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EX-31.1 - EXHIBIT 31.1 - PENNSYLVANIA REAL ESTATE INVESTMENT TRUSTa2015q3exhibit311.htm
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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 September 30, 2015
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 October 27, 2015: 69,190,692
 





PENNSYLVANIA REAL ESTATE INVESTMENT TRUST

CONTENTS
 

 
 
Page
 
 
 
 
 
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)
September 30,
2015
 
December 31,
2014
 
(unaudited)
 
 
ASSETS:
 
 
 
INVESTMENTS IN REAL ESTATE, at cost:
 
 
 
Operating properties
$
3,467,158

 
$
3,216,231

Construction in progress
131,924

 
60,452

Land held for development
8,424

 
8,721

Total investments in real estate
3,607,506

 
3,285,404

Accumulated depreciation
(1,071,477
)
 
(1,061,051
)
Net investments in real estate
2,536,029

 
2,224,353

INVESTMENTS IN PARTNERSHIPS, at equity:
154,588

 
140,882

OTHER ASSETS:
 
 
 
Cash and cash equivalents
22,136

 
40,433

Tenant and other receivables (net of allowance for doubtful accounts of $10,857 and $11,929 at September 30, 2015 and December 31, 2014, respectively)
36,750

 
40,566

Intangible assets (net of accumulated amortization of $13,198 and $11,873 at September 30, 2015 and December 31, 2014, respectively)
23,372

 
6,452

Deferred costs and other assets
86,717

 
87,017

Assets held for sale
13,627

 

Total assets
$
2,873,219

 
$
2,539,703

LIABILITIES:
 
 
 
Mortgage loans payable
$
1,392,270

 
$
1,407,947

Term Loans
400,000

 
130,000

Revolving Facility
60,000

 

Tenants’ deposits and deferred rent
15,731

 
15,541

Distributions in excess of partnership investments
64,238

 
65,956

Fair value of derivative liabilities
6,029

 
2,490

Liabilities on assets held for sale
1,895

 

Accrued expenses and other liabilities
89,738

 
73,032

Total liabilities
2,029,901

 
1,694,966

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 September 30, 2015 and December 31, 2014; 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 September 30, 2015 and December 31, 2014; liquidation preference of $86,250
35

 
35

Shares of beneficial interest, $1.00 par value per share; 200,000 shares authorized; issued and outstanding 69,190 shares at September 30, 2015 and 68,801 shares at December 31, 2014
69,190

 
68,801

Capital contributed in excess of par
1,474,504

 
1,474,183

Accumulated other comprehensive loss
(8,189
)
 
(6,002
)
Distributions in excess of net income
(853,820
)
 
(721,605
)
Total equity—Pennsylvania Real Estate Investment Trust
681,766

 
815,458

Noncontrolling interest
161,552

 
29,279

Total equity
843,318

 
844,737

Total liabilities and equity
$
2,873,219

 
$
2,539,703


See accompanying notes to the unaudited consolidated financial statements.
1


PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
(in thousands of dollars)
2015
 
2014
 
2015
 
2014
REVENUE:
 
 
 
 
 
 
 
Real estate revenue:
 
 
 
 
 
 
 
Base rent
$
68,378

 
$
66,908

 
$
200,069

 
$
209,896

Expense reimbursements
31,790

 
31,057

 
93,840

 
96,287

Percentage rent
866

 
542

 
1,712

 
1,455

Lease termination revenue
1,431

 
644

 
1,898

 
898

Other real estate revenue
2,355

 
2,638

 
6,967

 
8,005

Total real estate revenue
104,820

 
101,789

 
304,486

 
316,541

Other income
2,216

 
3,348

 
4,300

 
4,807

Total revenue
107,036

 
105,137

 
308,786

 
321,348

EXPENSES:
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 Property operating expenses:
 
 
 
 
 
 
 
CAM and real estate taxes
(33,004
)
 
(33,092
)
 
(100,073
)
 
(107,723
)
Utilities
(5,311
)
 
(5,520
)
 
(15,419
)
 
(19,571
)
Other property operating expenses
(4,428
)
 
(4,315
)
 
(12,416
)
 
(11,713
)
Total property operating expenses
(42,743
)
 
(42,927
)
 
(127,908
)
 
(139,007
)
 Depreciation and amortization
(36,108
)
 
(34,240
)
 
(105,938
)
 
(107,610
)
 General and administrative expenses
(7,554
)
 
(8,373
)
 
(25,624
)
 
(26,224
)
 Provision for employee separation expenses
(136
)
 
(85
)
 
(136
)
 
(4,961
)
 Acquisition costs and other expenses
(427
)
 
(723
)
 
(5,696
)
 
(3,329
)
Total operating expenses
(86,968
)
 
(86,348
)
 
(265,302
)
 
(281,131
)
Interest expense, net
(19,668
)
 
(20,071
)
 
(60,939
)
 
(61,792
)
Impairment of assets
(51,412
)
 
(2,297
)
 
(86,319
)
 
(19,695
)
Total expenses
(158,048
)
 
(108,716
)
 
(412,560
)
 
(362,618
)
Loss before equity in income of partnerships, gain on sale of interest in non operating real estate and gain (loss) on sale of interests in real estate
(51,012
)
 
(3,579
)
 
(103,774
)
 
(41,270
)
Equity in income of partnerships
2,385

 
3,206

 
6,499

 
8,392

Gain on sale of interest in non operating real estate

 

 
43

 

Gain (loss) on sale of interests in real estate
12,386

 
(513
)
 
12,386

 
(414
)
Net loss
(36,241
)
 
(886
)
 
(84,846
)
 
(33,292
)
Less: net loss attributable to noncontrolling interest
3,901

 
27

 
8,073

 
1,004

Net loss attributable to PREIT
(32,340
)
 
(859
)
 
(76,773
)
 
(32,288
)
Less: preferred share dividends
(3,962
)
 
(3,962
)
 
(11,886
)
 
(11,886
)
Net loss attributable to PREIT common shareholders
$
(36,302
)
 
$
(4,821
)
 
$
(88,659
)
 
$
(44,174
)


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 
 September 30,
 
Nine Months Ended 
 September 30,
2015
 
2014
 
2015
 
2014
Net loss
$
(36,241
)
 
$
(886
)
 
$
(84,846
)
 
$
(33,292
)
Noncontrolling interest
3,901

 
27

 
8,073

 
1,004

Dividends on preferred shares
(3,962
)
 
(3,962
)
 
(11,886
)
 
(11,886
)
Dividends on unvested restricted shares
(76
)
 
(87
)
 
(240
)
 
(293
)
Net loss used to calculate loss per share—basic and diluted
$
(36,378
)
 
$
(4,908
)
 
$
(88,899
)
 
$
(44,467
)
 
 
 
 
 
 
 
 
Basic and diluted loss per share:
$
(0.53
)
 
$
(0.07
)
 
$
(1.29
)
 
$
(0.65
)
 
 
 
 
 
 
 
 
(in thousands of shares)
 
 
 
 
 
 
 
Weighted average shares outstanding—basic
68,807

 
68,331

 
68,710

 
68,172

Effect of common share equivalents (1) 

 

 

 

