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EX-32.2 - EXHIBIT 32.2 - PENNSYLVANIA REAL ESTATE INVESTMENT TRUSTa2017q3exhibit322930.htm
EX-32.1 - EXHIBIT 32.1 - PENNSYLVANIA REAL ESTATE INVESTMENT TRUSTa2017q3exhibit321930.htm
EX-31.2 - EXHIBIT 31.2 - PENNSYLVANIA REAL ESTATE INVESTMENT TRUSTa2017q3exhibit312930.htm
EX-31.1 - EXHIBIT 31.1 - PENNSYLVANIA REAL ESTATE INVESTMENT TRUSTa2017q3exhibit311930.htm
EX-10.2 - EXHIBIT 10.2 - PENNSYLVANIA REAL ESTATE INVESTMENT TRUSTa2017q3exhibit102.htm
EX-10.1 - EXHIBIT 10.1 - PENNSYLVANIA REAL ESTATE INVESTMENT TRUSTa2017q3exhibit101.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 September 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 October 27, 2017: 69,908,935






PENNSYLVANIA REAL ESTATE INVESTMENT TRUST

CONTENTS
 

 
 
Page
 
 
 
 
 
Item 1.
 
 
 
 
 

 
 
 
 

 
 
 
 

 
 
 
 

 
 
 
 

 
 
 
 

 
 
 
Item 2.

 
 
 
Item 3.

 
 
 
Item 4.

 
 
 
 
 
 
 
 
Item 1.

 
 
 
Item 1A.

 
 
 
Item 2.

 
 
 
Item 3.
Not Applicable

 
 
 
Item 4.
Not Applicable

 
 
 
Item 5.
Not Applicable

 
 
 
Item 6.

 
 
 
 


Except as the context otherwise requires, references in this Quarterly Report on Form 10-Q to “we,” “our,” “us,” the “Company” and “PREIT” refer to Pennsylvania Real Estate Investment Trust and its subsidiaries, including our operating partnership, PREIT Associates, L.P. References in this Quarterly Report on Form 10-Q to “PREIT Associates” or the “Operating Partnership” refer to PREIT Associates, L.P.




Item 1. FINANCIAL STATEMENTS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
September 30,
2017
 
December 31,
2016
 
(unaudited)
 
 
ASSETS:
 
 
 
INVESTMENTS IN REAL ESTATE, at cost:
 
 
 
Operating properties
$
3,084,759

 
$
3,196,529

Construction in progress
129,614

 
97,575

Land held for development
5,881

 
5,910

Total investments in real estate
3,220,254

 
3,300,014

Accumulated depreciation
(1,082,840
)
 
(1,060,845
)
Net investments in real estate
2,137,414

 
2,239,169

INVESTMENTS IN PARTNERSHIPS, at equity:
201,000

 
168,608

OTHER ASSETS:
 
 
 
Cash and cash equivalents
76,942

 
9,803

Tenant and other receivables (net of allowance for doubtful accounts of $6,599 and $6,236 at September 30, 2017 and December 31, 2016, respectively)
34,745

 
39,026

Intangible assets (net of accumulated amortization of $12,643 and $11,064 at September 30, 2017 and December 31, 2016, respectively)
18,167

 
19,746

Deferred costs and other assets, net
107,304

 
93,800

Assets held for sale
49,074

 
46,680

Total assets
$
2,624,646

 
$
2,616,832

LIABILITIES:
 
 
 
Mortgage loans payable, net
$
1,032,578

 
$
1,222,859

Term Loans, net
547,567

 
397,043

Revolving Facility

 
147,000

Tenants’ deposits and deferred rent
12,234

 
13,262

Distributions in excess of partnership investments
59,871

 
61,833

Fair value of derivative liabilities
445

 
1,520

Liabilities related to assets held for sale
32,295

 
2,658

Accrued expenses and other liabilities
58,542

 
68,251

Total liabilities
1,743,532

 
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 September 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 September 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 September 30, 2017; liquidation preference of $172,500
69

 

Series D Preferred Shares, $.01 par value per share; 25,000 preferred shares authorized; 4,800 shares of Series D Preferred Shares issued and outstanding at September 30, 2017; liquidation preference of $120,000
48

 

Shares of beneficial interest, $1.00 par value per share; 200,000 shares authorized; issued and outstanding 69,888 shares at September 30, 2017 and 69,553 shares at December 31, 2016
69,888

 
69,553

Capital contributed in excess of par
1,768,540

 
1,481,787

Accumulated other comprehensive income
3,534

 
1,622

Distributions in excess of net income
(1,098,547
)
 
(997,789
)
Total equity—Pennsylvania Real Estate Investment Trust
743,613

 
555,254

Noncontrolling interest
137,501

 
147,152

Total equity
881,114

 
702,406

Total liabilities and equity
$
2,624,646

 
$
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 
 September 30,
 
Nine Months Ended 
 September 30,
(in thousands of dollars)
2017
 
2016
 
2017
 
2016
REVENUE:
 
 
 
