<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported) December 18, 1998
------------------------------
Pennsylvania Real Estate Investment Trust
- ------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
Pennsylvania 1-6300 23-6216339
- ------------------------------------------------------------------------------
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
The Bellevue, 200 S. Broad Street, Philadelphia, Pennsylvania 19102
- ------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (215) 875-0700
---------------------------
455 Pennsylvania Avenue, Fort Washington, Pennsylvania 19034
- ------------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
<PAGE>
Item 5. Other Events
(a) Audited Financial Statements as of and for the four month
period ended December 31, 1997
Effective October 14, 1997, the Registrant changed its fiscal year end
from August 31 of each year to December 31 of each year. On February 17, 1998,
the Registrant filed a Transition Report on Form 10-Q for the transition period
from September 1, 1997 to December 31, 1997. The Registrant now desires to
provide investors and the public with more recent audited financial statements.
The Registrant, therefore, hereby files its audited financial statements for the
year ended December 31, 1997.
(b) Statement Regarding Adjustment of Earnout Performance
Benchmarks Under The TRO Contribution Agreement
The Registrant entered into the TRO Contribution Agreement as of July
30, 1997 (the "Agreement"). The Agreement provided, among other things, for
distribution of the dilutive effects of the Registrant's offerings among the
Registrant and the former shareholders and debtholders of The Rubin
Organization, Inc. (collectively the "TRO shareholders"). Pursuant to Section
5.19(b) of the Agreement, at the request of holders of more than one-third of
the outstanding Class A Units issued to TRO shareholders and affiliates, a
Special Committee of Trustees reviewed the impact of a recent public offering by
the Registrant on the earnout performance benchmarks (the "Benchmarks")
contained in the Agreement. Based on its analysis, the Special Committee
adjusted the Benchmarks to distribute the dilutive effect of the Registrant's
December 1997 public offering among the Registrant and the TRO shareholders. The
adjustment is provided for in the Statement Regarding Adjustment of Earnout
Performance Benchmarks Under The TRO Contribution Agreement, dated December 29,
1998 and filed as an exhibit hereto.
(c) Settlement of Berman Litigation
On December 18, 1998, the Registrant settled certain litigation with
Daniel Berman and Robert Berman and/or entities owned or controlled by them
(collectively, the "Bermans"), partners of the Registrant with respect to
certain properties, including all claims by the Bermans and counterclaims by the
Registrant. The litigation had been ongoing since May of 1994 and was discussed
in various of the Registrant's public filings since that date. Pursuant to the
settlement, the Registrant received the Bermans' 50% interest in the Fox Run
multifamily community in Bear, Delaware (414 units), the Eagle's Nest
multifamily community in Coral Springs, Florida (264 units) and an undeveloped
14 acre parcel in Coral Springs, Florida that will accommodate the development
of approximately 260 units. The Registrant paid the Bermans $775,000 and assumed
the remaining 50% of the debt outstanding on the properties. In addition, the
Registrant refinanced the Fox Run property, whereby the existing financing of
$14.3 million with a weighted average interest rate of 7.78% was replaced with a
new mortgage in the amount of $14.6 million with an interest rate of 6.54% and a
maturity in December 2008. The Registrant paid a prepayment penalty of $270,000
in connection with the refinancing. The savings in interest payments will be
approximately $150,000, or $.01 per share. The Registrant will assume the
management of the Fox Run and Eagle's Nest apartment communities and intends to
sell the undeveloped parcel.
1
<PAGE>
(d) Exhibits
10.1 Statement Regarding Adjustment of Earnout Performance
Benchmarks Under The TRO Contribution Agreement, dated
December 29, 1998.
23.1 Consent of Arthur Andersen LLP (independent public
accountants of the Registrant)
99.1 Financial Statements
Consolidated Balance Sheets at December 31, 1997,
August 31, 1997 and August 31, 1996
Consolidated Statements of Income and Shareholders'
Equity for the four month period ended December 31,
1997 and for the fiscal years ended August 31, 1997,
1996 and 1995
Consolidated Statements of Cash Flows for the four
month period ended December 31, 1997 and for the
fiscal years ended August 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
99.2 Management's Discussion and Analysis of Financial
Condition and Results of Operations
99.3 Selected Financial Data
2
<PAGE>
Pursuant to the requirements of the Securities
Exchange Act of 1934, as amended, the Registrant has duly
caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
Date: December 30, 1998 By: /s/ Jonathan B. Weller
-------------------------------------
Jonathan B. Weller
President and Chief Operating Officer
3
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Number Exhibit Page Number
- ------ ------- -----------
<S> <C> <C>
10.1 Statement Regarding Adjustment of Earnout Performance Benchmarks
Under the TRO Contribution Agreement, dated December 29, 1998
23.1 Consent of Arthur Andersen LLP (independent public accountants of
the Registrant)
99.1 Financial Statements
99.2 Management's Discussion and Analysis of Financial Condition and
Results of Operations
99.3 Selected Financial Data
</TABLE>
4
<PAGE>
Exhibit 10.1
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
(the "Trust")
Special Committee of the Board of Trustees
Statement Regarding
Adjustment of Earnout Performance Benchmarks
Under
The TRO Contribution Agreement
Dated
December 29, 1998
Pursuant to Section 5.19(b) of the TRO Contribution Agreement
dated as of July 30, 1997 (the "Agreement") by and among the Trust, PREIT
Associates, L.P. (the "Partnership"), the former shareholders and debtholders of
The Rubin Organization, Inc. (together, the "TRO Shareholders") and certain
other persons, the Trust's Board of Trustees formed a special committee of
trustees (the "Special Committee") to address and resolve certain matters after
closing pertaining to the transactions contemplated by the Agreement. Section
5.19(b) provides that the Special Committee shall, at the request of at least
one-third of the Partnership's outstanding Class A Units issued to the TRO
Shareholders and affiliates or any trustee of the Trust, consider whether
adjustments should be made to the applicable earnout performance benchmarks (the
"Benchmarks") contained in the Agreement as the result of, among other things,
the raising by the Trust of equity capital. Capitalized terms not otherwise
defined herein have the meanings set forth in the Agreement.
At the request of holders of more than one-third of the
outstanding Class A Units issued to TRO Shareholders and affiliates, the Special
Committee has reviewed the impact of the Trust's December 1997 public offering
of 4,600,000 Shares (the "Offering") on the Benchmarks, considering financial
projections for the Trust both before the Offering and on a pro forma basis,
taking into account the issuance of the new Shares and the general performance
of the Trust during the period following the closing of the transactions under
the Agreement.
Based on its analysis, the Special Committee has determined
that an adjustment to the Benchmarks as a result of the Offering would be
appropriate under Section 5.19 of the Agreement. The Special Committee has
concluded that, because the Offering will in the long run enhance the Trust's
financial performance, both the TRO Shareholders and the Trust should share the
dilutive effect of the Offering on FFO per outstanding share and that the
Benchmarks should be adjusted by applying a declining fraction of the dilution
resulting from the Offering in each successive year of the earnout.
<PAGE>
The original Benchmarks and the effect of the new Shares on
FFO per outstanding share are set forth below:
<TABLE>
<CAPTION>
Year 1998 1999 2000 2001 2002
- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Original Target $ 2.66 $ 2.81 $ 2.94 $ 3.14 $ 2.43
Original Hurdle $ 2.40 $ 2.53 $ 2.65 $ 2.83 $ 2.19
Dilution $(0.36) $(0.40) $(0.42) $(0.48) $(0.38)
</TABLE>
Pursuant to Section 5.19 of the Agreement, the Special
Committee hereby adjusts the foregoing Benchmarks as follows:
<TABLE>
<CAPTION>
Year 1998 1999 2000 2001 2002
- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Percent of Dilution Applied 75% 58% 52% 25% 0%
Amount of Dilution Applied $(0.27) $(0.23) $(0.22) $(0.11) $(0.00)
Adjusted Target $ 2.39 $ 2.58 $ 2.72 $ 3.03 $ 2.43
Adjusted Hurdle $ 2.13 $ 2.30 $ 2.43 $ 2.72 $ 2.19
</TABLE>
The appropriate officers of the Trust are hereby directed to
cause the Trust's books and records to reflect the adjusted Benchmarks.
The foregoing statement regarding adjustment to the earnout
performance benchmarks under the Agreement was adopted and approved as of
December 29, 1998 by the undersigned members of the Special Committee of the
Board of Trustees of the Trust.
This Statement may be executed in two or more counterparts,
each of which shall be deemed to be an original, and all of such counterparts
together shall be deemed to be one and the same instrument.
/s/ Rosemarie Greco /s/ William R. Dimeling /s/ Leonard I. Korman
- ------------------- ----------------------- ---------------------
Rosemarie Greco William R. Dimeling Leonard I. Korman
1
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our report dated December 21, 1998 included in this form 8-K
dated December 30, 1998 into the Registrant's previously filed Registration
Statements on Forms S-3 (File No. 33-61115 and File No. 333-49817) and Forms S-8
(File No. 33-59771, File No. 33-59773, File No. 33-59767 and File No.
333-69877).