Weighted average shares outstanding—diluted
68,807

 
68,331

 
68,710

 
68,172

_________________________
(1) 
The Company had net losses used to calculate earnings per share for all periods presented. Therefore, the effects of common share equivalents of 352 and 672 for the three months ended September 30, 2015 and 2014, respectively, and 423 and 596 for the nine months ended September 30, 2015 and 2014, 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 
 September 30,
 
Nine Months Ended 
 September 30,
(in thousands of dollars)
2015
 
2014
 
2015
 
2014
Comprehensive loss:
 
 
 
 
 
 
 
Net loss
$
(36,241
)
 
$
(886
)
 
$
(84,846
)
 
$
(33,292
)
Unrealized (loss) gain on derivatives
(2,817
)
 
2,127

 
(3,663
)
 
(975
)
Amortization of losses on settled swaps, net of gains
202

 
383

 
1,212

 
2,221

Total comprehensive (loss) income
(38,856
)
 
1,624

 
(87,297
)
 
(32,046
)
Less: comprehensive loss attributable to noncontrolling interest
4,184

 
(85
)
 
8,337

 
967

Comprehensive (loss) income attributable to PREIT
$
(34,672
)
 
$
1,539

 
$
(78,960
)
 
$
(31,079
)


See accompanying notes to the unaudited consolidated financial statements.
4



PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF EQUITY
Nine Months Ended
September 30, 2015
(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, 2014
$
844,737

 
$
46

 
$
35

 
$
68,801

 
$
1,474,183

 
$
(6,002
)
 
$
(721,605
)
 
$
29,279

Net loss
(84,846
)
 

 

 

 

 

 
(76,773
)
 
(8,073
)
Other comprehensive loss
(2,451
)
 

 

 

 

 
(2,187
)
 

 
(264
)
Shares issued upon redemption of Operating Partnership units

 

 

 
29

 
577

 

 

 
(606
)
Shares issued under employee compensation plans, net of shares retired
(4,574
)
 

 

 
360

 
(4,934
)
 

 

 

Amortization of deferred compensation
4,678

 

 

 

 
4,678

 

 

 

Distributions paid to common shareholders ($0.63 per share)
(43,556
)
 

 

 

 

 

 
(43,556
)
 

Distributions paid to Series A preferred shareholders ($1.5498 per share)
(7,116
)
 

 

 

 

 

 
(7,116
)
 

Distributions paid to Series B preferred shareholders ($1.3827 per share)
(4,770
)
 

 

 

 

 

 
(4,770
)
 

Noncontrolling interests:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Distributions paid to Operating Partnership unit holders ($0.63 per unit)
(3,951
)
 

 

 

 

 

 

 
(3,951
)
Operating Partnership Units issued in connection with the purchase of Springfield Town Center
145,188

 

 

 

 

 

 

 
145,188

Other distributions to noncontrolling interests, net
(21
)
 

 

 

 

 

 

 
(21
)
Balance September 30, 2015
$
843,318

 
$
46

 
$
35

 
$
69,190

 
$
1,474,504

 
$
(8,189
)
 
$
(853,820
)
 
$
161,552



See accompanying notes to the unaudited consolidated financial statements.
5


PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
Nine Months Ended 
 September 30,
(in thousands of dollars)
2015
 
2014
Cash flows from operating activities:
 
 
 
Net loss
$
(84,846
)
 
$
(33,292
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation
99,271

 
100,584

Amortization
8,766

 
7,083

Straight-line rent adjustments
(1,321
)
 
(1,164
)
Provision for doubtful accounts
2,945

 
1,779

Amortization of deferred compensation
4,678

 
6,971

Loss on hedge ineffectiveness
512

 
1,354

(Gains) losses on sale of interests in real estate and non operating real estate, net
(12,429
)
 
414

Equity in income of partnerships in excess of distributions
(3,006
)
 
(1,976
)
Amortization of historic tax credits
(1,591
)
 
(2,508
)
Impairment of assets and expensed project costs
86,648

 
20,125

Change in assets and liabilities:
 
 
 
Net change in other assets
2,564

 
4,014

Net change in other liabilities
(11,213
)
 
(4,872
)
Net cash provided by operating activities
90,978

 
98,512

Cash flows from investing activities:
 
 
 
Investments in consolidated real estate acquisitions
(319,986
)
 
(20,000
)
Additions to construction in progress
(21,697
)
 
(30,745
)
Investments in real estate improvements
(33,922
)
 
(40,649
)
Cash proceeds from sales of real estate
37,056

 
165,632

Additions to leasehold improvements
(381
)
 
(953
)
Investments in partnerships
(18,906
)
 
(5,158
)
Capitalized leasing costs
(4,837
)
 
(4,223
)
Decrease (increase in) cash escrows
1,803

 
(318
)
Cash distributions from partnerships in excess of equity in income
4,873

 
1,537

Net cash (used in) provided by investing activities
(355,997
)
 
65,123

Cash flows from financing activities:
 
 
 
Borrowings from term loans
120,000

 
130,000

Net borrowings from (repayments of) revolving facility
210,000

 
(130,000
)
Proceeds from mortgage loans
272,044

 

Principal installments on mortgage loans
(14,945
)
 
(11,812
)
Repayments of mortgage loans
(272,776
)
 
(76,784
)
Payment of deferred financing costs
(3,634
)
 
(1,896
)
Dividends paid to common shareholders
(43,556
)
 
(41,225
)
Dividends paid to preferred shareholders
(11,886
)
 
(11,886
)
Distributions paid to Operating Partnership unit holders and non controlling interest
(3,951
)
 
(1,278
)
Value of shares of beneficial interest issued
1,081

 
3,062

Value of shares retired under equity incentive plans, net of shares issued
(5,655
)
 
(4,633
)
Net cash provided by (used in) financing activities
246,722

 
(146,452
)
Net change in cash and cash equivalents
(18,297
)
 
17,183

Cash and cash equivalents, beginning of period
40,433

 
34,230

Cash and cash equivalents, end of period
$
22,136

 
$
51,413


See accompanying notes to the unaudited consolidated financial statements.
6


PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015

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, 2014. 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. Our portfolio currently consists of a total of 40 properties in 12 states, including 30 operating shopping malls, six other retail properties, three development properties and one property under redevelopment (The Gallery at Market East). Two of the development properties are classified as “mixed use” (a combination of retail and other uses) and one of the development properties is classified as “other.” The above property counts do not include Voorhees Town Center in Voorhees, New Jersey, because that property has been classified as “held for sale” as of September 30, 2015 and was sold in October 2015.

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 September 30, 2015, we held an 89.2% 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 September 30, 2015, the total amount that would have been distributed would have been $165.4 million, which is calculated using our September 30, 2015 closing price on the New York Stock Exchange of $19.83 per share multiplied by the number of outstanding OP Units held by limited partners, which was 8,343,299 as of September 30, 2015.

We provide management, leasing and real estate development services through two of our subsidiaries: PREIT Services, LLC (“PREIT Services”), which generally develops and manages properties that we consolidate for financial reporting purposes, and PREIT-RUBIN, Inc. (“PRI”), which generally develops and manages properties that we do not consolidate for financial reporting purposes, including properties owned by partnerships in which we own an interest and properties that are owned by third parties in which we do not have an interest. PREIT Services and PRI are consolidated. PRI is a taxable REIT subsidiary, as defined by federal tax laws, which means that it is able to offer an expanded menu of services to tenants without jeopardizing our continuing qualification as a REIT under federal tax law.

