<PAGE>
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] Quarterly Report Pursuant To Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 1998
-----------------
[ ] Transition Report Pursuant To Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ______________________ to _______________________
Commission File Number 1-6300
-------------------------
Pennsylvania Real Estate Investment Trust
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<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
- --------------------------------------------------------------------------------
(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 August 7, 1998: 13,299,723
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
This report includes a total of 18 pages.
- --------------------------------------------------------------------------------
<PAGE>
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONTENTS
Page
----
Part I. Financial Information - Item 1
Financial Statements (Unaudited):
Consolidated Balance Sheets--June 30, 1998
and August 31, 1997 1-2
Consolidated Statements of Income--Three and Six Months
Ended June 30, 1998 and May 31, 1997 3
Consolidated Statements of Cash Flows--Six Months
Ended June 30, 1998 and May 31, 1997 4
Notes to Consolidated Financial Statements 5-11
Management's Discussion and Analysis of Financial
Condition and Results of Operations - Item 2 12-18
Part II. Other Information
Item 1. Legal Proceedings 19
Item 2. Not Applicable -
Item 3. Not Applicable -
Item 4. Not Applicable -
Item 5. Not Applicable -
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED BALANCE SHEETS
(Note 1)
ASSETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, August 31,
1998 1997
-------- ----------
<S> <C> <C>
INVESTMENTS IN REAL ESTATE, at cost:
Multifamily properties $ 162,920,000 $ 159,967,000
Retail properties 120,369,000 37,398,000
Industrial properties 5,078,000 5,078,000
Properties under development 13,499,000 --
----------------- -----------------
Total investments in real estate 301,866,000 202,443,000
Less- Accumulated depreciation 57,204,000 50,711,000
----------------- -----------------
244,662,000 151,732,000
INVESTMENT IN PREIT-RUBIN, INC. (Note 3) 4,113,000 --
INVESTMENTS IN PARTNERSHIPS AND JOINT VENTURES, at equity (Note 4) 20,271,000 1,039,000
ADVANCES TO PREIT-RUBIN, INC. (Note 2) 3,613,000 --
----------------- -----------------
272,659,000 152,771,000
Less- Allowance for possible losses 1,672,000 1,831,000
----------------- -----------------
270,987,000 150,940,000
OTHER ASSETS:
Cash and cash equivalents 1,113,000 1,399,000
Rents and sundry receivables 1,219,000 590,000
Deferred costs, prepaid real estate taxes and expenses, net 6,754,000 7,393,000
Deposits on properties -- 5,335,000
----------------- -----------------
$ 280,073,000 $ 165,657,000
================= =================
</TABLE>
(Continued)
-1-
<PAGE>
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Note 1)
LIABILITIES AND SHAREHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
June 30, August 31,
1998 1997
-------- ----------
<S> <C> <C>
LIABILITIES:
Mortgage notes payable $ 64,766,000 $ 83,528,000
Bank and other loans payable 55,126,000 33,884,000
Construction cost payable 1,090,000 --
Tenants' deposits and deferred rents 1,096,000 1,346,000
Accrued pension and retirement benefits 977,000 1,091,000
Accrued expenses and other liabilities 4,148,000 4,369,000
----------------- -----------------
127,203,000 124,218,000
----------------- -----------------
MINORITY INTEREST 15,837,000 540,000
----------------- -----------------
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDERS' EQUITY (Note 5):
Shares of beneficial interest, $1 par; 100,000,000 shares of beneficial
interest authorized and 25,000,000 preferred shares authorized; issued
and outstanding 13,299,723 shares at June 30, 1998, and 8,685,098
shares of beneficial interest at August 31, 1997 13,300,000 8,685,000
Capital contributed in excess of par 144,942,000 53,599,000
Distributions in excess of net income (21,209,000) (21,385,000)
----------------- -----------------
137,033,000 40,899,000
----------------- -----------------
$ 280,073,000 $ 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>
Three Months Ended Six Months Ended
----------------------------- -------------------------------
June 30, May 31, June 30, May 31,
1998 1997 1998 1997
-------- ------- -------- -------
<S> <C> <C> <C> <C>
REVENUES:
Gross revenues from real estate $ 13,783,000 $ 10,031,000 $ 27,308,000 $ 20,148,000
Interest and other income 133,000 54,000 255,000 122,000
------------- ------------- ------------- -------------
13,916,000 10,085,000 27,563,000 20,270,000
------------- ------------- ------------- -------------
EXPENSES:
Property operating expenses 4,980,000 3,967,000 10,019,000 8,142,000
Depreciation and amortization 2,113,000 1,565,000 4,251,000 3,120,000
General and administrative expenses 868,000 860,000 1,607,000 1,685,000
Interest expense 1,855,000 2,259,000 3,834,000 4,505,000
Provision for losses on investments -- -- -- 500,000
------------- ------------- ------------- -------------
9,816,000 8,651,000 19,711,000 17,952,000
------------- ------------- ------------- -------------
Income before equity in
unconsolidated entities, gains on
sales of interests in real estate
and minority interest 4,100,000 1,434,000 7,852,000 2,318,000
EQUITY IN LOSS OF PREIT-RUBIN, INC.
