Attached files
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EXCEL - IDEA: XBRL DOCUMENT - PENNSYLVANIA REAL ESTATE INVESTMENT TRUST | Financial_Report.xls |
EX-31.1 - EXHIBIT - PENNSYLVANIA REAL ESTATE INVESTMENT TRUST | q214exhibit311.htm |
EX-32.1 - EXHIBIT - PENNSYLVANIA REAL ESTATE INVESTMENT TRUST | q214exhibit321.htm |
EX-2.1 - EXHIBIT - PENNSYLVANIA REAL ESTATE INVESTMENT TRUST | ex21rubinseparationagreeme.htm |
EX-31.2 - EXHIBIT - PENNSYLVANIA REAL ESTATE INVESTMENT TRUST | q214exhibit312.htm |
EX-10.1 - EXHIBIT - PENNSYLVANIA REAL ESTATE INVESTMENT TRUST | ex101springfieldcontributi.htm |
EX-32.2 - EXHIBIT - PENNSYLVANIA REAL ESTATE INVESTMENT TRUST | q214exhibit322.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________
Form 10-Q
____________________________________________________
x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended June 30, 2014
or
o | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission File Number: 1-6300
____________________________________________________
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
(Exact name of Registrant as specified in its charter)
____________________________________________________
Pennsylvania | 23-6216339 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
200 South Broad Street Philadelphia, PA | 19102 | |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code (215) 875-0700
____________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | x | Accelerated filer | o | |
Non-accelerated filer | o | (Do not check if a smaller reporting company) | Smaller reporting company | o |
Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common shares of beneficial interest, $1.00 par value per share, outstanding at July 28, 2014: 68,775,675
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONTENTS
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Item 1. | |||
Item 2. | |||
Item 3. | |||
Item 4. | |||
Item 1. | |||
Item 1A. | |||
Item 2. | |||
Item 3. | Not Applicable | — | |
Item 4. | Not Applicable | — | |
Item 5. | Not Applicable | — | |
Item 6. | |||
Except as the context otherwise requires, references in this Quarterly Report on Form 10-Q to “we,” “our,” “us,” the “Company” and “PREIT” refer to Pennsylvania Real Estate Investment Trust and its subsidiaries, including our operating partnership, PREIT Associates, L.P. References in this Quarterly Report on Form 10-Q to “PREIT Associates” or the “Operating Partnership” refer to PREIT Associates, L.P.
Item 1. FINANCIAL STATEMENTS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts) | June 30, 2014 | December 31, 2013 | |||||
(unaudited) | |||||||
ASSETS: | |||||||
INVESTMENTS IN REAL ESTATE, at cost: | |||||||
Operating properties | $ | 3,437,079 | $ | 3,450,317 | |||
Construction in progress | 85,416 | 68,835 | |||||
Land held for development | 8,716 | 8,716 | |||||
Total investments in real estate | 3,531,211 | 3,527,868 | |||||
Accumulated depreciation | (1,063,080 | ) | (1,012,746 | ) | |||
Net investments in real estate | 2,468,131 | 2,515,122 | |||||
INVESTMENTS IN PARTNERSHIPS, at equity: | 19,170 | 15,963 | |||||
OTHER ASSETS: | |||||||
Cash and cash equivalents | 30,741 | 34,230 | |||||
Tenant and other receivables (net of allowance for doubtful accounts of $12,352 and $13,123 at June 30, 2014 and December 31, 2013, respectively) | 37,995 | 46,439 | |||||
Intangible assets (net of accumulated amortization of $14,923 and $14,506 at June 30, 2014 and December 31, 2013, respectively) | 8,434 | 9,075 | |||||
Deferred costs and other assets | 92,295 | 97,752 | |||||
Total assets | $ | 2,656,766 | $ | 2,718,581 | |||
LIABILITIES: | |||||||
Mortgage loans payable | $ | 1,494,801 | $ | 1,502,650 | |||
Term loans | 130,000 | — | |||||
Revolving Facility | — | 130,000 | |||||
Tenants’ deposits and deferred rent | 17,119 | 17,896 | |||||
Distributions in excess of partnership investments | 64,675 | 64,491 | |||||
Fair value of derivative liabilities | 3,245 | 844 | |||||
Accrued expenses and other liabilities | 87,132 | 76,248 | |||||
Total liabilities | 1,796,972 | 1,792,129 | |||||
COMMITMENTS AND CONTINGENCIES (Note 6): | |||||||
EQUITY: | |||||||
Series A Preferred Shares, $.01 par value per share; 25,000 preferred shares authorized; 4,600 shares of Series A Preferred Shares issued and outstanding at each of June 30, 2014 and December 31, 2013; liquidation preference of $115,000 | 46 | 46 | |||||
Series B Preferred Shares, $.01 par value per share; 25,000 preferred shares authorized; 3,450 shares of Series B Preferred Shares issued and outstanding at each of June 30, 2014 and December 31, 2013; liquidation preference of $86,250 | 35 | 35 | |||||
Shares of beneficial interest, $1.00 par value per share; 200,000 shares authorized; issued and outstanding 68,749 shares at June 30, 2014 and 68,293 shares at December 31, 2013 | 68,749 | 68,293 | |||||
Capital contributed in excess of par | 1,470,525 | 1,467,460 | |||||
Accumulated other comprehensive loss | (7,827 | ) | (6,637 | ) | |||
Distributions in excess of net income | (703,758 | ) | (636,939 | ) | |||
Total equity—Pennsylvania Real Estate Investment Trust | 827,770 | 892,258 | |||||
Noncontrolling interest | 32,024 | 34,194 | |||||
Total equity | 859,794 | 926,452 | |||||
Total liabilities and equity | $ | 2,656,766 | $ | 2,718,581 |
See accompanying notes to the unaudited consolidated financial statements.
1
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) | |||||||||||||||
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
(in thousands of dollars) | 2014 | 2013 | 2014 | 2013 | |||||||||||
REVENUE: | |||||||||||||||
Real estate revenue: | |||||||||||||||
Base rent | $ | 71,646 | $ | 69,207 | $ | 142,988 | $ | 137,709 | |||||||
Expense reimbursements | 30,879 | 30,931 | 65,230 | 61,792 | |||||||||||
Percentage rent | 324 | 584 | 914 | 1,566 | |||||||||||
Lease termination revenue | 154 | 91 | 254 | 231 | |||||||||||
Other real estate revenue | 3,142 | 2,735 | 5,368 | 5,428 | |||||||||||
Total real estate revenue | 106,145 | 103,548 | 214,754 | 206,726 | |||||||||||
Other income | 680 | 1,395 | 1,458 | 2,283 | |||||||||||
Total revenue | 106,825 | 104,943 | 216,212 | 209,009 | |||||||||||
EXPENSES: | |||||||||||||||
Operating expenses: | |||||||||||||||
CAM and real estate taxes | (35,228 | ) | (34,642 | ) | (74,631 | ) | (69,541 | ) | |||||||
Utilities | (5,841 | ) | (5,068 | ) | (14,051 | ) | (10,126 | ) | |||||||
Other operating expenses | (3,295 | ) | (3,909 | ) | (7,399 | ) | (7,647 | ) | |||||||
Total operating expenses | (44,364 | ) | (43,619 | ) | (96,081 | ) | (87,314 | ) | |||||||
Depreciation and amortization | (37,135 | ) | (35,088 | ) | (73,370 | ) | (68,705 | ) | |||||||
Other expenses: | |||||||||||||||
General and administrative expenses | (8,774 | ) | (9,606 | ) | (17,851 | ) | (18,462 | ) | |||||||
Impairment of assets | (16,098 | ) | — | (17,398 | ) | — | |||||||||
Provision for employee separation expense | (4,877 | ) | (1,035 | ) | (4,877 | ) | (2,314 | ) | |||||||
Acquisition costs and other expenses | (960 | ) | (198 | ) | (2,606 | ) | (400 | ) | |||||||
Total other expenses | (30,709 | ) | (10,839 | ) | (42,732 | ) | (21,176 | ) | |||||||
Interest expense, net | (21,550 | ) | (27,689 | ) | (41,720 | ) | (55,027 | ) | |||||||
Total expenses | (133,758 | ) | (117,235 | ) | (253,903 | ) | (232,222 | ) | |||||||
Loss before equity in income of partnerships, gain on sale of interest in real estate, discontinued operations and gains on sales of discontinued operations | (26,933 | ) | (12,292 | ) | (37,691 | ) | (23,213 | ) | |||||||
Equity in income of partnerships | 2,784 | 2,283 | 5,186 | 4,736 | |||||||||||
Gain on sale of interest in real estate | 99 | — | 99 | — | |||||||||||
Loss from continuing operations | (24,050 | ) | (10,009 | ) | (32,406 | ) | (18,477 | ) | |||||||
Discontinued operations: | |||||||||||||||
Operating results from discontinued operations | — | 1,000 | — | 2,021 | |||||||||||
Gains on sales of discontinued operations | — | — | — | 33,254 | |||||||||||
Income from discontinued operations | — | 1,000 | — | 35,275 | |||||||||||
Net (loss) income | (24,050 | ) | (9,009 | ) | (32,406 | ) | 16,798 | ||||||||
Less: net loss (income) attributable to noncontrolling interest | 725 | 314 | 977 | (691 | ) | ||||||||||
Net (loss) income attributable to PREIT | (23,325 | ) | (8,695 | ) | (31,429 | ) | 16,107 | ||||||||
Less: preferred share dividends | (3,962 | ) | (3,962 | ) | (7,924 | ) | (7,924 | ) | |||||||
Net (loss) income attributable to PREIT common shareholders | $ | (27,287 | ) | $ | (12,657 | ) | $ | (39,353 | ) | $ | 8,183 |
See accompanying notes to the unaudited consolidated financial statements.