 
 
 
 
Real estate revenue:
 
 
 
 
 
 
 
Base rent
$
56,874

 
$
60,188

 
$
171,078

 
$
188,424

Expense reimbursements
26,900

 
29,059

 
81,981

 
89,063

Percentage rent
593

 
825

 
1,223

 
1,661

Lease termination revenue
7

 
3,012

 
2,279

 
3,263

Other real estate revenue
2,345

 
3,176

 
6,992

 
8,044

Total real estate revenue
86,719

 
96,260

 
263,553

 
290,455

Other income
2,492

 
2,600

 
4,172

 
4,630

Total revenue
89,211

 
98,860

 
267,725

 
295,085

EXPENSES:
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 Property operating expenses:
 
 
 
 
 
 
 
CAM and real estate taxes
(25,772
)
 
(29,373
)
 
(83,985
)
 
(94,058
)
Utilities
(4,444
)
 
(4,753
)
 
(12,407
)
 
(13,216
)
Other property operating expenses
(3,087
)
 
(3,123
)
 
(9,117
)
 
(10,618
)
Total property operating expenses
(33,303
)
 
(37,249
)
 
(105,509
)
 
(117,892
)
 Depreciation and amortization
(29,966
)
 
(26,820
)
 
(94,652
)
 
(92,217
)
 General and administrative expenses
(8,288
)
 
(8,244
)
 
(26,561
)
 
(25,713
)
 Provision for employee separation expenses

 
(162
)
 
(1,053
)
 
(1,355
)
 Project costs and other expenses
(150
)
 
(1,080
)
 
(547
)
 
(1,374
)
Total operating expenses
(71,707
)
 
(73,555
)
 
(228,322
)
 
(238,551
)
Interest expense, net
(14,342
)
 
(17,198
)
 
(44,098
)
 
(53,611
)
Impairment of assets
(1,825
)
 
(9,865
)
 
(55,742
)
 
(24,589
)
Total expenses
(87,874
)
 
(100,618
)
 
(328,162
)
 
(316,751
)
Income (loss) before equity in income of partnerships, gain on sale of real estate by equity method investee, gains on sales of interests in non operating real estate and (losses) gains on sales of real estate
1,337

 
(1,758
)
 
(60,437
)
 
(21,666
)
Equity in income of partnerships
4,254

 
4,643

 
12,144

 
12,718

Gain on sale of real estate by equity method investee
6,718

 

 
6,718

 

Gains on sales of interests in non operating real estate

 

 
486

 
9

(Losses) gains on sales of interests in real estate, net
(9
)
 
31

 
(374
)
 
22,953

Net income (loss)
12,300

 
2,916

 
(41,463
)
 
14,014

Less: net (income available) loss attributable to noncontrolling interest
(1,305
)
 
(312
)
 
4,416

 
(1,502
)
Net income available (loss attributable) to PREIT
10,995

 
2,604

 
(37,047
)
 
12,512

Less: preferred share dividends
(7,525
)
 
(3,962
)
 
(20,797
)
 
(11,886
)
Net income (loss) attributable to PREIT common shareholders
$
3,470

 
$
(1,358
)
 
$
(57,844
)
 
$
626


See accompanying notes to the unaudited consolidated financial statements.
2


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

(in thousands of dollars, except per share amounts)
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
2017
 
2016
 
2017
 
2016
Net income (loss)
$
12,300

 
$
2,916

 
$
(41,463
)
 
$
14,014

Noncontrolling interest
(1,305
)
 
(312
)
 
4,416

 
(1,502
)
Dividends on preferred shares
(7,525
)
 
(3,962
)
 
(20,797
)
 
(11,886
)
Dividends on unvested restricted shares
(87
)
 
(81
)
 
(272
)
 
(241
)
Net income (loss) loss used to calculate loss per share—basic and diluted
$
3,383

 
$
(1,439
)
 
$
(58,116
)
 
$
385

 
 
 
 
 
 
 
 
Basic and diluted income (loss) per share:
$
0.05

 
$
(0.02
)
 
$
(0.84
)
 
$
0.01

 
 
 
 
 
 
 
 
(in thousands of shares)
 
 
 
 
 
 
 
Weighted average shares outstanding—basic
69,424

 
69,129

 
69,319

 
69,065

Effect of common share equivalents (1) 

 

 

 
386

Weighted average shares outstanding—diluted
69,424

 
69,129

 
69,319

 
69,451

_________________________
(1) 
There were no common share equivalents for the three months ended September 30, 2017. The Company had net losses used to calculate earnings per share for the three months ended September 30, 2016 and the nine months ended September 30, 2017, therefore, the effects of common share equivalents of 361 and 51, 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 
 September 30,
 
