<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, 1999
-------------
[ ] Transition Report Pursuant To Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from ______________________ to _______________________
Commission File Number 1-6300
----------------------------------------------------------
Pennsylvania Real Estate Investment Trust
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-6216339
- --------------------------------- ----------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
200 South Broad Street, Third Floor, Philadelphia, PA 19102-3803
- --------------------------------------------------------------------------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (215) 875-0700
------------------------------
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 |_| No |X|
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 4, 1999: 13,318,330
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
This report includes a total of 25 pages.
- --------------------------------------------------------------------------------
<PAGE>
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C> <C>
Part I. Financial Information
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets--June 30, 1999
and December 31, 1998 1-2
Consolidated Statements of Income--Three and Six Months
Ended June 30, 1999 and June 30, 1998 3
Consolidated Statements of Cash Flows-- Six Months
Ended June 30, 1999 and June 30, 1998 4
Notes to Consolidated Financial Statements 5-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-22
Item 3. Quantitative and Qualitative Disclosures about Market Risk 23
Part II. Other Information
Item 1. Not Applicable -
Item 2. Not Applicable -
Item 3. Not Applicable -
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
</TABLE>
<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, December 31,
1999 1998
------------- -------------
<S> <C> <C>
INVESTMENTS IN REAL ESTATE, at cost:
Multifamily properties $ 233,849,000 $ 230,997,000
Retail properties 279,442,000 261,823,000
Industrial properties 5,078,000 5,078,000
Land and properties under development 37,913,000 11,508,000
------------- -------------
Total investments in real estate 556,282,000 509,406,000
Less- Accumulated depreciation 77,318,000 71,129,000
------------- -------------
478,964,000 438,277,000
INVESTMENT IN PREIT-RUBIN, INC. (Note 2) 5,933,000 5,372,000
INVESTMENTS IN PARTNERSHIPS AND JOINT VENTURES, at equity (Note 3) 13,609,000 13,439,000
ADVANCES TO PREIT-RUBIN, INC. 5,450,000 4,074,000
------------- -------------
503,956,000 461,162,000
Less- Allowance for possible losses 1,503,000 1,572,000
------------- -------------
502,453,000 459,590,000
OTHER ASSETS:
Cash and cash equivalents 3,847,000 6,135,000
Rents and sundry receivables (net of allowance for doubtful accounts
of $661,000 and $364,000, respectively) 4,216,000 3,498,000
Deferred costs, prepaid real estate taxes and
expenses, net 17,494,000 12,392,000
------------- -------------
$ 528,010,000 $ 481,615,000
============= =============
</TABLE>
(Continued)
-1-
<PAGE>
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Note 1)
LIABILITIES AND SHAREHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------- -------------
<S> <C> <C>
LIABILITIES:
Mortgage notes payable (Note 4) $ 268,900,000 $ 167,003,000
Bank and other loans payable 74,473,000 135,273,000
Construction costs payable 4,732,000 --
Tenants' deposits and deferred rents 2,071,000 1,827,000
Accrued pension and retirement benefits 923,000 972,000
Accrued expenses and other liabilities 9,561,000 11,413,000
------------- -------------
360,660,000 316,488,000
------------- -------------
MINORITY INTEREST (Note 3) 31,574,000 28,045,000
COMMITMENTS AND CONTINGENCIES (Note 8) -- --
SHAREHOLDERS' EQUITY (Note 5):
Shares of beneficial interest, $1 par; authorized
unlimited; issued and outstanding 13,318,329 shares at June 30,
1999 and 13,299,723 shares at December 31, 1998 13,318,000 13,300,000
Capital contributed in excess of par 145,506,000 145,103,000
Distributions in excess of net income (23,048,000) (21,321,000)
------------- -------------
135,776,000 137,082,000
$ 528,010,000 $ 481,615,000
============= =============
</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 June 30
----------------------------- -----------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES:
Gross revenues from real estate $ 21,659,000 $ 13,783,000 $ 42,759,000 $ 27,308,000
Interest and other income 402,000 133,000 564,000 255,000
------------- ------------- ------------- -------------
22,061,000 13,916,000 43,323,000 27,563,000
------------- ------------- ------------- -------------
EXPENSES:
Property operating expenses 7,512,000 5,049,000 14,889,000 10,142,000
Depreciation and amortization 3,310,000 2,113,000 6,525,000 4,251,000
General and administrative expenses 994,000 868,000 1,846,000 1,607,000
Interest expense 5,360,000 1,856,000 10,467,000 3,834,000
------------- ------------- ------------- -------------
17,176,000 9,886,000 33,727,000 19,834,000
------------- ------------- ------------- -------------
Income before equity in
unconsolidated entities, gains
on sales of interests in real
estate and minority interest in
operating partnership 4,885,000 4,030,000 9,596,000 7,729,000
EQUITY IN LOSS OF PREIT-RUBIN, INC.
(Note 2) (856,000) (501,000) (1,948,000) (859,000)
EQUITY IN INCOME OF PARTNERSHIPS
AND JOINT VENTURES (Note 3) 1,377,000 1,214,000 2,843,000 2,689,000
GAINS ON SALES OF INTERESTS IN
REAL ESTATE -- 1,766,000 1,346,000 1,766,000
------------- ------------- ------------- -------------
Income before minority interest in
operating partnership 5,406,000 6,509,000 11,837,000 11,325,000
MINORITY INTEREST IN OPERATING
PARTNERSHIP (488,000) (304,000) (1,049,000) (529,000)
------------- ------------- -------------- -------------
NET INCOME $ 4,918,000 $ 6,205,000 $ 10,788,000 $ 10,796,000
============= ============= ============= =============
BASIC INCOME PER SHARE (Note 5) $ .37 $ .47 $ .81 $ .81
============ ============ ============== =============
DILUTED INCOME PER SHARE (Note 5) $ .37 $ .47 $ .81 $ .81
============ ============ ============== =============
</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)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30
------------------------------
1999 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 10,788,000 $ 10,796,000
Adjustments to reconcile net income to net cash
provided by operating activities-
Minority interest in operating partnership 1,049,000 529,000
Depreciation and amortization 6,525,000 4,251,000
Provision for doubtful accounts 297,000 87,000
Gains on sales of interests in real estate (1,346,000) (1,766,000)
Equity in loss of PREIT-RUBIN, Inc. 1,948,000 859,000
Decrease in allowance for possible losses (70,000) (98,000)
Change in assets and liabilities-
Rents and sundry receivables (1,015,000) (865,000)
Deferred costs, prepaid real estate taxes and expenses (3,999,000) 1,099,000
Accrued pension and retirement benefits (49,000) (34,000)
Accrued expenses and other liabilities (1,912,000) 262,000
Tenants' deposits and deferred rents 243,000 (221,000)
Others 167,000 123,000
------------- -------------
Net cash provided by operating activities 12,626,000 15,022,000
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in wholly-owned real estate (18,577,000) (1,810,000)
Investments in property under development (21,683,000) (11,185,000)
Investment in and advances to PREIT-RUBIN, Inc. (1,376,000) (200,000)
Investments in partnerships and joint ventures (2,244,000) (6,424,000)
Cash proceeds from sale of interest in partnership 1,093,000 1,958,000
Cash distributions from partnerships and joint ventures
in excess of equity in income 1,882,000 464,000
------------- -------------
Net cash used in investing activities (40,905,000) (17,197,000)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal installments on mortgage notes payable (1,603,000) (918,000)
Repayment of mortgage notes payable (17,000,000) (33,680,000)
Net (payments) borrowings under revolving credit facility (60,800,000) 50,551,000
Proceeds from mortgage notes payable 120,500,000 --
Shares of beneficial interest issued 82,000 206,000
Payment of deferred financing and equity offering costs (1,438,000) (1,076,000)
Distributions paid to shareholders (12,515,000) (12,499,000)
Distributions paid to OP Unit holders (1,096,000) (608,000)
Distributions to other minority partners (139,000) (12,000)
------------- -------------
Net cash provided by financing activities 25,991,000 1,964,000
------------- -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (2,288,000) (211,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 6,135,000 1,324,000
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,847,000 $ 1,113,000
============= =============
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING ACTIVITIES:
Accrual of construction costs $ 4,732,000 $ --
============= ============
</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, 1999
1. BASIS OF PRESENTATION:
The Registrant prepared the consolidated financial statements pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with 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.
