<PAGE>
- ------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[ ] Quarterly Report Pursuant To Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended
---------------------------------------------
[X] Transition Report Pursuant To Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from September 1, 1997 to December 31, 1997
------------------------- -----------------
Commission File Number 1-6300
-----------------------------------------------------
Pennsylvania Real Estate Investment Trust
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Pennsylvania 23-6216339
- ---------------------------------------------------------------- ------------------------------------
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
455 Pennsylvania Avenue, Suite 135, Ft. Washington, PA 19034
- ---------------------------------------------------------------- ------------------------------------
(Address of principal executive office) (Zip Code)
</TABLE>
Registrant's telephone number, including area code (215) 542-9250
----------------------------
N/A
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the last 90 days. Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares of beneficial interest outstanding at December 31, 1997: 13,288,848
- ------------------------------------------------------------------------------
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This report includes a total of 18 pages.
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<PAGE>
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I. Financial Information
Financial Statements (Unaudited):
Consolidated Balance Sheets--December 31, 1997 and August 31, 1997 (audited) 1-2
Consolidated Statements of Income--Four Months
Ended December 31, 1997 and 1996 3
Consolidated Statements of Cash Flows--Four Months
Ended December 31, 1997 and 1996 4
Notes to Consolidated Financial Statements 5-9
Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-14
Part II. Other Information
Item 1. Legal Proceedings 15
Item 2. Not Applicable --
Item 3. Not Applicable --
Item 4. Submission of Matters to a Vote of Security Holders 15-16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
</TABLE>
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED BALANCE SHEETS
(Note 1)
ASSETS
<TABLE>
<CAPTION>
December 31, August 31,
1997 1997
------------------ ------------------
(Unaudited)
<S> <C> <C>
INVESTMENTS IN REAL ESTATE, at cost:
Multifamily properties $ 161,270,000 $ 159,967,000
Industrial properties 5,078,000 5,078,000
Retail properties 120,209,000 37,398,000
------------------ ------------------
Total investments in real estate 286,557,000 202,443,000
Less- Accumulated depreciation 53,171,000 50,711,000
------------------ ------------------
233,386,000 151,732,000
PROPERTY UNDER DEVELOPMENT 1,369,000 --
INVESTMENT IN PREIT-RUBIN 4,853,000 --
INVESTMENTS IN PARTNERSHIPS AND JOINT VENTURES, at equity (Note 3)
14,505,000 1,039,000
ADVANCES TO PREIT-RUBIN (Note 2) 3,413,000 --
------------------ -----------------
257,526,000 152,771,000
Less- Allowance for possible losses 1,770,000 1,831,000
------------------ ------------------
255,756,000 150,940,000
OTHER ASSETS:
Cash and cash equivalents 1,324,000 1,399,000
Rents and sundry receivables 441,000 590,000
Deferred costs, prepaid real estate
taxes and expenses, net 8,045,000 7,393,000
Deposits on properties -- 5,335,000
------------------ ------------------
$ 265,566,000 $ 165,657,000
================== ==================
</TABLE>
The accompanying notes are an integral part of these statements.
(Continued)
-1-
<PAGE>
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Note 1)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31, August 31,
1997 1997
----------------- ----------------
(Unaudited)
<S> <C> <C>
LIABILITIES:
Mortgage notes payable $ 99,364,000 $ 83,528,000
Bank and other loans payable 4,575,000 33,884,000
Tenants' deposits and deferred rents 1,317,000 1,346,000
Accrued pension and retirement benefits 1,011,000 1,091,000
Accrued expenses and other liabilities 4,964,000 4,369,000
----------------- ----------------
111,231,000 124,218,000
------------------ -----------------
MINORITY INTEREST (Note 3) 15,805,000 540,000
----------------- ----------------
COMMITMENTS AND CONTINGENCIES (Note 7)
SHAREHOLDERS' EQUITY (Note 5):
Shares of beneficial interest, $1 par; authorized unlimited; issued and
outstanding 13,288,848 shares at December 31, 1997 and 8,685,098
shares at August 31, 1997 13,289,000 8,685,000
Capital contributed in excess of par 144,746,000 53,599,000
Distributions in excess of net income (19,505,000) (21,385,000)
----------------- ----------------
138,530,000 40,899,000
----------------- ----------------
$ 265,566,000 $ 165,657,000
================= ================
</TABLE>
The accompanying notes are an integral part of these statements.