2
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) | |||||||||||||||
(in thousands of dollars, except per share amounts) | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
2014 | 2013 | 2014 | 2013 | ||||||||||||
Loss from continuing operations | $ | (24,050 | ) | $ | (10,009 | ) | $ | (32,406 | ) | $ | (18,477 | ) | |||
Noncontrolling interest | 725 | 348 | 977 | 677 | |||||||||||
Dividends on preferred shares | (3,962 | ) | (3,962 | ) | (7,924 | ) | (7,924 | ) | |||||||
Dividends on unvested restricted shares | (92 | ) | (103 | ) | (205 | ) | (211 | ) | |||||||
Loss from continuing operations used to calculate loss per share—basic and diluted | $ | (27,379 | ) | $ | (13,726 | ) | $ | (39,558 | ) | $ | (25,935 | ) | |||
Income from discontinued operations | $ | — | $ | 1,000 | $ | — | $ | 35,275 | |||||||
Noncontrolling interest | — | (34 | ) | — | (1,368 | ) | |||||||||
Income from discontinued operations used to calculate earnings per share—basic and diluted | $ | — | $ | 966 | $ | — | $ | 33,907 | |||||||
Basic and diluted (loss) earnings per share: | |||||||||||||||
Loss from continuing operations | $ | (0.40 | ) | $ | (0.22 | ) | $ | (0.58 | ) | $ | (0.43 | ) | |||
Income from discontinued operations | — | 0.02 | — | 0.56 | |||||||||||
$ | (0.40 | ) | $ | (0.20 | ) | $ | (0.58 | ) | $ | 0.13 | |||||
(in thousands of shares) | |||||||||||||||
Weighted average shares outstanding—basic | 68,236 | 63,540 | 68,091 | 59,661 | |||||||||||
Effect of common share equivalents (1) | — | — | — | — | |||||||||||
Weighted average shares outstanding—diluted | 68,236 | 63,540 | 68,091 | 59,661 |
_________________________
(1) | The Company had net losses from continuing operations for all periods presented. Therefore, the effects of common share equivalents of 309 and 727 for the three months ended June 30, 2014 and 2013, respectively, and 326 and 780 for the six months ended June 30, 2014 and 2013, respectively, are excluded from the calculation of diluted loss per share for these periods because they would be antidilutive. |
See accompanying notes to the unaudited consolidated financial statements.
3
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
(in thousands of dollars) | 2014 | 2013 | 2014 | 2013 | |||||||||||
Comprehensive (loss) income: | |||||||||||||||
Net (loss) income | $ | (24,050 | ) | $ | (9,009 | ) | $ | (32,406 | ) | $ | 16,798 | ||||
Unrealized (loss) gain on derivatives | (1,919 | ) | 5,917 | (3,102 | ) | 8,096 | |||||||||
Amortization of losses of settled swaps, net of gains | 1,544 | 3,577 | 1,837 | 3,782 | |||||||||||
Total comprehensive (loss) income | (24,425 | ) | 485 | (33,671 | ) | 28,676 | |||||||||
Less: comprehensive loss (income) attributable to noncontrolling interest | 773 | (23 | ) | 1,052 | (1,121 | ) | |||||||||
Comprehensive (loss) income attributable to PREIT | $ | (23,652 | ) | $ | 462 | $ | (32,619 | ) | $ | 27,555 |
See accompanying notes to the unaudited consolidated financial statements.
4
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF EQUITY
Six Months Ended
June 30, 2014
(Unaudited)
PREIT Shareholders | |||||||||||||||||||||||||||||||
(in thousands of dollars, except per share amounts) | Total Equity | Series A Preferred Shares, $.01 par | Series B Preferred Shares, $.01 par | Shares of Beneficial Interest, $1.00 Par | Capital Contributed in Excess of Par | Accumulated Other Comprehensive Income (Loss) | Distributions in Excess of Net Income | Non- controlling interest | |||||||||||||||||||||||
Balance December 31, 2013 | $ | 926,452 | $ | 46 | $ | 35 | $ | 68,293 | $ | 1,467,460 | $ | (6,637 | ) | $ | (636,939 | ) | $ | 34,194 | |||||||||||||
Net loss | (32,406 | ) | — | — | — | — | — | (31,429 | ) | (977 | ) | ||||||||||||||||||||
Other comprehensive loss | (1,265 | ) | — | — | — | — | (1,190 | ) | — | (75 | ) | ||||||||||||||||||||
Shares issued under employee compensation plans, net of shares retired | (1,942 | ) | — | — | 456 | (2,398 | ) | — | — | — | |||||||||||||||||||||
Amortization of deferred compensation | 5,463 | — | — | — | 5,463 | — | — | — | |||||||||||||||||||||||
Distributions paid to common shareholders ($0.40 per share) | (27,466 | ) | — | — | — | — | — | (27,466 | ) | — | |||||||||||||||||||||
Distributions paid to Series A preferred shareholders ($1.0312 per share) | (4,744 | ) | — | — | — | — | — | (4,744 | ) | — | |||||||||||||||||||||
Distributions paid to Series B preferred shareholders ($0.9218 per share) | (3,180 | ) | — | — | — | — | — | (3,180 | ) | — | |||||||||||||||||||||
Noncontrolling interests: | |||||||||||||||||||||||||||||||
Distributions paid to Operating Partnership unit holders ($0.40 per unit) | (852 | ) | — | — | — | — | — | — | (852 | ) | |||||||||||||||||||||
Other distributions to noncontrolling interests, net | (266 | ) | — | — | — | — | — | — | (266 | ) | |||||||||||||||||||||
Balance June 30, 2014 | $ | 859,794 | $ | 46 | $ | 35 | $ | 68,749 | $ | 1,470,525 | $ | (7,827 | ) | $ | (703,758 | ) | $ | 32,024 |
See accompanying notes to the unaudited consolidated financial statements.
5
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30, | |||||||
(in thousands of dollars) | 2014 | 2013 | |||||
Cash flows from operating activities: | |||||||
Net (loss) income | $ | (32,406 | ) | $ | 16,798 | ||
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | |||||||
Depreciation | 68,415 | 65,430 | |||||
Amortization | 4,949 | 6,995 | |||||
Straight-line rent adjustments | (823 | ) | (757 | ) | |||
Provision for doubtful accounts | 629 | 1,103 | |||||
Amortization of deferred compensation | 5,463 | 4,422 | |||||
Loss on hedge ineffectiveness | 1,238 | 2,693 | |||||
Gains on sales of real estate | (99 | ) | (33,254 | ) | |||
Equity in income of partnerships, net of distributions | (853 | ) | (1,623 | ) | |||
Impairment of assets and expensed project costs | 17,659 | — | |||||
Change in assets and liabilities: | |||||||
Net change in other assets | 14,739 | 10,330 | |||||
Net change in other liabilities | 4,855 | (14,372 | ) | ||||
Net cash provided by operating activities | 83,766 | 57,765 | |||||
Cash flows from investing activities: | |||||||
Investments in consolidated real estate acquisitions | (20,000 | ) | (60,879 | ) | |||
Additions to construction in progress | (17,493 | ) | (13,775 | ) | |||
Investments in real estate improvements | (19,502 | ) | (11,224 | ) | |||
Cash proceeds from sales of real estate | 23,600 | 126,895 | |||||
Additions to leasehold improvements | (736 | ) | (145 | ) | |||
Investments in partnerships | (3,651 | ) | (166 | ) | |||
Capitalized leasing costs | (2,829 | ) | (2,722 | ) | |||
Increase in cash escrows | (211 | ) | (470 | ) | |||
Cash distributions from partnerships in excess of equity in income | 1,482 | 577 | |||||
Net cash (used in) provided by investing activities | (39,340 | ) | 38,091 | ||||
Cash flows from financing activities: | |||||||
Net proceeds from issuance of common shares | — | 220,300 | |||||
Borrowings from (repayments of) term loans | 130,000 | (182,000 | ) | ||||
Net (repayments of) borrowings from revolving facility | (130,000 | ) | 35,000 | ||||
Proceeds from mortgage loans | — | 76,692 | |||||
Principal installments on mortgage loans | (7,849 | ) | (8,447 | ) | |||
Repayments of mortgage loans | — | (217,524 | ) | ||||
Payment of deferred financing costs | (1,882 | ) | (3,613 | ) | |||
Dividends paid to common shareholders | (27,466 | ) | (22,402 | ) | |||
Dividends paid to preferred shareholders | (7,924 | ) | (7,924 | ) | |||
Distributions paid to Operating Partnership unit holders | (852 | ) | (813 | ) | |||
Value of shares of beneficial interest issued | 2,691 | 828 | |||||
Value of shares retired under equity incentive plans, net of shares issued | (4,633 | ) | (2,418 | ) | |||
Net cash used in financing activities | (47,915 | ) | (112,321 | ) | |||
Net change in cash and cash equivalents | (3,489 | ) | (16,465 | ) | |||
Cash and cash equivalents, beginning of period | 34,230 | 33,990 | |||||
Cash and cash equivalents, end of period | $ | 30,741 | $ | 17,525 |
See accompanying notes to the unaudited consolidated financial statements.
6
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
1. BASIS OF PRESENTATION
Nature of Operations
Pennsylvania Real Estate Investment Trust (“PREIT” or the “Company”) prepared the accompanying unaudited consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations, although we believe that the included disclosures are adequate to make the information presented not misleading. Our unaudited consolidated financial statements should be read in conjunction with the audited financial statements and the notes thereto included in PREIT’s Annual Report on Form 10-K for the year ended December 31, 2013. In our opinion, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly our consolidated financial position, the consolidated results of our operations, consolidated statements of other comprehensive income (loss), consolidated statements of equity and our consolidated statements of cash flows are included. The results of operations for the interim periods presented are not necessarily indicative of the results for the full year.
PREIT, a Pennsylvania business trust founded in 1960 and one of the first equity real estate investment trusts (“REITs”) in the United States, has a primary investment focus on retail shopping malls located in the eastern half of the United States, primarily in the Mid-Atlantic region. As of June 30, 2014, our portfolio consisted of a total of 45 properties in 12 states, including 34 shopping malls, seven other retail properties and four development properties, with two of the development properties classified as “mixed use” (a combination of retail and other uses), one of the properties classified as “other retail” (outlet) and one of the development properties classified as “other.”
