2020ANNUAL REPORT
FORM 10-K
DEAR
FELLOW
SHAREHOLDERS
April 1, 2021
2020 was a year marked by adaptation. We overcame unique
challenges to our business highlighting the resilience of the PREIT
team and the power of our portfolio. We have taken tremendous
steps in dealing with traditional retail issues through our targeted
strategy of dispositions and anchor replacements and, today, boast
a real estate portfolio of bullseye locations in high barrier-to-entry
markets that will stand the test of time.
As we began 2020, we were poised to begin to reap the rewards
of our redevelopment efforts following years of construction and
improving our tenant base. The COVID-19 pandemic changed ev-
erything and our measures of success — including traffic, sales, oc-
cupancy, NOI and leverage — were discarded. We went from oper-
ating a business focused on how many people we could pack in to a
curated event and pivoted to focusing on public health and safety,
polar opposites.
We immediately adapted, organizing around key initiatives that
would one day allow our business to operate again, addressing
new areas of focus including: supporting the essential business
that remained open at our properties and serving as a community
hub for blood and food drives, organizing our teams to focus on
collections, implementing painful but necessary furloughs and
layoffs, preserving liquidity through reduced spending and a con-
certed effort to defer major expenses and obtain forbearance on
mortgages, creating a mall re-opening team focused on safety pro-
tocols and tenant outreach to ensure our properties opened timely
and successfully, proactively reaching out to government officials
seeking various forms of relief and stating our case for re-opening,
innovating new programs to better serve our tenants including con-
tactless pick-up, small surprises, webpages collating resources and
promoting small business and our Park N Play outdoor community
event series, tracking government restrictions as they are put into
ONE
place and change, and developing new holiday procedures in the
face of rising cases across the country, all while developing new
organizational processes to stay on top of these new initiatives.
As we look ahead, we are looking at 5 key points that signal a bright
future:
1
It is clear as a result of the factors accelerated by COVID, that
we are in the real estate business, with an ability to attract a wide
array of uses and deliver a broader customer base to our
properties.
2 Demand is robust from uses far beyond traditional retail —
including life sciences, healthcare, self-storage and apartments.
3 Business will return in a significant way for retailers, restaurants
and entertainment in the brick and mortar format.
4 Quality real estate will thrive into the future and our region-
leading properties are gaining market share as weaker proper-
ties decline.
5 Growth in suburban markets will catalyze demand for our
offerings and for our multifamily and hotel densification efforts.
So far in 2021, we have announced transactions or approvals for
seven non-traditional uses at six properties:
n At Dartmouth Mall, we executed a lease with Aldi for a 21,000
square foot grocery store, further delivering on the promise to
solidify the region’s retail node on our site, expected to open in
Fall 2021.
n At Mall at Prince George’s, we signed a new lease with a 90,000
square foot self-storage facility in space that has never been
fully utilized, delivering a new source of revenue. The facility,
which will open in Q1 2022, will serve the thousands of residents
that have moved into the area in recent years.
TWO
n At Moorestown Mall, we obtained approval for the addition of
over 1,000 multifamily units as part of our effort to ignite our
multifamily densification initiative. We also announced that
Cooper University Health Care, a leading academic health
system in the southern New Jersey and Philadelphia region,
will open a specialty care facility in the former Sears location at
Moorestown Mall occupying over 165,000 square feet. This
addition, along with the apartments and hotel planned for the
site, will further evolve the property’s mix to create a one-stop
hub.
n At Magnolia Mall in Florence, SC, we executed a lease to
replace a JCPenney that vacated earlier this year. Tilt Studios
will open in the Fall and will occupy 100,000 square feet. This full
scale family entertainment facility inclusive of games, rides,
bowling and other family experiences is a first-to-market offer-
ing. Residents of Florence, SC, nearly 70% of which have
children, would have to drive an hour and a half for a similar
experience.
n At Woodland Mall, we executed a lease with LifeHub. This
unique destination is a gathering place for physical, mental,
social, educational, and creative enrichment. The 47,000 square
foot facility will offer classes and interactive enrichment events
that are designed to engage the “whole self” by expanding
members’ personal access to wellness experiences.
n At Plymouth Meeting Mall, we engaged a broker to pursue
our vision to bring a multitude of uses to Plymouth Meeting
Mall. The expectation is to take advantage of the premier
location of the property and robust demand in life sciences in
the Philadelphia market. Greater Philadelphia is one of the
largest life sciences markets by employment and lab inventory
worldwide, owing to the rich concentration of colleges, univer-
sities and top-tier healthcare institutions that have fostered
innovation in biotech R&D.
FOUR
We are confident that we are at the precipice of signifi-
cant brick & mortar performance improvement. We can now
proudly state that our portfolio is comprised solely of first-ring
suburban properties that are experiencing robust demand from
emerging retailers, alternative uses and region-leading destinations
that are outshining the competition and gaining market share.
This opportunity within our portfolio will be aided by a con-
tinued shift in population to the suburbs and we stand to
benefit on multiple
fronts. First, we offer comprehensive
collections of shopping, dining, entertainment, fitness, groceries
and other alternative uses. And second, our Philly and DC market
assets are the ones we have identified for multifamily land sales,
five of which are under contract for over 2,200 units to be devel-
oped, further cementing the walkable community we envisioned.
The end result of all of our work will be a distinguished
portfolio comprised of a diverse group of uses including life
sciences, healthcare, self-storage, grocers and more alongside
5,000 apartments all wrapped around a solid retail core, yielding
quality mixed-use assets that justify improved cap rates.
As our vision is actualized, we fully expect that the valuation of our
portfolio will improve as a result of cap rates reflective of a quality
portfolio with a revenue stream secured by a diversified mix of uses
with investment-grade credit.
We thank all of our stakeholders — PREIT associates, tenants, cus-
tomers, lenders, shareholders and our Trustees — for their support
throughout PREIT’s incredible history.
Joseph F. Coradino
Chairman & CEO
FIVE
TRUSTEES
UPPER ROW (FROM LEFT TO RIGHT)
GEORGE J. ALBURGER jr. (2)(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
Former Chief Executive Officer
Mack-Cali Realty Corp
JOANNE A. EPPS (1)(3)(4) Trustee Since 2018
Executive Vice President and Provost
Temple University
MARK PASQUERILLA (1)(3) Trustee Since 2003
President
Pasquerilla Enterprises, LP
LOWER ROW (FROM LEFT TO RIGHT)
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
Certain changes to committee chairs are contemplated to come
into effect at the annual meeting.
OFFICERS
JOSEPH F. CORADINO
Chief Executive Officer
MARIO C. VENTRESCA, JR.
Executive Vice President
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
Kenneth L. Brownstein
Vice President
Financial Planning and Analysis
PAULA CHARLES
Vice President
Leasing
JOHANNA DIDIO
Vice President
Legal
BRADFORD HUGHART
Vice President
Information Technology
SEAN LINEHAN
Vice President
Leasing
EUGENE McCAFFERY
Vice President
Leasing
DANIEL PASCALE
Vice President
Development
JOSHUA SCHRIER
Vice President
Acquisitions
Sathana Semonsky
Vice President
Chief Accounting Officer
JOSHUA TALLEY
First Vice President
Legal
David Zamichieli
Vice President
Property Accounting
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, share-
holder 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
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 statements 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
16,2020, 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, 2020.
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 27, 2021.
Shareholders can join our meeting at
www.virtualshareholdermeeting.com/PEI2021
If you experience technical difficulties call:
1-800-586-1548 (U.S. Domestic Toll Free)
1-303-562-9288 (International)
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.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Fiscal Year Ended December 31, 2020
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission File No. 1-6300
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
(Exact name of Registrant as specified in its charter)
Pennsylvania
(State or other jurisdiction of
incorporation or organization)
One Commerce Square
2005 Market Street, Suite 1000
Philadelphia, Pennsylvania
(Address of principal executive offices)
23-6216339
(IRS Employer
Identification No.)
19103
(Zip Code)
Registrant’s telephone number, including area code: (215) 875-0700
Title of each class
Shares of Beneficial Interest, par value $1.00 per share
Series B Preferred Shares, par value $0.01 per share
Series C Preferred Shares, par value $0.01 per share
Series D Preferred Shares, par value $0.01 per share
Securities Registered Pursuant to Section 12(b) of the Act:
Trading
Symbol(s)
PEI
PEIPrB
PEIPrC
PEIPrD
Securities Registered Pursuant to Section 12(g) of the Act: None
Name of each exchange on which registered
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No ☒
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☒
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during
the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or emerging growth company. See
the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
☐
☐
Accelerated filer
Smaller reporting company
Emerging growth company
☒
☒
☐
If an emerging growth company, indicate by check mark if the registrant has elected to not use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting
under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value, as of June 30, 2020, of the shares of beneficial interest, par value $1.00 per share, of the Registrant held by non-affiliates of the Registrant was
approximately $103.4 million. (Aggregate market value is estimated solely for the purposes of this report and shall not be construed as an admission for the purposes of determining
affiliate status.)
Indicate by check mark whether the Registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent
to the distribution of securities under a plan confirmed by a court. Yes ☒ No ☐
On March 9, 2021, 79,270,322 shares of beneficial interest, par value $1.00 per share, of the Registrant were outstanding.
Documents Incorporated by Reference
Portions of the Registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission pursuant to regulation 14A relating to its 2021 Annual Meeting of
Shareholders are incorporated by reference in Part III of this Form 10-K.
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2020
TABLE OF CONTENTS
Forward Looking Statements
Summary of Risk Factors
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
Properties
Legal Proceedings
Mine Safety Disclosures
PART I
PART II
Item 5.
Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Item 6.
Item 7.
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
Item 10.
Trustees, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
PART III
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
Item 13.
Certain Relationships and Related Transactions, and Trustee Independence
Item 14.
Principal Accountant Fees and Services
PART IV
Item 15.
Exhibits and Financial Statement Schedules
Item 16.
Form 10-K Summary
Signatures
Financial Statements
Page
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2
5
15
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35
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41
42
42
43
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70
71
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72
72
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73
78
79
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K for the year ended December 31, 2020, together with other statements and information publicly disseminated
by us, contain 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, anticipated events, trends and other matters that are not historical facts. These forward-looking statements reflect our current views
about future events, achievements or results and are subject to risks, uncertainties and changes in circumstances that might cause future events,
achievements or results to differ materially from those expressed or implied by the forward-looking statements. In particular, our business might
be materially and adversely affected by the following:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
the effectiveness of our financial restructuring and any additional strategies that we may employ to address our liquidity and capital
resources in the future;
our ability to achieve forecasted revenue and pro forma leverage ratio and generate free cash flow to further reduce indebtedness;
the COVID-19 global pandemic and the public health and governmental response, which have and may continue to exacerbate many of
the risks listed below;
changes in the retail and real estate industries, including bankruptcies, consolidation and store closings, particularly among anchor
tenants;
current economic conditions, including current high rates of unemployment and its effects on consumer confidence and spending, and
the corresponding effects on tenant business performance, prospects, solvency and leasing decisions;
our inability to collect rent due to the bankruptcy or insolvency of tenants or otherwise;
our ability to maintain and increase property occupancy, sales and rental rates;
increases in operating costs that cannot be passed on to tenants;
the effects of online shopping and other uses of technology on our retail tenants;
risks related to our development and redevelopment activities, including delays, cost overruns and our inability to reach projected
occupancy or rental rates;
social unrest and acts of vandalism or violence at malls, including our properties, or at other similar spaces, and the potential effect on
traffic and sales;
our ability to sell properties that we seek to dispose of or our ability to obtain prices we seek;
potential losses on impairment of certain long-lived assets, such as real estate, including losses that we might be required to record in
connection with any disposition of assets;
our substantial debt and our ability to remain in compliance with our financial covenants under our debt facilities;
our ability to raise capital, including through sales of properties or interests in properties, subject to the terms of our Credit Agreements;
and
•
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 the section entitled “Item 1A. Risk Factors.” We do not intend to update or revise any
forward-looking statements to reflect new information, future events or otherwise.
Except as the context otherwise requires, references in this Annual Report on Form 10-K to “we,” “our,” “us,” the “Company” and “PREIT” refer
to Pennsylvania Real Estate Investment Trust and its subsidiaries, including our operating partnership, PREIT Associates, L.P. References in this
Annual Report on Form 10-K to “PREIT Associates” or to the “Operating Partnership” refer to PREIT Associates, L.P.
1
RISKS RELATED TO OUR BUSINESS AND OUR PROPERTIES
SUMMARY OF RISK FACTORS
• The COVID-19 global pandemic and the public health and governmental response have adversely affected, and will likely continue to
adversely affect, our business, financial condition, liquidity and operating results. The extent and duration of such effects are uncertain,
continuously changing and difficult to predict. Additionally, the future outbreak of any other highly infectious or contagious diseases
may materially and adversely affect our business, financial condition, liquidity and operating results.
• We emerged from bankruptcy on December 10, 2020, which could adversely affect our business and relationships.
• Store closings, leasing and construction delays, lease terminations, tenant financial difficulties and tenant bankruptcies have in the past
and could in the future adversely affect our financial condition and results of operations.
• Changes in the retail industry, particularly among anchor tenant retailers, could adversely affect our results of operations and financial
condition.
• Approximately 36% of our non-anchor leases expire in 2021 or 2022 or are in holdover status, and if we are unable to renew these leases
or re-lease the space covered by these leases on equivalent terms, we might experience reduced occupancy and traffic at our properties
and lower rental revenue, net operating income and cash flows.
• We have identified a material weakness in our internal control over financial reporting which could, if not remediated, adversely affect
our ability to report our financial condition and results of operations in a timely and accurate manner, our liquidity and financial
condition, and our stock price.
• The investments we have made in redeveloping older properties and developing new properties could be subject to delays or other risks
and might not yield the returns we anticipate, which would harm our financial condition and operating results.
• We might be unable to effectively manage any redevelopment and development projects involving a mix of uses, or other unique
aspects, such as a project located in a city rather than a suburb, which could affect our financial condition and results of operations.
• Expense reimbursements are relatively low and might continue to be relatively low. Also, operating expenses may increase in the future,
reducing our cash flows.
• The valuation and accounting treatment of certain long-lived assets, such as real estate, or of intangible assets, such as goodwill, could
result in future asset impairments, which would be recorded as operating losses.
• Conditions in the U.S. economy might adversely affect our cash flows from operations.
• Our retail properties are concentrated in the Eastern United States, particularly in the Mid-Atlantic region, and adverse market conditions
in that region might affect the ability of our tenants to make lease payments and the interest of prospective tenants to enter into leases,
which might reduce the amount of revenue generated by our properties.
• The benefits of our redevelopment of The Gallery at Market East into Fashion District Philadelphia may not be realized as expected and
our financial results could be adversely affected.
• We have invested and may in the future invest in partnerships with third parties to acquire, develop or redevelop properties, and we
might not control the management, redevelopment or disposition of these properties, or we might be exposed to other risks.
• Our business could be harmed if members of our corporate management team terminate their employment with us or otherwise are
unable to continue in their current capacity or we are unable to attract and retain talented employees.
•
If we suffer losses that are not covered by insurance or that are in excess of our insurance coverage limits, we could lose invested capital
and anticipated profits.
• We might incur costs to comply with environmental laws, which could have an adverse effect on our results of operations.
•
Inflation may adversely affect our financial condition and results of operations.
• We face risks associated with, and have experienced, security breaches through cyber attacks. A significant privacy breach or IT system
disruption could adversely affect our business and we might be required to increase our spending on data and system security, which
could adversely affect our financial condition.
• We might not be successful in identifying suitable acquisitions, completing acquisitions, or integrating any properties we acquire, which
might adversely affect our financial condition or results of operations.
RISKS RELATED TO THE REAL ESTATE INDUSTRY
• Online shopping and other uses of technology could affect the business models and viability of retailers, which could, in turn, affect their
demand for retail real estate.
• We are subject to risks that affect the retail real estate environment generally.
2
• The retail real estate industry is highly competitive, and this competition could harm our ability to operate profitably.
• Acts of violence or war or other terrorist activity, including at our properties, could adversely affect our financial condition and results of
operations.
• Social unrest and acts of vandalism or violence could adversely affect our business operations.
• The illiquidity of real estate investments might delay or prevent us from selling properties that we determine no longer meet the strategic
and financial criteria we apply and could significantly affect our ability to respond in a timely manner to adverse changes in the
performance of our properties and harm our financial condition.
RISKS RELATED TO OUR INDEBTEDNESS AND OUR FINANCING
• We have substantial debt and stated value of preferred shares outstanding, which could adversely affect our overall financial health and
our operating flexibility. We require significant cash flows to satisfy our debt service. These obligations may prevent us from using our
cash flows for other purposes. If we are unable to satisfy these obligations, we might default on our debt and our financial condition and
results of operations would be adversely affected.
• The covenants in our Credit Agreements limit our ability to take certain actions, which could adversely affect our business and our
ability to raise capital.
•
If we are unable to comply with the covenants in our Credit Agreements, we might be adversely affected.
• Secured indebtedness exposes us to the possibility of foreclosure, which could result in the loss of our investment in certain of our
subsidiaries or in a property or group of properties or other assets subject to indebtedness.
• We might not be able to refinance our existing obligations or obtain the capital required to finance our activities.
• Payments by our direct and indirect subsidiaries of dividends and distributions to us might be adversely affected by their obligations to
make prior payments to the creditors of these subsidiaries.
• Our hedging arrangements might not be successful in limiting our risk exposure, and we might incur expenses in connection with these
arrangements or their termination that could harm our results of operations or financial condition.
• We are subject to risks associated with increases in interest rates, including in connection with our variable interest rate debt.
• Our actual financial results after emergence from bankruptcy may not be comparable to our historical financial information as a result of
the implementation of the Plan and the transactions contemplated thereby.
RISKS RELATING TO OUR ORGANIZATION AND STRUCTURE
• Our organizational documents contain provisions that might discourage a takeover of us and depress our share price.
• Limited partners of PREIT Associates may vote on certain fundamental changes we propose, which could inhibit a change in control that
might otherwise result in a premium to our shareholders.
• We have, in the past, and might again, in the future, enter into tax protection agreements for the benefit of certain former property
owners, including some limited partners of PREIT Associates, that might affect our ability to sell or refinance some of our properties that
we might otherwise want to sell or refinance, which could harm our financial condition.
RISKS RELATING TO OUR SECURITIES
• We could face adverse consequences as a result of the actions of activist shareholders.
• A few significant shareholders may influence or control the direction of our business, and, if the ownership of our common shares
continues to be concentrated, or becomes more concentrated in the future, it could prevent our other shareholders from influencing
significant corporate decisions.
• Holders of our common shares might have their interest in us diluted by actions we take in the future.
• Many factors, including changes in interest rates and the negative perceptions of the retail sector generally, can have an adverse effect on
the market value of our securities.
• We do not anticipate paying dividends on our shares in the foreseeable future.
•
Individual taxpayers might perceive REIT securities as less desirable relative to the securities of other corporations because of the lower
tax rate on certain dividends from such corporations, to the extent we pay dividends in the future, which might have an adverse effect on
the market value of our securities.
3
• Our common shares could be delisted from the NYSE if we fail to meet applicable continued listing requirements, which could have
materially adverse effects on our business.
• Any additional issuances of preferred shares in the future might adversely affect the earnings per share available to common
shareholders and amounts available to common shareholders for any future payments of dividends.
TAX RISKS
•
If we were to fail to qualify as a REIT, our shareholders would be adversely affected.
• We might be unable to comply with the strict income distribution requirements applicable to REITs, or compliance with such
requirements could adversely affect our financial condition or cause us to forego otherwise attractive opportunities.
• There is a risk of changes in the tax law applicable to REITs or our tenants.
• We could face possible adverse federal, state and local tax audits and changes in state and local tax laws, which might result in an
increase in our tax liability.
4
ITEM 1. BUSINESS.
OVERVIEW
PART I
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 operating properties and one is a development property. The 25 operating
properties include 20 shopping malls and five other retail properties, have a total of 19.8 million square feet and are located in nine states. We and
partnerships in which we hold an interest own 15.4 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 consolidate for financial reporting purposes. These consolidated properties have a
total of 14.9 million square feet, of which we own 11.8 million square feet. The seven operating retail properties that are owned by unconsolidated
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 excluding properties
acquired, disposed of, under redevelopment or designated as a non-core property during the periods presented. Core properties include all
operating retail properties except for Exton Square Mall and Fashion District Philadelphia. Valley View Mall was previously designated as a
non-core property. As discussed further in Notes 2 and 4 to our consolidated financial statements, a foreclosure sale judgment was ordered by the
court after the property operations were assumed by a receiver on behalf of the lender under the mortgage loan secured by Valley View Mall and
we no longer operate the property. “Core Malls” also excludes these properties as well as power centers and Gloucester Premium Outlets.
We have one property in our portfolio that is classified as under development; however, we do not currently have any activity occurring at this
property.
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 (which has since closed in
2020) 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 have opened Philadelphia flagship stores
at the property since its opening in September 2019. Fashion District Philadelphia is owned by our joint venture entity with our joint venture
partner, the Macerich Company (“Macerich”). As of January 1, 2021, Macerich is responsible for the operations of Fashion District Philadelphia.
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.
PREIT’S BUSINESS
We are primarily engaged in the ownership, management, leasing, acquisition, redevelopment, and disposition of shopping malls. In general, our
malls include tenants that are national or regional department stores, large format retailers or other anchors and a diverse mix of national, regional
and local in-line stores offering apparel (women’s, family, teen, children’s, men’s), shoes, eyewear, cards and gifts, jewelry, sporting goods,
home furnishings and personal care items, among other things. In recent years, we have increased the portion of our mall properties that is leased
to non-traditional mall tenants. Approximately 27% of our mall space is committed to non-traditional tenants offering services such as dining and
entertainment, health and wellness, off-price retail and fast fashion.
To enhance the experience for shoppers, most of our malls have restaurants and/or food courts, and some of the malls have multi-screen movie
theaters and other entertainment options, either as part of the mall or on outparcels around the perimeter of the mall property. In addition, many of
our malls have outparcels containing restaurants, banks or other stores. Our malls frequently serve as a central place for community, promotional
and charitable events in their geographic trade areas.
The largest core mall in our retail portfolio is 1.4 million square feet and contains 170 stores, and the smallest core mall is 0.5 million square feet
and contains 79 stores. The other properties in our retail portfolio range from 370,000 to 780,000 square feet.
We derive the substantial majority of our revenue from rent received under leases with tenants for space at retail properties in our real estate
portfolio. In general, our leases require tenants to pay minimum rent, which is a fixed amount specified in the lease, and which is often subject to
scheduled increases during the term of the lease for longer term leases. In 2020, 81% of the new leases that we signed contained scheduled rent
increases, and these increases, which are typically scheduled to occur between two and four times during the term, ranged from 2.0% to 10.0%,
with approximately 92% ranging from 2.0% to 4.0%. In addition or in the alternative, certain tenants are required to pay percentage rent, which
can be either a percentage of their sales revenue that exceeds certain levels specified in their lease agreements, or a percentage of their total sales
revenue.
The majority of our leases also provide that the tenant will reimburse us for certain expenses relating to the property for common area
maintenance (“CAM”), real estate taxes, utilities, insurance and other operating expenses incurred in the operation of the property subject, in
some cases, to certain limitations. The proportion of the expenses for which tenants are responsible was historically related to the tenant’s pro rata
share of space at the property. We have continued to shift the CAM provision in our leases to be a fixed amount, which gives greater predictability
to tenants, and a majority of such revenue is derived from leases specifying fixed CAM reimbursements.
5
Retail real estate industry participants sometimes classify malls based on the average sales per square foot of non-anchor mall tenants occupying
spaces under 10,000 square feet in size, the population and average household income of the trade area and the geographic market, the growth
rates of the population and average household income in the trade area and geographic market, and numerous other factors. Based on these
factors, in general, malls that have high average sales per square foot and are in trade areas with large populations and high household incomes
and/or growth rates are considered Class A malls, malls with average sales per square foot that are in the middle range of population or household
income and/or growth rates are considered Class B malls, and malls with lower average sales and smaller populations and lower household
incomes and/or growth rates are considered Class C malls. Although these classifications are defined differently by different market participants,
in general, most of our malls would be classified as Class A or Class B properties. The classification of a mall can change, and one of the goals of
our current property strategic plans and remerchandising programs is to increase the average sales per square foot of certain of our properties and
correspondingly increase their rental income and cash flows, and thus potentially their class, in order to maximize the value of the property. The
malls that we have sold pursuant to the strategic property disposition program we commenced in 2012 generally have been Class C properties.
BUSINESS STRATEGY
Our primary objective is to maximize the long-term value of the Company for our shareholders. To that end, our business goals are to obtain the
highest possible rental income, tenant sales and occupancy at our properties in order to maximize our cash flows, net operating income, funds
from operations, funds available for distribution to shareholders and other operating measures and results, and ultimately to maximize the values
of our properties.
To achieve this primary goal, we have developed a business strategy focused on increasing the values of our properties, and ultimately of the
Company, which includes:
• Raising capital by monetizing embedded value in the portfolio to enhance our liquidity position and reducing debt and leverage to
improve the balance sheet;
• Selling off non-core properties and underperforming assets;
• Raising the overall level of quality of our portfolio and of individual properties in our portfolio;
•
• Taking steps to position the Company for future growth opportunities.
Improving the operating results of our properties; and
Improving Our Balance Sheet by Reducing Debt and Leverage; Maintaining Liquidity
Leverage. We continue to seek ways to reduce our leverage by improving our operating performance and through a variety of other means
available to us. These means might include selling properties or interests in properties with values in excess of their mortgage loans and applying
any excess proceeds to debt reduction; entering into joint ventures or other partnerships or arrangements involving our contribution of assets; or
through other actions.
Mortgage Loan Refinancings and Repayments. We might pursue opportunities to make favorable changes to individual mortgage loans on our
properties. When we refinance such loans, we might seek a new term, better rates and excess proceeds. An aspect of our approach to debt
financing is that we strive to lengthen and stagger the maturities of our debt obligations in order to better manage our future capital requirements.
We might seek to repay certain mortgage loans in full in order to unencumber the associated properties, which enables us to increase our pool of
unencumbered assets, have greater financial flexibility and obtain additional financing.
Liquidity. As of December 31, 2020, our consolidated balance sheet reflected $43.3 million in cash and cash equivalents. We believe that this
amount and future net cash provided by operations, together with the available credit under the First Lien Revolving Facility (as defined below
and assuming continued compliance with the financial covenants thereunder) and other sources of capital, provide sufficient liquidity to meet our
liquidity requirements in the short term, including for one year from the filing of this Annual Report on Form 10-K.
Capital Recycling. We regularly conduct portfolio property reviews and, if appropriate, we seek to dispose of malls, other retail properties or
outparcels that we do not believe meet the financial and strategic criteria we apply, given economic, market and other circumstances. Disposing of
these properties can enable us to redeploy or recycle our capital to other uses, such as to repay debt, to reinvest in other real estate assets and
development and redevelopment projects, and for other corporate purposes. Along these lines, in 2020 we completed the sale of ten outparcels for
total consideration of $23.1 million. Since we began our disposition program in 2012, we have sold 17 malls, four power centers, two street retail
properties, three office properties and multiple land parcels and other real estate assets for a total of $909.7 million. The proceeds generated from
these sales were reinvested in our existing redevelopment program or used to repay debt. In September 2019, we conveyed Wyoming Valley Mall
to the lender of the mortgage loan secured by the property. In August 2020, we derecognized the assets of Valley View Mall as a result of a court
order assigning a receiver, however, we continue to recognize the mortgage until the property foreclosure sales process is complete. We are
currently under contract to sell five additional land outparcels and expect to close the transactions in 2022 or 2023. We have executed an
agreement of sale for a hotel site at one of our malls that we expect to close in 2021 and are actively marketing two other sites.
We expect to continue to look for opportunities to sell non-core assets, including land parcels, to residential, hotel and office developers at some
of our mall properties.
6
Raising the Overall Level of Quality of Our Portfolio and of Individual Properties in Our Portfolio
Portfolio Actions. We continue to refine our collection of properties to enhance the overall quality of the portfolio. We seek to have a portfolio
that derives most of its Net Operating Income, or “NOI” (a non-GAAP measure; as defined below) from higher productivity properties and from
properties located in major metropolitan markets. We hold ownership interests in 10 properties in the Philadelphia metro area, four properties in
the Washington, D.C. metro area and one property in the Boston-Providence metro area. One method we have used and continue to use for raising
the level of quality of our portfolio is disposing of assets that had certain economic features, such as sales productivity or occupancy levels below
the average for our portfolio and significantly lower expected income due to anchor closures. We currently have one non-core mall (“Non-Core
Malls”), Exton Square Mall, which we designated as a Non-Core Mall in 2018 because we have completed the first phase of a redevelopment with
the opening of Whole Foods and the sale of a land parcel to a multifamily developer as part of our densification effort (as discussed below), and
are continuing to consider the possible inclusion of other non-retail uses on the site. A second Non-Core Mall, Valley View Mall, was
derecognized in the third quarter as a result of a receiver being assigned to manage the property. A third Non-Core Mall, Wyoming Valley Mall,
was conveyed to the lender of the mortgage loan secured by that property in 2019.
Redevelopment. We might also seek to improve particular properties, to increase the potential value of properties in our portfolio, and to maintain
or enhance their competitive positions by redeveloping them. We do so in order to make the properties more attractive to customers and retailers,
which we expect to lead to increases in shopper traffic, sales, occupancy and rental rates. Redevelopments are generally more involved than
strategic property plans or remerchandising programs and require the investment of capital. We give redevelopment priority to properties in our
portfolio that are of a higher quality and where we anticipate the redevelopment can be economically transformative. Our property
redevelopments focus primarily on anchor replacement and remerchandising. We believe these activities will position us to optimize our financial
returns.
Densification. We seek to maximize the value of our retail properties by adding other uses where appropriate. We believe that by incorporating
residential, hotel or office uses into some of our retail properties, we will increase the value of those properties. The addition of other property
types to our sites may provide synergies to both the retail and non-retail uses. The presence of residents, hotel guests or office workers in close
proximity to the retail center may result in additional visits to the retail property We have executed an agreement of sale for a hotel site at one of
our malls that we expect to close in 2021. In 2020, we entered into agreements of sale for the sale of parcels for anticipated multifamily
development at five sites on, or adjacent to, our mall properties.
Since 2014, we, along with our 50/50 joint venture partner, Macerich, have been engaged in a redevelopment of Fashion District Philadelphia
(formerly The Gallery). In connection therewith, we contributed and sold real estate assets to the venture and Macerich acquired its interest in the
venture and real estate from us for $106.8 million in cash. We and Macerich are jointly and severally responsible for a minimum investment in the
project of $300.0 million. Fashion District Philadelphia is in a key location in central Philadelphia, strategically positioned above regional mass
transit, adjacent to the convention center and tourism sites, and amidst numerous offices and residential sites. See below under ‘Financing
Activity’ for a description of our loan secured by the Fashion District Philadelphia properties, which was amended in 2020. Since January 1, 2021,
Macerich is responsible for the operations of Fashion District Philadelphia.
An important aspect of any redevelopment project is its effect on the property and on the tenants and customers during the time that a
redevelopment is taking place. While we might undertake a redevelopment to maximize the long term performance of the property, in the short
term, the operations and performance of the property, as measured by sales, occupancy and NOI, will often be negatively affected. Tenants might
be relocated or closed as space for the redevelopment is aggregated, which affects overall tenant sales and rental rates. As Fashion District
Philadelphia was being redeveloped, occupancy, sales and NOI decreased from their levels prior to the commencement of the redevelopment. We
expect those trends to reverse as the newly constructed space is completed, leased and occupied. On September 19, 2019, Fashion District
Philadelphia, an aggregation of properties spanning three blocks in downtown Philadelphia that were formerly known as Gallery I, Gallery II and
907 Market Street, opened. Joining Century 21 (which subsequently closed in 2020) 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. Fashion District is expected to have additional
tenant openings throughout 2021.
Mall-Specific Plans. We seek to unlock value in our portfolio through a variety of targeted efforts at our properties. We believe that certain of our
properties, including those in trade areas around major cities or those which are leading properties in secondary markets, can benefit from
strategic remerchandising strategies, including, for example, selective re-tenanting of certain spaces in certain properties with higher quality,
better-matched tenants. Based on the demographics of the trade area or the relevant competition, we believe that this subset of properties provides
opportunities for meaningful value creation at the property level. We believe that we can successfully implement particular strategies at these
assets by incorporating in-demand uses such as dining, entertainment and fitness, by adding discount, specialty, fast fashion and native internet
retailer tenants, and by closing, relocating and right-sizing certain existing mall tenants. Some examples of in-demand tenants include Apple,
Urban Outfitters and The Cheesecake Factory. We also continuously work to optimize the match between the demographics of the trade area,
such as the household income level, and the nature and mix of tenants at such properties. We strive to work closely with tenants to enhance their
merchandising opportunities at our properties. We believe that these approaches can attract more national and other tenants to the property and
can lead to higher occupancy and NOI.
Shopper Experiences. In addition to such property-wide remerchandising efforts, we also seek to offer unique shopper experiences at our
properties by having tenants that provide products, services or interactions that are unlike other offerings in the trade area. We seek to add
first-to-market tenants, dining and entertainment options, beauty and fashion purveyors, off-price retail, traditionally online retailers and health
and fitness destinations such as Legoland Discovery Center, Peloton, Ulta, HomeSense, Dave & Buster's, Balsam Hill and the 1776
retail incubator, among others, as well as to provide amenities like children’s play areas and mall shopping smartphone apps.
7
Vacant Anchor Replacements. In recent years, through property dispositions, proactive store recaptures, lease terminations and other activities,
we have made efforts to reduce our risks associated with certain department store concentrations. Since 2012, we have reduced the number of
Sears locations from 27 to 4, the number of Macy’s locations from 25 to 14, and the number of J.C. Penney locations from 29 to 11.
From the beginning of 2018 through December 31, 2020, nine department stores within our core portfolio were recaptured or closed. To date, all
or a significant portion of these former department stores have tenants that either opened, are currently under construction, or have leases that are
executed or near execution.
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. Dick’s Sporting Goods at Valley Mall opened
in the first quarter of 2020. At Plymouth Meeting Mall, we opened Michael’s in the first quarter of 2020. In 2017, we purchased the Macy’s
location at Moorestown Mall in Moorestown, New Jersey and opened HomeSense, Sierra Trading and Michael’s between 2018 and the first
quarter of 2020.
Construction was completed in the first quarter of 2020 giving way to the opening of Burlington in place of a former Sears at Dartmouth Mall in
Dartmouth, Massachusetts. We expect to continue to move forward with several outparcels at Dartmouth Mall resulting from the Sears recapture
and to work with large format prospects for space adjacent to Burlington, but have experienced delays due to the impact of the COVID-19
pandemic.
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. This initiative has slowed down due to the impacts of the COVID-19 pandemic. 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 reasonable 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 availability and continued compliance with the financial covenants thereunder), (ii) obtaining construction loans on
specific projects, (iii) selling properties or interests in properties with values in excess of their mortgage loans (if applicable) and applying the
excess proceeds to fund capital expenditures or for debt reduction, or (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.
Improving the Operating Results of Our Properties
We aim to improve the overall operational performance of our portfolio of properties with a multi-pronged approach.
Occupancy. We continue to work to increase non-anchor and total occupancy in our properties, both of which have been negatively impacted by
the COVID-19 pandemic and tenant bankruptcies. From 2019 to 2020, total occupancy for our retail portfolio including consolidated and
unconsolidated properties (and including all tenants irrespective of the term of their agreement) decreased 450 basis points to 88.1%, and total
occupancy at our malls other than the Non-Core Malls (such other malls, the “Core Malls”) decreased 520 basis points to 90.3%.
In connection with the remerchandising plans at several of our properties, we are seeking or have obtained tenants for new spaces of different
types, such as pads or kiosks. We are also seeking tenants that have not previously been prevalent at our mall properties.
Key Tenants; Mall Leasing. We continue to recruit, and expand our relationships with, certain high profile retailers, and to initiate and expand our
relationships with other quality and first-to-market retailers or concepts. We coordinate closely with tenants on new store locations in an effort to
position our properties for our tenants’ latest concept or store prototype, in order to drive traffic to our malls and stimulate customer spending. We
believe that increasing our occupancy in ways that are tailored to particular properties will be helpful to our leasing efforts and will help increase
rental rates and tenant sales. We have also diversified the mix of tenants within our portfolio, with approximately 27% of our mall space
committed to non traditional tenants offering services such as dining and entertainment, health and wellness, off price retail and fast fashion.
Rental Rates and Releasing Spreads. Although we have been taking steps to seek positive rent spreads as we renew leases and enter into new
leases, during the challenging 2020 operating environment, total renewal spreads decreased 4.2% on all non-anchor leases. As discussed above,
since 2012, we have sold 17 low-productivity or underperforming malls. In 2020, we derecognized the assets of Valley View Mall as the property
was assigned to a receiver. We continue to recognize the mortgage until the property is sold through the foreclosure process. In 2019, we
conveyed Wyoming Valley Mall to the lender of the mortgage secured by the property. We believe that the disposition of these less productive
assets will help improve our negotiating position with retailers with multiple stores in our portfolio (including stores at these properties), and
potentially enable us to obtain higher rental rates from them at our remaining properties.
Specialty Leasing and Partnership Marketing. Some space at our properties might be available for a shorter period of time, pending a lease with a
permanent tenant or in connection with a redevelopment. We strive to manage the use of this space through our specialty leasing function, which
manages the short term leasing of stores and the licensing of income-generating carts and kiosks, with the goal of maximizing the rent we receive
during the period when a space is not subject to a longer term lease.
We also seek to generate ancillary revenue (such as sponsorship marketing revenue and promotional income) from the properties in our portfolio.
We believe that increased efforts in this area can enable us to increase the proportion of net operating income derived from ancillary revenue.
8
Operating Expenses and CAM Reimbursements. Our strategy for improving operating results also includes efforts to control or reduce the costs
of operating our properties. With respect to operating expenses, we have taken steps to manage a significant proportion of them through contracts
with third party vendors for housekeeping and maintenance, security services, landscaping and trash removal. These contracts provide reasonable
control, certainty and predictability. We also seek to contain certain expenses through our active programs for managing utility expense and real
estate taxes. We have taken advantage of opportunities to buy electricity economically in states that have opened their energy markets to
competition, and we expect to continue with this approach. We have instituted a solar energy program at five of our properties, which we expect
will lower our utility expenses and reduce our carbon footprint. We also review the annual tax assessments of our properties and, when
appropriate, pursue appeals.
With respect to CAM reimbursements, we have converted most of our leases to fixed CAM reimbursement, in contrast to the traditional pro-rata
CAM reimbursement. Fixed CAM reimbursement, while shifting some risk to us as landlord, offers tenants increased predictability of their costs,
a decrease in the number of items to be negotiated in a lease thus speeding lease execution, and reduced need for detailed CAM billings,
reconciliations and collections.
Taking Steps to Position the Company for Future Growth Opportunities
We are taking steps designed to position the Company to generate future growth. In connection therewith, we have implemented processes
designed to ensure strong internal discipline in the use, harvesting and recycling of our capital, and these processes will be applied in connection
with proposals to redevelop properties or to reposition properties with a mix of uses, or possibly, in the future, to acquire additional properties.
External Opportunities. Although it is not currently a primary focus, we may continue to seek to acquire, in an opportunistic, selective and
disciplined manner, properties that are well-located, that are in trade areas with growing or stable demographics, that have operating metrics that
are better than or equal to our existing portfolio averages, and that we believe have strong potential for increased cash flows and appreciation in
value if we call upon our relationships with retailers and apply our skills in asset management and redevelopment. We also seek to acquire
additional parcels or properties that are included within, or adjacent to, the properties already in our portfolio, in order to gain greater control over
the merchandising and tenant mix of a property. Taking advantage of any acquisition opportunities would likely involve some use of debt or
equity capital.
We pursue development of retail and mixed use projects that we expect can meet the financial and strategic criteria we apply, given economic,
market and other circumstances. We seek to leverage our skill sets in site selection, entitlement and planning, design, cost estimation and project
management to develop new retail and mixed use properties. We seek properties in trade areas that we believe have sufficient demand, once
developed, to generate cash flows that meet the financial thresholds we establish in the given environment. We manage all aspects of these
undertakings, including market and trade area research, acquisition, preliminary development work, construction and leasing.
Depending on the nature of the acquisition or development opportunity, we might involve a partner or sell land to a qualified third party, including
in connection with projects involving a use other than retail.
In light of the redevelopment and densification opportunities in our existing portfolio, the capital required to complete these investments, and the
limitations under our credit facilities, together with a limited availability of properties that meet our investment criteria, we are not currently
emphasizing external opportunities as part of our growth strategy.
Organic Opportunities. We look for ways to maximize the value of our assets by adding a mix of uses, such as office or multi-family residential
housing, initiated either by ourselves or with a partner, that are designed to attract a greater number of people to the property. Multiple
constituencies, from local governments to city planners to citizen groups, have indicated a preference for in-place development, development near
transportation hubs, the addition of uses to existing properties, and sustainable development, as opposed to locating, acquiring and developing
new green field sites. Also, if appropriate, we will seek to attract certain nontraditional tenants to these properties, including tenants using the
space for purposes such as entertainment, education, health care, government and childcare, which can bring larger numbers of people to the
property, as well as regional, local or nontraditional retailers. We are increasingly focused on bringing such nontraditional tenants to our
properties, and we believe that such uses will increase traffic and enable us to generate additional revenue and grow the value of the property.
RECENT DEVELOPMENTS
Financial Restructuring
Voluntary Prepackaged Chapter 11 Cases and Emergence from Bankruptcy
On November 1, 2020, we and certain of our wholly owned direct and indirect subsidiaries (collectively, the “Debtors”) filed voluntary petitions
under chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of Delaware
(the “Bankruptcy Court”). Our chapter 11 cases were jointly administered for procedural convenience under the caption In re Pennsylvania Real
Estate Investment Trust, et al., Case No. 20-12737 (KBO) (collectively, the “Chapter 11 Cases”). On November 30, 2020, the Bankruptcy Court
entered an order, confirming the Joint Prepackaged Chapter 11 Plan of Reorganization of Pennsylvania Real Estate Investment Trust and
Certain of Its Direct and Indirect Subsidiaries (with Additional Technical Modifications As of November 20, 2020) (the “Plan”). The Plan became
effective and we emerged from bankruptcy on December 10, 2020 (the “Effective Date”).
9
Prior to commencing the Chapter 11 Cases, on October 7, 2020, the Debtors entered into a Restructuring Support Agreement (as subsequently
amended, the “RSA”) with certain lenders party to our then-existing credit agreements. The RSA set forth, subject to certain conditions, the
commitment to and obligations of, on the one hand, the Debtors, and on the other hand, certain lenders, in connection with our financial
restructuring. The RSA automatically terminated pursuant to its terms on the Effective Date.
Although the filing of the Chapter 11 Cases constituted an event of default under the terms of our then-existing credit agreements, resulting in the
automatic and immediate acceleration of our obligations thereunder, any efforts to enforce our payment obligations under those agreements were
automatically stayed in connection with the Chapter 11 Cases, and our lenders’ rights of enforcement in respect of the agreements were subject to
the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. To the extent the commencement of the Chapter 11 Cases
constituted a cross-default under certain property-level debt facilities, ground leases, operating leases and other contractual and non-contractual
obligations of our non-Debtor affiliates, enforcement efforts as against such non-Debtors were not stayed by virtue of the Chapter 11 Cases
commenced by the Debtors and only enforcement as against the Debtor on account of guaranties, if any, or other similar arrangements, if
applicable, were stayed.
During the pendency of the Chapter 11 Cases, we conducted normal business activities without interruption. As contemplated by the Plan, we are
continuing our day-to-day operations substantially as conducted prior to the Chapter 11 Cases, and all of our commercial and operational
contracts and leases in effect prior to the Effective Date remain in effect after the Effective Date in accordance with their terms. The Plan did not
restructure our equity, and all of the outstanding equity interests in PREIT remained outstanding and unmodified following the Effective Date.
Each Debtor continues to exist after the Effective Date in the same form as prior to the Effective Date. The Board of Trustees also remains
unchanged.
Implementation of the Plan
On the Effective Date, we entered into (a) an Amended and Restated First Lien Credit Agreement (the “First Lien Credit Agreement”) for secured
loan facilities consisting of: (i) a secured first lien revolving credit facility allowing for borrowings up to $130.0 million, including a sub-facility
for letters of credit to be issued thereunder in an aggregate stated amount of up to $10.0 million (collectively, the “First Lien Revolving Facility”),
and (ii) a $384.5 million secured first lien term loan facility (the “First Lien Term Loan Facility”), as well as (b) a Second Lien Credit Agreement
(the “Second Lien Credit Agreement” and together with the First Lien Credit Agreement, the “Credit Agreements”) for a $535.2 million secured
second lien term loan facility (the “Second Lien Term Loan Facility”). The Credit Agreements replaced our previously existing secured term loan
under the Credit Agreement dated as of August 11, 2020 (as amended, the “Bridge Credit Agreement”), our Seven-Year Term Loan Agreement
entered into on January 8, 2014 (as amended, the “7-Year Term Loan”), and our 2018 Amended and Restated Credit Agreement entered into on
May 24, 2018 (together with the 7-Year Term Loan, the “Prepetition Unsecured Credit Agreements”).
The Credit Agreements each provide for a two-year maturity, subject to a one-year extension at the borrowers’ option, subject to (i) minimum
liquidity of $35.0 million, (ii) a minimum corporate debt yield of 8.0%, (iii) a maximum loan-to-value ratio of 105% for the total first lien and
second lien loans and letters of credit and the Borrowing Base Properties (defined in the Credit Agreements) as determined by an appraisal and
(iv) no default or event of default existing and our representations and warranties being true in all material respects. The loans under the Credit
Agreements are repayable in full at maturity, subject to mandatory prepayment provisions in the event of certain events including asset sales,
incurrence of indebtedness, issuances of equity and receipt of casualty insurance proceeds. Subject to certain limited exceptions, the terms of our
Credit Agreements place restrictions on, among other things, our ability to make certain restricted payments (including payments of dividends),
make certain types of investments and acquisitions, issue redeemable securities, incur additional indebtedness, incur liens on our assets, enter into
agreements with a negative pledge, make certain intercompany transfers, merge, consolidate, or sell our assets or the equity interests of our
subsidiaries, amend our organizational documents or material contracts, enter into certain transactions with affiliates, or enter into derivatives
contracts. Additionally, if we receive net cash proceeds from certain capital events (including equity issuances), we are required to prepay loans
under our Credit Agreements. In addition, the Credit Agreements contain, and any future debt agreements may contain, cross-default provisions
that trigger an event of default if we fail to make certain payments or otherwise fail to comply with our obligations with respect to certain of our
other indebtedness. For a detailed description of the terms of the Credit Agreements, see “Item 7. Management’s Discussion of Financial
Condition and Results of Operations—Liquidity and Capital Resources—Credit Agreements” and note 4 to our consolidated financial statements.
Our obligations under the Credit Agreements are guaranteed by certain of our subsidiaries. Our obligations under the Credit Agreements and the
guaranties are secured by mortgages and deeds of trust on a portfolio of 12 of our subsidiaries’ properties, including nine malls and three
additional parcels. The obligations are further secured by a lien on substantially all of our personal property pursuant to collateral agreements and
a pledge of substantially all of the equity interests held by us and the guarantors pursuant to pledge agreements, in each case subject to limited
exceptions.
As of the Effective Date, our capital structure consists of (i) the First Lien Revolving Facility; (ii) the First Lien Term Loan Facility; (iii) the
Second Lien Term Loan Facility; (iv) reinstated secured property-level debt; (v) assumed (or reinstated, as the case may be) general unsecured
debt payable in the ordinary course of business of the reorganized Company; (vi) reinstated specified derivatives, each being amended by an
amendment to the applicable ISDA master agreement, with most obligations thereunder secured pari passu with the facilities under the First Lien
Credit Agreement; and (vii) the existing, unmodified equity in the Company.
Below is a summary of the treatment that the holders of allowed prepetition unsecured claims against the Debtors received under the Plan (except
to the extent a different treatment was agreed to by the Debtors and the applicable holder of an allowed claim) in exchange for full and final
satisfaction, settlement, release and discharge of their claims:
• Each swap agreement, as amended, was reinstated and assumed with our obligations under the assumed swap agreements secured pari
passu with the facilities under the First Lien Credit Agreement (except for one derivative provider that elected to remain unsecured);
although a derivative provider that was not a party to the RSA could terminate its swap agreement, thus being entitled to receive the
incremental loans under the Second Lien Term Loan Facility equal to the termination value of the specified derivatives, none of the
derivative providers terminated their swap agreements.
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• Each holder of an allowed claim under the Prepetition Unsecured Credit Agreements received: (A) a payment in cash of such holder’s pro
rata share (calculated based on such holder’s loan commitment under the First Lien Revolving Facility) of the exit commitment fee; plus
(B) first, on a dollar-for-dollar basis on account of such holder’s allowed claim under the Prepetition Unsecured Credit Agreements, its pro
rata share (calculated based on such holder’s commitment of loans under the First Lien Revolving Facility) of the principal amount of loans
under the First Lien Term Loan Facility; and (C) second, on a dollar-for-dollar basis on account of such holder’s remaining allowed claim
under the Prepetition Unsecured Credit Agreements (if any), the principal amount of loans under the Second Lien Term Loan Facility in a
principal amount equal to such remaining allowed claim.
• Subject to the terms of the Plan, each prepetition lender under the Prepetition Unsecured Credit Agreements committed itself for all of its full
pro rata share (based on its holdings of loans under the Prepetition Unsecured Credit Agreements) of the First Lien Revolving Facility.
Subject to the terms and conditions of the First Lien Credit Agreement, (A) on the Effective Date, the amounts borrowed under the Bridge
Credit Agreement were rolled into the First Lien Revolving Facility; and (B) after the Effective Date, the available proceeds of the First Lien
Revolving Facility have been and will continue to be used for working capital, general corporate purposes and other permitted uses,
consistent with an approved annual business plan.
• On the Effective Date, (A) the First Lien Term Loan Facility and the Second Lien Term Loan Facility were used to refinance the allowed
claims in respect of the indebtedness under the Prepetition Unsecured Credit Agreements as set forth in the Plan and pursuant to the terms and
conditions of the First Lien Credit Agreement and the Second Lien Credit Agreement, respectively; (B) the Prepetition Unsecured Credit
Agreements and any documents ancillary thereto were cancelled; and (C) each holder of an allowed claim in respect of the indebtedness
under the Prepetition Unsecured Credit Agreements became bound by the terms and conditions of the First Lien Credit Agreement and/or the
Second Lien Credit Agreement (as applicable).
• All other allowed general unsecured claims against the Debtors, with all associated rights and defenses, were reinstated, riding through the
bankruptcy unaffected as if the bankruptcy cases were never commenced.
Operating Performance
Our net loss increased by $253.7 million to a net loss of $266.7 million for the year ended December 31, 2020 from a net loss of $13.0 million for
the year ended December 31, 2019. The change in our 2020 results of operations was primarily due to (a) a loss on remeasurement of FDP's assets
and an other than temporary impairment on our investment in FDP totaling $148.5 million; (b) a decrease in real estate revenue of $74.0 million
due to the COVID-19 related closure of our properties for the majority of the second quarter, as well as rent concession requests
from tenants for rent abatements; (c) a decrease in equity partnership income of $13.8 million due to COVID-19 related closures and rent
concessions at our equity investees’ properties; (d) an increase in interest expense of $20.4 million driven by higher interest rates on our Credit
Agreements and higher overall debt balances; and (e) a non-recurring gain on debt extinguishment recognized for the year ended December 31,
2019 of $24.9 million, which had a favorable impact on the prior year period; partially offset by: (a) a decrease in property operating expenses of
$9.7 million related to ongoing impacts of COVID-19 since the second quarter of 2020; (b) a non-recurring gain on derecognition of property,
which provided a benefit of $8.1 million in the current year period; and (c) a non-recurring gain on sales of real estate, which provided a benefit of
$11.4 million in the current year period.
Funds From Operations (“FFO”), a non-GAAP measure, decreased 101.6% from the prior year, and FFO as adjusted, also a non-GAAP measure,
decreased 101.2% from the prior year. Adjustments to FFO included a gain on derecognition of Valley View Mall, reorganization expenses, loss
on hedge ineffectiveness and a loss on debt extinguishment recognized in the fourth quarter 2020 as a result of our financial restructuring. FFO as
adjusted per diluted share decreased 101.2% from 2019.
Same Store net operating income (“Same Store NOI”), a non-GAAP measure, decreased 27.7% over the prior year. Same Store NOI, excluding
lease termination revenue, decreased 28.2% compared to 2019.
Renewal spreads at our properties decreased 3.6% on non-anchor leases under 10,000 square feet and decreased 11.3% for non-anchor leases of at
least 10,000 square feet.
Retail portfolio occupancy at December 31, 2020 was 88.1%, a decrease of 450 basis points compared to 2019. Non-anchor occupancy was
87.8%, a decrease of 390 basis points compared to 2019. Core Mall occupancy decreased by 520 basis points to 90.3%. Core Mall non-anchor
occupancy was 89.4%, a decrease of 350 basis points.