-2-
<PAGE>
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF INCOME
(Note 1)
(Unaudited)
<TABLE>
<CAPTION>
Four Months Ended
December 31,
----------------------------------
1997 1996
---------------- ----------------
<S> <C> <C>
REVENUES:
Gross revenues from real estate $ 17,170,000 $ 13,289,000
Interest and other income 82,000 108,000
---------------- ----------------
17,252,000 13,397,000
---------------- ----------------
EXPENSES:
Property operating expenses 6,835,000 5,435,000
Depreciation and amortization 2,695,000 2,049,000
General and administrative expenses 1,088,000 1,061,000
Interest expense 4,349,000 3,120,000
---------------- ----------------
14,967,000 11,665,000
---------------- ----------------
Income before equity in unconsolidated
entities, gains on sales of interests in real estate,
minority interest and extraordinary item 2,285,000 1,732,000
EQUITY IN INCOME OF PREIT-RUBIN (Note 2) 260,000 --
EQUITY IN INCOME OF PARTNERSHIPS AND JOINT VENTURES (Note 3)
2,101,000 1,766,000
GAINS ON SALE OF INTERESTS IN REAL ESTATE 2,090,000 1,461,000
---------------- ----------------
Income before minority interest and
extraordinary item 6,736,000 4,959,000
MINORITY INTEREST (474,000) (117,000)
---------------- ----------------
INCOME BEFORE EXTRAORDINARY ITEM 6,262,000 4,842,000
EXTRAORDINARY ITEM -- LOSS ON EARLY EXTINGUISHMENT OF DEBT
(300,000) --
---------------- ----------------
NET INCOME $ 5,962,000 $ 4,842,000
================ ================
BASIC INCOME PER SHARE (Note 4) $ .66 $ .56
================ ===============
DILUTED INCOME PER SHARE (Note 4) $ .66 $ .56
================ ===============
</TABLE>
The accompanying notes are an integral part of these statements.
-3-
<PAGE>
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(NOTES 1 AND 6)
<TABLE>
<CAPTION>
Four Months Ended
December 31,
-------------------------------------------
1997 1996
----------------- -----------------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,962,000 $ 4,842,000
Adjustments to reconcile net income to net cash
provided by operating activities-
Minority interest 474,000 117,000
Depreciation and amortization 2,695,000 2,049,000
Gains on sales of interests in real estate (2,090,000) (1,461,000)
Loss on early extinguishment of debt 300,000 --
Equity in income of PREIT-RUBIN (260,000) --
Decrease in allowance for possible losses (61,000) (59,000)
Change in assets and liabilities-
Rents and sundry receivables 149,000 316,000
Deferred costs, prepaid real estate taxes and expenses (3,075,000) (253,000)
Accrued pension and retirement benefits (80,000) (137,000)
Accrued expenses and other liabilities 296,000 (676,000)
Tenants' deposits and deferred rents (29,000) (97,000)
----------------- -----------------
Net cash provided by operating activities 4,281,000 4,641,000
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in wholly owned real estate (47,972,000) (1,292,000)
Investment in property under development (1,246,000) --
Investments in partnerships and joint ventures (9,947,000) (159,000)
Investment in and advances to PREIT-RUBIN (1,448,000) --
Cash distributions from partnerships and joint ventures
in excess of (less than) equity in income (518,000) 16,111,000
Cash proceeds from sales of interests in partnerships 3,862,000 2,068,000
Decrease in notes receivable -- 1,127,000
Cash distributions to minority partners (44,000) (78,000)
----------------- -----------------
Net cash provided by (used in) investing activities (57,313,000) 17,777,000
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal installments on mortgage notes payable (9,318,000) (448,000)
Repayment of bank loans payable (29,309,000) (12,403,000)
Payment of deferred financing costs (859,000) --
Shares of beneficial interest issued 96,829,000 33,000
Distributions paid to shareholders (4,082,000) (4,079,000)
Distributions paid to OP Unit holders (304,000) --
----------------- ----------------
Net cash provided by (used in) financing activities 52,957,000 (16,897,000)
----------------- -----------------
NET INCREASE IN CASH AND CASH EQUIVALENTS (75,000) 5,521,000
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,399,000 1,030,000
----------------- -----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,324,000 $ 6,551,000
================= =================
</TABLE>
The accompanying notes are an integral part of these statements.