(Notes 2 and 3) (501,000) -- (859,000) --
EQUITY IN INCOME OF PARTNERSHIPS AND JOINT
VENTURES (Note 4) 1,214,000 1,442,000 2,689,000 2,161,000
GAINS ON SALES OF INTERESTS IN REAL ESTATE 1,766,000 -- 1,766,000 1,461,000
------------- ------------- ------------- -------------
Income before minority interest 6,579,000 2,876,000 11,448,000 5,940,000
MINORITY INTEREST (374,000) (91,000) (652,000) (174,000)
------------- ------------- ------------- -------------
NET INCOME $ 6,205,000 $ 2,785,000 $ 10,796,000 $ 5,766,000
============= ============= ============= =============
BASIC INCOME PER SHARE (Note 5) $ .47 $ .32 $ .81 $ .66
============= ============= ============= =============
DILUTED INCOME PER SHARE (Note 5) $ .47 $ .32 $ .81 $ .66
============= ============= ============= =============
</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 7)
<TABLE>
<CAPTION>
Six Months Ended
--------------------------------
June 30, May 31,
1998 1997
-------- ---------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 10,796,000 $ 5,766,000
Adjustments to reconcile net income to net cash
provided by operating activities-
Minority interest 652,000 175,000
Depreciation and amortization 4,251,000 3,121,000
Gains on sales of interests in real estate (1,766,000) (1,461,000)
Equity in loss of PREIT-RUBIN, Inc. 859,000 --
Decrease in allowance for possible losses (98,000) (618,000)
Provision for possible losses -- 500,000
Change in assets and liabilities-
Rents and sundry receivables (778,000) 247,000
Deferred costs, prepaid real estate taxes and expenses 1,099,000 (244,000)
Accrued pension and retirement benefits (34,000) 47,000
Accrued expenses and other liabilities 262,000 542,000
Tenants' deposits and deferred rents (221,000) 46,000
------------- ------------
Net cash provided by operating activities 15,022,000 8,121,000
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in wholly owned real estate (1,810,000) (1,799,000)
Investments in property under development (11,185,000) --
Investment in and advances to PREIT-RUBIN, Inc. (200,000) --
Investments in partnerships and joint ventures (6,424,000) (2,401,000)
Decrease in notes receivable -- 1,649,000
Cash proceeds from sale of interest in partnership 1,958,000 2,069,000
Cash distributions from partnerships and joint ventures
in excess of equity in income 464,000 1,329,000
Cash distributions to minority partners (12,000) (83,000)
Other -- (240,000)
------------- ------------
Net cash (used in) provided by investing activities (17,209,000) 524,000
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal installments on mortgage notes payable (918,000) (640,000)
Repayment of mortgage notes payable (33,680,000) --
Proceeds from bank loans payable 50,551,000 --
Repayment of bank loans payable -- 1,681,000
Shares of beneficial interest issued 206,000 --
Payment of equity offering costs (1,076,000) --
Distributions paid to shareholders (12,499,000) (8,158,000)
Distributions paid to OP Unit holders (608,000) --
------------- -----------
Net cash provided by (used in) financing activities 1,976,000 (7,117,000)
------------- ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (211,000) 1,528,000
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,324,000 2,026,000
------------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,113,000 $ 3,554,000
============= ============
</TABLE>
The accompanying notes are an integral part of these statements.