We hold our interest in our portfolio of properties through our operating partnership, PREIT Associates, L.P. (“PREIT Associates” or the “Operating Partnership”). We are the sole general partner of the Operating Partnership and, as of June 30, 2014, we held a 97.0% controlling interest in the Operating Partnership, and consolidated it for reporting purposes. The presentation of consolidated financial statements does not itself imply that the assets of any consolidated entity (including any special-purpose entity formed for a particular project) are available to pay the liabilities of any other consolidated entity, or that the liabilities of any consolidated entity (including any special-purpose entity formed for a particular project) are obligations of any other consolidated entity.
Pursuant to the terms of the partnership agreement of the Operating Partnership, each of the limited partners has the right to redeem such partner’s units of limited partnership interest in the Operating Partnership (“OP Units”) for cash or, at our election, we may acquire such OP Units in exchange for our common shares on a one-for-one basis, in some cases beginning one year following the respective issue dates of the OP Units and in other cases immediately. If all of the outstanding OP Units held by limited partners had been redeemed for cash as of June 30, 2014, the total amount that would have been distributed would have been $40.1 million, which is calculated using our June 30, 2014 closing price on the New York Stock Exchange of $18.82 per share multiplied by the number of outstanding OP Units held by limited partners, which was 2,129,202 as of June 30, 2014.
We provide management, leasing and real estate development services through two companies: PREIT Services, LLC (“PREIT Services”), which generally develops and manages properties that we consolidate for financial reporting purposes, and PREIT-RUBIN, Inc. (“PRI”), which generally develops and manages properties that we do not consolidate for financial reporting purposes, including properties owned by partnerships in which we own an interest and properties that are owned by third parties in which we do not have an interest. PREIT Services and PRI are consolidated. PRI is a taxable REIT subsidiary, as defined by federal tax laws, which means that it is able to offer an expanded menu of services to tenants without jeopardizing our continuing qualification as a REIT under federal tax law.
We evaluate operating results and allocate resources on a property-by-property basis, and do not distinguish or evaluate our consolidated operations on a geographic basis. Due to the nature of our operating properties, which involve retail shopping, we have concluded that our individual properties have similar economic characteristics and meet all other aggregation criteria. Accordingly, we have aggregated our individual properties into one reportable segment. In addition, no single tenant accounts for 10% or more of consolidated revenue, and none of our properties are located outside the United States.
7
Fair Value
Fair value accounting applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements. Fair value measurements are determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, these accounting requirements establish a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access.
Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs might include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals.
Level 3 inputs are unobservable inputs for the asset or liability, and are typically based on an entity’s own assumptions, as there is little, if any, related market activity.
In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability. We utilize the fair value hierarchy in our accounting for derivatives (Level 2) and financial instruments (Level 2) and in our reviews for impairment of real estate assets (Level 3) and goodwill (Level 3).
New Accounting Developments
In May 2014, the Financial Accounting Standards Board issued “Revenue from Contracts with Customers.” The objective of this new standard is to establish a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The core principle of this new standard is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance is effective for annual reporting periods beginning after December 15, 2016 for public companies. Early adoption is not permitted. Entities have the option of using either a full retrospective or modified approach to adopt this standard. We are currently evaluating the new guidance and have not determined the impact this standard may have on our financial statements nor have we decided upon the method of adoption.
In April 2014, we adopted new accounting requirements pertaining to the reporting of discontinued operations. These new accounting requirements are required to be effective for the first quarter of 2015 but may be adopted as early as the first quarter of 2014 only for disposals or classifications as held for sale that have not been reported in financial statements previously issued or available for issuance. Under these new accounting requirements, only disposals representing a strategic shift in operations will be presented as discontinued operations. Previously, under U.S. GAAP, companies that sold a single investment property were generally required to report the sale as a discontinued operation, which required the companies to reclassify earnings from continuing operations for all periods presented. These new accounting requirements require expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income and expenses of discontinued operations.
In June 2014, we sold South Mall in Allentown, Pennsylvania. We applied these new accounting requirements by reporting the results of operations of South Mall in the continuing operations section of our unaudited consolidated statements of operations.
Correction of Prior Period Presentation
Certain prior period amounts have been reclassified to conform with the current year presentation.
Our previously reported results of operations for the three and six months ended June 30, 2013 have been corrected to eliminate certain immaterial intercompany revenues and expenses. These immaterial corrections had no effect on net income (loss), basic or diluted earnings (loss) per share amounts, comprehensive income (loss), shareholders' equity or cash flows. The immaterial
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corrections reduced both other real estate revenue and other operating expenses by approximately $0.1 million and $0.3 million for the three and six months ended June 30, 2013, respectively.
2. REAL ESTATE ACTIVITIES
Investments in real estate as of June 30, 2014 and December 31, 2013 were comprised of the following:
(in thousands of dollars) | As of June 30, 2014 | As of December 31, 2013 | |||||
Buildings, improvements and construction in progress | $ | 3,056,170 | $ | 3,049,758 | |||
Land, including land held for development | 475,041 | 478,110 | |||||
Total investments in real estate | 3,531,211 | 3,527,868 | |||||
Accumulated depreciation | (1,063,080 | ) | (1,012,746 | ) | |||
Net investments in real estate | $ | 2,468,131 | $ | 2,515,122 |
Capitalization of Costs
The following table summarizes our capitalized salaries, commissions and benefits and interest for the three and six months ended June 30, 2014 and 2013:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
(in thousands of dollars) | 2014 | 2013 | 2014 | 2013 | |||||||||||
Development/Redevelopment Activities: | |||||||||||||||
Salaries and benefits | $ | 431 | $ | 136 | $ | 825 | $ | 313 | |||||||
Interest | 191 | 213 | 294 | 289 | |||||||||||
Leasing Activities: | |||||||||||||||
Salaries, commissions and benefits | 1,409 | 1,185 | 2,829 | 2,722 |
Dispositions
In July 2014, we entered into a 50/50 joint venture with The Macerich Company to redevelop the Gallery at Market East in Philadelphia, Pennsylvania. In connection therewith, we contributed and sold real estate assets to the venture and Macerich acquired its interest in the venture and real estate from us for $106.8 million in cash. It is expected that both parties will make additional investments in the project. We used $25.8 million of such proceeds to repay a mortgage loan secured by 801 Market Street, a property that is part of the Gallery complex, $50.0 million to repay the outstanding balance on our 2013 Revolving Facility, and the remaining proceeds for general corporate purposes.
In June 2014, we sold South Mall in Allentown, Pennsylvania for $23.6 million, representing a capitalization rate of 10.1%. We recorded a gain of $0.1 million from the sale of this property.
Impairment of Assets
Nittany Mall
In June 2014, we recorded a loss on impairment of assets at Nittany Mall in State College, Pennsylvania of $13.9 million. During the second quarter of 2014, we entered into negotiations with a prospective buyer of the property, which are ongoing and could result in changes to our underlying assumptions. As a result of these negotiations, we determined that the holding period for the property was less than had been previously estimated, which we concluded to be a triggering event, leading us to conduct an analysis of possible asset impairment at this property. Based upon the purchase and sale agreement with the prospective buyer of the property, we determined that the estimated undiscounted cash flows, net of estimated capital expenditures, for Nittany Mall were less than the carrying value of the property, and recorded the impairment loss.
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North Hanover Mall
In June 2014, we recorded a loss on impairment of assets at North Hanover Mall in Hanover, Pennsylvania of $2.2 million. During the second quarter of 2014, we entered into negotiations with a prospective buyer of the property, which are ongoing and could result in changes to our underlying assumptions. As a result of these negotiations, we determined that the holding period for the property was less than had been previously estimated, which we concluded to be a triggering event, leading us to conduct an analysis of possible asset impairment at this property. Based upon the purchase and sale agreement with the prospective buyer of the property, we determined that the estimated undiscounted cash flows, net of estimated capital expenditures, for North Hanover were less than the carrying value of the property, and recorded the impairment loss. We previously recognized impairment losses on North Hanover of $6.3 million in 2013 and $24.1 million in 2011.
South Mall
In March 2014, we recorded a loss on impairment of assets at South Mall in Allentown, Pennsylvania of $1.3 million. We sold the property in June 2014.
Discontinued Operations
We have presented as discontinued operations the operating results of Phillipsburg Mall, Orlando Fashion Square, Chambersburg Mall, Paxton Towne Centre, Christiana Center and Commons at Magnolia, which are properties that were sold in 2013. The following table summarizes revenue and expense information for the three and six months ended June 30, 2013 for these discontinued operations (there were no operating results for these properties from, and there were no properties classified in, discontinued operations in the three or six months ended June 30, 2014):
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||
(in thousands of dollars) | 2013 | 2013 | |||||||
Real estate revenue | $ | 2,745 | $ | 6,888 | |||||
Expenses: | |||||||||
Operating expenses | (795 | ) | (2,881 | ) | |||||
Depreciation and amortization | (363 | ) | (727 | ) | |||||
Interest expense | (587 | ) | (1,259 | ) | |||||
Total expenses | (1,745 | ) | (4,867 | ) | |||||
Operating results from discontinued operations | 1,000 | 2,021 | |||||||
Gains on sales of discontinued operations | — | 33,254 | |||||||
Income from discontinued operations | $ | 1,000 | $ | 35,275 |
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3. INVESTMENTS IN PARTNERSHIPS
The following table presents summarized financial information of the equity investments in our unconsolidated partnerships as of June 30, 2014 and December 31, 2013:
(in thousands of dollars) | As of June 30, 2014 | As of December 31, 2013 | |||||
ASSETS: | |||||||
Investments in real estate, at cost: | |||||||
Operating properties | $ | 419,458 | $ | 416,964 | |||
Construction in progress | 20,037 | 2,298 | |||||
Total investments in real estate | 439,495 | 419,262 | |||||
Accumulated depreciation | (175,850 | ) | (169,369 | ) | |||
Net investments in real estate | 263,645 | 249,893 | |||||
Cash and cash equivalents | 11,831 | 15,327 | |||||
Deferred costs and other assets, net | 18,011 | 19,474 | |||||
Total assets | 293,487 | 284,694 | |||||
LIABILITIES AND PARTNERS’ DEFICIT: | |||||||
Mortgage loans payable | 395,266 | 398,717 | |||||
Other liabilities | 9,841 | 9,667 | |||||
Total liabilities | 405,107 | 408,384 | |||||
Net deficit | (111,620 | ) | (123,690 | ) | |||
Partners’ share | (57,071 | ) | (66,325 | ) | |||
PREIT’s share | (54,549 | ) | (57,365 | ) | |||
Excess investment (1) | 9,044 | 8,837 | |||||
Net investments and advances | $ | (45,505 | ) | $ | (48,528 | ) | |
Investment in partnerships, at equity | $ | 19,170 | $ | 15,963 | |||
Distributions in excess of partnership investments | (64,675 | ) | (64,491 | ) | |||
Net investments and advances | $ | (45,505 | ) | $ | (48,528 | ) |
_________________________
(1) | Excess investment represents the unamortized difference between our investment and our share of the equity in the underlying net investment in the partnerships. The excess investment is amortized over the life of the properties, and the amortization is included in “Equity in income of partnerships.” |
We record distributions from our equity investments as cash from operating activities up to an amount equal to the equity in income of partnerships. Amounts in excess of our share of the income in the equity investments are treated as a return of partnership capital and recorded as cash from investing activities.