Certain prior period amounts have been reclassified to conform with current
period presentation.
2. INVESTMENT IN PREIT-RUBIN, INC.:
PREIT-RUBIN, Inc. ("PRI") is responsible for various activities, including
management, leasing and real estate development of certain of the Registrant's
properties and for properties on behalf of third parties. Total management fees
paid by the Registrant's properties to PRI are included in property operating
expenses in the accompanying consolidated statements of income and amounted to
$193,000 and $291,000 for the three and six-month periods ended June 30, 1999,
respectively, and $53,000 and $93,000 for the three and six-month periods ended
June 30, 1998, respectively. The Registrant's properties also paid leasing and
development fees to PRI totaling $226,000 and $442,000 for the three and
six-month periods ended June 30, 1999, respectively, and $319,000 and $455,000
for the three and six-month periods ended June 30, 1998, respectively.
Leasing and development fees paid by the Registrant's properties to PRI are
capitalized and amortized to expense in accordance with the Registrant's normal
accounting policies. Intercompany profits earned by PRI related to such
activities are deferred and will be amortized to income over these same periods
in order to more properly match revenues and expenses.
-5-
<PAGE>
PRI also provides management, leasing and development services for partnerships
and other ventures in which certain officers of the Registrant and PRI have
either direct or indirect ownership interests. Total revenues earned by PRI for
such services were $856,000 and $1,703,000 for the three and six-month periods
ended June 30, 1999, respectively, and $860,000 and $1,742,000 for the three and
six-months periods ended June 30, 1998, respectively. As of June 30, 1999 and
December 31, 1998, $1,459,000 and $1,682,000, respectively, was due from these
affiliates. Of these amounts, approximately $642,000 was collected subsequent to
June 30, 1999.
Summarized unaudited financial information for PRI as of and for the three and
six-month periods ended June 30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
For the Six For the Three
Months Ended Months Ended
June 30 June 30
---------------------------------------------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Total assets $ 9,920,000 $ 11,122,000 $ 9,920,000 $ 11,122,000
=============== =============== =============== ===============
Management fees $ 2,469,000 $ 2,477,000 $ 1,231,000 $ 1,199,000
Leasing commissions 2,402,000 2,500,000 1,331,000 1,276,000
Development fees 475,000 563,000 233,000 373,000
Other revenues 1,498,000 1,455,000 1,011,000 825,000
--------------- --------------- --------------- ---------------
Total revenue $ 6,844,000 $ 6,995,000 $ 3,806,000 $ 3,673,000
=============== =============== =============== ===============
Net loss $ 2,051,000 $ 904,000 $ 901,000 $ 527,000
=============== =============== =============== ===============
Registrant's share of net loss $ 1,948,000 $ 859,000 $ 856,000 $ 501,000
=============== =============== =============== ===============
</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 18 partnerships and joint
ventures and 1 property under development at June 30, 1999, and 19 partnerships
and joint ventures and 2 properties under development at December 31, 1998 and
the Registrant's equity in income for the three and six-month periods ended June
30, 1999 and 1998:
-6-
<PAGE>
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---------------- ---------------
ASSETS
<S> <C> <C>
Investments in real estate, at cost:
Multifamily properties $ 54,816,000 $ 54,396,000
Retail properties 197,357,000 185,900,000
Industrial property -- 1,275,000
Properties under development 52,296,000 25,601,000
Land 926,000 926,000
---------------- ---------------
Total investments in real estate 305,395,000 268,098,000
Less- Accumulated depreciation 66,909,000 64,478,000
---------------- ---------------
238,486,000 203,620,000
Cash and cash equivalents 8,384,000 7,107,000
Deferred costs, prepaid real estate taxes and expenses, and other
assets, net 30,830,000 34,923,000
---------------- ---------------
Total assets $ 277,700,000 $ 245,650,000
================ ===============
LIABILITIES AND PARTNERS' EQUITY
Mortgage notes payable $ 227,071,000 $ 218,278,000
Bank loans payable 3,300,000 3,260,000
Construction loans payable 15,106,000 --
Other liabilities 17,631,000 9,675,000
---------------- ---------------
Total liabilities 263,108,000 231,213,000
---------------- ---------------
Net equity 14,592,000 14,437,000
Less: Partners' share 983,000 998,000
---------------- ---------------
Investment in partnerships and joint ventures $ 13,609,000 $ 13,439,000
================ ===============
</TABLE>
-7-
<PAGE>
EQUITY IN INCOME OF PARTNERSHIPS AND JOINT VENTURES
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
---------------------------------------------------------------------
1999 1998 1999 1998
--------------- ----------------- --------------- ----------------
<S> <C> <C> <C> <C>
Gross revenues from real estate $ 14,363,000 $ 13,312,000 $ 28,521,000 $ 28,047,000
---------------- ---------------- ---------------- ---------------
Expenses:
Property operating expenses 4,830,000 4,702,000 9,682,000 10,104,000
Mortgage and bank loan interest 4,441,000 4,093,000 8,629,000 8,326,000
Depreciation and amortization 2,311,000 2,083,000 4,465,000 4,154,000
---------------- ---------------- ---------------- ---------------
11,582,000 10,878,000 22,776,000 22,584,000
---------------- ---------------- ---------------- ---------------
2,781,000 2,434,000 5,745,000 5,463,000
Partners' share (1,404,000) (1,220,000) (2,902,000) (2,774,000)
---------------- ---------------- ---------------- ---------------
Equity in income of partnerships and joint
ventures $ 1,377,000 $ 1,214,000 $ 2,843,000 $ 2,689,000
================ ================ ================ ===============
</TABLE>
4. MORTGAGE NOTES PAYABLE:
On April 13, 1999, the Registrant completed the financing of eight multifamily
communities with $108 million of permanent, fixed-rate, long-term debt. The
financing replaces short-term floating rate debt with loans with a weighted
average fixed interest rate of 6.77%. The loans, secured by the eight
properties, amortize over 30 years and mature in May 2009. Approximately $88
million of the proceeds was used to repay outstanding amounts under the
Registrant's Credit Facility. The balance of the proceeds was used to pay off a
short-term floating rate loan of approximately $17 million which was secured by
the recently acquired Northeast Tower Center located in Philadelphia,
Pennsylvania and to fund the financing costs of approximately $3 million.
The Properties secured by this permanent debt are as follows:
<TABLE>
<CAPTION>
Property Name Location Units Loan Amount (1)
-------------------------------- ---------------------- --------- ---- ----------
<S> <C> <C>
Boca Palms Apartments Boca Raton, FL 522 $ 22,600,000
Cobblestone Apartments Pompano Beach, FL 384 13,850,000
Palms of Pembroke Pembroke Pines, FL 348 16,600,000
Marylander Apartments Baltimore, MD 508 12,300,000
Hidden Lakes Apartments Dayton, OH 360 10,700,000
Kenwood Gardens Toledo, OH 504 7,250,000
Lakewood Hills Apartments Harrisburg, PA 562 18,750,000
2031 Locust Street Philadelphia, PA 87 5,950,000
--------- -----------------
3,275 $ 108,000,000
========= =================
</TABLE>
(1) Each loan is non-recourse and the loans are not cross-collateralized.
