PENNSYLVANIA REAL ESTATE INVESTMENT TRUST - FORM 10-Q - May 4, 2018

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EX-32.2 - EXHIBIT 32.2 - PENNSYLVANIA REAL ESTATE INVESTMENT TRUSTa2018q1exhibit322.htm
EX-32.1 - EXHIBIT 32.1 - PENNSYLVANIA REAL ESTATE INVESTMENT TRUSTa2018q1exhibit321.htm
EX-31.2 - EXHIBIT 31.2 - PENNSYLVANIA REAL ESTATE INVESTMENT TRUSTa2018q1exhibit312.htm
EX-31.1 - EXHIBIT 31.1 - PENNSYLVANIA REAL ESTATE INVESTMENT TRUSTa2018q1exhibit311.htm
EX-10.3 - EXHIBIT 10.3 - PENNSYLVANIA REAL ESTATE INVESTMENT TRUSTa2018q1exhibit103.htm
EX-10.2 - EXHIBIT 10.2 - PENNSYLVANIA REAL ESTATE INVESTMENT TRUSTa2018q1exhibit102.htm
EX-10.1 - EXHIBIT 10.1 - PENNSYLVANIA REAL ESTATE INVESTMENT TRUSTa2018q1exhibit101.htm

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

Form 10-Q
x
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2018
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,” “smaller reporting company” and “emerging growth 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 April 30, 2018: 70,354,111





PENNSYLVANIA REAL ESTATE INVESTMENT TRUST

CONTENTS
 

 
 
Page
 
 
 
 
 
Item 1.
 
 
 
 
 

 
 
 
 

 
 
 
 

 
 
 
 

 
 
 
 

 
 
 
 

 
 
 
Item 2.

 
 
 
Item 3.

 
 
 
Item 4.

 
 
 
 
 
 
 
 
Item 1.

 
 
 
Item 1A.

 
 
 
Item 2.

 
 
 
Item 3.
Not Applicable
—

 
 
 
Item 4.
Not Applicable
—

 
 
 
Item 5.
Not Applicable
—

 
 
 
Item 6.

 
 
 
 


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



Item 1. FINANCIAL STATEMENTS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
March 31,
2018
 
December 31,
2017
 
(unaudited)
 
 
ASSETS:
 
 
 
INVESTMENTS IN REAL ESTATE, at cost:
 
 
 
Operating properties
$
3,193,444

 
$
3,180,212

Construction in progress
113,015

 
113,609

Land held for development
5,881

 
5,881

Total investments in real estate
3,312,340

 
3,299,702

Accumulated depreciation
(1,141,914
)
 
(1,111,007
)
Net investments in real estate
2,170,426

 
2,188,695

INVESTMENTS IN PARTNERSHIPS, at equity:
90,188

 
216,823

OTHER ASSETS:
 
 
 
Cash and cash equivalents
89,213

 
15,348

Tenant and other receivables (net of allowance for doubtful accounts of $8,107 and $7,248 at March 31, 2018 and December 31, 2017, respectively)
35,671

 
38,166

Intangible assets (net of accumulated amortization of $13,795 and $13,117 at March 31, 2018 and December 31, 2017, respectively)
17,015

 
17,693

Deferred costs and other assets, net
114,332

 
112,046

Total assets
$
2,516,845

 
$
2,588,771

LIABILITIES:
 
 
 
Mortgage loans payable, net
$
1,062,070

 
$
1,056,084

Term Loans, net
547,949

 
547,758

Revolving Facility
—

 
53,000

Tenants’ deposits and deferred rent
13,345

 
11,446

Distributions in excess of partnership investments
96,895

 
97,868

Fair value of derivative liabilities
—

 
20

Accrued expenses and other liabilities
55,822

 
61,604

Total liabilities
1,776,081

 
1,827,780

COMMITMENTS AND CONTINGENCIES (Note 6):

 

EQUITY:
 
 
 
Series B Preferred Shares, $.01 par value per share; 25,000 preferred shares authorized; 3,450 Series B Preferred Shares issued and outstanding at each of March 31, 2018 and December 31, 2017; liquidation preference of $86,250
35

 
35

Series C Preferred Shares, $.01 par value per share; 25,000 preferred shares authorized; 6,900 Series C Preferred Shares issued and outstanding at each of March 31, 2018 and December 31, 2017; liquidation preference of $172,500
69

 
69

Series D Preferred Shares, $.01 par value per share; 25,000 preferred shares authorized; 5,000 Series D Preferred Shares issued and outstanding at each of March 31, 2018 and December 31, 2017; liquidation preference of $125,000
50

 
50

Shares of beneficial interest, $1.00 par value per share; 200,000 shares authorized; 70,353 and 69,983 issued and outstanding shares at March 31, 2018 and December 31, 2017, respectively
70,353

 
69,983

Capital contributed in excess of par
1,665,325

 
1,663,966

Accumulated other comprehensive income
11,788

 
7,226

Distributions in excess of net income
(1,142,218
)
 
(1,117,290
)
Total equity—Pennsylvania Real Estate Investment Trust
605,402

 
624,039

Noncontrolling interest
135,362

 
136,952

Total equity
740,764

 
760,991

Total liabilities and equity
$
2,516,845

 
$
2,588,771


See accompanying notes to the unaudited consolidated financial statements.
1


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

 
Three Months Ended 
 March 31,
 
(in thousands of dollars)
2018
 
2017
 
REVENUE:
 
 
 
 
Real estate revenue:
 
 
 
 
Base rent
$
55,976

 
$
57,435

 
Expense reimbursements
27,130

 
28,097

 
Percentage rent
95

 
304

 
Lease termination revenue
31

 
481

 
Other real estate revenue
2,161

 
2,107

 
Total real estate revenue
85,393

 
88,424

 
Other income
889

 
840

 
Total revenue
86,282

 
89,264

 
EXPENSES:
 
 
 
 
Operating expenses:
 
 
 
 
 Property operating expenses:
 
 
 
 
CAM and real estate taxes
(29,396
)
 
(29,952
)
 
Utilities
(3,909
)
 
(3,823
)
 
Other property operating expenses
(3,400
)
 
(3,205
)
 
Total property operating expenses
(36,705
)
 
(36,980
)
 
 Depreciation and amortization
(34,030
)
 
(31,758
)
 
 General and administrative expenses
(10,132
)
 
(9,041
)
 
 Project costs and other expenses
(112
)
 
(312
)
 
Total operating expenses
(80,979
)
 
(78,091
)
 
Interest expense, net
(14,901
)
 
(15,338
)
 
Total expenses
(95,880
)
 
(93,429
)
 
Loss before equity in income of partnerships, gain on sale of real estate by equity method investee, adjustment to gains on sales of interests in non operating real estate and losses on sales of interests in real estate, net
(9,598
)
 
(4,165
)
 
Equity in income of partnerships
3,138

 
3,736

 
Gain on sale of real estate by equity method investee
2,773

 
—

 
Adjustment to gains on sales of interests in non operating real estate
(25
)
 
—

 
Losses on sales of interests in real estate, net
—

 
(57
)
 
