PENNSYLVANIA REAL ESTATE INVESTMENT TRUST - FORM 10-Q - April 29, 2016

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EX-31.2 - EXHIBIT 31.2 - PENNSYLVANIA REAL ESTATE INVESTMENT TRUSTa2016q1exhibit312.htm
EX-10.3 - EXHIBIT 10.3 - PENNSYLVANIA REAL ESTATE INVESTMENT TRUSTa2016q1exhibit103.htm
EX-32.2 - EXHIBIT 32.2 - PENNSYLVANIA REAL ESTATE INVESTMENT TRUSTa2016q1exhibit322.htm
EX-31.1 - EXHIBIT 31.1 - PENNSYLVANIA REAL ESTATE INVESTMENT TRUSTa2016q1exhibit311.htm
EX-10.1 - EXHIBIT 10.1 - PENNSYLVANIA REAL ESTATE INVESTMENT TRUSTa2016q1exhibit101.htm
EX-10.2 - EXHIBIT 10.2 - PENNSYLVANIA REAL ESTATE INVESTMENT TRUSTa2016q1exhibit102.htm
EX-32.1 - EXHIBIT 32.1 - PENNSYLVANIA REAL ESTATE INVESTMENT TRUSTa2016q1exhibit321.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 March 31, 2016
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 April 22, 2016: 69,470,731
 




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)
March 31,
2016
 
December 31,
2015
 
(unaudited)
 
 
ASSETS:
 
 
 
INVESTMENTS IN REAL ESTATE, at cost:
 
 
 
Operating properties
$
3,305,542

 
$
3,297,520

Construction in progress
66,497

 
64,019

Land held for development
5,906

 
6,350

Total investments in real estate
3,377,945

 
3,367,889

Accumulated depreciation
(1,046,632
)
 
(1,015,647
)
Net investments in real estate
2,331,313

 
2,352,242

INVESTMENTS IN PARTNERSHIPS, at equity:
157,995

 
161,029

OTHER ASSETS:
 
 
 
Cash and cash equivalents
30,453

 
22,855

Tenant and other receivables (net of allowance for doubtful accounts of $7,216 and $6,417 at March 31, 2016 and December 31, 2015, respectively)
32,562

 
40,324

Intangible assets (net of accumulated amortization of $13,972 and $13,441 at March 31, 2016 and December 31, 2015, respectively)
21,717

 
22,248

Deferred costs and other assets, net
89,974

 
75,450

Assets held for sale
23,371

 
126,244

Total assets
$
2,687,385

 
$
2,800,392

LIABILITIES:
 
 
 
Mortgage loans payable
$
1,247,173

 
$
1,321,331

Term Loans
398,160

 
398,040

Revolving Facility
115,000

 
65,000

Tenants’ deposits and deferred rent
17,741

 
14,631

Distributions in excess of partnership investments
64,712

 
65,547

Fair value of derivative liabilities
7,248

 
2,756

Liabilities related to assets held for sale
—

 
69,918

Accrued expenses and other liabilities
76,679

 
78,539

Total liabilities
1,926,713

 
2,015,762

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 March 31, 2016 and December 31, 2015; 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 March 31, 2016 and December 31, 2015; liquidation preference of $86,250
35

 
35

Shares of beneficial interest, $1.00 par value per share; 200,000 shares authorized; issued and outstanding 69,459 shares at March 31, 2016 and 69,197 shares at December 31, 2015
69,459

 
69,197

Capital contributed in excess of par
1,475,992

 
1,476,397

Accumulated other comprehensive loss
(9,052
)
 
(4,193
)
Distributions in excess of net income
(929,046
)
 
(912,221
)
Total equity—Pennsylvania Real Estate Investment Trust
607,434

 
629,261

Noncontrolling interest
153,238

 
155,369

Total equity
760,672

 
784,630

Total liabilities and equity
$
2,687,385

 
$
2,800,392


See accompanying notes to the unaudited consolidated financial statements.
1

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

 
Three Months Ended 
 March 31,
 
(in thousands of dollars)
2016
 
2015
 
REVENUE:
 
 
 
 
Real estate revenue:
 
 
 
 
Base rent
$
66,993

 
$
64,273

 
Expense reimbursements
31,134

 
31,510

 
Percentage rent
451

 
524

 
Lease termination revenue
235

 
441

 
Other real estate revenue
2,643

 
2,035

 
Total real estate revenue
101,456

 
98,783

 
Other income
516

 
1,274

 
Total revenue
101,972

 
100,057

 
EXPENSES:
 
 
 
 
Operating expenses:
 
 
 
 
 Property operating expenses:
 
 
 
 
CAM and real estate taxes
(34,189
)
 
(33,807
)
 
Utilities
(4,326
)
 
(5,149
)
 
Other property operating expenses
(4,596
)
 
(4,196
)
 
Total property operating expenses
(43,111
)
 
(43,152
)
 
 Depreciation and amortization
(33,735
)
 
(33,189
)
 
 General and administrative expenses
(8,586
)
 
(8,943
)
 
 Provision for employee separation expenses
(535
)
 
—

 
 Acquisition costs and other expenses
(51
)
 
(4,451
)
 
Total operating expenses
(86,018
)
 
(89,735
)
 
Interest expense, net
(19,346
)
 
(20,145
)
 
Impairment of assets
(606
)
 
(6,240
)
 
Total expenses
(105,970
)
 
(116,120
)
 
Loss before equity in income of partnerships, gains on sales of interests in non operating real estate and gains on sales of real estate
(3,998
)
 
(16,063
)
 
Equity in income of partnerships
3,883

 
2,083

 
Gains on sales of interests in non operating real estate
9

 
43

 
Gain on sale of interests in real estate
2,035

 
—

 
Net income (loss)
1,929

 
(13,937
)
 
Less: net (income) loss attributable to noncontrolling interest
(208
)
 
429

 
Net income (loss) attributable to PREIT
1,721

 
(13,508
)
 
Less: preferred share dividends
(3,962
)
 
(3,962
)
 
Net loss attributable to PREIT common shareholders
$
(2,241
)
 
$
(17,470
)
 


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 
 March 31,
2016
 
2015
Net income (loss)
$
1,929

 
$
(13,937
)
Noncontrolling interest
(208
)
 
429

Dividends on preferred shares
(3,962
)
 
(3,962
)
Dividends on unvested restricted shares
(84
)
 
(86
)
Net loss used to calculate loss per share—basic and diluted
$
(2,325
)
 
$
(17,556
)
 
 
 
 
Basic and diluted loss per share:
$
(0.03
)
 
$
(0.26
)
 
 
 
 
(in thousands of shares)
 
 
 
Weighted average shares outstanding—basic
68,973

 
68,566

Effect of common share equivalents (1) 
—

 
—

Weighted average shares outstanding—diluted
68,973

 
68,566

_________________________
(1) 
The Company had net losses used to calculate earnings per share for all periods presented. Therefore, the effects of common share equivalents of 298 and 432 for the three months ended March 31, 2016 and 2015, 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 
 March 31,
 
