As filed with the Securities and Exchange Commission on January 11, 2005
Registration No. 333-
--------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
______________
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
______________
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
(Exact Name of Registrant as Specified in Its Charter)
______________
PENNSYLVANIA 23-6216339
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
BRUCE GOLDMAN
EXECUTIVE VICE PRESIDENT-GENERAL COUNSEL
AND ASSISTANT SECRETARY
THE BELLEVUE, 200 SOUTH BROAD STREET THE BELLEVUE, 200 SOUTH BROAD STREET
PHILADELPHIA, PENNSYLVANIA 19102 PHILADELPHIA, PENNSYLVANIA 19102
(215) 875-0700 (215) 875-0700
(Address, Including Zip Code, and Telephone Number, (Name, Address, Including Zip Code, and Telephone
Including Area Code, of Registrant's Principal Executive Offices) Number, Including Area Code, of Agent for Service)
_______________________
COPY TO:
HOWARD A. BLUM, ESQUIRE
ROBERT C. JUELKE, ESQUIRE
DRINKER BIDDLE & REATH LLP
ONE LOGAN SQUARE, 18TH & CHERRY STREETS
PHILADELPHIA, PENNSYLVANIA 19103-6996
(215) 988-2700
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From
time to time after the effective date of this Registration Statement.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. |_|
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box. |X|
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_| _________
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_| ___________
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. |_|
CALCULATION OF REGISTRATION FEE
======================================================================================================================
Amount Proposed Maximum Proposed Maximum Amount of
Title of Shares to be Offering Price Aggregate Registration
to be Registered Registered(1) Per Share (2) Offering Price(2) Fee
----------------------------------------------------------------------------------------------------------------------
Shares of Beneficial Interest, par 895,511 $39.81 $35,650,292 $4,196
value $1.00 per share (and associated
rights)
======================================================================================================================
(1) In the event of a share split, share dividend or similar transaction
involving the Registrant's shares, in order to prevent dilution, the number of
shares registered automatically shall be increased to cover the additional
shares in accordance with Rule 416(a) under the Securities Act of 1933.
(2) Estimated pursuant to Rule 457(c) solely for the purpose of calculating the
registration fee. The price and fee are based on the average of the highest and
lowest selling prices of the Registrant's shares of beneficial interest on
January 6, 2005 on the New York Stock Exchange.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
SUBJECT TO COMPLETION, DATED JANUARY 11, 2005
PROSPECTUS
PREIT
[GRAPHIC OMITTED]
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
895,511 SHARES OF BENEFICIAL INTEREST
We are registering the reoffer and resale from time to time of up to
895,511 shares of beneficial interest, including:
o 286,200 shares that we may issue in the future to the holders of
units of limited partnership interest in PREIT Associates, L.P.,
of which we are the sole general partner, that PREIT Associates
issued on December 29, 2003 and March 25, 2004 as consideration
for its acquisition of the interests of certain affiliates of
PREIT-RUBIN, Inc. (formerly known as The Rubin Organization,
Inc.); and
o 609,311 shares that we may issue in the future to the holders of
units of limited partnership interest in PREIT Associates that
PREIT Associates issued on June 2, 2004 as consideration for its
exercise of its option to acquire all of the interests in New
Castle Associates not then owned by it.
These units are redeemable by their holders for cash or, at our option,
for a like number of our shares.
The reoffer and resale of the shares will be made by the holders of
those shares or by the holders' pledgees, donees, transferees, partners or other
successors in interest in public or private transactions, on or off of the New
York Stock Exchange, at prevailing market prices or at privately negotiated
prices. They may sell the offered shares directly or through broker-dealers
acting as principal or agent, or in a distribution by underwriters. We will not
receive any of the proceeds from the sale of any shares by the selling
shareholders, but we have agreed to bear certain expenses of registering the
sale of the shares under federal and state securities laws.
Our shares are traded on the New York Stock Exchange under the symbol
"PEI."
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 2 BEFORE DECIDING
TO INVEST IN OUR SHARES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
The date of this prospectus is __________, 2005.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
TABLE OF CONTENTS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST....................................................................1
RISK FACTORS.................................................................................................2
USE OF PROCEEDS.............................................................................................17
SELLING SHAREHOLDERS........................................................................................17
DESCRIPTION OF SHARES OF BENEFICIAL INTEREST................................................................21
FEDERAL INCOME TAX CONSIDERATIONS...........................................................................33
PLAN OF DISTRIBUTION........................................................................................50
LEGAL MATTERS...............................................................................................52
EXPERTS.....................................................................................................52
WHERE YOU CAN FIND MORE INFORMATION.........................................................................52
FORWARD LOOKING STATEMENTS..................................................................................54
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME.......................................................F-1
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
PREIT, which is organized as a business trust under Pennsylvania law,
is a fully integrated, self-administered and self-managed real estate investment
trust, founded in 1960, that acquires, develops, redevelops and operates retail
properties. We conduct substantially all of our operations through PREIT
Associates, L.P., and we have elected, and conduct our operations in a manner
intended, to comply with the requirements for qualification as a real estate
investment trust (a "REIT") under the Real Estate Investment Trust Act of 1960,
Sections 856-60 of the Internal Revenue Code of 1986, as amended.
Our principal executive offices are located at The Bellevue, 200 South
Broad Street, Philadelphia, Pennsylvania 19102, and our telephone number is
(215) 875-0700.
RISK FACTORS
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. 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 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 debt service, our results of operations would be adversely affected.
OUR SUBSTANTIAL DEBT AND THE DIVIDENDS PAYABLE ON OUR PREFERRED SHARES MAY
ADVERSELY AFFECT OUR OPERATING RESULTS AND PUT US AT A COMPETITIVE DISADVANTAGE.
As a result of our substantial debt obligations, we may not have
sufficient cash flow from operations to meet required payments of principal and
interest on our debt or to pay distributions on our securities at historical
rates, which could affect our ability to qualify as a REIT or to make necessary
investments in new business initiatives. In addition, increases in interest
rates on our existing indebtedness, which includes a significant amount of
variable rate debt, would increase our interest expense, which could harm our
cash flow and our ability to pay distributions. We also are obligated to pay a
quarterly dividend of $1.375 per share to the holders of the 2,475,000 11%
preferred shares that we issued in connection with our merger with Crown
American Realty Trust.
Our existing indebtedness and the dividends payable on our preferred
shares could have negative consequences to our shareholders, including:
o requiring us to use a significant portion of our cash flow
from operations to make interest and principal payments on our
debt and dividend payments on our preferred shares rather than
for other purposes such as working capital, capital
expenditures or dividends on our common shares;
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o harming our ability to obtain additional financing in the
future for working capital, capital expenditures,
acquisitions, development activities or other general
corporate purposes;
o limiting our flexibility to plan for or react to changes in
business and economic conditions; and
o making us more vulnerable to a downturn in our business or the
economy generally.
OUR FINANCIAL COVENANTS MAY RESTRICT OUR OPERATING OR ACQUISITION ACTIVITIES,
WHICH MAY HARM OUR FINANCIAL CONDITION AND OPERATING RESULTS.
Our existing $500 million credit facility currently requires our
operating partnership, PREIT Associates, L.P., to satisfy numerous financial
covenants. These covenants could reduce our flexibility in conducting our
operations by limiting our ability to borrow money 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. 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. If we are unable
to borrow under our credit facility or to arrange for alternative financing, our
financial condition and results of operations would be adversely impacted.
WE MAY BE UNABLE TO MANAGE EFFECTIVELY OUR RAPID GROWTH AND EXPANSION IN THE
RETAIL SECTOR, WHICH MAY RESULT IN DISRUPTIONS TO OUR BUSINESS.
In 2003, we completed the acquisition of six shopping malls from The
Rouse Company and the acquisition of 26 retail properties through our merger
with Crown. The merger requires the integration of two large and complex real
estate businesses that formerly operated independently. Following the merger and
the related transactions, the gross leasable area of our owned, managed or
leased retail properties is significantly higher than it was before the merger
and the Rouse shopping mall acquisition. We also completed the sale of all 19
properties in our multifamily portfolio in 2003.
The integration efforts required in connection with the Crown merger
and the Rouse shopping mall acquisition, together with our continuing efforts to
transform our strategic focus to ownership of retail properties, are substantial
and may cause disruptions in our operations and divert management's attention
away from day-to-day operations, which could impair our relationships with our
current tenants and employees. In addition, the Rouse shopping mall acquisition
and the Crown merger pose specific risks for our ongoing operations, including
that:
o we may not achieve the expected operating efficiencies,
value-creation potential, economies of scale or other benefits
of those transactions;
o we may not have adequate personnel and financial and other
resources to successfully handle our substantially increased
operations;
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o we may not be successful in leasing space in properties
acquired from Rouse or Crown;
o the combined portfolio may not perform at the level we
anticipate;
o we may experience difficulties and incur unforeseen expenses
in connection with assimilating and retaining Crown employees,
assimilating Crown's business and assimilating the properties
acquired from Rouse and Crown; and
o we may experience problems and incur unforeseen expenses in
connection with upgrading and expanding our systems and
processes as a result of the Rouse shopping mall acquisition
and the Crown merger.
In addition, we expect to make future acquisitions or investments in
real properties, other assets and other companies. If we fail to successfully
integrate these properties and/or fail to realize the intended benefits of these
transactions, our financial condition and results of operations may be
materially harmed.
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, 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, repair and
maintenance costs and administrative expenses. Although 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 results of operations.
ANY TENANT BANKRUPTCIES OR LEASING DELAYS WE ENCOUNTER, PARTICULARLY WITH
RESPECT TO OUR ANCHOR TENANTS, COULD ADVERSELY AFFECT OUR OPERATING RESULTS AND
FINANCIAL CONDITION.
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. Some of our 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 results of operations.
-4-
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 retail 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 also could 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.
PREIT-RUBIN MANAGES PROPERTIES OWNED BY THIRD PARTIES, AND THE LOSS,
INTERRUPTION OR TERMINATION OF ONE OR MORE MANAGEMENT CONTRACTS COULD HARM OUR
OPERATING RESULTS.
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.
-5-
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 have 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
in 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 retail properties. 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 themselves succeed in
acquiring those properties, assets or companies. 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.
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.
-6-
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 do so, we may not be able to sell the property, or may be required
to sell the 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 results of operations.
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. For
example, in connection with our November 2003 merger with Crown American Realty
Trust, we agreed with Mark E. Pasquerilla and entities affiliated with him not
to dispose of certain protected properties that we acquired in the merger in a
taxable transaction until November 20, 2011 or until Mr. Pasquerilla and his
affiliates own less than 25% of the aggregate of the shares and units of limited
partnership interest in PREIT Associates, L.P. that they acquired in the merger.
If we violate this agreement during the first five years of the protection
period, we would owe as damages the sum of the hypothetical tax owed by Mr.
Pasquerilla and/or his applicable affiliate, plus an amount intended to make him
or his affiliate whole for taxes that may be due upon receipt of those damages.
From the end of the first five years through the end of the tax protection
period, damages are intended to compensate the affected parties for interest
expense incurred on amounts borrowed to pay the taxes incurred on the prohibited
sale. If we were to sell properties in violation of this agreement, the amounts
that we would be required to pay to Mr. Pasquerilla and his affiliates could be
substantial. 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 AND REDEVELOPMENT PROPERTIES MAY NOT YIELD
ANTICIPATED RETURNS, WHICH WOULD HARM OUR OPERATING RESULTS AND REDUCE THE
AMOUNT OF FUNDS AVAILABLE FOR DISTRIBUTIONS.
Our development and redevelopment properties comprise a component of
our growth strategy. To the extent we continue current 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;
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o higher than estimated construction costs; 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.
Some of our retail properties, including some of those acquired as part
of the Rouse shopping mall acquisition and our merger with Crown, 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.
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 (including the five-person Office of the Chairman
that, in addition to Ronald Rubin, consists of Jonathan Weller, George Rubin,
Edward Glickman and Joseph Coradino). We are critically dependent upon our
corporate management team and other key employees to lead our integration
efforts for acquisitions. Although we have entered into employment agreements
with Ronald 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 Ronald 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 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.
Some of our retail properties are owned by partnerships in which we are
a general partner or 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.
-8-
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;
o we may incur liability for the actions of our partners or
co-venturers; and
o third-party managers may not be sensitive to REIT tax
compliance matters.
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 the properties held by these 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 also may 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.
-9-
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. As of the date of this
prospectus, we have reserved $0.4 million for future remediation of these
matters, but we may incur costs associated with such remediation that exceed
such amount.
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 presently are 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. Although these properties may be
eligible under state law for remediation with state funds, we cannot assure you
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 also are 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.
In addition, the malls that we acquired as part of our merger with Crown
have some environmental issues. Many of these malls contain, or at one time
contained, underground and/or above ground storage tanks used to store waste
oils or other petroleum products primarily related to the operation of auto
service center establishments at those malls. In some cases, the underground
storage tanks have been abandoned in place, filled in with inert materials or
removed and replaced with above ground tanks. Historical records indicate that
soil and groundwater contamination from underground tanks and, in one case, a
hydraulic lift, requiring remediation has occurred at five of the malls, and
subsurface investigations (Phase II assessments) and remediation work either are
ongoing or are scheduled to be conducted at three of those malls. In addition,
three of the Crown malls were constructed on sites a portion of which previously
had been used as landfills, two were constructed on former strip mines and dry
cleaning operations formerly were conducted at two of the malls. There also are
minor amounts of asbestos-containing materials in most of the Crown malls,
primarily in the form of floor tiles, mastics and roofing materials.
Fireproofing and insulation containing asbestos also are present in some of the
malls in non-public areas, such as mechanical rooms. Two of the Crown malls also
contain wastewater treatment facilities that treat wastewater at the malls
before discharge into local streams. Operation of these facilities is subject to
federal and state regulation.
-10-
Our environmental liability coverage for the types of environmental
liabilities described above, which currently covers liability for pollution and
on-site remediation of up to $5 million in any single claim and $5 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 that
may be applicable to our operations, and that 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 either are
uninsurable or are 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 to own or ground-lease those properties. The mortgaged
properties and related assets are restricted solely for the payment of the
related loans and are not available to pay our other debts, which could impair
our ability to borrow, which in turn could harm our business.
-11-
OUR OPERATING PERFORMANCE MAY BE ADVERSELY AFFECTED IF WE ARE UNABLE TO, OR
CHOOSE NOT TO, SELL SOME OF THE ASSETS THAT WE ACQUIRED IN THE CROWN MERGER.
As a result of the Crown merger, we acquired six properties that have
occupancy rates and sales volume substantially lower than that of the remainder
of the former Crown properties. We have completed the sale of five of the six
properties. The sixth property will continue to be held for sale. Although we
intend to sell this property within the next twelve months, we cannot predict
the length of time needed to find a willing purchaser of the sixth property for
the price or on the terms we set. In addition, whether or not we ultimately sell
this property, we may not recover our investment in this property, which could
harm our financial condition and results of operations. The sale of this
property may require lender consents that we may not be able to obtain.
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.
We provide management, leasing and development services for
partnerships and other ventures in which some of our officers and trustees,
including Ronald Rubin, our chairman, chief executive officer and one of our
trustees, have 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 generally are 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 outstanding units of limited partnership
interest in PREIT Associates. However, PREIT Associates may from time to time
issue additional units to third parties in exchange for contributions of
property to PREIT Associates. These issuances will dilute our percentage
ownership of PREIT Associates. Units 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 units issued on September 30, 1997 in
connection with our acquisition of The Rubin Organization have been redeemed,
the holders of units issued on September 30, 1997 are entitled to vote such
units 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.
-12-
MARK E. PASQUERILLA MAY HAVE THE ABILITY TO EXERCISE INFLUENCE OVER US AND MAY
DELAY, DEFER OR PREVENT US FROM TAKING ACTIONS THAT WOULD BE BENEFICIAL TO OUR
SHAREHOLDERS.
As of the date of this prospectus, Mark E. Pasquerilla and his
affiliates own approximately 6.3% of our outstanding common shares assuming the
redemption of their units of limited partnership interest in PREIT Associates,
L.P. for our common shares. Mr. Pasquerilla also is a member of our board of
trustees. Accordingly, Mr. Pasquerilla may be able to exercise influence over
the outcome of certain matters such as decisions relating to the election of the
board of trustees and the determination of our day-to-day corporate and
management policies, and possibly over the outcome of any proposed merger or
consolidation that we consider. Mr. Pasquerilla's ownership interest in us may
discourage third parties from seeking to acquire control of us, which may
adversely affect the market price of our common shares. As a condition to the
Crown merger, Mr. Pasquerilla and certain of his affiliates entered into a
standstill agreement limiting their rights in connection with, among other
things, a proposed change in control of us. However, we cannot assure you that
Mr. Pasquerilla and his affiliates will abide by the terms of the standstill
agreement, and the standstill agreement will not prevent Mr. Pasquerilla from
voting his shares or taking other actions with respect to matters not covered by
the standstill agreement.
OUR ORGANIZATIONAL DOCUMENTS CONTAIN PROVISIONS THAT MAY DISCOURAGE A TAKEOVER
OF US AND DEPRESS OUR SHARE PRICE.
Our organizational documents contain provisions that 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:
-13-
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 our 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 other securities
could have the effect of delaying or preventing a change in
control over us, even if a change in control were in our
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.
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.
Our portfolio of properties consists almost entirely of retail shopping
centers and we expect to continue to focus on acquiring retail centers in the
future. To the extent that the investing public has a negative perception of the
retail sector, the value of our shares could be negatively impacted, which could
result in our shares trading at a discount below the inherent value of our
assets as a whole.
-14-
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 that we cannot
predict.
LEGISLATIVE ACTIONS, HIGHER INSURANCE AND 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
changes to listing standards adopted by the New York Stock Exchange, we have
been and continue to be incurring certain costs and expenses, including hiring
additional personnel and utilizing additional outside legal, accounting and
advisory services. These activities increase our operating expenses. In
addition, insurers may increase premiums as a result of our increased size, so
our costs for our insurance policies, including our directors' and officers'
insurance policies, may increase.
We cannot predict the impact that new accounting pronouncements may
have on our results of operations. Any such accounting pronouncements also could
result in the incurrence of additional professional fees.
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.
-15-
TAX RISKS
IF WE WERE TO FAIL TO QUALIFY AS A REIT OUR SHAREHOLDERS WOULD BE ADVERSELY
AFFECTED.
We believe that we have qualified as a REIT since our inception and
intend to continue to qualify as a REIT. To qualify as a REIT, however, we must
comply with certain highly technical and complex requirements under the Internal
Revenue Code. We cannot be certain we have complied with these requirements
because there are very limited judicial and administrative interpretations of
these provisions, and even a technical or inadvertent mistake could jeopardize
our REIT status. In addition, facts and circumstances that 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 were to fail to qualify as a REIT, we would be subject to federal
income tax on our taxable income at regular corporate rates. Also, unless the
Internal Revenue Service granted us relief under statutory provisions, we would
remain disqualified from treatment as a REIT for the four taxable years
following the year during which we first failed to qualify. The additional tax
incurred at regular corporate rates would 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 tax 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 any
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.
-16-
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of shares by the
selling shareholders, nor will any of the proceeds be available for our use or
otherwise for our benefit.
SELLING SHAREHOLDERS
The following table provides the names of the selling shareholders as
of the date of this prospectus, any position held with the Company and the
number of shares beneficially owned by each such holder on that date. Because
the selling shareholders may sell all, some or none of their shares, we cannot
estimate the aggregate number of shares that will be owned by each selling
shareholder after completion of the offering to which this prospectus relates.