Net loss
(3,712
)
 
(486
)
 
Less: net loss attributable to noncontrolling interest
394

 
52

 
Net loss attributable to PREIT
(3,318
)
 
(434
)
 
Less: preferred share dividends
(6,844
)
 
(6,205
)
 
Net loss attributable to PREIT common shareholders
$
(10,162
)
 
$
(6,639
)
 

See accompanying notes to the unaudited consolidated financial statements.
2

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

(in thousands of dollars, except per share amounts)
Three Months Ended 
 March 31,
 
2018
 
2017
 
Net loss
$
(3,712
)
 
$
(486
)
 
Noncontrolling interest
394

 
52

 
Preferred share dividends
(6,844
)
 
(6,205
)
 
Dividends on unvested restricted shares
(138
)
 
(97
)
 
Net loss used to calculate loss per share—basic and diluted
$
(10,300
)
 
$
(6,736
)
 
 
 
 
 
 
Basic and diluted loss per share:
$
(0.15
)
 
$
(0.10
)
 
 
 
 
 
 
(in thousands of shares)
 
 
 
 
Weighted average shares outstanding—basic
69,601

 
69,218

 
Effect of common share equivalents (1) 
—

 
—

 
Weighted average shares outstanding—diluted
69,601

 
69,218

 
_________________________
(1) 
The Company had net losses used to calculate earnings per share for all periods presented. Therefore, the effects of common share equivalents of 209 and 109 for the three months ended March 31, 2018 and 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 INCOME
(Unaudited)
 
Three Months Ended 
 March 31,
 
(in thousands of dollars)
2018
 
2017
 
Comprehensive income:
 
 
 
 
Net loss
$
(3,712
)
 
$
(486
)
 
Unrealized gain on derivatives
4,828

 
1,710

 
Amortization of losses on settled swaps, net of gains
275

 
125

 
Total comprehensive income
1,391

 
1,349

 
Less: comprehensive income attributable to noncontrolling interest
(147
)
 
(145
)
 
Comprehensive income attributable to PREIT
$
1,244

 
$
1,204

 


See accompanying notes to the unaudited consolidated financial statements.
4


PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENT OF EQUITY
Three Months Ended
March 31, 2018
(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
B
 
Series
C
 
Series D
 
 
 
 
 
Non-
controlling
interest
Balance December 31, 2017
$
760,991

 
$
35

 
$
69

 
$
50

 
$
69,983

 
$
1,663,966

 
$
7,226

 
$
(1,117,290
)
 
$
136,952

Net loss
(3,712
)
 
—

 
—

 
—

 
—

 
—

 
—

 
(3,318
)
 
(394
)
Other comprehensive income
5,103

 
—

 
—

 
 
 
—

 
—

 
4,562

 
—

 
541

Shares issued under employee compensation plans, net of shares retired
(195
)
 
—

 
—

 
—

 
370

 
(565
)
 
—

 
—

 
—

Amortization of deferred compensation
1,924

 
—

 
—

 
—

 
—

 
1,924

 
—

 
—

 
—

Distributions paid to common shareholders ($0.21 per share)
(14,766
)
 
—

 
—

 
—

 
—

 
—

 
—

 
(14,766
)
 
—

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

 
—

 
—

 
—

 
—

 
—

 
(1,590
)
 
—

Distributions paid to Series C preferred shareholders ($0.4500 per share)
(3,105
)
 
—

 
—

 
—

 
—

 
—

 
—

 
(3,105
)
 
—

Distributions paid to Series D preferred shareholders ($0.4297 per share)
(2,149
)
 
—

 
—

 
—

 
—

 
—

 
—

 
(2,149
)
 
—

Noncontrolling interests:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Distributions paid to Operating Partnership unit holders ($0.21 per unit)
(1,737
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(1,737
)
Balance March 31, 2018
$
740,764

 
$
35

 
$
69

 
$
50

 
$
70,353

 
$
1,665,325

 
$
11,788

 
$
(1,142,218
)
 
$
135,362



See accompanying notes to the unaudited consolidated financial statements.
5

PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
Three Months Ended 
 March 31,
(in thousands of dollars)
2018
 
2017
Cash flows from operating activities:
 
 
 
Net loss
$
(3,712
)
 
$
(486
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation
31,209

 
29,632

Amortization
3,458

 
2,883

Straight-line rent adjustments
(823
)
 
(738
)
Provision for doubtful accounts
1,075

 
573

Amortization of deferred compensation
1,924

 
1,497

Adjustment to gains on sales of interests in non operating real estate
25

 
—

Losses on sales of interests in real estate, net
—

 
57

Equity in income of partnerships
(3,138
)
 
(3,736
)
Gain on sale of real estate by equity method investee
(2,773
)
 
—

Cash distributions from partnerships
2,742

 
3,771

Change in assets and liabilities:
 
 
 
Net change in other assets
1,061

 
8,411

Net change in other liabilities
(21
)
 
(2,457
)
Net cash provided by operating activities
31,027

 
39,407

Cash flows from investing activities:
 
 
 
Distribution of refinancing proceeds from equity method investee
123,000

 
—

Cash proceeds from sales of real estate
—

 
41,736

Cash distributions from partnerships of proceeds from real estate sold
19,727

 
—

Investments in partnerships
(13,896
)
 
(18,152
)
Investments in real estate improvements
(13,568
)
 
(12,504
)
Additions to construction in progress
(3,119
)
 
(16,178
)
Capitalized leasing costs
(2,172
)
 
(1,667
)
Additions to leasehold improvements and corporate fixed assets
(4
)
 
(390
)
Net cash provided by (used in) investing activities
109,968

 
(7,155
)
Cash flows from financing activities:
 
 
 
Net proceeds from issuance of preferred shares
—

 
166,345

Borrowing from (repayment of) mortgage loans
10,185

 
(150,000
)
Net repayments of revolving facility
(53,000
)
 
(12,000
)
Dividends paid to common shareholders
(14,766
)
 
(14,643
)
Dividends paid to preferred shareholders
(6,844
)
 
(5,618
)
Distributions paid to Operating Partnership unit holders and noncontrolling interest
(1,737
)
 
(1,746
)
Principal installments on mortgage loans
(3,832
)
 
(3,693
)
Payment of deferred financing costs
(436
)
 
(11
)
Value of shares of beneficial interest issued
484

 
344

Value of shares retired under equity incentive plans, net of shares issued
(679
)
 
(1,291
)
Net cash used in financing activities
(70,625
)
 
(22,313
)
Net change in cash, cash equivalents, and restricted cash
70,370

 
9,939

Cash, cash equivalents, and restricted cash, beginning of period
33,953

 
29,865

Cash, cash equivalents, and restricted cash, end of period
$
104,323

 
$
39,804


See accompanying notes to the unaudited consolidated financial statements.
6

PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018

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, 2017. 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 , 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 29 properties located in 10 states and operating in nine states, including 21 shopping malls, four other retail properties and four development or redevelopment properties. We have one property under redevelopment classified as “retail” (redevelopment of The Gallery at Market East into Fashion District Philadelphia (“Fashion District Philadelphia”)). Three properties in our portfolio are classified as under development; however, we do not currently have any activity occurring at these properties.