/s/ Arthur Andersen LLP
Philadelphia, Pennsylvania
December 30, 1998
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Trustees of
Pennsylvania Real Estate Investment Trust:
We have audited the accompanying consolidated balance sheets of Pennsylvania
Real Estate Investment Trust (a Pennsylvania Trust) and Subsidiaries as of
December 31, 1997, August 31, 1997 and August 31, 1996 and the related
consolidated statements of income, shareholders' equity and cash flows for the
four month period ended December 31, 1997 and for each of the three years in the
period ended August 31, 1997. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits. We did not audit the financial
statements for Lehigh Valley Mall Associates, a partnership in which the Company
has a 50 percent interest which is reflected in the accompanying financial
statements using the equity method of accounting. The equity in net income of
Lehigh Valley Mall Associates represents 19 percent, 23 percent, 31 percent and
32 percent of net income for the four month period ended December 31, 1997 and
for the years ended August 31, 1997, 1996, and 1995, respectively. The financial
statements of Lehigh Valley Mall Associates were audited by other auditors whose
report has been furnished to us and our opinion, insofar as it relates to the
amounts included for Lehigh Valley Mall Associates, is based solely on the
report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based upon our audit and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Pennsylvania Real Estate Investment Trust and
Subsidiaries as of December 31, 1997, August 31, 1997 and August 31, 1996, and
the results of their operations and their cash flows for the four month period
ended December 31, 1997 and for each of the three years in the period ended
August 31, 1997, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Philadelphia, Pennsylvania
December 21, 1998
<PAGE>
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31, August 31, August 31,
1997 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
INVESTMENTS IN REAL ESTATE, at cost (Notes 1 and 3):
Multifamily properties $161,270,000 $159,967,000 $156,102,000
Retail properties 120,209,000 37,398,000 37,362,000
Industrial properties 5,078,000 5,078,000 5,078,000
Properties under development 1,369,000 -- --
------------ ------------ ------------
Total investments in
real estate 287,926,000 202,443,000 198,542,000
Less- Accumulated depreciation 53,171,000 50,711,000 44,693,000
------------ ------------ ------------
234,755,000 151,732,000 153,849,000
INVESTMENT IN PREIT-RUBIN, INC., at equity 4,853,000 -- --
INVESTMENTS IN AND ADVANCES
TO PARTNERSHIPS AND JOINT
VENTURES, at equity
(Notes 1 and 4) 14,505,000 1,039,000 16,995,000
ADVANCES TO PREIT-RUBIN, INC. (Note 3) 3,413,000 -- --
------------ ------------ ------------
257,526,000 152,771,000 170,844,000
Less- Allowance for possible losses 1,770,000 1,831,000 2,042,000
------------ ------------ ------------
255,756,000 150,940,000 168,802,000
OTHER ASSETS:
Cash and cash equivalents 1,324,000 1,399,000 1,030,000
Notes receivable -- -- 1,649,000
Rents and sundry receivables 441,000 590,000 608,000
Deferred costs, prepaid real estate
taxes and expenses, net (Note 1) 8,045,000 7,393,000 5,636,000
Deposits on properties -- 5,335,000 --
------------ ------------ ------------
$265,566,000 $165,657,000 $177,725,000
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
(Continued)
2
<PAGE>
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
(Continued)
<TABLE>
<CAPTION>
December 31, August 31, August 31,
1997 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
LIABILITIES:
Mortgage notes payable (Note 6) $ 99,364,000 $ 83,528,000 $ 84,833,000
Bank and other loans payable (Note 6) 4,575,000 33,884,000 39,315,000
Tenants' deposits and deferred rents 1,317,000 1,346,000 1,422,000
Accrued pension and retirement benefits
(Notes 1 and 8) 1,011,000 1,091,000 1,207,000
Accrued expenses and other liabilities 4,964,000 4,369,000 3,901,000
------------- ------------- -------------
111,231,000 124,218,000 130,678,000
------------- ------------- -------------
MINORITY INTEREST (Note 3) 15,805,000 540,000 542,000
------------- ------------- -------------
COMMITMENTS AND CONTINGENCIES (Note 11) -- -- --
SHAREHOLDERS' EQUITY (Notes 1 and 9):
Shares of beneficial interest, $1 par;
authorized unlimited; issued and
outstanding 13,288,848, 8,685,098, and
8,676,098 shares at December 31, 1997,
August 31, 1997 and 1996, respectively 13,289,000 8,685,000 8,676,000
Capital contributed in excess of par 144,746,000 53,599,000 53,133,000
Distributions in excess of net income (19,505,000) (21,385,000) (15,304,000)
------------- ------------- -------------
138,530,000 40,899,000 46,505,000
------------- ------------- -------------
$ 265,566,000 $ 165,657,000 $ 177,725,000
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Four
Month Period
Ended For the Fiscal Years Ended August 31,
December 31, -------------------------------------------------
1997 1997 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Gross revenues from real estate $ 17,170,000 $ 40,231,000 $ 38,985,000 $ 36,978,000
Interest and other income 82,000 254,000 171,000 176,000
------------ ------------ ------------ ------------
17,252,000 40,485,000 39,156,000 37,154,000
------------ ------------ ------------ ------------
EXPENSES:
Property operating expenses 6,835,000 16,289,000 16,102,000 14,859,000
Depreciation and amortization 2,695,000 6,259,000 5,908,000 5,286,000
General and administrative expenses 1,088,000 3,324,000 3,119,000 3,091,000
Interest expense 4,349,000 9,086,000 9,831,000 8,908,000
Provisions for losses on investments -- 500,000 -- --
------------ ------------ ------------ ------------
14,967,000 35,458,000 34,960,000 32,144,000
------------ ------------ ------------ ------------
Income before equity in
unconsolidated entities, gains
on sales of interests in real
estate, minority interest and
extraordinary item 2,285,000 5,027,000 4,196,000 5,010,000
EQUITY IN INCOME OF PREIT-RUBIN, INC
(Notes 3 and 5) 260,000 -- -- --
EQUITY IN INCOME OF PARTNERSHIPS AND JOINT
VENTURES (Note 4) 2,101,000 4,337,000 6,258,000 6,381,000
GAINS ON SALES OF INTERESTS IN REAL ESTATE 2,090,000 1,069,000 865,000 119,000
------------ ------------ ------------ ------------
Income before minority interest and
extraordinary item 6,736,000 10,433,000 11,319,000 11,510,000
MINORITY INTEREST (Note 3) (474,000) (198,000) (275,000) (285,000)
------------ ------------ ------------ ------------
INCOME BEFORE EXTRAORDINARY ITEM 6,262,000 10,235,000 11,044,000 11,225,000
EXTRAORDINARY ITEM--LOSS ON EARLY
EXTINGUISHMENT OF DEBT (Note 6) (300,000) -- -- --
------------ ------------ ------------ ------------
NET INCOME $ 5,962,000 $ 10,235,000 $ 11,044,000 $ 11,225,000
============ ============ ============ ============
BASIC INCOME PER SHARE
(Note 7) $ .66 $ 1.18 $ 1.27 $ 1.29
============ ============ ============ ============
DILUTED INCOME PER SHARE
(Note 7) $ .66 $ 1.18 $ 1.27 $ 1.29
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE FOUR MONTH PERIOD ENDED
DECEMBER 31, 1997 AND THE THREE FISCAL
YEARS ENDED AUGUST 31, 1997
<TABLE>
<CAPTION>
Shares of Capital
Beneficial Contributed Distributions
Interest In Excess in Excess of
$1 Par of Par Net Income
------------ ------------ ------------
<S> <C> <C> <C>
BALANCE, SEPTEMBER 1, 1994 $ 8,670,000 $ 53,039,000 $ (4,961,000)
Net income -- -- 11,225,000
Shares issued upon exercise of
options (Note 9) 6,000 94,000 --
Distributions paid to shareholders
($1.88 per share) -- -- (16,302,000)
------------ ------------ ------------
BALANCE, AUGUST 31, 1995 8,676,000 53,133,000 (10,038,000)
Net income -- -- 11,044,000
Distributions paid to shareholders
($1.88 per share) -- -- (16,310,000)
------------ ------------ ------------
BALANCE, AUGUST 31, 1996 8,676,000 53,133,000 (15,304,000)
Net income -- -- 10,235,000
Shares issued upon exercise of options
(Note 9) 9,000 166,000 --
Issuance of compensatory stock options
(Note 9) -- 300,000 --
Distributions paid to shareholders
($1.88 per share) -- -- (16,316,000)
------------ ------------ ------------
BALANCE, AUGUST 31, 1997 8,685,000 53,599,000 (21,385,000)
Net income -- -- 5,962,000
Shares issued upon exercise of options
(Note 9) 4,000 64,000 --
New shares issued (Note 9) 4,600,000 91,083,000 --
Distributions paid to shareholders
($.47 per share) -- -- (4,082,000)
------------ ------------ ------------
BALANCE, DECEMBER 31, 1997 $ 13,289,000 $144,746,000 $(19,505,000)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Four
Month Period
Ended For the Fiscal Years Ended August 31,
December 31, ------------------------------------------------
1997 1997 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,962,000 $ 10,235,000 $ 11,044,000 $ 11,225,000
Adjustments to reconcile net income to net cash
provided by operating activities-
Minority interest 474,000 198,000 275,000 285,000
Depreciation and amortization 2,695,000 6,259,000 5,908,000 5,286,000
Gains on sales of interests in real estate (2,090,000) (1,069,000) (865,000) (119,000)
Provision for losses on investments -- 500,000 -- --
Issuance of compensatory stock options -- 300,000 -- --
Loss on early extinguishment of debt 300,000 -- -- --
Equity in income of PREIT-RUBIN, INC (260,000) -- -- --
Decrease in allowance for possible losses (61,000) (710,000) (734,000) (460,000)
Change in assets and liabilities-
Rents and sundry receivables 149,000 18,000 (192,000) (18,000)
Deferred costs, prepaid real estate taxes and expenses (3,075,000) (10,000) (356,000) (837,000)
Accrued pension and retirement benefits (80,000) (116,000) (6,000) 130,000
Accrued expenses and other liabilities 296,000 (310,000) (54,000) 1,042,000
Tenants' deposits and deferred rents (29,000) (76,000) 70,000 138,000
------------ ------------ ------------ ------------
Net cash provided by operating activities 4,281,000 15,219,000 15,090,000 16,672,000
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in wholly owned real estate (47,972,000) (3,901,000) (3,685,000) (38,058,000)
Investment in property under development (1,246,000) -- -- --
Investments in partnerships and joint ventures (9,947,000) (2,649,000) (897,000) (1,732,000)
Investment in and advances to PREIT-RUBIN, INC (1,448,000) -- -- --
Cash distributions from partnerships and joint ventures
in excess of (less than) equity in income (518,000) 17,605,000 889,000 (127,000)
Cash proceeds from sales of real estate investments -- -- 5,163,000 --
Cash proceeds from sales of interests in partnerships 3,862,000 2,069,000 -- --
Cash distributions to minority partners (44,000) (200,000) (261,000) (165,000)
Decrease in notes receivable -- 1,649,000 -- --
Deposits on agreement to purchase -- (5,336,000) -- --
Deferred acquisition costs -- (1,488,000) (276,000) --
------------ ------------ ------------ ------------
Net cash (used in) provided by investing activities (57,313,000) 7,749,000 933,000 (40,082,000)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal installments on mortgage notes payable (9,318,000) (1,305,000) (1,123,000) (821,000)
Increase in mortgage notes payable -- -- 8,800,000 35,000,000
Repayment of bank loans payable (29,309,000) -- -- --
Prepayment of mortgage notes payable -- -- (1,749,000) --
Proceeds from bank loan payable -- -- -- 39,379,000
Decrease in bank loan payable -- (5,431,000) (5,005,000) (35,000,000)
Decrease (increase) in deferred financing costs -- 278,000 (704,000) --
Payment of deferred financing costs (859,000) -- -- --
Shares of beneficial interest issued 96,829,000 175,000 -- 100,000
Distributions paid to shareholders (4,082,000) (16,316,000) (16,310,000) (16,302,000)
Distributions paid to OP Unit holders (304,000) -- -- --
------------ ------------ ------------ ------------
Net cash provided by (used in) financing activities 52,957,000 (22,599,000) (16,091,000) 22,356,000
------------ ------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (75,000) 369,000 (68,000) (1,054,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,399,000 1,030,000 1,098,000 2,152,000
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,324,000 $ 1,399,000 $ 1,030,000 $ 1,098,000
============ ============ ============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES:
Net assets acquired $ -- $ -- $ -- $ 3,590,000
Liabilities assumed (primarily bank loans payable) -- -- -- (3,804,000)
------------ ------------ ------------ ------------
$ -- $ -- $ -- $ (214,000)
============ ============ ============ ============
Accrual of acquisition costs $ -- $ 778,000 $ -- $ --
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE>
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FOUR MONTH PERIOD ENDED DECEMBER 31, 1997
AND THE THREE FISCAL YEARS ENDED AUGUST 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of Operations
Pennsylvania Real Estate Investment Trust (collectively with its subsidiaries,
the "Company") is a fully integrated, self-administered and self-managed real
estate investment trust ("REIT") which acquires, develops, redevelops and
operates retail and multifamily properties. Substantially all of the Company's
properties are located in the Eastern United States, with concentrations in the
Mid-Atlantic states and in Florida.