Descriptions of each non-GAAP measure mentioned above, NOI, Same Store NOI, FFO, FFO, as adjusted, and FFO as adjusted per diluted share,
as well as the related reconciliation to the comparable GAAP measures, are located in “Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Results of Operations—NON-GAAP SUPPLEMENTAL FINANCIAL MEASURES”.
Financing Activity
As described above, in connection with our financial restructuring and emergence from the Chapter 11 Cases, we entered into two secured credit
agreements: (a) the First Lien Credit Agreement, which includes (i) the First Lien Revolving Facility and (ii) the First Lien Term Loan Facility,
and (b) the Second Lien Credit Agreement, which includes the Second Lien Term Loan Facility. The First Lien Term Loan Facility and the
Second Lien Term Loan Facility are collectively referred to as the “Term Loans.” As described further above and in note 4 to our consolidated
financial statements, the Credit Agreements refinanced the credit agreements that were outstanding prior to the Effective Date, pursuant to the
terms of the Plan, and those credit agreements previously in effect were cancelled as of the Effective Date. As of December 31, 2020, aggregate
borrowings under the Credit Agreements were as follows: (a) $54.8 million under the First Lien Revolving Facility, (b) $384.1 million under the
First Lien Term Loan Facility, and (c) $538.0 million under the Second Lien Term Loan Facility. For a detailed description of the terms of our
Credit Agreements, see “Item 7. Management’s Discussion of Financial Condition and Results of Operations—Liquidity and Capital
Resources—Credit Agreements” and note 4 to our consolidated financial statements.
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PM Gallery LP, a Delaware limited partnership and joint venture entity owned indirectly by us and Macerich, previously entered into a $250.0
million term loan in January 2018 (as amended in July 2019 to increase the total maximum potential borrowings to $350.0 million) to fund the
ongoing redevelopment of Fashion District Philadelphia and to repay capital contributions to the venture previously made by the partners. On
December 10, 2020, PM Gallery LP, together with certain other subsidiaries owned indirectly by us and Macerich (including the fee and
leasehold owners of the properties that are part of the Fashion District Philadelphia project), entered into an Amended and Restated Term Loan
Agreement (the “FDP Loan Agreement”). In connection with the execution of the FDP Loan Agreement, a $100.0 million principal payment was
made (and funded indirectly by Macerich, the “Partnership Loan”) to pay down the existing loan, reducing the outstanding principal under the
FDP Loan Agreement from $301.0 million to $201.0 million. The joint venture must repay the Partnership Loan plus 15% accrued interest to the
Macerich lender prior to the resumption of 50/50 cash distributions to us and Macerich. In connection with the execution of the FDP Loan
Agreement, the governing structure of PM Gallery LP was modified such that, effective as of January 1, 2021, Macerich is responsible for the
entity’s operations and, subject to limited exceptions, controls major decisions. For a description of the terms of the FDP Loan Agreement, see
“Item 7. Management’s Discussion of Financial Condition and Results of Operations—Liquidity and Capital Resources—Credit
Agreements—FDP Loan Agreement” and note 3 to our consolidated financial statements.
Mortgage Loan Activity. During the year ended December 31, 2020, we executed forbearance and loan modification agreements for our
consolidated properties Cherry Hill Mall, Cumberland Mall, Dartmouth Mall, Francis Scott Key Mall, Viewmont Mall, and Woodland Mall and
for our unconsolidated partnership properties Metroplex and Springfield Mall. These arrangements allowed us to defer principal payments, and in
some cases interest as well, between May and August 2020 depending on the terms of each agreement. At the end of the deferral period, the
duration of repayment obligations for deferred amounts spans from four to six months. The repayment periods range from August 2020
through February 2021 pursuant to the terms of the specific agreements. Certain of these forbearance and loan modification agreements also
impose certain additional informational reporting requirements during the applicable modification periods.
In the second quarter of 2020, we received a notice of transfer of servicing for the mortgage loan secured by Valley View Mall, which had a
$27.3 million balance as of June 30, 2020. Subsequently, we failed to make the June 2020 monthly payment and our subsidiary that is the
borrower under the mortgage also received a notice of default on the mortgage from the lender. Additionally, we have not paid the balloon
payment of $27.3 million due at maturity on July 1, 2020. A foreclosure notice has been filed and operations of the property were assigned to a
receiver in August 2020.
CAPITAL STRATEGY
In support of the business strategies described above, our long-term corporate finance objective is to maximize the availability and minimize the
cost of the capital we employ to fund our operations. In pursuit of this objective and for other business reasons, we seek the broadest range of
funding sources (including commercial banks, institutional lenders, equity and debt investors and joint venture partners) and funding vehicles
(including mortgage loans, commercial loans, sales of properties or interests in properties, and debt and equity securities) available to us on the
most favorable terms. We pursue this goal by maintaining relationships with various capital sources and utilizing a variety of financing
instruments, all in an effort to enhance our flexibility to execute our business strategy in different economic environments or at different points in
the business cycle.
We have two wholly-owned property mortgage loans maturing in 2021. While mortgage interest rates remain relatively low, we intend to
continue to seek to extend the maturity dates of our mortgage loans to the maximum extent possible, or to replace them with longer term mortgage
loans. In February 2021, we amended our Woodland Mall mortgage loan to provide for an extension option, which will extend the maturity date
to December 10, 2022. We intend to exercise this extension option.
As part of our capital strategy, in the past, we have taken steps to restructure our debt and credit facilities to align with our needs and goals at such
time (including by implementing the Plan upon our emergence from the Chapter 11 Cases) and we intend to continue to evaluate our debt and
credit facilities going forward. See “Item 7. Management’s Discussion of Financial Condition and Results of Operations—Liquidity and Capital
Resources—Credit Agreements” for a detailed description of the terms of our Credit Agreements.
In general, in determining the amount and type of debt capital to employ in our business, we consider several factors, including: general economic
conditions, the capital market environment, prevailing and forecasted interest rates for various debt instruments, the cost of equity capital,
property values, capitalization rates for mall properties, our financing needs for acquisition, redevelopment and development opportunities, the
debt ratios of other mall REITs and publicly-traded real estate companies, and the federal tax law requirement that REITs distribute at least 90%
of net taxable income, among other factors.
In the normal course of business, we are exposed to financial market risks, including interest rate risk on our interest-bearing liabilities. We
attempt to limit these risks by following established risk management policies, procedures and strategies, including the use of various types of
financial instruments. 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 our underlying exposure, and subject to our ability to satisfy collateral requirements and the terms of
our Credit Agreements.
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Capital Availability
To maintain our status as a REIT, we are required, under federal tax laws, to distribute to shareholders 90% of our net taxable income, which
generally leaves insufficient funds to finance major initiatives internally. Because of these requirements, we ordinarily fund most of our
significant capital requirements through secured and unsecured indebtedness, sales of properties or interests in properties and, when appropriate,
the issuance of additional debt, equity or equity-related securities. As described above, the terms of our Credit Agreements and the existing
cumulative unpaid dividends on our preferred shares create significant limitations on our ability to raise capital, including in the capital markets.
Aggregate borrowings under our $130.0 million First Lien Revolving Facility may be limited by the debt yield covenants included in our Credit
Agreements. The maximum amount that was available to be borrowed by us under our First Lien Revolving Facility as of December 31, 2020 was
$75.2 million. As of the filing date of this Annual Report on Form 10-K, $54.8 million was outstanding under the First Lien Revolving Facility.
In addition, our ability to finance our growth using these sources depends, in part, on our creditworthiness, the availability of credit to us, the
market for our securities at the time or times we need capital and prevailing conditions in the capital and credit markets, among other things. We
believe that we will have adequate access to capital to fund the remaining cost of our redevelopment program, which we currently estimate to be
$16.9 million. Our continued ability to borrow under the Credit Agreements and any other indebtedness that we have or may obtain will be subject
to compliance with the covenants in the Credit Agreements or in the debt agreement governing such other indebtedness. These covenants impose
restrictions that limit our ability to raise capital, including by requiring us to use cash proceeds from certain capital events to prepay our debt in
certain circumstances. Furthermore, as a result of the existing cumulative unpaid dividends on our preferred shares and our bankruptcy filing, we
are no longer able to register the offer and sale of securities on Form S-3. This creates additional limitations on our ability to raise capital in the
capital markets, potentially increasing our costs of raising capital in the future.
OWNERSHIP STRUCTURE
We hold our interests in our portfolio of properties through our operating partnership, PREIT Associates, L.P. We are the sole general partner of
PREIT Associates and, as of December 31, 2020, held a 97.5% controlling interest in PREIT Associates. We consolidate PREIT Associates for
financial reporting purposes. We own our interests in our properties through various ownership structures, including partnerships and tenancy in
common arrangements (collectively, “partnerships”). PREIT Associates’ direct or indirect economic interest in the properties ranges from 25% or
50% (for eight partnership properties) up to 100%. See “Item 2. Properties—Retail Properties.”
We provide management, leasing and real estate development services through two of our subsidiaries: PREIT Services, LLC (“PREIT
Services”), which generally develops and manages properties that we consolidate for financial reporting purposes, and PREIT-RUBIN, Inc.
(“PRI”), which generally develops and manages properties that we do not consolidate for financial reporting purposes, including properties
owned by partnerships in which we own an interest, and properties that are owned by third parties in which we do not have an interest. PREIT
Services and PRI are 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.
COMPETITION
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
several factors, including location and rent charged. We compete with these companies to attract customers to our properties, as well as to attract
anchor and in-line stores and other tenants. Our malls and our other retail properties face competition from similar retail centers, including more
recently developed or renovated centers that are near our retail properties. We also face competition from an increasing 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 channels or 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
conditions of our Credit Agreements, lead us to make capital improvements to properties that we would have deferred or would not have
otherwise planned to make and might affect 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.
When we seek to make acquisitions, competitors (such as institutional investors, other REITs and other owner-operators of retail properties)
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. We might not succeed in acquiring retail
properties or development sites that we seek, or, if we pay a higher price for a property or site, or generate lower cash flow from an acquired
property or site than we expect, our investment returns will be reduced, which will adversely affect the value of our securities.
GOVERNMENT REGULATIONS
Under various federal, state and local laws, ordinances, regulations and case law, an owner, former owner or operator of real estate might be liable
for the costs of removal or remediation of hazardous or toxic substances present at, on, under, in or released from its property, regardless of
whether the owner, operator or other responsible party knew of or was at fault for the release or presence of hazardous or toxic
substances. Contamination might adversely affect the owner’s ability to sell or lease real estate or borrow with real estate as collateral. In
connection with our ownership, operation, management, development and redevelopment of properties, or any other properties we acquire in the
future, we might be liable under these laws and might incur costs in responding to these liabilities.
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Each of our retail properties has been subjected to a Phase I or similar environmental audit (which involves a visual property inspection and a
review of records, but not soil sampling or ground water analysis) by environmental consultants. These audits have not revealed, and we are not
aware of, any environmental liability that we believe would have a material adverse effect on our results of operations. It is possible, however,
that there are material environmental liabilities of which we are unaware.
We are aware of certain past environmental matters at some of our properties. We have, in the past, investigated and, where we consider
appropriate, performed remediation of such environmental matters, but we might be required in the future to perform testing relating to these
matters or to satisfy requirements for further remediation, or we might incur liability as a result of such environmental matters. See “Item 1A.
Risk Factors—Risks Related to Our Business and Our Properties—We might incur costs to comply with environmental laws, which could have
an adverse effect on our results of operations.”
SUSTAINABILITY
We strive to be socially and environmentally conscious. We now have the capacity to produce more than 8 million kilowatt hours of electricity per
year from solar arrays at five of our properties. The annual environmental benefit accrued through the production of renewable energy at these
five properties is equivalent to a reduction in greenhouse gas emissions from more than 1,200 passenger vehicles. During 2020, we completed an
LED retrofit at Dartmouth Mall which is expected to reduce our kilowatt hour usage by approximately 467,000 hours. We also currently offer
electric vehicle charging stations at five of our properties.
HUMAN CAPITAL
As of December 31, 2020, we had 175 employees at our properties and in our corporate office.
Our key human capital management objectives are to attract, retain and develop the highest quality talent to enhance our mission of enriching
communities through the built environment. To support these objectives, our human resources programs are designed to: reward and support
employees through competitive pay, benefits, and perquisite programs; enhance the Company’s culture through efforts aimed at making the
workplace more engaging and inclusive; acquire and develop talent and facilitate internal talent mobility; and evolve and invest in technology,
tools, and other resources for our employees.
We embrace diversity as valuable to a well-functioning company and provide equal opportunities without regard to race, color, religion, national
origin, age, sexual orientation, gender/gender identity, disability, status as a protected veteran, or any other characteristic protected by applicable
federal, state and local laws. We also endeavor to maintain workplaces that are free from discrimination or harassment on the basis of any such
status or characteristic. In 2020, we hosted a black-owned business showcase at Woodland Mall and endeavor to host several similar showcases
throughout our portfolio in the future due to the positive response.
Our compensation program is designed to attract and retain talent. We continually assess and strive to enhance employee satisfaction and
engagement, including by conducting an annual culture survey to engage employees and identify opportunities for improvement. Our employees,
many of whom have a long tenure with the Company, frequently express satisfaction with management. Our employees are offered regular
opportunities to participate in professional development programs, including tuition reimbursement, continuing education reimbursement, and
leadership training. During December 2019, we relocated our corporate headquarters to an office that is designed to create a better sense of place
and pride and to cultivate a more collaborative work environment.
The health and safety of our employees is a high priority, in particular during the COVID-19 pandemic. In protecting our employees’ safety, we
have invested in creating safe work environments for our employees by taking additional measures such as additional work from home flexibility,
increased cleaning protocols, mask wearing in our corporate office and at our properties and enhanced communication and engagement regarding
Company responses to the pandemic. We also offer wellness initiatives for our employees, such as Wholebeing programs on demand.
Additionally, we are committed to sustainability and giving back to the communities in which we operate. In 2020, our properties supported
several charitable organizations, hosting blood and food drives, among other community-facing initiatives, in response to the pandemic. Our
corporate giving program raised funds and awareness for various charitable and non-profit organizations.
As a result of the COVID-19 pandemic and resulting economic disruption, together with the preexisting economic challenges facing the retail
industry, the Company implemented reductions-in-force and unpaid furloughs in 2020. In order to attempt to ease the effects of such actions, the
Company extended health insurance to furloughed employees for certain periods and encouraged use of the Company’s existing wellness and
mental health services through its employee assistance program. The Company has since brought furloughed employees back to full pay.
None of our employees are unionized or covered by collective bargaining agreements, and we consider our current employee relations to be good.
INSURANCE
We have comprehensive liability, fire, flood, cyber liability, terrorism, extended coverage and rental loss insurance that we believe is adequate
and consistent with the level of coverage that is standard in our industry. We cannot be assured, however, that our insurance coverage will be
adequate to protect against a loss of our invested capital or anticipated profits, or that we will be able to obtain adequate coverage at a reasonable
cost in the future.
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STATUS AS A REIT
We conduct our operations in a manner intended to maintain our qualification as a REIT under the Internal Revenue Code of 1986, as amended.
Generally, as a REIT, we will not be subject to federal or state income taxes on our net taxable income that we currently distribute to our
shareholders. Our qualification and taxation as a REIT depend on our ability to meet various qualification tests (including dividend distribution,
asset ownership and income tests) and certain share ownership requirements prescribed in the Internal Revenue Code.
CORPORATE HEADQUARTERS
Our principal executive offices are currently located at One Commerce Square, 2005 Market Street, Philadelphia, Pennsylvania 19103. In
December 2018, we entered into a lease for this office space with Brandywine Realty Trust. Our lead independent trustee is also a trustee of
Brandywine Realty Trust. The lease commenced in late December 2019 and our corporate office opened on January 2, 2020 at the One
Commerce Square location. Our principal executive offices during 2019 were located at The Bellevue, 200 South Broad Street, Philadelphia,
Pennsylvania 19102. We had 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.
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
percentage 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 and 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.
AVAILABLE INFORMATION
We maintain a website with the address www.preit.com. We are not including or incorporating by reference the information contained on our
website into this report. We make available on our website, free of charge and as soon as practicable after filing with the SEC, copies of our most
recently filed Annual Report on Form 10-K, all Quarterly Reports on Form 10-Q and all Current Reports on Form 8-K filed during each year,
including all amendments to these reports, if any. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form
8-K, and amendments to these reports are also available on the SEC’s website at http://www.sec.gov. In addition, copies of our corporate
governance guidelines, codes of business conduct and ethics (which include the code of ethics applicable to our Chief Executive Officer,
Principal Financial Officer and Principal Accounting Officer) and the governing charters for the audit, nominating and governance, and executive
compensation and human resources committees of our Board of Trustees are available free of charge on our website, as well as in print to any
shareholder upon request. We intend to comply with the requirements of Item 5.05 of Form 8-K regarding amendments to and waivers under the
code of business conduct and ethics applicable to our Chief Executive Officer, Principal Financial Officer and Principal Accounting Officer by
providing such information on our website within four days after effecting any amendment to, or granting any waiver under, that code, and we
will maintain such information on our website for at least twelve months.
ITEM 1A. RISK FACTORS.
RISKS RELATED TO OUR BUSINESS AND OUR PROPERTIES
The COVID-19 global pandemic and the public health and governmental response have adversely affected, and will likely continue to
adversely affect, our business, financial condition, liquidity and operating results. The extent and duration of such effects are uncertain,
continuously changing and difficult to predict. Additionally, the future outbreak of any other highly infectious or contagious diseases
may materially and adversely affect our business, financial condition, liquidity and operating results.
The 2020 global outbreak of a novel coronavirus (COVID-19), which was declared a pandemic by the World Health Organization on March 11,
2020, resulted in travel restrictions, business closures, property shutdowns, government-imposed stay-at-home orders and the implementation of
“social distancing” and certain other measures to prevent the further spread of the virus, all of which have adversely impacted, and will likely
continue to impact, our operations, business, financial condition, liquidity and operating results, as well as our tenants’ businesses. The continued
spread of COVID-19 has also led to unprecedented global economic disruption and volatility in financial markets, a rise in unemployment levels,
decreases in consumer confidence levels and spending, and an overall worsening of U.S. economic conditions. We anticipate that our future
business, financial condition, liquidity and results of operations, including our results for 2021 and potentially future periods, will be materially
impacted by the COVID-19 pandemic. It remains highly uncertain how long the global pandemic, economic challenges and restrictions on
day-to-day life will last based on the current virus spread rate in the United States. New or renewed restrictions may be implemented in response
to evolving conditions and overall uncertainty about the timing of widespread availability of vaccines. Given the unprecedented and continually
evolving developments, we cannot reasonably predict or estimate its ultimate impact on us or our tenants, or on our ability or the ability of our
tenants to resume more normal operations. Additionally, other future global health crises could result in significant effects on regional and global
economies and on our business, financial condition, liquidity and results of operations.
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While we have taken several responsive steps (including staff reductions, reduction of capital expenditures and operating expenses, and
restructuring our debt, we anticipate that further actions may be necessary to adapt our business and address the impacts of the pandemic. The
spread of COVID-19 and measures taken to reduce its spread subject us to a variety of risks and could result in the following impacts, some of
which have already occurred and could continue and increase the longer the crisis continues:
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resumed property shutdowns or more onerous restrictions at any or all of our retail properties across the nine states in which we operate;
tenant failures to pay rent timely, resulting in revenue decreases from our properties and many requests from our tenants for rent relief or
deferral and our decision to pursue litigation against several tenants;
our rights to enforce remedies available under our leases or ability to collect rents as a landlord may potentially be impacted by state,
local or other efforts resulting in rent concessions for tenants or a delay in landlord’s ability to enforce evictions or pursue other remedies
available under the leases;
an economic downturn generally, and a decrease in profitability for many of our tenants specifically, as a result of widespread business
shutdowns or slowdowns;
additional tenant bankruptcies and, potentially, related store closures, including tenants that are substantial to our business in terms of
size and quantity;
deterioration of financial markets and tightening of credit availability, leading to a potentially reduced ability to obtain financing for our
tenants and us;
disruptions to supply-chain and distribution channels of our tenants, impacting retail product availability;
negative effects on our operations as a result of quarantines, social distancing measures, public safety concerns and limitations on the
nature and scope of activities at our properties required by state regulations, as well as limited public adherence to suggested safety
measures that could continue to result in new or renewed property closures as well as increased costs to comply with enhanced health,
sanitation and social distancing measures;
decreased operating performance from reductions in property revenue and cash flows;
potential reductions in the carrying value of our retail properties or other impairments of our assets;
our inability to meet the requirements of the covenants in our credit facilities or increases in our cost of capital that make obtaining
additional capital more difficult or available only on terms less favorable to us;
negative effects on our liquidity position and the cost of and ability to access funds from financial institutions and capital markets;
delays to capital raise initiatives; and
creation of other risks that may impact us or exacerbation of existing risks, including the risks described in this section.
Ultimately, the significance of COVID-19 or another pandemic in the future on our business remains highly uncertain and will depend on, among
other things, the extent and duration of the pandemic, the severity of the disease and the number of people infected with the virus, the timing of
widespread availability of vaccines, the effects on the economy of the pandemic and of the measures taken by governmental authorities and other
third parties restricting day-to-day life and business operations and the length of time that such measures remain in place or are renewed, and
implementation of additional governmental programs to assist businesses and consumers impacted by the COVID-19 pandemic. While we have
experienced and expect to continue to experience an adverse impact on our business, financial condition, liquidity and results of operations, we
cannot estimate the extent to which COVID-19 will impact our future business, financial condition, liquidity or results of operations.
We emerged from bankruptcy on December 10, 2020, which could adversely affect our business and relationships.
It is possible that our recent bankruptcy filing and emergence from chapter 11 bankruptcy proceedings could adversely affect our business and
relationships with tenants, employees and other constituents. Due to uncertainties, many risks exist, including the following:
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our ability to renew existing leases and compete for new business may be adversely affected;
our ability to attract, motivate and/or retain key executives and employees may be adversely affected;
employees may be distracted from performance of their duties or more easily attracted to other employment opportunities;
our ability to attract and retain tenants may be negatively impacted;
suppliers of our redevelopment and other projects could terminate their relationship or require financial assurances or enhanced
performance; and
to the extent the commencement of the Chapter 11 Cases constituted a cross-default under certain property-level debt facilities, ground
leases, operating leases and other contractual and non-contractual obligations of our non-Debtor affiliates, such cross-defaults may have
adverse effects on the affected facilities, leases and other contractual relationships.
The occurrence of one or more of these events could have a material and adverse effect on our operations, financial condition and reputation.
16
Store closings, leasing and construction delays, lease terminations, tenant financial difficulties and tenant bankruptcies have in the past
and could in the future adversely affect our financial condition and results of operations.
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, including as a result of the tenant’s failure to adapt its business model to the current
consumer landscape, that might weaken its financial condition. There are also a number of tenants that are based outside the U.S., and these
tenants are affected by economic conditions in the country where their headquarters are located and internationally. Any of such tenants might
enter into or renew leases with relatively shorter terms. Such tenants might also defer or fail to make rental payments when due, delay or defer
lease commencement, voluntarily vacate the premises or declare bankruptcy, which could result in the termination of the tenant’s lease, or
preclude the collection of rent in connection with the space for a period of time, and could result in material losses to us and harm to our results of
operations. Also, it might take time to terminate leases of underperforming or nonperforming tenants, and we might incur costs to remove such
tenants. Some of our tenants occupy stores at multiple locations in our portfolio, and so the effect of any bankruptcy or store closing of those
tenants might be more significant to us than the bankruptcy or store closings of other tenants. In addition, under some 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, including due to factors such as
tenants’ failure to innovate or change their business models at a pace sufficient to adapt to the evolving consumer landscape, could directly affect
our results of operations, and in some cases allow these tenants to cancel their leases pursuant to a sales termination clause. Also, if tenants are
unable to comply with the terms of our 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.
If a tenant files for bankruptcy, the tenant might have the right to reject its leases, and we cannot be sure that it will assume its leases and continue
to make rental payments in a timely manner. A bankruptcy filing by, or relating to, one of our tenants would bar all efforts by us to collect
pre-bankruptcy debts from that tenant, or from their property, unless we receive an order permitting us to do so from the bankruptcy court. In
addition, we cannot evict a tenant solely because of its bankruptcy. If a lease is assumed by the tenant in bankruptcy, all pre-bankruptcy balances
due under the lease must be paid to us in full. However, if a lease is rejected by a tenant in bankruptcy, we would have only a general unsecured
claim for damages in connection with such past-due balances in addition to the rejection damages. If a bankrupt tenant vacates a space, it might
not do so in a timely manner, and we might be unable to re-lease the vacated space during that time, at attractive rates, or at all. In addition, such
a scenario with one tenant could result in lease terminations or reductions in rent by other tenants of the same property whose leases have
co-tenancy provisions. These other tenants might seek changes to the terms of their leases, including changes to the amount of rent to be paid. Any
unsecured claim we hold against a bankrupt tenant might be paid only to the extent that funds are available and only in the same percentage as is
paid to all other holders of unsecured claims, and there are restrictions under bankruptcy laws that limit the amount of the claim we can make if a
lease is rejected. As a result, it is likely that we would recover substantially less than the full value of any unsecured claims we hold, which could
adversely affect our financial condition and results of operations. In some instances, retailers that have sought protection from creditors under
bankruptcy law have had difficulty in obtaining debtor-in-possession financing, which has decreased the likelihood that such retailers will emerge
from bankruptcy protection and has limited their alternatives. In recent years, there has been an increased level of tenant bankruptcies and store
closings by tenants that have been adversely affected by challenging economic conditions, which has been exacerbated by the impacts of the
COVID-19 pandemic. See “Item 7. Management’s Discussion and Analysis of Financial Conditions and Results of
Operations—Overview—Current Economic Conditions and Our Near Term Capital Needs” for information regarding tenants in bankruptcy.
Tenant bankruptcies and liquidations have adversely affected, and are likely in the future to adversely affect, our financial condition and results of
operations.
Changes in the retail industry, particularly among anchor tenant retailers, could adversely affect our results of operations and financial
condition.
The income we generate depends in part on our anchor or other major tenants’ ability to attract customers to our properties and generate traffic,
which affects the property’s ability to attract non-anchor tenants, and thus the revenue generated by the property. In recent years, in connection
with economic conditions and other changes in the retail industry, including customers’ use of smartphones and websites, the continued
expansion of e-commerce generally, and changes resulting from the COVID-19 pandemic and measures taken to reduce its spread, some anchor
tenant retailers have experienced decreases in operating performance, and in response, they are contemplating strategic, operational and other
changes. The strategic and operational changes being considered by anchor tenants include subleasing, combinations and other consolidation
designed to increase scale, leverage with suppliers like landlords, and other efficiencies, which might result in the restructuring of these
companies and which could involve withdrawal from certain geographic areas, such as secondary or tertiary trade areas, or the closure or sale of
stores operated by them. Further, our tenants may fail to innovate or change their business models at a pace sufficient to adapt to the evolving
consumer landscape, which could result in an increase in store closings, tenant bankruptcies or requests for rent relief, particularly among anchor
tenants. We have been affected by anchor store closings in the past, including a particularly elevated number of closings in 2020 and cannot assure
you that there will not be additional store closings by any anchor or other tenant in the future, which could affect our results of operations and cash
flows. Although we are adapting our business to reduce reliance on traditional anchor department stores, closure of one or more anchor stores
would have a negative effect on the affected properties, on our portfolio and on our results of operations. In addition, a lease termination by an
anchor for any reason, a failure by an anchor to occupy the premises, or any other cessation of operations by an anchor could result in lease
terminations or reductions in rent by other tenants of the same property whose leases permit cancellation or rent reduction (i.e., co-tenancy
provisions) if an anchor’s lease is terminated or the anchor otherwise ceases occupancy or operations. In that event, we might be unable to re-lease
the vacated space of the anchor or non-anchor stores in a timely manner, or at all. If a large number of anchor stores close in a particular region,
competition to fill these vacancies could cause us to lease space at lower rates than we would otherwise seek, which could negatively affect our
results of operations. In addition, the leases of some anchors might permit the anchor to transfer its lease, including any attendant approval rights,
17
to another retailer. The transfer to a new anchor could cause customer traffic in the property to decrease or to be composed of different types of
customers, which could reduce the income generated by that property. A transfer of a lease to a new anchor also could allow other tenants to make
reduced rental payments or to terminate their leases at the property, which could adversely affect our results of operations.
Approximately 36% of our non-anchor leases expire in 2021 or 2022 or are in holdover status, and if we are unable to renew these leases
or re-lease the space covered by these leases on equivalent terms, we might experience reduced occupancy and traffic at our properties
and lower rental revenue, net operating income and cash flows.
The current conditions in the economy, including changes in the means and patterns of consumer behavior generally and particularly in light of
the COVID-19 pandemic, may affect employment growth and cause fluctuations and variations in retail sales, consumer confidence and
consumer spending on retail goods. The weaker operating performance of certain retailers, combined in some circumstances with overleveraged
retailer balance sheets in recent years has resulted in bankruptcies, store closings, consolidations of operations, and in delays or deferred decisions
regarding the openings of new retail stores at some of our properties and affected renewals of both anchor and non-anchor leases. In recent years,
partially because of the economic environment, we frequently renewed leases with terms of one year, two years or three years, rather than the
more typical five years or ten years. These shorter term leases enabled both the tenant and us, before entering into a longer term lease, to evaluate
the advantages and disadvantages of a longer term lease at a later time in the economic cycle, at least in part with the expectation that there will be
greater visibility into future conditions in the economy and future trends. As a result, we have a substantial number of such leases that are in
holdover status or will expire in the next few years, including some leases with our top 20 tenants, and including both anchor and non-anchor
leases. See “Item 2. Properties—Retail Lease Expiration Schedule” and “Item 7. Management’s Discussion and Analysis of Financial Condition
and Results of Operations—Results of Operations—Leasing Activity.” We might not be successful in renewing the leases for, or re-leasing, the
space covered by leases that are in holdover status or that are expiring in 2021 or 2022, or obtaining positive rent renewal spreads, or even
renewing the leases on terms comparable to those of the expiring leases. If we are not successful, we will be likely to experience reduced
occupancy, traffic, rental revenue and net operating income, which could have a material adverse effect on our financial condition and results of
operations.
We have identified a material weakness in our internal control over financial reporting which could, if not remediated, adversely affect
our ability to report our financial condition and results of operations in a timely and accurate manner, our liquidity and financial
condition, and our stock price.
As further described in Part II, Item 9A of this report, in the course of completing our assessment of internal control over financial reporting as of
December 31, 2020, our management identified a material weakness in our internal control over financial reporting. A material weakness is a
deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of our
annual or interim financial statements will not be prevented or detected and corrected on a timely basis. Management has concluded that, because
of this material weakness, our internal control over financial reporting and our disclosure controls and procedures were not effective as of
December 31, 2020. Specifically, we identified deficiencies in the control environment that aggregate to a material weakness. These deficiencies
related to (i) attracting and retaining sufficient personnel with requisite financial expertise, (ii) the assessment of the risk of fraud, including risks
of management override of controls and proper segregation of duties, and (iii) assessing changes in the external environment and the potential
impact of those changes on the design, operating effectiveness and monitoring of internal controls over financial reporting. The Company was
unable to maintain a sufficient complement of accounting and financial reporting personnel to effect certain of our internal controls over financial
reporting and respond to the financial reporting impacts of the environment we operated in during 2020. The Company was also unable to ensure
appropriate segregation of duties as it relates to the preparation and review of journal entries. The material weakness contributed to the potential
for there to have been material accounting errors in substantially all financial statements account balances and disclosures. Additionally, certain
management review controls that would serve to prevent or detect material misstatements in our financial statements did not operate with an
appropriate level of precision, primarily due to the impact of the variability of the results from operating retail properties during a global
pandemic, including an increase in tenants with past due receivables and the impact of abatements and deferrals on those amounts.
Management has begun the process of evaluating the material weakness and developing its full remediation plan, as further described in Part II,
Item 9A of this report. Until our remediation plan is fully implemented, management will continue to devote time and attention to these efforts. If
we do not implement, test and effectively complete our remediation in a timely fashion, or at all, or if our remediation plan is inadequate, there
will be an increased risk that we will be unable to timely file future periodic reports with the SEC and that our future consolidated financial
statements could contain errors that will be undetected. If we are unable to report our results in a timely and accurate manner, we may not be able
to comply with the applicable covenants in our financing arrangements and may be required to seek amendments or waivers under these financing
arrangements, which, if not agreed to, could adversely impact our liquidity and financial condition. Among other adverse consequences, investors
could lose confidence in our reported financial information, which could lead to a decline in our stock price. In addition, we could be subjected to
regulatory scrutiny, investigations by the NYSE, civil or criminal penalties or shareholder litigation, the defense of any of which could cause the
diversion of management’s attention and resources. We could incur significant legal and other expenses, and we could be required to pay damages
to settle such actions if any such actions were not resolved in our favor. There can be no assurance that we will not conclude in the future that
this material weakness continues to exist or that we will not identify any significant deficiencies or other material weaknesses that will impair our
ability to report our financial condition and results of operations accurately or on a timely basis.
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The investments we have made in redeveloping older properties and developing new properties could be subject to delays or other risks
and might not yield the returns we anticipate, which would harm our financial condition and operating results.
To the extent we continue current redevelopment projects or enter into new redevelopment or development projects in the longer term, they will
be subject to a number of risks that could negatively affect our return on investment, financial condition and results of operations, including,
among others:
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higher than anticipated construction costs, including labor and material costs;
delayed ability or inability to reach projected occupancy, rental rates, profitability, and investment return;
timing delays due to the COVID-19 pandemic, weather, labor disruptions, zoning or other regulatory approvals, tenant decision delays,
delays in anchor approvals of redevelopment plans, where required, acts of God (such as fires, significant storms, earthquakes or floods)
and other factors outside our control, which might make a project less profitable or unprofitable, or delay profitability;
expenditure of money and time on projects that might be significantly delayed before stabilization;
inability to achieve financing on favorable terms, or at all;
the offer of inducements (including rent reduction, tenant allowance, and rent abatement) to tenants; and
the impact of co-tenancy requirements as a result of our inability to meet a projected timeline.
Some of our retail properties were constructed or last renovated more than 10 years ago. Older, unrenovated properties tend to generate lower rent
and might require significant expense for maintenance or renovations to maintain competitiveness, which, if incurred, could harm our results of
operations. Subject to the terms and conditions of our Credit Agreements, as a key component of our growth strategy, we plan to continue to
redevelop existing properties, and we might develop or redevelop other projects as opportunities arise. These plans are subject to then-prevailing
economic, capital market and retail industry conditions.
We might elect not to proceed with certain development projects after they have begun. In general, when we elect not to proceed with a project
that has commenced, development costs for such a project will be expensed in the then-current period. The accelerated recognition of these
expenses could have a material adverse effect on our results of operations for the period in which the expenses are recognized.
We might be unable to effectively manage any redevelopment and development projects involving a mix of uses, or other unique aspects,
such as a project located in a city rather than a suburb, which could affect our financial condition and results of operations.
The complex nature of redevelopment and development projects calls for substantial management time, attention and skill. Some of our
redevelopment and development projects currently, and in the future, are likely to involve mixed uses of the properties, including residential,
office and other uses. We might not have all of the necessary or desirable skill sets to manage such projects. When a development or
redevelopment project includes a non-retail use, we might seek to sell the rights to that component to a third-party developer with experience in
that use, or we might seek to partner with such a developer. If we are not able to sell the rights to, or partner with, such a developer, or if we choose
to develop the other component ourselves, we would be exposed not only to those risks typically associated with the development of commercial
real estate generally, and of retail real estate, but also to specific risks associated with the development, ownership and property management of
non-retail real estate, such as the demand for residential or office space of the types to be developed and the effects of general economic
conditions on such property types, as opposed to the effects on retail real estate, with which we are more familiar. Also, if we pursue a
redevelopment or development project with a different or unique aspect, such as a project in a dense city location like the redevelopment of FDP,
either in a partnership with another developer (like with Macerich for FDP) or ourselves, we would be, and are, exposed to the particular risks
associated with the unique aspect such as, in the case of dense city projects, differences in the entitlements process, different types of responses by
particular stakeholders and different involvement and priorities of local, state and federal government entities. In addition, even if we sell the
rights to develop a specific component or elect to participate in the development through a partnership, we might be exposed to the risks
associated with the failure of the other party to complete the development as expected. These include the risk that the other party would default on
its obligations, necessitating that we complete the component ourselves (including providing any necessary financing). Additionally, in
connection with our restructuring in 2020, Macerich will now substantially control the FDP joint venture’s operations and, subject to limited
exceptions, control major decisions. The lack of sufficient management resources, or of the necessary skill sets to execute our plans, or the failure
of a partner in connection with a joint, mixed-use or other unique development such as FDP, could delay or prevent us from realizing our
expectations with respect to any such projects and could adversely affect our results of operations and financial condition.
Expense reimbursements are relatively low and might continue to be relatively low. Also, operating expenses may increase in the future,
reducing our cash flows.
Our leases have historically provided that the tenant is liable for a portion of common area maintenance (“CAM”) costs, real estate taxes and other
operating expenses. If these expenses increase, then under such provisions, the tenant’s portion of such expenses also increases. Our new leases
are continuing to incorporate terms providing for fixed CAM reimbursement or caps on the rate of annual increases in CAM reimbursement. In
these cases, a tenant will pay a set or capped expense reimbursement amount, regardless of the actual amount of operating expenses. The tenant’s
payment remains the same even if operating expenses increase, causing us to be responsible for the excess amount. To the extent that existing
leases, new leases or renewals of leases do not require a pro rata contribution from tenants, and to the extent that any new fixed CAM
reimbursement provision sets an amount below actual expense levels, we are liable for the cost of such expenses in excess of the portion paid by
tenants, if any. This has affected and could, in the future, adversely affect our net effective rent and our results of operations. Further, if a property
is not fully occupied, as it typically is not, we are required to pay the portion of the expenses allocable to the vacant space that is otherwise
typically paid by tenants, which would adversely affect our results of operations.
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Our properties are also subject to the risk of increases in CAM costs and other operating expenses, which typically include real estate taxes,
energy and other utility costs, repairs, maintenance on and capital improvements to common areas, security, housekeeping, property and liability
insurance and administrative costs. A significant portion of our operating expenses are managed through contracts with third-party
vendors. Vendor consolidation could result in increased expense for such services. In addition, in recent years, municipalities have sought to
raise real estate taxes paid by our property in their jurisdiction because of their strained budgets, our recent redevelopment of such property or for
other reasons. In some cases, our mall might be the largest single taxpayer in a jurisdiction, which could make real estate tax increases significant
to us. If operating expenses increase, the availability of other comparable retail space in the specific geographic markets where our properties are
located might limit our ability to pass these increases through to tenants, or, if we do pass all or a part of these increases on, might lead tenants to
seek retail space elsewhere, which, in either case, could adversely affect our results of operations.
The valuation and accounting treatment of certain long-lived assets, such as real estate, or of intangible assets, such as goodwill, could
result in future asset impairments, which would be recorded as operating losses.
Real estate investments and related intangible assets are reviewed for impairment whenever events or changes in circumstances, such as a
decrease in net operating income, the loss of an anchor tenant or an agreement of sale at a price below book value, indicate that the carrying
amount of the property might not be recoverable. An operating property to be held and used is considered impaired under applicable accounting
authority only if management’s estimate of the aggregate future cash flows to be generated by the property, undiscounted and without interest
charges, is less than the carrying value of the property. 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. This estimate takes into consideration factors such as expected future net operating income, trends and prospects, and
upcoming lease maturities, as well as the effects of demand, competition and other factors. We have set our estimates of future cash flows to be
generated by our properties taking into account these factors, which might cause changes in our estimates in the future. If we find that the carrying
value of real estate investments and related intangible assets has been impaired, as we did in recent years, we will recognize impairment with
respect to such assets. Applicable accounting principles require that goodwill and certain intangible assets be tested for impairment annually or
earlier upon the occurrence of certain events or substantive changes in circumstances. If we find that the carrying value of goodwill or certain
intangible assets exceeds estimated fair value, we will reduce the carrying value of the real estate investment or goodwill or intangible asset to the
estimated fair value, and we will recognize impairment with respect to such investments or goodwill or intangible assets.
Impairment of long-lived assets is required to be recorded as a non-cash operating expense. We did not record any noncash impairment charges on
our long-lived assets in 2020. Our 2019 impairment analyses resulted in noncash impairment charges on long-lived assets of $5.0 million, and, as
a result, the carrying values of our impaired assets were reset to their estimated fair values as of the respective dates on which the impairments
were recognized. Any decline in the estimated fair values of our assets could result in impairment charges in the future. It is possible that such
impairments, if required, could be material. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Critical Accounting Policies and Estimates—Asset Impairment.”
Conditions in the U.S. economy might adversely affect our cash flows from operations.
The U.S. economy has continued to experience relatively slow income growth, increased health care costs and reduced or fluctuating business and
consumer confidence and retail sales. Particularly in light of the COVID-19 pandemic, the U.S. economy experienced a sharp downturn in
economic activity and a deterioration in the labor market in 2020. Changes in the patterns of consumer spending, consumer confidence and
seasonal spending have led to decreased operating performance of and bankruptcy or similar filings by several retailer tenants, which has led to
store closings, delays or deferred decisions regarding lease renewals and the openings of new retail stores at our properties, and has in some cases
affected the ability of our current tenants to meet their obligations to us. This has affected our ability to generate cash flows, meet our debt service
requirements, comply with the covenants under our Credit Agreements, make capital expenditures and make distributions to shareholders, and we
expect these impacts to continue. These conditions could have a material adverse effect on our financial condition and results of operations.
Our retail properties are concentrated in the Eastern United States, particularly in the Mid-Atlantic region, and adverse market
conditions in that region might affect the ability of our tenants to make lease payments and the interest of prospective tenants to enter
into leases, which might reduce the amount of revenue generated by our properties.
Our retail properties are concentrated in the Eastern United States, particularly in the Mid-Atlantic region, including a number of properties in the
Philadelphia, and to a lesser extent, the Washington, D.C. metropolitan areas. To the extent adverse conditions affecting retail properties, such as
economic conditions, population trends, changing demographics and urbanization, availability and costs of financing, construction costs, income,
unemployment, declining real estate values, local real estate conditions, sales and property taxes and tax laws, and weather conditions are
particularly adverse in these areas, our results of operations will be affected to a greater degree than companies that do not have concentrations in
these regions. If the sales of stores operating at our properties were to decline significantly due to adverse regional conditions, the risk that our
tenants, including anchors, will be unable to fulfill the terms of their leases to pay rent or will enter into bankruptcy might increase. Furthermore,
such adverse regional conditions might affect the likelihood or timing of lease commitments by new tenants or lease renewals by existing tenants
as such parties delay their leasing decisions in order to obtain the most current information about trends in their businesses or industries. If, as a
result of prolonged adverse regional conditions, occupancy at our properties decreases or our properties do not generate sufficient revenue to meet
our operating and other expenses, including debt service, our financial position, results of operations and cash flow would be adversely affected.
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The benefits of our redevelopment of The Gallery at Market East into Fashion District Philadelphia may not be realized as expected and
our financial results could be adversely affected.
We, along with our joint venture partner, The Macerich Company, undertook the significant redevelopment of Fashion District Philadelphia
(“FDP”). FDP opened in 2019, but full occupancy has not yet been achieved, and stabilization is currently anticipated to be realized in 2022.
Although FDP is expected to generate a positive contribution and provide for future growth, operating FDP involves a number of risks, including
those that are financial and operational in nature. For example, FDP may under-perform relative to our expectations or not perform in accordance
with our anticipated timetable or it may place unanticipated demands on our resources. Additionally, in connection with our restructuring in 2020,
Macerich will now substantially control the joint venture’s operations and, subject to limited exceptions, control major decisions. If we are unable
to realize the expected benefits of our investment in this joint venture, our financial results could be adversely affected.
We have invested and may in the future invest in partnerships with third parties to acquire, develop or redevelop properties, and we
might not control the management, redevelopment or disposition of these properties, or we might be exposed to other risks.
We have invested and may in the future invest as a partner with third parties in the acquisition or ownership of existing properties or the
development of new properties, in contrast to acquiring or owning properties or developing projects by ourselves. Entering into partnerships with
third parties involves risks not present where we act alone, in that we might not have primary control over the acquisition, disposition,
development, redevelopment, financing, leasing, management, budgeting and other aspects of the property or project. These limitations might
adversely affect our ability to develop, redevelop or sell these properties at the most advantageous time for us, if at all. Also, there might be
restrictive provisions and rights that apply to sales or transfers of interests in our partnership properties, which might require us to make decisions
about buying or selling interests at a disadvantageous time.
Some of our retail properties are owned by partnerships for which major decisions, such as a sale, lease, refinancing, redevelopment, expansion or
rehabilitation of a property, or a change of property manager, require the consent of all partners. Accordingly, because decisions must be
unanimous, necessary actions might be delayed significantly and it might be difficult or even impossible to remove a partner that is serving as the
property manager. We might not be able to resolve favorably any conflicts which arise with respect to such decisions, or we might be required to
provide financial or other inducements to our partners to obtain a resolution. In cases where we are not the controlling partner or where we are
only one of the general partners, there are many decisions that do not relate to fundamental matters that do not require our approval and that we do
not control. Also, in cases in which we serve as managing general partner of the partnership that owns the property, we might have certain
fiduciary responsibilities to the other partners in those partnerships.
Business disagreements with our third-party partners might arise. We might incur substantial expenses in resolving these disputes. Moreover, we
cannot assure you that our resolution of a dispute with a third-party partner will be on terms that are favorable to us.
The profitability of each partnership we enter into with a third party that has short-term financing or debt requiring a balloon payment is
dependent on the subsequent availability of long-term financing on satisfactory terms. If satisfactory long-term financing is not available, we
might have to rely on other sources of short-term financing or equity contributions. Although these partnerships are not wholly-owned by us, if
any obligations were recourse, we might be required to pay the full amount of any obligation of the partnership, or we might elect to pay all of the
obligations of such a partnership to protect our equity interest in its properties and assets. This could cause us to utilize a substantial portion of our
liquidity sources or operating funds and could have a material adverse effect on our operating results.
Other risks of investments in partnerships with third parties include:
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partners might become bankrupt or fail to fund their share of required capital contributions, which might inhibit our ability to make
important decisions in a timely fashion or necessitate our funding their share to preserve our investment, which might be at a
disadvantageous time or in a significant amount;
partners might undergo a change of control or a substantial change in management, which could similarly inhibit our ability to make
important decisions in a timely fashion or otherwise affect our intentions with respect to a project;
partners might have or develop business interests or goals that are inconsistent with our business interests or goals;
partners might be in a position to take action contrary to our policies or objectives;
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• we might incur liability for the actions of our partners;
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third-party managers might not be sensitive to publicly-traded company or REIT tax compliance matters; and
partners might suffer deterioration in their creditworthiness, making it difficult for the joint venture to obtain financing at favorable rates,
or at all.
Our business could be harmed if members of our corporate management team terminate their employment with us or otherwise are
unable to continue in their current capacity or we are unable to attract and retain talented employees.
Our future success depends, to a meaningful extent, upon the continued services of Joseph F. Coradino, our Chairman and Chief Executive
Officer, and Mario C. Ventresca, Jr., our Chief Financial Officer, and the services of our corporate management team and, more broadly, our
employees generally. Our executives have substantial experience in managing, developing and acquiring retail real estate. We have entered into
employment agreements with Joseph F. Coradino, our Chief Executive Officer, and Mario C. Ventresca, Jr., our Chief Financial Officer. Each of
these individuals could elect to terminate their respective agreements at any time. The loss of services of one or more members of our corporate
management team, or our failure to attract and retain talented employees generally could harm our business and our prospects. Further, if we
undertake certain cost-savings and restructuring initiatives in the future, they may be disruptive to our workforce and operations and adversely
affect our financial results, because they may impact employee morale and may impair our ability to attract and retain talent.
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If we suffer losses that are not covered by insurance or that are in excess of our insurance coverage limits, we could lose invested capital
and anticipated profits.
There are some types of losses, including those of a catastrophic nature, such as losses due to wars, earthquakes, floods, hurricanes, pollution,
environmental matters, information technology system failures (including phishing, ransomware and cyber attacks) and lease and contract claims,
that are generally uninsurable or not economically insurable, or might be subject to insurance coverage limitations, including large deductibles or
co-payments or caps on coverage amounts. Under federal terrorism risk insurance legislation, the United States government provides reinsurance
coverage to insurance companies following a declared terrorism event. There is a generally similar program relating to flood insurance. If either
or both of these programs were no longer in effect, it might become prohibitively expensive, or impossible, to obtain insurance that covers
damages or losses from those types of events. Tenants might also encounter difficulty obtaining coverage.
If one of these events occurred to, or caused the destruction of, one or more of our properties, we could lose both our invested capital and
anticipated profits from that property. We also might remain obligated for any mortgage loan or other financial obligation related to the property.
In addition, if we are unable to obtain insurance in the future at acceptable levels and at a reasonable cost, the possibility of losses in excess of our
insurance coverage might increase and we might not be able to comply with covenants under our debt agreements, which could adversely affect
our financial condition. If any of our properties were to experience a significant, uninsured loss, it could seriously disrupt our operations, delay
our receipt of revenue and result in large expense to repair or rebuild the property. These types of events could adversely affect our cash flow and
results of operations.
We might incur costs to comply with environmental laws, which could have an adverse effect on our results of operations.
Under various federal, state and local laws, ordinances, regulations and case law, an owner, former owner or operator of real estate might be liable
for the costs of removal or remediation of hazardous or toxic substances present at, on, under, in or released from its property, regardless of
whether the owner, operator or other responsible party knew of or was at fault for the release or presence of hazardous or toxic substances. The
responsible party also might be liable to the government or to third parties for substantial property damage and investigation and cleanup costs.
Even if more than one person might have been responsible for the contamination, each person covered by the environmental laws might be held
responsible for all of the clean-up costs incurred. In addition, some environmental laws create a lien on the contaminated site in favor of the
government for damages and costs the government incurs in connection with the contamination. Contamination might adversely affect the
owner’s ability to sell or lease real estate or borrow with that real estate as collateral. In connection with our ownership, operation, management,
development and redevelopment of properties, or any other properties we acquire in the future, we might be liable under these laws and might
incur costs in responding to these liabilities.
We are aware of certain environmental matters at some of our properties. We have, in the past, investigated and, where appropriate, performed
remediation of such environmental matters, but we might be required in the future to perform testing relating to these matters and further
remediation might be required, or we might incur liability as a result of such environmental matters. Environmental matters at our properties
include the following:
Asbestos. Asbestos-containing materials are present at a number of our properties, primarily in the form of floor tiles, mastics, roofing materials
and adhesives. Fire-proofing material containing asbestos is present at some of our properties in limited concentrations or in limited areas. Under
applicable laws and practices, asbestos-containing material in good, non-friable condition are allowed to be present, although removal might be
required in certain circumstances. In particular, in the course of any redevelopment, renovation, construction or build out of tenant space,
asbestos-containing materials are generally removed.
Underground and Above Ground Storage Tanks. Underground and above ground storage tanks are or were present at some of our properties.
These tanks were used to store waste oils or other petroleum products primarily related to the operation of automobile service center
establishments at those properties. In some cases, the underground storage tanks have been abandoned in place, filled in with inert materials or
removed and replaced with above ground tanks. Some of these tanks might have leaked into the soil, leading to ground water and soil
contamination. Where leakage has occurred, we might incur investigation, remediation and monitoring costs if responsible current or former
tenants, or other responsible parties, are unavailable to pay such costs.
Ground Water and Soil Contamination. Ground water contamination has been found at some properties in which we currently or formerly had an
interest. At some properties, dry cleaning operations, which might have used solvents, contributed to ground water and soil contamination.
Each of our retail properties has been subjected to a Phase I or similar environmental audit (which involves a visual property inspection and a
review of records, but not soil sampling or ground water analysis) by environmental consultants. These audits have not revealed, and we are not
aware of, any environmental liability that we believe would have a material adverse effect on our results of operations. It is possible, however, that
there are material environmental liabilities of which we are unaware. Also, we cannot assure you that future laws will not impose any material
environmental liability, or that the current environmental condition of our properties will not be affected by the operations of our tenants, by the
existing condition of the land, by operations in the vicinity of the properties (such as the presence of underground storage tanks) or by the
activities of unrelated third parties.
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We have environmental liability insurance coverage for the types of environmental liabilities described above, which currently covers liability for
pollution and on-site remediation of up to $10.0 million per occurrence and $10.0 million in the aggregate over our two-year policy term. We
cannot assure you that this coverage will be adequate to cover future environmental liabilities. If this environmental coverage were inadequate, we
would be obligated to fund those liabilities. We might be unable to continue to obtain insurance for environmental matters, at a reasonable cost or
at all, in the future.
In addition to the costs of remediation, we might incur additional costs to comply with federal, state and local laws relating to environmental
protection and human health and safety. There are also various federal, state and local fire, health, life-safety and similar regulations that might be
applicable to our operations and that might subject us to liability in the form of fines or damages for noncompliance. The cost described above,
individually or in the aggregate, could adversely affect our results of operations.
Inflation may adversely affect our financial condition and results of operations.