We hold our interest in our portfolio of properties through our operating partnership, PREIT Associates, L.P. (“PREIT Associates” or the “Operating Partnership”). We are the sole general partner of the Operating Partnership and, as of March 31, 2018, we held an 89.5% controlling interest in the Operating Partnership, and consolidated it for reporting purposes. The presentation of consolidated financial statements does not itself imply that the assets of any consolidated entity (including any special-purpose entity formed for a particular project) are available to pay the liabilities of any other consolidated entity, or that the liabilities of any consolidated entity (including any special-purpose entity formed for a particular project) are obligations of any other consolidated entity.

Pursuant to the terms of the partnership agreement of the Operating Partnership, each of the limited partners has the right to redeem such partner’s units of limited partnership interest in the Operating Partnership (“OP Units”) for cash or, at our election, we may acquire such OP Units in exchange for our common shares on a one-for-one basis, in some cases beginning one year following the respective issue dates of the OP Units and in other cases immediately. If all of the outstanding OP Units held by limited partners had been redeemed for cash as of March 31, 2018, the total amount that would have been distributed would have been $79.8 million, which is calculated using our March 29, 2018 (which was the last trading day in the first quarter of 2018) closing price on the New York Stock Exchange of $9.65 per share multiplied by the number of outstanding OP Units held by limited partners, which was 8,272,636 as of March 31, 2018.

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 May 2014, the Financial Accounting Standards Board ( the “FASB”) issued Accounting Standards Update (“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 adoption of this new standard did not have a significant impact on our consolidated financial statements. We adopted the standard effective January 1, 2018 using the modified retrospective approach, which requires a cumulative adjustment as of the date of the adoption, if applicable. We did not record any such cumulative adjustment in connection with the implementation of the new pronouncement.

The new revenue recognition standard will not have a material effect on our property revenues, the majority of which are subject to accounting guidance for leases, and will be subject to ASC 2016-02 when we adopt that new standard effective January 1, 2019 (see below). We recognize revenue for property operations when earned. Property operating revenues are disaggregated on the consolidated statement of operations into the categories of base rent, expense reimbursements, percentage rent, lease termination revenue and other real estate revenue, primarily in the amounts that correspond to these different categories as documented in various tenant leases. The types of our revenues that will be impacted by the new standard include property management revenues for services performed for third-party owned properties and for certain of our joint ventures, and certain billings to tenants for reimbursement of property marketing expenses. We expect that the amount and timing of the revenues that are impacted by this standard will be generally consistent with our previous measurement methodology and pattern of recognition.

Revenue from the reimbursement of marketing expenses, which is recorded in other property revenues in the consolidated statement of operations, is generated through tenant leases that require tenants to reimburse a defined amount of property marketing expenses. Our contract performance obligations are fulfilled throughout the calendar year when marketing expenditures are made for each property. Payments from the tenants are made on a regular periodic basis (usually monthly) as agreed upon within the respective leases. We aggregate the tenant payments for each property and defer income recognition if the reimbursements are lower than the aggregate marketing expenditures through that date. Deferred marketing reimbursement income is recorded in tenants’ deposits and deferred rent on the consolidated balance sheet, and was $0.6 million and $0.3 million as of March 31, 2018 and December 31, 2017, respectively. The marketing reimbursements are recognized as revenue at the time that the marketing expenditures occur. Marketing reimbursement revenue was $0.6 million, and $0.7 million for the three months ended March 31, 2018 and 2017, respectively.


8

Property management revenue from management and development activities is generated through management contracts with third party owners of real estate properties or with certain of our joint ventures, and is recorded in other income in the consolidated statement of operations. In the case of management fees, our contract performance obligations are fulfilled at the time the management services are performed, which is usually on a monthly basis. Payments from the third party owners or joint ventures are usually made every month and generally not received in advance. Revenue is recognized on a monthly basis. In the case of development fees, these revenues are generated through development agreements with third parties or joint ventures. Our contract performance obligations are fulfilled each month as we perform certain stipulated development activities. Payments are generally made monthly, correspond to the volume of development activity or spending on the respective project and are not generally received in advance. Development fees are recognized as revenue, and are usually based upon spending levels or other activities, as defined in the respective agreements. Property management fee revenue for each of the three months ended March 31, 2018 and 2017 was $0.2 million. Development fee revenue for the three months ended March 31, 2018 and 2017 was $0.3 million and $0.1 million, respectively.

In February 2017, the FASB issued ASU 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance. ASU 2017-05 focuses on recognizing gains and losses from the transfer of nonfinancial assets with noncustomers. It provides guidance as to the definition of an “in substance nonfinancial asset,” and provides guidance for sales of real estate, including partial sales. The Company adopted this new guidance effective January 1, 2018. This new guidance did not have a significant impact on our financial statements because all previous property sales were considered to be complete contracts and the related practical expedient was elected. We expect that future sale transactions will likely meet the criteria for full gain recognition on sale. This treatment is not different from our historical position when selling our entire interest in real estate properties; however, this historical treatment could be different in future partial sale transactions, should they occur.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities. The purpose of this updated guidance is to better align a company’s financial reporting for hedging activities with the economic objectives of those activities. ASU 2017-12 is effective for public business entities for fiscal years beginning after December 15, 2018, with early adoption, including adoption in an interim period, permitted. The Company adopted ASU 2017-12 on January 1, 2018, utilizing a modified retrospective transition method in which the Company recognized the cumulative effect of the change on the opening balance of each affected component of equity in the statement of financial position as of January 1, 2018 (the date of adoption). The adoption of this standard did not have a material impact on our consolidated financial statements.

In November 2016 the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230), which provides guidance on the presentation of restricted cash or restricted cash equivalents within the statement of cash flows.  Accordingly, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows.  The Company adopted this standard effective January 1, 2018.  The adoption of ASU No. 2016-18 changed the presentation of the statement of cash flows for the Company and we utilized a retrospective transition method for each period presented within financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 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 Company adopted this new standard effective January 1, 2018 using the retrospective transition method. The statement of cash flows for the three months ended March 31, 2017 has been restated to reflect the adoption of ASU 2016-15. Upon adoption, we changed the prior period presentation of the statement of cash flows for $0.7 million of cash distributions from partnerships that was previously presented within net cash used in investing activities to now be reflected within net cash provided by operating activities for the three-months ended March 31, 2017 using the nature of the distribution approach.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 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 for us and for our equity method investments will remain substantially similar to the current accounting. Leasing costs that are eligible to be capitalized as initial direct costs are also limited by ASU 2016-02; such costs totaled approximately $5.3 million and $5.1 million for the years ended December 31, 2017 and 2016, respectively, of which $0.7 million and $1.0 million, respectively, represented leasing commissions paid to internal personnel for specific lease transactions, the capitalization of which is expected to continue to be permissible under the updated Topic 842. 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.



