SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported) June 27, 2003
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Pennsylvania Real Estate Investment Trust
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(Exact Name of Registrant as Specified in Charter)
Pennsylvania 1-6300 23-6216339
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(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
The Bellevue, 200 S. Broad Street, Philadelphia, Pennsylvania 19102
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (215) 875-0700
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(Former Name or Former Address, if Changed Since Last Report)
Item 5. Other Events and Required FD Disclosure.
Pennsylvania Real Estate Investment Trust is re-issuing in an updated
format the presentation of Items 6, 7 and 8 as set forth in our Form 10-K for
the year ended December 31, 2002, filed on March 31, 2003, to reflect properties
sold and/or classified as held for sale since March 31, 2003 as discontinued
operations in the statements of income for all periods presented in accordance
with the provisions of Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets.
Except as otherwise expressly noted, the information contained in this
Current Report on Form 8-K has not been updated to reflect any developments
since December 31, 2002. In particular, this Form 8-K does not address the
anticipated effects of or risks associated with our proposed merger with Crown
American Realty Trust. For information regarding the proposed merger, please see
our Form 8-K dated May 13, 2003, filed on May 22, 2003. In addition, together
with Crown, we intend to file a registration statement on Form S-4 including a
joint proxy statement/prospectus and other materials with the SEC. WE URGE YOU
TO READ THESE MATERIALS WHEN THEY BECOME AVAILABLE BECAUSE THEY WILL CONTAIN
IMPORTANT INFORMATION REGARDING THE PROPOSED MERGER. Investors and security
holders may obtain a free copy of these materials when they become available, as
well as other materials filed with the SEC concerning Crown and us, at the SEC's
website at http://www.sec.gov. In addition, these materials and other documents
we file may be obtained for free by directing a request to Pennsylvania Real
Estate Investment Trust at The Bellevue, 200 S. Broad Street, Philadelphia,
Pennsylvania 19102; Attn: Investor Relations. In addition, these materials and
other documents filed by Crown may be obtained for free by directing a request
to Crown American Realty Trust at Pasquerilla Plaza, Johnstown, Pennsylvania
15901; Attn: Investor Relations.
We and Crown, and our respective trustees and executive officers and
other members of management and employees, may be deemed to be participants in
the solicitation of proxies from our shareholders and those of Crown in
connection with the merger. Information about our trustees and executive
officers and their ownership of our shares is set forth in the proxy statement
for our 2003 Annual Meeting of Shareholders, which was filed with the SEC on
April 30, 2003. Information about the trustees and executive officers of Crown
and their ownership of Crown shares is set forth in Crown's Annual Report on
Form 10-K and the amendment to its Form 10-K filed with the SEC on March 31,
2003 and April 22, 2003, respectively. Investors may obtain additional
information regarding the interests of such participants by reading the joint
proxy statement/prospectus when it becomes available.
This Current Report on Form 8-K, together with other statements and
information publicly disseminated by us, contains certain "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Forward-looking statements
relate to expectations, beliefs, projections, future plans and strategies,
anticipated events or trends and other matters that are not historical facts.
These forward-looking statements reflect our current views about future events
and are subject to risks, uncertainties and changes in circumstances that may
cause future events, achievements or results to differ materially from those
expressed or implied by the forward-looking statements. We do not intend to and
disclaim any duty or obligation to update or revise any forward-looking
statements to reflect new information, future events or otherwise.
Factors that may cause our actual results to differ materially from those
expressed or implied by our forward-looking statements include, but are not
limited to:
o the timing and full realization of the expected benefits from the
recently completed and currently proposed transactions;
o the cost, timing and difficulty of integrating the properties recently
acquired or currently proposed to be acquired into our business; and
o greater than expected operating costs, financing costs and business
disruption associated with the recently completed and currently
proposed transactions, including without limitation, difficulties in
maintaining relationships with employees and tenants following the
consummation of such transactions.
In addition, we are subject to the following risks:
Risks Related to Our Properties and Our Business
Our retail properties are concentrated in the Mid-Atlantic region of the United
States and adverse market conditions in that region may impact the ability of
our tenants to make lease payments and to renew leases, which may reduce the
amount of income generated by our properties.
Our retail properties currently are concentrated in the Mid-Atlantic
region of the United States. In particular, more than 77% of the square footage
of our retail properties are located in Pennsylvania. To the extent adverse
conditions affecting retail properties such as population trends and changing
demographics, income, sales and property tax laws, availability and costs of
financing, construction costs and weather conditions that may increase or
decrease energy costs are particularly adverse in Pennsylvania or in the
Mid-Atlantic region, our results of operations will be more notably affected. If
the sales of stores operating at our properties were to decline significantly
due to economic conditions, the risk that our tenants will be unable to fulfill
the terms of their leases or will enter into bankruptcy may increase. In
particular, economic and market conditions in the Mid-Atlantic region have a
substantial impact on the performance of our anchor and other tenants and may
impact the ability of our tenants to make lease payments and to renew their
leases. If, as a result of such tenant difficulties, our properties do not
generate sufficient income to meet our operating expenses, including future debt
service, our results of operations would be adversely affected.
After completion of the Rouse and multifamily transactions, as of June 27, 2003,
we had approximately $811.6 million of debt, $128.1 million of which was
variable rate debt, which may impede our operating performance and put us at a
competitive disadvantage.
Required repayments of debt and related interest can adversely affect
our operating performance. Of our approximately $811.6 million in total debt
outstanding at June 27, 2003, after giving effect to the Rouse and multifamily
transactions, approximately $128.1 million was variable rate debt. Increases in
interest rates on our existing indebtedness would increase our interest expense,
which could harm our cash flow and our ability to pay distributions. Of the
$811.6 million of debt, $155.5 million is attributable to joint ventures in
which we have an interest.
At June 27, 2003, our outstanding debt included approximately $117.9
million under our $200 million revolving credit facility. The weighted average
interest rate on amounts borrowed under this facility was 3.0% for the period
from January 1, 2003 to June 27, 2003, after giving effect to two interest rate
hedges. This credit facility expires on December 28, 2003 and may be extended
for an additional year only with the approval of the lenders. We may be unable
to extend the term of this credit facility or to replace this facility on
favorable terms, if at all.
Our substantial debt may harm our business and operating results,
including:
o requiring us to use a substantial portion of our funds from operations
to make principal and interest payments on our debt, which reduces the
amount available for distributions;
o placing us at a competitive disadvantage compared to our competitors
that have less debt;
o making us more vulnerable to economic and industry downturns and
reducing our flexibility in responding to changes in business and
economic conditions; and
o limiting our ability to borrow more money for operations, capital
expenditures or to finance acquisitions in the future.
Our financial covenants may restrict our operating or acquisition activities,
which may harm our financial condition and operating results.
Our existing $200 million credit facility currently requires our operating
partnership, PREIT Associates, L.P., to maintain certain asset and income to
debt ratios and minimum income and net worth levels. These covenants could
reduce our flexibility in conducting our operations by limiting our ability to
borrow and may create a risk of default on our debt if we cannot continue to
satisfy these covenants. If we default under this credit facility, the lenders
could require us to repay the debt immediately and could take possession of the
properties securing the credit facility. We rely on borrowings under this credit
facility to finance acquisitions, construction of our development properties,
renovations and capital improvements to our properties and for working capital,
and if we are unable to borrow under our credit facility or to refinance
existing indebtedness, our financial condition and results of operations would
be adversely impacted.
3
During the first quarter of 2002, we placed Creekview Shopping Center, a
completed retail development project into the collateral pool for the credit
facility and we expect to place additional projects into the collateral pool to
provide additional borrowing capacity, as necessary. If we are unable to place
additional completed development properties and acquired properties into the
collateral pool, or if completed development properties or acquired properties
are valued at less than we anticipate, we may be unable to fully access
additional borrowing capacity under the credit facility and fund certain of our
development and acquisition commitments and short term liquidity needs.
The credit facility we recently entered into with Wells Fargo to help
finance the Rouse portfolio acquisition contains the same financial covenants as
our $200 million credit facility (which was amended in connection with the Wells
Fargo credit facility) and two additional financial covenants, including a
covenant that our secured recourse indebtedness not exceed 15% of our Gross
Asset Value (as defined in the credit agreement for the credit facility) and a
covenant restricting our ability to incur certain unsecured indebtedness, which
could further reduce our flexibility in conducting our operations by further
limiting our ability to borrow. If, in the future, PREIT Associates, L.P. fails
to meet any one or more of these requirements, we would be in default under this
credit facility and the lenders could require us to repay the debt immediately.
We may be unable to manage effectively our rapid growth and expansion in the
retail sector, which may result in disruptions to our business.
We recently completed our acquisition of six shopping malls from The Rouse
Company. In addition, we expect to make future acquisitions or investments in
real properties, other assets and other companies. If we do not effectively
manage our rapid growth, we may not be able to make expected distributions to
our shareholders and the market value of our securities may decline.
To manage our growth effectively, we must successfully integrate new
acquisitions. We cannot assure you that we will be able to successfully
integrate or effectively manage additional properties. The integration process
for the Rouse portfolio acquisition will require substantial management
attention that could detract attention from our day to day business, which could
impair our relationships with our current tenants and employees. In addition,
the Rouse portfolio acquisition and any future acquisitions are subject to,
among other risks, the risk that we may experience difficulties and incur
expenses related to assimilating and retaining employees, assimilating ongoing
businesses or properties and maintaining relationships with tenants following
the completion of a transaction, and the risk that the properties that we
acquire will not perform at the level we anticipate. For example, we may not
achieve the operating efficiencies, economies of scale or other benefits we
expect from an acquisition. Accordingly, we may fail to realize the intended
benefits of an acquisition and we may fail to realize value from acquisitions
comparable to the resources we invest in them. Any difficulties associated with
integrating acquired properties could adversely affect our result of operations.
Competition may impede our ability to renew leases or re-let space as leases
expire and require us to undertake unbudgeted capital improvements, which could
harm our operating results.
We face competition from similar retail centers that are near our retail
properties with respect to the renewal of leases and re-letting of space as
leases expire. Any new competitive properties that are developed close to our
existing properties also may impact our ability to lease space to creditworthy
tenants. Increased competition for tenants may require us to make capital
improvements to properties that we would not have otherwise planned to make. Any
unbudgeted capital improvements could adversely affect our results of
operations. Also, to the extent we are unable to renew leases or re-let space as
leases expire, it would result in decreased cash flow from tenants and adversely
affect our results of operations.
Rising operating expenses could reduce our cash flow and funds available for
future distributions.
Our properties and any properties we acquire in the future are and will be
subject to operating risks common to real estate in general, any or all of which
may negatively affect us. If any property is not fully occupied or if rents are
being paid in an amount that is insufficient to cover operating expenses, then
we could be required to expend funds for that property's operating expenses. The
properties will be subject to increases in real estate and other tax rates,
utility costs, operating expenses, insurance costs, repairs and maintenance and
administrative expenses.
While some of our properties are leased on terms that require tenants to
pay a portion of the expenses associated with the property, renewals of leases
or future leases may not be negotiated on that basis, in which event we will
have to pay those costs. If we are unable to lease properties on a basis
requiring the tenants to pay all or some of the expenses associated with the
property, or if tenants fail to pay required tax, utility and other impositions,
we could be required to pay those costs which could adversely affect our
operating results.
Any tenant bankruptcies or leasing delays we encounter, particularly with
respect to our anchor tenants, could adversely affect our results of operations
and financial condition.
4
We receive a substantial portion of our income as rent under long term
leases. At any time, any of our tenants may experience a downturn in its
business that may weaken its financial condition. Our tenants may delay lease
commencement, fail to make rental payments when due, or declare bankruptcy. Any
leasing delays, tenant failures to make rental payments when due or tenant
bankruptcies could result in the termination of the tenant's lease and,
particularly in the case of a key anchor tenant, material losses to us and harm
to our results of operations. Certain tenants occupy stores at multiple
locations in our portfolio, and so the impact of any bankruptcy of those tenants
may be more significant on us than others. If tenants are unable to comply with
the terms of our leases, we may modify lease terms in ways that are unfavorable
to us. In addition, under many of our leases, our tenants pay rent based on a
percentage of their sales or other operating results. Accordingly, declines in
these tenants' performance directly impacts our operating results.
In addition to the loss of rental payments from an anchor tenant, a lease
termination by an anchor tenant or a failure by that anchor tenant to occupy the
premises could result in lease terminations or reductions in rent by other
tenants of the same shopping center whose leases permit cancellation or rent
reduction if an anchor tenant's lease is terminated. In that event, we may be
unable to re-lease the vacated space. In addition, the leases of some anchor
tenants may permit the anchor tenant to transfer its lease to another retailer.
The transfer to a new anchor tenant could cause customer traffic in the retail
center to decrease which could reduce the income generated by that retail
center. A transfer of a lease to a new anchor tenant could also allow other
tenants to make reduced rental payments or to terminate their leases at the
retail center, which could adversely affect our results of operations.
We depend upon income generated by PREIT-RUBIN's management of properties owned
by third parties, and the loss, interruption or termination of one or more
management contracts could harm our operating results.
As of March 31, 2003, PREIT-RUBIN, one of our indirectly-owned
subsidiaries, managed 14 retail properties containing approximately 5.3 million
square feet, four office buildings containing approximately 0.9 million square
feet and two multifamily properties with 137 units owned by third parties. Risks
associated with PREIT-RUBIN's management of properties owned by third parties
include:
o the property owner's termination of the management contract;
o loss of the management contract in connection with a property sale;
o non-renewal of the management contract after expiration;
o renewal of the management contract on terms less favorable than current
terms;
o decline in management fees as a result of general real estate market
conditions or local market factors; and
o claims of losses due to allegations of mismanagement.
The occurrence of one or more of these events could adversely affect
our results of operations.
We may not be successful in identifying suitable acquisitions that meet our
criteria, which may impede our growth.
Integral to our business strategy has been our strategic acquisitions of
retail properties. Our ability to expand through acquisitions requires us to
identify suitable acquisition candidates or investment opportunities that meet
our criteria and are compatible with our growth strategy. We analyze potential
acquisitions on a property-by-property and market-by-market basis. We may not be
successful in identifying suitable real estate properties or other assets in our
existing geographic markets or that otherwise meet our acquisition criteria or
consummating acquisitions or investments on satisfactory terms. Failures in
identifying or consummating acquisitions could reduce the number of acquisitions
we complete and slow our growth, which could adversely affect our results of
operations.
We face increasing competition for the acquisition of real estate properties and
other assets, which may impede our ability to make future acquisitions or may
increase the cost of these acquisitions.
We compete with many other entities engaged in real estate investment
activities for acquisitions of retail shopping centers, including institutional
pension funds, other REITs and other owner-operators of shopping centers. These
competitors may drive up the price we must pay for real estate properties, other
assets or other companies we seek to acquire or may succeed in acquiring those
companies or assets themselves. In addition, our potential acquisition targets
may find our competitors to be more attractive suitors because they may have
greater resources, may be willing to pay more, or may have more compatible
operating philosophy. In particular, larger REITs may enjoy significant
competitive advantages that result from, among other things, a lower cost of
capital and enhanced operating efficiencies. In addition, the number of entities
and the amount of funds competing for suitable investment properties may
increase. This would result in increased demand for these assets and therefore
increased prices paid for them. If we pay higher prices for properties, our
profitability will be reduced, and shareholders may experience a lower return on
their investment.
5
Illiquidity of real estate investments could significantly impede our ability to
respond to adverse changes in the performance of our properties and harm our
financial condition.
Because real estate investments are relatively illiquid, our ability to
promptly sell one or more properties in our portfolio in response to changing
economic, financial, and investment conditions is limited. The real estate
market is affected by many factors, such as general economic conditions,
availability of financing, interest rates and other factors, including supply
and demand, that are beyond our control. 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. We also cannot predict the length of time needed to find a willing purchaser
and to close the sale of a property.
We may be required to expend funds to correct defects or to make
improvements before a property can be sold. We cannot assure you that we will
have funds available to correct those defects or to make those improvements, and
if we cannot make such corrections, we may not be able to sell such property, or
may be required to sell such property on unfavorable terms. In acquiring a
property, we may agree 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 operating results.
We have entered into tax protection agreements for the benefit of some limited
partners of PREIT Associates, L.P. that may limit our ability to sell some of
our properties that we may otherwise want to sell, which could harm our
financial condition.
As the general partner of PREIT Associates, L.P. we have agreed to
indemnify certain former property owners who have become limited partners of
PREIT Associates, L.P. against tax liability that they may incur if we sell
these properties within a certain number of years in a taxable transaction. In
particular, we have provided tax protection of up to approximately $5.0 million
related to the August 1998 acquisition of the Woods Apartments for a period of
eight years ending in August 2006. Because the Woods Apartments were sold in
connection with the disposition of the multifamily portfolio and because that
transaction was treated as a tax-free exchange in connection with the
acquisition of Exton Square Mall, The Gallery at Market East and Moorestown Mall
from the Rouse Company, we are now obligated to provide tax protection to the
former owner of the Woods Apartments if we sell any of Exton Square Mall, The
Gallery at Market East or Moorestown Mall prior to August 2006. In some cases,
these agreements may make it uneconomical for us to sell these properties, even
in circumstances in which it otherwise would be advantageous to do so, which
could harm our ability to address liquidity needs in the future or otherwise
harm our financial condition.
Our investments in development properties may not yield anticipated returns,
which would harm our operating results and reduce the amount of funds available
for distributions.
A key component of our growth strategy is exploring our rights in
development properties, including our current projects at Christiana Power
Center Phase II, Newark, Delaware and New Garden, New Garden Township,
Pennsylvania. Christiana Power Center Phase II was to be completed by September
30, 2002 but has experienced significant delays and has not been completed as of
March 31, 2003. These delays have led to higher than anticipated costs and we
currently do not expect the development of Christiana Power Center Phase II to
be completed until the first quarter of 2005, if at all. The development of New
Garden is expected to be completed in the fourth quarter of 2004. To the extent
we continue these development projects or enter into new development projects,
they will be subject to a number of risks, including, among others:
o inability to obtain required zoning, occupancy and other governmental
approvals;
o expenditure of money and time on projects that may never be completed;
o higher than estimated construction costs;
o cost overruns and timing delays due to lack of availability of
materials and labor, delays in receipt of zoning and other regulatory
approvals, weather conditions and other factors outside our control;
and
o inability to obtain permanent financing upon completion of development
activities.
Unanticipated delays or expenses associated with our development properties
could adversely affect the investment returns from these projects and adversely
affect our financial condition and results of operations.
Some of our properties are in need of maintenance and/or renovation, which could
harm our operating results.
As of March 31, 2003, seven of our 22 retail properties were constructed or
last renovated more than 10 years ago. Two of the six retail properties acquired
as part of the Rouse portfolio acquisition were constructed or last renovated
more than 10 years ago. Older properties may generate lower rentals or may
require significant expense for maintenance and/or renovations, which could harm
our results of operations.
6
Our business and, in particular, our acquisition integration efforts could be
harmed if Ronald Rubin, our chairman and chief executive officer, and other
members of our senior management team terminate their employment with us.
Our future success depends, to a significant extent, upon the continued
services of Ronald Rubin our chairman and chief executive officer and of our
corporate management team. We are critically dependent upon our corporate
management team and other key employees to lead our integration efforts for the
Rouse portfolio acquisition. Although we have entered into employment agreements
with Mr. Rubin and certain other members of our corporate management team, they
could elect to terminate those agreements at any time. In addition, although we
have purchased a key man life insurance policy in the amount of $5 million to
cover Mr. Rubin, we cannot assure you that this would compensate us for the loss
of his services. The loss of services of one or more members of our corporate or
management team could harm our business and our prospects.
We hold substantial investments in unconsolidated partnerships and joint
ventures, which we may not be able to successfully manage.
After giving effect to the acquisition of the six properties from Rouse, as
of March 31, 2003, ten of our 28 retail properties were owned by joint ventures
in which we are a party. Of these properties, seven are owned by partnerships in
which we are a general partner. The remaining properties are owned by joint
ventures in which we have substantially the same powers as a general partner.
Under the terms of the partnership and joint venture agreements, major
decisions, such as a sale, lease, refinancing, expansion or rehabilitation of a
property, or a change of property manager, require the consent of all partners
or co-venturers. Accordingly, necessary actions may be delayed significantly
because decisions must be unanimous and it may be difficult or even impossible
to remove a partner or co-venturer that is serving as the property manager.
Business disagreements with partners may arise. We may incur substantial
expenses in resolving these disputes. To preserve our investment, we may be
required to make commitments to or on behalf of a partnership or joint venture
during a dispute. Moreover, we cannot assure you that our resolution of a
dispute with a partner will be on terms that are favorable to us.
Other risks of investments in partnerships and joint ventures include:
o partners or co-venturers might become bankrupt or fail to fund their
share of required capital contributions;
o partners or co-venturers might have business interests or goals that
are inconsistent with our business interests or goals;
o partners or co-venturers may be in a position to take action contrary
to our policies or objectives; and
o potential liability for the actions of our partners or co-venturers.
We may be unable to obtain long term financing required to finance our
partnerships and joint ventures, which could harm our operating results.
The profitability of each partnership or joint venture in which we are a
partner or co-venturer that has short-term financing or debt requiring a balloon
payment is dependent on the availability of long-term financing on satisfactory
terms. If satisfactory long-term financing is not available, we may have to rely
on other sources of short-term financing, equity contributions or the proceeds
of refinancing other properties to satisfy debt obligations which may not be as
favorable to us. Although we do not own the entire interest in connection with
many of the properties held by such partnerships and joint ventures, we may be
required to pay the full amount of any obligation of the partnership or joint
venture that we have guaranteed in whole or in part or we may elect to pay a
partnership's or joint venture's obligation to protect our equity interest in
its properties and assets, which could cause us to use a substantial portion of
our funds from operations, reducing amounts available for distribution.
The costs of compliance with environmental laws may harm our operating results.
Under various federal, state and local laws, ordinances and regulations,
an owner, former owner or operator of real estate may be liable for the costs of
removal or remediation of hazardous or toxic substances present at, on, under,
in, or released from its property. They may also be liable to the government or
to third parties for substantial property damage, investigation costs or clean
up costs. 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 may affect adversely the
owner's ability to sell or lease real estate or borrow with real estate as
collateral.
From time to time, we respond to inquiries from environmental authorities
with respect to properties both currently and formerly owned by us. We are aware
of certain environmental matters at some of our properties, including ground
water contamination, and the presence of asbestos containing materials. We have,
in the past, performed remediation of such environmental matters, but we may be
required in the future to perform testing relating to these matters and further
remediation may be required. We have reserved $0.1 million as of March 31, 2003
for future remediation of these matters, however, we may incur costs associated
with such remediation which exceed such amount.
7
In addition, at five of the properties in which we currently have an
interest, and at two properties in which we formerly had an interest,
environmental conditions have been or continue to be investigated and have not
been fully remediated. Groundwater contamination has been found at five of these
properties. While the former owners of two of the properties with groundwater
contamination are presently remediating such contamination, any failure of such
former owners to properly remediate such contamination could result in liability
to us for such contamination. Dry cleaning operations were performed at three of
the properties. Soil contamination has been identified at two of the properties
having dry cleaning operations and groundwater contamination was found at the
third property having dry cleaning operations. While these properties may be
eligible under state law for remediation with state funds, we cannot make any
assurances that sufficient funds will be available under state legislation to
pay the full costs of any such remediation and we may incur costs in connection
with such remediation.
Asbestos-containing materials are present in a number of our properties,
primarily in the form of floor tiles and adhesives. Fire-proofing material
containing asbestos is present at some of our properties in limited
concentrations or in limited areas. We have taken certain actions to remediate
or to comply with disclosure requirements, as necessary or appropriate, in
connection with the foregoing, but we may be required to take additional actions
or to make additional expenditures.