-4-
<PAGE>
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1998 AND MAY 31, 1997
1. BASIS OF PRESENTATION:
The consolidated financial statements have been prepared by the Registrant,
without audit, except as to the balance sheet as of August 31, 1997, which has
been prepared from audited data, 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.
On October 14, 1997, the Registrant filed a Form 8-K announcing its intention to
change its fiscal year-end from August 31 to December 31. 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. As such, the consolidated financial
statements herein include the Registrant's new calendar quarter and most
comparable prior fiscal quarter.
Certain reclassifications of prior period amounts have been made to conform with
current year presentation.
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") and other persons 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, for
which construction is substantially complete, and Northeast Tower Center, which
is 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
tangible assets acquired is being amortized over thirty five 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> <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>
3. INVESTMENT IN PREIT-RUBIN, INC.:
PREIT-RUBIN, Inc. is responsible for various activities including: management,
leasing and real estate development of the Registrant's properties and for
properties on behalf of third parties. Total management fees paid by the
Registrant's properties to PREIT-RUBIN, Inc. are included in property operating
expenses in the accompanying consolidated statements of income and amounted to
$37,000 and $92,000 for the three and six-month periods ended June 30, 1998,
respectively.
Summarized unaudited financial information for PREIT-RUBIN, Inc. as of and for
the three and six-month periods ended June 30, 1998 is as follows:
For the Six For the Three
Months Ended Months Ended
June 30, 1998 June 30, 1998
------------- -------------
Total assets $ 11,122,000 $ 11,122,000
------------- -------------
Management Fees $ 2,477,000 $ 1,199,000
Leasing Commissions $ 2,500,000 $ 1,276,000
Development Fee $ 563,000 $ 373,000
Other Revenues $ 1,455,000 $ 825,000
------------- -------------
Total revenue $ 6,995,000 $ 3,673,000
Net loss $ 904,000 $ 527,000
Registrant's share of net loss $ 859,000 $ 501,000
-6-
<PAGE>
4. 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 25 partnerships and joint
ventures and 4 properties under development at June 30, 1998, and 22
partnerships and joint ventures at August 31, 1997, and the Registrant's equity
in income for the three months ended June 30, 1998 and May 31, 1997:
<TABLE>
<CAPTION>
June 30, August 31,
1998 1997
------------ ----------
(Unaudited)
<S> <C> <C>
ASSETS
Investments in real estate, at cost:
Retail properties $ 160,493,000 $ 117,960,000
Multifamily properties 101,554,000 107,604,000
Industrial property 1,276,000 1,264,000
Properties under development 29,390,000 --
Land 4,446,000 4,446,000
-------------- --------------
Total investments in real estate 297,159,000 231,274,000
Less- Accumulated depreciation 73,471,000 71,938,000
-------------- --------------
223,688,000 159,336,000
Cash and cash equivalents 8,381,000 6,031,000
Deferred costs, prepaid real estate taxes and expenses, and other
assets, net 18,269,000 8,528,000
-------------- --------------
Total assets $ 250,337,000 $ 173,895,000
============== ==============
LIABILITIES AND PARTNERS' EQUITY
Mortgage notes payable $ 205,407,000 $ 162,097,000
Bank loans payable 6,807,000 8,770,000
Due to the Trust 3,439,000 3,118,000
Other liabilities 6,773,000 4,341,000
-------------- --------------
Total liabilities 222,426,000 178,326,000
-------------- --------------
Net equity (deficit) 27,911,000 (4,431,000)
Partners' share (7,640,000) (5,470,000)
-------------- --------------
Investment in partnerships and joint ventures $ 20,271,000 $ 1,039,000
============== ==============
</TABLE>
-7-
<PAGE>
EQUITY IN INCOME OF PARTNERSHIPS AND JOINT VENTURES
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------------- --------------------------------
June 30, May 31, June 30, May 31,
1998 1997 1998 1997
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Gross revenues from real estate $ 13,312,000 $ 12,907,000 $ 28,047,000 $ 25,865,000
------------- ------------- ------------- -------------
Expenses:
Property operating expenses 4,702,000 4,983,000 10,104,000 10,359,000
Mortgage and bank loan interest 4,093,000 3,326,000 8,326,000 6,705,000
Refinancing prepayment penalty -- -- -- 1,038,000
Depreciation and amortization 2,083,000 1,660,000 4,154,000 3,311,000
------------- ------------- ------------- -------------
10,878,000 9,969,000 22,584,000 21,413,000
------------- ------------- ------------- -------------
2,434,000 2,938,000 5,463,000 4,452,000
Partners' share (1,220,000) (1,496,000) (2,774,000) (2,291,000)
------------- ------------- ------------- -------------
Equity in income of partnerships
and joint ventures $ 1,214,000 $ 1,442,000 $ 2,689,000 $ 2,161,000
============= ============= ============= =============
</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%.