Inflationary price increases could have an adverse effect on consumer spending, which could impact our tenants’ sales and, in turn, our tenants’
business operations. This could affect the amount of rent these tenants pay, including if their leases provide for percentage rent or percentage of
sales rent, and their ability to pay rent. Also, inflation could cause increases in operating expenses, which could increase occupancy costs for
tenants and, to the extent that we are unable to recover operating expenses from tenants, could increase operating expenses for us. In addition, if
the rate of inflation exceeds the scheduled rent increases included in our leases, then our net operating income and our profitability would
decrease. Inflation could also result in increases in market interest rates, which could not only negatively impact consumer spending and tenant
investment decisions, but would also increase the borrowing costs associated with our existing or any future variable rate debt, to the extent such
rates are not effectively hedged or fixed, or any future debt that we incur.
We face risks associated with, and have experienced, security breaches through cyber attacks. A significant privacy breach or IT system
disruption could adversely affect our business and we might be required to increase our spending on data and system security, which
could adversely affect our financial condition.
We rely on information technology networks and systems, including the Internet, to process, transmit and store electronic information, and to
manage or support a variety of business processes and activities. In addition, our business relationships with our tenants and vendors involve the
storage and transmission of proprietary information and sensitive or confidential data. Like many businesses today, we have experienced an
increase in cyber-threats and attempted intrusions. Our systems are subject to a variety of forms of cyber attacks (including phishing and
ransomware attacks) with the objective of gaining unauthorized access to our systems or data or disrupting our operations. Security breaches
have, from time to time, occurred and may occur in the future. Due to the nature of these attacks, there is a risk that an attack or intrusion remains
undetected for a period of time. Although the cyber attacks we have experienced have not had a material impact on our financial results to date,
and we maintain cyber liability insurance coverage, there remains a risk that breaches in security could expose us, our tenants or our employees to
a risk of loss, misappropriation of assets that cannot be recovered, or misuse of proprietary information and of sensitive or confidential data. In
addition, our information technology systems, some of which are managed or hosted by third-parties, may be susceptible to damage, disruptions
or shutdowns due to computer viruses, attacks by computer hackers, telecommunication failures, user errors or catastrophic events, failures
during the process of upgrading or replacing software, databases or components thereof, power outages or hardware failures. Any of these
occurrences could result in disruptions in our operations, the loss of existing or potential tenants or shoppers, damage to our brand and reputation,
regulatory compliance efforts and costs, remediation costs, and litigation and potential liability. Even the most well-protected information
remains potentially vulnerable, because the techniques and sophistication used to conduct cyber attacks and breaches of IT systems, as well as the
sources of these attacks, change frequently and are often not recognized until they are launched and have been put in place for a period of
time. Although we make substantial efforts to maintain the security of our networks and related systems, there can be no assurance that our
security efforts will be effective or that attempted security breaches would not be successful or damaging. Our efforts include conducting periodic
assessments of internal and external threats to and vulnerabilities of our information and technology systems, security controls and processes in
place and the effectiveness of our management of cybersecurity risk. The results of these assessments are used to create and implement strategies
designed to prevent, detect and respond to cybersecurity threats, and we expect to continue to employ cybersecurity risk mitigation measures, as
well as seek to improve and expand such measures. We expect to continue to dedicate resources to technology and mitigating related risks. We
may incur increasing costs to deploy additional personnel and protection technologies, to train employees and engage third-party experts and
consultants, or to notify employees, suppliers or the general public as part of our notification obligations. The cost and operational consequences
of implementing further data or system protection measures or remediation efforts could be significant. Our processes, procedures and controls to
reduce these risks, our increased awareness of the risk of a cyber incident, and our insurance coverage, however, do not guarantee that our
financial results would not be materially impacted by a cyber incident.
Our retailer tenants’ businesses also require the collection, transmission and retention of large volumes of shopper and employee data, including
credit and debit card numbers and other personally identifiable information, in various information technology systems. The consequences of
cyber attacks perpetrated against our retailer tenants, which may include the misappropriation of assets or sensitive information or an operational
disruption, could diminish consumer confidence and spending, result in fines, legal claims or proceedings or other liability, as well as significant
remediation costs, any of which could have a material and adverse effect on their financial condition and results of operations and business. This
could, in turn, have an adverse effect on our financial condition or results of operations.
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We might not be successful in identifying suitable acquisitions, completing acquisitions, or integrating any properties we acquire, which
might adversely affect our financial condition or results of operations.
Acquisitions of retail properties have historically been an important component of our growth strategy, although we have initiated few
acquisitions in recent years and do not currently anticipate acquisition activity in the near term. Expanding by acquisitions requires us to identify
suitable acquisition candidates or investment opportunities that meet the criteria we apply, given economic, market or other circumstances, and
that are compatible with our growth strategy. Our credit facilities substantially limit our right to pursue acquisitions, subject to certain exceptions.
We might not be successful in identifying suitable properties or other assets in our existing geographic markets or in markets new to us that meet
the acquisition criteria we apply, given economic, market or other circumstances, in financing such properties or other assets or in consummating
acquisitions or investments on satisfactory terms. Further, time constraints or other limitations in the scope of our diligence review might lead us
to make acquisitions that might have additional or larger issues than we anticipated, which might reduce the returns on our investment and affect
our financial condition and results of operations.
When we seek to make acquisitions, competitors (such as institutional investors, other REITS and other owner-operators of retail properties)
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. We might not succeed in acquiring retail
properties or development sites that we seek, or, if we pay a higher price for a property or site, or generate lower cash flow from an acquired
property or site than we expect, our investment returns will be reduced, which will adversely affect the value of our securities.
To the extent that we pursue acquisitions of additional properties or portfolios of properties that meet the investment criteria we apply, given
economic, market and other circumstances, we might not be able to adapt our management and operational systems to effectively manage any
such acquired properties or portfolios, which could adversely affect our financial condition and results of operations.
RISKS RELATED TO THE REAL ESTATE INDUSTRY
Online shopping and other uses of technology could affect the business models and viability of retailers, which could, in turn, affect their
demand for retail real estate.
Online retailing and shopping and the use of technology to aid purchase decisions have increased in recent years, and particularly this past year in
light of the COVID-19 pandemic the shift to online shopping has been accelerated and significant. These changes to retail models are expected to
continue to remain popular in the future. In certain categories, such as books, music, apparel and electronics, online retailing has become a
significant proportion of total sales, and has affected retailers and consumers significantly. The information available online empowers
consumers with knowledge about products and information about prices and other offers differently than information available in a single
physical store with sales associates. Consumers are able to purchase products anytime and anywhere and are able to compare more products than
are typically found in a single retail location, and they are able to read product reviews and to compare product features and pricing. In addition,
customers of certain of our retailers use technology including smartphones to check competitors’ product offerings and prices while in stores
evaluating merchandise. Some tenants utilize our shopping centers as showrooms or as part of an omni-channel strategy (allowing for customers
to shop online or in stores and for order fulfillment and returns to take place in stores or via shipping). In this model, customers may make
purchases during or immediately after visiting our malls, with such sales not currently being captured in our tenant sales figures or monetized in
our minimum or percentage rents.
Online shopping and technology, such as smartphone applications, are affecting and might continue to affect the business models, sales and
profitability of retailers, which would, in turn, affect the demand for retail real estate, occupancy at our properties and the amount of rent that we
receive. Any resulting decreases in rental revenue could have a material adverse effect on our financial condition and results of operations.
We are subject to risks that affect the retail real estate environment generally.
Our business focuses on retail real estate, predominantly malls. As such, we are subject to certain risks that can affect the ability of our retail
properties to generate sufficient revenue to meet our operating and other expenses, including debt service, to make capital expenditures and to
make future distributions to our shareholders. We face continuing challenges because of changing consumer preferences and because the
conditions in the economy affect employment growth and cause fluctuations and variations in retail sales and in business and consumer
confidence and consumer spending on retail goods. In general, a number of factors can negatively affect the income generated by a retail property
or the value of a property, including: a downturn in the national, regional or local economy; a decrease in employment or consumer confidence or
spending; increases in operating costs, such as common area maintenance, real estate taxes, utility rates and insurance premiums; higher energy or
fuel costs resulting from adverse weather conditions, natural disasters, geopolitical concerns, terrorist activities and other factors; changes in
interest rate levels and the cost and availability of financing; a weakening of local real estate conditions, such as an oversupply of, or a reduction
in demand for, retail space or retail goods, and the availability and creditworthiness of current and prospective tenants; trends in the retail
industry; seasonality; changes in perceptions by retailers or shoppers of the safety, convenience and attractiveness of a retail property; perceived
changes in the convenience and quality of competing retail properties and other retailing options such as internet shopping or other strategies,
such as using smartphones or other technologies to determine where to make and to assist in making purchases; tenants’ ability to innovate or
change their business models at a pace sufficient to adapt to the evolving consumer landscape; the ability of our tenants to meet shoppers’
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demands for quality, variety, and product availability, which may be impacted by supply chain disruptions; and changes in laws and regulations
applicable to real property, including tax and zoning laws. For example, the COVID-19 pandemic resulted in travel restrictions and plant
shutdowns, which impacted our tenants’ supply chains and, ultimately, retail product availability. Continuing fears related to the COVID-19
pandemic could impact shoppers’ willingness to visit our retail properties and the continued spread of the virus has led to operational changes in
our mall environments to allow for social distancing and to provide enhanced health and safety measures, and may lead to renewed shutdowns of
one or more of our retail properties, particularly in certain geographies reporting increasing diagnoses of the virus or related illnesses. The extent
and duration of the pandemic and its impact on our tenants and our operations is uncertain, but the longer the pandemic continues, the greater the
risk is that its effects and various measures taken in response could continue to adversely affect us.
Changes in one or more of the aforementioned factors can lead to a decrease in the revenue or income generated by our properties and can have a
material adverse effect on our financial condition and results of operations. Many of these factors could also specifically or disproportionately
affect one or more of our tenants, which could lead to decreased operating performance, reduce property revenue and affect our results of
operations. If the estimated future cash flows related to a particular property are significantly reduced, we may be required to reduce the carrying
value of the property.
The retail real estate industry is highly competitive, and this competition could harm our ability to operate profitably.
Competition in the retail real estate industry is intense. We compete with other public and private retail real estate companies, including
companies that own or manage malls, 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 several factors, including location and rent charged. We compete with these companies to attract customers to our properties, as well as to
attract anchor, non-anchor and other tenants. Our properties face competition from similar retail centers, including more recently developed or
renovated centers that are near our retail properties. Some of our competitors have greater financial resources or have different investment criteria
than we do, a competitive factor that could become even more relevant as competitors gain size and economies of scale as a result of merger and
consolidation activity. 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 retailers with a significant online presence. 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
conditions of our 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 affect the 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. Additionally, such
costs and expenses could lead to greater earnings volatility than would be experienced by our larger competitors.
Acts of violence or war or other terrorist activity, including at our properties, could adversely affect our financial condition and results
of operations.
Violent activities, terrorist or other attacks, threats of attacks or the increased frequency of such attacks or threats of attacks could directly affect
the value of our properties as a result of casualties or through property damage, destruction or loss, or by making shoppers afraid to patronize such
properties. The availability of insurance for such acts, or of insurance generally, might decrease, or cost more, which could increase our operating
expenses and adversely affect our financial condition and results of operations. Future acts of violence or terrorist attacks in the United States
might result in declining economic activity, which could harm the demand for goods and services offered by our tenants and the value of our
properties, and might adversely affect the value of an investment in our securities. Such a decrease in retail demand could make it difficult for us
to renew leases or enter into new leases at our properties at lease rates equal to or above historical rates. To the extent that our tenants are directly
or indirectly affected by future attacks, their businesses similarly could be adversely affected, including their ability to continue to meet
obligations under their existing leases. Customers of the tenants at an affected property, and at other properties, might be less inclined to shop at
an affected location or at a retail property generally. Such acts might erode business and consumer confidence and spending, and might result in
increased volatility in national and international financial markets and economies. Any such acts could decrease demand for retail goods or real
estate, decrease or delay the occupancy of our properties, and limit our access to capital or increase our cost of raising capital.
Social unrest and acts of vandalism or violence could adversely affect our business operations.
Our business may be adversely affected by social, political, and economic instability, unrest, or disruption, including protests, demonstrations,
strikes, riots, civil disturbance, disobedience, insurrection and looting in geographic regions where our properties are located. Such events may
result in property damage and destruction and in restrictions, curfews, or other governmental actions that could give rise to significant changes in
economic conditions and cycles, which may adversely affect our financial condition and operations.
In 2020 and 2021, there have been demonstrations and protests, some of which involved violence, looting, arson and property destruction, in
cities throughout the United States. While the majority of protests have been peaceful, looting, vandalism and fires have taken place in certain
places, which led to the imposition of mandatory curfews and, in some locations, deployment of the National Guard. Governmental actions taken
to protect people and property, including curfews and restrictions on business operations, may disrupt operations, harm perceptions of personal
well-being and increase the need for additional expenditures on security resources. The effect and frequency of the demonstrations, protests or
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other factors is uncertain, and we cannot assure there will not be further political or in the future or that there will not be other events that could
lead to further social, political and economic instability. If such events or disruptions persist for a prolonged period of time, our overall business
and results of operations may be adversely affected.
The illiquidity of real estate investments might delay or prevent us from selling properties that we determine no longer meet the strategic
and financial criteria we apply and could significantly affect our ability to respond in a timely manner to adverse changes in the
performance of our properties and harm our financial condition.
Substantially all of our assets consist of investments in real properties. We review all of the assets in our portfolio regularly and we make
determinations about which assets have growth potential and which properties do not meet the strategic or financial criteria we apply and should
thus be divested. Because real estate investments are relatively illiquid, our ability to quickly sell one or more properties in our portfolio in
response to our evaluation or to changing economic and financial conditions is limited. The real estate market is affected by many factors that are
beyond our control, such as general economic conditions, the availability of financing, interest rates, and the supply and demand for space. We
cannot predict whether we will be able to sell any property for the price or on the terms we set, or whether any price or other terms offered by a
prospective purchaser would be acceptable to us. The number of prospective buyers interested in purchasing malls is limited. We also cannot
predict the length of time needed to find a willing purchaser and to close the sale of a property. In addition, prospective buyers might experience
increased costs of debt financing or other difficulties in obtaining debt financing (as the volatility in the credit markets may be reflected in lending
on unfavorable terms to the retail industry), which might make it more difficult for us to sell properties or might adversely affect the price we
receive for properties that we do sell. In the recent past, we have entered into agreements to sell properties that were delayed and then terminated
because the purchaser was unable to raise sufficient financing for closing. There are also limitations under federal income tax laws applicable to
REITs that could limit our ability to sell assets. Therefore, if we want to sell one or more of our properties, we might not be able to make such
dispositions in the desired time period, or at all, and might receive less consideration than we seek or than we originally invested in the property.
Additionally, the terms of our Credit Agreements require us to apply a portion of the net cash proceeds of asset dispositions as prepayments under
the Credit Agreements.
Before a property can be sold, we might be required to make expenditures to correct defects or to make improvements. We cannot assure you that
we will have funds available to correct those defects or to make those improvements, and if we cannot do so, we might not be able to sell the
property, or might be required to sell the property on unfavorable terms. In acquiring a property, we might agree with the sellers or others to
provisions that materially restrict us from selling that property for a period of time or impose other restrictions, such as limitations on the amount
of debt that can be placed or repaid on that property. These factors and any others that would impede our ability to respond to adverse changes in
the performance of our properties could significantly harm our financial condition and results of operations. In addition, failure to sell the
properties that we intend to sell could delay or negatively affect our strategy to obtain higher rental rates from retailers with multiple stores in our
portfolios, including at these properties.
RISKS RELATED TO OUR INDEBTEDNESS AND OUR FINANCING
We have substantial debt and stated value of preferred shares outstanding, which could adversely affect our overall financial health and
our operating flexibility. We require significant cash flows to satisfy our debt service. These obligations may prevent us from using our
cash flows for other purposes. If we are unable to satisfy these obligations, we might default on our debt and our financial condition and
results of operations would be adversely affected.
We use a substantial amount of debt and preferred shares outstanding to finance our business, including through indebtedness secured by
mortgages and deeds of trust on our properties. As of December 31, 2020, we had an aggregate consolidated indebtedness of $1,862.4 million,
substantially all of which is secured by our assets, including mortgages on our properties. These aggregate debt amounts do not include our
proportionate share of indebtedness of our partnership properties, which was $374.4 million as of December 31, 2020. We also had outstanding as
of December 31, 2020, in the aggregate, $89.4 million of 7.375% Series B Preferred Shares, $178.7 million of 7.20% Series C Preferred Shares
and $129.3 million of 6.875% Series D Preferred Shares.
Our substantial indebtedness involves significant obligations for the payment of interest and principal. If we do not have sufficient cash flow from
operations to meet these obligations, we might be forced to sell assets to generate cash, which might be on unfavorable terms, if at all, or we might
not be able to make all required payments of principal and interest on our debt, which could result in a default or have a material adverse effect on
our financial condition and results of operations. We are not currently paying dividends on our preferred shares due to, among other things,
restrictions in our credit facilities. As a result, unpaid dividends are accruing and increasing the liquidation amount of our preferred shares. If
dividends on our outstanding preferred shares have not been paid for six dividend payments, whether or not for consecutive dividend periods, the
size of our Board of Trustees will be increased by two members, and holders of each series of the outstanding preferred shares, voting as a group,
will have the right to elect two additional trustees to our Board of Trustees. See “—We could face adverse consequences as a result of the actions
of activist shareholders” for a description of risks related to the election of trustees by holders of our preferred shares.
Our substantial obligations arising from our indebtedness could also have other negative consequences to our shareholders, including the
acceleration of a significant amount of our debt if we are not in compliance with the terms of such debt or, if such debt contains cross-default or
cross-acceleration provisions (as our Credit Agreements do), other debt. If we fail to meet our obligations under our debt, we could lose assets due
to foreclosure or sale on unfavorable terms, which could create taxable income without accompanying cash proceeds, or such failure could harm
our ability to obtain additional financing in the future for working capital, capital expenditures, debt service requirements, acquisitions,
redevelopment and development activities, execution of our business strategy or other general corporate purposes. Also, our indebtedness and
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mandated debt service might limit our ability to refinance existing debt or to do so at a reasonable cost, might make us more vulnerable to adverse
economic and market conditions, might limit our ability to respond to competition or to take advantage of opportunities, and might discourage
business partners from working with us or counterparties from entering into hedging transactions with us.
Furthermore, since a significant percentage of our assets are used to secure our debt, this reduces the amount of collateral available for future
secured debt or credit support and reduces our flexibility in operating these secured assets. This relatively high level of debt and related security
could also limit our ability to borrow additional amounts for working capital, capital expenditures, debt service requirements, execution of our
business strategy or other purposes and could limit our ability to use operating cash flow in other areas of our business because we must dedicate
a substantial portion of these funds to service debt.
In addition to our current debt, we might incur additional debt in the future in the form of mortgage loans, unsecured borrowings, additional
borrowing under our existing Credit Agreements, other term loan borrowings or other financing vehicles or arrangements. We might do so in
order to finance development or redevelopment of properties, acquisitions or for other general corporate purposes, subject to the terms and
conditions of our Credit Agreements, which could exacerbate the risks described above. These consequences could have a material adverse effect
on our business, financial condition and results of operations.
The covenants in our Credit Agreements limit our ability to take certain actions, which could adversely affect our business and our
ability to raise capital.
The terms of our Credit Agreements place restrictions on, among other things, our ability to make certain restricted payments (including
distributions to shareholders, subject to limited exceptions including to preserve REIT status), make certain types of investments and acquisitions,
issue redeemable securities (subject to exceptions for shares that are redeemable solely in exchange for common shares or other equivalents),
incur additional indebtedness, incur liens on our assets, enter into agreements with a negative pledge, make certain intercompany transfers, merge,
consolidate, or sell our assets or the equity interests of our subsidiaries, amend our organizational documents or material contracts, enter into
certain transactions with affiliates, or enter into derivatives contracts. These restrictions could limit our ability to respond to changes and
competition and reduce our flexibility in conducting our operations, including by restricting our ability to manage our cash flows, pursue
acquisitions and redevelopment and development projects, and raise capital through securities offerings. The terms of our Credit Agreements also
restrict us, subject to certain exceptions, from entering into certain major leases, assigning leases, discounting rent under certain leases, collecting
rent in advance, terminating or modifying certain leases, consenting to tenants’ assignment or subletting of certain leases, or subordinating leases.
Additionally, if we receive net cash proceeds from certain capital events (including equity issuances), we are required to prepay loans under our
Credit Agreements. In addition, the Credit Agreements contain, and any future debt agreements may contain, cross-default provisions that trigger
an event of default if we fail to make certain payments or otherwise fail to comply with our obligations with respect to certain of our other
indebtedness. Our continued ability to borrow under the Credit Agreements and any other indebtedness that we have or may obtain will be subject
to compliance with the covenants in the Credit Agreements or in the debt agreement governing such other indebtedness.
Furthermore, as a result of the existing cumulative unpaid dividends on our preferred shares and our bankruptcy filing, we are no longer able to
register the offer and sale of securities on Form S-3. This creates limitations on our ability to raise capital in the capital markets, potentially
increasing our costs of raising capital in the future.
The restrictions on our business imposed by the terms of our Credit Agreements could adversely affect our business generally in addition to our
ability to raise capital and our results of operations, cash flow and ability to make capital expenditures in the future.
If we are unable to comply with the covenants in our Credit Agreements, we might be adversely affected.
As discussed in “Liquidity and Capital Resources – Identical covenants and common provisions contained in the Credit Agreements,” on
December 10, 2020, we entered into agreements for secured credit facilities as part of our restructuring efforts upon emergence from bankruptcy
and in accordance with the Plan. Our Credit Agreements require us to satisfy certain affirmative and negative covenants (including maintaining
minimum liquidity of $25 million) and to meet certain financial tests, including tests relating to our corporate debt yield and senior debt yield. As
of December 31, 2020, the maximum amount that was available to be borrowed by us under the First Lien Revolving Facility was $75.2 million,
which is not reduced by any usage of the borrowing capacity to fulfill our unrestricted cash liquidity requirement of $25 million as described
further in Note 4 to our consolidated financial statements.
As of December 31, 2020, we were in compliance with all the financial covenants in our Credit Agreements, however, a material decline in future
operating results could affect our ability to comply with these covenants, several of which only come into effect starting on June 30, 2021.
Particularly in light of recent property sales, reduction in our asset base and the impacts of the COVID-19 pandemic on our business, we are at
increased risk of being unable to comply with these covenants or having reduced borrowing capacity in the future. We expect the current
conditions in the economy and the retail industry, particularly in light of the COVID-19 pandemic and the resulting unprecedented global
economic disruption (including disruptions to our and our tenants’ businesses and operations), to continue to materially affect our operating
results. Furthermore, to determine our compliance with the Credit Agreements, including the covenants, we must apply our judgment to our facts,
taking into account our past practice, and interpret the contractual provisions in the agreements. To the extent that our lenders interpret these
differently than us, we may have disagreements or disputes, and if we are unable to resolve them, these disagreements may result in material
limitations on our ability to access funding under the facility, protracted negotiations, and/or legal proceedings.
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We regularly engage in discussions with lenders that participate in our credit facilities regarding our capital and liquidity resources and needs,
including, as appropriate, to explore alternatives and ensure that we will remain in compliance with our financial covenants and have continued
access to funding under the facilities, which alternatives may include waivers or amendments. There is no assurance that we could obtain such
agreements, waivers or amendments, and even if obtained, we would likely incur additional costs. Our inability to comply with the terms of our
credit agreements or to obtain any such agreement, waiver or amendment could result in a breach and a possible event of default under our Credit
Agreements, which could allow the lenders to discontinue lending or issuing letters of credit, terminate any commitments they have made to
provide us with additional funds, declare amounts outstanding to be immediately due and payable, and/or take possession of the property or
properties securing such debt. If a default were to occur, we might have to refinance the debt through secured or unsecured debt financing or
private or public offerings of debt or equity securities. If we are unable to do so, we might have to liquidate assets, potentially on unfavorable
terms. No assurance can be provided that we would be able to liquidate assets in a timely fashion or in satisfaction of our obligations.
Any of the factors described above could negatively affect our financial position, results of operations, cash flow and ability to make capital
expenditures in the future.
Secured indebtedness exposes us to the possibility of foreclosure, which could result in the loss of our investment in certain of our
subsidiaries or in a property or group of properties or other assets subject to indebtedness.
We have granted our lenders security interests in a portfolio of our assets, including equity interests in certain of our subsidiaries and in certain of
our real property. Incurring secured indebtedness, including mortgage indebtedness, increases our risk of asset and property losses because
defaults on indebtedness secured by our assets, including equity interests in certain of our subsidiaries and in certain of our real property, may
result in foreclosure actions initiated by lenders and ultimately our loss of the property or other assets securing any loans for which we are in
default.
Any foreclosure on a mortgaged property or group of properties could have a material adverse effect on the overall value of our portfolio of
properties and more generally on our business. For tax purposes, a foreclosure of any of our properties would be treated as a sale of the property
for a purchase price equal to the outstanding balance of the indebtedness secured by the mortgage. If the outstanding balance of the indebtedness
secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure, but would not receive any cash
proceeds, which could materially and adversely affect us. As a result, our substantial secured indebtedness could have a material adverse effect on
our business.
We might not be able to refinance our existing obligations or obtain the capital required to finance our activities.
The REIT provisions of the Internal Revenue Code of 1986, as amended, generally require the distribution to shareholders of 90% of a REIT’s net
taxable income, excluding net capital gains, which generally leaves insufficient funds to finance major initiatives internally. Due to these
requirements, and subject to the terms of the Credit Agreements, we generally fund certain capital requirements, such as the capital for
renovations, expansions, redevelopments, other non-recurring capital improvements, scheduled debt maturities, and acquisitions of properties or
other assets, through secured and unsecured indebtedness and, when available and market conditions are favorable, the issuance of additional
equity securities.
As of December 31, 2020, we had one consolidated mortgage loan with an outstanding balance of $67.2 million with an initial maturity in March
2021. We had a second mortgage loan with an initial maturity in April 2021 for which we subsequently negotiated an extension option in
February 2021, which will extend the maturity date to December 2021, including an option to extend the maturity by one year to December 2022
if certain criteria are met. Also, we estimate that we will need $16.9 million of additional capital to complete our current redevelopment projects,
including the completion of redevelopment at Fashion District Philadelphia, which opened on September 19, 2019. Our ability to finance growth
from financing sources depends, in part, on our creditworthiness, the availability of credit to us from financing sources, or the market for our debt,
equity or equity-related securities when we need capital, and on conditions in the capital markets generally. See “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” for information about our available
sources of funds. There can be no assurances that we will continue to be able to obtain the financing we need for future growth or to meet our debt
service as obligations mature, or that the financing will be available to us on acceptable terms, or at all. A lack of acceptable financing could delay
or hinder our growth initiatives, or prevent us from implementing our initiatives on satisfactory terms.
If our mortgage loans and other debts cannot be repaid in full, refinanced or extended at maturity on acceptable terms, or at all, a lender could
foreclose upon the mortgaged property and receive an assignment of rent and leases or pursue other remedies, or we might be forced to dispose of
one or more of our properties on unfavorable terms, which could have a material adverse effect on our financial condition and results of
operations and which might adversely affect our cash flow.
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Payments by our direct and indirect subsidiaries of dividends and distributions to us might be adversely affected by their obligations to
make prior payments to the creditors of these subsidiaries.
We own substantially all of our assets through our interest in PREIT Associates. PREIT Associates holds substantially all of its properties and
assets through subsidiaries, including subsidiary partnerships and limited liability companies, and derives substantially all of its cash flow from
cash distributions to it by its subsidiaries. We, in turn, derive substantially all of our cash flow from cash distributions to us by PREIT
Associates. Our direct and indirect subsidiaries must make payments on their obligations to their creditors when due and payable before they may
make distributions to us. Thus, PREIT Associates’ ability to make distributions to its partners, including us, depends on its subsidiaries’ ability
first to satisfy their obligations to their creditors. Similarly, our ability to pay dividends to holders of our shares depends on PREIT Associates’
ability first to satisfy its obligations to its creditors before making distributions to us. If the subsidiaries were unable to make payments to their
creditors when due and payable, or if the subsidiaries had insufficient funds both to make payments to creditors and distribute funds to PREIT
Associates, we might not have sufficient cash to satisfy our obligations and/or make distributions to our shareholders. Furthermore, our credit
facilities limit our ability to declare and pay dividends on our common and preferred shares, subject to certain exceptions. Even if permissible
under our credit facilities, we do not anticipate paying dividends on our shares in the foreseeable future. See “—We do not anticipate paying
dividends on our shares in the foreseeable future” for additional information on the limitations imposed by our credit facilities on our ability to
make distributions to our shareholders.
In addition, we will only have the right to participate in any distribution of the assets of any of our direct or indirect subsidiaries upon the
liquidation, reorganization or insolvency of such subsidiary after the claims of the creditors, including mortgage lenders and trade creditors, of
that subsidiary are satisfied. Our shareholders, in turn, will have the right to participate in any distribution of our assets upon our liquidation,
reorganization or insolvency only after the claims of our creditors, including trade creditors, are satisfied.
Some of our properties are owned or ground-leased by subsidiaries that we created solely to own or ground-lease those properties. The mortgaged
properties and related assets are restricted solely for the payment of the related loans and are not available to pay our other debts, which could
impair our ability to borrow, which in turn could have a material adverse effect on our operating results.
Our hedging arrangements might not be successful in limiting our risk exposure, and we might incur expenses in connection with these
arrangements or their termination that could harm our results of operations or financial condition.
In the normal course of business, we are exposed to financial market risks, including interest rate risk on our interest-bearing liabilities. We use
interest rate hedging arrangements to manage our exposure to interest rate volatility, but these arrangements might be ineffective and expose us to
additional risks, such as requiring that we fund our contractual payment obligations under such arrangements in relatively large amounts or on
short notice. We are also subject to credit risk with respect to the counterparties to derivative contracts. If a counterparty becomes bankrupt or
otherwise fails to perform its obligations under a derivative contract due to financial difficulties, we may experience delays in obtaining any
recovery under the derivative contract in a dissolution, assignment for the benefit of creditors, liquidation, winding-up, bankruptcy or other
analogous proceeding. As of December 31, 2020, the aggregate fair value of our derivative instruments was an unrealized loss of $23.3 million, of
which $20.6 million is included in other comprehensive (loss) income and is expected to be subsequently reclassified into earnings in the periods
that the hedged forecasted transactions affect earnings. Developing an effective interest rate risk strategy is complex, and no strategy can
completely insulate us from risks associated with interest rate fluctuations. As of December 31, 2020, we have 11 swaps that are non-designated
for purposes of applying hedge accounting. As such, we will be exposed to fluctuations in interest rates on these non-designated swaps, which will
be marked to market each reporting period. We might enter into interest rate swaps as hedges in connection with forecasted debt transactions or
payments, and if we repay such debt earlier than expected and are no longer obligated to make such payments, then we might determine that the
swaps no longer meet the criteria for effective hedges, and we might incur gain or loss on such ineffectiveness. We cannot assure you that our
hedging activities will have a positive impact, and it is possible that our strategies could adversely affect our financial condition or results of
operations. We might be subject to additional costs, such as transaction fees or breakage costs, if we terminate these arrangements. See “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and
Estimates—Derivatives.”
We are subject to risks associated with increases in interest rates, including in connection with our variable interest rate debt.
As of December 31, 2020, we had $1.2 billion of indebtedness with variable interest rates, although we have fixed the interest rates on an
aggregate of $794.0 million of this variable rate debt by using derivative instruments. In addition, our unconsolidated partnerships have $125.1
million, at our proportionate share, of indebtedness with variable rates. We might incur additional variable rate debt in the future, and, if we do so,
the proportion of our debt with variable interest rates might increase. See “Part I. Item 7A. Quantitative and Qualitative Disclosures About Market
Risk.”
An increase in market interest rates applicable to the variable portion of the debt portfolio would increase the interest incurred and cash flows
necessary to service such debt, subject to our hedging arrangements on such debt. This has and could, in the future, adversely affect our results of
operations. Also, in coming years, as our current mortgage loans mature, if these mortgage loans are refinanced at higher interest rates than the
rates in effect at the time of the prior loans, our interest expense in connection with debt secured by our properties will increase, and could
adversely affect our results of operations.
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Furthermore, the expected discontinuation of LIBOR after 2021 and the transition away from LIBOR presents various risks and challenges,
including with respect to our borrowings and hedging arrangements that rely on the LIBOR benchmark. Various parties are working on industry
wide and company specific transition plans as they relate to derivatives and cash markets exposed to LIBOR. 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. To the extent that our contracts that rely on the LIBOR benchmark do not provide for replacement rates, we may seek to amend such
contracts. While we are focused on effective planning for the phase-out of LIBOR, the transition may divert management attention and could have
other adverse consequences for us, including on our interest rates for current and future indebtedness.
Our actual financial results after emergence from bankruptcy may not be comparable to our historical financial information as a result
of the implementation of the Plan and the transactions contemplated thereby.
In the Disclosure Statement Relating to the Joint Prepackaged Chapter 11 Plan of Reorganization of Pennsylvania Real Estate Investment Trust
and Certain of Its Direct and Indirect Subsidiaries (including any exhibits, appendices, schedules, ballots and related documents thereto, the
“Disclosure Statement”) that we filed pursuant to section 1125 of the Bankruptcy Code with the Bankruptcy Court during the Chapter 11 Cases,
we included financial projections as required by the Bankruptcy Code to demonstrate to the bankruptcy court the feasibility of the Plan and
establish that we will have sufficient liquidity and be able to meet our financial obligations under the Plan and in the ordinary course of our
business upon emergence from bankruptcy. Those projections were prepared solely for the purpose of the bankruptcy proceedings and have not
been, and will not be, updated on an ongoing basis and should not be relied upon by investors. At the time they were prepared, the projections
included in the Disclosure Statement reflected numerous assumptions concerning our then-anticipated future performance and with respect to
prevailing and anticipated market and economic conditions that were and remain beyond our control and that may not materialize. Projections are
inherently subject to substantial and numerous uncertainties and to a wide variety of significant business, economic and competitive risks,
including risks related to or deriving from the COVID-19 pandemic and its consequences, and the assumptions underlying the projections and/or
valuation estimates may ultimately prove to be inaccurate in material respects. There is no guarantee that the financial projections included in the
Disclosure Statement will be realized, and actual results may vary significantly from those contemplated by the projections. As a result, investors
should not consider the financial projections to be assurances or guarantees of future performance.
RISKS RELATING TO OUR ORGANIZATION AND STRUCTURE
Our organizational documents contain provisions that might discourage a takeover of us and depress our share price.
Our organizational documents contain, or might contain in the future, provisions that might have an anti-takeover effect and might inhibit a
change in our management and the opportunity to realize a premium over the then-prevailing market price of our securities. These provisions
currently include:
(1) There are ownership limits and restrictions on transferability in our trust agreement. In order to protect our status as a REIT, no
more than 50% of the value of our outstanding shares (after taking into account options to acquire shares) may be owned, directly or
constructively, by five or fewer individuals (as defined in the Internal Revenue Code of 1986, as amended), and the shares must be
beneficially owned by 100 or more persons during at least 335 days of a taxable year of 12 months or during a proportionate part of
a shorter taxable year. To assist us in satisfying these tests, subject to some exceptions, our trust agreement prohibits any shareholder
from owning more than 9.9% of our outstanding shares of beneficial interest (exclusive of preferred shares) or more than 9.9% of
any class or series of preferred shares. The trust agreement also prohibits transfers of shares that would cause a shareholder to
exceed the 9.9% limit or cause our shares to be beneficially owned by fewer than 100 persons. Our Board of Trustees may exempt a
person from the 9.9% ownership limit if it receives a ruling from the Internal Revenue Service or an opinion of counsel or tax
accountants that exceeding the 9.9% ownership limit as to that person would not jeopardize our tax status as a REIT. Our Board has
granted such exemptions to Cohen & Steers Capital Management, Inc., Blackrock, Inc., CBRE Clarion Securities, Heitman Real
Estate Securities, Security Capital Research and Management and Nuveen Assets Management LLC. Absent an exemption, this
restriction might:
•
•
discourage, delay or prevent a tender offer or other transaction or a change in control of management that might involve a
premium price for our shares or otherwise be in the best interests of our shareholders; or
compel a shareholder who had acquired more than 9.9% of our shares to transfer the additional shares to a trust and, as a result,
to forfeit the benefits of owning the additional shares.
(2) Our trust agreement permits our Board of Trustees to issue preferred shares with terms that might discourage a third party from
acquiring the Company. Our trust agreement permits our Board of Trustees to create and issue multiple classes and series of
preferred shares, and classes and series of preferred shares having preferences to the existing shares on any matter, without a vote of
shareholders, including preferences in rights in liquidation or to dividends and option rights, and other securities having conversion
or option rights. Also, the Board might authorize the creation and issuance by our subsidiaries and affiliates of securities having
conversion and option rights in respect of our shares. Our trust agreement further provides that the terms of such rights or other
securities might provide for disparate treatment of certain holders or groups of holders of such rights or other securities. The
issuance of such rights or other securities could have the effect of discouraging, delaying or preventing a change in control of us,
even if a change in control were in our shareholders’ interest or would give the shareholders the opportunity to realize a premium
over the then-prevailing market price of our securities.
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(3) Advance Notice Requirements for Shareholder Nominations of Trustees. The Company’s advance notice procedures with regard to
shareholder proposals relating to the nomination of candidates for election as trustees, as provided in our amended and restated
Trust Agreement, require, among other things, that advance written notice of any such proposals, containing prescribed information,
be given to our Secretary at our principal executive offices not less than 90 days nor more than 120 days prior to the anniversary date
of the prior year’s meeting (or within 10 business days of the day notice is given of the annual meeting date, if the annual meeting
date is not within 30 days of the anniversary date of the immediately preceding annual meeting).
Limited partners of PREIT Associates may vote on certain fundamental changes we propose, which could inhibit a change in control
that might otherwise result in a premium to our shareholders.
Our assets generally are held through our interests in PREIT Associates. We currently hold a majority of the outstanding limited partnership
interests (“OP Units”) in PREIT Associates. However, PREIT Associates might, from time to time, issue additional OP Units to third parties in
exchange for contributions of property to PREIT Associates in amounts that could, individually or in the aggregate, be substantial. These
issuances will dilute our percentage ownership of PREIT Associates. OP Units generally do not carry a right to vote on any matter voted on by our
shareholders, although OP Units might, under certain circumstances, be redeemed for our shares. However, before the date on which at least half
of the units issued on September 30, 1997 in connection with our acquisition of The Rubin Organization have been redeemed, the holders of units
issued on September 30, 1997 are entitled to vote such units together with our shareholders, as a single class, on any proposal to merge,
consolidate or sell substantially all of our assets. Joseph F. Coradino, our Chairman and Chief Executive Officer, is among the holders of these
units.
These existing rights could inhibit a change in control that might otherwise result in a premium to our shareholders. In addition, we cannot assure
you that we will not agree to extend comparable rights to other limited partners in PREIT Associates.
We have, in the past, and might again, in the future, enter into tax protection agreements for the benefit of certain former property
owners, including some limited partners of PREIT Associates, that might affect our ability to sell or refinance some of our properties
that we might otherwise want to sell or refinance, which could harm our financial condition.
As the general partner of PREIT Associates, we have agreed to indemnify certain former property owners against tax liabilities that they might
incur if we sell a property in a taxable transaction or significantly reduce the debt secured by a property acquired from them within a certain
number of years after we acquired it, and we might do so again in the future. In some cases, these agreements might make it uneconomical for us
to sell or refinance these properties, even in circumstances in which it otherwise would be advantageous to do so, which could interfere with our
ability to execute strategic dispositions, harm our ability to address liquidity needs in the future or otherwise harm our financial condition.
RISKS RELATING TO OUR SECURITIES
We could face adverse consequences as a result of the actions of activist shareholders.
In recent years, proxy contests and other forms of shareholder activism have been directed against numerous public companies, including
us. Shareholders may engage in proxy solicitations, advance shareholder proposals, or otherwise attempt to effect changes in or acquire control
over us. Campaigns by shareholders to effect changes at publicly traded companies are sometimes led by investors seeking to increase short-term
shareholder value through actions such as financial restructuring, increased debt, special dividends, share repurchases, or sales of assets or the
entire company. Shareholder activists may also seek to involve themselves in the governance, strategic direction and operations of the company.
If a shareholder, by itself or in conjunction with other shareholders or as part of a group, engages in activist activities with respect to us, our
business could be adversely affected because responding to proxy contests and other actions by activist shareholders can be costly and
time-consuming, potentially disrupting operations and diverting the attention of our Board of Trustees, senior management and employees from
the execution of business strategies. In addition, perceived uncertainties as to our future direction might result in the loss of potential business
opportunities and harm our ability to attract new tenants, customers and investors. If individuals are elected to our Board of Trustees with a
specific agenda, it might adversely affect our ability to effectively and timely implement our strategies and initiatives and to retain and attract
experienced executives and employees. Finally, we might experience a significant increase in legal fees and administrative and associated costs
incurred in connection with responding to a proxy contest or related action. These actions could also negatively affect our share price.
If dividends on our outstanding preferred shares have not been paid for six dividend payments, whether or not for consecutive dividend periods,
the size of our Board of Trustees will be increased by two members, and holders of each series of the outstanding preferred shares, voting as a
group, will have the right to elect two additional trustees to our Board of Trustees. If the holders of our outstanding preferred shares elect
additional trustees with a specific agenda (such as pursuing strategies to benefit holders of our preferred shares), the risks described above could
be exacerbated.
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A few significant shareholders may influence or control the direction of our business, and, if the ownership of our common shares
continues to be concentrated, or becomes more concentrated in the future, it could prevent our other shareholders from influencing
significant corporate decisions.
As of December 31, 2020, a small number of individual shareholders together own or control more than 10% of our outstanding common shares.
Although these investors do not act as a group, they may be able to exercise influence over matters requiring shareholder approval, including
approval of significant corporate transactions that might affect the price of our shares. The concentration of ownership of our shares held by these
investors may make some transactions more difficult or impossible without their support.
The interests of these investors may conflict with our interests or the interests of our other shareholders. For example, the concentration of
ownership with these investors could allow them to influence our policies and strategies and could delay, defer or prevent a transaction or
business combination from occurring that might otherwise be favorable to us and our other shareholders.
Holders of our common shares might have their interest in us diluted by actions we take in the future.
We continue to contemplate ways to reduce our leverage through a variety of means available to us, subject to the terms of the Credit Agreements.
These means might include obtaining equity capital, including through the issuance of common or preferred equity or equity-related securities if
market conditions are favorable. In addition, we might contemplate acquisitions of properties or portfolios, and we might issue equity, in the form
of common shares, OP Units or other equity securities in consideration for such acquisitions, potentially in substantial amounts. Any issuance of
equity securities might result in substantial dilution in the percentage of our common shares held by our then existing shareholders, and the
interest of our shareholders might be materially adversely affected. The market price of our common shares could decline as a result of sales of a
large number of shares in the market or the perception that such sales could occur. Additionally, future sales or issuances of substantial amounts
of our common shares might be at prices below the then-current market price of our common shares and might adversely affect the market price
of our common shares.
Many factors, including changes in interest rates and the negative perceptions of the retail sector generally, can have an adverse effect on
the market value of our securities.
As is the case with other publicly traded companies, a number of factors might adversely affect the price of our securities, many of which are
beyond our control. These factors include:
•
Increases in market interest rates, which could cause certain prospective purchasers to invest elsewhere. Higher market interest rates
would not, however, result in more funds being available for us to distribute to shareholders and, to the contrary, would likely increase
our borrowing costs and potentially decrease funds available for distribution to our shareholders, if any. Thus, higher market interest
rates could cause the market price of our shares to decrease;
• A decline in the anticipated benefits of an investment in our securities as compared to an investment in securities of companies in other
industries (including benefits associated with the tax treatment of any dividends and distributions);
• Perception, by market professionals and participants, of REITs generally and REITs in the retail sector, and malls in particular. Our
portfolio of properties consists almost entirely of retail properties and we expect to continue to focus primarily on retail properties in the
future;
• Perception by market participants of our potential for growth;
• Levels and concentrations of institutional investor and research analyst interest in our securities;
• Relatively low trading volumes in securities of REITs;
• Our results of operations and financial condition; and
•
Investor confidence in the stock market or the real estate sector generally.
We do not anticipate paying dividends on our shares in the foreseeable future.
Our Credit Agreements limit our ability to declare and pay dividends on our common and preferred shares, subject to certain exceptions, and thus
we have deferred payments on our preferred shares and suspended payments on our common shares. We do not anticipate that we will pay any
cash dividends to holders of our common or preferred shares for the foreseeable future. Any future payment of cash dividends will be at the
discretion of our Board of Trustees and will depend on numerous factors in addition to the terms and conditions of our Credit Agreements,
including our cash flow, financial condition, capital requirements, annual distribution requirements under the REIT provisions of the Internal
Revenue Code, and other factors that our Board of Trustees deems relevant. We cannot assure you that we will be able to pay dividends on our
shares in the future. Consequently, you should not rely on dividends to receive a return on your investment. Any of the foregoing could adversely
affect the market price of our publicly traded securities.
If dividends on our outstanding preferred shares have not been paid for six dividend payments, whether or not for consecutive dividend periods,
the size of our Board of Trustees will be increased by two members, and holders of each series of the outstanding preferred shares, voting as a
group, will have the right to elect two additional trustees to our Board of Trustees. This could have an adverse impact on our governance and on
the interests of our shareholders other than the holders of our preferred shares if these additional trustees focus primarily on pursuing strategies to
benefit holders of our preferred shares.
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The dividend arrearage created by the suspension of dividends that continue to accrue on our outstanding preferred shares also will require that we
not resume any payment of cash dividends on our common shares unless full cumulative dividends accrued with respect to our preferred shares
for all past quarters have been paid (or funds have been set apart for payment of such dividends). We suspended our Distribution Reinvestment
and Share Purchase Plan (the “DRIP”) effective as of September 24, 2020 and, due in part to the fact that we are no longer able to register the offer
and sale of securities on Form S-3, we have no present intention to reactivate the DRIP.
Individual taxpayers might perceive REIT securities as less desirable relative to the securities of other corporations because of the lower
tax rate on certain dividends from such corporations, to the extent we pay dividends in the future, which might have an adverse effect on
the market value of our securities.
Currently, the maximum federal income tax rate on dividends, excluding tax on net investment income, from most publicly traded corporations is
20%. Dividends from REITs, however, do not qualify for this favorable tax treatment, and the maximum federal income tax rate on dividends
from REITs is 29.6% (which excludes tax on new investment income). It is possible also that tax legislation enacted in subsequent years might
increase this rate differential. Our credit facilities limit our ability to pay dividends on our common and preferred shares, subject to certain
exceptions, and thus we have deferred payments on our preferred shares and suspended payments on our common shares. To the extent we pay
dividends in the future, the differing treatment of dividends received from REITs and other corporations might cause individual investors to view
an investment in REITs as less attractive relative to other corporations, which might negatively affect the value of our shares.
Our common shares could be delisted from the NYSE if we fail to meet applicable continued listing requirements, which could have
materially adverse effects on our business.
In September 2020, we received notice from the New York Stock Exchange (the “NYSE”) that we were no longer in compliance with the NYSE
continued listing standard set forth in Section 802.01C of the NYSE’s Listed Company Manual, which requires listed companies to maintain an
average closing price of at least $1.00 per share over a consecutive 30-day trading period. We regained compliance as of December 31, 2020 after
the closing price for our common shares on December 31, 2020 and the average closing price for our common shares during the 30 trading-day
period ended December 31, 2020 both exceeded $1.00.
Although we regained compliance with NYSE continued listing standards in December 2020, if we fail to comply with those standards in the
future, in accordance with Rule 802.01D of the NYSE’s Listed Company Manual, the NYSE may suspend and delist our common shares and
preferred shares. The threat of delisting and/or a delisting of our shares could have adverse effects by, among other things:
•
•
•
reducing the liquidity and market price of our common shares;
reducing the number of investors willing to hold or acquire our common shares; and
reducing our ability to retain, recruit and motivate our trustees, officers and employees.
Any additional issuances of preferred shares in the future might adversely affect the earnings per share available to common
shareholders and amounts available to common shareholders for any future payments of dividends.
The market value of our common shares is based primarily upon the market’s perception of our growth potential and our current and potential
future earnings, net operating income, funds from operations, our liquidity and capital resources, and cash distributions. Consequently, our
common shares might trade at prices that are higher or lower than our net asset value per common share. If our future earnings, net operating
income, funds from operations or cash distributions are less than expected, it is likely that the market price of our common shares will decrease.
These metrics might be adversely affected by the existence of preferred shares, including our existing preferred shares and any additional
preferred shares that we might issue. Our Credit Agreements include certain restrictions on our ability to issue redeemable securities, subject to
exceptions for shares that are redeemable solely in exchange for common shares or other equivalents, and further require us to make mandatory
prepayments of loans upon receipt of certain threshold levels of net cash proceeds from equity issuances.
TAX RISKS
If we were to fail to qualify as a REIT, our shareholders would be adversely affected.
We believe that we have qualified as a REIT since our inception and intend to continue to qualify as a REIT. To qualify as a REIT, however, we
must comply with certain highly technical and complex requirements under the Internal Revenue Code, which is complicated in the case of a
REIT such as ours that holds its assets primarily in partnership form. We cannot be certain we have complied with these requirements because
there are very limited judicial and administrative interpretations of these provisions, and even a technical or inadvertent mistake could jeopardize
our REIT status. In addition, facts and circumstances that might be beyond our control might affect our ability to qualify as a REIT. We cannot
assure you that new legislation, regulations, administrative interpretations or court decisions will not change the tax laws significantly with
respect to our qualification as a REIT or with respect to the federal income tax consequences of qualification.
If we were to fail to qualify as a REIT, we would be subject to federal income tax, on our taxable income at regular corporate rates. Also, unless
the Internal Revenue Service granted us relief under statutory provisions, we would remain disqualified from treatment as a REIT for the four
taxable years following the year during which we first failed to qualify. The additional tax incurred at regular corporate rates would significantly
reduce the cash flow available for future distribution to shareholders and for debt service. In addition, we would no longer be required to make any
distributions to shareholders and our securities could be delisted from the exchange on which they are listed. If there were a determination that we
do not qualify as a REIT, there would be a material adverse effect on our results of operations and there could be a material reduction in the value
of our common shares.
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Furthermore, as a REIT, we might be subject to a 100% “prohibited transactions” tax on the gain from dispositions of property if we are deemed
to hold the property primarily for sale to customers in the ordinary course of business, unless the disposition qualifies under a safe harbor
exception for properties that have been held for at least two years and with respect to which certain other requirements are met. The potential
application of the prohibited transactions tax could cause us to forego or delay potential dispositions of property or other opportunities that might
otherwise be attractive to us, or to undertake such dispositions or other opportunities through a taxable REIT subsidiary, which would generally
result in income taxes being incurred. A failure to comply with applicable REIT requirements regarding the minimum percentages of our income
that must be derived from real estate or investment income might also result in additional tax liabilities for us.
We might be unable to comply with the strict income distribution requirements applicable to REITs, or compliance with such
requirements could adversely affect our financial condition or cause us to forego otherwise attractive opportunities.
To obtain the favorable tax treatment associated with qualifying as a REIT, in general, we are required each year to distribute to our shareholders
at least 90% of our net taxable income. In addition, we are subject to a tax on any undistributed portion of our income at regular corporate rates
and might also be subject to a 4% excise tax on this undistributed income. We could be required to borrow funds on a short-term basis to meet the
distribution requirements that are necessary to achieve the tax benefits associated with qualifying as a REIT, even if conditions are not favorable
for borrowing, which could adversely affect our financial condition and results of operations. In addition, compliance with these REIT
requirements might cause us to forgo opportunities we would otherwise pursue.
There is a risk of changes in the tax law applicable to REITs or our tenants.
Congress, the United States Treasury Department and the IRS frequently revise federal tax laws, regulations and other guidance. We cannot
predict whether, when or to what extent new federal tax laws, regulations, interpretations or rulings will be adopted.
The federal tax legislation that was signed into law on December 22, 2017 (the ‘‘Act’’) made a large quantity of changes to the Internal Revenue
Code. Among those changes were a significant reduction in the generally applicable corporate income tax rate (from a top corporate rate of 35%
to a flat 21% rate), and a reduction in the rates of taxation on most ordinary REIT dividends to individuals and other noncorporate taxpayers (from
a top marginal income tax rate of 39.6% to a top marginal income tax rate of 29.6%, plus, in each case, a 3.8% Medicare tax on net investment
income) so as to be lower than the rate applicable to other ordinary income recognized by such taxpayers. The Act also imposes certain additional
limitations on the deduction of net operating losses, which may in the future require us to make distributions that will be taxable to our
stockholders to the extent of our current or accumulated earnings and profits in order to comply with the annual REIT distribution requirements.
Federal tax legislation enacted in response to the COVID-19 crisis has relaxed some of those limitations on a temporary basis.
We also cannot predict the impact that any future federal tax legislation may have on REITs or our tenants. Any such legislative action may
prospectively or retroactively modify our tax treatment and, therefore, may adversely affect taxation of us and/or our shareholders. Any
legislative action might also negatively affect our tenants and, in turn, affect their ability to pay rent, which could adversely affect our financial
condition and results of operations.
We could face possible adverse federal, state and local tax audits and changes in state and local tax laws, which might result in an
increase in our tax liability.
