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PENNSYLVANIA REAL ESTATE INVESTMENT TRUST - Quarter Report: 2017 June (Form 10-Q)

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q
x
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2017
or
o
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from                      to                     
Commission File Number: 1-6300
  ____________________________________________________
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
(Exact name of Registrant as specified in its charter)
  ____________________________________________________
Pennsylvania
 
23-6216339
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
200 South Broad Street
Philadelphia, PA
 
19102
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code (215) 875-0700
____________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
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  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
 
Accelerated filer
o
Non-accelerated filer
o
(Do not check if a smaller reporting company)
Smaller reporting company
o
 
 
 
Emerging growth company
o

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. o
Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes  o   No  x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common shares of beneficial interest, $1.00 par value per share, outstanding at August 3, 2017: 69,827,608



Table of Contents


PENNSYLVANIA REAL ESTATE INVESTMENT TRUST

CONTENTS
 

 
 
Page
 
 
 
 
 
Item 1.
 
 
 
 
 

 
 
 
 

 
 
 
 

 
 
 
 

 
 
 
 

 
 
 
 

 
 
 
Item 2.

 
 
 
Item 3.

 
 
 
Item 4.

 
 
 
 
 
 
 
 
Item 1.

 
 
 
Item 1A.

 
 
 
Item 2.

 
 
 
Item 3.
Not Applicable
—

 
 
 
Item 4.
Not Applicable
—

 
 
 
Item 5.
Not Applicable
—

 
 
 
Item 6.

 
 
 
 


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.


Table of Contents

Item 1. FINANCIAL STATEMENTS
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
June 30,
2017
 
December 31,
2016
 
(unaudited)
 
 
ASSETS:
 
 
 
INVESTMENTS IN REAL ESTATE, at cost:
 
 
 
Operating properties
$
3,042,247

 
$
3,196,529

Construction in progress
137,369

 
97,575

Land held for development
5,913

 
5,910

Total investments in real estate
3,185,529

 
3,300,014

Accumulated depreciation
(1,055,334
)
 
(1,060,845
)
Net investments in real estate
2,130,195

 
2,239,169

INVESTMENTS IN PARTNERSHIPS, at equity:
206,618

 
168,608

OTHER ASSETS:
 
 
 
Cash and cash equivalents
19,021

 
9,803

Tenant and other receivables (net of allowance for doubtful accounts of $6,255 and $6,236 at June 30, 2017 and December 31, 2016, respectively)
29,742

 
39,026

Intangible assets (net of accumulated amortization of $12,165 and $11,064 at June 30, 2017 and December 31, 2016, respectively)
18,645

 
19,746

Deferred costs and other assets, net
99,886

 
93,800

Assets held for sale
81,559

 
46,680

Total assets
$
2,585,666

 
$
2,616,832

LIABILITIES:
 
 
 
Mortgage loans payable, net
$
1,036,640

 
$
1,222,859

Term Loans, net
547,376

 
397,043

Revolving Facility
52,000

 
147,000

Tenants’ deposits and deferred rent
11,280

 
13,262

Distributions in excess of partnership investments
60,659

 
61,833

Fair value of derivative liabilities
654

 
1,520

Liabilities related to assets held for sale
36,857

 
2,658

Accrued expenses and other liabilities
66,126

 
68,251

Total liabilities
1,811,592

 
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 June 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 June 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 June 30, 2017; liquidation preference of $172,500
69

 
—

Shares of beneficial interest, $1.00 par value per share; 200,000 shares authorized; issued and outstanding 69,809 shares at June 30, 2017 and 69,553 shares at December 31, 2016
69,809

 
69,553

Capital contributed in excess of par
1,650,746

 
1,481,787

Accumulated other comprehensive income
3,065

 
1,622

Distributions in excess of net income
(1,087,809
)
 
(997,789
)
Total equity—Pennsylvania Real Estate Investment Trust
635,961

 
555,254

Noncontrolling interest
138,113

 
147,152

Total equity
774,074

 
702,406

Total liabilities and equity
$
2,585,666

 
$
2,616,832


See accompanying notes to the unaudited consolidated financial statements.
1
Table of Contents


PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
(in thousands of dollars)
2017
 
2016
 
2017
 
2016
REVENUE:
 
 
 
 
 
 
 
Real estate revenue:
 
 
 
 
 
 
 
Base rent
$
56,769

 
$
61,243

 
$
114,204

 
$
128,236

Expense reimbursements
26,984

 
28,870

 
55,081

 
60,004

Percentage rent
326

 
385

 
630

 
836

Lease termination revenue
1,791

 
16

 
2,272

 
251

Other real estate revenue
2,540

 
2,225

 
4,647

 
4,868

Total real estate revenue
88,410

 
92,739

 
176,834

 
194,195

Other income
840

 
1,514

 
1,680

 
2,030

Total revenue
89,250

 
94,253

 
178,514

 
196,225

EXPENSES:
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 Property operating expenses:
 
 
 
 
 
 
 
CAM and real estate taxes
(28,261
)
 
(30,496
)
 
(58,213
)
 
(64,685
)
Utilities
(4,140
)
 
(4,137
)
 
(7,963
)
 
(8,463
)
Other property operating expenses
(2,825
)
 
(2,899
)
 
(6,030
)
 
(7,495
)
Total property operating expenses
(35,226
)
 
(37,532
)
 
(72,206
)
 
(80,643
)
 Depreciation and amortization
(32,928
)
 
(31,662
)
 
(64,686
)
 
(65,397
)
 General and administrative expenses
(9,232
)
 
(8,883
)
 
(18,273
)
 
(17,469
)
 Provision for employee separation expenses
(1,053
)
 
(658
)
 
(1,053
)
 
(1,193
)
 Project costs and other expenses
(85
)
 
(243
)
 
(397
)
 
(294
)
Total operating expenses
(78,524
)
 
(78,978
)
 
(156,615
)
 
(164,996
)
Interest expense, net
(14,418
)
 
(17,067
)
 
(29,756
)
 
(36,413
)
Impairment of assets
(53,917
)
 
(14,118
)
 
(53,917
)
 
(14,724
)
Total expenses
(146,859
)
 
(110,163
)
 
(240,288
)
 
(216,133
)
Loss before equity in income of partnerships, gains on sales of interests in non operating real estate and gains (losses) on sales of real estate
(57,609
)
 
(15,910
)
 
(61,774
)
 
(19,908
)
Equity in income of partnerships
4,154

 
4,192

 
7,890

 
8,075

Gains on sales of interests in non operating real estate
486

 
—

 
486

 
9

(Losses) gains on sales of interests in real estate, net
(308
)
 
20,887

 
(365
)
 
22,922

Net (loss) income
(53,277
)
 
9,169

 
(53,763
)
 
11,098

Less: net loss (income) attributable to noncontrolling interest
5,669

 
(982
)
 
5,721

 
(1,190
)
Net (loss attributable) income available to PREIT
(47,608
)
 
8,187

 
(48,042
)
 
9,908

Less: preferred share dividends
(7,067
)
 
(3,962
)
 
(13,272
)
 
(7,924
)
Net loss attributable to PREIT common shareholders
$
(54,675
)
 
$
4,225

 
$
(61,314
)
 
$
1,984



See accompanying notes to the unaudited consolidated financial statements.
2
Table of Contents

 
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

(in thousands of dollars, except per share amounts)
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
2017
 
2016
 
2017
 
2016
Net (loss) income
$
(53,277
)
 
$
9,169

 
$
(53,763
)
 
$
11,098

Noncontrolling interest
5,669

 
(982
)
 
5,721

 
(1,190
)
Dividends on preferred shares
(7,067
)
 
(3,962
)
 
(13,272
)
 
(7,924
)
Dividends on unvested restricted shares
(88
)
 
(76
)
 
(185
)
 
(160
)
Net loss used to calculate loss per share—basic and diluted
$
(54,763
)
 
$
4,149

 
$
(61,499
)
 
$
1,824

 
 
 
 
 
 
 
 
Basic and diluted loss (income) per share:
$
(0.79
)
 
$
0.06

 
$
(0.89
)
 
$
0.03

 
 
 
 
 
 
 
 
(in thousands of shares)
 
 
 
 
 
 
 
Weighted average shares outstanding—basic
69,307

 
69,091

 
69,263

 
69,032

Effect of common share equivalents (1) 
—

 
68

 
—

 
125

Weighted average shares outstanding—diluted
69,307

 
69,159

 
69,263

 
69,157

_________________________
(1) 
The Company had net losses used to calculate earnings per share for the three and six months ended June 30, 2017, therefore, the effects of common share equivalents of 0 and 57 for the three and six months ended June 30, 2017, respectively, are excluded from the calculation of diluted loss per share for these periods because they would be antidilutive.



See accompanying notes to the unaudited consolidated financial statements.
3
Table of Contents


PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Unaudited)
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
(in thousands of dollars)
2017
 
2016
 
2017
 
2016
Comprehensive (loss) income:
 
 
 
 
 
 
 
Net (loss) income
$
(53,277
)
 
$
9,169

 
$
(53,763
)
 
$
11,098

Unrealized (loss) gain on derivatives
(432
)
 
(3,006
)
 
1,278

 
(8,578
)
Amortization of losses on settled swaps, net of gains
213

 
126

 
338

 
252

Total comprehensive (loss) income
(53,496
)
 
6,289

 
(52,147
)
 
2,772

Less: comprehensive loss (income) attributable to noncontrolling interest
5,693

 
(677
)
 
5,548

 
(300
)
Comprehensive (loss) income PREIT
$
(47,803
)
 
$
5,612

 
$
(46,599
)
 
$
2,472



See accompanying notes to the unaudited consolidated financial statements.
4
Table of Contents


PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF EQUITY
Six Months Ended
June 30, 2017
(Unaudited)
 
 
 
 
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
 
 
 
 
 
Noncontrolling
interest
Balance December 31, 2016
$
702,406

 
$
46

 
$
35

 
$
—

 
$
69,553

 
$
1,481,787

 
$
1,622

 
$
(997,789
)
 
$
147,152

Net loss
(53,763
)
 
—

 
—

 
—

 
—

 
—

 
—

 
(48,042
)
 
(5,721
)
Other comprehensive income
1,616

 
—

 
—

 
—

 
—

 
—

 
1,443

 
—

 
173

Preferred shares issued in 2017 public offering, net
166,310

 
—

 
—

 
69

 
—

 
166,241

 
—

 
—

 
—

Shares issued under employee compensation plans, net of shares retired
(145
)
 
—

 
—

 
—

 
256

 
(401
)
 
—

 
—

 
—

Amortization of deferred compensation
3,119

 
—

 
—

 
—

 
—

 
3,119

 
—

 
—

 
—

Distributions paid to common shareholders ($0.42 per share)
(29,291
)
 
—

 
—

 
—

 
—

 
—

 
—

 
(29,291
)
 
—

Distributions paid to Series A preferred shareholders ($1.0312 per share)
(4,744
)
 
—

 
—

 
—

 
—

 
—

 
—

 
(4,744
)
 
—

Distributions paid to Series B preferred shareholders ($0.9218 per share)
(3,180
)
 
—

 
—

 
—

 
—

 
—

 
—

 
(3,180
)
 
—

Distributions paid to Series C preferred shareholders ($0.6900 per share)
(4,763
)
 
—

 
—

 
—

 
—

 
—

 
—

 
(4,763
)
 
—

Noncontrolling interests:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Distributions paid to Operating Partnership unit holders ($0.42 per unit)
(3,491
)
 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(3,491
)
Balance June 30, 2017
$
774,074

 
$
46

 
$
35

 
$
69

 
$
69,809

 
$
1,650,746

 
$
3,065

 
$
(1,087,809
)
 
$
138,113



See accompanying notes to the unaudited consolidated financial statements.
5
Table of Contents

PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
Six Months Ended 
 June 30,
(in thousands of dollars)
2017
 
2016
Cash flows from operating activities:
 
 
 
Net (loss) income
$
(53,763
)
 
$
11,098

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
 
Depreciation
60,126

 
62,655

Amortization
5,952

 
4,066

Straight-line rent adjustments
(1,356
)
 