We evaluate operating results and allocate resources on a property-by-property basis, and do not distinguish or evaluate our consolidated operations on a geographic basis. Due to the nature of our operating properties, which involve retail shopping, we have concluded that our individual properties have similar economic characteristics and meet all other aggregation criteria. Accordingly, we have aggregated our individual properties into one reportable segment. In addition, no single tenant accounts for 10% or more of consolidated revenue, and none of our properties are located outside the United States.

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 March 2015, the Financial Accounting Standards Board (“FASB”) issued “Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs” and “Interest—Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements,” which intend to simplify the presentation of debt issuance costs. The new guidance is effective for annual periods beginning after December 15, 2015 for public companies. We have evaluated this new guidance and have determined that this standard will not have a significant impact on our consolidated financial statements. We will adopt this new guidance in 2016.
 
In May 2014, the FASB 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 that the entity expects to receive in exchange for those goods or services. The new guidance is effective for annual reporting periods beginning after December 15, 2017 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 might have on our consolidated financial statements, nor have we decided upon the method of adoption.


8


2. REAL ESTATE ACTIVITIES

Investments in real estate as of September 30, 2015 and December 31, 2014 were comprised of the following:
 
(in thousands of dollars)
As of September 30,
2015
 
As of December 31,
2014
Buildings, improvements and construction in progress
$
3,055,060

 
$
2,843,326

Land, including land held for development
552,446

 
442,078

Total investments in real estate
3,607,506

 
3,285,404

Accumulated depreciation
(1,071,477
)
 
(1,061,051
)
Net investments in real estate
$
2,536,029

 
$
2,224,353


Capitalization of Costs

The following table summarizes our capitalized salaries, commissions, benefits, real estate taxes and interest for the three and nine months ended September 30, 2015 and 2014:
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
(in thousands of dollars)
2015
 
2014
 
2015
 
2014
Development/Redevelopment Activities:
 
 
 
 
 
 
 
Salaries and benefits
$
309

 
$
201

 
$
683

 
$
1,026

Real estate taxes
323

 
4

 
599

 
4

Interest
758

 
201

 
1,562

 
494

Leasing Activities:
 
 
 
 
 
 
 
Salaries, commissions and benefits
1,610

 
1,394

 
4,837

 
4,223


Dispositions

In October 2015, we sold Voorhees Town Center in Voorhees, New Jersey for $13.4 million, representing a capitalization rate of 10.3%. No gain or loss was recorded in connection with this sale. However, prior to the sale, as discussed in “Impairment of Assets” below, a $39.1 million impairment loss was recorded in the three and nine months ended September 30, 2015.

In August 2015, we sold Uniontown Mall in Uniontown, Pennsylvania for $23.0 million, representing a capitalization rate of 17.5%. No gain or loss was recorded in connection with this sale. However, prior to the sale, as discussed in “Impairment of Assets” below, $7.5 million of impairment losses were recorded in the nine months ended September 30, 2015.

Acquisition

On March 31, 2015, we acquired Springfield Town Center in Springfield, Virginia for aggregate consideration of $486.6 million, consisting of the following components: (i) the assumption and immediate payoff of $263.8 million of indebtedness owed to affiliates of Vornado Realty L.P.; (ii) 6,250,000 OP Units valued at $145.2 million, (iii) liabilities relating to tenant improvements and allowances of $14.8 million, (iv) the estimated present value of the “Earnout” (as described below) of $7.7 million, and (v) the remainder in cash. The seller is potentially entitled to receive consideration (the “Earnout”) under the terms of the Contribution Agreement which will be calculated as of March 31, 2018. Our allocation of the purchase price is as follows:

9


(in thousands of dollars)
 
 
Land
 
 
$
119,912

Building
 
 
299,012

Common area improvements
 
16,776

Site improvements and tenant improvements
 
35,565

Intangible assets (liabilities):
 
 
 
In-place lease value
 
18,123

 
Above market lease value
 
260

 
Below market lease value
 
(393
)
 
Above market ground lease value (as lessor)
 
(5,882
)
Deferred and other assets
 
3,231

Total
 
$
486,604




Impairment of Assets

Lycoming Mall

In September 2015, we recorded a loss on impairment of assets on Lycoming Mall in Pennsdale, Pennsylvania of $12.3 million in connection with negotiations with a prospective buyer of the property. In connection with these negotiations, we determined that the holding period for the property was less than had been previously estimated, which we concluded was 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, which has since been terminated, we determined that the estimated undiscounted cash flows, net of estimated capital expenditures, for Lycoming Mall were less than the carrying value of the property, and recorded a loss on impairment of assets.

Voorhees Town Center

In September 2015, we recorded a loss on impairment of assets on Voorhees Town Center in Voorhees, New Jersey of $39.1 million in connection with negotiations with the buyer of the property. In connection with these negotiations, we determined that the holding period for the property was less than had been previously estimated, which we concluded was 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 buyer of the property, we determined that the estimated undiscounted cash flows, net of estimated capital expenditures, for Voorhees Town Center were less than the carrying value of the property, and recorded a loss on impairment of assets. We sold this property in October 2015.

Gadsden Mall, New River Valley Mall and Wiregrass Commons Mall

In June 2015, we recorded aggregate losses on impairment of assets on Gadsden Mall in Gadsden, Alabama, New River Valley Mall in Christiansburg, Virginia and Wiregrass Commons Mall in Dothan, Alabama of $27.3 million after signing a purchase and sale agreement with a prospective buyer of the properties. The negotiations with this prospective buyer of the properties are ongoing, and could result in additional changes to our underlying assumptions. As a result of these negotiations, we determined that the holding period for the properties was less than had been previously estimated, which we concluded was a triggering event, leading us to conduct an analysis of possible asset impairment at these properties. Based upon the purchase and sale agreement with the prospective buyer of the properties, we determined that the estimated aggregate undiscounted cash flows, net of estimated capital expenditures, for Gadsden Mall, New River Valley Mall and Wiregrass Commons Mall were less than the aggregate carrying value of the properties, and recorded a loss on impairment of assets.

10



Uniontown Mall

In 2015, we recorded aggregate losses on impairment of assets on Uniontown Mall in Uniontown, Pennsylvania of $7.5 million. In connection with negotiations with the buyer of the property, we had determined that the holding period for the property was less than had been previously estimated, which we concluded was a triggering event, leading us to conduct an analysis of possible asset impairment at this property. Based upon the original purchase and sale agreement with the prospective buyer of the property and subsequent further negotiations, we determined that the estimated undiscounted cash flows, net of estimated capital expenditures, for Uniontown Mall were less than the carrying value of the property, and recorded both an initial loss on impairment of assets and a subsequent additional loss on impairment of assets. We sold the property in August 2015.