-4-
<PAGE>
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOUR MONTHS ENDED DECEMBER 31, 1997 AND 1996
1. BASIS OF PRESENTATION:
On October 14, 1997, the Registrant filed a Form 8-K announcing its intention
to change their fiscal year-end from August 31 to December 31. As such, the
consolidated financial statements herein include the Registrant's results for
the period September 1, 1997 through December 31, 1997 and the comparable
prior period.
The consolidated financial statements have been prepared by the Registrant,
without audit, except as to the balance sheet as of August 31, 1997, pursuant
to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Registrant believes that the disclosures are
adequate to make the information presented not misleading. It is suggested
that these consolidated financial statements be read in conjunction with the
audited financial statements and the notes thereto included in the
Registrant's latest annual report on Form 10-K. In the opinion of the
Registrant, all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the consolidated financial position and the
consolidated results of its operations and its cash flows, have been included.
The results of operations for such interim periods are not necessarily
indicative of the results for the full year.
2. THE TRO TRANSACTION:
On September 30, 1997, the Registrant completed a series of related
transactions pursuant to which the Registrant: (i) transferred substantially
all of its real estate interests to a newly formed operating partnership (the
"Operating Partnership"), of which the Registrant is the sole general partner;
(ii) the Operating Partnership acquired all of the non-voting 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, both of which are currently under construction, 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.
-5-
<PAGE>
All of the acquisitions described above have been recorded by the Registrant
using the purchase method of accounting. The Registrant accounts for its
non-controlling investment in PREIT-RUBIN, Inc. using the equity method. The
excess of 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>
Invesment 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>
3. INVESTMENTS IN PARTNERSHIPS AND JOINT VENTURES:
The following table presents summarized financial information as to the
Registrant's equity in the assets and liabilities of 22 partnerships and joint
ventures and 3 properties under development at December 31, 1997 and 22
partnerships and joint ventures at August 31, 1997, and the Registrant's
equity in income for the four months ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
December 31, August 31,
ASSETS 1997 1997
------------------ ------------------
(Unaudited)
<S> <C> <C>
Investments in real estate, at cost:
Multifamily properties $ 108,236,000 $ 107,604,000
Industrial property 1,275,000 1,264,000
Retail properties 160,684,000 117,960,000
Properties under development 7,378,000 --
Land 4,446,000 4,446,000
------------------ ------------------
Total investments in real estate 282,019,000 231,274,000
Less- Accumulated depreciation 71,155,000 71,938,000
------------------ ------------------
210,864,000 159,336,000
Cash and cash equivalents 8,442,000 6,031,000
Deferred costs, prepaid real estate taxes and other, net 20,469,000 8,528,000
------------------ ------------------
Total assets 239,775,000 173,895,000
------------------ ------------------
</TABLE>
-6-
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND PARTNERS' EQUITY
<S> <C> <C>
Mortgage notes payable $ 213,018,000 $ 162,097,000
Bank loans payable 6,724,000 8,770,000
Due to the Trust 3,371,000 3,118,000
Other liabilities 7,601,000 4,341,000
------------------ ------------------