(1,331
)
Provision for doubtful accounts
854

 
1,260

Amortization of deferred compensation
3,119

 
2,931

Loss on hedge ineffectiveness
—

 
143

Loss (gains) on sales of interests in real estate and non operating real estate, net
(121
)
 
(22,931
)
Equity in income of partnerships in excess of distributions
(2,066
)
 
(3,606
)
Impairment of assets
53,917

 
14,964

Change in assets and liabilities:
 
 
 
Net change in other assets
8,113

 
8,929

Net change in other liabilities
(4,753
)
 
2,102

Net cash provided by operating activities
70,022

 
80,280

Cash flows from investing activities:
 
 
 
Additions to construction in progress
(57,389
)
 
(28,121
)
Investments in real estate improvements
(23,214
)
 
(15,322
)
Cash proceeds from sales of real estate
45,922

 
131,592

Additions to leasehold improvements
(471
)
 
(288
)
Investments in partnerships
(38,259
)
 
(3,953
)
Capitalized leasing costs
(3,090
)
 
(3,016
)
(Increase) decrease in cash escrows
(2,951
)
 
3,158

Cash distributions from partnerships in excess of equity in income
1,141

 
4,778

Net cash (used in) provided by investing activities
(78,311
)
 
88,828

Cash flows from financing activities:
 
 
 
Net proceeds from issuance of preferred shares
166,310

 
—

Net borrowings from revolving facility
55,000

 
20,000

Proceeds from mortgage loans
—

 
139,000

Principal installments on mortgage loans
(8,118
)
 
(8,373
)
Repayments of mortgage loans
(150,000
)
 
(280,327
)
Payment of deferred financing costs
(71
)
 
(3,322
)
Dividends paid to common shareholders
(29,291
)
 
(29,170
)
Dividends paid to preferred shareholders
(12,687
)
 
(7,924
)
Distributions paid to Operating Partnership unit holders and noncontrolling interest
(3,491
)
 
(3,501
)
Value of shares of beneficial interest issued
1,148

 
621

Value of shares retired under equity incentive plans, net of shares issued
(1,293
)
 
(2,126
)
Net cash provided by (used in) financing activities
17,507

 
(175,122
)
Net change in cash and cash equivalents
9,218

 
(6,014
)
Cash and cash equivalents, beginning of period
9,803

 
22,855

Cash and cash equivalents, end of period
$
19,021

 
$
16,841


See accompanying notes to the unaudited consolidated financial statements.
6
Table of Contents

PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 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. 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. 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. Our portfolio currently consists of a total of 28 properties in nine states, including 20 operating shopping malls, four other operating retail properties and four development or redevelopment properties. Two of the development and redevelopment properties are classified as “mixed use” (a combination of retail and other uses), one is classified as “retail” (redevelopment of The Gallery at Market East into the Fashion Outlets of Philadelphia (“Fashion Outlets of Philadelphia”)), and one is classified as “other.” The above property counts do not include Logan Valley Mall in
Altoona, Pennsylvania and Valley View Mall in La Crosse, Wisconsin because these properties have been classified as “held for sale” as of June 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 June 30, 2017, we held an 89.4% controlling interest in the Operating Partnership, and consolidated it for reporting purposes. The presentation of consolidated financial statements does not itself imply that the assets of any consolidated entity (including any special-purpose entity formed for a particular project) are available to pay the liabilities of any other consolidated entity, or that the liabilities of any consolidated entity (including any special-purpose entity formed for a particular project) are obligations of any other consolidated entity.

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-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 June 30, 2017, the total amount that would have been distributed would have been $94.1 million, which is calculated using our June 30, 2017 closing price on the New York Stock Exchange of $11.32 per share multiplied by the number of outstanding OP Units held by limited partners, which was 8,312,676 as of June 30, 2017.

We provide management, leasing and real estate development services through two 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 one reportable segment. In addition, no single tenant accounts for 10% or more of consolidated revenue, and none of our properties are located outside the United States.

7
Table of Contents


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).

New Accounting Developments

In February 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-05 - Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20), which clarifies the scope of asset derecognition guidance and accounting for partial sales of nonfinancial assets. As it relates to the Company, real estate, such as land 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 January 2017, the FASB issued ASU No. 2017-01 - Business Combinations (Topic 805): Clarifying the Definition of a Business.  The update adds further guidance that assists preparers in evaluating whether a transaction will be accounted for as an acquisition of an asset or a business. We expect that future property acquisitions will generally qualify as asset acquisitions under the standard, which permits the capitalization of acquisition costs to the underlying assets. The Company adopted this new guidance effective January 1, 2017. This new guidance did not have a significant impact on our financial statements.

In August 2016, the FASB issued ASU No. 2016-15 - Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which is intended to reduce diversity in the practice of how certain transactions are classified in the statement of cash flows, including classification guidance for distributions received from equity method investments. The standard is effective for annual reporting periods beginning after December 15, 2017, however early adoption is permitted. The standard requires the use of the retrospective transition method. This new guidance is not expected to have a significant impact on our financial statements.

In March 2016, the FASB issued guidance intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. The new guidance allows for entities to make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. In addition, the guidance allows employers to withhold shares to satisfy minimum statutory tax withholding requirements up to the employees’ maximum individual tax rate without causing the award to be classified as a liability. The guidance also stipulates that cash paid by an employer to a taxing authority when directly withholding shares for tax

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withholding purposes should be classified as a financing activity on the statement of cash flows. The Company adopted this guidance effective January 1, 2017. The adoption of this guidance did not have a significant impact on the Company’s financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which will result in lessees recognizing
most leased assets and corresponding lease liabilities on the balance sheet. Leases of land and other arrangements where we are the lessee will be recognized on our balance sheet. Lessor accounting will remain substantially similar to the current accounting; however, certain refinements were made to conform the standard with the recently issued revenue recognition guidance in ASU 2014-09, specifically related to the allocation and recognition of contract consideration earned from lease and non-lease revenue components. Substantially all of our revenue and the revenues of our equity method investments are earned from arrangements that are within the scope of ASU 2016-02, thus we anticipate that the timing of recognition and financial statement presentation of certain revenues, particularly those that relate to consideration from non-lease components, including fixed common area maintenance arrangements, may be affected. Upon adoption of ASU 2016-02, consideration related to these non-lease components will be accounted for using the guidance in ASU 2014-09. Leasing costs that are eligible to be capitalized as initial direct costs are also limited by ASU 2016-02; such costs totaled approximately $5.1 million for the year ended December 31, 2016. We will adopt ASU 2016-02 on January 1, 2019 using the modified retrospective approach required by the standard. We are currently evaluating the ultimate impact that the adoption of the new standard will have on our consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) The objective of this new standard is to establish a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The core principle of this new standard is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. In March 2016, the FASB issued ASU No 2016-08, which updates Topic 606 to clarify principal versus agent considerations (reporting revenue gross versus net). The types of our revenues that will be impacted by the new standard include management, development and leasing fee revenues for services performed for third-party owned properties and for certain of our joint ventures, sales of real estate, including land parcels and operating properties, and certain billings to tenants for reimbursement of property operating expenses. We expect that the amount and timing of the revenues that are impacted by this standard will be generally consistent with our current measurement and pattern of recognition. We do not expect the adoption of this new standard to have a significant impact on our consolidated financial statements. We expect to adopt the standard using the modified retrospective approach, which requires a cumulative adjustment as of the date of the adoption. The new standard is effective for us on January 1, 2018.

2. REAL ESTATE ACTIVITIES

Investments in real estate as of June 30, 2017 and December 31, 2016 were comprised of the following:
 
(in thousands of dollars)
As of June 30,
2017
 
As of December 31,
2016
Buildings, improvements and construction in progress
$
2,699,909

 
$
2,794,213

Land, including land held for development
485,620

 
505,801

Total investments in real estate
3,185,529

 
3,300,014

Accumulated depreciation
(1,055,334
)
 
(1,060,845
)
Net investments in real estate
$
2,130,195

 
$
2,239,169


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Capitalization of Costs

The following table summarizes our capitalized salaries, commissions, benefits, real estate taxes and interest for the three and six months ended June 30, 2017 and 2016:
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
(in thousands of dollars)
2017
 
2016
 
2017
 
2016
Development/Redevelopment Activities:
 
 
 
 
 
 
 
Salaries and benefits
$
348

 
$
266

 
$
697

 
$
541

Real estate taxes
61

 
6

 
154

 
25

Interest
1,538

 
668

 
2,969

 
1,370

Leasing Activities:
 
 
 
 
 
 
 
Salaries, commissions and benefits
1,423

 
1,279

 
3,090

 
3,016


Dispositions

The following table presents our dispositions for the six months ended June 30, 2017:
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

 
—


Other Real Estate Activity

In June 2017, we sold a non operating parcel located at Valley Mall for $0.6 million, and recorded a gain of $0.4 million on the sale of this parcel.

In June 2017, we sold a non operating parcel located at Beaver Valley Mall for $3.6 million, and recorded a gain of $0.1 million on the sale of this parcel.

Acquisitions

In July 2017, we purchased the vacant anchor store from Macy’s located at Moorestown Mall for $8.9 million.

In April 2017, we purchased the vacant anchor stores from Macy’s located at Valley View and Valley Malls for $2.5 million each. We have executed a lease with a replacement tenant for the Valley View Mall location and this tenant is expected to open in the third quarter of 2017.

Impairment of Assets

In June 2017, we recorded a loss on impairment of assets on Logan Valley Mall, in Altoona, Pennsylvania of $38.4 million in connection with negotiations with the potential buyer of the property. In connection with these negotiations, we determined that the holding period of the property was less than previously estimated, which we concluded was a triggering event, leading us to conduct an analysis of possible impairment at this property. Based upon the negotiations, we determined that the estimated undiscounted cash flows, net of capital expenditures for the property, were less than the carrying value of the property, and recorded a loss on impairment of assets.

In June 2017, we recorded a loss on impairment of assets on Valley View Valley Mall, in La Crosse, Wisconsin of $15.5 million in connection with our decision to market the property for sale. In connection with this decision, we determined that the holding period of the property was less than previously estimated, which we concluded was a triggering event, leading us to

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conduct an analysis of possible impairment at this property. Based upon our estimates, we determined that the estimated undiscounted cash flows, net of capital expenditures for the property, were less than the carrying value of the property, and recorded a loss on impairment of assets. Our fair value analysis was based on an estimated capitalization rate of approximately 12% for Valley View Mall, which was determined using management’s assessment of property operating performance and general market conditions.

We have also determined that Logan Valley Mall and Valley View Mall meet the criteria of “assets held for sale,” and these properties have been reflected in the accompanying consolidated balance sheets as such.

3. INVESTMENTS IN PARTNERSHIPS

The following table presents summarized financial information of the equity investments in our unconsolidated partnerships as of June 30, 2017 and December 31, 2016:
 
(in thousands of dollars)
As of June 30, 2017
 
As of December 31, 2016
ASSETS:
 
 
 
Investments in real estate, at cost:
 
 
 
Operating properties
$
639,533

 
$
649,960

Construction in progress
247,574

 
160,699

Total investments in real estate
887,107

 
810,659

Accumulated depreciation
(216,581
)
 
(207,987
)
Net investments in real estate
670,526

 
602,672

Cash and cash equivalents
47,932

 
27,643

Deferred costs and other assets, net
41,073

 
37,705

Total assets
759,531

 
668,020

LIABILITIES AND PARTNERS’ INVESTMENT:
 
 
 
Mortgage loans payable, net
441,956

 
445,224

Other liabilities
44,698

 
23,945

Total liabilities
486,654

 
469,169

Net investment
272,877

 
198,851

Partners’ share
137,455

 
101,045

PREIT’s share
135,422

 
97,806

Excess investment (1)
10,537

 
8,969

Net investments and advances
$
145,959

 
$
106,775

 
 
 
 
Investment in partnerships, at equity
$
206,618

 
$
168,608

Distributions in excess of partnership investments
(60,659
)
 
(61,833
)
Net investments and advances
$
145,959

 
$
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 to the equity in income of partnerships. Amounts in excess of our share of the income in the equity investments are treated as a return of partnership capital and recorded as cash from investing activities.


