UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
☒ | |
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period endedSeptember 30, 2017
or
☐ | |
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from
toCommission File Number: 1-6300
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
(Exact name of Registrant as specified in its charter)
Pennsylvania | 23-6216339 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
One Commerce Square 2005 Market Street, Suite 1000 Philadelphia, PA | 19103 | |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code (215) 875-0700
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of Exchange on which registered |
Shares of Beneficial Interest, par value $1.00 per share | PEI | New York Stock Exchange |
Series B Preferred Shares, par value $0.01 per share | PEIPrB | New York Stock Exchange |
Series C Preferred Shares, par value $0.01 per share | PEIPrC | New York Stock Exchange |
Series D Preferred Shares, par value $0.01 per share | PEIPrD | New York Stock Exchange |
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☒ | |
Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONTENTS
Page | ||||
Item 1. | 1 | |||
Consolidated Balance Sheets—September 30, | ||||
Consolidated Statements of Equity—Three and Nine Months Ended September 30, | ||||
Consolidated Statements of Cash Flows—Nine Months Ended September 30, | 7 | |||
8 | ||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 26 | ||
Item 3. | 52 | |||
Item 4. | 53 | |||
PART II—OTHER INFORMATION | ||||
Item 1. | 54 | |||
Item 1A. | 54 | |||
Item 2. | 59 | |||
Item 3. | 60 | |||
Item 4. | Not Applicable | |||
Item 5. | Not Applicable | |||
Item 6. | 61 | |||
63 |
Except as the context otherwise requires, references in this Quarterly Report on Form 10-Q to “we,” “our,” “us,” the “Company” and “PREIT” refer to Pennsylvania Real Estate Investment Trust and its subsidiaries, including our operating partnership, PREIT Associates, L.P. References in this Quarterly Report on Form 10-Q to “PREIT Associates” or the “Operating Partnership” refer to PREIT Associates, L.P.
refer to the reorganized Company following emergence from the Chapter 11 Cases described herein.
Item 1. FINANCIAL STATEMENTS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED BALANCE SHEETS
|
| September 30, 2020 |
|
| December 31, 2019 |
| ||
(in thousands, except per share amounts) |
| (Unaudited) |
|
|
|
|
| |
ASSETS: |
|
|
|
|
|
|
|
|
INVESTMENTS IN REAL ESTATE, at cost: |
|
|
|
|
|
|
|
|
Operating properties |
| $ | 3,163,656 |
|
| $ | 3,099,034 |
|
Construction in progress |
|
| 46,872 |
|
|
| 106,011 |
|
Land held for development |
|
| 5,881 |
|
|
| 5,881 |
|
Total investments in real estate |
|
| 3,216,409 |
|
|
| 3,210,926 |
|
Accumulated depreciation |
|
| (1,280,117 | ) |
|
| (1,202,722 | ) |
Net investments in real estate |
|
| 1,936,292 |
|
|
| 2,008,204 |
|
INVESTMENTS IN PARTNERSHIPS, at equity: |
|
| 176,070 |
|
|
| 159,993 |
|
OTHER ASSETS: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
| 36,373 |
|
|
| 12,211 |
|
Tenant and other receivables |
|
| 64,367 |
|
|
| 41,261 |
|
Intangible assets (net of accumulated amortization of $19,896 and $18,248 at September 30, 2020 and December 31, 2019, respectively) |
|
| 11,756 |
|
|
| 13,404 |
|
Deferred costs and other assets, net |
|
| 138,821 |
|
|
| 103,688 |
|
Assets held for sale |
|
| 1,384 |
|
|
| 12,506 |
|
Total assets |
| $ | 2,365,063 |
|
| $ | 2,351,267 |
|
LIABILITIES: |
|
|
|
|
|
|
|
|
Mortgage loans payable, net |
| $ | 890,848 |
|
| $ | 899,753 |
|
Term Loans, net |
|
| 559,040 |
|
|
| 548,025 |
|
Revolving Facilities |
|
| 375,000 |
|
|
| 255,000 |
|
Tenants’ deposits and deferred rent |
|
| 10,601 |
|
|
| 13,006 |
|
Distributions in excess of partnership investments |
|
| 77,848 |
|
|
| 87,916 |
|
Fair value of derivative liabilities |
|
| 27,694 |
|
|
| 13,126 |
|
Accrued expenses and other liabilities |
|
| 105,637 |
|
|
| 107,016 |
|
Total liabilities |
|
| 2,046,668 |
|
|
| 1,923,842 |
|
COMMITMENTS AND CONTINGENCIES: |
|
|
|
|
|
|
|
|
EQUITY: |
|
|
|
|
|
|
|
|
Series B Preferred Shares, $.01 par value per share; 25,000 shares authorized; 3,450 shares issued and outstanding; liquidation preference of $87,840 and $86,250 at September 30, 2020 and December 31, 2019, respectively |
|
| 35 |
|
|
| 35 |
|
Series C Preferred Shares, $.01 par value per share; 25,000 shares authorized; 6,900 shares issued and outstanding; liquidation preference of $175,605 and $172,500 at September 30, 2020 and December 31, 2019, respectively |
|
| 69 |
|
|
| 69 |
|
Series D Preferred Shares, $.01 par value per share; 25,000 shares authorized; 5,000 shares issued and outstanding; liquidation preference of $127,149 and $125,000 at September 30, 2020 and December 31, 2019, respectively |
|
| 50 |
|
|
| 50 |
|
Shares of beneficial interest, $1.00 par value per share; 200,000 shares authorized; 79,490 and 77,550 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively |
|
| 79,490 |
|
|
| 77,550 |
|
Capital contributed in excess of par |
|
| 1,770,070 |
|
|
| 1,766,883 |
|
Accumulated other comprehensive loss |
|
| (27,828 | ) |
|
| (12,556 | ) |
Distributions in excess of net income |
|
| (1,504,371 | ) |
|
| (1,408,352 | ) |
Total equity—Pennsylvania Real Estate Investment Trust |
|
| 317,515 |
|
|
| 423,679 |
|
Noncontrolling interest |
|
| 880 |
|
|
| 3,746 |
|
Total equity |
|
| 318,395 |
|
|
| 427,425 |
|
Total liabilities and equity |
| $ | 2,365,063 |
|
| $ | 2,351,267 |
|
(in thousands, except per share amounts) | September 30, 2017 | December 31, 2016 | |||||
(unaudited) | |||||||
ASSETS: | |||||||
INVESTMENTS IN REAL ESTATE, at cost: | |||||||
Operating properties | $ | 3,084,759 | $ | 3,196,529 | |||
Construction in progress | 129,614 | 97,575 | |||||
Land held for development | 5,881 | 5,910 | |||||
Total investments in real estate | 3,220,254 | 3,300,014 | |||||
Accumulated depreciation | (1,082,840 | ) | (1,060,845 | ) | |||
Net investments in real estate | 2,137,414 | 2,239,169 | |||||
INVESTMENTS IN PARTNERSHIPS, at equity: | 201,000 | 168,608 | |||||
OTHER ASSETS: | |||||||
Cash and cash equivalents | 76,942 | 9,803 | |||||
Tenant and other receivables (net of allowance for doubtful accounts of $6,599 and $6,236 at September 30, 2017 and December 31, 2016, respectively) | 34,745 | 39,026 | |||||
Intangible assets (net of accumulated amortization of $12,643 and $11,064 at September 30, 2017 and December 31, 2016, respectively) | 18,167 | 19,746 | |||||
Deferred costs and other assets, net | 107,304 | 93,800 | |||||
Assets held for sale | 49,074 | 46,680 | |||||
Total assets | $ | 2,624,646 | $ | 2,616,832 | |||
LIABILITIES: | |||||||
Mortgage loans payable, net | $ | 1,032,578 | $ | 1,222,859 | |||
Term Loans, net | 547,567 | 397,043 | |||||
Revolving Facility | — | 147,000 | |||||
Tenants’ deposits and deferred rent | 12,234 | 13,262 | |||||
Distributions in excess of partnership investments | 59,871 | 61,833 | |||||
Fair value of derivative liabilities | 445 | 1,520 | |||||
Liabilities related to assets held for sale | 32,295 | 2,658 | |||||
Accrued expenses and other liabilities | 58,542 | 68,251 | |||||
Total liabilities | 1,743,532 | 1,914,426 | |||||
COMMITMENTS AND CONTINGENCIES (Note 6): | |||||||
EQUITY: | |||||||
Series A Preferred Shares, $.01 par value per share; 25,000 preferred shares authorized; 4,600 shares of Series A Preferred Shares issued and outstanding at each of September 30, 2017 and December 31, 2016; liquidation preference of $115,000 | 46 | 46 | |||||
Series B Preferred Shares, $.01 par value per share; 25,000 preferred shares authorized; 3,450 shares of Series B Preferred Shares issued and outstanding at each of September 30, 2017 and December 31, 2016; liquidation preference of $86,250 | 35 | 35 | |||||
Series C Preferred Shares, $.01 par value per share; 25,000 preferred shares authorized; 6,900 shares of Series C Preferred Shares issued and outstanding at September 30, 2017; liquidation preference of $172,500 | 69 | — | |||||
Series D Preferred Shares, $.01 par value per share; 25,000 preferred shares authorized; 4,800 shares of Series D Preferred Shares issued and outstanding at September 30, 2017; liquidation preference of $120,000 | 48 | — | |||||
Shares of beneficial interest, $1.00 par value per share; 200,000 shares authorized; issued and outstanding 69,888 shares at September 30, 2017 and 69,553 shares at December 31, 2016 | 69,888 | 69,553 | |||||
Capital contributed in excess of par | 1,768,540 | 1,481,787 | |||||
Accumulated other comprehensive income | 3,534 | 1,622 | |||||
Distributions in excess of net income | (1,098,547 | ) | (997,789 | ) | |||
Total equity—Pennsylvania Real Estate Investment Trust | 743,613 | 555,254 | |||||
Noncontrolling interest | 137,501 | 147,152 | |||||
Total equity | 881,114 | 702,406 | |||||
Total liabilities and equity | $ | 2,624,646 | $ | 2,616,832 |
See accompanying notes to the unaudited consolidated financial statements.
1
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) | |||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
(in thousands of dollars) | 2017 | 2016 | 2017 | 2016 | |||||||||||
REVENUE: | |||||||||||||||
Real estate revenue: | |||||||||||||||
Base rent | $ | 56,874 | $ | 60,188 | $ | 171,078 | $ | 188,424 | |||||||
Expense reimbursements | 26,900 | 29,059 | 81,981 | 89,063 | |||||||||||
Percentage rent | 593 | 825 | 1,223 | 1,661 | |||||||||||
Lease termination revenue | 7 | 3,012 | 2,279 | 3,263 | |||||||||||
Other real estate revenue | 2,345 | 3,176 | 6,992 | 8,044 | |||||||||||
Total real estate revenue | 86,719 | 96,260 | 263,553 | 290,455 | |||||||||||
Other income | 2,492 | 2,600 | 4,172 | 4,630 | |||||||||||
Total revenue | 89,211 | 98,860 | 267,725 | 295,085 | |||||||||||
EXPENSES: | |||||||||||||||
Operating expenses: | |||||||||||||||
Property operating expenses: | |||||||||||||||
CAM and real estate taxes | (25,772 | ) | (29,373 | ) | (83,985 | ) | (94,058 | ) | |||||||
Utilities | (4,444 | ) | (4,753 | ) | (12,407 | ) | (13,216 | ) | |||||||
Other property operating expenses | (3,087 | ) | (3,123 | ) | (9,117 | ) | (10,618 | ) | |||||||
Total property operating expenses | (33,303 | ) | (37,249 | ) | (105,509 | ) | (117,892 | ) | |||||||
Depreciation and amortization | (29,966 | ) | (26,820 | ) | (94,652 | ) | (92,217 | ) | |||||||
General and administrative expenses | (8,288 | ) | (8,244 | ) | (26,561 | ) | (25,713 | ) | |||||||
Provision for employee separation expenses | — | (162 | ) | (1,053 | ) | (1,355 | ) | ||||||||
Project costs and other expenses | (150 | ) | (1,080 | ) | (547 | ) | (1,374 | ) | |||||||
Total operating expenses | (71,707 | ) | (73,555 | ) | (228,322 | ) | (238,551 | ) | |||||||
Interest expense, net | (14,342 | ) | (17,198 | ) | (44,098 | ) | (53,611 | ) | |||||||
Impairment of assets | (1,825 | ) | (9,865 | ) | (55,742 | ) | (24,589 | ) | |||||||
Total expenses | (87,874 | ) | (100,618 | ) | (328,162 | ) | (316,751 | ) | |||||||
Income (loss) before equity in income of partnerships, gain on sale of real estate by equity method investee, gains on sales of interests in non operating real estate and (losses) gains on sales of real estate | 1,337 | (1,758 | ) | (60,437 | ) | (21,666 | ) | ||||||||
Equity in income of partnerships | 4,254 | 4,643 | 12,144 | 12,718 | |||||||||||
Gain on sale of real estate by equity method investee | 6,718 | — | 6,718 | — | |||||||||||
Gains on sales of interests in non operating real estate | — | — | 486 | 9 | |||||||||||
(Losses) gains on sales of interests in real estate, net | (9 | ) | 31 | (374 | ) | 22,953 | |||||||||
Net income (loss) | 12,300 | 2,916 | (41,463 | ) | 14,014 | ||||||||||
Less: net (income available) loss attributable to noncontrolling interest | (1,305 | ) | (312 | ) | 4,416 | (1,502 | ) | ||||||||
Net income available (loss attributable) to PREIT | 10,995 | 2,604 | (37,047 | ) | 12,512 | ||||||||||
Less: preferred share dividends | (7,525 | ) | (3,962 | ) | (20,797 | ) | (11,886 | ) | |||||||
Net income (loss) attributable to PREIT common shareholders | $ | 3,470 | $ | (1,358 | ) | $ | (57,844 | ) | $ | 626 |
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) | |||||||||||||||
(in thousands of dollars, except per share amounts) | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||||
Net income (loss) | $ | 12,300 | $ | 2,916 | $ | (41,463 | ) | $ | 14,014 | ||||||
Noncontrolling interest | (1,305 | ) | (312 | ) | 4,416 | (1,502 | ) | ||||||||
Dividends on preferred shares | (7,525 | ) | (3,962 | ) | (20,797 | ) | (11,886 | ) | |||||||
Dividends on unvested restricted shares | (87 | ) | (81 | ) | (272 | ) | (241 | ) | |||||||
Net income (loss) loss used to calculate loss per share—basic and diluted | $ | 3,383 | $ | (1,439 | ) | $ | (58,116 | ) | $ | 385 | |||||
Basic and diluted income (loss) per share: | $ | 0.05 | $ | (0.02 | ) | $ | (0.84 | ) | $ | 0.01 | |||||
(in thousands of shares) | |||||||||||||||
Weighted average shares outstanding—basic | 69,424 | 69,129 | 69,319 | 69,065 | |||||||||||
Effect of common share equivalents (1) | — | — | — | 386 | |||||||||||
Weighted average shares outstanding—diluted | 69,424 | 69,129 | 69,319 | 69,451 |
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOMEOPERATIONS
(Unaudited)
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(in thousands of dollars) |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
REVENUE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease revenue |
| $ | 58,473 |
|
| $ | 73,310 |
|
| $ | 178,313 |
|
| $ | 223,668 |
|
Expense reimbursements |
|
| 4,040 |
|
|
| 5,364 |
|
|
| 11,321 |
|
|
| 15,342 |
|
Other real estate revenue |
|
| 1,336 |
|
|
| 2,202 |
|
|
| 4,803 |
|
|
| 7,619 |
|
Total real estate revenue |
|
| 63,849 |
|
|
| 80,876 |
|
|
| 194,437 |
|
|
| 246,629 |
|
Other income |
|
| 340 |
|
|
| 498 |
|
|
| 764 |
|
|
| 1,440 |
|
Total revenue |
|
| 64,189 |
|
|
| 81,374 |
|
|
| 195,201 |
|
|
| 248,069 |
|
EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CAM and real estate taxes |
|
| (27,688 | ) |
|
| (28,320 | ) |
|
| (80,418 | ) |
|
| (85,891 | ) |
Utilities |
|
| (3,530 | ) |
|
| (4,009 | ) |
|
| (8,971 | ) |
|
| (11,350 | ) |
Other property operating expenses |
|
| (1,827 | ) |
|
| (1,836 | ) |
|
| (5,699 | ) |
|
| (5,815 | ) |
Total property operating expenses |
|
| (33,045 | ) |
|
| (34,165 | ) |
|
| (95,088 | ) |
|
| (103,056 | ) |
Depreciation and amortization |
|
| (34,420 | ) |
|
| (31,236 | ) |
|
| (95,597 | ) |
|
| (98,085 | ) |
General and administrative expenses |
|
| (9,526 | ) |
|
| (10,605 | ) |
|
| (30,790 | ) |
|
| (33,419 | ) |
Provision for employee separation expenses |
|
| (60 | ) |
|
| (218 | ) |
|
| (1,173 | ) |
|
| (1,078 | ) |
Insurance recoveries, net |
|
| 0 |
|
|
| 2,878 |
|
|
| 586 |
|
|
| 4,494 |
|
Project costs and other expenses |
|
| (124 | ) |
|
| (80 | ) |
|
| (287 | ) |
|
| (267 | ) |
Total operating expenses |
|
| (77,175 | ) |
|
| (73,426 | ) |
|
| (222,349 | ) |
|
| (231,411 | ) |
Interest expense, net |
|
| (20,260 | ) |
|
| (15,534 | ) |
|
| (54,300 | ) |
|
| (46,986 | ) |
Gain on debt extinguishment, net |
|
| 0 |
|
|
| 29,600 |
|
|
| 0 |
|
|
| 24,832 |
|
Gain on derecognition of property |
|
| 7,006 |
|
|
| 0 |
|
|
| 7,006 |
|
|
| 0 |
|
Impairment of development land parcel |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| (1,464 | ) |
Total expenses |
|
| (90,429 | ) |
|
| (59,360 | ) |
|
| (269,643 | ) |
|
| (255,029 | ) |
(Loss) income before equity in (loss) income of partnerships, gain on sales of real estate by equity method investee, (loss) gain on sales of real estate, net, and gain (loss) on sales of interests in non operating real estate |
|
| (26,240 | ) |
|
| 22,014 |
|
|
| (74,442 | ) |
|
| (6,960 | ) |
Equity in (loss) income of partnerships |
|
| (3,259 | ) |
|
| 1,531 |
|
|
| (2,798 | ) |
|
| 6,136 |
|
Gain on sales of real estate by equity method investee |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
|
| 553 |
|
(Loss) gain on sales of real estate, net |
|
| (94 | ) |
|
| 1,171 |
|
|
| 11,169 |
|
|
| 2,684 |
|
Gain (loss) on sales of interests in non operating real estate |
|
| 16 |
|
|
| 0 |
|
|
| (174 | ) |
|
| 0 |
|
Net (loss) income |
|
| (29,577 | ) |
|
| 24,716 |
|
|
| (66,245 | ) |
|
| 2,413 |
|
Less: net loss (income) attributable to noncontrolling interest |
|
| 734 |
|
|
| (454 | ) |
|
| 1,996 |
|
|
| 1,563 |
|
Net (loss) income attributable to PREIT |
|
| (28,843 | ) |
|
| 24,262 |
|
|
| (64,249 | ) |
|
| 3,976 |
|
Less: preferred share dividends |
|
| (6,843 | ) |
|
| (6,843 | ) |
|
| (20,531 | ) |
|
| (20,531 | ) |
Net (loss) income attributable to PREIT common shareholders |
| $ | (35,686 | ) |
| $ | 17,419 |
|
| $ | (84,780 | ) |
| $ | (16,555 | ) |
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
(in thousands of dollars) | 2017 | 2016 | 2017 | 2016 | |||||||||||
Comprehensive income (loss): | |||||||||||||||
Net income (loss) | $ | 12,300 | $ | 2,916 | $ | (41,463 | ) | $ | 14,014 | ||||||
Unrealized gain (loss) on derivatives | 266 | 3,823 | 1,544 | (4,755 | ) | ||||||||||
Amortization of losses on settled swaps, net of gains | 259 | 123 | 597 | 375 | |||||||||||
Total comprehensive income (loss) | 12,825 | 6,862 | (39,322 | ) | 9,634 | ||||||||||
Less: comprehensive (income) loss attributable to noncontrolling interest | (1,361 | ) | (729 | ) | 4,187 | (1,029 | ) | ||||||||
Comprehensive income (loss) PREIT | $ | 11,464 | $ | 6,133 | $ | (35,135 | ) | $ | 8,605 |
See accompanying notes to the unaudited consolidated financial statements.
2
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF EQUITYOPERATIONS (CONTINUED)
(Unaudited)
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(in thousands, except per share amounts) |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Net (loss) income |
| $ | (29,577 | ) |
| $ | 24,716 |
|
| $ | (66,245 | ) |
| $ | 2,413 |
|
Noncontrolling interest |
|
| 734 |
|
|
| (454 | ) |
|
| 1,996 |
|
|
| 1,563 |
|
Cumulative preferred share dividends |
|
| (6,843 | ) |
|
| (6,843 | ) |
|
| (20,531 | ) |
|
| (20,531 | ) |
Dividends on unvested restricted shares |
|
| 0 |
|
|
| (222 | ) |
|
| (363 | ) |
|
| (663 | ) |
Net (loss) income used to calculate (loss) income per share—basic and diluted |
| $ | (35,686 | ) |
| $ | 17,197 |
|
| $ | (85,143 | ) |
| $ | (17,218 | ) |
Basic and diluted (loss) income per share: |
| $ | (0.46 | ) |
| $ | 0.22 |
|
| $ | (1.10 | ) |
| $ | (0.23 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of shares) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding—basic |
|
| 77,401 |
|
|
| 76,492 |
|
|
| 77,149 |
|
|
| 74,771 |
|
Effect of common share equivalents(1) |
|
| 0 |
|
|
| 332 |
|
|
| 0 |
|
|
| 0 |
|
Weighted average shares outstanding—diluted |
|
| 77,401 |
|
|
| 76,824 |
|
|
| 77,149 |
|
|
| 74,771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) The Company had net losses used to calculate earnings per share for the three months ended September 30, 2020 and the nine months ended September 30, 2020 and 2019. Therefore, the effects of common share equivalents of 357 for the three months ended September 30, 2020 and, 411 and 375 for the nine months ended September 30, 2020 and 2019, respectively, are excluded from the calculation of diluted loss per share for these periods because they would be antidilutive. |
|
PREIT Shareholders | |||||||||||||||||||||||||||||||||||||||
Preferred Shares $.01 par | Shares of Beneficial Interest, $1.00 Par | Capital Contributed in Excess of Par | Accumulated Other Comprehensive Income | Distributions in Excess of Net Income | |||||||||||||||||||||||||||||||||||
(in thousands of dollars, except per share amounts) | Total Equity | Series A | Series B | Series C | Series D | Non- controlling interest | |||||||||||||||||||||||||||||||||
Balance December 31, 2016 | $ | 702,406 | $ | 46 | $ | 35 | $ | — | $ | — | $ | 69,553 | $ | 1,481,787 | $ | 1,622 | $ | (997,789 | ) | $ | 147,152 | ||||||||||||||||||
Net loss | (41,463 | ) | — | — | — | — | — | — | — | (37,047 | ) | (4,416 | ) | ||||||||||||||||||||||||||
Other comprehensive income | 2,141 | — | — | — | — | — | 1,912 | — | 229 | ||||||||||||||||||||||||||||||
Preferred shares issued in 2017 Series C and D preferred share offerings, net | 282,005 | — | — | 69 | 48 | — | 281,888 | — | — | — | |||||||||||||||||||||||||||||
Shares issued upon redemption of Operating Partnership units | — | — | — | — | — | 21 | 199 | — | — | (220 | ) | ||||||||||||||||||||||||||||
Shares issued under employee compensation plans, net of shares retired | 462 | — | — | — | — | 314 | 148 | — | — | — | |||||||||||||||||||||||||||||
Amortization of deferred compensation | 4,518 | — | — | — | — | — | 4,518 | — | — | — | |||||||||||||||||||||||||||||
Distributions paid to common shareholders ($0.63 per share) | (43,959 | ) | — | — | — | — | — | — | — | (43,959 | ) | — | |||||||||||||||||||||||||||
Distributions paid to Series A preferred shareholders ($1.5498 per share) | (7,116 | ) | — | — | — | — | — | — | — | (7,116 | ) | — | |||||||||||||||||||||||||||
Distributions paid to Series B preferred shareholders ($1.3827 per share) | (4,770 | ) | — | — | — | — | — | — | — | (4,770 | ) | — | |||||||||||||||||||||||||||
Distributions paid to Series C preferred shareholders ($1.14 per share) | (7,866 | ) | — | — | — | — | — | — | — | (7,866 | ) | — | |||||||||||||||||||||||||||
Noncontrolling interests: | |||||||||||||||||||||||||||||||||||||||
Distributions paid to Operating Partnership unit holders ($0.63 per unit) | (5,232 | ) | — | — | — | — | — | — | — | — | (5,232 | ) | |||||||||||||||||||||||||||
Other distributions to noncontrolling interests, net | (12 | ) | — | — | — | — | — | — | — | (12 | ) | ||||||||||||||||||||||||||||
Balance September 30, 2017 | $ | 881,114 | $ | 46 | $ | 35 | $ | 69 | $ | 48 | $ | 69,888 | $ | 1,768,540 | $ | 3,534 | $ | (1,098,547 | ) | $ | 137,501 |
See accompanying notes to the unaudited consolidated financial statements.
3
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(in thousands of dollars) |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Comprehensive (loss) income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
| $ | (29,577 | ) |
| $ | 24,716 |
|
| $ | (66,245 | ) |
| $ | 2,413 |
|
Unrealized gain (loss) on derivatives |
|
| 4,053 |
|
|
| (3,607 | ) |
|
| (15,750 | ) |
|
| (21,838 | ) |
Amortization of settled swaps |
|
| 3 |
|
|
| 3 |
|
|
| 73 |
|
|
| 82 |
|
Total comprehensive (loss) income |
|
| (25,521 | ) |
|
| 21,112 |
|
|
| (81,922 | ) |
|
| (19,343 | ) |
Less: comprehensive loss (income) attributable to noncontrolling interest |
|
| 138 |
|
|
| (363 | ) |
|
| 2,401 |
|
|
| 2,524 |
|
Comprehensive (loss) income attributable to PREIT |
| $ | (25,383 | ) |
| $ | 20,749 |
|
| $ | (79,521 | ) |
| $ | (16,819 | ) |
See accompanying notes to the unaudited consolidated financial statements.
4
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF EQUITY
Three and Nine Months Ended
September 30, 2020 and 2019
(Unaudited)
|
|
|
|
|
| PREIT Shareholders |
|
|
|
|
| |||||||||||||||||||||||||
|
|
|
|
|
| Preferred Shares $.01 par |
|
| Shares of Beneficial |
|
| Capital Contributed |
|
| Accumulated Other |
|
| Distributions |
|
| Non- |
| ||||||||||||||
(in thousands of dollars, except per share amounts) |
| Total Equity |
|
| Series B |
|
| Series C |
|
| Series D |
|
| Interest, $1.00 Par |
|
| in Excess of Par |
|
| Comprehensive (Loss) Income |
|
| in Excess of Net Income |
|
| controlling interest |
| |||||||||
Balance January 1, 2020 |
| $ | 427,425 |
|
| $ | 35 |
|
| $ | 69 |
|
| $ | 50 |
|
| $ | 77,550 |
|
| $ | 1,766,883 |
|
| $ | (12,556 | ) |
| $ | (1,408,352 | ) |
| $ | 3,746 |
|
Net loss |
|
| (13,549 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (13,033 | ) |
|
| (516 | ) |
Other comprehensive loss |
|
| (19,746 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (19,240 | ) |
|
| — |
|
|
| (506 | ) |
Shares issued under employee compensation plans, net of shares retired |
|
| (42 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,290 |
|
|
| (1,332 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
Amortization of deferred compensation |
|
| 1,624 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,624 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Dividends paid to common shareholders ($0.21 per share) |
|
| (16,492 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (16,492 | ) |
|
| — |
|
Dividends paid to Series B preferred shareholders ($0.4609 per share) |
|
| (1,591 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,591 | ) |
|
| — |
|
Dividends paid to Series C preferred shareholders ($0.45 per share) |
|
| (3,105 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3,105 | ) |
|
| — |
|
Dividends paid to Series D preferred shareholders ($0.4297 per share) |
|
| (2,148 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,148 | ) |
|
| — |
|
Noncontrolling interests: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions paid to Operating Partnership unit holders ($0.21 per unit) |
|
| (411 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (411 | ) |
Balance March 31, 2020 |
| $ | 371,965 |
|
| $ | 35 |
|
| $ | 69 |
|
| $ | 50 |
|
| $ | 78,840 |
|
| $ | 1,767,175 |
|
| $ | (31,796 | ) |
| $ | (1,444,721 | ) |
| $ | 2,313 |
|
Net loss |
|
| (23,119 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (22,374 | ) |
|
| (745 | ) |
Other comprehensive income (loss) |
|
| 12 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 508 |
|
|
| — |
|
|
| (496 | ) |
Shares issued under employee compensation plans, net of shares retired |
|
| 114 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 620 |
|
|
| (506 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
Amortization of deferred compensation |
|
| 1,670 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,670 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Dividends paid to common shareholders ($0.02 per share) |
|
| (1,589 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,589 | ) |
|
| — |
|
Dividends paid to Series B preferred shareholders ($0.4609 per share) |
|
| (1,591 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,591 | ) |
|
| — |
|
Dividends paid to Series C preferred shareholders ($0.45 per share) |
|
| (3,105 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3,105 | ) |
|
| — |
|
Dividends paid to Series D preferred shareholders ($0.4297 per share) |
|
| (2,148 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,148 | ) |
|
| — |
|
Noncontrolling interests: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions paid to Operating Partnership unit holders ($0.02 per unit) |
|
| (40 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (40 | ) |
Balance June 30, 2020 |
| $ | 342,169 |
|
| $ | 35 |
|
| $ | 69 |
|
| $ | 50 |
|
| $ | 79,460 |
|
| $ | 1,768,339 |
|
| $ | (31,288 | ) |
| $ | (1,475,528 | ) |
| $ | 1,032 |
|
Net loss |
|
| (29,577 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (28,843 | ) |
|
| (734 | ) |
Other comprehensive income |
|
| 4,056 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 3,460 |
|
|
| — |
|
|
| 596 |
|
Shares issued under employee compensation plans, net of shares retired |
|
| 34 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 30 |
|
|
| 4 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Amortization of deferred compensation |
|
| 1,727 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,727 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Distributions paid to Operating Partnership unit holders ($0.02 per unit) |
|
| (14 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (14 | ) |
Balance September 30, 2020 |
| $ | 318,395 |
|
| $ | 35 |
|
| $ | 69 |
|
| $ | 50 |
|
| $ | 79,490 |
|
| $ | 1,770,070 |
|
| $ | (27,828 | ) |
| $ | (1,504,371 | ) |
| $ | 880 |
|
5
|
|
|
|
|
| PREIT Shareholders |
|
|
|
|
| |||||||||||||||||||||||||
|
|
|
|
|
| Preferred Shares $.01 par |
|
| Shares of Beneficial |
|
| Capital Contributed |
|
| Accumulated Other |
|
| Distributions |
|
| Non- |
| ||||||||||||||
(in thousands of dollars, except per share amounts) |
| Total Equity |
|
| Series B |
|
| Series C |
|
| Series D |
|
| Interest, $1.00 Par |
|
| in Excess of Par |
|
| Comprehensive (Loss) Income |
|
| in Excess of Net Income |
|
| controlling interest |
| |||||||||
Balance January 1, 2019 |
| $ | 546,551 |
|
| $ | 35 |
|
| $ | 69 |
|
| $ | 50 |
|
| $ | 70,495 |
|
| $ | 1,671,042 |
|
| $ | 5,408 |
|
| $ | (1,306,318 | ) |
| $ | 105,770 |
|
Net loss |
|
| (16,223 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (14,535 | ) |
|
| (1,688 | ) |
Other comprehensive loss |
|
| (6,506 | ) |
|
| — |
|
|
| — |
|
|
|
|
|
|
| — |
|
|
| — |
|
|
| (5,941 | ) |
|
| — |
|
|
| (565 | ) |
Shares issued upon redemption of Operating Partnership units |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 6,250 |
|
|
| 89,736 |
|
|
| — |
|
|
| — |
|
|
| (95,986 | ) |
Shares issued under employee compensation plans, net of shares retired |
|
| (326 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 638 |
|
|
| (964 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
Amortization of deferred compensation |
|
| 1,922 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,922 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Dividends paid to common shareholders ($0.21 per share) |
|
| (14,930 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (14,930 | ) |
|
| — |
|
Dividends paid to Series B preferred shareholders ($0.4609 per share) |
|
| (1,590 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,590 | ) |
|
| — |
|
Dividends paid to Series C preferred shareholders ($0.4500 per share) |
|
| (3,105 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3,105 | ) |
|
| — |
|
Dividends paid to Series D preferred shareholders ($0.4297 per share) |
|
| (2,148 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,148 | ) |
|
| — |
|
Noncontrolling interests: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions paid to Operating Partnership unit holders ($0.21 per unit) |
|
| (1,698 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,698 | ) |
Balance March 31, 2019 |
| $ | 501,947 |
|
| $ | 35 |
|
| $ | 69 |
|
| $ | 50 |
|
| $ | 77,383 |
|
| $ | 1,761,736 |
|
| $ | (533 | ) |
| $ | (1,342,626 | ) |
| $ | 5,833 |
|
Net loss |
|
| (6,080 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (5,751 | ) |
|
| (329 | ) |
Other comprehensive income |
|
| (11,647 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (11,342 | ) |
|
| — |
|
|
| (305 | ) |
Shares issued under employee compensation plans, net of shares retired |
|
| 337 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 164 |
|
|
| 173 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Amortization of deferred compensation |
|
| 1,889 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,889 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Dividends paid to common shareholders ($0.21 per share) |
|
| (16,278 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (16,278 | ) |
|
| — |
|
Dividends paid to Series B preferred shareholders ($0.4609 per share) |
|
| (1,591 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,591 | ) |
|
| — |
|
Dividends paid to Series C preferred shareholders ($0.4500 per share) |
|
| (3,105 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3,105 | ) |
|
| — |
|
Dividends paid to Series D preferred shareholders ($0.4297 per share) |
|
| (2,148 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,148 | ) |
|
| — |
|
Noncontrolling interests: |
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions paid to Operating Partnership unit holders ($0.21 per unit) |
|
| (464 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (464 | ) |
Other changes in noncontrolling interest, net |
|
| (10 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (10 | ) |
Balance June 30, 2019 |
| $ | 462,850 |
|
| $ | 35 |
|
| $ | 69 |
|
| $ | 50 |
|
| $ | 77,547 |
|
| $ | 1,763,798 |
|
| $ | (11,875 | ) |
| $ | (1,371,499 | ) |
| $ | 4,725 |
|
Net income |
|
| 24,716 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 24,262 |
|
|
| 454 |
|
Other comprehensive income |
|
| (3,604 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3,513 | ) |
|
| — |
|
|
| (91 | ) |
Shares issued under employee compensation plans, net of shares retired |
|
| 335 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 55 |
|
|
| 280 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Amortization of deferred compensation |
|
| 1,822 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,822 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Dividends paid to common shareholders ($0.21 per share) |
|
| (16,284 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (16,284 | ) |
|
| — |
|
Dividends paid to Series B preferred shareholders ($0.4609 per share) |
|
| (1,591 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,591 | ) |
|
| — |
|
Dividends paid to Series C preferred shareholders ($0.4500 per share) |
|
| (3,105 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3,105 | ) |
|
| — |
|
Dividends paid to Series D preferred shareholders ($0.4297 per share) |
|
| (2,148 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,148 | ) |
|
| — |
|
Noncontrolling interests: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions paid to Operating Partnership unit holders ($0.21 per unit) |
|
| (425 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (425 | ) |
Other changes in noncontrolling interest, net |
|
| (76 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (76 | ) |
Balance September 30, 2019 |
| $ | 462,490 |
|
| $ | 35 |
|
| $ | 69 |
|
| $ | 50 |
|
| $ | 77,602 |
|
| $ | 1,765,900 |
|
| $ | (15,388 | ) |
| $ | (1,370,365 | ) |
| $ | 4,587 |
|
See accompanying notes to the unaudited consolidated financial statements.