-8-
<PAGE>
5. EARNINGS PER SHARE:
Basic Earnings Per Share is based on the weighted average number of common
shares outstanding during the year. Diluted Earnings Per Share is based on the
weighted average number of shares outstanding during the year, adjusted to give
effect to common share equivalents. A reconciliation between basic and diluted
Earnings Per Share is shown below:
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, 1999 June 30, 1999
------------------------------------- --------------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
----------- ---------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Net income $ 4,918,000 13,314,945 $ .37 $10,788,000 13,311,782 $ .81
=========== ========== =========== =========== ========== ===========
DILUTED EARNINGS PER SHARE:
Net income $ 4,918,000 13,314,945 $10,788,000 13,311,782
Share options issued -- 10,087 -- 7,022
----------- ---------- ----------- ----------
$ 4,918,000 13,325,032 $ .37 $10,788,000 13,318,804 $ .81
=========== ========== =========== =========== ========== ===========
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
----------- ---------- ----------- ----------- ---------- -----------
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>
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, 1999 August 31, 1999 September 15, 1999 $ .47
July 15, 1998 August 31, 1998 September 15, 1998 $ .47
-9-
<PAGE>
7. CASH FLOW INFORMATION:
Cash paid for interest was $5,219,000 (net of capitalized interest of $419,000)
and $1,994,000 (net of capitalized interest of $199,000) for the three month
periods ended June 30, 1999 and 1998, respectively.
Cash paid for interest was $10,015,000 (net of capitalized interest of $849,000)
and $4,570,000 (net of capitalized interest of $330,000) for the six-month
periods ended June 30, 1999 and 1998, 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.
As part of the merger with PREIT-RUBIN, Inc. (formerly The Rubin Organization,
Inc.) the Registrant entered into a contribution agreement (the "Contribution
Agreement") which includes a provision for PREIT Associates, L.P., the
Registrant's operating partnership to issue up to 800,000 additional Class A
Operating Partnership ("OP") units over the five-year period, beginning October
1, 1997 and ending September 30, 2002 according to a formula based upon the
Registrant's adjusted funds from operations per share during the five-year
period. The Contribution Agreement establishes "hurdle" and "target" levels for
the Registrant's adjusted funds from operations per share during specified
earn-out periods to determine whether, and to what extent, the contingent OP
units will be issued. The additional OP units issuable under the Contribution
Agreement are accounted for as additional purchase price when such amounts are
determinable. Through December 31, 1998, 162,500 contingent OP units have been
earned.
At June 30, 1999, the Registrant is required to fund approximately $61 million
($44 million for wholly-owned properties and $17 million represents the
Registrant's share for partnerships and joint ventures) to complete current
development and redevelopment projects. In connection with certain development
properties, PREIT Associates, L.P. may be required to issue additional OP units
upon the achievement of certain financial results.
9. SEGMENT INFORMATION:
In 1998, the Registrant adopted Statement of Financial Accounting Standards
("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related
Information." This Statement established standards for reporting financial
information about operating segments in interim and annual financial reports and
provides for a "management approach" in identifying the reportable segments.
The Registrant has four reportable segments: (1) retail properties, (2)
multifamily properties, (3) other, and (4) corporate. The retail segment
includes the operation and management of 21 regional and community shopping
centers (11 wholly owned and 10 owned in joint venture form). The multifamily
segment includes the operation and management of 19 apartment communities (14
wholly owned and 5 owned in joint venture form). The other segment includes the
operation and management of 6 retail properties under development (4 wholly
owned and 2 owned in joint venture form), 5 industrial properties, (all wholly
owned) and 3 land parcels (1 wholly owned and 2 owned in joint venture form).
The corporate segment is responsible for cash and investment management and
certain other general support functions.
-10-
<PAGE>
The accounting policies for the segments are the same as those the Registrant
uses for its consolidated financial reporting, except that for segment reporting
purposes, the Registrant uses the "proportionate-consolidation method" of
accounting (a non-GAAP measure) for joint venture properties, instead of the
equity method of accounting. The Registrant calculates the
proportionate-consolidation method by applying its percentage ownership interest
to the historical financial statements of its equity method investments.
<TABLE>
<CAPTION>
(In thousands)
Adjustments
to Equity Total
Six Months Ended June 30, 1999 Retail Multifamily Other Corporate Total Method Consolidated
- ------------------------------ -------- ----------- -------- --------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Real estate operating revenues $ 30,453 $ 25,585 $ 776 $ -- $ 56,814 $ (14,055) $ 42,759
Real estate operating expense 9,255 10,377 14 -- 19,646 (4,757) 14,889
-------- --------- -------- --------- --------- --------- -----------
Net operating income 21,198 15,208 762 -- 37,168 (9,298) 27,870
-------- --------- -------- --------- --------- --------- -----------
General and administrative expenses -- -- -- (1,846) (1,846) -- (1,846)
Interest income -- -- -- 564 564 -- 564
PRI net operating income -- -- -- (1,203) (1,203) 1,203 --
-------- --------- -------- --------- --------- --------- ----------
EBITDA 21,198 15,208 762 (2,485) 34,683 (8,095) 26,588
-------- --------- -------- --------- --------- --------- -----------
Interest expense (8,424) (5,512) (584) (565) (15,085) 4,618 (10,467)
Depreciation and amortization (4,792) (3,713) (50) (656) (9,211) 2,686 (6,525)
PRI income taxes -- -- 104 104 (104) --
Gains on sales of interests in real
estate 445 -- 901 -- 1,346 -- 1,346
Minority interest in operating
partnership -- -- -- (1,049) (1,049) -- (1,049)
Equity in interest of partnerships
and joint ventures -- -- -- -- -- 2,843 2,843
Equity in loss of PRI -- -- -- -- -- (1,948) (1,948)
-------- --------- -------- --------- --------- --------- -----------
Net income $ 8,427 $ 5,983 $ 1,029 $ (4,651) $ 10,788 $ -- $ 10,788
-------- --------- -------- --------- --------- --------- -----------
Investments in real estate, at cost $279,442 $ 233,849 $ 42,991 $ -- $ 556,282 $ -- $ 556,282
-------- --------- -------- --------- --------- --------- -----------
Total assets $231,576 $ 202,850 $ 54,203 $ 169,623 $ 658,252 $(130,242) $ 528,010
-------- --------- -------- --------- --------- --------- -----------
Recurring capital expenditures $ 185 $ 1,497 $ -- $ -- $ 1,682 $ (185) $ 1,497
-------- --------- ======== --------- --------- --------- -----------
Adjustments
to Equity Total
Six Months Ended June 30, 1998 Retail Multifamily Other Corporate Total Method Consolidated
- ------------------------------ --------- ----------- -------- --------- --------- ----------- ------------
Real estate operating revenues $ 17,939 $ 22,224 $ 809 $ -- $ 40,972 $ (13,664) $ 27,308
Real estate operating expense 5,666 9,364 13 -- 15,043 (4,901) 10,142
-------- --------- -------- --------- --------- --------- ---------
Net operating income 12,273 12,860 796 -- 25,929 (8,763) 17,166
-------- --------- -------- --------- --------- --------- ---------
General and administrative expenses -- -- -- (1,607) (1,607) -- (1,607)
Interest income -- -- -- 255 255 -- 255
PRI net operating income -- -- -- (506) (506) 506 --
-------- --------- -------- --------- --------- --------- --------