The Company's interest in its properties is held through PREIT Associates, L.P.
(the "Operating Partnership"). The Company is the sole general partner of the
Operating Partnership and, as of December 31, 1997, the Company held a 95.4%
interest in the Operating Partnership. The Operating Partnership holds a 95%
economic interest in PREIT-RUBIN, INC. (the "Management Company") through its
ownership of 95% of the Management Company's non-voting preferred stock.
Consolidation
The Company consolidates its accounts and the accounts of the Operating
Partnership and reflects the remaining interest in the Operating Partnership as
minority interest. One partnership in which the Company is a 65% general
partner, and has control as provided in the partnership agreement, has been
consolidated for financial statement presentation. The minority partner's
interest is 35%. All significant intercompany accounts and transactions have
been eliminated in consolidation.
Investment in Management Company
The Company's investment in the Management Company is accounted for using the
equity method. See Note 5 for further discussion.
Partnership and Joint Venture Investments
In accordance with the American Institute of Certified Public Accountants'
Statement of Position 78-9, "Accounting for Investments in Real Estate
Ventures," the Company accounts for its investment in partnerships and joint
ventures which it does not control using the equity method of accounting. These
investments, which represent 25% to 70% noncontrolling ownership interests, are
recorded initially at the Company's cost and subsequently adjusted for the
Company's net equity in income and cash contributions and distributions.
7
<PAGE>
Statements of Cash Flows
The Company considers all highly liquid short-term investments with an original
maturity of three months or less to be cash equivalents. Cash paid for interest
was $4,412,000, $8,963,000, $9,962,000 and $8,619,000 for the four month period
ended December 31, 1997, and the fiscal years ended August 31, 1997, 1996 and
1995, respectively.
Capitalization of Costs
It is the Company's policy to capitalize interest and real estate taxes related
to construction in progress and to depreciate these costs over the life of the
related assets in order to more properly match revenues and expenses. These
items are capitalized for income tax purposes and amortized or depreciated in
accordance with the provisions of the Internal Revenue Code. For the four month
period ended December 31, 1997, the Company capitalized interest and real estate
taxes of $247,000. No interest or taxes were capitalized for the fiscal years
ended August 31, 1997, 1996 and 1995.
The Company has capitalized as deferred costs certain expenditures related to
the financing and leasing of certain properties. Capitalized loan fees are being
amortized over the term of the related loans and leasing commissions are being
amortized over the term of the related leases.
During the fiscal year ended August 31, 1997, the Company capitalized certain
deposits associated with the planned future purchase of two regional malls.
These deposits were applied to the respective properties upon consummation of
the transaction described in Note 3.
Depreciation
The Company, for financial reporting purposes, depreciates its buildings,
equipment and leasehold improvements over their estimated useful lives of 10 to
40 years, using the straight-line method of depreciation. For federal income tax
purposes, the Company currently uses the straight-line method of depreciation
and the useful lives prescribed by the Internal Revenue Code.
Allowance for Possible Losses
The Company determines asset impairment, if any, in accordance with the
provisions of Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." This Statement requires long-lived assets to be held and used by the
Company to be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If the sum of the expected future cash flows (undiscounted and
without interest charges) is less than the carrying amount of the asset, an
impairment loss is recognized. Measurement of an impairment loss for these
assets is based on the fair market value of the assets.
During 1997, an impairment loss of approximately $500,000 was recorded following
the expiration of an option to sell certain land parcels held by a partnership
in which the Company holds an equity interest.
8
<PAGE>
Benefit Plans
The Company has provided pension benefits since 1970 for all employees,
excluding the Chairman, for whom retirement benefits are provided in an
employment contract.
With regard to the Chairman's employment contract, no provision was required for
the four months ended December 31, 1997 or for the fiscal years ended August 31,
1997, 1996 and 1995.
Derivative Financial Instruments
In managing interest rate exposure on certain floating rate debt, the Company at
times enters into interest rate swap and cap agreements. When interest rates
change, the differential to be paid or received is accrued as interest expense
and is recognized over the life of the swap agreements. The costs of cap
transactions are deferred and amortized over the contract period. The amortized
costs of cap transactions and interest income and interest expense on swap
transactions are included in mortgage and bank loan interest.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This Statement
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. This Statement will be effective for the Company's
calendar year 2000. This Statement must be applied to (a) derivative instruments
and (b) certain derivative instruments embedded in hybrid contracts that were
issued, acquired, or substantively modified after December 31, 1997. The Company
does not expect the adoption of this Statement to have a material impact on its
financial position or results of operations.
Income Taxes
The Company has elected to qualify as a real estate investment trust under
Sections 856-860 of the Internal Revenue Code and intends to remain so
qualified. Accordingly, no provision for Federal income taxes has been reflected
in the financial statements.
Earnings and profits, which will determine the taxability of distributions to
shareholders, will differ from net income reported for financial reporting
purposes due to differences in cost basis, differences in the estimated useful
lives used to compute depreciation and differences between the allocation of the
Company's net income and loss for financial reporting purposes and for tax
reporting purposes.
The Company is subject to a Federal excise tax computed on a calendar year. The
excise tax equals 4% of the excess, if any, of 85% of the Company's ordinary
income plus 95% of the Company's capital gain net income for the calendar year
over cash distributions during the calendar year, as defined. The Company has in
the past distributed a substantial portion of its taxable income in the
subsequent fiscal year and may also follow this policy in the future.
No provision for excise tax was made for the four months ended December 31, 1997
or for the fiscal years 1997, 1996 and 1995 as no tax was due.
The tax status of distributions paid to shareholders was composed of the
following for the four month period ended December 31, 1997 and the calendar
years ended December 31, 1997, 1996 and 1995:
9
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------
1997 1996 1995
---------------- ----------------- ------------
<S> <C> <C> <C>
Ordinary income $ 1.66 $ 1.72 $ 1.88
Capital gains .22 .16 --
--------- --------- ---------
$ 1.88 $ 1.88 $ 1.88
========= ========= =========
</TABLE>
The Management Company is subject to Federal and state income taxes. The
operating results of the Management Company include a provision for income
taxes.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform with the current
period presentation.
2. CHANGE IN FISCAL YEAREND:
On October 14, 1997, the Company filed a Form 8-K announcing their intention to
change their fiscal yearend from August 31 to December 31. On February 17, 1998,
the Company filed a Transition Report on Form 10-Q which included their results
for the period September 1, 1997 through December 31, 1997 and the comparable
period. Listed below is unaudited income statement information with respect to
the four months ended December 31, 1996:
Revenues $ 13,397,000
Net income $ 4,842,000
Basic income per share $ .56
Diluted income per share $ .56
10
<PAGE>
3. THE TRO TRANSACTION:
On September 30, 1997, the Company completed a series of related transactions
pursuant to which the Company: (i) transferred substantially all of its real
estate interests to PREIT Associates, L.P. of which the Company is the sole
general partner; (ii) the Operating Partnership acquired all of the nonvoting
common shares of The Rubin Organization, Inc. ("TRO") a commercial real estate
development and management firm (renamed "PREIT-RUBIN, Inc."), constituting 95%
of the total equity of PREIT-RUBIN, Inc. in exchange for the issuance of 200,000
Class A Operating Partnership ("OP") Units and a provision to issue up to
800,000 additional Class A OP Units over the next five years according to a
formula based upon the Company's per share growth in adjusted funds from
operations; (iii) the Operating Partnership acquired the interests of certain
affiliates of TRO ("TRO Affiliates") in The Court at Oxford Valley, Magnolia
Mall, North Dartmouth Mall and Springfield Park; (iv) the Operating Partnership
agreed to acquire the interests of TRO Affiliates in Hillview Shopping Center
and Northeast Tower Center, at prices based upon a pre-determined formula; and
(v) the Operating Partnership acquired the development rights of certain TRO
Affiliates, subject to related obligations, in Christiana Power Center (Phases I
and II), Red Rose Commons and Blue Route Metroplex.
The following pro forma financial information of the Company for the four month
period ended December 31, 1997 and the fiscal year ended August 31, 1997 gives
effect to the properties acquired as if the purchases had occurred on September
1, 1997.
<TABLE>
<CAPTION>
(Unaudited)
Four Month Fiscal Year
Period Ended Ended
December 31, August 31,
1997 1997
----------------- -----------------
<S> <C> <C>
Pro forma total revenues $ 18,292,000 $ 53,209,000
Pro forma net income $ 6,692,000 $ 10,459,000
Basic pro forma net income per common share $ .71 $ 1.21
Diluted pro forma net income per common share $ .71 $ 1.20
</TABLE>
The pro forma financial information presented within this footnote is not
necessarily indicative of the results which actually would have occurred if the
acquisitions had been consummated on September 1, 1997, nor does the pro forma
information purport to represent the results of operations for future periods.
As part of the September 30, 1997 transactions discussed above, the Company
entered into a contribution agreement (the "TRO Contribution Agreement") which
includes a provision to issue up to 800,000 additional Class A OP units over the
five-year period beginning October 1, 1997 and September 30, 2002 according to a
formula based upon the Company's adjusted funds from operations per share during
the five-year period. The TRO Contribution Agreement establishes "hurdle" and
"target" levels set forth for the Company's adjusted funds from operations per
share during specified earn-out periods to determine whether, and to what
extent, the contingent OP units will be issued. The Company intends to account
for the issuance of contingent OP units as additional purchase price when such
amounts are determinable.
11
<PAGE>
All of the acquisitions described above have been recorded by the Company using
the purchase method of accounting. The Company accounts for its noncontrolling
investment in PREIT-RUBIN, Inc. using the equity method. The excess of the
purchase price of PREIT-RUBIN, Inc. over the fair value of net assets acquired
is being amortized over 35 years.