The shares offered by this prospectus may be offered from time to time
by the selling shareholders named below or by their pledgees, donees,
transferees, partners or other successors in interest.
------------------------------------------------------------------------------------------------------------------------
Number of Shares
Beneficially Owned Number of Shares
Name Position with Company Prior to Offering (1) Offered
---- ---------------------- --------------------- ----------------
------------------------------------------------------------------------------------------------------------------------
Ronald Rubin Chairman, Chief Executive Officer and Trustee 1,346,275 (2) 315,732
of PREIT
------------------------------------------------------------------------------------------------------------------------
George Rubin Trustee; Vice Chairman of PREIT since June 685,800 (3) 78,801
2004; President of PREIT Services, LLC and
PREIT-RUBIN from September 1997 to June 2004
------------------------------------------------------------------------------------------------------------------------
Leonard Shore Executive Vice President - Special Projects of 198,369 (4) 83,647
PREIT and Executive Vice President of PREIT
Services, LLC
------------------------------------------------------------------------------------------------------------------------
Joseph Coradino President of PREIT Services, LLC and 144,176 (5) 19,133
PREIT-RUBIN since June 2004; Executive Vice
President - Retail Division of PREIT from December
2001 to June 2004; Executive Vice President -
Retail Division and Treasurer of PREIT-RUBIN from
November 1998 to June 2004
-----------------------------------------------------------------------------------------------------------------------
Lewis Stone None 110,272 (6) 66,401
-----------------------------------------------------------------------------------------------------------------------
Gerald Broker None 38,478 (7) 15,683
-----------------------------------------------------------------------------------------------------------------------
Patricia Berns None 46,466 (8) 12,623
-----------------------------------------------------------------------------------------------------------------------
Edward Glickman President, Chief Operating Officer and Trustee 237,128 (9) 11,272
of PREIT since June 2004; Executive Vice
President and Chief Financial Officer of PREIT
from September 1997 to June 2004
-----------------------------------------------------------------------------------------------------------------------
Joseph Straus, Jr. None 29,730 (10) 6,336
-----------------------------------------------------------------------------------------------------------------------
-17-
------------------------------------------------------------------------------------------------------------------------
Number of Shares
Beneficially Owned Number of Shares
Name Position with Company Prior to Offering (1) Offered
---- ---------------------- --------------------- ----------------
------------------------------------------------------------------------------------------------------------------------
Alan Feldman None 17,187 (11) 4,214
-----------------------------------------------------------------------------------------------------------------------
Douglas Grayson Executive Vice President - Development of PREIT 50,835 (12) 5,529
since March 2002; Executive Vice President -
Development of PREIT-RUBIN from October 1998 to
March 2002
-----------------------------------------------------------------------------------------------------------------------
Eric Mallory None 17,406 (13) 4,225
-----------------------------------------------------------------------------------------------------------------------
James Paterno None 13,118 (14) 3,177
-----------------------------------------------------------------------------------------------------------------------
Judith Garfinkel None 22,173 (15) 2,503
-----------------------------------------------------------------------------------------------------------------------
David Bryant Senior Vice President - Finance and Treasurer 32,325 (16) 1,277
of PREIT
-----------------------------------------------------------------------------------------------------------------------
Susan Kirchoff None 4,196 (17) 1,040
-----------------------------------------------------------------------------------------------------------------------
Non-QTIP Marital Trust N/A 221,080 (19) 172,074
under Will of Richard I.
Rubin (18)
-----------------------------------------------------------------------------------------------------------------------
Pan American Office N/A 5,226 (21) 5,226
Investments, L.P. (20)
-----------------------------------------------------------------------------------------------------------------------
Ivyridge Investment Corp. N/A 86,618 (22) 86,618
-----------------------------------------------------------------------------------------------------------------------
TOTAL 3,306,858 895,511
-----------------------------------------------------------------------------------------------------------------------
(1) Class A and Class B units of limited partnership in PREIT Associates,
L.P. are redeemable by PREIT at the election of the limited partner
holding the units at the time and for the consideration set forth in
the limited partnership agreement of PREIT Associates, L.P. In general,
and subject to exceptions and limitations, beginning one year following
the respective issue dates, "qualifying parties" may give one or more
notices of redemption with respect to all or any part of the Class A
units then held by that party. Class B units are redeemable at the
option of the holder at any time after issuance. If a notice of
redemption is given, PREIT has the right to elect to acquire the units
tendered for redemption for PREIT's own account, either in exchange for
the issuance of a like number of shares in PREIT, subject to
adjustments for stock splits, recapitalizations and like events, or a
cash payment equal to the average of the closing prices of PREIT's
shares on the ten consecutive trading days immediately before PREIT's
receipt of the notice of redemption.
(2) Includes 131,050 shares that Ronald Rubin owns directly, 574,135 Class
A units of limited partnership interest in PREIT Associates, L.P.
(49,006 of which are held by the Non-QTIP Marital Trust U/W Richard I.
Rubin (the "Marital Trust") of which Ronald Rubin and George Rubin are
beneficiaries and 2,776 of which are owned by a corporation of which
Ronald Rubin is the sole shareholder) that are redeemable for cash or,
at PREIT's option for a like number of shares, 150,000 shares subject
to exercisable options, 7,835 shares held by a trust of which Ronald
Rubin is a trustee, 104,282 Class A units of limited partnership
interest in PREIT Associates, L.P. that are not redeemable until March
25, 2005 and 378,973 Class A units that are not redeemable until June
2, 2005 (172,074 of which are held by the Marital Trust of which Ronald
Rubin and George Rubin are beneficiaries). Excludes 5,226 Class A units
held by Pan American Office Investments, L.P. Ronald Rubin controls and
holds substantial ownership interests in Pan American Office
Investments, L.P.
-18-
(3) Includes 73,835 shares that George Rubin owns directly, 278,593 Class A
units of limited partnership interest in PREIT Associates, L.P. (49,006
of which are held by the Marital Trust of which Ronald Rubin and George
Rubin are beneficiaries) that are redeemable for cash or, at PREIT's
option, for a like number of shares, 75,000 shares subject to
exercisable options, and 7,835 shares held by a trust of which Mr.
Rubin is a trustee. Also includes 900 shares held by a trust, the
beneficiary of which is Mr. Rubin's daughter, 500 shares held by Mr.
Rubin's spouse, as to both of which Mr. Rubin disclaims beneficial
ownership, 46,336 Class A units of limited partnership interest in
PREIT Associates, L.P. that are not redeemable until March 25, 2005 and
202,801 Class A units that are not redeemable until June 2, 2005
(172,074 of which are held by the Marital Trust of which Ronald Rubin
and George Rubin are beneficiaries). Excludes 5,226 Class A units held
by Pan American Office Investments, L.P. George Rubin holds limited
partnership interests in Pan American Office Investments, L.P.
(4) Includes 112,715 Class A units of limited partnership interest in PREIT
Associates, L.P. that are redeemable for cash or, at PREIT's option,
for a like number of shares, 29,763 Class A units of limited
partnership interest in PREIT Associates, L.P. that are not redeemable
until March 25, 2005 and 53,885 Class A units that are not
redeemable until June 2, 2005.
(5) Includes 85,756 Class A units of limited partnership interest in PREIT
Associates, L.P. that are redeemable for cash or, at PREIT's option,
for a like number of shares and 19,133 Class A units of limited
partnership interest in PREIT Associates, L.P. that are not redeemable
until March 25, 2005.
(6) Includes 43,871 Class A units of limited partnership interest in PREIT
Associates, L.P. that are redeemable for cash or, at PREIT's option,
for a like number of shares, 12,517 Class A units of limited
partnership interest in PREIT Associates, L.P. that are not redeemable
until March 25, 2005 and 53,884 Class A units that are not redeemable
until June 2, 2005.
(7) Includes 22,795 Class A units of limited partnership interest in PREIT
Associates, L.P. that are redeemable for cash or, at PREIT's option,
for a like number of shares and 15,683 Class A units of limited
partnership interest in PREIT Associates, L.P. that are not redeemable
until March 25, 2005.
(8) Includes 33,843 Class A units of limited partnership interest in PREIT
Associates, L.P. that are redeemable for cash or, at PREIT's option,
for a like number of shares and 12,623 Class A units of limited
partnership interest in PREIT Associates, L.P. that are not redeemable
until March 25, 2005.
(9) Includes 26,260 shares that Mr. Glickman owns directly, 45,436 Class A
units of limited partnership interest in PREIT Associates, L.P. that
are redeemable for cash or, at PREIT's option, for a like number of
shares, 134,260 shares subject to exercisable options and 11,272 Class
A units of limited partnership interest in PREIT Associates, L.P. that
are not redeemable until March 25, 2005.
(10) Includes 23,394 Class A units of limited partnership interest in PREIT
Associates, L.P. that are redeemable for cash or, at PREIT's option,
for a like number of shares and 6,336 Class A units of limited
partnership interest in PREIT Associates, L.P. that are not redeemable
until March 25, 2005.
(11) Includes 12,973 Class A units of limited partnership interest in PREIT
Associates, L.P. that are redeemable for cash or, at PREIT's option,
for a like number of shares and 4,214 Class A units of limited
partnership interest in PREIT Associates, L.P. that are not redeemable
until March 25, 2005.
(12) Includes 18,388 Class A units of limited partnership interest in PREIT
Associates, L.P. that are redeemable for cash or, at PREIT's option,
for a like number of shares and 5,529 Class A units of limited
partnership interest in PREIT Associates, L.P. that are not redeemable
until March 25, 2005.
-19-
(13) Includes 13,181 Class A units of limited partnership interest in PREIT
Associates, L.P. that are redeemable for cash or, at PREIT's option,
for a like number of shares and 4,225 Class A units of limited
partnership interest in PREIT Associates, L.P. that are not redeemable
until March 25, 2005.
(14) Includes 9,941 Class A units of limited partnership interest in PREIT
Associates, L.P. that are redeemable for cash or, at PREIT's option,
for a like number of shares and 3,177 Class A units of limited
partnership interest in PREIT Associates, L.P. that are not redeemable
until March 25, 2005.
(15) Includes 8,969 Class A units of limited partnership interest in PREIT
Associates, L.P. that are redeemable for cash or, at PREIT's option,
for a like number of shares and 2,503 Class A units of limited
partnership interest in PREIT Associates, L.P. that are not redeemable
until March 25, 2005.
(16) Includes 4,744 Class A units of limited partnership interest in PREIT
Associates, L.P. that are redeemable for cash or, at PREIT's option,
for a like number of shares and 1,277 Class A units of limited
partnership interest in PREIT Associates, L.P. that are not redeemable
until March 25, 2005.
(17) Includes 3,156 Class A units of limited partnership interest in PREIT
Associates, L.P. that are redeemable for cash or, at PREIT's option,
for a like number of shares and 1,040 Class A units of limited
partnership interest in PREIT Associates, L.P. that are not redeemable
until March 25, 2005.
(18) Ronald Rubin and George Rubin are beneficiaries of the Marital Trust.
Ronald Rubin and George Rubin disclaim beneficial ownership of the
securities held by the Marital Trust except to the extent of their
respective pecuniary interests therein.
(19) Includes 49,006 Class A units of limited partnership interest in PREIT
Associates, L.P. that are redeemable for cash, or at PREIT's option,
for a like number of shares and 172,074 Class A units that are not
redeemable until June 2, 2005.
(20) Ronald Rubin controls and holds substantial ownership interests in Pan
American Office Investments, L.P. George Rubin holds limited
partnership interests in Pan American Office Investments, L.P.
(21) Includes 5,226 Class A units of limited partnership interest in PREIT
Associates, L.P. that are not redeemable until June 2, 2005.
(22) Includes 86,618 Class A units of limited partnership interest in PREIT
Associates, L.P. that are not redeemable until June 2, 2005.
-20-
DESCRIPTION OF SHARES OF BENEFICIAL INTEREST
The following summary of the material terms of our shares of beneficial
interest does not include all of the terms of the shares and should be read
together with our trust agreement and by-laws and with applicable Pennsylvania
law. In addition, this summary includes a description of our 11%
Non-Convertible, Senior Preferred Shares, par value $0.01 per share, liquidation
preference $50.00 per share (the "11% preferred shares"). Accordingly, you
should read the form of the designating amendment to our trust agreement for
those preferred shares. Our trust agreement and by-laws and the form of
designating amendment are incorporated by reference into the registration
statement of which this prospectus is a part.
AUTHORIZED CAPITAL STOCK
Under our trust agreement, we have the authority to issue up to
100,000,000 shares of beneficial interest, $1.00 par value per share, and up to
25,000,000 preferred shares.
SHARES OF BENEFICIAL INTEREST
VOTING, DIVIDEND AND OTHER RIGHTS. Subject to the provisions of our
trust agreement regarding "Excess Shares" (See "--REIT Ownership Limitations and
Transfer Restrictions Applicable to Shares of Beneficial Interest and 11%
Preferred Shares"), (1) the holders of our shares are entitled to one vote per
share on all matters voted on by shareholders, including elections of trustees,
and (2) subject to the rights of holders of any preferred shares, including the
11% preferred shares, the holders of our shares are entitled to a pro rata
portion of any distributions declared from time to time by our board of trustees
from funds available for those distributions, and upon liquidation are entitled
to receive pro rata all of the assets available for distribution to those
holders. See "-- 11% Preferred Shares--Dividends and --Liquidation." The
majority of shares voting on a matter at a meeting at which at least a majority
of the outstanding shares are present in person or by proxy constitutes the act
of the shareholders, except with respect to the election of trustees (see
below). Our trust agreement permits the holders of securities of our affiliates
to vote with our shareholders on specified matters, and our trustees have
granted that right to certain holders of currently outstanding PREIT Partnership
Units with respect to fundamental changes in us (i.e., mergers, consolidations
and sales of substantially all of our assets). See "- Summary of the Operating
Partnership Agreement and PREIT Partnership Units - Authorization of PREIT
Partnership Units and Voting Rights." Shareholders do not have any pre-emptive
rights to purchase our securities.
Our trust agreement provides that our board of trustees may authorize
the issuance of multiple classes and series of shares of beneficial interest
and, subject to the rights of the holders of the 11% preferred shares, classes
and series of preferred shares having preferences to the existing shares in any
matter, including rights in liquidation or to dividends and option rights
(including shareholder rights plans), 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. Accordingly, the rights of holders of existing shares of beneficial
interest are subject and junior to preferred rights, including the rights of
holders of the 11% preferred shares, as to dividends and in liquidation (and
other such matters) and to the extent set forth in any subsequently authorized
preferred shares or class of preferred shares.
-21-
BOARD OF TRUSTEES. Our board of trustees is divided into three classes
serving staggered three-year terms. Our trust agreement does not provide for
cumulative voting in the election of trustees, and the candidates receiving the
highest number of votes are elected to the office of trustee.
TRUSTEE NOMINATION PROCESS. Our trust agreement provides that
nominations for election to the office of trustee at any annual or special
meeting of shareholders shall be made by the trustees, or by petition in writing
delivered to the secretary not fewer than 35 days before the meeting signed by
the holders of at least two percent of the shares outstanding on the date of the
petition. Nominations not made in accordance with these procedures will not be
considered unless the number of persons nominated is fewer than the number of
persons to be elected to the office of trustee at the meeting. In this latter
event, any person entitled to vote in the election of trustees may make
nominations at the meeting for the trustee positions that would not otherwise be
filled.
11% PREFERRED SHARES
In connection with our merger with Crown American Realty Trust, we
issued 2,475,000 preferred shares to the former holders of Crown's 11% preferred
shares that are identical in all material respects to the former Crown 11%
preferred shares. The number of 11% preferred shares may be decreased by our
board from time to time, though not below the number of 11% preferred shares
then outstanding.
RANK. With respect to dividend rights and rights upon liquidation,
dissolution or winding up, the 11% preferred shares rank senior to all classes
or series of our equity securities, except that the 11% preferred shares will
rank on a parity with additional preferred shares that we may issue with terms
specifically providing that the new preferred shares rank on a parity with the
11% preferred shares with respect to dividend rights or rights upon our
liquidation, dissolution or winding up, if the aggregate liquidation preference
of the additional preferred shares and the 11% preferred shares together do not
exceed $123,750,000.
DIVIDENDS. Holders of the 11% preferred shares will be entitled to
receive, when, as and if declared by our board of trustees, out of funds legally
available for the payment of dividends, cumulative, preferential cash dividends
in an amount per share equal to $5.50 per annum. Each dividend will be payable
to holders of record as they appear on our transfer books on the record date as
provided below.
In addition, holders of the 11% preferred shares may be eligible to
receive additional dividends ("Additional Dividends") from time to time if our
"Total Debt" (as defined in the designating amendment) exceeds the product of
6.5 times "EBITDA" (as defined in the designating amendment) (the "Leverage
Ratio") without the consent of the holders of at least 50% of the 11% preferred
shares outstanding at that time. Holders who consent to a waiver of this
restriction will be paid a consent fee. If required to be paid, Additional
Dividends will be for an amount per share equal to 0.25% of the Preferred
Liquidation Preference Amount (as defined below) on an annualized basis for the
first quarter with respect to which an Additional Dividend is due. For each
quarter after that initial due date that we continue to exceed the permitted
Leverage Ratio, the Additional Dividend will increase by an amount per share
equal to an additional 0.25% of the Preferred Liquidation Preference Amount on
an annualized basis. However, the maximum total dividend on the 11% preferred
shares, including any Additional Dividends, will not at any time exceed 13% of
the Preferred Liquidation Preference Amount per annum.
-22-
If any 11% preferred shares are outstanding, we will not declare, pay,
or set apart for payment dividends on our common shares or any other series
ranking, as to dividends, on a parity with or junior to the 11% preferred shares
for any period unless we contemporaneously declare and pay, or declare and set
apart funds sufficient to pay, full cumulative dividends (including any
Additional Dividends) on the 11% preferred shares for all past dividend periods
and the then current dividend period. If we do not pay dividends in full or set
apart a sum sufficient for full payment on the 11% preferred shares and the
shares of any series of preferred shares ranking on a parity as to dividends
with the 11% preferred shares, we will declare, pro rata, all dividends on the
11% preferred shares and any series of preferred shares ranking on a parity as
to dividends with the 11% preferred shares so that the amount of dividends that
we declare per share on the 11% preferred shares and such other series of
preferred shares will in all cases bear to each other the same ratio that
accrued and unpaid dividends per 11% preferred share and such other series of
preferred shares bear to each other. We will not pay any interest, or sum of
money in lieu of interest, in respect of any dividend payment or payments on the
11% preferred shares that may be in arrears.
Except as provided in the immediately preceding paragraph, unless we
contemporaneously have declared and paid, or declared and set apart funds
sufficient to pay, full cumulative dividends (including any Additional
Dividends) on the 11% preferred shares for all past dividend periods and the
then current dividend period, we will not declare and pay, or declare and set
apart for payment, any dividends on our capital shares ranking junior to or on a
parity with the 11% preferred shares as to dividends, other than distributions
payable in our common shares or other capital shares ranking junior to the 11%
preferred shares as to dividends and upon our liquidation, dissolution or
winding up. In that event, we also will not redeem, purchase, or otherwise
acquire for any consideration any of our common shares or any other capital
shares ranking junior to or on a parity with the 11% preferred shares as to
dividends or upon our liquidation, dissolution or winding up, nor will we pay
any moneys to or make moneys available for a sinking fund for the redemption of
any such shares, except by conversion into or exchange for other of our capital
shares ranking junior to the 11% preferred shares as to dividends and upon our
liquidation, dissolution and winding up.