6
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
| Nine Months Ended September 30, |
| |||||
(in thousands of dollars) |
| 2020 |
|
| 2019 |
| ||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net (loss) income |
| $ | (66,245 | ) |
| $ | 2,413 |
|
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
| 89,115 |
|
|
| 89,736 |
|
Amortization |
|
| 10,154 |
|
|
| 12,152 |
|
Straight-line rent adjustments |
|
| (1,779 | ) |
|
| (2,084 | ) |
Amortization of deferred compensation |
|
| 5,021 |
|
|
| 5,633 |
|
Gain on debt extinguishment, net |
|
| 0 |
|
|
| (24,832 | ) |
Gain on derecognition of property |
|
| (7,006 | ) |
|
| 0 |
|
Insurance recoveries in excess of property loss |
|
| 0 |
|
|
| (3,994 | ) |
Gain on sales of interests in real estate and non-operating real estate, net |
|
| (10,995 | ) |
|
| (2,684 | ) |
Equity in loss (income) of partnerships |
|
| 2,798 |
|
|
| (6,136 | ) |
Gain on sales of real estate by equity method investee |
|
| 0 |
|
|
| (553 | ) |
Cash distributions from partnerships |
|
| 1,285 |
|
|
| 19,223 |
|
Impairment of development land parcel |
|
| 0 |
|
|
| 1,464 |
|
Change in assets and liabilities: |
|
|
|
|
|
|
|
|
Net change in other assets |
|
| (30,657 | ) |
|
| (5,248 | ) |
Net change in other liabilities |
|
| (514 | ) |
|
| (5,417 | ) |
Net cash (used in) provided by operating activities |
|
| (8,823 | ) |
|
| 79,673 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Distribution of refinancing proceeds from equity method investee |
|
| 0 |
|
|
| 25,000 |
|
Cash proceeds from sales of real estate |
|
| 21,951 |
|
|
| 35,351 |
|
Cash proceeds from sale of mortgage |
|
| 0 |
|
|
| 8,000 |
|
Proceeds from insurance claims related to damage to real estate assets |
|
| 0 |
|
|
| 6,977 |
|
Cash distributions from partnerships of proceeds from real estate sold |
|
| 0 |
|
|
| 879 |
|
Additions to construction in progress |
|
| (31,478 | ) |
|
| (86,118 | ) |
Investments in real estate improvements |
|
| (16,429 | ) |
|
| (21,487 | ) |
Additions to leasehold improvements and corporate fixed assets |
|
| (4,863 | ) |
|
| (819 | ) |
Investments in equity method investees |
|
| (30,228 | ) |
|
| (55,221 | ) |
Capitalized leasing costs |
|
| (150 | ) |
|
| (413 | ) |
Net cash used in investing activities |
|
| (61,197 | ) |
|
| (87,851 | ) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Net borrowings under revolving facilities |
|
| 120,000 |
|
|
| 148,000 |
|
Net repayments to term loans |
|
| (12,000 | ) |
|
| 0 |
|
Repayments of mortgage loans and finance lease liabilities |
|
| (487 | ) |
|
| (71,210 | ) |
Proceeds from notes payable |
|
| 4,536 |
|
|
| 0 |
|
Principal installments on mortgage loans |
|
| (9,535 | ) |
|
| (12,806 | ) |
Net borrowings under bridge facility |
|
| 22,500 |
|
|
| 0 |
|
Payment of deferred financing costs |
|
| (35 | ) |
|
| (95 | ) |
Value of shares of beneficial interest issued |
|
| 572 |
|
|
| 978 |
|
Dividends paid to common shareholders |
|
| (18,081 | ) |
|
| (47,492 | ) |
Dividends paid to preferred shareholders |
|
| (13,688 | ) |
|
| (20,531 | ) |
Distributions paid to Operating Partnership unit holders and noncontrolling interest |
|
| (465 | ) |
|
| (2,587 | ) |
Value of shares retired under equity incentive plans, net of shares issued |
|
| (466 | ) |
|
| (632 | ) |
Net cash provided by (used in) financing activities |
|
| 92,851 |
|
|
| (6,375 | ) |
Net change in cash, cash equivalents, and restricted cash |
|
| 22,831 |
|
|
| (14,553 | ) |
Cash, cash equivalents, and restricted cash, beginning of period |
|
| 19,629 |
|
|
| 32,445 |
|
Cash, cash equivalents, and restricted cash, end of period |
| $ | 42,460 |
|
| $ | 17,892 |
|
Nine Months Ended September 30, | |||||||
(in thousands of dollars) | 2017 | 2016 | |||||
Cash flows from operating activities: | |||||||
Net (loss) income | $ | (41,463 | ) | $ | 14,014 | ||
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | |||||||
Depreciation | 87,963 | 93,561 | |||||
Amortization | 8,695 | 686 | |||||
Straight-line rent adjustments | (1,908 | ) | (1,953 | ) | |||
Provision for doubtful accounts | 1,281 | 1,513 | |||||
Amortization of deferred compensation | 4,518 | 4,518 | |||||
Loss on hedge ineffectiveness | — | 143 | |||||
Gain on sale of real estate by equity method investee | (6,718 | ) | — | ||||
Gains on sales of interests in real estate and non operating real estate, net | (112 | ) | (22,962 | ) | |||
Equity in income of partnerships in excess of distributions | (3,024 | ) | (5,070 | ) | |||
Amortization of historic tax credits | (1,768 | ) | (1,768 | ) | |||
Impairment of assets | 55,742 | 24,589 | |||||
Change in assets and liabilities: | |||||||
Net change in other assets | (5,682 | ) | 1,753 | ||||
Net change in other liabilities | (4,556 | ) | (4,872 | ) | |||
Net cash provided by operating activities | 92,968 | 104,152 | |||||
Cash flows from investing activities: | |||||||
Additions to construction in progress | (93,178 | ) | (48,312 | ) | |||
Investments in real estate improvements | (36,850 | ) | (32,846 | ) | |||
Cash proceeds from sales of real estate | 77,778 | 154,764 | |||||
Cash distributions from partnerships of proceeds from real estate sold | 30,265 | — | |||||
Additions to leasehold improvements and corporate fixed assets | (511 | ) | (449 | ) | |||
Investments in partnerships | (56,778 | ) | (9,995 | ) | |||
Capitalized leasing costs | (4,633 | ) | (4,394 | ) | |||
Decrease in cash escrows | 2,311 | 3,098 | |||||
Cash distributions from partnerships in excess of equity in income | 1,895 | 6,014 | |||||
Net cash (used in) provided by investing activities | (79,701 | ) | 67,880 | ||||
Cash flows from financing activities: | |||||||
Net proceeds from issuance of preferred shares | 282,005 | — | |||||
Net borrowings from revolving facility | 3,000 | 50,000 | |||||
Proceeds from mortgage loans | — | 139,000 | |||||
Principal installments on mortgage loans | (12,581 | ) | (12,711 | ) | |||
Repayments of mortgage loans | (150,000 | ) | (280,327 | ) | |||
Payment of deferred financing costs | (71 | ) | (3,335 | ) | |||
Dividends paid to common shareholders | (43,959 | ) | (43,769 | ) | |||
Dividends paid to preferred shareholders | (19,752 | ) | (11,886 | ) | |||
Distributions paid to Operating Partnership unit holders and noncontrolling interest | (5,232 | ) | (5,245 | ) | |||
Value of shares of beneficial interest issued | 1,790 | 947 | |||||
Value of shares retired under equity incentive plans, net of shares issued | (1,328 | ) | (2,177 | ) | |||
Net cash provided by (used in) financing activities | 53,872 | (169,503 | ) | ||||
Net change in cash and cash equivalents | 67,139 | 2,529 | |||||
Cash and cash equivalents, beginning of period | 9,803 | 22,855 | |||||
Cash and cash equivalents, end of period | $ | 76,942 | $ | 25,384 |
See accompanying notes to the unaudited consolidated financial statements.
7
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
1. BASIS OF PRESENTATION
Nature of Operations
Pennsylvania Real Estate Investment Trust (“PREIT” or the “Company”) prepared the accompanying unaudited consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission.Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations, although we believe that the included disclosures are adequate to make the information presented not misleading. Our unaudited consolidated financial statements should be read in conjunction with the audited financial statements and the notes thereto included in PREIT’s Annual Report on Form 10-K for the year ended December 31, 2016.2019. In our opinion, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly our consolidated financial position, the consolidated results of our operations, consolidated statements of other comprehensive income (loss), consolidated statements of equity and our consolidated statements of cash flows are included. The results of operations for the interim periods presented are not necessarily indicative of the results for the full year.
PREIT, a Pennsylvania business trust founded in 1960 and one of the first equity real estate investment trusts (“REITs”) in the United States, has a primary investment focus on retail shopping malls located in the eastern half of the United States, primarily in the Mid-Atlantic region. OurAs of September 30, 2020, our portfolio currently consists of a total of 2826 properties operating in nine9 states, including 20 operating shopping malls, four5 other operating retail properties and four1 development or redevelopment properties. Two of the development and redevelopment properties are classified as “mixed use” (a combination of retail and other uses), oneproperty. The property in our portfolio that is classified as “retail” (redevelopment of The Gallery at Market East into Fashion District Philadelphia (“Fashion District Philadelphia”)), and one is classified as “other.” The above property counts dounder development does not include Valley View Mall in La Crosse, Wisconsin because this property is classified as “held for sale” as of September 30, 2017.
We hold our interest in our portfolio of properties through our operating partnership, PREIT Associates, L.P. (“PREIT Associates” or the “Operating Partnership”). We are the sole general partner of the Operating Partnership and, as of
September 30,Pursuant to the terms of the partnership agreement of the Operating Partnership, each of the limited partners has the right to redeem such partner’s units of limited partnership interest in the Operating Partnership (“OP Units”) for cash or, at our election, we may acquire such OP Units in exchange for our common shares on a one-for-one1-for-one basis, in some cases beginning one year following the respective issue dates of the OP Units and in other cases immediately. If all of the outstanding OP Units held by limited partners had been redeemed for cash as of
We provide management, leasing and real estate development services through two2 of our subsidiaries: PREIT Services, LLC (“PREIT Services”), which generally develops and manages properties that we consolidate for financial reporting purposes, and PREIT-RUBIN, Inc. (“PRI”), which generally develops and manages properties that we do not consolidate for financial reporting purposes, including properties owned by partnerships in which we own an interest and properties that are owned by third parties in which we do not have an interest. PREIT Services and PRI are consolidated. PRI is a taxable REIT subsidiary, as defined by federal tax laws, which means that it is able to offer an expanded menu of services to tenants without jeopardizing our continuing qualification as a REIT under federal tax law.
We evaluate operating results and allocate resources on a property-by-property basis, and do not distinguish or evaluate our consolidated operations on a geographic basis. Due to the nature of our operating properties, which involve retail shopping, we have concluded that our individual properties have similar economic characteristics and meet all other aggregation criteria. Accordingly, we have aggregated our individual properties into
COVID-19 Related Risks and Uncertainties
The 2020 global outbreak of a novel coronavirus (“COVID-19”) has adversely impacted and continues to impact our business, financial condition, liquidity and operating results, as well as our tenants’ businesses. The prolonged and increased spread of COVID-19 has also led to unprecedented global economic disruption and volatility in financial markets. Some of our tenants’ financial health and business viability have been adversely impacted and their creditworthiness has deteriorated. We anticipate that our future business, financial condition, liquidity and results of operations, including our results for 2020 and potentially in future periods, will continue to be materially impacted by the COVID-19 pandemic. It remains highly uncertain how long the global pandemic, economic challenges and restrictions on day-to-day life and business operations will last based on the current virus spread rate in the United States, which has resulted in a number of jurisdictions that previously
8
relaxed restrictions implementing new or renewed restrictions. Given these factors, so long as the lingering effects of COVID-19 remain, the virus may continue to impact us or our tenants, or our ability or the ability of our tenants to resume more normal operations.
COVID-19 closures of our properties began on March 12, 2020 and continued through the reopening of our last property on July 3, 2020. These closures impacted most of our properties for the full second quarter of 2020 with traffic and tenant reopenings increasing through the third quarter of 2020. Certain jurisdictions where our properties are located that have relaxed restrictions or have experienced limited public adherence with suggested safety measures have been contemplating or implementing new or renewed restrictions. As such, as the pandemic continues, intensifies or experiences resurgences, it is possible that additional closures will occur. During the mall closure period in the second quarter of 2020, the Company furloughed a significant portion of its property and corporate employee base and later made permanent headcount reductions, which contributed to decreased general and administrative expenses in the third quarter of 2020.
All of our properties have remained open during the third quarter of 2020 and are employing safety and sanitation measures designed to address the risks posed by COVID-19, with some of our tenants still operating at reduced capacity. The significance of COVID-19 on our business, however, will continue to depend on, among other things, the extent and duration of the pandemic, the severity of the disease and the number of people infected with the virus, the further effects on the economy of the pandemic and of the measures taken by governmental authorities and other third parties restricting daily activities and the length of time that such measures remain in place or are renewed, and implementation of governmental programs to assist businesses and consumers impacted by the COVID-19 pandemic.
Going Concern Considerations
Under the accounting guidance related to the presentation of financial statements, when preparing financial statements for each annual and interim reporting period, management has the responsibility to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern. As a result of the considerations articulated below, we believe there is substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued.
In applying the accounting guidance, management considered our current financial condition and liquidity sources, including current funds available, forecasted future cash flows and our conditional and unconditional obligations due over the next twelve months. Management specifically considered the following: (i) our senior unsecured facility, which includes a revolving facility maturing in 2022 with a balance of $375.0 million as of September 30, 2020, term loans maturing in 2021 and 2023 with balances of $244.5 million and $293.5 million, respectively, as of September 30, 2020 and the Bridge Facility (as defined below) with a balance of $22.5 million as of September 30, 2020 maturing on October 31, 2020; (ii) our mortgage loans with varying maturities through 2025 with a principal balance of $890.8 million as of September 30, 2020; (iii) the financial covenant compliance requirements of our credit agreements; and (iv) recurring costs of operating our business.
On March 30, 2020, the Company amended its 7-Year term loan agreement, dated as of January 8, 2014 (as amended through the date hereof, the “7-Year Term Loan Agreement”) and its credit agreement, dated as of May 24, 2018, by and among the Company, each of the financial institutions from time to time party thereto, and Wells Fargo Bank, National Association, as administrative agent, (as amended through the date hereof, the “2018 Credit Agreement” (each a “Credit Agreement” and together with the 2014 7-Year Term Loan Agreement, the “Credit Agreements”) to provide certain debt covenant relief through September 30, 2020. The Company’s Credit Agreements were also amended on May 1, 2020 to extend the required delivery date of compliance certificates covering the fiscal quarter ended March 31, 2020 by six days. Further deterioration in our financial results due to COVID-19 has affected our covenant compliance prior to September 30, 2020. In anticipation of the Company not meeting certain financial covenants applicable under the Credit Agreements for the quarter ended June 30, 2020, on July 27, 2020, the Company further amended the Credit Agreements primarily to suspend certain debt covenants from and including June 30, 2020 until but excluding August 31, 2020, to reduce its minimum liquidity requirement during the Suspension Period (defined below) and to permit limited additional debt. On August 30, 2020, the Company agreed to a non-binding term sheet with Wells Fargo Bank, National Association and other financial institutions (the “Lenders”) for further amendments to the Credit Agreements. The Company’s agreement to this term sheet, along with entering into an agreement (the “Bridge Credit Agreement”) for an additional secured term loan facility permitting borrowings of up to $30.0 million on August 11, 2020 (the “Bridge Facility”) extended the Company’s suspension of certain debt covenants through September 30, 2020 (the “Suspension Period”). Subsequent to August 11, 2020, references to the Credit Agreements and Term Loans include the Bridge Facility. On September 30, 2020, the Company further amended the Credit Agreements and secured a one-month extension of the Suspension Period to October 31, 2020, an extension of the Bridge Facility maturity date to October 31, 2020, and certain other covenant amendments, including permission to incur an additional $25.0 million under the Bridge Facility. The Company further amended the Bridge Credit Agreement on October 16, 2020 to increase the aggregate amount of commitments thereunder by $25.0 million.
On October 7, 2020, the Company and certain of the Company’s wholly owned direct and indirect subsidiaries (collectively, the “Company Parties”) entered into a Restructuring Support Agreement (the “RSA”) with certain of the lenders party to its Credit Agreements.
9
The RSA contemplates agreed-upon terms for a financial restructuring of the existing debt and certain other obligations of the Company Parties through either (i) an out-of-court restructuring on the terms set forth in the out-of-court restructuring term sheet attached to the RSA or, if the Company is unable to obtain the consent of 100% of the lenders under the Credit Agreements, (ii) a prepackaged plan of reorganization on the terms set forth in the plan term sheet attached to the RSA, a solicitation of votes therefor, and the commencement by the Company of voluntary cases under chapter 11 of title 11 of the United States Code, 11 U.S.C. §§ 101-1532, in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). The RSA was amended on October 16, 2020 and again on October 23, 2020, to, among other things, extend the date by which the Company Parties were required to commence the solicitation and the Chapter 11 Cases and provide for a limited tolling of the Company Parties’ alleged breach of the RSA (described further below).
On October 19, 2020, the Company and certain of its subsidiaries party to its Credit Agreements received letters from the administrative agent alleging events of default with respect to each of the Credit Agreements, in addition to a letter from certain lenders under the RSA regarding an alleged breach of the RSA (collectively, the “Reservation Letters”). The Reservation Letter in respect of the RSA asserts that the Company Parties’ failure to commence the Chapter 11 Cases on or before October 18, 2020 constituted a breach of their obligations under the RSA. The Reservation Letter in respect of the Bridge Credit Agreement asserted that an event of default has occurred thereunder as a result of the alleged breach of the Company Parties’ obligations under the RSA. The remaining Reservation Letters alleged that an event of default occurred under the Bridge Credit Agreement, in turn triggering alleged cross-defaults under each of the 7-Year Term Loan Agreement and the 2018 Credit Agreement. The Reservation Letter in respect of each Credit Agreement stated that interest will accrue on the outstanding principal balance of the loans under such Credit Agreement at the increased Post-Default Rate (as defined in such Credit Agreement) beginning on October 19, 2020. The Reservation Letters specified that the lenders have not waived their rights and remedies under the Credit Agreements or the RSA (as applicable), and that they expressly reserved all available rights and remedies thereunder and under applicable law. The Company responded to the administrative agent that it disputed the lenders’ characterization of the situation described in the Reservation Letters and that these events did not constitute a breach of the RSA or event of default under any of the Credit Agreements. On October 19, 2020, the borrower under the FDP Term Loan also received a letter from the administrative agent under the FDP Term Loan alleging an event of default under the FDP Term Loan as a result of the alleged breach of the 2018 Credit Agreement and outlining the 45-day cure period that will expire on December 3, 2020.
On November 1, 2020, the Company and the other Company Parties under the RSA (the “Debtors”) filed a voluntary Chapter 11 Cases petition (the “Chapter 11 Cases”) in the Bankruptcy Court to implement a prepackaged financial restructuring plan (the "Prepackaged Plan"). The Chapter 11 Cases are being jointly administered under the caption In re Pennsylvania Real Estate Investment Trust, et al. (Case No. 20-12737). Under the Prepackaged Plan, the Company would be recapitalized and its debt maturities extended. The Debtors will continue to operate their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. The Prepackaged Plan and requested first-day relief, which was subsequently granted, anticipate the continued payment of employee wages and benefits without interruption and that trade claimants and other unsecured creditors that continue to work with the Debtors on existing terms will be paid in full and in the ordinary course of business. The Prepackaged Plan is subject to approval by the United States Bankruptcy Court for the District of Delaware. See Note 4 to our unaudited consolidated financial statements for further detail.
On November 2, 2020, the borrower under the FDP Term Loan received a subsequent letter from the administrative agent asserting an event of default as a result of the filing of the Chapter 11 Cases and the automatic acceleration of the FDP Term Loan. The administrative agent under the FDP Term Loan is a party to the RSA, and PREIT has responded to the administrative agent with a letter expressly reserving its rights in connection with the FDP Term Loan and, in the event the Prepackaged Plan is not confirmed or the RSA is otherwise terminated, expressly reserving its rights under the RSA and the Prepackaged Plan.
Despite weaker market conditions resulting from COVID-19, the Company plans to sell certain real estate assets and continue to control certain operational costs in the ordinary course of business. Due to the inherent risks, unknown results and inherent uncertainties associated with the bankruptcy process and the direct correlation between these matters and our ability to satisfy our financial obligations that may arise over the applicable twelve-month period, absent approval of the Prepackaged Plan, we are unable to conclude that it is probable that we will be able to meet our obligations arising within twelve months of the date of issuance of these financial statements under the parameters set forth in this accounting guidance.
As a result, management evaluated whether this was mitigated by our approved plans and expectations for the applicable period under the second step of this accounting standard.
Our liquidity, including our ability to meet our ongoing operational obligations, fund recurring costs of operations, particularly in light of the costs associated with our bankruptcy proceedings and the current COVID-19 pandemic and resulting adverse impacts on our business is dependent upon, among other things: (i) our ability to comply with the terms and conditions of any cash collateral order that may be entered by the Bankruptcy Court in connection with the Chapter 11 Cases, (ii) our ability to maintain adequate cash on hand, (iii) our ability to generate cash flow from operations, (iv) our ability to develop, confirm and consummate the Prepackaged Plan or an alternative restructuring transaction, (v) the cost, duration and outcome of the Chapter 11 Cases; (vi) our execution of the sale of certain real estate assets in the ordinary course of business, which sales would provide cash, and (vii) controlling costs. While certain of these factors are within management’s control to some extent, all of them involve performance by third parties and therefore cannot be considered probable of occurring.
10
Fair Value
Fair value accounting applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements. Fair value measurements are determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, these accounting requirements establish a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access.
Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs might include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals.
Level 3 inputs are unobservable inputs for the asset or liability, and are typically based on an entity’s own assumptions, as there is little, if any, related market activity.
In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. We utilize the fair value hierarchy in our accounting for derivatives (Level 2) and financial instruments (Level 2) and in our reviews for impairment of real estate assets (Level 3) and goodwill (Level 3).
Impairment of Assets
Real estate investments and related intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the property might not be recoverable, which is referred to as a “triggering event.” The continued impact of COVID-19 on the economy and market conditions, together with delayed reopening of some tenants at our properties in the third quarter of 2020, was deemed to be a triggering event during the third quarter of 2020, which led to an impairment review. In connection with our review of our long-lived assets for impairment, we utilize qualitative and quantitative factors in order to estimate fair value. The significant qualitative factors that we use include age and condition of the property, market conditions in the property’s trade area, competition with other shopping centers within the property’s trade area and the creditworthiness and performance of the property’s tenants. The significant quantitative factors that we use include historical and forecasted financial and operating information relating to the property, such as net operating income, occupancy statistics, vacancy projections and tenants’ sales levels.
If there is a triggering event in relation to a property to be held and used, we will estimate the aggregate future cash flows, net of estimated capital expenditures, to be generated by the property, undiscounted and without interest charges. In addition, this estimate may consider a probability weighted cash flow estimation approach when alternative courses of action to recover the carrying amount of a long-lived asset are under consideration or when a range of possible values is estimated.
The determination of undiscounted cash flows requires significant estimates by our management, including the expected course of action at the balance sheet date that would lead to such cash flows. Subsequent changes in estimated undiscounted cash flows arising from changes in the anticipated action to be taken with respect to the property could affect the determination of whether an impairment exists, and the effects of such changes could materially affect our net income. If the estimated undiscounted cash flows are less than the carrying value of the property, the carrying value is written down to its fair value.
Assessment of our ability to recover certain lease-related costs must be made when we have a reason to believe that a tenant might not be able to perform under the terms of the lease as originally expected. This requires us to make estimates as to the recoverability of such costs.
An other-than-temporary impairment of an investment in an unconsolidated joint venture is recognized when the carrying value of the investment is not considered recoverable based on evaluation of the severity and duration of the decline in value. To the extent impairment has occurred, the excess carrying value of the asset over its estimated fair value is recorded as a reduction to income. We concluded that there was no impairment as of September 30, 2020. The Company continues to monitor potential triggering events throughout the year for impairment indicators.
New Accounting Developments
Effective January 1, 2020, we adopted Accounting Standards Update (“ASU”) No. 2017-05ASU 2016-13, Financial Instruments - Other Income - GainsCredit Losses (“ASC 326”), and Losses fromsubsequently issued amendments to the Derecognitioninitial and transitional guidance within ASU 2018-19, ASU 2019-04 and ASU 2019-05. ASU 2016-13 introduced new guidance for an approach based on expected losses to estimate credit losses on certain types of Nonfinancial Assets (Subtopic 610-20), which clarifies the scopefinancial instruments, and
11
Table of asset derecognition guidance andContents
will affect our accounting for partial sales of nonfinancial assets. As it relates to the Company, real estate, such as landtrade receivables and buildings, would be considered an example of a nonfinancial asset. The standard is effective in conjunction with ASU No. 2014-09 (discussed below), which is effective for annual reporting periods beginning after December 15, 2017, however early adoption is permitted. The provisions of this update must be applied at the same time as the adoption of ASU No. 2014-09. The Company is evaluating the effect that ASU No. 2017-05 will have on its consolidated financial statements and related disclosures.
In April 2020, the Financial Accounting Standards Board (“FASB”) issued a Staff Question-and-Answer (“Q&A”) to adoptclarify whether lease concessions related to the standard usingeffects of COVID-19 require the modified retrospective approach, which requires a cumulative adjustment asapplication of the datelease modification guidance under ASU 2016-02, Leases (Topic 842) (“ASC 842”). Under ASC 842, we would have to determine, on a lease-by-lease basis, if a lease concession was the result of a new arrangement reached with the tenant or an enforceable right and obligation within the existing lease. The Q&A allows for the bypass of a lease-by-lease analysis and for us to elect to either apply the lease modification accounting framework or not, to all of the adoption. lease concessions we make with similar characteristics and circumstances. The FASB staff suggested that, in the context of the COVID-19 crisis, under ASC 842, leases where the total lease cash flows will remain substantially the same or less than those under the original lease contract after the COVID-19 related effects, a company may choose to forgo the evaluation of the enforceable rights and obligations of the original lease contract. Instead, the company would account for rent concessions, either:
1. As if they are part of the enforceable rights and obligations under the existing lease contract. Under this approach, the rent concession would be treated as a variable lease payment (negative), resulting in negative variable rent in the affected period(s); or
2. As a lease modification. Under this approach, the resulting change in lease income will be recognized over the remainder of the post-modification lease term.
We also continue to evaluatehave determined that we will apply the scope of revenue-related disclosures we expect to provide pursuantpractical expedient and record negative variable rent, when applicable. This will be the case if the total amended lease payments are substantially the same as they would have been under the original lease terms. In addition, all abatements granted and recorded using this method must be related to the new requirements. The new standard is effectiveimpact of COVID-19. Abatements that do not meet the above COVID-19 criteria will be treated as lease modifications under ASC 842 with the abatement being amortized as a reduction to rental income over the post-modification lease term.
Dividends Declared
On August 12, 2020, in connection with the Company’s negotiation of amendments to its Credit Agreements, the Company announced that all dividends on common and Preferred Shares will be suspended for us on January 1, 2018.
2. REAL ESTATE ACTIVITIES
Investments in real estate as of
September 30,(in thousands of dollars) |
| September 30, 2020 |
|
| December 31, 2019 |
| ||
Buildings, improvements and construction in progress |
| $ | 2,753,965 |
|
| $ | 2,753,039 |
|
Land, including land held for development |
|
| 462,444 |
|
|
| 457,887 |
|
Total investments in real estate |
|
| 3,216,409 |
|
|
| 3,210,926 |
|
Accumulated depreciation |
|
| (1,280,117 | ) |
|
| (1,202,722 | ) |
Net investments in real estate |
| $ | 1,936,292 |
|
| $ | 2,008,204 |
|
(in thousands of dollars) | As of September 30, 2017 | As of December 31, 2016 | |||||
Buildings, improvements and construction in progress | $ | 2,727,880 | $ | 2,794,213 | |||
Land, including land held for development | 492,374 | 505,801 | |||||
Total investments in real estate | 3,220,254 | 3,300,014 | |||||
Accumulated depreciation | (1,082,840 | ) | (1,060,845 | ) | |||
Net investments in real estate | $ | 2,137,414 | $ | 2,239,169 |
Capitalization of Costs
The following table summarizes our capitalized interest, salaries,compensation, including commissions, benefits and real estate taxes for the
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
(in thousands of dollars) | 2017 | 2016 | 2017 | 2016 | |||||||||||
Development/Redevelopment Activities: | |||||||||||||||
Interest | $ | 2,209 | $ | 851 | $ | 5,358 | $ | 2,221 | |||||||
Salaries and benefits | 362 | 339 | 1,058 | 880 | |||||||||||
Real estate taxes | 496 | 176 | 651 | 202 | |||||||||||
Leasing Activities: | |||||||||||||||
Salaries, commissions and benefits | 1,536 | 1,378 | 4,633 | 4,394 |
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| |||||||||||
(in thousands of dollars) |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Development/Redevelopment Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest (1) |
| $ | 489 |
|
| $ | 2,683 |
|
| $ | 1,844 |
|
| $ | 7,012 |
|
Compensation |
|
| 25 |
|
|
| 281 |
|
|
| 416 |
|
|
| 969 |
|
Real estate taxes |
|
| 29 |
|
|
| 524 |
|
|
| 255 |
|
|
| 945 |
|
Leasing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation, including commissions (2) |
|
| - |
|
|
| 108 |
|
|
| 164 |
|
|
| 413 |
|
(1) | Includes interest capitalized on investments in partnerships under development. |
(2) | The definition of initial direct costs under ASC 842 includes only those incremental costs of a lease that would not have been incurred if the lease had not been obtained. Commissions paid for successful leasing transactions continue to be capitalized. |
Sale Date | Property and Location | Description of Real Estate Sold | Capitalization Rate | Sale Price | Gain | ||||||||||
(in millions) | |||||||||||||||
2017 Activity: | |||||||||||||||
January | Beaver Valley Mall, Monaca, Pennsylvania | Mall | 15.6 | % | $ | 24.2 | $ | — | |||||||
Crossroads Mall, Beckley, West Virginia | Mall | 15.5 | % | 24.8 | — | ||||||||||
August | Logan Valley Mall Altoona, Pennsylvania | Mall | 16.5 | % | 33.2 | — |
12
Dispositions
In 2017, we sold two non operating parcels located at Valley Mall and Beaver Valley Mall for an aggregate of
In November 2019, we entered into an agreement to sell 14 tenant occupied parcels across five properties — Magnolia Mall, Capital City Mall, Woodland Mall, Jacksonville Mall and Valley Mall — for total consideration of $29.9 million. As of December 31, 2019, we completed the dispositions on three outparcels at Capital City Mall and Magnolia Mall for total consideration of $5.2 million. In connection with these sales, we recorded a lossgain of $2.7 million. In January 2020, the sale of the outparcel at Woodland Mall for total consideration of $5.1 million was completed and in March 2020, the sale of two outparcels at Magnolia Mall for total consideration of $2.9 million was completed with a resulting gain on sale of $1.9 million which was recorded in March 2020. In June 2020, we completed the sale of six outparcels at Magnolia Mall, Valley Mall and Jacksonville Mall for total consideration of $14.4 million. In connection with these sales, we recorded a gain of $9.3 million. During June 2020, the tenant of the remaining two outparcels subject to this agreement filed for bankruptcy. As a result, the agreement was amended to terminate the sale of the final two outparcels.
In March 2019, we entered into an agreement of sale with a buyer to sell an undeveloped land parcel located in Gainesville, Florida for total consideration of $15.0 million and the sale transaction was split into four parcels. The first parcel was sold in March 2019 for $5.0 million. As a result of executing the agreement of sale, we recorded losses on impairment of assets. Our fair value analysis was basedassets of $1.5 million in the first quarter of 2019. Subsequently, we closed on an estimated capitalization ratethe sale of approximately 12%two parcels in November 2019 and the sale of the final parcel closed in December 2019 for Valley View Mall, which was determined using management’s assessmentaggregate consideration of property operating performance and general market conditions. We have also determined that Valley
3. INVESTMENTS IN PARTNERSHIPS
The following table presents summarized financial information of the equity investments in our unconsolidated partnerships as of
September 30,(in thousands of dollars) |
| September 30, 2020 |
|
| December 31, 2019 |
| ||
ASSETS: |
|
|
|
|
|
|
|
|
Investments in real estate, at cost: |
|
|
|
|
|
|
|
|
Operating properties |
| $ | 1,147,457 |
|
| $ | 883,530 |
|
Construction in progress |
|
| 35,940 |
|
|
| 251,029 |
|
Total investments in real estate |
|
| 1,183,397 |
|
|
| 1,134,559 |
|
Accumulated depreciation |
|
| (256,471 | ) |
|
| (229,877 | ) |
Net investments in real estate |
|
| 926,926 |
|
|
| 904,682 |
|
Cash and cash equivalents |
|
| 29,058 |
|
|
| 34,766 |
|
Deferred costs and other assets, net |
|
| 117,609 |
|
|
| 43,476 |
|
Total assets |
|
| 1,073,593 |
|
|
| 982,924 |
|
LIABILITIES AND PARTNERS’ INVESTMENT: |
|
|
|
|
|
|
|
|
Mortgage loans payable, net |
|
| 493,634 |
|
|
| 499,057 |
|
FDP Term Loan, net |
|
| 299,575 |
|
|
| 299,091 |
|
Other liabilities |
|
| 124,703 |
|
|
| 79,166 |
|
Total liabilities |
|
| 917,912 |
|
|
| 877,314 |
|
Net investment |
| $ | 155,681 |
|
| $ | 105,610 |
|
Partners’ share |
|
| 76,128 |
|
|
| 50,997 |
|
PREIT’s share |
|
| 79,553 |
|
|
| 54,613 |
|
Excess investment(1) |
|
| 18,669 |
|
|
| 17,464 |
|
Net investments and advances |
| $ | 98,222 |
|
| $ | 72,077 |
|
Reconciliation to comparable GAAP balance sheet item: |
|
|
|
|
|
|
|
|
Investment in partnerships, at equity |
| $ | 176,070 |
|
| $ | 159,993 |
|
Distributions in excess of partnership investments |
|
| (77,848 | ) |
|
| (87,916 | ) |
Net investment |
| $ | 98,222 |
|
| $ | 72,077 |
|
_____________________
(in thousands of dollars) | As of September 30, 2017 | As of December 31, 2016 | |||||
ASSETS: | |||||||
Investments in real estate, at cost: | |||||||
Operating properties | $ | 612,623 | $ | 649,960 | |||
Construction in progress | 261,735 | 160,699 | |||||
Total investments in real estate | 874,358 | 810,659 | |||||
Accumulated depreciation | (201,964 | ) | (207,987 | ) | |||
Net investments in real estate | 672,394 | 602,672 | |||||
Cash and cash equivalents | 47,431 | 27,643 | |||||
Deferred costs and other assets, net | 34,218 | 37,705 | |||||
Total assets | 754,043 | 668,020 | |||||
LIABILITIES AND PARTNERS’ INVESTMENT: | |||||||
Mortgage loans payable, net | 440,315 | 445,224 | |||||
Other liabilities | 54,079 | 23,945 | |||||
Total liabilities | 494,394 | 469,169 | |||||
Net investment | 259,649 | 198,851 | |||||
Partners’ share | 130,627 | 101,045 | |||||
PREIT’s share | 129,022 | 97,806 | |||||
Excess investment (1) | 12,107 | 8,969 | |||||
Net investments and advances | $ | 141,129 | $ | 106,775 | |||
Investment in partnerships, at equity | $ | 201,000 | $ | 168,608 | |||
Distributions in excess of partnership investments | (59,871 | ) | (61,833 | ) | |||
Net investments and advances | $ | 141,129 | $ | 106,775 |
(1) | Excess investment represents the unamortized difference between our investment and our share of the equity in the underlying net investment in the unconsolidated partnerships. The excess investment is amortized over the life of the properties, and the amortization is included in “Equity in income of partnerships.” |
We record distributions from our equity investments as cash from operating activities up to an amount equal tousing the equity in income of partnerships. Amounts in excess of our sharenature of the income in the equity investments are treated as a return of partnership capital and recorded as cash from investing activities.