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The following table summarizes our share of equity in income of partnerships for the three and six months ended June 30, 2014 and 2013:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
(in thousands of dollars) | 2014 | 2013 | 2014 | 2013 | |||||||||||
Real estate revenue | $ | 20,331 | $ | 19,528 | $ | 41,507 | $ | 39,722 | |||||||
Expenses: | |||||||||||||||
Operating expenses | (5,749 | ) | (5,725 | ) | (12,849 | ) | (11,694 | ) | |||||||
Interest expense | (5,452 | ) | (5,545 | ) | (10,927 | ) | (11,094 | ) | |||||||
Depreciation and amortization | (3,413 | ) | (3,534 | ) | (7,062 | ) | (7,106 | ) | |||||||
Total expenses | (14,614 | ) | (14,804 | ) | (30,838 | ) | (29,894 | ) | |||||||
Net income | 5,717 | 4,724 | 10,669 | 9,828 | |||||||||||
Less: Partners’ share | (2,858 | ) | (2,339 | ) | (5,331 | ) | (4,885 | ) | |||||||
PREIT’s share | 2,859 | 2,385 | 5,338 | 4,943 | |||||||||||
Amortization of excess investment | (75 | ) | (102 | ) | (152 | ) | (207 | ) | |||||||
Equity in income of partnerships | $ | 2,784 | $ | 2,283 | $ | 5,186 | $ | 4,736 |
Acquisitions
In June 2014, we contributed $3.2 million, representing a 25% interest, to the partnership that will be developing Gloucester Premium Outlets in Gloucester Township, New Jersey. The partnership used our and our partners' contribution to purchase the land on which the property will be developed.
Financing Activity
In June 2014, the partnership that will be developing Gloucester Premium Outlets entered into a $90.0 million construction loan. The initial term of the loan is four years with an extension option for one year. The loan is interest only and the interest rate is LIBOR plus 1.50% during the initial term and decreases to LIBOR plus 1.40% if and when the project is completed and a 1.10x debt service coverage ratio is achieved.
Lehigh Valley Mall
We have a 50% partnership interest in Lehigh Valley Associates LP, the owner of the substantial majority of Lehigh Valley Mall, which is a significant unconsolidated subsidiary, and which is included in the amounts above. Summarized balance sheet information as of June 30, 2014 and December 31, 2013 and summarized statement of operations information for the three and six months ended June 30, 2014 and 2013 for this entity, which is accounted for using the equity method, is as follows:
As of | ||||||||
(in thousands of dollars) | June 30, 2014 | December 31, 2013 | ||||||
Summarized balance sheet information | ||||||||
Total assets | $ | 51,379 | $ | 55,592 | ||||
Mortgage loan payable | 132,484 | 133,542 |
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Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
(in thousands of dollars) | 2014 | 2013 | 2014 | 2013 | ||||||||||||
Summarized statement of operations information | ||||||||||||||||
Revenue | $ | 8,961 | $ | 8,509 | $ | 18,096 | $ | 17,326 | ||||||||
Property operating expenses | (2,455 | ) | (2,385 | ) | (5,211 | ) | (4,607 | ) | ||||||||
Interest expense | (1,964 | ) | (1,994 | ) | (3,935 | ) | (3,996 | ) | ||||||||
Net income | 3,774 | 3,326 | 7,090 | 7,082 | ||||||||||||
PREIT's share of equity in income of partnership | 1,887 | 1,663 | 3,545 | 3,541 |
4. FINANCING ACTIVITY
2013 Revolving Facility, as amended
In April 2013, PREIT, PREIT Associates, and PRI (collectively, the “Borrower” or “we”) entered into a credit agreement (as amended, the “2013 Revolving Facility”) with Wells Fargo Bank, National Association, and the other financial institutions signatory thereto, for a $400.0 million senior unsecured revolving credit facility. The 2013 Revolving Facility replaced the previously existing 2010 Credit Facility. In December 2013, we amended the 2013 Revolving Facility to make certain terms of the 2013 Revolving Facility consistent with the terms of the 2014 Term Loans (discussed below). The 2013 Revolving Facility and the 2014 Term Loans are collectively referred to as the "Credit Agreements." All capitalized terms used in this note 4 and not otherwise defined herein have the meanings ascribed to such terms in the 2013 Revolving Facility.
As of June 30, 2014, there were no amounts outstanding under our 2013 Revolving Facility, and $7.1 million was pledged as collateral for letters of credit. The unused portion of the 2013 Revolving Facility that was available to us was $392.9 million.
Interest expense related to the 2013 Revolving Facility was $0.3 million and $0.8 million for the three months ended June 30, 2014 and 2013, respectively, and $0.8 million for each of the six months ended June 30, 2014 and 2013, respectively. Deferred financing fee amortization associated with the 2013 Revolving Facility was $0.4 million for each of the three months ended June 30, 2014 and 2013, and $0.7 million and $0.4 million for the six months ended June 30, 2014 and 2013, respectively.
The initial maturity of the 2013 Revolving Facility is April 17, 2016, and the Borrower has options for two one-year extensions of the initial maturity date, subject to certain conditions and to the payment of extension fees of 0.15% and 0.20% of the Facility Amount for the first and second options, respectively.
The Borrower has the option to increase the maximum amount available under the 2013 Revolving Facility, through an accordion option, from $400.0 million to as much as $600.0 million, in increments of $5.0 million (with a minimum increase of $25.0 million), based on Wells Fargo Bank’s ability to obtain increases in Revolving Commitments from the current lenders or Revolving Commitments from new lenders. No option to increase the maximum amount available under the 2013 Revolving Facility has been exercised by the Borrower.
Amounts borrowed under the 2013 Revolving Facility bear interest at a rate between 1.50% and 2.05% per annum, depending on PREIT’s leverage, in excess of LIBOR, with no floor, as set forth in the table below. The rate in effect at June 30, 2014 was 1.70% per annum in excess of LIBOR. In determining PREIT’s leverage (the ratio of Total Liabilities to Gross Asset Value), the capitalization rate used to calculate Gross Asset Value is (a) 6.50% for each Property having an average sales per square foot of more than $500 for the most recent period of 12 consecutive months, and (b) 7.50% for any other Property.
Level | Ratio of Total Liabilities to Gross Asset Value | Applicable Margin | |
1 | Less than 0.450 to 1.00 | 1.50 | % |
2 | Equal to or greater than 0.450 to 1.00 but less than 0.500 to 1.00 | 1.70 | % |
3 | Equal to or greater than 0.500 to 1.00 but less than 0.550 to 1.00 | 1.85 | % |
4 | Equal to or greater than 0.550 to 1.00 | 2.05 | % |
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In the event that we seek and obtain an investment grade credit rating, alternative interest rates would apply. The unused portion of the 2013 Revolving Facility is subject to a fee of 0.30% per annum. In the event that we seek and obtain an investment grade credit rating, alternative facility fees would apply.
PREIT and the subsidiaries of PREIT that either (1) account for more than 2.5% of adjusted Gross Asset Value (other than an Excluded Subsidiary), (2) own or lease an Unencumbered Property, or (3) own, directly or indirectly, a subsidiary described in clause (2) serve as guarantors for funds borrowed under the 2013 Credit Facility. In the event that we seek and obtain an investment grade credit rating, we may request that a subsidiary guarantor be released, unless such guarantor becomes obligated in respect of the debt of the Borrower or another subsidiary or owns Unencumbered Property or incurs recourse debt.
The 2013 Revolving Facility and the 2014 Term Loans (discussed below) are cross-defaulted with one another.
The 2013 Revolving Facility and the 2014 Term Loans contain certain affirmative and negative covenants which are identical and which are described in detail below in the section entitled “Identical covenants contained in the 2013 Revolving Facility and 2014 Term Loans.” As of June 30, 2014, the Borrower was in compliance with all such financial covenants.
The Borrower may prepay the 2013 Revolving Facility at any time without premium or penalty, subject to reimbursement obligations for the lenders’ breakage costs for LIBOR borrowings. The Borrower must repay the entire principal amount outstanding under the 2013 Revolving Facility at the end of its term, as the term may be extended.
Upon the expiration of any applicable cure period following an event of default, the lenders may declare all of the obligations in connection with the 2013 Revolving Facility immediately due and payable, and the Commitments of the lenders to make further loans under the 2013 Revolving Facility will terminate. Upon the occurrence of a voluntary or involuntary bankruptcy proceeding of PREIT, PREIT Associates, PRI, any Material Subsidiary, any subsidiary that owns or leases an Unencumbered Property or certain other subsidiaries, all outstanding amounts will automatically become immediately due and payable and the Commitments of the lenders to make further loans will automatically terminate.
