ANNUAL REPORT
PROXY STATEMENT
refLecting on the past, savoring the future
1960
1980
2000
2020
1970
1990
2010
ANNUAL REPORT
ANNUAL REPORT
PROXY STATEMENT
PROXY STATEMENT
refLecting on the past, savoring the future
refLecting on the past, savoring the future
1960
1960
1980
1980
2000
2000
2020
2020
1970
1970
1990
1990
2010
2010
ANNUAL REPORT
PROXY STATEMENT
refLecting on the past, savoring the future
1960
1980
2000
2020
1970
1990
2010
1960197019801990200020102020refLecting on the past, savoring the futureANNUAL REPORTPROXY STATEMENT1960197019801990200020102020refLecting on the past, savoring the futureANNUAL REPORTPROXY STATEMENT ANNUAL REPORT
PROXY STATEMENT
refLecting on the past, savoring the future
1960
1980
2000
2020
1970
1990
2010
Retail is ever-evolving. Over the last several decades, we have
Retail is ever-evolving. Over the last several decades, we have
seen many retail venues change with the times. We have seen
seen many retail venues change with the times. We have seen
the advent of the catalog and ecommerce platforms, big box
the advent of the catalog and ecommerce platforms, big box
stores and pop-ups, incorporation of a multitude of food and
stores and pop-ups, incorporation of a multitude of food and
beverage options and we have seen arcades come back,
beverage options and we have seen arcades come back, big-
bigger than ever. One thing remains, experience is a key driver
ger than ever. One thing remains, experience is a key driver of
of consumer spending.
consumer spending.
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
balance sheet strength driven by disciplined capital expenditures. Additional information is available at preit.com or on
Twitter or LinkedIn.
ANNUAL REPORT
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
PROXY STATEMENT
refLecting on the past, savoring the future
1960
1980
2000
2020
2019 2018
Year ended December 31,
2017
refLecting on the past, savoring the future
(in thousands, except per share amounts)
ANNUAL REPORT
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
PROXY STATEMENT
$
$
336,792
$ (13,000)
$ (38,247)
$ (0.52)
104,621
$ 3,210,926
$ 2,351,267
0.84
$
79,573
$ 2,893,082
$
362,400
$ (126,503)
$ (137,704)
$ (1.98)
$
111,496
$ 3,184,594
$ 2,405,114
0.84
$
78,767
$ 2,874,955
1960
$ 367,490
$ (32,848)
$ (57,901)
$ (0.84)
$
123,120
$ 3,299,702
$ 2,588,771
0.84
$
78,256
$ 3,212,328
1970
1980
1990
2000
2010
2020
* Reconciliation to GAAP can be found on page 58.
1970
1990
2010
01
DEAR FELLOW SHAREHOLDERS
This year PREIT turns 60. Given our extensive history, it is a good time
to stop and reflect on all of the changes that have occurred in the
retail industry both recently and over an extended period of time. We have
seen businesses born online with only a few employees open stores and
become powerful forces within the retail world, we have seen grocery
stores open new formats and begin delivering to our homes, we have
seen the emergence of high-quality quick service restaurants. We have
seen malls transform from community hubs anchored by service-laden
department stores to fashion centers and now back to where they start-
ed — as the center of their communities where our consumers can shop,
dine, have fun, work and, soon... live.
2019 was a monumental year in which our portfolio was transformed
following many years of pruning and anchor repurposings. We opened
marquee projects, Fashion District — As we enter our first full year of
refLecting on the past, savoring the future
operation, we are pleased to have cemented the tenant mix of the future,
introducing experiential retailers — AMC, City Winery, Wonderspaces
and Round 1, Co-working options — RECPhilly and Industrious, as well
as popular apparel brands with mass appeal including – Sephora, Kate
Spade, Nike, Holister, American Eagle, H&M and many more. We expect
to capitalize on the momentum created thus far and solidify The District as
Philadelphia’s go-to destination for style, dining, entertainment, and arts
& culture.
1960
1980
refLecting on the past, savoring the future
1970
1980
1960
2000
…as well as Woodland Mall – we opened the highly anticipated expan-
sion wing in October 2019. We have generated strong double-digit traffic
growth since the expansion wing opened and comp sales have soared
over 10%. New stores reflect a unique hybrid of national and local tenants,
many of which are the brand’s exclusive location in the market such as
Von Maur, Urban Outfitters, The Cheesecake Factory, Tricho Salon, and
Black Rock Bar & Grill. In 2020, we welcome Sephora, White House |
1990
Black Market and more.
2020
2010
1970
1990
2000
2020
2010
ANNUAL REPORT
PROXY STATEMENT
ANNUAL REPORT
PROXY STATEMENT
02
JO S EPH F. CO RA DINO, CHA IRMA N & CE O
We also topped off several years of anchor repurposing and tenant mix dif-
ferentiation. At the same time, the retail world was in major transition. We
have replaced 13 department stores in 3 years in an active core portfolio
of 18 properties, defining the Company as the most successful landlord
in navigating recent retail disruption. In these 13 stores, PREIT welcomes
over 30 new tenants spanning a variety of consumer categories: off-price,
sports & leisure, fitness, arts & crafts, dining & entertainment, home décor
as well as traditional department stores. 2020 brings about the opening
of DICK’s Sporting Goods at Valley Mall and Burlington at Dartmouth Mall,
rounding out the program.
As we continued to diversify our tenant base, we ended the year with 47%
of our non-anchor space committed to uses that are not historical mall
uses — of this space, 60% encompasses dining and entertainment, 29%
is occupied by off-price merchants and 11% houses health and wellness
tenants. This signifies the changing dynamics of the mall business and
how we have mitigated risk from continued retail uncertainty.
With over 9000 store closings in the country during 2019, there is no
doubt it was an unusual time. Retail bankruptcies filled the airwaves and
dealt a blow to many landlords. We mobilized quickly and are underway
with re-leasing stores closed as a result of bankruptcy. We have execut-
ed or are at lease to replace 93% of the space. Approximately half of the
backfills are temporary, allowing us to capture upside as the environment
improves. Executing on re-leasing this space will pave the way for the
refLecting on the past, savoring the future
earnings growth underwritten as part of our redevelopment.
1980
1960
Taking a quick look in the rearview mirror, we are pleased to say we
generally saw the tectonic shift coming. That is why we moved down the
path to improve the portfolio in the manner we did, divesting non-core
assets which included 18 low-quality mall assets. These assets sit today
with anchor and inline vacancies that will take years and extensive capital
to repair, if plausible, and we are confident this was the right path to take
and we executed at the right time. We generated $890 million in asset
sales through the program which we used to reduce debt and fund our
redevelopment program.
refLecting on the past, savoring the future
1970
1990
2000
2020
1960
1980
2000
Even after selling those assets, we recognized there were still challeng-
es, including the anchor environment. We moved swiftly to redefine our
anchor profile — having taken back 7 stores proactively. We filled these
boxes with tenants that have great credit and, as such, better secure our
1990
2010
1970
ANNUAL REPORT
PROXY STATEMENT
ANNUAL REPORT
PROXY STATEMENT
2020
2010
ANNUAL REPORT
PROXY STATEMENT
ANNUAL REPORT
PROXY STATEMENT
refLecting on the past, savoring the future
1960
1980
2000
2020
refLecting on the past, savoring the future
1960
1980
1970
2000
1990
2020
2010
1970
1990
2010
04
05
47% OF NON-ANCHOR SPACE COMMIT TE D T O UN I Q UE U S ES
60% Dining & Entertainment
29% Off-price Merchants
11% Health & Wellness
ANNUAL REPORT
PROXY STATEMENT
ANNUAL REPORT
PROXY STATEMENT
refLecting on the past, savoring the future
1960
1980
2000
2020
refLecting on the past, savoring the future
1960
1980
1970
2000
1990
2020
2010
1970
1990
2010
07
underlying earnings stream – TJX, DICK’s Sporting Goods, Burlington,
Dave & Buster’s, Five Below to name a few.
Moving into 2020, we announced the entry into agreements for transac-
tions confirming that we are on our way to shoring up our balance sheet.
This effort, once completed, includes land for multifamily and hotel den-
sification, operating outparcels and a creative and a solidly-priced sale/
leaseback of five mid-tier properties. These capital raising transactions
demonstrate our ability to efficiently access internally generated capital.
We are excited to execute on our vision to be an innovator at the forefront
of shaping consumer experiences through the built environment. With
concentrations in Philadelphia and Washington DC markets, our proper-
ties are located in densely-populated, high barrier-to-entry markets afford-
ed with great opportunity to deliver a unique mix of retail, dining, living,
working, staying, playing and engaging with the community, befitting the
modern consumer lifestyle. We look forward to executing on our densifi-
cation plan that will further transform our assets.
PREIT is a powerful company with sales approaching $550 per square
foot and a strong portfolio of mass appeal, economically accessible retail
and entertainment properties with admirable underlying demographics in
high barrier-to-entry markets. The profile of our portfolio is strengthened
by having completed our anchor replacement program with measurably
more secure underlying cash flows from better credit tenants. As we move
refLecting on the past, savoring the future
into the next era of retailing, this groundwork, amplified with 7,000 multi-
family units across our platform, results in vibrant mixed-use communities
and enhanced asset values.
1960
1980
2000
We thank all of our stakeholders — PREIT associates, tenants, share-
holders and our Trustees — for their support and partnership along this
journey.
refLecting on the past, savoring the future
1970
1960
1980
2000
Joseph F. Coradino
Chairman & CEO
April 1, 2020
1990
2020
2010
1970
1990
2010
08
550
525
500
475
D
o
l
l
a
r
s
450
425
400
375
350
2020
S ALE S P ER S QUA RE FOOT GROWTH
$539
$510
$493
$464
$457
$394
$380
$372
12.12
12.13
12.14
12.15
12.16
12.17(1)
12.18 (1)
12.19
(1) Represents 2019 core malls only
ANNUAL REPORT
PROXY STATEMENT
ANNUAL REPORT
PROXY STATEMENT
TOTAL SHAREHOLDE R RETURN PERFORMAN C E
I
n
d
e
x
V
a
u
e
l
200
180
160
140
120
100
80
60
40
20
12.31.14
12.31.15
12.31.16
12.31.17
12.31.18
12.31.19
PREIT
S&P 500
NAREIT Equity
Russell 2000
The five-year performance graph above compares our cumulative total shareholder return with the S&P 500
Index, the NAREIT Equity Index and the Russell 2000 Index. Equity real estate investment trusts are defined
as those which derive more than 75% of their income from equity investments in real estate assets.
The graph assumes that the value of the investment in each of the four was $100 on the
last trading day of 2014 and that all dividends were reinvested.
ANNUAL REPORT
PROXY STATEMENT
ANNUAL REPORT
PROXY STATEMENT
refLecting on the past, savoring the future
1960
1980
2000
2020
refLecting on the past, savoring the future
1960
1980
1970
2000
1990
2020
2010
1970
1990
2010
11
Founded as one of the
first publicly held REITs
in the US
1960
Mall expansion in suburbs
increases presence of
shopping malls in US
1970/1980
Started trading on the
American Stock Exchange
under ticker symbol PEI
1970
Merged with The Rubin
Organization, with Ronald
Rubin named CEO;
Trading moved to the
New York Stock Exchange
1997
1970
1970
Started trading on the
American Stock Exchange
under ticker symbol PEI
1970
1997
1997
2003
1960
1960
1970/1980
1970/1980
2003
2003
2012
2003
2012
2016
2012
2016
2020
2016
2020
2020
2012
2016
Joseph F. Coradino
named CEO; Outlined
Strategic focus changes
Strategic focus changes
Strategic focus changes
strategy focused on
from a diversified property
from a diversified property
from a diversified property
improving portfolio quality
base to one focused on
base to one focused on
base to one focused on
Joseph F. Coradino
Joseph F. Coradino
Joseph F. Coradino
and the balance sheet
retail; Acquired six-mall
retail; Acquired six-mall
retail; Acquired six-mall
named CEO; Outlined
named CEO; Outlined
named CEO; Outlined
while enhancing operating
portfolio from The Rouse
portfolio from The Rouse
portfolio from The Rouse
strategy focused on
strategy focused on
strategy focused on
Launched redevelopment
performance to position
Company; Sold all
Company; Sold all
Company; Sold all
improving portfolio quality
improving portfolio quality
improving portfolio quality
phase of capital recycling
company for growth
multi-family properties;
multi-family properties;
multi-family properties;
and the balance sheet
and the balance sheet
and the balance sheet
program, executing
Completed merger with
Completed merger with
Completed merger with
while enhancing operating
while enhancing operating
while enhancing operating
several leases with anchor
Crown American Trust,
Crown American Trust,
Crown American Trust,
performance to position
performance to position
performance to position
replacements
acquiring 26 retail assets
acquiring 26 retail assets
acquiring 26 retail assets
company for growth
company for growth
company for growth
Founded as one of the
first publicly held REITs
in the US
Founded as one of the
first publicly held REITs
in the US
Founded as one of the
Mall expansion in suburbs
first publicly held REITs
increases presence of
in the US
shopping malls in US
Mall expansion in suburbs
increases presence of
shopping malls in US
Mall expansion in suburbs
increases presence of
shopping malls in US
Mall expansion in suburbs
increases presence of
shopping malls in US
Founded as one of the
first publicly held REITs
in the US
2018
Launched redevelopment
phase of capital recycling
program, executing
several leases with anchor
replacements
2018
2018
Launched redevelopment
phase of capital recycling
program, executing
several leases with anchor
replacements
PREIT relocates corporate
Launched redevelopment
office to new space
phase of capital recycling
reflective of the Company
program, executing
transformation; Multifamily
several leases with anchor
densification program
replacements
launched
2016
PREIT relocates corporate
office to new space
reflective of the Company
transformation; Multifamily
PREIT relocates corporate
densification program
office to new space
launched
reflective of the Company
transformation; Multifamily
densification program
launched
2020
PREIT relocates corporate
office to new space
reflective of the Company
transformation; Multifamily
densification program
launched
1960
1970/1980
1960
1970/1980
Formed joint-venture
with Macerich to
redevelop The Gallery
Formed joint-venture
with Macerich to
redevelop The Gallery
Formed joint-venture
with Macerich to
redevelop The Gallery
Formed joint-venture
with Macerich to
redevelop The Gallery
Implemented and
completed anchor
repositioning program,
adding over 30 new
tenants where 13
underperforming
department stores
sat
2014
2014
2014
Implemented and
completed anchor
repositioning program,
adding over 30 new
Implemented and
tenants where 13
completed anchor
underperforming
repositioning program,
department stores
adding over 30 new
sat
tenants where 13
underperforming
department stores
sat
Implemented and
completed anchor
repositioning program,
adding over 30 new
tenants where 13
underperforming
department stores
sat
2018
2014
Strategic focus changes
from a diversified property
base to one focused on
retail; Acquired six-mall
Strategic focus changes
portfolio from The Rouse
from a diversified property
Company; Sold all
base to one focused on
multi-family properties;
retail; Acquired six-mall
Completed merger with
portfolio from The Rouse
Crown American Trust,
Company; Sold all
acquiring 26 retail assets
multi-family properties;
Completed merger with
Crown American Trust,
acquiring 26 retail assets
2003
2012
2005/2006
2005/2006
2005/2006
May Company merges with
Federated and begins operating
under Macy’s brand
May Company merges with
Federated and begins operating
under Macy’s brand
May Company merges with
Federated and begins operating
under Macy’s brand
1970
1997
2013
2017
Started trading on the
American Stock Exchange
under ticker symbol PEI
Started trading on the
American Stock Exchange
under ticker symbol PEI
Started trading on the
American Stock Exchange
under ticker symbol PEI
Merged with The Rubin
Organization, with Ronald
Rubin named CEO;
Trading moved to the
New York Stock Exchange
Merged with The Rubin
Organization, with Ronald
Rubin named CEO;
Trading moved to the
New York Stock Exchange
2013
1997
Merged with The Rubin
Organization, with Ronald
Rubin named CEO;
Trading moved to the
Beginning of asset
Merged with The Rubin
New York Stock Exchange
disposition program,
Organization, with Ronald
aimed at improving
Rubin named CEO;
overall portfolio quality
Trading moved to the
New York Stock Exchange
2013
2017
2013
Beginning of asset
disposition program,
aimed at improving
overall portfolio quality
Sold 17 low-productivity
malls revealing high-
quality platform with
improved growth profile
Beginning of asset
disposition program,
aimed at improving
overall portfolio quality
Beginning of asset
disposition program,
aimed at improving
overall portfolio quality
2017
2017
Sold 17 low-productivity
malls revealing high-
quality platform with
improved growth profile
Sold 17 low-productivity
malls revealing high-
quality platform with
improved growth profile
Sold 17 low-productivity
malls revealing high-
quality platform with
improved growth profile
2015
2019
2005/2006
2015
2005/2006
May Company merges with
Federated and begins operating
under Macy’s brand
Acquired Springfield Town
May Company merges with
Center in Fairfax County,
Federated and begins operating
VA; Philadelphia City
under Macy’s brand
Council approves legislation
leading to the redevelop-
ment of The Gallery
2015
2015
2019
2019
2019
Acquired Springfield Town
Center in Fairfax County,
VA; Philadelphia City
Council approves legislation
Acquired Springfield Town
Fashion District Philadelphia
leading to the redevelop-
Center in Fairfax County,
opens in September with a
ment of The Gallery
VA; Philadelphia City
successful launch of
Council approves legislation
Philadelphia’s newest
leading to the redevelop-
shopping, dining,
ment of The Gallery
entertainment and cultural
destination; Woodland Mall
expansion wing opens
Acquired Springfield Town
Center in Fairfax County,
VA; Philadelphia City
Council approves legislation
leading to the redevelop-
ment of The Gallery
Fashion District Philadelphia
opens in September with a
successful launch of
Philadelphia’s newest
shopping, dining,
entertainment and cultural
destination; Woodland Mall
expansion wing opens
Fashion District Philadelphia
opens in September with a
successful launch of
Philadelphia’s newest
Fashion District Philadelphia
shopping, dining,
opens in September with a
entertainment and cultural
successful launch of
destination; Woodland Mall
Philadelphia’s newest
expansion wing opens
shopping, dining,
entertainment and cultural
destination; Woodland Mall
expansion wing opens
Joseph F. Coradino
named CEO; Outlined
strategy focused on
improving portfolio quality
and the balance sheet
while enhancing operating
performance to position
company for growth
Formed joint-venture
with Macerich to
redevelop The Gallery
2014
Implemented and
completed anchor
repositioning program,
adding over 30 new
tenants where 13
underperforming
department stores
sat
2018
Launched redevelopment
phase of capital recycling
program, executing
several leases with anchor
replacements
PREIT relocates corporate
office to new space
reflective of the Company
transformation; Multifamily
densification program
launched
2020
Beginning of asset
disposition program,
aimed at improving
Sold 17 low-productivity
malls revealing high-
quality platform with
overall portfolio quality
improved growth profile
2013
2017
2015
2019
Acquired Springfield Town
Fashion District Philadelphia
Center in Fairfax County,
opens in September with a
VA; Philadelphia City
successful launch of
Council approves legislation
Philadelphia’s newest
leading to the redevelop-
shopping, dining,
ment of The Gallery
entertainment and cultural
destination; Woodland Mall
expansion wing opens
EN C LOS ED M ALLS A S OF DECE MBE R 31, 2019
CAPITAL CITY MALL
CAPITAL CITY MALL
Camphill, PA
Camp Hill, PA
Ownership Interest
Ownership Interest
Acquired
Acquired
Square Feet
Square Feet
100%
100%
2003
2003
617,000
612,000
CHERRY HILL MALL
CHERRY HILL MALL
Cherry Hill, NJ
Cherry Hill, NJ
Ownership Interest
Ownership Interest
Acquired
Acquired
Square Feet
Square Feet
100%
100%
2003
2003
1,300,000
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
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
100%
2003
991,000
LEHIGH VALLEY MALL
Whitehall, PA
Ownership Interest
Acquired
Square Feet
50%
1973
1,160,000
MAGNOLIA MALL
Florence, SC
Ownership Interest
Acquired
Square Feet
100%
1997
602,000
MOORESTOWN MALL
Moorestown, NJ
Ownership Interest
Acquired
Square Feet
100%
2003
932,000
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
VALLEY MALL
Hagerstown, MD
Hagerstown, MD
Ownership Interest
Ownership Interest
Acquired
Acquired
Square Feet
Square Feet
VALLEY VIEW MALL
La Crosse, WI
Ownership Interest
Acquired
Square Feet
100%
2003
579,000
VIEWMONT MALL
Scranton, PA
Ownership Interest
Acquired
Square Feet
WILLOW GROVE PARK
Willow Grove, PA
Ownership Interest
Acquired
Square Feet
100%
2000 / 2003
1,035,000
100%
2003
689,000
100%
100%
2003
2003
798,000
798,000
WOODLAND MALL
Grand Rapids, MI
Ownership Interest
Acquired
Square Feet
100%
2005
976,000
GLOUCESTER PREMIUM OUTLETS
Gloucester Township, NJ
Ownership Interest
Acquired
Square Feet
25%
2015
368,000
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, 2 019
Total square feet represents entire property. PREIT-owned square footage may be less.