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The following table summarizes our share of equity in income of partnerships for the three and six months ended June 30, 2017 and 2016:
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
(in thousands of dollars)
2017
 
2016
 
2017
 
2016
Real estate revenue
$
29,526

 
$
27,201

 
$
57,694

 
$
56,392

Operating expenses:
 
 
 
 
 
 
 
Property operating expenses
(8,412
)
 
(6,908
)
 
(17,114
)
 
(17,022
)
Interest expense
(5,433
)
 
(5,384
)
 
(10,806
)
 
(10,776
)
Depreciation and amortization
(6,800
)
 
(5,804
)
 
(12,655
)
 
(11,527
)
Total expenses
(20,646
)
 
(18,096
)
 
(40,576
)
 
(39,325
)
Net income
8,880

 
9,105

 
17,118

 
17,067

Less: Partners’ share
(4,755
)
 
(4,883
)
 
(9,246
)
 
(9,099
)
PREIT’s share
4,125

 
4,222

 
7,872

 
7,968

Amortization of and adjustments to excess investment
29

 
(30
)
 
18

 
107

Equity in income of partnerships
$
4,154

 
$
4,192

 
$
7,890

 
$
8,075


Significant Unconsolidated Subsidiary

One of our unconsolidated subsidiaries, Lehigh Valley Associates LP, the owner of the substantial majority of Lehigh Valley Mall, in which we have a 50% partnership interest, met the conditions of significant unconsolidated subsidiaries as of December 31, 2016. The financial information of this entity is included in the amounts above. Summarized balance sheet information as of June 30, 2017 and December 31, 2016 and summarized statement of operations information for the three and six months ended June 30, 2017 and 2016 for this entity, which is accounted for using the equity method, are as follows:
 
 
As of
 
(in thousands of dollars)
 
June 30, 2017
 
December 31, 2016
 
Summarized balance sheet information
 
 
 
 
 
     Total assets
 
$
46,223

 
$
49,264

 
     Mortgage loan payable
 
125,285

 
126,520

 
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
(in thousands of dollars)
 
2017
 
2016
 
2017
 
2016
Summarized statement of operations information
 
 
 
 
 
 
 
 
     Revenue
 
$
8,647

 
$
9,121

 
$
17,456

 
$
18,169

     Property operating expenses
 
(2,582
)
 
(1,956
)
 
(4,484
)
 
(4,183
)
     Interest expense
 
(1,861
)
 
(1,897
)
 
(3,731
)
 
(3,803
)
     Net income
 
3,059

 
4,727

 
7,262

 
8,477

     PREIT’s share of equity in income
 
 
 
 
 
 
 
 
          of partnership
 
1,529

 
2,197

 
3,631

 
4,239


4. FINANCING ACTIVITY

Credit Agreements

We have entered into four 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: (1) the 2013 Revolving Facility, (2) 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 Loan are collectively referred to as the “Term Loans.”


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In May 2017 we borrowed an additional $150.0 million on the 2014 7-Year Term Loan, which was used to repay borrowings under the 2013 Revolving Facility. As of June 30, 2017, we had borrowed $550.0 million under the Term Loans in the aggregate and $52.0 million under the 2013 Revolving Facility (with $15.8 million pledged as collateral for letters of credit at June 30, 2017). The carrying value of the Term Loans on our consolidated balance sheet is net of $2.6 million of unamortized debt issuance costs.

Interest expense and the deferred financing fee amortization related to the Credit Agreements for the three and six months ended June 30, 2017 and 2016 were as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in thousands of dollars)
2017
 
2016
 
2017
 
2016
2013 Revolving Facility
 
 
 
 
 
 
 
 
 
Interest expense
 
$
645

 
$
782

 
$
1,409

 
$
1,472

 
Deferred financing amortization
 
199

 
199

 
398

 
397

 
 
 
 
 
 
 
 
 
 
Term Loans
 
 
 
 
 
 
 
 
 
Interest expense
 
3,712

 
3,045

 
6,547

 
6,037

 
Deferred financing amortization
 
190

 
121

 
377

 
241


Each of the Credit Agreements contain certain affirmative and negative covenants, which are identical to those contained in the other Credit Agreements, and which are described in detail in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016. As of June 30, 2017, we were in compliance with all financial covenants in the Credit Agreements. Following recent property sales, the net operating income (“NOI”) from our remaining unencumbered properties is at a level such that pursuant to Unencumbered Debt Yield covenant (as described in our Annual Report on Form 10-K for the year ended December 31, 2016), the maximum unsecured amount that was available for us to borrow under the 2013 Revolving Facility as of June 30, 2017 was $183.4 million.

Amounts borrowed under the Credit Agreements 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. In determining our leverage (the ratio of Total Liabilities to Gross Asset Value), the capitalization rate used to calculate Gross Asset Value is 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 2013 Revolving Facility is subject to a facility fee, which depends on leverage and is currently 0.25%, and is recorded in interest expense in the consolidated statements of operations.

The following table presents the applicable margin for each level 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%
 

(1) The rate in effect at June 30, 2017.


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Mortgage Loans

The aggregate carrying values and estimated fair values of mortgage loans based on interest rates and market conditions at June 30, 2017 and December 31, 2016 were as follows:
 
June 30, 2017
 
December 31, 2016
(in millions of dollars)
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Mortgage loans(1)
$
1,036.6

 
$
1,040.0

 
$
1,222.9

 
$
1,189.6

(1)The carrying value of mortgage loans is net of unamortized debt issuance costs of $3.7 million and $4.5 million as of June 30, 2017 and December 31, 2016, respectively.

The mortgage loans contain various customary default provisions. As of June 30, 2017, we were not in default on any of the mortgage loans.

Mortgage Loan Activity

In March 2017, we repaid a $150.6 million mortgage loan including accrued interest secured by The Mall at Prince Georges in Hyattsville, Maryland using $110.0 million from our 2013 Revolving Facility and the balance from available working capital.

Interest Rate Risk

We follow established risk management policies designed to limit our interest rate risk on our interest bearing liabilities, as further discussed in note 7 to our unaudited consolidated financial statements.

5. CASH FLOW INFORMATION

Cash paid for interest was $27.2 million (net of capitalized interest of $3.1 million) and $33.9 million (net of capitalized interest of $1.4 million) for the six months ended June 30, 2017 and 2016, respectively.

In our statement of cash flows, we show cash flows on our revolving facility on a net basis. Aggregate borrowings on our 2013 Revolving Facility were $202.0 million and $200.0 million for the six months ended June 30, 2017 and 2016, respectively. Aggregate paydowns were $297.0 million and $180.0 million for the six months ended June 30, 2017 and 2016, respectively.

A $150.0 million paydown of the 2013 Revolving Facility was made in the six months ended June 30, 2017, which was directly paid from the 2014 7-Year Term Loan additional borrowing and is considered to be a non-cash transaction.

6. COMMITMENTS AND CONTINGENCIES

Contractual Obligations

As of June 30, 2017, we had unaccrued contractual and other commitments related to our capital improvement projects and development projects of $148.0 million, including commitments related to the redevelopment of the Fashion Outlets of Philadelphia, in the form of tenant allowances and contracts with general service providers and other professional service providers. In addition, our operating partnership, PREIT Associates, has jointly and severally guaranteed the obligations of the joint venture we formed with Macerich to develop the Fashion Outlets of 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.

Provision for Employee Separation Expense

In 2017 and 2016, we terminated the employment of certain employees and officers. In connection with the departure of those employees and officers, we recorded $1.1 million and $0.7 million of employee separation expenses for the three months ended June 30, 2017 and 2016, respectively, and $1.1 million and $1.2 million for the six months ended June 30, 2017 and 2016, respectively. As of June 30, 2017, $1.1 million 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

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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

Our outstanding derivatives 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 is recorded in “Accumulated other comprehensive income (loss)” and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. To the extent these instruments are ineffective as cash flow hedges, changes in the fair value of these instruments are recorded in “Interest expense, net.” We recognize all derivatives at fair value as either assets or liabilities in the accompanying consolidated balance sheets. The carrying amount of the derivative assets is reflected 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.

Amounts reported in “Accumulated other comprehensive income (loss)” that are related to derivatives will be reclassified to “Interest expense, net” as interest payments are made on our corresponding debt. During the next 12 months, we estimate that $1.0 million will be reclassified as an increase to interest expense in connection with derivatives. The amortization of these amounts could be accelerated in the event that we repay amounts outstanding on the debt instruments and do not replace them with new borrowings.

Interest Rate Swaps

As of June 30, 2017, we had entered into 30 interest rate swap agreements with a weighted average base interest rate of 1.35% on a notional amount of $749.6 million, maturing on various dates through December 2021, and one forward starting interest rate swap agreement with a base interest rate of 1.42% on a notional amount of $48.0 million, which will be effective starting January 2018 and will mature in February 2021.

We entered into these interest rate swap agreements in order to hedge the interest payments associated with our issuances of variable interest rate long term debt. We have assessed the effectiveness of these interest rate swap agreements as hedges at inception and on a quarterly basis. As of June 30, 2017, we considered these interest rate swap agreements to be highly effective as cash flow hedges. The interest rate swap agreements are net settled monthly.

Accumulated other comprehensive loss as of June 30, 2017 includes a net loss of $1.2 million relating to forward starting swaps that we cash settled in prior years that are being amortized over 10 year periods commencing on the closing dates of the debt instruments that are associated with these settled swaps through August 2018.



15
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The following table summarizes the terms and estimated fair values of our interest rate swap derivative instruments at June 30, 2017 and December 31, 2016. The notional values provide an indication of the extent of our involvement in these instruments, but do not represent exposure to credit, interest rate or market risks.
(in millions of dollars)
Notional Value
 
Fair Value at
June 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
 
(0.1
)
 
(0.3
)
 
1.78
%
 
 
 
January 2, 2019
 
25.0
 
0.3

 
0.3

 
0.70
%
 
 
 
January 2, 2019
 
20.0
 
(0.1
)
 
(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
 
0.2

 
0.2

 
1.23
%
 
 
 
June 26, 2020
 
20.0
 
0.2

 
0.2

 
1.23
%
 
 
 
June 26, 2020
 
20.0
 
0.2

 
0.2

 
1.23
%
 
 
 
June 26, 2020
 
20.0
 
0.2

 
0.2

 
1.23
%
 
 
 
June 26, 2020
 
20.0
 
0.2

 
0.2

 
1.24
%
 
 
 
June 26, 2020
 
9.0
 
0.2

 
0.2

 
1.19
%
 
 
 
February 1, 2021
 
35.0
 
0.9

 
0.9

 
1.01
%
 
 
 
March 1, 2021
 
35.0
 
0.9

 
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
 
 
 
$
5.6

 
$
4.3

 
 
 
 
 
 
 
_________________________
(1) 
As of June 30, 2017 and December 31, 2016, derivative valuations in their entirety were classified in Level 2 of the fair value hierarchy and we did not have any significant recurring fair value measurements related to derivative instruments using significant unobservable inputs (Level 3).



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The table below presents the effect of derivative financial instruments on our consolidated statements of operations and on our share of our partnerships’ statements of operations for the three and six months ended June 30, 2017 and 2016:
 
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 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
 
$
(0.9
)
 
$
(4.3
)
 
$
0.1

 
$
(11.0
)
 
N/A
Loss reclassified from Accumulated Other Comprehensive Income (Loss) into income (effective portion)
 
$
0.7

 
$
1.4

 
$
1.5

 
$
2.8

 
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 June 30, 2017, we were not in default on any of our derivative obligations.

We have an agreement with a derivative counterparty that incorporates the loan covenant provisions of our loan agreement with a lender affiliated with the derivative counterparty. Failure to comply with the loan covenant provisions would result in our being in default on any derivative instrument obligations covered by the agreement.

As of June 30, 2017, 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 $0.7 million. If we had breached any of the default provisions in these agreements as of June 30, 2017, we might have been required to settle our obligations under the agreements at their termination value (including accrued interest) of $0.7 million. We had not breached any of these provisions as of June 30, 2017.