Nine Months Ended 
 September 30,
(in thousands of dollars)
2017
 
2016
 
2017
 
2016
Comprehensive income (loss):
 
 
 
 
 
 
 
Net income (loss)
$
12,300

 
$
2,916

 
$
(41,463
)
 
$
14,014

Unrealized gain (loss) on derivatives
266

 
3,823

 
1,544

 
(4,755
)
Amortization of losses on settled swaps, net of gains
259

 
123

 
597

 
375

Total comprehensive income (loss)
12,825

 
6,862

 
(39,322
)
 
9,634

Less: comprehensive (income) loss attributable to noncontrolling interest
(1,361
)
 
(729
)
 
4,187

 
(1,029
)
Comprehensive income (loss) PREIT
$
11,464

 
$
6,133

 
$
(35,135
)
 
$
8,605



See accompanying notes to the unaudited consolidated financial statements.
4



PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF EQUITY
Nine Months Ended
September 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
 
Series D
 
 
 
 
 
Non-
controlling
interest
Balance December 31, 2016
$
702,406

 
$
46

 
$
35

 
$

 
$

 
$
69,553

 
$
1,481,787

 
$
1,622

 
$
(997,789
)
 
$
147,152

Net loss
(41,463
)
 

 

 

 

 

 

 

 
(37,047
)
 
(4,416
)
Other comprehensive income
2,141

 

 

 

 
 
 

 

 
1,912

 

 
229

Preferred shares issued in 2017 Series C and D preferred share offerings, net
282,005

 

 

 
69

 
48

 

 
281,888

 

 

 

Shares issued upon redemption of Operating Partnership units

 

 

 

 

 
21

 
199

 

 

 
(220
)
Shares issued under employee compensation plans, net of shares retired
462

 

 

 

 

 
314

 
148

 

 

 

Amortization of deferred compensation
4,518

 

 

 

 

 

 
4,518

 

 

 

Distributions paid to common shareholders ($0.63 per share)
(43,959
)
 

 

 

 

 

 

 

 
(43,959
)
 

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

 

 

 

 

 

 

 
(7,116
)
 

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

 

 

 

 

 

 

 
(4,770
)
 

Distributions paid to Series C preferred shareholders ($1.14 per share)
(7,866
)
 

 

 

 

 

 

 

 
(7,866
)
 

Noncontrolling interests:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Distributions paid to Operating Partnership unit holders ($0.63 per unit)
(5,232
)
 

 

 

 

 

 

 

 

 
(5,232
)
Other distributions to noncontrolling interests, net
(12
)
 

 

 

 
 
 

 

 

 

 
(12
)
Balance September 30, 2017
$
881,114

 
$
46

 
$
35

 
$
69

 
$
48

 
$
69,888

 
$
1,768,540

 
$
3,534

 
$
(1,098,547
)
 
$
137,501



See accompanying notes to the unaudited consolidated financial statements.
5


PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
Nine Months Ended 
 September 30,
(in thousands of dollars)
2017
 
2016
Cash flows from operating activities:
 
 
 
Net (loss) income
$
(41,463
)
 
$
14,014

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
 
Depreciation
87,963

 
93,561

Amortization
8,695

 
686

Straight-line rent adjustments
(1,908
)
 
(1,953
)
Provision for doubtful accounts
1,281

 
1,513

Amortization of deferred compensation
4,518

 
4,518

Loss on hedge ineffectiveness

 
143

Gain on sale of real estate by equity method investee
(6,718
)
 

Gains on sales of interests in real estate and non operating real estate, net
(112
)
 
(22,962
)
Equity in income of partnerships in excess of distributions
(3,024
)
 
(5,070
)
Amortization of historic tax credits
(1,768
)
 
(1,768
)
Impairment of assets
55,742

 
24,589

Change in assets and liabilities:
 
 
 
Net change in other assets
(5,682
)
 
1,753

Net change in other liabilities
(4,556
)
 
(4,872
)
Net cash provided by operating activities
92,968

 
104,152

Cash flows from investing activities:
 
 
 
Additions to construction in progress
(93,178
)
 
(48,312
)
Investments in real estate improvements
(36,850
)
 
(32,846
)
Cash proceeds from sales of real estate
77,778

 
154,764

Cash distributions from partnerships of proceeds from real estate sold
30,265

 

Additions to leasehold improvements and corporate fixed assets
(511
)
 
(449
)
Investments in partnerships
(56,778
)
 
(9,995
)
Capitalized leasing costs
(4,633
)
 
(4,394
)
Decrease in cash escrows
2,311

 
3,098

Cash distributions from partnerships in excess of equity in income
1,895

 
6,014

Net cash (used in) provided by investing activities
(79,701
)
 
67,880

Cash flows from financing activities:
 
 
 