We are aware of environmental concerns at Christiana Power Center Phase
II, one of our development properties. The final costs and necessary remediation
are not known and may cause us to decide not to develop the property, which
would result in us having incurred unnecessary development costs and could have
an adverse impact on our operating results. We are also a party to a number of
agreements for the purchase of property for development in which initial
environmental investigations have revealed environmental risk factors that might
require remediation by the owner or prior owners of the property. Such
environmental risks may cause us to decide not to purchase such properties,
which would result in us having incurred unnecessary development expenses and
could adversely affect our results of operations.
Our environmental liability coverage for the types of environmental
liabilities described above, which covers liability for pollution and on-site
remediation of up to $2 million in any single claim and $4 million in the
aggregate, may be inadequate, which could result in our being obligated to fund
those liabilities.
In addition to the costs of remediation described above, we may incur
additional costs to comply with federal, state and local laws, ordinances and
regulations relating to environmental protection and human health and safety
generally. We cannot assure you that future laws, ordinances or regulations 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. In addition, there are various
local, state and federal fire, health, life-safety and similar regulations which
may be applicable to our operations, and which may subject us to liability in
the form of fines or damages for noncompliance.
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.
Catastrophic losses, such as losses due to wars, earthquakes, floods,
hurricanes, pollution and environmental matters, generally are either
uninsurable or not economically insurable, or may be subject to insurance
coverage limitations, such as large deductibles or co-payments. 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. 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 may increase and we may not be able to comply with
covenants under our debt agreements, which could adversely affect our financial
condition.
Some of our properties are held by special purpose entities and are not
generally available to satisfy creditors' claims in bankruptcy, which could
impair our ability to borrow.
Some of our properties are owned or ground-leased by subsidiaries that we
created solely for that purpose. The mortgaged properties and related assets are
restricted solely for the payment of the related loans and are not available to
pay our debts, which could impair our ability to borrow, which in turn could
harm our business.
Risks Related to Our Organization and Structure
Some of our officers have interests in properties that we manage and therefore
may have conflicts of interest that could adversely affect our business.
8
We provide management, leasing and development services for partnerships
and other ventures in which some of our officers, including Ronald Rubin, our
chairman and chief executive officer, have either direct or indirect ownership
interests. In addition, we lease substantial office space from Bellevue
Associates, an entity in which some of our officers have an interest. Our
officers who have interests in both sides of these transactions face a conflict
of interest in deciding to enter into these agreements and in negotiating their
terms, which could result in our obtaining terms that are less favorable than we
might otherwise obtain, which could adversely affect our business.
Limited partners of PREIT Associates, L.P. may vote on certain fundamental
changes we propose, which could inhibit a change in control that might result in
a premium to our shareholders.
Our assets are generally held through PREIT Associates, L.P., a Delaware
limited partnership of which we are the sole general partner. We currently hold
a majority of the limited partner interests in PREIT Associates. However, PREIT
Associates may from time to time issue additional limited partner interests in
PREIT Associates to third parties in exchange for contributions of property to
PREIT Associates. These issuances will dilute our percentage ownership of PREIT
Associates. Limited partner interests in PREIT Associates generally do not carry
a right to vote on any matter voted on by our shareholders, although limited
partner interests may, under certain circumstances, be redeemed for our shares.
However, before the date on which at least half of the partnership interests
issued on September 30, 1997 in connection with our acquisition of The Rubin
Organization have been redeemed, the holders of partnership interests issued on
September 30, 1997 are entitled to vote such units and additional units received
or to be received pursuant to the transactions that were the subject of the
September 30, 1997 issuance, along with our shareholders as a single class, on
any proposal to merge, consolidate or sell substantially all of our assets. Our
partnership interest in PREIT Associates is not included for purposes of
determining when half of the partnership interests issued on September 30, 1997
have been redeemed, nor are they counted as votes. 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.
Our organizational documents contain certain provisions which may discourage a
takeover of us and depress our share price.
Our organizational documents contain provisions which may have an
anti-takeover effect and inhibit a change in our management. These provisions
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 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 us to be
beneficially owned by fewer than 100 persons. Our board of
trustees may exempt a person from the 9.9% ownership limit if they
receive 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. Absent an exemption, this restriction may:
o discourage a tender offer or other transactions or a change in
management or control that might involve a premium price for
our shares or otherwise be in the best interests of our
shareholders; or
o 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 may discourage a third party from
acquiring our 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, including rights
in liquidation or to dividends and option rights, and other
securities having conversion or option rights and may authorize
the creation and issuance by our subsidiaries and affiliates of
securities having conversion and option rights in respect of
shares. Our trust agreement further provides that the terms of
such rights or other securities may provide for disparate
treatment of certain holders or groups of holders of such rights
or other securities. The issuance of such rights or preferred
shares could have the effect of delaying or preventing a change in
control over us, even if a change in control were in the
shareholders' interest.
(3) Our staggered board of trustees may affect the ability of a
shareholder to take control of our company. Our board of trustees
has three classes of trustees. The term of office of one class
expires each year. Trustees for each class are elected for three
year terms upon the expiration of the term of the respective
class. The staggered terms for trustees may affect the ability of
a shareholder to take control of us, even if a change in control
were in the best interests of our shareholders.
9
In addition, we have adopted a shareholder rights plan that may discourage
a tender offer or other transaction that might involve a premium price for our
shares or otherwise be in the best interests of our shareholders.
Risks Related to the Real Estate Industry
Negative perceptions of the retail sector generally may result in a decline in
our share price.
A substantial portion of our portfolio consists of retail shopping centers
and we expect to continue to focus on acquiring retail shopping centers in the
future. To the extent that the investing public has a negative perception of the
retail sector, the value of our common shares could be negatively impacted,
which could result in our common shares trading at a discount below the inherent
value of our assets as a whole.
Costs associated with complying with the Americans with Disabilities Act may
adversely affect our financial condition and results of operations.
Our properties are subject to the Americans with Disabilities Act of 1990.
Under the Americans with Disabilities Act, all places of public accommodation
are required to comply with rules related to access and use by disabled persons.
The Americans with Disabilities Act's requirements could require costly
modifications to our properties and could result in imposition of injunctive
relief, monetary penalties or, in some cases, an award of damages. Future
legislation also may impose additional requirements which we cannot predict.
Legislative actions, higher insurance costs and potential new accounting
pronouncements could increase our operating expenses and impact our financial
condition and results of operations.
In order to comply with the Sarbanes-Oxley Act of 2002 as well as proposed
changes to listing standards by the New York Stock Exchange, we have been and
continue to be enhancing our internal controls, hiring additional personnel and
utilizing additional outside legal, accounting and advisory services. These
activities increase our operating expenses. In addition, insurers will likely
increase premiums as a result of higher claims rates incurred over the past
year, so our premiums for our insurance policies, including our directors' and
officers' insurance policies, may increase.
We cannot predict the impact that proposed accounting pronouncements,
such as the proposed accounting treatment that would require merger costs to be
expensed in the period in which they are incurred, will have on our financial
condition or results of operations.
Possible terrorist activity or other acts of violence or war could adversely
affect our financial condition and results of operations.
Future terrorist attacks in the United States, such as the attacks that
occurred in New York and Washington, D.C. on September 11, 2001 and other acts
of terrorism or war, may result in declining economic activity, which could harm
the demand for and the value of our properties and may adversely affect the
value of an investment in our securities. A decrease in retail demand could make
it difficult for us to renew or re-lease our properties at lease rates equal to
or above historical rates. Terrorist activities also could directly impact the
value of our properties through damage, destruction or loss, and the
availability of insurance for such acts may be lower, or cost more, which could
adversely affect our financial condition and results of operations. To the
extent that our tenants are impacted by future attacks, their businesses
similarly could be adversely affected, including their ability to continue to
meet obligations under their existing leases. These acts may erode business and
consumer confidence and spending, and may result in increased volatility in
national and international financial markets and economies. Any one of these
events may decrease demand for real estate, decrease or delay the occupancy of
our new or renovated properties, increase our operating expenses due to
increased physical security for our properties and limit our access to capital
or increase our cost of raising capital.
Tax Risks
If we fail to qualify as a REIT our shareholders could be adversely affected.
We believe that we have qualified as a REIT since our inception and intend
to continue to qualify as a REIT. However, we cannot assure shareholders that we
have been qualified or will remain qualified. To qualify as a REIT, we must
comply with certain highly technical and complex requirements under the Internal
Revenue Code. We cannot be certain we have complied with such requirements
because there are very limited judicial and administrative interpretations of
these provisions. Even a technical or inadvertent mistake could jeopardize our
10
REIT status. In addition, facts and circumstances that may be beyond our control
may 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 fail to qualify as a REIT, we will 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 reduce significantly the cash flow available for
distribution to shareholders and for debt service. In addition, we would no
longer be required to make any distributions to shareholders.
We may be unable to comply with the strict income distribution requirements
applicable to REITs or compliance with such requirements could adversely affect
our financial condition.
To obtain the favorable treatment associated with qualifying as a REIT,
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 the undistributed
portion of our income at regular corporate rates and may also be subject to a 4%
excise tax on this undistributed income. We could be required to seek 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.
Recent change in taxation of corporate dividends may adversely affect the value
of our shares.
President Bush signed the Jobs and Growth Tax Relief Reconciliation Act of
2003 into law on May 28, 2003 (the "Jobs and Growth Tax Act"). The Jobs and
Growth Tax Act, among other things, generally reduces to 15% the maximum
marginal rate of federal tax payable by individuals on dividends received from a
regular C corporation. This reduced tax rate, however, will not apply to
dividends paid to individuals by a REIT on its shares except for certain limited
amounts. The earnings of a REIT that are distributed to its shareholders will
still generally be subject to less federal income taxation than earnings of a
non-REIT C corporation that are distributed to its shareholders net of
corporate-level income tax. The Jobs and Growth Tax Act, however, could cause
individual investors to view shares of regular C corporations as more attractive
relative to shares of REITs than was the case prior to the enactment of the
legislation because the dividends from regular C corporations will generally be
taxed at a lower rate than previously while dividends from REITs will generally
be taxed at the same rate as previously. We cannot predict what effect, if any,
the enactment of this legislation may have on the value of our common shares,
either in terms of price or relative to other investments.
11
Item 6 of Form 10-K. Selected Financial Data.
The following table sets forth Selected Financial Data for the Company
as of and for the years ended December 31, 2002, 2001, 2000, 1999 and 1998.
Information for all years presented has been updated to reflect the effects of
discontinued operations in accordance with SFAS No. 144. The information set
forth below should be read in conjunction with "Item 7 of Form 10-K.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and notes thereto
appearing elsewhere in this Current Report on Form 8-K.
For the Year Ended December 31,
-------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(dollars in thousands, except per share results)
Operating results:
Total revenues $75,055 $62,334 $51,293 $42,847 $23,569
Income from continuing operations $11,838 $11,613 $24,245 $11,856 $10,601
Net income $23,678 $19,789 $32,254 $20,739 $23,185
Income from continuing operations per
share-basic $0.73 $0.79 $1.81 $0.89 $0.80
Income from continuing operations per
share-diluted $0.72 $0.79 $1.81 $0.89 $0.80
Net income per share - basic $1.47 $1.35 $2.41 $1.56 $1.74
Net income per share - diluted $1.44 $1.35 $2.41 $1.56 $1.74
Balance sheet data:
Investments in real estate, at
cost $739,429 $636,294 $612,266 $577,521 $509,406
Total assets $703,663 $602,628 $576,663 $547,590 $481,615
Total mortgage, bank and
construction loans payable $450,551 $360,373 $382,396 $364,634 $302,276
Minority interest $32,472 $36,768 $29,766 $32,489 $28,045
Shareholders' equity $188,013 $180,285 $143,906 $133,412 $137,082
Other data:
Cash flows from operating activities $28,541 $37,655 $44,473 $29,437 $31,302
Cash flows from investing activities (24,047) (25,428) (36,350) (64,873) (159,734)
Cash flows from financing activities (1,199) (8,060) (9,197) 31,784 134,830
Cash distributions per share $2.04 $2.04 $1.92 $1.88 $1.88
Property acquisitions and dispositions are primarily responsible for the
significant fluctuations in the Company's historical financial condition and
results of operations. See Item 7 for further discussion.
12
Item 7 of Form 10-K. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
The following discussion should be read in conjunction with the
consolidated financial statements and the notes thereto included elsewhere in
this report. Except where specifically indicated, the following discussion does
not include the anticipated effects of the transactions described under
"Significant Transactions."
OVERVIEW
As of December 31, 2002, the Company owned interests in 22 retail
properties containing an aggregate of approximately 11.8 million square feet, 19
multifamily properties containing 7,242 units and four industrial properties
with an aggregate of approximately 0.3 million square feet. The Company also
owns interests in two retail properties currently under development, which are
expected to contain an aggregate of approximately 0.8 million square feet upon
completion. As described below in "Significant Transactions - Acquisition of
Shopping Malls from Rouse," since December 31, 2002, the Company has acquired
interests in six additional retail properties. Also, as further described below
in "Significant Transactions - Sale of Multifamily Portfolio," the Company has
sold its interest in 17 of its multifamily properties and has entered into
agreements to sell the remaining two.
As of December 31, 2002, the Company provided management, leasing and
development services for affiliated and third-party property owners with respect
to 18 retail properties containing approximately 6.9 million square feet, six
office buildings containing approximately 1.1 million square feet and two
multifamily properties with 137 units.
The Company has achieved significant growth since 1997 with the
acquisition of The Rubin Organization ("TRO") and the formation of PREIT -
Rubin, Inc. ("PRI"). During 2002, the Company continued this trend with two
retail properties in its development pipeline, and same store net operating
income growth of 6.5% and 1.0% in the retail and multifamily sectors,
respectively. Since December 31, 2002, the Company has aggressively pursued its
growth strategy through the acquisition of six malls from The Rouse Company. As
part of the Company's strategic decision to focus on the retail sector, the
Company also has sold a substantial portion of its multifamily portfolio and has
entered into agreements to sell its interest in two remaining multifamily
properties. In connection with these transactions, management, anticipates that
it will need to devote significant resources to integrating the properties
acquired and proposed to be acquired into the Company's existing retail
portfolio. This integration process could impact the Company's day-to-day
business.
The Company's net income increased by $3.9 million to $23.7 million for
the year ended December 31, 2002 as compared to $19.8 million for the year ended
December 31, 2001. Real estate properties sold in 2002 generated gains of $4.1
million as compared to $2.1 million for the properties sold in 2001. Property
acquisitions and the placement in service in 2002 of properties previously under
development resulted in an increase in Company real estate revenues, with a
corresponding increase in property operating expenses, and depreciation,
amortization and interest expenses.
As of December 31, 2002, the Company had investments in 14
unconsolidated partnerships and joint ventures (the "Joint Ventures"). As
further described in "Significant Transactions - Sale of Multifamily Portfolio,"
two of these investments were sold subsequent to December 31, 2002 and the
Company has entered into agreements to sell its interests in two additional
joint ventures. The purpose of the Joint Ventures is to own and operate real
estate. It is a common practice in the real estate industry to invest in real
estate in this manner. Of the 14 Joint Venture properties existing at December
31, 2002, the Company managed four of the properties and other parties,
including several of the Company's Joint Venture partners, managed the remaining
10 properties. None of the Company's Joint Venture partners are affiliates of
the Company. One of the Company's key strategic objectives is to obtain
managerial control of all its assets, although the Company cannot assure you
that it will do so. The Company holds a non-controlling interest in each Joint
Venture, and accounts for the Joint Ventures using the equity method of
accounting. Under this accounting method, the Company does not consolidate the
Joint Ventures. Instead, the Company records the earnings from the Joint
Ventures under the income statement caption entitled "Equity in income of
partnerships and joint ventures." Changes in the Company's investment in these
entities are recorded in the balance sheet caption entitled "Investment in and
advances to partnerships and joint ventures, at equity". For further information
regarding the Company's Joint Ventures, see Note 3 to the consolidated financial
statements.
SIGNIFICANT TRANSACTIONS
Acquisition of Shopping Malls from Rouse
On April 28, 2003, the Company acquired Moorestown Mall, The Gallery at
Market East and Exton Square Mall from affiliated entities of The Rouse Company
("Rouse"). In a related transaction, on June 5, 2003, the Company acquired
Echelon Mall and Plymouth Meeting Mall from Rouse. Additionally, on June 5,
2003, the Company acquired the ground lessor's interest in Plymouth Meeting Mall
from the Teachers Insurance and Annuity Association ("TIAA"). These transactions
were conducted by the Company through an exchange accommodation title holder in
accordance with the provisions of Section 1031 of the Internal Revenue Code. In
addition, on April 28, 2003, New Castle Associates acquired Cherry Hill Mall
13
from Rouse in exchange for its interest in Christiana Mall, cash and the
assumption by New Castle Associates of mortgage debt on Cherry Hill Mall. As
further described below, on that same date, the Company also acquired an
ownership interest in New Castle Associates and an option to acquire the
remaining ownership interests.
The aggregate purchase price for the Company's acquisition of the five
malls from Rouse, for TIAA's ground lease interest in Plymouth Meeting Mall and
for its interest in New Castle Associates (including the additional purchase
price expected to be paid upon exercise of the Company's option to acquire the
remaining interests in New Castle Associates) was $549.4 million, including
approximately $237.4 million in cash, the assumption of $277 million in
non-recourse mortgage debt and the issuance of $35 million in units of limited
partnership interest in the Company's operating partnership ("PALP OP Units").
All of the PALP OP Units were or will be issued as part of the consideration for
the Company's acquisition of its interest in New Castle Associates. One of the
partners of New Castle Associates, Pan American Associates, the former sole
general partner and a limited partner of New Castle Associates, is controlled by
Ronald Rubin, the Company's Chairman and Chief Executive Officer, and George
Rubin, a trustee of the Company and President of the Company's management
subsidiaries, PREIT-RUBIN, Inc. and PREIT Services, LLC.
The Company financed the cash portion of the purchase price through the
acquisition credit facility and the financings described below under "Liquidity
and Capital Resources - Acquisition Credit Facility" and "- Mortgage
Refinancings."
The Company's acquisition of its interest in New Castle Associates
consisted of acquiring 49% of the aggregate partnership interests in New Castle
Associates from partners of New Castle Associates other than Pan American
Associates on April 28, 2003, in exchange for an aggregate of 585,422 PALP OP
Units valued at $17.1 million. Simultaneously with this acquisition, the Company
increased its aggregate ownership interest in New Castle Associates to 72.89% by
acquiring an additional ownership interest directly from New Castle Associates
in exchange for a cash investment in New Castle Associates of approximately
$30.8 million. This cash investment was used by New Castle Associates to pay to
Rouse the majority of the cash portion of the purchase price and associated
costs for the acquisition of Cherry Hill Mall.
The Company also obtained an option, exercisable commencing April 30,
2004 and expiring October 27, 2004, to acquire the remaining interests in New
Castle Associates, including that of Pan American Associates, in exchange for an
aggregate of 609,317 additional PALP OP Units. If the Company does not exercise
this option, the remaining partners of New Castle Associates will have the
right, beginning April 28, 2008 and expiring October 25, 2008, to require the
Company to acquire the remaining interests in New Castle Associates in exchange
for an aggregate of 670,248 additional PALP OP Units. Unless and until the
Company acquires the remaining interests in New Castle Associates, the remaining
partners of New Castle Associates other than the Company will be entitled to
receive a cumulative preferred distribution equal to approximately $1.2 million
in the aggregate per annum, subject to certain downward adjustments based upon
certain capital distributions by New Castle Associates. If the Company does not
exercise its call right, this preferred distribution will increase by 50%
beginning January 1, 2005 and by an additional 5% over the amount for the
preceding year beginning each January 1 thereafter. If the remaining New Castle
Associates partners do not exercise their put rights, this preferred
distribution will terminate on October 25, 2008.
In connection with the Company's acquisition of its interest in New
Castle Associates, Pan American Associates ceased to be a general partner of New
Castle Associates and the Company designated one of its affiliates as the sole
general partner. Certain former partners of New Castle Associates not affiliated
with the Company exercised their special right to redeem for cash an aggregate
of 261,349 PALP OP Units issued to such partners at closing, and the Company
paid to those partners an aggregate amount of approximately $7.7 million. In
addition, the Company granted registration rights to the partners of New Castle
Associates with respect to the Company shares underlying the PALP OP Units
issued or to be issued to them, other than those redeemed for cash following the
closing.
To facilitate the exchange of Christiana Mall for Cherry Hill Mall, the
Company waived any right of first refusal that it may have had with respect to
the sale of Christiana Mall by New Castle Associates. Upon the sale of
Christiana Mall by New Castle Associates, and before the Company's investment in
New Castle Associates, the Company's management and leasing agreement for that
property was terminated, and the Company received a brokerage fee of $2 million
from New Castle Associates in respect of the exchange of Christiana Mall for
Cherry Hill Mall. The Company also entered into a new management and leasing
agreement with New Castle Associates for Cherry Hill Mall, which provides for a
fee of approximately 5.25% of all rents and other revenues received by New
Castle Associates from the Cherry Hill Mall.
14
The following chart shows information related to each of these malls:
-------------- ---------- ---------- ---------- ----- ------------ ---------- --------- --------- ---------- ------ ----------
Total Mortgage
Total Owned Balance
Square Square % Sales (in Mortgage Date of
Feet (in Feet (in Occupied per Major Lease millions) Interest Maturity Date Last
Mall Name thousands) thousands) In-Line(1) SF(1) Tenants Expiration(2) (3),(4) Rate (4) (4) Built Renovated
-------------- ---------- ---------- ---------- ----- ------------ ---------- --------- --------- ---------- ------ ----------
Cherry Hill 1,282 533 94.5% $404 JCPenney N/A $74 10.6% 10/1/2005 1961 1990
Mall Macy's N/A 60 5.0% 10/1/2005
Cherry Hill, Strawbridge's N/A
NJ
-------------- ---------- ---------- --------- ----- ------------ --------- --------- --------- ---------- ------ ----------
Moorestown 1,036 716 93.9% 312 Boscov's 2005 64 LIBOR 6/11/2013 1963 2000
Mall Lord & N/A +125 bps.
Moorestown, Taylor 2022
NJ Sears N/A
Strawbridge's
-------------- ---------- ---------- --------- ----- ------------ --------- --------- --------- ---------- ------ ----------
Exton Square 1,098 463 89.7% 361 Boscov's N/A 101 6.95% 12/1/2008 1973 2000
Mall Sears N/A
Exton, PA JCPenney N/A
Strawbridge's N/A
-------------- ---------- ---------- --------- ----- ------------ --------- --------- --------- ---------- ------ ----------
The Gallery 1220 191 98.9% 419 K-Mart N/A -- -- -- 1977 1983
at Market Strawbridge's N/A
East
Philadelphia,
PA
-------------- ---------- ---------- --------- ----- ------------ --------- --------- --------- ---------- ------ ----------
Echelon Mall 1,140 601 80.1% 252 Boscov's N/A -- -- -- 1970 1998
Voorhees, NJ Strawbridge's N/A
-------------- ---------- ---------- --------- ----- ------------ --------- --------- --------- ---------- ------ ----------
Plymouth 823 607 87.4% 244 Boscov's 2015 -- -- -- 1966 1999
Meeting Mall Strawbridge's N/A
Plymouth
Meeting, PA
-------------- ---------- ---------- --------- ----- ------------ --------- --------- --------- ---------- ------ ----------
TOTAL / 6,599 3,111 90.0% $328 $299
AVERAGE
-------------- ---------- ---------- --------- ----- ------------ --------- --------- --------- ---------- ------ ----------
(1) Information is as of 12/31/02.
(2) The lease expiration date for tenants that own their own store is noted
as N/A.
(3) Mortgage balances are as of the settlement date.
(4) Reflects the June 2003 refinancing of Moorestown Mall.