Total liabilities 230,714,000 178,326,000
------------------ ------------------
Net equity (deficit) 9,061,000 (4,431,000)
Partners' share (5,444,000) (5,470,000)
------------------ ------------------
Investment in partnerships and joint ventures $ 14,505,000 $ 1,039,000
================== ==================
</TABLE>
EQUITY IN INCOME OF PARTNERSHIPS AND JOINT VENTURES
<TABLE>
<CAPTION>
Four Months Ended
December 31,
--------------------------------------
1997 1996
------------------ ------------------
(Unaudited)
<S> <C> <C>
Gross revenues from real estate $ 19,258,000 $ 17,997,000
------------------ ------------------
Expenses:
Property operating expenses 7,122,000 7,060,000
Mortgage and bank loan interest 5,205,000 4,999,000
Depreciation and amortization 2,609,000 2,307,000
------------------ ------------------
14,936,000 14,366,000
------------------ ------------------
4,322,000 3,631,000
Partners' share (2,221,000) (1,865,000)
------------------ ------------------
Equity in income of partnerships and joint ventures $ 2,101,000 $ 1,766,000
================== ==================
</TABLE>
One partnership, Emerald Point, in which the Registrant is a general partner
and has control as provided in the partnership agreement, has been
consolidated for financial statement presentation. All of the assets and
liabilities of such partnership are included in the consolidated financial
statements at 100%. The minority partner's interest is 35%.
-7-
<PAGE>
4. EARNINGS PER SHARE:
In 1997, the Registrant adopted SFAS No. 128, "Earnings Per Share." The
adoption of this statement had no impact on previously reported earnings per
share for 1996.
<TABLE>
<CAPTION>
For the Four Months Ended
December 31, 1997
---------------------------------------------
Per Share
Income Shares Amount
------------- ------------- ------------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Income before extraordinary item $ 6,262,000 $ .69
Extraordinary item (300,000) (.03)
------------- ------------
Net income $ 5,962,000 9,024,719 $ .66
============= ============= ============
DILUTED EARNINGS PER SHARE:
Income before extraordinary item $ 6,262,000 9,024,719 $ .69
Share options issued -- 24,404 --
Extraordinary item (300,000) -- (.03)
------------- ------------- ------------
Net income $ 5,962,000 9,049,123 $ .66
============= ============= ============
</TABLE>
<TABLE>
<CAPTION>
For the Four Months Ended
December 31, 1996
---------------------------------------------
Per Share
Income Shares Amount
------------- ------------- ------------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Net income $ 4,842,000 8,676,000 $ .56
============= ============= ============
DILUTED EARNINGS PER SHARE:
Net income $ 4,842,000 8,676,000
Share options issued -- 16,497
------------- -------------
$ 4,842,000 8,692,497 $ .56
============= ============= ============
</TABLE>
5. DISTRIBUTIONS:
The per-share amount declared at the date of this report and the per-share
amount declared in the comparable period for distribution are as follows:
<TABLE>
<CAPTION>
Amount
Per
Date Declared Record Date Payment Date Share
----------------- ---------------- ----------------- ----
<S> <C> <C> <C>
January 12, 1998 February 27, 1998 March 16, 1998 $.47
December 20, 1996 January 31, 1997 February 18, 1997 $.47
</TABLE>
6. CASH FLOW INFORMATION:
Cash paid for interest was $4,165,000 (net of capitalized interest of
$247,000) and $3,125,000 for the four months ended December 31, 1997 and 1996,
respectively.
-8-
<PAGE>
7. COMMITMENTS AND CONTINGENCIES:
Environmental matters have arisen at certain properties in which the
Registrant has an interest for which reserves have previously been
established. In management's opinion, no incremental cost will be incurred on
these properties.