8. EQUITY OFFERING

2017 Preferred Share Offering

In January 2017, we issued 6,900,000 7.20% Series C Cumulative Redeemable Perpetual Preferred Shares (the “Series C Preferred Shares”) in a public offering at $25.00 per share. We received net proceeds from the offering of approximately $166.3 million after deducting payment of the underwriting discount of $5.4 million ($0.7875 per Series C Preferred Share) and offering expenses of $0.7 million. We used a portion of the net proceeds from this offering to repay all $117.0 million of the then-outstanding borrowings under the 2013 Revolving Facility.

We may not redeem the Series C Preferred Shares before January 27, 2022 except to preserve our status as a REIT or upon the occurrence of a Change of Control, as defined in the Trust Agreement addendum designating the Series C Preferred Shares. On and after January 27, 2022, we may redeem any or all of the Series C Preferred Shares at $25.00 per share plus any accrued and unpaid dividends. In addition, upon the occurrence of a Change of Control, we may redeem any or all of the Series C Preferred Shares for cash within 120 days after the first date on which such Change of Control occurred at $25.00 per share plus any accrued and unpaid dividends. The Series C Preferred Shares have no stated maturity, are not subject to any sinking fund or mandatory redemption provisions, and will remain outstanding indefinitely unless we redeem or otherwise repurchase them or they are converted.



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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 28 retail properties in nine states, of which 24 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 Outlets of Philadelphia discussion below). The 24 operating properties include 20 shopping malls and four other operating retail properties, have a total of 19.3 million square feet and are located in eight states. We and partnerships in which we own an interest own 14.8 million square feet at these properties (excluding space owned by anchors).

There are 18 operating retail properties in our portfolio that we consolidate for financial reporting purposes. These consolidated operating properties have a total of 15.2 million square feet, of which we own 12.0 million square feet. The six operating retail properties that are owned by unconsolidated partnerships with third parties have a total of 4.1 million square feet, of which 2.8 million square feet are owned by such partnerships. The above property counts and square feet do not include Logan Valley Mall in Altoona, Pennsylvania and Valley View Mall in La Crosse, Wisconsin because these properties have been classified as “held for sale” as of June 30, 2017.

The development portion of our portfolio contains four properties in two states, with two classified as “mixed use” (a combination of retail and other uses), one is classified as “retail” (The Gallery at Market East into the Fashion Outlets of Philadelphia (“Fashion Outlets of Philadelphia”)), and one classified as “other.” We have two properties (Woodland Mall 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 (Capital City Mall in Harrisburg, Pennsylvania, Exton Square Mall in Exton, Pennsylvania, Magnolia Mall in Florence, South Carolina, Viewmont Mall in Scranton, Pennsylvania and Valley View Mall in LaCrosse, Wisconsin).

Our primary business is owning and operating retail shopping malls, which we primarily do through our operating partnership, PREIT Associates, L.P. (“PREIT Associates”). 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 in which we own interests through partnerships with third parties 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.

We have continuously made efforts to improve the overall quality of our portfolio and to achieve operational excellence. Since 2013, we have executed a strategic disposition program whereby we have sold 16 of our lower-productivity malls, with two more properties currently on the market (Logan Valley Mall and Valley View Mall). We have also sought to improve the quality 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. In the last several years, we have added over one million square feet of space in the categories of dining, entertainment, fast fashion, grocery, health & wellness and off-price retailers.

Net loss for the three months ended June 30, 2017 was $53.3 million, a decrease in earnings of $62.4 million compared to net income of $9.2 million for the three months ended June 30, 2016. This decrease is primarily due to higher impairment of assets in the three months ended June 30, 2017 ($53.9 million related to Logan Valley Mall and Valley View Mall) compared to $14.1 million in the three months ended June 30, 2016, and to a $20.6 million decrease in gains on sales of interest in real estate from properties sold in 2016 and 2017.

Net loss for the six months ended June 30, 2017 was $53.8 million, a decrease in earnings of $64.9 million compared to net income of $11.1 million for the six months ended June 30, 2016. This decrease is primarily due to higher impairment of assets in the six months ended June 30, 2017 ($53.9 million related to Logan Valley Mall and Valley View Mall) compared to $14.7

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million recorded in the six months ended June 30, 2016, a $12.1 million decrease in net income from properties sold in 2016 and 2017, and a $22.5 million decrease in gains on sales of interests in real estate, partially offset by a decrease of interest expense related to lower interest rates and lower and weighted average debt balance due to the application of cash proceeds from property sales in 2016 and 2017, along with the net proceeds from our 2017 Series C Preferred Share issuance.

We evaluate operating results and allocate resources on a property-by-property basis, and do not distinguish or evaluate our consolidated operations on a geographic basis. Due to the nature of our operating properties, which involve retail shopping, we have concluded that our individual properties have similar economic characteristics and meet all other aggregation criteria. Accordingly, we have aggregated our individual properties into one reportable segment. In addition, no single tenant accounts for 10% or more of consolidated revenue, and none of our properties are located outside the United States.

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 of outlet centers, and declining mall traffic, among other factors.

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.

The table below sets forth information related to our tenants in bankruptcy for our consolidated and unconsolidated properties:
 
 
Pre-bankruptcy
 
Units Closed
Year
 
Number of Tenants (1)
 
Number of locations impacted
 
GLA
 
PREIT’s Share of Annualized Gross Rent(2) 
(in thousands)
 
Number of locations closed
 
GLA
 
PREIT’s Share of Annualized Gross Rent (2)(in thousands)
2017 (Six Months)
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated properties
 
11

 
65

 
253,086

 
$
8,892.8

 
16

 
87,580

 
$
2,477.3

Unconsolidated properties
 
6

 
12

 
101,259

 
1,389.6

 
6

 
81,531

 
949.3

Total
 
11

 
77

 
354,345

 
$
10,282.4

 
22

 
169,111

 
$
3,426.6

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2016 (Full Year)
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated properties
 
7

 
41

 
147,030

 
$
7,148.2

 
21

 
74,973

 
$
3,226.5

Unconsolidated properties
 
6

 
10

 
86,012

 
1,166.9

 
4

 
64,809

 
471.4

Total
 
9

 
51

 
233,042

 
$
8,315.1

 
25

 
139,782

 
$
3,697.9

(1) Total represents unique tenants
(2) Includes our share of tenant gross rent from partnership properties based on PREIT’s ownership percentage in the respective equity method investments as of June 30, 2017.



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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, we acquired the Sears property at Woodland Mall and we have recaptured the Sears premises at Capital City Mall and Magnolia Mall in 2017. In July 2017, we purchased the Macy’s location at Moorestown Mall and in April 2017, we purchased the vacant anchor boxes formerly occupied by Macy’s at our Valley View Mall and Valley Mall locations. We are in negotiations to purchase the Macy’s store located at Plymouth Meeting Mall.

The table below sets forth information related to our anchor replacement program:
 
 
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:
 
 
 
 
 
 
 
 
 
Cumberland Mall
JC Penney(1)
51
Q3 15
 
Q3 15
Dick's Sporting Goods
50
Q4 16
 
Exton Square Mall
JC Penney(1)
118
Q2 15
 
N/A
Round 1
58
Q4 16
In process:
 
 
 
 
 
 
 
 
 
Exton Square Mall
K-mart (1)
96
Q1 16
 
Q2 16
Whole Foods
58
Q4 17
 
Viewmont Mall
Sears (1)
193
Q3 16
 
Q3 16
Dick's Sporting Goods/Field & Stream
90
Q4 17
 
Home Goods
23
Q4 17
 
Capital City Mall
Sears (1)
101
Q1 17
 
Q2 17
Dick's Sporting Goods
62
Q3 17
 
Small shop space and outparcels
55
Q4 17
 
Woodland Mall
Sears (1)(4)
313
Q2 17
 
Q2 17
Von Maur
86
Q4 19
 
Restaurants and small shop space
TBD
Q4 19
 
Magnolia Mall
Sears (1)
91
Q1 17
 
Q2 17
Burlington
46
Q4 17
 
 
Home Goods, Five Below and outparcels
45
Q2 18
Pending:
 
 
 
 
 
 
 
 
 
Plymouth Meeting Mall
Macy's (3)
215
Q1 17
 
N/A
TBD
TBD
 
 
Moorestown Mall
Macy's (1)(2)
200
Q1 17
 
N/A
TBD
43
 
 
Valley Mall
Macy's (1)(5)
120
Q1 16
 
N/A
TBD
70
 
 
 
BonTon (1)
123
Q1 18
 
N/A
Belk
123
Q4 18
 
Willow Grove Park
JC Penney (1)(6)
124
Q3 17
 
N/A
TBD
TBD
 

(1) 
Property is PREIT owned
(2) 
Property was purchased by PREIT in July 2017
(3) 
Property is third-party owned
(4) 
Purchased by PREIT in the fourth quarter of 2016
(5) 
Purchased by PREIT in April 2017
(6) 
Closed in July 2017

In response to anchor store closings and other trends in the retail space, we have been changing the mix of tenants at our properties. We have been reducing the percentage of traditional mall tenants and increasing the share of space dedicated to dining, entertainment, fast fashion, off price, and large format box tenants. Some of these changes may result in the redevelopment of all or a portion of our properties. See —Capital Improvements, Redevelopment and Development Projects.
To fund the capital necessary to replace anchors and to maintain a reasonable level of leverage, we expect to use a variety of means available to us, subject to and in accordance with the terms of our Credit Agreements. These steps might include (i)

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making additional borrowings under our credit facility, (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.
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 $137.4 million as of June 30, 2017.

In 2014, we entered into a 50/50 joint venture with The Macerich Company (“Macerich”) to redevelop the Fashion Outlets of Philadelphia. As we redevelop the Fashion Outlets of Philadelphia, operating results in the short term, as measured by sales, occupancy, real estate revenue, property operating expenses, NOI and depreciation, will likely continue to be negatively affected until the newly constructed space is completed, leased and occupied.

We are also engaged in several types of development projects. However, we do not expect to make any significant investment in these projects in the short term, other than the redevelopment of the Fashion Outlets of 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 financial statements, and the reported amounts of revenue and expenses during the reporting periods. In preparing the financial statements, management has utilized available information, including historical experience, 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 similar businesses. The estimates and assumptions made by management in applying Critical Accounting Policies have not changed materially during 2017 or 2016 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.

Asset Impairment

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. A property to be held and used is considered impaired only if management’s 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. In addition, these estimates may consider a probability weighted cash flow estimation approach when alternative courses of action to recover the carrying amount of a long-lived asset are under consideration or when a range of possible values is estimated.
The determination of undiscounted cash flows requires significant estimates by management, including the expected course of action at the balance sheet date that would lead to such cash flows. Subsequent changes in estimated undiscounted cash flows arising from changes in the anticipated action to be taken with respect to the property could impact the determination of whether an impairment exists and whether the effects could materially affect our net income. To the extent estimated

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undiscounted cash flows are less than the carrying value of the property, the loss will be measured as the excess of the carrying amount of the property over the estimated fair value of the property.
Assessment of our ability to recover certain lease related costs must be made when we have a reason to believe that the tenant might not be able to perform under the terms of the lease as originally expected. This requires us to make estimates as to the recoverability of such costs. See “Results of Operations” for a description of the losses on impairment of assets recorded during the three and six months ended June 30, 2017 and 2016.
 
New Accounting Developments

See note 1 to our unaudited consolidated financial statements for descriptions of new accounting developments.

OFF BALANCE SHEET ARRANGEMENTS

We have no material off-balance sheet items other than the unconsolidated partnerships described in note 3 to the unaudited consolidated financial statements and in the “Overview” section above.