9


2. REAL ESTATE ACTIVITIES

Investments in real estate as of March 31, 2018 and December 31, 2017 were comprised of the following:
 
(in thousands of dollars)
As of March 31,
2018
 
As of December 31,
2017
Buildings, improvements and construction in progress
$
2,811,636

 
$
2,808,622

Land, including land held for development
500,704

 
491,080

Total investments in real estate
3,312,340

 
3,299,702

Accumulated depreciation
(1,141,914
)
 
(1,111,007
)
Net investments in real estate
$
2,170,426

 
$
2,188,695


Capitalization of Costs

The following table summarizes our capitalized interest, compensation, including commissions, and real estate taxes for the three months ended March 31, 2018 and 2017: 
 
Three Months Ended 
 March 31,
 
(in thousands of dollars)
2018
 
2017
 
Development/Redevelopment Activities:
 
 
 
 
Interest
$
1,625

 
$
1,431

 
Compensation, including commissions
438

 
348

 
Real estate taxes
164

 
93

 
 
 
 
 
 
Leasing Activities:
 
 
 
 
Compensation, including commissions
2,172

 
1,667

 



10

3. INVESTMENTS IN PARTNERSHIPS

The following table presents summarized financial information of the equity investments in our unconsolidated partnerships as of March 31, 2018 and December 31, 2017:
 
(in thousands of dollars)
March 31, 2018
 
December 31, 2017
ASSETS:
 
 
 
Investments in real estate, at cost:
 
 
 
Operating properties
$
563,525

 
$
612,689

Construction in progress
334,579

 
293,102

Total investments in real estate
898,104

 
905,791

Accumulated depreciation
(200,286
)
 
(202,424
)
Net investments in real estate
697,818

 
703,367

Cash and cash equivalents
26,391

 
26,158

Deferred costs and other assets, net
31,466

 
34,345

Total assets
755,675

 
763,870

LIABILITIES AND PARTNERS’ INVESTMENT:
 
 
 
Mortgage loans payable, net
512,772

 
513,139

Term Loan, net
247,517

 
—

Other liabilities
36,359

 
37,971

Total liabilities
796,648

 
551,110

Net investment
(40,973
)
 
212,760

Partners’ share
(20,396
)
 
106,886

PREIT’s share
(20,577
)
 
105,874

Excess investment (1)
13,870

 
13,081

Net investments and advances
$
(6,707
)
 
$
118,955

 
 
 
 
 
 
 
 
Investment in partnerships, at equity
$
90,188

 
$
216,823

Distributions in excess of partnership investments
(96,895
)
 
(97,868
)
Net investments and advances
$
(6,707
)
 
$
118,955

_________________________
(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.


11

The following table summarizes our share of equity in income of partnerships for the three months ended March 31, 2018 and 2017:
 
 
Three Months Ended 
 March 31,
 
(in thousands of dollars)
2018
 
2017
 
Real estate revenue
$
26,088

 
$
28,168

 
Operating expenses:
 
 
 
 
Property operating and other expenses
(8,330
)
 
(8,704
)
 
Interest expense
(5,734
)
 
(5,372
)
 
Depreciation and amortization
(5,071
)
 
(5,855
)
 
Total expenses
(19,135
)
 
(19,931
)
 
Net income
6,953

 
8,237

 
Partners’ share
(3,824
)
 
(4,491
)
 
PREIT’s share
3,129

 
3,746

 
Amortization of and adjustments to excess investment, net
9

 
(10
)
 
Equity in income of partnerships
$
3,138

 
$
3,736

 


Dispositions

In February 2018, a partnership in which we hold a 50% ownership share sold its office condominium interest in 907 Market Street in Philadelphia, Pennsylvania for $41.8 million. The partnership recorded a gain on sale of $5.5 million, of which our share was $2.8 million. The partnership distributed to us proceeds of $19.7 million in connection with this transaction in February 2018, which is recorded in gain on sale of real estate by equity method investee in the accompanying consolidated statement of operations.

Term Loan Activity

In January 2018, we along with Macerich, our partner in the Fashion District Philadelphia redevelopment project, entered into a
$250.0 million term loan (the “FDP Term Loan”). We own a 50% partnership interest in Fashion District Philadelphia. The FDP Term Loan matures in January 2023, and bears interest at a variable rate of LIBOR plus 2.00%. PREIT and Macerich have secured the FDP Term Loan by pledging their respective equity interests in the entities that own Fashion District Philadelphia. The entire $250.0 million available under the FDP Term Loan was drawn during the first quarter of 2018, and we received an aggregate of $123.0 million as distributions of our share of the draws.

Mortgage Activity

In February 2018, the mortgage loan secured by Pavilion at Market East in Philadelphia, Pennsylvania was amended and extended to February 2021 and bears interest at a variable rate of LIBOR plus 2.85%. We own a 40% partnership interest in Pavilion at Market East, which owns non-operating land held for development.

In March 2018, the unconsolidated partnership that owns Gloucester Premium Outlets in Blackwood, New Jersey, in which we own a 25% partnership interest, entered into a $86.0 million interest only mortgage loan secured by the property, with an interest rate of LIBOR plus 1.50% and a maturity date of March 2022, with one option of the unconsolidated partnership to extend by 12 months. The proceeds were used to repay the existing $84.1 million mortgage loan plus accrued interest.

12


Significant Unconsolidated Subsidiary

We have a 50% ownership interest in Lehigh Valley Associates L.P. (“LVA”), which met the definition of a significant unconsolidated subsidiary for the year ended December 31, 2016. LVA did not meet the definition of a significant subsidiary as of or for the year ended December 31, 2017. The financial information of LVA is included in the amounts above. Summarized balance sheet information as of March 31, 2018 and December 31, 2017, and summarized statement of operations information for the three months ended March 31, 2018 and 2017 for this entity, which is accounted for using the equity method, are as follows:
 
 
As of
 
(in thousands of dollars)
 
March 31, 2018
 
December 31, 2017
 
Summarized balance sheet information
 
 
 
 
 
     Total assets
 
$
47,762

 
$
43,850

 
     Mortgage loan payable, net
 
197,941

 
199,451

 
 
 
Three Months Ended 
 March 31,
 
(in thousands of dollars)
 
2018
 
2017
 
Summarized statement of operations information
 
 
 
 
 
     Revenue
 
$
9,132

 
$
8,809

 
     Property operating expenses
 
(2,405
)
 
(1,903
)
 
     Interest expense
 
(2,045
)
 
(1,869
)
 
     Net income
 
4,026

 
4,203

 
     PREIT’s share of equity in income of partnership
 
2,013

 
2,102

 

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, 2017: (1) the 2013 Revolving Facility, (2) the 2014 7-Year Term Loan, (3) the 2014 5-Year Term Loan, and (4) the 2015 5-Year Term Loan. The 2014 7-Year Term Loan, the 2014 5-Year Term Loan and the 2015 5-Year Term Loan are collectively referred to as the “Term Loans.”

As of March 31, 2018, we had borrowed the full $550.0 million available 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 March 31, 2018). The carrying value of the Term Loans on our consolidated balance sheet is net of $2.1 million of unamortized debt issuance costs.