In the normal course of business, certain subsidiaries through which we own real estate have undergone, are currently undergoing or may undergo
tax audits. There can be no assurance that the ultimate outcomes of any such audits will not have a material adverse effect on our results of
operations.
From time to time, changes in state and local tax laws or regulations are enacted, which might result in an increase in our tax liability including
potentially increases in the real estate taxes due on the properties we own. The shortfall in tax revenue for many states and municipalities in recent
years might lead to an increase in the frequency and size of such changes. If such changes occur, we might be required to pay additional taxes on
our assets, including our properties, or income. We might be unable to effectively pass these increased costs onto our existing tenants and such
increased costs may make our properties less appealing to renewing tenants and potential new tenants, which could negatively affect our
occupancy rates. These increased tax costs could adversely affect our financial condition and results of operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
34
ITEM 2. PROPERTIES.
RETAIL PROPERTIES
We currently own interests in 26 retail properties, of which 25 are operating properties and one is a development property. The 25 operating
properties include 20 shopping malls and five other retail properties, have a total of 19.8 million square feet and are located in nine states. We and
partnerships in which we hold an interest own 15.4 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 consolidate for financial reporting purposes. These consolidated properties have a
total of 14.9 million square feet, of which we own 11.8 million square feet. The seven operating retail properties that are owned by unconsolidated
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
operating retail properties except for Exton Square Mall and Fashion District Philadelphia. Valley View Mall was previously designated as a
non-core property. As discussed further in Notes 2 and 4 to our consolidated financial statements, a foreclosure sale judgment was ordered by the
court after the property operations were assumed by a receiver on behalf of the lender under the mortgage loan secured by Valley View Mall and
we no longer operate the property. “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.
In general, we own the land underlying our properties in fee or, in the case of our properties held by partnerships with others, ownership by the
partnership entity is in fee. At certain properties, however, the underlying land is owned by third parties and leased to us or the partnership in
which we hold an interest pursuant to long-term ground leases. In a ground lease, the building owner pays rent for the use of the land and is
responsible for all costs and expenses related to the building and improvements.
See financial statement Schedule III for financial statement information regarding the consolidated properties.
The following tables present information regarding our retail properties. We refer to the total retail space of these properties, including anchors
and non-anchor stores, as “total square feet,” and the portion that we own as “owned square feet.”
35
Property/Location (1)
MALLS
Capital City Mall, Camp Hill, PA
Cherry Hill Mall, Cherry Hill, NJ
Cumberland Mall, Vineland, NJ
Dartmouth Mall, Dartmouth, MA
Exton Square Mall, Exton, PA (6)
Francis Scott Key Mall, Frederick,
MD
Jacksonville Mall, Jacksonville, NC
Magnolia Mall, Florence, SC
Moorestown Mall, Moorestown, NJ
Patrick Henry Mall, Newport News,
VA
Plymouth Meeting Mall, Plymouth
Meeting, PA (7)
The Mall at Prince Georges,
Hyattsville, MD
Springfield Town Center,
Springfield, VA (7)
Valley Mall, Hagerstown, MD
Viewmont Mall, Scranton, PA
Willow Grove Park, Willow Grove,
PA
Woodland Mall, Grand Rapids, MI
Consolidated Retail Properties
Ownership
Interest
Total Square
Feet (2)
Owned Square
Feet (3)
Year Built /
Last Renovated
Occupancy
% (4)
Anchors/Major
Tenants (5)
100 %
623,348
503,348
1974/2005
98.1%
100 %
1,313,665
834,780
1961/2009
93.0%
100 %
100 %
100 %
951,217
608,455
990,145
677,987
468,455
808,945
1973/2003
1971/2000
1973/2000
100 %
100 %
754,267
493,145
614,934
493,145
1978/1991
1981/2008
91.3%
97.7%
51.3%
91.6%
99.4%
100 %
591,860
591,860
1979/2007
79.2%
100 %
955,239
955,239
1963/2008
82.5%
100 %
717,831
433,674
1988/2005
96.6%
100 %
911,879
911,879
1966/2009
82.4%
100 %
930,061
930,061
1959/2004
83.0%
100 %
1,373,955
983,970
1974/2015
90.2%
100 %
827,735
827,735
1974/1999
98.7%
100 %
689,226
549,425
1968/2006
97.0%
100 %
1,086,194
673,073
1982/2001
96.6%
100 %
979,922
567,700
1968/2019
88.9%
JC Penney, Sportsman's Warehouse, Macy’s,
Dicks Sporting Goods, and Dave & Buster’s
Apple, The Container Store, Crate and Barrel,
JC Penney, Macy’s and Nordstrom
Best Buy, BJ’s Wholesale Club, Boscov’s,
Burlington, Dick’s Sporting Goods, Home
Depot, and Marshalls
Burlington, JC Penney, Macy’s and AMC
Boscov’s, Macy’s, Whole Foods and Round 1
Barnes & Noble, Dick's Sporting Goods, JC
Penney, Macy’s, Sears and Value City
Furniture
Barnes & Noble, Belk, JC Penney and Sears
Barnes & Noble, Belk, Best Buy, Dick’s
Sporting Goods, Burlington, HomeGoods, and
Five Below
Boscov’s, Regal Cinema RPX, Sears,
HomeSense, Five Below, and Sierra Trading
Post
Dick’s Sporting Goods, Dillard’s, JC Penney
and Macy’s
AMC Theater, Boscov’s, Dick's Sporting
Goods, Legoland Discovery Center, Whole
Foods, and Burlington
Macy’s, Marshalls, Ross Dress for Less, TJ
Maxx and Target
Dick’s Sporting Goods, JC Penney, Macy’s,
Nordstrom Rack, Regal Cinemas and Target
Dick's Sporting Goods, JC Penney, Tilt, and
Belk
JC Penney, Dick’s Sporting Goods/ Field and
Stream, HomeGoods and Macy’s
Apple, Bloomingdale’s, Macy’s, Nordstrom
Rack and Sears
Apple, Barnes & Noble, JC Penney, Kohl’s,
Macy’s, and Von Maur
14,798,144 11,826,210
Total consolidated mall properties
RETAIL LOCATED AT CONSOLIDATED MALLS
Valley View Center, La Crosse, WI
(6)
Total consolidated other retail
properties
100 %
60,272
60,272
1980/2001
100.0%
Chuck E. Cheese, Dick’s Sporting Goods and
Play It Again Sports
60,272
60,272
(1) The location stated is the major city or town nearest to the property and is not necessarily the local jurisdiction in which the property is
located.
(2) Total square feet includes space owned by us and space owned by tenants or other lessors.
(3) Owned square feet includes only space owned by us and excludes space owned by tenants or other lessors.
(4) Occupancy is calculated based on space owned by us, excludes space owned by tenants or other lessors and includes space occupied by both
anchor and non-anchor tenants, irrespective of the term of their agreements.
(5) Includes anchors/major tenants that own their space or lease from lessors other than us and do not pay rent to us.
(6) Property designated as non-core.
(7) A portion of the underlying land at this property is subject to a ground lease.
36
Unconsolidated Operating Properties
Property/Location (1)
MALLS
Fashion District Philadelphia,
Philadelphia, PA(6)
Lehigh Valley Mall, Allentown, PA
Springfield Mall,
Springfield, PA
OTHER RETAIL
Gloucester Premium Outlets,
Blackwood, NJ
Metroplex Shopping Center,
Plymouth Meeting, PA
The Court at Oxford Valley,
Langhorne, PA
Red Rose Commons, Lancaster, PA
Total unconsolidated retail
properties
Ownership
Interest
Total Square
Feet (2)
Owned Square
Feet (3)
Year Built /
Last Renovated
Occupancy
% (4)
Anchors/Major
Tenants (5)
50%
50%
50%
25%
50%
50%
50%
826,532
826,532
1977/2019
74.2%
Ardene, Burlington, AMC, and Round 1
1,192,770
985,478
1960/2008
88.0%
Apple, Barnes & Noble, Dave & Buster's,
Boscov’s, JC Penney and Macy’s
610,735
222,836
1974/1997
82.9%
Macy’s and Target
376,971
376,971
2015
777,695
476,966
2001
703,909
456,286
1996
82.5%
92.1%
86.8%
462,883
263,293
1998
100.0%
4,951,495
3,608,362
Dave & Buster's, Nike Factory Store, Old
Navy
Barnes & Noble, Giant Food Store, Lowe’s,
Ross Dress for Less, Saks off Fifth and Target
Best Buy, BJ’s Wholesale Club, Dick’s
Sporting Goods and Home Depot
Barnes & Noble, Burlington, Home Depot,
HomeGoods and Weis Markets
(1) The location stated is the major city or town nearest to the property and is not necessarily the local jurisdiction in which the property is
located.
(2) Total square feet includes space owned by the unconsolidated partnership and space owned by tenants or other lessors.
(3) Owned square feet includes only space owned by the unconsolidated partnership and excludes space owned by tenants or other lessors.
(4) Occupancy is calculated based on space owned by the unconsolidated partnership, includes space occupied by both anchor and non-anchor
tenants and includes all tenants irrespective of the term of their agreements.
(5) Includes anchors that own their space or lease from lessors other than us and do not pay rent to us.
(6) Property designated as non-core.
The following table sets forth our average annual gross rent per square foot, under the terms of the leases (for consolidated and unconsolidated
properties) for the five years ended December 31, 2020:
Average Gross Rent
Under 10,000 square feet
Over 10,000 square feet
All Non-Anchor stores
Anchor stores
2020
2019
2018
2017
2016
$
$
$
$
56.05 $
20.71 $
37.87 $
6.84 $
57.09 $
20.79 $
39.30 $
5.41 $
57.07 $
21.13 $
39.97 $
5.05 $
58.09 $
21.17 $
40.88 $
5.10 $
56.56
21.15
40.98
4.43
LARGE FORMAT RETAILERS AND ANCHORS
Historically, large format retailers and anchors have been an important element of attracting customers to a mall, and they have generally been
department stores whose merchandise appeals to a broad range of customers, although in recent years we have attracted some non-traditional
large format retailers. These large format retailers and anchors either own their stores, the land under them and adjacent parking areas, or enter
into long-term leases at rent that is generally lower than the rent charged to in-line tenants. Well-known, large format retailers and anchors
continue to play an important role in generating customer traffic and making malls desirable locations for in-line store tenants, even though the
market share of traditional department store anchors has been declining and such companies have experienced significant changes. See “Item 1A.
Risk Factors—Risks Related to Our Business and Our Properties.” The following table indicates the parent company of each of our large format
retailers and anchors and sets forth the number of stores and square feet owned or leased by each at our retail properties, including consolidated
and unconsolidated, as of December 31, 2020:
37
Tenant Name (1)
AMC Entertainment Holdings, Inc.
Ashley Homestore
Barnes & Noble, Inc.
Belk, Inc.
Best Buy Co., Inc.
BJ’s Wholesale Club, Inc.
Boscov’s Department Store
Burlington Stores, Inc.
Dave & Buster’s, Inc.
Dick’s Sporting Goods, Inc.
Dillard’s, Inc.
DSW Shoe Warehouse
H&M Hennes & Mauritz L.P.
The Home Depot, Inc.
Hudson's Bay Company
J.C. Penney Company, Inc.
Macy’s, Inc.
Macy’s
Bloomingdales
Total Macy’s, Inc.
Nordstrom, Inc.
Nordstrom
Nordstrom Rack
Total Nordstrom, Inc.
Office Depot, Inc. (OfficeMax)
Onelife Fitness
PetsMart, Inc
Cineworld Group (Regal Cinemas)
Round One Entertainment, Inc.
Ross Stores
Transform Operating Stores LLC
Sears
Sears Appliance and Mattress Store
Total Transform Operating Stores LLC
The TJX Companies, Inc.
HomeGoods
HomeSense
Marshalls
Sierra Trading Post
TJ Maxx
Total The TJX Companies, Inc.
Target Corporation
Tilt Studio
Ulta Beauty, Inc.
Von Maur, Inc.
Weis Markets, Inc.
Whole Foods, Inc.
Number of
Stores (2)
GLA (2)
4
189,647
39,793
1
8
237,130
3
311,397
6
190,153
2
234,761
5
889,229
6
340,649
4
137,738
11
615,353
1
144,157
5
90,418
13
283,070
3
397,322
54,118
2
11 1,637,355
Percent of
Total GLA (3)
1.1 %
0.2 %
1.4 %
1.8 %
1.1 %
1.4 %
5.1 %
2.0 %
0.8 %
3.5 %
0.8 %
0.5 %
1.6 %
2.3 %
0.3 %
9.4 %
13 2,408,619
237,537
1
14 2,646,156
15.3 %
1
2
3
2
1
3
4
2
2
4
1
5
138,000
73,439
211,439
51,509
70,000
78,720
205,135
116,451
60,320
619,851
15,000
634,851
3
1
2
1
1
8
4
2
7
1
1
1
84,076
28,486
65,004
19,089
27,597
224,252
656,052
66,993
78,828
86,165
65,032
65,156
145 11,109,349
1.2 %
0.3 %
0.4 %
0.5 %
1.2 %
0.7 %
0.3 %
3.7 %
1.3 %
3.8 %
0.4 %
0.5 %
0.5 %
0.4 %
0.4 %
64.1 %
(1) To qualify as a large format retailer or an anchor for inclusion in this table, a tenant must occupy at least 15,000 square feet or be part of a
chain that has stores in our portfolio occupying an aggregate of at least 15,000 square feet.
(2) Number of stores and gross leasable area (“GLA”) include anchors that own their own space or lease from lessors other than us and do not
pay rent to us. Includes stores that have closed that are still obligated to make rental or expense contribution payments.
(3) Percent of Total GLA is calculated based on the total GLA of all properties.
38
MAJOR TENANTS
The following table presents information regarding the top 20 tenants at our retail properties, including consolidated and unconsolidated
properties, by gross rent as of December 31, 2020:
Primary Tenant (1)
Foot Locker, Inc.
L Brands, Inc.
Signet Jewelers Limited
Dick's Sporting Goods, Inc.
American Eagle Outfitters, Inc.
Express, Inc.
Dave & Buster's, Inc.
Macy's Inc.
Gap, Inc.
Cineworld Group
Genesco, Inc.
The Home Depot, Inc.
J.C. Penney Company, Inc.
Luxottica Group S.p.A.
Darden Concepts, Inc.
Shoe Show, Inc.
H&M Hennes & Mauritz L.P.
Sycamore Partners
AMC Entertainment Holdings, In
The Children's Place Retail Stores,
Inc.
Total
Brands
Champs, Foot Locker, Footaction, Footaction Flight 23,
House of Hoops by Foot Locker, Kids Foot Locker, Lady Foot
Locker, Nike Yardline
Bath & Body Works, Pink, Victoria's Secret
Kay Jewelers, Piercing Pagoda, Piercing Pagoda Plus, Totally
Pagoda, Zale's Jewelers
Dick's Sporting Goods, Field & Stream
Aerie, American Eagle Outfitters
Express, Express Factory Outlet, Express Men
Dave & Buster's
Bloomingdale's, Macy's
Banana Republic, Gap/Gap Kids/Gap Outlet/Old Navy
Regal Cinemas
Hat Shack, Hat World, Johnston & Murphy, Journey's,
Journey's Kidz, Lids, Lids Locker Room, Shi by Journey's,
Underground by Journey's
The Home Depot
JC Penney
Lenscrafters, Pearle Vision, Sunglass Hut
Bahama Breeze, Capital Grille, Olive Garden, Seasons 52,
Yard House
Shoe Dept, Shoe Dept. Encore
H & M
Hot Topic, Talbots, Torrid
AMC
The Children's Place
Total number
of locations
Percent of
PREIT’s Annualized
Gross Rent (2)
49
38
57
12
20
15
4
14
19
4
28
3
11
29
8
22
13
29
4
4.6 %
4.0 %
3.1 %
2.9 %
2.4 %
2.0 %
1.7 %
1.7 %
1.7 %
1.6 %
1.6 %
1.6 %
1.5 %
1.3 %
1.2 %
1.2 %
1.1 %
1.1 %
1.1 %
16
395
1.0 %
38.4 %
(1) Tenant includes all brands and concepts of the tenant.
(2) Includes our proportionate share of tenant rent from partnership properties that are not consolidated by us, based on our ownership percentage
in the respective equity method investments. Annualized gross rent is calculated based on gross monthly rent as of December 31, 2020.
39
RETAIL LEASE EXPIRATION SCHEDULE—NON-ANCHORS
The following table presents scheduled lease expirations of non-anchor tenants as of December 31, 2020:
All Tenants
(1)
Tenants in Bankruptcy (2)
(in thousands of dollars, except per
square foot amounts)
For the Year Ended December 31,
2020 and Prior (3)
2021
2022
2023
2024
2025
2026
2027
2028
2029
Thereafter
Total/Average
Number
of Leases
GLA of
Expiring
Expiring Leases
Year
PREIT’s
Share of
Gross Rent
in Expiring
Average
Expiring
Gross
Rent psf
Percent of
PREIT’s
Total
Gross
Rent
PREIT’s
Share of
Gross
Rent in
Expiring
Average
Expiring
Gross
Rent psf
GLA of
Expiring
Leases
Year
Percent of
PREIT’s
Share of
Gross
Rent in
Expiring
Year
115 265,557 $ 12,220 $
218 725,166 24,868
234 776,226 30,096
195 1,110,992 34,902
174 747,572 33,717
178 1,019,718 33,660
125 718,281 25,822
90 640,582 22,624
74 611,236 21,140
80 599,830 19,065
101 966,751 26,825
1,584 8,181,911 $ 284,939 $
51.85
39.25
44.31
35.88
50.25
42.07
46.36
38.53
36.85
39.70
35.02
40.96
4.3 %
3,380 $
8.7 % 32,140
—
10.6 %
12.2 %
5,808
8,486
11.8 %
11.8 % 10,933
9.1 % 10,960
6,455
7.9 %
4,571
7.4 %
—
6.7 %
1,494
9.4 %
100.0 % 84,227 $
186 $
1,186
—
55.00
50.37
—
809 139.23
58.61
418
63.25
418
44.99
287
489
75.76
466 101.86
—
—
77 103.27
64.17
4,336 $
0.1 %
0.4 %
— %
0.3 %
0.1 %
0.1 %
0.1 %
0.2 %
0.2 %
— %
0.0 %
1.5 %
(1) Does not include tenants occupying space under license agreements with initial terms of less than one year. The GLA of these tenants is
648,247 square feet.
(2) As described above under “Item 1A. Risk Factors,” if a tenant files for bankruptcy, the tenant might have the right to reject its leases, and we
cannot be sure that it will assume its leases and continue to make rental payments in a timely manner. If a lease is rejected by a tenant in
bankruptcy, we would have only a general unsecured claim for damages in connection with past-due balances plus rejection damages for rent
reserved subject to the cap imposed by the Bankruptcy Code.
(3) Includes all tenant leases that had expired and were on a month to month basis as of December 31, 2020.
See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Leasing
Activity” for information regarding rent for leases signed in 2020.
RETAIL LEASE EXPIRATION SCHEDULE—ANCHORS
The following table presents scheduled lease expirations of anchor tenants as of December 31, 2020 (includes leases with tenants that have filed
for bankruptcy protection, depending on the current status of the lease):
All Tenants
PREIT’s
Share of
Gross
Rent in
Expiring
Tenants in Bankruptcy
PREIT’s
Share of
Gross
Rent in
Expiring
Average
Expiring
Gross
Percent of
PREIT’s
Share of
Gross
Rent in
Expiring
GLA of
Expiring
Leases
Year
Rent psf
Year
Percent
of
PREIT’s
Total
Gross Rent
(in thousands of dollars, except per
square foot amounts)
For the Year Ending December 31,
2021
2022
2023
2024
2025
2026
2027
2028
2029
Thereafter
Total/Average
Number
of Leases
Expiring Leases
GLA of
Expiring
Average
Expiring
Gross
Year (1)(2) Rent psf
1,150 $
3 258,396 $
3,120
6 897,867
1,895
3 348,592
6,988
5 702,674
2,900
5 720,381
2,265
4 299,359
—
—
—
6,820
9 982,424
2,210
1
65,155
6 389,466
4,585
42 4,664,314 $ 31,933 $
6.45
3.87
5.44
9.94
4.03
9.91
—
6.94
33.92
11.77
7.18
— $
3.6 %
—
9.8 %
—
5.9 %
21.9 % 257,475
9.1 % 330,136
7.1 % 101,293
—
—
21.4 % 102,825
—
6.9 %
—
14.4 %
100.0 % 791,729 $
— $
—
—
908
1,714
442
—
482
—
—
3,546 $
—
—
—
3.52
5.19
4.37
—
4.69
—
—
4.48
— %
— %
— %
2.8 %
5.4 %
1.4 %
— %
1.5 %
— %
— %
11.1 %
(1) As described above under “Item 1A. Risk Factors,” if a tenant files for bankruptcy, the tenant might have the right to reject and terminate its
leases, and we cannot be sure that it will affirm its leases and continue to make rental payments in a timely manner. If a lease is rejected by a
tenant in bankruptcy, we would have only a general unsecured claim for damages in connection with such balances.
See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Leasing
Activity” for information regarding rent in leases signed in 2020.
40
DEVELOPMENT AND REDEVELOPMENT PROPERTIES
We have one property in our portfolio that is classified as under development, however we do not currently have any activity occurring at this
property.
In September 2019, one property that we previously classified as a redevelopment property, Fashion District Philadelphia (formerly The Gallery
at Market East), opened. Development work at that property is continuing and is expected to stabilize in 2022.
OFFICE SPACE
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 for the
year ended December 31, 2019. This lease terminated in December 2019.
In December 2018, we entered into a lease for our 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.
ITEM 3. LEGAL PROCEEDINGS.
In the normal course of business, we have become, and might in the future become, involved in legal actions relating to the ownership and
operation of our properties and the properties we manage for third parties. In management’s opinion, the resolutions of any such pending legal
actions are not expected to have a material adverse effect on our consolidated financial condition or results of operations.
On November 1, 2020, we and certain of our wholly owned subsidiaries commenced voluntary cases under chapter 11 of title 11 of the United
States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware under the caption In re Pennsylvania Real Estate
Investment Trust, et al. and filed our prepackaged chapter 11 plan of reorganization with the Bankruptcy Court. On November 30, 2020, the
Bankruptcy Court entered an order confirming the Plan. The Plan became effective and we subsequently emerged from bankruptcy on December
10, 2020. Refer to Item 1. Business—Recent Developments—Financial Restructuring for a detailed description of these matters.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
41
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES.
Common Shares
Our common shares of beneficial interest are listed on the New York Stock Exchange under the symbol “PEI.”
As of December 31, 2020, there were approximately 1,700 holders of record of our common shares and approximately 21,000 beneficial holders
of our common shares.
During 2019 and for the first quarter 2020, we declared quarterly cash distributions on our common shares of beneficial interest equal to $0.21 per
share. In the second quarter 2020, we paid a quarterly cash dividend of $0.02 per common share. We paid no quarterly dividend during the third
or fourth quarter 2020. Our future payment of distributions will be at the discretion of our Board of Trustees and will depend upon 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. Further,
the Company cannot declare and pay cash dividends on common shares while there exists a preferred dividend arrearage, as described below.
Other than as may be required to maintain our status as a REIT, we do not anticipate that we will pay any cash dividends to holders of our common
or preferred shares for the foreseeable future.
The Credit Agreements provide generally that we may only make dividend payments in the minimum amount necessary to maintain our status as
a REIT. We must maintain our status as a REIT at all times.
Units
Class A and Class B Units of PREIT Associates (“OP Units”) are redeemable by PREIT Associates at the election of the limited partner holding
the OP Units at the time and for the consideration set forth in PREIT Associates’ partnership agreement. In general, and subject to exceptions and
limitations, beginning one year following the respective issue dates, “qualifying parties” may give one or more notices of redemption with respect
to all or any part of the Class A Units then held by that party. Class B Units are redeemable at the option of the holder at any time after issuance.
If a notice of redemption is given, we have the right to elect to acquire the OP Units tendered for redemption for our own account, either in
exchange for the issuance of a like number of our common shares, subject to adjustments for stock splits, recapitalizations and like events, or a
cash payment equal to the average of the closing prices of our shares on the ten consecutive trading days immediately before our receipt, in our
capacity as general partner of PREIT Associates, of the notice of redemption. If we decline to exercise this right, then PREIT Associates will pay
a cash amount equal to the number of OP Units tendered multiplied by such average closing price.
Issuer Purchases of Equity Securities
We did not acquire any shares in the three months ended December 31, 2020.
Preferred Dividend Arrearages
Dividends on the Series B, Series C and Series D preferred shares are cumulative and therefore will continue to accrue at an annual rate of
$1.8436 per share, $1.80 per share and $1.7188 per share, respectively. As of December 31, 2020, the cumulative amount of unpaid dividends on
our issued and outstanding preferred shares totaled $13.7 million. This consisted of unpaid dividends per share on the Series B, Series C and
Series D preferred shares of $0.92 per share, $0.90 per share and $0.86 per share, respectively.
ITEM 6. SELECTED FINANCIAL DATA.
Not required and omitted.
42
ITEM 7. 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 operating properties and one is a development property. The 25 operating
properties include 20 shopping malls and five other retail properties, have a total of 19.8 million square feet and are located in nine states. We and
partnerships in which we hold an interest own 15.4 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 consolidate for financial reporting purposes. These consolidated properties have a
total of 14.9 million square feet, of which we own 11.8 million square feet. The seven operating retail properties that are owned by unconsolidated
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
operating retail properties except for Exton Square Mall and Fashion District Philadelphia. Valley View Mall was previously designated as a
non-core property. As discussed further in Notes 2 and 4 to our consolidated financial statements, a foreclosure sale judgment was ordered by the
court after the property operations were assumed by a receiver on behalf of the lender under the mortgage loan secured by Valley View Mall and
we no longer operate the property. “Core Malls” also excludes these properties as well as power centers and Gloucester Premium Outlets.
We have one property in our portfolio that is classified as under development; however, we do not currently have any activity occurring at this
property.
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 (which has since closed in
2020) 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 have opened Philadelphia flagship stores
at the property since its opening in September 2019.
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 management, leasing and real estate development services through PREIT
Services, LLC (“PREIT Services”), which generally develops and manages properties that we consolidate for financial reporting purposes, and
PREIT-RUBIN, Inc. (“PRI”), which generally develops and manages properties that we do not consolidate for financial reporting purposes,
including properties 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.
The COVID-19 global pandemic that began in 2020 has adversely impacted and continues to impact our business, financial condition, liquidity
and operating results, as well as our tenants’ businesses. The prolonged and increased spread of COVID-19 has also led to unprecedented global
economic disruption and volatility in financial markets. Some of our tenants’ financial health and business viability have been adversely impacted
and their creditworthiness has deteriorated. We anticipate that our future business, financial condition, liquidity and results of operations,
including in 2021 and potentially in future periods, will continue to be materially impacted by the COVID-19 pandemic. It remains highly
uncertain how long the global pandemic, economic challenges and restrictions on day-to-day life and business operations will last based on the
emergence of new strains of the virus and the current virus spread rate in the United States, which have resulted in a number of jurisdictions that
previously relaxed restrictions implementing new or renewed restrictions. Given these factors, so long as the lingering effects of COVID-19
remain, the virus may continue to impact us or our tenants, or our ability or the ability of our tenants to resume more normal operations.
COVID-19 closures of our properties began on March 12, 2020 and continued through the reopening of our last property on July 3, 2020. These
closures impacted most of our properties for the full second quarter of 2020 with traffic and tenant reopenings increasing through the third and
fourth quarters of 2020. New or renewed restrictions in the jurisdictions where our properties are located may be implemented in response to
evolving conditions and overall uncertainty about the timing of widespread availability of vaccines. As such, as the pandemic continues,
intensifies or experiences resurgences, it is possible that additional closures will occur. During the mall closure period in the second quarter of
2020, the Company furloughed a significant portion of its property and corporate employee base and later made permanent headcount reductions,
which contributed to decreased general and administrative expenses in the third and fourth quarters of 2020.
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All of our properties have remained open since the third quarter of 2020 and are employing safety and sanitation measures designed to address the
risks posed by COVID-19, with some of our tenants still operating at reduced capacity. Following the pandemic-related closures, approximately
4% of our tenants failed to re-open (inclusive of tenants that filed for bankruptcy protection in the aftermath). As a result of the challenging
environment created by COVID-19, primarily beginning in the second quarter of 2020, many of our tenants have sought rent relief and deferral
and several have failed to pay rent due. Although we continue to make progress in collecting COVID-19-period rents, we have also initiated legal
proceedings against certain tenants for failure to pay. As of December 31, 2020, we had cash receipts of 80% of billed second, third and fourth
quarter rents. We believe that our rent collections are probable, but expect that collections will continue to be below our tenants’ rent obligations
as long as the effects of COVID-19 affect the financial strength of our tenants. The significance of COVID-19 on our business, however, will
continue to depend on, among other things, the extent and duration of the pandemic, the severity of the disease and the number of people infected
with the virus, the timing and widespread availability and acceptance of vaccines, the further effects on the economy of the pandemic and of the
measures taken by governmental authorities and other third parties restricting daily activities and the length of time that such measures remain in
place or are renewed, and implementation of governmental programs to assist businesses and consumers impacted by the COVID-19 pandemic.
Our net loss increased by $253.7 million to a net loss of $266.7 million for the year ended December 31, 2020 from a net loss of $13.0 million for
the year ended December 31, 2019. The change in our 2020 results of operations was primarily due to (a) a loss on remeasurement of FDP's assets
and an other than temporary impairment on our investment in FDP totaling $148.5 million; (b) a decrease in real estate revenue of $74.0 million
due to the COVID-19 related closure of our properties for the majority of the second quarter, as well as rent concession requests
from tenants for rent abatements; (c) a decrease in equity partnership income of $13.8 million due to COVID-19 related closures and rent
concessions at our equity investees’ properties; (d) an increase in interest expense of $20.4 million driven by higher interest rates on our Credit
Agreements and higher overall debt balances; and (e) a non-recurring gain on debt extinguishment recognized for the year ended December 31,
2019 of $24.9 million, which had a favorable impact on the prior year period; partially offset by: (a) a decrease in property operating expenses of
$9.7 million related to ongoing impacts of COVID-19 since the second quarter of 2020; (b) a non-recurring gain on derecognition of property,
which provided a benefit of $8.1 million in the current year period; and (c) a non-recurring gain on sales of real estate, which provided a benefit of
$11.4 million in the current year period.
We evaluate operating results and allocate resources on a property-by-property basis, and do not distinguish or evaluate our consolidated
operations on a geographic basis. 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 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, 2020, 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
partnerships with third parties in which we own a 25% to 50% interest.
Acquisitions and Dispositions
See note 2 to our consolidated financial statements for a description of our dispositions and acquisitions in 2020 and 2019.
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-commerce 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. All of these factors have been exacerbated by the impact of the
COVID-19 pandemic in 2020.
44
The table below sets forth information related to our tenants in bankruptcy for our consolidated and unconsolidated properties (excluding tenants
in bankruptcy at sold properties):
Year
2020
Consolidated properties
Unconsolidated properties
Total
2019
Consolidated properties
Unconsolidated properties
Total
Pre-bankruptcy
Units Closed
Number of
Tenants (1)
Number of
locations
impacted
GLA (2)
PREIT’s
Share of
Annualized
Gross Rent (3)
(in thousands)
Number of
locations
closed
GLA (2)
PREIT’s
Share of
Annualized
Gross Rent (3)
(in thousands)
17
18
23
9
8
11
91 2,068,153 $
31
468,164
122 2,536,317 $
18,604
3,747
22,351
39
13
52
389,696 $
162,378
552,074 $
6,771
2,093
8,865
71
14
85
400,516 $
56,030
456,546 $
14,656
1,481
16,137
63
8
71
242,742 $
32,024
274,766 $
9,480
915
10,395
(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, 2020.
Anchor Replacements
In recent years, through property dispositions, proactive store recaptures, lease terminations and other activities, we have made efforts to reduce
our risks associated with certain department store concentrations.
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. Dick’s Sporting Goods at Valley Mall opened
in the first quarter of 2020. At Plymouth Meeting Mall, we opened Michael’s in the first quarter of 2020. In 2017, we purchased the Macy’s
location at Moorestown Mall in Moorestown, New Jersey and opened HomeSense, Sierra Trading and Michael’s between 2018 and the first
quarter of 2020.
Construction was completed in the first quarter of 2020 giving way to the opening of Burlington in place of a former Sears at Dartmouth Mall in
Dartmouth, Massachusetts. We expect to continue to move forward with several outparcels at Dartmouth Mall resulting from the Sears recapture
and to work with large format prospects for space adjacent to Burlington, but have experienced delays due to the impact of the COVID-19
pandemic.
During 2019, an anchor tenant, 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. Sears
closed its stores at Moorestown Mall in Moorestown, New Jersey and Jacksonville Mall in Jacksonville, North Carolina in April 2020. Sears
continues to be financially obligated pursuant to the leases at these locations. In May 2020, J.C. Penney filed for bankruptcy and announced the
closure of its stores at the Mall at Prince Georges in Hyattsville, Maryland, and Magnolia Mall in Florence, South Carolina.
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. This initiative has slowed down due to the impacts of the COVID-19 pandemic. 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 reasonable 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 availability and continued compliance with the financial covenants thereunder), (ii) obtaining construction loans on
specific projects, (iii) selling properties or interests in properties with values in excess of their mortgage loans (if applicable) and applying the
excess proceeds to fund capital expenditures or for debt reduction, or (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.
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 complexity, and can
include building out new or existing space for individual tenants, upgrading common areas or exterior areas such as parking lots, or redeveloping
the entire property, among other projects. Project costs are accumulated in “Construction in progress” on our consolidated balance sheet until the
asset is placed into service, and amounted to $46.3 million as of December 31, 2020.
45
As of December 31, 2020, we had unaccrued contractual and other commitments related to our capital improvement projects and development
projects at our consolidated and unconsolidated properties of $16.9 million, including $11.7 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.
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, Net Operating Income (“NOI”) and depreciation, will continue to be affected until the newly constructed space is completed,
leased and occupied.
In January 2018, we and Macerich entered into a $250.0 million term loan (as amended in July 2019 to increase the total maximum potential
borrowings to $350.0 million) to fund the ongoing redevelopment of Fashion District Philadelphia and to repay capital contributions to the
venture previously made by the partners. 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. On December 10, 2020, PM Gallery LP, together with certain other subsidiaries owned
indirectly by us and Macerich (including the fee and leasehold owners of the properties that are part of the Fashion District Philadelphia project),
entered into an Amended and Restated Term Loan Agreement (the “FDP Loan Agreement”). In connection with the execution of the FDP Loan
Agreement, a $100.0 million principal payment was made (and funded indirectly by Macerich, the “Partnership Loan”) to pay down the existing
loan, reducing the outstanding principal under the FDP Loan Agreement from $301.0 million to $201.0 million. The joint venture must repay the
Partnership Loan plus 15% accrued interest to the Macerich lender prior to the resumption of 50/50 cash distributions to us and Macerich. In
connection with the execution of the FDP Loan Agreement, the governing structure of PM Gallery LP was modified such that, effective as of
January 1, 2021, Macerich is responsible for the entity’s operations and, subject to limited exceptions, controls major decisions. The Company
considered the changes to the governing structure of PM Gallery LP and determined the investment would qualify as a variable interest entity and
would continue to be accounted for under the equity method of accounting.
The FDP Loan Agreement provides for (i) a maturity date of January 22, 2023, with the potential for a one-year extension upon the borrowers’
satisfaction of certain conditions, (ii) an interest rate at the borrowers’ option for each advance of either (A) the Base Rate (defined as the highest
of (a) the Prime Rate, (b) the Federal Funds Rate plus 0.50%, and (c) the LIBOR Market Index Rate plus 1.00%) plus 2.50% or (B) LIBOR for the
applicable period plus 3.50%, (iii) a full recourse guarantee of 50% of the borrowers’ obligations by PREIT Associates, L.P., on a several basis,
(iv) a full recourse guarantee of certain of the borrowers’ obligations by The Macerich Partnership, L.P., up to a maximum of $50.0 million, on a
several basis, (v) a pledge of the equity interests of certain indirect subsidiaries of PREIT and Macerich, as well as of PREIT-RUBIN, Inc. and
one of its subsidiaries, that have a direct or indirect ownership interest in the borrowers, (vi) a non-recourse carve-out guaranty and a hazardous
materials indemnity by each of PREIT Associates, L.P. and The Macerich Partnership, L.P., and (vii) mortgages of the borrowers’ fee and
leasehold interests in the properties that are part of the Fashion District Philadelphia project and certain other properties. The FDP Loan
Agreement contains certain covenants typical for loans of its type.
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 AND ESTIMATES
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 utilized available information, including our past history, industry standards and
the current economic environment, among other factors, in forming its estimates and judgments, giving due consideration to materiality.
Management has also considered events and changes in property, market and economic conditions, estimated future cash flows from property
operations and the risk of loss on specific accounts or amounts in determining its estimates and judgments. Actual results may differ from these
estimates. In addition, other companies may utilize different estimates, which may affect comparability of our results of operations to those of
companies in a similar business. The estimates and assumptions made by management in applying critical accounting policies have not changed
materially during 2020 and 2019, except as otherwise noted, and none of these estimates or assumptions have proven to be materially incorrect or
resulted in our recording any significant adjustments relating to prior periods. We will continue to monitor the key factors underlying our
estimates and judgments, but no change is currently expected.
Set forth below is a summary of the accounting policy that management 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 circumstances indicate that the
carrying amount of the property might not be recoverable. A property to be held and used is considered impaired only if 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.
If there is a triggering event in relation to a property to be held and used, we will estimate the aggregate future cash flows, less estimated capital
expenditures, to be generated by the property, undiscounted and without interest charges. In addition, this estimate may consider a probability
weighted cash flow estimation approach when alternative courses of action to recover the carrying amount of a long-lived asset are under
consideration or when a range of possible values is estimated.
46
The determination of undiscounted cash flows requires significant estimates by management, including the expected course of action at the
balance sheet date that would lead to such cash flows. Subsequent changes in estimated undiscounted cash flows arising from changes in the
anticipated action to be taken with respect to the property could impact the determination of whether an impairment exists and whether the effects
could materially affect our net income. To the extent estimated undiscounted cash flows are less than the carrying value of the property, the loss
will be measured as the excess of the carrying amount of the property over the estimated fair value of the property. Our intent is to hold and
operate our properties long-term, which reduces the likelihood that our carrying value is not recoverable. A shortened holding period would
increase the likelihood that the carrying value is not recoverable.
Assessment of our ability to recover certain lease related costs must be made when we have a reason to believe that the tenant might not be able to
perform under the terms of the lease as originally expected. This requires us to make estimates as to the recoverability of such costs.
An other-than-temporary impairment of an investment in an unconsolidated joint venture is recognized when the carrying value of the investment
is not considered recoverable based on evaluation of the severity and duration of the decline in value. To the extent impairment has occurred, the
excess carrying value of the asset over its estimated fair value is charged to income.
Revenue and Receivables
We derive over 95% of our revenue from tenant rent and other tenant-related activities. Tenant rent includes base rent, percentage rent, expense
reimbursements (such as reimbursements of costs of common area maintenance (“CAM”), real estate taxes and utilities), and the amortization of
above-market and below-market lease intangibles.
We accrue revenue under leases, provided that it is probable that we will collect substantially all of the lease revenue that is due under the terms of
the lease both at inception and on an ongoing basis. When collectability of lease revenue is not probable, leases are prospectively accounted for on
a cash basis and any difference between the revenue that has been accrued and the cash collected from the tenant over the life of the lease is
recognized as a current period adjustment to lease revenue. We review the collectability of our tenant receivables related to tenant rent including
base rent, straight-line rent, expense reimbursements and other revenue or income by specifically analyzing billed and unbilled revenues,
including straight-line rent receivable, and considering historical collection issues, tenant creditworthiness and current economic and industry
trends. Our revenue recognition and receivables collectability analysis places particular emphasis on past-due accounts and considers the nature
and age of the receivables, the payment history and financial condition of the payor, the basis for any disputes or negotiations with the payor, and
other information that could affect collectability.
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.
Percentage rent represents rental revenue that the tenant pays based on a percentage of its sales, either as a percentage of its total sales or as a
percentage of sales over a certain threshold. In the latter case, we do not record percentage rent until the sales threshold has been reached.
Revenue for rent received from tenants prior to their due dates is deferred until the period to which the rent applies.
In addition to base rent, certain lease agreements contain provisions that require tenants to reimburse a fixed or pro rata share of certain CAM
costs, real estate taxes and utilities. Tenants generally make monthly expense reimbursement payments based on a budgeted amount determined
at the beginning of the year. Effective January 1, 2019, we recognize fixed CAM revenue prospectively on a straight-line basis.
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 termination agreement is signed, collectability 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 parties, 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 development activity and are recognized on the percentage
of completion method. These activities are collectively included in “Other income” in the consolidated statements of operations.
47
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 recognition 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. The marketing reimbursements are recognized as revenue at the time that the marketing expenditures occur.
Property management revenue from management and development activities is generated through contracts with third party owners of real estate
properties or with certain of our joint ventures, and is recorded in other income in the consolidated statements of operations. In the case of
management fees, our performance obligations are fulfilled over time as the management services are performed and the associated revenues are
recognized on a monthly basis when the customer is billed. In the case of development fees, our performance obligations are fulfilled over time as
we perform certain stipulated development activities as set forth in the respective development agreements and the associated revenues are
recognized on a monthly basis when the customer is billed.
Derivatives
In the normal course of business, we are exposed to financial market risks, including interest rate risk on our interest-bearing liabilities. We
attempt to limit these risks by following established risk management policies, procedures and strategies, including the use of derivative financial
instruments. We do not use derivative financial instruments for trading or speculative purposes.
Currently, we use interest rate swaps to manage our interest rate risk. The valuation of these instruments is determined using widely accepted
valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual
terms of the derivatives, including the period to maturity, and uses observable market-based inputs.
Derivative financial instruments are recorded on the consolidated balance sheet as assets or liabilities based on the fair value of the instrument.
Changes in the fair value of derivative financial instruments are recognized currently in earnings, unless the derivative financial instrument meets
the criteria for hedge accounting. If the derivative financial instruments meet the criteria for a cash flow hedge, the gains and losses in the fair
value of the instrument are deferred in other comprehensive (loss) 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. As described in Note 6 to our consolidated financial statements, during the year ended December 31,
2020, we accelerated the reclassification of a portion of the amounts in other comprehensive (loss) income to earnings as a result of the hedged
forecasted transactions becoming probable not to occur due to the financial restructuring. The accelerated reclassification into earnings resulted in
a loss of $2.8 million which was recorded within interest expense, net in the consolidated statement of operations.
The anticipated transaction to be hedged must expose us to interest rate risk, and the hedging instrument must reduce the exposure and meet the
requirements for hedge accounting. We must formally designate the instrument as a hedge and document and assess the effectiveness of the hedge
at inception and on a quarterly basis. Interest rate hedges that are designated as cash flow hedges are designed to mitigate the risks associated with
future cash outflows on debt.
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.” Derivatives not
designated as hedges are not speculative and are also used to manage the Company’s exposure to interest rate movements and other identified
risks but do not meet the strict hedge accounting requirements. For certain interest rate swaps that were not re-designated subsequent to December
10, 2020, changes in the fair value of derivatives are recorded directly in earnings as interest expense in the consolidated statement of operations.
We incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s
nonperformance 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 valuation 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,
2020, we have assessed the significance of the effect of the credit valuation adjustments on the overall valuation of our derivative positions and
have determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives. As a result, we have
determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
New Accounting Developments
See note 1 to our consolidated financial statements for descriptions of new accounting developments.
48
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 severally guaranteed its 50% share of the FDP Term Loan (see note 3 to
our consolidated financial statements), which currently has $201.0 million outstanding (our share of which is $100.5 million). The joint venture
also has the outstanding Partnership Loan of $100.0 million that was used to pay down the FDP Term Loan in December 2020 (our share of which
is $50.0 million). We monitor the joint venture’s cash flows and its ability to meet its debt service requirements. If our Fashion District
Philadelphia joint venture were unable to satisfy its obligations under the FDP Term Loan or the Partnership Loan and we were required to satisfy
the payment obligations under these guarantees, this could have a material impact on our liquidity and available capital resources. The FDP Term
Loan balance will become due in 2023 and the Partnership Loan in 2027.
RESULTS OF OPERATIONS
Overview
Our net loss increased by $253.7 million to a net loss of $266.7 million for the year ended December 31, 2020 from a net loss of $13.0 million for
the year ended December 31, 2019. The change in our 2020 results of operations was primarily due to (a) a loss on remeasurement of FDP's assets
and an other than temporary impairment on our investment in FDP totaling $148.5 million; (b) a decrease in real estate revenue of $74.0 million
due to the COVID-19 related closure of our properties for the majority of the second quarter, as well as rent concession requests
from tenants for rent abatements; (c) a decrease in equity partnership income of $13.8 million due to COVID-19 related closures and rent
concessions at our equity investees’ properties; (d) an increase in interest expense of $20.4 million driven by higher interest rates on our Credit
Agreements and higher overall debt balances; and (e) a non-recurring gain on debt extinguishment recognized for the year ended December 31,
2019 of $24.9 million, which had a favorable impact on the prior year period; partially offset by: (a) a decrease in property operating expenses of
$9.7 million related to ongoing impacts of COVID-19 since the second quarter of 2020; (b) a non-recurring gain on derecognition of property,
which provided a benefit of $8.1 million in the current year period; and (c) a non-recurring gain on sales of real estate, which provided a benefit of
$11.4 million in the current year period.
Occupancy
The tables below set forth certain occupancy statistics for our retail properties in total and our Core Malls as of December 31, 2020 and 2019:
Retail portfolio weighted average:
Total excluding anchors
Total including anchors
Core Malls weighted average: (3)
Total excluding anchors
Total including anchors
Consolidated Properties
2019
2020
Occupancy (1) as of December 31,
Unconsolidated Properties
Combined (2)
2020
2019
2020
2019
88.4 %
88.1 %
92.2 %
92.8 %
86.0 %
88.5 %
89.8 %
91.7 %
87.8 %
88.1 %
90.4 %
90.7 %
93.7 %
96.1 %
81.2 %
87.1 %
86.2 %
90.6 %
89.4 %
90.3 %
91.7 %
92.6 %
92.9 %
95.5 %
(1) Occupancy for all periods presented includes all tenants irrespective of the term of their agreement.
(2) Combined occupancy is calculated by using occupied gross leasable area (“GLA”) for consolidated and unconsolidated properties and
dividing by total GLA for consolidated and unconsolidated properties.
(3) Core Malls excludes Fashion District Philadelphia, Exton Square Mall, Valley View Mall, Wyoming Valley Mall, power centers and
Gloucester Premium Outlets.
From 2019 to 2020, total occupancy for our retail portfolio, including consolidated and unconsolidated properties (and including all tenants
irrespective of the term of their agreement), decreased 450 basis points to 88.1%.
From 2019 to 2020, total occupancy for our Core Malls, including consolidated and unconsolidated properties, decreased 520 basis points to
90.3%.
49
Leasing Activity
The table below sets forth summary leasing activity information with respect to our properties for the year ended December 31, 2020, including
anchor and non-anchor space at consolidated and unconsolidated properties:
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
Total Fixed Rent
Percentage in Lieu
Total Renewal Leases (4)
Total Non Anchor (5)
Anchor
New Leases
Renewal Leases
Total Anchor
Number GLA
Term
(in years)
Initial
Rent psf
Previous
Rent psf
Initial Gross Rent
Spread (1)
$
%
Annualized
Tenant
Improvements
psf (3)
Avg Rent
Spread (2)
%
47 103,317
—
—
47 103,317
135 352,807
5 92,781
140 445,588
36 103,299
176 548,887
223 652,204
—
—
2 186,505
2 186,505
5.7 $
—
5.7
2.8
3.8
3.0
1.4
2.7
3.2 $
— $
5.0
5.0 $
42.37 $
—
42.37
52.64
16.07
45.03
33.00
42.76 $
42.70
—
6.07 $
6.07
— $
—
—
—
—
—
— %
— %
— %
— % $
— %
— %
56.58
16.94
48.33
43.90
47.49 $
(3.94 )
(0.87 )
(3.30 )
(10.91 )
(4.73 )
(7.0 %)
(5.1 )%
(6.8 )%
(24.8 )%
(10.0 )%
(3.6 )%
(11.3 )%
(4.2 )%
— %
$
—
6.04 $
—
0.03
— %
0.5 %
— % $
— %
8.00
-
8.00
0.01
—
0.01
0.01
0.01
—
—
(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 22 leases and 88,886 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 (7.4)% for all non anchor leases.
(5) Includes 23 leases and 83,650 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.
50
The following table sets forth our results of operations for the years ended December 31, 2020 and 2019:
(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
(Loss) gain on debt extinguishment, net
Gain on derecognition of property
Impairment of assets
Impairment of development land parcel
Reorganization expenses
Equity in (loss) income of partnerships
Loss on remeasurement of assets by equity method investee
Gain on sales of real estate by equity method investee
Gain on sales of interests in real estate, net
Gains on sales of non-operating real estate
Net loss
For the Year Ended
December 31, 2020
% Change
2019 to 2020
For the Year Ended
December 31, 2019
$
$
260,936
(126,898 )
887
(126,362 )
(50,272 )
(1,227 )
586
(294 )
(84,341 )
(1,487 )
8,127
—
—
(3,769 )
(5,544 )
(148,545 )
—
11,444
54
(266,706 )
(22 )% $
(7 )%
(52 )%
(8 )%
9 %
(67 )%
(87 )%
4 %
32 %
(106 )%
N/A
(100 )%
(100 )%
N/A
(167 )%
N/A
(100 )%
317 %
(98 )%
1952 % $
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
2,730
(13,000 )
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 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.
The following table reports the breakdown of real estate revenues based on the terms of the lease contracts for the years ended December 31, 2020
and 2019:
(in thousands 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
Twelve Months Ended December 31,
2020
2019
$
$
186,199 $
38,304
32,542
1,204
2,250
260,499
(23,358 )
237,141
15,462
8,333
260,936 $
218,819
43,874
36,243
4,704
1,444
305,084
(2,773 )
302,311
19,979
12,668
334,958
51
Real estate revenue decreased by $74.0 million, or 22%, in 2020 as compared to 2019, primarily due to:
•
•
•
•
•
•
•
•
•
•
a decrease of $22.2 million in same store base rent due to a $13.4 million decrease related to mall closures as a result of the COVID-19
pandemic, along with associated rent abatements and reduced percent of sales revenue, a $7.3 million decrease related to tenant
bankruptcies in 2019 and 2020 as well as a $1.5 million decrease from net new store openings over the previous twelve months;
an increase of $19.7 million in same store credit losses due to increased accounts receivable balances from tenant bankruptcies and some
struggling tenants across our portfolio that were exacerbated by mall closures as a result of the COVID-19 pandemic beginning in March
2020;
a decrease of $8.7 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, vacancies and abatements resulting from the COVID-19 pandemic, the
derecognition of Valley View Mall during the third quarter of 2020 as a result of our loss of control of the property as well as a decrease
in lease revenue at Exton Square Mall due to the sale of an outparcel during 2019;
a decrease of $7.8 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 $3.8 million in same store common area expense reimbursements, including a decrease of $0.9 million associated with the
straight lining of fixed common area expense reimbursements. Excluding the impact of the straight line adjustment, same store common
area reimbursements decreased by $2.9 million due to a decrease in same store common area expense (see “-Property Operating
Expenses”), as well as bankruptcy and COVID-19 related store closings 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 $3.5 million in same store percentage rent due to COVID-19 related mall closures resulting in lower sales;
a decrease of $3.3 million in same store utility reimbursements, offset by a decrease in same store utility expense (see “-Property
Operating Expenses”)
a decrease of $2.8 million in same store other real estate revenue, including decreases in partnership marketing revenue of $1.3 million
and promotional revenues of $1.0 million; and
a decrease of $2.5 million in same store real estate tax reimbursements due to bankruptcy and COVID-19 related mall closures and rental
concessions made to certain tenants under which the terms of their leases were modified such that they no longer pay expense
reimbursements, partially offset by an increase in same store real estate tax expense (see “-Property Operating Expenses”); partially
offset by
an increase of $0.8 million in same store lease termination revenue, including $2.2 million from the termination of leases with 11 tenants
during 2020, as compared to $1.4 million received from 17 tenants during 2019.
Property Operating Expenses
Property operating expenses decreased by $9.7 million, or 7%, in 2020 as compared to 2019, primarily due to:
•
•
•
•
•
a decrease of $3.8 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 $3.6 million in same store common area maintenance expense, including a $1.3 million decrease in cleaning expense and a
$0.7 million decrease in security expense due to negotiated credits with our vendors while our properties were closed, a $0.6 million
decrease in utility expense and a $0.3 million decrease in snow removal expense due to lower snow fall amounts during 2020 across the
Mid-Atlantic States, where many of our properties are located;
a decrease of $2.0 million in same store tenant utility expense due to a combination of lower electricity usage and electricity rates; and
a decrease of $1.6 million at non-same store properties Valley View Mall and Exton Square Mall due to a decrease in the real estate tax
assessment value at Valley View Mall, the derecognition of Valley View Mall during the third quarter of 2020 as a result of our loss of
control of the property and a decrease in cleaning and security expenses at both properties due to negotiated credits with our vendors
while properties were closed; partially offset by
an increase of $2.0 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.