The following table summarizes the consideration paid to acquire the assets and
businesses described above:
<TABLE>
<CAPTION>
Net Other Total
Class A Cash Paid Liabilities Transaction Purchase
OP Units (Received) Assumed Costs Price
-------- ---------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Investment in
PREIT-RUBIN, Inc. $ 4,680,000 $ (878,000) $ -- $ 793,000 $ 4,595,000
Investment in The Court
at Oxford Valley 5,458,000 683,000 -- 688,000 6,829,000
Magnolia Mall 5,000,000 15,165,000 25,154,000 977,000 46,296,000
North Dartmouth Mall -- 35,000,000 -- 986,000 35,986,000
Development Properties -- 6,446,000 -- 1,859,000 8,305,000
--------------- --------------- --------------- ---------------- ----------------
$ 15,138,000 $ 56,416,000 $ 25,154,000 $ 5,303,000 $ 102,011,000
=============== =============== =============== ================ ================
</TABLE>
4. INVESTMENTS IN PARTNERSHIPS AND JOINT VENTURES:
The following table presents summarized financial information as to the
Company's equity in the assets and liabilities of 22, 22, and 26 partnerships
and joint ventures at December 31, 1997, August 31, 1997 and 1996, respectively,
and 3 properties under development at December 31, 1997, and the Company's
equity in income for the four month period ended December 31, 1997 and the
fiscal years ended August 31, 1997, 1996, and 1995:
<TABLE>
<CAPTION>
August 31,
December 31, -------------------------------------
ASSETS 1997 1997 1996
------ ----------------- ---------------- -------------------
<S> <C> <C> <C>
Investments in real estate, at cost:
Multifamily properties $ 108,236,000 $ 107,604,000 $ 105,480,000
Industrial property 1,275,000 1,264,000 1,264,000
Retail properties 160,684,000 120,660,000 128,936,000
Properties under development 7,378,000 -- --
Land 4,446,000 4,446,000 4,446,000
----------------- ---------------- -----------------
Total investments in real estate 282,019,000 233,974,000 240,126,000
Less- Accumulated depreciation 71,155,000 71,838,000 73,989,000
----------------- ---------------- -----------------
210,864,000 162,136,000 166,137,000
Cash and cash equivalents 8,442,000 6,031,000 5,589,000
Deferred costs, prepaid real estate taxes and other, net 20,469,000 5,728,000 6,020,000
----------------- ---------------- -----------------
Total assets 239,775,000 173,895,000 177,746,000
----------------- ---------------- -----------------
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
August 31,
December 31, -------------------------------------
LIABILITIES AND PARTNERS' EQUITY 1997 1997 1996
-------------------------------- ----------------- ---------------- -------------------
<S> <C> <C> <C>
Mortgage notes payable 213,018,000 162,097,000 133,578,000
Bank loans payable 6,724,000 8,770,000 9,124,000
Due to the Company 3,371,000 3,118,000 2,795,000
Other liabilities 7,601,000 4,341,000 4,436,000
----------------- ---------------- -----------------
Total liabilities 230,714,000 178,326,000 149,933,000
----------------- ---------------- -----------------
Net equity (deficit) 9,061,000 (4,431,000) 27,813,000
Partners' share (5,444,000) (5,470,000) (10,818,000)
----------------- ---------------- -----------------
Investment in and advances to partnerships and
joint ventures $ 14,505,000 $ 1,039,000 $ 16,995,000
================= ================ =================
</TABLE>
EQUITY IN INCOME OF PARTNERSHIPS AND JOINT VENTURES
<TABLE>
<CAPTION>
For the
Four Month
Period Ended For the Fiscal Years Ended August 31,
December 31, --------------------------------------------------
1997 1997 1996 1995
------------------ --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Gross revenues from real estate $ 19,258,000 $ 52,446,000 $ 53,209,000 $ 52,339,000
---------------- --------------- --------------- ---------------
Expenses:
Property operating expenses 7,122,000 20,774,000 21,724,000 20,477,000
Mortgage and bank loan interest 5,205,000 14,908,000 11,984,000 12,463,000
Depreciation and amortization 2,609,000 6,978,000 6,833,000 6,502,000
----------------- --------------- --------------- ---------------
14,936,000 42,660,000 40,541,000 39,442,000
----------------- --------------- --------------- ---------------
4,322,000 9,786,000 12,668,000 12,897,000
Partners' share (2,221,000) (5,449,000) (6,410,000) (6,516,000)
----------------- --------------- --------------- ---------------
Equity in income of partnerships and joint
ventures $ 2,101,000 $ 4,337,000 $ 6,258,000 $ 6,381,000
================ =============== =============== ===============
</TABLE>
Mortgage notes payable which are secured by the related properties, are due in
installments over various terms extending to the year 2016 with interest rates
ranging from 7.28% to 10.25% with an average interest rate of 7.93%. Principal
payments are due as follows:
For the years ended December 31:
1998 $ 13,146,000
1999 9,174,000
2000 20,017,000
2001 4,413,000
2002 4,718,000
2003 and thereafter 161,549,000
----------------
$ 213,017,000
================
13
<PAGE>
The liability under each mortgage note is limited to the particular property
except for two loans in the amount of $8,334,000 which are guaranteed by the
partners of the respective partnerships, including the Company. In addition, one
bank loan in the amount of $867,000 has been guaranteed by the partners of the
partnership including the Company.
The Company's investments in certain partnerships and joint ventures reflect
cash distributions in excess of the Company's net investments totaling
$5,898,000, $5,833,000 and $5,976,000 for the four month period ended December
31, 1997 and the fiscal years ended August 31, 1997 and 1996, respectively. The
Company is generally entitled to a priority return on these investments.
The Company has a 50% partnership interest in Lehigh Valley Mall Associates
which is included in the amounts above. Summarized financial information as of
December 31, 1997, August 31, 1997, 1996 and 1995 and for the four month period
ended December 31, 1997 and the fiscal years ended August 31, 1997, 1996 and
1995 for this investment which is accounted for by the equity method is as
follows:
<TABLE>
<CAPTION>
For the
Four Month
Period Ended For the Fiscal Years Ended August 31,
December 31, --------------------------------------------------------
1997 1997 1996 1995
------------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Total assets $ 24,943,000 $ 24,645,000 $ 23,552,000 $ 20,858,000
Mortgages payable 53,157,000 53,406,000 22,489,000 22,227,000
Revenues 4,266,000 14,840,000 13,823,000 13,667,000
Property operating expenses 1,508,000 4,657,000 4,198,000 3,412,000
Interest expense 1,289,000 4,638,000 1,998,000 2,040,000
Net income 2,313,000 4,660,000 6,915,000 7,548,000
Equity in income of partnership 1,157,000 2,330,000 3,458,000 3,774,000
</TABLE>
5. INVESTMENT IN PREIT-RUBIN, INC.:
PREIT-RUBIN, Inc. is responsible for various activities including: management,
leasing and real estate development of certain of the Company's properties and
for properties on behalf of third parties. Total management fees paid by the
Company's properties to PREIT-RUBIN, Inc. are included in property operating
expenses in the accompanying consolidated statements of income and amounted to
$35,000 for the four month period ended December 31, 1997.
14
<PAGE>
Summarized unaudited financial information for PREIT-RUBIN, Inc. as of and for
the four month period ended December 31, 1997 is as follows:
Total assets $ 13,859,000
===============
Management fees $ 1,377,000
Leasing commissions 1,877,000
Development fees 124,000
Other revenues 2,334,000
---------------
Total revenue $ 5,712,000
===============
Net income $ 303,000
===============
Company's share of net income $ 260,000
===============
6 MORTGAGE NOTES AND BANK LOANS PAYABLE:
Mortgage Notes Payable:
Mortgage notes payable which are secured by the related properties are due in
installments over various terms extending to the year 2025 with interest at
rates ranging from 5.90% to 9.50% with an average interest rate of 8.07%.
Principal payments are due as follows:
For the years ended December 31:
1998 $ 35,301,000
1999 1,490,000
2000 1,610,000
2001 1,750,000
2002 1,885,000
2003 and thereafter 57,328,000
---------------
$ 99,364,000
===============
The carrying values of the mortgage notes and bank loans payable at December 31,
1997, August 31, 1997 and 1996 were approximately equal to their respective fair
values, as determined by using year-end interest rates and market conditions. At
December 31, 1997, the fair value of the interest rate protection referred to
above was approximately $0. In the event that the Company wanted to terminate
the swap agreement referred to above, the amount which would be payable at
December 31, 1997 was approximately $132,000.
Credit Facility:
On September 30, 1997, the Operating Partnership entered into a $150 million
revolving credit facility (the "Credit Facility"). The obligations of the
Operating Partnership under the Credit Facility have been guaranteed by the
Company.
The Credit Facility is for an initial term of two years and bears interest, at
the borrowers election, at (i) the higher of prime rate, or the Federal Funds
lending rate plus .5%, or (ii) the London Interbank Offered Rate plus margins
ranging from 1.1% to 1.7%, depending on the Company's consolidated Leverage
Ratio, as defined.
The Credit Facility requires the Company to maintain ongoing compliance with a
number of customary financial and other covenants, including leverage ratios
based on gross asset value, fixed charge coverage ratios and a minimum tangible
15
<PAGE>
net worth requirement. Until the Company reduces its leverage ratio below 50%,
the lending banks will hold unrecorded mortgages on eleven unencumbered
properties which the Operating Partnership owns, directly or indirectly, and
would be entitled to record such mortgages upon any event of default.
As of December 31, 1997, the Operating Partnership had $10.3 million outstanding
on the Credit Facility ($4.6 million on wholly-owned properties and $5.7 million
on joint venture properties). The weighted average interest rate based on
amounts borrowed on the credit facility was 7.48% for the four month period
ended December 31, 1997.
At December 31, 1997, the Company was in compliance with all debt covenants.
During 1995, the Company purchased interest rate protection at a cost of
$250,000 on $15,000,000 of outstanding debt limiting the 30-day LIBOR rate to
7.5% for three years. The Company also limited its exposure to increases in
LIBOR on $20,000,000 of its floating rate debt by entering into a swap agreement
which fixes a rate of 6.12% versus 30-day LIBOR through June 2001.
The Company is exposed to credit loss in the event of nonperformance by
counterparties to the interest rate protection agreements; however, the Company
does not anticipate nonperformance by the counterparties.
During the four month period ended December 31, 1997, the Company wrote off
unamortized deferred financing costs of $300,000 in connection with the
refinancing of its Credit Facility. The write off of these costs has been
reflected as an extraordinary loss on the accompanying consolidated statement of
income for the four month period ended December 31, 1997.
7. NET INCOME PER SHARE:
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings Per Share" ("SFAS No. 128").
SFAS No. 128 establishes standards for computing and presenting earnings per
share ("EPS"). Basic earnings per share are based on the weighted average number
of common shares outstanding during the year. Diluted earnings per share are
based on the weighted average number of shares outstanding during the year
adjusted to give effect to common
16
<PAGE>
shares equivalents. All per share amounts for all periods presented have been
restated to conform to SFAS No. 128. A reconciliation between basic and diluted
EPS is shown below (in thousands, except per share data).
<TABLE>
<CAPTION>
For the
Four Month
Period Ended For the Fiscal Years Ended August 31,
December 31, ----------------------------------------------------------------------
1997 1997 1996 1995
--------------------- --------------------- --------------------- ---------------------
Basic Diluted Basic Diluted Basic Diluted Basic Diluted
----- ------- ----- ------- ----- ------- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income before extra-
ordinary item $ 6,262 $ 6,262 $ 10,235 $ 10,235 $ 11,044 $ 11,044 $ 11,225 $ 11,225
Extraordinary item (300) (300) -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------- --------
Net income $ 5,962 $ 5,962 $ 10,235 $ 10,235 $ 11,044 $ 11,044 $ 11,225 $ 11,225
========= ========= ========= ========= ========= ========= ========= =========
Weighted average shares
outstanding 9,049 9,049 8,679 8,679 8,676 8,676 8,671 8,671
Effect of share options issued
-- 50 -- 25 -- 16 -- 17
--------- --------- --------- --------- --------- --------- --------- ---------
Total weighted average shares
outstanding 9,049 9,099 8,679 8,704 8,676 8,692 8,671 8,688
========= ========= ========= ========= ========= ========= ========= =========
Income per share before
extra-ordinary item $ .69 $ .69 $ 1.18 $ 1.18 $ 1.27 $ 1.27 $ 1.29 $ 1.29
Extraordinary item per share
(.03) (.03) -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Net income per share $ .66 $ .66 $ 1.18 $ 1.18 $ 1.27 $ 1.27 $ 1.29 $ 1.29
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
8. BENEFIT PLANS:
During 1995, the Company adopted a 401(k) Plan (the "Plan") in which
substantially all of the officers and employees are eligible to participate. The
period permits eligible participants, as defined in the plan agreement, to defer
up to 15% of their compensation, and the Company, at its discretion, may match a
percentage of the employees' contributions. The employees' contributions are
fully vested and contributions from the Company vest in accordance with an
employee's years of service as defined in the plan agreement. The Company's
contributions to the Plan for the four month period ended December 31, 1997 and
for the fiscal years ended August 31, 1997, 1996 and 1995 were $43,000, $41,000,
$39,000 and $1,000, respectively.