5. 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
the six months ended May 31, 1997.
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, 1998 June 30, 1998
-------------------------------------------- ------------------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
------ ------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Net income $ 6,205,000 13,297,470 $ .47 $ 10,796,000 13,294,718 $ .81
============= ============= =========== ============== ============= ==========
DILUTED EARNINGS PER SHARE:
Net income $ 6,205,000 13,297,470 10,796,000 13,294,718
Share options issued
-- 26,465 -- 28,836
------------- ------------- -------------- -------------
$ 6,205,000 13,323,935 $ .47 $ 10,796,000 13,323,554 $ .81
============= ============= =========== ============== ============= ==========
</TABLE>
-8-
<PAGE>
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
May 31, 1997 May 31, 1997
-------------------------------------------- ------------------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
------ ------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Net income $ 2,785,000 8,678,098 $ .32 $ 5,766,000 8,677,698 $ .66
============= ============= =========== ============== ============= ==========
DILUTED EARNINGS PER SHARE:
Net income $ 2,785,000 8,678,098 5,766,000 8,677,698
Share options issued
-- 20,758 -- 23,562
------------- ------------- -------------- -------------
$ 2,785,000 8,698,856 $ .32 $ 5,766,000 8,701,260 $ .66
============= ============= =========== ============== ============= ==========
</TABLE>
6. 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:
Amount
Per
Date Declared Record Date Payment Date Share
------------- ----------- ------------ ------
July 15, 1998 August 31, 1998 September 15, 1998 $.47
July 8, 1997 July 31, 1997 August 15, 1997 $.47
7. CASH FLOW INFORMATION:
Cash paid for interest was $1,994,000, net of capitalized interest of $199,000
and $2,324,000, net of capitalized interest of $0 for the three months ended
June 30, 1998 and May 31, 1997, respectively.
Cash paid for interest was $4,570,000, net of capitalized interest of $330,000,
and $4,462,000, net of capitalized interest of $0 for the six months ended June
30, 1998 and May 31, 1997, respectively.
8. 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 material incremental cost will be incurred on these
properties.
-9-
<PAGE>
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.
9. ACQUISITIONS:
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
upon completion of construction based on a predetermined formula which
calculates the agreed-upon value of the center.
On May 12, 1998 a partnership in which the Registrant owns a 50% interest
acquired a shopping center in Springfield, PA for $7.3 million in cash of which
the Registrant's share is approximatley $3.7 million.
10. RECENT ACCOUNTING PRONOUNCEMENTS:
In March 1998, the Emerging Issues Task Force ("EITF") reached consensus on
Issue No. 97-11, "Accounting for Internal Costs Relating to Real Estate Property
Acquisition." The EITF concluded that internal costs related to the acquisition
of operating properties should be expensed as incurred. The adoption of this
pronouncement had no impact on the Registrant as the Registrant had not
previously capitalized internal costs relating to the acquisition of operating
properties.
