Attached files

file filename
EX-32.2 - EXHIBIT 32.2 - PENNSYLVANIA REAL ESTATE INVESTMENT TRUSTa2017q2exhibit322.htm
EX-32.1 - EXHIBIT 32.1 - PENNSYLVANIA REAL ESTATE INVESTMENT TRUSTa2017q2exhibit321.htm
EX-31.2 - EXHIBIT 31.2 - PENNSYLVANIA REAL ESTATE INVESTMENT TRUSTa2017q2exhibit312.htm
EX-31.1 - EXHIBIT 31.1 - PENNSYLVANIA REAL ESTATE INVESTMENT TRUSTa2017q2exhibit311.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q
x
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2017
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
 
 
 
Emerging growth company
o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 August 3, 2017: 69,827,608






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)
June 30,
2017
 
December 31,
2016
 
(unaudited)
 
 
ASSETS:
 
 
 
INVESTMENTS IN REAL ESTATE, at cost:
 
 
 
Operating properties
$
3,042,247

 
$
3,196,529

Construction in progress
137,369

 
97,575

Land held for development
5,913

 
5,910

Total investments in real estate
3,185,529

 
3,300,014

Accumulated depreciation
(1,055,334
)
 
(1,060,845
)
Net investments in real estate
2,130,195

 
2,239,169

INVESTMENTS IN PARTNERSHIPS, at equity:
206,618

 
168,608

OTHER ASSETS:
 
 
 
Cash and cash equivalents
19,021

 
9,803

Tenant and other receivables (net of allowance for doubtful accounts of $6,255 and $6,236 at June 30, 2017 and December 31, 2016, respectively)
29,742

 
39,026

Intangible assets (net of accumulated amortization of $12,165 and $11,064 at June 30, 2017 and December 31, 2016, respectively)
18,645

 
19,746

Deferred costs and other assets, net
99,886

 
93,800

Assets held for sale
81,559

 
46,680

Total assets
$
2,585,666

 
$
2,616,832

LIABILITIES:
 
 
 
Mortgage loans payable, net
$
1,036,640

 
$
1,222,859

Term Loans, net
547,376

 
397,043

Revolving Facility
52,000

 
147,000

Tenants’ deposits and deferred rent
11,280

 
13,262

Distributions in excess of partnership investments
60,659

 
61,833

Fair value of derivative liabilities
654

 
1,520

Liabilities related to assets held for sale
36,857

 
2,658

Accrued expenses and other liabilities
66,126

 
68,251

Total liabilities
1,811,592

 
1,914,426

COMMITMENTS AND CONTINGENCIES (Note 6):

 

EQUITY:
 
 
 
Series A Preferred Shares, $.01 par value per share; 25,000 preferred shares authorized; 4,600 shares of Series A Preferred Shares issued and outstanding at each of June 30, 2017 and December 31, 2016; liquidation preference of $115,000
46

 
46

Series B Preferred Shares, $.01 par value per share; 25,000 preferred shares authorized; 3,450 shares of Series B Preferred Shares issued and outstanding at each of June 30, 2017 and December 31, 2016; liquidation preference of $86,250
35

 
35

Series C Preferred Shares, $.01 par value per share; 25,000 preferred shares authorized; 6,900 shares of Series C Preferred Shares issued and outstanding at June 30, 2017; liquidation preference of $172,500
69

 

Shares of beneficial interest, $1.00 par value per share; 200,000 shares authorized; issued and outstanding 69,809 shares at June 30, 2017 and 69,553 shares at December 31, 2016
69,809

 
69,553

Capital contributed in excess of par
1,650,746

 
1,481,787

Accumulated other comprehensive income
3,065

 
1,622

Distributions in excess of net income
(1,087,809
)
 
(997,789
)
Total equity—Pennsylvania Real Estate Investment Trust
635,961

 
555,254

Noncontrolling interest
138,113

 
147,152

Total equity
774,074

 
702,406

Total liabilities and equity
$
2,585,666

 
$
2,616,832


See accompanying notes to the unaudited consolidated financial statements.
1



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

 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
(in thousands of dollars)
2017
 
2016
 
2017
 
2016
REVENUE:
 
 
 
 
 
 
 
Real estate revenue:
 
 
 
 
 
 
 
Base rent
$
56,769

 
$
61,243

 
$
114,204

 
$
128,236

Expense reimbursements
26,984

 
28,870

 
55,081

 
60,004

Percentage rent
326

 
385

 
630

 
836

Lease termination revenue
1,791

 
16

 
2,272

 
251

Other real estate revenue
2,540

 
2,225

 
4,647

 
4,868

Total real estate revenue
88,410

 
92,739

 
176,834

 
194,195

Other income
840

 
1,514

 
1,680

 
2,030

Total revenue
89,250

 
94,253

 
178,514

 
196,225

EXPENSES:
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 Property operating expenses:
 
 
 
 
 
 
 
CAM and real estate taxes
(28,261
)
 
(30,496
)
 
(58,213
)
 
(64,685
)
Utilities
(4,140
)
 
(4,137
)
 
(7,963
)
 
(8,463
)
Other property operating expenses
(2,825
)
 
(2,899
)
 
(6,030
)
 
(7,495
)
Total property operating expenses
(35,226
)
 
(37,532
)
 
(72,206
)
 
(80,643
)
 Depreciation and amortization
(32,928
)
 
(31,662
)
 
(64,686
)
 
(65,397
)
 General and administrative expenses
(9,232
)
 
(8,883
)
 
(18,273
)
 
(17,469
)
 Provision for employee separation expenses
(1,053
)
 
(658
)
 
(1,053
)
 
(1,193
)
 Project costs and other expenses
(85
)
 
(243
)
 
(397
)
 
(294
)
Total operating expenses
(78,524
)
 
(78,978
)
 
(156,615
)
 
(164,996
)
Interest expense, net
(14,418
)
 
(17,067
)
 
(29,756
)
 
(36,413
)
Impairment of assets
(53,917
)
 
(14,118
)
 
(53,917
)
 
(14,724
)
Total expenses
(146,859
)
 
(110,163
)
 
(240,288
)
 
(216,133
)
Loss before equity in income of partnerships, gains on sales of interests in non operating real estate and gains (losses) on sales of real estate
(57,609
)
 
(15,910
)
 
(61,774
)
 