3. INVESTMENTS IN PARTNERSHIPS

The following table presents summarized financial information of the equity investments in our unconsolidated partnerships as of September 30, 2015 and December 31, 2014:
 
(in thousands of dollars)
As of September 30, 2015
 
As of December 31, 2014
ASSETS:
 
 
 
Investments in real estate, at cost:
 
 
 
Operating properties
$
753,001

 
$
654,024

Construction in progress
5,678

 
41,919

Total investments in real estate
758,679

 
695,943

Accumulated depreciation
(194,114
)
 
(190,100
)
Net investments in real estate
564,565

 
505,843

Cash and cash equivalents
37,041

 
15,229

Deferred costs and other assets, net
41,061

 
37,274

Total assets
642,667

 
558,346

LIABILITIES AND PARTNERS’ INVESTMENT:
 
 
 
Mortgage loans payable
438,061

 
383,190

Other liabilities
32,470

 
34,314

Total liabilities
470,531

 
417,504

Net investment
172,136

 
140,842

Partners’ share
89,764

 
74,663

PREIT’s share
82,372

 
66,179

Excess investment (1)
7,978

 
8,747

Net investments and advances
$
90,350

 
$
74,926

 
 
 
 
Investment in partnerships, at equity
$
154,588

 
$
140,882

Distributions in excess of partnership investments
(64,238
)
 
(65,956
)
Net investments and advances
$
90,350

 
$
74,926

_________________________
(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.


11


The following table summarizes our share of equity in income of partnerships for the three and nine months ended September 30, 2015 and 2014:
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
(in thousands of dollars)
2015
 
2014
 
2015
 
2014
Real estate revenue
$
25,432

 
$
25,684

 
$
76,285

 
$
67,191

Operating expenses:
 
 
 
 
 
 
 
Property operating expenses
(8,768
)
 
(8,659
)
 
(28,819
)
 
(21,508
)
Interest expense
(5,211
)
 
(5,483
)
 
(15,653
)
 
(16,410
)
Depreciation and amortization
(6,508
)
 
(4,972
)
 
(18,806
)
 
(12,035
)
Total expenses
(20,487
)
 
(19,114
)
 
(63,278
)
 
(49,953
)
Net income
4,945

 
6,570

 
13,007

 
17,238

Less: Partners’ share
(2,647
)
 
(3,283
)
 
(6,667
)
 
(8,614
)
PREIT’s share
2,298

 
3,287

 
6,340

 
8,624

Amortization of excess investment
87

 
(81
)
 
159

 
(232
)
Equity in income of partnerships
$
2,385

 
$
3,206

 
$
6,499

 
$
8,392


Financing Activity

In September 2015, the unconsolidated partnership that owns Springfield Mall in Springfield, Pennsylvania entered into a $65.0 million mortgage loan secured by the property with a fixed interest rate of 4.45% and a term of 10 years with no options to extend. The proceeds were used to repay the existing $61.7 million mortgage loan plus accrued interest. We received $1.0 million of proceeds as a distribution in connection with the financing.

Disposition

In July 2015, we sold our entire 50% interests in the Springfield Park shopping center in Springfield, Pennsylvania for $20.2 million, representing a capitalization rate of 7.0%, and recognized a gain of $12.0 million. In connection with our interest in the property, we had an ongoing obligation to sublet approximately 10,100 square feet of space of a tenant at the property, which we transferred as part of the transaction. In connection with the sale, a mortgage loan of approximately $9.0 million, of which our share was 50%, was assumed by the buyer of our interests. We are providing limited property management services to the shopping center for a limited term for nominal consideration. We divested $0.1 million of goodwill in connection with this transaction. We used the net proceeds from the transaction for general corporate purposes. See note 8 regarding the related party aspect of this transaction.

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 was considered to be a significant unconsolidated subsidiary as of December 31, 2014, and which is included in the amounts above. Summarized balance sheet information as of September 30, 2015 and December 31, 2014 and summarized statement of operations information for the three and nine months ended September 30, 2015 and 2014 for this entity, which is accounted for using the equity method, is as follows:
 
 
As of
(in thousands of dollars)
 
September 30, 2015
 
December 31, 2014
Summarized balance sheet information
 
 
 
 
     Total assets
 
$
52,668

 
$
51,703

     Mortgage loan payable
 
129,698

 
131,394


12



 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
(in thousands of dollars)
 
2015
 
2014
 
2015
 
2014
Summarized statement of operations information
 
 
 
 
 
 
 
 
     Revenue
 
$
8,903

 
$
9,037

 
$
26,807

 
$
27,133

     Property operating expenses
 
(2,200
)
 
(2,297
)
 
(7,219
)
 
(7,516
)
     Interest expense
 
(1,923
)
 
(1,956
)
 
(5,794
)
 
(5,891
)
     Net income
 
3,964

 
3,984

 
11,284

 
11,066

     PREIT’s share of equity in income of partnership
 
1,982

 
1,992

 
5,642

 
5,533


4. FINANCING ACTIVITY

Credit Agreements

We have entered into four credit agreements (collectively, the “Credit Agreements”), as further discussed and defined below: (1) the 2013 Revolving Facility, (2) the 2014 7-Year Term Loan, (3) the 2014 5-Year Term Loan, and (4) the 2015 5-Year Term Loan.

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. 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). In June 2015, we further amended the 2013 Revolving Facility to lower the interest rates in the applicable pricing grid, modify one covenant and to extend the Termination Date to June 26, 2018. 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 September 30, 2015, $60.0 million was outstanding under our 2013 Revolving Facility, $7.9 million was pledged as collateral for letters of credit and the unused portion that was available to us was $332.1 million.

Interest expense related to the 2013 Revolving Facility was $0.7 million and $0.4 million for the three months ended September 30, 2015 and 2014, respectively, and $2.4 million and $1.2 million for the nine months ended September 30, 2015 and 2014, respectively. Deferred financing fee amortization associated with the 2013 Revolving Facility was $0.2 million and $0.4 million for the three months ended September 30, 2015 and 2014, respectively, and $1.2 million (including $0.2 million of accelerated amortization resulting from the 2015 amendment) and $1.1 million for the nine months ended September 30, 2015 and 2014, respectively.

Pursuant to the June 2015 amendment, the initial maturity of the 2013 Revolving Facility is now June 26, 2018, and the Borrower has two options for 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.

Subject to the terms of the Credit Agreements, 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.

After the June 2015 amendment, amounts borrowed under the 2013 Revolving Facility bear interest at a rate between 1.20% and 1.55% per annum, depending on PREIT’s leverage at the end of each quarter, in excess of LIBOR, as set forth in the table below. The rate that is in effect as of September 30, 2015 is 1.30% 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.

13


Level
Ratio of Total Liabilities to Gross Asset Value
Applicable Margin
1
Less than 0.450 to 1.00
1.20
%
2
Equal to or greater than 0.450 to 1.00 but less than 0.500 to 1.00
1.25
%
3
Equal to or greater than 0.500 to 1.00 but less than 0.550 to 1.00
1.30
%
4
Equal to or greater than 0.550 to 1.00
1.55
%

The 2013 Revolving Facility is subject to a facility fee which is currently 0.25%, depending on leverage, and is recorded in interest expense in the consolidated statements of operations. In the event that we seek and obtain an investment grade credit rating, alternative interest rates and facility fees would apply.