(in thousands of dollars)
2016
 
2015
 
Comprehensive loss:
 
 
 
 
Net income (loss)
$
1,929

 
$
(13,937
)
 
Unrealized loss on derivatives
(5,572
)
 
(2,011
)
 
Amortization of losses on settled swaps, net of gains
126

 
772

 
Total comprehensive loss
(3,517
)
 
(15,176
)
 
Less: comprehensive loss attributable to noncontrolling interest
379

 
466

 
Comprehensive loss attributable to PREIT
$
(3,138
)
 
$
(14,710
)
 


See accompanying notes to the unaudited consolidated financial statements.
4


PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF EQUITY
Three Months Ended
March 31, 2016
(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, 2015
$
784,630

 
$
46

 
$
35

 
$
69,197

 
$
1,476,397

 
$
(4,193
)
 
$
(912,221
)
 
$
155,369

Net income
1,929

 
—

 
—

 
—

 
—

 
—

 
1,721

 
208

Other comprehensive loss
(5,446
)
 
—

 
—

 
—

 
—

 
(4,859
)
 
—

 
(587
)
Shares issued under employee compensation plans, net of shares retired
(1,716
)
 
—

 
—

 
262

 
(1,978
)
 
—

 
—

 
—

Amortization of deferred compensation
1,573

 
—

 
—

 
—

 
1,573

 
—

 
—

 
—

Distributions paid to common shareholders ($0.21 per share)
(14,584
)
 
—

 
—

 
—

 
—

 
—

 
(14,584
)
 
—

Distributions paid to Series A preferred shareholders ($0.5156 per share)
(2,372
)
 
—

 
—

 
—

 
—

 
—

 
(2,372
)
 
—

Distributions paid to Series B preferred shareholders ($0.4609 per share)
(1,590
)
 
—

 
—

 
—

 
—

 
—

 
(1,590
)
 
—

Noncontrolling interests:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Distributions paid to Operating Partnership unit holders ($0.21 per unit)
(1,752
)
 
—

 
—

 
—

 
—

 
—

 
—

 
(1,752
)
Balance March 31, 2016
$
760,672

 
$
46

 
$
35

 
$
69,459

 
$
1,475,992

 
$
(9,052
)
 
$
(929,046
)
 
$
153,238



See accompanying notes to the unaudited consolidated financial statements.
5

PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
Three Months Ended 
 March 31,
(in thousands of dollars)
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income (loss)
$
1,929

 
$
(13,937
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation
31,400

 
31,364

Amortization
2,991

 
2,450

Straight-line rent adjustments
(618
)
 
(272
)
Provision for doubtful accounts
918

 
1,259

Amortization of deferred compensation
1,573

 
1,803

Loss on hedge ineffectiveness
143

 
512

Gains on sales of interests in real estate and non operating real estate, net
(2,044
)
 
(43
)
Equity in income of partnerships in excess of distributions
(1,346
)
 
(748
)
Impairment of assets and expensed project costs
631

 
6,332

Change in assets and liabilities:
 
 
 
Net change in other assets
9,938

 
4,530

Net change in other liabilities
(1,032
)
 
(6,332
)
Net cash provided by operating activities
44,483

 
26,918

Cash flows from investing activities:
 
 
 
Investments in consolidated real estate acquisitions
—

 
(319,986
)
Additions to construction in progress
(11,839
)
 
(3,211
)
Investments in real estate improvements
(5,921
)
 
(6,426
)
Cash proceeds from sales of real estate
84,765

 
—

Additions to leasehold improvements
(141
)
 
(288
)
Investments in partnerships
(919
)
 
(7,708
)
Capitalized leasing costs
(1,737
)
 
(1,655
)
Decrease in cash escrows
2,085

 
981

Cash distributions from partnerships in excess of equity in income
4,463

 
1,323

Net cash provided by (used in) investing activities
70,756

 
(336,970
)
Cash flows from financing activities:
 
 
 
Borrowings from term loans
—

 
120,000

Net borrowings from revolving facility
50,000

 
210,000

Proceeds from mortgage loans
9,000

 
5,844

Principal installments on mortgage loans
(4,263
)
 
(4,742
)
Repayments of mortgage loans
(139,843
)
 
—

Payment of deferred financing costs
(521
)
 
(130
)
Dividends paid to common shareholders
(14,584
)
 
(14,510
)
Dividends paid to preferred shareholders
(3,962
)
 
(3,962
)
Distributions paid to Operating Partnership unit holders and non controlling interest
(1,752
)
 
(446
)
Value of shares of beneficial interest issued
324

 
337

Value of shares retired under equity incentive plans, net of shares issued
(2,040
)
 
(5,292
)
Net cash (used in) provided by financing activities
(107,641
)
 
307,099

Net change in cash and cash equivalents
7,598

 
(2,953
)
Cash and cash equivalents, beginning of period
22,855

 
40,433

Cash and cash equivalents, end of period
$
30,453

 
$
37,480


See accompanying notes to the unaudited consolidated financial statements.
6

PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016

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, 2015. 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 33 properties in 11 states, including 25 operating shopping malls, four other retail properties and four development or redevelopment properties. Two of the development and redevelopment properties are classified as “mixed use” (a combination of retail and other uses), one is classified as “retail” (redevelopment of The Gallery at Market East (the “Gallery”) into the Fashion Outlets of Philadelphia), and one is classified as “other.” The above property counts do not include two street retail properties in Philadelphia, Pennsylvania, because these properties have been classified as “held for sale” as of March 31, 2016.

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 March 31, 2016, we held an 89.3% 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 March 31, 2016, the total amount that would have been distributed would have been $182.2 million, which is calculated using our March 31, 2016 closing price on the New York Stock Exchange of $21.85 per share multiplied by the number of outstanding OP Units held by limited partners, which was 8,338,299 as of March 31, 2016.

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 2016, the Financial Accounting Standards Board (the “FASB”) issued guidance intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. The new guidance allows for entities to make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. In addition, the guidance allows employers to withhold shares to satisfy minimum statutory tax withholding requirements up to the employees’ maximum individual tax rate without causing the award to be classified as a liability. The guidance also stipulates that cash paid by an employer to a taxing authority when directly withholding shares for tax-withholding purposes should be classified as a financing activity on the statement of cash flows. This guidance is effective for annual reporting periods beginning after December 15, 2016, and interim periods within that reporting period. Early adoption is permitted in any interim or annual period, with any adjustments reflected as of the beginning of the fiscal year of adoption. The Company is in the process of evaluating the impact of this new guidance.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires lessees to record operating and financing leases as assets and liabilities on the balance sheet and lessors to expense costs that are not initial direct leasing costs. This standard will be effective for the first annual reporting period beginning after December 15, 2018. The Company is evaluating the effect that ASU No. 2016-02 will have on its consolidated financial statements and related disclosures.
 