In May 1998, the EITF reached consensus on Issue No. 98-9, "Accounting for
Contingent Rent in Interim Financial Periods." EITF 98-9 requires a lessor to
defer recognition of contingent rental income in interim periods until the
specified target that triggers the contingent rental income is achieved. The
Registrant adopted the provisions of this pronouncement during the second
quarter, and as a result, did not accrue approximately $250,000 of additional
percentage rental revenues in the current interim period.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." The 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. The Statement
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting. This Statement is effective for fiscal years
beginning after June 15, 1999. A company may also implement the Statement as of
the beginning of any fiscal quarter after issuance (that is, fiscal quarters
beginning June 16, 1998 and thereafter). Statement 133 cannot be applied
retroactively. 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 (and, at the
Registrant's election, before January 1, 1998).
-10-
<PAGE>
11. SUBSEQUENT EVENTS:
On July 24, 1998, the Registrant sold its 25% partnership interest in Punta
Gorda Mall, Punta Gorda, Florida and Ormond Beach Mall, Daytona Beach, Florida.
The total gains on the sales of these properties was approximately $1,280,000.
On August 7, 1998, the Registrant acquired all of the partnership interest in a
partnership that owns The Woods Apartments located in Ambler, Pennsylvania for a
purchase price of approximately $21.2 million consisting of $12.2 million in
cash, $1.7 million to be paid through the issuance of OP units and $7.3 million
through the assumption of debt.
On July 15, 1998, PREIT-RUBIN, Inc. granted to certain key employees
approximately 138,000 options to acquire shares of beneficial interest in the
Registrant. Concurrent with this transaction, the Registrant issued an option to
PREIT-RUBIN, Inc. to purchase the equivalent number of shares, which
PREIT-RUBIN, Inc. then acquired through the issuance of an intercompany note.
-11-
<PAGE>
ITEM 2. 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, for which construction is substantially
complete, and Northeast Tower Center, which is 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 $61.2 million of cash including transaction
costs. The cash was obtained primarily from borrowings under a new $150 million
Credit Facility entered into by the Operating Partnership coincident with the
September 30, 1997 closing of the TRO Transaction with a group of banks. 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 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.
As of 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 was reduced by 30 basis points to a margin of 1.4% over 30-day
LIBOR. In addition, the maturity date for the Credit Facility was extended from
September 30, 1999 to December 31, 2000.
-12-
<PAGE>
On March 20, 1998, the Registrant borrowed $33.7 million under the Credit
Facility to repay the outstanding term loan which matured in March 1998. The
term loan accrued interest at a fixed rate of 8.62% and was secured by three
properties. At June 30, 1998 the interest rate on the Credit Facility was 7.06%.
As of June 30, 1998, $61.0 million of borrowings under the Credit Facility were
outstanding ($55.1 million directly by the Operating Partnership and $5.9
million through partnerships and joint ventures) and, subject to the terms and
conditions of the Credit Facility, up to $89.0 million was available to fund
property acquisitions, scheduled debt maturities and other uses.
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 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 make distributions required in order 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.
Acquisitions and Dispositions
The Registrant is actively involved in pursuing and evaluating a number of
individual property and portfolio acquisition opportunities. In addition, the
Registrant has stated that a key corporate goal is to gain managerial control of
all of its assets. In cases where existing joint venture assets are controlled
by outside partners the Registrant is evaluating the possible acquisition of the
outside interests. In cases where that opportunity does not exist, the
Registrant is considering the disposition of its interests.
-13-
<PAGE>
In addition to acquisitions previously disclosed in Footnote 9 of the
Consolidated Financial Statements, the following is a summary of the completed
and planned acquisition transactions through the date of this report (in
thousands):
Completed Acquisitions
<TABLE>
<CAPTION>
Capital Resources
--------------------------------------
Acquisition Property Property Location Purchase Credit Assumed OP
----------------------
Date Type City State Price Facility Debt Units Reference
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
7/21/98 Shopping Center Wilmington DE $4,300 $1,300 $-- $3,000 See Footnote 11
8/7/98 Apartments Ambler PA 21,200 12,200 7,300 1,700 See Footnote 11
---------------------------------------------------
Total Completed Acquisitions $25,500 $13,500 $7,300 $4,700
Planned Acquisitions
Capital Resources
--------------------------------------
Agreement Property Property Location Purchase Credit Assumed OP
----------------------
Date Type City State Price Facility Debt Units
- ---------------------------------------------------------------------------------------------------------
5/27/98 Regional Mall Hyattsville MD (*)$65,000 $19,000 $43,000 $3,000
7/24/98 Shopping Center Exton PA (*)18,400 18,400 -- --
---------------------------------------------------
Total Planned Acquisitions 83,400 37,400 43,000 3,000
---------------------------------------------------
Total Acquisitions and Planned Acquisitions $108,900 $50,900 $50,300 $7,700
===================================================
</TABLE>
While management expects both of these planned acquisitions to close in August,
1998 there can be no assurance that such closings will, in fact, take place.