The Registrant has been named as a defendant in a suit brought by persons and
their affiliates who are partners of the Registrant in three partnerships. The
Registrant is vigorously defending the suit and has denied the plaintiffs'
allegations. The Registrant also believes that it has viable claims against
certain of the same partners (or their affiliates) which it is asserting. As
the pleadings are not yet closed and discovery is ongoing, it is not possible
to judge the ultimate outcome of these suits at this time. However, management
does not believe that resolution of these matters will have a material adverse
effect on the Registrant's financial condition or results of operations.
8. SUBSEQUENT EVENT:
On January 26, 1998, the Registrant 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.
-9-
<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 Registrant 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 Registrant 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 Registrant 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 Registrant agreed to acquire the
interests of TRO Affiliates in Hillview Shopping Center and Northeast Tower
Center, both of which are currently under construction, 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"), 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 Registrant.
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
Registrant sold 4,600,000 common shares of beneficial interest at a price of
$22.375 per share. The net proceeds to the Registrant from the public
offering, after deducting underwriting discounts and commissions were
approximately $97 million. The Registrant 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
Registrant'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.
-10-
<PAGE>
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 $5.8
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
property acquisitions, scheduled debt maturities and other uses.
In addition to the Credit Facility, the Registrant has a $33.8 million Term
Loan outstanding as of December 31, 1997, which is secured by three
properties. This loan accrues interest at a fixed rate of 8.62% and matures in
March 1998. The Registrant anticipates repaying the balance outstanding under
the Term Loan on the maturity date with borrowings under the Credit Facility.
In addition to amounts due under the Credit Facility and under the Term Loan,
during the next three years mortgage loans secured by properties owned by
three partnerships in which the Registrant has an interest mature by their
terms. Balloon payments on these loans total $17.0 million, of which the
Registrant's proportionate share is $8.5 million.
The Registrant expects to meet its short-term liquidity requirements generally
through its available working capital and net cash provided by operations. The
Registrant believes that the net cash provided by operations will be
sufficient to allow the Registrant to make any distributions necessary to
enable the Registrant to continue to qualify as a REIT under the Code. The
Registrant 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 Registrant 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 (FFO) increased by $1,641,000 for the four months ended
December 31, 1997, as compared to the same period in 1996 as follows:
-11-
<PAGE>
<TABLE>
<CAPTION>
Four Months Ended
December 31,
Funds from Operations(1) --------------------------------------
- ---------------------------------------------------------- 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 (2) 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 (3) $ 0.86 $ 0.75
================== ==================
</TABLE>
(1) Funds from operations ("FFO") is defined as income before gains (losses)
on investments and extraordinary items (computed in accordance with generally
accepted accounting principles "GAAP") plus real estate depreciation and
similar adjustments for unconsolidated joint ventures after adjustments for
non-real estate depreciation and amortization of financing costs. FFO should
not be construed as an alternative to net income (as determined in accordance
with GAAP) as an indicator of the Registrant's operating performance, or to
cash flows from operating activities (as determined in accordance with GAAP)
as a measure of liquidity. In addition, the Registrant's measure of FFO as
presented may not be comparable to similarly titled measures reported by other
companies.
(2) Net of minority interest of $67,000 and $88,000 in 1997 and 1996,
respectively.
(3) Assuming full conversion of the 646,286 Operating Partnership Units into
shares of the Registrant. The weighted average effect for the four months
ending December 31, 1997 and 1996 was 484,715 and 0, respectively.
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 Registrant 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 Registrant'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,
-12-
<PAGE>
which represents the Registrant's share of proceeds from the refinancing of
debt at two properties. In December 1996, the Registrant 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 Registrant which totaled $96.8 million. The proceeds
from the public offering were used to repay outstanding borrowings under the
Credit Facility 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.
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 Registrant 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 Registrant 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.
Interest expense increased by $1,229,000 to $4,349,000 as a result of interest
on borrowings against the Registrant'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 Registrant'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.
