Item 1. Business
Pennsylvania Real Estate Investment Trust, a Pennsylvania business trust ("PREIT"), conducts substantially all of its operations through PREIT Associates, L.P. ("PREIT Associates"), a Delaware limited partnership. As used in this report, unless the context requires otherwise, the terms "Company," "we," "us," and "our" includes PREIT, PREIT Associates and their subsidiaries and affiliates, including PREIT-RUBIN, Inc. ("PREIT-RUBIN" or "PRI", formerly The Rubin Organization, Inc.) and PREIT Services, LLC ("PREIT Services"), which together comprise our commercial property development and management business.
The Company
PREIT, which is organized as a business trust under Pennsylvania law, is a fully integrated, self-administered and self-managed real estate investment trust, founded in 1960, which acquires, develops, redevelops and operates retail, multifamily and industrial properties.
As of December 31, 2001, we owned interests in 22 shopping centers containing an aggregate of approximately 10.9 million square feet, 19 multifamily properties containing an aggregate of 7,242 units and 4 industrial properties with an aggregate of approximately 0.3 million square feet. We also own interests in 4 shopping centers currently under development, which we expect to contain an aggregate of approximately 1.3 million square feet upon completion. We cannot assure you that all 4 development properties will be completed successfully.
We also provide management, leasing and development services to 19 retail properties containing approximately 8.3 million square feet, 7 office buildings containing approximately 1.8 million square feet and 2 multifamily properties containing 137 units for affiliated or third-party owners.
Recent Developments
In March 2002, we refinanced a mortgage secured by our Camp Hill multifamily property located in Camp Hill, Pennsylvania. The mortgage amount was $12.8 million, has a 10 year term and bears interest at the rate of 7.015% per annum.
Our Structure
PREIT Associates holds substantially all of our assets. As the sole general partner of PREIT Associates, we have the exclusive power to manage and conduct PREIT Associates' business, subject to limited exceptions. As of December 31, 2001, we owned approximately 90.1% of PREIT Associates. We anticipate that all of our acquisitions of interests in real estate will be owned, directly or indirectly, by PREIT Associates.
The following is a diagram of our structure as of December 31, 2001, which reflects the January 1, 2001 acquisition by PREIT Associates of the minority interest in PREIT-RUBIN:
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(1) Sole general partner of PREIT Associates. Of our 90.1% interest in PREIT Associates, we hold 99.99% of our units of limited partnership interest ("Units") as a limited partner and 0.01% as the sole general partner.
(2) Includes an aggregate of 1,138,758 Units, 6.9% of the Units outstanding at December 31, 2001, owned by the persons who were shareholders and affiliates of The Rubin Organization before our acquisition of The Rubin Organization. Under the terms of our acquisition of The Rubin Organization, these individuals have the right to receive up to 302,500 additional Units in respect of their former ownership interest in The Rubin Organization, depending on our adjusted funds from operations over the one year, nine month period commencing on January 1, 2001, until September 30, 2002 and also to receive additional Units in respect of their interest in other properties we acquired rights to as part of the acquisition. Although not yet issued, the former shareholders and affiliates of The Rubin Organization are entitled to 167,500 units for the 12 month period from January 1, 2001 through December 31, 2001.
(3) Interests in some of these properties are owned directly by PREIT under arrangements in which the entire economic benefit of ownership has been pledged to PREIT Associates, rather than being owned directly by PREIT Associates. PREIT Associates' economic interest in these properties ranges from 0.01% to 100%.
Retail Properties
As of December 31, 2001, we had interests in 22 retail properties containing an aggregate of approximately 10.9 million square feet. PREIT Services currently manages 12 of these properties, all of which are wholly owned by the Company. PREIT-RUBIN manages 3 of the properties, each of which is owned by a joint venture in which the Company is a party. The remaining 7 properties are also owned by joint ventures in which the Company is a party and are managed by our joint venture partners, or by an entity we or our joint venture partners designate, and in many instances a change in the management of the property requires the concurrence of both partners. Fourteen of the 22 retail properties (containing an aggregate of approximately 7.9 million square feet) are located in Pennsylvania, two (containing an aggregate of approximately 0.3 million square feet) are located in Florida, two (containing an aggregate of approximately 0.8 million square feet) are located in South Carolina, and one is located in each of Delaware, Maryland, Massachusetts and New Jersey (containing an aggregate of approximately 1.8 million square feet).
The following table presents information regarding our retail properties as of December 31, 2001:
* By PREIT Associates; we own approximately 90.1% of PREIT Associates.
(1) Year initially completed and, where applicable, the most recent year in which the property was renovated substantially or an additional phase of the property was completed. (2) Total Square Feet includes space owned by the tenant; Owned Square Feet and Percent Leased excludes such space. (3) GLA stands for Gross Leasable Area. (4) Percent Leased is calculated as a percent of Owned Square Feet for which leases were in effect as of December 31, 2001. (5) With respect to Phase I, we have an undivided one-half interest in one of three floors in a freestanding department store. (6) We expect to acquire the remaining 11% ownership interest in 2002. (7) Property is income producing as of 12/31/01, with development activity in 2001. (8) Development was completed in January 2002, property is 100% leased and occupied as of January 31, 2002. (9) The percentage of our ownership interest in Willow Grove Park is nominal until the satisfaction of certain conditions.
The following table presents information regarding the primary tenant in each of our retail properties:
Primary Tenant, Square Footage and Annualized Base Rent as of December 31, 2001
(1) Includes lease(s) in which the tenant pays rent based on a percentage of sales in lieu of minimum rent. No annualized base rent has been estimated for these leases.
The following table presents, as of December 31, 2001, scheduled lease expirations with respect to our retail properties for the next 10 years, assuming that none of the tenants exercise renewal options or termination rights:
(1) Percentage of total leased GLA is calculated by dividing the approximate GLA of expiring leases by the total leased GLA, which is 7,488,014.
(2) Includes all tenant leases which have already expired and are on a month-to-month basis.
Development Properties
We have rights in 4 development properties -Christiana Power Center Phase II, Newark, DE; New Garden, New Garden Township, PA; South Brunswick, South Brunswick, NJ; and Pavilion at Market East, Philadelphia, PA.
The following table presents information, as of December 31, 2001, regarding the development properties:
* By PREIT Associates; we currently own approximately 90.1% of PREIT Associates.
We acquired our rights to Christiana Power Center Phase II when we acquired The Rubin Organization, and we hold our rights subject to a contribution agreement executed in connection with that acquisition. The contribution agreement provides for PREIT Associates to issue Units to former affiliates of The Rubin Organization as consideration for their rights in this property according to the formula described below. As Christiana Power Center Phase II is completed and leased, it will be valued based on the following principles:
o all space leased and occupied by credit-worthy tenants will be valued at ten times adjusted cash flow, computed as specified in the contribution agreement;
o all space leased to a credit-worthy tenant but unoccupied will be valued at ten times adjusted cash flow calculated as though the space was built and occupied as shown in the property's budget; and
o space not leased or occupied, whether built or unbuilt, will be valued as mutually agreed upon or, failing agreement, by appraisal.
Additional provisions exist for valuing triple net lease/purchase arrangements. No consideration will be paid until the earlier of:
o the completion of the property;
o our abandonment of the project; or
o September 30, 2002.
If the project is not completed by September 30, 2002, we will value the project and PREIT Associates will issue Units equal in value to 50% of the amount, if any, by which the value of PREIT Associates' interest in the project exceeds the aggregate cost of the project at the time of completion. Negative amounts arising in connection with the completion or abandonment of the project will be netted back against earlier completed projects in order of completion. Units issued in respect of the foregoing valuations of the project will be valued at the greater of (1) the average of the closing prices of the Shares for the twenty trading days before the date of the completion valuation and (2) $19.00. If the average of the closing prices of the shares on the 20 trading days before each valuation is less than $19.00, PREIT Associates will issue additional Units, of a new class but equal in value to those Units not issued because of the operation of the pricing limitation.
Multifamily Properties
We have interests in 19 multifamily properties with an aggregate of 7,242 units. In 2001, we managed 14 of these multifamily properties, and the remaining 5 multifamily properties were managed by one or more of our partners. Effective January 1, 2002, we began managing one of the properties that was previously managed by our partner in the property. If our partners currently managing the remaining 4 multifamily properties become unable or unwilling to perform their obligations or responsibilities, we are capable of managing these properties with our own staff.
The following table presents information, as of December 31, 2001, regarding the 19 multifamily properties in which we have an interest:
* By PREIT Associates; we currently own approximately 90.1% of PREIT Associates.
(1) Year initially completed and most recently renovated, and where applicable, year(s) in which additional phases were completed at the property.
(2) Includes all apartment and commercial units occupied or available for occupancy at December 31, 2001.
Other Properties
We own four industrial properties that we acquired shortly after our organization. We have not acquired any property of this type in over 28 years. We do not consider these properties to be strategically held assets. These properties, in the aggregate, contributed less than 1% of our net rental income in our fiscal year ended December 31, 2001. We have been implementing a program providing for the orderly disposition of these assets.
The following table shows information, as of December 31, 2001, regarding the remaining four industrial properties:
* By PREIT Associates; we currently own approximately 90.1% of PREIT Associates.
Right of First Refusal Properties.
We obtained rights of first refusal with respect to the interests of some of the former affiliates of The Rubin Organization, after our acquisition of The Rubin Organization, in the three retail properties listed below:
(1) The interest subject to the right of first refusal is subject to adjustment in connection with the refinancing of the participating mortgage that currently encumbers this property.
(2) The property is currently undergoing a renovation. A portion of the property was sold in 2001. The post-renovation Gross Leasable area of the remaining property has not been determined.
Acquisition of The Rubin Organization
On September 30, 1997, we completed a series of related transactions in which:
o we transferred substantially all of our real estate interests to PREIT Associates;
o PREIT Associates acquired all of the nonvoting common shares of The Rubin Organization, Inc., a commercial real estate development and management firm (renamed PREIT-RUBIN, Inc.), constituting 95% of the total equity of PREIT-RUBIN in exchange for the issuance of 200,000 Class A units of limited partnership interest in PREIT Associates ("Units") and a contingent obligation to issue up to 800,000 additional Units over the next five years, discussed below; and
o PREIT Associates acquired the interests of some of the former affiliates of The Rubin Organization in The Court at Oxford Valley, Magnolia Mall, North Dartmouth Mall, Springfield Park, Hillview Shopping Center and Northeast Tower Center at prices based upon a pre-determined formula; and subject to related obligations, in Christiana Power Center (Phase I and II), Red Rose Commons and Metroplex Shopping Center. Subsequent to September 30, 1997, by mutual agreement with the former affiliates of The Rubin Organization, PREIT Associates did not acquire Hillview Shopping Center.
The 800,000 additional Units discussed above are to be issued over the five-year period beginning October 1, 1997 and ending September 30, 2002 according to a formula based on our adjusted funds from operations per share during the five year period. The contribution agreement established "hurdles" and "targets" during specified "earn-out periods" to determine whether, and to what extent, the contingent Units will be issued. For the period beginning October 1, 1997 through December 31, 2001, 665,000 contingent OP units had been earned, resulting in an additional purchase price of approximately $12.9 million. Under the contribution agreement, the hurdles and targets were adjusted on December 29, 1998 (after the issuance of 32,500 OP units for the period ended December 31, 1997) to account for the dilutive effect of our December 1997 public offering, as follows:
Per Share Adjusted FFO Base No. Max. No. Contingent Contingent Earnout Period Hurdle Target TRO OP Units TRO OP Units - -------------- ------ ------ ------------ ------------
1-1-98 to 12-31-98 $2.13 $2.39 20,000 130,000 1-1-99 to 12-31-99 $2.30 $2.58 57,500 167,500 1-1-00 to 12-31-00 $2.43 $2.72 57,500 167,500 1-1-01 to 12-31-01 $2.72 $3.03 57,500 167,500 1-1-02 to 9-30-02 $2.19 $2.43 52,500 135,000 ------- -------
Total 245,000 767,500 ======= =======
Following our July 2001 public offering, the hurdle and target for the 2001 period were further adjusted to $2.63 and $2.94, respectively, to account for the dilutive effect of our July 2001 public offering.
In general:
o if the hurdle for any earn-out period is not met, no contingent Units will be issued in respect of that period; o if the target for any earn-out period is met, the maximum number of contingent Units for that period will be issued; and o if adjusted funds from operations for any earn-out period is between the hurdle and the target for the period, PREIT Associates would issue the base contingent Units for that period, plus a pro rata portion of the number of contingent Units by which the maximum contingent Units exceeded the base contingent Units for that period equal to the amount by which the per share adjusted funds from operations exceeded the hurdle but was less than the target.
The foregoing is subject to the right to carry back to prior earn-out periods amounts in excess of the target in the current period, thereby earning additional contingent Units, but never more than the maximum aggregate amount, and to carry forward into the next, but only the next, earn-out period amounts of per share adjusted funds from operations which exceed the target in any such period, provided, in all cases, no amounts in excess of the target in any period may be applied to result in the issuance of additional contingent Units in any other period until first applied to eliminate all shortfalls from targets in all prior periods.
The contribution agreement provides that if we declared a share split, share dividend or other similar change in our capitalization, the "hurdle" and "target" levels will be proportionately adjusted. The contribution agreement also provides for the creation of a special committee of independent Trustees to consider, among other matters, whether other equitable adjustments, either upward or downward, should be effected in the "hurdle" and "target" levels to reflect:
o our incurrence of non-project specific indebtedness or our raising of equity capital; o our breach of any of our representations or warranties in the contribution agreement which may adversely affect adjusted funds from operations; and o the effect on adjusted funds from operations of any adverse judgment in litigation pending against us.
Through December 31, 2001, 465,000 of the 767,500 units described above have been issued, and another 167,500 units have been earned, but not yet issued. For the nine month period commencing January 1, 2002 and ending September 30, 2002, we may be required to issue the remaining 135,500 Units, depending on our per share "adjusted funds from operations" during this period. "Adjusted funds from operations" is defined as our consolidated net income for any period, plus, to the extent deducted in computing such net income:
o depreciation attributable to real property; o certain amortization expenses; o the expenses of the acquisition of The Rubin Organization; o losses on the sale of real estate; o material write-downs on real estate, including predevelopment costs; o material prepayment fees; and o rents currently due in excess of rents reported, minus: o rental revenue reported in excess of amounts currently due; o lease termination fees; and o gains on the sale of real estate.
In connection with adjusting the hurdle and target for the 2001 period as discussed above, the special committee also indicated that it will consider a request to adjust the hurdle and target for the 2002 period in order to account for the dilutive effect of our July 2001 public offering.
Risk Factors
Real Estate Industry
We face risks associated with local real estate conditions in areas where we own properties
We may be affected adversely by general economic conditions and local real estate conditions. For example, an oversupply of retail space or apartments in a local area or a decline in the attractiveness of our properties to shoppers, residents or tenants would have a negative effect on us.
Other factors that may affect general economic conditions or local real estate conditions include:
o population trends o income tax laws o availability and costs of financing o construction costs o weather conditions that may increase or decrease energy costs
We may be unable to compete with our larger competitors and other alternatives to our portfolio of properties
The real estate business is highly competitive. We compete for interests in properties with other real estate investors and purchasers, many of whom have greater financial resources, revenues and geographical diversity than we have. Furthermore, we compete for tenants with other property owners. Our apartment properties portfolio competes with providers of other forms of housing, such as single family housing. Competition from single family housing increases when lower interest rates make mortgages more affordable. All of our shopping center and apartment properties are subject to significant local competition. Further, our portfolio of retail properties faces competition from internet-based operations that may be capable of providing lower-cost alternatives to customers.
We are subject to significant regulation that restricts our activities
Local zoning and use laws, environmental statutes and other governmental requirements restrict our expansion, rehabilitation and reconstruction activities. These regulations may prevent us from taking advantage of economic opportunities.
Legislation such as the Americans with Disabilities Act may require us to modify our properties. Future legislation may impose additional requirements. We cannot predict what requirements may be enacted.