Pursuant to an amendment completed in June 2015, the initial maturity of the 2013 Revolving Facility is June 26, 2018, and the Borrower has options for two one-year extensions of the initial maturity date, subject to certain conditions and to the payment of extension fees of 0.15% and 0.20% of the Facility Amount for the first and second options, respectively. We expect to exercise the first of these one-year extension options or negotiate an extension of the maturity date during the first half of 2018.

Interest expense and the deferred financing fee amortization related to the Credit Agreements for the three months ended March 31, 2018 and 2017 were as follows:

13

 
Three Months Ended 
 March 31,
(in thousands of dollars)
2018
 
2017
2013 Revolving Facility
 
 
 
 
 
Interest expense
 
$
365

 
$
764

 
Deferred financing amortization
 
200

 
199

 
 
 
 
 
 
Term Loans
 
 
 
 
 
Interest expense
 
4,286

 
2,835

 
Deferred financing amortization
 
191

 
187


Each of the Credit Agreements contains 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, 2017. As of March 31, 2018, 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, 2017), the maximum unsecured amount that was available for us to borrow under the 2013 Revolving Facility as of March 31, 2018 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 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%
 
1.45%
 
3
Equal to or greater than 0.500 to 1.00 but less than 0.550 to 1.00 (1)
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 March 31, 2018.

Mortgage Loans

The aggregate carrying values and estimated fair values of mortgage loans based on interest rates and market conditions at March 31, 2018 and December 31, 2017 were as follows:
 
March 31, 2018
 
December 31, 2017
(in millions of dollars)
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Mortgage loans(1)
$
1,062.1

 
$
1,023.0

 
$
1,056.1

 
$
1,029.7

(1) The carrying value of mortgage loans is net of unamortized debt issuance costs of $3.7 million and $3.4 million as of March 31, 2018 and December 31, 2017, respectively.

The mortgage loans contain various customary default provisions. As of March 31, 2018, we were not in default on any of the mortgage loans.


14

Mortgage Loan Activity

In January 2018, we extended the $68.5 million mortgage loan secured by Francis Scott Key Mall in Frederick, Maryland to January 2022, with an additional extension option to January 2023. The rate on the mortgage loan is LIBOR plus 2.60%.

In February 2018, we borrowed an additional $10.2 million on the mortgage loan secured by Viewmont Mall in Scranton, Pennsylvania. Following this borrowing, this mortgage loan has $67.2 million outstanding with an interest rate of LIBOR plus 2.35% and a maturity date of March 2021.


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 $12.2 million (net of capitalized interest of $1.6 million) and $13.5 million (net of capitalized interest of $1.4 million) for the three months ended March 31, 2018 and 2017, 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 $0.0 million and $135.0 million for the three months ended March 31, 2018 and 2017, respectively. Aggregate paydowns (excluding the non cash item discussed below) were $53.0 million and $147.0 million for the three months ended March 31, 2018 and 2017, respectively.

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the statement of financial position that sum to the total of the same such amounts shown in the statement of cash flows.

(in thousands of dollars)
 
March 31,
2018
 
December 31,
2017
Cash and cash equivalents
 
$
89,213

 
$
15,348

Restricted cash included in other assets
 
15,110

 
18,605

Total cash, cash equivalents, and restricted cash shown in the statement of cash flows
 
$
104,323

 
$
33,953


Our restricted cash consists of cash held in escrow by banks for real estate taxes and other purposes.

6. COMMITMENTS AND CONTINGENCIES

Contractual Obligations

As of March 31, 2018, we had unaccrued contractual and other commitments related to our capital improvement projects and development projects of $133.5 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.


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.

15


Cash Flow Hedges of Interest Rate Risk

For derivatives that have been designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in “Accumulated other comprehensive income” and subsequently reclassified into “Interest expense, net” in the same periods during which the hedged transaction affects earnings. As of March 31, 2018, all of our outstanding derivatives have been designated as cash flow hedges. We recognize all derivatives at fair value as either assets or liabilities in the accompanying consolidated balance sheets.
During the next 12 months, we estimate that $4.0 million will be reclassified as a decrease to interest expense in connection with derivatives. The recognition of these amounts could be accelerated in the event that we repay amounts outstanding on the debt instruments and do not replace them with new borrowings.

Interest Rate Swaps

As of March 31, 2018, we had 29 interest rate swap agreements outstanding with a weighted average base interest rate of 1.48% on a notional amount of $748.6 million, maturing on various dates through December 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. The interest rate swap agreements are net settled monthly.

Accumulated other comprehensive income as of March 31, 2018 includes a net loss of $0.4 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.

The following table summarizes the terms and estimated fair values of our interest rate swap derivative instruments designated as cash flow hedges of interest rate risk at March 31, 2018 and December 31, 2017 based on the year they mature. 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 the accompanying consolidated balance sheets, the carrying amount of derivative assets is reflected in “Deferred costs and other assets, net” and the carrying amount of derivative liabilities is reflected in “Accrued expenses and other liabilities.”
Maturity Date
Aggregate Notional Value at March 31, 2018
(in millions of dollars)
 
Aggregate Fair Value at
March 31, 2018 (1)
(in millions of dollars)
 
Aggregate Fair Value at
December 31, 2017 (1) (in millions of dollars)
 
Weighted Average Interest
Rate
Interest Rate Swaps
 
 
 
 
 
 
 
   2018(2)
N/A

 
N/A

 
$
—

 
 
2019
$
250.0

 
$
1.2

 
0.8

 
1.44
%
2020
100.0

 
2.5

 
1.9

 
1.23
%
2021
398.6

 
10.9

 
7.0

 
1.57
%
Total
$
748.6

 
$
14.6

 
$
9.7

 
1.48
%

_________________________
(1) 
As of March 31, 2018 and December 31, 2017, 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).
(2) 
Three swaps matured in the first quarter of 2018. As of December 31, 2017, these swaps had a notional value that totaled $110.6 million, had a weighted average interest rate of 1.11% and a de minimus fair value.



16

The tables below present the effect of derivative financial instruments on accumulated other comprehensive income and on our consolidated statements of operations for the three months ended March 31, 2018 and 2017:
 
For the three months ended March 31,
 
Amount of Gain or (Loss) Recognized in Other Comprehensive Income on Derivative Instruments
 
Amount of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Interest Expense
(in millions of dollars)
2018
 
2017
 
2018
 
2017
Derivatives in Cash Flow Hedging Relationships
 
 
 
 
 
 
 
Interest rate products
$
5.2

 
$
1.0

 
$
(0.1
)
 
$
0.8


 
 
For the three months ended March 31,
(in millions of dollars)

 
2018
 
2017
Total interest expense presented in the consolidated statements of operations in which the effects of cash flow hedges are recorded
 
$
(14.9
)
 
$
(15.3
)
 
 
 
 
 
Amount of gain (loss) reclassified from accumulated other comprehensive income into interest expense
 
$
(0.1
)
 
$
0.8


Credit-Risk-Related Contingent Features

We have agreements with some of our derivative counterparties that contain a provision pursuant to which, if our entity that originated such derivative instruments defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then we could also be declared in default on our derivative obligations. As of March 31, 2018, we were not in default on any of our derivative obligations.