Depreciation and Amortization
Depreciation and amortization expense decreased by $11.4 million, or 8%, in 2020 as compared to 2019, primarily due to:
•
a decrease of $8.7 million due to accelerated amortization of capital improvements associated with store closings during 2019, partially
offset by accelerated amortization of capital improvements associated with store closings during 2020 and a higher asset base resulting
from capital improvements related to new tenants at our same store properties
52
•
•
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; and
a decrease of $1.0 million at non-same store properties Exton Square Mall and Valley View Mall due to the derecognition of Valley
View Mall during the third quarter of 2020 as a result of a receiver being assigned to manage the property, accelerated amortization of
capital improvements associated with store closings during 2019, as well as a decrease in depreciation expense at Exton Square Mall due
to the sale of an out-parcel during 2019.
General and Administrative Expenses
General and administrative expenses increased by $4.3 million, or 9%, in 2020 as compared to 2019, primarily due to higher professional fees of
$12.3 million, $8.0 million of which were a direct result of our financial restructuring, partially offset by lower employee compensation expenses
of $6.7 million and lower travel and convention expenses of $1.3 million.
Provision for Employee Separation Expenses
During the years ended December 31, 2020 and 2019, we terminated the employment of certain employees and officers. In connection with the
departure of those employees and officers, we recorded $1.2 million and $3.7 million, respectively, of employee separation expenses.
Insurance Recoveries, net
During the year ended December 31, 2020, we recorded net recoveries of approximately $0.6 million. These net recoveries primarily relate to
remediation expenses.
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 interruption claims. $0.5 million of the recoveries received relate to business interruption.
Interest Expense
Interest expense increased by $20.4 million, or 32%, in 2020 as compared to 2019 due to higher weighted average effective interest rates (5.58%
in 2020 compared to 4.31% in 2019) and a higher weighted average debt balance ($2,236.9 million in 2020 compared to $2,052.7 million in
2019). Also included in interest expense, net is $2.8 million of expense due to the accelerated reclassification of other comprehensive (loss)
income into earnings from our derivatives.
(Loss) Gain on Debt Extinguishment
As a result of our financial restructuring, we incurred $0.9 million of lender expenses which were accounted for as a loss on debt extinguishment
for the year ended December 31, 2020. Additionally, as a result of the financial restructuring, we accelerated the amortization of a portion of our
deferred financing costs under our previously existing credit agreements which resulted in a loss on debt extinguishment of $0.6 million for the
year ended December 31, 2020.
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.
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. 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 recorded a gain on extinguishment of debt of $29.6 million
during the three months ended September 30, 2019.
Gain on Derecognition of Property
In August 2020, a court order assigned a receiver to operate Valley View Mall on behalf of the lender of the mortgage loan secured by the
property. We no longer operate the property as a result of court order assigning the receiver. As a result, we derecognized the assets associated
with Valley View Mall and recognized a gain on derecognition of property of $8.1 million in the consolidated statement of operations for the year
ended December 31, 2020.
53
Impairment of Assets
During the year ended December 31, 2019, we recorded impairment of assets of $5.0 million. We did not record any asset impairments during the
year ended December 31, 2020. The assets that incurred impairments and the amount of such impairments are as follows:
(in thousands of dollars)
Gainesville land
Woodland Mall
Valley View Mall
Other
Total impairment of assets
For the Year Ended
December 31, 2019
$
$
1,464
2,098
1,408
48
5,018
See note 2 to our consolidated financial statements for a further discussion of impairment of assets.
Reorganization Expenses
For the period from November 1, 2020 to December 10, 2020, we incurred costs and fees of $3.8 million in connection with our efforts to
effectuate the financial restructuring that were directly attributable to our bankruptcy proceedings, which we classified within reorganization
expenses in the consolidated statement of operations.
Equity in (Loss) Income of Partnerships
Equity in income of partnerships decreased by $13.8 million, or 167%, in 2020 as compared to 2019. This decrease was primarily due to lower
lease revenue in 2020 at Same Store properties.
Loss on Remeasurement of Assets by Equity Method Investee
Loss on remeasurement of assets by equity method investee is comprised of $145.7 million of our share of the loss on remeasurement on the
assets of our joint venture in FDP and $2.8 million of other than temporary impairment on the fair value of our non-controlling ownership interest
in the joint venture. See note 3 to the consolidated financial statements for additional information.
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 Sales of Real Estate, net of Adjustments to Gain on Sales
In January 2020, we completed the sale of an outparcel at Woodland Mall in Grand Rapids, Michigan for total consideration of $5.2 million. In
March 2020, we completed the sale of two outparcels at Magnolia Mall in Florence, South Carolina for total consideration of $2.9 million. In
connection with the March sale, we recorded a gain of $1.9 million. In June 2020, we completed the sale of six outparcels at Magnolia Mall,
Jacksonville Mall and Valley Mall for total consideration of $14.4 million and net gain of $9.3 million. In December 2020, we sold a land
outparcel for $0.6 million in consideration. As a result of the sale, we recorded a gain on sale of $0.2 million.
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 Non-operating 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.
54
NON-GAAP SUPPLEMENTAL FINANCIAL MEASURES
Overview
The preceding discussion analyzes our financial condition and results of operations in accordance with generally accepted accounting principles,
or GAAP, for the periods presented. We also use Net Operating Income (“NOI”) and Funds from Operations (“FFO”) which are non-GAAP
financial measures, to supplement our analysis and discussion of our operating performance:
• 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 differentiate between properties
that we have owned for the full periods presented and properties acquired, sold or under redevelopment during those periods.
Furthermore, our use and presentation of NOI combines NOI from our consolidated properties and NOI attributable to our share of
unconsolidated properties in order to arrive at total NOI. We believe that this is also helpful information because it reflects the pro rata
contribution from our unconsolidated properties that are owned through investments accounted for under GAAP as equity in income of
partnerships. See “Unconsolidated Properties and Proportionate Financial Information” below.
• We believe that FFO is also helpful to management and investors as a measure of operating performance because it excludes various
items included in net loss 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. 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.
• 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 properties, and FFO, as adjusted, may not be comparable to other similarly titled measures used by our industry
peers. None of these measures are measures of performance in accordance with GAAP, and they have limitations as analytical tools. They should
not be considered as alternative measures of our net loss, operating performance, cash flow or liquidity. They are not indicative of funds available
for our cash needs, including our ability to make cash distributions. Please see below for a discussion of these non-GAAP measures and their
respective reconciliation to the most directly comparable GAAP measure.
Unconsolidated Properties and Proportionate Financial Information
The non-GAAP financial measures presented below incorporate financial information attributable to our share of unconsolidated properties. This
proportionate financial information is non-GAAP financial information, but we believe that it is helpful information because it reflects the pro
rata contribution from our unconsolidated properties that are owned through investments accounted for under GAAP using the equity method of
accounting. Under such method, earnings from these unconsolidated partnerships are recorded in our statements of operations prepared in
accordance with GAAP under the caption entitled “Equity in income of partnerships.”
To derive the proportionate financial information reflected in the tables below as “unconsolidated,” we multiplied the percentage of our economic
interest in each partnership on a property-by-property basis by each line item. Under the partnership agreements relating to our current
unconsolidated partnerships with third parties, we own a 25% to 50% economic interest in such partnerships, and there are generally no
provisions in such partnership agreements relating to special non-pro rata allocations of income or loss, and there are no preferred or priority
returns of capital or other similar provisions. While this method approximates our indirect economic interest in our pro rata share of the revenue
and expenses of our unconsolidated partnerships, we do not have a direct legal claim to the assets, liabilities, revenues or expenses of the
unconsolidated partnerships beyond our rights as an equity owner in the event of any liquidation of such entity. Our percentage ownership is not
necessarily indicative of the legal and economic implications of our ownership interest. Accordingly, NOI and FFO results based on our share of
the results of unconsolidated partnerships do not represent cash generated from our investments in these partnerships.
We have determined that we hold a noncontrolling interest in each of our unconsolidated partnerships, and account for such partnerships using the
equity method of accounting, because:
• Except for two properties that we co-manage with our partner, all of the other entities are managed on a day-to-day basis by one of our
other partners as the managing general partner in each of the respective partnerships. In the case of the co-managed properties, all
decisions in the ordinary course of business are made jointly.
• The managing general partner is responsible for establishing the operating and capital decisions of the partnership, including budgets, in
the ordinary course of business.
• All major decisions of each partnership, such as the sale, refinancing, expansion or rehabilitation of the property, require the approval of
all partners.
• Voting rights and the sharing of profits and losses are generally in proportion to the ownership percentages of each partner.
55
We hold legal title to a property owned by one of our unconsolidated partnerships 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
applicable agreements between us and the entity with ownership interests, we and such other entity have joint control because decisions regarding
matters such as the sale, refinancing, expansion or rehabilitation of the property require the approval of both us and the other entity owning an
interest in the property. Hence, we account for this property like our other unconsolidated partnerships using the equity method of accounting.
The balance sheet items arising from this property appear under the caption “Investments in partnerships, at equity.”
For further information regarding our unconsolidated partnerships, see note 3 to our consolidated financial statements.
Net Operating Income (“NOI”)
NOI (a non-GAAP measure) is derived from real estate revenue (determined in accordance with GAAP, including lease termination revenue),
minus property operating expenses (determined in accordance with GAAP), plus our pro rata share of revenue and property operating expenses of
our unconsolidated partnership investments. NOI does not represent cash generated from operating activities in accordance with GAAP and
should not be considered to be an alternative to net loss (determined in accordance with GAAP) as an indication of our financial performance or
to be an alternative to cash flow from operating activities (determined in accordance with GAAP) as a measure of our liquidity. It is not indicative
of funds available for our cash needs, including our ability to make cash distributions. We believe NOI is helpful to management and investors as
a measure of operating performance because it is an indicator of the return on property investment, and provides a method of comparing property
performance over time. We believe that net loss is the most directly comparable GAAP measure to NOI. NOI excludes other income, general and
administrative expenses, provision for employee separation expenses, interest expense, depreciation and amortization, insurance recoveries,
gain/loss on debt extinguishment, gain on derecognition of property, impairment of assets, gains on sales of real estate by equity method
investees, equity in loss/income of partnerships, loss on remeasurement of assets by equity method investee, gain on sale of non operating real
estate, gain/loss on sale of real estate, impairment of development land parcel, project costs and other expenses and reorganization 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 loss to NOI of our consolidated properties for the years ended 2020 and 2019:
(in thousands of dollars)
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
(Loss) gain on debt extinguishment
Gain on derecognition of property
Impairment of assets
Impairment of development land parcel
Reorganization expenses
Equity in loss (income) of partnerships
Loss on remeasurement of assets by equity method investee
Gain on sales of real estate by equity method investee
Gain on sales of real estate, net
Gain on sales of interests in non operating real estate
Net operating income from consolidated properties
For the Year Ended December 31,
2020
(266,706 ) $
(887 )
126,362
50,272
1,227
294
(586 )
84,341
1,487
(8,127 )
—
—
3,769
5,544
148,545
—
(11,444 )
(54 )
134,038 $
2019
(13,000 )
(1,834 )
137,784
46,010
3,689
284
(4,362 )
63,987
(24,859 )
—
1,455
3,562
—
(8,289 )
—
(553 )
(2,744 )
(2,730 )
198,400
$
$
56
The table below reconciles equity in (loss) income of partnerships to NOI of our share of unconsolidated properties for the years ended 2020 and
2019:
(in thousands of dollars)
Equity in (loss) income of partnerships
Other income
Depreciation and amortization
Interest and other expenses
Net operating income from equity method investments at ownership share
$
$
For the Year Ended December 31,
2020
2019
(5,544 ) $
(48 )
16,640
13,508
24,556 $
8,289
(76 )
9,874
11,243
29,330
The table below presents total NOI and total NOI excluding lease terminations for the years ended December 31, 2020 and 2019:
Same Store
Non Same Store
Total (non-GAAP)
(in thousands of dollars)
NOI from consolidated properties
NOI from equity method investments at ownership share
Total NOI
Less: lease termination revenue
Total NOI - excluding lease termination revenue
22,869
$ 132,264 $ 185,874 $
28,597
155,133 214,471
1,531
$ 152,865 $ 212,940 $
2,268
2020
2019
2020
1,774 $
1,687
3,461
-
3,461 $
2019
2020
732
2019
12,526 $ 134,038 $ 198,400
29,329
13,258 158,594 227,729
1,549
13,240 $ 156,326 $ 226,180
24,556
2,268
18
Total NOI decreased by $69.1 million, or 30.4%, in 2020 as compared to 2019. NOI from Non Same Store properties decreased by $9.8 million.
This decrease was primarily due to the conveyance of Wyoming Valley Mall, the derecognition of Valley View Mall and the operating results at
non-core properties. NOI from Same Store properties decreased by $59.3 million primarily due to property results as discussed in “—Results of
Operations—Real Estate Revenue” and “—Property Operating Expenses.”
Funds From Operations
The National Association of Real Estate Investment Trusts (“NAREIT”) defines Funds From Operations (“FFO”), which is a non-GAAP measure
commonly used by REITs, as net income (computed in accordance with GAAP) excluding (i) depreciation and amortization 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 depreciable 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 definition differently than we
do. NAREIT’s established guidance provides that excluding impairment write downs of depreciable real estate is consistent with the NAREIT
definition.
FFO is a commonly used measure of operating performance and profitability among REITs. We use FFO and FFO per diluted share and unit of
limited partnership interest in our operating partnership (“OP Unit”) in measuring our performance against our peers and as one of the
performance measures for determining incentive compensation amounts earned under certain of our performance-based executive compensation
programs.
FFO does not include gains and losses on sales of operating real estate assets or impairment write downs of depreciable real estate (including
development land parcels), which are included in the determination of net loss in accordance with GAAP. Accordingly, FFO is not a
comprehensive measure of our operating cash flows. In addition, since FFO does not include depreciation on real estate assets, FFO may not be a
useful performance measure when comparing our operating performance to that of other non-real estate commercial enterprises. We compensate
for these limitations by using FFO in conjunction with other GAAP financial performance measures, such as net loss and net cash used in
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 loss (determined in accordance with GAAP) as an
indication of our financial performance or to be an alternative to cash flow from operating activities (determined in accordance with GAAP) as a
measure of our liquidity, nor is it indicative of funds available for our cash needs, including our ability to make cash distributions. We believe that
net loss is the most directly comparable GAAP measurement to FFO.
When applicable, we also present FFO, as adjusted, and FFO per diluted share and OP Unit, as adjusted, which are non-GAAP measures, for the
years ended December 31, 2020 and 2019, 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, insurance recoveries or losses, net,
gain on derecognition of property, loss on hedge ineffectiveness and reorganization expenses which had an effect on our results of operations, but
are not, in our opinion, indicative of our ongoing operating performance.
57
We believe that FFO is helpful to management and investors as a measure of operating performance because it excludes various items included in
net loss 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 extinguishment (including accelerated amortization of financing costs), impairment of assets, provision
for employee separation expense, insurance recoveries or losses, net, gain on derecognition of property, loss on hedge ineffectiveness and
reorganization expenses.
The following table presents a reconciliation of net 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, 2020 and 2019:
(in thousands, except per share amounts)
Net loss
Depreciation and amortization on real estate:
Consolidated properties
PREIT’s share of equity method investments
Gain on sales of real estate, net
Impairment of real estate assets
Loss on remeasurement of assets by equity method investee
Dividends on preferred shares (1)
Funds from operations attributable to common shareholders and OP Unit holders
$
Provision for employee separation expense
Insurance recoveries, net
Reorganization expenses
Loss (gain) on debt extinguishment
Gain on derecognition of property
Impairment of development land parcel
Loss on hedge ineffectiveness
Funds from operations attributable to common shareholders and OP Unit holders, as adjusted $
Funds from operations attributable to common shareholders and OP Unit holders per diluted
share and OP Unit
Funds from operations attributable to common shareholders and OP Unit holders, as adjusted,
per diluted share and OP Unit
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
$
$
For the Year Ended December 31,
% Change
2019 to 2020
2020
(266,706 )
$
2019
(13,000 )
124,940
16,641
(11,444 )
—
148,545
(13,687 )
(1,711 )
1,227
(586 )
3,769
1,487
(8,127 )
—
2,912
(1,029 )
(101.6)%
(101.2)%
$
136,422
9,874
(2,756 )
1,456
—
(27,375 )
104,621
3,689
(4,362 )
—
(24,859 )
—
3,562
—
82,651
(0.02 )
(101.6)%
$
1.33
(101.2)%
$
(0.01 )
77,227
2,012
380
79,619
1.05
75,221
3,221
453
78,895
(1) Does not include the impact of $13.7 million of accrued, undeclared and unpaid preferred share dividends for the year ended December 31,
2020. The Company cannot declare and pay cash dividends on common shares while there exists a preferred dividend arrearage.
FFO was a loss of $1.7 million for 2020, a decrease of $106.3 million, or 101.6%, compared to $104.6 million for 2019. This decrease was
primarily due to:
•
•
•
•
•
•
a $59.0 million decrease in Same Store NOI primarily due to mall closures as a result of the COVID-19 pandemic, along with associated
rent abatements and reduced percent of sales revenue coupled with additional tenant bankruptcies in 2020;
a $9.8 million decrease in Non Same Store NOI primarily due to three anchor store closings during 2018 and 2019 at Valley View Mall
and Exton Square Mall and associated co-tenancy concessions, vacancies and abatements resulting from the COVID-19 pandemic, the
derecognition of Valley View Mall during the third quarter of 2020 as a result of our loss of control of the property as well as a decrease
in lease revenue at Exton Square Mall due to the sale of an outparcel during 2019;
a $4.3 million increase in general and administrative expense primarily due to costs associated with the financial restructuring;
a $20.4 million increase in net interest expense;
a $3.8 million decrease in insurance recoveries;
reorganization expenses of $3.8 million in 2020;
58
•
•
•
•
a $0.9 million decrease in other income; partially offset by
a $2.5 million decrease in provision for employee separation expenses;
a $24.9 million gain on extinguishment of debt in 2019 compared to a $1.5 million loss on extinguishment of debt in 2020; and
a $8.1 million gain on the derecognition of property.
FFO per diluted share and OP Unit decreased $(1.35) per share to $(0.02) per share for 2020, compared to $1.33 per share for 2019 due to the
factors noted above.
LIQUIDITY AND CAPITAL RESOURCES
This “Liquidity and Capital Resources” section contains certain “forward-looking statements” that relate to expectations and projections that are
not historical facts. These forward-looking statements reflect our current views about our future liquidity and capital resources, and are subject to
risks and uncertainties that might cause our actual liquidity and capital resources to differ materially from the forward-looking statements.
Additional factors that might affect our liquidity and capital resources include those discussed in the section entitled “Item 1A. Risk Factors.” We
do not intend to update or revise any forward-looking statements about our liquidity and capital resources to reflect new information, future
events or otherwise.
Capital Resources
We currently expect to meet certain of our short-term liquidity requirements, including operating expenses, recurring capital expenditures, tenant
improvements and leasing commissions, generally through our available working capital and our First Lien Revolving Facility, subject to the
terms and conditions of our First Lien Credit Agreement. See “Credit Agreements—Similar terms of the Credit Agreements” below for covenant
information. We expect to spend approximately $16.9 million related to our capital improvements and development projects in 2021. 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 2020 were $31.8 million, based on distributions of $0.9218 per Series B Preferred Share, distributions of $0.90 per Series
C Preferred Share, distributions of $0.8594 per Series D Preferred Share and distributions of $0.23 per common share and OP Unit. Our Credit
Agreements limit our ability to declare and pay dividends on our common and preferred shares, subject to certain exceptions. We have deferred
payments on our preferred shares and suspended payments on our common shares since the third quarter of 2020. Other than as may be required
to maintain our status as a REIT, we do not anticipate that we will pay any cash dividends to holders of our common or preferred shares for the
foreseeable future.
As a result of the existing cumulative unpaid dividends on our preferred shares and our bankruptcy filing, we are no longer able to register the
offer and sale of securities on Form S-3. This creates additional limitations on our ability to raise capital in the capital markets, potentially
increasing our costs of raising capital in the future. Our ability to raise capital in the capital markets may also be impacted by market fluctuations
more generally, including as a result of the COVID-19 pandemic and related economic downturn.
During 2020, our capital raised includes proceeds of $22.5 million from our share of asset sales by us and our unconsolidated subsidiaries and
through the financial restructuring, we obtained availability under our revolving facility of $75.2 million as of December 31, 2020.
We are actively seeking to raise additional capital, including through asset dispositions identified through our portfolio property reviews.
Disposing of these properties can enable us to redeploy or recycle our capital to other uses. In many cases, we are marketing land parcels for
development for a variety of different nontraditional, non-retail uses, including hotel, multifamily residential and healthcare uses, which we
believe can also help position our portfolio within differentiated mixed-use environments. During 2020, we executed agreements of sale for five
land parcels for anticipated multifamily development and one land parcel for anticipated hotel development that are expected to provide an
aggregate of up to approximately $89.7 million in proceeds, which will primarily be used to repay amounts outstanding under our Credit
Agreements. These agreements include 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, which in several cases has been delayed due to the effects of COVID-19 on business operations and
availability of financing. Closing of the transactions cannot be assured or the timing of their completion yet estimated 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
expenditures, tenant improvements or leasing commissions with sources other than operating cash flows:
•
•
•
adverse changes or prolonged downturns in general, local or retail industry economic, financial, credit or capital market or competitive
conditions, as a result of the COVID-19 pandemic or otherwise, leading to a reduction in real estate revenue or cash flows or an increase
in expenses;
continued deterioration in our tenants’ business operations and financial stability, particularly in light of the COVID-19 pandemic,
including anchor or non-anchor tenant bankruptcies, leasing delays or terminations, or lower sales, causing deferrals or declines in rent,
percentage rent and cash flows;
inability to achieve targets for, or decreases in, property occupancy and rental rates, resulting in lower or delayed real estate revenue and
operating income;
59
•
increases in operating costs, including increases that cannot be passed on to tenants, resulting in reduced operating income and cash
flows; and
•
increases in interest rates, resulting in higher borrowing costs.
In addition, we are continuing to monitor the COVID-19 pandemic 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. Thus far, the pandemic and
the actions taken to address it and the related overall worsening of economic conditions have had an adverse effect on our business, operations,
liquidity and financial condition.
As of December 31, 2020, all of our malls had re-opened while adhering to social distancing and sanitation and safety protocols designed to
address the risks posed by COVID-19, however, many of our tenants continue to operate at reduced capacity. The pandemic’s effect, primarily
beginning in the second quarter of 2020, had a significant impact on our operations, financial condition, liquidity and results of operations in 2020
and its impact is expected to continue through future periods. As of December 31, 2020, we had cash receipts of 80% of billed second, third and
fourth quarter rents. We believe that our rent collections are probable, but expect that collections will continue to be below our tenants’ rent
obligations as long as lingering effects of COVID-19, including new or renewed restrictions and business closures, affect the return of customers
to malls and the financial strength of our tenants. While we continue to record rental revenue, the reduced collection levels have impacted our
liquidity position and may continue to do so. See “Item 1A. Risk Factors—Risks Related to Our Business and Properties—The COVID-19 global
pandemic and the public health and governmental response have adversely affected, and will likely continue to adversely affect, our business,
financial condition, liquidity and operating results. The extent and duration of such effects are uncertain, continuously changing and difficult to
predict. Additionally, the future outbreak of any other highly infectious or contagious diseases may materially and adversely affect our business,
financial condition, liquidity and operating results.”
We expect to meet certain of our longer-term requirements, such as obligations to fund redevelopment and development projects, certain capital
requirements, 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 substantially. 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 connection 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 discontinued, 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 secured credit agreements (collectively, as amended, the “Credit Agreements”): (a) the First Lien Credit Agreement,
which, as described in more detail below, includes (i) the $130.0 million First Lien Revolving Facility, and (ii) the $384.5 million First Lien Term
Loan Facility, and (b) the Second Lien Credit Agreement, which, as described in more detail below, includes the $535.2 Second Lien Term Loan
Facility. The First Lien Term Loan Facility and the Second Lien Term Loan Facility are collectively referred to as the “Term Loans.” The Credit
Agreements refinanced our previously existing credit agreements in effect prior to the Effective Date, including our secured term loan under the
Credit Agreement dated as of August 11, 2020 (as amended, the “Bridge Credit Agreement”), our Seven-Year Term Loan Agreement entered into
on January 8, 2014 (as amended, the “7-Year Term Loan”), and our 2018 Amended and Restated Credit Agreement entered into on May 24, 2018
(as amended, the “2018 Credit Agreement”). Capitalized terms used in this section and not otherwise defined in this Annual Report on Form 10-K
have the meanings ascribed to such terms in the applicable Credit Agreement.
As of December 31, 2020, we had borrowed $922.1 million under the Term Loans and $54.8 million under the First Lien Revolving Facility. The
carrying value of the Term Loans on our consolidated balance sheet as of December 31, 2020 is net of $13.6 million of unamortized debt issuance
costs. The maximum amount that was available to be borrowed by us under the First Lien Revolving Facility as of December 31, 2020 was $75.2
million.
60
Our obligations under the Credit Agreements are guaranteed by certain of our subsidiaries. Our obligations under the Credit Agreements and the
guaranties are secured by mortgages and deeds of trust on a portfolio of 12 of our subsidiaries’ properties, including nine malls and three
additional parcels. The obligations are further secured by a lien on substantially all of our personal property pursuant to collateral agreements and
a pledge of substantially all of the equity interests held by us and the guarantors, pursuant to pledge agreements, in each case subject to limited
exceptions.
The maturity date of the Credit Agreements is December 10, 2022 (or such earlier date that the obligations under the applicable Credit Agreement
have been accelerated), unless extended by one year until December 10, 2023 at our option (the “Maturity Date”). Any such extension would be
subject to our fulfillment of certain conditions including maintaining minimum liquidity of $35.0 million, a minimum corporate debt yield of
8.0% and a maximum loan-to-value ratio of 105% for the total first lien and second lien loans and letters of credit and the Borrowing Base
Properties as determined by an appraisal (provided that we may obtain a second appraisal of each Borrowing Base Property prepared by a
nationally recognized appraisal firm and use the highest appraised value), and provided that no default or event of default exists and our
representations and warranties are true in all material respects.
First Lien Credit Agreement
On December 10, 2020, we entered into an Amended and Restated First Lien Credit Agreement (the “First Lien Credit Agreement”) with Wells
Fargo Bank, National Association and the other financial institutions signatory thereto and their assignees, for secured loan facilities consisting
of: (i) a secured first lien revolving credit facility allowing for borrowings up to $130.0 million, including a sub-facility for letters of credit to be
issued thereunder in an aggregate stated amount of up to $10.0 million (collectively, the “First Lien Revolving Facility”), and (ii) a $384.5 million
secured first lien term loan facility (the “First Lien Term Loan Facility”).
Amounts borrowed under the First Lien Credit Agreement may be either Base Rate Loans or LIBOR Loans. Base Rate Loans bear interest at the
highest of (a) the Prime Rate, (b) the Federal Funds Rate plus 0.50% and (c) the LIBOR Market Index Rate plus 1.0%, provided that the Base Rate
will not be less than 1.50% per annum, in each case plus (w) for revolving loans, 2.50% per annum, and (x) for term loans, 4.74% per annum.
LIBOR Loans bear interest at LIBOR plus (y) for revolving loans, 3.50% per annum, and (z) for term loans, 5.74% per annum, in each case,
provided that LIBOR will not be less than 0.50% per annum. Interest is due to be paid in cash on the last day of each applicable interest period
(with rolling 30-day interest periods) and on the Maturity Date. We must pay certain fees to the administrative agent for the account of the lenders
in connection with the First Lien Credit Agreement, including an unused fee for the account of the revolving lenders, which will accrue (i) 0.35%
per annum on the daily amount of the unused revolving commitments when that amount is greater than or equal to 50% of the aggregate amount
of revolving commitments, and (ii) 0.25% when that amount is less than 50% of the aggregate amount of revolving commitments. Accrued and
unpaid unused fees will be payable quarterly in arrears during the term of the First Lien Credit Agreement and on the Revolving Termination Date
(or any earlier date of termination of the revolving commitments or reduction of the revolving commitments to zero).
Letters of credit and the proceeds of revolving loans may be used (i) to refinance existing indebtedness under the Bridge Credit Agreement, (ii) for
working capital and general corporate purposes (subject to certain exceptions set forth in the First Lien Credit Agreement, including limitations
on investments in non-Borrowing Base Properties), and (iii) to fund professional fee payments and other fees and expenses subject to the
provisions of the Plan and related confirmation order and for other uses permitted by the provisions of the First Lien Credit Agreement, Plan and
confirmation order, in each case consistent with an approved annual business plan. The proceeds of term loans may only be used to refinance
existing indebtedness under the 2018 Credit Agreement and the 7-Year Term Loan. We may terminate or reduce the amount of the revolving
commitments at any time and from time to time without penalty or premium, subject to the terms of the First Lien Credit Agreement.
Second Lien Credit Agreement
On December 10, 2020, we also entered into a Second Lien Credit Agreement (the “Second Lien Credit Agreement”) with Wells Fargo Bank,
National Association and the other financial institutions signatory thereto and their assignees for a $535.2 million secured second lien term loan
facility (the “Second Lien Term Loan Facility”).
Amounts borrowed under the Second Lien Credit Agreement may be either Base Rate Loans or LIBOR Loans. Base Rate Loans bear interest at
the highest of (a) the Prime Rate, (b) the Federal Funds Rate plus 0.50% and (c) the LIBOR Market Index Rate plus 1.0%, provided that the Base
Rate will not be less than 1.50% per annum, in each case plus 7.00% per annum. LIBOR Loans bear interest at LIBOR plus 8.00% per annum,
provided that LIBOR will not be less than 0.50% per annum. Interest is due to be paid in kind on the last day of each applicable interest period
(with rolling 30-day interest periods) by adding the accrued and unpaid amount thereof to the principal balance of the loans under the Second Lien
Credit Agreement and then accruing interest on the increased principal amount (provided that after the discharge of our Senior Debt Obligations,
interest will be paid in cash). We must pay certain fees to the administrative agent for the account of the lenders in connection with the Second
Lien Credit Agreement.
The proceeds of loans under the Second Lien Credit Agreement may only be used to refinance existing indebtedness under the 2018 Credit
Agreement and the 7-Year Term Loan.
On February 8, 2021, the Company entered into the first amendment to the Second Lien Credit Agreement (“First Amendment”). The First
Amendment provided for elimination of approximately $5.3 million of the disputed default interest that was capitalized into the principal balance
of the Second Lien Term Loan Facility, reducing the outstanding principal amount of loans outstanding under the Second Lien Credit Agreement,
retroactively as of December 10, 2020, to $535.2 million. The First Amendment also eliminated the disputed PIK interest that was capitalized
through the date of the amendment.
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Similar terms of the Credit Agreements
Each of the Credit Agreements contains certain affirmative and negative covenants and other provisions, which substantially align with those
contained in the other Credit Agreements, and which are described in detail below.
Covenants
Each of the Credit Agreements contains, among other restrictions, certain affirmative and negative covenants, including, without limitation,
requirements that we:
• maintain liquidity of at least $25.0 million, to be comprised of unrestricted cash held in certain deposit accounts subject to control
agreements, up to $5.0 million held in a certain other deposit account excluded from the collateral, the unused revolving loan commitments
under the First Lien Credit Agreement (to the extent available to be drawn), and amounts on deposit in a designated collateral proceeds
account and amounts on deposit in a cash collateral account;
• maintain a minimum senior debt yield of 11.35% from and after June 30, 2021;
• maintain a minimum corporate debt yield of (a) 6.50% from June 30, 2021 through and including September 30, 2021 and (b) 7.25% from
and after October 1, 2021;
•
provide to the administrative agent, among other things, PREIT and its subsidiaries’ quarterly and annual financial statements, annual
budget, reports on projected sources and uses of cash, and an updated annual business plan, as well as quarterly and annual operating
statements, rent rolls, and certain other collections and tenant reports and information as the administrative agent may reasonably request
with respect to each Borrowing Base Property;
• maintain PREIT’s status as a REIT;
•
•
•
•
use commercially reasonable efforts to obtain subordination, non-disturbance and attornment agreements from each tenant under certain
Major Leases as well as ground lease estoppel certificates from each ground lessor of a Borrowing Base Property;
comply with the requirements of the various security documents and, at the administrative agent’s request, promptly notify the administrative
agent of any acquisition of any owned real property that is not subject to a mortgage and grant liens on such real property to secure our
obligations under the applicable Credit Agreement;
not amend any existing sale agreements with respect to Borrowing Base Properties to result in a reduction of cash consideration by 20% or
more; and
not retain more than $6.5 million of cash in property-level accounts held by our subsidiaries that are owners of real property (subject to
certain exceptions).
Each of the Credit Agreements also limits our ability, subject to certain exceptions, to make certain restricted payments (including payments of
dividends and voluntary prepayments of certain indebtedness which includes, with respect to the First Lien Credit Agreement, voluntary
prepayments under the Second Lien Credit Agreement), make certain types of investments and acquisitions, issue redeemable securities, incur
additional indebtedness, incur liens on our assets, enter into agreements with a negative pledge, make certain intercompany transfers, merge,
consolidate or sell all or substantially all our assets or the equity interests of our subsidiaries, amend our organizational documents or material
contracts, enter into transactions with affiliates, or enter into derivatives contracts. We are also prohibited from selling certain properties unless
certain conditions are satisfied with respect to the terms of the sale agreement for such property or, in the case of Borrowing Base Properties,
payment of certain release prices.
The First Lien Credit Agreement and, after our Senior Debt Obligations are discharged, the Second Lien Credit Agreement, each prohibit us from
(i) entering into Major Leases, (ii) assigning leases, (iii) discounting any rent under leases where the leased premises is at least 7,500 square feet
at a Borrowing Base Property and the discounted amount is more than $750,000 and more than 25% of the aggregate contractual base rent payable
over the initial term (not including any extension options), (iv) collecting rent in advance, (v) terminating or modifying the terms of any Major
Lease or releasing or discharging tenants from any obligations thereunder, (vi) consenting to a tenant’s assignment or subletting of a Major Lease,
or (vii) subordinating any lease to any other deed of trust, mortgage, deed to secure debt or encumbrance, other than the mortgages already
encumbering the applicable Borrowing Base Property and the mortgages entered into in connection with the other Credit Agreement. Under the
First Lien Credit Agreement and, under the Second Lien Credit Agreement after the First Lien Termination Date, any amounts equal to or greater
than $2.5 million but less than $3.5 million received by or on behalf of a guarantor in consideration of any termination or modification of a lease
(or the release or discharge of a tenant) are subject to restrictions on use, and such amounts that are equal to or greater than $3.5 million must be
applied to reduce our outstanding obligations under the applicable Credit Agreement.
As of December 31, 2020, we were in compliance with all terms under the Credit Agreements. We are not required to comply with any financial
covenants under our Credit Agreements until June 30, 2021. We expect to be in compliance with these financial covenants when they come into
effect.
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Voluntary and Mandatory Prepayments
Subject to certain conditions, we may prepay loans under the First Lien Credit Agreement, and under the Second Lien Credit Agreement after the
First Lien Termination Date, without premium or penalty. Under the First Lien Credit Agreement, if at any time the aggregate principal amount of
all outstanding revolving loans, together with the aggregate amount of all letter of credit liabilities, exceeds the aggregate amount of the revolving
commitments, we must make a payment of that excess amount. Under the First Lien Credit Agreement, at any time, and under the Second Lien
Credit Agreement, at any time after the First Lien Termination Date, if we receive net cash proceeds from certain capital events, subject to certain
exceptions, we must prepay loans under the applicable Credit Agreement (and under the First Lien Credit Agreement, we must either prepay loans
or cash collateralize the letter of credit liabilities or specified derivatives obligations, as applicable) as follows:
•
•
•
•
•
in the event of any debt issuance, in an amount equal to 100% of net cash proceeds;
in the event of any equity issuance, in an amount equal to 50% of net cash proceeds (with the other 50% of such net cash proceeds required to
prepay the loans (under the First Lien Credit Agreement, the revolving loans) or be deposited into a designated collateral proceeds account);
in the event of any asset disposition (other than an asset disposition of all or any portion of a Borrowing Base Property), in an amount equal
to 70% of net cash proceeds (with the other 30% of net cash proceeds required to either prepay the loans (under the First Lien Credit
Agreement, the revolving loans) or be deposited into a designated collateral proceeds account);
in the event of any insurance and condemnation event with respect to collateral that is not a Borrowing Base Property, 100% of net cash
proceeds, except for such amounts that we have elected to reinvest for reconstruction of property in accordance with the terms of the
applicable Credit Agreement; and
in the event of any insurance and condemnation event at a Borrowing Base Property, all net cash proceeds at the request of the administrative
agent, provided that the administrative agent is required to release all or a portion of the funds to us for specified uses depending on the
amount of net cash proceeds.
In the event of certain non-guarantor prepayment events resulting in the receipt of net cash proceeds by a borrower or guarantor from our
non-guarantor subsidiaries or joint ventures, those amounts are required to prepay loans (and under the First Lien Credit Agreement, prepay loans
or be used to cash collateralize the letter of credit liabilities or specified derivatives obligations, as applicable) as follows (subject to certain
exceptions): (a) 100% of net cash proceeds received if the event constitutes a debt issuance, (b) 50% of net cash proceeds received if the event
constitutes an equity issuance, (c) 100% of net cash proceeds received if the event constitutes an insurance condemnation event, and (d) 70% of
net cash proceeds received if the event constitutes an asset disposition, provided, in each case (subject to certain exceptions), that the net cash
proceeds received and not otherwise required to prepay loans must either prepay loans (under the First Lien Credit Agreement, the revolving
loans) or be deposited into a designated collateral proceeds account.
In the event we receive net cash proceeds from an asset disposition of all or any portion of a Borrowing Base Property in accordance with the
terms of the applicable Credit Agreement (each of which allows for the release of certain properties from the liens created by the security
documents applicable thereto upon our request and subject to our satisfaction of certain specified conditions with respect to such property), such
net proceeds must prepay the loans as follows (subject to certain exceptions):
•
•
•
in the event a Borrowing Base Property is released, the greater of (x) 110% of the property’s closing date appraised value, as reduced by any
prepayment made in connection with the release, and (y) 100% of the net cash proceeds received from the sale of the property;
in the event an income producing parcel is released, 100% of net cash proceeds; and
in the event a non-income producing parcel is released, 70% of net cash proceeds (with the other 30% required to either (i) prepay loans
(under the First Lien Credit Agreement, the revolving loans) or (ii) be deposited into a designated collateral proceeds account).
Under the Second Lien Credit Agreement, any net cash proceeds applied to the obligations under the First Lien Credit Agreement or to cash
collateralize certain letter of credit liabilities or specified derivatives obligations under the First Lien Credit Agreement or deposited into the
designated collateral proceeds account will reduce, on a dollar-for-dollar basis, any net cash proceeds required to be applied as a principal
prepayment of the loans under the Second Lien Credit Agreement. In the event net cash proceeds are applied under the First Lien Credit
Agreement resulting in its termination and the automatic release of the security interest in the collateral thereunder, to the extent any excess net
cash proceeds remain, 100% of such remaining proceeds are required to be applied to the loans under the Second Lien Credit Agreement.
We may request disbursements from the designated collateral proceeds account subject to the same terms and conditions applicable to a
disbursement of loans (or in the case of the First Lien Credit Agreement, revolving loans), the proceeds of which must be used in a manner
consistent with an approved annual business plan. Under the First Lien Credit Agreement, no revolving loans will be disbursed at any time that
designated collateral proceeds are on deposit and we may elect to apply designated collateral proceeds as a principal prepayment of the revolving
loans at any time. Under the Second Lien Credit Agreement, amounts in the designated collateral proceeds account in accordance with the First
Lien Credit Agreement are held by the administrative agent as additional collateral securing our obligations under the Second Lien Credit
Agreement.
Under the First Lien Credit Agreement, we have pledged and granted to the administrative agent an additional security interest in a letter of credit
collateral account.
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Additionally, under the First Lien Credit Agreement, in the event our senior debt yield is less than 12.06% for the calendar quarter ending June 30,
2021 or any calendar quarter thereafter, concurrently with the delivery of a compliance certificate and thereafter once per calendar month until the
ratio is equal to or greater than 12.06% for a subsequent quarter (as shown in a compliance certificate), we must either make prepayments, or
deposits into a cash collateral account, of all excess cash flow generated during the month preceding such required deposit date. So long as no
default or event of default exists, in the event the excess cash flow for any given month is negative and would cause our liquidity to fall below
$12.5 million (provided that we deliver evidence of the operating shortfall deficiency to the administrative agent), we may request a disbursement
of funds on deposit in the cash collateral account to fund or reimburse us for such deficiency. We may also request disbursement of the funds in
the cash collateral account following the termination of a cash sweep period, subject to certain conditions.
Under the First Lien Credit Agreement, if at any time, and under the Second Lien Credit Agreement, if at any time after the First Lien Termination
Date, our unrestricted cash or cash equivalents exceed $40.0 million for five consecutive days, we must make prepayments of the amount in
excess of $40.0 million. Under the First Lien Credit Agreement, those prepayments will be applied first to the revolving loans until the principal
balance is reduced to zero, then to the term loans.
Events of Default
In addition to customary events of default including, among other things, non-payment or non-performance under each of the Credit Agreements,
events of default include our (i) failure to pay Material Indebtedness (defined as indebtedness with an aggregate outstanding principal amount of
$25.0 million or more, or $250.0 million in the case of Nonrecourse Indebtedness), and (ii) the acceleration of such Material Indebtedness (or the
occurrence of any event that would permit the holders of such Material Indebtedness to accelerate such Material Indebtedness), in each case,
provided that no event of default will result from a default, event of default, acceleration or other action in connection with a guaranty by a loan
party of indebtedness secured by a mortgage on a non-Borrowing Base Property until the earliest to occur of (x) commencement of a related court
proceeding, (y) in the event such loan party has agreed that an event permitting acceleration of the guaranty has occurred, 45 days following the
expiration or termination of a related forbearance agreement, subject to certain conditions, or (z) such loan party makes or agrees to make a
payment in satisfaction of any claim made on the guaranty in connection with the event of default, acceleration or other action. The First Lien
Credit Agreement also provides that the non-subordination of second priority liens is an event of default.
Upon the occurrence of an event of default (except with respect to bankruptcy as described in the next sentence), the lenders may declare all of the
obligations in connection with the applicable Credit Agreement (including an amount equal to the outstanding letters of credit under the First Lien
Credit Agreement) immediately due and payable and may terminate the lenders’ commitments thereunder (including the obligation of the issuing
banks to issue letters of credit under the First Lien Credit Agreement). Upon the occurrence of a voluntary or involuntary bankruptcy proceeding,
all outstanding amounts (including an amount equal to the outstanding letters of credit under the First Lien Credit Agreement) would
automatically become immediately due and payable and the lenders’ commitments under the applicable Credit Agreement (including the
obligation of the issuing banks to issue letters of credit under the First Lien Credit Agreement) would automatically terminate. The First Lien
Credit Agreement also provides certain specified derivatives providers with specific remedies with respect to specified derivatives contracts
thereunder.
FDP Loan Agreement
As described in note 4 of our consolidated financial statements, PM Gallery LP, a Delaware limited partnership and joint venture entity owned
indirectly by us and The Macerich Company (“Macerich”), previously entered into a $250.0 million term loan in January 2018 (as amended in
July 2019 to increase the total maximum potential borrowings to $350.0 million) to fund the ongoing redevelopment of Fashion District
Philadelphia and to repay capital contributions to the venture previously made by the partners. On December 10, 2020, PM Gallery LP, together
with certain other subsidiaries owned indirectly by us and Macerich (including the fee and leasehold owners of the properties that are part of the
Fashion District Philadelphia project), entered into an Amended and Restated Term Loan Agreement (the “FDP Loan Agreement”). In connection
with the execution of the FDP Loan Agreement, a $100.0 million principal payment was made (and funded indirectly by Macerich) to pay down
the existing loan, reducing the outstanding principal under the FDP Loan Agreement from $301.0 million to $201.0 million. In connection with
the execution of the FDP Loan Agreement, the governing structure of PM Gallery LP was modified such that, effective as of January 1, 2021,
Macerich is responsible for the entity’s operations and, subject to limited exceptions, controls major decisions.
The FDP Loan Agreement provides for (i) a maturity date of January 22, 2023, with the potential for a one-year extension upon the borrowers’
satisfaction of certain conditions, (ii) an interest rate at the borrowers’ option for each advance of either (A) the Base Rate (defined as the highest
of (a) the Prime Rate, (b) the Federal Funds Rate plus 0.50%, and (c) the LIBOR Market Index Rate plus 1.00%) plus 2.50% or (B) LIBOR for the
applicable period plus 3.50%, (iii) a full recourse guarantee of 50% of the borrowers’ obligations by PREIT Associates, L.P., on a several basis,
(iv) a full recourse guarantee of certain of the borrowers’ obligations by The Macerich Partnership, L.P., up to a maximum of $50.0 million, on a
several basis, (v) a pledge of the equity interests of certain indirect subsidiaries of PREIT and Macerich, as well as of PREIT-RUBIN, Inc. and
one of its subsidiaries, that have a direct or indirect ownership interest in the borrowers, (vi) a non-recourse carve-out guaranty and a hazardous
materials indemnity by each of PREIT Associates, L.P. and The Macerich Partnership, L.P., and (vii) mortgages of the borrowers’ fee and
leasehold interests in the properties that are part of the Fashion District Philadelphia project and certain other properties. The FDP Loan
Agreement contains certain covenants typical for loans of its type.
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Preferred Shares
We have 3,450,000 7.375% Series B Cumulative Redeemable Perpetual Preferred Shares (the “Series B Preferred Shares”) outstanding,
6,900,000 7.20% Series C Cumulative Redeemable Perpetual Preferred Shares (the “Series C Preferred Shares”) outstanding and 5,000,000
6.875% Series D Cumulative Redeemable Perpetual Preferred Shares (the “Series D Preferred Shares”) outstanding. Upon 30 days’ notice, we
may redeem any or all of the Series B Preferred Shares at $25.00 per share plus any accrued and unpaid dividends. We may not redeem the Series
C Preferred Shares and the Series D Preferred Shares before January 27, 2022 and September 15, 2022, respectively, except to preserve our status
as a REIT or upon the occurrence of a Change of Control, as defined in the Trust Agreement addendums designating the Series C and Series D
Preferred Shares, respectively. On and after January 27, 2022 and September 15, 2022, we may redeem any or all of the Series C Preferred Shares
or the Series D Preferred Shares, respectively, at $25.00 per share plus any accrued and unpaid dividends. In addition, upon the occurrence of a
Change of Control, we may redeem any or all of the Series C Preferred Shares or the Series D Preferred Shares for cash within 120 days after the
first date on which such Change of Control occurred at $25.00 per share plus any accrued and unpaid dividends. The Series B Preferred Shares,
the Series C Preferred Shares and the Series D Preferred Shares have no stated maturity, are not subject to any sinking fund or mandatory
redemption and will remain outstanding indefinitely unless we redeem or otherwise repurchase them or they are converted.
Mortgage Loan Activity—Consolidated Properties
During the year ended December 31, 2020, we entered into forbearance and loan modification agreements for our consolidated properties Cherry
Hill Mall, Cumberland Mall, Dartmouth Mall, Francis Scott Key Mall, Viewmont Mall, and Woodland Mall and for our unconsolidated
partnership properties Metroplex and Springfield Mall. These arrangements allowed us to defer principal payments, and in some cases interest as
well, on the mortgages between May and August of 2020 depending on the terms of the contract. At the end of each deferment period, the
repayment period spans from four to six months to pay back the deferred amounts. The repayment periods range from August 2020 through
February 2021 depending on the terms of the specific agreements.
In the second quarter of 2020, we defaulted on the mortgage loan secured by Valley View Mall due to a missed payment on June 1, 2020, and not
paying the balloon payment of $27.3 million. In the third quarter of 2020, the operations of the property were transferred to a receiver and
foreclosure was filed. We recorded a gain on derecognition of property during the third quarter 2020 and have recorded the mortgage balance and
an offsetting contract asset on our balance sheet as of December 31, 2020, both of which will be eliminated when the property foreclosure sale is
completed.
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.
Mortgage Loans
Our mortgage loans, which are secured by nine of our consolidated properties, are due in installments over various terms extending to the year
2025. Our nine properties include Valley View Mall, which was assigned to a receiver in the third quarter 2020. Although we have not yet
conveyed Valley View Mall because foreclosure proceedings are ongoing, we no longer control or operate the property as a result of court order
assigning the receiver. The mortgage principal balance of Valley View Mall was $27.2 million at December 31, 2020, which we will continue to
recognize until the foreclosure process is completed. Six 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 4.09% at December 31, 2020. Three of our mortgage loans bear interest at variable rates and
had a weighted average interest rate of 2.40% at December 31, 2020. The weighted average interest rate of all consolidated mortgage loans was
3.60% at December 31, 2020. 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 properties as of December 31, 2020:
(in thousands of dollars)
Consolidated mortgage loans
Principal payments
Balloon payments (1)(2)
Total consolidated mortgage loans
Less: Unamortized debt issuance costs
Carrying value of mortgage notes payable
Total
2021
Payments by Period
2023
2022
2024-2025 Thereafter
48,436 $
$
13,652 $
837,052 216,418 355,989
885,488 $ 233,993 $ 369,641 $
17,575 $
6,398 $
10,811 $
53,299 211,346
59,697 $ 222,157 $
—
—
—
985
$ 884,503
(1) Our mortgage secured by Valley View Mall was in default as of December 31, 2020. The property conveyance process is not complete as of December 31,
2020. The $27.2 million mortgage balance is included in our 2021 balloon payments.
(2) On February 8, 2021, we entered into an amendment to extend the maturity of our mortgage secured by Woodland Mall to December 2021, including an
option to extend the maturity by one year to December 2022 if certain criteria are met. The $122.0 million mortgage balance is included in our 2021 balloon
payments.
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Contractual Obligations
The following table presents our consolidated aggregate contractual obligations as of December 31, 2020 for the periods presented:
(in thousands of dollars)
Mortgage loans
Term Loans
First Lien Revolving Facility
Interest on indebtedness (3)
Operating leases
Ground leases
Development and redevelopment commitments (4)
Total
Total
885,488 $
$
1,011,595
54,830
139,066
4,328
53,275
16,893
$ 2,165,475 $
2021
233,993 (1) $
429,338 $
— 1,011,595 (2)
—
54,830
61,248
62,495
1,949
688
3,168
1,735
—
16,893
315,804 $ 1,562,128 $
222,157 $
—
—
15,323
1,691
3,103
—
242,274 $
—
—
—
—
—
45,269
—
45,269
2022-2023
2024-2025
Thereafter
(1) The 2021 balance includes $27.2 million for our mortgage loan secured by Valley View Mall, which was in default as of December 31, 2020. We do not
expect to pay the principal balance remaining. Also, included in the 2021 amount is $122.0 million for our mortgage loan secured by Woodland Mall. On
February 8, 2021, we entered into an amendment to extend the maturity of this mortgage loan to December 2021, including an option to extend the maturity
by one year to December 2022 if certain criteria are met.
(2) Includes our First Lien Term Loan of $384.1 million and the anticipated maturity date balance of our Second Lien Term Loan Facility of $627.5 million,
which includes estimated capitalized PIK interest based on current interest rates.
(3) Includes interest payments expected to be made on consolidated debt, including those in connection with interest rate swap agreements.
(4) 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, 2021, 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. We have satisfied this obligation.
Interest Rate Derivative Agreements
As of December 31, 2020, we had interest rate swap agreements designated in qualifying hedging relationships outstanding with a weighted
average base interest rate of 2.41% on a notional amount of $529.7 million, maturing on various dates through May 2023. As of December 31,
2020, our non-designated swaps outstanding had a weighted average base interest rate of 1.57%, a notional amount of $264.3 million and mature
on various dates through December 2021.
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 (loss) income” and subsequently reclassified into “Interest expense, net” in the same periods during which
the hedged transaction affects earnings. Through December 10, 2020, all of our derivatives were designated and qualified as cash flow hedges of
interest rate risk.
On December 10, 2020 as a result of the Financial Restructuring, we de-designated seven of our interest rate swaps which were previously
designated cash flow hedges against the 2018 Credit Facility and 7-year Term Loan, as the hedged forecasted transactions were no longer
probable to occur during the hedged time period due to the financial restructuring as described in Note 1. As such, the Company accelerated the
reclassification of a portion of the amounts in other comprehensive (loss) income to earnings which resulted in a loss of $2.8 million that was
recorded within interest expense, net in the consolidated statement of operations. Additionally, on December 10, 2020, the Company voluntarily
de-designated the remaining thirteen interest swaps that were also previously designated as cash flow hedges against the 2018 Credit Facility and
7-year Term Loan. Upon de-designation, the accumulated other comprehensive (loss) income balance of each of these de-designated derivatives
will be separately reclassified to earnings as the originally hedged forecasted transactions affect earnings. Through December 10, 2020, the
changes in fair value of the derivatives were recorded to accumulated other comprehensive (loss) income in the consolidated balance sheets.