Our Properties
We face risks that may restrict our ability to develop properties
There are risks associated with our development activities in addition to those generally associated with the ownership and operation of established shopping centers and multifamily properties. These risks include:
o expenditure of money and time on projects that may never be completed o higher than estimated construction costs o late completion because of unexpected delays in zoning approvals, other land use approvals, construction or other factors outside of our control o failure to obtain zoning, occupancy or other governmental approvals
The risks described above are compounded by the fact that we must distribute 90% of our taxable income in order to maintain our qualification as a REIT. As a result of these distribution requirements, new developments are financed primarily through lines of credit or other forms of construction financing. Because we incur debt to finance the developments, our loss could exceed our equity investment in these developments.
Furthermore, we must acquire and develop suitable high traffic retail sites at costs consistent with the overall economics of the project. Because retail development is extremely competitive, we cannot assure you that we can contract for appropriate sites within our geographic markets.
Some of our properties are old and in need of maintenance and/or renovation
Some of the properties in which we have an interest were constructed or last renovated more than 10 years ago. Older properties may generate lower rentals or may require significant capital expense for renovations. More than forty percent of our apartment communities have not been renovated in the last ten years. Some of our apartments lack amenities that are customarily included in modern construction, such as dishwashers, central air conditioning and microwave ovens. Some of our facilities are difficult to lease because they are too large, too small or inappropriately proportioned for today's market. We generally consider renovation of properties when renovation will enhance or maintain the long-term value of our properties.
We may be unable to successfully integrate and effectively manage the properties we acquire
Subject to the availability of financing and other considerations, we intend to continue to acquire interests in properties that we believe will be profitable or will enhance the value of our portfolios. Some of these properties may have unknown characteristics or deficiencies. Therefore, it is possible that some properties will be worth less or will generate less revenue than we believe at the time of acquisition. It is also possible that the operating performance of some of our properties will decline.
To manage our growth effectively, we must successfully integrate new acquisitions. We cannot assure you that we will be able to successfully integrate or effectively manage additional properties.
When we acquire properties, we also take on other risks, including:
o financing risks (some of which are described below) o the risk that we will not meet anticipated occupancy or rent levels o the risk that we will not obtain required zoning, occupancy and other governmental approvals o the risk that there will be changes in applicable zoning and land use laws that affect adversely the operation or development of our properties
We may be unable to renew leases or relet space as leases expire
When a lease expires, a tenant may refuse to renew it. We may not be able to relet the property on similar terms, if we are able to relet the property at all. We have established an annual budget for renovation and reletting expenses that we believe is reasonable in light of each property's operating history and local market characteristics. This budget, however, may not be sufficient to cover these expenses.
We have been and may continue to be affected negatively by tenant bankruptcies and leasing delays
At any time, a tenant may experience a downturn in its business that may weaken its financial condition. As a result, our tenants may delay lease commencement, fail to make rental payments when due, or declare bankruptcy. Any such event could result in the termination of that tenant's lease and losses to us.
We receive a substantial portion of our shopping center income as rents under long-term leases. If retail tenants are unable to comply with the terms of their leases because of rising costs or falling sales, we may modify lease terms to allow tenants to pay a lower rental or a smaller share of operating costs and taxes.
For example, in 2001 we were impacted by bankruptcies of retail tenants under multi-year lease agreements, including tenants expected to occupy space yet to be constructed, such as Bradlees, Inc., which was scheduled to begin occupancy on February 1, 2001 at Northeast Tower Center in Pennsylvania, and Lechter's, Inc., which was scheduled to begin occupancy on July 1, 2001 at Creekview Shopping Center in Warrington, Pennsylvania and existing tenants such as Homeplace, Inc., which ceased paying rent on July 1, 2001 at The Court at Oxford Valley in Langhorne, Pennsylvania. In addition, as a result of the weakening economy, we entered into an agreement, which included payments to JC Penney Company, Inc., to induce it to keep its store open at Prince George's Plaza in Hyattsville, Maryland beyond the scheduled expiration of its lease in July 2001.
The amount of rent and expense reimbursements that we would have received under the four lease agreements, as well as the cost of the inducement that we agreed to pay, totaled $2.6 million in 2001. We have secured replacement tenants for the Creekview Shopping Center and The Court at Oxford Valley spaces noted above, with some tenants occupying the space as of December 31, 2001, and with others expected to take possession of the space in 2002. We are currently negotiating with a prospective tenant to occupy the space at Northeast Tower Center. We do not anticipate that rent payments from this tenant will begin in 2002.
Future terrorist activity may have an adverse affect on our financial condition and operating results.
Future terrorist attacks in the United States, such as the attacks that occurred in New York and Washington, D.C. on September 11, 2001 and other acts of terrorism or war, may result in declining economic activity, which could harm the demand for and the value of our properties. A decrease in demand would make it difficult for us to renew or re-lease our properties at lease rates equal
to or above historical rates. Terrorist activities also could directly impact the value of our properties through damage, destruction or loss, and the availability of insurance for such acts may be less, or cost more, which would adversely affect our financial condition. To the extent that our tenants are impacted by future attacks, their businesses similarly could be adversely affected, including their ability to continue to honor their existing leases. These acts may further erode business and consumer confidence and spending, and may result in increased volatility in national and international financial markets and economies. Any one of these events may decrease demand for real estate, decrease or delay the occupancy of our new or renovated properties, increase our operating expenses due to increased physical security for our properties and limit our access to capital or increase our cost of raising capital. We apply comprehensive planning and operational measures to enhance the security of our employees, tenants and visitors at our properties. This effort, a strong component of our operational program before September 11th, undergoes regular review and,where necessary and appropriate, improvement and enhancement. The need to enhance security measures and add additional security personnel at our properties could increase the costs of operating our properties with a materially adverse impact on our cash flow.
We face risks associated with PREIT-RUBIN's management of properties owned by third parties
PREIT-RUBIN manages a substantial number of properties owned by third parties. Risks associated with the management of properties owned by third parties include:
o the property owner's termination of the management contract o loss of the management contract in connection with a property sale o non-renewal of the management contract after expiration o renewal of the management contract on terms less favorable than current terms o decline in management fees as a result of general real estate market conditions or local market factors o claims of losses due to allegations of mismanagement
Coverage under our existing insurance policies may be inadequate to cover losses
We generally maintain insurance policies related to our business, including casualty, general liability and other policies covering our business operations, employees and assets. However, we could be required to bear all losses that are not adequately covered by insurance, including terrorism coverage. Although we believe that our insurance programs are adequate, we cannot assure you that we will not incur losses in excess of our insurance coverage, if we are unable to obtain insurance in the future at acceptable levels and reasonable cost, or that compliance with covenants under our debt agreements will be met.
Insurance payouts resulting from the terrorist attacks occurring on September 11, 2001 could significantly reduce the insurance industry's reserves. Moreover, the demand for higher levels of insurance coverage will likely increase because of these attacks. As a result, we expect our insurance premiums to increase in the future, which may have a materially adverse impact on our cash flow and results of operations. Furthermore, we may not be able to purchase policies in the future with coverage limits and deductibles similar to those that were available before the attacks. Because it is not possible to determine what kind of policies will be available in the future and at what prices, there is no guarantee that we will be able to maintain our pre-September 11, 2001 insurance coverage levels.
We face risks due to lack of geographic diversity
Most of our properties are located in the eastern United States. A majority of the properties are located either in Pennsylvania or Florida. General economic conditions and local real estate conditions in these geographic regions have a particularly strong effect on us. Other REITs may have a more geographically diverse portfolio and thus may be less susceptible to downturns in one or more regions.
We face possible environmental liabilities
Current and former real estate owners and operators may be required by law to investigate and clean up hazardous substances released at the properties they own or operate. They may also be liable to the government or to third parties for substantial property damage, investigation costs and cleanup costs. In addition, some environmental laws create a lien on the contaminated site in favor of the government for damages and costs the government incurs in connection with the contamination. Contamination may affect adversely the owner's ability to sell or lease real estate or to borrow with the real estate as collateral.
From time to time, we respond to inquiries from environmental authorities with respect to properties both currently and formerly owned by us. We cannot assure you of the results of pending investigations, but we do not believe that resolution of these matters will have a material adverse effect on our financial condition or results of operations.
We have no way of determining at this time the magnitude of any potential liability to which we may be subject arising out of unknown environmental conditions or violations with respect to the properties we formerly owned. Environmental laws today can impose liability on a previous owner or operator of a property that owned or operated the property at a time when hazardous or toxic substances were disposed of, or released from, the property. A conveyance of the property, therefore, does not relieve the owner or operator from liability.
We are aware of certain environmental matters at some of our properties, including ground water contamination, above-normal radon levels and the presence of asbestos containing materials and lead-based paint. We have, in the past, performed remediation of such environmental matters, and at December 31, 2001, we are not aware of any significant remaining potential liability relating to these environmental matters. We may be required in the future to perform testing relating to these matters. We have reserved approximately $100,000 to cover such costs if they are necessary. We cannot assure you that these amounts will be adequate to cover future environmental costs.
At five properties in which we currently have an interest, and at two properties in which we formerly had an interest, environmental conditions that have been or continue to be investigated and have not been fully remediated. At five of these properties, groundwater contamination has been found. At two of the properties with groundwater contamination, the former owners of the properties are remediating the groundwater contamination. Dry cleaning operations were performed at three of the properties in which we currently or formerly had an interest. At two of the dry cleaning properties, soil contamination has been identified and groundwater contamination was found at the other dry cleaning property. Although the properties with contamination arising from dry cleaning operations may be eligible under a state law for remediation with state funds, we cannot assure you that sufficient funds will be available under the legislation to pay the full costs of any such remediation.
There are asbestos-containing materials in a number of our properties, primarily in the form of floor tiles and adhesives. The floor tiles and adhesives are generally in good condition. Fire-proofing material containing asbestos is present at some of our properties in limited concentrations or in limited areas. At properties where radon has been identified as a potential concern, we have remediated or are performing additional testing. Lead-based paint has been identified at certain of our multifamily properties and we have notified tenants under applicable disclosure requirements. Based on our current knowledge, we do not believe that the future liabilities associated with asbestos, radon and lead-based paint at the foregoing properties will be material.
We have limited environmental liability coverage for the types of environmental liabilities described above. The policy covers liability for pollution and on-site remediation limited to $2 million for any single claim and further limited to $4 million in the aggregate. The policy expires on December 1, 2002. We are aware of environmental concerns at two of our development properties. Our present view is that our share of any remediation costs necessary in connection with the development of these properties will be within the budgets for development of these properties (or, in the case of one of these properties, our prospective partner, who also is the current owner of such property, will address the environmental concerns prior to the commencement of the development process), but the final costs and necessary remediation are not known and may cause us to decide not to develop one or more of these properties.
Financing Risks
We face risks generally associated with our debt
We finance parts of our operations and acquisitions through debt. This debt creates risks, including:
o rising interest rates on our floating-rate debt o failure to prepay or refinance existing debt, which may result in forced disposition of properties on disadvantageous terms o refinancing terms less favorable than the terms of existing debt o failure to meet required payments of principal and interest
We may not be able to comply with leverage ratios imposed by our credit facility or to use our credit facility when credit markets are tight
We currently use a three-year secured credit facility for working capital, acquisitions, construction of our development pipeline, renovations and capital improvements to our properties. The credit facility is secured by 11 properties and currently requires our operating partnership, PREIT Associates, to maintain certain asset and income to debt ratios and minimum income and net worth levels. As of December 31, 2001, we were in compliance with all debt covenants. If, in the future, PREIT Associates fails to meet any one or more of these requirements, we would be in default. The lenders, in their sole discretion, may waive a default. We might secure alternative or substitute financing. We cannot assure you, however, that we can obtain waivers or alternative financing. Any default may have a materially adverse effect on our operations and financial condition.
When the credit markets are tight, we may encounter resistance from lenders when we seek financing or refinancing for some of our properties. If our credit facility is reduced significantly or withdrawn, our operations would be affected adversely. If we are unable to increase our borrowing capacity under the credit facility, our ability to make acquisitions and grow would be affected adversely. We cannot assure you as to the availability or terms of financing for any particular property.
We have entered into agreements limiting the interest rate on portions of our credit facility. If other parties to these agreements fail to perform as required by the agreements, we may suffer credit loss.
We may be unable to obtain long-term financing required to finance our partnerships and joint ventures
The profitability of each partnership or joint venture in which we are a partner or co-venturer that has short-term financing or debt requiring a balloon payment is dependent on the availability of long-term financing on satisfactory terms. If satisfactory long-term financing is not available, we may have to rely on other sources of short-term financing, equity contributions or the proceeds of refinancing the existing properties to satisfy debt obligations. Although we do not own the entire interest in connection with many of the properties held by such partnerships or joint ventures, we may be required to pay the full amount of any obligation of the partnership or joint venture that we have guaranteed in whole or in part to protect our equity interest in the property owned by the partnership or joint venture. Additionally, we may determine to pay a partnership's or joint venture's obligation to protect our equity interest in its assets.
Governance
We may be unable to effectively manage our partnerships and joint ventures due to disagreements with our partners and joint venturers
Generally, we hold interests in our portfolio properties through PREIT Associates. In many cases we hold properties through joint ventures or partnerships with third-party partners and joint venturers and, thus, we hold less than 100% of the ownership interests in these properties. Of the properties with respect to which our ownership is partial, most are owned by partnerships in which we are a general partner. The remaining properties are owned by joint ventures in which we have substantially the same powers as a general partner. Under the terms of the partnership and joint venture agreements, major decisions, such as a sale, lease, refinancing, expansion or rehabilitation of a property, or a change of property manager, require the consent of all partners or co-venturers. Necessary actions may be delayed significantly because decisions must be unanimous. It may be difficult or even impossible to change a property manager if a partner or co-venturer is serving as property manager.
Business disagreements with partners may arise. We may incur substantial expenses in resolving these disputes. To preserve our investment, we may be required to make commitments to or on behalf of a partnership or joint venture during a dispute. Moreover, we cannot assure you that our resolution of a dispute with a partner will be on terms that are favorable to us.
Other risks of investments in partnerships and joint ventures include:
o partners or co-venturers might become bankrupt or fail to fund their share of required capital contributions o partners or co-venturers might have business interests or goals that are inconsistent with our business interests or goals o partners or co-venturers may be in a position to take action contrary to our policies or objectives o potential liability for the actions of our partners or co-venturers
We are subject to restrictions that may impede our ability to effect a change in control
Our Trust Agreement restricts the possibility of our sale or change in control, even if a sale or change in control were in our shareholders' interest. These restrictions include the ownership limit designed to ensure qualification as a REIT, the staggered terms of our Trustees and our ability to issue preferred shares. Additionally, we have adopted a rights plan that may deter a potential acquiror from attempting to acquire us.
We have entered into agreements restricting our ability to sell some of our properties
Some limited partners of PREIT Associates may suffer adverse tax consequences if certain properties owned by PREIT Associates are sold. As the general partner of PREIT Associates, we have agreed from time to time, subject to certain exceptions, that the consent of the holders of a majority (or all) of certain limited partner interests issued by PREIT Associates in exchange for a property is required before that property may be sold. These agreements may result in our being unable to sell one or more properties, even in circumstances in which it would be advantageous to do so.
We may issue preferred shares with greater rights than your shares
Our Board of Trustees may issue up to 25,000,000 preferred shares without shareholder approval. Our Board of Trustees may determine the relative rights, preferences and privileges of each class or series of preferred shares. Because our Board of Trustees has the power to establish the preferences and rights of the preferred shares, preferred shares may have preferences, distributions, powers and rights senior to your rights as a shareholder.
We may amend our business policies without your approval
Our Board of Trustees determines our growth, investment, financing, capitalization, borrowing, REIT status, operating and distribution policies. Although the Board of Trustees has no present intention to amend or revise any of these policies, these policies may be amended or revised without notice to shareholders. Accordingly, shareholders may not have control over changes in our policies. We cannot assure you that changes in our policies will serve fully the interests of all shareholders.