MALLS
OTHER RETAIL
PROPERTIES
17,768,000
2,314,000
TOTAL GLA
20,082,000
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
18
19
25
48
48
50
70
71
ANNUAL REPORT
PROXY STATEMENT
ANNUAL REPORT
PROXY STATEMENT
refLecting on the past, savoring the future
1960
1980
2000
2020
refLecting on the past, savoring the future
1970
1960
1980
2000
1990
2020
2010
1970
1990
2010
16
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2019 ANNUAL REPORT
17
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 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
Weighted average number of shares outstanding
Weighted average effect of full conversion OP Units
Effect of common share equivalents
2019
$ 336,792
$ (13,000 )
$ (38,247 )
$ (0.52 )
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 )
$
$ 111,392
$ (131,350 )
$ 7,141
$ 140,516
$ (47,219 )
$ (94,805 )
$ 142,091
$ (105,418 )
(32,585 )
$
$ 154,931
$
(4,878)
$ (162,632 )
$ 141,108
$ (382,291 )
$ 225,860
$
$
$
$
$
$
$
0.84
—
$
$ 1.8436
$ 1.8000
$ 1.7188
$ (13,000 )
(27,375 )
—
—
(2,756 )
1,456
$
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
$
0.84
$ 2.0625
$ 1.8438
—
$
—
$
$
0.84
$ 2.0625
$ 1.8438
—
$
—
$
(32,848 )
(27,845 )
(4,103 )
(6,539 )
361
55,793
$
(12,713 )
(15,848 )
—
—
(23,022 )
62,603
$ (129,567 )
(15,848 )
—
—
(12,362 )
140,318
136,422
9,874
131,694
8,612
127,327
10,974
125,192
10,214
141,142
12,563
$104,621
$ 111,496
$ 123,120
$ 146,426
$ 136,246
75,221
3,221
453
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
78,895
78,225
77,754
77,601
76,055
Funds from operations per diluted share and OP Unit
$
1.33
$
1.43
$
1.58
$
1.89
$
1.79
(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 $2,845 and $6,597
at December 31, 2019 and 2018, respectively)
Intangible assets (net of accumulated amortization of $18,248 and $15,543 at
December 31, 2019 and 2018, 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,
2019
December 31,
2018
$ 3,099,034
106,011
5,881
$ 3,063,531
115,182
5,881
3,210,926
(1,202,722 )
3,184,594
(1,118,582 )
2,008,204
2,066,012
159,993
131,124
12,211
18,084
41,261
38,914
13,404
103,688
12,506
17,868
110,805
22,307
$ 2,351,267
$ 2,405,114
$ 899,753
548,025
255,000
13,006
87,916
13,126
107,016
$ 1,047,906
547,289
65,000
15,400
92,057
3,010
87,901
1,923,842
1,858,563
Equity:
Series B Preferred Shares, $.01 par value per share; 25,000 shares authorized; 3,450 shares issued and
outstanding at December 31, 2019 and 2018; 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
As of December 31,
outstanding at December 31, 2019 and 2018; liquidation preference of $172,500
69
69
(in thousands)
Balance sheet items
2019
2018
2017
2016
2015
Investments in real estate, at cost
$ 3,210,926
$ 3,184,594
$3,299,702
$3,300,014
$3,367,889
Total assets
$2,351,267
$ 2,405,114
$ 2,588,771
$ 2,616,832
$ 2,800,392
Long term debt excluding unamortized debt costs
Consolidated properties:
Mortgage loans payable
Revolving facilities
Term loans
Company’s share of partnerships:
Mortgage loans payable
$ 901,565
$ 255,000
$ 550,000
$ 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
$ 228,143
$ 232,355
$ 235,672
$ 201,509
$ 202,074
(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.
Series D Preferred Shares, $.01 par value per share; 25,000 shares authorized; 5,000 shares issued and
outstanding at December 31, 2019 and 2018; liquidation preference of $125,000
50
50
Shares of beneficial interest, $1.00 par value per share; 200,000 shares authorized; 77,550 shares issued and
outstanding at December 31, 2019 and 70,495 shares issued and outstanding at December 31, 2018
Capital contributed in excess of par
Accumulated other comprehensive (loss)/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.
77,550
1,766,883
(12,556 )
(1,408,352 )
423,679
3,746
70,495
1,671,042
5,408
(1,306,318 )
440,781
105,770
427,425
546,551
$ 2,351,267
$ 2,405,114
18 SELECTED FINANCIAL INFORMATION
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2019 ANNUAL REPORT
19
CONSOLIDATED STATEMENTS OF OPERATIONS
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
EARNINGS PER SHARE
For The Year Ended December 31,
2019
2018
2017
(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,
$
2019
(13,000 )
2,128
(27,375 )
—
(883 )
2018
2017
$
$ (126,503 )
16,174
(27,375 )
—
(542 )
(32,848 )
6,895
(27,845 )
(4,103 )
(372 )
(in thousands of dollars)
Revenue:
Real estate revenue:
Lease revenue
Expense reimbursements
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 expenses
Insurance recoveries, net
Project costs and other expenses
Total operating expenses
Interest expense, net
Gain on debt extinguishment, net
Impairment of assets
Impairment of development land parcel
Total expenses
Loss before equity in income of partnerships, gain on sales of real estate by
equity method investee, gain on sales of real estate, net, gain on sales of
interest in non operating real estate, and adjustment to gain on sales of interests
in non operating real estate
Equity in income of partnerships
Gain on sales of real estate by equity method investee
Gain (loss) on sales of real estate, net
Gain on sales of interests in non operating real estate
Adjustment to gain on sales of interests in 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
$ 302,311
19,979
12,668
334,958
1,834
$ 324,829
21,322
12,078
358,229
4,171
$ 325,010
22,468
14,046
361,524
5,966
336,792
362,400
367,490
(113,260 )
(14,733 )
(8,565 )
(136,558 )
(137,784 )
(46,010 )
(3,689 )
4,362
(284 )
(113,235 )
(15,990 )
(12,007 )
(141,232 )
(133,116 )
(38,342 )
(1,139 )
689
(693 )
(111,275 )
(16,151 )
(12,879 )
(140,305 )
(128,822 )
(36,736 )
(1,299 )
—
(768 )
(319,963 )
(63,987 )
24,859
(1,455 )
(3,562 )
(313,833 )
(61,355 )
—
(137,487 )
—
(307,930 )
(58,430 )
—
(55,793 )
—
(364,108 )
(512,675 )
(422,153 )
(27,316 )
8,289
553
2,744
2,718
12
(13,000 )
2,128
(10,872 )
(27,375 )
—
(150,275 )
11,375
2,772
1,722
8,126
(223 )
(126,503 )
16,174
(110,329 )
(27,375 )
—
(54,663 )
14,367
6,567
(27)
1,270
(362)
(32,848 )
6,895
(25,953 )
(27,845 )
(4,103 )
Net loss used to calculate earnings per share – basic and diluted
$
(39,130 )
$ (138,246 )
$
(58,273 )
Basic and diluted loss per share
$
(0.52 )
$
(1.98 )
$
(0.84 )
(in thousands of shares)
Weighted average shares outstanding – basic
Effect of dilutive common share equivalents(1)
Weighted average shares outstanding – diluted
75,221
—
69,749
—
69,364
—
75,221
69,749
69,364
(1) For the years ended December 31, 2019, 2018 and 2017, there were net losses allocable to common shareholders, so the effect of common share equivalents of 452, 203 and 93 for
the years ended December 31, 2019, 2018 and 2017, respectively, is excluded from the calculation of diluted loss per share, as their inclusion would be anti-dilutive.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(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,
2019
2018
2017
$
(13,000 )
(18,937 )
85
(31,852 )
3,016
$
$ (126,503 )
(2,755 )
721
(128,537 )
16,390
(32,848 )
5,415
859
(26,574 )
6,225
$
(28,836 )
$ (112,147 )
$
(20,349 )
Net loss attributable to PREIT common shareholders
$
(38,247 )
$ (137,704 )
$
(57,901 )
See accompanying notes to consolidated financial statements.
20 CONSOLIDATED FINANCIAL STATEMENTS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2019 ANNUAL REPORT
21
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2019, 2018 AND 2017
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016
PREIT Shareholders
PREIT Shareholders
(in thousands of dollars,
except per share amounts)
Total Equity
Series A
Series B
Series C
Series D
Preferred Shares $.01 par
Shares of
Beneficial
Interest,
$1.00 par
Capital
Contributed
in Excess
of par
Accumulated
Other
Comprehensive
Income (Loss)
Distributions
in Excess of
Net Income
Non-
controlling
interest
Balance January 1, 2017 $ 702,406
$ 46
$ 35
$ —
$ —
$ 69,553
$1,481,787
$1,622 $(993,359) $142,722
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
(32,848)
—
—
6,274
—
—
—
—
—
—
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
—
—
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)
Dividends paid to Series D
preferred shareholders
($0.4488 per share)
(7,827)
—
—
—
—
(6,361)
—
—
—
—
(10,971)
—
—
—
—
(2,244)
—
—
—
—
Dividends paid to
common shareholders
($0.84 per share)
(58,651)
—
—
—
—
Noncontrolling interests:
Distributions paid to
Operating Partnership
unit holders
($0.84 per unit)
(6,970)
—
—
—
—
Other contributions from
noncontrolling
interest, net
18
—
—
—
—
December 31, 2017
760,991
(126,503 )
—
—
35
—
69
—
Net loss
Other comprehensive
income
(2,034 )
—
—
—
Shares issued under
employee compensation
plan, net of shares retired
Amortization of deferred
compensation
663
—
—
—
—
6,925
—
—
—
—
—
—
Dividends paid to Series
B preferred
shareholders
($1.8438 per share)
Dividends paid to Series
C preferred
shareholders
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(7,827 )
—
(6,361 )
—
(10,971 )
—
(2,244 )
—
(58,651 )
—
—
—
—
—
—
—
—
(6,970)
—
—
18
50
69,983
1,663,966
7,226 (1,109,469 )
129,131
—
—
512
—
—
—
(110,329 )
(16,174 )
—
(1,818 )
—
(216 )
151
6,925
—
—
—
—
—
—
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
($1.719 per share)
Dividends paid to
common shareholders
(8,594 )
—
—
—
—
($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
Net loss
Other comprehensive
(13,000 )
—
—
35
—
69
—
income
(18,852 )
—
—
—
50
70,495
1,671,042
5,408 (1,306,318 )
105,770
—
—
—
—
—
—
—
(10,872 )
(2,128 )
(17,964 )
—
(888 )
Shares issued under
redemption of Operating
Partnership units
Shares issued under
employee compensation
plan, net of shares retired
Amortization of deferred
compensation
—
—
—
—
—
6,250
89,736
698
—
—
—
—
6,212
—
—
—
—
805
—
(107 )
6,212
—
—
—
—
(95,986 )
—
—
—
—
Dividends paid to Series
B preferred
shareholders
($1.8436 per share)
Dividends paid to Series
C preferred
shareholders
($1.80 per share)
Dividends paid to Series
D preferred
shareholders
(6,364 )
—
—
—
—
—
—
—
(6,364 )
—
(12,419 )
—
—
—
—
—
—
—
(12,419 )
—
($1.719 per share)
(8,592 )
—
—
—
—
Dividends paid to
common shareholders
($0.84 per share)
(63,787 )
—
—
—
—
Noncontrolling interests:
Distributions paid to
Operating Partnership
unit holders
($0.84 per unit)
Other distributions to
noncontrolling
interest, net
—
—
—
—
—
(3,004 )
—
—
—
—
(18 )
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(8,592 )
—
(63,787 )
—
—
—
—
—
—
—
(3,004 )
—
—
(18 )
December 31, 2019 $427,425
$ —
$35
$69
$50
$77,550
$1,766,883
$(12,556) $(1,408,352)
$3,746
(6,361 )
—
—
—
—
—
—
—
(6,361 )
—
See accompanying notes to consolidated financial statements.
($1.80 per share)
(12,420 )
—
—
—
—
—
—
—
(12,420 )
—
22 CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2019 ANNUAL REPORT
23
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
Amortization of deferred compensation
Gain on debt extinguishment, net
Insurance recoveries in excess of property loss
Gain on sale 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 assets
Impairment of development land parcel
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,
2019
2018
2017
$
(13,000 )
$ (126,503 )
$
(32,848 )
126,583
16,180
(5,166 )
—
—
6,212
(24,859 )
(3,861 )
(5,474 )
(8,289 )
(553 )
22,570
—
1,455
3,562
—
(4,191 )
223
121,644
14,554
(1,989 )
2,461
(4,200 )
6,925
—
(689 )
(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
—
—
(881 )
(14,367 )
(6,567 )
16,849
(1,768 )
55,793
—
—
(5,652 )
(4,752 )
Net cash provided by operating activities
111,392
134,864
142,091
Cash flows from investing activities:
Investments in consolidated real estate acquisitions
Cash proceeds from sales of real estate
Cash proceeds from sale of mortgage
Net proceeds from insurance claims related to damage to real estate assets
Cash distributions from partnerships of proceeds from real estate sold
Investments in partnerships
Investments in real estate improvements
Additions to construction in progress
Capitalized leasing costs
Distribution of financing proceeds from equity method investee
Additions to leasehold improvements and corporate fixed assets
—
50,407
8,000
6,977
879
(72,939 )
(34,260 )
(113,791 )
(568 )
25,000
(1,055 )
(17,611 )
13,730
—
700
19,727
(58,112 )
(35,170 )
(75,649 )
(12,022 )
123,000
(160 )
—
77,778
—
—
30,265
(73,434 )
(51,949 )
(116,550 )
(6,066 )
35,221
(683 )
Net cash used in investing activities
(131,350 )
(41,567 )
(105,418 )
Cash flows from financing activities:
Net proceeds from issuance of preferred shares
Redemption of Series A Preferred Shares
Borrowings under revolving facilities
Repayments of mortgage loans and finance lease liabilities
Proceeds from 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 provided by (used in) financing activities
Net change in cash, cash equivalents, and restricted cash
Cash, cash equivalents, and restricted cash, beginning of period
—
—
190,000
(71,387 )
—
(17,911 )
(95 )
1,256
(63,787 )
(27,375 )
(3,004 )
(556 )
—
—
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 )
7,141
(94,805 )
(32,585 )
(12,817 )
32,445
(1,508 )
33,953
4,088
29,865
Cash, cash equivalents, and restricted cash, end of period
$ 19,628
$ 32,445
$ 33,953
See accompanying notes to consolidated financial statements.
24
CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2019, 2018 and 2017
1. Organization and Summary of Significant Accounting Policies
Company’s debt is also an obligation of the Operating Partnership.
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, 2019, our portfolio consists of a total of 26 properties oper-
ating in nine states, including 21 shopping malls, four other retail properties
and one development property. The property in our portfolio that is classi-
fied as under development does not currently have any activity occurring.
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, 2019, held a 97.5% 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, 2019, the total amount that
would have been distributed would have been $10.8 million, which is cal-
culated using our December 31, 2019 closing share price on the New York
Stock Exchange of $5.33 multiplied by the number of outstanding OP Units
held by limited partners, which was 2,022,635 as of December 31, 2019.
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 inter-
company accounts and transactions have been eliminated in consolidation.
The operating partnership meets the criteria as a variable interest entity. The
Company’s significant asset is its investment in the Operating Partnership,
and consequently, substantially all of the Company’s assets and liabilities
represent those assets and liabilities of the Operating Partnership. All of the
GOING CONCERN CONSIDERATIONS Under the accounting guid-
ance related to the presentation of financial statements, when preparing
financial statements for each annual and interim reporting period, man-
agement has the responsibility to evaluate whether there are conditions
or events, considered 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. The accompanying con-
solidated financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The financial statements do
not include any adjustments that might be necessary should the Company
be unable to continue as a going concern. As a result of the consider-
ations articulated below, we believe there is 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.
In applying the accounting guidance, management considered our current
financial condition and liquidity sources, including current funds available,
forecasted future cash flows and our conditional and unconditional obliga-
tions due over the next twelve months. Management specifically considered
the following: i) our senior unsecured facility, which includes a revolving
facility maturing in 2022 with a balance of $255.0 million as of December
31, 2019 and term loans maturing in 2021 with a balance of $550.0 million
as of December 31, 2019; ii) our mortgage loans with varying maturities
through 2025 with a principal balance of $901.6 million as of December
31, 2019; iii) the financial covenant compliance requirements of our credit
agreements; and (iv) recurring costs of operating our business.
The Company anticipates not meeting certain financial covenants applicable
under the credit agreements during 2020. The Company plans to continue
to work with the lender group to obtain temporary debt covenant relief
through September 2020 and then pursue a longer term financing solution
prior to the expiration of the initial modification. In addition, the Company
plans to execute the sale-leaseback of certain properties, sell certain real
estate assets and control certain operational costs. Due to the inherent risks,
unknown results and significant uncertainties associated with each of these
matters and the direct correlation between these matters and our ability to
satisfy our financial obligations that may arise over the applicable twelve
month period, we are unable to conclude that it is probable that we will
be able to meet our obligations arising within twelve months of the date of
issuance of these financial statements under the parameters set forth in this
accounting guidance.
As a result, management evaluated whether this was mitigated by our
approved plans and expectations for the applicable period under the second
step of this accounting standard.
Our ability to satisfy obligations under our senior unsecured credit facility
and mortgage loans, maintain compliance with our debt covenants and fund
recurring costs of operations depends primarily on management’s ability to
obtain relief from the lender group in regards to debt covenants, execute the
sale-leaseback of certain properties, complete the sale of certain real estate
assets which will provide cash from those sales, and continue to control
operational costs. While controlling operational costs are within manage-
ment’s control to some extent, executing the sale-leaseback transactions,
selling real estate assets, and obtaining relief from the lender group through
modified debt covenant requirements involve performance by third parties
and therefore cannot be considered probable of occurring.
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% noncontrolling
ownership interest at December 31, 2019, 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:
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2019 ANNUAL REPORT
25
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 cap-
tion “Investments in partnerships, at equity.”
For further information regarding our unconsolidated partnerships, see note 3.
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, 2019 and 2018, cash and
cash equivalents and restricted cash totaled $19.6 million and $32.4 mil-
lion, respectively, and included tenant security deposits of $1.8 million and
$2.3 million, respectively. Cash paid for interest was $59.4 million, $58.4
million and $55.4 million for the years ended December 31, 2019, 2018
and 2017, respectively, net of amounts capitalized of $7.7 million, $6.4
million and $7.6 million, respectively.