Any dividend that we pay on the 11% preferred shares will first be
credited against the earliest accrued but unpaid dividend due with respect to
the 11% preferred shares that remains payable.
LIQUIDATION RIGHTS. If we are liquidated or dissolved, or if our
operations are wound up, the holders of the 11% preferred shares will be
entitled to be paid out of our assets legally available for distribution to our
shareholders a liquidation preference equal to the sum of $50.00 per share plus
an amount equal to any accrued and unpaid dividends on the 11% preferred shares
- whether or not earned or declared - to the date of payment (the "Preferred
Liquidation Preference Amount"), before we distribute any assets to holders of
our common shares or any other capital shares that rank junior to the 11%
preferred shares as to liquidation rights. After payment of the full amount of
the liquidating distributions to which they are entitled, the holders of the 11%
preferred shares will have no right or claim to any of our remaining assets.
-23-
If we have made liquidating distributions in full to all holders of the
11% preferred shares, our remaining assets will be distributed among the holders
of any other classes or series of capital shares ranking junior to the 11%
preferred shares upon our liquidation, dissolution or winding up according to
their respective rights and preferences and in each case according to their
respective number of shares.
Our consolidation or merger with or into any other corporation, or the
sale, lease, transfer or conveyance of all or substantially all of our property
or business, will not be deemed to constitute a liquidation, dissolution or
winding up for purposes of liquidation rights.
REDEMPTION. We may not redeem the 11% preferred shares before July 31,
2007, except under certain limited circumstances to preserve our status as a
REIT. See "--REIT Ownership Limitations and Transfer Restrictions Applicable to
Shares of Beneficial Interest and 11% Preferred Shares." On and after July 31,
2007, we, at our option - to the extent we have legally available funds - and
upon not less than 30 nor more than 60 days written notice, may redeem the 11%
preferred shares, in whole or in part, at any time or from time to time, during
the periods and at the redemption prices shown below plus any accrued and unpaid
dividends to the date of redemption:
Redemption Price
Redemption Period Per 11% Preferred Share
----------------- -----------------------
July 31, 2007 through July 30, 2009 $52.50
July 31, 2009 through July 30, 2010 $51.50
On or after July 31, 2010 $50.00
Notwithstanding the foregoing, unless we contemporaneously have
declared and paid, or declared and set aside a sum sufficient for the payment
of, full cumulative dividends on all outstanding 11% preferred shares for all
past dividend periods and the then current dividend period, (1) we will not
redeem any 11% preferred shares unless we redeem all outstanding 11% preferred
shares simultaneously and (2) we will not purchase or otherwise acquire directly
or indirectly through a subsidiary or otherwise, any 11% preferred shares;
except that we may purchase or otherwise acquire 11% preferred shares through a
purchase or exchange offer made on the same terms to holders of all outstanding
11% preferred shares.
If we redeem fewer than all of the outstanding 11% preferred shares,
then we will determine the number of shares to be redeemed and those shares may
be redeemed pro rata from their record holders either in proportion to the
number of shares held by those holders - as nearly as may be practicable without
creating fractional 11% preferred shares - or under any other equitable method
that we determine to use.
-24-
We will retire and restore to the status of authorized and unissued
preferred shares, without designation as to series, all 11% preferred shares
that we redeem. After doing so, we may reissue them as any series of preferred
shares.
The 11% preferred shares have no stated maturity and will not be
subject to any sinking fund.
VOTING RIGHTS. Holders of the 11% preferred shares do not have any
voting rights, except as described below or as otherwise required by law.
Subject to the provisions of our trust agreement regarding Excess Shares (see
"--REIT Ownership Limitations and Transfer Restrictions Applicable to Shares of
Beneficial Interest and 11% Preferred Shares"), in any matter in which the
holders of the 11% preferred shares may vote, including any action by written
consent, each holder will be entitled to one vote per share. The holders of each
share may separately designate a proxy for the vote to which that share is
entitled.
Whenever dividends on any 11% preferred shares have been in arrears for
six or more quarterly dividend periods - regardless of whether the periods are
consecutive - the holders of 11% preferred shares (voting separately as a class
with all other series of preferred shares upon which rights to vote on such
matter with the 11% preferred shares have been conferred and are then
exercisable) will be entitled to vote for the election of two additional members
of our board of trustees. This vote may occur at a special meeting called by the
holders of record of at least 10% of the 11% preferred shares and any other
preferred shares, if any (unless the request is received less than 90 days
before the date fixed for the next annual or special meeting of the
shareholders). In addition, this vote may occur at the next annual meeting of
shareholders, and at each annual meeting after that annual meeting. These voting
rights expire when we have paid, or declared and set aside a sum sufficient for
the payment of, all dividends accumulated on the 11% preferred shares for past
dividend periods and the then current dividend period. In this event, the entire
board will be increased by two trustees, each of whom will be elected to serve
until the earlier of (1) the election and qualification of the trustee's
successor or (2) payment of the dividend arrearage for the 11% preferred shares.
If any trustee elected by the holders of the 11% preferred shares
ceases to serve as a trustee before the trustee's term expires, the holders of
the 11% preferred shares - and any other series of preferred shares, if any,
entitled to vote on such matter, as described above - then outstanding may, at a
special meeting of the holders called as provided above, elect a successor to
hold office for the unexpired term of the trustee whose place is vacant.
While any 11% preferred shares remain outstanding, we will not (1)
without the affirmative vote of, or consent of the holders of all of, the 11%
preferred shares outstanding at the time (such series voting separately as a
class), authorize, create or issue, or increase the authorized or issued amount
of, any class or series of capital shares ranking senior to the 11% preferred
shares with respect to the payment of dividends or the distribution of assets
upon our liquidation, dissolution or winding up, or create, authorize or issue
any obligation or security convertible into or evidencing the right to purchase
any such shares; or (2) without the affirmative vote of, or consent of the
holders of at least two-thirds of, the 11% preferred shares outstanding at the
time (such series voting separately as a class), amend, alter or repeal the
provisions of our trust agreement, whether by merger, consolidation or
otherwise, so as to materially and adversely affect any right, preference,
privilege or voting power of the 11% preferred shares or the holders thereof.
Any increase in the amount of the authorized preferred shares, or the creation
or issuance of any other series of preferred shares, or any increase in the
amount of authorized shares of preferred shares or any other series of preferred
shares, in each case ranking on a parity with or junior to the 11% preferred
shares with respect to payment of dividends or the distribution of assets upon
our liquidation, dissolution or winding up, will not be deemed to materially and
adversely affect the rights, preferences, privileges or voting powers of the 11%
preferred shares.
-25-
The foregoing voting provisions will not apply if, at or before the
time when the act with respect to which such vote would otherwise be required is
effected, we have redeemed or called for redemption upon proper notice all
outstanding 11% preferred shares and we have deposited in trust an amount of
funds sufficient to effect the redemption.
SHAREHOLDER RIGHTS PLAN
The following summary of the Rights Agreement, dated as of April 30,
1999, as the same may be amended from time to time (the "Rights Agreement"),
between us and American Stock Transfer and Trust Company, as rights agent (the
"Rights Agent") does not include all of the terms of the Rights Agreement. You
should read this summary together with the Rights Agreement, which is
incorporated by reference into the registration statement of which this
prospectus is a part.
The description and terms of the rights issuable under our shareholder
rights plan are set forth in the Rights Agreement. Each right entitles its
registered holder to purchase from us one share at a price of $70.00 (the
"Exercise Price"), subject to certain adjustments.
The rights, unless earlier redeemed or exchanged by our board of
trustees, become exercisable upon the close of business on the day (the
"Distribution Date") that is the earlier of (i) the tenth day following a public
announcement that a person or group of affiliated or associated persons (an
"Acquiring Person"), with certain exceptions set forth below, has acquired
beneficial ownership or voting control of 15% or more of our outstanding voting
shares, and (ii) the tenth business day (or such later date as may be determined
by our board of trustees before any person or group of affiliated or associated
persons becomes an Acquiring Person) after the date of the commencement or
public announcement of a person's or group's intention to commence a tender or
exchange offer the consummation of which would result in the acquisition of
beneficial ownership or voting control of 15% or more of our outstanding voting
shares (even if no shares actually are acquired as part of that offer). The
rights will expire at the close of business on March 31, 2009, unless we redeem
or exchange them earlier as described below.
Unless we redeem or exchange the rights, if a person or group of
affiliated or associated persons becomes an Acquiring Person, each holder of
record of a right, other than the Acquiring Person (whose rights will become
null and void), will have the right to pay the Exercise Price in return for
shares having a market value equal to double the Exercise Price. In addition,
after a person or group becomes an Acquiring Person, if we were to undergo a
change of control, each holder of record of a right, other than the Acquiring
Person (whose rights will become null and void), will have the right to pay the
Exercise Price in return for shares of the acquiring entity having a market
value equal to double the Exercise Price.
-26-
At any time after any person or group of affiliated or associated
persons becomes an Acquiring Person and before the Acquiring Person acquires 50%
or more of our outstanding voting shares, our board of trustees may exchange the
rights (other than rights owned by the Acquiring Person, which will have become
null and void), in whole or in part, at an exchange ratio of one share per right
(subject to adjustment).
The rights have anti-takeover effects in that they will cause
substantial dilution to a person or group of affiliated or associated persons
that attempts to acquire our shares on terms not approved by our board of
trustees. The rights should not interfere with any merger or other business
combination approved by our board of trustees because we may redeem the rights
at $0.001 per right at any time until the close of business on the tenth day (or
such later date as described above) after a person or group has obtained
beneficial ownership or voting control of 15% or more of our voting shares.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our shares of beneficial interest
and for the 11% preferred shares is American Stock Transfer & Trust Co.
LIMITED LIABILITY OF SHAREHOLDERS
Our trust agreement provides that shareholders, to the fullest extent
permitted by applicable law, are not liable for any act, omission or liability
of a trustee and that the trustees have no power to bind shareholders
personally. Nevertheless, there may be liability in some jurisdictions that may
decline to recognize a business trust as a valid organization. With respect to
all types of claims in any such jurisdiction, and with respect to tort claims,
certain contract claims and possible tax claims in jurisdictions where the
business trust is treated as a partnership for certain purposes, shareholders
may be personally liable for such obligations to the extent that we do not
satisfy those claims. We conduct substantially all of our business that is in
jurisdictions other than the Commonwealth of Pennsylvania in entities recognized
in the relevant jurisdiction to limit the liability of equity owners. We carry
insurance in amounts that we deem adequate to cover foreseeable tort claims.
SUMMARY OF THE OPERATING PARTNERSHIP AGREEMENT AND PREIT PARTNERSHIP UNITS
The following summary of the First Amended and Restated Agreement of
Limited Partnership of PREIT Associates, L.P., as amended (the "Operating
Partnership Agreement"), and PREIT Partnership Units does not include all of the
terms of the Operating Partnership Agreement or the PREIT Partnership Units, so
you should read the summary together with the Operating Partnership Agreement,
which is incorporated by reference into the registration statement of which this
prospectus is a part.
-27-
GENERAL. We are the sole general partner of PREIT Associates. When
PREIT Associates initially was organized on September 30, 1997, we contributed
to PREIT Associates, or to entities wholly owned by PREIT Associates, the real
estate interests that we owned, directly or indirectly, or the economic benefits
of those real estate interests, in exchange for a general partnership interest
in PREIT Associates and a number of Class A PREIT Partnership Units that
equaled, in the aggregate, the number of our shares of beneficial interest
issued and outstanding on September 30, 1997. In addition, as part of our merger
with Crown American Realty Trust, PREIT Associates issued to us a number of 11%
Senior Preferred PREIT Partnership Units, representing another class of PREIT
Partnership Units, equal to the number of 11% preferred shares that we issued in
the merger. The number of 11% PREIT Partnership Units issued will at any time
always equal the number of 11% preferred shares outstanding at that time.
MANAGEMENT. Under the Operating Partnership Agreement, we, as the sole
general partner of PREIT Associates, have the authority, to the exclusion of the
limited partners, to make all management decisions on behalf of PREIT
Associates. In addition, we, as general partner, may cause PREIT Associates to
create and issue additional classes of limited or preferred partner interests
with terms different from the limited partner and general partner interests
currently outstanding. We have agreed in the Operating Partnership Agreement to
conduct substantially all of our business activities through PREIT Associates
unless a majority in interest of the PREIT Partnership Units (exclusive of PREIT
Partnership Units that we own) consent to the conduct of business activities
outside PREIT Associates.
AUTHORIZATION OF PREIT PARTNERSHIP UNITS AND VOTING RIGHTS. The
Operating Partnership Agreement authorizes the issuance of an unlimited number
of PREIT Partnership Units in one or more classes. Holders of PREIT Partnership
Units are entitled to distributions from PREIT Associates as and when made by us
as the general partner. Because we are required to make distributions on the
Class A PREIT Partnership Units that we hold directly or indirectly at the times
and in the amounts required to allow us to make distributions to our
shareholders necessary to preserve our status as a REIT for federal income tax
purposes, we anticipate that the other holders of PREIT Partnership Units will
receive those distributions at the approximate time, and in the same amounts, as
we declare and pay dividends to our shareholders.
Holders of PREIT Partnership Units generally have no right to vote on
any matter voted on by holders of our shares except that, before the date on
which at least half of the PREIT Partnership Units issued on September 30, 1997
in connection with the organization of PREIT Associates have been redeemed, the
holders of PREIT Partnership Units issued and outstanding on September 30, 1997
are entitled to vote those PREIT Partnership Units and additional PREIT
Partnership Units that they may have received and may receive in the future in
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 PREIT Partnership Units are not
included for purposes of determining when half of the PREIT Partnership Units
issued and outstanding on September 30, 1997 have been redeemed, nor are they
counted as votes. If the holders of our shares vote on such a transaction, and
holders of PREIT Partnership Units are entitled to vote on the transaction, then
each covered PREIT Partnership Unit will be entitled to one vote for each share
issuable by us upon the redemption of such PREIT Partnership Unit and the
necessary vote to effect such action shall be the sum of an absolute majority of
the outstanding PREIT Partnership Units entitled to vote on such matter and the
applicable vote of the holders of our outstanding shares. The required aggregate
vote may be met by any combination of holders of PREIT Partnership Units or
shares.
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The Operating Partnership Agreement also provides that we may not
engage in a fundamental transaction (e.g., a merger) unless, by the terms of the
fundamental transaction, the PREIT Partnership Units are treated in the same
manner as that number of shares for which they are exchangeable upon notice of
redemption are treated. Holders of PREIT Partnership Units also have the right
to vote on certain amendments to the Operating Partnership Agreement. In
addition, so long as any 11% PREIT Partnership Units remain outstanding, PREIT
Associates will not (1) without the affirmative vote of, or consent of the
holders of all of, the 11% PREIT Partnership Units outstanding at the time,
authorize, create or issue, or increase the authorized or issued amount of, any
class or series of capital shares ranking senior to the 11% PREIT Partnership
Units with respect to payment of dividends or the distribution of assets upon
liquidation, dissolution or winding up, or create, authorize or issue any
obligation or security convertible into or evidencing the right to purchase any
such shares; or (2) without the affirmative vote of, or consent of the holders
of at least two-thirds of, the 11% PREIT Partnership Units outstanding at the
time (such series voting separately as a class), amend, alter or repeal the
provisions of the Operating Partnership Agreement, whether by merger,
consolidation or otherwise, so as to materially and adversely affect any right,
preference, privilege or voting power of the 11% PREIT Partnership Units or of
the holders of the 11% PREIT Partnership Units. Any increase in the amount of
the authorized preferred units, or the creation or issuance of any other series
of preferred units, or any increase in the amount of authorized shares of
preferred units or any other series of preferred units, in each case ranking on
a parity with or junior to the 11% PREIT Partnership Units with respect to
payment of dividends or the distribution of assets upon PREIT Associates'
liquidation, dissolution or winding up, will not be deemed to materially and
adversely affect the rights, preferences, privileges or voting powers of the 11%
PREIT Partnership Units.
REDEMPTION RIGHTS. Class A and Class B PREIT Partnership Units are
redeemable by PREIT Associates at the election of a limited partner holding the
units, at such time, and for such consideration, as provided in the Operating
Partnership Agreement. In general, and subject to certain exceptions and
limitations, holders of Class A PREIT Partnership Units (other than us and our
subsidiaries) may, beginning one year following the respective issue dates, give
one or more notices of redemption with respect to all or any part of the Class A
PREIT Partnership Units so received and then held by such party. Class B PREIT
Partnership Units are redeemable at the option of the holder at any time after
issuance. The 11% PREIT Partnership Units will be redeemable in the same amounts
and during the same time periods as the 11% preferred shares. See "--11%
Preferred Shares--Redemption."
If a notice of redemption is given, we may elect to acquire the PREIT
Partnership Units tendered for redemption for our own account, either in
exchange for the issuance of a like number of shares (subject to adjustments for
stock splits, recapitalizations, and like events) or a cash payment equal to the
average closing price of the shares over the ten consecutive trading days
immediately before we receive, in our capacity as general partner of PREIT
Associates, the notice of redemption. If we decline to exercise such right, then
on the tenth day following tender for redemption, PREIT Associates will pay a
cash amount equal to the number of Class A or Class B PREIT Partnership Units so
tendered multiplied by such average closing price. PREIT Associates is required
to distribute to us such additional amounts as we may need at any time to pay
the redemption price of the 11% preferred shares, and that payment also will be
treated as payment of the redemption price of the same number of 11% PREIT
Partnership Units, which also will be redeemed.
-29-
RANKING; LIQUIDATION. The 11% PREIT Partnership Units will, with
respect to distribution rights and rights upon liquidation, rank senior to the
other PREIT Partnership Units. Upon liquidation of PREIT Associates, each holder
of an 11% PREIT Partnership Unit will be entitled to receive a liquidation
preference equal to $50.00 per unit, plus any accrued and unpaid dividends on
the 11% PREIT Partnership Unit before payment or distribution of any amounts to
holders of other PREIT Partnership Units.
REIT OWNERSHIP LIMITATIONS AND TRANSFER RESTRICTIONS APPLICABLE TO SHARES OF
BENEFICIAL INTEREST AND 11% PREFERRED SHARES
Among the requirements for qualification as a REIT under the Internal
Revenue Code are (1) not more than 50% in value of our outstanding shares,
including our shares of beneficial interest and the 11% preferred shares (after
taking into account options to acquire shares), may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Internal Revenue
Code to include certain entities) during the last half of a taxable year, (2)
our 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, and (3) certain percentages of our gross income must be from
particular activities. In order to continue to qualify as a REIT under the
Internal Revenue Code, our trustees have adopted, and our shareholders have
approved, provisions of our trust agreement that restrict the ownership and
transfer of shares (the "Ownership Limit Provisions").
The Ownership Limit Provisions provide that no person may beneficially
own, or be deemed to own by virtue of the attribution provisions of the Internal
Revenue Code, more than 9.9% of any separate class of our shares. For this
purpose, our shares of beneficial interest and the 11% preferred shares are
treated as separate classes. Our trustees may exempt a person from the Ownership
Limit Provisions after obtaining a ruling from the Internal Revenue Service or
an opinion of counsel or our tax accountants to the effect that such ownership
will not jeopardize our status as a REIT.
Issuance or transfers of shares in violation of the Ownership Limit
Provisions, or that would cause us to be beneficially owned by fewer than 100
persons, are void ab initio and the intended transferee acquires no rights to
the shares.