The 2013 Revolving Facility contains certain affirmative and negative covenants and other provisions which are identical to those contained in the other Credit Agreements and which are described in detail below in the section entitled “—Identical covenants and common provisions contained in the Credit Agreements.”

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.

Term Loans

2015 5-Year Term Loan

In June 2015, the Borrower entered into a five year term loan agreement (the “2015 5-Year Term Loan”) with Wells Fargo Bank, National Association, PNC Bank, National Association and the other financial institutions signatory thereto, for a $150.0 million senior unsecured five year term loan facility. The maturity date of the 2015 5-Year Term Loan is June 26, 2020. At closing, the Borrower borrowed the entire $150.0 million under the 2015 5-Year Term Loan and used the proceeds to repay $150.0 million of the then outstanding balance under the Borrower’s 2013 Revolving Facility.

Amounts borrowed under the 2015 5-Year Term Loan bear interest at the rate specified below per annum, depending on PREIT’s leverage, in excess of LIBOR, unless and until the Borrower receives an investment grade credit rating and provides notice to the Administrative Agent (the “Rating Date”), after which alternative rates would apply. In determining PREIT’s leverage (the ratio of Total Liabilities to Gross Asset Value), the capitalization rate used to calculate Gross Asset Value is 6.50% for each Property having an average sales per square foot of more than $500 for the most recent period of 12 consecutive months and (b) 7.50% for any other Property.
Level
Ratio of Total Liabilities to Gross Asset Value
2015 5-Year Term
Loan
Applicable Margin
1
Less than 0.450 to 1.00
1.35%
2
Equal to or greater than 0.450 to 1.00 but less than 0.500 to 1.00
1.45%
3
Equal to or greater than 0.500 to 1.00 but less than 0.550 to 1.00
1.60%
4
Equal to or greater than 0.550 to 1.00
1.90%

The rate that is in effect as of September 30, 2015 is 1.60% per annum in excess of LIBOR.

The 2015 5-Year Term Loan also contains an additional covenant that prior to the Rating Date, if any, 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.

The Borrower may prepay the 2015 5-Year Term Loan at any time without premium or penalty, subject to reimbursement obligations for the lenders’ breakage costs for LIBOR borrowings.

The 2015 5-Year Term Loan contains certain affirmative and negative covenants and other provisions which are identical to those contained in the other Credit Agreements, and which are described in detail below in the section entitled “—Identical covenants and common provisions contained in the Credit Agreements.”


14


2014 Term Loans

In January 2014, the Borrower entered into two unsecured term loans in the initial aggregate amount of $250.0 million, comprised of:

(1) a five year term loan agreement (the “2014 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 five-year term loan facility; and

(2) a seven year term loan agreement (the “2014 7-Year Term Loan” and, together with the 2014 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 seven year term loan facility.

In June 2015, the Borrower entered into an amendment to each of the 2014 Term Loans under which PREIT is required to maintain, on a consolidated basis, minimum Unencumbered Debt Yield of 11.0%, versus 12.0% previously, consistent with the amendment to the covenant in the 2013 Revolving Facility, and the provision of the 2015 5-Year Term Loan. The cross-default provisions in the 2014 Term Loans were also amended to add the new 2015 5-Year Term Loan.

Amounts borrowed under the 2014 Term Loans bear interest at the rate specified in the chart below per annum, depending on PREIT’s leverage at the end of each quarter, 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
2014 7-Year Term Loan
Applicable Margin
2014 5-Year Term Loan
Applicable Margin
1
Less than 0.450 to 1.00
1.80%
1.35%
2
Equal to or greater than 0.450 to 1.00 but less than 0.500 to 1.00
1.95%
1.45%
3
Equal to or greater than 0.500 to 1.00 but less than 0.550 to 1.00
2.15%
1.60%
4
Equal to or greater than 0.550 to 1.00
2.35%
1.90%

The rates that are in effect as of September 30, 2015 are 2.15% and 1.60% for the 7-Year Term Loan and 5-Year Term Loan, respectively, per annum in excess of LIBOR.

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.

Subject to the terms of the Credit Agreements, the Borrower has the option to increase the maximum amount available under the 2014 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.

Subject to the terms of the Credit Agreements, the Borrower has the option to increase the maximum amount available under the 2014 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 contain certain affirmative and negative covenants and other provisions which are identical to those contained in the other Credit Agreements, and which are described in detail below in the section entitled “—Identical covenants and common provisions contained in the Credit Agreements.”

The Borrower may prepay the 2014 Term Loans at any time without premium or penalty, subject to reimbursement obligations for the lenders’ breakage costs for LIBOR borrowings. The payment of the 2014 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% from closing to one year after closing, to 2% from one year after closing to two years after closing, to 1% from two years after closing to three years after closing, and without penalty thereafter.


15


The table set forth below presents the amounts outstanding, interest rate (inclusive of the LIBOR spread and excluding the impact of interest rate swap agreements on LIBOR-based debt) in effect and the maturity dates of the 2014 Term Loans and the 2015 Term Loan (collectively, the “Term Loans”) as of September 30, 2015:
(in millions of dollars)
2014 7-Year Term Loan
 
2014 5-Year Term Loan
 
2015 5-Year Term Loan
 
Total facility
$
100.0

 
$
150.0

 
$
150.0

 
Amount outstanding
$
100.0

 
$
150.0

 
$
150.0

 
Interest rate
2.13
%
 
1.63
%
 
1.64
%
 
Maturity date
January 2021

 
January 2019

 
June 2020

 

Interest expense related to the Term Loans was $2.7 million and $1.2 million for the three months ended September 30, 2015 and 2014, respectively, and $5.9 million and $3.4 million for the nine months ended September 30, 2015 and 2014, respectively. Deferred financing fee amortization associated with the Term Loans was $0.1 million and $0.1 million for the three months ended September 30, 2015 and 2014, respectively, and $0.3 million and $0.2 million for the nine months ended September 30, 2015 and 2014, respectively.

Identical covenants and common provisions contained in the Credit Agreements

The Credit Agreements 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 1.50:1 (4) minimum Unencumbered Debt Yield of 11.0%; (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 Credit Agreements are subject to customary events of default and are cross-defaulted with one another. As of September 30, 2015, the Borrower was in compliance with all such financial covenants.

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 (2), or (4) with respect to the Term Loans, are guarantors under the 2013 Revolving Facility, as amended, will serve as guarantors for funds borrowed under the Credit Agreements. In the event that we seek and obtain an investment grade credit rating, if any, PREIT 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.

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 Credit Agreements immediately due and payable, and the Commitments of the lenders to make further loans under the 2013 Revolving Facility and the 2014 Term Loans 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.

16



Mortgage Loans

The carrying values and estimated fair values of mortgage loans based on interest rates and market conditions at September 30, 2015 and December 31, 2014 were as follows:
 
September 30, 2015
 
December 31, 2014
(in millions of dollars)
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Mortgage loans
$
1,392.3

 
$
1,398.2

 
$
1,407.9

 
$
1,415.5


The mortgage loans contain various customary default provisions. As of September 30, 2015, we were not in default on any of the mortgage loans.