The combined impact of the Registrant's normal working capital requirements and
the completion of the acquisitions detailed above would be to reduce the
availability under the line of credit to $35.1 million.
Management believes those amounts available under the Credit Facility together
with amounts, which may be acquired through public and private offerings of debt
and/or equity securities will be sufficient to finance acquisitions. However,
there can be no assurance that these sources of financing will be available and
the inability to obtain this capital could an adverse impact on the Company's
ability to fund its acquisition and development activities.
(*) These acquisition costs are approximate.
<PAGE>
Dispositions
Consistent with management's long-term strategic plan to review and evaluate all
joint venture real estate holdings, on July 24, 1998 the Registrant sold it's
25% partnership interest in Punta Gorda Mall in Punta Gorda, Florida and Ormond
Beach Mall in Daytona Beach, Florida. The total gain on the sales of these
properties was approximately $1.3 million. These proceeds were applied to the
Company's line of credit.
Development, Expansions and Renovations
The Registrant is involved in a number of ongoing development and redevelopment
projects which will call upon the capital resources of the Registrant. In each
case, the Registrant will evaluate the financing opportunities available to it
at the time the project requires funding. In cases where the project is
undertaken with a joint venture partner the Registrant's flexibility in funding
the project may be constrained by the joint venture agreement or the covenants
existing in its line of credit which limit the use of borrowed funds in joint
venture projects.
-14-
<PAGE>
Funds from operations (FFO) increased by $5,784,000 for the six months ended
June 30, 1998, as compared to the six months ended May 31, 1997, as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------- ----------------------------
June 30, May 31, June 30, May 31,
Funds from Operations(1) 1998 1997 1998 1997
- ---------------------------------------------------------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Income before minority interest $ 6,579,000 $ 2,876,000 $ 11,448,000 $ 5,940,000
Less: Gains on sales of interests in real estate (1,766,000) -- (1,766,000) (1,461,000)
Minority interest in consolidated partnership (70,000) (91,000) (123,000) (174,000)
Add: Provision for losses on investments 500,000
Depreciation and amortization-
Wholly owned and consolidated partnerships (2) 2,089,000 1,498,000 4,178,000 2,986,000
Unconsolidated partnerships and joint ventures 1,008,000 804,000 2,007,000 1,601,000
Refinancing prepayment fees -- -- -- 519,000
Excess purchase price over net assets acquired 29,000 -- 58,000 --
Less:
Depreciation of non-real estate assets (57,000) (57,000) (114,000) (114,000)
Amortization of deferred financing costs (113,000) (70,000) (243,000) (138,000)
----------- ----------- ------------ -----------
Funds from operations $ 7,699,000 $ 4,960,000 $ 15,445,000 $ 9,661,000
=========== =========== ============ ===========
Weighted average number of shares outstanding 13,297,470 8,678,098 13,294,718 8,678,098
Weighted average effect of full conversion of OP Units 646,286 -- 646,286 --
----------- ----------- ------------ ----------
13,943,756 8,678,098 13,941,004 8,678,098
=========== =========== ============ ===========
</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 similar measures reported by other companies.
(2) Net of minority interest for the three months of $52,000 in 1998 and $67,000
in 1997 and for the six months of $102,000 in 1998 and $134,000 in 1997.
Net cash provided by operating activities increased to $15,022,000 from
$8,121,000 for the six months ended June 30, 1998, as compared to the six months
ended May 31, 1997. The increase is primarily attributable to additional
net operating income and other assets, provided by Magnolia Mall and North
Dartmouth Mall which the Registrant acquired on September 30, 1997.