If a purported transfer or other event occurs that would, if effective,
result in the ownership of shares in violation of the Ownership Limit
Provisions, our trust agreement provides that such transfer or other event with
respect to that number of shares that would be owned by the transferee in excess
of the Ownership Limit Provisions, automatically are exchanged for an equal
number of Excess Shares (as defined in our trust agreement), to the extent
necessary to ensure that the purported transfer or other event does not result
in the ownership of shares in violation of the Ownership Limit Provisions. Any
purported transferee or other purported holder of Excess Shares is required to
give us written notice of a purported transfer or other event that would result
in the issuance of Excess Shares.
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Excess Shares are not treasury shares but rather continue as issued and
outstanding shares of beneficial interest. While outstanding, Excess Shares will
be held in trust. We will serve as the trustee of that trust. The purported
holder of the Excess Shares will be entitled to designate the beneficiary of the
Trust. A holder of Excess Shares is not entitled to any dividends or
distributions. If, after the purported transfer or other event resulting in an
exchange of shares of beneficial interest for Excess Shares, and before our
discovery of that exchange, we pay any dividends or distributions on the shares
that were exchanged for Excess Shares, then the holder of the Excess Shares will
be required to repay those dividends or distributions to us upon demand. Holders
of Excess Shares will participate ratably (based on the total number of shares
and Excess Shares) if we undergo any liquidation, dissolution or winding up.
Except as required by law, holders of Excess Shares are not entitled to vote
such shares on any matter. While Excess Shares are held in trust, any interest
in that trust may be transferred by the trustee only to a person whose ownership
of shares will not violate the Ownership Limit Provisions, at which time the
Excess Shares automatically will be exchanged for the same number of shares of
the same type and class as the shares for which the Excess Shares were
originally exchanged. Before any transfer of any interest in the Excess Shares
held in trust, the purported transferee or other purported holder, as the case
may be, must give us advance notice of the intended transfer and we must waive
in writing our purchase rights, described below. Our trust agreement contains
provisions designed to ensure that the purported transferee or other purported
holder of Excess Shares does not receive in return for such a transfer an amount
that reflects any appreciation in the shares for which Excess Shares were
exchanged during the period that such Excess Shares were outstanding. Any amount
received by a purported transferee or other purported holder in excess of the
amount permitted to be received must be paid to us. If the foregoing
restrictions are determined to be invalid by any court of competent jurisdiction
then the intended transferee or holder of any Excess Shares may be deemed, at
our option, to have acted as an agent on our behalf in acquiring the Excess
Shares and to hold the Excess Shares on our behalf.
Our trust agreement further provides that a purported transfer of
Excess Shares shall be deemed to be offered for sale to us at the lesser of (1)
the price paid for the shares by the purported transferee or, in the case of a
gift, devise or other transaction, the market price for such shares at the time
of such gift, devise or other transaction or (2) the market price for the shares
on the date we or our designee exercise our or its option to purchase the Excess
Shares. We may purchase such Excess Shares during a 90-day period, beginning on
the date of the violative transfer if the original transferee-shareholder gives
notice to us of the transfer or, if no notice is given, the date our board of
trustees determines that a violative transfer or other event resulting in an
exchange of shares for the Excess Shares has occurred.
Each shareholder, upon demand, is required to disclose to us in writing
such information with respect to the direct, indirect and constructive ownership
of shares as our board of trustees deems necessary to comply with the provisions
of our trust agreement or the Internal Revenue Code applicable to a REIT or to
comply with the requirements of any taxing authority or governmental agency.
Certificates representing shares of any class or series issued after September
29, 1997 will bear a legend referring to the restrictions described above.
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CERTAIN PROVISIONS AFFECTING A CHANGE IN CONTROL
In addition to our shareholder rights plan, the following may deter a
potential acquiror from acquiring our shares:
OWNERSHIP LIMITS AND RESTRICTIONS ON TRANSFERABILITY. 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. Our 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 our board
receives a ruling from the Internal Revenue Service or an opinion of counsel or
tax accountants that exceeding the 9.9% ownership limit as to that person would
not jeopardize our status as a REIT. Absent an exemption, this restriction may
discourage a tender offer or other transaction or change in management or
control that might involve a premium price for our shares or otherwise be in the
best interests of our shareholders.
STAGGERED BOARD. 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 a shareholder's ability to
take control of us, even if a change in control were in the best interests of
our shareholders.
MULTIPLE CLASSES AND SERIES OF SHARES OF BENEFICIAL INTEREST. 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 (including shareholder rights
plans), 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 our 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. Our issuance of such rights or
preferred shares could delay or prevent someone from acquiring control of us,
even if a change in control were in the best interests of our shareholders.
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FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the federal income tax
considerations that may be material to an owner of shares of PREIT. The
discussion, which is not exhaustive of all possible tax considerations, does not
include a detailed discussion of any state, local or foreign tax considerations;
nor does it cover all aspects of federal income taxation that may be relevant to
a prospective shareholder in light of his or her particular circumstances or to
certain types of shareholders who are subject to special treatment under the
federal income tax laws (including, but not limited to, (1) insurance companies,
(2) tax-exempt entities, (3) financial institutions, (4) broker-dealers, (5)
foreign corporations, (6) persons who are not citizens or residents of the
United States, (7) trusts, estates, regulated investment companies, other REITs,
or S corporations, (8) persons subject to the alternative minimum tax, (9)
persons holding their shares as part of a hedge, straddle, conversion or other
risk-reduction or constructive sale transaction, (10) persons holding the shares
through a partnership or similar pass-through entity, (11) persons with a
"functional currency" other than the U.S. dollar, (12) U.S. expatriates and (13)
persons who do not hold the shares as a capital asset).
THIS DISCUSSION IS NOT INTENDED TO BE, AND SHOULD NOT BE CONSTRUED TO BE, TAX
ADVICE. YOU ARE ADVISED TO CONSULT WITH YOUR OWN TAX ADVISOR REGARDING THE
SPECIFIC TAX CONSEQUENCES TO YOU OF THE OWNERSHIP OF SHARES IN AN ENTITY
ELECTING TO BE TAXED AS A REIT, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND
OTHER TAX CONSEQUENCES AND POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
TAXATION OF PREIT
GENERAL. If PREIT qualifies for taxation as a REIT, it generally will
not be subject to federal corporate income taxes on net income that it currently
distributes to shareholders but PREIT's shareholders will generally be taxed at
ordinary income rates on dividends that they receive other than dividends
designated by PREIT as capital gain dividends or qualified dividend income. This
differs from non-REIT C corporations, which generally are subject to federal
corporate income taxes but whose individual stockholders are currently taxed on
dividends they receive at capital gains rates. In general, income earned by a
REIT and distributed to its shareholders will be subject to less overall federal
income taxation than if such income were earned by a non-REIT C corporation,
subjected to corporate income tax, and then distributed to shareholders and
subjected to tax at capital gain rates.
While PREIT is generally not subject to corporate income taxes on
income that PREIT distributes currently to shareholders, PREIT will be subject
to federal tax as follows:
1. PREIT will be taxed at regular corporate rates on any "REIT taxable
income." REIT taxable income is the taxable income of a REIT subject to
specified adjustments, including a deduction for dividends paid.
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2. Under some circumstances, PREIT may be subject to the "alternative
minimum tax" due to PREIT's undistributed items of tax preference and
alternative minimum tax adjustments, if any.
3. If PREIT has net income from the sale or other disposition of
"foreclosure property" that is held primarily for sale to customers in the
ordinary course of business, or other nonqualifying income from foreclosure
property, PREIT will be subject to tax at the highest corporate rate on this
income.
4. PREIT's net income from "prohibited transactions" will be subject to
a 100% tax. In general, prohibited transactions are sales or other dispositions
of property, other than foreclosure property, held primarily for sale to
customers in the ordinary course of business.
5. If PREIT fails to satisfy either the 75% or the 95% gross income
test discussed below, but nonetheless maintains its qualification as a REIT
because other requirements are met, PREIT will be subject to a tax equal to the
gross income attributable to the greater of (1) the amount by which 75% of
PREIT's gross income exceeds the amount qualifying under the 75% test for the
taxable year or (2) the amount by which 90% (or, in the case of taxable years
beginning on or after October 22, 2004, 95%) of PREIT's gross income exceeds the
amount of PREIT's income qualifying under the 95% test for the taxable year,
multiplied in either case by a fraction reflecting the ratio of PREIT's net
income to its gross income.
6. PREIT generally will be subject to a 4% excise tax on any shortfall
to the extent PREIT fails to distribute during each calendar year (or pay income
taxes on) at least the sum of:
o 85% of PREIT's ordinary income for the year;
o 95% of PREIT's capital gain net income for the year; and
o any undistributed taxable income from prior calendar years.
7. PREIT will be subject to a 100% penalty tax on amounts received by
PREIT (or on certain expenses deducted by a taxable REIT subsidiary) if certain
arrangements among PREIT, its tenants and/or a taxable REIT subsidiary of PREIT,
as further described below, are not comparable to similar arrangements among
unrelated parties.
8. If PREIT acquires any assets from a taxable C corporation in a
carry-over basis transaction, PREIT could be liable for specified tax
liabilities inherited from that C corporation with respect to that corporation's
"built-in gain" in its assets. Built-in gain is the amount by which an asset's
fair market value exceeds its adjusted tax basis at the time PREIT acquired the
asset. Applicable Treasury regulations, however, allow PREIT to avoid the
recognition of gain and the imposition of corporate-level tax with respect to a
built-in gain asset acquired in a carry-over basis transaction from a C
corporation unless and until PREIT disposes of that built-in gain asset during
the 10-year period following its acquisition, at which time PREIT would
recognize, and would be subject to tax at the highest regular corporate rate on,
the built-in gain.
If PREIT is subject to taxation on its REIT taxable income or is
subject to tax due to the sale of a built-in gain asset that was acquired in a
carry-over basis transaction from a C corporation, some of the dividends PREIT
pays to its shareholders may be subject to tax at the reduced capital gains
rates, rather than ordinary income rates.
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In addition, notwithstanding PREIT's status as a REIT, PREIT may also
have to pay certain state and local income taxes, because not all states and
localities treat REITs in the same manner that they are treated for federal
income tax purposes. Moreover, each of PREIT's taxable REIT subsidiaries (as
further described below) is subject to federal corporate income tax on its net
income.
REQUIREMENTS FOR REIT QUALIFICATION. The Internal Revenue Code
generally defines a REIT as a corporation, trust or association (1) that is
managed by one or more trustees or directors; (2) the beneficial ownership of
which is evidenced by transferable shares of stock, or by transferable
certificates of beneficial interest; (3) that would be taxable as a domestic
corporation, but for Sections 856 through 859 of the Internal Revenue Code; (4)
that is neither a financial institution nor an insurance company subject to
certain provisions of the Internal Revenue Code; (5) the beneficial ownership of
which is held by 100 or more persons; (6) not more than 50% in value of the
outstanding shares of which are owned, directly or indirectly, by five or fewer
individuals (as defined in the Internal Revenue Code to include certain
entities) during the last half of each taxable year; (7) that makes an election
to be a REIT for the current taxable year or previously has made such an
election which has not been terminated or revoked; and (8) that meets certain
other tests, described below, regarding the nature of its income and assets. The
Internal Revenue Code provides that conditions (1) through (4), inclusive, must
be met during the entire taxable year and that condition (5) must be met during
at least 335 days of a taxable year of 12 months, or during a proportionate part
of a taxable year of less than 12 months. PREIT's trust agreement contains
certain restrictions regarding the transfers of its shares and provides certain
disclosure requirements for 1% or greater shareholders that are intended to
assist PREIT in continuing to satisfy the share ownership requirements described
in (5) and (6) above. These restrictions, however, may not ensure that PREIT
will be able to satisfy these share ownership requirements. If PREIT fails to
satisfy these ownership requirements, PREIT will fail to qualify as a REIT.
In addition, PREIT must satisfy all relevant filing and other
administrative requirements established by the Internal Revenue Service that
must be met to maintain REIT status, use a calendar year for federal income tax
purposes, and comply with the record keeping requirements of the Internal
Revenue Code and regulations promulgated thereunder. To qualify for REIT tax
treatment with respect to any taxable year, PREIT cannot have at the end of that
taxable year any undistributed earnings and profits that are attributable to a
non-REIT taxable year.
A REIT is permitted to have wholly owned subsidiaries. Such a
subsidiary will constitute a "qualified REIT subsidiary" unless the REIT elects
to have it treated instead as a "taxable REIT subsidiary." A qualified REIT
subsidiary is not treated as a separate entity for federal income tax purposes.
Rather, all the assets, liabilities and items of income, deductions and credit
of a qualified REIT subsidiary are treated as if they were those of the REIT. A
qualified REIT subsidiary is not subject to federal corporate income taxation,
although it may be subject to state and local taxation in some states.
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A REIT is also generally permitted to own any percentage of the stock
of a "taxable REIT subsidiary," provided that the aggregate value of the REIT's
interests in taxable REIT subsidiaries does not exceed 20% of the value of the
REIT's gross assets and the aggregate value of the REIT's interests in its
taxable REIT subsidiaries and the securities of other issuers does not exceed
25% of the value of the REIT's gross assets. Provided that certain limitations
on operating activities are satisfied, an entity that is taxable as a
corporation and is wholly or partially owned by a REIT will qualify as a
"taxable REIT subsidiary" if both the REIT and the subsidiary so elect. A
taxable REIT subsidiary is subject to federal income tax, and state and local
income tax where applicable, as a regular C corporation. If a REIT receives
dividends from a taxable REIT subsidiary, then dividends from the REIT to its
noncorporate shareholders, to the extent attributable to the taxable REIT
subsidiary dividends, generally will be eligible to be subject to tax at reduced
capital gains rates, rather than taxed at ordinary income rates.
A REIT is deemed to own its proportionate share of the assets of a
partnership in which it is a partner and is deemed to receive its proportionate
share of the income of the partnership. Thus, PREIT's proportionate share of the
assets, liabilities and items of income of PREIT Associates, L.P. and each of
the real estate partnerships and other pass-through entities in which PREIT
Associates holds an interest (the "Subsidiary Partnerships") will be treated as
assets, liabilities and items of income of PREIT for purposes of applying the
requirements described herein, provided that PREIT Associates and the Subsidiary
Partnerships are treated as partnerships for federal income tax purposes.
INCOME TESTS. To maintain its qualification as a REIT, a REIT must
satisfy two gross income requirements each year. First, at least 75% of a REIT's
gross income each year (other than gross income from prohibited transactions)
must be derived directly or indirectly from investments in real property or
mortgages on real property (including "rents from real property" and, in certain
circumstances, interest) or from certain types of temporary investments. Second,
at least 95% of a REIT's gross income each year (other than gross income from
prohibited transactions) must be derived from the same items that qualify under
the 75% income test, and/or from dividends, interest and gain from the sale or
disposition of stock or securities.
Rents will qualify as "rents from real property" in satisfying the
gross income requirements for a REIT described above only if several conditions
are met. These conditions relate to the identity of the tenant, the computation
of the rent payable and the nature of the property leased. First, the amount of
rent must not be based in whole or in part on the income or profits of any
person. However, an amount received or accrued generally will not be excluded
from rents from real property solely by reason of being based on a fixed
percentage or percentages of receipts or sales. Second, rents received from a
"related party tenant" will not qualify as rents from real property in
satisfying the gross income tests unless the tenant is a taxable REIT
subsidiary, at least 90% of the particular property is leased to unrelated
tenants and the rent paid by the taxable REIT subsidiary is substantially
comparable to the rent paid by the unrelated tenants for comparable space. A
tenant is a related party tenant if the REIT, or an actual or constructive owner
of 10% or more of the REIT, actually or constructively owns 10% or more of the
tenant. Third, if rent attributable to personal property, leased in connection
with a lease of real property, is greater than 15% of the total rent received
under the lease, then the portion of rent attributable to the personal property
will not qualify as rents from real property.
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PREIT does not anticipate receiving rents that fail to meet these
conditions in amounts that, together with other types of nonqualifying income
earned by PREIT, would cause PREIT to fail to satisfy the gross income tests.
In addition, for rents to qualify as "rents from real property," PREIT
generally must not furnish or render more than a de minimis amount of services
to tenants, other than through an "independent contractor" from whom PREIT
derives no revenue or through a taxable REIT subsidiary. The "independent
contractor" requirement, however, does not apply to the extent the services
provided by PREIT are "usually or customarily rendered" in connection with the
rental of space for occupancy only and are not otherwise considered "rendered to
the occupant." If the impermissible tenant service income (which is the greater
of the amount actually received from an impermissible service to tenants or 150%
of the cost of such service) that PREIT receives with respect to a property
exceeds 1% of PREIT's total income from that property, then all of the income
from that property will fail to qualify as rents from real property. Although
PREIT-RUBIN, which, together with PREIT Services, LLC, comprise PREIT's
commercial property development and management business, renders services with
respect to rental properties of PREIT Associates and the Subsidiary
Partnerships, and PREIT-RUBIN does not constitute an "independent contractor"
for this purpose, PREIT believes that the services being provided by PREIT-RUBIN
with respect to these properties in past years have been usual or customary and
should not otherwise be considered "rendered to the occupant." Moreover, for
years beginning after December 31, 2000, PREIT and PREIT- RUBIN have elected for
PREIT-RUBIN to be treated as a taxable REIT subsidiary. PREIT believes that the
aggregate amount of any nonqualifying income in any taxable year earned by PREIT
Associates and the Subsidiary Partnerships has not caused, and will not cause,
PREIT to exceed the limits on nonqualifying income under the 75% and 95% gross
income tests.
PREIT Associates owns all of the outstanding shares of PREIT-RUBIN. As
a taxable REIT subsidiary, PREIT-RUBIN is taxable as a regular corporation.
PREIT-RUBIN performs management, development and leasing services for PREIT
Associates and other real estate owned in whole or in part by third parties. The
third-party income earned by and taxed to PREIT-RUBIN would be nonqualifying
income if earned directly by PREIT. As a result of the corporate structure, all
third-party and other services income will be earned by and taxed to PREIT-RUBIN
at applicable federal and state corporate income tax rates and will be received
by PREIT only indirectly as dividends, after reduction by these taxes. Any such
dividends will be qualifying income under the 95% test but will not be
qualifying income for purposes of the 75% test.
If PREIT fails to satisfy one or both of the 75% and 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for that year
if it is entitled to relief under the Internal Revenue Code. It is not possible,
however, to state whether in all circumstances PREIT would be entitled to the
benefit of these relief provisions. Even if these relief provisions were to
apply, however, a tax would be imposed with respect to the "excess net income"
attributable to the failure to satisfy the 75% and 95% gross income tests.
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ASSET TESTS. PREIT, at the close of each quarter of its taxable year,
must satisfy several tests relating to the nature of its assets: (1) at least
75% of the value of PREIT's total assets must be represented by "real estate
assets," cash, cash items and government securities; (2) not more than 25% of
PREIT's total assets may be represented by securities other than those in the
75% asset class; (3) of the investments included in the 25% asset class (other
than shares of a taxable REIT subsidiary or a qualified REIT subsidiary), the
value of any one issuer's securities owned by PREIT may not exceed 5% of the
value of PREIT's total assets (the "5% test"), and PREIT may not own more than
10% of the vote or value of any one issuer's outstanding securities aside from
certain kinds of debt instruments (the "10% test"); and (4) not more than 20% of
PREIT's total assets may be represented by the securities of one or more taxable
REIT subsidiaries.