(19,908
)
Equity in income of partnerships
4,154

 
4,192

 
7,890

 
8,075

Gains on sales of interests in non operating real estate
486

 

 
486

 
9

(Losses) gains on sales of interests in real estate, net
(308
)
 
20,887

 
(365
)
 
22,922

Net (loss) income
(53,277
)
 
9,169

 
(53,763
)
 
11,098

Less: net loss (income) attributable to noncontrolling interest
5,669

 
(982
)
 
5,721

 
(1,190
)
Net (loss attributable) income available to PREIT
(47,608
)
 
8,187

 
(48,042
)
 
9,908

Less: preferred share dividends
(7,067
)
 
(3,962
)
 
(13,272
)
 
(7,924
)
Net loss attributable to PREIT common shareholders
$
(54,675
)
 
$
4,225

 
$
(61,314
)
 
$
1,984



See accompanying notes to the unaudited consolidated financial statements.
2


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

(in thousands of dollars, except per share amounts)
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
2017
 
2016
 
2017
 
2016
Net (loss) income
$
(53,277
)
 
$
9,169

 
$
(53,763
)
 
$
11,098

Noncontrolling interest
5,669

 
(982
)
 
5,721

 
(1,190
)
Dividends on preferred shares
(7,067
)
 
(3,962
)
 
(13,272
)
 
(7,924
)
Dividends on unvested restricted shares
(88
)
 
(76
)
 
(185
)
 
(160
)
Net loss used to calculate loss per share—basic and diluted
$
(54,763
)
 
$
4,149

 
$
(61,499
)
 
$
1,824

 
 
 
 
 
 
 
 
Basic and diluted loss (income) per share:
$
(0.79
)
 
$
0.06

 
$
(0.89
)
 
$
0.03

 
 
 
 
 
 
 
 
(in thousands of shares)
 
 
 
 
 
 
 
Weighted average shares outstanding—basic
69,307

 
69,091

 
69,263

 
69,032

Effect of common share equivalents (1) 

 
68

 

 
125

Weighted average shares outstanding—diluted
69,307

 
69,159

 
69,263

 
69,157

_________________________
(1) 
The Company had net losses used to calculate earnings per share for the three and six months ended June 30, 2017, therefore, the effects of common share equivalents of 0 and 57 for the three and six months ended June 30, 2017, 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 (LOSS) INCOME
(Unaudited)
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
(in thousands of dollars)
2017
 
2016
 
2017
 
2016
Comprehensive (loss) income:
 
 
 
 
 
 
 
Net (loss) income
$
(53,277
)
 
$
9,169

 
$
(53,763
)
 
$
11,098

Unrealized (loss) gain on derivatives
(432
)
 
(3,006
)
 
1,278

 
(8,578
)
Amortization of losses on settled swaps, net of gains
213

 
126

 
338

 
252

Total comprehensive (loss) income
(53,496
)
 
6,289

 
(52,147
)
 
2,772

Less: comprehensive loss (income) attributable to noncontrolling interest
5,693

 
(677
)
 
5,548

 
(300
)
Comprehensive (loss) income PREIT
$
(47,803
)
 
$
5,612

 
$
(46,599
)
 
$
2,472



See accompanying notes to the unaudited consolidated financial statements.
4



PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF EQUITY
Six Months Ended
June 30, 2017
(Unaudited)
 
 
 
 
PREIT Shareholders
 
 
 
 
 
Preferred Shares $.01 par
 
Shares of
Beneficial
Interest,
$1.00 Par
 
Capital
Contributed
in Excess of
Par
 
Accumulated
Other
Comprehensive
Income
 
Distributions
in Excess of
Net Income
 
 
(in thousands of dollars, except per share amounts)
Total
Equity
 
Series
A
 
Series
B
 
Series
C
 
 
 
 
 
Noncontrolling
interest
Balance December 31, 2016
$
702,406

 
$
46

 
$
35

 
$

 
$
69,553

 
$
1,481,787

 
$
1,622

 
$
(997,789
)
 
$
147,152

Net loss
(53,763
)
 

 

 

 

 

 

 
(48,042
)
 
(5,721
)
Other comprehensive income
1,616

 

 

 

 

 

 
1,443

 

 
173

Preferred shares issued in 2017 public offering, net
166,310

 

 

 
69

 

 
166,241

 

 

 

Shares issued under employee compensation plans, net of shares retired
(145
)
 

 

 

 
256

 
(401
)
 

 

 

Amortization of deferred compensation
3,119

 

 

 

 

 
3,119

 

 

 

Distributions paid to common shareholders ($0.42 per share)
(29,291
)
 

 

 

 

 

 

 
(29,291
)
 

Distributions paid to Series A preferred shareholders ($1.0312 per share)
(4,744
)
 

 

 

 

 

 

 
(4,744
)
 

Distributions paid to Series B preferred shareholders ($0.9218 per share)
(3,180
)
 

 

 

 

 

 

 
(3,180
)
 

Distributions paid to Series C preferred shareholders ($0.6900 per share)
(4,763
)
 

 

 

 

 

 

 
(4,763
)
 

Noncontrolling interests:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Distributions paid to Operating Partnership unit holders ($0.42 per unit)
(3,491
)
 

 

 

 

 

 

 

 
(3,491
)
Balance June 30, 2017
$
774,074

 
$
46

 
$
35

 
$
69

 
$
69,809

 
$
1,650,746

 
$
3,065

 
$
(1,087,809
)
 
$
138,113



See accompanying notes to the unaudited consolidated financial statements.
5


PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
Six Months Ended 
 June 30,
(in thousands of dollars)
2017
 
2016
Cash flows from operating activities:
 
 
 
Net (loss) income
$
(53,763
)
 
$
11,098

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
 
Depreciation
60,126

 
62,655

Amortization
5,952

 
4,066

Straight-line rent adjustments
(1,356
)
 
(1,331
)
Provision for doubtful accounts
854

 
1,260

Amortization of deferred compensation
3,119

 
2,931

Loss on hedge ineffectiveness

 
143

Loss (gains) on sales of interests in real estate and non operating real estate, net
(121
)
 
(22,931
)
Equity in income of partnerships in excess of distributions
(2,066
)
 
(3,606
)
Impairment of assets
53,917

 
14,964

Change in assets and liabilities:
 
 
 
Net change in other assets
8,113

 
8,929

Net change in other liabilities
(4,753
)
 
