UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
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Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended
or
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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:
(Exact name of Registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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(Address of principal executive offices) |
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(Zip Code) |
Registrant’s telephone number, including area code (
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
Trading Symbol(s) |
Name of Exchange on which registered |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer |
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. On May 15, 2020,
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONTENTS
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Page |
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PART I—FINANCIAL INFORMATION |
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Item 1. |
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1 |
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Consolidated Balance Sheets—March 31, 2020 and December 31, 2019 |
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Consolidated Statements of Operations—Three Months Ended March 31, 2020 and 2019 |
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Consolidated Statements of Comprehensive Income (Loss)—Three Months Ended March 31, 2020 and 2019 |
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Consolidated Statements of Equity—Three Months Ended March 31, 2020 and 2019 |
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Consolidated Statements of Cash Flows—Three Months Ended March 31, 2020 and 2019 |
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Item 2. |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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40 |
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Item 4. |
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41 |
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PART II—OTHER INFORMATION |
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Item 1. |
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42 |
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Item 1A. |
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42 |
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Item 2. |
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44 |
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Item 3. |
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Not Applicable |
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Item 4. |
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Not Applicable |
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Item 5. |
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Not Applicable |
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Item 6. |
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45 |
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46 |
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Except as the context otherwise requires, references in this Quarterly Report on Form 10-Q to “we,” “our,” “us,” the “Company” and “PREIT” refer to Pennsylvania Real Estate Investment Trust and its subsidiaries, including our operating partnership, PREIT Associates, L.P. References in this Quarterly Report on Form 10-Q to “PREIT Associates” or the “Operating Partnership” refer to PREIT Associates, L.P.
Item 1. FINANCIAL STATEMENTS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED BALANCE SHEETS
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March 31, 2020 |
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December 31, 2019 |
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(in thousands, except per share amounts) |
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(Unaudited) |
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ASSETS: |
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INVESTMENTS IN REAL ESTATE, at cost: |
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Operating properties |
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$ |
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$ |
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Construction in progress |
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Land held for development |
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Total investments in real estate |
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Accumulated depreciation |
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Net investments in real estate |
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INVESTMENTS IN PARTNERSHIPS, at equity: |
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OTHER ASSETS: |
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Cash and cash equivalents |
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Tenant and other receivables |
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Intangible assets (net of accumulated amortization of $ March 31, 2020 and December 31, 2019, respectively) |
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Deferred costs and other assets, net |
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Assets held for sale |
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Total assets |
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$ |
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$ |
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LIABILITIES: |
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Mortgage loans payable, net |
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$ |
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$ |
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Term Loans, net |
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Revolving Facilities |
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Tenants’ deposits and deferred rent |
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Distributions in excess of partnership investments |
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Fair value of derivative liabilities |
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Accrued expenses and other liabilities |
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Total liabilities |
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COMMITMENTS AND CONTINGENCIES: |
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EQUITY: |
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Series B Preferred Shares, $ |
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Series C Preferred Shares, $ |
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Series D Preferred Shares, $ |
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Shares of beneficial interest, $ |
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Capital contributed in excess of par |
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Accumulated other comprehensive (loss) income |
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Distributions in excess of net income |
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Total equity—Pennsylvania Real Estate Investment Trust |
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Noncontrolling interest |
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Total equity |
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Total liabilities and equity |
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$ |
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$ |
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See accompanying notes to the unaudited consolidated financial statements.
1
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Three Months Ended March 31, |
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(in thousands of dollars) |
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2020 |
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2019 |
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REVENUE: |
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Real estate revenue: |
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Lease revenue |
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$ |
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$ |
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Expense reimbursements |
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Other real estate revenue |
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Total real estate revenue |
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Other income |
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Total revenue |
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EXPENSES: |
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Operating expenses: |
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Property operating expenses: |
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CAM and real estate taxes |
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Utilities |
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Other property operating expenses |
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Total property operating expenses |
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Depreciation and amortization |
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General and administrative expenses |
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Provision for employee separation expenses |
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Insurance recoveries, net |
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Project costs and other expenses |
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Total operating expenses |
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Interest expense, net |
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Loss on debt extinguishment, net |
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( |
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Impairment of development land parcel |
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( |
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Total expenses |
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Loss before equity in income of partnerships, gain on sales of real estate by equity method investee, gain on sales of real estate, net, and adjustment to loss on sales of interests in non operating real estate |
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Equity in income of partnerships |
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Gain on sales of real estate by equity method investee |
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Gain on sales of real estate, net |
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Loss on sales of interests in non operating real estate |
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Net loss |
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Less: net loss attributable to noncontrolling interest |
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Net loss attributable to PREIT |
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Less: preferred share dividends |
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Net loss attributable to PREIT common shareholders |
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$ |
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$ |
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See accompanying notes to the unaudited consolidated financial statements.
2
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Three Months Ended March 31, |
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(in thousands, except per share amounts) |
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2020 |
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2019 |
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Net loss |
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$ |
( |
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$ |
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Noncontrolling interest |
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Preferred share dividends |
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( |
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Dividends on unvested restricted shares |
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Net loss used to calculate loss per share—basic and diluted |
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$ |
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$ |
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Basic and diluted income (loss) per share: |
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$ |
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$ |
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(in thousands of shares) |
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Weighted average shares outstanding—basic |
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Effect of common share equivalents(1) |
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Weighted average shares outstanding—diluted |
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(1) |
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See accompanying notes to the unaudited consolidated financial statements.
3
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
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Three Months Ended March 31, |
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(in thousands of dollars) |
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2020 |
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2019 |
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Comprehensive loss: |
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Net loss |
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$ |
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$ |
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Unrealized loss on derivatives |
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( |
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Amortization of settled swaps |
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Total comprehensive loss |
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( |
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Less: comprehensive loss attributable to noncontrolling interest |
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Comprehensive loss attributable to PREIT |
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$ |
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$ |
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See accompanying notes to the unaudited consolidated financial statements.
4
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF EQUITY
Three Months Ended
March 31, 2020 and 2019
(Unaudited)
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PREIT Shareholders |
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Preferred Shares $ |
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Shares of Beneficial |
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Capital Contributed |
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Accumulated Other |
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Distributions |
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Non- |
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(in thousands of dollars, except per share amounts) |
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Total Equity |
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Series B |
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Series C |
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Series D |
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Interest, $ |
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in Excess of Par |
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Comprehensive (Loss) Income |
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in Excess of Net Income |
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controlling interest |
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Balance January 1, 2020 |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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Net loss |
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( |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
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Other comprehensive loss |
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( |
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— |
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— |
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— |
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— |
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— |
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( |
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— |
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Shares issued under employee compensation plans, net of shares retired |
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( |
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— |
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— |
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— |
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( |
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— |
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— |
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— |
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Amortization of deferred compensation |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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Dividends paid to common shareholders ($ |
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( |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
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— |
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Dividends paid to Series B preferred shareholders ($ |
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( |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
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— |
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Dividends paid to Series C preferred shareholders ($ |
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( |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
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— |
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Dividends paid to Series D preferred shareholders ($ |
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( |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
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— |
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Noncontrolling interests: |
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Distributions paid to Operating Partnership unit holders ($ |
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( |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
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Balance March 31, 2020 |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
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PREIT Shareholders |
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Preferred Shares $ |
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Shares of Beneficial |
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Capital Contributed |
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Accumulated Other |
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Distributions |
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Non- |
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(in thousands of dollars, except per share amounts) |
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Total Equity |
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Series B |
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Series C |
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Series D |
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Interest, $ |
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in Excess of Par |
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Comprehensive (Loss) Income |
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in Excess of Net Income |
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controlling interest |
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Balance January 1, 2019 |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
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Net loss |
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( |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
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( |
) |
|
Other comprehensive loss |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
Shares issued upon redemption of Operating Partnership units |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
Shares issued under employee compensation plans, net of shares retired |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Amortization of deferred compensation |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Dividends paid to common shareholders ($ |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
Dividends paid to Series B preferred shareholders ($ |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
Dividends paid to Series C preferred shareholders ($ |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
Dividends paid to Series D preferred shareholders ($ |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
Noncontrolling interests: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions paid to Operating Partnership unit holders ($ |
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
Balance March 31, 2019 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
See accompanying notes to the unaudited consolidated financial statements.
5
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
Three Months Ended March 31, |
|
|||||
|
(in thousands of dollars) |
|
2020 |
|
|
2019 |
|
||
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
( |
) |
|
$ |
( |
) |
|
Adjustments to reconcile net loss to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
|
|
|
|
|
|
|
Amortization |
|
|
|
|
|
|
|
|
|
Straight-line rent adjustments |
|
|
( |
) |
|
|
( |
) |
|
Amortization of deferred compensation |
|
|
|
|
|
|
|
|
|
Loss on debt extinguishment, net |
|
|
|
|
|
|
|
|
|
Gain on sales of interests in real estate and non-operating real estate, net |
|
|
( |
) |
|
|
|
|
|
Equity in income of partnerships |
|
|
( |
) |
|
|
( |
) |
|
Gain on sales of real estate by equity method investee |
|
|
|
|
|
|
( |
) |
|
Cash distributions from partnerships |
|
|
|
|
|
|
|
|
|
Impairment of development land parcel |
|
|
|
|
|
|
|
|
|
Change in assets and liabilities: |
|
|
|
|
|
|
|
|
|
Net change in other assets |
|
|
|
|
|
|
|
|
|
Net change in other liabilities |
|
|
( |
) |
|
|
( |
) |
|
Net cash provided by operating activities |
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
Cash proceeds from sales of real estate |
|
|
|
|
|
|
|
|
|
Cash proceeds from sale of mortgage |
|
|
|
|
|
|
|
|
|
Proceeds from insurance claims related to damage to real estate assets |
|
|
|
|
|
|
|
|
|
Cash distributions from partnerships of proceeds from real estate sold |
|
|
|
|
|
|
|
|
|
Additions to construction in progress |
|
|
( |
) |
|
|
( |
) |
|
Investments in real estate improvements |
|
|
( |
) |
|
|
( |
) |
|
Additions to leasehold improvements and corporate fixed assets |
|
|
( |
) |
|
|
( |
) |
|
Investments in equity method investees |
|
|
( |
) |
|
|
( |
) |
|
Capitalized leasing costs |
|
|
( |
) |
|
|
( |
) |
|
Net cash used in investing activities |
|
|
( |
) |
|
|
( |
) |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
Net borrowings under revolving facilities |
|
|
|
|
|
|
|
|
|
Repayments of mortgage loans and finance lease liabilities |
|
|
( |
) |
|
|
( |
) |
|
Principal installments on mortgage loans |
|
|
( |
) |
|
|
( |
) |
|
Payment of deferred financing costs |
|
|
( |
) |
|
|
( |
) |
|
Value of shares of beneficial interest issued |
|
|
|
|
|
|
|
|
|
Dividends paid to common shareholders |
|
|
( |
) |
|
|
( |
) |
|
Dividends paid to preferred shareholders |
|
|
( |
) |
|
|
( |
) |
|
Distributions paid to Operating Partnership unit holders and noncontrolling interest |
|
|
( |
) |
|
|
( |
) |
|
Value of shares retired under equity incentive plans, net of shares issued |
|
|
( |
) |
|
|
( |
) |
|
Net cash provided by financing activities |
|
|
|
|
|
|
|
|
|
Net change in cash, cash equivalents, and restricted cash |
|
|
( |
) |
|
|
( |
) |
|
Cash, cash equivalents, and restricted cash, beginning of period |
|
|
|
|
|
|
|
|
|
Cash, cash equivalents, and restricted cash, end of period |
|
$ |
|
|
|
$ |
|
|
See accompanying notes to the unaudited consolidated financial statements.
6
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020
1. BASIS OF PRESENTATION
Nature of Operations
Pennsylvania Real Estate Investment Trust (“PREIT” or the “Company”) prepared the accompanying unaudited consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations, although we believe that the included disclosures are adequate to make the information presented not misleading. Our unaudited consolidated financial statements should be read in conjunction with the audited financial statements and the notes thereto included in PREIT’s Annual Report on Form 10-K for the year ended December 31, 2019. In our opinion, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly our consolidated financial position, the consolidated results of our operations, consolidated statements of comprehensive income (loss), consolidated statements of equity and our consolidated statements of cash flows are included. The results of operations for the interim periods presented are not necessarily indicative of the results for the full year.
PREIT, a Pennsylvania business trust founded in 1960 and one of the first equity real estate investment trusts (“REITs”) in the United States, has a primary investment focus on retail shopping malls located in the eastern half of the United States, primarily in the Mid-Atlantic region. As of March 31, 2020, our portfolio consists of a total of
We hold our interest in our portfolio of properties through our operating partnership, PREIT Associates, L.P. (“PREIT Associates” or the “Operating Partnership”). We are the sole general partner of the Operating Partnership and, as of March 31, 2020, we held a
Pursuant to the terms of the partnership agreement of the Operating Partnership, each of the limited partners has the right to redeem such partner’s units of limited partnership interest in the Operating Partnership (“OP Units”) for cash or, at our election, we may acquire such OP Units in exchange for our common shares on a
We provide management, leasing and real estate development services through
We evaluate operating results and allocate resources on a property-by-property basis, and do not distinguish or evaluate our consolidated operations on a geographic basis. Due to the nature of our operating properties, which involve retail shopping, we have concluded that our individual properties have similar economic characteristics and meet all other aggregation criteria. Accordingly, we have aggregated our individual properties into
COVID-19 Related Risks and Uncertainties
The 2020 global outbreak of a novel coronavirus (COVID-19) has adversely impacted, and will likely continue to impact, our business, financial condition, liquidity and operating results, as well as our tenants’ businesses. The continued spread of COVID-19 has also led to unprecedented global economic disruption and volatility in financial markets. We anticipate that our future business, financial condition, liquidity and results of operations, including our results for 2020 and potentially thereafter, will be materially impacted by the COVID-19 pandemic. It remains highly uncertain how long the global pandemic, economic challenges and restrictions on day-to-day life will last. Given the unprecedented and rapidly evolving developments, we cannot reasonably predict or estimate its ultimate impact on us or our tenants, or on our ability or the ability of our tenants to resume more normal operations.
7
COVID-19 impacted our properties and caused the closures of all our properties with the first closure occurring on March 12, 2020. The first property reopening occurred in late April 2020 while others remain closed until individual states’ stay at home orders are lifted. Since most of the closures occurred in the second half of March 2020, the impact of the closures on our first quarter 2020 financial results was not significant.
Ultimately, the significance of COVID-19 on our business remains highly uncertain and will depend on, among other things, the extent and duration of the pandemic, the severity of the disease and the number of people infected with the virus, the effects on the economy of the pandemic and of the measures taken by governmental authorities and other third parties restricting daily activities and the length of time that such measures remain in place, and implementation of governmental programs to assist businesses and consumers impacted by the COVID-19 pandemic.
Going Concern Considerations
Under the accounting guidance related to the presentation of financial statements, when preparing financial statements for each annual and interim reporting period, management has the responsibility to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern. As a result of the considerations articulated below, we believe there is substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued.
In applying the accounting guidance, management considered our current financial condition and liquidity sources, including current funds available, forecasted future cash flows and our conditional and unconditional obligations due over the next twelve months. Management specifically considered the following: (i) our senior unsecured facility, which includes a revolving facility maturing in
As a result, management evaluated whether this was mitigated by our approved plans and expectations for the applicable period under the second step of this accounting standard.
Our ability to satisfy obligations under our senior unsecured credit facility and mortgage loans, maintain compliance with our debt covenants and fund recurring costs of operations depends primarily on management’s ability to obtain relief from the lender group in regards to debt covenants, complete the sale-leaseback of certain properties, complete the sale of certain real estate assets which will provide cash from those sales, and continue to control operational costs. While controlling operational costs are within management’s control to some extent, executing the sale-leaseback transactions, selling real estate assets, and obtaining relief from the lender group through modified debt covenant requirements involve performance by third parties and therefore cannot be considered probable of occurring.
Fair Value
Fair value accounting applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements. Fair value measurements are determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, these accounting requirements establish a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
8
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access.
Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs might include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals.
Level 3 inputs are unobservable inputs for the asset or liability, and are typically based on an entity’s own assumptions, as there is little, if any, related market activity.
In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability. We utilize the fair value hierarchy in our accounting for derivatives (Level 2) and financial instruments (Level 2) and in our reviews for impairment of real estate assets (Level 3) and goodwill (Level 3).
Impairment of Assets
Real estate investments and related intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the property might not be recoverable, which is referred to as a “triggering event.” The COVID-19 impact on the economy and market conditions, together with the resulting closures of our properties, was deemed to be a triggering event as of March 31, 2020 which led to an impairment review. In connection with our review of our long-lived assets for impairment, we utilize qualitative and quantitative factors in order to estimate fair value. The significant qualitative factors that we use include age and condition of the property, market conditions in the property’s trade area, competition with other shopping centers within the property’s trade area and the creditworthiness and performance of the property’s tenants. The significant quantitative factors that we use include historical and forecasted financial and operating information relating to the property, such as net operating income, occupancy statistics, vacancy projections and tenants’ sales levels.
If there is a triggering event in relation to a property to be held and used, we will estimate the aggregate future cash flows, net of estimated capital expenditures, to be generated by the property, undiscounted and without interest charges. In addition, this estimate may consider a probability weighted cash flow estimation approach when alternative courses of action to recover the carrying amount of a long-lived asset are under consideration or when a range of possible values is estimated.
The determination of undiscounted cash flows requires significant estimates by our management, including the expected course of action at the balance sheet date that would lead to such cash flows. Subsequent changes in estimated undiscounted cash flows arising from changes in the anticipated action to be taken with respect to the property could affect the determination of whether an impairment exists, and the effects of such changes could materially affect our net income. If the estimated undiscounted cash flows are less than the carrying value of the property, the carrying value is written down to its fair value.
Assessment of our ability to recover certain lease related costs must be made when we have a reason to believe that a tenant might not be able to perform under the terms of the lease as originally expected. This requires us to make estimates as to the recoverability of such costs.
An other-than-temporary impairment of an investment in an unconsolidated joint venture is recognized when the carrying value of the investment is not considered recoverable based on evaluation of the severity and duration of the decline in value. To the extent impairment has occurred, the excess carrying value of the asset over its estimated fair value is recorded as a reduction to income. We concluded that there was no impairment as of March 31, 2020.
New Accounting Developments
Effective January 1, 2020, we adopted Accounting Standards Update (“ASU”) ASU 2016-13, Financial Instruments - Credit Losses (“ASC 326”), and subsequently issued amendments to the initial and transitional guidance within ASU 2018-19, ASU 2019-04 and ASU 2019-05. ASU 2016-13 introduced new guidance for an approach based on expected losses to estimate credit losses on certain types of financial instruments, and will affect our accounting for trade receivables and notes receivable. The adoption of this guidance did not have a material impact on our consolidated financial statements.
In April 2020, the Financial Accounting Standards Board issued a Staff Question-and-Answer (“Q&A”) to clarify whether lease concessions related to the effects of COVID-19 require the application of the lease modification guidance under ASU 2016-02, Leases (Topic 842) (“ASC 842”). Under ASC 842, we would have to determine, on a lease-by-lease basis, if a lease concession was the result of a new arrangement reached with the tenant or an enforceable right and obligation within the existing lease. The Q&A allows for the bypass of a lease-by-lease analysis and for us to elect to either apply the lease modification accounting framework or not, to all of the lease concessions we make with similar characteristics and circumstances. We are continuing to assess the impact of this Q&A guidance in light of our ongoing negotiations with tenants.
9
Dividends Declared
On
2. REAL ESTATE ACTIVITIES
Investments in real estate as of March 31, 2020 and December 31, 2019 were comprised of the following:
|
(in thousands of dollars) |
|
March 31, 2020 |
|
|
December 31, 2019 |
|
||
|
Buildings, improvements and construction in progress |
|
$ |
|
|
|
$ |
|
|
|
Land, including land held for development |
|
|
|
|
|
|
|
|
|
Total investments in real estate |
|
|
|
|
|
|
|
|
|
Accumulated depreciation |
|
|
( |
) |
|
|
( |
) |
|
Net investments in real estate |
|
$ |
|
|
|
$ |
|
|
Capitalization of Costs
The following table summarizes our capitalized interest, compensation, including commissions, and real estate taxes for the three months ended March 31, 2020 and 2019:
|
|
|
Three Months Ended March 31, |
|
|||||
|
(in thousands of dollars) |
|
2020 |
|
|
2019 |
|
||
|
Development/Redevelopment Activities: |
|
|
|
|
|
|
|
|
|
Interest (1) |
|
$ |
|
|
|
$ |
|
|
|
Compensation |
|
|
|
|
|
|
|
|
|
Real estate taxes |
|
|
|
|
|
|
|
|
|
Leasing Activities: |
|
|
|
|
|
|
|
|
|
Compensation, including commissions (2) |
|
|
|
|
|
|
|
|
|
(1) |
Includes interest capitalized on investments in partnerships under development. |
|
(2) |
The definition of initial direct costs under ASC 842 includes only those incremental costs of a lease that would not have been incurred if the lease had not been obtained. Commissions paid for successful leasing transactions continue to be capitalized. |
Dispositions
In November 2019, we entered into an agreement to sell
In March 2019, we entered into an agreement of sale with a buyer to sell an undeveloped land parcel located in Gainesville, Florida for total consideration of $
10
3. INVESTMENTS IN PARTNERSHIPS
The following table presents summarized financial information of the equity investments in our unconsolidated partnerships as of March 31, 2020 and December 31, 2019:
|
(in thousands of dollars) |
|
March 31, 2020 |
|
|
December 31, 2019 |
|
||
|
ASSETS: |
|
|
|
|
|
|
|
|
|
Investments in real estate, at cost: |
|
|
|
|
|
|
|
|
|
Operating properties |
|
$ |
|
|
|
$ |
|
|
|
Construction in progress |
|
|
|
|
|
|
|
|
|
Total investments in real estate |
|
|
|
|
|
|
|
|
|
Accumulated depreciation |
|
|
( |
) |
|
|
( |
) |
|
Net investments in real estate |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
|
|
|
|
|
|
|
Deferred costs and other assets, net |
|
|
|
|
|
|
|
|
|
Total assets |
|
|
|
|
|
|
|
|
|
LIABILITIES AND PARTNERS’ INVESTMENT: |
|
|
|
|
|
|
|
|
|
Mortgage loans payable, net |
|
|
|
|
|
|
|
|
|
FDP Term Loan, net |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
|
|
|
|
|
|
|
Net investment |
|
$ |
|
|
|
$ |
|
|
|
Partners’ share |
|
|
|
|
|
|
|
|
|
PREIT’s share |
|
|
|
|
|
|
|
|
|
Excess investment(1) |
|
|
|
|
|
|
|
|
|
Net investments and advances |
|
$ |
|
|
|
$ |
|
|
|
Reconciliation to comparable GAAP balance sheet item: |
|
|
|
|
|
|
|
|
|
Investment in partnerships, at equity |
|
$ |
|
|
|
$ |
|
|
|
Distributions in excess of partnership investments |
|
|
( |
) |
|
|
( |
) |
|
Net investment |
|
$ |
|
|
|
$ |
|
|
_____________________
|
(1) |
Excess investment represents the unamortized difference between our investment and our share of the equity in the underlying net investment in the unconsolidated partnerships. The excess investment is amortized over the life of the properties, and the amortization is included in “Equity in income of partnerships.” |
We record distributions from our equity investments using the nature of the distribution approach.
The following table summarizes our share of equity in income of partnerships for the three months ended March 31, 2020 and 2019:
|
|
|
Three Months Ended March 31, |
|
|||||
|
(in thousands of dollars) |
|
2020 |
|
|
2019 |
|
||
|
Real estate revenue |
|
$ |
|
|
|
$ |
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
Property operating and other expenses |
|
|
( |
) |
|
|
( |
) |
|
Interest expense(1) |
|
|
( |
) |
|
|
( |
) |
|
Depreciation and amortization |
|
|
( |
) |
|
|
( |
) |
|
Total expenses |
|
|
( |
) |
|
|
( |
) |
|
Net income |
|
|
|
|
|
|
|
|
|
Partners’ share |
|
|
( |
) |
|
|
( |
) |
|
PREIT’s share |
|
|
|
|
|
|
|
|
|
Amortization of and adjustments to excess investment, net |
|
|
|
|
|
|
( |
) |
|
Equity in income of partnerships |
|
$ |
|
|
|
$ |
|
|
(1) Net of capitalized interest expense of $
11
Dispositions
In March 2019, a partnership in which we hold a
Term Loan
In January 2018, our Fashion District Philadelphia redevelopment project joint venture entity entered into a $
Significant Unconsolidated Subsidiary
We have a
LVA
|
(in thousands of dollars) |
|
March 31, 2020 |
|
|
December 31, 2019 |
|
||
|
Summarized balance sheet information |
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
|
|
|
$ |
|
|
|
Mortgage loan payable, net |
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|||||
|
(in thousands of dollars) |
|
2020 |
|
|
2019 |
|
||
|
Summarized statement of operations information |
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
|
|
|
$ |
|
|
|
Property operating expenses |
|
|
( |
) |
|
|
( |
) |
|
Interest expense |
|
|
( |
) |
|
|
( |
) |
|
Net income |
|
|
|
|
|
|
|
|
|
PREIT’s share of equity in income of partnership |
|
|
|
|
|
|
|
|
FDP
|
(in thousands of dollars) |
|
March 31, 2020 |
|
|
December 31, 2019 |
|
||
|
Summarized balance sheet information |
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
|
|
|
$ |
|
|
|
FDP Term Loan, net |
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|||||
|
(in thousands of dollars) |
|
2020 |
|
|
2019 |
|
||
|
Summarized statement of operations information |
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
|
|
|
$ |
|
|
|
Property operating expenses |
|
|
( |
) |
|
|
( |
) |
|
Interest expense |
|
|
( |
) |
|
|
- |
|
|
Net income |
|
|
( |
) |
|
|
( |
) |
|
PREIT’s share of equity in income of partnership |
|
|
( |
) |
|
|
( |
) |
12
4. FINANCING ACTIVITY
Credit Agreements
As of March 31, 2020, we have entered into
As of March 31, 2020, we had borrowed the full $
Amounts borrowed under the Credit Agreements, either under the 2018 Revolving Facility or the Term Loans, which may be either LIBOR Loans or Base Rate Loans, bear interest at the rate specified below per annum, depending on our leverage, unless and until we receive an investment grade credit rating and provide notice to the Administrative Agent, as defined therein (the “Rating Date”), after which alternative rates would apply, as described in the Credit Agreements. In determining our leverage (the ratio of Total Liabilities to Gross Asset Value), the capitalization rate used to calculate Gross Asset Value is (a)
|
|
|
|
Applicable Margin |
|
|||||||||||||
|
Level |
Ratio of Total Liabilities to Gross Asset Value |
|
Revolving Loans that are LIBOR Loans |
|
|
Revolving Loans that are Base Rate Loans |
|
|
Term Loans that are LIBOR Loans |
|
|
Term Loans that are Base Rate Loans |
|
||||
|
1 |
Less than |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
2 |
Equal to or greater than to 1.00 |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
3 |
Equal to or greater than to 1.00 |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
4 |
Equal to or greater than |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
5 |
Equal to or greater than |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
(1) |
The rates in effect under the Credit Agreements were based upon the Level 5 Ratio of Total Liabilities to Gross Asset Value as of March 31, 2020. |
The Credit Agreements contain certain affirmative and negative covenants, several of which were amended on March 30, 2020. The affirmative and negative covenants, as amended, include, without limitation, requirements that PREIT maintain, on a consolidated basis: (1) Minimum Tangible Net Worth of $
13
We may prepay the amounts due under the Credit Agreements at any time without premium or penalty, subject to reimbursement obligations for the lenders’ breakage costs for LIBOR borrowings. We must make prepayments under the 2018 Term Loan Facility in an amount equal to
Upon the expiration of any applicable cure period for an event of default (except with respect to bankruptcy as described in the next sentence), the lenders may declare all of the obligations in connection with the Credit Agreements immediately due and payable.