PREIT believes that it has complied, and anticipates that it will
continue to comply, with these asset tests. PREIT is deemed to hold directly its
proportionate share of all real estate and other assets of PREIT Associates and
all assets deemed owned by PREIT Associates through its ownership of partnership
interests in other partnerships. As a result, PREIT believes that more than 75%
of its assets are real estate assets. In addition, PREIT does not plan to hold
any securities other than securities in a qualified REIT subsidiary or taxable
REIT subsidiary of PREIT representing more than 10% of the vote or value of any
one issuer's common stock, or securities of any one issuer the value of which
exceeds 5% of the value of PREIT's gross assets. Further, PREIT does not plan to
hold securities of taxable REIT subsidiaries that, in the aggregate, exceed 20%
of the total value of PREIT's assets. As previously discussed, PREIT is deemed
to own its proportionate share of the assets of a partnership in which it is a
partner so that the partnership interest, itself, is not a security for purposes
of this asset test.
After initially meeting the asset tests at the close of any quarter,
PREIT will not lose its status as a REIT for failure to satisfy the asset tests
at the end of a later quarter solely by reason of changes in asset values. If
the failure to satisfy the asset tests results from an acquisition of securities
or other property during a quarter, the failure can be cured by disposition of
sufficient nonqualifying assets within 30 days after the close of that quarter.
PREIT intends to maintain adequate records of the value of its assets to ensure
compliance with the asset tests, and to take any other action within 30 days
after the close of any quarter as may be required to cure any noncompliance. No
assurance can be given, however, that this other action will always be
successful.
For taxable years beginning after October 22, 2004, a REIT that fails
the 5% or 10% tests at the close of any quarter without curing such failure
within 30 days after the close of such quarter is excused if (a) the value of
the assets causing the failure does not exceed the lesser of 1% of the total
value of the REIT's assets at the end of the relevant quarter or $10,000,000 and
(b) within six months after the last day of the quarter in which the REIT
identifies the failure, the REIT either disposes of the assets causing the
failure or otherwise satisfies the 5% and 10% tests. In addition, a REIT that
fails the 5% or 10% tests in a taxable year may nevertheless qualify as a REIT
if (a) the REIT provides the IRS with a description of each asset causing the
failure, (b) the failure was due to reasonable cause and not willful neglect,
(c) the REIT pays a tax equal to the greater of (i) $50,000 or (ii) the highest
rate of corporate tax imposed (currently 35%) on the net income generated by the
assets causing the failure during the period of the failure and (d) within six
months after the last day of the quarter in which the REIT identifies the
failure, the REIT either disposes of the assets causing the failure or otherwise
satisfies the 5% and 10% tests.
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ANNUAL DISTRIBUTION REQUIREMENTS. To qualify as a REIT, PREIT generally
must distribute to its shareholders each year at least 90% of its REIT taxable
income (computed without the dividends paid deduction and excluding net capital
gains) and 90% of PREIT's net income after tax, if any, from foreclosure
property, minus the sum of certain items of noncash income. Distributions must
generally be made during the taxable year to which they relate. Distributions
may be made in the following year in two circumstances. First, if PREIT declares
a dividend in October, November, or December of any year with a record date in
one of these months and pays the dividend on or before January 31 of the
following year, PREIT will be treated as having paid the dividend on December 31
of the year in which the dividend was declared. Second, distributions may be
made in the following year if the dividends are declared before PREIT timely
files its tax return for the year and if made before the first regular dividend
payment made after such declaration. To the extent that PREIT does not
distribute all of its net capital gain or distributes at least 90%, but less
than 100% of its REIT taxable income, as adjusted, PREIT will be subject to tax
on the undistributed amounts at regular corporate tax rates. In addition, PREIT
may be subject to a 4% nondeductible excise tax on the excess of the required
distribution over the sum of the amounts actually distributed and amounts
retained for which federal income tax was paid if PREIT fails to distribute
during a calendar year (or, in the case of distributions with declaration and
record dates falling in the last three months of the calendar year, by the end
of January following such calendar year) at least the sum of (1) 85% of PREIT's
REIT ordinary income for such year, (2) 95% of PREIT's REIT capital gain net
income for such year, and (3) any undistributed taxable income from prior
periods.
PREIT may elect to retain rather than distribute all or a portion of
its net capital gains and pay the tax on the gains. In that case, PREIT may
elect to have its shareholders include their proportionate share of the
undistributed net capital gains in income as long-term capital gains and receive
a credit for their share of the tax paid by PREIT. For purposes of the 4% excise
tax described above, any retained amounts would be treated as having been
distributed.
PREIT believes that it has made, and expects to continue to make,
timely distributions sufficient to satisfy the annual 90% distribution
requirement. It is possible, however, that PREIT, from time to time, may not
have sufficient cash or other liquid assets to meet the 90% distribution
requirement and to avoid all corporate-level taxes. In that event, PREIT may
arrange for short-term, or possibly long-term, borrowing (by itself or by PREIT
Associates) to meet the 90% distribution requirement and avoid the
corporate-level taxes.
Under some circumstances, PREIT may be able to rectify a failure to
meet the distribution requirement for a year by paying deficiency dividends to
shareholders in a later year, which may be included in PREIT's deduction for
dividends paid for the earlier year. Thus, PREIT may be able to avoid being
taxed on amounts distributed as deficiency dividends. However, PREIT will be
required to pay interest based upon the amount of any deduction taken for
deficiency dividends.
FAILURE TO QUALIFY. For taxable years beginning after October 22, 2004,
if PREIT would otherwise fail to qualify as a REIT because of a violation of one
of the requirements described above, its qualification as a REIT will not be
terminated if the violation is due to reasonable cause and not willful neglect
and PREIT pays a tax of $50,000 for the violation. The immediately preceding
sentence does not apply, however, to violations of the income tests or the 5%
and 10% tests described above, each of which has other specific relief
provisions that are described above. PREIT has also taken certain other steps to
attempt to ensure its continued compliance with the tests applicable to REITs.
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If PREIT fails to qualify for taxation as a REIT in any taxable year,
PREIT will be subject to tax (including any applicable alternative minimum tax)
on its taxable income at regular corporate rates. If PREIT fails to qualify as a
REIT, it will not be required to make any distributions to its shareholders and
any distributions that are made will not be deductible by PREIT. As a result,
PREIT's failure to qualify as a REIT would significantly reduce both the cash
available for distributions by PREIT to its shareholders and its earnings. In
addition, if PREIT fails to qualify as a REIT, all distributions to
shareholders, to the extent of PREIT's current and accumulated earnings and
profits, will be taxable as regular corporate dividends, which means that
shareholders taxed as individuals currently would be taxed on those dividends at
capital gains rates and corporate shareholders generally would be entitled to a
dividends received deduction with respect to such dividends. Unless entitled to
relief under specific statutory provisions, PREIT also will be disqualified from
taxation as a REIT for the four taxable years following the year during which
qualification was lost. It is not possible to state whether in all circumstances
PREIT would be entitled to this statutory relief.
LIMITATIONS APPLICABLE TO TAXABLE REIT SUBSIDIARIES. Certain provisions
of the Internal Revenue Code are designed to curtail a REIT's ability to
minimize the taxable income of any taxable REIT subsidiary, such as PREIT-RUBIN.
A 100% tax will apply to any excessive interest expense or other deductions paid
by a taxable REIT subsidiary to the REIT and to any amounts by which the taxable
REIT subsidiary undercharges tenants of the REIT. Also, there are limitations on
the deductibility of interest by highly leveraged taxable REIT subsidiaries.
INCOME TAXATION OF PREIT ASSOCIATES, THE SUBSIDIARY PARTNERSHIPS AND THEIR
PARTNERS
The following discussion summarizes certain federal income tax
considerations applicable to PREIT's investment in PREIT Associates and the
Subsidiary Partnerships:
CLASSIFICATION OF PREIT ASSOCIATES AND SUBSIDIARY PARTNERSHIPS AS
PARTNERSHIPS. PREIT will be entitled to include in its income its distributive
share of the income and to deduct its distributive share of the losses of PREIT
Associates (including PREIT Associates' share of the income or losses of the
Subsidiary Partnerships) only if PREIT Associates and the Subsidiary
Partnerships (collectively, the "Partnerships") are classified for federal
income tax purposes as partnerships rather than as associations taxable as
corporations. The Partnerships have not elected, and do not intend to elect, to
be taxable for federal income tax purposes as corporations. Accordingly, under
applicable "check-the-box" regulations, they should be classified as
partnerships for federal income tax purposes.
PARTNERSHIP ALLOCATIONS. Although a partnership agreement generally
will determine the allocation of income and losses among partners, the
allocations will be disregarded for tax purposes under Section 704(b) of the
Internal Revenue Code if they do not comply with the provisions of Section
704(b) of the Internal Revenue Code and the Treasury Regulations promulgated
thereunder as to substantial economic effect and other requirements.
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If an allocation is not recognized for federal income tax purposes, the
item subject to the allocation will be reallocated in accordance with the
partners' interests in the partnership, which will be determined by taking into
account all of the facts and circumstances relating to the economic arrangement
of the partners with respect to the item. PREIT Associates' allocations of
taxable income and loss are intended to comply with the requirements of Section
704(b) of the Internal Revenue Code and the Treasury Regulations promulgated
thereunder.
TAX ALLOCATIONS WITH RESPECT TO CONTRIBUTED PROPERTIES. The properties
contributed directly or indirectly to PREIT Associates have generally been
appreciated as of the time of contribution, and it is likely that properties
contributed in the future will also be appreciated. Under Section 704(c) of the
Internal Revenue Code, items of income, gain, loss and deduction attributable to
appreciated or depreciated property that is contributed to a partnership in
exchange for an interest in the partnership must be allocated for federal income
tax purposes in a manner so that the contributor is charged with or benefits
from the unrealized gain or unrealized loss associated with the property at the
time of the contribution. The amount of the unrealized gain or unrealized loss
is generally equal to the difference between the fair market value of the
contributed property at the time of contribution and the adjusted tax basis of
the property at the time of contribution. The partnership agreements of the
Partnerships require allocations of income, gain, loss and deduction
attributable to the contributed property to be made in a manner that is
consistent with Section 704(c) of the Internal Revenue Code. If the Partnerships
sell contributed property at a gain or loss, the gain or loss will be allocated
to the contributing partner(s) generally to the extent of the precontribution
unrealized gain or loss.
DEPRECIATION. The Partnerships' assets other than cash consist in
substantial part of appreciated property contributed by partners in PREIT
Associates. Assets contributed to a partnership in a tax-free transaction carry
over their depreciation schedules. Accordingly, the Partnerships' depreciation
deductions for their real property are based in substantial part on the historic
depreciation schedules for the properties. The properties are being depreciated
over a range of 15 to 40 years using various methods of depreciation which were
determined at the time that each item of depreciable property was placed in
service. Any real property purchased by the Partnerships will be depreciated
over at least 39 years, and land is nondepreciable. In certain instances where a
partnership interest rather than real estate is contributed to the Partnership,
the real estate may not carry over its depreciation schedule but rather may,
similarly, be subject to the lengthier depreciation period.
Section 704(c) of the Internal Revenue Code requires that depreciation
as well as gain and loss be allocated in a manner so as to take into account the
variation between the fair market value and tax basis of the property
contributed. Depreciation with respect to any property purchased by PREIT
Associates or its Subsidiary Partnerships subsequent to the admission of its
partners, however, will be allocated among the partners in accordance with their
respective percentage interests in the Partnerships.
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SALE OF PARTNERSHIP PROPERTY. Generally, any gain realized by a
partnership on the sale of property held by the partnership for more than one
year will be long-term capital gain, except for any portion of the gain that is
treated as depreciation or cost recovery recapture. However, under the REIT
requirements, PREIT's share as a partner of any gain realized by the
Partnerships on the sale of any property held as inventory or other property
held primarily for sale to customers in the ordinary course of a trade or
business will be treated as income from a prohibited transaction that is subject
to a 100% penalty tax. The prohibited transaction income could also have an
adverse effect upon PREIT's ability to satisfy the income tests for REIT status.
Under existing law, whether property is held as inventory or primarily for sale
to customers in the ordinary course of a trade or business is a question of fact
that depends on all the facts and circumstances with respect to the particular
transaction. A safe harbor to avoid classification as a prohibited transaction
exists as to real estate assets held for the production of rental income by a
REIT for at least four years where in any taxable year the REIT has made no more
than seven sales of property or, in the alternative, the aggregate of the
adjusted bases of all properties sold does not exceed 10% of the adjusted bases
of all of the REIT's properties during the year and the expenditures includable
in a property's net sales price. The Partnerships intend to hold properties for
investment with a view to long-term appreciation, to engage in the business of
acquiring, developing, owning, and operating and leasing properties and to make
occasional sales of the properties as are consistent with PREIT's and PREIT
Associates' investment objectives. No assurance can be given, however, that no
property sale by the Partnerships will constitute a sale of inventory or other
property held primarily for sale to customers.
TAXATION OF SHAREHOLDERS
TAXATION OF TAXABLE DOMESTIC SHAREHOLDERS. As long as PREIT qualifies
as a REIT, distributions made to PREIT's taxable domestic shareholders (or "U.S.
shareholders") out of current or accumulated earnings and profits (and not
designated as capital gain dividends or qualified dividend income) will be taken
into account by them as ordinary income (at graduated federal income tax rates
up to 35%). In determining the extent to which a distribution constitutes a
dividend for tax purposes, PREIT's earnings and profits will be allocated first
to distributions with respect to its preferred shares and then to its common
shares. Corporate shareholders will not be eligible for the dividends-received
deduction as to such amounts. Dividends paid by a REIT will generally not
constitute qualified dividends that are taxed at the federal capital gain tax
rates (up to only 15%) that are generally applicable to dividend income earned
by individuals from non-REIT C corporations, except to the extent the REIT
dividends are attributable to dividend income earned by the REIT or are
attributable to other REIT income on which certain income taxes have been paid
by the REIT. PREIT does not anticipate that any substantial amount of its
dividends will constitute qualified dividends.
Distributions in excess of current and accumulated earnings and profits
will not be taxable to a U.S. shareholder to the extent that the distributions
do not exceed the adjusted basis of the shareholder's shares. Rather, such
distributions will reduce the adjusted basis of such shares. To the extent that
distributions exceed the adjusted basis of a U.S. shareholder's shares, the
distributions will be taxable as capital gains, assuming the shares are a
capital asset in the hands of the U.S. shareholder.
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Distributions will generally be taxable, if at all, in the year of the
distribution. However, if PREIT declares a dividend in October, November, or
December of any year with a record date in one of these months and pays the
dividend on or before January 31 of the following year, PREIT will be treated as
having paid the dividend, and the shareholder will be treated as having received
the dividend, on December 31 of the year in which the dividend was declared.
PREIT may elect to designate distributions of its net capital gain as
"capital gain dividends." Capital gain dividends are taxed to PREIT's U.S.
shareholders as gain from the sale or exchange of a capital asset held for more
than one year. This tax treatment applies regardless of the period during which
the shareholders have held their shares. If PREIT designates any portion of a
dividend as a capital gain dividend, the amount that will be taxable to the
shareholder as capital gain will be detailed to U.S. shareholders on Internal
Revenue Service Form 1099-DIV. Corporate shareholders, however, may be required
to treat up to 20% of capital gain dividends as ordinary income.
Instead of paying capital gain dividends, PREIT may elect to require
shareholders to include PREIT's undistributed net capital gains in their income.
If PREIT makes such an election, U.S. shareholders (1) will include in their
income as long-term capital gains their proportionate share of such
undistributed capital gains and (2) will be deemed to have paid their
proportionate share of the tax paid by PREIT on such undistributed capital gains
and thereby receive a credit or refund for such amount. A U.S. shareholder of
PREIT's shares will increase the basis in its shares by the difference between
the amount of capital gain included in its income and the amount of tax it is
deemed to have paid. PREIT's earnings and profits will be adjusted
appropriately.
PREIT must classify portions of its designated capital gain dividend
into the following categories:
1. a 15% gain distribution, which will be taxable to non-corporate U.S.
shareholders at a maximum rate of 15%; or
2. an unrecaptured Section 1250 gain distribution, which will be
taxable to non-corporate U.S. shareholders at a maximum rate of 25%.
Distributions made by PREIT and gain arising from the sale or exchange
by a U.S. shareholder of PREIT's shares will not be treated as passive activity
income, and as a result, U.S. shareholders of PREIT's shares generally will not
be able to apply any "passive losses" against this income or gain. In addition,
taxable distributions from PREIT generally will be treated as investment income
for purposes of the investment interest limitations. A U.S. shareholder of
PREIT's shares may elect to treat capital gain dividends, capital gains from the
disposition of shares and income designated as qualified dividend income as
investment income for purposes of the investment interest limitation, in which
case the applicable gain or income will be taxed at ordinary income tax rates.
U.S. shareholders of PREIT's shares may not include in their individual income
tax returns any of PREIT's net operating losses or capital losses. PREIT's
operating or capital losses would be carried over by PREIT for potential offset
against future income, subject to applicable limitations. PREIT will notify
shareholders regarding the portions of distributions for each year that
constitute ordinary income, return of capital and capital gain. In general, a
domestic shareholder will realize capital gain or loss on the disposition of
shares equal to the difference between (1) the amount of cash and the fair
market value of any property received on the disposition and (2) the
shareholder's adjusted basis of the shares. The gain or loss generally will
constitute long-term capital gain or loss if the shareholder has held the shares
for more than one year. For an individual shareholder, a long-term capital gain
will generally be taxable at a maximum rate of 15%.
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Loss upon a sale or exchange of shares by a shareholder who has held
the shares for six months or less (after applying certain holding period rules)
will be treated as a long-term capital loss to the extent of distributions from
PREIT required to be treated by the shareholder as long-term capital gain
(including both 15%- and 25%-rate gain).
TAXATION OF TAX-EXEMPT SHAREHOLDERS. PREIT does not expect that
distributions by PREIT to a shareholder that is a tax-exempt entity will
constitute "unrelated business taxable income" ("UBTI"), provided that the
tax-exempt entity has not financed the acquisition of its shares with
"acquisition indebtedness" within the meaning of the Internal Revenue Code and
the shares are not otherwise used in an unrelated trade or business of the
tax-exempt entity. However, for a tax-exempt shareholder that is a social club,
voluntary employee benefit association, supplemental unemployment benefit trust,
or qualified group legal services plan exempt from federal income taxation under
Internal Revenue Code Sections 501(c)(7), (c)(9), (c)(17) and (c)(20),
respectively, or a single parent title-holding corporation exempt under Section
501(c)(2) the income of which is payable to any of the aforementioned tax-exempt
organizations, income from an investment in PREIT's shares will constitute UBTI
unless the organization properly sets aside or reserves such amounts for
purposes specified in the Internal Revenue Code. These tax exempt shareholders
should consult their own tax advisors concerning these "set aside" and reserve
requirements.
Notwithstanding the above, however, a portion of the dividends paid by
a "pension held REIT" are treated as UBTI as to any trust which is described in
Section 401(a) of the Internal Revenue Code, is tax-exempt under Section 501(a)
of the Internal Revenue Code, and holds more than 10%, by value, of the
interests in the REIT. Tax-exempt pension funds that are described in Section
401(a) of the Internal Revenue Code are referred to below as "pension trusts."
A REIT is a "pension held REIT" if it meets the following two tests:
1. it would not have qualified as a REIT but for Section 856(h)(3) of
the Internal Revenue Code, which provides that shares owned by pension trusts
will be treated, for purposes of determining whether the REIT is closely held,
as owned by the beneficiaries of the trust rather than by the trust itself; and
2. either (a) at least one pension trust holds more than 25% of the
value of the interests in the REIT, or (b) a group of pension trusts, each
individually holding more than 10% of the value of the REIT's shares,
collectively owns more than 50% of the value of the REIT's shares.