The following table provides a summary of cash, cash equivalents, and
restricted cash reported within the statement of cash flows as of December
31, 2019, 2018 and 2017.
December 31,
(in thousands of dollars)
2019
2018
2017
Cash and cash
equivalents
Restricted cash
included in other assets
Total cash, cash
equivalents, and restricted
cash shown in the
statement of cash flows
$12,211
$18,084
$ 15,348
7,417
14,361
18,605
$19,628
$32,445
$33,953
Our restricted cash consists of cash held in escrow by banks for real
estate taxes and other purposes.
SIGNIFICANT NON-CASH TRANSACTIONS In the third quarter of 2019,
we conveyed Wyoming Valley Mall to the lender of the mortgage loan
secured by the property. The loan had a balance of approximately $72.8
million as of the conveyance on September 26, 2019. The conveyance
was a non-cash transaction with the exception of $7.5 million of cash and
escrow balances which were transferred to the lender.
During the second quarter of 2018, we received the building and improve-
ments 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 ter-
mination 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
$229.0 million, $65.0 million and $309.0 million, and aggregate repay-
ments were $39.0 million, $53.0 million and $403.0 million for the years
ended December 31, 2019, 2018 and 2017, respectively.
Accrued construction costs decreased by $8.5 million in the year ended
December 31, 2019, increased by $15.7 million in the year ended December
31, 2018 and decreased by $8.3 million in the year ended December 31,
2017, representing non-cash changes in construction in progress.
USE OF ESTIMATES The preparation of finan-
ACCOUNTING POLICIES USE OF ESTIMATES
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 and fair value.
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
REVENUE RECOGNITION
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”).
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 transfers of non-financial assets including sales of
property and equipment, real estate, and intangible assets. 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
are subject to ASC 842 effective January 1, 2019. See Lease accounting
related under New Accounting Developments for our adoption impact
from ASC 842 on January 1, 2019.
We record base rent on a straight-line basis, which means that the monthly
base rent revenue according to the terms of our leases with our tenants
is adjusted so that an average monthly rent is recorded for each tenant
over the term of its lease. When tenants vacate prior to the end of their
lease, we accelerate amortization of any related unamortized straight-line
rent balances, and unamortized above-market and below-market intangible
balances are amortized as a decrease or increase to real estate revenue,
respectively. The straight-line rent adjustment increased revenue by $1.6
million, $2.0 million, and $2.7 million in the years ended December 31,
2019, 2018 and 2017, respectively. The straight-line rent receivable balances
included in tenant and other receivables on the accompanying consolidated
balance sheet as of December 31, 2019 and 2018 were $30.4 million and
$27.2 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 per-
centage 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 reimburse-
ment payments based on a budgeted amount determined at the beginning
of the year. Effective January 1, 2019, we recognize fixed CAM revenue pro-
spectively on a straight-line basis. Prior to that, during the year, our income
increased or decreased based on actual expense levels and changes in other
factors that influenced the reimbursement amounts, such as occupancy levels.
As of December 31, 2018, our tenant accounts receivable included accrued
income of $1.9 million because actual reimbursable expense amounts eligible
to be billed to tenants under applicable contracts exceeded amounts actually
billed. Prior to the adoption of ASC 842, we recorded 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 triggered. 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.
Revenue from the reimbursement of marketing expenses is generated
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 payments are received
monthly as required by the respective lease terms. We defer income recog-
nition if the reimbursements exceed the aggregate 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 $0.2 million as of December 31, 2019
and 2018, respectively. The marketing reimbursements are recognized as
revenue at the time that the marketing expenditures occur. Marketing rev-
enue, included in other real estate revenues in the consolidated statements
of operations, was $4.1 million, $3.9 million, and $4.4 million and for the
years ended December 31, 2019, 2018 and 2017, respectively.
Property management revenue from management and development activ-
ities 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 man-
agement 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 respec-
tive development agreements and the associated revenues are recognized
on a monthly basis when the customer is billed. Property management fee
revenue was $0.5 million, $0.7 million, and $0.9 million for the years ended
December 31, 2019, 2018 and 2017, respectively. Development fee rev-
enue was $0.7 million, $0.8 million, and $0.9 million for the years ended
December 31, 2019, 2018 and 2017, respectively.
FAIR VALUE Fair value accounting applies to reported balances that are
FAIR VALUE
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).
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2019 ANNUAL REPORT
27
FINANCIAL INSTRUMENTS Carrying amounts reported on the consolidated
FINANCIAL INSTRUMENTS
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.
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.
IMPAIRMENT OF ASSETS Real estate investments and related intangible
IMPAIRMENT OF ASSETS
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 determina-
tion 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.
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
REAL ESTATE ACQUISITIONS
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-
INTANGIBLE ASSETS
idated balance sheets as of December 31, 2019 and 2018 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, 2019 were as follows:
(in thousands of dollars)
Basis
Accumulated
Amortization
Total
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.
Balance,
January 1, 2017
Goodwill divested
$ 6,322
—
$ (1,073)
—
$ 5,249
—
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.
REAL ESTATE Land, buildings, fixtures and tenant improvements are
REAL ESTATE
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. The esti-
mated useful lives are as follows:
Buildings
Land improvements
Furniture/fixtures
Tenant improvements
20-40 years
15 years
3-10 years
Lease term
Balance,
December 31, 2017
Goodwill divested
6,322
—
(1,073)
—
December 31, 2018
Goodwill divested
6,322
—
(1,073)
—
5,249
—
5,249
—
December 31, 2019
$ 6,322
$ (1,073)
$ 5,249
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, 2019 and 2018:
As of December 31,
(in thousands of dollars)
2019
2018
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
$ 8,155
—
8,155
5,249
$13,404
$ 215
—
$ 215
$ 12,594
25
12,619
5,249
$ 17,868
$ 403
5,484
$ 5,887
Intangible liabilities are included in “Accrued expenses and other liabilities” in the
consolidated balance sheets. Amortization of lease intangibles was $3.3 million,
$2.4 million, and $2.0 million for the years ended December 31, 2019, 2018 and
2017, respectively.
Net amortization of above-market and below-market lease intangibles
increased revenue by $0.1 million, $0.2 million and $0.1 million for the years
ended December 31, 2019, 2018 and 2017, respectively. Amortization of
above-market ground lease intangibles increased expenses by $0.1 million
for each of the years ended December 31, 2018 and 2017, 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,
2020
2021
2022
2023
2024
2025 and thereafter
Value of Lease
Intangibles
Customer
Relationship
Value
Below
Market
Leases, net
$ 1,518
1,429
1,299
1,296
1,251
1,285
$ 77
—
—
—
—
—
$ (67)
(42)
(10)
(10)
(10)
(76)
Total
$ 8,078
$77
$(215)
ASSETS CLASSIFIED AS HELD FOR SALE The determination to classify
ASSETS CLASSIFIED AS HELD FOR SALE
an asset as held for sale requires significant estimates by us about the
property and the expected market for the property, which are based on
factors including recent sales of comparable properties, recent expressions
of interest in the property, financial metrics of the property and the physical
condition of the property. We must also determine if it will be possible under
those market conditions to sell the property for an acceptable price within
one year. When assets are identified by our management as held for sale,
we discontinue depreciating the assets and estimate the sales price, net of
selling costs, of such assets. We generally consider operating properties to
be held for sale when they meet criteria such as whether the sale transac-
tion has been approved by the appropriate level of management and there
are no known material contingencies relating to the sale such that the sale
is probable and is expected to qualify for recognition as a completed sale
within one year. If the expected net sales price of the asset that has been
identified as held for sale is less than the net book value of the asset, the
asset is written down to fair value less the cost to sell. Assets and liabilities
related to assets classified as held for sale are presented separately in the
consolidated balance sheet. If we determine that a property no longer meets
the held-for-sale criteria, we reclassify the property’s assets and liabilities to
their original locations on the consolidated balance sheet and record depre-
ciation and amortization expense for the period that the property was in
held-for-sale status.
In June 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 was under contract, and we believed that we will likely
complete a sale of the property within one year. We completed the sale of the
land parcel in multiple transactions in 2019. Additionally, 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 were in advanced negotiations with a buyer and believed that
the sale would likely be complete within one year. In April 2019, we com-
pleted the sale of the New Garden Township land parcel.
As of December 31, 2019, we determined that 13 land parcels and out-
parcels met the criteria to be classified as held for sale. The determination
was made because we entered into agreements to sell multiple outparcels
to a buyer and two separate land parcels in separate transactions. We also
believe that we would likely complete the sale transactions within one year.
The outparcels were part of an agreement executed in November 2019 with
one buyer to sell 14 outparcels across five properties, of which three were
sold as of December 31, 2019. In January 2020, an additional outparcel
under this arrangement was sold.
We also have two separate agreements to sell land parcels at Woodland Mall
and Moorestown Mall.
CAPITALIZATION OF COSTS Costs incurred in relation to development
CAPITALIZATION OF COSTS
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
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2019 ANNUAL REPORT
29
is probable that the property will not be acquired, capitalized pre-acquisi-
tion costs are charged to expense.
The per share distributions paid to common shareholders had the following
components for the years ended December 31, 2019, 2018 and 2017:
For leases under which we are a lessor, certain internal leasing and legal
costs such as salaries, commissions and benefits related to time spent
by leasing and legal department personnel involved in originating leases
with third-party tenants were previously capitalized under ASC 840.
However, they are now being recorded as period costs in accordance
with ASC 842. We will continue to amortize previously capitalized initial
direct costs over the remaining terms of the associated leases.
The following table summarizes our capitalized salaries, commis-
sions and benefits, real estate taxes and interest for the years ended
December 31, 2019, 2018 and 2017:
For the Year Ended December 31,
(in thousands of dollars)
2019
2018
2017
For the Year Ended December 31,
2019
2018
2017
Ordinary income
Non-dividend distribution
$ —
0.84
$ 0.25
0.59
$ —
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, 2019, 2018 and 2017:
Development/Redevelopment:
Salaries and benefits
Real estate taxes
Interest
Leasing:
Salaries, commissions
and benefits
$1,332
$1,057
$ 7,725
$ 1,380
$ 1,198
$ 6,395
$ 1,296
$ 1,035
$ 7,620
Series A Preferred Share Dividends(1)
Ordinary income
Non-dividend distributions
$ 568
$ 7,022
$ 6,066
For the Year Ended December 31,
2019
2018
2017
$ —
1.70
$ 1.70
RECEIVABLES We review the collectibility of our tenant receivables
RECEIVABLES
related to tenant rent including base rent, straight-line rent, expense
reimbursements and other revenue or income. We specifically analyze
billed and unbilled revenues, including straight-line rent receivable,
historical collection issues, customer creditworthiness and current eco-
nomic and industry trends. The receivables analysis places particular
emphasis on past-due accounts and considers the nature and age of the
receivables, the payment history and financial condition of the payor, the
basis for any disputes or negotiations with the payor, and other informa-
tion that could affect collectibility. If deemed uncollectible, we record an
offset for credit losses directly to lease revenue.
INCOME TAXES We have elected to qualify as a real estate investment
INCOME TAXES
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, 2019, 2018 and 2017, as no excise tax
was due in those years.
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
$ —
1.80
$ 1.80
—
$ —
1.59
$ —
$ 1.80
$ 1.59
$ —
1.72
$ 1.72
—
$ —
0.45
$ —
$ 1.72
$ 0.45
(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 no federal
or state income tax provision or benefit in the year ended December 31,
2019, but had a nominal provision in the year ended December 31, 2018
and a nominal benefit in the year ended December 31, 2017. We had net
deferred tax assets of $14.3 million and $16.7 million for the years ended
December 31, 2019 and 2018, 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, because we
have determined that it is more likely than not that these assets will not
be realized based on recent earnings history for our taxable REIT sub-
sidiaries. 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
DEFERRED FINANCING COSTS
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
DERIVATIVES
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 instru-
ment as a hedge and document and assess the effectiveness of the hedge
at inception and on a quarterly basis. Interest rate hedges that are desig-
nated as cash flow hedges are designed to mitigate the risks associated
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, 2019, 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
OPERATING PARTNERSHIP UNIT REDEMPTIONS
redemption of OP Units are recorded at the book value of the OP Units
surrendered.
SHARE-BASED COMPENSATION EXPENSE Share based payments
SHARE-BASED COMPENSATION EXPENSE
to employees and non-employee trustees, including grants of restricted
shares and share options, are valued at fair value on the date of grant, and
are expensed over the applicable vesting period.
EARNINGS PER SHARE The difference between basic weighted average
EARNINGS PER SHARE
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.
LEASE ACCOUNTING RELATED
NEW ACCOUNTING DEVELOPMENTS LEASE ACCOUNTING RELATED
Effective January 1, 2019, we adopted Accounting Standards Update
(“ASU”) 2016-02, Leases (Topic 842) (“ASC 842”) and related guidance
using the optional transition method and elected to apply the provisions
of the standard as of the adoption date rather than the earliest date pre-
sented. Prior period amounts were not restated. We implemented the
standard using the following practical expedients:
n
n
We have elected the package of practical expedients that allows us to
not reassess (i) whether any expired or existing contracts are or contain
leases, (ii) the lease classification for any expired or existing leases, and
(iii) initial direct costs for any existing leases.
For leases under which we are the lessor, we also have elected to not
separate non-lease components such as common area maintenance
(“CAM”) and real estate reimbursements from the associated lease
component (minimum rent). Instead, we 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 non-lease components and associated lease compo-
nent, and (2) the lease component, if accounted for separately, would
be classified as an operating lease. Utility reimbursements are presented
separately and not in the single component as the pattern of transfer is
not aligned with the use of the property and therefore the criteria for use
of the practical expedient are not met.
The adoption of this standard had the following effects on our financial
statements as of December 31, 2019 and for the year ended December
31, 2019:
As of January 1, 2019, for leases under which the Company is a lessee,
we recorded a right-of-use (“ROU”) asset of $24.6 million and corre-
sponding lease liability for all leases previously accounted for as operating
leases under ASC 840. The Company also derecognized an unfavorable
ground lease liability of $5.5 million and reduced the corresponding ROU
asset by the same amount. As of December 31, 2019, the ROU asset was
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2019 ANNUAL REPORT
31
$24.1 million and is included in deferred costs and other assets, net and
the lease liability was $30.3 million and is included in accrued expenses
and other liabilities in the accompanying consolidated balance sheet.
Effective January 1, 2019, we changed our fixed CAM revenue recognition
to be recognized prospectively on a straight-line basis. In the year ended
December 31, 2019, $2.7 million, of such revenues were recognized and
are included within lease revenue in the accompanying consolidated state-
ments of operations; previously, such amounts were recognized as billed
in accordance with the terms of the respective leases.
We review the collectability of both billed and unbilled lease revenues each
reporting period, taking into consideration the tenant’s payment history,
credit profile and other factors, including its operating performance. For
any tenant receivable balances deemed to be uncollectible, under ASC
842 we record an offset for credit losses directly to Lease revenue in the
consolidated statement of operations. Previously, under ASC 840, uncol-
lectible tenants’ receivables were reported in Other property operating
expenses in the consolidated statement of operations. We recorded offsets
for credit losses of $2.8 million for the year ended December 31, 2019.
For leases under which the Company is a lessor, certain internal leasing
and legal costs that were previously capitalized under ASC 840 are now
recorded as period costs under ASC 842. For the year ended December
31, 2018, we capitalized $5.2 million of internal leasing and legal sal-
aries and benefits, respectively. No such costs were capitalized for the
year ended December 31, 2019. We will continue to amortize previously
capitalized initial direct costs over the remaining terms of the associated
leases.
OTHER ACCOUNTING 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 classification guidance for distributions
received from equity method investments. We adopted this new stan-
dard effective January 1, 2018 using the retrospective transition method.
The statement of cash flows for the year ended December 31, 2017 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 year ended December 31, 2017 for $5.7 million of cash distributions
from partnerships that was previously presented within net cash used in
investing activities to now be reflected within net cash provided by oper-
ating activities for the year ended December 31, 2017 using the nature of
the distribution approach.
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 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 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. This new guidance did not have a material
impact on our consolidated 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 consolidated financial statements.
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 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 October 2018, the Financial Accounting Standards Board (“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 did not have a material impact on our consolidated finan-
cial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments -
Credit Losses, and subsequently issued amendments to the initial and
transitional guidance within ASU 2018-19, ASU 2019-04 and ASU
2019-05 between November 2018 and May 2019. ASU 2016-13 intro-
duced new guidance for an approach based on expected losses to
estimate credit losses on certain types of financial instruments, and will
affect our accounting for trade receivables and notes receivable. We
adopted this new standard on January 1, 2020. Our receivables primarily
relate to leases under ASC 842, which are not within the scope of ASU
2016-13. The adoption of this new standard is not expected to have a
material impact on our consolidated financial statements.
IMMATERIAL ERROR CORRECTION The Consolidated Statements of
Operations and the Consolidated Statements of Comprehensive Income
for the year ended December 31, 2017 includes the impact of correcting
the reporting of net loss (income) attributable to noncontrolling interest
and common shareholders. Specifically, the correction adjusts for a com-
putational 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 for the year ended December 31, 2017.
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 net loss (and comprehensive 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. 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; and September 30, 2017; and, by $0.02 for the
three months ended December 31, 2017.
The Consolidated Statement of Equity for the years ended December
31, 2018 and 2017 included the cumulative impact of $9.3 million and
$7.8 million, respectively, which corrected the reporting of noncontrolling
interest by decreasing noncontrolling interest and increasing Total Equity -
Pennsylvania Real Investment Trust by the corresponding 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, 2019 and 2018 were com-
prised of the following:
December 31,
(in thousands of dollars)
2019
2018
Buildings, improvements and
construction in progress
Land, including land held
for development
$ 2,753,039
$ 2,719,400
457,887
465,194
Total investments in real estate
Accumulated depreciation
3,210,926
(1,202,722 )
3,184,594
(1,118,582 )
Net investments in real estate
$2,008,204
$2,066,012
IMPAIRMENT OF ASSETS During the years ended December 31, 2019,
2018, and 2017, we recorded asset impairment losses of $5.0 million,
$137.5 million, and $55.8 million, respectively. Such impairment losses
are recorded in “Impairment of assets” for the years ended 2019, 2018
and 2017. 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)
2019
2018
2017
Gainesville land
Woodland Mall
Exton Square Mall
Wyoming Valley Mall
Valley View Mall
Wiregrass Mall
mortgage loan receivable
New Garden Township land
Logan Valley Mall
Sunrise Plaza land
Other
$ 1,464
2,098
—
—
1,408
$ 2,089
—
73,218
32,177
14,294
$ 1,275
—
—
—
15,521
—
—
—
—
47
8,122
7,567
—
—
20
—
—
38,720
226
51
Total Impairment of Assets
$5,017
$137,487
$55,793
MULTIPLE OUTPARCELS AND LAND PARCELS In November 2019, we
MULTIPLE OUTPARCELS AND LAND PARCELS
entered into an agreement to sell 14 tenant occupied parcels across five
properties — Magnolia Mall, Capital City Mall, Woodland Mall, Jacksonville
Mall and Valley Mall — for total consideration of $29.9 million. As of
December 31, 2019, we completed the dispositions on three outparcels at
Capital City Mall and Magnolia Mall for total consideration of $5.2 million.
In connection with these sales, we recorded a gain of $2.7 million. Of
the remaining outparcels, impairment of assets was recorded for one at
Woodland Mall, located in Grand Rapids, Michigan, for $1.5 million. In
January 2020, the sale of the outparcel at Woodland Mall was complete.