Limited partners of PREIT Associates may vote on fundamental changes we propose
Our assets are generally held through PREIT Associates, a Delaware limited partnership of which we are the sole general partner. We currently hold a majority of the limited partner interests in PREIT Associates. However, PREIT Associates may from time to time issue additional limited partner interests in PREIT Associates to third parties in exchange for contributions of property to PREIT Associates. These issuances will dilute our percentage ownership of PREIT Associates. Limited partner interests in PREIT Associates generally do not carry a right to vote on any matter voted on by our shareholders, although limited partner interests may, under certain circumstances, be redeemed for our shares. However, before the date on which at least half of the partnership interests issued on September 30, 1997 have been redeemed, the holders of partnership interests issued on September 30, 1997 are entitled to vote, along with our shareholders, on any proposal to merge, consolidate or sell substantially all of our assets. Our partnership interests are not included for purposes of determining when half of the partnership interests have been redeemed, nor are they counted as votes. We cannot assure you that we will not agree to extend comparable rights to other limited partners in PREIT Associates.
Our success depends in part on Ronald Rubin
We are dependent on the efforts of Ronald Rubin, our Chairman and Chief Executive Officer. The loss of his services could have an adverse effect on our operations.
Our employees who work both for us and for PREIT-RUBIN may have conflicts of interest
There are numerous potential conflicts of interest relating to our ownership of PREIT-RUBIN. PREIT-RUBIN renders management, development, leasing and related services to a substantial number of properties in which affiliates of PREIT-RUBIN retain equity interests. In such instances, the interests of our management who are also PREIT-RUBIN affiliates may differ from our own. We believe that PREIT-RUBIN's management arrangements with these entities, executed after arms-length negotiation of business terms, are at least as favorable to PREIT-RUBIN as the average of management arrangements with parties unrelated to PREIT-RUBIN. In addition, PREIT-RUBIN leases substantial office space from an entity in which our affiliates have an interest.
Other Risks
We may fail to qualify as a REIT and you may incur tax liabilities as a result. If we fail to qualify as a REIT, we will be subject to Federal income tax at regular corporate rates. In addition, we might be barred from qualification as a REIT for the four years following disqualification. The additional tax incurred at regular corporate rates would reduce significantly the cash flow available for distribution to shareholders and for debt service.
To qualify as a REIT, we must comply with certain highly technical and complex requirements. We cannot be certain we have complied because there are few judicial and administrative interpretations of these provisions. In addition, facts and circumstances that may be beyond our control may affect our ability to qualify as a REIT. We cannot assure you that new legislation, regulations, administrative interpretations or court decisions will not change the tax laws significantly with respect to our qualification as a REIT or with respect to the federal income tax consequences of qualification. We believe that we have qualified as a REIT since our inception and intend to continue to qualify as a REIT. However, we cannot assure you that we have been qualified or will remain qualified.
We may be unable to comply with the strict income distribution requirements applicable to REITs
To obtain the favorable treatment associated with qualifying as a REIT, we are required each year to distribute to our shareholders at least 90% of our net taxable income. We could be required to borrow funds on a short-term basis to meet the distribution requirements that are necessary to achieve the tax benefits associated with qualifying as a REIT, even if conditions are not favorable for borrowing.
Employees
We employ approximately 497 people on a full-time basis.
Item 2.
Item 2. Properties
We refer you to the tables under "Item 1. Business" for the properties we own, both wholly and those in which we have a percentage interest.
PREIT-RUBIN leases 11,421 square feet (2nd Floor) and 28,064 square feet (3rd Floor) of space for its principal offices at 200 S. Broad Street, Philadelphia, PA, under a lease with a remaining term of 8 years. The base rent is $19.50 per square foot.
Titles to all of our real estate investments have been searched and reported to us by reputable title companies. The exceptions listed in the title reports will not, in our opinion, interfere materially with our use of the respective properties for the intended purposes.
Schedule of Real Estate and Accumulated Depreciation
We refer you to Schedule III, "Real Estate and Accumulated Depreciation - December 31, 2001," of the financial statement schedules set forth herein for the amount of encumbrances, initial cost of the properties to us, cost of improvements, the amount at which carried and the amount of the accumulated depreciation.
Item 3.
Item 3. Legal Proceedings
From time to time, we are a plaintiff or defendant in various matters arising out of our usual and customary business of owning and investing in real estate, both directly and through joint ventures and partnerships. We expect to be covered against any such liability by our liability insurance, though we cannot assure you to this effect. We cannot assure you of the results of pending litigation, but we do not believe that resolution of these matters will have a material adverse effect on our financial condition or results of operations.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5.
Item 5. Market for Our Common Equity and Related Shareholder Matters
Shares
Our shares of beneficial interest began trading on the New York Stock Exchange on November 14, 1997 (ticker symbol: PEI). Before then, our shares were traded on the American Stock Exchange.
The following table presents the high and low sales prices for our shares, as reported by the New York Stock Exchange, and cash distributions paid for the periods indicated:
Distributions High Low Paid ---- --- ----
Quarter ended March 31, 2001 $22.36 $18.94 $.51 Quarter ended June 30, 2001 $24.70 $20.50 .51 Quarter ended September 30, 2001 $25.05 $18.25 .51 Quarter ended December 31, 2001 $23.90 $20.50 .51 ----- $2.04
Distributions High Low Paid ---- --- ----
Quarter ended March 31, 2000 $17.25 $14.63 $.47 Quarter ended June 30, 2000 $18.50 $16.00 .47 Quarter ended September 30, 2000 $18.06 $16.88 .47 Quarter ended December 31, 2000 $19.75 $16.81 .51 ----- $1.92
As of December 31, 2001, there were approximately 1,300 holders of record of our shares.
We currently anticipate that cash distributions will continue to be paid in the future in March, June, September and December; however, our future payment of distributions will be at the discretion of our Board of Trustees and will depend on numerous factors, including our cash flow, financial condition, capital requirements, annual distribution requirements under the real estate investment trust provisions of the Internal Revenue Code and other factors that our Board of Trustees deems relevant.
On February 8, 2002 the Company announced a quarterly cash dividend of $0.51 per share. The dividend was paid on March 15, 2002 to shareholders and unitholders of record on February 28, 2002. This marks the 40th anniversary of the Company's first dividend payment and represents the Company's 100th consecutive distribution since its initial dividend payment. Throughout its history the Company has never omitted or reduced a shareholder dividend.
To commemorate the Company's 100th dividend payment, Company officials participated in the closing bell-ringing ceremony at the New York Stock Exchange on Thursday, March 14, 2002.
Units
Class A and Class B Units of PREIT Associates are redeemable by PREIT Associates at the election of the limited partner holding the Units, at the time and for the consideration set forth in PREIT Associates' partnership agreement. In general, and subject to exceptions and limitations, beginning one year following the respective issue dates, "qualifying parties" may give one or more notices of redemption with respect to all or any part of the Class A Units then held by that party. Class B Units are redeemable at the option of the holder at any time after issuance.
If a notice of redemption is given, we have the right to elect to acquire the Units tendered for redemption for our own account, either in exchange for the issuance of a like number of our shares, subject to adjustments for stock splits, recapitalizations and like events, or a cash payment equal to the average of the closing prices of our shares on the ten consecutive trading days immediately before our receipt, in our capacity as general partner of PREIT Associates, of the notice of redemption. If we decline to exercise this right, then on the tenth day following tender for redemption, PREIT Associates will pay a cash amount equal to the number of Units so tendered multiplied by such average closing price.
PREIT Associates issued the Units under exemptions provided by Section 4(2) of the Securities Act of 1933 and Regulation D promulgated under the Securities Act.
Item 6.
Item 6. Selected Financial Data
Selected Financial Information (Thousands of dollars, except per share results)
(1) We changed from a fiscal year end to a calendar year end in 1997.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the Consolidated Financial Statements and the notes thereto included elsewhere in this report.
OVERVIEW The Company owns interests in 22 shopping centers containing an aggregate of approximately 10.9 million square feet, 19 multifamily properties containing 7,242 units and four industrial properties with an aggregate of approximately 0.3 million square feet. The Company also owns interests in four shopping centers currently under development, which are expected to contain an aggregate of approximately 1.3 million square feet upon completion.
The Company also provides management, leasing and development services to 19 additional retail properties containing approximately 8.3 million square feet, seven office buildings containing approximately 1.8 million square feet and two additional multifamily properties with 137 units for affiliated and third-party owners.
The Company has achieved significant growth since 1997 with the acquisition of The Rubin Organization ("TRO") and the formation of PREIT-RUBIN, Inc. ("PRI"). During 2001, the Company continued this trend with four retail properties in its development pipeline, and same store net operating income growth of 4.9% and 3.7% in the retail and multifamily sectors, respectively, excluding the impact of lease termination fees in the retail sector, which were excluded because they were unusually high in 2000.
The Company's net income decreased by $12.5 million to $19.8 million for the year ended December 31, 2001 as compared to $32.3 million for the year ended December 31, 2000. Operating results in 2000 included larger gains on sales of real estate and higher lease termination fees than in 2001. Specifically, the properties sold in 2000 generated gains of $10.3 million as compared to $2.1 million for the properties sold in 2001. Lease termination revenues were $6.0 million in 2000 compared to $1.2 million in 2001.
In 2001, the placement in service of properties previously under development generated net income in excess of the net income lost as a result of the sale of properties in 2000 and 2001. The net result was an increase in Company real estate revenues, with a corresponding increase in property operating expenses, and depreciation, amortization and interest expenses.
Also in 2001, the Company implemented a structural change in accordance with changes to REIT tax laws authorized by the REIT Modernization Act of 1999. Specifically, effective January 1, 2001, the Company began consolidating the activities of its commercial property development and management affiliates, PREIT Services, LLC and PREIT-RUBIN, Inc. The result is reflected in the Company's Consolidated Financial Statements as new management fees, the elimination of intercompany interest income, an increase in general and administrative expenses (not all of which is attributable to the consolidation), and the elimination of Equity in Loss of PREIT-Rubin, Inc.
The Company has investments in 16 partnerships and joint ventures (the "Joint Ventures"). The purpose of the Joint Ventures is to own and operate real estate. It is a common practice in the real estate industry to invest in real estate in this manner. Of the 16 Joint Venture properties, the Company manages 5 of the properties and other parties, including several of the Company's Joint Venture partners, manage the remaining 11 properties. None of the Company's Joint Venture partners are affiliates of the Company. The Company holds a non-controlling interest in the Joint Ventures, and accounts for the Joint Ventures using the equity method of accounting. Under this accounting method, the Company does not consolidate the Joint Ventures. Instead, the Company records the earnings from the Joint Ventures under the income statement caption entitled "Equity in income of partnerships and joint ventures". Changes in the Company's investment in these entities are recorded in the balance sheet caption entitled "Investment in and advances to partnerships and joint ventures, at equity". For further information regarding the Company's Joint Ventures, see Note 2 to the Consolidated Financial Statements.
EQUITY OFFERING On July 11, 2001, the Company issued, through a public offering, 2.0 million shares of beneficial interest at a price of $23.00 per share (the "Offering"). Net proceeds from the Offering after deducting the underwriting discount of $1.5 million and other expenses of approximately $0.2 million were approximately $44.3 million. Proceeds from the Offering were used to repay $20.7 million outstanding on an existing construction loan and $16.5 million of outstanding indebtedness under the Company's Credit Facility. The remaining proceeds were used to fund projects then under development.
CREDIT FACILITY The Company's operating partnership has entered into a $250 million credit facility (the "Credit Facility") consisting of a $175 million revolving credit facility (the "Revolving Facility") and a $75 million construction facility (the "Construction Facility") with a group of banks. The obligations of the Company's operating partnership under the Credit Facility are secured by a pool of ten properties and have been guaranteed by the Company.
The Credit Facility bears interest at the London Interbank Offered Rate (LIBOR) plus margins ranging from 130 to 180 basis points, depending on the ratio of the Company's consolidated liabilities to gross asset value (the "Leverage Ratio"), each as determined pursuant to the terms of the Credit Facility. At December 31, 2001, the margin was set at 165 basis points.
The Credit Facility contains affirmative and negative covenants customarily found in facilities of this type, as well as requirements that the Company maintain, on a consolidated basis: (i) a maximum Leverage Ratio of 65%; (ii) a maximum Borrowing Base Value (as defined in the Credit Facility) of 70% under the Revolving Facility; (iii) a minimum weighted average collateral pool property occupancy of 85%; (iv) minimum tangible net worth of $229 million plus 75% of cumulative net proceeds from the sale of equity securities; (v) minimum ratios of EBITDA to Debt Service and Interest Expense (as defined in the Credit Facility) of 1.40:1 and 1.75:1, respectively, at December 31, 2001; (vi) maximum floating rate debt of $250 million; and (vii) maximum commitments for properties under development not in excess of 25% of Gross Asset Value (as defined in the Credit Facility). As of December 31, 2001, the Company was in compliance with all debt covenants.
LIQUIDITY AND CAPITAL RESOURCES The Company expects to meet its short-term liquidity requirements generally through its available working capital and net cash provided by operations. The Company believes that its net cash provided by operations will be sufficient to allow the Company to make any distributions necessary to enable the Company to continue to qualify as a REIT under the Internal Revenue Code of 1986, as amended. The Company also believes that the foregoing sources of liquidity will be sufficient to fund its short-term liquidity needs for the foreseeable future, including capital expenditures, tenant improvements and leasing commissions. The following are some of the risks that could impact Company cash flows and require the funding of future distributions, capital expenditures, tenant improvements and/or leasing commissions with sources other than operating cash flows:
o Increase in tenant bankruptcies reducing revenue and operating cash flows o Increase in interest rates affecting the Company's net cost of borrowing o Increase in insurance premiums and/or the Company's portion of claims o Eroding market conditions in one or more of our primary geographic regions adversely affecting property operating cash flows
The Company expects to meet certain long-term capital requirements such as property acquisitions, scheduled debt maturities, renovations, expansions and other non-recurring capital improvements through long-term secured and unsecured indebtedness and the issuance of additional equity securities. The Company also expects to increase the funds available under the Revolving Facility and the Construction Facility by placing development properties into the collateral pool upon the achievement of prescribed criteria so as to fund acquisitions, development activities and capital improvements. In general, when the credit markets are tight, the Company may encounter resistance from lenders when the Company seeks financing or refinancing for properties or proposed acquisitions. The Company also may be unable to sell additional equity securities on terms that are favorable to the Company, if at all. Additionally, the following are some of the potential impediments to accessing additional funds under the Credit Facility:
o Reduction in occupancy at one or more properties in the collateral pool o Reduction in appraised value of one or more properties in the collateral pool o Reduction in net operating income at one or more of the properties in the collateral pool o Constraining leverage covenants under the Credit Facility o Increased interest rates affecting our interest coverage ratios o Reduction in the Company's consolidated earnings before interest, taxes, depreciation and amortization (EBITDA)
At December 31, 2001 the Company had outstanding borrowings of $98.5 million under its Revolving Facility and had pledged $1.7 million under the Revolving Facility as collateral for several letters of credit. Of the unused portion of the Revolving Facility of approximately $74.8 million, as of December 31, 2001, the Company's loan covenant restrictions allowed the Company to borrow approximately an additional $4.8 million based on the existing property collateral pool. As noted, one of the additional means of increasing the Company's borrowing capacity via the Revolving Facility is the addition of unencumbered acquisition and/or development properties to the collateral pool. For example, during the first quarter of 2002, the Company placed Creekview Shopping Center, a recently completed retail development project, into the collateral pool, which increased the Company's borrowing capacity to approximately $20 million. The Company expects to place additional projects into the collateral pool to provide additional borrowing capacity, as necessary. The Company believes that the anticipated placement of properties into the collateral pool will allow for sufficient availability of borrowing capacity to fund the development pipeline commitments as well as any short-term liquidity needs.