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The percentage of any REIT dividend from a "pension held REIT" that is treated
as UBTI is equal to the ratio of the UBTI earned by the REIT, treating the REIT
as if it were a pension trust and therefore subject to tax on UBTI, to the total
gross income of the REIT. An exception applies where the percentage is less than
5% for any year, in which case none of the dividends would be treated as UBTI.
Based on the current estimated ownership of PREIT's common and
preferred shares and as a result of certain limitations on transfer and
ownership of common and preferred shares contained in PREIT's trust agreement,
PREIT does not expect to be classified as a "pension held REIT."
TAXATION OF NON-U.S. SHAREHOLDERS. The rules governing U.S. federal
income taxation of nonresident alien individuals, foreign corporations, foreign
partnerships and other foreign shareholders (collectively, "Non-U.S.
Shareholders") are complex, and no attempt will be made herein to provide more
than a limited summary of these rules. Prospective Non-U.S. Shareholders should
consult with their own tax advisor to determine the impact of U.S. federal,
state and local income tax laws with regard to an investment in shares,
including any reporting requirements. In particular, Non-U.S. Shareholders who
are engaged in a trade or business in the United States, and Non-U.S.
Shareholders who are individuals and who were present in the United States for
183 days or more during the tax year and have a "tax home" in the United States,
may be subject to tax rules different from those described below.
Distributions that are not attributable to gain from sales or exchanges
by PREIT of U.S. real property interests and not designated by PREIT as capital
gain dividends or qualified dividend income will be treated as dividends of
ordinary income to the extent that they are made out of current or accumulated
earnings and profits of PREIT. These distributions, ordinarily, will be subject
to a withholding tax equal to 30% of the gross amount of the distribution unless
an applicable tax treaty reduces that tax or the dividends are treated as
effectively connected with the conduct by the Non-U.S. Shareholder of a U.S.
trade or business. Under some treaties, however, lower rates generally
applicable to dividends do not apply to dividends from REITs. Dividends that are
effectively connected with a trade or business will be subject to tax on a net
basis, that is, after allowance for deductions, at graduated rates, in the same
manner as U.S. shareholders are taxed with respect to these dividends, and are
generally not subject to withholding. Applicable certification and disclosure
requirements must be satisfied to be exempt from withholding under the
effectively connected income exception. Any dividends received by a corporate
Non-U.S. Shareholder that is engaged in a U.S. trade or business also may be
subject to an additional branch profits tax at a 30% rate, or lower applicable
treaty rate. PREIT expects to withhold U.S. income tax at the rate of 30% on any
dividend distributions, not designated as (or deemed to be) capital gain
dividends, made to a Non-U.S. Shareholder unless:
o a lower treaty rate applies and the Non-U.S. Shareholder furnishes
an Internal Revenue Service Form W-8BEN to PREIT evidencing
eligibility for that reduced rate; or
o the Non-U.S. Shareholder furnishes an Internal Revenue Service Form
W-8ECI to PREIT claiming that the distribution is effectively
connected income.
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Distributions in excess of current and accumulated earnings and profits
of PREIT will not be taxable to a Non-U.S. Shareholder to the extent that they
do not exceed the adjusted basis of the shareholder's shares, but rather will
reduce the adjusted basis of the shares. To the extent that these distributions
exceed the adjusted basis of a Non-U.S. Shareholder's shares, they will give
rise to tax liability if the Non-U.S. Shareholder would otherwise be subject to
tax on any gain from the sale or disposition of shares as described below (in
which case they also may be subject to a 30% branch profits tax if the
shareholder is a foreign corporation). If it cannot be determined at the time a
distribution is made whether or not the distribution will be in excess of
current or accumulated earnings and profits, the entire distribution will be
subject to withholding at the rate applicable to dividends. However, the
Non-U.S. Shareholder may seek a refund of the amounts from the Internal Revenue
Service if it is subsequently determined that the distribution was, in fact, in
excess of current or accumulated earnings and profits of PREIT.
PREIT may be required to withhold at least 10% of any distribution in
excess of its current and accumulated earnings and profits, even if a lower
treaty rate applies or the Non-U.S. Shareholder is not liable for tax on the
receipt of that distribution. However, a Non-U.S. Shareholder may seek a refund
of these amounts from the Internal Revenue Service if the Non-U.S. Shareholder's
U.S. tax liability with respect to the distribution is less than the amount
withheld.
PREIT generally will be required to withhold and remit to the Internal
Revenue Service 35% of all distributions, if any, to Non-U.S. Shareholders that
are, or could be, designated as capital gain dividends. Distributions can be
designated as capital gains to the extent of PREIT's net capital gain for the
taxable year of the distribution. The amount withheld is creditable against the
Non-U.S. Shareholder's United States federal income tax liability.
Although the law is not entirely clear on the matter, it appears that
amounts of undistributed capital gain that are designated by PREIT as deemed
distributions (as discussed under "Taxation of Taxable Domestic Shareholders"
above) would be treated with respect to Non-U.S. Shareholders in the manner
outlined in the preceding paragraph for actual distributions by PREIT of capital
gain dividends. Under that approach, the Non-U.S. Shareholders would be able to
offset as a credit against their United States federal income tax liability
resulting therefrom their proportionate share of the tax paid by PREIT on the
undistributed capital gains (and to receive from the Internal Revenue Service a
refund to the extent their proportionate share of the tax paid by PREIT were to
exceed their actual United States federal income tax liability).
Under the Foreign Investment in Real Property Tax Act, which is referred to as
"FIRPTA," distributions to a Non-U.S. Shareholder that are attributable to gain
from sales or exchanges by PREIT of U.S. real property interests, whether or not
designated as a capital gain dividend, will cause the Non-U.S. Shareholder to be
treated as recognizing gain that is income effectively connected with a U.S.
trade or business. Non-U.S. Shareholders will be taxed on this gain at the same
rates applicable to U.S. shareholders, subject to a special alternative minimum
tax in the case of nonresident alien individuals. Also, this gain may be subject
to a 30% (or lower applicable treaty rate) branch profits tax in the hands of a
Non-U.S. Shareholder that is a corporation.
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For taxable years of PREIT beginning after October 22, 2004, the rules
described in the preceding two paragraphs generally do not apply, however, to
capital gain dividends paid on any class of PREIT's stock that is regularly
traded on an established securities market in the United States if the Non-U.S.
Shareholder does not own more than 5% of that class of stock. If such a
less-than-5% Non-U.S. Shareholder receives a capital gain dividend on such a
class of PREIT stock, the dividend will be treated instead as a dividend of
ordinary income. PREIT believes its common shares will be treated as regularly
traded on an established securities market in the United States for this
purpose.
Gain recognized by a Non-U.S. Shareholder upon a sale or exchange of
PREIT's shares generally will not be subject to United States taxation unless:
o the investment in PREIT's shares is effectively connected with a
U.S. trade or business (or, in the case of a Non-U.S. Shareholder
that is an eligible resident of a foreign country that has an
applicable tax treaty with the U.S., a U.S. permanent establishment
of the Non-U.S. Shareholder), in which case the Non-U.S. Shareholder
will be subject to the same treatment as a domestic shareholder with
respect to any gain or loss;
o the Non-U.S. Shareholder is a nonresident alien individual who is
present in the United States for 183 days or more during the taxable
year and has a tax home in the United States, in which case the
nonresident alien individual will be subject to a 30% tax on the
individual's net capital gains for the taxable year; or
o PREIT's shares constitute a U.S. real property interests within the
meaning of FIRPTA, as described below.
PREIT's shares will constitute U.S. real property interests within the
meaning of FIRPTA unless PREIT is a "domestically controlled REIT," defined
generally as a REIT for which at all times during a defined testing period less
than 50% in value of its stock has been held directly or indirectly by foreign
persons. PREIT believes that it is a domestically controlled REIT, and,
therefore, that its shares do not constitute U.S. real property interests.
However, because PREIT's shares are publicly traded, PREIT cannot guarantee that
it is or will continue to be a domestically controlled REIT.
Even if PREIT were not to qualify as a domestically controlled REIT at
the time a Non-U.S. Shareholder sells PREIT's shares, gain arising from the sale
still would not be subject to FIRPTA tax if:
o the class of shares sold is "regularly traded" on an established
securities market, such as the NYSE (which PREIT believes to be the
case); and
o the selling Non-U.S. Shareholder has owned, actually or
constructively, no more than 5% of the outstanding class of shares
during the five-year period ending on the date of the sale.
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If the gain on the sale of shares were to be subject to tax under
FIRPTA, the Non-U.S. Shareholder would be subject to the same treatment as U.S.
shareholders with respect to the gain (subject to applicable alternative minimum
tax and a special alternative minimum tax in the case of nonresident alien
individuals).
BACKUP WITHHOLDING TAX AND INFORMATION REPORTING
In general, information-reporting requirements will apply to payments
of dividends on PREIT's shares to some U.S. shareholders, unless an exception
applies.
The payor is required to withhold tax on such payments at the rate of
28% if (1) the payee fails to furnish a taxpayer identification number, or TIN,
to the payor or to establish an exemption from backup withholding, or (2) the
Internal Revenue Service notifies the payor that the TIN furnished by the payee
is incorrect.
In addition, a payor of the dividends on PREIT's shares is required to
withhold tax at a rate of 28% if (1) there has been a notified payee
under-reporting with respect to interest, dividends or original issue discount
described in Section 3406(c) of the Internal Revenue Code, or (2) there has been
a failure of the payee to certify under the penalty of perjury that the payee is
not subject to backup withholding under the Internal Revenue Code.
Some shareholders, including corporations, may be exempt from backup
withholding. Any amounts withheld under the backup withholding rules from a
payment to a shareholder will be allowed as a credit against the shareholder's
United States federal income tax and may entitle the shareholder to a refund,
provided that the required information is furnished to the Internal Revenue
Service.
The payor will be required to furnish annually to the Internal Revenue
Service and to PREIT's shareholders information relating to the amount of
dividends paid on PREIT's shares, and that information reporting may also apply
to payments of proceeds from the sale of PREIT's shares. Some shareholders,
including corporations, financial institutions and certain tax-exempt
organizations, are generally not subject to information reporting.
With regard to Non-U.S. Shareholders, information reporting generally
will apply to payments of dividends on PREIT's shares, and backup withholding
described above for a U.S. shareholder will apply, unless the payee certifies
that it is not a U.S. person or otherwise establishes an exemption.
The payment of the proceeds from the disposition of PREIT's shares to
or through the U.S. office of a U.S. or foreign broker will be subject to
information reporting and backup withholding as described above for U.S.
shareholders unless the Non-U.S. Shareholder satisfies the requirements
necessary to be an exempt Non-U.S. Shareholder or otherwise qualifies for an
exemption. The proceeds of a disposition by a Non-U.S. Shareholder of PREIT's
shares to or through a foreign office of a broker generally will not be subject
to information reporting or backup withholding. However, if the broker is a U.S.
person, a controlled foreign corporation for U.S. tax purposes, a foreign person
50% or more of whose gross income from all sources for specified periods is from
activities that are effectively connected with a U.S. trade or business, a
foreign partnership if partners who hold more than 50% of the interest in the
partnership are U.S. persons, or a foreign partnership that is engaged in the
conduct of a trade or business in the U.S., then information reporting generally
will apply as though the payment was made through a U.S. office of a U.S. or
foreign broker.
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Applicable Treasury regulations provide presumptions regarding the
status of a PREIT shareholder when payments to such shareholder cannot be
reliably associated with appropriate documentation provided to the payor.
Because the application of these Treasury regulations varies depending on the
shareholder's particular circumstances, you are advised to consult your tax
advisor regarding the information reporting requirements applicable to you.
SUNSET OF TAX PROVISIONS
Several of the tax considerations described herein are subject to a
sunset provision. The sunset provision generally provides that for taxable years
beginning after December 31, 2008, certain provisions that are currently in the
Internal Revenue Code will revert back to a prior version of those provisions.
These provisions include those related to the 15% capital gains rate and its
application to qualified dividend income and other tax rates described herein.
OTHER TAX CONSIDERATIONS
PREIT and its shareholders may be subject to state or local taxation in
various state or local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of PREIT and its
shareholders may not conform to the federal income tax consequences discussed
above. Prospective shareholders should consult their own tax advisors regarding
the effect of state and local tax laws on an investment in shares of PREIT.
TAX SHELTER REPORTING
Under applicable Treasury regulations, if a taxpayer recognizes a loss
of $2 million or more, in the case of an individual taxpayer, or $10 million or
more, in the case of a corporate taxpayer, the taxpayer may be required to file
a disclosure statement with the Internal Revenue Service on Form 8886. Losses on
sales of portfolio securities are in many cases exempt from this reporting
requirement, but sales of REIT shares currently are not exempt. The fact that a
loss is reportable under these regulations does not affect the legal
determination of whether the taxpayer's treatment of the loss is proper.
Stockholders should consult their tax advisors to determine the applicability of
these regulations in light of their individual circumstances.
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PLAN OF DISTRIBUTION
This prospectus relates to the offer and sale from time to time of up
to 895,511 shares that may be issued to the holders of PREIT Partnership Units
listed above under the caption "Selling Shareholders," or to their pledgees,
donees, transferees, partners or other successors in interest. We will not
receive any of the proceeds from the sale of any shares by the selling
shareholders. The distribution of the shares may be effected from time to time
in one or more underwritten transactions at a fixed price or prices, which may
be changed, or at market prices prevailing at the time of sale, at prices
related to such prevailing market prices or at negotiated prices. Any such
underwritten offering may be on a "best efforts" or a "firm commitment" basis.
In connection with any such underwritten offering, underwriters or agents may
receive compensation in the form of discounts, concessions or commissions from
the selling shareholders or from purchasers of shares for whom they may act as
agents. Underwriters may sell shares to or through dealers, and such dealers may
receive compensation in the form of discounts, concessions or commissions from
the underwriters and/or commissions from the purchasers for whom they may act as
agents.
Under agreements into which we may enter, underwriters, dealers and
agents who participate in the distribution of shares may be entitled to
indemnification from us against certain liabilities, including liabilities under
the Securities Act, or to contribution with respect to payments that such
underwriters, dealers or agents may be required to make in respect thereof.
The selling shareholders and any underwriters, dealers or agents that
participate in the distribution of shares may be deemed to be "underwriters"
within the meaning of the Securities Act, and any profit on the sale of shares
by them and any discounts, commissions or concessions received by any such
underwriters, dealers or agents might be deemed to be underwriting discounts and
commissions under the Securities Act.
At a time a particular offer of shares is made, a prospectus
supplement, if required, will be distributed that will set forth the name or
names of any underwriters, dealers or agents, any discounts, commissions and
other terms constituting compensation from the selling shareholders and any
other required information.
The sale of the shares by the selling shareholders also may be effected
from time to time by selling the shares directly to purchasers or to or through
broker-dealers. In connection with any such sale, any such broker-dealer may act
as agent for the selling shareholders or may purchase from the selling
shareholders all or a portion of the shares as principal, and any such sale may
be made pursuant to any of the methods described below. Such sales may be made
on the NYSE or other exchanges on which the shares are then traded, in the
over-the-counter market, in negotiated transactions or otherwise at prices and
at terms then prevailing or at prices related to the then-current market prices
or at prices otherwise negotiated.
The shares also may be sold in one or more of the following
transactions: (a) block transactions (which may involve crosses) in which a
broker-dealer may sell all or a portion of such shares as agent but may position
and resell all or a portion of the block as principal to facilitate the
transaction; (b) purchases by any such broker-dealer as principal and resale by
such broker-dealer for its own account; (c) a special offering, an exchange
distribution or a secondary distribution in accordance with applicable NYSE or
other stock exchange rules; (d) ordinary brokerage transactions and transactions
in which any such broker-dealer solicits purchasers; (e) sales "at the market"
to or through a market maker or into an existing trading market, on an exchange
or otherwise, for such shares; (f) sales in other ways not involving market
makers or established trading markets, including direct sales to purchasers; (g)
transactions in options, swaps or other derivatives that may not be listed on an
exchange; and (h) the creation or settlement of hedging transactions.
-50-
In effecting sales, broker-dealers engaged by the selling shareholders
may arrange for other broker-dealers to participate. Broker-dealers will receive
commissions or other compensation from the selling shareholders in amounts to be
negotiated immediately prior to the sale that will not exceed those customary in
the types of transactions involved. Broker-dealers may also receive compensation
from purchasers of the shares that is not expected to exceed that amount which
is customary in the types of transactions involved. The shares may also be sold
pursuant to Rule 144 promulgated under the Securities Act.
We will pay all expenses incident to the offering and sale of the
shares, other than commissions, discounts and fees of underwriters,
broker-dealers or agents. We have agreed to indemnify the selling shareholders
against certain losses, claims, damages and liabilities, including liabilities
under the Securities Act.
-51-
LEGAL MATTERS
The legality of the shares offered hereby and certain federal income
tax matters will be passed upon for us by Drinker Biddle & Reath LLP.
EXPERTS
The consolidated financial statements and schedules of PREIT and
subsidiaries as of December 31, 2003 and 2002, and for each of the years in the
three-year period ended December 31, 2003 included in PREIT's Annual Report on
Form 10-K filed on March 15, 2004 have been incorporated herein by reference in
reliance upon the reports of KPMG LLP, independent auditors, and is incorporated
herein by reference in reliance upon the authority of such firm as experts in
accounting and auditing.
The financial statements of Lehigh Valley Associates for the year ended
December 31, 2002 and 2001 have been audited by Ernst & Young LLP, independent
registered public accounting firm, as set forth in their report thereon. Such
report is included in PREIT's Annual Report on Form 10-K filed on March 15, 2004
and is incorporated herein by reference in reliance upon such report given on
the authority of such firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Securities
Exchange Act of 1934, which require us to file reports, proxy statements and
other information with the SEC. You may read and copy our SEC filings at the
SEC's Public Reference Facilities, which are in Room 1024, 450 Fifth Street,
N.W., Washington, D.C. 20549 and the SEC's following regional offices: 233
Broadway, New York, New York 10279 and 175 W. Jackson Boulevard, Chicago,
Illinois 60604. Information on the operation of the Public Reference Room and
copies of our filings can be obtained from the Public Reference Section of the
SEC, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates, by
calling 1-800-SEC-0330. The SEC also maintains an Internet web site at
www.sec.gov that contains our SEC filings. In addition, our shares are listed on
the New York Stock Exchange and our SEC filings can be inspected at the offices
of the New York Stock Exchange, 20 Broad Street, New York, New York 10005. We
also maintain an internet website that contains information about us at
www.preit.com.
We filed with the SEC a registration statement on Form S-3 under the
Securities Act of 1933 with respect to the securities we are offering by this
prospectus. This prospectus does not contain all of the information set forth in
the registration statement because we have omitted some of the information as
permitted by the SEC's rules and regulations. Statements contained in this
prospectus as to the contents of any contract or other document are not
necessarily complete. In each instance, each statement is qualified, in all
respects, by reference to the copy of the applicable contract or document filed
as an exhibit to the registration statement. For further information about us
and our securities, we refer you to the registration statement and the exhibits
and schedules that may be obtained from the SEC at its principal office in
Washington, D.C. after payment of the SEC's prescribed fees.
-52-
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The SEC allows us to "incorporate by reference" the information in
documents we file with them. This means that we can disclose important
information by referring you to these documents. The information we incorporate
by reference is an important part of this prospectus, and information in
documents we file after the date of this prospectus automatically will update
and supersede information in this prospectus.