We also entered into two agreements in December 2019 to sell two
land parcels at Moorestown Mall, located in Moorestown, New Jersey,
and Woodland Mall in 2020. An impairment of $0.6 million was
recorded in 2019 for the land value of the parcel at Woodland Mall.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2019 ANNUAL REPORT
33
GAINESVILLE DEVELOPMENT LAND PARCEL We had an undeveloped
GAINESVILLE DEVELOPMENT LAND PARCEL
land parcel in Gainesville, Florida. In 2018 and 2017, we recorded losses
on impairment of assets on the land parcel located in Gainesville, Florida
of $2.1 million and $1.3 million, respectively, in connection with negoti-
ations with a potential buyer. 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. In March 2019,
we entered into an agreement of sale with a buyer to sell the undeveloped
land parcel in Gainesville, Florida for total consideration of $15.0 million
and the sale transaction was split into four parcels. The first parcel was
sold in March 2019 for $5.0 million. In connection with this transaction,
we recorded losses on impairment of assets of $1.5 million in the first
quarter of 2019. Subsequently, we closed on the sale of two parcels in
November 2019 and the final parcel closed in December 2019 for aggre-
gate consideration for the three parcels of $10.0 million. The net gain from
the sale of this undeveloped land parcel was less than $0.1 million.
EXTON SQUARE MALL In connection with the preparation of our
EXTON SQUARE MALL
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.
WYOMING VALLEY MALL In connection with the preparation of our
WYOMING VALLEY MALL
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 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 discounted estimated future cash flows at the property, using a dis-
count rate of 10.5% and a terminal capitalization rate of 9.0%, which was
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.
VALLEY VIEW MALL In connection with the preparation of our annual
VALLEY VIEW MALL
financial statements for the year ended December 31, 2019, we recorded
a loss on impairment of assets on Valley View Mall in La Crosse, Wisconsin
of $1.4 million. We noted a triggering event as a result of our determination
to decrease the holding period of the property to one year. This led to us
conduct an analysis of possible impairment at the property. Our fair value
analysis was based on a direct capitalization rate of 13.2% for Valley View
Mall, which was determined using management’s assessment of property
operating performance and general market conditions. The capitalization
rate was determined using management’s assessment of property oper-
ating performance and general market conditions and were classified in
Level 3 of the fair value hierarchy.
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 antici-
pated 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 performance and
general market conditions and were 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 car-
rying 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 12.0% for Valley View Mall, which was determined using
management’s assessment of property operating performance and gen-
eral market conditions.
WIREGRASS MORTGAGE LOAN RECEIVABLE In connection with the
WIREGRASS MORTGAGE LOAN RECEIVABLE
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 $0.2 million, $1.0 million,
and $1.0 million of interest income in the years ended December 31,
2019, 2018 and 2017, 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
NEW GARDEN TOWNSHIP DEVELOPMENT LAND PARCEL
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. As of December 31, 2018, this
land parcel was classified as held-for-sale in our consolidated balance
sheet.
LOGAN VALLEY MALL In 2017, we recorded an aggregate loss on impair-
LOGAN VALLEY MALL
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
impairment at this property. Based upon the negotiations, we determined
that the estimated undiscounted cash flows, net of capital expenditures
for the property, were less than the carrying value of the property, and
recorded a loss on impairment of assets. We sold Logan Valley Mall in
August 2017.
SUNRISE PLAZA LAND In 2017, we recorded a loss on impairment of
SUNRISE PLAZA LAND
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.
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 replace-
ment 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 was to be calculated as of March 31, 2018. The estimated value
of the Earnout was zero and no amounts were paid out at or after March
31, 2018.
DISPOSITIONS The table below presents our dispositions in 2017. There were no dispositions of our mall properties in 2019 and 2018. 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
Beaver Valley Mall, Monaca,
Pennsylvania
Crossroads Mall, Beckley,
West Virginia
Logan Valley Mall, Altoona,
Pennsylvania
Mall
Mall
Mall
DISPOSITIONS – OTHER ACTIVITY In 2020, we entered into an agree-
ment of sale for the sale and leaseback of five properties for an estimated
total consideration of $153.6 million. Additionally, we entered into agree-
ments of sale for land parcels for anticipated multifamily development for
an estimated total consideration of $125.3 million. These agreements are
subject to certain conditions and final closing of these sales transactions
cannot be assured.
In 2019, we entered into an agreement of sale with a buyer to sell an
undeveloped land parcel located in Gainesville, Florida for total consider-
ation of $15.0 million and the sale transaction was split into four parcels.
The first parcel was sold in March 2019 for $5.0 million. As a result of exe-
cuting the agreement of sale, we recorded losses on impairment of assets
of $1.5 million in the first quarter of 2019. Subsequently, we closed on two
parcels in November 2019 and the final parcel closed in December 2019
for an aggregate consideration of $10.0 million.
In 2019, we sold an undeveloped land parcel located in New Garden
Township, Pennsylvania, for total consideration of $11.0 million, consisting
of $8.25 million in cash and $2.75 million of preferred stock. We ascribed
no value for accounting purposes to the preferred shares as they are not
tradeable, cannot be transferred or sold and have no redemption feature.
Up to $1.25 million of the cash consideration received is subject to claw-
back if the buyer does not receive entitlements for a stipulated number
of housing units, which has been recorded as a liability in our consoli-
dated balance sheet. In connection with this sale, we recorded a gain of
$0.2 million.
15.6 %
$ 24.2
$ —
15.5 %
24.8
—
16.5 %
33.2
—
In 2019, we sold an outparcel adjacent to Exton Square Mall where a
Whole Foods store is located for total consideration of $22.1 million. In
connection with this sale, we recorded a gain of $1.3 million.
In 2019, we sold an outparcel located at Valley View Mall in La Crosse,
Wisconsin for total consideration of $1.4 million. In connection with this
sale, we recorded a gain of $1.2 million.
In 2019, we conveyed Wyoming Valley Mall to the lender of the mortgage
loan secured by the property. The loan had a balance of approximately
$72.8 million as of the conveyance on September 26, 2019. As a result
of the transfer, having previously recognized an asset impairment loss of
approximately $32.2 million on the value of the property, we wrote off the
remaining carrying value of the property of $43.2 million and recorded a
net gain on extinguishment of debt of $29.6 million in 2019.
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.
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2019 ANNUAL REPORT
35
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.
We present distributions from our equity investments using the nature of
the distributions approach in the accompanying consolidated statement
of cash flows.
DEVELOPMENT ACTIVITIES As of December 31, 2019 and 2018, we
had capitalized amounts related to construction and development activi-
ties. The following table summarizes certain capitalized construction and
development information for our consolidated properties as of December
31, 2019 and 2018:
December 31,
(in thousands of dollars)
2019
2018
Construction in progress
Land held for development
Deferred costs and other assets
$ 106,011
5,881
7,274
$ 115,182
5,881
6,487
Total capitalized construction
and development activities
$ 119,166
$127,550
3. Investments in Partnerships
The following table summarizes our share of equity in income of partner-
ships for the years ended December 31, 2019, 2018 and 2017:
For the Year Ended December 31,
(in thousands of dollars)
2019
2018
2017
$99,580
$ 98,781
$115,118
Real estate revenue
Expenses:
Property operating and
other expenses
(34,955 )
(23,272 )
Depreciation and amortization (21,942 )
Interest expense
(30,839 )
(23,373 )
(19,393 )
(33,273 )
(25,251 )
(24,872 )
Total expenses
(80,169 )
(73,605 )
(83,396 )
Net income
19,411
25,176
31,722
Less: Partners’ share
(10,768 )
(13,719 )
(17,607 )
The following table presents summarized financial information of our equity
investments in unconsolidated partnerships as of December 31, 2019 and
2018:
December 31,
(in thousands of dollars)
2019
2018
PREIT’s share
Amortization of excess
investment
Equity in income of
partnerships
8,643
11,457
14,115
(354 )
(82 )
252
$ 8,289
$11,375
$14,367
ASSETS:
Investments in real estate, at cost:
Operating properties
Construction in progress
Total investments in real estate
Accumulated depreciation
$ 883,530
251,029
1,134,559
(229,877 )
Net investments in real estate
Cash and cash equivalents
Deferred costs and other assets, net
904,682
34,766
43,476
$ 575,149
420,771
995,920
(212,574)
783,346
20,446
30,549
Total assets
$982,924
$834,341
LIABILITIES AND PARTNERS’ INVESTMENT:
Mortgage loans payable, net
FDP Term Loan, net
Other liabilities
$ 499,057
299,091
79,166
$ 507,090
247,901
34,463
Total liabilities
$877,314
$789,454
Net investment
Partners’ share
PREIT’s share
Excess investment(1)
$ 105,610
50,997
54,613
17,464
$ 44,887
21,583
23,304
15,763
Net investments and advances
$ 72,007
$ 39,067
Investment in partnerships, at equity
Distributions in excess of
partnership investments
$ 159,993
$131,124
(87,916 )
(92,057)
Net investments and advances
$ 72,077
$ 39,067
(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.”
DISPOSITIONS In March 2019, a partnership in which we hold a 25%
interest sold an undeveloped land parcel adjacent to Gloucester Premium
Outlets for $3.8 million. The partnership recorded a gain on sale of
$2.3 million, of which our share was $0.6 million, which is recorded in
gain on sale of real estate by equity method investee in the accompanying
consolidated statement of operations.
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 distributed 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, our Fashion District Philadelphia redevel-
opment project joint venture entity entered into a $250.0 million term loan
(the “FDP Term Loan”). We and our partner in the project, The Macerich
Company (“Macerich”), each 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 mil-
lion 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. In July 2019, the FDP Term Loan was
modified to increase the total potential borrowings from $250.0 million to
$350.0 million. A total of $51.0 million was drawn during the third quarter
of 2019 and we received aggregate distributions of $25.0 million as our
share of the draws.
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 mort-
gage 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, 2019. The
balances of the variable interest rate mortgage loans have interest rates
that range from 3.19% to 4.60% and had a weighted average interest rate
of 3.37% at December 31, 2019. The weighted average interest rate of all
unconsolidated mortgage loans was 4.43% at December 31, 2019. The
liability under each mortgage loan is limited to the unconsolidated partner-
ship 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,
2020
2021
2022
2023
2024
2025 and thereafter
Company’s Proportionate Share
Principal
Amortization
$ 4,378
4,049
3,738
3,620
2,886
7,213
Balloon
Payments
$ —
41,170
21,500
33,502
—
106,087
Total
$ 4,386
45,219
25,238
37,122
2,886
113,300
Total principal payments
$25,884
$ 202,259
$ 228,143
Less: Unamortized debt issuance costs
Carrying value of mortgage notes payable
Property
Total
$ 8,801
91,945
93,476
74,245
5,772
226,601
500,839
1,782
$499,057
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 $3.1 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
$96.4 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.
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2019 ANNUAL REPORT
37
SIGNIFICANT UNCONSOLIDATED SUBSIDIARY We have a 50% owner-
ship interest in each of Lehigh Valley Associates L.P. (“LVA”) and Fashion
District Philadelphia (“FDP”). The financial information of LVA and FDP are
included in the amounts above. Summarized balance sheet information as
of December 31, 2019, 2018 and 2017, and summarized statement of
operations information for the years ended December 31, 2019, 2018 and
2017 for these entities, which are accounted for using the equity method,
are as follows:
LVA:
As of or for the years ended December 31,
(in thousands of dollars)
2019
2018
2017
Total assets
Mortgage payable
Revenue
Property operating
expenses
Interest expense
Net income
PREIT’s share of equity in
income of partnership
$ 62,504
191,998
32,906
8,448
8,055
13,162
$ 52,255
196,328
35,662
9,014
8,222
15,605
$ 43,850
199,451
34,945
9,038
10,907
11,389
6,581
7,803
5,695
FDP:
As of or for the years ended December 31,
(in thousands of dollars)
2019
2018
2017
Total assets
FDP Term Loan, net
Revenue
Property operating
expenses
Interest expense
Net income
PREIT’s share of equity in
income of partnership
$641,377
299,091
8,028
$ 497,419
250,000
4,053
$ 428,827
—
18,708
6,995
178
(7,352)
3,630
126
(4,990)
6,909
126
2,436
(3,676)
(2,495)
1,218
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, 2019, we had borrowed $550.0 million under the
Term Loans and $255.0 million under the 2018 Revolving Facility. The
carrying value of the Term Loans on our consolidated balance sheet as
of December 31, 2019 is net of $2.0 million of unamortized debt issu-
ance costs. The net operating income (“NOI”) from our unencumbered
properties is at a level such that within the Unencumbered Debt Yield cov-
enant (as described below) under the Credit Agreements, the maximum
unsecured amount that was available to us as of December 31, 2019 was
$30.1 million.
Interest expense and the deferred financing fee amortization related to the
Credit Agreements for the years ended December 31, 2019, 2018 and
2017 were as follows:
(in thousands of dollars)
2019
2018
2017
For the Year Ended December 31,
Revolving Facilities:
Interest expense
Deferred financing
amortization
Term Loans:
Interest expense
Deferred financing
amortization
Accelerated financing fee
$ 7,526
$ 1,807
$ 2,463
1,097
1,052
796
20,922
17,585
14,935
760
—
763
363
759
—
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, 2019, $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 cer-
tain affirmative and negative covenants and other provisions, which are
identical to those contained in the other Credit Agreements, and which are
described in detail below.
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
provides 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 capitalization rate used to calculate Gross Asset Value is 6.50% for each property having an average
sales per square foot of more than $500 for the most recent period of 12 consecutive months and (b) 7.50% for any other property. 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 consoli-
dated 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
Equal to or greater than 0.550 to 1.00(1)
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%
1.45%
1.60%
1.90%
0.35%
0.45%
0.60%
0.90%
(1) The rates in effect under the Credit Agreements were based upon the Level 4 Ratio of Total Liabilities to Gross Asset Value as of December 31, 2019.
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 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.
The weighted average interest rate of all consolidated mortgage loans was
4.04% at December 31, 2019. 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.
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, 2019:
(in thousands of dollars)
Principal
For the Year Ending December 31, Amortization
Balloon
Payments
Total
2020
2021
2022
2023
2024
2025 and thereafter
$ 16,266
17,862
13,463
6,584
6,405
4,406
$ 27,161 $ 43,427
206,647
369,451
59,883
6,405
215,752
188,785
355,988
53,299
—
211,346
Total principal payments
$64,986
$836,579 $ 901,565
Less: Unamortized
debt issuance costs
1,812
Carrying value of mortgage notes payable
$ 899,753
The estimated fair values of our consolidated mortgage loans based on
year-end interest rates and market conditions at December 31, 2019 and
2018 are as follows:
2019 2018
As of December 31, 2019, we were in compliance with all such financial
covenants. We anticipate not meeting certain financial covenants appli-
cable under the credit agreements during 2020. See Going Concern
Considerations section in Note 1.
(in millions of dollars)
Consolidated
mortgage loans(1)
Carrying
Value
Fair
Value
Carrying
Value
Fair
Value
$899.8
$ 873.9
$1,047.9
$1,002.3
CONSOLIDATED MORTGAGE LOANS Our consolidated mortgage loans,
which are secured by 10 of our consolidated properties, are due in install-
ments over various terms extending to the year 2025. Seven 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 4.08% at December
31, 2019. Three of our mortgage loans bear interest at variable rates and
had a weighted average interest rate of 3.94% at December 31, 2019.
(1) The carrying value of consolidated mortgage loans has been reduced by unamortized
debt issuance costs of $1.8 million and $3.1 million as of December 31, 2019 and 2018,
respectively.
The consolidated mortgage loans contain various customary default pro-
visions. As of December 31, 2019, we were not in default on any of the
consolidated mortgage loans.
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2019 ANNUAL REPORT
39
MORTGAGE LOAN ACTIVITY The following table presents the mortgage loans we have entered into or extended since January 1, 2018 relating to our
consolidated properties:
Financing Date
2018 Activity:
January
February
Property
Francis Scott Key(1)
Viewmont Mall(2)
Amount Financed
or Extended
(in millions of dollars)
Stated Interest Rate
Maturity
$ 68.5
$ 10.2
LIBOR plus 2.60%
LIBOR plus 2.35%
January 2022
March 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.
OTHER MORTGAGE LOAN ACTIVITY In March 2019, we defeased a
$58.5 million mortgage loan including accrued interest, secured by Capital
City Mall in Camp Hill, Pennsylvania using funds from our 2018 Revolving
Facility and the balance from available working capital. We recorded a loss
on debt extinguishment of $4.8 million in March 2019 in connection with
this defeasance.
As discussed in Note 2, in September 2019, we conveyed Wyoming Valley
Mall to the lender of the mortgage loan secured by the property. The loan
had a balance of approximately $72.8 million as of the conveyance on
September 26, 2019. In connection with the conveyance, $7.5 million of
cash and escrow balances were transferred to the lender and we recorded
a net gain on extinguishment of debt of $29.6 million.
In April 2019, we received a notice from the servicer of the Cumberland
Mall mortgage of a cash sweep event due to the failure of an anchor tenant
to renew for a full term. We satisfied this requirement in August 2019.
We have a $27.4 million mortgage, secured by Valley View Mall in La
Crosse, Wisconsin, which matures in July 2020. Subsequent to December
31, 2019, we have commenced disposition discussions with the lender
regarding the property.
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 mil-
lion after deducting payment of the underwriting discount of $5.4 million
($0.7875 per Series C Preferred Share) and offering expenses of $0.8 mil-
lion. 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 pay-
ment 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 gen-
eral corporate purposes.
We may not redeem the Series C Preferred Shares and the Series D
Preferred Shares before January 27, 2022 and September 15, 2022,
respectively, except to preserve our status as a REIT or upon the occurrence
of a Change of Control, as defined in the Trust Agreement addendums
designating the Series C Preferred Shares and Series D Preferred Shares.
On and after January 27, 2022 for the Series C Preferred Shares and
September 15, 2022 for the Series D Preferred Shares, we may redeem
any or all of the Series C Preferred Shares or Series D Preferred Shares
at $25.00 per share plus any accrued and unpaid dividends. In addition,
upon the occurrence of a Change of Control, we may redeem any or all of
the Series C Preferred Shares or Series D Preferred Shares for cash within
120 days after the first date on which such Change of Control occurred, at
$25.00 per share plus any accrued and unpaid dividends. The Series C
Preferred Shares and Series D Preferred Shares have no stated maturity,
are not subject to any sinking fund or mandatory redemption provisions,
and will remain outstanding indefinitely unless we redeem or otherwise
repurchase them or they are converted.
PREFERRED SHARE REDEMPTION On October 12, 2017 (the
“Redemption Date”), 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 million excess of the redemption price
over the carrying amount of the Series A Preferred Shares was deducted
from Net income (loss) attributed to PREIT common shareholders in the
fourth quarter of 2017.
6. Derivatives
In the normal course of business, we are exposed to financial market risks,
including interest rate risk on our interest bearing liabilities. We attempt to
limit these risks by following established risk management policies, proce-
dures 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 comprehensive income” and subsequently reclassified into “Interest
expense, net” in the same periods during which the hedged transaction
affects earnings. As of December 31, 2019, all of our outstanding deriva-
tives 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 2020, we estimate that $2.7 million will be reclassified as an
increase 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, 2019, we had interest rate
swap agreements outstanding with a weighted average base interest rate
of 1.86% on a notional amount of $795.6 million, maturing on various
dates through May 2023, and forward starting interest rate swap agree-
ments with a weighted average base interest rate of 2.75% on a notional
amount of $100.0 million, with effective dates in 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, 2019 and 2018 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.