-15-
<PAGE>
Net cash used in investing activities was $17,209,000 for the six months ended
June 30, 1998, as compared to net cash provided by investing activities of
$524,000 for the six months ended May 31, 1997. Investing activities in the 1998
period include payment of costs related to properties under development of $11.1
million and investments in partnerships and joint ventures of $6.4 million and
includes $2 million proceeds from the sale of Charter Pointe Apartments in
Altemonte Springs, Florida. Investing activities in the 1997 period included
$2,000,000 of proceeds from the sale of three shopping centers located in
Pennsylvania in Lancaster, Waynesburg and Beaver Falls.
Net cash provided by financing activities was $1,976,000 for the six months
ended June 30, 1998, as compared to net cash of used $7,117,000 for the six
months ended May 31, 1997. Financing activities in the 1998 period include
proceeds from the Registrant's credit facility in the amount of $50.5 million of
which $33.7 million was used to repay bank mortgage notes payable, dividends
paid to shareholders and OP unit holders of approximately $13.1 million and
payment of equity offering costs of $1 million. Financing activities in the 1997
period include dividends paid to shareholders in the amount of $8.2 million.
Results of Operations
Three-Month Periods Ended June 30, 1998 and May 31, 1997
Gross revenues from real estate increased by $3,752,000 to $13,783,000 for the
three-month period ended June 30, 1998, as compared to the three-month period
ended May 31, 1997. The 1998 period included $3,616,000 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 $136,000 primarily as a result of an increase in apartment revenues of
$89,000. During the second quarter, the Registrant adopted the provisions of
Emerging Issues Task Force Issue No. 98-9, "Accounting for Contingent Rent in
Interim Financial Periods." This pronouncement requires a lessor to defer
recognition of contingent rental income in interim periods until all specified
targets or thresholds which trigger additional rental amounts are achieved. As a
result of the adoption of this pronouncement, the Registrant did not accrue
approximately $250,000 of additional percentage rental revenue in the current
interim period.
Property operating expenses increased by $1,013,000 to $4,980,000. The 1998
period included $1,031,000 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 decreased by $18,000
primarily due to decreases in utility and other operating costs for apartments
of $59,000.
Depreciation and amortization increased by $548,000 to $2,113,000 primarily as a
result of depreciation of $412,000 on the addition of the Magnolia Mall and
North Dartmouth Mall properties and increased amortization of financing costs.
Depreciation from properties owned during both periods increased by $136,000.
-16-
<PAGE>
Interest expense decreased by $404,000 to $1,855,000. Interest expense
attributable to properties increased by $334,000 due to the acquisition of
Magnolia Mall, which the Registrant acquired on September 30, 1997 offset by the
repayment of the mortgage on Cobblestone Apartments in December 1997. Interest
expense incurred against the Registrant's Credit Facility decreased by $70,000
as a result of interest savings from the repayment of amounts borrowed under the
Credit Facility from proceeds of a public offering in December 1997.
Equity in income of partnerships and joint ventures decreased by $228,000 to
$1,214,000 as a result of the Registrant's purchase of a 50% interest in Oxford
Valley Road Associates on September 30, 1997, added additional income of
$113,000 and Springfield Mall, acquired during the second quarter, added
additional income of which was $42,000. Equity in the income of properties owned
during both periods decreased by $393,000 of which $343,000 is a result of lower
net income from Whitehall Mall and Palmer Park Mall, both properties which are
currently being redeveloped.
Equity in net loss of PREIT-RUBIN for the 1998 period was $501,000.
The gains on the sale of interest in real estate of $1,766,000 in the 1998
period relates to the sale of the Registrant's interest in Charter Pointe
Apartments in Altemonte Springs, Florida.
Minority interest in income increased by $283,000 to $374,000 as a result of the
Class A OP units issued in connection with the TRO Transaction.
Net income for the quarter ended June 30, 1998 increased to $6,205,000 from
$2,785,000 as reported in the comparable period in the prior year.