We filed the documents listed below under the Exchange Act with the
SEC, and we incorporate each of the documents, and all documents filed after the
date of this prospectus under Section 13(a), 13(c), 14 or 15(d) of the Exchange
Act, into this prospectus by reference:
1. Annual Report on Form 10-K for the year ended December 31, 2003,
filed on March 15, 2004.
2. Quarterly Reports on Form 10-Q for the quarter ended March 31, 2004
(filed on May 10, 2004), the quarter ended June 30, 2004 (filed on August 6,
2004), and the quarter ended September 30, 2004 (filed on November 9, 2004).
3. Current Reports on Form 8-K dated January 21, 2004 (filed on January
29, 2004), dated February 6, 2004 (filed on February 6, 2004), dated February 9,
2004 (filed on February 9, 2004), dated June 17, 2004 (filed on June 18, 2004),
dated September 22, 2004 (filed on September 24, 2004), dated September 24, 2004
(filed on September 28, 2004), dated October 7, 2004 (filed on October 8, 2004),
dated October 8, 2004 (filed on October 12, 2004), dated October 14, 2004 (filed
on October 20, 2004), dated October 28, 2004 (filed on November 3, 2004), and
dated November 30, 2004 (filed on December 6, 2004).
4. Registration Statement on Form 8-A12B, filed on December 17, 1997,
setting forth the description of our common shares, and filed on May 3, 1999,
setting forth the description of rights to purchase PREIT common shares,
including any amendment or reports filed for the purpose of updating such
information.
We will provide without charge to each person to whom a copy of this
prospectus is delivered, after their written or oral request, a copy of any or
all of the documents we have incorporated in this prospectus by reference.
Written requests for copies should be addressed to:
Pennsylvania Real Estate Investment Trust
Attention: Bruce Goldman,
Executive Vice President and General Counsel
The Bellevue
200 South Broad Street
Philadelphia, Pennsylvania 19102
Telephone: (215) 875-0700
-53-
FORWARD LOOKING STATEMENTS
This prospectus, together with other statements and information
publicly disseminated by us, contains certain "forward-looking statements"
within the meaning of the U.S. Private Securities Litigation Reform Act of 1995,
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. In particular, our business may be affected by
uncertainties affecting real estate businesses generally as well as the
following, among other factors:
o general economic, financial and political conditions, including the
possibility of war or terrorist attacks;
o changes in local market conditions or other competitive factors;
o existence of complex regulations, including those relating to our
status as a REIT, and the adverse consequences if we were to fail to
qualify as a REIT;
o risks relating to construction and development activities;
o our ability to maintain and increase property occupancy and rental
rates;
o our ability to acquire additional properties and our ability to
integrate acquired properties into our existing portfolio;
o dependence on our tenants' business operations and their financial
stability;
o possible environmental liabilities;
o our ability to raise capital through public and private offerings of
debt and/or equity securities and other financing risks, including
the availability of adequate funds at reasonable cost; and
o our short- and long-term liquidity position.
Additional factors that may cause our actual results to differ
materially from those expressed or implied by our forward-looking statements
include those discussed in the section entitled "Risk Factors." We do not intend
to and disclaim any duty or obligation to update or revise any forward-looking
statements to reflect new information, to reflect future events or otherwise.
-54-
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
INDEX
PAGE
----
INTRODUCTORY NOTE F-2
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
Pro Forma Condensed Consolidated Statement of Income for the year ended December 31, 2003.............................. F-3
Notes to Pro Forma Condensed Consolidated Statement of Income.......................................................... F-4
F-1
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF INCOME
On November 20, 2003, Pennsylvania Real Estate Investment Trust
("PREIT") announced the closing of the merger of Crown American Realty Trust
("Crown") with and into PREIT (the "Merger") in accordance with an Agreement and
Plan of Merger (the "Merger Agreement") dated as of May 13, 2003, by and among
PREIT, PREIT Associates, L.P., a limited partnership of which PREIT is the sole
general partner, Crown and Crown American Properties, L.P., a limited
partnership of which Crown was the sole general partner before the Merger.
Through the Merger and related transactions, PREIT acquired 26 wholly owned
regional shopping malls and the remaining 50% interest in Palmer Park Mall in
Easton, Pennsylvania.
The following unaudited pro forma condensed consolidated financial
information sets forth:
o the historical financial information for the year ended
December 31, 2003 derived from PREIT's audited financial
statements and Crown's historical information from January 1,
2003 to November 19, 2003 derived from Crown's unaudited
interim financial statements;
o adjustments to give effect to the acquisition of interests in
an aggregate of seven enclosed shopping malls during the
second and third quarters of 2003 (collectively, the
"Completed Acquisitions"). PREIT acquired six properties from
The Rouse Company in the second quarter of 2003, consisting of
five wholly-owned properties and a 73% interest in a
partnership that owned a sixth property (New Castle Associates
that owned Cherry Hill Mall). The purchase price allocation
for Cherry Hill Mall is equal to 73% of the fair value of the
property acquired (reflecting the Company's 73% ownership
interest acquired in 2003) plus the remaining 27% carryover
basis, which is based on the historical basis of New Castle
Associates. New Castle Associates is consolidated for
financial reporting purposes. The Company issued 609,317 PREIT
Operating Partnership units in 2004 to purchase the remaining
27% minority interest in New Castle Associates. PREIT also
acquired the remaining 70% of the economic interest in Willow
Grove Park from its venture partner in September 2003;
o adjustments to give effect to the merger of Crown with and
into PREIT, including (i) the acquisition of the assets and
liabilities of Crown American, including 12 wholly-owned
enclosed shopping malls, an 89% interest in 14 enclosed
shopping malls and a 50% partnership interest in a shopping
mall, (ii) the issuance of 11,725,175 PREIT shares of
beneficial interest, (iii) the issuance of 2,475,000 PREIT
preferred shares, and (iv) the issuance of 1,703,214 Operating
Partnership units. The Company expects to issue an additional
341,297 PREIT Operating Partnership units in 2006 to purchase
the remaining 11% minority interest in the 14 shopping malls;
and
o the pro forma, as adjusted, unaudited condensed consolidated
statement of income for the year ended December 31, 2003, as
adjusted to give effect to the Completed Acquisitions and the
merger of Crown with and into PREIT.
You should read the information below along with all other financial
information and analysis presented or incorporated by reference in this
prospectus. The unaudited pro forma condensed consolidated financial information
is presented for information purposes only, and PREIT's management does not
expect that this information will be indicative of PREIT's future results of
operations. The unaudited pro forma adjustments are based on available
information and upon assumptions that PREIT believes are reasonable. The
purchase accounting allocations made by management in connection with the
unaudited pro forma financial information are based on the assumptions and
estimates of management. The unaudited pro forma condensed consolidated
financial information assumes that the Completed Acquisitions and the merger of
Crown with and into PREIT were completed as of January 1, 2003 for purposes of
the unaudited pro forma condensed consolidated statement of income. The
unaudited pro forma financial information has not been adjusted to reflect the
effects of PREIT's August 2003 equity offering on periods prior to the date of
the offering.
F-2
Pennsylvania Real Estate Investment Trust
Pro Forma Condensed Consolidated Statement of Income
For the Twelve Months Ended December 31, 2003
(Unaudited)
(In thousands, except per share amounts)
Completed
Acquisitions
PREIT Completed Pro forma PREIT
Historical (a) Acquisitions Adjustments Adjusted
----------------------------------------------------------
Revenue
Real estate revenues:
Base rent $ 112,117 $ 29,607 (b) $ 772 (c) $ 142,496
Expense reimbursements 47,970 20,335 (b) - 68,305
Percentage rent 4,281 488 (b) - 4,769
Lease termination revenue 985 1,019 (b) - 2,004
Other real estate revenues 5,164 2,590 (b) - 7,754
----------------------------------------------------------
Total real estate revenues 170,517 54,039 772 225,328
Management company revenue 11,994 - (825) (d) 11,169
Interest and other income 887 - - 887
----------------------------------------------------------
Total revenue 183,398 54,039 (53) 237,384
----------------------------------------------------------
Expenses
Property operating expenses (60,339) (23,120) (b) (160) (d) (83,619)
Depreciation and amortization (37,616) - (9,847) (e) (47,463)
General and administrative expenses (40,168) - - (40,168)
Interest expense (35,318) (6,230) (b) (8,752) (f) (50,300)
----------------------------------------------------------
Total expenses (173,441) (29,350) (18,759) (221,550)
Income before equity in income of partnerships and joint
ventures, gains on sales of interests in real estate and
minority interest 9,957 24,689 (18,812) 15,834
Equity in income of partnerships and joint ventures 7,231 - (514) (g) 6,717
Gains on sales of interests in real estate 16,199 - - 16,199
----------------------------------------------------------
Income from continuing operations before minority interest 33,387 24,689 (19,326) 38,750
Minority interest in properties (894) - (413) (h) (1,307)
Minority interest in Operating Partnership (3,298) - (783) (h) (4,081)
----------------------------------------------------------
Income from continuing operations $ 29,195 $ 24,689 $ (20,522) $ 33,362
==========================================================
Basic income from continuing operations per share $ 1.36
---------
Diluted income from continuing operations per share $ 1.33
---------
Weighted average number of shares outstanding:
Basic 20,390
---------
Diluted 20,784
---------
Company
Crown Pro forma Pro forma As
Historical (i)(j)(k) Adjustments Adjusted
Revenue ---------------------------------------------------------
Real estate revenues:
Base rent $ 118,954 $ (14,392) (l) $ 247,058
Expense reimbursements 52,370 (7,897) (m) 112,778
Percentage rent 5,263 (714) (n) 9,318
Lease termination revenue - - 2,004
Other real estate revenues - (3,330) (o) 4,424
---------------------------------------------------------
Total real estate revenues 176,587 (26,333) 375,582
Management company revenue 6,305 (235) (p) 17,239
Interest and other income - - 887
---------------------------------------------------------
Total revenue 182,892 (26,568) 393,708
---------------------------------------------------------
Expenses
Property operating expenses (75,831) 15,682 (q) (143,768)
Depreciation and amortization (43,972) 315 (r) (91,120)
General and administrative expenses (23,890) 17,076 (s) (46,982)
Interest expense (44,344) 11,017 (t) (83,627)
---------------------------------------------------------
Total expenses (188,037) 44,090 (365,497)
Income before equity in income of partnerships and joint
ventures, gains on sales of interests in real estate and
minority interest (5,145) 17,522 28,211
Equity in income of partnerships and joint ventures - (726) (u) 5,991
Gains on sales of interests in real estate 500 - 16,699
---------------------------------------------------------
Income from continuing operations before minority interest (4,645) 16,796 50,901
Minority interest in properties - (654) (v) (1,961)
Minority interest in Operating Partnership 684 (666) (v) (4,063)
---------------------------------------------------------
Income from continuing operations $ (3,961) $ 15,476 $ 44,877
=========================================================
Basic income from continuing operations per share $ 1.01 (w)
------------
Diluted income from continuing operations per share $ 1.00 (w)
------------
Weighted average number of shares outstanding:
Basic 30,812 (w)
------------
Diluted 31,340 (w)
------------
F-3
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
1. Adjustments to the Pro Forma Condensed Consolidated Statement of
Income--Year Ended December 31, 2003.
a. Reflects PREIT's historical results of operations for the year
ended December 31, 2003.
b. In the second quarter of 2003, the Company acquired interests in
six properties from The Rouse Company consisting of The Gallery
at Market East, Moorestown Mall, Exton Square Mall, Echelon
Mall, Plymouth Meeting Mall and a 73% joint venture partnership
interest in New Castle Associates. New Castle Associates
acquired Cherry Hill Mall in a transaction that immediately
preceded the Company's acquisition of the New Castle Associates
partnership interest. Such interest is consolidated for
accounting purposes. The Gallery at Market East, Moorestown
Mall, Exton Square Mall and the interest in New Castle
Associates were acquired on April 28, 2003. Echelon Mall and
Plymouth Meeting Mall were acquired on June 5, 2003.
In September 2003, the Company acquired an additional 70%
interest in Willow Grove Park, an enclosed mall located in
Willow Grove, Pennsylvania. The Company now owns 100% of Willow
Grove Park. These acquisitions are collectively referred to as
the "Completed Acquisitions."
The Company's policies for the purchase accounting of fixed
assets and intangible assets are described below.
A property's purchase price is allocated to the property's
assets based on management's estimates of their fair value. The
determination of the fair value of intangible assets requires
significant estimates by management and considers many factors
involving the Company's expectations about the underlying
property and the general market conditions in which the property
operates. The judgment and subjectivity inherent in assumptions
on which estimates are based can have a significant impact on
the estimate of the fair value of the intangible assets that the
Company records.
The Company's methodology for allocating a portion of the
purchase price to intangible assets includes estimating an
"as-if vacant" fair value of the physical property, which is
allocated to land, building and improvements. The difference
between the purchase price and the "as-if vacant" fair value is
allocated to intangible assets. There are three categories of
intangible assets to be considered: (i) value of in-place
leases, (ii) above- and below-market value of in-place leases
and (iii) customer relationship value.
The value of in-place leases is estimated based on the value
associated with the costs avoided in originating leases
comparable to the acquired in-place leases as well as the value
associated with lost rental revenue during the assumed lease-up
period. The value of in-place leases is amortized as real estate
amortization over the estimated weighted-average remaining lease
lives. The Company generally uses a weighted-average life of
seven years for this purpose.
Above- and below-market in-place lease values for acquired
properties are recorded based on the present value of the
difference between (i) the contractual amounts to be paid
pursuant to the in-place leases and (ii) management's estimates
of fair market lease rates for the comparable in-place leases,
measured over a period equal to the remaining non-cancelable
term of the lease. The value of above-market lease values is
amortized as a reduction of rental income over the remaining
terms of the respective leases. The value of below-market lease
values is amortized as an increase to rental income over the
remaining terms of the respective leases including renewal
options.
The Company allocates no value to customer relationship
intangibles if the Company has pre-existing business
relationships with the major retailers in the acquired property
because the customer relationships associated with the acquired
property provide no incremental value over the Company's
existing relationships.
F-4
The adjustments reflect the historical results of operations,
prior to acquisition, for properties acquired by PREIT in the
Completed Acquisitions for the year ended December 31, 2003.
ROUSE WILLOW COMPLETED
($000'S) ACQUISITIONS GROVE PARK ACQUISITIONS
-------- ------------ ---------- ------------
REVENUE
Real estate revenue
Base rent............................ $ 21,385 $ 8,222 $ 29,607
Expense reimbursements............... 13,947 6,388 20,335
Percentage rent...................... 463 25 488
Lease termination revenue............ 1,019 -- 1,019
Other real estate revenue............ 1,433 1,157 2,590
-------- ------- --------
Total real estate revenue.............. 38,247 15,792 54,039
-------- ------- --------
EXPENSES
Property operating expenses............ (17,108) (6,012) (23,120)
Interest expense....................... -- (6,230) (6,230)
-------- ------- --------
Income from continuing operations...... $ 21,139 $ 3,550 $ 24,689
-------- ------- --------
c. Reflects pro forma adjustments to revenue associated with
straight-line rent adjustments and amortization of leases to
market as a result of Completed Acquisitions.
($000'S)
--------
Straight-line rent............................... $ 958
Amortization of above/below market rents, net.... (186)
-----
$ 772
=====
d. Reflects the pro forma adjustments resulting from changes in
management fees on properties managed by PREIT-RUBIN, Inc. as
the result of the Completed Acquisitions. PREIT-RUBIN, Inc. no
longer manages Christiana Mall or Willow Grove Park (PREIT
Services, LLC now manages Willow Grove Park, but does not
receive a management fee). PREIT-RUBIN, Inc. manages Cherry Hill
Mall for a management fee equal to 5.25% of Cherry Hill Mall's
rents and other revenues. The pro forma adjustment for Cherry
Hill Mall reflects only the portion of the management fee that
is attributable to the Company's partner's 27% minority interest
in the property as the remaining amount will be eliminated in
consolidation.
($000'S)
--------
Pro forma management fees for Cherry Hill Mall... $ 160
Historical management fees for Willow Grove
Park........................................... (528)
Historical management fees for Christiana Mall... (457)
------
$(825)
=====
e. Reflects depreciation expense related to the Completed
Acquisitions and amortization expense on intangible assets
acquired in the Completed Acquisitions. Depreciation expense is
calculated using a 30-year blended life for buildings and
improvements. The value of in-place leases is amortized on a
straight-line basis over seven years, which approximates the
remaining term of the respective leases.
ASSET INFORMATION
($000'S)
DATE BUILDING AND IN-PLACE
PROPERTY ACQUIRED IMPROVEMENTS LEASE VALUE
------------------------------------------------------ ----------------- ------------ -----------
Moorestown Mall....................................... April 28, 2003 $62,995 $1,149
The Gallery at Market East............................ April 28, 2003 48,210 2,290
Exton Square Mall..................................... April 28, 2003 121,688 9,831
Cherry Hill Mall...................................... April 28, 2003 157,506 7,472
Echelon Mall.......................................... June 5, 2003 13,777 1,841
Plymouth Meeting Mall................................. June 5, 2003 52,707 128
Willow Grove Park -- historical....................... September 4, 2003 (1) 42,667 --
Willow Grove Park -- stepped-up....................... September 4, 2003 101,265 7,761
-------- -------
$600,815 $30,472
======== =======
(1) Indicates date that the property was first consolidated by
the Company.
F-5
EXPENSE INFORMATION
($000'S)
PROPERTY DEPRECIATION AMORTIZATION TOTAL
------------------------------ ------------ ------------ -----
Moorestown Mall............... $884 $55 $939
The Gallery at Market East.... 417 109 526
Exton Square Mall............. 1,073 468 1,541
Cherry Hill Mall.............. 1,485 356 1,841
Echelon Mall.................. 470 110 580
Plymouth Meeting Mall......... 918 8 926
Willow Grove Park --
historical.................. 1,067 -- 1,067
Willow Grove Park --
stepped-up.................. 1,688 739 2,427
------ ------ ------
$8,002 $1,845 $9,847
====== ====== ======
f. Reflects interest expense, including amortization of financing
costs, on indebtedness used to finance the Completed
Acquisitions. The balances amortize over varying periods. In May
2003, the Moorestown Mall and Dartmouth Mall mortgages were
refinanced at a fixed interest rate of 4.95%. The bank loan
interest rate is based on the Company's bridge loan financing,
which had an interest rate of LIBOR plus 200 basis points, or
3.12% at the acquisition date. A variance of a 1/8 percent
increase or decrease in interest rates would result in an
increase or decrease in pro forma interest expense,
respectively, of $176,000 for the year ended December 31, 2003.
($000'S)
--------
Mortgage Borrowings:
Moorestown Mall $64.3 million at 4.95%............. $ 1,589
Exton Square Mall $100.5 million at 6.95%.......... 2,874
Cherry Hill Mall $73.7 million at 10.6%............ 2,549
Cherry Hill Mall $60.4 million at 5.0%............. 990
Dartmouth Mall $70.0 million at 4.95%.............. 1,448
-------
Total mortgage expense......................... 9,450
-------
Bank loan borrowing of $140.5 million at 3.12%..... 1,462
Amortization of debt premium....................... (2,160)
-------
$ 8,752
=======
g. Reflects the adjustment made to eliminate the equity in income
of four joint ventures owning multifamily properties that were
sold in 2003.
h. Reflects adjustment to minority interest as a result of the
preferred return due to the minority interest partners in New
Castle Associates. The minority partners received a preferred
return of $1.2 million annually, which is equal to a return of
6.97% per annum on the fair market value of their minority
interest, which was $17.8 million at the acquisition date. The
adjustment amount of $413,000 represents the portion of the
preferred return associated with the period from January 1, 2003
to April 28, 2003 (Cherry Hill Mall's acquisition date). PREIT's
historical results include the preferred return subsequent to
Cherry Hill Mall's acquisition date.