Maturity Date
Interest Rate Swaps
2020
2021
2022
2023
Forward Starting Swaps
2023
Total
Aggregate Notional Value at
December 31, 2019
(in millions of dollars )
Aggregate Fair Value at
December 31, 2019 (1)
(in millions of dollars)
Aggregate Fair Value at
December 31, 2018
(in millions of dollars )
Weighted Average
Interest Rate
$ 100.0
495.6
—
200.0
$ 0.2
(1.4)
—
(7.3)
100.0
(3.4)
$895.6
$(11.9)
$ 1.9
8.1
—
(0.4)
(2.6)
$ 7.0
1.23%
1.66%
—
2.67%
2.75%
1.96%
(1) As of December 31, 2019 and 2018, derivative valuations in their entirety were classified in Level 2 of the fair value hierarchy and we did not have any significant recurring fair value
measurements related to derivative instruments using significant unobservable inputs (Level 3).
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, 2019 and 2018:
Year Ended December 31,
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)
2019
2018
2017
2019
2018
2017
Derivatives in Cash Flow Hedging Relationships
Interest rate products
$(15.8)
$(0.4)
$4.0
$(3.1)
$2.4
$ 2.3
(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 (loss) reclassified from accumulated other
comprehensive income into interest expense
Year Ended December 31,
2019
2018
2017
$ (64.0)
$ (61.4)
$ (58.4)
$ (3.1)
$ 2.4
$ 2.3
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2019 ANNUAL REPORT
41
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,
2019, 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, 2019, 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 $13.1 million. If
we had breached any of the default provisions in these agreements as
of December 31, 2019, we might have been required to settle our obliga-
tions under the agreements at their termination value (including accrued
interest) of $12.4 million. We had not breached any of these provisions as
of December 31, 2019.
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 $0.9 million for the years ended December 31, 2019,
2018 and 2017, 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, $0.2 million, and $0.3 million for the years ended
December 31, 2019, 2018 and 2017, 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, 2019, 2018 and 2017, approximately 44,000, 31,000, and
38,000 shares, respectively, were purchased for total consideration of $0.2
million, $0.2 million, and $0.4 million, respectively. We recorded expense of
approximately $48 thousand, $43 thousand and $0.1 million for the years
ended December 31, 2019, 2018 and 2017, respectively, related to the
share purchase plan.
8. Share Based Compensation
SHARE BASED COMPENSATION PLANS As of December 31, 2019, 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, 2019, 2018 and 2017, we recorded
aggregate compensation expense for share based awards of $7.0 million
(including a net reversal of $1.1 million of amortization relating to employee
separation), $6.9 million (including $0.1 million of accelerated amortiza-
tion relating to employee separation), and $5.7 million (including a net
reversal of $0.2 million of amortization relating 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, 2019, 2018 and 2017, we capitalized compensation costs
related to share based awards of $0.2 million, $0.1 million, and $0.1 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 1,145,956 as
of December 31, 2019. 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 2019, 2018 and 2017 was $5.6 million, $5.1
million, and $4.8 million, respectively, based on the share price on the
date of the grant. As of December 31, 2019, 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 0.8 years.
A summary of the status of our unvested restricted shares as of December
31, 2019 and changes during the years ended December 31, 2019, 2018
and 2017 is presented below:
Shares
Weighted Average
Grant Date Fair Value
Unvested at January 1, 2017
Shares granted
Shares vested
Shares forfeited
December 31, 2017
Shares granted
Shares vested
Shares forfeited
December 31, 2018
Shares granted
Shares vested
Shares forfeited
December 31, 2019
386,412
336,296
(238,859 )
(34,427 )
449,422
461,395
(260,178 )
(29,241 )
621,398
798,370
(349,533 )
(131,971 )
938,264
$ 21.88
14.95
19.56
18.00
16.85
11.02
16.58
14.17
13.29
7.04
13.14
8.75
$ 8.67
RESTRICTED SHARES AWARDED TO EMPLOYEES In 2019, 2018 and
2017, 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 remains 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 683,570,
392,697, and 245,950 restricted shares subject to time based vesting to
our employees in 2019, 2018 and 2017, respectively. The weighted average
grant date fair values of time based restricted shares was $7.15 per share in
2019, $10.99 per share in 2018, and $16.43 per share in 2017. The aggre-
gate fair value of the restricted shares granted in 2019, 2018, and 2017
were $4.9 million, $4.3 million, and $4.0 million, respectively. Compensation
cost relating to time based restricted share awards is recorded ratably over
the respective vesting periods. We recorded $3.7 million (including a net
reversal of $0.2 million of accelerated amortization relating to employee
separation), $4.3 million (including $0.1 million of accelerated amortization
relating to employee separation) and $3.9 million (including $0.2 million
of accelerated amortization relating to employee separation) of compensa-
tion expense related to time based restricted shares for the years ended
December 31, 2019, 2018 and 2017, respectively. The total fair value of
shares vested during the years ended December 31, 2019, 2018 and 2017
was $3.8 million, $2.0 million, and $3.9 million, respectively.
On February 24, 2020, the Company granted 1,093,292 time-based
restricted shares to employees that vest over periods of two to three years
in annual installments.
OUTPERFORMANCE UNITS (“OPUS”) AWARDED TO EMPLOYEES
Of the time-based restricted shares granted to employees in 2019 described
above, 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. We recorded
$0.8 million (including a net reversal of $0.1 million of accelerated amorti-
zation relating to employee separation) of compensation expense related to
OPUs for the year ended December 31, 2019.
RESTRICTED SHARES AWARDED TO NON-EMPLOYEE TRUSTEES
As part of the compensation we pay to our non-employee trustees for
their service, we grant restricted shares subject to time based vesting.
The awarded shares vest over a one-year period. These annual awards
have been made under the 2003 Equity Incentive Plan and the 2018
Equity Incentive Plan. We granted a total of 114,800, 68,698, and 64,358
restricted shares subject to time based vesting to our non-employee trustees
in 2019, 2018, and 2017, respectively. The weighted average grant date
fair values of time based restricted shares was $6.35 per share in 2019,
$11.17 per share in 2018, and $11.45 per share in 2017. The aggregate fair
value of the restricted shares granted in 2019, 2018 and 2017 were $0.7
million, $0.8 million, $0.7 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 $0.7 million, $0.5 million, and $0.5 million of compensation
expense related to time based vesting of non-employee trustee restricted
share awards in 2019, 2018 and 2017, respectively. As of December 31,
2019, 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
$0.8 million, $0.6 million, and $0.8 million for the years ended December
31, 2019, 2018 and 2017, respectively. In 2020, we will record compensa-
tion 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:
Future Compensation Expense
(in thousands of dollars)
For the Year Ending
December 31,
Employees
Non-Employee
Trustees
2020
2021
2022
2023
Total
$ 2,527
1,352
150
—
$4,029
$ 284
—
—
—
Total
$ 2,811
1,352
150
—
$ 284
$4,313
RESTRICTED SHARE UNIT PROGRAMS In 2019, 2018, 2017, 2016 and
2015, our Board of Trustees established the 2019-2021 RSU Program,
2018-2020 RSU Program, 2017-2019 RSU Program, 2016-2018 RSU
Program, and the 2015-2017 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 both 2019
and 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 being 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.
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2019 ANNUAL REPORT
43
N/A
N/A
N/A
N/A
0.706
(in thousand of dollars)
The aggregate fair values of the RSU awards in 2019, 2018 and 2017 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 2019, 2018 and 2017 by grant date:
(in thousands of dollars, except per share data)
RSUs and assumptions by Grant Date
Grant Date:
January 29, 2019
January 19, 2018
February 27, 2017
Measurement Basis:
RSUs granted
Aggregate fair value of shares granted
Weighted average fair value per share
40.3%
Risk free interest rate
PREIT Stock Beta compared to Dow
Jones US Real Estate Index(1)
Absolute TSR
RSUs
Relative TSR
RSUs
Absolute TSR
RSUs
Relative TSR
RSUs
Relative TSR
RSUs
210,193
$ 1,550
$ 7.38
40.3 %
2.58 %
210,193
$ 1,890
$ 8.99
40.3 %
2.58 %
115,614
$ 1,336
$ 10.93
31.6 %
2.19 %
115,614
$ 1,779
$ 14.56
31.6 %
2.19 %
140,490
$ 1,620
$ 11.53
25.8 %
1.42 %
(1) 2019 and 2018’s RSU Award valuations used a matrix approach, where the correlation was calculated between PREIT and each of its peers and each peer against all other peers.
9. Leases
As discussed in Note 1, we adopted ASC 842, the new lease accounting
standard, effective January 1, 2019.
AS LESSEE We have entered into ground leases for portions of the
land at Springfield Town Center and Plymouth Meeting Mall. We have
also entered into an office lease for our headquarters location, as well as
vehicle, solar panel and equipment leases as a lessee. The initial terms
of these agreements generally range from three to 40 years, with certain
agreements containing extension options for up to an additional 60 years.
As of December 31, 2019, we included only those renewal options we
were reasonably certain of exercising. Upon lease execution, the Company
measures a liability for the present value of future lease payments over the
noncancellable period of the lease and any renewal option period we are
reasonably certain of exercising. Certain agreements require that we pay
a portion of reimbursable expenses such as CAM, utilities, insurance and
real estate taxes. These payments are not included in the calculation of
the lease liability and are presented as variable lease costs.
We applied judgments related to the determination of the discount rates
used to calculate the lease liability upon adoption at January 1, 2019.
In order to calculate our incremental borrowing rate under ASC 842, we
utilized judgments and estimates regarding our implied credit rating using
market data and made other adjustments to determine an appropriate
incremental borrowing rate as of January 1, 2019.
Compensation cost relating to the RSU awards is expensed ratably over the
applicable three year vesting period. We recorded $1.8 million (including a
reversal of $0.8 million of accelerated amortization relating to employee sep-
aration), $2.1 million, and $1.3 million (including a reversal of $0.4 million of
accelerated amortization relating to employee separation) of compensation
expense related to the RSU Programs for the years ended December 31,
2019, 2018 and 2017, respectively. We will record future aggregate com-
pensation expense of $2.8 million related to the existing awards under the
RSU Programs.
For the years ended December 31, 2019, 2018 and 2017, no shares were
issued from the 2017-2019, 2016-2018, and 2015-2017 RSU programs
because the required criteria were not met.
On February 24, 2020, the Board of Trustees established the 2020-2022
Equity Award program, and the Company granted 709,943 RSUs to
employees (the “2020 RSUs”). The 2020 RSUs have a three-year measure-
ment period that ends on December 31, 2022 or a shorter period ending
upon the change in control of the Company. The 2020 RSUs represent the
right to receive common shares in the future depending on the Company’s
performance in the achievement of operating performance measures
and a modification based on total return to shareholders. The preliminary
number of common shares to be issued by the Company with respect to
the 2020 RSUs awarded is based on a multiple determined by achievement
of certain specified operating performance measures during the applicable
Measurement Period. These performance measures, the three-year core
mall non-anchor occupancy and the three-year fixed charge coverage ratio,
are each weighted 50%. The preliminary number of common shares to be
issued by the Company as determined under the operating performance
goals will be adjusted, upwards or downwards, depending on the Company’s
total return to shareholders, as defined, for the applicable Measurement
Period relative to the performance of other real estate investment trusts
comprising a leading index of retail real estate investment trusts. Unlike the
RSUs awarded in 2018 and 2019, the number of shares that may be issued
with respect to the 2020 RSUs are not dependent on any absolute level of
total return to shareholders.
Total
$ 750
294
3,515
622
$ 5,181
$ 294
$ 2,205
$ 632
99
306
4.42%
6.42%
The following table presents additional information pertaining to the Company’s leases:
(in thousand of dollars)
Finance lease cost:
Amortization of right-of-use assets
Interest on lease liabilities
Operating lease costs
Variable lease costs
Total lease costs
Solar Panel
Leases
$ 750
294
—
—
$1,044
For the Year Ended December 31, 2019
Ground
Leases
Office, equipment,
and vehicle leases
$ —
—
1,583
165
$ 1,748
$ —
—
1,932
457
$ 2,389
Other information related to leases as of and for the year ended December 31, 2019 is as follows:
Cash paid for the amounts included in the measurement of lease liabilities
Operating cash flows used for finance leases
Operating cash flows used for operating leases
Financing cash flows used for finance leases
Weighted average remaining lease term-finance leases (months)
Weighted average remaining lease term-operating leases (months)
Weighted average discount rate-finance leases
Weighted average discount rate-operating leases
Future payments against lease liabilities as of December 31, 2019 are as follows:
(in thousand of dollars)
2020
2021
2022
2023
2024
Thereafter
Total undiscounted lease payments
Less imputed interest
Total lease liabilities
Finance leases
Operating leases
Total
$ 925
925
925
925
925
2,999
7,624
(1,242)
$ 6,382
$ 2,237
2,730
2,538
2,485
2,373
46,853
59,216
(28,965)
$ 3,162
3,655
3,463
3,410
3,298
49,852
66,840
(30,207)
$ 30,251
$ 36,633
Future minimum lease payments under these agreements as of December 31, 2018 were as follows:
(in thousand of dollars)
Year ending December 31,
2019
2020
2021
2022
2023
Thereafter
Finance leases
Operating leases
Total
$ 925
925
925
925
925
3,923
$ 8,548
$ 3,264
2,237
2,730
2,538
2,485
49,226
$ 4,189
3,162
3,655
3,463
3,410
53,149
$ 62,480
$ 71,028
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2019 ANNUAL REPORT
45
AS LESSOR As of December 31, 2019, the fixed contractual lease pay-
ments, including minimum rents and fixed CAM amounts, to be received
over the next five years pursuant to the terms of noncancellable operating
leases with initial terms greater than one year are included in the table
below. The amounts presented assume that no leases are renewed and
no renewal options are exercised. Additionally, the table does not include
variable lease payments that may be received under certain leases for
percentage rents or the reimbursement of operating costs, such as
common area expenses, utilities, insurance and real estate taxes. These
variable lease payments are recognized in the period when the applicable
expenditures are incurred or, in the case of percentage rents, when the
sales data is made available.
(in thousands of dollars)
For the Year Ending December 31,
2020
2021
2022
2023
2024
2025 and thereafter
$ 205,574
187,241
168,671
149,296
127,355
386,280
$1,224,417
10. Related Party Transactions
OFFICE LEASES During 2019, we leased 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 $1.7 million,
$1.3 million, and $1.3 million for the years ended December 31, 2019,
2018 and 2017, respectively. This lease terminated in December 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 commenced in
December 2019 and we moved into our new offices at One Commerce
Square in January 2020.
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 $2.5 million to IBX
during 2019 and $2.7 million during 2018.
11. Commitments and Contingencies
CONTRACTUAL OBLIGATIONS As of December 31, 2019, we had
unaccrued contractual and other commitments related to our capital
improvement projects and development projects of $75.2 million, including
$33.1 million of commitments related to the redevelopment of Fashion
District Philadelphia, in the form of tenant allowances and contracts with
general service providers and other professional service providers. For the
purposes of this disclosure, the contractual obligations and other commit-
ments related to Fashion District Philadelphia are included at 100% of the
obligation and not at our 50% ownership share. 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 rede-
velopment 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, 2019, we expect to meet this obligation.
EMPLOYMENT AGREEMENTS One officer of the Company currently has
employment agreements with terms that renew automatically each year for
additional one-year terms. This employment agreement provided for aggre-
gate base compensation for the year ended December 31, 2019 of $0.9
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.
A former officer, the Executive Vice President and Chief Financial Officer,
executed a Separation of Employment Agreement (the “Separation
Agreement”) with the Company on December 23, 2019. Consistent with
the officer’s amended and restated employment agreement dated as of
December 30, 2008 (together with the May 6, 2009 Amendment thereto)
as modified in certain respects by the Separation Agreement, the officer
has been paid amounts that were fully earned but not yet paid on or
before the last day of full-time employment, in addition to a payment equal
to two times the current base salary and a payment equal to two times
the average bonus amount in the last three calendar years. The officer
may continue to participate in the Company’s benefit plans for eighteen
months. The officer will also be paid the supplemental retirement plan
account balance, as required by the terms of the employment agreements
and the nonqualified supplemental executive retirement agreement.
In March 2020, the Company entered into an employment agreement with
Mario C. Ventresca, Jr., its Executive Vice President and Chief Financial
Officer.
PROVISION FOR EMPLOYEE SEPARATION EXPENSE We recorded
$3.7 million, $1.1 million and $1.3 million of employee separation expense
during the years ended December 31, 2019, 2018 and 2017, respectively,
in connection with the termination of certain employees. As of December
31, 2019, $3.5 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 year ended December 31, 2019, we recorded net recoveries of
$4.4 million. These net recoveries primarily relate to remediation expenses
and business interruption claims. $0.5 million of the recoveries received
relate to business interruption.
During the year ended December 31, 2018, we recorded net recoveries, of
approximately $0.7 million. This amount consisted of combined estimated
property impairment and remediation losses of $2.3 million, offset by a cor-
responding insurance claim recovery of $3.0 million.
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 There were no tax protection agree-
ments in effect as of December 31, 2019.
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 and 2017, we recognized $1.0 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 of 2018 and 2017, respectively.
In aggregate, we recorded $0.8 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 and 2017,
respectively.
13. Summary of Quarterly Results (Unaudited)
The following presents a summary of the unaudited quarterly financial information for the years ended December 31, 2019 and 2018:
(in thousands of dollars, except per share amounts)
For the Year Ended December 31, 2019
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter (1)
Total
$ 85,305
Total revenue
Net income (loss) (2)(3)
(16,223 )
Net income (loss) attributable to PREIT(2)(3)(4)
(14,535 )
Basic and diluted earnings (loss) per share(4) (0.30)
$ 81,392
(6,080 )
(5,751 )
(0.17 )
$ 81,374
24,716
24,262
0.22
$ 88,721
(15,413 )
(14,848 )
(0.29 )
$ 336,792
(13,000 )
(10,872 )
(0.52 )
(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 per share(4)
1st Quarte r
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 )
(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 $1.5 million (1st Quarter 2019), $3.5 million (4th Quarter 2019), $34.2 million (2nd Quarter 2018), and $103.2 million (4th Quarter 2018).
(3) Includes gain on sales of real estate by equity method investee of $0.6 million (1st Quarter 2019) and $2.8 million (1st Quarter 2018), gain on sales of real estate $1.5 million (2nd Quarter
2019), $1.2 million (3rd Quarter 2019), $0.1 million (4th Quarter 2019), $0.7 million (2nd Quarter 2018) and $0.8 million (4th Quarter 2018) and gain on sales of interests in non operating
real estate of $2.7 million (4th Quarter 2019) and $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.
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2019 ANNUAL REPORT
47
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.
/S/ KPMG LLP
Philadelphia, Pennsylvania
March 13, 2020
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, 2019, 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
49 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, 2019 and 2018, the related consolidated statements of
operations, comprehensive income (loss), equity, and cash flows for each
of the years in the threeyear period ended December 31, 2019, and the
related notes and financial statement schedule III (collectively, the con-
solidated 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, 2019 and 2018, and the results of its
operations and its cash flows for each of the years in the threeyear period
ended December 31, 2019, in conformity 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,
2019, 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 March 13, 2020
expressed an unqualified opinion on the effectiveness of the Company’s
internal control over financial reporting.
GOING CONCERN The accompanying consolidated financial statements
have been prepared assuming that the Company will continue as a going
concern. As discussed in Note 1 to the consolidated financial statements,
in the event the Company does not meet certain covenants applicable
under its credit agreements during 2020 the Company’s liquidity would
not be sufficient to meet its obligations within one year of the date of issu-
ance of the financial statements, which raises substantial doubt about the
Company’s ability to continue as a going concern. Management’s plans
in regard to these matters are also described in Note 1. The consolidated
financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
CHANGE IN ACCOUNTING PRINCIPLE As discussed in Note 1 to the
consolidated financial statements, the Company has changed its method
of accounting for leases as of January 1, 2019 due to the adoption of
Financial Accounting Standard Board’s Accounting Standards Codification
(ASC) 842, Leases.