In 2016, the Company adopted Accounting Standards Update (“ASU”) No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. The Company evaluated the application of ASU No. 2015-02 and concluded that no change was required to its accounting of its interests in less than wholly owned joint ventures, however, the Operating Partnership now meets the criteria as a variable interest entity. The Company’s significant asset is its investment in the Operating Partnership, and consequently, substantially all of the Company’s assets and liabilities represent those assets and liabilities of the Operating Partnership. All of the Company’s debt is also an obligation of the Operating Partnership.
 
In March 2015, the 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. This guidance provides an amendment to the accounting guidance related to the presentation of debt issuance costs and is effective for fiscal years beginning after December 15, 2015, and we have adopted this guidance as of January 1, 2016.  This

8

guidance is applied retrospectively to all prior periods.  Under the new guidance, debt issuance costs related to a note shall be reported in the Consolidated Balance Sheets as a direct deduction from the face amount of that note.  In this regard, debt issuance costs shall not be classified separately from related debt obligations as a deferred charge.  Therefore, as a result of adopting this guidance, the Company reclassified in its Consolidated Balance Sheets $4.2 million of debt issuance costs, net of accumulated amortization, at December 31, 2015, from “Deferred costs and other assets, net” to “Mortgage loans payable,” and $2.0 million of debt issuance costs at December 31, 2015, from “Deferred costs and other assets, net” to “Term loans,” thereby decreasing the carrying value of our recognized debt obligations for presentational purposes.
 
2. REAL ESTATE ACTIVITIES

Investments in real estate as of March 31, 2016 and December 31, 2015 were comprised of the following:
 
(in thousands of dollars)
As of March 31,
2016
 
As of December 31,
2015
Buildings, improvements and construction in progress
$
2,855,977

 
$
2,847,986

Land, including land held for development
521,968

 
519,903

Total investments in real estate
3,377,945

 
3,367,889

Accumulated depreciation
(1,046,632
)
 
(1,015,647
)
Net investments in real estate
$
2,331,313

 
$
2,352,242


Capitalization of Costs

The following table summarizes our capitalized salaries, commissions, benefits, real estate taxes and interest for the three months ended March 31, 2016 and 2015:
 
 
Three Months Ended 
 March 31,
(in thousands of dollars)
2016
 
2015
Development/Redevelopment Activities:
 
 
 
Salaries and benefits
$
274

 
$
154

Real estate taxes
19

 
—

Interest
703

 
35

Leasing Activities:
 
 
 
Salaries, commissions and benefits
1,737

 
1,655


Dispositions

The following table presents our dispositions for the three months ended March 31, 2016:
Sale Date
 
Property and Location
 
Description of Real Estate Sold
 
Capitalization Rate
 
Sale Price
 
Gain
 
 
 
 
(in millions)
2016 Activity:
 
 
 
 
 
 
 
 
 
 
March 2016
 
Lycoming Mall
Pennsdale, Pennsylvania
 
Mall
 
18.0
%
 
$
26.4

 
$
0.3

March 2016
 
Gadsden Mall,
Gadsden, Alabama,
New River Valley Mall,
Christiansburg, Virginia, and
Wiregrass Commons Mall, Dothan, Alabama (1)
 
Three Malls (single combined transaction)
 
17.4
%
 
66.0

 
1.6

February 2016
 
Palmer Park Mall,
Easton, Pennsylvania
 
Mall
 
13.6
%
 
18.0

 
0.1

_________________________
(1) In connection with this transaction, we issued a mortgage loan to the buyer for $17.0 million, which is recorded in “Deferred

9

costs and other assets, net” on our consolidated balance sheet. The mortgage loan is secured by Wiregrass Commons Mall, bears interest at the rate of 6.00% per annum and has a maturity date of April 2026.

Impairment of Assets

In March 2016 we recorded a loss on impairment of assets on an office building located in Voorhees, New Jersey of $0.6 million in connection with negotiations with a prospective buyer of the property. In connection with these negotiations, we determined that the holding period of the property was less than previously estimated, which we concluded was a triggering event, leading us to conduct an analysis of possible impairment at this property. Based upon the negotiations, we determined that the estimated undiscounted cash flows, net of capital expenditures for the property, were less than the carrying value of the property, and recorded a loss on impairment of assets.

3. INVESTMENTS IN PARTNERSHIPS

The following table presents summarized financial information of the equity investments in our unconsolidated partnerships as of March 31, 2016 and December 31, 2015:
 
(in thousands of dollars)
As of March 31, 2016
 
As of December 31, 2015
ASSETS:
 
 
 
Investments in real estate, at cost:
 
 
 
Operating properties
$
639,874

 
$
636,774

Construction in progress
128,479

 
126,199

Total investments in real estate
768,353

 
762,973

Accumulated depreciation
(191,450
)
 
(186,580
)
Net investments in real estate
576,903

 
576,393

Cash and cash equivalents
29,711

 
37,362

Deferred costs and other assets, net
37,999

 
39,890

Total assets
644,613

 
653,645

LIABILITIES AND PARTNERS’ INVESTMENT:
 
 
 
Mortgage loans payable
444,599

 
440,450

Other liabilities
22,853

 
30,425

Total liabilities
467,452

 
470,875

Net investment
177,161

 
182,770

Partners’ share
91,516

 
95,165

PREIT’s share
85,645

 
87,605

Excess investment (1)
7,638

 
7,877

Net investments and advances
$
93,283

 
$
95,482

 
 
 
 
Investment in partnerships, at equity
$
157,995

 
$
161,029

Distributions in excess of partnership investments
(64,712
)
 
(65,547
)
Net investments and advances
$
93,283

 
$
95,482

_________________________
(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.


10

The following table summarizes our share of equity in income of partnerships for the three months ended March 31, 2016 and 2015:
 
 
Three Months Ended 
 March 31,
(in thousands of dollars)
2016
 
2015
Real estate revenue
$
29,191

 
$
26,497

Operating expenses:
 
 
 
Property operating expenses
(10,212
)
 
(10,706
)
Interest expense
(5,392
)
 
(5,350
)
Depreciation and amortization
(5,722
)
 
(6,370
)
Total expenses
(21,326
)
 
(22,426
)
Net income
7,865

 
4,071

Less: Partners’ share
(4,216
)
 
(2,036
)
PREIT’s share
3,649

 
2,035

Amortization of excess investment
234

 
48

Equity in income of partnerships
$
3,883

 
$
2,083


Significant Unconsolidated Subsidiaries

Two of our unconsolidated subsidiaries, in each of which we have a 50% partnership interest, (i) Lehigh Valley Associates LP, the owner of the substantial majority of Lehigh Valley Mall, and (ii) Metroplex West Associates, LP, the owner of the substantial majority of Metroplex Shopping Center, met the conditions of significant unconsolidated subsidiaries as of March 31, 2016. The financial information of these entities are included in the amounts above. Summarized balance sheet information as of March 31, 2016 and December 31, 2015 and summarized statement of operations information for the three months ended March 31, 2016 and 2015 for these entities, which are accounted for using the equity method, are as follows:
 
 
Lehigh Valley Associates LP
 
Metroplex West Associates, LP
 
 
As of
 
As of
(in thousands of dollars)
 