2014 Term Loans
On January 8, 2014, the Borrower entered into two unsecured term loans in the initial aggregate amount of $250.0 million, comprised of:
(1) a 5 Year Term Loan Agreement (the “5 Year Term Loan”) with Wells Fargo Bank, National Association, U.S. Bank National Association and the other financial institutions signatory thereto, for a $150.0 million senior unsecured 5 year term loan facility; and
(2) a 7 Year Term Loan Agreement (the “7 Year Term Loan” and, together with the 5 Year Term Loan, the “2014 Term Loans”) with Wells Fargo Bank, National Association, Capital One, National Association and the other financial institutions signatory thereto, for a $100.0 million senior unsecured 7 year term loan facility.
Amounts borrowed under the 2014 Term Loans bear interest at the rate specified below per annum, depending on PREIT’s leverage, in excess of LIBOR, with no floor. In determining PREIT’s leverage (the ratio of Total Liabilities to Gross Asset Value), the capitalization rate used to calculate Gross Asset Value is (a) 6.50% for each Property having an average sales per square foot of more than $500 for the most recent period of 12 consecutive months, and (b) 7.50% for any other Property.
Level | Ratio of Total Liabilities to Gross Asset Value | 5 Year Term Loan Applicable Margin | 7 Year Term Loan Applicable Margin |
1 | Less than 0.450 to 1.00 | 1.35% | 1.80% |
2 | Equal to or greater than 0.450 to 1.00 but less than 0.500 to 1.00 | 1.45% | 1.95% |
3 | Equal to or greater than 0.500 to 1.00 but less than 0.550 to 1.00 | 1.60% | 2.15% |
4 | Equal to or greater than 0.550 to 1.00 | 1.90% | 2.35% |
The initial rate in effect under the 5 Year Term Loan was 1.45% per annum in excess of LIBOR. The initial rate in effect under the 7 Year Term Loan was 1.95% per annum in excess of LIBOR.
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If PREIT seeks and obtains an investment grade credit rating and so notifies the lenders under the respective 2014 Term Loans, alternative interest rates would apply.
The table set forth below presents the amount outstanding, interest rate (inclusive of the LIBOR spread) in effect and the maturity dates of the 2014 Term Loans as of June 30, 2014:
(in millions of dollars) | 5 Year Term Loan | 7 Year Term Loan | |||||
Total facility | $ | 150.0 | $ | 100.0 | |||
Amount outstanding | $ | 100.0 | $ | 30.0 | |||
Interest rate | 1.60 | % | 2.10 | % | |||
Maturity date | January 2019 | January 2021 |
Interest expense related to the 2014 Term Loans was $1.2 million and $2.2 million for the three and six months ended June 30, 2014, respectively. Deferred financing fee amortization associated with the 2014 Term Loans was $0.1 million for each of the three and six months ended June 30, 2014.
Under the 2014 Term Loans, there is a deferred draw feature that enables PREIT to borrow the amounts specified in each of the term loans over a period of up to one year. From the effective date until either one year later or until the maximum amount under the respective loan is borrowed (or until the lenders’ commitments are otherwise terminated), the unused portion of the 2014 Term Loans is subject to a fee of 0.20%, in the case of the 5 year Term Loan, and 0.35%, in the case of the 7 Year Term Loan, per annum. There is an additional commitment termination fee under the 7 Year Term Loan if the maximum amount is not borrowed within one year.
PREIT and the subsidiaries of PREIT that either (1) account for more than 2.5% of adjusted Gross Asset Value (other than an Excluded Subsidiary), (2) own or lease an Unencumbered Property, (3) own, directly or indirectly, a subsidiary described in clause (2), or (4) are guarantors under the 2013 Revolving Facility serve as guarantors for funds borrowed under the 2014 Term Loans. In the event that we seek and obtain an investment grade credit rating, we may request that a subsidiary guarantor be released, unless such guarantor becomes obligated in respect of the debt of the Borrower or another subsidiary, or owns Unencumbered Property and incurs recourse debt.
The Borrower has the option to increase the maximum amount available under the 5 Year Term Loan, through an accordion option (subject to certain conditions), from $150.0 million to as much as $300.0 million, in increments of $5.0 million (with a minimum increase of $25.0 million), based on Wells Fargo Bank’s ability to obtain increases in commitments from the current lenders or from new lenders.
The Borrower has the option to increase the maximum amount available under the 7 Year Term Loan, through an accordion option (subject to certain conditions), from $100.0 million to as much as $200.0 million, in increments of $5.0 million (with a minimum increase of $25.0 million), based on Wells Fargo Bank’s ability to obtain increases in commitments from the current lenders or from new lenders.
The 2014 Term Loans and the 2013 Revolving Facility contain certain affirmative and negative covenants which are identical and are described in detail below in the section “Identical covenants contained in the 2013 Revolving Facility and 2014 Term Loans.”
The Borrower may prepay the 5 Year Term Loan at any time without premium or penalty, subject to reimbursement obligations for the lenders’ breakage costs for LIBOR borrowings. The payment of the 7 Year Term Loan prior to its maturity is subject to reimbursement obligations for the lenders’ breakage costs for LIBOR borrowings and a declining prepayment penalty ranging from 3% within one year after closing, to 2% within two years, to 1% within three years and without penalty thereafter.
Upon the expiration of any applicable cure period following an event of default, the lenders may declare all of the obligations in connection with the 2014 Term Loans immediately due and payable, and before the one year anniversary of the effective date, the commitments of the lenders to make further loans, if any, under the 2014 Term Loans would terminate. Upon the occurrence of a voluntary or involuntary bankruptcy proceeding of PREIT, PREIT Associates, PRI, any material subsidiary, any subsidiary that owns or leases an Unencumbered Property or certain other subsidiaries, all outstanding amounts would automatically become immediately due and payable and, before the one year anniversary of the effective date, the commitments of the lenders to make further loans will automatically terminate.
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PREIT may use the proceeds of the 2014 Term Loans for the repayment of debt, for the payment of development or redevelopment costs, and for working capital and general corporate purposes.
Letter of Credit for Springfield Town Center Acquisition
In connection with the agreement to acquire Springfield Town Center (see note 6), in March 2014, we obtained a $46.5 million letter of credit from Wells Fargo Bank, National Association (the "Letter of Credit"). Amounts secured under the Letter of Credit for Springfield Town Center are subject to a fee per annum, depending on PREIT’s leverage. The initial fee in effect is 1.15% per annum. The Letter of Credit initially expires in July 2015 and may be extended up to one year. The Letter of Credit is subject to covenants that are identical to those contained in the 2013 Revolving Facility and the 2014 Term Loans. We expect that the Letter of Credit will be terminated at the closing of the Springfield Town Center acquisition.
Identical covenants contained in the 2013 Revolving Facility, 2014 Term Loans and Letter of Credit
The 2013 Revolving Facility, 2014 Term Loans, and the Letter of Credit contain certain affirmative and negative covenants which are identical, including, without limitation, requirements that PREIT maintain, on a consolidated basis: (1) minimum Tangible Net Worth of not less than 75% of the Company’s tangible net worth on December 31, 2012, plus 75% of the Net Proceeds of all Equity Issuances effected at any time after December 31, 2012; (2) maximum ratio of Total Liabilities to Gross Asset Value of 0.60:1, provided that it will not be a Default if the ratio exceeds 0.60:1 but does not exceed 0.625:1, for more than two consecutive quarters on more than two occasions during the term; (3) minimum ratio of Adjusted EBITDA to Fixed Charges of 1.45:1 on or before June 30, 2014, or 1.50:1 thereafter; (4) minimum Unencumbered Debt Yield of 12.0%; (5) minimum Unencumbered NOI to Unsecured Interest Expense of 1.75:1; (6) maximum ratio of Secured Indebtedness to Gross Asset Value of 0.60:1; (7) maximum Investments in unimproved real estate and predevelopment costs not in excess of 5.0% of Gross Asset Value; (8) maximum Investments in Persons other than Subsidiaries, Consolidated Affiliates and Unconsolidated Affiliates not in excess of 5.0% of Gross Asset Value; (9) maximum Mortgages in favor of the Borrower or any other Subsidiary not in excess of 5.0% of Gross Asset Value; (10) the aggregate value of the Investments and the other items subject to the preceding clauses (7) through (9) not in excess of 10.0% of Gross Asset Value; (11) maximum Investments in Consolidation Exempt Entities not in excess of 25.0% of Gross Asset Value; (12) maximum Projects Under Development not in excess of 15.0% of Gross Asset Value; (13) the aggregate value of the Investments and the other items subject to the preceding clauses (7) through (9) and (11) and (12) not in excess of 35.0% of Gross Asset Value; (14) Distributions may not exceed (A) with respect to our preferred shares, the amounts required by the terms of the preferred shares, and (B) with respect to our common shares, the greater of (i) 95.0% of Funds From Operations and (ii) 110% of REIT taxable income for a fiscal year; and (15) PREIT may not permit the amount of the Gross Asset Value attributable to assets directly owned by PREIT, PREIT Associates, PRI and the guarantors to be less than 95% of Gross Asset Value excluding assets owned by Excluded Subsidiaries or Unconsolidated Affiliates.
These covenants and restrictions limit PREIT’s ability to incur additional indebtedness, grant liens on assets and enter into negative pledge agreements, merge, consolidate or sell all or substantially all of its assets and enter into certain transactions with affiliates. The 2013 Revolving Facility, the 2014 Term Loans and the Letter of Credit are subject to customary events of default and are cross-defaulted with one another.
As of June 30, 2014, the Borrower was in compliance with all such financial covenants.
2010 Credit Facility
Prior to the 2013 Revolving Facility, we had a secured credit facility consisting of a revolving line of credit with a capacity of $250.0 million (the “2010 Revolving Facility”) and term loans with an aggregate balance of $97.5 million (collectively, the “2010 Term Loan” and, together with the 2010 Revolving Facility, the “2010 Credit Facility”).
Interest expense related to the 2010 Revolving Facility was $0.1 million and $0.4 million for the three and six months ended June 30, 2013, respectively.