2,102

Net cash provided by operating activities
70,022

 
80,280

Cash flows from investing activities:
 
 
 
Additions to construction in progress
(57,389
)
 
(28,121
)
Investments in real estate improvements
(23,214
)
 
(15,322
)
Cash proceeds from sales of real estate
45,922

 
131,592

Additions to leasehold improvements
(471
)
 
(288
)
Investments in partnerships
(38,259
)
 
(3,953
)
Capitalized leasing costs
(3,090
)
 
(3,016
)
(Increase) decrease in cash escrows
(2,951
)
 
3,158

Cash distributions from partnerships in excess of equity in income
1,141

 
4,778

Net cash (used in) provided by investing activities
(78,311
)
 
88,828

Cash flows from financing activities:
 
 
 
Net proceeds from issuance of preferred shares
166,310

 

Net borrowings from revolving facility
55,000

 
20,000

Proceeds from mortgage loans

 
139,000

Principal installments on mortgage loans
(8,118
)
 
(8,373
)
Repayments of mortgage loans
(150,000
)
 
(280,327
)
Payment of deferred financing costs
(71
)
 
(3,322
)
Dividends paid to common shareholders
(29,291
)
 
(29,170
)
Dividends paid to preferred shareholders
(12,687
)
 
(7,924
)
Distributions paid to Operating Partnership unit holders and noncontrolling interest
(3,491
)
 
(3,501
)
Value of shares of beneficial interest issued
1,148

 
621

Value of shares retired under equity incentive plans, net of shares issued
(1,293
)
 
(2,126
)
Net cash provided by (used in) financing activities
17,507

 
(175,122
)
Net change in cash and cash equivalents
9,218

 
(6,014
)
Cash and cash equivalents, beginning of period
9,803

 
22,855

Cash and cash equivalents, end of period
$
19,021

 
$
16,841


See accompanying notes to the unaudited consolidated financial statements.
6


PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017

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, 2016. 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 28 properties in nine states, including 20 operating shopping malls, four other operating 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 into the Fashion Outlets of Philadelphia (“Fashion Outlets of Philadelphia”)), and one is classified as “other.” The above property counts do not include Logan Valley Mall in
Altoona, Pennsylvania and Valley View Mall in La Crosse, Wisconsin because these properties have been classified as “held for sale” as of June 30, 2017.

We hold our interest in our portfolio of properties through our operating partnership, PREIT Associates, L.P. (“PREIT Associates” or the “Operating Partnership”). We are the sole general partner of the Operating Partnership and, as of June 30, 2017, we held an 89.4% controlling interest in the Operating Partnership, and consolidated it for reporting purposes. The presentation of consolidated financial statements does not itself imply that the assets of any consolidated entity (including any special-purpose entity formed for a particular project) are available to pay the liabilities of any other consolidated entity, or that the liabilities of any consolidated entity (including any special-purpose entity formed for a particular project) are obligations of any other consolidated entity.

Pursuant to the terms of the partnership agreement of the Operating Partnership, each of the limited partners has the right to redeem such partner’s units of limited partnership interest in the Operating Partnership (“OP Units”) for cash or, at our election, we may acquire such OP Units in exchange for our common shares on a one-for-one basis, in some cases beginning one year following the respective issue dates of the OP Units and in other cases immediately. If all of the outstanding OP Units held by limited partners had been redeemed for cash as of June 30, 2017, the total amount that would have been distributed would have been $94.1 million, which is calculated using our June 30, 2017 closing price on the New York Stock Exchange of $11.32 per share multiplied by the number of outstanding OP Units held by limited partners, which was 8,312,676 as of June 30, 2017.

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 February 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-05 - Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20), which clarifies the scope of asset derecognition guidance and accounting for partial sales of nonfinancial assets. As it relates to the Company, real estate, such as land and buildings, would be considered an example of a nonfinancial asset. The standard is effective in conjunction with ASU No. 2014-09 (discussed below), which is effective for annual reporting periods beginning after December 15, 2017, however early adoption is permitted. The provisions of this update must be applied at the same time as the adoption of ASU No. 2014-09. The Company is evaluating the effect that ASU No. 2017-05 will have on its consolidated financial statements and related disclosures.

In January 2017, the FASB issued ASU No. 2017-01 - Business Combinations (Topic 805): Clarifying the Definition of a Business.  The update adds further guidance that assists preparers in evaluating whether a transaction will be accounted for as an acquisition of an asset or a business. We expect that future property acquisitions will generally qualify as asset acquisitions under the standard, which permits the capitalization of acquisition costs to the underlying assets. The Company adopted this new guidance effective January 1, 2017. This new guidance did not have a significant impact on our financial statements.

In August 2016, the FASB issued ASU No. 2016-15 - Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which is intended to reduce diversity in the practice of how certain transactions are classified in the statement of cash flows, including classification guidance for distributions received from equity method investments. The standard is effective for annual reporting periods beginning after December 15, 2017, however early adoption is permitted. The standard requires the use of the retrospective transition method. This new guidance is not expected to have a significant impact on our financial statements.

In March 2016, 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

8


withholding purposes should be classified as a financing activity on the statement of cash flows. The Company adopted this guidance effective January 1, 2017. The adoption of this guidance did not have a significant impact on the Company’s financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which will result in lessees recognizing
most leased assets and corresponding lease liabilities on the balance sheet. Leases of land and other arrangements where we are the lessee will be recognized on our balance sheet. Lessor accounting will remain substantially similar to the current accounting; however, certain refinements were made to conform the standard with the recently issued revenue recognition guidance in ASU 2014-09, specifically related to the allocation and recognition of contract consideration earned from lease and non-lease revenue components. Substantially all of our revenue and the revenues of our equity method investments are earned from arrangements that are within the scope of ASU 2016-02, thus we anticipate that the timing of recognition and financial statement presentation of certain revenues, particularly those that relate to consideration from non-lease components, including fixed common area maintenance arrangements, may be affected. Upon adoption of ASU 2016-02, consideration related to these non-lease components will be accounted for using the guidance in ASU 2014-09. Leasing costs that are eligible to be capitalized as initial direct costs are also limited by ASU 2016-02; such costs totaled approximately $5.1 million for the year ended December 31, 2016. We will adopt ASU 2016-02 on January 1, 2019 using the modified retrospective approach required by the standard. We are currently evaluating the ultimate impact that the adoption of the new standard will have on our consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) 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. In March 2016, the FASB issued ASU No 2016-08, which updates Topic 606 to clarify principal versus agent considerations (reporting revenue gross versus net). The types of our revenues that will be impacted by the new standard include management, development and leasing fee revenues for services performed for third-party owned properties and for certain of our joint ventures, sales of real estate, including land parcels and operating properties, and certain billings to tenants for reimbursement of property operating expenses. We expect that the amount and timing of the revenues that are impacted by this standard will be generally consistent with our current measurement and pattern of recognition. We do not expect the adoption of this new standard to have a significant impact on our consolidated financial statements. We expect to adopt the standard using the modified retrospective approach, which requires a cumulative adjustment as of the date of the adoption. The new standard is effective for us on January 1, 2018.