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RESULTS OF OPERATIONS

Occupancy

The table below sets forth certain occupancy statistics for our properties as of June 30, 2017 and 2016:
 
 
Occupancy (1) at June 30,
 
Consolidated
Properties
 
Unconsolidated
Properties(2)
 
Combined(2)(3)
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
Retail portfolio weighted average:
 
 
 
 
 
 
 
 
 
 
 
Total excluding anchors
90.1
%
 
91.0
%
 
90.3
%
 
95.9
%
 
90.1
%
 
91.3
%
Total including anchors
92.7
%
 
93.7
%
 
92.1
%
 
96.7
%
 
92.7
%
 
94.0
%
Malls weighted average:
 
 
 
 
 
 
 
 
 
 
 
Total excluding anchors
90.0
%
 
90.0
%
 
89.8
%
 
95.4
%
 
90.0
%
 
90.5
%
Total including anchors
92.8
%
 
93.4
%
 
93.0
%
 
96.9
%
 
92.9
%
 
93.7
%
Other retail properties
N/A

 
N/A

 
91.4
%
 
96.5
%
 
91.4
%
 
96.5
%
_________________________
(1) 
Occupancy for both periods presented includes all tenants irrespective of the term of their agreements. Retail portfolio and mall occupancy for all periods presented includes properties classified as held for sale in 2017 because the Company has not yet entered into a purchase and sale agreement with respect to such properties and excludes properties sold or classified as held for sale in 2016. The Fashion Outlets of Philadelphia is excluded for 2016 and 2017 because the property is currently partially closed and undergoing a major reconstruction.
(2) 
We own a 25% to 50% interest in each of our unconsolidated properties, and do not control such properties. Our percentage ownership is not necessarily indicative of the legal and economic implications of our ownership interest. See "—Use of Non GAAP Measures" for further details on our ownership interests in our unconsolidated properties.
(3) 
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.



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Leasing Activity

The table below sets forth summary leasing activity information with respect to our consolidated and unconsolidated properties for the three months ended June 30, 2017:
 
 
 
Initial Gross Rent Spread (1)
 
Avg Rent Spread (2)
 
Annualized Tenant Improvements psf (3)
 
 
Number
 
GLA
 
Term
 
Initial Rent psf
 
Previous Rent psf
 
$
 
%
 
%
 
Non Anchor
New Leases
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Under 10,000 sf
 
34

 
96,738

 
6.6

 
$
35.80

 
 N/A
 
N/A
 
N/A
 
N/A
 
$
4.53

Over 10,000 sf
 
8

 
104,596

 
9.1

 
17.13

 
 N/A
 
N/A
 
N/A
 
N/A
 
7.84

Total New Leases
 
42

 
201,334

 
7.1

 
$
26.10

 
 N/A
 
 N/A
 
 N/A
 
 N/A
 
$
6.25

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Renewal Leases
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Under 10,000 sf
 
71

 
123,600

 
4.1

 
$
75.52

 
$
74.25

 
$
1.27

 
1.7%
 
3.7%
 
$
0.08

Over 10,000 sf
 
6

 
146,706

 
3.0

 
11.51

 
11.22

 
0.29

 
2.6%
 
11.8%
 
—

Total Fixed Rent
 
77

 
270,306

 
4.0

 
$
40.78

 
$
40.04

 
$
0.74

 
1.8%
 
5.0%
 
$
0.04

Percentage in Lieu
 
1

 
4,734

 
3.0

 
$
3.81

 
$
4.56

 
N/A
 
N/A
 
N/A
 
$
—

Total Renewal Leases
 
78

 
275,040

 
4.0

 
$
40.14

 
$
39.43

 
$
0.71

 
1.8%
 
5.0%
 
$
0.04

Total Non Anchor(4)
 
120

 
476,374

 
5.1

 
$
34.21

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Anchor
New Leases
 
2

 
143,094

 
10.0

 
$
5.29

 
N/A
 
N/A
 
N/A
 
N/A
 
$
3.84

Renewal Leases
 
2

 
387,765

 
11.0

 
$
5.97

 
$
5.97

 
$
—

 
—%
 
N/A
 


Total
 
4

 
530,859

 
10.5

 
$
5.79

 
 
 
 
 
 
 
 
 
 
 _________________________
(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 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) 
Tenant improvements and certain other leasing costs are presented as annualized amounts per square foot and are spread uniformly over the initial lease term.
(4) 
Includes 8 leases and 20,499 square feet of GLA with respect to our unconsolidated partnerships. We own a 25% to 50% interest in each of our unconsolidated properties and do not control such properties. Our percentage ownership is not necessarily indicative of the legal and economic implications of our ownership interest. See "—Use of Non GAAP Measures" for further details on our ownership interests in our unconsolidated properties.


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The table below sets forth summary leasing activity information with respect to our consolidated and unconsolidated properties for the six months ended June 30, 2017:
 
 
 
Initial Gross Rent Spread (1)
 
Avg Rent Spread (2)
 
Annualized Tenant Improvements psf (3)
 
 
Number
 
GLA
 
Term
 
Initial Rent psf
 
Previous Rent psf
 
$
 
%
 
%
 
Non Anchor
New Leases
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Under 10,000 sf
 
96

 
183,329

 
6.4

 
$
45.47

 
 N/A
 
N/A
 
N/A
 
N/A
 
$
7.47

Over 10,000 sf
 
13

 
210,465

 
9.8

 
17.04

 
 N/A
 
N/A
 
N/A
 
N/A
 
6.99

Total New Leases
 
109

 
393,794

 
6.8

 
$
30.28

 
 N/A
 
 N/A
 
 N/A
 
 N/A
 
$
7.21

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Renewal Leases
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Under 10,000 sf
 
154

 
293,368

 
3.9

 
$
62.19

 
$
60.96

 
$
1.23

 
2.0%
 
4.9%
 
$
0.03

Over 10,000 sf
 
9

 
204,436

 
2.9

 
13.54

 
13.25

 
0.29

 
2.2%
 
8.1%
 
—

Total Fixed Rent
 
163

 
497,804

 
3.8

 
$
42.21

 
$
41.37

 
$
0.84

 
2.0%
 
5.3%
 
$
0.02

Percentage in Lieu
 
3

 
14,843

 
1.7

 
$
5.28

 
$
5.51

 
(0.23)
 
(4.2)%
 
N/A
 
$
—

Total Renewal Leases
 
166

 
512,647

 
3.8

 
$
41.14

 
$
40.33

 
$
0.81

 
2.0%
 
5.3%
 
$
—

Total Non Anchor(4)
 
3

 
14,843

 
1.6

 
$
5.28

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Anchor
New Leases
 
5

 
349,972

 
11.0

 
$
7.70

 
N/A
 
N/A
 
N/A
 
N/A
 
$
1.38

Renewal Leases
 
3

 
599,765

 
9.0

 
$
4.35

 
$
4.36

 
$
(0.01
)
 
(0.2)%
 
N/A
 
$
—

Total
 
8

 
949,737

 
10.3

 
$
5.58

 
 
 
 
 
 
 
 
 
 
 _________________________
(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 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) 
Tenant improvements and certain other leasing costs are presented as annualized amounts per square foot and are spread uniformly over the initial lease term.
(4) 
Includes 17 leases and 39,275 square feet of GLA with respect to our unconsolidated partnerships. We own a 25% to 50% interest in each of our unconsolidated properties and do not control such properties. Our percentage ownership is not necessarily indicative of the legal and economic implications of our ownership interest. See "—Use of Non GAAP Measures" for further details on our ownership interests in our unconsolidated properties.






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Overview

Net loss for the three months ended June 30, 2017 was $53.3 million, a decrease in earnings of $62.4 million compared to net income of $9.2 million for the three months ended June 30, 2016. This decrease is primarily due to higher impairment of assets in the three months ended June 30, 2017 ($53.9 million related to Logan Valley Mall and Valley View Mall) compared to $14.1 million in the three months ended June 30, 2016, and to a $20.6 million decrease in gains on sales of interest in real estate from properties sold in 2016 and 2017.

Net loss for the six months ended June 30, 2017 was $53.8 million, a decrease in earnings of $64.9 million compared to net income of $11.1 million for the six months ended June 30, 2016. This decrease is primarily due to higher impairment of assets in the six months ended June 30, 2017 ($53.9 million related to Logan Valley Mall and Valley View Mall) compared to $14.7 million recorded in the six months ended June 30, 2016, a $12.1 million decrease in net income from properties sold in 2016 and 2017, and a $22.5 million decrease in gains on sales of interests in real estate, partially offset by a decrease of interest expense related to lower interest rates and lower and weighted average debt balance due to the application of cash proceeds from property sales in 2016 and 2017, along with the net proceeds from our 2017 Series C Preferred Share issuance.

The following table sets forth our results of operations for the three and six months ended June 30, 2017 and 2016.
 
 
Three Months Ended 
 June 30,
 
% Change
2016 to
2017
 
Six Months Ended 
 June 30,
 
% Change
2016 to
2017
 
(in thousands of dollars)
 
2017
 
2016
 
 
2017
 
2016
 
 
Real estate revenue
 
$
88,410

 
$
92,739

 
(5
)%
 
$
176,834

 
$
194,195

 
(9
)%
 
Property operating expenses
 
(35,226
)
 
(37,532
)
 
(6
)%
 
(72,206
)
 
(80,643
)
 
(10
)%
 
Other income
 
840

 
1,514

 
(45
)%
 
1,680

 
2,030

 
(17
)%
 
Depreciation and amortization
 
(32,928
)
 
(31,662
)
 
4
 %
 
(64,686
)
 
(65,397
)
 
(1
)%
 
General and administrative expenses
 
(9,232
)
 
(8,883
)
 
4
 %
 
(18,273
)
 
(17,469
)
 
5
 %
 
Provision for employee separation expense
 
(1,053
)
 
(658
)
 
60
 %
 
(1,053
)
 
(1,193
)
 
(12
)%
 
Project costs and other expenses
 
(85
)
 
(243
)
 
(65
)%
 
(397
)
 
(294
)
 
35
 %
 
Interest expense, net
 
(14,418
)
 
(17,067
)
 
(16
)%
 
(29,756
)
 
(36,413
)
 
(18
)%
 
Impairment of assets
 
(53,917
)
 
(14,118
)
 
282
 %
 
(53,917
)
 
(14,724
)
 
266
 %
 
Equity in income of partnerships
 
4,154

 
4,192

 
(1
)%
 
7,890

 
8,075

 
(2
)%
 
(Losses) gains on sales of interests in real estate, net
 
(308
)
 
20,887

 
(101
)%
 
(365
)
 
22,922

 
(102
)%
 
Gain on sales of interests in non operating real estate
 
486

 
—

 
—
 %
 
486

 
9

 
5,300
 %
 
Net income (loss)
 
$
(53,277
)
 
$
9,169

 
(681
)%
 
$
(53,763
)
 
$
11,098

 
(584
)%
 

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

Real estate revenue decreased by $4.3 million, or 5%, in the three months ended June 30, 2017 compared to the three months ended June 30, 2016, primarily due to:

•
a decrease of $5.5 million in real estate revenue related to properties sold in 2016 and 2017;

•
a decrease of $0.5 million in same store utility reimbursements due to a combination of lower tenant electric billing rates as set by the Public Utility Commission, as well as a decrease in electric consumption;

•
a decrease of $0.3 million in same store common area expense reimbursements, due to a decrease in common area expense (see “—Property Operating Expenses”), as well as lower occupancy at some properties, and rental concessions made to certain tenants under which the terms of their leases were modified such that they no longer pay expense reimbursements; and

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•
a decrease of $0.2 million in same store percentage rent, primarily due to lower sales from some tenants that paid percentage rent during the three months ending June 30, 2016; partially offset by

•
an increase of $1.7 million in same store lease termination revenue, including $1.1 million received from one tenant in the second quarter of 2017 for three locations;

•
an increase of $0.3 million in same store base rent due to $1.0 million from net new store openings  over the previous twelve months, partially offset by a $0.5 million decrease related to tenant bankruptcies in 2016 and 2017, as well as a $0.2 million decrease related to co-tenancy concessions due to anchor closings in 2016 and 2017; and

•
an increase of $0.3 million in same store seasonal photo income due to a temporary timing difference resulting from the Easter holiday occurring in March 2016 in the prior period compared to April 2017 in the current period.