Mortgage Loan Activity

In September 2015. we entered into a $170.0 million mortgage loan secured by Willow Grove Park in Willow Grove, Pennsylvania. The mortgage loan has a fixed interest rate of 3.88% per annum and a 10 year term. Payments are of principal and interest based on a 30 year amortization schedule with a balloon payment due in October 2025. In connection with the financing, we repaid the existing $133.6 million mortgage loan plus accrued interest. The balance of the proceeds were used for general corporate purposes.

In June 2015, we entered into a $96.2 million mortgage loan secured by Patrick Henry Mall in Newport News, Virginia. The mortgage loan has a fixed interest rate of 4.35% per annum and a 10 year term. Payments are of principal and interest based on a 30 year amortization schedule with a balloon payment due in July 2025. In connection with the financing, we repaid the existing $83.8 million mortgage loan plus accrued interest and incurred an $0.8 million prepayment penalty. The balance of the proceeds were used for general corporate purposes.

In April 2015, we repaid a $55.3 million mortgage loan plus accrued interest secured by Magnolia Mall in Florence, South Carolina using $40.0 million from our 2013 Revolving Facility and the balance from available working capital.

In March 2015, we borrowed an additional $5.8 million under the mortgage loan secured by Francis Scott Key Mall in Frederick, Maryland.

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 $56.2 million (net of capitalized interest of $1.6 million) and $55.8 million (net of capitalized interest of $0.5 million) for the nine months ended September 30, 2015 and 2014, respectively.

In our statement of cash flows, we show cash flows on our revolving facility on a net basis. Aggregate borrowings on our 2013 Revolving Facility were $290.0 million and $140.0 million for the nine months ended September 30, 2015 and 2014, respectively. Aggregate paydowns were $230.0 million and $270.0 million for the nine months ended September 30, 2015 and 2014, respectively. The $150.0 million paydown in the nine months ended September, 2015 was directly paid from the 2015 5-Year Term Loan initial borrowing, and is considered to be a non-cash transaction.

In connection with our acquisition of Springfield Town Center in March 2015, we issued 6,250,000 OP Units with a value of $145.2 million as partial consideration for the purchase.


17


6. COMMITMENTS AND CONTINGENCIES

Contractual Obligations

As of September 30, 2015, we had unaccrued contractual and other commitments related to our capital improvement projects and development projects of $19.3 million in the form of tenant allowances and contracts with general service providers and other professional service providers.

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.

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 income or 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 $4.3 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.

Interest Rate Swaps

As of September 30, 2015, we had entered into 16 interest rate swap agreements with a weighted average interest rate of 1.55% on a notional amount of $421.9 million maturing on various dates through January 2019. In October 2015, we entered into five additional interest rate swap agreements with a weighted average interest rate of 1.23% on a notional amount of $100.0 million maturing in June 2020.

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 September 30, 2015, 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 September 30, 2015 includes a net loss of $2.2 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.

In the nine months ended September 30, 2015, we recorded net loss on hedge ineffectiveness of $0.5 million. Following our July 2014 repayment of the $25.8 million mortgage loan secured by 801 Market Street, Philadelphia, Pennsylvania, we anticipated that we would not have sufficient 1-month LIBOR based interest payments to meet the entire swap notional amount related to two of our swaps, and we estimated that this condition would exist until approximately March 2015, when we planned to incur variable rate debt as part of the consideration for the acquisition of Springfield Town Center. These swaps, with an aggregate notional amount of $40.0 million, did not qualify for ongoing hedge accounting after July 2014 as a result of the unrealized forecasted transactions. We recognized mark-to-market interest expense on these two swaps of $0.5 million for the period from January 1, 2015 to March 31, 2015, the date the Springfield Town Center acquisition closed and variable rate debt was issued. These swaps are scheduled to expire by their terms in January 2019.

18



The following table summarizes the terms and estimated fair values of our interest rate swap derivative instruments at September 30, 2015 and December 31, 2014. 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
September 30, 2015 (1)
 
Fair Value at
December 31, 2014 (1)
 
Interest
Rate
 
Maturity Date
Interest Rate Swaps
 
 
 
 
 
 
 
 
$25.0
 
$
(0.1
)
 
$
(0.2
)
 
1.10
%
 
July 31, 2016
28.1
 
(0.3
)
 
(0.4
)
 
1.38
%
 
January 2, 2017
33.2
 
(0.2
)
 
0.1

 
3.72
%
 
December 1, 2017
7.6
 

 

 
1.00
%
 
January 1, 2018
55.0
 
(0.5
)
 

 
1.12
%
 
January 1, 2018
48.0
 
(0.4
)
 

 
1.12
%
 
January 1, 2018
30.0
 
(0.8
)
 
(0.4
)
 
1.78
%
 
January 2, 2019
20.0
 
(0.6
)
 
(0.3
)
 
1.78
%
 
January 2, 2019
20.0
 
(0.6
)
 
(0.3
)
 
1.78
%
 
January 2, 2019
20.0
 
(0.6
)
 
(0.3
)
 
1.79
%
 
January 2, 2019
20.0
 
(0.6
)
 
(0.3
)
 
1.79
%
 
January 2, 2019
20.0
 
(0.6
)
 
(0.3
)
 
1.79
%
 
January 2, 2019
25.0
 
(0.2
)
 
N/A

 
1.16
%
 
January 2, 2019
25.0
 
(0.2
)
 
N/A

 
1.16
%
 
January 2, 2019
25.0
 
(0.2
)
 
N/A

 
1.16
%
 
January 2, 2019
20.0
 
(0.1
)
 
N/A

 
1.16
%
 
January 2, 2019
 
 
$
(6.0
)
 
$
(2.4
)
 
 
 
 
_________________________
(1) 
As of September 30, 2015 and December 31, 2014, derivative valuations in their entirety were classified in Level 2 of the fair value hierarchy and we did not have any significant recurring fair value measurements related to derivative instruments using significant unobservable inputs (Level 3).

The 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 nine months ended September 30, 2015 and 2014:
 
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
Consolidated
Statements of
Operations 
Location
(in millions of dollars)
 
2015
 
2014
 
2015
 
2014
 
Derivatives in cash flow hedging relationships:
 
 
 
 
 
 
 
 
 
 
Interest rate products
 
 
 
 
 
 
 
 
 
 
(Loss) gain recognized in Other Comprehensive Income (Loss) on derivatives
 
$
(3.9
)
 
$
1.4

 
$
(5.5
)
 
$
(0.7
)
 
N/A
Loss reclassified from Accumulated Other Comprehensive Income (Loss) into income (effective portion)
 
$
1.3

 
$
1.0

 
$
3.5

 
$
3.3

 
Interest expense
Loss recognized in income on derivatives (ineffective portion and amount excluded from effectiveness testing)
 
$

 
$
(0.1
)
 
$
(0.5
)
 
$
(1.4
)
 
Interest expense


19


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 September 30, 2015, we were not in default on any of our derivative obligations.

We have an agreement with a derivative counterparty that incorporates the loan covenant provisions of our loan agreement with a lender affiliated with the derivative counterparty. Failure to comply with the loan covenant provisions would result in our being in default on any derivative instrument obligations covered by the agreement.

As of September 30, 2015, 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 $6.0 million. If we had breached any of the default provisions in these agreements as of September 30, 2015, we might have been required to settle our obligations under the agreements at their termination value (including accrued interest) of $6.5 million. We had not breached any of these provisions as of September 30, 2015.