2. REAL ESTATE ACTIVITIES

Investments in real estate as of June 30, 2017 and December 31, 2016 were comprised of the following:
 
(in thousands of dollars)
As of June 30,
2017
 
As of December 31,
2016
Buildings, improvements and construction in progress
$
2,699,909

 
$
2,794,213

Land, including land held for development
485,620

 
505,801

Total investments in real estate
3,185,529

 
3,300,014

Accumulated depreciation
(1,055,334
)
 
(1,060,845
)
Net investments in real estate
$
2,130,195

 
$
2,239,169


9



Capitalization of Costs

The following table summarizes our capitalized salaries, commissions, benefits, real estate taxes and interest for the three and six months ended June 30, 2017 and 2016:
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
(in thousands of dollars)
2017
 
2016
 
2017
 
2016
Development/Redevelopment Activities:
 
 
 
 
 
 
 
Salaries and benefits
$
348

 
$
266

 
$
697

 
$
541

Real estate taxes
61

 
6

 
154

 
25

Interest
1,538

 
668

 
2,969

 
1,370

Leasing Activities:
 
 
 
 
 
 
 
Salaries, commissions and benefits
1,423

 
1,279

 
3,090

 
3,016


Dispositions

The following table presents our dispositions for the six months ended June 30, 2017:
Sale Date
 
Property and Location
 
Description of Real Estate Sold
 
Capitalization Rate
 
Sale Price
 
Gain
 
 
 
 
(in millions)
2017 Activity:
 
 
 
 
 
 
 
 
 
 
January
 
Beaver Valley Mall,
Monaca, Pennsylvania
 
Mall
 
15.6
%
 
$
24.2

 
$

 
 
Crossroads Mall,
Beckley, West Virginia
 
Mall
 
15.5
%
 
24.8

 


Other Real Estate Activity

In June 2017, we sold a non operating parcel located at Valley Mall for $0.6 million, and recorded a gain of $0.4 million on the sale of this parcel.

In June 2017, we sold a non operating parcel located at Beaver Valley Mall for $3.6 million, and recorded a gain of $0.1 million on the sale of this parcel.

Acquisitions

In July 2017, we purchased the vacant anchor store from Macy’s located at Moorestown Mall for $8.9 million.

In April 2017, we purchased the vacant anchor stores from Macy’s located at Valley View and Valley Malls for $2.5 million each. We have executed a lease with a replacement tenant for the Valley View Mall location and this tenant is expected to open in the third quarter of 2017.

Impairment of Assets

In June 2017, we recorded a loss on impairment of assets on Logan Valley Mall, in Altoona, Pennsylvania of $38.4 million in connection with negotiations with the potential 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.

In June 2017, we recorded a loss on impairment of assets on Valley View Valley Mall, in La Crosse, Wisconsin of $15.5 million in connection with our decision to market the property for sale. In connection with this decision, we determined that the holding period of the property was less than previously estimated, which we concluded was a triggering event, leading us to

10


conduct an analysis of possible impairment at this property. Based upon our estimates, 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. Our fair value analysis was based on an estimated capitalization rate of approximately 12% for Valley View Mall, which was determined using management’s assessment of property operating performance and general market conditions.

We have also determined that Logan Valley Mall and Valley View Mall meet the criteria of “assets held for sale,” and these properties have been reflected in the accompanying consolidated balance sheets as such.

3. INVESTMENTS IN PARTNERSHIPS

The following table presents summarized financial information of the equity investments in our unconsolidated partnerships as of June 30, 2017 and December 31, 2016:
 
(in thousands of dollars)
As of June 30, 2017
 
As of December 31, 2016
ASSETS:
 
 
 
Investments in real estate, at cost:
 
 
 
Operating properties
$
639,533

 
$
649,960

Construction in progress
247,574

 
160,699

Total investments in real estate
887,107

 
810,659

Accumulated depreciation
(216,581
)
 
(207,987
)
Net investments in real estate
670,526

 
602,672

Cash and cash equivalents
47,932

 
27,643

Deferred costs and other assets, net
41,073

 
37,705

Total assets
759,531

 
668,020

LIABILITIES AND PARTNERS’ INVESTMENT:
 
 
 
Mortgage loans payable, net
441,956

 
445,224

Other liabilities
44,698

 
23,945

Total liabilities
486,654

 
469,169

Net investment
272,877

 
198,851

Partners’ share
137,455

 
101,045

PREIT’s share
135,422

 
97,806

Excess investment (1)
10,537

 
8,969

Net investments and advances
$
145,959

 
$
106,775

 
 
 
 
Investment in partnerships, at equity
$
206,618

 
$
168,608

Distributions in excess of partnership investments
(60,659
)
 
(61,833
)
Net investments and advances
$
145,959

 
$
106,775

_________________________
(1) 
Excess investment represents the unamortized difference between our investment and our share of the equity in the underlying net investment in the unconsolidated 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 six months ended June 30, 2017 and 2016:
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
(in thousands of dollars)
2017
 
2016
 
2017
 
2016
Real estate revenue
$
29,526

 
$
27,201

 
$
57,694

 
$
56,392

Operating expenses:
 
 
 
 
 
 
 
Property operating expenses
(8,412
)
 
(6,908
)
 
(17,114
)
 
(17,022
)
Interest expense
(5,433
)
 
(5,384
)
 
(10,806
)
 
(10,776
)
Depreciation and amortization
(6,800
)
 
(5,804
)
 
(12,655
)
 
(11,527
)
Total expenses
(20,646
)
 
(18,096
)
 
(40,576
)
 