March 31, 2016
 
December 31, 2015
 
March 31, 2016
 
December 31, 2015
Summarized balance sheet information
 
 
 
 
 
 
 
 
     Total assets
 
$
47,580

 
$
48,352

 
$
36,230

 
$
36,164

     Mortgage loan payable
 
128,305

 
128,883

 
81,121

 
81,505


 
 
Three Months Ended 
 March 31,
 
Three Months Ended 
 March 31,
(in thousands of dollars)
 
2016
 
2015
 
2016
 
2015
Summarized statement of operations information
 
 
 
 
 
 
 
 
     Revenue
 
$
9,048

 
$
8,944

 
$
2,868

 
$
2,884

     Property operating expenses
 
(2,226
)
 
(2,480
)
 
(748
)
 
(637
)
     Interest expense
 
(1,906
)
 
(1,940
)
 
(1,024
)
 
(1,044
)
     Net income
 
4,083

 
3,461

 
763

 
358

     PREIT’s share of equity in income
 
 
 
 
 
 
 
 
          of partnership
 
2,042

 
1,730

 
381

 
179






11

4. FINANCING ACTIVITY

Credit Agreements

We have entered into four credit agreements (collectively, the “Credit Agreements”), as further discussed in our Annual Report on Form 10-K for the year ended December 31, 2015: (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. The 2014 7-Year Term Loan, the 2014 5-Year Term Loan and the 2015 5-Year Term Loan are collectively referred to as the “Term Loans.”

As of March 31, 2016, we had borrowed $400.0 million under the Term Loans and $115.0 million under the 2013 Revolving Facility (with $15.3 million pledged as collateral for a letter of credit at March 31, 2016.
Interest expense and the deferred financing fee amortization related to the Credit Agreements for the three months ended March 31, 2016 and 2015 was as follows:

 
Three Months Ended March 31,
(in thousands of dollars)
2016
 
2015
2013 Revolving Facility
 
 
 
 
 
Interest expense
 
$
690.1

 
$
380.9

 
Deferred financing amortization
 
198.7

 
358.0

 
 
 
 
 
 
Term Loans
 
 
 
 
 
Interest expense
 
2,991.9

 
1,257.2

 
Deferred financing amortization
 
119.9

 
76.4


Each of the Credit Agreements contain certain affirmative and negative covenants, which are identical to those contained in the other Credit Agreements and which are described in detail in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015. As of March 31, 2016, we were in compliance with all financial covenants in the Credit Agreements. Following recent property sales, the net operating income (“NOI”) from our remaining unencumbered properties is at a level such that within the Unencumbered Debt Yield covenant (as described in our Annual Report on Form 10-K for the year ended December 31, 2015), the maximum unsecured amount that was available for us to borrow under the 2013 Revolving Facility as of March 31, 2016 was $209.6 million.


Amounts borrowed under the Credit Agreements bear interest at the rate specified below per annum, depending on our leverage, in excess of LIBOR, unless and until we receive an investment grade credit rating and provide notice to the administrative agent (the “Rating Date”), after which alternative rates would apply. In determining our 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. 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.

 
 
Applicable Margin
Level


Ratio of Total Liabilities
to Gross Asset Value
2013 Revolving Facility
 
2014 7-Year Term Loan
 
2014 5-Year Term Loan
 
2015 5-Year Term Loan
 
1
Less than 0.450 to 1.00
1.20%
 
1.80%
 
1.35%
 
1.35%
 
2
Equal to or greater than 0.450 to 1.00 but less than 0.500 to 1.00
1.25%
(1) 
1.95%
(1) 
1.45%
(1) 
1.45%
(1) 
3
Equal to or greater than 0.500 to 1.00 but less than 0.550 to 1.00
1.30%
 
2.15%
 
1.60%
 
1.60%
 
4
Equal to or greater than 0.550 to 1.00
1.55%
 
2.35%
 
1.90%
 
1.90%
 

(1) The rate in effect at March 31, 2016.

12


Mortgage Loans

The carrying values and estimated fair values of mortgage loans based on interest rates and market conditions at March 31, 2016 and December 31, 2015 were as follows:
 
March 31, 2016
 
December 31, 2015
(in millions of dollars)
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Mortgage loans
$
1,247.2

 
$
1,267.1

 
$
1,321.3

 
$
1,323.3


The mortgage loans contain various customary default provisions. As of March 31, 2016, we were not in default on any of the mortgage loans.

Mortgage Loan Activity

In April 2016, we entered into a $130.0 million mortgage loan secured by Woodland Mall in Grand Rapids, Michigan. The new mortgage loan bears interest at the rate of 2.00% plus LIBOR, and has a maturity date of April 2021.

In March 2016, we borrowed an additional $9.0 million, lowered the interest rate to 2.35% plus LIBOR, and extended the maturity date to March 2021 on the mortgage loan secured by Viewmont Mall in Scranton, Pennsylvania.

In March 2016, we repaid a $79.3 million mortgage loan plus accrued interest secured by Valley Mall in Hagerstown, Maryland using $50.0 million from our 2013 Revolving Facility and the balance from available working capital.

In March 2016, we repaid a $32.8 million mortgage loan plus accrued interest secured by Lycoming Mall in Pennsdale, Pennsylvania in connection with the March 2016 sale of the property using proceeds from the sale and available working capital.

In March 2016, we repaid a $28.1 million mortgage loan plus accrued interest secured by New River Valley Mall in Christiansburg, Virginia in connection with the March 2016 sale of the property using proceeds from the sale.

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 $17.3 million (net of capitalized interest of $0.7 million) and $17.0 million (net of capitalized interest of less than $0.1 million) for the three months ended March 31, 2016 and 2015, 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 $70.0 million and $210.0 million for the three months ended March 31, 2016 and 2015, respectively. Aggregate paydowns were $20.0 million for the three months ended March 31, 2016.

In connection with the sale of Gadsden Mall, New River Valley Mall and Wiregrass Commons, we issued a mortgage note to the buyer in the amount of $17.0 million that is secured by Wiregrass Commons Mall.

6. COMMITMENTS AND CONTINGENCIES

Contractual Obligations

As of March 31, 2016, we had unaccrued contractual and other commitments related to our capital improvement projects and development projects of $72.6 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

13

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, net,” 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 $4.0 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 March 31, 2016, we had entered into 21 interest rate swap agreements with a weighted average interest rate of 1.34% on a notional amount of $497.7 million maturing on various dates through February 2021, and one forward starting interest rate swap agreement with an interest rate of 1.42% on a notional amount of $48.0 million, which will be effective starting January 2018 and maturing in February 2021.

In April 2016, we entered into five additional interest rate swap agreements with a weighted average interest rate of 1.02% on an aggregate notional amounts of $130.0 million .

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 March 31, 2016, except as set forth below, we considered these interest rate swap agreements to be highly effective as cash flow hedges. The interest rate swap agreements are net settled monthly.

In March 2016, in connection with the sale of, and repayment of, the mortgage loan secured by Lycoming Mall, we recorded a loss on hedge ineffectiveness of $0.1 million.

Accumulated other comprehensive loss as of March 31, 2016 includes a net loss of $1.9 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.