Mortgage Notes In addition to amounts due under the Credit Facility, a balloon payment of $22.1 million, of which the Company's proportionate share is $8.8 million, comes due in December 2003 with respect to a mortgage loan secured by a property owned by a partnership in which the Company has an interest. Construction and mortgage loans on properties wholly-owned by the Company also mature by their terms. Balloon payments, due in the next three years, on these loans total $6.2 million for a mortgage loan and $4.0 million for a construction loan. The Company is pursuing long-term financing for the construction loan which has a balloon payment coming due in 2002.
Mortgage notes payable which are secured by 18 of the Company's wholly-owned properties are due in installments over various terms extending to the year 2025 with interest at rates ranging from 5.90% to 9.50% with a weighted average interest rate of 7.45% at December 31, 2001. Principal payments are due as follows (thousands of dollars):
Eight of the Company's multifamily communities are financed with $105 million of permanent, fixed-rate, long-term debt. This debt carries a weighted average fixed interest rate of approximately 6.77%. The eight properties secure the non-recourse loans, which amortize over 30 years and mature in May 2009.
Commitments At December 31, 2001, the Company had approximately $13.4 million committed to complete current development and redevelopment projects, which is expected to be financed through the Revolving Facility or through short-term construction loans. In connection with certain development properties, including those development properties acquired as part of the Company's acquisition of TRO, the Company may be required to issue additional units of limited partner interest in its operating partnership ("OP Units") upon the achievement of certain financial targets.
Cash Flows During the year ended December 31, 2001, the Company generated $37.7 million in cash flows from operating activities. Financing activities used cash of $8.1 million including: (i) $29.8 million of distributions to shareholders, (ii) $20.6 million and $11.8 million of repayments on a construction loan and the Revolving Facility, respectively, (iii) $4.6 million of mortgage notes payable principal installments, (iv) $4.1 million of net distributions to OP unit holders and minority partners and (v) $0.4 million payment of deferred financing costs offset by (i) $48.3 million of net proceeds from shares of beneficial interest issued, including amounts raised through the Offering described above and (ii) $15.0 million of proceeds from a mortgage loan. Investing activities used cash of $25.4 million including: (i) $14.5 million of investments in wholly-owned real estate assets, (ii) $29.2 million of investments in property under development and (iii) $1.7 million of investments in partnerships and joint ventures; offset by (i) cash proceeds from sales of real estate interests of $10.2 million, (ii) cash distributions from partnerships and joint ventures in excess of equity in income of $8.2 million and (iii) cash from the consolidation of PRI of $1.6 million.
Contingent Liabilities The Company along with certain of its joint venture partners has guaranteed debt totaling $5.8 million. The debt matures in 2003 (see Note 2 to the consolidated financial statements).
Interest Rate Protection In order to limit exposure to variable interest rates, the Company has entered into interest rate swap agreements as follows:
Fixed Interest Rate Notional Amount vs. 30-day LIBOR Maturity Date - --------------- ---------------- ------------- $20 million 6.02% December 2003 $55 million 6.00% December 2003
Financial Instruments Sensitivity Analysis The analysis below presents the sensitivity of the market value of the Company's financial instruments to selected changes in market interest rates. In order to mitigate the impact of fluctuation in market interest rates, the Company entered into two interest rate swap agreements with notional amounts totaling $75.0 million. All derivative instruments are entered into for other than trading purposes. As of December 31, 2001, the Company's consolidated debt portfolio consisted of $257.9 million in fixed rate mortgage notes, $98.5 million borrowed under its Revolving Facility and $4.0 million of construction notes payable.
Changes in market interest rates have different impacts on the fixed and variable portions of the Company's debt portfolio. A change in market interest rates on the fixed portion of the debt portfolio impacts the net financial instrument position, but it has no impact on interest incurred or cash flows. A change in market interest rates on the variable portion of the debt portfolio impacts the interest incurred and cash flows, but does not impact the net financial instrument position. The sensitivity analysis related to the fixed debt portfolio assumes an immediate 100 basis point move in interest rates from their actual December 31, 2001 levels, with all other variables held constant. A 100 basis point increase in market interest rates would result in a decrease in the net financial instrument position of $10.9 million at December 31, 2001. A 100 basis point decrease in market interest rates would result in an increase in the net financial instrument position of $11.7 million at December 31, 2001. Based on the variable-rate debt included in the Company's debt portfolio, including two interest rate swap agreements, as of December 31, 2001, a 100 basis point increase in interest rates would result in an additional $0.2 million in interest incurred at December 31, 2001. A 100 basis point decrease would reduce interest incurred by $0.2 million at December 31, 2001.
ACQUISITIONS, DISPOSITIONS AND DEVELOPMENT ACTIVITES The Company is actively involved in pursuing and evaluating a number of individual property and portfolio acquisition opportunities. In addition, the Company has stated that a key strategic goal is to obtain managerial control of all of its assets. In certain cases where existing joint venture assets are managed by outside partners, the Company is considering the possible acquisition of these outside interests. In certain cases where that opportunity does not exist, the Company is considering the disposition of its interests. There can be no assurance that the Company will consummate any such acquisition or disposition.
Acquisitions In 2000, the Company entered into an agreement giving it a joint venture interest in Willow Grove Park, a 1.2 million square foot regional mall in Willow Grove, PA. Under the agreement, the Company is responsible for the expansion of the property to include a new Macy's store and decked parking. The total cost of the expansion through December 31, 2001 was $14.1 million. In 2002, the Company expects to make an additional cash contribution of approximately $3.1 million and contribute the expansion asset to the joint venture in return for a subordinated 50% general partnership interest. Also, in 2000, the Company purchased the remaining 35% interest in the Emerald Point multifamily community in Virginia Beach, VA.
Dispositions In 2001, the Company sold parcels of land located at Paxton Town Centre in Harrisburg, PA and Commons at Magnolia in Florence, SC and an undeveloped parcel of land adjacent to the Metroplex Shopping Center in Plymouth Meeting, PA. Consistent with management's stated long-term strategic plan to review and evaluate all joint venture real estate holdings and non-core properties, during 2001 and 2000 the Company sold its interests in several properties. Under this plan, in 2001, the Company sold its interest in the Ingleside Shopping Center in Thorndale, PA, and in 2000, the Company sold the CVS Warehouse and Distribution Center in Alexandria, VA, Valleyview Shopping Center in Wilmington, DE, Forestville Shopping Center in Forestville, MD and the Company's 50% interest in Park Plaza Shopping Center in Pinellas Park, FL.
Development, Expansions and Renovations The Company is involved in a number of development and redevelopment projects, which may require equity funding by the Company or third-party debt or equity financing (see Note 10 to the Consolidated Financial Statements). In each case, the Company will evaluate the financing opportunities available to it at the time a project requires funding. In cases where the project is undertaken with a joint venture partner, the Company's flexibility in funding the project may be governed by the joint venture agreement or the covenants existing in its line of credit, which limit the Company's involvement in joint venture projects.
RELATED PARTY TRANSACTIONS The Company provides management, leasing and development services for partnerships and other ventures in which certain officers of the Company have either direct or indirect ownership interests, including Ronald Rubin, the Company's Chairman and Chief Executive Officer. The Company believes that the terms of the management agreements for these services are no less favorable to the Company than its agreements with non-affiliates.
The Company has no off-balance sheet transactions other than those discussed in the Interest Rate Protection section. No officer or employee of the Company benefits from or has benefited from any off-balance sheet transactions with or involving the Company.
The Company leases its corporate home office space from an affiliate of certain officers of the Company. The lease terms were established at market rates at the commencement date.
In connection with the Company's acquisition of The Rubin Organization ("TRO") in 1997, the Company agreed to issue up to 800,000 limited partnership units over a five-year period ended September 30, 2002 contingent on the Company achieving specified performance targets. Through December 31, 2001, 497,500 contingent limited partnership units had been issued. An additional 167,500
contingent limited partnership units were earned in 2001 but have not yet been issued. The remaining 135,000 units may be earned in 2002. The recipients of the contingent limited partnership units include officers of the Company, including Ronald Rubin, the Company's Chairman and Chief Executive Officer, who were partners of TRO at the time of TRO's acquisition.
SIGNIFICANT ACCOUNTING POLICIES The Company's significant accounting policies are described in Note 1 to the Consolidated Financial Statements of the Company. The Company believes that the most critical accounting policies include revenue recognition and asset impairment.
Revenue Recognition The Company derives over 89% of its revenues from tenant rents and other tenant related activities. Tenant rents include base rents, percentage rents, expense reimbursements (such as common area maintenance, real estate taxes and utilities) and straight-line rents. The Company records base rents on a straight-line basis, which means that the monthly base rent income according to the terms of the Company's leases with its tenants is adjusted so that an average monthly rent is recorded for each tenant over the term of its lease. The difference between base rent and straight-line rent is a non-cash increase or decrease to rental income. In 2001, non-cash straight line rent income was $0.8 million. Percentage rents represent rental income that the tenant pays based on a percentage of its sales. Tenants that pay percentage rent usually pay in one of two ways, either a percentage of their total sales or a percentage of sales over a certain threshold. In the latter case, the Company does not record percentage rent until the sales threshold has been reached. Expense reimbursement payments are generally made monthly based on a budgeted amount determined at the beginning of the year. During the year, the Company's income increases or decreases based on actual expense levels and changes in other factors that influence the reimbursement amounts, such as occupancy levels. In 2001, the Company accrued $0.9 million of income because reimbursable expense levels were greater than amounts billed. These increases/ decreases are non-cash changes to rental income. Shortly after the end of the year, the Company prepares a reconciliation of the actual amounts due from tenants. The difference between the actual amount due and the amounts paid by the tenant throughout the year is billed or credited to the tenant, depending on whether the tenant paid too much or too little during the year.
The Company's other significant source of revenues comes from management activities, including property management, leasing and development. Management fees are generally a percentage of managed property revenues or cash receipts. Leasing fees are earned upon the consummation of new leases. Development fees are earned over the time period of the development activity. These activities are collectively referred to as Management fees in the consolidated statement of income. There are no significant cash versus accrual differences for these activities.
Evaluation of Asset Impairment The Company periodically evaluates its real estate assets for potential impairment indicators. Judgments regarding the existence of impairment indicators are based on legal factors, market conditions and the operational performance of the properties. Future events could cause the Company to conclude that impairment indicators exist and that a property's value is impaired. Any resulting impairment loss would be measured by comparing the individual property's fair value to its carrying value and reflected in the Company's consolidated statements of income.
RESULTS OF OPERATIONS
Year Ended December 31, 2001 compared with Year Ended December 31, 2000
Net income decreased by $12.5 million to $19.8 million ($1.35 per share) for the year ended December 31, 2001 as compared to $32.3 million ($2.41 per share) for the year ended December 31, 2000.
Revenues increased by $11.7 million or 11% to $113.6 million in the year ended December 31, 2001 from $101.9 million for the year ended December 31, 2000. Gross revenues from real estate increased by $1.4 million to $101.9 million for the year ended December 31, 2001 from $100.5 million for the year ended December 31, 2000. This increase in gross revenues resulted from a $4.5 million increase in base rents, a $0.3 million increase in percentage rents and a $1.4 million increase in expense reimbursements. Offsetting this increase is a $4.8 million decrease in lease termination fees from $6.0 million in 2000 to $1.2 million in 2001. Lease termination fees in 2000 included an unusually large $4.0 million fee received in connection with the sale of the CVS Warehouse and Distribution Center. Base rents increased due to a $3.1 million increase in retail rents, resulting from two properties under development in 2000 now placed in service, and higher rents due to new and renewal leases at higher rates in 2001. These positive influences were partially offset by the sale of two retail properties that were sold in the third quarter of 2000, resulting in a $0.8 million reduction in base rents. Base rents also increased due to a $1.8 million increase in multifamily rents, resulting from rental rate increases and higher occupancy rates. The increase in base rents was offset by a $0.4 million decrease in industrial rents due to the sale of the CVS Warehouse. Percentage rents increased due to higher tenant sales levels. Expense reimbursements increased due to two properties under development in 2000 now placed in service, increased property operating expenses and the recovery of 2000 renovation costs over 10 years at Dartmouth Mall. Management fees were $11.3 million for the year ended December 31, 2001. This entire amount represents an increase in consolidated revenues in 2001 because PRI was not consolidated in 2000. Interest and other income decreased by $1.0 million because interest income on a loan with PRI was eliminated in 2001 due to the consolidation of PRI effective January 1, 2001. Without the effects of the consolidation of PRI, the Company's revenues for 2001 would have increased by $1.4 million over revenues in 2000.
Property operating expenses increased by $0.7 million or 2% to $33.4 million for the year ended December 31, 2001 from $32.7 million for the year ended December 31, 2000. Payroll expense increased $0.4 million or 7% due to normal salary increases and increased benefit costs. Real estate and other taxes increased by $0.5 million as two properties under development in 2000 were placed in service and tax rates were slightly higher for properties owned during both periods, partially offset by savings from the sale of two properties in 2000. Utilities decreased by $0.1 million. Other operating expenses decreased by $0.1 million due to decreased repairs and maintenance expenses.
Depreciation and amortization expense increased by $2.3 million to $18.0 million for the year ended December 31, 2001 from $15.7 million for the year ended December 31, 2000 due to $0.9 million from two properties under development in 2000 now placed in service, and $1.4 million from a higher asset base, of which $0.9 million is attributable to the 2000 renovation at Dartmouth Mall.
General and administrative expenses increased by $18.6 million to $23.6 million for the year ended December 31, 2001 from $5.0 million for the year ended December 31, 2000. The primary reason for the increase is the consolidation of PRI in 2001, which accounted for $16.3 million of the increase. General and administrative expenses also increased primarily due to a $1.2 million increase in payroll and benefits expenses, as well as minor increases in several other expense categories totaling $1.1 million in the aggregate.
Interest expense increased by $1.1 million to $25.0 million for the year ended December 31, 2001 as compared to $23.9 million for the year ended December 31, 2000. Retail mortgage interest increased by $0.4 million. Of this amount, $0.6 million was due to a full year of interest on a mortgage for a property placed in service in 2000, offset by $0.2 million due to expected amortization of mortgage balances. Multifamily mortgage interest decreased by $0.1 million due to expected amortization of mortgage balances. Bank loan interest expense increased by $0.8 million because of higher amounts outstanding in 2001 as compared to 2000, plus development assets placed in service in 2001.
Equity in loss of PREIT-RUBIN, Inc. was $6.3 million in the year ended December 31, 2000. There was no corresponding amount in 2001 due to the consolidation of PRI in 2001.
Equity in income of partnerships and joint ventures decreased by $0.9 million to $6.5 million in the year ended December 31, 2001 from $7.4 million in the year ended December 31, 2000. The decrease was primarily due to a mortgage prepayment fee of $0.3 million, and increased interest and bad debt expenses.
Minority interest in the operating partnership decreased $1.3 million to $2.5 million in the year ended December 31, 2001 from $3.8 million in the year ended December 31, 2000.
Gains on sales of interests in real estate were $2.1 million and $10.3 million, respectively, in the years ended December 31, 2001 and 2000 resulting from the sales of the Company's interests in Ingleside Center and land parcels at Florence Commons Shopping Center and Paxton Towne Centre in 2001, and Park Plaza, the CVS Warehouse and Distribution Center, Valley View Shopping Center and Forestville Shopping Center in 2000.
Year Ended December 31, 2000 compared with Year Ended December 31, 1999
Net income increased by $11.6 million to $32.3 million ($2.41 per share) for the year ended December 31, 2000 as compared to $20.7 million ($1.56 per share) for the year ended December 31, 1999.