Net proceeds from issuance of preferred shares
282,005

 

Net borrowings from revolving facility
3,000

 
50,000

Proceeds from mortgage loans

 
139,000

Principal installments on mortgage loans
(12,581
)
 
(12,711
)
Repayments of mortgage loans
(150,000
)
 
(280,327
)
Payment of deferred financing costs
(71
)
 
(3,335
)
Dividends paid to common shareholders
(43,959
)
 
(43,769
)
Dividends paid to preferred shareholders
(19,752
)
 
(11,886
)
Distributions paid to Operating Partnership unit holders and noncontrolling interest
(5,232
)
 
(5,245
)
Value of shares of beneficial interest issued
1,790

 
947

Value of shares retired under equity incentive plans, net of shares issued
(1,328
)
 
(2,177
)
Net cash provided by (used in) financing activities
53,872

 
(169,503
)
Net change in cash and cash equivalents
67,139

 
2,529

Cash and cash equivalents, beginning of period
9,803

 
22,855

Cash and cash equivalents, end of period
$
76,942

 
$
25,384


See accompanying notes to the unaudited consolidated financial statements.
6


PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 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 Fashion District Philadelphia (“Fashion District Philadelphia”)), and one is classified as “other.” The above property counts do not include Valley View Mall in La Crosse, Wisconsin because this property is classified as “held for sale” as of September 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 September 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 September 30, 2017, the total amount that would have been distributed would have been $87.0 million, which is calculated using our September 29, 2017 closing price on the New York Stock Exchange of $10.49 per share multiplied by the number of outstanding OP Units held by limited partners, which was 8,291,072 as of September 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 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

8


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. We also continue to evaluate the scope of revenue-related disclosures we expect to provide pursuant to the new requirements. The new standard is effective for us on January 1, 2018.

2. REAL ESTATE ACTIVITIES

Investments in real estate as of September 30, 2017 and December 31, 2016 were comprised of the following:
 
(in thousands of dollars)
As of September 30,
2017
 
As of December 31,
2016
Buildings, improvements and construction in progress
$
2,727,880

 
$
2,794,213

Land, including land held for development
492,374

 
505,801

Total investments in real estate
3,220,254

 
3,300,014

Accumulated depreciation
(1,082,840
)
 
(1,060,845
)
Net investments in real estate
$
2,137,414

 
$
2,239,169


Capitalization of Costs

The following table summarizes our capitalized interest, salaries, commissions, benefits and real estate taxes for the three and nine months ended September 30, 2017 and 2016: 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
(in thousands of dollars)
2017
 
2016
 
2017
 
2016
Development/Redevelopment Activities:
 
 
 
 
 
 
 
Interest
$
2,209

 
$
851

 
$
5,358

 
$
2,221

Salaries and benefits
362

 
339

 
1,058

 
880

Real estate taxes
496

 
176

 
651

 
202

 
 
 
 
 
 
 
 
Leasing Activities:
 
 
 
 
 
 
 
Salaries, commissions and benefits
1,536

 
1,378

 
4,633

 
4,394


9



Dispositions

The following table presents our dispositions for the nine months ended September 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

 

August
 
Logan Valley Mall
Altoona, Pennsylvania
 
Mall
 
16.5
%
 
33.2

 


Other Real Estate Activity

In 2017, we sold two non operating parcels located at Valley Mall and Beaver Valley Mall for an aggregate of $4.2 million, and recorded aggregate gains of $0.5 million on these parcels.

Acquisitions

In 2017, we purchased vacant anchor stores from Macy’s located at Moorestown Mall, Valley View Mall and Valley Mall for an aggregate of $13.9 million. We have executed a lease with a replacement tenant for the Valley View Mall location and this tenant opened in September 2017.

Impairment of Assets

In September 2017, we recorded a loss on impairment of assets on a land parcel located in Gainesville, Florida of $1.3 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 September 2017, we recorded a loss on impairment of assets on a land parcel located at Sunrise Plaza in Forked River, New Jersey of $0.2 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 and August 2017, we recorded an aggregate loss on impairment of assets on Logan Valley Mall, in Altoona, Pennsylvania of $38.7 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. We sold Logan Valley Mall in August 2017.