On December 22, 2020, we re-designated nine interest rate swaps with a notional amount of $375.0 million as cash flow hedges of interest rate
risk against the First Lien Term Loan Facility. These interest rate swaps qualified for hedge accounting treatment with changes in the fair value of
the derivatives recorded through accumulated other comprehensive (loss) income.
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.”
As of December 31, 2020, we had 13 total derivatives which 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.”
Derivatives not designated as hedges are not speculative and are also used to manage the Company’s exposure to interest rate movements and
other identified risks but do not meet the strict hedge accounting requirements. For the eleven remaining interest rate swaps that were not
re-designated subsequent to December 10, 2020, changes in the fair value of derivatives are recorded directly in earnings as interest expense in the
consolidated statement of operations.
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As of December 31, 2020, the fair value of derivatives in a liability position, which excludes accrued interest but includes any adjustment for
nonperformance risk related to these agreements, was $23.3 million. If we had breached any of the default provisions in these agreements as of
December 31, 2020, we might have been required to settle our obligations under the agreements at their termination value (including accrued
interest) of $26.0 million. We had not breached any of these provisions as of December 31, 2020.
CASH FLOWS
Net cash provided by operating activities totaled $6.3 million for 2020, compared to $111.4 million for 2019.
The decrease in net cash provided by operating activities in 2020 was primarily due to our decrease in revenue due to mall closures as a result of
the COVID-19 pandemic along with associated rent abatements and an increase in tenant bankruptcies in 2020. Also, we had higher general and
administrative expense along with increased interest expense in 2020 as a result of our financial restructuring contributed to the decrease.
Cash flows used in investing activities were $77.7 million for 2020, compared to $131.4 million for 2019.
Investing activities in 2020 included investment in construction in progress of $22.8 million, investments in partnerships of $35.3 million
(primarily at Fashion District Philadelphia) and real estate improvements of $37.8 million (primarily related to capital improvements at our
properties, including tenant allowances), partially offset by $22.5 million of proceeds from land and outparcel sales.
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 million (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.
Cash flows provided by financing activities were $103.1 million for 2020, compared to $7.1 million for 2019.
Cash flows provided by financing activities for 2020 included payments of aggregate dividends and distributions of $32.3 million, principal
installments on mortgage loans of $16.1 million and deferred financing costs of $14.1 million, offset by $162.4 million of net new borrowings
under our revolving facility and term loans.
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.
See note 1 to our consolidated financial statements for details regarding costs capitalized during 2020 and 2019.
COMMITMENTS
As of December 31, 2020, we had unaccrued contractual and other commitments related to our capital improvement projects and development
projects of $16.9 million in the form of tenant allowances, lease termination fees, and contracts with general service providers and other
professional service providers. In addition, our operating partnership, PREIT Associates, has jointly and severally guaranteed the obligations of
the joint venture we formed with Macerich to develop Fashion District Philadelphia to commence and complete a comprehensive redevelopment
of that property costing not less than $300.0 million within 48 months after commencement of construction, which was March 14, 2016. We have
satisfied this obligation.
ENVIRONMENTAL
We are aware of certain environmental matters at some of our properties. We have, in the past, performed remediation of such environmental
matters, and we are not aware of any significant remaining potential liability relating to these environmental matters 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 $10.0 million per occurrence and up to $10.0 million in the aggregate over our two year policy term. See
“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
several factors, including location and rent charged. We compete with these companies to attract customers to our properties, as well as to attract
anchor and non-anchor store and other tenants. Our malls and our other operating properties 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.
67
The existence or development of competing retail properties and the related increased competition for tenants might, subject to the terms and
conditions 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, 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.
When we seek to make acquisitions, competitors (such as institutional investors, other REITs and other owner-operators of retail properties)
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. We might not succeed in acquiring retail
properties or development sites that we seek, or, if we pay a higher price for a property and/or generate lower cash flow from an acquired property
than we expect, our investment returns will be reduced, which will adversely affect the value of our securities.
We receive a substantial portion of our operating income as rent under leases with tenants. At any time, any tenant having space in one or more of
our properties could experience a downturn in its business that might weaken its financial condition. Such tenants might enter into or renew leases
with relatively shorter terms. Such tenants might also defer or fail to make rental payments when due, delay or defer lease commencement,
voluntarily vacate the premises or declare bankruptcy, which could result in the termination of the tenant’s lease or preclude the collection of rent
in connection with the space for a period of time, and could result in material losses to us and harm to our results of operations. Also, it might take
time to terminate leases of underperforming or nonperforming tenants and we might incur costs to remove such tenants. Some of our tenants
occupy stores at multiple locations in our portfolio, and so the effect of any bankruptcy or store closings of those tenants might be more significant
to us than the bankruptcy or store closings of other tenants. See “Item 2. Properties—Major Tenants.” In addition, under many of our leases, our
tenants pay rent based, in whole or in part, on a percentage of their sales. Accordingly, declines in these tenants’ sales directly affect our results of
operations. Also, if tenants are unable to comply with the terms of their leases, or otherwise seek changes to the terms, including changes to the
amount of rent, we might modify lease terms in ways that are less favorable to us. Given current conditions in the economy, certain industries and
the capital markets, in some instances retailers that have sought protection from creditors under bankruptcy law have had difficulty in obtaining
debtor-in-possession financing, which has decreased the likelihood that such retailers will emerge from bankruptcy protection and has limited
their alternatives. All of these factors have been exacerbated by the impact of the COVID-19 pandemic in 2020.
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
percentage 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.
ITEM 7A. 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, 2020, our consolidated debt portfolio consisted of $884.5 million of fixed and variable rate mortgage loans (net of debt issuance
costs), $54.8 million outstanding under our First Lien Revolver, which bore interest at a rate of 4.0%, $384.1 million borrowed under our First
Lien Term Loan Facility, which bore interest at a rate of 6.24%, and $538.0 million borrowed under our Second Lien Term Loan Facility, which
bore interest at a rate of 8.5%.
Our mortgage loans, which are secured by nine of our consolidated properties, are due in installments over various terms extending to October
2025. Our nine properties include Valley View Mall, which was assigned to a receiver in the third quarter 2020. Although we have not yet
conveyed Valley View Mall because foreclosure proceedings are ongoing, we no longer control or operate the property as a result of court order
assigning the receiver. The mortgage principal balance of Valley View Mall was $27.2 million at December 31, 2020, which we will continue to
recognize until the foreclosure process is completed. Six of our mortgage loans bear interest at fixed interest rates that range from 3.88% to
5.95%, and had a weighted average interest rate of 4.09% at December 31, 2020. Three of our mortgage loans bear interest at variable rates, a
portion of which has been swapped to fixed rates, and had a weighted average interest rate of 2.40% at December 31, 2020. The weighted average
interest rate of all consolidated mortgage loans was 3.60% at December 31, 2020. 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.
68
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 principal payments in the specified periods:
Fixed Rate Debt
Variable Rate Debt
(in thousands of dollars)
For the Year Ending December 31,
2021
2022
2023
2024
2025 and thereafter
Principal
Payments
Weighted
Average
Interest Rate
Principal
Payments
$
$
$
$
$
42,672
302,729
59,697
6,405
215,752
4.01 % $
191,322
3.96 % $ 1,043,862 (2)
—
3.99 % $
—
4.03 % $
—
4.04 % $
Weighted
Average
Interest Rate (1)
2.27 %
7.33 %
—
—
—
(1) Based on the weighted average interest rate in effect as of December 31, 2020 and does not include the effect of our interest rate swap
derivative instruments as described below.
(2) Includes term loan debt of $922.1 million under our First Lien Term Loan Facility and Second Lien Term Loan Facility with a weighted
average interest rate of 7.56% as of December 31, 2020.
As of December 31, 2020 and 2019, we had $1,235.2 million and $1,064.5 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 contracts are recognized in interest expense over the life of the contracts. If
interest rates rise, the resulting cost of funds is expected to be lower than that which would have been available if debt with matching
characteristics was issued directly. Conversely, if interest rates fall, the resulting costs would be expected to be, 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 loss in the same period that the underlying transaction occurs, expires or is otherwise terminated. See Note 6 of the notes to our
consolidated financial statements for further information.
As of December 31, 2020, we had interest rate swap agreements outstanding with a weighted average base interest rate of 2.13% on a notional
amount of $794.0 million, maturing on various dates through May 2023. See Item 7. Management’s Discussion and Analysis—Liquidity and
Capital Resources—Interest Rate Derivative Agreements for a discussion of changes to the designation of certain of our interest rate swap
agreements in 2020.
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 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 million, with effective dates in 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 portfolio 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, 2020 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 $37.5 million at
December 31, 2020. A 100 basis point decrease in market interest rates would have resulted in an increase in our net financial instrument position
of $25.9 million at December 31, 2020. Based on the variable rate debt included in our debt portfolio at December 31, 2020, a 100 basis point
increase in interest rates would have resulted in an additional $4.4 million in interest expense annually. A 100 basis point decrease would have
reduced interest incurred by $4.4 million annually.
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 million in interest expense annually. A 100 basis point decrease would have
reduced interest incurred by $2.7 million annually.
Because the information presented above includes only those exposures that existed as of December 31, 2020, it does not consider changes,
exposures 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 fluctuations will depend on the exposures that arise during the period, our
hedging strategies at the time and interest rates.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Our consolidated balance sheets as of December 31, 2020 and 2019, and the related consolidated statements of operations, comprehensive
income, equity and cash flows for the years ended December 31, 2020 and 2019, and the notes thereto, our report on internal control over financial
reporting, the reports of our independent registered public accounting firm thereon, our summary of unaudited quarterly financial information for
the years ended December 31, 2020 and 2019, and the financial statement schedule begin on page F-1 of this report.
69
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
We are committed to providing accurate and timely disclosure in satisfaction of our SEC reporting obligations. In 2002, we established a
Disclosure Committee to formalize our disclosure controls and procedures. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that:
•
information that we are required to disclose in our reports under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded,
processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and
• material information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to
management, including our principal executive and principal financial officers, as appropriate, to allow timely decisions regarding
required disclosure.
Our Chief Executive Officer and Chief Financial Officer, have reviewed the effectiveness of our disclosure controls and procedures as
of December 31, 2020 and, based on this evaluation, have concluded that due to a material weakness in our internal control over financial
reporting described below, our disclosure controls and procedures were not effective as of December 31, 2020.
Management’s Report on Internal Control Over Financial Reporting
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 Rules 13a-15(f) and 15d-15(f) of the Exchange Act, internal control over financial
reporting is a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our Board
of Trustees, management and other personnel, to provide reasonable assurance 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, accurately and fairly reflect the Company’s transactions and the
dispositions of assets of the Company;
(2) Provide reasonable assurance that transactions are recorded as necessary 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 financial 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 inadequate 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
our assessment, management, including our Chief Executive Officer and Chief Financial Officer, have concluded that our internal control over
financial reporting was not effective as of December 31, 2020, the end of the period covered by this Form 10-K, because of the material weakness
described below.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely
basis.
Material Weakness
We identified deficiencies that aggregate to a material weakness in our internal control over financial reporting as of December 31, 2020. These
deficiencies related to (i) attracting and retaining sufficient personnel with requisite financial expertise, (ii) the assessment of the risk of fraud,
including risks of management override of controls and proper segregation of duties, and (iii) assessing changes in the external environment and
the potential impact of those changes on the design, operating effectiveness and monitoring of internal controls over financial reporting.
70
Our company has been significantly affected by the COVID-19 global pandemic and a bankruptcy filing during the past year. The Company was
unable to maintain a sufficient complement of accounting and financial reporting personnel to effect certain of our internal controls over financial
reporting and respond to the financial reporting impacts of the environment we operated in during 2020. The Company was also unable to ensure
appropriate segregation of duties as it relates to the preparation and review of journal entries. The material weakness contributed to the potential
for there to have been material accounting errors in substantially all financial statements account balances and disclosures. Additionally, certain
management review controls that would serve to prevent or detect material misstatements in our financial statements did not operate with an
appropriate level of precision, primarily due to the impact of the variability of the results from operating retail properties during a global
pandemic, including an increase in tenants with past due receivables and the impact of abatements and deferrals on those amounts.
The material weakness did not result in adjustments to our consolidated financial statements. As a result of the material weakness noted above, we
completed additional procedures prior to filing this Annual Report on Form 10-K for the year ended December 31, 2020 (“Form 10-K”). Based
on these procedures, management believes that our consolidated financial statements included in this Form 10-K have been prepared in
accordance with generally accepted accounting principles. Our CEO and CFO have certified that, based on such officer’s knowledge, the
financial statements, and other financial information included in this Form 10-K, fairly present in all material respects the financial condition,
results of operations and cash flows of the Company as of, and for, the periods presented in this Form 10-K. In addition, we have developed a
remediation plan for this material weakness, which is described below.
Our independent registered public accounting firm, KPMG LLP, who audited the consolidated financial statements included in this Annual
Report on form 10-K, issued an adverse opinion on the effectiveness of the Company’s internal control over financial reporting. KPMG LLP’s
report appears on page F-3 in this report.
Management’s Remediation Plan
The Company and its Board of Trustees are committed to maintaining a strong internal control environment. In order to remediate the material
weakness described above, we intend to implement additional policies and procedures and take necessary actions, which are expected to include:
•
Implementing policies and procedures to enhance independent review and documentation of journal entries, including segregation
of duties;
• Enhancing our procedures in certain management review controls, including the thresholds utilized for review and the response to
outliers;
• Hiring additional finance and accounting staff;
• Developing policies and procedures to enhance the precision of management review of financial statement information and control
impact of changes in the external environment; and
• Reevaluating our monitoring activities for relevant controls.
Management is beginning the process of implementing and monitoring the effectiveness of these and other processes, procedures and controls and
will make any further changes deemed appropriate. Management believes our planned remedial efforts will effectively remediate the identified
material weakness. As we continue to evaluate and work to improve our internal control over financial reporting, management may determine it is
necessary to take additional measures to address control deficiencies or determine it necessary to modify the remediation plan described above.
Changes in Internal Control over Financial Reporting
As defined in Rules 13a-15(f) and 15d-15(e) under the Exchange Act, our management, including our Chief Executive Officer and Chief
Financial Officer, has evaluated our internal control over financial reporting to determine whether any changes to our internal control over
financial reporting occurred during the fourth quarter of the year ended December 31, 2020 that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting. Based on that evaluation, other than the identification of the material weakness
noted above, no such changes to our internal control over financial reporting occurred during the fourth quarter of the year ended December 31,
2020.
ITEM 9B. OTHER INFORMATION.
None.
71
PART III
ITEM 10. TRUSTEES, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The information required by this Item is incorporated by reference to, and will be contained in, our definitive proxy statement, and thus we have
omitted such information in accordance with General Instruction G(3) to Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated by reference to, and will be contained in, our definitive proxy statement, and thus we have
omitted such information in accordance with General Instruction G(3) to Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
SHAREHOLDER MATTERS.
The information required by this Item is incorporated by reference to, and will be contained in, our definitive proxy statement, and thus we have
omitted such information in accordance with General Instruction G(3) to Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND TRUSTEE INDEPENDENCE.
The information required by this Item is incorporated by reference to, and will be contained in, our definitive proxy statement, and thus we have
omitted such information in accordance with General Instruction G(3) to Form 10-K.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information required by this Item is incorporated by reference to, and will be contained in, our definitive proxy statement, and thus we have
omitted such information in accordance with General Instruction G(3) to Form 10-K.
72
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The following documents are included in this report:
PART IV
(1) Financial Statements
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2020 and 2019
Consolidated Statements of Operations for the years ended December 31, 2020 and 2019
Consolidated Statements of Comprehensive Loss for the years ended December 31, 2020 and 2019
Consolidated Statements of Equity for the years ended December 31, 2020 and 2019
Consolidated Statements of Cash Flows for the years ended December 31, 2020 and 2019
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
III – Real Estate and Accumulated Depreciation
F-1
F-4
F-5
F-7
F-8
F-9
F-10
S-1
All other schedules are omitted because they are not applicable, not required or because the required information is reported in the consolidated
financial statements or notes thereto.
73
(3) Exhibits
2.1
2.2
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
Contribution Agreement, dated as of March 2, 2014, by and among Franconia Two, L.P., PR Springfield Town Center LLC, PREIT Associates,
L.P. and Vornado Realty L.P., filed as Exhibit 10.1 to PREIT’s Quarterly Report on Form 10-Q filed on August 1, 2014, is incorporated herein by
reference.
Confirmation Order for Joint Prepackaged Chapter 11 Plan of Reorganization of Pennsylvania Real Estate Investment Trust and Certain of Its
Direct and Indirect Subsidiaries (with Additional Technical Modifications as of November 20, 2020), filed as Exhibit 2.1 to PREIT’s Current
Report on Form 8-K filed on December 4, 2020, is incorporated herein by reference.
Amended and Restated Trust Agreement dated December 18, 2008, filed as Exhibit 3.1 to PREIT’s Current Report on Form 8-K filed on
December 23, 2008, is incorporated herein by reference.
Amendment, dated June 7, 2012, to Amended and Restated Trust Agreement of Pennsylvania Real Estate Investment Trust dated December 18,
2008, as amended, filed as Exhibit 3.1 to PREIT’s Current Report on Form 8-K filed on June 12, 2012, is incorporated herein by reference.
Amendment to Amended and Restated Trust Agreement dated December 18, 2008, as amended, dated as of March 30, 2020, filed as Exhibit 3.1
to PREIT’s Current Report on Form 8-K filed on March 31, 2020, is incorporated herein by reference.
By-laws of PREIT (as amended through March 31, 2020), filed as Exhibit 3.2 to PREIT’s Current Report on Form 8-K filed on March 31, 2020,
is incorporated herein by reference.
Designating Amendment to Trust Agreement designating the rights, preferences, privileges, qualifications, limitations and restrictions of
PREIT’s 8.25% Series A Cumulative Redeemable Perpetual Preferred Shares, liquidation preference $25.00 per share, par value $0.01 per share,
filed as Exhibit 3.2 to PREIT’s Form 8-A filed on April 20, 2012, is incorporated herein by reference.
Second Designating Amendment to Trust Agreement designating the rights, preferences, privileges, qualifications, limitations and restrictions of
PREIT’s 7.375% Series B Cumulative Redeemable Perpetual Preferred Shares, liquidation preference $25.00 per share, par value $0.01 per share,
filed as Exhibit 3.2 to PREIT’s Form 8-A filed on October 11, 2012, is incorporated herein by reference.
Third Designating Amendment to Trust Agreement designating the rights, preferences, privileges, qualifications, limitations and restrictions of
PREIT’s 7.20% Series C Cumulative Redeemable Perpetual Preferred Shares, liquidation preference $25.00 per share, par value $0.01 per share,
filed as Exhibit 3.4 to PREIT’s Form 8-A filed on January 27, 2017, is incorporated by reference.
Fourth Designating Amendment to Trust Agreement designating the rights, preferences, privileges, qualifications, limitations and restrictions of
PREIT’s 6.875% Series D Cumulative Redeemable Perpetual Preferred Shares, liquidation preference $25.00 per share, par value $0.01 per
share, filed as Exhibit 3.5 to PREIT’s Form 8-A filed on September 11, 2017, is incorporated herein by reference.
First Amended and Restated Agreement of Limited Partnership, dated September 30, 1997, of PREIT Associates, L.P., filed as Exhibit 4.15 to
PREIT’s Current Report on Form 8-K dated October 14, 1997, is incorporated herein by reference.
First Amendment to the First Amended and Restated Agreement of Limited Partnership, dated July 15, 1998, of PREIT Associates, L.P., filed as
Exhibit 4.1 to PREIT’s Quarterly Report on Form 10-Q filed on November 13, 1998, is incorporated herein by reference.
Second Amendment to the First Amended and Restated Agreement of Limited Partnership, dated July 15, 1998, of PREIT Associates, L.P., filed
as Exhibit 4.2 to PREIT’s Quarterly Report on Form 10-Q filed on November 13, 1998, is incorporated herein by reference.
Third Amendment to the First Amended and Restated Agreement of Limited Partnership, dated October 13, 1998, of PREIT Associates, L.P.,
filed as Exhibit 4.3 to PREIT’s Quarterly Report on Form 10-Q filed on November 13, 1998, is incorporated herein by reference.
Fourth Amendment to First Amended and Restated Agreement of Limited Partnership, dated May 13, 2003, of PREIT Associates L.P., filed as
Exhibit 4.1 to PREIT’s Quarterly Report on Form 10-Q filed on November 7, 2003, is incorporated herein by reference.
Addendum to First Amended and Restated Agreement of Limited Partnership of PREIT Associates, L.P. designating the rights, obligations,
duties and preferences of Series A Preferred Units, filed as Exhibit 10.1 to PREIT’s Current Report on Form 8-K filed on April 20, 2012, is
incorporated herein by reference.
Second Addendum to First Amended and Restated Agreement of Limited Partnership of PREIT Associates, L.P. designating the rights,
obligations, duties and preferences of the Series B Preferred Units, filed as Exhibit 10.1 to PREIT’s Current Report on Form 8-K filed on
October 11, 2012, is incorporated herein by reference.
Third Addendum to First Amended and Restated Agreement of Limited Partnership of PREIT Associates, L.P. designating the rights, obligations,
duties and preferences of the Series C Preferred Units, filed as Exhibit 10.1 to PREIT’s Current Report on Form 8-K filed on January 27, 2017, is
incorporated herein by reference.
Fourth Addendum to First Amended and Restated Agreement of Limited Partnership of PREIT Associates, L. P. designating the rights,
obligations, duties and preferences of the Series D Preferred Units, filed as Exhibit 10.1 to PREIT’s Current Report on form 8-K filed on
September 11, 2017, is incorporated herein by reference.
Form of share certificate evidencing the 8.25% Series A Cumulative Redeemable Perpetual Preferred Shares, filed as Exhibit 4.1 to PREIT’s
Form 8-A filed on April 20, 2012, is incorporated herein by reference.
Form of share certificate evidencing the 7.375% Series B Cumulative Redeemable Perpetual Preferred Shares, filed as Exhibit 4.1 to PREIT’s
Form 8-A filed on October 11, 2012, is incorporated herein by reference.
Form of share certificate evidencing the 7.20% Series C Cumulative Redeemable Perpetual Preferred Shares, filed as Exhibit 4.3 to PREIT’s
Form 8-A filed on January 27, 2017, is incorporated herein by reference.
74
4.13
4.14
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
Form of share certificate evidencing the 6.875% Series D Cumulative Redeemable Perpetual Preferred Shares, filed as Exhibit 4.4 to PREIT’s
Form 8-A filed on September 11, 2017, is incorporated herein by reference.
Description of Registrant’s Securities, filed as Exhibit 4.15 to PREIT’s Annual Report on Form 10-K filed on March 16, 2020, is incorporated
herein by reference.
Amended and Restated Credit Agreement dated as of May 24, 2018 by and among PREIT Associates, L.P., PREIT-RUBIN, Inc., PREIT and the
financial institutions party thereto, filed as Exhibit 10.1 to PREIT’s Quarterly Report on Form 10-Q filed on August 3, 2018, is incorporated
herein by reference.
Amended and Restated Guaranty dated as of May 24, 2018 in favor of Wells Fargo Bank, National Association, executed by certain direct and
indirect subsidiaries of PREIT Associates, L.P., filed as Exhibit 10.2 to PREIT’s Quarterly Report on Form 10-Q filed on August 3, 2018, is
incorporated herein by reference.
First Amendment to Amended and Restated Credit Agreement dated as of May 24, 2018, by and among PREIT Associates, L.P., PREIT-RUBIN,
Inc., PREIT and the financial institutions party thereto, dated as of March 31, 2020, filed as Exhibit 10.2 to PREIT’s Current Report on Form 8-K
filed on March 31, 2020, is incorporated herein by reference.
Letter Agreement executed by Wells Fargo, National Association amending 7-Year Term Loan and 2018 Credit Agreement, dated May 1, 2020,
filed as Exhibit 10.7 to PREIT’s Quarterly Report on Form 10-Q filed on May 21, 2020, is incorporated herein by reference.
Second Amendment to Amended and Restated Credit Agreement dated as of May 24, 2018, by and among PREIT Associates, L.P.,
PREIT-RUBIN, Inc., Pennsylvania Real Estate Investment Trust, and the financial parties thereto, dated as of July 27, 2020, filed as Exhibit 10.2
to PREIT’s Current Report on Form 8-K filed on July 31, 2020, is incorporated herein by reference
Third Amendment to Amended and Restated Credit Agreement dated as of May 24, 2018, by and among PREIT Associates, L.P.,
PREIT-RUBIN, Inc., Pennsylvania Real Estate Investment Trust, and the financial institutions party thereto, dated as of September 30, 2020, filed
as Exhibit 10.2 to PREIT’s Current Report on Form 8-K filed on October 2, 2020, is incorporated herein by reference.
Seven-Year Term Loan Agreement dated as of January 8, 2014 by and among PREIT Associates, L.P., PREIT-RUBIN, Inc., PREIT and the
financial institutions party thereto, filed as Exhibit 10.9 to PREIT’s Annual Report on Form 10-K filed on February 28, 2014, is incorporated
herein by reference.
Seven-Year Term Loan Guaranty dated as of January 8, 2014 in favor of Wells Fargo Bank, National Association, executed by certain direct and
indirect subsidiaries of PREIT Associates, L.P, filed as Exhibit 10.10 to PREIT’s Annual Report on Form 10-K filed on February 28, 2014, is
incorporated herein by reference.
First Amendment to Seven-Year Term Loan Agreement dated as of November 3, 2014 by and among PREIT Associates, L.P., PREIT-RUBIN,
Inc., PREIT and the financial institutions party thereto, filed as Exhibit 10.12 to PREIT’s Annual Report on Form 10-K filed on February 23,
2015, is incorporated herein by reference.
Second Amendment to Seven-Year Term Loan Agreement dated as of November 12, 2014 by and among PREIT Associates, L.P.,
PREIT-RUBIN, Inc., PREIT and the financial institutions party thereto, filed as Exhibit 10.6 to PREIT’s Annual Report on Form 10-K filed on
March 16, 2020, is incorporated herein by reference.
Third Amendment to Seven-Year Term Loan Agreement dated as of June 26, 2015 by and among PREIT Associates, L.P., PREIT-RUBIN, Inc.,
PREIT and the financial institutions party thereto, filed as Exhibit 10.3 to PREIT’s Quarterly Report on Form 10-Q filed on August 3, 2015, is
incorporated herein by reference.
Fourth Amendment to Seven-Year Term Loan Agreement dated as of June 30, 2016 by and among PREIT Associates, L.P., PREIT-RUBIN, Inc.,
PREIT and the financial institutions party thereto, filed as Exhibit 10.2 to PREIT’s Quarterly Report on Form 10-Q filed on July 28, 2016, is
incorporated herein by reference.
Fifth Amendment to Seven-Year Term Loan Agreement dated as of June 5, 2018 by and among PREIT Associates, L.P., PREIT-RUBIN, Inc.,
PREIT and the financial institutions party thereto, filed as Exhibit 10.3 to PREIT’s Quarterly Report on Form 10-Q filed on August 3, 2018, is
incorporated herein by reference.
Sixth Amendment to Seven-Year Term Loan Agreement dated as of January 8, 2014, as amended, by and among PREIT Associates, L.P.,
PREIT-RUBIN, Inc., PREIT, and the financial institutions party thereto, dated as of March 30, 2020, filed as Exhibit 10.1 to PREIT’s Current
Report on Form 8-K filed on March 31, 2020, is incorporated herein by reference.
Seventh Amendment to Seven-Year Term Loan Agreement dated as of January 8, 2014, as amended, by and among PREIT Associates, L.P.,
PREIT-RUBIN, Inc. Pennsylvania Real Estate Investment Trust, and the financial institutions party thereto, dated as of July 27, 2020, filed as
Exhibit 10.1 to PREIT’s Current Report on Form 8-K filed on July 31, 2020, is incorporated herein by reference.
Eighth Amendment to Seven-Year Term Loan Agreement dated as of January 8, 2014, as amended, by and among PREIT Associates, L.P.,
PREIT-RUBIN, Inc., Pennsylvania Real Estate Investment Trust, and the financial institutions party thereto, dated as of September 30, 2020, filed
as Exhibit 10.1 to PREIT’s Current Report on Form 8-K filed on October 2, 2020, is incorporated herein by reference.
Credit Agreement, dated as of August 11, 2020, by and among PREIT Associates, L.P., PREIT-RUBIN, Inc., Pennsylvania Real Estate
Investment Trust, and the financial institutions party thereto and their assignees, filed as Exhibit 10.1 to PREIT’s Current Report on Form 8-K/A
filed on August 14, 2020, is incorporated herein by reference.
First Amendment to Credit Agreement dated as of August 11, 2020, by and among PREIT Associates, L.P., PREIT-RUBIN, Inc., Pennsylvania
Real Estate Investment Trust, and the financial institutions party thereto and their assignees, dated as of September 30, 2020, filed as Exhibit 10.3
to PREIT’s Current Report on Form 8-K filed on October 2, 2020, is incorporated herein by reference.
75
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
+10.30
+10.31
+10.32
+10.33
+10.34
+10.35
+10.36
+10.37
+10.38
+10.39
+10.40
+10.41
+10.42
Second Amendment to Credit Agreement dated as of August 11, 2020, by and among PREIT Associates, L.P., PREIT-RUBIN, Inc., Pennsylvania
Real Estate Investment Trust, and the financial institutions party thereto and their assignees, dated as of October 16, 2020, filed as Exhibit 10.1 to
PREIT’s Current Report on Form 8-K filed on October 22, 2020, is incorporated herein by reference.
Amended and Restated First Lien Credit Agreement, dated as of December 10, 2020, by and among PREIT Associates, L.P., PREIT-RUBIN,
Inc., Pennsylvania Real Estate Investment Trust, and the financial institutions party thereto and their assignees, filed as Exhibit 10.1 to PREIT’s
Current Report on Form 8-K filed on December 16, 2020, is incorporated herein by reference.
Amended and Restated Guaranty, dated as of December 10, 2020, in favor of Wells Fargo Bank, National Association, executed by
PREIT-RUBIN, Inc., PREIT-RUBIN OP, Inc., and certain direct and indirect subsidiaries of PREIT Associates, L.P., filed as Exhibit 10.2 to
PREIT’s Current Report on Form 8-K filed on December 16, 2020, is incorporated herein by reference.
Second Lien Credit Agreement, dated as of December 10, 2020, by and among PREIT Associates, L.P., PREIT-RUBIN, Inc., Pennsylvania Real
Estate Investment Trust, and the financial institutions party thereto and their assignees, filed as Exhibit 10.3 to PREIT’s Current Report on Form
8-K filed on December 16, 2020, is incorporated herein by reference.
Guaranty, dated as of December 10, 2020, in favor of Wells Fargo Bank, National Association, executed by PREIT-RUBIN, Inc., PREIT-RUBIN
OP, Inc., and certain direct and indirect subsidiaries of PREIT Associates, L.P., filed as Exhibit 10.4 to PREIT’s Current Report on Form 8-K filed
on December 16, 2020, is incorporated herein by reference.
First Amendment to Second Lien Credit Agreement, dated as of February 8, 2021, by and among PREIT Associates, L.P., PREIT-RUBIN, Inc.,
Pennsylvania Real Estate Investment Trust, and the financial institutions party thereto and their assignees, filed as Exhibit 10.1 to PREIT’s
Current Report on Form 8-K filed on February 12, 2021, is incorporated herein by reference.
Repayment Guaranty, dated as of January 22, 2018, in favor of Wells Fargo Bank, National Association, executed by PREIT Associates, L.P.,
filed as Exhibit 10.5 to PREIT’s Current Report on Form 8-K filed on December 16, 2020, is incorporated herein by reference.
Guaranty Reaffirmation, dated as of December 10, 2020, in favor of Wells Fargo Bank, National Association, executed by PREIT Associates,
L.P., filed as Exhibit 10.6 to PREIT’s Current Report on Form 8-K filed on December 16, 2020, is incorporated herein by reference.
Promissory Note, dated August 15, 2012, in the principal amount of $150.0 million, issued by Cherry Hill Center, LLC and PR Cherry Hill STW
LLC in favor of New York Life Insurance Company, filed as Exhibit 10.3 to PREIT’s Quarterly Report on Form 10-Q filed on October 26, 2012,
is incorporated herein by reference.
Promissory Note, dated August 15, 2012, in the principal amount of $150.0 million, issued by Cherry Hill Center, LLC and PR Cherry Hill STW
LLC in favor of Teachers Insurance and Annuity Association of America, filed as Exhibit 10.4 to PREIT’s Quarterly Report on Form 10-Q filed
on October 26, 2012, is incorporated herein by reference.
Forbearance Agreement, effective as of July 1, 2020, by and among PR Cherry Hill STW LLC, Cherry Hill Center, LLC, PREIT Associates, L.P.,
New York Life Insurance Company and Teachers Insurance Annuity Association of America, filed as Exhibit 10.6 to PREIT’s Quarterly Report
on Form 10-Q filed August 11, 2020, is incorporated herein by reference.
Amended and Restated Employment Agreement dated as of April 25, 2012 by and between PREIT and Joseph F. Coradino, filed as Exhibit 10.1
to PREIT’s Current Report on Form 8-K filed on April 27, 2012, is incorporated herein by reference.
Amended and Restated Nonqualified Supplemental Executive Retirement Agreement dated as of June 7, 2012 by and between PREIT and Joseph
F. Coradino, filed as Exhibit 10.1 to PREIT’s Current Report on Form 8-K filed on June 12, 2012, is incorporated herein by reference.
Employment Agreement, dated as of January 1, 2020, between PREIT and Mario C. Ventresca, Jr., filed as Exhibit 99.1 to PREIT’s Current
Report on Form 8-K/A filed on March 9, 2020, is incorporated herein by reference.
Letter Agreement, dated as of May 8, 2013 by and between PREIT Services, LLC and Andrew M. Ioannou, filed as Exhibit 10.70 to PREIT’s
Annual Report on Form 10-K filed on February 28, 2017, is incorporated herein by reference.
Letter Agreement, dated as of December 21, 2017 by and between PREIT Services, LLC and Lisa M. Most, filed as Exhibit 10.21 to PREIT’s
Annual report on Form 10-K filed February 25, 2019 is incorporated herein by reference.
Letter Agreement, dated as of May 8, 2013 by and between PREIT Services, LLC and Joseph J. Aristone, filed as Exhibit 10.46 to PREIT’s
Annual Report on Form 10-K/A filed March 28, 2019 is incorporated herein by reference.
Letter Agreement, dated as of February 24, 2014 by and between PREIT Services, LLC and Heather Crowell, filed as Exhibit 10.47 to
Amendment No. 1 to PREIT’s Annual Report on Form 10-K/A filed March 28, 2019 is incorporated herein by reference.
Separation of Employment Agreement, dated December 21, 2017 between PREIT and Bruce Goldman, filed as Exhibit 10.49 to PREIT’s Annual
Report on Form 10-K filed on February 16, 2018 is incorporated herein by reference.
Separation of Employment Agreement, dated December 23, 2019 between PREIT and Robert F. McCadden, filed as Exhibit 10.27 to PREIT’s
Annual Report on Form 10-K filed on March 16, 2020, is incorporated herein by reference.
Amended and Restated Employee Share Purchase Plan, filed as Exhibit 10.2 to PREIT’s Current Report on Form 8-K filed on June 1, 2018, is
incorporated herein by reference.
PREIT’s Second Amended and Restated 2003 Equity Incentive Plan, filed as Exhibit 10.3 to PREIT’s Current Report on Form 8-K filed on June
12, 2012, is incorporated herein by reference.
Amendment No. 1 to Second Amended and Restated 2003 Equity Plan, filed as Exhibit 10.1 to PREIT’s Current Report on Form 8-K filed on July
22, 2013, is incorporated herein by reference.
Form of Restricted Share Award Agreement under PREIT’s 2003 Equity Incentive Plan, filed as Exhibit 10.1 to PREIT’s Current Report on Form
8-K filed on February 26, 2008, is incorporated herein by reference.
76
+10.43
+10.44
+10.45
+10.46
+10.47
+10.48
+10.49
+10.50
+10.51
+10.52
+10.53
+10.54
+10.55
+10.56
+10.57
+10.58
+10.59
10.60
10.61
10.62
Form of Restricted Share Award Agreement under PREIT’s 2003 Equity Incentive Plan filed as Exhibit 10.3 to PREIT’s Quarterly Report on
Form 10-Q filed on May 4, 2018, is incorporated herein by reference.
PREIT’s 2018 Equity Incentive Plan, filed as Exhibit 10.1 to PREIT’s Current Report on Form 8-K filed on June 1, 2018, is incorporated herein
by reference.
2016-2018 Restricted Share Unit Program, filed as Exhibit 10.1 to PREIT’s Quarterly Report on Form 10-Q filed on April 29, 2016, is
incorporated herein by reference.
Form of 2016-2018 Restricted Share Unit and Dividend Equivalent Rights Award Agreement, filed as Exhibit 10.2 to PREIT’s Quarterly Report
on Form 10-Q filed on April 29, 2016, is incorporated herein by reference.
2017-2019 Restricted Share Unit Program, filed as Exhibit 10.1 to PREIT’s Quarterly Report on Form 10-Q filed on November 2, 2017, is
incorporated herein by reference.
Form of 2017-2019 Restricted Share Unit and Dividend Equivalent Rights Award Agreement, filed as Exhibit 10.2 to PREIT’s Quarterly Report
on Form 10-Q filed on November 2, 2017, is incorporated herein by reference.
2018-2020 Restricted Share Unit Program, filed as Exhibit 10.1 to PREIT’s Quarterly Report on Form 10-Q filed on May 4, 2018, is incorporated
herein by reference.
Form of 2018-2020 Restricted Share Unit and Dividend Equivalent Rights Award Agreement, filed as Exhibit 10.2 to PREIT’s Quarterly Report
on Form 10-Q on May 4, 2018, is incorporated herein by reference.
2019-2021 Equity Award Program, filed as Exhibit 10.1 to PREIT’s Quarterly Report on Form 10-Q on May 7, 2019, is incorporated herein by
reference.
Form of 2019-2021 Restricted Share Unit and Dividend Equivalent Rights Award Agreement, filed as Exhibit 10.2 to PREIT’s Quarterly Report
on Form 10-Q on May 7, 2019, is incorporated herein by reference.
Form of Restricted Share and Outperformance Unit Award Agreement under PREIT’s 2018 Equity Incentive Plan, filed as Exhibit 10.3 to
PREIT’s Quarterly Report on Form 10-Q on May 7, 2019, is incorporated herein by reference.
Form of Restricted Share Award Agreement under PREIT’s 2018 Equity Incentive Plan, filed as Exhibit 10.4 to PREIT’s Quarterly Report on
Form 10-Q on May 7, 2019, is incorporated herein by reference.
2020-2022 Equity Award Program, filed as Exhibit 10.1 to PREIT’s Quarterly Report on Form 10-Q filed on May 21, 2020, is incorporated
herein by reference.
Form of 2020-2022 Restricted Share Unit Award Agreement, filed as Exhibit 10.2 to PREIT’s Quarterly Report on Form 10-Q filed on May 21,
2020, is incorporated herein by reference.
Form of 2020-2022 Restricted Share Award Agreement, filed as Exhibit 10.3 to PREIT’s Quarterly Report on Form 10-Q filed on May 21, 2020
is incorporated herein by reference.
Amended and Restated Pennsylvania Real Estate Investment Trust 2018 Equity Incentive Plan, filed as Exhibit 10.1 to PREIT’s Current Report
on Form 8-K filed on May 28, 2020, is incorporated herein by reference.
Form of Restricted Share Award Notice under the Amended and Restated Pennsylvania Real Estate Investment Trust 2018 Equity Incentive Plan,
filed as Exhibit 10.2 to PREIT’s Current Report on Form 8-K filed on May 28, 2020, is incorporated herein by reference.
Lease between PREIT Associates, L.P. and Commerce Square Partners – Philadelphia Plaza, L.P., dated December 3, 2018, filed as Exhibit 10.51
to PREIT’s Annual Report on Form 10-K filed on March 16, 2020, is incorporated herein by reference.
First Amendment to Office Lease between PREIT Associates, L.P. and Commerce Square Partners – Philadelphia Plaza, L.P., dated September
27, 2019, filed as Exhibit 10.52 to PREIT’s Annual Report on Form 10-K filed on March 16, 2020, is incorporated herein by reference.
Tax Protection Agreement, dated March 31, 2015, between PREIT Associates, L.P., PR Springfield Town Center LLC, Franconia Two, L.P., and
Vornado Realty L.P., filed as Exhibit 10.1 to PREIT’s Current Report on Form 8-K filed on April 1, 2015, is incorporated herein by reference.
+10.63
PREIT Services, LLC Severance Pay Plan for Certain Officers, effective January 1, 2007, filed as Exhibit 99.1 to PREIT’s Current Report on
Form 8-K filed January 18, 2017, is incorporated herein by reference.
10.64
10.65
10.66
10.67
Restructuring Support Agreement, dated October 7, 2020, by and among Pennsylvania Real Estate Investment Trust and the other parties thereto,
filed as Exhibit 10.1 to PREIT’s Current Report on Form 8-K filed on October 14, 2020, is incorporated herein by reference.
Amendment and Waiver to Restructuring Support Agreement, dated as of October 16, 2020, by and among PREIT Associates, L.P.,
PREIT-RUBIN, Inc., Pennsylvania Real Estate Investment Trust, and the financial institutions party thereto and their assignees, filed as Exhibit
10.2 to PREIT’s Current Report on Form 8-K filed on October 22, 2020, is incorporated herein by reference.
Second Amendment to Restructuring Support Agreement, dated as of October 23, 2020, by and among PREIT Associates, L.P., PREIT-RUBIN,
Inc., Pennsylvania Real Estate Investment Trust, and the financial institutions party thereto and their assignees, filed as Exhibit 10.11 to PREIT’s
Quarterly Report on Form 10-Q filed on November 9, 2020, is incorporated herein by reference.
Notice of (I) Entry of Findings of Fact, Conclusions of Law, and Order Approving the Adequacy of the Debtors’ Disclosure Statement for, and
Confirming, the Debtors’ Joint Prepackaged Chapter 11 Plan of Reorganization of Pennsylvania Real Estate Investment Trust and Certain of Its
Direct and Indirect Subsidiaries and (II) Occurrence of Effective Date, filed as Exhibit 10.7 to PREIT’s Current Report on Form 8-K filed on
December 16, 2020, is incorporated herein by reference.
77
21*
Direct and Indirect Subsidiaries of the Registrant.
23.1*
24*
31.1*
31.2*
32.1**
32.2**
Consent of KPMG LLP (Independent Registered Public Accounting Firm).
Power of Attorney (included on signature page to this Form 10-K).
Certification pursuant to Exchange Act Rules 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification pursuant to Exchange Act Rules 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*
101.SCH*
101.CAL*
101.DEF*
101.LAB*
101.PRE*
104*
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within
the Inline XBRL document.
Inline XBRL Taxonomy Extension Schema Document.
Inline XBRL Taxonomy Extension Calculation Linkbase Document.
Inline XBRL Taxonomy Extension Definition Linkbase Document.
Inline XBRL Taxonomy Extension Label Linkbase Document.
Inline XBRL Taxonomy Extension Presentation Linkbase Document.
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101.INS).
+ Management contract or compensatory plan or arrangement required to be filed as an Exhibit to this form.
(*) Filed herewith
(**) Furnished herewith
ITEM 16. FORM 10-K SUMMARY.
None.
78
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: March 16, 2021
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
By:
/s/ Joseph F. Coradino
Joseph F. Coradino
Chairman and Chief Executive Officer
79
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Mario C. Ventresca, Jr.
and Joseph F. Coradino, or either of them, his or her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution,
for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form
10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agents, and either of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully as he or she might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agents, or either of them or any substitute therefore, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
Name
Capacity
Date
/s/ Joseph F. Coradino
Joseph F. Coradino
/s/ Mario C. Ventresca, Jr.
Mario C. Ventresca, Jr.
/s/ Sathana Semonsky
Sathana Semonsky
/s/ George J. Alburger, Jr.
George J. Alburger, Jr.
/s/ Michael J. DeMarco
Michael J. DeMarco
/s/ JoAnne A. Epps
JoAnne A. Epps
/s/ Mark E. Pasquerilla
Mark E. Pasquerilla
/s/ Charles P. Pizzi
Charles P. Pizzi
/s/ John J. Roberts
John J. Roberts
Chairman, Chief Executive Officer (principal executive
officer) and Trustee
March 16, 2021
Executive Vice President and Chief Financial Officer
(principal financial officer)
Vice President and Chief Accounting Officer (principal
accounting officer)
Trustee
Trustee
Trustee
Trustee
Trustee
Trustee
March 16, 2021
March 16, 2021
March 16, 2021
March 16, 2021
March 16, 2021
March 16, 2021
March 16, 2021
March 16, 2021
80
Report of Independent Registered Public Accounting Firm
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, 2020 and 2019, the related consolidated statements of operations, comprehensive loss, equity, and cash flows for each of the
years in the two-year period ended December 31, 2020, and the related notes and financial statement schedule III (collectively, the consolidated
financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the
Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the two-year period ended
December 31, 2020, 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, 2020, 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 16, 2021
expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in 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 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 statements are free of material misstatement, whether due to error or fraud. Our
audits included performing procedures to assess the risks of material 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
significant 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.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were
communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the
consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical
audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating
the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Assessment of holding period assumption used in the recoverability of operating properties
As discussed in Note 2 to the consolidated financial statements, net investments in real estate, including operating properties, was $1.9 billion
at December 31, 2020. The Company performs impairment testing of its investments in real estate and related intangible assets whenever
events or changes in circumstances indicate that the carrying value may not be recoverable. If there is a triggering event in relation to a
property to be held and used, the Company will estimate the aggregate future cash flows, net of estimated capital expenditures, to be
generated by the property, undiscounted and without interest charges. During 2020, the impact of the COVID-19 pandemic on the operations
of the Company’s wholly owned properties resulted in recoverability assessments performed on all wholly owned properties.
We identified the assessment of the Company’s expected holding period for operating properties as a critical audit matter. Subjective auditor
judgment was required to assess the relevant events or changes in circumstances that the Company used to evaluate its expected holding
period. A shortened holding period assumption could have a significant adverse impact on the estimated cash flows used in determining the
recoverability of the carrying value of operating properties.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design of certain internal
controls over the Company’s property impairment process, including controls over the Company’s evaluation of the expected holding period.
We evaluated the relevant events or changes in circumstances and the current economic environment that the Company used to evaluate its
expected holding period by:
•
•
•
inquiring with the Company and inspecting documents such as the Board of Trustee meeting minutes and the Company’s debt maturity
schedules
reading certain publicly available information to identify potential sales of properties
corroborating the information obtained with others in the Company that have responsibility for and authorization to pursue disposition
transactions.
F-1
Evaluation of collectability of tenant receivables
As discussed in Note 1 to the consolidated financial statements, the Company accrues revenue under leases, provided that it is probable that
the Company will collect substantially all of the lease revenue that is due by the tenant under the terms of the lease both at inception and on
an ongoing basis. When probability is not met, leases are prospectively accounted for on a cash basis and any difference between the revenue
that has been accrued and the cash collected from the tenant over the life of the lease is recognized as a current period adjustment to lease
revenue. The Company reviews the collectability of its tenant receivables related to tenant rent including base rent, straight-line rent, expense
reimbursements and other revenue or income by specifically analyzing billed and unbilled revenues, including straight-line rent receivable,
and considering historical collection issues, tenant creditworthiness and current economic and industry trends. The Company’s revenue
recognition and receivables collectability analysis places particular emphasis on past-due accounts and considers the nature and age of the
receivables, the payment history and financial condition of the payor, the basis for any disputes or negotiations with the payor, and other
information that could affect collectability. Tenant and other receivables, net was $54.5 million at December 31, 2020.
We identified the evaluation of collectability of tenant receivables as a critical audit matter. Evaluating the Company’s probability
assessment of collection of substantially all lease payments for each of its leases requires significant auditor judgment because of the
subjective nature of the evidence obtained and the existence of the material weakness in internal control over financial reporting identified.
The following are the primary procedures we performed to address this critical audit matter. For a sample of receivables, we evaluated the
collectability of the tenant receivable by assessing the age of the receivable, the tenant’s payment history, reading certain publicly available
information, and evaluating publicly available industry sector trends. In addition, we inquired with Company employees to obtain evidence
regarding creditworthiness of specific tenants
/s/ KPMG LLP
We have served as the Company’s auditor since 2002.
Philadelphia, Pennsylvania
March 16, 2021
F-2
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, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission. In our opinion, because of the effect of the material weakness, described below, on the achievement
of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31,
2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of
the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the
consolidated balance sheets of the Company as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive
loss, equity, and cash flows for each of the years in the two-year period ended December 31, 2020, and the related notes and financial statement
schedule III (collectively, the consolidated financial statements), and our report dated March 16, 2021 expressed an unqualified opinion on those
consolidated financial statements.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely
basis. A material weakness related to the Company’s attracting and retaining of sufficient personnel with requisite financial experience,
assessment of risk of fraud, including risks of management override of controls and proper segregation of duties, and assessment of changes in the
external environment and the potential impact of those changes on the design, operating effectiveness and monitoring of internal controls over
financial reporting has been identified and included in management’s assessment. The material weakness was considered in determining the
nature, timing, and extent of audit tests applied in our audit of the 2020 consolidated financial statements, and this report does not affect our report
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
reasonable 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
material 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 necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
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 statements 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 maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of 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 management and directors of the
company; 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 financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Philadelphia, Pennsylvania
March 16, 2021
F-3
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED BALANCE SHEETS
(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 $1,492 and $2,845 at December 31,
2020 and 2019, respectively)
Intangible assets (net of accumulated amortization of $19,187 and $18,248 at December 31, 2020 and 2019,
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)
EQUITY:
$
$
$
Series B Preferred Shares, $.01 par value per share; 25,000 shares authorized; 3,450 shares issued and
outstanding; liquidation preference of $89,430 and $86,250 at December 31, 2020 and 2019, respectively
Series C Preferred Shares, $.01 par value per share; 25,000 shares authorized; 6,900 shares issued and
outstanding; liquidation preference of $178,710 and $172,500 at December 31, 2020 and 2019, respectively
Series D Preferred Shares, $.01 par value per share; 25,000 shares authorized; 5,000 shares issued and
outstanding; liquidation preference of $129,297 and $125,000 at December 31, 2020 and 2019, respectively
Shares of beneficial interest, $1.00 par value per share; 200,000 shares authorized; 79,537 and 77,550 shares
issued and outstanding at December 31, 2020 and 2019, respectively
Capital contributed in excess of par
Accumulated other comprehensive loss
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.
$
December 31,
2020
2019
3,168,536 $
46,285
5,516
3,220,337
(1,308,427 )
1,911,910
27,066
43,309
54,532
11,392
127,593
1,384
2,177,186 $
884,503 $
908,473
54,830
8,899
76,586
23,292
93,663
2,050,246
35
69
50
79,537
1,771,777
(20,620 )
(1,699,638 )
131,210
(4,270 )
126,940
2,177,186 $
3,099,034
106,011
5,881
3,210,926
(1,202,722 )
2,008,204
159,993
12,211
41,261
13,404
103,688
12,506
2,351,267
899,753
548,025
255,000
13,006
87,916
13,126
107,016
1,923,842
35
69
50
77,550
1,766,883
(12,556 )
(1,408,352 )
423,679
3,746
427,425
2,351,267
F-4
For The Year Ended December 31,
2020
2019
237,141 $
15,462
8,333
260,936
887
261,823
(106,522 )
(11,829 )
(8,547 )
(126,898 )
(126,362 )
(50,272 )
(1,227 )
586
(294 )
(304,467 )
(84,341 )
(1,487 )
8,127
—
—
(3,769 )
(385,938 )
(124,115 )
(5,544 )
(148,545 )
—
11,444
54
—
(266,706 )
7,189
(259,517 )
(27,375 )
(286,892 ) $
302,311
19,979
12,668
334,958
1,834
336,792
(113,260 )
(14,733 )
(8,565 )
(136,558 )
(137,784 )
(46,010 )
(3,689 )
4,362
(284 )
(319,963 )
(63,987 )
24,859
—
(1,455 )
(3,562 )
—
(364,108 )
(27,316 )
8,289
—
553
2,744
2,718
12
(13,000 )
2,128
(10,872 )
(27,375 )
(38,247 )
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
$
(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
(Loss) gain on debt extinguishment, net
Gain on derecognition of property
Impairment of assets
Impairment of development land parcel
Reorganization expenses
Total expenses
Loss before equity in (loss) income of partnerships, loss on remeasurement of assets by equity
method investee, gain on sales of real estate by equity method investee, gain on sales of real
estate, net, and gain on sales of interests in non operating real estate, net of adjustment
Equity in (loss) income of partnerships
Loss on remeasurement of assets by equity method investee
Gain on sales of real estate by equity method investee
Gain 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: cumulative preferred share dividends
Net loss attributable to PREIT common shareholders
$
See accompanying notes to consolidated financial statements.