Upon the occurrence of a voluntary or involuntary bankruptcy proceeding of PREIT, PALP, PRI, any material subsidiary, any subsidiary that owns or leases an Unencumbered Property or certain other subsidiaries, all outstanding amounts would automatically become immediately due and payable. In the event of an involuntary bankruptcy proceeding, we have a limited time period to obtain a dismissal of the involuntary bankruptcy prior to the occurrence of an event of default.
Interest expense and deferred financing fee amortization related to the Credit Agreements for the three months ended March 31, 2020 and 2019 were as follows:
|
|
|
Three Months Ended March 31, |
|
|
|||||
|
(in thousands of dollars) |
|
2020 |
|
|
2019 |
|
|
||
|
Revolving Facility: |
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
$ |
|
|
|
$ |
|
|
|
|
Deferred financing amortization |
|
|
|
|
|
|
|
|
|
|
Term Loans: |
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
Deferred financing amortization |
|
|
|
|
|
|
|
|
|
The aggregate carrying values and estimated fair values of mortgage loans based on interest rates and market conditions at March 31, 2020 and December 31, 2019 were as follows:
|
|
|
March 31, 2020 |
|
|
December 31, 2019 |
|
||||||||||
|
(in millions of dollars) |
|
Carrying Value |
|
|
Fair Value |
|
|
Carrying Value |
|
|
Fair Value |
|
||||
|
Mortgage loans(1) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|||||||||||||||
|
(1) |
The carrying value of mortgage loans is net of unamortized debt issuance costs of $ |
The mortgage loans contain various customary default provisions.
Mortgage Loan Activity
In March 2019, we defeased a $
In April 2020, we received a notice of transfer of servicing from the special servicer for the mortgage loan secured by Valley View Mall, which had a balance of $
14
Interest Rate Risk
We follow established risk management policies designed to limit our interest rate risk on our interest bearing liabilities, as further discussed in Note 7 to our unaudited consolidated financial statements.
5. CASH FLOW INFORMATION
Cash paid for interest was $
In our statement of cash flows, we show cash flows on our Revolving Facilities on a net basis. Aggregate borrowings on our Revolving Facilities were $
Accrued construction costs decreased by $
In the first quarter of 2019, we issued
The following table provides a summary of cash, cash equivalents, and restricted cash reported within the statement of cash flows as of March 31, 2020 and 2019.
|
|
|
March 31, |
|
|||||
|
(in thousands of dollars) |
|
2020 |
|
|
2019 |
|
||
|
Cash and cash equivalents |
|
$ |
|
|
|
$ |
|
|
|
Restricted cash included in other assets |
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents, and restricted cash shown in the statement of cash flows |
|
$ |
|
|
|
$ |
|
|
6. COMMITMENTS AND CONTINGENCIES
Contractual Obligations
As of March 31, 2020, we had unaccrued contractual and other commitments related to our capital improvement projects and development projects of $
Provision for Employee Separation Expenses
In 2020, we terminated the employment of certain employees and officers. In connection with the departure of those employees and officers, we recorded $
Property Damage from Natural and Other Disasters
During September 2018, Jacksonville Mall in Jacksonville, North Carolina incurred property damage and an interruption of business operations as a result of Hurricane Florence. The property was closed for business during and immediately after the natural disaster, however, significant remediation efforts were quickly undertaken, and the mall was reopened shortly thereafter.
15
During the three months ended March 31, 2019, we recorded net recoveries of approximately $
During the three months ended March 31, 2020, Cherry Hill Mall in Cherry Hill, New Jersey experienced a power outage due to the failure of an underground high voltage cable, which required the use of backup generator power. We recorded net costs of approximately $
7. DERIVATIVES
In the normal course of business, we are exposed to financial market risks, including interest rate risk on our interest bearing liabilities. We attempt to limit these risks by following established risk management policies, procedures and strategies, including the use of financial instruments such as derivatives. We do not use financial instruments for trading or speculative purposes.
Cash Flow Hedges of Interest Rate Risk
For derivatives that have been designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in “Accumulated other comprehensive income” and subsequently reclassified into “Interest expense, net” in the same periods during which the hedged transaction affects earnings. As of March 31, 2020, all of our outstanding derivatives are designated as cash flow hedges. We recognize all derivatives at fair value as either assets or liabilities in the accompanying consolidated balance sheets.
During the next 12 months, we estimate that $
Interest Rate Swaps
As of March 31, 2020, we had interest rate swap agreements outstanding with a weighted average base interest rate of
The following table summarizes the terms and estimated fair values of our interest rate swap derivative instruments designated as cash flow hedges of interest rate risk at March 31, 2020 and December 31, 2019 based on the year they mature. The notional values provide an indication of the extent of our involvement in these instruments, but do not represent exposure to credit, interest rate or market risks. In the accompanying consolidated balance sheets, the carrying amount of derivative assets is reflected in “Deferred costs and other assets, net” and the carrying amount of derivative liabilities is reflected in “Accrued expenses and other liabilities.”
|
Maturity Date |
|
Aggregate Notional Value at March 31, 2020 (in millions of dollars) |
|
|
Aggregate Fair Value at March 31, 2020 (1) (in millions of dollars) |
|
|
Aggregate Fair Value at December 31, 2019 (1) (in millions of dollars) |
|
|
Weighted Average Interest Rate |
|
||||
|
Interest Rate Swaps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
|
|
% |
|
2021 |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
% |
|
2022 |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
2023 |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
% |
|
Forward Starting Swaps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2023 |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
% |
|
Total |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
|
|
% |
|
(1) |
As of March 31, 2020 and December 31, 2019, derivative valuations in their entirety were classified in Level 2 of the fair value hierarchy and we did not have any significant recurring fair value measurements related to derivative instruments using significant unobservable inputs (Level 3). |
16
The tables below present the effect of derivative financial instruments on accumulated other comprehensive income and on our consolidated statements of operations for the three months ended March 31, 2020 and 2019:
|
|
|
Three Months Ended March 31, |
|
|||||||||||||
|
|
|
Amount of Gain or (Loss) Recognized in Other Comprehensive Income on Derivative Instruments |
|
|
Amount of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Interest Expense |
|
||||||||||
|
(in millions of dollars) |
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||
|
Derivatives in Cash Flow Hedging Relationships |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate products |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
|
|
Three Months Ended March 31, |
|
|||||
|
(in millions of dollars) |
|
2020 |
|
|
2019 |
|
||
|
Total interest expense presented in the consolidated statements of operations in which the effects of cash flow hedges are recorded |
|
$ |
( |
) |
|
$ |
( |
) |
|
Amount of loss reclassified from accumulated other comprehensive income into interest expense |
|
$ |
|
|
|
$ |
( |
) |
Credit-Risk-Related Contingent Features
We have agreements with some of our derivative counterparties that contain a provision pursuant to which, if our entity that originated such derivative instruments defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then we could also be declared in default on our derivative obligations. As of March 31, 2020, we were not in default on any of our derivative obligations.
We have an agreement with a derivative counterparty that incorporates the loan covenant provisions of our loan agreement with a lender affiliated with the derivative counterparty. Failure to comply with the loan covenant provisions would result in our being in default on any derivative instrument obligations covered by the agreement.
As of March 31, 2020, the fair value of derivatives in a liability position, which excludes accrued interest but includes any adjustment for nonperformance risk related to these agreements, was $
8. LEASES
As Lessee
We have entered into ground leases for portions of the land at Springfield Town Center and Plymouth Meeting Mall. We have also entered into an office lease for our headquarters location, as well as vehicle, solar panel and equipment leases as a lessee. The initial terms of these agreements generally range from
We applied judgments related to the determination of the discount rates used to calculate the lease liability upon adoption of ASC 842 at January 1, 2019. In order to calculate our incremental borrowing rate under ASC 842, we utilized judgments and estimates regarding our implied credit rating using market data and made other adjustments to determine an appropriate incremental borrowing rate as of January 1, 2019.
17
The following table presents additional information pertaining to the Company’s leases:
|
|
|
Three Months Ended March 31, 2020 |
|
|||||||||||||
|
(in thousands of dollars) |
|
Solar Panel Leases |
|
|
Ground Leases |
|
|
Office, equipment, and vehicle leases |
|
|
Total |
|
||||
|
Finance lease cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of right-of-use assets |
|
$ |
|
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
|
|
|
Interest on lease liabilities |
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
Operating lease costs |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable lease costs |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total lease costs |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Other information related to leases as of and for the three months ended March 31, 2020 is as follows:
|
(in thousands of dollars) |
|
|
|
|
|
Cash paid for the amounts included in the measurement of lease liabilities |
|
|
|
|
|
Operating cash flows used for finance leases |
|
$ |
|
|
|
Operating cash flows used for operating leases |
|
$ |
|
|
|
Financing cash flows used for finance leases |
|
$ |
|
|
|
Weighted average remaining lease term-finance leases (months) |
|
|
|
|
|
Weighted average remaining lease term-operating leases (months) |
|
|
|
|
|
Weighted average discount rate-finance leases |
|
|
|
% |
|
Weighted average discount rate-operating leases |
|
|
|
% |
Future payments against lease liabilities as of March 31, 2020 are as follows:
|
(in thousands of dollars) |
|
Finance leases |
|
|
Operating leases |
|
|
Total |
|
|||
|
April 1 to December 31, 2020 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
2023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
2024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Thereafter |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total undiscounted lease payments |
|
|
|
|
|
|
|
|
|
|
|
|
|
Less imputed interest |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Total lease liabilities |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Future payments against lease liabilities as of December 31, 2019 are as follows:
|
(in thousands of dollars) |
|
Finance leases |
|
|
Operating leases |
|
|
Total |
|
|||
|
Year ending December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
2023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
2024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Thereafter |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total undiscounted lease payments |
|
|
|
|
|
|
|
|
|
|
|
|
|
Less imputed interest |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Total lease liabilities |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
18
As Lessor
As of March 31, 2020, the fixed contractual lease payments, including minimum rents and fixed CAM amounts, to be received over the next five years pursuant to the terms of noncancellable operating leases with initial terms greater than one year are included in the table below. The amounts presented assume that no leases are renewed and no renewal options are exercised. Additionally, the table does not include variable lease payments that may be received under certain leases for percentage rents or the reimbursement of operating costs, such as common area expenses, utilities, insurance and real estate taxes. These variable lease payments are recognized in the period when the applicable expenditures are incurred or, in the case of percentage rents, when the sales data is made available.
|
(in thousands of dollars) |
|
|
|
|
|
April 1 to December 31, 2020 |
|
$ |
|
|
|
2021 |
|
|
|
|
|
2022 |
|
|
|
|
|
2023 |
|
|
|
|
|
2024 |
|
|
|
|
|
Thereafter |
|
|
|
|
|
|
|
$ |
|
|
19
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following analysis of our consolidated financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and the notes thereto included elsewhere in this report. The disclosures in this report are complementary to those made in our Annual Report on Form 10-K for the year ended December 31, 2019. As disclosed in our Current Report on Form 8-K filed with the SEC on May 11, 2020, we are filing this Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020 (the “Quarterly Report”) on a delayed basis in reliance on the conditional filing relief provided under the SEC’s Order, as amended (Release No. 34-88465) under Section 36 of the Securities Exchange Act of 1934, as amended, due to circumstances related to the novel coronavirus (COVID-19) pandemic. The impacts of the COVID-19 pandemic have disrupted our business and operations and substantial management time and effort have been diverted to address the health and safety needs of our employees, mall customers, tenants and properties, including a substantial amount of the accounting, finance and management team’s attention to analyze the impact on our liquidity and financial condition. We have also transitioned our business operations to a remote working model and furloughed or reduced the hours of many employees. Certain service providers on which we rely to assist in the preparation of the Quarterly Report have also experienced operational disruptions. These impacts delayed our ability to finalize our quarterly close process and prepare our financial statements and disclosures. As a result of these factors, we were unable to finalize and file the Quarterly Report on a timely basis to meet our original filing deadline of May 11, 2020, and are filing the Quarterly Report on May 21, 2020, which is within the additional 45 days allotted by the SEC’s Order.
OVERVIEW
Pennsylvania Real Estate Investment Trust, a Pennsylvania business trust founded in 1960 and one of the first equity real estate investment trusts (“REITs”) in the United States, has a primary investment focus on retail shopping malls located in the eastern half of the United States, primarily in the Mid-Atlantic region.
We currently own interests in 26 retail properties, of which 25 are operating properties and one is a development property. The 25 operating properties include 21 shopping malls and four other retail properties, have a total of 20.3 million square feet and are located in nine states. We and partnerships in which we hold an interest own 15.9 million square feet at these properties (excluding space owned by anchors or third parties).
There are 18 operating retail properties in our portfolio that we consolidate for financial reporting purposes. These consolidated properties have a total of 15.4 million square feet, of which we own 12.4 million square feet. The seven operating retail properties that are owned by unconsolidated partnerships with third parties have a total of 4.9 million square feet, of which 3.6 million square feet are owned by such partnerships. When we refer to “Same Store” properties, we are referring to properties that have been owned for the full periods presented and exclude properties acquired, disposed of, under redevelopment or designated as a non-core property during the periods presented. Core properties include all operating retail properties except for Exton Square Mall, Valley View Mall and Fashion District Philadelphia. “Core Malls” also excludes these properties as well as power centers and Gloucester Premium Outlets.
We have one property in our portfolio that is classified as under development; however, we do not currently have any activity occurring at this property.
Fashion District Philadelphia opened on September 19, 2019. Fashion District Philadelphia is an aggregation of properties spanning three blocks in downtown Philadelphia that were formerly known as Gallery I, Gallery II and 907 Market Street. Joining Century 21 and Burlington in 2019 were multiple dining and entertainment venues including Market Eats, a multi offering food court, City Winery, AMC Theatres, and Round 1 Bowling & Amusement. In addition, Nike Factory Store, Ulta, and H & M have opened Philadelphia flagship stores at the property since its opening in September 2019.
Our primary business is owning and operating retail shopping malls, which we do primarily through our operating partnership, PREIT Associates, L.P. (“PREIT Associates” or the “Operating Partnership”). We provide management, leasing and real estate development services through PREIT Services, LLC (“PREIT Services”), which generally develops and manages properties that we consolidate for financial reporting purposes, and PREIT-RUBIN, Inc. (“PRI”), which generally develops and manages properties that we do not consolidate for financial reporting purposes, including properties owned by partnerships in which we own an interest and properties that are owned by third parties in which we do not have an interest. PRI is a taxable REIT subsidiary, as defined by federal tax laws, which means that it is able to offer additional services to tenants without jeopardizing our continuing qualification as a REIT under federal tax law.
Our revenue consists primarily of fixed rental income, additional rent in the form of fixed and variable expense reimbursements, and percentage rent (rent that is based on a percentage of our tenants’ sales or a percentage of sales in excess of thresholds that are specified in the leases) derived from our income producing properties. We also receive income from our real estate partnership investments and from the management and leasing services PRI provides.
20
Net loss for the three months ended March 31, 2020 was $13.5 million compared to a net loss of $16.2 million for the three months ended March 31, 2019. This $2.7 million decrease was primarily due to: (a) non-recurring items recorded in the prior year including a loss on debt extinguishment of $4.8 million and an asset impairment charge of $1.5 million on an undeveloped land parcel, both of which had a favorable impact on the current year; (b) a decrease in depreciation and amortization of $4.6 million in the current period; and (c) a gain on the sale of real estate of $1.9 million recorded in the three months ended March 31, 2020; partially offset by a $10.7 million decrease in real estate revenue as described below in our Results of Operations.
See “Non-GAAP Supplemental Financial Measures” below for more information about our use of Same Store NOI and Non Same Store NOI, which are non-GAAP measures.
We evaluate operating results and allocate resources on a property-by-property basis, and do not distinguish or evaluate our consolidated operations on a geographic basis. Due to the nature of our operating properties, which involve retail shopping, we have concluded that our individual properties have similar economic characteristics and meet all other aggregation criteria. Accordingly, we have aggregated our individual properties into one reportable segment. In addition, no single tenant accounts for 10% or more of our consolidated revenue, and none of our properties are located outside the United States.
Current Economic and Industry Conditions and Impact of COVID-19
Conditions in the economy have caused fluctuations and variations in business and consumer confidence, retail sales, and consumer spending on retail goods. Further, traditional mall tenants, including department store anchors and smaller format retail tenants, face significant challenges resulting from changing consumer expectations, the convenience of e-commerce shopping, competition from fast fashion retailers, the expansion of outlet centers, and declining mall traffic, among other factors. Additionally, in March 2020, the World Health Organization declared the outbreak of a novel coronavirus (COVID-19) a global pandemic. The global COVID-19 pandemic has caused significant disruptions to our industry and many other industries and has contributed to significant volatility in the financial markets. Our business and operations and those of many of our tenants have been materially and adversely impacted by the government-mandated travel restrictions, business closures and property shutdowns and the implementation of “social distancing” and certain other measures to prevent the further spread of the virus.
As a result of the COVID-19 pandemic, during March 2020, we temporarily closed all of our enclosed shopping malls. Certain of our malls have since re-opened and are adhering to social distancing and sanitation and safety protocols. The pandemic’s full effect was not experienced in the first quarter of 2020, but is expected to have a more significant impact on our financial condition, liquidity and results of operations in the second quarter of 2020 and thereafter. During March and April, we received many requests from tenants relating to rent relief or deferral. As of the filing date of this Quarterly Report on Form 10-Q, a substantial amount of contractual rent receivables for April and May remains outstanding and are under negotiation. We believe that our rent collections are probable, but expect that collections will continue to be below our tenants’ rent obligations as long as governmental orders require non-essential businesses to remain closed and residents to stay at home. We continue to record rental revenue during this period. Collections and requests for rent relief and deferral during this period may not be indicative of future periods.
We have taken several steps to respond to the pandemic and enhance our liquidity position, including staff reductions, reduction of capital expenditures and operating expenses, engagement with our lenders to negotiate modifications to our debt facilities and instruments, and a 90% common share dividend reduction, and we anticipate further actions will be necessary to address the impacts of the pandemic, which may include suspension or further reduction of share dividends. It remains highly uncertain and difficult to predict how long the pandemic and the economic challenges and restrictions it has resulted in will last, but we expect the pandemic to continue to have an adverse impact on our business, financial condition, liquidity and results of operations. See “Item 1A. Risk Factors - The COVID-19 global pandemic and the public health and governmental actions in response have adversely affected, and will likely continue to adversely affect, our business, financial condition, liquidity and operating results. The extent and duration of such effects are highly uncertain and cannot be predicted.”
In recent years, there has been an increased level of tenant bankruptcies and store closings by tenants who have been significantly impacted by these factors, and the impacts of the global COVID-19 pandemic have created additional economic challenges for many of our tenants.
Although we opened certain tenants at our redevelopment projects in 2019 and early 2020 and expect additional tenant openings later in 2020 subsequent to the COVID-19 pandemic shutdowns, we also have tenants who continue to face significant economic challenges, particularly in light of the COVID-19 pandemic, and we are in active discussions to restructure certain leasing arrangements through, among other things, downsizing and rent relief, which is expected to have a significant and unfavorable impact on our operating results.
21
The table below sets forth information related to our tenants in bankruptcy for our consolidated and unconsolidated properties (excluding tenants in bankruptcy at sold properties):
|
|
|
Pre-bankruptcy |
|
|
Units Closed |
|
||||||||||||||||||||||
|
Year |
|
Number of Tenants (1) |
|
|
Number of locations impacted |
|
|
GLA(2) |
|
|
PREIT’s Share of Annualized Gross Rent(3) (in thousands) |
|
|
Number of locations closed |
|
|
GLA(2) |
|
|
PREIT’s Share of Annualized Gross Rent(3) (in thousands) |
|
|||||||
|
2020 (Three Months Ended March 31) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated properties |
|
|
1 |
|
|
|
1 |
|
|
|
10,377 |
|
|
$ |
271,842 |
|
|
|
— |
|
|
|
— |
|
|
$ |
— |
|
|
Unconsolidated properties |
|
|
3 |
|
|
|
3 |
|
|
|
24,108 |
|
|
|
584,367 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Total |
|
|
3 |
|
|
|
4 |
|
|
|
34,485 |
|
|
$ |
856,209 |
|
|
|
— |
|
|
|
— |
|
|
$ |
— |
|
|
2019 (Full Year) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated properties |
|
|
9 |
|
|
|
71 |
|
|
|
400,516 |
|
|
$ |
14,656 |
|
|
|
63 |
|
|
|
242,742 |
|
|
$ |
9,480 |
|
|
Unconsolidated properties |
|
|
8 |
|
|
|
14 |
|
|
|
56,030 |
|
|
|
1,481 |
|
|
|
8 |
|
|
|
32,024 |
|
|
|
915 |
|
|
Total |
|
|
11 |
|
|
|
85 |
|
|
|
456,546 |
|
|
$ |
16,137 |
|
|
|
71 |
|
|
|
274,766 |
|
|
$ |
10,395 |
|
|
(1) |
Total represents unique tenants and includes both tenant-owned and landlord-owned stores. |
|
(2) |
Gross Leasable Area (“GLA”) in square feet. |
|
(3) |
Includes our share of tenant gross rent from partnership properties based on PREIT’s ownership percentage in the respective equity method investments as of March 31, 2020. |
Anchor Replacements
In recent years, through property dispositions, proactive store recaptures, lease terminations and other activities, we have made efforts to reduce our risks associated with certain department store concentrations.
During 2019, we re-opened or introduced additional tenants to former anchor positions at Woodland Mall in Grand Rapids, Michigan, Valley Mall in Hagerstown, Maryland and Plymouth Meeting Mall, in Plymouth Meeting, Pennsylvania. We opened Von Maur and Urban Outfitters, on a site formerly occupied by Sears at Woodland Mall and in-line lease-up continues. At Valley Mall, we opened Onelife Fitness in February 2019 to complete the former Macy’s redevelopment and during the year we signed a lease with Dick’s Sporting Goods to occupy the former Sears store at the property. Dick’s Sporting Goods opened in the first quarter of 2020. At Plymouth Meeting Mall, we opened Burlington, Dick’s Sporting Goods, Edge Fitness and Miller’s Ale House in the former Macy’s location during 2019, and the last tenant, Michael’s, opened in the first quarter of 2020. In 2017, we purchased the Macy’s location at Moorestown Mall in Moorestown, New Jersey and opened Sierra Trading in 2019 and Michael’s in the first quarter of 2020.
Construction was completed in the first quarter of 2020 giving way to the opening of Burlington in place of a former Sears at Dartmouth Mall in Dartmouth, Massachusetts. We expect to continue to move forward with several outparcels at Dartmouth Mall resulting from the Sears recapture and working with large format prospects for space adjacent to Burlington.
We currently have three vacant anchor positions at Valley View Mall in La Crosse, Wisconsin and during 2019, an additional anchor, Sears, closed at Exton Square Mall in Exton, Pennsylvania. In January 2020, the Lord & Taylor store at Moorestown Mall in Moorestown, New Jersey closed and we are working with several retail and entertainment prospects to fill the space. We had been notified by Sears of its plans to close stores at Moorestown Mall in Moorestown, New Jersey and Jacksonville Mall in Jacksonville, North Carolina, which it subsequently did close in April 2020. Sears continues to be financially obligated pursuant to the leases at these locations.
22
The table below sets forth information related to our anchor replacement program:
|
Property |
Former Anchors |
GLA (in '000's) |
Date Closed |
|
Decommission Date |
Replacement Tenant(s) |
GLA (in '000's) |
Actual/Targeted Occupancy Date |
|
Completed: |
||||||||
|
Dartmouth Mall |
Sears |
108 |
Q3 19 |
|
Q3 19 |
Burlington |
44 |
Q1 20 |
|
Moorestown Mall |
Macy's |
200 |
Q1 17 |
|
Q2 17 |
HomeSense |
28 |
Q3 18 |
|
|
|
|
|
|
|
Five Below |
9 |
Q4 18 |
|
|
|
|
|
|
|
Sierra Trading Post |
19 |
Q1 19 |
|
|
|
|
|
|
|
Michael's |
25 |
Q1 20 |
|
Valley Mall |
Macy's |
120 |
Q1 16 |
|
Q4 17 |
Tilt Studio |
48 |
Q3 18 |
|
|
|
|
|
|
|
One Life Fitness |
70 |
Q3 18 |
|
|
Bon-Ton |
123 |
Q1 18 |
|
Q1 18 |
Belk |
123 |
Q4 18 |
|
|
Sears |
72 |
Q3 17 |
|
Q2 18 |
Dick's Sporting Goods |
57 |
Q1 20 |
|
Plymouth Meeting Mall |
Macy's(1) |
215 |
Q1 17 |
|
Q2 17 |
Burlington |
42 |
Q3 19 |
|
|
|
|
|
|
|
Dick's Sporting Goods |
58 |
Q3 19 |
|
|
|
|
|
|
|
Miller's Ale House |
8 |
Q3 19 |
|
|
|
|
|
|
|
Edge Fitness |
38 |
Q4 19 |
|
|
|
|
|
|
|
Michael's |
26 |
Q1 20 |
|
Willow Grove Park |
JC Penney |
125 |
Q3 17 |
|
Q1 18 |
Yard House |
8 |
Q4 19 |
|
In Progress: |
|
|
|
|
|
|
|
|
|
Willow Grove Park |
JC Penney |
See above |
|
|
|
Studio Movie Grill |
49 |
(2) |
|
(1) |
Property is subject to a ground lease. |
|
(2) |
Timing of occupancy has not yet been determined due to uncertainty around duration of buildout due to COVID-19 restrictions on construction. |
In response to anchor store closings and other trends in the retail space, we have been changing the mix of tenants at our properties. We have been reducing the percentage of traditional mall tenants and increasing the share of space dedicated to dining, entertainment, fast fashion, off price, and large format box tenants. Some of these changes may result in the redevelopment of all or a portion of our properties. See “—Capital Improvements, Redevelopment and Development Projects.”
To fund the capital necessary to replace anchors and to maintain a reasonable level of leverage, we expect to use a variety of means available to us, subject to and in accordance with the terms of our Credit Agreements. These steps might include (i) making additional borrowings under our Credit Agreements (assuming continued compliance with the financial covenants thereunder), (ii) obtaining construction loans on specific projects, (iii) selling properties or interests in properties with values in excess of their mortgage loans (if applicable) and applying the excess proceeds to fund capital expenditures or for debt reduction, (iv) obtaining capital from joint ventures or other partnerships or arrangements involving our contribution of assets with institutional investors, private equity investors or other REITs, or (v) obtaining equity capital, including through the issuance of common or preferred equity securities if market conditions are favorable, or through other actions. As discussed in Note 4 to our unaudited consolidated financial statements, we entered into amendments to our Credit Agreements in March 2020 to provide certain debt covenant relief through September 30, 2020, in anticipation of a longer term solution prior to the expiration of the initial modification. Accordingly, we anticipate entering into additional modifications of our Credit Agreements and, in light of the effects of COVID-19 on our business, operations, liquidity and financial condition, we are also in discussions with the lenders of our properties’ mortgage loans to seek modifications of such loans. No assurance can be provided that we will obtain such modifications.
