revolving
Facility, subject to the terms and conditions of our 2018 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 aggregate
distributions made to preferred shareholders, common shareholders and OP
Unit holders for 2018 were $93.5 million, based on distributions of $1.8438
per Series B Preferred Share, distributions of $1.8000 per Series C Preferred
Share, distributions of $1.7188 per Series D Preferred Share and distributions
of $0.84 per common share and OP Unit. For the first quarter of 2019, we
have announced a distribution 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 beneficial interest,
preferred shares and various types of debt securities, among other types of
securities, to the public.
During 2018, we raised capital from a number of sources, including
proceeds of $33.5 million from our share of asset sales by us and our
unconsolidated subsidiaries, $123.0 million in distributions from the pro-
ceeds of the Fashion District Philadelphia Term Loan, net proceeds of
$12.0 million from our revolving facilities and an additional $10.2 million
on the mortgage loan secured by Viewmont Mall.
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
62 MANAGEMENT’S DISCUSSION AND ANALYSIS
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
February
2016 Activity:
March
April
Property
Francis Scott Key Mall(1)
Viewmont Mall(2)
Viewmont Mall(2)
Woodland Mall(3)
Amount Financed
or Extended
(in millions of dollars)
Stated Interest Rate
Maturity
$ 68.5
$ 10.2
$ 9.0
$ 130.0
LIBOR plus 2.60%
LIBOR Plus 2.35%
January 2022
March 2021
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) In 2018, the mortgage was increased by $10.2 million to $67.2 million. In 2016, 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.
As a result of its Chapter 11 bankruptcy filing, the Bon-Ton anchor store at Wyoming Valley Mall in Wilkes-Barre, Pennsylvania closed on August 31, 2018.
In addition, the Sears store at Wyoming Valley Mall ceased operations on July 15, 2018 and Sears vacated the premises on August 1, 2018, the date its
lease expired. We have received a notice of transfer of servicing, dated July 9, 2018, from the special servicer for the mortgage loan secured by Wyoming
Valley Mall, which had a balance of $73.8 million as of December 31, 2018, and with respect to which we received a notice of default on the loan from the
lender, dated December 14, 2018. The loan is subject to a cash sweep arrangement as a result of an anchor tenant trigger event. We are working with the
special servicer regarding a potential deed in lieu of foreclosure, but make no assurances as to whether an agreement will ultimately be reached. The lender’s
recourse is limited to foreclosing on the property and we have not guaranteed the payment of principal or interest on the mortgage loan.
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, 2018. Three of our mortgage loans bear interest at variable rates and had a weighted average interest rate of 4.60% at
December 31, 2018. The weighted average interest rate of all consolidated mortgage loans was 4.36% at December 31, 2018. 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, 2018:
Payments by Period
(in thousands of dollars)
Total
2019
2020
2021
2022-2023
Thereafter
Consolidated mortgage loans
Principal payments
Balloon payments
$ 92,928
958,042
$ 18,561
—
$ 19,759
27,161
$ 20,685
188,785
$ 23,112
530,750
$ 10,811
211,346
Total consolidated mortgage loans
$ 1,050,970
$ 18,561
$ 46,920
$ 209,470
$ 553,862
$ 222,157
Less: Unamortized debt issuance costs
3,064
Carrying value of mortgage notes payable
$ 1,047,906
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2018 ANNUAL REPORT
63
CONTRACTUAL OBLIGATIONS The following table presents our consolidated aggregate contractual obligations as of December 31, 2018 for the periods
presented:
(in thousands of dollars)
Mortgage loans
Term Loans
2018 Revolving Facility
Interest on indebtedness(1)
Operating leases
Ground leases
Development and
Total
2019
2020
2021
2022-2023
Thereafter
$ 1,050,970
550,000
65,000
247,102
2,654
41,279
$ 18,561
—
—
65,268
1,823
1,184
$ 46,920
—
—
64,573
461
1,384
$ 209,470
250,000
65,000
58,201
272
1,584
$ 553,862
300,000
—
43,737
98
3,168
$ 222,157
—
—
15,323
—
33,959
redevelopment commitments(2)
117,906
110,766
7,140
—
—
—
Total
$2,074,911
$197,602
$120,478
$584,527
$900,865
$271,439
(1) Includes interest payments expected to be made on consolidated debt, including those in connection with interest rate swap agreements.