EBITDA 12,273 12,860 796 (1,858) 24,071 (8,257) 15,814
-------- --------- -------- --------- --------- --------- ---------
Interest expense (4,027) (3,311) (428) (451) (8,217) 4,383 (3,834)
Depreciation and amortization (2,717) (3,330) (59) (595) (6,701) 2,450 (4,251)
PRI income taxes -- -- -- 406 406 (406) --
Gains on sales of interests in real
estate -- 1,766 -- -- 1,766 -- 1,766
Minority interest in operating
partnership -- -- -- (529) (529) -- (529)
Equity in interest of partnerships
and joint ventures -- -- -- -- -- 2,689 2,689
Equity in loss of PRI -- -- -- -- -- (859) (859)
-------- --------- -------- --------- --------- --------- ---------
Net income $ 5,529 $ 7,985 $ 309 $ (3,027) $ 10,796 $ -- $ 10,796
-------- --------- -------- --------- --------- --------- ---------
Investments in real estate, at cost $120,369 $ 169,920 $ 18,577 $ -- $ 301,866 $ -- $ 301,866
-------- --------- -------- --------- --------- --------- ---------
Total assets $106,946 $ 105,079 $ 17,532 $ 159,726 $ 389,283 $(109,210) $ 280,073
-------- --------- -------- --------- --------- --------- ---------
Recurring capital expenditures $ 537 $ 1,057 $ -- $ -- $ 1,594 $ (536) $ 1,058
-------- --------- -------- --------- --------- --------- ---------
</TABLE>
-11-
<PAGE>
<TABLE>
<CAPTION>
(In thousands)
Adjustments
to Equity Total
Three Months Ended June 30, 1999 Retail Multifamily Other Corporate Total Method Consolidated
- -------------------------------- --------- ----------- --------- --------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Real estate operating revenues $ 15,578 $ 12,781 $ 379 $ -- $ 28,738 $ (7,079) $ 21,659
Real estate operating expense 4,703 5,172 11 -- 9,886 (2,374) 7,512
-------- --------- -------- --------- --------- --------- -----------
Net operating income 10,875 7,609 368 -- 18,852 (4,705) 14,147
-------- --------- -------- --------- --------- --------- -----------
General and administrative expenses -- -- -- (994) (994) -- (994)
Interest income -- -- -- 402 402 -- 402
PRI net operating income -- -- -- (403) (403) 403 --
-------- --------- -------- --------- --------- --------- ----------
EBITDA 10,875 7,609 368 (995) 17,857 (4,302) 13,555
-------- --------- -------- --------- --------- --------- -----------
Interest expense (3,829) (3,279) (421) (211) (7,740) 2,380 (5,360)
Depreciation and amortization (2,466) (1,873) (24) (348) (4,711) 1,401 (3,310)
Minority interest in operating
partnership -- -- -- (488) (488) -- (488)
Equity in interest of partnerships
and joint ventures -- -- -- -- -- 1,377 1,377
Equity in loss of PRI -- -- -- -- -- (856) (856)
-------- --------- -------- --------- --------- --------- -----------
Net income $ 4,580 $ 2,457 $ (77) $ (2,042) $ 4,918 $ -- $ 4,918
-------- --------- -------- --------- --------- --------- -----------
Investments in real estate, at cost $279,442 $ 233,849 $ 42,991 $ -- $ 556,282 $ -- $ 556,282
-------- --------- -------- --------- --------- --------- -----------
Total assets $231,576 $ 202,850 $ 54,203 $ 169,623 $ 658,252 $(130,242) $ 528,010
-------- --------- -------- --------- --------- --------- -----------
Recurring capital expenditures $ 48 $ 670 $ -- $ -- $ 718 $ (93) $ 625
-------- --------- -------- --------- --------- --------- -----------
Adjustments
to Equity Total
Three Months Ended June 30, 1998 Retail Multifamily Other Corporate Total Method Consolidated
- -------------------------------- --------- ----------- --------- --------- --------- ----------- ------------
Real estate operating revenues $ 8,898 $ 11,001 $ 405 $ -- $ 20,304 $ (6,521) $ 13,783
Real estate operating expense 2,745 4,592 8 -- 7,345 (2,296) 5,049
-------- --------- -------- --------- --------- --------- ---------
Net operating income 6,153 6,409 397 -- 12,959 (4,225) 8,734
-------- --------- -------- --------- --------- --------- ---------
General and administrative expenses -- -- -- (868) (868) -- (868)
Interest income -- -- -- 133 133 -- 133
PRI net operating income -- -- -- (286) (286) 286 --
-------- --------- -------- --------- --------- --------- --------
EBITDA 6,153 6,409 397 (1,021) 11,938 (3,939) 7,999
-------- --------- -------- --------- --------- --------- ---------
Interest expense (2,018) (1,581) (201) (240) (4,040) 2,184 (1,856)
Depreciation and amortization (1,371) (1,651) (29) (291) (3,342) 1,229 (2,113)
PRI income taxes -- -- -- 187 187 (187) --
Gains on sales of interests in real
estate -- 1,766 -- -- 1,766 -- 1,766
Minority interest in operating
partnership -- -- -- (304) (304) -- (304)
Equity in interest of partnerships
and joint ventures -- -- -- -- -- 1,214 1,214
Equity in loss of PRI -- -- -- -- -- (501) (501)
-------- --------- -------- --------- --------- --------- ---------
Net income $ 2,764 $ 4,943 $ 167 $ (1,669) $ 6,205 $ -- $ 6,205
-------- --------- -------- --------- --------- --------- ---------
Investments in real estate, at cost $120,369 $ 162,920 $ 18,577 $ -- $ 301,866 $ -- $ 301,866
-------- --------- -------- --------- --------- --------- ---------
Total assets $106,946 $ 105,079 $ 17,532 $ 159,726 $ 389,283 $(109,210) $ 280,073
-------- --------- -------- --------- --------- --------- ---------
Recurring capital expenditures $ 140 $ 636 $ -- $ -- $ 776 $ (152) $ 624
-------- --------- -------- --------- --------- --------- ---------
</TABLE>
-12-
<PAGE>
10. RECENT ACCOUNTING PRONOUNCEMENTS:
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS 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. In June 1999, the FASB issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133," which delayed the effective date
of SFAS No. 133 for one year until January 1, 2001. The Registrant does not
expect the adoption of this statement to have a material impact on its financial
position or results of operations.
-13-
<PAGE>
Item 2.
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
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 to continue to qualify as a REIT under the Internal
Revenue 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 such as
property acquisitions, scheduled debt maturities, renovations, expansions and
other non-recurring capital improvements through long-term secured and unsecured
indebtedness and the issuance of additional equity securities.
The Credit Facility
As of June 30, 1999, $77.8 million of borrowings under the Credit Facility were
outstanding ($74.5 million directly by the Registrant and $3.3 million through
partnerships and joint ventures). In addition, the Registrant has pledged $5.8
million under the Credit Facility as collateral for several letters of credit
drawn to facilitate development projects. Subject to the terms and conditions of
the Credit Facility, up to $66.4 million was available to fund property
acquisitions, scheduled debt maturities and other uses. At June 30, 1999 the
interest rate on the Credit Facility was 6.84%.
Mortgage Notes
In order to secure additional funds for its acquisition and development
activities, on April 13, 1999, the Registrant concluded the financing of eight
multifamily communities with $108 million of permanent, fixed-rate, long-term
debt. With the financing, the Registrant replaced short-term floating rate debt
with fixed rate, mortgage debt. The new debt carries a weighted average fixed
interest rate of approximately 6.77%, equating to a spread of 158 basis points
over the yield on ten year U. S. Treasury Notes at the time rates were locked.
The eight properties (see Note 4 of the Consolidated Financial Statements)
secure the non-recourse loans, which amortize over 30 years and mature in May
2009. Proceeds from these newly-placed loans were used to 1) repay approximately
$88 million of the Credit Facility, 2) pay off a short-term floating rate loan
of approximately $17 million and 3) fund approximately $3 million in closing
costs. As a result of the repayment of the Registrant's Credit Facility, a
balance of approximately $60 million of the Registrant's Credit Facility
remained outstanding.