Capital Improvements, Redevelopment and Development Projects
We might engage in various types of capital improvement projects at our operating properties. Such projects vary in cost and complexity, and can include building out new or existing space for individual tenants, upgrading common areas or exterior areas such as parking lots, or redeveloping the entire property, among other projects. Project costs are accumulated in “Construction in progress” on our consolidated balance sheet until the asset is placed into service, and amounted to $81.5 million as of March 31, 2020.
As of March 31, 2020, we had unaccrued contractual and other commitments related to our capital improvement projects and development projects at our consolidated and unconsolidated properties of $56.8 million, including $32.8 million of commitments related to the redevelopment of Fashion District Philadelphia, in the form of tenant allowances and contracts with general service providers and other professional service providers.
23
In 2014, we entered into a 50/50 joint venture with The Macerich Company (“Macerich”) to redevelop Fashion District Philadelphia. As we redevelop Fashion District Philadelphia, operating results in the short term, as measured by sales, occupancy, real estate revenue, property operating expenses, Net Operating Income (“NOI”) and depreciation, will continue to be affected until the newly constructed space is completed, leased and occupied. Fashion District Philadelphia opened in September 2019 and is not yet fully stabilized as development work is continuing.
In January 2018, we along with Macerich, our partner in the Fashion District Philadelphia redevelopment project, entered into a $250.0 million term loan (the “FDP Term Loan”). The initial term of the FDP Term Loan is five years, and bears interest at a variable rate of 2.00% over LIBOR. PREIT and Macerich secured the FDP Term Loan by pledging their respective equity interests of 50% each in the entities that own Fashion District Philadelphia. The entire $250.0 million available under the FDP Term Loan was drawn during the first quarter of 2018, and we received an aggregate $123.0 million as a distribution of our share of the draw in 2018. In July 2019, the FDP Term Loan was modified to increase the total maximum potential borrowings from $250.0 million to $350.0 million. A total of $51.0 million was drawn during the third quarter of 2019 and we received aggregate distributions of $25.0 million as our share of the draws.
We also own one development property, but we do not expect to make any significant investment at this property in the short term.
CRITICAL ACCOUNTING POLICIES
Critical Accounting Policies are those that require the application of management’s most difficult, subjective, or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that might change in subsequent periods. In preparing the consolidated financial statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. In preparing the consolidated financial statements, management has utilized available information, including our past history, industry standards and the current economic environment, among other factors, in forming its estimates and judgments, giving due consideration to materiality. Management has also considered events and changes in property, market and economic conditions, estimated future cash flows from property operations and the risk of loss on specific accounts or amounts in determining its estimates and judgments. Actual results may differ from these estimates. In addition, other companies may utilize different estimates, which may affect comparability of our results of operations to those of companies in a similar business. The estimates and assumptions made by management in applying Critical Accounting Policies have not changed materially during 2020 or 2019, except as otherwise noted, and none of these estimates or assumptions have proven to be materially incorrect or resulted in our recording any significant adjustments relating to prior periods. We will continue to monitor the key factors underlying our estimates and judgments, but no change is currently expected.
For additional information regarding our Critical Accounting Policies, see “Critical Accounting Policies” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2019.
Impairment of Assets
Real estate investments and related intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the property might not be recoverable, which is referred to as a “triggering event.” The COVID-19 impact on the economy and market conditions, together with the resulting closures of our properties, was deemed to be a triggering event at March 31, 2020 which led to an impairment review. In connection with our review of our long-lived assets for impairment, we utilize qualitative and quantitative factors in order to estimate fair value. The significant qualitative factors that we use include age and condition of the property, market conditions in the property’s trade area, competition with other shopping centers within the property’s trade area and the creditworthiness and performance of the property’s tenants. The significant quantitative factors that we use include historical and forecasted financial and operating information relating to the property, such as net operating income, occupancy statistics, vacancy projections and tenants’ sales levels.
If there is a triggering event in relation to a property to be held and used, we will estimate the aggregate future cash flows, less estimated capital expenditures, to be generated by the property, undiscounted and without interest charges. In addition, this estimate may consider a probability weighted cash flow estimation approach when alternative courses of action to recover the carrying amount of a long-lived asset are under consideration or when a range of possible values is estimated.
The determination of undiscounted cash flows requires significant estimates by management, including the expected course of action at the balance sheet date that would lead to such cash flows. Subsequent changes in estimated undiscounted cash flows arising from changes in the anticipated action to be taken with respect to the property could impact the determination of whether an impairment exists and whether the effects could materially affect our net income. To the extent estimated undiscounted cash flows are less than the carrying value of the property, the loss will be measured as the excess of the carrying amount of the property over the estimated fair value of the property.
Assessment of our ability to recover certain lease related costs must be made when we have a reason to believe that the tenant might not be able to perform under the terms of the lease as originally expected. This requires us to make estimates as to the recoverability of such costs.
24
An other than temporary impairment of an investment in an unconsolidated joint venture is recognized when the carrying value of the investment is not considered recoverable based on evaluation of the severity and duration of the decline in value. To the extent impairment has occurred, the excess carrying value of the asset over its estimated fair value is charged to income. We concluded that there was no impairment as of March 31, 2020.
New Accounting Developments
See Note 1 to our unaudited consolidated financial statements for descriptions of new accounting developments.
OFF BALANCE SHEET ARRANGEMENTS
We have no material off-balance sheet items other than (i) the partnerships described in Note 3 to our unaudited consolidated financial statements and in the “Overview” section above, (ii) unaccrued contractual commitments related to our capital improvement and development projects at our consolidated and unconsolidated properties, and (iii) specifically with respect to our joint venture formed with Macerich to develop Fashion District Philadelphia, our operating partnership, PREIT Associates, has jointly and severally guaranteed the obligations of the joint venture to complete a comprehensive redevelopment of that property costing not less than $300.0 million within 48 months after commencement of construction, which was March 14, 2016, and has severally guaranteed its 50% share of the FDP Term Loan (see Note 3 to our unaudited consolidated financial statements), which currently has $301.0 million outstanding (our share of which is $150.5 million). If our Fashion District Philadelphia joint venture were unable to satisfy its obligations under the FDP Term Loan and we were required to satisfy its payment obligations under the guarantee, this could have a material impact on our liquidity and available capital resources. The FDP Term Loan balance will become due in 2023.
RESULTS OF OPERATIONS
Overview
Net loss for the three months ended March 31, 2020 was $13.5 million compared to a net loss of $16.2 million for the three months ended March 31, 2019. This $2.7 million decrease was primarily due to: (a) non-recurring items recorded in the prior year including a loss on debt extinguishment of $4.8 million and an asset impairment charge of $1.5 million on an undeveloped land parcel both of which had a favorable impact on the current year; (b) a decrease in depreciation and amortization of $4.6 million in the current period; and (c) a gain on the sale of real estate of $2.0 million recorded in the three months ended March 31, 2020; partially offset by a $10.7 million decrease in real estate revenue as described below. See “—Real Estate Revenue.”
Occupancy
The table below sets forth certain occupancy statistics for our properties as of March 31, 2020 and 2019:
|
|
|
Occupancy(1) at March 31, 2020 |
|
|||||||||||||||||||||
|
|
|
Consolidated Properties |
|
|
Unconsolidated Properties |
|
|
Combined(2) |
|
|||||||||||||||
|
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||||
|
Retail portfolio weighted average:(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total excluding anchors |
|
|
89.1 |
% |
|
|
90.6 |
% |
|
|
87.7 |
% |
|
|
90.7 |
% |
|
|
88.8 |
% |
|
|
90.7 |
% |
|
Total including anchors |
|
|
90.0 |
% |
|
|
91.3 |
% |
|
|
90.0 |
% |
|
|
92.4 |
% |
|
|
90.0 |
% |
|
|
91.5 |
% |
|
Core Malls weighted average:(4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total excluding anchors |
|
|
90.8 |
% |
|
|
91.9 |
% |
|
|
86.2 |
% |
|
|
88.9 |
% |
|
|
90.3 |
% |
|
|
91.5 |
% |
|
Total including anchors |
|
|
93.2 |
% |
|
|
95.0 |
% |
|
|
90.6 |
% |
|
|
92.4 |
% |
|
|
92.9 |
% |
|
|
94.7 |
% |
|
(1) |
Occupancy for all periods presented includes all tenants irrespective of the term of their agreement. |
|
(2) |
Combined occupancy is calculated by using occupied gross leasable area (“GLA”) for consolidated and unconsolidated properties and dividing by total GLA for consolidated and unconsolidated properties. |
|
(3) |
Retail portfolio includes all retail properties excluding Fashion District Philadelphia because that property was under redevelopment until it opened in September 2019 and has not yet stabilized. |
|
(4) |
Core Malls excludes Fashion District Philadelphia, Exton Square Mall, Valley View Mall, power centers and Gloucester Premium Outlets. |
25
Leasing Activity
The table below sets forth summary leasing activity information with respect to our consolidated and unconsolidated properties for the three months ended March 31, 2020:
|
|
|
|
|
Number |
|
|
GLA |
|
|
Term |
|
|
Initial Rent per square foot ("psf") |
|
|
Previous Rent psf |
|
|
Initial Gross Rent Renewal Spread(1) |
|
|
Average Rent Renewal Spread(2) |
|
|
Annualized Tenant Improvements psf(3) |
|
||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
% |
|
|
% |
|
|
|
|
|
|||
|
Non Anchor |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New Leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under 10k square feet ("sf") |
|
|
|
|
28 |
|
|
|
65,591 |
|
|
|
6.7 |
|
|
$ |
41.32 |
|
|
N/A |
|
|
N/A |
|
|
N/A |
|
|
N/A |
|
|
$ |
9.27 |
|
||||
|
Over 10k sf |
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
N/A |
|
|
N/A |
|
|
N/A |
|
|
N/A |
|
|
|
- |
|
||||
|
Total New Leases |
|
|
|
|
28 |
|
|
|
65,591 |
|
|
|
6.7 |
|
|
$ |
41.32 |
|
|
N/A |
|
|
N/A |
|
|
N/A |
|
|
N/A |
|
|
$ |
9.27 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Renewal Leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under 10k sf |
|
|
|
|
55 |
|
|
|
150,527 |
|
|
|
2.8 |
|
|
$ |
51.10 |
|
|
$ |
54.52 |
|
|
$ |
(3.41 |
) |
|
|
(6.3 |
%) |
|
|
(1.3 |
%) |
|
$ |
0.01 |
|
|
Over 10k sf |
|
|
|
|
1 |
|
|
|
11,344 |
|
|
|
2.0 |
|
|
|
26.45 |
|
|
|
28.98 |
|
|
|
(2.53 |
) |
|
|
(8.7 |
%) |
|
|
(8.7 |
%) |
|
|
- |
|
|
Total Fixed Rent |
|
|
|
|
56 |
|
|
|
161,871 |
|
|
|
2.8 |
|
|
$ |
49.37 |
|
|
$ |
52.73 |
|
|
$ |
(3.35 |
) |
|
|
(6.4 |
%) |
|
|
(1.6 |
%) |
|
$ |
0.01 |
|
|
Total Percentage in Lieu |
|
|
|
|
11 |
|
|
|
17,719 |
|
|
|
1.2 |
|
|
|
53.00 |
|
|
|
90.92 |
|
|
|
(37.92 |
) |
|
|
(41.7 |
%) |
|
N/A |
|
|
|
- |
|
|
|
Total Renewal Leases (4) |
|
|
|
|
67 |
|
|
|
179,590 |
|
|
|
2.6 |
|
|
$ |
49.73 |
|
|
$ |
56.49 |
|
|
$ |
(6.76 |
) |
|
|
(12.0 |
%) |
|
|
|
|
|
$ |
0.02 |
|
|
Total Non Anchor |
|
|
|
|
95 |
|
|
|
245,181 |
|
|
|
3.7 |
|
|
$ |
47.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Initial gross rent renewal spread is computed by comparing the initial rent per square foot in the new lease to the final rent per square foot amount in the expiring lease. For purposes of this computation, the rent amount includes minimum rent, common area maintenance (“CAM”) charges, estimated real estate tax reimbursements and marketing charges, but excludes percentage rent. In certain cases, a lower rent amount may be payable for a period of time until specified conditions in the lease are satisfied. |
|
(2) |
Average rent renewal spread is computed by comparing the average rent per square foot over the new lease term to the final rent per square foot amount in the expiring lease. For purposes of this computation, the rent amount includes minimum rent and fixed CAM charges, but excludes pro rata CAM charges, estimated real estate tax reimbursements, marketing charges and percentage rent. |
|
(3) |
These leasing costs are presented as annualized amounts per square foot and are spread uniformly over the initial lease term. |
|
(4) |
Includes 9 leases and 30,552 square feet of GLA with respect to our unconsolidated partnerships. We own a 25% to 50% interest in each of our unconsolidated properties and do not control such properties. Our percentage ownership is not necessarily indicative of the legal and economic implications of our ownership interest. See “— Non-GAAP Supplemental Financial Measures” for further details on our ownership interests in our unconsolidated properties. |
The following table sets forth our results of operations for the three months ended March 31, 2020 and 2019.
|
|
|
Three Months Ended March 31, |
|
|
% Change 2019 to 2020 |
||||||||
|
(in thousands of dollars) |
|
2020 |
|
|
2019 |
|
|
|
|||||
|
Real estate revenue |
|
$ |
73,950 |
|
|
$ |
84,678 |
|
|
|
(13 |
) |
% |
|
Property operating expenses |
|
|
(32,537 |
) |
|
|
(35,128 |
) |
|
|
(7 |
) |
% |
|
Other income |
|
|
293 |
|
|
|
627 |
|
|
|
(53 |
) |
% |
|
Depreciation and amortization |
|
|
(30,269 |
) |
|
|
(34,904 |
) |
|
|
(13 |
) |
% |
|
General and administrative expenses |
|
|
(10,695 |
) |
|
|
(11,205 |
) |
|
|
(5 |
) |
% |
|
Provision for employee separation expenses |
|
|
(73 |
) |
|
|
(719 |
) |
|
|
(90 |
) |
% |
|
Insurance recoveries, net |
|
|
- |
|
|
|
(236 |
) |
|
|
(100 |
) |
% |
|
Project costs and other expenses |
|
|
(95 |
) |
|
|
(58 |
) |
|
|
64 |
|
% |
|
Interest expense, net |
|
|
(16,858 |
) |
|
|
(15,898 |
) |
|
|
6 |
|
% |
|
Loss on debt extinguishment, net |
|
|
- |
|
|
|
(4,768 |
) |
|
|
(100 |
) |
% |
|
Impairment of development land parcel |
|
|
- |
|
|
|
(1,464 |
) |
|
|
(100 |
) |
% |
|
Equity in income of partnerships |
|
|
819 |
|
|
|
2,289 |
|
|
|
(64 |
) |
% |
|
Gain on sales of real estate by equity method investee |
|
|
- |
|
|
|
563 |
|
|
|
(100 |
) |
% |
|
Gain on sales of real estate, net |
|
|
1,962 |
|
|
|
- |
|
|
|
100 |
|
% |
|
Loss on sales of interests in non operating real estate |
|
|
(46 |
) |
|
|
- |
|
|
|
100 |
|
% |
|
Net loss |
|
$ |
(13,549 |
) |
|
$ |
(16,223 |
) |
|
|
(16 |
) |
% |
26
The amounts in the preceding tables reflect our consolidated properties and our unconsolidated properties. Our unconsolidated properties are presented under the equity method of accounting in the line item “Equity in income of partnerships.”
Real estate revenue
Effective January 1, 2019, we adopted Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) (“ASC 842”) and related guidance using the optional transition method and elected to apply the provisions of the standard as of the adoption date rather than the earliest date presented. Prior period amounts were not restated. Since we adopted the practical expedient in ASC 842, which allows us to avoid separating lease (minimum rent) and non-lease rental income (common area maintenance and real estate tax reimbursements), all rental income earned pursuant to tenant leases is reflected as one line, “Lease revenue,” in the consolidated statement of operations. Utility reimbursements are presented separately in “Expense reimbursements.” We review the collectability of both billed and unbilled lease revenues each reporting period, taking into consideration the tenant’s payment history, credit profile and other factors, including its operating performance. For any tenant receivable balances deemed to be uncollectible, under ASC 842 we record an offset for credit losses directly to Lease revenue in the consolidated statement of operations. Previously, under ASC 840, uncollectible tenants’ receivables were reported in Other property operating expenses in the consolidated statement of operations.
The following table reports the breakdown of real estate revenues based on the terms of the lease contracts for the three months ended March 31, 2020 and 2019:
|
|
|
Three Months Ended March 31, |
|
|||||
|
(in thousands of dollars) |
|
2020 |
|
|
2019 |
|
||
|
Contractual lease payments: |
|
|
|
|
|
|
|
|
|
Base rent |
|
$ |
51,048 |
|
|
$ |
55,885 |
|
|
CAM reimbursement income |
|
|
10,168 |
|
|
|
11,645 |
|
|
Real estate tax income |
|
|
8,496 |
|
|
|
9,540 |
|
|
Percentage rent |
|
|
19 |
|
|
|
9 |
|
|
Lease termination revenue |
|
|
9 |
|
|
|
313 |
|
|
|
|
|
69,740 |
|
|
|
77,392 |
|
|
Less: credit losses |
|
|
(2,019 |
) |
|
|
(777 |
) |
|
Lease revenue |
|
|
67,721 |
|
|
|
76,615 |
|
|
Expense reimbursements |
|
|
4,305 |
|
|
|
5,062 |
|
|
Other real estate revenue |
|
|
1,924 |
|
|
|
3,001 |
|
|
Total real estate revenue |
|
$ |
73,950 |
|
|
$ |
84,678 |
|
The Company has presented the above information to provide additional detail about the components of lease revenue based on the terms of the underlying lease contracts. The presentation of contractual lease payments is not, and is not intended to be, a presentation in accordance with GAAP. The Company believes this information is useful to investors, securities analysts and other interested parties to evaluate the Company’s performance.
Real estate revenue decreased by $10.7 million, or 13%, in the three months ended March 31, 2020 compared to the three months ended March 31, 2019, primarily due to:
|
|
• |
a decrease of $2.7 million at Wyoming Valley Mall which was conveyed to the lender of the mortgage loan secured by Wyoming Valley Mall on September 26, 2019; |
|
|
• |
a decrease of $2.3 million at non-same store properties Valley View Mall and Exton Square Mall due to three anchor store closings during 2018 and 2019 and associated co-tenancy concessions, as well as a decrease in lease revenue at Exton Square Mall due to the sale of an outparcel during the three months ended June 30, 2019; |
|
|
• |
a decrease of $1.9 million in same store base rent due to a $1.9 million decrease related to tenant bankruptcies in 2019 and 2020, as well as a $0.5 million decrease related to COVID-19 related mall closures and associated rent abatements and reduced percentage of sales revenue, partially offset by $0.5 million from net new store openings over the previous twelve months; |
|
|
• |
an increase of $1.3 million in same store credit losses due to increased delinquent accounts receivable balances for some tenants across our portfolio that was exacerbated by the COVID-19 related mall closures starting in March 2020; |
|
|
• |
a decrease of $1.0 million in same store common area expense reimbursements, including a decrease of $0.2 million associated with the straight lining of fixed common area expense reimbursements effective January 1, 2019 in accordance with ASC 842. Excluding the impact of the straight line adjustment, same store common area reimbursements decreased by $0.8 million due to a decrease in same store common area expense (see “—Property Operating Expenses”), as well as 2019 bankruptcy-related store closings and rental concessions made to some tenants under which the terms of their leases were modified such that they no longer pay expense reimbursements; |
27
|
|
• |
a decrease of $0.6 million in same store real estate tax reimbursements due to 2019 bankruptcy store closings and rental concessions made to some tenants under which the terms of their leases were modified such that they no longer pay expense reimbursements, partially offset by an increase in same store real estate tax expense (see “—Property Operating Expenses”); |
|
|
• |
a decrease of $0.4 million in same store utility reimbursements, offset by a decrease in same store utility expense (see “—Property Operating Expenses”); and |
|
|
• |
a decrease of $0.3 million in same store lease termination revenue, including $0.2 million received from one tenant during the three months ending March 31, 2019. |
Property operating expenses
Property operating expenses decreased by $2.6 million, or 7%, in the three months ended March 31, 2020 compared to the three months ended March 31, 2019, primarily due to:
|
|
• |
a decrease of $1.3 million at Wyoming Valley Mall which was conveyed to the lender of the mortgage loan secured by Wyoming Valley Mall on September 26, 2019; |
|
|
• |
a decrease of $0.7 million in same store common area maintenance expense, including a $0.5 million decrease in snow removal expense due to lower snow fall amounts during the three months ending March 31, 2020 across the Mid-Atlantic States, where many of our properties are located; |
|
|
• |
a decrease of $0.5 million at non-same store properties Valley View Mall and Exton Square Mall due to a decrease in the real estate tax assessment value at Valley View Mall and a decrease in snow removal expense at Exton Square Mall; and |
|
|
• |
a decrease of $0.5 million in same store tenant utility expense due to a combination of lower electricity usage and lower electricity rates; partially offset by |
|
|
• |
an increase of $0.4 million in same store real estate tax expense due to a combination of increases in the real estate tax assessment values and the real estate tax rates. |
Depreciation and amortization
Depreciation and amortization expense decreased by $4.6 million, or 13%, in the three months ended March 31, 2020 compared to the three months ended March 31, 2019, primarily due to:
|
|
• |
a decrease of $3.4 million due to accelerated amortization of capital improvements associated with store closings during the three months ended March 31, 2019, partially offset by a higher asset base resulting from capital improvements related to new tenants at our same store properties; |
|
|
• |
a decrease of $0.6 million at Wyoming Valley Mall which was conveyed to the lender of the mortgage loan secured by Wyoming Valley Mall on September 26, 2019; and |
|
|
• |
a decrease of $0.6 million at non-same store properties Exton Square Mall and Valley View Mall due to accelerated amortization of capital improvements associated with store closings during the three months ended March 31, 2019, as well as a decrease in depreciation expense at Exton Square Mall due to the sale of an outparcel during the three months ended June 30, 2019. |
General and administrative expenses
General and administrative expenses decreased by $0.5 million, or 5%, in the three months ended March 31, 2020 compared to the three months ended March 31, 2019 primarily due to lower payroll and incentive compensation expenses.
Interest expense
Interest expense increased by $1.0 million, or 6%, in the three months ended March 31, 2020 compared to the three months ended March 31, 2019. This increase was primarily due to higher weighted average debt balances, partially offset by slightly lower weighted average interest rates. Our weighted average effective borrowing rate was 4.2% for the three months ended March 31, 2020 compared to 4.3% for the three months ended March 31, 2019. Our weighted average debt balance was $1,714.2 million for the three months ended March 31, 2020, compared to $1,679.8 million for the three months ended March 31, 2019.
Loss on debt extinguishment, net
There were no losses on debt extinguishment for the three months ended March 31, 2020. During the three months ended March 31, 2019, we defeased a $58.5 million mortgage loan including accrued interest, secured by Capital City Mall in Camp Hill, Pennsylvania using funds from our 2018 Revolving Facility and the balance from available working capital. We recorded a loss on debt extinguishment of $4.8 million in March 2019 in connection with this defeasance.
28
Impairment of Assets
There was no impairment of assets for the three months ended March 31, 2020. Impairment of development land parcel for the three months ended March 31, 2019 was $1.5 million in connection with the sale of a land parcel in Gainesville, Florida.
Equity in income of partnerships
Equity in income of partnerships decreased by $1.5 million, or 64%, in the three months ended March 31, 2020 compared to the three months ended March 31, 2019, primarily due to higher operating expenses, interest expense and depreciation and amortization at our partnership properties.
Gain on sales of real estate by equity method investee
There were no sales of real estate by equity method investees in the three months ended March 31, 2020. In the three months ended March 31, 2019, a partnership in which we hold a 25% interest share sold an undeveloped land parcel adjacent to Gloucester Premium Outlets for $3.8 million. The partnership recorded a gain on sale of $2.3 million, of which our share was $0.6 million, which is recorded in gain on sale of real estate by equity method investee in the accompanying consolidated statement of operations.
Gain on sales of real estate
In January 2020, we completed the sale of an outparcel at Woodland Mall in Grand Rapids, Michigan for total consideration of $5.2 million. In March 2020, we completed the sale of two outparcels at Magnolia Mall in Florence, South Carolina for total consideration of $2.9 million. In connection with the March sale, we recorded a gain of $2.0 million. There were no gains on sales of real estate in the three months ended March 31, 2019.
NON-GAAP SUPPLEMENTAL FINANCIAL MEASURES
Overview
The preceding discussion analyzes our financial condition and results of operations in accordance with generally accepted accounting principles, or GAAP, for the periods presented. We also use Net Operating Income (“NOI”) and Funds from Operations (“FFO”), which are non-GAAP financial measures, to supplement our analysis and discussion of our operating performance:
|
|
• |
We believe that NOI is helpful to management and investors as a measure of operating performance because it is an indicator of the return on property investment and provides a method of comparing property performance over time. When we use and present NOI, we also do so on a same store (“Same Store NOI”) and non same store (“Non Same Store NOI”) basis to differentiate between properties that we have owned for the full periods presented and properties acquired, sold, under redevelopment or designated as non-core during those periods. Furthermore, our use and presentation of NOI combines NOI from our consolidated properties and NOI attributable to our share of unconsolidated properties in order to arrive at total NOI. We believe that this is also helpful information because it reflects the pro rata contribution from our unconsolidated properties that are owned through investments accounted for under GAAP as equity in income of partnerships. See “Unconsolidated Properties and Proportionate Financial Information” below. |
|
|
• |
We believe that FFO is also helpful to management and investors as a measure of operating performance because it excludes various items included in net income that do not relate to or are not indicative of operating performance, such as gains on sales of operating real estate and depreciation and amortization of real estate, among others. In addition to FFO and FFO per diluted share and OP Unit, when applicable, we also present FFO, as adjusted and FFO per diluted share and OP Unit, as adjusted, which we believe is helpful to management and investors because they adjust FFO to exclude items that management does not believe are indicative of operating performance, such as provision for employee separation expense and accelerated amortization of financing costs. |
|
|
• |
We use both NOI and FFO, or related terms like Same Store NOI and, when applicable, Funds From Operations, as adjusted, for determining incentive compensation amounts under certain of our performance-based executive compensation programs. |
NOI and FFO are commonly used non-GAAP financial measures of operating performance in the real estate industry, and we use them as supplemental non-GAAP measures to compare our performance between different periods and to compare our performance to that of our industry peers. Our computation of NOI, FFO and other non-GAAP financial measures, such as Same Store NOI, Non Same Store NOI, NOI attributable to our share of unconsolidated properties, and FFO, as adjusted, may not be comparable to other similarly titled measures used by our industry peers. None of these measures are measures of performance in accordance with GAAP, and they have limitations as analytical tools. They should not be considered as alternative measures of our net income, operating performance, cash flow or liquidity. They are not indicative of funds available for our cash needs, including our ability to make cash distributions. Please see below for a discussion of these non-GAAP measures and their respective reconciliation to the most directly comparable GAAP measure.