14

The following table summarizes the terms and estimated fair values of our interest rate swap derivative instruments at March 31, 2016 and December 31, 2015. 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
March 31, 2016 (1)
 
Fair Value at
December 31, 2015 (1)
 
Interest
Rate
 
Effective Date
 
Maturity Date
Interest Rate Swaps
 
 
 
 
 
 
 
 
 
 
$25.0
 
$
—

 
$
(0.1
)
 
1.10
%
 
 
 
July 31, 2016
28.1
 
(0.2
)
 
(0.2
)
 
1.38
%
 
 
 
January 2, 2017
33.0
 
N/A

 
—

 
3.72
%
 
 
 
December 1, 2017
48.0
 
(0.4
)
 
(0.1
)
 
1.12
%
 
 
 
January 1, 2018
7.6
 
—

 
—

 
1.00
%
 
 
 
January 1, 2018
55.0
 
(0.4
)
 
(0.1
)
 
1.12
%
 
 
 
January 1, 2018
30.0
 
(0.8
)
 
(0.5
)
 
1.78
%
 
 
 
January 2, 2019
20.0
 
(0.6
)
 
(0.4
)
 
1.78
%
 
 
 
January 2, 2019
20.0
 
(0.6
)
 
(0.3
)
 
1.78
%
 
 
 
January 2, 2019
20.0
 
(0.6
)
 
(0.3
)
 
1.79
%
 
 
 
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
 
(0.3
)
 
—

 
1.16
%
 
 
 
January 2, 2019
25.0
 
(0.3
)
 
—

 
1.16
%
 
 
 
January 2, 2019
25.0
 
(0.3
)
 
—

 
1.16
%
 
 
 
January 2, 2019
20.0
 
(0.2
)
 
—

 
1.16
%
 
 
 
January 2, 2019
20.0
 
(0.2
)
 
0.1

 
1.23
%
 
 
 
June 26, 2020
20.0
 
(0.2
)
 
0.2

 
1.23
%
 
 
 
June 26, 2020
20.0
 
(0.2
)
 
0.2

 
1.23
%
 
 
 
June 26, 2020
20.0
 
(0.2
)
 
0.2

 
1.23
%
 
 
 
June 26, 2020
20.0
 
(0.2
)
 
0.2

 
1.24
%
 
 
 
June 26, 2020
9.0
 
(0.1
)
 
N/A

 
1.19
%
 
 
 
February 1, 2021
48.0
 
(0.2
)
 
N/A

 
1.42
%
 
January 2, 2018
 
February 1, 2021
 
 
$
(7.2
)
 
$
(1.7
)
 
 
 
 
 
 
_________________________
(1) 
As of March 31, 2016 and December 31, 2015, 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).



15

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 months ended March 31, 2016 and 2015:
 
 
 
Three Months Ended 
 March 31,
 
Consolidated
Statements of
Operations 
Location
(in millions of dollars)
 
2016
 
2015
 
Derivatives in cash flow hedging relationships:
 
 
 
 
 
 
Interest rate products
 
 
 
 
 
 
Gain (loss) recognized in Other Comprehensive Income (Loss) on derivatives
 
$
(6.7
)
 
$
(1.7
)
 
N/A
Loss reclassified from Accumulated Other Comprehensive Income (Loss) into income (effective portion)
 
$
1.4

 
$
1.0

 
Interest expense
Loss recognized in income on derivatives (ineffective portion and amount excluded from effectiveness testing)
 
$
(0.1
)
 
$
(0.5
)
 
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 March 31, 2016, 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 March 31, 2016, 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 $7.2 million. If we had breached any of the default provisions in these agreements as of March 31, 2016, we might have been required to settle our obligations under the agreements at their termination value (including accrued interest) of $7.8 million. We had not breached any of these provisions as of March 31, 2016.


16

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 33 retail properties in 11 states, of which 29 are operating properties, three are development properties, and one is under redevelopment. The 29 operating properties include 25 shopping malls and four other retail properties, have a total of 24.2 million square feet and are located in 10 states. We and partnerships in which we own an interest own 18.1 million square feet at these properties (excluding space owned by anchors). The above property and square footage counts do not include two street retail properties in Philadelphia, Pennsylvania, because these properties have been classified as “held for sale” as of March 31, 2016.

There are 23 operating retail properties in our portfolio that we consolidate for financial reporting purposes. These consolidated operating properties have a total of 20.1 million square feet, of which we own 15.3 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 and redevelopment portion of our portfolio contains four properties in two states, with two classified as “mixed use” (a combination of retail and other uses), one is classified as “retail” (redevelopment of The Gallery at Market East (the “Gallery”) into the Fashion Outlets of Philadelphia), 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 income for the three months ended March 31, 2016 was $1.9 million, an increase of $15.9 million compared to net loss of $13.9 million for the three months ended March 31, 2015. This increase was primarily due to a decrease in impairment of assets of $5.6 million, $3.5 million in acquisition costs related to Springfield Town Center in 2015 that did not recur in 2016, a $3.7 million increase in Net Operating Income (“NOI”), and a $2.0 million gain on sale of interests in real estate.

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.

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,

17

and (ii) obtaining equity capital, including through the issuance of common or preferred equity securities if market conditions are favorable, or through other actions.

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 $66.5 million as of March 31, 2016.

In 2014, we entered into a 50/50 joint venture with The Macerich Company (“Macerich”) to redevelop the Gallery. As we redevelop the Gallery, operating results in the short term, as measured by sales, occupancy, real estate revenue, property operating expenses, NOI 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 2016 or 2015 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, 2015.
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.

18

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.

New Accounting Developments

In March 2016, the Financial Accounting Standards Board (the “FASB”) issued guidance intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. The new guidance allows for entities to make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. In addition, the guidance allows employers to withhold shares to satisfy minimum statutory tax withholding requirements up to the employees’ maximum individual tax rate without causing the award to be classified as a liability. The guidance also stipulates that cash paid by an employer to a taxing authority when directly withholding shares for tax-withholding purposes should be classified as a financing activity on the statement of cash flows. This guidance is effective for annual reporting periods beginning after December 15, 2016, and interim periods within that reporting period. Early adoption is permitted in any interim or annual period, with any adjustments reflected as of the beginning of the fiscal year of adoption. The Company is in the process of evaluating the impact of this new guidance.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires lessees to record operating and financing leases as assets and liabilities on the balance sheet and lessors to expense costs that are not initial direct leasing costs. This standard will be effective for the first annual reporting period beginning after December 15, 2018. The Company is evaluating the effect that ASU No. 2016-02 will have on its consolidated financial statements and related disclosures.
 
In 2016, the Company adopted Accounting Standards Update (“ASU”) No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. The Company evaluated the application of ASU No. 2015-02 and concluded that no change was required to its accounting of its interests in less than wholly owned joint ventures, however, the Operating Partnership now meets the criteria as a variable interest entity. The Company’s significant asset is its investment in the Operating Partnership, and consequently, substantially all of the Company’s assets and liabilities represent those assets and liabilities of the Operating Partnership. All of the Company’s debt is also an obligation of the Operating Partnership.
 