Sale of Multifamily Portfolio
On May 30, 2003, the Company completed the sale of 13 of its
wholly-owned multifamily properties to MPM Acquisition Corp., an affiliate of
Morgan Properties, Ltd. (together, "Morgan"), for a total sale price of $314
million (approximately $151.5 million of which consisted of assumed
indebtedness). The sale was completed pursuant to a purchase and sale agreement
entered into by the Company in March 2003 to sell all of the 19 properties and
related assets in its portfolio of multifamily properties to Morgan for $420
million, which included the assumption of certain indebtedness by Morgan. The 19
properties in the Company's multifamily portfolio (aggregating to a total of
7,242 apartment units), consisted of 15 properties that were wholly-owned by the
Company and four multifamily properties in which the Company held a 50% joint
venture interest. Prior to the closing on May 30, 2003, the Company and Morgan
amended the purchase and sale agreement to exclude from the transaction the
Company's interests in the four properties held in joint venture form, resulting
in a reduction of approximately $24.85 million, inclusive of $13.4 million in
indebtedness that was to be assumed, from the original sale price of $420
million.
The original purchase and sale agreement was also amended to reflect
(1) the deferral of the closing of two of the wholly-owned multifamily
properties, Emerald Point in Virginia Beach, Virginia and Regency Lakeside in
Omaha, Nebraska, until on or before July 31, 2003 (unless further extended for
90 days by both parties) pending receipt of a required consent from Fannie Mae
to Morgan's assumption of the loans secured by those properties and (2) the
addition of a purchase price credit of $3 million for Morgan toward its closing
costs upon the closing of the sale of all 15 of the Company's wholly-owned
multifamily properties. On July 25, 2003, the Company completed the sale of the
two remaining wholly-owned properties to Morgan for $81.4 million, inclusive of
$33.8 million in assumed indebtedness and before giving effect to the $3 million
purchase price credit. Morgan's cash deposit of approximately $3.1 million was
returned to Morgan upon the closing of the
15
two additional wholly-owned properties. The net cash proceeds received by the
Company were $44.3 million.
With respect to its four joint venture multifamily properties, the
Company has sold its 50% interest in the following two properties: (1) Cambridge
Hall Apartments in West Chester, Pennsylvania; sold on May 1, 2003 to Tree Farm
Road, L.P. (the Company's joint venture partner) for $6.7 million, inclusive of
$2.5 million in assumed indebtedness and (2) Countrywood Apartments in Tampa,
Florida; sold on May 31, 2003 to Countrywood Apartments General Partnership (the
Company's joint venture partner) for $9.1 million, inclusive of $7.3 million in
assumed indebtedness. The Company also has entered into two separate agreements
to sell its interests in the other two joint venture properties to its joint
venture partners for an aggregate of approximately $8.6 million, inclusive of
approximately $3.5 million of assumed indebtedness. Closing on these two sales
is expected to occur no later than October 13, 2003.
The Company has used a substantial portion of the net proceeds of the
sales of its multifamily properties to pay off the amounts borrowed under its
unsecured acquisition credit facility entered into in connection with the
Company's acquisition of six malls from affiliated companies of The Rouse
Company.
The Company's sale of its multifamily portfolio to Morgan has been
structured to meet the requirements of Section 1031 of the Internal Revenue Code
for a tax-deferred exchange for certain of the retail properties acquired from
The Rouse Company.
CRITICAL ACCOUNTING POLICIES
In preparing the consolidated financial statements, management has made
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. In preparing these financial
statements, management has utilized available information including the
Company's past history, industry standards and the current economic environment,
among other factors, in forming its estimates and judgments, giving due
consideration to materiality. Actual results may differ from those estimates. In
addition, other companies may utilize different estimates, which may impact
comparability of the Company's results of operations to those of companies in
similar businesses. Set forth below is a summary of the accounting policies that
management believes are critical to the preparation of the consolidated
financial statements. This summary should be read in conjunction with the more
complete discussion of the Company's accounting policies included in Note 1 to
the consolidated financial statements of the Company.
Revenue Recognition
The Company derives over 84% of its revenues from tenant rents and
other tenant related activities. Tenant rents include base rents, percentage
rents, expense reimbursements (such as common area maintenance, real estate
taxes and utilities) and straight-line rents. The Company records base rents on
a straight-line basis, which means that the monthly base rent income according
to the terms of the Company's leases with its tenants is adjusted so that an
average monthly rent is recorded for each tenant over the term of its lease. The
difference between base rent and straight-line rent is a non-cash increase or
decrease to rental income. The straight-line rent adjustment increased revenue
by approximately $1.0 million in 2002, $0.8 million in 2001 and $1.2 million in
2000. Percentage rents represent rental income that the tenant pays based on a
percentage of its sales. Tenants that pay percentage rent usually pay in one of
two ways, either a percentage of their total sales or a percentage of sales over
a certain threshold. In the latter case, the Company does not record percentage
rent until the sales threshold has been reached. Deferred revenue represents
rental revenue received from tenants prior to their due dates. Certain lease
agreements contain provisions that require tenants to reimburse a pro rata share
of real estate taxes and certain common area maintenance costs. Expense
reimbursement payments generally are made monthly based on a budgeted amount
determined at the beginning of the year. During the year, the Company's income
increases or decreases based on actual expense levels and changes in other
factors that influence the reimbursement amounts, such as occupancy levels. In
2002, the Company accrued $0.6 million of income because reimbursable expense
levels were greater than amounts billed. Shortly after the end of the year, the
Company prepares a reconciliation of the actual amounts due from tenants. The
difference between the actual amount due and the amounts paid by the tenant
throughout the year is billed or credited to the tenant, depending on whether
the tenant paid too much or too little during the year. Termination fee income
is recognized in the period when a termination agreement is signed. In the event
that a tenant is in bankruptcy when the termination agreement is signed,
termination fee income is recognized when it is received.
The Company's other significant source of revenues comes from
management activities, including property management, leasing and development.
Management fees generally are a percentage of managed property revenues 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.
These activities collectively are referred to as "management fees" in the
consolidated statement of income. There are no significant cash versus accrual
differences for these activities.
Allowance for Doubtful Accounts Receivable
The Company makes estimates of the collectibility of its accounts
receivables related to tenant rents, including base rents, percentage rents,
16
straight line rentals, expense reimbursements and other revenue or income. The
Company specifically analyzes accounts receivable, historical bad debts,
customer credit worthiness, current economic trends and changes in customer
payment terms when evaluating the adequacy of the allowance for doubtful
accounts. In addition, with respect to tenants in bankruptcy, the Company makes
estimates of the expected recovery of pre-petition and post-petition claims in
assessing the estimated collectibility of the related receivable. In some cases,
the time required to reach an ultimate resolution of these claims can exceed one
year. These estimates have a direct impact on the Company's net income because a
higher bad debt reserve results in less net income.
Real Estate
Land, buildings and 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
and/or replacements, which improve or extend the life of the asset, are
capitalized and depreciated over their estimated useful lives.
Properties are depreciated using the straight line method over the
estimated useful lives of the assets. The estimated useful lives are as follows:
Buildings 30-50 years
Land Improvements 15 years
Furniture/Fixtures 3-10 years
Tenant Improvements Lease term
The Company is required to make subjective assessments as to the useful
life of its properties for purposes of determining the amount of depreciation to
reflect on an annual basis with respect to those properties. These assessments
have a direct impact on the Company's net income. If the Company were to
lengthen the expected useful life of a particular asset, it would be depreciated
over more years, and result in less depreciation expense and higher annual net
income.
Assessment by the Company of certain other lease related costs must be
made when the Company has a reason to believe that the tenant may not be able to
perform under the terms of the lease as originally expected. This requires
management to make estimates as to the recoverability of such assets. Gains from
sales of real estate properties generally are recognized using the full accrual
method in accordance with the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 66 - "Accounting for Real Estate Sales," provided that
various criteria are met relating to the terms of sale and any subsequent
involvement by the Company with the properties sold.
The Company has certain joint venture investments that are consolidated
for financial reporting purposes because the Company either is subject to a
majority of the risk of loss or is entitled to receive a majority of the
entity's residual returns or both. The operations that are not allocable to the
Company's joint venture in these entities are reflected in minority interest in
the consolidated statements of income.
Off Balance Sheet Arrangements
The Company has a number of off balance sheet joint ventures and other
unconsolidated arrangements with varying structures described more fully in Note
3 to the consolidated financial statements. All of these arrangements are
accounted for under the equity method because the Company has the ability to
exercise significant influence, but not control over the operating and financial
decisions of the joint ventures. Accordingly, the Company's share of the
earnings of these joint ventures and companies is reflected in consolidated net
income based upon the Company's estimated economic ownership percentage.
To the extent that the Company contributes assets to a joint venture,
the Company's investment in the joint venture is recorded at the Company's cost
basis in the assets that were contributed to the joint venture. To the extent
that the Company's cost basis is different than the basis reflected at the joint
venture level, the basis difference is amortized over the life of the related
asset and reflected in the Company's share of equity in net income of joint
ventures.
Assets Held for Sale
The Company adopted the provisions of SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" effective January 1, 2002. This
standard addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. When assets are identified by management as held
for sale, the Company discontinues depreciating the assets and estimates the
sales price, net of selling costs of such assets. If, in management's opinion,
the net sales price of the assets that have been identified for sale is less
than the net book value of the assets, a valuation allowance is established. The
Company generally considers assets to be held for sale when the 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
within one year. Accordingly, the results of operations of operating properties
disposed of or classified as held for sale subsequent to January 1, 2002 for
which the Company has no significant continuing involvement, are reflected as
discontinued operations.
17
The Company's multifamily segment was originally reported as continuing
operations in the consolidated statements of income included in the Company's
Annual Report on Form 10-K for the year ending December 31, 2002. Since the
filing of the Form 10-K on March 31, 2003, the wholly-owned multifamily
properties have either been sold or classified as held for sale. Accordingly,
pursuant to SFAS No. 144, the Company is re-issuing the financial statements
included in its Form 10-K to reflect such properties as discontinued operations
in the statements of income for all periods presented.
Asset Impairment
On a periodic basis, management assesses whether there are any
indicators that the value of the real estate properties may be impaired. A
property's value is impaired only if management's estimate of the aggregate
future cash flows - undiscounted and without interest charges - to be generated
by the property are less than the carrying value of the property. These
estimates consider factors such as expected future operating income, trends and
prospects, as well as the effects of demand, competition and other factors. In
addition, these estimates may consider a probability weighted cash flow
estimation approach when alternative courses of action to recover the carrying
amount of a long lived asset are under consideration or when a range is
estimated. The determination of undiscounted cash flows requires significant
estimates by management and considers the expected course of action at the
balance sheet date. Subsequent changes in estimated undiscounted cash flows
arising from changes in anticipated action could impact the determination of
whether an impairment exists and whether the effects could materially impact the
Company's net income. To the extent impairment has occurred, the loss will be
measured as the excess of the carrying amount of the property over the fair
value of the property.
The Company conducts an annual review of goodwill balances for
impairment and to determine whether any adjustments to the carrying value of
goodwill are recognized.
LIQUIDITY AND CAPITAL RESOURCES
Equity Offering
On July 11, 2001, the Company issued, through a public offering, 2.0
million shares of beneficial interest at a price of $23.00 per share (the
"Offering"). Net proceeds from the Offering after deducting the underwriting
discount of $1.5 million and other expenses of approximately $0.2 million were
approximately $44.3 million. Proceeds from the Offering were used to repay $20.7
million outstanding on an existing construction loan and $16.5 million of
outstanding indebtedness under the Company's Credit Facility. The remaining
proceeds were used to fund projects then under development.
Credit Facility
The Company's operating partnership has a $200 million revolving credit
facility (the "Credit Facility") with a group of banks. As of December 31, 2002,
the obligations of the Company's operating partnership under the Credit Facility
were secured by a pool of 11 properties and were guaranteed by the Company.
There was $130.8 million outstanding under the Credit Facility at December 31,
2002. The Credit Facility expires in December 2003. The initial term of the
Credit Facility may be extended for an additional year on the lender's approval.
The Company has not yet determined if it will seek to extend the existing Credit
Facility or if it will seek another financing alternative.
The Credit Facility bears interest at the London Interbank Offered Rate
(LIBOR) plus margins ranging from 130 to 190 basis points (after giving effect
to an amendment to the Credit Facility in the second quarter of 2003), depending
on the ratio of the Company's consolidated liabilities to gross asset value (the
"Leverage Ratio"), each as determined pursuant to the terms of the Credit
Facility. As of December 31, 2002, the margin was set at 165 basis points.
The Credit Facility, as amended in the second quarter of 2003, contains
affirmative and negative covenants customarily found in facilities of this type,
as well as requirements that the Company maintain, on a consolidated basis: (1)
a maximum Leverage Ratio of 0.70:1; (2) a maximum Borrowing Base Value (as
defined in the Credit Facility) of 70%; (3) a minimum weighted average
collateral pool property occupancy of 85%; (4) minimum Tangible Net Worth (as
defined in the Credit Facility) of $262 million plus 75% of cumulative net
proceeds from the sale of equity securities; (5) minimum ratios of earnings
before interest, taxes, depreciation, and amortization ("EBITDA") to Debt
Service and Interest Expense (as defined in the Credit Facility) of 1.55:1 and
1.90:1, respectively, at December 31, 2002; (6) maximum floating rate debt of
$400 million; and (7) maximum commitments for properties under development not
in excess of 25% of Gross Asset Value (as defined in the Credit Facility). As of
the date of this report, the Company is in compliance with all of these debt
covenants.
The amendment to the Credit Facility in the second quarter of 2003 also
modified the definition of Total Liabilities to exclude the debt premiums on the
properties acquired from The Rouse Company resulting from the above-market
interest rates on the assumed debt. The Company agreed to pay each lender under
the Credit Facility an amendment fee of 0.15% of each lender's existing
revolving commitment amount, which fees totaled $300,000.
18
Acquisition Credit Facility
The Company financed a significant portion of the cash portion of the
purchase price for its acquisition of six malls from The Rouse Company through
an unsecured credit facility (the "Acquisition Credit Facility"). The
Acquisition Credit Facility included a $175 million term loan and a $25 million
revolving line of credit. PREIT applied a substantial portion of the proceeds
from the sale of its multifamily portfolio to repay in full all amounts borrowed
under the Acquisition Credit Facility as of July 25, 2003. The revolving line of
credit remains available for future borrowings. The fees paid to Wells Fargo for
the term loan and the revolving line of credit were $1,312,500 and $187,500,
respectively. In addition, there is a fee of 0.125% per annum on the unused
portion of the revolving line of credit payable to Wells Fargo quarterly in
arrears. At PREIT's option, the revolving line of credit bears interest at
either the Base Rate (the greater of Wells Fargo's prime rate or the Federal
Funds Rate plus 0.5%) or the LIBOR rate for which deposits are offered to Wells
Fargo for one-, two-, three- or six-month periods, plus margins ranging from
2.5% to 3.0%, depending on PREIT's ratio of Total Liabilities to Gross Asset
Value (as defined in the credit agreement for the Acquisition Credit Facility).
As of July 29, 2003, the margins for the LIBOR Loans were set at 3.0%.
The financial covenants of the Acquisition Credit Facility are the same
as those of the Credit Facility, plus two additional covenants providing that
the Company's secured recourse indebtedness may not exceed 15% of its Gross
Asset Value and that the Company may not, without Wells Fargo's approval, incur
unsecured indebtedness (as defined in the credit agreement for the Acquisition
Credit Facility) other than under the Acquisition Credit Facility and the Credit
Facility or with respect to trade payables.
Mortgage Refinancings
In the second quarter of 2003, the Company refinanced Dartmouth Mall in
Dartmouth, Massachusetts for $70 million and Moorestown Mall in Moorestown, New
Jersey for $64.3 million. The term of the refinancings is ten years, with
amortization on a 30-year basis, at an interest rate of 4.95%. The Company
received net cash proceeds of $74.2 million from the refinancings after
repayment of the existing mortgage debt on these properties. The proceeds of the
refinancings were used toward the cash portion of the purchase price for the
Company's acquisition of six malls from The Rouse Company.
Capital Resources
The Company expects to meet its short-term liquidity requirements
generally through its available working capital and net cash provided by
operations. The Company believes that its net cash provided by operations will
be sufficient to allow the Company to make any distributions necessary to enable
the Company to continue to qualify as a REIT under the Internal Revenue Code of
1986, as amended. The Company also believes that the foregoing sources of
liquidity will be sufficient to fund its short-term liquidity needs for the
foreseeable future, including capital expenditures, tenant improvements and
leasing commissions. The following are some of the risks that could impact the
Company's cash flows and require the funding of future distributions, capital
expenditures, tenant improvements and/or leasing commissions with sources other
than operating cash flows:
o increase in tenant bankruptcies reducing revenue and operating cash flows;
o increase in interest expenses as a result of borrowing incurred in order to
finance long-term capital requirements such as property and portfolio
acquisitions;
o increase in interest rates affecting the Company's net cost of borrowing;
o increase in insurance premiums and/or the Company's portion of claims;
o eroding market conditions in one or more of the Company's primary geographic
regions adversely affecting property operating cash flows; and
o disputes with tenants over common area maintenance and other charges.
The Company expects to meet certain long-term capital requirements such as
property and portfolio acquisitions, scheduled debt maturities, renovations,
expansions and other non-recurring capital improvements through long-term
secured and unsecured indebtedness and the issuance of additional equity
securities. The Company also expects to increase the funds available under the
Credit Facility by placing acquired or developed properties into the collateral
pool upon the achievement of prescribed criteria so as to fund acquisitions,
development activities and capital improvements. In general, when the credit
markets are tight, the Company may encounter resistance from lenders when the
Company seeks financing or refinancing for properties or proposed acquisitions.
The Company also may be unable to sell additional equity securities on terms
that are favorable to the Company, if at all. Additionally, the following are
some of the potential impediments to accessing additional funds under the Credit
Facility:
o reduction in occupancy at one or more properties in the collateral pool;
o reduction in appraised value of one or more properties in the collateral
pool;
o reduction in net operating income at one or more properties in the collateral
pool;
o constraining leverage covenants under the Credit Facility;
o increased interest rates affecting interest coverage ratios; and
o reduction in the Company's consolidated earnings before interest, taxes,
depreciation and amortization (EBITDA).
19
At December 31, 2002 the Company had outstanding borrowings of $130.8
million under its Credit Facility and had pledged $0.7 million under the Credit
Facility as collateral for several letters of credit. Of the unused portion of
the Credit Facility of approximately $68.5 million, as of December 31, 2002, the
Company's loan covenant restrictions allowed the Company to borrow approximately
an additional $22.6 million based on the existing property collateral pool. As
noted, one of the additional means of increasing the Company's borrowing
capacity under the Credit Facility is the addition of unencumbered acquisition
and/or development properties to the collateral pool. For example, during the
first quarter of 2002, the Company placed Creekview Shopping Center, a recently
completed retail development project, into the collateral pool, which increased
the Company's borrowing capacity by approximately $20 million. The Company
expects to place additional projects into the collateral pool to provide
additional borrowing capacity, as necessary. The Company believes that the
anticipated placement of properties into the collateral pool will allow for
sufficient availability of borrowing capacity to fund the development pipeline,
as well as any short-term liquidity needs that are not fulfilled by cash flows
from operations. At May 31, 2003, the Company had outstanding borrowings of
$103.9 million under its Credit Facility and had pledged $0.7 million under the
Credit Facility as collateral for several letters of credit. Of the unused
portion of the Credit Facility of $95.4 million, as of May 31, 2003, the
Company's loan covenant restrictions allowed the Company to borrow approximately
an additional $15.6 million based on the existing property collateral pool.
Mortgage Notes
Mortgage notes payable, which are secured by 19 of the Company's
wholly-owned properties, are due in installments over various terms extending to
the year 2025 with interest at rates ranging from 4.70% to 8.70% with a weighted
average interest rate of 7.32% at December 31, 2002. The following table
outlines the timing of payment requirements related to the Company's mortgage
notes and Credit Facility as of December 31, 2002 (in thousands):
Payments by Period
------------------
Up to More than
Total 1 Year 2-3 Years 4-5 Years 5 Years
----- ------ --------- --------- -------
Fixed Rate Mortgages $319,751(1) $ 10,924 $22,794 $85,585 $200,448
Credit Facility 130,800 130,800 - - -
------- ------- ------- ------- --------
$450,551 $141,724 $22,794 $85,585 $200,448
======== ======== ======= ======= ========
(1) Includes approximately $192.9 million of mortgages related to the
wholly-owned multifamily portfolio.
20
The foregoing table includes $18.7 million of balloon payments that
come due under the Company's mortgage notes during the next three years. Of this
amount, $6.2 million, representing the mortgage on The Woods Apartments, was
repaid in January 2003. In addition to the obligations reflected in the
foregoing table, a balloon payment of $22.1 million, of which the Company's
proportionate share is $8.8 million, comes due in December 2003 with respect to
a mortgage loan secured by a retail property owned by a partnership in which the
Company has a 40% interest.
As of December 31, 2002, eight of the Company's multifamily communities
are financed with $104 million of permanent, fixed-rate, long-term debt. This
debt carries a weighted average fixed interest rate of approximately 6.77%. The
eight properties secure the non-recourse loans, which amortize over 30 years and
mature in 2009. This debt was assumed by the purchaser upon the sale of the
Company's multifamily portfolio as described under "Significant Transactions -
Sale of Multifamily Portfolio."
In March 2002, the mortgage on Camp Hill Plaza Apartments in Camp Hill,
Pennsylvania, was refinanced. The new $12.8 million mortgage has a 10-year term
and bears interest at the fixed rate of 7.02% per annum. In connection with the
refinancing, unamortized deferred financing costs of $0.1 million were written
off and are reflected as interest expense in the consolidated statements of
income in accordance with the provisions of SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" ("SFAS No. 145"), which was adopted by the Company in 2002. This
mortgage was assumed by the purchaser upon the sale of the Company's Multifamily
Portfolio, as described under "Significant Transactions - Sale of Multifamily
Portfolio."
Mortgage notes payable, after giving effect to the Rouse transactions
and the sale of the multifamily portfolio, are secured by ten of the Company's
wholly-owned properties. The mortgage notes are due in installments over various
terms extending to the year 2013 with interest rates ranging from 4.95% to
10.60% with a weighted average interest rate of 6.99% at June 27, 2003. The
following table outlines the timing of payment requirements related to the
Company's mortgage notes, Acquisition Credit Facility, and Credit Facility as of
June 27, 2003 (in thousands):
Payments by Period
------------------
Up to 1/1/04 to 1/1/06 to Payments
Total 12/31/03 12/31/05 12/31/07 Thereafter
----- -------- -------- -------- ----------
Fixed Rate Mortgages $527,996 $ 4,043 $158,345 $88,137 $277,471
Acquisition Credit Facility 10,250(1) 10,250(1) - - -
Credit Facility 117,900 117,900 - - -
------- ------- -------- ------- --------
$656,146 $132,193 $158,345 $88,137 $277,471
======== ======== ======== ======= ========
(1) The $10.2 million was repaid subsequent to June 27, 2003.
21
The foregoing table includes $140.9 million of balloon payments that
come due under the Company's mortgage notes during the next 2 1/2 years.
Commitments
At December 31, 2002, the Company had approximately $15.0 million
committed to complete current development and redevelopment projects. This
amount is expected to be financed through the Credit Facility or through
short-term construction loans. In connection with certain development and
predevelopment properties acquired as part of the Company's acquisition of TRO,
the Company was required as of December 31, 2002 to issue additional Units in
its operating partnership to the former owners of the properties upon final
determination of the values attributable to the properties by a special
committee of disinterested members of the Company's Board of Trustees. Further,
as of December 31, 2002, up to an additional 135,000 Units may have been earned
by the former TRO affiliates for the period from January 1, 2002 to September
30, 2002, depending upon the final determination by the special committee of the
Company's adjusted funds of operations for such period. The special committee
has retained independent legal and accounting advisors in connection with its
review of the payments owed to the former TRO affiliates. The special committee
and its advisors and the former TRO affiliates and their advisors have engaged
in discussions concerning the appropriate number of Class A Units to be issued
in respect of the nine month period ended September 30, 2002 and the development
and predevelopment properties. The discussions between the special committee,
the former TRO affiliates and their respective advisors are continuing.