Revenues increased by $11.5 million or 13% to $101.9 million in the year ended December 31, 2000 from $90.4 million for the year ended December 31, 1999. Gross revenues from real estate increased by $11.3 million to $100.5 million for the year ended December 31, 2000 from $89.2 million in 1999. This increase is due to a $4.0 million increase in base rents, a $5.7 million increase in lease termination fees, a $0.2 million increase in percentage rents and a $1.3 million increase in expense reimbursements. Base rents increased due to a $2.9 million increase in retail rents, resulting from 1999 property acquisitions and development properties placed in service in 2000 and higher rents due to new and renewal leases at higher rates in 2000. Base rents also increased due to a $1.9 million increase in multifamily rents, resulting from rental rate increases and higher occupancy rates. Industrial rents decreased $0.8 million due to the sale of the CVS Warehouse and Distribution Center in Alexandria, Va in April 2000. Lease termination fees in 2000 included a non-recurring $4.0 million fee received in connection with the sale of the CVS Warehouse and Distribution Center and $1.6 million received in connection with the termination of several retail leases, that are also considered non-recurring. Percentage rents increased due to higher tenant sales levels. Expense reimbursements increased due to 1999 property acquisitions and development properties placed in service in 2000 and increased property operating expenses. Other revenues increased due to increased miscellaneous income from the multifamily properties. Interest and other income increased by $0.3 million to $1.4 million for the year ended December 31, 2000 from $1.1 million for the year ended December 31, 1999 due to increased interest income on the loan to PRI.
Property operating expenses increased by $0.9 million or 3% to $32.7 million for the year ended December 31, 2000 from $31.8 million for the year ended December 31, 1999. Real estate and other taxes increased by $0.5 million due to 1999 property acquisitions and development properties placed in service in 2000 and slightly higher tax rates for properties owned during both periods. Other operating expenses increased by $0.4 million due to development properties placed in service in 2000.
Depreciation and amortization expense increased by $1.8 million to $15.7 million for the year ended December 31, 2000 from $13.9 million for the year ended December 31, 1999. The property acquisitions and development properties placed in service referred to above resulted in increased depreciation expense of $0.5 million. Depreciation and amortization expense for properties owned during both periods increased by $1.3 million due to a higher asset base for properties owned during both periods.
General and administrative expenses increased by $1.4 million to $5.0 million for the year ended December 31, 2000 from $3.6 million for the year ended December 31, 1999 primarily due to increased payroll and benefits expense.
Interest expense increased by $1.7 million to $23.9 million for the year ended December 31, 2000 from $22.2 million for the year ended December 31, 1999. Multifamily mortgages that were originated in April 1999 resulted in an increase of $1.7 million. Retail mortgage interest increased by $0.6 million because development properties were placed in service. These increases were partially offset by a decrease in bank loan interest expense of $0.6 million resulting from the capitalization of more interest in 2000 than in 1999 due to development activity.
Equity in income of partnerships and joint ventures increased by $1.2 million to $7.4 million in 2000 primarily attributable to increased income from Whitehall Mall which was under redevelopment in 1999.
Equity in net loss of PREIT-RUBIN, Inc. for the 2000 period was $6.3 million compared with $4.0 million for the 1999 period. The $2.3 million increase in the equity in net loss was primarily due to decreases in non-recurring brokerage commissions of $1.2 million, management fees of $1.0 million, publication fees of $0.4 million and depreciation and amortization expense of $0.2 million, partially offset by decreased operating expenses of $0.5 million due to a $0.3 million decrease in publication costs and a $0.2 million decrease in professional services.
Minority interest in the operating partnership increased $1.7 million to $3.8 million primarily as a result of increased earnings and 167,500 additional contingent OP units earned under the Contribution Agreement related to the acquisition of TRO in 1997.
Gains from the sale of interests in real estate were $10.3 million and $1.8 million for 2000 and 1999, respectively. The 2000 period reflects a gain on the sale of interest in Park Plaza Shopping Center in Pinellas Park, FL, the CVS Warehouse and Distribution Center in Alexandria, VA, and the Valleyview Shopping Center in Wilmington, DE. The 1999 period includes gains on the sale of interests in 135 Commerce Drive, Fort Washington, PA and an undeveloped land parcel at Crest Plaza in Allentown, PA.
SAME STORE PROPERTIES Retail sector operating income, excluding the impact of certain lease termination fees for the year ended December 31, 2001 for the properties owned since January 1, 2000 (the "Same Store Properties"), increased by $2.2 million or 4.9% over the year ended December 31, 2000. This increase resulted from new and renewal leases at higher rates, higher occupancy and higher percentage rents in 2001 as compared to 2000. Multifamily sector same store growth was $1.2 million or 3.7% for the year ended December 31, 2001 due to revenue increases of 4.0% which were partially offset by increases in real estate taxes, utilities, apartment turnover expenses, repairs and maintenance and insurance costs. Certain retail lease terminations were excluded from this comparison because they were unusually large in 2000.
Set forth below is a schedule comparing the net operating income (excluding the impact of retail lease termination fees) for the Same Store Properties for the year ended December 31, 2001, as compared to the year ended December 31, 2000.
(In thousands) Year Ended December 31, ----------------------------- 2001 2000 ----------- ------------ Retail Sector: Revenues $67,629 $64,342 Property operating expenses 20,140 19,057 ------- ------- Net operating income $47,489 $45,285 ======= =======
Multifamily Sector: Revenues $56,394 $54,199 Property operating expenses 23,455 22,448 ------- ------- Net operating income $32,939 $31,751 ======= =======
FUNDS FROM OPERATIONS Funds from operations ("FFO") is defined as income before gains (losses) on property sales and extraordinary items (computed in accordance with generally accepted accounting principles "GAAP") plus real estate depreciation and similar adjustments for unconsolidated joint ventures after adjustments for non-real estate depreciation and amortization of financing costs.
The Company computes funds from operations in accordance with standards established by NAREIT, which may not be comparable to funds from operations reported by other REITs that do not define the term in accordance with the current NAREIT definition, or that interpret the current NAREIT definition differently than the Company. Funds from operations does not represent cash generated from operating activities in accordance with GAAP and should not be considered as an alternative to net income (determined in accordance with GAAP) as an indication of the Company's financial performance or as an alternative to cash flow from operating activities (determined in accordance with GAAP) as a measure of the Company's liquidity, nor is it indicative of funds available to fund the Company's cash needs, including its ability to make cash distributions.
Funds from operations decreased 2% to $44.7 million for the year ended December 31, 2001, as compared to $45.8 million in 2000. The decrease was primarily due to a $4.8 million decrease in lease termination fees offset in part by an improvement in net operating income from same store retail and residential properties, and newly acquired/placed in service properties in 2000.
CAPITAL EXPENDITURES Substantially all of the Company's recurring capital expenditures in 2001 related to its multifamily communities. The multifamily communities expended $3.0 million for recurring capital expenditures, ($409 per unit owned adjusted for partnership interests). The Company's policy is to capitalize expenditures for floor coverings, appliances and major exterior preparation and painting for apartments. During the year, $1.7 million ($241 per unit owned) was expended for floor covering and $0.7 million ($91 per unit owned) for appliances.
COMPETITION The Company's shopping centers compete with other shopping centers in their trade areas as well as alternative retail formats, including catalogues, home shopping networks and internet commerce. Apartment properties compete for tenants with other multifamily properties in their markets. Economic factors, such as employment trends and the level of interest rates, impact shopping center sales as well as a prospective tenant's choice to rent or own his/her residence.
SEASONALITY Shopping center leases often provide for the payment of rents based on a percentage of sales over certain levels. Income from such rents is recorded only after the minimum sales levels have been met. The sales levels are often met in the fourth quarter, during the December holiday season.
INFLATION Inflation can have many effects on the financial performance of the Company. Shopping center leases often provide for the payment of rents based on a percentage of sales, which may increase with inflation. Leases may also provide for tenants to bear all or a portion of operating expenses, which may reduce the impact of such increases on the Company. Apartment leases are normally for a one-year term, which may allow the Company to seek increased rents as leases are renewed or when new tenants are obtained.
FORWARD-LOOKING STATEMENTS The matters discussed in this report, as well as news releases issued from time to time by the Company use forward-looking terminology such as "may," "will," "should," "expect," "anticipate," "estimate," "plan," or "continue" or the negative thereof or other variations thereon, or comparable terminology which constitute "forward-looking statements." Such forward-looking statements (including without limitation, information concerning the Company's continuing dividend levels, planned acquisition, development and divestiture activities, short- and long-term liquidity position, ability to raise capital through public and private offerings of debt and/or equity securities, availability of adequate funds at reasonable cost, revenues and operating expenses for some or all of the properties, leasing activities, occupancy rates, changes in local market conditions or other competitive factors) involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company's results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The Company disclaims any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements contained herein to reflect future events or developments.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
See Item 7 under the heading "Financial Instruments Sensitivity Analysis" for a discussion of our market risk.
Item 8.
Item 8. Financial Statements and Supplementary Data
Our consolidated balance sheets as of December 31, 2001 and 2000, and the related consolidated statements of income, shareholders' equity and cash flows for the years ended December 31, 2001, 2000 and 1999, and the notes thereto, and the report of independent public accountants thereon, and our summary of unaudited quarterly financial information for the years ended December 31, 2001 and 2000, and the financial statement schedules are set forth on pages through of this report.
Item 9.
Item 9. Disagreements on Accounting and Financial Disclosure
None.
PART III
Item 10.
Item 10. Trustees and Executive Officers of the Trust.
The information required by this item is incorporated by reference to, and will be contained in, our definitive proxy statement, which we anticipate will be filed no later than April 30, 2002, and thus we have omitted the Item in accordance with General Instruction G(3) to Form 10-K.
Item 11.
Item 11. Executive Compensation
The information required by this Item is incorporated by reference to, and will be contained in, our definitive proxy statement, which we anticipate will be filed no later than April 30, 2002, and thus we have omitted the item in accordance with General Instruction G(3) to Form 10-K.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is incorporated by reference to, and will be contained in, our definitive proxy statement, which we anticipate will be filed no later than April 30, 2002, and thus we have omitted the item in accordance with General Instruction G(3) to Form 10-K.
Item 13.
Item 13. Certain Relationships and Related Transactions.
The information required by this Item is incorporated by reference to, and will be contained in, our definitive proxy statement, which we anticipate will be filed no later than April 30, 2002, and thus we have omitted the item in accordance with General Instruction G(3) to Form 10-K.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
The following documents are filed as part of this report:
(3) Exhibits
3.1 Trust Agreement as Amended and Restated on December 16, 1997, filed as Exhibit 3.2 to the Trust's Current Report on Form 8-K dated December 16, 1997, is incorporated herein by reference.
3.2 By-Laws of the Trust as amended through December 16, 1997, filed as exhibit 3.3 to the Trust's Current Report on Form 8-K dated December 17, 1997, is incorporated herein by reference.
4.1 First Amended and Restated Agreement of Limited Partnership, dated September 30, 1997, of PREIT Associates, L.P., filed as exhibit 4.15 to the Trust's Current Report on Form 8-K dated October 14, 1997, is incorporated herein by reference.
4.2 First Amendment to the First Amended and Restated Agreement of Limited Partnership, dated September 30, 1997, of PREIT Associates, L.P., filed as exhibit 4.1 to the Trust's Current Report on Form 10-Q for the quarterly period ended September 30, 1998, is incorporated herein by reference.
4.3 Second Amendment to the First Amended and Restated Agreement of Limited Partnership, dated September 30, 1997, of PREIT Associates, L.P., filed as exhibit 4.2 to the Trust's Current Report on Form 10-Q for the quarterly period ended September 30, 1998, is incorporated herein by reference.
4.4 Third Amendment to the First Amended and Restated Agreement of Limited Partnership, dated September 30, 1997, of PREIT Associates, L.P., filed as exhibit 4.3 to the Trust's Current Report on Form 10-Q for the quarterly period ended September 30, 1998, is incorporated herein by reference.
4.5 Rights Agreement dated as of April 30, 1999 between the Trust and American Stock Transfer and Trust Company, as Rights Agent, filed as exhibit 1 to the Trust's Registration Statement on Form 8-A dated April 29, 1999, is incorporated herein by reference.
+10.1 Employment Agreement, dated as of January 1, 1990, between the Trust and Sylvan M. Cohen, filed as exhibit 10.1 to the Trust's Annual Report on Form 10-K for the fiscal year ended August 31, 1990, incorporated herein by reference.
+10.2 Second Amendment to Employment Agreement, dated as of September 29, 1997, between the Trust and Sylvan M. Cohen, filed as exhibit 10.36 to the Trust's Current Report on Form 8-K dated October 14, 1997, is incorporated herein by reference.
10.3 Trust's 1990 Incentive Stock Option Plan, filed as Appendix A to Exhibit "A" to the Trust's Quarterly Report on Form 10-Q for the quarterly period ended November 30, 1990, is incorporated herein by reference.
+10.4 Trust's Amended and Restated 1990 Stock Option Plan for Non-Employee Trustees, filed as Appendix A to the Trust's definitive proxy statement for the Annual Meeting of Shareholders on December 16, 1997 filed on November 18, 1997, is incorporated herein by reference.
+10.5 Amendment No. 2 to the Trust's 1990 Stock Option Plan for Non-Employee Trustees, filed as exhibit 10.9 to the Trust's annual Report on Form 10-K for the fiscal year ended December 31, 2000, is incorporated herein by reference.
+10.6 Amended and Restated Employment Agreement, dated as of March 22, 2002 between the Trust and Jonathan B. Weller.
10.7 The Trust's Amended Incentive and Non Qualified Stock Option Plan, filed as exhibit A to the Trust's definitive proxy statement for the Annual Meeting of Shareholders on December 15, 1994 filed on November 17, 1994, is incorporated herein by reference.
10.8 Amended and Restated 1990 Incentive and Non-Qualified Stock Option Plan of the Trust, filed as exhibit 10.40 to the Trust's Current Report on Form 8-K dated October 14, 1997, is incorporated herein by reference.
10.9 Amendment No. 1 to the Trust's 1990 Incentive and Non-Qualified Stock Option Plan, filed as exhibit 10.16 to the Trust's Annual Report on Form 10-K for the year ended December 31, 1998, is incorporated herein by reference.
+10.10 The Trust's 1993 Jonathan B. Weller Non Qualified Stock Option Plan, filed as exhibit B to the Trust's definitive proxy statement for the Annual Meeting of Shareholders on December 15, 1994 which was filed November 17, 1994, as incorporated herein by reference.
+10.11 Amended and Restated Employment Agreement, dated as of March 22, 2002 between the Trust and Jeffrey Linn.
10.12 PREIT Contribution Agreement and General Assignment and Bill of Sale, dated as of September 30, 1997, by and between the Trust and PREIT Associates, L.P., filed as exhibit 10.15 to the Trust's Current Report on Form 8-K dated October 14, 1997, is incorporated herein by reference.
10.13 Declaration of Trust, dated June 19, 1997, by Trust, as grantor, and Trust, as initial trustee, filed as exhibit 10.16 to the Trust's Current Report on Form 8-K dated October 14, 1997, is incorporated herein by reference.
10.14 TRO Contribution Agreement, dated as of July 30, 1997, among the Trust, PREIT Associates, L.P., and the persons and entities named therein, filed as exhibit 10.17 to the Trust's Current Report on Form 8-K dated October 14, 1997, is incorporated herein by reference.
10.15 First Amendment to TRO Contribution Agreement, dated September 30, 1997, filed as exhibit 10.18 to the Trust's Current Report on Form 8-K dated October 14, 1997, is incorporated herein by reference.
10.16 Contribution Agreement (relating to the Court at Oxford Valley, Langhorne, Pennsylvania), dated as of July 30, 1997, among the Trust, PREIT Associates, L.P., Rubin Oxford, Inc. and Rubin Oxford Valley Associates, L.P., filed as exhibit 10.19 to the Trust's Current Report on Form 8-K dated October 14, 1997, is incorporated herein byreference.
10.17 First Amendment to Contribution Agreement (relating to the Court at Oxford Valley, Langhorne, Pennsylvania), dated September 30, 1997, filed as exhibit 10.20 to the Trust's Current Report on Form 8-K dated October 14, 1997, is incorporated herein by reference.