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

As of March 31, 2018, we did not have any derivatives in a net liability position.


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 29 retail properties, of which 25 are operating properties and four are development or redevelopment properties. The 25 operating properties include 21 shopping malls and four other retail properties, have a total of 20.0 million square feet and are located in nine states. We and partnerships in which we hold an interest own 15.3 million square feet at these properties (excluding space owned by anchors or third parties).
There are 19 operating retail properties in our portfolio that we consolidate for financial reporting purposes. These consolidated properties have a total of 15.9 million square feet, of which we own 12.5 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. When we refer to “Same Store” properties, we are referring to properties that have been owned for the full periods presented and exclude properties acquired or disposed of or under redevelopment during the periods presented.
We have one property under redevelopment classified as “retail” (redevelopment of The Gallery at Market East into Fashion District Philadelphia).  We have three properties in our portfolio that are classified as under development; however, we do not currently have any activity occurring at these properties.
Our primary business is owning and operating retail shopping malls, which we do primarily through our operating partnership, PREIT Associates, L.P. (“PREIT Associates” or the “Operating Partnership”). 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 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. 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.
Our revenue consists primarily of fixed rental income, additional rent in the form of expense reimbursements, and percentage rent (rent that is based on a percentage of our tenants’ sales or a percentage of sales in excess of thresholds that are specified in the leases) derived from our income producing properties. We also receive income from our real estate partnership investments and from the management and leasing services PRI provides.

Net loss for the three months ended March 31, 2018 was $3.7 million, an increased loss of $3.2 million compared to net loss of $0.5 million for the three months ended March 31, 2017. This increase was primarily due to a $3.0 million decline in real estate revenue driven by the sale of properties in 2017, an increase in depreciation expense of $2.3 million, and relatively flat property operating expenses despite the 2017 property sales. These factors were offset by a $2.8 million gain on sale of real estate by an equity method investee.

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 our 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

18

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(3) 
(in thousands)
 
Number of locations closed
 
GLA(2)
 
PREIT’s Share of Annualized Gross Rent (3)(in thousands)
2018 (Three Months)
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated properties
 
3

 
27

 
287,138

 
$
4,029

 
—

 
—

 
$
—

Unconsolidated properties
 
2

 
4

 
4,352

 
248

 
—

 
—

 
—

Total
 
3

 
31

 
291,490

 
$
4,277

 
—

 
—

 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2017 (Full Year)
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated properties
 
16

 
75

 
341,701

 
$
10,837

 
23

 
102,336

 
$
3,655

Unconsolidated properties
 
9

 
16

 
191,538

 
2,103

 
7

 
82,713

 
974

Total
 
18

 
91

 
533,239

 
$
12,940

 
30

 
185,049

 
$
4,629

(1) Totals represent number of 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 March 31, 2018.



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 in 2017 we recaptured the Sears premises at Capital City Mall and Magnolia Mall. Also in 2017, we purchased the Macy’s locations at Moorestown Mall, Valley View Mall and Valley Mall locations. We have entered into a ground lease for the land associated with the Macy’s store located at Plymouth Meeting Mall, and are in negotiations with replacement tenants for that location.

The table below sets forth information related to our anchor replacement program:

 
 
Former Anchors
 
 
Replacement Tenant(s)
Property
Name
GLA '000's
Date Store Closed
 
Date De-commissioned
Name
GLA
'000's
Actual/Targeted Occupancy Date
Completed:
 
 
 
 
 
 
 
 
 
Exton Square Mall
K-mart
96
Q1 16

Q2 16
Whole Foods
55
Q1 18
In process:
 
 
 
 
 
 
 
 
 
Magnolia Mall
Sears
91
 
 
 
Burlington
46
Q3 17
 
Q1 17
 
Q2 17
HomeGoods
22
Q2 18
 
 
 
 
Five Below
8
Q2 18
 
Valley Mall
Macy's 
120
Q1 16
 
n/a
One Life Fitness
70
Q4 18
 
 
Tilt Studio
48
Q4 18
 
BonTon
123
Q1 18
 
n/a
Belk
123
Q4 18

Moorestown Mall
Macy's
200
Q1 17
 
n/a
Sierra Trading Post
19
Q1 19

 
HomeSense
28
Q3 18

 
Grocer and other tenant
32
Q4 18
 
Woodland Mall
Sears
313
Q2 17
 
Q2 17
Von Maur
86
Q4 19
 
Restaurants and small shop space
TBD
Q4 19
 
Willow Grove Park
JC Penney
125
Q3 17
 
n/a
Movie theater and entertainment
49
Q3 19
 
 
Restaurant and entertainment space
TBD
Q3 19
Pending:
 
 
 
 
 
 
 
 
 
Plymouth Meeting Mall
Macy's (1)
215
Q1 17
 
n/a
Various large format tenants
153
Q4 19
(1) 
Property is third-party owned and is subject to a ground lease dated June 23, 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) making additional borrowings under our 2013 Revolving 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.

20

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 $113.0 million as of March 31, 2018.

In 2014, we entered into a 50/50 joint venture with The Macerich Company (“Macerich”) to redevelop Fashion District Philadelphia. As we redevelop Fashion District Philadelphia, operating results in the short term, as measured by sales, occupancy, real estate revenue, property operating expenses, Net Operating Income (“NOI”) and depreciation, will continue to be affected until the newly constructed space is completed, leased and occupied.
In January 2018, we along with Macerich, entered into a $250.0 million term loan (the “FDP Term Loan”). The initial term of the FDP Term Loan is five years, and bears interest at a variable rate of 2.00% over LIBOR. PREIT and Macerich have secured the FDP Term Loan by pledging their respective equity interests in the entities that own the Fashion District Philadelphia. The entire $250.0 million available under the FDP Term Loan was drawn during the first quarter of 2018, and we received an aggregate of $123.0 million as distributions of our share of the draws.


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 consolidated financial statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. In preparing the consolidated financial statements, management has utilized available information, including our past history, 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 a similar business. The estimates and assumptions made by management in applying Critical Accounting Policies have not changed materially during 2018 or 2017, 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, 2017.

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.
The determination of undiscounted cash flows requires significant estimates by management, including the expected course of action at the balance sheet date that would lead to such cash flows. Subsequent changes in estimated undiscounted cash flows arising from changes in the anticipated action to be taken with respect to the property could impact the determination of whether an impairment exists and whether the effects could materially affect our net income. To the extent estimated undiscounted cash flows are less than the carrying value of the property, the loss will be measured as the excess of the carrying amount of the property over the estimated fair value of the property.
Assessment of our ability to recover certain lease related costs must be made when we have a reason to believe that the tenant might not be able to perform under the terms of the lease as originally expected. This requires us to make estimates as to the recoverability of such costs.