Cash Flows
During the year ended December 31, 2002, the Company generated $28.5
million in cash flows from operating activities. Financing activities used cash
of $1.2 million including: (1) $33.2 million of distributions to shareholders,
(2) $13.0 million and $4.0 million of repayments on a mortgage note payable and
a construction loan payable, respectively, (3) $5.0 million of mortgage notes
payable principal installments, (4) $1.7 million of net distributions to unit
holders of the Company's operating partnership and minority partners and (5)
$0.2 million payment of deferred financing costs offset by (1) $10.8 million of
net proceeds from shares of beneficial interest issued, (2) $32.3 million of net
bank loan borrowings and (3)$12.8 million of proceeds from a mortgage loan.
Investing activities used cash of $24.0 million including: (1) $25.2 million of
investments in wholly-owned real estate assets, (2) $10.0 million of investments
in property under development and (3) $1.7 million of investments in
partnerships and joint ventures; offset by (1) cash proceeds from sales of real
estate interests of $8.9 million and (2) cash distributions from partnerships
and joint ventures in excess of equity in income of $4.0 million.
Contingent Liabilities
As of December 31, 2002, the Company along with certain of its joint
venture partners had guaranteed debt totaling $5.5 million. The debt matures in
2003 (see Note 3 to the consolidated financial statements).
In June and July respectively, of 2003, a former administrative
employee and a former building engineer of PREIT-Rubin Inc. ("PREIT-Rubin") pled
guilty to criminal charges related to the misappropriation of funds at a
property owned by a third-party for which PREIT-Rubin provided certain
management services. The former employees worked under the supervision of the
Director of Real Estate for the third-party, who earlier pled guilty to criminal
charges. Together with other individuals, the former PREIT-Rubin employees and
the third-party's Director of Real Estate misappropriated funds from the
third-party through a series of schemes. The third-party has estimated its
losses at approximately $15 million, and has alleged that PREIT-Rubin is
responsible for such losses under its management agreement. However, no claim
has been filed against PREIT-Rubin. The Company believes that restitution to be
paid by the individual participants and the fidelity policy carried by the
third-party owner will result in mitigation of the third-party's losses. In
addition, the Company believes that PREIT-Rubin has valid defenses to any
potential claims of the third-party and that it has insurance to cover some or
all of any potential claims. The Company is unable to determine an estimate or
the likelihood of any loss.
ACQUISITIONS, DISPOSITIONS AND DEVELOPMENT ACTIVITIES
The Company is actively involved in pursuing and evaluating a number of
individual property and portfolio acquisition opportunities. Please refer to
"Significant Transactions" above and to Notes 15 and 16 to the consolidated
financial statements for a discussion of certain transactions and other
significant events that occurred after December 31, 2002. In addition, the
Company has stated that a key strategic goal is to obtain managerial control of
all of its assets. In certain cases where existing joint venture assets are
managed by outside partners, the Company is considering the possible acquisition
of these outside interests. In certain cases where that opportunity does not
exist, the Company is considering the disposition of its interests. There can be
no assurance that the Company will consummate any such acquisition or
disposition.
Acquisitions
In 2000, the Company entered into an agreement giving it a partnership
interest in Willow Grove Park, a 1.2 million square foot regional mall in Willow
Grove, Pennsylvania. Under the agreement, the Company was responsible for the
expansion of the property to include a new Macy's store and decked parking. The
total cost of the expansion was $16.6 million. In June 2002, the Company
contributed the expansion asset to the partnership. As a result of this
contribution, the Company increased its capital interest in the partnership that
owns Willow Grove Park to 30% and its management interest in the partnership to
50%, and became the managing general partner of the partnership.
22
In 2000, the Company acquired the remaining 35% interest in Emerald
Point, a multifamily property located in Virginia Beach, Virginia. The Company
paid approximately $11.0 million for the interest, including $5.7 million in
assumed debt and $5.3 million borrowed under the Credit Facility.
In April 2002, the Company purchased Beaver Valley Mall located in
Monaca, Pennsylvania for a purchase price of $60.8 million. The purchase was
financed primarily through a $48.0 million mortgage and a $10.0 million bank
borrowing. The bank borrowing was subsequently repaid. Also in 2002, the Company
exercised an option to purchase a portion of the land on which Beaver Valley
Mall is situated for $0.5 million.
In July 2002, the Company acquired the remaining 11% interest in
Northeast Tower Center pursuant to the Contribution Agreement entered into in
connection with the acquisition of The Rubin Organization. The purchase price
for the acquisition consisted of 24,337 Units in the Company's operating
partnership, PREIT Associates, L.P.
In October 2002, the Company acquired the remaining 50% interest in
Regency Lakeside Apartments. The Company paid approximately $14.2 million for
the interest, including $9.6 million in the form of an assumed mortgage, $2.5
million borrowed under the Credit Facility and $2.1 million in cash.
Dispositions
In 2001, the Company sold parcels of land located at Paxton Towne
Centre in Harrisburg, Pennsylvania and Commons at Magnolia in Florence, South
Carolina and an undeveloped parcel of land adjacent to the Metroplex Shopping
Center in Plymouth Meeting, Pennsylvania. Consistent with management's stated
long-term strategic plan to review and evaluate all joint venture real estate
holdings and non-core properties, during 2001 and 2000 the Company sold its
interests in several properties. Under this plan, in 2001, the Company sold its
interest in the Ingleside Shopping Center in Thorndale, Pennsylvania, and in
2000, the Company sold the CVS Warehouse and Distribution Center in Alexandria,
Virginia; Valleyview Shopping Center in Wilmington, Delaware; Forestville
Shopping Center in Forestville, Maryland and the Company's 50% interest in Park
Plaza Shopping Center in Pinellas Park, Florida.
In July 2002, the Company sold Mandarin Corners shopping center in
Jacksonville, Florida for $16.3 million. The Company recorded a gain on the sale
of approximately $4.1 million. In accordance with the provisions of Statement of
Financial Accounting Standards No. 144, the operating results and gain on sale
of Mandarin Corners Shopping Center are included in discontinued operations for
all periods presented.
In 2003, the Company sold a parcel of land located at Crest Plaza
Shopping Center located in Allentown, Pennsylvania for $3.2 million. The Company
will recognize a gain of approximately $2.0 million in 2003 as a result of this
sale.
Development, Expansions and Renovations
The Company is involved in a number of development and redevelopment
projects, which may require equity funding by the Company or third-party debt or
equity financing (see Note 11 to the consolidated financial statements). In each
case, the Company will evaluate the financing opportunities available to it at
the time a project requires funding. In cases where the project is undertaken
with a joint venture partner, the Company's flexibility in funding the project
may be governed by the joint venture agreement or the covenants existing in its
line of credit, which limit the Company's involvement in joint venture projects.
RELATED PARTY TRANSACTIONS/OFF BALANCE SHEET ARRANGEMENTS
The Company provides management, leasing and development services for
partnerships and other ventures in which certain officers of the Company have
either direct or indirect ownership interests, including Ronald Rubin, the
Company's Chairman and Chief Executive Officer. The Company believes that the
terms of the management agreements for these services are no less favorable to
the Company than its agreements with non-affiliates. As discussed in
"Significant Transactions - Acquisition of Shopping Malls from Rouse," the
Company canceled one such management agreement in the second quarter of 2003,
with respect to Christiana Mall, and received a $2 million brokerage fee from
the sale of that mall.
The Company has no material off-balance sheet transactions other than
the Joint Ventures described in Note 3 of the consolidated financial statements
and the "Overview" section above, and the interest rate swap agreements
discussed in "Item 7A. Quantitative and Qualitative Disclosure About Market
Risk" in the Company's Annual Report on Form 10-K for the year ended December
31, 2002. No officer or employee of the Company benefits from or has benefited
from any off-balance sheet transactions with or involving the Company.
The Company leases its corporate home office space from Bellevue
Associates, an affiliate of certain officers of the Company, including Ronald
Rubin, the Company's Chairman and Chief Executive Officer. In the third quarter
of 2002, the Company expanded this lease to include additional space within the
same building. Management believes that the lease terms were established at
market rates at the commencement of the lease.
23
In connection with the Company's acquisition of TRO in 1997, the
Company issued 200,000 Class A Units in its operating partnership, and agreed to
issue up to 800,000 additional Class A Units over a five-year period ending
September 30, 2002 contingent on the Company achieving specified performance
targets. Through December 31, 2001, 665,000 of the contingent Class A Units had
been issued. A special committee of disinterested members of the Company's Board
of Trustees will determine whether the remaining 135,000 Class A Units for the
period from January 1, 2002 to September 30, 2002 have been earned. Additional
Class A Units also will be payable with respect to development and
predevelopment properties acquired in the TRO transaction in an amount to be
determined by the special committee based on the Contribution Agreement under
which the Company acquired its interest in the properties and on the other facts
that the special committee deems relevant. The special committee has retained
independent legal and accounting advisors in connection with its review of the
payments owed to the former TRO affiliates. The special committee and its
advisors and the former TRO affiliates and their advisors have engaged in
discussions concerning the appropriate number of Class A Units to be issued in
respect of the nine month period ended September 30, 2002 and the development
and predevelopment properties. The discussions between the special committee,
the former TRO affiliates and their respective advisors are continuing. No
payments have yet been made or allocated among the former TRO affiliates, but,
collectively, Ronald Rubin, George F. Rubin, Edward A. Glickman, Joseph F.
Coradino, Douglas S. Grayson and David J. Bryant, each of whom is a former TRO
affiliate and an executive officer of the Company, are expected to receive a
substantial portion thereof upon payment.
Officers of the Company, including Ronald Rubin, also are parties to
the Rouse transaction through their ownership interest in New Castle Associates,
as described above in "Significant Transactions - Acquisition of Shopping Malls
from Rouse."
RESULTS OF OPERATIONS
Year Ended December 31, 2002 compared with Year Ended December 31, 2001
Net income increased by $3.9 million to $23.7 million ($1.47 per share)
for the year ended December 31, 2002 as compared to $19.8 million ($1.35 per
share) for the year ended December 31, 2001. This increase was primarily because
of increased gains on the sale of real estate interests and increased net
operating income from properties placed in service or acquired in 2002.
Revenues increased by $12.8 million or 20% to $75.1 million for the
year ended December 31, 2002 from $62.3 million for the year ended December 31,
2001. Gross revenues from real estate increased by $12.7 million to $63.3
million for the year ended December 31, 2002 from $50.6 million for the year
ended December 31, 2001. This increase in gross revenues resulted from a $9.5
million increase in base rents, a $3.2 million increase in expense
reimbursements and a $0.2 million increase in percentage rents. Base rents
increased due to a $9.5 million increase in retail rents, resulting primarily
from the inclusion of rents from the newly acquired Beaver Valley Mall ($6.4
million) and two properties under development in 2001 that were placed in
service ($2.0 million), and higher rents due to new and renewal leases at higher
rates in 2002. Expense reimbursements increased due to an increase in
reimbursable property operating expenses. Management company revenue decreased
by $0.3 million. Interest and other income increased by $0.3 million due to
increased interest on notes receivable from Joint Ventures.
Property operating expenses increased by $3.6 million to $16.3 million
for the year ended December 31, 2002 compared to $12.7 million for the year
ended December 31, 2001. Real estate and other taxes increased by $1.2 million
due to higher property tax rates. Payroll expense increased $0.8 million due to
normal salary increases and increased benefit costs. Utilities increased by $0.2
million. Other operating expenses increased by $1.4 million due primarily to
increased insurance and repairs and maintenance expenses. Property operating
expenses also were generally higher due to the newly acquired Beaver Valley
Mall.
Depreciation and amortization expense increased by $3.7 million to
$13.0 million for the year ended December 31, 2002 from $9.3 million for the
year ended December 31, 2001 due to $1.4 million from the newly acquired Beaver
Valley Mall, $1.1 million from two properties under development in 2001 that
were placed in service, and $1.2 million from additional property improvements.
General and administrative expenses increased by $1.1 million to $24.7
million for the year ended December 31, 2002 from $23.6 million for the year
ended December 31, 2001 primarily due to a $0.8 million increase in payroll and
benefits and a $0.3 million increase in marketing costs.
Interest expense increased by $3.1 million to $15.4 million for the
year ended December 31, 2002 as compared to $12.3 million for the year ended
December 31, 2001. Mortgage interest increased by $1.3 million. This was
primarily due to $2.7 million interest expense for the Beaver Valley Mall
mortgage, partially offset by a $1.4 million reduction in interest expense
associated with the repayment of a construction note payable at Paxton Towne
Centre. Bank loan interest expense increased by $1.8 million because of greater
weighted average amounts outstanding in 2002 as compared to 2001.
Equity in income of partnerships and joint ventures increased by $0.9
million to $7.4 million for the year ended December 31, 2002 from $6.5 million
for the year ended December 31, 2001. The increase was primarily due to
increased rental revenues, partially offset by increased property operating,
depreciation and mortgage interest expense.
Gains on sales of interests in real estate were $2.1 million in the
year 2001 resulting from the sale of the Company's interests in Ingleside Center
in Thorndale, Pennsylvania and land parcels at Commons at Magnolia and Paxton
Towne Centre in 2001.
Minority interest in the operating partnership decreased $0.2 million
to $1.3 million for the year ended December 31, 2002 from $1.5 million for the
year ended December 31, 2001.
Income from discontinued operations increased $3.6 million in the year
ended 2002 compared with the year ended 2001. This increase resulted from the
$4.1 million gain on the sale of Mandarin Corners Shopping Center, partially
offset by a $0.5 decrease in results of operations and minority interest.
24
Year Ended December 31, 2001 compared with Year Ended December 31, 2000
Net income decreased by $12.5 million to $19.8 million ($1.35 per
share) for the year ended December 31, 2001 as compared to $32.3 million ($2.41
per share) for the year ended December 31, 2000.
Revenues increased by $11.0 million or 21% to $62.3 million for the
year ended December 31, 2001 from $51.3 million for the year ended December 31,
2000. Gross revenues from real estate increased by $0.7 million to $50.6 million
for the year ended December 31, 2001 from $49.9 million for the year ended
December 31, 2000. This increase in gross revenues resulted from a $2.9 million
increase in base rents, a $0.3 million increase in percentage rents and a $1.5
million increase in expense reimbursements. Offsetting this increase is a $3.7
million decrease in lease termination fees from $4.6 million in 2000 to $0.8
million in 2001. Lease termination fees in 2000 included a $4.0 million fee
received in connection with the sale of the CVS Warehouse and Distribution
Center. Base rents increased due to a $3.3 million increase in retail rents,
resulting from two properties under development in 2000 that were placed in
service, and higher rents due to new and renewal leases at higher rates in 2001.
These increases include an offset from the sale of two retail properties that
were sold in the third quarter of 2000, resulting in a $0.8 million reduction in
base rents. The increase in base rents was offset by a $0.4 million decrease in
industrial rents due to the sale of the CVS Warehouse and Distribution Center.
Percentage rents increased due to higher tenant sales levels. Expense
reimbursements increased due to two properties under development in 2000 that
were placed in service, increased property operating expenses and the recovery
of 2000 renovation costs over 10 years at Dartmouth Mall. Management fees were
$11.3 million for the year ended December 31, 2001. This entire amount
represents an increase in consolidated revenues in 2001 because PREIT-Rubin was
not consolidated in 2000. Interest and other income decreased by $1.0 million
because interest income on a loan with PREIT-Rubin was eliminated in 2001 due to
the consolidation of PREIT-Rubin effective January 1, 2001. Without the effects
of the consolidation of PREIT-Rubin, the Company's revenues for 2001 would have
increased by $1.4 million over revenues in 2000.
Property operating expenses increased by $0.1 million to $12.7 million
for the year ended December 31, 2001 from $12.6 million for the year ended
December 31, 2000. Payroll expense increased $0.3 million or 12% due to normal
salary increases and increased benefit costs. Real estate and other taxes
increased by $0.4 million as two properties under development in 2000 were
placed in service and tax rates were slightly higher for properties owned during
both periods, partially offset by savings from the sale of two properties in
2000. Utilities decreased by $0.1 million. Other operating expenses decreased by
$0.8 million due to decreased repairs and maintenance expenses.
Depreciation and amortization expense increased by $2.4 million to $9.3
million for the year ended December 31, 2001 from $6.9 million for the year
ended December 31, 2000 primarily due to $0.9 million from two properties under
development in 2000 now placed in service and $1.5 million from a higher asset
base, of which $0.9 million is attributable to the 2000 renovation at Dartmouth
Mall.
General and administrative expenses increased by $18.6 million to $23.6
million for the year ended December 31, 2001 from $5.0 million for the year
ended December 31, 2000. The primary reason for the increase is the
consolidation of PREIT-Rubin in 2001, which accounted for $16.3 million of the
increase. General and administrative expenses also increased primarily due to a
$1.2 million increase in payroll and benefits expenses, as well as minor
increases in several other expense categories totaling $1.0 million in the
aggregate.
Interest expense increased by $1.2 million to $12.3 million for the
year ended December 31, 2001 as compared to $11.1 million for the year ended
December 31, 2000. Retail mortgage interest increased by $0.5 million. Of this
amount, $0.6 million was due to a full year of interest on a mortgage for a
property placed in service in 2000, offset by $0.1 million due to amortization
of mortgage balances. Bank loan interest expense increased by $0.8 million
because of higher amounts outstanding in 2001 as compared to 2000, and because
of lower capitalized interest in 2001 due to development assets placed in
service in 2001.
Equity in loss of PREIT-RUBIN was $6.3 million in the year ended
December 31, 2000. There was no corresponding amount in 2001 due to the
consolidation of PREIT-Rubin in 2001.
Equity in income of partnerships and joint ventures decreased $0.9
million to $6.5 million for the year ended December 31, 2001 as compared to $7.4
million for the year ended December 31, 2000.
Minority interest in the operating partnership decreased $1.3 million
to $1.5 million in the year ended December 31, 2001 from $2.8 million in the
year ended December 31, 2000.
Gains on sales of interests in real estate were $2.1 million and $10.3
million, respectively, in the years ended December 31, 2001 and 2000 resulting
from the sales of the Company's interests in Ingleside Center and land parcels
at the Commons at Magnolia Shopping Center and Paxton Towne Centre in 2001, and
Park Plaza, the CVS Warehouse and Distribution Center, Valley View Shopping
Center and Forestville Shopping Center in 2000.
Income from discontinued operations increased $0.2 million to $8.2
million for the year ended December 31, 2001 from $8.0 million for the year
ended December 31, 2000.
25
SAME STORE PROPERTIES
Retail sector net operating income, for the year ended December 31,
2002 for the properties owned since January 1, 2001 (the "Same Store
Properties"), increased by $3.0 million or 6.5% over the year ended December 31,
2001. This increase resulted from new and renewal leases at higher rates, higher
occupancy and higher percentage rents in 2002 as compared to 2001.
Net operating income is derived from revenues (determined in accordance
with GAAP) minus property operating expenses (determined in accordance with
GAAP). Net operating income does not represent cash generated from operating
activities in accordance with GAAP and should not be considered to be an
alternative to net income (determined in accordance with GAAP) as an indication
of the Company's financial performance or to be an alternative to cash flow from
operating activities (determined in accordance with GAAP) as a measure of the
Company's liquidity; nor is it indicative of funds available for the Company's
cash needs, including its ability to make cash distributions. The Company
believes that net income is the most directly comparable GAAP measurement to net
operating income. The Company believes that net operating income is helpful to
investors as a measure of operating performance because it is an indicator of
the return on investment on the properties, and provides a comparison
measurement of the properties over time. Net operating income excludes general
and administrative expenses, management company revenues, interest income,
interest expense, depreciation and amortization, income from discontinued
operations and gains or sale of interest in real estate.
Set forth below is a schedule comparing the net operating income for
the Same Store Properties for the year ended December 31, 2002, as compared to
the year ended December 31, 2001 (in thousands):
For the year ended For the year ended
December 31, 2002 December 31, 2001
----------------- -----------------
Same Store Total Same Store Total
---------- ----- ---------- -----
Retail
Revenues $67,272 $100,393 $63,897 $79,951
Expenses (18,823) (28,534) (18,423) (22,108)
-------- -------- -------- --------
NOI $48,449 $71,859 $45,474 $57,843
======= ======= ======= =======
A reconciliation of total net operating income to net income is
presented in Note 12 of the consolidated financial statements.
FUNDS FROM OPERATIONS
The National Association of Real Estate Investment Trusts ("NAREIT")
defines Funds from Operations ("FFO") as income before gains (losses) on
property sales and extraordinary items (computed in accordance with GAAP); plus
real estate depreciation and similar adjustments for unconsolidated joint
ventures after adjustments for non-real estate depreciation and amortization of
financing costs. The Company computes 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 the
Company. FFO does not represent cash generated from operating activities in
accordance with GAAP and should not be considered to be an alternative to net
income (determined in accordance with GAAP) as an indication of the Company's
financial performance or to be an alternative to cash flow from operating
activities (determined in accordance with GAAP) as a measure of the Company's
liquidity, nor is it indicative of funds available for the Company's cash needs,
including its ability to make cash distributions. The Company believes that net
income is the most directly comparable GAAP measurement to FFO. The Company
believes that FFO is helpful to investors as a measure of operating performance
because it excludes various items included in net income that do not relate to
or are not indicative of operating performance, such as various non-recurring
items, gains on sales of real estate and depreciation and amortization of real
estate.
FFO increased 14.5% to $51.2 million for the year ended December 31,
2002, as compared to $44.7 million in 2001. The increase was primarily due to
completed development projects, the acquisition of a 30% interest in Willow
Grove Park; the acquisition of Beaver Valley Mall; and internal growth in the
Company's retail portfolio.
The following information is provided to reconcile net income to FFO,
and to show the items included in our FFO for the past periods indicated (in
thousands, except per share data):
26
For the year ended December 31,
2002 per share 2001 per share
---- --------- ---- ---------
Net income $23,678 $1.33 $19,789 $1.19
Minority interest in operating partnership 1,307 0.07 1,481 0.09
Minority interest in discontinued operations 1,308 0.07 1,043 0.06
Gains on sales of interests in real estate - - (2,107) (0.13)
Gains on dispositions of discontinued operations (4,085) (0.23) - -
Depreciation and amortization:
Wholly owned & consolidated partnership 12,709 0.71 (1) 9,123 0.55 (1)
Unconsolidated partnerships & joint ventures 7,446 0.41 (1) 6,264 0.38 (1)
Discontinued operations 8,727 0.49 8,428 0.51
Excess purchase price over net assets acquired - - 423 0.03
Prepayment fee 77 - (2) 255 0.02 (2)
------- ----- ----- ----
FUNDS FROM OPERATIONS $51,167 $2.85 (3) $44,699 $2.70 (3)
======= ===== ======= =====
Weighted average number of shares outstanding 16,162 14,657
Weighted average effect of full conversion of OP Units 1,805 1,869
----- -----
Total weighted average shares outstanding, including OP Units 17,967 16,526
------ ------
1) Excludes depreciation of non-real estate assets, amortization of deferred
financing costs and discontinued operations.
2) Prepayment fee for the refinancing of the mortgage on Camp Hill Apartments
in 2002 and Countrywood Apartments in 2001.
3) Includes the non-cash effect of straight-line rents of $1.0 million and
$1.1 million for year to date 2002 and 2001, respectively.
CAPITAL EXPENDITURES
Substantially all of the Company's recurring capital expenditures in
2002 related to its wholly owned multifamily properties, which are the subject
of the transactions described above in "Significant Transactions - Sale of
Multifamily Portfolio." The multifamily properties expended $2.5 million for
recurring capital expenditures ($340 per unit owned adjusted for partnership
interests). The Company's policy is to capitalize expenditures for floor
coverings, appliances and major exterior preparation and painting for
apartments. During 2002, $1.8 million ($284 per unit) was expended for floor
covering and $0.7 million ($117 per unit owned) for appliances.
COMPETITION
The Company's shopping centers compete with other shopping centers in
their trade areas as well as alternative retail formats, including catalogues,
home shopping networks and internet commerce. Economic factors, such as
employment trends and the level of interest rates, impact shopping center sales.