Real estate revenue decreased by $17.3 million, or 9%, in the six months ended June 30, 2017 compared to the six months ended June 30, 2016, primarily due to:

•
a decrease of $18.0 million in real estate revenue related to properties sold in 2016 and 2017;

•
a decrease of $0.8 million in same store common area expense reimbursements, due to a decrease in common area expense (see “—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;

•
a decrease of $0.8 million in same store utility reimbursements due to a combination of lower tenant electric billing rates as set by the Public Utility Commission, as well as a decrease in electric consumption; and

•
a decrease of $0.3 million in same store percentage rent due to lease renewals with higher base rents and corresponding higher sales breakpoints for calculating percentage rent, as well as lower sales from some tenants that paid percentage rent during the six months ending June 30, 2016; partially offset by

•
an increase of $2.0 million in same store lease termination revenue, including $1.1 million received from one tenant for three locations; and

•
an increase of  $0.3 million in same store base rent due to $1.6 million from net new store openings over the previous twelve months, partially offset by a $0.9 million decrease related to tenant bankruptcies in 2016 and 2017, as well as a $0.4 million decrease related to co-tenancy concessions due to anchor closings in 2016 and 2017.

Property operating expenses

Property operating expenses decreased by $2.3 million, or 6%, in the three months ended June 30, 2017 compared to the three months ended June 30, 2016, primarily due to:

•
a decrease of $2.6 million in property operating expenses related to properties sold in 2016 and 2017; and

•
a decrease of $0.6 million in same store common area maintenance expense, including a $0.7 million decrease in personnel costs; partially offset by

•
an increase of $0.7 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 $8.4 million, or 10%, in the six months ended June 30, 2017 compared to the six months ended June 30, 2016, primarily due to:

•
a decrease of $8.4 million in property operating expenses related to properties sold in 2016 and 2017;

•
a decrease of $1.2 million in same store common area maintenance expense, including a $1.4 million decrease in personnel costs; and


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•
a decrease of $0.4 million in same store bad debt expense, primarily due to bad debt expense recorded in connection with the Pac Sun bankruptcy during the six months ended June 30, 2016; partially offset by

•
an increase of $1.4 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.

Other income

Other income decreased by $0.7 million, or 45%, in the three months ended June 30, 2017 compared to the three months ended June 30, 2016, primarily due to a decrease in management fees from properties that we no longer manage.

Other income decreased by $0.3 million, or 17%, in the six months ended June 30, 2017 compared to the six months ended June 30, 2016, primarily due to a decrease in management fees from properties that we no longer manage, partially offset by higher mortgage interest income earned in the six months ended June 30, 2017.

Depreciation and amortization

Depreciation and amortization expense increased by $1.3 million, or 4%, in the three months ended June 30, 2017 compared to the three months ended June 30, 2016, primarily due to:

•
an increase of $3.5 million due to a higher asset base resulting from capital improvements related to new tenants at our same store properties, as well as accelerated amortization of capital improvements associated with store closings in the three months ended June 30, 2017; partially offset by

•
a decrease of $2.2 million related to properties sold in 2016 and 2017.

Depreciation and amortization expense decreased by $0.7 million, or 1%, in the six months ended June 30, 2017 compared to the six months ended June 30, 2016, primarily due to:

•
a decrease of $4.2 million related to properties sold in 2016 and 2017; partially offset by
 
•
an increase of $3.5 million due to a higher asset base resulting from capital improvements related to new tenants at our same store properties, as well as accelerated amortization of capital improvements associated with store closings in the six months ended June 30, 2017.

Impairment of assets

Impairment of assets for the three and six months ended June 30, 2017 consisted of $38.4 million in connection with sale negotiations with a prospective buyer of Logan Valley Mall in Altoona, Pennsylvania and $15.5 million in connection with the marketing for sale of Valley View Mall in La Crosse, Wisconsin.

Impairment of assets for the three and six months ended June 30, 2016 included of $14.1 million in connection with sale negotiations with a prospective buyer of Washington Crown Center in Washington, Pennsylvania., which was sold in August 2016.

Interest expense

Interest expense decreased by $2.6 million, or 16%, in the three months ended June 30, 2017 compared to the three months ended June 30, 2016. This decrease was primarily due to lower weighted average interest rates and average debt balances. Our weighted average effective borrowing rate was 3.97% for the three months ended June 30, 2017 compared to 4.10% for the three months ended June 30, 2016. Our weighted average debt balance was reduced to $1,627.5 million for the three months ended June 30, 2017, compared to $1,731.5 million for the three months ended June 30, 2016 due to the application of cash proceeds from property sales in 2016 and 2017, along with the net proceeds from our 2017 Series C Preferred Share issuance, net of capital expenditures related to anchor replacements and redevelopment spending.

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Interest expense decreased by $6.7 million, or 18%, in the six months ended June 30, 2017 compared to the six months ended June 30, 2016. This decrease was primarily due to lower weighted average interest rates and average debt balances. Our weighted average effective borrowing rate was 4.0% for the six months ended June 30, 2017 compared to 4.22% for the six months ended June 30, 2016. Our weighted average debt balance was reduced to $1,644.9 million for the six months ended June 30, 2017, compared to $1,782.2 million for the six months ended June 30, 2016 due to the application of cash proceeds from property sales in 2016 and 2017, along with the net proceeds from our 2017 Series C Preferred Share issuance, net 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) and Funds from Operations (FFO) which are non-GAAP financial measures, to supplement our analysis and discussion of our operating performance:

•
We believe that NOI is helpful to management and investors as a measure of operating performance because it is an indicator of the return on property investment and provides a method of comparing property performance over time. When we use and present NOI, we also do so on a same store (Same Store NOI) and non-same store (Non Same Store NOI) basis to differentiate between properties that we have owned for the full periods presented and properties acquired, sold or under redevelopment 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, we also present FFO, as adjusted and FFO per diluted share and OP Unit, as adjusted to show the effect of items such as provision for employee separation expense and loss on hedge ineffectiveness.

NOI and FFO are commonly used non-GAAP financial measures of operating performance in the real estate industry, and we use them as supplemental non-GAAP measures to compare our performance between different periods and to compare our performance to that of our industry peers. Our computation of NOI, FFO and other non-GAAP financial measures, such as Same Store NOI, Non Same Store NOI, NOI attributable to our share of unconsolidated properties, and FFO, as adjusted, may not be comparable to other similarly titled measures used by our industry peers. None of these measures are measures of performance in accordance with GAAP, and they have limitations as analytical tools. They should not be considered as alternative measures of our net income, operating performance, cash flow or liquidity. They are not indicative of funds available for our cash needs, including our ability to make cash distributions. Please see below for a discussion of these non-GAAP measures and their respective reconciliation to the most directly comparable GAAP measure.


Unconsolidated Properties and Proportionate Financial Information

The non-GAAP financial measures presented below incorporate financial information attributable to our share of unconsolidated properties. This proportionate financial information is non-GAAP financial information, but we believe that it is helpful information because it reflects the pro rata contribution from our unconsolidated properties that are owned through investments accounted for under GAAP using the equity method of accounting. Under such method, earnings from these unconsolidated partnerships are recorded in our statements of operations prepared in accordance with GAAP under the caption entitled “Equity in income of partnerships.”

To derive the proportionate financial information reflected in the tables below as “unconsolidated,” we multiplied the percentage of our economic interest in each partnership on a property-by-property basis by each line item. Under the partnership agreements relating to our current unconsolidated partnerships with third parties, we own a 25% to 50% economic interest in such partnerships, and there are generally no provisions in such partnership agreements relating to special non-pro rata allocations of income or loss, and there are no preferred or priority returns of capital or other similar provisions. While this method approximates our indirect economic

29
Table of Contents

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 noncontrolling 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 this property, under the applicable agreements between us and the entity with ownership interests, we and such other entity have joint control because decisions regarding matters such as the sale, refinancing, expansion or rehabilitation of the property require the approval of both us and the other entity owning an interest in the property. Hence, we account for this property like our other unconsolidated partnerships using the equity method of accounting. The balance sheet items arising from this property appear under the caption “Investments in partnerships, at equity.”

For further information regarding our unconsolidated partnerships, see note 3 to our unaudited consolidated financial statements.



Net Operating Income (“NOI”)

NOI (a non-GAAP measure) is derived from real estate revenue (determined in accordance with GAAP, including lease termination revenue), minus property operating expenses (determined in accordance with GAAP), plus our pro rata share of revenue and property operating expenses of our unconsolidated partnership investments. NOI excludes other income, general and administrative expenses, provision for employee separation expenses, interest expense, depreciation and amortization, gain on sale of interest in non operating real estate, gain on sale of interest in real estate, and project costs and other expenses. We believe that net income is the most directly comparable GAAP measure to NOI.

Same Store NOI is calculated using retail properties owned for the full periods presented and excludes properties acquired or disposed of or under redevelopment during the periods presented. Non Same Store NOI is calculated using the retail properties excluded from the calculation of Same Store NOI.

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The table below reconciles net (loss) income to NOI of our consolidated properties for the three and six months ended June 30, 2017 and 2016:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
(in thousands)
2017
 
2016
 
2017
 
2016
Net (loss) income
$
(53,277
)
 
$
9,169

 
$
(53,763
)
 
$
11,098

Other income
(840
)
 
(1,514
)
 
(1,680
)
 
(2,030
)
Depreciation and amortization
32,928

 
31,662

 
64,686

 
65,397

General and administrative expenses
9,232

 
8,883

 
18,273

 
17,469

Employee separation expenses
1,053

 
658

 
1,053

 
1,193

Project costs and other expenses
85

 
243

 
397

 
294

Interest expense, net
14,418

 
17,067

 
29,756

 
36,413

Impairment of assets
53,917

 
14,118

 
53,917

 
14,724

Equity in income of partnerships
(4,154
)
 
(4,192
)
 
(7,890
)
 
(8,075
)
(Gains) losses on sales of interests in real estate, net
308

 
(20,887
)
 
365

 
(22,922
)
Gains on sales of non operating real estate
(486
)
 
—

 
(486
)
 
(9
)
NOI - consolidated properties
$
53,184

 
$
55,207

 
$
104,628

 
$
113,552


The table below reconciles equity in income of partnerships to NOI of our share of unconsolidated properties for the three and six months ended June 30, 2017 and 2016:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
June 30,
(in thousands)
2017
 
2016
 
2017
 
2016
Equity in income of partnerships
$
4,154

 
$
4,192

 
$
7,890

 
$
8,075

Depreciation and amortization
3,026

 
2,584

 
5,592

 
5,018

Interest and other expenses
2,566

 
2,578

 
5,116

 
5,159

Net operating income from equity method investments at ownership share
$
9,746

 
$
9,354

 
$
18,598

 
$
18,252



The table below presents total NOI and total NOI excluding lease terminations for the three months ended June 30, 2017 and 2016:
 
 
Same Store
 
Non Same Store
 
Total (non GAAP)
(in thousands)
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
NOI from consolidated properties
 
$
52,979

 
$
52,131

 
$
205

 
$
3,076

 
$
53,184

 
$
55,207

NOI from equity method investments at ownership share
 
7,173

 
7,830

 
2,573

 
1,524

 
9,746

 
9,354

Total NOI
 
$
60,152

 
$
59,961

 
$
2,778

 
$
4,600

 
$
62,930

 
$
64,561

Less: lease termination revenue
 
1,827

 
61

 
35

 
—

 
1,862

 
61

Total NOI - excluding lease termination revenue
 
$
58,325

 
$
59,900

 
$
2,743

 
$
4,600

 
$
61,068

 
$
64,500


Total NOI decreased by $1.6 million in the three months ended June 30, 2017 compared to the three months ended June 30, 2016 primarily due to a decrease of $1.8 million in NOI from Non Same Store properties. This decrease is primarily due to properties sold in 2016 and 2017. See “—Real Estate Revenue” and “—Property Operating Expenses” above for further information about the factors affecting NOI from our consolidated properties.