(39,325
)
Net income
8,880

 
9,105

 
17,118

 
17,067

Less: Partners’ share
(4,755
)
 
(4,883
)
 
(9,246
)
 
(9,099
)
PREIT’s share
4,125

 
4,222

 
7,872

 
7,968

Amortization of and adjustments to excess investment
29

 
(30
)
 
18

 
107

Equity in income of partnerships
$
4,154

 
$
4,192

 
$
7,890

 
$
8,075


Significant Unconsolidated Subsidiary

One of our unconsolidated subsidiaries, Lehigh Valley Associates LP, the owner of the substantial majority of Lehigh Valley Mall, in which we have a 50% partnership interest, met the conditions of significant unconsolidated subsidiaries as of December 31, 2016. The financial information of this entity is included in the amounts above. Summarized balance sheet information as of June 30, 2017 and December 31, 2016 and summarized statement of operations information for the three and six months ended June 30, 2017 and 2016 for this entity, which is accounted for using the equity method, are as follows:
 
 
As of
 
(in thousands of dollars)
 
June 30, 2017
 
December 31, 2016
 
Summarized balance sheet information
 
 
 
 
 
     Total assets
 
$
46,223

 
$
49,264

 
     Mortgage loan payable
 
125,285

 
126,520

 
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
(in thousands of dollars)
 
2017
 
2016
 
2017
 
2016
Summarized statement of operations information
 
 
 
 
 
 
 
 
     Revenue
 
$
8,647

 
$
9,121

 
$
17,456

 
$
18,169

     Property operating expenses
 
(2,582
)
 
(1,956
)
 
(4,484
)
 
(4,183
)
     Interest expense
 
(1,861
)
 
(1,897
)
 
(3,731
)
 
(3,803
)
     Net income
 
3,059

 
4,727

 
7,262

 
8,477

     PREIT’s share of equity in income
 
 
 
 
 
 
 
 
          of partnership
 
1,529

 
2,197

 
3,631

 
4,239


4. FINANCING ACTIVITY

Credit Agreements

We have entered into four credit agreements (collectively, as amended, the “Credit Agreements”), as further discussed in our Annual Report on Form 10-K for the year ended December 31, 2016: (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.”


12


In May 2017 we borrowed an additional $150.0 million on the 2014 7-Year Term Loan, which was used to repay borrowings under the 2013 Revolving Facility. As of June 30, 2017, we had borrowed $550.0 million under the Term Loans in the aggregate and $52.0 million under the 2013 Revolving Facility (with $15.8 million pledged as collateral for letters of credit at June 30, 2017). The carrying value of the Term Loans on our consolidated balance sheet is net of $2.6 million of unamortized debt issuance costs.

Interest expense and the deferred financing fee amortization related to the Credit Agreements for the
three and six months ended June 30, 2017 and 2016 were as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in thousands of dollars)
2017
 
2016
 
2017
 
2016
2013 Revolving Facility
 
 
 
 
 
 
 
 
 
Interest expense
 
$
645

 
$
782

 
$
1,409

 
$
1,472

 
Deferred financing amortization
 
199

 
199

 
398

 
397

 
 
 
 
 
 
 
 
 
 
Term Loans
 
 
 
 
 
 
 
 
 
Interest expense
 
3,712

 
3,045

 
6,547

 
6,037

 
Deferred financing amortization
 
190

 
121

 
377

 
241


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, 2016. As of June 30, 2017, 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 pursuant to Unencumbered Debt Yield covenant (as described in our Annual Report on Form 10-K for the year ended December 31, 2016), the maximum unsecured amount that was available for us to borrow under the 2013 Revolving Facility as of June 30, 2017 was $183.4 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 depends on leverage and is currently 0.25%, and is recorded in interest expense in the consolidated statements of operations.

The following table presents the applicable margin for each level for the Credit Agreements:
 
 
Applicable Margin
 
Level
Ratio of Total Liabilities
to Gross Asset Value
2013 Revolving Facility
 
Term Loans
 
1
Less than 0.450 to 1.00
1.20%
 
1.35%
 
2
Equal to or greater than 0.450 to 1.00 but less than 0.500 to 1.00
1.25%
(1) 
1.45%
(1) 
3
Equal to or greater than 0.500 to 1.00 but less than 0.550 to 1.00
1.30%
 
1.60%
 
4
Equal to or greater than 0.550 to 1.00
1.55%
 
1.90%
 

(1) The rate in effect at June 30, 2017.


13


Mortgage Loans

The aggregate carrying values and estimated fair values of mortgage loans based on interest rates and market conditions at June 30, 2017 and December 31, 2016 were as follows:
 
June 30, 2017
 
December 31, 2016
(in millions of dollars)
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Mortgage loans(1)
$
1,036.6

 
$
1,040.0

 
$
1,222.9

 
$
1,189.6

(1)The carrying value of mortgage loans is net of unamortized debt issuance costs of $3.7 million and $4.5 million as of June 30, 2017 and December 31, 2016, respectively.

The mortgage loans contain various customary default provisions. As of June 30, 2017, we were not in default on any of the mortgage loans.

Mortgage Loan Activity

In March 2017, we repaid a $150.6 million mortgage loan including accrued interest secured by The Mall at Prince Georges in Hyattsville, Maryland using $110.0 million from our 2013 Revolving Facility and the balance from available working capital.

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 $27.2 million (net of capitalized interest of $3.1 million) and $33.9 million (net of capitalized interest of $1.4 million) for the six months ended June 30, 2017 and 2016, 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 $202.0 million and $200.0 million for the six months ended June 30, 2017 and 2016, respectively. Aggregate paydowns were $297.0 million and $180.0 million for the six months ended June 30, 2017 and 2016, respectively.

A $150.0 million paydown of the 2013 Revolving Facility was made in the six months ended June 30, 2017, which was directly paid from the 2014 7-Year Term Loan additional borrowing and is considered to be a non-cash transaction.

6. COMMITMENTS AND CONTINGENCIES

Contractual Obligations

As of June 30, 2017, we had unaccrued contractual and other commitments related to our capital improvement projects and development projects of $148.0 million, including commitments related to the redevelopment of the Fashion Outlets of Philadelphia, in the form of tenant allowances and contracts with general service providers and other professional service providers. In addition, our operating partnership, PREIT Associates, has jointly and severally guaranteed the obligations of the joint venture we formed with Macerich to develop the Fashion Outlets of Philadelphia to commence and complete a comprehensive redevelopment of that property costing not less than $300.0 million within 48 months after commencement of construction which was March 14, 2016.