-14-
<PAGE>
In addition to amounts due under the Credit Facility prior to December 31, 2000,
a mortgage loan, secured by a property owned by one partnership in which the
Registrant has an interest, matures by its term. The balloon payment on this
loan is $1.2 million of which the Registrant's proportionate share is $.6
million. A mortgage loan on a property wholly-owned by the Registrant also
matures by its terms. The balloon payment on this loan totals $14.9 million.
Acquisitions and Dispositions
The Registrant is actively involved in pursing and evaluating a number of
individual property and portfolio acquisition opportunities. In addition, the
Registrant has stated that a key strategic goal is to obtain managerial control
of all of its assets. In certain cases where existing joint venture assets are
managed by outside partners, the Registrant is considering the possible
acquisition of these outside interests. In certain cases where that opportunity
does not exist, the Registrant is considering the disposition of its interests.
There can be no assurance that the Registrant will consummate any such
acquisition or disposition.
Completed Acquisitions
The following acquisitions were completed during 1999:
<TABLE>
<CAPTION>
Property Location Capital Resources
- ----------------------------------------------------------------------- ------------------------------------
Acquisition Property Purchase Credit Assumed OP
Date Type City State Price Facility Debt Units
- ----------- --------- ------------ ----- ----------- --------- ----------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
April 1999 Shopping Philadelphia PA $ 13,500 $ -- $ 12,500 $ 1,000
Center
June 1999 Shopping Harrisburg PA 20,000 20,000 -- --
Center ----------- --------- ----------- ---------
Total Completed Acquisitions $ 33,500 $ 20,000 $ 12,500 $ 1,000
=========== ========= =========== =========
</TABLE>
Development, Expansions and Renovations
The Registrant is involved in a number of development and redevelopment
projects, which may require equity funding by the Registrant or third-party debt
or equity financing. Currently, the Registrant is developing a site in Plymouth
Meeting, PA for the Metroplex Shopping Center (a joint venture project) to build
a 780,000 square foot power center. During May 1999, the Registrant along with
its joint venture partner, acquired the 103-acre site for this development
project. The Registrant has also began construction of a 560,000 square foot
power center for Paxton Towne Centre located in Harrisburg, PA. For each
development and redevelopment project, the Registrant will evaluate the
financing opportunities available to it at the time a 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 governed 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.
-15-
<PAGE>
Funds from Operations
Funds from operations (FFO) increased by $3,330,000 for the six months ended
June 30, 1999, as compared to the six months ended June 30, 1998, as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------------------ -------------------------------
Funds from Operations(1) 1999 1998 1999 1998
- -------------------------------------------------- -------------- -------------- ----------------- ------------
<S> <C> <C> <C> <C>
Income before minority interest in operating
partnership $ 5,406,000 $ 6,509,000 $ 11,837,000 $ 11,325,000
Less: Gains on sales of interests in real estate -- (1,766,000) (1,346,000) (1,766,000)
Add:
Depreciation and amortization-
Wholly-owned and consolidated
partnerships 3,266,000 2,089,000 6,422,000 4,178,000
Unconsolidated partnerships and joint
ventures 1,137,000 1,008,000 2,196,000 2,007,000
Excess purchase price over net assets
acquired 54,000 29,000 107,000 58,000
Less:
Refinancing prepayment fee 55,000 -- 55,000 --
Depreciation of non-real estate assets (60,000) (57,000) (120,000) (114,000)
Amortization of deferred financing costs (237,000) (113,000) (376,000) (243,000)
-------------- ------------- -------------- ------------
Funds from operations $ 9,621,000 $ 7,699,000 $ 18,775,000 $ 15,445,000
============== ============= ============== ============
Weighted average number of shares outstanding 13,314,945 13,297,470 13,311,782 13,294,718
Weighted average effect of full conversion of OP
Units 1,320,688 646,286 1,297,232 646,286
-------------- ------------- -------------- ------------
14,635,633 13,943,756 14,609,014 13,941,004
============== ============= ============== ============
</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.
-16-
<PAGE>
Cash Flows
During the six months ended June 30, 1999, the Registrant generated $12.6
million in cash flow from operating activities. Investing activities used cash
of $40.9 million including (i) $1.0 million in investments in property under
development, net of payables, (ii) $39.3 million in investments in wholly-owned
real estate assets, (iii) $3.6 million in investments in the affiliated
management company and partnerships, offset by (iv) cash proceeds from the sale
of a partnership interest of $1.1 million and (v) distributions from
partnerships in excess of equity in income of $1.9 million. Financing activities
provided cash flow of $26.0 million and included (i) $120.5 million in net
proceeds from mortgages, (ii) the payoff of matured debt of $17.0 million and
(iii) a net paydown of $60.8 million under the Registrant's Credit Facility,
offset by (iv) $13.7 million of distributions to shareholders, OP unit holders
and minority interests, (v) payments of deferred financing costs of $1.4
million, and (vi) principal installments on mortgages of $1.6 million.
Commitments
At June 30, 1999, the Registrant is required to fund approximately $61 million
($44 million for wholly-owned properties and $17 million represents the
Registrant's share for partnerships and joint ventures) to complete current
development and redevelopment projects. In connection with certain development
properties, PREIT Associates, L.P., may be required to issue additional OP units
upon the achievement of certain financial results.
Interest Rate Protection
In order to reduce exposure to variable interest rates, the Registrant entered
into a six-year interest rate swap agreement with First Union on $20 million of
indebtedness which fixes a rate of 6.12% per annum versus 30-day LIBOR until
2001.
Contingent Liability
The Registrant along with certain of its joint venture partners has guaranteed
debt totaling $7 million.
Results of Operations
Three Month Periods Ended June 30, 1999 and 1998
Gross revenues from real estate increased by $7,900,000 to $21,700,000 for the
three-month period ended June 30, 1999, as compared to the corresponding period
in 1998. The 1999 period included $7,300,000 of revenues attributable to the
acquisitions made by the Registrant during 1998 (the "1998 Acquisitions") as
described in the Registrant's 1998 Form 10-K. Acquisitions made during 1999 (the
"1999 Acquisitions"), accounted for an additional $400,000 of revenues. Revenues
from properties owned during both periods increased by $200,000 primarily as a
result of an increase in apartment revenues.
Property operating expenses increased by $2,400,000 to $7,500,000. This is
entirely attributable to $2,400,000 of operating expenses from the 1998
Acquisitions.
-17-
<PAGE>
Depreciation and amortization increased by $1,200,000 to $3,300,000 primarily as
a result of the 1998 Acquisitions and increased amortization of financing costs.
Interest expense increased by $3,500,000 to $5,400,000. This increase is
primarily attributable to $1,500,000 of interest expense on previously mortgaged
properties from the 1998 Acquisitions and $1,600,000 of interest expense
incurred on the newly placed mortgages.
Equity in income of partnerships and joint ventures increased by $200,000 to
$1,400,000. The 1999 period includes $100,000 of equity in income attributable
to the 1998 Acquisitions. Equity in income of properties owned during both
periods increased by $100,000.
Equity in net loss of PREIT-RUBIN, Inc. for the 1999 period was $800,000 as
compared to $500,000 in the 1998 period.
Minority interest in the operating partnership increased from $300,000 to
$500,000 as a result of OP units issued in connection with five acquisitions
during 1998 and additional contingent OP units issued under the Contribution
Agreement. Minority interest partners held a 9.2% and 4.6% interest in the
operating partnership at June 30, 1999 and 1998, respectively.