The weighted average effective interest rate based on amounts borrowed under the 2010 Term Loan for the six months ended June 30, 2013 was 3.95%. Interest expense, excluding non-cash amortization and accelerated amortization of deferred financing fees related to the 2010 Term Loan, was $0.1 million and $2.4 million for the three and six months ended June 30, 2013, respectively.
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Deferred financing fee amortization associated with the 2010 Credit Facility was $0.1 million and $0.8 million for the three and six months ended June 30, 2013, respectively. Accelerated deferred financing fee amortization was $0.1 million and $0.9 million for the three and six months ended June 30, 2013, respectively, in connection with permanent paydowns of the 2010 Term Loan of $84.5 million in January and February 2013, and $0.1 million in connection with the $97.5 million final permanent paydown of the 2010 Term Loan in April 2013.
Mortgage Loans
The carrying values and estimated fair values of mortgage loans based on interest rates and market conditions at June 30, 2014 and December 31, 2013 were as follows:
June 30, 2014 | December 31, 2013 | ||||||||||||||
(in millions of dollars) | Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||
Mortgage loans | $ | 1,494.8 | $ | 1,486.4 | $ | 1,502.7 | $ | 1,467.9 |
The mortgage loans contain various customary default provisions. As of June 30, 2014, we were not in default on any of the mortgage loans.
Mortgage Loan Activity
In July 2014, we repaid a $25.8 million mortgage loan plus accrued interest secured by 801 Market Street, a property that is part of the Gallery at Market East in Philadelphia, Pennsylvania, using proceeds from the transaction relating to the Gallery at Market East with The Macerich Company.
In July 2014, we repaid a $51.0 million mortgage loan plus accrued interest secured by Logan Valley Mall in Altoona, Pennsylvania using $50.0 million from our 2013 Revolving Facility and $1.0 million from available working capital. The $50.0 million borrowed from the 2013 Revolving Facility was subsequently repaid in July 2014 using proceeds from the transaction relating to the Gallery at Market East with The Macerich Company.
Interest Rate Risk
We follow established risk management policies designed to limit our interest rate risk on our interest bearing liabilities, as further discussed in note 7 to our unaudited consolidated financial statements.
5. CASH FLOW INFORMATION
Cash paid for interest was $36.6 million (net of capitalized interest of $0.3 million) and $51.1 million (net of capitalized interest of $0.3 million) for the six months ended June 30, 2014 and 2013, respectively.
In our statement of cash flows, we show cash flows on our revolving facilities on a net basis. Gross borrowings on our revolving facilities were $90.0 million and $342.5 million for the six months ended June 30, 2014 and 2013, respectively. Gross paydowns were $220.0 million and $307.5 million for the six months ended June 30, 2014 and 2013, respectively.
6. COMMITMENTS AND CONTINGENCIES
Contractual Obligations
As of June 30, 2014, we had unaccrued contractual and other commitments related to our capital improvement projects and development projects of $21.7 million in the form of tenant allowances and contracts with general service providers and other professional service providers.
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Springfield Town Center
On March 2, 2014, we entered into a Contribution Agreement (the “Contribution Agreement”) relating to the acquisition of Springfield Town Center in Springfield, Virginia (the “Property”) for total consideration of $465.0 million. The total consideration is expected to be funded using $125.0 million of common and preferred Operating Partnership units, with the remaining balance to be paid in cash. We expect to provide the remaining cash balance by borrowing from the amounts available under our existing credit agreements. In addition, the seller of the Property may be entitled to certain additional consideration based on the value of the Property three years after the closing date. The closing is subject to the substantial completion of the redevelopment of the Property in accordance with plans and specifications for such redevelopment, as well as certain other customary closing conditions.
Pursuant to the Contribution Agreement, closing will occur after all of the conditions to closing have been satisfied or waived, on the date that is the earlier of (i) fifteen days after the later of the date on which Regal Cinemas, Dick’s Sporting Goods and at least seventy-five percent (75%) of the aggregate square footage of the in-line space of the Property are occupied, certificates of occupancy have been issued with respect to all of the common areas of the Property and the “grand opening” of the Property has occurred, and (ii) March 31, 2015 (which date may be extended in certain circumstances).
In connection with this Contribution Agreement, we have secured a $46.5 million letter of credit and have incurred $1.9 million of acquisition related expenses as of June 30, 2014. These expenses are included in "Acquisition costs and other expenses" on the consolidated statements of operations for the three and six months ended June 30, 2014.
Employee Separation
In May 2014, George F. Rubin separated from his position as Vice Chairman of PREIT. Under the terms of Mr. Rubin’s separation agreement from the Company, which became effective in June 2014, we recorded employee separation expense of $4.1 million in the second quarter of 2014. Mr. Rubin will receive a payment of approximately $2.6 million, which amount is in addition to the payment of the amounts accrued under Mr. Rubin’s supplemental retirement plan. All of Mr. Rubin’s outstanding unvested restricted shares became vested in connection with his separation and he remains eligible to receive shares under the Company’s Restricted Share Unit Programs based on the achievement of the performance metrics established by those programs as if his employment had not terminated. Mr. Rubin’s term as a member of the Company’s board of trustees expired at the Company’s Annual Meeting held on May 30, 2014.
In the second quarter of 2014, we terminated the employment of certain employees. In connection with the departure of those employees, we recorded an additional $0.8 million of employee separation expense.
7. DERIVATIVES
In the normal course of business, we are exposed to financial market risks, including interest rate risk on our interest bearing liabilities. We attempt to limit these risks by following established risk management policies, procedures and strategies, including the use of financial instruments such as derivatives. We do not use financial instruments for trading or speculative purposes.
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Cash Flow Hedges of Interest Rate Risk
Our outstanding derivatives have been designated under applicable accounting authority as cash flow hedges. The effective portion of changes in the fair value of derivatives designated as, and that qualify as, cash flow hedges is recorded in “Accumulated other comprehensive income (loss)” and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. To the extent these instruments are ineffective as cash flow hedges, changes in the fair value of these instruments are recorded in “Interest expense, net.”
We recognize all derivatives at fair value as either assets or liabilities in the accompanying consolidated balance sheets. The carrying amount of the derivative assets is reflected in “Deferred costs and other assets,” the amount of the associated liabilities is reflected in “Accrued expenses and other liabilities” and the amount of the net unrealized loss is reflected in “Accumulated other comprehensive income (loss)” in the accompanying balance sheets.
Amounts reported in “Accumulated other comprehensive income (loss)” that are related to derivatives will be reclassified to “Interest expense, net” as interest payments are made on our corresponding debt. During the next 12 months, we estimate that $4.4 million will be reclassified as an increase to interest expense in connection with derivatives. The amortization of these amounts could be accelerated in the event that we repay amounts outstanding on the debt instruments and do not replace them with new borrowings.
In June 2014, we gave notice to the mortgage lender that we intended to repay the mortgage loan secured by Logan Valley Mall, and in connection therewith, we recorded hedge ineffectiveness of $1.2 million in the three and six months ended June 30, 2014. The notice of our intention to repay the mortgage loan made it probable that the hedged transaction identified in our original hedge documentation would not occur, and we reclassified $1.2 million from accumulated other comprehensive loss to interest expense. We repaid the mortgage loan in July 2014.
Interest Rate Swaps
As of June 30, 2014, we had entered into 12 interest rate swap agreements with a weighted average interest rate of 1.67% on a notional amount of $328.1 million maturing on various dates through January 2019.
We entered into these interest rate swap agreements in order to hedge the interest payments associated with our issuances of variable interest rate long term debt. We have assessed the effectiveness of these interest rate swap agreements as hedges at inception and on a quarterly basis. As of June 30, 2014, we considered these interest rate swap agreements to be highly effective as cash flow hedges. The interest rate swap agreements are net settled monthly.
Accumulated other comprehensive loss as of June 30, 2014 includes a net loss of $2.8 million relating to forward starting swaps that we cash settled in prior years that are being amortized over 10 year periods commencing on the closing dates of the debt instruments that are associated with these settled swaps.
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The following table summarizes the terms and estimated fair values of our interest rate swap derivative instruments at June 30, 2014 and December 31, 2013. The notional values provide an indication of the extent of our involvement in these instruments, but do not represent exposure to credit, interest rate or market risks.
(in millions of dollars) Notional Value | Fair Value at June 30, 2014 (1) | Fair Value at December 31, 2013 (1) | Interest Rate | Maturity Date | |||||||||
Interest Rate Swaps | |||||||||||||
$25.0 | $ | (0.3 | ) | $ | (0.3 | ) | 1.10 | % | July 31, 2016 | ||||
28.1 | (0.5 | ) | (0.5 | ) | 1.38 | % | January 2, 2017 | ||||||
34.4 | — | 0.2 | 3.72 | % | December 1, 2017 | ||||||||
7.6 | — | 0.1 | 1.00 | % | January 1, 2018 | ||||||||
55.0 | (0.1 | ) | 0.2 | 1.12 | % | January 1, 2018 | |||||||
48.0 | (0.1 | ) | 0.2 | 1.12 | % | January 1, 2018 | |||||||
30.0 | (0.5 | ) | N/A | 1.78 | % | January 2, 2019 | |||||||
20.0 | (0.3 | ) | N/A | 1.78 | % | January 2, 2019 | |||||||
20.0 | (0.3 | ) | N/A | 1.78 | % | January 2, 2019 | |||||||
20.0 | (0.4 | ) | N/A | 1.79 | % | January 2, 2019 | |||||||
20.0 | (0.4 | ) | N/A | 1.79 | % | January 2, 2019 | |||||||
20.0 | (0.3 | ) | N/A | 1.79 | % | January 2, 2019 | |||||||
$ | (3.2 | ) | $ | (0.1 | ) |
_________________________
(1) | As of June 30, 2014 and December 31, 2013, derivative valuations in their entirety were classified in Level 2 of the fair value hierarchy. As of June 30, 2014 and December 31, 2013, we did not have any significant recurring fair value measurements related to derivative instruments using significant unobservable inputs (Level 3). |
The table below presents the effect of derivative financial instruments on our consolidated statements of operations and on our share of our partnerships’ statements of operations for the three and six months ended June 30, 2014 and 2013:
Three Months Ended June 30, | Six Months Ended June 30, | Consolidated Statements of Operations Location | ||||||||||||||||
(in millions of dollars) | 2014 | 2013 | 2014 | 2013 | ||||||||||||||
Derivatives in cash flow hedging relationships: | ||||||||||||||||||
Interest rate products | ||||||||||||||||||
(Loss) gain recognized in Other Comprehensive Income (Loss) on derivatives | $ | (0.3 | ) | $ | 9.7 | $ | (2.2 | ) | $ | 7.6 | N/A | |||||||
Loss reclassified from Accumulated Other Comprehensive Income (Loss) into income (effective portion) | $ | 1.2 | $ | 3.0 | $ | 2.2 | $ | 7.0 | Interest expense | |||||||||
Loss recognized in income on derivatives (ineffective portion and amount excluded from effectiveness testing) | $ | (1.2 | ) | $ | (3.2 | ) | $ | (1.2 | ) | $ | (2.7 | ) | Interest expense |
Credit-Risk-Related Contingent Features
We have agreements with some of our derivative counterparties that contain a provision pursuant to which, if our entity that originated such derivative instruments defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then we could also be declared in default on our derivative obligations. As of June 30, 2014, we were not in default on any of our derivative obligations.