8. RELATED PARTY TRANSACTION

As disclosed in note 3, we sold our entire 50% interests in Springfield Park shopping center in Springfield, Pennsylvania in July 2015. The buyer, Rubin Retail Acquisitions, L.P., is an entity controlled by Ronald Rubin, Executive Chairman and a Trustee of PREIT, and his brother, George Rubin, a former Vice Chairman and a former Trustee of PREIT. In accordance with PREIT’s Related Party Transactions Policy, a Special Committee consisting exclusively of independent members of PREIT’s Board of Trustees considered and approved the terms of the transaction. The disinterested members of PREIT’s Board of Trustees also approved the transaction.

9. HISTORIC TAX CREDITS
Phase I

In the third quarter of 2009, we closed a transaction with a counterparty (the “Phase I Counterparty”) related to the historic rehabilitation of an office building located at 801 Market Street in Philadelphia, Pennsylvania (the “Phase I Project”). Capital contributions received from the Phase I Counterparty are, in substance, consideration that we received in exchange for a put option, whereby we might be obligated or entitled to repurchase the Phase I Counterparty’s ownership interest in the Phase I Project, and our obligation to deliver tax credits to the Phase I Counterparty. During 2015, the counterparty elected to exercise its put option, and in October 2015, we paid $1.8 million to the Phase I Counterparty to repurchase its ownership interest in the Phase I Project.
Phase II
In the second quarter of 2012, we closed a transaction with a counterparty (the “Phase II Counterparty”) related to the historic rehabilitation of an office building located at 801 Market Street in Philadelphia, Pennsylvania (the “Phase II Project”). The Phase II Project has two stages of development, Phase II(i) and Phase II(ii). The Phase II Counterparty contributed equity of $5.5 million to Phase II(i) through December 31, 2013 and $5.8 million to Phase II(ii) through September 30, 2014. In exchange for its contributions into the Phase II Project, the Phase II Counterparty received substantially all of the historic rehabilitation tax credits associated with the Phase II Project as a distribution. The Phase II Counterparty’s contributions, other than the amounts allocated to a put option (whereby we might be obligated or entitled to repurchase the Phase II Counterparty’s ownership interest in the Phase II Project), are classified as “Accrued expenses and other liabilities” and recognized as “Other income” in the consolidated financial statements as our obligation to deliver tax credits is relieved.
The tax credits are subject to a five year credit recapture period, as defined in the Internal Revenue Code of 1986, as amended, beginning one year after the completion of the Phase II Project, of which Phase II(i) was completed in the second quarter of 2012, and Phase II(ii) was completed in the second quarter of 2013. Our obligation to the Phase II Counterparty with respect to the tax credits is ratably relieved annually in the third quarter of each year, upon the expiration of each portion of the recapture period and the satisfaction of other revenue recognition criteria. We recognized the contribution received from the Phase II Counterparty as “Other income” in the consolidated statements of operations of $0.9 million related to the third recapture period of Phase II(i) and $1.2 million related to the second recapture period of Phase II(i) in each of the three and nine months, respectively, ended September 30, 2015 and 2014. We recognized the contribution received of $0.9 million related to the second recapture period of Phase II(ii) and $1.0 million related to the first recapture period of Phase II(ii) in each of the three

20


and nine months, respectively, ended September 30, 2015 and 2014. We also recorded $0.3 million of priority returns earned by the Phase II Counterparty in each of the three and nine months ended September 30, 2015 and 2014.
In the aggregate, we recorded net income of $1.8 million and $1.9 million to “Other income” in the consolidated statements of operations in connection with Phase II in each of the three and nine months ended September 30, 2015 and 2014, respectively.


21


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 40 retail properties, of which 36 are operating properties, three are development properties, and one is under redevelopment (The Gallery at Market East). The 36 operating properties include 30 shopping malls and six other retail properties, have a total of 27.1 million square feet and are located in 11 states. We and partnerships in which we own an interest own 20.6 million square feet at these properties (excluding space owned by anchors). The above property and square footage counts do not include Voorhees Town Center in Voorhees, New Jersey, because that property has been classified as “held for sale” as of September 30, 2015 and was sold in October 2015.

There are 30 operating retail properties in our portfolio that we consolidate for financial reporting purposes. These consolidated operating properties have a total of 23.0 million square feet, of which we own 17.8 million square feet. The six operating retail properties that are owned by unconsolidated partnerships with third parties have a total of 4.1 million square feet, of which 2.8 million square feet are owned by such partnerships.

The development portion of our portfolio contains three properties in two states, with two classified as “mixed use” (a combination of retail and other uses), 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 September 30, 2015 was $36.2 million, an increase of $35.4 million compared to net loss of $0.9 million for the three months ended September 30, 2014.This increase was primarily due to the $51.4 million of impairment losses recorded in the three months ended September 30, 2015, partially offset by gains on sales of interests in real estate of $12.4 million in the three months ended September 30, 2015.

Net loss for the nine months ended September 30, 2015 was $84.8 million, an increase of $51.6 million compared to net loss of $33.3 million for the nine months ended September 30, 2014. This increase was primarily due to the $86.3 million of impairment losses recorded in the nine months ended September 30, 2015 compared to $19.7 million of impairment losses recorded in the nine months ended September 30, 2014, partially offset by gains on sales of interest in real estate of $12.4 million in the nine months ended September 30, 2015. Our operating results were also affected by the dispositions of three consolidated malls and interests in three partnership properties since September 30, 2014, and the Springfield Town Center acquisition (closed March 31, 2015). These effects were partially offset by increased Same Store NOI (as defined below) in the nine months ended September 30, 2015.
 
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.


22


Current Economic Conditions and Our Near Term Capital Needs

The conditions in the economy have caused relatively slow job growth 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, and in some cases, has led to bankruptcy filings by them. We continue to adjust our plans and actions to take into account the current environment as it evolves. 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 Credit Agreements. These steps might include (i) obtaining capital from joint ventures or other partnerships or arrangements involving our contribution of assets with institutional investors, private equity investors or other REITs, or 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, and (ii) obtaining equity capital, including through the issuance of common or preferred equity securities if market conditions are favorable, or through other actions.

Acquisitions and Dispositions

Springfield Town Center

On March 31, 2015, we acquired Springfield Town Center in Springfield, Virginia for aggregate consideration of $486.6 million, consisting of the following components: (i) the assumption and immediate payoff of $263.8 million of indebtedness owed to affiliates of Vornado Realty L.P.; (ii) 6,250,000 OP Units valued at $145.2 million, (iii) liabilities relating to tenant improvements and allowances of $14.8 million, (iv) the estimated present value of the “Earnout” (as described below) of $7.7 million, and (v) the remainder in cash. The seller is potentially entitled to receive consideration (the “Earnout”) under the terms of the Contribution Agreement which will be calculated as of March 31, 2018. The acquisition of Springfield Town Center affects the comparability of our occupancy, real estate revenue, property operating expenses and depreciation and amortization to prior periods. In addition, the debt incurred to finance a portion of the purchase price will cause us to incur interest expense. The impact of the acquisition on our net income, net operating income and Funds From Operations will depend on rental rates, occupancy and the overall performance of the property.