Gains on sales of interests in real estate in the 1998 period were $1,800,000
from the sales of shopping centers. There were no gains during the comparable
1999 period.
Net income for the quarter ended June 30, 1999 decreased to $4,900,000 from
$6,200,000 as reported in the comparable period in the prior year.
Six Month Periods Ended June 30, 1999 and 1998
Gross revenues from real estate increased by $15,400,000 to $42,700,000 for the
six-month period ended June 30, 1999, as compared to the corresponding period in
1998. The 1999 period included $14,500,000 of revenues attributable to the 1998
Acquisitions as described in the Registrant's 1998 Form 10-K. The 1999
Acquisitions accounted for an additional $400,000 of revenues. Revenues from
properties owned during both periods increased by $500,000 primarily as a result
of an increase in apartment revenues.
Property operating expenses increased by $4,700,000 to $14,900,000. This was
entirely attributable to $4,700,000 of expenses from the 1998 Acquisitions.
Depreciation and amortization increased by $2,300,000 to $6,500,000 entirely as
a result of the 1998 Acquisitions and increased amortization of financing costs.
Interest expense increased by $6,600,000 to $10,400,000. Interest expense
attributable to mortgaged properties increased by $5,000,000 due primarily to
the 1998 Acquisitions. Interest expense incurred against the Registrant's Credit
Facility to fund the 1998 Acquisitions increased by $1,400,000. Interest expense
incurred on the newly placed mortgages resulted in a $1,600,000 increase.
Equity in income of partnerships and joint ventures increased by $200,000 to
$2,800,000. The 1999 period includes $200,000 of equity in income attributable
to the 1998 Acquisitions.
-18-
<PAGE>
Equity in net loss of PREIT-RUBIN, Inc. for the 1999 period was $1,900,000 as
compared to $900,000 in the 1998 period.
Minority interest in the operating partnership increased from $500,000 for the
six months ended June 30, 1998 to $1,000,000 for the six months ended June 30,
1999 as a result of OP units issued in connection with five acquisitions during
1998 and additional contingent OP units issued under the Contribution Agreement.
Minority interest partners held a 9.2% and 4.6% interest in the Operating
Partnership at June 30, 1999 and 1998, respectively.
Net income was $10,800,000 for both six month periods.
Year 2000 Issues
Overview of Y2K Issue
The Year 2000 or "Y2K" problem refers to the concept that many existing programs
that can use only two digits to identify a year in the date field. Those
programs were designed and developed at a time when data storage was expensive,
and the impact of the upcoming century change was not considered. If not
corrected, many programs may fail or provide inaccurate results at the turn of
the century. The Registrant (and tenants that provide the Registrant with a
significant percentage of its income) use information systems and control
systems which may be affected by the Y2K problem.
The Y2K Remediation Plan
In the latter months of 1997, the Registrant began assessing the myriad of
issues surrounding the Y2K problem. Several representatives from management and
various departments at regional and home offices, including property management,
financial, risk management and information systems participated in this
assessment.
Due to the number of issues implicated by the Y2K problem, the Registrant
decided to carry out the plan in two critical areas: information technology
systems ("IT Systems") and non-information technology systems ("Non-IT
Systems"). The Registrant established a Y2K Remediation Plan consisting of the
following phases with respect to each IT and Non-IT System: inventorying systems
and devices that are vulnerable to the Y2K problem, assessment of the
criticality of the inventoried items, remediation of the noncompliant items, and
testing of the corrections that have been applied. The following is a discussion
of each of these phases with respect to each of IT and Non-IT Systems,
including a summary of the results obtained to date and a time frame for
completion.
Area One - IT
The Registrant further delineated this phase into three segments. The first
segment is the core financial systems, namely, the accounting and payroll
systems. The Registrant believes these are its mission critical systems and has
determined these systems to be Y2K compliant.
The second segment covers desktop computing systems. As of this writing, the
Registrant has begun to replace a number of its desktop computers. These
computers are either older models which may become subject to Y2K errors or
which are incapable of running current versions of software programs which are
Y2K compliant. In addition to replacement of computer hardware, the Registrant
has and is continuing to replace or upgrade computer software which may become
subject to Y2K errors. The expected completion date for remediating these
desktop computing systems is October 31, 1999.
-19-
<PAGE>
The third segment covers our network computing and telecommunication systems.
The Registrant's computer systems are interconnected through local and wide area
networks. These networks rely on sophisticated telecommunications equipment. The
Registrant has attempted to identify the aspects of these networks which may be
impacted by the Y2K problem and to remediate these issues as they are
identified. To accomplish that goal, the Registrant is in the process of
upgrading a significant part of the hardware and software which are utilized in
its network. The internal network computing systems upgrade is expected to be
completed by October 31, 1999. The network is also reliant on the services of
many external telecommunications providers which are facing Y2K challenges.
Area Two - Non-IT Systems
The Registrant has identified several categories of Non-IT Systems used at the
real estate assets which have the most exposure to Y2K problems. These
categories include:
o Building Automation (e.g. Energy Management)
o Security Alarm Systems
o Fire and Life Safety Systems
o Elevators and Escalators
o Exterior Lighting
The Registrant has completed the first phase of its Remediation Plan for these
Non-IT Systems by compiling an inventory of the related machines and equipment.
The Registrant has engaged the assistance of outside engineering consultants to
help identify the potential Y2K problems which may impact the performance of
these systems.
The Registrant intends to respond to the consultant's findings, which are due by
the end of the third quarter, in an appropriate and commercially reasonable
manner taking remedial action where necessary and feasible.
The Registrant expects to complete the Year 2000 Remediation Plan, including
final testing, by the end of the fourth quarter of 1999.
Failure of IT Systems
The Registrant has obtained assurances from outside software providers and
hardware suppliers that its core financial systems are Y2K compliant. In
addition, the Registrant expects to correct the issues related to its desktop
computing and networking problems within its control before January 1, 2000,
thereby lowering or avoiding any increased cost(s) of correcting problems after
the fact.
Because the Registrant's major source of income is rental payments under its
tenants' leases, the failure of IT Systems is not expected to have a significant
effect on the Registrant's financial condition and results of operation. Even if
the Registrant were to experience problems with its IT Systems, the rental
payments under its tenants' leases would not be pardoned.
-20-
<PAGE>
Failure of Non-IT Systems
The Registrant believes that the Y2K dangers to its financial condition and
operation associated with a failure of embedded systems in the machinery and
equipment of its real estate are not material. Because most of these embedded
systems can be operated in a manual or by-pass mode, the Y2K problem is
substantially lessened until it can be remedied. Furthermore, each of the
Registrant's properties has, for the most part, separate building management
systems. Therefore, a Y2K problem experienced at one property should have no
effect on other properties.
The Registrant considered the preliminary findings of the outside engineering
consultants and concluded that, based on such preliminary findings, the Y2K
issues would not have a material adverse impact on its financial condition or
results of operations.
Y2K Problems of Registrant's Vendors
The successfulness of the Registrant's business is not dependent on the
operations of any one vendor or supplier. Accordingly, if any of the
Registrant's vendors or suppliers fails to operate due to Y2K related problems,
the Registrant expects to be able to engage alternate providers without
encountering any significant effect on its financial condition and results of
operations. In an effort to further its Y2K readiness, the Registrant has
surveyed major business partners, vendors and suppliers relative to their Y2K
compliance.
Developing Contingency Plans
After evaluating the results of a study of both its IT and Non-IT Systems, the
Registrant will develop a contingency plan for any material challenges it faces.
Management has determined that the appropriate total cost of its Y2K Plan and
the potential related impact on operation's amounts incurred to date have been
approximately $150,000 and the estimated remaining expenses of Y2K remediation
are expected to be approximately $200,000.
Costs associated with Y2K problems could have a material impact on the
Registrant's operations.