10.18 Contribution Agreement (relating to Northeast Tower Center, Philadelphia, Pennsylvania), dated as of July 30, 1997, among the Trust, PREIT Associates, L.P., Roosevelt Blvd. Co., Inc. and the individuals named therein, filed as exhibit 10.22 to the Trust's Current Report on Form 8-K dated October 14, 1997, is incorporated herein by reference.
10.19 First Amendment to Contribution Agreement (relating to Northeast Tower Center, Philadelphia, Pennsylvania), dated as of December 23, 1998, among the Trust, PREIT Associates, L.P., Roosevelt Blvd. Co., Inc. and the individuals named therein, filed as exhibit 2.2 to the Trust's Current Report on Form 8-K dated January 7, 1999, is incorporated herein by reference.
10.20 Contribution Agreement (relating to the pre-development properties named therein), dated as of July 30, 1997, among the Trust, PREIT Associates, L.P., and TRO Predevelopment, LLC, filed as exhibit 10.23 to the Trust's Current Report on Form 8-K dated October 14, 1997, is incorporated herein by reference.
10.21 First Amendment to Contribution Agreement (relating to the pre-development properties), dated September 30, 1997, filed as exhibit 10.24 to the Trust's Current Report on Form 8-K dated October 14, 1997, is incorporated herein by reference.
10.22 First Refusal Rights Agreement, effective as of September 30, 1997, by Pan American Associates, its partners and all persons having an interest in such partners with and for the benefit of PREIT Associates, L.P., filed as exhibit 10.25 to the Trust's Current Report on Form 8-K dated October 14, 1997, is incorporated herein by reference.
10.23 Contribution Agreement among the Woods Associates, a Pennsylvania limited partnership, certain general, limited and special limited partners thereof, PREIT Associates, L.P., a Delaware limited partnership, and the Trust dated as of July 24, 1998, as amended by Amendment #1 to the Contribution Agreement, dated as of August 7, 1998, filed as exhibit 2.1 to the Trust's Current Report on Form 8-K dated August 7, 1998, is incorporated herein by reference.
10.24 Purchase and Sale and Contribution Agreement dated as of September 17, 1998 by and among Edgewater Associates #3 Limited Partnership, an Illinois Limited partnership, Equity-Prince George's Plaza, Inc., an Illinois corporation, PREIT Associates, L.P., a Delaware limited partnership and PR PGPlaza LLC, a Delaware limited liability company, filed as exhibit 2.1 to the Trust's Current Report on Form 8-K dated September 17, 1998 is incorporated herein by reference.
10.25 Purchase and Sale Agreement dated as of July 24, 1998 by and between Oaklands Limited Partnership, a Pennsylvania limited partnership, and PREIT Associates, L.P. a Delaware limited partnership, filed as exhibit 2.1 to the Trust's Current Repot on Form 8-K dated August 27, 1998 is incorporated herein by reference.
10.26 Registration Rights Agreement, dated as of September 30, 1997, among the Trust and the persons listed on Schedule A thereto, filed as exhibit 10.30 to the Trust's Current Report on Form 8-K dated October 14, 1997, is incorporated herein by reference.
10.27 Registration Rights Agreement, dated as of September 30, 1997, between the Trust and Florence Mall Partners, filed as exhibit 10.31 to the Trust's Current Report on Form 8-K dated October 14, 1997, is incorporated herein by reference.
10.28 Letter Agreement, dated March 26, 1996, by and among The Goldenberg Group, The Rubin Organization, Inc., Ronald Rubin and Kenneth Goldenberg, filed as exhibit 10.32 to the Trust's Current Report on Form 8-K dated October 14, 1997, is incorporated herein by reference.
10.29 Letter Agreement dated July 30, 1997, by and between The Goldenberg Group and Ronald Rubin, filed as exhibit 10.33 to the Trust's Current Report on Form 8-K dated October 14, 1997, is incorporated herein by reference.
+10.30 Employment Agreement, dated September 30, 1997, between the Trust and Ronald Rubin, filed as exhibit 10.34 to the Trust's Current Report on Form 8-K dated October 14, 1997, is incorporated herein by reference.
+10.31 Employment Agreement effective January 1, 1999 between the Trust and Edward Glickman.
+10.32 Trust Incentive Bonus Plan, effective as of January 1, 1998, filed as exhibit 10.37 to the Trust's Current Report on Form 8-K dated October 14, 1997, is incorporated herein by reference.
+10.33 PREIT-RUBIN, Inc. Stock Bonus Plan Trust Agreement, effective as of September 30, 1997, by and between PREIT-RUBIN, Inc. and CoreStates Bank, N.A., filed as exhibit 10.38 to the Trust's Current Report on Form 8-K dated October 14, 1997, is incorporated herein by reference.
+10.34 PREIT-RUBIN, Inc. Stock Bonus Plan, filed as exhibit 10.39 to the Trust's Current Report on Form 8-K dated October 14, 1997, is incorporated herein by reference.
+10.35 1997 Stock Option Plan, filed as exhibit 10.41 to the Trust's Current Report on Form 8-K dated October 14, 1997, is incorporated herein by reference.
+10.36 Amendment No. 1 to the Trust's 1997 Stock Option Plan, filed as Exhibit 10.48 to the Trust's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, is incorporated herein by reference.
+10.37 The Trust's Special Committee of the Board of Trustees' Statement Regarding Adjustment of Earnout Performance Benchmarks Under the TRO Contribution Agreement, dated December 29, 1998, filed as Exhibit 10.1 to the Trust's Current Report on Form 8-K dated December 18, 1998, is incorporated herein by reference.
+10.38 The Trust's 1998 Non-Qualified Employee Share Purchase Plan, filed as exhibit 4 to the Trust's Form S-3 dated January 6, 1999, is incorporated herein by reference.
+10.39 Amendment No. 1 to the Trust's Non-Qualified Employee Share Purchase Plan, filed as exhibit 10.52 to the Trust's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, is incorporated herein by reference.
+10.40 The Trust's 1998 Qualified Employee Share Purchase Plan, filed as exhibit 4 to the Trust's Form S-8 dated December 30, 1998, is incorporated herein by reference.
+10.41 Amendment No. 1 to the Trust's Qualified Employee Share Purchase Plan, filed as exhibit 10.54 to the Trust's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, is incorporated herein by reference.
+10.42 PREIT-RUBIN Inc. 1998 Stock Option Plan, filed as Exhibit 4 to the Trust's Form S-3 dated March 19, 1999, is incorporated herein by reference.
+10.43 Amendment No. 1 to the PREIT-RUBIN, Inc. 1998 Stock Option Plan, filed as exhibit 10.56 to the Trust's Annual Report on Form 10-K for the fiscal year ended December 31, 1998, is incorporated herein by reference.
10.44 Promissory Note, dated April 13, 1999, by and between the Registrant and GMAC Commercial Mortgage Corporation, a California corporation ("GMAC"), filed as exhibit 10.1 to the Trust's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, is incorporated herein by reference.
10.45 Mortgage and Security Agreement, dated April 13, 1999, by and between the Registrant and GMAC, filed as exhibit 10.2 to the Trust's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, is incorporated herein by reference.
10.46 Promissory Note, dated April 13, 1999, by and between PR Marylander LLC, a Delaware limited liability company ("PR Maryland"), and GMAC, filed as exhibit 10.3 to the Trust's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, is incorporated herein by reference.
10.47 Indemnity Deed of Trust and Security Agreement, dated April 13, 1999, by and between PR Marylander and GMAC, filed as exhibit 10.4 to the Trust's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, is incorporated herein by reference.
10.48 Indemnity Deed of Trust and Security Agreement, dated April 13, 1999, by and between PR Kenwood Gardens LLC, a Delaware limited liability company ("PR Kenwood Gardens"), and GMAC, filed as exhibit 10.5 to the Trust's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, is incorporated herein by reference.
10.49 Mortgage and Security Agreement, dated April 13, 1999, by and between PR Kenwood Gardens and GMAC, filed as exhibit 10.6 to the Trust's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, is incorporated herein by reference.
10.50 Promissory Note, dated April 13, 1999, by and between GP Stones Limited Partnership, a Florida limited partnership ("GP Stones"), and GMAC, filed as exhibit 10.7 to the Trust's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, is incorporated herein by reference.
10.51 Mortgage and Security Agreement, dated April 13, 1999, by and between GP Stones and GMAC, filed as exhibit 10.8 to the Trust's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, is incorporated herein by reference.
10.52 Promissory Note, dated April 13, 1999, by and between PR Boca Palms LLC, a Delaware limited liability company ("PR Boca Palms"), and GMAC, filed as exhibit 10.9 to the Trust's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, is incorporated herein by reference.
10.53 Mortgage and Security Agreement, dated April 13, 1999, by and between PR Boca Palms and GMAC, filed as exhibit 10.10 to the Trust's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, is incorporated herein by reference.
10.54 Promissory Note, dated April 13, 1999, by and between PR Pembroke LLC, a Delaware limited liability company ("PR Pembroke"), and GMAC, filed as exhibit 10.11 to the Trust's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, is incorporated herein by reference.
10.55 Mortgage and Security Agreement, dated April 13, 1999, by and between PR Pembroke and GMAC, filed as exhibit 10.12 to the Trust's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, is incorporated herein by reference.
10.56 Promissory Note, dated April 13, 1999, by and between PR Hidden Lakes LLC, a Delaware limited liability company ("PR Hidden Lakes"), and GMAC, filed as exhibit 10.13 to the Trust's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, is incorporated herein by reference.
10.57 Mortgage and Security Agreement, dated April 13, 1999, by and between PR Hidden Lakes and GMAC, filed as exhibit 10.14 to the Trust's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, is incorporated herein by reference.
10.58 Promissory Note, dated April 13, 1999, by and between PREIT Associates L.P., a Delaware limited partnership ("PREIT Associates"), and GMAC, filed as exhibit 10.15 to the Trust's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, is incorporated herein by reference.
10.59 Mortgage and Security Agreement, dated April 13, 1999, by and between PREIT Associates and GMAC, filed as exhibit 10.16 to the Trust's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, is incorporated herein by reference.
+10.60 The Trust's 1999 Equity Incentive Plan, filed as Appendix A to the Trust's definitive proxy statement for the Annual Meeting of Shareholders on April 29, 1999 filed on March 30, 1999, is incorporated herein by reference.
10.61 Credit Agreement, dated as of December 28, 2000, among PREIT Associates, the Trust, each Subsidiary Borrower (as defined therein) and the leading institution named therein, filed as exhibit 10.67 to the Trust's Current Report on Form 8-K filed on January 5, 2001, is incorporated herein by reference.
10.62 Form of Revolving Note, dated December 28, 2000, filed as exhibit 10.68 to the Trust's Current Report on Form 8-K filed on January 5, 2001, is incorporated herein by reference.
10.63 Swingline Note, dated December 28, 2000, filed as exhibit 10.69 to the Trust's Current Report on Form 8-K filed on January 5, 2001, is incorporated herein by reference.
10.64 Guaranty, dated as of December 28, 2000, executed by the Trust and certain direct or indirect subsidiaries of the Trust, filed as exhibit 10.70 to the Trust's Current Report on Form 8-K filed on January 5, 2001, is incorporated herein by reference.
+10.65 The Trust's Restricted Share Plan for Non-Employee Trustees, effective January 1, 2002.
+10.66 The Trust's 2002-2004 Long-Term Incentive Plan, effective January 1, 2002.
+10.67 Amended and Restated Employment Agreement, dated as of March 22, 2002, between the Trust and David J. Bryant.
+10.68 Amended and Restated Employment Agreement, dated as of March 22, 2002, between the Trust and Raymond J. Trost.
+10.69 Employment Agreement, dated as of March 22, 2002, between the Trust and Bruce Goldman.
+10.70 Amended and Restated Employment Agreement, dated as of March 22, 2002, between PREIT Services, LLC and George Rubin.
+10.71 Amended and Restated Employment Agreement, dated as of March 22, 2002, between PREIT Services, LLC and Douglas Grayson.
+10.72 Amended and Restated Employment Agreement, dated as of March 22, 2002, between PREIT Services, LLC and Joseph Coradino.
21 Listing of subsidiaries
23 Consent of Arthur Andersen LLP (Independent Public Accountants of the Company).
99 Letter Regarding Arthur Andersen LLP
+ Management contract or compensatory plan or arrangement required to be filed as an exhibit to this form.
(b) Report on Form 8-K.
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
Date: March 27, 2002 By: /s/ Jonathan B. Weller --------------------------
Jonathan B. Weller President and Chief Operating Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Ronald Rubin and Jonathan B. Weller, or either of them, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agents, and either of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agents, or either of them or any substitute therefor, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
Report of Independent Public Accountants
To the Shareholders and Trustees of Pennsylvania Real Estate Investment Trust:
We have audited the accompanying consolidated balance sheets of Pennsylvania Real Estate Investment Trust (a Pennsylvania Business Trust) and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements and the schedules referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedules based on our audits. We did not audit the financial statements of Lehigh Valley Mall Associates, a partnership in which the Company has a 50% interest, which is reflected in the accompanying financial statements using the equity method of accounting. The equity in net income of Lehigh Valley Mall Associates represents 17%, 10% and 15%, of net income for the years ended December 31, 2001, 2000, and 1999, respectively. The financial statements of Lehigh Valley Mall Associates were audited by other auditors whose report has been furnished to us and our opinion, insofar as it relates to the amounts included for Lehigh Valley Mall Associates, is based solely on the report of the other auditors.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits, and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of Pennsylvania Real Estate Investment Trust and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed in the index to the financial statement schedules in Item 14 are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic consolidated financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Philadelphia, Pennsylvania March 6, 2002
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the Years Ended December 31, 2001, 2000 and 1999
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 2001, 2000 and 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations Pennsylvania Real Estate Investment Trust, a Pennsylvania business trust (collectively with its subsidiaries, the "Company") is a fully integrated, self-administered and self-managed real estate investment trust ("REIT") which acquires, rehabilitates, develops, and operates retail and multifamily properties. Substantially all of the Company's properties are located in the Eastern United States, with concentrations in the Mid-Atlantic states and in Florida.
The Company's interest in its properties is held through PREIT Associates, L.P. (the "Operating Partnership"). The Company is the sole general partner of the Operating Partnership and, as of December 31, 2001, the Company held a 90.1% interest in the Operating Partnership.
Pursuant to the terms of the partnership agreement, each of the other limited partners of the Operating Partnership has the right to convert his/her interest in the Operating Partnership into cash or, at the election of the Company, into shares on a one-for-one basis, in some cases beginning one year following the respective issue date and in some cases immediately.
Investment in PRI As of December 31, 2000, the Operating Partnership held a 95% economic interest in PREIT-RUBIN, Inc. ("PRI") through its ownership of 95% of PRI's stock, which represented all of the nonvoting common stock of PRI.
Effective January 1, 2001, in exchange for Company shares valued at approximately $0.5 million, the Operating Partnership acquired the 5% minority interest representing all of the voting common stock in PRI, which is now 100% owned by the Operating Partnership, and consolidated. Also effective January 1, 2001, PRI was converted to a Taxable REIT Subsidiary, as defined under the Internal Revenue Code. As a Taxable REIT Subsidiary, PRI is able to pursue certain business opportunities not previously available under the rules governing REITs. On January 1, 2001, the Company also formed PREIT Services, LLC ("PREIT Services") for the purpose of managing the Company's properties that were previously managed by PRI.
The Company's investment in PRI was previously accounted for using the equity method. See Note 3 for further discussion. The excess of the Company's investment over the underlying equity in the net assets of PRI ($12.8 million at December 31, 2001) was amortized using a 35 year life. Effective January 1, 2002, this amount is no longer amortized (see Recent Accounting Pronouncements, below).
Consolidation The Company consolidates its accounts and the accounts of the Operating Partnership and reflects the remaining interest in the Operating Partnership as minority interest. All significant intercompany accounts and transactions have been eliminated in consolidation.