29
Unconsolidated Properties and Proportionate Financial Information
The non-GAAP financial measures presented below incorporate financial information attributable to our share of unconsolidated properties. This proportionate financial information is non-GAAP financial information, but we believe that it is helpful information because it reflects the pro rata contribution from our unconsolidated properties that are owned through investments accounted for under GAAP using the equity method of accounting. Under such method, earnings from these unconsolidated partnerships are recorded in our statements of operations prepared in accordance with GAAP under the caption entitled “Equity in income of partnerships.”
To derive the proportionate financial information reflected in the tables below as “unconsolidated,” we multiplied the percentage of our economic interest in each partnership on a property-by-property basis by each line item. Under the partnership agreements relating to our current unconsolidated partnerships with third parties, we own a 25% to 50% economic interest in such partnerships, and there are generally no provisions in such partnership agreements relating to special non-pro rata allocations of income or loss, and there are no preferred or priority returns of capital or other similar provisions. While this method approximates our indirect economic interest in our pro rata share of the revenue and expenses of our unconsolidated partnerships, we do not have a direct legal claim to the assets, liabilities, revenues or expenses of the unconsolidated partnerships beyond our rights as an equity owner in the event of any liquidation of such entity. Our percentage ownership is not necessarily indicative of the legal and economic implications of our ownership interest. Accordingly, NOI and FFO results based on our share of the results of unconsolidated partnerships do not represent cash generated from our investments in these partnerships.
We have determined that we hold a non controlling interest in each of our unconsolidated partnerships, and account for such partnerships using the equity method of accounting, because:
|
|
• |
Except for two properties that we co-manage with our partner, all of the other entities are managed on a day-to-day basis by one of our other partners as the managing general partner in each of the respective partnerships. In the case of the co-managed properties, all decisions in the ordinary course of business are made jointly. |
|
|
• |
The managing general partner is responsible for establishing the operating and capital decisions of the partnership, including budgets, in the ordinary course of business. |
|
|
• |
All major decisions of each partnership, such as the sale, refinancing, expansion or rehabilitation of the property, require the approval of all partners. |
|
|
• |
Voting rights and the sharing of profits and losses are generally in proportion to the ownership percentages of each partner. |
We hold legal title to a property owned by one of our unconsolidated partnerships through a tenancy in common arrangement. For this property, such legal title is held by us and another entity, and each has an undivided interest in title to the property. With respect to this property, under the applicable agreements between us and the entity with ownership interests, we and such other entity have joint control because decisions regarding matters such as the sale, refinancing, expansion or rehabilitation of the property require the approval of both us and the other entity owning an interest in the property. Hence, we account for this property like our other unconsolidated partnerships using the equity method of accounting. The balance sheet items arising from this property appear under the caption “Investments in partnerships, at equity.”
For further information regarding our unconsolidated partnerships, see Note 3 to our unaudited consolidated financial statements.
Net Operating Income (“NOI”)
NOI (a non-GAAP measure) is derived from real estate revenue (determined in accordance with GAAP, including lease termination revenue), minus property operating expenses (determined in accordance with GAAP), plus our pro rata share of revenue and property operating expenses of our unconsolidated partnership investments. NOI excludes other income, general and administrative expenses, insurance recoveries, employee separation expenses, interest expense, depreciation and amortization, impairment of assets, gains/ adjustment to gains on sale of interest in non operating real estate, gain on sales of interest in real estate by equity method investee, gains/ losses on sales of interests in real estate, net, gain or loss on debt extinguishment, and project costs and other expenses. We believe that net income is the most directly comparable GAAP measure to NOI.
Same Store NOI is calculated using retail properties owned for the full periods presented and excludes properties acquired, disposed, under redevelopment or designated as non-core during the periods presented. In 2018, Wyoming Valley Mall was designated as non-core and subsequently conveyed to the lender of the mortgage loan secured by that property in September 2019. In 2019, Exton Square and Valley View Malls were designated as non-core and are excluded from Same Store NOI. Non Same Store NOI is calculated using the retail properties excluded from the calculation of Same Store NOI.
30
The table below reconciles net loss to NOI of our consolidated properties for the three months ended March 31, 2020 and 2019:
|
|
|
Three Months Ended March 31, |
|
|
|||||
|
(in thousands of dollars) |
|
2020 |
|
|
2019 |
|
|
||
|
Net loss |
|
$ |
(13,549 |
) |
|
$ |
(16,223 |
) |
|
|
Other income |
|
|
(293 |
) |
|
|
(628 |
) |
|
|
Depreciation and amortization |
|
|
30,269 |
|
|
|
34,904 |
|
|
|
General and administrative expenses |
|
|
10,695 |
|
|
|
11,205 |
|
|
|
Insurance recoveries, net |
|
|
- |
|
|
|
236 |
|
|
|
Provision for employee separation expenses |
|
|
73 |
|
|
|
719 |
|
|
|
Project costs and other expenses |
|
|
95 |
|
|
|
58 |
|
|
|
Interest expense, net |
|
|
16,858 |
|
|
|
15,898 |
|
|
|
Loss on debt extinguishment |
|
|
- |
|
|
|
4,768 |
|
|
|
Impairment of development land parcel |
|
|
- |
|
|
|
1,464 |
|
|
|
Equity in income of partnerships |
|
|
(819 |
) |
|
|
(2,289 |
) |
|
|
Gain on sales of real estate by equity method investee |
|
|
- |
|
|
|
(563 |
) |
|
|
Gain on sales of interests in real estate, net |
|
|
(1,962 |
) |
|
|
- |
|
|
|
Loss on sales of non-operating real estate |
|
|
46 |
|
|
|
- |
|
|
|
NOI from consolidated properties |
|
$ |
41,413 |
|
|
$ |
49,549 |
|
|
The table below reconciles equity in income of partnerships to NOI of our share of unconsolidated properties for the three months ended March 31, 2020 and 2019:
|
|
|
Three Months Ended March 31, |
|
|||||
|
(in thousands of dollars) |
|
2020 |
|
|
2019 |
|
||
|
Equity in income of partnerships |
|
$ |
819 |
|
|
$ |
2,289 |
|
|
Other income |
|
|
(14 |
) |
|
|
(12 |
) |
|
Depreciation and amortization |
|
|
3,610 |
|
|
|
1,970 |
|
|
Interest and other expenses |
|
|
3,029 |
|
|
|
2,776 |
|
|
NOI from equity method investments at ownership share |
|
$ |
7,444 |
|
|
$ |
7,023 |
|
The table below presents total NOI and total NOI excluding lease termination revenue for the three months ended March 31, 2020 and 2019:
|
|
|
Same Store |
|
|
Non Same Store |
|
|
Total (non-GAAP) |
|
|||||||||||||||
|
(in thousands of dollars) |
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
|
2020 |
|
|
2019 |
|
||||||
|
NOI from consolidated properties |
|
$ |
40,430 |
|
|
$ |
45,271 |
|
|
$ |
983 |
|
|
$ |
4,278 |
|
|
$ |
41,413 |
|
|
$ |
49,549 |
|
|
NOI from equity method investments at ownership share |
|
|
6,612 |
|
|
|
7,052 |
|
|
|
832 |
|
|
|
(29 |
) |
|
|
7,444 |
|
|
|
7,023 |
|
|
Total NOI |
|
|
47,042 |
|
|
|
52,323 |
|
|
|
1,815 |
|
|
|
4,249 |
|
|
|
48,857 |
|
|
|
56,572 |
|
|
Less: lease termination revenue |
|
|
9 |
|
|
|
300 |
|
|
|
- |
|
|
|
16 |
|
|
|
9 |
|
|
|
316 |
|
|
Total NOI excluding lease termination revenue |
|
$ |
47,033 |
|
|
$ |
52,023 |
|
|
$ |
1,815 |
|
|
$ |
4,233 |
|
|
$ |
48,848 |
|
|
$ |
56,256 |
|
Total NOI decreased by $7.7 million in the three months ended March 31, 2020 compared to the three months ended March 31, 2019 due to (a) a $5.3 million decrease in Same Store NOI and (b) a decrease of $2.4 million in Non Same Store NOI. The decrease in Same Store NOI is primarily due to lost revenues from bankrupt tenants, an increase in credit losses and a decrease in percentage of sales revenue due to COVID-19 related mall closures. The decrease in NOI from Non Same Store properties is due to the conveyance of Wyoming Valley Mall and lower contributions from Exton Square Mall, resulting from an anchor closing and related co-tenancy revenue adjustments, the sale of an outparcel during the second quarter of 2019 and a decrease in other non-recurring revenues compared to the first quarter of 2019. See “— Real Estate Revenue” and “— Property Operating Expenses” above for further information about the factors affecting NOI from our consolidated properties.
Funds From Operations (“FFO”)
The National Association of Real Estate Investment Trusts (“NAREIT”) defines FFO, which is a non-GAAP measure commonly used by REITs, as net income (computed in accordance with GAAP) excluding (i) depreciation and amortization related to real estate, (ii) gains and losses from the sale of certain real estate assets, (iii) gains and losses from change in control, and (iv) impairment write-downs of certain real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity. We compute FFO in accordance with standards established by NAREIT, which may not be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition, or that interpret the current NAREIT definition differently than we do.
31
FFO is a commonly used measure of operating performance and profitability among REITs. We use FFO and FFO per diluted share and unit of limited partnership interest in our operating partnership (“OP Unit”) and, when applicable, related measures such as Funds From Operations, as adjusted, in measuring our performance against our peers and as one of the performance measures for determining incentive compensation amounts earned under certain of our performance-based executive compensation programs.
FFO does not include gains and losses on sales of operating real estate assets or impairment write downs of depreciable real estate, which are included in the determination of net income in accordance with GAAP. Accordingly, FFO is not a comprehensive measure of our operating cash flows. In addition, since FFO does not include depreciation on real estate assets, FFO may not be a useful performance measure when comparing our operating performance to that of other non-real estate commercial enterprises. We compensate for these limitations by using FFO in conjunction with other GAAP financial performance measures, such as net income and net cash provided by operating activities, and other non-GAAP financial performance measures, such as NOI. FFO does not represent cash generated from operating activities in accordance with GAAP and should not be considered to be an alternative to net income (determined in accordance with GAAP) as an indication of our financial performance or to be an alternative to cash flow from operating activities (determined in accordance with GAAP) as a measure of our liquidity, nor is it indicative of funds available for our cash needs, including our ability to make cash distributions. We believe that net income is the most directly comparable GAAP measurement to FFO.
We also present Funds From Operations, as adjusted, and Funds From Operations per diluted share and OP Unit, as adjusted, which are non-GAAP measures, for the three months ended March 31, 2020 and 2019, respectively, to show the effect of such items as gain or loss on debt extinguishment (including accelerated amortization of financing costs), impairment of assets, provision for employee separation expense and insurance recoveries or losses, net, which affected our results of operations, but are not, in our opinion, indicative of our operating performance.
The following table presents a reconciliation of net loss determined in accordance with GAAP to FFO attributable to common shareholders and OP Unit holders, FFO attributable to common shareholders and OP Unit holders per diluted share and OP Unit, FFO attributable to common shareholders and OP Unit holders, as adjusted, and FFO attributable to common shareholders and OP Unit holders per diluted share and OP Unit, as adjusted for the three months ended March 31, 2020 and 2019:
|
|
|
Three Months Ended March 31, |
|
|
|||||
|
(in thousands, except per share amounts) |
|
2020 |
|
|
2019 |
|
|
||
|
Net loss |
|
$ |
(13,549 |
) |
|
$ |
(16,223 |
) |
|
|
Depreciation and amortization on real estate: |
|
|
|
|
|
|
|
|
|
|
Consolidated properties |
|
|
29,944 |
|
|
|
34,565 |
|
|
|
PREIT’s share of equity method investments |
|
|
3,610 |
|
|
|
1,970 |
|
|
|
Gain on sales of interest in real estate, net |
|
|
(1,962 |
) |
|
|
- |
|
|
|
Preferred share dividends |
|
|
(6,844 |
) |
|
|
(6,844 |
) |
|
|
Funds from operations attributable to common shareholders and OP Unit holders |
|
|
11,199 |
|
|
|
13,468 |
|
|
|
Loss on debt extinguishment, net |
|
|
- |
|
|
|
4,768 |
|
|
|
Impairment of development land parcel |
|
|
- |
|
|
|
1,464 |
|
|
|
Provision for employee separation expense |
|
|
73 |
|
|
|
719 |
|
|
|
Insurance recoveries, net |
|
|
- |
|
|
|
236 |
|
|
|
Funds from operations, as adjusted, attributable to common shareholders and OP Unit holders |
|
$ |
11,272 |
|
|
$ |
20,655 |
|
|
|
Funds from operations attributable to common shareholders and OP Unit holders per diluted share and OP Unit |
|
$ |
0.14 |
|
|
$ |
0.17 |
|
|
|
Funds from operations, as adjusted, attributable to common shareholders and OP Unit holders per diluted share and OP Unit |
|
$ |
0.14 |
|
|
$ |
0.26 |
|
|
|
Weighted average number of shares outstanding |
|
|
76,774 |
|
|
|
71,358 |
|
|
|
Weighted average effect of full conversion of OP Units |
|
|
2,023 |
|
|
|
6,884 |
|
|
|
Effect of common share equivalents |
|
|
520 |
|
|
|
309 |
|
|
|
Total weighted average shares outstanding, including OP Units |
|
|
79,317 |
|
|
|
78,551 |
|
|
FFO attributable to common shareholders and OP Unit holders was $11.2 million for the three months ended March 31, 2020, a decrease of $2.3 million, or 16.8%, compared to $13.5 million for the three months ended March 31, 2019.
FFO attributable to common shareholders and OP Unit holders per diluted share and OP Unit was $0.14 and $0.17 for the three months ended March 31, 2020 and 2019, respectively.
FFO, as adjusted, attributable to common shareholders and OP Unit holders per diluted share and OP Unit was $0.14 and $0.26 for the three months ended March 31, 2020 and 2019, respectively.
32
LIQUIDITY AND CAPITAL RESOURCES
This “Liquidity and Capital Resources” section contains certain “forward-looking statements” that relate to expectations and projections that are not historical facts. These forward-looking statements reflect our current views about our future liquidity and capital resources, and are subject to risks and uncertainties that might cause our actual liquidity and capital resources to differ materially from the forward-looking statements. Additional factors that might affect our liquidity and capital resources include those discussed herein and in the section entitled “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC. We do not intend to update or revise any forward-looking statements about our liquidity and capital resources to reflect new information, future events or otherwise.
Capital Resources
We currently expect to meet our short-term liquidity requirements, including distributions to shareholders, recurring capital expenditures, tenant improvements and leasing commissions, but excluding acquisitions and redevelopment and development projects, generally through our available working capital and net cash provided by operations and our 2018 Revolving Facility, subject to the terms and conditions of our 2018 Revolving Facility. See “Identical covenants and common provisions contained in the Credit Agreements” below for covenant information. We expect to spend approximately $56.8 million related to our capital improvements and development projects. In connection with the impacts of the COVID-19 pandemic on our business, we have announced that, beginning with the second quarter of 2020, we intend to reduce the common share dividend per share by 90% to $0.02. We believe that our net cash provided by operations will be sufficient to allow us to make any distributions necessary to enable us to continue to qualify as a REIT under the Internal Revenue Code of 1986, as amended, though we may determine it is appropriate to suspend or further reduce dividends from current levels. The aggregate quarter’s distributions made to preferred shareholders, common shareholders and OP Unit holders for the three months ended March 31, 2020 were $23.3 million, based on the quarter’s distributions of $0.4609 per Series B Preferred Share, distributions of $0.45 per Series C Preferred Share, distributions of $0.4297 per Series D Preferred Share and distributions of $0.21 per common share and OP Unit. On May 19, 2020, we announced that our Board of Trustees declared a quarterly cash dividend of $0.02 per common share payable on June 15, 2020 to common shareholders of record on June 1, 2020. Simultaneously, our Board of Trustees also declared quarterly cash dividends of $0.4609375 per share on our 7.375% Series B Cumulative Redeemable Perpetual Preferred Shares, $0.450000 per share on our 7.20% Series C Preferred Shares, and $0.4296875 per share on our 6.875% Series D Preferred Shares. These dividends are also payable on June 15, 2020 to holders of record on June 1, 2020.
In December 2019, our universal shelf registration statement was filed with the SEC and, in January 2020, it became effective. We may use the availability under our shelf registration statement to offer and sell common shares of beneficial interest, preferred shares and various types of debt securities, among other types of securities, to the public.
During the first quarter of 2020, we raised capital from a number of sources, including proceeds of $8.0 million from asset sales and net proceeds of $34.0 million from our revolving facilities. In April 2020, in light of the impact of COVID-19 on our business and limited capital resources, we applied for and received a loan in the amount of $4.5 million under the Paycheck Protection Program (PPP) of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. PPP loans are eligible for forgiveness pursuant to program guidelines to the extent the proceeds are used for qualifying purposes within the eight-weeks following loan funding. No assurance can be provided that any portion of our loan will be forgiven. On April 23, 2020, the Small Business Administration (“SBA”) issued new guidance about the eligibility of a public company with substantial market value and access to capital markets to qualify for a PPP loan. On April 28, 2020, the SBA and the Department of Treasury announced that the SBA will review all PPP loans in excess of $2 million and for which the borrower applies for forgiveness. We believe, including on the basis of advice of external legal counsel, that we qualify for the loan under the PPP guidelines, but should we be audited or reviewed as a result of applying for forgiveness or otherwise, such audit or review could result in the diversion of management’s time and attention, and legal and reputational costs. If we were to be audited and receive an adverse finding in such audit, we could be required to return the full amount of the PPP loan, which could reduce our liquidity, and potentially subject us to additional fines and penalties.
We are actively seeking to raise additional capital, including through asset dispositions identified through our portfolio property reviews. Disposing of these properties can enable us to redeploy or recycle our capital to other uses. During December 2019 and subsequently, we have executed agreements of sale that are expected to provide an aggregate of up to approximately $281.0 million in proceeds and net liquidity improvement of approximately $133.0 million. These agreements include a sale-leaseback transaction for five properties, the sale of land parcels for multifamily residential development, the sale of operating outparcels and the sale of land parcels for hotel development. We have also executed letters of intent with other potential buyers to sell several land parcels for multifamily residential development. Each of the transactions is subject to numerous closing conditions, including the completion of due diligence and securing of entitlements, and closing of the transactions cannot be assured or the timing of their completion yet estimated with certainty. We are also engaging in discussions with the lenders under our Credit Agreements and the lenders of our properties’ mortgage loans for modifications of those loans in an effort to ensure continued compliance with the obligations thereunder and, to the extent applicable, continued ability to borrow thereunder.
33
The following are some of the factors that could affect our cash flows and require the funding of future cash distributions, recurring capital expenditures, tenant improvements or leasing commissions with sources other than operating cash flows:
|
|
• |
adverse changes or prolonged downturns in general or due to the global COVID-19 pandemic, local or retail industry economic, financial, credit or capital market or competitive conditions, leading to a reduction in real estate revenue or cash flows or an increase in expenses; |
|
|
• |
deterioration in our tenants’ business operations and financial stability, including anchor or non-anchor tenant bankruptcies, leasing delays or terminations, or lower sales, causing deferrals or declines in rent, percentage rent and cash flows; |
|
|
• |
inability to achieve targets for, or decreases in, property occupancy and rental rates, resulting in lower or delayed real estate revenue and operating income; |
|
|
• |
increases in operating costs, including increases that cannot be passed on to tenants, which may include costs related to implementing and maintaining social distancing and enhanced sanitation and safety protocols, resulting in reduced operating income and cash flows; and, |
|
|
• |
increases in interest rates, including potentially as a result of the expected phase out of LIBOR, resulting in higher borrowing costs. |
In addition, we are continuing to monitor the COVID-19 pandemic and the related business and travel restrictions and changes to behavior intended to reduce its spread, and its impact on our tenants, their supply chains and customers and the retail industry. Thus far, the pandemic and the actions taken to address it have had an adverse effect on our business, operations, liquidity and financial condition.
As a result of the COVID-19 pandemic, during March 2020, we temporarily closed all of our enclosed shopping malls. Certain of our malls have since re-opened and are adhering to social distancing and sanitation and safety protocols. The pandemic’s full effect was not experienced in the first quarter of 2020, but is expected to have a more significant impact on our financial condition, liquidity and results of operations in the second quarter of 2020 and thereafter. During March and April, we received many requests from tenants relating to rent relief or deferral. As of the filing date of this Quarterly Report on Form 10-Q, a substantial amount of contractual rent receivables for April and May remains outstanding and are under negotiation. We believe that our rent collections are probable, but expect that collections will continue to be below our tenants’ rent obligations as long as governmental orders require non-essential businesses to remain closed and residents to stay at home. While we continue to record rental revenue, the reduced collection levels have impacted our liquidity position and are expected to continue to do so.
The magnitude and duration of the pandemic and its continuing impact on our business, operations, liquidity and financial condition are currently uncertain, as this continues to evolve globally. However, if the outbreak and its impacts continue on their current trajectory, such impacts could continue to grow and affect us in a material way. To the extent that our tenants and their customers and suppliers continue to be impacted by the coronavirus outbreak, or by the other risks, this could continue to materially disrupt our business operations. See “Item 1A. Risk Factors - The COVID-19 global pandemic and the public health and governmental actions in response have adversely affected, and will likely continue to adversely affect, our business, financial condition, liquidity and operating results. The extent and duration of such effects are highly uncertain and cannot be predicted.”
We expect to meet certain of our longer-term requirements, such as obligations to fund redevelopment and development projects, certain capital requirements (including scheduled debt maturities), future property and portfolio acquisitions, renovations, expansions and other non-recurring capital improvements, through a variety of capital sources, subject to the terms and conditions of our Credit Agreements, as further described below.
The capital and credit markets fluctuate and, at times, limit access to debt and equity financing for companies. While we generally expect to be able to access capital, as a result of the COVID-19 pandemic, access to debt and equity financing is currently limited and there is no assurance we will be able to access capital and credit markets in the future or on terms and conditions that are attractive or acceptable to us.
LIBOR Alternative
In July 2017, the Financial Conduct Authority (“FCA”), which is the authority that regulates LIBOR, announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. The Alternative Reference Rates Committee ("ARRC") has identified the Secured Overnight Financing Rate ("SOFR") as the rate that represents best practice as the alternative to USD-LIBOR for use in derivatives and other financial contracts that are currently indexed to USD-LIBOR. We are not able to predict when LIBOR will cease to be available or when there will be sufficient liquidity in the SOFR markets. Any changes adopted by FCA or other governing bodies in the method used for determining LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR. If that were to occur, our interest payments could change, perhaps substantially. In addition, uncertainty about the extent and manner of future changes may result in interest rates and/or payments that are higher or lower than if LIBOR were to remain available in its current form.
We have material contracts that are indexed to LIBOR and are monitoring and evaluating the related risks, which include interest on loans or amounts received and paid on derivative instruments. These risks arise in connection with transitioning contracts to a new alternative rate,
34
including any resulting value transfer that may occur. The value of loans, securities, and derivative instruments tied to LIBOR could also be affected if LIBOR is limited or discontinued. For some instruments, the method of transitioning to an alternative rate may be challenging, as they may require negotiation with the respective counterparty.
If a contract is not transitioned to an alternative rate and LIBOR is discontinued, the impact on our contracts is likely to vary by contract. If LIBOR is discontinued or if the methods of calculating LIBOR change from their current form, interest rates on our current or future indebtedness may be adversely affected.
While we expect LIBOR to be available in substantially its current form until the end of 2021, it is possible that LIBOR will become unavailable prior to that point. This could occur, for example, if a requisite number of banks decline to make submissions to the LIBOR administrator. In that case, the risks associated with the transition to an alternative reference rate would be accelerated and magnified.
Credit Agreements
We have entered into two credit agreements (collectively, as amended, the “Credit Agreements”): (1) the 2018 Credit Agreement, which includes (a) the $375 million 2018 Revolving Facility and (b) the $300 million 2018 Term Loan Facility, and (2) the $250 million 2014 7-Year Term Loan. The 2018 Term Loan Facility and the 2014 7-Year Term Loan are collectively referred to as the “Term Loans.” On March 30, 2020, we entered into amendments of our Credit Agreements, as discussed in Note 4 to our unaudited consolidated financial statements.
As of March 31, 2020, we had borrowed $550.0 million under the Term Loans and $289.0 million under the 2018 Revolving Facility. The carrying value of the Term Loans on our consolidated balance sheet as of March 31, 2020 is net of $1.8 million of unamortized debt issuance costs. The net operating income (“NOI”) from our unencumbered properties is at a level such that within the Unencumbered Debt Yield covenant (see Note 4 to our unaudited consolidated financial statements) under the Credit Agreements, the maximum amount that was available to be borrowed by us under the 2018 Revolving Facility as of March 31, 2020 was $65.3 million, which is not reduced by any usage of the borrowing capacity to fulfill our unrestricted cash liquidity requirement of $25 million as described further in Note 4 to our unaudited consolidated financial statements.
Identical covenants and common provisions contained in the Credit Agreements
See Note 4 to our unaudited consolidated financial statements for a description of the identical covenants and common provisions contained in the Credit Agreements.
On March 30, 2020, we entered into an amendment of our Credit Agreements. The primary purpose of the amendments is to provide certain debt covenant relief through September 30, 2020. As of March 31, 2020, we were in compliance with all such financial covenants. However, we anticipate not meeting certain financial covenants applicable under the Credit Agreements during 2020. It was initially anticipated that we would not be in compliance with certain covenants after September 30, 2020, however, in light of COVID-19, our ability to comply with our financial covenants may be impacted prior to September 30, 2020. We plan to continue to work with our lender group to pursue a longer term financing solution prior to any inability to comply with the financial covenants thereunder. In addition, we plan to complete the sale-leaseback of certain properties, sell certain real estate assets and control certain operational costs, and we have also achieved deferral on approximately $11.6 million in real estate tax payments. Due to the inherent risks, unknown results and significant uncertainties associated with each of these matters and the direct correlation between these matters and our ability to satisfy our financial obligations that may arise in 2020, we are unable to conclude that it is probable that we will be able to meet our obligations arising within twelve months of the date of issuance of these financial statements and continue as a going concern.
As a result, management evaluated whether this was mitigated by our approved plans and expectations for the applicable period under the second step of the going concern accounting standard.
Our ability to satisfy obligations under our senior unsecured credit facility and mortgage loans, maintain compliance with our debt covenants and fund recurring costs of operations depends primarily on management’s ability to obtain relief from the lender group in regards to debt covenants, execute the sale-leaseback of certain properties, complete the sale of certain real estate assets which will provide cash from those sales, and continue to control operational costs. While controlling operational costs is within management’s control to some extent, executing the sale-leaseback transactions, selling real estate assets, and obtaining relief from the lender group through modified debt covenant requirements involve performance by third parties and therefore cannot be considered probable of occurring. In particular, as of the date of the filing of this Quarterly Report on Form 10-Q, we are in active discussions with the lenders participating in our credit facilities to modify the terms of the Credit Agreements and obtain long term debt covenant relief. See “Item 1A. Risk Factors - If we are unable to comply with the covenants in our Credit Agreements, we might be adversely affected” and “We have determined that there is substantial doubt about our ability to continue as a going concern.”