21

An other than temporary impairment of an investment in an unconsolidated joint venture is recognized when the carrying value of the investment is not considered recoverable based on evaluation of the severity and duration of the decline in value. To the extent impairment has occurred, the excess carrying value of the asset over its estimated fair value is charged to income.
If there is a triggering event in relation to a property to be held and used, we will estimate the aggregate future cash flows, less estimated capital expenditures, to be generated by the property, undiscounted and without interest charges. In addition, this estimate 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.
In determining the estimated undiscounted cash flows of the property or properties that are being analyzed for impairment of assets, we take the sum of the estimated undiscounted cash flows, generally assuming a holding period of 10 years, plus a terminal value calculated using the estimated net operating income in the eleventh year and terminal capitalization rates, which in 2018 through March 31, 2018 ranged from 5.25% to 13.0%.
 
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 March 31, 2018 and 2017:
 
 
Occupancy (1) at March 31,
 
Consolidated
Properties
 
Unconsolidated
Properties(2)
 
Combined(2)(3)
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
Retail portfolio weighted average:
 
 
 
 
 
 
 
 
 
 
 
Total excluding anchors
90.5
%
 
90.3
%
 
92.7
%
 
92.4
%
 
91.0
%
 
90.8
%
Total including anchors
92.9
%
 
92.5
%
 
94.0
%
 
93.8
%
 
93.1
%
 
92.9
%
Malls weighted average:
 
 
 
 
 
 
 
 
 
 
 
Total excluding anchors
91.0
%
 
90.5
%
 
92.5
%
 
92.1
%
 
91.1
%
 
90.8
%
Total including anchors
93.2
%
 
92.6
%
 
94.9
%
 
94.6
%
 
93.3
%
 
92.9
%
Other retail properties
41.9
%
 
74.9
%
 
93.4
%
 
93.1
%
 
91.0
%
 
92.3
%
_________________________
(1) 
Occupancy for both periods presented includes all tenants irrespective of the term of their agreements. Fashion District Philadelphia is excluded for 2017 and 2018 because the property is currently partially closed and undergoing a major reconstruction.
(2) 
We own a 25% to 50% interest in each of our unconsolidated properties, and do not control such properties. Our percentage ownership is not necessarily indicative of the legal and economic implications of our ownership interest. See "—Use of Non GAAP Measures" for further details on our ownership interests in our unconsolidated properties.
(3) 
Combined occupancy is calculated by using occupied gross leasable area (“GLA”) for consolidated and unconsolidated properties and dividing by total GLA for consolidated and unconsolidated properties.



23

Leasing Activity

The table below sets forth summary leasing activity information with respect to our consolidated and unconsolidated properties for the three months ended March 31, 2018:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Annualized Tenant Improvements psf (3)
 
 
 
 
Number
 
GLA
in square feet (“sf”)
 
Term (years)
 
Initial Rent per square foot (“psf”)
 
Previous Rent psf
 
Initial Gross Rent Renewal Spread (1)
 
Average Rent Renewal Spread (2)
 
 
 
 
 
 
 
 
$
 
%
 
%
 
Non Anchor
New Leases
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Under 10k sf
 
Consolidated
 
18

 
51,205

 
7.5

 
$
40.59

 
 
 
 
 
 
 
 
 
$
8.33

 
 
Unconsolidated
 
8

 
29,429

 
7.4

 
39.65

 
 
 
 
 
 
 
 
 
20.94

Total Under 10k sf
 
26

 
80,634

 
7.4

 
40.24

 

 

 

 

 
$
12.89

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Over 10k sf
 
Consolidated
 
2

 
22,457

 
10.0

 
38.52

 

 

 

 

 
$
8.77

Total New Leases
 
28

 
103,091

 
8.0

 
$
39.87

 

 

 

 

 
$
11.76

Renewal Leases
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Under 10k sf
 
Consolidated
 
25

 
54,457

 
3.2

 
$
47.01

 
$
46.36

 
$
0.65

 
1.4
 %
 
4.4
 %
 
$
—

 
 
Unconsolidated
 
21

 
45,009

 
3.3

 
77.14

 
79.23

 
(2.09
)
 
(2.6
)%
 
2.0
 %
 
0.90

Total Under 10k sf
 
46

 
99,466

 
3.2

 
$
60.64

 
$
61.24

 
$
(0.60
)
 
(1.0
)%
 
3.0
 %
 
$
0.40

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Over 10k sf
 
Consolidated
 
4

 
109,647

 
7.3

 
$
23.82

 
$
22.68

 
$
1.14

 
5.0
 %
 
23.6
 %
 
$
4.97

 
 
Unconsolidated
 
1

 
11,306

 
1.0

 
14.15

 
25.72

 
(11.57
)
 
(45.0
)%
 
(45.0
)%
 
—

Total Over 10k sf
 
5

 
120,953

 
6.7

 
$
22.91

 
$
22.96

 
$
(0.05
)
 
(0.2
)%
 
15.7
 %
 
$
4.90

Total Fixed Rent
 
51

 
220,419

 
5.1

 
$
39.94

 
$
40.23

 
$
(0.29
)
 
(0.7
)%
 
7.1
 %
 
$
3.65

Percentage in Lieu
 
Consolidated
 
14

 
52,198

 
1.4

 
$
28.41

 
$
36.53

 
$
(8.12
)
 
(22.2
)%
 
N/A
 
—

Total Renewal Leases(4)
 
65

 
272,617

 
4.4

 
$
37.73

 
$
39.52

 
$
(1.79
)
 
(4.5
)%
 
7.1
 %
 
$
3.43

Total Non Anchor
 
93

 
375,708

 
5.5

 
$
38.32

 
 
 
 
 
 
 
 
 
 
Anchor
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
New Leases
 
 
 
—

 
—

 
—

 
$
—

 

 

 

 

 
$
—

Renewal Leases
 
Consolidated
 
1

 
102,825

 
8.0

 
$
4.73

 
$
5.38

 
(0.65
)
 
(12.1
)%
 

 
$
—

Total
 
 
 
1

 
102,825

 
8.0

 
$
4.73

 
 
 
 
 
 
 
 
 
 
________________________
(1) 
Initial gross rent renewal spread is computed by comparing the initial rent per square foot in the new lease to the final rent per square foot amount in the expiring lease. For purposes of this computation, the rent amount includes minimum rent, common area maintenance (“CAM”) charges, estimated real estate tax reimbursements and marketing charges, but excludes percentage rent. In certain cases, a lower rent amount may be payable for a period of time until specified conditions in the lease are satisfied.
(2) 
Average rent renewal spread is computed by comparing the average rent per square foot over the new lease term to the final rent per square foot amount in the expiring lease. For purposes of this computation, the rent amount includes minimum rent and fixed CAM charges, but excludes pro rata CAM charges, estimated real estate tax reimbursements, marketing charges and percentage rent.
(3) 
Tenant improvements and certain other leasing costs are presented as annualized amounts per square foot and are spread uniformly over the initial lease term.
(4) 
We own a 25% to 50% interest in each of our unconsolidated properties and do not control such properties. Our percentage ownership is not necessarily indicative of the legal and economic implications of our ownership interest. See “—Use of Non-GAAP Measures” for further details on our ownership interests in our unconsolidated properties.