Voorhees Town Center

In October 2015, we sold Voorhees Town Center in Voorhees, New Jersey for $13.4 million, representing a capitalization rate of 10.3%. No gain or loss was recorded in connection with this sale; however, a $39.1 million impairment loss was recorded in the three and nine months ended September 30, 2015. See “Results of Operations—Impairment of Assets” for more information on this impairment.

Uniontown Mall

In August 2015, we sold Uniontown Mall in Uniontown, Pennsylvania for $23.0 million, representing a capitalization rate of 17.5%. No gain or loss was recorded in connection with this sale; however, $7.5 million of impairment losses were recorded in the nine months ended September 30, 2015 (prior to the sale). See “Results of Operations—Impairment of Assets” for more information on this impairment.

Springfield Park

In July 2015, we sold our entire 50% interests in the Springfield Park shopping center for $20.2 million, representing a capitalization rate of 7.0%, and we recognized a gain of approximately $12.0 million in the three and nine months ended September 30, 2015. In connection with the sale, a mortgage loan of approximately $9.0 million, of which our share was 50%, was assumed by the buyer of our interests. We are providing limited property management services to the shopping center for a limited term for nominal consideration. We divested $0.1 million of goodwill in connection with this transaction. We used the net proceeds from the transaction for general corporate purposes. See note 8 to our consolidated financial statements regarding the related party aspect of this transaction.




23


Capital Improvements, Redevelopment 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 $131.9 million as of September 30, 2015.

In 2014, we entered into a 50/50 joint venture with The Macerich Company (“Macerich”) to redevelop The Gallery at Market East in Philadelphia, Pennsylvania (“The Gallery”). As we redevelop The Gallery, operating results in the short term, as measured by sales, occupancy, real estate revenue, property operating expenses, net operating income and depreciation, will likely be negatively affected until the newly constructed space is completed, leased and occupied.

We are also engaged in several types of development projects. However, we do not expect to make any significant investment in these projects in the short term.

CRITICAL ACCOUNTING POLICIES

Critical Accounting Policies are those that require the application of management’s most difficult, subjective or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that might change in subsequent periods. In preparing the 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 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 2015 or 2014 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, 2014.
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.

24



See “Results of Operations” for a description of the losses on impairment of assets relating to Lycoming Mall, Voorhees Town Center, Uniontown Mall, Gadsden Mall, New River Valley Mall and Wiregrass Commons Mall that were recorded during the nine months ended September 30, 2015.


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.


25



RESULTS OF OPERATIONS

Occupancy

The table below sets forth certain occupancy statistics for our properties as of September 30, 2015 and 2014:
 
 
Occupancy (1) as of September 30,
 
Consolidated
Properties
 
Unconsolidated
Properties
 
Combined(2)
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
Retail portfolio weighted average:
 
 
 
 
 
 
 
 
 
 
 
Total excluding anchors
90.9
%
 
92.0
%
 
94.1
%
 
95.7
%
 
91.5
%
 
92.6
%
Total including anchors
93.8
%
 
95.4
%
 
95.2
%
 
96.6
%
 
94.0
%
 
95.5
%
Malls weighted average:
 
 
 
 
 
 
 
 
 
 
 
Total excluding anchors
90.9
%
 
91.9
%
 
94.0
%
 
94.8
%
 
91.1
%
 
92.1
%
Total including anchors
93.8
%
 
95.4
%
 
95.9
%
 
96.5
%
 
94.0
%
 
95.4
%
Other retail properties
89.0
%
 
99.5
%
 
94.6
%
 
96.8
%
 
94.4
%
 
96.9
%
_________________________
(1) 
Occupancy for both periods presented includes all tenants irrespective of the term of their agreements. Retail portfolio and mall occupancy for all periods presented excludes properties sold in 2015 and 2014 and The Gallery because the property is under redevelopment.
(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.



26


Leasing Activity

The table below sets forth summary leasing activity information with respect to our consolidated and unconsolidated properties for the nine months ended September 30, 2015:
 
 
 
 
 
 
 
Average Gross Rent psf
 
Increase in Gross Rent psf
 
Annualized
Tenant
Improvements
psf(2)
 
 
Number
 
GLA
 
Previous
 
New(1)
 
Dollar
 
Percentage
 
New Leases - non anchor tenants less than 10,000 square feet:(3)
1st Quarter
 
23

 
43,481

 
N/A

 
$
70.36

 
$
70.36

 
N/A

 
$
5.73

2nd Quarter
 
44

 
94,220

 
N/A

 
$
56.36

 
$
56.36

 
N/A

 
$
10.57

3rd Quarter
 
40

 
73,446

 
 N/A

 
$
47.88

 
$
47.88

 
 N/A

 
$
5.87

Total/Average
 
107

 
211,147

 
N/A

 
$
56.29

 
$
56.29

 
N/A

 
$
7.94

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
New Leases - non anchor tenants 10,000 square feet or greater:(3)
1st Quarter
 
1

 
13,000

 
N/A

 
$
22.49

 
$
22.49

 
N/A

 
$
12.64

2nd Quarter
 
2

 
23,785

 
N/A

 
$
15.41

 
$
15.41

 
N/A

 
$
1.44

3rd Quarter
 
5

 
99,332

 
 N/A

 
$
13.82

 
$
13.82

 
 N/A

 
$
14.06

Total/Average
 
8

 
136,117

 
N/A

 
$
14.93

 
$
14.93

 
N/A

 
$
11.72

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Renewal - non anchor tenants less than 10,000 square feet:(4)
1st Quarter
 
60

 
137,227

 
$
45.25

 
$
45.95

 
$
0.70

 
1.5
%
 
$
0.18

2nd Quarter
 
78

 
255,466

 
$
37.64

 
$
39.39

 
$
1.75

 
4.6
%
 
$

3nd Quarter
 
77

 
181,961

 
$
40.96

 
$
43.97

 
$
3.01

 
7.3
%
 
$
0.01

Total/Average
 
215

 
574,654

 
$
40.51

 
$
42.41

 
$
1.90

 
4.7
%
 
$
0.05

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Renewal - non anchor tenants 10,000 square feet or greater:(4)
1st Quarter
 
1

 
12,608

 
$
13.00

 
$
13.50

 
$
0.50

 
3.8
%
 
$

2nd Quarter
 
9

 
253,119

 
$
23.39

 
$
24.38

 
$
0.99

 
4.2
%
 
$

3rd Quarter
 
2

 
26,230

 
$
57.73

 
$
68.36

 
$
10.63

 
18.4
%
 
$

Total/Average
 
12

 
291,957

 
$
26.03

 
$
27.86

 
$
1.83

 
7.1
%
 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
New Leases - Anchor Tenants:
1st Quarter
 

 

 
N/A

 
$

 
$

 
N/A

 
$

2nd Quarter
 
1

 
48,208

 
N/A

 
$
5.23

 
$
5.23

 
N/A

 
$

3rd Quarter
 

 

 
 N/A

 
$

 
$

 
 N/A

 
$

Total/Average
 
1

 
48,208

 
N/A

 
$
5.23

 
$
5.23

 
N/A

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Renewal Leases - Anchor Tenants:(4)