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<PAGE>
The gain on the sale of interest in real estate of $2,090,000 in the 1997
period relates to the sale of the Registrant's 60% interest in Gateway Mall,
St. Petersburg, Florida. The prior year gains of $1,461,000 consist of the
sale of the Registrant'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 Registrant'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.
-14-
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
Reference is made to the litigation between the Registrant and affiliates of
the Registrant and Daniel Berman and Robert Berman and/or entities owned or
controlled by them (collectively, the "Bermans") most recently described in
Item 3 of the Registrant's Report on Form 10-K for its fiscal year ended
August 31, 1997, filed with the Securities and Exchange Commission on November
28, 1997.
In December 1997, the court in the Delaware Litigation issued an opinion
granting partial summary judgment in favor of the Registrant and certain of
its affiliates on certain counterclaims of the Bermans in that action (which
counterclaims are substantially similar to the claims made by the Bermans as
plaintiffs in the Pennsylvania Litigation). Under the court's decision: the
Bermans would be liable for one-half of (i) the costs incurred at Eagles' Nest
and in respect of the 14 acre undeveloped tract in Coral Gables, Florida, and
(ii) reasonable environmental clean-up costs at Fox Run; and the counterclaims
of the Bermans relating to Eagles' Nest and Fox Run were dismissed. The court
did not dismiss counterclaims by the Bermans in the Delaware Litigation
alleging that (i) there had been an oral modification of the management
agreement relating to Fox Run (and the court therefore permitted the Bermans
to continue to manage that project until that claim is resolved), and (ii) the
environmental clean up costs incurred by certain of the Registrant's
affiliates at Fox Run were excessive.
The Registrant intends to continue to vigorously resist plaintiffs' claims in
the Pennsylvania Litigation and the defendants' remaining counterclaims in the
Delaware Litigation and to pursue the claims asserted by the Registrant in the
Delaware Litigation. Management does not believe that resolution of these
matters will have a material adverse effect on the Registrant's financial
condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
A Special Meeting of Holders of Certificates of Beneficial Interest was held
on September 29, 1997, pursuant to a Notice of Meeting and related proxy
statement dated August 27, 1997, and filed with the Securities and Exchange
Commission pursuant to Rule 14a-6(b) on August 28, 1997. Each of the matters
voted upon at the meeting was described in detail in such proxy statement.
The holders of 5,681,699 shares voted in favor of approval of the transaction
between the Registrant and The Rubin Organization, Inc., the holders of
216,259 shares voted against approval of the transaction, and the holders of
94,364 shares abstained from voting on the transaction.
The holders of 5,158,545 shares voted in favor of approval of the Registrant's
Amended and Restated Trust Agreement, the holders of 736,109 shares voted
against such matter, and the holders of 97,667 shares abstained from voting on
the matters.
The holders of 7,416,766 shares voted in favor of approval of the Registrant's
Amended and Restated 1990 Incentive and Nonqualified Stock Option Plan, the
holders of 454,785 shares voted against such matter, and the holders of
176,027 shares abstained from voting on such matter.
The holders of 5,229,751 shares voted in favor of approval of the Registrant's
1997 Stock Option Plan, the holders of 581,168 shares voted against approval
of such matter, and the holders of 181,303 abstained from voting on such
matter.
-15-
<PAGE>
The 1997 Annual Meeting of Holders of Certificates of Beneficial Interest of
the Registrant was held on December 16, 1997, pursuant to a Notice of Meeting
and related proxy statement dated November 14, 1997, and filed with the
Securities and Exchange Commission pursuant to Rule 14a-6(b) on November 18,
1997.
At the Annual Meeting, Ms. Rosemarie B. Greco and Messrs. William F. Dimeling
and George F. Rubin were reelected to the Board of Trustees of the Registrant
for terms expiring at the Annual Meeting of Shareholders to be held in 2001.
In such election, 7,033,092 shares were voted for the election of Ms.
Rosemarie B. Greco, 7,014,196 shares were voted for the election of Mr.