Partnership and Joint Venture Investments The Company accounts for its investment in partnerships and joint ventures which it does not control using the equity method of accounting. These investments, which represent a 0.01% noncontrolling interest in Willow Grove Park (See Note 11) and 40% to 60% noncontrolling ownership interests in the Company's other partnerships and joint ventures, are recorded initially at the Company's cost and subsequently adjusted for the Company's net equity in income and cash contributions and distributions.
Statements of Cash Flows The Company considers all highly liquid short-term investments with an original maturity of three months or less to be cash equivalents. Cash paid for interest, net of amounts capitalized, was $23.7 million, $24.1 million and $22.1 million for the years ended December 31, 2001, 2000 and 1999, respectively. At December 31, 2001 and 2000, cash and cash equivalents totaling $10.3 million and $6.1 million, respectively included tenant escrow deposits of $1.0 million and $1.2 million, respectively.
Capitalization of Costs It is the Company's policy to capitalize interest and real estate taxes related to properties under development and to depreciate these costs over the life of the related assets. For the years ended December 31, 2001, 2000 and 1999, the Company capitalized interest of $2.6 million, $3.3 million and $2.3 million, respectively and real estate taxes of $0.1 million, $0.3 million and $0.1 million, respectively.
The Company capitalizes as deferred costs certain expenditures related to the financing and leasing of certain properties. Capitalized loan fees are amortized over the term of the related loans and leasing commissions are amortized over the term of the related leases.
The Company records certain deposits associated with planned future purchases of real estate as assets when paid. These deposits are transferred to the properties upon consummation of the transaction. The Company capitalizes costs associated with properties held for future development.
The Company capitalizes repairs and maintenance costs that extend the useful life of the asset and that meet certain minimum cost thresholds. Costs that do not meet these thresholds, or do not extend the asset lives are expensed as incurred.
Depreciation The Company, for financial reporting purposes, depreciates its buildings, equipment and leasehold improvements over their estimated useful lives of 5 to 50 years, using the straight-line method of depreciation. For federal income tax purposes, the Company uses the straight-line method of depreciation and the useful lives prescribed by the Internal Revenue Code. Depreciation expense was $17.7 million, $15.3 million and $13.4 million for the years ended December 31, 2001, 2000 and 1999, respectively.
Allowance for Possible Losses The Company reviews the carrying value of long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized. Measurement of an impairment loss for these assets is based on the estimated fair market value of the assets. No impairment losses were recognized in the years ended December 31, 2001, 2000 or 1999.
Derivative Financial Instruments On January 1, 2001, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an Amendment of FASB Statement No. 133." Specifically SFAS No. 133 requires the Company to recognize all derivatives as either assets or liabilities in the consolidated balance sheet and to measure those instruments at fair value. Additionally, the fair value adjustments will affect either shareholders' equity or net income depending on whether the derivative instrument qualifies as a hedge for accounting purposes and, if so, the nature of the hedging activity.
Income Taxes The Company has elected to qualify as a real estate investment trust under Sections 856-860 of the Internal Revenue Code and intends to remain so qualified. Accordingly, no provision for federal income taxes has been reflected in the accompanying consolidated financial statements.
Earnings and profits, which determine the taxability of distributions to shareholders, will differ from net income reported for financial reporting purposes due to differences in cost basis, differences in the estimated useful lives used to compute depreciation and differences between the allocation of the Company's net income and loss for financial reporting purposes and for tax reporting purposes.
The Company is subject to a federal excise tax computed on a calendar year basis. The excise tax equals 4% of the excess, if any, of 85% of the Company's ordinary income plus 95% of the Company's capital gain net income for the year plus 100% of any prior year shortfall over cash distributions during the year, as defined by the Internal Revenue Code. The Company has in the past distributed a substantial portion of its taxable income in the subsequent fiscal year and may also follow this policy in the future.
A provision for excise tax of $0.2 million was recorded for the year ended December 31, 2000. No provision for excise tax was made for the years ended December 31, 2001 or 1999, as no tax was due in those years.
The tax status of per share distributions paid to shareholders was composed of the following for the years ended December 31, 2001, 2000, and 1999:
Year Ended Year Ended Year Ended 12/31/2001 12/31/2000 12/31/1999 Ordinary income $1.80 $1.14 $1.67 Capital gains 0.24 0.78 0.21 ---- ---- ----
$2.04 $1.92 $1.88 ===== ===== =====
PRI is subject to federal, state and local income taxes. The operating results of PRI include a provision or benefit for income taxes. Tax benefits are recorded by PRI to the extent realizable.
The aggregate cost for federal income tax purposes of the Company's investment in real estate was approximately $581 million and $543 million at December 31, 2001 and 2000, respectively.
Fair Value of Financial Instruments Carrying amounts reported in the balance sheet for cash, accounts receivable, accounts payable and accrued expenses, and borrowings under the Credit Facility and the construction loan payable approximate fair value due to the nature of these instruments. Accordingly, these items have been excluded from the fair value disclosures.
Revenue Recognition Rental revenue is recognized on a straight-line basis over the lease term regardless of when payments are due. The straight-line rent adjustment increased revenue by approximately $0.8 million in 2001, $1.2 million in 2000, and $0.7 million in 1999. Certain lease agreements contain provisions that require tenants to reimburse a pro rata share of real estate taxes and certain common area maintenance costs. Percentage rents are recorded after annual tenant sales targets are met.
No tenant represented 10% or more of the Company's rental revenue in any period presented.
Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Reclassifications Certain prior period amounts have been reclassified to conform with the current year presentation.
Recent Accounting Pronouncements In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires the use of the purchase method of accounting for business combinations initiated after June 30, 2001. SFAS No. 142 requires the Company to cease amortizing goodwill that existed as of June 30, 2001, effective January 1, 2002. Recorded goodwill balances will be reviewed for impairment at least annually and written down if the carrying value of the goodwill balance exceeds its fair value.
For goodwill recorded prior to June 30, 2001, the Company will adopt the provisions of SFAS No. 141 and SFAS No. 142 as of January 1, 2002, and accordingly, goodwill will no longer be amortized after December 31, 2001. The Company will conduct an annual review of the goodwill balances for impairment and determine whether any adjustments to the carrying value of goodwill are required. The Company's consolidated balance sheet at December 31, 2001 includes $12.8 million (net of $1.1 million of accumulated amortization expense) of goodwill recognized in connection with the acquisition of PRI in 1997. In accordance with the provisions of these statements, the Company amortized this goodwill through the end of 2001, recognizing approximately $0.4 million of goodwill amortization expense for the year ended December 31, 2001.
While the Company has not yet completed all of the valuation and other work necessary to adopt these accounting standards, it is believed that, except for the impact of discontinuing the amortization of goodwill, there will not be a significant impact on the Company's financial condition or operating results.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). This Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" ("APB 30") for the disposal of a segment of a business as previously defined in APB 30. The provisions of SFAS No. 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years, with earlier application encouraged. The provisions of the Statement generally are to be applied prospectively. The Company is in the process of evaluating the financial statement impact of the adoption of SFAS No. 144.
2. INVESTMENTS IN PARTNERSHIPS & JOINT VENTURES
The following table presents summarized financial information of the equity investments in the Company's 16 partnerships and joint ventures as of December 31, 2001 and 2000, including 3 properties with development activity.
Year Ended Year Ended 12/31/2001 12/31/2000 Thousands of dollars Assets Investments in real estate, at cost: Multifamily properties $57,281 $ 57,200 Retail properties 430,368 410,745 Properties under development 5,986 28,477 ------- --------
Total investments in real estate 493,635 496,422 Less: Accumulated depreciation 86,356 78,025 ------- -------- 407,279 418,397 Cash and cash equivalents 4,390 5,788 Deferred costs, prepaid real estate taxes and other, net 51,666 56,012 ------- -------- Total assets 463,335 480,197 ------- --------
Liabilities and Partners' Equity Mortgage notes payable 401,193 327,684 Construction loans payable -- 61,857 Other liabilities 18,036 33,127 ------- --------
Total liabilities 419,229 422,668 ------- --------
Net equity 44,106 57,529 Less: Partners' share 30,576 36,578 ------- -------- Company's share 13,530 20,951 ------- -------- Advances 150 519 ------- -------- Investment in and advances to partnerships and Joint ventures $13,680 $ 21,470 ======= ========
Mortgage notes payable, which are secured by 14 of the related properties, are due in installments over various terms extending to the year 2016 with interest rates ranging from 6.40% to 8.39% with a weighted average interest rate of 7.42% at December 31, 2001. The Company's proportionate share of principal payments due in the next five years and thereafter is as follows (thousands of dollars):
Year Ended 12/31 Principal Amortization Balloon Payments Total - ---------------- ---------------------- ---------------- ----- 2002 $2,606 $-- $2,606 2003 2,392 8,832 11,224 2004 2,620 -- 2,620 2005 2,860 -- 2,860 2006 2,948 21,760 24,708 2007 and thereafter 16,119 85,665 101,784 ------ ------ ------- $29,545 $116,257 $145,802 ======= ======== ========
The liability under each mortgage note is limited to the particular property, except for a loan with a balance of $5.8 million, which is guaranteed by the partners of the respective partnerships, including the Company.
In 2001, the Company and its joint venture partner secured a mortgage for a property previously under development. The proceeds from the mortgage were used to repay the construction loan on the property. The balance of the loan at December 31, 2001 was $65.4 million. This loan bears an interest rate of 7.25% and matures in October 2011.
The Company's investments in certain partnerships and joint ventures reflect cash distributions in excess of the Company's net investments totaling $1.8 million and $2.1 million as of December 31, 2001 and 2000, respectively.
The following table summarizes the Company's equity in income for the years ended December 31, 2001, 2000 and 1999 (thousands of dollars):
The Company has a 50% partnership interest in Lehigh Valley Mall Associates which is included in the amounts above. Summarized financial information as of December 31, 2001, 2000 and 1999 for this investment, which is accounted for by the equity method, is as follows (thousands of dollars):
Year Ended Year Ended Year Ended 12/31/2001 12/31/2000 12/31/1999
Total assets $19,729 $21,148 $23,283
Mortgages payable 49,599 50,596 51,518
Revenues 18,076 17,295 17,296
Property operating expenses 6,678 5,888 6,057
Interest expense 3,957 4,068 4,103
Net income 6,690 6,565 6,356
Equity in income of partnership 3,345 3,282 3,178
3. INVESTMENT IN PRI PRI is responsible for various activities, including management, leasing and real estate development of properties on behalf of third parties. Prior to January 1, 2001, PRI also provided these services to certain of the Company's properties. Management fees paid by the Company's properties to PRI were included in property operating expenses in the accompanying consolidated statements of income and amounted to $0.9 million and $0.6 million for the years ended December 31, 2000 and 1999. The Company's properties also paid leasing and development fees to PRI totaling $1.3 million and $0.5 million for the years ended December 31, 2000 and 1999. The Company did not pay management, leasing or development fees to PRI in 2001 because it became a consolidated entity on January 1, 2001. Effective January 1, 2001, management services previously provided by PRI for certain of the Company's properties are provided by PREIT Services, which is 100% owned by the Company.
In July 1998, PRI issued 134,500 non-qualified stock options to its employees ("PRI options") to purchase shares of beneficial interest in the Company at a price equal to fair market value of the shares ($23.85) on the grant date. The options vest in four equal annual installments commencing July 15, 1999. At the same time, the Company sold an option to PRI which will enable PRI to purchase an equal number of shares from the Company with the same terms and conditions as the PRI options. The purchase price for the options was determined based on the Black-Scholes option pricing model and was valued at $1.20 per option. There were no stock options issued in 2001, 2000 or 1999.
PRI also provides management, leasing and development services for partnerships and other ventures in which certain officers of the Company and PRI have either direct or indirect ownership interests. Total revenues earned by PRI for such services were $2.9 million, $3.2 million and $3.6 million for the years ended December 31, 2001, 2000 and 1999, respectively. As of December 31, 2001 and 2000, $0.3 million and $0.7 million, respectively, was due from these affiliates. Of these amounts, approximately $0.2 million and $0.7 million, respectively, were collected subsequent to December 31, 2001 and 2000. Market rate interest is charged on the remaining related party receivable balance of $0.1 million. PRI holds a note receivable from a related party with a balance of $0.1 million that is due in installments through 2010 and bears an interest rate of 10% per annum.
Summarized financial information for PRI as of and for the years ended December 31, 2000 and 1999 is as follows (2001 information is not presented because PRI was consolidated effective January 1, 2001):
(Thousands of dollars): Year Ended Year Ended 12/31/2000 12/31/1999
Total assets $ 6,782 $ 7,185 ======= ======= Management fees $ 3,739 $ 4,526 Leasing commissions 4,113 5,312 Development fees 617 691 Other revenues 3,620 4,382 ------- ------- Total revenue $12,089 $14,911 ======= ======= Net loss $(6,624) $(4,237) ======= ======= Company's share of net loss $(6,307) $(4,036) ======= =======
4. MORTGAGE NOTES, BANK AND CONSTRUCTION LOANS PAYABLE
Mortgage Notes Payable Mortgage notes payable which are secured by 18 of the Company's properties are due in installments over various terms extending to the year 2025 with interest at rates ranging from 5.90% to 9.50% with a weighted average interest rate of 7.45% at December 31, 2001. Principal payments are due as follows (thousands of dollars):
Year Ended 12/31 Principal Amortization Balloon Payments Total - ---------------- ---------------------- ---------------- ----- 2002 $4,917 $-- $4,917 2003 5,080 6,201 11,281 2004 5,274 -- 5,274 2005 5,674 12,500 18,174 2006 6,074 -- 6,074 2007 and thereafter 15,789 196,364 212,153 ------ ------- ------- $42,808 $215,065 $257,873 ======= ======== ========
The fair value of the mortgage notes payable was approximately $259.1 million at December 31, 2001 based on year-end interest rates and market conditions.
Credit Facility In December 2000, the Operating Partnership entered into a Credit Facility consisting of a $175 million three-year revolving credit facility (the "Revolving Facility") and a $75 million two-year construction finance facility (the "Construction Facility"). The obligations of the Operating Partnership under the Credit Facility are secured by a pool of properties and have been guaranteed by the Company.
The Credit Facility bears interest at the London Interbank Offered Rate ("LIBOR") plus margins ranging from 130 to 180 basis points, depending on the Company's consolidated Leverage Ratio, as defined by the Credit Facility.
The Credit Facility is secured by 10 of the Company's existing retail and industrial properties. The facility contains covenants and agreements which affect, among other things, the amount of permissible borrowings and other liabilities of the Company. The initial term of the Revolving Facility may be extended for an additional year on the lenders' approval or, alternatively, may be converted by the Company into a two-year amortizing term loan at the beginning of the third year. In addition, at the Company's discretion, properties financed under the Construction Facility may be placed in the collateral pool for the Revolving Facility upon their completion.
As of December 31, 2001 and 2000, the Operating Partnership had $98.5 million and $110.3 million outstanding on the Revolving Facility. The weighted average interest rate based on amounts borrowed on the Company's credit facilities (old and new) was 5.84%, 8.22% and 6.95% for the years ended December 31, 2001, 2000 and 1999, respectively. The interest rate at December 31, 2001 was 3.52%. Derivative instruments fixed the interest rate on $75.0 million of the $98.5 million outstanding at December 31, 2001 (see Note 5).
The Credit Facility contains affirmative and negative covenants customarily found in facilities of this type, as well as requirements that the Company maintain, on a consolidated basis: (i) a maximum Leverage Ratio of 65%; (ii) a maximum Borrowing Base Value (as defined in the Credit Facility) of 70% under the Revolving Facility; (iii) a minimum weighted average collateral pool property occupancy of 85%; (iv) minimum tangible net worth of $229 million plus 75% of cumulative net proceeds from the sale of equity securities; (v) minimum ratios of EBITDA to Debt Service and Interest Expense (as defined in the Credit Facility) of 1.40:1 and 1.75:1, respectively, at December 31, 2001; (vi) maximum floating rate debt of $250 million; and (vii) maximum commitments for properties under development not in excess of 25% of Gross Asset Value (as defined in the Credit Facility). As of December 31, 2001, the Company was in compliance with all debt covenants.