(2) The timing of the payments of these amounts is uncertain. We expect that a significant majority of such payments (of which we include 100% of Fashion District Philadelphia which is scheduled to open
in the third quarter of 2019) will be made prior to December 31, 2019, 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
March
2017 Activity:
October
Property
(in millions of dollars)
Stated Interest Rate
Maturity
Amount Financed
or Extended
Pavilion at Market East(1)
Gloucester Premium Outlets(2)
$ 8.3
$ 86.0
LIBOR plus 2.85%
LIBOR plus 1.50%
February 2021
March 2022
Lehigh Valley Mall(3)(4)
$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 $3.2 million.
(2) We own a 25% partnership interest in Gloucester Premium Outlets and our share of this mortgage loan is $21.5 million.
(3) 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.
(4) 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,
2018, we had interest rate swap agreements outstanding with a weighted
average base interest rate of 1.55% on a notional amount of $797.3 mil-
lion, maturing on various dates through May 2023, and forward starting
interest rate swap agreements outstanding with a weighted average base
interest rate of 2.71% on a notional amount of $250.0 million, with effec-
tive dates from January 2019 through June 2020, and maturity dates in
May 2023. 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. The interest rate swap agreements are net
settled monthly. We assessed the effectiveness of these swap agreements
as hedges at inception and do so on a quarterly basis. On December 31,
2018, we considered these interest rate swap agreements to be highly
effective as cash flow hedges.
As of December 31, 2018, 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 $3.0 million. If we had breached
any of the default provisions in these agreements as of December 31, 2018,
we might have been required to settle our obligations under the agreements
at their termination value (including accrued interest) of $3.2 million. We had
not breached any of these provisions as of December 31, 2018.
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 $134.9 million for 2018
compared to $142.1 million for 2017 and $154.9 million for 2016. The
decrease in net cash provided by operating activities in 2018 is primarily
due to dilution from sales of operating properties in 2017, partially offset
by changes in working capital and other items. The decrease in net cash
provided by operating activities in 2017 also was primarily due to dilution
from sales of operating properties in 2016 and 2017.
Cash flows used in investing activities were $41.6 million for 2018, com-
pared to $105.4 million for 2017 and $4.9 million for 2016.
Investing activities in 2018 included investment in construction in progress
of $75.6 million, investments in partnerships of $58.1 million (primarily at
Fashion District Philadelphia) and real estate improvements of $35.2 mil-
lion (primarily related to capital improvements at our properties, including
tenant allowances), partially offset by $13.7 million of proceeds from land
and outparcel sales, $123.0 million of distributions from the FDP Term
Loan, and $19.7 million of proceeds from the sale of 907 Market Street by
the Fashion District Philadelphia joint venture.
Investing activities for 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 million (primarily related to capital improvements at our properties,
including tenant allowances), partially offset by $77.8 million of proceeds
from the sale of three operating properties 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.
Cash flows used in financing activities were $94.8 million for 2018 com-
pared to cash flows used in financing activities of $32.6 million for 2017
and cash flows used in financing activities of $162.6 million for 2016.
Cash flows used in financing activities for 2018 included aggregate div-
idends and distributions of $93.5 million and principal installments on
mortgage loans of $18.7 million, partially offset by $12.0 million of net
borrowings on our 2013 Revolving Facility and a $10.2 million increase in
Viewmont Mall’s mortgage principal.
Cash flows used in financing activities in 2017 included the mortgage loan
repayments of $150.0 million on The Mall of Prince Georges, 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, partially offset by $286.8 million of proceeds from
our 2017 Series C and D Preferred Share offerings and $56.0 million of
net borrowings from our 2013 Revolving Facility.