Provision for Employee Separation Expense

In 2017 and 2016, we terminated the employment of certain employees and officers. In connection with the departure of those employees and officers, we recorded $1.1 million and $0.7 million of employee separation expenses for the three months ended June 30, 2017 and 2016, respectively, and $1.1 million and $1.2 million for the six months ended June 30, 2017 and 2016, respectively. As of June 30, 2017, $1.1 million of these amounts are accrued and unpaid.

7. DERIVATIVES

In the normal course of business, we are exposed to financial market risks, including interest rate risk on our interest bearing

14


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 $1.0 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 June 30, 2017, we had entered into 30 interest rate swap agreements with a weighted average base interest rate of 1.35% on a notional amount of $749.6 million, maturing on various dates through December 2021, and one forward starting interest rate swap agreement with a base interest rate of 1.42% on a notional amount of $48.0 million, which will be effective starting January 2018 and will mature in February 2021.

We entered into these interest rate swap agreements in order to hedge the interest payments associated with our issuances of variable interest rate long term debt. We have assessed the effectiveness of these interest rate swap agreements as hedges at inception and on a quarterly basis. As of June 30, 2017, we considered these interest rate swap agreements to be highly effective as cash flow hedges. The interest rate swap agreements are net settled monthly.

Accumulated other comprehensive loss as of June 30, 2017 includes a net loss of $1.2 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 through August 2018.



15


The following table summarizes the terms and estimated fair values of our interest rate swap derivative instruments at June 30, 2017 and December 31, 2016. The notional values provide an indication of the extent of our involvement in these instruments, but do not represent exposure to credit, interest rate or market risks.
(in millions of dollars)
Notional Value
 
Fair Value at
June 30, 2017
(1)
 
Fair Value at
December 31, 2016 (1)
 
Interest
Rate
 
Effective Date of Forward Starting Swap
 
Maturity Date
 
Interest Rate Swaps
 
 
 
 
 
 
 
 
 
 
 
28.1
 
N/A

 
$

 
1.38
%
 
 
 
January 2, 2017
 
48.0
 
$

 
(0.1
)
 
1.12
%
 
 
 
January 1, 2018
 
7.6
 

 

 
1.00
%
 
 
 
January 1, 2018
 
55.0
 

 
(0.1
)
 
1.12
%
 
 
 
January 1, 2018
 
30.0
 
(0.1
)
 
(0.3
)
 
1.78
%
 
 
 
January 2, 2019
 
25.0
 
0.3

 
0.3

 
0.70
%
 
 
 
January 2, 2019
 
20.0
 
(0.1
)
 
(0.2
)
 
1.78
%
 
 
 
January 2, 2019
 
20.0
 
(0.1
)
 
(0.2
)
 
1.78
%
 
 
 
January 2, 2019
 
20.0
 
(0.1
)
 
(0.2
)
 
1.79
%
 
 
 
January 2, 2019
 
20.0
 
(0.1
)
 
(0.2
)
 
1.79
%
 
 
 
January 2, 2019
 
20.0
 
(0.1
)
 
(0.2
)
 
1.79
%
 
 
 
January 2, 2019
 
25.0
 
0.1

 
0.1

 
1.16
%
 
 
 
January 2, 2019
 
25.0
 
0.1

 
0.1

 
1.16
%
 
 
 
January 2, 2019
 
25.0
 
0.1

 
0.1

 
1.16
%
 
 
 
January 2, 2019
 
20.0
 
0.1

 

 
1.16
%
 
 
 
January 2, 2019
 
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

 
1.23
%
 
 
 
June 26, 2020
 
20.0
 
0.2

 
0.2

 
1.24
%
 
 
 
June 26, 2020
 
9.0
 
0.2

 
0.2

 
1.19
%
 
 
 
February 1, 2021
 
35.0
 
0.9

 
0.9

 
1.01
%
 
 
 
March 1, 2021
 
35.0
 
0.9

 
0.9

 
1.02
%
 
 
 
March 1, 2021
 
20.0
 
0.5

 
0.5

 
1.01
%
 
 
 
March 1, 2021
 
20.0
 
0.5

 
0.5

 
1.02
%
 
 
 
March 1, 2021
 
20.0
 
0.5

 
0.5

 
1.02
%
 
 
 
March 1, 2021
 
50.0
 
0.1

 
N/A

 
1.75
%
 
 
 
December 29, 2021
 
25.0
 
0.1

 
N/A

 
1.75
%
 
 
 
December 29, 2021
 
25.0
 
0.1

 
N/A

 
1.75
%
 
 
 
December 29, 2021
 
25.0
 
0.1

 
N/A

 
1.75
%
 
 
 
December 29, 2021
 
25.0
 
0.1

 
N/A

 
1.75
%
 
 
 
December 29, 2021
 
 
 
 
 
 
 
 
 
 
 
 
 
Forward Starting Swap
 
 
 
 
 
 
 
 
 
48.0
 
0.5

 
0.7

 
1.42
%
 
January 2, 2018
 
February 1, 2021
 
 
 
$
5.6

 
$
4.3

 
 
 
 
 
 
 
_________________________
(1) 
As of June 30, 2017 and December 31, 2016, 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).



16


The table below presents the effect of derivative financial instruments on our consolidated statements of operations and on our share of our partnerships’ statements of operations for the three and six months ended June 30, 2017 and 2016:
 
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
Consolidated
Statements of
Operations 
Location
(in millions of dollars)
 
2017
 
2016
 
2017
 
2016
 
Derivatives in cash flow hedging relationships:
 
 
 
 
 
 
 
 
 
 
Interest rate products
 
 
 
 
 
 
 
 
 
 
Gain (loss) recognized in Other Comprehensive Income (Loss) on derivatives
 
$
(0.9
)
 
$
(4.3
)
 
$
0.1

 
$
(11.0
)
 
N/A
Loss reclassified from Accumulated Other Comprehensive Income (Loss) into income (effective portion)
 
$
0.7

 
$
1.4

 
$
1.5

 
$
2.8

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

 
$

 
$

 
$
(0.1
)
 
Interest expense

Credit-Risk-Related Contingent Features

We have agreements with some of our derivative counterparties that contain a provision pursuant to which, if our entity that originated such derivative instruments defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then we could also be declared in default on our derivative obligations. As of June 30, 2017, 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 June 30, 2017, 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 $0.7 million. If we had breached any of the default provisions in these agreements as of June 30, 2017, we might have been required to settle our obligations under the agreements at their termination value (including accrued interest) of $0.7 million. We had not breached any of these provisions as of June 30, 2017.