In March 2015, the 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. This guidance provides an amendment to the accounting guidance related to the presentation of debt issuance costs and is effective for fiscal years beginning after December 15, 2015, and we have adopted this guidance as of January 1, 2016.  This guidance is applied retrospectively to all prior periods.  Under the new guidance, debt issuance costs related to a note shall be reported in the Consolidated Balance Sheets as a direct deduction from the face amount of that note.  In this regard, debt issuance costs shall not be classified separately from related debt obligations as a deferred charge.  Therefore, as a result of adopting this guidance, the Company reclassified in its Consolidated Balance Sheets $4.2 million of debt issuance costs, net of accumulated amortization, at December 31, 2015, from “Deferred costs and other assets, net” to “Mortgage loans payable,” and $2.0 million of debt issuance costs at December 31, 2015, from “Deferred costs and other assets, net” to “Term loans,” thereby decreasing the carrying value of our recognized debt obligations for presentational purposes.
 

See “Results of Operations” for a description of the losses on impairment of assets recorded during the three months ended March 31, 2016 and 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.


19


RESULTS OF OPERATIONS

Occupancy

The table below sets forth certain occupancy statistics for our properties as of March 31, 2016 and 2015:
 
 
Occupancy (1) as March 31,
 
Consolidated
Properties
 
Unconsolidated
Properties
 
Combined(2)
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
Retail portfolio weighted average:
 
 
 
 
 
 
 
 
 
 
 
Total excluding anchors
90.0
%
 
91.5
%
 
95.2
%
 
97.0
%
 
91.0
%
 
92.5
%
Total including anchors
93.6
%
 
95.4
%
 
96.1
%
 
97.6
%
 
94.0
%
 
95.7
%
Malls weighted average:
 
 
 
 
 
 
 
 
 
 
 
Total excluding anchors
90.0
%
 
91.5
%
 
95.5
%
 
93.0
%
 
90.4
%
 
91.6
%
Total including anchors
93.6
%
 
95.4
%
 
96.9
%
 
95.3
%
 
93.9
%
 
95.3
%
Other retail properties
N/A

 
N/A

 
95.4
%
 
99.9
%
 
95.4
%
 
99.9
%
_________________________
(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 or classified as held for sale in 2016 and 2015 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.



20

Leasing Activity

The table below sets forth summary leasing activity information with respect to our consolidated and unconsolidated properties for the three months ended March 31, 2016:
 
 
 
Initial Gross Rent Spread (1)
 
Avg Rent Spread (2)
 
Annualized Tenant Improvements psf (3)
 
 
Number
 
GLA
 
Term
 
Initial Rent psf
 
Previous Rent psf
 
$
 
%
 
%
 
Non Anchor
New Leases
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Under 10,000 sf
 
21

 
52,773

 
7.5

 
$
44.48

 
 N/A
 
N/A
 
N/A
 
N/A
 
$
8.82

Over 10,000 sf
 
2

 
88,278

 
10.0

 
17.22

 
 N/A
 
N/A
 
N/A
 
N/A
 
10.89

Total New Leases
 
23

 
141,051

 
7.7

 
$
27.42

 
 N/A
 
 N/A
 
 N/A
 
 N/A
 
$
10.12

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Renewal Leases
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Under 10,000 sf
 
51

 
132,725

 
3.9

 
$
58.37

 
$
52.61

 
$
5.76

 
10.9%
 
17.2%
 
$
0.33

Over 10,000 sf
 
1

 
10,377

 
5.0

 
26.51

 
23.51

 
3.00

 
12.8%
 
15.8%
 
—

Total Fixed Rent
 
52

 
143,102

 
3.9

 
$
56.06

 
$
50.50

 
$
5.56

 
11.0%
 
17.1%
 
$
0.31

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Percentage in Lieu
 
6

 
30,663

 
1.8
 
$
14.09

 
$
16.06

 
$
(1.97
)
 
(12.3)%
 
N/A
 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Renewal Leases
 
58

 
173,765

 
3.7

 
$
48.65

 
$
44.42

 
$
4.23

 
9.5%
 
N/A
 
$
0.26

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Non Anchor
 
81

 
314,816

 
4.8

 
$
39.14

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Anchor
New Leases
 
1

 
90,000

 
10.0

 
$
16.60

 
N/A
 
N/A
 
N/A
 
N/A
 
3.68

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Renewal Leases
 
6

 
644,843

 
3.3

 
$
3.53

 
$
3.53

 
$
—

 
—%
 
N/A
 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
7

 
734,843

 
4.3

 
$
5.13

 
 
 
 
 
 
 
 
 
 
 _________________________
(1) 
Initial renewal spread is computed by comparing the initial rent per square foot in the new lease to the final rent per square foot amount in the expiring lease. For purposes of this computation, the rent amount includes minimum rent, common area maintenance (“CAM”) charges, estimated real estate tax reimbursements and marketing charges, but excludes percentage rent. In certain cases, a lower rent amount may be payable for a period of time until specified conditions in the lease are satisfied.
(2) 
Average renewal spread is computed by comparing the average rent per square foot over the new lease term to the final rent per square foot amount in the expiring lease. For purposes of this computation, the rent amount includes minimum rent and fixed CAM charges, but excludes pro rata CAM charges, estimated real estate tax reimbursements, marketing charges and percentage rent.
(3) 
These leasing costs are presented as annualized costs per square foot and are spread uniformly over the initial lease term.

As of March 31, 2016, for non anchor leases, the average gross rent per square foot as of the expiration date was $45.35 for the renewing leases in “Holdover” status and $41.49 for leases expiring in 2016.

21

Overview

Net income for the three months ended March 31, 2016 was $1.9 million, an increase of $15.9 million compared to net loss of $13.9 million for the three months ended March 31, 2015. This increase was primarily due to a decrease in impairment of assets of $5.6 million, $3.5 million in acquisition costs related to Springfield Town Center in 2015 that did not recur in 2016, a $3.7 million increase in Net Operating Income (“NOI”), and a $2.0 million gain on sale of interests in real estate.

The following table sets forth our results of operations for the three months ended March 31, 2016 and 2015.
 
Three Months Ended 
 March 31,
 
% Change
2015 to
2016
 
(in thousands of dollars)
2016
 
2015
 
 
Real estate revenue
$
101,456

 
$
98,783

 
3
 %
 
Other income
516

 
1,274

 
(59
)%
 
Property operating expenses
(43,111
)
 
(43,152
)
 
—
 %
 
Depreciation and amortization
(33,735
)
 
(33,189
)
 
2
 %
 
General and administrative expenses
(8,586
)
 
(8,943
)
 
(4
)%
 
Provision for employee separation expense
(535
)
 
—

 
—
 %
 
Acquisition costs and other expenses
(51
)
 
(4,451
)
 
(99
)%
 
Interest expense, net
(19,346
)
 
(20,145
)
 
(4
)%
 
Impairment of assets
(606
)
 
(6,240
)
 
(90
)%
 
Equity in income of partnerships
3,883

 
2,083

 
86
 %
 
Gains on sales of interests in real estate
2,035

 
—

 
—
 %
 
Gain on sales of interests in non operating real estate
9

 
43

 
(79
)%
 
Net income (loss)
$
1,929

 
$
(13,937
)
 
114
 %
 

The amounts in the preceding table reflect our consolidated properties and our unconsolidated properties. Our unconsolidated properties are presented under the equity method of accounting in the line item “Equity in income of partnerships.”