William F. Dimeling and 7,036,022 shares were voted for the election of Mr.
George F. Rubin. Under the Trust Agreement for the Registrant, votes cannot be
cast against a candidate. Proxies filed at the 1997 Annual Meeting by the
holders of 84,188 shares withheld authority to vote for Ms. Greco, those filed
by the holders of 103,084 shares withheld authority to vote for Mr. Dimeling
and those filed by the holders of 81,258 shares withheld authority to vote for
Mr. Rubin. The following persons continued as Trustees following the Annual
Meeting: for terms expiring at the 1999 Annual Meeting - Sylvan M. Cohen, Lee
H. Javitch and Jonathan B. Weller; for terms expiring at the 2000 Annual
Meeting - Ronald Rubin, Leonard I. Korman and Jeffrey P. Orleans.
Also at the Annual Meeting, the shareholders approved amendments to the
Registrant's 1990 Stock Option Plan for Non-Employee Directors, which
amendments were described in detail in the Registrant's Proxy Statement for
the Annual Meeting. The holders of 6,533,212 shares voted for approval of the
amendments, the holders of 429,700 shares voted against approval of the
amendments, and the holders of 152,080 shares abstained from voting on the
amendments.
Item 5. Other Information
On January 26, 1998, a wholly-owned affiliate of PREIT Associates, L.P., the
operating partnership of the Registrant, effectively acquired both the fee
interest in the land for Phase I of the Registrant's Christiana Power Center
retail project and the 50% interest in the project not previously owned by the
Registrant. The consideration paid for the acquisition of such land and
interest was $6.0 million plus the right of the transferror to receive Limited
Partner units in PREIT Associates, L.P. upon completion of the Center. The
value of the limited partner units to be issued will be equal to approximately
$2.7 million plus 50% of the equity value of the center to be computed
following completion based upon an agreed-upon formula. Units of limited
partner interest in PREIT Associates, L.P. are redeemable for cash equal to
the price of the Registrant's Shares at the time of redemption, or, at the
option of the Registrant, Shares of the Registrant on a one-for-one basis.
Construction of Phase I commenced in the fourth quarter of 1997 and
substantial portions of the Center are expected to be completed in the fourth
quarter of 1998.
-16-
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits (27.) Financial Data Schedule (included in
electronic filing format)
(b) Reports on Form 8-K:
1. Report on Form 8-K dated October 13, 1997 and filed
October 14, 1997 (Item Nos. 2, 7 and 8); included
pro forma consolidating financial information for
the Registrant and identified acquired businesses
at May 31, 1997 and for the year ended August 31,
1996 and the nine months ended May 31, 1997 and
related notes and management assumptions;
incorporated by reference historical financial
information on the same acquired businesses from
the Registrant's definitive proxy statement dated
August 27, 1997 and filed with the Securities and
Exchange Commission on August 28, 1997.
2. Report on Form 8-K dated December 2, 1997 and filed
on December 2, 1997 (Item 7(c)).
3. Report on Form 8-K dated December 17, 1997 and
filed on December 17, 1997 (Item 7(c)).
4. Report on Form 8-K dated December 22, 1997 and
filed on December 22, 1997 (Item 7(c)).
-17-
<PAGE>
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
SIGNATURE OF REGISTRANT
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned on its behalf by the undersigned thereunto duly authorized.
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
Registrant
By /s/ Ronald Rubin
-------------------------------------------
Ronald Rubin
Chief Executive Officer
By /s/ Edward A. Glickman
-------------------------------------------
Edward A. Glickman
Executive Vice President and
Chief Financial Officer
By /s/ Dante J. Massimini
-------------------------------------------
Dante J. Massimini,
Senior Vice President and Treasurer
Date: February 17, 1998
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<NAME> PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
<S> <C>
<PERIOD-TYPE> 4-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> SEP-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,324,000
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<RECEIVABLES> 32,626,000
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<COMMON> 13,289,000
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