35
Interest Rate Derivative Agreements
As of March 31, 2020, we had interest rate swap agreements outstanding with a weighted average base interest rate of 1.87% on a notional amount of $795.2 million, maturing on various dates through May 2023 and a forward starting interest rate swap agreement with a weighted average interest rate of 2.75% on a notional amount of $100.0 million, with an effective date in June 2020 and a maturity date in May 2023. We entered into these interest rate swap agreements in order to hedge the interest payments associated with our issuances of variable interest rate long term debt. The interest rate swap agreements are net settled monthly.
We assessed the effectiveness of these swap agreements as hedges at inception and continue to do so on a quarterly basis. On March 31, 2020, we considered these interest rate swap agreements to be highly effective as cash flow hedges.
As of March 31, 2020, the fair value of derivatives in a liability position, which excludes accrued interest but includes any adjustment for nonperformance risk related to these agreements, was $31.7 million. If we had breached any of the default provisions in these agreements as of March 31, 2020, we might have been required to settle our obligations under the agreements at their termination value (including accrued interest) of $32.9 million. We had not breached any of these provisions as of March 31, 2020.
The carrying amount of the associated assets are recorded in “Deferred costs and other assets,” liabilities are reflected in “Fair value of derivative instruments” and the net unrealized loss is reflected in “Accumulated other comprehensive loss” in the accompanying consolidated balance sheets and consolidated statements of comprehensive income.
Mortgage Loan Activity
In April 2020, we received a notice of transfer of servicing from the special servicer for the mortgage loan secured by Valley View Mall, which had a balance of $27.3 million as of March 31, 2020.
Mortgage Loans
As of March 31, 2020, our mortgage loans, which are secured by nine of our consolidated properties, are due in installments over various terms extending to October 2025. Six of these mortgage loans bear interest at fixed interest rates that range from 3.88% to 5.95% and had a weighted average interest rate of 4.08% at March 31, 2020. Three of our mortgage loans bear interest at variable rates, a portion of which have been swapped to fixed rates, and, taking into consideration the impact of interest rate swaps, had a weighted average interest rate of 3.83% at March 31, 2020. The weighted average interest rate of all consolidated mortgage loans was 4.01% at March 31, 2020. Mortgage loans for properties owned by unconsolidated partnerships are accounted for in “Investments in partnerships, at equity” and “Distributions in excess of partnership investments” on the consolidated balance sheets and are not included in the table below.
The following table outlines the timing of principal payments related to our consolidated mortgage loans as of March 31, 2020:
|
(in thousands of dollars) |
|
Total |
|
|
Remainder of 2020 |
|
|
2021-2022 |
|
|
2023-2024 |
|
|
Thereafter |
|
|||||
|
Principal payments |
|
$ |
61,509 |
|
|
$ |
12,790 |
|
|
$ |
31,324 |
|
|
$ |
12,989 |
|
|
$ |
4,406 |
|
|
Balloon payments |
|
|
836,581 |
|
|
|
27,161 |
|
|
|
544,775 |
|
|
|
53,299 |
|
|
|
211,346 |
|
|
Total |
|
$ |
898,090 |
|
|
$ |
39,951 |
|
|
$ |
576,099 |
|
|
$ |
66,288 |
|
|
$ |
215,752 |
|
|
Less: unamortized debt issuance costs |
|
|
1,595 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value of mortgage notes payable |
|
$ |
896,495 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In light of the effects of COVID-19 on our business, operations, liquidity and financial condition, we are also in discussions with the lenders of our properties’ mortgage loans to seek modifications of such loans. No assurance can be provided that we will obtain such modifications.
36
Contractual Obligations
The following table presents our aggregate contractual obligations as of March 31, 2020 for the periods presented:
|
(in thousands of dollars) |
|
Total |
|
|
Remainder of 2020 |
|
|
2021-2022 |
|
|
2023-2024 |
|
|
Thereafter |
|
|||||
|
Mortgage loan principal payments |
|
$ |
898,090 |
|
|
$ |
39,951 |
|
|
$ |
576,099 |
|
|
$ |
66,288 |
|
|
$ |
215,752 |
|
|
Term Loans |
|
|
550,000 |
|
|
|
— |
|
|
|
250,000 |
|
|
|
300,000 |
|
|
|
— |
|
|
2018 Revolving Facility |
|
|
289,000 |
|
|
|
— |
|
|
|
289,000 |
|
|
|
— |
|
|
|
— |
|
|
Interest on indebtedness(1) |
|
|
163,543 |
|
|
|
50,228 |
|
|
|
88,275 |
|
|
|
18,659 |
|
|
|
6,381 |
|
|
Operating leases |
|
|
3,679 |
|
|
|
391 |
|
|
|
1,621 |
|
|
|
1,667 |
|
|
|
— |
|
|
Ground leases |
|
|
54,553 |
|
|
|
1,212 |
|
|
|
3,319 |
|
|
|
3,169 |
|
|
|
46,853 |
|
|
Development and redevelopment commitments(2) |
|
|
56,798 |
|
|
|
54,880 |
|
|
|
1,918 |
|
|
|
— |
|
|
|
— |
|
|
Total |
|
$ |
2,015,663 |
|
|
$ |
146,662 |
|
|
$ |
1,210,232 |
|
|
$ |
389,783 |
|
|
$ |
268,986 |
|
|
(1) |
Includes interest payments expected to be made on consolidated debt, including those in connection with interest rate swap agreements. |
|
(2) |
The timing of the payments of these amounts is uncertain. We expect that a significant majority of such payments (of which we include 100% of our obligations related to Fashion District Philadelphia, which opened in September 2019) will be made prior to December 31, 2020, but cannot provide any assurance that changed circumstances at these projects will not delay the settlement of these obligations. In addition, our operating partnership, PREIT Associates, has jointly and severally guaranteed the obligations of the joint venture we formed with Macerich to develop Fashion District Philadelphia to commence and complete a comprehensive redevelopment of that property costing not less than $300.0 million within 48 months after commencement of construction, which was March 14, 2016. As of March 31, 2020, we believe we have satisfied this obligation. |
Preferred Share Dividends
Annual dividends on our 3,450,000 7.375% Series B Preferred Shares ($25.00 liquidation preference), our 6,900,000 7.20% Series C Preferred Shares ($25.00 liquidation preference) and our 5,000,000 6.875% Series D Preferred Shares ($25.00 liquidation preference) are expected to be $6.4 million, $12.4 million and $8.6 million, respectively, in the aggregate.
CASH FLOWS
Net cash provided by operating activities totaled $14.4 million for the three months ended March 31, 2020 compared to $23.0 million for the three months ended March 31, 2019. This decrease was due to changes in working capital between periods, dilution from assets sold in 2019, and distributions from partnerships, among other factors.
Cash flows used in investing activities were $28.8 million for the three months ended March 31, 2020 compared to cash flows used in investing activities of $38.7 million for the three months ended March 31, 2019. Cash flows provided by investing activities for the three months ended March 31, 2020 included $8.0 million of proceeds from asset sales including the sale of three outparcels. Cash flows used in investing activities included additions to construction in progress of $20.2 million, investments in partnerships of $9.3 million (primarily at Fashion District Philadelphia), and real estate improvements of $2.4 million (primarily related to ongoing improvements at our properties).
Cash flows provided by financing activities were $6.4 million for the three months ended March 31, 2020 compared to cash flows provided by financing activities of $5.9 million for the three months ended March 31, 2019. Cash flows used in financing activities for the first three months of 2020 included aggregate dividends and distributions of $23.7 million, and principal installments on mortgage loans of $3.5 million, partially offset by $34.0 million of net borrowings under our 2018 Revolving Facility.
Cash flows provided by financing activities for the three months ended March 31, 2019, included $97.0 million of net borrowings under our 2018 Revolving Facility, partially offset by aggregate dividends and distributions of $23.5 million, principal installments on mortgage loans of $3.8 million, and $63.3 million used to defease the mortgage secured by the Capital City Mall.
ENVIRONMENTAL
We are aware of certain environmental matters at some of our properties. We have, in the past, performed remediation of such environmental matters, and we are not aware of any significant remaining potential liability relating to these environmental matters or of any obligation to satisfy requirements for further remediation. We may be required in the future to perform testing relating to these matters. We have insurance coverage for certain environmental claims up to $25.0 million per occurrence and up to $25.0 million in the aggregate. See our Annual Report on Form 10-K for the year ended December 31, 2019, in the section entitled “Item 1A. Risk Factors—We might incur costs to comply with environmental laws, which could have an adverse effect on our results of operations.”
37
COMPETITION AND TENANT CREDIT RISK
Competition in the retail real estate market is intense. We compete with other public and private retail real estate companies, including companies that own or manage malls, power centers, strip centers, lifestyle centers, factory outlet centers, theme/festival centers and community centers, as well as other commercial real estate developers and real estate owners, particularly those with properties near our properties, on the basis of several factors, including location and rent charged. We compete with these companies to attract customers to our properties, as well as to attract anchor and non-anchor stores and other tenants. We also compete to acquire land for new site development or to acquire parcels or properties to add to our existing properties. Our malls and our other operating properties face competition from similar retail centers, including more recently developed or renovated centers that are near our retail properties. We also face competition from a variety of different retail formats, including internet retailers, discount or value retailers, home shopping networks, mail order operators, catalogs, and telemarketers. Our tenants face competition from companies at the same and other properties and from other retail formats as well, including internet retailers. This competition could have a material adverse effect on our ability to lease space and on the amount of rent and expense reimbursements that we receive.
The existence or development of competing retail properties and the related increased competition for tenants might, subject to the terms and conditions of the Credit Agreements, require us to make capital improvements to properties that we would have deferred or would not have otherwise planned to make and might also affect the total sales, sales per square foot, occupancy and net operating income of such properties. Any such capital improvements, undertaken individually or collectively, would involve costs and expenses that could adversely affect our results of operations.
We compete with many other entities engaged in real estate investment activities for acquisitions of malls, other retail properties and prime development sites or sites adjacent to our properties, including institutional pension funds, other REITs and other owner-operators of retail properties. When we seek to make acquisitions, competitors might drive up the price we must pay for properties, parcels, other assets or other companies or might themselves succeed in acquiring those properties, parcels, assets or companies. In addition, our potential acquisition targets might find our competitors to be more attractive suitors if they have greater resources, are willing to pay more, or have a more compatible operating philosophy. In particular, larger REITs might enjoy significant competitive advantages that result from, among other things, a lower cost of capital, a better ability to raise capital, a better ability to finance an acquisition, better cash flow and enhanced operating efficiencies. We might not succeed in acquiring retail properties or development sites that we seek, or, if we pay a higher price for a property and/or generate lower cash flow from an acquired property than we expect, our investment returns will be reduced, which will adversely affect the value of our securities.
We receive a substantial portion of our operating income as rent under leases with tenants. At any time, any tenant having space in one or more of our properties could experience a downturn in its business that might weaken its financial condition. Such tenants might enter into or renew leases with relatively shorter terms. Such tenants might also defer or fail to make rental payments when due, delay or defer lease commencement, voluntarily vacate the premises or declare bankruptcy, which could result in the termination of the tenant’s lease or preclude the collection of rent in connection with the space for a period of time, and could result in material losses to us and harm to our results of operations. Also, it might take time to terminate leases of underperforming or nonperforming tenants and we might incur costs to remove such tenants. The COVID-19 pandemic and the economic challenges resulting from it have exacerbated these risks. Some of our tenants occupy stores at multiple locations in our portfolio, and so the effect of any bankruptcy or store closings of those tenants might be more significant to us than the bankruptcy or store closings of other tenants. See “Item 2. Properties—Major Tenants” in our Annual Report on Form 10-K for the year ended December 31, 2019. In addition, under many of our leases, our tenants pay rent based, in whole or in part, on a percentage of their sales. Accordingly, declines in these tenants’ sales directly affect our results of operations. Also, if tenants are unable to comply with the terms of their leases, or otherwise seek changes to the terms, including changes to the amount of rent, we might modify lease terms in ways that are less favorable to us. Given current conditions in the economy, certain industries and the capital markets, particularly in light of the COVID-19 pandemic, in some instances retailers that have sought protection from creditors under bankruptcy law have had difficulty in obtaining debtor-in-possession financing, which has decreased the likelihood that such retailers will emerge from bankruptcy protection and has limited their alternatives.
SEASONALITY
There is seasonality in the retail real estate industry. Retail property leases often provide for the payment of all or a portion of rent based on a percentage of a tenant’s sales revenue, or sales revenue over certain levels. Income from such rent is recorded only after the minimum sales levels have been met. The sales levels are often met in the fourth quarter, during the November/December holiday season. Also, many new and temporary leases are entered into later in the year in anticipation of the holiday season and a higher number of tenants vacate their space early in the year. As a result, our occupancy and cash flows are generally higher in the fourth quarter and lower in the first and second quarters. Our concentration in the retail sector increases our exposure to seasonality and has resulted, and is expected to continue to result, in a greater percentage of our cash flows being received in the fourth quarter. There is potential for an impact to our holiday season sales levels if COVID-19 related closures are prolonged into the end of 2020 or customer traffic is impacted by social distancing guidelines or COVID-19 related concerns.
38
INFLATION
Inflation can have many effects on financial performance. Retail property leases often provide for the payment of rent based on a percentage of sales, which might increase with inflation. Leases might also provide for tenants to bear all or a portion of operating expenses, which might reduce the impact of such increases on us. However, rent increases might not keep up with inflation, or if we recover a smaller proportion of property operating expenses, we might bear more costs if such expenses increase because of inflation.
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 , together with other statements and information publicly disseminated by us, contain certain forward-looking statements that can be identified by the use of words such as “anticipate,” “believe,” “estimate,” “expect,” “project,” “intend,” “may” or similar expressions. Forward-looking statements relate to expectations, beliefs, projections, future plans, strategies, anticipated events, trends and other matters, including our expectations regarding the impact of COVID-19 on our business, that are not historical facts. These forward-looking statements reflect our current views about future events, achievements, results, cost reductions, dividend payments and the impact of COVID-19 and are subject to risks, uncertainties and changes in circumstances that might cause future events, achievements or results to differ materially from those expressed or implied by the forward-looking statements. In particular, our business might be materially and adversely affected by the following:
|
|
• |
the COVID-19 global pandemic and the public health and governmental actions in response, which have and may continue to exacerbate many of the risks listed below; |
|
|
• |
our ability to implement plans and initiatives to adequately address the “going concern” considerations described in Note 1 to our unaudited consolidated financial statements; |
|
|
• |
changes in the retail and real estate industries, including consolidation and store closings, particularly among anchor tenants; |
|
|
• |
current economic conditions and the corresponding effects on tenant business performance, prospects, solvency and leasing decisions; |
|
|
• |
our inability to collect rent due to the bankruptcy or insolvency of tenants or otherwise; |
|
|
• |
our ability to maintain and increase property occupancy, sales and rental rates; |
|
|
• |
increases in operating costs that cannot be passed on to tenants; |
|
|
• |
the effects of online shopping and other uses of technology on our retail tenants; |
|
|
• |
risks related to our development and redevelopment activities, including delays, cost overruns and our inability to reach projected occupancy or rental rates; |
|
|
• |
acts of violence at malls, including our properties, or at other similar spaces, and the potential effect on traffic and sales; |
|
|
• |
our ability to sell properties that we seek to dispose of or our ability to obtain prices we seek; |
|
|
• |
potential losses on impairment of certain long-lived assets, such as real estate, including losses that we might be required to record in connection with any disposition of assets; |
|
|
• |
our substantial debt and the liquidation preference of our preferred shares and our high leverage ratio and our ability to remain in compliance with our financial covenants under our debt facilities; |
|
|
• |
our ability to refinance our existing indebtedness when it matures, on favorable terms or at all; |
|
|
• |
our ability to satisfy our indebtedness if such indebtedness were to be accelerated due to breach of covenants or payment default, as well as our ability to satisfy any other debt that was accelerated as a consequence; |
|
|
• |
our ability to raise capital, including through sales of properties or interests in properties and through the issuance of equity or equity-related securities if market conditions are favorable; |
|
|
• |
our ability to continue to pay dividends at current levels or at all; and |
|
|
• |
potential dilution from any capital raising transactions or other equity issuances. |
Additional factors that might cause future events, achievements or results to differ materially from those expressed or implied by our forward-looking statements include those discussed herein and in our Annual Report on Form 10-K for the year ended December 31, 2019 in the section entitled “Item 1A. Risk Factors” and any subsequent reports we file with the SEC. We do not intend to update or revise any forward-looking statements to reflect new information, future events or otherwise.
39
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The analysis below presents the sensitivity of the market value of our financial instruments to selected changes in market interest rates. As of March 31, 2020, our consolidated debt portfolio consisted of $896.5 million of fixed and variable rate mortgage loans (net of debt issuance costs), $300.0 million borrowed under our 2018 Term Loan Facility, which bore interest at a rate of 3.83% and $250.0 million borrowed under our 2014 7-Year Term Loan, which bore interest at a rate of 3.83%. As of March 31, 2020, $289.0 million was outstanding under our 2018 Revolving Facility, which bore interest at a rate of 2.81%.
Our mortgage loans, which are secured by nine of our consolidated properties, are due in installments over various terms extending to October 2025. Six of these mortgage loans bear interest at fixed interest rates that range from 3.88% to 5.95%, and had a weighted average interest rate of 4.08% at March 31, 2020. Three of our mortgage loans bear interest at variable rates, a portion of which has been swapped to fixed rates, and, taking into consideration the impact of interest rate swaps, had a weighted average interest rate of 3.83% at March 31, 2020. The weighted average interest rate of all consolidated mortgage loans was 4.01% at March 31, 2020. Mortgage loans for properties owned by unconsolidated partnerships are accounted for in “Investments in partnerships, at equity” and “Distributions in excess of partnership investments” on the consolidated balance sheets and are not included in the table below.
Our interest rate risk is monitored using a variety of techniques. The table below presents the principal amounts of the expected annual maturities due in the respective years and the weighted average interest rates for the principal payments in the specified periods:
|
|
|
Fixed Rate Debt |
|
|
Variable Rate Debt |
|
|||||||||||
|
(in thousands of dollars) For the Year Ending December 31, |
|
Principal Payments |
|
|
Weighted Average Interest Rate(1) |
|
|
Principal Payments |
|
|
|
Weighted Average Interest Rate(1) |
|
||||
|
2020 |
|
$ |
38,691 |
|
|
|
5.01 |
% |
|
$ |
1,260 |
|
|
|
|
3.58 |
% |
|
2021 |
|
|
15,745 |
|
|
|
4.01 |
% |
|
|
440,902 |
|
(2) |
|
|
3.80 |
% |
|
2022 |
|
|
302,539 |
|
|
|
3.96 |
% |
|
|
355,912 |
|
(2) |
|
|
2.87 |
% |
|
2023 |
|
|
59,883 |
|
|
|
3.99 |
% |
|
|
300,000 |
|
(2) |
|
|
3.83 |
% |
|
2024 and thereafter |
|
|
222,156 |
|
|
|
4.04 |
% |
|
|
— |
|
|
|
|
— |
|
|
(1) |
Based on the weighted average interest rates in effect as of March 31, 2020. |
|
(2) |
Includes Term Loan debt balance of $550.0 million with a weighted average interest rate of 3.83% as of March 31, 2020. |
As of March 31, 2020, we had $1,098.1 million of variable rate debt. To manage interest rate risk and limit overall interest cost, we may employ interest rate swaps, options, forwards, caps and floors, or a combination thereof, depending on the underlying exposure. Interest rate differentials that arise under swap contracts are recognized in interest expense over the life of the contracts. If interest rates rise, the resulting cost of funds is expected to be lower than that which would have been available if debt with matching characteristics was issued directly. Conversely, if interest rates fall, the resulting costs would be expected to be, and in some cases have been, higher. We may also employ forwards or purchased options to hedge qualifying anticipated transactions. Gains and losses are deferred and recognized in net income in the same period that the underlying transaction occurs, expires or is otherwise terminated.
As of March 31, 2020, we had interest rate swap agreements outstanding with an aggregate weighted average interest rate of 1.67% on a notional amount of $795.2 million maturing on various dates through May 2023 and a forward starting interest rate swap agreement with a weighted average interest rate of 2.75% on a notional amount of $100.0 million, with an effective date in June 2020 and a maturity date in May 2023.
Changes in market interest rates have different effects on the fixed and variable rate portions of our debt portfolio. A change in market interest rates applicable to the fixed portion of the debt portfolio affects the fair value, but it has no effect on interest incurred or cash flows. A change in market interest rates applicable to the variable portion of the debt portfolio affects the interest incurred and cash flows, but does not affect the fair value. The following sensitivity analysis related to our debt portfolio, which includes the effects of our interest rate swap agreements, assumes an immediate 100 basis point change in interest rates from their actual March 31, 2020 levels, with all other variables held constant.
A 100 basis point increase in market interest rates would have resulted in a decrease in our net financial instrument position of $35.5 million at March 31, 2020. A 100 basis point decrease in market interest rates would have resulted in an increase in our net financial instrument position of $36.8 million at March 31, 2020. Based on the variable rate debt included in our debt portfolio at March 31, 2020, a 100 basis point increase in interest rates would have resulted in an additional $3.0 million in interest expense annually. A 100 basis point decrease would have reduced interest incurred by $3.0 million annually.
Because the information presented above includes only those exposures that existed as of March 31, 2020, it does not consider changes, exposures or positions which have arisen or could arise after that date. The information presented herein has limited predictive value. As a result, the ultimate realized gain or loss or expense with respect to interest rate fluctuations will depend on the exposures that arise during the period, our hedging strategies at the time and interest rates.
40
ITEM 4. CONTROLS AND PROCEDURES.
We are committed to providing accurate and timely disclosure in satisfaction of our SEC reporting obligations. In 2002, we established a Disclosure Committee to formalize our disclosure controls and procedures. Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2020, and have concluded as follows:
|
|
• |
Our disclosure controls and procedures are designed to ensure that the information that we are required to disclose in our reports under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. |
|
|
• |
Our disclosure controls and procedures are effective to ensure that information that we are required to disclose in our Exchange Act reports is accumulated and communicated to management, including our principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. |
We have incorporated the effects of COVID-19 into our control structure, primarily as a result of our employees working remotely. We have not experienced any material impact to our internal control over financial reporting to date as a result of the COVID-19 pandemic. We are continually monitoring and assessing the COVID-19 pandemic’s effect on our internal control processes in order to minimize the impact to their design and operating effectiveness. There was no change in our internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
41
PART II—OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In the normal course of business, we have become and might in the future become involved in legal actions relating to the ownership and operation of our properties and the properties that we manage for third parties. In management’s opinion, the resolution of any such pending legal actions is not expected to have a material adverse effect on our consolidated financial position or results of operations.
ITEM 1A. RISK FACTORS.
In addition to the other information set forth in this report, you should carefully consider the risks that could materially affect our business, financial condition or results of operations. The following is an update to the Company’s risk factors and should be read in conjunction with the risk factors previously disclosed under the caption “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019.
The COVID-19 global pandemic and the public health and governmental actions in response have adversely affected, and will likely continue to adversely affect, our business, financial condition, liquidity and operating results. The extent and duration of such effects are highly uncertain and cannot be predicted.
The 2020 global outbreak of a novel coronavirus (COVID-19), which was declared a pandemic by the World Health Organization on March 11, 2020, has resulted in travel restrictions, business closures, property shutdowns, government-imposed stay-at-home orders and the implementation of “social distancing” and certain other measures to prevent the further spread of the virus, all of which have adversely impacted, and will likely continue to impact, our business, financial condition, liquidity and operating results, as well as our tenants’ businesses. The continued spread of COVID-19 has also led to unprecedented global economic disruption and volatility in financial markets. We anticipate that our future business, financial condition, liquidity and results of operations, including our results for 2020 and potentially thereafter, will be materially impacted by the COVID-19 pandemic. It remains highly uncertain how long the global pandemic, economic challenges and restrictions on day-to-day life will last. Given the unprecedented and rapidly evolving developments, we cannot reasonably predict or estimate its ultimate impact on us or our tenants, or on our ability or the ability of our tenants to resume more normal operations.
While we have taken several responsive steps (including staff reductions, reduction of capital expenditures and operating expenses, engagement with our lenders to negotiate modifications to our debt facilities and instruments, and a 90% common share dividend reduction), we anticipate that further actions will be necessary to address the impacts of the pandemic, which may include suspension or further reduction of share dividends. The spread of COVID-19 and measures taken to reduce its spread subjects us to a variety of risks and could result in the following impacts, some of which have already occurred and could continue and increase the longer the crisis continues:
|
|
• |
property shutdowns at all of our retail properties across the nine states in which we operate; |
|
|
• |
tenant failures to pay rent timely, resulting in revenue decreases from our properties and many requests from our tenants for rent relief or deferral; |
|
|
• |
our rights to enforce remedies available under our leases or ability to collect rents as a landlord may potentially be impacted by state, local or other efforts resulting in rent concessions for tenants or a delay in landlord’s ability to enforce evictions or pursue other remedies available under the leases; |
|
|
• |
an economic downturn generally, and a decrease in profitability for many of our tenants specifically, as a result of widespread business shutdowns or slowdowns; |
|
|
• |
deterioration of financial markets leading to a potentially reduced ability to obtain financing for our tenants and us; |
|
|
• |
disruptions to supply-chain and distribution channels of our tenants, impacting retail product availability; |
|
|
• |
negative effects on our operations as a result of quarantines, social distancing measures, public safety concerns and limitations on the nature and scope of activities at our properties required by state regulations; |
|
|
• |
decreased operating performance from reductions in property revenue and cash flows; |
|
|
• |
potential reductions in the carrying value of our retail properties or other impairments of our assets; |
|
|
• |
our inability to meet the requirements of the covenants in our existing credit facilities or increases in our cost of capital that make obtaining additional capital more difficult or available only on terms less favorable to us; |
|
|
• |
negative effects on our liquidity position and the cost of and ability to access funds from financial institutions and capital markets; |
42
|
|
• |
delays to capital raise initiatives; and |
|
|
• |
creation of other risks that may impact us or exacerbation of existing risks, including the risks described in the section entitled “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2019. |
Ultimately, the significance of COVID-19 on our business remains highly uncertain and will depend on, among other things, the extent and duration of the pandemic, the severity of the disease and the number of people infected with the virus, the effects on the economy of the pandemic and of the measures taken by governmental authorities and other third parties restricting day-to-day life and the length of time that such measures remain in place, and implementation of governmental programs to assist businesses and consumers impacted by the COVID-19 pandemic. While we have experienced and expect to continue to experience an adverse impact on our business, financial condition, liquidity and results of operations, we cannot estimate the extent to which COVID-19 will impact our future business, financial condition, liquidity or results of operations.
If we are unable to comply with the covenants in our Credit Agreements, we will be adversely affected.
The Credit Agreements require us to satisfy certain customary affirmative and negative covenants and to meet numerous financial tests, including tests relating to our leverage, unencumbered debt yield, interest coverage, fixed charge coverage, tangible net worth, corporate debt yield and facility debt yield. These covenants could limit our ability to respond to changes and competition, reduce our flexibility in conducting our operations by limiting our ability to borrow money, sell or place liens on assets, manage our cash flows, repurchase securities, make capital expenditures or make distributions to shareholders, and restrict our ability to pursue acquisitions, redevelopment and development projects. We expect the current conditions in the economy and the retail industry, particularly in light of the COVID-19 pandemic and the resulting unprecedented global economic disruption (including disruptions to our and our tenants’ businesses and operations), to continue to affect our operating results. The leverage covenant in the Credit Agreements generally takes our net operating income and applies capitalization rates to calculate Gross Asset Value, and consequently, deterioration or improvement to our operating performance also affects the calculation of our leverage. In addition, a material decline in future operating results could affect our ability to comply with other financial ratio covenants contained in our Credit Agreements, which are calculated on a trailing four quarter basis. While we are unable to predict or estimate the duration and scope of the effects of the COVID-19 pandemic on our future operating results, we anticipate such effects will be material. Also, we might be restricted in the amount we can borrow based on the Unencumbered Debt Yield covenant under the Credit Agreements. Following recent property sales, the NOI from our remaining unencumbered properties is at a level such that the maximum amount that was available to be borrowed by us under the 2018 Revolving Facility was $65.3 million as of March 31, 2020, which is not reduced by any usage of the borrowing capacity to fulfill our unrestricted cash liquidity requirement of $25 million as described further in Note 4 to our unaudited consolidated financial statements.