Real Estate Revenue

Real estate revenue increased by $2.7 million, or 3%, in the three months ended March 31, 2016 compared to the three months ended March 31, 2015, primarily due to:

•
an increase of $7.7 million in real estate revenue from the acquisition of Springfield Town Center in March 2015;

•
an increase of $1.4 million in Same Store (as defined below) base rent due to increases from new store openings and lease renewals with higher base rental amounts, with notable increases at Cherry Hill Mall and Moorestown Mall; and
  
•
an increase of $0.5 million in other Same Store revenue, including a $0.3 million timing difference in seasonal photo income resulting from the Easter holiday occurring in the first quarter of 2016 and in the second quarter of 2015; partially offset by

•
a decrease of $5.0 million in real estate revenue related to properties sold in 2015 and 2016;

•
a decrease of $1.3 million in Same Store expense reimbursements, following decreases in snow removal expense and utility expenses (see “—Operating Expenses”); and

•
a decrease of $0.4 million due to the business failure of an office tenant at Voorhees Town Center.

Property Operating Expenses

Property operating expenses were unchanged in the three months ended March 31, 2016 compared to the three months ended March 31, 2015, primarily due to:

22


•
a decrease of $2.0 million in property operating expenses related to properties sold in 2015 and 2016;

•
a decrease of $1.3 million in Same Store common area maintenance expense, including decreases of $0.9 million in snow removal expense and $0.2 million in common area utilities. During the three months ended March 31, 2016, weather across the Mid-Atlantic States, where many of our properties are located, was milder and drier compared to the three months ended March 31, 2015; and

•
a decrease of $0.8 million in Same Store non-common area utility expense. Temperatures across the Mid-Atlantic States, where many of our properties are located, were well above average during the three months ended March 31, 2016, resulting in lower electricity usage compared to the three months ended March 31, 2015. In addition, there was a significant increase in electric rates during February 2015 due to extreme cold weather that particularly affected our properties located in Pennsylvania, New Jersey and Maryland; offset by

•
an increase of $3.6 million in property operating expenses from the acquisition of Springfield Town Center in March 2015; and

•
an increase of $0.6 million in Same Store real estate tax expense due to a combination of increases in real estate tax assessment values and real estate tax rates.


Net Operating Income (“NOI”)

NOI (a non-GAAP measure) is derived from real estate revenue (determined in accordance with generally accepted accounting principles, or GAAP, including lease termination revenue), minus property operating expenses (determined in accordance with GAAP), plus our share of revenue and property operating expenses of our partnership investments. It does not represent cash generated from operating activities in accordance with GAAP and should not be considered to be an alternative to net income (determined in accordance with GAAP) as an indication of our financial performance or to be an alternative to cash flow from operating activities (determined in accordance with GAAP) as a measure of our liquidity. It is not indicative of funds available for our cash needs, including our ability to make cash distributions. We believe that NOI is helpful to management and investors as a measure of operating performance because it is an indicator of the return on property investment, and provides a method of comparing property performance over time. We believe that net income is the most directly comparable GAAP measurement to NOI.

NOI excludes other income, general and administrative expenses, provision for employee separation expenses, interest expense, depreciation and amortization, gain on sale of interest in non operating real estate, gain on sale of interest in real estate, impairment of assets, acquisition costs and other expenses.

The following tables present NOI for the three months ended March 31, 2016 and 2015. The results are presented using the “proportionate-consolidation method” (a non-GAAP measure), which includes our share of the results of our partnership investments. Under GAAP, we account for our partnership investments under the equity method of accounting. Operating results for retail properties that we owned for the full periods presented (“Same Store”) exclude properties acquired or disposed of or reclassified as held for sale during the periods presented. A reconciliation of NOI to net income (loss) determined in accordance with GAAP appears under the heading “Reconciliation of GAAP Net Income (Loss) to Non-GAAP Measures.”

Three months ended March 31, 2016:
 
Same Store
 
Non Same Store
 
Total
(in thousands of dollars)
2016
 
2015
 
%
Change
 
2016
 
2015
 
%
Change
 
2016
 
2015
 
%
Change
Real estate revenue
$
95,754

 
$
95,143

 
0.6
 %
 
$
19,093

 
$
16,803

 
13.6
%
 
$
114,847

 
$
111,946

 
2.6
 %
Property operating expenses
(37,885
)
 
(39,381
)
 
(3.8
)%
 
(9,719
)
 
(8,972
)
 
8.3
%
 
(47,604
)
 
(48,353
)
 
(1.5
)%
Net Operating Income
$
57,869

 
$
55,762

 
3.8
 %
 
$
9,374

 
$
7,831

 
19.7
%
 
$
67,243

 
$
63,593

 
5.7
 %


23

Total NOI increased by $3.7 million, or 5.7%, in the three months ended March 31, 2016 compared to the three months ended March 31, 2015 primarily due to an increase of $2.1 million in NOI from Same Store properties. This increase in NOI from Same Store properties was primarily due to increases in rent. Non Same Store NOI increased by $1.5 million. Lease terminations were $0.2 million and $0.4 million for the three months ended March 31, 2016 and 2015, respectively. See “—Real Estate Revenue” and “—Property Operating Expenses” above for further information about the factors affecting NOI from our consolidated properties.

Depreciation and Amortization

Depreciation and amortization expense increased by $0.5 million, or 2%, in the three months ended March 31, 2016 compared to the three months ended March 31, 2015, primarily due to:

•
an increase of $3.8 million related to the March 2015 acquisition of Springfield Town Center; and

•
an increase of $0.9 million due to accelerated amortization of capital improvements associated with store closings in the three months ended March 31, 2016; partially offset by

•
a decrease of $4.6 million related to properties sold in 2015 and 2016.

Impairment of Assets

Impairment of assets for the three months ended March 31, 2016 consisted of $0.6 million associated with an office building located in Voorhees, New Jersey, and for the three months ended March 31, 2015 consisted of $6.2 million associated with Uniontown Mall in Uniontown, Pennsylvania, which has since been sold.

Acquisition Costs and Other Expenses

Acquisition costs and other expenses decreased by $4.4 million during the three months ended March 31, 2016 compared to the three months ended March 31, 2015, primarily due to acquisition costs incurred in the three months ended March 31, 2015 related to our acquisition of Springfield Town Center in March 2015.