In June 2017, we recorded a loss on impairment of assets on Valley View 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 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 Valley

10


View Mall meets the criteria of “assets held for sale,” and this property has 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 September 30, 2017 and December 31, 2016:
 
(in thousands of dollars)
As of September 30, 2017
 
As of December 31, 2016
ASSETS:
 
 
 
Investments in real estate, at cost:
 
 
 
Operating properties
$
612,623

 
$
649,960

Construction in progress
261,735

 
160,699

Total investments in real estate
874,358

 
810,659

Accumulated depreciation
(201,964
)
 
(207,987
)
Net investments in real estate
672,394

 
602,672

Cash and cash equivalents
47,431

 
27,643

Deferred costs and other assets, net
34,218

 
37,705

Total assets
754,043

 
668,020

LIABILITIES AND PARTNERS’ INVESTMENT:
 
 
 
Mortgage loans payable, net
440,315

 
445,224

Other liabilities
54,079

 
23,945

Total liabilities
494,394

 
469,169

Net investment
259,649

 
198,851

Partners’ share
130,627

 
101,045

PREIT’s share
129,022

 
97,806

Excess investment (1)
12,107

 
8,969

Net investments and advances
$
141,129

 
$
106,775

 
 
 
 
Investment in partnerships, at equity
$
201,000

 
$
168,608

Distributions in excess of partnership investments
(59,871
)
 
(61,833
)
Net investments and advances
$
141,129

 
$
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 nine months ended September 30, 2017 and 2016:
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
(in thousands of dollars)
2017
 
2016
 
2017
 
2016
Real estate revenue
$
29,395

 
$
29,475

 
$
87,089

 
$
85,867

Operating expenses:
 
 
 
 
 
 
 
Property operating and other expenses
(7,885
)
 
(8,198
)
 
(25,098
)
 
(25,220
)
Interest expense
(5,460
)
 
(5,388
)
 
(16,266
)
 
(16,165
)
Depreciation and amortization
(6,496
)
 
(5,840
)
 
(19,151
)
 
(17,367
)
Total expenses
(19,841
)
 
(19,426
)
 
(60,515
)
 
(58,752
)
Net income
9,554

 
10,049

 
26,574

 
27,115

Less: Partners’ share
(5,321
)
 
(5,397
)
 
(14,567
)
 
(14,496
)
PREIT’s share
4,233

 
4,652

 
12,007

 
12,619

Amortization of and adjustments to excess investment
21

 
(9
)
 
137

 
99

Equity in income of partnerships
$
4,254

 
$
4,643

 
$
12,144

 
$
12,718



Dispositions

In September 2017, a partnership in which we hold a 50% ownership share sold its condominium interest in 801 Market Street in Philadelphia, Pennsylvania for $61.5 million. The partnership recorded a gain on sale of $13.4 million, of which our share is $6.7 million. The partnership distributed to us proceeds of $30.3 million in connection with this transaction in September 2017, which is recorded in gain on sale of real estate by equity method investee in the accompanying consolidated statement of operations.


Mortgage Activity

In August 2017, the mortgage loan secured by Pavilion at Market East in Philadelphia, Pennsylvania was extended to November 2017. We own a 40% partnership interest in Pavilion at Market East, which owns non-operating land held for development. Our share of the mortgage loan is $3.3 million as of September 30, 2017.

In October 2017, Lehigh Valley Associates, LP (“LVA”), an unconsolidated entity in which we have a 50% partnership interest, and which owns Lehigh Valley Mall in Allentown, Pennsylvania, entered into a new $200.0 million mortgage loan. The mortgage loan has a fixed interest rate of 4.06% and has a term of 10 years. In connection with this new mortgage loan financing, the unconsolidated entity repaid the previous $124.6 million mortgage loan using proceeds from the new mortgage loan and will record $3.1 million of prepayment penalty and will accelerate the amortization of $0.1 million of unamortized financing costs in the fourth quarter of 2017. The unconsolidated entity distributed to us excess proceeds of $35.3 million in October 2017.


Significant Unconsolidated Subsidiary

LVA 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 September 30, 2017 and December 31, 2016 and summarized statement of operations information for the three and nine months ended September 30, 2017 and 2016 for this entity, which is accounted for using the equity method, are as follows:
 
 
As of
 
(in thousands of dollars)
 
September 30, 2017
 
December 31, 2016
 
Summarized balance sheet information
 
 
 
 
 
     Total assets
 
$
46,280

 
$
49,264

 
     Mortgage loan payable
 
124,653

 
126,520

 

12


 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
(in thousands of dollars)
 
2017
 
2016
 
2017
 
2016
Summarized statement of operations information
 
 
 
 
 
 
 
 
     Revenue
 
$
8,355

 
$
9,023

 
$
25,811

 
$
27,192

     Property operating expenses
 
(2,169
)
 
(2,204
)
 
(6,653
)
 
(6,386
)
     Interest expense
 
(1,851
)
 
(1,888
)
 
(5,582
)
 
(5,691
)
     Net income
 
3,449

 
4,066

 
10,710

 
12,544

     PREIT’s share of equity in income
 
 
 
 
 
 
 
 
          of partnership
 
1,724

 
2,033

 
5,355

 
6,272


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.”

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 September 30, 2017, we had borrowed $550.0 million under the Term Loans in the aggregate and no amounts were borrowed under the 2013 Revolving Facility (with $15.8 million pledged as collateral for letters of credit at September 30, 2017). The carrying value of the Term Loans on our consolidated balance sheet is net of $2.4 million of unamortized debt issuance costs.