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We have an agreement with a derivative counterparty that incorporates the loan covenant provisions of our loan agreement with a lender affiliated with the derivative counterparty. Failure to comply with the loan covenant provisions would result in our being in default on any derivative instrument obligations covered by the agreement.
As of June 30, 2014, the fair value of derivatives in a net liability position, which excludes accrued interest but includes any adjustment for nonperformance risk related to these agreements, was $3.2 million. If we had breached any of the default provisions in these agreements as of June 30, 2014, we might have been required to settle our obligations under the agreements at their termination value (including accrued interest) of $3.6 million. We had not breached any of these provisions as of June 30, 2014.
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following analysis of our consolidated financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and the notes thereto included elsewhere in this report.
OVERVIEW
Pennsylvania Real Estate Investment Trust, a Pennsylvania business trust founded in 1960 and one of the first equity real estate investment trusts (“REITs”) in the United States, has a primary investment focus on retail shopping malls located in the eastern half of the United States, primarily in the Mid-Atlantic region.
We currently own interests in 45 retail properties, of which 41 are operating properties and four are development properties. The 41 operating properties include 34 enclosed malls and seven other retail properties, have a total of 30.1 million square feet and operate in 11 states. We and partnerships in which we own an interest own 23.3 million square feet at these properties (excluding space owned by anchors).
There are 34 operating retail properties in our portfolio that we consolidate for financial reporting purposes. These consolidated properties have a total of 25.5 million square feet, of which we own 20.2 million square feet. The seven operating retail properties that are owned by unconsolidated partnerships with third parties have a total of 4.6 million square feet, of which 3.1 million square feet are owned by such partnerships.
The development portion of our portfolio contains four properties in three states, with two classified as “mixed use” (a combination of retail and other uses), one classified as “retail” (outlet) and one classified as “other.”
Our primary business is owning and operating retail shopping malls, which we primarily do through our operating partnership, PREIT Associates, L.P. (“PREIT Associates”). We provide management, leasing and real estate development services through PREIT Services, LLC (“PREIT Services”), which generally develops and manages properties that we consolidate for financial reporting purposes, and PREIT-RUBIN, Inc. (“PRI”), which generally develops and manages properties that we do not consolidate for financial reporting purposes, including properties in which we own interests through partnerships with third parties and properties that are owned by third parties in which we do not have an interest. PRI is a taxable REIT subsidiary, as defined by federal tax laws, which means that it is able to offer additional services to tenants without jeopardizing our continuing qualification as a REIT under federal tax law.
Net loss for the three months ended June 30, 2014 was $24.1 million, an increase of $15.0 million compared to a net loss of $9.0 million for the three months ended June 30, 2013. This increase was primarily due to $16.1 million of impairment of assets recorded in connection with North Hanover and Nittany Malls and an increase of $3.8 million of employee separation expense, partially offset by $6.1 million of lower interest expense recorded in the three months ended June 30, 2014 as compared to the same period in 2013.
Net loss for the six months ended June 30, 2014 was $32.4 million, a decrease of $49.2 million compared to net income of $16.8 million for the six months ended June 30, 2013. This decrease was primarily due to $33.3 million of gains on sales of discontinued operations recorded in the six months ended June 30, 2013, $17.4 million of impairment of assets in connection with North Hanover Mall, Nittany Mall and South Mall recorded in the six months ended June 30, 2014, an increase of $4.7 million in depreciation and amortization expense, a decrease of $4.0 million of net operating income (“NOI”) from properties sold since January 1, 2013 and an increase of $2.6 million of employee separation expense in the six months ended June 30, 2014 as compared to the same period in 2013. These decreases were partially offset by $13.3 million of lower interest expense recorded in the six months ended June 30, 2014 as compared to the same period in 2013.
We evaluate operating results and allocate resources on a property-by-property basis, and do not distinguish or evaluate our consolidated operations on a geographic basis. Due to the nature of our operating properties, which involve retail shopping, we have concluded that our individual properties have similar economic characteristics and meet all other aggregation criteria. Accordingly, we have aggregated our individual properties into one reportable segment. In addition, no single tenant accounts for 10% or more of consolidated revenue, and none of our properties are located outside the United States.
We hold our interests in our portfolio of properties through our operating partnership, PREIT Associates. We are the sole general partner of PREIT Associates and, as of June 30, 2014, held a 97.0% controlling interest in PREIT Associates, and consolidated it for reporting purposes. We hold our investments in seven of the 41 retail properties and two of the four development properties in our portfolio through unconsolidated partnerships with third parties in which we own a 25% to 50%
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interest. We hold a noncontrolling interest in each unconsolidated partnership, and account for such partnerships using the equity method of accounting. We do not control any of these equity method investees for the following reasons:
• | Except for two properties that we co-manage with our partner, all of the other entities are managed on a day-to-day basis by one of our other partners as the managing general partner in each of the respective partnerships. In the case of the co-managed properties, all decisions in the ordinary course of business are made jointly. |
• | The managing general partner is responsible for establishing the operating and capital decisions of the partnership, including budgets, in the ordinary course of business. |
• | All major decisions of each partnership, such as the sale, refinancing, expansion or rehabilitation of the property, require the approval of all partners. |
• | Voting rights and the sharing of profits and losses are generally in proportion to the ownership percentages of each partner. |
We record the earnings from the unconsolidated partnerships using the equity method of accounting under the statements of operations caption entitled “Equity in income of partnerships,” rather than consolidating the results of the unconsolidated partnerships with our results. Changes in our investments in these entities are recorded in the balance sheet caption entitled “Investment in partnerships, at equity.” In the case of deficit investment balances, such amounts are recorded in “Distributions in excess of partnership investments.”
We hold our interest in three of our unconsolidated partnerships through tenancy in common arrangements. For each of these properties, title is held by us and another person or persons, and each has an undivided interest in the property. With respect to each of the three properties, under the applicable agreements between us and the other persons with ownership interests, we and such other persons have joint control because decisions regarding matters such as the sale, refinancing, expansion or rehabilitation of the property require the approval of both us and the other person (or at least one of the other persons) owning an interest in the property. Hence, we account for each of the properties using the equity method of accounting. The balance sheet items arising from these properties appear under the caption “Investments in partnerships, at equity.” The statements of operations items arising from these properties appear in “Equity in income of partnerships.”
For further information regarding our unconsolidated partnerships, see note 3 to our unaudited consolidated financial statements.
Recent Developments
In July 2014, we entered into a 50/50 joint venture with The Macerich Company to redevelop the Gallery at Market East in Philadelphia, Pennsylvania. In connection therewith, we contributed and sold real estate assets to the venture and Macerich acquired its interest in the venture and real estate from us for $106.8 million in cash. It is expected that both parties will make additional investments in the project. We used $25.8 million of such proceeds to repay a mortgage loan secured by 801 Market Street, a property that is part of the Gallery complex, $50.0 million to repay the outstanding balance on our 2013 Revolving Facility, and the remaining proceeds for general corporate purposes.
Current Economic Conditions and Our Near Term Capital Needs
The conditions in the economy have caused unemployment to remain relatively high and have caused fluctuations and variations in retail sales, business and consumer confidence and consumer spending on retail goods. As a result, the sales and profit performance of certain retailers has fluctuated. We continue to adjust our plans and actions to take into account the current environment. In particular, we continue to contemplate ways to maintain or reduce our leverage through a variety of means available to us, subject to and in accordance with the terms of our 2013 Revolving Facility, 2014 Term Loans and the Letter of Credit. These steps might include obtaining additional equity capital, including through the issuance of common or preferred equity securities if market conditions are favorable, through joint ventures or other partnerships or arrangements involving our contribution of assets with institutional investors, private equity investors or other REITs, through sales of properties or interests in properties with values in excess of their mortgage loans and application of the excess proceeds to debt reduction, or through other actions.
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Capital Improvements and Development Projects
At our operating properties, we might engage in various types of capital improvement projects. Such projects vary in cost and complexity, and can include building out new or existing space for individual tenants, upgrading common areas or exterior areas such as parking lots, or redeveloping the entire property, among other projects. Project costs are accumulated in “Construction in progress” on our consolidated balance sheet until the asset is placed into service, and amounted to $85.4 million as of June 30, 2014.
At our wholly-owned development properties, we are also engaged in several types of projects. However, we do not expect to make any significant investment in these projects in the short term. As of June 30, 2014, we had incurred $54.0 million of costs (net of impairment charges recorded in prior years) related to our activity at our wholly-owned development properties.