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.audits provide a reason-
able basis for our opinion.
/S/ KPMG LLP
We have served as the Company’s auditor since 2002.
Philadelphia, Pennsylvania
March 13, 2020
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Trustees
Pennsylvania Real Estate Investment Trust:
OPINION ON INTERNAL CONTROL OVER FINANCIAL REPORTING We
have audited Pennsylvania Real Estate Investment Trust and subsidiaries’
(the Company) internal control over financial reporting as of December 31,
2019, 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 financial reporting as
of December 31, 2019, 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, 2019 and
2018, the related consolidated statements of operations, comprehensive
income (loss), equity, and cash flows for each of the years in the three-
year period ended December 31, 2019, and the related notes and financial
statement schedule III (collectively, the consolidated financial statements),
and our report dated March 13, 2020 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.
48 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2019 ANNUAL REPORT
49
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
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.
We currently own interests in 26 retail properties, of which 25 are oper-
ating properties and one is a development property. The 25 operating
properties include 21 shopping malls and four other retail properties, 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 18 operating retail properties in our portfolio that we consoli-
date for financial reporting purposes. These consolidated properties have
a total of 15.2 million square feet, of which we own 12.1 million square
feet. The seven operating retail properties that are owned by unconsoli-
dated partnerships with third parties have a total of 4.9 million square feet
of which 3.6 million square feet are owned by such partnerships. When
we refer to “Same Store” properties, we are referring to properties that
have been owned for the full periods presented and exclude properties
acquired, disposed of, under redevelopment or designated as a non-core
property during the periods presented. Core properties include all oper-
ating retail properties except for Exton Square Mall, Valley View Mall and
Fashion District Philadelphia. “Core Malls” also excludes these properties
as well as power centers and Gloucester Premium Outlets. Wyoming Valley
Mall was conveyed to the lender of the mortgage loan secured by that
property in September 2019.
We have one property in our portfolio that is classified as under devel-
opment; however, we do not currently have any activity occurring at this
property.
Fashion District Philadelphia opened on September 19, 2019. Fashion
District Philadelphia is an aggregation of properties spanning three blocks
in downtown Philadelphia that were formerly known as Gallery I, Gallery II
and 907 Market Street. Joining Century 21 and Burlington in 2019 were
multiple dining and entertainment venues including Market Eats, a multi
offering food court, City Winery, AMC Theatres, and Round 1 Bowling &
Amusement. In addition, Nike Factory Store, Ulta, and H & M, opened
Philadelphia flagship stores at the property. Through December 31, 2019
we had incurred costs of $175.4 million relating to our share of the devel-
opment costs of the project.
We are a fully integrated, self-managed and self-administered REIT that
has elected to be treated as a REIT for federal income tax purposes. In
general, we are required each year to distribute to our shareholders at least
90% of our net taxable income and to meet certain other requirements
in order to maintain the favorable tax treatment associated with qualifying
as a REIT.
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 producing properties. We also receive income from our real estate
partnership investments and from the management and leasing services
PRI provides.
Our net loss decreased by $113.5 million to a net loss of $13 million for
the year ended December 31, 2019 from a net loss of $126.5 million for
the year ended December 31, 2018. The change in our 2019 results of
operations was primarily due to lower impairment losses in 2019, a gain
on debt extinguishment in 2019, partially offset by a $6.7 million decrease
in same store lease termination revenue and a $7.6 million decrease in
non same store net operating income due to four anchor store closings
during 2018 and 2019 and associated co-tenancy concessions, as well
as a decrease in lease revenue at Exton Square Mall due to the sale of an
outparcel in 2019.
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, 2019, held a 97.5% controlling interest in the
Operating Partnership, and consolidated it for reporting purposes. We
hold our investments in seven of the 25 operating retail properties and the
one development property in our portfolio through unconsolidated part-
nerships 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 2019, 2018 and 2017.
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.
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
2019
Consolidated properties
Unconsolidated properties
Total
2018
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)
9
8
11
10
3
10
71
14
85
43
5
48
400,516
56,030
$14,656
1,481
456,546
$16,137
1,221,433
14,977
$ 7,072
402
1,236,410
$ 7,474
63
8
71
4
–
4
242,742
32,024
$ 9,480
915
274,766
$10,395
265,399
–
$ 1,549
–
265,399
$ 1,549
(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, 2019.
ANCHOR REPLACEMENTS In recent years, through property disposi-
tions, 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 prop-
erty at Woodland Mall and recaptured the Sears premises at Capital City
Mall and Magnolia Mall 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
the Plymouth Meeting Mall in 2017, and executed leases with replacement
tenants for that location in 2018.
During 2019, we re-opened or introduced additional tenants to former
anchor positions at Woodland Mall in Grand Rapids, Michigan, Valley
Mall in Hagerstown, Maryland and Plymouth Meeting Mall, in Plymouth
Meeting, Pennsylvania. We opened Von Maur and Urban Outfitters, on a
site formerly occupied by Sears at Woodland Mall and in-line lease-up con-
tinues. At Valley Mall, we opened Onelife Fitness in February to complete
the former Macy’s redevelopment and during the year we signed a lease
with Dick’s Sporting Goods to occupy the former Sears store at the prop-
erty. Dick’s Sporting Goods is expected to open in the first quarter of 2020.
At Plymouth Meeting Mall, we opened Burlington, Dick’s Sporting Goods,
Edge Fitness and Miller’s Ale House in the former Macy’s location, and
the last tenant, Michael’s, opened in the first quarter of 2020. We opened
Sierra Trading at Moorestown Mall in Moorestown, New Jersey in 2019 and
Michael’s opened in the first quarter of 2020.
Construction is underway to open Burlington in place of a former Sears
at Dartmouth Mall in Dartmouth, Massachusetts. We are also moving for-
ward with several outparcels at Dartmouth Mall resulting from the Sears
recapture and working with large format prospects for space adjacent to
Burlington.
We currently have three vacant anchor positions at Valley View Mall in La
Crosse, Wisconsin and during 2019 an additional anchor, Sears, closed at
Exton Square Mall in Exton, Pennsylvania. In January 2020, the Lord &
Taylor store at Moorestown Mall in Moorestown, New Jersey closed and we
are working with several retail and entertainment prospects to fill the space.
We have been notified by Sears that it plans to close stores at Moorestown
Mall in Moorestown, New Jersey and Jacksonville Mall in Jacksonville,
North Carolina. Sears continues to be financially obligated pursuant to the
leases at these locations.
50 MANAGEMENT’S DISCUSSION AND ANALYSIS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2019 ANNUAL REPORT
51
The table below sets forth information related to our anchor replacement program:
Former
Anchors
GLA
(in ‘000’s)
Date
Closed
Decommission
on Date
Replacement
Tenant(s)
GLA
(in ‘000’s)
Actual/Targeted
Occupancy Date
Property
Completed:
Magnolia Mall
Sears
91
Q1 17
Q2 17
Moorestown Mall
Macy’s
200
Q1 17
Q2 17
Valley Mall
Macy’s
120
Q1 16
Q4 17
Willow Grove Park
Woodland Mall
Bon-Ton
JC Penney
Sears
123
125
313
Q1 18
Q3 17
Q2 17
Q1 18
Q1 18
Q2 17
Plymouth Meeting
Mall
Macy’s(1)
215
Q1 17
Q2 17
In Progress:
Valley mall
Sears
123
Q3 17
Q3 18
Willow Grove Park
JC Penney
see above
Burlington
HomeGoods
Five Below
HomeSense
Five Below
Sierra Trading Post
Michael’s
Tilt Studio
One Life Fitness
Belk
Yard House
Black Rock Bar
& Grille
Von Maur
Urban Outfitters
Small shops
Burlington
Dick’s Sporting
Goods
Miller’s Ale House
Edge Fitness
Michael’s
Dick’s Sporting
Goods
Studio Movie Grille
46
22
8
28
9
19
25
48
70
123
8
9
87
8
13
40
58
8
38
26
59
49
44
Q3 17
Q2 18
Q2 18
Q3 18
Q4 18
Q1 19
Q1 20
Q3 18
Q3 18
Q4 18
Q4 19
Q3 19
Q4 19
Q4 19
Q4 19
Q3 19
Q3 19
Q3 19
Q4 19
Q1 20
Q1 20
Q2 20
Q1 20
Dartmouth mall
Sears
108
Q3 19
Q3 19
Burlington
1)Property is subject to a ground lease.
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 (assuming continued compliance with the financial
covenants thereunder), (ii) obtaining construction loans on specific proj-
ects, (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
contribution 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 $106.0
million as of December 31, 2019.
As of December 31, 2019, we had unaccrued contractual and other com-
mitments related to our capital improvement projects and development
projects at our consolidated and unconsolidated properties of $75.2 mil-
lion, including $33.1 million of commitments related to the redevelopment
of Fashion District Philadelphia, in the form of tenant allowances and
contracts with general service providers and other professional service
providers. We expect to incur approximately $25.0 million in incremental
leasing costs during 2020.
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. In July 2019, the FDP Term Loan was modified to increase the total
maximum potential borrowings from $250.0 million to $350.0 million. A
total of $51.0 million was drawn during the third quarter of 2019 and we
received aggregate distributions of $25.0 million as our share of the draws.
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 2019, 2018 and 2017, 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, undiscounted and
without interest charges, are less than the carrying value of the property.
This estimate takes into consideration factors such as expected future
operating income, trends and prospects, as well as the effects of demand,
competition and other factors.
The determination of undiscounted cash flows requires significant esti-
mates by management, including the expected course of action at the
balance sheet date that would lead to such cash flows. Subsequent
changes in estimated undiscounted cash flows arising from changes
in the anticipated action to be taken with respect to the property could
impact the determination of whether an impairment exists and whether
the effects could materially affect our net income. To the extent estimated
undiscounted cash flows are less than the carrying value of the property,
the loss will be measured as the excess of the carrying amount of the
property over the estimated fair value of the property.
Assessment of our ability to recover certain lease related costs must be
made when we have a reason to believe that the tenant might not be
able to perform under the terms of the lease as originally expected. This
requires us to make estimates as to the recoverability of such costs.
An other-than-temporary impairment of an investment in an unconsoli-
dated joint venture is recognized when the carrying value of the investment
is not considered recoverable based on evaluation of the severity and
duration of the decline in value. To the extent impairment has occurred,
the excess carrying value of the asset over its estimated fair value is
charged to income.
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 partnerships
described in note 3 to our consolidated financial statements and in the
“Overview” section above, (ii) unaccrued contractual commitments related
to our capital improvement and development projects at our consolidated
and unconsolidated properties, and (iii) 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 complete a comprehensive
redevelopment of that property costing not less than $300.0 million within
48 months after commencement of construction, which was March 14,
2016, and has severally guaranteed its 50% share of the FDP Term Loan
(see note 3 to our consolidated financial statements), which currently has
$301.0 million outstanding (our share of which is $150.5 million). If our
Fashion District Philadelphia joint venture were unable to satisfy its obliga-
tions under the FDP Term Loan and we were required to satisfy its payment
obligations under the guarantee, this could have a material impact on our
liquidity and available capital resources. The FDP Term Loan balance will
become due in 2023.
Results of Operations
OVERVIEW Net loss for the year ended December 31, 2019 was $13.0
million, compared to a net loss for the year ended December 31, 2018 of
$126.5 million. The change in our 2019 results of operations was primarily
due to impairment losses in 2018 that did not recur in 2019.
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.
52 MANAGEMENT’S DISCUSSION AND ANALYSIS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2017 ANNUAL REPORT
53
OCCUPANCY The tables below set forth certain occupancy statistics for our retail properties in total and our Core Malls as of December 31, 2019, 2018
and 2017:
Occupancy(1) as of December 31,
Consolidated Properties Unconsolidated Properties Combined(2)
2019
2018
2017
2019
2018
2017
2019
2018
2017
Retail portfolio weighted average:(3)
Total excluding anchors
Total including anchors
Core Malls weighted average:(4)
Total excluding anchors
Total including anchors
92.2 %
92.8 %
93.5 %
94.7 %
94.1 %
96.0 %
89.8 %
91.7 %
90.5 %
92.2 %
92.2 %
93.6 %
91.7 %
92.6 %
92.6 %
92.7 %
93.3 %
95.4 %
93.7 %
96.1 %
94.3 %
96.5 %
94.7 %
96.7 %
86.2 %
90.6 %
88.4 %
92.0 %
90.2 %
93.3 %
92.9%
95.5%
93.6 %
96.0 %
94.2 %
96.3 %
(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 was under redevelopment until it opened in September 2019 and has not yet stabilized.
(4) Core Malls excludes Fashion District Philadelphia, Exton Square Mall, Valley View Mall, Wyoming Valley Mall, power centers and Gloucester Premium Outlets.
From 2018 to 2019, total occupancy for our retail portfolio, including consolidated and unconsolidated properties (and including all tenants irrespective of the
term of their agreement), decreased 10 basis points to 92.6%.
From 2018 to 2019, total occupancy for our Core Malls, including consolidated and unconsolidated properties, decreased 50 basis points to 95.5%.
LEASING ACTIVITY The table below sets forth summary leasing activity information with respect to our properties for the year ended December 31, 2019,
.
including anchor and non-anchor space at consolidated and unconsolidated properties:
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)
Non Anchor
New Leases
Under 10,000 sf
Over 10,000 sf
Total New Leases
Renewal Leases
Under 10,000 sf
Over 10,000 sf
109
6
115
104
14
292,866
103,549
396,415
6,7
10.0
7.6
$ 43.09
19.49
$36.92
—
—
—
$
—
—
—
%
%
—
—
—
—
—
—
$ 12.79
16.77
14.17
235,399
250,555
3.4
3.7
$ 61.74
15.95
$61.91
15.22
$ (0.17 )
(0.3 ) %
0.73 4.8 %
1.7%
5.3%
$ 1.73
0.46
Total Fixed Rent
118
485,954
3.6
$38.13
$37.84
$ 0.29
0.8 %
2.5 % $ 1.06
Percentage in Lieu
73
301,245
2.4
28.12
41.02
(12.90 )
(31.5 )%
—
—
Total Renewal Leases(4)
191
787,199
3.1
$34.30
$39.05
$ (4.75)
(12.2 )%
—
$ 0.74
Total Non Anchor(5)
306
1,183,614
4.6
$35.18
Anchor
New Leases
Renewal Leases
Total
1
8
9
43,840
807,083
10.0
3.7
$ 16.50
3.78
—
$ 4.35
—
(0.57 )
—
(13.1)%
—
—
$ 12.11
—
850,923
4.0
$ 4.44
(1) Initial gross rent renewal spread is computed by comparing the initial rent per square foot in the new lease to the final rent per square foot amount in the expiring lease. For purposes of this
computation, the rent amount includes minimum rent, common area maintenance (“CAM”) reimbursements, estimated real estate tax reimbursements and marketing charges, but excludes
percentage rent. In certain cases, a lower rent amount may be payable for a period of time until specified conditions in the lease are satisfied.(
2)Average renewal spread is computed by comparing the average rent per square foot over the new lease term to the final rent per square foot amount in the expiring lease. For purposes of this
computation, the rent amount includes minimum rent and fixed CAM reimbursements, but excludes pro rata CAM reimbursements, estimated real estate tax reimbursements, marketing charges
and percentage rent.
(3) These leasing costs are presented as annualized costs per square foot and are spread uniformly over the initial lease term.
(4) Includes 3 leases and 64,131 square feet of GLA with respect to tenants whose leases were restructured and extended following a bankruptcy filing. Excluding these leases, the initial gross
rent spreads were -8.7% for all non anchor leases.
(5) Includes 30 leases and 144,384 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 “—NON-GAAP SUPPLEMENTAL
FINANCIAL MEASURES” for further details on our ownership interests in our unconsolidated properties.
See “Item 2. Properties—Retail Lease Expiration Schedule - Anchors” and “Item 2. Properties—Retail Lease Expiration Schedule – Non-Anchors” for
information regarding average minimum rent on expiring leases.
The following table sets forth our results of operations for the years ended December 31, 2019, 2018 and 2017:
(in thousands of dollars)
Results of operations:
Real estate revenue
Property operating expenses
Other income
Depreciation and amortization
General and administrative expenses
Provision for employee separation expenses
Insurance recoveries, net
Project costs and other expenses
Interest expense, net
Gain on debt extinguishment, net
Impairment of assets
Impairment of development land parcel
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
Adjustment to gain on sales of interests in non
operating real estate
For the Year Ended
December 31, 2019
% Change
2018 to 2019
For the Year Ended
December 31, 2018
% Change
For the Year Ended
2017 to 2018 December 31, 2017
$ 334,958
(136,558 )
1,834
(137,784 )
(46,010 )
(3,689 )
4,362
(284 )
(63,987 )
(24,859 )
(1,455 )
(3,562 )
8,289
553
2,744
2,718
(6 )%
3 %
(56 ) %
4 %
20 %
224 %
533 %
(59)%
4 %
N/A
(99) %
N/A
(27 )%
(80 )%
59 %
67 %
$ 358,229
(141,232 )
4,171
(133,116 )
(38,342 )
(1,139 )
689
(693 )
(61,355 )
—
(137,487 )
—
11,375
2,722
1,722
8,126
(1 )%
1 %
(30 )%
3 %
4 %
(12 )%
N/A
(10 )%
5 %
N/A
146 %
N/A
(21 )%
(58) %
(6478 )%
540 %
$ 361,524
(140,305 )
5,966
(128,822 )
(36,736 )
(1,299 )
—
(768 )
(58,430 )
—
(55,793 )
—
14,367
6,567
(27 )
1,270
12
105 %
(223 )
(38 )%
(362 )
Net loss
$ (13,000 )
(90) %
$ (126,503 )
285 %
$ (32,848 )
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 Effective January 1, 2019, we adopted Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) (“ASC 842”) and
related guidance using the optional transition method and elected to apply the provisions of the standard as of the adoption date rather than the earliest
date presented. Prior period amounts were not restated. Since we adopted the practical expedient in ASC 842, which allows us to avoid separating lease
(minimum rent) and non-lease rental income (common area maintenance and real estate tax reimbursements), all rental income earned pursuant to tenant
leases is reflected as one line, “Lease revenue,” in the consolidated statement of operations. Utility reimbursements are presented separately in “Expense
reimbursements.” We review the collectability of both billed and unbilled lease revenues each reporting period, taking into consideration the tenant’s pay-
ment history, credit profile and other factors, including its operating performance. For any tenant receivable balances deemed to be uncollectible, under ASC
842 we record an offset for credit losses directly to Lease revenue in the consolidated statement of operations. Previously, under ASC 840, uncollectible
tenants’ receivables were reported in Other property operating expenses in the consolidated statement of operations.