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The table below presents total NOI and total NOI excluding lease terminations for the six months ended June 30, 2017 and 2016:
 
 
Same Store
 
Non Same Store
 
Total (non GAAP)
(in thousands)
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
NOI from consolidated properties
 
$
104,510

 
$
103,888

 
$
118

 
$
9,664

 
$
104,628

 
$
113,552

NOI from equity method investments at ownership share
 
14,736

 
15,185

 
3,862

 
3,067

 
18,598

 
18,252

Total NOI
 
$
119,246

 
$
119,073

 
$
3,980

 
$
12,731

 
$
123,226

 
$
131,804

Less: lease termination revenue
 
2,346

 
243

 
71

 
56

 
2,417

 
299

Total NOI - excluding lease termination revenue
 
$
116,900

 
$
118,830

 
$
3,909

 
$
12,675

 
$
120,809

 
$
131,505


Total NOI decreased by $8.6 million in the six months ended June 30, 2017 compared to the six months ended June 30, 2016 primarily due to a decrease of $8.8 million in NOI from Non Same Store properties. This decrease is primarily due to properties sold in 2016 and 2017. See “—Real Estate Revenue” and “—Property Operating Expenses” above for further information about the factors affecting NOI from our consolidated properties.


Funds From Operations

The National Association of Real Estate Investment Trusts (“NAREIT”) defines Funds From Operations (“FFO”), which is a non-GAAP measure commonly used by REITs, as net income (computed in accordance with GAAP) excluding gains and losses on sales of operating properties, plus real estate depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures to reflect funds from operations on the same basis. 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”) 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 six months ended June 30, 2017 and 2016, respectively, to show the effect of such items as provision for employee separation expense and loss on hedge ineffectiveness, which had a significant effect on our results of operations, but are not, in our opinion, indicative of our operating performance.

We believe that FFO is 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. We believe that Funds From Operations, as adjusted, is helpful to management and investors as a measure of operating performance because it adjusts FFO to exclude items that management does not believe are indicative of our operating performance, such as provision for employee separation expense and loss on hedge ineffectiveness.

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The following table presents a reconciliation of net 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 and FFO, as adjusted, attributable to common shareholders and OP Unit holders per diluted share and OP Unit, for the three and six months ended June 30, 2017 and 2016: 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
(in thousands, except per share amounts)
2017
 
2016
 
2017
 
2016
Net (loss) income
$
(53,277
)
 
$
9,169

 
$
(53,763
)
 
$
11,098

  Depreciation and amortization on real estate
 
 
 
 
 
 
 
    Consolidated properties
32,506

 
31,297

 
63,940

 
64,663

    PREIT’s share of equity method investments
3,026

 
2,584

 
5,592

 
5,018

    (Losses) gains on sales of interests in real estate, net
308

 
(20,887
)
 
365

 
(22,922
)
    Impairment of assets
53,917

 
14,118

 
53,917

 
14,724

Dividends on preferred shares
(7,067
)
 
(3,962
)
 
(13,272
)
 
(7,924
)
Funds from operations attributable to common shareholders and OP Unit holders
$
29,413

 
$
32,319

 
$
56,779

 
$
64,657

Provision for employee separation expense
1,053

 
658

 
1,053

 
1,193

Loss on hedge ineffectiveness
—

 
—

 
—

 
143

Funds from operations, as adjusted, attributable to common shareholders and OP Unit holders
$
30,466

 
$
32,977

 
$
57,832

 
$
65,993

Funds from operations attributable to common shareholders and OP Unit holders per diluted share and OP Unit
$
0.38

 
$
0.42

 
$
0.73

 
$
0.83

Funds from operations, as adjusted, attributable to common shareholders and OP Unit holders per diluted share and OP Unit
$
0.39

 
$
0.43

 
$
0.74

 
$
0.85

 
 
 
 
 
 
 
 
Weighted average number of shares outstanding
69,307

 
69,091

 
69,263

 
69,032

Weighted average effect of full conversion of OP Units
8,313

 
8,327

 
8,313

 
8,333

Effect of common share equivalents
—

 
68

 
57

 
125

Total weighted average shares outstanding, including OP Units
77,620

 
77,486

 
77,633

 
77,490


FFO attributable to common shareholders and OP Unit holders was $29.4 million for the three months ended June 30, 2017, a decrease of $2.9 million, or 9.0%, compared to $32.3 million for the three months ended June 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 $0.38 and $0.42 for the three months ended June 30, 2017 and 2016, respectively.

FFO attributable to common shareholders and OP Unit holders was $56.8 million for the six months ended June 30, 2017, a decrease of $7.9 million, or 12%, compared to $64.7 million for the six months ended June 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 $0.73 and $0.83 for the six months ended June 30, 2017 and 2016, respectively.


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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, 2016 filed with the Securities and Exchange Commission. 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 expect to meet our short-term liquidity requirements, including distributions to common and preferred shareholders, recurring capital expenditures, tenant improvements and leasing commissions, but excluding acquisitions and development and redevelopment projects, generally through our available working capital and net cash provided by operations, subject to the terms and conditions 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 Code of 1986, as amended. The aggregate distributions made to preferred shareholders, common shareholders and OP Unit holders for the six months ended June 30, 2017 were $45.5 million, based on distributions of $1.0312 per Series A Preferred Share, $0.9218 per Series B Preferred Share, $0.6900 per Series C Preferred Share (partial period), and $0.42 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:

•
adverse changes or prolonged downturns in general, local or retail industry economic, financial, credit or capital market or competitive conditions, leading to a reduction in real estate revenue or cash flows or an increase in expenses;
•
deterioration in our tenants’ business operations and financial stability, including anchor or non anchor tenant bankruptcies, leasing delays or terminations, or lower sales, causing deferrals or declines in rent, percentage rent and cash flows;
•
inability to achieve targets for, or decreases in, property occupancy and rental rates, resulting in lower or delayed real estate revenue and operating income;
•
increases in operating costs, including increases that cannot be passed on to tenants, resulting in reduced operating income and cash flows; and
•
increases in interest rates resulting in higher borrowing costs.

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.
In December 2014, our universal shelf registration statement was filed with the SEC and became effective. We may use the availability under our shelf registration statement to offer and sell common shares of beneficial interest, preferred shares and various types of debt securities, among other types of securities, to the public.

Credit Agreements

We have entered into four credit agreements (collectively, as amended, the “Credit Agreements”): (1) the 2013 Revolving Facility, (2) the 2014 7-Year Term Loan, (3) the 2014 5-Year Term Loan, and (4) the 2015 5-Year Term Loan.

See note 4 in the notes to our audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2016 for a description of the identical covenants and common provisions contained in the Credit Agreements.

In May 2017, we borrowed an additional $150.0 million on the 2014 7-Year Term Loan, which was used to repay borrowings under the 2013 Revolving Facility. As of June 30, 2017, we had borrowed $550.0 million under the Term Loans, and $52.0 million was 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 $183.4 million.

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Interest Rate Derivative Agreements

As of June 30, 2017, we had entered into 30 interest rate swap agreements with a weighted average base interest rate of 1.35% on a notional amount of $749.6 million, maturing on various dates through December 2021 and one forward starting interest rate swap agreement with an interest rate of 1.42% on a notional amount of $48.0 million, which will be effective starting January 2018 and will mature in February 2021.

We entered into these interest rate swap agreements in order to hedge the interest payments associated with our issuances of variable interest rate long term debt. We have assessed the effectiveness of these interest rate swap agreements as hedges at inception and on a quarterly basis. As of June 30, 2017, we considered these interest rate swap agreements to be highly effective as cash flow hedges. The interest rate swap agreements are net settled monthly.

Accumulated other comprehensive loss as of June 30, 2017 includes a net loss of $1.2 million relating to forward starting swaps that we cash settled in prior years that are being amortized over 10 year periods commencing on the closing dates of the debt instruments that are associated with these settled swaps.

As of June 30, 2017, 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 $0.7 million. If we had breached any of the default provisions in these agreements as of June 30, 2017, we might have been required to settle our obligations under the agreements at their termination value (including accrued interest) of $0.7 million. We had not breached any of these provisions as of June 30, 2017.

Mortgage Loan Activity

In March 2017, we repaid a $150.6 million mortgage loan including accrued interest secured by The Mall at Prince Georges in Hyattsville, Maryland using $110.0 million from our 2013 Revolving Facility and the balance from available working capital.

Mortgage Loans

As of June 30, 2017, our mortgage loans, which are secured by 11 of our consolidated and held for sale properties, are due in installments over various terms extending to October 2025. Eight 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% at June 30, 2017. Three of our mortgage loans bear interest at variable rates and had a weighted average interest rate of 3.29% at June 30, 2017. The weighted average interest rate of all consolidated mortgage loans was 4.04% at June 30, 2017. 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 June 30, 2017:
 
(in thousands of dollars)
Total
 
Remainder of 2017
 
2018-2019
 
2020-2021
 
Thereafter
Principal payments
$
117,920

 
$
9,558

 
$
36,855

 
$
38,635

 
$
32,872

Balloon payments
922,453

 
—

 
68,469

 
178,600

 
675,384

Total
$
1,040,373

 
$
9,558

 
$
105,324

 
$
217,235

 
$
708,256

Less: unamortized debt issuance costs
3,733

 
 
 
 
 
 
 
 
Carrying value of mortgage notes payable
$
1,036,640

 
 
 
 
 
 
 
 


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The following table outlines the timing of principal payments related to our mortgage loan related to assets held for sale as of June 30, 2017:
 
(in thousands of dollars)
Total
 
Remainder of 2017
 
2018-2019
 
2020-2021
 
Thereafter
Principal payments
$
1,733

 
$
226

 
$
1,189

 
$
318

 
$
—

Balloon payments
27,161

 
—

 
—

 
27,161

 
—

Total
$
28,894

 
$
226

 
$
1,189

 
$
27,479

 
$
—

Less: unamortized debt issuance costs
168

 
 
 
 
 
 
 
 
Carrying value of mortgage notes payable
$
28,726

 
 
 
 
 
 
 
 


Contractual Obligations

The following table presents our aggregate contractual obligations as of June 30, 2017 for the periods presented:
(in thousands of dollars)
Total
 
Remainder of 2017
 
2018-2019
 
2020-2021
 
Thereafter
Mortgage loan principal payments
$
1,040,373

 
$
9,558

 
$
105,324

 
$
217,235

 
$
708,256

Mortgage loan principal payments related to assets held for sale
28,894

 
226

 
1,189

 
27,479

 
—

Term Loans
550,000

 
—

 
150,000

 
400,000

 
—

2013 Revolving Facility
52,000

 
—

 
52,000

 
—

 
—

Interest on indebtedness (1)
283,968

 
32,647

 
110,747

 
86,822

 
53,752

Operating leases
4,998

 
1,052

 
3,691

 
255

 
—

Ground leases
7,420

 
280

 
1,120

 
1,120

 
4,900

Development and redevelopment commitments (2)
148,023

 
78,124

 
69,899

 
—

 
—

Total
$
2,115,676

 
$
121,887

 
$
493,970

 
$
732,911

 
$
766,908

_________________________
(1)Includes payments expected to be made in connection with interest rate swaps and a forward starting interest rate swap agreement.
(2)The timing of the payments of these amounts is uncertain. We expect that more than half of such payments will be made prior to December 31, 2017, 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 the Fashion Outlets of 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. Our operating partnership, PREIT Associates, and Macerich have jointly and severally guaranteed this obligation.

Preferred Share Dividends

Annual dividends on our 4,600,000 8.25% Series A Preferred Shares ($25.00 liquidation preference), our 3,450,000 7.375% Series B Preferred Shares ($25.00 liquidation preference) and our 6,900,000 7.20% Series C Preferred Shares ($25.00 liquidation preference) are expected to be $9.5 million, $6.4 million and $6.6 million, respectively.

CASH FLOWS

Net cash provided by operating activities totaled $70.0 million for the six months ended June 30, 2017 compared to $80.3 million for the six months ended June 30, 2016. The decrease in 2017 is primarily due to properties sold in 2017 and 2016.

Cash flows used in investing activities were $78.3 million for the six months ended June 30, 2017 compared to cash flows provided by investing activities of $88.8 million for the six months ended June 30, 2016. Cash flows used in investing activities for the six months ended June 30, 2017 included investment in construction in progress of $57.4 million, investments in

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partnerships of $38.3 million (primarily at The Fashion Outlets of Philadelphia) and real estate improvements of $23.2 million (primarily related to ongoing improvements at our properties), partially offset by $45.9 million of proceeds from sales of Beaver Valley Mall, Crossroads Mall and two non operating parcels. Investing activities for the first six months of 2016 included $131.6 million in proceeds from the sale of five operating properties and one outparcel, partially offset by investment in construction in progress of $28.1 million and real estate improvements of $15.3 million, primarily related to ongoing improvements at our properties.