Interest Expense

Interest expense decreased by $0.8 million, or 4%, in the three months ended March 31, 2016 compared to the three months ended March 31, 2015. Our weighted average effective borrowing rate was 4.33% for the three months ended March 31, 2016 compared to 4.86% for the three months ended March 31, 2015. Our weighted average debt balance was $1,836.9 million for the three months ended March 31, 2016 compared to $1,619.0 million for the three months ended March 31, 2015. This increase is largely due to amounts borrowed to fund the cash portion of the purchase consideration for Springfield Town Center, partially offset by application of proceeds from asset sales that were used to repay debt.

Equity in Income of Partnerships

Equity in income of partnerships increased by $1.8 million, or 86%, for the three months ended March 31, 2016 compared to the three months ended March 31, 2015. This increase was primarily due to an increase in equity in income from the Gallery due to decreased operating expenses and also due to Gloucester Premium Outlets, which opened in 2015.


Funds From Operations

The National Association of Real Estate Investment Trusts (“NAREIT”) defines Funds From Operations (“FFO”), which is a non-GAAP measure commonly used by REITs, as net income (computed in accordance with GAAP) excluding gains and losses on sales of operating properties, plus real estate depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures to reflect funds from operations on the same basis. We compute FFO in accordance with standards established by NAREIT, which may not be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition, or that interpret the current NAREIT definition differently than we do. NAREIT’s established guidance provides that excluding impairment write downs of depreciable real estate is consistent with the NAREIT definition.


24

FFO is a commonly used measure of operating performance and profitability among REITs. We use FFO and FFO per diluted share and unit of limited partnership interest in our operating partnership (“OP Unit”) in measuring our performance against our peers and as one of the performance measures for determining incentive compensation amounts earned under certain of our performance-based executive compensation programs.

FFO does not include gains and losses on sales of operating real estate assets or impairment write downs of depreciable real estate, which are included in the determination of net income in accordance with GAAP. Accordingly, FFO is not a comprehensive measure of our operating cash flows. In addition, since FFO does not include depreciation on real estate assets, FFO may not be a useful performance measure when comparing our operating performance to that of other non-real estate commercial enterprises. We compensate for these limitations by using FFO in conjunction with other GAAP financial performance measures, such as net income and net cash provided by operating activities, and other non-GAAP financial performance measures, such as NOI. FFO does not represent cash generated from operating activities in accordance with GAAP and should not be considered to be an alternative to net income (determined in accordance with GAAP) as an indication of our financial performance or to be an alternative to cash flow from operating activities (determined in accordance with GAAP) as a measure of our liquidity, nor is it indicative of funds available for our cash needs, including our ability to make cash distributions. We believe that net income is the most directly comparable GAAP measurement to FFO.

We also present Funds From Operations, as adjusted, and Funds From Operations per diluted share and OP Unit, as adjusted, which are non-GAAP measures, for the three months ended March 31, 2016 and 2015, respectively, to show the effect of such items as acquisition costs, provision for employee separation expense, and loss on hedge ineffectiveness, which had a significant effect on our results of operations, but are not, in our opinion, indicative of our operating performance.

We believe that FFO is helpful to management and investors as a measure of operating performance because it excludes various items included in net income that do not relate to or are not indicative of operating performance, such as gains on sales of operating real estate and depreciation and amortization of real estate, among others. We believe that Funds From Operations, as adjusted, is helpful to management and investors as a measure of operating performance because it adjusts FFO to exclude items that management does not believe are indicative of our operating performance, such as acquisition costs, provision for employee separation expense, accelerated amortization of deferred financing costs and gain and loss on hedge ineffectiveness.

The following table presents FFO attributable to common shareholders and OP Unit holders and FFO attributable to common shareholders and OP Unit holders per diluted share and OP Unit, and FFO attributable to common shareholders and OP Unit holders, as adjusted, and FFO attributable to common shareholders and OP Unit holders per diluted share and OP Unit, as adjusted, for the three months ended March 31, 2016 and 2015: 
(in thousands, except per share amounts)
Three Months Ended 
 March 31, 2016
 
% Change
2015 to 2016
 
Three Months Ended 
 March 31, 2015
Funds from operations attributable to common shareholders and OP Unit holders
$
32,338

 
32.7%
 
$
24,364

Acquisition costs
—

 
 
 
3,330

Provision for employee separation expense
535

 
 
 
—

Loss on hedge ineffectiveness
142

 
 
 
512

Funds from operations attributable to common shareholders and OP Unit holders, as adjusted
$
33,015

 
17.0%
 
$
28,206

Funds from operations attributable to common shareholders and OP Unit holders per diluted share and OP Unit
$
0.42

 
23.5%
 
$
0.34

Funds from operations attributable to common shareholders and OP Unit holders per diluted share and OP Unit, as adjusted
$
0.43

 
7.5%
 
$
0.40

 
 
 
 
 
 
Weighted average number of shares outstanding
68,973

 
 
 
68,566

Weighted average effect of full conversion of OP Units
8,338

 
 
 
2,192

Effect of common share equivalents
298

 
 
 
432

Total weighted average shares outstanding, including OP Units
77,609

 
 
 
71,190



25

FFO attributable to common shareholders and OP Unit holders was $32.3 million for the three months ended March 31, 2016, an increase of $8.0 million, or 32.7%, compared to $24.4 million for the three months ended March 31, 2015. This increase is primarily due to the $3.7 million increase in NOI and a decrease of $4.4 million of acquisition and other expenses.

FFO attributable to common shareholders and OP Unit holders per diluted share and OP Unit increased by $0.08 to $0.42 per share for the three months ended March 31, 2016, compared to $0.34 for the three months ended March 31, 2015.

Reconciliation of GAAP Net Income (Loss) to Non-GAAP Measures

The preceding discussion compares our unaudited Consolidated Statements of Operations results for different periods based on GAAP. Also, the non-GAAP measures of NOI and FFO have been discussed. We believe that NOI is helpful to management and investors as a measure of operating performance because it is an indicator of the return on property investment, and provides a method of comparing property performance over time. We believe that FFO is helpful to management and investors as a measure of operating performance because it excludes various items included in net income that do not relate to or are not indicative of operating performance, such as gains on sales of operating real estate and depreciation and amortization of real estate, among others. FFO is a commonly used measure of operating performance and profitability among REITs, and we use FFO attributable to common shareholders and OP Unit holders and FFO attributable to common shareholders and OP Unit holders per diluted share and OP Unit as supplemental non-GAAP measures to compare our performance for different periods to that of our industry peers. The amounts presented in the “Share of Unconsolidated Partnerships” column are derived using the “proportionate consolidation method” (a non-GAAP measure), which includes our share of the results of our unconsolidated partnerships based on our ownership percentage in each such uncontrolled partnership. We believe that this presentation is helpful to management and investors because it provides comparable information about the operating results of our unconsolidated partnerships and is thus indicative of the return on property investment and of operating performance over time. Results based on our share of the results of unconsolidated partnerships do not represent cash generated from operating activities of our unconsolidated partnerships and should not be considered to be an alternative to cash flow from unconsolidated properties’ operating activities as a measure of our liquidity, because we do not have a direct legal claim to the revenues or expenses of the unconsolidated partnerships beyond our rights as an equity owner or tenant in common owner.