Some of our properties are of the same type and are within the same market area
as other competitive properties. This results in the competition for both
acquisition of prime sites and for tenants to occupy the space that we and our
competitors develop and manage. The existence of competitive properties could
have a material adverse effect on our ability to lease space and on the level of
rents we can obtain.
SEASONALITY
There is seasonality in the retail real estate industry. Shopping
center leases often provide for the payment of rents based on a percentage of
sales over certain levels. Income from such rents is recorded only after the
minimum sales levels have been met. The sales levels are often met in the fourth
quarter, during the December holiday season.
INFLATION
Inflation can have many effects on the financial performance of the
Company. Shopping center leases often provide for the payment of rents based on
a percentage of sales, which may increase with inflation. Leases may also
provide for tenants to bear all or a portion of operating expenses, which may
reduce the impact of such increases on the Company. However, during times when
inflation is greater than increases in rent as provided for in leases, net
increases may not keep up with inflation.
27
Item 8 of Form 10-K. Financial Statements and Supplementary Data
The following documents are included in this report:
(1) Financial Statements
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31, 2002 and 2001 F-3
Consolidated Statements of Income for the years ended
December 31, 2002, 2001 and 2000 F-4 to F-5
Consolidated Statements of Shareholders' Equity and Comprehensive Income
for the years ended December 31, 2002, 2001 and 2000 F-6
Consolidated Statements of Cash Flows for the years
ended December 31, 2002, 2001 and 2000 F-7
Notes to Consolidated Financial Statements F-8 to F-30
Opinion of Independent Auditors for Lehigh Valley Associates F-31
Opinion of Independent Auditors for Lehigh Valley Associates F-32
(2) Financial Statement Schedules
II - Valuation and Qualifying Accounts S-1
III - Real Estate and Accumulated Depreciation S-2 to S-3
All other schedules are omitted because they are not
applicable, not required or because the required information
is reported in the consolidated financial statement or notes
thereto.
Independent Auditors' Report
The Shareholders and Trustees
Pennsylvania Real Estate Investment Trust:
We have audited the consolidated financial statements of Pennsylvania Real
Estate Investment Trust (a Pennsylvania business trust) and subsidiaries as
listed in the accompanying index. In connection with our audits of the
consolidated financial statements, we have also audited the financial statement
schedules listed in the accompanying index. These consolidated financial
statements and financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedules based on our
audits. We did not audit the financial statements of Lehigh Valley Mall
Associates, a partnership in which the Company has a 50% interest, which is
reflected in the accompanying consolidated financial statements using the equity
method of accounting. The Company's investment in Lehigh Valley Mall Associates
at December 31, 2002 and 2001 was a deficit of ($16.0 million) and ($15.9
million), respectively, and the equity in net income of Lehigh Valley Mall
Associates was $3.6 million, $3.3 million, and $3.3 million for the years ended
December 31, 2002, 2001, and 2000 respectively. The financial statements of
Lehigh Valley Mall Associates were audited by other auditors whose report has
been furnished to us, and our opinion, insofar as it relates to the amounts
included for Lehigh Valley Mall Associates, is based solely on the report of the
other auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the report of
the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Pennsylvania Real Estate Investment
Trust and subsidiaries as of December 31, 2002 and 2001, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, the
related financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
As discussed in Notes 1 and 2, the Company has adopted Statement of Financial
Accounting Standards No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, and Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets as of January 1, 2002.
/s/ KPMG LLP
Philadelphia, Pennsylvania
March 27, 2003, except as to
Note 16, which is as of
June 27, 2003
F-2
CONSOLIDATED BALANCE SHEETS
As of December 31, As of December 31,
2002 2001
---- ----
ASSETS: (thousands of dollars, except per share amounts)
Investments in real estate, at cost:
Retail properties $423,046 $347,269
Multifamily properties 290,607 254,138
Construction in progress 23,272 32,383
Industrial properties 2,504 2,504
-------- --------
Total investments in real estate 739,429 636,294
Less: Accumulated depreciation 136,733 112,424
-------- --------
602,696 523,870
Investments in and advances to partnerships and joint
ventures, at equity 25,361 27,846
-------- --------
628,057 551,716
Other assets:
Cash and cash equivalents 13,553 10,258
Rents and sundry receivables (net of allowance for
doubtful accounts of $965 and $727, respectively) 13,243 10,293
Deferred costs, prepaid real estate taxes
and expenses, net 48,810 30,361
-------- --------
$703,663 $602,628
======== ========
LIABILITIES:
Mortgage notes payable $319,751 $257,873
Bank loan payable 130,800 98,500
Construction loan payable -- 4,000
Tenants' deposits and deferred rents 5,046 3,908
Accrued expenses and other liabilities 27,581 21,294
-------- --------
483,178 385,575
-------- --------
Minority interest 32,472 36,768
-------- --------
Commitments and contingencies
SHAREHOLDERS' EQUITY:
Shares of beneficial interest, $1 par value per share; 100,000
authorized; issued and outstanding 16,697 and
15,876, respectively 16,697 15,876
Capital contributed in excess of par 216,769 198,398
Deferred compensation (2,513) (1,386)
Accumulated other comprehensive loss (4,366) (3,520)
Distributions in excess of net income (38,574) (29,083)
-------- --------
Total shareholders' equity 188,013 180,285
-------- --------
$703,663 $602,628
======== ========
See accompanying notes to consolidated financial statements.
F-3
CONSOLIDATED STATEMENTS OF INCOME Year Ended December 31,
-----------------------
2002 2001 2000
---- ---- ----
REVENUES: (thousands of dollars, except per share amounts)
Real estate revenue
Base rent $46,022 $36,523 $33,592
Expense reimbursements 12,959 9,843 8,320
Percentage rent 1,948 1,680 1,369
Lease termination revenue 754 813 4,618
Other real estate revenues 1,658 1,778 2,009
------- ------- -------
Total real estate revenue 63,341 50,637 49,908
Management company revenue 11,003 11,336 --
Interest and other income 711 361 1,385
------- ------- -------
Total revenues 75,055 62,334 51,293
------- ------- -------
EXPENSES:
Property operating expenses:
Property payroll and benefits 3,586 2,838 2,549
Real estate and other taxes 4,322 3,143 2,659
Utilities 1,031 799 747
Other operating expenses 7,326 5,876 6,663
------- ------- -------
Total property operating expenses 16,265 12,656 12,618
Depreciation and amortization 12,969 9,348 6,888
General and administrative expenses:
Corporate payroll and benefits 14,138 13,286 2,703
Other general and administrative expenses 10,609 10,291 2,250
------- ------- -------
Total general and administrative expenses 24,747 23,577 4,953
Interest expense 15,378 12,306 11,102
------- ------- -------
Total expenses 69,359 57,887 35,561
------- ------- -------
5,696 4,447 15,732
Equity in income of PREIT - RUBIN, Inc. -- -- (6,307)
Equity in income of partnerships
and joint ventures 7,449 6,540 7,366
Gains on sales of interests in real estate -- 2,107 10,298
------- ------- -------
Income before minority interest and
discontinued operations 13,145 13,094 27,089
Minority interest in operating partnership (1,307) (1,481) (2,844)
------- ------- -------
Income from continuing operations 11,838 11,613 24,245
Income from discontinued operations 9,063 9,219 8,949
Minority interest in discontinued operations (1,308) (1,043) (940)
Gains on sales of interests in real estate 4,085 -- --
------- ------- -------
Income from discontinued operations 11,840 8,176 8,009
------- ------- -------
NET INCOME $23,678 $19,789 $32,254
======= ======= =======
See accompanying notes to consolidated financial statements.
F-4
EARNINGS PER SHARE
Year Ended December 31,
-----------------------
2002 2001 2000
---- ---- ----
Basic earnings per share
Income from continuing operations $0.73 $0.79 $1.81
Income from discontinued operations 0.74 0.56 0.60
----- ----- -----
Net income per share - basic $1.47 $1.35 $2.41
===== ===== =====
Diluted earnings per share
Income from continuing operations $0.72 $0.79 $1.81
Income from discontinued operations 0.72 0.56 0.60
---- ---- ----
Net income per share - diluted $1.44 $1.35 $2.41
===== ===== =====
See accompanying notes to consolidated financial statements.
F-5
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME For the
Years Ended December 31, 2002, 2001 and 2000
Shares of Accumulated
Beneficial Capital Other Distributions Total
Interest Contributed in Deferred Comprehensive in Excess Shareholders'
$1 Par Excess of Par Compensation Loss of Net Income Equity
------ ------------- ------------ ---- ------------- ------
(thousands of dollars, except per share amounts)
Balance, January 1, 2000 $13,338 $145,697 $-- $-- ($25,623) $133,412
Net income -- -- -- -- 32,254 32,254
Shares issued upon exercise of options 13 211 -- -- -- 224
Shares issued upon conversion of
operating partnership units 116 2,588 -- -- -- 2,704
Shares issued under share purchase plans 43 601 -- -- -- 644
Shares issued under equity incentive plan,
net of retirements 118 2,020 (2,162) -- -- (24)
Amortization of deferred compensation -- -- 350 -- -- 350
Distributions paid to shareholders
($1.92 per share) -- -- -- -- (25,658) (25,658)
------- -------- ------- ------- -------- --------
Balance, December 31, 2000 $13,628 $151,117 ($1,812) $-- ($19,027) $143,906
------- -------- ------- --- -------- --------
Comprehensive Income:
Net income -- -- -- -- 19,789 19,789
Other comprehensive loss -- -- -- (3,520) -- (3,520)
------
Total comprehensive income 16,269
Shares issued under equity offering 2,000 42,274 -- -- -- 44,274
Shares issued upon exercise of options 7 129 -- -- -- 136
Shares issued upon conversion of
operating partnership units 130 2,730 -- -- -- 2,860
Shares issued under share purchase plans 47 855 -- -- -- 902
Shares issued under equity incentive plan,
net of retirements 64 1,293 (730) -- -- 627
Amortization of deferred compensation -- -- 1,156 -- -- 1,156
Distributions paid to shareholders
($2.04 per share) -- -- -- -- (29,845) (29,845)
------- -------- ------- ------- -------- --------
Balance, December 31, 2001 $15,876 $198,398 ($1,386) ($3,520) ($29,083) $180,285
------- -------- ------- ------- -------- --------
Comprehensive Income:
Net income -- -- -- -- 23,678 23,678
Other comprehensive income -- -- -- 566 -- 566
Hedging activity attributable
to development activities -- -- -- (1,412) -- (1,412)
--------
Total comprehensive income 22,832
Shares issued upon exercise of options 121 2,421 -- -- -- 2,542
Shares issued upon conversion of
operating partnership units 316 7,087 -- -- -- 7,403
Shares issued under distribution
reinvestment and share purchase plan 249 5,884 -- -- -- 6,133
Shares issued under share purchase plans 17 326 -- -- -- 343
Shares issued under equity incentive plan,
net of retirements 118 2,653 (3,137) -- -- (366)
Amortization of deferred compensation -- -- 2,010 -- -- 2,010
Distributions paid to shareholders
($2.04 per share) -- -- -- -- (33,169) (33,169)
------- -------- ------- ------- -------- --------
Balance, December 31, 2002 $16,697 $216,769 ($2,513) ($4,366) ($38,574) $188,013
======= ======== ======= ======= ======== ========
See accompanying notes to consolidated financial statements.
F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
2002 2001 2000
---- ---- ----
(thousands of dollars)
Cash Flows from Operating Activities:
Net income $23,678 $19,789 $32,254
Adjustments to reconcile net income to
net cash provided by operating activities:
Minority interest, net of distributions - - 667
Depreciation and amortization 21,411 17,974 15,661
Amortization of deferred financing costs 1,156 672 494
Provision for doubtful accounts 837 533 752
Amortization of deferred compensation 2,010 1,156 350
Gains on sales of interests in real estate (4,085) (2,107) (10,298)
Equity in loss of PREIT-RUBIN, Inc. - - 6,307
Change in assets and liabilities,
Net change in other assets (19,078) (5,615) (3,351)
Net change in other liabilities 2,612 5,253 1,637
------- ------- -------
Net cash provided by operating activities 28,541 37,655 44,473
------- ------- -------
Cash Flows from Investing Activities:
Investments in wholly-owned real estate (25,206) (14,463) (24,886)
Investments in construction in progress (10,043) (29,234) (25,657)
Investments in partnerships and joint ventures (1,686) (1,732) (5,093)
Investments in and advances to PREIT-RUBIN, Inc. - - (5,036)
Cash distributions from partnerships and joint
ventures in excess of equity in income 3,958 8,232 1,338
Cash proceeds from sales of interests in partnerships - 3,095 2,940
Cash proceeds from sales of wholly-owned real estate 8,930 7,058 20,044
Net cash received from PREIT-RUBIN, Inc. - 1,616 -
Net cash used in investing activities (24,047) (25,428) (36,350)
------- ------- -------
Cash Flows from Financing Activities:
Principal installments on mortgage notes payable (5,014) (4,575) (4,440)
Proceeds from mortgage notes payable 12,800 15,000 -
Proceeds from construction loan payable - - 17,843
Repayment of mortgage notes payable (13,039) - (14,942)
Repayment of construction loan payable (4,000) (20,647) -
Net (payment) borrowing from revolving credit facility 32,300 (11,800) 19,300
Payment of deferred financing costs (154) (432) (1,594)
Shares of beneficial interest issued, net of issuance costs 10,784 48,348 294
Distributions paid to shareholders (33,169) (29,845) (25,658)
Distributions paid to OP unit holders and minority partners,
in excess of minority interest (1,707) (4,109) -
------- ------- -------
Net cash used in financing activities (1,199) (8,060) (9,197)
------- ------- -------
Net change in cash and cash equivalents 3,295 4,167 (1,074)
Cash and cash equivalents, beginning of period 10,258 6,091 7,165
------- ------- -------
Cash and cash equivalents, end of period $13,553 $10,258 $6,091
======= ======= ======
See accompanying notes to consolidated financial statements.
F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2002, 2001 and 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Pennsylvania Real Estate Investment Trust, a Pennsylvania business
trust (collectively with its subsidiaries, the "Company"), is a fully
integrated, self-administered and self-managed real estate investment trust
("REIT"), founded in 1960, which acquires, develops, redevelops and operates
retail, multifamily and industrial properties. Substantially all of the
Company's properties are located in the Eastern United States, with
concentrations in the Mid-Atlantic states and in Florida.
The Company's interest in its properties is held through PREIT
Associates, L.P. (the "Operating Partnership"). The Company is the sole general
partner of the Operating Partnership and, as of December 31, 2002, the Company
held a 90.4% interest in the Operating Partnership.
Pursuant to the terms of the partnership agreement, each of the other
limited partners of the Operating Partnership has the right to convert his/her
interest in the Operating Partnership into cash or, at the election of the
Company, into shares of the Company on a one-for-one basis, in some cases
beginning one year following the respective issue date of the interest in the
Operating Partnership and in some cases immediately.
Investment in PREIT-RUBIN, Inc.
As of December 31, 2000, the Operating Partnership held a 95% economic
interest in PREIT-RUBIN, Inc. ("PRI") through its ownership of 95% of PRI's
stock, which represented all of the nonvoting common stock of PRI.
Effective January 1, 2001, in exchange for Company shares valued at
approximately $0.5 million, the Operating Partnership acquired the 5% minority
interest representing all of the voting common stock in PRI, which is now 100%
owned by the Operating Partnership. Also effective January 1, 2001, PRI was
converted to a Taxable REIT Subsidiary, as defined under the Internal Revenue
Code. As a Taxable REIT Subsidiary, PRI is able to pursue certain business
opportunities not previously available under the rules governing REITs. On
January 1, 2001, the Company also formed PREIT Services, LLC ("PREIT Services")
for the purpose of managing the Company's properties that were previously
managed by PRI.
The Company's investment in PRI was accounted for using the equity
method of accounting through December 31, 2000. See Note 4 for further
discussion. The excess of the Company's investment over the underlying equity in
the net assets of PRI ($16.7 million at December 31, 2002) was amortized using a
35 year life. Effective January 1, 2002, this amount is no longer amortized (see
Goodwill and Other Intangible Assets, below).
Consolidation
The Company consolidates its accounts and the accounts of the Operating
Partnership and other controlled subsidiaries and ventures and reflects the
remaining interest in the Operating Partnership as minority interest. All
significant intercompany accounts and transactions have been eliminated in
consolidation. Certain prior period amounts have been reclassified to conform
with current year presentations.
Partnership and Joint Venture Investments
The Company accounts for its investment in partnerships and joint
ventures which it does not control using the equity method of accounting. These
investments, which represent 30% to 60% noncontrolling ownership interests at
December 31, 2002, are recorded initially at the Company's cost and subsequently
adjusted for the Company's net equity in income and cash contributions and
distributions.
Statements of Cash Flows
The Company considers all highly liquid short-term investments with an
original maturity of three months or less to be cash equivalents. Cash paid for
interest, net of amounts capitalized, was $27.7 million, $23.7 million and $24.1
million for the years ended December 31, 2002, 2001 and 2000, respectively. At
December 31, 2002 and 2001, cash and cash equivalents totaling $13.6 million and
$10.3 million, respectively, included tenant escrow deposits of $0.9 million and
$1.0 million, respectively.
F-8
Significant Non-Cash Transactions
The Company assumed long-term debt in the amount of $9.6 million and
$5.7 million resulting from property acquisitions in 2002 and 2000. There were
no property acquisitions in 2001.
Real Estate Acquisitions
The Company has adopted the provisions of SFAS 141, Business
Combinations. This statement makes significant changes to the accounting for
business combinations, goodwill, and intangible assets. Among other provisions,
SFAS 141 requires that a portion of the purchase price of real estate
acquisitions be assigned to the fair value of an intangible asset for above
market operating leases or a liability for below market operating leases. The
origination intangible asset represents the fair value of the cost of acquiring
leases with existing tenants in place. Management reviews the carrying value of
intangible assets for impairment on an annual basis. The market value represents
the amount by which future cash flows under the contractual lease terms are
either above or below market at the date of acquisition. Such intangible assets
or liabilities are then required to be amortized into revenue over the remaining
life of the related leases. Above or below market leases are computed utilizing
a discounted cash flow model.
Capitalization of Costs
It is the Company's policy to capitalize interest and real estate taxes
related to properties under development and to depreciate these costs over the
life of the related assets. For the years ended December 31, 2002, 2001 and
2000, the Company capitalized interest of $0.7 million, $2.0 million and $3.3
million, respectively, and real estate taxes of $0.1 million, $0.1 million and
$0.3 million, respectively.
The Company capitalizes as deferred costs certain expenditures related
to the financing and leasing of certain properties. Capitalized financing costs
are amortized over the term of the related loans and leasing commissions are
amortized over the term of the related leases.
The Company records certain deposits associated with planned future
purchases of real estate as assets when paid. These deposits are transferred to
the properties upon consummation of the transaction. The Company capitalizes
certain internal costs associated with properties held for future development.
These costs were approximately $0.7 million, $0.1 million and $0.1 million for
the years ended December 31, 2002, 2001 and 2000, respectively.
The Company capitalizes repairs and maintenance costs that extend the
useful life of the asset and that meet certain minimum cost thresholds. Costs
that do not meet these thresholds, or do not extend the asset lives, are
expensed as incurred.
Real Estate
The Company, for financial reporting purposes, depreciates its
buildings, equipment and leasehold improvements over their estimated useful
lives of 3 to 50 years, using the straight-line method of depreciation.
Depreciation expense was $13.0 million, $9.3 million and $6.9 million for the
years ended December 31, 2002, 2001 and 2000, respectively. For federal income
tax purposes, the Company uses the straight-line method of depreciation and the
useful lives prescribed by the Internal Revenue Code.
Land, buildings and 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
and/or replacements, which improve or extend the life of the asset, are
capitalized and depreciated over their estimated useful lives.
Properties are depreciated using the straight line method over the
estimated useful lives of the assets. The estimated useful lives are as follows:
Buildings 30-50 years
Land Improvements 15 years
Furniture/Fixtures 3-10 years
Tenant Improvements Lease term
The Company is required to make subjective assessments as to the useful
life of its properties for purposes of determining the amount of depreciation to
reflect on an annual basis with respect to those properties. These assessments
have a direct impact on the Company's net income. If the Company were to
lengthen the expected useful life of a particular asset, it would be depreciated
over more years, and result in less depreciation expense and higher annual net
income.
Assessment by the Company of certain other lease related costs must be
made when the Company has a reason to believe that the tenant may not be able to
perform under the terms of the lease as originally expected. This requires
management to make estimates as to the recoverability of such assets.
F-9
Gains from sales of real estate properties generally are recognized
using the full accrual method in accordance with the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 66 - "Accounting for Real Estate
Sales," provided that various criteria are met relating to the terms of sale and
any subsequent involvement by the Company with the properties sold.
Long Lived Assets
Statement of Financial Standards No. 144 ("SFAS 144"), Accounting for
the Impairment or Disposal of Long-Lived Assets, provides a single accounting
model for long-lived assets as held-for-sale, broadens the scope of businesses
to be disposed of that qualify for reporting as discontinued operations and
changes the timing of recognizing losses on such operations. The Company adopted
SFAS 144 on January 1, 2002. The adoption of SFAS 144 did not materially affect
the Company's consolidated financial statements.
When assets are identified by management as held for sale, the Company
discontinues depreciating the assets and estimates the sales price, net of
selling costs of such assets. If, in management's opinion, the net sales price
of the assets that have been identified for sale is less than the net book value
of the assets, a valuation allowance is established.
Assets to be disposed of are separately presented in the balance sheet
and reported at the lower of the carrying amount or fair value less costs to
sell, and are no longer depreciated. The other assets and liabilities related to
assets classified as held-for-sale are presented separately in the consolidated
balance sheet.
On a periodic basis, management assesses whether there are any
indicators that the value of the real estate properties may be impaired. A
property's value is impaired only if management's estimate of the aggregate
future cash flows - undiscounted and without interest charges - to be generated
by the property are less than the carrying value of the property. These
estimates consider factors such as expected future operating income, trends and
prospects, as well as the effects of demand, competition and other factors. In
addition, these estimates may consider a probability weighted cash flow
estimation approach when alternative courses of action to recover the carrying
amount of a long lived asset are under consideration or when a range is
estimated. The determination of undiscounted cash flows requires significant
estimates by management and considers the expected course of action at the
balance sheet date. Subsequent changes in estimated undiscounted cash flows
arising from changes in anticipated action could impact the determination of
whether an impairment exists and whether the effects could materially impact the
Company's net income. To the extent impairment has occurred, the loss will be
measured as the excess of the carrying amount of the property over the fair
value of the property.
Prior to adoption of SFAS 144, the Company accounted for the impairment
of long-lived assets in accordance with SFAS 121, Accounting for Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of.
Derivative Financial Instruments
The Company accounts for its derivative financial instruments under
Statement of Financial Accounting Standard's ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," and SFAS No. 138, "Accounting
for Certain Derivative Instruments and Certain Hedging Activities - an Amendment
of FASB Statement No. 133." Specifically, SFAS No. 133 requires the Company to
recognize all derivatives as either assets or liabilities in the consolidated
balance sheet and to measure those instruments at fair value. Additionally, the
fair value adjustments will affect either shareholders' equity or net income
depending on whether the derivative instrument qualifies as an effective hedge
for accounting purposes and, if so, the nature of the hedging activity.
Income Taxes
The Company has elected to qualify as a real estate investment trust
under Sections 856-860 of the Internal Revenue Code and intends to remain so
qualified. Accordingly, no provision for federal income taxes has been reflected
in the accompanying consolidated financial statements.
Earnings and profits, which determine the taxability of distributions
to shareholders, will differ from net income 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 the
Company's net income and loss for financial reporting purposes and for tax
reporting purposes.