Cash flows provided by financing activities were $17.5 million for the six months ended June 30, 2017 compared to cash flows used in financing activities of $175.1 million for the six months ended June 30, 2016. Cash flows provided by financing activities for the first six months of 2017 included approximately $166.3 million of proceeds from our 2017 Series C Preferred Share offering and $55.0 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 $45.5 million, and principal installments on mortgage loans of $8.1 million. Cash flows used in financing activities for the six months ended June 30, 2016 included mortgage loan repayments of 280.3 million, dividends and distributions of $40.6 million and principal installment payments of $8.4 million, partially offset by $20.0 million of net 2013 Revolving Facility borrowings, and an additional borrowing 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, in the section entitled “Item 1A. Risk Factors —We might incur costs to comply with environmental laws, which could have an adverse effect on our results of operations.”

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-line 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 retail 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 our Credit Agreements, lead us to make capital improvements to properties that we would have deferred or would not have otherwise planned to make and might affect occupancy and net operating income of such properties.
Any such capital improvements, undertaken individually or collectively, would involve costs and expenses that could adversely affect our results of operations.

We compete with many other entities engaged in real estate investment activities for acquisitions of malls, other retail properties and prime development sites or sites adjacent to our properties, including institutional pension funds, other REITs and other owner-operators of retail properties. When we seek to make acquisitions, competitors might drive up the price we must pay for properties, parcels, other assets or other companies or might themselves succeed in acquiring those properties, parcels, assets or companies. In addition, our potential acquisition targets might find our competitors to be more attractive suitors if they have greater resources, are willing to pay more, or have a more compatible operating philosophy. In particular, larger REITs might enjoy significant competitive advantages that result from, among other things, a lower cost of capital, a better ability to raise capital, a better ability to finance an acquisition, better cash flow and enhanced operating efficiencies. We might not succeed in acquiring retail properties or development sites that we seek, or, if we pay a higher price for a property or site, 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.

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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. 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. Some of our tenants occupy stores at multiple locations in our portfolio, and so the effect of any bankruptcy or store closing of those tenants might be more significant to us than the bankruptcy or store closings of other tenants. 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 our 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, 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 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 may 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 June 30, 2017, together with other statements and information publicly disseminated by us, contain certain “forward-looking statements” within the meaning of the federal securities laws. Forward-looking statements relate to expectations, beliefs, projections, future plans, strategies, anticipated events, trends and other matters 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 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:

•
changes in the retail industry, including consolidation and store closings, particularly among anchor tenants;
•
our ability to maintain and increase property occupancy, sales and rental rates, in light of the relatively high number of leases that have expired or are expiring in the next two years;
•
increases in operating costs that cannot be passed on to tenants;
•
current economic conditions and the state of employment growth and consumer confidence and spending, and the corresponding effects on tenant business performance, prospects, solvency and leasing decisions and on our cash flows, and the value and potential impairment of our properties;

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•
the effects of online shopping and other uses of technology on our retail tenants;
•
risks related to our development and redevelopment activities;
•
acts of violence at malls, including our properties, or at other similar spaces, and the potential effect on traffic and sales;
•
our ability to identify and execute on suitable acquisition opportunities and to integrate acquired properties into our portfolio;
•
our partnerships and joint ventures with third parties to acquire or develop properties;
•
concentration of our properties in the Mid-Atlantic region;
•
changes in local market conditions, such as the supply of or demand for retail space, or other competitive factors;
•
changes to our corporate management team and any resulting modifications to our business strategies;
•
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, or of intangible assets, such as goodwill, including such losses that we might be required to record in connection with any dispositions of assets;
•
our substantial debt and the liquidation preference value of our preferred shares and our high leverage ratio;
•
constraining leverage, unencumbered debt yield, interest and tangible net worth covenants under our principal credit agreements;
•
our ability to refinance our existing indebtedness when it matures, on favorable terms or at all;
•
our ability to raise capital, including through joint ventures or other partnerships, through sales of properties or interests in properties, through the issuance of equity or equity-related securities if market conditions are favorable, or through other actions;
•
our short- and long-term liquidity position;
•
potential dilution from any capital raising transactions or other equity issuances; and
•
general economic, financial and political conditions, including credit and capital market conditions, changes in interest rates or unemployment.

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, 2016 in the section entitled “Item 1A. Risk Factors.” 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 June 30, 2017, our consolidated debt portfolio consisted primarily of $1,036.6 million of fixed and variable rate mortgage loans (net of debt issuance costs), $52.0 million borrowed under our 2013 Revolving Facility which bore interest at a rate of 2.43%, $150.0 million borrowed under our 2014 5-Year Term Loan which bore interest at a rate of 2.50%, $150.0 million borrowed under our 2015 5-Year Term Loan which bore interest at a rate of 2.50% and $250.0 million borrowed under our 2014 7-Year Term Loan which bore interest at a rate of 2.50%.

Our mortgage loans, which are secured by 11 of our consolidated properties (including one property that is classified as held for sale) are due in installments over various terms extending to October 2025. Eight 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% at June 30, 2017. Three of our mortgage loans bear interest at variable rates and had a weighted average interest rate of 3.29% at June 30, 2017. The weighted average interest rate of all consolidated mortgage loans was 4.04% at June 30, 2017. Mortgage loans for properties owned by unconsolidated partnerships are accounted for in “Investments in partnerships, at equity” and “Distributions in excess of partnership investments” on the consolidated balance sheets and are not included in the table below.

Our interest rate risk is monitored using a variety of techniques. The table below presents the principal amounts of the expected annual maturities due in the respective years and the weighted average interest rates for the principal payments in the specified periods:
 
 
Fixed Rate Debt
 
Variable Rate Debt
(in thousands of dollars)
For the Year Ending December 31,
Principal
Payments
 
Weighted
Average
Interest Rate (1)
 
Principal
Payments
 
Weighted
Average
Interest Rate (1)
2017
$
8,944

 
4.23
%
 
$
840

 
3.05
%
2018
16,971

 
4.25
%
 
122,149

(2) 
2.92
%
2019
17,712

 
4.25
%
 
151,680

(3) 
2.32
%
2020
45,272

 
5.03
%
 
151,680

(3) 
2.23
%
2021 and thereafter
726,858

 
4.21
%
 
429,160

(3) 
2.85
%
_________________________
(1) 
Based on the weighted average interest rates in effect as of June 30, 2017.
(2) 
Includes 2013 Revolving Facility borrowings of $52.0 million with an interest rate of 2.43% as of June 30, 2017.
(3) 
Includes Term Loan debt balance of $550.0 million with a weighted average interest rate of 2.50% as of June 30, 2017.

As of June 30, 2017, we had $855.5 million of variable rate debt. Also, as of June 30, 2017, we had entered into 30 interest rate swap agreements with an aggregate weighted average interest rate of 1.35% on a notional amount of $749.6 million maturing on various dates through December 2021 and one forward starting interest rate swap agreement with an interest rate of 1.42% on a notional amount of $48.0 million, which will be effective starting January 2018 and maturing in February 2021.

Changes in market interest rates have different effects on the fixed and variable rate portions of our debt portfolio. A change in market interest rates applicable to the fixed portion of the debt portfolio affects the fair value, but it has no effect on interest incurred or cash flows. A change in market interest rates applicable to the variable portion of the debt portfolio affects the interest incurred and cash flows, but does not affect the fair value. The following sensitivity analysis related to our debt portfolio, which includes the effects of our interest rate swap agreements, assumes an immediate 100 basis point change in interest rates from their actual June 30, 2017 levels, with all other variables held constant.

A 100 basis point increase in market interest rates would have resulted in a decrease in our net financial instrument position of $57.1 million at June 30, 2017. A 100 basis point decrease in market interest rates would have resulted in an increase in our net financial instrument position of $60.3 million at June 30, 2017. Based on the variable rate debt included in our debt portfolio at June 30, 2017, a 100 basis point increase in interest rates would have resulted in an additional $1.1 million in interest expense annually. A 100 basis point decrease would have reduced interest incurred by $1.1 million annually.

To manage interest rate risk and limit overall interest cost, we may employ interest rate swaps, options, forwards, caps and floors, or a combination thereof, depending on the underlying exposure. Interest rate differentials that arise under swap contracts are recognized in interest expense over the life of the contracts. If interest rates rise, the resulting cost of funds is expected to be lower than that which would have been available if debt with matching characteristics was issued directly. Conversely, if interest rates fall, the resulting costs would be expected to be, and in some cases have been, higher. We

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may also employ forwards or purchased options to hedge qualifying anticipated transactions. Gains and losses are deferred and recognized in net income in the same period that the underlying transaction occurs, expires or is otherwise terminated. See note 7 of the notes to our unaudited consolidated financial statements.

Because the information presented above includes only those exposures that existed as of June 30, 2017, it does not consider changes, exposures or positions which have arisen or could arise after that date. The information presented herein has limited predictive value. As a result, the ultimate realized gain or loss or expense with respect to interest rate fluctuations will depend on the exposures that arise during the period, our hedging strategies at the time and interest rates.

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 June 30, 2017, and have concluded as follows:

•
Our disclosure controls and procedures are designed to ensure that the information that we are required to disclose in our reports under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
•
Our disclosure controls and procedures are effective to ensure that information that we are required to disclose in our Exchange Act reports is accumulated and communicated to management, including our principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure.

There was no change in our internal controls over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.


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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.

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 discussed 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.

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 June 30, 2017 and the average price paid per share (in thousands of shares).
 
Period
Total Number
of Shares
Purchased
 
Average Price
Paid  per
Share
 
Total Number of
Shares  Purchased
as part of Publicly
Announced Plans
or Programs
 
Maximum Number
(or  Approximate Dollar
Value) of Shares that
May Yet Be Purchased
Under the Plans or
Programs
April 1 - April 30, 2017
—

 
$
—

 
—

 
$
—

May 1 - May 31, 2017
—

 
—

 
—

 
—

June 1 - June 30, 2017
330

 
11.33

 
—

 
—

Total
330

 
$
11.33

 
—

 
$
—




42
Table of Contents

ITEM 6.  EXHIBITS.

 
 
 
 
31.1
 
 
31.2
 
 
32.1
 
 
32.2
 
 
101
Pursuant to Rule 405 of Regulation S-T, the following financial information from the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2017 is formatted in XBRL interactive data files: (i) Consolidated Statements of Operations for the three and six months ended June 30, 2017 and 2016; (ii) Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2017 and 2016; (iii) Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016; (iv) Consolidated Statements of Equity for the six months ended June 30, 2017; (v) Consolidated Statements of Cash Flows for the six months ended June 30, 2017 and 2016; and (vi) Notes to Unaudited Consolidated Financial Statements.




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Table of Contents

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:
August 9, 2017
 
 
 
 
By:
/s/ Joseph F. Coradino
 
 
 
Joseph F. Coradino
 
 
 
Chairman and Chief Executive Officer
 
 
 
 
 
 
By:
/s/ Robert F. McCadden
 
 
 
Robert F. McCadden
 
 
 
Executive Vice President and Chief Financial Officer
 
 
 
 
 
 
By:
/s/ Jonathen Bell
 
 
 
Jonathen Bell
 
 
 
Senior Vice President and Chief Accounting Officer
 
 
 
(Principal Accounting Officer)


44
Table of Contents

Exhibit Index
 
 
 
31.1*
 
 
31.2*
 
 
32.1**
 
 
32.2**
 
 
101*
Pursuant to Rule 405 of Regulation S-T, the following financial information from the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2017 is formatted in XBRL interactive data files: (i) Consolidated Statements of Operations for the three and six months ended June 30, 2017 and 2016; (ii) Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2017 and 2016; (iii) Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016; (iv) Consolidated Statements of Equity for the six months ended June 30, 2017; (v) Consolidated Statements of Cash Flows for the six months ended June 30, 2017 and 2016; and (vi) Notes to Unaudited Consolidated Financial Statements.





_______________________
*
filed herewith
**
furnished herewith


45