F-5
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS (continued)
EARNINGS PER SHARE
(in thousands of dollars, except per share amounts)
Net loss
Noncontrolling interest
Cumulative preferred share dividends
Dividends on unvested restricted shares
Net loss used to calculate earnings per share – basic and diluted
Basic and diluted loss per share
(in thousands of shares)
Weighted average shares outstanding – basic
Effect of dilutive common share equivalents (1)
Weighted average shares outstanding – diluted
For The Year Ended December 31,
2020
2019
(266,706 ) $
7,189
(27,375 )
(363 )
(287,255 ) $
(13,000 )
2,128
(27,375 )
(883 )
(39,130 )
(3.72 ) $
(0.52 )
$
$
$
77,227
—
77,227
75,221
—
75,221
(1) For the years ended December 31, 2020 and 2019, there were net losses allocable to common shareholders, so the effect of common share
equivalents of 380 and 452 for the years ended December 31, 2020 and 2019, respectively, is excluded from the calculation of diluted loss per
share, as their inclusion would be anti-dilutive.
See accompanying notes to consolidated financial statements.
F-6
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands of dollars)
Comprehensive loss:
Net loss
Unrealized loss on derivatives
Reclassification adjustment of loss from de-designated interest rate swaps
Amortization of losses on settled swaps, net of gains
Total comprehensive loss
Less: Comprehensive loss attributable to noncontrolling interest
Comprehensive loss attributable to PREIT
For The Year Ended December 31,
2020
2019
$
$
(266,706 ) $
(11,252 )
2,818
75
(275,065 )
7,484
(267,581 ) $
(13,000 )
(18,937 )
—
85
(31,852 )
3,016
(28,836 )
See accompanying notes to consolidated financial statements.
F-7
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF EQUITY
For the Years Ended
December 31, 2020 and 2019
Preferred Shares $.01 par
Total
Equity
Series
B
Series
C
Series
D
PREIT Shareholders
Shares of
Beneficial
Interest,
$1.00 par
(in thousands of dollars, except per share
amounts)
Balance January 1, 2019
Net loss
Other comprehensive income
Shares issued upon redemption of Operating
Partnership units
Shares issued under employee compensation plan,
net of shares retired
Amortization of deferred compensation
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
($1.719 per share)
Dividends paid to common shareholders ($0.84 per
share)
Noncontrolling interests:
Distributions paid to Operating Partnership unit
holders ($0.84 per unit)
Other distributions to noncontrolling interest, net
Balance December 31, 2019
Net loss
Other comprehensive income
Shares issued upon redemption of Operating
Partnership units
Shares issued under employee compensation plan,
net of shares retired
Amortization of deferred compensation
Dividends paid to Series B preferred shareholders
($0.9218 per share)
Dividends paid to Series C preferred shareholders
($0.90 per share)
Dividends paid to Series D preferred shareholders
($0.8594 per share)
Dividends paid to common shareholders ($0.23 per
share)
Noncontrolling interests:
Distributions paid to Operating Partnership unit
holders ($0.23 per unit)
Balance December 31, 2020
$
546,551 $
(13,000 )
(18,852 )
-
698
6,212
(6,364 )
(12,419 )
(8,592 )
(63,787 )
(3,004 )
(18 )
427,425
(266,706 )
(8,359 )
(28 )
133
6,748
(3,182 )
(6,210 )
(4,296 )
(18,081 )
35 $
—
—
—
—
—
—
—
—
—
—
—
35
—
—
—
—
—
—
—
—
—
69 $
—
—
—
—
—
—
—
—
—
—
—
69
—
—
—
—
—
—
—
—
—
50 $
—
—
—
—
—
—
—
—
—
—
—
50
—
—
—
—
—
—
—
—
—
Capital
Contributed
in Excess of
par
1,671,042 $
—
—
Accumulated
Other
Comprehensive
Income (Loss)
5,408 $
—
(17,964 )
Distributions
in Excess of
Net Income
(1,306,318 ) $
(10,872 )
—
Non-
controlling
interest
105,770
(2,128 )
(888 )
70,495 $
—
—
6,250
89,736
805
—
(107 )
6,212
—
—
—
—
(95,986 )
—
—
—
—
—
—
—
—
—
—
—
(6,364 )
—
(12,419 )
—
(8,592 )
—
(63,787 )
—
—
77,550
—
—
—
—
1,766,883
—
—
—
—
(12,556 )
—
(8,064 )
—
—
(1,408,352 )
(259,517 )
—
(3,004 )
(18 )
3,746
(7,189 )
(295 )
—
—
1,987
—
(1,854 )
6,748
—
—
—
—
(28 )
—
—
—
—
—
—
—
—
—
—
—
(3,182 )
—
(6,210 )
—
(4,296 )
—
(18,081 )
—
—
—
—
—
—
—
—
—
—
—
—
(504 )
126,940 $
$
—
35 $
—
69 $
—
50 $
—
79,537 $
—
1,771,777 $
—
(20,620 ) $
—
(1,699,638 ) $
(504 )
(4,270 )
See accompanying notes to consolidated financial statements.
F-8
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
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
Amortization of deferred compensation
Loss (gain) on debt extinguishment, net
Gain on derecognition of property
Paid-in-kind interest
Insurance recoveries in excess of property loss
Loss on hedge ineffectiveness
Gain on sale of interests in real estate and non-operating real estate, net
Equity in loss (income) of partnerships
Loss on remeasurement of assets by equity method investee
Gain on sale of real estate by equity method investee
Cash distributions from partnerships
Impairment of assets
Impairment of development land parcel
Change in assets and liabilities:
Net change in other assets
Net change in other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Cash proceeds from sales of real estate
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
Net cash used in investing activities
Cash flows from financing activities:
Net (repayments) borrowings under the Restructured Revolver
Net borrowings under First Lien Revolving Facility
Repayments to 2014 and 2018 term loans and Bridge Facility
Borrowings under Bridge Facility and First and Second Lien Term Loans
Repayments of finance lease liabilities and mortgage loans
Proceeds from notes payable
Principal installments on mortgage loans
Payment of deferred financing costs
Payment of debt extinguishment 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
Cash, cash equivalents, and restricted cash, end of period
For The Year Ended December 31,
2019
2020
$
(266,706 ) $
(13,000 )
117,791
13,089
(1,988 )
6,748
1,487
(8,127 )
9,515
—
2,912
(11,498 )
5,544
148,545
—
1,778
—
—
(7,936 )
(5,281 )
5,873
22,517
—
—
—
(34,269 )
(37,753 )
(22,779 )
(150 )
—
(4,914 )
(77,348 )
(255,000 )
54,830
(605,396 )
968,000
(655 )
4,536
(16,076 )
(14,072 )
(922 )
572
(18,081 )
(13,688 )
(504 )
(466 )
103,078
31,603
19,628
51,231 $
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
111,392
50,407
8,000
6,977
879
(72,939 )
(34,260 )
(113,791 )
(568 )
25,000
(1,055 )
(131,350 )
190,000
—
—
—
(71,387 )
—
(17,911 )
(95 )
—
1,256
(63,787 )
(27,375 )
(3,004 )
(556 )
7,141
(12,817 )
32,445
19,628
$
See accompanying notes to consolidated financial statements.
F-9
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2020 and 2019
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Pennsylvania Real Estate Investment Trust (“PREIT” or the “Company”), 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, 2020, our portfolio consists of a total of 26 properties
operating in nine states, including 20 shopping malls, five other retail properties and one development property. The property in our portfolio
that is classified 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, 2020, we held a 97.5% controlling
interest in the Operating Partnership, (after the redemption of 6,250,000 OP Units (as defined below) during the first quarter of 2019, which is
discussed in more detail in Note 5), 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 partnership agreement of the Operating Partnership, each of the 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, 2020,
the total amount that would have been distributed would have been $2.0 million, which is calculated using our December 31, 2020 closing share
price on the New York Stock Exchange of $1.00 multiplied by the number of outstanding OP Units held by limited partners, which was 1,975,928
as of December 31, 2020.
We provide management, leasing and real estate development services through two of our subsidiaries: PREIT Services, LLC (“PREIT
Services”), which generally develops and manages properties that we consolidate for financial reporting purposes, and PREIT-RUBIN, Inc.
(“PRI”), which generally develops and manages properties that we do not consolidate for financial reporting purposes, including properties
owned by partnerships in which we own an interest, and properties that are owned by third parties in which we do not have an interest. PREIT
Services and PRI are consolidated. PRI is a taxable REIT subsidiary, as defined by federal tax laws, which means that it is able to offer an
expanded menu of 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-property 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 criteria. Accordingly, we have aggregated our
individual properties into one reportable segment. In addition, no single tenant accounts for 10% or more of consolidated revenue, and none of our
properties are located outside the United States.
Consolidation
We consolidate our accounts and the accounts of the Operating Partnership and other controlled subsidiaries, and we reflect the remaining interest
in such entities as noncontrolling interest. All significant intercompany accounts and transactions have been eliminated in consolidation.
The Operating Partnership meets the criteria as a variable interest entity. The Company’s significant asset is its investment in the Operating
Partnership, and consequently, substantially all of the Company’s assets and liabilities represent those assets and liabilities of the Operating
Partnership. All of the Company’s debt is also an obligation of the Operating Partnership.
Financial Restructuring
On October 7, 2020, the Company and certain of the Company’s wholly owned direct and indirect subsidiaries (collectively, the “Company
Parties”) entered into a Restructuring Support Agreement (the “RSA”), which contemplated agreed-upon terms for a financial restructuring of the
then-existing debt and certain other obligations of the Company Parties (collectively with the following events, the “Financial Restructuring”).
The RSA was amended on October 16, 2020, and again on October 23, 2020, to, among other things, extend the date by which the Company
Parties were required to commence the solicitation of votes on their joint prepackaged chapter 11 plan of reorganization (the “Plan”) and,
thereafter, the voluntary chapter 11 cases. On November 1, 2020, the Company and the other Company Parties under the RSA (the “Debtors”)
filed their respective voluntary petitions under chapter 11 of title 11 of the United States Code, 11 U.S.C. §§ 101-1532 (the “Bankruptcy Code”)
in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”), commencing the chapter 11 cases to confirm and
consummate the Plan in order to effectuate the Debtors’ financial restructuring. The Debtors’ chapter 11 cases were jointly administered for
procedural convenience under the caption In re Pennsylvania Real Estate Investment Trust, et al., Case No. 20-12737 (KBO). Under the Plan, the
Debtors would be recapitalized and their debt maturities extended. The Debtors continued to operate their businesses as debtors in possession
F-10
under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the
Bankruptcy Court. On November 30, 2020, the Bankruptcy Court entered an order (the “Confirmation Order”), confirming the Joint
Prepackaged Chapter 11 Plan of Reorganization of Pennsylvania Real Estate Investment Trust and Certain of Its Direct and Indirect
Subsidiaries (with Additional Technical Modifications As of November 20, 2020) (the “Confirmed Plan”). On December 10, 2020 (the “Effective
Date”), each condition precedent to consummation of the Confirmed Plan, enumerated in Section 8.2 thereof, was satisfied or waived in
accordance with the Confirmed Plan and the Confirmation Order, and therefore the Effective Date occurred and the Debtors emerged from
bankruptcy. On the Effective Date, the Company entered into the credit agreements, which are described in Note 4.
COVID-19 Related Risks and Uncertainties
The COVID-19 global pandemic that began in 2020 has adversely impacted and continues to impact our business, financial condition, liquidity
and operating results, as well as our tenants’ businesses. The prolonged and increased spread of COVID-19 has also led to unprecedented global
economic disruption and volatility in financial markets. Some of our tenants’ financial health and business viability have been adversely impacted
and their creditworthiness has deteriorated. We anticipate that our future business, financial condition, liquidity and results of operations,
including in 2021 and potentially in future periods, will continue to be materially impacted by the COVID-19 pandemic. It remains highly
uncertain how long the global pandemic, economic challenges and restrictions on day-to-day life and business operations will last based on the
emergence of new strains of the virus and the current virus spread rate in the United States, which have resulted in a number of jurisdictions that
previously relaxed restrictions implementing new or renewed restrictions. Given these factors, so long as the lingering effects of COVID-19
remain, the virus may continue to impact us or our tenants, or our ability or the ability of our tenants to resume more normal operations.
COVID-19 closures of our properties began on March 12, 2020 and continued through the reopening of our last property on July 3, 2020. These
closures impacted most of our properties for the full second quarter of 2020 with traffic and tenant reopenings increasing through the third and
fourth quarters of 2020. New or renewed restrictions in the jurisdictions where our properties are located may be implemented in response to
evolving conditions and overall uncertainty about the timing of widespread availability of vaccines. As such, as the pandemic continues,
intensifies or experiences resurgences, it is possible that additional closures will occur. During the mall closure period in the second quarter of
2020, the Company furloughed a significant portion of its property and corporate employee base and later made permanent headcount reductions,
which contributed to decreased general and administrative expenses in the third and fourth quarters of 2020.
All of our properties have remained open during the third and fourth quarters of 2020 and are employing safety and sanitation measures designed
to address the risks posed by COVID-19, with some of our tenants still operating at reduced capacity. The significance of COVID-19 on our
business, however, will continue to depend on, among other things, the extent and duration of the pandemic, the severity of the disease and the
number of people infected with the virus, the timing and widespread availability and acceptance of vaccines, the further effects on the economy of
the pandemic and of the measures taken by governmental authorities and other third parties restricting daily activities and the length of time that
such measures remain in place or are renewed, and implementation of governmental programs to assist businesses and consumers impacted by the
COVID-19 pandemic.
Partnership Investments
We account for our investments in partnerships 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, 2020, are recorded initially at our cost, and subsequently adjusted for
our share of net equity in income or loss and cash contributions and distributions. We do not control any of these equity method investees for the
following reasons:
• Except for two properties that we co-manage with our partner (effective January 1, 2021, one of these properties is now being managed
by 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 operating and capital decisions of the partnership, including budgets, in
the ordinary course of business.
• All major decisions of each partnership, such as the sale, refinancing, expansion or rehabilitation of the property, require the approval of
all partners.
• Voting rights and the sharing of profits and losses are 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 (loss) income of partnerships,” rather than consolidating the results of the unconsolidated partnerships with our
results. Certain non-recurring gains/losses on sales of real estate by equity method investee and impairment charges are reported on separate lines
in our consolidated statements of operations. Changes in our investments in these entities are recorded in the consolidated 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.”
F-11
We hold legal title to a property owned by one of our unconsolidated partnerships 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
applicable agreement between us and the other entity with an ownership interest, we and such other entity have joint control because decisions
regarding matters such as the sale, refinancing, expansion or rehabilitation of the property require the approval of both us and the other entity
owning an interest in the property. Hence, we account for this property like our other unconsolidated partnerships using the equity method of
accounting. The balance sheet items arising from the properties appear under the caption “Investments in partnerships, at equity.” In the case of
deficit investment balances, such amounts are recorded in “Distributions in excess of partnership investments.”
For further information regarding our unconsolidated partnerships, see note 3.
Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires our
management to make estimates 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 revenue 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 impairment and fair value.
Our management makes complex or subjective assumptions and judgments 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 and Receivables
We derive over 95% of our revenue from tenant rent and other tenant-related activities. Tenant rent includes base rent, percentage rent, expense
reimbursements (such as reimbursements of costs of common area maintenance (“CAM”), real estate taxes and utilities), and the amortization of
above-market and below-market lease intangibles (as described below under “Intangible Assets”).
We accrue revenue under leases, provided that it is probable that we will collect substantially all of the lease revenue that is due under the terms of
the lease both at inception and on an ongoing basis. When collectability of lease revenue is not probable, leases are prospectively accounted for on
a cash basis and any difference between the revenue that has been accrued and the cash collected from the tenant over the life of the lease is
recognized as a current period adjustment to lease revenue. We review the collectability of our tenant receivables related to tenant rent including
base rent, straight-line rent, expense reimbursements and other revenue or income by specifically analyzing billed and unbilled revenues,
including straight-line rent receivable, and considering historical collection issues, tenant creditworthiness and current economic and industry
trends. Our revenue recognition and receivables collectability analysis places particular emphasis on past-due accounts and considers the nature
and age of the receivables, the payment history and financial condition of the payor, the basis for any disputes or negotiations with the payor, and
other information that could affect collectability.
We record base rent on a straight-line basis, which means that the monthly base rent revenue according to the terms of our leases with our tenants
is adjusted so that an average monthly rent is recorded for each tenant over the term of its lease. When tenants vacate prior to the end of their lease,
we accelerate amortization of any related unamortized straight-line rent balances, and unamortized above-market and below-market intangible
balances are amortized as a decrease or increase to real estate revenue, respectively. The straight-line rent adjustment increased revenue by $2.0
million and $5.2 million in the years ended December 31, 2020 and 2019, respectively. The straight-line rent receivable balances included in
tenant and other receivables on the accompanying consolidated balance sheet as of December 31, 2020 and 2019 were $29.8 million and $30.4
million, respectively.
Percentage rent represents rental revenue that the tenant pays based on a percentage of its sales, either as a percentage of its total sales or as a
percentage of sales over a certain threshold. In the latter case, we do not record percentage rent until the sales threshold has been reached.
Revenue for rent received from tenants prior to their due dates is deferred until the period to which the rent applies.
In addition to base rent, certain lease agreements contain provisions that require tenants to reimburse a fixed or pro rata share of certain CAM
costs, real estate taxes and utilities. Tenants generally make monthly expense reimbursement payments based on a budgeted amount determined
at the beginning of the year. Effective January 1, 2019, we recognize fixed CAM revenue prospectively on a straight-line basis.
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.
F-12
Lease termination fee revenue is recognized in the period when a termination agreement is signed, collectability 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 parties, 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 development activity and are recognized on the percentage
of completion method. These activities are collectively included in “Other income” in the consolidated 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 recognition 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 $0.4 million and $0.2 million as of December 31, 2020 and 2019, respectively. The marketing
reimbursements are recognized as revenue at the time that the marketing expenditures occur. Marketing revenue, included in other real estate
revenues in the consolidated statements of operations, was $2.9 million and $4.1 million for the years ended December 31, 2020 and 2019,
respectively.
Property management revenue from management and development activities is generated through contracts with third party owners of real estate
properties or with certain of our joint ventures, and is recorded in other income in the consolidated statements of operations. In the case of
management fees, our performance obligations are fulfilled over time as the management services are performed and the associated revenues are
recognized on a monthly basis when the customer is billed. In the case of development fees, our performance obligations are fulfilled over time as
we perform certain stipulated development activities as set forth in the respective development agreements and the associated revenues are
recognized on a monthly basis when the customer is billed. Property management fee revenue was $0.5 million and $0.5 million for the years
ended December 31, 2020 and 2019, respectively. Development fee revenue was less than $10 thousand and $0.7 million for the years ended
December 31, 2020 and 2019, respectively.
Fair Value
Fair value accounting applies to reported balances that are required or permitted to be measured at fair value under existing accounting
pronouncements.
Fair value measurements are determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis
for considering market participant assumptions in fair value measurements, these accounting requirements establish a fair value hierarchy that
distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity
(observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant
assumptions (unobservable inputs classified within Level 3 of the hierarchy).
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access.
Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 2 inputs might include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or
liability (other than quoted prices), such as interest rates, foreign exchange rates and yield curves that are observable at commonly quoted
intervals.
Level 3 inputs are unobservable inputs for the asset or liability and are typically based on an entity’s own assumptions, as there is little, if any,
related market activity.
In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in
the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value
measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires
judgment, and considers factors specific to the asset or liability. We utilize the fair value hierarchy in our accounting for derivatives (Level 2) and
financial instruments (Level 2) and in our reviews for impairment of real estate assets (Level 3) and goodwill (Level 3).
Financial Instruments
Carrying amounts reported on the consolidated balance sheet for cash and cash equivalents, tenant and other receivables, accrued expenses, other
liabilities and the First Lien Revolving Facility approximate fair value due to the short-term nature of these instruments. The Term Loans (see
note 4) bear interest at variable rates that fluctuate with market rates. The carrying values of the Term Loans approximate their respective fair
values. 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.
F-13
Impairment of Assets
Real estate investments and related intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the
carrying amount of the property might not be recoverable, which is referred to as a “triggering event.” The COVID-19 impact on the economy and
market conditions, together with the resulting closures of our properties and the delayed reopening of some tenants was deemed to be a triggering
event as of June 30, 2020, September 30, 2020 and December 31, 2020, which led to impairment reviews for each of the respective quarters of
2020. 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 conditions 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, estimated holding periods, occupancy statistics, vacancy projections and tenants’ sales levels.
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
expenditures, to be generated by the property, undiscounted and without interest charges. In addition, this estimate may consider a probability
weighted cash flow estimation approach when alternative courses of action to recover the carrying amount of a long-lived asset are under
consideration or when a range of possible values is estimated.
The determination of undiscounted cash flows requires significant estimates by our management, including the expected course of action at the
balance sheet date that would lead to such cash flows. Subsequent changes in estimated undiscounted cash flows arising from changes in the
anticipated action to be taken with respect to the property could affect the determination of whether an impairment exists, and 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. Our intent is to hold and operate our properties long-term, which reduces the likelihood that our
carrying value is not recoverable. A shortened holding period would increase the likelihood that the carrying value is not recoverable.
Assessment of our ability to recover certain lease related costs must be made when we have a reason to believe that a tenant might not be able to
perform under the terms of the lease as originally expected. This requires us to make estimates as to the recoverability of such costs.
An other-than-temporary impairment of an investment in an unconsolidated joint venture is recognized when the carrying value of the investment
is not considered recoverable based on evaluation of the severity and duration of the decline in value. To the extent impairment has occurred, the
excess carrying value of the asset over its estimated fair value is recorded as a reduction to income.
Real Estate
Land, buildings, fixtures and tenant improvements are recorded at cost and stated at cost less accumulated depreciation. Expenditures for
maintenance and repairs are charged to operations as incurred. Renovations or replacements, which improve or extend the life of an asset, are
capitalized and depreciated over their estimated useful lives. For financial reporting purposes, properties are depreciated using the straight-line
method over the estimated useful lives of the assets. The estimated useful lives are as follows:
Buildings
Land improvements
Furniture/fixtures
Tenant improvements
20-40 years
15 years
3-10 years
Lease term
We are required to make subjective assessments as to the useful lives of our real estate assets for purposes of determining the amount of
depreciation to reflect on an annual basis with respect to those assets based on various factors, including industry standards, historical experience
and the condition of the asset at the time of acquisition. These assessments affect our annual net income. If we were to determine that a different
estimated useful life was appropriate for a particular asset, it would be depreciated over the newly estimated useful life, and, other things being
equal, result in changes in annual depreciation expense and annual net income.
We recognize gains from sales of real estate properties and interests in partnerships when an enforceable contract is in place, control of the asset
transfers to a buyer and it is probable that we will collect the consideration due in exchange for transferring the asset.
Real Estate Acquisitions
We account for our property acquisitions by allocating the purchase price of a property to the property’s assets based on management’s estimates
of their fair value. Debt assumed in connection with property acquisitions is recorded at fair value at the acquisition date, and any resulting
premium or discount is amortized through interest expense over the remaining term of the debt, resulting in a non-cash decrease (in the case of a
premium) or increase (in the case of a discount) in interest expense. The 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.
F-14
Intangible Assets
Our intangible assets on the accompanying consolidated balance sheets as of December 31, 2020 and 2019 each included $5.2 million (in each
case, net of $1.1 million of amortization expense recognized prior to January 1, 2002) of goodwill recognized in connection with the 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, 2020 were as follows:
(in thousands of dollars)
Balance, January 1, 2019
Goodwill divested
Balance, December 31, 2019
Goodwill divested
Balance, December 31, 2020
Basis
$
Accumulated
Amortization Total
(1,073 ) $
—
(1,073 )
—
(1,073 ) $
6,322 $
—
6,322
—
6,322 $
5,249
—
5,249
—
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 properties 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 accumulated amortization, as of December 31, 2020 and 2019:
(in thousands of dollars)
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
December 31,
2020
2019
$
$
$
$
6,143 $
—
6,143
5,249
11,392 $
134 $
—
134 $
8,155
—
8,155
5,249
13,404
215
—
215
Intangible liabilities are included in “Accrued expenses and other liabilities” in the consolidated balance sheets. Amortization of lease
intangibles were $2.0 million and $3.3 million for the years ended December 31, 2020 and 2019, respectively.
F-15
Net amortization of above-market and below-market lease intangibles increased revenue by $0.1 million and $0.1 million for the years ended
December 31, 2020 and 2019, 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,
2021
2022
2023
2024
2025
2026 and thereafter
Total
Assets Classified as Held for Sale
Value of Lease
Intangibles
Below Market
Leases, net
$
$
1,338 $
1,207
1,205
1,161
319
913
6,143 $
(44 )
(10 )
(10 )
(10 )
(10 )
(50 )
(134 )
The determination to classify an asset as held for sale requires significant estimates by us about the property and the expected market for the
property, which are based on factors including recent sales of comparable properties, recent expressions of interest in the property, financial
metrics of the property and the physical condition of the property. We must also determine if it will be possible under those market conditions
to sell the property for an acceptable price within one year. When assets are identified by our management as held for sale, we discontinue
depreciating the assets and estimate the sales price, net of selling costs, of such assets. We generally consider operating properties to be held for
sale when they meet criteria such as whether the sale transaction 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 sheets. 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 depreciation and amortization expense
for the period that the property was in held-for-sale status.
As of December 31, 2020, we determined that two of our hotel land parcels met the criteria to be classified as held for sale and we believe that
we will likely complete the sale transactions within one year. As of December 31, 2019, we determined that 13 land parcels and outparcels, in
addition to the two hotel parcels, met the criteria to be classified as held for sale.
Capitalization of Costs
Costs incurred in relation to development and redevelopment projects for interest, property taxes and insurance are capitalized only during
periods in which activities necessary to prepare the property for its intended use are in progress. Costs incurred for such items after the property
is substantially complete and ready for its intended use are charged to expense as incurred. Capitalized costs, as well as tenant inducement
amounts and internal and external commissions, are recorded in construction in progress. We capitalize a portion of development department
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 necessary to commence its planned principal activities.
We capitalize payments made to obtain options to acquire real property. Other related costs that are incurred before acquisition that are
expected to have ongoing value to the project are capitalized if the acquisition of the property is probable. If the property is acquired, other
expenses related to the acquisition are recorded to project costs and other expenses. When it is probable that the property will not be acquired,
capitalized pre-acquisition costs are charged to expense.
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, commissions and benefits, real estate taxes and interest for the years ended December
31, 2020 and 2019:
(in thousands of dollars)
Development/Redevelopment:
Salaries and benefits
Real estate taxes
Interest
Leasing:
Salaries, commissions and benefits
For the Year Ended December 31,
2020
2019
$
$
$
$
428 $
285 $
2,192 $
1,332
1,057
7,725
150 $
568
F-16
Income Taxes
We have elected to qualify as a real estate investment trust, or REIT, under Sections 856-860 of the Internal Revenue Code of 1986, as
amended, and intend to remain so qualified.
In some instances, we follow methods of accounting for income tax purposes that differ from generally accepted accounting principles.
Earnings and profits, which determine the taxability of distributions to shareholders, will differ from net income or loss reported for financial
reporting purposes due to differences in cost basis, differences in the estimated useful lives used to compute depreciation, and differences
between the allocation of our net income or loss for financial reporting purposes and for tax reporting purposes.
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, 2020 and 2019, as no excise tax
was due in those years.
The per share distributions paid to common shareholders had the following components for the years ended December 31, 2020 and 2019:
Ordinary income
Non-dividend distribution
Per-share distributions
For the Year Ended December 31,
2020
2019
$
$
— $
0.23
0.23 $
—
0.84
0.84
The per share distributions paid to Series B, Series C and Series D preferred shareholders had the following components for the years ended
December 31, 2020 and 2019:
Series B Preferred Share Dividends
Ordinary income
Non-dividend distributions
Series C Preferred Share Dividends
Ordinary income
Non-dividend distributions
Series D Preferred Share Dividends
Ordinary income
Non-dividend distributions
For the Year Ended December 31,
2020
2019
$
$
$
$
$
$
— $
0.92
0.92 $
— $
0.90
0.90 $
— $
0.86
0.86 $
—
1.84
1.84
—
1.80
1.80
—
1.72
1.72
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 litigation 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 years ended December
31, 2020 or 2019. We had net deferred tax assets of $10.6 million and $14.3 million for the years ended December 31, 2020 and 2019,
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 subsidiaries.
F-17
Deferred Financing Costs
Deferred financing costs include fees and costs incurred to obtain financing. Such costs are amortized to interest expense over the terms of the
related indebtedness. Interest expense is determined in a manner that approximates the effective interest method in the case of costs associated
with mortgage loans, or on a straight line basis in the case of costs associated with our First Lien Revolving Facility and Term Loans (see note
4). Prior to the Financial Restructuring these costs were associated with our previous credit facility and term loan.
Derivatives
In the normal course of business, we are exposed to financial market risks, including interest rate risk on our interest-bearing liabilities. We
attempt to limit these risks by following established risk management policies, procedures and strategies, including the use of derivative
financial instruments. We do not use derivative financial instruments for trading or speculative purposes.
Currently, we use interest rate swaps to manage our interest rate risk. The valuation of these instruments is determined using widely accepted
valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the
contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs.
Derivative financial instruments are recorded on the consolidated balance sheet as assets or liabilities based on the fair value of the instrument.
Changes in the fair value of derivative financial instruments are recognized currently in earnings, unless the derivative financial instrument
meets the criteria for hedge accounting. If the derivative financial instruments meet the criteria for a cash flow hedge, the gains and losses in
the fair value of the instrument are deferred in other comprehensive (loss) income. Gains and losses on a cash flow hedge are reclassified into
earnings when the forecasted transaction affects earnings. A contract that is designated as a hedge of an anticipated transaction that is no longer
likely to occur is immediately recognized in earnings.
The anticipated transaction to be hedged must expose us to interest rate risk, and the hedging instrument must reduce the exposure and meet the
requirements for hedge accounting. We must formally designate the instrument as a hedge and document and assess the effectiveness of the
hedge at inception and on a quarterly basis. Interest rate hedges that are designated as cash flow hedges are designed to mitigate the risks
associated with future cash outflows on debt.
On December 10, 2020 as a result of the Financial Restructuring, we de-designated seven of our interest rate swaps which were previously
designated cash flow hedges against the 2018 Credit Facility and 7-year Term Loan, as the hedged forecasted transactions were no longer
probable to occur during the hedged time period due to the financial restructuring as described in Note 1. As such, the Company accelerated the
reclassification of a portion of the amounts in other comprehensive (loss) income to earnings which resulted in a loss of $2.8 million that was
recorded within interest expense, net in the consolidated statement of operations. Additionally, on December 10, 2020, the Company
voluntarily de-designated the remaining thirteen interest swaps that were also previously designated as cash flow hedges against the 2018
Credit Facility and 7-year Term Loan. Upon de-designation, the accumulated other comprehensive (loss) income balance of each of these
de-designated derivatives will be separately reclassified to earnings as the originally hedged forecasted transactions affect earnings. Through
December 10, 2020, the changes in fair value of the derivatives were recorded to accumulated other comprehensive (loss) income in the
consolidated balance sheets.
On December 22, 2020, we re-designated nine interest rate swaps with a notional amount of $375.0 million as cash flow hedges of interest rate
risk against the First Lien Term Loan Facility. These interest rate swaps qualified for hedge accounting treatment with changes in the fair value
of the derivatives recorded through accumulated other comprehensive (loss) income.
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.”
Derivatives not designated as hedges are not speculative and are also used to manage the Company’s exposure to interest rate movements and
other identified risks but do not meet the strict hedge accounting requirements. For the eleven remaining interest rate swaps that were not
re-designated subsequent to December 10, 2020, changes in the fair value of derivatives are recorded directly in earnings as interest expense in
the consolidated statement of operations.
We incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s
nonperformance 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 valuation 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, 2020, we have assessed the significance of the effect of the credit valuation adjustments on the overall valuation of our
derivative positions and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives. As
a result, we have determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
Operating Partnership Unit Redemptions
Shares issued upon redemption of OP Units are recorded at the book value of the OP Units surrendered.
F-18
Share-Based Compensation Expense
Share based payments to employees and non-employee trustees, including grants of restricted shares and share options, are valued at fair value
on the date of grant, and are expensed over the applicable vesting period.
Earnings Per Share
The difference between basic weighted average shares outstanding and diluted weighted average shares outstanding is the dilutive effect of
common share equivalents. Common share equivalents consist primarily of shares that are issued under employee share compensation
programs and outstanding share options whose exercise price is less than the average market price of our common shares during these periods.
New Accounting Developments
Lease accounting related
In April 2020, the Financial Accounting Standards Board (“FASB”) issued a Staff Question-and-Answer (“Q&A”) to clarify whether lease
concessions related to the effects of COVID-19 require the application of the lease modification guidance under ASU 2016-02, Leases (Topic
842) (“ASC 842”). Under ASC 842, we would have to determine, on a lease-by-lease basis, if a lease concession was the result of a new
arrangement reached with the tenant or an enforceable right and obligation within the existing lease. The Q&A allows for the bypass of a
lease-by-lease analysis and for us to elect to either apply the lease modification accounting framework or not, to all of the lease concessions we
make with similar characteristics and circumstances. The FASB staff suggested that, in the context of the COVID-19 crisis, under ASC 842,
leases where the total lease cash flows will remain substantially the same or less than those under the original lease contract after the
COVID-19 related effects, a company may choose to forgo the evaluation of the enforceable rights and obligations of the original lease
contract. Instead, the company would account for rent concessions, either (a) as if they are part of the enforceable rights and obligations under
the existing lease contract. Under this approach, the rent concession would be treated as a variable lease payment (negative), resulting in
negative variable rent in the affected period(s); or (b) as a lease modification. Under this approach, the resulting change in lease income will be
recognized over the remainder of the post-modification lease term.
We applied the practical expedient and recorded negative variable rent, when applicable. This applied where the total amended lease payments
were substantially the same as they would have been under the original lease terms. In addition, all abatements granted and recorded using this
method must be related to the impact of COVID-19. Abatements that did not meet the above COVID-19 criteria were treated as lease
modifications under ASC 842 with the abatement being amortized as a reduction to rental income over the post-modification lease term.
Other accounting
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on
Financial Reporting, which provides optional guidance for a limited period of time to ease the potential burden in accounting for (or
recognizing the effects of) reference rate reform on financial reporting for contracts, hedging relationships, and other transactions that reference
the London Interbank Offered Rate (“LIBOR”). Companies may generally elect to apply the guidance for periods that include March 12, 2020
through December 31, 2022. The Company is evaluating the anticipated impact of this standard on its condensed consolidated financial
statements as well as timing of adoption.
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.
Effective January 1, 2020, we adopted ASU 2016-13, Financial Instruments - Credit Losses (“ASC 326”), and subsequently issued amendments
to the initial and transitional guidance within ASU 2018-19, ASU 2019-04 and ASU 2019-05. ASU 2016-13 introduced 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. The adoption of this guidance did not have a material impact on our consolidated financial statements.
2. REAL ESTATE ACTIVITIES
Investments in real estate as of December 31, 2020 and 2019 were comprised of the following:
(in thousands of dollars)
Buildings, improvements and construction in progress
Land, including land held for development
Total investments in real estate
Accumulated depreciation
Net investments in real estate
December 31,
2020
2019
463,103
$ 2,757,234 $ 2,753,039
457,887
3,220,337 3,210,926
(1,308,427 ) (1,202,722 )
$ 1,911,910 $ 2,008,204
F-19
Impairment of Assets
During the year ended December 31, 2019, we recorded asset impairment losses of $5.0 million, which are recorded in “Impairment of assets”
in the consolidated statements of operations. We did not record any asset impairment losses during the year ended December 31, 2020. The
assets that incurred impairment losses and the amount of such losses are as follows:
(in thousands of dollars)
Gainesville land
Woodland Mall
Valley View Mall
Other
Total Impairment of Assets
Multiple outparcels and land parcels
For the Year Ended
December 31,
2019
$
$
1,464
2,098
1,408
47
5,017
In November 2019, we 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.
Gainesville development land parcel
We had an undeveloped land parcel in Gainesville, Florida. 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 aggregate 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.
Valley View Mall
In connection with the preparation of our annual 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
operating performance and general market conditions and were classified in Level 3 of the fair value hierarchy.
Wiregrass Mortgage loan receivable
In connection with the sale of three malls in 2016, we received a $17.0 million mortgage note secured by Wiregrass Commons Mall in Dothan,
Alabama. The note had a fixed interest rate of 6.0% and we recorded $0.2 million of interest income in the year ended December 31, 2019.
This mortgage note receivable was sold in February 2019 for $8.0 million having been written down to the expected sale proceeds in a prior
period.
F-20
Dispositions
Valley View Mall Derecognition
In August 2020, a court order assigned a receiver to operate Valley View Mall in La Crosse, Wisconsin on behalf of the lender of the mortgage
loan secured by the property. Although we have not yet conveyed the property because foreclosure proceedings are ongoing, we no longer
control or operate the property as a result of court order assigning the receiver. In September 2020, a court order was issued to conduct a
foreclosure sale of the property and as a result we have no further operating liabilities from the property. As a result of our loss of control of the
property, we derecognized the property and recorded an offsetting contract asset and recognized a gain on derecognition of property of
$8.1 million in the consolidated statement of operations for the year ended December 31, 2020. The contract asset is included in deferred costs
and other assets, net in the consolidated balance sheet as of December 31, 2020. The mortgage principal balance was $27.2 million at
December 31, 2020, which we will continue to recognize until the foreclosure process is completed. The derecognition of Valley View Mall
and its related assets were a non-cash conversion of assets, which had no impact on the Company’s cash flows.
Other Property Dispositions
During 2020, we entered into agreements of sale for five land parcels for anticipated multifamily development for an estimated total
consideration of $87.2 million and one land parcel for anticipated hotel development for an estimated total consideration of $2.5 million. These
agreements are subject to certain conditions and final closing of these sales transactions cannot be assured.
In December 2020, we completed the sale of land Sunrise Outparcel, LLC for consideration of $0.6 million. In connection with the sale we
recorded a gain on sale of $0.2 million.
In November 2019, we 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. In January 2020, the sale of the outparcel at Woodland Mall for total consideration of $5.1 million was completed
and in March 2020, the sale of two outparcels at Magnolia Mall for total consideration of $2.9 million was completed with a resulting gain on sale
of $1.9 million which was recorded in March 2020. In June 2020, we completed the sale of six outparcels at Magnolia Mall, Valley Mall and
Jacksonville Mall for total consideration of $14.4 million. In connection with these sales, we recorded a gain of $9.3 million. During June 2020,
the tenant of the remaining two outparcels subject to this agreement filed for bankruptcy. As a result, the agreement was amended to terminate the
sale of the final two outparcels.
In 2019, we entered into an agreement of sale with a buyer to sell an undeveloped land parcel located 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. As
a result of executing 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 consolidated balance sheet. In connection with this sale, we recorded a gain of $0.2 million.
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.
Development Activities
As of December 31, 2020 and 2019, we had capitalized amounts related to construction and development activities. The following table
summarizes certain capitalized construction and development information for our consolidated properties as of December 31, 2020 and 2019:
(in thousands of dollars)
Construction in progress
Land held for development
Deferred costs and other assets
Total capitalized construction and development activities
December 31,
2020
$
$
46,285 $
5,516
4,197
55,998 $
2019
106,011
5,881
7,274
119,166
F-21
3. INVESTMENTS IN PARTNERSHIPS
The following table presents summarized financial information of our equity investments in unconsolidated partnerships as of December 31,
2020 and 2019:
(in thousands of dollars)
ASSETS:
Investments in real estate, at cost:
Operating properties
Construction in progress
Total investments in real estate
Accumulated depreciation
Net investments in real estate
Cash and cash equivalents
Deferred costs and other assets, net
Total assets
LIABILITIES AND PARTNERS’ INVESTMENT:
Mortgage loans payable, net
FDP Term Loan, net
Partnership Loan
Other liabilities
Total liabilities
Net investment
Partners’ share
PREIT’s share
Excess investment (1)
Net investments and advances
Investment in partnerships, at equity
Distributions in excess of partnership investments
Net investments and advances
December 31,
2020
2019
$
824,328 $
883,530
251,029
20,632
844,960 1,134,559
(229,877 )
(224,641 )
904,682
620,319
34,766
28,060
43,476
161,465
982,924
809,844
491,119
201,000
100,000
132,715
924,834
(114,990 )
(59,080 )
(55,910 )
6,390
(49,520 ) $
27,066 $
(76,586 )
(49,520 ) $
499,057
299,091
—
79,166
877,314
105,610
50,997
54,613
17,464
72,077
159,993
(87,916 )
72,077
$
$
$
(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 (loss) income of partnerships.”
We record distributions from our equity investments using the nature of the distribution approach.
The following table summarizes our share of equity in (loss) income of partnerships for the years ended December 31, 2020 and 2019:
(in thousands of dollars)
Real estate revenue
Expenses:
Property operating and other expenses
Interest expense
Depreciation and amortization
Total expenses
Net (loss) income
Less: Partners’ share
PREIT’s share
Amortization of excess investment
Equity in (loss) income of partnerships
For the Year Ended December 31,
2020
2019
$
101,762 $
99,580
(48,285 )
(27,665 )
(34,947 )
(110,897 )
(9,135 )
4,186
(4,949 )
(595 )
(5,544 ) $
(34,955 )
(23,272 )
(21,942 )
(80,169 )
19,411
(10,768 )
8,643
(354 )
8,289
$
F-22
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.
Fashion District Philadelphia
FDP Loan Agreement
PM Gallery LP, a Delaware limited partnership and joint venture entity owned indirectly by us and The Macerich Company (“Macerich”),
previously entered into a $250.0 million term loan in January 2018 (as amended in July 2019 to increase the total maximum potential
borrowings to $350.0 million) to fund the ongoing redevelopment of Fashion District Philadelphia and to repay capital contributions to the
venture previously made by the partners. 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. On December 10, 2020, PM Gallery LP, together with certain other subsidiaries owned
indirectly by us and Macerich (including the fee and leasehold owners of the properties that are part of the Fashion District Philadelphia
project), entered into an Amended and Restated Term Loan Agreement (the “FDP Loan Agreement”). In connection with the execution of the
FDP Loan Agreement, a $100.0 million principal payment was made (and funded indirectly by Macerich, the “Partnership Loan”) to pay down
the existing loan, reducing the outstanding principal under the FDP Loan Agreement from $301.0 million to $201.0 million. The joint venture
must repay the Partnership Loan plus 15% accrued interest to the Macerich lender prior to the resumption of 50/50 cash distributions to the
Company and its joint venture partner.
The FDP Loan Agreement provides for (i) a maturity date of January 22, 2023, with the potential for a one-year extension upon the borrowers’
satisfaction of certain conditions, (ii) an interest rate at the borrowers’ option for each advance of either (A) the Base Rate (defined as the
highest of (a) the Prime Rate, (b) the Federal Funds Rate plus 0.50%, and (c) the LIBOR Market Index Rate plus 1.00%) plus 2.50% or
(B) LIBOR for the applicable period plus 3.50%, (iii) a full recourse guarantee of 50% of the borrowers’ obligations by PREIT Associates,
L.P., on a several basis, (iv) a full recourse guarantee of certain of the borrowers’ obligations by The Macerich Partnership, L.P., up to a
maximum of $50.0 million, on a several basis, (v) a pledge of the equity interests of certain indirect subsidiaries of PREIT and Macerich, as
well as of PREIT-RUBIN, Inc. and one of its subsidiaries, that have a direct or indirect ownership interest in the borrowers, (vi) a non-recourse
carve-out guaranty and a hazardous materials indemnity by each of PREIT Associates, L.P. and The Macerich Partnership, L.P., and (vii)
mortgages of the borrowers’ fee and leasehold interests in the properties that are part of the Fashion District Philadelphia project and certain
other properties. The FDP Loan Agreement contains certain covenants typical for loans of its type.
Joint Venture
In connection with the execution of the FDP Loan Agreement, the governing structure of PM Gallery LP was modified such that, effective as
of January 1, 2021, Macerich is responsible for the entity’s operations and, subject to limited exceptions, controls major decisions. The
Company considered the changes to the governing structure of PM Gallery LP and determined the investment would qualify as a variable
interest entity and would continue to be accounted for under the equity method of accounting.
The table below includes the total assets and liabilities of the unconsolidated joint venture as of the December 10, 2020 remeasurement date.
Our maximum exposure to losses indicated below is limited to the extent of our investment, which is a 50% ownership.
Unconsolidated joint venture assets
Unconsolidated joint venture liabilities
Unconsolidated joint venture net assets
Equity interest in joint venture (based on 50% ownership)
Equity interests on the consolidated balance sheets (1)
Maximum risk of loss
$
$
$
$
$
401,655
363,393
38,262
19,131
16,261
16,261
(1) Amount shown is net of a 15% discount for non-controlling interest ownership
In connection with the December 10, 2020 remeasurement of assets of FDP, the joint venture recognized a loss on remeasurement of assets of
which our share was $145.7 million and we recorded $2.8 million of other than temporary impairment on the fair value of our non-controlling
ownership interest in the joint venture. These amounts are included in loss on remeasurement of assets by equity method investee in our
consolidated statement of operations.
F-23
Mortgage Loans of Unconsolidated Properties
Mortgage loans, which are secured by seven of the unconsolidated properties (including one property under development), are due in
installments over various terms extending to the year 2027. Five of the mortgage loans bear interest at a fixed interest rate and two of the
mortgage loans bear interest at a variable interest rate. The balances of the fixed interest rate mortgage loans have interest rates that range from
4.06% to 5.56% and had a weighted average interest rate of 4.55% at December 31, 2020. The balances of the variable interest rate mortgage
loans have interest rates that range from 1.66% to 3.04% and had a weighted average interest rate of 1.83% at December 31, 2020. The
weighted average interest rate of all unconsolidated mortgage loans was 4.25% at December 31, 2020. The liability under each mortgage loan
is limited to the unconsolidated partnership that owns the particular property. Our proportionate share, based on our respective partnership
interest, of principal payments due in the next five years and thereafter is as follows:
(in thousands of dollars)
For the Year Ending December 31,
2021
2022
2023
2024
2025
2026 and thereafter
Total principal payments
Less: Unamortized debt issuance costs
Carrying value of mortgage notes payable
Company’s Proportionate Share
Balloon
Payments
Total
$
Principal
Amortization
4,216 $
3,738
3,620
2,886
2,828
4,386
21,674 $
$
41,170 $
21,500
33,502
—
26,299
79,788
202,259 $
45,386 $
25,238
37,122
2,886
29,127
84,174
223,933
$
Property
Total
92,302
93,476
74,244
5,772
58,253
168,348
492,395
1,276
491,119
Mortgage Loan Activity
During the year ended December 31, 2020, we executed forbearance and loan modification agreements for Metroplex and Springfield Mall.
These arrangements allowed us to defer principal payments, and in some cases interest as well, between May and August 2020 depending on
the terms of each agreement. At the end of the deferral period, repayment of deferred amounts spanned four to six months. The repayment
periods ranged from August 2020 through February 2021 depending on the terms of the specific agreements.
4. FINANCING ACTIVITY
Credit Agreements
We have entered into two secured credit agreements (collectively, as amended, the “Credit Agreements”): (a) an Amended and Restated First
Lien Credit Agreement (the “First Lien Credit Agreement”) with Wells Fargo Bank, National Association and the other financial institutions
signatory thereto and their assignees, for secured loan facilities consisting of: (i) a secured first lien revolving credit facility allowing for
borrowings up to $130.0 million, including a sub-facility for letters of credit to be issued thereunder in an aggregate stated amount of up to $10.0
million (collectively, the “First Lien Revolving Facility”), and (ii) a $384.5 million secured first lien term loan facility (the “First Lien Term Loan
Facility”), and (b) a Second Lien Credit Agreement (the “Second Lien Credit Agreement”) with Wells Fargo Bank, National Association and the
other financial institutions signatory thereto and their assignees for a $535.2 million secured second lien term loan facility (the “Second Lien
Term Loan Facility”). The Credit Agreements mature in December 2022. The First Lien Term Loan Facility and the Second Lien Term Loan
Facility are collectively referred to as the “Term Loans.” The Credit Agreements refinanced our previously existing secured term loan under the
Credit Agreement dated as of August 11, 2020 (as amended, the “Bridge Credit Agreement”), our Seven-Year Term Loan Agreement entered into
on January 8, 2014 (as amended, the “7-Year Term Loan”), and our 2018 Amended and Restated Credit Agreement entered into on May 24, 2018
(as amended, the “2018 Credit Agreement”). Upon our entry into the Credit Agreements, the Bridge Credit Agreement, the 7-Year Term Loan
and the 2018 Credit Agreement were cancelled.
As of December 31, 2020, we had borrowed $922.1 million under the Term Loans and $54.8 million under the First Lien Revolving Facility. The
carrying value of the Term Loans on our consolidated balance sheet as of December 31, 2020 is net of $13.6 million of unamortized debt issuance
costs. The maximum amount that was available to us under the First Lien Revolving Facility as of December 31, 2020 was $75.2 million.
F-24
Interest expense and deferred financing fee amortization related to the Credit Agreements, 2018 Credit Agreement, 7-Year Term Loan and the
Bridge Credit Agreement for the years ended December 31, 2020 and 2019 were as follows:
(in thousands of dollars)
Revolving Facilities:
Interest expense (1)
Deferred financing amortization (2)
Term Loans:
Interest expense (3)
Deferred financing amortization (4)
For the Year Ended
December 31,
2020
2019
$10,713
1,112
32,167
1,907
$7,526
1,097
20,922
760
(1) $0.1 million of 2020 expense applied to the First Lien Revolving Facility and the remaining expense applied to the Restructured Revolver.
(2) $0.1 million of 2020 amortization applied to the First Lien Revolving Facility and the remaining amortization applied to the Restructured
Revolver.
(3) $4.3 million of 2020 expense applied to the Term Loans, of which $2.8 million was for the Second Lien Term Loan Facility and was not
paid in cash, but capitalized to the principal balance of the loan. $3.2 million applied to the Bridge Credit Agreement with the remaining
expense applied to the Restructured Term Loans.
(4) $0.4 million of 2020 amortization applied to the Term Loans and $0.8 million applied to the Bridge Credit Agreement with the remaining
expense applied to the Restructured Term Loans.
Our obligations under the Credit Agreements are guaranteed by certain of our subsidiaries. Our obligations under the Credit Agreements and the
guaranties are secured by mortgages and deeds of trust on a portfolio of 12 of our subsidiaries’ properties, including nine malls and three
additional parcels. The obligations are further secured by a lien on substantially all of our personal property pursuant to collateral agreements and
a pledge of substantially all of the equity interests held by us and the guarantors, pursuant to pledge agreements, in each case subject to limited
exceptions.
The Credit Agreements each provide for a two-year maturity of December 2022 (the “Maturity Date”), subject to a one-year extension to
December 2023 at the borrowers’ option, subject to (i) minimum liquidity of $35.0 million, (ii) a minimum corporate debt yield of 8.0%, (iii) a
maximum loan-to-value ratio of 105% for the total first lien and second lien loans and letters of credit and the Borrowing Base Properties as
determined by an appraisal and (iv) no default or event of default existing and our representations and warranties being true in all material
respects. The loans under the Credit Agreements are repayable in full at maturity, subject to mandatory prepayment provisions in the event of
certain events including asset sales, incurrence of indebtedness, issuances of equity and receipt of casualty insurance proceeds. The terms of our
Credit Agreements place restrictions on, among other things, and subject to certain exceptions, our ability to make certain restricted payments
(including payments of dividends), make certain types of investments and acquisitions, issue redeemable securities, incur additional
indebtedness, incur liens on our assets, enter into agreements with a negative pledge, make certain intercompany transfers, merge, consolidate, or
sell our assets or the equity interests of our subsidiaries, amend our organizational documents or material contracts, enter into certain transactions
with affiliates, or enter into derivatives contracts. Additionally, if we receive net cash proceeds from certain capital events (including equity
issuances), we are required to prepay loans under our Credit Agreements. In addition, the Credit Agreements contain cross-default provisions that
trigger an event of default if we fail to make certain payments or otherwise fail to comply with our obligations with respect to certain of our other
indebtedness.
In connection with entering into the Credit Agreements, the Company incurred $26.8 million in expenses, $5.6 million of which were incurred
prior to November 1, 2020 and were included in other assets in the consolidated balance sheet on the Effective Date. Of the $26.8 million, $3.8
million was directly attributable to the Company’s bankruptcy proceedings and were therefore classified as reorganization expenses in the
consolidated statement of operations. The Company capitalized $14.1 million of the total expenses as deferred financing costs and allocated those
costs between the First Lien Revolving Facility, the First Lien Term Loan Facility and Second Lien Term Loan Facility. The Company expensed
$8.0 million of the total costs, which are classified within general and administrative expenses within the consolidated statement of operations for
the year ended December 31, 2020. The Company classified a portion of the costs within loss on extinguishment of debt of $0.9 million and the
Company accelerated the amortization of a portion of its previously recognized deferred financing fees, which resulted in $0.6 million loss on
extinguishment of debt for the year ended December 31, 2020.