Construction Loan Payable The Company has a construction loan outstanding with a balance of $4.0 million and $24.6 million at December 31, 2001 and 2000. The construction loan bears interest at the rate of LIBOR plus 1.75% or 3.62%, at December 31, 2001. The loan is secured by a first mortgage on the property under development. The loan maturity was extended to 2002, and the Company is currently pursuing long-term financing for the property.
5. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
As of January 1, 2001, the adoption of SFAS 133 resulted in derivative instruments reported on the consolidated balance sheet as liabilities of $0.6 million; and an adjustment of $0.6 million to accumulated other comprehensive loss, which are gains and losses not affecting distributions in excess of net income. The Company recorded additional other comprehensive loss of $3.4 million to recognize the change in value during the year ending December 31, 2001.
In the normal course of business, the Company is exposed to the effect of interest rate changes. The Company limits these risks by following established risk management policies and procedures including the use of derivatives. For interest rate exposures, derivatives are used primarily to align rate movements between interest rates associated with the Company's leasing income and other financial assets with interest rates on related debt, and manage the cost of borrowing obligations.
In the normal course of business, the Company uses a variety of derivative financial instruments to manage, or hedge, interest rate risk. The Company requires that hedging derivative instruments are effective in reducing interest rate risk exposure. This effectiveness is essential for qualifying for hedge accounting. Instruments that meet hedging criteria are formally designated as hedges at the inception of the derivative contract. When the terms of an underlying transaction are modified, or when the underlying hedged item ceases to exist, all changes in the fair value of the instrument are marked-to-market with changes in value included in net income each period until the instrument matures. Any derivative instrument used for risk management that does not meet the hedging criteria is marked-to-market each period with unrealized gains and losses reported in earnings.
To determine the fair values of derivative instruments, the Company uses a variety of methods and assumptions that are based on market conditions and risks existing at each balance sheet date. For the majority of financial instruments, including most derivatives, long-term investments and long-term debt, standard market conventions and techniques such as discounted cash flow analysis, option pricing models, replacement cost, and termination cost are used to determine fair value. All methods of assessing fair value result in a general approximation of value, and such value may never actually be realized.
The Company has a policy of only entering into contracts with major financial institutions based upon their credit ratings and other factors. When viewed in conjunction with the underlying and offsetting exposure that the derivatives are designed to hedge, the Company has not sustained any material adverse effect on its net income or financial position from the use of derivatives.
To manage interest rate risk, the Company may employ options, forwards, interest rate swaps, caps and floors or a combination thereof depending on the underlying exposure. The Company undertakes a variety of borrowings: from lines of credit, to medium- and long-term financings. To limit overall interest cost, the Company may use interest rate instruments, typically interest rate swaps, to convert a portion of its variable rate debt to fixed rate debt, or even a portion of its fixed-rate debt to variable rate. Interest rate differentials that arise under these swap contracts are recognized in interest expense over the life of the contracts. 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. The Company 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 December 31, 2001, $4.0 million in deferred losses were recognized, $3.5 million of which is included in accumulated other comprehensive loss, a component of shareholders' equity, with the remainder credited to minority interest.
The following table summarizes the notional values and fair values of the Company's derivative financial instruments at December 31, 2001. The notional value provides an indication of the extent of the Company's involvement in these instruments at that time, but does not represent exposure to credit, interest rate or market risks.
On December 31, 2001, the derivative instruments were reported at their fair value as a liability of $4.0 million. This amount is included in accrued expenses and other liabilities on the accompanying consolidated balance sheet.
Interest rate hedges that are designated as cash flow hedges hedge the future cash outflows on debt. Interest rate swaps that convert variable payments to fixed payments, interest rate caps, floors, collars, and forwards are cash flow hedges. The unrealized gains/losses in the fair value of these hedges are reported on the consolidated balance sheet with a corresponding adjustment to either accumulated other comprehensive income or earnings depending on the type of hedging relationship. If the hedging transaction is a cash flow hedge, then the offsetting gains/losses are reported in accumulated other comprehensive income/loss. Over time, the unrealized gains and losses held in accumulated other comprehensive income/loss will be charged to earnings. This treatment matches the adjustment recorded when the hedged items are also recognized in earnings. Within the next twelve months, the Company expects to record a charge to earnings of approximately $2.7 million of the current balance held in accumulated other comprehensive income/loss.
The Company may hedge its exposure to the variability in future cash flows for forecasted transactions over a maximum period of 12 months. During the forecasted period, unrealized gains and losses in the hedging instrument will be reported in accumulated other comprehensive income. Once the hedged transaction takes place, the hedge gains and losses will be reported in earnings during the same period in which the hedged item is recognized in earnings.
6. NET INCOME PER SHARE
Basic Earnings Per Share ("EPS") is based on the weighted average number of common shares outstanding during the year. Diluted EPS is based on the weighted average number of shares outstanding during the year, adjusted to give effect to common share equivalents. A reconciliation between basic and diluted EPS is shown below.
(1) OP Unit conversions in 2001, 2000 and 1999 have no effect on diluted earnings per share.
7. BENEFIT PLANS
The Company maintains a 401(k) Plan (the "Plan") in which substantially all of its officers and employees are eligible to participate. The Plan permits eligible participants, as defined in the Plan agreement, to defer up to 15% of their compensation, and the Company, at its discretion, may match a percentage of the employees' contributions. The Company's and its employees' contributions are fully vested, as defined in the Plan agreement. The Company's contributions to the Plan for the years ended December 31, 2001, 2000 and 1999 were $247,000, $25,000 and $34,000, respectively.
The Company also maintains a Supplemental Retirement Plan (the "Supplemental Plan") covering certain senior management employees. The Supplemental Plan provides eligible employees through normal retirement date, as defined in the Supplemental Plan agreement, a benefit amount similar to the amount that would have been received under the provisions of a pension plan that was terminated in 1994. Contributions recorded by the Company under the provisions of this plan were $62,000, $65,000 and $62,000 for the years ended December 31, 2001, 2000 and 1999, respectively.
The Company also maintains share purchase plans through which the Company's employees may purchase shares of beneficial interest at a 15% discount of the fair market value. In 2001, 2000 and 1999, 47,000, 43,000 and 23,000 shares were purchased for total consideration of $0.9 million, $0.6 million and $0.3 million, respectively.
8. STOCK OPTION PLANS
The Company has five plans that provide for the granting of options to purchase shares of beneficial interest to key employees and nonemployee trustees of the Company. Options are granted at the fair market value of the shares on the date of the grant. The options vest and are exercisable over periods determined by the Company, but in no event later than 10 years from the grant date. Changes in options outstanding are as follows:
(1) Amount is net of 41,036 and 118,500 restricted stock awards issued to certain employees as incentive compensation in 2001 and 2000. The restricted stock was awarded at its fair value that ranged from $21.93 to $23.58 per share in 2001 and $18.16 to $18.56 per share in 2000 for a total value of $0.9 million in 2001 and $2.2 million in 2000. Restricted stock vests ratably over periods of three to five years. The Company recorded compensation expense of $1.2 million in 2001 and $0.4 million in 2000 related to these restricted stock awards.
At December 31, 2001, options for 657,750 shares of beneficial interest with an aggregate purchase price of $14.9 million (average of $22.71 per share) were exercisable.
Outstanding options as of December 31, 2001 have a weighted average remaining contractual life of 5.2 years, an average exercise price of $22.64 per share and an aggregate purchase price of $19.4 million.
The following table summarizes information relating to all options outstanding at December 31, 2001.
The fair value of each option granted was estimated on the grant date using the Black-Scholes options pricing model and the assumptions presented below:
2001 2000 1999
Weighted average fair value $0.52 $0.81 $1.06 Expected life in years 5 5 5 Risk-free interest rate 4.60% 5.80% 4.59% Volatility 12.99% 17.34% 19.05% Dividend yield 9.42% 10.04% 9.40%
The Company accounts for stock-based compensation using the intrinsic value method in APB Opinion No. 25 as permitted under SFAS No. 123, "Accounting for Stock-Based Compensation". If compensation cost for these plans had been determined using the fair value method prescribed by SFAS No. 123, the impact on the Company's net income and net income per share would have been immaterial.
9. OPERATING LEASES
The Company's multifamily apartment units are typically leased to residents under operating leases for a period of one year. The Company's retail properties are leased to tenants under operating leases with expiration dates extending to the year 2025.
Future minimum rentals under noncancelable operating leases with terms greater than one year are as follows:
Years Ended 12/31 2002 $ 35,844 2003 34,110 2004 32,018 2005 29,439 2006 24,472 2007 and thereafter 143,902
The total future minimum rentals as presented do not include amounts that may be received as tenant reimbursements for charges to cover increases in certain operating costs or contingent amounts that may be received as percentage rents.
10. COMMITMENTS AND CONTINGENCIES
The Company leases office space from an affiliate of certain officers of the Company. Total rent expense under this lease, which expires in 2010, was $0.9 million, $0.7 million and $0.6 million for the years ended December 31, 2001, 2000 and 1999, respectively. Minimum rental payments under this lease are $0.7 million per year from 2002 to 2010.
The Company is involved in a number of development and redevelopment projects which may require equity funding by the Company, or third-party debt or equity financing. In each case, the Company will evaluate the financing opportunities available to it at the time the project requires funding. In cases where the project is undertaken with a joint venture partner, the Company's flexibility in funding the project may be governed by the joint venture agreement or the covenants existing in its line of credit which limit the Company's involvement in joint venture projects. At December 31, 2001, the Company had approximately $13.4 million committed to complete current development and redevelopment projects, which is expected to be financed through the Company's Revolving Facility or through short-term construction loans.
In connection with certain development properties, the Company may be required to issue additional OP units upon the achievement of certain financial results. Further, the Company is obligated to acquire the remaining 11% interest in a retail property in 2002.
In the normal course of business, the Company becomes involved in legal actions relating to the ownership and operations of its properties and the properties it manages for third parties. In management's opinion, the resolutions of these legal actions are not expected to have a material adverse effect on the Company's consolidated financial position or results of operations.
The Company is aware of certain environmental matters at certain of its properties, including ground water contamination, above-normal radon levels and the presence of asbestos containing materials and lead-based paint. The Company has, in the past, performed remediation of such environmental matters, and, at December 31, 2001, the Company is not aware of any significant remaining potential liability relating to these environmental matters. The Company may be required in the future to perform testing relating to these matters. The Company has reserved approximately $0.1 million to cover possible environmental costs at a property formerly owned by the Company.
As of December 31, 2001, eleven executive officers of the Company had employment agreements that provided for aggregate initial base compensation of $2.7 million subject to increases as approved by the Company's compensation committee, among other incentive compensation.
11. ACQUISITIONS AND DISPOSITIONS
In January 2001, a partnership in which the Company owns a 50% interest sold an undeveloped parcel of land adjacent to the Metroplex Shopping Center, which is owned by the partnership, for approximately $7.6 million. The Company recorded a nominal gain on the land sale.
In March 2001, the Company sold its interest in Ingleside Shopping Center, located in Thorndale, PA for $5.1 million. The Company's proportionate share of the gain on the sale of the property was approximately $1.8 million.
In May 2001, the Company sold a parcel of land at Paxton Towne Centre in Harrisburg, PA for $6.3 million resulting in a gain of $1.3 million.
In June 2001, the Company sold a parcel of land at Commons of Magnolia in Florence, SC. The Company received cash at the closing of approximately $1.3 million, and is entitled to receive a development fee of $1.5 million for the construction of the store that will be built on the site, for total proceeds expected from the transaction, upon completion of the development, of $2.8 million. The Company recorded a loss on this transaction of $1.0 million.
In 2000, the Company entered into an agreement giving it a 0.01% joint venture interest in Willow Grove Park, a 1.2 million square foot regional mall in Willow Grove, PA. Under the agreement, the Company was responsible for the expansion of the property to include a new Macy's store and decked parking. The total cost of the expansion through December 31, 2001 was $14.1 million. In 2002, the Company expects to make an additional cash contribution of approximately $3.1 million and contribute the expansion asset to the joint venture in return for a subordinated 50% general partnership interest.
During 2000, the Company acquired the remaining 35% interest in a multifamily property, (Emerald Point). The Company paid approximately $11.0 million for the interest, including $5.7 million in assumed debt and $5.3 million borrowed under the line of credit.
During 2000, the Company sold Forestville Shopping Center, Valley View Shopping Center, CVS Warehouse and Distribution Center, and its 50% interest in Park Plaza Shopping Center. Total proceeds from these sales was approximately $23.0 million. The property sales resulted in gains totaling approximately $10.3 million.
During 1999, the Company acquired two shopping centers (Home Depot at Northeast Tower Center and Florence Commons), three shopping center development sites (Creekview Shopping Center, Paxton Town Centre and Metroplex Shopping Center), and an additional 10% interest in Rio Mall, in which it now owns a 60% interest. The Company paid approximately $51.4 million, consisting of $28.0 million in cash, $12.5 million in assumed debt, $9.9 million borrowed under the line of credit and $1.0 million of OP units.
Each of these acquisitions was accounted for by the purchase method of accounting. The results of operations for the acquired properties have been included from their respective purchase dates. The 2001, 2000 and 1999 acquisitions did not result in a requirement to present pro forma information.
In connection with the Company's 1997 acquisition of The Rubin Organization ("TRO") and certain other property interests, the Company agreed to issue up to 800,000 additional Class A OP units over a five-year period ending September 30, 2002, if certain earnings are achieved. The Company accounts for the issuance of contingent OP units as additional purchase price when such amounts are determinable. Through December 31, 2001, 665,000 contingent OP units had been earned, resulting in additional purchase price of approximately $12.9 million.
12. SEGMENT INFORMATION
The Company has four reportable segments: (1) retail properties, (2) multifamily properties, (3) development and other, and (4) corporate. The retail segment includes the operation and management of 22 regional and community shopping centers (12 wholly-owned and 10 owned in joint venture form). The multifamily segment includes the operation and management of 19 apartment communities (14 wholly-owned and 5 owned in joint venture form). The other segment includes the operation and management of 4 retail properties under development (3 wholly-owned and 1 owned in joint venture form) and 4 industrial properties (all wholly-owned). The corporate segment includes cash and investment management, real estate management and certain other general support functions.
The accounting policies for the segments are the same as those described in Note 1, except that, for segment reporting purposes, the Company uses the "proportionate-consolidation method" of accounting (a non-GAAP measure) for joint venture properties, instead of the equity method of accounting. The Company calculates the proportionate-consolidation method by applying its percentage ownership interest to the historical financial statements of their equity method investments.
The chief operating decision-making group for the Company's Retail, Multifamily, Development and Other and Corporate segments is comprised of the Company's President, Chief Executive Officer and the lead executives of each of the Company's operating segments. The lead executives of each operating segment also manage the profitability of each respective segment. The operating segments are managed separately because each operating segment represents different property types, as well as properties under development and corporate services.
13. SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
The following presents a summary of the unaudited quarterly financial information for the years ended December 31, 2001 and 2000.
(1) Includes gains on sale of real estate of approximately $1.8 million (1st Quarter 2001), $0.3 million (2nd Quarter 2001), $2.3 million (1st Quarter 2000), $6.6 million (2nd Quarter 2000), and $1.3 million (3rd Quarter 2000).
(2) Includes lease termination fees of approximately $6.0 million in 2nd Quarter.
Schedule II Pennsylvania Real Estate Investment Trust Valuation and Qualifying Accounts
Schedule III PREIT - Investment in Real Estate as of December 31, 2001 (Thousands of dollars)
(RESTUBBED TABLE)
The aggregate cost for Federal income tax purposes of the Company's investment in real estate was approximately $581 million and $543 million at December 31, 2001 and 2000, respectively. The changes in total real estate and accumulated depreciation for the years ended December 31, 2001 and 2000 are as follows:
EXHIBIT INDEX