Interest expense and the deferred financing fee amortization related to the Credit Agreements for the
three and nine months ended September 30, 2017 and 2016 were as follows:
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
(in thousands of dollars)
2017
 
2016
 
2017
 
2016
2013 Revolving Facility
 
 
 
 
 
 
 
 
 
Interest expense
 
$
601

 
$
805

 
$
2,011

 
$
2,277

 
Deferred financing amortization
 
199

 
199

 
597

 
596

 
 
 
 
 
 
 
 
 
 
Term Loans
 
 
 
 
 
 
 
 
 
Interest expense
 
4,205

 
3,125

 
10,752

 
9,162

 
Deferred financing amortization
 
191

 
191

 
568

 
431


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 September 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 September 30, 2017 was $189.7 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

13


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 September 30, 2017.

Mortgage Loans

The aggregate carrying values and estimated fair values of mortgage loans based on interest rates and market conditions at September 30, 2017 and December 31, 2016 were as follows:
 
September 30, 2017
 
December 31, 2016
(in millions of dollars)
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Mortgage loans(1)
$
1,032.6

 
$
1,035.7

 
$
1,222.9

 
$
1,189.6

(1)The carrying value of mortgage loans is net of unamortized debt issuance costs of $3.5 million and $4.5 million as of September 30, 2017 and December 31, 2016, respectively.

The mortgage loans contain various customary default provisions. As of September 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 of $0.6 million), 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 $40.6 million (net of capitalized interest of $5.5 million) and $50.2 million (net of capitalized interest of $2.2 million) for the nine months ended September 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 $236.0 million and $250.0 million for the nine months ended September 30, 2017 and 2016, respectively. Aggregate paydowns (excluding the non cash item discussed below) were $233.0 million and $200.0 million for the nine months ended September 30, 2017 and 2016, respectively. A $150.0 million paydown of the 2013 Revolving Facility was made in the nine months ended September 30, 2017, which was directly paid from the 2014 7-Year Term Loan additional borrowing and is considered to be a non-cash transaction.


14


6. COMMITMENTS AND CONTINGENCIES

Contractual Obligations

As of September 30, 2017, we had unaccrued contractual and other commitments related to our capital improvement projects and development projects of $115.9 million, including commitments related to the redevelopment of Fashion District 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 Fashion District 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 $0.2 million of employee separation expenses for the three months ended September 30, 2016 and no employee separation expenses for the three months ended September 30, 2017, and $1.1 million and $1.4 million for the nine months ended September 30, 2017 and 2016, respectively. As of September 30, 2017, $0.8 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 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 $0.3 million will be reclassified as an increase to interest expense in connection with derivatives. The amortization of these amounts could be accelerated in the event that we repay amounts outstanding on the debt instruments and do not replace them with new borrowings.

Interest Rate Swaps

As of September 30, 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 September 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 September 30, 2017 includes a net loss of $1.0 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 September 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
September 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
 

 
(0.3
)
 
1.78
%
 
 
 
January 2, 2019
 
25.0
 
0.2

 
0.3

 
0.70
%
 
 
 
January 2, 2019
 
20.0
 

 
(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
 
0.3

 
0.2

 
1.23
%
 
 
 
June 26, 2020
 
20.0
 
0.3

 
0.2

 
1.23
%
 
 
 
June 26, 2020
 
20.0
 
0.3

 
0.2

 
1.23
%
 
 
 
June 26, 2020
 
20.0
 
0.3

 
0.2

 
1.23
%
 
 
 
June 26, 2020
 
20.0
 
0.3

 
0.2

 
1.24
%
 
 
 
June 26, 2020
 
9.0
 
0.1

 
0.2

 
1.19
%
 
 
 
February 1, 2021
 
35.0
 
0.8

 
0.9

 
1.01
%
 
 
 
March 1, 2021
 
35.0
 
0.8

 
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
 
 
 
$
5.9

 
$
4.3

 
 
 
 
 
 
 
_________________________
(1) 
As of September 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 nine months ended September 30, 2017 and 2016:
 
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 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
 
$
0.1

 
$
2.6

 
$
0.2

 
$
(8.1
)
 
N/A
Loss reclassified from Accumulated Other Comprehensive Income into income (effective portion)
 
$
0.4

 
$
1.3

 
$
1.9

 
$
3.9

 
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 September 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 September 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 $0.4 million. If we had breached any of the default provisions in these agreements as of September 30, 2017, we might have been required to settle our obligations under the agreements at their termination value (including accrued interest) of $0.4 million. We had not breached any of these provisions as of September 30, 2017.


8. EQUITY OFFERINGS

Preferred Share Offerings

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 our 2013 Revolving Facility.