Summary
The Registrant does not believe that it is possible to identify and remediate
all of the possible Y2K problems that could impact its IT Systems or the
functionality of all of its Non-IT Systems. The Registrant's multi-faceted
approach to the Y2K issue is designed to enable the Registrant to be successful
in meeting its material challenges.
Although the Registrant believes its Y2K Plan is adequate to address the Y2K
issue, there can be no assurance to that effect.
-21-
<PAGE>
Forward-Looking Statements
The matters discussed in this report, as well as news releases issued from time
to time by the Registrant include use of forward-looking terminology such as
"may," "will," "should," "expect," "anticipate," "estimate," "plan," or
"continue" or the negative thereof or other variations thereon, or comparable
terminology which constitute "forward-looking statements." Such forward-looking
statements (including without limitation, information concerning the
Registrant's planned acquisition, development and divestiture activities, short-
and long-term liquidity position, ability to raise capital through public and
private offerings of debt and/or equity securities, availability of adequate
funds at reasonable cost, revenues and operating expenses for some or all of the
properties, leasing activities, occupancy rates, changes in local market
conditions or other competitive factors) involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of the Registrant's results to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements. The Registrant disclaims any obligation to update
any such factors or to publicly announce the result of any revisions to any of
the forward-looking statements contained herein to reflect future events or
developments.
-22-
<PAGE>
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of December 31, 1998, the Registrant's consolidated debt position consisted
of $150.0 million in fixed rate mortgage notes, $17.0 million in floating rate
mortgage notes, and $135.3 million borrowed under its revolving Credit Facility.
As a result of the refinancing described in Note 4 to the consolidated financial
statements and additional borrowings to June property acquisitions and
development activities, the Registrant's consolidated debt position consisted of
$268.9 million in fixed rate mortgage notes and $74.5 million borrowed under its
revolving Credit Facility.
A 100 basis point increase in market interest rates would result in a decrease
in the net financial instrument position of $15.5 million at June 30, 1999. A
100 basis point decrease in market interest rates would result in an increase in
the net financial instrument position of $16.2 million at June 30, 1999. Based
on the variable-rate debt included in the Registrant's debt portfolio, including
an interest rate swap agreement, as of June 30, 1999, a 100 basis point increase
in interest rates would result in an additional $545,000 in interest incurred at
June 30, 1999. A 100 basis point decrease would reduce interest incurred by
$545,000 at June 30, 1999.
There have been no material changes in the Registrant's qualitative disclosures
about market risk in 1999. Reference is made to Item 7A. in the Registrant's
Form 10-K for the year ended December 31, 1998.
-23-
<PAGE>
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
The 1999 Annual Meeting of Holders of Certificate of Beneficial Interest of the
Registrant was held on April 29, 1999.
At such meeting, Messrs. Sylvan M. Cohen, Lee H. Javitch and Jonathan B. Weller
were reelected to the Board of Trustees of the Registrant to serve for a term
ending at the Annual Meeting of Shareholders to be held in the spring of 2002
and until their respective successors are elected and qualified. In such
election, 11,627,760 votes were cast for Mr. Cohen, 11,631,008 votes were cast
for Mr. Javitch and 11,631,822 votes were cast for Mr. Weller. Under the Trust
Agreement for the Registrant, votes cannot be cast against a candidate. Proxies
filed at the 1999 Annual Meeting by holders of 149,221 shares withheld authority
to vote for Mr. Cohen, those filed by the holders of 145,973 shares withheld
authority to vote for Mr. Javitch and those filed by the holders of 145,159
shares withheld authority to vote for Mr. Weller. The following persons continue
as Trustees following the Annual Meeting: William Dimeling, Rosemarie Greco,
Ronald Rubin, George Rubin, Leonard Korman and Jeffrey Orleans.
Also at such meeting, the Registrant's shareholders voted to approve the
adoption of the 1999 Equity Incentive Plan (10,731,005 votes for, 905,038 votes
against, 158,938 abstentions), to approve the adoption of the Qualified Employee
Share Purchase Plan (11,137,551 votes for, 509,321 votes against, 130,109
abstentions) and to amend the 1990 Stock Option Plan for Non-Employee Trustees
(10,592,379 votes for, 1,018,546 votes against, 166,056 abstentions).
No "broker non-votes" were received at the 1999 Annual Meeting.
Item 5. Other Information
The Registrant issued a press release on August 12, 1999 containing financial
information for the quarter ended June 30, 1999. A copy of the press release is
attached hereto as Exhibit 99.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule (included in electronic filing format)
99. Press Release, issued August 12, 1999, containing financial
information for the period ended June 30, 1999
(b) Reports on Form 8-K
(i) Current Report on Form 8-K dated April 14, 1999 and filed on April
23, 1999.
(ii) Current Report on Form 8-K dated April 29, 1999 and filed on May 3,
1999.
-24-
<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-Finance and
Treasurer
Date: August 13, 1999
-25-
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<FISCAL-YEAR-END> DEC-31-1999
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<PAGE>
[PREIT GRAPHIC] NEWS Pennsylvania Real Estate Investment Trust
FOR RELEASE 200 South Broad Street
Philadelphia, PA 19102
www.preit.com
Phone: 215-875-0700
Fax: 215-546-7311
FOR FURTHER INFORMATION:
<TABLE>
<CAPTION>
<S> <C> <C>
AT THE COMPANY AT THE FINANCIAL RELATIONS BOARD
- -------------- --------------------------------
Edward A. Glickman Joe Calabrese Pamela King Judith Sylk-Siegel
Executive Vice President and CFO (General Info) (Analyst Info) (Media Info)
(215) 875-0700 (212) 661-8030 (212) 661-8030 (212) 661-8030
</TABLE>
FOR IMMEDIATE RELEASE
- ---------------------
August 12, 1999
Pennsylvania Real Estate Investment Trust Reports
Second Quarter 1999 Results, FFO Per Share Increases 20% to $0.66
Philadelphia, PA, August 12, 1999 -- Pennsylvania Real Estate Investment Trust
(NYSE:PEI) announced today the results of its operations for the second quarter
ended June 30, 1999.
Second Quarter Highlights
o Increased FFO by 20.0% to $0.66 per share on 14.6 million shares/OP units
outstanding from $0.55 per share on 13.9 million shares/OP units outstanding
during the second quarter of 1998
o Funds from operations for the quarter increased 25.0% to $9.6 million from
$7.7 million in 1998
o Increased combined net operating income 45.5% to $18.9 million from $13.0
million in 1998
o Retail net operating income increased 76.7% from the 1998 second quarter
o Multifamily net operating income grew 18.7% from the 1998 second quarter
o Commenced construction of two power centers: Metroplex (Plymouth Meeting, PA)
and Paxton Towne Centre (Harrisburg, PA)
Second Quarter Results
Funds from operations (FFO) for the three months ended June 30, 1999 totaled
$9,621,000, a 25.0% increase over FFO of $7,699,000 for the comparable
three-month period ended June 30, 1998. The growth was driven by acquisitions
and development projects completed in 1998 and improved operating results in the
Company's portfolio. Second quarter FFO was $0.66 per share on 14,636,000
weighted average share equivalents outstanding (including Operating Partnership
[OP] units), compared to $0.55 per share on 13,943,000 weighted average share
equivalents for the three months ended June 30, 1998. As calculated by NAREIT,
FFO is defined as net income, excluding extraordinary and unusual items, gain
(or loss) on the sale of property, plus depreciation and amortization.
<PAGE>
Net operating income before depreciation from wholly-owned properties and the
Company's proportionate share of partnerships and joint venture properties,
including PREIT-RUBIN, increased 45.5% to $18,852,000 for the three months ended
June 30, 1999, from $12,959,000 for the three months ended June 30, 1998. The
increase is mainly due to acquisitions completed in the second half of 1998 and
the completion of two development properties in the fourth quarter of 1998.