During 1995, the Company also adopted a Supplemental Retirement Plan (the
"Supplemental Plan") covering certain senior management employees. The
Supplemental Plan provides eligible employees through normal retirement date, as
defined in the plan agreement, a benefit amount similar to that which would have
been received under the provisions of a pension plan which was terminated in
1994. Contributions due by the Company under the provisions of this plan were
$11,000, $92,000, $160,000 and $168,000 for the four month period ended December
31, 1997 and for the fiscal years ended August 31, 1997, 1996 and 1995.
17
<PAGE>
9. STOCK OPTION PLANS:
In December 1990, the shareholders approved an incentive stock option plan for
key employees and a stock option plan for nonemployee trustees, covering 200,000
and 100,000 shares of beneficial interest, respectively. Under the terms of the
plans, the purchase price of shares subject to each option granted will be at
least equal to the fair market value of the shares on the date of grant. Options
under the incentive stock option plan may be exercised as determined by the
Company, but in no event later than 10 years from the date of grant. In December
1993, the Board of Trustees amended the incentive stock option plan for key
employees, to increase the number of shares subject to option to 400,000 shares,
to change the name of the plan to "1990 Incentive and Non Qualifying Stock
Option Plan" and to expand some provisions of the plan. The stock option plan
for nonemployee trustees provides for annual grants of 1,000 options (becoming
exercisable in four equal installments). The options expire 10 years after the
date of grant.
In December 1993, the Board of Trustees adopted a nonqualifying stock option
plan covering 100,000 shares. The Company granted options on February 1, 1994
having a term of 10 years and subject to the other terms and conditions set
forth in the plan. All 100,000 shares are outstanding at December 31, 1997.
On September 30, 1997, the Company adopted an Incentive and Non-Qualified Stock
Option Plan (the "1997 Stock Option Plan") in connection with the TRO
Transaction. Options on 455,000 Shares were granted to former TRO officers and
employees on September 30, 1997 at an exercise price of $25.41 per share. All
options granted on September 30, 1997 vest in four equal annual installments
commencing January 1, 1999, and on each anniversary date thereof.
Changes in options outstanding are as follows:
<TABLE>
<CAPTION>
1997 Stock Plan For
Exercise Option Employees Nonemployee
Price Plan Plan Trustees
-------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Options outstanding at 8/31/95 $15.75-$25.375 -- 244,625 35,250
Options granted $20.375-$20.75 -- 50,500 6,000
Options exercised -- -- -- --
------------ -------------- ----------------
Options outstanding at 8/31/96 $15.75-$25.375 -- 295,125 41,250
Options granted $22.375-$24.625 -- 45,000 6,000
Options exercised $15.75-$25.375 -- -- (9,000)
------------ -------------- ----------------
Options outstanding at 8/31/97 $15.75-$25.375 -- 340,125 38,250
Options granted $25.41 455,000 -- --
Options exercised $15.75-$20.375 -- -- (3,750)
------------ -------------- -----------------
Options outstanding at 12/31/97 $15.75-$25.41 455,000 340,125 34,500
============ ============== ================
</TABLE>
At December 31, 1997, options for 223,286 shares of beneficial interest with an
aggregate purchase price of $4,853,000, (average of $21.73 per share) were
exercisable.
18
<PAGE>
During the fourth quarter of 1997, the Board of Trustees extended the exercise
dates for 62,500 options previously granted to an officer of the Company and two
retiring trustees. As a result, the Company recorded compensation expense of
$300,000 for the four month period ended December 31, 1997 relating to this
change in terms.
During fiscal year 1997, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" (SFAS No.
123). SFAS No. 123 encourages a fair value method of accounting for employee
stock options and similar equity instruments. The statement also allows an
entity to continue to account for stock-based compensation using the intrinsic
value method in APB Opinion No. 25. As provided for in the statement, the
Company elected to continue the intrinsic value method of expense recognition.
If compensation cost for these plans had been determined using the fair value
method prescribed by SFAS No. 123, the Company's net income and net income per
share would have reflected the unaudited pro forma amounts indicated below:
<TABLE>
<CAPTION>
For the
Four Month For the Fiscal Years Ended
Period Ended --------------------------------------
December 31, August 31, August 31,
1997 1997 1996
---------------- ------------------ -----------------
------------------------(Unaudited)------------------------
<S> <C> <C> <C>
Net income:
As reported $ 5,962,000 $ 10,235,000 $ 11,044,000
Pro forma $ 5,861,000 $ 10,212,000 $ 11,033,000
Net income per share:
As reported-
Basic $ .66 $ 1.18 $ 1.27
Diluted $ .66 $ 1.18 $ 1.27
Pro forma-
Basic $ .65 $ 1.18 $ 1.27
Diluted $ .65 $ 1.18 $ 1.27
</TABLE>
The pro forma effect on the results may not be representative of the impact in
future years because the fair value method was not applied to options granted
before 1996.
The fair value of each option was estimated on the grant date using the
Black-Scholes option pricing model and the assumptions presented below.
<TABLE>
<CAPTION>
For the
Four Month For the Fiscal Years Ended
Period Ended -------------------------------
December 31, August 31, August 31,
1997 1997 1996
------------ ---------- ----------
<S> <C> <C> <C>
Expected life in years 5 5 5
Risk-free interest rate 6.09% 6.10% 5.58%
Volatility 18.38% 17.31% 18.12%
Dividend yield 7.65% 7.28% 8.90%
</TABLE>
The weighted average fair value of options granted was $2.34, $2.05 and $1.29
for the four month period ended December 31, 1997 and the fiscal years ended
August 31, 1997 and 1996, respectively.
19
<PAGE>
10. OPERATING LEASES:
The Company's apartments are typically leased to residents under operating
leases for a period of one year. The Company's shopping centers are leased to
tenants under operating leases with expiration dates extending to the year 2012.
Future minimum rentals under noncancelable operating leases at December 31, 1997
are as follows:
1998 $ 12,049,000
1999 11,456,000
2000 10,839,000
2001 9,620,000
2002 7,947,000
Thereafter 29,537,000
----------------
$ 81,448,000
================
The total future minimum rentals presented above do not include amounts that may
be received as tenant reimbursements for charges to cover increases in certain
operating costs.
11. COMMITMENTS AND CONTINGENCIES:
During 1995 certain environmental matters arose at certain properties in which
the Company has an interest. The Company retained environmental consultants in
order to investigate these matters. At one property, in which the Company has a
50% ownership interest, groundwater contamination exists which the Company
alleges was caused by the former tenant. Estimates to remediate this property,
which are subject to the length of monitoring and the extent of remediation
required, range in total from $100,000 to $1,000,000. In addition, above normal
radon levels have been detected at two wholly owned properties. The estimated
remaining cost to remediate these properties is approximately $115,000, which
costs were received as a credit from the sellers as part of the initial
acquisition.
The Company has recorded its share of these liabilities totaling $363,000
related to the consultants evaluation of these matters which, in certain
instances, are subject to applicable state approvals of the remediation plans.
In Management's opinion, no material incremental cost will be incurred on these
properties. The Company will pursue recovery of remediation costs from all of
the responsible parties, including its tenants and partners.
12. ACQUISITION:
The Company acquired one property during the fiscal year ended August 31, 1995
for approximately $34,000,000 (including improvements) which was accounted for
by the purchase method. The results of operations for the acquired property has
been included from the respective purchase date. The pro forma financial
information presented within this footnote is not necessarily indicative of the
results which actually would have occurred if the acquisition had been
consummated on September 1, 1994, nor does the pro forma information purport to
represent the results of operations for future periods.
20
<PAGE>
Fiscal Year
Ended
August 31,
1995
-----------------
(Unaudited)
Pro forma total revenues $ 37,815,000
Pro forma net income $ 11,103,000
Basic pro forma net income per common share $ 1.28
Diluted pro forma net income per common share $ 1.28
13. SUBSEQUENT EVENTS:
On January 26, 1998, the Company acquired the remaining 50% interest in a
shopping center under construction located in Newark, Delaware, for a purchase
price of at least $8.7 million consisting of $6 million in cash, $2.7 million to
be paid through the issuance of Operating Partnership (OP) Units upon completion
of the shopping center, and a contingent payment to issue additional OP Units at
completion based on a predetermined formula which calculates the value of the
center.
On May 12, 1998, a partnership in which the Company owns a 50% interest acquired
a shopping center in Springfield, Pennsylvania for $7.3 million in cash of which
the Company's share was approximately $3.7 million.
On July 21, 1998, the Company acquired Foulk Plaza (subsequently renamed
"Brandywood Plaza") located in Wilmington, Delaware for a purchase price of
approximately $4.3 million consisting of $1.3 million in cash and $3.0 million
through the issuance of OP units.
On August 7, 1998, the Company acquired all of the partnership interests in a
partnership that owns The Wood Apartments located in Ambler, Pennsylvania for a
purchase price of approximately $21.2 million consisting of $12.2 million in
cash, $1.7 million paid through the issuance of OP units and $7.3 million
through the assumption of debt.
On August 27, 1998, the Company acquired Festival at Oaklands Shopping Center
(subsequently renamed, "Festival at Exton") located in Exton, Pennsylvania for a
cash purchase price of approximately $17.7 million.
On September 17, 1998, the Company acquired all of the beneficial interests in a
trust that owns Prince Georges Plaza located in Hyattsville, Maryland for a
purchase price of approximately $65.0 million, consisting of $19.0 million in
cash, $3.0 million paid through the issuance of OP units and $43.0 million
through the assumption of debt.
On December 18, 1998, the Company acquired the remaining 50% interest in two
multifamily communities and a parcel of undeveloped land located in Coral
Springs, Florida and Bear, Delaware. The Company paid $775,000 in cash to
acquire the partnership interests and assumed mortgage indebtedness of
approximately $29.8 million.
21
<PAGE>
14. SUMMARY OF QUARTERLY RESULTS (UNAUDITED):
The following presents a summary of the unaudited quarterly financial
information for the three months ended December 31, 1997 and for the fiscal
years ended August 31, 1997 and 1996.