In September 2017, we issued 4,800,000 6.875% Series D Cumulative Redeemable Perpetual Preferred Shares (the “Series D Preferred Shares”) in a public offering at $25.00 per share. We received net proceeds from the offering of approximately $115.7 million after deducting payment of the underwriting discount of $3.8 million ($0.7875 per Series D Preferred Share) and offering expenses of $0.5 million. In October 2017, we issued an additional 200,000 6.875% Series D Preferred Shares pursuant to the underwriter’s exercise of an overallotment option at $25.00 per share. We received net proceeds from this additional offering of approximately $4.8 million after deducting payment of the underwriting discount of $0.2 million ($0.7875 per Series D Preferred Share). We used the net proceeds from the offering of our Series D Preferred Shares to redeem all of our then outstanding Series A Cumulative Redeemable Perpetual Preferred Shares (the “Series A Preferred Shares”) and for general corporate purposes.

We may not redeem the Series C Preferred Shares and the Series D Preferred Shares before January 27, 2022 and September 15, 2022, respectively, except to preserve our status as a REIT or upon the occurrence of a Change of Control, as defined in the Trust Agreement

17


addendums designating the Series C Preferred Shares and Series D Preferred Shares. On and after January 27, 2022 for the Series C Preferred Shares and September 15, 2022 for the Series D Preferred Shares, we may redeem any or all of the Series C Preferred Shares or Series D 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 or Series D 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 and Series D 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.

Preferred Share Redemption

On October 12, 2017 (the “Redemption Date”), the Company redeemed all 4,600,000 of its Series A Preferred Shares remaining issued and outstanding as of the Redemption Date, for $115.0 million (the redemption price of $25.00 per share) plus accrued and unpaid dividends of $0.7 million (the amount equal to all accrued and unpaid dividends on the Series A Preferred Shares (whether or not declared) from September 15, 2017 to but excluding the Redemption Date). The Series A Preferred Shares were initially issued in April 2012. As a result of this redemption, the $4.1 million excess of the redemption price over the carrying amount of the Series A Preferred Shares will be included in Net income (loss) attributed to PREIT common shareholders in the fourth quarter of 2017.

9. HISTORIC TAX CREDITS
In the second quarter of 2012, we closed a transaction with a counterparty (the “Counterparty”) related to the historic rehabilitation of an office building located at 801 Market Street in Philadelphia, Pennsylvania (the “Project”), which has two stages of development. The Counterparty contributed equity of $5.5 million to the first stage through December 31, 2013 and $5.8 million to the second stage through September 30, 2014. In exchange for its contributions into the Project, the Counterparty received substantially all of the historic rehabilitation tax credits associated with the Project as a distribution. The Counterparty’s contributions, other than the amounts allocated to a put option (whereby we might be obligated or entitled to repurchase the Counterparty’s ownership interest in the Project), are classified as “Accrued expenses and other liabilities” and recognized as “Other income” in the consolidated financial statements as our obligation to deliver tax credits is relieved.
The tax credits are subject to a five year credit recapture period, as defined in the Internal Revenue Code of 1986, as amended, beginning one year after the completion of the Project, which was the second quarter of 2012 for the first stage and the second quarter of 2013 for the second stage. Our obligation to the Counterparty with respect to the tax credits is ratably relieved annually in the third quarter of each year, upon the expiration of each portion of the recapture period and the satisfaction of other revenue recognition criteria.
With regard to the first stage, we recognized the contribution received of $0.9 million from the Counterparty as “Other income” in each of the third quarters of 2017 and 2016, respectively, for the fifth and final recapture period and the fourth recapture period. With regard to the second stage, we recognized the contribution received of $1.0 million in each of the third quarters of 2017 and 2016, respectively related to the fourth and third recapture periods. We also recorded $0.2 million of priority returns earned by the Counterparty in each of the three and nine months ended September 30, 2017 and 2016. In the aggregate, we recorded net income of $1.8 million to “Other income” in the consolidated statements of operations in connection with the Project in each of the three and nine months ended September 30, 2017 and 2016, respectively.



18


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 District Philadelphia discussion below). The 24 operating properties include 20 shopping malls and four other operating retail properties, have a total of 19.6 million square feet and are located in eight states. We and partnerships in which we own an interest own 15.0 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 15.4 million square feet, of which we own 12.2 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 Valley View Mall in La Crosse, Wisconsin because this property has been classified as “held for sale” as of September 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 Fashion District Philadelphia (“Fashion District 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 (Exton Square Mall in Exton, Pennsylvania, Moorestown Mall in Moorestown, New Jersey, Valley Mall in Hagerstown, Maryland, Willow Grove Park in Willow Grove, Pennsylvania and Woodland Mall in Grand Rapids, Michigan).