Furthermore, to determine our compliance with the Credit Agreements, including the covenants, we must apply our judgment to our facts, taking into account our past practice, and interpret the contractual provisions in the agreements. To the extent that our lenders interpret these differently than us, we may have disagreements or disputes, and if we are unable to resolve them, these disagreements may result in material limitations on our ability to access funding under the facility, protracted negotiations, and/or legal proceedings.
We have determined that, as of March 31, 2020, we were in compliance with all the financial covenants in our Credit Agreements. Particularly in light of recent property sales, reduction in our asset base and the impacts of the COVID-19 pandemic on our business, however, we are at increased risk of being unable to comply with these covenants or having reduced borrowing capacity. We currently anticipate not meeting certain financial covenants applicable under the Credit Agreements during 2020. We regularly engage in discussions with lenders that participate in our senior unsecured credit facility regarding our capital and liquidity resources and needs, including to explore alternatives and ensure that we will remain in compliance with our financial covenants and have continued access to funding under the facility, which alternatives may include waivers or amendments. As discussed in “Liquidity and Capital Resources – Identical covenants and common provisions contained in the Credit Agreements,” on March 30, 2020, we entered into amendments of our Credit Agreements to obtain certain debt covenant relief through September 30, 2020. It was initially anticipated that we would not be in compliance with certain covenants after September 30, 2020, however, in light of COVID-19, our ability to comply with our financial covenants may be impacted prior to September 30, 2020. As of the date of the filing of this Quarterly Report on Form 10-Q, we are in active discussions with the lenders participating in our credit facilities to further modify the terms of those agreements, obtain debt covenant relief and pursue a longer term financing solution. There is no assurance that we could obtain such waivers or amendments, and even if obtained, we would likely incur additional costs. Our inability to obtain any such waiver or amendment could result in a breach and a possible event of default under our Credit Agreements, which could allow the lenders to discontinue lending or issuing letters of credit, terminate any commitments they have made to provide us with additional funds, and/or declare amounts outstanding to be immediately due and payable. If a default were to occur, we might have to refinance the debt through secured or unsecured debt financing or private or public offerings of debt or equity securities. If we are unable to do so, we might have to liquidate assets, potentially on unfavorable terms. No assurance can be provided that we would be able to liquidate assets in a timely fashion or in satisfaction of our obligations. Any of such consequences could negatively affect our financial position, results of operations, cash flow and ability to make capital expenditures and distributions to shareholders.
43
We have determined that there is substantial doubt about our ability to continue as a going concern.
In evaluating whether there are conditions or events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that the financial statements are issued, our management considered our current financial condition and liquidity sources, including current funds available, forecasted future cash flows and our conditional and unconditional obligations due over the next twelve months. Management considered the following: (i) our senior unsecured facility, which includes a revolving facility maturing in 2022 with a balance of $289.0 million as of March 31, 2020 and term loans maturing in 2023 with a balance of $550.0 million as of December 31, 2019; (ii) our mortgage loans with varying maturities through 2025 with a principal balance of $896.5 million as of March 31, 2020; (iii) the financial covenant compliance requirements of our credit agreements; and (iv) recurring costs of operating our business. As a result of the considerations articulated below, management concluded there is substantial doubt about our ability to continue as a going concern.
Although we plan to control costs, complete the sale-leaseback of certain properties, sell certain real estate assets and continue to work with the lenders participating in our credit facilities to obtain debt covenant relief and pursue longer term financing solutions, and we are also in discussions with the lenders of our properties’ mortgage loans to seek modification of those loans, there are inherent risks, unknown results and significant uncertainties associated with each of these matters and the direct correlation between these matters and our ability to satisfy financial obligations that may arise over the applicable twelve month period. Our ability to satisfy obligations under our senior unsecured credit facility and mortgage loans, maintain compliance with our debt covenants and fund recurring costs of operations, particularly in light of the current COVID-19 pandemic and resulting adverse impacts on our business, depends on management’s ability to execute the sale-leaseback transactions, to complete the sale of certain real estate assets, which sales will provide cash, to continue to control costs, and to obtain relief from lenders participating in our credit facilities and from lenders under our properties’ mortgage loans. While controlling costs is within management’s control to some extent, executing the sale-leaseback transactions, selling real estate assets and obtaining relief from lenders or other long term financing solutions involve performance by third parties and therefore cannot be considered probable of occurring.
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The financial statements do not include any adjustments that might be necessary should we be unable to continue as a going concern. Management is taking steps to mitigate the associated risks, but we can provide no assurance that cash generated from our operations together with cash received in the future from our various sources of funding will be sufficient to enable us to continue as a going concern.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Issuer Purchases of Equity Securities
The following table shows the total number of shares that we acquired in the three months ended March 31, 2020 and the average price paid per share (in thousands of shares).
|
Period |
|
Total Number of Shares Purchased |
|
|
Average Price Paid per Share |
|
|
Total Number of Shares Purchased as part of Publicly Announced Plans or Programs |
|
|
Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs |
|
||||
|
January 1 - January 31, 2020 |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
|
February 1 - February 29, 2020 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
March 1 - March 31, 2020 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Total |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
44
ITEM 6. EXHIBITS.
|
3.1 |
|
|
|
|
|
3.2 |
|
|
|
|
|
10.1*+ |
|
|
|
|
|
10.2*+ |
|
|
|
|
|
10.3*+ |
|
|
|
|
|
10.4+ |
|
|
|
|
|
10.5 |
|
|
|
|
|
10.6 |
|
|
|
|
|
10.7* |
|
|
|
|
|
31.1* |
|
|
|
|
|
31.2* |
|
|
|
|
|
32.1** |
|
|
|
|
|
32.2** |
|
|
|
|
|
101.INS* |
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
|
|
|
|
101.SCH* |
Inline XBRL Taxonomy Extension Schema Document. |
|
|
|
|
101.CAL* |
Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
|
|
|
|
101.DEF* |
Inline XBRL Taxonomy Extension Definition Linkbase Document. |
|
|
|
|
101.LAB* |
Inline XBRL Taxonomy Extension Label Linkbase Document. |
|
|
|
|
101.PRE* |
Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
|
|
|
|
104* |
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101.INS). |
|
* |
Filed herewith |
|
** |
Furnished herewith |
|
+ |
Management contract or compensatory plan or arrangement. |
45
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 |
||
|
Date: |
May 21, 2020 |
|
|
|
|
|
|
By: |
/s/ Joseph F. Coradino |
|
|
|
|
|
Joseph F. Coradino |
|
|
|
|
|
Chairman and Chief Executive Officer |
|
|
|
|
|
|
|
|
|
|
By: |
/s/ Mario C. Ventresca, Jr. |
|
|
|
|
|
Mario C. Ventresca, Jr. |
|
|
|
|
|
Executive Vice President and Chief Financial Officer |
|
46
Exhibit 10.1
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2020 - 2022 EQUITY AWARD PROGRAM
(Established under the Pennsylvania Real Estate Investment Trust
2018 Equity Incentive Plan)
TABLE OF CONTENTS
Page
|
2. |
Definitions1 |
|
|
3. |
Award Agreement4 |
|
|
4. |
Performance Goals; Delivery of Shares4 |
|
|
5. |
Restricted Shares8 |
|
|
6. |
DERs8 |
|
|
7. |
Holding Period9 |
|
|
8. |
Beneficiary Designation9 |
|
|
9. |
Delivery to Guardian10 |
|
|
10. |
Source of Shares10 |
|
|
11. |
Capital Adjustments10 |
|
|
12. |
Tax Withholding10 |
|
|
13. |
Administration10 |
|
|
14. |
Amendment and Termination10 |
|
|
15. |
Headings10 |
|
|
16. |
Incorporation of Plan by Reference10 |
|
|
APPENDIX A |
A-1 |
|
|
APPENDIX B |
B-1 |
|
|
APPENDIX C |
C-1 |
|
|
APPENDIX D |
D-1 |
|
- i -
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2020 - 2022 EQUITY AWARD PROGRAM
(Established under the Pennsylvania Real Estate Investment Trust
2018 Equity Incentive Plan)
PREAMBLE
WHEREAS, Pennsylvania Real Estate Investment Trust (the “Trust”) established, and its shareholders approved, the Pennsylvania Real Estate Investment Trust 2018 Equity Incentive Plan (the “Plan”), primarily in order to award equity-based benefits to certain officers and other key employees of the Trust and its “Related Corporations” and “Subsidiary Entities” (both as defined in the Plan);
WHEREAS, the Trust’s Executive Compensation and Human Resources Committee (the “Committee”) is responsible for the administration of the Plan and may, pursuant to the powers granted to it thereunder, adopt rules and regulations for the administration of the Plan and determine the terms and conditions of each award granted thereunder;
WHEREAS, the Committee desires to establish a program for the 2020 through 2022 period under the Plan for the benefit of certain officers and other key employees of the Trust and PREIT Services, LLC (the “Program”), whereby such officers and key employees would receive time-based Restricted Shares under the Plan; and
WHEREAS, in addition to the grant of time-based Restricted Shares, the Committee desires to award Restricted Share Units or RSUs under the Plan, subject to the Performance Goals set forth in the Program.
NOW, THEREFORE, effective as of January 1, 2020, the Pennsylvania Real Estate Investment Trust 2020-2022 Equity Award Program is hereby adopted under the Plan by the Committee, with the following terms and conditions:
1.Purposes. The purposes of this Program are to motivate certain officers and key employees of the Trust and its Related Corporations to reach and exceed challenging performance goals, and to focus the attention of the eligible officers and key employees on the critical financial indicators used to measure the success of the Trust and of other companies in the same business as the Trust.
(a)“Award” means an award of Restricted Share Units or Restricted Shares to a Participant.
(b)“Award Agreement” means a written document evidencing the grant to a Participant of an Award, as described in Section 10.1 of the Plan.
(c)“Base Units” means the number of Restricted Share Units set forth in the Award Agreement (increased by any additional Restricted Share Units “purchased” pursuant to
- 1 -
Section 6 hereof) by which the number of Shares that may be delivered to a Participant is measured.
(d)“Board” means the Board of Trustees of the Trust.
(e)“Business Combination” means “Business Combination” as such term is defined in the definition of “Change in Control” in the Plan.
(f)“Cause” means “Cause” as such term is defined in a Participant’s Employment Agreement or, if the Participant is not a party to an Employment Agreement, then (solely for purposes of this Program) as set forth below –
(1)Fraud in connection with the Participant’s employment;
(2)Theft, misappropriation or embezzlement of funds of the Trust or its affiliates or of a successor company or affiliate thereof by the Participant;
(3)The Participant’s act resulting in termination pursuant to the provisions of the Trust’s Code of Business Conduct and Ethics for Employees and Officers (as modified, amended or supplemented from time to time) or of any similar code maintained by a successor company;
(4)Indictment of the Participant for a crime involving moral turpitude;
(5)The Participant’s breach of his or her obligations under a confidentiality agreement or non-competition agreement entered into with the Trust or an Affiliate or with a successor company or an affiliate thereof;
(6)Failure of the Participant to perform his or her duties to the Employer (other than on account of illness, accident, vacation or leave of absence) that persists – after written demand for substantial performance which specifically identifies the manner in which the Participant has failed to perform – for more than 30 calendar days after such notice to him or her; or
(7)The Participant’s repeated abuse of alcohol or drugs.
(g)“Change in Control” means “Change in Control” as such term is defined in the Plan.
(h)“Code” means the Internal Revenue Code of 1986, as amended, or any successor statute, as applicable.
(i)“Committee” means the Executive Compensation and Human Resources Committee of the Board, which Committee has developed the Program and has the responsibility to administer the Program under Section 3 of the Plan and Section 13 hereof.
(j)“DER” means “DER” (dividend equivalent right) as such term is defined in the Plan.
- 2 -
(k)“Disability Termination” means the termination of a Participant’s employment under the disability provisions of the Participant’s Employment Agreement or, if the Participant is not a party to an Employment Agreement, then as a result of a “Disability” as defined in the Plan.
(l)“Effective Date” means January 1, 2020.
(m)“Employer” means, collectively and individually (as applicable), the Trust and PREIT Services, LLC, and any other “Related Corporation” or “Subsidiary Entity” (both as defined in the Plan) that becomes an Employer under the Plan with the consent of the Trust.
(n)“Employment Agreement” means the written agreement entered into by a Participant and an Employer (if any) setting forth the terms and conditions of the Participant’s employment, as amended at any applicable time.
(o)“Good Reason” means “Good Reason” as such term is defined in a Participant’s Employment Agreement or, if the Participant is not a party to an Employment Agreement, then the relocation of the Participant’s principal business office to a new principal business office that is more than 50 miles from the Participant’s primary residence and at least 20 miles further from such residence that the Participant’s current principal business office, without the consent of the Participant.
(p)“Measurement Period” means the period beginning on the Effective Date and ending on the earlier of December 31, 2022, such earlier date declared by the Committee in connection with a termination of the Program or the date of a Change in Control (provided that, if the Change in Control arises from a Business Combination, the Measurement Period shall end on the date of the closing or effectiveness of the Business Combination, as applicable).
(q)“Participant” means each individual who has received an Award under the Program.
(r)“Performance Goals” means “Performance Goals” as such term is defined in the Plan.
(s)“Plan” means the Pennsylvania Real Estate Investment Trust 2018 Equity Incentive Plan, as it may be amended from time to time.
(t)“Program” means the Pennsylvania Real Estate Investment Trust 2020-2022 Equity Award Program (established under the Plan), as it may be amended from time to time.
(u)“Restricted Share” means a restricted share issued under the Plan.
(v)“Restricted Share Unit” or “RSU” means a restricted share unit issued under the Plan.
(w) “Retirement” or “Retire” means the Participant’s termination of employment with all Employers, other than for Cause, following the date on which (i) the sum of the following equals or exceeds 65 years: (A) the number of years of the Participant’s employment with all Employers, and (B) the Participant’s age on the date of termination of
- 3 -
employment, (ii) the Participant has attained the age of 55 years, and (iii) the number of years of the Participant’s employment with the Employers is at least five. Notwithstanding the foregoing, “Retirement” shall not include a Participant’s resignation from the Employer when such resignation is given in connection with the Participant’s prior acceptance (or planned acceptance) of an employment or consulting position with another person or company.
(x)“Shares” means “Shares” as such term is defined in the Plan.
(y)“Share Value” means, as applicable and except as provided in the following sentence, the average of the closing prices of one Share on the New York Stock Exchange (the “NYSE”) (or, if not then listed on the NYSE, on the principal market or quotation system on which then traded) for: (i) the 20 days on which Shares were traded prior to the Effective Date (for the value of a Share on the Effective Date); (ii) the 20 days on which Shares were traded prior to and including the last day of the Measurement Period (for the value of a Share on the last day of the Measurement Period); or (iii) the 20 days on which the Shares were traded prior to and including the applicable dividend payment date (for the “purchase” of additional RSUs or notional shares upon the payment of a dividend by the Trust). In the event of a Business Combination approved by the shareholders of the Trust on or prior to December 31, 2022, Share Value upon the closing of such Business Combination shall mean the final price per Share agreed upon by the parties to the Business Combination.
(z)“Trust” means Pennsylvania Real Estate Investment Trust, a Pennsylvania business trust.
(aa)“Trustee” means a member of the Board.
3.Award Agreement. Each Participant shall be issued an Award Agreement setting forth the initial number of Base Units and Restricted Shares. The award of Base Units shall entitle the Participant to receive the number of Shares determined under Section 4 hereof. Each Award Agreement, and the Shares which may be delivered thereunder, are subject to the terms of this Program and the terms of the Plan.
4.Performance Goals; Delivery of Shares.
(a)Base Units Earned. The number of Shares to be issued by the Trust, if any, with respect to any award of Base Units shall be determined based on the Trust’s achievement of the Operating Performance Goals (as defined below) for the Measurement Period as described in Section 4(b) hereof and a modification based on the Trust’s TRS (as defined below) performance for the Measurement Period, as described in and determined pursuant to Section 4(c) hereof. Also, except as otherwise provided in subsection (e) below, a Participant must be employed by an Employer on the last day of the Measurement Period in order to receive any Shares subject to Performance Goals under the Program. See Appendix A attached hereto for examples illustrating the operation of this Section.
(b)Operating Performance Goals. The Committee established in writing the objective operating Performance Goals to use under the Program (the “Operating Performance Goals”), consisting of “Core Mall Non-Anchor Occupancy” and “Fixed Charge Coverage Ratio” metrics, each weighted 50%, and minimum, target and maximum ranges for each metric, in its February 24, 2020 meeting. For each Operating Performance Goal, the multiplier related to the level of achievement during the Measurement Period is as follows:
- 4 -
|
Multiplier(1) |
|
|
Below Minimum |
0 |
|
Minimum |
0.5 |
|
Target |
1.0 |
|
Maximum |
2.0 |
(1) Multiplier between performance measure goals determined by linear interpolation.
Once the applicable multiplier for each Operating Performance Goal is determined, the payout percentage of Base Units (the “Payout Percentage”) shall be determined as follows: (1) the applicable multiplier of the Core Mall Non-Anchor Occupancy metric multiplied by 50%, plus (2) applicable multiplier of the Fixed Charge Coverage Ratio metric multiplied by 50%.
Once the Payout Percentage is determined, it is multiplied by the number of a Participant’s Base Units subject to the Program at the end of the Measurement Period, with the product being the preliminary number of Shares subject to modification as described in Section 4(c) hereof. To be clear, if, for the Measurement Period, the Trust does not achieve at least the minimum achievement for at least one of the Operating Performance Goals, the Trust shall not deliver to the Participants any Shares subject to Performance Goals under the Program.
(c)TRS Modifier. The preliminary number of Shares to be awarded, if any, as determined in accordance with Section 4(b) above, shall be adjusted, upwards or downwards, depending on the Trust’s performance, based on its “TRS” (as defined below), over the Measurement Period relative to the TRS performance of other real estate investment trusts comprising a leading index of retail real estate investment trusts (such adjustment as a percentage of the preliminary number of Shares, the “TRS Modifier”). The TRS Modifier shall be determined based on the whole percentile (expressed as a percentage equal to the percentile rounded up for fractions of one-half or greater) at which the Trust’s TRS for the Measurement Period places the Trust among the component members of the “FTSE Retail REIT Index” (as defined below) for the Measurement Period, each ranked pursuant to such TRS. Once the Trust’s percentile position within the FTSE Retail REIT Index is determined, the TRS Modifier shall be determined as follows:
|
|
• |
if the Trust’s TRS is equal to or below the 25th percentile on the FTSE Retail REIT Index, the TRS Modifier shall be 80%; |
|
|
• |
if the Trust’s TRS is above the 25th percentile but less than the 50th percentile on the FTSE Retail REIT Index, the TRS Modifier shall be determined by linear interpolation between 80% at the 25th percentile (as set forth in the prior bullet), and 100% at the 50th percentile (as set forth in the subsequent bullet); |
|
|
• |
if the Trust’s TRS is equal to the 50th percentile on the FTSE Retail REIT Index, the TRS Modifier shall be 100%; |
|
|
• |
if the Trust’s TRS is above the 50th percentile and below the 75th percentile on the FTSE Retail REIT Index, the TRS Modifier shall be determined by linear interpolation between 100% at the 50th percentile (as set forth in the prior bullet), and 120% at the 75th percentile (as set forth in the subsequent bullet); and |
|
|
• |
if the Trust’s TRS is equal to or above the 75th percentile on the FTSE Retail REIT Index, the TRS Modifier shall be 120%. |
- 5 -
Once the TRS Modifier is determined, it is multiplied by the preliminary number of Shares determined pursuant to Section 4(b) hereof, with the product being the number of Shares awarded. The number of Shares that may be delivered shall not exceed 200% of the Participant’s Base Units subject to the Program. Shares will be delivered under the Program to the extent that Shares remain available under the Plan. If the total number of Shares to be delivered exceeds the number of Shares available under the Plan, then the number of Shares for each Participant will be reduced on a pro rata basis based on each individual Participant’s Base Units as compared to the total of all Participants’ Base Units, each determined as of the last day of the Measurement Period.
(d)Definitions for this Section. The following terms shall be defined as set forth below:
(1) “FTSE Retail REIT Index” means the FTSE NAREIT US ALL Equity REIT Index – Retail Subset Index (as it may be renamed from time to time) or, in the event such index shall cease to be published, such other index as the Committee shall determine to be comparable thereto.
(2) “TRS” means total return to shareholders for the Measurement Period for the Trust and for the other component members of the FTSE Retail REIT Index. TRS is calculated by (i) adding ending Share Value to value of dividends paid during the Measurement Period, assuming for purposes of the calculation that such dividends were reinvested, (ii) dividing the result by the beginning Share Value and (iii) subtracting one from such quotient. “Component members” of the FTSE Retail REIT Index means those entities used for purposes of compiling the FTSE Retail REIT Index as of the first day of the Measurement Period, which are listed in Appendix D attached hereto, and that remain publicly held companies as of the last day of the Measurement Period, whether or not they are still included in the FTSE Retail REIT Index on such last day.
(e)Termination of Employment. Upon a Participant’s termination of employment on or prior to the last day of the Measurement Period, the following shall occur:
(1)Termination without Cause, for Good Reason, or on Account of Disability or Death. If, on or prior to the last day of the Measurement Period, (i) the Participant terminates his or her employment with the Employer for Good Reason, (ii) the Employer terminates the Participant’s employment for reasons other than for Cause, (iii) the Participant incurs a Disability Termination, or (iv) the Participant dies, the Participant (or the Participant’s beneficiary(ies), if applicable) shall be eligible to receive Shares in respect of the Participant’s Base Units under the Program (or not) as though the Participant had remained employed by the Employer through the end of the Measurement Period.
(2)Termination for Any Other Reason. If, on or prior to the last day of the Measurement Period, the Participant’s employment with the Employer terminates for any reason other than a reason described in paragraph (1) above, the Participant shall forfeit all of his or her the Base Units (and all of the Shares that may have become deliverable with respect to such Base Units) under the Program.
(f)Determination of Performance; Share Delivery. Within 60 days after the end of the Measurement Period, the Committee shall provide each Participant with a written
- 6 -
determination of whether the Trust did or did not attain the Performance Goals for the Measurement Period (and, if applicable, the extent to which each Performance Goal was attained) and the calculations used to make such determination. If Shares are to be delivered in respect of a Participant’s Base Units under the Program, they shall be delivered to Participants no later than the March 15 following the end of the Measurement Period, unless the Measurement Period ends as a result of a Change in Control, in which case the Shares will be delivered to the Participants within five days following the end of the Measurement Period.
(g)Elective Deferrals. Except in the event of delivery on account of a Change in Control, if Shares are to be delivered in respect of a Participant’s Base Units under the Program, a Participant may elect to defer delivery (and the Trust shall defer issuance) of all or a portion of the Shares until, as specified in the Participant’s deferral election agreement, (i) the Participant’s separation from service from the Trust’s controlled group of entities and/or (ii) a date chosen by the Participant. The Participant may also elect in the deferral election agreement to receive Shares upon the occurrence of an “unforeseeable emergency,” as defined in section 409A(a)(2)(B)(ii) of the Code, to the extent not prohibited by that section of the Code and regulations issued thereunder. If a Change in Control or the Participant’s death occurs during the deferral period, the Participant’s Shares (and cash attributable to DERs) shall be delivered in a single sum to the Participant or to the Participant’s beneficiary(ies) (as applicable) on the 30th day after the Change in Control (provided that, if the Change in Control arises from a Business Combination, the Change in Control shall be deemed to occur on the date of the closing or effectiveness of the Business Combination, as applicable) or the Participant’s death (as applicable).
A Participant’s deferral election agreement must be submitted to the Committee no later than June 30, 2022 in order to be effective; otherwise, Shares (and cash attributable to DERs) deliverable to the Participant in respect of his or her Base Units if any, will be delivered no later than March 15, 2023. Unless the delivery of deferred Shares is occasioned by either of the events described in the last sentence of the preceding paragraph, if deferred Shares are to be delivered to a Participant who is a “specified employee,” as defined in section 409A(a)(2)(B)(i) of the Code, upon his or her separation from service from the Trust’s controlled group of entities, the Trust shall issue and deliver such deferred Shares (and cash attributable to DERs) on the date that is six months after the date of his or her separation from service. A deferral election agreement shall be substantially in the form set forth in Appendix B attached hereto.
The Committee intends to administer the Program, including the delivery of Shares under an election made pursuant to this subsection (e) and the underlying deferral election agreement, in accordance with section 409A of the Code and regulations and other guidance issued thereunder, but makes no representation with respect to the qualification of the Program or the Awards granted hereunder.
(a)Vesting. Restricted Shares awarded to each Participant shall vest in three equal annual installments as set forth in the Award Agreement. The Committee may at any time accelerate the time at which the restrictions on all or any part of the Restricted Shares will lapse. All unvested Restricted Shares awarded to a Participant shall become fully vested upon a Change in Control.
- 7 -
(b)Recordkeeping. The Trust’s transfer agent shall register a Participant’s Restricted Shares in a book entry in the Participant’s name, and shall include provisions in its records noting the restrictions on transfer on such Restricted Shares. The Restricted Shares shall remain subject to such restrictions until the Participant becomes vested in the Restricted Shares. The Trust shall be entitled to direct the transfer agent to transfer to the Trust any Restricted Shares that are forfeited by a Participant and any Shares used to satisfy the tax withholding requirements applicable to the Trust and its affiliates. As soon as practicable after the Restricted Shares become vested, such restriction provisions shall be removed, and the Shares (net of any Shares used to satisfy tax withholding requirements) shall be delivered to the Participant in the form of certificates or in any other form permitted by the Trust.
(c)Voting; Dividends. The Participant shall have voting rights and the right to receive dividends on non-vested Restricted Shares.
(d)Termination of Employment. If the Participant’s employment terminates on account of his or her death or Disability, any otherwise unvested Restricted Shares that are held by the Participant at the time of such a termination of service shall then become fully vested and will be released from any otherwise applicable transfer restrictions. However, if the Participant’s employment is terminated for any reason other than death or Disability, all unvested Restricted Shares held by the Participant at the time of such termination of service shall be forfeited and transferred to the Trust.
6.DERs. Participants shall be awarded DERs with respect to their number of Base Units. Each DER will be expressed as a specific dollar amount (the “Dollar Amount”) equal to the dollar amount of the dividend paid on an actual Share on a specific date (the “Dividend Date”) multiplied by the Participant’s number of Base Units. Until the end of the Measurement Period, the Committee will apply the Dollar Amount to “purchase” a number of additional RSUs, respectively, equal to the Dollar Amount divided by the Share Value. The delivery of Shares in respect of such additional RSUs shall also be subject to the attainment of the Performance Goals set forth in Section 4. DERs shall also be awarded on such additional RSUs and applied in the same manner (thereby increasing the Participant’s Base Units on a cumulative basis). RSUs deemed purchased with DERs hereunder may be whole or fractional units. The “purchase price” of the additional RSUs credited pursuant to the terms of the Program shall equal the Share Value as defined herein.