The Company is subject to a federal excise tax computed on a calendar
year basis. The excise tax equals 4% of the excess, if any, of 85% of the
Company's ordinary income plus 95% of the Company's capital gain net income for
the year plus 100% of any prior year shortfall over cash distributions during
the year, as defined by the Internal Revenue Code. The Company has in the past
distributed a substantial portion of its taxable income in the subsequent fiscal
year and may also follow this policy in the future.
No provision for excise tax was made for the years ended December 31,
2002 or 2001, as no tax was due in those years. A provision for excise tax of
$0.2 million was recorded for the year ended December 31, 2000.
F-10
The tax status of per share distributions paid to shareholders was
composed of the following for the years ended December 31, 2002, 2001, and 2000:
Year Ended December 31,
2002 2001 2000
---- ---- ----
Ordinary income $1.83 $1.80 $1.14
Capital gains .08 0.24 0.78
Return of capital .13 -- --
----- ----- -----
$2.04 $2.04 $1.92
===== ===== =====
PRI is subject to federal, state and local income taxes. The operating
results of PRI include a provision or benefit for income taxes. Tax benefits are
recorded by PRI to the extent realizable.
The aggregate cost for federal income tax purposes of the Company's
investment in real estate was approximately $672 million and $581 million at
December 31, 2002 and 2001, respectively.
Fair Value of Financial Instruments
Carrying amounts reported on the balance sheet for cash, accounts
receivable, accounts payable and accrued expenses, and borrowings under the
Credit Facility approximate fair value due to the nature of these instruments.
Accordingly, these items have been excluded from the fair value disclosures. The
estimated fair value for fixed rate debt, which is calculated for disclosure
purposes, is based on the borrowing rates available to the Company for fixed
rate mortgages payable with similar terms and average maturities. The Company's
variable rate debt has an estimated fair value that is approximately the same as
the recorded amounts in the balance sheets. Although management is not aware of
any factors that would significantly affect these fair value amounts, such
amounts have not been comprehensively revalued for purposes of these financial
statements since that date and current estimates of fair value may differ
significantly from the amounts presented herein.
Revenue Recognition
The Company derives over 84% of its revenues from tenant rents and
other tenant related activities. Tenant rents include base rents, percentage
rents, expense reimbursements (such as common area maintenance, real estate
taxes and utilities) and straight-line rents. The Company records base rents on
a straight-line basis, which means that the monthly base rent income according
to the terms of the Company's leases with its tenants is adjusted so that an
average monthly rent is recorded for each tenant over the term of its lease. The
difference between base rent and straight-line rent is a non-cash increase or
decrease to rental income. The straight-line rent adjustment increased revenue
by approximately $1.0 million in 2002, $0.8 million in 2001 and $1.2 million in
2000. Certain lease agreements contain provisions that require tenants to
reimburse a pro rata share of real estate taxes and certain common area
maintenance costs. Percentage rents are recorded after annual tenant sales
targets are met. Percentage rents represent rental income that the tenant pays
based on a percentage of its sales. Tenants that pay percentage rent usually pay
in one of two ways, either a percentage of their total sales or a percentage of
sales over a certain threshold. In the latter case, the Company does not record
percentage rent until the sales threshold has been reached. Deferred revenue
represents rental revenue received from tenants prior to their due dates.
Expense reimbursement payments generally are made monthly based on a budgeted
amount determined at the beginning of the year. During the year, the Company's
income increases or decreases based on actual expense levels and changes in
other factors that influence the reimbursement amounts, such as occupancy
levels. These increases/ decreases are non-cash changes to rental income. In
2002, the Company accrued $0.6 million of income because reimbursable expense
levels were greater than amounts billed. Shortly after the end of the year, the
Company prepares a reconciliation of the actual amounts due from tenants. The
difference between the actual amount due and the amounts paid by the tenant
throughout the year is credited or billed to the tenant, depending on whether
the tenant paid too much or too little during the year. Termination fee income
is recognized in the period when a termination agreement is signed. In the event
that a tenant is in bankruptcy when the termination agreement is signed,
termination fee income is recognized when it is received.
The Company's other significant source of revenues comes from
management activities, including property management, leasing and development.
Management fees generally are a percentage of managed property revenues 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.
These activities collectively are referred to as "management fees" in the
consolidated statement of income. There are no significant cash versus accrual
differences for these activities.
No tenant represented 10% or more of the Company's rental revenue in
any period presented.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires the
Company's management to make estimates and assumptions that affect the reported
amount of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from those estimates.
F-11
Goodwill and Other Intangible Assets
On January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets." SFAS No. 142 requires the Company to cease amortizing
goodwill as of June 30, 2001, effective January 1, 2002.
Under SFAS No. 142, the Company will conduct an annual review of the
goodwill balances for impairment and determine whether any adjustments to the
carrying value of goodwill are required. The Company's other assets on the
accompanying consolidated balance sheets at December 31, 2002 and December 31,
2001 include $16.7 million and $12.9 million, respectively (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.
The impact of goodwill amortization recorded in 2001 and 2000 is as
follows (thousands of dollars, except per share data):
Year Ended December 31,
2001 2000
---- ----
Net income $19,789 $32,254
Impact of goodwill amortization 423 291
------- -------
Adjusted net income $20,212 $32,545
======= =======
Basic earnings per share $1.35 $2.41
Impact of goodwill amortization 0.03 0.02
------- -------
Adjusted basic earnings per share $1.38 $2.43
======= =======
Diluted earnings per share $1.35 $2.41
Impact of goodwill amortization 0.03 0.02
------- -------
Adjusted diluted earnings per share $1.38 $2.43
======= =======
Off Balance Sheet Arrangements
The Company has a number of off balance sheet joint ventures and other
unconsolidated arrangements with varying structures described more fully in Note
3 below. All of these arrangements are accounted for under the equity method
because the Company has the ability to exercise significant influence, but not
control over the operating and financial decisions of the joint ventures.
Accordingly, the Company's share of the earnings of these joint ventures and
companies is included in consolidated net income.
To the extent that the Company contributes assets to a joint venture,
the Company's investment in the joint venture is recorded at the Company's cost
basis in the assets that were contributed to the joint venture. To the extent
that the Company's cost basis is different than the basis reflected at the joint
venture level, the basis difference is amortized over the life of the related
asset and reflected in the Company's share of equity in net income of joint
ventures.
Discontinued Operations
The Company adopted the provisions of SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" effective January 1, 2002. This
standard addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. It also retains the basic provisions for
presenting discontinued operations in the income statement but broadened the
scope to include a component of an entity rather than a segment of a business.
Pursuant to the definition of a component of an entity in SFAS No. 144, assuming
no significant continuing involvement, the sale of a retail or industrial
property is now considered a discontinued operation. In addition, properties
classified as held for sale are considered discontinued operations. The Company
generally considers assets to be held for sale when the 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 within one
year. Accordingly, the results of operations of operating properties disposed of
or classified as held for sale subsequent to January 1, 2002 for which the
Company has no significant continuing involvement, are reflected as discontinued
operations. Properties classified in this manner for 2002 were reclassified as
such in the accompanying Statements of Operations for each of the three years
ended December 31, 2002. Interest expense, which is specifically identifiable to
the property, is used in the computation of interest expense attributable to
discontinued operations. Certain prior periods amounts have been restated to
conform with current year presentation in accordance with SFAS No. 144. Please
refer to Note 2 below for a description of the properties included in
discontinued operations as of December 31, 2002.
F-12
Stock-based Compensation Expense
Effective January 1, 2003, the Company adopted the expense recognition
provisions of SFAS No. 123, Accounting for Stock-Based Compensation. The Company
values stock options issued using the Black-Scholes option-pricing model and
recognizes this value as an expense over the period in which the options vest.
Under this standard, recognition of expense for stock options is prospectively
applied to all options granted after the beginning of the year of adoption.
Prior to 2003, the Company followed the intrinsic method set forth in APB
Opinion 25, Accounting for Stock Issued to Employees. The compensation expense
associated with the stock options is included in general and administrative
expenses in the accompanying consolidated statements of operations.
In December 2002, SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123" amended FASB Statement No. 123, "Accounting for Stock-Based Compensation,"
to provide alternative methods of transition for a voluntary change to the fair
value method of accounting for stock-based employee compensation. In addition,
this Statement amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements. Certain
of the disclosure modifications are required for fiscal years ending after
December 15, 2002 and are included in the notes to these consolidated financial
statements.
Under the modified prospective method of adoption selected by the
Company under the provisions of SFAS No. 148, compensation cost will be
recognized in 2003 as if the recognition provisions of SFAS No. 123 had been
applied from the date of adoption. The following table illustrates the effect on
net income and earnings per share if the fair value based method had been
applied to all outstanding and unvested awards in each period (thousands of
dollars, except per share amounts).
Year Ended December 31
----------------------
2002 2001 2000
---- ---- ----
Net Income $23,678 $19,789 $32,254
Add: Stock-based employee compensation
expense included in reported net income 2,008 1,156 350
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards (2,159) (1,306) (499)
------- ------- -------
$23,527 $19,639 $32,105
======= ======= =======
Earnings per share:
Basic - as reported
$1.47 $1.35 $2.41
===== ===== =====
Basic - pro forma
$1.46 $1.34 $2.40
===== ===== =====
Diluted - as reported
$1.44 $1.35 $2.41
===== ===== =====
Diluted - pro forma
$1.44 $1.34 $2.40
===== ===== =====
Recent Accounting Pronouncements
In November 2002, the Financial Accounting Standards Board ("FASB")
issued Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees; including Guarantees of Indebtedness of Others."
This interpretation requires that a liability be recognized at the inception of
a guarantee issued or modified after December 31, 2002 whether or not payment
under the guarantee is probable. For guarantees entered into prior to December
31, 2002, the interpretation requires certain information related to the
guarantees be disclosed in the guarantor's financial statements. The disclosure
requirements of this interpretation are effective for fiscal years ending after
December 15, 2002. In the normal course of business, the Company has guaranteed
certain indebtedness of others. These guarantees have historically been
disclosed by the Company. Therefore the impact of the disclosure requirements
will not be material to the Company's financial condition. The impact of
adoption of the recognition provisions is not expected to be material to the
Company's financial condition or results of operations as the Company
historically has provided guarantees on a limited basis.
F-13
In January 2003, the FASB issued Financial Interpretation No. 46, ("FIN
No. 46"), "Consolidation of Variable Interest Entities." The consolidation
requirements of FIN No. 46 apply immediately to variable interest entities
created after January 31, 2003 and applies to existing variable interest
entities in the first fiscal year or interim period beginning after June 15,
2003. FIN No. 46 requires that a variable interest entity be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or is entitled to receive a majority of
the entity's residual returns or both. The impact of FIN No. 46 is not expected
to be material to the Company's results of operations or shareholders' equity.
During 2002, the FASB issued SFAS Nos. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" ("SFAS No. 145"), and No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS No. 146"). SFAS No. 145 eliminates the
requirement that gains and losses from the extinguishment of debt be aggregated
and, if material, classified as an extraordinary item, net of the related income
tax effect. SFAS No. 145 is effective for fiscal years beginning after May 15,
2002. The Company has historically incurred these costs and expects it will
continue to incur these costs as it refinances term debt prior to its maturity.
The Company adopted this accounting standard effective December 31, 2002. SFAS
No. 146 addresses financial accounting and reporting for exit and disposal
costs. SFAS No. 146 is effective for exit or disposal activities that are
initiated after December 31, 2002. The impact of the adoption of SFAS No. 146 is
not expected to be material to the Company's financial condition or results of
operations.
2. REAL ESTATE ACTIVITIES
Investments in real estate as of December 31, 2002 and 2001 are
comprised of the following (in thousands):
2002 2001
---- ----
Buildings and improvements $608,544 $519,864
Land 130,885 116,430
------- -------
739,429 636,294
Accumulated depreciation (136,733) (112,424)
-------- --------
Net investments in real estate $602,696 $523,870
======== ========
Acquisitions
In April 2002, the Company purchased Beaver Valley Mall located in
Monaca, Pennsylvania for a purchase price of $60.8 million. The purchase was
financed primarily through a $48.0 million mortgage and a $10.0 million bank
borrowing. The bank borrowing was subsequently repaid. Also in 2002, the Company
exercised an option to purchase a portion of the land on which Beaver Valley
Mall is situated for $0.5 million.
Pro forma revenues, net income, basic net income per share and diluted
net income per share for the twelve month periods ended December 31, 2002 and
2001, reflecting the purchase of Beaver Valley Mall as if the purchase took
place at the beginning of the respective periods indicated, are presented below.
The unaudited pro forma information presented within this footnote is not
necessarily indicative of the results which actually would have occurred if the
acquisition had been completed at the beginning of the respective periods
indicated, nor does the pro forma information purport to represent the results
of operations for future periods (thousands of dollars, except per share data):
Year Ended December 31,
-----------------------
2002 2001
---- ----
Revenues $77,893 $73,221
======= =======
Net income $24,167 $21,800
======= =======
Net income per share - basic $1.50 $1.49
===== =====
Net income per share - diluted $1.47 $1.48
===== =====
With respect to the Beaver Valley Acquisition, the Company recorded in
other assets on the accompanying consolidated balance sheet an intangible asset
related to the origination value of acquired leases of $1.8 million and a net
intangible asset of $1.0 million for market values of acquired leases.
Amortization expense recorded during the period ended December 31, 2002 for the
origination value of acquired leases totaled $0.2 million. The amortization of
market leases resulted in a net reduction in rental income of $0.1 million
during the period ended December 31, 2002.
The Beaver Valley Mall acquisition was accounted for by the purchase
method of accounting. Beaver Valley Mall's results of operations have been
included from its purchase date.
In July 2002, pursuant to the Contribution Agreement entered into in
connection with the acquisition of The Rubin Organization in September 1997, the
Company acquired the 11% interest in Northeast Tower Center that it did not
previously own. This property is a retail power center located in Philadelphia,
Pennsylvania. The purchase price for the acquisition consisted of 24,337 units
of limited partnership interest in the Operating Partnership, valued at $0.6
million.
F-14
In October 2002, the Company acquired the 50% interest in Regency
Lakeside Apartments that the Company did not previously own and consolidated the
results of this property from the date of acquisition. The Company paid
approximately $14.2 million for the interest, including $9.6 million in the form
of an assumed mortgage, $2.5 million borrowed under its Credit Facility and $2.1
million in cash. Amounts related to the assumed mortgage have been excluded from
the statements of cash flows as non-cash items.
In 2000, the Company entered into an agreement giving it a partnership
interest in Willow Grove Park, a 1.2 million square foot regional mall in Willow
Grove, Pennsylvania. Under the agreement, the Company was responsible for the
expansion of the property to include a new Macy's store and decked parking. In
June 2002, the Company contributed the expansion asset to the partnership. The
total cost of the expansion was $16.6 million. As a result of this contribution,
the Company increased its capital interest in the partnership that owns Willow
Grove Park to 30% and its management interest in the partnership to 50%, and
became the managing general partner of the partnership.
During 2000, the Company acquired the 35% interest that it did not
previously own in Emerald Point, a multifamily property located in Virginia
Beach, Virginia. The Company paid approximately $11.0 million for the interest,
including $5.7 million in assumed debt and $5.3 million borrowed under its
Credit Facility.
Dispositions
In July 2002, the Company sold Mandarin Corners shopping center in
Jacksonville, Florida for $16.3 million. The Company recorded a gain on the sale
of approximately $4.1 million. In accordance with the provisions of SFAS No.144,
the operating results and gain on sale of Mandarin Corners shopping center are
included in discontinued operations for all periods presented, and the Company
has restated the financial statements for 2001 and 2000 to present the
comparative results as discontinued operations.
In January 2001, a partnership in which the Company owns a 50% interest
sold an undeveloped parcel of land adjacent to the Company-owned Metroplex
Shopping Center in Plymouth Meeting, Pennsylvania, for approximately $7.6
million. The Company recorded a nominal gain on the land sale.
In March 2001, the Company sold its interest in Ingleside Shopping
Center, located in Thorndale, Pennsylvania for $5.1 million. The Company
recorded a gain on the sale of the property of approximately $1.8 million.
In May 2001, the Company sold a parcel of land at Paxton Towne Centre
in Harrisburg, Pennsylvania for $6.3 million resulting in a gain of $1.3
million.
In June 2001, the Company sold a parcel of land at Commons of Magnolia
in Florence, South Carolina. The Company received cash at the closing of
approximately $1.3 million, and after the completion of the project, received a
development fee of $1.5 million for the construction of the store that was built
on the site, for total proceeds from the transaction, of $2.8 million. The
Company recorded a loss on this transaction of $1.0 million.
During 2000, the Company sold Forestville Shopping Center, Valley View
Shopping Center, CVS Warehouse and Distribution Center, and its 50% interest in
Park Plaza Shopping Center. Total proceeds from these sales were approximately
$23.0 million. The property sales resulted in gains totaling approximately $10.3
million.
Discontinued Operations
See Note 16 for a discussion of the sale of certain multifamily
properties in the second quarter of 2003.
In accordance with SFAS No. 144, the Company has restated its
statements of operations for 2001 and 2000 to present as discontinued operations
the operating results of (i) its multifamily portfolio and (ii) Mandarin
Corners, which was sold in 2002, and in which the Company does not have
significant continuing involvement.
F-15
The following table summarizes revenue and expense information for
Mandarin Corners and the multifamily portfolio (thousands of dollars):
Year Ended December 31,
2002 2001 2000
---- ---- ----
Real estate revenues $52,263 $51,248 $50,563
Expenses:
Property operating expenses 21,472 20,746 20,057
Depreciation and amortization 8,727 8,428 8,773
Interest expense 13,001 12,855 12,784
------- ------ ------
Total expenses 43,200 42,029 41,614
Income from discontinued operations
before equity in income of joint
ventures and partnerships, gain
on sale and minority interest 9,063 9,219 8,949
Gain on sale 4,085 -- --
Minority interest (1,308) (1,043) (940)
------- ------ -------
Income from discontinued operations $11,840 $8,176 $ 8,009
======= ====== =======
Development Activity
As of December 31, 2002, the Company has capitalized $10.1 million for
development activities for properties under construction. Of this amount, $8.6
million is included in deferred costs and other assets in the accompanying
consolidated balance sheets, and the remaining $1.5 million is included in
investments in and advances to partnerships and joint ventures. The Company
capitalizes direct costs associated with development activities such as legal
fees, interest, real estate taxes, certain internal costs, surveys, civil
engineering surveys, environmental testing costs, traffic and feasibility
studies and deposits on land purchase contracts. Deposits on land purchase
contracts were $1.9 million at December 31, 2002, of which $0.5 million was
refundable and $1.4 million was non-refundable.
3. INVESTMENTS IN PARTNERSHIPS & JOINT VENTURES
The following table presents summarized financial information of the
equity investments in the Company's 15 unconsolidated partnerships and joint
ventures as of December 31, 2002 and 2001(thousands of dollars):
Year Ended December 31,
2002 2001
---- ----
Assets
Investments in real estate, at cost:
Retail properties $457,532 $444,534
Multifamily properties 29,458 57,281
Construction in progress 1,506 5,986
------- -------
Total investments in real estate 488,496 507,801
Less: Accumulated depreciation 93,004 86,356
------- -------
395,492 421,445
Cash and cash equivalents 8,982 4,390
Deferred costs, prepaid real
estate taxes and other, net 36,734 51,666
------- -------
Total assets 441,208 477,501
------- -------
Liabilities and Partners' equity
Mortgage notes payable 381,872 401,193
Other liabilities 16,977 18,036
------- -------
Total liabilities 398,849 419,229
------- -------
Net equity 42,359 58,272
Less: Partners' share 17,103 30,576
------- -------
Company's share 25,256 27,696
------- -------
Advances 105 150
------- -------
Investment in and advances to partnerships and
joint ventures(1) $25,361 $27,846
======= =======
(1) Amounts include $20.7 million and $21.2 million at December 31, 2002 and
2001, respectively, of joint venture investments with deficit balances.
These deficit balances are primarily the result of distributions received
by the Company in excess of its investment and its equity in income of
the joint ventures.
F-16
Mortgage notes payable, which are secured by 13 of the joint venture
properties, are due in installments over various terms extending to the year
2016 with interest rates ranging from 6.55% to 8.39% and a weighted average
interest rate of 7.68% at December 31, 2002. The Company's proportionate share,
based on its respective partnership interest, of principal payments due in the
next five years and thereafter is as follows (thousands of dollars):
Year Ended December 31, Principal Amortization Balloon Payments Total
----------------------- ---------------------- ---------------- -----
2003 $ 2,199 $ 8,832 $ 11,031
2004 2,414 -- 2,414
2005 2,646 -- 2,646
2006 3,534 53,943 57,477
2007 2,278 -- 2,278
2008 and thereafter 7,386 83,496 90,882
------- -------- --------
$20,457 $146,271 $166,728
======= ======== ========
The liability under each mortgage note is limited to the particular
property, except $5.5 million of the mortgage at Laurel Mall, which is
guaranteed by Laurel Mall's partners, including the Company.
The Company is the managing general partner of the partnership that
owns Willow Grove Park. With respect to the partnership's quarterly cash flow,
the Company's joint venture partner is first entitled to a 9% cumulative return
on its 70% interest in the partnership, and the Company is then entitled to a 9%
cumulative return on its 30% interest. Any remaining cash flow is divided
equally between the Company and its joint venture partner. Upon a refinancing,
sale of assets or dissolution of the partnership, the proceeds are first
allocated between the Company and its joint venture partner in proportion to
their capital accounts until each party receives its adjusted capital balance.
Any remaining funds are distributed first to the Company's joint venture partner
until it has received a 12% internal rate of return on its investment, and then
to the Company until the Company has received a 12% internal rate of return on
its investment. Any further remaining funds in the case of a refinancing or sale
of assets are shared equally between the Company and its joint venture partner
or, in the case of a dissolution, are shared by the Company and its joint
venture partner according to their respective positive capital account balances.
The Company has an option to acquire the interest of its joint venture
partner in the partnership that owns Willow Grove Park in 2003 at a price equal
to a 12% internal rate of return on its joint venture partner's investment in
the partnership. If the Company does not elect to acquire this interest in 2003,
then its joint venture partner will have an option to exchange its interest in
the partnership that owns Willow Grove Park for the Company's interest in Paxton
Towne Centre, a shopping center located in Harrisburg, Pennsylvania. If the
Company's joint venture partner exercises this option, the value of (i) the net
operating income of Paxton Towne Centre for the preceding twelve months
capitalized at 9% will be compared with (ii) the amount required to achieve a
12% internal rate of return on the Company's joint venture partner's investment
in the Willow Grove partnership. If (i) is greater than (ii), then the Company's
joint venture partner will pay the difference to the Company in cash. If (ii) is
greater than (i), then the Company will pay the difference to its joint venture
partner in cash.
The following table summarizes the Company's equity in income for the
years ended December 31, 2002, 2001 and 2000 (thousands of dollars):
Year Ended December 31,
2002 2001 2000
---- ---- ----
Gross revenues from real estate $97,903 $94,272 $80,303
------- ------- -------
Expenses:
Property operating expenses 33,868 33,981 27,267
Refinancing prepayment penalty - 510 -
Interest expense 31,417 30,229 25,477
Depreciation and amortization 17,434 16,363 12,436
------ ------ ------
Total expenses 82,719 81,083 65,180
------ ------ ------
Net income 15,184 13,189 15,123
Partners' share (7,735) (6,649) (7,757)
------ ------ ------
Company's share of equity in income of partnerships
and joint ventures $7,449 $6,540 $7,366
====== ====== ======
F-17
The Company has a 50% partnership interest in Lehigh Valley Mall
Associates which is included in the amounts above. Summarized financial
information as of December 31, 2002, 2001 and 2000 for this investment, which is
accounted for by the equity method, is as follows (thousands of dollars):
Year Ended December 31, 2002
2002 2001 2000
---- ---- ----
Total assets $18,882 $19,729 $21,148
Mortgages payable 48,520 49,599 50,596
Revenues 18,180 18,076 17,295
Property operating expenses 6,225 6,678 5,888
Interest expense 3,868 3,957 4,068
Net income 7,287 6,690 6,565
Company's share of equity in income of partnership 3,644 3,345 3,282
4. INVESTMENT IN PREIT-RUBIN, INC.
PRI is responsible for various activities, including management,
leasing and real estate development of properties on behalf of third parties.