Results of Operations
Six-Month Periods Ended June 30, 1998 and May 31, 1997
Gross revenues from real estate increased by $7,160,000 to $27,308,000 for the
six-month period ended June 30, 1998, as compared to the six-month period ended
May 31, 1997. The 1998 period included $6,904,000 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 $193,000 primarily as a result of an increase in apartment revenues of
$176,000. During the second quarter, the Registrant adopted the provisions of
Emerging Issues Task Force Issue No. 98-9, "Accounting for Contingent Rent in
Interim Financial Periods." This pronouncement requires a lessor to defer
recognition of contingent rental income in interim periods until all specified
targets or thresholds which trigger additional rental amounts are achieved. As a
result of the adoption of this pronouncement, the Registrant did not accrue
approximately $250,000 of additional percentage rental revenue in the current
interim period.
Property operating expenses increased by $1,877,000 to $10,019,000. The 1998
period included $2,154,000 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 decreased by $277,000
primarily due to decreases in utility and other operating costs for apartments
of $279,000.
Depreciation and amortization increased by $1,131,000 to $4,251,000 primarily as
a result of depreciation of $824,000 on the addition of the Magnolia Mall and
North Dartmouth Mall properties and increased amortization of financing costs.
Depreciation from properties owned during both periods increased by $307,000.
-17-
<PAGE>
Interest expense decreased by $671,000 to $3,834,000. Interest expense
attributable to properties increased by $675,000 due to the acquisition of
Magnolia Mall, which the Registrant acquired on September 30, 1997 offset by the
repayment of the mortgage on Cobblestone Apartments in December 1997.
Equity in income of partnerships and joint ventures increased by $528,000 to
$2,689,000. The Registrant's purchase of a 50% interest in Oxford Valley Road
Associates on September 30, 1997, contributed additional income of $234,000,
while the non-recurrence in the 1997 period of a prepayment penalty due to the
refinancing of debt at Regency Apartments increased income by $519,000. The 1997
period also includes income from properties sold during 1997 in the amount of
$36,000. Equity in the income of properties owned during both periods decreased
by $218,000, of which $493,000 is a result of lower net income from Whitehall
Mall and Palmer Park Mall both properties of which are being redeveloped. Income
from the remaining properties increased by $275,000.
Equity in net loss of PREIT-RUBIN for the 1998 period was $859,000.
The gains on the sale of interest in real estate of $1,766,000 in the 1998
period relates to the sale of the Registrant's interest in Charter Pointe
Apartments in Altemonte Springs, Florida.
Minority interest increased by $478,000 to $652,000 as a result of the Class A
OP units issued in connection with the TRO Transaction.
Net income for the six months ended June 30, 1998 increased to $10,796,000 from
$5,766,000 as reported in the comparable period in the prior year.
Year 2000 Issue
The Registrant has recognized the need to ensure that its systems, equipment and
operations will not be adversely impacted by the change to the calendar year
2000. The Registrant has initiated the process of identifying potential areas of
risk and the related effects on planning, purchasing and daily operations. No
estimates can be made as to the potential adverse impact resulting from the
failure of third-party suppliers and tenants to prepare for the year 2000.
However, the Registrant does not anticipate that the total cost of successfully
converting all internal systems, equipment and operations to the year 2000 will
have a material adverse effect on its financial position or results of
operations.
-18-
<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 Springs, 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 defend 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
position or results of operations.
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 - none.
-19-
<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 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: August 14, 1998
-20-
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000077281
<NAME> PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 1,113,000
<SECURITIES> 0
<RECEIVABLES> 35,970,000
<ALLOWANCES> 1,672,000
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 301,866,000
<DEPRECIATION> 57,204,000
<TOTAL-ASSETS> 280,073,000
<CURRENT-LIABILITIES> 23,148,000
<BONDS> 119,892,000
0
0
<COMMON> 13,300,000
<OTHER-SE> 123,733,000
<TOTAL-LIABILITY-AND-EQUITY> 280,073,000
<SALES> 27,563,000
<TOTAL-REVENUES> 30,505,000
<CGS> 0
<TOTAL-COSTS> 15,875,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,834,000
<INCOME-PRETAX> 10,796,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 10,796,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,796,000
<EPS-PRIMARY> .81
<EPS-DILUTED> .81
</TABLE>