The following table summarizes our share of equity in (loss) income of partnerships for the
three and nine months ended September 30,
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(in thousands of dollars) |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Real estate revenue |
| $ | 24,198 |
|
| $ | 23,742 |
|
| $ | 75,484 |
|
| $ | 70,636 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property operating and other expenses |
|
| (13,924 | ) |
|
| (8,805 | ) |
|
| (35,884 | ) |
|
| (24,331 | ) |
Interest expense(1) |
|
| (6,038 | ) |
|
| (5,771 | ) |
|
| (18,008 | ) |
|
| (17,428 | ) |
Depreciation and amortization |
|
| (10,570 | ) |
|
| (5,317 | ) |
|
| (25,965 | ) |
|
| (14,675 | ) |
Total expenses |
|
| (30,532 | ) |
|
| (19,893 | ) |
|
| (79,857 | ) |
|
| (56,434 | ) |
Net (loss) income |
|
| (6,334 | ) |
|
| 3,849 |
|
|
| (4,373 | ) |
|
| 14,202 |
|
Partners’ share |
|
| 3,183 |
|
|
| (2,191 | ) |
|
| 1,884 |
|
|
| (7,777 | ) |
PREIT’s share |
|
| (3,151 | ) |
|
| 1,658 |
|
|
| (2,489 | ) |
|
| 6,425 |
|
Amortization of and adjustments to excess investment, net |
|
| (108 | ) |
|
| (127 | ) |
|
| (309 | ) |
|
| (289 | ) |
Equity in (loss) income of partnerships |
| $ | (3,259 | ) |
| $ | 1,531 |
|
| $ | (2,798 | ) |
| $ | 6,136 |
|
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
(in thousands of dollars) | 2017 | 2016 | 2017 | 2016 | |||||||||||
Real estate revenue | $ | 29,395 | $ | 29,475 | $ | 87,089 | $ | 85,867 | |||||||
Operating expenses: | |||||||||||||||
Property operating and other expenses | (7,885 | ) | (8,198 | ) | (25,098 | ) | (25,220 | ) | |||||||
Interest expense | (5,460 | ) | (5,388 | ) | (16,266 | ) | (16,165 | ) | |||||||
Depreciation and amortization | (6,496 | ) | (5,840 | ) | (19,151 | ) | (17,367 | ) | |||||||
Total expenses | (19,841 | ) | (19,426 | ) | (60,515 | ) | (58,752 | ) | |||||||
Net income | 9,554 | 10,049 | 26,574 | 27,115 | |||||||||||
Less: Partners’ share | (5,321 | ) | (5,397 | ) | (14,567 | ) | (14,496 | ) | |||||||
PREIT’s share | 4,233 | 4,652 | 12,007 | 12,619 | |||||||||||
Amortization of and adjustments to excess investment | 21 | (9 | ) | 137 | 99 | ||||||||||
Equity in income of partnerships | $ | 4,254 | $ | 4,643 | $ | 12,144 | $ | 12,718 |
(1) Net of capitalized interest expense of $467 and $1,602 for the three months ended September 30, 2020 and 2019, respectively, and $2,394 and $4,554 for the nine months ended September 30, 2020 and 2019, respectively.
14
Dispositions
In September 2017,March 2019, a partnership in which we hold a 50% ownership share25% interest sold its condominium interest in 801 Market Street in Philadelphia, Pennsylvaniaan undeveloped land parcel adjacent to Gloucester Premium Outlets for $61.5$3.8 million. The partnership recorded a gain on sale of $13.4$2.3 million, of which our share is $6.7 million. The partnership distributed to us proceeds of $30.3was $0.6 million, in connection with this transaction in September 2017, which is recorded in gain on salesales of real estate by equity method investee in the accompanying consolidated statement of operations.
Term Loan
In August 2017,January 2018, our Fashion District Philadelphia redevelopment project joint venture entity entered into a $250.0 million term loan (the “FDP Term Loan”). We and our partner in the mortgage loan secured by Pavilion at Market East in Philadelphia, Pennsylvania was extended to November 2017. We own a 40% partnership interest in Pavilion at Market East, which owns non-operating land held for development. Our share of the mortgage loan is $3.3 million as of September 30, 2017.
Mortgage Loan activity
During the nine months ended September 30, 2020, we executed forbearance and loan modification agreements for Metroplex and Springfield Mall. These arrangements allowed us to defer principal payments, and in some cases interest as well, between May and August 2020 depending on the terms of each agreement. At the end of the deferral period, repayment of deferred amounts spans from four to six months. The repayment periods range from August 2020 through February 2021 depending on the terms of the specific agreements.
Significant Unconsolidated Subsidiary
We have a 50% ownership interest in Lehigh Valley Mall in Allentown, Pennsylvania, entered into a new $200.0 million mortgage loan. The mortgage loan has a fixed interest rate of 4.06%Associates L.P. (“LVA”) and has a term of 10 years. In connection with this new mortgage loan financing, the unconsolidated entity repaid the previous $124.6 million mortgage loan using proceeds from the new mortgage loan and will record $3.1 million of prepayment penalty and will accelerate the amortization of $0.1 million of unamortized financing costs in the fourth quarter of 2017. The unconsolidated entity distributed to us excess proceeds of $35.3 million in October 2017.
LVA
(in thousands of dollars) |
| September 30, 2020 |
|
| December 31, 2019 |
| ||
Summarized balance sheet information |
|
|
|
|
|
|
|
|
Total assets |
| $ | 64,971 |
|
| $ | 62,504 |
|
Mortgage loan payable, net |
|
| 189,360 |
|
|
| 191,998 |
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| |||||||||||
(in thousands of dollars) |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Summarized statement of operations information |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
| $ | 6,596 |
|
| $ | 8,006 |
|
| $ | 21,243 |
|
| $ | 24,589 |
|
Property operating expenses |
|
| (1,984 | ) |
|
| (2,138 | ) |
|
| (6,568 | ) |
|
| (6,351 | ) |
Interest expense |
|
| (1,944 | ) |
|
| (2,027 | ) |
|
| (5,803 | ) |
|
| (6,055 | ) |
Net income |
|
| 1,864 |
|
|
| 3,059 |
|
|
| 6,402 |
|
|
| 9,768 |
|
PREIT’s share of equity in income of partnership |
|
| 932 |
|
|
| 1,529 |
|
|
| 3,201 |
|
|
| 4,884 |
|
As of | |||||||||
(in thousands of dollars) | September 30, 2017 | December 31, 2016 | |||||||
Summarized balance sheet information | |||||||||
Total assets | $ | 46,280 | $ | 49,264 | |||||
Mortgage loan payable | 124,653 | 126,520 |
15
FDP
(in thousands of dollars) |
| September 30, 2020 |
|
| December 31, 2019 |
| ||
Summarized balance sheet information |
|
|
|
|
|
|
|
|
Total assets |
| $ | 725,087 |
|
| $ | 641,377 |
|
FDP Term Loan, net |
|
| 299,575 |
|
|
| 299,091 |
|
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(in thousands of dollars) |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Summarized statement of operations information |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
| $ | 4,763 |
|
| $ | 1,271 |
|
| $ | 15,276 |
|
| $ | 2,667 |
|
Property operating expenses |
|
| (6,228 | ) |
|
| (1,901 | ) |
|
| (14,305 | ) |
|
| (3,100 | ) |
Interest expense |
|
| (933 | ) |
|
| (2 | ) |
|
| (2,137 | ) |
|
| (2 | ) |
Net loss |
|
| (9,365 | ) |
|
| (2,553 | ) |
|
| (16,304 | ) |
|
| (4,879 | ) |
PREIT’s share of equity in loss of partnership |
|
| (4,690 | ) |
|
| (1,262 | ) |
|
| (8,164 | ) |
|
| (2,299 | ) |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(in thousands of dollars) | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Summarized statement of operations information | ||||||||||||||||
Revenue | $ | 8,355 | $ | 9,023 | $ | 25,811 | $ | 27,192 | ||||||||
Property operating expenses | (2,169 | ) | (2,204 | ) | (6,653 | ) | (6,386 | ) | ||||||||
Interest expense | (1,851 | ) | (1,888 | ) | (5,582 | ) | (5,691 | ) | ||||||||
Net income | 3,449 | 4,066 | 10,710 | 12,544 | ||||||||||||
PREIT’s share of equity in income | ||||||||||||||||
of partnership | 1,724 | 2,033 | 5,355 | 6,272 |
4. FINANCING ACTIVITY
Credit Agreements
As of September 30, 2020, we have entered into four3 credit agreements (collectively, as amended, the “Credit Agreements”), as further discussed in our Annual Report on Form 10-K for the year ended December 31, 2016:agreements: (1) the 20132018 Credit Agreement, which, as described in more detail below, includes (a) the $375.0 million 2018 Revolving Facility, and (b) the $300.0 million 2018 Term Loan Facility, (2) the $250.0 million 2014 7-Year Term Loan, and (3) the Bridge Facility. The 2018 Term Loan Facility, the 2014 7-Year Term Loan (3) the 2014 5-Year Term Loan, and (4) the 2015 5-Year Term Loan. The 2014 7-Year Term Loan, the 2014 5-Year Term Loan and the 2015 5-Year Term LoanBridge Facility are collectively referred to as the “Term Loans.”
As of September 30, 2017,2020, we had borrowed $550.0$560.5 million available under the Term Loans, inincluding $22.5 million under our Bridge Facility and the aggregate and no amounts were borrowedfull $375.0 million under the 20132018 Revolving Facility (with $15.8 million pledged as collateral for letters of credit at September 30, 2017).Facility. The carrying value of the Term Loans on our consolidated balance sheet as of September 30, 2020 is net of $2.4$1.5 million of unamortized debt issuance costs.
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||
(in thousands of dollars) | 2017 | 2016 | 2017 | 2016 | |||||||||||||
2013 Revolving Facility | |||||||||||||||||
Interest expense | $ | 601 | $ | 805 | $ | 2,011 | $ | 2,277 | |||||||||
Deferred financing amortization | 199 | 199 | 597 | 596 | |||||||||||||
Term Loans | |||||||||||||||||
Interest expense | 4,205 | 3,125 | 10,752 | 9,162 | |||||||||||||
Deferred financing amortization | 191 | 191 | 568 | 431 |
Amounts borrowed under the 2018 Credit Agreement or the 7-Year Term Loan Agreements, which may be either LIBOR Loans or Base Rate Loans, bear interest at the rate specified below per annum, depending on our leverage, in excess of LIBOR, unless and until we receive an investment grade credit rating and provide notice to the administrative agent (the “Rating Date”), after which alternative rates would apply.apply, as described in the applicable Credit Agreements. The applicable interest rates for amounts borrowed under our Bridge Facility are described further below.
During the Suspension Period, the Applicable Margin will be determined based on the Level 5 Ratio of Total Liabilities to Gross Asset Value (listed below). In determining our leverage (the ratio of Total Liabilities to Gross Asset Value), the capitalization rate used to calculate Gross Asset Value is (a) 6.50% for each property having an average sales per square foot of more than $500 for the most recent period of 12 consecutive months, and (b) 7.50% for any other property. The 2013Prior to July 27, 2020 amendment, the 2018 Revolving
16
|
|
| Applicable Margin |
| |||||||||||||
Level | Ratio of Total Liabilities to Gross Asset Value |
| Revolving Loans that are LIBOR Loans |
|
| Revolving Loans that are Base Rate Loans |
|
| Term Loans that are LIBOR Loans |
|
| Term Loans that are Base Rate Loans |
| ||||
1 | Less than 0.450 to 1.00 |
|
| 1.20 | % |
|
| 0.20 | % |
|
| 1.35 | % |
|
| 0.35 | % |
2 | Equal to or greater than 0.450 to 1.00 but less than 0.500 to 1.00 |
|
| 1.25 | % |
|
| 0.25 | % |
|
| 1.45 | % |
|
| 0.45 | % |
3 | Equal to or greater than 0.500 to 1.00 but less than 0.550 to 1.00 |
|
| 1.30 | % |
|
| 0.30 | % |
|
| 1.60 | % |
|
| 0.60 | % |
4 | Equal to or greater than 0.550 to but less than 0.600 to 1.000 |
|
| 1.55 | % |
|
| 0.55 | % |
|
| 1.90 | % |
|
| 0.90 | % |
5 | Equal to or greater than 0.600 to 1.000 (1) |
|
| 1.90 | % | (2) |
| 0.90 | % |
|
| 2.25 | % | (2) |
| 1.25 | % |
(1) | The rates in effect under the 2018 Credit Agreement and 7-Year Term Loan Agreements were based upon the Level 5 Ratio of Total Liabilities to Gross Asset Value as of September 30, 2020. |
(2) | Under the July 2020 amendments, during the Suspension Period, the rate determined by adding LIBOR and the Applicable Margin for LIBOR Loans for Level 5 will be increased (but not decreased) to equal the rate determined by adding Base Rate and the Applicable Margin for Base Rate Loans on the date of conversion or continuation of any LIBOR Loan. |
The Credit Agreements contain certain affirmative and negative covenants, several of which were amended on March 30, 2020. Pursuant to the July 2020 amendments, some of those covenants have been suspended for the duration of the Suspension Period, as extended by the September 30, 2020 amendments. The affirmative and negative covenants, as amended by the March 2020 amendments, include, without limitation, requirements that PREIT maintain, on a consolidated basis: (1) Minimum Tangible Net Worth of $1,463.2 million, plus 75% of the Net Proceeds of all Equity Issuances effected at any time after March 31, 2018; (2) maximum ratio of Total Liabilities to Gross Asset Value of 0.65:1 at any time prior to and including September 30, 2020, or 0.60:1 at any time thereafter, provided that it will not be a Default if after September 30, 2020, the ratio exceeds 0.60:1 but does not exceed 0.625:1 for more than 2 consecutive quarters on more than 2 occasions during the remainder of the term (which covenant has been suspended for the duration of the Suspension Period); (3) minimum ratio of Adjusted EBITDA to Fixed Charges of 1.40 to 1.00 for any period ending on or before September 30, 2020, or 1.50:1 for any period ending thereafter (which covenant has been suspended for the duration of the Suspension Period); (4) minimum Unencumbered Debt Yield of (a) 10.0% at any time prior to and including September 30, 2020, (b) 11.25% any time after September 30, 2020 through and including June 30, 2021, and (c) 11.50% any time thereafter (which covenant has been suspended for the duration of the Suspension Period); (5) minimum Unencumbered Net Operating Income to Unsecured Interest Expense of 1.75:1; (6) maximum ratio of Secured Indebtedness to Gross Asset Value of 0.60:1; and (7) Distributions may not exceed (a) with respect to our preferred shares, the amounts required by the terms of the preferred shares, and (b) with respect to our common shares, the greater of (i) 95.0% of Funds From Operations (FFO), and (ii) 110% of REIT taxable income for a fiscal year. Our Credit Agreements previously required us to maintain unrestricted cash liquidity of $8.5 million at all times during the Suspension Period and $25.0 million prior to the Suspension Period and following table presentsSeptember 30, 2020 (the end of the initially extended Suspension Period), such liquidity to be comprised of unrestricted cash and cash equivalents, undrawn availability under the 2018 Revolving Facility and undrawn availability under the Bridge Facility. The minimum liquidity requirements under each of our Credit Agreements were eliminated by the September 30, 2020 amendments. The covenants and restrictions in the Credit Agreements limit our ability to incur additional indebtedness, grant liens on assets and enter into negative pledge agreements, merge, consolidate or sell all or substantially all of its assets, and enter into transactions with affiliates and the March 2020 amendments limit our ability to enter into sale-leaseback transactions with respect to Unencumbered Properties. The Credit Agreements are subject to customary events of default and are cross-defaulted with one another. The July 2020 amendments prohibit us from taking any action (or omitting from taking any action) during the Suspension Period (as extended by the September 2020 amendments) where such action would be otherwise prohibited to be taken or omitted during the existence of a default or event of default, including but not limited to making certain Restricted Payments (as defined in the Credit Agreements), creating, assuming or incurring liens on our assets, income or profits, and engaging in certain transactions regarding mergers, acquisitions and sales of assets, in each case unless permitted by the Credit Agreements. Restricted Payments (as defined in the Credit Agreements) include cash dividends with respect to our shares. As such, the Credit Agreements, as amended, restrict our ability to declare and pay dividends on our common shares and preferred shares for the duration of the Suspension Period. The filing of the Chapter 11 Cases constitutes an event of default under the Credit Agreements.
We may prepay the amounts due under the Credit Agreements at any time without premium or penalty, subject to reimbursement obligations for the lenders’ breakage costs for LIBOR borrowings. We must make prepayments under the 2018 Term Loan Facility in an amount equal to 54.55% of any Net Cash Proceeds received from certain Capital Events (provided that any Net Cash Proceeds from Capital Events in excess of $150 million must be applied 50% toward repayment of outstanding amounts under the 2018 Revolving Facility with 54.55% of the remaining 50% applied to prepay amounts under the 2018 Term Loan Facility), subject to certain exceptions. If we had more than $50.0 million of unrestricted cash on our balance sheet for five consecutive days any time prior to September 30, 2020, we were required to prepay the 2018 Revolving Facility with our excess cash above $50.0 million. We must also make prepayments under the 7-Year Term Loan in an amount equal to 45.45% of any Net Cash Proceeds received from certain Capital Events (provided that any Net Cash Proceeds from Capital Events in excess of $150 million must be applied 50% toward repayment of outstanding amounts under the 2018 Revolving Facility with 45.45% of the remaining 50% applied to prepay the amounts outstanding under the 7-Year Term Loan), subject to certain exceptions. We also made monthly principal amortization payments of
17
$1.09 million of the term loan under the 2018 Credit Agreement and of $909 thousand of the term loan under the 7-Year Term Loan, in each case for the months of April, May, June, July, August and September of 2020.
Upon the expiration of any applicable margincure period for an event of default (except with respect to bankruptcy as described in the next sentence), the lenders may declare all of the obligations in connection with the Credit Agreements immediately due and payable.
Upon the occurrence of a voluntary or involuntary bankruptcy proceeding of PREIT, PALP, PRI, any material subsidiary, any subsidiary that owns or leases an Unencumbered Property or certain other subsidiaries, all outstanding amounts automatically become immediately due and payable. The filing of the Chapter 11 Cases constitutes such a proceeding under the Credit Agreements and Bridge Facility, however, any efforts to enforce the payment obligations thereunder are automatically stayed as a result of the Chapter 11 Cases and the lenders’ rights of enforcement are subject to the Bankruptcy Code. In the event of an involuntary bankruptcy proceeding, we have a limited time period to obtain a dismissal of the involuntary bankruptcy prior to the occurrence of an event of default.
Bridge Facility
The Company’s obligations under the Bridge Facility and related guaranty are secured by mortgages and deeds of trust on a portfolio of 12 of our subsidiaries’ properties, including 9 malls and 3 additional parcels. The obligations are further secured by a pledge of substantially all of the personal property of the Company and the guarantors pursuant to a collateral agreement and a pledge of substantially all of the equity interests of the guarantors (subject to limited exceptions) pursuant to a pledge agreement. The initial maturity date of the Bridge Facility was the earlier of (a) September 30, 2020, or (b) the date the obligations under the Bridge Facility have been accelerated. On September 30, 2020, the maturity date was extended to October 31, 2020.
Amounts borrowed under the Bridge Facility may be either Base Rate Loans or LIBOR Loans. Base Rate Loans bear interest at the highest of (a) the Prime Rate, (b) the Federal Funds Rate plus 0.50% and (c) the LIBOR Market Index Rate plus 1.0%, provided that the Base Rate will not be less than 2.00% per annum, in each case plus 7.00% per annum. LIBOR Loans bear interest at LIBOR plus 8.00% per annum. After the initial borrowing and prior to the October 2020 amendment, the Company was only permitted to draw when its unrestricted cash and cash equivalents were equal to or less than $12.5 million, and subsequent borrowings were determined according to a multiple of amounts set forth in the loan budget. Pursuant to the October 2020 amendment to the Bridge Credit Agreement, the commitments under the Bridge Facility were increased by $25.0 million and the entire $25.0 million was drawn and deposited into a cash collateral account. We may only draw amounts from the cash collateral account holding the unfunded amount of commitments if our unrestricted cash and cash equivalents (not including the cash in such account) is equal to or less than $12.5 million. The Company must also pay certain fees to the administrative agent for the account of the lenders in connection with the Bridge Facility, including a ticking fee, which will accrue 0.50% per annum on the daily amount of the unused commitments. Accrued and unpaid ticking fees will be payable on the maturity date.
The Bridge Facility contains, among other restrictions, certain affirmative and negative covenants, including, without limitation, requirements that the Borrower and certain of its subsidiaries (i) comply with all of the affirmative and negative covenants set forth in the 2018 Credit Agreement, (ii) promptly notify the administrative agent of any acquisition of any owned real property that is not subject to a mortgage and grant liens on such real property to secure the Bridge Facility, (iii) use the proceeds of the Bridge Facility for purposes consistent with certain categories set forth in the loan budget, (iv) provide weekly reports with respect to variances in actual results relative to projected amounts set forth in the loan budget and providing an explanation for any such deviation, certifying that no Default or Event of Default has occurred (or if one has occurred, specifying the nature and extent thereof and any corrective action taken or proposed to be taken with respect thereto), and beginning on the fourth week following the effective date certifying compliance with covenants limiting the permitted variation of certain actual disbursements by the Company and its subsidiaries from amounts set forth in the loan budget; (v) beginning with the fourth full week following the effective date, and for each levelrolling four-week period thereafter, the Borrower is required to cause certain of its actual aggregate disbursements not to exceed the aggregate amount of such disbursements in the loan budget by more than 20% during any such four-week testing period, (vi) prior to August 31, 2020, agree to a non-binding term sheet with respect to amendments of each of the 2018 Credit Agreement and the 7-Year Term Loan (which the Borrower satisfied on August 30, 2020), (vii) provide operating statements, rent rolls, collections and leasing information, as well as certain reports and agreements as the administrative agent may reasonably require, to the administrative agent for each of the Mortgaged Properties, (viii) maintain liquidity of at least $8.5 million, to be comprised of unrestricted cash held in certain deposit accounts subject to control agreements as well as up to $5.0 million held in a certain other deposit account not subject to a control agreement and the unused commitments under the Bridge Facility (to the extent available to be drawn); and (ix) not retain more than $6.5 million of cash in property-level accounts held by subsidiaries that are owners of real property (subject to certain exceptions). As discussed above, the minimum liquidity requirement under the Bridge Facility was eliminated by the September 2020 amendment. The Bridge Facility also prevents the Company and its subsidiaries, subject to certain exceptions, from incurring additional indebtedness, incurring liens on their property, making investments, and amending their organizational documents.
The Bridge Facility permits prepayment at any time without premium or penalty. At any time that the Borrower or any Guarantor or subsidiary or unconsolidated joint venture thereof (to the extent that such entity has the ability to require a distribution from such joint venture of its portion of Net Cash Proceeds) receives Net Cash Proceeds from any Capital Event, the Borrower must prepay the Bridge Facility in an amount equal to 100% of such Net Cash Proceeds (or with respect to any joint venture, the portion of such Net Cash Proceeds distributed to the Borrower or any Guarantor).
18
Interest expense and deferred financing fee amortization related to the Credit Agreements and Bridge Facility for the Credit Agreements:
Applicable Margin | |||||
Level | Ratio of Total Liabilities to Gross Asset Value | 2013 Revolving Facility | Term Loans | ||
1 | Less than 0.450 to 1.00 | 1.20% | 1.35% | ||
2 | Equal to or greater than 0.450 to 1.00 but less than 0.500 to 1.00 | 1.25% | (1) | 1.45% | (1) |
3 | Equal to or greater than 0.500 to 1.00 but less than 0.550 to 1.00 | 1.30% | 1.60% | ||
4 | Equal to or greater than 0.550 to 1.00 | 1.55% | 1.90% |
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| |||||||||||
(in thousands of dollars) |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Revolving Facility: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
| $ | 3,505 |
|
| $ | 2,082 |
|
| $ | 8,363 |
|
| $ | 5,143 |
|
Deferred financing amortization |
|
| 278 |
|
|
| 274 |
|
|
| 830 |
|
|
| 822 |
|
Term Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
| 6,931 |
|
|
| 5,212 |
|
|
| 18,230 |
|
|
| 15,477 |
|
Deferred financing amortization |
|
| 910 |
|
|
| 191 |
|
|
| 1,297 |
|
|
| 570 |
|
The aggregate carrying values and estimated fair values of mortgage loans based on interest rates and market conditions at September 30, 20172020 and December 31, 20162019 were as follows:
|
| September 30, 2020 |
|
| December 31, 2019 |
| ||||||||||
(in millions of dollars) |
| Carrying Value |
|
| Fair Value |
|
| Carrying Value |
|
| Fair Value |
| ||||
Mortgage loans(1) |
| $ | 890.8 |
|
| $ | 894.6 |
|
| $ | 899.8 |
|
| $ | 873.9 |
|
|
|
(1) | The carrying value of mortgage loans is net of unamortized debt issuance costs of $1.2 million and $1.8 million as of September 30, 2020 and December 31, 2019, respectively. |
September 30, 2017 | December 31, 2016 | ||||||||||||||
(in millions of dollars) | Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||
Mortgage loans(1) | $ | 1,032.6 | $ | 1,035.7 | $ | 1,222.9 | $ | 1,189.6 |
The mortgage loans contain various customary default provisions. As of
Mortgage Loan Activity
During the nine months ended September 30, 2017,2020, we were notexecuted forbearance and loan modification agreements for Cherry Hill Mall, Cumberland Mall, Dartmouth Mall, Francis Scott Key Mall, Viewmont Mall, and Woodland Mall. These arrangements allowed us to defer principal payments, and in some cases interest as well, between May and August 2020 depending on the terms of each agreement. At the end of the deferral period, repayment of deferred amounts spans from four to six months. The repayment periods range from August 2020 through February 2021 pursuant to the terms of the specific agreements. Certain of these forbearance and loan modification agreements also impose certain additional informational reporting requirements during the applicable modification periods.
In the second quarter of 2020, we received a notice of transfer of servicing for the mortgage loan secured by Valley View Mall, which had a $27.3 million balance as of June 30, 2020. Subsequently, we failed to make the June 2020 monthly payment and our subsidiary that is the borrower under the mortgage also received a notice of default on anythe mortgage from the lender. Additionally, we have not paid the balloon payment of $27.3 million due at maturity on July 1, 2020. A foreclosure notice has been filed and operations of the property has been assigned to a receiver in August 2020. See Note 2 to our unaudited financial statements for further detail.
In September 2019, we conveyed Wyoming Valley Mall to the lender of the mortgage loans.
In March 2017,2019, we repaiddefeased a $150.6$58.5 million mortgage loan (includingincluding accrued interest, of $0.6 million), secured by TheCapital City Mall at Prince Georges in Hyattsville, MarylandCamp Hill, Pennsylvania using $110.0 millionfunds from our 20132018 Revolving Facility and the balance from available working capital.
Note Payable
In April 2020, in light of the impact of COVID-19 on our business and limited capital resources, we applied for and received proceeds from a potentially forgivable loan in the amount of $4.5 million under the Paycheck Protection Program (PPP) of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. We entered into a note payable with our lender bank (“Note Payable”). The Note Payable will mature on April 15, 2022. Based on the CARES Act and the Note Payable, all payments of both principal and interest will be deferred until at least August 2021. The Note Payable accrues interest at a rate of 1.00% per annum, and the interest will continue to accrue throughout the period the Note Payable is outstanding, or the forgiveness date. All or a portion of PPP loans are eligible for forgiveness pursuant to program guidelines to the extent the proceeds are used for qualifying purposes within a 24-week period following the loan funding. The proceeds are included in “Accrued expenses and other liabilities” in our consolidated balance sheet.
19
Interest Rate Risk
We follow established risk management policies designed to limit our interest rate risk on our interest bearing liabilities, as further discussed in noteNote 7 to our unaudited consolidated financial statements.
Subsequent Events
As discussed in Note 1, on October 7, 2020, the Company Parties entered into the RSA with certain of our lenders under our Credit Agreements. The RSA was amended on October 16, 2020 and again on October 23, 2020, to, among other things, extend the date by which the Company Parties were required to commence the solicitation and the Chapter 11 Cases and provide for a limited tolling of the Company Parties’ alleged breach of the RSA (described further below).
As discussed above, we amended our Bridge Credit Agreement on October 16, 2020 to, among other things, increase the aggregate amount of commitments under the Bridge Facility by $25.0 million.
Additionally, as discussed above, on October 19, 2020, we received Reservation Letters from the administrative agent alleging events of default with respect to each of the Credit Agreements, in addition to a letter from certain lenders under the RSA regarding an alleged breach of the RSA. The Reservation Letter in respect of each Credit Agreement states that interest will accrue on the outstanding principal balance of the loans under such Credit Agreement at the increased Post-Default Rate (as defined in such Credit Agreement) beginning on October 19, 2020. The Reservation Letters specify that the lenders have not waived their rights and remedies under the Credit Agreements or the RSA (as applicable), and that they expressly reserve all available rights and remedies thereunder and under applicable law. The Company has responded to the administrative agent that it disputes the lenders’ characterization of the situation described in the Reservation Letters and that no breach of the RSA or event of default under any of the Credit Agreements has occurred. On October 19, 2020, the borrower under the FDP Term Loan also received a letter from the administrative agent under the FDP Term Loan alleging an event of default under the FDP Term Loan as a result of the alleged breach of the 2018 Credit Agreement and outlining the 45-day cure period that will expire on December 3, 2020. On November 2, 2020, the borrower under the FDP Term Loan received a subsequent letter from the administrative agent asserting an event of default as a result of the filing of the Chapter 11 Cases and the automatic acceleration of the FDP Term Loan. The administrative agent under the FDP Term Loan is a party to the RSA, and PREIT has responded to the administrative agent with a letter expressly reserving its rights in connection with the FDP Term Loan and, in the event the Prepackaged Plan is not confirmed or the RSA is otherwise terminated, expressly reserving its rights under the RSA and the Prepackaged Plan. As discussed below, the Chapter 11 Cases constitute an event of default under our Credit Agreements and may also trigger cross-defaults under certain of our property-level debt facilities. We have received and expect to continue to receive notices from certain property-level lenders asserting those cross-defaults, including the agent for the credit facilities secured by Woodland Mall and Willow Grove Mall. We expect to engage in discussions with the applicable agents under those facilities regarding potential forbearance agreements.
On November 1, 2020, the Debtors filed the Chapter 11 Cases in the Bankruptcy Court to implement the Prepackaged Plan. Under the Prepackaged Plan, the Company would be recapitalized and its debt maturities extended. The Debtors will continue to operate their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. The Prepackaged Plan and requested first-day relief, which was subsequently granted, anticipate the continued payment of employee wages and benefits without interruption and that trade claimants and other unsecured creditors that continue to work with the Debtors on existing terms will be paid in full and in the ordinary course of business. The Prepackaged Plan is not expected to have any impact on our shareholders, and based on our discussions with the NYSE, our common and preferred shares are expected to continue to trade in the normal course, subject to regaining compliance with the NYSE trading price listing condition within the applicable grace period. The Prepackaged Plan is subject to approval by the Bankruptcy Court. Under the RSA, subject to certain terms and conditions, the consenting lenders have agreed, among other things, to (i) take all commercially reasonable actions necessary to facilitate the consummation of the Prepackaged Plan and refrain from taking any actions inconsistent therewith, and not fail or omit to take an action that is required by the RSA, applicable law, or the In-Court Definitive Documents (defined in the RSA); (ii) not object to, delay, impede, or take any other action that may reasonably be expected to interfere with the consummation of the Prepackaged Plan; (iii) negotiate in good faith the In-Court Definitive Documents and execute, deliver and perform thereunder to implement the Prepackaged Plan; (iv) timely vote and consent to accept the Prepackaged Plan; (v) support and take all reasonable actions necessary or appropriate to consummate the exit financing arrangements; (vi) timely vote against and not solicit any alternative restructuring; and (vii) except as permitted in the RSA, not transfer any ownership (including any beneficial ownership as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended) held by such consenting lender.
At the hearing before the Bankruptcy Court held on November 3, 2020 on the Debtors’ motions for first-day relief, customary relief was granted, and the Bankruptcy Court scheduled a combined hearing on the adequacy of the Debtors’ Disclosure Statement and confirmation of the Prepackaged Plan for November 24, 2020.
The filing of the Chapter 11 Cases constitutes an event of default that accelerated our obligations under each of our Credit Agreements. The Credit Agreements provide that as a result of the filing of the Chapter 11 Cases, the principal and interest due thereunder shall be immediately due and payable. Any efforts to enforce such payment obligations under the Credit Agreements are automatically stayed as a result of the commencement of the Chapter 11 Cases, and the lenders’ rights of enforcement in respect of the Credit Agreements are subject to the applicable provisions of the Bankruptcy Code.
20
The commencement of the Chapter 11 Cases and/or acceleration of the Credit Agreements may also constitute a cross-default under certain property-level debt facilities (in an aggregate outstanding principal amount of approximately $896.5 million), ground leases, operating leases and other contractual and non-contractual obligations of our affiliates. We have filed a motion for the entry of an order extending the automatic stay as a result of the commencement of the Chapter 11 Cases to such affiliates to safeguard our reorganization efforts in the event a counterparty to any of such obligations seeks to take adverse action.
5. CASH FLOW INFORMATION
Cash paid for interest was
In our statement of cash flows, we show cash flows on our revolving facilityRevolving Facilities on a net basis. Aggregate borrowings on our 2013 Revolving FacilityFacilities were
Accrued construction costs decreased by $6.3 million in the nine months ended September 30, 2017, which was directly paid from2020 and decreased by $15.7 million in the 2014 7-Year Term Loan additional borrowingnine months ended September 30, 2019, representing non-cash changes in investment in real estate and is consideredconstruction in progress.
In the first quarter of 2019, we issued 6,250,000 common shares of beneficial interest in the Company in exchange for a like number of OP Units in our Operating Partnership. The shares were issued to beVornado Investments LLC, an affiliate of Franconia Two, L.P., the holder of the OP Units.
The following table provides a non-cash transaction.
| September 30, |
| ||||||
(in thousands of dollars) |
| 2020 |
|
| 2019 |
| ||
Cash and cash equivalents |
| $ | 36,373 |
|
| $ | 11,709 |
|
Restricted cash included in other assets |
|
| 6,087 |
|
|
| 6,183 |
|
Total cash, cash equivalents, and restricted cash shown in the statement of cash flows |
| $ | 42,460 |
|
| $ | 17,892 |
|
Our restricted cash consists of cash held in escrow by banks for real estate taxes and other purposes.
6. COMMITMENTS AND CONTINGENCIES
Contractual Obligations
As of
September 30,Provision for Employee Separation Expense
During the nine months ended September 30, 2020 and 2016,2019, we terminated the employment of certain employees and officers. In connection with the departure of those employees and officers, we recorded $0.2$0.1 million and $1.2 million, respectively of employee separation expenses forin the three and nine months ended September 30, 20162020, compared to $0.2 million and no employee separation expenses$1.1 million, respectively, for the three and nine months ended September 30, 2017,2019. As of September 30, 2020, we had $0.6 million of severance accrued and $1.1 millionunpaid related to the termination of employees.