24

Overview

Net loss for the three months ended March 31, 2018 was $3.7 million, an increased loss of $3.2 million compared to net loss of $0.5 million for the three months ended March 31, 2017. This increase was primarily due to a $3.0 million decline in real estate revenue driven by the sale of properties in 2017, an increase in depreciation expense of $2.3 million, and relatively flat property operating expenses despite the 2017 property sales. These factors were offset by a $2.8 million gain on 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.

The following table sets forth our results of operations for the three months ended March 31, 2018 and 2017.
 
 
Three Months Ended 
 March 31,
 
% Change
2017 to
2018
 
(in thousands of dollars)
 
2018
 
2017
 
 
Real estate revenue
 
$
85,393

 
$
88,424

 
(3
)%
 
Property operating expenses
 
(36,705
)
 
(36,980
)
 
(1
)%
 
Other income
 
889

 
840

 
6
 %
 
Depreciation and amortization
 
(34,030
)
 
(31,758
)
 
7
 %
 
General and administrative expenses
 
(10,132
)
 
(9,041
)
 
12
 %
 
Project costs and other expenses
 
(112
)
 
(312
)
 
(64
)%
 
Interest expense, net
 
(14,901
)
 
(15,338
)
 
(3
)%
 
Equity in income of partnerships
 
3,138

 
3,736

 
(16
)%
 
Gain on sale of real estate by equity method investee
 
2,773

 
—

 
—
 %
 
Adjustment to gains on sales of interest in non operating real estate
 
(25
)
 
—

 
—
 %
 
Losses on sales of interests in real estate, net
 
—

 
(57
)
 
—
 %
 
Net loss
 
$
(3,712
)
 
$
(486
)
 
664
 %
 

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

Real estate revenue

Real estate revenue decreased by $3.0 million, or 3%, in the three months ended March 31, 2018 compared to the three months ended March 31, 2017, primarily due to:

•
a decrease of $3.5 million in real estate revenue related to properties sold in 2017;

•
a decrease of $0.5 million in same store common area expense reimbursements, due to lower occupancy at some properties, and rental concessions made to some tenants under which the terms of their leases were modified such that they no longer pay expense reimbursements; and

•
a decrease of $0.4 million in same store lease termination revenue, including $0.4 million received from one tenant during the three months ending March 31, 2017; partially offset by

•
an increase of $1.0 million in same store base rent due to $1.6 million from net new store openings over the previous twelve months, partially offset by a $0.2 million decrease related to tenant bankruptcies in 2017 and 2018, as well as a $0.5 million decrease related to co-tenancy concessions that resulted from anchor closings; and

•
an increase of $0.4 million in same store real estate tax reimbursements, due to an increase in real estate tax expense (see “—Property Operating Expenses”), partially offset by lower occupancy at some properties and rental concessions made to some tenants under which the terms of their leases were modified such that they no longer pay expense reimbursements.


25

Property operating expenses

Property operating expenses decreased by $0.3 million, or 1%, in the three months ended March 31, 2018 compared to the three months ended March 31, 2017, primarily due to:

•
a decrease of $2.0 million in property operating expenses related to properties sold in 2017; partially offset by

•
an increase of $1.0 million in same store real estate tax expense due to a combination of increases in real estate tax assessment values and real estate tax rates; and

•
an increase of $0.5 million in same store bad debt expense, primarily due to bad debt expense recorded in connection with 2018 tenant bankruptcies.

Depreciation and amortization

Depreciation and amortization expense increased by $2.3 million, or 7%, in the three months ended March 31, 2018 compared to the three months ended March 31, 2017, primarily due to:

•
an increase of $3.1 million due to a higher asset base resulting from capital improvements related to new tenants at our same store properties, as well as accelerated amortization of capital improvements associated with store closings; partially offset by

•
a decrease of $0.8 million related to properties sold in 2017.

General and administrative expenses

General and administrative expenses increased by $1.1 million, or 12%, in the three months ended March 31, 2018 compared to the three months ended March 31, 2017, primarily due to increases in short-term incentive compensation expense and long-term deferred compensation amortization, as well as an increase in professional fee expense.


Interest expense

Interest expense decreased by $0.4 million, or 3%, in the three months ended March 31, 2018 compared to the three months ended March 31, 2017. This decrease was primarily due to greater amounts of capitalized interest in 2018 and lower weighted average debt balances, partially offset by higher weighted average interest rates. Our weighted average effective borrowing rate was 4.08% for the three months ended March 31, 2018 compared to 4.06% for the three months ended March 31, 2017. Our weighted average debt balance was $1,620.4 million for the three months ended March 31, 2018, compared to $1,651.6 million for the three months ended March 31, 2017.

Equity in income of partnerships

Equity in income of partnerships decreased by $0.6 million, or 16%, in the three months ended March 31, 2018 compared to the three months ended March 31, 2017, primarily due to lower rent resulting from the sale of the 801 Market and 907 Market office condominium interests.
Gain on sale of real estate by equity method investee
Gain on sale of real estate by equity method investee was $2.8 million in the three months ended March 31, 2018, which is from our 50% share of a $5.5 million gain on the sale of a condominium interest in 907 Market Street in Philadelphia, Pennsylvania recorded by a partnership in which we hold a 50% ownership interest.


NON-GAAP SUPPLEMENTAL FINANCIAL MEASURES

Overview


26

The preceding discussion analyzes our financial condition and results of operations in accordance with generally accepted accounting principles, or GAAP, for the periods presented. We also use Net Operating Income (“NOI”) and Funds from Operations (“FFO”) which are non-GAAP financial measures, to supplement our analysis and discussion of our operating performance:

•
We believe that NOI is helpful to management and investors as a measure of operating performance because it is an indicator of the return on property investment and provides a method of comparing property performance over time. When we use and present NOI, we also do so on a same store (“Same Store NOI”) and non-same store (“Non Same Store NOI”) basis to differentiate between properties that we have owned for the full periods presented and properties acquired, sold or under redevelopment during those periods. Furthermore, our use and presentation of NOI combines NOI from our consolidated properties and NOI attributable to our share of unconsolidated properties in order to arrive at total NOI. We believe that this is also helpful information because it reflects the pro rata contribution from our unconsolidated properties that are owned through investments accounted for under GAAP as equity in income of partnerships. See “Unconsolidated Properties and Proportionate Financial Information” below.

•
We believe that FFO is also helpful to management and investors as a measure of operating performance because it excludes various items included in net income that do not relate to or are not indicative of operating performance, such as gains on sales of operating real estate and depreciation and amortization of real estate, among others. In addition to FFO and FFO per diluted share and OP Unit, when applicable, we also present FFO, as adjusted and FFO per diluted share and OP Unit, as adjusted, which we believe is helpful to management and investors because they adjust FFO to exclude items that management does not believe are indicative of operating performance, such as provision for employee separation expense and loss on hedge ineffectiveness.

•
We use both NOI and FFO, or related terms like Same Store NOI and, when applicable, Funds From Operations, as adjusted, for determining incentive compensation amounts under certain of our performance-based executive compensation programs.