Cash flows used in financing activities for 2016 included the mortgage
loan repayments of $280.3 million (relating to Woodland Mall, Valley Mall,
Lycoming Mall, and 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 borrowings 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.
See note 1 to our consolidated financial statements for details regarding
costs capitalized during 2018 and 2017.
Commitments
As of December 31, 2018, we had unaccrued contractual and other
commitments related to our capital improvement projects and develop-
ment projects of $117.9 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 ending December 31, 2018 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
64 MANAGEMENT’S DISCUSSION AND ANALYSIS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2018 ANNUAL REPORT
65
n our substantial debt and the liquidation preference of our preferred
shares and our high leverage ratio;
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 sales of properties or inter-
ests in properties and through the issuance of equity or equity-related
securities if market conditions are favorable; and
n potential dilution from any capital raising transactions or other equity
issuances.
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 ending December 31, 2018 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.
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
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 signifi-
cant to us than the bankruptcy or store closings of other tenants. See our
Annual Report on Form 10-K for the year ending December 31, 2018
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
This Annual Report for the year ended December 31, 2018, together
with other statements and information publicly disseminated by us, con-
tain certain forward-looking statements that can be identified by the use
of words such as “anticipate,” “believe,” “estimate,” ”expect,” “intend,”
“may,” “project,” and similar expressions. Forward-looking statements
relate to expectations, beliefs, projections, future plans, strategies, antici-
pated events, trends and other matters that are not historical facts.These
forward-looking statements reflect our current views about future events,
achievements or results and are subject to risks, uncertainties and changes
in circumstances that might cause future events, achievements or results
to differ materially from those expressed or implied by the forward-looking
statements. In particular, our business might be materially and adversely
affected by the following:
n changes in the retail and real estate industries, including consolidation
and store closings, particularly among anchor tenants;
n current economic conditions and the corresponding effects on tenant
business performance, prospects, solvency and leasing decisions;
n our inability to collect rent due to the bankruptcy or insolvency of tenants
or otherwise;
n our ability to maintain and increase property occupancy, sales and rental
rates;
n increases in operating costs that cannot be passed on to tenants;
n the effects of online shopping and other uses of technology on our retail
tenants;
n risks related to our development and redevelopment activities, including
delays, cost overruns and our inability to reach projected occupancy or
rental rates;
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 sell properties that we seek to dispose of or our ability to
obtain prices we seek;
n potential losses on impairment of certain long-lived assets, such as real
estate, including losses that we might be required to record in connec-
tion with any dispositions of assets;
66 MANAGEMENT’S DISCUSSION AND ANALYSIS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2018 ANNUAL REPORT
67
$250.0 million, with effective dates from January 2019 through June
2020, and maturity dates in May 2023. 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. The interest rate
swap agreements are net settled monthly.
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, 2018 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 $49.2 million at
December 31, 2018. A 100 basis point decrease in market interest rates
would have resulted in an increase in our net financial instrument position
of $51.5 million at December 31, 2018. Based on the variable rate debt
included in our debt portfolio at December 31, 2018 a 100 basis point
increase in interest rates would have resulted in an additional $0.8 mil-
lion in interest expense annually. A 100 basis point decrease would have
reduced interest incurred by $0.8 million annually. Because the infor-
mation presented above includes only those exposures that existed as of
December 31, 2018, 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,
2018, our consolidated debt portfolio consisted primarily of $1,047.9 million
(net of unamortized debt issuance costs) of fixed and variable rate mortgage
loans, $300.0 million borrowed under our 2018 Term Loan Facility, which
bore interest at a rate of 3.95%, $250.0 million borrowed under our 2014
7-Year Term Loan, which bore interest at a rate of 3.95% and $65.0 million
borrowed under our 2018 Revolving Facility, which bore interest at a rate of
3.71%.