Notice of Non-Compliance with Continued Listing Standards |
On September 25, 2020, the Company received notice from the NYSE that the Company is no longer in compliance with the NYSE continued listing standard set forth in Section 802.01C of the NYSE’s Listed Company Manual, which requires listed companies to maintain an average closing price of at least $1.00 per share over a consecutive 30-day trading period.
21
Under NYSE rules, the Company has ten business days following receipt of the notice to respond to the NYSE and $1.4 millionindicate its intent to cure this deficiency or be subject to suspension and delisting. The Company notified the NYSE, within the required ten business day period, that it intends to cure the deficiency. Under NYSE rules, the Company has six months from the date of the notice to regain compliance with the minimum share price requirement.
The Company intends to consider all available options to cure the deficiency and regain compliance. The notice does not affect the Company’s ongoing business operations or its reporting requirements with the SEC.
Property Damage from Natural and Other Disasters
During September 2018, Jacksonville Mall in Jacksonville, North Carolina incurred property damage and an interruption of business operations as a result of Hurricane Florence. The property was closed for business during and immediately after the natural disaster, however, significant remediation efforts were quickly undertaken, and the mall was reopened shortly thereafter.
During the nine months ended September 30, 20172019, we recorded net recoveries of approximately $0.2 million. These net recoveries primarily relate to remediation expenses and 2016, respectively. Asbusiness interruption claims. $0.1 million of the recoveries received relate to business interruption.
During the nine months ended September 30, 2017, $0.82020, Cherry Hill Mall in Cherry Hill, New Jersey experienced a power outage due to the failure of an underground high voltage cable, which required the use of backup generator power. We recorded net costs of approximately $0.6 million during the nine months ended September 30, 2020 and received recoveries of these amounts are accrued and unpaid.
7. DERIVATIVES
In the normal course of business, we are exposed to financial market risks, including interest rate risk on our interest bearing liabilities. We attempt to limit these risks by following established risk management policies, procedures and strategies, including the use of financial instruments such as derivatives. We do not use financial instruments for trading or speculative purposes.
Cash Flow Hedges of Interest Rate Risk
For derivatives that have been designated under applicable accounting authority as cash flow hedges. The effective portion of changes in the fair value of derivatives designated as, and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in “Accumulated other comprehensive income (loss)”income” and is subsequently reclassified into earnings“Interest expense, net” in the period thatsame periods during which the hedged forecasted transaction affects earnings. To the extent these instrumentsAs of September 30, 2020, all of our outstanding derivatives are ineffectivedesignated as cash flow hedges, changes in the fair value of these instruments are recorded in “Interest expense, net.”hedges. We recognize all derivatives at fair value as either assets or liabilities in the accompanying consolidated balance sheets. The carrying amountCompany expects to reassess the designation of its derivatives and their effectiveness in the fourth quarter 2020 as a result of the derivative assets is reflectedPrepackaged Plan filing, as discussed in “Deferred costs and other assets, net,” the amount of the associated liabilities is reflected in “Accrued expenses and other liabilities” and the amount of the net unrealized income or loss is reflected in “Accumulated other comprehensive income (loss)” in the accompanying balance sheets.
During the next 12 months, we estimate that
Interest Rate Swaps
As of September 30, 2017
During the second quarter of
22
The following table summarizes the terms and estimated fair values of our interest rate swap derivative instruments designated as cash flow hedges of interest rate risk at
September 30,Maturity Date |
| Aggregate Notional Value at September 30, 2020 (in millions of dollars) |
|
| Aggregate Fair Value at September 30, 2020 (1) (in millions of dollars) |
|
| Aggregate Fair Value at December 31, 2019 (1) (in millions of dollars) |
|
| Weighted Average Interest Rate |
| ||||
Interest Rate Swaps |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 |
| $ | - |
|
| $ | - |
|
| $ | 0.2 |
|
| - |
| |
2021 |
|
| 494.4 |
|
|
| (8.1 | ) |
|
| (1.4 | ) |
|
| 1.79 | % |
2022 |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
2023 |
|
| 300.0 |
|
|
| (19.6 | ) |
|
| (7.3 | ) |
|
| 2.70 | % |
Total |
| $ | 794.4 |
|
| $ | (27.7 | ) |
| $ | (8.5 | ) |
|
| 2.13 | % |
(in millions of dollars) Notional Value | Fair Value at September 30, 2017 (1) | Fair Value at December 31, 2016 (1) | Interest Rate | Effective Date of Forward Starting Swap | Maturity Date | |||||||||||
Interest Rate Swaps | ||||||||||||||||
28.1 | N/A | $ | — | 1.38 | % | January 2, 2017 | ||||||||||
48.0 | $ | — | (0.1 | ) | 1.12 | % | January 1, 2018 | |||||||||
7.6 | — | — | 1.00 | % | January 1, 2018 | |||||||||||
55.0 | — | (0.1 | ) | 1.12 | % | January 1, 2018 | ||||||||||
30.0 | — | (0.3 | ) | 1.78 | % | January 2, 2019 | ||||||||||
25.0 | 0.2 | 0.3 | 0.70 | % | January 2, 2019 | |||||||||||
20.0 | — | (0.2 | ) | 1.78 | % | January 2, 2019 | ||||||||||
20.0 | (0.1 | ) | (0.2 | ) | 1.78 | % | January 2, 2019 | |||||||||
20.0 | (0.1 | ) | (0.2 | ) | 1.79 | % | January 2, 2019 | |||||||||
20.0 | (0.1 | ) | (0.2 | ) | 1.79 | % | January 2, 2019 | |||||||||
20.0 | (0.1 | ) | (0.2 | ) | 1.79 | % | January 2, 2019 | |||||||||
25.0 | 0.1 | 0.1 | 1.16 | % | January 2, 2019 | |||||||||||
25.0 | 0.1 | 0.1 | 1.16 | % | January 2, 2019 | |||||||||||
25.0 | 0.1 | 0.1 | 1.16 | % | January 2, 2019 | |||||||||||
20.0 | 0.1 | — | 1.16 | % | January 2, 2019 | |||||||||||
20.0 | 0.3 | 0.2 | 1.23 | % | June 26, 2020 | |||||||||||
20.0 | 0.3 | 0.2 | 1.23 | % | June 26, 2020 | |||||||||||
20.0 | 0.3 | 0.2 | 1.23 | % | June 26, 2020 | |||||||||||
20.0 | 0.3 | 0.2 | 1.23 | % | June 26, 2020 | |||||||||||
20.0 | 0.3 | 0.2 | 1.24 | % | June 26, 2020 | |||||||||||
9.0 | 0.1 | 0.2 | 1.19 | % | February 1, 2021 | |||||||||||
35.0 | 0.8 | 0.9 | 1.01 | % | March 1, 2021 | |||||||||||
35.0 | 0.8 | 0.9 | 1.02 | % | March 1, 2021 | |||||||||||
20.0 | 0.5 | 0.5 | 1.01 | % | March 1, 2021 | |||||||||||
20.0 | 0.5 | 0.5 | 1.02 | % | March 1, 2021 | |||||||||||
20.0 | 0.5 | 0.5 | 1.02 | % | March 1, 2021 | |||||||||||
50.0 | 0.1 | N/A | 1.75 | % | December 29, 2021 | |||||||||||
25.0 | 0.1 | N/A | 1.75 | % | December 29, 2021 | |||||||||||
25.0 | 0.1 | N/A | 1.75 | % | December 29, 2021 | |||||||||||
25.0 | 0.1 | N/A | 1.75 | % | December 29, 2021 | |||||||||||
25.0 | 0.1 | N/A | 1.75 | % | December 29, 2021 | |||||||||||
Forward Starting Swap | ||||||||||||||||
48.0 | 0.5 | 0.7 | 1.42 | % | January 2, 2018 | February 1, 2021 | ||||||||||
$ | 5.9 | $ | 4.3 |
(1) | As of September 30, |
The tabletables below presentspresent the effect of derivative financial instruments on our consolidated statements of operationsaccumulated other comprehensive income and on our share of our partnerships’consolidated statements of operations for the three and
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||||||||||||||||||
|
| Amount of Gain or (Loss) Recognized in Other Comprehensive Income on Derivative Instruments |
|
| Amount of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Interest Expense |
|
| Amount of Gain or (Loss) Recognized in Other Comprehensive Income on Derivative Instruments |
|
| Amount of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Interest Expense |
| ||||||||||||||||||||
(in millions of dollars) |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||||||
Derivatives in Cash Flow Hedging Relationships |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate products |
| $ | 0.3 |
|
| $ | (2.8 | ) |
| $ | 3.7 |
|
| $ | (0.8 | ) |
| $ | (22.1 | ) |
| $ | (18.6 | ) |
| $ | 6.4 |
|
| $ | (3.1 | ) |
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(in millions of dollars) |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Total interest expense presented in the consolidated statements of operations in which the effects of cash flow hedges are recorded |
| $ | (20.3 | ) |
| $ | (15.5 | ) |
| $ | (54.3 | ) |
| $ | (47.0 | ) |
Amount of loss reclassified from accumulated other comprehensive income into interest expense |
| $ | 3.7 |
|
| $ | (0.8 | ) |
| $ | 6.4 |
|
| $ | (3.1 | ) |
Three Months Ended September 30, | Nine Months Ended September 30, | Consolidated Statements of Operations Location | ||||||||||||||||
(in millions of dollars) | 2017 | 2016 | 2017 | 2016 | ||||||||||||||
Derivatives in cash flow hedging relationships: | ||||||||||||||||||
Interest rate products | ||||||||||||||||||
Gain (loss) recognized in Other Comprehensive Income (Loss) on derivatives | $ | 0.1 | $ | 2.6 | $ | 0.2 | $ | (8.1 | ) | N/A | ||||||||
Loss reclassified from Accumulated Other Comprehensive Income into income (effective portion) | $ | 0.4 | $ | 1.3 | $ | 1.9 | $ | 3.9 | Interest expense | |||||||||
Loss recognized in income on derivatives (ineffective portion and amount excluded from effectiveness testing) | $ | — | $ | (0.1 | ) | Interest expense |
Credit-Risk-Related Contingent Features
We have agreements with some of our derivative counterparties that contain a provision pursuant to which, if our entity that originated such derivative instruments defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then we could also be declared in default on our derivative obligations. As of
September 30,We have an agreement with a derivative counterparty that incorporates the loan covenant provisions of our loan agreement with a lender affiliated with the derivative counterparty. Failure to comply with the loan covenant provisions would result in our being in default on any derivative instrument obligations covered by the agreement.
As of
September 30,8. EQUITY OFFERINGS
As Lessee
We received net proceeds from the offering of approximately $166.3 million after deducting paymenthave entered into ground leases for portions of the underwriting discountland at Springfield Town Center and Plymouth Meeting Mall. We have also entered into an office lease for our headquarters location, as well as vehicle, solar panel and equipment leases as a lessee. The initial terms of $5.4 million ($0.7875 per Series C Preferred Share)these agreements generally range from three to 40 years, with certain agreements containing extension options for up to an additional 60 years. As of September 30, 2020, we included only those renewal options we were reasonably certain of exercising. Upon lease execution, the Company measures a liability for the present value of future lease payments over the noncancelable period of the lease and offering expensesany renewal option period we are reasonably certain of $0.7 million. We usedexercising. Certain agreements require that we pay a portion of reimbursable expenses such as CAM, utilities, insurance and real estate taxes. These payments are not included in the net proceeds from this offering to repay all $117.0 millioncalculation of the then-outstanding borrowings under our 2013 Revolving Facility.
We received net proceeds from the offering of approximately $115.7 million after deducting payment of the underwriting discount of $3.8 million ($0.7875 per Series D Preferred Share) and offering expenses of $0.5 million. In October 2017, we issued an additional 200,000 6.875% Series D Preferred Shares pursuant to the underwriter’s exercise of an overallotment option at $25.00 per share. We received net proceeds from this additional offering of approximately $4.8 million after deducting payment of the underwriting discount of $0.2 million ($0.7875 per Series D Preferred Share). We used the net proceeds from the offering of our Series D Preferred Shares to redeem all of our then outstanding Series A Cumulative Redeemable Perpetual Preferred Shares (the “Series A Preferred Shares”) and for general corporate purposes.
The Counterparty contributed equity of $5.5 millionfollowing table presents additional information pertaining to the first stage through December 31, 2013 and $5.8 million to the second stage through September 30, 2014. In exchange for its contributions into the Project, the Counterparty received substantially all of the historic rehabilitation tax credits associated with the Project as a distribution. The Counterparty’s contributions, other than the amounts allocated to a put option (whereby we might be obligated or entitled to repurchase the Counterparty’s ownership interest in the Project), are classified as “Accrued expenses and other liabilities” and recognized as “Other income” in the consolidated financial statements as our obligation to deliver tax credits is relieved.Company’s leases:
|
| Three Months Ended September 30, 2020 |
|
| Nine Months Ended September 30, 2020 |
| ||||||||||||||||||||||||||
(in thousands of dollars) |
| Solar Panel Leases |
|
| Ground Leases |
|
| Office, equipment, and vehicle leases |
|
| Total |
|
| Solar Panel Leases |
|
| Ground Leases |
|
| Office, equipment, and vehicle leases |
|
| Total |
| ||||||||
Finance lease cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of right-of-use assets |
| $ | 209 |
|
| $ | — |
|
| $ | — |
|
| $ | 209 |
|
| $ | 621 |
|
| $ | — |
|
| $ | — |
|
| $ | 621 |
|
Interest on lease liabilities |
|
| 68 |
|
|
| — |
|
|
| — |
|
|
| 68 |
|
|
| 215 |
|
|
| — |
|
|
| — |
|
|
| 215 |
|
Operating lease costs |
|
| — |
|
|
| 436 |
|
|
| 333 |
|
|
| 769 |
|
|
| — |
|
|
| 1,309 |
|
|
| 1,008 |
|
|
| 2,317 |
|
Variable lease costs |
|
| — |
|
|
| 44 |
|
|
| 60 |
|
|
| 104 |
|
|
| — |
|
|
| 129 |
|
|
| 142 |
|
|
| 271 |
|
Total lease costs |
| $ | 277 |
|
| $ | 480 |
|
| $ | 393 |
|
| $ | 1,150 |
|
| $ | 836 |
|
| $ | 1,438 |
|
| $ | 1,150 |
|
| $ | 3,424 |
|
Other information related to the fourthleases as of and third recapture periods. We also recorded $0.2 million of priority returns earned byfor the Counterparty in each of the three and nine months ended September 30, 20172020 is as follows:
(in thousands of dollars) |
|
|
|
|
Cash paid for the amounts included in the measurement of lease liabilities |
|
|
|
|
Operating cash flows used for finance leases |
| $ | 208 |
|
Operating cash flows used for operating leases |
| $ | 1,552 |
|
Financing cash flows used for finance leases |
| $ | 526 |
|
Weighted average remaining lease term-finance leases (months) |
|
| 89 |
|
Weighted average remaining lease term-operating leases (months) |
|
| 300 |
|
Weighted average discount rate-finance leases |
|
| 4.35 | % |
Weighted average discount rate-operating leases |
|
| 6.43 | % |
Future payments against lease liabilities as of September 30, 2020 are as follows:
(in thousands of dollars) |
| Finance leases |
|
| Operating leases |
|
| Total |
| |||
October 1 to December 31, 2020 |
| $ | 248 |
|
| $ | 563 |
|
| $ | 811 |
|
2021 |
|
| 990 |
|
|
| 2,573 |
|
|
| 3,563 |
|
2022 |
|
| 988 |
|
|
| 2,558 |
|
|
| 3,546 |
|
2023 |
|
| 983 |
|
|
| 2,514 |
|
|
| 3,497 |
|
2024 |
|
| 949 |
|
|
| 2,428 |
|
|
| 3,377 |
|
Thereafter |
|
| 3,000 |
|
|
| 53,545 |
|
|
| 56,545 |
|
Total undiscounted lease payments |
|
| 7,158 |
|
|
| 64,181 |
|
|
| 71,339 |
|
Less imputed interest |
|
| (1,048 | ) |
|
| (33,969 | ) |
|
| (35,017 | ) |
Total lease liabilities |
| $ | 6,110 |
|
| $ | 30,212 |
|
| $ | 36,322 |
|
24
Future payments against lease liabilities as of December 31, 2019 were as follows:
(in thousands of dollars) |
| Finance leases |
|
| Operating leases |
|
| Total |
| |||
Year ending December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
2020 |
| $ | 925 |
|
| $ | 2,237 |
|
| $ | 3,162 |
|
2021 |
|
| 925 |
|
|
| 2,730 |
|
|
| 3,655 |
|
2022 |
|
| 925 |
|
|
| 2,538 |
|
|
| 3,463 |
|
2023 |
|
| 925 |
|
|
| 2,485 |
|
|
| 3,410 |
|
2024 |
|
| 925 |
|
|
| 2,373 |
|
|
| 3,298 |
|
Thereafter |
|
| 2,999 |
|
|
| 46,853 |
|
|
| 49,852 |
|
Total undiscounted lease payments |
|
| 7,624 |
|
|
| 59,216 |
|
|
| 66,840 |
|
Less imputed interest |
|
| (1,242 | ) |
|
| (28,965 | ) |
|
| (30,207 | ) |
Total lease liabilities |
| $ | 6,382 |
|
| $ | 30,251 |
|
| $ | 36,633 |
|
As Lessor
As of September 30, 2020, the fixed contractual lease payments, including minimum rents and 2016. Infixed CAM amounts, to be received over the aggregate, we recorded net incomenext five years pursuant to the terms of $1.8 million to “Other income”noncancelable operating leases with initial terms greater than one year are included in the consolidated statements of operations in connection withtable below. The amounts presented assume that no leases are renewed and no renewal options are exercised, and do not include any rent deferral arrangements executed during the Project in each of the three and nine months ended September 30, 20172020. Additionally, the table does not include variable lease payments that may be received under certain leases for percentage rents or the reimbursement of operating costs, such as common area expenses, utilities, insurance and 2016, respectively.real estate taxes. These variable lease payments are recognized in the period when the applicable expenditures are incurred or, in the case of percentage rents, when the sales data is made available.
(in thousands of dollars) |
|
|
|
|
October 1 to December 31, 2020 |
| $ | 54,272 |
|
2021 |
|
| 202,070 |
|
2022 |
|
| 183,810 |
|
2023 |
|
| 165,410 |
|
2024 |
|
| 144,048 |
|
Thereafter |
|
| 485,258 |
|
|
| $ | 1,234,868 |
|
25
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following analysis of our consolidated financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and the notes thereto included elsewhere in this report.
OVERVIEW
Pennsylvania Real Estate Investment Trust, a Pennsylvania business trust founded in 1960 and one of the first equity real estate investment trusts (“REITs”) in the United States, has a primary investment focus on retail shopping malls located in the eastern half of the United States, primarily in the Mid-Atlantic region.
We currently own interests in 2826 retail properties, in nine states, of which 2425 are operating properties and four are development properties, one of which is a former operating property that is currently partially closed and undergoing a major reconstruction (see Fashion District Philadelphia discussion below).development property. The 2425 operating properties include 20 shopping malls and fourfive other operating retail properties, have a total of 19.619.8 million square feet and are located in eightnine states. We and partnerships in which we ownhold an interest own 15.015.4 million square feet at these properties (excluding space owned by anchors)anchors or third parties).
There are 18 operating retail properties in our portfolio that we consolidate for financial reporting purposes. These consolidated operating properties have a total of 15.414.9 million square feet, of which we own 12.211.8 million square feet. The sixseven operating retail properties that are owned by unconsolidated partnerships with third parties have a total of 4.14.9 million square feet, of which 2.83.6 million square feet are owned by such partnerships. The aboveWhen we refer to “Same Store” properties, we are referring to properties that have been owned for the full periods presented and exclude properties acquired, disposed of, under redevelopment or designated as a non-core property countsduring the periods presented. Core properties include all operating retail properties except for Exton Square Mall and square feet do not includeFashion District Philadelphia. Valley View Mall was previously designated as a non-core property. As discussed further in La Crosse, Wisconsin because thisNotes 2 and 4 to our unaudited consolidated financial statements, a foreclosure sale judgment was ordered by the court after the property has been classifiedoperations were assumed by a receiver on behalf of the lender under the mortgage loan secured by Valley View Mall and we no longer operate the property. “Core Malls” also excludes these properties as “held for sale”well as of September 30, 2017.
We have one property in our portfolio contains four properties in two states, with two classified as “mixed use” (a combination of retail and other uses), onethat is classified as “retail” (The Galleryunder development; however, we do not currently have any activity occurring at Market East into this property.
Fashion District Philadelphia (“opened on September 19, 2019. Fashion District Philadelphia”)),Philadelphia is an aggregation of properties spanning three blocks in downtown Philadelphia that were formerly known as Gallery I, Gallery II and one classified as “other.” We907 Market Street. Joining Century 21 and Burlington in 2019 were multiple dining and entertainment venues including Market Eats, a multi offering food court, City Winery, AMC Theatres, and Round 1 Bowling & Amusement. In addition, Nike Factory Store, Ulta, and H & M have two properties (Woodland Mallopened Philadelphia flagship stores at the property since its opening in Grand Rapids Michigan and The Mall at Prince Georges in Hyattsville, Maryland) that have redevelopment projects currently underway. We also have five properties with projects underway to replace vacant anchor stores (Exton Square Mall in Exton, Pennsylvania, Moorestown Mall in Moorestown, New Jersey, Valley Mall in Hagerstown, Maryland, Willow Grove Park in Willow Grove, Pennsylvania and Woodland Mall in Grand Rapids, Michigan).
Our primary business is owning and operating retail shopping malls, which we do primarily do through our operating partnership, PREIT Associates, L.P. (“PREIT Associates” or the “Operating Partnership”). We provide management, leasing and real estate development services through PREIT Services, LLC (“PREIT Services”), which generally develops and manages properties that we consolidate for financial reporting purposes, and PREIT-RUBIN, Inc. (“PRI”), which generally develops and manages properties that we do not consolidate for financial reporting purposes, including properties owned by partnerships in which we own interests through partnerships with third partiesan interest and properties that are owned by third parties in which we do not have an interest. PRI is a taxable REIT subsidiary, as defined by federal tax laws, which means that it is able to offer additional services to tenants without jeopardizing our continuing qualification as a REIT under federal tax law.
Our revenue consists primarily of fixed rental income, additional rent in the overall qualityform of fixed and variable expense reimbursements, and percentage rent (rent that is based on a percentage of our portfolio and to achieve operational excellence. Since 2013, we have executedtenants’ sales or a strategic disposition program whereby we have sold 17percentage of our lower-productivity malls, with one more property currently on the market (Valley View Mall). We have also sought to improve the qualitysales in excess of our remaining properties through remerchandising and redevelopment activities. Where possible, we have sought to proactively replace challenged department stores with a diverse mix of high-performance retailers. Approximately 20% of our retail space is committed to dining and entertainment. Since 2012, we have added over one million square feet of spacethresholds that are specified in the categories of dining, entertainment, fast fashion, grocery, health & wellnessleases) derived from our income producing properties. We also receive income from our real estate partnership investments and off-price retailers.
Net incomeloss for the three months ended September 30, 20172020 was $12.3 million, an increase in earnings of $9.4$29.6 million compared to net income of $2.9$24.7 million for the three months ended September 30, 2016.2019. This increase$54.3 million decrease was primarily due to a $6.7 million gain on the sale of real estate by an equity method investee,to: (a) a decrease in impairmentreal estate revenue of assets$17.0 million resulting from $9.9the ongoing impact of COVID-19 on our tenants along with tenant requests for rent concessions; (b) a decrease in equity partnership income of $4.8 million due to the same reasons as described above; (c) an increase in interest expense of $4.7 million driven by higher revolving balances, our additional term loan facility entered into in August 2020 (the “Bridge Facility”) and higher interest rates in connection with our debt modifications; and (d) a non-recurring gain on debt extinguishment of $29.6 million recognized in the third quarter of 20162019, which had a favorable impact on the prior year period; partially offset by a non-recurring gain on derecognition of property of $7.0 million resulting from the assignment of operations at Valley View Mall to $1.8a receiver and a decrease in property operating expenses of $1.1 million inrelated to ongoing impacts of COVID-19 during the third quarter of 2017 and an increase in Same Store Net Operating Income (excluding lease termination revenue) of $1.5 million, partially offset by decreases in lease termination revenue of $3.5 million and Non-Same Store Net Operating Income of $3.6 million . See “Use of Non-GAAP Measures—Net Operating Income” for the definition and additional discussion about Net Operating Income, a non-GAAP measure.
Net loss for the nine months ended September 30, 20172020 was $41.5 million, a decrease in earnings of $55.5$66.2 million compared to net income of $14.0$2.4 million for the nine months ended September 30, 2016.2019. This $68.7 million decrease was primarily due to: (a) a decrease in real estate revenue of $52.2 million due to the COVID-19 related closure of our properties for the majority of the second quarter, as well as rent concession requests from tenants for rent abatements and deferrals; (b) a decrease in equity partnership income of $8.9 million due to the same reasons as described above; (c) an increase in impairmentinterest expense of assets$7.3 million driven by higher revolving balances, our new Bridge Facility and higher interest rates in connection with our debt modifications; and (d) a non-recurring gain on debt extinguishment recognized for the nine months ended September 30, 2019 of $31.2$24.8 million recognized for the nine months ended September 30, 2019, which had a favorable impact on the prior year period; partially offset by: (a) a decrease in property operating expenses of $7.9 million related to ongoing impacts of COVID-19 from the second and third quarters of 2020; (b) a decrease in general and administrative expenses of $2.7 million due to furloughs, headcount reductions and other cost reductions implemented in response to COVID-19; and (c) non-recurring gain on derecognition of property as described above, which provided a benefit of $7.0 million in the current year period and non-recurring gains on salesales of real estate which provided a benefit of $23.3$8.5 million to the current year period.
See “Non-GAAP Supplemental Financial Measures” below for more information about our use of Same Store NOI and a decrease in Non-SameNon Same Store Net Operating Income of $12.4 million, partially offset by a $9.5 million decrease in interest expense and a $6.7 million gain on the sale of real estate by an equity method investee. See “Use of Non-GAAP Measures—Net Operating Income” for the definition and additional discussion about Net Operating Income, aNOI, which are non-GAAP measure.
We evaluate operating results and allocate resources on a property-by-property basis, and do not distinguish or evaluate our consolidated operations on a geographic basis. Due to the nature of our operating properties, which involve retail shopping, we have concluded that our individual properties have similar economic characteristics and meet all other aggregation criteria. Accordingly, wehave aggregated our individual properties into one reportable segment. In addition, no single tenant accounts for 10% or more of our consolidated revenue, and none of our properties are located outside the United States.
Restructuring Support Agreement
On October 7, 2020, we and certain of our wholly owned direct and indirect subsidiaries (collectively, the “Company Parties”) entered into a Restructuring Support Agreement (the “RSA”) with certain of the lenders under our Credit Agreements (defined and discussed further under “Credit Agreements” below).
The RSA contemplates agreed-upon terms for a financial restructuring (the “Restructuring”) of the existing debt and certain other obligations of the Company Parties through either (i) an out-of-court restructuring on the terms set forth in the Out-of-Court Restructuring Term Sheet attached to the RSA or, if we are unable to obtain the consent of 100% of the lenders under the Credit Agreements, (ii) a prepackaged plan of reorganization on the terms set forth in the Plan Term Sheet attached to the RSA, a solicitation of votes therefor, and the commencement of voluntary cases (the “Chapter 11 Cases”) under chapter 11 of title 11 of the United States Code, 11 U.S.C. 101-1532 in the United States Bankruptcy Court for the District of Delaware. The RSA was amended on October 16, 2020 and again on October 23, 2020, to, among other things, extend the date by which the Company Parties were required to commence the solicitation and the Chapter 11 Cases.
On October 19, 2020, the Company Parties received letters from the Agent alleging events of default with respect to each of the Credit Agreements, in addition to a letter from certain lenders under the RSA regarding an alleged breach of the RSA (collectively, the “Reservation Letters”). The Reservation Letter in respect of the RSA asserts that the Company Parties’ failure to commence the Chapter 11 Cases on or before October 18, 2020 constituted a breach of their obligations under the RSA. The Reservation Letter in respect of the Bridge Credit Agreement asserts that an event of default has occurred thereunder as a result of the alleged breach of the Company Parties’ obligations under the RSA. The remaining Reservation Letters allege that an event of default occurred under the Bridge Credit Agreement, in turn triggering alleged cross-defaults under each of the 7-Year Term Loan Agreement and the 2018 Credit Agreement. The Reservation Letter in respect of each Credit Agreement states that interest will accrue on the outstanding principal balance of the loans under such Credit Agreement at the increased Post-Default Rate (as defined in such Credit Agreement) beginning on October 19, 2020. The Reservation Letters specify that the lenders have not waived their rights and remedies under the Credit Agreements or the RSA (as applicable), and that they expressly reserve all available rights and remedies thereunder and applicable law. The Company has responded to the Agent that it disputes the lenders’ characterization of the situation described in the Reservation Letters and that no breach of the RSA or event of default under any of the Credit Agreements has occurred.
On November 1, 2020, as a result of obtaining approval of approximately 95% of the lenders under the Credit Agreement, but not 100%, we filed a voluntary Chapter 11 Cases petition in the United States Bankruptcy Court for the District of Delaware to implement our prepackaged financial restructuring plan (the "Prepackaged Plan"). Under the Prepackaged Plan, we expect the Company to be recapitalized and our debt maturities extended. The filing of the Chapter 11 Cases permits us to continue business operations in compliance with the orders of the Bankruptcy Court and without interruption while we obtain necessary approvals of our restructuring plan. The Prepackaged Plan is subject to approval by the United States Bankruptcy Court for the District of Delaware. See Item 1A. “Risk Factors” elsewhere in this report for more discussion of the risks associated with our bankruptcy proceedings.
Current Economic and Industry Conditions
Conditions in the economy have caused fluctuations and variations in business and consumer confidence, retail sales, and consumer spending on retail goods. Further, traditional mall tenants, including department store anchors and smaller format retail tenants, face significant challenges resulting from changing consumer expectations, the convenience of e-commerce shopping, competition from fast fashion retailers, the expansion
27
of outlet centers, and declining mall traffic, among other factors.
As a result of the COVID-19 pandemic, in mid-March 2020, we began closing our enclosed shopping malls, which remained closed for the majority of the second quarter of 2020. All of our malls have since re-opened and are adhering to social distancing and sanitation and safety protocols designed to address the risks posed by COVID-19, but many of our tenants are operating at reduced capacity. Following the pandemic related closures, approximately 4% of our tenants failed to re-open (inclusive of tenants that filed for bankruptcy protection in the aftermath). Also, following re-opening, 163,000 square feet of new tenants have opened for business in the same store portfolio and 82,000 opened at Fashion District. Certain jurisdictions where our malls are located that have relaxed restrictions or have experienced limited public adherence with suggested safety measures are now contemplating or implementing new or renewed travel restrictions and business closures, which could result in additional closures of our properties. The pandemic’s effect has had a significant impact on our operations, financial condition, liquidity and results of operations through the third quarter of 2020 due to the slow or reduced reopening of our tenants at various properties. As a result of the challenging environment created by COVID-19, many of our tenants have sought rent relief and deferral. At this time, we continue to make progress in collecting COVID-period rents. As of September 30, 2020, we had cash receipts representing in excess of 67% of billed second quarter and third quarter 2020 rents. Specifically, our cash receipts through September 30, 2020 represent approximately 99% of billed third quarter rents, including payments toward prior months. We believe that our rent collections are probable, but expect that collections will continue to be below our tenants’ rent obligations as long as lingering effects of COVID-19 affect the financial strength of our tenants.
In recent years, there has been an increased level of tenant bankruptcies and store closings by tenants who have been significantly impacted by these factors.
Although we opened certain tenants at our redevelopment projects in 2019 and early 2020 and expect additional tenant openings before the end of 2020, we also have tenants who continue to face significant economic challenges, particularly in light of the COVID-19 pandemic, and we continue to actively communicate to restructure certain leasing arrangements through, among other things, downsizing and rent relief, which may impact our operating results.
It continues to remain highly uncertain and difficult to predict how long the pandemic and the economic challenges and restrictions it has resulted in will last, but we expect the pandemic to continue to have an adverse impact on our business, financial condition, liquidity and results of operations. See “Item 1A. Risk Factors – The COVID-19 global pandemic and the public health and governmental actions in response have adversely affected, and will likely continue to adversely affect, our business, financial condition, liquidity and operating results. The extension and duration of such effects are uncertain, rapidly changing and difficult to predict. Additionally, the future outbreak of any other highly infectious or contagious diseases may materially and adversely affect our business, financial condition, liquidity and operating results.”
28
The table below sets forth information related to our tenants in bankruptcy for our consolidated and unconsolidated properties (excluding tenants in bankruptcy at sold properties):
|
| Pre-bankruptcy |
|
| Units Closed |
| ||||||||||||||||||||||
Year |
| Number of Tenants (1) |
|
| Number of locations impacted |
|
| GLA(2) |
|
| PREIT’s Share of Annualized Gross Rent(3) (in thousands) |
|
| Number of locations closed |
|
| GLA(2) |
|
| PREIT’s Share of Annualized Gross Rent(3) (in thousands) |
| |||||||
2020 (Nine Months Ended September 30) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated properties |
|
| 16 |
|
|
| 82 |
|
|
| 2,056,091 |
|
| $ | 17,676 |
|
|
| 30 |
|
|
| 114,892 |
|
| $ | 5,121 |
|
Unconsolidated properties |
|
| 16 |
|
|
| 26 |
|
|
| 438,789 |
|
|
| 3,276 |
|
|
| 9 |
|
|
| 42,126 |
|
|
| 1,072 |
|
Total |
|
| 21 |
|
|
| 108 |
|
|
| 2,494,880 |
|
| $ | 20,952 |
|
|
| 39 |
|
|
| 157,018 |
|
| $ | 6,193 |
|
2019 (Full Year) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated properties |
|
| 9 |
|
|
| 71 |
|
|
| 400,516 |
|
| $ | 14,656 |
|
|
| 63 |
|
|
| 242,742 |
|
| $ | 9,480 |
|
Unconsolidated properties |
|
| 8 |
|
|
| 14 |
|
|
| 56,030 |
|
|
| 1,481 |
|
|
| 8 |
|
|
| 32,024 |
|
|
| 915 |
|
Total |
|
| 11 |
|
|
| 85 |
|
|
| 456,546 |
|
| $ | 16,137 |
|
|
| 71 |
|
|
| 274,766 |
|
| $ | 10,395 |
|
(1) | Total represents unique tenants and includes both tenant-owned and landlord-owned stores. |
(2) | Gross Leasable Area (“GLA”) in square feet. |
Pre-bankruptcy | Units Closed | ||||||||||||||||||||||
Year | Number of Tenants (1) | Number of locations impacted | GLA(2) | PREIT’s Share of Annualized Gross Rent(2) (in thousands) | Number of locations closed | GLA(2) | PREIT’s Share of Annualized Gross Rent (3)(in thousands) | ||||||||||||||||
2017 (Nine Months) | |||||||||||||||||||||||
Consolidated properties | 13 | 69 | 310,585 | $ | 9,541.6 | 17 | 90,508 | $ | 2,959.7 | ||||||||||||||
Unconsolidated properties | 8 | 15 | 183,956 | 2,021.5 | 6 | 81,531 | 949.3 | ||||||||||||||||
Total | 14 | 84 | 494,541 | $ | 11,563.1 | 23 | 172,039 | $ | 3,909.0 | ||||||||||||||
2016 (Full Year) | |||||||||||||||||||||||
Consolidated properties | 7 | 38 | 137,111 | $ | 6,738.7 | 20 | 73,011 | $ | 3,181.5 | ||||||||||||||
Unconsolidated properties | 6 | 10 | 86,012 | 1,166.9 | 4 | 64,809 | 471.4 | ||||||||||||||||
Total | 9 | 48 | 223,123 | $ | 7,905.6 | 24 | 137,820 | $ | 3,652.9 |
(3) | Includes our share of tenant gross rent from partnership properties based on PREIT’s ownership percentage in the respective equity method investments as of September 30, 2020. |
Anchor Replacements
In recent years, through property dispositions, proactive store recaptures, lease terminations and other activities, we have made efforts to reduce our risks associated with certain department store concentrations. In December 2016,concentrations.