Net income for the three months ended June 30, 1999 was $4,918,000, or $0.37 per
basic share, on total weighted average shares outstanding of 13,315,000 compared
to $6,205,000, or $0.47 per basic share, on 13,297,000 total weighted average
shares outstanding for the three months ended June 30, 1998. Net income for the
1998 period included a gain on sale of Charter Pointe Apartments in Altamonte
Springs, FL totaling $1,766,000 or $0.13 per share.
Six Months Results
Funds from operations (FFO) for the six months ended June 30, 1999 totaled
$18,775,000, a 21.6% increase over FFO of $15,445,000 for the prior comparable
six-month period ended June 30, 1998. FFO for the six-month period totaled $1.29
per share and OP unit on 14,609,000 weighted average shares outstanding
(including OP units), compared to $1.11 per share on 13,941,000 weighted average
shares for the six months ended June 30, 1998.
Net operating income before depreciation from wholly-owned properties and the
Company's proportionate share of partnerships and joint venture properties,
including PREIT-RUBIN, increased 43.3% to $37,168,000 for the six months ended
June 30, 1999, from $25,929,000 for the six months ended June 30, 1998.
On a fully diluted basis, net income for the six months ended June 30, 1999 was
$0.81 per share on 13,312,000 total weighted average shares outstanding. Net
income for the 1999 period includes gains on the sales of 135 Commerce Drive in
Fort Washington, PA and a land parcel at Crest Plaza in Allentown, PA totaling
$1,346,000, or $0.10 per share.
Comments from Management
Ronald Rubin, Chief Executive Officer of PREIT, said, "We continue to be pleased
with our operating results, demonstrating the integration of several accretive
acquisitions, the strength of our portfolio, and the prudence of our focus on
strategic development projects and internal growth. During the 1999 second
quarter we achieved double digit increases in FFO, combined net operating income
as well as solid performance from our multifamily portfolio, reflecting the
effectiveness of our long-term growth strategies." Mr. Rubin continued, "In the
quarters ahead we will continue to focus on maintaining the growth of our
development pipeline, and obtaining adequate funding for such purpose."
Same Store NOI Growth Continues - Multifamily & Shopping Center Portfolios
Same store net operating income for the Company's portfolio of multifamily
properties increased 4.4% over the second quarter of 1998, primarily driven by a
2.7% increase in revenues and a 0.4% increase in operating expenses. Same store
net operating income for the second quarter of 1999 for the Company's shopping
center portfolio increased by 1.8% over the comparable quarter.
<PAGE>
Portfolio Highlights
o Metroplex Shopping Center (Plymouth Meeting, PA) - PREIT announced that a
partnership in which it holds a 50% interest obtained financing and closed on
the 103-acre site for the development of Metroplex Shopping Center in Plymouth
Meeting, PA. The 780,000 square foot power center will be anchored by Target
Stores, Lowe's and Giant Supermarket. Initial occupancy is expected in the
second quarter of 2000.
o Paxton Towne Centre (Harrisburg, PA) - The Company announced the acquisition
of a 100-acre site and the commencement of construction for Paxton Towne
Centre, a 560,000 square foot power center in Harrisburg, PA. Anchor tenants
include Target Stores, Kohl's and Weis Markets, and initial occupancy is
expected in the second quarter of 2000.
o Development Pipeline - During the second quarter, PREIT announced that it has
entered into a joint venture to develop the Pavilion at Market East in
Philadelphia, PA. The 375,000 square foot retail, entertainment and parking
complex will be anchored by a Disney Quest indoor theme park. Also in the
second quarter the Company entered into an agreement to acquire a 50-acre site
known as Frankford Arsenal in Philadelphia, PA. The Company expects to acquire
the site and begin construction on a 500,000 square foot power center in the
fourth quarter of 1999.
o Home Depot at Northeast Tower Center (Philadelphia, PA) - The Company acquired
an 89% interest in the Home Depot parcel at its Northeast Tower Center in
Philadelphia, PA as contemplated at the time of the acquisition of the balance
of the center. The purchase price was $13.5 million, including $12.5 million
of long term debt.
o Dispositions - After the close of the second quarter the Company sold a
non-core land parcel in Rancocas, NJ in which it owned a 75% interest. The
Company's proportionate share of the gain on the sale is approximately
$175,000, or $0.01 per share.
Jonathan B. Weller, President and Chief Operating Officer of PREIT, commented,
"During the first six months of 1999, we have completed several transactions
that further diversify and enhance the Company's portfolio, either through
acquisitions or development projects. Each of these transactions began with our
identification of opportunities that met our financial objectives, leveraged our
expertise in property management, leasing and project development, and offer the
potential for FFO growth. Over the remainder of this year, we fully expect to
build upon this momentum as the Company's current development and redevelopment
pipeline includes 7 power centers, 3 strip centers and 2 enclosed malls."
Capital Resources
The Company announced in April the completion of a $108 million financing with a
10-year term and a weighted average interest rate of 6.77%, as well as the use
of proceeds to pay down its line of credit and a short-term secured financing.
During the second quarter, the Company utilized approximately $20 million from
its line of credit, primarily for the acquisition of the Paxton Towne Centre
land and other development activities. At the end of the second quarter
approximately $66 million was available under the Company's $150 million line of
credit. In addition the Company incurred new mortgage and construction debt in
the amount of approximately $24 million, primarily for the acquisition of the
Home Depot Parcel at Northeast Tower Centre and the construction financing for
the Metroplex Shopping Center.
<PAGE>
Edward Glickman, Chief Financial Officer of PREIT, added, "Since the beginning
of the year one of our primary objectives was to provide the Company with
additional capital to fund its development projects and other high value-added
opportunities. By locking in the interest rate of 6.77% on our $108 million
financing, we have reduced our interest rate exposure and increased the
availability under the line of credit to facilitate our 1999 and 2000
developments. Furthermore, we continue to pursue opportunities to enhance our
financial flexibility to position PREIT to take advantage of significant
opportunities that exist in our industry."
Quarterly Dividend Declared
The Company declared a quarterly dividend of $0.47 per share payable on
September 15, 1999 to shareholders and unitholders of record as of August 31,
1999. The September 15, 1999 dividend payment will be PREIT's 90th consecutive
distribution since its initial dividend paid in August of 1962. Throughout its
history, the Company has never omitted or reduced a shareholder dividend.
Pennsylvania Real Estate Investment Trust, founded in 1960 and one of the first
equity REITs in the U.S., has a primary investment focus on shopping centers
(8.1 million square feet) and apartment communities (7,241 units) located
primarily in the eastern United States. The Company's portfolio currently
consists of interests in 47 properties in 10 states. In addition, there are 6
retail properties under development. Pennsylvania Real Estate Investment Trust
is headquartered in Philadelphia, PA.
With the exception of the historical information contained in the release, the
matters described herein contain forward-looking statements that are made
pursuant to the Safe Harbor provisions of the Private Securities Litigation
Reform Act of 1995. Such statements involve various risks and may cause actual
results to differ materially. These risks include, but are not limited to, the
ability of the Company to grow internally or by acquisition and to integrate
acquired businesses, the availability of adequate funds at reasonable cost,
changing industry and competitive conditions, and other risks outside the
control of the company referred to in the Company's registration statement and
periodic reports filed with the Securities and Exchange Commission.
[Financial Tables Follow]
# # #
** A supplemental quarterly financial package **
is available on the Company's web site at www.preit.com.
To receive additional information on Pennsylvania Real Estate Investment Trust
via fax at no charge, please dial 1-800-PRO-INFO and enter the
ticker symbol PEI.