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, 2018. Three of our mortgage loans bear interest at variable
rates and had a weighted average interest rate of 4.60% at December 31,
2018. The weighted average interest rate of all consolidated mortgage loans
was 4.36% at December 31, 2018. 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)
$ 16,881
2019
$ 45,240
2020
$ 18,568
2021
2022
$ 358,874
2023 and thereafter $ 350,233
4.26 % $ 1,680
5.03 % $ 1,680
4.20 % $ 440,902
4.05 % $ 66,912
4.24 % $ 365,000
4.35%
4.35%
4.05%
4.95%
3.91%
(1) Based on the weighted average interest rate in effect as of December 31, 2018 and does
not include the effect of our interest rate swap derivative instruments as described below.
At December 31, 2018, we had $876.2 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, 2018, we had interest rate swap agreements out-
standing with a weighted average base interest rate of 1.55% on a notional
amount of $797.3 million, maturing on various dates through May 2023,
and forward starting interest rate swap agreements outstanding with a
weighted average base interest rate of 2.71% on a notional amount of
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 (1)(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 (1)(3)(4) Trustee Since 2003
Former Global Managing Partner
PricewaterhouseCoopers LLP
(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
HEATHER CROWELL
Executive Vice President
Strategy and Communications
ANDREW M. IOANNOU
Executive Vice President
Finance and Acquisitions
MARIO C. VENTRESCA, JR.
Executive Vice President
Operations
DANIEL M. HERMAN
Senior Vice President
Development
LISA M. MOST
Senior Vice President
General Counsel and
Chief Compliance Officer
ANTHONY DILORETO
First Vice President
Leasing
MICHAEL A. FENCHAK
First Vice President
Asset Management
VINCE VIZZA
First Vice President
Leasing
RUDOLPH ALBERTS, JR.
Vice President
Asset Management
SAM COLLIER
Vice President
Leasing
PAULA CHARLES
Vice President
Leasing
JOHANNA DIDIO
Vice President
Legal
MARK GAMBILL
Vice President
Development
BRADFORD HUGHART
Vice President
Information Technology
MICHAEL A. KHOURI
Vice President
Leasing
SEAN LINEHAN
Vice President
Leasing
DAVID MARSHALL
Vice President
Financial Services
EUGENE McCAFFERY
Vice President
Leasing
SEAN MULROY
Vice President
Business Analytics
DANIEL PASCALE
Vice President
Development
JOSHUA SCHRIER
Vice President
Acquisitions
JOSHUA TALLEY
Vice President
Legal
68 MANAGEMENT’S DISCUSSION AND ANALYSIS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2018 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, EQ 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 15, 2018, he was not aware of any
violation by the Company of the NYSE’s corporate governance listing
standards.
70 INVESTOR INFORMATION
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, 2018.
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 2018
March 31
June 30
September 30
December 31
Quarter Ended
Calendar Year 2017
March 31
June 30
September 30
December 31
High
$ 12.47
$ 12.07
$ 11.40
$ 9.68
High
$ 19.92
$ 15.34
$ 13.02
$ 12.11
Distributions
Paid per
Common
Share
$0.21
0.21
0.21
0.21
$0.84
Low
$ 9.38
$ 8.97
$ 9.34
$ 5.68
Distributions
Paid per
Common
Share
$0.21
0.21
0.21
0.21
$0.84
Low
$ 13.76
$ 10.00
$ 9.75
$ 9.32
In February 2019, our Board of Trustees declared a cash dividend of
$0.21 per share payable in March 2019. 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, 2018, there were approximately 2,200 registered
shareholders and 21,000 beneficial holders of record of the Company’s
common shares of beneficial interest. The Company had an aggregate
of approximately 274 employees as of December 31, 2018.
STOCK MARKET
New York Stock Exchange
Common Ticker Symbol: PEI
ANNUAL MEETING
The Annual Meeting of Shareholders is scheduled for 11AM on
Thursday, May 30, 2019 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.