During 2019, we acquired the Sears propertyre-opened or introduced additional tenants to former anchor positions at Woodland Mall and we have recaptured the Sears premises at Capital City Mall and Magnoliain Grand Rapids, Michigan, Valley Mall in 2017.Hagerstown, Maryland and Plymouth Meeting Mall, in Plymouth Meeting, Pennsylvania. Dick’s Sporting Goods at Valley Mall opened in the first quarter of 2020. At Plymouth Meeting Mall, we opened Michael’s in the first quarter of 2020. In 2017, we purchased the Macy’s locationslocation at Moorestown Mall Valley Viewin Moorestown, New Jersey and opened HomeSense, Sierra Trading and Michael’s between 2018 and the first quarter of 2020.
Construction was completed in the first quarter of 2020 giving way to the opening of Burlington in place of a former Sears at Dartmouth Mall in Dartmouth, Massachusetts. We expect to continue to move forward with several outparcels at Dartmouth Mall resulting from the Sears recapture and Valleyworking with large format prospects for space adjacent to Burlington but have experienced delays due to the impact of COVID-19.
During 2019, an anchor tenant, Sears, closed at Exton Square Mall in Exton, Pennsylvania. In January 2020, the Lord & Taylor store at Moorestown Mall in Moorestown, New Jersey closed and we are working with several retail and entertainment prospects to fill the space. Sears closed its stores at Moorestown Mall in Moorestown, New Jersey and Jacksonville Mall in Jacksonville, North Carolina in April 2020. Sears continues to be financially obligated pursuant to the leases at these locations. We areIn May 2020, J.C. Penney filed for bankruptcy and announced the closure of its stores at Mall of Prince Georges in negotiations to purchase the leasehold associated with the Macy’s store located at Plymouth Meeting Mall.
Former/Existing Anchors | Replacement Tenant(s) | ||||||||
Property | Name | GLA '000's | Date Store Closed/Closing | Date De-commissioned | Name | GLA '000's | Actual/Targeted Occupancy Date | ||
Completed:(1) | |||||||||
Cumberland Mall | JC Penney(2) | 51 | Q3 15 | Q3 15 | Dick's Sporting Goods | 50 | Q4 16 | ||
Exton Square Mall | JC Penney(2) | 118 | Q2 15 | N/A | Round 1 | 58 | Q4 16 | ||
Viewmont Mall | Sears (2) | 193 | Q3 16 | Q2 17 | Dick's Sporting Goods/Field & Stream | 90 | Q3 17 | ||
Home Goods | 23 | Q3 17 | |||||||
Capital City Mall | Sears (2) | 101 | Q1 17 | Q2 17 | Dick's Sporting Goods | 62 | Q3 17 | ||
Sears Appliance | 15 | Q4 17 | |||||||
Fine Wine & Good Spirits | 12 | Q4 17 | |||||||
Magnolia Mall | Sears (2) | 91 | Q1 17 | Q2 17 | Burlington | 46 | Q3 17 | ||
Home Goods, Five Below and outparcels | 45 | Q2 18 | |||||||
Valley View Mall | Macys (2)(3) | 100 | Q2 17 | Q2 17 | Herberger's | 100 | Q3 17 | ||
In process: | |||||||||
Exton Square Mall | K-mart (2) | 96 | Q1 16 | Q2 16 | Whole Foods | 58 | Q1 18 | ||
Valley Mall | Macy's (2)(3) | 120 | Q1 16 | N/A | Large format fitness facility | 70 | Q4 18 | ||
Tilt Studio | 49 | Q3 18 | |||||||
BonTon (2) | 123 | Q1 18 | N/A | Belk | 123 | Q4 18 | |||
Moorestown Mall | Macy's (2)(4) | 200 | Q1 17 | Q3 17 | Off-price outdoor gear retailer | 18 | Q4 18 | ||
Off-price home furnishings retailer | 25 | Q4 18 | |||||||
Woodland Mall | Sears (2)(6) | 313 | Q2 17 | Q2 17 | Von Maur | 86 | Q4 19 | ||
Restaurants and small shop space | TBD | Q4 19 | |||||||
Willow Grove Park | JC Penney (2)(7) | 124 | Q3 17 | N/A | TBD | TBD | TBD | ||
Pending: | |||||||||
Plymouth Meeting Mall | Macy's (5) | 215 | Q1 17 | N/A | TBD | TBD | TBD |
In response to anchor store closings and other trends in the retail space, we have been changing the mix of tenants at our properties. We have been reducing the percentage of traditional mall tenants and increasing the share of space dedicated to dining, entertainment, fast fashion, off price, and large format box tenants. This initiative has slowed down due to the impacts of the COVID-19 pandemic. Some of these changes may result in the redevelopment of all or a portion of our properties. See “—Capital Improvements, Redevelopment and Development Projects.”
To fund the capital necessary to replace anchors and to maintain a reasonable level of leverage, we expect to use a variety of means available to us, subject to and in accordance with the terms of our Credit Agreements. These steps might include (i) making additional borrowings under our credit facility,Credit Agreements (assuming availability and continued compliance with the financial covenants thereunder), (ii) obtaining construction loans on specific projects, (iii) selling properties or interests in properties with values in excess of their mortgage loans (if applicable) and applying the excess proceeds to fund capital expenditures or for debt reduction, (iv) obtaining capital from joint ventures or other partnerships or arrangements involving our contribution of assets with institutional investors, private equity investors or other REITs, or (v) obtaining equity capital, including through the issuance of common or preferred equity securities if market conditions are favorable, or through other actions.
29
agreements providing for a longer term solution as contemplated by the RSA before the applicable modifications expire. In light of the effects of COVID-19 on our business, operations, liquidity and financial condition, we executed forbearance and loan modification arrangements with the lenders of certain of our properties’ mortgage loans (refer to Note 4 to our unaudited consolidated financial statements).
Capital Improvements, Redevelopment and Development Projects
We might engage in various types of capital improvement projects at our operating properties. Such projects vary in cost and complexity, and can include building out new or existing space for individual tenants, upgrading common areas or exterior areas such as parking lots, or redeveloping the entire property, among other projects. Project costs are accumulated in “Construction in progress” on our consolidated balance sheet until the asset is placed into service and amounted to $129.6$46.9 million as of September 30, 2017.
As of September 30, 2020, we had unaccrued contractual and other commitments related to our capital improvement projects and development projects at our consolidated and unconsolidated properties of $27.9 million, including $14.1 million of commitments related to the redevelopment of Fashion District Philadelphia, in the form of tenant allowances and contracts with general service providers and other professional service providers.
In 2014, we entered into a 50/50 joint venture with The Macerich Company (“Macerich”) to redevelop Fashion District Philadelphia. As we redevelop Fashion District Philadelphia, operating results in the short term, as measured by sales, occupancy, real estate revenue, property operating expenses, NOINet Operating Income (“NOI”) and depreciation, will likely continue to be negatively affected until the newly constructed space is completed, leased and occupied.
In January 2018, we along with Macerich, our partner in the Fashion District Philadelphia redevelopment project, entered into a $250.0 million term loan (the “FDP Term Loan”). The initial term of the FDP Term Loan is five years, and bears interest at a variable rate of 2.00% over LIBOR. PREIT and Macerich secured the FDP Term Loan by pledging their respective equity interests of 50% each in the entities that own Fashion District Philadelphia. The entire $250.0 million available under the FDP Term Loan was drawn during the first quarter of 2018, and we received an aggregate $123.0 million as a distribution of our share of the draw in 2018. In July 2019, the FDP Term Loan was modified to increase the total maximum potential borrowings from $250.0 million to $350.0 million. A total of $51.0 million was drawn during the third quarter of 2019 and we received aggregate distributions of $25.0 million as our share of the draws.As discussed in Note 4 to our unaudited consolidated financial statements, on October 19, 2020, the borrower under the FDP Term Loan received a letter from the administrative agent under the FDP Term Loan alleging an event of default under the FDP Term Loan as a result of the alleged breach of the 2018 Credit Agreement and outlining the 45-day cure period that will expire on December 3, 2020. On November 2, 2020, the borrower under the FDP Term Loan received a subsequent letter from the administrative agent asserting an event of default as a result of the filing of the Chapter 11 Cases and the automatic acceleration of the FDP Term Loan. The administrative agent under the FDP Term Loan is a party to the RSA, and PREIT has responded to the administrative agent with a letter expressly reserving its rights in connection with the FDP Term Loan and, in the event the Prepackaged Plan is not confirmed or the RSA is otherwise terminated, expressly reserving its rights under the RSA and the Prepackaged Plan.
We are also engaged in several types ofown one development projects. However,property, but we do not expect to make any significant investment in these projectsat this property in the short term, other than the redevelopment of Fashion District Philadelphia.
CRITICAL ACCOUNTING POLICIES
Critical Accounting Policies are those that require the application of management’s most difficult, subjective, or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that might change in subsequent periods. In preparing the unaudited consolidated financial statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. In preparing the consolidated financial statements, management has utilized available information, including historical experience,our past history, industry standards and the current economic environment, among other factors, in forming its estimates and judgments, giving due consideration to materiality. Management has also considered events and changes in property, market and economic conditions, estimated future cash flows from property operations and the risk of loss on specific accounts or amounts in determining its estimates and judgments. Actual results may differ from these estimates. In addition, other companies may utilize different estimates, which may affect comparability of our results of operations to those of companies in a similar businesses.business. The estimates and assumptions made by management in applying Critical Accounting Policies have not changed materially during 20172020 or 20162019, except as otherwise noted, and none of these estimates or assumptions have proven to be materially incorrect or resulted in our recording any significant adjustments relating to prior periods. We will continue to monitor the key factors underlying our estimates and judgments, but no change is currently expected.
For additional information regarding our Critical Accounting Policies, see “Critical Accounting Policies” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2016.
Real estate investments and related intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the property might not be recoverable. Arecoverable, which is referred to as a “triggering event.” The continued impact of COVID-19 on the economy and market conditions, together with delayed reopening of some tenants at our properties in the third quarter of 2020, was deemed to be a triggering event during the third quarter of 2020, which led to an impairment review. In connection with our review of our long-lived assets for impairment, we utilize qualitative and quantitative factors in order to estimate fair value. The significant qualitative factors that we use include age and condition of the property, market conditions in the property’s trade area, competition with other shopping centers within the property’s trade area and the creditworthiness and performance of the property’s tenants. The significant quantitative factors that we use include historical and forecasted financial and operating information relating to the property, such as net operating income, occupancy statistics, vacancy projections and tenants’ sales levels.
If there is a triggering event in relation to a property to be held and used, is considered impaired only if management’swe will estimate of the aggregate future cash flows, less estimated capital expenditures, to be generated by the property, undiscounted and without interest charges, are less than the carrying value of the property. This estimate takes into consideration factors such as expected future operating income, trends and prospects, as well as the effects of demand, competition and other factors.charges. In addition, these estimatesthis estimate may consider a probability weighted cash flow estimation approach when alternative courses of action to recover the carrying amount of a long-lived asset are under consideration or when a range of possible values is estimated.
The determination of undiscounted cash flows requires significant estimates by management, including the expected course of action at the balance sheet date that would lead to such cash flows. Subsequent changes in estimated undiscounted cash flows arising from changes in the anticipated action to be taken with respect to the property could impact the determination of whether an impairmentexists and whether the effects could materially affect our net income. To the extent estimated undiscounted cash flows are less than the carrying value of the property, the loss will be measured as the excess of the carrying amount of the property over the estimated fair value of the property.
Assessment of our ability to recover certain lease relatedlease-related costs must be made when we have a reason to believe that the tenant might not be able to perform under the terms of the lease as originally expected. This requires us to make estimates as to the recoverability of such costs. See “Results
An other than temporary impairment of Operations” for a descriptionan investment in an unconsolidated joint venture is recognized when the carrying value of the lossesinvestment is not considered recoverable based on evaluation of the severity and duration of the decline in value. To the extent impairment has occurred, the excess carrying value of assets recorded during the three and nine months endedasset over its estimated fair value is charged to income. We concluded that there was no impairment as of September 30, 2017 and 2016.
New Accounting Developments
See noteNote 1 to our unaudited consolidated financial statements for descriptions of new accounting developments.
OFF BALANCE SHEET ARRANGEMENTS
We have no material off-balance sheet items other than (i) the unconsolidated partnerships described in noteNote 3 to theour unaudited consolidated financial statements and in the “Overview” section above.
31
RESULTS OF OPERATIONS
Overview
Net loss for the three months ended September 30, 2020 was $29.6 million compared to net income of $24.7 million for the three months ended September 30, 2019. This $54.3 million decrease was primarily due to: (a) a decrease in real estate revenue of $17.0 million resulting from the ongoing impact of COVID-19 on our tenants along with tenant requests for rent concessions; (b) a decrease in equity partnership income of $4.8 million due to the same reasons as described above; (c) an increase in interest expense of $4.7 million driven by higher revolving balances, our additional Bridge Facility entered into in August 2020 and higher interest rates in connection with our debt modifications; and (d) a non-recurring gain on debt extinguishment of $29.6 million recognized in the third quarter of 2019, which had a favorable impact on the prior year period; partially offset by a non-recurring gain on derecognition of property of $7.0 million resulting from assignment of operations at Valley View Mall to a receiver and a decrease in property operating expenses of $1.1 million related to ongoing impacts of COVID-19 during the third quarter of 2020.
Net loss for the nine months ended September 30, 2020 was $66.2 million compared to net income of $2.4 million for the nine months ended September 30, 2019. This $68.7 million decrease was primarily due to: (a) a decrease in real estate revenue of $52.2 million due to the COVID-19 related closure of our properties for the majority of the second quarter, as well as rent concession requests from tenants for rent abatements and deferrals; (b) a decrease in equity partnership income of $8.9 million due to the same reasons as described above; (c) an increase in interest expense of $7.3 million driven by higher revolving balances, our new Bridge Facility and higher interest rates in connection with our debt modifications; and (d) a non-recurring gain on debt extinguishment recognized for the nine months ended September 30, 2019 of $24.8 million recognized for the nine months ended September 30, 2019, which had a favorable impact on the prior year period; partially offset by: (a) a decrease in property operating expenses of $7.9 million related to ongoing impacts of COVID-19 from the second and third quarters of 2020; (b) a decrease in general and administrative expenses of $2.7 million due to furloughs, headcount reductions and other cost reductions implemented in response to COVID-19; and (c) non-recurring gain on derecognition of property as described above, which provided a benefit of $7.0 million in the current year period and non-recurring gains on sales of real estate which provided a benefit of $8.5 million to the current year period.
Occupancy
The table below sets forth certain occupancy statistics for our properties as of
September 30,
|
| Occupancy(1) at September 30, |
| |||||||||||||||||||||
|
| Consolidated Properties |
|
| Unconsolidated Properties |
|
| Combined(2) |
| |||||||||||||||
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||||
Retail portfolio weighted average:(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total excluding anchors |
|
| 88.1 | % |
|
| 90.2 | % |
|
| 88.2 | % |
|
| 89.9 | % |
|
| 88.1 | % |
|
| 90.1 | % |
Total including anchors |
|
| 92.3 | % |
|
| 92.7 | % |
|
| 90.3 | % |
|
| 91.8 | % |
|
| 91.9 | % |
|
| 92.5 | % |
Core Malls weighted average:(4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total excluding anchors |
|
| 90.0 | % |
|
| 91.6 | % |
|
| 81.9 | % |
|
| 86.6 | % |
|
| 89.1 | % |
|
| 91.1 | % |
Total including anchors |
|
| 93.8 | % |
|
| 94.8 | % |
|
| 87.6 | % |
|
| 90.9 | % |
|
| 93.2 | % |
|
| 94.4 | % |
Occupancy (1) at September 30, | |||||||||||||||||
Consolidated Properties | Unconsolidated Properties(2) | Combined(2)(3) | |||||||||||||||
2017 | 2016 | 2017 | 2016 | 2017 | 2016 | ||||||||||||
Retail portfolio weighted average: | |||||||||||||||||
Total excluding anchors | 91.7 | % | 92.0 | % | 92.1 | % | 93.8 | % | 91.8 | % | 92.4 | % | |||||
Total including anchors | 93.9 | % | 94.4 | % | 93.5 | % | 95.0 | % | 93.8 | % | 94.6 | % | |||||
Malls weighted average: | |||||||||||||||||
Total excluding anchors | 92.3 | % | 92.1 | % | 89.5 | % | 94.8 | % | 92.0 | % | 92.4 | % | |||||
Total including anchors | 94.2 | % | 94.5 | % | 92.9 | % | 96.4 | % | 94.1 | % | 94.8 | % | |||||
Other retail properties | 36.7 | % | 83.1 | % | 94.0 | % | 93.8 | % | 91.3 | % | 93.3 | % |
(1) | Occupancy for |
(2) |
| Combined occupancy is calculated by using occupied gross leasable area (“GLA”) for consolidated and unconsolidated properties and dividing by total GLA for consolidated and unconsolidated properties. |
(3) | Retail portfolio includes all retail properties excluding Fashion District Philadelphia because that property was under redevelopment until it opened in September 2019 and has not yet stabilized. |
(4) | Core Malls excludes Fashion District Philadelphia, Exton Square Mall, power centers and Gloucester Premium Outlets. As of August 2020, the operations of Valley View Mall were assigned to a receiver on behalf of the lender of the mortgage loan secured by the property. |
32
Leasing Activity
The table below sets forth summary leasing activity information with respect to our consolidated and unconsolidated properties for the three months ended
September 30,
|
|
|
| Number |
|
| GLA |
|
| Term |
|
| Initial Rent per square foot ("psf") |
|
| Previous Rent psf |
|
| Initial Gross Rent Renewal Spread(1) |
|
| Average Rent Renewal Spread(2) |
|
| Annualized Tenant Improvements psf(3) |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ |
|
| % |
|
| % |
|
|
|
|
| |||
Non Anchor |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New Leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under 10k square feet ("sf") |
|
|
|
| 5 |
|
|
| 8,194 |
|
|
| 1.8 |
|
| $ | 36.78 |
|
| N/A |
|
| N/A |
|
| N/A |
|
| N/A |
|
| $ | - |
| ||||
Over 10k sf |
|
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
| N/A |
|
| N/A |
|
| N/A |
|
| N/A |
|
|
| - |
| ||||
Total New Leases |
|
|
|
| 5 |
|
|
| 8,194 |
|
|
| 1.8 |
|
| $ | 36.78 |
|
| N/A |
|
| N/A |
|
| N/A |
|
| N/A |
|
| $ | - |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Renewal Leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under 10k sf |
|
|
|
| 19 |
|
|
| 30,009 |
|
|
| 1.9 |
|
| $ | 66.82 |
|
| $ | 71.05 |
|
| $ | (4.23 | ) |
|
| (6.0 | %) |
|
| (9.1 | %) |
| $ | - |
|
Over 10k sf |
|
|
|
| 1 |
|
|
| 12,608 |
|
|
| 5.0 |
|
|
| 14.00 |
|
|
| 13.50 |
|
|
| 0.50 |
|
|
| 3.7 | % |
|
| 3.7 | % |
|
| - |
|
Total Fixed Rent |
|
|
|
| 20 |
|
|
| 42,617 |
|
|
| 2.8 |
|
| $ | 51.19 |
|
| $ | 54.02 |
|
| $ | (2.83 | ) |
|
| (5.2 | %) |
|
| (8.1 | %) |
| $ | - |
|
Total Percentage in Lieu |
|
|
|
| 6 |
|
|
| 28,535 |
|
|
| 1.3 |
|
|
| 39.14 |
|
|
| 46.98 |
|
|
| (7.85 | ) |
|
| (16.7 | %) |
| N/A |
|
|
| - |
| |
Total Renewal Leases |
|
|
|
| 26 |
|
|
| 71,152 |
|
|
| 2.2 |
|
| $ | 46.36 |
|
| $ | 51.20 |
|
| $ | (4.84 | ) |
|
| (9.5 | %) |
|
|
|
|
| $ | - |
|
Total Non Anchor |
|
|
|
| 31 |
|
|
| 79,346 |
|
|
| 2.2 |
|
| $ | 45.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial Gross Rent Spread (1) | Avg Rent Spread (2) | Annualized Tenant Improvements psf (3) | |||||||||||||||||||||||||||
Number | GLA (in square feet) | Term (years) | Initial Rent psf | Previous Rent psf | $ | % | % | ||||||||||||||||||||||
Non Anchor | |||||||||||||||||||||||||||||
New Leases | |||||||||||||||||||||||||||||
Under 10,000 sf | 29 | 60,419 | 7.7 | $ | 52.50 | N/A | N/A | N/A | N/A | $ | 10.72 | ||||||||||||||||||
Over 10,000 sf | 3 | 92,448 | 10.0 | 16.90 | N/A | N/A | N/A | N/A | 6.02 | ||||||||||||||||||||
Total New Leases | 32 | 152,867 | 7.9 | $ | 30.97 | N/A | N/A | N/A | N/A | $ | 7.88 | ||||||||||||||||||
Renewal Leases | |||||||||||||||||||||||||||||
Under 10,000 sf | 49 | 110,385 | 3.4 | $ | 56.86 | $ | 57.84 | $ | (0.98 | ) | (1.7)% | 0.1% | $ | 0.21 | |||||||||||||||
Over 10,000 sf | 6 | 114,589 | 4.0 | 22.12 | 24.55 | (2.43 | ) | (9.9)% | (6.4)% | — | |||||||||||||||||||
Total Fixed Rent | 55 | 224,974 | 3.5 | $ | 39.17 | $ | 40.88 | $ | (1.71 | ) | (4.2)% | (1.9)% | $ | 0.10 | |||||||||||||||
Percentage in Lieu | 0 | — | 0.0 | $ | — | $ | — | N/A | N/A | N/A | $ | — | |||||||||||||||||
Total Renewal Leases | 55 | 224,974 | 3.5 | $ | 39.17 | $ | 40.88 | $ | (1.71 | ) | (4.2)% | (1.9)% | $ | — | |||||||||||||||
Total Non Anchor(4) | 87 | 377,841 | 5.1 | $ | 35.85 | ||||||||||||||||||||||||
Anchor | |||||||||||||||||||||||||||||
New Leases | — | — | — | $ | — | N/A | N/A | N/A | N/A | $ | — | ||||||||||||||||||
Renewal Leases | 4 | 336,207 | 6.3 | $ | 6.78 | $ | 6.69 | $ | 0.09 | 1.3% | N/A | $ | — | ||||||||||||||||
Total | 4 | 336,207 | 6.3 | $ | 6.78 |
(1) | Initial gross rent renewal spread is computed by comparing the initial rent per square foot in the new lease to the final rent per square foot amount in the expiring lease. For purposes of this computation, the rent amount includes minimum rent, common area maintenance (“CAM”) charges, estimated real estate tax reimbursements and marketing charges, but excludes percentage rent. In certain cases, a lower rent amount may be payable for a period of time until specified conditions in the lease are satisfied. |
(2) | Average rent renewal spread is computed by comparing the average rent per square foot over the new lease term to the final rent per square foot amount in the expiring lease. For purposes of this computation, the rent amount includes minimum rent and fixed CAM charges, but excludes pro rata CAM charges, estimated real estate tax reimbursements, marketing charges and percentage rent. |
(3) | These leasing costs are presented as annualized amounts per square foot and are spread uniformly over the initial lease term. |
The table below sets forth summary leasing activity information with respect to our consolidated and unconsolidated properties for the nine months ended September 30, 2017:2020:
|
|
|
| Number |
|
| GLA |
|
| Term |
|
| Initial Rent per square foot ("psf") |
|
| Previous Rent psf |
|
| Initial Gross Rent Renewal Spread(1) |
|
| Average Rent Renewal Spread(2) |
|
| Annualized Tenant Improvements psf(3) |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ |
|
| % |
|
| % |
|
|
|
|
| |||
Non Anchor |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New Leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under 10k square feet ("sf") |
|
|
|
| 34 |
|
|
| 75,658 |
|
|
| 6.0 |
|
| $ | 40.60 |
|
| N/A |
|
| N/A |
|
| N/A |
|
| N/A |
|
| $ | 9.06 |
| ||||
Over 10k sf |
|
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
| N/A |
|
| N/A |
|
| N/A |
|
| N/A |
|
|
| - |
| ||||
Total New Leases |
|
|
|
| 34 |
|
|
| 75,658 |
|
|
| 6.0 |
|
| $ | 40.60 |
|
| N/A |
|
| N/A |
|
| N/A |
|
| N/A |
|
| $ | 9.06 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Renewal Leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under 10k sf |
|
|
|
| 81 |
|
|
| 201,084 |
|
|
| 2.6 |
|
| $ | 52.96 |
|
| $ | 56.33 |
|
| $ | (3.37 | ) |
|
| (6.0 | %) |
|
| (2.5 | %) |
| $ | 0.01 |
|
Over 10k sf |
|
|
|
| 3 |
|
|
| 61,345 |
|
|
| 4.5 |
|
|
| 15.92 |
|
|
| 16.28 |
|
|
| (0.36 | ) |
|
| (2.2 | %) |
|
| (12.8 | %) |
|
| - |
|
Total Fixed Rent |
|
|
|
| 84 |
|
|
| 262,429 |
|
|
| 3.1 |
|
| $ | 44.30 |
|
| $ | 46.97 |
|
| $ | (2.67 | ) |
|
| (5.7 | %) |
|
| (3.4 | %) |
| $ | 0.01 |
|
Total Percentage in Lieu |
|
|
|
| 24 |
|
|
| 76,509 |
|
|
| 1.3 |
|
|
| 33.64 |
|
|
| 44.38 |
|
|
| (10.74 | ) |
|
| (24.2 | %) |
| N/A |
|
|
| - |
| |
Total Renewal Leases (4) |
|
|
|
| 108 |
|
|
| 338,938 |
|
|
| 2.7 |
|
| $ | 41.89 |
|
| $ | 46.38 |
|
| $ | (4.49 | ) |
|
| (9.7 | %) |
|
|
|
|
| $ | 0.01 |
|
Total Non Anchor |
|
|
|
| 142 |
|
|
| 414,596 |
|
|
| 3.3 |
|
| $ | 41.66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial Gross Rent Spread (1) | Avg Rent Spread (2) | Annualized Tenant Improvements psf (3) | |||||||||||||||||||||||||||
Number | GLA (in square feet) | Term (years) | Initial Rent psf | Previous Rent psf | $ | % | % | ||||||||||||||||||||||
Non Anchor | |||||||||||||||||||||||||||||
New Leases | |||||||||||||||||||||||||||||
Under 10,000 sf | 125 | 243,748 | 6.7 | $ | 47.21 | N/A | N/A | N/A | N/A | $ | 7.34 | ||||||||||||||||||
Over 10,000 sf | 16 | 302,913 | 9.9 | 17.00 | N/A | N/A | N/A | N/A | 7.03 | ||||||||||||||||||||
Total New Leases | 141 | 546,661 | 7.1 | $ | 30.47 | N/A | N/A | N/A | N/A | $ | 7.17 | ||||||||||||||||||
Renewal Leases | |||||||||||||||||||||||||||||
Under 10,000 sf | 203 | 403,753 | 3.8 | $ | 60.82 | $ | 60.10 | $ | 0.72 | 1.2% | 3.8% | $ | 0.07 | ||||||||||||||||
Over 10,000 sf | 15 | 319,025 | 3.3 | 16.62 | 17.31 | (0.69 | ) | (4.0)% | 0.9% | — | |||||||||||||||||||
Total Fixed Rent | 218 | 722,778 | 3.7 | $ | 41.31 | $ | 41.21 | $ | 0.10 | 0.2% | 3.3% | $ | 0.04 | ||||||||||||||||
Percentage in Lieu | 3 | 14,843 | 1.7 | $ | 5.51 | $ | 5.51 | — | —% | N/A | $ | — | |||||||||||||||||
Total Renewal Leases | 221 | 737,621 | 3.7 | $ | 40.59 | $ | 40.49 | $ | 0.10 | 0.2% | 3.3% | $ | 0.05 | ||||||||||||||||
Total Non Anchor(4) | 362 | 1,284,282 | 5.0 | $ | 36.28 | ||||||||||||||||||||||||
Anchor | |||||||||||||||||||||||||||||
New Leases | 5 | 349,972 | 11.0 | $ | 7.70 | N/A | N/A | N/A | N/A | $ | 1.38 | ||||||||||||||||||
Renewal Leases | 7 | 935,972 | 7.4 | $ | 5.23 | $ | 5.20 | $ | 0.03 | 0.6% | N/A | $ | — | ||||||||||||||||
Total | 12 | 1,285,944 | 8.9 | $ | 5.90 |
(1) | Initial gross rent renewal spread is computed by comparing the initial rent per square foot in the new lease to the final rent per square foot amount in the expiring lease. For purposes of this computation, the rent amount includes minimum rent, common area maintenance (“CAM”) charges, estimated real estate tax reimbursements and marketing charges, but excludes percentage rent. In certain cases, a lower rent amount may be payable for a period of time until specified conditions in the lease are satisfied. |
(2) | Average rent renewal spread is computed by comparing the average rent per square foot over the new lease term to the final rent per square foot amount in the expiring lease. For purposes of this computation, the rent amount includes minimum rent and fixed CAM charges, but excludes pro rata CAM charges, estimated real estate tax reimbursements, marketing charges and percentage rent. |
(3) | These leasing costs are presented as annualized amounts per square foot and are spread uniformly over the initial lease term. |
(4) | |
Includes |
The following table sets forth our results of operations for the three and nine months ended September 30, 20172020 and 2016.2019.
|
| Three Months Ended September 30, |
|
| % Change 2019 to 2020 |
| Nine Months Ended September 30, |
|
| % Change 2019 to 2020 | ||||||||||||||||
(in thousands of dollars) |
| 2020 |
|
| 2019 |
|
|
|
| 2020 |
|
| 2019 |
|
|
| ||||||||||
Real estate revenue |
| $ | 63,849 |
|
| $ | 80,876 |
|
|
| (21.1 | ) | % |
| $ | 194,437 |
|
| $ | 246,629 |
|
|
| (21.2 | ) | % |
Property operating expenses |
|
| (33,045 | ) |
|
| (34,165 | ) |
|
| (3.3 | ) | % |
|
| (95,088 | ) |
|
| (103,056 | ) |
|
| (7.7 | ) | % |
Other income |
|
| 340 |
|
|
| 498 |
|
|
| (31.7 | ) | % |
|
| 764 |
|
|
| 1,440 |
|
|
| (46.9 | ) | % |
Depreciation and amortization |
|
| (34,420 | ) |
|
| (31,236 | ) |
|
| 10.2 |
| % |
|
| (95,597 | ) |
|
| (98,085 | ) |
|
| (2.5 | ) | % |
General and administrative expenses |
|
| (9,526 | ) |
|
| (10,605 | ) |
|
| (10.2 | ) | % |
|
| (30,790 | ) |
|
| (33,419 | ) |
|
| (7.9 | ) | % |
Provision for employee separation expenses |
|
| (60 | ) |
|
| (218 | ) |
|
| (72.5 | ) | % |
|
| (1,173 | ) |
|
| (1,078 | ) |
|
| 8.8 |
| % |
Insurance recoveries, net |
|
| - |
|
|
| 2,878 |
|
|
| (100.0 | ) | % |
|
| 586 |
|
|
| 4,494 |
|
|
| (87.0 | ) | % |
Project costs and other expenses |
|
| (124 | ) |
|
| (80 | ) |
|
| 55.0 |
| % |
|
| (287 | ) |
|
| (267 | ) |
|
| 7.5 |
| % |
Interest expense, net |
|
| (20,260 | ) |
|
| (15,534 | ) |
|
| 30.4 |
| % |
|
| (54,300 | ) |
|
| (46,986 | ) |
|
| 15.6 |
| % |
Gain on debt extinguishment, net |
|
| - |
|
|
| 29,600 |
|
|
| (100.0 | ) | % |
|
| - |
|
|
| 24,832 |
|
|
| (100.0 | ) | % |
Gain on derecognition of property |
|
| 7,006 |
|
|
| - |
|
|
| 100.0 |
| % |
|
| 7,006 |
|
|
| - |
|
|
| 100.0 |
| % |
Impairment of development land parcel |
|
| - |
|
|
| - |
|
|
| 0.0 |
| % |
|
| - |
|
|
| (1,464 | ) |
|
| (100.0 | ) | % |
Equity in (loss) income of partnerships |
|
| (3,259 | ) |
|
| 1,531 |
|
|
| (312.9 | ) | % |
|
| (2,798 | ) |
|
| 6,136 |
|
|
| (145.6 | ) | % |
Gain on sales of real estate by equity method investee |
|
| - |
|
|
| - |
|
|
| 0.0 |
| % |
|
| - |
|
|
| 553 |
|
|
| (100.0 | ) | % |
(Loss) gain on sales of real estate, net |
|
| (94 | ) |
|
| 1,171 |
|
|
| (108.0 | ) | % |
|
| 11,169 |
|
|
| 2,684 |
|
|
| 316.1 |
| % |
Gain (loss) on sales of interests in non operating real estate |
|
| 16 |
|
|
| - |
|
|
| 100.0 |
| % |
|
| (174 | ) |
|
| - |
|
|
| 100.0 |
| % |
Net (loss) income |
| $ | (29,577 | ) |
| $ | 24,716 |
|
|
| (219.7 | ) | % |
| $ | (66,245 | ) |
| $ | 2,413 |
|
|
| (2,845.3 | ) | % |
Three Months Ended September 30, | % Change 2016 to 2017 | Nine Months Ended September 30, | % Change 2016 to 2017 | ||||||||||||||||||||
(in thousands of dollars) | 2017 | 2016 | 2017 | 2016 | |||||||||||||||||||
Real estate revenue | $ | 86,719 | $ | 96,260 | (10 | )% | $ | 263,553 | $ | 290,455 | (9 | )% | |||||||||||
Property operating expenses | (33,303 | ) | (37,249 | ) | (11 | )% | (105,509 | ) | (117,892 | ) | (11 | )% | |||||||||||
Other income | 2,492 | 2,600 | (4 | )% | 4,172 | 4,630 | (10 | )% | |||||||||||||||
Depreciation and amortization | (29,966 | ) | (26,820 | ) | 12 | % | (94,652 | ) | (92,217 | ) | 3 | % | |||||||||||
General and administrative expenses | (8,288 | ) | (8,244 | ) | 1 | % | (26,561 | ) | (25,713 | ) | 3 | % | |||||||||||
Provision for employee separation expense | — | (162 | ) | (100 | )% | (1,053 | ) | (1,355 | ) | (22 | )% | ||||||||||||
Project costs and other expenses | (150 | ) | (1,080 | ) | (86 | )% | (547 | ) | (1,374 | ) | (60 | )% | |||||||||||
Interest expense, net | (14,342 | ) | (17,198 | ) | (17 | )% | (44,098 | ) | (53,611 | ) | (18 | )% | |||||||||||
Impairment of assets | (1,825 | ) | (9,865 | ) | (82 | )% | (55,742 | ) | (24,589 | ) | 127 | % | |||||||||||
Equity in income of partnerships | 4,254 | 4,643 | (8 | )% | 12,144 | 12,718 | (5 | )% | |||||||||||||||
Gain on sale of real estate by equity method investee | 6,718 | — | 6,718 | — | |||||||||||||||||||
Gain on sales of interests in non operating real estate | — | — | — | % | 486 | 9 | 5,300 | % | |||||||||||||||
(Losses) gains on sales of interests in real estate, net | (9 | ) | 31 | (129 | )% | (374 | ) | 22,953 | (102 | )% | |||||||||||||
Net income (loss) | $ | 12,300 | $ | 2,916 | 322 | % | $ | (41,463 | ) | $ | 14,014 | (396 | )% |
34
The amounts in the preceding tables reflect our consolidated properties and our unconsolidated properties. Our unconsolidated properties are presented under the equity method of accounting in the line item “Equity in income of partnerships.”