F-6
Also reflects minority interest adjustment for the impact of
585,422 PREIT Operating Partnership Units that were issued in
connection with the Completed Acquisitions and the impact of
this change in the minority interest percentage. The additional
units outstanding increased the minority interest percentage to
10.9% for the year ended December 31, 2003.
($000'S)
Income from continuing operations before
minority interest........................$38,750
Less: minority interest in properties...... (1,307)
-------
37,443
Pro forma minority interest percentage for
PREIT Adjusted column............... 10.9%
-------
Minority interest in Operating Partnership. 4,081
Less: PREIT historical minority interest... (3,298)
-------
$783
=======
i. Reflects Crown historical results of operations for the period
from January 1, 2003 to November 19, 2003 (unaudited). Certain
amounts were combined to conform to PREIT's income statement
presentation. The amounts that are presented for the minority
interest in Operating Partnership of approximately $684,000
represent the portion of minority interest that relates only to
Crown's continuing operations based on the historical weighted
average minority ownership percentages for the time periods
presented.
j. Reflects the adjustments to eliminate the six properties that
were classified as discontinued operations from Crown's
historical results of operations for the period from January 1,
2003 to November 19, 2003 (unaudited).
($000'S)
--------
Base rent....................................... $18,495 See note l
Expense reimbursements.......................... 9,223 See note m
Percentage rent................................. 737 See note n
Other real estate revenues...................... 3,531 See note o
-------
Total real estate revenues...................... 31,986
-------
Property operating expenses..................... (17,316) See note q
Depreciation and amortization................... (7,656) See note r
Interest expense................................ (1,821) See note t
-------
Total real estate expenses...................... (26,793)
-------
Income from discontinued operations............. $5,193
=======
k. Reflects the adjustments to eliminate the equity in income of
Palmer Park recorded by PREIT and Crown and to consolidate the
operations of Palmer Park for the period from January 1, 2003 to
November 19, 2003.
($000'S)
--------
Base rent....................................... $3,114 See note l
Expense reimbursements.......................... 1,326 See note m
Percentage rent................................. 23 See note n
Other real estate revenues...................... 201 See note o
-------
Total real estate revenues...................... 4,664
-------
Property operating expenses..................... (1,869) See note q
Depreciation and amortization................... (962) See note r
Interest expense................................ (1,107) See note t
-------
Total real estate expenses...................... (3,938)
-------
Equity in income of Palmer Park................. $726 See note u
------
F-7
l. Reflects the pro forma adjustments to base rent for properties
acquired by us in connection with the Crown merger.
($000'S)
--------
Straight-line rent adjustment...................... $ 1,268
Amortization of above-market and below-market leases (279)
Elimination of base rent for properties
classified as discontinued operations (see
note j).......................................... (18,495)
Consolidation of Palmer Park base rent (see
note k).......................................... 3,114
-------
$(14,392)
========
m. Reflects adjustments to expense reimbursements as a result of
the merger with Crown.
($000'S)
--------
Elimination of expense reimbursements for
properties classified as discontinued
operations (see note j)........................... $(9,223)
Consolidation of Palmer Park property expense
reimbursements (see note k)....................... 1,326
-------
$(7,897)
=======
n. Reflects adjustments to percentage rent as a result of the
merger with Crown.
($000'S)
--------
Elimination of percentage rent for properties
classified as discontinued operations (see
note j)........................................... $(737)
Consolidation of Palmer Park percentage rent
(see note k)...................................... 23
-----
$(714)
=====
o. Reflects adjustments to other real estate revenue as a result of
the merger with Crown.
($000'S)
--------
Elimination of other real estate revenue for
properties classified as discontinued
operations (see note j)........................... $(3,531)
Consolidation of Palmer Park other real estate
revenue (see note k).............................. 201
-------
$(3,330)
=======
F-8
p. Reflects decrease in management fee income that will result
because PREIT-RUBIN, Inc. no longer charges management fees to
Palmer Park Mall. Palmer Park Mall was previously owned
approximately 50% by PREIT and approximately 50% by Crown, and
was previously accounted for under the equity method for
financial reporting purposes. Management fees for Palmer Park
were $235,000 for the period from January 1, 2003 to
November 19, 2003.
q. Reflects adjustments to property operating expenses as a result
of the merger with Crown.
($000'S)
--------
Elimination of property operating expenses for
properties classified as discontinued
operations (see note j).................................... $(17,316)
Consolidation of Palmer Park property
operating expenses (see note k)............................ 1,869
Elimination of Palmer Park management fee
(see note p)............................................... (235)
--------
$(15,682)
========
r. Reflects adjustments to depreciation expense and amortization
expense on intangible assets in connection with the Crown
merger. Depreciation expense is calculated using a 30-year
blended life for buildings and improvements. The value of
in-place leases is amortized on a straight-line basis over the
remaining term of the respective leases. The elimination of
Crown historical depreciation expense includes $7,656,000
related to the properties classified as discontinued operations.
($000'S)
--------
Depreciation expense:
Depreciation on Crown investments in real
estate at stepped-up basis................................. $ 28,372
Consolidation of Palmer Park depreciation
expense (see note k)....................................... 962
Elimination of Crown historical depreciation
expense.................................................... (43,972)
--------
(14,638)
Amortization expense:
Amortization of in-place lease value........................ 14,323
-------
$(315)
=====
s. Reflects an adjustment to eliminate costs incurred by Crown in
connection with the merger. These costs were incurred by Crown
and related to employee severance payments and other costs such
as investment banking fees, lender consent fees and professional
fees directly attributable to the merger transaction.
F-9
Also reflects an adjustment to decrease general and
administrative expenses on a pro forma basis as a result of the
merger transaction with Crown. PREIT anticipates that general
and administrative expenses will decrease by $490,000 annually
and by $436,000 for the period from January 1, 2003 to November
19, 2003, as a result of reduction in compensation expense.
($000'S)
--------
Elimination of merger-related severance costs ($10,308)
Elimination of other merger-related expenses....... (6,332)
Reduction in compensation expense.................. (436)
--------
($17,076)
========
t. Reflects the adjustments to interest expense resulting from the
Crown merger. PREIT entered into new borrowings consisting of
additional line of credit borrowings of $155.2 million at a rate
of 3.12% that paid off Crown's existing line of credit with a
balance of $154.7 million at November 19, 2003 and reduced
mortgage loans payable by $7.5 million.
The fixed interest rates on the mortgage notes payable that
PREIT assumed upon the completion of the merger with Crown are
at above-market rates. PREIT recorded a debt premium adjustment
of approximately $61.7 million to reflect the difference between
the fixed interest rates and the market interest rates for those
borrowings. The debt premium was calculated based on
management's estimates of market interest rates on similar
completed mortgage transactions. PREIT determined that the
market interest rates for these four borrowings were between
5.00% and 5.75%, compared with existing fixed interest rates
between 6.15% and 7.61%.
A variance of a 1/8 percent increase or decrease in interest
rates would result in an increase or decrease in pro forma
interest expense, respectively, of $194,000 for the year ended
December 31, 2003.
($000'S)
--------
Crown historical expenses that will not be
incurred post-merger:
Line of credit borrowings.......................... $(4,381)
Elimination of interest expense for properties
classified as discontinued operations (see note
j)................................................ (1,821)
Amortization of deferred financing fees............ (1,640)
Pro forma borrowings:
Line of credit borrowings.......................... 4,305
Amortization of debt premium....................... (9,501)
Amortization of deferred financing fees............ 914
Consolidation of Palmer Park interest expense
(see note k)...................................... 1,107
--------
Pro forma interest expense adjustment.............. $(11,017)
========
u. Reflects the adjustments to eliminate the equity in income of
Palmer Park recorded by PREIT and Crown of $726,000 for the
period from January 1, 2003 to November 19, 2003, respectively
(see note k).
F-10
v. In connection with the Crown merger, Crown American Properties,
L.P., ("CAP"), a limited partnership of which Crown was the sole
general partner before the merger, retained an 11% minority
interest in two partnerships that, in the aggregate, owned 15
properties at the time of the merger. This interest is subject
to a put-call arrangement involving 341,297 Operating
Partnership units. This adjustment reflects additional minority
interest as a result of the preferred return due to CAP. CAP
receives a preferred return of $0.7 million annually, which is
equal to the anticipated annual operating partnership
distribution on the 341,297 Operating Partnership units that the
Company expects to issue to purchase the remaining 11% minority
interest in 2006. The adjustment for the period from January 1,
2003 to November 19, 2003 is $654,000.
Also, reflects adjustment to minority interest as a result of
the issuance of additional units of the Company's Operating
Partnership and the change in net income in connection with
Completed Acquisitions and the merger with Crown. As a result of
the additional Operating Partnership units issued, pro forma
minority interest in the operating partnership would increase
from 10.2% to 11.5% for the year ended December 31, 2003. Also
reflects elimination of Crown's historical minority interest
account.
($000'S)
--------
Pro forma income from continuing operations
before minority interest................................ $ 50,901
Dividends on preferred shares............................ (13,613)
Minority interest in properties.......................... (1,961)
--------
35,327
Minority interest percentage....................... 11.5%
--------
Minority interest in Operating Partnership......... (4,063)
PREIT historical minority interest................. 4,081
Crown historical minority interest................. (684)
--------
$(666)
========
w. Reflects adjustment to weighted average shares outstanding
(basic and diluted) and income from continuing operations per
share (basic and diluted).
($000'S)
--------
Pro forma income from continuing operations
before minority interest.......................... $50,901
Minority interest in properties.................... (1,961)
Minority interest in Operating Partnership......... (4,063)
--------
Pro forma income from continuing operations........ 44,877
Dividends on preferred shares...................... (13,613)
--------
Pro forma income from continuing operations
available to common shares........................ $31,264
========
Weighted average shares outstanding
Historical weighted average shares outstanding
-- basic.......................................... 20,390
Impact of common share exchange.................... 10,422
--------
Pro forma weighted average shares outstanding
-- basic.......................................... 30,812
========
Historical weighted average shares outstanding
-- diluted........................................ 20,784
Impact of common share exchange.................... 10,422
Impact of newly issued options to purchase
shares of beneficial interest..................... 134
--------
Pro forma weighted average shares outstanding
-- diluted........................................ 31,340
========
F-11
Income from continuing operations per share
Historical income from continuing operations
per share -- basic................................ $1.36
Impact of pro forma adjustments.................... (0.35)
--------
Pro forma income from continuing operations
per share -- basic................................ $1.01
========
Historical income from continuing operations
per share -- diluted.............................. $1.33
Impact of pro forma adjustments.................... (0.33)
--------
Pro forma income from continuing operations
per share -- diluted.............................. $1.00
========
In August 2003, the Company issued 6,325,000 common shares at a
public offering price of $29.75 per share, for net proceeds of
approximately $184 million. The net proceeds were used to pay
down approximately $94.9 million that was then outstanding under
the Company's line of credit and to finance the $45.5 million
purchase price of the acquired interest in Willow Grove Park,
with the remaining proceeds used for working capital purposes.
The accompanying pro forma consolidated financial information
has not been adjusted to reflect the impact of this public stock
offering prior to the offering date. Pro forma income from
continuing operations per share--basic and diluted would be
$1.08 and $1.06, respectively, for the year ended December 31,
2003 if the pro forma consolidated financial information were to
give effect to this public offering and subsequent pay-down of
the Company's line of credit as if these events occurred, for
pro forma purposes, as of January 1, 2003.
F-12
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than
selling or underwriting discounts and commissions, we will incur in connection
with the issuance and distribution of the securities being registered. All
amounts shown are estimated except the SEC registration fee.
Securities and Exchange Commission Registration Fee........ $ 4,196
Legal Fees and Expenses.................................... 30,000
Miscellaneous Expenses..................................... 15,000
--------
Total...................................................... $49,196
========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The PREIT trust agreement, as amended, provides that:
o no trustee shall be personally liable to any person or entity for
any of PREIT's acts, omissions or obligations;
o no trustee shall be personally liable for monetary damages for any
action, or any failure to act, except to the extent a Pennsylvania
business corporation's director would remain liable under the
provisions of Section 1713 of the Pennsylvania Business Corporation
Law; and
o no officer who performs his duties in good faith, in a manner
reasonably believed to be in PREIT's best interests and with the
care, skill and diligence a person of ordinary prudence would use
will be liable by reason of having been an officer.
Pennsylvania law permits and the PREIT trust agreement and by-laws
provide that every trustee and officer is entitled as of right to be indemnified
by PREIT against reasonable expenses (including attorney's fees) and any
liability, loss, judgment, excise tax, fine, penalty, or settlement they pay or
incur in connection with an actual (whether pending or completed) or threatened
claim, action, suit or proceeding, whether civil, criminal, administrative,
investigative or otherwise, whether brought by or in PREIT's right or otherwise,
in which he or she may be involved, as a party or otherwise, by reason of being
or having been a trustee or officer or because the person is or was serving in
any capacity at PREIT's request as a trustee, director, officer, employee,
agent, partner, fiduciary or other representative of another REIT, corporation,
partnership, joint venture, trust, employee benefit plan or other entity
provided, however, that:
o no right of indemnification will exist with respect to an action
brought by a trustee or officer against PREIT; and
II-1
o no indemnification will be made in any case where the act or failure
to act giving rise to the claim for indemnification is determined by
the final judgment of a court of competent jurisdiction to have
constituted willful misconduct or recklessness.
The right to indemnification is contractual in nature and includes the
right to be paid in advance the expenses incurred in connection with any
proceedings; provided, however, that advance payments must be made in accordance
with applicable law and must be accompanied by an undertaking by or on behalf of
the applicable trustee or officer to repay all amounts so advanced if it is
determined ultimately that the applicable trustee or officer is not entitled to
indemnification under PREIT's trust agreement.
In addition, the PREIT trust agreement and Pennsylvania law permit
PREIT to provide similar indemnification to employees, agents and other persons
who are not trustees or officers. Pennsylvania law also permits indemnification
in connection with a proceeding brought by or in PREIT's right to procure a
judgment in PREIT's favor and requires indemnification in certain cases where
the trustee or officer is the prevailing party. Certain of the employment
agreements PREIT has entered into with its officers provide the officer
indemnification. Generally, these contracts require PREIT to indemnify the
officer to the fullest extent permitted under PREIT's trust agreement. The
limited partnership agreement for PREIT Associates, PREIT's operating
partnership, also provides for indemnification of PREIT, its trustees and its
officers for any and all actions with respect to PREIT Associates; provided,
however, that PREIT Associates will not provide indemnity for:
o willful misconduct or knowing violation of the law;
o any transaction where the covered person received an improper
personal benefit in violation or breach of PREIT Associates' limited
partnership agreement;
o any violation of PREIT Associates' limited partnership agreement; or
o any liability the person may have to PREIT Associates under certain
specified documents.
Currently, PREIT maintains directors' and officers' liability insurance
for its trustees and officers.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be permitted to trustees, officers, or persons
controlling PREIT pursuant to the foregoing provisions, PREIT has been informed
that in the Securities and Exchange Commission's opinion, the indemnification is
against public policy as expressed in the Securities Act of 1933, as amended,
and is, therefore, unenforceable. In addition, indemnification may be limited by
state securities laws.
II-2
ITEM 16. EXHIBITS.
(A) EXHIBITS:
EXHIBIT
NUMBER DESCRIPTION
------ -----------
5 Opinion of Drinker Biddle & Reath LLP
8 Opinion of Drinker Biddle & Reath LLP regarding tax matters
23.1 Consent of KPMG LLP (Independent Auditors of the Registrant)
23.2 Consent of Ernst & Young LLP (Independent Registered
Public Accounting Firm of Lehigh Valley Associates)
23.3 Consent of Drinker Biddle & Reath LLP (included in
Exhibits 5 and 8)
24 Powers of Attorney (included on signature page)
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the SEC pursuant to rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20 percent change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
II-3
provided, however, that the undertakings set forth in paragraphs (i) and (ii)
above do not apply if the information required to be included in a
post-effective amendment by those paragraphs is contained in periodic reports
filed with or furnished to the SEC by the registrant pursuant to Section 13 or
15(d) of the Exchange Act that are incorporated by reference in the registration
statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, as amended, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(4) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Exchange
Act (and, where applicable, each filing of an employee benefit plan's annual
report pursuant to Section 15(d) of the Exchange Act) that is incorporated by
reference in the registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(5) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to trustees, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the SEC such indemnification
is against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a trustee, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
trustee, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
the requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Philadelphia, Commonwealth of Pennsylvania, on
January 11, 2005.
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
By: /s/ Jonathan B. Weller
--------------------------
Jonathan B. Weller
Vice Chairman
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below, does hereby constitute and appoint RONALD RUBIN and JONATHAN B.
WELLER, and each of them, his or her true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him or her and
in his or her name, place and stead, in any and all capacities, to sign any and
all amendments (including post-effective amendments) to this registration
statement and to file the same with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he or she might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or either of them, or his or their substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated:
Name Capacity Date
---- --------- ----
/s/ Ronald Rubin Chairman, Chief Executive Officer and Trustee January 11, 2005
--------------------------
Ronald Rubin
/s/ Jonathan B. Weller Vice Chairman and Trustee January 11, 2005
--------------------------
Jonathan B. Weller
/s/ George F. Rubin Vice Chairman and Trustee January 11, 2005
--------------------------
George F. Rubin
II-5
Name Capacity Date
---- --------- ----
/s/ Robert F. McCadden Executive Vice President and Chief January 11, 2005
-------------------------- Financial Officer
Robert F. McCadden
/s/ David J. Bryant Senior Vice President - Finance and January 11, 2005
-------------------------- Treasurer (Chief Accounting Officer)
David J. Bryant
/s/ Stephen B. Cohen Trustee January 11, 2005
--------------------------
Stephen B. Cohen
/s/ Edward A. Glickman Trustee January 11, 2005
--------------------------
Edward A. Glickman
/s/ Rosemarie B. Greco Trustee January 11, 2005
--------------------------
Rosemarie B. Greco
/s/ Lee H. Javitch Trustee January 11, 2005
--------------------------
Lee H. Javitch
/s/ Leonard I. Korman Trustee January 11, 2005
--------------------------
Leonard I. Korman
/s/ Ira Lubert Trustee January 11, 2005
--------------------------
Ira Lubert
/s/ Donald F. Mazziotti Trustee January 11, 2005
--------------------------
Donald F. Mazziotti
/s/ Mark E. Pasquerilla Trustee January 11, 2005
--------------------------
Mark E. Pasquerilla
/s/ John J. Roberts Trustee January 11, 2005
--------------------------
John J. Roberts
II-6
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- ------------
5 Opinion of Drinker Biddle & Reath LLP
8 Opinion of Drinker Biddle & Reath LLP as to certain federal income
tax matters
23.1 Consent of KPMG LLP (Independent Auditors of the Registrant)
23.2 Consent of Ernst & Young LLP (Independent Registered Public
Accounting Firm of Lehigh Valley Associates)
23.3 Consent of Drinker Biddle & Reath LLP (included in Exhibits 5 and 8)
24 Powers of Attorney (included on signature page)
II-7