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 17 of our lower-productivity malls, with one more property currently on the market (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. Since 2012, 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 income for the three months ended September 30, 2017 was $12.3 million, an increase in earnings of $9.4 million compared to net income of $2.9 million for the three months ended September 30, 2016. This increase was primarily due to a $6.7 million gain on the sale of real estate by an equity method investee, a decrease in impairment of assets from $9.9 million in the third quarter of 2016 to $1.8 million in the third quarter of 2017 and an increase in Same Store Net Operating Income (excluding lease termination revenue) of $1.5 million, partially offset by decreases in lease termination revenue of $3.5 million and Non-Same Store Net Operating Income of $3.6 million . See “Use of Non-GAAP Measures—Net Operating Income” for the definition and additional discussion about Net Operating Income, a non-GAAP measure.


19


Net loss for the nine months ended September 30, 2017 was $41.5 million, a decrease in earnings of $55.5 million compared to net income of $14.0 million for the nine months ended September 30, 2016. This decrease was primarily due to an increase in impairment of assets of $31.2 million, a decrease in gains on sale of real estate of $23.3 million and a decrease in Non-Same Store Net Operating Income of $12.4 million, partially offset by a $9.5 million decrease in interest expense and a $6.7 million gain on the sale of real estate by an equity method investee. See “Use of Non-GAAP Measures—Net Operating Income” for the definition and additional discussion about Net Operating Income, a non-GAAP measure.

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 (excluding tenants in bankruptcy at sold properties):
 
 
Pre-bankruptcy
 
Units Closed
Year
 
Number of Tenants (1)
 
Number of locations impacted
 
GLA(2)
 
PREIT’s Share of Annualized Gross Rent(2) 
(in thousands)
 
Number of locations closed
 
GLA(2)
 
PREIT’s Share of Annualized Gross Rent (3)(in thousands)
2017 (Nine Months)
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated properties
 
13

 
69

 
310,585

 
$
9,541.6

 
17

 
90,508

 
$
2,959.7

Unconsolidated properties
 
8

 
15

 
183,956

 
2,021.5

 
6

 
81,531

 
949.3

Total
 
14

 
84

 
494,541

 
$
11,563.1

 
23

 
172,039

 
$
3,909.0

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2016 (Full Year)
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated properties
 
7

 
38

 
137,111

 
$
6,738.7

 
20

 
73,011

 
$
3,181.5

Unconsolidated properties
 
6

 
10

 
86,012

 
1,166.9

 
4

 
64,809

 
471.4

Total
 
9

 
48

 
223,123

 
$
7,905.6

 
24

 
137,820

 
$
3,652.9

(1) Total represents unique tenants.
(2) Gross Leasable Area (“GLA”) in square feet.
(3) Includes our share of tenant gross rent from partnership properties based on PREIT’s ownership percentage in the respective equity method investments as of September 30, 2017.



20


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 2017, we purchased the Macy’s locations at Moorestown Mall, Valley View Mall and Valley Mall locations. We are in negotiations to purchase the leasehold associated with 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:(1)
 
 
 
 
 
 
 
 
 
Cumberland Mall
JC Penney(2)
51
Q3 15
 
Q3 15
Dick's Sporting Goods
50
Q4 16
 
Exton Square Mall
JC Penney(2)
118
Q2 15
 
N/A
Round 1
58
Q4 16
 
Viewmont Mall
Sears (2)
193
Q3 16
 
Q2 17
Dick's Sporting Goods/Field & Stream
90
Q3 17
 
Home Goods
23
Q3 17
 
Capital City Mall
Sears (2)
101
Q1 17
 
Q2 17
Dick's Sporting Goods
62
Q3 17
 
 
Sears Appliance
15
Q4 17
 
 
Fine Wine & Good Spirits
12
Q4 17
 
Magnolia Mall
Sears (2)
91
Q1 17
 
Q2 17
Burlington
46
Q3 17
 
 
Home Goods, Five Below and outparcels
45
Q2 18
 
Valley View Mall
Macys (2)(3)
100
Q2 17
 
Q2 17
Herberger's
100
Q3 17
In process:
 
 
 
 
 
 
 
 
 
Exton Square Mall
K-mart (2)
96
Q1 16
 
Q2 16
Whole Foods
58
Q1 18
 
Valley Mall
Macy's (2)(3)
120
Q1 16
 
N/A
Large format fitness facility
70
Q4 18
 
 
Tilt Studio
49
Q3 18
 
BonTon (2)
123
Q1 18
 
N/A
Belk
123
Q4 18
 
Moorestown Mall
Macy's (2)(4)
200
Q1 17
 
Q3 17
Off-price outdoor gear retailer
18
Q4 18
 
 
Off-price home furnishings retailer
25
Q4 18
 
Woodland Mall
Sears (2)(6)
313
Q2 17
 
Q2 17
Von Maur
86
Q4 19
 
Restaurants and small shop space
TBD
Q4 19