Real Estate Revenue
Effective January 1, 2019, we adopted Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) (“ASC 842”) and related guidance using the optional transition method and elected to apply the provisions of the standard as of the adoption date rather than the earliest date presented. Prior period amounts were not restated. Since we adopted the practical expedient in ASC 842, which allows us to avoid separating lease (minimum rent) and non-lease rental income (common area maintenance and real estate tax reimbursements), all rental income earned pursuant to tenant leases is reflected as one line, “Lease revenue,” in the consolidated statement of operations. Utility reimbursements are presented separately in “Expense reimbursements.” We review the collectability of both billed and unbilled lease revenues each reporting period, taking into consideration the tenant’s payment history, credit profile and other factors, including its operating performance. For any tenant receivable balances deemed to be uncollectible, under ASC 842 we record an offset for credit losses directly to Lease revenue in the consolidated statement of operations. Previously, under ASC 840, uncollectible tenants’ receivables were reported in Other property operating expenses in the consolidated statement of operations.
The following table reports the breakdown of real estate revenues based on the terms of the lease contracts for the three and nine months ended September 30, 2020 and 2019:
|
| Three Months Ended September, |
|
| Nine Months Ended September 30, |
| ||||||||||
(in thousands of dollars) |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Contractual lease payments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base rent |
| $ | 47,258 |
|
| $ | 53,688 |
|
| $ | 136,084 |
|
| $ | 163,676 |
|
CAM reimbursement income |
|
| 8,974 |
|
|
| 10,816 |
|
|
| 29,043 |
|
|
| 33,365 |
|
Real estate tax income |
|
| 7,999 |
|
|
| 9,114 |
|
|
| 25,015 |
|
|
| 27,494 |
|
Percentage rent |
|
| 85 |
|
|
| 772 |
|
|
| 84 |
|
|
| 935 |
|
Lease termination revenue |
|
| 2,011 |
|
|
| 11 |
|
|
| 2,236 |
|
|
| 480 |
|
|
|
| 66,327 |
|
|
| 74,401 |
|
|
| 192,462 |
|
|
| 225,950 |
|
Less: credit losses |
|
| (7,853 | ) |
|
| (1,091 | ) |
|
| (14,149 | ) |
|
| (2,282 | ) |
Lease revenue |
|
| 58,474 |
|
|
| 73,310 |
|
|
| 178,313 |
|
|
| 223,668 |
|
Expense reimbursements |
|
| 4,040 |
|
|
| 5,364 |
|
|
| 11,321 |
|
|
| 15,342 |
|
Other real estate revenue |
|
| 1,335 |
|
|
| 2,202 |
|
|
| 4,803 |
|
|
| 7,619 |
|
Total real estate revenue |
| $ | 63,849 |
|
| $ | 80,876 |
|
| $ | 194,437 |
|
| $ | 246,629 |
|
The Company has presented the above information to provide additional detail about the components of lease revenue based on the terms of the underlying lease contracts. The presentation of contractual lease payments is not, and is not intended to be, a presentation in accordance with GAAP. The Company believes this information is useful to investors, securities analysts and other interested parties to evaluate the Company’s performance.
Real Estate Revenue
Real estate revenue
decreased by• | an increase of $6.4 million in same store credit losses due to increased accounts receivable balances from tenant bankruptcies and some struggling tenants across our portfolio that was exacerbated by mall closures as a result of COVID-19 starting in March 2020; |
• | a decrease of $3.8 million in same store base rent due to a $2.2 million decrease related to tenant bankruptcies in 2019 and 2020 and a $1.8 million decrease related to COVID-19 mall closures and associated rent abatements partially offset by net new store openings over the previous twelve months; |
• | a decrease of $2.4 million at Wyoming Valley Mall which was conveyed to the lender of the mortgage loan secured by Wyoming Valley Mall on September 26, 2019; |
• | a decrease of $1.9 million at non-same store properties Valley View Mall, due to its derecognition during the third quarter of 2020 and Exton Square Mall due to three anchor store closings during 2018 and 2019 and associated co-tenancy concessions, and a decrease in lease revenue from vacancies resulting from the COVID-19 pandemic; |
• | a decrease of $1.3 million in same store common area expense reimbursements, including a decrease of $0.3 million associated with the straight lining of fixed common area expense reimbursements effective January 1, 2019 in accordance with ASC 842. Excluding the |
35
impact of the straight line adjustment, same store common area reimbursements decreased by $1.0 million due to a decrease in same store common area expense (see “-Property Operating Expenses”), as well as 2019 bankruptcy store closings and rental concessions made to some tenants under which the terms of their leases were modified such that they no longer pay expense reimbursements; |
• | a decrease of $1.0 million in same store utility reimbursements, offset by a decrease in same store utility expense (see “-Property Operating Expenses”); and |
• | a decrease of $0.7 million in same store real estate tax reimbursements due to bankruptcy store closings and rental concessions made to some tenants under which the terms of their leases were modified such that they no longer pay expense reimbursements, partially offset by an increase in same store real estate tax expense (see “-Property Operating Expenses”); partially offset by |
• | an increase of $2.0 million in same store lease termination revenue, consisting of five tenants during the three months ending September 30, 2020. |
Real estate revenue decreased by $26.9 million$52.1 million, or 9%21%, in the nine months ended September 30, 20172020 compared to the nine months ended September 30, 2016,2019, primarily due to:
• | a decrease of $18.8 million in same store base rent due to a $13.8 million decrease related to mall closures as a result of COVID-19 and associated rent abatements and reduced percent of sales revenue as well as a $6.5 million decrease related to tenant bankruptcies in 2019 and 2020, partially offset by $1.5 million from net new store openings over the previous twelve months; |
• | an increase of $11.5 million in same store credit losses due to increased accounts receivable balances from tenant bankruptcies and some struggling tenants across our portfolio that was exacerbated by mall closures as a result of COVID-19 starting in March 2020; |
• | a decrease of $7.8 million at Wyoming Valley Mall which was conveyed to the lender of the mortgage loan secured by Wyoming Valley Mall on September 26, 2019; |
• | a decrease of $6.1 million at non-same store properties Valley View Mall due to its derecognition during the third quarter of 2020 and Exton Square Mall due to three anchor store closings during 2018 and 2019 and associated co-tenancy concessions, vacancies and abatements resulting from the COVID-19 pandemic, as well as a decrease in lease revenue at Exton Square Mall due to the sale of an out parcel during the nine months ended September 30, 2019; |
• | a decrease of $3.0 million in same store utility reimbursements, offset by a decrease in same store utility expense (see “- Property Operating Expenses”); |
• | a decrease of $2.8 million in same store common area expense reimbursements, including a decrease of $0.7 million associated with the straight lining of fixed common area expense reimbursements effective January 1, 2019 in accordance with ASC 842. Excluding the impact of the straight line adjustment, same store common area reimbursements decreased by $2.1 million due to a decrease in same store common area expense (see “- Property Operating Expenses”), as well as 2019 bankruptcy store closings and rental concessions made to some tenants under which the terms of their leases were modified such that they no longer pay expense reimbursements; and |
• | a decrease of $1.5 million in same store real estate tax reimbursements due to bankruptcy store closings and rental concessions made to some tenants under which the terms of their leases were modified such that they no longer pay expense reimbursements, partially offset by an increase in same store real estate tax expense (see “- Property Operating Expenses”); partially offset by |
• | an increase of $1.8 million in same store lease termination revenue, including $2.2 million from the termination of leases with seven tenants during the nine months ending September 30, 2020, partially offset by $0.4 million received from seven tenants during the nine months ended September 30, 2019. |
Property Operating Expenses”), as well as lower occupancy at some properties and rental concessions made to some tenants under which the terms of their leases were modified such that they no longer pay expense reimbursements;
Property operating expenses decreased by $3.9$1.1 million, or 11%3%, in the three months ended
• | a decrease of $1.2 million at Wyoming Valley Mall which was conveyed to the lender of the mortgage loan secured by Wyoming Valley Mall on September 26, 2019; |
• | a decrease of $0.5 million in same store common area maintenance expense, including a $0.2 million decrease in utility expense, a $0.1 million decrease in personnel expense, and a $0.1 million decrease in housekeeping expense; |
36
• | a decrease of $0.3 million at non-same store properties Valley View Mall and Exton Square Mall; and |
• | a decrease of $0.2 million in same store tenant utility expense due to a combination of lower electricity usage and electricity rates; partially offset by |
• | an increase of $1.2 million in same store real estate tax expense due to a combination of increases in the real estate tax assessment value and the real estate tax rate. |
Property operating expenses decreased by $12.4$8.0 million, or 11%8%, in the nine months ended September 30, 20172020 compared to the nine months ended September 30, 2016,2019, primarily due to:
• | a decrease of $3.8 million in same store common area maintenance expense, including a $1.3 million decrease in cleaning expense and a $0.7 million decrease in security expense due to negotiated credits with our vendors while properties were closed, a $0.5 million decrease in snow removal expense due to lower snow fall amounts during the nine months ending September 30, 2020 across the Mid-Atlantic States, where many of our properties are located, and a $0.5 million decrease in utility expense; |
• | a decrease of $3.8 million at Wyoming Valley Mall which was conveyed to the lender of the mortgage loan secured by Wyoming Valley Mall on September 26, 2019; |
• | a decrease of $1.6 million in same store tenant utility expense due to a combination of lower electricity usage and electricity rates; and |
• | a decrease of $1.1 million at non-same store properties Valley View Mall and Exton Square Mall due to a decrease in the real estate tax assessment value at Valley View Mall and a decrease in cleaning and security expenses at both properties due to negotiated credits with our vendors while properties were closed; partially offset by |
• | an increase of $2.2 million in same store real estate tax expense due to a combination of increases in the real estate tax assessment value and the real estate tax rate. |
Depreciation and amortization
Depreciation and amortization expense increased by $3.1$3.2 million, or 12%10.2%, in the three months ended September 30, 20172020 compared to the three months ended September 30, 2016,2019, primarily due to:
• | an increase of $3.7 million due to accelerated amortization of capital improvements associated with store closings and a higher asset base resulting from capital improvements related to new tenants at our same store properties; partially offset by |
• | a decrease of $0.5 million at Wyoming Valley Mall which was conveyed to the lender of the mortgage loan secured by Wyoming Valley Mall on September 26, 2019; and |
Depreciation and amortization expense increaseddecreased by $2.4$2.5 million, or 3%3.0%, in the nine months ended September 30, 20172020 compared to the nine months ended September 30, 2016,2019, primarily due to:
• | a decrease of $1.7 million at Wyoming Valley Mall which was conveyed to the lender of the mortgage loan secured by Wyoming Valley Mall on September 26, 2019; |
• | a decrease of $0.6 million at non-same store properties Exton Square Mall and Valley View Mall due to |
• | a decrease of $0.3 million due to accelerated amortization of capital improvements associated with store closings during the nine months ended September 30, 2019, partially offset by accelerated amortization of capital improvements associated with store closings during the nine months ended September 30, 2020 and a higher asset base resulting from capital improvements related to new tenants at our same store properties. |
General and administrative expenses
General and administrative expenses decreased by $1.1 million, or 10.2%, in the three months ended September 30, 2020 compared to the three months ended September 30, 2019 primarily due to lower payroll and incentive compensation expenses.
37
General and administrative expenses decreased by $2.6 million, or 7.9%, in the nine months ended September 30, 2017; partially offset2020 compared to the nine months ended September 30, 2019 primarily due to lower payroll and incentive compensation expenses.
Interest expense
Interest expense increased by
Interest expense increased by $6.8 million, or 14.5%, in the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. This increase was primarily due to higher weighted average debt balances and higher weighted average interest rates. Our weighted average effective borrowing rate was 4.20% for the nine months ended September 30, 2020 compared to 4.26% for the nine months ended September 30, 2019. Our weighted average debt balance was $1,768.8 million for the nine months ended September 30, 2020, compared to $1,687.4 million for the nine months ended September 30, 2019.
Gain on debt extinguishment, net
In March 2019, we defeased a decrease$58.5 million mortgage loan including accrued interest, secured by Capital City Mall in Camp Hill, Pennsylvania using funds from our 2018 Revolving Facility and the balance from available working capital. We recorded a loss on debt extinguishment of $7.1$4.8 million relatedin March 2019 in connection with this defeasance.
In September 2019, we conveyed Wyoming Valley Mall to properties soldthe lender of the mortgage loan secured by the property. The loan had a balance of approximately $72.8 million as of the conveyance on September 26, 2019. As a result of the transfer, having previously recognized an asset impairment loss of approximately $32.2 million on the value of the property, we recorded a gain on extinguishment of debt of $29.6 million during the three months ended September 30, 2019.
Gain on derecognition of property
In August 2020, a court order assigned a receiver to operate Valley View Mall on behalf of the lender of the mortgage loan secured by the property. We no longer operate the property as a result of court order assigning the receiver. As a result, we derecognized the assets associated with Valley View Mall and recognized a gain on derecognition of property of $7.0 million in 2016the consolidated statement of operations for the three and 2017 and one property classified as held for sale effective Junenine months ended September 30, 2017.
Impairment of assets
There was no impairment of assets for the three months ended September 30, 2017 consisted primarily2020 and 2019 or for the nine months ended September 30, 2020.
Impairment of $1.3 million in connection with sale negotiations ofdevelopment land in Gainesville, Florida, $0.3parcel for the nine months ended September 30, 2019 was $1.5 million in connection with the sale of Logan Valley Mall in August 2017, and $0.2 million on a land parcel located at Sunrise Plaza in Forked River, New Jersey.
Equity in (loss) income of assetspartnerships
Equity in (loss) income of partnerships decreased by $4.8 million, or 312.9%, for the three months ended September 30, 2016 consisted of $9.9 million in connection with the the sale of Beaver Valley Mall, which was sold in January 2017.
Equity in 2016 and 2017, along with the net proceeds from our 2017 Series C and Series D Preferred Share issuances, netincome of capital expenditures related to anchor replacements and redevelopment spending.
Gain on sales of real estate by equity method investee
There were no sales of real estate by equity method investees in the three months ended September 30, 2020 and 2019 or the nine months ended September 30, 2017 compared to 4.21% for2020.
During the nine months ended September 30, 2016. Our weighted average debt balance2019, a partnership in which we hold a 25% interest share sold an undeveloped land parcel adjacent to Gloucester Premium Outlets for $3.8 million. The partnership recorded a gain on sale of $2.3 million, of which our share was reduced to $1,650.5$0.6 million, forwhich is recorded in gain on sale of real estate by equity method investee in the nineaccompanying consolidated statement of operations.
38
(Loss) gain on sales of real estate
During the three months ended September 30, 2017, compared2020, we recorded unfavorable adjustments to $1,765.1previously recognized real estate sales described in the next paragraph, which resulted in a loss on sales of real estate of $0.1 million.
In January 2020, we completed the sale of an outparcel at Woodland Mall in Grand Rapids, Michigan for total consideration of $5.2 million. In March 2020, we completed the sale of two outparcels at Magnolia Mall in Florence, South Carolina for total consideration of $2.9 million. In connection with the March sale, we recorded a gain of $2.0 million. In June 2020, we completed the sale of six outparcels at Magnolia Mall, Jacksonville Mall and Valley Mall for total consideration of $14.4 million and net gain of $9.3 million.
In April 2019, we sold a Whole Foods store located on a parcel adjacent to Exton Square Mall for total consideration of $22.1 million. In
connection with this sale, we recorded a gain of $1.3 million.
During the ninethree months ended September 30, 2016 due2020, we recorded favorable adjustments to the applicationpreviously recognized real estate sales described below.
In April 2019, we sold an undeveloped land parcel located in New Garden Township, Pennsylvania, for total consideration of $11.0 million,
consisting of $8.25 million in cash proceeds from property sales in 2016 and 2017, along$2.75 million of preferred stock. We ascribed no value for accounting purposes to the preferred shares as they are not tradeable, cannot be transferred or sold and have no redemption feature. Up to $1.25 million of the cash consideration received is subject to claw-back if the buyer does not receive entitlements for a stipulated number of housing units. In connection with the net proceeds from our 2017 Series C and Series D Preferred Share issuances, netthis sale, we recorded a gain of capital expenditures related to anchor replacements and redevelopment spending.
NON-GAAP SUPPLEMENTAL FINANCIAL MEASURES
Overview
The preceding discussion analyzes our financial condition and results of operations in accordance with generally accepted accounting principles, or GAAP, for the periods presented. We also use Net Operating Income (NOI)(“NOI”) and Funds from Operations (FFO)(“FFO”), which are non-GAAP financial measures, to supplement our analysis and discussion of our operating performance:
• | We believe that NOI is helpful to management and investors as a measure of operating performance because it is an indicator of the return on property investment and provides a method of comparing property performance over time. When we use and present NOI, we also do so on a same store (“Same Store NOI”) and non same store (“Non Same Store NOI”) basis to differentiate between properties that we have owned for the full periods presented and properties acquired, sold, under redevelopment or designated as non-core during those periods. Furthermore, our use and presentation of NOI combines NOI from our consolidated properties and NOI attributable to our share of unconsolidated properties in order to arrive at total NOI. We believe that this is also helpful information because it reflects the pro rata contribution from our unconsolidated properties that are owned through investments accounted for under GAAP as equity in income of partnerships. See “Unconsolidated Properties and Proportionate Financial Information” below. |
• | We believe that FFO is also helpful to management and investors as a measure of operating performance because it excludes various items included in net income that do not relate to or are not indicative of operating performance, such as gains on sales of operating real estate and depreciation and amortization of real estate, among others. In addition to FFO and FFO per diluted share and OP Unit, when applicable, we also present FFO, as adjusted and FFO per diluted share and OP Unit, as adjusted, which we believe is helpful to management and investors because they adjust FFO to exclude items that management does not believe are indicative of operating performance, such as provision for employee separation expense and accelerated amortization of financing costs. |
• | We use both NOI and FFO, or related terms like Same Store NOI and, when applicable, Funds From Operations, as adjusted, for determining incentive compensation amounts under certain of our performance-based executive compensation programs. |
NOI and FFO are commonly used non-GAAP financial measures of operating performance in the real estate industry, and we use them as supplemental non-GAAP measures to compare our performance between different periods and to compare our performance to that of our industry peers. Our computation of NOI, FFO and other non-GAAP financial measures, such as Same Store NOI, Non Same Store NOI, NOI attributable to our share of unconsolidated properties, and FFO, as adjusted, may not be comparable to other similarly titled measures used by our industry peers. None of these measures are measures of performance in accordance with GAAP, and they have limitations as analytical tools. They should not be considered as alternative measures of our net income, operating performance, cash flow or liquidity. They are not indicative of funds available for our cash needs, including our ability to make cash distributions.
The non-GAAP financial measures presented below incorporate financial information attributable to our share of unconsolidated properties. This proportionate financial information is non-GAAP financial information, but we believe that it is helpful information because it reflects the pro rata contribution from our unconsolidated properties that are owned through investments accounted for under GAAP using the equity method of accounting. Under such method, earnings from these unconsolidated partnerships are recorded in our statements of operations prepared in accordance with GAAP under the caption entitled “Equity in (loss) income of partnerships.”
To derive the proportionate financial information reflected in the tables below as “unconsolidated,” we multiplied the percentage of our economic interest in each partnership on a property-by-property basis by each line item. Under the partnership agreements relating to our current unconsolidated partnerships with third parties, we own a 25% to 50% economic interest in such partnerships, and there are generally no provisions in such partnership agreements relating to special non-pro rata allocations of income or loss, and there are no preferred or priority returns of capital or other similar provisions. While this method approximates our indirect economic interest in our pro rata share of the revenue and expenses of our unconsolidated partnerships, we do not have a direct legal claim to the assets, liabilities, revenues or expenses of the unconsolidated partnerships beyond our rights as an equity owner in the event of any liquidation of such entity. Our percentage ownership is not necessarily indicative of the legal and economic implications of our ownership interest. Accordingly, NOI and FFO results based on our share of the results of unconsolidated partnerships do not represent cash generated from our investments in these partnerships.
We have determined that we hold a noncontrollingnon controlling interest in each of our unconsolidated partnerships, and account for such partnerships using the equity method of accounting, because:
• | Except for two properties that we co-manage with our partner, all of the other entities are managed on a day-to-day basis by one of our other partners as the managing general partner in each of the respective partnerships. In the case of the co-managed properties, all decisions in the ordinary course of business are made jointly. |
• | The managing general partner is responsible for establishing the operating and capital decisions of the partnership, including budgets, in the ordinary course of business. |
• | All major decisions of each partnership, such as the sale, refinancing, expansion or rehabilitation of the property, require the approval of all partners. |
• | Voting rights and the sharing of profits and losses are generally in proportion to the ownership percentages of each partner. |
We hold legal title to a property owned by one of our unconsolidated partnerships through a tenancy in common arrangement. For this property, such legal title is held by us and another entity, and each has an undivided interest in title to the property. With respect to this property, under the applicable agreements between us and the entity with ownership interests, we and such other entity have joint control because decisions regarding matters such as the sale, refinancing, expansion or rehabilitation of the property require the approval of both us and the other entity owning an interest in the property. Hence, we account for this property like our other unconsolidated partnerships using the equity method of accounting. The balance sheet items arising from this property appear under the caption “Investments in partnerships, at equity.”
For further information regarding our unconsolidated partnerships, see noteNote 3 to our unaudited consolidated financial statements.
Net Operating Income (“NOI”)
NOI (a non-GAAP measure) is derived from real estate revenue (determined in accordance with GAAP, including lease termination revenue), minus property operating expenses (determined in accordance with GAAP), plus our pro rata share of revenue and property operating expenses of our unconsolidated partnership investments. NOI excludes other income, general and administrative expenses, provision forinsurance recoveries, employee separation expenses, interest expense, depreciation and amortization, gain on saleimpairment of assets, gains/losses in sales of interest in non operating
Same Store NOI is calculated using retail properties owned for the full periods presented and excludes properties acquired, or disposed, of or under redevelopment or designated as non-core during the periods presented. In 2018, Wyoming Valley Mall was designated as non-core and subsequently conveyed to the lender of the mortgage loan secured by that property in September 2019. In 2019, Exton Square and Valley View Malls were designated as non-core and are excluded from Same Store NOI. Non Same Store NOI is calculated using the retail properties excluded from the calculation of Same Store NOI.
40
The table below reconciles net (loss) income to NOI of our consolidated properties for the three and nine months ended September 30, 20172020 and 2016:
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(in thousands of dollars) |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Net (loss) income |
| $ | (29,577 | ) |
| $ | 24,716 |
|
| $ | (66,245 | ) |
| $ | 2,413 |
|
Other income |
|
| (338 | ) |
|
| (498 | ) |
|
| (765 | ) |
|
| (1,440 | ) |
Depreciation and amortization |
|
| 34,420 |
|
|
| 31,236 |
|
|
| 95,597 |
|
|
| 98,085 |
|
General and administrative expenses |
|
| 9,526 |
|
|
| 10,605 |
|
|
| 30,790 |
|
|
| 33,419 |
|
Insurance recoveries, net |
|
| - |
|
|
| (2,878 | ) |
|
| (586 | ) |
|
| (4,494 | ) |
Provision for employee separation expenses |
|
| 60 |
|
|
| 218 |
|
|
| 1,173 |
|
|
| 1,078 |
|
Project costs and other expenses |
|
| 124 |
|
|
| 80 |
|
|
| 287 |
|
|
| 267 |
|
Interest expense, net |
|
| 20,260 |
|
|
| 15,534 |
|
|
| 54,300 |
|
|
| 46,986 |
|
Impairment of development land parcel |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 1,464 |
|
Equity in loss (income) of partnerships |
|
| 3,259 |
|
|
| (1,531 | ) |
|
| 2,798 |
|
|
| (6,136 | ) |
Gain on debt extinguishment, net |
|
| - |
|
|
| (29,600 | ) |
|
| - |
|
|
| (24,832 | ) |
Gain on derecognition of property |
|
| (7,006 | ) |
|
| - |
|
|
| (7,006 | ) |
|
| - |
|
Gain on sales of real estate by equity method investee |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (553 | ) |
Loss (gain) on sales of interests in real estate, net |
|
| 94 |
|
|
| (1,171 | ) |
|
| (11,169 | ) |
|
| (2,684 | ) |
(Gain) loss on sales of interest in non operating real estate |
|
| (16 | ) |
|
| - |
|
|
| 174 |
|
|
| - |
|
NOI from consolidated properties |
| $ | 30,806 |
|
| $ | 46,711 |
|
| $ | 99,348 |
|
| $ | 143,573 |
|
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
(in thousands) | 2017 | 2016 | 2017 | 2016 | |||||||||||
Net income (loss) | $ | 12,300 | $ | 2,916 | $ | (41,463 | ) | $ | 14,014 | ||||||
Other income | (2,492 | ) | (2,600 | ) | (4,172 | ) | (4,630 | ) | |||||||
Depreciation and amortization | 29,966 | 26,820 | 94,652 | 92,217 | |||||||||||
General and administrative expenses | 8,288 | 8,244 | 26,561 | 25,713 | |||||||||||
Employee separation expenses | — | 162 | 1,053 | 1,355 | |||||||||||
Project costs and other expenses | 150 | 1,080 | 547 | 1,374 | |||||||||||
Interest expense, net | 14,342 | 17,198 | 44,098 | 53,611 | |||||||||||
Impairment of assets | 1,825 | 9,865 | 55,742 | 24,589 | |||||||||||
Equity in income of partnerships | (4,254 | ) | (4,643 | ) | (12,144 | ) | (12,718 | ) | |||||||
Gain on sale of real estate by equity method investee | (6,718 | ) | — | (6,718 | ) | — | |||||||||
Gains on sales of non operating real estate | — | — | (486 | ) | (9 | ) | |||||||||
Losses (gains) on sales of interests in real estate, net | 9 | (31 | ) | 374 | (22,953 | ) | |||||||||
NOI - consolidated properties | $ | 53,416 | $ | 59,011 | $ | 158,044 | $ | 172,563 |
The table below reconciles equity in (loss) income of partnerships to NOI of our share of unconsolidated properties for the three and nine months ended September 30, 20172020 and 2016:2019:
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| |||||||||||
(in thousands of dollars) |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Equity in (loss) income of partnerships |
| $ | (3,259 | ) |
| $ | 1,531 |
|
| $ | (2,798 | ) |
| $ | 6,136 |
|
Other income |
|
| (12 | ) |
|
| (24 | ) |
|
| (38 | ) |
|
| (46 | ) |
Depreciation and amortization |
|
| 5,095 |
|
|
| 2,403 |
|
|
| 12,396 |
|
|
| 6,453 |
|
Interest and other expenses |
|
| 2,942 |
|
|
| 2,823 |
|
|
| 8,733 |
|
|
| 8,414 |
|
NOI from equity method investments at ownership share |
| $ | 4,766 |
|
| $ | 6,733 |
|
| $ | 18,293 |
|
| $ | 20,957 |
|
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
(in thousands) | 2017 | 2016 | 2017 | 2016 | |||||||||||
Equity in income of partnerships | $ | 4,254 | $ | 4,643 | $ | 12,144 | $ | 12,718 | |||||||
Other income | (20 | ) | — | (20 | ) | — | |||||||||
Depreciation and amortization | 2,902 | 2,571 | 8,493 | 7,591 | |||||||||||
Interest and other expenses | 2,566 | 2,571 | 7,683 | 7,729 | |||||||||||
Net operating income from equity method investments at ownership share | $ | 9,702 | $ | 9,785 | $ | 28,300 | $ | 28,038 |
The table below presents total NOI and total NOI excluding lease terminationstermination revenue for the three months ended September 30, 20172020 and 2016:2019:
|
| Same Store |
|
| Non Same Store |
|
| Total (non-GAAP) |
| |||||||||||||||
(in thousands of dollars) |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||||
NOI from consolidated properties |
| $ | 30,662 |
|
| $ | 43,858 |
|
| $ | 144 |
|
| $ | 2,853 |
|
| $ | 30,806 |
|
| $ | 46,711 |
|
NOI from equity method investments at ownership share |
|
| 5,421 |
|
|
| 7,029 |
|
|
| (655 | ) |
|
| (296 | ) |
|
| 4,766 |
|
|
| 6,733 |
|
Total NOI |
|
| 36,083 |
|
|
| 50,887 |
|
|
| (511 | ) |
|
| 2,557 |
|
|
| 35,572 |
|
|
| 53,444 |
|
Less: lease termination revenue |
|
| 2,011 |
|
|
| 55 |
|
|
| - |
|
|
| - |
|
|
| 2,011 |
|
|
| 55 |
|
Total NOI excluding lease termination revenue |
| $ | 34,072 |
|
| $ | 50,832 |
|
| $ | (511 | ) |
| $ | 2,557 |
|
| $ | 33,561 |
|
| $ | 53,389 |
|
Same Store | Non Same Store | Total (non GAAP) | ||||||||||||||||||||||
(in thousands) | 2017 | 2016 | 2017 | 2016 | 2017 | 2016 | ||||||||||||||||||
NOI from consolidated properties | $ | 52,676 | $ | 53,982 | $ | 740 | $ | 5,029 | $ | 53,416 | $ | 59,011 | ||||||||||||
NOI from equity method investments at ownership share | 7,604 | 8,347 | 2,098 | 1,438 | 9,702 | 9,785 | ||||||||||||||||||
Total NOI | 60,280 | 62,329 | 2,838 | 6,467 | 63,118 | 68,796 | ||||||||||||||||||
Less: lease termination revenue | 282 | 3,805 | — | 55 | 282 | 3,860 | ||||||||||||||||||
Total NOI - excluding lease termination revenue | $ | 59,998 | $ | 58,524 | $ | 2,838 | $ | 6,412 | $ | 62,836 | $ | 64,936 |
Total NOI decreased by $5.7$17.9 million in the three months ended September 30, 20172020 compared to the three months ended September 30, 20162019 due to (a) a $14.8 million decrease in Same Store NOI and (b) a decrease of $3.1 million in Non Same Store NOI. The decrease in Same Store NOI is primarily due to lost revenues from bankrupt tenants, an increase in credit losses and a decrease in percentage of $3.6 millionsales revenue due to COVID-19 related mall closures. The decrease in NOI from Non Same Store properties. This decreaseproperties is primarily due to properties soldthe conveyance of Wyoming Valley Mall and derecognition of Valley View Mall in 2016 and 2017.the third quarter of 2020. See “—
41
The table below presents total NOI and total NOI excluding lease terminationstermination revenue for the nine months ended September 30, 20172020 and 2016:2019:
|
| Same Store |
|
| Non Same Store |
|
| Total (non-GAAP) |
| |||||||||||||||
(in thousands of dollars) |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||||
NOI from consolidated properties |
| $ | 98,169 |
|
| $ | 133,210 |
|
| $ | 1,180 |
|
| $ | 10,363 |
|
| $ | 99,349 |
|
| $ | 143,573 |
|
NOI from equity method investments at ownership share |
|
| 17,510 |
|
|
| 21,148 |
|
|
| 784 |
|
|
| (191 | ) |
|
| 18,294 |
|
|
| 20,957 |
|
Total NOI |
|
| 115,679 |
|
|
| 154,358 |
|
|
| 1,964 |
|
|
| 10,172 |
|
|
| 117,643 |
|
|
| 164,530 |
|
Less: lease termination revenue |
|
| 2,236 |
|
|
| 513 |
|
|
| - |
|
|
| 17 |
|
|
| 2,236 |
|
|
| 530 |
|
Total NOI excluding lease termination revenue |
| $ | 113,443 |
|
| $ | 153,845 |
|
| $ | 1,964 |
|
| $ | 10,155 |
|
| $ | 115,407 |
|
| $ | 164,000 |
|
Same Store | Non Same Store | Total (non GAAP) | ||||||||||||||||||||||
(in thousands) | 2017 | 2016 | 2017 | 2016 | 2017 | 2016 | ||||||||||||||||||
NOI from consolidated properties | $ | 153,740 | $ | 154,391 | $ | 4,304 | $ | 18,172 | $ | 158,044 | $ | 172,563 | ||||||||||||
NOI from equity method investments at ownership share | 22,339 | 23,533 | 5,961 | 4,505 | 28,300 | 28,038 | ||||||||||||||||||
Total NOI | 176,079 | 177,924 | 10,265 | 22,677 | 186,344 | 200,601 | ||||||||||||||||||
Less: lease termination revenue | 2,629 | 4,048 | 71 | 110 | 2,700 | 4,158 | ||||||||||||||||||
Total NOI - excluding lease termination revenue | $ | 173,450 | $ | 173,876 | $ | 10,194 | $ | 22,567 | $ | 183,644 | $ | 196,443 |
Total NOI decreased by $14.3$46.9 million in the nine months ended September 30, 20172020 compared to the nine months ended September 30, 20162019 due to (a) a $38.7 million decrease in Same Store NOI and (b) a decrease of $8.2 million in Non Same Store NOI. The decrease in Same Store NOI is primarily due to lost revenues from bankrupt tenants, an increase in credit losses and a decrease in percentage of $12.4 millionsales revenue due to COVID-19 related mall closures. The decrease in NOI from Non Same Store properties. This decreaseproperties is primarily due to properties soldthe conveyance of Wyoming Valley Mall and lower contributions from Exton Square Mall, resulting from an anchor closing and related co-tenancy revenue adjustments, the sale of an outparcel during the second quarter of 2019 and a decrease in 2016 and 2017.other non-recurring revenues compared to 2019. See “—
Funds From Operations
The National Association of Real Estate Investment Trusts (“NAREIT”) defines Funds From Operations (“FFO”),FFO, which is a non-GAAP measure commonly used by REITs, as net income (computed in accordance with GAAP) excluding (i) depreciation and amortization related to real estate, (ii) gains and losses on salesfrom the sale of operating properties, pluscertain real estate depreciationassets, (iii) gains and amortization,losses from change in control, and after adjustments for unconsolidated partnerships(iv) impairment write-downs of certain real estate assets and joint venturesinvestments in entities when the impairment is directly attributable to reflect funds from operations ondecreases in the same basis.value of depreciable real estate held by the entity. We compute FFO in accordance with standards established by NAREIT, which may not be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition, or that interpret the current NAREIT definition differently than we do. NAREIT’s established guidance provides that excluding impairment write downs of depreciable real estate is consistent with the NAREIT definition.
FFO is a commonly used measure of operating performance and profitability among REITs. We use FFO and FFO per diluted share and unit of limited partnership interest in our operating partnership (“OP Unit”) and, when applicable, related measures such as Funds From Operations, as adjusted, in measuring our performance against our peers and as one of the performance measures for determining incentive compensation amounts earned under certain of our performance-based executive compensation programs.
FFO does not include gains and losses on sales of operating real estate assets or impairment write downs of depreciable real estate, which are included in the determination of net income in accordance with GAAP. Accordingly, FFO is not a comprehensive measure of our operating cash flows. In addition, since FFO does not include depreciation on real estate assets, FFO may not be a useful performance measure when comparing our operating performance to that of other non-real estate commercial enterprises. We compensate for these limitations by using FFO in conjunction with other GAAP financial performance measures, such as net income and net cash provided by operating activities, and other non-GAAP financial performance measures, such as NOI. FFO does not represent cash generated from operating activities in accordance with GAAP and should not be considered to be an alternative to net income (determined in accordance with GAAP) as an indication of our financial performance or to be an alternative to cash flow from operating activities (determined in accordance with GAAP) as a measure of our liquidity, nor is it indicative of funds available for our cash needs, including our ability to make cash distributions. We believe that net income is the most directly comparable GAAP measurement to FFO.