For the three months ended December 31, 1997, revenues totaled $13,831,000, net
income was $5,436,000, income before gains on sales of interests in real estate
was $3,795,000, and gain on sales of interests in real estate totaled
$2,090,000. On a per share basis, net income was $.60 and $.59 per basic and
diluted income share, income before gain on sales of interests in real estate
was $.42 and $.41 per basic and diluted income per share, and gain on sales of
interests in real estate was $.23 for both basic and diluted income per share.
<TABLE>
<CAPTION>
For the Fiscal Year Ended August 31, 1997
(in thousands of dollars, except per share data)
----------------------------------------------------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Revenues $ 10,063 $ 10,186 $ 10,085 $ 10,151 $ 40,485
============ ============ ============ ============ ============
Income before gains (loss) on sales of
interests in real estate $ 2,639 $ 1,520(1) $ 2,785 $ 2,222(2) $ 9,166
Gains (loss) on sales of interests in real
estate -- 1,461 -- (392) 1,069
------------ ------------ ------------ ------------ ------------
Net income $ 2,639 $ 2,981 $ 2,785 $ 1,830 $ 10,235
============ ============ ============ ============ ============
Basic income per share:
Income before gains (loss) on sales of
interests in real estate
$ .30 $ .17 $ .32 $ .26 $ 1.06
Gains (loss) on sales of interests in
real estate -- .17 -- (.05) .12
----------- ----------- ----------- ----------- -----------
Total $ .30 $ .34 $ .32 $ .21 $ 1.18
=========== =========== =========== =========== ===========
Diluted income per share:
Income before gains (loss) on sales
of interests in real estate
$ .30 $ .17 $ .32 $ .26 $ 1.06
Gains (loss) on sales of interests in
real estate -- .17 -- (.05) .12
----------- ----------- ----------- ------------ -----------
Total $ .30 $ .34 $ .32 $ .21 $ 1.18
=========== =========== =========== =========== ===========
</TABLE>
(1) Reflects the recording of a provision for asset impairment (see Note 1) and
the Company's share of prepayment fees relating to the refinancing of
certain debt at partnerships accounted for under the equity method.
(2) Includes additional compensation expense (see Note 9) relating to a change
in the terms of certain stock options previously granted.
22
<PAGE>
<TABLE>
<CAPTION>
For the Fiscal Year Ended August 31, 1997
(in thousands of dollars, except per share data)
----------------------------------------------------------------------------
For the Year Ended August 31, 1996
----------------------------------------------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Revenues $ 9,696 $ 9,667 $ 9,968 $ 9,825 $ 39,156
============ ============ ============ ============ ============
Income before gains on sales of
interests in real estate $ 2,845 $ 2,336 $ 2,625 $ 2,373 $ 10,179
Gains on sales of interests in real estate
-- -- 411 454 865
------------ ------------ ------------ ------------ ------------
Net income $ 2,845 $ 2,336 $ 3,036 $ 2,827 $ 11,044
============ ============ ============ ============ ============
Basis income per share:
Income before gains on sales of
interests in real estate
$ .33 $ .27 $ .30 $ .27 $ 1.17
Gains on sales of interests in
real estate -- -- .05 .05 .10
----------- ----------- ----------- ----------- -----------
Total $ .33 $ .27 $ .35 $ .32 $ 1.27
=========== =========== =========== =========== ===========
Diluted income per share:
Income before gains on sales of
interests in real estate
$ .33 $ .27 $ .30 $ .27 1.17
Gains on sales of interests in
real estate -- -- .05 .05 .10
----------- ----------- ----------- ----------- -----------
Total $ .33 $ .27 $ .35 $ .32 $ 1.27
=========== =========== =========== =========== ===========
</TABLE>
23
<PAGE>
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The TRO Transaction
On September 30, 1997, the Company acquired The Rubin Organization, Inc. ("TRO",
renamed "PREIT-RUBIN, Inc."), a commercial property development and management
firm, and certain related real estate interests (the "TRO Transaction").
As part of the TRO Transaction, the Company acquired Magnolia Mall, located in
Florence, South Carolina, North Dartmouth Mall, located in North Dartmouth,
Massachusetts and a 50% interest in the Court at Oxford Valley, located in
Langhorne, Pennsylvania. The Company also acquired the development rights of
certain affiliates of TRO ("TRO Affiliates"), subject to related obligations, in
Christiana Power Center (Phases I and II), Red Rose Commons and Blue Route
Metroplex. In addition, the Company agreed to acquire the interests of TRO
Affiliates in Hillview Shopping Center and Northeast Tower Center, at prices
based upon a pre-determined formula.
The TRO Transaction was financed through the issuance of 646,286 Class A
Operating Partnership Units in PREIT Associates, L.P. (the "Operating
Partnership"), with a value of approximately $15.1 million, assumption of
mortgage indebtedness at Magnolia Mall of approximately $25.2 million, and $59.9
million of cash. The cash was obtained primarily from borrowings under a new
Credit Facility entered into by the Operating Partnership coincident with the
September 30, 1997 closing of the TRO Transaction, with a group of banks led by
CoreStates Bank, N.A. The obligations of the Operating Partnership under the new
Credit Facility have been guaranteed by the Company.
Liquidity and Capital Resources
Borrowings under the Credit Facility increased from approximately $34 million at
August 31, 1997 to approximately $90 million at September 30, 1997, following
the consummation of the TRO Transaction. On December 23, 1997, the Company sold
4,600,000 common shares of beneficial interest at a price of $22.375 per share.
The net proceeds to the Company from the public offering, after deducting
underwriting discounts and commissions were approximately $97 million. The
Company used the net proceeds to prepay the $8.8 million mortgage loan (8.25%)
secured by Cobblestone Apartments in Pompano Beach, Florida (the "Cobblestone
Mortgage") and to repay approximately $88 million of amounts then outstanding
under the Credit Facility.
At September 30, 1997, the interest rate on the Credit Facility was set at a
margin equal to 1.7% over 30-day LIBOR. As a result of the reduction in the
Company's Leverage Ratio, following the December 1997 public offering, the
interest rate is expected to be reduced by 30 basis points to a margin of 1.4%
over 30-day LIBOR. In addition, the maturity date for the Credit Facility will
be extended from September 30, 1999 to December 31, 2000.
As of December 31, 1997, $10.3 million of borrowings under the Credit Facility
were outstanding ($4.6 million directly by the Operating Partnership and $5.7
million through partnerships and joint ventures) and, subject to the terms and
conditions of the Credit Facility, up to $139.7 million was available to fund
1
<PAGE>
property acquisitions, scheduled debt maturities and other uses. Subsequent to
December 31, 1997, and through December 28, 1998, the Company borrowed
additional amounts under the Credit Facility totaling approximately $134.2
million leaving approximately $5.1 million of amounts available for use. These
borrowings were used to fund various development projects and property
acquisitions during 1998.
On March 20, 1998, the Registrant borrowed $33.7 million under the Credit
Facility to repay the term loan outstanding which matured in March 1998. The
term loan accrued interest at a fixed rate of 8.62% and was secured by three
properties. At December 31, 1997, the interest rate on the Credit Facility was
7.42%.
In addition to amounts due under the Credit Facility, during the next three
years, mortgage loans secured by properties owned by four partnerships in which
the Company has an interest mature by their terms. Balloon payments on these
loans total $17.0 million, of which the Company's proportionate share is $8.5
million.
The Company expects to meet its short-term liquidity requirements generally
through its available working capital and net cash provided by operations. The
Company believes that the net cash provided by operations will be sufficient to
allow the Company to make any distributions necessary to enable the Company to
continue to qualify as a REIT under the Code. The Company also believes that the
foregoing sources of liquidity will be sufficient to fund its short-term
liquidity needs for the foreseeable future, including capital expenditures,
tenant improvements and leasing commissions.
The Company expects to meet certain long-term liquidity requirements including
property acquisitions, scheduled debt maturities, renovations, expansions and
other non-recurring capital improvements through borrowings under the Credit
Facility, long-term secured and unsecured indebtedness and the issuance of
additional equity securities.
Funds from Operations
The White Paper on Funds from Operations approved by the Board of Governors of
NAREIT in March 1995 defines Funds from Operations as net income (loss)
(computed in accordance with GAAP), excluding gains (or losses) from debt
restructuring and sales of properties, plus real estate related depreciation and
amortization and after adjustments for unconsolidated partnerships and joint
ventures. The Company believes that Funds from Operations is helpful to
investors as a measure of the performance of an equity REIT because, along with
cash flow from operating activities, financing activities, and investing
activities, it provides investors with an indication of the ability of the
Company to incur and service debt, to make capital expenditures and to fund
other cash needs. The Company computes Funds from Operations in accordance with
standards established by NAREIT which may not be comparable to Funds from
Operations reported by other REITs that do not define the term in accordance
with the current NAREIT definition or that interpret the current NAREIT
definition differently than the Company. Funds from Operations does not
represent cash generated from operating activities in accordance with GAAP and
should not be considered as an alternative to net income (determined in
accordance with GAAP) as an indication of the Company's financial performance or
to cash flow from operating activities (determined in accordance with GAAP) as a
measure of the Company's liquidity, nor is it indicative of funds available to
fund the Company's cash needs, including its ability to make cash distributions.
2
<PAGE>
Funds from operations (FFO) increased by $1,641,000 for the four months ended
December 31, 1997, as compared to the same period in 1996 were as follows:
<TABLE>
<CAPTION>
Four Months Ended
December 31,
-------------------------------------
Funds from Operations 1997 1996
--------------------- ----------- ------------
<S> <C> <C>
Income before minority interest and extraordinary item $ 6,736,000 $ 4,959,000
Less: Gains on sales of interests in real estate (2,090,000) (1,461,000)
Minority interest in consolidated partnership (80,000) (117,000)
Add:
Depreciation and amortization-
Wholly owned and consolidated partnerships (1) 2,629,000 1,961,000
Unconsolidated partnerships and joint ventures 1,252,000 1,119,000
Excess purchase price over net assets acquired 29,000 --
Refinancing prepayment fees -- 214,000
Less:
Depreciation of non-real estate assets (76,000) (73,000)
Amortization of deferred financing costs (254,000) (97,000)
----------- -----------
Funds from operations $ 8,146,000 $ 6,505,000
=========== ===========
Funds from operations per share and OP Unit (2) $ 0.86 0.75
=========== ===========
</TABLE>
Funds from Operations for each of the previous five fiscal years were as
follows:
<TABLE>
<CAPTION>
For the Fiscal
Years Ended August 31,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ------------ -----------
(in thousands)
<S> <C> <C> <C> <C> <C>
Net income ............................................. $ 10,235 $11,044 $11,225 $ 20,687 $ 14,000
Less: Gains on sales of interests in real estate ...... (1,069) (865) (119) (12,362) (3,875)
Plus: Provision for losses ............................. 500 -- -- 1,795 320
Depreciation and amortization
Wholly owned and consolidated partnerships........ 5,989 5,650 5,044 3,322 2,685
Unconsolidated partnerships and joint ventures.... 3,380 3,334 3,214 3,229 4,119
Refinancing prepayment fees ........................ 1,133 -- -- -- --
Less: Depreciation of non-real estate assets ............ (222) (202) (173) (146) (104)
Amortization of deferred financing costs .......... (286) (333) (228) (108) (275)
-------- ------- ------- --------- --------
Funds from operations ................................. $ 19,660 $18,628 $18,963 $ 16,417 $ 16,870
======== ======= ======= ========= ========
</TABLE>
(1) Net of minority interest of $67,000 and $88,000 in 1997 and 1996,
respectively.