First Lien Credit Agreement
Amounts borrowed under the First Lien Credit Agreement may be either Base Rate Loans or LIBOR Loans. Base Rate Loans bear interest at
the highest of (a) the Prime Rate, (b) the Federal Funds Rate plus 0.50% and (c) the LIBOR Market Index Rate plus 1.0%, provided that the
Base Rate will not be less than 1.50% per annum, in each case plus (w) for revolving loans, 2.50% per annum, and (x) for term loans, 4.74%
per annum. LIBOR Loans bear interest at LIBOR plus (y) for revolving loans, 3.50% per annum, and (z) for term loans, 5.74% per annum, in
each case, provided that LIBOR will not be less than 0.50% per annum. Interest is due to be paid in cash on the last day of each applicable
interest period (with rolling 30-day interest periods) and on the Maturity Date. We must pay certain fees to the administrative agent for the
account of the lenders in connection with the First Lien Credit Agreement, including an unused fee for the account of the revolving lenders,
which will accrue (i) 0.35% per annum on the daily amount of the unused revolving commitments when that amount is greater than or equal to
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50% of the aggregate amount of revolving commitments, and (ii) 0.25% when that amount is less than 50% of the aggregate amount of
revolving commitments. Accrued and unpaid unused fees will be payable quarterly in arrears during the term of the First Lien Credit
Agreement and on the Revolving Termination Date (or any earlier date of termination of the revolving commitments or reduction of the
revolving commitments to zero).
Letters of credit and the proceeds of revolving loans may be used (i) to refinance existing indebtedness under the Bridge Credit Agreement, (ii)
for working capital and general corporate purposes (subject to certain exceptions set forth in the First Lien Credit Agreement, including
limitations on investments in non-Borrowing Base Properties), and (iii) to fund professional fee payments and other fees and expenses subject
to the provisions of the Plan and related confirmation order and for other uses permitted by the provisions of the First Lien Credit Agreement,
Plan and confirmation order, in each case consistent with an approved annual business plan. The proceeds of term loans may only be used to
refinance existing indebtedness under the 2018 Credit Agreement and the 7-Year Term Loan. We may terminate or reduce the amount of the
revolving commitments at any time and from time to time without penalty or premium, subject to the terms of the First Lien Credit Agreement.
The First Lien Credit Agreement contains, among other restrictions, certain additional affirmative and negative covenants and other terms, many
of which substantially align with those in the Second Lien Credit Agreement and are summarized below under “Similar Terms of the Credit
Agreements.”
Second Lien Credit Agreement
Amounts borrowed under the Second Lien Credit Agreement may be either Base Rate Loans or LIBOR Loans. Base Rate Loans bear interest at
the highest of (a) the Prime Rate, (b) the Federal Funds Rate plus 0.50% and (c) the LIBOR Market Index Rate plus 1.0%, provided that the
Base Rate will not be less than 1.50% per annum, in each case plus 7.00% per annum. LIBOR Loans bear interest at LIBOR plus 8.00% per
annum, provided that LIBOR will not be less than 0.50% per annum. Interest is due to be paid in kind on the last day of each applicable interest
period (with rolling 30-day interest periods) by adding the accrued and unpaid amount thereof to the principal balance of the loans under the
Second Lien Credit Agreement and then accruing interest on the increased principal amount (provided that after the discharge of our Senior
Debt Obligations, interest will be paid in cash). We must pay certain fees to the administrative agent for the account of the lenders in
connection with the Second Lien Credit Agreement.
The proceeds of loans under the Second Lien Credit Agreement may only be used to refinance existing indebtedness under the 2018 Credit
Agreement and the 7-Year Term Loan.
The Second Lien Credit Agreement contains, among other restrictions, certain additional affirmative and negative covenants and other terms,
many of which substantially align with those in the First Lien Credit Agreement and are summarized below under “Similar Terms of the Credit
Agreements.”
On February 8, 2021, the Company entered into the first amendment to the Second Lien Credit Agreement (“First Amendment”). The First
Amendment provided for elimination of approximately $5.3 million of the disputed default interest that was capitalized into the principal balance
of the Second Lien Term Loan Facility on the effective date thereof, reducing the outstanding principal amount of loans outstanding under the
Second Lien Credit Agreement, retroactively, as of December 10, 2020, to $535.2 million. The First Amendment also eliminated the disputed
PIK interest that was capitalized through the date of the amendment.
Similar Terms of the Credit Agreements
Each of the Credit Agreements contains certain affirmative and negative covenants and other provisions, which substantially align with those
contained in the other Credit Agreements, and which are described in detail below.
Covenants
Each of the Credit Agreements contains, among other restrictions, certain affirmative and negative covenants, including, without limitation,
requirements that we:
• maintain liquidity of at least $25.0 million, to be comprised of unrestricted cash held in certain deposit accounts subject to control
agreements, up to $5.0 million held in a certain other deposit account excluded from the collateral, the unused revolving loan commitments
under the First Lien Credit Agreement (to the extent available to be drawn), and amounts on deposit in a designated collateral proceeds
account and amounts on deposit in a cash collateral account;
• maintain a minimum senior debt yield of 11.35% from and after June 30, 2021;
• maintain a minimum corporate debt yield of (a) 6.50% from June 30, 2021 through and including September 30, 2021 and (b) 7.25% from
•
and after October 1, 2021;
provide to the administrative agent, among other things, PREIT and its subsidiaries’ quarterly and annual financial statements, annual
budget, reports on projected sources and uses of cash, and an updated annual business plan, as well as quarterly and annual operating
statements, rent rolls, and certain other collections and tenant reports and information as the administrative agent may reasonably request
with respect to each Borrowing Base Property;
• maintain PREIT’s status as a REIT;
•
•
use commercially reasonable efforts to obtain subordination, non-disturbance and attornment agreements from each tenant under certain
Major Leases as well as ground lease estoppel certificates from each ground lessor of a Borrowing Base Property;
comply with the requirements of the various security documents and, at the administrative agent’s request, promptly notify the
administrative agent of any acquisition of any owned real property that is not subject to a mortgage and grant liens on such real property to
secure our obligations under the applicable Credit Agreement;
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•
•
not amend any existing sale agreements with respect to Borrowing Base Properties to result in a reduction of cash consideration by 20% or
more; and
not retain more than $6.5 million of cash in property-level accounts held by our subsidiaries that are owners of real property (subject to
certain exceptions).
Each of the Credit Agreements also limits our ability, subject to certain exceptions, to make certain restricted payments (including payments of
dividends and voluntary prepayments of certain indebtedness which includes, with respect to the First Lien Credit Agreement, voluntary
prepayments under the Second Lien Credit Agreement), make certain types of investments and acquisitions, issue redeemable securities, incur
additional indebtedness, incur liens on our assets, enter into agreements with a negative pledge, make certain intercompany transfers, merge,
consolidate or sell all or substantially all our assets or the equity interests of our subsidiaries, amend our organizational documents or material
contracts, enter into transactions with affiliates, or enter into derivatives contracts. We are also prohibited from selling certain properties unless
certain conditions are satisfied with respect to the terms of the sale agreement for such property or, in the case of Borrowing Base Properties,
payment of certain release prices.
The First Lien Credit Agreement and, after our Senior Debt Obligations are discharged, the Second Lien Credit Agreement, each prohibit us
from (i) entering into Major Leases, (ii) assigning leases, (iii) discounting any rent under leases where the leased premises is at least 7,500
square feet at a Borrowing Base Property and the discounted amount is more than $750,000 and more than 25% of the aggregate contractual
base rent payable over the initial term (not including any extension options), (iv) collecting rent in advance, (v) terminating or modifying the
terms of any Major Lease or releasing or discharging tenants from any obligations thereunder, (vi) consenting to a tenant’s assignment or
subletting of a Major Lease, or (vii) subordinating any lease to any other deed of trust, mortgage, deed to secure debt or encumbrance, other
than the mortgages already encumbering the applicable Borrowing Base Property and the mortgages entered into in connection with the other
Credit Agreement. Under the First Lien Credit Agreement and, under the Second Lien Credit Agreement after the First Lien Termination Date,
any amounts equal to or greater than $2.5 million but less than $3.5 million received by or on behalf of a guarantor in consideration of any
termination or modification of a lease (or the release or discharge of a tenant) are subject to restrictions on use, and such amounts that are equal
to or greater than $3.5 million must be applied to reduce our outstanding obligations under the applicable Credit Agreement.
As of December 31, 2020, we were in compliance with all financial covenants under the Credit Agreements, several of which only come into
effect on June 30, 2021.
Voluntary and Mandatory Prepayments
Subject to certain conditions, we may prepay loans under the First Lien Credit Agreement, and under the Second Lien Credit Agreement after
the First Lien Termination Date, without premium or penalty. Under the First Lien Credit Agreement, if at any time the aggregate principal
amount of all outstanding revolving loans, together with the aggregate amount of all letter of credit liabilities, exceeds the aggregate amount of
the revolving commitments, we must make a payment of that excess amount. Under the First Lien Credit Agreement, at any time, and under the
Second Lien Credit Agreement, at any time after the First Lien Termination Date, if we receive net cash proceeds from certain capital events,
subject to certain exceptions, we must prepay loans under the applicable Credit Agreement (and under the First Lien Credit Agreement, we
must either prepay loans or cash collateralize the letter of credit liabilities or specified derivatives obligations, as applicable) as follows:
•
•
in the event of any debt issuance, in an amount equal to 100% of net cash proceeds;
in the event of any equity issuance, in an amount equal to 50% of net cash proceeds (with the other 50% of such net cash proceeds required
to prepay the loans (under the First Lien Credit Agreement, the revolving loans) or be deposited into a designated collateral proceeds
account);
in the event of any asset disposition (other than an asset disposition of all or any portion of a Borrowing Base Property), in an amount
equal to 70% of net cash proceeds (with the other 30% of net cash proceeds required to either prepay the loans (under the First Lien Credit
Agreement, the revolving loans) or be deposited into a designated collateral proceeds account);
in the event of any insurance and condemnation event with respect to collateral that is not a Borrowing Base Property, 100% of net cash
proceeds, except for such amounts that we have elected to reinvest for reconstruction of property in accordance with the terms of the
applicable Credit Agreement; and
in the event of any insurance and condemnation event at a Borrowing Base Property, all net cash proceeds at the request of the
administrative agent, provided that the administrative agent is required to release all or a portion of the funds to us for specified uses
depending on the amount of net cash proceeds.
•
•
•
In the event of certain non-guarantor prepayment events resulting in the receipt of net cash proceeds by a borrower or guarantor of our
non-guarantor subsidiaries or joint ventures, those amounts are required to prepay loans (and under the First Lien Credit Agreement, prepay
loans or be used to cash collateralize the letter of credit liabilities or specified derivatives obligations, as applicable) as follows (subject to
certain exceptions): (a) 100% of net cash proceeds received if the event constitutes a debt issuance, (b) 50% of net cash proceeds received if the
event constitutes an equity issuance, (c) 100% of net cash proceeds received if the event constitutes an insurance condemnation event, and (d)
70% of net cash proceeds received if the event constitutes an asset disposition, provided, in each case (subject to certain exceptions), that the
net cash proceeds received and not otherwise required to prepay loans must either prepay loans (under the First Lien Credit Agreement, the
revolving loans) or be deposited into a designated collateral proceeds account.
In the event we receive net cash proceeds from an asset disposition of all or any portion of a Borrowing Base Property in accordance with the
terms of the applicable Credit Agreement (each of which allows for the release of certain properties from the liens created by the security
documents applicable thereto upon our request and subject to our satisfaction of certain specified conditions with respect to such property),
such net proceeds must prepay the loans as follows (subject to certain exceptions):
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•
•
•
in the event a Borrowing Base Property is released, the greater of (x) 110% of the property’s closing date appraised value, as reduced by
any prepayment made in connection with the release, and (y) 100% of the net cash proceeds received from the sale of the property;
in the event an income producing parcel is released, 100% of net cash proceeds; and
in the event a non-income producing parcel is released, 70% of net cash proceeds (with the other 30% required to either (i) prepay loans
(under the First Lien Credit Agreement, the revolving loans) or (ii) be deposited into a designated collateral proceeds account).
Under the Second Lien Credit Agreement, any net cash proceeds applied to the obligations under the First Lien Credit Agreement or to cash
collateralize certain letter of credit liabilities or specified derivatives obligations under the First Lien Credit Agreement or deposited into the
designated collateral proceeds account will reduce, on a dollar-for-dollar basis, any net cash proceeds required to be applied as a principal
prepayment of the loans under the Second Lien Credit Agreement. In the event net cash proceeds are applied under the First Lien Credit
Agreement resulting in its termination and the automatic release of the security interest in the collateral thereunder, to the extent any excess net
cash proceeds remain, 100% of such remaining proceeds are required to be applied to the loans under the Second Lien Credit Agreement.
We may request disbursements from the designated collateral proceeds account subject to the same terms and conditions applicable to a
disbursement of loans (or in the case of the First Lien Credit Agreement, revolving loans), the proceeds of which must be used in a manner
consistent with an approved annual business plan. Under the First Lien Credit Agreement, no revolving loans will be disbursed at any time that
designated collateral proceeds are on deposit and we may elect to apply designated collateral proceeds as a principal prepayment of the
revolving loans at any time. Under the Second Lien Credit Agreement, amounts in the designated collateral proceeds account in accordance
with the First Lien Credit Agreement are held by the administrative agent as additional collateral securing our obligations under the Second
Lien Credit Agreement.
Under the First Lien Credit Agreement, we have pledged and granted to the administrative agent an additional security interest in a letter of
credit collateral account.
Additionally, under the First Lien Credit Agreement, in the event our senior debt yield is less than 12.06% for the calendar quarter ending June
30, 2021 or any calendar quarter thereafter, concurrently with the delivery of a compliance certificate and thereafter once per calendar month
until the ratio is equal to or greater than 12.06% for a subsequent quarter (as shown in a compliance certificate), we must either make
prepayments, or deposits into a cash collateral account, of all excess cash flow generated during the month preceding such required deposit
date. So long as no default or event of default exists, in the event the excess cash flow for any given month is negative and would cause our
liquidity to fall below $12.5 million (provided that we deliver evidence of the operating shortfall deficiency to the administrative agent), we
may request a disbursement of funds on deposit in the cash collateral account to fund or reimburse us for such deficiency. We may also request
disbursement of the funds in the cash collateral account following the termination of a cash sweep period, subject to certain conditions.
Under the First Lien Credit Agreement, if at any time, and under the Second Lien Credit Agreement, if at any time after the First Lien
Termination Date, our unrestricted cash or cash equivalents exceed $40.0 million for five consecutive days, we must make prepayments of the
amount in excess of $40.0 million. Under the First Lien Credit Agreement, those prepayments will be applied first to the revolving loans until
the principal balance is reduced to zero, then to the term loans.
Events of Default
In addition to customary events of default including, among other things, non-payment or non-performance under each of the Credit
Agreements, events of default include our (i) failure to pay Material Indebtedness (defined as indebtedness with an aggregate outstanding
principal amount of $25.0 million or more, or $250.0 million in the case of Nonrecourse Indebtedness), and (ii) the acceleration of such
Material Indebtedness (or the occurrence of any event that would permit the holders of such Material Indebtedness to accelerate such Material
Indebtedness), in each case, provided that no event of default will result from a default, event of default, acceleration or other action in
connection with a guaranty by a loan party of indebtedness secured by a mortgage on a non-Borrowing Base Property until the earliest to occur
of (x) commencement of a related court proceeding, (y) in the event such loan party has agreed that an event permitting acceleration of the
guaranty has occurred, 45 days following the expiration or termination of a related forbearance agreement, subject to certain conditions, or (z)
such loan party makes or agrees to make a payment in satisfaction of any claim made on the guaranty in connection with the event of default,
acceleration or other action. The First Lien Credit Agreement also provides that the non-subordination of second priority liens is an event of
default.
Upon the occurrence of an event of default (except with respect to bankruptcy as described in the next sentence), the lenders may declare all of
the obligations in connection with the applicable Credit Agreement (including an amount equal to the outstanding letters of credit under the
First Lien Credit Agreement) immediately due and payable and may terminate the lenders’ commitments thereunder (including the obligation
of the issuing banks to issue letters of credit under the First Lien Credit Agreement). Upon the occurrence of a voluntary or involuntary
bankruptcy proceeding, all outstanding amounts (including an amount equal to the outstanding letters of credit under the First Lien Credit
Agreement) would automatically become immediately due and payable and the lenders’ commitments under the applicable Credit Agreement
(including the obligation of the issuing banks to issue letters of credit under the First Lien Credit Agreement) would automatically terminate. The
First Lien Credit Agreement also provides certain specified derivatives providers with specific remedies with respect to specified derivatives
contracts thereunder.
Restructured Credit Agreements
Prior to completion of the Financial Restructuring, we had entered into three credit agreements: (1) the 2018 Credit Agreement, which included
(a) the $375.0 million 2018 Revolving Facility (“Restructured Revolver”), and (b) the $300.0 million 2018 Term Loan Facility, (2) the
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$250.0 million 2014 7-Year Term Loan, and (3) the Bridge Credit Agreement (collectively the “Restructured Credit Agreements”). Throughout
2020, we entered into various amendments to the Restructured Credit Agreements. On August 11, 2020, we entered into the Bridge Credit
Agreement which provided for up to $30.0 million of additional borrowings and an original maturity date of September 30, 2020. On September
30, 2020, we amended our Restructured Credit Agreements to, among other things, extend the maturity date of the Bridge Credit Agreement
until October 31, 2020 and to provide for the ability to request additional commitments of up to $25.0 million under our Bridge Credit
Agreement. The September 2020 amendments also eliminated the minimum liquidity requirement under each of the Restructured Credit
Agreements. We also amended the Bridge Credit Agreement on October 16, 2020 to, among other things, increase the aggregate amount of
commitments under the Bridge Credit Agreement by $25.0 million.
As of November 1, 2020, we had borrowed $590.0 million available under the Restructured Credit Agreements, including $55.0 million under
our Bridge Credit Agreement and the full $375.0 million under the 2018 Revolving Facility.
Amounts borrowed under the 2018 Credit Agreement or the 7-Year Term Loan Agreements, which could be either LIBOR Loans or Base Rate
Loans, bore interest at the rate specified below per annum, depending on our leverage. The applicable interest rates for amounts borrowed under
our Bridge Credit Agreement are described further below.
During the period for which certain of the financial covenants under the 2018 Credit Agreement and 2018 Term Loan Facility were suspended
(the “Suspension Period”), the Applicable Margin was determined based on the Level 5 Ratio of Total Liabilities to Gross Asset Value (listed
below). In determining our leverage (the ratio of Total Liabilities to Gross Asset Value), the capitalization rate used to calculate Gross Asset
Value was (a) 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. Prior to July 27, 2020 amendment, the 2018 Revolving Facility was subject to a facility fee, which
varied based on leverage and was 0.35% as of July 27, 2020 and was recorded in interest expense in the consolidated statements of operations.
Subsequent to July 27, 2020 the 2018 Revolving Facility was no longer subject to a facility fee.
The Restructured Credit Agreements contained certain affirmative and negative covenants, several of which were amended on March 30, 2020.
Pursuant to the July 2020 amendments, some of those covenants were suspended for the duration of the Suspension Period, as extended by the
September 30, 2020 amendments. As such, the Restructured Credit Agreements, as amended, restricted our ability to declare and pay dividends
on our common shares and preferred shares for the duration of the Suspension Period. The filing of the chapter 11 cases constituted an event of
default under the Restructured Credit Agreements.
We were permitted to prepay the amounts due under the Restructured Credit Agreements at any time without premium or penalty, subject to
reimbursement obligations for the lenders’ breakage costs for LIBOR borrowings. We were required to make prepayments under the 2018 Term
Loan Facility in an amount equal to 54.55% of any net cash proceeds received from certain capital events (provided that any net cash proceeds
from capital events in excess of $150 million were required to be applied 50% toward repayment of outstanding amounts under the 2018
Revolving Facility with 54.55% of the remaining 50% applied to prepay amounts under the 2018 Term Loan Facility), subject to certain
exceptions. If we had more than $50.0 million of unrestricted cash on our balance sheet for five consecutive days, we were required to prepay the
2018 Revolving Facility with our excess cash above $50.0 million. We were also required to make prepayments under the 7-Year Term Loan in
an amount equal to 45.45% of any net cash proceeds received from certain capital events (provided that any net cash proceeds from capital events
in excess of $150 million were required to be applied 50% toward repayment of outstanding amounts under the 2018 Revolving Facility with
45.45% of the remaining 50% applied to prepay the amounts outstanding under the 7-Year Term Loan), subject to certain exceptions. We also
made monthly principal amortization payments of $1.09 million of the term loan under the 2018 Credit Agreement and of $909 thousand of the
term loan under the 7-Year Term Loan, in each case for the months of April, May, June, July, August and September of 2020.
The Company’s obligations under the Bridge Credit Agreement and related guaranty were secured by mortgages and deeds of trust on a portfolio
of 12 of our subsidiaries’ properties, including nine malls and three additional parcels. The obligations were further secured by a pledge of
substantially all of the personal property of the Company and the guarantors pursuant to a collateral agreement and a pledge of substantially all of
the equity interests of the guarantors (subject to limited exceptions) pursuant to a pledge agreement. The initial maturity date of the Bridge Credit
Agreement was the earlier of (a) September 30, 2020, or (b) the date the obligations under the Bridge Facility were accelerated. On September 30,
2020, the maturity date was extended to October 31, 2020.
Amounts borrowed under the Bridge Credit Agreement were either Base Rate Loans or LIBOR Loans. Base Rate Loans bore interest at the
highest of (a) the Prime Rate, (b) the Federal Funds Rate plus 0.50% and (c) the LIBOR Market Index Rate plus 1.0%, provided that the Base
Rate would not be less than 2.00% per annum, in each case plus 7.00% per annum. LIBOR Loans bore interest at LIBOR plus 8.00% per annum.
After the initial borrowing and prior to the October 2020 amendment, the Company was only permitted to draw when its unrestricted cash and
cash equivalents were equal to or less than $12.5 million, and subsequent borrowings were determined according to a multiple of amounts set
forth in the loan budget. Pursuant to the October 2020 amendment to the Bridge Credit Agreement, the commitments under the Bridge Credit
Agreement were increased by $25.0 million and the entire $25.0 million was drawn and deposited into a cash collateral account. We could only
draw amounts from the cash collateral account holding the unfunded amount of commitments if our unrestricted cash and cash equivalents (not
including the cash in such account) was equal to or less than $12.5 million. The Company was also required to pay certain fees to the
administrative agent for the account of the lenders in connection with the Bridge Credit Agreement, including a ticking fee, which accrued 0.50%
per annum on the daily amount of the unused commitments. Accrued and unpaid ticking fees were payable on the maturity date.
The Bridge Credit Agreement permitted prepayment at any time without premium or penalty. At any time that the borrower or any guarantor or
subsidiary or unconsolidated joint venture thereof (to the extent that such entity has the ability to require a distribution from such joint venture of
its portion of net cash proceeds) received net cash proceeds from any capital event, the borrower was required to prepay the Bridge Facility in an
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amount equal to 100% of such net Cash proceeds (or with respect to any joint venture, the portion of such net cash proceeds distributed to the
borrower or any guarantor).
Consolidated Mortgage Loans
Our consolidated mortgage loans, which are secured by nine of our consolidated properties, are due in installments over various terms extending
to the year 2025. Our nine properties include Valley View Mall, which was assigned to a receiver in the third quarter 2020. Although we have not
yet conveyed Valley View Mall because foreclosure proceedings are ongoing, we no longer control or operate the property as a result of court
order assigning the receiver. The mortgage principal balance of Valley View Mall was $27.2 million at December 31, 2020, which we will
continue to recognize until the foreclosure process is completed. Six 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 4.09% at December 31, 2020. Three of our mortgage loans bear interest at variable
rates and had a weighted average interest rate of 2.40% at December 31, 2020. The weighted average interest rate of all consolidated mortgage
loans was 3.60% at December 31, 2020. Mortgage loans for properties owned by unconsolidated partnerships are accounted for in “Investments
in partnerships, at equity” and “Distributions in excess of partnership investments,” and are not included in the table below.
The following table outlines the timing of principal payments and balloon payments pursuant to the terms of our consolidated mortgage loans
of our consolidated properties as of December 31, 2020:
(in thousands of dollars)
For the Year Ending December 31,
2021
2022
2023
2024
2025
2026 and thereafter
Total principal payments
Less: Unamortized debt issuance costs
Carrying value of mortgage notes payable
Principal
Amortization
Balloon
Payments
Total
$
$
17,576 $
13,652
6,398
6,405
4,406
—
48,437 $
(1)
(2) $
216,418
355,989
53,299
—
211,345
—
837,051
$
233,994
369,641
59,697
6,405
215,751
—
885,488
985
884,503
(1) Our mortgage secured by Valley View Mall was in default as of December 31, 2020. The property conveyance process is not complete as
of December 31, 2020. The $27.2 million mortgage balance is included in our 2021 balloon payments.
(2) On February 8, 2021, we entered into an amendment to extend the maturity of our mortgage secured by Woodland Mall to December
2021, including an option to extend the maturity by one year to December 2022 if certain criteria are met. The $122.0 million mortgage
balance is included in our 2021 balloon payments.
The estimated fair values of our consolidated mortgage loans based on year-end interest rates and market conditions at December 31, 2020 and
2019 are as follows:
(in millions of dollars)
Consolidated mortgage loans (1)
2020
2019
Carrying
Value
Fair Value
Carrying
Value
Fair Value
$
885.5 $
873.2 $
899.8 $
873.9
(1) The carrying value of consolidated mortgage loans has been reduced by unamortized debt issuance costs of $1.0 million and $1.8 million
as of December 31, 2020 and 2019, respectively.
The consolidated mortgage loans contain various customary default provisions. As of December 31, 2020, we were not in default on any of the
consolidated mortgage loans, except for our mortgage secured by Valley View Mall.
Mortgage Loan Activity
Woodland Restructuring
Our subsidiary, PR Woodland Limited Partnership (“PR Woodland”) is the borrower under a loan agreement secured by the Woodland Mall in
Grand Rapids, Michigan. We have guaranteed certain obligations of PR Woodland under the loan agreement. On December 10, 2020, PR
Woodland, the administrative agent, and certain lenders under the loan agreement entered into a forbearance agreement and loan agreement
amendment, agreeing to, among other things, forbear from exercising any of their rights and remedies as a result of alleged events of default while
the parties were proceeding in good faith toward a further amendment to the loan agreement.
Forbearance Agreements
During the year ended December 31, 2020, we executed forbearance and loan modification agreements for Cherry Hill Mall, Cumberland Mall,
Dartmouth Mall, Francis Scott Key Mall, Viewmont Mall, and Woodland Mall. These arrangements allowed us to defer principal payments,
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and in some cases interest as well, between May and August 2020 depending on the terms of each agreement. At the end of the deferral period,
repayment of deferred amounts spans from four to six months. The repayment periods range from August 2020 through February
2021 pursuant to the terms of the specific agreements. Certain of these forbearance and loan modification agreements also impose certain
additional informational reporting requirements during the applicable modification periods.
Valley View Mall
In the second quarter of 2020, we received a notice of transfer of servicing for the mortgage loan secured by Valley View Mall, which had a
$27.3 million balance as of June 30, 2020. Subsequently, we failed to make the June 2020 monthly payment and our subsidiary that is the
borrower under the mortgage also received a notice of default on the mortgage from the lender. Additionally, we have not paid the balloon
payment of $27.3 million due at maturity on July 1, 2020. A foreclosure notice has been filed and operations of the property has been assigned
to a receiver in August 2020. See Note 2 for further detail.
Other Activity
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.
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.
Subsequent Event
On February 8, 2021, we entered into an amendment to our mortgage loan secured by the Woodland Mall in Grand Rapids, Michigan, which
provides for an extension to the maturity date until December 10, 2021, with an option to extend an additional year if certain criteria are met.
Among other things, the amendment also (i) reduces the cap on guarantor liability for PREIT Associates, L.P. to $10.0 million; (ii) restricts the
lenders from exercising their rights and remedies under the guaranty until December 10, 2022, except if there is a bankruptcy filing with
respect to the borrowers or guarantor; (iii) adjusts the interest rate; (iv) provides for the pledge of additional collateral as security for the
borrowers’ obligations (including the anchor parcel at Woodland Mall which was released as collateral from our senior secured credit
facilities); and (v) requires the borrowers to pay to the lenders a $5.0 million remargin payment.
Note Payable
In April 2020, in light of the impact of COVID-19 on our business and limited capital resources, we applied for and received proceeds from a
potentially forgivable loan in the amount of $4.5 million under the Paycheck Protection Program (PPP) of the Coronavirus Aid, Relief, and
Economic Security (CARES) Act. We entered into a note payable with our lender bank (“Note Payable”). The Note Payable will mature
on April 15, 2022. Based on the CARES Act and the Note Payable, all payments of both principal and interest will be deferred until at
least August 2021. The Note Payable accrues interest at a rate of 1.00% per annum, and the interest will continue to accrue throughout the
period the Note Payable is outstanding, or the forgiveness date. All or a portion of PPP loans are eligible for forgiveness pursuant to program
guidelines to the extent the proceeds are used for qualifying purposes within a 24-week period following the loan funding. The proceeds are
included in “Accrued expenses and other liabilities” in our consolidated balance sheet.
5. CASH FLOW INFORMATION
We consider all highly liquid short-term investments with a maturity of three months or less at purchase or acquisition to be cash equivalents. At
December 31, 2020 and 2019, cash and cash equivalents and restricted cash totaled $51.2 and $19.6 million, respectively, and included tenant
security deposits of $1.5 million and $1.8 million, respectively.
Cash paid for interest was $75.3 million and $59.4 million for the years ended December 31, 2020 and 2019, respectively, net of amounts
capitalized of $2.2 million and $7.7 million, respectively.
In our statement of cash flows, we report cash flows on our revolving facilities on a net basis. In 2020, we separated our Restructured Revolver
from our First Lien Revolving Facility. Aggregate borrowings on our First Lien Revolving Facility were $55.0 million, with repayments of
$0.2 million for the year ended December 31, 2020. Aggregate borrowings on our Restructured Revolver were $120.0 million and $229.0
million, and aggregate repayments were $375.0 million and $39.0 million for the years ended December 31, 2020 and 2019, respectively.
Accrued construction costs decreased by $14.6 million in the year ended December 31, 2020 and decreased by $8.5 million in the year ended
December 31, 2019.
F-31
In the first quarter of 2019, we issued 6,250,000 common shares of beneficial interest in the Company in exchange for a like number of OP Units
in our Operating Partnership. The shares were issued to Vornado Investments LLC, an affiliate of Franconia Two, L.P., the holder of the OP
Units.
The following table provides a summary of cash, cash equivalents, and restricted cash reported within the statement of cash flows as of
December 31, 2020 and 2019.
(in thousands of dollars)
Cash and cash equivalents
Restricted cash included in other assets
Total cash, cash equivalents, and restricted cash shown in the statement of cash flows
December 31,
2020
2019
$
$
43,309 $
7,922
51,231 $
12,211
7,417
19,628
Our restricted cash consists of cash held in escrow by banks for real estate taxes and other purposes.
Significant Non-Cash Transactions
The Company incurred $6.7 million of interest expense during the chapter 11 cases, which was capitalized into the principal balance of the
Second Lien Term Loan Facility on the Effective Date. The Company also incurred $2.8 million in PIK interest expense on the Second Lien
Term Loan Facility through December 31, 2020. These amounts are both included in interest expense, net in the consolidated statement of
operations.
In the third quarter of 2020, a court order assigned a receiver to operate Valley View Mall in La Crosse, Wisconsin on behalf of the lender of
the mortgage loan secured by the property. Although we have not yet conveyed the property because foreclosure proceedings are ongoing, we
no longer control or operate the property as a result of court order assigning the receiver. In September 2020, a court order was issued to
conduct a foreclosure sale of the property and as a result we have no further operating liabilities from the property. The mortgage principal
balance was $27.2 million at December 31, 2020, which we will continue to recognize until the foreclosure process is completed. During the
year ended December 31, 2020, we derecognized the property and recorded an offsetting contract asset and recognized a gain on derecognition
of property of $8.1 million in the consolidated statement of operations. The contract asset is included in deferred costs and other assets, net in
the consolidated balance sheet as of December 31, 2020. The derecognition of Valley View Mall and its related assets were a non-cash
conversion of assets, which had no impact on the Company’s cash flows.
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.
6. DERIVATIVES
In the normal course of business, we are exposed to financial market risks, including interest rate risk on our interest bearing liabilities. We
attempt to limit these risks by following established risk management policies, procedures and strategies, including the use of financial
instruments such as derivatives. We do not use financial instruments for trading or speculative purposes.
Cash Flow Hedges of Interest Rate Risk
For derivatives that have been designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded
in “Accumulated other comprehensive (loss) income” and subsequently reclassified into “Interest expense, net” in the same periods during
which the hedged transaction affects earnings. Through December 10, 2020, all of our derivatives were designated and qualified as cash flow
hedges of interest rate risk.
On December 10, 2020 as a result of the Financial Restructuring, we de-designated seven of our interest rate swaps which were previously
designated cash flow hedges against the 2018 Credit Facility and 7-year Term Loan, as the hedged forecasted transactions were no longer
probable to occur during the hedged time period due to the financial restructuring as described in Note 1. As such, the Company accelerated the
reclassification of a portion of the amounts in other comprehensive (loss) income to earnings which resulted in a loss of $2.8 million that was
recorded within interest expense, net in the consolidated statement of operations. Additionally, on December 10, 2020, the Company
voluntarily de-designated the remaining thirteen interest swaps that were also previously designated as cash flow hedges against the 2018
Credit Facility and 7-year Term Loan. Upon de-designation, the accumulated other comprehensive (loss) income balance of each of these
de-designated derivatives will be separately reclassified to earnings as the originally hedged forecasted transactions affect earnings. Through
December 10, 2020, the changes in fair value of the derivatives were recorded to accumulated other comprehensive (loss) income in the
consolidated balance sheets.
On December 22, 2020, we re-designated nine interest rate swaps with a notional amount of $375.0 million as cash flow hedges of interest rate
risk against the First Lien Term Loan Facility. These interest rate swaps qualified for hedge accounting treatment with changes in the fair value
of the derivatives recorded through accumulated other comprehensive (loss) income.
As of December 31, 2020, we had 13 total derivatives which were designated as cash flow hedges.
F-32
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 2021, we estimate that $11.0 million will be reclassified as an increase to interest expense in connection with our designated
derivatives. The recognition 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.
Non-designated Hedges
Derivatives not designated as hedges are not speculative and are also used to manage the Company’s exposure to interest rate movements and
other identified risks but do not meet the strict hedge accounting requirements. For the eleven remaining interest rate swaps that were not
re-designated subsequent to December 10, 2020, changes in the fair value of derivatives are recorded directly in earnings as interest expense in
the consolidated statement of operations.
Interest Rate Swaps
As of December 31, 2020, we had interest rate swap agreements designated in qualifying hedging relationships outstanding with a weighted
average base interest rate of 2.41% on a notional amount of $529.7 million, maturing on various dates through May 2023. As of December 31,
2020, our non-designated swaps outstanding with a weighted average base interest rate of 1.57% on a notional amount of $264.3 million,
maturing on various dates through December 2021. We originally 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 as of December 31, 2020
and 2019 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
Derivatives in Cash Flow Hedging
Relationships
Interest rate Swaps
2020
2021
2022
2023
Forward Starting Swaps
2023
Non-designated Hedges
Interest Rate Swaps
2021
Total
Aggregate Notional Value at
December 31, 2020
(in millions of dollars)
Aggregate Fair Value at
December 31, 2020 (1)
(in millions of dollars)
Aggregate Fair Value at
December 31, 2019 (1)
(in millions of dollars)
Weighted
Average Interest
Rate
N/A
N/A
$
$
229.7 $
—
300.0
—
264.3
794.0 $
$
(3.0 )
—
(17.2 )
—
(3.1 )
(23.3 ) $
0.2
(1.4 )
—
(7.3 )
N/A
2.04 %
—
2.70 %
(3.4 )
—
(11.9 )
1.57 %
2.13 %
(1) As of December 31, 2020 and 2019, 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 (loss) income and on our
consolidated statements of operations for the years ended December 31, 2020 and 2019:
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
Year Ended December 31,
(in millions of dollars)
Derivatives in Cash Flow Hedging Relationships
$
Interest rate products
2020
2019
2020
2019
(21.6 ) $
(15.8 ) $
10.4 (1) $
(3.1 )
F-33
(1) Includes $2.8 million of accelerated reclassification of a portion of amounts in other comprehensive (loss) income to earnings.
(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,
2020
2019
(84.3 ) $
10.4 $
(64.0 )
(3.1 )
The impact of our non-designated swaps resulted in a loss of $0.1 million for the year ended December 31, 2020, which is recognized in
interest expense, net in the consolidated statement of operations.
Credit-Risk-Related Contingent Features
We have agreements with some of our derivative counterparties that contain a provision pursuant to which, if our entity that originated such
derivative instruments defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by
the lender, then we could also be declared to be in default on our derivative obligations. On December 10, 2020, we amended our agreements
with our derivative counterparties so that our November 1, 2020 bankruptcy filing was not considered a default under our agreements. As of
December 31, 2020, 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, 2020, the fair value of derivatives in a liability position, which excludes accrued interest but includes any adjustment for
nonperformance risk related to these agreements, was $23.3 million. If we had breached any of the default provisions in these agreements as of
December 31, 2020, we might have been required to settle our obligations under the agreements at their termination value (including accrued
interest) of $26.0 million. We had not breached any of these provisions as of December 31, 2020.
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 agreement, 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 $0.7 million and $0.9 million for the years ended December 31, 2020 and 2019,
respectively.
Supplemental Retirement Plans
We maintain Supplemental Retirement Plans (the “Supplemental Plans”) covering certain senior management employees. Expenses under the
provisions of the Supplemental Plans were $0.2 million and $0.2 million for the years ended December 31, 2020 and 2019, 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, 2020 and 2019, approximately 59,000 and 44,000 shares, respectively, were purchased for
total consideration of $48 thousand and $0.2 million, respectively. We recorded expense of less than $10 thousand and $48 thousand for the
years ended December 31, 2020 and 2019, respectively, related to the share purchase plan. We suspended our Employee Share Purchase Plan
effective as of September 25, 2020.
8. SHARE BASED COMPENSATION
Share Based Compensation Plans
As of December 31, 2020, 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, 2020 and 2019, we recorded aggregate compensation expense for share based awards of $6.7 million
(including a net reversal of $0.1 million of amortization relating to employee separation) and $7.0 million (including a net reversal of $1.1
F-34
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 statement for share based compensation arrangements. For the years ended December 31,
2020 and 2019, we capitalized compensation costs related to share based awards of $0.1 million and $0.2 million, 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 pursuant to current or future
RSU Programs, or otherwise) was 2,098,924 as of December 31, 2020. 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 aggregate fair value of the restricted shares that we granted to our employees and non-employee trustees in 2020 and 2019 were $4.6
million and $5.6 million, respectively, based on the share price on the date of the grant. As of December 31, 2020, there was $4.3 million of
total unrecognized compensation cost related to unvested share based compensation 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 1.7 years.
A summary of the status of our unvested restricted shares as of December 31, 2020 and changes during the years ended December 31, 2020 and
2019 is presented below:
January 1, 2019
Shares granted
Shares vested
Shares forfeited
December 31, 2019
Shares granted
Shares vested
Shares forfeited
December 31, 2020
Weighted Average
Grant Date
Fair Value
Shares
621,398 $
798,370
(349,533 )
(131,971 )
938,264
1,706,624
(474,376 )
(93,791 )
2,076,721 $
13.29
7.04
13.14
8.75
8.67
3.22
3.24
4.96
5.60
Restricted Shares Awarded to Employees
In 2020 and 2019 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 1,093,292 and 683,570 restricted shares subject to time based vesting to our employees in 2020 and 2019, respectively. The
weighted average grant date fair values of time based restricted shares was $3.59 per share in 2020 and $7.15 per share in 2019. The aggregate
fair value of the restricted shares granted in 2020 and 2019 were $3.9 million and $4.9 million, respectively. Compensation cost relating to time
based restricted share awards is recorded ratably over the respective vesting periods. We recorded $3.4 million (including a net reversal of $0.1
million of accelerated amortization relating to employee separation) and $3.7 million (including a net reversal of $0.2 million relating to
employee separation) of compensation expense related to time based restricted shares for the years ended December 31, 2020 and 2019,
respectively. The total fair value of shares vested during the years ended December 31, 2020 and 2019 was $3.4 million and $3.8 million,
respectively.
Outperformance Units (“OPUs”) Awarded to Employees
Of the time-based restricted shares granted to employees in 2019, 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. If we pay dividends, 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 $0.1 million and
$0.8 million (including a net reversal of $0.1 million of accelerated amortization relating to employee separation) of compensation expense
related to OPUs for the years ended December 31, 2020 and 2019, respectively.
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 613,332 and 114,800 restricted shares subject to time based vesting to our non-employee trustees in 2020
and 2019, respectively. The weighted average grant date fair values of time based restricted shares was $1.13 per share in 2020 and $6.35 per
share in 2019. The aggregate fair value of the restricted shares granted in 2020 and 2019 were $0.7 million and $0.7 million, respectively,
F-35
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 and $0.7 million of compensation expense related to time based vesting of non-employee
trustee restricted share awards in 2020 and 2019, respectively. As of December 31, 2020, 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 $0.7 million and $0.8 million for the years ended December 31, 2020 and 2019, respectively. In 2021,
we will record compensation expense of $0.3 million in connection with the amortization of existing non-employee trustee restricted share
awards.
We will record future compensation expense in connection with the vesting of existing time based restricted share awards to employees and
non-employee trustees as follows:
(in thousands of dollars)
For the Year Ending December 31,
2021
2022
2023
Total
Future Compensation Expense
Non-Employee
Trustees
Employees
$
2,566 $
1,287
141
3,994 $
$
269 $
—
—
269 $
Total
2,835
1,287
141
4,263
Restricted Share Unit Programs
In 2020, 2019, 2018, 2017, 2016 and 2015, our Board of Trustees established the 2020 – 2022 RSU Program, 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”).
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 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 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 RSU’s are not dependent on any absolute level of total return to shareholders. In 2019, 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. If paid, 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.
The aggregate fair values of the RSU awards in 2020 and 2019 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 2020 and 2019 by grant date:
(dollars in thousands, except per share data)
Grant Date:
RSUs and assumptions by Grant Date
February 24, 2020
January 29, 2019
Measurement Basis:
RSUs granted
Aggregate fair value of shares granted
Weighted average fair value per share
Volatility
Risk free interest rate
Core Mall
Non-Anchor
Occupancy
Fixed Charge
Coverage Ratio
Absolute TSR
RSUs
Relative TSR
RSUs
$
$
354,972
1,217 $
3.43 $
53.0 %
1.35 %
354,972
1,217 $
3.43 $
53.0 %
1.35 %
210,193
1,550 $
7.38 $
40.3 %
2.58 %
210,193
1,890
8.99
40.3 %
2.58 %
F-36
Compensation cost relating to the RSU awards is expensed ratably over the applicable three year vesting period. We recorded $2.6 million and
$1.8 million (including a reversal of $0.8 million of accelerated amortization relating to employee separation) of compensation expense related
to the RSU Programs for the years ended December 31, 2020 and 2019, respectively. We will record future aggregate compensation expense of
$2.7 million related to the existing awards under the RSU Programs.
For the years ended December 31, 2020 and 2019, no shares were issued from the 2018-2020 or 2017-2019 RSU programs because the
required criteria were not met.
9. LEASES
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. 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.
Our leases do not provide a readily determinable implicit interest rate; therefore, we estimate our incremental borrowing rate to calculate the
present value of remaining lease payments. In determining our incremental borrowing rate, we considered the lease term, market interest rates and
estimates regarding our implied credit rating using market data with adjustments to determine an appropriate incremental borrowing rate.
The following table presents additional information pertaining to the Company’s leases:
For the Year Ended December 31, 2020
For the Year Ended December 31, 2019
Solar Panel
Leases
Ground
Leases
Office,
equipment,
and vehicle
leases
Total
Solar Panel
Leases
Ground
Leases
Office,
equipment,
and vehicle
leases
Total
(in thousands of dollars)
Finance lease cost:
Amortization of
$
right-of-use assets
Interest on lease liabilities
Operating lease costs
Variable lease costs
Total lease costs
$
823 $
280
—
—
1,103 $
— $
—
1,746
173
1,919 $
— $
—
1,279
191
1,470 $
823 $
280
3,025
364
4,492 $
750 $
294
—
—
1,044 $
— $
—
1,583
165
1,748 $
— $
—
1,932
457
2,389 $
750
294
3,515
622
5,181
Other information related to leases as of and for the years ended December 31, 2020 and 2019 are as follows:
(dollars in thousands)
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, 2020 are as follows:
2020
2019
$
$
$
$
272
$
2,106
$
717
86
298
4.35 %
6.44 %
294
2,205
632
99
306
4.42 %
6.42 %
(in thousands of dollars)
2021
2022
2023
2024
2025
Thereafter
Total undiscounted lease payments
Less imputed interest
Total lease liabilities
Finance leases
Operating leases
Total
$
$
990 $
988
983
949
929
2,072
6,911
(983 )
5,928 $
2,566 $
2,554
2,514
2,429
2,341
51,138
63,542
(33,417 )
30,125 $
3,655
3,463
3,410
3,298
3,270
53,210
70,306
(34,400 )
35,906
F-37
As Lessor
As of December 31, 2020, the fixed contractual lease payments, 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,
2021
2022
2023
2024
2025
2026 and thereafter
$
$
190,895
170,015
150,139
128,176
102,161
287,059
1,028,445
10. RELATED PARTY TRANSACTIONS
Office Leases
In 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 for the
year ended December 31, 2019. This lease terminated in December 2019.
In January 2020, we moved into a new office space at One Commerce Square, which is located at 2005 Market Street, Philadelphia,
Pennsylvania. The lease for the office, which commenced in December 2019, is executed with Brandywine Realty Trust. Our lead independent
trustee is also a Trustee of Brandywine Realty Trust. We paid $1.9 million in reimbursement of construction costs and $0.2 million of total rent
under the lease for the year ended December 31, 2020.
Employee Health Insurance
We purchase healthcare benefits for our employees through Independence Blue Cross (“IBX”). Our lead independent trustee became chairman
of the board of directors of IBX during 2018. We paid total insurance healthcare premiums of $2.3 million to IBX during 2020 and $2.5 million
during 2019.
11. COMMITMENTS AND CONTINGENCIES
Contractual Obligations
As of December 31, 2020, we had unaccrued contractual and other commitments related to our capital improvement projects and development
projects of $16.9 million, including $11.7 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 commitments 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 redevelopment of that
property costing not less than $300.0 million within 48 months after commencement of construction, which was March 14, 2016. We have
satisfied this obligation.
Preferred Dividend Arrearages
Dividends on the Series B, Series C and Series D preferred shares are cumulative and therefore will continue to accrue at an annual rate of
$1.8436 per share, $1.80 per share and $1.7188 per share, respectively. As of December 31, 2020, the cumulative amount of unpaid dividends
on our issued and outstanding preferred shares totaled $13.7 million. This consisted of unpaid dividends per share on the Series B, Series C and
Series D preferred shares of $0.92 per share, $0.90 per share and $0.86 per share, respectively.
Employment Agreements
Two officers of the Company have employment agreements with terms that renew automatically each year for additional one-year terms. The
employment agreements provided for aggregate base compensation for the year ended December 31, 2020 of $1.3 million, subject to increases
as approved by the Executive Compensation and Human Resources Committee of our Board of Trustees in future years, as well as additional
incentive compensation. On July 31, 2020, these officers agreed to, and the Executive Compensation and Human Resources Committee of our
Board of Trustees approved, a temporary 25% base salary reduction for the period from July 27, 2020 to September 30, 2020. On December
10, 2020, the Executive Compensation and Human Resources Committee approved payments to the officers in the amounts by which their
salaries were previously reduced.
F-38
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 was also paid the supplemental
retirement plan account balance, as required by the terms of the employment agreements and the nonqualified supplemental executive
retirement agreement.
Provision for Employee Separation Expense
We recorded $3.2 million and $3.7 million of employee separation expense during the years ended December 31, 2020 and 2019, respectively,
in connection with the termination of certain employees. As of December 31, 2020, $0.3 million of these amounts were accrued and unpaid.
NYSE Continued Listing Standards
On September 25, 2020, the Company received notice from the NYSE that the Company was not in compliance with the NYSE continued listing
standard set forth in Section 802.01C of the NYSE’s Listed Company Manual (the “Continued Listing Standards”), which requires listed
companies to maintain an average closing price of at least $1.00 per share over a consecutive 30-day trading period.
On January 4, 2021, the Company received notice from the NYSE that it regained compliance with the Continued Listing Standards. The
Company regained compliance after the closing price for its common shares on December 31, 2020 and the average closing price for its common
shares during the 30 trading-day period ended December 31, 2020 both exceeded $1.00.
Property Damage from Natural Disaster
During the year ended December 31, 2020, we recorded net recoveries of $0.6 million. These net recoveries relate to remediation expenses.
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.
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 management’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 environmental
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
operations. However, we can provide no assurance that the amounts reserved will be adequate to cover further environmental costs. We have
insurance coverage for certain environmental claims up to $10.0 million per occurrence and up to $10.0 million in the aggregate.
Tax Protection Agreements
There were no tax protection agreements in effect as of December 31, 2020.
F-39
SCHEDULE III
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
INVESTMENTS IN REAL ESTATE
As of December 31, 2020
Cost of
Improvements
Net of
Retirements
and
Impairment
Charges
Balance of
Land and
Land
Held for
Develop-
ment
Balance of
Building &
Improvements
and
Construction
in Progress
Accumulated
Depreciation
Balance
Initial Cost of
Building &
Improvements
65,575 $
185,611
43,889
28,328
103,955
60,284 $ 11,321 $ 125,918 $
272,799 48,608
31,476 9,842
55,774 7,021
(74,930 ) 23,714
56,624 $
439,740 278,878
34,338
74,234
48,014
84,096
13,495
25,287
Current
Encumbrance
Date of
Acquisition/
Construction
2003
2003
2005
1998
2003
Life of
Depre-
ciation
40
40
40
40
40
(1)
—
262,284
40,944
56,662
—
47,526
47,139
42,302
—
62,995
86,643
40,885 9,440
37,717 9,913
59,501 12,591
— 1,177
116,795 23,060
53,848 16,397
88,757
84,131
95,441
—
167,664
140,169
46,318
43,332
53,696
—
81,388
77,847
68,341
—
—
—
—
86,815
2003
2003
1998
2006
2003
2003
40
40
40
10
40
40
58,388
157,221 31,738
213,136 108,911
57,686
76,602 13,066
134,287
70,295
—
—
2003
40
1998
40
353,551
—
57,931
45,351
61,519
131,189
121,965
36
23,082 119,912
225
82,217 26,991
(46,457 ) 4,204
48,049 12,606
110,406 36,412
136,963 44,865
82,083
376,633
—
—
53,666
121,482
2,533
4,092
109,467
54,334
231,931 114,128
88,547
240,769
2015
2004
2003
2003
2003
2003
2005
40
N/A
40
40
40
40
40
—
—
—
27,213
67,177
152,548
122,518
884,502
$ 376,526 $ 1,601,543 $ 1,242,268 $ 463,103 $ 2,757,234 $ 1,308,427 $
Initial
Cost
of Land
$ 11,380 $
29,938
8,711
7,015
19,976
9,786
9,188
6,229
1,177
10,934
16,075
29,265
13,065
119,912
189
8,325
9,402
12,505
26,748
26,706
(in thousands of dollars)
Capital City Mall
Cherry Hill Mall
Cumberland Mall
Dartmouth Mall
Exton Square Mall
Francis Scott Key
Mall
Jacksonville Mall
Magnolia Mall
Monroe Land
Moorestown Mall
Patrick Henry Mall
Plymouth Meeting
Mall
The Mall at Prince
Georges
Springfield Town
Center
Swedes Square land
Valley Mall
Valley View Mall
Viewmont Mall
Willow Grove Park
Woodland Mall
Investment In Real
Estate
(1) Represents mortgage principal balances outstanding as of December 31, 2020 and does not include unamortized debt costs with an
aggregate balance of $1.0 million.
The aggregate cost basis and depreciated basis for federal income tax purposes of our investment in real estate was $3,163.8 million and
$2,180.2 million at December 31, 2020, respectively, and $3,132.2 million and $2,225.4 million at December 31, 2019, respectively. The
changes in total real estate and accumulated depreciation for the years ended December 31, 2020 and 2019 are as follows:
(in thousands of dollars)
Total Real Estate Assets:
Balance, beginning of year
Improvements and development
Impairment of assets
Dispositions
Write-off of fully depreciated assets
Reclassification to held for sale
Balance, end of year
Balance, end of year – held for sale
For the Year Ended December 31,
2020
3,210,926 $
49,075
—
(39,661 )
(3 )
—
3,220,337 $
2019
3,184,594
137,593
(3,989 )
(81,118 )
(12,031 )
(14,123 )
3,210,926
1,384 $
15,653
$
$
$
S-1
(in thousands of dollars)
Accumulated Depreciation:
Balance, beginning of year
Depreciation expense
Impairment of assets
Dispositions
Write-off of fully depreciated assets
Reclassification to held for sale
Balance, end of year
Balance, end of year – held for sale
For the Year Ended December 31,
2020
1,202,722 $
116,369
-
(13,808 )
(3 )
3,147
1,308,427 $
— $
2019
1,118,582
125,495
(484 )
(25,693 )
(12,031 )
(3,147 )
1,202,722
3,147
$
$
$
S-2