We also present Funds From Operations, as adjusted, and Funds From Operations per diluted share and OP Unit, as adjusted, which are non-GAAP measures, for the three and nine months ended September 30, 20172020 and 2016,2019, respectively, to show the effect of such items as gain or loss on debt extinguishment (including accelerated amortization of financing costs), impairment of assets, provision for employee separation expense and loss on hedge ineffectiveness,insurance recoveries or losses, net, which affected our results of operations, but are not, in our opinion, indicative of our operating performance.
The following table presents a reconciliation of net (loss) income (loss) determined in accordance with GAAP to FFO attributable to common shareholders and OP Unit holders, FFO attributable to common shareholders and OP Unit holders per diluted share and OP Unit, FFO as adjusted, attributable to common shareholders and OP Unit holders, as adjusted, and FFO attributable to common shareholders and OP Unit holders per diluted share and OP Unit, as adjusted for the three and nine months ended September 30, 2020 and 2019:
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
(in thousands, except per share amounts) |
| 2020 |
|
| 2019 |
|
| 2020 |
|
| 2019 |
| ||||
Net (loss) income |
| $ | (29,577 | ) |
| $ | 24,716 |
|
| $ | (66,245 | ) |
| $ | 2,413 |
|
Depreciation and amortization on real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated properties |
|
| 34,053 |
|
|
| 30,948 |
|
|
| 94,538 |
|
|
| 97,126 |
|
PREIT’s share of equity method investments |
|
| 5,095 |
|
|
| 2,402 |
|
|
| 12,396 |
|
|
| 6,453 |
|
Loss (gain) on sales of interest in real estate, net |
|
| 94 |
|
|
| (1,171 | ) |
|
| (11,169 | ) |
|
| (2,684 | ) |
Preferred share dividends declared and paid (1) |
|
| - |
|
|
| (6,843 | ) |
|
| (13,688 | ) |
|
| (20,531 | ) |
Funds from operations attributable to common shareholders and OP Unit holders |
|
| 9,665 |
|
|
| 50,052 |
|
|
| 15,832 |
|
|
| 82,777 |
|
Gain on debt extinguishment, net |
|
| - |
|
|
| (29,600 | ) |
|
| - |
|
|
| (24,832 | ) |
Gain on derecognition of property |
|
| (7,006 | ) |
|
| - |
|
|
| (7,006 | ) |
|
| - |
|
Impairment of development land parcel |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 1,464 |
|
Provision for employee separation expense |
|
| 60 |
|
|
| 218 |
|
|
| 1,173 |
|
|
| 1,078 |
|
Insurance recoveries, net |
|
| - |
|
|
| (2,878 | ) |
|
| (586 | ) |
|
| (4,494 | ) |
Funds from operations, as adjusted, attributable to common shareholders and OP Unit holders |
| $ | 2,719 |
|
| $ | 17,792 |
|
| $ | 9,413 |
|
| $ | 55,993 |
|
Funds from operations attributable to common shareholders and OP Unit holders per diluted share and OP Unit (1) |
| $ | 0.12 |
|
| $ | 0.63 |
|
| $ | 0.20 |
|
| $ | 1.05 |
|
Funds from operations, as adjusted, attributable to common shareholders and OP Unit holders per diluted share and OP Unit (1) |
| $ | 0.03 |
|
| $ | 0.23 |
|
| $ | 0.12 |
|
| $ | 0.71 |
|
Weighted average number of shares outstanding |
|
| 77,401 |
|
|
| 76,492 |
|
|
| 77,149 |
|
|
| 74,771 |
|
Weighted average effect of full conversion of OP Units |
|
| 2,023 |
|
|
| 2,023 |
|
|
| 2,023 |
|
|
| 3,625 |
|
Effect of common share equivalents |
|
| 357 |
|
|
| 332 |
|
|
| 411 |
|
|
| 375 |
|
Total weighted average shares outstanding, including OP Units |
|
| 79,781 |
|
|
| 78,847 |
|
|
| 79,583 |
|
|
| 78,771 |
|
(1)Does not include the impact of $6.8 million of accrued, undeclared and unpaid preferred share dividends for each of the three and nine months ended September 30, 2020. The Company cannot declare and pay cash dividends on common shares while there exists a preferred dividend arrearage.
FFO attributable to common shareholders and OP Unit holders was $9.7 million for the three months ended September 30, 2020, a decrease of $40.4 million, or 80.7%, compared to $50.1 million for the three months ended September 30, 2019.
FFO attributable to common shareholders and OP Unit holders per diluted share and OP Unit was $0.12 and $0.63 for the three months ended September 30, 2020 and 2019, respectively.
FFO, as adjusted, attributable to common shareholders and OP Unit holders per diluted share and OP Unit for the threewas $0.03 and nine months ended September 30, 2017 and 2016:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
(in thousands, except per share amounts) | 2017 | 2016 | 2017 | 2016 | |||||||||||
Net income (loss) | $ | 12,300 | $ | 2,916 | $ | (41,463 | ) | $ | 14,014 | ||||||
Depreciation and amortization on real estate | |||||||||||||||
Consolidated properties | 29,589 | 26,448 | 93,529 | 91,109 | |||||||||||
PREIT’s share of equity method investments | 2,902 | 2,571 | 8,493 | 7,591 | |||||||||||
Gain on sale of real estate by equity method investee | (6,718 | ) | — | (6,718 | ) | — | |||||||||
Losses (gains) on sales of interests in real estate, net | 9 | (31 | ) | 374 | (22,953 | ) | |||||||||
Impairment of assets | 1,825 | 9,865 | 55,742 | 24,589 | |||||||||||
Dividends on preferred shares | (7,525 | ) | (3,962 | ) | (20,797 | ) | (11,886 | ) | |||||||
Funds from operations attributable to common shareholders and OP Unit holders | 32,382 | 37,807 | 89,160 | 102,464 | |||||||||||
Provision for employee separation expense | — | 162 | 1,053 | 1,355 | |||||||||||
Loss on hedge ineffectiveness | — | — | — | 143 | |||||||||||
Funds from operations, as adjusted, attributable to common shareholders and OP Unit holders | $ | 32,382 | $ | 37,969 | $ | 90,213 | $ | 103,962 | |||||||
Funds from operations attributable to common shareholders and OP Unit holders per diluted share and OP Unit | $ | 0.42 | $ | 0.49 | $ | 1.15 | $ | 1.32 | |||||||
Funds from operations, as adjusted, attributable to common shareholders and OP Unit holders per diluted share and OP Unit | $ | 0.42 | $ | 0.49 | $ | 1.16 | $ | 1.34 | |||||||
Weighted average number of shares outstanding | 69,424 | 69,129 | 69,319 | 69,065 | |||||||||||
Weighted average effect of full conversion of OP Units | 8,291 | 8,319 | 8,303 | 8,328 | |||||||||||
Effect of common share equivalents(1) | — | 361 | 51 | 386 | |||||||||||
Total weighted average shares outstanding, including OP Units | 77,715 | 77,809 | 77,673 | 77,779 |
FFO attributable to common shareholders and OP Unit holders was $32.4$15.8 million for the threenine months ended September 30, 2017,2020, a decrease of $5.4$67.0 million or, 14.3%80.9%, compared to $37.8$82.8 million for the threenine months ended September 30, 2016. This decrease is primarily due to properties sold in 2016 and 2017.
FFO attributable to common shareholders and OP Unit holders per diluted share and OP Unit was $0.42$0.20 and $0.49 for the three months ended September 30, 2017 and 2016, respectively.
FFO, as adjusted, attributable to common shareholders and OP Unit holders per diluted share and OP Unit was $1.15$0.12 and $1.32
43
LIQUIDITY AND CAPITAL RESOURCES
This “Liquidity and Capital Resources” section contains certain “forward-looking statements” that relate to expectations and projections that are not historical facts. These forward-looking statements reflect our current views about our future liquidity and capital resources, and are subject to risks and uncertainties that might cause our actual liquidity and capital resources to differ materially from the forward-looking statements. Additional factors that might affect our liquidity and capital resources include those discussed herein and in the section entitled “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 20162019 filed with the Securities and Exchange Commission.SEC. We do not intend to update or revise any forward-looking statements about our liquidity and capital resources to reflect new information, future events or otherwise.
Capital Resources
We currently expect to meet certain of our short-term liquidity requirements, including distributions to common and preferred shareholders, recurring capital expenditures, tenant improvements and leasing commissions, but excluding acquisitions and developmentredevelopment and redevelopmentdevelopment projects, generally through our available working capital and our restructuring plan. Pursuant to the July 2020 amendments to our Credit Agreements as well as the Bridge Facility, as discussed further below and in Note 1 and Note 4 to our unaudited consolidated financial statements, we are prohibited from declaring or paying cash dividends on our common shares and preferred shares during the Suspension Period as well as while any event of default is continuing. See “Identical covenants and common provisions contained in the Credit Agreements” below for covenant information. We expect to spend approximately $27.9 million related to our capital improvements and development projects, however, the timing of this spending is uncertain.
During the third quarter of 2020, we received proceeds of $22.5 million through borrowings under our Bridge Facility. We are actively seeking to raise additional capital, including through asset dispositions identified through our portfolio property reviews. Disposing of these properties can enable us to redeploy or recycle our capital to other uses. During December 2019 and subsequently, we have executed agreements of sale that are expected to provide an aggregate of up to approximately $97.5 million in proceeds and net cash providedliquidity improvement. These agreements include the sale of land parcels for multifamily residential development, the sale of operating outparcels and the sale of land parcels for hotel development. We have also executed letters of intent with other potential buyers to sell several land parcels for multifamily residential development. Each of the transactions is subject to numerous closing conditions, including the completion of due diligence and securing of entitlements, which in several cases has been delayed due to the effects of COVID-19 on business operations and availability of financing. During the third quarter of 2020, we terminated agreements for a sale-leaseback transaction for five properties with estimated proceeds of $153.6 million. Closing of the transactions cannot be assured or the timing of their completion yet estimated with certainty, with several transactions not expected to close until 2021.
In October 2020, we entered into the RSA with certain of the lenders under our Credit Agreements. The RSA contemplates agreed-upon terms for a restructuring of the existing debt and certain other obligations of the Company Parties. The Restructuring is anticipated to be effected through either (i) an out-of-court restructuring on the terms set forth in the Out-of-Court Restructuring Term Sheet attached to the RSA or, if the Company is unable to obtain the consent of 100% of the lenders under the Credit Agreements, (ii) a prepackaged plan of reorganization on the terms set forth in the Plan Term Sheet attached to the RSA (the plan of reorganization described therein, the “Plan”), a solicitation of votes therefor, and the commencement by the Company of voluntary cases (the “Chapter 11 Cases”). The RSA was amended on October 16, 2020 and again on October 23, 2020, to, among other things, extend the date by which the Company Parties were required to commence the solicitation and the Chapter 11 Cases.
On November 1, 2020, we filed the Chapter 11 Cases with the United States Bankruptcy Court of Delaware to implement our Prepackaged Plan, which is intended to help us recapitalize our business and extend our debt maturities. We expect that the filing of the Chapter 11 Cases will permit us to continue business operations in compliance with the orders of the Bankruptcy Court and without interruption while we obtain the necessary approvals of our financial restructuring plan. The Prepackaged Plan is subject to the termsapproval and conditionsmonitoring of our 2013 Revolving Facility and our 2014 Term Loans and 2015 Term Loan (collectively, the “Credit Agreements”). We believe that our net cash provided by operations will be sufficient to allow us to make any distributions necessary to enable us to continue to qualify as a REIT under the Internal Revenue CodeUS Bankruptcy Court of 1986, as amended. The aggregate distributions made to preferred shareholders, common shareholders and OP Unit holders for the nine months ended September 30, 2017 were $68.9 million, based on distributions of $1.5498 per Series A Preferred Share, $1.3827 per Series B Preferred Share, $1.1400 per Series C Preferred Share (partial period), and $0.63 per common share and OP Unit.
The following are some of the factors that could affect our cash flows and require the funding of future cash distributions, recurring capital expenditures, tenant improvements or leasing commissions with sources other than operating cash flows:
• | further adverse changes or prolonged downturns in general or due to the global COVID-19 pandemic, local or retail industry economic, financial, credit or capital market or competitive conditions, leading to a reduction in real estate revenue or cash flows or an increase in expenses; |
• | execution of a pre-packaged reorganization under the Prepackaged Plan and the effects of our commencement of Chapter 11 Cases; |
• | deterioration in our tenants’ business operations and financial stability, including additional anchor or non-anchor tenant bankruptcies, leasing delays or terminations, or lower sales, causing deferrals or declines in rent, percentage rent and cash flows; |
• | inability to achieve targets for, or decreases in, property occupancy and rental rates, resulting in lower or delayed real estate revenue and operating income; |
44
• | increases in operating costs, including increases that cannot be passed on to tenants, which may include costs related to implementing and maintaining social distancing and enhanced sanitation and safety protocols, resulting in reduced operating income and cash flows; and, |
• | increases in interest rates, including potentially as a result of the expected phase out of LIBOR, resulting in higher borrowing costs. |
In addition, we are continuing to monitor the COVID-19 pandemic and the related business and travel restrictions and changes to behavior intended to reduce its spread, and its impact on our tenants, their supply chains and customers and the retail industry. Thus far, the pandemic and the actions taken to address it and the related overall worsening of economic conditions have had an adverse effect on our business, operations, liquidity and financial condition.
For the third quarter of 2020, all of our malls had re-opened while adhering to social distancing and sanitation and safety protocols designed to address the risks posed by COVID-19, however, many of our tenants continue to operate at reduced capacity. The pandemic’s effect continued to have a significant impact on our operations, financial condition, liquidity and results of operations in the third quarter of 2020 and its impact is expected to continue through future periods. During the third quarter of 2020, we collected nearly 100% of our billed third quarter rents, however, a substantial amount of contractual rent receivables from prior quarters remain outstanding and are under negotiation. We believe that our rent collections are probable, but expect that collections will continue to be below our tenants’ rent obligations as long as lingering effects of COVID-19, including new or renewed restrictions and business closures, affect the return of customers to malls and the financial strength of our tenants. While we continue to record rental revenue, the reduced collection levels have impacted our liquidity position and may continue to do so.
The magnitude and duration of the pandemic and its continuing impact on our business, operations, liquidity and financial stability, including anchorcondition are currently uncertain, as this continues to evolve globally. However, if the continued spread of COVID-19 and its impacts continue on their current trajectory, such impacts could continue to grow and negatively affect us in a material way. To the extent that our tenants and their customers and suppliers continue to be impacted by the coronavirus outbreak, or non anchor tenant bankruptcies, leasing delays or terminations, or lower sales, causing deferrals or declinesby the other risks, this could continue to materially disrupt our business operations. See “Item 1A. Risk Factors -The COVID-19 global pandemic and the public health and governmental actions in rent, percentage rentresponse have adversely affected, and cash flows;
We expect to meet certain of our longer-term requirements, such as obligations to fund redevelopment and development projects, and certain capital requirements (including scheduled debt maturities), future property and portfolio acquisitions, renovations, expansions and other non-recurring capital improvements, through a variety of capital sources, subject to the terms and conditions of our Credit Agreements.
The capital and credit markets fluctuate and, at times, limit access to debt and equity financing for companies. While we generally expect to be able to access capital, as a result of the COVID-19 pandemic, access to debt and equity financing is currently limited and there is no assurance we will be able to access capital and credit markets in the future or on terms and conditions that are attractive or acceptable to us.
LIBOR Alternative
In December 2014,July 2017, the Financial Conduct Authority (“FCA”), which is the authority that regulates LIBOR, announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. The Alternative Reference Rates Committee ("ARRC") has identified the Secured Overnight Financing Rate ("SOFR") as the rate that represents best practice as the alternative to USD-LIBOR for use in derivatives and other financial contracts that are currently indexed to USD-LIBOR. We are not able to predict when LIBOR will cease to be available or when there will be sufficient liquidity in the SOFR markets. Any changes adopted by FCA or other governing bodies in the method used for determining LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR. If that were to occur, our universal shelf registration statement was filedinterest payments could change, perhaps substantially. In addition, uncertainty about the extent and manner of future changes may result in interest rates and/or payments that are higher or lower than if LIBOR were to remain available in its current form.
We have material contracts that are indexed to LIBOR and are monitoring and evaluating the related risks, which include interest on loans or amounts received and paid on derivative instruments. These risks arise in connection with transitioning contracts to a new alternative rate, including any resulting value transfer that may occur. The value of loans, securities, and derivative instruments tied to LIBOR could also be affected if LIBOR is limited or discontinued. For some instruments, the method of transitioning to an alternative rate may be challenging, as they may require negotiation with the SECrespective counterparty.
If a contract is not transitioned to an alternative rate and became effective. WeLIBOR is discontinued, the impact on our contracts is likely to vary by contract. If LIBOR is discontinued or if the methods of calculating LIBOR change from their current form, interest rates on our current or future indebtedness may usebe adversely affected.
45
While we expect LIBOR to be available in substantially its current form until the availability under our shelf registration statementend of 2021, it is possible that LIBOR will become unavailable prior to offer and sell common sharesthat point. This could occur, for example, if a requisite number of beneficial interest, preferred shares and various types of debt securities, among other types of securities,banks decline to make submissions to the public.
Credit Agreements
We have entered into fourthree credit agreementsagreements: (1) the 2018 Credit Agreement, which, as described in more detail below, includes (a) the $375.0 million 2018 Revolving Facility, and (b) the $300.0 million 2018 Term Loan Facility, (2) the $250.0 million 2014 7-Year Term Loan Agreement (collectively, as amended, the “Credit Agreements”): (1), and (3) the 2013 RevolvingBridge Facility. The 2018 Term Loan Facility (2)and the 2014 7-Year Term Loan (3)are collectively referred to as the 2014 5-Year Term Loan,“Term Loans.” As discussed further below and (4) the 2015 5-Year Term Loan.
As of September 30, 2020, we had borrowed $538.0 million available under the Term Loans, the full $375.0 million under the 2018 Revolving Facility and $22.5 million under our Bridge Facility. The carrying value of the Term Loans on our consolidated balance sheet as of September 30, 2020 is net of $1.5 million of unamortized debt issuance costs.
Identical covenants and common provisions contained in the Credit Agreements
See Note 4 to our unaudited consolidated financial statements for a description of the identical covenants and common provisions contained in the Credit Agreements.
On March 30, 2020, and again on July 27, 2020, we entered into amendments of our Credit Agreements. The primary purpose of the March amendments was to provide certain debt covenant relief through September 30, 2020. Our Credit Agreements were also amended on May 1, 2020 to extend the required delivery date of compliance certificates covering the fiscal quarter ended March 31, 2020 by six days. Further deterioration in our financial results due to COVID-19 affected our ability to comply with our financial covenants prior to September 30, 2020. In anticipation of not meeting certain financial covenants as of June 30, 2020, we entered into the July 2020 amendments, which suspended certain debt covenants from and including June 30, 2020 until but excluding August 31, 2020, reduced our minimum liquidity requirement from $25 million to $8.5 million during the debt covenant suspension period, which was initially extended until September 30, 2020 based on our fulfillment of certain conditions including entering into the Bridge Facility and agreeing to a non-binding term sheet to terms of further amendments to our Credit Agreements and further extended until October 31, 2020 by additional amendments to our Credit Agreements entered into on September 30, 2020 (such period, the “Suspension Period”) and permit limited additional debt. The September 2020 amendments eliminated the minimum liquidity requirement under the Credit Agreements. The July 2020 amendments prohibit us from taking any action (or omitting from taking any action) during the Suspension Period where such action would be otherwise prohibited to be taken or omitted during the existence of a default or event of default, including but not limited to making certain Restricted Payments (as defined in the Credit Agreements), creating, assuming or incurring liens on our assets, income or profits, and engaging in certain transactions regarding mergers, acquisitions and sales of assets, in each case unless permitted by the Credit Agreements. Restricted Payments (as defined in the Credit Agreements) include cash dividends with respect to our shares. As such, the Credit Agreements, as amended, restrict our ability to declare and pay dividends on our common shares and preferred shares for the duration of the Suspension Period. As discussed, above on September 30, 2020 we executed additional amendments to extend the Suspension Period through October 31, 2020.
On November 1, 2020, as a result of obtaining approval of approximately 95% of the lenders under the Credit Agreements, but not 100%, we filed the Chapter 11 Cases petition in the United States Bankruptcy Court for the District of Delaware to implement our Prepackaged Plan. Under the Prepackaged Plan, the Company would be recapitalized and its debt maturities extended. The filing of the Chapter 11 Cases permits us to continue business operations in compliance with the orders of the Bankruptcy Court and without interruption while we obtain necessary approvals of the restructuring plan. The Prepackaged Plan is subject to approval by the United States Bankruptcy Court for the District of Delaware. Due to the inherent risks, unknown results and significant uncertainties associated with each of these matters and the direct correlation between these matters and our ability to satisfy our financial obligations that may arise in 2020, we are unable to conclude that it is probable that we will be able to meet our obligations arising within twelve months of the date of issuance of these financial statements and continue as a going concern.
46
As a result, management evaluated whether this was mitigated by our approved plans and expectations for the applicable period under the second step of the going concern accounting standard. Our ability to meet our ongoing obligations and fund recurring costs of operations, particularly in light of the costs associated with our bankruptcy proceedings and the current COVID-19 pandemic and resulting adverse impacts on our business, is dependent upon, among other things: (i) our ability to comply with the terms and conditions of any cash collateral order that may be entered by the Bankruptcy Court in connection with the Chapter 11 Cases, (ii) our ability to maintain adequate cash on hand, (iii) our ability to generate cash flow from operations, (iv) our ability to develop, confirm and consummate the Prepackaged Plan or an alternative restructuring transaction, (v) the cost, duration and outcome of the Chapter 11 Cases; (vi) our execution of the sale of certain real estate assets, which sales would provide cash, and (vii) controlling costs. While certain of these factors are within management’s control to some extent, all of them involve performance by third parties and therefore cannot be considered probable of occurring.
The filing of the Chapter 11 Cases constitutes an event of default under the Credit Agreements, however, any efforts to enforce the payment obligations under the Credit Agreements are automatically stayed as a result of the Chapter 11 Cases and the lenders’ rights of enforcement are subject to the Bankruptcy Code.
See “Item 1A. Risk Factors—If we borrowed an additional $150.0 millionare unable to comply with the covenants in our credit agreements, we might be adversely affected,”“—We have determined that there is substantial doubt about our ability to continue as a going concern,” “—We are subject to the risks and uncertainties associated with Chapter 11 proceedings, which could have a material adverse effect on our business, financial condition, results of operations and liquidity,” “—The RSA is subject to significant conditions and milestones that may be beyond our control, depend on the 2014 7-Year Term Loan, which was usedactions of third parties and may be difficult for us to repay borrowings undersatisfy. If the 2013 Revolving Facility. RSA is terminated, our ability to confirm and consummate the Prepackaged Plan could be materially and adversely affected,” and “—As a result of the Chapter 11 Cases, our financial results may be volatile and may not reflect historical trends.”
Interest Rate Derivative Agreements
As of September 30, 2017,2020, we had borrowed $550.0 million under the Term Loans, and no amounts were outstanding under our 2013 Revolving Facility, $15.8 million was pledged as collateral for letters of credit, and, pursuant to certain covenants in the 2013 Revolving Facility, the unused portion of the 2013 Revolving Facility that was available to us was $189.7 million.
We havemade no swap payments in May and June 2020 and were not required to pay in July or August 2020. Beginning in September 2020, the payments increased to make up for the deferrals.
We assessed the effectiveness of these interest rate swap agreements as hedges at inception and continue to do so on a quarterly basis. As of September 30, 2017,2020, we considered these interest rate swap agreements to be highly effective as cash flow hedges. The interest rate swap agreements are net settled monthly.
As of September 30, 2017,2020, the fair value of derivatives in a net liability position, which excludes accrued interest but includes any adjustment for nonperformance risk related to these agreements, was $0.4$27.7 million. If we had breached any of the default provisions in these agreements as of September 30, 2017,2020, we might have been required to settle our obligations under the agreements at their termination value (including accrued interest) of $0.4$30.1 million. We had not breached any of these provisions as of September 30, 2017.
The carrying amount of the associated assets are recorded in “Deferred costs and other assets,” liabilities are reflected in “Fair value of derivative instruments” and the net unrealized loss is reflected in “Accumulated other comprehensive loss” in the accompanying consolidated balance sheets and consolidated statements of comprehensive income.
Mortgage Loan Activity
During the nine months ended September 30, 2020, we entered into forbearance and loan modification agreements for Cherry Hill Mall, Cumberland Mall, Dartmouth Mall, Francis Scott Key Mall, Metroplex, Springfield Mall, Viewmont Mall, and Woodland Mall. These arrangements allowed us to defer principal payments, and in some cases interest as well, on the mortgages between May and August of 2020 depending on the terms of the contract. At the end of each deferment period, the repayment period spans from four to six months to pay back the deferred amounts. The repayment periods range from August 2020 through February 2021 depending on the terms of the specific agreements.
In March 2017,the second quarter of 2020, we repaid a $150.6 milliondefaulted on the mortgage loan (including accrued interest of $0.6 million) secured by TheValley View Mall at Prince Georges in Hyattsville, Maryland using $110.0 million fromdue to a missed payment on June 1, 2020, and not paying the balloon payment of $27.3 million. In the third quarter of 2020, the operations of the property were transferred to a receiver and foreclosure was filed. We recorded a gain derecognition of property during the three months ended September 30, 2020 and have recorded the mortgage balance and an offsetting contract asset on our 2013 Revolving Facility andbalance sheet as of September 30, 2020, both of which will be eliminated when the balance from available working capital.
Mortgage Loans
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As of September 30, 2017,2020, our mortgage loans, which are secured by 11eight of our consolidated and held for sale properties, are due in installments over various terms extending to October 2025. EightFive of these mortgage loans bear interest at fixed interest rates that range from 3.88% to 5.95% and had a weighted average interest rate of 4.28%4.08% at September 30, 2017.2020. Three of our mortgage loans bear interest at variable rates, a portion of which have been swapped to fixed rates, and, taking into consideration the impact of interest rate swaps, had a weighted average interest rate of 3.48%2.42% at September 30, 2017.2020. The weighted average interest rate of all consolidated mortgage loans was 4.23%3.60% at September 30, 2017.2020. Mortgage loans for properties owned by unconsolidated partnerships are accounted for in “Investments in partnerships, at equity” and “Distributions in excess of partnership investments” on the consolidated balance sheets and are not included in the table below.
The following table outlines the timing of principal payments related to our consolidated mortgage loans as of September 30, 2017:2020:
(in thousands of dollars) |
| Total |
|
| Remainder of 2020 |
|
| 2021-2022 |
|
| 2023-2024 |
|
| Thereafter |
| |||||
Principal payments |
| $ | 55,030 |
|
| $ | 5,759 |
|
| $ | 31,876 |
|
| $ | 12,989 |
|
| $ | 4,406 |
|
Balloon payments |
|
| 837,000 |
|
|
| 27,161 |
|
|
| 545,194 |
|
|
| 53,299 |
|
|
| 211,346 |
|
Total |
|
| 892,030 |
|
| $ | 32,920 |
|
| $ | 577,070 |
|
| $ | 66,288 |
|
| $ | 215,752 |
|
Less: unamortized debt issuance costs |
|
| 1,182 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value of mortgage notes payable |
| $ | 890,848 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of dollars) | Total | Remainder of 2017 | 2018-2019 | 2020-2021 | Thereafter | ||||||||||||||
Principal payments | $ | 113,591 | $ | 5,229 | $ | 36,855 | $ | 38,635 | $ | 32,872 | |||||||||
Balloon payments | 922,453 | — | 68,469 | 178,600 | 675,384 | ||||||||||||||
Total | $ | 1,036,044 | $ | 5,229 | $ | 105,324 | $ | 217,235 | $ | 708,256 | |||||||||
Less: unamortized debt issuance costs | 3,466 | ||||||||||||||||||
Carrying value of mortgage notes payable | $ | 1,032,578 |
(in thousands of dollars) | Total | Remainder of 2017 | 2018-2019 | 2020-2021 | Thereafter | ||||||||||||||
Principal payments | $ | 1,598 | $ | 91 | $ | 1,189 | $ | 318 | $ | — | |||||||||
Balloon payments | 27,161 | — | — | 27,161 | — | ||||||||||||||
Total | $ | 28,759 | $ | 91 | $ | 1,189 | $ | 27,479 | $ | — | |||||||||
Less: unamortized debt issuance costs | 153 | ||||||||||||||||||
Carrying value of mortgage notes payable | $ | 28,606 |
Contractual Obligations
The following table presents our aggregate contractual obligations as of September 30, 20172020 for the periods presented:
(in thousands of dollars) |
| Total |
|
| Remainder of 2020 |
|
| 2021-2022 |
|
| 2023-2024 |
|
| Thereafter |
| |||||
Mortgage loan principal payments |
| $ | 892,030 |
|
| $ | 32,920 |
|
| $ | 577,070 |
|
| $ | 66,288 |
|
| $ | 215,752 |
|
Term Loans |
|
| 560,500 |
|
|
| 22,500 |
|
|
| 244,545 |
|
|
| 293,455 |
|
|
| — |
|
2018 Revolving Facility |
|
| 375,000 |
|
|
| — |
|
|
| 375,000 |
|
|
| — |
|
|
| — |
|
Interest on indebtedness(1) |
|
| 158,650 |
|
|
| 20,867 |
|
|
| 112,743 |
|
|
| 18,659 |
|
|
| 6,381 |
|
Operating leases |
|
| 10,404 |
|
|
| 126 |
|
|
| 1,812 |
|
|
| 1,774 |
|
|
| 6,692 |
|
Ground leases |
|
| 53,777 |
|
|
| 437 |
|
|
| 3,319 |
|
|
| 3,168 |
|
|
| 46,853 |
|
Development and redevelopment commitments(2) |
|
| 27,914 |
|
|
| 24,175 |
|
|
| 3,739 |
|
|
| — |
|
|
| — |
|
Total |
| $ | 2,078,275 |
|
| $ | 101,025 |
|
| $ | 1,318,228 |
|
| $ | 383,344 |
|
| $ | 275,678 |
|
(in thousands of dollars) | Total | Remainder of 2017 | 2018-2019 | 2020-2021 | Thereafter | ||||||||||||||
Mortgage loan principal payments | $ | 1,036,044 | $ | 5,229 | $ | 105,324 | $ | 217,235 | $ | 708,256 | |||||||||
Mortgage loan principal payments related to assets held for sale | 28,759 | 91 | 1,189 | 27,479 | — | ||||||||||||||
Term Loans | 550,000 | — | 150,000 | 400,000 | — | ||||||||||||||
2013 Revolving Facility(1) | — | — | — | — | — | ||||||||||||||
Interest on indebtedness (1)(2) | 263,909 | 14,822 | 108,357 | 86,978 | 53,752 | ||||||||||||||
Operating leases | 4,713 | 528 | 3,779 | 406 | — | ||||||||||||||
Ground leases | 7,280 | 140 | 1,120 | 1,120 | 4,900 | ||||||||||||||
Development and redevelopment commitments (3) | 115,878 | 49,601 | 66,277 | — | — | ||||||||||||||
Total | $ | 2,006,583 | $ | 70,411 | $ | 436,046 | $ | 733,218 | $ | 766,908 |
(1) | Includes interest payments expected to be made on consolidated debt, including those in connection with interest rate swap agreements. |
(2) | The timing of the payments of these amounts is uncertain. We expect that a significant majority of such payments (of which we include 100% of our obligations related to Fashion District Philadelphia, which opened in September 2019) will be made prior to December 31, 2020, but cannot provide any assurance that changed circumstances at these projects will not delay the settlement of these obligations. In addition, our operating partnership, PREIT Associates, has jointly and severally guaranteed the obligations of the joint venture we formed with Macerich to develop Fashion District Philadelphia to commence and complete a comprehensive redevelopment of that property costing not less than $300.0 million within 48 months after commencement of construction, which was March 14, 2016. As of September 30, 2020, we believe we have satisfied this obligation. |
Preferred Share Dividends
On August 12, 2020, in connection with interest rate swapsthe Company’s negotiation of amendments to its Credit Agreements, the Company announced that all dividends on common and a forward starting interest rate swap agreement.
CASH FLOWS
Net cash provided byused in operating activities totaled $93.0$8.8 million for the nine months ended September 30, 20172020 compared to $104.2 million for the nine months ended September 30, 2016. The decrease in 2017 is primarily due to properties sold in 2017 and 2016.
Cash flows used in investing activities of $67.9were $61.2 million for the nine months ended September 30, 2016.2020 compared to cash flows used in investing activities of $87.9 million for the nine months ended September 30, 2019. Cash flows used in investing
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activities included additions to construction in progress of $93.2$20.2 million, investments in partnerships of $56.8$30.2 million (primarily at Fashion District Philadelphia), and real estate improvements of $36.9$27.7 million (primarily related to ongoing improvements at our properties), partially offset.
Cash flows provided by $77.8investing activities for the nine months ended September 30, 2019 included $44.2 million of proceeds from asset sales including the sale of Logan Valley Mall, Beaver Valley Mall, Crossroads Malltwo land parcels and two non operating parcelsoutparcels, the sale of a mortgage loan and $30.3 million ofcash distributions from partnerships of proceeds from real estate sold. Investing activities for the first nine monthssold by an equity method investee, as well as $7.0 million of 2016 included $154.8insurance proceeds, and $25.0 million in proceedsof distributions from the sale of five operating properties and one outparcel, partially offset by investmentdraws under our expanded Fashion District Philadelphia term loan. Cash flows used in investing activities included additions to construction in progress of $48.3$86.2 million, investments in partnerships of $55.2 million (primarily at Fashion District Philadelphia), and real estate improvements of $32.8$21.5 million primarily(primarily related to ongoing improvements at our properties.
Cash flows provided by financing activities were $53.9$92.9 million for the nine months ended September 30, 20172020 compared to cash flows used in financing activities of $169.5$6.4 million for the nine months ended September 30, 2016.2019. Cash flows provided by financing activities for the first nine monthsincluded $120.0 million in net borrowings under our 2018 Revolving Facility, $22.5 million of 2017 included $282.0net borrowing under our Bridge Facility and $4.5 million of proceeds from the note payable described in Note 4 to our 2017 Series C and D Preferred Share offerings and $3.0 million of net borrowings on our 2013 Revolving Facility, partially offset by the mortgage loan repayments of The Mall of Prince Georges of $150.0 million, aggregate dividends and distributions of $68.9 million, and principal installments on mortgage loans of $12.6 million.unaudited consolidated financial statements. Cash flows used in financing activities for the nine months ended September 30, 20162020 included mortgage loan repayments of 280.3 million,aggregate dividends and distributions of $60.9$32.2 million, and principal installment paymentsinstallments on mortgage loans of $12.7$9.5 million partially offset by $130.0and net repayments of term loans of $12.0 million.
Cash flows used in financing activities for the first nine months of 2019 included aggregate dividends and distributions of $70.6 million, fromprincipal installments on mortgage loans of $12.8 million, and $71.2 million used to defease the mortgage on Woodlandloans secured by Capital City Mall $50.0 millionand the release of net 2013 Revolving Facility borrowings, and an additional borrowingescrow funds relating to the conveyance of $9.0 million from the mortgage loan secured by Viewmont Mall.
ENVIRONMENTAL
We are aware of certain environmental matters at some of our properties. We have, in the past, performed remediation of such environmental matters, and we are not aware of any significant remaining potential liability relating to these environmental matters or of any obligation to satisfy requirements for further remediation. We may be required in the future to perform testing relating to these matters. We have insurance coverage for certain environmental claims up to $25.0 million per occurrence and up to $25.0 million in the aggregate. See our Annual Report on Form 10-K for the year ended December 31, 2016,2019, in the section entitled “Item 1A. Risk Factors —WeFactors—We might incur costs to comply with environmental laws, which could have an adverse effect on our results of operations.”