Prior to January 1, 2001, PRI also provided these services to certain of the
Company's properties. The Company did not pay management, leasing or development
fees to PRI in 2002 or 2001 because it became a consolidated entity on January
1, 2001. Effective January 1, 2001, management services previously provided by
PRI for certain of the Company's properties are provided by PREIT Services,
which is 100% owned by the Company. Management fees paid by the Company's
properties to PRI were included in property operating expenses in the
accompanying consolidated statements of income for the year ended December 31,
2000 and amounted to $0.9 million. The Company's properties also paid leasing
and development fees to PRI totaling $1.3 million for the year ended December
31, 2000. The Company has recorded additional purchase price in connection with
its acquisition of The Rubin Organization (see Note 11).
Summarized financial information for PRI as of and for the year ended
December 31, 2000 is as follows (2002 and 2001 information is not presented
because PRI was consolidated effective January 1, 2001) (thousands of dollars):
Year Ended December 31, 2000
Management fees $ 3,739
Leasing commissions 4,113
Development fees 617
Other revenues 3,620
-------
Total revenue $12,089
=======
Net loss $(6,624)
=======
Company's share of net loss $(6,307)
=======
5. MORTGAGE NOTES, BANK AND CONSTRUCTION LOANS PAYABLE
Mortgage Notes Payable
Mortgage notes payable, which are secured by 19 of the Company's wholly
owned properties, are due in installments over various terms extending to the
year 2025 with interest at rates ranging from 4.70% to 8.70% and a weighted
average interest rate of 7.32% at December 31, 2002. Principal payments are due
as follows (thousands of dollars):
F-18
Year Ended December 31, Principal Amortization Balloon Payments Total
----------------------- ---------------------- ---------------- -----
2003 $ 4,723 $ 6,201 $ 10,924
2004 4,939 -- 4,939
2005 5,355 12,500 17,855
2006 5,762 -- 5,762
2007 4,341 75,482 79,823
2008 and thereafter 17,801 182,647 200,448
------- -------- --------
$42,921 $276,830 $319,751
======= ======== ========
The fair value of the mortgage notes payable was approximately $347.7
million at December 31, 2002 based on year-end interest rates and market
conditions.
Refinancing
In March 2002, the mortgage on Camp Hill Plaza Apartments in Camp Hill,
Pennsylvania, was refinanced. The $12.8 million mortgage has a 10-year term and
bears interest at the fixed rate of 7.02% per annum. In connection with the
refinancing, unamortized deferred financing costs of $0.1 million were written
off and reflected as interest expense in the consolidated statements of income.
Credit Facility
In December 2000, the Operating Partnership entered into a Credit
Facility that, as of December 31, 2002 consisted of a $200 million revolving
credit facility that expires on December 28, 2003. The obligations of the
Operating Partnership under the Credit Facility are secured by a pool of
properties and have been guaranteed by the Company.
The Credit Facility bears interest at the London Interbank Offered Rate
("LIBOR") plus margins ranging from 130 to 180 basis points, depending on the
Company's consolidated Leverage Ratio, as defined by the Credit Facility.
As of December 31, 2002, the Credit Facility was secured by eleven of
the Company's existing retail and industrial properties. The Credit Facility
contains covenants and agreements which affect, among other things, the amount
of permissible borrowings and other liabilities of the Company. The initial term
of the Credit Facility may be extended for an additional year with the lenders'
approval.
As of December 31, 2002 and 2001, $130.8 million and $98.5 million
respectively, was outstanding on the Credit Facility. The weighted average
interest rate based on amounts borrowed on the Company's credit facilities was
3.43%, 5.84% and 8.07% for the years ended December 31, 2002, 2001 and 2000,
respectively. The interest rate at December 31, 2002 was 3.07%. Derivative
instruments fixed the base interest rate on $75.0 million of the $130.8 million
outstanding at December 31, 2002 (see Note 6 ).
The Credit Facility contains affirmative and negative covenants
customarily found in facilities of this type, as well as requirements that the
Company maintain, on a consolidated basis: (1) a maximum Leverage Ratio of 65%;
(2) a maximum Borrowing Base Value (as defined in the Credit Facility) of 70%
under the Credit Facility; (3) a minimum weighted average collateral pool
property occupancy of 85%; (4) minimum Tangible Net Worth (as defined in the
Credit Facility) of $262 million plus 75% of cumulative net proceeds from the
sale of equity securities; (5) minimum ratios of EBITDA to Debt Service and
Interest Expense (as defined in the Credit Facility) of 1.55:1 and 1.90:1,
respectively, at December 31, 2002; (6) maximum floating rate debt of $200
million; and (7) maximum commitments for properties under development not in
excess of 25% of Gross Asset Value (as defined in the Credit Facility). As of
December 31, 2002, the Company was in compliance with all debt covenants.
6. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
As of January 1, 2001, the adoption of SFAS 133 resulted in derivative
instruments reported on the Company's consolidated balance sheet as liabilities
of $0.6 million; and an adjustment of $0.6 million to accumulated other
comprehensive loss. The Company recorded additional other comprehensive gain of
$0.6 million and other comprehensive loss of $3.4 million, respectively, net of
minority interest of $0.1 million in each year to recognize the change in value
of these derivative instruments during the years ended December 31, 2002 and
2001, respectively.
F-19
In the normal course of business, the Company is exposed to the effect
of interest rate changes. The Company limits these risks by following
established risk management policies and procedures including the use of
derivatives. For interest rate exposures, derivatives are used primarily to
align rate movements between interest rates associated with the Company's
leasing income and other financial assets with interest rates on related debt,
and to manage the cost of borrowing obligations.
In the normal course of business, the Company uses a variety of
derivative financial instruments to manage, or hedge, interest rate risk. The
Company requires that hedging derivative instruments are effective in reducing
interest rate risk exposure. This effectiveness is essential for qualifying for
hedge accounting. Instruments that meet hedging criteria are formally designated
as hedges at the inception of the derivative contract. When the terms of an
underlying transaction are modified, or when the underlying hedged item ceases
to exist, all changes in the fair value of the instrument are marked-to-market
with changes in value included in net income in each period until the instrument
matures. Any derivative instrument used for risk management that does not meet
the hedging criteria is marked-to-market each period with unrealized gains and
losses reported in earnings.
To determine the fair values of derivative instruments, the Company
uses a variety of methods and assumptions that are based on market conditions
and risks existing at each balance sheet date. For the majority of financial
instruments, including most derivatives, long-term investments and long-term
debt, standard market conventions and techniques such as discounted cash flow
analysis, option pricing models, replacement cost and termination cost are used
to determine fair value. All methods of assessing fair value result in a general
approximation of value, and such value may never actually be realized.
The Company has a policy of only entering into contracts with major
financial institutions based upon their credit ratings and other factors. When
viewed in conjunction with the underlying and offsetting exposure that the
derivatives are designed to hedge, the Company has not sustained any material
adverse effect on its net income or financial position from the use of
derivatives.
To manage interest rate risk, the Company may employ options, forwards,
interest rate swaps, caps and floors or a combination thereof depending on the
underlying exposure. The Company undertakes a variety of borrowings: from lines
of credit, to medium- and long-term financings. To limit overall interest cost,
the Company may use interest rate instruments, typically interest rate swaps, to
convert a portion of its variable rate debt to fixed rate debt, or even a
portion of its fixed-rate debt to variable rate debt. Interest rate
differentials that arise under these swap contracts are recognized in interest
expense over the life of the contracts. 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. The Company may also employ forwards or
purchased options to hedge qualifying anticipated transactions. Gains and losses
are deferred and recognized in net income in the same period that the underlying
transaction occurs, expires or is otherwise terminated.
The following table summarizes the notional values and fair values of
the Company's derivative financial instruments at December 31, 2002. The
notional value provides an indication of the extent of the Company's involvement
in these instruments at that time, but does not represent exposure to credit,
interest rate or market risks.
Hedge Type Notional Value Interest Rate Maturity Fair Value
---------- -------------- ------------- -------- ----------
1.) Swap - Cash Flow $20.0 million 6.02% 12/15/03 ($0.9 million)
2.) Swap - Cash Flow $55.0 million 6.00% 12/15/03 ($2.6 million)
As of December 31, 2002 and 2001, the estimated unrealized loss
attributed to the cash flow hedges was $3.5 million and $4.0 million
respectively and has been included in other liabilities in the accompanying
consolidated balance sheet.
Interest rate hedges that are designated as cash flow hedges hedge the
future cash outflows on debt. Interest rate swaps that convert variable payments
to fixed payments, interest rate caps, floors, collars and forwards are cash
flow hedges. The unrealized gains/losses in the fair value of these hedges are
reported on the consolidated balance sheet with a corresponding adjustment to
either accumulated other comprehensive income or earnings depending on the type
of hedging relationship. If the hedging transaction is a cash flow hedge, then
the offsetting gains/losses are reported in accumulated other comprehensive
income/loss. Over time, the unrealized gains and losses held in accumulated
other comprehensive income/loss will be charged to earnings. This treatment
matches the adjustment recorded when the hedged items are also recognized in
earnings. Within the next twelve months, the Company expects to incur interest
expense of approximately $2.9 million of the current balance held in accumulated
other comprehensive income/loss.
For the Company's cash flow hedges, the fair value is recognized
temporarily as a component of equity and subsequently recognized in earnings
over the hedged transaction as interest expense or depreciation expense over the
life of the constructed asset for hedged borrowings associated with development
activities. Approximately $1.4 million of the amount in accumulated other
comprehensive income is attributable to development activities at December 31,
2002.
F-20
7. EARNINGS PER SHARE
Basic Earnings Per Share ("EPS") is based on the weighted average
number of common shares outstanding during the year. Diluted EPS is based on the
weighted average number of shares outstanding during the year, adjusted to give
effect to common share equivalents.
Earnings per share is calculated as follows (in thousands, except per
share data):
Year Ended December 31,
-----------------------
2002 2001 2000
---- ---- ----
Income from continuing operations $11,838 $11,613 $24,245
Income from discontinued operations 11,840 8,176 8,009
------ ----- -----
Net income $23,678 $19,789 $32,254
======= ======= =======
Basic earnings per share
Income from continuing operations $0.73 $0.79 $1.81
Income from discontinued operations 0.74 0.56 0.60
---- ---- ----
Net income per share - basic $1.47 $1.35 $2.41
===== ===== =====
Diluted earnings per share
Income from continuing operations $0.72 $0.79 $1.81
Income from discontinued operations 0.72 0.56 0.60
---- ---- ----
Net income per share - diluted $1.44 $1.35 $2.41
===== ===== =====
A reconciliation between basic and diluted weighted average shares
outstanding is shown below (in thousands):
Year Ended December 31,
2002 2001 2000
---- ---- ----
Basic Diluted Basic Diluted Basic Diluted
Weighted average shares outstanding 16,162 16,162 14,657 14,657 13,403 13,403
Effect of unvested restricted shares and
share options issued -- 226 -- 27 -- --
------ ------ ------ ------ ------ ------
Total weighted average
shares outstanding 16,162 16,388 14,657 14,684 13,403 13,403
====== ====== ====== ====== ====== ======
8. BENEFIT PLANS
The Company maintains a 401(k) Plan (the "Plan") in which substantially
all of its officers and employees are eligible to participate. The Plan permits
eligible participants, as defined in the Plan agreement, to defer up to 15% of
their compensation, and the Company, at its discretion, may match a specified
percentage of the employees' contributions. The Company's and its employees'
contributions are fully vested, as defined in the Plan agreement. The Company's
contributions to the Plan for the years ended December 31, 2002, 2001 and 2000
were $274,000, $247,000 and $25,000, respectively.
The Company also maintains Supplemental Retirement Plans (the
"Supplemental Plans") covering certain senior management employees. The
Supplemental Plans provide eligible employees through normal retirement date, as
defined in the Supplemental Plans, a benefit amount similar to the amount that
would have been received under the provisions of a pension plan that was
terminated in 1994. Contributions recorded by the Company under the provisions
of this plan were $89,000, $62,000 and $65,000 for the years ended December 31,
2002, 2001 and 2000, respectively.
The Company also maintains share purchase plans through which the
Company's employees may purchase shares of beneficial interest at a 15% discount
to the fair market value. In 2002, 2001 and 2000, 17,000, 47,000 and 43,000
shares, respectively, were purchased for total consideration of $0.3 million,
$0.9 million and $0.6 million, respectively.
F-21
9. STOCK-BASED COMPENSATION
The Company has six plans that provide for the granting of restricted
stock awards and options to purchase shares of beneficial interest to key
employees and nonemployee trustees of the Company. Options are granted at the
fair market value of the shares on the date of the grant. The options vest and
are exercisable over periods determined by the Company, but in no event later
than 10 years from the grant date. Changes in options outstanding are as
follows:
1999 Restricted Share 1997 1993 1990 1990
Equity Incentive Plan for Non-Employee Stock Option Stock Option Employees Nonemployee
Plan Trustees Plan Plan Plan Trustee Plan
Authorized shares 400,000 50,000 455,000 100,000 400,000 100,000
------- ------ ------- ------- ------- -------
Available for grant
at December 31, 2002 194,211(1) 45,000 -- -- -- 64,500
------- ------ ------- ------- ------- -------
(1) Amount is net of 136,427, 41,036 and 118,500 restricted stock awards issued
to certain employees as incentive compensation in 2002, 2001 and 2000,
respectively. The restricted stock was awarded at its fair value that
ranged from $23.12 to $25.55 per share in 2002, $21.93 to $23.58 per share
in 2001 and $18.16 to $18.56 per share in 2000 for a total value of $3.2
million in 2002, $0.7 million in 2001 and $2.2 million in 2000. Restricted
stock vests ratably over periods of three to five years. The Company
recorded compensation expense of $2.0 million in 2002, $1.2 million in 2001
and $0.4 million in 2000 related to these restricted stock awards.
Weighted 1999 1997 1993 1990 1990
Equity
Average Exercise Incentive Stock Option Stock Option Employees Nonemployee
Price Plan Plan Plan Plan Trustee Plan
Options outstanding at 1/1/2000 $23.19 -- 360,000 100,000 346,375 36,500
====== ======= ======= ======= ======= ======
Options granted $17.84 100,000 -- -- -- 12,500
Options exercised $15.94 -- -- -- (12,625) (4,000)
Options forfeited $21.10 -- -- -- (89,500) --
------ ------- ------- ------- ------- ------
Options outstanding at 12/31/2000 $22.64 100,000 360,000 100,000 244,250 45,000
====== ======= ======= ======= ======= ======
Options granted $21.50 -- -- -- -- 17,500
Options exercised $19.15 -- -- -- -- (7,125)
Options forfeited $25.06 -- -- -- -- (2,000)
------ ------- ------- ------- ------- ------
Options outstanding at 12/31/2001 $22.64 100,000 360,000 100,000 244,250 53,375
====== ======= ======= ======= ======= ======
Options granted -- -- -- -- -- --
Options exercised $20.37 -- -- -- (95,515) (1,000)
------ ------- ------- ------- ------- ------
Options outstanding at 1/1/2002 $23.24 100,000 360,000 100,000 148,735 52,375
====== ======= ======= ======= ======= ======
At December 31, 2002, options for 703,860 shares of beneficial interest
with an aggregate exercise price of $16.6 million (average of $23.62 per share)
were exercisable.
Outstanding options as of December 31, 2002 have a weighted average
remaining contractual life of 4.3 years, a weighted average exercise price of
$23.24 per share and an aggregate exercise price of $17.7 million.
The following table summarizes information relating to all options
outstanding at December 31, 2002.
Options Outstanding at Options Exercisable at
December 31, 2002 December 31, 2002
----------------- -----------------
Weighted
Weighted Weighted Average
Average Average Remaining
Range of Exercise Number of Exercise Price Number of Exercise Price Contractual
Prices (Per Share) Shares (Per Share) Shares (Per Share) Life (Years)
------------------ ------ ----------- ------ ----------- ------------
$17.00 - $18.99 149,375 $17.82 104,375 $17.86 5.6
$19.00 - $20.99 39,000 20.35 38,000 20.36 3.2
$21.00 - $22.99 49,500 22.31 38,250 22.52 4.4
$23.00 - $24.99 160,235 24.34 160,235 24.34 1.6
$25.00 - $25.41 363,000 25.41 363,000 25.41 4.7
------- -------
761,110 703,860
======= =======
F-22
The fair value of each option granted in 2001 and 2000 was estimated on
the grant date using the Black-Scholes options pricing model and the assumptions
presented below:
2001 2000
---- ----
Weighted average fair value $0.52 $0.81
Expected life in years 5 5
Risk-free interest rate 4.60% 5.80%
Volatility 12.99% 17.34%
Dividend yield 9.42% 10.04%
No options were granted in 2002.
10. OPERATING LEASES
The Company's multifamily apartment units are typically leased to
residents under operating leases for a period of one year. The Company's retail
and industrial properties are leased to tenants under operating leases with
various expiration dates extending at the outside of the range to the year 2025.
Future minimum rentals under noncancelable operating leases with terms greater
than one year are as follows (in thousands):
Years ended December 31,
2003 $ 43,986
2004 42,126
2005 39,286
2006 33,394
2007 30,081
2008 and thereafter 163,416
-------
Total $352,289
========
The total future minimum rentals as presented do not include amounts
that may be received as tenant reimbursements for charges to cover increases in
certain operating costs or contingent amounts that may be received as percentage
rents.
F-23
11. COMMITMENTS AND CONTINGENCIES
Related Party Transactions
PRI provides management, leasing and development services for
partnerships and other ventures in which certain officers of the Company and PRI
have either direct or indirect ownership interests. Total revenues earned by PRI
for such services were $3.5 million, $2.9 million and $3.2 million for the years
ended December 31, 2002, 2001 and 2000, respectively. As of December 31, 2002
and 2001, $0.7 million and $0.3 million, respectively, was due from these
affiliates. Of these amounts, approximately $0.6 million and $0.3 million,
respectively, were collected subsequent to December 31, 2002 and 2001. PRI holds
a note receivable from a related party with a balance of $0.1 million that is
due in installments through 2010 and bears an interest rate of 10% per annum.
The Company leases office space from an affiliate of certain officers
of the Company. Total rent expense under this lease, which expires in 2010, was
$0.9 million, $0.9 million and $0.7 million for the years ended December 31,
2002, 2001 and 2000, respectively. Minimum rental payments under this lease are
$0.8 million per year from 2003 to 2010.
As of December 31, 2002, 12 executive officers of the Company had
employment agreements with terms of two to three years that provided for
aggregate base compensation for 2002 of $2.9 million subject to increases as
approved by the Company's compensation committee, as well as additional
incentive compensation.
Acquisition of The Rubin Organization
In connection with the Company's 1997 acquisition of The Rubin
Organization ("TRO") and certain other related property interests, the Company
agreed to issue up to 800,000 additional Class A OP units over a five-year
period ending September 30, 2002, if certain earnings were achieved. The Company
accounts for the issuance of contingent OP units as additional purchase price
when such amounts are determinable. Through December 31, 2001, 665,000
contingent OP units had been issued, resulting in additional purchase price of
approximately $12.9 million. A special committee of disinterested members of the
Company's Board of Trustees will determine whether the remaining 135,000
contingent OP units for the period from January 1, 2002 through September 30,
2002 have been earned, and any related payment will be accounted for as
additional purchase price. Issuance of additional Class A OP Units has been
excluded from the statements of cash flows as non-cash items.
In connection with certain development properties acquired in the TRO
transaction, the Company will be required to issue additional units of limited
partnership interest in the Operating Partnership ("OP units") to the former
owners of the properties upon final determination by the special committee of
the values attributable to the properties.
F-24
Development Activities
The Company is involved in a number of development and redevelopment
projects which may require equity funding by the Company, or third-party debt or
equity financing. In each case, the Company will evaluate the financing
opportunities available to it at the time the project requires funding. In cases
where the project is undertaken with a joint venture partner, the Company's
flexibility in funding the project may be governed by the joint venture
agreement or the covenants existing in its line of credit, which limit the
Company's involvement in joint venture projects. At December 31, 2002, the
Company had approximately $15.0 million committed to complete current
development and redevelopment projects, which is expected to be financed through
the Company's Credit Facility or through short-term construction loans.
Legal Actions
In the normal course of business, the Company becomes involved in legal
actions relating to the ownership and operations of its properties and the
properties it manages for third parties. In management's opinion, the
resolutions of these legal actions are not expected to have a material adverse
effect on the Company's consolidated financial position or results of
operations.
Environmental
The Company's management is aware of certain environmental matters at
some of the Company's properties, including ground water contamination,
above-normal radon levels and the presence of asbestos containing materials and
lead-based paint. The Company has, in the past, performed remediation of such
environmental matters, and the Company's management is not aware of any
significant remaining potential liability relating to these environmental
matters. The Company may be required in the future to perform testing relating
to these matters. The Company's management can make no assurances that the
amounts that have been reserved for these matters of $0.1 million will be
adequate to cover future environmental costs.
Guarantees
The Company has provided the following guarantees:
o The Company has guaranteed $5.5 million of the mortgage at Laurel
Mall, an unconsolidated joint venture.
o The Company has guaranteed the amounts outstanding under the
credit facility ($130.8 million at December 31, 2002).
o The Company has provided tax protection of up to approximately
$5.0 million related to the August 1998 acquisition of the Woods
Apartments for a period of eight years ending in August 2006. The
seller of the Woods Apartments received $1.7 million worth of
Class A Units as partial consideration for the sale of the
property.
12. SEGMENT INFORMATION
The Company has four reportable segments: (1) retail properties, (2)
multifamily properties, (3) development and other, and (4) corporate. The retail
segment includes the operation and management of 22 regional and community
shopping centers (12 wholly-owned and 10 owned in joint venture form). The
multifamily segment includes the operation and management of 19 apartment
communities (15 wholly-owned and 4 owned in joint venture form). The other
segment includes the operation and management of 2 retail properties under
development and 4 industrial properties (all wholly-owned). The corporate
segment includes cash and investment management, real estate management and
certain other general support functions.
The accounting policies for the segments are the same as those the
Company uses for consolidated financial reporting, except that, for segment
reporting purposes, the Company uses the "proportionate-consolidation method" of
accounting (a non-GAAP measure) for joint venture properties, instead of the
equity method of accounting. The Company calculates the
proportionate-consolidation method by applying its percentage ownership interest
to the historical financial statements of their equity method investments. The
column titled "Adjustments to the Equity Method" in the charts below reconciles
the amounts presented under the proportionate-consolidation method to the
consolidated amounts reflected on the Company's consolidated balance sheets and
consolidated statements of income.
The chief operating decision-making group for the Company's Retail,
Multifamily, Development and Other and Corporate segments is comprised of the
Company's President, Chief Executive Officer and the lead executives of each of
the Company's operating segments. The lead executives of each operating segment
also manage the profitability of each respective segment with a focus on net
operating income. The operating segments are managed separately because each
operating segment represents a different property type (retail or multifamily),
as well as construction in progress ("CIP") and corporate services.