The following table reports the breakdown of real estate revenues based on the terms of the lease contracts for the years ended December 31, 2019, 2018 and 2017:
(in thousand of dollars)
Contractual lease payments:
Base rent
CAM reimbursement income
Real estate tax income
Percentage rent
Lease termination revenue
Less: credit losses
Lease revenue
Expense reimbursements
Other real estate revenue
Total real estate revenue
For the Year Ended December 31,
2019
2018
2017
$ 218,819
43,874
36,243
4,704
1,444
305,084
(2,773)
302,311
19,979
12,668
$ 226,609
45,106
40,095
4,291
8,729
324,830
—
$ 230,898
48,751
38,235
4,366
2,760
325,010
—
324,830
21,322
12,077
325,010
22,468
14,046
$ 334,958
$ 358,229
$ 361,524
54 MANAGEMENT’S DISCUSSION AND ANALYSIS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2019 ANNUAL REPORT
55
REAL ESTATE REVENUE Real estate revenue decreased by $23.3 mil-
lion, or 6%, in 2019 as compared to 2018, primarily due to:
n
n
n
n
n
n
n
n
n
n
a decrease of $6.7 million in same store lease termination revenue,
including $8.1 million from the termination of leases with three tenants
during 2018, partially offset by $1.2 million received from three tenants
during 2019;
a decrease of $6.1 million at non-same store properties Valley View Mall
and Exton Square Mall due to three anchor store closings during 2018
and 2019 and associated co-tenancy concessions, as well as a decrease
in lease revenue at Exton Square Mall due to the sale of an outparcel
during the three months ended June 30, 2019;
a decrease of $4.5 million at Wyoming Valley Mall, which was conveyed
to the lender of the mortgage loan secured by Wyoming Valley Mall on
September 26, 2019;
an increase of $2.5 million in same store credit losses as a result of the
adoption of ASC 842. Under ASC 840, such amounts were included in
other property operating expenses and were $2.1 million during 2018;
a decrease of $2.4 million in same store real estate tax reimbursements
due to 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, par-
tially offset by an increase in real estate tax expense (see “—Property
Operating Expenses”);
a decrease of $0.7 million in same store tenant utility reimbursements
due to a combination of lower tenant usage and lower occupancy at
some properties;
a decrease of $0.4 million in same store common area expense reim-
bursements, including an increase of $2.5 million associated with the
straight line recognition of fixed common area expense reimbursements
effective January 1, 2019 in accordance with ASC 842. Excluding the
impact of the straight line adjustment, same store common area reim-
bursements decreased by $2.9 million due to 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;
a decrease of $0.2 million in same store base rent due to a $3.3 million
decrease related to tenant bankruptcies during 2018 and 2019, partially
offset by a $3.1 million increase from net new store openings over the
previous twelve months; and
a decrease in same store partnership marketing revenue of $0.2 million;
partially offset by
an increase of $0.5 million in same store percentage rent, including a
$0.3 million increase from one tenant.
Real estate revenue decreased by $3.3 million, or 1%, in 2018 as com-
pared to 2017, primarily due to:
n
n
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;
a decrease of $0.9 million in same store partnership marketing revenue;
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
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
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.
PROPERTY OPERATING EXPENSES Property operating expenses
decreased by $4.7 million, or 3%, in 2019 as compared to 2018, pri-
marily due to:
n
n
n
n
n
n
n
a decrease of $2.1 million in same store credit losses as a result of the
adoption of ASC 842. Under ASC 840, such amounts were included in
other property operating expenses and were $2.1 million during 2018;
a decrease of $1.7 million at Wyoming Valley Mall, which was conveyed
to the lender of the mortgage loan secured by Wyoming Valley Mall on
September 26, 2019;
a decrease of $1.4 million at non-same store properties Valley View Mall
and Exton Square Mall primarily due to a decrease in real estate tax
expense due to a lower tax assessment, a decrease in tenant electric
expense and a decrease in credit losses as a result of the adoption of
ASC 842. Under ASC 840 such amounts were included in other prop-
erty operating expenses during 2018;
a decrease of $0.7 million in same store marketing expense; and
a decrease of $0.6 million in same store tenant utility expense due to
a combination of lower tenant electric usage and electric rates; partially
offset by
an increase of $1.3 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; and
an increase of $0.5 million in same store common area maintenance
expense, including increases of $0.5 million in loss prevention expense
and $0.2 in insurance expense, partially offset by a $0.2 million
decrease in snow removal expense.
Property operating expenses increased by $0.9 million, or 1%, in 2018 as
compared to 2017, primarily due to:
n
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
n
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
n
n
a decrease of $4.0 million in property operating expenses related to sold
properties; and
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.
GENERAL AND ADMINISTRATIVE EXPENSES General and administra-
tive expenses increased by $7.7 million, or 20%, in 2019 as compared to
2018, primarily due to certain internal leasing and legal costs that were
previously capitalized under ASC 840 now being recorded as period costs
under ASC 842 and included in general and administrative expenses. In
2018, we capitalized $5.2 million of internal leasing and legal salaries and
benefits. No such costs were capitalized in 2019.
General and administrative 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 com-
pensation amortization, as well as an increase in professional fee expense.
INSURANCE RECOVERIES, NET During the year ended December 31,
2019, we recorded net recoveries of approximately $4.4 million. These net
recoveries primarily relate to remediation expenses and business inter-
ruption claims. $0.5 million of the recoveries received relate to business
interruption.
During the year ended December 31, 2018, we recorded net recoveries 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.
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 remedia-
tion efforts were quickly undertaken and the mall was reopened shortly
thereafter. The net insurance proceeds described above primarily relate
to this event.
IMPAIRMENT OF ASSETS During the years ended December 31, 2019,
2018, and 2017, we recorded impairment of assets of $5.0 million, $137.5
million, and $55.8 million, respectively. The assets that incurred impair-
ments and the amount of such impairments are as follows:
(in thousands of dollars)
2019
2018
2017
For the Year Ended December 31,
Gainesville land
Woodland Mall
Exton Square Mall
Wyoming Valley Mall
Valley View Mall
Wiregrass Mall mortgage
note receivable
New Garden Land
Logan Valley Mall
Sunrise land
Other
$ 1,464
2,098
—
—
1,408
$ 2,089
—
73,218
32,177
14,294
$ 1,275
—
—
—
15,521
—
—
—
—
48
8,122
7,567
—
—
20
—
—
38,720
226
51
Total impairment of assets
$5,018
$137,487
$55,793
See note 2 to our consolidated financial statements for a further discussion
of impairment of assets.
INTEREST EXPENSE Interest expense increased by $2.6 million, or 4%,
in 2019 as compared to 2018 due to higher weighted average effective
interest rates (4.31% in 2019 compared to 4.15% in 2018) and a higher
weighted average debt balance ($2,052.7 million in 2019 compared to
$1,624.6 million in 2018), partially offset by higher capitalized interest.
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).
DEPRECIATION AND AMORTIZATION Depreciation and amortization
expense increased by $4.7 million, or 4%, in 2019 as compared to 2018,
primarily due to:
n an increase of $10.8 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 $3.9 million at two properties that have a lower asset base
resulting from impairment charges during 2018; and
n a decrease of $2.2 million at Wyoming Valley Mall due to a lower asset
base resulting from an impairment charge during 2018, as well as the
property being conveyed to the lender of the mortgage loan secured by
the mall on September 26, 2019.
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
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 $1.4 million related to sold properties.
EQUITY IN INCOME OF PARTNERSHIPS Equity in income of partner-
ships decreased by $3.1 million, or 27%, in 2019 as compared to 2018.
This decrease was primarily due to lower lease revenue in 2019 at Same
Store properties.
56 MANAGEMENT’S DISCUSSION AND ANALYSIS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2019 ANNUAL REPORT
57
Equity in income of partnerships decreased by $3.0 million, or 21%,
in 2018 as compared to 2017. This decrease was primarily due to
unamortized below-market lease intangibles written off in 2017 related
to Fashion District Philadelphia, partially offset by a $1.6 million mort-
gage prepayment penalty incurred at Lehigh Valley Mall in 2017 that
did not recur.
GAINS ON SALE OF REAL ESTATE BY EQUITY METHOD INVESTEE
Gain on sale of real estate by equity method investee was $0.5 million in
2019, which resulted from our 25% share of a $2.0 million gain on the
sale of a land parcel at Gloucester Premium Outlets in Blackwood, New
Jersey recorded by a partnership in which we hold a 25% ownership
interest.
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% own-
ership interest.
Gain on sale of real estate by equity method investee was $6.5 million
in 2017, which resulted from out 50% share of $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% own-
ership interest.
GAIN (LOSS) ON SALES OF REAL ESTATE, NET OF ADJUSTMENTS
TO GAIN ON SALES Gain on sales of real estate was $2.8 million in
2019, which was primarily due to a $1.3 million gain on the sale of a
Whole Foods store located on a parcel adjacent to Exton Square Mall,
a $0.2 million gain on the sale of an undeveloped land parcel located
in New Garden Township, Pennsylvania, and a $1.2 million gain on the
sale of an outparcel located at Valley View Mall in La Crosse, Wisconsin.
Gain on sales of real estate was $1.5 million in 2018, which was pri-
marily 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.
Loss on sale of real estate in 2017 was $0.4 million, which was pri-
marily due to adjustments to gains of sales from proper
-
ties sold in prior periods.
GAIN (LOSS) ON SALES OF REAL ESTATE, NET OF ADJUSTMENTS
TO GAIN ON SALES Gain on sales of non-operating real estate was
$2.7 million in 2019, which was primarily due to a $1.9 million gain
from the sale of two parcels adjacent to Capital City Mall in Camp Hill,
Pennsylvania and a $0.7 million gain from the sale of a parcel adjacent
to Magnolia Mall in Florence, South Carolina.
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.
NON-GAAP SUPPLEMENTAL FINANCIAL MEASURES
OVERVIEW The preceding discussion analyzes our financial condi-
tion and results of operations in accordance with generally accepted
accounting principles, or GAAP, for the periods presented. We also use
Net Operating Income (“NOI”) and Funds from Operations (“FFO”)
which are non-GAAP financial measures, to supplement our analysis
and discussion of our operating performance:
n
n
We believe that NOI is helpful to management and investors as a measure
of operating performance because it is an indicator of the return on property
investment and provides a method of comparing property performance over
time. 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 differen-
tiate 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 unconsol-
idated 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 mea-
sure of operating performance because it excludes various items included in
net income that do not relate to or are not indicative of operating performance,
such as gains on sales of operating real estate and depreciation and amor-
tization of real estate, among others. In addition to FFO and FFO per diluted
share and OP Unit, when applicable, we also present FFO, as adjusted and
FFO per diluted share and OP Unit, as adjusted, which we believe is helpful
to management and investors because they adjust FFO to exclude items that
management does not believe are indicative of operating performance, such
as gain on debt extinguishment and insurance recoveries.
n
We use both NOI and FFO, or related terms like Same Store NOI and, when
applicable, Funds From Operations, as adjusted, for determining incentive
compensation amounts under certain of our performance-based executive
compensation programs.
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 measures, such as Same Store NOI,
Non Same Store NOI, NOI attributable to our share of unconsolidated prop-
erties, 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 analyt-
ical tools. They should not be considered 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 distri-
butions. Please see below for a discussion of these non-GAAP measures and
their respective reconciliation to the most directly comparable GAAP measure.
UNCONSOLIDATED PROPERTIES AND PROPORTIONATE FINANCIAL
INFORMATION The non-GAAP financial measures presented below incorpo-
rate financial information attributable to our share of unconsolidated properties.
This proportionate financial information is non-GAAP financial information, but
we believe that it is helpful information because it reflects the pro rata contri-
bution from our unconsolidated properties that are owned through investments
accounted for under GAAP using the equity method of accounting. Under such
method, earnings from these unconsolidated partnerships are recorded in our
statements of operations prepared in accordance with GAAP under the caption
entitled “Equity in income of partnerships.”
To derive the proportionate financial information reflected in the tables below
as “unconsolidated,” we multiplied the percentage of our economic interest in
each partnership on a property-by-property basis by each line item. Under the
partnership agreements relating to our current unconsolidated partnerships
with third parties, we own a 25% to 50% economic interest in such partner-
ships, 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 nec-
essarily 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
Except for two properties that we co-manage with our partner, all of the
other entities are managed on a day-to-day basis by one of our other
partners as the managing general partner in each of the respective
partnerships. In the case of the co-managed properties, all decisions in
the ordinary course of business are made jointly.
The managing general partner is responsible for establishing the operating
and capital decisions of the partnership, including budgets, in the ordinary
course of business.
All major decisions of each partnership, such as the sale, refinancing,
expansion or rehabilitation of the property, require the approval of all part-
ners.
n
Voting rights and the sharing of profits and losses are generally in propor-
tion 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 to 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.”
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 sepa-
ration expenses, interest expense, depreciation and amortization, insurance
recoveries, gain/loss on debt extinguishment, impairment of assets, gains
on sales of real estate by equity method investees, gain on sale of non oper-
ating real estate, gain/loss 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, under
redevelopment, or designated as non-core during the periods presented. In
2018, Wyoming Valley Mall was designated as non-core and subsequently
conveyed to the lender of the mortgage loan secured by that property in
2019. In 2019, Exton Square Mall and Valley View Mall were designated as
non-core and are excluded from Same Store NOI. Non Same Store NOI is
calculated using the retail properties excluded from the calculation of Same
Store NOI.
The table below reconciles net income (loss) to NOI of our consolidated
properties for the years ended 2019, 2018 and 2017:
(in thousands of dollars)
2019
2018
2017
For the Year Ended December 31,
Net loss
Other income
Depreciation and amortization
General and administrative
expenses
Provision for employee
separation expenses
Project costs and other expenses
Insurance recoveries, net
Interest expense, net
Gain on debt extinguishment
Impairment of assets
Impairment of development
land parcel
Equity in income of Partnerships
Gain on sales of real estate by
equity method investee
Gains (losses) on sales of
interests in real estate
Gains on sales of
non-operating real estate
$ (13,000 ) $ (126,503 )
(4,171 )
133,116
(1,834 )
137,784
$ (32,848 )
(5,966 )
128,822
46,010
38,342
36,736
3,689
284
(4,362 )
63,987
(24,859 )
1,455
1,139
693
(689 )
61,355
—
137,487
1,299
768
—
58,430
—
55,793
3,562
(8,289 )
—
(11,375 )
—
(14,367 )
(553 )
(2,772 )
(6,539 )
(2,744 )
(1,525 )
361
(2,718 )
(8,100)
(1,270 )
For further information regarding our unconsolidated partnerships, see note
3 to our consolidated financial statements.
Net operating income from
consolidated properties
$198,412
$ 216,997
$ 221,219
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 revenue
and property operating expenses of our unconsolidated partnership invest-
ments. 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 oper-
ating 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 manage-
ment and investors as a measure of operating performance because it is
an indicator of the return on property investment, and provides a method
The table below reconciles equity in income of partnerships to NOI of our
share of unconsolidated properties for the years ended 2019, 2018 and
2017:
For the Year Ended December 31,
(in thousands of dollars)
2019
2018
2017
Equity in income of
partnerships
Other income
Depreciation and amortization
Interest and other expenses
Net operating income from
equity method investments
at ownership share
$ 8,289
(76 )
9,874
11,243
$ 11,375
(82 )
8,612
10,828
$ 14,367
(594 )
10,974
12,013
$29,330
$ 30,733
$36,760
58 MANAGEMENT’S DISCUSSION AND ANALYSIS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2019 ANNUAL REPORT
59
The table below presents total NOI and total NOI excluding lease terminations for the years ended December 31, 2019 and 2018:
(in thousands of dollars)
2019
2018
2019
2018
2019
2018
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
$ 185,874 $196,836
$ 12,526 $ 20,161
$ 198,400 $ 216,997
28,597
30,161
732
572
29,329
30,733
$ 214,471 $226,997
8,641
1,531
$13,258 $20,733
577
18
$227,729 $247,730
9,218
1,549
$212,940 $218,356
$13,240 $20,156
$226,180 $238,512
Total NOI decreased by $20.0 million, or 8.1%, in 2019 as compared to 2018. NOI from Non Same Store properties decreased by $7.5 million. This decrease
was primarily due to the conveyance of Wyoming Valley Mall and operating results at non-core properties. NOI from Same Store properties decreased by
$12.5 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, 2018 and 2017:
Same Store
Non Same Store Total (non-GAAP)
(in thousands of dollars)
2018
2017
2018
2017
2018
2017
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
9,218
257,979
3,227
$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 dis-
cussed 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 (i) depreciation and amor-
tization of real estate, (ii) gains and losses on sales of certain real estate
assets, (iii) gains and losses from change in control and (iv) impairment
write-downs of certain real estate assets and investments in entities when
the impairment is directly attributable to decreases in the value of depre-
ciable real estate held by the entity. 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 defini-
tion 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-
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.
When applicable, 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,
2019, 2018 and 2017, respectively, to show the effect of such items as
gain or loss on debt extinguishment (including accelerated amortization of
financing costs), impairment of assets, provision for employee separation
expense and insurance recoveries or losses, net, loss on redemption of
preferred shares and loss on hedge ineffectiveness 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 performance, such as gains on sales of operating real estate and depreciation and amortization of real
estate, among others. We believe that Funds From Operations, as adjusted, is helpful to management and investors as a measure of operating performance
because it adjusts FFO to exclude items that management does not believe are indicative of our operating performance, such as gain or loss on debt extin-
guishment (including accelerated amortization of financing costs), impairment of assets, provision for employee separation expense and insurance recoveries
or losses, net, 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, 2019, 2018 and 2017:
$ (13,000)
136,422
9,874
—
(2,756 )
1,456
(27,375 )
—
104,621
—
3,689
(4,362 )
(24,859)
—
3,562
(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
Gain (loss) on debt extinguishment
Loss on redemption of preferred shares
Impairment of development land parcel
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
2019
% Change
2018 to 2019
For the Year Ended December 31,
% Change
2017 to 2018
2018
$ (126,503)
2017
$ (32,848 )
131,694
8,612
(2,772 )
(1,525 )
129,365
(27,375 )
—
111,496
8,122
1,139
(689)
363
—
—
127,327
10,974
(6,539 )
361
55,793
(27,845 )
(4,103 )
123,120
—
1,299
—
1,557
4,103
—
(9.4 %)
(6.2 %)
$ 82,651
(31.4% ) $ 120,431
(7.4%)
$ 130,079
$ 1.33
(7.0%)
$ 1.43
(9.5%)
$ 1.58
$ 1.05
(32.0%)
$ 1.54
(12.6%)
$ 1.67
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
75,221
3,221
453
78,895
69,749
8,273
203
78,225
69,364
8,297
93
77,754
FFO was $104.6 million for 2019, a decrease of $6.9 million, or 6.2%, com-
pared to $111.5 million for 2018. This decrease was primarily due to:
n a $12.5 million decrease in Same Store NOI primarily due to tenant bankruptcies
and a $7.1 million decrease in lease termination revenue;
n a $7.5 million decrease in Non Same Store NOI primarily due to three anchor
store closings during 2018 and 2019 and associated co-tenancy concessions,
as well as a decrease in lease revenue at Exton Square Mall due to the sale of an
outparcel in 2019 and the conveyance of Wyoming Valley Mall;
n a $7.7 million increase in general and administrative expense primarily due to the
implementation of ASC 842;
n a $4.8 million decrease in gains on non-operating real estate;
n a $2.6 million increase in net interest expense;
n a $2.6 million increase in provision for employee separation expenses;
n a $2.3 million decrease in other income; and
n a $3.6 million increase in impairment of development land parcels; partially offset
by
60 MANAGEMENT’S DISCUSSION AND ANALYSIS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2019 ANNUAL REPORT
61
n a $24.9 million net gain on debt extinguishment;
n a $8.1 million impairment on a mortgage loan receivable asset in 2018 that did
not recur in 2019; and
n a $4.4 million increase in insurance proceeds, net.$1.05
FFO per diluted share and OP Unit decreased $(0.10) per share to $1.33
per share for 2019, compared to $1.43 per share for 2018 due to the fac-
tors noted above and higher share count in the 2018 period.
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:
n
a $11.0 million decrease in Non Same Store NOI primarily due to prop-
erties sold; and
n a $8.1 million impairment on a mortgage loan receivable asset; partially
offset by
n a $4.1 million loss on preferred share redemption in 2017;
n a $1.7 million decrease in interest expense; and
n a $0.8 million increase in Same Store NOI.I.
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.
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
discussed in the section entitled “Item 1A. Risk Factors.” We do not intend
to update or revise any forward-looking statements about our liquidity and
capital resources to reflect new information, future events or otherwise.