COMPETITION AND TENANT CREDIT RISK
Competition in the retail real estate market is intense. We compete with other public and private retail real estate companies, including companies that own or manage malls, power centers, strip centers, lifestyle centers, factory outlet centers, theme/festival centers and community centers, as well as other commercial real estate developers and real estate owners, particularly those with properties near our properties, on the basis of several factors, including location and rent charged. We compete with these companies to attract customers to our properties, as well as to attract anchor and in-linenon-anchor stores and other tenants. We also compete to acquire land for new site development or to acquire parcels or properties to add to our existing properties. Our malls and our other retailoperating properties face competition from similar retail centers, including more recently developed or renovated centers that are near our retail properties. We also face competition from a variety of different retail formats, including internet retailers, discount or value retailers, home shopping networks, mail order operators, catalogs, and telemarketers. Our tenants face competition from companies at the same and other properties and from other retail channels or formats as well, including internet retailers. This competition could have a material adverse effect on our ability to lease space and on the amount of rent and expense reimbursements that we receive.
The existence or development of competing retail properties and the related increased competition for tenants might, subject to the terms and conditions of ourthe Credit Agreements, leadrequire us to make capital improvements to properties that we would have deferred or would not have otherwise planned to make and might also affect the total sales, sales per square foot, occupancy and net operating income of such properties.
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We compete with many other entities engaged in real estate investment activities for acquisitions of malls, other retail properties and prime development sites or sites adjacent to our properties, including institutional pension funds, other REITs and other owner-operators of retail properties. When we seek to make acquisitions, competitors might drive up the price we must pay for properties, parcels, other assets or other companies or might themselves succeed in acquiring those properties, parcels, assets or companies. In addition, our potential acquisition targets might find our competitors to be more attractive suitors if they have greater resources, are willing to pay more, or have a more compatible operating philosophy. In particular, larger REITs might enjoy significant competitive advantages that result from, among other things, a lower cost of capital, a better ability to raise capital, a better ability to finance an acquisition, better cash flow and enhanced operating efficiencies. We might not succeed in acquiring retail properties or development sites that we seek, or, if we pay a higher price for a property or site, and/or generate lower cash flow from an acquired property or site than we expect, our investment returns will be reduced, which will adversely affect the value of our securities.
We receive a substantial portion of our operating income as rent under leases with tenants. At any time, any tenant having space in one or more of our properties could experience a downturn in its business that might weaken its financial condition, as was the case for a few of our tenants in recent periods.condition. Such tenants might enter into or renew leases with relatively shorter terms. Such tenants might also defer or fail to make rental payments when due, delay or defer lease commencement, voluntarily vacate the premises or declare bankruptcy, which could result in the termination of the tenant’s lease or preclude the collection of rent in connection with the space for a period of time, and could result in material losses to us and harm to our results of operations. Also, it might take time to terminate leases of underperforming or nonperforming tenants and we might incur costs to remove such tenants. The COVID-19 pandemic and the economic challenges resulting from it have exacerbated these risks. Some of our tenants occupy stores at multiple locations in our portfolio, and so the effect of any bankruptcy or store closingclosings of those tenants might be more significant to us than the bankruptcy or store closings of other tenants. See “Item 2. Properties—Major Tenants” in our Annual Report on Form 10-K for the year ended December 31, 2019. In addition, under many of our leases, our tenants pay rent based, in whole or in part, on a percentage of their sales. Accordingly, declines in these tenants’ sales directly affect our results of operations. Also, if tenants are unable to comply with the terms of ourtheir leases, or otherwise seek changes to the terms, including changes to the amount of rent, we might modify lease terms in ways that are less favorable to us. Given current conditions in the economy, certain industries and the capital markets, particularly in light of the COVID-19 pandemic, in some instances retailers that have sought protection from creditors under bankruptcy law have had difficulty in obtaining debtor-in-possession financing, which has decreased the likelihood that such retailers will emerge from bankruptcy protection and has limited their alternatives.
SEASONALITY
There is seasonality in the retail real estate industry. Retail property leases often provide for the payment of all or a portion of rent based on a percentage of a tenant’s sales revenue, or sales revenue over certain levels. Income from such rent is recorded only after the minimum sales levels have been met. The sales levels are often met in the fourth quarter, during the November/December holiday season. Also, many new and temporary leases are entered into later in the year in anticipation of the holiday season and a higher number of tenants vacate their space early in the year. As a result, our occupancy and cash flows are generally higher in the fourth quarter and lower in the first and second quarters. Our concentration in the retail sector increases our exposure to seasonality and has resulted, and is expected to continue to result, in a greater percentage of our cash flows being received in the fourth quarter.
INFLATION
Inflation can have many effects on financial performance. Retail property leases often provide for the payment of rent based on a percentage of sales, which might increase with inflation. Leases maymight also provide for tenants to bear all or a portion of operating expenses, which might reduce the impact of such increases on us. However, rent increases might not keep up with inflation, or if we recover a smaller proportion of property operating expenses, we might bear more costs if such expenses increase because of inflation.
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q for the quarter ended September 30, 2017,2020 , together with other statements and information publicly disseminated by us, contain certain “forward-looking statements” withinforward-looking statements that can be identified by the meaninguse of the federal securities laws.words such as “anticipate,” “believe,” “estimate,” “expect,” “project,” “intend,” “may” or similar expressions. Forward-looking statements relate to expectations, beliefs, projections, future plans, strategies, anticipated events, trends and other matters, including our expectations regarding the impact of COVID-19 on our business, that are not historical facts. When used, the words “anticipate,” “believe,” “estimate,” “target,” “goal,” ”expect,” “intend,” “may,” “plan,” “project,” “result,” “should,” “will,” and similar expressions, which do not relate solely to historical matters, are intended to identify forward looking statements. These forward-looking statements reflect our current views about future events, achievements, or results, cost reductions, dividend payments and the impact of COVID-19 and are subject to risks, uncertainties and changes in circumstances that might cause future events, achievements or results to differ materially from those expressed or implied by the forward-looking statements. In particular, our business might be materially and adversely affected by uncertainties affecting real estate businesses generally as well as the following, among other factors:following:
• | the ability to implement a restructuring of our indebtedness in accordance with the RSA, including by confirming and consummating a plan of reorganization or otherwise; |
• | risks attendant to the bankruptcy process, including our ability to obtain court approvals with respect to motions filed in the Chapter 11 Cases, the outcomes of court rulings and the Chapter 11 Cases in general and the length of time that we may be required to operate in bankruptcy; |
• | the effectiveness of the overall restructuring activities pursuant to the Chapter 11 Cases and any additional strategies that we may employ to address our liquidity and capital resources; |
• | the actions and decisions of creditors, regulators and other third parties that have an interest in the Chapter 11 Cases, which may interfere with the ability to confirm and consummate a plan of reorganization; |
• | restrictions on us due to the terms of any interim and final orders that we may seek from the Bankruptcy Court authorizing our use of cash collateral securing the indebtedness under the Bridge Facility; |
• | our ability to achieve forecasted revenue and pro forma leverage ratio and generate free cash flow to further reduce indebtedness; |
• | the COVID-19 global pandemic and the public health and governmental actions in response, which have and may continue to exacerbate many of the risks listed below; |
• | our ability to implement plans and initiatives to adequately address the “going concern” considerations described in Note 1 to our unaudited consolidated financial statements; |
• | changes in the retail and real estate industries, including bankruptcies, consolidation and store closings, particularly among anchor tenants; |
• | current economic conditions, including current high rates of unemployment and its effects on consumer confidence and spending, and the corresponding effects on tenant business performance, prospects, solvency and leasing decisions; |
• | our inability to collect rent due to the bankruptcy or insolvency of tenants or otherwise; |
• | our ability to maintain and increase property occupancy, sales and rental rates; |
• | increases in operating costs that cannot be passed on to tenants; |
• | the effects of online shopping and other uses of technology on our retail tenants; |
• | risks related to our development and redevelopment activities, including delays, cost overruns and our inability to reach projected occupancy or rental rates; |
• | social unrest and acts of vandalism or violence at malls, including our properties, or at other similar spaces, and the potential effect on traffic and sales; |
• | our ability to sell properties that we seek to dispose of or our ability to obtain prices we seek; |
• | potential losses on impairment of certain long-lived assets, such as real estate, including losses that we might be required to record in connection with any disposition of assets; |
• | our substantial debt and the liquidation preference of our preferred shares and our high leverage ratio and our ability to remain in compliance with our financial covenants under our debt facilities and obtain additional debt covenant relief under our debt facilities as those debt facilities may be restructured in connection with the Chapter 11 Cases; |
• | our ability to raise capital, including through sales of properties or interests in properties and through the issuance of equity or equity-related securities if market conditions are favorable; |
• | our ability to pay dividends; and |
• | potential dilution from any capital raising transactions or other equity issuances. |
Additional factors that might cause future events, achievements or results to differ materially from those expressed or implied by our forward-looking statements include those discussed herein and in our Annual Report on Form 10-K for the year ended December 31, 20162019 in the section entitled “Item 1A. Risk Factors.”Factors” and any subsequent reports we file with the SEC. We do not intend to update or revise any forward-looking statements to reflect new information, future events or otherwise.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The analysis below presents the sensitivity of the market value of our financial instruments to selected changes in market interest rates. As of
September 30,Our mortgage loans, which are secured by
Our interest rate risk is monitored using a variety of techniques. The table below presents the principal amounts of the expected annual maturities due in the respective years and the weighted average interest rates for the principal payments in the specified periods:
|
| Fixed Rate Debt |
|
| Variable Rate Debt |
| |||||||||||
(in thousands of dollars) For the Year Ending December 31, |
| Principal Payments |
|
| Weighted Average Interest Rate(1) |
|
| Principal Payments |
|
|
| Weighted Average Interest Rate(1) |
| ||||
2020 |
| $ | 32,500 |
|
|
| 4.01 | % |
| $ | 22,920 |
|
|
|
| 8.64 | % |
2021 |
|
| 16,297 |
|
|
| 4.01 | % |
|
| 435,867 |
| (2) |
|
| 2.38 | % |
2022 |
|
| 302,539 |
|
|
| 3.96 | % |
|
| 441,912 |
| (2) |
|
| 3.66 | % |
2023 |
|
| 59,883 |
|
|
| 3.99 | % |
|
| 293,455 |
| (2) |
|
| 4.50 | % |
2024 and thereafter |
|
| 222,156 |
|
|
| 4.04 | % |
|
| — |
|
|
|
| — |
|
Fixed Rate Debt | Variable Rate Debt | ||||||||||||
(in thousands of dollars) For the Year Ending December 31, | Principal Payments | Weighted Average Interest Rate (1) | Principal Payments | Weighted Average Interest Rate (1) | |||||||||
2017 | $ | 4,900 | 4.21 | % | $ | 420 | 3.24 | % | |||||
2018 | 16,972 | 4.25 | % | 70,149 | 3.78 | % | |||||||
2019 | 17,713 | 4.25 | % | 151,680 | (2) | 2.34 | % | ||||||
2020 | 45,272 | 5.03 | % | 151,680 | (2) | 2.24 | % | ||||||
2021 and thereafter | 726,858 | 4.21 | % | 429,160 | (2) | 2.99 | % |
(1) | Based on the weighted average interest rates in effect as of September 30, |
(2) | Includes Term Loan debt |
As of September 30, 2017
As of September 30, 2020, we had interest rate swap agreements outstanding with an aggregate weighted average interest rate of 2.13% on a notional amount of $794.4 million maturing on various dates through May 2023.
Changes in market interest rates have different effects on the fixed and variable rate portions of our debt portfolio. A change in market interest rates applicable to the fixed portion of the notesdebt portfolio affects the fair value, but it has no effect on interest incurred or cash flows. A change in market interest rates applicable to the variable portion of the debt portfolio affects the interest incurred and cash flows, but does not affect the fair value. The following sensitivity analysis related to our unaudited consolidateddebt portfolio, which includes the effects of our interest rate swap agreements, assumes an immediate 100 basis point change in interest rates from their actual September 30, 2020 levels, with all other variables held constant.
A 100 basis point increase in market interest rates would have resulted in a decrease in our net financial statements.
Because the information presented above includes only those exposures that existed as of
September 30,ITEM 4. CONTROLS AND PROCEDURES.
We are committed to providing accurate and timely disclosure in satisfaction of our SEC reporting obligations. In 2002, we established a Disclosure Committee to formalize our disclosure controls and procedures. Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as of
September 30,• | Our disclosure controls and procedures are designed to ensure that the information that we are required to disclose in our reports under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. |
• | Our disclosure controls and procedures are effective to ensure that information that we are required to disclose in our Exchange Act reports is accumulated and communicated to management, including our principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. |
We have continued to address the effects of COVID-19 on our control structure, including modifications to business modeling, forecasting and proceduresestimations, as well as for the consequences of reductions in headcount and remote working arrangements. We believe that these modifications to our control environment enhanced our internal control over financial reporting given the current environment, and provided us an appropriate control environment for the preparation and filing of this Form 10-Q. We are designedcontinually monitoring and assessing the COVID-19 pandemic’s effect on our internal control processes in order to ensure thatminimize the information that we are requiredimpact to disclose in our reports under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarizedtheir design and reported within the time periods specified in the SEC’s rules and forms.
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PART II—OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In the normal course of business, we have become and might in the future become involved in legal actions relating to the ownership and operation of our properties and the properties that we manage for third parties. In management’s opinion, the resolution of any such pending legal actions is not expected to have a material adverse effect on our consolidated financial position or results of operations.
See Note 4 to our unaudited consolidated financial statements for information related to the Chapter 11 Cases that were filed on November 1, 2020.
ITEM 1A. RISK FACTORS.
In addition to the other information set forth in this report, you should carefully consider the risks that could materially affect our business, financial condition or results of operations, which are discussedoperations. The following is an update to the Company’s risk factors and should be read in conjunction with the risk factors previously disclosed under the caption “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016.2019.
We are subject to the risks and uncertainties associated with Chapter 11 proceedings, which could have a material adverse effect on our business, financial condition, results of operations and liquidity.
On November 1, 2020, the Company and certain of the Company’s wholly owned direct and indirect subsidiaries (together, the “Debtors”) filed a voluntary Chapter 11 Cases petition in the United States Bankruptcy Court for the District of Delaware to implement a prepackaged financial restricting plan (the “Prepackaged Plan”). The Company Parties have filed a motion with the Bankruptcy Court seeking joint administration of the Chapter 11 Cases under the caption In re Pennsylvania Real Estate Investment Trust, et al. (Case No. 20-12737). As previously reported, on October 7, 2020, we entered into a Restructuring Support Agreement (the “RSA”) with certain of the lenders under our Credit Agreements that contemplates agreed-upon terms for a financial restructuring of the existing debt and certain other obligations of the Company Parties thereunder through a prepackaged plan of reorganization on the terms set forth in the term sheet attached to the RSA pursuant to the Chapter 11 Cases. Under the RSA, subject to certain terms and conditions, the consenting lenders have agreed, among other things, to (i) take all commercially reasonable actions necessary to facilitate the consummation of the Prepackaged Plan and refrain from taking any actions inconsistent therewith, and not fail or omit to take an action that is required by the RSA, applicable law, or the In-Court Definitive Documents (defined in the RSA); (ii) not object to, delay, impede, or take any other action that may reasonably be expected to interfere with the consummation of the Prepackaged Plan; (iii) negotiate in good faith the In-Court Definitive Documents and execute, deliver and perform thereunder to implement the Prepackaged Plan; (iv) timely vote and consent to accept the Prepackaged Plan; (v) support and take all reasonable actions necessary or appropriate to consummate the exit financing arrangements; (vi) timely vote against and not solicit any alternative restructuring; and (vii) except as permitted in the RSA, not transfer any ownership (including any beneficial ownership as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended) held by such consenting lender.
The Company Parties will continue to operate their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. The Prepackaged Plan and requested first-day relief, which was subsequently granted, anticipate the continued payment of employee wages and benefits without interruption and that trade claimants and other unsecured creditors that continue to work with the Company Parties on existing terms will be paid in full and in the ordinary course of business.
The Chapter 11 Cases could have a material adverse effect on our business, financial condition, results of operations and liquidity. So long as the Chapter 11 Cases are ongoing, our management team will be required to spend a significant amount of time and effort dealing with the reorganization, which will pull resources away from our business operations. For the duration of the Chapter 11 Cases, our operations and ability to execute our business plans, as well as our continuation as a going concern, are subject to risks and uncertainties associated with bankruptcy. These risks include the following:
• | our ability to obtain confirmation of the Prepackaged Plan under the Chapter 11 Cases and successfully consummate the restructuring; |
• | our ability to improve our liquidity and long-term capital structure and to address our debt service obligations through the restructuring and the potential adverse effects of the Chapter 11 Cases on our liquidity and results of operations; |
• | our ability to obtain timely approval by the Bankruptcy Court with respect to the motions filed in the Chapter 11 Cases; |
• | objections to the Prepackaged Plan or other pleadings filed that could protract the Chapter 11 Cases and third party motions which may interfere with the Company’s ability to consummate the restructuring contemplated by the RSA or an alternative restructuring; |
• | the length of time that the Company will operate under Chapter 11 protection and the continued availability of operating financing during the pendency of the Chapter 11 Cases; |
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• | the potential for the NYSE to act in accordance with Rule 802.01D in its Listed Company Manual to suspend and delist our shares in connection with the Chapter 11 Cases; |
• | increased administrative and legal costs related to the Chapter 11 process; |
• | our level of indebtedness and related debt service obligations and restrictions, including those expected to be imposed by covenants in any exit financing, that may limit our operational and financial flexibility; and |
• | our ability to continue as a going concern and our ability to maintain relationships with tenants, employees and other third parties as a result of such going concern, the implementation of the Prepackaged Plan and the Chapter 11 Cases. |
Bankruptcy proceedings also might make it more difficult to retain management and other key personnel necessary to the success and growth of our business. In addition, the longer a proceeding related to a bankruptcy continues, the more likely it is that our tenants would lose confidence in our ability to reorganize our businesses successfully and may seek to establish alternative commercial relationships. It is not possible to predict the outcome of any bankruptcy proceeding, and in connection with the Chapter 11 Cases, we cannot accurately predict or quantify the ultimate impact that events that occur during our Chapter 11 Cases will have on our business, financial condition, results of operations or cash flows.
The bankruptcy process involves the actions and decisions of creditors, regulators and other third parties that may have an interest in the Chapter 11 Cases, and no assurances can be made regarding the actions of those third parties or our ability to obtain court approvals with respect to motions filed in the Chapter 11 Cases or obtain favorable court rulings in the Chapter 11 Cases. Even if the Prepackaged Plan is consummated, we will continue to face a number of risks, including our ability to reduce expenses, implement strategic initiatives and generally maintain favorable relationships and secure the confidence of our counterparties. Accordingly, we cannot guarantee that the proposed restructuring will achieve our stated goals nor can we give any assurance of our ability to continue as a going concern.
The RSA is subject to significant conditions and milestones that may be beyond our control, depend on the actions of third parties and may be difficult for us to satisfy. If the RSA is terminated, our ability to confirm and consummate the Prepackaged Plan could be materially and adversely affected.
The RSA sets forth certain conditions we must satisfy, including the timely satisfaction of milestones in the Chapter 11 Cases, such as confirmation of the Prepackaged Plan and effectiveness thereof and obtaining approval of debtor-in-possession financing. Our ability to timely complete such milestones is subject to risks and uncertainties that may be beyond our control. The RSA may be terminated upon the occurrence of certain events, including the failure to meet such milestones. Should a termination event occur, all obligations of the parties to the RSA will terminate. A termination of the RSA may result in the loss of support for the Prepackaged Plan, which could adversely affect our ability to confirm and consummate the Prepackaged Plan. If the Prepackaged Plan is not consummated, there can be no assurance that any new restructuring plan would be as favorable to holders of claims as the current Prepackaged Plan and our Chapter 11 Cases could become protracted, which could significantly and detrimentally impact our relationships with tenants and other stakeholders.
Our long-term liquidity requirements and the adequacy of our capital resources are difficult to predict at this time.
We face uncertainty regarding the adequacy of our liquidity and capital resources. In addition to the cash requirements necessary to fund ongoing operations, we have incurred significant professional fees and other costs in connection with preparation for the Chapter 11 Cases and expect that we will continue to incur significant professional fees and costs throughout the duration of the Chapter 11 Cases. We cannot assure you that cash flow from operations and the availability of financing will be sufficient to continue to fund our operations and allow us to satisfy our obligations related to the Chapter 11 Cases until we are able to emerge from the Chapter 11 Cases.
Our liquidity, including our ability to meet our ongoing operational obligations, is dependent upon, among other things: (i) our ability to comply with the terms and conditions of any cash collateral order that may be entered by the Bankruptcy Court in connection with the Chapter 11 Cases, (ii) our ability to maintain adequate cash on hand, (iii) our ability to generate cash flow from operations, (iv) our ability to develop, confirm and consummate the Prepackaged Plan or an alternative restructuring transaction, (v) the cost, duration and outcome of the Chapter 11 Cases; (vi) our execution of the sale of certain real estate assets, which sales would provide cash, and (vii) controlling costs. While certain of these factors are within management’s control to some extent, all of them involve performance by third parties and therefore cannot be considered probable of occurring.
As a result of the Chapter 11 Cases, our financial results may be volatile and may not reflect historical trends.
During the Chapter 11 Cases, we expect our financial results to continue to be volatile as restructuring activities and expenses and claims assessments significantly impact our condensed consolidated financial statements. As a result, our historical financial performance is likely not indicative of our financial performance after the date of the bankruptcy filing. In addition, if we emerge from Chapter 11, the amounts reported in subsequent condensed consolidated financial statements may materially change relative to historical consolidated financial statements, including as a result of revisions to our operating plans pursuant to the Prepackaged Plan. We also may be required to adopt fresh start accounting, in which case our assets and liabilities will be recorded at fair value as of the fresh start reporting date, which may differ materially from the recorded
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values of assets and liabilities on our consolidated balance sheets. Our financial results after the application of fresh start accounting also may be different from historical trends.
Our common shares could be delisted from the NYSE if we fail to meet applicable continued listing requirements, which could have materially adverse effects on our business.
On September 25, 2020, we received notice from the New York Stock Exchange (the “NYSE”) that we are no longer in compliance with the NYSE continued listing standard set forth in Section 802.01C of the NYSE’s Listed Company Manual, which requires listed companies to maintain an average closing price of at least $1.00 per share over a consecutive 30-day trading period.
Under NYSE rules, we have ten business days following receipt of the notice to respond to the NYSE and indicate its intent to cure this deficiency or be subject to suspension and delisting. We notified the NYSE, within the required ten business day period, that we intend to cure the deficiency. Under NYSE rules, we have six months from the date of the notice to regain compliance with the minimum share price requirement.
We intend to consider all available options to cure the deficiency and regain compliance. The notice does not affect our ongoing business operations or our reporting requirements with the SEC. Although at the time of this filing we do not expect the NYSE to do so, in accordance with Rule 802.01D of the NYSE’s Listed Company Manual, the NYSE may suspend and delist our common shares and/or preferred shares in connection with the filing of the Chapter 11 Cases discussed above.
The threat of delisting and/or a delisting of our common shares could have adverse effects by, among other things:
• | reducing the liquidity and market price of our common shares; |
• | reducing the number of investors willing to hold or acquire our common shares; and |
• | reducing our ability to retain, recruit and motivate our directors, officers and employees. |
The COVID-19 global pandemic and the public health and governmental actions in response have adversely affected, and will likely continue to adversely affect, our business, financial condition, liquidity and operating results. The extent and duration of such effects are uncertain, rapidly changing and difficult to predict. Additionally, the future outbreak of any other highly infectious or contagious diseases may materially and adversely affect our business, financial condition, liquidity and operating results.
The 2020 global outbreak of a novel coronavirus (COVID-19), which was declared a pandemic by the World Health Organization on March 11, 2020, has resulted in travel restrictions, business closures, property shutdowns, government-imposed stay-at-home orders and the implementation of “social distancing” and certain other measures to prevent the further spread of the virus, all of which have adversely impacted, and will likely continue to impact, our operations, business, financial condition, liquidity and operating results, as well as our tenants’ businesses. The continued spread of COVID-19 has also led to unprecedented global economic disruption and volatility in financial markets, a rise in unemployment levels in the U.S., decreases in consumer confidence levels and spending, and an overall worsening of U.S. economic conditions. We anticipate that our future business, financial condition, liquidity and results of operations, including our results for 2020 and potentially future periods, will be materially impacted by the COVID-19 pandemic. It remains highly uncertain how long the global pandemic, economic challenges and restrictions on day-to-day life will last based on the current virus spread rate in the United States, which has resulted in a number of jurisdictions that previously relaxed restrictions implementing new or renewed restrictions. Given the unprecedented and continually evolving developments, we cannot reasonably predict or estimate its ultimate impact on us or our tenants, or on our ability or the ability of our tenants to resume more normal operations. Additionally, other future global health crises could result in significant effects on regional and global economies and on our business, financial condition, liquidity and results of operations.
While we have taken several responsive steps (including staff reductions, reduction of capital expenditures and operating expenses, execution of modifications to our debt facilities and instruments, including mortgage loans secured by certain of our properties, and suspension of share dividends given the restrictions in our credit facilities, we anticipate that further actions will be necessary to address the impacts of the pandemic. The spread of COVID-19 and measures taken to reduce its spread subjects us to a variety of risks and could result in the following impacts, some of which have already occurred and could continue and increase the longer the crisis continues:
• | resumed property shutdowns or more onerous restrictions at any or all of our retail properties across the nine states in which we operate; |
• | tenant failures to pay rent timely, resulting in revenue decreases from our properties and many requests from our tenants for rent relief or deferral; |
• | our rights to enforce remedies available under our leases or ability to collect rents as a landlord may potentially be impacted by state, local or other efforts resulting in rent concessions for tenants or a delay in landlord’s ability to enforce evictions or pursue other remedies available under the leases; |
• | an economic downturn generally, and a decrease in profitability for many of our tenants specifically, as a result of widespread business shutdowns or slowdowns; |
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• | additional tenant bankruptcies and, potentially, related store closures, including tenants that are substantial to our business in terms of size and quantity; |
• | deterioration of financial markets and tightening of credit availability, leading to a potentially reduced ability to obtain financing for our tenants and us; |
• | disruptions to supply-chain and distribution channels of our tenants, impacting retail product availability; |
• | negative effects on our operations as a result of quarantines, social distancing measures, public safety concerns and limitations on the nature and scope of activities at our properties required by state regulations, as well as limited public adherence to suggested safety measures that could continue to result in new or renewed property closures; |
• | decreased operating performance from reductions in property revenue and cash flows; |
• | potential reductions in the carrying value of our retail properties or other impairments of our assets; |
• | our inability to meet the requirements of the covenants in our existing credit facilities or obtain additional debt covenant relief under our credit facilities or increases in our cost of capital that make obtaining additional capital more difficult or available only on terms less favorable to us; |
• | negative effects on our liquidity position and the cost of and ability to access funds from financial institutions and capital markets; |
• | delays to capital raise initiatives; and |
• | creation of other risks that may impact us or exacerbation of existing risks, including the risks described in the section entitled “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2019 and Quarterly Report on Form 10-Q for the quarter ended June 30, 2020. |
Ultimately, the significance of COVID-19 or another pandemic in the future on our business remains highly uncertain and will depend on, among other things, the extent and duration of the pandemic, the severity of the disease and the number of people infected with the virus, the effects on the economy of the pandemic and of the measures taken by governmental authorities and other third parties restricting day-to-day life and business operations and the length of time that such measures remain in place or are renewed, and implementation of governmental programs to assist businesses and consumers impacted by the COVID-19 pandemic. While we have experienced and expect to continue to experience an adverse impact on our business, financial condition, liquidity and results of operations, we cannot estimate the extent to which COVID-19 will impact our future business, financial condition, liquidity or results of operations.
If we are unable to comply with the covenants in our credit agreements, we will be adversely affected.
Our future credit facilities, including any exit financing related to the Prepackaged Plan, will likely contain customary affirmative and negative covenants and require us to meet numerous financial tests, including tests relating to our leverage, unencumbered debt yield, interest coverage, fixed charge coverage, tangible net worth, corporate debt yield and facility debt yield. These covenants are expected to place limitations on our ability to make distributions to shareholders other than to preserve REIT status and could limit our ability to respond to changes and competition, reduce our flexibility in conducting our operations by limiting our ability to borrow money, sell or place liens on assets, manage our cash flows, repurchase securities, or make capital expenditures, and restrict our ability to pursue acquisitions, redevelopment and development projects. We expect the current conditions in the economy and the retail industry, particularly in light of the COVID-19 pandemic, the resulting unprecedented global economic disruption (including disruptions to our and our tenants’ businesses and operations) and ongoing social unrest, to continue to affect our operating results, even after emerging from bankruptcy.
Our inability to comply with the terms of our credit agreements, including any financial covenants contained therein, could result in a breach and a possible event of default, which could allow the lenders to discontinue lending or issuing letters of credit, terminate any commitments they have made to provide us with additional funds, and/or declare amounts outstanding to be immediately due and payable. If a default were to occur, we might have to refinance the debt through secured or unsecured debt financing or private or public offerings of debt or equity securities. If we are unable to do so, we might have to liquidate assets, potentially on unfavorable terms. No assurance can be provided that we would be able to liquidate assets in a timely fashion or in satisfaction of our obligations. Any of such consequences could negatively affect our financial position, results of operations, cash flow and ability to make capital expenditures and distributions to shareholders in the future. Further, a breach and a possible event of default under any exit financing could also prevent us from successfully implementing the Prepackaged Plan or emerging successfully from bankruptcy.
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We have determined that there is substantial doubt about our ability to continue as a going concern.
In evaluating whether there are conditions or events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that the financial statements are issued, our management considered our current financial condition and liquidity sources, including current funds available, forecasted future cash flows and our conditional and unconditional obligations due over the next twelve months. Management considered the following: (i) the various instruments of indebtedness, including mortgage loans; (ii) our expected ability to control operational costs, including the costs associated with the Chapter 11 Cases and implementing the Prepackaged Plan; (iii) recurring costs of operating our business; and (iv) our ability to generate cash flows, including through the sale of certain real estate assets. As a result of the considerations articulated below, absent approval of the Prepackaged Plan, management concluded there is substantial doubt about our ability to continue as a going concern.
Although we plan to control costs, sell certain real estate assets and work with our lenders to implement the Prepackaged Plan in accordance with the RSA, among other steps, there are inherent risks, unknown results and significant uncertainties associated with each of these matters and the direct correlation between these matters and our ability to satisfy financial obligations that may arise over the applicable twelve month period. Our ability to fund recurring costs of operations, particularly in light of the costs associated with our current bankruptcy proceedings and the current COVID-19 pandemic and resulting adverse impacts on our business, depends on, among other things: (i) our ability to comply with the terms and conditions of any cash collateral order that may be entered by the Bankruptcy Court in connection with the Chapter 11 Cases, (ii) our ability to maintain adequate cash on hand, (iii) our ability to generate cash flow from operations, (iv) our ability to develop, confirm and consummate the Prepackaged Plan or an alternative restructuring transaction, (v) the cost, duration and outcome of the Chapter 11 Cases; (vi) our execution of the sale of certain real estate assets in the ordinary course of business, which sales would provide cash, and (vii) controlling costs. While certain of these factors are within management’s control to some extent, all of them involve performance by third parties and therefore cannot be considered probable of occurring.
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The financial statements do not include any adjustments that might be necessary should we be unable to continue as a going concern. Management is taking steps to mitigate the associated risks, but we can provide no assurance that cash generated from our operations together with cash received in the future from our various sources of funding will be sufficient to enable us to continue as a going concern.
Social unrest and acts of vandalism or violence could adversely affect our business operations.
Our business may be adversely affected by social, political, and economic instability, unrest, or disruption, including protests, demonstrations, strikes, riots, civil disturbance, disobedience, insurrection and looting in geographic regions where our properties are located. Such events may result in property damage and destruction and in restrictions, curfews, or other governmental actions that could give rise to significant changes in economic conditions and cycles, which may adversely affect our financial condition and operations.
There have been demonstrations and protests, some of which involved violence, looting, arson and property destruction, in cities throughout the U.S. While the majority of protests have been peaceful, looting, vandalism and fires have taken place in certain places, which led to the imposition of mandatory curfews and, in some locations, deployment of the U.S. National Guard. Governmental actions taken to protect people and property, including curfews and restrictions on business operations, may disrupt operations, harm perceptions of personal well-being and increase the need for additional expenditures on security resources. The effect and duration of the demonstrations, protests or other factors is uncertain, and we cannot assure there will not be further political or in the future or that there will not be other events that could lead to further social, political and economic instability. If such events or disruptions persist for a prolonged period of time, our overall business and results of operations may be adversely affected.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Issuer Purchases of Equity Securities
The following table shows the total number of shares that we acquired in the three months ended
September 30,Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||||||
July 1 - July 31, 2020 | — | $ | — | — | $ | — | ||||||||||
August 1 - August 31, 2020 | — | — | — | — | ||||||||||||
September 1 - September 30, 2020 | — | — | — | — | ||||||||||||
Total | — | $ | — | — | $ | — |
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs | |||||||||
July 1 - July 31, 2017 | 2,500 | $ | 11.59 | — | $ | — | |||||||
August 1 - August 31, 2017 | — | — | — | — | |||||||||
September 1 - September 30, 2017 | 495 | 10.26 | — | — | |||||||||
Total | 2,995 | $ | 11.37 | — | $ | — |
Limitation on the Payment of Dividends
Our Credit Agreements, as amended, restrict our ability to declare and pay dividends on our common shares and preferred shares for the duration of the Suspension Period until October 31, 2020. See Note 4 to our unaudited consolidated financial statements for a description of our Credit Agreements and the referenced restrictions.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Defaults on Indebtedness
As discussed in Note 4 to our unaudited consolidated financial statements, we received Reservation Letters from the administrative agent under our Credit Agreements alleging certain events of default thereunder. We have responded to the administrative agent that we dispute the lenders’ characterization of the situation described in the Reservation Letters and that these events do not constitute an event of default under any of the Credit Agreements.
As discussed in Note 4 to our unaudited consolidated financial statements, the filing of the Chapter 11 Cases constitutes an event of default that accelerated our obligations under each of our Credit Agreements and may also constitute a cross-default under certain property-level debt facilities.
Preferred Dividend Arrearage
Dividends on the Series B, Series C and Series D preferred shares are cumulative and therefore will continue to accrue at an annual rate of $0.4609 per share, $0.45 per share and $0.4297 per share, respectively. As of September 30, 2020, the cumulative amount of unpaid dividends on the preferred shares totaled $6.9 million.
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ITEM 6.
EXHIBITS.3.1 | |
3.2 | |
3.3 | |
3.4 | |
3.5 | |
3.6 | |
3.7 | |
3.8 | |
10.1 | |
10.2 | |
10.3 | |
10.4 | |
10.5 | |
10.6 | |
10.7 | |
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10.8 | |
10.9 | |
10.10 | |
10.11* | |
31.1* | |
31.2* | |
32.1** | |
32.2** | |
101.INS* | Inline XBRL Instance Document – the |
101.SCH* | Inline XBRL Taxonomy Extension Schema Document. |
101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document. |
101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document. |
101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
104* | Cover Page Interactive Data File (formatted as Inline XBRL and contained in |
* | Filed herewith |
** | Furnished herewith |
+ | Management contract or compensatory plan or arrangement. |
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SIGNATURE OF REGISTRANT
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST | ||||
Date: | November | |||
By: | /s/ Joseph F. Coradino | |||
Joseph F. Coradino | ||||
Chairman and Chief Executive Officer | ||||
By: | /s/ | |||
Mario C. Ventresca, Jr. | ||||
Executive Vice President and Chief Financial Officer | ||||
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