(2) Assuming full conversion of the 646,286 Operating Partnership Units into
shares of the Company. The weighted average effect for the four months ending
December 31, 1997 and 1996 was 484,715 and 0, respectively.
Cash Flows
Net cash provided by operating activities decreased to $4,281,000 from
$4,641,000 for the four months ended December 31, 1997, as compared to the four
months ended December 31, 1996. The decrease is primarily attributable to
additional operating income provided by Magnolia Mall and North Dartmouth Mall
which the Company acquired on September 30, 1997, offset by the prepayment of
real estate taxes in the 1997 period and the timing of other working capital
changes.
Net cash used in investing activities was $57,313,000 for the four months ended
December 31, 1997 as compared to net cash provided by investing activities of
$17,777,000 in the same period last year. Investing activities in the 1997
period includes the cash portion of the purchase price for the retail properties
and development assets acquired in the TRO Transaction of approximately $59
million along with capital expenditures at existing properties of approximately
$1.3 million. Cash provided by investing activities in the 1997 period includes
the Company's share of the cash proceeds from the sale of Gateway Mall in
December 1997 of $3.9 million. Cash provided by financing activities in the 1996
period includes $15.4 million, which represents the Company's share of proceeds
3
<PAGE>
from the refinancing of debt at two properties. In December 1996, the Company
sold its interests in three shopping centers in Pennsylvania and received net
proceeds of $2.1 million. Capital expenditures at existing properties in the
four months ended December 31, 1996 were approximately $1.3 million.
Net cash provided by financing activities was $52,957,000 for the four months
ended December 31, 1997 as compared to net cash used in financing activities of
$16,897,000 for the four months ended December 31, 1996. Financing activities in
the 1997 period included the net proceeds from the sale of 4.6 million shares of
the Company which totaled $96.8 million. The proceeds from the public offering
were used to repay outstanding borrowings under the Credit Facility of
approximately $29.3 million and to repay an $8.8 million mortgage loan.
Financing activities in the 1996 period included net repayments of bank loans
totaling $12.4 million and normal amortization of mortgage debt. Distributions
paid to shareholders were approximately $4.1 million in both periods.
Net cash provided by operating activities increased by approximately 1% to $15.2
million for the year ended August 31, 1997 as compared to $15.1 million the same
period last year. Operating cash flow was higher primarily as a result of timing
of collections of receivables.
Net cash provided by investing activities was $7.7 million for the year ended
August 31, 1997 as compared to $0.9 million in the same period last year. For
the year ended August 31, 1997, the Company refinanced two properties and
received $15.4 million, sold interests in four shopping centers and received
proceeds of $2.1 million, invested $6.2 million in real estate and incurred
deposits to acquire real estate of $5.3 million. For the year ended August 31,
1996, the Company sold two properties and received net cash proceeds of $5.2
million.
Net cash used in financing activities increased by 40% to $22.6 million for the
year ended August 31, 1997 as compared to $16.1 million in the same period last
year. Financing activities included a $5.4 million reduction in bank loans
payable and distributions paid to shareholders of $16.3 million. Financing
activities in 1996 included proceeds of a mortgage note payable on Shenandoah
Village Apartments of $8.8 million, a $5.0 million reduction in bank loans
payable and distributions paid to shareholders of $16.3 million.
Results of Operations
Four Month Periods Ended December 31, 1997 and 1996
Gross revenues from real estate increased by $3,881,000 to $17,170,000 for the
four month period ended December 31, 1997 as compared to the same period in the
prior year. The 1997 period included $3,540,000 of revenues attributable to
Magnolia Mall and North Dartmouth Mall which the Company acquired on September
30, 1997. Revenues from properties owned during both periods increased by
$341,000 primarily as a result of an increase in apartment revenues.
Operating expenses increased by $1,400,000 to $6,835,000 The 1997 period
included $1,326,000 of expenses attributable to Magnolia Mall and North
Dartmouth Mall which the Company acquired on September 30, 1997. Operating
expenses from properties owned during both periods increased by $74,000.
Depreciation and amortization increased by $646,000 to $2,695,000 primarily as a
result of the addition of the Magnolia Mall and North Dartmouth Mall properties
($407,000), and increased amortization of financing costs of approximately
$135,000.
4
<PAGE>
Interest expense increased by $1,229,000 to $4,349,000 as a result of interest
on borrowings against the Company's Credit Facility for acquisitions and working
capital needs.
Equity in income of partnerships and joint ventures increased by $335,000 to
$2,101,000 primarily as a result of the Company's purchase of a 50% interest in
Oxford Valley Road Associates on September 30, 1997 ($113,000). The 1996 period
includes a prepayment penalty in the amount of $214,000 due to the refinancing
of debt at Lehigh Valley Mall. The 1996 period also included income from
properties sold during 1996 in the amount of $66,000. Income from properties
owned during both periods increased by $74,000.
Equity in income of PREIT-RUBIN, Inc. for the 1997 period was $260,000.
The gain on the sale of interest in real estate of $2,090,000 in the 1997 period
relates to the sale of the Company's 60% interest in Gateway Mall, St.
Petersburg, Florida. The prior year gains of $1,461,000 consist of the sale of
the Company's 50% interest in three shopping centers in Pennsylvania.
Minority interest increased by $357,000 to $474,000 as a result of the Class A
OP units issued in connection with the TRO transaction.
Extraordinary loss of $300,000 is due to the write-off of remaining deferred
financing costs following the early extinguishment of the Company's previous
credit facility.
Net income for the four months ended December 31, 1997 increased to $5,962,000
from $4,842,000 as reported in the comparable period in the prior year.
Fiscal 1997 Compared With Fiscal 1996
Gross revenues from real estate for the fiscal year ended August 31, 1997
increased by 3% to $40.2 million from $39.0 million in the prior year. The 1997
period included $0.4 million of revenues attributable to Forestville Plaza in
which the Company acquired its partners' remaining 25% interest in the prior
fiscal year. The 1996 period included $0.5 million of revenues attributable to
Chateau Apartments which the Company sold in June 1996. Revenues from
properties owned during both periods increased by $1.0 million primarily as a
result of increases in apartment revenues.
Operating expenses for the fiscal year ended August 31, 1997 increased 1%
to $16.3 million from $16.1 million in the prior year. The 1997 period included
$0.2 million of expenses attributable to Forestville Plaza in which the Company
acquired its partners' remaining 25% interest in the prior fiscal year. The
1996 period included $0.3 million of expenses attributable to Chateau
Apartments which the Company sold. Operating expenses from properties owned
during both periods increased by $0.3 million.
Depreciation and amortization for the fiscal year ended August 31, 1997
increased by 7% to $6.3 million from $5.9 million in 1996, primarily as a
result of ongoing capital expenditures in apartments.
General and administrative expenses increased by 6% to $3.3 million from
$3.1 million in 1996, primarily as a result of costs associated with litigation
with a partner.
Mortgage and bank loan interest expense decreased by 8% to $9.1 million
from $9.8 million in 1996, primarily as a result of decreased borrowing against
the Company's credit facility.
In fiscal year 1996, a partnership in which the Company has a 50% interest
signed an option to sell a parcel of land at a stipulated price, subject to the
buyer's obtaining certain zoning variance approvals. In fiscal year 1997, the
option expired. As a result, management revised its estimate of the property's
selling price and recorded a $0.5 million provision for investment losses to
reduce the property held for sale to its estimated net realizable value.
5
<PAGE>
Equity in income of partnerships and joint ventures decreased in the
fiscal year ended August 31, 1997, by 32% to $4.3 million from $6.3 million in
1996, primarily as a result of an increase in mortgage interest expense of $2.9
million ($1.8 million of which was the Company's proportional share). The
increase in partnership mortgage interest expense is attributable to prepayment
fees of $1.9 million ($1.1 million of which was the Company's proportional
share) in connection with refinancings, as well as additional interest expense
associated with the refinancings, of Regency Apartments, Lehigh Valley Mall and
Cambridge Hall Apartments in 1997. In addition, equity in income from
properties owned during both periods exclusive of the increase in mortgage
interest mentioned above increased by $0.5 million.
Net income for the fiscal year ended August 31, 1997 before gains on sales
of interests in real estate decreased 10% to $9.2 million from $10.2 million for
the comparable period in 1996. In fiscal year 1997, net gains on the sales of
interests in real estate were $1.1 million, as compared to $0.9 million in 1996.
The net gains on sales of interests in real estate of $1.1 million in 1997
consisted of gains on the sale of the Company's joint venture interest in
shopping centers in Lancaster, Beaver Falls and Waynesburg, PA of $1.5 million,
offset by a loss on the sale of a shopping Center in Margate, FL of $0.4
million. The gains in 1996 totaling $0.9 million were derived from the sale of
land in Bucks County, PA and the sale of the Chateau Apartments in Midland, TX.
In 1997, net income was reduced by an accounting provision of $0.5 million for
losses on land held for sale in the Company's investment portfolio and
prepayment fees of $1.9 million paid in connection with refinancing of two
partnership properties, the Company's share of which was $1.1 million.
Fiscal 1996 Compared With Fiscal 1995
Gross revenues from real estate for the fiscal year ended August 31, 1996
increased by 5% to $39.0 million from $37.0 million in 1995. The increase is
due primarily to an increase in revenues of $1.2 million from the Boca Palms
Apartments, which was acquired in November 1994 and $0.4 million from
Forestville Plaza which became wholly owned during the year. Exclusive of Boca
Palms Apartments and Forestville Plaza, revenues from properties owned during
both periods increased 2% to $33.7 in 1996 from $33.1 million in 1995.
Operating expenses in the fiscal year ended August 31, 1996 increased by
8% to $16.1 million from $14.9 million in 1995. The increase is due primarily
to $0.4 million of increased expenses from the Boca Palms Apartments,
approximately $0.2 million of additional operating expenses as a result of the
harsh winter weather in the Mid-Atlantic region and $0.1 million attributable
to the increased ownership of Forestville Plaza.
Depreciation and amortization increased by 13% to $5.9 million from $5.3
million in 1995, primarily as a result of the acquisition of Boca Palms, the
remaining interest in Forestville Plaza, and ongoing capital expenditures.
Interest expense increased by 11% to $9.9 million from $8.9 million in 1995 as
a result of increased borrowings to finance the Boca Palms acquisition and for
general corporate purposes.
For fiscal year ended August 31, 1996, $0.7 million was charged against
the allowance for investment losses, $0.3 million for carrying costs for land
held for sale, and $0.4 million of development expenses incurred at Crest
Plaza, Allentown, Pennsylvania, for a potential expansion of the shopping
center, including a Caldor store. The lease with Caldor was canceled and the
cost was written off following a bankruptcy declaration by Caldor.