Participants who make a deferral election under Section 4(g) shall also be awarded DERs under the Plan with respect to their deferred Shares. Each such DER will be expressed as a Dollar Amount equal to the dollar amount of the dividend paid on an actual Share on a Dividend Date during the deferral period multiplied by the number of Shares still deferred by the Participant as of the Dividend Date. The Committee will apply the Dollar Amount to “purchase” notional shares (on which DERs thereafter will also be awarded and applied in the same manner). Notional shares deemed purchased with DERs hereunder may be whole or fractional share. DERs expressed as a Dollar Amount will continue to be applied to “purchase” notional shares on Dividend Dates until all of the Participant’s deferred Shares are delivered to the Participant (or to his or her beneficiary(ies), if applicable), as elected in his or her deferral election agreement. A Participant’s notional shares “purchased” with DERs awarded with respect to his or her deferred Shares shall be 100% vested at all times.
- 8 -
The Trust shall establish a bookkeeping account (the “DER Account”) for each such Participant and credit to such account the number of whole and fractional additional RSUs, and notional shares deemed purchased with the Dollar Amounts. The Participant’s additional RSUs, and notional shares shall be subject to the adjustments described in Section 11 hereof. All whole additional RSUs (for which Shares become deliverable under this Section) and whole notional shares credited to a Participant’s DER Account shall be replaced by issued Shares on a one-to-one basis on the delivery date referred to in Section 4(f), and the fractional additional RSUs (for which Shares become deliverable under this Section) and fractional notional shares credited to a Participant’s DER Account shall be aggregated and replaced by issued Shares on a one-for-one basis (and with cash in lieu of a fractional Share based on the closing price of a Share on the replacement date), and delivered to the Participant (or to his or her beneficiary(ies), if applicable) on the date the associated Shares are delivered to the Participant.
7.Holding Period. The Chief Executive Officer of the Trust and each Executive Vice President and Senior Vice President who receives Shares pursuant to RSUs granted under this Program shall hold such Shares for a minimum of one year from the date such Shares are received. Similarly, the Chief Executive Officer of the Trust and each Executive Vice President and Senior Vice President who receives any time-based Restricted Shares in connection with this Program, shall hold such time-based Restricted Shares for a minimum of one year from the date such time-based Restricted Shares vest.
(a)Each Participant shall designate the person(s) as the beneficiary(ies) to whom the Participant’s Shares shall be delivered in the event of the Participant’s death prior to the delivery of the Shares to him or her. Each beneficiary designation shall be substantially in the form set forth in Appendix C attached hereto and shall be effective only when filed with the Committee during the Participant’s lifetime.
(b)Any beneficiary designation may be changed by a Participant without the consent of any previously designated beneficiary or any other person by the filing of a new beneficiary designation with the Committee. The filing of a new beneficiary designation shall cancel all beneficiary designations previously filed.
(c)If any Participant fails to designate a beneficiary in the manner provided above, or if the beneficiary designated by a Participant predeceases the Participant, the Committee shall direct such Participant’s Shares to be delivered to the Participant’s surviving spouse or, if the Participant has no surviving spouse, then to the Participant’s estate.
9.Delivery to Guardian. If Shares are issuable under this Program to a minor, a person declared incompetent, or a person incapable of handling the disposition of property, the Committee may direct the delivery of the Shares to the guardian, legal representative, or person having the care and custody of the minor, incompetent or incapable person. The Committee may require proof of incompetence, minority, incapacity or guardianship as the Committee may deem appropriate prior to the delivery. The delivery shall completely discharge the Committee, the Trustees and the Employer from all liability with respect to the Shares delivered.
10.Source of Shares. This Program shall be unfunded, and the delivery of Shares shall be pursuant to the Plan. Each Participant and beneficiary shall be a general and unsecured
- 9 -
creditor of the Employer to the extent of the Shares determined hereunder, and the Participant shall have no right, title or interest in any specific asset that the Employer may set aside, earmark or identify as reserved for the delivery of Shares under the Program. The Employer’s obligation under the Program shall be merely that of an unfunded and unsecured promise to deliver Shares in the future, provided the applicable Performance Goal is met as applicable. Except as expressly provided herein, no person shall be entitled to the privileges of ownership in respect of Shares that are subject to Awards hereunder until such Shares have been issued to that person.
11.Capital Adjustments. Calculations required under the Program, the number of Base Units awarded under the Program, and the number of Shares that may be delivered under the Program in respect of such Base Units shall be adjusted to reflect any increase or decrease in the number of issued Shares resulting from a subdivision (share-split), consolidation (reverse split), share dividend, merger, spinoff or other similar event or transaction affecting the Trust during the Measurement Period.
12.Tax Withholding. The delivery of Shares (and cash, if applicable) to a Participant or beneficiary under this Program shall be subject to applicable tax withholding pursuant to Section 10.6 of the Plan.
13.Administration. This Program shall be administered by the Committee pursuant to the powers granted to it in Section 3 of the Plan.
14.Amendment and Termination. The Committee reserves the right to amend the Program, by written resolution, at any time and from time to time in any fashion, provided any such amendment does not conflict with the terms of the Plan, and to terminate it at will. However, no amendment or termination of the Program shall adversely affect any Award Agreement already issued under the Program without the written consent of the affected Participant(s).
15.Headings. The headings of the Sections and subsections of the Program are for reference only. In the event of a conflict between a heading and the content of a Section or subsection, the content of the Section or subsection shall control.
16.Incorporation of Plan by Reference. Because the Program is established under the Plan in order to provide for, and determine the terms and conditions of, the granting of certain Awards thereunder, the terms and conditions of the Plan are hereby incorporated by reference and made a part of this Program. If any terms of the Program conflict with the terms of the Plan, the terms of the Plan shall control.
- 10 -
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2020-2022 EQUITY AWARD PROGRAM
(Established under the Pennsylvania Real Estate Investment Trust
2018 Equity Incentive Plan)
EXAMPLE OF BASE UNIT AWARDS*
“A” is a participant in the Pennsylvania Real Estate Investment Trust 2020-2022 Equity Award Program (the “Program”).
The Share Value of a beneficial interest (a “Share”) in the “Trust” (as defined in the Program) on January 1, 2020 is $5, and the Share Value of a Share on December 31, 2022 is $10. For the three-year period beginning January 1, 2020 and ending December 31, 2022 (the “Measurement Period”), dividends total $2.52 per Share (and are paid in an equal amount on a quarterly basis – i.e., $.21 dividend per Share per quarter).
Award
Participant A receives a Restricted Share Unit award for 250 “Base Units” (as defined in the Program).
Dividends and Crediting Additional RSUs
Additional Restricted Share Units are deemed purchased and credited on a quarterly basis using dividends deemed to be paid on the units. The purchase price of the additional Restricted Share Units credited pursuant to the terms of the Program is the 20-day average share price prior to and including the date of the dividend.
The following table illustrates how dividends are deemed to be paid on the Base Units and how additional Restricted Share Units are credited and added to the aggregate number of Base Units held by Participant A:
|
Date
|
Aggregate Base Units |
Deemed Dividend |
20-Day Average Share Price
|
Additional RSUs Credited
|
|
1/1/20 |
250.0 |
- |
- |
- |
|
3/15/20 |
250.0 |
$52.50 |
$5 |
10.5 |
|
6/15/20 |
260.5 |
$54.71 |
$5 |
10.9 |
|
9/15/20 |
271.4 |
$57.00 |
$6 |
9.5 |
|
12/15/20 |
280.9 |
$59.00 |
$6 |
9.8 |
|
|
* The example set forth in this Appendix A is illustrative only and is not intended to be precise or definitive. |
A - 1
|
Date
|
Aggregate Base Units |
Deemed Dividend |
20-Day Average Share Price
|
Additional RSUs Credited
|
|
290.8 |
$61.06 |
$7 |
8.7 |
|
|
6/15/21 |
299.5 |
$62.89 |
$7 |
9.0 |
|
9/15/21 |
308.5 |
$64.78 |
$8 |
8.1 |
|
12/15/21 |
316.6 |
$66.48 |
$8 |
8.3 |
|
3/15/22 |
324.9 |
$68.23 |
$9 |
7.6 |
|
6/15/22 |
332.5 |
$69.82 |
$9 |
7.8 |
|
9/15/22 |
340.2 |
$71.45 |
$10 |
7.1 |
|
12/15/22 |
347.4 |
$72.95 |
$10 |
7.3 |
|
12/31/22 |
354.7 |
- |
- |
- |
Achievement of Performance Goals and Payout of Shares
Performance Goals
Following the expiration of the Measurement Period, the Committee (as defined in the Program) determines the level of achievement and applicable multiplier of each of the target Operating Performance Goals (as defined in the Program) (which are based on mall non-anchor occupancy and fixed charge coverage ratio metrics). For each Operating Performance Goal, the multiplier related to the level of achievement during the Measurement Period is as follows:
|
Level of Achievement of |
Multiplier(1) |
|
Below Minimum |
0 |
|
Minimum |
0.5 |
|
Target |
1.0 |
|
Maximum |
2.0 |
(1) Multiplier between performance measure goals determined by linear interpolation.
Once the applicable multiplier for each Operating Performance Goal is determined, the Payout Percentage (as defined in the Program) shall be determined as follows: (1) the applicable multiplier of the Core Mall Non-Anchor Occupancy metric multiplied by 50%, plus (2) applicable multiplier of the Fixed Charge Coverage Ratio metric multiplied by 50%.
If, as of December 31, 2022, the Trust’s achievement of at least one Operating Performance Goal is at or above Minimum achievement level, the 354.7 Base Units held by Participant A as of December 31, 2022, would be multiplied by the applicable Payout Percentage, with the product being the Preliminary Shares to be issued to Participant A subject to modification as discussed below based on the Trust’s relative TRS (defined below). If the Trust’s achievement of all Operating Performance Goals is below the Minimum achievement level, no Preliminary Shares will be issued.
As examples: (1) if the Trust’s achievement under both Operating Performance Goals is at Target, Participant A would receive 354.7 Preliminary Shares; (2) if the Trust’s achievement under both Operating Performance Goals is below the Minimum, Participant A would receive 0 Preliminary Shares; (3) if the Trust’s achievement is at Target for one Operating Performance
A - 2
Goal and at Maximum for the other Operating Performance Goal, Participant A would receive 532.05 Preliminary Shares; and (4) if the Trust’s achievement under both Operating Performance Goals is at Maximum, Participant A would receive 709.4 Preliminary Shares. The number of Preliminary Shares determined under the Operating Performance Goals would then be subject to modification based on the Trust’s TRS as discussed below, but in no case will the number of Shares delivered exceed 200% of Participant A’s Base Units.
TRS Modifier
After the determination of the number of Preliminary Shares, the Committee determines where the Trust’s performance, based on its TRS (as defined in the Program), places the Trust among the component members of the “FTSE Retail REIT Index” (as defined in the Program) (the “Index”), ranked pursuant to each member’s TRS over the Measurement Period. The TRS Modifier (as defined in the Program) will be determined based on the following:
|
Percentile |
TRS Modifier
|
|
25th or below |
80% |
|
Between 25th and 50th |
80% - 100%* |
|
50th |
100% |
|
Between 50th and 75th |
100% - 120%* |
|
75th or above |
120% |
* If the TRS is above the 25th percentile but below the 50%, or above the 50th percentile but below the 75th percentile, then the percent of the number preliminary shares earned will be determined by linear interpolation between the 25th and 50th percentiles and 50th and 75th percentiles, as applicable.
Assume the Trust’s TRS for the Measurement Period is determined to be 20% as of December 31, 2022. Participant A’s Preliminary Shares would be multiplied by the applicable TRS Modifier, with the product being the number of Shares to be delivered. In no event shall the total number of Shares delivered exceed 200% of Participant A’s Base Units.
For example, if Participant A has 354.7 Preliminary Shares, and the Trust’s TRS places the Trust at the 50th percentile on the Index, Participant A would receive 354 Shares (and cash for the 0.7 Share). If the Trust’s TRS places the Trust at the 24th percentile, Participant A would receive 283 Shares (and cash for the 0.7 Share). If the Trust’s TRS places the Trust at the 90th percentile, Participant A would receive 425 Shares (and cash for the 0.6 Share).
A - 3
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2020-2022 EQUITY AWARD PROGRAM
(Established under the Pennsylvania Real Estate Investment Trust
2018 Equity Incentive Plan)
DEFERRAL ELECTION AGREEMENT*
The Pennsylvania Real Estate Investment Trust 2020-2022 Equity Award Program, effective as of January 1, 2020 (the “Program”), provides a select group of management or highly compensated employees with the ability to defer a portion of their compensation earned under the Program. The purpose of this Deferral Election Agreement is to allow you to defer the delivery of all or a portion of the Shares issuable in respect of the Restricted Share Units issued to you under the Program that are otherwise deliverable to you under the Program until one of the events selected below occurs.
AFTER YOU SIGN THIS DEFERRAL ELECTION AGREEMENT AND IT IS ACCEPTED BY PENNSYLVANIA REAL ESTATE INVESTMENT TRUST (THE “TRUST”), YOU MAY NOT REVOKE IT AFTER JUNE 30, 2022. IF YOU DECIDE SUBSEQUENTLY TO CHOOSE A LATER DELIVERY DATE, YOU MUST SUBMIT A NEW DEFERRAL ELECTION AGREEMENT AT LEAST 12 MONTHS PRIOR TO YOUR ORIGINAL DELIVERY DATE AND YOUR NEW DELIVERY DATE MUST BE AT LEAST FIVE YEARS AFTER YOUR ORIGINAL DELIVERY DATE. YOU MAY NOT, UNDER ANY CIRCUMSTANCES, ACCELERATE THE DELIVERY OF YOUR SHARES AFTER THIS DEFERRAL ELECTION AGREEMENT HAS BECOME EFFECTIVE (OTHER THAN AS A RESULT OF AN UNFORESEEABLE EMERGENCY, IF ELECTED BELOW).
You need only complete this Deferral Election Agreement if you wish to defer the delivery of Shares that become deliverable to you under the Program. Capitalized terms in this Deferral Election Agreement are defined in the Program.
1.Participation Election
|
|
* Because of the complexities involved in the application of federal, state and local tax laws to specific circumstances and the uncertainties as to possible future changes in the tax laws, you should consult your personal tax advisor regarding your own situation before completing this Deferral Election Agreement. |
B- 1
I hereby elect to have the Trust deliver the percentage set forth above of the Shares that may become deliverable to me in respect of my Restricted Share Units under the Program upon the following event [check only one box]:
|
☐ |
(A)On the 10th calendar day after my separation from service from the Trust’s controlled group of entities (the date which is six months after such separation from service if I am a “specified employee” at that time – see Section 4(g) of the Program). |
|
☐ |
(B)On the following date: ___________ __, 20__ [must be after December 31, 2023]. |
|
☐ |
(C)Upon the earlier of the 10th calendar day after my separation from service (as described in event (A) above) or the following date: ___________ __, 20__ [must be after December 31, 2023]. |
3.Acceleration in the Event of an Unforeseeable Emergency
In addition to the election I made in 2 above, if I check the following box, I also elect to have the Trust deliver Shares, to the extent permitted by applicable law, to me:
|
☐ |
Upon an “Unforeseeable Emergency,” as defined in Section 4(g) of the Program. (This term is defined quite restrictively in the Internal Revenue Code. See the footnote on the previous page regarding consulting with your own tax advisor before completing this Deferral Election Agreement.) |
4.Change in Control or Death
If a Change in Control or my death occurs before all of the Shares are delivered to me, such Shares shall be delivered in a single distribution to me or to my beneficiary(ies) designated in my Beneficiary Designation Form (as applicable) on the 30th day after such Change in Control (provided that, if the Change in Control arises from a Business Combination, the Change in Control shall be deemed to occur on the date of the closing or effectiveness of the Business Combination, as applicable) or death (as applicable). In addition, the Trust may distribute the Shares to me prior to the date selected under Section 2 above to the extent such delivery is consistent with Section 409A of the Internal Revenue Code.
5.Insufficient Share Possibility
Because of the finite number of Shares available under the Pennsylvania Real Estate Investment Trust 2018 Equity Incentive Plan, I understand that it is possible that not enough Shares will be available under the Plan to deliver all of the Shares otherwise required to be delivered to me (or to my beneficiary(ies)) on the deferral date(s) chosen in 2 and 3 above. I acknowledge and agree that in the event that an insufficient number of Shares are available under the Plan, cash will be delivered to me in lieu of Shares.
* * * * *
B - 2
By signing this Deferral Election Agreement, I agree to the terms and conditions of the Program as the Program now exists, and as it may be amended from time to time (provided that no amendment of the Program will adversely affect my rights under the Program without my written consent).
Signature of ParticipantDate
ACCEPTED:
Executive Compensation and Human Resources Committee
of Pennsylvania Real Estate Investment Trust
By:
Date:
B - 3
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2020-2022 EQUITY AWARD PROGRAM
(Established under the Pennsylvania Real Estate Investment Trust
2018 Equity Incentive Plan)
BENEFICIARY DESIGNATION FORM
This Form is for your use under the Pennsylvania Real Estate Investment Trust 2020-2022 Equity Award Program (the “Program”) to name a beneficiary for the Shares that may be deliverable to you from the Program. You should complete the Form, sign it, have it signed by your Employer, and date it.
* * * *
I understand that in the event of my death before I receive Shares that may be deliverable to me under the Program, the Shares will be delivered to the beneficiary designated by me below or, if none or if my designated beneficiary predeceases me, to my surviving spouse or, if none, to my estate. I further understand that the last beneficiary designation filed by me during my lifetime and accepted by my Employer cancels all prior beneficiary designations previously filed by me under the Program.
I hereby state that ____________________________ [insert name], residing at ________________________________________________________________ [insert address], whose Social Security number is __________________, is designated as my beneficiary.
Signature of ParticipantDate
ACCEPTED:
[insert name of Employer]
By:
Date:
E - 1
FTSE Retail REIT Index
(FTSE NAREIT US All Equity REIT Index – Retail Subset)
(Component Members as of January 1, 2020)
|
|
1. |
Acadia Realty Trust |
|
|
2. |
Agree Realty Corporation |
|
|
3. |
Alpine Income Property Trust Inc |
|
|
4. |
American Finance Trust, Inc. |
|
|
5. |
Brixmor Property Group Inc. |
|
|
6. |
Brookfield Property REIT Inc Class A |
|
|
7. |
CBL & Associates Properties, Inc. |
|
|
8. |
Cedar Realty Trust, Inc. |
|
|
9. |
Essential Properties Realty Trust |
|
|
10. |
Federal Realty Investment Trust |
|
|
11. |
Four Corners Property Trust, Inc. |
|
|
12. |
Getty Realty Corp |
|
|
13. |
Kimco Realty Corporation |
|
|
14. |
Kite Realty Group Trust |
|
|
15. |
Macerich Company |
|
|
16. |
National Retail Properties, Inc. |
|
|
17. |
Pennsylvania Real Estate Investment Trust |
|
|
18. |
Postal Realty Trust, Inc. Class A |
|
|
19. |
Realty Income Corporation |
|
|
20. |
Regency Centers Corporation |
|
|
21. |
Retail Opportunity Investments Corp. |
|
|
22. |
Retail Properties of America, Inc. Class A |
|
|
23. |
Retail Value, Inc. |
|
|
24. |
RPT Realty |
|
|
25. |
Saul Centers, Inc. |
|
|
26. |
Seritage Growth Properties Class A |
|
|
27. |
Simon Property Group, Inc. |
|
|
28. |
SITE Centers Corp. |
|
|
29. |
Spirit Realty Capital, Inc. |
|
|
30. |
STORE Capital Corporation |
|
|
31. |
Tanger Factory Outlet Centers, Inc. |
|
|
32. |
Taubman Centers, Inc. |
|
|
33. |
Urban Edge Properties |
|
|
34. |
Urstadt Biddle Properties Inc. |
|
|
35. |
Urstadt Biddle Properties Inc. Class A |
|
|
36. |
Washington Prime Group Inc. |
|
|
37. |
Weingarten Realty Investors |
|
|
38. |
Wheeler Real Estate Investment Trust, Inc. |
D - 1
Exhibit 10.2
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2018 EQUITY INCENTIVE PLAN
RESTRICTED SHARE UNIT AND DIVIDEND EQUIVALENT RIGHTS
AWARD AGREEMENT
ISSUED PURSUANT TO THE
2020-2022 EQUITY AWARD PROGRAM
This RESTRICTED SHARE UNIT AND DIVIDEND EQUIVALENT RIGHTS AWARD AGREEMENT (this “Award Agreement”) is effective as of the 24th day of February 2020 and is between Pennsylvania Real Estate Investment Trust, a Pennsylvania business trust (the “Trust”), and _________________________________ (the “Grantee”), a “Key Employee” under the Pennsylvania Real Estate Investment Trust 2018 Equity Incentive Plan (the “Plan”).
WHEREAS, the Trust’s Executive Compensation and Human Resources Committee established the Pennsylvania Real Estate Investment Trust 2020-2022 Equity Award Program (the “Program”) under the Plan for specified Key Employees;
WHEREAS, the Program provides for the award of Restricted Share Units, as well as dividend equivalent rights or “DERs” with respect to such Restricted Share Units;
WHEREAS, the Program designates Operating Performance Goals (as defined in the Program) and a TRS Modifier (as defined in the Program) that determine if and the extent to which Shares will become deliverable to a participant in the Program based on his or her Restricted Share Units;
WHEREAS, the Grantee may defer delivery of his or her Shares (if deliverable) until a later date and, if so deferred, the Grantee will be awarded additional DERs with respect to such Shares; and
WHEREAS, DERs awarded with respect to Restricted Share Units and deferred Shares will be expressed as a dollar amount, which will be applied to “purchase” additional Restricted Share Units and notional shares of the Trust, as applicable (on which DERs will also be awarded), and will be settled in actual shares of the Trust (and in cash to the extent the Grantee’s account holds a fractional Restricted Share Unit or notional share).
NOW THEREFORE, in consideration of the mutual covenants hereinafter set forth and for other good and valuable consideration, the legal sufficiency of which is hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows:
1.Restricted Stock Units.
(a)The Grantee is hereby awarded a number of “Base Units” equal to ______ Restricted Share Units. The Grantee’s Base Units will increase in number pursuant to the “purchase” of additional Restricted Share Units with DERs, as described in subsections (b) and (e) below.
(b)The Grantee is hereby awarded a DER with respect to each of his or her Base Units, as such number of units may be adjusted from time to time in accordance with the Program. If the Grantee makes a deferral election under Section 4(g) of the Program, the Grantee shall also be awarded DERs with respect to each deferred Share.
(c)The Trust hereby promises to deliver to the Grantee the number of Shares that Grantee becomes entitled to under Section 4 of the Program (if any). Unless the Grantee elects to make a deferral election pursuant to Section 4(g) of the Program, in which case Shares will be delivered in accordance with such election, the Shares shall be delivered no later than the March 15 following the end of the “Measurement Period” (as defined in the Program), unless the Measurement Period ends as a result of a “Change in Control” (as defined in the Program), in which case the Shares will be delivered to the Grantee within five days following the end of the Measurement Period (the “Delivery Date”). This Award Agreement is in all respects limited and conditioned as hereinafter provided, and is subject in all respects to the terms and conditions of the Program and the Plan now in effect and as they may be amended from time to time; provided, that no amendment may adversely affect this Award Agreement without the written consent of the Grantee.
(d)Pursuant to Section 4(e) of the Program, if the Grantee’s employment with the “Employer” (as defined in the Program) (i) is terminated by the Employer for reasons other than for “Cause” (as defined in the Program), (ii) is terminated by the Grantee for “Good Reason” (as defined in the Program), (iii) terminates on account of the Grantee’s death, or (iv) terminates as a “Disability Termination” (as defined in the Program), in each case on or before the last day of the Measurement Period, the Grantee shall nevertheless be eligible to receive Shares subject to the Base Units the Grantee was granted under the Program (or not) as though the Grantee had remained employed by the Employer through the end of the Measurement Period. If the Grantee’s employment with the Employer terminates for any other reason, the Grantee shall forfeit all of his or her Base Units (and all of the Shares that may have become deliverable with respect to such Base Units) under the Program.
(e)DERs awarded with respect to Base Units will be expressed as a specific dollar amount equal in value to the amount of dividends paid on an actual Share on a specific date (the “Dividend Date”) during the Measurement Period, multiplied by the Grantee’s Base Units as of the Dividend Date. The Committee will apply the dollar amount to “purchase” full and fractional Restricted Share Units at “Share Value” (as defined in the Program), which will be subject to Section 4 of the Program, and on which DERs thereafter will also be awarded. The Grantee’s additional Restricted Share Units will be replaced by issued Shares (and by cash, to the extent the Grantee has a right to receive a fractional Share) and delivered to the Grantee (if at all) in accordance with Section 4 of the Program.
DERs awarded with respect to deferred Shares will also be expressed as a specific dollar amount equal in value to the amount of dividends paid on an actual Share on a Dividend Date during the deferral period, multiplied by the number of Shares still deferred by the Grantee as of the Dividend Date. The Committee will apply the dollar amount to “purchase” full and fractional notional shares at the closing price on the Dividend Date, on which DERs thereafter will also be awarded. The Grantee’s notional shares will be recorded in a bookkeeping account,
- 2 -
and will be 100% vested. The Grantee’s notional shares will be replaced by issued Shares (and by cash, to the extent the Grantee holds a fractional notional share) and delivered to the Grantee (if at all) in accordance with Section 4 of the Program.
2.Share Delivery. Shares delivered pursuant to the Program shall be registered in the Grantee’s name (or, if the Grantee so requests, in the name of the Grantee and the Grantee’s spouse, jointly with right of survivorship).
3.Transferability. The Grantee may not, except by will or by the laws of descent and distribution, assign or transfer his or her Restricted Share Units or notional Shares. The Grantee may assign or transfer, in whole or in part, Shares delivered hereunder pursuant to the Program, subject to any restrictions imposed by applicable law or the Trust’s insider trading policies.
4.Withholding of Taxes. Payments made with respect to this Award will be subject to tax withholding to the extent required by law and in accordance with the terms of the Plan.
5.Share Retention Requirements. For purposes of the share retention requirements set forth in Section X of the Trust’s Corporate Governance Guidelines (the “Share Retention Requirements”), the Shares issued to the Grantee under the Program shall be treated as though they were restricted shares that became vested upon issuance. If the Grantee has not met the Share Retention Requirements1 when the Shares are issued, the Grantee shall be required to retain 100% of such Shares until such Share Retention Requirements have been satisfied. However, any share retention requirement that results from this provision shall immediately lapse upon the Participant’s termination of employment with the Employer.
6.Additional Holding Period. In addition to any restrictions imposed pursuant to Paragraph 5, if the Grantee is the Chief Executive Officer of the Trust, an Executive Vice President or a Senior Vice President, the Grantee hereby agrees that he or she shall hold any Shares received pursuant to RSUs granted under this Award for a minimum of one year from the date such Shares are received, even if the Grantee is otherwise in compliance with the Share Retention Requirements.
7.Recoupment Policy. The Grantee hereby agrees that any Shares delivered under this Award Agreement shall be subject to the Trust’s “Recoupment Policy” (if applicable to the Grantee) as in effect on the date the Restricted Share Units are granted under this Award Agreement, and as subsequently amended.