F-25
Adjustments
to Equity
Method and
Held for Sale Development Discontinued Total
Year Ended December 31, 2002 Retail Multifamily and Other Corporate Total Operations Consolidated
---------------------------- ------ ----------- --------- --------- ----- ---------- ------------
(thousands of dollars)
Real estate operating revenue $100,393 $57,582 $329 $- $158,304 $(94,963) $ 63,341
Real estate operating expense (28,534) (24,103) (24) - (52,661) 36,396 (16,265)
------- ------- --- - ------- ------ -------
Net operating income 71,859 33,479 305 - 105,643 (58,567) 47,076
Management company revenue - - - 11,003 11,003 - 11,003
Interest and other income - - - 711 711 - 711
General and administrative
expenses - - - (24,747) (24,747) - (24,747)
--------- ------- ------- ------- -------- -------- --------
71,859 33,479 305 (13,033) 92,610 (58,567) 34,043
Interest expense (27,542) (14,258) - 103 (41,697) 26,319 (15,378)
Depreciation and amortization (19,502) (9,303) (52) - (28,857) 15,888 (12,969)
Equity in income of partnerships
and joint ventures - - - - - 7,449 7,449
Minority interest in operating
partnership - - - (2,194) (2,194) 887 (1,307)
Discontinued operations 152 - - (421) (269) 8,024 7,755
Gains on sales of real estate 4,085 - - - 4,085 - 4,085
----- - - - ----- - -----
Net income $29,052 $9,918 $253 $(15,545) $23,678 $- $23,678
======== ======== ======= ======== ======== ========= ========
Investments in real estate, at cost $620,346 $305,336 $27,330 $- $953,012 $(213,583) $739,429
======== ======== ======= ======== ======== ========= ========
Total assets $592,167 $218,718 $25,310 $41,214 $877,409 $(173,746) $703,663
======== ======== ======= ======== ======== ========= ========
Recurring capital expenditures $114 $2,790 $- $- $2,904 $(363) $2,541
======== ======== ======= ======== ======== ========= ========
Adjustments
to Equity
Method and
Held for Sale Development Discontinued Total
Year Ended December 31, 2001 Retail Multifamily and Other Corporate Total Operations Consolidated
---------------------------- ------ ----------- --------- --------- ----- ---------- ------------
(thousands of dollars)
Real estate operating revenue $79,951 $56,394 $324 $- $136,669 $(86,032) $ 50,637
Real estate operating expense (22,108) (23,456) (14) - (45,578) 32,922 (12,656)
------- ------- ------ ------- -------- -------- --------
Net operating income 57,843 32,938 310 - 91,091 (53,110) 37,981
Management company revenue - - - 11,336 11,336 - 11,336
Interest and other income - - - 361 361 - 361
General and administrative
expenses - - - (23,577) (23,577) - (23,577)
------- ------- ------ ------- -------- -------- --------
57,843 32,938 310 (11,880) 79,211 (53,110) 26,101
Interest expense (21,416) (14,102) - (76) (35,594) 23,288 (12,306)
Depreciation and amortization (14,456) (9,126) (52) - (23,634) 14,286 (9,348)
Equity in income of partnerships
and joint ventures - - - - - 6,540 6,540
Minority interest in operating
partnership - - - (2,499) (2,499) 1,018 (1,481)
Discontinued operations 223 - - (25) 198 7,978 8,176
Gains on sales of real estate 2,107 - - - 2,107 - 2,107
------- ------- ------ ------- -------- -------- --------
Net income $24,301 $9,710 $258 $(14,480) $19,789 $- $19,789
======== ======== ======= ======== ======== ========= =========
Investments in real estate, at cost $510,531 $283,028 $40,850 $- $834,409 $(198,115) $636,294
======== ======== ======= ======== ======== ========= =========
Total assets $482,727 $206,016 $38,743 $28,336 $755,822 $(153,194) $602,628
======== ======== ======= ======== ======== ========= =========
Recurring capital expenditures $18 $2,965 $- $- $2,983 $(293) $2,690
======== ======== ======= ======== ======== ========= =========
F-26
Adjustments
to Equity
Method and
Held for Sale Development Discontinued Total
Year Ended December 31, 2000 Retail Multifamily and Other Corporate Total Operations Consolidated
---------------------------- ------ ----------- --------- --------- ----- ---------- ------------
(thousands of dollars)
Real estate operating revenue $69,749 $54,199 $4,707 $- $128,655 $(78,747) $49,908
Real estate operating expense (19,864) (22,448) (45) - (42,357) 29,739 (12,618)
-------- -------- ------- ------- -------- -------- -------
Net operating income 49,885 31,751 4,662 - 86,298 (49,008) 37,290
PREIT-RUBIN Net Operating Loss - - - (4,498) (4,498) 4,498 -
Interest and other income - - - 1,385 1,385 - 1,385
General and administrative
expenses - - - (4,953) (4,953) - (4,953)
-------- -------- ------- ------- -------- -------- -------
49,885 31,751 4,662 (8,066) 78,232 (44,510) 33,722
Interest expense (17,845) (14,068) - (1,141) (33,054) 21,952 (11,102)
Depreciation and amortization (10,674) (8,931) (63) (1,261) (20,929) 14,041 (6,888)
Equity in loss of PREIT-RUBIN - - - - - (6,307) (6,307)
Equity in income of partnerships
and joint ventures - - - - - 7,366 7,366
Minority interest in operating
partnership - - - (3,627) (3,627) 783 (2,844)
Discontinued operations 1,491 - - (157) 1,334 6,675 8,009
Gains on sales of real estate 3,650 - 6,648 - 10,298 - 10,298
-------- -------- ------- ------- -------- -------- -------
Net income $26,507 $8,752 $11,247 $(14,252) $32,254 $- $32,254
======== ======== ======= ======= ======== ========= ========
Investments in real estate, at cost $464,633 $278,199 $60,727 $- $803,559 $(191,293) $612,266
======== ======== ======= ======= ======== ========= ========
Total assets $448,720 $211,328 $58,820 $15,771 $734,639 $(157,976) $576,663
======== ======== ======= ======= ======== ========= ========
Recurring capital expenditures $642 $3,464 $- $- $4,106 $(627) $3,479
======== ======== ======= ======= ======== ========= ========
F-27
13. SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
The following presents a summary of the unaudited quarterly financial
information for the years ended December 31, 2002 and 2001. The amounts
presented below for 2002 and 2001 reflects the impact of discontinued
operations.
Year Ended December 31, 2002
In thousands of dollars, except per share data 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter(3) Total
Revenues (2) $14,947 $18,434 $18,920 $22,753 $75,055
======= ======= ======= ======= =======
Net income (1) $3,727 $4,442 $8,178 $7,331 $23,678
====== ====== ====== ====== =======
Net income per share - basic (2) $0.23 $0.27 $0.49 $0.45 $1.47
===== ===== ===== ===== =====
Net income per share - diluted $0.23 $0.27 $0.49 $0.44 $1.44
===== ===== ===== ===== =====
Year Ended December 31, 2002 - Impact of Discontinued Operations
In thousands of dollars, except per share data 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter(3) Total
Revenues $12,878 $12,914 $12,873 $13,598 $52,263
======= ======= ======= ======= =======
Income from discontinued operations $2,188 $1,957 $5,652 $2,043 $11,840
====== ====== ====== ====== =======
Basic income from discontinued operations per share (2) $0.14 $0.12 $0.34 $0.14 $0.74
===== ===== ===== ===== =====
Diluted income from discontinued operations per share $0.14 $0.12 $0.34 $0.12 $0.72
===== ===== ===== ===== =====
Year Ended December 31, 2001 - Restated
In thousands of dollars, except per share data 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total
Revenues $14,414 $14,815 $14,616 $18,489 $62,334
======= ======= ======= ======= =======
Net income (1) $5,092 $3,906 $4,149 $6,642 $19,789
====== ====== ====== ====== =======
Net income per share - basic $0.37 $0.29 $0.27 $0.42 $1.35
===== ===== ===== ===== =====
Net income per share - diluted $0.37 $0.29 $0.27 $0.42 $1.35
===== ===== ===== ===== =====
Year Ended December 31, 2001 - Impact of Discontinued Operations
In thousands of dollars, except per share data 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total
Revenues $12,582 $12,723 $12,921 $13,022 $51,248
======= ======= ======= ======= =======
Income from discontinued operations $1,986 $1,892 $2,052 $2,246 $8,176
====== ====== ====== ====== ======
Basic income from discontinued operations per share $0.15 $0.14 $0.13 $0.14 $0.56
===== ===== ===== ===== =====
Diluted income from discontinued operations per share $0.15 $0.14 $0.13 $0.14 $0.56
===== ===== ===== ===== =====
(1) Includes gains on sale of real estate of approximately
$4.1 million (3rd Quarter 2002), $1.8 million (1st
Quarter 2001) and $0.3 million (2nd Quarter 2001).
(2) Results for the full year do not necessarily equal the
summation of the quarterly amounts due to rounding.
(3) Fourth quarter revenues include a significant portion of
annual percentage rents as most percentage rent minimum sales
levels are met in the fourth quarter. Also, fourth quarter net
income includes the impact of the capitalization of $0.6
million of internal costs related to development activities.
F-28
14. PENDING TRANSACTIONS
On March 3, 2003, the Company entered into an agreement to sell all of
its 7,242 apartment units to Morgan Properties of King of Prussia, Pennsylvania
(together, "Morgan"), for $420 million. The $420 million sale price of the
multifamily portfolio includes a mix of cash payable at closing and Morgan's
agreement to assume or pay off indebtedness related to the properties. As of
December 31, 2002, approximately $213.7 million of the $420 million sale price
would be payable in cash and approximately $206.3 million would be payable in
the form of assumed indebtedness. The portion attributable to cash is expected
to increase and the portion attributable to assumed indebtedness is expected to
decrease by the amount of the Company's principal payments on this indebtedness
between January 1, 2003 and closing. The multifamily portfolio was not
classified as held for sale at December 31, 2002 because the Company was not
actively marketing these properties, nor was there an agreement between the
Company and Morgan at December 31, 2002.
On March 7, 2003, the Company entered into Agreements of Purchase and
Sale to acquire Cherry Hill Mall, Moorestown Mall, Plymouth Meeting Mall,
Gallery at Market East, Exton Square Mall and Echelon Mall from affiliated
companies of The Rouse Company ("Rouse"). The Company intends, upon the
execution of definitive agreements with New Castle Associates, to assign its
rights under the Agreement of Purchase and Sale to acquire Cherry Hill Mall to
New Castle Associates. The partners of New Castle Associates include Ronald
Rubin, our Chairman and Chief Executive Officer, and George Rubin, our Trustee
and President of our management subsidiaries, PREIT-RUBIN, Inc. and PREIT
Services, LLC.
The aggregate purchase price for the acquisition of the six Rouse
properties, assuming the Company was to acquire all of the equity of New Castle
Associates, would be $548 million, including approximately $233 million in cash,
the assumption of $277 million in non-recourse mortgage debt and $38 million in
Units. All of the Units would be issued as part of the consideration for the
Company's acquisition of the equity of New Castle Associates. Upon the sale of
Christiana Mall by New Castle Associates, the Company's management and leasing
agreement for that property will be terminated, and the Company will receive a
brokerage fee of approximately $2 million from New Castle Associates.
15. SUBSEQUENT EVENT
In 2003, the Company sold a parcel of land located at Crest Plaza
Shopping Center located in Allentown, PA for a purchase price of $3.2 million.
The Company expects to recognize a gain of approximately $2.0 million in 2003 as
a result of this sale.
16. UPDATE ON SIGNIFICANT TRANSACTIONS
Sale of Multifamily Portfolio
On May 30, 2003, the Company completed the sale of 13 of its
wholly-owned multifamily properties to MPM Acquisition Corp., an affiliate of
Morgan Properties, Ltd. (together, "Morgan"), for a total sale price of $314
million (approximately $151.5 million of which consisted of assumed
indebtedness). The sale was completed pursuant to the purchase and sale
agreement entered into by the Company in March 2003 to sell all of the 19
properties and related assets in its portfolio of multifamily properties to
Morgan for $420 million, as described in Note 14 above. The 19 properties in the
Company's multifamily portfolio (aggregating to a total of 7,242 apartment
units), consisted of 15 properties that were wholly-owned by the Company and
four multifamily properties in which the Company held a 50% joint venture
interest. Prior to the closing on May 30, 2003, the Company and Morgan amended
the purchase and sale agreement to exclude from the transaction the Company's
interests in the four properties held in joint venture form, resulting in a
reduction of approximately $24.85 million, inclusive of $13.4 million in
indebtedness that was to be assumed, from the original sale price of $420
million. The Company has presented as discontinued operations the results of
properties either sold or designated as assets held for sale during 2003 for all
periods presented in these financial statements.
The original purchase and sale agreement was also amended to reflect
(1) the deferral of the closing of two of the wholly-owned multifamily
properties, Emerald Point in Virginia Beach, Virginia and Regency Lakeside in
Omaha, Nebraska, until on or before July 31, 2003 (unless further extended for
90 days by both parties) pending receipt of a required consent from Fannie Mae
to Morgan's assumption of the loans secured by those properties and (2) the
addition of a purchase price credit of $3 million for Morgan toward its closing
costs upon the closing of the sale of all 15 of the Company's wholly-owned
multifamily properties. On July 25, 2003, the Company completed the sale of the
two remaining wholly-owned properties to Morgan for $81.4 million, inclusive of
$33.8 million in assumed indebtedness and before giving effect to the $3 million
purchase price credit. Morgan's cash deposit of approximately $3.1 million was
returned to Morgan upon the closing of the two remaining wholly-owned
properties. The net cash proceeds received by the company were $44.3 million.
With respect to its four joint venture multifamily properties, the
Company has sold its 50% interest in the following two properties: (1) Cambridge
Hall Apartments in West Chester, Pennsylvania; sold on May 1, 2003 to Tree Farm
Road, L.P. (the Company's joint venture partner) for $6.7 million, inclusive of
$2.5 million in assumed indebtedness and (2) Countrywood Apartments in Tampa,
Florida; sold on May 31, 2003 to Countrywood Apartments General Partnership (the
Company's joint venture partner) for $9.1 million, inclusive of $7.3 million in
assumed indebtedness. The Company also has entered into two seperate agreements
to sell its interests in the other two joint venture properties
F-29
to its joint venture partners for an aggregate of approximately $8.6 million,
inclusive of approximately $3.5 million of assumed indebtedness. Closing on
these two sales is expected to occur no later than October 13, 2003. As equity
method investments, the results of operations of these properties and resultant
gain or loss on sale has been presented in continuing operations for all periods
presented.
Acquisition of Shopping Malls from Rouse
Pursuant to the agreements described in Note 14 above, on April 28,
2003, the Company acquired Moorestown Mall, The Gallery at Market East and Exton
Square Mall from affiliated entities of The Rouse Company ("Rouse") and, on June
5, 2003, the Company acquired Echelon Mall and Plymouth Meeting Mall from Rouse.
On June 5, 2003, the Company also acquired the ground lessor's interest in
Plymouth Meeting Mall from the Teachers Insurance and Annuity Association
("TIAA"). In addition, on April 28, 2003, New Castle Associates acquired Cherry
Hill Mall from Rouse in exchange for its interest in Christiana Mall, cash and
the assumption by New Castle Associates of mortgage debt on Cherry Hill Mall. On
that same date, the Company also acquired an ownership interest in New Castle
Associates and an option to acquire the remaining ownership interests.
The aggregate purchase price for the Company's acquisition of the five
malls from Rouse, for TIAA's ground lease interest in Plymouth Meeting Mall and
for its interest in New Castle Associates (including the additional purchase
price expected to be paid upon exercise of the Company's option to acquire the
remaining interests in New Castle Associates) was $549.4 million, including
approximately $237.4 million in cash, the assumption of $277 million in
non-recourse mortgage debt and the issuance of $35 million in units of limited
partnership interest in the Company's operating partnership ("PALP OP Units").
All of the PALP OP Units were or will be issued as part of the consideration for
the Company's acquisition of its interest in New Castle Associates.
Agreement to Merge with Crown American Realty Trust
On May 14, 2003, the Company and Crown American Realty Trust ("Crown")
jointly announced that the Company, its operating partnership, Crown and Crown
American Properties, L.P., a limited partnership of which Crown is the sole
general partner ("CAP"), entered into an Agreement and Plan of Merger, dated as
of May 13, 2003. The merger agreement provides for the merger of Crown with and
into the Company.
F-30
REPORT OF INDEPENDENT AUDITORS
To the Partners of
Lehigh Valley Associates
We have audited the balance sheets of Lehigh Valley Associates (a
limited partnership) as of December 31, 2002 and 2001, and the related
statements of operations, partners' deficiency, and cash flows for the years
then ended. These financial statements are the responsibility of Lehigh Valley
Associates' management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Lehigh Valley
Associates at December 31, 2002 and 2001, and the results of its operations and
its cash flows for the years then ended, in conformity with accounting
principles generally accepted in the United States.
ERNST & YOUNG
Philadelphia, Pennsylvania
January 21, 2003
F-31
REPORT OF INDEPENDENT AUDITORS
To the Partners of
Lehigh Valley Associates
We have audited the balance sheets of Lehigh Valley Associates (a
limited partnership) as of December 31, 2001 and 2000, and the related
statements of operations, partners' deficiency, and cash flows for the years
then ended. These financial statements are the responsibility of Lehigh Valley
Associates' management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Lehigh Valley
Associates at December 31, 2001 and 2000, and the results of its operations and
its cash flows for the years then ended, in conformity with accounting
principles generally accepted in the United States.
ERNST & YOUNG
Philadelphia, Pennsylvania
January 15, 2002
F-32
Schedule II
Pennsylvania Real Estate Investment Trust
Valuation and Qualifying Accounts
(in thousands)
Column A Column B Column C Column D Column E
Additions
Description Balance
Beginning Charged to Costs Charged to Balance End
of Period and Expenses Other Accounts Deductions (1) of Period
--------- ------------ -------------- -------------- ---------
Allowance for Possible Losses:
Year ended December 31, 2002 $93 $-- $-- $-- $93
Year ended December 31, 2001 $93 $-- $-- $-- $93
Year ended December 31, 2000 $528 $-- $-- ($435) $93
Allowance for Doubtful Accounts:
Year ended December 31, 2002 $727 $837 $-- ($599) $965
Year ended December 31, 2001 $733 $533 $-- ($539) $727
Year ended December 31, 2000 $582 $752 $-- ($601) $733
(1) Principally write-offs of tenant receivable balances.
S-1
Schedule III
Real Estate as of December 31, 2002
Initial Cost of Current Date
Initial Cost of Improvements Accum. Current of Life
Cost of Building & Net of Balance of Building & Depr. Encumb. Construction/ of
Land Improvement Retirements Land Improvements Balance Balance Acquisition Depr.
---- ----------- ----------- ---- ------------ ------- ------- ----------- -----
(Thousands of dollars)
INVESTMENT IN REAL ESTATE (CONTINUING OPERATIONS):
RETAIL PROPERTIES:
Beaver Valley Mall 13,606 14,971 32,615 13,196 47,997 1,207 47,740
Christiana Power Center 9,347 23,089 2,737 12,828 22,344 3,535 - 1998 39
Commons at Magnolia 577 3,436 5,779 601 9,191 491 - 1999 39
Crest Plaza 332 2,349 13,191 282 15,590 4,540 - 1964 40
Creekview (Warrington) 1,380 4,825 12,384 1,380 17,208 1,006 - 1998 40
Dartmouth Mall 7,199 28,945 13,576 7,199 42,521 6,997 - 1998 39
Festival Shopping Center 3,728 14,988 268 3,728 15,256 1,718 - 1998 39
Magnolia Mall 9,279 37,358 7,719 10,379 43,978 6,043 21,658 1998 39
Northeast Tower Center 7,864 18,338 4,658 8,265 22,596 2,036 - 1998 39
Northeast Tower - 2,716 10,863 - 2,716 10,863 1,018 12,500 1999 39
Home Depot
Paxton Tower Center 15,719 29,222 6,948 15,719 36,170 2,800 - 1998 40
Prince George's Plaza 13,066 57,678 6,069 13,066 63,747 8,076 44,879 1998 39
South Blanding Village 2,946 6,138 414 2,946 6,551 2,977 - 1988 40
------- ------- ------- ------ ------- ------ --------
Subtotal 87,759 252,200 106,358 92,305 354,012 42,444 126,777
INDUSTRIAL PROPERTIES:
ARA-Allentown 3 82 - 3 82 81 - 1962 40
ARA -Pennsauken 20 190 - 20 190 166 - 1962 50
Interstate Commerce 34 364 1,404 34 1,768 1,435 - 1963 50
Sears 25 206 176 25 382 343 - 1963 50
------- ------- ------- ------ ------- ------ --------
Subtotal 82 842 1,580 82 2,422 2,025 -
------- ------- ------- ------ ------- ------ --------
TOTAL CONTINUED $87,841 $253,042 $107,938 $92,387 $356,434 $44,469 $126,777
======= ======== ======== ======= ======== ======= ========
INVESTMENT IN REAL ESTATE (DISCONTINUED OPERATIONS):
MULTIFAMILY PROPERTIES:
2031 Locust St $100 $1,028 $2,717 $100 $3,745 $3,072 $5,708 1961 25
Boca Palms 7,107 28,444 3,823 7,107 32,267 9,146 21,682 1994 39
Camp Hill 336 3,060 2,533 336 5,594 4,383 12,725 1969 33
Cobblestone
Apartments 2,791 9,697 3,329 2,791 13,026 4,379 13,287 1992 40
Eagles Nest 4,021 17,615 2,832 4,021 20,448 6,660 14,727 1998 39
Emerald Point 3,062 18,645 12,512 3,789 30,430 8,591 15,152 1993 39
Fox Run - Bear 1,355 19,959 2,862 1,355 22,821 7,904 13,565 1998 39
Hidden Lakes 1,225 11,794 1,644 1,225 13,438 3,867 10,265 1994 39
Kenwood Gardens 489 3,235 4,175 489 7,410 6,036 6,955 1963 38
Lakewood Hills 501 11,402 6,139 501 17,541 11,861 17,988 1972-80 45
Palms of Pembroke 4,869 17,384 2,324 4,869 19,707 5,210 15,925 1994 39
Regency Lakeside 5,364 8,617 17,300 5,364 25,917 8,494 19,059 2002 40
Shenandoah Village 2,200 8,975 2,934 2,200 11,909 3,438 7,815 1993 39
The Marylander 117 4,340 3,948 117 8,287 6,922 11,800 1962 39
The Woods 4,234 17,268 2,302 4,234 19,570 2,301 6,321 1998 39
------- ------- ------- ------ ------- ------ --------
TOTAL DISCONTINUED $ 37,771 $181,463 $ 71,374 $ 38,498 $252,110 $ 92,264 $192,974
======== ======== ======== ======== ======== ======== ========
GRAND TOTAL $125,612 $434,505 $179,312 $130,885 $608,544 $136,733 $319,751
======== ======== ======== ======== ======== ======== ========
S-2
The aggregate cost for Federal income tax purposes of the Company's investment
in real estate was approximately $672 million and $581 million at December 31,
2002 and 2001, respectively. The changes in total real estate and accumulated
depreciation for the years ended December 31, 2002 and 2001 are as follows:
Total Real Estate Assets
------------------------
Year Ended December 31,
2002 2001 2000
---- ---- ----
BALANCE, beginning of period $636,294 $612,266 $577,521
Acquisitions and development 99,025 15,068 41,477
Improvements 36,326 16,007 10,584
Dispositions (32,216) (7,047) (17,316)
-------- -------- --------
BALANCE, end of period $739,429 $636,294 $612,266
Accumulated Depreciation
------------------------
Year Ended December 31,
2002 2001 2000
---- ---- ----
BALANCE, beginning of period $112,424 $95,026 $84,577
Depreciation expense 21,037 17,688 15,335
Acquisitions 8,368 -- --
Dispositions (5,096) (290) (4,886)
-------- -------- -------
BALANCE, end of period $136,733 $112,424 $95,026
S-3
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(c) Exhibits
23.1 Consent of KPMG LLP (Independent Auditors of the Company).
23.2 Consent of Ernst & Young LLP (Independent Auditors of
Lehigh Valley Associates).
23.3 Consent of Ernst & Young LLP (Independent Auditors of
Lehigh Valley Associates).
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
Date: August 8, 2003 By: /s/ Jonathan B. Weller
----------------------------------------
Jonathan B. Weller
President and Chief Operating Officer
Exhibit Index
23.1 Consent of KPMG LLP (Independent Auditors of the Company).
23.2 Consent of Ernst & Young LLP (Independent Auditors of Lehigh
Valley Associates).
23.3 Consent of Ernst & Young LLP (Independent Auditors of Lehigh
Valley Associates).