Equity in income of partnerships and joint ventures decreased by 2% to
$6.3 million from $6.4 million in 1995, primarily as a result of a
non-recurring lease termination fee received from a shopping center tenant in
the amount of $0.2 million for fiscal year 1995. The Company's share of
partnership and joint venture income in 1996 was also reduced by approximately
$0.1 million as compared to the prior year due to higher operating expenses
resulting from the harsh winter weather discussed earlier.
Net income for the fiscal year ended August 31, 1996, before gains on
sales of interests in real estate, decreased by 8% to $10.2 million from $11.1
million for the comparable period in 1995. In the 1996 period, the gains on the
sales of interests in real estate were $0.9 million as compared to the 1995
period which included a gain on sale of interest in real estate of $0.1
million. Net income was reduced by an increase in operating expenses of $0.3
million primarily due to winter conditions in the Mid-Atlantic region and the
receipt in the prior year of $0.2 million as a non-recurring termination fee
from a shopping center tenant.
6
<PAGE>
Year 2000 Issue
Many existing computer programs use only two digits to identify a year in the
date field. Those programs were designed and developed at a time when data
storage was expensive, and the impact of the upcoming century change was not
considered. If not corrected, many programs may fail or provide inaccurate
results at the turn of the century. The Company uses information systems and
control systems which may be affected by the two digit date.
The Company has established a Year 2000 Remediation Plan consisting of the
following phases: inventorying systems and devices (including information
technology ("IT") and non-IT systems) that are vulnerable to the Year 2000
problem, assessment of the criticality of the inventoried items, remediation of
the non compliant items, and testing of the corrections that have been applied.
The Company has completed the first phase of its Remediation Plan for IT systems
and has determined that all mission critical systems are Year 2000 compliant. In
addition, the Company has begun the first phase of its Remediation Plan for its
non-IT systems (such as elevators, HVAC and lighting systems) and is currently
completing an inventory of non-IT systems and assessing the potential risks of
noncompliance. The amount of remediation effort is not anticipated to be
extensive due to the Company's use of readily available, off-the-shelf software
and hardware products that are supported by the manufacturers. After evaluating
the Company's required compliance efforts, appropriate contingency plans will be
developed based on the outcome of the assessment phase and the survey of its
major suppliers. The Company expects to complete the Year 2000 Remediation Plan,
including final testing by the beginning of the fourth quarter of 1999. Business
partners, suppliers and tenants are also being surveyed relative to their Year
2000 compliance to mitigate the potential impact of Year 2000 issues.
Management has determined the approximate total cost of its Year 2000
Remediation Plan and the potential related impact on operations. Amounts
incurred to date have been less than $100,000 and the estimated remaining
expenses of Year 2000 remediation are also expected to be less than $100,000.
All costs related to Year 2000 remediation are expensed as incurred.
Although the Company believes its Year 2000 Remediation Plan is adequate to
address the Year 2000 issue, there can be no assurance to that effect. If the
required remediation efforts are not made, or are not completed timely, the Year
2000 issue could have a material impact on the operations of the Company.
Inflation
Inflation can have many effects on the financial performance of the Company.
Shopping center leases often provide for the payment of rents based on a
percentage of sales which may increase with inflation. Leases may also require
tenants to bear all or a portion of operating expenses, which may reduce the
impact of expense increases on the Company. Apartment leases normally provide
for a one-year term, which may allow the Company to seek increased rents as
leases are renewed or when new tenants are obtained.
7
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
For the Four
Month Period For the Fiscal Years Ended August 31,
Ended -------------------------------------------------------------------
December 31, 1997 1997 1996 1995 1994 1993
----------------- ----------- ----------- ----------- ----------- -----------
(amounts in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Revenues:
Gross revenues from real estate ...... $17,170 $40,231 $38,985 $36,978 $27,640 $21,083
Interest and other income ............ 82 254 171 176 274 542
-------- -------- -------- -------- -------- --------
Total revenues ...................... 17,252 40,485 39,156 37,154 27,914 21,625
Expenses:
Property operating expenses ......... 6,835 16,289 16,102 14,859 11,758 8,959
Depreciation and amortization ......... 2,695 6,259 5,908 5,286 3,541 2,784
General and administrative
expenses ............................ 1,088 3,324 3,119 3,091 2,528 1,873
Interest expense ...................... 4,349 9,086 9,831 8,908 4,162 2,222
Provision for losses on investments -- 500 -- -- 1,795 320
-------- -------- -------- -------- -------- --------
Total expense ..................... 14,967 35,458 34,960 32,144 23,784 16,158
-------- -------- -------- -------- -------- --------
Income before equity in unconsolidated
entities, gains on sales of interests in
real estate, minority interest and
extraordinary item ................... 2,285 5,027 4,196 5,010 4,130 5,467
Equity in income of partnerships and
joint ventures ...................... 2,101 4,337 6,258 6,381 4,416 4,750
Equity in loss of PREIT-RUBIN, Inc. ... 260 -- -- -- -- --
Gains on sales of interests in real
estate .............................. 2,090 1,069 865 119 12,362 3,875
Minority interest ..................... (474) (198) (275) (285) (221) (92)
Extraordinary loss ..................... (300) -- -- -- -- --
-------- -------- -------- -------- -------- --------
Net income ........................... $ 5,962 $10,235 $11,044 $11,225 $20,687 $14,000
======== ======== ======== ======== ======== ========
Basic Income Per Share Results:
Income before gains on sales of
interests in real estate and
extraordinary item ................... $.46 $1.06 $1.17 $1.28 $ .96 $1.17
Gains on sales of interests in real
estate .............................. .23 .12 .10 .01 1.43 .45
Extraordinary item ..................... (.03) -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Net income ........................... $.66 $1.18 $1.27 $1.29 $2.39 $1.62
========= ========= ========= ========= ========= =========
Weighted average number of shares
outstanding (1) ..................... 9,049 8,679 8,676 8,671 8,664 8,643
========= ========= ========= ========= ========= =========
Diluted Income Per Share Results:
Income before gains on sales of
interests in real estate and
extraordinary item .................... $.46 $1.06 $1.17 $1.28 $.96 $1.17
Gains on sales of interest in real
estate .23 .12 .10 .01 1.42 0.45
Extraordinary item ..................... (.03) -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Net income ............................. $.66 $1.18 $1.27 $1.29 $2.38 $1.62
======== ======== ======== ======== ======== ========
Weighted average number of shares
outstanding(1) ........................ 9,099 8,704 8,692 8,688 8,679 8,659
======== ======== ======== ======== ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
For the Four For the Fiscal
Month Period Year Ended
Ended August 31,
December 31, -------------
1997 1997
---------------- -------------
(amounts in thousands, except
per share data)
<S> <C> <C>
Balance Sheet Data
(at end of period):
Investments in real estate, at cost ...... $ 287,926 $ 202,443
Total assets. ........................... 265,566 165,657
Total debt .............................. 103,939 117,412
Minority interest ........................ 15,805 540
Shareholder's equity ..................... 138,530 40,899
Other Data:
Cash flows from operating activities....... 4,281 15,219
Cash flows from investing activities....... (57,313) 7,749
Cash flows from financing activities....... 52,957 (22,599)
Funds from operations (2) ............... 8,146 19,660
EBITDA (3). .............................. 14,741 35,169
<CAPTION>
For the Fiscal Years Ended August 31,
----------------------------------------------------------
1996 1995 1994 1993
------------- ------------- ------------- -------------
(amounts in thousands, except per share data)
<S> <C> <C> <C> <C>
Balance Sheet Data
(at end of period):
Investments in real estate, at cost ...... $ 198,542 $ 195,929 $ 154,281 $ 112,262
Total assets. ........................... 177,725 181,336 142,495 107,854
Total debt .............................. 124,148 122,518 80,155 51,929
Minority interest ........................ 542 528 408 331
Shareholder's equity ..................... 46,505 51,771 56,748 51,852
Other Data:
Cash flows from operating activities ...... 15,090 16,672 15,909 13,034
Cash flows from investing activities ...... 933 (40,082) (18,524) (38,683)
Cash flows from financing activities ...... (16,091) 22,356 3,305 25,913
Funds from operations (2) ............... 18,628 18,963 16,417 16,870
EBITDA (3). .............................. 34,423 33,936 24,854 27,161
</TABLE>
- ------------
(1) Weighted average number of shares outstanding excludes shares issuable upon
conversion of outstanding Operating Partnership ("OP") units and includes
the dilutive effect of outstanding options. Income allocable to holders of
OP units is included in minority interest.
(2) The White Paper on Funds from Operations approved by the Board of Governors
of NAREIT in March 1995 defines Funds from Operations as net income (loss)
(computed in accordance with GAAP), excluding gains (or losses) from debt
restructuring and sales of properties, plus real estate related
depreciation and amortization and after adjustments for unconsolidated
partnerships and joint ventures. The Company believes that Funds from
Operations is helpful to investors as a measure of the performance of an
equity REIT because, along with cash flows from operating activities,
financing activities, and investing activities, it provides investors with
an indication of the ability of the Company to incur and service debt, to
make capital expenditures and to fund other cash needs. The Company
computes Funds from Operations in accordance with standards established by
NAREIT which may not be comparable to Funds from Operations reported by
other REITs that do not define the term in accordance with the current
NAREIT definition or that interpret the current NAREIT definition
differently than the Company. Funds from Operations does not represent
cash generated from operating activities in accordance with GAAP and
should not be considered as an alternative to net income (determined in
accordance with GAAP) as an indication of the Company's financial
performance or to cash flow from operating activities (determined in
accordance with GAAP) as a measure of the Company's liquidity, nor is it
indicative of funds available to fund the Company's cash needs, including
its ability to make cash distributions.
(3) EBITDA is defined as operating income before interest expense, income
taxes, depreciation and amortization. The Company believes EBITDA is
useful to investors as an indicator of the Company's ability to service
debt and pay cash distributions. EBITDA, as calculated by the Company, may
not be comparable to EBITDA reported by other REITs that do not define
EBITDA exactly as the Company defines the term. EBITDA does not represent
cash generated from operating activities determined in accordance with
GAAP and should not be considered as an alternative to operating income or
net income determined in accordance with GAAP as an indicator of
performance or as an alternative to cash flows from operating activities
as an indicator of liquidity.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000077281
<NAME> PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
<CURRENCY> DOLLARS
<S> <C>
<PERIOD-TYPE> 4-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> SEP-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 1,324,000
<SECURITIES> 0
<RECEIVABLES> 32,626,000
<ALLOWANCES> 1,770,000
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 286,557,000
<DEPRECIATION> 53,171,000
<TOTAL-ASSETS> 265,566,000
<CURRENT-LIABILITIES> 23,097,000
<BONDS> 103,939,000
0
0
<COMMON> 13,289,000
<OTHER-SE> 125,241,000
<TOTAL-LIABILITY-AND-EQUITY> 265,566,000
<SALES> 17,170,000
<TOTAL-REVENUES> 21,229,000
<CGS> 0
<TOTAL-COSTS> 10,618,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,349,000
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 6,262,000
<DISCONTINUED> 0
<EXTRAORDINARY> 300,000
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> .66
<EPS-DILUTED> .66
</TABLE>