8. EQUITY OFFERING

2017 Preferred Share Offering

In January 2017, we issued 6,900,000 7.20% Series C Cumulative Redeemable Perpetual Preferred Shares (the “Series C Preferred Shares”) in a public offering at $25.00 per share. We received net proceeds from the offering of approximately $166.3 million after deducting payment of the underwriting discount of $5.4 million ($0.7875 per Series C Preferred Share) and offering expenses of $0.7 million. We used a portion of the net proceeds from this offering to repay all $117.0 million of the then-outstanding borrowings under the 2013 Revolving Facility.

We may not redeem the Series C Preferred Shares before January 27, 2022 except to preserve our status as a REIT or upon the occurrence of a Change of Control, as defined in the Trust Agreement addendum designating the Series C Preferred Shares. On and after January 27, 2022, we may redeem any or all of the Series C Preferred Shares at $25.00 per share plus any accrued and unpaid dividends. In addition, upon the occurrence of a Change of Control, we may redeem any or all of the Series C Preferred Shares for cash within 120 days after the first date on which such Change of Control occurred at $25.00 per share plus any accrued and unpaid dividends. The Series C Preferred Shares have no stated maturity, are not subject to any sinking fund or mandatory redemption provisions, and will remain outstanding indefinitely unless we redeem or otherwise repurchase them or they are converted.



17


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 28 retail properties in nine states, of which 24 are operating properties, and four are development properties, one of which is a former operating property that is currently partially closed and undergoing a major reconstruction (see Fashion Outlets of Philadelphia discussion below). The 24 operating properties include 20 shopping malls and four other operating retail properties, have a total of 19.3 million square feet and are located in eight states. We and partnerships in which we own an interest own 14.8 million square feet at these properties (excluding space owned by anchors).

There are 18 operating retail properties in our portfolio that we consolidate for financial reporting purposes. These consolidated operating properties have a total of 15.2 million square feet, of which we own 12.0 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 above property counts and square feet do not include Logan Valley Mall in Altoona, Pennsylvania and Valley View Mall in La Crosse, Wisconsin because these properties have been classified as “held for sale” as of June 30, 2017.

The development 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” (The Gallery at Market East into the Fashion Outlets of Philadelphia (“Fashion Outlets of Philadelphia”)), and one classified as “other.” We have two properties (Woodland Mall in Grand Rapids Michigan and The Mall at Prince Georges in Hyattsville, Maryland) that have redevelopment projects currently underway. We also have five properties with projects underway to replace vacant anchor stores (Capital City Mall in Harrisburg, Pennsylvania, Exton Square Mall in Exton, Pennsylvania, Magnolia Mall in Florence, South Carolina, Viewmont Mall in Scranton, Pennsylvania and Valley View Mall in LaCrosse, Wisconsin).

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.

We have continuously made efforts to improve the overall quality of our portfolio and to achieve operational excellence. Since 2013, we have executed a strategic disposition program whereby we have sold 16 of our lower-productivity malls, with two more properties currently on the market (Logan Valley Mall and Valley View Mall). We have also sought to improve the quality of our remaining properties through remerchandising and redevelopment activities. Where possible, we have sought to proactively replace challenged department stores with a diverse mix of high-performance retailers. Approximately 20% of our retail space is committed to dining and entertainment. In the last several years, we have added over one million square feet of space in the categories of dining, entertainment, fast fashion, grocery, health & wellness and off-price retailers.

Net loss for the three months ended June 30, 2017 was $53.3 million, a decrease in earnings of $62.4 million compared to net income of $9.2 million for the three months ended June 30, 2016. This decrease is primarily due to higher impairment of assets in the three months ended June 30, 2017 ($53.9 million related to Logan Valley Mall and Valley View Mall) compared to $14.1 million in the three months ended June 30, 2016, and to a $20.6 million decrease in gains on sales of interest in real estate from properties sold in 2016 and 2017.

Net loss for the six months ended June 30, 2017 was $53.8 million, a decrease in earnings of $64.9 million compared to net income of $11.1 million for the six months ended June 30, 2016. This decrease is primarily due to higher impairment of assets in the six months ended June 30, 2017 ($53.9 million related to Logan Valley Mall and Valley View Mall) compared to $14.7

18


million recorded in the six months ended June 30, 2016, a $12.1 million decrease in net income from properties sold in 2016 and 2017, and a $22.5 million decrease in gains on sales of interests in real estate, partially offset by a decrease of interest expense related to lower interest rates and lower and weighted average debt balance due to the application of cash proceeds from property sales in 2016 and 2017, along with the net proceeds from our 2017 Series C Preferred Share issuance.

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 and Industry Conditions

Conditions in the economy have caused fluctuations and variations in business and consumer confidence, retail sales, and consumer spending on retail goods. Further, traditional mall tenants, including department store anchors and smaller format retail tenants face significant challenges resulting from changing consumer expectations, the convenience of e-commerce shopping, competition from fast fashion retailers, the expansion of outlet centers, and declining mall traffic, among other factors.

In recent years, there has been an increased level of tenant bankruptcies and store closings by tenants who have been significantly impacted by these factors.

The table below sets forth information related to our tenants in bankruptcy for our consolidated and unconsolidated properties:
 
 
Pre-bankruptcy
 
Units Closed
Year
 
Number of Tenants (1)
 
Number of locations impacted
 
GLA
 
PREIT’s Share of Annualized Gross Rent(2) 
(in thousands)
 
Number of locations closed
 
GLA
 
PREIT’s Share of Annualized Gross Rent (2)(in thousands)
2017 (Six Months)
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated properties
 
11

 
65

 
253,086

 
$
8,892.8

 
16

 
87,580

 
$
2,477.3

Unconsolidated properties
 
6

 
12

 
101,259

 
1,389.6

 
6

 
81,531

 
949.3

Total
 
11

 
77

 
354,345

 
$
10,282.4

 
22

 
169,111

 
$
3,426.6

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2016 (Full Year)
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated properties
 
7

 
41

 
147,030

 
$
7,148.2

 
21

 
74,973

 
$
3,226.5

Unconsolidated properties
 
6

 
10

 
86,012

 
1,166.9

 
4

 
64,809

 
471.4

Total
 
9

 
51

 
233,042

 
$
8,315.1

 
25

 
139,782

 
$
3,697.9

(1) Total represents unique tenants
(2) Includes our share of tenant gross rent from partnership properties based on PREIT’s ownership percentage in the respective equity method investments as of June 30, 2017.