8.Governing Law. This Award Agreement shall be construed in accordance with, and its interpretation shall be governed by, applicable federal law and otherwise by the laws of the Commonwealth of Pennsylvania (without reference to the principles of the conflict of laws).
|
|
1 |
The Trust’s Corporate Governance Guidelines require certain officers to maintain ownership of PREIT securities having an aggregate value equal to a multiple of the officer’s salary. That multiple is: five times for the Chief Executive Officer, two times for Executive Vice Presidents, and one time for Senior Vice Presidents. |
- 3 -
9.Controlling Documents. The terms and conditions of the Program and the Plan are incorporated herein by reference, made a part hereof, and shall control in the event of any conflict with any other terms of this Award Agreement.
10.Electronic Delivery of Documents. The Grantee hereby authorizes the Trust to deliver electronically any prospectuses or other documentation related to this Award, the Plan and any other compensation or benefit plan or arrangement in effect from time to time (including, without limitation, reports, proxy statements or other documents that are required to be delivered to participants in such plans or arrangements pursuant to federal or state laws, rules or regulations). For this purpose, electronic delivery will include, without limitation, delivery by means of e-mail or e-mail notification that such documentation is available on the Trust’s Intranet site. Upon written request, the Trust will provide to the Grantee a paper copy of any document also delivered to the Grantee electronically. The authorization described in this paragraph may be revoked by the Grantee at any time by written notice to the Trust.
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IN WITNESS WHEREOF, the Trust has caused this Award Agreement to be duly executed by its duly authorized officer and the Grantee has hereunto set his or her hand and seal, all as of this 24th day of February 2020.
PENNSYLVANIA REAL ESTATE
INVESTMENT TRUST
By:
Grantee
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2020-2022 EQUITY AWARD PROGRAM
(Established under the Pennsylvania Real Estate Investment Trust
2018 Equity Incentive Plan)
BENEFICIARY DESIGNATION FORM
This Form is for your use under the Pennsylvania Real Estate Investment Trust 2020-2022 Equity Award Program (the “Program”) to name a beneficiary for the Shares that may be deliverable to you from the Program. You should complete the Form, sign it, have it signed by your Employer, and date it.
* * * *
I understand that in the event of my death before I receive Shares that may be deliverable to me under the Program, the Shares will be delivered to the beneficiary designated by me below or, if none or if my designated beneficiary predeceases me, to my surviving spouse or, if none, to my estate. I further understand that the last beneficiary designation filed by me during my lifetime and accepted by my Employer cancels all prior beneficiary designations previously filed by me under the Program.
I hereby state that ____________________________ [insert name], residing at ________________________________________________________________ [insert address], whose Social Security number is __________________, is designated as my beneficiary.
Signature of ParticipantDate
ACCEPTED:
[insert name of Employer]
By:
Date:
Exhibit 10.3
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
2018 EQUITY INCENTIVE PLAN
RESTRICTED SHARE AWARD AGREEMENT
This RESTRICTED SHARE AWARD AGREEMENT (the “Award Agreement”) is effective as of the 24th day of February 2020 (the “Award Date”) and is made between Pennsylvania Real Estate Investment Trust, a Pennsylvania business trust (the “Trust”), and ____________________ (the “Grantee”), a “Key Employee,” as defined in the Pennsylvania Real Estate Investment Trust 2018 Equity Incentive Plan (the “Plan”).
WHEREAS, the Trust desires to award the Grantee shares of beneficial interest in the Trust (“Shares”) subject to certain restrictions as hereinafter provided, in accordance with the provisions of the Plan, a copy of which is attached hereto (if not previously provided to the Grantee);
NOW THEREFORE, in consideration of the mutual covenants hereinafter set forth and for other good and valuable consideration, the legal sufficiency of which is hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows:
1.Award of Restricted Shares. The Trust hereby awards to the Grantee as of the Award Date _____________ Shares subject to the restrictions set forth in Paragraph 2 (“Restricted Shares”). This grant is in all respects limited and conditioned as hereinafter provided, and is subject in all respects to the terms and conditions of the Plan now in effect and as it may be amended from time to time (but only to the extent that such amendments apply to outstanding grants of Restricted Shares). Such terms and conditions are incorporated herein by reference, made a part hereof, and shall control in the event of any conflict with any other terms of this Award Agreement.
2.Vesting.
(a)Regular Vesting. The Grantee shall vest in (i.e., have the right to sell, assign, transfer, pledge or otherwise encumber or dispose of) the Restricted Shares granted under the Award Agreement as indicated in the schedule below. The “Committee” (as defined in the Plan) may at any time accelerate the time at which the restrictions on all or any part of the Restricted Shares will lapse.
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Date Restricted Shares |
Number of Restricted Shares |
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February 15, 2021 |
___________ Restricted Shares |
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February 15, 2022 |
an additional ___________ Restricted Shares |
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February 15, 2023 |
an additional ___________ Restricted Shares |
(b)Accelerated Vesting Upon Change in Control. All unvested Restricted Shares awarded to the Grantee shall become fully vested upon a “Change in Control” (as defined in the Plan).
(c)Additional Holding Period. In addition to any restrictions imposed pursuant to this Paragraph 2, if the Grantee is the Chief Executive Officer of the Trust, an Executive Vice President or a Senior Vice President, the Grantee hereby agrees that he or she shall hold the Restricted Shares received under this Award Agreement for a minimum of one year from the date such Restricted Shares vest.
3.Restriction Provisions; Share Certificates. The Trust’s transfer agent shall register the Grantee’s Restricted Shares in a book entry in the Grantee’s name, and shall include provisions in its records noting the restrictions on transfer on such Restricted Shares that are set forth in this Award Agreement. The Restricted Shares shall remain subject to such restrictions until the Grantee becomes vested in the Restricted Shares. The Grantee, by executing this Agreement, irrevocably grants to the Trust a power of attorney to direct the Trust’s transfer agent to transfer to the Trust any Restricted Shares that are forfeited pursuant to Paragraph 5 and any Shares used to satisfy the withholding requirements set forth in Paragraph 8. The Grantee also agrees to execute any documents requested by the Trust in connection with such transfer to the Trust. As soon as practicable after the Restricted Shares become vested under Paragraph 2, such restriction provisions shall be removed, and the Shares (net of any Shares used to satisfy the withholding requirements of Paragraph 8) shall be delivered to the Grantee in the form of certificates or in any other form permitted by the Trust.
4.Voting and Dividend Rights. The Grantee shall have voting rights and the right to receive dividends on non-vested Restricted Shares. The character of those dividends for tax purposes and whether those amounts are subject to tax withholding will depend on whether the Grantee has made the election described in Paragraph 6.
5.Termination of Service. If the Grantee’s service with the Trust and all of its “Subsidiary Entities” (as defined in the Plan) terminates on account of his or her death or “Disability” (as defined in the Plan), any otherwise unvested Restricted Shares that are held by the Grantee at the time of such a termination of service shall then become fully vested and will be released from any otherwise applicable transfer restrictions in the same manner described in the last sentence of Paragraph 3. However, if the Grantee’s service with the Trust and all of its Subsidiary Entities is terminated for any reason other than death or Disability, all unvested Restricted Shares held by the Grantee at the time of such termination of service shall be transferred to the Trust pursuant to the power described in Paragraph 3.
6.Notice of Tax Election. If the Grantee makes an election under section 83(b) of the Internal Revenue Code of 1986, as amended (the “Code”), for the immediate recognition of income attributable to the award of Restricted Shares, the Grantee shall inform the Trust in writing of such election within 10 days of the filing of such election. The amount includible in the Grantee’s income as a result of an election under section 83(b) of the Code shall be subject to applicable federal, state and local tax withholding requirements and to such additional withholding rules (the “Withholding Rules”) as may be applicable. Dividends paid on Restricted Shares for which the
Grantee has made such an election shall not be treated as compensation subject to withholding, but rather as dividends on shares of a real estate investment trust.
7.Transferability. The Grantee may not assign or transfer, in whole or in part, Restricted Shares subject to the Award Agreement in which the Grantee is not vested.
8.Withholding of Taxes. The release of Shares upon vesting (or, if a Section 83(b) election is made with respect to this Award, the effectiveness of the Award itself) will be conditioned on the Grantee making arrangements reasonably satisfactory to the Trust for the delivery of amounts necessary to timely satisfy all applicable federal, state and local tax withholding requirements. If the amount includible in the Grantee’s income as a result of the vesting of Restricted Shares is subject to the withholding requirements of applicable tax law, the Grantee, subject to the provisions of the Plan and the Withholding Rules, may satisfy the withholding tax, in whole or in part, by electing to have the Trust withhold Shares (or by returning Shares to the Trust) pursuant to the Withholding Rules. Such Shares shall be valued, for this purpose, at their “Fair Market Value” (as defined in the Plan) on the date the amount attributable to the vesting of the Restricted Shares is includible in income by the Grantee under section 83 of the Code. Such election must be made in compliance with and subject to the Withholding Rules, and the Trust may not withhold Shares in excess of the maximum statutory tax rate permitted without affecting the equity classification of the award. Notwithstanding the foregoing, the Trust may limit the number of Shares withheld to the extent necessary to avoid adverse accounting consequences.
9.Governing Law. This Award Agreement shall be construed in accordance with, and its interpretation shall be governed by, applicable federal law and otherwise by the laws of the Commonwealth of Pennsylvania (without reference to the principles of the conflict of laws).
10.Electronic Delivery of Documents. The Grantee hereby authorizes the Trust to deliver electronically any prospectuses or other documentation related to this Award, the Plan and any other compensation or benefit plan or arrangement in effect from time to time (including, without limitation, reports, proxy statements or other documents that are required to be delivered to participants in such plans or arrangements pursuant to federal or state laws, rules or regulations). For this purpose, electronic delivery will include, without limitation, delivery by means of e-mail or e-mail notification that such documentation is available on the Trust’s Intranet site. Upon written request, the Trust will provide to the Grantee a paper copy of any document also delivered to the Grantee electronically. The authorization described in this paragraph may be revoked by the Grantee at any time by written notice to the Trust.
[signature page follows]
IN WITNESS WHEREOF, the Trust has caused this Award Agreement to be duly executed by its duly authorized officer and the Grantee has hereunto set his or her hand and seal, all as of this 24th day of February 2020.
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
By:_____________________________________________
Name:
Title:
GRANTEE
________________________________________________
Name:
Exhibit 10.7
WELLS FARGO BANK, NATIONAL
ASSOCIATION
550 South Tyron Street, 6th Floor
Charlotte, NC 28202
May 1, 2020
Pennsylvania Real Estate Investment Trust
2005 Market Street
Suite 1000
Philadelphia, PA 19103
Attention: Andrew Ioannou
Re:Extension of Delivery of First Quarter 2020 Compliance Certificate; WFB
Loan No.s 1011175–0 and 1009394
Ladies and Gentlemen:
Reference is hereby made to: (i) that certain Seven-Year Term Loan Agreement, dated as of January 8, 2014, as amended by the First Amendment to Seven-Year Term Loan Agreement, dated as of November 7, 2014, as further amended by the letter amendment, dated November 12, 2014, as further amended by the Third Amendment to Seven-Year Term Loan Agreement, dated as of June 26, 2015, as further amended by the Fourth Amendment to Seven-Year Term Loan Agreement, dated as of June 30, 2016, as further amended by the Fifth Amendment to Seven-Year Term Loan Agreement, dated as of June 5, 2018, and as further amended by the Sixth Amendment to Seven-Year Term Loan Agreement, dated as of March 30, 2020, by and among PREIT ASSOCIATES, L.P., a Delaware limited partnership (“PREIT”), PREIT-RUBIN, INC., a Pennsylvania corporation (“PREIT-RUBIN”), PENNSYLVANIA REAL ESTATE INVESTMENT TRUST, a Pennsylvania business trust (collectively, the “Borrower”), each of the financial institutions a party thereto together with their assignees pursuant to Section 11.6(b) therein (collectively, the “7-Year TL Lenders”), and WELLS FARGO BANK, NATIONAL ASSOCIATION, as Administrative Agent for itself and the 7-Year TL Lenders (in such capacity, and in its capacity as the Administrative Agent for the Revolver/TL Lenders (defined below), “Administrative Agent”) (as amended, the “7-Year Term Loan Agreement”); and (ii) that certain Amended and Restated Credit Agreement, dated as of May 24, 2018, as amended by the First Amendment to Amended and Restated Credit Agreement, dated as of March 30, 2020, by and among Borrower, each of the financial institutions a party thereto together with their assignees pursuant to Section 11.6(b) therein (collectively, the “Revolver/TL Lenders”, and together with the 7-Year TL Lenders, collectively, the “Lenders”), and WELLS FARGO BANK, NATIONAL ASSOCIATION, as Administrative Agent for itself and the Revolver/TL Lenders (as amended, the “Revolver/TL Credit Agreement”, and together with the 7-Year Term Loan Agreement, each a “Credit Agreement” and collectively, the “Credit Agreements”). Unless otherwise defined herein, each capitalized term used herein shall have the meaning given to such term in the Credit Agreements.
Pursuant to Section 7.1.(a)(iii) of each Credit Agreement, Borrower is required to deliver to Administrative Agent on or before May 15, 2020 a Compliance Certificate covering Parent’s fiscal quarter ending on March 30, 2020. Borrower has requested, and Administrative Agent and the Requisite Lenders have agreed, to extend the required delivery
date of such Compliance Certificate required under each Credit Agreement to May 21, 2020.
This Amendment is entered into as an interim accommodation in order to permit a one-time extension of a Compliance Certificate, but is not intended to be (nor shall it be construed to be) the final written agreement with respect to the Discussions (as defined in the Pre-Negotiation Agreement dated as of April 10, 2020, by and among Parent, Borrower, each of the Guarantors, and Administrative Agent), which Pre Negotiation Agreement remains in full force and effect.
Nothing in this letter shall alter or affect any provision, condition, or covenant contained in any of the Loan Documents or Other Related Documents or affect or impair any rights, powers, or remedies of Administrative Agent. The provisions of the Loan Documents shall continue in full force and effect.
Sincerely,
WELLS FARGO BANK, NATIONAL ASSOCIATION, as Administrative Agent
By:/s/ D. Bryan Gregory
Name:D. Bryan Gregory
Title:Managing Director
Exhibit 31.1
CERTIFICATION
I, Joseph F. Coradino, certify that:
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1. |
I have reviewed this Quarterly Report on Form 10-Q of Pennsylvania Real Estate Investment Trust; |
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2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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(c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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(d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
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5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of trustees (or persons performing the equivalent functions): |
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(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: May 21, 2020
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/s/ Joseph F. Coradino |
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Name: |
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Joseph F. Coradino |
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Title: |
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Chairman and Chief Executive Officer |
Exhibit 31.2
CERTIFICATION
I, Mario C. Ventresca, Jr., certify that:
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1. |
I have reviewed this Quarterly Report on Form 10-Q of Pennsylvania Real Estate Investment Trust; |
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2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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(c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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(d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
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5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of trustees (or persons performing the equivalent functions): |
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(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: May 21, 2020
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/s/ Mario C. Ventresca, Jr. |
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Name: |
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Mario C. Ventresca, Jr. |
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Title: |
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Executive Vice President and Chief Financial Officer |
Exhibit 32.1
Certification of Chief Executive Officer
Pursuant to Section 906 of Sarbanes-Oxley Act of 2002
I, Joseph F. Coradino, the Chief Executive Officer of Pennsylvania Real Estate Investment Trust (the “Company”), hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1) the Form 10-Q of the Company for the quarter ended March 31, 2020 as filed with the Securities and Exchange Commission on the date hereof (the “Form 10-Q”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and
(2) the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: May 21, 2020
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/s/ Joseph F. Coradino |
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Name: |
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Joseph F. Coradino |
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Title: |
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Chairman and Chief Executive Officer |
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Exhibit 32.2
Certification of Chief Financial Officer
Pursuant to Section 906 of Sarbanes-Oxley Act of 2002
I, Mario C. Ventresca, Jr., the Executive Vice President and Chief Financial Officer of Pennsylvania Real Estate Investment Trust (the “Company”), hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1) the Form 10-Q of the Company for the quarter ended March 31, 2020 as filed with the Securities and Exchange Commission on the date hereof (the “Form 10-Q”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and
(2) the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: May 21, 2020
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/s/ Mario C. Ventresca, Jr. |
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Name: |
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Mario C. Ventresca, Jr. |
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Title: |
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Executive Vice President and Chief Financial Officer |
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Leases - Lessor Payments to be Received, Maturity (Details) $ in Thousands |
Mar. 31, 2020
USD ($)
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|---|---|
| Leases [Abstract] | |
| April 1 to December 31, 2020 | $ 236,741 |
| 2021 | 219,447 |
| 2022 | 198,743 |
| 2023 | 177,228 |
| 2024 | 154,973 |
| Thereafter | 538,710 |
| Total payments to be received | $ 1,525,842 |
Financing Activity - Carrying and Fair Values of Mortgage Loans (Details) - USD ($) $ in Thousands |
Mar. 31, 2020 |
Dec. 31, 2019 |
|---|---|---|
| Debt Instrument [Line Items] | ||
| Mortgage loans, carrying value | $ 896,495 | $ 899,753 |
| Carrying Value | Mortgage Loan | ||
| Debt Instrument [Line Items] | ||
| Mortgage loans, carrying value | 896,500 | 899,800 |
| Fair Value | Mortgage Loan | ||
| Debt Instrument [Line Items] | ||
| Mortgage loans, fair value | $ 895,200 | $ 873,900 |
Investments in Partnerships - Term Loan (Details) - Fashion District Philadelphia - USD ($) $ in Millions |
1 Months Ended | 3 Months Ended | |||
|---|---|---|---|---|---|
Jan. 31, 2018 |
Sep. 30, 2019 |
Mar. 31, 2018 |
Mar. 31, 2020 |
Jul. 31, 2019 |
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| Schedule of Equity Method Investments [Line Items] | |||||
| Long-term debt | $ 250.0 | $ 350.0 | |||
| Ownership percentage | 50.00% | 50.00% | |||
| Debt instrument, maturity month and year | 2023-01 | ||||
| Debt instrument, interest rate terms | LIBOR plus 2.00% | ||||
| Proceeds from (Repayments of) Long-term debt and capital securities | $ 51.0 | $ 250.0 | |||
| Distribution of financing proceeds from equity method investee | $ 25.0 | $ 123.0 | |||
| LIBOR | |||||
| Schedule of Equity Method Investments [Line Items] | |||||
| Debt, variable interest rate | 2.00% | ||||
CONSOLIDATED STATEMENTS OF EQUITY (Parenthetical) - $ / shares |
3 Months Ended | ||
|---|---|---|---|
Mar. 31, 2020 |
Mar. 31, 2019 |
Dec. 31, 2019 |
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| Common stock, dividend per share paid (in dollars per share) | $ 0.21 | $ 0.21 | |
| Distributions paid to Operating Partnership unit holders | 0.21 | 0.21 | |
| Preferred shares, par value (in dollars per share) | 0.01 | 0.01 | |
| Common stock, par value (in dollars per share) | 1.00 | 1.00 | $ 1.00 |
| Series B Preferred Stock | |||
| Preferred stock, dividends per share paid (in dollars per share) | 0.4609 | 0.4609 | |
| Preferred shares, par value (in dollars per share) | 0.01 | 0.01 | 0.01 |
| Series C Preferred Stock | |||
| Preferred stock, dividends per share paid (in dollars per share) | 0.45 | 0.4500 | |
| Preferred shares, par value (in dollars per share) | 0.01 | 0.01 | 0.01 |
| Series D Preferred Stock | |||
| Preferred stock, dividends per share paid (in dollars per share) | 0.4297 | 0.4297 | |
| Preferred shares, par value (in dollars per share) | $ 0.01 | $ 0.01 | $ 0.01 |
Derivatives |
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| Derivative Instruments And Hedging Activities Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Derivatives |
7. DERIVATIVES
In the normal course of business, we are exposed to financial market risks, including interest rate risk on our interest bearing liabilities. We attempt to limit these risks by following established risk management policies, procedures and strategies, including the use of financial instruments such as derivatives. We do not use financial instruments for trading or speculative purposes.
Cash Flow Hedges of Interest Rate Risk
For derivatives that have been designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in “Accumulated other comprehensive income” and subsequently reclassified into “Interest expense, net” in the same periods during which the hedged transaction affects earnings. As of March 31, 2020, all of our outstanding derivatives are designated as cash flow hedges. We recognize all derivatives at fair value as either assets or liabilities in the accompanying consolidated balance sheets.
During the next 12 months, we estimate that $13.0 million will be reclassified as a decrease to interest expense in connection with derivatives. The recognition of these amounts, however, could be accelerated in the event that we repay amounts outstanding on the debt instruments and do not replace them with new borrowings or that the debt becomes due under the terms of the agreements.
Interest Rate Swaps
As of March 31, 2020, we had interest rate swap agreements outstanding with a weighted average base interest rate of 1.85% on a notional amount of $795.2 million, maturing on various dates through May 2023, and a forward starting interest rate swap agreement with a weighted average interest rate of 2.75% on a notional amount of $100.0 million, with an effective date in June 2020, and a maturity date in May 2023. We entered into these interest rate swap agreements in order to hedge the interest payments associated with our issuances of variable interest rate long term debt. The interest rate swap agreements are net settled monthly.
The following table summarizes the terms and estimated fair values of our interest rate swap derivative instruments designated as cash flow hedges of interest rate risk at March 31, 2020 and December 31, 2019 based on the year they mature. The notional values provide an indication of the extent of our involvement in these instruments, but do not represent exposure to credit, interest rate or market risks. In the accompanying consolidated balance sheets, the carrying amount of derivative assets is reflected in “Deferred costs and other assets, net” and the carrying amount of derivative liabilities is reflected in “Accrued expenses and other liabilities.”
The tables below present the effect of derivative financial instruments on accumulated other comprehensive income and on our consolidated statements of operations for the three months ended March 31, 2020 and 2019:
Credit-Risk-Related Contingent Features
We have agreements with some of our derivative counterparties that contain a provision pursuant to which, if our entity that originated such derivative instruments defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then we could also be declared in default on our derivative obligations. As of March 31, 2020, we were not in default on any of our derivative obligations.
We have an agreement with a derivative counterparty that incorporates the loan covenant provisions of our loan agreement with a lender affiliated with the derivative counterparty. Failure to comply with the loan covenant provisions would result in our being in default on any derivative instrument obligations covered by the agreement.
As of March 31, 2020, the fair value of derivatives in a liability position, which excludes accrued interest but includes any adjustment for nonperformance risk related to these agreements, was $31.7 million. If we had breached any of the default provisions in these agreements as of March 31, 2020, we might have been required to settle our obligations under the agreements at their termination value (including accrued interest) of $32.9 million. We had not breached any of these provisions as of March 31, 2020. |
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Investments in Partnerships |
3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Equity Method Investments And Joint Ventures [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Investments in Partnerships |
3. INVESTMENTS IN PARTNERSHIPS
The following table presents summarized financial information of the equity investments in our unconsolidated partnerships as of March 31, 2020 and December 31, 2019:
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We record distributions from our equity investments using the nature of the distribution approach.
The following table summarizes our share of equity in income of partnerships for the three months ended March 31, 2020 and 2019:
(1) Net of capitalized interest expense of $1,091 and $1,472 for the three months ended March 31, 2020 and 2019, respectively.
Dispositions
In March 2019, a partnership in which we hold a 25% interest sold an undeveloped land parcel adjacent to Gloucester Premium Outlets for $3.8 million. The partnership recorded a gain on sale of $2.3 million, of which our share was $0.6 million, which is recorded in gain on sales of real estate by equity method investee in the accompanying consolidated statement of operations.
Term Loan
In January 2018, our Fashion District Philadelphia redevelopment project joint venture entity entered into a $250.0 million term loan (the “FDP Term Loan”). We and our partner in the project, The Macerich Company (“Macerich”), each own a 50% partnership interest in Fashion District Philadelphia. The FDP Term Loan matures in January 2023, and bears interest at a variable rate of LIBOR plus 2.00%. PREIT and Macerich secured the FDP Term Loan by pledging their respective equity interests in the entities that own Fashion District Philadelphia. The entire $250.0 million available under the FDP Term Loan was drawn during the first quarter of 2018, and we received an aggregate $123.0 million as a distribution of our share of the draws in 2018. In July 2019, the FDP Term Loan was modified to increase the total potential borrowings from $250.0 million to $350.0 million. A total of $51.0 million was drawn during the third quarter of 2019 and we received aggregate distributions of $25.0 million as our share of the draws.
Significant Unconsolidated Subsidiary
We have a 50% ownership interest in Lehigh Valley Associates L.P. (“LVA”) and Fashion District Philadelphia (“FDP”). The financial information of LVA and FDP are included in the amounts above. Summarized balance sheet information as of March 31, 2020 and December 31, 2019, and summarized statement of operations information for the three months ended March 31, 2020 and 2019 for these entities, which are accounted for using the equity method, are as follows:
LVA
FDP
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Leases (Tables) |
3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Leases [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Lease, Cost |
The following table presents additional information pertaining to the Company’s leases:
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| Supplemental Cash Flows and Terms |
Other information related to leases as of and for the three months ended March 31, 2020 is as follows:
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| Future Minimum Payments Against Lease Liabilities Maturity |
Future payments against lease liabilities as of March 31, 2020 are as follows:
Future payments against lease liabilities as of December 31, 2019 are as follows:
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| Lessor, Operating Lease, Payments to be Received, Maturity |
As of March 31, 2020, the fixed contractual lease payments, including minimum rents and fixed CAM amounts, to be received over the next five years pursuant to the terms of noncancellable operating leases with initial terms greater than one year are included in the table below. The amounts presented assume that no leases are renewed and no renewal options are exercised. Additionally, the table does not include variable lease payments that may be received under certain leases for percentage rents or the reimbursement of operating costs, such as common area expenses, utilities, insurance and real estate taxes. These variable lease payments are recognized in the period when the applicable expenditures are incurred or, in the case of percentage rents, when the sales data is made available.
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Investments in Partnerships (Tables) |
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| Equity Method Investments And Joint Ventures [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Summary of Equity Investments |
The following table presents summarized financial information of the equity investments in our unconsolidated partnerships as of March 31, 2020 and December 31, 2019:
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| Summary of Share of Equity in Income of Partnerships |
The following table summarizes our share of equity in income of partnerships for the three months ended March 31, 2020 and 2019:
(1) Net of capitalized interest expense of $1,091 and $1,472 for the three months ended March 31, 2020 and 2019, respectively. |
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| Summarized Balance Sheet And Statement Of Operations For Subsidiary | Summarized balance sheet information as of March 31, 2020 and December 31, 2019, and summarized statement of operations information for the three months ended March 31, 2020 and 2019 for these entities, which are accounted for using the equity method, are as follows:
LVA
FDP
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Real Estate Activities - Investments in Real Estate (Detail) - USD ($) $ in Thousands |
Mar. 31, 2020 |
Dec. 31, 2019 |
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| Real Estate [Abstract] | ||
| Buildings, improvements and construction in progress | $ 2,761,543 | $ 2,753,039 |
| Land, including land held for development | 466,116 | 457,887 |
| Total investments in real estate | 3,227,659 | 3,210,926 |
| Accumulated depreciation | (1,230,657) | (1,202,722) |
| Net investments in real estate | $ 1,997,002 | $ 2,008,204 |