CRITICAL ACCOUNTING POLICIES
Critical Accounting Policies are those that require the application of management’s most difficult, subjective or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that might change in subsequent periods. In preparing the unaudited consolidated financial statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting periods. In preparing the financial statements, management has utilized available information, including our historical experience, industry standards and the current economic environment, among other factors, in forming its estimates and judgments, giving due consideration to materiality. Management has also considered events and changes in property, market and economic conditions, estimated future cash flows from property operations and the risk of loss on specific accounts or amounts in determining its estimates and judgments. Actual results may differ from these estimates. In addition, other companies may utilize different estimates, which may affect comparability of our results of operations to those of companies in similar businesses. The estimates and assumptions made by management in applying critical accounting policies have not changed materially during 2014 or 2013 except as otherwise noted, and none of these estimates or assumptions have proven to be materially incorrect or resulted in our recording any significant adjustments relating to prior periods. We will continue to monitor the key factors underlying our estimates and judgments, but no change is currently expected.
For additional information regarding our Critical Accounting Policies, see “Critical Accounting Policies” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2013.
Asset Impairment
Real estate investments and related intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the property might not be recoverable. A property to be held and used is considered impaired only if management’s estimate of the aggregate future cash flows, less estimated capital expenditures, to be generated by the property, undiscounted and without interest charges, are less than the carrying value of the property. This estimate takes into consideration factors such as expected future operating income, trends and prospects, as well as the effects of demand, competition and other factors. In addition, these estimates may consider a probability weighted cash flow estimation approach when alternative courses of action to recover the carrying amount of a long-lived asset are under consideration or when a range of possible values is estimated.
The determination of undiscounted cash flows requires significant estimates by management, including the expected course of action at the balance sheet date that would lead to such cash flows. Subsequent changes in estimated undiscounted cash flows arising from changes in the anticipated action to be taken with respect to the property could impact the determination of whether an impairment exists and whether the effects could materially affect our net income. To the extent estimated undiscounted cash flows are less than the carrying value of the property, the loss will be measured as the excess of the carrying amount of the property over the estimated fair value of the property.
Assessment of our ability to recover certain lease related costs must be made when we have a reason to believe that the tenant might not be able to perform under the terms of the lease as originally expected. This requires us to make estimates as to the recoverability of such costs.
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See “Results of Operations” for a description of impairment losses recorded during the quarter.
New Accounting Developments
In May 2014, the Financial Accounting Standards Board issued “Revenue from Contracts with Customers.” The objective of this new standard is to establish a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The core principle of this new standard is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance is effective for annual reporting periods beginning after December 15, 2016 for public companies. Early adoption is not permitted. Entities have the option of using either a full retrospective or modified approach to adopt this standard. We are currently evaluating the new guidance and have not determined the impact this standard may have on our financial statements nor have we decided upon the method of adoption.
In April 2014, we adopted new accounting requirements pertaining to the reporting of discontinued operations. These new accounting requirements are required to be effective for the first quarter of 2015 but may be adopted as early as the first quarter of 2014 only for disposals or classifications as held for sale that have not been reported in financial statements previously issued or available for issuance. Under these new accounting requirements, only disposals representing a strategic shift in operations will be presented as discontinued operations. Previously, under U.S. GAAP, companies that sold a single investment property were generally required to report the sale as a discontinued operation, which required the companies to reclassify earnings from continuing operations for all periods presented. These new accounting requirements require expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income and expenses of discontinued operations.
In June 2014, we sold South Mall in Allentown, Pennsylvania. We applied these new accounting requirements by reporting the results of operations of South Mall in the continuing operations section of our unaudited consolidated statements of operations.
OFF BALANCE SHEET ARRANGEMENTS
We have no material off-balance sheet items other than the partnerships described in note 3 to the unaudited consolidated financial statements and in the “Overview” section above.
RESULTS OF OPERATIONS
Occupancy
The table below sets forth certain occupancy statistics for our properties (excluding the properties included in discontinued operations or sold) as of June 30, 2014 and 2013:
Occupancy (1) as of June 30, | |||||||||||||||||
Consolidated Properties | Unconsolidated Properties | Combined(2) | |||||||||||||||
2014 | 2013 | 2014 | 2013 | 2014 | 2013 | ||||||||||||
Retail portfolio weighted average: | |||||||||||||||||
Total excluding anchors | 89.1 | % | 89.3 | % | 94.3 | % | 94.1 | % | 90.0 | % | 90.2 | % | |||||
Total including anchors | 92.9 | % | 93.1 | % | 96.0 | % | 95.8 | % | 93.3 | % | 93.4 | % | |||||
Malls weighted average: | |||||||||||||||||
Total excluding anchors | 89.0 | % | 89.3 | % | 96.0 | % | 95.9 | % | 89.5 | % | 89.8 | % | |||||
Total including anchors | 92.9 | % | 93.1 | % | 97.2 | % | 97.2 | % | 93.1 | % | 93.3 | % | |||||
Other retail properties | 99.5 | % | N/A | 95.2 | % | 94.9 | % | 95.3 | % | 94.9 | % |
_________________________
(1) | Occupancy for both periods presented includes all tenants irrespective of the term of their agreements. |
(2) | Combined occupancy is calculated by using occupied gross leasable area (“GLA”) for consolidated and unconsolidated properties and dividing by total GLA for consolidated and unconsolidated properties. |
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Leasing Activity
The table below sets forth summary leasing activity information with respect to our consolidated and unconsolidated properties for the six months ended June 30, 2014:
Average Gross Rent psf | Increase in Gross Rent psf | Annualized Tenant Improvements psf(2) | |||||||||||||||||||||||
Number | GLA | Previous | New(1) | Dollar | Percentage | ||||||||||||||||||||
New Leases:(3) | |||||||||||||||||||||||||
1st Quarter | 39 | 81,690 | N/A | $ | 48.07 | $ | 48.07 | N/A | $ | 5.20 | |||||||||||||||
2nd Quarter | 52 | 152,596 | N/A | 41.71 | 41.71 | N/A | 7.25 | ||||||||||||||||||
Total/Average | 91 | 234,286 | N/A | $ | 43.93 | $ | 43.93 | N/A | $ | 6.54 | |||||||||||||||
Renewal - non-anchor tenants 10,000 square feet and under:(4) | |||||||||||||||||||||||||
1st Quarter | 48 | 145,510 | $ | 36.02 | $ | 38.68 | $ | 2.66 | 7.4 | % | $ | — | |||||||||||||
2nd Quarter | 105 | 286,783 | 33.75 | 35.27 | 1.52 | 4.5 | % | — | |||||||||||||||||
Total/Average | 153 | 432,293 | $ | 34.51 | $ | 36.42 | $ | 1.90 | 5.5 | % | $ | — | |||||||||||||
Renewal - non-anchor tenants greater than 10,000 square feet:(4) | |||||||||||||||||||||||||
1st Quarter | 6 | 107,781 | $ | 16.22 | $ | 17.04 | $ | 0.82 | 5.1 | % | $ | — | |||||||||||||
2nd Quarter | 4 | 124,249 | 17.51 | 18.90 | 1.39 | 7.9 | % | — | |||||||||||||||||
Total/Average | 10 | 232,030 | $ | 16.91 | $ | 18.04 | $ | 1.13 | 6.7 | % | $ | — | |||||||||||||
Anchor New: | |||||||||||||||||||||||||
1st Quarter | 1 | 52,055 | N/A | $ | 7.50 | $ | 7.50 | N/A | $ | 4.00 | |||||||||||||||
2nd Quarter | 1 | 98,391 | N/A | 15.34 | 15.34 | N/A | 8.33 | ||||||||||||||||||
Total/Average | 2 | 150,446 | N/A | $ | 12.63 | $ | 12.63 | N/A | $ | 6.83 | |||||||||||||||
Anchor Renewal: | |||||||||||||||||||||||||
1st Quarter | 1 | 101,476 | $ | 2.79 | $ | 2.80 | $ | 0.01 | 0.4 | % | $ | — | |||||||||||||
2nd Quarter | 1 | 77,688 | 2.85 | 2.92 | 0.07 | 2.5 | % | — | |||||||||||||||||
Total/Average | 2 | 179,164 | $ | 2.82 | $ | 2.85 | $ | 0.04 | 1.3 | % | $ | — | |||||||||||||
_________________________
(1) | New rent is the initial amount payable upon rent commencement. In certain cases, a lower rent may be payable until certain conditions in the lease are satisfied. |
(2) | These leasing costs are presented as annualized costs per square foot and are spread uniformly over the initial lease term. |
(3) | This category includes newly constructed and recommissioned space. |
(4) | This category includes expansions and lease extensions. |
As of June 30, 2014, for non-anchor leases, the average gross rent per square foot as of the expiration date was $34.91 for the renewing leases in “Holdover” status and $38.06 for leases expiring in 2014.
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Overview
Net loss for the three months ended June 30, 2014 was $24.1 million, an increase of $15.0 million compared to a net loss of $9.0 million for the three months ended June 30, 2013. This increase was primarily due to $16.1 million of impairment of assets recorded in connection with North Hanover and Nittany Malls and an increase of $3.8 million of employee separation expense, partially offset by $6.1 million of lower interest expense recorded in the three months ended June 30, 2014 as compared to the same period in 2013.
Net loss for the six months ended June 30, 2014 was $32.4 million, a decrease of $49.2 million compared to net income of $16.8 million for the six months ended June 30, 2013. This decrease was primarily due to $33.3 million of gains on sales of discontinued operations recorded in the six months ended June 30, 2013, $17.4 million of impairment of assets in connection with North Hanover Mall, Nittany Mall and South Mall recorded in the six months ended June 30, 2014, an increase of $4.7 million in depreciation and amortization expense, a decrease of $4.0 million of NOI from properties sold since January 1, 2013 and an increase of $2.6 million of employee separation expense in the six months ended June 30, 2014 as compared to the same period in 2013. These decreases were partially offset by $13.3 million of lower interest expense recorded in the six months ended June 30, 2014 as compared to the same period in 2013.
The following table sets forth our results of operations for the three and six months ended June 30, 2014 and 2013.
Three Months Ended June 30, | % Change 2013 to 2014 | Six Months Ended June 30, | % Change 2013 to 2014 | ||||||||||||||||
(in thousands of dollars) | 2014 | 2013 | 2014 | 2013 | |||||||||||||||
Real estate revenue | $ | 106,145 | $ | 103,548 |