19


Anchor Replacements

In recent years, through property dispositions, proactive store recaptures, lease terminations and other activities, we have made efforts to reduce our risks associated with certain department store concentrations. In December 2016, we acquired the Sears property at Woodland Mall and we have recaptured the Sears premises at Capital City Mall and Magnolia Mall in 2017. In July 2017, we purchased the Macy’s location at Moorestown Mall and in April 2017, we purchased the vacant anchor boxes formerly occupied by Macy’s at our Valley View Mall and Valley Mall locations. We are in negotiations to purchase the Macy’s store located at Plymouth Meeting Mall.

The table below sets forth information related to our anchor replacement program:
 
 
Former/Existing Anchors
 
 
Replacement Tenant(s)
Property
Name
GLA '000's
Date Store Closed/Closing
 
Date De-commissioned
Name
GLA
'000's
Actual/Targeted Occupancy Date
Completed:
 
 
 
 
 
 
 
 
 
Cumberland Mall
JC Penney(1)
51
Q3 15
 
Q3 15
Dick's Sporting Goods
50
Q4 16
 
Exton Square Mall
JC Penney(1)
118
Q2 15
 
N/A
Round 1
58
Q4 16
In process:
 
 
 
 
 
 
 
 
 
Exton Square Mall
K-mart (1)
96
Q1 16
 
Q2 16
Whole Foods
58
Q4 17
 
Viewmont Mall
Sears (1)
193
Q3 16
 
Q3 16
Dick's Sporting Goods/Field & Stream
90
Q4 17
 
Home Goods
23
Q4 17
 
Capital City Mall
Sears (1)
101
Q1 17
 
Q2 17
Dick's Sporting Goods
62
Q3 17
 
Small shop space and outparcels
55
Q4 17
 
Woodland Mall
Sears (1)(4)
313
Q2 17
 
Q2 17
Von Maur
86
Q4 19
 
Restaurants and small shop space
TBD
Q4 19
 
Magnolia Mall
Sears (1)
91
Q1 17
 
Q2 17
Burlington
46
Q4 17
 
 
Home Goods, Five Below and outparcels
45
Q2 18
Pending:
 
 
 
 
 
 
 
 
 
Plymouth Meeting Mall
Macy's (3)
215
Q1 17
 
N/A
TBD
TBD
 
 
Moorestown Mall
Macy's (1)(2)
200
Q1 17
 
N/A
TBD
43
 
 
Valley Mall
Macy's (1)(5)
120
Q1 16
 
N/A
TBD
70
 
 
 
BonTon (1)
123
Q1 18
 
N/A
Belk
123
Q4 18
 
Willow Grove Park
JC Penney (1)(6)
124
Q3 17
 
N/A
TBD
TBD
 

(1) 
Property is PREIT owned
(2) 
Property was purchased by PREIT in July 2017
(3) 
Property is third-party owned
(4) 
Purchased by PREIT in the fourth quarter of 2016
(5) 
Purchased by PREIT in April 2017
(6) 
Closed in July 2017

In response to anchor store closings and other trends in the retail space, we have been changing the mix of tenants at our properties. We have been reducing the percentage of traditional mall tenants and increasing the share of space dedicated to dining, entertainment, fast fashion, off price, and large format box tenants. Some of these changes may result in the redevelopment of all or a portion of our properties. See —Capital Improvements, Redevelopment and Development Projects.
To fund the capital necessary to replace anchors and to maintain a reasonable level of leverage, we expect to use a variety of means available to us, subject to and in accordance with the terms of our Credit Agreements. These steps might include (i)

20


making additional borrowings under our credit facility, (ii) obtaining construction loans on specific projects, (iii) selling properties or interests in properties with values in excess of their mortgage loans (if applicable) and applying the excess proceeds to fund capital expenditures or for debt reduction, (iv) 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 (v) 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

We might engage in various types of capital improvement projects at our operating properties. 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 $137.4 million as of June 30, 2017.

In 2014, we entered into a 50/50 joint venture with The Macerich Company (“Macerich”) to redevelop the Fashion Outlets of Philadelphia. As we redevelop the Fashion Outlets of Philadelphia, operating results in the short term, as measured by sales, occupancy, real estate revenue, property operating expenses, NOI and depreciation, will likely continue to 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, other than the redevelopment of the Fashion Outlets of Philadelphia.

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 2017 or 2016 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, 2016.

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

21


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. See “Results of Operations” for a description of the losses on impairment of assets recorded during the three and six months ended June 30, 2017 and 2016.
 
New Accounting Developments

See note 1 to our unaudited consolidated financial statements for descriptions of new accounting developments.

OFF BALANCE SHEET ARRANGEMENTS

We have no material off-balance sheet items other than the unconsolidated partnerships described in note 3 to the unaudited consolidated financial statements and in the “Overview” section above.


22




RESULTS OF OPERATIONS

Occupancy

The table below sets forth certain occupancy statistics for our properties as of June 30, 2017 and 2016:
 
 
Occupancy (1) at June 30,
 
Consolidated
Properties
 
Unconsolidated
Properties(2)
 
Combined(2)(3)
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
Retail portfolio weighted average:
 
 
 
 
 
 
 
 
 
 
 
Total excluding anchors
90.1
%
 
91.0
%
 
90.3
%
 
95.9
%
 
90.1
%
 
91.3
%
Total including anchors
92.7
%
 
93.7
%
 
92.1
%
 
96.7
%
 
92.7
%
 
94.0
%
Malls weighted average:
 
 
 
 
 
 
 
 
 
 
 
Total excluding anchors
90.0
%
 
90.0
%
 
89.8
%
 
95.4
%
 
90.0
%
 
90.5
%
Total including anchors
92.8
%
 
93.4
%
 
93.0
%
 
96.9
%
 
92.9
%
 
93.7
%
Other retail properties
N/A

 
N/A

 
91.4
%
 
96.5
%
 
91.4
%