CAPITAL RESOURCES We currently expect to meet our short-term liquidity
requirements, 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. See “Identical covenants and common provisions con-
tained in the Credit Agreements” below for covenant information. We expect
to spend approximately $75.2 million related to our capital improvements and
development projects and an additional $25.0 million in incremental leasing
costs for these redevelopment and development projects. 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 2019 were $94.1 million, based on distributions of $1.8436 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 2020, we have
announced a distribution of $0.21 per common share and OP Unit.
In December 2019, 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.
62 MANAGEMENT’S DISCUSSION AND ANALYSIS
During 2019, we raised capital from a number of sources, including proceeds
of $50.4 million from our share of asset sales by us and our unconsolidated
subsidiaries, $148.0 million in distributions from the proceeds of the Fashion
District Philadelphia Term Loan ($124.0 million and $25.0 million in 2018 and
2019, respectively), and net proceeds of $190.0 million from our revolving
facilities.
We are actively seeking to raise additional capital, including through asset dis-
positions identified through our portfolio property reviews. Disposing of these
properties can enable us to redeploy or recycle our capital to other uses.
During December 2019 and subsequently, we have executed agreements of
sale that are expected to provide an aggregate of up to approximately $312.0
million in proceeds and net liquidity improvement of approximately $200.0
million. These agreements include a sale-leaseback transaction for five prop-
erties, the sale of land parcels for multifamily residential development, the sale
of operating outparcels and the sale of land parcels for hotel development.
Each of the transactions is subject to numerous closing conditions, including
the completion of due diligence and securing of entitlements, and closing of
the transactions cannot be assured or the timing of their completion yet esti-
mated with certainty.
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.
In addition, we are continuing to monitor the outbreak of a novel coro-
navirus (COVID-19) and the related business and travel restrictions and
changes to behavior intended to reduce its spread, and its impact on our
tenants, their supply chains and customers and the retail industry. The
magnitude and duration of the pandemic and its impact on our operations
and liquidity is uncertain as of the date of the Report as this continues to
evolve globally. However, if the outbreak continues on its current trajectory,
such impacts could grow and become material. To the extent that our
tenants and their customers and suppliers continue to be impacted by the
coronavirus outbreak, or by the other risks identified in this Report, this
could materially interrupt our business operations.
We expect to meet certain of our longer-term requirements, such as obli-
gations to fund redevelopment and development projects, certain capital
requirements (including scheduled debt maturities), future property and
portfolio acquisitions, renovations, expansions and other non-recurring
capital improvements, through a variety of capital sources, subject to the
terms and conditions of our Credit Agreements, as further described below.
LIBOR ALTERNATIVE In July 2017, the Financial Conduct Authority
(“FCA”), which is the authority that regulates LIBOR, announced it intends
to stop compelling banks to submit rates for the calculation of LIBOR after
2021. The Alternative Reference Rates Committee (“ARRC”) has identified
the Secured Overnight Financing Rate (“SOFR”) as the rate that represents
best practice as the alternative to USD-LIBOR for use in derivatives and
other financial contracts that are currently indexed to USD-LIBOR. We are
not able to predict when LIBOR will cease to be available or when there will
be sufficient liquidity in the SOFR markets. Any changes adopted by FCA
or other governing bodies in the method used for determining LIBOR may
result in a sudden or prolonged increase or decrease in reported LIBOR.
If that were to occur, our interest payments could change, perhaps sub-
stantially. In addition, uncertainty about the extent and manner of future
changes may result in interest rates and/or payments that are higher or
lower than if LIBOR were to remain available in its current form.
We have material contracts that are indexed to LIBOR and are monitoring
and evaluating the related risks, which include interest on loans or amounts
received and paid on derivative instruments. These risks arise in connec-
tion with transitioning contracts to a new alternative rate, including any
resulting value transfer that may occur. The value of loans, securities, and
derivative instruments tied to LIBOR could also be affected if LIBOR is
limited or discontinued. For some instruments, the method of transitioning
to an alternative rate may be challenging, as they may require negotiation
with the respective counterparty.
If a contract is not transitioned to an alternative rate and LIBOR is discon-
tinued, the impact on our contracts is likely to vary by contract. If LIBOR
is discontinued or if the methods of calculating LIBOR change from their
current form, interest rates on our current or future indebtedness may be
adversely affected.
While we expect LIBOR to be available in substantially its current form until
the end of 2021, it is possible that LIBOR will become unavailable prior to
that point. This could occur, for example, if a requisite number of banks
decline to make submissions to the LIBOR administrator. In that case, the
risks associated with the transition to an alternative reference rate would be
accelerated and magnified.
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, 2019, we had borrowed $550.0 million under the
Term Loans and $255.0 million under the 2018 Revolving Facility. The
carrying value of the Term Loans on our consolidated balance sheet as of
December 31, 2019 is net of $1.8 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, 2019
was $30.1 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, 2019, we were in compliance with all such financial
covenants. However, we anticipate not meeting certain financial covenants
applicable under the Credit Agreements during 2020. We plan to continue
to work with our lender group to obtain temporary debt covenant relief
through September 2020 and then pursue a longer term financing solution
prior to the expiration of the initial modification. In addition, we plan to exe-
cute the sale-leaseback of certain properties, sell certain real estate assets
and control certain operational costs. Due to the inherent risks, unknown
results and significant uncertainties associated with each of these matters
and the direct correlation between these matters and our ability to satisfy
our financial obligations that may arise over the applicable twelve month
period, we are unable to conclude that it is probable that we will be able to
meet our obligations arising within twelve months of the date of issuance of
these financial statements and continue as a going concern.
As a result, management evaluated whether this was mitigated by our
approved plans and expectations for the applicable period under the
second step of the going concern accounting standard.
Our ability to satisfy obligations under our senior unsecured credit facility
and mortgage loans, maintain compliance with our debt covenants and
fund recurring costs of operations depends primarily on management’s
ability to obtain relief from the lender group in regards to debt covenants,
execute the sale-leaseback of certain properties, complete the sale of
certain real estate assets which will provide cash from those sales, and
continue to control operational costs. While controlling operational costs is
within management’s control to some extent, executing the sale-leaseback
transactions, selling real estate assets, and obtaining relief from the lender
group through modified debt covenant requirements involve performance
by third parties and therefore cannot be considered probable of occurring.
In particular, as of the date of the filing of this Annual Report on Form 10-K,
we are in active discussions with the banks participating in our credit facili-
ties to modify the terms of the Credit Agreements and obtain debt covenant
relief. See “Item 1A. Risk Factors – Risks Related to our Indebtedness and
Our Financing – If we are unable to comply with the covenants in our credit
agreements, we might be adversely affected.” and “Item 1A. Risk Factors
– Risks Related to our Indebtedness and Our Financing – We have deter-
mined that there is substantial doubt about our ability to continue as a going
concern within.”
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.
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2019 ANNUAL REPORT
63
MORTGAGE LOAN ACTIVITY—CONSOLIDATED PROPERTIES The following table presents the mortgage loans we have entered into or extended since
January 1, 2017 related to our consolidated properties:
CONTRACTUAL OBLIGATIONS The following table presents our consolidated aggregate contractual obligations as of December 31, 2019 for the periods
presented:
Financing Date
2018 Activity:
January
February
Property
Francis Scott Key Mall(1)
Viewmont Mall(2)
Amount Financed
or Extended
(in millions of dollars)
Stated Interest Rate
Maturity
$ 68.5
$ 10.2
LIBOR plus 2.60%
LIBOR Plus 2.35%
January 2022
March 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.
We 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 $72.8 million as of September 26, 2019. Our subsidiary that was the borrower under the loan also received a notice of default on the loan from
the lender, dated December 14, 2018. The loan was subject to a cash sweep arrangement as a result of an anchor tenant trigger event. We had entered into
an agreement with the lender to jointly market the property for sale for a stipulated period of time. The property did not sell and we conveyed the property
to the lender by deed in lieu of foreclosure on September 26, 2019.
In April 2019, we received a notice from the servicer of the Cumberland Mall mortgage of a cash sweep event due to the failure of an anchor tenant to renew
for a full term. We satisfied this requirement in August 2019.
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.
MORTGAGE LOANS Our mortgage loans, which are secured by ten of our consolidated properties, are due in installments over various terms extending to
the year 2025. Seven 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 4.08% at December 31, 2019. Three of our mortgage loans bear interest at variable rates and had a weighted average interest rate of 3.94% at December
31, 2019. The weighted average interest rate of all consolidated mortgage loans was 4.04% at December 31, 2019. Mortgage loans for properties owned
by unconsolidated partnerships are accounted for in “Investments in partnerships, at equity” and “Distributions in excess of partnership investments,” and
are not included in the table below.
The following table outlines the timing of principal payments and balloon payments pursuant to the terms of our mortgage loans on our consolidated prop-
erties as of December 31, 2019:
(in thousands of dollars)
Mortgage loans
Term Loans
2018 Revolving Facility
Interest on indebtedness(1)
Operating leases
Ground leases
Development and
Total
2020
2021-2022
2023-2024
Thereafter
$ 901,565
550,000
255,000
192,318
4,328
54,889
$ 43,427
—
—
69,038
688
1,549
$ 576,098
250,000
255,000
94,704
1,949
3,319
$ 66,288
300,000
—
22,195
1,691
3,168
$ 215,752
—
—
6,381
—
46,853
redevelopment commitments(2)
75,224
73,306
1,918
—
—
Total
$2,033,324
$188,008
$1,182,988
$393,342
$268,986
(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 obligations related to Fashion District Philadelphia, which
opened in September 2019) will be made prior to December 31, 2020, 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. As
of December 31, 2019, we expect to meet this obligation.
MORTGAGE LOAN ACTIVITY—UNCONSOLIDATED PROPERTIES The following table presents the mortgage loans secured by our unconsolidated prop-
erties entered into since January 1, 2017:
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
Payments by Period
is $100.0 million.
(in thousands of dollars)
Total
2020
2021
2022
2023-2024
Thereafter
Consolidated mortgage loans
Principal payments
Balloon payments
$ 64,985
836,580
$ 16,266
27,161
$ 17,862
188,785
$ 13,462
355,989
$ 12,989
53,299
$ 4,406
211,346
Total consolidated mortgage loans
$ 901,565
$ 43,427
$206,647
$369,451
$66,288
$215,752
Less: Unamortized debt issuance costs
1,812
Carrying value of mortgage notes payable
$ 899,753
(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.
64 MANAGEMENT’S DISCUSSION AND ANALYSIS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2019 ANNUAL REPORT
65
INTEREST RATE DERIVATIVE AGREEMENTS As of December 31,
2019, we had interest rate swap agreements outstanding with a weighted
average base interest rate of 1.85% on a notional amount of $795.6 mil-
lion, maturing on various dates through May 2023, and forward starting
interest rate swap agreements with a weighted average base interest rate
of 2.75% on a notional amount of $100.0 million, with effective dates
in 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, 2019, we
considered these interest rate swap agreements to be highly effective as
cash flow hedges.
As of December 31, 2019, 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 $13.1 million. If
we had breached any of the default provisions in these agreements as of
December 31, 2019, we might have been required to settle our obliga-
tions under the agreements at their termination value (including accrued
interest) of $12 million. We had not breached any of these provisions as
of December 31, 2019.
The carrying amount of the associated assets are recorded in “Deferred
costs and other assets,” liabilities are reflected in “Fair value of deriva-
tive 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 $111.4 million for 2019
compared to $134.9 million for 2018 and $142.1 million for 2017.
The decrease in net cash provided by operating activities in 2019 is pri-
marily due to dilution from sales of operating properties in 2018, partially
offset by changes in working capital, distributions from partnerships, and
other items. 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.
Cash flows used in investing activities were $131.4 million for 2019, com-
pared to $41.6 million for 2018 and $105.4 million for 2017.
Investing activities in 2019 included investment in construction in progress
of $113.8 million, investments in partnerships of $72.9 million (primarily at
Fashion District Philadelphia) and real estate improvements of $34.3 mil-
lion (primarily related to capital improvements at our properties, including
tenant allowances), partially offset by $50.4 million of proceeds from land
and outparcel sales, and $25.0 million of distributions from the FDP Term
Loan.
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.
Cash flows provided by financing activities were $7.1 million for 2019 com-
pared to cash flows used in financing activities of $94.8 million for 2018
and cash flows used in financing activities of $32.6 million for 2017.
Cash flows provided by financing activities for 2019 included aggregate
dividends and distributions of $94.2 million and principal installments on
mortgage loans of $17.9 million, offset by $190.0 million of net borrowings
on our 2013 Revolving Facility.
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.
See note 1 to our consolidated financial statements for details regarding
costs capitalized during 2019 and 2018.
Commitments
As of December 31, 2019, we had unaccrued contractual and other
commitments related to our capital improvement projects and develop-
ment projects of $75.2 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. As of
December 31, 2019, we expect to meet this obligation.
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 over our three year policy term. See
our Annual Report on Form 10-K for the year ending December 31, 2019
in the section entitled “Item 1A. Risk Factors—We might incur costs to
comply with environmental laws, which could have an adverse effect on
our results of operations.”
Competition And Tenant Credit Risk
Competition in the retail real estate market is intense. We compete with
other public and private retail real estate companies, including companies
that own or manage malls, power centers, strip centers, lifestyle centers,
factory outlet centers, theme/festival centers and community centers, as
well as other commercial real estate developers and real estate owners,
particularly those with properties near our properties, on the basis of sev-
eral factors, including location and rent charged. We compete with these
companies to attract customers to our properties, as well as to attract
anchor and non-anchor store and other tenants. We also compete to
acquire land for new site development or to acquire parcels or properties
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 significant
to us than the bankruptcy or store closings of other tenants. See “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 debt-
or-in-possession financing, which has decreased the likelihood that such
retailers will emerge from bankruptcy protection and has limited their alter-
natives.
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 November/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.
66 MANAGEMENT’S DISCUSSION AND ANALYSIS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2019 ANNUAL REPORT
67
n our substantial debt and the liquidation preference of our preferred
shares and our high leverage ratio and our ability to remain in compli-
ance with our financial covenants under our debt facilities;
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, 2019 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.
Forward Looking Statements
This Annual Report for the year ended December 31, 2019, 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;
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, 2019, our consolidated debt portfolio consisted of $899.8 million of fixed
and variable rate mortgage loans (net of debt issuance costs), $300.0 mil-
lion borrowed under our 2018 Term Loan Facility, which bore interest at a
rate of 3.59% and $250.0 million borrowed under our 2014 7-Year Term
Loan, which bore interest at a rate of 3.59%. As of December 31, 2019,
$255.0 million was outstanding under our 2018 Revolving Facility, which
bore interest at a rate of 3.31%.
Our mortgage loans, which are secured by 10 of our consolidated proper-
ties, are due in installments over various terms extending to October 2025.
Seven 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 4.08%
at December 31, 2019. Three of our mortgage loans bear interest at vari-
able rates, a portion of which has been swapped to fixed rates, and, taking
into consideration the impact of interest rate swaps, had a weighted average
interest rate of 3.94% at December 31, 2019. The weighted average interest
rate of all consolidated mortgage loans was 4.04% at December 31, 2019.
Mortgage loans for properties owned by unconsolidated partnerships are
accounted for in “Investments in partnerships, at equity” and “Distributions
in excess of partnership investments” on the consolidated balance sheets
and are not included in the table below.
Our interest rate risk is monitored using a variety of techniques. The table
below presents the principal amounts of the expected annual maturities due
in the respective years and the weighted average interest rates for the prin-
cipal 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)
$ 41,747
2020
$ 15,745
2021
$302,539
2022
2023
$ 59,883
2024 and thereafter $ 222,156
5.03 % $ 1,680
4.01 % $ 440,902
3.96 % $ 321,912
3.99 % $300,000
4.04 % $ —
3.69%
3.63%
3.26%
3.59%
—%
(1) Based on the weighted average interest rate in effect as of December 31, 2019 and does
not include the effect of our interest rate swap derivative instruments as described below.
As of December 31, 2019 and 2018, we had $1,064.5 million and $876.2
million, respectively, 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 con-
tracts 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, and in some cases have been, 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 of the notes to our audited consolidated
financial statements.
As of December 31, 2019, we had interest rate swap agreements out-
standing with a weighted average base interest rate of 1.85% on a notional
amount of $795.6 million, maturing on various dates through May 2023,
and forward starting interest rate swap agreements with a weighted
average base interest rate of 2.75% on a notional amount of $100.0 mil-
lion, with effective dates in June 2020 and maturity dates in May 2023.
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 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.
Changes in market interest rates have different effects on the fixed and
variable rate 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 port-
folio affects the interest incurred and cash flows, but does not affect the
fair value. The following sensitivity analysis related to our 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, 2019 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 $36.9 million at
December 31, 2019. A 100 basis point decrease in market interest rates
would have resulted in an increase in our net financial instrument position
of $38.3 million at December 31, 2019. Based on the variable rate debt
included in our debt portfolio at December 31, 2019, a 100 basis point
increase in interest rates would have resulted in an additional $2.7 mil-
lion in interest expense annually. A 100 basis point decrease would have
reduced interest incurred by $2.7 million annually.
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 million
in interest expense annually.
Because the information presented above includes only those exposures
that existed as of December 31, 2019, it does not consider changes, expo-
sures or positions which have arisen or 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 fluc-
tuations will depend on the exposures that arise during the period, our
hedging strategies at the time and interest rates.
68 MANAGEMENT’S DISCUSSION AND ANALYSIS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2019 ANNUAL REPORT
69
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 A. 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
MARIO C. VENTRESCA, JR.
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
LISA M. MOST
Executive Vice President
General Counsel and
Chief Compliance Officer
DANIEL M. HERMAN
Senior Vice President
Development
RUDOLPH ALBERTS, JR.
Senior Vice President
Asset Management
MICHAEL A. KHOURI
First Vice President
Leasing
ANTHONY DILORETO
First Vice President
Leasing
MICHAEL A. FENCHAK
First Vice President
Asset Management
VINCE VIZZA
First Vice President
Leasing
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
SEAN LINEHAN
Vice President
Leasing
DAVID MARSHALL
Vice President
Financial Services
EUGENE McCAFFERY
Vice President
Leasing
DANIEL PASCALE
Vice President
Development
JOSHUA SCHRIER
Vice President
Acquisitions
JOSHUA TALLEY
Vice President
Legal
Investor Information
HEADQUARTERS
One Commerce Square
2005 Market Street, Suite 1000,
Philadelphia, PA 19103
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
Faegre 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
One Commerce Square
2005 Market Street, Suite 1000,
Philadelphia, PA 19103
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 27, 2019, he was not aware of any
violation by the Company of the NYSE’s corporate governance listing
standards.
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, 2019.
DISTRIBUTION RECORD
The following table shows the Company’s cash distributions paid for the
periods indicated.
Quarter Ended
March 31
June 30
September 30
December 31
Distributions Paid
per Common Share
2019
$ 0.21
$ 0.21
$ 0.21
$ 0.21
$0.84
2018
$ 0.21
$ 0.21
$ 0.21
$ 0.21
$ 0.84
In February 2020, our Board of Trustees declared a cash dividend of
$0.21 per share payable in March 2020. 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, the terms and conditions of our
credit agreements and other factors that our Board of Trustees deems
relevant.
As of December 31, 2019, there were approximately 1,800 registered
shareholders and 19,000 beneficial holders of record of the Company’s
common shares of beneficial interest. The Company had an aggregate
of approximately 233 employees as of December 31, 2019.
STOCK MARKET
New York Stock Exchange
Common Ticker Symbol: PEI
ANNUAL MEETING
The Annual Meeting will be conducted as a virtual meeting of stockholders
by means of a live webcast at 11AM on Thursday, May 28, 2020.
Shareholders can join our meeting at www.virtualshareholdermeeting.
com/PEI2020
If you experience technical difficulties call:
1-800-586-1548 (U.S. Domestic Toll Free)
1-303-562-9288 (International)
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.
70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2019 ANNUAL REPORT
71